By Teresa Rivas
The first quarter was great for investors. First-quarter earnings season has been a different story. Yet, a few companies with growing sales could offer hope.
After surging more than 10% in the first three months of the year bolstered by strong economic data, the S&P 500 index has found April to be much crueler: The index is down some 4.6% this month.
Many hoped that the strong economic backdrop would lead to robust first-quarter results for corporations, adding more fuel to the rally's fire. That hasn't turned out to be the case. Earnings season started off with slumping financials, putting even more pressure on Big Tech to perform. This week will see Facebook parent Meta Platforms, Microsoft, and Google parent Alphabet report results.
Tech, of course, has done much of the heavy lifting in terms of market gains since 2023, and with good reason: The companies are seeing surging sales and profits. Analysts expect earnings per share to grow 5.5% in the first quarter for the Magnificent Seven companies, excluding Tesla. Consensus estimates for the S&P 500, by contrast, have fallen in recent months.
Investors could just pile more money into tech -- but that's hardly an undiscovered group. Nor is it foolproof, as most of the Magnificent Seven have fallen over the past week. Another tactic could be to look for companies that are displaying strong sales growth outside of that sector.
By the end of last week, just 58% of companies had beaten analysts' revenue estimates, a much lower percentage compared with the most recent one-, five-, and 10-year periods. And companies overall have been beating consensus estimates by about 1% -- again lagging behind historical averages.
That may explain why recent results haven't done much to boost the market.
"Early first-quarter financial reports show that U.S. large-cap companies are beating earnings estimates by decent amounts because of cost controls, not incremental revenue," writes DataTrek Research co-founder Nicholas Colas. "Investors like to see earnings beats driven by upside revenue surprises, not belt tightening."
The preference is easy to understand: Companies can only rein in expenses so much, and cuts can hurt them competitively.
One way to look for winners is to find companies expected to see big gains in revenue that investors might treat more favorably.
Barron's screened for companies with expected first-quarter sales growth of 30% or more, compared with the year-ago period. Not surprisingly, the list was dominated by tech names: Nvidia, Super Micro Computer, Micron Technology, Qorvo, and Broadcom were all near the top of the list.
But there were other companies that made the cut as well, with multiples below their five-year averages.
That list includes Extra Space Storage. The real estate investment trust is expected to see revenue rise nearly 58% in its first quarter, to nearly $793 million. Yet it changes hands at 16.3 times forward funds from operations (a key metric for REITs that measures a company's cash flows), compared with an average of 20.9 times over the past five years.
Water technology firm Xylem also makes the cut. It trades at 29.8 times forward earnings, below its average of 31.4 times, even as sales are expected to jump almost 38%.
First Solar is the cheapest on the list: The solar-power company sports a forward price/earnings ratio of just 11.1, compared with nearly 29 times over the past five years. Analysts see sales climbing 31%.
Of course, these companies aren't surefire winners. Solar-power companies, for example, have had a tough run as high interest rates mean fewer consumers are financing solar panel installations. In addition, they may miss analysts' high sales-growth expectations, and investor interest could shift as reporting season matures.
As of now, "it is too early to say that cost-cut driven earnings beats will be the story of first-quarter financial results," notes Colas.
Nonetheless, for investors looking for interesting nontech ideas, companies that aren't just cost-cutting their way to growth is one way to identify potential winners.
Write to Teresa Rivas at teresa.rivas@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
April 24, 2024 02:00 ET (06:00 GMT)
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