As we head into earnings season, investors can be forgiven for their cynicism about “earnings beats,” the series of breathless headlines about companies reporting results that come in ahead of analysts’ expectations.
But there are also stocks for which analysts have been raising their price targets, and it might be worthwhile to take a closer look at those companies.
During second-quarter earnings season, 80% of S&P 500 SPX, -0.14% companies reported earnings per share that were higher than consensus estimates, according to S&P Global Market Intelligence. That “beat rate” has steadily risen over the past year from 71% for second-quarter earnings season in 2017. Over the past five full calendar years, the “beat rate” has averaged 66%.
Beating earnings estimates doesn’t mean much if companies are in the habit of lowering their “guidance” or giving other hints heading into earnings season. Sell-side analysts do their part to help set up the “beats.” For example, consensus third-quarter earnings estimates among analysts polled by FactSet declined for 136 of the S&P 500 member companies between Sept. 10 and Oct. 9, while the estimates increased for only 77. Considering that U.S. economic growth has accelerated and that the unemployment rate has declined to a 49-year low, it’s fair to question these numbers.
This is why investors are better off ignoring the “beats” and looking harder at companies’ success in increasing their sales and profits. A company that “misses” estimates while still increasing sales and earnings at a healthy pace, consistently, may be an excellent investment despite some temporarily bad headlines.
Price targets
Turning back to the analysts, we thought it might be more interesting to look at consensus price targets, to see which stocks have been generating greater enthusiasm among analysts, irrespective of any cuts to quarterly earnings estimates. Among the S&P 500, the results weren’t very exciting, with price targets increasing by 10% or more for only two companies between Sept. 10 and Oct. 9. The consensus price target for Advanced Micro Devices AMD, +2.95% increased 24% and the target for Eli Lilly LLY, -0.01% rose by 12%.
So we expanded the stock universe by looking at the S&P Composite 1500 Index, which is made up of the S&P 500, the S&P 400 Mid-Cap Index MID, -0.56% and the S&P 600 Small-Cap Index SML, -0.41%
(In case you’re wondering, consensus EPS estimates are available for 1,475 of the S&P 1500. Third-quarter consensus estimates have been cut for 323 companies over the past month, while the estimates have been increased for 181.)
Among the S&P 1500, 21 companies with ratings available from at least three analysts have had their consensus price targets increased by 10% or more over the past month:
Company Ticker Industry Consensus price target - Sept. 10 Consensus - Oct. 9 Change in price target Total return - 2018 through Oct. 8 Barnes & Noble Inc. BKS, +2.56% Specialty Stores $5.00 $7.25 45% 13% Denbury Resources Inc. DNR, +2.52% Oil and Gas Production $4.73 $5.96 26% 187% Advanced Micro Devices Inc. AMD, +2.95% Semiconductors $20.15 $24.93 24% 157% Momenta Pharmaceuticals Inc. MNTA, +2.02% Biotechnology $20.80 $25.60 23% 45% Sonic Corp. SONC, -0.02% Restaurants $35.50 $42.91 21% 61% Balchem Corp. BCPC, -0.90% Chemicals $92.00 $108.60 18% 30% Casey's General Stores Inc. CASY, +0.51% Food Retail $112.67 $128.70 14% 11% XO Group Inc. XOXO, +0.20% Other Consumer Services $30.67 $34.67 13% 87% Bottomline Technologies Inc. EPAY, +0.01% Software $60.83 $68.75 13% 96% Vonage Holdings Corp. VG, -0.21% Specialty Telecommunications $15.50 $17.50 13% 37% Manhattan Associates Inc. MANH, -0.74% Software $56.00 $63.00 13% 1% Eli Lilly and Co. LLY, -0.01% Pharmaceuticals: Major $100.43 $112.46 12% 39% Ensco PLC Class A ESV, +7.05% Contract Drilling $7.00 $7.80 11% 50% Noble Corp. PLC NE, +0.28% Contract Drilling $5.42 $6.02 11% 59% Fox Factory Holding Corp. FOXF, -1.25% Recreational Products $60.14 $66.71 11% 67% Perficient Inc. PRFT, +0.04% Personnel Services $30.00 $33.25 11% 35% Harmonic Inc. HLIT, -2.80% Telecommunications Equipment $6.17 $6.81 10% 36% Masimo Corp. MASI, -0.22% Medical Specialties $113.00 $124.80 10% 41% Abercrombie & Fitch Co. Class A ANF, -1.72% Apparel/Footwear Retail $22.54 $24.88 10% 17% FactSet Research Systems Inc. FDS, +1.19% Financial Publishing/Services $192.08 $211.92 10% 15% Transocean Ltd. RIG, +1.50% Contract Drilling $12.84 $14.15 10% 31% Source: FactSet
You can click the tickers for more information about each company, including news, price ratios, charts and financials.
Of course, a large increase in a consensus price target doesn’t mean everything is rosy. Barnes and Noble BKS, +2.56% tops the list. The stock is up 13% this year through Oct. 8 after sliding 36% in 2017. Its three-year return is a negative 33%. Analysts expect the bookseller’s sales to decline 4% during calendar 2018 (the company’s fiscal 2018 ended on April 28), but for its EPS (adjusted for one-time items) to increase to 38 cents in calendar 2018 from 25 cents in calendar 2017. Three analysts cover the stock, with one “buy” rating and two neutral ratings. The consensus price target implies upside of only 3% over the next 12 months from the closing price of $7.02 on Oct. 8.
Here’s a summary of analysts’ ratings and price targets for the group, showing that for many of the high-flying stocks on the list, including Advanced Micro Devices, analysts have been raising their targets to catch up to the market.
Company Ticker Share 'buy' ratings Share neutral ratings Share 'sell' ratings Closing price - Oct. 8 Consensus price target Implied 12-month upside potential Barnes & Noble Inc. BKS, +2.56% 33% 67% 0% $7.02 $7.25 3% Denbury Resources Inc. DNR, +2.52% 18% 73% 9% $6.35 $5.96 -6% Advanced Micro Devices Inc. AMD, +2.95% 39% 46% 15% $26.46 $24.93 -6% Momenta Pharmaceuticals Inc. MNTA, +2.02% 20% 60% 20% $20.26 $25.60 26% Sonic Corp. SONC, -0.02% 7% 93% 0% $43.38 $42.91 -1% Balchem Corp. BCPC, -0.90% 20% 80% 0% $105.03 $108.60 3% Casey's General Stores Inc. CASY, +0.51% 43% 57% 0% $123.58 $128.70 4% XO Group Inc. XOXO, +0.20% 0% 100% 0% $34.49 $34.67 1% Bottomline Technologies Inc. EPAY, +0.01% 60% 40% 0% $67.98 $68.75 1% Vonage Holdings Corp. VG, -0.21% 89% 11% 0% $13.96 $17.50 25% Manhattan Associates Inc. MANH, -0.74% 17% 83% 0% $50.05 $63.00 26% Eli Lilly and Co. LLY, -0.01% 53% 47% 0% $115.46 $112.46 -3% Ensco PLC Class A ESV, +7.05% 46% 33% 21% $8.79 $7.80 -11% Noble Corp. PLC NE, +0.28% 24% 52% 24% $7.17 $6.02 -16% Fox Factory Holding Corp. FOXF, -1.25% 44% 56% 0% $65.06 $66.71 3% Perficient Inc. PRFT, +0.04% 100% 0% 0% $25.82 $33.25 29% Harmonic Inc. HLIT, -2.80% 60% 40% 0% $5.71 $6.81 19% Masimo Corp. MASI, -0.22% 43% 57% 0% $119.50 $124.80 4% Abercrombie & Fitch Co. Class A ANF, -1.72% 20% 47% 33% $19.78 $24.88 26% FactSet Research Systems Inc. FDS, +1.19% 0% 78% 22% $219.68 $211.92 -4% Transocean Ltd. RIG, +1.50% 56% 17% 27% $13.97 $14.15 1% Source: FactSet
Most analysts set price targets for the next 12 months. That is not very much time for serious long-term investors, so it is possible that if you don’t look beyond the targets, you might overlook important opportunities for gains over the next five to 10 years.
Here are sales expectations for the group, for calendar 2018 and calendar 2019, based on consensus estimates among analysts polled by FactSet:
Company Ticker Adjusted sales - 2017 ($mil) Estimated sales - 2018 ($mil) Estimated sales - 2019 ($mil) Expected change in sales - 2018 Expected change in sales - 2019 Barnes & Noble Inc. BKS, +2.56% $3,739 $3,600 $3,528 -4% -2% Denbury Resources Inc. DNR, +2.52% $1,106 $1,409 $1,558 27% 11% Advanced Micro Devices Inc. AMD, +2.95% $5,326 $6,702 $7,371 26% 10% Momenta Pharmaceuticals Inc. MNTA, +2.02% $139 $62 $85 -56% 39% Sonic Corp. SONC, -0.02% $459 $418 $410 -9% -2% Balchem Corp. BCPC, -0.90% $595 $658 $711 11% 8% Casey's General Stores Inc. CASY, +0.51% $8,100 $9,386 $10,419 16% 11% XO Group Inc. XOXO, +0.20% $161 $168 $183 5% 9% Bottomline Technologies Inc. EPAY, +0.01% $372 $411 $450 11% 9% Vonage Holdings Corp. VG, -0.21% $1,002 $1,050 $1,157 5% 10% Manhattan Associates Inc. MANH, -0.74% $575 $554 $546 -4% -2% Eli Lilly and Co. LLY, -0.01% $22,863 $24,358 $24,605 7% 1% Ensco PLC Class A ESV, +7.05% $1,843 $1,704 $1,774 -8% 4% Noble Corp. PLC NE, +0.28% $1,201 $1,039 $1,106 -13% 6% Fox Factory Holding Corp. FOXF, -1.25% $476 $612 $675 29% 10% Perficient Inc. PRFT, +0.04% $485 $498 $527 3% 6% Harmonic Inc. HLIT, -2.80% $357 $402 $448 12% 12% Masimo Corp. MASI, -0.22% $798 $851 $900 7% 6% Abercrombie & Fitch Co. Class A ANF, -1.72% $3,478 $3,560 $3,614 2% 2% FactSet Research Systems Inc. FDS, +1.19% $1,264 $1,380 $1,466 9% 6% Transocean Ltd. RIG, +1.50% $2,877 $2,936 $3,044 2% 4% Source: FactSet
Here are EPS expectations for the group, again for calendar 2018 and calendar 2019, based on consensus estimates among analysts polled by FactSet:
Company Ticker Adjusted EPS - 2017 Consensus EPS estimate - 2018 Consensus EPS estimate -2019 Expected change in earnings - 2018 Expected change in earnings - 2019 Barnes & Noble Inc. BKS, +2.56% $0.25 $0.38 $0.47 51% 22% Denbury Resources Inc. DNR, +2.52% $0.15 $0.49 $0.83 233% 68% Advanced Micro Devices Inc. AMD, +2.95% $0.16 $0.47 $0.67 187% 43% Momenta Pharmaceuticals Inc. MNTA, +2.02% -$1.21 -$2.13 -$1.00 N/A N/A Sonic Corp. SONC, -0.02% $1.33 $1.54 $1.70 16% 10% Balchem Corp. BCPC, -0.90% $2.51 $2.77 $3.05 11% 10% Casey's General Stores Inc. CASY, +0.51% $3.99 $4.37 $4.94 10% 13% XO Group Inc. XOXO, +0.20% $0.28 $0.66 $0.75 136% 14% Bottomline Technologies Inc. EPAY, +0.01% $1.13 $1.36 $1.57 20% 15% Vonage Holdings Corp. VG, -0.21% $0.28 $0.36 $0.35 29% -4% Manhattan Associates Inc. MANH, -0.74% $1.87 $1.59 $1.35 -15% -15% Eli Lilly and Company LLY, -0.01% $4.28 $5.47 $5.76 28% 5% Ensco PLC Class A ESV, +7.05% -$0.46 -$1.32 -$1.10 N/A N/A Noble Corp. PLC NE, +0.28% -$1.15 -$1.85 -$1.73 N/A N/A Fox Factory Holding Corp. FOXF, -1.25% $1.59 $2.09 $2.36 32% 13% Perficient Inc. PRFT, +0.04% $1.23 $1.50 $1.65 22% 10% Harmonic Inc. HLIT, -2.80% -$0.34 $0.10 $0.22 N/A 127% Masimo Corp. MASI, -0.22% $2.55 $2.91 $3.06 14% 5% Abercrombie & Fitch Co. Class A ANF, -1.72% $0.59 $0.82 $0.96 39% 17% FactSet Research Systems Inc. FDS, +1.19% $7.72 $8.88 $9.89 15% 11% Transocean Ltd. RIG, +1.50% -$0.28 -$0.85 -$0.57 N/A N/A Source: FactSet
As always, if you see any stocks listed here that you might be interested in buying, you had better do plenty of research on your own, in order to form your own opinion about a company’s strategy and its prospects for success over the next five to 10 years.
Don’t miss: Trump’s trade deal bodes well for these companies — and their investors
Create an email alert for Philip van Doorn’s Deep Dive columns here.
