Like many investors, we at the Forecasts favor stocks with strong, consistent profit growth. Historical profit growth is not a good predictor of stock performance, but the ability to keep profits increasing over time says something about the quality of management and the viability of the business model. Online-retail giant Amazon.com Inc. (AMZN) boasts an impressive and consistent growth history, says Richard Moroney, editor of Dow Theory Forecasts.
Companies can generate profit growth in two ways. First, by growing sales. Second, by improving profit margins. The best growth companies deliver on both fronts.
AMZN has generated five-year annualized gains of 20% for sales, 24% for per-share profits, and 23% for operating cash flow. Both profits and operating cash flow have increased in nine of the last 10 years, while sales rose at least 9% every year, with increases of at least 19% in eight of those years.
We expect robust growth to continue, with analysts projecting sales growth of 11% in each of the next three years, supporting profit gains of at least 26% annually. Both sales and profit targets are trending higher, while profit margins continue to fatten.
The stock seems timely, scoring at least 77 in Quadrix® for Momentum, Earnings Estimates, and Performance. While Amazon isn’t cheap, scoring 13 for Quadrix Value and trading at 56 times trailing earnings, it does trade 9% below its own five-year norm.
Despite its lofty P/E ratio, Amazon’s price/earnings-to-growth (PEG) ratio of 1.9 is 17% below the median for broadline retailers. For the solid, dependable growth Amazon offers, we don’t mind paying up a bit. We are adding Amazon to the Buy List.
Recommended Action: Buy AMZN.
