Earnings Reports: How to Anticipate Surprises
A company’s SUE score has nothing to do with the courtroom success of its lawyers.
SUE stands for “standardized unexpected earnings,” and analysts say this statistic can help predict future corporate earnings surprises--good and bad--by looking backward: specifically, by providing the most relevant comparison between the profits companies have reported in recent quarters and what analysts had expected.
If the theory holds up, semiconductor equipment firm Applied Materials Inc., insurer Progressive Corp. and retailer Gap Inc. are among the companies that should post positive surprises in the reporting season that started in earnest this week, while Polaroid Corp. and Royal Dutch Petroleum Co. should be among those that disappoint.
The implication, of course, is that their stocks should respond accordingly.
A company’s SUE score, simplified, measures the per-share earnings by which a company beats--or falls short of--analysts’ estimates in a given period divided by the “standard deviation” of the estimates. Standard deviation is a numerical expression of how much certain data--in this case, earnings estimates--deviate from the mean.
Thus, SUE scores tend to discount surprises from companies with minuscule earnings, those covered by few analysts or those with forecasts all over the map. The best scores are earned by companies that have hefty earnings and beat forecasts clustered within a tight range.
Joseph J. Abbott, equity strategist at IBES Inc., a New York earnings-tracking firm that helped popularize SUE scores within the investment industry, explains that the most significant SUEs are above +1.0 or below -1.0.
He says companies with SUEs above +1.0 in each of the last two quarters, plus upward revisions over the last 90 days in analysts’ fourth-quarter estimates, are candidates to post more good news this time around. Earnings surprises, both good and bad, “are like cockroaches--you hardly ever get just one,” Abbott adds.
Likewise, firms with SUE scores of -1.0 or below in the last two quarters, plus downward revisions in the last three months, are considered good bets to post negative surprises when they next report.
Microsoft Corp., which clobbered analysts’ earnings estimates on Tuesday, exemplifies the SUE system. The company’s last two quarterly SUE scores were very high at 7.8 and 2.6, and analysts’ mean forecast for the fourth quarter had been upgraded about 14% over the last three months.
Sure enough, Microsoft reported diluted earnings of 73 cents a share for the fourth quarter, versus a mean estimate of 59 cents.
To find other earnings-surprise candidates for the fourth-quarter reporting season, The Times asked Abbott to check the IBES database of major companies to see which fit the bullish or bearish bill in terms of recent SUE scores and estimate revisions. The accompanying chart shows a sampling of high- and low-scoring companies.
One caveat: Just because a company has lately had positive earnings surprises and high SUE scores doesn’t mean it’s a classic growth story.
Energy-services provider McDermott International Inc., for example, smashed analysts’ estimates with its quarterly results issued Oct. 30. But investors shrugged, because the outlook for its industry has deteriorated. Shares of gold-mining company Placer Dome Inc. have also languished despite recent upside surprises.
To boost earnings, “sometimes these companies use aggressive cost-cutting programs that the analysts aren’t aware of,” Abbott says. “But you can’t keep cutting costs every quarter down to zero. At some point, you have to bring in revenue.”
But the accompanying list of high SUE scorers also includes such strong growth companies as Gap and America Online Inc. Their stocks have been fueled in part by their positive earnings surprises over the last year.
Abbott, for one, wouldn’t be surprised to see it happen again.
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The Surprise Factor
Equity strategist Joseph J. Abbott of earnings tracker IBES Inc. says these companies could be candidates to post an earnings surprise this reporting season, based on recent quarterly results and analysts’ revisions for the latest quarter. The SUE (standardized unexpected earnings) scores are the actual earnings-per-share (EPS) surprise divided by the standard deviation of analysts’ estimates. Also listed are analysts’ mean EPS estimate for the latest quarter and the three-month percentage change in that forecast. The sampling includes several of Abbott’s top picks in each category, ranked by percentage change in earnings estimates.
Positive Surprise Candidates
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3rd-qtr 2nd-qtr 4th-qtr 98 98 98 3 mo. Ticker SUE SUE mean % chg. Company symbol score score EPS est* in est. Placer Dome PDG 2.1 1.2 $0.09 56.2% Applied Materials AMAT 2.8 3.4 0.06 28.1 McDermott Intl. MDR 13.1 3.8 0.54 14.9 Gap GAP 3.0 1.7 0.49 13.3 Progressive PGR 8.5 1.8 1.53 12.0 Centex CTX 2.7 3.8 0.83 10.0 W.R. Grace GRA 3.4 1.3 0.31 8.8 America Online AOL 2.4 3.7 0.13 8.6 Adolph Coors ACCOB 2.5 1.8 0.22 7.5 Amgen AMGN 2.1 4.5 0.85 5.5 TJX TJX 9.6 1.6 0.34 5.3
Est. earnings report Company date Placer Dome 2/19 Applied Materials 2/11 McDermott Intl. 2/3 Gap 2/27 Progressive 1/24 Centex 1/24 W.R. Grace 2/3 America Online 2/8 Adolph Coors 2/18 Amgen 1/22 TJX 3/1
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Negative Surprise Candidates
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3rd-qtr 2nd-qtr 4th-qtr 98 98 98 3 mo. Ticker SUE SUE mean % chg. Company symbol score score EPS est* in est. Polaroid PRD -3.1 -1.0 0.12 -88.8% Tenneco TEN -1.8 -1.9 0.16 -76.1 Hercules HPC -1.1 -1.2 0.29 -62.2 Timken TKR -2.0 -2.7 0.22 -40.7 Williams WMB -3.4 -2.1 0.21 -38.2 Royal Dutch Petro. RD -3.1 -1.6 0.32 -33.6 Pacificorp PPW -7.2 -2.5 0.22 -25.4 Mirage Resorts MIR -2.4 -2.2 0.23 -23.1 Helmerich & Payne HP -12.0 -4.9 0.26 -18.8
Est. earnings report Company date Polaroid 1/28 Tenneco 1/27 Hercules 2/1 Timken 1/22 Williams 1/22 Royal Dutch Petro. 2/21 Pacificorp 1/24 Mirage Resorts 2/11 Helmerich & Payne 1/22
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Source: IBES Inc.
*Operating after-tax earnings per share
*Josh Friedman can be reached by e-mail at josh.friedman@latimes.com.
