The start of earnings season is typically defined as the day that Alcoa Inc. (AA.N) reports its earnings. For the first quarter of 2012, it is scheduled to kick off on April 10, only days after a majority of U.S. companies close the books on the first quarter. There are, however, a significant number of companies that report first-quarter earnings before Alcoa does, together comprising an “earnings preseason”. During this quarter’s coming earnings preseason, 33 companies are scheduled to report earnings, including tech giants Adobe Systems Inc (ADBE.O) and Oracle Corp. (ORCL.O) as well as Costco Wholesale Corp. (COST.O), Nike Inc (NKE.N), and FedEx Corp. (FDX.N).
Within the group of companies reporting earnings before Alcoa, economically sensitive sectors like Consumer Discretionary and Information Technology are well represented. In contrast, defensive sectors such as Health Care, Telecommunications Services, and Utilities don’t have any companies reporting (see Exhibit 1 below). “Preseason” companies may report earnings that are more volatile than those of a majority of other companies because of the fact that they are more likely to be part of these sectors. But that may also make them more useful to investors looking for clues to the strength of the underlying economy.
EXHIBIT 1: COMPANIES REPORTING DURING PRESEASON
Source: Thomson ONE
Historically, earnings preseason results tend to provide insight into the direction of the entire earnings season. Although the results from the preseason are more volatile than those of the index as a whole, exhibiting a wider range and higher standard deviation than the earnings season as a whole, these early-reporting companies collectively tend to anticipate at least the direction of later changes in the earnings beat rate. Over the last ten years, when the preseason earnings beat rate is higher (or lower) than average, the overall beat rate is also higher (lower) than average two thirds of the time, as pictured in the chart below.
EXHIBIT 2: PERCENTAGE OF S&P 500 COMPANIES BEATING EARNINGS ESTIMATES
Source: Thomson ONE
This week, 12 companies are scheduled to report earnings for the first quarter of 2012. Using the StarMine SmartEstimate, we have identified two companies that are likely to post earnings surprises, Discover Financial Services (DFS.N) and Micron Technology (MU.O).
Discover Financial Services
Analysts polled by Refinitiv estimate that Discover Financial Services will report earnings of 91 cents per share for the first quarter of 2012 (shown in gold in the chart below). The StarMine SmartEstimate (blue line), which places more weight on the most recent estimates made by the analysts with a track record of being most accurate, predicts earnings will be higher, at 94 cents per share. This 3.2% difference between the SmartEstimate and the consensus, or the “Predicted Surprise”, is due, in part, to Discover’s success in the Federal Reserve’s recent stress tests of financial institutions. The Fed subsequently approved Discover’s plan to return capital to shareholders and the company promptly announced plans to repurchase up to $2 billion of its stock. The anticipated reduction in share count is expected to increase earnings; as a result, many analysts have revised their earnings estimates upward.
EXHIBIT 3: DISCOVER FINANCIAL SERVICES SMARTESTIMATE
Source: StarMine Professional
Micron Technology
Analysts predict that Micron Technology will post a loss of 19 cents a share in the first quarter. However, the SmartEstimate for the company currently stands at a loss of 22 cents a share, giving the semiconductor manufacturer a Predicted Surprise of -16.0%. Analysts expect that the fall in prices of DRAM memory modules will put downward pressure on Micron’s earnings. Although the NAND modules used in flash drives are providing a source of growth, this isn’t significant enough to offset the weakness in other parts of the business. However, the wild card in this segment of the industry is the uncertain impact of recent bankruptcy of Japanese chipmaker Elpida Memory Inc.
EXHIBIT 4: MICRON TECHNOLOGY INC SMARTESTIMATE
Source: StarMine Professional
The fourth-quarter earnings season was a fairly disappointing one for investors, as we noted in this report just a few days ago. Now that the first quarter is drawing to a close, the question naturally becomes whether we are in for more of the same. Or is the outlook more bullish? Given the generally low expectations for first-quarter earnings, the 33 companies reporting during the preseason may be able to shed light on the question of whether investors will have to brace themselves for earnings that are indeed underwhelming. If these early reporters in economically sensitive sectors beat estimates, it could mean that the low forecasts are too pessimistic; that the early reporters are a positive harbinger of an economic recovery. On the other hand, if the preseason gets off to a slow start, even those lackluster expectations for first-quarter earnings may prove to have been too high, and we may see investors rediscovering the allure of stocks in the less economically sensitive sectors.
Learn more about how StarMine analytics can help you pinpoint critical developments in your portfolio or watch list. Request a free trial today.
