Manpower (NYSE:MAN) is witnessing an improvements of trends in Europe, an event with significant impact on a company with 65% of its revenues coming from across the Atlantic and which had its stock fall to the $40s after being in the $70s just a couple years ago as the European debt situation worsened, says John Healy, Managing Director and Equity Research Analyst at Northcoast Research Holdings, LLC.
“If you look at the growth rate and the trajectory of the growth rates, or rather the growth declines in Europe, they’re starting to look like the numbers might become — what I would say are less bad — so revenue trends are no longer what I would say are decelerating. I anticipate that to occur probably in the first quarter, which is typically a good sign and a good opportunity to begin to buy the stock of Manpower or any staffing firm — when the industry trends start to appear like they’re no longer decelerating, and the next moves might be up rather than down. I think we’re on the cusp of seeing that with Manpower,” Healy said.
Healy says the market has already priced the European decline into MAN‘s stock, and he says the company engaged in improving its agility and go-to-market strategy, which he expects will result in improved profits over the long run. The company has also been repurchasing its own stock, and investing in its Experis brand.
“In 2013, I see Manpower as an outperformer for four reasons: revenue trends that look less bad, a valuation that is very attractive relative to its peers, successful initiatives to improve the cost structure of the company and the opportunity to improve mix associated with the furthering of the launch of the Experis brand,” Healy said.
Demand for container leasing is growing as shipping companies free up capital for more core projects, preferring the flexibility that comes from outsourcing ownership of containers and not having to return containers to different ports around the world, benefiting container-leasing companies like Textainer Group Holdings (TGH), says Helane Becker, Director at Dahlman Rose & Co.
“We believe it’s cheaper to rent than to own. The leasing companies have also been in a position where they have been able to raise capital. A shipping company has its capital tied up in its new-build program, and it is much cheaper to lease containers rather than to buy them,” Becker said.
Becker has a “buy” rating on Textainer and prefers the company over its competitor TAL International (TAL), because TGH has never cut its dividend. In the past, TAL has modified its dividend to reflect economic conditions, and Becker prefers the predictability afforded on TGH‘s dividend history.
“This compares to Textainer, which has never cut their dividend. There have been quarters in which they didn’t raise the dividend but more importantly, they’ve never cut it, so that is why we always pick Textainer first. Its board is also a little more conservative than TAL’s board,” Becker said.
Ryder System (R) is benefiting from a pickup in commercial vehicle rentals, which can partially be attributed to a housing recovery, and a steady leasing market. Renting is also looking more attractive to businesses as the costs of purchasing and maintaining new equipment rise due to EPA regulation, says Kevin W. Sterling, CFA, Senior Vice President and Senior Equity Research Analyst BB&T Capital Markets.
“I have made Ryder my top pick for 2013 in what is likely to be a slow growth economy. Also, the average age of trucks on the road today is the oldest in history, so I think there is a huge replacement cycle coming,” Sterling said. “When you factor in the cost of new equipment and the high cost of maintenance, I think leasing is a great alternative to replace some of that older equipment instead of buying a new truck.”
Sterling also says Ryder has the ability to tap into the debt capital markets, giving it the ability to fund capex initiatives, which is especially important as the costs of equipment rise. He says Ryder spent $2 billion in capex, and the company historically increases earnings after capex, because the company doesn’t buy a new truck without a lease agreement on hand.
“The interest level from investors is pretty high as many investors are looking for derivative plays on housing and auto, and I believe Ryder fits that bill. Furthermore, I think investors understand the replacement cycle on the horizon and why leasing is an attractive alternative versus purchasing new equipment.”
Manpower (MAN) is expected to continue recovering after it saw a downturn that can be attributed to some of its fundamentals move in the wrong direction due to the company’s European exposure, and the stock saw a significant rally toward the end of 2012, says Jeffrey M. Silber, Managing Director at BMO Capital Markets Corp.
“The stock has actually rallied towards year end. It’s up about 12% year to date [for 2012], and it’s trading at about 14 times next year’s earnings — again, the group is at 16 — so as long as you think Europe will start recovering within the next 12 months or so, I think this stock can continue to work,” Silber said.
MAN gets about 60% of its business from Europe, mostly from lower-skilled staffing, and a European recovery is expected to significantly impact the company’s equity. Silber says companies are still unsure about the European performance for 2013, but he hopes comparisons will get better this year.
“You are seeing in some of the other areas growth slow a little bit. Temporary staffing usually rebounds after an economic downturn pretty dramatically, and then as the economic cycle matures, you see growth slow a little bit. So I think you will still see these companies saying that they are looking for growth, but because of the tough comps and the law of large numbers, growth will slow a little bit,” Silber said.
Robert Half International (RHI) aggressively hired recruiters at the end of the downturn and at the beginning of the upturn, getting a head start against the competition and taking market share, and the stock is expected to appreciate from current levels, says Jeffrey M. Silber, Managing Director at BMO Capital Markets Corp.
“Historically, Robert Half’s stock trades at a premium, but not now, as it is trading roughly in line with the group at about 16 times next year’s earnings. So it’s another one that we think we can get multiple expansion on top of positive estimate revisions as well,” Silber said.
Silber says later-cycle staffing companies like Robert Half tend to do better as the economic recovery matures, and he goes on to say that an economic upturn is good for temporary staffing in general. He also says the vertical RHI works is doing well this cycle regardless of the passing of previous catalysts.
“Robert Half is typically known as the class of the staffing sector. They focus mostly on accounting and finance staffing. We don’t have the Sarbanes-Oxley bubble that we had last cycle that really drove a lot of demand in accounting and finance, but accounting and finance staffing is still doing fairly well this cycle,” Silber said.
Total S.A. (TOT) is working to produce LNG in places like Africa and the Middle East and to sell it in Asian markets where the commodity is priced off the price of oil, in order to make some of the best margins in this industry, says Oswald Clint, Senior Research Analyst at Sanford C. Bernstein & Co., LLC.
“I like the French integrated oil company Total, which is also listed in New York as well. It has 4.9% growth in the next four years, that’s an annual growth number, so almost 5% which is highest at the large caps European majors,” Clint said. “They are taking out gas and putting into Asia priced off of oil prices, so I like that.”
TOT also is involved in African deepwater for its oil production, which creates a positive cash flow. He also says that oil prices are not expected to increase dramatically, remaining mostly flat, and in this environment he prefers companies like Total which are growing volumes.
“Today they can generate high returns and can generate a lot of upfront cash flow. So I am really expecting a great level of volume, so that’s Total. And it’s a stock with a high dividend yield at the moment of 6%. All combined, that’s definitely attractive to me, and that’s one of the stocks I like most,” Clint said.
Synovus Financial Corp. (SNV) has become prudently conservative in its lending practices, clearing up numerous uncertainties in its balance sheet while, at the same time, the Southeastern housing environment seemed to be improving, leading Jonathan S. Raclin, Principal at Barrington Asset Management, Inc., to include the stock in his investment strategy.
“It is admittedly a relatively high-risk, but potentially a high-reward opportunity. They recently announced that they had sold off a large portion of their bad loans. While I think it’s very tough to make money in the banking industry with an incredible amount of regulation and with interest rates as low as they are, the news for Synovus going forward should be better,” Raclin said.
Raclin also says smaller banks like SVN‘s Coastal Bank are able to provide a more personalized banking relationship, especially now that large banks are extremely focused on cost structures rather than personal service. He also says its g may provide exposure to positive trends going forward.
“There may also be some further consolidation in the banking industry, and Synovus is in a part of the world — Georgia, South Carolina, Alabama and Florida — which may prove attractive to an outside entity. We began to acquire the position at $1.50. It’s now trading at approximately $2.50. We think it could be worth more as the housing recovery, especially in the Southeast, continues to show strength,” Raclin said.
Chevron Corporation (CVX) continues growing LNG volumes at one of the fastest rates among big oil and gas majors despite cost increases in its Australian developments, which have caused the company to increase its capex payments in the region, says Iain Reid, Senior Equity Research Analyst at Jefferies & Company, Inc.
“We [have] a positive recommendation on Chevron, which is a developer of two of the largest of the Australian projects, which are currently going ahead at the moment, Gorgon, and a development called Wheatstone. And Chevron is the largest resource holder of gas offshore the northwest shelf of Australia,” Reid said.
Reid says, however, CVX announced a 40% increase in the cost of the Gorgon project, leading to a capex rising of $37 to $52 billion, casting shadows on the upside the company could have experienced from its Australian LNG project, yet the growth rate of LNG volumes still poses a positive for the company.
“[CVX] was our top large-cap pick when we produced this piece of research this time last year, but the cost increase in Gorgon has, we think, cast a bit of shadow over the stock in that sense, but it is still a very important company in terms of global LNG, and CVX is certainly the company which is growing the fastest of the big majors in LNG volumes because of these two huge projects they have in Australia,” Reid said.
Transocean LTD (RIG) continues to improve its operations in a favorable commodity-price environment with a strong revenue backlog. Philip Weiss, Senior Analyst at Argus Research Company, interprets these signs as the beginning of a turnaround for RIG, and he says this name provides deep value for investors.
“Another possible benefit is that they also sold 35 or so their jack-up rigs to a private equity firm. Transocean is going to retain a piece of that business, but I still like the move. It will benefit margins, and with the jack-up market being relatively strong, it should be a good time to sell these rigs, many of which are relatively old,” Weiss said.
Weiss says the stock peaked at over $160 in 2008 and at the current levels he says there is room for growth, especially as the company carries a backlog that approaches $30 billion. Transocean is currently building more capacity to meet demand, and they are growing efficiency and the number of deepwater resources plays is also growing.
“They’re buildings new rigs, and I think that’s important, and they have contracts for those rigs, which is even better. And I think that’s the first one that I think of in terms of companies that are really well positioned right now. One thing to remember though is that this looks like a deep value play, so it may take a little bit longer to generate strong gains. But I think it’s one that you have an opportunity now to get a good price and do well on that stock,” Weiss said.
