'Dirty 30' Evaluation Tool - Part 5

by: Cory Cook

On to Part 5! Well, if you haven't read parts 1-4 then get to stepping and get those read first! Now that you have taken care of some back research, let's get this next part going!

For a refresher here is the Hormel (NYSE:HRL) evaluation that we were working off:

In Part 5, we are going to review the Revenue, Sales, and Income section. To be honest, this will be a pretty short post because there really isn't much to be said about the different variables that make up this section. Let's get started!

10-Year, 5-Year, 1-Year Revenue Growth

Revenue growth per share is very important to me when looking for a potential investment opportunity. I like to look at the 10-year, 5-year, and 1-year revenue per share growth rate. This gives me a look at what historically the company has done in terms of growth and also what they are looking like currently.

Is one better than the other? That's a great question. It all depends on the company, in my opinion. Is it a company that is in a mature industry, such as Target (NYSE:TGT), or is it a company that is in a relatively new industry, like an Amazon (NASDAQ:AMZN). This makes all the difference in the world. Let's take a look at a couple of these companies.

TGT data by GuruFocus.com

AMZN data by GuruFocus.com

Now, it may be totally unfair for me to place these two side by side, and for good reason, but let's take a look at why I like to compare these numbers. Now, TGT has a 10-year revenue per share growth of 5.8% while AMZN has a 10-year rate of just over 27%. AMZN is astounding and clearly the gain in value shows the difference (AMZN $32-$1,125 pps, TGT $48-$74). No question here which one has had the better 10 year performance. Problem is how many people were even looking at AMZN as a long-term hold in 2007?

So, what do I look for in terms of % gain in revenue per share? 5% in all three categories. Why you ask? Well, let me give you a bit of hypothetical math.

5% per year compounded over 10 years equals about 63% revenue per share growth. Now let's assume that 63% revenue growth also turns into 31.5% EPS growth (half of revenue growth). Also let's say that you followed all the rules and bought at a 15 P/E, then in a bull market sold at a 20 P/E.

10 shares of $10 stock w/$0.66 EPS
(Fast forward 10 years of compound and assume 20 P/E)
EPS = $.87 multiplied by 20 = $17.36 per share
10 shares x $17.36 = $173.60
Add in Dividend of 3% annually = ~$203.60
(assumes $3 per year dividend with no increases, or 3% of INITIAL stock price)

TOTAL RETURN = ~103%

I know that this isn't the most realistic way to calculate how much money an investment is going to net you in a 10-year period. What it does do however is show you that you don't always need to look for those huge growth stocks that explode onto the scene and leave you (and your portfolio) open to a ton of risk. You can make great returns with companies that consistently make small improvements to their bottom line. Trust me there are way more of those out there than there are Amazon's!

Total Revenue/Sales

This one is pretty simple, I want to see an increase YoY in revenue. Without revenue growth, it is going to be tough to have significant EPS growth. Without the EPS growth, the share price is going to have a tough time increasing.

Again, it is pretty simple. YoY Revenue growth equals a better possibility for EPS growth and ultimately price per share increases.

Net income

Again, this one is black and white. I want to see YoY growth. Same reasons as above.

If you have any comments or suggestions, as always, let me know in the comment section below.