Revenue Growth: Focus On Healthcare Stocks
With about 90% of S&P 500 companies having reported fourth quarter results, the bottom line once again this earnings season looks a lot better than the top line. Earnings grew about 10% last quarter compared to a year earlier. Revenue? Not so much. Revenue growth has clocked in at 0.8%. That’s a deflating result following the third quarter’s 4.1% revenue growth that S&P Capital IQ characterized as a potential “inflection point for corporate sales.” The inflection didn’t seem to hold. In a vast understatement, S&P Capital IQ noted that, alas, fourth quarter results had “failed to impress.”
Looking at trailing 12-month operating revenue for the 10 largest stocks in the S&P 500 is a pretty decent microcosm of what’s happening. Five of the stocks had revenue growth below 1%. Only Google (GOOG) and Microsoft (MSFT) had robust revenue growth.
The financial sector was the big revenue drag in the fourth quarter (see JPMorgan (JPM) and Wells Fargo (WFC) in the above chart for a taste.) FactSet reports that if you back out financials, revenue growth was a tad more encouraging for the index, coming in at 2.2%. That’s still not exactly robust.
Top line growth is especially important this year. After last year’s multiple expansion it’s hard to justify even higher multiples this year. That helps explain why corporate titans are so busy squeezing out more productivity and/or buying back shares to goose earnings per share results.
If you don’t have strong revenue growth to fuel earnings growth, those are levers you’ve got to pull, and pull hard.
Productivity has its charms, and if you’re convinced a company is buying back shares that are undervalued, that can be smart C-suite strategy as well. Let’s just agree that in the aggregate, with the market PE ratio at 17, it’s not a layup finding companies buying back stock that is truly selling at a discount to intrinsic value.
Which is why revenue growth should be front and center as you conduct your financial research. Companies that are actually selling more stuff have an old-fashioned way to potentially grow earnings: through a fatter top line. As S&P Capital IQ recently summed up the earnings-vs.-revenue disconnect:
“In 2014, the focus on corporate revenue growth will be greater than ever. Now that U.S. companies have proven that they can post impressive earnings growth, comparable to long-term historical averages, the true test of corporate health will be determined by the ability to grow sales. Cost cutting will no longer appease.”
The Healthcare Sector is a good place to train your financial research. FactSet reports that health care’s 5.7% average revenue growth in the fourth quarter was the highest in the index. Within the health care sector, biotech led with a 21% revenue gain in the fourth quarter compared to the year earlier period. Health care technology had a 12% bump in revenue. The sector is expected to continue its solid revenue growth in 2014, amid a middling overall outlook of 3.7% growth for the entire S&P 500.
Firing up the YCharts Stock Screener, it’s easy to drill down to the industry components within a give sector. Of the seven biotech stocks in the S&P 500, only Amgen (AMGN) clocks in as a decent value at this juncture, with four of the six carrying trailing 12 month PE ratios above 44.
With a PE ratio less cash below 15, Amgen trades below the market level. But you just know there’s gotta be a tradeoff, right? Starting with said revenue growth. Amgen hasn’t exactly kept pace with Vertex Pharmaceuticals (VRTX) Regeneron Pharmaceuticals (REGN) and Alexion Pharmaceuticals (ALXN).
Then again, Amgen dwarfs the combined revenue of all three. Here’s the same chart shown in straight up dollar terms:
While it may lack the momentum growth story of a Gilead, Amgen should appeal to value oriented investors looking for exposure to the industry. That Amgen still trades at a rational valuation after the price rose more than 45% over the past 12 months is as close to bargain as you are likely to find in the industry.
Expanding the YCharts Stock Screener to look at the entire health care sector and sorting by recent revenue growth presents a list full of pricey fast growers.
But there’s a dowdy old-school name that makes the top 10 in terms of revenue growth and is delivering on earnings as well. Aetna (AET):
Even after a 60% price gain in the past 12 months, Aetna’s PE ratio is still below 15. Drill down further using financial advisor tools.
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 firstname.lastname@example.org. Read the RIABiz profile of YCharts. You can also request a demonstration of YCharts Platinum.