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Analyst Blog: Earnings Preview - ESP

Zacks Equity Research

2 Supermarket Stocks to Bet on this Earnings Season

WMT KR

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The third-quarter earnings season is now nearing its end and investors seem happy about the positive signs of growth this reporting cycle after five consecutive quarters of declines amid the much-talked about Presidential election. In fact, the pace of growth, which is currently slow, should improve further in the coming days.

Now the focus has almost fully shifted to the retail sector. These retail companies remain in the positive territory, buoyed by cost-cutting initiatives and leaner inventories. However, problems like shift of focus from store sales traffic to online sales pose a concern.

In the retail sector, supermarket stocks such as Whole Foods Market, Inc. (WFM), SUPERVALU Inc. (SVU) and Sprouts Farmers Market, Inc. (SFM) have been witnessing margin pressure due to industry-wide weakness. These providers of daily need items are grappling with headwinds like stiff competition, food price deflation, an aggressive promotional environment and waning store traffic.

Whole Foods Market reported its fourth-quarter fiscal 2016 results on Nov 3, wherein earnings beat the Zacks Consensus Estimate, while revenues marginally missed the same. However, the company witnessed a 2.6% drop in comparable-store sales (comps) during the quarter, due to tough competition and food price deflation.

SUPERVALU and Sprouts Farmers also reported gross margin declines in their recently reported quarters due to a lingering deflationary environment, increased competition and industry dynamics that have led to more promotions throughout the industry. This in turn impacted retail deflation and traffic growth, thus affecting the top and bottom lines of industry participants.
Also, we note that the grocery business is highly competitive and fragmented. With more companies entering as well as expanding their presence, it is becoming tough for existing players to retain their market share.

Here, we have identified two stocks, which are grappling with margin pressure but possess strong fundamentals. Hence, it’s better to grab these supermarket stocks now before they start touching new highs after their quarterly releases.

The Way to Pick the Right Stocks

Since there are quite a number of companies in the consumer staples space, it may be difficult to pick the right stocks for your portfolio. One way to narrow down the list of choices is by looking at stocks with a favorable Zacks Rank of #1 (Strong Buy), 2 (Buy) or 3 (Hold) – and a positive 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 a positive earnings surprise is as high as 70%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

2 Prominent Choices
You may bet on retail giant Wal-Mart Stores, Inc. (WMT - Free Report) , which has a Zacks Rank #3 and an Earnings ESP of +1.04%. The Zacks Consensus Estimate for the third quarter of fiscal 2017 stands at 96 cents a share.

This Bentonville, AR-based company has posted positive earnings surprises in all the trailing four quarters, translating to an average positive surprise of 6.13%. It has a long-term earnings growth rate of 5.28%. The company is slated to report results on Nov 17, before the bell.

Investors can also count on retailer The Kroger Co. (KR - Free Report) , which has an Earnings ESP of 0.00% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.

The company delivered an average positive earnings surprise of 5.43% in the trailing four quarters and has a long-term earnings growth rate of 8.48%. The Zacks Consensus Estimate for the third quarter of fiscal 2017 stands at 42 cents a share. The company is expected to report results on Dec 1, before the bell.

Bottom Line

We believe that investing in these companies, which have an earnings beat potential, should yield strong returns for your portfolio in the short term.

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