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Can Fortune Brands (FBHS) Sustain Earnings Impetus in Q1?

Fortune Brands Home & Security Inc. FBHS is slated to report first-quarter 2016 results on Apr 20, after the closing bell. In the last quarter, the company delivered a positive earnings surprise of 3.7%. Let’s see how things are shaping up for this announcement.

Factors Influencing This Quarter

With constant focus on product portfolio and future growth opportunities, Fortune Brands has been making investments in designing, planning and implementing additional capacity. The company expects the positive momentum witnessed in 2015 to continue this year, driven basically by sturdy execution and market growth. The company anticipates the U.S. home products market to grow 6–7% in 2016, while the global market is expected to grow 5–6%.

Based on the company’s expectation of outperforming the market and solid contribution from the Norcraft acquisition, management envisions sales to grow in the range of 10–12% in 2016. Adjusted earnings for 2016 are anticipated in the band of $2.42–$2.52 per share, compared with $2.07 reported in 2015.

Further, given Fortune Brands’ healthy financial status, the company remains committed to drive shareholder value using its cash flow and balance sheet. Fortune Brands expects to generate free cash flow of $350–$375 million in 2016.

While these efforts are expected to lead to substantial growth, they are likely to take time owing to the soft consumer discretionary spending environment. Also, in the trailing four quarters, the company delivered an average negative earnings surprise of 4%, which lowers our enthusiasm for the quarter to be reported.

Earnings Whispers

Our proven model does not conclusively show that Fortune Brands is likely to beat on earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1, 2 or 3 for this to happen. This is not the case here, as you will see below:

Zacks ESP: Fortune Brands has an Earnings ESP of 0.00%. This is because the Most Accurate estimate and the Zacks Consensus Estimate are both pegged at 33 cents.

Zacks Rank: Fortune Brands carries a Zacks Rank #3 (Hold), which increases the predictive power of ESP. However, the company’s ESP of 0.00% makes surprise prediction difficult.

We caution against stocks with a Zacks Rank #4 or 5 (Sell rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks That Warrant a Look

Here are some companies you may want to consider as our model shows that these have the right combination of elements to beat earnings estimates:

McDonald's Corp. MCD scheduled to release earnings on Apr 22, has an Earnings ESP of +1.74% and a Zacks Rank #2 (Buy).

AutoNation Inc. AN scheduled to release earnings on Apr 22, has an Earnings ESP of +1.09% and a Zacks Rank #2.

Lithia Motors Inc. LAD scheduled to report earnings on Apr 21, has an Earnings ESP of +0.65% and a Zacks Rank #2.

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Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
AUTONATION INC (AN): Free Stock Analysis Report
 
LITHIA MOTORS (LAD): Free Stock Analysis Report
 
MCDONALDS CORP (MCD): Free Stock Analysis Report
 
FORTUNE BRD H&S (FBHS): Free Stock Analysis Report
 
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