Better Than Expected

12/12/2016


We love surprises. At least, we love the good kind.

When quarterly results top analysts' targets, it sometimes means a company is truly gaining operating momentum. Other times it just means a company is good at managing expectations. While more and more companies have managed to exceed consensus profit estimates in recent quarters, sales surprises have become tougher to deliver.

Over the last four quarters, 71% of reports from S&P 500 Index stocks exceeded quarterly profit estimates, versus just 54% beating on sales. Sales surprises are usually more common; since 1994, 59% of reports from S&P 500 companies have exceeded quarterly sales targets. However, just 74 companies in the S&P 500 beat on sales in each of the last four quarters, while more than twice as many (166) managed four consecutive profit surprises.

Given the relative scarcity of serial surprisers, even on the profit side, we decided to screen for companies that have exceeded both sales and profit estimates in each of the last four quarters. Only 12 of our A-rated stocks met this criteria; you can find them in the table below. All 12 have seen their profit estimates for the current fiscal year rise over the last 12 weeks, while sales estimates have increased for all but two companies.

Three intriguing options are reviewed in the following paragraphs:

In each of the last four quarters, Amgen ($141; AMGN) exceeded analyst profit targets by at least 3%, averaging a 10% surprise. The company's sales surprises were smaller, averaging 1.5%. Amgen has exceeded sales targets in 10 consecutive quarters, while profits have topped estimates in each of the last 15 quarters.

Expectations for Amgen are modest. The consensus projects growth of 4% in sales and 7% in per-share profits for the December quarter and 3% and 8%, respectively, in 2017. Demand for some of Amgen's key drugs has weakened, hurt by increased competition. However, newer products such as Kyprolis for myeloma and Prolia for osteoporosis should drive growth going forward. Looking further ahead, Amgen has a robust portfolio of drugs under development, none more exciting than migraine treatment erenumab. In recent months, clinical trials have shown the drug effective at reducing the frequency of migraines, with few reported side effects.

Amgen's pipeline features a dozen drugs in late-stage trials, as well as a half-dozen biosimilars, including ABP980, a breast-cancer detector in a Phase III study that will finish in February. Despite its rich portfolio of new drugs, Amgen trades at 12 times trailing earnings, 47% below the median biotechnology stock and 32% below its own three-year average. Amgen, yielding 2.8%, is a Buy and a Long-Term Buy.


Citrix Systems ($89; CTXS) has delivered six consecutive quarterly sales surprises, averaging a 3.2% beat over the last four quarters — impressive, but nowhere close to its achievement on the profit side. The last time Citrix failed to meet a consensus profit estimate was the June 2010 quarter. Over the last four quarters, Citrix averaged a 25% profit surprise.

The company, a maker of software that helps operate computer networks, grew per-share profits 73% over the last 12 months. The consensus projects less than 8% profit growth in 2017, which seems somewhat low even considering the expected merger of the GoTo business with LogMeIn ($99; LOGM) in the first quarter of 2017. In the September quarter, GoTo products accounted for about 20% of Citrix's total revenue.

A combination of stock buybacks and widening profit margins boosts our confidence in Citrix's ability to exceed analyst targets. The company has repurchased enough stock to shrink the share count 17% over the last three years, and operating profit margins rose more than six percentage points over that same period. Citrix expects margins to keep improving, and its generous cash flow should support continued repurchases. Citrix, which trades at less than 17 times expected 2017 earnings, 30% below the industry median, is a Focus List Buy and a Long-Term Buy.


FedEx ($197; FDX) grew its sales 10% and per-share profits 22% over the last four quarters, topping sales targets by an average of 1.7% and earnings estimates by an average of 3.9% along the way. Analysts expect growth to continue, projecting sales up 19% and per-share profits 13% in the year ending May 2017. FedEx delivers that growth for a bargain price. At 18 times trailing earnings, the stock trades 17% below the median for airfreight and logistics companies in the S&P 1500 Index and 28% below its own three-year average P/E ratio.

The company expects shipping volume to rise 10% during this holiday season, with e-commerce driving much of the growth. Rival United Parcel Service ($119; UPS) has projected 14% growth, suggesting upside to FedEx's target. Researcher ShipMatrix estimates FedEx will ship 370 million packages between Black Friday and Christmas, up from 325 million last year. Since the last holiday season, FedEx has invested about $2 billion in its U.S. ground network, including four new distribution hubs and 19 automated stations, equating to 12 million square feet of space for sorting packages. FedEx was added to the Buy and Long-Term Buy lists in October and the Focus List in November.

SERIAL SURPRISERS
Of our 32 A-rated stocks, only the 12 below exceeded consensus sales and profit estimates in each of the last four quarters. Most of them have seen their sales and profit estimates for the current year rise in recent weeks, and most also earn solid Quadrix Earnings Estimates scores. Stocks in bold are on our buy lists.
Avg. Surprise,
Last 4 Quarters
Est. Growth,
--- Current Year ---
Est. Growth,
---- Next Year ----
------------------- Quadrix Scores -------------------
Company (Price; Ticker)
Sales
(%)
Per-Share
Profits
(%)
Sales
(%)

Per-Share
Profits
(%)

Sales
(%)
Per-Share
Profits
(%)
Momen-
tum
Value
Earnings
Estimates
Overall
Amgen ($141; AMGN)
1.5
10.0
5
11
3
8
62
85
74
91
CBS ($63; CBS)
2.2
6.2
5
25
1
8
66
81
73
94
Citrix Systems ($89; CTXS)
3.2
25.1
4
20
4
8
88
66
72
91
Facebook ($118; FB)
5.1
21.1
52
79
34
27
99
31
92
82
FedEx ($197; FDX)
1.7
3.9
19
13
5
11
76
65
64
86
General Motors ($36; GM)
6.8
19.7
7
20
(1)
(5)
90
98
51
98
Home Depot ($132; HD)
1.4
4.2
6
17
5
13
52
57
59
70
Lam Research
($107; LRCX)
0.7
7.5
22
31
0
(4)
81
70
84
95
Magna International
($46; MGA)
2.1
5.1
13
6
5
12
81
98
54
97
Morgan Stanley ($43; MS)
5.2
23.1
(2)
1
5
15
81
74
84
89
Qualcomm ($68; QCOM)
5.3
15.3
1
7
3
5
78
70
23
87
Thermo Fisher Scientific
($142; TMO)
2.4
2.1
8
12
8
12
83
63
87
81
Note: Quadrix scores are percentile ranks, with 100 the best.      Source: Surprise data from Zacks.

Sector snapshot
---- Sales Estimates ----
---- Profit Estimates ----
Sector (Number Of Companies,
Reporting, % Of Total)
% Exceeding
Target

Combined
Surprise
(%)

% Exceeding
Target
Combined
Surprise
(%)
Consumer discretionary (81, 99%)
55
1.0
64
5.5
Consumer staples (36, 97%)
38
(0.6)
78
3.9
Energy (36, 100%)
47
(3.0)
69
32.4
Financials (63, 100%)
70
3.7
88
8.2
Health care (58, 97%)
58
0.2
67
2.3
Industrials (69, 100%)
37
(0.2)
70
5.5
Materials (25, 100%)
38
(0.1)
54
4.9
Real estate (29, 100%)
71
0.1
43
1.0
Technology (65, 98%)
77
1.2
89
6.3
Telecom Services (5, 100%)
20
(0.6)
40
1.2
Utilities (28, 100%)
29
(2.9)
79
5.5
S&P 500 Index (495, 99%)
54
0.3
72
5.5
Source: Thomson Reuters.


Haves and have-nots

When it comes to sales and profit surprises, not all sectors are created equal.

As the table above shows, the S&P 500 Index's financials and technology sectors delivered among the largest sales and profit surprises in the third quarter, while energy delivered the worst sales surprise (-3%) as well as by far the strongest earnings surprise (+32%).  

In the third quarter, six of the 11 sectors of the S&P 500 Index saw more than half of their constituents fall short of consensus sales targets, while just two sectors performed so poorly relative to profit estimates. Only the consumer-discretionary, financials, health-care, and technology sectors saw most of their stocks top sales and profit targets. Not surprisingly, those four sectors boast the highest aggregate sales surprises among the 11, and account for three of the four largest profit surprises.

Sectors notable for their unimpressive third-quarter surprises include consumer staples, industrials, materials, telecom services, and utilities. Does this mean you should avoid these stocks? Not necessarily. However, stocks that deliver solid sales and profit surprises in these sectors separate themselves from the pack.


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