Following are two stocks that saw strong gains after reporting earnings and are likely to continue their outperformance in the medium term.
Polycom Inc (NASDAQ:PLCM), a leading supplier of audio, video, and web conferencing products, gained over 12% yesterday on better than expected Q1 results and Q2 guidance. The company reported Q1 revenues of 344.2 mn (vs. 338 mn consensus) and EPS of $0.48 (vs. $0.42 consensus). It also guided Q2 sales at $358-365 mn (vs. $351mn consensus), Q2 EPS at $0.49-$0.50 (vs. $0.47 consensus) and operating margins improvement of 20bps sequentially.
The stock is trading at a P/E of ~20x FY12e consensus EPS vs. historical range of 20-25x fwd PE. It is expected to outperform going forward; following are the three key drivers for the stock:
- Unfolding margin expansion story: The company is expected to reach 20% operating margin by the end of 2011 (from current 16.6%) through increased employee productivity and strategic partnerships.
- Increased penetration at existing partners: The company managed to nearly double the revenues from the top seven partners in the last two quarters and added Motorola (NYSE:MMI) and Ericsson as new partners.
- Secular industry growth: PLCM is likely to be a leading beneficiary of the acceleration of video conferencing demand, due to improving economics, the transition to high-definition technologies and low latency networks. According to IDC, the enterprise video conferencing market is expected to grow at a CAGR of 18.4% to $3 billion in 2015.
International Game technology (NYSE:IGT), a designer, manufacturer, and marketer electronic gaming equipment and systems products worldwide, gained 9% yesterday after Q2FY11 earnings positively surprised the street. The company reported an EPS of $0.23 in Q2FY11 (versus the consensus $0.20 and above the Q1 EPS of $0.21) and revenues of $492.3 mn (vs. consensus $479.2 mn and a sequential growth of 5.9%). The company also raised the guidance for FY2011 to $0.84-0.90 from $0.79-0.87 guided earlier. This boost in guidance comes from the interest cost savings from the new credit facility and swap.
IGT’s results are in stark contrast to the recent preannouncements from Bally Technologies (NYSE:BYI) and WMS Industries (NYSE:WMS) in which they cut their outlooks due to soft demand. It appears that IGT management is doing a good job of improving efficiencies, increasing margins, and delivering improved overall game content to gaming operators, which is likely to help both its top line and bottom line going forward. The company is trading at a PE of 17x, which is in line with its peers. The company is expected to gain market share and the stock is likely to outperform its peers. Further, low investor expectations on the sector provide a favorable risk-reward ratio.