This article was originally published on LivewireMarkets.com on February 7th, 2025

Sales growth is one of the most important metrics when evaluating growth stocks. Let’s face it: it’s hard to be a growth company if you’re not constantly selling more products and services to consumers.

Companies with strong sales growth demonstrate market demand, expansion potential, and the ability to capture a larger share of the industry, and investors often rightly look at sales growth to identify companies that are scaling rapidly and gaining traction in their respective markets.

That said, sales growth alone is no panacea. If viewed in isolation, it can even be misleading. High sales growth does not necessarily equate to financial health or long-term profitability.

Some companies may aggressively grow sales but struggle with rising costs, poor margins, or excessive debt. Without strong profitability and cash flow management, even a high-growth company can face financial instability.

With all that in mind, this episode sees our guests running the ruler over a handful of stocks that have exhibited strong sales growth. Are they all they are cracked up to be, or have investors been wrong-footed as share prices have departed from reality?

To answer those questions, Livewire’s Hans Lee was joined by David Wilson from First Sentier Investors and Joe McCarthy from Elston Asset Management. For good measure, they each share a stock with strong sales growth which also ticks all the other boxes.

Note: This episode was recorded on Wednesday, 30 January 2024. You can watch the video, listen to the podcast or read an edited transcript below.

Edited Transcript

Hans Lee: Hello and welcome to Livewire’s Buy Hold Sell. I’m Hans Lee. One of the hallmarks of a great growth stock is sales growth. Of course, it’s hard to be a growth stock unless you’re selling more and growing revenues from year to year. So today, we’re looking at companies with strong sales growth. Do they still stack u,p or have their share prices departed from reality? To find out, we are joined by David Wilson from First Sentier and Joe McCarthy from Elston.

First up, we’re discussing South32. S32 was spun out of BHP in 2015 and the company is expected to have strong revenue growth over the next three years. David, is it a buy, hold, or sell for you?

South32 (ASX: S32)

David Wilson (HOLD): For us, Hans, the stock is a hold. We still think the underlying assets aren’t particularly strong. They’re actually quite short run. There’s a fair bit of CAPEX still required to actually grow the business from here, and also the alumina price is backed up as well. So for us, it’s a hold.

Hans Lee: Okay. Joe, the share price barely moved over the last year, only up about 1%. I guess that’s not a bad result compared to other commodity names, but what do you think? Buy, hold, or sell?

Joe McCarthy (HOLD): It’s a hold for me. We think their assets are okay, but again, the life of them is not encouraging. One thing we do think is with their Worsley alumina smelter, the strategy behind bringing bauxite to that, it’s good what they’re doing with that and we think it’ll be more reliable. But probably what concerns us is with some of the assets, it’s either the location of them in terms of geopolitical risk and the cost competitiveness of them. And we think that’s a risk to profitability throughout the cycle and we want something that’s a bit stronger than that.

Xero (ASX: XRO)

Hans Lee: Fair enough. Next up we’re discussing Xero, the Wellington-born small business accounting platform that now has four million subscribers all over the world. Joe, I’m going to stay with you Joe. Is it a buy, hold, or sell?

Joe McCarthy (BUY): So it’s a buy for me and the reason for that is in the recent results that we’ve seen from that business, the customer acquisition spend – specifically in the international part of the business – has definitely improved. Previously, it was a bit subpar and actually a bit of a reason not to own it because that was their big growth option. In addition to that, they’ve also gotten their group overhead costs under control and they’re running a more sustainable P&L, which is a really good job by management there.

Hans Lee: Okay, Joe, thank you very much. David, the share prices is up a very punchy 60% over the past 12 months, but what do you say? Is it a buy, hold, or sell?

David Wilson (BUY): Despite that, we actually agree with Joe. We think the stock is a buy. Basically, the way you break the company down is you’ve got an excellent Australian business that’s very profitable and generating a lot of cash. You’ve got a UK business that’s also very strong, but it’s now getting some momentum as well. So that’s very encouraging, and importantly, the new management team has actually restructured the team that they’ve got in North America. And so we think there’s ample opportunity for them to grow. We think things are very much in place to take the business forward over the next five to 10 years. So for us, it’s a buy.

Seek (ASX: SEK)

Hans Lee: Okay, let’s have a look now at Seek, the job ads platform that’s leveraged its business here in Australia and has made expansions overseas with varying degrees of success. David, to you, is this one a buy, hold, or sell?

David Wilson (SELL): Hans, this one’s a sell. It’s a company that’s really struggled to generate earnings growth. To put it into some perspective, over the last 10 years, its EPS is down 25%. You compare that with REA and Car Group and you’re talking EPS that is up two to three times over that period. Combined with that, we weren’t a fan of the sale of the growth assets into the externally managed fund as well. So for us, it’s a sell.

Hans Lee: Joe, David makes a good point and it does show in the share price. It’s down around 12% over the last year. While sales growth was up 43% in the three years prior to last year, it was actually down 6% in the last 12 months. So given all of that, buy, hold, or sell for you?

Joe McCarthy (BUY): It’s a buy for me, but I think that’s completely a fair take on what David said. I agree with that, but I actually feel like management is listening to the shareholders and there’s three things that have changed my mind about this business, because I was probably a sell at least a year ago. And what we’ve seen is proof of pricing power. So Seek has increased the monetisation of their ads and they’re actually increasing market share, which is quite impressive. Secondly, it’s on the cost control side of things. They’ve shown a genuine commitment to actually rewarding long-term shareholders with some margin expansion and they’ve got cost targets that management can be held to account.

And lastly, they’ve cleaned up the financials. So if you go back two years, quite frankly, it was just a mess. And the only thing I’d say with the business is it is one where it is a bit macro sensitive. So you do need to look at that and we all have our concerns about it, but we look at job ads in the key markets, they’re below the long-term trend, but we actually think over time that we’ll normalise and provide upside.

Guest picks

Hans Lee: It wouldn’t be an episode of Buy Hold Sell if we didn’t get some picks from our guests. So let’s get some picks from our guests. Joe, what is an ASX stock that you like that has had and will likely continue to have strong sales growth?

James Hardie (ASX: JHX)

Joe McCarthy: So for me, it’s James Hardie and as a business they have the best fibre cement product servicing the US exterior siding industry. What makes it good is they provide the best trade-off between the durability and also the look. And in addition to that, it’s actually a very affordable product. In terms of the full life cycle of owning that product on the side of your house, it’s probably one of the cheaper options out there.

On top of that, it has the levers for growth; so you’ve got product expansion, which they’ve already done a good job of. Expansion into new markets, which is a key feature of their recovery from the ‘22 lows. And you’ve also got market share gains within existing markets.

And on the macro side as well, again, it can be a bit of a volatile one and it makes us all a bit nervous. But with that business, the thesis doesn’t rely on a recovery in the US home building market, but if that does happen, it’ll really turbocharge the growth.

Hans Lee: So James Hardie there for Joe. David, what about you? What have you brought for us?

TechnologyOne (ASX: TNE)

David Wilson: Well, we actually like James Hardie as well, but it’s not the stock we’re going to talk about, but we think James Hardie, it’s a business that we’ve owned for many years, so we actually agree 100% with Joe.

For us, the stock that we want to talk to is Technology One. Again, another great Australian tech success story, a bit like Xero and a bit like WiseTech. This one’s been a slower burn, but it’s growing revenues at 15 to 20%. It’s got a great business in Australia supporting local councils and also universities, and they are now growing that business into the UK. And so we think that it’s a very durable earnings growth that the company’s going to be able to deliver.

Joe McCarthy: We completely agree with David on that as well.

Hans Lee: We’re all in agreement up here. Fantastic. That’s all we’ve got time for today. We’ll see you next time for more Buy Hold Sell. If you’ve enjoyed the program, please give us a like and you can also subscribe to the Livewire Markets’ YouTube channel as well as our website where there’s more great content. Until we see you next time, thanks for watching and we’ll see you around. Bye-bye.

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