Markel and Pulte can flaunt rapid revenue growth

2023-11-05 - John Dorfman John Dorfman is chairman of Dorfman Value Investments LLC in Boston and a syndicated columnist. His firm or clients may own or trade securities discussed in this column. He can be reached at jdorfman@dorfmanvalue.com.

For a while, revenue growth at all costs was a popular approach, and investors fell for it.

Now that stocks such as AMC Entertainment Holdings Inc. (AMC) and WeWork Inc. (WE) have crashed to earth, investors are a little less in love with revenue growth. So, now that the fad has faded, let’s revisit the area, with a trio of safeguards.

Safeguard No. 1: We don’t want companies that are giving away their product or service for less than it costs to produce — no matter whether the product is movie tickets or office space. That’s madness.

Safeguard No. 2: We don’t want companies that borrow to the hilt to fund rapid growth. That’s foolhardiness.

Safeguard No. 3: We don’t want companies whose stocks sell for sky-high prices, perhaps because they are being flogged on internet bulletin boards. That’s stupidity.

Here are five companies that have grown their revenue by 15% or more in the latest year and the latest five years, and in my judgment don’t crash into the guardrails I described above.

Markel

Markel Group Inc. (MKL) is a specialty insurer, offering lines such as professional liability, marine insurance, reinsurance and workers’ compensation. During the past five years, it has grown its revenue at a 16.7% annual clip.

Unusually for an insurer, it invests much of the revenue generated by its insurance operations into non-insurance ventures such as payroll processing, commercial real estate and private equity.

Pulte

Pulte Group Inc. (PHM), based in Atlanta, is one of the largest

U.S. homebuilders, selling at a variety of price points. Its average selling price is about $540,000.

Its five-year revenue growth rate is 18.1%.

You may think I’m crazy to recommend a homebuilder at a time when rising mortgage rates have scared many buyers out of the housing market. Perhaps I am, but I think the pent-up demand for single-family houses will outweigh the mortgage problem in the next two or three years.

Eagle Materials

Cement, slag, aggregates and concrete are not the stuff that dreams are made of. But they have propelled Eagle Materials Inc. (EXP) to a 15.9% revenue growth rate over the past five years.

Recent results have been helped by the federal infrastructure bill, passed in November 2021. But Eagle’s stock price hasn’t moved much since that bill was passed. The stock sells for only 11 times earnings, a modest multiple. The company’s net profit margin is handsome, 22%.

Permian Resources

Boasting an 18.7% revenue growth rate the past five years is Permian Resources Corp. (PR) of Midland, Texas. It was formed through the merger of three small oil companies. Colgate Energy and Centennial Resources merged in 2022 to form Permian, which is now in the process of acquiring Earthstone Energy.

The company has a market value of a little over $5 billion, which makes it a mid-capitalization stock, yet a comparative minnow in the world of big oil. Profitability has been spotty, so this one is speculative, but the stock is cheap at under 10 times earnings.

Dorian LPG

Dorian LPG Ltd. (LPG)m, based in Stamford, Connecticut, owns and operates about 22 ships designed to carry liquefied petroleum gas, which the U.S. is exporting in increasing amounts to Europe. Its five-year revenue growth rate is 27.6%. I like the stock because I think the outlook for gas exports is strong.

Dorian went public in 2014 and has reported a profit in seven of its 10 fiscal years. The latest fiscal year is the only one in which I would say its profitability was excellent, with a 19% return on stockholders’ equity. The stock sells for six times recent earnings and five times forward estimates.

The record

The last time I wrote about stocks with rapid revenue growth, the results were spectacular — a gain of 81% from July 20, 2020, to July 16, 2021. All four stocks I recommended rose, with MYR Group Inc. (MYRG) leading the pack with a 172% gain.

Align Technology Inc. (ALGN) chipped in a 97% gain, and LGI Homes Inc. (LGIH) returned 40%. Progressive Corp. (PGR) brought up the read with 15%. Three of the four stocks beat the Standard & Poor’s 500 Total Return Index, which was up 33% for the period.

But alas, that time wasn’t typical. In six outings, my rapid revenue growth stocks have returned an average of 14.5%, just a shade better than the index, which came in at 14% for the same six one-year periods.

Three of the six columns showed a profit, and only two beat the S&P.

Bear in mind that my column results are hypothetical and shouldn’t be confused with results I obtain for clients. Also, past performance doesn’t predict the future.

Disclosure: My firm has a professional liability policy with Markel. A few of my firm’s clients own Pulte.