Some investors with long-term commitments aren’t interested in a company’s performance for only one quarter. Others react, or overreact, to breathless headlines after companies surprise analysts. Digging a little deeper might shed light on long-term investment ideas you may have overlooked.
The financial media’s quarterly earnings coverage tends to focus on whether companies met, “beat” or “missed” estimates for earnings and sales, as well as so-called guidance. If a company predicts less than what analysts predict, you will see some saucy headlines. Then again, a company boosting sales rapidly may still “miss” a consensus estimate, and a company slipping into the doldrums may still “beat” an earnings estimate. So those headlines can do a disservice to investors who don’t look more deeply into the actual results.
Another challenge of earnings season is determining when it begins and when it ends. More than one out of five S&P 500 SPX, -1.97% companies have fiscal quarters ending on dates that don’t match calendar quarter-end dates. Third-quarter earnings season isn’t over, but through Nov. 9, 90% of S&P 500 companies had reported results for fiscal quarters ended Aug. 18 or later. So this is a good time to highlight some impressive numbers.
S&P Global Market Intelligence expects S&P 500 companies to report a 24.7% increase in earnings per share from a year earlier. That is a remarkable figure that in great part reflects the massive cut in the maximum federal income tax rate for corporations to 21% from 35%, signed into law by President Trump in December. If nothing else changes, paying only 21% of your gross profit to Uncle Sam means a 21.5% increase in after-tax profit. No company’s financials are that simple, but you get the idea. The tax cuts weren’t fully implemented until halfway through the first quarter, which means the second quarter was when investors saw companies’ fully boosted year-over-year earnings comparisons. So next year, after a full year of the tax cut is baked into results, those amazing year-over-year comparisons will end.
With that in mind, along with the fact that any company’s earnings can be greatly distorted at any time from accounting changes, acquisitions, sales or other one-time events, it’s probably more useful to compile a list of earnings-season winners by looking at sales and gross profit margins.
A company’s gross profit margin is its sales, less the cost of goods sold, divided by sales. It is an indication of the company’s pricing power for the goods and services it provides to customers. If a company’s sales are rising rapidly but its gross margin is declining steadily over several quarters, it is a sign that its expansion may be unsustainable. On the other hand, rising sales and widening gross margins are generally good signs. Gross margins don’t take overhead into account, so if you are impressed with a company’s sales results, you still need to look at the whole picture before considering an investment.
The gross margin also doesn’t apply to banks (for which investors generally focus on returns on equity, well as loan growth and asset quality) and retailers, for which investors are fixated on comparable-store sales increases. So we will cover those groups in separate stories.
Among the 454 S&P 500 companies that announced results for quarters ended Aug. 18 or later through Nov. 9, here are the 20 that increased sales the most from a year earlier while also expanding their gross profit margins, according to FactSet:
Company Ticker Industry Increase in quarterly sales Increase in quarterly sales per share Gross margin Gross margin - year earlier Total return - 2018 through Nov. 9 Pioneer Natural Resources Co. PXD, -3.44% Oil and Gas Production 92% 55% 33.32% 20.11% -7% Concho Resources Inc. CXO, -4.89% Oil and Gas Production 90% 48% 42.95% 28.71% -9% EQT Corp. EQT, -3.51% Oil and Gas Production 86% 25% 37.08% 28.77% -37% EOG Resources Inc. EOG, -4.04% Oil and Gas Production 78% 77% 37.39% 17.27% -2% Occidental Petroleum Corp. OXY, -1.89% Oil and Gas Production 73% 74% 45.32% 20.99% 3% Newfield Exploration Co. NFX, -4.95% Oil and Gas Production 62% 61% 49.37% 37.81% -31% FMC Corp. FMC, -1.60% Chemicals 60% 60% 44.74% 39.77% -11% Mosaic Co. MOS, -0.90% Chemicals 48% 34% 16.92% 12.13% 43% CenturyLink Inc. CTL, +1.69% Telecommunications 44% -27% 31.99% 29.67% 23% Apache Corp. APA, -2.78% Oil and Gas Production 42% 42% 38.77% 12.38% -10% ConocoPhillips COP, -2.38% Oil and Gas Production 42% 47% 31.29% 12.85% 24% Cabot Oil & Gas Corp. COG, -0.86% Oil and Gas Production 42% 49% 31.83% 20.03% -10% Anadarko Petroleum Corp. APC, -3.33% Integrated Oil 38% 53% 45.62% 0.80% 10% Micron Technology Inc. MU, -4.27% Semiconductors 38% 34% 61.03% 50.70% -5% Devon Energy Corp. DVN, -4.42% Oil and Gas Production 37% -8% 21.79% 16.51% -20% Hess Corp. HES, -2.86% Oil and Gas Production 37% 44% 20.89% -12.59% 26% Phillips 66 PSX, -2.08% Oil Refining/Marketing 36% 49% 6.97% 4.30% 1% Electronic Arts Inc. EA, -1.38% Recreational Products 35% 36% 67.08% 59.10% -15% Netflix Inc. NFLX, -3.10% Cable/Satellite TV 34% 33% 39.68% 33.23% 58% Jefferies Financial Group Inc. JEF, -2.82% Investment Banks/Brokers 32% -51% 88.91% 87.02% -16% DowDuPont Inc. DWDP, -1.67% Chemicals 32% -9% 21.32% 20.97% -16% Nucor Corp. NUE, -0.99% Steel 30% 32% 18.87% 11.20% 1% Marathon Oil Corp. MRO, -3.25% Oil and Gas Production 30% 30% 31.79% -8.95% 6% Crown Castle International Corp CCI, -1.03% Real Estate Investment Trusts 29% 23% 37.53% 35.65% 3% Amazon.com Inc. AMZN, -4.41% Internet Retail 29% 28% 41.67% 37.02% 46% Arista Networks Inc. ANET, -3.20% Computer Communications 29% 26% 64.19% 64.12% 4% Twitter Inc. TWTR, -6.07% Internet Software/Services 29% 22% 67.86% 64.40% 42% Cimarex Energy Co. XEC, -4.57% Oil and Gas Production 28% 27% 53.55% 47.04% -26% Noble Energy Inc. NBL, -5.39% Oil and Gas Production 25% 26% 23.42% 3.75% -8% PulteGroup Inc. PHM, -1.76% Homebuilding 24% 33% 24.08% 23.84% -26% Chevron Corp. CVX, -1.77% Integrated Oil 24% 22% 15.48% 14.77% -2% Adobe Inc. ADBE, -3.34% Software 24% 24% 85.96% 84.66% 40% Northrop Grumman Corp. NOC, -2.86% Aerospace and Defense 23% 24% 24.68% 23.08% -6% News Corp. Class A NWSA, -3.86% Publishing 23% 22% 40.49% 39.46% -11% Alexandria Real Estate Equities Inc. ARE, -0.43% Real Estate Investment Trusts 22% 7% 37.32% 33.47% -3% Freeport-McMoRan Inc. FCX, -1.67% Precious Metals 21% 21% 29.38% 27.57% -40% United Rentals Inc. URI, -4.35% Finance/Rental/Leasing 20% 23% 40.78% 40.43% -26% Vornado Realty Trust VNO, +0.16% Real Estate Investment Trusts 20% 21% 49.72% 43.21% -7% CF Industries Holdings Inc. CF, -1.82% Chemicals 20% 19% 16.63% 1.72% 25% Source: FactSet
You can click the tickers for more information about each company, including news, ratings, price ratios and financials.
In addition to raw revenue numbers, the table includes sales per share because this figure can shed further light on the results. If a company’s sales growth reflects an acquisition that was paid for with the issuance of new shares, the ownership position of the acquiring company’s shareholders has been diluted. In this scenario, the per-share numbers give a better indication of “how much more revenue the diluted shareholders really gained.”
Nearly half of the companies on the list are oil producers or in related industries. It’s not a surprise to see them here because the price of West Texas crude oil (WTI) CL1, -1.48% was up 42% for one year through September. However, WTI dropped 18% from the end of September through Nov. 9, while the S&P 500 energy sector fell 9.5% and the S&P 500 oil and gas production subsector was down 14%.
Don’t miss: Biotech stocks have been hit hard — here are ones analysts like best for a rebound
Create an email alert for Philip van Doorn’s Deep Dive columns here.
