With all the talk about dividends, value and economic moats, it is perhaps easy to overlook the one thing that matters more than anything else when investing: earnings growth. Certainly, many other aspects of a company and its investment case are very much worthy of your attention and consideration, but the success of a company ultimately comes down to how quickly it can grow its net profit over a prolonged period of time.
Long term potential
Clearly, the likes of Telstra Corporation Ltd (ASX: TLS) may not strike you as a company that could be classed as 'high growth'. Looking at its forecasts for the next couple of years backs up this point, since Telstra is expected to see its earnings fall by over 4% during the period. However, beyond that, Telstra could surprise on the upside, with its plan to derive a third of its revenue from Asia within five years likely to provide a stimulus to its top and bottom lines moving forward.
In addition, Telstra is transforming itself from a provider of telecoms to a more diversified business, which includes exposure to the potentially lucrative health care space. As such, its future performance as a growth play could be significantly different than that seen in the past and, with a yield of 4.9% still on offer, its total return could prove to be significant.
Turnaround stock
In fact, medical devices company, Cochlear Limited (ASX: COH), is in the midst of a similar transition. While it does not intend to diversify in the same way as Telstra, Cochlear has seen its bottom line fall by 6.8% per annum during the last five years, but is forecast to grow its earnings at an annualised rate of 38.9% during the next two years.
Of course, the market has already begun to factor in such strong profit growth, with shares in Cochlear having risen by 40% in the last year. However, with the company having a price to earnings growth (PEG) ratio of just 0.79, it still seems to offer strong growth at a reasonable price.
Balanced Growth
One company that is perhaps less up and down than Telstra or Cochlear is investment bank, Macquarie Group Ltd (ASX: MQG). Clearly, it has benefited from a rising ASX in recent years, with its bottom line increase of 9.2% per annum during the last five years coinciding with a 30% rise for the wider index. This has undoubtedly improved fee income and investor sentiment in stocks such as Macquarie that are relatively highly correlated with the ASX.
However, Macquarie's 71% share price rise during that period could continue. Its earnings are set to increase by just under 8% per annum during the next two years and, with an increasingly loose monetary policy environment, the ASX (and, subsequently, Macquarie) could gain a real boost.
