Growth Investing: What to Do If Growth Stalls?

StockMarketBoardGrowth investing is a label that’s loosely applied to investors who are looking for companies with above-average growth rates. Growth shares tend to have quite rich valuations too.

However, growth investors believe that over time, growth in the company’s sales and profit will make an expensive share price look less pricey in the future. But that hinges on the company being able to grow.

Let’s consider Biosensors International (SGX: B20), which is Singapore’s flagship bio-technology firm that specialises in drug-eluting stents (DES). The company first introduced its Biomatrix DES product in 2008. These stents help unclog arteries that have blockages that prevent the smooth flow of blood.

After the product’s introduction, Biosensors’ top and bottom-line grew 60% and 40% a year respectively. Such growth rates, coupled with the company’s valuation of 17 times earnings, which is around a third higher than the Straits Times Index’s (SGX: ^STI), puts Biosensors onto the radar screen of growth investors.

What’s more, Frost & Sullivan reckoned the market for stents in Asia, which stood at US$1.5b in 2005, could grow between 6% – 20% annually. Consequently, the Asian stent market could be worth as much as US$6.5b today. Interestingly, Biosensor recently reported annual sales of around US$336m, which would suggest further growth opportunities.

During a recent visit to the company’s manufacturing site in Kaki Bukit, the company’s Chief Financial Officer, Ronnie Ede, shared the company’s concerns over the long-term growth of the DES market. He acknowledged that the market could continue to grow in the near term but also recognised eventually the DES market could slow. After all, when anyone who needs a stent has got one then the market for stents could slow. However, that may still be some way down the line.

The company also recognised the risks of being a one-product company. Stents and related licensing made up almost 96% of the company’s sales for the last twelve months.

To address these issues, the company has been looking at acquisitions outside the stent market to fuel growth and diversify its product line. The company’s recently raised S$300m to help fund potential acquisitions.

Perhaps one of the greatest fears of growth investors is to see a slowdown in sales and profit growth, which can send stocks on high valuation tumbling. Thing is, it is easy for management to project growth rates into infinity but it’s another to recognise how and why existing growth may slow eventually.

The job of good management is to identify problems before they happen. In the case of Biosensors, it looks as though the management is planning well ahead of time, which is what you would expect from a stent maker whose products, which introduced in a timley fashion, should prevent medical complications later on.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Contributor Chong Ser Jing doesn’t own shares in any companies mentioned.