4 Earnings Surprises Worth a Second Look

by Will Ashworth | April 25, 2012 1:54 pm

As of last Friday, 245 companies had reported first-quarter results, with 72% beating earnings estimates[1].

This is the second-best quarterly performance since 2000, when Bespoke Investment Group began tracking earnings results. The news is so positive that I thought I’d look at some of the better “beats” from last week’s slew of reports.

First up is Royal Caribbean Cruise Lines (NYSE:RCL[2]), which reported a 40% surprise on the upside April 20. That’s the good news. Unfortunately, that beat was up against an exceptionally soft estimate of $0.15 a share. And since RCL delivered $0.36 a share in the first quarter of last year, earnings declined year-over-year by 42%!

The two biggest factors in the slide were higher fuel costs (again!) and fewer bookings due to the Costa Concordia tragedy. The former is likely to be an ongoing problem; the latter has already dissipated, and bookings are returning to normal.

When you consider that¬†Royal Caribbean’s fuel costs are almost double what they were five years ago — against a 50% increase in revenue — I think you really have to marvel that it’s making any money at all.

Things will get better in the cruise business, and when they do, Royal Caribbean’s stock price won’t be stuck in the 20s.

United Rentals (NYSE:URI[3]) announced blowout earnings April 17, trouncing analyst expectations. Just a couple of days earlier, I was passing a construction site and against the building was an unoccupied scissor lift with a United Rentals sticker slapped on the side — a Peter Lynch moment if there ever was one.

The company earned $0.36 a share in the first quarter, $0.31 higher than the analyst estimate of $0.05 a share and $0.68 better than its $0.32 loss a year earlier. Most important, rental revenue, which represents a majority of URI’s sales, jumped 21%, to $523 million, thanks in part to increased rental rates and higher volume of equipment rented. URI spent $264 million in 2012 to increase the size of its fleet.

I think United Rentals’ performance suggests that the economy is getting stronger. Even if it’s an illusion, URI’s growth isn’t. By the middle of this year, it will close its $4.2 billion acquisition of RSC Holdings (NYSE:RRR[4]), one of its main rivals. Look for analysts to adjust their earnings estimates in the days ahead. Good things are happening.

On April 17, the same day Warren Buffett announced that he has stage 1 prostate cancer, he also got a bit of good news: USG Corporation (NYSE:USG[5]), one of the worst-performing stocks in Berkshire Hathaway‘s (NYSE:BRK-B[6]) equity portfolio, announced a first-quarter loss of just $0.26, versus the consensus estimate of a $0.42 loss. Buffett is USG’s largest shareholder, with almost 33% of the stock.

The company managed to turn an operating loss of $58 million last year into a $27 million operating profit in 2012. Furthermore, revenues grew by 13%, to $812 million, and gross margins almost tripled. Granted, all of this was achieved amid continuing low demand, but a profit is better than a loss any day of the week. Unfortunately, investors didn’t seem to care, but I’m sure Buffett sees the light at the end of the tunnel.

When I read that E*Trade Financial‘s (NASDAQ:ETFC[7]) first-quarter earnings beat analyst expectations by 44% on¬† April 20, I thought I was seeing things.

The E*Trade I remember was floundering in losses. Not anymore. In fact, E*Trade also made money for 2011 overall. I guess I’ve really shied away from financials since the bank crisis, so this was an eye-opener.

It was no surprise, however, to investors who were smart enough to have bought early in the New Year. If so, your bet has paid off big time. I

E*Trade is up almost 31% year-to-date through April 24. It added $4 billion in net new brokerage assets in the quarter, with about half the increase coming from new money and the rest from existing customers.

The company is doing the best job it ever has in hanging on to customer accounts. That stability will continue to pay dividends in the coming quarters as retail investors slowly rejoin the markets. Eventually, people are going to realize that the mattress isn’t working so well as a retirement vehicle. And wasn’t it just last summer that people were talking about E*Trade as a takeover target for TD Ameritrade (NASDAQ:AMTD[8])? It’s funny what a difference a year can make.

If these are any indication of what the remainder of 2012 will look like from an earnings perspective, the markets are in for a humdinger of a year.

As of this writing, Will Ashworth did not own a position in any of the stocks named here.

Endnotes:
  1. 72% beating earnings estimates: http://www.bespokeinvest.com/thinkbig/2012/4/20/earnings-and-revenue-beat-rates-so-far-in-q1.html
  2. RCL: http://studio-5.financialcontent.com/investplace/quote?Symbol=RCL
  3. URI: http://studio-5.financialcontent.com/investplace/quote?Symbol=URI
  4. RRR: http://studio-5.financialcontent.com/investplace/quote?Symbol=RRR
  5. USG: http://studio-5.financialcontent.com/investplace/quote?Symbol=USG
  6. BRK-B: http://studio-5.financialcontent.com/investplace/quote?Symbol=BRK-B
  7. ETFC: http://studio-5.financialcontent.com/investplace/quote?Symbol=ETFC
  8. AMTD: http://studio-5.financialcontent.com/investplace/quote?Symbol=AMTD

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