Bracing For Earnings Season

10/23/2017


Quarterly reports often act as catalysts that propel stocks to new highs or torpedo their fortunes. It's an expectations game, with investors prizing companies that top analysts' profit and revenue estimates, while also issuing impressive guidance.

The reward for identifying stocks that go on to deliver the "beat and raise" is not always just a one-day rally. Reverberations from the reports can be felt weeks afterwards, as stocks, settling into the intra-quarter news vacuum, often continue to drift in the direction set by earnings season.

As companies begin to report September-quarter results, expectations are running especially high for technology stocks, as shown below. Of the S&P 500 Index's 11 sectors, only technology has seen analyst estimates increase since July 1 for both earnings per share and revenue.

PROFIT-ESTIMATE TRENDS BY SECTOR
The S&P 500 energy sector is expected to deliver the strongest third-quarter growth of any sector, while technology has seen the strongest positive analyst revisions since July 1. Over the past eight quarters, the energy sector has averaged a leading 17% profit surprise, though the technology sector has averaged the highest percentage of companies topping estimates at 83%.
Estimated
-- EPS Growth --
Estimated
Sales Growth-
EPS Surprises,
8-Quarter Averages
Average
Quadrix Scores
S&P 500 Sector
Current
(%)
July 1
(%)
Current
(%)
July 1
(%)
% Of
Surprise
Amount
% Of
Companies
Surprising
Earns.
Ests.
Overall
Cons. discretion.
1
4
2
2
7
71
48
72
Consumer staples
3
6
4
3
3
66
55
59
Energy
135
187
13
18
17
65
41
39
Financials
(3)
6
0
1
3
72
54
74
Health care
4
5
5
5
4
79
61
66
Industrials
5
9
5
4
5
71
44
60
Materials
5
7
7
6
6
66
47
55
Real estate
3
5
5
6
3
56
40
40
Technology
12
9
8
7
6
83
65
70
Telecom
(1)
(2)
(1)
(2)
2
47
42
59
Utilities
(2)
0
4
8
4
60
53
55
S&P 500 Index
5
9
4
5
5
71
52
63
Note: Current EPS and sales estimates include 4% of companies that already reported third-quarter results. Source: Thomson Reuters.

As for our recommended stocks, we measured their attractiveness through four different lenses: Projected growth, track record for topping estimates, recent share-price action, and analyst-revision trends. See the tables below for stocks that look best and most problematic from each of these angles.

PROJECTED GROWTH
The following recommended stocks have the strongest and weakest combination of projected growth in earnings per share (EPS) and sales for the third quarter.
---- Estimated Change ----
Company (Price; Ticker)
EPS
(%)
Sales
(%)
Quarter End
Strongest growth
Applied Materials ($55; AMAT)
37
20
October
Chemours ($56; CC) 
69
13
September
Facebook ($176; FB)
17
40
September
ON Semiconductor ($20; ON)
68
44
September
Weakest growth
Amgen ($186; AMGN)
3
(1)
September
Carnival ($67; CCL)
(24)
6
November
CBS ($57; CBS)
8
(1)
September
Southwest Airlines ($59; LUV)
(6)
4
September
MANAGING EXPECTATIONS
The following recommended stocks have the best and worst track records for topping consensus profit and revenue estimates in the past eight quarters.
-- Past Eight Quarters --
Company (Price; Ticker)
Number Of
EPS Beats
Number Of
Sales Beats
Quarter End
Serial surprisers
Carnival ($67; CCL)
8
7
November
Facebook ($176; FB)
8
8
September
Vantiv ($69; VNTV)
8
8
September
VMware ($117; VMW)
8
8
October
Prone to disappoint
CDW ($69; CDW)
7
2
September
Lowe's ($81; LOW)
3
4
October
ON Semiconductor ($20; ON)
3
4
September
Southwest Airlines ($59; LUV)
5
4
September

 

ANALYST-REVISION TRENDS
The following recommended stocks have the sharpest increases and decreases in third-quarter profit estimates over the past 90 days.
---------- EPS Estimate ----------
Company (Price; Ticker)
Current
($)
30 Days
Ago
($)
90 Days
Ago
($)
Quarter
End
Rising estimates
Applied Materials ($55; AMAT)
0.90
0.90
0.81
 Oct. 
Facebook ($176; FB)
1.27
1.26
1.16
 Sept. 
ON Semiconductor ($20; ON)
0.40
0.40
0.36
 Sept. 
Zions Bancorp ($46; ZION)
0.73
0.73
0.67
 Sept. 
Eroding estimates
Alaska Air Group ($80; ALK)
2.31
2.43
2.74
 Sept. 
Carnival ($67; CCL)
0.51
0.64
0.64
 Nov. 
FedEx ($222; FDX)
2.88
3.11
3.20
 Nov. 
Southwest Airlines ($59; LUV)
0.87
0.94
1.10
 Sept. 
RECENT STOCK PERFORMANCE
The following recommended stocks have delivered the strongest and weakest total returns in the past month.
--- Total Return ---
Quadrix
Perfor-
mance
Score
Company (Price; Ticker)
1
Month
(%)
3
Months
(%)
Quarter
End
Surging ahead of earnings
Applied Materials ($55; AMAT)
15
19
91
Oct.
CDW ($69; CDW)
9
8
82
Sept.
Chemours ($56; CC)
9
25
98
Sept.
ON Semiconductor ($20; ON)
13
28
91
Sept.
Limping into earnings season
CBS ($57; CBS)
(1)
(11)
10
Sept.
Celgene ($137; CELG)
(4)
2
58
Sept.
LabCorp of America ($148; LH)
(4)
(3)
30
Sept.
Vantiv ($69; VNTV)
(5)
9
55
Sept.

Of course, multiple stock screens can lead to conflicting conclusions. For example, analyst expectations for Carnival ($67; CCL) are already quite modest — and falling — and yet the company consistently tops estimates. We have created a couple of tools to wrap all these metrics together.

The Quadrix Earnings Estimates score, used since 2004, considers 18 metrics that look at estimate-revision trends and the spread between the highest and lowest estimates in the consensus. The score rewards stocks with rising profit estimates and tight spreads.

We recently designed a new custom profit score. It uses 44 factors, some shared by the Earnings Estimates rank. Additional metrics include track record for delivering profit surprises, share-price performance, more revision periods, the number of analyst estimates, and additional variables that consider the range of estimates.

Stocks that look good based on both earnings scores are listed in the table below. Below, we review four stocks that appear especially well-positioned for their upcoming earnings reports.

Applied Materials ($55; AMAT) shares looks especially timely in Quadrix, scoring above 90 for Momentum, Earnings Estimates, and Performance. Strong demand for semiconductor equipment has led to outstanding growth in Applied Materials' per-share profits (up 126% in the 12 months ended July), revenue (40%), operating cash flow (73%), and free cash flow (102%).

Looking ahead to the October quarter, analysts forecast 37% higher earnings per share on 20% revenue growth. Estimates jumped after Applied Materials gave a stronger-than-expected outlook but remain below the upper end of management's guidance, leaving some room for upside.

The stock has rallied 15% in the past month, bringing its gain over the past 12 months to 101%. Yet the stock's Value score has actually risen to 68 from 53 a year ago, thanks to surging operating growth. At 19 times trailing earnings, Applied Materials shares trade below their five-year median of 23 and the industry median of 21 for S&P 1500 semiconductor-equipment stocks. Applied Materials is a Buy and a Long-Term Buy.


Carnival's ($67; CCL) profit estimates dropped after management warned that hurricane-related port closures would cause profits to fall in the November quarter. The Caribbean is Carnival's biggest destination for its cruise ships, typically accounting for one-third of its total capacity. If there's a silver lining for Carnival, it's that the storms arrived after the company's crucial August quarter, typically 30% to 45% larger than its other quarters.

The soft November quarter could put more pressure on the stock's Overall score, currently just 70. But the weakness may be just a momentary setback for the stock. Carnival sees Puerto Rico and the Caribbean recovering before Christmas. Additionally, its booking volumes and prices for the first half of fiscal 2018 ending November exceed levels seen least year. Given the circumstances, analyst estimates for fiscal 2018 ending November are holding up well, with the consensus projecting 17% profit growth on 6% higher revenue. Carnival is a Buy and a Long-Term Buy.  


CDW ($69; CDW) shares have surged 9% in the past month and 33% for the year, as anticipation builds that the U.S. will slash the corporate tax rate. With the U.S. representing more than 90% of CDW's sales, the company stands to benefit from the tax cuts. CDW supplies hardware, software, and cloud services to businesses, schools, and government agencies. It has steadily outgrown the broad, highly fragmented market for technology spending. Management targets low-double-digit profit growth through 2018, with sales projected to outpace U.S. IT spending by 2% to 3%.

Analysts project 10% profit growth on nearly 8% sales growth in the September quarter. The consensus has held firm at $1.07 per share over the last 60 days. Management consistently tops profit estimates, though it has beaten the consensus sales estimate in just two of the past eight quarters. CDW typically announces September-quarter results in early November. CDW is a Focus List Buy and a Long-Term Buy.  


Price hikes have created a tailwind for chemical maker Chemours' ($56; CC) operating momentum. Both prices and volumes rose in the first half of 2017 on broad strength across the company's three business units. Citing higher demand, Chemours raised prices in July, a steeper hike than the one it pushed through in March.

For the September quarter, analysts target 71% higher per-share profits on 14% revenue growth. The company is scheduled to report results Nov. 3.

Chemours shares have surged 155% in 2017 yet earn a decent Value rank of 67. The stock has a trailing P/E ratio of 24, exceeding the S&P 1500 materials sector's median of 22. But it trades at just 16 times estimated 2017 profits, below its sector median of 20. Even if its trailing P/E reverts to the sector norm of 22, the stock will reach $78 by early 2018 if Chemours meets the 2017 consensus profit estimate of $3.57. Chemours is a Focus List Buy and a Long-Term Buy.

A NEW EARNINGS SCORE
We created a new profit rank that can be used in conjunction with our traditional Quadrix Earnings Estimates category score. The custom profit rank uses 44 factors — more than twice the number of factors in the Earnings Estimates score. This custom profit score shares a handful of factors that also comprise the Earnings Estimates rank, which can result in similar scores. All eight recommended stocks below score above 85 in our new score and Earnings Estimates, while receiving above-average ranks for Earnings Predictability.
------------- Quadrix Scores -------------
Est. Current
---- Quarter ----
Est. Next
---- Quarter ----
Est. Current
------- Year -------
Est. Next
------- Year -------
Company (Price; Ticker)
Profit
Rank
Earns.
Ests.
Earnings
Predict-
ability
Overall
EPS
($)
Growth
(%)
EPS
($)
Growth
(%)
EPS
($)
Growth
(%)
EPS
($)
Growth
(%)
Amgen ($186; AMGN)
94
90
97
97
3.11
3
3.09
7
12.57
8
12.84
2
Applied Materials
($55; AMAT)
97
95
78
99
0.90
37
0.90
35
3.22
84
3.64
13
Citizens Financial
($37; CFG)
100
98
90
99
0.64
24
0.66
20
2.52
31
2.79
10
Cognizant Technology
($74; CTSH)
96
93
100
97
0.95
11
0.98
13
3.70
9
4.35
17
Facebook ($176; FB)
90
92
86
90
1.27
17
1.69
20
5.33
26
6.47
21
ICON ($114; ICLR)
97
91
70
92
1.32
11
1.40
5
5.32
11
5.86
10
Lear ($173; LEA)
90
91
92
100
3.74
17
4.19
10
16.59
18
17.54
6
VMware ($117; VMW)
97
96
90
94
1.28
NA
1.61
NA
5.07
NA
5.53
9
Note: Quadrix scores are percentile ranks, with 100 the best.   NA because VMware's change to its fiscal year makes year-over-year comparisons difficult.

 


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