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Earnings ESP

Having entered the second week of the second-quarter 2014 earnings season, all eyes are on this week’s releases. Major finance companies reported their results in the preceding week, and Friday’s market gain was largely driven by upbeat results of some bio-tech and internet stocks.
 
Expectations are high this quarter, with earnings estimated to increase by 4.8% on the back of 2.2% revenue growth. Margins are predicted to increase modestly. Industrial products sector is expected to witness 0.8% earnings growth. We believe the sector has lot more in store for us this quarter.
 
Factors that makes us Optimistic
 
Operating environments for industrial products sector were quite favourable in the quarter. Industrial production in the U.S. grew 5.5% year over year, including a 6.7% annual hike in manufacturing production and an 18.8% increase in mining production. However, utilities suffered a 21.4% decline. Favourable industrial activities indicate a healthy demand for industrial products sector.
 
Also, the U.S. job report for June was encouraging. Nearly 288,000 new jobs were added as against 224,000 in May and only 129,000 in January. Unemployment rate fell to 6.1% from 6.6% recorded in January. New job additions in the second quarter totalled 794,000, up 53% from the preceding quarter.
 
The strengthening job market reflects a recovering economy. This has prompted the Federal Reserve to discontinue its bond purchases by year-end 2014. Further, export demand for U.S-made goods, especially automotive vehicles and parts, consumer articles, industrial supplies and materials, and food and beverages, increased by $2.0 billion to $195.5 billion in May.    
 
Performance So Far and Outlook
 
Let us take a look at the sector’s performance so far in second-quarter 2014. Just 4% of the total Industrial Products companies in the S&P 500 group reported their results as of Jul 16. Earnings grew 9.7% year over year with a beat ratio of 100%, while revenues climbed 2.5%. 
 
With demand in domestic and international markets picking up, improvements are anticipated in the sector. For the industrial sector at large, earnings growth is predicted at 8.7% in 2014 and 11.8% in 2015, to be driven by margin improvements. Revenue growth is likely to remain low at 0.3% in 2014 and 4.2% in 2015.
 
We are elaborating a few simple guidelines below that will help investors to select the Industrial Products stocks that are likely to beat earnings estimates this season.
 
How to Pick?
 
Choosing the right stocks, with the potential to beat earnings estimates from a plethora of industry players, can be a daunting task. The Industrial Products sector includes machinery, pollution control, industrial products-services, construction building services and containers and glass industries. The procedure, however, can be simplified by selecting stocks with a favorable Zacks Rank of #1 (Strong Buy), #2 (Buy) or #3 (Hold) – and a positive Zacks Earnings ESP.
 
Earnings ESP is our proprietary methodology to determine which stocks have the best chance to surprise in their next earnings announcement. It shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate. Our research shows that for stocks with this combination, the chance of positive earnings surprise is as high as 70%.
 
Here are four Industrial Products stocks currently equipped with the right combination of elements to post an earnings beat:
 
Caterpillar Inc. (CAT - Analyst Report): The company is one of the leading manufacturers of construction and mining equipment, diesel and natural gas engines, and industrial gas turbines. This farm and construction equipment manufacturer is well positioned to benefit from the recovery in the U.S. construction sector. Also, growing export demand in the country will bode well for the company going forward. It has a $68.7 billion market capitalization at present.
 
Caterpillar currently sports a Zacks Rank #1. Earnings ESP for the second quarter is +2.00%, with the Zacks Consensus Estimate pegged at $1.50 and the Most Accurate Estimate at $1.53. Important metrics are provided below:
 
·         Earnings Growth Rate: 7.3% for 2014; 10.2% for the next five years
·         Forward Price-to-Earnings (P/E) multiple: 17.84 versus 16.94 for the industry
·         Forward Dividend Yield: 2.54% 
·         Return on Equity (ROE): 20.4% versus 19.8% for the industry
 
Caterpillar Inc. is scheduled to release its second-quarter financial results on Jul 24 before the market opens.
 
Lincoln Electric Holdings Inc. (LECO - Analyst Report): The company manufactures and sells welding and cutting products. Its product portfolio includes welding power sources, wire feeding systems, robotic welding packages, fume extraction equipments, consumables and fluxes as well as regulators and torches used in cutting. Growth in the transportation and energy-related sectors will be advantageous for the company. It has a $5.4 billion market capitalization at present.
 
Lincoln Electric Holdings currently sports a Zacks Rank #3. Earnings ESP for the second quarter is +1.10%, with the Zacks Consensus Estimate pegged at 91 cents per share and the Most Accurate Estimate at 92 cents per share. Important metrics are provided below:
 
·         Earnings Growth Rate: 11.4% for 2015
·         Forward Price-to-Earnings (P/E) multiple: 18.51 versus 16.94 for the industry
·         Forward Dividend Yield: 1.37% 
·         Return on Equity (ROE): 21.1% versus 19.8% for the industry
 
Lincoln Electric Holdings is scheduled to release its second-quarter results on Jul 28 before the market opens.
 
Precision Castparts Corp. (PCP - Analyst Report): The company manufactures complex metal components and products. Its product portfolio includes high-quality investment castings, forgings and fasteners/fastener systems for critical aerospace and industrial gas turbine (IGT) applications. Two promising end-markets for the company are the aerospace and industrial gas turbine markets. It currently has a $37.2 billion market capitalization.
 
Precision Castparts currently sports a Zacks Rank #2. Earnings ESP for first-quarter of fiscal 2015 (ended Jun 2014) is +0.60%, with the Zacks Consensus Estimate pegged at $3.35 and the Most Accurate Estimate at $3.37. Important metrics are provided below:
 
·         Earnings Growth Rate: 16.5% for 2014; 13.3% for the next five years
·         Forward Price-to-Earnings (P/E) multiple: 18.35 versus 16.94 for the industry
·         Forward Dividend Yield: 0.05% 
·         Return on Equity (ROE): 16.6% versus 19.8% for the industry
 
Precision Castparts is scheduled to release its first-quarter fiscal 2015 financial results on Jul 24 before the market opens.
 
Graphic Packaging Holding Company (GPK - Snapshot Report): The company is one of the leading providers of paperboard packaging solutions for a wide variety of products to food, beverage and other consumer products companies. It currently has a $3.8 billion market capitalization.
 
Graphic Packaging Holding presently holds a Zacks Rank #2. Earnings ESP for second quarter is +5.88%, with the Zacks Consensus Estimate pegged at 17 cents per share and the Most Accurate Estimate at 18 cents per share. Important metrics are provided below:
 
·         Earnings Growth Rate: 26.9% for 2014; 21.5% for the next five years
·         Forward Price-to-Earnings (P/E) multiple: 17.39 versus 16.94 for the industry
·         Return on Equity (ROE): 17.8% versus 19.8% for the industry
 
Graphic Packaging Holding is scheduled to release its second-quarter 2014 results on Jul 24 before the market opens.
 
Going Forward
 
Economic growth induces heightened industrial activities and hence, is considered favourable for the expansion of the industrial products/machinery industry. This direct correlation, right on the heels of expected economic growth worldwide, makes us confident about this industry. Amid this backdrop, a sneak peek at some possible winners having a solid Zacks Rank and a positive Zacks Earnings ESP this earnings season, could be a great idea for investors seeking exposure to this sector. 

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