The significance of a company surpassing analysts’ expectations in its quarterly results may be questioned, given that analysts often set a deliberately low bar, possibly influenced by the company’s projections.
This phenomenon frequently results in a high “beat rate,” exceeding 70% each earnings season. Furthermore, a reported “beat” could signify a net loss that is simply less than anticipated.
To assess impressive quarterly results, a combination of improved profit margins and increased sales serves as a more substantial criterion.
This entails analyzing gross profit margins and operating margins concurrently.
An evaluation of the top 20 companies in the S&P 500, which demonstrate the most significant increases in sales while simultaneously expanding these crucial profit margins, indicates that four of these entities, collectively termed the “Magnificent Seven,” clear the screening process.
Deutsche Bank analysts underscore that the collective market value of this exclusive group, including Microsoft Corp., Apple Inc., Nvidia Corp., Amazon.com Inc., Meta Platforms Inc., Alphabet Inc., and Tesla Inc., exceeds the combined stock markets of Japan, France, and the United Kingdom.
However, it’s important to note that approximately 20% of S&P 500 companies operate on fiscal years that don’t align with the calendar year, resulting in a lack of clear starting or ending points for the quarterly earnings season.
As of now, 338 companies in the benchmark index have reported results for fiscal quarters ending November 15 or later.
Conventional metrics like net income or earnings per share may present a skewed picture due to exceptional events impacting the bottom line, such as goodwill write-downs, noncash accounting adjustments, or extraordinary legal expenses.
As a result, attention is redirected towards companies demonstrating the most substantial year-over-year increases in quarterly sales while simultaneously enhancing gross profit margins and operating margins.
Gross margin, indicative of a company’s pricing power, is determined by dividing net sales by the cost of goods or services sold. A widening gross margin alongside rising sales is viewed favorably.
Net operating margin goes a step further by deducting additional overhead and non-production-related expenses from earnings before interest and taxes, offering a more comprehensive gauge of profitability.
Among the 263 companies analyzed, covering various sectors except financials, 20 companies stand out for achieving the highest growth in quarterly sales while simultaneously expanding both gross and operating margins.
The top three companies on this roster, along with Royal Caribbean Group ranking sixth, all operate in the travel and leisure sectors, demonstrating recovery from the COVID-19 pandemic.
Notably, four of the Magnificent Seven—Meta, Microsoft, Alphabet, and Amazon—are included in this distinguished list.
Explanations are provided for why the remaining three, Nvidia, Apple, and Tesla, did not secure a spot, highlighting specific aspects of their recent earnings reports and financial performance.
