With positive U.S. economic data hitting the wire on an almost daily basis, we thought this would be a good time to gauge the state of corporate earnings for U.S. companies and look ahead to how improved economic reports might be impacting analysts’ estimates. More specifically, we’ll look at expectations for the current quarter and for fiscal year 2012 in the context of the earnings season just ended and the trend of corporate earnings in the last year. As companies get ready to close the current quarter, investors begin to anticipate the upcoming season and the impact it will have on full year earnings, ultimately the biggest driver of stock prices; in this context, it is MarketGrader.com’s goal to serve as a guide during upcoming earnings seasons to help investors follow specific sectors, industries and stocks that might be affected by changing expectations. MarketGrader.com’s analysis of corporate earnings, tallied in our “Earnings Season Report Cards,” is based on a bottom-up approach by which we measure reported and diluted earnings per share and aggregate the values across our broad coverage universe as well as for broad market indexes, particularly the S&P 500 and the equally-weighted Barron’s 400. By tracking on a daily basis earnings reports relative to analysts’ expectations we are able to maintain a running total of quarterly and annual earnings that help investors understand whether companies are collectively reporting ahead or below expectations and what sectors and specific stocks are contributing the most to the upside and downside.  This particular report will focus on corporate earnings for the S&P 500.

By MarketGrader.com’s account, earnings for the S&P 500 were virtually flat relative to the fourth quarter of 2010. With 475 of the 500 companies (or 95%) reported to date, index components are on pace to report $21.33 in fully diluted earnings per share in Q4 2011, putting it 0.5% below the $21.43 earned in the equivalent quarter a year earlier. Sequentially, when comparing the results against Q3 2011 earnings per share of $22.32, the drop was 4.4%. It’s important to note that MarketGrader.com’s tally of fully diluted EPS is lower than the tally of EPS as reported by the companies since the share base across most companies based on full dilution is larger than the number of shares used to calculate reported EPS. The trend of companies beating their consensus estimate last quarter was also negative compared to the third quarter, with 59% of all companies surpassing analysts’ expectations compared to 69% during the previous earnings season. While the number of companies that met estimates remained unchanged at 11%, the deficit in positive earnings surprises showed up in the earnings miss category, with 30% of companies failing to live up to their consensus estimate vs. 20% in the prior period. Despite a flat fourth quarter, S&P 500 companies reported a healthy 11.8% increase in diluted earnings per share for all of 2011 to $87.48 compared to $78.25 earned in 2010. Such increase is what has kept stock valuations within reason despite a gain of over 20% since early October in the main market benchmarks, along with rising estimates for the quarters ahead, which make forward P/Es appear relatively benign.

On a sector-by-sector basis, Consumer Discretionary was the big winner of 2011’s fourth quarter, with diluted EPS up 78% in the aggregate compared to the comparable period in 2010. It was followed by modest gains of 8% for financials, 6% for Industrials and 4% for Technology. The quarter’s biggest laggard was Materials, with diluted EPS coming in 71% lower than the Q4 2010 reports. Nominally, Telecommunications companies fell in the aggregate by more than 100% but this is simply an arithmetic quirk as the group as a whole reported negative diluted EPS. The two other sectors that reported earnings below the year earlier period were Consumer Staples, down 31% and Utilities, down 15%. Health Care was essentially flat with a 1% gain.

Some notable names that were upgraded by MarketGrader.com following their earnings report were Yahoo (YHOO – Hold), Ford (F – Buy), Humana (HUM – Buy), American International Group (AIG – Hold) and Paccar (PACR – Buy). Notable downgrades included Chevron (CVX – Sell), First Solar (FSLR – Sell), Alpha Natural Resources (ANR – Sell), Newmont Mining (NEM – Sell) and Hewlett-Packard (HPQ – Sell). For the complete list please visit our Earnings Season Report Card.

In contrast to last quarter’s flat earnings, analysts continue to sound bullish about earnings prospects for the S&P 500 both in the first quarter of 2012 and for the full fiscal year. Consensus estimates show the index earning $23.63 per fully diluted share this quarter, an increase of 11% from 2011’s first quarter. Full year 2012 earnings expectations are even rosier, with analysts polled by FactSet Research expecting aggregate S&P 500 diluted EPS of $103.99, up 19% from the $87.48 earned in 2011. On a quarter-by-quarter basis, S&P 500 companies are expected to report diluted EPS gains of 15% in the second quarter, 20% in the third quarter and 30% in the year’s last quarter. All else being equal, if analysts’ forecasts materialize into actual reported earnings for S&P 500 companies, the index would need to climb an additional 19% from current levels to 1,643 to maintain the exact same trailing P/E of 15.8 it sports today (based on fully diluted earnings.) With European sovereign yields for peripheral countries still dangerously high, the potential for U.S. rates to start climbing sooner than the Fed anticipates and what promises to be a highly contested November election, equity investors would no doubt sign off on such a bet today with over three quarters of the year still left. While we can’t predict the future, we do look forward to tracking and reporting the results in quarters to come.

With the U.S. stock market at or near 52-week highs, depending on which benchmark you look at, and an uneasy complacency among investors seemingly setting in, we thought an update on our MarketGrader Sentiment Index might serve as a reality check. For those not familiar with the index, or MGSI as we call it, we suggest a quick read of our October 5th, 2011 introductory post, available here. To summarize: MGSI tracks the ratio of stocks in the MarketGrader.com coverage universe with a positive sentiment to those with a negative sentiment. Such ratings are based on our four sentiment indicators that track price momentum, price trend, earnings guidance and short interest. Any reading of the MGSI ratio above 2.5 suggests excessive investor optimism, while a reading below 1.5 suggests excessive pessimism. Extreme readings above 3.0 or below 1.0 suggest extreme scenarios. Which brings us to our current state of affairs.

Before discussing what MGSI is saying today it is worth noting how we got to our current state of collective enthusiasm for stocks. Since our October 5th warning of an extreme reading of 0.14 (with seven stocks in negative sentiment territory for each one with positive sentiment) the market has rallied strongly as the risk premium in risk assets has fallen significantly. Since our article, the S&P 500 Index has gained 20.8% with the Dow up 19.4%, the NASDAQ Composite up 23.1% and the Russell 2000 up 28.0%. We’ll take this opportunity, of course, to highlight the performance of the MarketGrader-powered Barron’s 400 Index, up 29.2% since Oct. 4th 2011. In rising periods such as this one the B400 clearly continues to outperform. Perhaps more telling than the rise in these benchmarks has been the fall in the VIX, the now ubiquitous measure of implied volatility in S&P 500 options, which closed Thursday 53% below its Oct. 4th level.

This forceful rise in equities in the last four and a half months has expectedly pushed the MGSI to and all-time high of 4.96, solidly in what we call “Extreme Optimism” territory. Today there are 1,175 stocks in MarketGrader.com with positive sentiment and only 358 with negative sentiment. To put this into perspective, since MGSI’s inception in November 2008, the index has spent only 20 days above 3.0 and three days above 3.5. And this rise has been powered by stocks across the board, as seen from our individual sector MGSI sub-indexes. These essentially track the same ratio of positive-to-negative sentiment stocks MGSI tracks but on a sector by sector basis across nine sectors. Of all nine MGSI sectors tracked by MarketGrader, seven are currently scoring above 2.5, inside our “Excessive Optimism” territory. Six of the seven currently score above 3.o, inside of our “Extreme Optimism” area. These are all at 52-week highs. The seventh, Energy, is not at a yearly high but is only a stone’s throw away from getting there. The sector with the most extreme reading is Financials with an off-the charts MGSI level of 9.61. Of the 15 stocks in the sector with a sentiment score above nine (out of 10) only three have a ‘Buy’ rating based on underlying company fundamentals. The only two sectors not in the overly optimistic camp are Telecommunications, which only counts a very narrow 109 companies and Materials, a somewhat broader group. Telecommunications, at 0.88, is actually in “Extreme Pessimism” territory and Materials, at 2.11, is in neutral, or ‘Goldilocks’ territory, not too hot,not too cold.

The MarketGrader Sentiment Index readings should be seen as tactical, rather than strategic market calls, considering they are based on a very narrow view of the market, namely through investor sentiment. Investors should place the MGSI readings in the context of macroeconomic trends and overall earnings-driven trends for U.S. companies. From the perspective of company fundamentals we feel generally bullish about the case for equities in the years ahead, particularly given the lack of earnings multiple expansion despite the aforementioned increases in stock prices. With three quarters of the S&P 500 and 83% of the Barron’s 400 companies having already reported results this earnings season, both indexes are still trading at below historical P/E ratios of 13 and 14 times 12-month forward earnings respectively. And while corporate earnings gains have slowed down from the early 2011 pace, U.S. companies continue to show productivity gains and are sitting on piles of cash and mostly sound business models. This will, however, be the subject of a separate story. For now cautious investors might want to keep an eye on MGSI, available for free here at MarketGrader.com.

Amid an uncertain economic climate investors should be looking not only for companies that are able to survive an economic downturn but also for those that might actually benefit from taking market share from weaker rivals that may be too busy defending their turf or simply focused on surviving a weak economy. A good place to find these companies is MarketGrader’s Cash Kings idea list, one of 22 unique lists published daily for our subscribers.  In order to qualify as a ‘Cash King,’ a company must have an overall ‘Buy’ rating from MarketGrader, a Cash Flow overall grade of at least A- and a minimum of $1 billion in cash on hand. Our current list, available for free to all visitors as the Idea List of the Week, includes a total of 113 companies. 22 of them have at least $10 billion in cash on hand and 36 have a market cap of at least $50 billion; this is clearly a list of mostly large cap companies, with the smallest one, BBVA Banco Frances SA Buenos Aires (BFR), having a capitalization of $1.8 billion. And very telling perhaps of investor preference for safer, solid companies amid the recent market downturn, only five of the companies on the list have a Negative Sentiment rating, while 30 have a Neutral Sentiment rating and 78 have a Positive Sentiment rating.

The following are a few of the highlights of the top ten Cash Kings on MarketGrader.com:

1. Intel Corp (NASD: INTC)

Intel, which was recently the highest overall graded company in all of MarketGrader, has only $2.14 billion in total debt, compared to $11.90 billion in cash on hand. The company received an A+ grade in 4 of the 6 indicators that make up our Cash Flow category: EBITDA Margin, Debt/Cash Flow Ratio, Interest Coverage Capacity and Economic Value. Intel has an overall grade of 91.8 (out of 100).

2. Cliff’s Natural Resources Inc. (NYSE: CLF)

Cliff’s Natural Resources, with an overall grade of 89.0, saw its cash flow grow considerably in its latest quarter to $106.90 million, a 60.27% increase from $66.70 million reported in the year earlier period. The company’s liquidity is not only remarkable but the current amount of debt it carries relative to the cash flow it generates from its operations is even lower now than it was a year ago. It received an A+ grade in 3 of our 6 Cash Flow indicators: Cash Flow Growth, Debt/Cash Flow Ratio and Retention Rate.

3. Apple Inc. (NASD: AAPL)

Apple is truly a cash machine, generating almost $6 billion in free cash flow per quarter and more than $23 billion over the last 12 months.  Its cash flow grew considerably in its latest quarter to $6.22 billion, a 166.91% increase from $2.33 billion reported in the year earlier period. When compared to the 96.25% increase in cash flow in the last twelve months it seems like the rate of growth is accelerating, which could have a very positive impact on earnings growth in coming quarters. The company clearly has very strong liquidity having no debt to finance and $29.23 billion in cash on hand. This affords it significant flexibility to take on debt if it wanted to pursue new growth opportunities such as an acquisition. Apple received an A+ in 5 of 6 Cash Flow indicators: Cash Flow Growth, Debt/cash flow Ratio, Interest Covering Capacity, Economic Value, and Retention Rate. It has an overall grade of 88.0.

The following companies round out our top ten Cash Kings:

4. Research In Motion LTD. (NASD: RIMM)- Overall Grade: 87.6

5. Vale SA (NYSE: VALE)- Overall Grade: 87.2

6. Microsoft (NASD: MSFT)- Overall Grade: 87.1

7. Freeport-Mcmoran Copper and Gold (NYSE: FCX)- Overall Grade: 86.0

8. Altera Corp (NASD: ALTR)- Overall Grade: 86.0

9. Lam Research Corp (NASD: LRCX)- Overall Grade: 84.9

10.  Annaly Capital Management (NYSE: NLY)- Overall Grade: 84.4

For the complete list of all 113 “Cash Kings” and their fundamental analysis, please click here.

We upgraded Stericycle (SRCL) this morning from a HOLD to BUY based on last night’s positive earnings report of strong income and revenue growth.  SRCL reported $335.18 million in sales a 20.96% increase in revenue, and $48.12 million in net income an 18.36%, over the same quarter one year ago.  They reported fully diluted eps of $0.56, beating the consensus estimate 0f $0.55 eps by a penny.

SRCL completed 6 acquisitions during the quarter with anticipated annualized revenue of $37 million. Four of the acquisitions were international(Brazil, Chile and 2 from the UK).  The bulk of anticipated acquisition revenue is expected to come internationally.

The company anticipates 2010 eps to come in between $2.38 – $2.44, an increase of 16.7% to 19.6% over 2009’s diluted $2.04 eps.

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Yum! Brands (YUM) reported earnings of $0.59 per share, topping the consensus analyst estimate of $0.53, yesterday after market close. The stock has been upgraded by MarketGrader, from a HOLD to a BUY on improving revenue and income growth.

Barron’s 400 component Intel (INTC) reported their strongest 1st quarter revenues ever of just under $10.3 Billion. We maintain our current BUY rating on Intel. Intel is now up 13.4% since our January 15th, 2010 upgrade. Check out our free report on Intel (INTC) by clicking here.

Biogen Idec (BIIB) will be one of the first Barron’s 400 companies to report when earnings season begins next week. We upgraded BIIB from a HOLD to a BUY on 10/21/2009 following their 10/20/2009 earnings report.  Since the upgrade, the stock is up 23.9%, compared to 9.5% for the S&P 500 Healthcare Index, and 7.2% for the S&P 1500 Biotech Index.

Preview MarketGrader’s coverage of Biogen Idec by clicking here.  Read our blog as earning season unfolds for new company upgrades and downgrades.