25MOST

PROFITABLE

GROWTH
COMPANIES By Chris Barth

Source: Yahoo Finance

WWW.FORBESNEWSLETTERS.COM
 The Fortune 500 ranks America’s largest corporations—behemoths like Exxon Mobil and Bank of
America—by gross revenue, regardless of expenses. The list is bandied by PR people and corporate
executives as though it were the gold standard. But what does it really say? It says bigger is better,
because it merely ranks companies by total revenue and income; the list fails to take into account
profit growth relative to the size of the company.
It’s difficult to compare Wal-Mart ($419 billion in trailing four quarter sales) against QLogic
($584 million in TFQ sales) without letting sheer size and volume affect the numbers. In fact,
when analysts do attempt to compare disparate companies using traditional metrics, inequalities
in company size and industry practices make the rankings unreliable and often misleading.
Al Ehrbar, president of EVA Dimensions, a company out of Locust Valley, NY, thinks his com-
pany has built a better mousetrap. The company has developed a metric called EVA Momentum
to measure profitability, performance and momentum on a balanced scale, regardless of market
cap or industry sector. Ehrbar calls EVA Momentum, “a bona fide innovation in financial analy-
sis…that promises to open a new chapter in value-based management.”
It looks like they’re on to something. If you invested equally in today’s Top 25 Fortune 500
companies five years ago, you would have gotten a 23.1% total cumulative return on that invest-
ment. If you had invested in our Top 25 Most Profitable Growth companies, that return would
have been 173.9%. During that same time period, the S&P 500 returned -1.01%.

HOW EVA MOMENTUM WORKS

The equation used to determine EVA Momentum is simple: The change in a company’s eco-
nomic profit in one period divided by the company’s sales in the prior period. Despite its stream-
lined nature, the equation does a good job of intricately balancing performance and momentum
of a company.
The numerator drills down to the change in a company’s economic value added (EVA). EVA it-
self already accounts for Generally Accepted Accounting Principles shortcomings (like the
expensing of R&D investments and the practice of keeping rented assets off the books); it also al-
lows for comparison across industries by charging for the opportunity cost of all capital.
Analyzing the change in EVA further levels the playing field, allowing investors to compare
companies’ momentum regardless of their relative profits. When looking for companies that are
headed in the right direction, most investors look at various shapes and sizes—large mainstays
with the strength to withstand downturns, young companies about to make big moves and hard-
hit companies rebounding from previous losses. Even though they can make for great invest-
ments, companies in the red are often omitted from other company rankings.
Take for example, JDS Uniphase; the communications company, despite remaining in the red,
has made large strides to move closer to profitability over the last 5-years, as it has recovered from
large expenditures during the dotcom boom.

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 “JDS Uniphase is a classic example of a firm that is on an upward march, by making a nega-
tive EVA less negative,” says Bennett Stewart, who developed EVA Momentum. The metric
reflects this positive change for the company, despite the fact that it has yet to bring in a positive
cash flow, and allows investors to directly compare the trending tendencies of profitable and
unprofitable companies.
Still, we face the difficulty of comparing large and small companies. Certainly, a profit
increase of $100 million means a lot more to Verisign than it does to a gargantuan company like
Oracle. For that reason, EVA Dimensions divides the change in EVA by trailing period sales. The
sales figure acts as a scaling anchor, giving perspective to each company’s numbers; consequently,
small and large companies can be analyzed side-by-side without bias.

WHAT WE FOUND
We looked at the EVA Momentum of S&P 500 companies over 1-year and 5-year time peri-
ods, ending in mid-December 2010. The rankings, predictably, varied depending on the time
period analyzed, with a 62% correlation between the 1- and 5-year rankings; only six companies
(Gilead Sciences, MasterCard, Intuitive Surgical, IntercontinentalExchange, Google, and Dia-
mond Offshore Drilling) ranked in the top 20 for both 1-year and 5-year EVA Momentum.
“One thing that has a strong affect on the 1-year is that ’08 was so devastating for both finan-
cials and energy companies,” says Ehrbar. “If you look at the ranking from a year ago, the 5-year
bottom was dominated by oil and gas and financials. They leveled off in ‘09 and have came back
strongly in 2010 in terms of their operating numbers. So you get companies like Legg Mason and
Devon Energy at the top of the 1-year rankings.”
The 5-year rankings, on the other hand, are more stable. Since the 5-year analysis—at this
point—spans the recession, it is less likely to be influenced strongly by industry booms and busts
tied to the financial crisis. The 5-year rankings will change at a slower pace, as recent change is tem-
pered by a more robust set of historical data. The 1-year EVA Momentum figures serve as a helpful
balance to the steady 5-year numbers, showing recent inertia and volatility in company profits.

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Intuitive Surgical (ISRG)
EVA Momentum Rank: 1 5-year Cumulative EVA Momentum: 163.3%
Trailing Four Quarters Sales: $1.35billion 5-year Cumulative Total Return: 122.7%

Source: Yahoo Finance

Intercontinental Exchange (ICE)

EVA Momentum Rank: 2 5-year Cumulative EVA Momentum: 152.9%
Trailing Four Quarters Sales: $853million 5-year Cumulative Total Return: 182.8%

Source: Yahoo Finance

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Gilead Sciences (GILD)
EVA Momentum Rank: 3 5-year Cumulative EVA Momentum: 100.7%
Trailing Four Quarters Sales: $7.98billion 5-year Cumulative Total Return: 31.5%

Source: Yahoo Finance

JDS Uniphase (JDSU)

EVA Momentum Rank: 4 5-year Cumulative EVA Momentum: 97.3%
Trailing Four Quarters Sales: $1.47billion 5-year Cumulative Total Return: -23.7%

Source: Yahoo Finance

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Celgene (CELG)
EVA Momentum Rank: 5 5-year Cumulative EVA Momentum: 93.5%
Trailing Four Quarters Sales: $3.31billion 5-year Cumulative Total Return: 71.9%

Source: Yahoo Finance

Google (GOOG)
EVA Momentum Rank: 6 5-year Cumulative EVA Momentum: 82.6%
Trailing Four Quarters Sales: $27.56billion 5-year Cumulative Total Return: 32.4%

Source: Yahoo Finance

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Discovery Communications (DISCA)
EVA Momentum Rank: 7 5-year Cumulative EVA Momentum: 80.7%
Trailing Four Quarters Sales: $3.72billion 5-year Cumulative Total Return: 135.6%

Source: Yahoo Finance

Apple (AAPL)
EVA Momentum Rank: 8 5-year Cumulative EVA Momentum: 66.0%
Trailing Four Quarters Sales: $65.23billion 5-year Cumulative Total Return: 340.5%

Source: Yahoo Finance

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Southwestern Energy (SWN)
EVA Momentum Rank: 9 5-year Cumulative EVA Momentum: 60.1%
Trailing Four Quarters Sales: $2.57billion 5-year Cumulative Total Return: 105.2%

Source: Yahoo Finance

Diamond Offshore Drilling (DO)

EVA Momentum Rank: 10 5-year Cumulative EVA Momentum: 59.9%
Trailing Four Quarters Sales: $3.37billion 5-year Cumulative Total Return: -5.7%

Source: Yahoo Finance

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Freeport-McMoRan Copper & Gold (FCX)
EVA Momentum Rank: 11 5-year Cumulative EVA Momentum: 52.9%
Trailing Four Quarters Sales: $17.99billion 5-year Cumulative Total Return: 99.0%

Source: Yahoo Finance

Priceline.com (PCLN)
EVA Momentum Rank: 12 5-year Cumulative EVA Momentum: 48.3%
Trailing Four Quarters Sales: $2.90billion 5-year Cumulative Total Return: 1804.0%

Source: Yahoo Finance

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Salesforce.com (CRM)
EVA Momentum Rank: 13 5-year Cumulative EVA Momentum: 45.9%
Trailing Four Quarters Sales: $1.55billion 5-year Cumulative Total Return: 256.9%

Source: Yahoo Finance

Broadcom Corp. (BRCM)

EVA Momentum Rank: 14 5-year Cumulative EVA Momentum: 42.9%
Trailing Four Quarters Sales: $6.21billion 5-year Cumulative Total Return: 28.5%

Source: Yahoo Finance

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Cognizant Technology Solutions (CTSH)
EVA Momentum Rank: 15 5-year Cumulative EVA Momentum: 41.0%
Trailing Four Quarters Sales: $4.19billion 5-year Cumulative Total Return: 192.5%

Source: Yahoo Finance

Teradyne (TER)
EVA Momentum Rank: 16 5-year Cumulative EVA Momentum: 40.5%
Trailing Four Quarters Sales: $1.55billion 5-year Cumulative Total Return: -12.7%

Source: Yahoo Finance

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Red Hat (RHT)
EVA Momentum Rank: 17 5-year Cumulative EVA Momentum: 39.5%
Trailing Four Quarters Sales: $819million 5-year Cumulative Total Return: 52.0%

Source: Yahoo Finance

Biogen Idec (BIIB)

EVA Momentum Rank: 18 5-year Cumulative EVA Momentum: 39.5%
Trailing Four Quarters Sales: $4.62billion 5-year Cumulative Total Return: 42.8%

Source: Yahoo Finance

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MasterCard (MA)
EVA Momentum Rank: 19 5-year Cumulative EVA Momentum: 37.3%
Trailing Four Quarters Sales: $5.40billion 5-year Cumulative Total Return: 402.4%*

*Performance is from May 25, 2006 (first trading day) through Jan 7, 2011. Source: Yahoo Finance

El Paso Corp. (EP)

EVA Momentum Rank: 20 5-year Cumulative EVA Momentum: 36.7%
Trailing Four Quarters Sales: $4.83billion 5-year Cumulative Total Return: 10.6%

Source: Yahoo Finance

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Wynn Resorts (WYNN)
EVA Momentum Rank: 21 5-year Cumulative EVA Momentum: 36.1%
Trailing Four Quarters Sales: $3.76billion 5-year Cumulative Total Return: 119.7%

Source: Yahoo Finance

CBS (CBS)
EVA Momentum Rank: 22 5-year Cumulative EVA Momentum: 35.9%
Trailing Four Quarters Sales: $13.66billion 5-year Cumulative Total Return: -29.3%

Source: Yahoo Finance

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Hudson City Bancorp (HCBK)
EVA Momentum Rank: 23 5-year Cumulative EVA Momentum: 33.8%
Trailing Four Quarters Sales: $1.37billion 5-year Cumulative Total Return: 5.7%

Source: Yahoo Finance

Altera (ALTR)
EVA Momentum Rank: 24 5-year Cumulative EVA Momentum: 32.8%
Trailing Four Quarters Sales: $1.76billion 5-year Cumulative Total Return: 82.4%

Source: Yahoo Finance

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Akamai Technologies (AKAM)
EVA Momentum Rank: 25 5-year Cumulative EVA Momentum: 32.5%
Trailing Four Quarters Sales: $977million 5-year Cumulative Total Return: 116.7%

Source: Yahoo Finance

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