There are twelve dozen ways to go about finding a "good" investment, but one of the best is analyzing historical EPS.
EPS is a popular business performance metric because it tells us how much we earned per share of stock. Analysts base their careers on the ability to accurately predict the direction of earnings for us. Why? EPS has the ability to significantly move price levels. In other words, stock price is closely tied to EPS. Unfortunately, companies know this and have developed ways to manipulate EPS with overstated sales, understated expenses and stock buybacks. Ultimately, it's up to the investor to research each stock, even if the company is experiencing high EPS growth.
Let The Research Begin
I started my research by asking BusinessTrends to create a list of the top 10 companies based in the United States with the highest EPS growth. This is a custom report so you won't find it on their website. The good news is that I have permission to share it with you. Subscribers of SeekingAlpha products can also download the report as a pdf.
This is the list they gave me. It only includes companies with a share price over $5.
You will notice 11 companies because DXC Technology (DXC) was thrown out of the results due to abnormal reporting and a negative YoY quarterly growth rate. What's left are 10 companies with the potential to have another great year in 2017.
The Search For Stars
The companies in the list above all have an annual EPS growth that's higher than 500%. Some of them are growing due to sales growth and operational efficiencies. Others are growing due to accounting manipulation. The ideal company is growing because of revenue growth and operational efficiencies, not buybacks or one-time adjustments. I'm looking for stars and I found four. This is a review of the best and worst on the list.
Chico's FAS (NYSE:CHS) is an apparel store in the consumer cyclical sector. It's trading at $13.17 and has a consistently growing EPS. For the fifty-two weeks ended January 28, 2017 the Company reported net income of $91.2 million, or $0.69 per diluted share, compared to net income of $1.9 million, or $0.01 per diluted share last year. That said, net sales decreased for the year from $2.5 billion compared to $2.7 billion in fiscal 2015. Comparable sales declined by 3.7% due to reduced transaction count and lower ticket. In a nutshell, the company has strong EPS growth, but it's due to a goodwill impairment charge in 2016. If 2017 had the same impairment charge, EPS would have been negative. In other words, this is one of those false flag companies. Still, the company has a one year price return of 34.86% so it appears some investors took the bait.
Penn National Gaming (NASDAQ:PENN) is a resort and casino company also in the consumer cyclical sector. It trades at $18.32 and has a consistently growing EPS. It's worth mentioning that PENN is also number 25 on a list of companies with the highest number of insiders selling shares -- 16 corporate insiders sold shares last month. How does a company make it to the top ten list for EPS growth and insider selling? In a nutshell, this company had a remarkable increase in earnings per share last year due to an increase in revenues and management knows we won't see the same growth in 2017 so they're selling. Management's already telling analysts to expect a significant decrease in diluted EPS, from a 2016 actual EPS of $1.19 to a 2017 expected EPS of $.31. This is a false flag company.
Carrols Restaurant Group (NASDAQ:TAST) is in the consumer cyclical sector. Trading at a price of $13.75, the company experienced a large increase in TTM EPS, which is $1.02. TAST had a steady increase in EPS over the last twelve months as gross margin remained flat at 20%, while operating margin deteriorated slightly. Growth is due to an increase in traffic and ticket as well as extensive acquisitions. The company posted a "3.2% comparable restaurant sales increase for the fourth quarter on top of the prior year period increase of 5.1%". In 2016, TAST "acquired 56 BURGER KING restaurants and announced a 43-unit acquisition in December". Will we see this level of growth again next year -- probably not, but we should continue to see some topline growth. That said, operating margins are hovering around 4%, which is typical. This is why I'm not a fan of the restaurant industry. I wouldn't call this a false flag, but don't expect to see the same level of growth next year. Either way, operating margins don't give much room to breathe. We are passing on this.
Eagle Pharmaceuticals (NASDAQ:EGRX) is a specialty drug manufacturer in the healthcare sector. Trading at a price of $87.28 -- this is after a 10.52% YoY drop in price -- EGRX is the most expensive company on the list (and for good reason). According to a recent company press release the increase is due to a 92% increase in market share, which is amazing. TTM EPS is $4.97 due to incredibly high revenue growth of 186%. I think this is one of the best looking companies on the list. Revenues are based on measures that will likely continue into 2017 and both gross and operating margin are improved. This is not a false flag; this is a star. Growth here is real and likely to continue.
Brady (NYSE:BRC) is a security and protection services company in the industrials sector. Trading at a price of $37.15, the company experienced declining revenue growth last year. Brady's TTM EPS is $1.85. EPS has gone up steadily throughout the year with a flat gross margin of around 50%. Operating margins have increased significantly, however, from 4.59% in the beginning of the year to 11.40% last quarter. Improvements are due to operational efficiencies, but I don't expect to see this level of improvement next year and sales are expected to decline. Here's a quote from the CFO:
Our fourth quarter revenues were approximately in line with our expectations coming into the quarter; finishing with an organic sales decline of 0.9 percent. Demand has been choppy and we lack a clear catalyst for improved near-term sales. -Brady's Chief Financial Officer, Aaron Pearce.
We are going to pass on Brady as well at this time.
TransUnion (NYSE:TRU) is a business services company in the industrials sector. Trading at a price of $37.97, the company experienced revenue growth of 13.15%. TransUnion's TTM EPS is $.65. In 2016, the company ended the year at $.66, up from $.04 in 2015 and -$.09 in 2014. The company is a steadily growing EPS and experienced a modest increase in gross margin over the past year from 64% to 66%. Operating margin is also up from 13.63% to 17.63%. Revenue increased for the past three years along with net income due to a steady increase in price and product offering. Cash provided by operating activities is in line with net income growth. Interest expense also dropped significantly. Total revenue was up 13% in 2016 and 15% in 2015. The company is on a strong campaign to make acquisitions, but revenue growth is organic and across all platforms, with Decision Services growing 19%. Revenue from Decision Services accounted for approximately 20% of USIS revenue in 2016. I believe this trend will continue as demand for predictive analytics increases. TRU is a star.
Ameresco (NYSE:AMRC) is an engineering and construction company in the industrials sector. Trading at a price of only $6.20, the company experienced YoY revenue growth of 3.23%. Ameresco's TTM EPS is $.25. This company has grown EPS over the last four quarters. Gross margin is flat at 20% and operating margin has increased marginally from 2.04% to 3.65%. Revenues increased 3% to $651.2 million, and net income is $12.0 million compared to $0.8 million last year. Likewise, annual EPS is $.26, up from $.02 in the prior year. This is great, but can they do it again? Total project backlog is up 11%; contracted backlog is up as well. Ameresco expects to earn between $665 million and $700 million in 2017, which is at least $10 million more than 2016. The company expects net income per diluted share "to be in the range of $0.37 to $0.43 for 2017", which is considerably higher that it was in 2016 at $.26. While operating margins are slim, we're going to buy based on increased demand.
YRC Worldwide (NASDAQ:YRCW) is a trucking company in the industrials sector. Trading at a price of $10.02, the company saw a decline in revenue of 2.79%. YRC Worldwide's TTM EPS is $.65. YRCM has a volatile EPS, which increased over 100% last year. Gross margin is one of the highest on the list at 71% and has remained flat over the last year along with operating margin. Yes, this company experienced a huge increase in EPS in 2016, but it had nothing to do with growth. This is an accounting illusion. We're going to pass.
Nanometrics (NASDAQ:NANO) is a semiconductor equipment company in the technology sector. The company is trading at a price of $28.03 after a record YoY increase in revenue of 18.02%. Nanometrics' TTM EPS is $1.74. Annual EPS has grown significantly over the last year from $0.12 to $1.75. Gross margin remained relatively flat while operating margin increased significantly from 3.50% to 13.16%. Gross profit increased each year over the past three years, along with operating income. Growth is due to gains in market share that the company expects to continue into 2017. "Our year-on-year revenue growth of 18% significantly outperformed overall industry spending," said Dr. Timothy J. Stultz, president and chief executive officer. Over the past three years the company increased revenues by over 50% "while keeping operating expenses relatively flat, resulting in incremental operating margins in the 60% to 65% range, well above our target business model." Management thinks revenues will be over 20% higher in the coming year. This is a buy for us.
Bottom line: A Star is Born
CHS, PENN, TAST, BRC and YRCW don't have the fundamentals to support another year of EPS growth like last year. EGRX, TRU, AMRC, NANO are our picks for 2017. If I had to choose two, it would be EGRX and NANO. If I had to choose one, it would be EGRX.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in EGRX, TRU, AMRC, NANO over the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.