Three Mid-Cap Picks for Solid Gains
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Mid-cap stocks offer attractive growth with a good history of income generation – stocks in the Mid-Cap segment have outperformed the stocks in the Small-Cap and Large-Cap segments. The five year annualized return for this category as per the S&P400 Mid-Cap Index amounted to 3.27%. Analysts believe that mid-cap stocks provide the best of both worlds by yielding stable returns with growth prospects.
B/E Aerospace is a manufacturer and distributor of cabin interiors for commercial aircrafts and aerospace fasteners and consumables. It possesses a well-diversified portfolio of products ranging from aircraft seating to storage equipment. The company has maintained its customer base in three regions, namely the U.S., Europe and Asian economies with revenue shares of around 52%, 24% and 24%, respectively.
The company reports its operations in three segments, mainly commercial aircraft, consumables management and business jet. The annual average revenue growth of the company in the past three years amounts to 16.8%. The net income growth depicts a further improvement totaling 18.1%. First quarter 2013 revenues showed a further increase of 12.7% year-over-year, mainly attributed to operational efficiencies.
The decision to capitalize its operations towards seller-furnished equipment (SFE) still continues. The management commits to CAPR of 20% for the coming four years and continues to allocate its earnings towards growth prospects and expansion plans. An increase in capital expenditure of 64% in 2012 authenticates the aforementioned claim. The free cash flows are projected to be around 70% of net earnings in the coming year.
The company’s revenues are contingent upon the airline industry, which is a heavily regulated industry; therefore, compliance costs can adversely affect its operating earnings. Furthermore, the airline industry tends to be more sensitive to changes in economic climate. More specific risks include a large portion of intangible assets on the balance sheet, impairment of which would cause a significant decline in the asset base.
The P/E and forward P/E ratio stand at 25.5 and 14.5, respectively. The projected P/E ratio is expected to decline due an anticipated increase in earnings by the end of the year.
Tyson Foods is the second largest food production company, specializing in production, marketing and distribution of meat, prepared foods and related products. It has a vertically integrated production process with four distinct operating segments, namely chicken, beef, pork and prepared foods.
Tyson’s revenues for the recent quarter amounted to $8.419 billion, showing a modest increase of 1.82% compared to last year’s quarter. On a broader term investment horizon, the company’s average revenue growth amounted to 7.6% in the last three years. However, more recently, the company has been losing money due to a decrease in demand for packaged food and beef and an increase in the prices of feed.
The management declared a quarterly dividend of $0.05 per share for the recent quarter, backed by an annual EPS of $1.58. The projected dividend yield is expected to equal 0.8% based on this quarter's estimates. The free cash flow of the company increased by 23% despite a decline in operating earnings.
Expectations for the coming quarters are contingent upon stability in the farm industry. In the future, the meat industry is expected to make a recovery, especially the beef segment as the Japanese market provides room for expansion. Operational efficiencies in the chicken segment are expected to have a reinforcing effect on the increase in profits. Future prospects for the company seem promising as the management increases its capital expenditure by 7.3% in 2012.
Low margins and the volatile nature of the prices is a major risk to its operations. Fluctuations in demand and supply brought about by consumer preferences will have an adverse impact on its earnings. Financial risks would include the inability to pay off its $458 million worth of notes.
The P/E and forward P/E ratio stand at 17.2 and 9.6, respectively – both of these ratios are below the industry average.
Acuity brands was incorporated in September 2007. It provides lighting devices for commercial, institutional, industrial and residential areas in the U.S. alongside international regions such as Europe and Asia. In 2012 the company managed to maintain its position as the industry leader for the fourth consecutive year.
The company showed an increase in revenues of 7.96% year-over-year. Growth in revenues for the last three years amounted to 5.3% while growth in net income touched 11.1% for the same time frame. The quarterly earnings for 2013 stand at $25 million, showing a marked increase of 25% as compared to last year.
The company has been paying out dividends on a consistent basis with the recent quarter's dividends at $0.13 per share. The free cash flows of the company increased by 2.17% despite an increase in capital expenditure. Therefore growth-dividend policies can be pursued side by side.
Acuity brands have been able to outperform the S&P400 Mid-Cap index along with the Dow Jones Index in the last three years. However, the company faces several risks. The aggressive pricing adopted by the company and competitive nature of the industry can shrink its profit margins. Changes in technology employed and the advent of new products are serious threats.
The P/E and forward P/E ratio for the stock stand at 27.9 and 19.6, respectively. Furthermore, the P/B and P/S ratio stand at 3.7 and 1.7, respectively.
All of the above mentioned stocks have shown exceptional performance over the past year and have substantial growth potential. These companies have a solid position in their respective markets, and I expect these companies to grow well in the future. These stocks will prove to be good investments for investors looking for growth as well as income.
Ishtiaq Ahmed has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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!