“Earnings beat” season begins in a week, when you can expect to see headlines saying this or that company has reported profits that were better than analysts had expected. There will be a few dire headlines, of course, about companies “missing” estimates.
The “beat rate” generally runs about 70%, in part because companies underestimate their expected profits in the “guidance” they provide to investors. Sell-side analysts do their part, often lowering estimates to set up the “beats.” But as we near third-quarter earnings season, analysts aren’t lowering estimates as often as usual.
Profits in the third quarter were buoyed by President Trump’s tax cuts that went into effect during the first quarter. The accelerating economic expansion, along with a tremendous amount of stock buybacks, will also help boost earnings per share (EPS).
If you are looking for companies that are on a tear, sales numbers are often your best indication because any company’s profit numbers can be distorted by accounting adjustments or other one-time events.
Here’s a summary of sales and earnings-per-share expectations for the three indexes that make up the S&P 1500 Composite Index, based on consensus estimates among analysts:
Looking at this year’s total returns, small-cap stocks have been the best performers. They are also expected to post the largest increase in earnings per share, probably because smaller companies tend to have fewer shelters from federal income taxes than large ones — they will receive a bigger windfall from the tax cuts, in other words.
The large-cap S&P 500 Index has performed nearly as well as the small-cap index, but the S&P Mid-Cap 400 Index has been the worst performer. Despite that lack of love from investors, the mid-cap companies are expected to record the largest increases in sales among the three groups this year.
Expected Mid-Cap Sales Winners
Here are the 20 S&P 400 Mid-Cap Index companies expected to achieve the highest increases in sales for 2018:
You can click on the tickers for more information, including news, price ratios, earnings estimates and other financials. The 2017 sales numbers are adjusted by sell-side analysts for subsequent accounting changes and restatements.
The presence of eight oil producers, drillers or service companies on the list is no surprise, as the price of West Texas Crude oil has risen 61% over the past 12 months. A significant decline in break-even costs for domestic share oil producers means that if the price of oil merely holds from here, significant further increases in sales (and profits) are expected for many (but not all) over the next few years.
Beyond the oil companies, there is a story behind each tremendous increase in expected sales, and it is important to do your own research to understand the numbers and form your own opinion about the long-term strategy of any company that may interest you as a possible investment.
For example, Syneos Health which provides services to biotech companies and medical-device makers going through product trials, is expected to increase sales by 138% this year. The company was formerly known as INC Research and was renamed Syneos when it acquired inVentive Health in August 2017. On an adjusted “combined company” basis, Syneos’ sales during the first half of 2018 actually declined slightly from a year earlier, to $1.56 billion.
Looking ahead, analysts are expecting sales growth of 7% for Syneos in 2019. Leaving aside the oil companies, there are five companies expected to increase sales by double digits next year, including Plantronics, Marriott Vacations Worldwide, Exelixis, PRA Health Sciences, and Inogen.
Ratings and Price Targets
Here are total returns for the mid-cap group, along with summaries of analysts’ ratings and price targets: