As I have said previously, fourth-quarter earnings season is good – not great, but good. More than 1,100 companies within the S&P 1500 have reported and positive surprises are leading negative surprises by a margin of 2.5:1. Average growth, excluding outliers, is 14.1% among those that have reported. The Zacks Rank universe shows a similar story. Among reports from more than 2,500 companies, positive surprises have outnumbered negative surprises by a margin of 1.8:1. Average growth, again excluding outliers, is 14.4%.
As fourth-quarter earnings season wraps up, the markets will be left to a combination of profit forecasts, economic data, M&A activity and sentiment to determine price direction. The economic data has been mixed, though implying sustained growth overall. Companies continue to partner up. This said, Chrysler (DCX) seems to have about as much appeal as Sadie Hawkins, according to media reports. Sentiment is downright bullish, despite Friday's pullback. Forecasts, however, are a legitimate reason to kvetch.
There continues to be a downward drift in 2007 earnings estimates, regardless of market cap. Furthermore, if recent trends hold true, we should see a material drop in the number of estimate revisions over the next six or so weeks. It is likely that the decline in the number of estimate revisions will be accompanied by a more negative tint to the Zacks Revision ratio (the ratio of upward to downward earnings estimate revisions), which has already has been staying below 1.0 for several weeks.
The economic calendar is packed next week. January durable goods orders, January existing home sales and the Conference Board’s February consumer confidence index will be released on Tuesday. Wednesday brings revised fourth-quarter GDP data, January new home sales and February Chicago PMI. January personal spending and income, January construction spending and the February ISM manufacturing index will be published on Thursday. The week ends with the final February University of Michigan consumer confidence index. Yes, it will be a busy week.
Companies That Could Surprise During the Week of Feb 26 - Mar 2
Foster Wheeler (FWLT) beat earnings expectations in its second and third quarters by margins of 17 cents and 27 cents per share, respectively. The most recent consensus is suggesting the possibility of another upside surprise. The Most Recent Consensus, which calls for earnings per share of 77 cents, is six cents above the consensus estimate of 71 cents per share. Foster Wheeler is scheduled to report on Tuesday, Feb 27, after the close of trading.
GAP Inc. (GPS) surprised the financial community a few weeks ago by saying overall same-store sales were flat in January; many broker analysts were anticipating a decline in same-store sales. The operator of casual clothing chains also preannounced 2006 full-year profits of 89 to 91 cents per share. As result, analysts revised their projections and pushed the consensus estimate for fourth-quarter earnings higher by three cents to 22 cents per share. The Most Recent Consensus is even more bullish at 24 cents per share. GPS has delivered four consecutive positive surprises. GAP is scheduled to report on Thursday, Mar 1, after the close of trading.
Warmer than usual weather in November and December did not cast cloud on analysts’ expectations for Reliant Energy (RRI). Over the past 30 days, the consensus estimate for fourth-quarter results has improved by a penny to a loss of 17 cents per share. The Most Recent Consensus is even more bullish, calling for a profit of six cents per share. The electric company has topped expectations for two consecutive quarters, most recently by nine cents per share. Reliant Energy is scheduled to report on Tuesday, Feb 27, before the start of trading.
Vornado Realty (VNO) may have lost on its bid to acquire Equity Office Properties (EOP), but VNO could please its own shareholders next week. During the past 30 days, brokerage analysts have raised their forecasts. The consensus estimate calls for profits to have totaled $1.40 per share in the fourth quarter, five cents above the forecast of a month ago. The Most Recent Consensus is more bullish at $1.50 per share. VNO has topped expectations during three out of the past four quarters. Vornado Realty is scheduled to report on Tuesday, Feb 27, before the start of trading.
Cablevision Systems (CVC) missed third-quarter forecasts by four cents with a loss of 21 cents. Although the fourth-quarter consensus estimate has been holding relatively steady over the past two months at a loss of five cents per share, the Most Recent Consensus is pointing towards the possibility of another negative surprise. The Most Recent Consensus calls for a loss of six cents per share. Cablevision is scheduled to report on Tuesday, Feb 27, before the start of trading.
Charles Rotblut, CFA, is Senior Market Analyst for Zacks.com.