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July 14, 2016

StarMine Picks Five Companies with Negative Earnings Outlook

by Sridharan Raman.

Each quarter, the StarMine team uses the Eikon Screener to pick five companies expected to beat earnings estimates and five expected to post negative results, based on SmartEstimate and Predicted Surprise data.

Here are the five negative picks and the data behind our choices. (Stay tuned for the positive surprise expectations in another story.) Historically, our selections have demonstrated an accuracy rate of about 75%, giving investors an edge when it comes to positioning themselves ahead of these earnings announcements.

Our picks for negative Predicted Surprises this quarter are — Tesla Motors (TSLA.O), Mosaic Co. (MOS.N), Viacom Inc. (VIAB.O), Copa Holdings Sa (CPA.N) and Cal-Maine Foods Inc.  (CALM.O).

It’s worth noting that the last edition of this newsletter for Q1 2016 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%.

Negative Surprise Predictions

Tesla Motors (TSLA.O)

Industry Report Date Mean SmartEstimate Predicted Surprise
Automobiles 03-Aug-16 ($0.51) ($0.66) -27.9%
neg1

Source: Eikon/StarMine

Negative news cycle

Tesla has its hands full, coping with news of possible accidents caused by the autopilot feature on their new sedans and delays in delivering cars due to logistical and production issues.  As if that were not enough, Tesla is proposing a merger with Solar City and all these moving parts have investors and analysts nervous.

There are now fewer buy estimates than there were just 90 days ago (2 vs. 9), and analysts have lowered earnings estimates for the quarter, the full year and next year. There is even a Bold Estimate calling for a loss of 66 cents per share for the quarter. This is an estimate by a 5-star rated analyst with a history of being accurate.

Mosaic Co. (MOS.N)

Industry Report Date Mean SmartEstimate Predicted Surprise
Chemicals 02-Aug-16 $0.12 $0.15 -18.1%
neg2

Source: Eikon/StarMine

Tough Phosphate pricing

Mosaic’s margins have declined along with phosphate prices. This fertilizer producer has seen YOY revenues fall for three consecutive quarters. Return on net operating assets — a measure of operating efficiency — is at a five year low of 9.2%, almost five percentage points below the industry median. With poor free cash flows and over $3.8 billion in total debt, the company’s dividends may well be at risk. There is a Bold Estimate for earnings of just 10 cents per share and fewer buy and more sell recommendations than 90 days ago. Analysts expect the phosphate markets to remain over- supplied—and that could keep prices down in the near future.

Viacom Inc (VIAB.O)

Industry Report Date Mean SmartEstimate Predicted Surprise
Media 04-Aug-16 $1.14 $1.04 -9.0%
neg3

Source: Eikon/StarMine

Poor ad sales and weak box office hurt earnings

Teenage Mutant Ninja Turtles did not perform up to expectations at the box office. Nor did the ad revenues. That sums up the quarter for Viacom.

Revenues in the last quarter were at a five year low of $3 billion, and several analysts are expecting it to go below that threshold in the next quarter. There are 7 Bold Estimates that are far below the consensus – a significant number.

When the Comedy Central channel lost stars Jon Stewart and Stephen Colbert in a short span, there was a huge void that the company has been unable to fill. Those struggles are part of the reason advertising revenues are down. The much sought after younger audience seems to have given the company a thumb’s down, and so have the analysts when it comes to their earnings this quarter.

Copa Holdings Sa (CPA.N)

Industry Report Date Mean SmartEstimate Predicted Surprise
Airlines 03-Aug-16 $0.23 $0.19 -17.3%
neg4

Source: Eikon/StarMine

Weaker Brazilian markets

With many international carriers increasing their exposure to South America, Copa Airlines is facing pricing competition. Copa has kept its capacity flat, with hopes of controlling supply. Brazil has been hardest hit, with Zika virus concerns possibly keeping the international travelers out. The load capacity at Copa is 77.4%, four percentage points below the industry median.

Analysts have lowered earnings estimates by 72% for the quarter in the last 90 days. They have also lowered earnings estimates for the whole year and next year by 22% and 17% respectively. That indicates that they do not anticipate a quick turnaround in earnings.

There is a Bold Estimate of 5 cents per share for the quarter. The shorts are taking an interest in the stock, too, with 14.1% of shares being shorted. On the last earnings call, CFO Jose Montero said, “demand for air travel in our region continues to be affected by lower economic growth and devalued currencies in Latin America” and the large presence of Copa in that market is likely to be a headwind to earnings.

Cal-Maine Foods Inc  (CALM.O)

Industry Report Date Mean SmartEstimate Predicted Surprise
Food Products 18-Jul-16 ($0.19) ($0.28) -50.7%
neg5

Source: Eikon

Egg prices crack

The avian flu outbreak tightened egg supplies, but the stock has bounced back to a point where the market is oversupplied. That has meant lower prices, and that’s bad news for Cal-Maine — one of the biggest egg makers in the southern half of the U.S.

As you can see above, analysts have aggressively cut estimates for the quarter, the whole year and next year. That indicates that egg prices may be depressed for some time as the markets work through the excess capacity. The shorts have piled on too, as 27.6% of outstanding shares are shorted. Chairman and CEO Dolph Baker spoke at the recent Stephens Spring investment conference and noted that some consumers have shifted to egg substitutes, which has led to lower demand for whole eggs. There has also been an increase in egg imports, which has added to the supply and depressed prices further. Plainly put, he said, “the industry is currently experiencing losses.”

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