Where will you be in 10 years?
It's impossible to know – but that does not mean you can't plan that far ahead.
Indeed, one way investors can get an edge over the market is to take a long-term view. For many, "long term" is five years, but I prefer to use 10 years as my long-term horizon. When thinking about long-term growth, I try to remember that it is very rare for a company to grow earnings per share (EPS) every year for 10 years in a row.
For example, the Commonwealth Bank of Australia (ASX: CBA) has grown EPS for the last five years, but in two of the last 10 years earnings per share have actually decreased. Now, I'm not saying that's bad, but I use the Commonwealth Bank as an example because, with a price to earnings (PE) ratio of over 15 and a price to book (PB) ratio of over 2.6, it is arguably priced for continuous growth. Yet based on past performance, the company does not grow each and every year – just most years.
With that in mind, I've tried to find some companies that I think can grow for 10 years in a row, starting from 2014.
First on the list would have to be Vocus Communications Limited (ASX: VOC), a company that has already laid down plenty of incredibly useful fibre optic cables. I think that the company will be able to grow profits every year because – at the current rate – every 58c the company spends on capex results in an extra $1 of contracted revenue. Better yet, that figure – the capex efficiency – continues to improve. However, it is possible that the company might see earnings per share decrease if it issues a lot of new shares to pay for an acquisition or some new project. Although the company has doubled in value since I first bought shares, I still consider Vocus shares reasonably priced, if no longer such a bargain.
Second on the list is blood plasma and protein science company CSL Limited (ASX: CSL), which can also demonstrate improving returns on investment over the years. The company celebrates its 20th year as a public company this year, and is arguably one of the best ASX success stories. Most consider it a defensive investment because its products are so critical to healthcare systems throughout the world.
Astonishingly, CSL has grown revenue for 21 consecutive years, but profit is also influenced by other factors such as R&D expenditure and interest repayments which vary over time. The company's recurrent share buy-backs have the impact of boosting earnings per share, and increase the chances that earnings per share will grow for 10 years. At the moment, management is proceeding with expansion plans to position the company for increased plasma demand. 10 years of earnings per share growth is a big ask for a $30 billion company, but CSL is in with a solid chance.
Finally, I also think that online classifieds company Carsales.Com Ltd (ASX: CRZ) could grow earnings per share for 10 more years. My thinking is that the business doesn't require extensive working capital, so the company is free to invest free cash-flow in expanding its Australian business or on international investments.
Earnings will possibly be exposed to greater risk if the company expands further into financing, although I consider the recent acquisition of 50.1% of Stratton Finance to be a sensible bolt-on acquisition. I suspect that the accumulation of shares of international businesses such as South Korea's Skencarsales, Brazil's Webmotors and the South East Asia focussed iCar Asia Ltd (ASX: ICQ), will prove more significant drivers of long-term growth.
