Uncovering the market’s hidden blue chip stocks in Australia

Uncovering the market’s hidden blue chip stocks

December 4, 2013 – 2:20PM

Most investors know Woolworths and Commonwealth Bank of Australia are some of the most reliable earners listed on the ASX. That’s a big reason why they are considered the bluest of blue-chip stocks. But if a steady earnings profile makes a blue-chip stock, then the list would extend beyond the top 50 to include other names – some better known than others – such as Carsales.com, Mermaid Marine, Silver Chef and Corporate Travel Management. What most investors want when they buy shares in a company is exposure to a business that’s on a firm financial footing, a history of steady earnings growth, and decent prospects – all at a reasonable price. Sounds simple, really – except we all know it’s not. But we’ve tried to make things a little bit easier for you by measuring the stability of earnings, operating income and dividends paid of each and every one of the biggest 300 listed companies by market capitalisation, to come up with a short list of the businesses that have had the steadiest earnings profile over the past 10 years.

As you can see from the table, there are a couple of the 13 names that have had less than a decade of earnings experience – Carsales with eight and Corporate Travel Management with five – but we’ve decided to include them on the basis that they score highly and a record of five years is enough to get a handle on how reliable an earner a business is.

As alluded to above, the main criterion is the earnings per share stability score. The term measures how closely actual data tracks a linear trend line. A score of approaching one indicates the next period’s EPS is almost perfectly predictable based on past results. A stability score of zero suggests a company with an extremely volatile bottom line, which means yesterday’s earnings give no guidance to tomorrow’s.

As a secondary insight, we also calculated the stability of operating income and dividends.

Of course, no single metric is perfect. For example, mining services company Monadelphous would have been our 14th stock, except the only thing you can reliably predict for businesses in that corner of the market is that, compared to the past decade, they are going to it tough in the coming years.

There are some more predictable names on the list, such as supermarket giant Woolworths and a pair of companies operating in the traditionally steady healthcare space – hospital owner and operator Ramsay Health Care and global blood plasma products firm CSL.

When it comes to our list of reliable earners, “steady” shouldn’t be confused with “slow”. The median annual EPS growth for the 13 stocks is 19, compounded, over the past seven years. Return on equity averages 22 per cent. Leading the charge in that regard are online classified businesses Carsales.com and REA Group, which runs realestate.com.au, as well as other property sites globally.

Discount electronics store JB Hi-Fi continues to prove the doubters wrong, although this festive season will be a crucial one for all retailers. The stock has surged 90 per cent this year.

Which brings us to the final – and perhaps most challenging – aspect of investing: finding value.

Most of the names on this market have been recognised and rewarded over the past year, as you can see from their elevated price-to-earnings ratios, which average 20 against the market at closer to 14 or 15.

Woolworths shares on a P/E of 17 maybe look a little better value; after all, you would expect it to trade at a premium to the market given its quality and history. Mermaid Marine’s stock price is actually lower now than it was at the start of the year, and is trading on the lowest multiple.

Given the rapid growth in some of the companies on our list, we’ve also listed the price-to-earnings growth, or PEG, ratio, which provides a guide for the value of a business based on expected long-term EPS growth. A score below 1 implies good value, and while not cheap, at 1.3 and 1.4, Carsales, REA Group and Super Retail Group look better value than most.