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Earnings season: Why does it look so different?

Today's Financial News - Posted November 2, 2009

question markEarnings season is slowly winding down. It has been less than a month, but the second half of the season looks dramatically different that the start.

By Andrew Snyder, TodaysFinancialNews.com

Baltimore – (TFN): It is amazing how earnings sentiment has changed over the past two weeks ago. In mid-October, any figure close to analyst estimates was enough to send share price up by double-digit proportions. Now, an out of place coma in an otherwise pristine report can send shares plummeting.

Just ask Wonder Auto Technology (NASDAQ:WATG) share owners.

Before this morning’s bell, the Chinese auto parts manufacturer revealed its third-quarter financials. With top-line growth of over 50% leading to $6.5 million of net income, which beat expectations, investors would expect a rational market to send share price higher.

But it isn’t so. As I write, shares of the $320 million company are down by nearly 8%.

The only possible reason share price is down on the news comes due to a small decrease in margin performance. Although the company issued annual revenue guidance of $208 million, which is above the expected figure of $204.27 million, Wonder Auto’s expected annual profit is $23 million, just a hair shy of the Street’s estimated $23.3 million.

The difference is just over 1%, but the weakening margin is a sign that future growth, the stuff market valuations are really based on, will be tougher to find than expected.

Even so, a share price of less than $12 for this company represents a good deal. Look for a fair valuation of $14 within ninety days.

A not so golden book

It is a similar situation over at AngloGold Ashanti (NYSE:AU). One would think with gold prices in record territory over the past three months, earnings at a top gold miner would be through the roof.

Unfortunately, AngloGold was thoroughly hedged.

It was going to rack up profits in a narrow range no matter what gold prices did. But now that increasing prices appears to be a long-term trend and any downside still allows room for serious profitability, the company is unraveling its hedges.

Because of the costs of erasing many of the hedges from its books, the $13 billion African miner posted a quarterly loss of $596 million this morning. Without those costs, the company says it would have earned $163 million.

Without any hedges, the sky’s the limit.

Investors have an interesting choice with AngloGold. If they believe gold prices are just beginning their skyward journey, an unhedged miner offers plenty of well-leveraged upside potential.

But if prices turnaround, companies savvy enough to hedge their books at current prices will offer dominate returns.

Fortunately, there are enough choices in the industry to make any investor happy. AngloGold is a well-run company that will be a strong long-term performer in any portfolio. The short-term, however, could be a different picture as the volatile commodities market settles down.

Although most big names have already posted their quarterly results, this is still going to be a hectic week on the earnings front. Toss in some fiercely watched economic data and we should be in for yet another wild ride.

Strap in and hold on.


Next Article: TFN eNews 11/02/2009: Could this quarter-a-share stinker have some 35% upside left?

Posted by Andrew Snyder · Filed Under Featuring..., Investment Strategies 

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