Wednesday was another day of the market focusing on the sovereign debt troubles in Europe, and another day of not focusing on individual fundamentals of companies other than maybe the first hour after an earnings report.
Several stocks that we own reported very impressive if not shockingly good numbers, recording numbers that easily surpassed analyst estimates, making us wonder whether analysts really were researching these stocks.
Which company had the most impressive report?
Was it the transforming retailer that posted a surprising profit catching the Street off guard? Or the innovative home soda product manufacturer that reported profits roughly 75% above analyst estimates? Or the energy services company that trades significant below its July IPO even though it crushed earnings for the second consecutive report since gong public?
Why was the analyst community so wrong about the earnings potential of these companies?
Liz Claiborne (LIZ)
The women's focused retailer has been in the process of a transformation for what seems like an eternity. During Q3, LIZ announced numerous transactions including the sale of its namesake to J.C. Penney (NYSE:JCP) that completed the transition to a focus on three core brands. (See Liz Claiborne Transformation Complete: A Look At What's Left). Though LIZ previously reported solid comps in Q3 for the core brands, analysts just didn't get with the program that the company was transformed.
For Q3, LIZ reported positive adjusted earnings of $.05 compared to expectations of a loss of $.05. The stock bounced from a big opening loss to a large gain as the conference call ended to a 3.5% loss as the market closed. After years of losses, maybe it was too much to expect better estimates from analysts.
Per Reuters report:
- On an adjusted basis, it earned 5 cents a share from continuing operations, while analysts on average had expected a loss of 5 cents, according to Thomson Reuters I/B/E/S.
The leading manufacturer of home beverage carbonation systems was absolutely crushed after guiding toward a sequentially weak Q3 back in August. The once high flyer slumped more than 50% in days. While the guidance was basically inline with prior estimates, it was sequentially down from a Q2 beat, making investors fear SODA might have already peaked. After all, shouldn't SODA have a robust holiday season considering the product is so new to North American markets?
Instead the market got another massive under promise, over deliver scenario. After handily smashing estimates in the first three earnings releases since going public, the analyst community decided to take management's word yet again. Big mistake.
SODA reported $.56 in earnings compared to estimates around $.34. Yes, you read that correctly. Not only did SODA not report a down quarter, it instead reported massive growth.
Sure the company started in Europe and modeling for a different consumer base in the U.S. is difficult. And the economic environment during August probably made any CFO hesitant to issue an aggressive guidance. Why did analysts allow such a major sandbagging to go unquestioned?
- SodaStream beats by euro .13, beats on revs; guides Q4 revs above consensus; announces new distribution partner in Brazil 34.11: Reports Q3 (Sep) earnings of euro .37 per share, euro .13 better than the Capital IQ Consensus Estimate of euro .24; revenues rose 38.8% year/year to euro .3 mln vs the euro .5 mln consensus. Co issues upside guidance for Q4, sees Q4 revs of up ~24% YoY to ~euro mln vs. euro .51 mln Capital IQ Consensus Estimate. Net income on an adjusted basis for 4Q11 is expected to be in line with 4Q10 adj. net income of euro 4.3 mln, reflecting an increase in advertising and promotional expenses to support the rollout of new distribution in the United States during the upcoming holiday season. Gross margin for Q3 was 53.5%, compared to 56.3% for the same period in 2010. This decrease was mainly due to the growing portion of soda maker starter kit sales in the revenue mix, as part of management's strategy to increase market penetration. Company also announces that it has signed an exclusive distribution agreement in Brazil with Grupo Cassab, a company that has managed global consumer brands in Brazil for more than 80 years. SodaStream products are expected to be available in Brazil during the first quarter of 2012.
C&J Energy Services (NYSE:CJES)
A leading independent provider of premium hydraulic fracturing, coiled tubing and pressure pumping services doesn't seem like the company that would surprise. Considering the domestic focus and rapid expansion of fleets, analysts should be on top of the fast rising numbers.
CJES reported earnings of $.89 versus the $.78 estimate with revenue of $229M topping estimates by more than 10%. Though the company works in a straight forward business with long term contracts and major backlogs, analysts apparently can't catch up with the numbers.
The earnings beat is probably the least impressive of the three, but its ability to increase earnings by 31% sequentially might have been the most impressive pure number. Or maybe trading at a sub 5 PE with 200% earnings growth tops that in the mind boggling category.
- C&J Energy - CORRECTION: Co beats by $0.12, beats on rev: Earlier we used incorrect estimates to compare CJES results to. The correct comparison is as follows. Reports Q3 (Sept) earnings of $0.89 per share, $0.12 better than the Capital IQ Consensus Estimate of $0.77; revenues rose 173% year/year to $229.0 mln vs the $208.8 mln consensus.
All three companies reported earnings that caught analysts off guard. Naturally with the market down over 3% on Wednesday, it was difficult to place too much emphasis on the stock reactions. In a good tape, these beats would generate returns of 10% or 20% or more in the first day.
SODA alone traded more than 100% higher a few months ago based on expectations that were surpassed with this report. LIZ recently traded at 52-week highs, but it's apparent that most investors aren't clued into the new growth focus. CJES continues to fly under the radar. Also, 200% earnings growth and the stock won't even approach the IPO price from July.
Don't be surprised if these stocks lead the next market rally. While it might be difficult to pick the most impressive report from Wednesday, it clearly isn't difficult to invest in any of these companies.
Disclosure: I am long CJES, LIZ, SODA.
Additional disclosure: All information is for informative basis only. Please consult an investment advisor before making any investment decisions.