3 Stocks that are Beating Analyst Estimates

We're finally hitting the heart of the earnings season . Many large cap stocks have already reported results, the mid-caps are set to weigh in soon, and we'll hear from the bulk of small caps in a few weeks.

With all of the macro headwinds and tailwinds in place, it wasn't clear what this round of quarterly reports would look like. Yet as has been the case for nearly two years, many companies continue to watch costs very closely and once again are delivering solid quarterly results. In fact, all of the companies in the table below beat profit forecasts by at least 20%. (I excluded all financial services stocks as well as all stocks trading for more than 16 times projected profits. I also adjusted the profit outlooks to account for recent earnings upside).

-- David Sterman

It's hard to discern a clear macro trend. The companies in this table operate in a wide range of industries, yet they share one common trait. Most of these companies posted gross and operating margins ahead of analysts' forecasts. Here are few standouts among the list.

1. Western Digital (NYSE: WDC )

Many of us assumed the sudden popularity of tablet computers would take a big bite out of demand for personal computers (PCs). But the PC's obituary may not yet be at hand. Demand seems to be holding up fairly well, as evidenced by quarterly results from Western Digital, a leading provider of hard drives. The company shipped 53.8 million units to PC makers in the quarter, roughly 7% ahead of forecasts. And the company didn't have to resort to price cuts to move the merchandise. Gross margins of 19.3% were roughly 50 basis points higher than forecasts. Taken together, these factors enabled the company to exceed profit forecasts by more than 20%.

Investors still think of makers of hard drives as low-growth opportunities, which explains why shares typically sport single-digit forward multiples. But value investors may want to take note of Western Digital's stunning balance sheet . The company ended fiscal (June) 2011 with $3.2 billion in net cash, and thanks to very robust free cash flow , that figure could rise to $6.5 billion in the next three years, according to Goldman Sachs. The whole company is worth $8.6 billion. It may only be a matter of time before Western Digital announces a massive share buyback program. It may come later this year, after Western Digital completes its acquisition of Hitachi's hard drive business.

2. Lincoln Electric (Nasdaq: LECO )

This is a tough time for U.S. manufacturers as well as the companies that supply them with key equipment. If you want to boost sales, you'll have to look abroad. This is the recipe in place for Lincoln Electric, a leading vendor of welding equipment. As the company boosts sales to Europe, Latin America and Asia at an accelerating pace, analysts are increasingly getting caught off-guard. Per share profits beat the consensus by 3% last September, 10% in December, 14% in March and 24% in the quarter ended June.

Part of the strength is coming from heavy research and development (R&D) spending in 2009 and 2010, which has refreshed and broadened the entire product line. Analysts at Barrington Researchcall Lincoln Electric "a value story that should have significant upside due to future growth." They anticipate 35% upside to their $50 price target, which would still put the stock at less than 10 times 2012 EBITDA , on an enterprise value basis.

3. Datalink (Nasdaq: DTLK )

In the past two years, investors have been aggressively pursuing companies involved in computer storage and cloud computing, Spending in these areas has been strong, deal-making has been a consistent theme and the outlook for the next few years remains quite robust.

Little-known Datalink, which works with data centers to help optimize storage and cloud computing strategies has stayed off of most investors' radars, thanks to a small market value ($175 million) and sales base ($294 million in 2010). Considering the company has beaten profit forecasts by an average of 45% in the past four quarters, such anonymity may not last much longer. In fact, fewer than 100,000 shares of Datalink traded hands daily, on average, in 2010. But that figure has approached two million in a few recent sessions.

Analystsspot a bright future thanks to a rapidly expanding customer base. Datalink added 77 new customers in the second quarter -- a 15% increase compared with the previous quarter. The gain is the result of recent moves to expand Datalink's products and services offerings to focus on upgrading existing data centers to operate with state-of-the-art systems. Management hints that the company is on the prowl for a tuck-in acquisition that will make the product suite even broader. With the current momentum in place, per share profits could approach $1 in 2012. Shares, at a recent $10, appear more reasonably valued than many larger peers.

Action to Take --> Look for earnings estimates to rise for these companies as analysts digest current trends and extrapolate them into future results. You may find one of these stocks to be an appealing pick-up.

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Disclosure: Neither David Sterman nor StreetAuthority, LLC hold positions in any securities mentioned in this article.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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