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Published: September 29, 2010
After a sharp plunge in 2009, many companies are reporting
vastly improved results this year. But until the economy is
firmly in growth mode, further profit gains may be hard to come
by. But a small minority of companies is in the midst of a
profit spurt that shows no signs of a slowdown.
I decided to set about to look for these impressive growth
stories, screening for companies that are expected to boost
profits by at least +40% in 2011. And to whittle the list down,
I eliminated any company worth less than $1.5 billion. They must
also sport price-to-earnings (P/E) ratios below 12 times next
year's projected profits. Lastly, I eliminated banks and
financial services companies from the list as analysts have an
especially hard time accurately forecasting future profits in
this sector.
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The 26 stocks that made cut represent some clear themes. A
number of them operate coal mines and are now benefiting from
improved pricing for coal that should support robust
earnings
per share (EPS) growth in 2011. In a similar vein, the steel and
aluminum producers are also expected to benefit from both higher
volumes and better pricing, as I noted in a recent profile of
Alcoa (NYSE: AA).
Outside of those sectors, a few other companies caught my
attention, as they are likely to benefit from changing
conditions in their industries. Let's take a look...
Navistar (NYSE: NAV)
This maker of trucks, buses, RV chassis and other big rigs has
received a bit of luck. Just as its military division is set to
slow down after completing a big contract to supply armored
vehicles for the wars in Iraq and Afghanistan, its commercial
division is kicking into high gear. The economic slowdown of the
last few years led truck buyers to hold off on purchases, and as
a result, the age of the average truck is near an all-time high,
according to analysts at Sterne Agee. In addition, dealer
inventories are now quite lean and that's setting the stage for
an expected surge in truck orders in 2011, which will be
bolstered by ever-tightening emissions regulations.
While the economy was in a funk, Navistar looked to cut costs in
every corner of the business. The net result: "Depending on
volume, (expectation of 240,000 units for 2011), Navistar
expects to achieve a higher level of profitability than during
past cycles," wrote Sterne Agee analysts in a recent report. In
the past five years, Navistar has earned a little more than $4 a
share on two occasions. Sterne Agee thinks EPS will exceed $5 a
share next year, and that shares should trade for 12 times that
profit view, with a price target in the low $60s. That
represents roughly +50% upside from current levels.
JetBlue (Nasdaq: JBLU)
If you've traveled by air recently, you've probably noticed that
airplanes are flying with fuller loads these days. It's all
about supply and demand. Major carriers took many planes out of
service in 2008 and 2009, and passenger volumes have begun to
rise since then. After being repeatedly burned in past cycles
when the major carriers deployed too many planes -- right at a
time when demand slowed -- the whole industry has shown a lot
more discipline this time around. It vows to add planes back
into the system at a slow pace, making sure that the supply of
airline seats remains just below demand levels. And that is
enabling the carriers to push through fare increases, which are
now roughly +20% higher than a year ago, according to the
Airline Transport Association (ATA).
While most airline carriers are in the midst of a nice profit
rebound, JetBlue seems to be the biggest beneficiary of the new
industry economics. The low-cost carrier is likely to see
profits double this year and rise another +40% to +50% in 2011
to around $0.60 a share. But the carrier is getting little
credit: Shares are right in the middle of the 52-week range and
trade for less than 10 times next year's profits.
After years of torrid growth, JetBlue is likely to settle into a
moderate +10% growth phase in coming years (sales growth is more
robust this year due to very easy comparisons from 2009 when
demand for air travel slumped). But that +10% growth should be
sufficient to push profit growth at twice that pace. That's
because JetBlue's infrastructure investments are largely
completed, and any new revenue is more rapidly flowing to the
bottom line.
Shares of JetBlue hit $30 back in 2003 when investors first fell
in love with the company's instant popularity among consumers.
The investor honeymoon ended a while ago, and shares have lost
-80% of their value since that peak even as consumer loyalty to
the JetBlue brand remains very strong. Back in 2003, the carrier
earned $0.64 a share, but profits have been weak ever since as
management continually tinkered with pricing. That tinkering is
now complete, which is why analysts expect EPS to finally
rebound back to that 2003 peak. If JetBlue can deliver on
forecasts, investors are likely to return to this success story.
Action to Take --> One of
the charms of low
P/E stocks is that they are more likely to
hold their own if the market slumps anew and investors first
look to shed high P/E stocks. And if the market strengthens,
economically-sensitive names like JetBlue and Navistar are
likely to find much favor among investors seeking a nice
combination of value and growth.
-- David Sterman
Staff Writer
StreetAuthority
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