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Analysts Predict Solid EPS, Revenue Gains for B400 Companies

John A. PrestboJohn A. Prestbo

Barron’s 400 Index companies are predicted to report solid gains in per-share earnings and revenue over the same period in 2015. And, if the estimates materialize, the Barron’s 400 once again will outshine the S&P 500.

The forecasted year-over-year increase in earnings per share is 63% greater for the Barron’s 400 than for the S&P 500. In revenue, the Barron’s 400 is expected to outgain the S&P 500 by two and a half times. Here is the “box score” of security analysts’ prognostications compared to actual results a year earlier.

Median 3Q 2016 Estimate vs. Median 3Q 2015 Actual
EPS Revenue
Barron’s 400 8.16% 6.63%
S&P 500 4.99% 2.59%

Typically, analysts begin their estimates on the optimistic side, subsequently trimming as the quarter in question draws near. That was mostly the case with third quarter forecasts this year for both the Barron’s 400 and the S&P 500. But the S&P 500 had a minor uptick in revenue expectations.

Trend of Summed 3Q Estimates Over Past Six Months
EPS Revenue
Barron’s 400 -3.46% -1.07%
S&P 500 -4.54% 0.33%

Analysts may have shrunk their projections too far. Twenty Barron’s 400 companies already have reported for the third quarter because they are on nonstandard fiscal years. Their per-share earnings surpassed forecasts by a median of 2.75%. But that was surpassed by 28 early-reporting companies in the S&P 500, whose per-share earnings posted a median surprise of 3.8%.

Sector comparisons show the financially strong Barron’s 400 companies prevailing in most, but not all. Here are the details:

Median 3Q 2016 Estimate vs. Median 3Q 2015 Actual
Earnings per Share Revenue
Barron’s 400 S&P 500 Barron’s 400 S&P 500
Consumer Discretionary 6.33% 6.35% 6.04% 3.66%
Consumer Staples 6.89% 3.23% 4.39% 1.43%
Energy 7.46% -56.85% 10.11% -9.26%
Financials 8.73% 3.88% 6.60% 1.70%
Health Care 10.66% 7.97% 11.87% 6.64%
Industrials 7.23% 3.30% 5.83% 1.30%
Materials 3.12% 5.36% 1.24% -0.39%
Technology 6.33% 9.27% 7.01% 6.43%
Telecommunications 29.25% -13.25% 20.86% 0.53%
Utilities -26.64% 5.21% 3.21% 6.61%

Many of the differences between the Barron’s 400 and the S&P 500 stem from the fact that, with 100 more companies, the S&P 500’s sectors have more components. That is certainly the case with energy, which is clearly the S&P 500’s Achilles heel. The Barron’s 400 has 14 energy companies—none of which are predicted to have lower per-share earnings than the year before. The S&P 500 has 37, of which 24 are expected to post year-over-year declines. Limiting the energy sector to strong, growth-focused companies benefits the Barron’s 400 tremendously.

The S&P 500 earnings expectations come out on top in consumer discretionary (by a whisker), materials, technology and utilities. But of these, only utilities are in the S&P 500’s favor in revenue. Here, too, is a major variance in component count. The S&P 500 has 28 utilities while the Barron’s 400 has only two. Utilities and telecommunications are inconsequential sectors in the Barron’s 400; there are just four telecom components to the S&P 500’s five, with only two overlaps.

Though the Barron’s 400 components are equally weighted, comparative analysis by market-capitalization groupings also is illuminating. The table below shows that the largest companies tend to have the biggest forecasted year-over-year increases.

Median 3Q 2016 Estimate vs. Median 3Q 2015 Actual
Earnings per Share Revenue
Barron’s 400 S&P 500 Barron’s 400 S&P 500
Mega Cap (>$10 billion) 9.34% 5.83% 6.24% 3.57%
Large Cap ($3 bln-$10 bln) 8.59% 5.64% 5.77% 2.59%
Mid Cap ($1 bln-$3 bln) 7.74% 1.84% 6.75% 2.02%
Small Cap ($500m-$1 bln) 3.42% N.A. 10.31% N.A.
Micro Cap (< $500 mln) 4.45% N.A. 4.28% N.A.

This is the first quarter this year that small caps and micro caps are predicted to contribute to the overall gains of the Barron’s 400. Revenue gains weren’t a problem in this year’s first two quarters, but converting that into profits was overly challenging. If these forecasts pan out, it indicates that these smaller companies are getting a handle on cost controls.

For now, it’s a matter of waiting till the reports roll in to see if the Barron’s 400 growth expectations actually occur. The experience of the first two quarters suggests the estimates will prove true with room to spare.

John Prestbo, senior advisor to MarketGrader Capital, was formerly editor and executive director of Dow Jones Indexes. He was also chairman of the Dow Jones Index Oversight Committee. During his time at Dow Jones Indexes he worked, along with Barron's and MarketGrader, on the development of the Barron's 400 Index. Prior to that, Mr. Prestbo worked as an editor and writer for The Wall Street Journal in various capacities, including page-one editor, commodity news editor and markets editor. Mr. Prestbo has co-authored or edited several books over the past 30 years. The most recent was "The Market's Measure: An Illustrated History of America Told Through the Dow Jones Industrial Average," published by Dow Jones Indexes in 1999 and "Barron's Guide to Making Investment Decisions" which he helped to compile and edit in 2006. Mr. Prestbo won the University of Missouri Award for Distinguished Business Writing in 1967 and the George M. Loeb Achievement Award for Business Writing in 1968. In 2007, he won the William F. Sharpe Indexing Lifetime Achievement Award. That same year, he was honored for his leadership by Dow Jones Indexes during its celebration of 10 years as a separate business unit.

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