Sales Tell The Growth Tale

2/2/2015


We call them quarterly earnings reports for a reason — profits take the lead position. However, as the chart below shows, sales tend to follow a smoother path.

Over the last 40 quarters, the capitalization-weighted S&P 1500 Index posted just four quarters with year-to-year sales declines — December 2008 through September 2009. In contrast, the index's operating profits declined in 12 quarters, dipping into negative territory in the December 2008 quarter.

Profits and sales tend to accelerate or decelerate at the same time. However, since sales are less vulnerable to the accounting and operational vagaries that frequently sway profits, the index's sales trends may more reliably reflect corporate America's health.

As of Jan. 27, with 24% of S&P 500 companies having reported fourth-quarter results, Thomson Reuters' blend of actual results and estimates suggests sales are on pace to rise just 0.5%, the lowest since the September 2009 quarter. A projected 18% revenue decline in the energy sector weighs on expectations. However, six of the of the other nine sectors should see sales grow, and analysts expect nearly 4% higher sales excluding energy.

In the second and third quarters of 2014, the S&P 1500 Index's sales rose 6%, higher than the 10-year average of 5%. In contrast to the upward sales trend during the first nine months of last year, profit growth has hopped around, never coming close to the 22% seen in the last quarter of 2013.

During the 10-year period, the index's value has been more highly correlated with sales than profits, meaning price moves tend to hew more closely to sales than to profits.

Does all this mean investors should forget about profits and focus on sales? Not at all. Markets still pay more attention to profits. Price/earnings remains the best-known and among the most widely used valuation ratios, and while experts can come up with a lot of reasons why it shouldn't have predictive power, it still does.

Rather than using sales growth as a substitute for earnings growth while analyzing a stock, consider them in concert. If two companies post strong earnings growth, one backed up by higher sales and one not, we're likely to put more trust in the one with sales growth. With that in mind, the table below features 13 buy-rated stocks that delivered double-digit growth in both sales and profits in each of the last two quarters, as well as the trailing 12 months. Four of these stocks are discussed in the following paragraphs:

Shares of F5 Networks ($113; FFIV) have slumped 10% since posting a strong December quarter. The company expects sales growth of at least 11% (continuing a five-quarter trend of similar growth) and per-share-earnings growth of at least 17% in the March quarter — solid numbers, though less than analysts expected. While F5 mentioned a slowdown in large deals, it emphasized new-business prospects remain robust.

F5, which makes products that manage internet traffic, stands to benefit from several trends:

• Increasing demand for enterprise software. Such purchases often precede network upgrades. 

• A rise in the use of mobile apps, a nascent networking market.

• Continued market-share gains in the wake of rival Cisco Systems' ($27; CSCO) exit from the market for products that balance network traffic loads. 

• Telecom companies' rising need for firewalls and network security.

Despite the market's downbeat reaction to F5's results, we see solid growth potential. F5 remains a Focus List Buy and a Long-Term Buy.


Few firms manage the kind of sales growth delivered by Gilead Sciences ($102; GILD). Sales rose 117% in the September quarter and 94% in the 12 months ended September. Those kind of increases typically reflect acquisitions, but the biotech leader generated its growth the old-fashioned way — developing an effective treatment for a dangerous disease (hepatitis C) and selling it for a premium price.

Sovaldi, which cures more than 90% of hepatitis C cases, costs $84,000 for a 12-week treatment. The newer Harvoni drug costs even more, though Gilead says many patients will be cured after just eight weeks of treatment. Gilead has taken heat for its pricing strategy. Recent deals with pharmacy-benefit managers CVS Health ($100; CVS) and EnvisionRx, and managed-care providers Aetna ($93; AET), Anthem ($134; ANTM), and UnitedHealth ($108; UNH), reportedly featured sharp discounts on the drug. Gilead hopes to launch Sovaldi in India by June and is working on a generic-licensing deal that would allow a new combination pill to bypass clinical trials. Sovaldi and Harvoni combined to generate half of Gilead's revenue — and the lion's share of its growth — in the September quarter. Gilead is a Long-Term Buy.


In the December quarter, Skyworks Solutions ($82; SWKS) earned $1.26 per share, up 88% and $0.07 above the consensus. Sales rose 59%, also exceeding expectations. Robust smartphone demand, paced by Apple's ($115; AAPL) iPhone, which saw sales rise 57% in the December quarter, deserves credit for much of Skyworks' growth. But the company also continues to benefit from increased demand for connectivity in consumer products. Business wins in the quarter include chips for use in smart lightbulbs, televisions, set-top boxes, and automobile-communications systems.

The profit consensus has been rising in recent months, but apparently not fast enough; Skyworks projects March-quarter growth of 56% in sales and 81% in per-share profits, both well above expectations. Given the company's history — eight consecutive quarters of at least 11% sales growth and 25% profit growth — aggressive targets make sense.

Skyworks shares have returned 172% over the last year, by far the strongest gain among S&P 1500 semiconductor makers. Despite that gain, the stock still trades at 16 times expected year-ahead earnings, 12% below the industry median. Skyworks is a Buy and a Long-Term Buy.


December-quarter results mostly justify our faith in United Rentals ($86; URI), which has fallen 28% from the all-time high it set in November. Quarterly sales and profits topped the consensus, and guidance for revenue growth in 2015 (5% to 9%) seems reasonable relative to analysts' expectations. Since the announcement, the consensus target for 2015 sales growth has fallen to 7% from 8%. The profit-growth consensus is now 17%, down from nearly 20% before the earnings news. Over the last 12 months, United Rentals grew sales 15% and per-share profits 45%.

Energy exposure deserves much of the blame for the stock's weakness, but the CEO said upstream oil-and-gas customers account for just 6% of its revenue. The company's modest exposure to the troubled energy-production industry, coupled with momentum in the construction business (housing starts came in well above expectations in December), suggest the sell-off has been too sharp.

We see a lot to like about the largest equipment-rental company in the U.S, which claims a 16% share of the market. United Rentals expects the North American rental industry to grow at an annualized rate of more than 8% over the next four years. Rental rates have risen in each of the last four years (3.5% in 2014), and the company expects a similar gain this year. United Rentals trades at 12 times trailing earnings, a 34% discount to the sector median. The stock is a Focus List Buy and a Long-Term Buy.

STOCKS WITH SALES GROWTH
Growth,
--- Last Quarter ---
Growth,
Previous Quarter
Growth,
Last 12 Months
-------- Quadrix Scores --------
Company (Price; Ticker)
Sales
(%)
Per-Share
Profits
(%)
Sales
(%)
Per-Share
Profits
(%)
Sales
(%)
Per-Share
Profits
(%)
Momen-
tum
Quality
Overall
Sector
Ameriprise Financial
($126; AMP)
11
17
12
23
11
11
79
89
96
Financials
Apple ($115; AAPL)
30
48
12
20
15
29
88
98
99
Technology
B/E Aerospace ($60; BEAV)
24
56
28
24
21
29
79
93
89
Industrials
Cognizant Technology
($54; CTSH)
12
10
16
23
17
18
83
98
95
Technology
F5 Networks ($113; FFIV)
14
38
18
27
17
25
87
96
95
Technology
Gilead Sciences ($102; GILD)
117
241
136
368
94
206
99
99
94
Health care
Jones Lang LaSalle
($152; JLL)
23
56
29
47
24
38
98
92
94
Financials
Lam Research ($80; LRCX)
14
37
27
91
28
151
95
91
97
Technology
Micron Technology ($29; MU)
13
83
49
314
50
481
84
98
96
Technology
Nvidia ($19; NVDA)
16
48
13
28
12
27
92
85
91
Technology
Shire ($219; SHPG)
32
64
20
44
20
51
96
99
91
Health care
Skyworks Solutions
($82; SWKS)
59
108
51
109
41
80
99
99
96
Technology
United Rentals ($86; URI)
17
39
18
35
15
45
83
97
90
Industrials
Note: Quadrix scores are percentile ranks, with 100 the best.

 


Most sectors follow uptrend

While growth varies greatly from sector to sector, most sectors within the S&P 1500 Index share one trend — higher sales in recent years.

In their most recent quarterly report, S&P 1500 Index stocks averaged 9% sales growth with median growth of 6%, as 78% posted higher sales. While sales growth in the most recent quarter topped both year-earlier numbers and the 12-quarter average of 7% and median of 4%, the fourth quarter of 2014 is trending below historical norms.

By definition, half of the data points in a set are above the median and half below.

Nine sectors saw improvement in average sales growth over the last two years, while seven posted higher median growth. These numbers indicate the market's sales momentum springs from a broad base, not just a few pockets of strength.

SECTOR COMPARISON
The average S&P 1500 Index company's sales rose 9% in the most recent quarter, up from 7% a year earlier and 6% a year before that. The fourth quarter pf 2014 seems to be reversing that trend, with the consensus projecting sales growth of just 0.5%. Data reflect the most recent quarter available, regardless of whether a company has posted fourth-quarter results; most have not.
Sales Growth,
------ Last Quarter ------
Sales Growth.
--- Four Quarters Ago ---
Sales Growth,
--- Eight Quarters Ago ---
S&P 1500 Industry
Avg.
(%)
Median
(%)
%
Positive
Avg.
(%)
Median
(%)
%
Positive
Avg.
(%)
Median
(%)
%
Positive
Consumer
discretionary
7.6
5.4
77
8.5
6.6
77
9.2
8.3
82
Consumer
staples
3.5
4.4
67
5.7
4.4
73
7.6
5.4
81
Energy
12.6
11.2
73
10.0
9.3
76
3.3
1.5
53
Financials
8.1
6.3
78
3.4
2.1
61
7.1
5.0
68
Health care
14.0
9.5
88
8.3
7.7
79
9.2
8.1
81
Industrials
7.6
6.3
79
6.1
5.9
80
4.3
3.5
65
Materials
6.3
7.8
74
4.8
4.7
70
2.1
1.3
56
Technology
9.9
4.3
80
6.5
7.7
73
5.6
4.6
67
Telecom services
4.4
3.8
60
1.2
2.9
53
3.8
3.1
61
Utilities
5.4
4.3
77
2.4
3.2
66
(4.6)
(4.2)
27
S&P 1500 Index
8.7
6.3
78
7.1
5.2
73
5.6
3.8
64
Note: Sales changes of more than 75% or less than negative 75% are excluded.

 


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