Five Stocks to Profit from the Global Urbanization Trend
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The world is going through an important demographic change: big masses of population move every day from rural areas to the cities, a factor which will have important implications for many companies over several decades.
The United Nations' World Urbanization Prospects, 2011 Revision offers some interesting perspectives on the strength of the global urbanization trend. According to the study, the world population is expected to increase by 2.3 billion, passing from 7.0 billion to 9.3 billion between 2011 and 2050. At the same time, the population living in urban areas is projected to gain 2.6 billion, passing from 3.6 billion in 2011 to 6.3 billion 2050.
Thus, the urban areas of the world are expected to absorb all the population growth expected over the next four decades while at the same time drawing in some of the rural population. As a result, the world rural population is projected to start decreasing in about a decade and there will likely be 0.3 billion fewer rural inhabitants in 2050 than today. The world is becoming more populated, and urban landscapes are becoming an increasingly bigger presence versus rural areas.
It looks like the world will need much better infrastructure and a lot of new urban homes, and that bodes well in terms of long term demand for investors in Caterpillar (NYSE: CAT). The company has an undisputed leadership position in construction and mining equipment, and a unique brand power to leverage its global presence.
Caterpillar has been reporting strong financial numbers lately, with a 22% increase in sales and an upgrade in earnings guidance for the rest of the year during the last quarter. In spite of that, the stock is trading at pessimistic valuations with a P/E of 9.5 and a dividend yield near 2.4%.
With the never ending crisis in Europe, economic slowdown in China and uninspiring growth rates in the US; investors seem to be concerned about the negative effects of the macroeconomic environment on a cyclical company. That´s probably the main reason behind the stock´s low valuation, and it’s a valid concern.
But regardless of short term economic fluctuations, Caterpillar is well positioned for long term growth, and the company has demonstrated its resilience in the face of adverse economic conditions. There are also some encouraging signs in key markets like US construction, which has plenty of upside potential from current levels, and this could provide a very strong tailwind for Caterpillar in the middle term.
If we talk about the need for more global infrastructure, General Electric (NYSE: GE) cannot be left out of the conversation. The company has been betting strongly on the energy infrastructure business over the last years, and it also has strong competitive advantages in its widespread international presence and unquestionable financial strength to undertake heavy capital investments.
General Electric is trading at a P/E near 18 and paying a dividend yield of 3.3%, which doesn´t sound like an absolute bargain, but still a reasonable valuation for a market leader. Cyclical risk can be a problem for the company, but GE has a diversified exposure to different industries and key positions in many businesses with strong growth prospects in emerging markets.
The global urbanization trend will not only impact construction and infrastructure companies. The decrease in rural population, combined with less arable land due to urbanization, will require permanent increases in agricultural productivity to produce enough food to meet growing demand with fewer resources.
Fewer farmers with less land at their disposal will need better technology, and Deere (NYSE: DE) is particularly well positioned to benefit from that need. The company is being affected by slowing international markets and the drought in the US, but that weakness is already reflected in the stock price with a P/E ratio below 10 and a dividend yield near of 2.5.
Deere has a leadership position in agribusiness machinery, which stands to benefit from the demand for better technology in rural production over the next decades. Current valuation looks quite attractive, so Deere seems like an interesting alternative for long term investors trying to capitalize transitory weakness in a global powerhouse.
The countryside will need to continue spending in fertilizers and other crop improving technologies in the long term regardless of transitory factors like the drought affecting US production, so companies like Agrium (NYSE: AGU) and Potash (NYSE: POT) are interesting plays to capitalize growth opportunities coming from that demand.
Potash has a P/E ratio of 14 and a dividend yield of 1.4%, while Agrium carries a P/E ratio of 9.3 and pays a 1% in dividends. Fertilizing is for the most part a commodity business, so these companies are price takers as opposed to price formers. This means high volatility in profit margins due to fluctuations in industry wide fertilizer prices.
On the other hand, agricultural commodity prices have been quite strong lately, and that should be a positive factor for these companies in the middle term. Farmers spend more on fertilizers when the sales price for their products make it a worthwhile investment for their business. Climatic factors may be transitory by nature, but as long as the fundamentals remain strong in agribusiness industry, these companies will continue benefitting from the global urbanization trend.
Demographic shifts don´t usually make it to the front lines of the financial press, at least not on a daily basis. Precisely for that reason, investors should pay close attention to this kind of factors in their search for investment opportunities with superior long term potential. These are the elements which could make a big difference on you portfolio for the long term.
acardenal owns shares of Caterpillar. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend PotashCorp. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.