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Saturday, June 4, 2011

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Hitting a baseball, they say, is the most difficult feat in sports. No wonder players who hit safely just three times out of 10 at-bats are considered stars. In the corporate world, the elite consists of companies that routinely knock it out of the park during earnings season.

Investing pros refer to these companies as triple plays. They surpass analysts' estimates for profit and sales, and then they raise expectations about future results.

Less than 10% of companies pulled off triple plays in the earnings season that ended this winter, according to Bespoke Investment Group.

The latest on corporate earnings


The least-common component of the triple play is raised guidance, which occurs when a company signals to investors that it will continue to top expectations. Company executives often indicate that they're optimistic by using words like "robust" and "healthy" when talking to Wall Street about demand for their products. This happens less often in uncertain economic climates.

"There are very few companies that are sticking their necks out going forward," says Ron Muhlenkamp, manager of the $635 million Muhlenkamp (MUHLX) fund.

By many measures, however, corporate America has never looked healthier. The country's largest nonfinancial companies hold hundreds of billions of dollars in cash on their balance sheets. When the economy tanked, companies slashed spending to make a profit. Today, more of them are earning profits the old-fashioned way: by increasing sales. By the end of 2010, corporate profits had surpassed the heights they'd reached before the recession. Transcend 16 GB Class 10 SDHC Flash Memory Card TS16GSDHC10E

And now revenue is rebounding too.

During the slowdown, companies with sales growth tended to be those, like Family Dollar Stores (FDO, news), that catered to budget-conscious consumers. But sales are now closing in on their prerecession peaks, says Aaron Smith, senior economist at Moody's Analytics.

Among triple plays, Apple (AAPL, news) is the paragon, a growth company that continues to confound.

"It's growing at a ridiculous clip," says Michael Sansoterra, manager of the RidgeWorth Large Cap Growth fund (STCAX) and an Apple shareholder.

There are questions about how long Apple can keep creating products that consumers think they can't do without and whether the iPad will start to cannibalize Apple's laptop computer sales. For now, though, many investors think the stock is a bargain, given its growth prospects.

"Can the stock go up another 50%? Sure," says Jerry Jordan, the manager of the Jordan Opportunity Fund (JORDX) fund and an Apple shareholder.

Many investors would contend that Apple is in a category of its own.

For most companies, the ability to beat Wall Street's estimates involves psychology as much as business chops. Investors punish companies that fail to meet estimates. Knowing this, managers often offer conservative guidance (or none at all).

That's why it's noteworthy when executives raise guidance. In effect, they're saying, "Have I got news for you," says Sandeep Dahiya, associate professor of finance at Georgetown University's McDonough School of Business.

Rather than focusing on whether companies beat estimates, investors should use a company's earnings report as a starting point, the pros say.

Many professional investors create their own earnings models for the companies they hold and then compare their own projections with those of analysts and company management. There's often a herd mentality among analysts, some critics say. "By the time everyone upgrades Netflix (NFLX, news) to a "buy," it's too well known" to offer great growth prospects, says Bob Auer, the manager of the Auer Growth (AUERX) fund, whose holdings include the triple play Altera (ALTR, news), a maker of microchips.

A company's earnings can offer a hint about where its share price is headed. Research on so-called "post-earnings-announcement drift" shows that stock prices generally continue to move in the direction of the earnings surprise for up to a year after the announcement.

"The companies that beat expectations continue to do very well," Dahiya says

Here is a closer look at five companies that recently topped sales and profit expectations while raising guidance. The stocks could be good long-term plays.


The stock trades at 12 times this year's earnings estimates, well below its 10-year average of 47.

What's next? Technology that brings the computer to your TV, analysts say. Apple could use a new hit, since it is facing tough competition from smartphones running the Android operating system from Google (GOOG, news).


Caterpillar (CAT, news), the world's largest construction-equipment maker, recently agreed to buy mining-equipment manufacturer Bucyrus International (BUCY, news).

"This could be a $150 stock in a couple years," says Craig Hodges, co-manager of the Hodges (HDPMX) fund.

Some critics, however, say it's better to grow profits organically than to pay top dollar to buy a company.


One might think high-end mattresses would be a tough sell in a shaky economy. Not so for those made by Tempur-Pedic International (TPX, news).

The Lexington, Ky., company recently beat quarterly earnings estimates by an impressive 16%. "They have knocked the cover off the ball," says Hodges, a shareholder.
Boston Beer Company

Sales growth, past four quarters: 12%

Industry sales growth: 5%

In September 2008 I predicted that Molson Coors (TAP: 44.19, -0.17, -0.38%) shares would outperform Boston Beer (SAM: 82.00, -1.18, -1.42%), despite the latter making better beer, because the former had lower prices and costs and a more modest stock valuation. I was right for about the first year. Since then I haven't even been close. Consumers didn't trade down to cheaper beer during the recession, and during the current recovery, "better beer," as Boston Beer calls the category that includes its Sam Adams line, has grown much faster than beer in general. Over the past year shares of Boston Beer have gained 69%, versus 15% for shares of Molson Coors. Boston Beer isn't cheap at 25 times forecast earnings, but last year the company increased sales by 12% while larger rivals reported weak or negative growth. Over the past few years the company has shifted from mostly contract brewing to nearly all in-house brewing, reduced delivery times and improved margins. Management is also pushing new "better than better" beers, including its cork-bottle Barrel Room Collection and its $20-a-bottle Infinium Ale.
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Southwest Airlines

Sales growth, past four quarters: 18%

Industry sales growth: 15%

Southwest Airlines (LUV: 11.56, -0.01, -0.09%) gained leading market share in dozens of airports by cutting frills (including assigned seating) and offering low fares, and by avoiding crowded hubs. Major carriers have slashed perks of late, too, but Southwest is still growing faster. On Wednesday, the company announced that it received regulatory approval for its proposed merger with discount carrier AirTran. Analysts say the deal offers plenty of opportunity for profitable growth, because Southwest's non-hub model leaves little city overlap. Sales are expected to rise 15% this year, compared with 10% for American Airlines parent AMR (AMR: 5.96, -0.07, -1.16%) and 9% for United Continental (UAL: 22.73, -0.31, -1.35%). Rising oil prices look likely to crimp profits, however. Wall Street expects earnings per share to decline 8% this year. The stock seems reasonably priced, nonetheless. Southwest has no net debt and its shares sell for about 0.7 times yearly sales. That's a 60% discount to the broad stock market.

Whole Foods

Sales growth, past four quarters: 14%

Industry sales growth: 5%

Wondering who sells that aforementioned $20-a-bottle beer? Whole Foods (WFMI: 59.95, 0.00, 0.00%) does. The upscale grocer specializes in markets with higher-income shoppers who are willing to pay up for organic and specialty fare. It, too, got clobbered during the recent recession but has made a remarkable recovery. Read into that what you will about U.S. spending habits or income inequality, but while Kroger (KR: 23.57, -0.19, -0.80%) and Safeway (SWY: 22.28, -0.40, -1.76%) are expected to make do with 6% sales growth in their current fiscal year, Whole Foods is forecast to increase sales twice as fast. Its profit margins are nearly double those of traditional grocers. Shares, alas, are priced like Parmigiano Reggiano. They sell for 36 times earnings, making them slightly more than twice as expensive as the average stock.

Acme Packet

Acme Packet (APKT, news) makes devices that help send data across Internet-protocol networks. The Bedford, Mass., company invented the session border controller, which has become more important as more video and voice data have gone online.

Investors are paying a hefty premium for the stock, however; it trades at 60 times this year's expected earnings.


This San Jose, Calif., company makes programmable logic devices used in communications network gear, consumer electronics and industrial equipment.

Sales to China contributed one-third of its 2010 revenue of nearly $2 billion.
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