Earnings season is upon us once again, and we will get to see if the highly paid analysts are actually doing their job or if they are just chasing the herd. Following a reasonably good showing for the fourth quarter last year, Wall St. firms are fairly positive on the first-quarter numbers. The equity strategists at Merrill Lynch have dug through the data and ranked the 10 sectors for the quarter and found that health care and technology are the most attractive, while materials and telecom are least attractive. They screened the stocks in their coverage universe for the names most likely to beat earnings expectations. Here are the two criteria used to judge candidates.
- The stocks had to have Merrill Lynch estimates for earnings and sales significantly above the Wall St. estimates.
- The companies had to have positively surprised on both earnings and sales in the previous quarter’s reporting season.
The screens came up with 24 stocks in eight different sectors. We have chosen their highest ranked stock in each sector.
Home Depot Inc. (NYSE: HD) may surprise Wall St. in the consumer discretionary sector. Estimates for the quarter call for $0.76 in earnings per share (EPS) on revenues of $18.65 billion. The Thomson/First Call estimate for the stock is $75.
SanDisk Corp. (NASDAQ: SNDK) could show significant upside in the information technology (IT) sector. Analysts are looking for earnings of $0.77 per share on revenues of $1.30 billion. The Wall St. consensus price target for the stock is $60.
Covidien PLC (NYSE: COV) could prove to be the candidate in health care. The maker of a wide range medical instruments and supplies employs more than 43,000 people worldwide. Analysts are estimating earnings of $1.09 per share on revenues of $3.12 billion. The consensus price target for the stock is $70.
Valero Energy Corp. (NYSE: VLO) is the energy sector candidate that may fool Wall St. Estimates are for earnings of $1.04 on revenues of $30.74 billion. The consensus target for this name is $48.50.
Ventas Inc. (NYSE: VTR) is a real estate investment trust (REIT) that engages in investment, management, financing and leasing of properties in the health care industry. Estimates call for $1.00 EPS on revenues of $660.67 million. The consensus target for the stock is $71, which is below the current trading level. Ventas pays shareholders a 3.60% distribution. REIT distributions may contain return of principal.
International Paper Co. (NYSE: IP) is another Merrill Lynch choice that may offer an earnings surprise. The company is expected to earn $0.74 a share on revenues of $7.03 billion. The consensus price target is $52.
Kimberly-Clark Corp. (NYSE: KMB) is the consumer staples candidate expected to surprise. The consensus is for $1.33 per share in earnings on revenue of $5.30 billion. The consensus price target for the stock is $87, which is more than $10 lower than the current trading level. The stock pays investors a solid 3.30% dividend.
Stericycle Inc. (NASDAQ: SRCL) is a leader in medical waste management and is the industrial sector candidate expected to surprise. Analysts are looking for $0.88 per share in earnings and revenues of $520.03 million. The consensus target for the stock is $110.
Typically buying stocks on binary events, hunches, tips, rumors or earning surprise hopes can be a losing game. However, the Merrill Lynch team has done extensive work on these stocks, and even if they are wrong and the companies just match expectations, investors still would own very solid names.