5 Companies Posting Strong Sales Amid a Tough Top-Line Climate

by: John P. Reese

While many companies are continuing to post strong third-quarter earnings numbers, much of the earnings season talk has centered on concerns about the "top line" -- that is, revenue growth. The consensus seems to be that while corporations have done a great job of cutting costs and squeezing every dollar out of every sale, demand for their products hasn't picked up as much as investors would like.

Generally that may be true -- but it doesn't mean there aren't plenty of exceptions. Whether because of conditions within their specific industries, an ability to tap into areas of the world that do have strong demand, or a good ol' fashioned ability to market and sell their products, a number of firms have been producing very good top-line growth in a challenging climate.

With that in mind, I thought I'd see which companies that have been riding impressive sales waves also get approval from my Guru Strategies, fundamental-based approaches that are each based on the strategy of a different investing great. Here are some of the best of the bunch.

Neogen Corporation (NASDAQ:NEOG): Neogen makes a variety of products involved in food and animal safety, such as rapid diagnostic test kits to detect foodborne bacteria and other harmful substances, and veterinary instruments, pharmaceuticals, and nutritional supplements for animals.

The $782-million-market-cap Michigan-based firm has been growing revenues at a 17.7% clip over the long term. (I use an average of the three-, four-, and five-year growth rates to determine long-term growth rates for both sales and earnings.) Demand has really increased more recently -- sales grew at a 34% clip in the most recent quarter, and a 26% pace in the quarter before that (vs. the respective year-ago quarters).

Neogen's strong sales growth is one reason it gets high marks from the strategy I base on the writings of Martin Zweig. The Zweig approach looks at earnings from a variety of angles, making sure that they are not only growing, but also accelerating. And, Zweig found that cost-cutting or one-time measures could only boost earnings for so long; eventually, a company has to grow sales in order to grow earnings, so this strategy looks for companies that are also growing revenues at a an accelerating rate. Neogen's last two quarters of sales growth meet that criteria, and the firm has also shown accelerating earnings per share growth: EPS grew at 31.6% in the most recent quarter, up from an average of 29.6% in the three quarters before that (all figures vs. the year-ago quarters), which was up from the long-term rate of 21.4%.

Another reason the Zweig-based model likes Neogen: The firm has no long-term debt.

Catalyst Health Solutions Inc. (NASDAQ:CHSI): This Maryland-based pharmacy benefits manager ($1.7 billion market cap) grew sales at a 37% pace in what for most businesses was a rough 2008. It then upped them another 14% last year, and another 21% through the first half of this year.

Catalyst gets approval from two of my models. My Peter Lynch-inspired strategy likes the firm's 26.5% long-term EPS growth rate and 0.86 P/E/Growth ratio. It also likes the Catalyst's financials, including the firm's impressive 52% equity/assets ratio and 8.4% return on assets rate. My James O'Shaughnessy-based growth model, meanwhile, likes Catalyst's 0.52 price/sales ratio and 62 relative strength. That combination indicates Wall Street has been embracing the stock, but that it also remains cheap.

Infosys Technologies (NASDAQ:INFY): This global information/technology giant ($38 billion market cap) may be based in India, but it gets about two-thirds of its revenue from North America. It's been growing revenues at a 20.9% clip over the long term, and sales growth has been even better in recent quarters -- in the third quarter, sales grew 29.6% (vs. the year-ago quarter).

Infosys has more than just strong revenue growth going for it. The firm has upped earnings per share in each year of the past decade, has no long-term debt, and has averaged a 31.9% return on equity over the past ten years -- all of which are reasons that it gets approval from my Warren Buffett-inspired Guru Strategy.

Coach, Inc. (NYSE:COH): Surprised? Luxury goods stocks were pounded during the financial crisis, with conventional wisdom being that if consumers were going to buy anything, they'd buy bargain-priced goods -- not the expensive bags and clothing and accessories a firm like Coach sells.

Well, Coach has bounced back pretty nicely. After managing to slightly increase revenues in its 2009 fiscal year (which covered July 1, 2008 through June 30, 2009 -- the very heart of the financial crisis), Coach upped revenue by 12% in its 2010 fiscal year, finishing with a particularly impressive 22% gain for the April-June quarter. Then in the first quarter of its fiscal 2011, it upped revenue by 20%.

Coach ($15 billion market cap) is another favorite of my Buffett-based model. A few reasons: The firm has upped EPS in all but one year of the past decade; it's conservatively financed, with just $24.2 million in debt and $717.6 million in annual earnings; and it has averaged a 37.3% return on equity over the past decade, a sign of the "durable competitive advantage" Buffett is known to seek in his investments.

Research in Motion Limited (RIMM): This Ontario, Canada-based tech titan designs and manufactures the BlackBerry smartphone, and makes software and the operating system used by the BlackBerry.

RIM has an exceptional 65% long-term revenue growth rate. It's tough to sustain such a high rate forever, but the firm has continued to post some solid sales increases in the past year. Over the past four quarters, its sales have increased (from earliest to most recent) 41%, 18%, 24%, and 31% (vs. the respective year-ago quarters).

RIM's strong performance has earned it strong interest from the strategy I base on the writings of hedge fund guru Joel Greenblatt. Greenblatt used a remarkably simple two-variable approach to find winning stocks, looking at return on capital and earnings yield. Research in Motion has an earnings yield of 15.0%, which ranks 100th out of the thousands of stocks in my database, while its return on capital of 71.7% ranks 84th. Those scores make the stock the 24th-most attractive in the market right now, according to this strategy.

Disclosure: Author long NEOG, CHSI, RIMM, and INFY