Steady as She Grows: Firms with Earnings Power

In times of economic uncertainty, investors put a premium on companies that can generate consistent earnings growth. That's part of the reason growth has enjoyed a renaissance over the past several months. Morningstar's Large Growth Index gained about 1.5% for the three months ending March 31, 2003 (making it the best-performing index for the quarter), while the Large Value Index dropped about 7%.

Although it would be a mistake to assume that any short-term trend will continue into the future, there's something to be said for companies that have delivered reliable earnings over many years. This week, we'll focus on companies that have demonstrated consistent growth over time. As always, we'll use Morningstar's  Premium Stock Screener to narrow down the field. 

First, we used Morningstar's 10-year financial-statement data to identify companies that have shown a consistent record of stable or growing earnings year-in and year-out. We limited the field to companies that managed to maintain or increase their earnings for each of the past 10 years. There's always a chance that a company could boost earnings by using aggressive accounting practices or managing operations strictly to meet an earnings target, but looking at earnings over many time periods mitigates that risk to some extent. Indeed, only 76 stocks out of our database of 6,804 names made it through all 10 hurdles.

As most aging sports stars eventually discover, though, past success is no guarantee of future glory. So we also looked at projected earnings growth, requiring a projected growth rate of at least 15% for the next five years. All told, 21 elite companies made it through the final screen. One note of caution, though: Make sure not to pay top dollar for those great growth characteristics, or you could be setting yourself up for a fall. We'd favor shares that are selling at a discount to our estimate of their fair value. Here are some highlights:

 CDW Computer Centers 
Economic Moat: Narrow
Business Risk: Average
From the  Analyst Report: Information technology spending has been in a slump for quite a while, but CDW's steady performance in the current downturn suggests to us that the company is well positioned to ride out the bad times--and to be a big beneficiary of a future recovery.

 Paychex (PAYX)
Economic Moat: Wide
Business Risk: Below Average
From the  Analyst Report: Paychex runs a great business with a proven strategy for generating substantial amounts of cash. Given the firm's strong position in the payroll-processing industry and its formidable competitive advantages, we would consider purchasing the stock at a 20% discount to our $40 fair value estimate.

 Sysco (SYY)
Economic Moat: Wide
Business Risk: Below Average
From the  Analyst Report: We're upgrading Sysco to a wide moat from narrow and raising our fair value estimate to $33 from $30. Excellent second-quarter results put the company well on the way to a 28th straight year of earnings growth, and we see few cracks in the armor. We'd gladly buy the stock if it fell to $26 or below.

 Expeditors International of WA (EXPD)
Economic Moat: Wide
Business Risk: Average
From the  Analyst Report: Expeditors International has built a very attractive business that has largely variable costs, requires little capital spending, and throws off gobs of free cash flow. The firm also generates high returns on capital, and has compounded earnings at 25% per year over the past 10 years without large acquisitions or any debt.

 Walgreen (WAG)
Economic Moat: Wide
Business Risk: Average
From the  Analyst Report: After reviewing Walgreen's first-quarter results, our opinion is unchanged: very impressive company, somewhat pricey stock. Though Walgreen has historically traded at a premium valuation to its drugstore peers and the overall market thanks to steady and superior growth, we'd exercise patience and wait for the shares to fall to about $25 before buying.

To run this screen yourself and see all the stocks that meet our criteria, click  here. After clicking, you can save the screening criteria by using the "Save Criteria" button in the bottom right-hand corner of the screen.