Sales growth is an important measure for any company, as it is vital to growth projections and strategic decision making. By monitoring this key metric over multiple time periods, one can clearly understand a company’s growth trend.
Sales growth is essential to justify the expenses incurred to operate a business. Low revenues lead to an unprofitable business and dismal financial performance. Stagnant companies may generate near-term profit but cannot generate enough growth to attract new investors.
Also, in a growing economy, lack of sales growth most likely denotes that the company is not gaining market share over its competitors. In simple terms, without impressive sales growth, the bottom-line improvement may not be sustainable over the longer term.
Further, it's worth keeping in mind that when companies incur a loss, albeit transitorily, they are valued on their revenues, as sales growth (or decline) is usually an indicator of a company's future earnings performance.
Hence, the Price-to-Sales (P/S) ratio can turn out to be an appropriate metric for stock valuation. This metric's importance lies in the fact that management has limited opportunities to manipulate sales unlike earnings.
Focusing alone on sales growth is, however, not desirable. Considering a company's cash position along with its sales number can prove to be a more dependable strategy. Substantial cash in hand and a steady cash flow give a company more flexibility with respect to business decisions and investments.
Picking the Winning Stocks
In order to shortlist stocks that have witnessed impressive sales growth along with a high cash balance, we have selected 5-Year Historical Sales Growth (%) greater than X-Industry and Cash Flow greater than $500 million as our main screening parameters.
But sales growth and cash strength are not the absolute criteria for selecting stocks. So, we added certain other factors to arrive at a winning strategy.
Price-to-Sales (P/S) Ratio less than X-Industry: This metric determines the value placed on each dollar of a company’s revenues. The lower the ratio, the better it is for picking a stock since the investor is paying less for each unit of sales.
% Change F1 Sales Estimate Revisions (4 Weeks) greater than X-Industry: Better-than-industry estimate revision has often been seen to trigger an increase in the stock price.
Operating Margin (Average Last 5 years) greater than 5%: Operating margin measures how much every dollar of a company's sales translates into profits. A high ratio indicates that the company has good cost control and sales are increasing faster than costs, an optimal situation for the company.
Return on Equity (ROE) greater than 5%: This metric will ensure that sales growth is translated into profits and the company is not hoarding cash. A high ROE means the company is spending wisely and is in all likelihood profitable.
Zacks Rank less than or equal to 2: Zacks Rank #1 (Strong Buy) or 2 (Buy) stocks are known to outperform irrespective of the market environment. You can see the complete list of today’s Zacks #1 Rank stocks here.
Here are five of the 17 stocks that qualified the screening:
Based in Auburn Hills, MI, BorgWarner Inc. (BWA - Free Report) provides solutions for combustion, hybrid, and electric vehicles. The company has expected sales growth rate of 6.4% for the current year and carries a Zacks Rank #2.
PG&E Corporation (PCG - Free Report) transmits, delivers, and sells electricity and natural gas. This San Francisco, CA -based stock has expected sales growth rate of 2% for this year and carries a Zacks Rank #2.
Teradyne, Inc. (TER - Free Report) , based in North Reading, MA, designs, develops, manufactures, sells, and supports automatic test equipment. Its current year expected sales growth rate is 19.5% and has a Zacks Rank #2.
TransUnion (TRU - Free Report) provides risk and information solutions. This Chicago, IL-based company’s current year sales are expected to grow at the rate of 12.1% and the stock has a Zacks Rank #2.
Headquartered in Los Angeles, CA, CBRE Group, Inc. is a commercial real estate services and investment company. The company has expected sales growth rate of 6.2% for this year and a Zacks Rank #2.
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Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.
Disclosure: Performance information for Zacks’ portfolios and strategies are available at: https://www.zacks.com/performance
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