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Aug. 8, 2017, 6:56 a.m. EDT

Trump is right about record earnings — and these companies are getting even more profitable

Facebook, Micron Technology and Broadcom are among companies that stand out in the S&P 500

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By Philip van Doorn, MarketWatch


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President Donald Trump

President Trump made a bold claim on Aug. 1, using Twitter to quote Fox Business host Stuart Varney:

The S&P 500 Index trades for 18.8 times aggregate consensus earnings estimates for the current year, the highest it’s been in this eight-year bull market. So to support stock prices at this stage of the cycle, S&P 500 /zigman2/quotes/210599714/realtime SPX -0.39%  companies had better be on pace to set record earnings .

As president for less than seven months, Trump can’t take credit for the U.S. economy, and bragging about stock-market performance could backfire, depending on the timing of the inevitable market decline.

Still, the good news for investors is that it appears Varney and Trump are correct. S&P 500 companies are expected by analysts to earn a record $131.67 a share in 2017, an increase of 10.3%, according to FactSet. And analysts forecast earnings growth of 11.1% for 2018 and 9.5% for 2019.

Apple Inc. /zigman2/quotes/202934861/composite AAPL +0.48% didn’t set an earnings record when it released fiscal third-quarter results on Aug. 1, but it beat analysts’ expectations and contributed to the overall earnings record that Trump has been crowing about. Earnings were up 12% to $8.72 billion, and earnings per share jumped 18% to $1.67.

So maybe setting an earnings record shouldn’t be much of a surprise this far into the bull market. Investors, of course, want to know how long this current bull cycle can continue, especially during a prolonged period of slow GDP growth. In a monthly strategy letter, Christopher Hyzy, the CIO of Bank of America’s Global Wealth & Investment Division, and his research team said Tuesday that the world economy had entered a “new cycle” that might be called “The Tortoise and the Hare Cycle.”

They wrote: “The tortoise is the global economy (and lagging regulatory framework), and the hare is the pace of innovation!” They reiterated their target level of 2,450 to 2,500 for the S&P 500, the upper range of which is only 1% higher than Tuesday’s close. “[W]e also believe the risk is to the upside toward 2,600 for the second half of the year given our view that ‘this new cycle’ continues well into 2018,” they added.

That’s comforting. But what might also be useful to investors is knowing which companies are becoming more profitable while increasing their sales rapidly. After all, any company’s earnings can be skewed by one-time events, good or bad.

So we have put together a list of the 20 S&P 500 companies that have done two things: 1. increased sales per share the most over the past 12 reported months through Aug. 1; 2. improved gross profit margins.

A company’s gross margin is its sales, less the cost of goods sold, divided by sales. This measure excludes costs that affect the bottom line. However, it is useful because it shows whether a company’s core business is getting better.

Here’s the list:

Company Ticker Industry Sales per share - past 12 months Sales per share - year-earlier 12-month period Growth of sales per share Gross margin - past 12 months Gross margin - year-earlier 12-month period
Anadarko Petroleum Corp. Oil and Gas Production $22.90 $15.50 48% 26.08% -8.27%
Facebook Inc. Class A /zigman2/quotes/205064656/composite FB Internet/ Online Services $11.29 $7.68 47% 86.26% 84.50%
E-Trade Financial Corp. /zigman2/quotes/205731930/composite ETFC Investment Banks/ Brokers $8.02 $5.47 47% 89.30% 83.14%
Applied Materials Inc. /zigman2/quotes/209393259/composite AMAT Electronic Production Equipment $11.87 $8.16 45% 43.65% 40.97%
Ameriprise Financial Inc. /zigman2/quotes/203836224/composite AMP Investment Banks/ Brokers $78.86 $54.78 44% 37.66% 36.61%
EQT Corp. /zigman2/quotes/209305691/composite EQT Oil and Gas Production $14.10 $10.00 41% 30.44% 7.19%
Total Systems Services Inc. Data Processing Services $25.38 $18.02 41% 33.82% 29.71%
Broadcom Ltd. /zigman2/quotes/200646538/composite AVGO Semiconductors $37.78 $27.12 39% 37.74% 33.59%
Range Resources Corp. /zigman2/quotes/205059849/composite RRC Oil and Gas Production $8.78 $6.43 37% 19.32% -21.55%
Vertex Pharmaceuticals Inc. /zigman2/quotes/202259802/composite VRTX Biotechnology $8.58 $6.40 34% 89.08% 87.65%
Cabot Oil & Gas Corp. /zigman2/quotes/205804016/composite COG Oil and Gas Production $3.41 $2.54 34% 26.68% -8.28%
Incyte Corp. /zigman2/quotes/204510994/composite INCY Biotechnology $6.62 $4.94 34% 92.33% 91.87%
Netflix Inc. /zigman2/quotes/202353025/composite NFLX Movies/ Entertainment $23.01 $17.41 32% 33.79% 30.93%
Pioneer Natural Resources Co. /zigman2/quotes/206736173/composite PXD Oil and Gas Production $27.34 $20.79 32% 13.27% -7.99%
Align Technology Inc. /zigman2/quotes/201592768/composite ALG Medical Specialties $15.20 $11.65 30% 77.61% 75.92%
Nvidia Corp. /zigman2/quotes/200467500/composite NVDA Semiconductors $11.65 $8.93 30% 59.16% 56.35%
Micron Technology Inc. /zigman2/quotes/205710729/composite MU Semiconductors $15.48 $11.92 30% 33.92% 22.66%
Lam Research Corp. /zigman2/quotes/208077897/composite LRCX Electronic Production Equipment $43.57 $33.61 30% 46.63% 46.00%
EOG Resources Inc. /zigman2/quotes/204634330/composite EOG Oil and Gas Production $16.78 $13.02 29% 14.10% -1.37%
Quanta Services Inc. /zigman2/quotes/203420082/composite PWR Engineering and Construction $52.26 $41.21 27% 12.89% 11.55%
Source: FactSet

We have looked at sales per share, rather than revenue, because the per-share numbers bake in any dilution caused by the issuance of new shares to fund acquisitions or executive bonuses. They also factor in any reduction to the share count from stock buybacks.

The six oil producers on the list show the biggest improvements in gross margins, reflecting the recovery for oil prices in 2016, which has stalled this year. But margins have increased because of improvements in efficiency. So there’s some good news. Still, the price of West Texas crude oil CL1 0.00%  has declined 8% this year, helping push the S&P 500 energy sector down 10% (with dividends reinvested), while the entire index has returned 12%. The only other sector taking it on the chin this year is telecommunications services, which is down 5%.

Apple didn’t make the list because the company’s sales per share over the past 12 months increased only 7% from the previous 12-month period. But the company’s gross margin increased to 41.75% from 38.44%.

Here’s what sell-side analysts think about the group:

Company Ticker Share ‘buy’ ratings Share neutral ratings Share ‘sell’ ratings Closing price - Aug. 1 Consensus price target Implied 12-month upside potential
Anadarko Petroleum Corp. 74% 23% 3% $44.70 $62.23 39%
Facebook Inc. Class A /zigman2/quotes/205064656/composite FB 89% 7% 4% $169.86 $188.66 11%
E-Trade Financial Corp. /zigman2/quotes/205731930/composite ETFC 67% 33% 0% $41.16 $45.14 10%
Applied Materials Inc. /zigman2/quotes/209393259/composite AMAT 79% 17% 4% $44.10 $52.05 18%
Ameriprise Financial Inc. /zigman2/quotes/203836224/composite AMP 50% 50% 0% $145.92 $148.09 1%
EQT Corp. /zigman2/quotes/209305691/composite EQT 50% 50% 0% $63.93 $75.66 18%
Total Systems Services Inc. 56% 44% 0% $64.00 $67.74 6%
Broadcom Ltd. /zigman2/quotes/200646538/composite AVGO 94% 6% 0% $248.39 $276.76 11%
Range Resources Corp. /zigman2/quotes/205059849/composite RRC 78% 19% 3% $20.30 $35.23 74%
Vertex Pharmaceuticals Inc. /zigman2/quotes/202259802/composite VRTX 74% 26% 0% $153.20 $179.56 17%
Cabot Oil & Gas Corp. /zigman2/quotes/205804016/composite COG 67% 33% 0% $25.36 $29.26 15%
Incyte Corp. /zigman2/quotes/204510994/composite INCY 76% 24% 0% $128.76 $146.94 14%
Netflix Inc. /zigman2/quotes/202353025/composite NFLX 64% 29% 7% $182.03 $185.21 2%
Pioneer Natural Resources Co. /zigman2/quotes/206736173/composite PXD 90% 10% 0% $163.27 $206.51 26%
Align Technology Inc. /zigman2/quotes/201592768/composite ALG 100% 0% 0% $169.43 $188.17 11%
Nvidia Corp. /zigman2/quotes/200467500/composite NVDA 51% 35% 14% $164.49 $142.63 -13%
Micron Technology Inc. /zigman2/quotes/205710729/composite MU 84% 16% 0% $28.34 $43.24 53%
Lam Research Corp. /zigman2/quotes/208077897/composite LRCX 86% 14% 0% $157.46 $190.76 21%
EOG Resources Inc. /zigman2/quotes/204634330/composite EOG 59% 41% 0% $94.46 $103.58 10%
Quanta Services Inc. /zigman2/quotes/203420082/composite PWR 71% 29% 0% $34.44 $41.96 22%
Source: FactSet

Analysts have majority “buy” ratings on all but two of those companies.

If you see any stocks that interest you, your next step is to do your own research to carefully consider the companies’ long-term prospects, hopefully with the assistance of a broker or investment adviser.

This article was originally published on Aug. 2, 2017.

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$ 233.70
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$ 64.44
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1.78%
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$ 40.22
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0.40%
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Philip van Doorn covers various investment and industry topics. He has previously worked as a senior analyst at TheStreet.com. He also has experience in community banking and as a credit analyst at the Federal Home Loan Bank of New York.

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