Last month, Sara Lee Corp. (SLE) reported strong results for the second quarter of fiscal 2010. Earnings for the quarter were $0.36 compared to $0.20 during the same period of fiscal 2009. Earnings were well above the Zacks Consensus Estimate of $0.23.

Further, the company reported strong operating income growth for the second quarter of fiscal 2010. The growth was driven by significant improvement in operating income across all segments and particularly in the North American Retail and International Beverage business segments, mainly due to lower corporate expenses. Therefore, the company raised its full year EPS guidance to a range of $1.00 to $1.05 per share compared to a range of 91 cents to 95 cents mentioned earlier.


Based on the above, 3 of the 11 analysts covering the stock made upward revisions to their 2010 estimates, while none moved in the opposite direction. For fiscal year 2011, 3 analysts increased their estimates, again with none in the opposite direction. Two analysts have also raised their estimates for the upcoming quarter, and it is encouraging to see that here there were no downward revisions, either.


In the last 30 days, the Zacks Consensus Estimate for fiscal year 2010 has gone up from $1.04 to $1.06. For fiscal year 2011, the Zacks Consensus Estimate has increased from $1.06 to $1.08. The estimate revision for 2010 indicates that analysts are expecting the company to report earnings at the high end of the guided range.


With respect to earnings surprises, Sara Lee’s track record in the preceding four quarters has been positive. It produced an average positive earnings surprise of 53.16% over the last four quarters, meaning that it has beaten the Zacks Consensus Estimate by that measure over the trailing 12 months. The trend indicates another big surprise in the current quarter.

In Conclusion

The fact that all the analysts revising estimates have moved in the upward direction is a big positive, since it indicates a consensus of opinion regarding earnings growth in the next quarter and the year. Moreover, the revisions have moved the consensus for the year to the high end of the guided range, which means that analysts are seeing momentum in the business.

Thus, the short-term rating on the stock is Outperform with a Zacks #1 Rank.

Sara Lee is a global manufacturer and marketer of high-quality brand products, focused primarily in the meats, bakery, beverage and household products categories.

Although the food market is highly competitive, a greater share of value-added branded products in Sara Lee’s product-mix helps strengthen its margins and reduces exposure to commodity prices in the long term. Thus, our long-term recommendation on the stock remains Outperform.

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