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July 20, 2016

Idea of the Week: StarMine Models Pick Companies to Beat Q2 Earnings Consensus

by Sridharan Raman.

The StarMine team has selected five companies using the Eikon Screener that we expect to beat Q2 earnings estimates, based on SmartEstimate and Predicted Surprise data.

We earlier identified our five negative picks here.

Read on for the data behind our five positive picks. Historically, our selections have demonstrated an accuracy rate of about 75%, giving investors an edge ahead of earnings announcements.

Our picks for positive Predicted Surprises this quarter are — Amazon (AMZN.O), Boeing Co. (BA.N), Hawaiian Holdings Inc. (HA.O), Allison Transmission Holdings Inc. (ALSN.N) and Hecla Mining Co. (HL.N).

In Q1, we correctly anticipated the surprise direction in eight out of the ten stocks chosen.

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 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%.

Positive Surprise Predictions


Amazon (AMZN.O)

Industry Report Date Mean SmartEstimate Predicted Surprise
Internet & Catalog Retail 28-Jul-16 $1.11 $1.14 2.6%


Exhibit 1. Amazon Revenue 


Source: Eikon/StarMine

Amazon earnings are primed

“Prime Day,” when thousands of items are put on sale, has been a huge success for Amazon. While there were many items that were discounted, analysts noted that it was essentially a clearance sale on items that were not selling anyway, or older versions of electronics products. As you can see in the chart above, revenues have increased by more than 20% Y-o-Y on each of the last three quarters. That kind of revenue growth despite the huge revenue base has analysts excited. Revenue estimates for the current quarter are up 4.2% in the last 90 days, while earnings estimates are up 12%. Analysts have also raised revenue and earnings estimates for the next year. Amazon is finally churning out strong earnings after years of investing in the business and losing money. In fact, analysts expect earnings of $5.40 per share for the whole year. That is expected to increase to $9.92 next year and more than $16 per share in two years. That kind of earnings growth has analysts and investors taking notice.

Boeing Co. (BA.N)

Industry Report Date Mean SmartEstimate Predicted Surprise
Aerospace & Defense 27-Jul-16 $2.236 $2.311 3.3%


Exhibit 2. Boeing Analyst Revisions


Source: Eikon/StarMine

Effect of global turmoil

With an attempted coup in Turkey and instability in the Middle East and Europe, aerospace and defense companies may benefit from increased orders and countries looking to shore up their defenses. During the Farnborough Airshow, Boeing released its 20-year outlook, saying it expects orders to increase by 4% from last year’s estimates, confirming the expectations for growth in the coming years. All nine analysts revising estimates since the beginning of July have raised them. Earnings estimates for the current quarter are up 5.5% in the last 90 days, and the consensus earnings estimate is 1.8% higher for next year too.

Hawaiian Holdings Inc. (HA.O)

Industry Report Date Mean SmartEstimate Predicted Surprise
Airlines 21-Jul-16 $1.15 $1.17 1.7%


Exhibit 3. Japanese Yen vs. U.S. Dollar


Source: Eikon/StarMine

Favorable yen

Hawaii is a popular destination for Japanese vacationers, and the U.S. dollar is down almost 20% since the beginning of the year. That means Hawaii becomes a cheaper destination –good news for Hawaiian Airlines. Unlike Brazil’s Copa Holdings, which was a negative Predicted Surprise, Hawaiian has a passenger load factor of 81.1%, despite expanding to some new routes. While other airlines are struggling with over capacity on certain routes and increased competition, Hawaiian Airlines remains one of the primary airlines servicing the islands, and that is likely to help earnings going forward as traffic increases. The airline has added only four new planes to its fleet while keeping load factors above 80%, which shows that management is keen to expand cautiously. Lower fuel prices have helped operating profit margins reach a five year high of 19.2%. Management has also lowered operating expenses by more than 2 cents per available seat mile, to 11 cents from 13 cents in 2014.

Allison Transmission Holdings Inc. (ALSN.N) 

Industry Report Date Mean SmartEstimate Predicted Surprise
Machinery 27-Jul-16 $0.64 $0.66 3.7%


Exhibit 4. Allison’s Free Cash Flow


Source: Eikon/StarMine

European demand

Europeans have been slow to adopt automatic transmissions, but the trend is shifting.. That will likely benefit Alison Transmission earnings this quarter and going forward. In the U.S., Alison Transmission’s largest market, the mid size truck business seems to be picking up steam. Being the largest player in this space, the company enjoys strong margins and pricing powers. As a result it has been able consistently to generate strong cash flows. For the last three years, the company’s free cash flow has exceeded net income, which is a sign of strong earnings quality. The company recently signed supply agreements with Paccar and Cummins, two of the largest truck manufacturers in the U.S., which will likely help earnings going forward.

Hecla Mining Co. (HL.N) 

Industry Report Date Mean SmartEstimate Predicted Surprise
Metals & Mining 04-Aug-16 $0.05 $0.06 >15.2%


Exhibit 5. Silver Price


Source: Eikon

Strong silver price

Silver prices are up almost 50% since the start of the year. That alone is enough to boost Hecla Mining’s profits. The icing on the cake?One of their assets, the San Sebastian mines located in the Mexican silver belt, is turning out to be far more productive than expected. That means that the company will likely exceed their silver production targets. Some of their other assets like the Casa Berardi and Green’s Creek mines are also expected to have higher yields than initially projected. Analysts have raised revenue and earnings estimates for the quarter by 5.3% and 53% in the last 90 days. They have raised revenue estimates for next year by 15%. Analysts expect to see strong production numbers for this quarter and for the rest of the year.

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