Whither Sales Growth? Cheap Stocks That Have It

If it were called revenue season, rather than earnings season, the first quarter would have long ago been deemed a major disappointment with an attendant market sell-off.

According to S&P Capital IQ , among the S&P 500 companies that have reported, less than 40% met or beat the street’s revenue expectations. Typically more than 60% manage to deliver on revenue expectations. In the case of AT&T, (T) revenue for the quarter fell 1.4% compared to a year earlier. For the likes of Procter & Gamble (PG), Google (GOOG), Amgen (AMGN) and McDonald’s (MCD) the transgression was weaker than expected sales.

But hey, it’s called earnings season, so the fact that nearly 70% of companies have managed to massage their balance sheets has trumped the weak revenue story. At least for now.

Profit growth through cost-cutting, asset sales and other non-organic growth tactics has been a centerpiece of the post-crisis investing landscape. Sluggish economic growth here and abroad has made it increasingly hard to generate substantive top line growth. In 2012 the S&P 500 average was a meager 0.8% increase, pulled down by a 10% decline for the energy sector. The 2013 forecast is for 3.1% revenue growth. (Ever-optimistic analysts are calling for 4.5% revenue growth in 2014.)

Amid this long-in-the-tooth bull run, finding companies with strong revenue stories -- not just deft earnings management -- seems a solid starting point for further investigation.

Using the YCharts Stock Screener, choose Indexes under the “Start With” tab on the left side of the screen, and then choose S&P 500. From there move to the Filters side of the screen and add “Revenue Quarterly YoY growth.” You can then use the slider for that metric to impose a fairly low bar: companies with positive year-over-year revenue growth. That knocks out about 150 companies. From there, Pro subscribers can take a shortcut to finding companies selling at compelling valuations: uncheck the “Neutral” and “Avoid” options sitting just under the sliders section. That leaves you with stocks currently rated Attractive by Ycharts’ proprietary analysis. Just 22 stocks make that cut.

Sorting the list by recent revenue growth, Western Digital (WDC) tops the list. It just reported a 24% jump in quarterly revenue to $3.61 billion. Platinum subscribers can keep track of sales forecasts under the Forward Estimates tab in the Chart Browser. As the chart below shows, the Street was expecting $3.59 billion in current quarter revenue growth. Moreover, the hard-drive manufacturer’s actual trailing 12-month revenue rocketed up more than 90%.

WDC Revenue TTM Chart

WDC Revenue TTM data by YCharts

A lot of that has to do with the continuing recovery from the late 2011 supply chain disruption caused by massive flooding in areas of Thailand where the hard drive manufacturer has plants. Another Pro-level metric shows analysts expect Western Digital sales to fall 1.7% over the next fiscal year. Not exactly a big haircut given the hard-to-replicate rebound. The stock is trading at a cheaper forward PE ratio than its main rival Seagate Technology (STX) and a lower price/sales ratio as well.

WDC Forward PE Ratio Chart

WDC Forward PE Ratio data by YCharts

Apple (AAPL) is the next Attractive stock that has strong revenue growth and a compelling valuation. Though 10% revenue growth over the past 12 months would make most S&P 500 companies blush, that’s way down from the 42% revenue growth rate for the year earlier period. That’s a problem for longer-term shareholders who bought a supercharged growth company that has now lost (at least temporarily) its mojo. But for prospective investors, the stock now trades at valuations close to the 2009 crisis lows, as seen in this chart that tracks forward price/sales and forward enterprise value/sales.

AAPL Forward Price / Sales Ratio Chart

AAPL Forward Price / Sales Ratio data by YCharts

So today you’re paying a lot less to bet that the “exciting” new products Tim Cook alluded to in this quarter’s earnings release -- scheduled to come to market in the fourth quarter and early 2014 -- can reboot stronger sales growth. Analysts expect 9.8% revenue growth over the next fiscal year. Anything above that would be a welcome beat.

Carla Fried, a senior contributing editor at ycharts.com, has covered investing for more than 25 years. Her work appears in The New York Times, Bloomberg.com and Money Magazine. She can be reached at editor@ycharts.com.



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