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The first week of earnings season was underway last week with positive surprises outnumbering negative 8 to 1. Still the market dropped, and broadly. Last week, 86% of stocks were down. It seems that the market focus has shifted from fear of slower growth to fear of higher interest rates in the face of earnings ’better than expected.’
The numbers look better and maybe better than expected but still not good. CSX Corp has been a good bellwether for the overall economy. The company contributed its second quarter earnings announcement on Monday and on Wednesday appeared the SEC filing 10-q that contains the financial statements for the quarter. The recovery from the steep drop in sales last year is very similar to the recovery experience in 2001 when sales growth was up very quickly from the recession low of –22% but the recovery stalled in 2002 and with it, the share price. It was not until 2004 that the top line began to expand at a faster rate and from 2004 to 2008 Cash Flow Return on Total Invest Capital (CFR) increased from 4.3% to nearly 12% before dropping off in the recent recession. In the year ended June 2010, CFR at CSX Corp. was 10% up from 8% in the prior period. The improvement is a function of better cash flow from operations and fewer shares due to resumed repurchases.
The company financial statements continue to trace out a positive surprise pattern and if the shares drop another 10% they will become available to the surprise model.
Earnings season heats up this week starting Monday with positive surprise more likely from Autobytel Inc. (ABTL), Crown Holdings Inc. (CCK), Encore Wire Corp. (WIRE), Hasbro Inc. (HAS), Heartland Express, Inc. ( HTLD, NVR Inc. (NVR), Skyline Corp. (SKY), T. Rowe Price Group, Inc. (TROW), Texas Instruments Inc. (TXN), Tupperware Brands Corporation (TUP), Zions Bancorp. (ZION).
Monday earnings announcements that are more likely to report negative surprises are: Brown & Brown Inc. (BRO), Cache Inc. (CACH), Cullen/Frost Bankers, Inc. (CFR), Human Genome Sciences Inc. (HGSI), ICU Medical, Inc. (ICUI), Knight Capital Group Inc. (KCG), Landry’s Restaurants Inc. (LNY), Packaging Corp. of America (PKG), Ralcorp Holdings Inc. (RAH) and Seacor Holdings Inc. (CKH).
As the week progresses the volume of new announcements increases. On Tuesday look for positive surprises in the earnings announced by: AO Smith Corp. (AOS), Altera Corp. (ALTR), Apple Inc. (AAPL), AptarGroup, Inc. (ATR), Astec Industries, Inc. (ASTE), Cirrus Logic Inc. (CRUS), Courier Corporation (CRRC), Cytec Industries Inc. (CYT), Gilead Sciences Inc. (GILD), The Goldman Sachs Group, Inc. (GS), Illinois Tool Works Inc. (ITW), Lee Enterprises Inc. (LEE), Linear Technology Corp. (LLTC), Mueller Industries Inc. (MLI), Polaris Industries, Inc. (PII) and Whirlpool Corp. (WHR).
Negative surprises on Tuesday are more likely with the earnings announcements from: Boston Scientific Corporation (BSX),Cintas Corporation (CTAS), LaBranche & Co. Inc. (LAB), Marten Transport Ltd. (MRTN), Meridian Bioscience Inc. (VIVO), Peabody Energy Corp. (BTU), Pepsico, Inc. (PEP), TD AMERITRADE Holding Corporation (AMTD) and Texas Industries Inc. (TXI).
The positive surprise pattern in the fundamentals is higher sales growth, rising gross profit margins, high and falling SG&A costs to sales, lower financing costs, lower inventory turnover, lower receivables turnover and rising cash flow return on invested capital.
I will report again on surprises as this week of earnings announcements progresses.
