The Zacks Analyst Blog Highlights: Caterpillar, Lincoln Electric Holdings, Precision Castparts, Graphic Packaging Holding and Visa

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Jul 24, 2014, 09:30 ET

CHICAGO, July 24, 2014 /PRNewswire/ -- Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include the Caterpillar Inc. (NYSE:CAT-Free Report), Lincoln Electric Holdings Inc. (Nasdaq:LECO-Free Report), Precision Castparts Corp. (NYSE:PCP-Free Report), Graphic Packaging Holding Company (NYSE:GPK-Free Report) and Visa Inc. (NYSE:V-Free Report).

Today, Zacks is promoting its ''Buy'' stock recommendations. Get #1Stock of the Day pick for free.

Here are highlights from Wednesday's Analyst Blog:

4 Industrial Stocks to Surprise This Earnings Season

Having entered the second week of the second-quarter 2014 earnings season, all eyes are on this week's releases. Major finance companies reported their results in the preceding week, and Friday's market gain was largely driven by upbeat results of some bio-tech and internet stocks.

Expectations are high this quarter, with earnings estimated to increase by 4.8% on the back of 2.2% revenue growth. Margins are predicted to increase modestly. Industrial products sector is expected to witness 0.8% earnings growth. We believe the sector has lot more in store for us this quarter.

Factors That Make Us Optimistic

Operating environments for industrial products sector were quite favorable in the quarter. Industrial production in the U.S. grew 5.5% year over year, including a 6.7% annual hike in manufacturing production and an 18.8% increase in mining production. However, utilities suffered a 21.4% decline. Favorable industrial activities indicate a healthy demand for industrial products sector.

Also, the U.S. job report for June was encouraging. Nearly 288,000 new jobs were added as against 224,000 in May and only 129,000 in January. Unemployment rate fell to 6.1% from 6.6% recorded in January. New job additions in the second quarter totaled 794,000, up 53% from the preceding quarter.

The strengthening job market reflects a recovering economy. This has prompted the Federal Reserve to discontinue its bond purchases by year-end 2014. Further, export demand for U.S-made goods, especially automotive vehicles and parts, consumer articles, industrial supplies and materials, and food and beverages, increased by $2.0 billion to $195.5 billion in May.

Performance So Far and Outlook

Let us take a look at the sector's performance so far in second-quarter 2014. Just 4% of the total Industrial Products companies in the S&P 500 group reported their results as of Jul 16. Earnings grew 9.7% year over year with a beat ratio of 100%, while revenues climbed 2.5%.

With demand in domestic and international markets picking up, improvements are anticipated in the sector. For the industrial sector at large, earnings growth is predicted at 8.7% in 2014 and 11.8% in 2015, to be driven by margin improvements. Revenue growth is likely to remain low at 0.3% in 2014 and 4.2% in 2015.

We are elaborating a few simple guidelines below that will help investors to select the Industrial Products stocks that are likely to beat earnings estimates this season.

How to Pick?

Choosing the right stocks, with the potential to beat earnings estimates from a plethora of industry players, can be a daunting task. The Industrial Products sector includes machinery, pollution control, industrial products-services, construction building services and containers and glass industries. The procedure, however, can be simplified by selecting stocks with a favorable Zacks Rank of #1 (Strong Buy), #2 (Buy) or #3 (Hold) – and a positive Zacks 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 positive earnings surprise is as high as 70%.

Here are four Industrial Products stocks currently equipped with the right combination of elements to post an earnings beat:

Caterpillar Inc. (NYSE:CAT-Free Report): The company is one of the leading manufacturers of construction and mining equipment, diesel and natural gas engines, and industrial gas turbines. This farm and construction equipment manufacturer is well positioned to benefit from the recovery in the U.S. construction sector. Also, growing export demand in the country will bode well for the company going forward. It has a $68.7 billion market capitalization at present.

Caterpillar currently sports a Zacks Rank #1. Earnings ESP for the second quarter is +2.00%, with the Zacks Consensus Estimate pegged at $1.50 and the Most Accurate Estimate at $1.53. Important metrics are provided below:

Earnings Growth Rate: 7.3% for 2014; 10.2% for the next five years
Forward Price-to-Earnings (P/E) multiple: 17.84 versus 16.94 for the industry
Forward Dividend Yield: 2.54%
Return on Equity (ROE): 20.4% versus 19.8% for the industry

Caterpillar Inc. is scheduled to release its second-quarter financial results on Jul 24 before the market opens.

Lincoln Electric Holdings Inc. (Nasdaq:LECO-Free Report): The company manufactures and sells welding and cutting products. Its product portfolio includes welding power sources, wire feeding systems, robotic welding packages, fume extraction equipments, consumables and fluxes as well as regulators and torches used in cutting. Growth in the transportation and energy-related sectors will be advantageous for the company. It has a $5.4 billion market capitalization at present.

Lincoln Electric Holdings currently sports a Zacks Rank #3. Earnings ESP for the second quarter is +1.10%, with the Zacks Consensus Estimate pegged at 91 cents per share and the Most Accurate Estimate at 92 cents per share. Important metrics are provided below:

Earnings Growth Rate: 11.4% for 2015
Forward Price-to-Earnings (P/E) multiple: 18.51 versus 16.94 for the industry
Forward Dividend Yield: 1.37%
Return on Equity (ROE): 21.1% versus 19.8% for the industry

Lincoln Electric Holdings is scheduled to release its second-quarter results on Jul 28 before the market opens.

Precision Castparts Corp. (NYSE:PCP-Free Report): The company manufactures complex metal components and products. Its product portfolio includes high-quality investment castings, forgings and fasteners/fastener systems for critical aerospace and industrial gas turbine (IGT) applications. Two promising end-markets for the company are the aerospace and industrial gas turbine markets. It currently has a $37.2 billion market capitalization.

Precision Castparts currently sports a Zacks Rank #2. Earnings ESP for first-quarter of fiscal 2015 (ended Jun 2014) is +0.60%, with the Zacks Consensus Estimate pegged at $3.35 and the Most Accurate Estimate at $3.37. Important metrics are provided below:

Earnings Growth Rate: 16.5% for 2014; 13.3% for the next five years
Forward Price-to-Earnings (P/E) multiple: 18.35 versus 16.94 for the industry
Forward Dividend Yield: 0.05%
Return on Equity (ROE): 16.6% versus 19.8% for the industry

Precision Castparts is scheduled to release its first-quarter fiscal 2015 financial results on Jul 24 before the market opens.

Graphic Packaging Holding Company (NYSE:GPK-Free Report): The company is one of the leading providers of paperboard packaging solutions for a wide variety of products to food, beverage and other consumer products companies. It currently has a $3.8 billion market capitalization.

Graphic Packaging Holding presently holds a Zacks Rank #2. Earnings ESP for second quarter is +5.88%, with the Zacks Consensus Estimate pegged at 17 cents per share and the Most Accurate Estimate at 18 cents per share. Important metrics are provided below:

Earnings Growth Rate: 26.9% for 2014; 21.5% for the next five years
Forward Price-to-Earnings (P/E) multiple: 17.39 versus 16.94 for the industry
Return on Equity (ROE): 17.8% versus 19.8% for the industry

Graphic Packaging Holding is scheduled to release its second-quarter 2014 results on Jul 24 before the market opens.

Going Forward

Economic growth induces heightened industrial activities and hence, is considered favorable for the expansion of the industrial products/machinery industry. This direct correlation, right on the heels of expected economic growth worldwide, makes us confident about this industry. Amid this backdrop, a sneak peek at some possible winners having a solid Zacks Rank and a positive Zacks Earnings ESP this earnings season, could be a great idea for investors seeking exposure to this sector.

Is an Earnings Surprise for Visa (V) in the Works?

Investors are always looking for stocks that are poised to beat at earnings season and Visa Inc. (NYSE:V-Free Report) may be one such company. The firm has earnings coming up pretty soon, and events are shaping up quite nicely for their report.

That is because Visa is seeing favorable earnings estimate revision activity as of late, which is generally a precursor to an earnings beat. After all, analysts raising estimates right before earnings—with the most up-to-date information possible—is a pretty good indicator of some favorable trends underneath the surface for V in this report.

In fact, the Most Accurate Estimate for the current quarter is currently at $2.10 per share for V, compared to a broader Zacks Consensus Estimate of $2.09 per share. This suggests that analysts have very recently bumped up their estimates for V, giving the stock a Zacks Earnings ESP of 0.48% heading into earnings season.

Why is this Important?

A positive reading for the Zacks Earnings ESP has proven to be very powerful in producing both positive surprises, and outperforming the market. Our recent 10 year backtest shows that stocks that have a positive Earnings ESP and a Zacks Rank #3 (Hold) or better show a positive surprise nearly 70% of the time, and have returned over 28% on average in annual returns (see more Top Earnings ESP stocks here).

Given that V has a Zacks Rank #2 (Buy) and an ESP in positive territory, investors might want to consider this stock ahead of earnings. Clearly, recent earnings estimate revisions suggest that good things are ahead for Visa, and that a beat might be in the cards for the upcoming report.

Today, Zacks is promoting its ''Buy'' stock recommendations. Get #1Stock of the Day pick for free.

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