Sale Growth Rates – Why is this such an important number when investing in shares?

Recently a number of our clients held a position in iinet (IIN) which is currently in the process of a fierce take over bid war between TPG Telecom (TPG) and M2 Group (MTU) .  Whilst I watched the bidding war take place from the sidelines, and saw the stock price appreciate nicely, it did cause me to pause for a moment and think what now to do with the capital if this all goes ahead?  This lead us to revisit the Teleco sector and complete some initial investigations into this area.

As interest rates have continued to slide, the hunt for yield continues to march on. Telstra (TLS) and the banks have been one of the primary benefactors of this switch from cash and term deposit to new found stock investors….but does this mean TLS is a good buy?

The stock since 2010 has steadily marched higher from its $2.55 lows, trading to a share price as at today of $6.23.  However those that took place in the Telstra 2 issue, are still waiting to get their money back with their initial entry point of $7.40 (dividends aside) so no doubt this will be an eager price point if it reaches these levels.

With massive consolidation in this sector, it is interesting to see how the sales growth rate changes within this sector for each company, and more importantly, why is this figure so important?

Sales growth looks at how quickly they are able to grow their headline revenue often referred to as sales.  In reality, if you think of money flowing into the business and money flowing out of the business, this rate looks at the money flowing into the company.  In other words is this stream of wealth flowing to this company increasing in flow rate, or is contracting to a trickle?

Ideally, if a company can manage their costs base, a high growth sales number is quiet important as it shows the business is continuing to grow.  This is assuming they are able to maintain the expense side of the equation.  It also assumes that if this growth is sustainable over the longer term, then it is likely that this number is one factor which would lead the tugging of the share price higher.  This is of course also assuming the stock is priced at fair or below fair value.

Now there is a lot more that goes into stock analysis than just this one number, but this can be a helpful quick check up point of interest to see if this stock is worth investing in or whether you should give it a miss.

So lets look at two companies in the Teleco sector.

• Telstra (TLS) which has 1 years sale growth of -1.5%, and over the past 10 years has grown on average by 1.4%.

• M2 Group (MTU) which last year had a earnings growth of 35.5%, and over 10 years 33.8% average annualised growth.

Whilst they are very different companies is terms of size and scale and business cycles, interestingly MTU has gone from a share price of $1.69 to $10.98 since 2010, compared to TLS $2.10 to $6.23.

There is another whole argument about why TLS has increased its value and what they have done from a business model and changes taking place with the copper network etc.  Equally with MTU, there is one about organic growth versus acquisition growth, and if the current growth path select is sustainable in the long term.

These questions really are looked into following a more detailed comprehensive analysis. However if you are just looking for a quick check point for whether this stock looks interesting or not, this initial sales growth rate might be an interesting reference point.

Now with all great investment ideas, it is important to seek professional advice and we would of course recommend speaking with our team of expert financial advisers at AJ Financial Planning.