Study Notes:
Observing popular media- you’ll see lots of lists suggesting future growth companies.
And at this point – you might be asking – what are some common growth factors that might influence a company’s future earnings growth?
Companies with a stable and predictable business model are more likely to experience consistent growth. This stability allows for more accurate forecasting and planning for future growth.
The growth of Free Cash Flow to Equity (FCFE) and dividends can significantly impact a company’s earnings growth. A positive FCFE indicates that the company is generating more cash than it needs to maintain or expand its operations, which can be reinvested in growth initiatives or returned to shareholders.
Stable financial leverage helps maintain a constant cost of equity, which is crucial for valuing the company’s future earnings. Changes in financial leverage can affect the cost of equity capital thus impacting growth expectations.
Companies that pay out a significant portion of their free cash flow as dividends to shareholders may not have as much capital to reinvest in growth. However, this can be a positive sign for investors looking for stable, dividend-paying stocks.
The overall market trends and growth rates can significantly influence a company’s future earnings growth. For example, a company operating in a rapidly growing market segment may experience higher growth rates compared to those in mature or declining markets.
Companies with a strong competitive advantage, such as unique technology, strong brand, or superior customer service, are more likely to experience growth. This advantage can help the company capture market share and maintain growth over time.
Growth can be driven by focusing on the company’s core business areas, where it has the most experience and expertise, as well as by nurturing growth in adjacent business areas. This approach allows companies to leverage their existing strengths while exploring new opportunities.
Companies that have a transferable advantage and can expand internationally may experience significant growth. This can be particularly beneficial for companies in industries with global demand, such as technology or consumer goods.
Combining healthy organic growth with strategic acquisitions can help companies grow faster. Additionally, pruning less profitable segments of the business can free up resources for investment in growth areas.
The ability to adapt to market changes and maintain resilience in the face of challenges is crucial for sustaining growth. Companies that can quickly pivot their strategies or innovate to meet changing market demands are more likely to experience sustained growth.
An example of a US company with strong growth factors is DaVita Inc. (ticker: DVA), which operates in the health care sector.
Let’s open this up in TWS’ Fundamental Explorer.
DaVita’s growth is driven by the ongoing expansion of the health care sector, particularly the demand for dialysis treatment for patients with chronic kidney conditions. With more than half a million dialysis patients in the U.S. needing regular care, DaVita has a significant patient base that is expected to grow. This growth is supported by demographic trends both domestically and internationally, indicating a long-term tailwind for the company.
Furthermore, DaVita benefits from strong ownership, with Warren Buffett’s Berkshire Hathaway Inc. holding more than 40% of the company’s shares. Berkshire Hathaway’s investment in DaVita began in 2011 and has steadily increased its position. This backing from a renowned investor like Buffett appears to add credibility and stability to the company’s growth prospects.
The company’s earnings are projected to grow significantly, with a 20% increase from $7.42 in fiscal year 2023 to $8.94 in the current year, followed by another 13%, to $10.08, in FY 2025. Looking at this trend of increasing earnings indicates a strong growth trajectory for DaVita, making it a possible investment for those looking for long-term growth in the health care sector.
Identifying a combination of stable business models, strong financial performance indicators, market trends, competitive advantages, strategic focus areas, and adaptability are key company-specific growth factors that can influence future earnings growth.
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