Earnings Surprise Predictions Wrapup: So Far, 80% Successful

Once again, as financial market participants braced themselves for the quarterly event known as “earnings season”, the StarMine research team at Thomson Reuters sat down to scan the universe of stocks in the S&P 500 and other major North American indexes. Their goal, as always, is to identify a handful of companies that are likely to post results that are either significant positive earnings “surprises” or that will report results that fall well below what analysts are expecting and that the market will view as disappointing. Armed with this information, investors once again stood a better chance of beating the market: as market participants know all too well, a surprising or unexpected earnings release, one announcing results that either beat or fall short of analysts’ forecasts, has the potential to disrupt a company’s share price. (History shows that correctly predicting the direction of future earnings revisions and earnings surprises gives investors a good chance of predicting the direction of changes in the stock price, as the market reacts to the flow of earnings news.) Responding to an earnings surprise rapidly enough to limit losses or capture profits is difficult in today’s fast-moving markets; that’s why getting some insight into what appears likely to happen and anticipating those “surprises” is more vital than ever.

At this point – about midway through the S&P 500 first-quarter earnings season – five of the ten companies that we chose to highlight this quarter have so far reported their results; of these, four have delivered the positive and negative surprises that we had predicted. This 80% success rate thus far is due to the information provided by two key StarMine models: SmartEstimates. which are generated by quantitatively analyzing the most recent forecasts by top-ranked analysts and the Predicted Surprise. the percentage difference between the SmartEstimate and the I/B/E/S consensus estimate. When the SmartEstimate diverges significantly from consensus, it becomes a leading indicator of the direction in which earnings forecasts are likely to be revised, or the nature of the anticipated surprise. Overall, the accuracy rate for this predictor (in determining the direction of the anticipated surprise) is around 70%. The StarMine research team achieved this accuracy rate for Q4 2011 and you can view the report card here ; we will provide an updated report for the first quarter’s stocks once all have reported.

Listed below are the companies whose shares trade on North American exchanges that we believed were likely to deliver pleasant surprises or nasty shocks when they reported their earnings for Q1 2012, together with some analyst views on each. With five of them still to report, there is room for investors to use this information and determine whether to adjust their portfolios ahead of the announcement dates.

TOP POSITIVE SURPRISE FORECASTS:

1. Western Digital Corp . is benefiting from higher HDD prices that have not fallen back to pre-Thai flooding levels. Demand remains strong ahead of Windows 8 release. The company reported stronger than expected results last week.

2. Monster Beverages . is taking market share from major competitor Red Bull. Analysts cite higher margins and prices are getting Monster drinks even more shelf space in convenience stores. The company will report its results May 7.

3. Kinder Morgan Inc. . charges a fixed “toll” for all oil and natural gas passing though the pipelines and his insulated from volatility in the commodity prices. New pipeline projects in the works to meet increased demand. Kinder Morgan crushed the estimates with earnings of 56 cents per share.

4. Old Dominion Freight Lines . is benefitting from increased demand for small truckloads across the country. It is passing on higher fuel costs to customers through a fuel surcharge. The company’s results failed to meet analysts’ forecasts by one cent a share, as a result of higher-than-expected spending.

5. WestJet Airlines . is experiencing load factors of over 80% despite raising airfares. The airline has operating margins above the industry median. The company reports its results May 2.

TOP NEGATIVE SURPRISE FORECASTS:

1. Hasbro . is suffering from potential young customers moving to higher tech games like Xbox and Playstation an earlier age. Hasbro reported earnings of 4 cents a share compared to consensus of 8 cents.

2. Nokia . is losing market share to Apple, and the margins are falling for the company. Nokia reported a loss of 10 cents as opposed a consensus of a loss of 2 cents.

3. Genworth Financial . profits in the life insurance business being hit by low long term interest rates, which forces the company to invest in higher risk assets to meet policy obligations in the future. The company reports its results tomorrow, May 1.

4. Clear Channel Outdoor . is caught in a tough position as its cash strapped parent holding company requires dividend payments to meet short term loan obligations. Clear Channel Outdoor announces its results on May 4.

5. Sina Corp. . owns popular Chinese social networking site Weibo and is facing headwinds from government regulation. The new regulations require all users to provide names and valid addresses, and may drive users away. Sina will announce its quarterly results May 14.

SMARTESTIMATES AND THE PREDICTED SURPRISE %

SmartEstimates: Thomson Reuters StarMine Professional quantitatively analyzes the earnings estimate accuracy of sell-side analysts and uses this information to create proprietary SmartEstimates®. SmartEstimates help you better predict future earnings and analyst revisions with estimates that place more weight on recent forecasts by top-rated analysts.