Revenue Growth Targets in Large Cap Firms

A recent article by Carol Hymowitz in her Wall Street Journal column, "In The Lead," which focuses on CEOs, featured Robert Lane of John Deere, the farm equipment maker.

The piece discussed Deere's commitment to R&D and innovation, though it cited no specific revenue growth target. By way of demonstrating that revenue growth is now a top priority among CEOs, Hymowitz quoted Jeff Immelt, CEO of GE, as setting an 8% annual revenue growth rate.

From my proprietary research, I can confirm that GE's sales growth target is too low to ever place it among the consistently high-growth, superior total return companies of the S&P500.

That is not to say that revenue growth below double-digits is useless. For those companies mired....er...positioned in largely slower-growth sectors, new products and services are necessary to offset the Schumpeterian effects of eroding value-added of older offerings. Rather like Lewis Carroll's "Through the Looking Glass, the Red Queen has characters run, and explains,

"HERE, you see, it takes all the running YOU can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!"

Just so. Without attention to innovation to drive revenue growth, even slower-growth companies will slowly experience flattening, then shrinking sales. Sort of like...GM.

It's great to see that even relatively staid companies such as farm equipment manufacturer John Deere is attending to innovation and growth. And it is also reassuring to see its CEO attending to revenue growth through innovation. However, targeting only 8-9% annual growth rates won't result in its escaping the gravitational-like pull of the large number of middling large-cap firms that experience inconsistent, or just slightly-above-average revenue growth.

And, thus, it's unlikely that Deere, or GE, will soon, if ever, be selected for our equity portfolios. It's hard work, but not exceptional, for a firm to generate consistent single-digit sales growth for years. Thus, the likelihood that such a firm will consistently outperform the S&P on total return is not as great as it is for consistently higher-growth firms.