When examining a company that appears on multiple screens, we usually focus on what the screens have in common. That's easy enough for Favored Value and Consensus Choices, as we'll see in a moment, but Relative Growth is the odd man out.
Favored Value and Consensus Choices have two overlapping criteria: analyst sentiment and price-to-earnings-to-growth [PEG] ratio requirements. The first is simple enough. The analysts are about as bullish as they're likely to be. The one hold recommendation became a buy two months ago. Today, the four analysts who track the stock all give it their highest rating.
The PEG ratio is also relatively straightforward. Both Favored Value and Consensus Choices require that the measure of a company's price relative to its prospects be no higher than 2.0. With a 2007 per-share earnings estimate of $4.41 and a consensus growth rate of 14.7 percent, the company's PEG ratio using a sample price taken last week works out to 0.94. Not only is that satisfactory under the screen's pragmatic threshold, it's also low enough to attract more aggressive value mavens, who like to see PEG ratios come in below 1.00.
Relative Growth is substantially different than the other two screens. Analyst sentiment is in no way factored into the screen. Instead, if looks for companies that are growing faster than their industries and are above where they've been in the past.
Learn about Growth Rate Ratios
A company's three year sales growth rate - 15.1 percent, in Anixter's case - must be lower than its trailing-12 month [TTM] sales growth rate. Furthermore, the TTM sales growth rate must be greater than the industry average over that period. Anixter meets both requirements.
Relative Growth then looks to ensure that per-share earnings growth was higher than sales growth in the trailing 12 months; it does an investor no good to find a company with a high sales growth rate that is unable to convert the increased revenue into growing profits.
Finally, it looks for the most recent quarter's earnings growth rate to exceed that of the trailing 12 months. While Anixter meets this easily, the sheer earnings growth in the latest quarter is worth investigating. It was caused by a combination of robust organic growth — management projects 8 to 12 percent organic growth for the rest of 2006 — and the acquisition of IMS Inc., completed in May.
Is the growth rate likely to be that fevered going forward? No, but we're not looking for it either. At recent share prices, our analysis indicates that a new investor today would require per-share earnings growth of 8.6 percent over the next five years to break even. Given that the three analysts that contributed long-term earnings growth projections to the consensus 14.7 percent rate are in a range of 17 to 12 percent, the shares don't seem to adequately reflect potential growth right now.
At the time of publication, Paul DeMartino did not directly own puts or calls or shares of any company mentioned in this article. He may be an owner, albeit indirectly, as an investor in a mutual fund or an Exchange Traded Fund.
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