In most walks of life, sticky is bad, if not downright disgusting. Nothing ruins my day more quickly than stepping in gum or grabbing a door handle that leaves a surprise between my fingers. But in investing, sticky is great -- at least when it comes to revenue.

Simply stated, companies that generate sticky revenue hold up better when the economy is lousy. Finding these businesses can help you find winning stocks in low- and no-growth environments like we have today.

Why is sticky stellar?
Sticky revenue goes by many names: recurring, subscription or annuity revenue, just to name a few. Whatever you call it, sticky revenue is predictable and stable. It represents sales that we feel comfortable counting on in the future.

Companies that have it can invest in capital projects more confidently, and can focus their efforts and money on generating new sales. We benefit as shareholders because stable cash flow encourages growth investment, dividends, and share repurchases.

Consider an automobile manufacturer and a mechanic. The car maker sells you a car once, books that single sale, and doesn't hear from you again until years down the road, when you're ready for a replacement or need a Volvo (with extra airbags) for your 16-year-old. The automaker's sales are one and done.

Meanwhile, your mechanic gets to know you by name, thanks to oil changes every 2,000 miles, scheduled maintenance every 30,000 miles, and touch-ups from time to time when permit-wielding Junior sideswipes the mailbox. As you can see, frequency plays a role in explaining why recurring revenue is so special.

A second reason sticky revenue matters has to do with consumer behavior. When times are tough, consumers are more likely to suspend new purchases than they are to alter existing purchasing habits. For example, in the event of an economic downturn, most car owners would opt to delay the purchase of a new car, instead of skipping an oil change.

In search of stickiness
The mechanic example above is an example of subscription/servicing sticky revenue, but there are other flavors. A popular example is Procter & Gamble (NYSE: PG) and its razor-and-blade sticky-revenue model.

Even as the rugged look (see Matthew Fox from Lost) and bum look (see Zack Galifianakis from The Hangover) refuse to go the way of the bell bottom, most of us shave every day. In economic booms and busts, we buy razor blades every month, resulting in two brands (Fusion and Mach3) that each generate sales of more than $1 billion for P&G.

With P&G set to launch its new ProSeries line of razors and skin care later this month, it seems likely that its reliance on sticky revenue will continue.

A lesser known example of sticky revenue comes from providing a mission-critical behind-the-scenes service. Jack Henry & Associates (Nasdaq: JKHY) provides software and processing services to over 9,800 small- and mid-tier banks. Without these services, smaller banks would have to take mundane (but vital) tasks like electronic funds transfer and online bill payment in house and wouldn't be able to compete profitably with their larger competitors. 

As a result of its sticky revenue sales, Jack Henry has trounced the S&P 500 over the past 20 years, generating annualized returns of 30% per year versus only 6% for the market. With its acquisition of iPay Technologies announced last month, Jack looks to be adding mission-critical services (and more sticky revenue) going forward.

Sticky is as sticky does
Sticky revenue doesn't necessarily translate to market-beating results like at Jack Henry. However, during the economic downturn, when generating sales has been tough, companies that benefit from the resiliency of sticky revenue have had an easier go of things:


3-Year Stock Performance

Sticky Revenue?

3-Year Sales Growth

Dell (Nasdaq: DELL)


Nope. Dell sells are one-offs of computers and related electronics.


Winnebago (NYSE: WGO)


Nope. RV sales have plummeted 77% since 2007.


Netflix (Nasdaq: NFLX)


Yup. Netflix is so useful, fun and accessible, its subscription is as sticky as it gets.


Oracle (Nasdaq: ORCL)


Yup. Of the $23 billion in revenue, much of it from mission-critical software, 50% is sticky.


Steal this sticky stock today
Dresser-Rand Group (NYSE: DRC) operates in two lines of business. It custom-designs and sells rotating compressors and turbines to help get oil and gas out of the ground, ship it to and fro, and refine it.

Its second business is similar to the mechanic's business we referenced above. The company installs, services, and repairs the equipment it sells and equipment sold by other manufacturers.

Because the equipment runs continuously and is mission-critical, if it ain't workin', the cash register ain't cha-chingin'. As a result, customers sign up for 30 years' worth of scheduled maintenance, and call in any other unexpected breakdowns.

Customers actually make a plan to pay Dresser-Rand, on a scheduled basis, for more than a quarter of a century. Now that is sticky revenue.

During 2009, the company generated 45% of its $2.3 billion in sales from its service business, and it has been growing those sticky revenues at a 10% clip. Even if the price of oil were to plummet, and customers decided to hold off on buying new equipment, the installed units still need to be serviced. Dresser-Rand is happy to oblige -- it makes 20%-plus operating margins along the way.

With almost half of its revenue base highly predictable, and a leadership position in both of its businesses, DRC's shares are a steal at $33. This price translates to less than 16 times 2010 forecasted earnings.

Make money in every market
Finding companies that benefit from sticky revenue is tough, but the payoff is worth the hunt. Uncovering market leaders with the stickiest revenue streams is one of the ways that Motley Fool Pro copes with a sluggish economy. If you agree that sticky is beautiful, and you want to learn more, drop your email address in the box below.