Soaring past Salesforce.com (NYSE:CRM) will be no easy feat. Salesforce stock has more than doubled over the past five years, climbing an impressive 137%. But there are a few stocks that for a variety of reasons could equal, and even surpass, Salesforce stock's performance in the years ahead. They include data security provider Fortinet (NASDAQ:FTNT), a bug's worst nightmare Rollins (NYSE:ROL), and household manufacturer A. O. Smith (NYSE:AOS).
Rounding the corner and heading for home
Tim Brugger (Fortinet): Some pundits were less than enamored with Fortinet's second quarter, particularly its guidance for the current period of $367 million to $373 million. How another quarter of 17% revenue growth -- at the midpoint of Fortinet's forecast -- is somehow construed as negative is a bit of a head-scratcher, but it's simply made its stock an even better value.
Last quarter's 17% increase in Fortinet's top line was nice, but even that took a backseat to the progress it made in both its efforts to boost recurring revenue via subscriptions and managing overhead. Fortinet hit a home run in both key areas and CEO Ken Xie has positioned it to continue delivering where it counts.
Of Fortinet's $363.5 million in sales last quarter, products accounted for $142.7 million, a mere 1% increase year over year. However, recurring revenue from Fortinet's service unit climbed 26% to $220.8 million and now equals 61% of total sales. On the overhead front, Fortinet took another step in the right direction.
Operating expenses rose just 3.6% last quarter to $239.3 million, more than acceptable given Fortinet's 17% jump in total revenue. There's still room for improvement, particularly Fortinet's sales-related costs, which at $166.34 million equals 46% of total revenue. That said, expense management combined with Fortinet's top line boosted per-share earnings to $0.13, well above last year's loss of $0.01 a share.
Fortinet's market -- cybersecurity -- is gathering steam: It's positioning itself for steady, reliable growth, and profits are soaring, which is going to give Salesforce a run for its money.
Roll with this pest control leader
Rich Duprey (Rollins): They say cockroaches would be one of the few living organisms to survive a nuclear Armageddon, which means that pest control leader Rollins will always have business -- at least up till the moment of conflagration. Before that outcome, though, the owner of pest and termite control brands Orkin and Western will continue to profit handsomely.
In its second-quarter earnings report issued in July, Rollins announced it was the 45th consecutive quarter it notched both higher revenues and earnings. Sales rose 5% to $433 million while profits rose 12% to $0.25 per share.
Part of its strong performance is tied to its ability to successfully integrate pest control businesses as it rolls up the industry under its umbrella. Last month, it completed the acquisition of Northwest Exterminating, a Georgia-based company, but one that was the 17th-largest pest control operator in the country.
Rollins pays a dividend of $0.46 annually, which currently yields a modest 1%, but the termite terminator has raised the payout for 15 consecutive years. At almost 53 times earnings and 45 times next year's estimates, Rollins' stock isn't cheap, but it's a quality business that's far and away the leader in its industry and there's no reason to expect it won't keeping posting record results. At least not till the last flash bang.
A silent multibagger in the making
Neha Chamaria (A. O. Smith): A. O. Smith has become a household name in the water heater market, but not many know how rapidly it is growing. In July, the company reported record second-quarter numbers with revenue and earnings per share climbing 11% and 8%, respectively, year over year. Not only has A. O. Smith been able to successfully pass on higher prices for its water heaters in North America but it is also clocking strong sales from key international markets like China.
China, in fact, could be one of the biggest growth drivers for A. O. Smith going forward as the company sets up new air purification and water treatment facilities to meet surging demand for its products. India is another high-potential market that A. O. Smith is tapping, which isn't surprising given that the company is being led by an India native, CEO Ajita Rajendra. The world's two most populous nations offer a common tailwind for A. O. Smith: a booming middle class.
Meanwhile, A. O. Smith is aggressively diversifying its portfolio and maintaining low leverage while earning close to 20% returns on invested capital and equity each in the past couple of years. Given the backdrop, it seems highly likely that A. O. Smith stock will continue its torrid run like in the past, making investors richer as the years go by.
Neha Chamaria has no position in any of the stocks mentioned. Rich Duprey has no position in any of the stocks mentioned. Tim Brugger has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Rollins. The Motley Fool recommends Fortinet and Salesforce.com. The Motley Fool has a disclosure policy.
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