Are you looking for high-growth basic materials stocks with strong sources of profits? If so, we have the perfect list of companies for you.
We began by looking for basic materials stocks with 5-year projected EPS growth above 15%. Could there be a fundamental reason for this growth potential? We researched the financials of the companies on our list to look for at least one fundamental reason, which could trigger the growth.
We screened for those basic materials stocks with strong sales trends, comparing growth in revenue to growth in accounts receivable. Since accounts receivable is the portion of revenue not yet received, and there is no guarantee the money will ever be received, the smaller the portion of revenue made up of receivables, the healthier the company's revenue.
We screened for stocks seeing faster growth in revenue than accounts receivable year-over-year, as well as accounts receivable comprising a smaller portion of current assets over the same time period.
Finally, we analyzed our list of companies for strong profitability by performing DuPont analysis. DuPont analyzes profitability by breaking up return on equity (net income/equity) into three components. If the ROE is unsatisfactory, the DuPont analysis helps target the part of the business that is underperforming. Learn more about the equation here.
Those companies that pass DuPont are seeing positive trends in the sources of their increasing profitability, which adds further weight to the idea that the names are profitable.
Our final list consisted of 2 companies.
A Closer Look
We looked at American Vanguard Corp. (AVD) in more detail. The stock trades around $32.35 versus its 52-week range of $15.85-$37.39, up 102% in the past 1-year. The stock trades with a P/E multiple of 26 times, and pays a dividend of 0.43%. The company's competitor Aceto (ACET) is up 33% in the past 1-year, trades with a P/E multiple of 14 times, and pays a dividend of 2%. Let us remind you that Aceto is a small company with a market cap of $280 million.
A noteworthy comment on the company's cash flow: For the nine months ended September 30th, 2012, cash flow from operations was $13 million, and capital expenditures were $14.9 million. Also, the balance sheet consists of cash and cash equivalents of $24 million. Current installments of long-term debt are $15.6 million with long-term debt at $38.5 million. Do you think encouraging sales trends supersede the liabilities of the company?
For an interactive version of this chart, click on the image below. Click on play to see the change in the monthly returns for the 2 stocks mentioned
Does the DuPont analysis, and strong top-line growth build a strong investment case? Use this as a starting point for your own analysis.
1. American Vanguard Corp. : Engages in the manufacture, development, and marketing of specialty chemical products for agricultural and commercial uses in the United States and internationally.
- Market cap at $925.23M, most recent closing price at $32.51.
- MRQ net profit margin at 8.9% vs. 6.26% y/y. MRQ sales/assets at 0.228 vs. 0.213 y/y. MRQ assets/equity at 1.846 vs. 1.922 y/y.
- Revenue grew by 23.01% during the most recent quarter ($90.76M vs. $73.78M y/y). Accounts receivable grew by 9.66% during the same time period ($106.36M vs. $96.99M y/y). Receivables, as a percentage of current assets, decreased from 52.62% to 46.09% during the most recent quarter (comparing 3 months ending 2012-09-30 to 3 months ending 2011-09-30).
- 5-year projected EPS growth at 32%
2. Calumet Specialty Products Partners LP (CLMT): Produces and sells specialty hydrocarbon products in North America.
- Market cap at $2.33B, most recent closing price at $36.11.
- MRQ net profit margin at 3.6% vs. 2.52% y/y. MRQ sales/assets at 0.527 vs. 0.474 y/y. MRQ assets/equity at 2.64 vs. 2.991 y/y.
- Revenue grew by 51.69% during the most recent quarter ($1,179.82M vs. $777.78M y/y). Accounts receivable grew by 13.37% during the same time period ($264.14M vs. $232.99M y/y). Receivables, as a percentage of current assets, decreased from 33.93% to 27.43% during the most recent quarter (comparing 3 months ending 2012-09-30 to 3 months ending 2011-09-30).
- 5-year projected EPS growth a 16%.
* Accounting and profitability data sourced from Google Finance, all other data sourced from Finviz.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.