Buy These Inflation Proof Stocks
Madhu is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Ever increasing energy costs, along with the slowdown in the housing industry in the past, have forced investors to think about capital appreciation for their investments and invest in stocks that are less affected by such economic imbalances. This situation proved to be advantageous to large cap growth stocks. They took benefited from prevalent lower interest rates and attracted investors looking for long-term capital appreciation.
One of the investment management firms that invests using the same ideology is Kornitzer Capital Management Inc. (KCM). In its recently disclosed 13F filings it made 25 new positions, including companies like Hibbett Sports, Infoblox Inc, Insulet Corp, Realpage Inc, Microchip Technology Inc. Screening its portfolio, I have picked up three stocks from KMC's portfolio in which it has increased its investment by more than 100% as per its recent filings. I expect that these companies will take advantage of the low interest rates for their growth and save investors from the impact of inflation with expected higher returns. Let's have a look at these stocks individually.
% change in position
Cerner Corporation (NASDAQ: CERN)
Kansas City Southern (NYSE: KSU)
Walgreen Co. (NYSE: WAG)
Source – Whalewisdom.com
Cerner Corporation recently reported its 4Q and also full year earnings for FY 2012. The total revenue of the company has jumped by 21% to $2.67 billion for the full year from $2.20 billion in 2011. The revenue growth was mainly due to record bookings of 1.02 billion, which increased by 13% y/y. The free cash flow for the quarter was at a record ~$424 million, which was up by ~18% y/y. These figures clearly depict a solid performance by the company this quarter.
What lies ahead?
Cerner's main markets include the US, Canada, the UK, Australia, Spain, and France. In order to further increase its footprint Cerner has been focusing on the Middle East, and the company recently signed an agreement with King Saudi University. Under this agreement it will provide electronic health record (EHR) systems for two of their hospitals, namely King Khalid University Hospital and King Abdulaziz University Hospital. In the coming 18-20 months, both university hospitals shall provide 30 EHR systems. And as per the management guidance, this agreement will bring drastic revenue growth for Cerner in the coming years.
Furthermore, Cerner's current customers are indicating positive signals for its future growth. Almost all the customers, including Bayfront Medical Center, Carolinas Healthcare System, and Casa Grade Regional Medical Center, are on track with Cerner for their HIT requirements. I expect these clients will increase their HIT spending by 6.7% in the next year, along with the new business bookings, which are expected to be in the range of $720 million - $760 million in 1Q13.
I believe Cerner will witness long-term growth opportunities in the field of Healthcare IT, and therefore I recommend buying this stock.
Kansas City Southern
Recently, Kansas reported strong 4Q12 results that were in line with market expectations. The company posted an operating income of $174 million, a decent 15% increase from the corresponding same quarter in the last year. This was mainly due to tremendous revenue growth in its automobiles, chemical, petroleum, and inter-modal lines of business.
Following the lines of the US rail companies, Kansas is also focusing on Mexico to gain from the flourishing trade opportunities between the two countries. I see 2013-2014 to be a tremendous growth year for Kansas, as it is going to open four new manufacturing units in Mexico. Mexico already contributes around 45% to the company's total revenue. New Mexican units will be opened in 2014 and it will further increase its Mexican production by 25%-30%. Considering the strong fundamentals and good growth prospects from the Mexican market supported by cheap labor costs, I expect the revenue growth to be 10% and 13% for 2013 and 2014, respectively.
Furthermore, Kansas has been continuously taking initiatives for reducing its overall costs. Kansas had already reduced its debt burden by $200 million in FY11. In February 2012, 18 financial institutions, including Morgan Stanley, Bank of America, Merrill Lynch, JP Morgan, and others together granted a term loan worth $275 million to Kansas. This term loan will mature on Jan. 15, 2017 and Kansas may utilize this term loan (carrying 1.25% interest rate) to reduce its debt burden, which carries an 8% fixed interest rate. This initiative by Kansas shall reduce its overall operating cost and will boost its earnings.
I recommend a buy for Kansas looking at its long-term growth prospects and its cost reduction initiatives.
Walgreen reported slightly disappointing annual sales figures. Total sales for fiscal 2012 were $71.6 billion, compared to $72.2 billion in 2011. This slight decline in earnings was mainly due to its multi-billion dollar investment in the European health and beauty retailer Alliance Boots.
I believe Walgreen is adopting a two-step approach for its win-win strategy. Walgreen has already purchased 45% of Alliance Boots for $6.7 billion and will acquire the remaining 55% for $6 billion within the coming three years. The company will gain from Boots’ operations in Europe and several other emerging countries. Due to the acquisition of Boots, Walgreen's European market shall grow by 50%, and it's overall market share in the Pharmacy industry may be boosted by 10%. The combination of Walgreen/Boots is on track to achieve the first year synergy target of $100-150 million. Moreover, with this acquisition Walgreen's total revenue is expected to increase to $130 billion in FY 2016.
Looking at Walgreen's tremendous expansion plans, I believe its total earning shall grow by around 80% in the coming four years, and it may be considered as a long run growth stock. Therefore, I recommend a buy for Walgreen.
To sum up, Cerner and Kansas both have been performing well over market expectations and can be considered growth stocks for long-term capital appreciation. On the other hand, Walgreen's results have disappointed a bit due to its huge capital investment. However, it can also be considered for a long-term investment based on its acquisition of Alliance Boots. I recommend a buy rating for all the three stocks.
madhudube 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!