StarMine Models Pick European Companies For Earnings Beats

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Includes: ASTVF, GSK, JDWPY, SUBCY, TOT
by: Lipper Alpha Insight

By Sridharan Raman

The StarMine team has selected five European companies, using the Eikon Screener, that we expect to beat earnings estimates, based on SmartEstimate and Predicted Surprise data.

Historically, our selections have demonstrated an accuracy rate of about 75%, giving investors an edge ahead of earnings announcements.

Our picks for positive Predicted Surprises this quarter are - GlaxoSmithKline Plc (NYSE:GSK), Total SA (NYSE:TOT), Austevoll Seafood ASA (OTC:ASTVF), Subsea 7 SA (OTCPK:SUBCY) and J.D. Wetherspoon Plc (OTCPK:JDWPY).

SmartEstimates aim to provide earnings forecasts that are more accurate than I/B/E/S Consensus Estimates, by putting more weight on the recent forecasts of top-rated analysts. When SmartEstimates diverge significantly from Consensus, you can anticipate the occurrence of earnings surprises with an accuracy rate of 70%. Revenue SmartEstimates are even more predictive of surprises, with a historical accuracy rate of 78%.

Positive surprise predictions

GlaxoSmithKline Plc

Industry Report Date Mean SmartEstimate Predicted Surprise
Pharmaceuticals 27-Jul-16 p20.94 p21.37 2.0%
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Exhibit 1. Analyst Recommendations

Source: Thomson Reuters Eikon/StarMine

Low exposure to U.S. markets

The strong performance of ViiV - a joint venture with Pfizer (NYSE:PFE) focusing on HIV drugs - is likely to boost earnings. Further, GSK has strong cash flows and a hefty dividend close to 5%. GSK does not have a large exposure to the U.S. drug market, which may shield it from the drug pricing risk in the U.S. However, foreign exchange movements are likely to be a tailwind to earnings. There are now more buy recommendations than there were 90 days ago, and fewer sell and strong sell recommendations as analysts have raised both revenue and earnings estimates for this year and next.

Total SA

Industry Report Date Mean SmartEstimate Predicted Surprise
Oil& Gas 28-Jul-16 $0.74 $0.78 5.8%
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Exhibit 2. Total SA Cash Flow from Operations

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Source: Thomson Reuters Eikon/StarMine

Being conservative helps

Even before all the big oil companies announced that they were cutting capital expenditures on the back of falling oil prices, Total had slowly decreased them since 2015. While they did still spend more than they earned in cash flow from operations, you can see in the chart above that in 2015, capital expenditures were down compared to 2014. That conservatism is likely to help Total in the future. Brent crude prices have also risen off their lows, which will also help earnings this quarter.

Austevoll Seafood ASA

Industry Report Date Mean SmartEstimate Predicted Surprise
Food Products 18-Aug-16 NOK1.78 NOK1.81 1.4%
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Exhibit 3. Analyst Revisions

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Source: Thomson Reuters Eikon/StarMine

Salmon shortages

Salmon has become more popular than ever, yet supplies are not keeping pace, and that has led to higher prices globally. Scandinavian salmon is well received globally as naturally sourced and with low antibiotics, which means it commands a premium price, and that leads to higher margins. In the last quarter, Austevoll's revenues increased (Y-o-Y) by 24.4%, and double-digit increases are expected again this quarter.

Salmon is fast becoming a super food, with its health benefits being touted in medical journals. Norwegian company Austevoll is well positioned to take advantage of this trend, and analysts have continued to raise earnings and revenue estimates for this quarter, the whole year and next year. There is even a Bold Estimate of 2.37 Norwegian Krone. This is an estimate by a 5-Star rated analyst with a track history of accuracy.

Subsea 7 SA

Industry Report Date Mean SmartEstimate Predicted Surprise
Energy Equip. & Services 28-Jul-16 $0.164 $0.180 9.8%
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Exhibit 4. Subsea Operating Profit Margin

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Source: Thomson Reuters Eikon/StarMine

Rebounding oil prices

Subsea has benefited from a strong order book. It recently closed on a $1.3 billion deal to supply the Beatrice wind farm turbine foundations and array cables off Scotland, which is expected to help earnings going forward. Overall, Subsea has a healthy backlog of orders, and a larger order book means improved efficiency. That has led to margins improving over the last two years. The trailing 4Q operating margin is now at 17.4%, more than double what it was two years ago.

While the rest of the industry is reeling from capex spending cuts, Subsea seems to be firing on all cylinders and operating margins now exceed the industry median by more than 13 percentage points. Unlike most other equipment manufacturers, Subsea has seen positive free cash flows in each of the last four quarters, and that is expected to continue as new deals are inked. Analysts have raised earnings estimates for the whole year by 62% but even more impressive is that they have also raised earnings estimates for next year by 26% in the last 90 days.

J.D. Wetherspoon Plc

Industry Report Date Mean SmartEstimate Predicted Surprise
Hotels Rest. & Leisure 12-Sep-16 p45.98 p47.65 3.6%
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Exhibit 5. J.D. Wetherspoon Free Cash Flow

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Source: Thomson Reuters Eikon

A toast to the pub

J.D. Wetherspoon operates pubs across England and Ireland, and the pub culture is as strong as ever. The company has a strong value proposition, and the management team has done a good job of not expanding too quickly, so the slowdown in the region has not been as severe for J.D. Wetherspoon. The company generates strong cash flows that exceed net income.

In the last semiannual period, the company reported free cash flow of £60 million compared to net income of £31 million. Those strong cash flows are likely to help the company make strategic investments in new pubs in lucrative locations. They are also a sign of strong earnings quality. The company has closed more pubs than it has opened in the last year, and while that may reduce revenues it is likely to help margins, as the underperforming pubs are the ones that have been closed.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.