We are near the halfway mark for fourth quarter earnings season with results in from 212 members of the S&P 500. So far the results have been pretty decent. In a typical earnings season, you’ll see about 67% of companies deliver positive earnings surprises. This season we have seen a solid 71.2% of companies beat.
While earnings surprises may garner most of the attention, I’m much more impressed by a company that beats on both the bottom line and the top line. That’s because earnings can often be “massaged” by management to come in a penny or two ahead of consensus. But revenue is generally much less susceptible (although not immune) to manipulation.
So far in Q4, 52.8% of companies have beaten expectations on the top-line, while revenue is up 2.3% year-over-year. But this isn’t alarming – soft revenues have been a recurring theme in recent quarters.
The Triple Play
Positive revenue and earnings surprises are great, but if management guidance is weak and/or if analysts still revise their earnings estimates lower, a stock can still get punished.
And while there have been plenty of earnings and revenue beats this quarter, earnings estimate revisions have been pretty weak. Estimates for the first quarter of 2014 have been steadily dropping as this earnings season has progressed. Total earnings for the S&P 500 are now expected to be down -1.2% in Q1 compared to expectations of +2% growth at the beginning of January.
So earnings and revenue beats are not enough. The true winners from earnings season are those who can deliver the coveted “Triple Play”:
- A positive earnings surprise
- A positive revenue surprise, and
- Significant positive earnings estimate revisions
And as the well-documented “post-earnings announcement drift” shows, these blow out quarters are often handsomely rewarded by the market for several weeks after a company reports.
4 Triple Plays
So which companies have delivered the “Triple Play” this earnings season? I ran a screen in Research Wizard, and here are 4 of the top companies from the list:
- EPS Surprise: +129%
- Revenue Surprise: +9%
- 4-Week Change in 2014 Consensus: +46%
- 4-Week Change in 2015 Consensus: +14%
Logitech develops hardware and software products that enable or enhance digital navigation, music and video entertainment, gaming, social networking, and audio and video communication over the Internet. The company reported its 4th consecutive positive earnings surprise on January 22. It is a Zacks Rank #1 (Strong Buy) stock.
GATX Corp (GMT)
- EPS Surprise: +23%
- Revenue Surprise: +2%
- 4-Week Change in 2014 Consensus: +10%
- 4-Week Change in 2015 Consensus: +11%
GATX Corporation is a railcar leasing company. The company delivered strong fourth quarter results on January 23, and management provided bullish guidance for 2014. It is a Zacks Rank #1 (Strong Buy) stock.
Acuity Brands (AYI)
- EPS Surprise: +13%
- Revenue Surprise: +6%
- 4-Week Change in 2014 Consensus: +8%
- 4-Week Change in 2015 Consensus: +8%
Acuity Brands provides lighting solutions for both indoor and outdoor applications. Acuity announced record results for the first quarter of its fiscal 2014 on January 9. It is a Zacks Rank #1 (Strong Buy) stock.
Open Text Corp (OTEX)
- EPS Surprise: +9%
- Revenue Surprise: +3%
- 4-Week Change in 2014 Consensus: +7%
- 4-Week Change in 2015 Consensus: +12%
Open Text provides Enterprise Information Management (EIM) software. The company delivered solid top and bottom line beats on January 23, prompting analysts to revise their estimates significantly for both 2014 and 2015. It is a Zacks Rank #1 (Strong Buy) stock.
The Bottom Line
Overall, fourth quarter earnings season has been decent so far. But these four companies each delivered outstanding results and are well-positioned to run higher over the coming weeks.
Todd Bunton, CFA is the Growth & Income Stock Strategist for Zacks Investment Research and Editor of the Income Plus Investor service.
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