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 & 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.
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 two of the stocks from our screen with sound investment merit: NIKE, Inc. (NKE - Free Nike Stock Report) and McKesson Corp. (MCK).
NIKE, Inc. is the largest global designer, marketer, and distributer of athletic footwear, apparel, equipment, and accessories for a wide variety of sports and fitness activities. The company is comprised of its NIKE Brand and Brand Jordan product offerings (accounted for over 90% of February-period revenues) as well as Converse Inc. and Hurley International, both of which operate as wholly-owned subsidiaries. To wit, NIKE divested Cole Haan and Umbro in fiscal 2013. The company sells its products to retailers as well as through NIKE-owned retail stores and Websites, known as its Direct-To-Consumer business. There were 303 U.S. retail stores and 450 international locations (as of May 31, 2013). In addition, the company has license agreements permitting unaffiliated parties to manufacture and sell certain apparel, digital devices, applications, and other equipment designed for sports activities.
During the fiscal third quarter, NIKE posted a 13% top-line advance, which included sales gains of 12% and 16% in the NIKE Brand and Converse segments. Growth has largely stemmed from higher demand in the Basketball, Running, Sportswear, and Football (Soccer) categories, as well as from increased demand for new products and brand promotions, especially surrounding various sporting events, such as the World Cup. Despite foreign exchange headwinds, which will likely persist in fiscal 2015, management anticipates full-year revenues will increase at a high single-digit rate. In addition, NIKE has an $8 billion share-repurchase authorization, and so far, the company has bought back 39.6 million shares, for a total of $2.5 billion, since the program’s start in September of 2012. Indeed, stock repurchases should continue to support share-net growth.
Overall, the company’s short- and long-term prospects are promising, thanks to NIKE’s brand strength, diverse portfolio, extensive geographic footprint, and its ability to navigate through volatile macroeconomic conditions. Most importantly, the company’s emphasis on innovation is, in our view, the fundamental growth catalyst for NIKE and should ultimately drive demand. All told, average annual sales growth over the 2017-2019 period is in the 10%-15% range, with share earnings advancing at a mid-teens percentage rate.
McKesson Corp. delivers pharmaceuticals, medical supplies, and technologies that are designed to reduce costs and improve quality across the healthcare industry. The company operates in two segments: Distribution Solutions (98% of revenues, as of March 31, 2014) and Technology Solutions (2%).
The Distribution Solutions segment, which primarily distributes ethical and proprietary drugs and equipment and health and beauty care products, among other things, throughout North America and internationally, is separated into three businesses. Specifically, North America pharmaceutical distribution and services, International pharmaceutical distribution and services, which includes the acquisition of Celesio AG (discussed below), and Medical Surgical distribution and services. The Technology Solutions segment provides a comprehensive portfolio of software and services to help healthcare organizations improve quality and patient safety, reduce the cost and variability of care, and better manage their resources and revenue streams. This also includes the InterQual clinical criteria solution, claims payment processing solutions, and network performance tools.
Overall, the Distribution Solutions segment, which posted a 13% year-over-year top-line advance in fiscal 2013, should continue to be the leading growth driver over the short and long terms. In fact, McKesson recently acquired Celesio AG, a German generic drug producer, and owns approximately 76% of Celesio shares on a fully-diluted basis. The valuable add-on should bolster its share of the global generic drug market, particularly in Europe, and significantly increase both the top and bottom lines, specifically in the Distribution Solutions business. Moreover, management anticipates solid growth across its portfolio of businesses, as the company further expands its global sourcing capabilities and direct relationships with manufacturing partners, among other things. In addition, the company plans to continue to deploy capital through a mixture of internal capital investments, acquisitions, share repurchases, and dividends.
All told, revenues are expected to increase at a double-digit clip in fiscal 2014, with adjusted share earnings in the $10.40-$10.80 range, compared to $8.35 in fiscal 2013. All told, we expect this level of growth to be maintained, for the most part, over the 3- to 5-year horizon.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.