Much of 2017 Growth Will Rely On Energy
Now that 2016 is in the books and the focus is fully on 2017, we wanted to dig into the key drivers for the expected rebound in growth. After two years of flat growth, consensus estimates suggest earnings growth of 10.4% for the S&P 500 in 2017. A rebound in oil prices will be a key driver for the energy sector, which will have the best growth out of all eleven sectors as earnings will finally grow after contracting for two consecutive years. In the aggregated estimates, financials, information technology and materials are the sectors that will follow energy’s lead with double-digit earnings growth in 2017. They will also largely be the drivers of revenue growth, which is expected to improve to 5.1% in 2017, from less than 3% in 2016.
Digging even deeper, CFRA Research identified the ten companies with the largest year-over-year profit and revenue growth in calendar-year 2017 (see tables 1 and 2). Only three companies made both lists: Cimarex Energy, Chevron Corporation and Concho Resources, all of which are energy companies. We would point out that when coming off such a deeply negative base of earnings and revenue growth, like the energy sector is, lofty growth rates are more easily achieved.
The composition of the top ten earnings growth companies varies across six of the 11 S&P 500 sectors. Energy had the largest representation with the three companies mentioned above benefiting from a recent stabilization in oil prices above $50 a barrel, an expectation in the market for those prices to rise over the course of the year, cost cuts, and exposure to the Permian Basin which has solid economics. Of note, CFRA Research has an underweight recommendation on the energy sector given the stretched valuations (the next-twelve-month price-to-earnings ratio is three times higher than the eight year average prior to 2014), and potential for turbulence in oil prices in 2017.
Freeport-McMoRan’s growth outlook, by our analysis, is likely also related to expectations for improving commodity prices as oil, copper and gold have hit inflection points.
Topping the profit growth list is Micron Technology, the only tech company in the top 10. The semiconductor industry has been a key contributor to tech earnings growth in the last year and is expected to show growth of 16.3% in 2017 (vs. 20.5% in 2016), second only to the 22.1% expected from the internet software and services industry. Micron is expected to benefit from a bottoming in the pricing of its key product that occurred in the second half of last year. In addition, demand for Dynamic Random Access Memory (DRAM), especially as it relates to mobile exposure, should exceed supply.
A couple of unexpected financial companies also land on the earnings growth list. First is Leucadia National Corporation, a holding company for a number of different segments. Its largest business by assets is investment bank Jefferies Group, with its second-largest business beef processor National Beef. The turnaround in earnings is expected to be driven by both businesses as the financial unit benefits from an improving financial marketplace and less regulation, while National Beef is seeing improved margins as feed costs decline and the supply of cattle rises.
American International Group (AIG) is also on the list as 2017 expectations compare to a transformational year for the insurance giant that included large $5.6 billion reserve charge taken in the fourth quarter, creating in a low bar for the new year.
Energy is the most heavily-represented sector within the revenue growth list as it accounts for seven of the top-10 companies. It also accounts for more than 50% of the 30 companies with the best growth in the index. Within the top 10, all seven energy companies come from the oil, gas and consumable fuels industry group, while none coming from the energy equipment and services industry group. We attribute this to equipment companies being less leveraged to oil prices.
Synchrony Financial tops the list as the company has been able to quickly grow net interest income in an improving economy and forward growth should be driven by increases in purchase volumes, loan receivables, and average active accounts, aided by portfolio acquisitions.
Our evaluation of the 12-month potential of stocks is indicated by STARS:
5-STARS Strong Buy—Total return is expected to outperform the total return of a relevant benchmark by a wide margin over the coming 12 months, with shares rising in price on an absolute basis.
4-STARS Buy—Total return is expected to outperform the total return of a relevant benchmark over the coming 12 months, with shares rising in price on an absolute basis.
3-STARS Hold—Total return is expected to closely approximate the total return of a relevant benchmark over the coming 12 months, with shares generally rising in price on an absolute basis.
2-STARS Sell—Total return is expected to underperform the total return of a relevant benchmark over the coming 12 months, and the share price is not anticipated to show a gain.
1-STARS Strong Sell—Total return is expected to underperform the total return of a relevant benchmark by a wide margin over the coming 12 months, with shares falling in price on an absolute basis.
NR – Not ranked.
Article by Lindsey Bell, CFRA Research