For investors looking to balance the search for growth with some caution, the "Growth at a Reasonable Price" (GARP) method presents a viable middle path. This method tries to find companies with good and lasting growth, but whose stock prices are not at the very high levels seen with popular momentum stocks. By also looking at elements like financial strength and earnings, the method aims to bypass companies that are growing without regard for cost, preferring those with stable core operations. One stock that recently appeared from this type of filtering process is SPS Commerce Inc (NASDAQ:SPSC).
Examining the Growth Driver
The main attraction of SPS Commerce for a GARP framework starts with its solid growth path, a key part of the filtering process. The company's basic report notes good movement on important financial measures.
- Revenue Growth: In the last year, revenue rose by 19.28%, with an average yearly growth rate close to 18% over recent years. For the future, analysts expect continued good revenue growth of about 10.83% per year.
- Earnings Increase: Growth in earnings per share (EPS) is even stronger. EPS grew by 20.72% last year and has averaged a yearly growth rate above 22% in recent years. Future projections indicate a good forward EPS growth rate near 14.87%.
This steady double-digit growth in both revenue and earnings is a sign of a company effectively running its business model, which centers on cloud-based supply chain management services for retail, grocery, and logistics companies. The small decrease in expected growth rates from past high levels is a normal step for a company that is growing up and is seen without bias in the review, as the forward rates stay clearly in the "good growth" range.
Valuation: Fair Given the Situation
A stock with good growth can still be a bad investment if bought at too high a price. This is where the valuation review is essential. SPS Commerce’s valuation score of 5 out of 10 implies it is not low-cost in a pure sense, but significantly, it seems fairly priced compared to its growth potential and similar companies.
- The company’s Price-to-Earnings (P/E) ratio of 22.53 is seen as high on its own. Yet, it is lower than over 70% of other software companies and is about equal to the current average P/E of the S&P 500.
- More future-oriented measures look a bit more favorable. Its Price-to-Forward Earnings ratio of 19.60 is also lower than almost 73% of the industry.
- The review mentions a "proper valuation" when looking at the PEG ratio, which changes the P/E for projected earnings growth. This shows the market price may suitably account for the company's growth rate.
For a GARP investor, this valuation outline is central. It implies the market acknowledges the growth but has not pushed it to extreme, speculative valuations, leaving possible space for gain as growth keeps happening.
Additional Basics: Strength and Earnings
While growth and valuation are the main standards, the filtering process also requires acceptable scores in financial strength and earnings. These elements supply the steadiness and quality that support the growth narrative.
SPS Commerce’s financial strength score of 7 is supported by a very good balance sheet. The company has no debt, putting its Debt/Equity ratio with the top in its field. Its Altman-Z score near 12 shows very little short-term risk of failure and beats 90% of industry peers. While the report notes a negative point because of rising share counts and a Return on Invested Capital (ROIC) presently below its cost of capital, the general stability and cash position, with good current and quick ratios, stays sound.
On earnings, the company gets a score of 6. It shows steady earnings and positive cash flow across many years. Its operating margin of 14.85% is especially good, beating more than 81% of the software industry. Return measures like Return on Assets (7.34%) and Return on Equity (8.87%) are also in the better part of their peer group. These measures verify that the company’s growth is turning into real earnings, not just hopeful revenue gains.
Summary and Next Steps
SPS Commerce Inc shows an example of the affordable growth filtering idea. It displays the good, clear growth in revenue and earnings that growth investors want, yet its valuation, while not bargain cheap, is fair compared to its industry and future outlook. This mix speaks to the central GARP idea of paying a suitable price for quality growth. Also, its debt-free balance sheet and adequate earnings give a base of financial stability that helps the durability of its growth path.
The company’s complete basic analysis report, which lists all the detailed measures and comparisons, can be seen here.
For investors wanting to find other companies that match this profile of good growth at a fair price, the filter that found SPSC can be a beginning for more study. You can look for more possible choices by going to the Affordable Growth stock screener.
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Disclaimer: This article is for informational purposes only and does not constitute financial advice, a recommendation, or an offer or solicitation to buy or sell any securities. The analysis is based on data and ratings provided by third-party sources. Investors should conduct their own independent research and consult with a qualified financial advisor before making any investment decisions.
