Quarterly “Beats”: Bah, Here Are Real Growers

It’s still early in second-quarter reporting season, but FactSet (FDS) notes that so far 73% of the 70-odd companies in the S&P 500 that have reported earnings managed to beat on revenue. That’s well above the four-year average of 57.2% reporting revenue performance above expectations.

And that’s where the good news stops. In reality, companies are beating rather dismal revenue projections. Set the bar low and it’s not so hard to step over it. So far, the revenue gain for the S&P 500 companies that have reported is a not-too-inspiring 3%. Though that’s still better than all U.S. business activity.

US Total Business Sales Chart

US Total Business Sales data by YCharts

The lack of organic revenue growth is about the only metric needed to explain the recent M&A flurry; those that can’t grow it, buy it.

Interestingly the health care and technology sectors are outliers. According to FactSet, the healthcare sector of the S&P 500 is on pace to deliver 8.2% revenue growth for the second quarter and the technology sector is set to record 6.6% revenue growth. And both sectors have full-year 2014 revenue estimates near those second-quarter levels.

Drilling down to the health care stocks in the S&P 500 using the YCharts Stock Screener turns up more than a few names worth some further financial research. Express Scripts (ESRX), Amgen (AMGN) and Baxter International (BAX) all have solid operating revenue growth for the past five years. (Express Scripts’ haul is skewed by its $29 billion acquisition of Medco that closed in the spring of 2012).

Despite attractive attributes, the three stocks have trailed the broader market over the past year, one can see in a stock chart.

Moreover, all three are currently holdings in the Market Vectors Wide Moat ETF (MOAT), a portfolio of 20 companies Morningstar’s (MORN) proprietary research deems to operate with large competitive advantages, that happen to trade at the widest discount to Morningstar’s estimate of fair value. The portfolio is reconstituted quarterly. (Full disclosure: Morningstar is an investor in YCharts.) YCharts moat articles here.

Baxter International and Amgen trade at about 8% discounts to fair value. Express Scripts, at a 25% discount to fair value, offers the biggest potential bang for the buck. As noted in earlier YCharts posts, Express Scripts is still working to fully integrate Medco, a process Express Scripts concedes is going to last through this year.

Feeling patient? Well, consider that noted value shops Dodge & Cox and Weitz added to their Express Scripts positions in the second quarter.

We’re not talking about a wounded warrior here; free cash flow is more than triple where it stood prior to the Medco deal, while the price-to-free-cash flow ratio isn’t appreciably higher:

ESRX Free Cash Flow (TTM) Chart

ESRX Free Cash Flow (TTM) data by YCharts

Over in the tech sector, the biggest revenue boosts over the past three years came from Facebook (FB), Apple (AAPL), Salesforce.com (CRM) and Qualcomm (QCOM).

FB Operating Revenue (3 Year Growth) Chart

FB Operating Revenue (3 Year Growth) data by YCharts


Of course, you have to be willing to pay up a pretty penny for both Facebook – PE ratio of 91 -- and Salesforce.com (don’t bother asking).

Even with its sharp price spike over the past quarter, Apple still remains the bargain of the bunch, selling at less than 16x trailing 12-month earnings, with Qualcomm hovering around 20x.

(Earlier in earnings season, we wrote about some of the silliness of “beating” estimates that management had drastically lowered, Weight Watchers International (WTW) being a case in point. To keep up with the quarter’s results for all companies, use the YCharts earnings and dividend calendar.)

Carla Fried, a senior contributing editor at ycharts.com, has covered investing for more than 25 years. Her work appears in The New York Times, Bloomberg.com and Money Magazine. She can be reached at editor@ycharts.com. Read the RIABiz profile of YCharts. You can also request a demonstration of YCharts Platinum.



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