Want Growth? Look at These Companies

Federico is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

I am always looking for growth, but that growth must be priced at a reasonable or not expensive valuation. When analyzing growth stocks I look at several things then I ask myself this simple question, will the fundamentals improve in this company? As Peter Lynch explained, this is the question that ultimately matters. In this article I describe 3 growth companies that are fairly valued, have attractive growth prospects, and prominent investors have bought in recent quarters.

Growth At Reasonable Price (GARP)

The first stock is MasterCard (NYSE: MA), which benefits from the continued secular shift from cash to electronic payments (as 85% of global transactions are still comprised of cash and check) with the expectation for additional issuer additions in 4Q12. In fact, I think this secular trend from cash to electronic will offset macroeconomic weaknesses. Top value managers seem to agree with this thesis, considering that prominent investors Chuck Akre, Andreas Halvorsen, Joel Greenblatt, and Ken Heebner bought the stock in the recent quarter. At the last Mastercard Investor Day, the company reaffirmed its FY13-15 annual growth targets and projected net annual revenue growth of 12% with operating margins no less than 50%. This reflects that MasterCard’s management is very optimistic on the company's future. I also like companies that buy back their shares. During the third quarter of 2012, MasterCard repurchased ~500,000 shares of Class A common stock at a cost of $216 million, with $1.1 billion remaining under the most recent $1.5 billion repurchase program authorization. MasterCard continues to drive growth through increased cross-border volumes, improved pricing along with consistent growth of processed transactions, which grew 29% in the first half of 2012, backed by 18.3% growth in 2011 and 2.9% in 2010. MasterCard is also focused on achieving international growth. The company reported a worldwide increase of 14% in gross dollar volume. Outside the U.S., the growth rate was 17%, with more than 20% growth in Asia-Pacific, Middle East, and Africa according to Zacks. MasterCard’s cross-border volume increased by 14%. FBR Capital issued an interesting report explaining that while its research team believes that +20% EPS CAGR is achievable for the three-year period ending in 2015, near term, they expect EPS CAGR to be below 20% reflecting the weak global economy, which will adversely affect net revenue growth rates. However, once the global economy stabilizes, considering MasterCard’s exposure to underpenetrated, high-growth emerging markets, FBR expect EPS growth to surpass 20%.

MasterCard shares are fairly valued at 21x consensus 2012 earnings estimate. The company has a high ROE of 42% and strong growth metrics. In fact, MasterCard reports a 3 year annual EPS growth of 65% and 21% sales.

The stock to play the US housing rebound?

Williams-Sonoma (NYSE: WSM) goal is to double its size in 10 years. This is not a surprise for investors as the company has been growing earnings at an average rate of 105% and revenues at 10% in the past 3 years. The company has a solid balance sheet and shareholder friendly management. Williams-Sonoma has a proven ability to grow its own brands, acquire new companies, and provide superior customer experience in its stores and through its web sites and catalogues. In a recent report, Deutsche Bank upgraded the stock explaining that the company is one of the best retailers to balance merchandising strength with better analytics to drive consistent top line growth and improved margins. Deutsche Bank also projects revenue growth from improvements in housing and related home furnishing sales. In fact, economists are optimistic that the housing market is recovering and that home remodeling is rising. This trend should benefit Williams-Sonoma. The company recently delivered strong performance in revenues, operating margins and earnings per share. Diluted earnings per share grew 16% on net revenue growth of 7%, with comparable brand revenue growth accelerating from 5.4% in Q1 to 7.4% in Q2. Also during the quarter, e-commerce net revenues increased a strong 14%.

Most importantly, the company drove this growth in revenue and earnings while simultaneously investing in its long-term growth initiative. All brands contributed to these results. Pottery Barn and West Elm again performed very well during the quarter. Pottery Barn Kids and Pottery Barn Teens both posted year-over-year increases, and Williams-Sonoma improved its revenue trend versus the prior quarter.

I am also optimistic on Starbucks(NASDAQ: SBUX) Verismo launch. Williams-Sonoma will be the first retailer to launch the platform, and the company will carry its own exclusive premium model. The availability of Starbucks Verismo pods combined with this versatile machine will appeal to Williams’s customers' desire to create an authentic Starbucks café experience in their home. Lastly, the company is starting to expand to international markets. Management recently announced the opening of the first company-operated stores outside of North America. Williams will be opening 4 stores in Sydney, Australia, a Williams-Sonoma, a West Elm, a Pottery Barn and a Pottery Barn Kids, expecting to open these stores in early fiscal 2013.

An Innovator in the Medical Devices sector

Sirona (NASDAQ: SIRO) just introduced a product that could be a blockbuster in the dental sector. Cantor Fitzgerald believes that  Omnicam is a game-changing technology that could spark a new product cycle and drive broader adoption in the vastly under-penetrated 3D dental market.

 Cantor highlighted that Sirona still trades at a discount to its peer group and considering the company has a market-leading new product and likely return to positive operating leverage and double-digit EPS growth in 2013, they think a premium is warranted.

Sirona has a clear leadership position in the attractive, growing digital dental market and is on the cusp of a new product cycle. The company is poised to continue growing revenue faster than the underlying dental market. In fact in the recent earnings report, the U.S. segment grew 7.7% and continued to show sequential improvement up from last quarter’s 4.9% growth rate and first quarter’s 2.0%. International markets were up 6.6% constant currency. The company keeps expanding its outstanding portfolio of high-tech dental products through continuous innovation and continues building its world-class global sales and service infrastructure, which is active in over 135 countries around the globe. Top investors Joel Greenblatt and Ruane Cuniff bought the stock in the past quarter.

martinzaldua has no positions in the stocks mentioned above. The Motley Fool owns shares of MasterCard, Starbucks, and Williams-Sonoma and has the following options: short JAN 2013 $47.00 puts on Starbucks. Motley Fool newsletter services recommend Starbucks and Williams-Sonoma. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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