3 Earnings Surprises That Caught My Attention Last Week

We're more than two months into the new year, and surprisingly the majority of earnings reports continue to be better than Wall Street had predicted. With so many companies reporting during the weeks that comprise earnings season each quarter, earnings reports can fall through the cracks.

Each week this year I've taken a look at three companies that could be worth further research after either beating or missing their profit expectations. Today, we're going to take a look at three more companies that reported earnings last week and may have slid under your radar, and that you should give a second look:

Company

Consensus EPS

Reported EPS

Surprise

Hovnanian (NYSE: HOV  ) ($0.47) ($0.17) 64%
Smith & Wesson (Nasdaq: SWHC  ) $0.04 $0.07 75%
Ciena (Nasdaq: CIEN  ) ($0.05) ($0.17) (240%)

Source: Yahoo! Finance.

Hovnanian
When it comes to the housing sector, things that are less bad continue to garner a large influx of buyers of homebuilder stocks. As for me, I still say the proof will be in the pudding when these homebuilders can demonstrate some actual growth.

Recent data from RealtyTrac indicate that 1.35 million foreclosed properties are already on the market, and LPS Mortgage Monitor noted that another 4 million properties are well on their way to flooding the foreclosure market. So pardon my naivety, but how are homebuilders going to command anything near their asking prices when all-cash deals in the foreclosure sector keep driving down prices?

For Hovnanian, new home contracts jumped 38% over last February and the company had fewer writedowns, but the overall selling price on these homes rose only a modest 3.1% while homebuilding gross margin percentage actually dropped 40 basis points over the year-ago period. Foreclosures are likely to constrain margins and selling prices for years to come, which has me quite pessimistic on the entire sector.

Smith & Wesson
Talk about blowing away Wall Street's estimates. Smith & Wesson has now trounced estimates in four straight quarters.

For its third quarter, Smith & Wesson reported a 24% increase in sales to $98.1 million and a doubling in its firearm backlog from a year ago to $198.5 million. The company reported strength from its M&P handguns, M&P sporting rifles, and all personal protection and concealed carry pistols. My Foolish colleague Rich Smith doesn't seem to like shares much when compared to peer Sturm, Ruger (NYSE: RGR  ) , but I'm going to disagree. I think they can both head higher.

After boosting its full-year sales forecast to $395 million to $400 million, Smith & Wesson is being valued at 25 times forward earnings and 12 times cash flow, both of which are in line with the company's averages from 2002-2007. Similarly, Sturm, Ruger is valued at 15 times forward earnings and 14 times cash flow. With both companies beating estimates and their valuations very much in line, I see both being solid long-term growth plays.

Ciena
Don't you think it's time for some fiber in your diet? Ciena last week reported a wider-than-expected loss amid a 4% decline in sales, but most of this was due to seasonality and delayed recognition of revenue. The shares actually rose on the news

The big news of the day was the communication equipment maker's moderately bullish growth forecast for the second half of the year. Large telecommunication providers AT&T and Verizon have both signaled that they anticipate the need for infrastructure and bandwidth to ramp up in 2012 over what was very weak capital expenditures in the fourth quarter of 2011. This is great news for infrastructure plays like Ciena that rely on increasing capex budgets to drive growth. I for one am bullish on much of the fiber optic and network equipment sector this year, and Ciena is no different.

Foolish roundup
Sometimes, an earnings beat or miss isn't as cut-and-dried as it appears. I've given my two cents on what's next for each of these companies; now it's your turn to sound off. Share your thoughts in the comments section below and consider adding these stocks to your free and personalized watchlist.

If you'd like the inside track on three more companies that could wind up in the earnings beat column, then I suggest you get a copy of our latest special report, "3 American Companies Set to Dominate the World." Did I mention the best part? This report is completely free, so don't miss out!

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. He considers himself a straight shooter. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

Try any of our Foolish newsletter services free for 30 days. We Fools don't 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 that always exceeds expectations.


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