Posted on 05/23/2003 10:35:22 AM PDT by MeneMeneTekelUpharsin
The Rationale
Investors too often ignore sales, and we're not talking about the kind that fill your freezer with $3.99 a pound shell steaks. We mean revenues, as in the top line.
These days everyone seems fixated on the consensus earnings estimate, and more specifically whether a company meets it, beats it or falls short. And rightly so. After all, earnings usually drive share prices. But sales are worth a look as well, for a couple of important reasons. First, sales ? and not earnings ? typically signal growth early on in two types of companies: those that are young and approaching profitability, and those that have taken restructuring charges during the past year. Second, sales figures are harder, though not impossible, to fiddle with since they appear on the income statement before the various charges.
In any of our price/sales screens , we like to mention that some researchers, including James O'Shaughnessy, author of the 1997 bestseller, "What Works on Wall Street," feel sales are a better predictor of stock performance than earnings. This is especially true of value stocks. But sales figures can also be used to find growth companies ? those with momentum ? both in terms of moving product and in gathering positive attention from analysts. Accelerating sales growth shows something is going right with a company's plan, something that may soon be reflected in its shares.
The Recipe
To find companies that are working the cash register like a chimpanzee with a drum set, we used our stock-screening tool . Starting with more than 8,000 companies, we pulled out those with three-year annualized sales growth of more than 15% (the S&P 500 index has averaged 6.85%). And whatever the three-year rate was, the one-year rate had to be even higher. Each company's 2003 earnings consensus, based on at least two analysts, had to have been raised within the past quarter. Also, each company's return on equity needed to exceed 12%. ROE shows how efficiently a company uses its resources. Since we want institutions to take notice of our companies, annual sales had to be more than $200 million and average daily trading volume over 100,000 shares. Just to make sure, we required that institutional investors already have at least a 5% stake in each stock, but not more than 60%, to leave room for future buying. All these steps left us with just eight names.
The Results
William Taft and Winston Churchill both did it. And Melvin Switzer of Kent, England, was as loud as a fire siren, 87.5 decibels. But on May 24, 1993, in a Swedish hospital, a sleeping Kare Walkert snored louder than anyone recorded before ? a gurney-rattling 93 decibels, about the level of a lawn mower. Is someone you know a record contender? More than 20 million Americans suffer from sleep apnea, defined as a pause in air flow for 10 seconds or longer. That's as many as suffer from asthma or diabetes. And apnea, often marked by snoring, causes serious health problems. In addition to feeling constantly tired, apnea sufferers are at risk for high blood pressure, coronary disease and stroke.
The good news is that Poway, Calif.-based ResMed (RMD ) makes equipment to diagnose and treat sleep-disordered breathing, including sleep apnea. The company's snoring solution comes in the form of a compact air generator with a mouthpiece and mask. The bad news? You go to bed looking like Chuck Yeager breaking the sound barrier. Sales of ResMed's wares, though, are rising. Revenues of $69 million for the third quarter, reported April 22, were up 31% year-over-year. Domestic sales grew 27% to $34 million, while international orders were up 35% to $35 million. Net income of $12.3 million worked out to 35 cents a share, topping the Reuters Research consensus by two cents. And the strong results came in a quarter when a stronger euro and Aussie dollar made manufacturing more expensive, pushing gross margins down to 62.5% from 64.0% a year earlier.
The company's recent success hasn't gone unnoticed. Investors have bid ResMed's shares up more than 25% since mid-March. And analysts have boosted earnings estimates. The Reuters Research earnings views for 2003 and 2004 have each risen two cents in the past month. Even the media is taking notice. Investor's Business Daily listed ResMed among its "Stable Seventy" stocks on March 27, citing "stellar, steady earnings growth." And Forbes.com on April 7 called ResMed one of the "25 Fastest-Growing Tech Companies."
"We were particularly gratified because both groups used criteria based on the past five years of performance in making their evaluations," said ResMed Chief Executive Peter Farrell. "We manage our business for long-term success, and we are proud of our record over the eight years we have been public." So what's next for ResMed? The snore-busting industry, which also includes Murrysville, Pa.-based Respironics (RESP ) along with several smaller players, is growing sales at between 15% and 20% annually. That's not surprising, considering doctors say snoring is made worse by obesity, itself a ballooning industry. ResMed, meanwhile, has averaged 27% growth in each of the last three years. Analysts say ResMed is taking market share from rivals now, and should continue to do so.
The company's new AutoSet Spirit, which self-adjusts the rate of airflow according to users' needs, may further propel sales. Such "auto-titrating" devices already comprise 50% of international sales, but only 10% of sales in the U.S. An application for coverage has been submitted to Medicare and Medicaid, which currently reimburse a portion of the costs for the traditional devices but not the auto-titrating units. ResMed stock may look a little pricey at 29 times the Reuters Research 2003 earnings estimate of 1.28, compared with Respironics' 23 P/E. (Both are cheaper than the medical-products industry's 2003 P/E of 33.) But ResMed is projected to grow earnings faster, at 20% a year over the next five years, compared with 18% for Respironics. And ResMed's 21% ROE is almost double that of Respironics. That shows that management is using its resources more efficiently, and makes future share repurchases doubly attractive. That said, we think both of these companies are positioned to grow business nicely, even if the economy continues snoring for awhile.
As always, use the list below as a starting point for further research.
Bye.
Interesting response to the supposition that I might be deceased due to SARS. Now, that's nice.
Exactly what my research has given me. My posting is intended to help those who are trying to find information not found anywhere else (namely here on FR). Many others have truly helped me with important information on this forum. That is what makes us family...we share.
You're the one who thinks they can foresee the future. Not me.
And I do not believe you can, either.
And I do not believe you can, either.
Trying to remember when I definitely predicted the future. Only God knows the future. Your responses, though, are interesting. You remind me of teenagers that I teach in school. A small core group always disparages what I have to say. However, the mom of one I taught in years past told me TODAY that her son (who gave me trouble many times in class) learned a LOT in my class. Over time, you will too. And, when you're wrong, send your mom to tell me you at that time appreciate what you've been taught.
When you said you were probably going to die of SARS, which you referenced again today.
That is in the context of IF the disease spreads into the U.S. It is highly contagious...some of us are susceptible to respiratory ailments, and the likelihood of my contracting SARS is pretty high. It was merely a supposition, not a prediction. Maybe I didn't present it in a way that was palatable to you. If you'll give me a rephrase that you find acceptable, then I'll make a point to use it.
Your original context, which you resumed weeks after this thread had died was "LOOK! LOOK! SARS IS COMING!!! HOORAY!!! I TOLD YOU IT WAS COMING!!!
I think it's wierd that you are looking forward with great anticipation to the prospect of a deadly plague.
Leaves me wondering why the sudden interest in companies producing respirators. Interest by someone with LOTS of money...not small investors.
Died?
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