If you're going to invest your hard-earned, you need to ensure that the companies you wish to buy into have at least some semblance of earnings growth.
Scanning the top-20 stocks of the S&P/ASX 200 (INDEXASX: XJO), there are only three that exhibit forecast earnings growth of 10% or more over the next 1-2 years. Except for the three companies below, it was quite a sobering experience to discover that the remaining 17 in the top 20 were looking at forecast earnings growth that was low-single digit at best, and disastrously negative at worst.
It's quite depressing to realise that fund managers at most large superannuation funds in Australia hug this index like their life (or career) depends on it (but that's a story for another day).
If you're going to develop a watch list of potential stocks for your portfolio, forecast earnings are a simple first measure to consider.
Of course, there are a multitude of ways to analyse a stock and a company itself, but if you're going to look forward (which you are if you're a buyer of a company's shares), then it's the earnings-per-share that matter over the longer-term.
Naturally too, forecasts are just that. There's no guarantee that these figures will be met by the companies in question, but given that guidance is usually provided by the companies themselves to the various analysts that cover the company, it's your only option when factoring in how a company's profits and earnings-per-share are positioned for the immediate term.
Here are three companies from the list of the 20 biggest companies in Australia by market capitalisation that have the potential to increase their earnings at above-average rates over the next 12 months.
CSL Limited (ASX: CSL)
A global biopharmaceutical company with a multitude of products designed to treat bleeding disorders and viral/bacterial diseases amongst many others. It is one of the best share market performers over the last 22 years. However, it's the future that counts.
With consensus earnings-per-share expected to be around $4.75 per share by June 2017 – a nice increase over 2015's $3.74 per share. If these numbers are met, this puts CSL on a price multiple of approximately 24 times which makes the stock cheaper than it appears.
The caveat though is to not to try and time the market but to hold for a number of years to allow the company's economic fundamentals to shine through, and this is definitely worth a closer look.
Brambles Limited (ASX: BXB)
Best known for its CHEP pallets, Brambles can best be described as a supply-chain logistics company with operations in over 60 countries.
2017 financial year earnings are forecast to reach 63.6 cents per share, up from 51.9 cents per share as at June 2015. This puts Brambles on a forecast multiple of 20.3 times earnings which is fractionally cheaper than its 10-year average.
With strong network effects in its core CHEP pallet operations, Brambles' earnings look sustainable well into the future and make this a stock worthy of a place on your watchlist.
Transurban Group (ASX: TCL)
This is an expensive business due to the defensive nature of its operations in toll roads here in Australia and in the United States.
I've said before that Transurban would be a good buy below $7 (wishful thinking I know) but is it any wonder why the stock continues to rise? There are its defensive operations and the market-wide hunt for yield which has impacted the share price.
Unlike the majority of top-20 businesses on the ASX though, Transurban is expected to post an almost 10% rise in earnings per share, despite its history of share issuance.
This is not a stock to buy today, but it's nevertheless a quality business ready to be picked up in any severe market meltdown.
Foolish takeaway
If you're an investor that wishes to stick to the big end of town, these three businesses above show the best prospects for earnings growth. It's a difficult place to invest due to the popularity of the big names, but if you're patient, any or all of the shares in the three companies above will suit your portfolio if bought at rational prices.
