Investors are used to seeing earnings-season headlines as companies typically “beat” analysts’ estimates for sales and earnings. This is part of the Wall Street game, aided by the companies themselves, that sets up an earnings-beat rate that typically exceeds two-thirds of the S&P 500.
But beating an estimate alone means nothing — a company can have declining sales or earnings and still report results higher than what analysts expect.
Earnings results for any one quarter can be skewed by accounting changes, legal settlements, divestitures, accounting policy changes or other one-time events So what can you easily learn from an earnings report?
Sales and margins
A company’s sales may increase greatly simply because it acquired another company. Or maybe it’s because of heavy discounting. It’s important to understand whether or not a company is having difficulty defending its market position. Discounting to juice sales for a quarter or two may help pad an executive’s bonus, but it is unsustainable and does nothing for investors. This is why you should look at gross profit margins as well.
A company’s gross margin is its sales, less the cost of goods sold, divided by sales. It doesn’t reflect overhead expenses. It simply gives an indication of pricing power. If your sales are rising quickly while the gross margin is expanding, you’re doing a good job moving product.
We still have a way to go before all the fourth-quarter results are in, but the consensus among analysts polled by S&P Global Market Intelligence is for S&P 500 SPX, +0.38% companies to increase their quarterly sales 6.7% from a year earlier, while improving earnings per share by 14.9%. Keeping in mind that 2018 results (especially for earnings) were elevated by the cut in the maximum federal corporate income-tax rate to 21% from 35%, it’s obvious that we’re entering new territory. For 2019, analysts expect first-quarter sales for the S&P 500 to increase by 6%, with EPS declining by 0.6%.
So you can expect a far different tone during coming earnings seasons. The problem with margin data is that we have to look back — but it still points to impressive pricing power for these companies.
Having their cake and eating it too
Through Feb. 12, data for quarters ended Oct. 26 or later were available for 390 S&P SPX, +0.38% companies. Here are the 20 that increased sales the most in the most recently reported quarter while also expanding their gross margins:
| Company | Ticker | Industry | Increase in quarterly sales from year-earlier quarter | Gross margin - most recent quarter | Gross margin - year-earlier quarter | Most recent reported quarter end through Feb. 12 |
| Marathon Petroleum Corp. | MPC, +2.21% | Oil Refining/ Marketing | 68% | 9.43% | 8.50% | 12/31/2018 |
| Occidental Petroleum Corp. | OXY, -0.97% | Oil & Gas Production | 37% | 35.11% | 29.32% | 12/31/2018 |
| SL Green Realty Corp. | SLG, +0.88% | Real Estate Investment Trusts | 34% | 62.68% | 38.30% | 12/31/2018 |
| UDR Inc. | UDR, +0.57% | Real Estate Investment Trusts | 32% | 41.05% | 23.49% | 12/31/2018 |
| Helmerich & Payne Inc. | HP, +1.09% | Contract Drilling | 31% | 15.42% | 8.73% | 12/31/2018 |
| Prologis Inc. | PLD, +0.25% | Real Estate Investment Trusts | 30% | 37.19% | 35.77% | 12/31/2018 |
| Autodesk Inc. | ADSK, +0.82% | Software | 29% | 88.47% | 83.97% | 10/31/2018 |
| Duke Realty Corp. | DRE, +0.63% | Real Estate Investment Trusts | 26% | 28.33% | 27.22% | 12/31/2018 |
| Northrop Grumman Corp. | NOC, -0.22% | Aerospace & Defense | 24% | 20.46% | 19.76% | 12/31/2018 |
| FMC Corp. | FMC, +2.04% | Chemicals: Agricultural | 24% | 44.45% | 42.62% | 12/31/2018 |
| Twitter Inc. | TWTR, +3.16% | Internet Software/ Services | 24% | 70.42% | 70.23% | 12/31/2018 |
| Nucor Corp. | NUE, -0.91% | Steel | 24% | 17.67% | 10.22% | 12/31/2018 |
| National Oilwell Varco Inc. | NOV, +1.91% | Oilfield Services/ Equipment | 22% | 17.06% | 7.57% | 12/31/2018 |
| Regeneron Pharmaceuticals Inc. | REGN, -0.47% | Biotechnology | 22% | 91.70% | 91.14% | 12/31/2018 |
| Fortinet Inc. | FTNT, -0.38% | Computer Communications | 22% | 75.23% | 74.51% | 12/31/2018 |
| Nvidia Corp. | NVDA, +2.73% | Semiconductors | 21% | 60.39% | 59.52% | 10/28/2018 |
| Cboe Global Markets Inc. | CBOE, +1.36% | Investment Banks/ Brokers | 20% | 34.17% | 33.78% | 12/31/2018 |
| American Express Company | AXP, +0.69% | Financial Conglomerates | 20% | 70.04% | 68.26% | 12/31/2018 |
| Amazon.com Inc. | AMZN, +0.54% | Internet Retail | 20% | 38.13% | 36.32% | 12/31/2018 |
| Keysight Technologies Inc. | KEYS, +1.38% | Electronic Equipment/ Instruments | 19% | 56.83% | 55.81% | 10/31/2018 |
| Source: FactSetr | ||||||
You can click the tickers for more about each company, including news, profiles, price ratios and targets, ratings and estimates.
Gross margin data is typically not available for banks and insurance companies, which focus on different measures of profitability.
Sales growth and margin expansion are only two data points, but they can get you started as you analyze companies for possible investment.
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