Toy Retailer Inc. offers a good example of a growth stock examination, with actual and estimated five-year annual earnings growth rates of at least 10%, an average growth rate of 13% or more over the last 10 years and an estimated 13% or more growth rate in the next five years.
Earlier in the most recent year, Toy Retailer Inc. represented a growth company that continued its expansion despite a large market capitalization. It did so first by outmatching its competition, and then by expanding its markets. Later, the toy retailer ventured into children's clothing, mail catalog sales, action figure and video software products, and foreign operations.
It was the latter area—foreign markets—that was coming under increasing scrutiny in analysts' projections. In any growth company, a major concern is how the company can continue to expand. Toy Retailer Inc. dominated the retail U.S. toy market, with subsequently less room to expand, and the retail market was not a growth industry; the focus, therefore, was into expanding their product lines or opening more stores overseas.
Figure 1 shows the completed worksheet. Value Line was used as the source of both company and industry information.
Entering the per share data from an information source is relatively straightforward, but it is important to stick to the same source for company information, since reporting services make different adjustments to the data they provide. However, one potential source of confusion may come when trying to determine the actual years covered by the data reporting source. For example, Toy Retailer Inc. has a fiscal year-end of January 31, which means that most of the activity for the firm will have taken place in the previous year. Value Line reports data for Year 5 based on the January 31, Year 6, fiscal year-end report. Standard & Poor's, on the other hand, reports Year 5 data based on the January 31, Year 5, fiscal year-end-which would be Year 4 data in Value Line's report.
A Tour Through the Worksheet: Per Share Information
The first item that may strike you is that the stock price that is "current" on the worksheet is nearly 20% below its all-time highs in Year 5—double the market's decline from its high over the same time.
Toy Retailer Inc. reacted in classical growth stock fashion: Its price took a fall after the first of the year because it only met—and failed to exceed—expected predictions for a strong Christmas season. Underlying the strong but expected domestic performance was lower than expected foreign sales. Prices had not yet recovered from the post-holiday drop.
Next, it is important to examine the year-by-year earnings per share figures. Are they steadily increasing, or has there been a change in trend? Earnings clearly increased, but the biggest increase occurred in Year 4 when earnings shot up 27.8%. Calculating the year-by-year percentage change for earnings is an effective tool for identifying changes in trends and growth rates. The Value Line data also shows an increase in book value every year.
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