Using Price-to-Cash Flow to Find Value

By Kevin Matras
November 10, 2009

The Price to Earnings ratio (or P/E) is probably the most common ratio in determining whether a company is under or overvalued. However, the Price to Cash Flow (or P/CF) is another great ratio to do just that. Cash of course is vital to a company’s financial health, especially nowadays, in order to finance operations, invest in the business, etc. And cash can’t really be manipulated on the Income Statement like earnings can.

The reason why some people like this measurement better than the P/E ratio is that the net income of the Cash Flow portion rightly adds back in depreciation and amortization, since these are not cash expenditures. Whereas the net income that goes into the Earnings portion of the P/E ratio does not add these in, thus artificially reducing the income and skewing the P/E ratio. So many analysts prefer using the Price to Cash Flow metric to judge a stock’s value.

And just like the P/E ratio is calculated by dividing the Price by its Earnings per share — the Price to Cash Flow ratio is calculated by dividing the Price by its Cash Flow per share. Also like a P/E ratio, the lower the number, the better. Currently, the average Price to Cash Flow (P/CF) for the stocks in the S&P 500 is 9.6. For the 12-month forward P/E ratio, it’s 15.3. But just like the P/E ratio, a value of less than 15 to 20 is generally considered good.

But make sure you compare the stock’s P/CF to its Industry, since different Industries will have different numbers that are considered normal. For example: the average Price/Cash Flow for Gold Mining companies is about 30, whereas it’s about 3 for Telecom.

Screen
The screen I’m running today is relatively simple:
* Zacks Rank = 1
(Only Strong Buys get thru.)
* One Year Projected Growth Rate >= Average for the S&P 500
(Looking for above-market growth rates.)
* Current Cash Flow >= 5 Year Average Cash Flow
(I want to see the Company’s cash position improving.)
* Price to Cash Flow less than or equal to Median for its Industry
(I want to see Companies with valuations lower than the median for their respective groups.)

There were 30 stocks that came thru this week’s screen. Here are 5 of them:
BARE – Bare Escentuals, Inc.
CMN – Cantel Medical Corp.
HS – HealthSpring, Inc.
TTC – Toro Company
VIA.B – Viacom Inc.

Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.

Earnings Season Winding down

By Dirk Van Dijk
November 06, 2009

Earnings season is rapidly drawing to an end. There will be only 280 firms reporting next week, and only 16 of those will be members of the S&P 500. That is down from 855 firms that reported this week, including 89 S&P 500 members. Most of the major firms that will be reporting are retailers, which will be reporting fiscal periods that ended in October, not September.

Some of the most important of these are Dow component Wal-Mart (WMT), Macy’s (M) and J.C. Penney’s (JCP). Among the important non-retail firms that will report are semiconductor equipment giant Applied Materials (AMAT), Rockwell Automation (ROK) and Tesoro (TSO), the oil refiner.

The flow of economic data will slow down after the fire hose of the last week. However there are a few things to keep an eye out for. These include:

Thursday:

* (1) Weekly initial unemployment claims, which have been trending down. Last week they fell by 20,000 to 512,000. I would expect another drop, but smaller.
* (2) Oil inventories, which have recently been trending down, but are at high levels for this time of year.
* (3) The Treasury budget. The consensus is that we ran a deficit of $150 billion in October.

Friday:

The Trade numbers are due out. While the trade deficit is dramatically lower than a year ago, it has recently started to trend up again, in large part due to the rebound in oil prices. The consensus is for the deficit to rise to $31.9 billion from $30.7 billion last month. That sounds about right to me. At least the recent increases in the trade balance have come from imports rising faster than exports, rather than seeing both of them decline.

Potential Positive Surprises

Historically the best indicators of firms which are likely to report positive surprises are a recent history of positive surprises and rising estimates going into the report. Some of the companies that have these characteristics include:

J.C. Penney’s (JCP) has seen its quarterly estimate jump by 103% over the last month and last time around they posted earnings that were twice what was expected. On the other hand, because the retailers earn most of their money next quarter, with very small absolute numbers it is easy to have big percentage surprises.

Electronic Arts (ERTS) has seen its estimates for the about-to-be-reported quarter rise by 19.2% over the last month and last time out it beat the Zacks Consensus Estimate by 45.5%.

Applied Materials (AMAT) has seen the estimates for its quarterly earnings edge up by 3.39% over the last month and last time it posted a 66.7% surprise. However that was a smaller than expected loss of $0.03, so the percentage surprise is much less than it appears.

Let Me Check My Calendar

By Kevin Matras
November 05, 2009

Even if you’re not that familiar with options, I’ll bet you’ve heard someone use the term ‘calendar spread’. Whether or not they knew what they were talking about is another story. So let’s define it here.

Definition
A Calendar Spread (also known as a ‘time spread’ or ‘horizontal spread’) is when you sell (write) an option in one month and buy an option with the same strike price but in a different, further out month.

Since the option you’re writing has less time (worth less) and the one you’re buying has more time (will be worth more), this can also be referred to as a ‘debit spread’ as well. You can do this with puts too – sell a put in a nearby month and buy the same strike in a further out month. As you would expect, you’d have a neutral to bullish bias with the calls and a neutral to bearish bias with the puts. You can also ’sell’ this strategy by buying the nearby and selling the further out – but today, let’s keep our focus on the long side.

Example:
Let’s use IBM (IBM – Analyst Report) for this example.

* Let’s say you wrote the December 125 call for 2.20 (collect $220) (delta is .35)
* And let’s say you bought the April 125 call for 6.50 (paid $650) (delta is .45)
* net cost (debit) is 4.30 or $430

Why Would I Want to Do This? The maximum potential loss is limited to what you paid for the spread – in this case $430. The maximum profit if removed together would be the difference between the two option prices at the expiration of the nearby month. Continuing with this example, let’s say IBM closed under $125 by the time the nearby December option expired:

* At expiration, the December 125 call I wrote for $220 is now worth $0
* And the April 125 call I bought for $650 is now worth $540
* my calendar spread is worth $540
$540 less my cost of $430 = profit of $110 or a 25% profit

If I wanted, I could hold onto that further out call if I thought a rally was underway – and make even more money. But of course, if it went down, I could lose the rest of the premium. But again, my maximum loss would be limited to $430.

This is a great strategy. Granted, you’re limited in your profit potential, but you’re capitalizing on the dynamics that the nearby month will lose its value (time value) quicker than the further out one. Some people probably don’t bother with this strategy because the profit potential seems small. But if you look at it in percentages, a 20% or 25% return isn’t small at all. For example, if you put ten of these on, before commissions, that would cost $4,300. If you made $110 profit on each one, that’s a $1,100 profit or 25%. And that’s pretty exciting.

You can learn more about this strategy and others by downloading our free options booklet: 3 Smart Ways to Make Money with Options (Two of Which You Probably Never Heard About).

Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.

Screening for PEG Ratio

Screening for PEG Ratio

By Kevin Matras
November 03, 2009

This week, I’m going to focus on a simple strategy that uses the PEG Ratio for determining a company’s under- or overvaluation. Let’s first start with a definition. A PEG ratio is simply the: P/E Ratio divided by the Growth Rate. A value of 1 or less is considered good (at par or undervalued), while a value of greater than 1 is, in general, not as good (overvalued). Once again, the PEG Ratio is simply the P/E Ratio divided by the Growth Rate. Many believe this ratio tells a more complete story than just the P/E.

A company with a P/E Ratio of 25 and a Growth Rate of 20 would have a PEG Ratio of 1.25 (25 / 20 = 1.25). While a company with a P/E Ratio of 40 and a Growth Rate of 50 would have a PEG Ratio of 0.8. Traditionally, investors would look at the stock with the lower P/E Ratio and deem it a bargain (undervalued). But looking at it closer, you can see it doesn’t have the growth rate to justify its P/E.

The stock with the P/E of 40, though, is actually the better bargain since its PEG Ratio is lower (0.8), implying it’s undervalued with more potential value. (Undervalued in relation to its projected growth rate.)

In other words, the lower the PEG, the better the value, because the investor would be paying less for each unit of earnings growth. So for this week’s screen, we’re going to use the PEG ratio to find value. Let’s first start with:
* Zacks Rank less than or equal to 2
(Only stocks with a Zacks Rank of Strong Buy or Buy get through.)
* Average Broker Rating less than or equal to 2.5
(The brokers too have to be on board as well. Only companies in the better part of a Strong Buy or Buy are allowed.)
* Projected One Year Growth Rate >= 20
(Strong performers are what we’re looking for.)
* PEG Ratio less than 1
(P/E using F(1) divided by its F(1) projected growth rate.) (We’re using a classic, text book example to identify undervalued stocks.)
* Price >= $5

Here are 5 stocks from this week’s list (for Tuesday, 11/3/09):
BUCY – Bucyrus International, Inc.
DV – DeVry Inc.
IMA – Inverness Medical Innovations, Inc.
OSIS – OSI Systems, Inc.
SCHL – Scholastic Corp.

Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.

Earnings Preview for Nov. 2 – 6

By Dirk Van Dijk
October 30, 2009

This will be another busy week for earnings, particularly among the smaller firms. A total of 855 firms are due to report, including 89 S&P 500 members, and Kraft Foods (KFT), a Dow 30 Component. Other noteworthy firms that are set to release reports include Cisco (CSCO), Ford (F ) and Time Warner (TWX ). It will also be a busy week for the oil industry with major firms like Marathon (MRO), Anadarko (APC) and Devon (DVN) reporting.

It is also going to be a very busy week for economic data:

Monday:
* Construction Spending is expected to be down 0.4% in September after rising 0.8% in August
* The ISM Manufacturing index for October is expected to rise to 53.0% from 52.6% in September
* Pending Home Sales are expected to rise by 0.4% for September, slowing from a 6.4% jump in August

Tuesday
* Factory Orders are expected to rise by 1.0% following a 0.8% increase in September
* Auto and Truck sales are due out. There is no consensus number available, but I think they are likely to rise a little bit from the very depressed 9.2 million annual rate in September. No boom though, as artifical inticements like “Cash for Clunkers” are missing

Wednesday
* The ADP estimate of private non-farm payrolls is expected to see a drop of 190,000, and improvement over the 254,000 drop in September, but still a big drop
* The ISM Services index is expected to rise to 51.7 for October from 50.9 in September
* The Federal Open Market Committee meeting ends. There is almost no chance of any change in the Fed funds rate, but economists will be studying the statement for indications of when the Fed might pull back from its Quantitative Easing program

Thursday
* Third quarter productivity is expected to rise by 5.8% on top of a 6.6% rise in the second quarter. Given the strength in GDP (up 3.5%) and the weakness in the job market, I will take the over on that number
* Weekly initial unemployment claims, which have been trending down. Last week they fell by 1,000 to 530,000. I would expect another small drop

Friday
* The big employment report for October with a ton of data in it, including
o Non Farm Payrolls, a loss of 166,000 is expected down from a drop of 263,000 in September
o Unemployment rate expected to rise to 9.9% from 9.8%
o Average work week (an important leading indicator of employment) expected to tick up to 33.1 hours from 33.0
o Average hourly earnings expected to increase at the same 0.1% as they did in September
* Consumer Credit is expected to drop by $10.0 billion following a $12.0 billion fall in September. Historically any decline in Consumer Credit is unusual, so even a $10 billion decline is very significant

Potential Positive Surprises
Historically the best indicators of firms which are likely to report positive surprises are a recent history of positive surprises and rising estimates going into the report. Some of the companies that have these characteristics include:

Ford (F): While a loss of 15 cents is currently expected, last time around Ford had a much smaller-than-expected loss, and analysts have been aggressively raising their estimates for the last of the Big Three. “Cash for Clunkers” boosted sales in July and August, and the clearing away of inventory has allowed it to reduce the level of incentives it has to provide to move metal.

Hartford Insurance (HIG): In the second quarter, HIG beat the consensus numbers by 63.8% and analysts have been tripping all over themselves raising estimates lately, with the estimates for the third quarter up 42.3% over the last month. HIG is currently expected to earn $1.07 for the third quarter.

Pioneer Natural Resources (PXD): Pioneer is like a lot of the upstream oil and gas companies that beat estimates significantly in the second quarter and are seeing estimates rising just before they report. Last time PXD surprised by 50.0%, and over the last month estimates for this quarter have shot up by 54.2%.

Potential Negative Surprises
Unlike the upstream part of the oil business, the downstream end looks like it could be a disappointment. That has been the story of the big oil firms like Exxon that have already reported — solid results from the exploration and production side, but very week results for the refineries and gas station end of the business. Two oil firms with heavy exposure to the downstream end that look like they could disappoint are:

Marathon (MRO) missed by 34.0% the last time around and the estimates for the quarter have fallen by 8.2% over the last month to $0.56

Sonoco (SUN) missed by 28.0% last time and estimates for the third quarter have fallen by 131.3% — from a profit to a loss of 9 cents now expected.

Current Ratio

By Kevin Matras
October 27, 2009

This week, I’m focusing on another ratio to help gauge a company’s financial health: the Current Ratio. It’s calculated by dividing current assets by current liabilities. The higher the ratio the better, meaning the company has more liquid assets to meet its short-term obligations. A ratio of 2 or more (meaning a company has at least twice as many short-term assets than short-term liabilities) is generally considered good. Currently, the average current ratio for the stocks in the S&P 500 is 2.09. (This is a nice improvement from mid-year when it was at 1.75; and an even bigger improvement from the beginning of the year when it was at 1.67.)

How to Use
Screening for this is quite easy to do. It’s a ratio, so on any of our screeners, including the Research Wizard, you’d want to first go to ‘Ratios’. And then go to the ‘Liquidity and Coverage’ section. From there, you’ll find an item called ‘Current Ratio’. That’s the one. As for what value to use, I prefer to compare a stock’s Current Ratio to the median for its Industry. And in this week’s screen, were doing just that. We’ll also add in some other items to help us find sound companies with solid prospects for the future.

Screen Parameters
* Zacks Ranks = 1
(Only Strong Buys allowed.)
* Current Ratio > median for its respective X Industry
(Looking at the companies with the strongest liquid positions to meet their short-term financial obligations.)
* Current ratio > 2
(And at the very least, we want the companies to exceed the commonly held definition of good, which means greater than 2.)
* Projected 1 Yr. Growth Rate > median for its respective X Industry
(This means we’re looking for the companies with the best growth rates within their groups.)
* Projected 1 Yr. Growth Rate > 0
(I only want positive projected growth rates.)
* Price >= $5
* Volume >= 100,000

Here are 5 stocks that passed this week’s screen:
BLK – Snapshot Report BlackRock, Inc.
CBT – Snapshot Report Cabot Corp.
FIRE – Snapshot Report Sourcefire, Inc.
ISRG – Analyst Report Intuitive Surgical, Inc.
VRX – Snapshot Report Valeant Pharmaceuticals

Start using this financial strength ratio in your own screening to help you find the stocks best able to prosper during these tough financial times. Start putting these ideas and others to the test today. Sign up now for a two week trial to the Research Wizard and start screening and backtesting your strategies before your next trade.

Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.

Earnings Preview for Oct 26 – 30

By Charles Rotblut
October 23, 2009

Investors will be inundated with earnings reports this week. More than 800 companies are scheduled to release third-quarter reports. Within this group are 149 S&P 500 members, including Dow components Chevron (CVX), Exxon Mobil (XOM), Procter & Gamble (PG) and Verizon (VZ).

We’ll get our first look at how well the economy fared in the third quarter with the advance GDP report. Economists are expecting a return to growth with a 3.1% expansion. Any number below 3% could cause a negative reaction in the equity markets.

* Tuesday: September Durable Goods Orders, October Conference Board Consumer Confidence, August Case-Shiller housing price index
* Wednesday: September new home sales, weekly crude inventories, weekly mortgage applications
* Thursday: Advance Q3 GDP, weekly initial jobless claims, weekly natural gas inventories
* Friday: September personal income and spending, revised October University of Michigan consumer confidence, October Chicago PMI

No Fed officials are scheduled to speak. The Federal Open Market Committee (FOMC) will hold a 2-day meeting starting on Nov 3. The Treasury Department will sell $121 billion in new debt this week. The auctions will include 5-year TIPS (Monday), 2-year notes (Tuesday), 5-year notes (Wednesday) and 7-year notes (Thursday). Demand has been strong, despite the influx of new debt.

Although third-quarter earnings have been running above expectations, the major indexes have stayed in a relatively narrow range ever since the Dow broke above 10,000. The blue-chip average has found resistance at about 10,160. This sideways action is not surprising given that the rally has lasted for more than 7 months. The only concern is the recent trend of volume being higher on down days than up days. Nonetheless, the bull continues to breathe and a further move upward is still possible.

Companies That Could Issue Positive Earnings Surprises
Jones Apparel Group (JNY) has topped expectations for 5 consecutive quarters. Four of the covering analysts have recently raised their third-quarter profit projections this month, including 2 within the past 7 days. The revisions have pushed the Zacks Consensus Estimate 2 cents higher to 27 cents per share. Jones Apparel Group is scheduled to report on Wednesday, Oct 28, before the start of trading.

Recent positive revisions by 5 analysts, including 3 within the past week, have raised the third-quarter Zacks Consensus Estimate on McKesson Corporation (MCK). The average forecast now calls for profits of $1.01 per share, versus 99 cents a week ago. MCK has issued positive earnings surprises for 6 consecutive quarters. McKesson is scheduled to report on Tuesday, Oct 27, after the close of trading.

Owens Corning (OC) has issued positive earnings surprises for 3 out of the last 4 quarters. Judging by the recent trend in estimate revisions, analysts believe the company could surprise again. The third-quarter Zacks Consensus Estimate of 40 cents per share is 7 cents higher than the average forecast of a month ago, reflecting revisions by 3 analysts. The most accurate estimate is more bullish at 42 cents per share. Owens Corning is scheduled to report on Wednesday, Oct 28, before the start of trading.

The third-quarter Zacks Consensus Estimate for Penske Automotive Group (PAG) rose this week to 27 cents per share. Two analysts boosted their forecasts, a sign of optimism about the forthcoming report. The most accurate estimate is even more bullish at 29 cents per share. PAG has topped expectations for 2 consecutive quarters by an average margin of 7.5 cents per share. Penske Automotive Group is scheduled to report on Friday, Oct 30, before the start of trading.

Companies That Could Issue Negative Earnings Surprises
Sprint Nextel (S) has issued 2 negative earnings surprises in the past 4 quarters. The wireless telecom provider’s second-quarter results were 11 cents below expectations. Ahead of the company’s third-quarter report, 11 analysts have lowered their projections. The revisions have worsened the Zacks Consensus Estimate by 5 cents to a loss of 15 cents per share. Sprint Nextel is scheduled to report on Thursday, Oct 29, before the start of trading.

Gold Miners’ Margin Problem

By Charles Rotblut
October 21, 2009

As gold sets new highs, it would only be natural to assume that profit forecasts for gold mining companies would be soaring too. Surprisingly, profit forecasts are not jumping.

Though some brokerage analysts have raised their full-year projections in recent weeks, the Zacks Consensus Estimate is not moving higher for most gold miners. Rather, it is essentially unchanged for Barrick Gold (ABX – Analyst Report), Eldorado (EGO – Snapshot Report), Goldcorp (GG – Snapshot Report) and most of their peers.

Where are we seeing increases are for companies that are significantly dependant on other metals, such as copper or silver. For example, the 2009 Zacks Consensus Estimate for Freeport-McMoRan (FCX – Analyst Report) has risen 67 cents over the past 30 days to $3.79 per share. (This morning, FCX reported third-quarter profits of $2.07 per share, topping forecasts for $1.14 per share). Analysts hadPan American Silver (PAAS – Snapshot Report) is also seeing expectations rise with the Zacks Consensus now at 75 cents per share, versus 70 cents a month ago.

Ore Quality Is An Issue
A big reason why the gold miners are not shining as brightly as the precious metal is the quality of the ore being mined. There is a general school of thought that the miners are digging up ore that is more difficult to process. As result, this is adversely impacting costs. When miners dig up gold, they are effectively taking rock out of the ground. Though the goal would be to just dig up gold, the actual rocks contain various other metals and minerals. This means the mining company has to separate the gold from the other metals. Ore is considered to be higher quality when there is a greater concentration of gold in the rocks. Conversely, ore is considered to be of lower quality if the rock contains less gold.

Obviously, it is in every miner’s best interest to dig up higher quality ore. However, as more and more gold is dug up, the quality of the ore decreases, hurting margins. It is this concern that has many analysts unwilling to raise their profit forecasts. Investors should note that this is not dissimilar to what is occurring with oil. Many of the newly discovered oil fields are in areas where it is expensive to drill in. An example is Brazil’s Tupi field, which lies several miles below sea level.

Not The First Time Analysts Have Been Cautious
What’s interesting about the lack of estimate revisions is that this is not the first time it has happened. Back in February, when gold broke above $1,000 for the first time this year, I pointed out that brokerage analysts were not raising their forecasts. (Read Why Gold Miners Are Not Glittering.) Rather, analysts were cutting forecasts at that time.

Since then, gold mining stocks have rallied with Market Vectors Gold Miners (GDX) gaining about 43%. However, had you invested in a fund that tracked the S&P 500 instead, you would have realized an approximate 42% return. In other words, you could have gotten a similar return with considerably more diversification by buying S&P 500 SPDR (SPY) instead of GDX. (An investment in gold, via Gold SPDR (GLD) would have only earned you an 11.2% return over the same period of time.)

As you can see, while gold has been rallying, it has not given investors the best opportunities to profit. The mixed earnings estimate picture for gold miners suggests that the risks of investing in these companies remains elevated. Though gold mining stocks could still go higher, especially if third-quarter margins are better than expected, there are industries whose short-term prospects are brighter.

Grading Management with ROE

By Kevin Matras
October 20, 2009

This week I want to talk about Return on Equity.Return on Equity, or ROE, is a commonly used measure of management efficiency. It’s a favorite screening criterion of many money managers and investors, including myself, because it tells you how successful a company is at using its shareholders’ capital. Moreover, companies with steadily increasing ROEs are generally better managed with attention being paid to the details.

Criteria Defined
Return on Equity shows how much profit a company is making on its shareholder equity. The formula for ROE is calculated as:
Income / Average Shareholders Equity (past 12 months). The Income number for a company is listed on their Income Statement. Shareholders Equity is the difference between Total Assets and Total Liabilities, and is found on a company’s Balance Sheet. ROE is always expressed as a percentage. So a company with a ROE of 10%, for example, means it created 10 cents of assets for every one dollar of shareholder equity in a given year.

How to Use
I think ROE is a great item to use regardless of what kind of investor you are – whether it be Growth & Income, Value or even Aggressive Growth or Momentum. Seeing how a company makes use of its equity, and the return it makes on it, is an important measure to look at. It can also alert you to problems when it’s falling. Another great way to use the ROE is to compare it to its Industry.

Some industries require greater assets than others to run their business. Take the Steel Industry versus the Software Industry for an extreme example. (Steel has a median ROE of 13.5%, while the Computer Software-Services has a median ROE of 7.5%.). If you screened for only absolute numbers, you may miss some great stocks in some great groups.

So trying to find companies with the best ROEs relative to their group (Sector or Industry etc.) is one of the best ways of making an apples-to-apples comparison in an effort to find the top stocks.

Conclusion
ROE can be a powerful screening criterion for investors in measuring how effective management has become, and how profitable they are in using investors’ cash. A better understanding of the factors that affect ROE, and how to best use it, will help make this criteria even more valuable to you.

The screen I’m running this week has me looking for companies with:
* ROE >= 5 Year Avg. ROE
* ROE >= Avg. for their Industry
* Zacks Rank = 1 (Strong Buys)

Here are 5 stocks from this week’s screen (for 10/20/09):
BUCY – Bucyrus International, Inc.
ISBC – Investors Bancorp, Inc.
STE – Steris Corp.
SVR – Syniverse Holdings, Inc.
WWW – Wolverine World Wide, Inc.

Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.

Earnings Preview for Oct 19-23

By Charles Rotblut
October 16, 2009

Third-quarter earnings season hits full stride this week with 439 companies confirmed to report. More than of a quarter of these are from the S&P 500 (135 companies). Dow components include 3M (MMM), American Express (AXP), AT&T (T), Boeing (BA), Caterpillar (CAT), Coca-Cola (KO), E.I. DuPont (DD), McDonald’s (MCD), Merck & Co. (MRK), Microsoft (MSFT), Pfizer (PFE), Travelers (TRV) and United Technologies (UTX).

Housing data will be the highlight on the economic calendar. The existing home sales data will be influenced by the first-time home buyers’ credit. The starts and permits data could be more interesting, especially if they show fear on the part of builders about the subsidy potentially not being renewed.

* Monday: October NAHB housing index
* Tuesday: September housing starts and building permits, September Producer Price Index (PPI)
* Wednesday: Fed Beige Book, weekly crude inventories, weekly mortgage applications
* Thursday: September Leading Indicators, August FHFA housing price index, Fed balance sheet, weekly initial jobless claims, weekly natural gas inventories
* Friday: September existing home sales

Fed Chairman Ben Bernanke has 2 speeches scheduled for this week. On Monday, he will talk about Asia and the financial crisis at a conference in Santa Barbara. On Friday, he will talk about the changes to the financial regulations and monetary policy at a Boston Fed conference.

Boston Federal Reserve Bank President Eric Rosengren will give opening remarks to conference attendees on Wednesday. He will speak again on Thursday to discuss whether the Fed should make fiscal stability one of its objectives. New York Federal Reserve Bank President William Dudley will moderate a panel about monetary policy on Thursday. Vice Chairman Donald L. Kohn will be at the conference on Friday, participating in a panel discussion about the international response to the financial crisis.

Philadelphia Federal Reserve Bank President Charles Plosser will discuss monetary policy at the Standford Institute for Economic Policy Research on Tuesday. Governor Daniel Tarullo is scheduled to speak on Wednesday at the Exchequer Club of Washington, D.C.

Attitudes towards earnings news appear to have shifted from celebrating positive surprises to almost demanding perfection. We saw this with Goldman Sachs (FCS) and IBM (IBM) , both of which declined after exceeding both revenue and earnings forecasts.

This week should be more telling, given the large number of companies reporting. Keep an eye on revenues, since that appears to be a stumbling block for many. Through Thursday (Oct 15) evening, the ratio of positive-to-negative revenue surprises is just 1.5:1. Conversely, the ratio of positive-to-negative earnings surprises is 6.1:1.

Companies That Could Issue Positive Earnings Surprises
Recent revisions by 3 analysts have pushed the third-quarter Zacks Consensus Estimate higher for Eastman Chemical (EMN). Analysts now expect the company to report profits of $1.13 per share, a 4-cent increase over the average forecast of a month ago. The most accurate estimate is more bullish at $1.15 per share. EMN has topped expectations for 2 consecutive quarters. Eastman Chemical is scheduled to report on Friday, October 23, before the start of trading.

Five analysts have raised their full-year forecasts on E.I. DuPont (DD) in recent weeks, including 3 during the past 7 days. The revisions have pushed the Zacks Consensus Estimate 2 cents higher to 33 cents per share. Though DD has topped expectations twice in the past 4 quarters, this call is not without risk since the chemical company’s Q408 results were 4 cents below projections. DuPont is scheduled to report on Tuesday, Oct 20, after the close of trading.

A continued rise in assets under management (AUM) has analysts optimistic about T. Rowe Price (TROW). The Zacks Consensus Estimate has risen by 2 cents over the past 30 days, reaching 46 cents per share. More than half of the 19 covering analysts have increased their projections. TROW has topped expectations for 2 consecutive quarters, reversing a previous trend of disappointments. T. Rowe Price is scheduled to report on Friday, Oct 23, before the start of trading.

Western Digital (WDC) has topped earnings expectations for 7 consecutive quarters. Ahead of the hard drive maker’s fiscal first-quarter report, about one-third of the covering analysts have raised their profit projections. The revisions have pushed the Zacks Consensus Estimate 6 cents higher to 89 cents per share. The most accurate is far more bullish at 94 cents per share. Western Digital is scheduled to report on Thursday, Oct 22, after the close of trading.

Companies That Could Issue Negative Earnings Surprises
SuperValu (SVU) has missed expectations twice during the last 4 quarters. This past week, 2 analysts lowered their fiscal second-quarter forecasts, causing the Zacks Consensus Estimate to fall by a penny to 36 cents per share. The most accurate estimate is even more bearish at 33 cents per share. SuperValu is scheduled to report on Tuesday, Oct 20, before the start of trading.