This earnings season looks fine from a "beat/miss" perspective, but less so when you consider earnings growth. The true winners this earnings season delivered the covered "triple play."
Second quarter earnings season is in the home stretch with results in from about 80% of the companies in the S&P 500. From a 'beat/miss' perspective, this earnings season looks just fine.
Approximately two-thirds of companies (67%) have delivered positive earnings surprises this quarter, which is firmly in-line with recent quarters. Finance has been one of the strongest sectors, but even if you back that sector out, the beat ratio is still a respectable 65%. However, earnings growth has been less impressive. Excluding finance, earnings have fallen -3.9% year-over-year.
While earnings surprises may garner most of the attention, I'm much more impressed by a company that beats on both the bottom line and the top line. That's because earnings can often be "massaged" by management to clear the quarterly hurdle set by Wall Street. But revenue is generally much less susceptible (although not immune) to manipulation.
So far in Q2, 53% of companies have beaten expectations on the top-line, or 51% excluding finance. While that is well below the historical average, it is actually a bit better than the recent average.
The triple play
Positive revenue and earnings surprises are great, but if management guidance is weak and/or if analysts still revise their earnings estimates lower, a stock can still be punished. The true winners from earnings season are those who can deliver the coveted "triple play":
• A positive earnings surprise
• A positive revenue surprise
• Significant positive earnings estimate revisions
And as the well-documented "post-earnings announcement drift" shows, these blow out quarters are often handsomely rewarded by the market for several weeks after a company reports.
Four triple plays
So which companies have delivered the "triple play" this earnings season? I ran a screen in Research Wizard, and here are four of the top companies from the list.
EPS surprise: +44%
Revenue surprise: +12%
Four-week change in 2013 consensus: +31%
Four-week change in 2014 consensus: +22%
With over 1.1 billion active monthly users, Facebook is the largest social networking site in the world. The company reported significantly better-than-expected second quarter earnings on July 24, prompting analysts to revise their estimates much higher for both 2013 and 2014. It is a Zacks Rank #2 (Buy) stock.
Asbury Automotive Group (ABG)
EPS surprise: +21%
Revenue surprise: +4%
Four-week change in 2013 consensus: +8%
Four-week change in 2014 consensus: +10%
Asbury Automotive Group is one of the largest automotive retailers in the U.S. with 77 retail auto stores. Over 85% of its sales are from import brands. Asbury reported its seventh consecutive positive earnings surprise on July 23. It is a Zacks Rank #1 (Strong Buy) stock.
Meritage Homes (MTH)
EPS surprise: +61%
Revenue surprise: +10%
Four-week change in 2013 consensus: +21%
Four-week change in 2014 consensus: +6%
Meritage Homes is a homebuilder that operates in the Western, Southern and Southeastern United States. The company crushed second quarter estimates on July 24, prompting a flurry of positive estimate revisions from analysts. It is a Zacks Rank #2 (Buy) stock.
E*TRADE Financial (ETFC)
EPS surprise: +62%
Revenue surprise: +4%
Four-week change in 2013 consensus: +25%
Four-week change in 2014 consensus: +20%
E*TRADE Financial provides financial services including online brokerage and related banking products and services to retail investors. Analysts have revised their estimates significantly higher for the company after it delivered a big second quarter beat on July 24. It is a Zacks Rank #2 (Buy) stock.
The bottom line
Second quarter earnings season may not be that great overall, but these four companies each reported outstanding quarters and are well-positioned to run higher over the coming weeks.
The information contained in this article should not be construed as investment advice or as a solicitation to buy or sell any stock. Nothing published by Physician’s Money Digest should be considered personalized investment advice. Physician’s Money Digest, its writers and editors, and Intellisphere LLC and its employees are not responsible for errors and/or omissions.