Not Great Expectations -- Analyst Sales, Profit Estimates Falling
Even incurable optimists can't stand in the rain for months without acknowledging their hair is wet.
Analysts are notoriously enthusiastic about the stocks they cover, a bias we must take into account when assessing consensus sales and profit targets. However, in recent weeks pessimism has sneaked into analysts' estimates.
For S&P 500 Index companies, negative sales-estimate revisions for the current fiscal year outnumber positive revisions 1.6-to-1, while revisions for the next fiscal year are just as discouraging, with a similar negative-to-positive ratio. Revisions to profit estimates aren't as strongly negative, but the average stock's per-share-earnings growth target for the current year has declined 1.1% over the last 90 days, with a dip of 2.5% in next year's estimate.
Analysts aren't the only ones who've lost that loving feeling.
• Newsletter editors are more cautious than pessimistic, according to Investors Intelligence. As of Aug. 18, 43.9% of advisers were in the correction camp, versus the 37.7% who feel bullish. Correction status implies advisers either expect a switch in the market's trend or are hedging their bets. Advisers in the correction category have outnumbered bulls in just 1.5% of the weeks since mid-1989, which underscores the current level of uncertainty in the stock market.
• Until last week, individual investors were similarly uncertain, though they came to that indecision from a gloomier place. Based on the American Association of Individual Investors Survey for the week ended Aug. 12, 33% of investors were in the neutral camp, down from 44% a week earlier. While more than half of those who left neutral territory turned bullish, bears (36%) still outnumber bulls (31%).
Stock analysts' profit-estimate cuts explain what's happened to the S&P 500's consensus targets, which are derived from estimates for the individual stocks in the index.
Against this backdrop, stocks with rising estimates stand out from the crowd. The table below lists 14 A-rated stocks that have seen both sales and profit estimates for both the current fiscal year and the next year rise over the last 90 days. We profile five of them below:
Everyone has something to say about Apple ($115; AAPL) these days. The Chinese slowdown will hurt smartphone revenue. Apple Watch sales haven't impressed. Where are the new blockbuster products? These and other concerns weigh on the shares, which have declined 11% over the last four weeks, worse than the S&P 1500 Technology Sector Index's 3% dip.
But not all the important commentary filters through to news headlines. Analysts do their talking with sales and profit projection, and estimates for this year and next year have risen at least 1% over the last 90 days. What about the last 30 days, when Apple has been taking body blows in the market? During that period, the current-year profit projection crept higher while next year's held steady; sales projections for both years increased 1%. At 12 times expected year-ahead earnings, Focus List Buy and Long-Term Buy Apple seems unduly cheap relative to its growth potential.
Analysts expect real estate developer CBRE ($37; CBG) to grow sales 13% in the second half of this year and 23% next year. Given the upward trend in consensus revenue estimates, even today's aggressive targets may not be high enough.
We see a lot of reasons for optimism regarding CBRE. Per-share operating cash flow nearly doubled over the last year, helping fund $6 billion in ongoing projects. Two-thirds of fee revenue comes from contracted services with mostly recurring cash streams. U.S. real estate vacancy rates are falling. Estimate-revision trends suggest we're not the only ones who see these catalysts. CBRE, a Buy and a Long-Term Buy, earlier this month issued $600 million in bonds with plans to use at least some of the funds to help pay for its pending $1.5 billion acquisition of Johnson Controls' ($45; JCI) Global WorkPlace Solutions business.
The consensus projects CDW ($39; CDW) will grow sales 10% and per-share profits 22% this year, followed by growth of 10% and 11% respectively in 2016. The technology-equipment distributor has benefited from strong demand across most of its customer base. In the June quarter, corporate sales rose 6% with public sales up 8%; hardware sales rose 8%, software 5%, and services 9%.
Weakness in the personal-computer market hasn't crimped CDW's growth or analyst expectations. Over the last 90 days, consensus profit targets for 2015 and 2016 have risen by at least 5%. More impressively, sales estimates increased 3% for 2015 and 7% for 2016. Sales estimates tend to be steadier than profit estimates — only 18 companies in the S&P 500 Index saw such a robust gain in next year's sales estimate. CDW is a Focus List Buy and a Long-Term Buy.
Concerns about the sustainability of growth in Gilead Sciences' ($116; GILD) hepatitis C drug franchise help explain analysts' low expectations. According to the consensus, Gilead will follow up this year's 29% sales growth and 44% per-share-profit growth with 1% to 2% declines next year. However, estimate-revision trends suggest worries have begun to ease.
While we certainly expect growth to slow, the company can do better than shrinkage in sales and profits. Despite the hepatitis C drugs' high prices, a medical panel found them cost-effective because of their high cure rate. The untreated hepatitis C market is huge, both in the U.S. and overseas. The Centers for Disease Control and Prevention estimates 1.5 million Americans with hepatitis C have yet to be diagnosed, while another 1.2 million who know they contracted the disease have yet to be treated. And don't forget Gilead's impressive portfolio of HIV drugs, five of which generate more than $1 billion in annual revenue. Gilead is a Focus List Buy and a Long-Term Buy.
HCA Holdings ($90; HCA) topped consensus profit targets in each of the last five quarters, with per-share profits up at least 45% in four of those five quarters. During the same five-quarter period, sales growth ranged from 7% to 10%. That kind of consistency gives us confidence in analysts' expectations for double-digit profit growth this year and next year, supported by sales growth of 6% to 7%.
Over the last 90 days, the profit consensus for both 2015 and 2016 has increased more than 1%. Early this month, HCA projected continued excellent demand this year, with same-facility admission growth of 4% to 5%. Inpatient surgeries have increased in nine consecutive quarters, outpatient procedures in eight of the last nine. HCA, which said its profit margins would rise as volume increased, is a Focus List Buy and a Long-Term Buy.