Our Analysts Talk Quality
October 8, 2019
Ryan Dimas: When your goal is identifying the sustainability of long-term corporate performance, you need to know whether a company’s growth trajectory will stand the test of time. At William Blair, we call this sustainable value creation.
Quality companies, those that exhibit sustainable value creation can be found across the corporate lifecycle. It’s helpful to understand where a company is in its corporate lifecycle because each stage brings with it different risks as well as opportunities.
When researching a company, we analyze different attributes based on where a company is in its corporate lifecycle.
Emergent growth companies are early in their development, but beyond the startup stage. They often have a single product or service that is exhibiting rapid growth, which can be disruptive to incumbent businesses.
In some cases, it is actually creating the market itself. The company is consistently generating revenue and adding new customers, but the focus is still on making customers aware of the competitive advantage of its offering. The runway for growth in its current product or service is large and long, but the long-term sustainability of the company is not yet proven.
Expanding growth companies have successfully transitioned beyond the emergent growth category. New growth opportunities are pursued by expanding beyond their original product or service by integrating innovation into its core offering, introducing new products or services, establishing new distribution channels or entering new markets and divesting older exhausted ones. Business risk has decreased as the company successfully fends off competition and has a proven business model.
Within the sustained stage, margins have improved to a point that the company’s profitability is high and stable. Growth rates are lower but the company has demonstrated its ability to dominate the market.
Cash flow typically exceeds investment needs within a sustained growth company, so excess profits can be returned to shareholders through dividends and buybacks, leading to a more stable return profile. Business risk is low due to the long history of operating performance and durability of growth versus its peers.
Companies at different stages of the corporate lifecycle may exhibit different risk and return characteristics. So, it’s helpful to have a diversity of growth within a portfolio. Diversifying across the corporate lifecycle helps us pursue better client outcomes.
Filmed April 2019
The views and opinions expressed herein are those of the speakers as of the date of publication, are subject to change without notice as economic and market conditions dictate, and may not reflect the views and opinions of other investment teams within William Blair. Factual information has been obtained from sources we believe to be reliable, but its accuracy, completeness, or interpretation cannot be guaranteed. This material may include estimates, outlooks, projections, and other forward-looking statements. Due to a variety of factors, actual events may differ significantly from those presented.
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Lifecycle stages are provided for illustrative purposes only and are not intended as investment advice or as projections of future returns.
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