All IBD readers should anticipate meaningful deceleration in the rate of earnings-per-share (EPS) increases for growth stocks in calendar year 2019. Yet companies in the IBD 50 also hint at good prospects for healthy EPS increases for at least a few more quarters.
Looking at IBD 50 firms through Wednesday’s close, Thomson Reuters estimates show earnings rising 33.5% on average in the fourth quarter of 2018 vs. a year ago. That tops the 25% minimum increase exacted by the C in CAN SLIM, IBD’s seven-point investment system to find top growth stocks. C stands for current quarterly earnings. For Q1 of this year, the average estimate calls for a 29.3% increase.
These same companies on average grew their earnings per share by a whopping 58.6% vs. year-ago levels in the third quarter. Realistically, that kind of growth is simply impossible to sustain quarter after quarter.
Wall Street Sees Big Q1 Gains For These Growth Stocks
Looking ahead to Q1 of this year, Horizon Pharma (HZNP) (EPS estimate up 667% year over year to 54 cents a share), Atlassian (TEAM) (up 80%), Kirkland Lake Gold (KL) (40%), Match Group (MTCH) (35%), Innoviva (INVA) (29%) and Palo Alto Networks (PANW) (25%) show some of the highest expected rises.
Earnings plunged 86% to 3 cents a share in Q1 of last year for Horizon. This fact supremely juices its upcoming first-quarter estimate. The Irish specialist in drugs for arthritis and pain earned 25 cents a share in Q1 of 2015 and 22 cents in the same quarter for 2016. Its numbers can be lumpy.
Atlassian staged a breakout from a good cup with handle in earnest this month, Horizon Pharma, Match, Palo Alto are all crafting new bases. Kirkland, which cleared a cup without handle on Dec. 10, has rallied beyond the 5% proper buy zone.
Fourth-quarter results reporting is just weeks away. A few IBD 50 firms could show powerful earnings gains that match the big percentage increases of third quarter. But one should also expect growth to taper after that.
Earnings Acceleration And Deceleration
Take Match, the online dating website and app leader. Analysts forecast the Dallas-based company to grow profits by 111% in the fourth quarter. That exceeds a 105% jump in Q3. It would mark four straight quarters of triple-digit EPS gains.
Earnings by Match had fallen sharply in the second, third and fourth quarters of 2017. Once again, easy comps helped create such big EPS gains recently. Still, profit at Match may climb 35% in Q1 this year. For all of 2019, the Street sees earnings warming up 17% to $1.68 a share after a 144% leap in 2018 to $1.44.
The market tends to discount the economy, government policy, inflation, interest rates, corporate profits and other factors that determine stock valuations. Yet big adjustments can still take place when companies issue big surprises — to the upside or downside. Watch for these potential news:
- Do companies raise their future profit growth forecasts?
- Examine sales guidance: up, stable, or down?
- Will top growth firms keep boosting share buybacks, bolstering the chance of higher earnings per share?
Mind The Top Line
The Trump tax cuts of 2018 helped sharply expand the bottom line across all industries. This tailwind has now passed. A savvy investor will thus pay close attention to stocks in leading industry groups that can generate solid double-digit increases in both sales and earnings.
New capital investments, new products and dramatic changes in industry conditions all help companies produce a consistently strong or accelerating top line. Big sales serve as the main engine for equally vibrant profits.
Wall Street sees 24 firms in the IBD 50 growing sales in 2018 by 20% or more. Expect this growth to slow down, too.
The Street thinks Abiomed (ABMD) sales could bulge 29% higher to $990 million in fiscal 2020, just a touch below a 30% increase seen in the current fiscal year that ends in March.
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