3 Companies that will Benefit From the Recovering Economy
Madhu is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In past few years the US economy has been through a rough patch. Earnings were down, spending was down, unemployment was high and so was retrenchment. But we have moved a long way since then, with the economy now showing signs of recovery. In this article I have picked up three stocks which have benefited because of the stabilization of the economy. I anticipate that as the markets gains more strength in the time to come; these stocks should show further upside. The stocks are USG Corporation (NYSE: USG), Automatic Data Processing (NASDAQ: ADP), and Wal-Mart (NYSE: WMT). USG's stock growth parallels the growth of the US housing market. The improving US housing market has supported the company's last quarter result. On similar lines, the stabilization in the US economy has resulted in more jobs, and this helped Automatic Data's payroll processing segment. And finally, for Wal-Mart the recovery in the economy has raised the spending power of consumers. Stock of world's largest retailer has been strong, and with its expansion plans I feel the stock will maintain its upward trend. Let's discuss these stocks in detail.
The U.S. Housing market is improving at an exceptional rate. The same is evident from the fact that in December 2012 housing starts were up by ~37% y/y and reached 954,000. These starts have reached their highest levels in the last four years. The improvement in the housing sector has simultaneously helped complementary companies such as USG Corporation that manufactures building materials. Better than expected 4Q12 of the company is an outcome of the stabilizing market. USG was able to increase the total revenue for the quarter by ~12% y/y and the net loss was ~$13 million, drastically improved from last year's ~$100 million for the same period. I am optimistic about the future of the housing market in the U.S. and expect that the auxiliary industries will grow along with it.
For FY13 the total revenue of the company is expected to be ~$3.5 billion with an operating profit of ~$340 million. The estimation is based on three factors. Firstly, because of the improving market and changes in foreclosure regulations the rate of new residential construction will remain at 950,000 units throughout the year. It is to be noted that every 100,000 new starts result in ~200 million square feet of incremental production for the company. Secondly, the new UltraLight premium wallboard that accounted for ~47% of the total wallboard volume will continue to grow in the coming year. And lastly, on average the company's rivals have already increased their prices by a flat 30% for all of their customers, whereas USG has applied a more conservative approach by adopting rates that vary with different customers. The adoption of this technique leads to an average increase of ~20% in prices that can help USG in acquiring new customers in the future.
Automatic Data Processing
The unemployment rate in the US has been following a decreasing trend and was ~7.8% in the last three months of 2012. This helped Automatic Data Processing increase its revenue, as the major source of the company's income is processing of payrolls. The company recently declared 2Q13 results, in which the total revenue was up by ~7% y/y. The growth in revenue was mainly driven by employer services and PEO services that increased by ~7% and ~13%, respectively.
The company also issued guidance for FY13, and it expects an increase in total revenue and EPS by ~5% each. Seeing the decreasing unemployment rate, this guidance seems to be achievable. It is estimated to go down further to ~7% in 2013, which will in-turn help the employer services segment of the company. Along with that, the company's new products like Vantage HCM, Workforce NOW ver. 4.0, etc., are in place to increase its market share. Vantage HCM has a broader suite of services in its unified database, including benefits of administration, time & labor management, talent management, and HR & recruiting features. It is already implemented by around 10 clients, sold to 30 others, and by the end of FY13 it will be released with a global system of records. The Workforce ver. 4.0 is built from a unified database and offers a broad product suite. The company intends to migrate its legacy major account customers on to Workforce Now over the next two years. The company can keep-up with the increasing employment in the US with the help of these products. Overall, I am optimistic about ADP and I feel that the new products will help the company increase its customer base.
How do you grow bigger than the biggest? Well, if you are Wal-Mart you can definitely not lose that position in the first place. The world's largest retailer is going big, again, as it recently announced its plans for expansion in Canada. It is safe to say that the move is a reply to Target (NYSE: TGT)'s expansion plans in the region. Recently Target announced it will move north and open ~125 stores in Canada starting this March. Wal-Mart is going to invest ~$450 million to build new stores and renovate the old ones. The company is planning to open at least 37 super-centers which will increase its retail space by ~1.4 million square feet. By the end of January 2014 it will operate around 388 stores in Canada. Along with this, the plan includes expansion of its grocery segment in all the stores of the country. Currently, this facility is available only in 50% of its Canadian stores. Grocery allows Wal-Mart to get a competitive edge on Target, which focuses more on clothing and housewares.
Additionally, its consumer electronic business is also solid and growing. Recently at the Consumer Electronic Show it announced its pre-paid plan Straight Talk with the new iPhone 5. This plan includes unlimited talk, text and data for a low cost of $70/month. Availability of iPhone on the pre-paid network is a game changing event for Straight Talk and the pre-paid industry, as the iPhone was responsible for driving consumers to enter post-paid contracts. Looking at this, I feel that its ability to adapt according to the changing market conditions and consumer needs will help the stock to grow.
What's in for the investors?
Summing up, I can say that the recovery in the US economy has helped all the above mentioned stocks. Increased prices, improving US Housing Market, and products like UltraLight are indicators of the fact that USG will grow. On the other side, the improvement in the US economy has resulted in reduction of the overall unemployment rate in the country and will continue to go down in the future as well. This will assist Automatic Data to increase its business and will provide a good base to its latest initiatives like Vantage HCM and Workforce NOW. The stock seems strong and the company will give a decent performance in the future as well. Finally, Wal-Mart’s expansion plans and innovative business ideas will help its stock to grow the same way it has been growing in the past. I recommend a buy rating for all three stocks.
madhudube has no position in any stocks mentioned. The Motley Fool recommends Automatic Data Processing. 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!