Management's obsession with earnings guidance can be a problem, and will usually lead a company to pursue a short-term strategy at the expense of what is needed to boost the long-term strength of the company. Although this is not my preferred investment strategy, a case can be made that examining stocks that had large earnings upside surprises might reveal some common characteristics that would allow investors to ferret out these winners in the future.
IN PICTURES: 20 Tools For Building Up Your Portfolio
One problem that an investor can encounter is whether a company either beat or missed its guidance as earnings releases are not exactly known for its transparency. Thankfully, an investor can go to Yahoo! (Nasdaq:YHOO) and head to the finance section where the numbers are presented.
Improving Operations
Mead Westvaco (NYSE:MWV) had a huge earnings upside surprise last quarter, reporting 22 cents versus the one cent analyst estimates. This packaging company said during its earnings call that "One of the biggest drivers of our second quarter results were the prominent improvements to our operational effectiveness and cost structure that we continue to implement across our businesses."
Jumping over to retail, Sears Holdings (Nasdaq:SHLD) also had a nice upside surprise, reporting a net profit of 13 cents versus the anticipated loss of 88 cents. The company did this despite an anemic consumer market that is not spending at previous levels before the bubble. This was reflected in a domestic comparable store sales decline of 7.4% for Sears Holdings in the quarter.
Finance Surprises
Fifth Third Bancorp (NYSE:FITB) also shocked investors in its last quarter with net income of $1.15 versus the expected loss of 34 cents. This large regional bank benefited from the sale of a non-core asset during the quarter, which helped cushion its income statement from net charge offs of $626 million.
Another financial with a large upside earnings surprise was SLM Corp (NYSE:SLM), which came in with 31 cents versus the estimate of 4 cents. The earnings report was notable for a mess of one-time items, but analysts had accounted for these in the estimates.
Impressive Tech Sales
Over in the technology sector, Western Digital (NYSE:WDC) reported 76 cents per share compared to expectations of 28. The company produced an impressive quarter to end its fiscal year, generating cash flow from operations of $349 million, and ending the quarter with $1.8 billion in cash and equivalents. If you consider that the June quarter is probably close to the trough of the recession, this is quite an achievement for Western Digital.
The guidance game can be a nightmare for investors as the volatility that can result from even a small deviance can be frightening. However, credit should be given to those companies that did succeed in beating estimates in a major way. (For more, see Can Earnings Guidance Accurately Predict The Future?)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
