Markets & Finance

Stock Screen: 21 Smart Growth Plays


This S&P list uncovers companies that have posted strong increases in sales and earnings since 1990

From Standard & Poor's Equity ResearchFrom Standard & Poor's investing newsletter The Outlook

Past performance is not indicative of future results. But when past performance is consistent over a long period of time, and the performance is good across a variety of metrics, investors should pay attention.

Richard Tortoriello, a quantitative analyst with Standard & Poor's Equity Research, put together a list of companies that have recorded strong compound annual growth rates in sales, earnings, and stock price since 1990. The benchmarks to beat were 19% a year for sales and earnings and 23% for stock price appreciation.

All the stocks that made the cut are listed below. Three are highlighted here:

Fastenal

Sales at this distributor of fasteners and other industrial and construction supplies should increase by 17% in 2008 with help from store openings, market share gains, and expanded product offerings. We expect net margins to widen slightly in 2008 on improving sales and cost controls. Our per-share earnings estimate is $1.85 for 2008, up from the $1.55 we see for 2007 and the $1.32 posted in 2006. We are particularly bullish about Fastenal's new growth strategy. The plan calls for the company to slow its rate of store openings, while increasing the number of the sales staff at its stores. We believe this will allow Fastenal (FAST) to wring more sales and profits from its existing sites, and to add stores over a longer period of time.

Fastenal trades at 24 times our 2008 earnings estimate, in the lower end of its range for the past decade. Based on our positive view of the company's new operating strategy and profit growth outlook, we think a p-e multiple in the upper half of Fastenal's range is merited. Our 12-month target price is $59, or 32 times our 2008 earnings forecast. We have a 5 STARS (strong buy) rating on the shares.

Risks to our recommendation and target price include an inability for Fastenal to make a successful transition to its new business model.

Oracle

This leading software provider has spent more than $25 billion over the past three fiscal years on acquisitions. These acquisitions have allowed Oracle (ORCL) to strengthen its competitive position and expand its customer base. A large customer base offers the company the opportunity to cross-sell additional products. It also provides Oracle with a profitable and recurring base of revenues for maintenance and support contracts. We think this has been instrumental in allowing Oracle to increase revenue and earnings per share at an impressive pace.

We have a 5 STARS (strong buy) rating on shares of Oracle, reflecting our view of the company's strong market position and non-GAAP operating margins that are among the highest of the software stocks S&P covers. Risks to our recommendation and target price include Oracle's exposure to customers within the financial services sector, which may have been impacted by weakness in the mortgage industry.

We expect per-share profits of $1.21 for fiscal 2008 (ending May) and $1.43 for fiscal 2009. We have a target price of $26 on the shares, which recently traded at a p-e-to-growth ratio of 1.0 times our calendar 2008 earnings estimate of $1.32, below peers.

Staples

The world's leading office products company, with more than 1,900 office superstores, continues to post solid sales and earnings results despite an economic slowdown that may have limited spending by consumers and small businesses. We expect revenues for fiscal 2008 (ending January) to climb about 9%, to $19.8 billion, driven by the opening of 100 to 110 net new stores in North America, continued international expansion, and account growth in the company's North American delivery unit. We expect per-share profits, driven by strong revenue growth and cost containment, to increase 11%, to $1.43 a share in fiscal 2008 from $1.29 reported in 2007.

The shares recently traded at about 13.4 times our fiscal 2009 earnings estimate of $1.64 per share, a slight discount to the S&P 500. This also represents a 21% discount from the stock's historical forward one-year p-e average of 17 over the past three years. We see the company continuing to gain market share because of execution that is superior to its peers, and we expect the company's growth potential to drive the shares higher. Our rating on the shares is 4 STARS (buy). We have a target price of $29, which is about 18 times our 2009 earnings estimate.

A slowdown in capital spending by large businesses in the wake of a greater-than-expected economic slowdown represents a risk to our recommendation and target. However, we believe business spending trends and a solid job market bode well for Staples (SPLS). The North American delivery division's recent performance has been stellar, in our opinion, and we anticipate continued strong results. In addition, we think strong results from new Chicago stores indicate further growth in untapped domestic metropolitan areas. Longer term, we believe China and South America will provide Staples with additional growth opportunities.

Top-Performing Stocks

Company

Ticker

S&P STARS

Rank

S&P Quality

Rank

Altera

ALTR

3

B

Brown & Brown

BRO

3

A+

Cerner

CERN

NR

B-

Cisco Systems

CSCO

4

B+

Comtech Telecommunications

CMTL

NR

B

Constellation Brands

STZ

3

B+

Dell

DELL

3

B+

Dentsply International

XRAY

NR

A-

Expeditors International

EXPD

4

A+

Fair Isaac

FIC

3

B+

Fastenal

FAST

5

A

Gentex

GNTX

3

B+

Inter Parfums

IPAR

3

A-

Metal Management

MM

NR

NR

Micros Systems

MCRS

NR

B

NBTY

NTY

3

B

Oracle

ORCL

5

B

Staples

SPLS

4

B+

Stryker

SYK

3

A

Teva Pharmaceutical

TEVA

5

NR

UnitedHealth Group

UNH

4

A+


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