Lombardi: Stock Market Commentary & Forecasts, Financial & Economic Analysis Since 1986

An Earnings-based Stock Market Rally Soon—Is It Really Possible?

Friday, September 30th, 2011
By for Profit Confidential

The results so far are showing a significant amount of earnings numbers that are beating Street expectations. Is it possible this could lead to a stock market rally in the near future?The results so far are showing a significant amount of earnings numbers that are beating Street expectations. This isn’t necessarily a difficult thing for a corporation to manage, but it’s certainly better than not beating consensus.

Paychex, Inc. (NASDAQ/PAYX) just reported earnings that beat the Street and this is another one of those benchmark companies whose business has a good pulse on the economy. Paychex is a well-known payroll and human resources company that’s made a serious amount of wealth for its shareholders.

The company just announced that its total revenues were $563.1 million for the three months ended August 31, 2011 (its fiscal first quarter of 2012), representing a solid increase of nine percent over the same quarter last year. Net income grew 13% to $148.9 million and diluted earnings per share increased 14% to $0.41 per share.

Paychex management cited that it is cautiously optimistic about its fiscal 2012 year, which is no surprise considering the domestic employment situation. Currently, the company anticipates top-line revenue growth of between seven percent and nine percent this fiscal year, with earnings growing five percent to seven percent. The kicker with this stock is that it’s about seven points below its 52-week high and yielding about 4.5%. As an investor, a 10% annual return would be a reasonable expectation, and that’s without much improvement in the economy.

Another well-known large-cap that just reported solid financial results is AutoZone, Inc. (NYSE/AZO). This auto-parts retailer seems to have its share price on autopilot—to the moon. The stock barely corrected during the financial crisis of 2009, and has more than doubled since then.

AutoZone is another great barometer on the retail economy, as it has over 4,600 retail stores in the U.S., Puerto Rico, and Mexico. The company reported net sales of $2.6 billion in its fourth quarter (16 weeks), ended August 27, 2011, representing a solid increase of eight percent over the same quarter last year. According to the company, domestic same-store sales, or sales for stores open at least one year, increased 4.5%. Net income increased $32.5 million, or 12%, over the same period last year to $301.5 million, while diluted earnings per share increased an impressive 27% to $7.18 per share, up from $5.66 per share in the same quarter last year.

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For its fiscal year ended August 27, 2011, total sales grew 9.6% to $8.1 billion, while earnings per share increased 30% to $19.47 per share. The numbers solidly beat Wall Street consensus and AutoZone authorized another $750 million in new share buybacks. All this, and the stock is still trading for a reasonable valuation.

As we all know, the stock market’s been consumed by all the investment risk in the global economy. Sentiment has been overwhelmed by fear and uncertainty. While not every business is doing great, the numbers are now telling us that some have weathered the storm exceedingly well and are poised for further growth. If the European sovereign debt issue can be contained, an earnings-based stock market rally seems likely in the near future.

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Mitchell Clark - Equity Markets Specialist, Financial AdvisorMitchell Clark, B. Comm. is a Senior Editor at Lombardi Financial specializing in large- and micro-cap stocks. He’s the editor of a variety of popular Lombardi Financial newsletters, such as Income for Life and Micro-Cap Reporter. Mitchell, who has been with Lombardi Financial for 17 years, won the Jack Madden Prize in economic history and is a long-time student of equity markets. Prior to joining Lombardi, Mitchell was as a stock broker for a large investment bank. Add Mitchell Clark to your Google+ circles