By: Grover Grafton
A Little Refresher:
Over significant periods, companies and their traded interests (stocks) trend toward the average performance of the micro-economic (company level) and industry-specific fundamental performance.
These fundamentals can include many measures of performance: Return on Equity (ROE), Return on Capital (ROC), After-Tax Operating Margin, etc. We discussed these and more at an industry level in a prior article (Click the link below).
Today, however, we will look at two additional fundamental metrics and their industry-level compounded growth rates (CAGR) for the past 5 years. First, Net Income and second, Revenue.
For reference:
Net Income = Revenue - Cost of Goods Sold - SG&A - Taxes - Interest ("Bottom Line")
Revenue = Sales
Why these two metrics as opposed to others?
While there are numerous good predictive measures of performance, in the end, an investment is only worth the cash it can deliver to you over its life, discounted back to the present (NPV). This sounds simple, but end results are largely affected by discount rates, which often mirror interest rates or bond yields, the price paid for a security, and of course the sum of the cash flows. These can all be hard to determine and evaluate; however, investing in a growing pie (company) whose earnings and revenues are growing at a good clip over extended periods allows for a degree of miscalculation in the prior two factors.
In short, there is not particular reason to select growth in Net Income and Revenue beyond their simplicity and their acting as a proxy for growth in cashflow.
Down to Numbers:
Ok. So below is a data table rerviweing 93 industries and their respective CAGR in Net Income and Revenue. Have fun exploring, we will have a review below. :)
Data Notes:
Best on desktop for easy viewing.
Pre-sorted highest ---> Lowest by 5yr CAGR
There are 93 distinct industries represented in the dataset.
These industries collectively represent 6,481 firms.
The data also includes 2 summary rows:
"Total Market" (all firms)
"Total Market (without financials)" (5,214 firms)
Review:
Top 5 by net income CAGR 5yr:
Telecom. Equipment: 35.80%
Precious Metals: 33.37%
Oil/Gas Distribution: 30.55%
Homebuilding: 29.39%
Real Estate (Development): 26.70%
The top 5 industries by revenue CAGR 5yr:
Real Estate (Development): 55.56%
Drugs (Pharmaceutical): 41.54%
Tobacco: 34.97%
Oil/Gas Distribution: 27.45%
Software (Internet): 22.24%
Things to remember:
Commodity fluctuations can greatly impact commodity companies' revenue and profitability as they have large fixed costs. These fluctuations may, however, be temporary.
5 years is a medium-term period and may not represent future results but rather serves as a place to dig in and find the companies that will continue the outperformance.
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