With earnings season underway, now may be a good opportunity for investors to look for stocks that could surprise to the upside or downside.
Not only is it important to analyse the earnings result itself, investors also need to take note of the outlook statements provided by management for the year ahead.
Here are three stocks that investors should watch closely this earnings season:
1. Virtus Health Ltd (ASX: VRT) – Virtus is Australia's leading IVF service provider with around 36% market share. It hasn't been a great start to 2015 for the company, with the share price down by more than 37% following a disappointing profit downgrade.
Virtus advised the market in June that lower IVC cycles in NSW, loss of market share in Queensland and Victoria and storm damage to one of its Sydney clinics would result in only low-to-mid-single digit percentage profit growth in FY15. This was a decrease from low-to-mid-teens growth that was forecast just four months earlier.
Although I'm not expecting a great result when the company reports, I will be looking closely at the company's outlook for FY16. If management can provide some positive guidance in regards to IVF cycle growth for the year ahead, Virtus could be re-rated. The shares are currently trading at 12.5x earnings and offers an attractive dividend yield of around 5.2%.
2. Veda Group Ltd (ASX: VED) – Veda is the largest credit reference agency in Australia and New Zealand. The services it provides include credit reporting, credit scoring and marketing analytics.
The company has been an impressive performer since listing just over 18 months ago with the share price increasing by more than 40% over that time.
All of Veda's divisions have been contributing to strong growth and the company has a number of competitive and industry tailwinds behind it that should see the company deliver an impressive set of results.
With the shares currently trading at more than 25x earnings, the market is clearly expecting that strong growth to continue. Investors need to be careful however, as any miss on expectations could see the share price fall well below $2. On the flip side, a strong earnings outlook could see the share price move even higher.
3. InvoCare Limited (ASX: IVC) – InvoCare is the leading provider of funeral services in Australia and owns some of the most well known brands in the sector including Guardian Funerals, Liberty Funerals and White Lady Funerals.
The company offers defensive and predictable earnings as the services it provides are always in demand and this sees the company frequently trade at a premium to the rest of the market.
Along with the services it offers in Australia, InvoCare has recently expanded its operations into the much larger US market. Although this move is in its very early stages, a successful expansion into the US could provide the company with a strong platform for long-term earnings growth.
Investors should keep a close eye on how the US operations are progressing when the company delivers its earnings report as this could be the driver of the share price in the short to medium term. The company is currently trading at more than 27x earnings, so investors will be expecting strong growth and a positive outlook statement for this to be justified.
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