2012 and 2013 were years of little top-line (or revenue) growth for many established Australian companies. Cost cutting, efficiency drives and redundancies were the name of the game for management teams who were tasked with increasing profit from a stable revenue base. The reason for no or poor revenue growth? Most blamed the Australian economy, which has grown below trend for around five years now.
A turnaround
Australian gross domestic product (GDP) growth has started to pick up now and this will impact share prices in the months and years to come. Companies that can leverage this growth by growing their own revenue bases will be rewarded, while companies that disappoint will see their share prices punished.
An example of a company that has fared poorly due to dropping revenue is Echo Entertainment Group Ltd (ASX: EGP). Echo announced a drop in revenue of 5% and a 30% drop in net profit after tax. The company's shares were subsequently sold off by 6% on the day, as investors were expecting much better.
Three companies set for growth
In stark contrast to Echo, the following three companies have reported earnings to 31December 2013, and been rewarded for growing revenues.
Woolworths Limited (ASX: WOW) announced last week that sales from continued operations increased 6%, with the company's ever-important Australian food and liquor division growing 4.8%. Woolworths' shareholders were rewarded with a 2% rise on the day and sales are forecast to continue growing in the years ahead.
Shares in real estate website company REA Group Limited (ASX: REA) jumped 5% in early February when it announced an incredible 30% jump in revenue and 37% rise in net profit. These figures were above analyst estimates and upbeat guidance for the coming years has seen the company put on over 13% since the announcement.
Finally, Magellan Flagship Fund Limited (ASX: MFF) delivered an incredible 400% increase in revenue in the six months to 31 December, compared to a year earlier. Revenue jumped from under $20 million to over $100 million due to strong inflows to the fund. It outperforms most other funds which should continue to support future inflows.
Foolish takeaway
Investors are now spending more time searching for companies likely to outperform on revenue. The three options above have delivered in this reporting period and remain likely to perform well in the future. To identify companies that may deliver unexpectedly good revenue growth, one should consider companies that might benefit over the long run from structural changes such as a decrease in the Australian dollar.
