The single largest ray of economic sunshine across the past three years has been the ability of corporate earnings to keep expanding even while sales growth slowed. That's largely been the result of productivity gains and continuing strength in international markets. However, continuing economic woes in Europe and slowing growth in emerging markets like China and Brazil are beginning to take a toll on America's powerhouse companies. Corporate profit growth grew just 6% last quarter, which is a two-year low.
As growth becomes increasingly difficult for America's top companies to find, I wanted to take a look at not only which companies in the Dow Jones Industrial Average (INDEX: ^DJI) have seen the highest levels of growth over the past five years, but also whether that growth has translated into bottom-line and share-price growth.
The 10 Dow Companies With the best 5-Year Sales Growth
Merck (NYS: MRK)
AT&T (NYS: T)
Microsoft (NAS: MSFT)
Intel (NAS: INTC)
Source: S&P CapitalIQ. Price change is unadjusted for dividends.
A few observations are worth noting.
First off, sales growth can fool investors. Merck and AT&T have the highest sales growth of all Dow components, but that's heavily skewed by huge acquisitions. In Merck's case, it shelled out more than $50 billion for Schering-Plough while AT&T's sales growth is aided by its Cingular merger. Since the merger closed in 2007, AT&T's sales-growth rate has been an anemic 1.3% per year. In both Merck and AT&T's case, earnings growth significantly trails their overstated sales growth.
On the other hand, tech giants like Intel and Microsoft have managed to post earnings growth far in excess of revenue gains. Part of that is a lower tax rates; Microsoft's operating profit growth actually trails its sales growth. However, another part is that while both Intel and Microsoft can be acquisitive, their targets have a relatively low level of sales. Because of this, their sales growth does a good job of showing their ability to organically grow their business aside from buying that sales growth through M&A activity.
Second, even if you've picked out a company that you think could experience high sales growth in coming years, that won't guarantee a winner. Of the above list, only two stocks -- Coca-Cola and Intel --showed high sales/earnings growth and saw their share price move north in the past five years.
The best performing Dow stock of the last five years, McDonald's, saw only the 15th highest sales growth in the Dow. Its outperformance was the result of expanding its profit margins and a beaten-down P/E ratio. Microsoft saw significantly better sales growth than McDonalds with earnings growth that was only slightly lower. Yet it underperformed McDonald's by almost 140% over the time period. That's because Microsoft was trading at a premium to its peers. At today's prices, McDonald's now trades at a P/E nearly double Intel and Microsoft.
Even with McDonald's executing extremely well, it's difficult to see it being the Dow's top performer five years from today when you consider the steep premium it trades at compared with peers seeing similar growth rates.
However, the Dow is just a jumping-off point if you're looking for companies that can see explosive growth over the next half decade. If you're looking for a company that could see better growth than any blue-chip stock in the Dow, I encourage you to take a copy of our brand new free report, "The Motley Fool's Top Stock for 2012." It highlights a company that is revolutionizing commerce in Latin America and was hand-picked by the Motley Fool's chief investment officer. You can get instant access to the name of this company for free.
At the time thisarticle was published Eric Bleeker owns shares of Cisco. The Motley Fool owns shares of JPMorgan Chase, Microsoft, Coca-Cola, Cisco Systems, and Intel and has created a bull call spread position on Cisco Systems.Motley Fool newsletter serviceshave recommended buying shares of Cisco Systems, Pfizer, Microsoft, McDonald's, Intel, and Coca-Cola and creating bull call spread positions in Microsoft and Intel. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.
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