Despite strong results from major banks, the third-quarter earnings growth for the S&P 500 index is still expected to decline 2.2% year over year. While energy remains one of the biggest drags, major sectors like technology, autos and transportation also lack sheen (read more: Reassuring Start to Q3 Earnings Season).
But, securing earnings growth on a year-over-year basis is the highest priority among the top brass of any organization, be it a fledgling company or a recognized corporation. This is because it serves as a major indicator of a company’s profitability. Better-than-expected earnings also more often than not lead to an increase in the share price. In addition to actual earnings, expectations of earnings play a significant role in influencing the price of a stock.
Earnings Estimates & Share Price
Consider a company’s revenues over a given period of time, subtract the cost of production and you have earnings. But, what are earnings estimates? It includes analysts’ opinions of factors such as sales growth, product demand, competitive industry environment, profit margins, expenses and cost control. Analysts can also examine the cash flow based on these periodic earnings estimates to determine the fair value of the company.
In many cases, companies have seen that their share price decline despite earnings growth or for that matter a stock price has even surged following an earnings decline. This happens because of missing or beating of estimates.
As we are headed into a not-so-encouraging earnings season, it is imperative to look for stocks that have not only displayed historical earnings growth but are also seeing a rise in quarterly and annual earnings estimates.
In order to shortlist stocks that have striking earnings growth and are witnessing positive estimate revisions, we have added the following parameters:
Zacks Rank less than or equal to 2: Only Zacks Rank #1 (Strong Buy) and 2 (Buy) stocks are allowed. With the Zacks Rank proving itself to be one of the best rating systems out there, this is a great way to start things off. You can see the complete list of today’s Zacks #1 Rank stocks here.
5-Year Historical EPS Growth (%) greater than X-Industry: Stocks that possess strong EPS growth history.
% Change EPS F(0)/F(-1) greater than or equal to 5: Companies that witnessed year-over-year earnings growth rate of 5% or more in the last reported fiscal.
% Change Q1 Estimates over the last 4 weeks greater than zero: Stocks that have seen their current quarter earnings estimates revised higher in the last 4 weeks.
% Change F1 Estimates over the last 1 week greater than zero: Stocks that have seen their annual earnings estimates revised higher in the last 1 week.
% Change F1 Estimates over the last 4 weeks greater than zero: Stocks that have seen their annual earnings estimates revised higher in the last 4 weeks.
The above criteria narrowed down the universe of about 7,724 stocks to only five. Here are the stocks:
Lennox International, Inc. LII designs, manufactures and markets a range of products for the heating, ventilation, air conditioning and refrigeration markets. The company’s estimated earnings growth rate for the current quarter and year are 23.8% and 32.1%, respectively.
Spectrum Brands Holdings, Inc. SPB manufactures and sells consumer products worldwide. It operates through five segments: Global Batteries & Appliances, Global Pet Supplies, Home and Garden, Hardware & Home Improvementand Global Auto Care. The company’s projected earnings growth rate for the current quarter and current year are 13.72% and 20.1%, respectively.
ULTA Salon, Cosmetics & Fragrance, Inc. ULTA operates as a specialty retailer in the United States. Its stores provide cosmetics, fragrance, haircare, skincare, bath and body products, and salon styling tools. The company’s estimated earnings growth rate for the current quarter and year are 22.16% and 25.5%, respectively.
ONE Gas, Inc. OGS operates as a regulated natural gas distribution utility company in the United States. The company’s estimated earnings growth rate for the current quarter as well as year are 38.57% and 16.9%, respectively.
Thermo Fisher Scientific, Inc. TMO provides analytical instruments, equipment, reagents and consumables, software, and services for research, manufacturing, analysis, discovery and diagnostics worldwide. The company’s anticipates earnings growth rate of 9.44% and 10.9% for the current quarter and year, respectively.
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Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.
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