Companies Doing Well Despite Signs of Weakening Economic Growth

Eileen is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

While the U.S. economy continues to chug along, there were signs of weakening growth in the second quarter. The Commerce Department reported that June retail sales increased 0.4%, not quite the 0.8% average growth estimated by 82 economists surveyed by Bloomberg.

Demand did not change much from May, and the recent data reported lead to a downward revision of May’s retail sales, from 0.6% to 0.5%. Consumer spending, which accounts for almost three-fourths of the economy, grew 1.5% in the second quarter versus a spending forecast of 1.7% by economists at Morgan Stanley. There are market expectations that the remainder of the year should have moderate increases after this very weak second quarter.

Yet despite the apparent signs of weakening, there are sectors where consumers are spending their money. June’s retail data point to higher sales at automakers and specialty retailers. Purchases of big-ticket items like cars are aided by the recent rallies in the stock market and rising home prices. Gains at specialty retailers reflect specific consumer spending trends, such as greater spending on home-related goods due to the improving housing market and budget-conscious consumers shopping at dollar stores.

The two automakers and two specialty retailers below could be buying opportunities. Let's take a closer look.

General Motors had record sales

For the first six months of 2013, General Motors’ (NYSE: GM) sales increased nearly 4% over the same period last year. Overall, the company posted sales of 4.85 million cars during the first half of the year. The Chevrolet brand sold 2.5 million vehicles, up 1.4% over last year. The release of new models in the U.S. and overseas carried the latest quarter, where Chevy achieved its eleventh straight quarter of higher sales.

The company’s estimated average EPS for 2013 is $3.30 and is estimated to increase to $4.36 in 2014. GM shares currently trade at a cheap eight times 2014 earnings, a fair price for a company with an estimated 5-year annual growth rate of 15%.

Ford gained as customers upgraded 

Ford (NYSE: GM) is another car company benefiting from consumers upgrading their cars. The company had its best June since 2006, with a 13% increase over last year. Ken Czubay, Ford’s Marketing VP, noted that the company had strong demand across its entire lineup. Small car unit sales totaled 35,851, up 39% over last year; this was also the segment’s best performance in 13 years.

The company’s truck lineup is also doing very well with sales up 20%; the F-Series sold 68,009 vehicles, an increase of 24% and the best June sales month since 2005. Ford shares are a good value at ten times 2014 earnings. Growth for next year is projected at 18%, followed by a slow down to 12% over the next five years. Estimated EPS for 2013 and 2014 is $1.42 and $1.68.

Growing sales supported by housing market

Increased activity in the housing market is also benefiting retailers that supply household goods, like Bed Bath & Beyond (NASDAQ: BBBY). The company’s first quarter results gave us a diluted EPS of $.93 and net earnings of $202.5 million, versus $.89 per share and $206.8 million in the same quarter last year. Comparable same store sales increased by 3.4%. Net sales for the quarter were up 17.8%, increasing to $2.6 billion.

The company is projecting diluted EPS for 2013 to be between $4.84 and $5.01; average EPS estimated by analysts for 2014 is $5.62. Bed Bath & Beyond shares trade at 16 times 2014 earnings and its PEG ratio is 1.29, so shares appear somewhat overvalued. However, the next quarter should boost company sales as students go back to school shopping.

Strong results on sales of consumables

Rising sales at Family Dollar Stores (NYSE: FDO) matched the high-end estimates projected by the company for the third quarter. Net sales rose 9% to $2.57 billion from $2.36 billion in the same period last year. Comparable store sales for the quarter rose 2.9%.

The company’s sales of consumables like food, health and beauty products, and tobacco increased 14.8% and helped the company gain market share. However, discretionary sales remain “challenged” and the company expects its customers to continue to keep their spending in check on these items. Analysts estimate full year 2013 EPS of $3.78 and $4.15 for 2014. Growth for the next five years is estimated at 11%, a drop from the 19% rate of the past five years.

My Foolish conclusion

General Motors and Ford are the best buys of the group and should continue to do well if the economic recovery picks up speed. A note on Ford -- the company may be subject to legal problems regarding claims that its MyFord Touch system screens are defective, so it will be important to watch how this issue unfolds.

Bed Bath & Beyond and Family Dollar Stores appear to be overvalued at the moment, but are worth watching. For Bed Bath & Beyond, continued strength in the housing market should help to drive future sales, while Family Dollar Stores should profit from slow job growth and budget-conscious consumer spending.

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Eileen Rojas has no position in any stocks mentioned. The Motley Fool recommends Bed Bath & Beyond, Ford, and General Motors. The Motley Fool owns shares of Ford. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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