Game maker Activision Blizzard (NASDAQ:ATVI) has been a standout performer for investors over the years. Those who bought shares when Motley Fool's Stock Advisor first recommended it in 2002, for example, are up more than 1,700%, which has obliterated the market's return. Driving those gains was the company's ability to consistently turn out products that consumers craved, leading revenue and profits to rise rapidly.
While Activision Blizzard could continue to outpace the market for years to come, it will be hard for it to deliver a repeat performance over the next 15 years. That's why we're on the lookout for companies that are a bit earlier in their growth cycle and have the potential to produce market-smashing returns in the years ahead. Three that caught our eye are Continental Building Products (NYSE:CBPX), Dave & Buster's Entertainment (NASDAQ:PLAY), and Pioneer Natural Resources (NYSE:PXD).
Building a strong future
Rich Duprey (Continental Building Products): Housing might have softened a little bit in April from the month before, but compared to last year, business is booming. That's good news for Continental Building Products, a regional producer of gypsum wallboard products.
According to the Census Bureau, housing starts fell 2.6% in April from March but were up 0.7% from April 2016. More importantly, building permits, a metric that looks at how the industry might be in the future, were down 2.5% sequentially but up 5.7% year over year.
Of course, the housing market isn't uniform, but in the southeast where Continental is strongest, the company says it has enjoyed an exceptionally robust market, particularly in Florida and Georgia. Housing's ups and downs out west are of little concern because it doesn't participate in that market. Continental estimates that it has a 17% share of the wallboard market east of the Mississippi River, a region that accounts for more than 55% of total U.S. wallboard demand.
Its business is naturally going to be tied to the health of the overall housing market, and after the financial market's collapse a decade ago, the industry has been clawing its way back up. U.S. housing starts reached 1 million units in 2014, 1.11 million in 2015, and 1.17 million in 2016. During its first-quarter earnings conference call with analysts last month, CFO Dennis Schemm said he believes 1.25 million to 1.3 million units this year is possible.
At 22 times earnings and 17 times next year's estimates, Continental Building Products looks fairly to slightly undervalued in comparison to the broad market averages, but when you see that it also trades at less than 10 times the free cash flow it produces, the building products manufacturer looks cheap. This gives Continental the chance to enjoy significant expansion.
Eat. Drink. Play. Watch.
Daniel Miller (Dave & Buster's Entertainment): Few companies have done as well in their respective industry as Activision Blizzard has in the third-party video game arena. Not only has Activision's stock surged 65% year to date -- it's up a staggering 415% over the past five years! And while Dave & Buster's Entertainment, Inc. operates in a different arena, it's using video games to change how people eat and play -- and it's becoming a strong business model.
It's true that my generation wants an experience and social media-worthy pictures (as if it takes anything more than a sandwich to become worthy), and we tend to go out more often than other demographics. That makes my generation perfect for Dave & Buster's target consumer. A decade ago, the company was more focused on food, as a traditional restaurant would be, with about 56% of its business being generated by food and beverage, while earnings before interest, taxes, depreciation, and amortization (EBITDA) margin was around 11%. Management flipped the focus to more games and entertainment, with about 55% of its business from that segment in 2016, and its EBITDA margin jumped to 23.8%.
Now that the business model is generating better margins, the growth story is ready to take off. Dave & Buster's opened 11 stores last year and plans another 11 to 12 this year, with a pipeline of 25 signed leases to secure future growth. It also plans to continue driving comparable sales through nine promotional windows and three new food & beverage rollouts per year. And last but not least is its potential abroad. It signed its first international agreement in 2015 and expects to open seven international locations over the next few years.
Dave & Buster's has consistently improved its business model, and the story is in the early innings. While the restaurant industry can be a scary place for investments during economic downturns, long-term investors could have a big winner in Dave & Buster's.
An oil company with massive return potential
Matt DiLallo (Pioneer Natural Resources): Oil producers aren't often thought of as big-time growth stocks because of the industry's cyclicality. However, Pioneer Natural Resources hopes to change that mentality as it launches an ambitious plan to become a million-barrel-a-day producer by 2026. For a company that's currently producing only at a quarter of that rate, it will need to deliver substantial production growth in the years ahead to meet that goal.
That's exactly what Pioneer intends on doing, targeting more than 15% compound annual production growth over that time frame under the assumption that oil averages close to $55 per barrel. Given the returns Pioneer can earn on new wells drilled at that oil price, it estimates that its output growth can fuel 20% compound annual cash flow growth. That's elite-level cash flow growth -- not just for an oil company, but for any business. In fact, according to a report by an analyst at J.P. Morgan, only 15 companies have achieved 20% cash flow growth over the past decade, most of which are tech giants.
What's worth noting about those cash flow growth machines is that their stocks crushed the market's average return. Overall, the 15 stocks delivered average total shareholder returns of 662% over a 10-year period, or 18.8% annually. While Pioneer might have a tough time matching those returns given the unpredictability of oil prices, its ability to deliver robust production and cash flow growth at lower oil prices should still fuel market-beating returns for investors over the long haul.