Long term earnings growth the real predictor of outperformance

“Earnings growth drives prices in the long term, so identifying companies with sustainable earnings growth potential is crucial.” 

This is the view of Tim Samway, Managing Director of Hyperion Asset Management, and he should know.  Hyperion’s portfolios just delivered post February reporting season earnings per share (EPS) growth of 4% for their investors, compared with the market’s -9%.

During a presentation to financial advisers from around Australia, Mr Samway said that the Hyperion investment team’s focus on a company’s fundamentals is the key to achieving alpha in a low growth, low yield economy. 

“When you consider the massive deleveraging we have seen across the economy, interest rates at historically low levels and staying there, not to mention falls in commodity prices, it’s no surprise that many companies have struggled to sustain earnings growth,” he said. “But at Hyperion we look for companies with growth drivers that are independent of cyclical factors.”

“Earnings growth is definitely number one,” he explained, “but if you can identify companies which also have predictable earnings growth, you can protect your capital as well.”

“At Hyperion, we have a few golden rules that inform our investment decisions. We look for companies that grow earnings above the growth in GDP and have pricing power in their markets, because this is a lever for growth. Finally, we look for an ability to grow market share, which in turn relies on a strong value proposition.”

Mr Samway said that the market in general has little or no exposure to structural growth stories and that as a result, Hyperion’s portfolio differs substantially from the index.

“For example, we have strong positions in a number of companies taking advantage of the secular shift in traditional retail and advertising dollars to online.  These stocks represent 26% of our portfolio versus the market’s 0.5% and they haven’t disappointed, producing profit growth in the double digits,” he said.

“And shareholders should be heartened to see company management able to increase dividends per share, indicating their confident view of the future.”

Mr Samway finished by saying that Hyperion’s house view is that equity markets continue to be undervalued.

“In addition to our retail stocks, we are also overweight non-bank financials. We believe that double digit growth is sustainable over the long term, provided you focus on the fundamentals. Our expectation is that top line growth is key, as the market can’t expect to continue to rely on cost savings alone.”

“The Hyperion portfolios have demonstrated that they can deliver sales and earnings growth in a subdued growth environment, independent of cyclical factors. Our long term view and focus on not cutting corners in our research and investment decisions has produced great results, and the long-term outlook for the portfolio remains attractive”, he said.

Last month Hyperion was nominated in three categories and won in two including being named as Domestic Equities Category Winner in the Morningstar Awards 2013, Australia.