5 Stocks That Are Beating Analyst Estimates

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Includes: GS, HBI, MAN, PII, SVU
by: StreetAuthority

By David Sterman

The era of cost-cutting is over. This means it's going to get harder for companies to show radical profit gains. Indeed, the pace of upside surprises in the first quarter of 2011 has modestly lagged previous quarters, according to Zacks.com. Yet some companies continue to surprise analysts and investors with scorching profit growth.

Generating strong results to start the year can often set the stage for continued upside. Here's a look at mid and large-cap companies that have exceeded first-quarter profit forecasts by at least 25%, and a deeper look at some notable standouts.

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1. Hanesbrands
There is one simple rule to investing: Find companies that consistently do better than many expect. For Hanesbrands, a leading vendor of both underwear and outerwear, that has been the case ever since management laid out a turnaround plan back in 2008. The company sought to cut its network of factories by more than half (down to a current 54), streamline all other aspects of the business and take down a potentially crippling debt load.

First-quarter results show all of that work to be in evidence. Analysts were universally surprised that the company could actually expand margins in the first quarter even though cotton prices (the primary expense) are soaring. Other costs were far lower than many expected, and it explains why Hanesbrands topped profit forecasts by nearly 50%.

This wasn't just a one-time event. Management thinks it will reap even more gains from the streamlining efforts. Equally impressive, the company has been able to push through price increases (which will really show up in the current quarter), which is no mean feat when you have customers like Wal-Mart (NYSE:WMT) and Target (NYSE:TGT). Analysts now think Hanesbrands can boost per share profits about 25% this year to $2.90. Citigroup even sees EPS (earnings per share) approaching $4 by 2013. Not bad for a $30 stock.

To get to that target, management is counting on further penetration in fast-growing markets like Brazil, China and India, where a rising middle class is trading up to the premium underwear and outerwear (at least relative to local brands) that Hanesbrands sells.

The company's rising profit picture is also helping to clean up the balance sheet. Long-term debt is on track to fall from $2.1 billion in 2008 to $1.6 billion by 2013. And the stronger the balance sheet, the more likely investors are willing to give the stock a higher price-to-earnings (P/E) multiple. A quick review of recent analyst reports shows a consensus view that shares should rise up from a current $30 to around $40 over the next year.

2. Supervalu
This supermarket operator has become an industry also-ran, losing customers to Whole Foods (WFMI) on the high end and to Wal-Mart on the low end. The company's operating metrics are among the weakest in the industry, and an ill-fated expansion plan in the last decade has left the company with too much debt. Those are good reasons to want to shun this stock.

Yet as I've argued in the past, investors have been too harsh. Even considering the firm's challenges, shares are far too cheap. A recent blowout quarter, in which Supervalu exceeded profit forecasts by 29%, has pushed this stock up 32% since I recommended it in early December (though my paired-trade play has not been a winner, as Whole Foods, which I suggested investors short, is up 33% in that time).

Importantly, many investors and analysts remain dubious of Supervalu's turnaround efforts, which my colleague Ryan Fuhrmann expertly outlined here. Ryan correctly notes the company remains a cash flow powerhouse. Operating cash flow of $1.1 billion and free cash flow of $502 million in fiscal (February) 2011 make clear that the company is healthier that its detractors would have you believe. The stock trades for about eight times projected (February) 2012 profits, the lowest of any supermarket chain.

To be sure, management has yet to generate improving same-store-sales at its grocery stores, but a steady refurbishment of each store should help to stabilize sales, if early efforts on that plan are any indication. In addition, the company's Save-A-Lot discount chain, was launched to compete with the popular "dollar stores," is gaining real traction, which management will discuss at a May 3 analyst meeting.

After a recent strong run, this stock could mark time in the near-term or even pull back as momentum investors cycle back out. Keep an eye on it, though. Any pullback below $10 would make for a compelling entry point. In a few years, I still see this stock moving up to $15 as its sales stabilize and it becomes more closely valued to its supermarket peers. Part of that outlook resides on an expectation that long-term debt, which is too high at $6.7 billion, will fall below $5 billion in the next three years, thanks to robust free cash flow. Reduced interest expense from that lower debt load will provide another boost to profits.

The pullback plays
Lastly, there are a few companies that now look set for considerable momentum in 2011, but their stocks have just spiked higher and you're best off waiting for profit-taking before jumping in.

These include:

3. Polaris Industries, which ran from $90 to $105 on outstanding first quarter results. The maker of personal watercraft, all-terrain vehicles and motorcycles is seeing strong demand both in the United States and abroad and looks like a clear play on rising spending on leisure activities. Yet at nearly 20 times projected 2012 profits, the stock isn't cheap.

4. Manpower. With operations across the globe, this staffing firm is firing on all cylinders. "Every geographic segment had revenue above our estimates," note Merrill Lynch's analysts. Despite the impressive results, this stock may be hard-pressed to rally much further, at least until it becomes clearer that extremely ambitious profit forecasts can be met. Right now, analysts think EPS can rise from $1.72 in 2010 to around $3 in 2011 and closer to $4 in 2012. For that to happen, the global economy will need to get even healthier.

5. Lastly, Goldman Sachs posted very impressive first-quarter results, and its shares barely budged, still trading for a reasonable 10 times projected 2011 profits. Much of the bank's first-quarter profit upside came from volatile lending and investing activities. Results from Goldman's investment banking division were less impressive. Yet if you believe we're on the cusp of a strong period of IPO activity, then those concerns should diminish, making this an attractive stock to consider.

It's helpful to assess why companies are topping forecasts. It may shed light on your holdings and highlight what areas of the economy are seeing pockets of strength. Of all these first-quarter earnings performers, Hanesbrands looks like the best value play, although a pullback in Polaris or Supervalu would set the stage for the next upward move for those stocks.

Disclosure: Neither David Sterman nor StreetAuthority, LLC hold positions in any securities mentioned in this article.

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