All
else equal, stock prices correlate more to earnings per share (EPS)
than to any other single factor. That is, if a stock’s EPS moves up
sharply over the next year, so will its share price, albeit not by
exactly the same amount. Positive earnings surprises (reported
earnings exceed stock analysts’ forecasts) are another factor that
frequently moves share prices higher.
With that in mind, here are two under the radar
stocks that made shareholders happy by consistently
exceeding expectations in 2018 and could continue their
winning ways this year.
Automatic Data Processing
Automatic Data Processing (ADP) provides payroll processing,
benefits management, tax reporting and related data processing
services to mid-sized companies.
With 13 of the 19 stock analysts that are following it rating ADP at
“hold,” which often translates to “sell,” ADP is a contrarian play.
One reason for analysts’ sour outlook is that ADP had been slow to
update its software to reflect current industry practices, thus
hurting its competitive position. However, ADP has gone a long way
towards resolving those issues. It also recently acquired an
international provider of payroll management services, considerably
extending its global reach.
Thanks to those efforts, ADP has beat analyst earnings forecasts in
each of its last four quarters. For instance, for its most recent
quarter ending in September, earnings came in at $1.20 per share,
$0.09 above forecasts, and up 28% over year-ago.
ADP, currently paying dividends equating to a 2.4% yield, has a
strong dividend growth track record. It announced an 11% raise in
December 2017, followed by a 10% hike last June, and then a 14%
raise in November. Adding those up, ADP’s recent $0.79 per share
dividend was 25% above its year-ago payout.
Probably due to its string of consistent positive earnings surprises
and hefty dividend hikes, ADP returned 14% (share price changes plus
dividends) for 2018 compared to the S&P 500’s 6% loss.
The good new is that analysts are only forecasting 7% EPS growth for
ADP in 2019, leaving plenty of room for further upside surprises.
Motorola Solutions
Split off from Motorola Inc. in 2011, Motorola Solutions (MSI)
provides communications services to government and police agencies
and other large enterprises. Products include two-way radios, and
other voice and data communications products. However, public safety
communications systems requirements are rapidly evolving.
Instead of operating stand-alone communications systems, the federal
government will soon require public safety agencies to be
interconnected via its FirstNet broadband network, and Motorola
Solutions intends to be a major player.
Motorola has already made significant progress in that
transformation. Essentially recording zero revenue growth from its
2011 spinoff through 2016, Motorola’s recorded 13% year-over-year
revenue growth in its September quarter. Earnings at $1.94 per share
were $0.22 above analyst forecasts and up 27% from September 2017.
Motorola is paying a 1.9% dividend yield and has been growing its
payout around 10% annually.
Despite the down market, Motorola Solutions shareholders enjoyed a
30% return in 2018. Analysts are only forecasting 7% EPS growth for
2019, so there’s plenty of upside potential here.
Those are my ideas. But do your own research. The more you know
about your stocks, the better your results.
published 1/11/19
