Issues defined as “growth stocks” have a number of common traits, but the most important is that their earnings are expected to grow at a faster pace than the broader market over a period of time. With that in mind, Value Line runs a screen in its Summary and Index that searches for stocks that meet this key criterion. It focuses on issues that have recorded good per-share earnings gains in recent years and that ought to continue to do so in the future, such as Perrigo Co. (PRGO) and Open Text Corp. (OTEX).
To make our list, a company's annual growth of sales, cash flow, earnings, dividends and book value must together have averaged 10% or more over the past 10 years and be expected to average at least 10% in the coming 3-5 years, which is no easy feat considering that this time span included varying rates of economic growth. Below we highlight some of the stocks from our screen with sound investment merit:
Perrigo is a leading supplier of healthcare products. It develops, manufactures, and distributes over-the-counter (OTC) and generic prescription pharmaceuticals, infant formulas, nutritional products, and active pharmaceutical ingredients (API). The company’s primary markets and manufacturing operations are located in the United States, Israel, Mexico, the United Kingdom, and Australia.
Perrigo has four reportable segments, aligned by product type, including Consumer Healthcare, Nutritionals, Rx Pharmaceuticals, and Active Pharmaceutical Ingredients (API). The Consumer Healthcare business, 61% of fiscal 2011 revenues, consists of the company’s U.S., U.K., Mexico, and Australia operations supporting the sale of OTC pharmaceutical products. The Nutritionals unit (18%) manufactures, markets, and distributes store brand infant formula products and infant and toddler foods and vitamins. The Rx Pharmaceuticals segment (12%) sells generic prescription drugs for the U.S. market. The API business (7%) develops active pharmaceutical ingredients globally for the generic drug industry and pharmaceutical companies. The company also operates an Other category, which consists of the Israel Pharmaceutical and Diagnostic Products segment. At only about 2% of fiscal 2011 revenue, this category does not meet the sales threshold necessary to be considered a separate reportable segment.
Perrigo has recently benefitted from product recalls by its competitors. A series of product recalls at Johnson and Johnson (JNJ - Free J&J Stock Report) over the last several years (Tylenol, Motrin, etc.) provided Perrigo the opportunity to gain additional market share. After partially returning to the market earlier this year, J&J was forced recall more of its products in January and February (grape-flavored Tylenol and Aveeno lotion). We expect the impact to continue helping Perrigo’s top line for several quarters to come. Looking further out, we think Perrigo will be able to hold on to roughly 50% of the business it picked up as a result of J&J’s woes.
Historically, top and bottom line growth at Perrigo has been strong. Share net has advanced an average of 25% annually since 2002, while revenues have improved 9% each year over the same time frame. We believe there is a lot to like with this issue. The company is the dominant player in its primary market; it has a sustainable, diversified revenue stream with strong cash flows; and the company has a sound strategy for long term growth. We look for both revenue and earnings to continue their double digit advances this year.
Open Text Corp.
Open Text is the world’s leading provider of enterprise content management (ECM) software solutions that store, locate, and distribute information across intranets, extranets, and the Internet. The company’s software combines collaboration and process optimization functions. Product and service offerings are developed both organically and through acquisitions.
The company’s customer base consists of a several Global 2000 organizations, mid-market companies, and government agencies. It sells to a well-diversified pool of buyers, and no single customer accounts for more than 10% of revenues. Open Text has a worldwide client base, and in fiscal 2011, approximately 49% of revenues were generated outside the North America.
The business environment that Open Text operates in looks favorable thus far this year, judging by the performance of some of its peers. For example, IBM’s (IBM, Free IBM Stock Report) information management business grew 5% year over year, while Microsoft (MSFT, Free Microsoft Stock Report) believes its competing business division should grow by the low double-digits over the next year as it increasingly embraces social enterprise scenarios.
We currently project solid long-term earnings performance for Open Text. In our view, technology spending for ECM solutions in both domestic and foreign markets should boost earnings and revenues by approximately 10% over the three to five year horizon. Finally, while we are upbeat on the acquisitions the company has made, we like the renewed focus on organic growth the new CEO, Mark Barrenechea, has emphasized.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.