Today we’re taking a look at three companies with stellar growth records – earnings growing 20%-35% over the last five years, all with ROE over 10% in the last few years, all with a fair value around double their current price.
The first is hardly a newcomer: founded in 1882, this Hawaii-based company handles shipping and the logistics of shipping to Hawaii, Japan, Alaska, Guam, and Micronesia. It also offers expedited service from China to California.
Over the last decade the company has seen its revenue nearly double from $1.6 billion to $3.1 billion. Earnings have increased from $75 million to $295 million, a 14.7% compound annual growth rate, as net margin improved from about 4% to about 9%, and over the last five years earnings have grown even faster – 23% per year, with EPS growing even faster – nearly 27%.
Equity has skyrocketed, growing from $338 million in 2013 to $2.4 billion in 2023 – a compound annual growth rate of 21%. ROE is often in the 10%-20% range, and sometimes higher.
The company is Matson Inc (MATX), formerly Alexander and Baldwin Holdings. There are some scary numbers in its past. For example, earnings dropped 45% from 2013 to 2014, falling from $75 million to $41 million. 2017-2019 saw every year lower than the last, first a 54% crash and then an additional 24% drop – plummeting from $230 million to $80 million.
Are these reasons not to invest? Not really. 2014’s crash was followed by 165% growth, and the two sinking years were followed by a 123% increase in profits the next year. Expect a wild ride with this one – but one that moves up over the long term.
Revenue needs to be looked at more closely. Over the past ten years, it has grown 6.6% per year, and 6.9% over the last five years. That’s below our standard of 7% per year. Is that a deal breaker? The 7% minimum was chosen to ensure because the S&P’s median growth rate is 6.5% – you can’t get above average returns buying below average companies. But Matson, despite being below our targeting growth rate, is above the S&P, which was the whole point of the minimums. There doesn’t seem to be much of a reason to be too dogmatic about a fraction of a percent difference from a theoretical ideal.
But there is a bigger issue. The reason we look at revenue is to ensure growth is sustainable – you can’t consistently grow profits faster than revenue. But with last year’s net margin being 9% against the last couple years’ margins around 25%, there is a lot of room to improve margins, thus growing earnings faster than revenue.
If we’re trying to project what this company’s profits will be 50 years from now, we wouldn’t want to guess much more than 6.6%-6.9% per year.
But the company’s projected annual growth of 15% over the next five years seems very plausible. And against a P/E of only 13, this company looks attractive. I’ll be looking to add 8 shares to the P13 Portfolio.
The next company on the list is Virgina-based Stride (LRN). Founded in 2000, the company offers online education services. Stride has seen its revenue grow at a compound rate of 8% over the last decade, from $848 million to $1.8 billion. Earnings have risen at double that pace, and over the last five years growth has skyrocketed to 35%, with EPS close behind at 34%.
Equity has nearly doubled, from $533 million to $947 million. Net margin has improved from 3.3% to 6.9% since 2013, and ROE has more than doubled, exceeding 13% the last two years.
With a Zack’s rank of 1 and earnings estimates rising, the projected annual growth of 20% over the next five years makes the P/E of 15 look pretty cheap; I’ll be looking to add 12 shares to the P13 Portfolio.
The last company on the list is Colorado-based Century Communities (CCS). Founded in 2002, the company is engaged in designing, building, and selling homes, as well as being involved in mortgage, title, and homeowners insurance.
Century’s performance has been stellar: revenue has grown from $171 million a decade ago to $3.6 billion last year, a compound annual growth rate of 36%. In the most recent five years growth has slowed, but is still an impressive 11% per year. The first five years revenue grew at an unbelievable 66% per year.
Earnings have followed revenue, increasing 20-fold since 2013, for a 36% annual compound growth rate. The last five years have seen a dip in growth, but the 22% annual increase is nothing to sneeze at. EPS has done phenomenally well – 24% over the past decade and 20% over the last five years, increasing more than 8 fold since 2013. EPS growth has not kept pace with earnings, as shares outstanding have nearly tripled. But with the company clearly investing that money well, the dilution is nothing to worry about.
With a P/E of 15 and projected growth of 20%, it’s no surprise that Zack’s gives the company a Value Grade of A and a Zack’s Score of 2. I’ll be looking to add ten shares to the P13 Portfolio.
DISCLOSURE: I do not currently own the stock indicated but I plan to buy some within 24 hours. This is not a recommendation to buy; do your own research, and plan any stock purchases with the help of a financial advisor and an eye towards your appetite for risk and your own unique financial circumstances.
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