Issues defined as “growth stocks” have a number of common traits, but the most important is that their earnings are expected to grow at a faster pace than the broader market over a period of time. With that in mind, Value Line runs a screen in its Selection & Opinion that searches for stocks that meet this key criterion. It focuses on issues that have recorded good per-share earnings gains in recent years and that should continue to do so in the future, such as BlackRock (BLK), Iron Mountain (IRM), and Darden Restaurants (DRI).
To make our list, all stocks had to be ranked 3 (Average), or better, for both Safety and Timeliness (i.e., relative price performance in the year ahead) ), two of Value Line’s many proprietary rankings. Additionally, all of these companies have managed to increase earnings at a 10%, or better, compounded annual rate over the past five years, which is no easy feat considering that this time span included varying rates of economic growth, including one recession. We also required at least 15% earnings growth in the current fiscal year and a minimum of 14% projected three- to five-year profit growth. We further limited our list to stocks that had moved up in price by at least 15% in the past 13 weeks, thus ensuring strong relative price momentum.
The resulting list is an interesting mix of names (some surprising, others not), that not only performed well even as economic growth slowed, but are projected by our analysts to have worthwhile earnings growth prospects in the year ahead. Below we highlight some of the stocks from our screen:
BlackRock, Inc.
BlackRock, one of the world's largest publicly traded investment management firms, manages assets on behalf of institutions and individuals worldwide through a variety of equity, fixed-income, cash management, alternative investment, and advisory products. The company also offers investment system, risk management, and financial advisory services.
According to Value Line analyst Garrett Sussman, BlackRock continues to take advantage of healthy capital markets. The asset management giant reported strong results during the fourth quarter, driven by a strong performance from equities and solid capital inflows. Assets under management advanced 3% sequentially, to more than $3.561 trillion, following the one-year anniversary of the acquisition of Barclays Global Investors, which more than doubled the company's total assets. The performance of the financial markets over the quarter added $132 billion in assets to BlackRock. Moreover, new business totaled $23.9 billion, most of which has been longer-term equity, fixed-income, and multi-asset class products. However, this inflow of business was more than offset by outflows exceeding $38 billion, mostly related to one client. For the full year, BlackRock reported earnings of $10.55 a share, a more-than-70% advance.
Moreover, Mr. Sussman notes that favorable market conditions should persist this year, and high asset levels ought to continue to drive above-average performance fees and returns for BlackRock. He looks for more strength from equity-based offerings, as investors become less risk-averse and the economy continues to recover, irregularly. Too, BlackRock's ETF platform, acquired from BGI, should attract inflows, as more investors realize the diversification benefits of these funds.
Iron Mountain Incorporated
Iron Mountain is a leading provider of records, documents, and information-management services. The company services more than 90,000 corporate clients, operating more than 900 facilities in about 165 markets worldwide.
Iron Mountain posted solid bottom-line results last year. Excluding one-time items, adjusted share-net rose 20%, to $1.15, on 4% higher revenue of nearly $3.13 billion. The provider of information management and storage services benefited from solid gains in its International Physical (storage) segment and from strong growth in hybrid services (i.e., converting paper documents to digital files). The document-shredding business, meanwhile, was helped by higher recycled-paper prices. On the downside, poor segment results and cloudy prospects prompted the company to write down the value of its electronic records storage venture by $255 million. A weak, and largely jobless, economic recovery also hurt growth.
Value Line analyst Nils C. Van Liew looks for earnings to increase at a high single-digit pace this year. Ongoing productivity initiatives should help, though the company also stands to benefit from firmer pricing for both core storage services and for scrap paper. Weak job creation and gas prices (a key input cost) are concerns, however.
The board of directors recently authorized a huge dividend increase. Indeed, shareholders of record on December 27, 2010 received a payout of 18.75 cents a share, up approximately 200% from the previous quarter's distribution of 6.30 cents. What's more, Mr. Van Liew believes that the company may maintain the higher payout, given the financial flexibility afforded by strong free cash flow of the storage business.
Darden Restaurants
Darden Restaurants is the world's largest casual dining operator. As of November 28, 2010, it had 1,852 units in the United States and Canada. The company operates several chains: The Olive Garden (Italian; 735 units); Red Lobster (seafood; 693 units); and steakhouses LongHorn (340 units) and Capital Grille (44 units).
Value Line analyst Warren Thorpe expects the restaurant to post double-digit earnings growth in fiscal 2011 (ends May 29, 2011). Despite some weather- and calendar-related woes in the February period, the company's various restaurant chains are performing admirably, and Mr. Thorpe believes that rising commodity costs should be somewhat held in check by improved traffic as the economy strengthens.
Recent remodels, value-enhanced menus and the promotional activity to go with them, and increased advertising spending should all help support results this fiscal year and next. In fact, Mr. Thorpe looks for another double-digit share-net advance in fiscal 2012.
To see the results of our screen, limited to those stocks that carry Above-Average scores Timeliness, subscribers can click here. As always, subscribers should carefully review the analyses in Ratings and Reports before committing funds to any particular equity.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.
