Earnings Surprises: Three Companies That Beat Analysts' Estimates

Fani is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

It was a busy week for investors and full of surprises, positive and negative. Apple monopolized the headlines once again. The world's most valuable firm witnessed a sharp drop in the stock price after reporting flat quarterly profits due to increased manufacturing costs. Microsoft's earnings were in line with analysts' expectations, but net profit for the final three months of 2012 marked a 4% year-over-year decline. Nokia, the mobile maker that is struggling to achieve a turnaround, posted overall encouraging results. The firm managed to return to profitability, but failed to support an accelerating trend on its stock chart. The market reacted badly on Nokia's decision to drop dividend payments after 20 years. Against this backdrop of disappointing news, there were some companies that exceeded analysts' median expectations and rewarded their longtime investors with juicy returns.

Netflix (NASDAQ: NFLX) shares surged 40% on news of the firm's $0.13 earnings per share beat. Analysts had been expecting a loss due to the company's heavy investments associated with its aggressive expansion internationally. However, Netflix proved them wrong and posted some impressive numbers. The video streaming company ended the fourth quarter of 2012 with nearly four million new subscribers in the U.S. and abroad. Profit for the quarter was also robust and topped analysts' estimates. Looking ahead, the company anticipates strong market penetration in the U.S. For the first three months of 2013, Netflix expects to add almost another two million customers into its clientele. It has decided to put on ice its international expansion plans as they have been significantly costly. At the moment, this is probably the wise thing to do.

On the negative side, the stock is trading way below the peak of $300 achieved in 2011 and with comparably unfavorable valuation metrics. However, I believe that overall Netflix has a lot of room for growth. The company is well-positioned to benefit from demand in the streaming business, where it has established a strong foothold. The firm has made some strategic deals, which could boost its cash-generating capacity in the medium-term. Recently, Netflix struck a licensing deal with Warner Bros. In an effort to improve its content offerings and teamed up with Youtube on a project that aims to be worthy of competition. The two companies are building an Airplay rival called Dial.

Bristol-Myers Squibb (NYSE: BMY) surprised to the unexpected after reporting a $0.47 per share profit, excluding one-time items, up by 5 cents from what analysts' had predicted. However, earnings were enhanced mainly due to a tax benefit from a hepatitis C drug that failed last year and a steep reduction in advertising and product promotion expenses. U.S. Patent expiration of blood-thinner Plavix and hypertension treatment Avapro/Avalide caused net sales for the quarter and full-year of 2012 to shrink.

Overall, 2012 was a tough year for the pharmaceutical company. Weak sales growth resulted in a significant year-over-year revenue deterioration adding pressure over the company's future prospects. At the moment, Bristol-Myers is experiencing a transitional period preparing for a future without one of its major products, Plavix. The biopharmaceutical giant is aiming at building a strong pipeline consisting of potential blockbusters, such as the FDA approved Eliquis, which is co-developed with Pfizer. This year, the firm plans to invest largely on late-stage development programs that could reinforce an improved sales outcome in the medium-term. Thus, I do believe that investors should pay attention to the results of the company's experimental treatments and news on its upcoming products.

Western Digital's (NASDAQ: WDC) stock uptrend after revealing its fiscal Q2 2013 financial results was relatively modest. The leading disk drive maker had an amazing quarter that exceeded analysts' median predictions. For the period, the firm posted GAAP profits of $2.09 a share while consensus estimates called for a $1.82 per share profit. Despite the uncertain macro economic environment and soft PC demand, Western Digital managed to sustain a leading position in the industry. Most importantly, cash flow from operating activities, as well as free cash flow nearly doubled on a year-over-year basis.

At the moment, the stock looks considerably strong, both technically and fundamentally. Its valuation metrics, especially compared to the industry as a whole, could indicate a possible value opportunity. However, the so-called “death of the PC” era and the competition rising from the development of new disruptive technologies could impose serious risks over the company's long-term sustainability. Western Digital's financial and operating performance should provoke investors' interest for the short-term. In the long-run though, the company's viability is directly linked to its ability to produce new technologies and adjust to the transformation of the industry.

To sum up, often the market's reaction to news of earnings releases can be really confusing. For instance, Nokia's dividend suspension was negative news for the market. However, this decision could help Nokia strengthen its accounts at a time most crucial for its survival. Beating analysts' expectations does not necessarily mean that a stock is set for a long-term rally. Before deciding whether a stock fits our investment portfolio we should focus on the broader picture. I chose to include the above mentioned companies mainly because I do believe that they are worth watching for specific reasons. Netflix and Bristol-Myers because they have great upside potential in the medium-term, and Western Digital primarily because it performs impressively in a deeply controversial industry

FaniKel has no position in any stocks mentioned. The Motley Fool recommends Netflix. The Motley Fool owns shares of Netflix and Western Digital.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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