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: Gildan Activewear (GIL) and Lindsay Corp. (LNN).
Lindsay Corporation produces center pivot and lateral move irrigation systems under the Zimmatic and Greenfield brands, mini-center pivots, and horse reel travelers. The company acquired Watertronics in January of 2008, and Barrier Systems in June of 2006. Irrigation accounted for 86% of fiscal 2012 (years end August 31st) revenues, while infrastructure products (steel tubing and assemblies, movable traffic and safety barriers, along with crash cushions) made up 14% of the top line last fiscal year. Overseas revenues were 36% of the fiscal 2012 total.
Lindsay Corp. recently reported strong results, particularly on the bottom line. Share earnings came in at $1.50 during the February quarter, which was a marked improvement over the year-earlier tally of $1.00 a share. As commodity prices remain high and with farmer sentiment positive, the top line has climbed sharply. Cognizant of the drought conditions that pervaded the last growing season in the Corn Belt, famers have looked to install efficient irrigation systems to ensure steady crop production. Lindsay was also awarded a $39 million Middle East contract of which no revenue has yet to be recorded. The lion’s share of this revenue will be recognized over the remainder of 2013, which augurs well for sales growth moving forward. During the May period, earnings per share came in at $2.01 versus $1.47 the prior year, as the company continued its positive momentum.
Still, our positive outlook isn’t without a few caveats. Despite solid execution and results in recent periods, CEO Mark Parod issued a warning that the latter part of calendar year 2013 and 2014 might well see a decrease in demand if agricultural commodity prices fall, as projected by the USDA. What’s more, some of the increase in sales may be seen as a pull-forward in irrigation equipment orders, as farmers anticipate dry weather conditions and potential water restrictions. However, management did recently mention that, as of now, demand remains high. In aggregate, we look for double-digit annual growth rates for Lindsay’s sales, cash flow, earnings, dividends, and book value, on average, over the 3- to 5-year pull.
Gildan Activewear is a vertically integrated manufacturer of basic, frequently replaced, nonfashion apparel. Activewear/underwear (t-shirts, sports shirts, underwear, fleece sweat shirts/pants) account for 80% of the top line, while socks comprise 20%. The company has yarn-spinning, textile making, sewing, and distribution operations. Gildan primarily sells “blanks” (plain tees and sweatshirts) to distributors serving silk-screen printers. Printed tees and sweatshirts are marketed at sporting events and stadium concerts.
We look for Gildan Activewear’s earnings to double in fiscal 2013, which ends October 4th. The year-to-year shortfalls in the first three quarters of last fiscal year were primarily caused due to unusually volatile cotton prices. Past purchases of relatively high-priced cotton were included in cost of goods sold and distributors deferred orders in anticipation of a price decline (which did not come to fruition). In fact, cotton prices have been quite stable over the past several months and orders for Gildan’s printwear products have recovered. These variables, along with contributions from the acquisition of a supplier of high-quality T-shirts and sports shirts, and progress in the retail markets, coupled with production efficiencies, are the key factors behind our estimate of record share net in 2013.
The company is in the early stages of a major push into the retail market. Traditionally, sales to the wholesale distributors of “blank” fleece activewear and T-shirts have accounted for most of the company’s top line. However, Gildan-branded shipments of socks and underwear to premier customers such as Wal-Mart (WMT – Free Wal-Mart Stock Report) and Kohl’s (KSS), are expected to ramp up over the near term. Two years ago, higher-profit branded items represented 35% of the company’s retail business, and by late 2013, we look for that figure to reach about 65%.
The bottom line should advance at a solid rate, as should other operating fundamentals, over the 3- to 5-year pull. The likely catalysts include new offerings, such as sports team and work place uniforms in the wholesale market, a ramp-up of Gildan’s retail business, and expansion in overseas markets.
At the time of this writing, the author did not have any positions in any of the companies mentioned.