Wall Street is often criticized for paying too much attention to the bottom line, but that focus is hard to fault right now.
Companies are reporting record profits in the first quarter, but it's getting increasingly difficult to find companies moving the revenue needle. Less than half, 200, of the companies in the Standard & Poor's 500 have reported 5% or higher revenue gains in their most recent quarter, says S&P Capital IQ. And just 131 have lifted revenue by 10% or more.
Slow-growing companies are dragging the average down even more. Revenue growth of S&P 500 companies is expected to come in at just 1% when the first-quarter earnings season winds down, well below the 5% earnings growth during the period.
Cost-cutting and stock buybacks have kept profits moving higher despite sluggish growth. But longer-term, investors are searching now for companies that are finding ways to increase revenue, too. "Revenue is growing slowly because we're in a 1% to 2% (economic growth) environment," says Doug Sandler of RiverFront Investment Group. "Revenue growth is reflective of that."
Investors looking for companies boosting the top line are focusing on several themes, including:
•Mergers. The urge for companies to merge is starting to show up in the top line. Most of the companies with the very largest rates of revenue growth can point to acquisitions. For instance, the fastest revenue growth of an S&P 500 company, 115%, was reported by prescription drug firm Express Scripts. Most of that growth, though, came from the company's purchase of rival Medco that closed in April 2012, says David Toung of Argus Research. There's a similar story behind the 107% growth of industrial fluid company Pentair, which bought Tyco Flow Control. There's likely more to come as merger-and-acquisition activity in the U.S. hit $347.2 billion in the first quarter, double the level in the same period a year ago, Dealogic says.
•Home builders.DR Horton, Lennar and Pulte are enjoying some of the most rapid growth rates outside of merger bumps. During the three months ended March, DR Horton posted revenue of $1.4 billion, up 49% vs. a year earlier. Revenue at Lennar grew 37%, and 32% at Pulte.
•Tech.Technology as a group hasn't been a particular standout in terms of revenue growth, with the top line rising 4.7% in the quarter, ranking the sector as the fourth-fastest grower among the 10. But the sector has some strong growers, including Salesforce.com, Google and Expedia with 32%, 31% and 24% revenue growth, respectively.
Stocks can move higher even without revenue growth, as companies lean on dealmaking, Sandler says. Investors are looking for companies to find growth wherever they can find it, be it through new products or dealmaking, says John Quealy of Canaccord Genuity.
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OCTOBER 30, 2014
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