The market has boomed on a number of strong earnings results and positive forward guidance. But this earnings season’s results have been polarizing. Companies with strong earnings are seeing significant gains, and companies with poor earnings are getting punished. There has been very little middle ground for companies, and that’s what makes this earnings season so important.
Just look at FedEx (NYSE:FDX) and Family Dollar (NYSE:FDO), and you’ll see what I mean. FDX jumped 8% after announcing profits surged 76% year-over-year and total sales climbed 10% to $10.59 billion. FDO, on the other hand saw its stock drop 7% on the day it reported profits and sales that failed to meet analyst expectations.
This divide between winners and losers is increasing because we’re now nearing “peak earnings.” The financial crisis was a massive hit to earnings. So, the subsequent recovery years showed dramatic improvement on a year-over-year basis. But those types of growth rates were not sustainable, and the new year-over-year comparisons are getting tougher. Analysts are taking this into account and currently are expecting about 7% average growth for S&P 500 companies — down from the 15% expected just three months ago. Here’s an example of why earnings growth is slowing:
Company A had earnings per share of $1 in the quarters before the financial crisis. During the crisis, earnings dropped to 50 cents per share. Then, as the recovery took hold, earnings improved to 75 cents per share and back to $1 per share. That growth came from customers coming back — not from real company growth. Now that the company is looking at more normal growth rates and might post in the neighborhood on $1.10 per share, that 10% rise in earnings looks pretty pitiful compared to last year’s 33% rise.
Obviously, the key to being on the right side of the divide is to demand each of your portfolio holdings to have strong sales and profits that translate to earnings growth
Take the following for example:
Check Point Software Technologies (NASDAQ:CHKP). The company reported top- and bottom-line growth that trumped estimates across the board. Management announced that the company experienced exceptional performance across all of its key business metrics and was especially successful in its products and licenses segment as well as its software updates business.
As such, sales for the fourth quarter increased 12% year-over-year to $356.8 million. This topped the consensus sales estimate of $355.6 million. Similarly, net income for the quarter climbed 16% to $159.8 million, or 75 cents per share. Excluding special items, adjusted earnings weighed in at 84 cents per share, trumping the consensus earnings estimate of 82 cents per share by 2%.
For the full year, earnings jumped 20% to $544 million, or $2.54 per share, and total sales rose 14% to $1.25 billion. This earnings announcement kicked off the trading week on the right foot, and I want you to add this conservative stock below $59.
Intuitive Surgical (NASDAQ:ISRG) also announced solid earnings performance for the fourth quarter. Total sales climbed 28% year-over-year to $497 million, thanks to increased sales of its patented da Vinci surgical system. This trumped the consensus sales estimate of $483.7 million by 3%. Over the same period, net income jumped 25% to $151 million, or $3.75 per share. Street analysts forecast earnings of just $3.35 per share, so the company posted a 12% earnings surprise.
The only downside I see to the report is news that European hospitals are becoming more careful with their spending, so sales have slowed down a bit on that front. However, the company remains dedicated to expanding in international markets, and its hard work is paying off in countries like Korea. I’m not overly concerned with this. The da Vinci Surgical system is one of a kind, and the company is smart to focus on emerging Asian markets.
The other thing to note about this stock is that it has been on an incredible run. So the dip we saw after earnings is just a case of normal profit-taking, and if you look at ISRG’s chart, you’ll notice that this stock tends to gain tremendous ground and then recede briefly when earnings are released. With that in mind, I reiterate my “strong buy” recommendation. Continue to buy shares of this moderately aggressive stock below $484.
UnitedHealth Group (NYSE:UNH) revealed stellar operating performance in both the fourth quarter and for full-year 2011. In particular, its Optum segment, which focuses on population health management and care delivery, grew sales by 23% in Q4 2011 compared with Q4 2010. OptumHealth now serves nearly one in five Americans. The company also served an additional 170,000 people in the fourth quarter, helping to boost the company’s top- and bottom-lines.
Total fourth-quarter sales rose 8% to $25.92 billion, topping analyst estimates of $25.7 billion. Over the same period, net earnings advanced 22% to $1.26 billion, or $1.71 per share. The Street forecast earnings of $1.03 per share, so UnitedHealth Group posted a 14% earnings surprise. You should continue to buy this conservative stock below $56.