This Earnings Season's Biggest Surprises So Far

By James Brumley | April 19, 2010 AAA

The show just got started, but it's never too soon to start the earnings scorecard. Already we've seen some surprises - good and bad - that need a little more explanation, as they may be hinting at something much bigger than just a shortfall or big win.

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Has the Habit been Broken?
If it were just one disappointing quarter for Shaw Communications Inc. (NYSE:SJR), one may be able to chalk it up to bad luck at the wrong time. When it's five quarters in a row though, it's not a temporary case of the sniffles - it's an epidemic. The latest link in the chain of shortfalls came last week when the Canadian cable television provider earned 32 cents per shares instead of the expected 33 cents, and despite an 11% improvement in revenue.

That said, taking out a debt-retirement cost this year as well as discounting a tax benefit for the same quarter last year, earnings would have actually increased. (Breeze through consensus estimates like the biggest Wall Street forecasters. For further reading, see Strategies For Quarterly Earnings Season.)

In simpler terms, that standing string of disappointments may have actually turned the corner last quarter, on an operating basis; the downside surprise is a tad misleading. While it's too soon to say the losing streak's been broken, it's also too soon to say it hasn't. Total subscriber counts were way up for almost all services.

From Good to Better
While topping EPS forecasts of 58 cents with an actual earnings per share figure of 61 cents may put Infosys Technologies Ltd. (Nasdaq:INFY) in a bullish light, that 5% beat isn't even the compelling part of the software company's story. The company expect revenues to be 16-18% better in fiscal 2011 than they were in fiscal 2010, with earnings improving by as much as 8.6% for that period.

And, considering the company just inked a three-year services deal with Microsoft (Nasdaq:MSFT), the outlook is plenty plausible. Currently, Infosys provides services to such corporations as Goldman Sachs (NYSE:GS) and BT Group ( NYSE:BT).

Where did all the Money Go?
Falling short of the expected earnings of 21 cents per share isn't a death blow for Healthcare Services Group (Nasdaq:HCSG) - the actual figure of 17 cents is only 19% shy of the target; it was only 4% short of last year's 18 cents.

No, it was the 15% increase in selling expenses along with the hefty 28% increase in administrative expenses that are troubling. The forward-looking P/E of 22.10 is frothy enough as it is; there's no room for greater costs - they were too high as they were.

The Bottom Line
When your earnings are more than six times better than analysts expected, either you did very, very well, or the analysts were asleep at the wheel. In Talbot's (NYSE:TLB) case, the assumption was that it was mostly the former. It was, after all, a swing back to profitability for the retailer, prompting phrases like 'turnaround' and '[the] turn is well underway'.

While the jury may still be out on the permanency of the so-called turnaround, the last three (so far unreported) months have seen positive sales growth. And, sales of full-priced merchandise improved (+10%) at the expense of discounted merchandise sales (-21%). (Consensus estimates can send stocks spiraling - but are they representing reality? For more information, check out Surprising Earnings Results.)

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