Earnings & Sales Surprises on the Rise

Third-quarter earnings are going to be important, and the season kicks off shortly.

But while earnings indeed will be the focus of attention, so will sales - and now more so than ever.

Businesses have done a great job in cutting costs and slashing expenses, which has helped more and more of them beat on the bottom line.

In fact, a larger number of companies have posted positive surprises in each of the last 3 reported quarters:

• For the quarter ending 9/08:
  286 companies in the S&P 500 posted positive EPS Surprises

• For the quarter ending 12/08:
  293 companies in the S&P 500 posted positive EPS Surprises

• For the quarter ending 3/09:
  312 companies in the S&P 500 posted positive EPS Surprises

• And for the quarter ending 6/09:
  345 companies in the S&P 500 posted positive EPS Surprises

This trend of more companies reporting positive surprises is encouraging.

However, improvement in sales surprises has lagged earnings surprises.

Only last quarter did we see more companies report sales surprises than the previous quarter:

• For the quarter ending 3/09:
  148 companies in the S&P 500 posted positive Sales Surprises

• For the quarter ending 6/09:
  193 companies in the S&P 500 posted positive Sales Surprises

But it's possible that sales have turned a corner, and a trend will develop with more companies posting sales surprises, just as with EPS surprises.

Another interesting tidbit to this study is that the percentage increase of the number of companies posting positive earnings surprises has increased sequentially, period for period. This helps further the notion that this is a trend that can continue.

• Between 9/08 and 12/08: the percentage of companies that reported
  positive surprises increased by 2.4%

• Between 12/08 and 3/09: the percentage of companies that reported
  positive surprises increased by 6.5%

• Between 3/09 and 6/09: the percentage of companies that reported
  positive surprises increased by 10.6%

While sales surprises only have one period of increases to go by:

• Between 3/09 and 6/09: the percentage of companies that reported
  positive sales surprises increased by 30.4%. That's an auspicious start.

The reason I did this study (i.e., was there an increase in the number of companies posting positive earnings surprises and sales surprises?), was that I remembered doing a similar study (albeit in reverse) earlier this year for the number of companies making new lows with each successive new low in the market.

And I found that with each new major low in the market, fewer and fewer companies were making new 52-week lows. That told me the downward move in the markets was losing steam and that an upswing was likely. And that's exactly what we saw.

Seeing a strengthening trend in earnings surprises suggests to me that things are getting better. And I believe a similar trend will develop with sales surprises, especially after last quarter's big increase.

So, in this week's screen, I'm looking for companies with:

• Last EPS Surprise > 0
  Companies that have surprised in the past have a tendency to surprise again in the future.

• Last Sales Surprise > 0
  The same is true for sales surprises. Companies that have surprised in the past have a tendency to surprise again in the future.

• % Change Q(0) EPS Est. over the last 4 weeks > 0
  This is the % Change in EPS estimate revisions for the completed quarter that’s about to report.

• % Change Q(0) Sales Est. over the last 4 weeks > 0
  This is the % Change in Sales estimate revisions for the completed quarter that’s about to report.

The screen this week (for the week of 9/21/09) produced 10 companies. Here are 5 of them:

BBBY - Snapshot Report Bed Bath & Beyond, Inc. - (reports on 9/23/09)
GPN - Snapshot Report Global Payments Inc. - (reports on 10/1/09)
KBH - Snapshot Report KB Home - (reports on 9/25/09)
SMSC - Snapshot Report Standard Microsystems Corp. - (reports on 10/1/09)
XRTX - Snapshot Report Xyratex Ltd. - (reports on 9/30/09)

Get the rest of the stocks on this list and start searching for the newest companies for the next quarter. It's easy to do, and it could put the odds of success in your favor.

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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.

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