Upward earnings estimate revisions and positive earnings surprises tend to go hand in hand with a good Zacks Rank. That is certainly no surprise, as those are the key factors that go into determining the rank. However, in recent quarters, almost as much attention is being paid to how a company performs on the top line as to how well it is doing on the bottom line.
Therefore I wanted to look for firms that would look good if we had a sales-based Zacks Rank, as well as looking good on the “normal" Zacks Rank. I started with all the firms that currently hold the conventional Zacks #1 Rank and a market capitalization above $500 million, and then required that the consensus revenue estimates to have risen by at least 1% for both 2011 and 2012. I also required the firms to have had a positive revenue surprise in the most recently reported quarter.
Since sales were the focus, I also required that firms have grown their revenues at a pace of over 5% per year for the last five years, and that they have a price-to-sales ratio of less than 3x. Only eight firms were able to qualify.
8 Firms Pass the Screen
Those eight firms are, however, a remarkably diverse group. They range from a huge Canadian energy company (one of the best plays on the Alberta Oil Sands) to a Brazilian meatpacker to a Chinese semiconductor firm to a domestic payment processing firm. The net margins that these firms are able to earn range from a razor thin 1.46% to a very healthy 20.44%.
While there was no screening requirement about the current level of revenue growth expected for this year versus last year, all but one are expected to have higher revenues this year than last, with some expected to see dramatic jumps. As with earnings estimates, the fact that the estimates are rising should make you more confident that the current expectations will be met or exceeded. All prices and data are as of the close 6/28/11.
Heartland Payment (HPY, $20.61): By far the cheapest of the eight on a price-to-sales basis at only 0.41x, but for a good reason — its net margins are very thin at just 1.46%. It has a solid record of increasing sales over the past five years, growing an average of 14.4% per year.
It provides bankcard payment processing services to merchants in the United States and Canada to approximately 250,000 business locations. It is not particularly cheap on a P/E basis, selling at 20.7x 2011 and 17.4x 2012x expected earnings. It boasts a strong balance sheet with cash on hand exceeding total long-term debt.
Brazil Food (BZFS, $16.92) is the largest meatpacker in Brazil, and Brazil produces a lot of meat. There is some question about whether a merger, engineered by the Brazilian government, will go through. If it does, it should be very beneficial to the company (but probably not to Brazilian consumers).
Its earnings are expected to grow very quickly, rising from just $0.55 in 2010 to $1.02 in 2011 and $1.24 in 2012. Those earnings estimates have been on a rapid rise, up 30.5% and 25.2% over the last three months. Its trailing net margin of 5.25% is on the low side, but it is trading for just 1.19x sales.
Telecom Argentina (TEO, $25.95) is, as its name suggests, a telecommunications firm in Argentina. Argentina has been booming for the past several years, growing at more than 8%. It serves approximately 4.1 million fixed lines, 1.4 million Internet subscribers, and 18.2 million mobile telephony subscribers.
This one could be of particular interest to income-oriented investors as it boasts a 6.22% dividend yield with a low payout ratio of just 52% and a solid balance sheet. It is also has very reasonable P/Es of just 8.9x 2011 and 8.5x 2012 expected earnings.
Suncor Energy (SU, $38.23) is by far the largest market cap in the list at over $58 billion. It is a leader in developing the Alberta Oil sands. It thus has no real exploration risk and has rapidly growing production. The downside to oil sands is that the oil is amongst the highest cost in the world. That provides a lot of operational leverage.
If oil prices are high this firm will mint money, but it is more vulnerable than most oil firms to falling oil prices. It trades at just 1.57x sales despite boasting very solid net margins on 10.46% overt the last 12 months. It is also reasonable on an earnings basis, trading for 13.0x 2011 and 11.5x 2012 EPS.
Spreadtrum (SPRD, $12.49) is a very rapidly growing Chinese semiconductor company. It is selling for just 1.59x sales despite having grown those sales by an average of 41.5% over the last five years and expectations of a huge acceleration in that sales growth this year. The firm is extremely cheap on earnings as well, trading at just 6.8x 2011 and 5.8x 2012 expectations. However, there are some questions about its very high inventory growth.
FEI Company (FEI, $37.42) is a small-cap that focuses on the very small. It supplies instruments for nanoscale imaging, analysis and prototyping. Nanotechnology could well be “the next big thing” and FEI seems well positioned to benefit. It is not a very large industry yet, and sometimes such innovations can take much longer to come to fruition than people initially expect. Valuation is higher than average, but then again, so is the potential. FEIC is selling for 15.9x 2011 and 14.1x 2012 EPS.
Joy Global (JOYG, $89.89) is the worldwide leader in mining equipment. It is the ideal “picks and shovels” play on the growth in demand for non-oil natural resources such as coal and copper. I think this is a very strong candidate for a long-term strategic holding as the growth of places like China and India will result in ever more demand for minerals and thus for more mining equipment.
Snapping it up when it has a Zacks #1 Rank and rising revenue estimates seems like a good idea to me. JOYG is trading for 15.3x this year and 12.7x next year’s earnings (fiscal year ends in October).
The Cooper Companies (COO, $75.63) is a contact lens and medical device firm. It has the highest price-to-sales ratio on the list, but those are supported by solid net margins of 13.73%. Valuation on an earnings basis is a bit on the steep side at 18.5x 2011 and 16.6x 2012 EPS.
Over the long term, demographics should make contact lenses a growth market. However I would not be surprised if this firm were taken over by one of the larger medical device firms.
Keep in mind that a screen should just be a starting point for you investment investigation. However, starting with the Zacks #1 Ranked firms is always a good idea. Finding those that show promise on the top line as well as the bottom line might prove to be an even better idea.
| Company | Ticker | Price/Sales | % Change Curr FY Est – 4 wk | % Change Next FY Est – 4 wk | 5 yr Hist Sales Growth | Annual Sls This Yr/Last Yr | Sales Surprise | Net Margin – 12 mo. |
| Heartland Paymt | HPY | 0.41 | 7.51% | 7.35% | 14.41% | 12.84% | 3.05% | 1.46% |
| Brf-Brasil Food | BRFS | 1.19 | 5.78% | 8.54% | 33.41% | 49.82% | 0.97% | 5.25% |
| Telecom Argenti | TEO | 1.28 | 1.27% | 7.10% | 10.56% | 18.68% | 3.99% | 13.08% |
| Suncor Energy | SU | 1.57 | 2.09% | 4.83% | 23.78% | 44.44% | 11.14% | 10.46% |
| Spreadtrum-Adr | SPRD | 1.59 | 1.67% | 1.23% | 41.54% | 229.63% | 3.08% | 20.44% |
| Fei Company | FEIC | 2.06 | 1.34% | 2.52% | 6.20% | 9.85% | 5.95% | 10.52% |
| Joy Global Inc | JOYG | 2.37 | 3.30% | 2.45% | 12.05% | -2.06% | 2.65% | 13.46% |
| Cooper Cos | COO | 2.86 | 1.02% | 1.19% | 7.51% | 7.23% | 3.35% | 13.73% |
COOPER COS (COO): Free Stock Analysis Report
HEARTLAND PAYMT (HPY): Free Stock Analysis Report
JOY GLOBAL INC (JOYG): Free Stock Analysis Report
SPREADTRUM-ADR (SPRD): Free Stock Analysis Report
SUNCOR ENERGY (SU): Free Stock Analysis Report
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