Exposed: The hollow promise of ‘Long-Term Sustainable Growth’ in the corporate world

*This content is supplied by Sean Peche, Portfolio Manager at Ranmore Fund Management Ltd

First appeared on LinkedIn

Ranmore’s Sean Peche critically examines “long-term, sustainable growth” in the corporate world. Highlighting examples like Microsoft, Peloton, Estee Lauder, and PayPal, he showcases how these companies’ claims of sustainable growth don’t necessarily materialise, reflected in their declining share prices and earnings. Diageo’s recent profit decline further exemplifies this trend. The article emphasises scepticism as a valuable tool in risk management, cautioning against overpaying for future prospects based on optimistic corporate rhetoric. It concludes by underscoring the unpredictability of the market and the high cost of buying into the overhyped concept of sustainable growth.

Does “long-term, sustainable growth” exist?

Think about it.

How can we expect anything sustainable long-term in a dynamic and competitive world?

Few companies grow earnings sustainably; even winners like Microsoft experienced years of negative growth (2013 – 2016).

So isn’t it obvious that when companies talk of all this “long-term sustainable growth” it’s often marketing nonsense?

“Peloton Announces Leadership Transitions to Position Peloton for Sustainable Growth, Profitability, and Long-Term Success”, they said on Feb 2022 at $37.

An endless stream of losses has seen the share fall nearly 90% to $4.41.

with the only “sustainable growth” being shares in issue from exercised options.

“We plan to build upon and leverage … while investing for long-term sustainable growth.” Wrote Estee Lauder in their December 2021 quarterly report.

Except earnings estimates have completely collapsed since then, and the share price has fallen 70%.

Providing no margin of safety to those who paid $300=150x 2024 expected earnings.

They didn’t think they were paying 150x earnings, but unfortunately, the forecasts weren’t “sustainable”, falling from $9.60 in 2021 to $2.47 today.

“We are proud of the ways …. while driving long-term, sustainable growth for our stockholders.” Wrote the PayPal CEO in April 2021 AGM Docs.

But operating income fell 10% in 2022, and the share price has crashed by 80%.

And guess who said this on 1 August 2023:

“I am excited to partner with them (30k employees) to deliver a strong fiscal ’24 while enabling delivery of long-term sustainable growth for decades to come.”

“Strong”, “decades”, “sustainable”, and “growth” – if you thought they knew how to market products, you’re right.

Diageo – Quality Growth favourite

They said this on Friday:

“We now expect organic operating profit growth for the first half of fiscal 24 to DECLINE compared to the first half of fiscal 23, primarily due to Latin America / Caribbean’s DECLINING net sales, increased trade investment, LOWER operating leverage and ADVERSE mix resulting from DOWNTRADING.”

The share price fell 12%, the largest % fall since 1990.

Down 22% year to date.

But still on 17x forecasts.

which may fall further.

What’s the lesson?

The world is changing, and the unexpected is happening everywhere.

That’s why we won’t over-pay for the future.

Diageo showed us that not even CEOs know what it holds over the short term; forget “decades.”

Cullen Roche wrote, “Being a sceptic is a powerful risk management tool. It’s not always easy to sit idly while the market rips higher or exuberance runs wild on Wall Street. However, being sceptical of the market will almost always ensure you avoid the devastating pitfalls that hinder many investor portfolios.”

We agree, and that’s why we take talk of “long-term sustainable growth” with a big pinch of salt.

Talk is cheap, and paying for it can be very expensive.

Disclaimer:

The portfolio manager has no positions in the companies mentioned above.
Ranmore Fund Management Ltd is authorised and regulated by the UK’s Financial Conduct Authority.
The content is for information purposes only.