Catch the Post-Earnings Drift

First quarter earnings season is almost in the books, and by almost every measure it has been an excellent quarter.

The typical earnings season will have a surprise ratio (#beat/#miss) around 3:1 with a median surprise of about 3.0%. This season there has been more than 4 beats for every miss, with a median surprise of 4.6%.

These strong earnings surprises have led to a flurry of analysts revisions. The ratio of S&P 500 companies with rising to falling estimates is 1.84 for 2011 and 2.06 for 2012 - both very bullish indicators.

And as Len Zacks discovered in the 1970s, it’s earnings estimate revisions that impact stock prices the most.

Strong Revenue Growth

Another bullish signal is the strong top-line growth companies are finally reporting. Revenue growth has been a stellar 12.1% (excluding financials) so far this quarter, up from just 6.9% in the fourth quarter.

It looks like the cyclical industries are once again leading the charge, but companies across every sector are reporting better than expected revenue and EPS numbers.

Catch the Post-Earnings Announcement Drift

Below are four companies that have recently beaten consensus estimates on both revenue and earnings and have seen rising earnings estimates as a result.

While some of these stocks have already moved higher on their earnings announcement, I believe there is still room for each of them to run higher.

For one, each one is reasonably valued. Secondly, the well-documented "post-earnings announcement drift" suggests that companies with positive earnings surprises can see upward stock price movements for several weeks, or even months.

4 Stocks Moving Higher:

Eastman Chemical Company (EMN - Analyst Report) reported first quarter earnings per share of $2.52 on April 28, crushing the Zacks Consensus Estimate by 55 cents.

Revenue also came in much hotter than expected. The company reported Q1 revenue of $1.758 billion, well ahead of the consensus at $1.519 billion. This was a 28% increase year-over-year due to higher volume and selling prices.

In the Q1 press release, management gave 2011 EPS guidance of "slightly higher than $9". This sent earnings estimates soaring. The Zacks Consensus Estimate for 2011 is now $9.06, up from $8.08 just 30 days ago. The 2012 consensus estimate also shot higher, from $8.82 to $9.90.

Valuation is still reasonable for this Zacks #1 Rank (Strong Buy) stock. Shares trade at just 11.6x 2011 earnings, a discount to the industry average of 14.4x. Its price to sales ratio of 1.1 is in-line with the industry average.

Eastman Chemical Company is a global chemical company with a broad portfolio of chemical, plastic, and fiber products. It is headquartered in Kingsport, Tennessee and has a market cap of $7.4 billion.

WABCO Holdings Inc. (WBC - Snapshot Report) reported an exceptional first quarter on April 29. Revenue came in at $678 million, a 36% increase over the same quarter in 2010. This beat the Zacks Consensus Estimate of $642 million.

WBC reported earnings per share of $1.12, beating the Zacks Consensus Estimate of $0.93.

Estimates have skyrocketed over the last 10 days, sending the stock to a Zacks #1 Rank (Strong Buy). The 2011 consensus estimate is currently $4.50, up from $4.06 before the earnings surprise, and 56% higher than 2010 EPS.

Shares are trading at 14.5x 12-month forward earnings, well below the industry average of 21.8x. It is also below its 10-year median of 15.0x.

WABCO Holdings Inc. supplies safety and control systems, such as electronic braking, stability, suspension and transmission control systems, for the commercial vehicle industry. It is headquartered in Brussels, Belgium and has a market cap of $4.8 billion.

Towers Watson (TW - Snapshot Report) reported its third quarter 2011 results on May 5.

Earnings per share came in at $1.26, 34% above the Zacks Consensus Estimate. Revenues for the quarter were $866 million, which beat the consensus estimate of $813 million.

Analysts' estimates have been surging off the strong quarter. The 2011 Zacks Consensus Estimate is now $3.60, up from $3.41 thirty days ago. The 2012 consensus estimate also jumped higher, from $4.00 per share to $4.43.

It is a Zacks #1 Rank (Strong Buy) stock.

The stock jumped more than 8% on the earnings announcement, but shares still have plenty of room to run higher. The stock trades at just 14.1x 12-month forward earnings, a significant discount to the industry average of 19.8x. It is also a discount to its 10-year median of 15.0x.

Towers Watson is a global consulting firm focusing on risk management and human resources. It is headquartered in New York, New York and has a market cap of $4.4 billion.

Caterpillar Inc. (CAT - Analyst Report) continues to blow away analysts' expectations.

On April 29, the world's largest construction and mining equipment manufacturer reported a quarterly EPS record of $1.84. This was a 411% increase year-over-year and 40% above the Zacks Consensus Estimate of $1.31.

Revenue came in at $12.949 billion, a 57% increase, and 14% above the $11.395 billion consensus. This was the company's 4th consecutive positive sales surprise, as well as its biggest.

Management raised its guidance for both revenue and EPS off the strong quarter. The company now expects to earn between $6.25 and $6.75 per share, up from previous guidance of $6.00 per share.

This bullish guidance sent analysts' estimates soaring. The 2011 Zacks Consensus Estimate is $6.87, ahead of guidance, and up from $6.28 just 30 days ago. It is also 64% higher than 2010 EPS.

CAT is a Zacks #1 Rank (Strong Buy) stock.

Despite shares skyrocketing more than 380% off of their March 2009 lows, it looks like Caterpillar still has plenty of room to run. Shares trade at just 14.7x 12-month forward earnings, a discount to its 10-year median of 16.0x, and well below the industry average of 30.5x.

Caterpillar Inc. is headquartered in Peoria, Illinois and has a market cap of $71.6 billion.

Conclusion

Another excellent earnings season is almost behind us. Many companies have reported strong revenue and earnings beats and have seen rising estimates as a result.

These four companies each reported outstanding quarters and have plenty of room to run higher over the coming weeks and months.

Todd Bunton is the Growth & Income Stock Strategist for Zacks.com.

Read the full analyst report on EMN

Read the full analyst report on CAT

Read the full analyst report on TW

Read the full analyst report on WBC