StarMine’s Positive Predicted Surprises – Europe

Each year, the StarMine team quantitatively analyzes the earnings estimate accuracy of sell-side analysts and uses this information to create proprietary SmartEstimates. So what do sportswear, cars, phones, roads and houses have in common?

They are all represented in our picks for European companies expected to beat earnings estimates for 2015: JD Sports Fashion Plc (JD.L), Peugeot Sa (PEUP.PA), Deutsche Telekom Ag (DTEGn.DE), Ferrovial Sa (FER.MC) and Persimmon Plc (PSN.L).

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 the 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%.

As we do each year, we selected 10 companies using the Eikon Screener that we expect to fall into the positive or the negative camp, based on SmartEstimate and Predicted Surprise data. We have summarized that data and the facts behind it for the five positive picks below. Historically, our selections have demonstrated an accuracy rate of about 80%, giving investors an edge when it comes to positioning themselves ahead of earnings announcements. Stay tuned to see the negative picks in Europe.

Positive surprise predictions

JD Sports Fashion Plc (JD.L)

Source: Eikon/StarMine

‘Athleisure’ fashion lifts JD Sports

Stretchy pants aren’t just for the gym floor anymore. The athleisure trend in sportswear is seeing workout gear worn outside the health club, and that’s helping  JD Sports. The weather does not seem to have dampened customer enthusiasm here, in contrast with other retail stores. Nike is one of the major brands sold and if the trend in Nike sales is anything to go by, JD Sports could benefit.

JD Sports has seen improving trailing 4Q operating margins over the past six quarters (to 7.4% from 4.9%). That has driven an improvement in return on net operating assets in the same period to 54.2% from 28.4%. The rest of the industry has remained flat in the same period.

There is even a Bold Estimate of 59.20 pence, which means a 5-star analyst with a strong history of accuracy has an estimate that is far above the consensus.

Peugeot Sa (PEUP.PA)

Source: Eikon/StarMine

Peugeot sees turnaround

In 2012, Peugeot cut its dividend and received a bailout from the French government. Since then, the company has turned its fortunes around, improving sales, making strategic joint ventures that are paying dividends and reducing labor costs to industry-leading levels.

That has led to trailing-year operating profit margins to a 10 year high of 3.5%, and return on net operating assets to also ready a five year high.

Peugeot has generated positive free cash flow in each of its last three semi-annual periods. In the last period, the company reported net income of €652 million and free cash flow of €1.2 billion. That is a sign of strong earnings quality and sustainable earnings. Peugeot management may even contemplate bringing back the dividend.

Deutsche Telekom Ag (DTEGn.DE)

Source: Eikon/StarMine

Strong cash flow generation

Deutsche Telekom has continued to invest in next-generation fiber in Europe, but at the same time averaging more than 10% revenue growth for each of the last four quarters.

That means capital expenditures are being covered by operations, and the company has consistently generated strong free cash flow. In the last quarter, Deutsche Telecom generated €809 million in net income, but generated €1.9 billion in free cash flow. When earnings are being backed by strong cash flow, they are likely to remain sustainable.

After some tough times competitively, it looks like prices have stabilized across Europe. DT has enjoyed improved margins in the last four quarters — doubling to 12.4%.

Ferrovial Sa (FER.MC)

Source: Eikon/StarMine

Rising tolls and stronger traffic patterns

A toll increase of 8% again in 2016 is likely to help earnings going forward.

Lower oil prices mean that more people are taking to the roads, which in turn increases congestion, which leads to increased demand for more efficient toll roads. Increase in construction on parallel and alternative routes also increased demand for toll roads.

On average, revenues have increased by more than 10% each quarter (YOY) over the past eight quarters. All three 5-star rated analysts are above the consensus estimate for the year. Analysts have taken earnings estimates up by €0.18 in the last year to €0.70.

Persimmon Plc (PSN.L)

Source: Eikon/StarMine

Continued strength in housing

Persimmon’s CEO Jeff Fairburn said on the last earnings call a year ago that the company is looking at ‘very strong numbers in terms of operating profit.”

Then he pointed out one particular factor – return on capital. “That really is very pleasing to see that it’s the culmination of all of the other drivers in the business that lead to a return on capital of nearly 25%,” Fairburn said. That trend is likely to continue as Persimmon continues to aggressively price their units and demand remains strong, buoying margins. They have also done a good job at keeping costs low.

Strong free cash flow had led to speculation of a special dividend payout as the cash on the balance sheet increased to almost £380 million last year and may possibly go higher this year.