A healthy business with steady sales growth is the key to survival in today’s fast changing and highly competitive business environment. As such, superior revenues are necessary to drive growth, and most companies look for a strong relationship between sales growth levels and the value of an enterprise.
Revenues are income generated by a company through business activities. Though a company might not be profitable over a particular time period, it usually generates revenues unless there are unforeseen situations. In such cases, the company is valued on the basis of revenues. This is because sales growth (or decline) is usually an early indicator of the company’s future earnings performance.
The Price-to-Sales (P/S) ratio takes into account a company’s revenues when valuing it. It remains the key stock selection criteria keeping in mind that management usually has limited opportunities to manipulate revenue figures as it can with earnings.
While sales growth is an important metric for any corporate for the purpose of growth projections and strategic decision making, this in isolation doesn’t indicate too much about a company’s future prospects. Though it provides investors an insight into product demand and pricing power, a huge sales number does not necessarily convert into profits.
Therefore, a consideration of a company’s cash position along with its sales number can 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 potential investments. Most importantly, an adequate cash position suggests that revenues are being channelized in the right direction.
Selecting 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 more 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 (four weeks) greater than X-Industry: Estimate revisions, better than the industry, are often seen to trigger an increase in stock price.
Operating Margin (average last five 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 it.
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.
Here are five of the 22 stocks that qualified the screening:
Based in Burbank, CA, The Walt Disney Company DIS operates as an entertainment company. Expected sales growth rate for the current year is 8.1% and the stock carries a Zacks Rank #2.
SS&C Technologies Holdings, Inc. SSNC provides software products and software-enabled services. This Windsor, CT-based company’s expected sales growth rate for 2018 is 100.3% and it carries a Zacks Rank #2.
The Progressive Corporation PGR, headquartered in Mayfield Village, OH, provides personal and commercial auto insurance, residential property insurance, and other specialty property-casualty insurance and related services. Its current-year expected sales growth rate is 19.1% and the stock sports a Zacks Rank #1.
Headquartered in Atlanta, GA, Intercontinental Exchange, Inc. ICE operates regulated exchanges, clearing houses, and listings venues for financial and commodity markets. The company’s expected sales growth rate for 2018 is 5.1% and it carries a Zacks Rank #2.
American Axle & Manufacturing Holdings, Inc. AXL designs, engineers, validates, and manufactures driveline, metal forming, powertrain, and casting products. This Detroit, MI-based company’s sales are expected to increase at the rate of 14.1% for 2018 and the stock carries a Zacks Rank #2.
The Walt Disney Company (DIS): Free Stock Analysis Report
American Axle & Manufacturing Holdings, Inc. (AXL): Free Stock Analysis Report
SS&C Technologies Holdings, Inc. (SSNC): Free Stock Analysis Report
The Progressive Corporation (PGR): Free Stock Analysis Report
Intercontinental Exchange Inc. (ICE): Free Stock Analysis Report
