By Andy Obermueller
How does a $500 million company become a $1 billion company?
The same way a $10 billion company turns into a $20 billion company: One dollar at a time.
Investors have a lot of ways to count those dollars, or, more specifically, they have various methods to measure the growth of those dollars.
Two of the most common yardsticks in this regard come from the income statement: revenue growth and earnings growth. Other investors, Warren Buffett for instance, look past the income statement to the balance sheet, where they prefer to focus on the spread between assets and liabilities, which is known as shareholder equity.
Today, I'll show you companies with a lot of room to grow -- each with a market cap between $400 million and $500 million -- that are also showing serious earnings growth. Among all U.S. companies, only 20 had year-over-year earnings growth of more than 100% in the most recent quarter.
Here are three:
1. LoopNet (Nasdaq: LOOP) -- The company runs a popular website with nationwide real estate listings. While thousands of sites offer prospective homeowners free ads for houses, LoopNet collects information from brokers seeking to sell commercial and industrial property. It's a relatively pricey service (about $35 a month for a subscription or $30 for a temporary login) used mostly by industry insiders. It earned $7.28 million in the most recent quarter compared with $3.31 million a year ago, a 120% increase.
Does that increase signal a "buy" opportunity? The underlying question is whether this increase in earnings is likely to continue, and the answer appears to be no. The company's revenue is very, very stable and the only reason for this uptick in earnings was a tax refund, which is an extraordinary event -- not something the company is likely to see every year. (Unless it has really dumb accountants.)
LoopNet is a great resource for people in the real estate business, but this earnings spike was a one-time deal. Keep looking.
2. Conceptus (Nasdaq: CPTS) -- This medical device company makes a noninvasive form of permanent birth control for women that requires no surgery and no drug or hormone regimen. The product, called Essure, has been approved by the Food & Drug Administration (FDA) and is available internationally. The product is 98% effective, carries a high level of patient satisfaction and a high awareness among obstetricians.
This company's quarterly results also were the result of a favorable tax event on the income statement. But it bears a second look because, unlike LoopNet, Conceptus shows a favorable uptrend in revenue and earnings, indicating use of its product is growing. And as market awareness begins to rise, so too will demand. There are about 700,000 tubal ligations a year in the United States (and some 400,000 vasectomies), and many of those patients might prefer a noninvasive procedure. The total market, however, is far wider than that, as there are 7.5 million women who don't want any more children, but who still take birth control. Revenue is up 241% in the past four years.
Don't let the low price-to-earnings (P/E) ratio (about 6) fool you into thinking this is a low- or no-growth company or some sort of value play. It's not. The earnings multiple shot down because earnings shot up so dramatically in a one-time event. This is an excellent company with a proven, FDA-approved product that is capable of substantially growing its market, increasing its earnings even further. The shares are worth considering for growth investors with a multiyear horizon.
3. Sonosite (Nasdaq: SONO) -- makes a handheld ultrasound machine about the size of a laptop. It's a good, old-fashioned high-tech growth story. This small ultrasound machine can be deployed in traditional areas like the OB/GYN's office in addition to areas that typically haven't had easy access to the technology's capabilities, such as the emergency room, the operating room and internal medicine clinics. "Deployed" is a good word to use, as the Pentagon has adopted the technology in its hospitals and even in the field in war zones, and it's also been stationed courtside at basketball games. The company isn't content with its product lineup and has been making acquisitions to bolster its offerings.
Earnings rocketed up 158.7% in the most recent quarter compared with a year ago, and it did it without a check from the U.S. Treasury. Instead, it took in more money and managed costs. That said, this is a tough company to predict, and earnings and revenue, while generally on a positive trend, seem a little inconsistent.
A new device that offers significant advantages over the incumbent technology is a valuable thing indeed. That's what GPS technology did to Rand McNally, what the iPhone did to the BlackBerry and what Google (Nasdaq: GOOG) did to Yahoo (Nasdaq: YHOO) -- and all made billions in the process. I expect Sonosite to continue its growth story and advance its products in the vast medical marketplace. It's a strong buy.
Coming up, I'll show you the companies that are showing significant top line growth. Stay tuned...
Disclosure: Neither Andy Obermueller nor StreetAuthority, LLC hold positions in any securities mentioned in this article.