Earnings Preview: Five Companies That Could Surprise

The market’s fear about a potential credit meltdown is overshadowing what is turning out a pretty good earnings season. Through the close of trading on Thursday, Jul 26, positive surprises outnumbered negative surprises by a ratio of 3.7:1 among companies within the S&P 500. (On Thursday, the day of the Dow’s 311-point plunge, positive surprises outnumbered negative surprises by a ratio of 37:6.) Median company growth is running at 12.8%, which is better than the first-quarter. (With a similar number of reports, first quarter growth was running at 10.5%).

Extending the universe out to the S&P 1500 (S&P 500, S&P MidCap 400 and the S&P SmallCap 600), a similar story exists. Positive surprises are outnumbering negative surprises by a margin of 2.65:1 (versus 2.3:1 in the first quarter). Median company growth is running at 9.4% (versus 8.8% in the first quarter). The slower growth rates for the smaller capitalization companies may partially be explained by the simple fact that larger companies have more exposure overseas, which provide the double benefit of faster economic growth and favorable currency translations. (A euro dollar of profits is worth about $1.35 in American dollars.)

So when will investors’ focus shift back to the bullish earnings news? It’s hard to say because the subprime mortgage hole is not only getting deeper, but also wider. (Risky corporate debt is starting to get sucked into it). Plus, the earnings calendar contains 129 financial companies for the week of Jul 30 – Aug 3. Fortunately, about a third of these companies are insurance companies. REITs and other real estate companies account for 49 companies in the group, but many of these have exposure to commercial properties, which are not experiencing the same problems as residential properties are. There are 13 banks and eight investment banking firms, however, so there will still be a focus on the health of debt markets.

Overall, we have confirmed scheduled earnings reports from 810 companies for the week of Jul 30 – Aug 3. Included in this group are 97 S&P 500 members and Dow components General Motors (GM), Proctor & Gamble (PG) and Verizon Communications (VZ).

On the economic front, Tuesday features June personal income and spending, June construction spending, the Conference Board’s July consumer confidence survey and the July Chicago PMI. Wednesday features June pending home sales and the July ISM manufacturing index. June factory orders will be released on Thursday. Friday will feature July employment data and the July ISM services index.

Companies That Could Issue Positive Earnings Surprises during the Week of July 30 – Aug 3

Activision (ATVI) recently said that it expects to exceed its previous fiscal first-quarter guidance for revenues of $425 million and earnings of three cents per share. The video game maker has shipped more than eight million units of Spider-Man3, Shrek the Third, Transformers and Guitar Hero II. Two of the 13 covering brokerage analysts adjusted their projections in response, sending the consensus estimate up by a penny to five cents per share. The Most Recent Consensus is more bullish at six cents per share. ATVI has exceeded expectations twice during the past four quarters. Activision is scheduled to report on Thursday, Aug 2, after the close of trading.

A few weeks ago, CommScope (CTV) raised its guidance for second-quarter earnings. The wire and cable maker expects sales to have totaled between $500 and $510 million and for operating margins to be in the range of 15-16%. Previously, the company had forecast revenues of between $490 and $510 million and operating margins of 14.5-15.5%. (Strong demand has been allowing cable makers to enjoy pricing power for the past several quarters.) Nearly all of the covering brokerage analysts raised their forecasts in response, causing the second-quarter consensus estimate to rise by three cents to 76 cents per share. The Most Recent Consensus is more bullish at 77 cents per share. CTV has topped expectations for 12 consecutive quarters. CommScope is scheduled to report on Monday, Jul 30, after the close of trading.

Two of the 13 covering brokerage analysts have raised their second-quarter forecasts on CV Therapeutics (CVTX) over the past 30 days. These revisions have narrowed the consensus estimate to a loss of 86 cents per share, from the prior prediction for a loss of 90 cents per share. The biotech company exceeded expectations during the past four quarters by an average margin of nine cents per share. CV Therapeutics is scheduled to report on Monday, Jul 30, after the close of trading.

Refining margins have been strong thanks to a combination of elevated crude prices and tight capacity. As a result, it is not surprising to see earnings estimates rising ahead of Marathon Oil’s (MRO) second-quarter report. During past 30 days, six brokerage analysts have raised their forecasts. The consensus estimate of $1.98 is 19 cents above the average projection of a month ago and 39 cents above the average forecast of two months ago. The Most Recent Consensus calls for profits of $2.18 per share. MRO has exceeded expectations during the past two quarters by an average margin of 6.5 cents.

Companies That Could Issue Negative Earnings Surprises during the Week of Jul 30 – Aug 3

Last month, Advanced Medical Optics (EYE) slashed its guidance, citing the impact of lower sales, the recall of a contact lens solution and higher interest expense. Slightly more than half of the covering brokerage analysts materially cut their forecasts in response, resulting in the second-quarter consensus estimate plunging to a loss of 68 cents per share from a profit of four cents per share. EYE has missed expectations twice during the past four quarters. Advanced Medical Optics is scheduled to report on Thursday, Aug 2, before the start of trading.