Earnings are exactly what they sound like. They’re everything that’s left over after everything else has been paid. Earnings are analogous to the money you and I have after we pay all of our bills. Not much is more important in personal finance. It should come as no surprise then that stocks with impressive earnings growth are attractive.
Earnings growth is one of the most important factors that causes a stock’s share price to rise or fall. However, two companies with similar reported earnings growth might not be as similar as they appear. If one of those companies has used stock buybacks to increase earnings per share while the other has not, there is a difference. One has real growth and the other has engineered it. Buybacks are generally considered positive but other forms of engineering are less desirable. Let’s get into it and see which of the fast-growing stocks below are real.
Toyota Motor Corporation (TM)
Toyota Motor Corporation (NYSE:TM) had a very strong year in 2023. Actually, the company ends its fiscal year at the end of March, so we’re really talking about the 12 months ended March 31 of this year. That caveat aside, let’s look at the stock with a particular focus on impressive earnings.
Earnings are a function of overall sales so it’s important to start with sales. Fortunately for Toyota, sales were strong during the 12 months ended December 31, 2023. Vehicle sales increased 7.2% during that period which was the first time Toyota saw an annual sales increase in the previous two years.
Toyota’s revenues increased by more than 21% in 2023. That led to an increase in earnings of more than 100%.
The impressive earnings growth was primarily a function of strong volume growth and price increases. Most of Toyota’s increase in earnings per share is attributable to real growth although the company does and plans to continue engaging in share buybacks. Share buybacks generally indicate financial stability which is certainly the case with Toyota, but in some cases are used to artificially inflate per-share earnings.
Intuitive Surgical (ISRG)
Intuitive Surgical (NASDAQ:ISRG) is a healthcare device manufacturer best known for its leading product, the Da Vinci Surgical System. It’s also a stock that is quite well regarded at the moment due to growth in AI and robotics in particular. Investors are hoping that advancements and innovation in those fields will further the growth of the company, improving the stock in the process.
Revenue grew by 14.5% in 2023, leading to earnings growth of 36%, and per-share earnings growth approaching 38%. A company can do all kinds of things operationally to increase earnings growth above revenue growth so that disparity doesn’t bother me.
However, there’s something about Intuitive Surgical that does bother me. The company paid $262 million of income taxes on $1.59 billion of pre-tax income in 2022. The company only paid $142 million of income taxes in 2023 while pre-tax income increased to $1.94 billion.
I don’t know about you, but I certainly couldn’t get away with that as an individual taxpayer. I’m reading a book about Warren Buffett’s investing style and it is one of the things mentioned as a red flag. If Buffett sees tax payment rates below 35%, he bolts. Thus, Intuitive Surgical may be engineering its earnings growth.
Advanced Micro Devices (AMD)
Advanced Micro Devices (NASDAQ:AMD) continues to be the second most popular AI chip stock overall. it has grown impressively in 2024, up 10% and up more than 60% since November.
Investors continue to love AMD simply because it is the clear challenger to Nvidia’s (NASDAQ:NVDA) dominance in the AI chip space. AMD makes chips that are slightly less powerful but much less expensive than those produced by Nvidia. That value proposition continues to be highly attractive and generally explains its share price growth in the last 6 to 8 months.
That aside, let’s look at earnings for AMD and what they say about the company. There’s nothing out of order concerning earnings at AMD. The company reported a per-share earnings loss of nine cents during the first three months of 2023. That became eight cents of earnings per share during the first three months of 2024.
Earnings are not engineered but I think what may surprise some readers is just how much AMD struggles to produce positive earnings margins.
Novo Nordisk (NVO)
Novo Nordisk (NYSE:NVO) stock continues to grow very rapidly on the success of its weight loss drugs, Wegovy in particular. Year to date, NVO stock has provided more than 40% returns.
Investors wonder if the company can continue to substantiate its prices given the fact that P/E ratios are historically high at the moment. I believe the answer is ‘yes’ for a few reasons. One, it is still very early in the weight loss drug life cycle. Novo Nordisk has massive opportunities ahead and the capability to capitalize on them. It clearly has a first-mover advantage but can grow much more especially if the company sorts out supply chain issues. Two, Novo Nordisk is among the leaders developing an orally administered weight loss pill.
The next wave of impressive pharmaceutical stock earnings will come from the commercialization of orally administered weight-loss drugs. Novo Nordisk has as good a chance as any other pharma firm to capture that opportunity. Massive earnings growth at the company in 2023 was a result of real improvements company-wide. Investors should still consider Novo Nordisk to be one of the best pharma stocks even after it has grown so rapidly.
Linde (LIN)
Linde (NYSE:LIN) produces and sells industrial gases globally. Many investors will have heard of the stock more recently because it is associated with the potential of hydrogen and is a major hydrogen producer. However, unlike many up-and-coming hydrogen stocks, Linde is very stable and represents a very solid investment overall.
One of the primary reasons Linde is so stable and such a solid investment overall is that the company is very well-operated. Linde’s recent earnings are an excellent case in point. 2023 sales declined by 2% but the company managed to produce per-share earnings growth of nearly 53% during the same period.
The company did this by drastically slashing operating expenses another line item called ‘other operating expenses’. That increased to $2.6 billion in operating income, spiking net income growth.
Linde is a highly respected and stable firm overall so no one should be surprised that earnings growth, though impressive, was real.
The Southern Company (SO)
The Southern Company (NYSE:SO) is going to continue to be a stock worth investing in for several reasons. One of the most obvious is that utility companies in general continue to be undervalued at the moment. The benefit there is that many, The Southern Company included, currently pay a higher yielding dividend as a result of lower prices.
The Southern Company’s 3.66% dividend is a good reason to buy the stock overall. Utilities stocks are very stable and dependable and for certain investors that’s highly attractive.
Company-wide revenues declined 13.75% in 2023. While that may discourage some investors, there’s a strong narrative that favors The Southern Company anyway. Primarily, the company is very well operated and managed to grow earnings per share by 11% despite shrinking revenues.
It starts with decreasing the cost of sales by 24%. So, despite shrinking revenues The Southern Company was still capable of increasing gross margins. For those who care to continue reading down the income statement, it was more of the same. The Southern Company judiciously slashed expenses leading to increasing per share earnings for shareholders. It’s exactly what any investor should want from a stock.
MercadoLibre (MELI)
Let me just start by saying that nothing about MercadoLibre’s (NASDAQ:MELI) financial statements suggests that its growth is engineered. Instead, what I see is a stock very much worth buying in a company that looks to be hitting its stride.
MercadoLibre very much looks like one of the cleanest companies overall. There doesn’t look to be any type of engineering going on whatsoever. Case in point, net income grew by 104% in 2023 and earnings per share grew by 104%. Furthermore, MercadoLibre is paying an amount of taxes on pre-tax income that one would generally expect to see.
Anyway, investors really should consider MercadoLibre because the company is growing very quickly. When I say growing very quickly, that means overall revenue growth but also growth at the bottom line level. MercadoLibre only began producing net gains in 2021. Those net gains amounted to $83 million in that year and ballooned to $987 million in 2023. It’s a well-run company experiencing massive growth. The only potential issue is that share prices are very high, exceeding $1,500. Perhaps the company might enact a forward stock split a la Nvidia (NASDAQ:NVDA) in the future.
On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Automotive, Biotech, Consumer Discretionary, E-Commerce, Energy, Healthcare, Hydrogen, Renewable Energy, Retail, Semiconductor, Technology, Utility
