| Companies
with Accelerating Revenue and Earnings Growth |
Published: March 1, 2004
The long-awaited economic rebound has finally kicked
into high gear, and a number of firms are now starting to see a dramatic
improvement in both their top and bottom lines. In this type of bullish
business environment, investors tend to gravitate toward faster-growing
companies and high-beta stocks, as these tend to outperform the broader
market during major upswings.
Along those lines, companies that have not only been
able to post strong revenue/earnings growth in recent years, but that
are also showing accelerating top- and bottom-line growth
(meaning they grew at a faster clip last year then they did the year
before, as well as the year before that, etc...) are likely to perform
better than most. With this in mind, this week my staff and I scanned
the investment universe in search of firms that have delivered not only
strong double-digit growth, but also accelerating revenue and earnings
growth in recent years.
Strong growth is important, but we also want to be
mindful of valuation levels whenever making any investment decision.
After all, we don't want to end up investing in companies whose shares
are already overextended. Therefore, in order to ensure that our scan
delivered a list of stocks that were reasonably valued in the open
market, we also searched for companies with low PEG ratios.
For those of you unfamiliar with this basic concept,
PEG stands for "Price/Earnings to Growth" ratio. It is
calculated by taking a company's P/E ratio (Price/Earnings) and dividing
that figure by the firm's projected future earnings growth rate. What
this leaves you with is a measure of how richly valued a company's stock
is relative to the firm's growth potential. For example, if a particular
stock sports a P/E of 30, at first glance it may appear to be richly
valued. However, if that same company is expected to grow at a +50%
annual clip in the coming years, then it really might be considered a
bargain stock.
In general, the average stock trades at a PEG of
around "1," and companies that trade at PEG's of "2"
or higher are considered to be fairly richly valued. However, keep in
mind that since they depend so heavily on projected earnings
data, PEG ratios can vary widely and are by no means perfectly accurate
valuation measures. Still, for our purposes, we feel much more
comfortable making an investment if the stock we're looking at sports a
PEG ratio of less than 1.5.
With the above analysis as a backdrop, we recently
searched through our universe of 10,000 stocks to find companies that
met the following criteria:
1. Market capitalization of greater than $100 million.
2. Average annual net income growth of at least +10% per year over the
past three years.
3. Stable or accelerating net income growth over the past three years,
meaning last year's (Year 1) net income growth >= Year 2 growth >=
Year 3 growth. (Growth in any given year is calculated as the percentage
increase relative to the prior year's net income.)
4. Average annual revenue growth of at least +10% over the past three
years.
5. Stable or accelerating revenue growth over the past three years
(identical to scan #3 above, except using sales data as opposed to
earnings data).
6. Projected earnings growth of at least +15% annually over the next
five years.
7. PEG ratio of less than or equal to 1.5.
Our goal was to come up with a list of firms that are
fairly large and reasonably valued with accelerating revenue and
earnings growth over the past three years. After running this data
through StreetAuthority's advanced screening software, we came up with
the following list of companies:
| Company
(Symbol) |
Price |
Market
Cap. |
Industry |
| Artisan Components
(ARTI) |
$19.79 |
440M |
Semiconductors |
| Bradley
Pharmaceuticals (BDY) |
26.20 |
280M |
Drugs |
| Centex (CTX) |
115.50 |
7.2B |
Homebuilding |
| CGI
Group (GIB) |
6.45 |
2.6B |
Business/Online
Services |
| Dentsply International
(XRAY) |
45.00 |
3.6B |
Medical Equipment |
| Hi-Tech
Pharmacal (HITK) |
25.17 |
210M |
Drugs |
| Hilb Rogal &
Hamilton (HRH) |
37.60 |
1.3B |
Property Insurance |
| Kensey
Nash Corp. (KNSY) |
25.61 |
290M |
Medical Equipment |
| ManTech International
(MANT) |
19.76 |
635M |
Systems & Security |
| Omnicare
(OCR) |
47.07 |
4.8B |
Medical Goods &
Services |
| Portfolio Recovery
Assoc. (PRAA) |
25.15 |
385M |
Business Support |
| Ross
Stores (ROST) |
29.83 |
4.5B |
Clothing Stores |
| SRA Intl. (SRX) |
38.70 |
990M |
Consultants |
| SurModics
(SRDX) |
21.08 |
370M |
Chemicals |
| Urban Outfitters (URBN) |
44.10 |
1.8B |
Clothing Stores |
After having my research staff take a closer
fundamental look at each of the above firms, we came to the conclusion
that Bradley Pharmaceuticals (BDY), Centex (CTX), CGI Group (GIB),
Hi-Tech Pharmacal (HITK), Omnicare (OCR), Portfolio Recovery Associates
(PRAA), Ross Stores (ROST), SRA International (SRX), SurModics (SRDX)
and Urban Outfitters (URBN) are all worth a closer look. As always,
however, please make sure to do your own due diligence on each of these
firms to decide if they are right for your portfolio. Any and all final
investing decisions for your own account are entirely up to you.
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Please Note: The above article was merely a
small excerpt from an issue of our premium, long-term-oriented investing
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