Earnings Estimates Score Has Predictive Power

9/15/2014


The Earnings Estimates score has always been the red-headed stepchild of the Quadrix family.

This score considers estimate-revision trends and the dispersion of those estimates, rewarding companies with rising estimates and tighter spreads.

Estimate trends do offer useful information about a company, and we consider them whenever we analyze an individual stock. Yet sometimes we treat the Earnings Estimates score differently than we do the other Quadrix categories, for legitimate reasons.

• Profit estimates are notoriously volatile, and the Earnings Estimates score can fluctuate wildly.

• Our data for the score dates back to February 2004; in contrast, most other data points date back to the early 1990s. In addition, some of the Earnings Estimates statistics we use are even newer, with data only back to June 2010.

• Historically, the Earnings Estimates score on its own has had little predictive power. Since the score's inception in 2004, top scorers have averaged returns roughly in line with the average stock.

However, while the Earnings Estimates score doesn't always help investors much on its own, it has become more effective in recent years. Since mid-2010, when we overhauled the score and added three new factors, top Earnings Estimates scorers have outperformed by an average of 0.8% in rolling 12-month periods. Among the five other category scores, only Value worked better.

Earnings Estimates also serves another purpose, a key counterweight to Quadrix's big hitter — the Value score. Value carries greater weight than any other Quadrix category, and it has also delivered the strongest performance. But when Value falls out of favor, Quadrix benefits from opposing forces.

All five other category scores tend to underperform when Value is working and work when Value underperforms, a trend particularly strong with Earnings Estimates. Since 2004, top Earnings Estimates and Value scorers have both outperformed in 21% of the rolling 12-month periods and both underperformed 11% of the time. More than two-thirds of the time, one outperformed while the other underperformed.

Both Value and Earnings Estimates worked together in just nine of the 39 rolling 12-month periods since June 2010. Five of those times occurred during the eight periods that ended this year, an almost unprecedented stretch of cooperation.

The effectiveness of Quadrix scores can change quickly, particularly with Earnings Estimates. Trends often erode as fast as they arise. However, while we look forward at least 12 months when analyzing investments, we are always interested in what's working now.

With that in mind, the table below contains 17 A-rated stocks that seem poised to outperform based on the current Value/Earnings Estimates détente. Three interesting companies, all rated Focus List Buy and Long-Term Buy, are reviewed below:

Foot Locker ($56; FL) scores 98 in Earnings Estimates. Because many companies' estimates remain steady, the Earnings Estimates score sometimes rewards firms with small positive revisions. Not so with Foot Locker, which has seen its per-share-earnings consensus for fiscal 2015 ending January rise 4% over the last 30 days, while the 2016 estimates rose 5%. During that 30-day period, 18 analysts raised their estimates with nobody downshifting.

Operating momentum has picked up, with sales rising 13% in each of the last two quarters after four quarters of less than 7% growth. Per-share profits rose 28% in the six months ended July, the first half of fiscal 2015, more than double the 13% gain seen in fiscal 2014.

In the wake of better-than-expected July-quarter sales and profits that topped consensus expectations by nearly 19%, Foot Locker shares rose to a record high. Yet subscribers can still acquire the shares at an attractive price, paying 16 times expected year-ahead earnings, below the industry average of 17.


Lear ($103; LEA) topped the profit consensus by at least 7% in each of the last two quarters. Analysts expect per-share profits to rise 35% this year and 16% next year, and those estimates are on the rise. The 2014 consensus has risen 4% over the last 60 days, while the 2015 target has increased 3%. An Earnings Estimates score of 94 is one of three Quadrix category scores above 90 and five above 75 — broad-based strength that makes Lear look good from a number of angles.

While auto-parts stocks in the S&P 1500 Index have averaged a negative return of 3% so far this year, Lear shares have returned 27%. Despite that price momentum, Lear, at 13 times the 2014 profit estimate, is 24% cheaper than the average auto parts supplier. Lear also trades at a discount based on price/sales, price/book, and price/operating cash flow.


ManpowerGroup's ($76; MAN) consensus profit targets for 2014 and 2015 have risen since July 21, when the employment-services concern posted stronger-than-expected profits for the June quarter and lifted expectations for the September quarter. Over the last two months, the 2014 per-share estimate rose $0.13 to $5.26 while the 2015 estimate is now $5.92, up $0.12.

U.S. nonfarm payrolls have expanded every month since October 2010, adding nearly 9 million jobs during that period. While the pace of hiring overall slowed in August relative to July, U.S. businesses hired more temporary workers, which tends to be a leading indicator for full-time hiring.

Unemployment in the euro zone remains above 11% but should improve gradually in coming months — good news for Manpower, which generates 65% of its revenue in Europe. Analysts expect Manpower to grow earnings per share 19% this year and 13% next year; generally positive global labor and economic trends increase our confidence in this aggressive outlook.

STOCKS WITH POSITIVE PROFIT-ESTIMATE-REVISION TRENDS
The 17 stocks listed below earn Quadrix Overall scores above 80 and Earnings Estimates and Value scores above 60, characteristics shared by just 11% of the stocks in our research universe. In addition, all 17 score above 60 in at least five of the six Earnings Estimates factors that delivered the best outperformance over the last 12 months. Stocks recommended on our buy lists are presented in bold.
------------------------------------- Quadrix Scores -------------------------------------
--- Estimated Earnings Per Share ---
------------------ Revision Trends ------------------
-- Current Year --
---- Next Year ----
Company (Price; Ticker)
Earns.
Ests.
Curr.
Qtr.
12-Wk.
Chg.
(%)
Next
Qtr.
4-Wk.
Chg.
(%)
Next
Qtr.
8-Wk.
Chg.
(%)
Curr.
Year
4-Wk.
Chg.
(%)
Curr.
Year
12-Wk.
Chg.
(%)
Next
Year
12-Wk.
Chg.
(%)
Value
Overall
Today
($)
90 Days
Ago
($)
Today
($)
90 Days
Ago
($)
Ameriprise Financial
($125; AMP)
91
95
86
90
95
93
87
69
96
8.45
8.26
9.48
9.37
Boeing ($128; BA)
67
87
37
84
73
82
84
70
85
8.07
7.59
8.42
8.30
Capital One Financial
($82; COF)
66
86
55
89
67
93
92
88
87
7.67
7.21
7.69
7.42
CF Industries ($251; CF)
88
76
86
85
71
64
44
75
85
19.77
19.37
20.68
20.64
Cigna ($96; CI)
70
17
85
76
83
74
76
85
95
7.34
7.30
8.06
8.02
Dover ($87; DOV)
90
71
73
68
68
73
83
65
82
4.83
4.80
5.43
5.37
Foot Locker ($56; FL)
98
77
94
92
95
85
93
65
97
3.44
3.29
3.79
3.62
Hewlett-Packard
($37; HPQ)
94
72
74
67
82
73
74
91
93
3.73
3.71
3.96
3.89
Intel ($35; INTC)
77
91
71
80
68
85
91
61
95
2.19
1.90
2.29
1.99
Jones Lang LaSalle
($133; JLL)
93
95
97
96
95
93
79
61
95
7.63
7.24
8.46
8.24
Kroger ($52; KR)
91
84
72
65
69
81
91
68
86
3.29
3.22
3.64
3.55
Lear ($103; LEA)
94
84
73
86
71
80
85
80
98
7.97
7.64
9.34
8.96
Magna International
($112; MGA)
97
85
90
84
88
85
89
80
99
8.67
8.32
9.96
9.55
ManpowerGroup
($76; MAN)
86
87
37
79
71
78
82
89
96
5.26
5.19
5.92
5.82
Southwest Airlines
($33; LUV)
91
95
77
85
74
93
93
76
99
1.77
1.52
2.07
1.77
Travelers ($93; TRV)
75
75
71
84
66
44
72
98
97
9.27
9.29
9.21
9.13
Verizon Communications
($49; VZ)
68
69
71
66
66
62
61
92
90
3.57
3.56
3.87
3.84
Note: Quadrix scores are percentile ranks, with 100 the highest. 

 


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