Beyond Earnings

10FORECASTING GROWTH

“Insufficient facts always invite danger.”

—Spock, Star Trek, season 1, episode 24 (“Space Seed,” 1968)

KEY LEARNING POINTS

• High growth rates for sales, assets, and earnings are short‐lived and rarely persist.
• On average, few firms sustain exceptional growth beyond five years.
• Lacking any other information, the most reasonable estimate of asset growth net of inflation is 5%.
• The long‐term asset growth rate after inflation has been approximately 2.5%.
• The probability of maintaining a given growth rate or higher for different lengths of time is shown and available to check growth rate assumptions.

High growth rates are the holy grail of zealous investors. That’s because extraordinary growth can vastly improve a company’s (and investor’s) fortunes. Backtests with perfect knowledge demonstrate that companies with the highest growth had better total shareholder performance than lower growth firms. This potential persuades many investors to pay large premiums for high‐growth stocks, but few firms actually deliver on these expectations.¹ The brutal reality is that, whereas CFROI is persistent over a five‐ to ten‐year window, growth is not.

Let’s consider the attraction of a growth stock by looking at Apple in late 2007, a few months before the global credit crisis rocked the world. Stock prices were flying high, and investors were optimistic about global growth. Apple was undergoing a mesmerizing transformation. With Steve Jobs back at the helm, the firm ...