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Over the past three years, corporate profits underlying the S&P 500 index have rebounded from a negative number to a record sum. Soaring profits, in turn, have helped to justify a quick rise in stock prices. But profits for the current quarter are expected to increase just 5.8% from a year ago.
That's slow by a variety of measures. Six months ago Wall Street was forecasting more than twice as much growth for this quarter. The compounded average growth rate of the past two decades is over 11%. During the same quarter a year ago, the growth rate was 16%.
The slowdown is more a return to normalcy than a stumble. U.S. companies have turned record percentages of their sales into profits during the recovery, partly because they have held off on costly hiring for as long as possible, and partly because they have enjoyed booming demand in overseas markets, notably China.
But China's government on Monday cut its target for this year's economic growth to 7.5%--more than double the U.S. rate, but China's slowest rate in eight years. And in January, America added more jobs than during any January since the housing bubble. (Numbers for February are due out Friday.) Jobs growth is fine news, but it suggests U.S. companies have already tapped the easiest sources of profit gains.
Investors, then, should lower their return expectations for stocks, which after Tuesday's market plunge sell for almost precisely their average historical price relative to trailing earnings. They can also seek out companies that are bucking the earnings slowdown. Below are listed a handful that turned up on a recent screen for companies with rising earnings estimates for the current quarter and current fiscal year as well as a record of topping earnings estimates in their most recent three quarterly reports.
Lincoln Electric (LECO) makes welding products, including equipment and consumables. That gives it exposure to worldwide construction and industrial markets, including pipelines and power plants. Despite a financial crisis in Europe last quarter, Lincoln increased sales 23% from a year earlier on a rise in U.S. manufacturing and exports. Earnings are expected to climb 19% this year. The stock sells for 15 times the 2012 forecast.
On Assignment (ASGN) is a staffing firm that specializes in a narrow group of jobs with relatively high pay and strong demand: travelling nurses and doctors, clinical researchers, engineers and so on. Its sales last quarter jumped 34%. Management says that the percentage of temporary workers in the workforce is only slightly above its low reached in 2001 and 2002, following the dotcom stock bust, and that companies will now likely look to temps as they add workers while staying cautious on the economic recovery. Wall Street expects the company's earnings per share to rise 25% this year. The stock sells for just under 17 times projected 2012 earnings.
Red Robin Gourmet Burgers (RRGB) has 465 restaurants in the U.S. and Canada. The chain hired a new chief executive in 2010, and a turnaround seems to be afoot. Same-store sales growth, a closely watched measure of whether results are improving at longstanding locations, have increased for six straight quarters. Restaurant profit margins expanded by two percentage points last year, to 19.8%. The stock price is up more than 40% in a year. Wall Street expects Red Robin's earnings per share to climb 18% this year. Shares fetch 18 times the 2012 forecast.
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