Demand is strong for higher-end, white-collar, U.S.-focused business professionals within the employer services and staffing sectors due to high profit margins and discretionary budgets at most corporations, as well as the limited supply of workers with the right skill sets, says Timothy McHugh, CFA, Partner and Analyst at William Blair & Company, L.L.C.
“If you look, even in the most recent BLS data, the majority of the employment growth in the last several months has come from white-collar professionals and the temporary staffing industry,” he said. “While those two areas account for a relatively small percentage of a labor market, they are accounting for the bulk of the employment growth right now.”
McHugh likes Robert Half International Inc. (RHI), a high-quality company on the staffing side. He says the company continues to grow faster than the overall industry and perform well at the top line. McHugh also says that RHI’s focus on the U.S. makes him more confident that the company’s growth can be sustained over time.
“Given the strength in the company’s gross margin, we think the company can recover back to the company’s prior peak margin during the next few years, which should provide for a significant earnings growth. That’s why we like Robert Half,” McHugh said.
Although, the short-term outlook appears uncertain for the commercial aerospace and industrial companies, dictated by macroeconomic and political events in Europe and Asia, it looks bright in the longer view, which can be benchmarked by the large commercial airline backlog at the principal aircraft producers, says Richard L. Whittington, a Senior Equity Research Analyst at Drexel Hamilton, LLC.
“It is a split outlook in my estimation. The military-oriented contractors, which have seen very strong business fundamentals for the past decade in the aftermath of the terrorist attacks in 2001, are seeing a picture more dominated by tight government spending and fiscal circumstance,” he said. “It’s more about the backlogs. The backlogs extend, at present rates of production, nearly eight years, which is an unprecedented visibility and duration.”
Whittington likes The Boeing Company (BA) due to the company continuing to push forward on higher rates of production in its key commercial airliner models. He says Boeing should see its commercial profit margins rise 300 to 400 basis points over the next half-dozen years at the same time revenues increase, and that will significantly offset any declines in its military program.
“I see Boeing as a market share gainer within airliners, in general. Its latest model, the 787, should move from a steep loss position over the past couple of years of delay, heavy R&D and expense incursion to make some product fixes to a position of solid profitability, and perhaps, very high profitability late in the decade,” Whittington said.
Proposed cuts in military funding and the upcoming presidential election are the primary macro headwinds that continue to pressure the defense world as companies are starting to see changes in customer behavior, says Jeremy W. Devaney, a Vice President and Senior Research Analyst of BB&T Capital Markets.
“Specifically, we’ve spent a lot of time trying to get our arms around sequestration and possible impacts that the funding cuts may have on our universe, as well as the remainder of the defense world,” he said. “I’d say the broader macro trends are definitely negative, but there are positive stories underlying that.”
Devaney has a “buy” recommendation on AeroVironment, Inc. (AVAV), which specializes in unmanned aerial vehicles, which have been named a priority area by the Department of Defense. He says there is risk prevalent in AVAV, but he believes its product set and slate of opportunities is such that it will remain a priority in the face of potential budget cuts.
“We like AVAV right now,” Devaney said. “AVAV because of its very defined positioning within its customer and its low dollar cost to the customer. We think that AVAV might thread the needle through sequestration.”
The ultrabook category of the PC market may drive demand trends in servers later in 2012, therefore, boosting the semiconductor equipment industry, says Hans Mosesmann, an Analyst at Raymond James & Associates, Inc.
“In consumer PCs, there is a lot of enthusiasm about ultrabook as a new category for PCs,” he said. “We had a product cycle in ultrabooks. We’ll have to wait and see how demand is for these products, but it is encouraging that the OEM activity and the build plans are very positive.”
Mosesmann recently upgraded ARM Holdings plc (ARMH) to a “buy” rating as the I.P. used for ARM processors in ultrabooks comes from the U.K-based company. He says although, this computing platform may not be new, per se, ultrabooks are expected to sell at a lower price point this year due to increased demand from consumers, benefiting ARMH.
“Their technology/I.P. have become the de facto in standard in smartphones and tablets that are used by Apple, for example, used by Samsung, Qualcomm, NVIDIA and Texas Instruments, these last three as merchant chip suppliers, so obviously, ARM is going to benefit, we believe,” Mosesmann said.
A pickup in spending is expected in the second half of the year in the memory segment of the semiconductor capital equipment space for companies levered to developments in DRAM and NAND flash, says Patrick Ho, Vice President at Stifel Nicolaus & Co., Inc.
“Overall, we should see a pickup in NAND flash in the second half of the year, and that should trickle down positively for capex spending in that customer segment,” he said. “I think what I characterize as what I call a wild card is DRAM. I think DRAM is beginning to show some signs of recovery.”
Ho recommends Lam Research Corporation (LRCX) in terms companies that will benefit from a recovery in memory. When looking at the group as a whole, he likes Lam Research based on, not only near-term industry fundamentals, but also longer term due to the acquisition of Novellus Systems, Inc.
“Plus, by their acquisition of Novellus, I do believe that it opens up opportunities with Intel that Lam Research never had before this deal. So both near term and long term, I do like that name, it’s one of my preferred names at this time,” Ho said.
Technology trends in the health care IT sector, such as mobility and social media, are being used by hospitals and physicians to improve doctor efficiency and ensure productivity remains high, as well as promote services to consumers to drive patient flow, says Leo Carpio, a Senior Research Analyst at Caris & Company, Inc.
“I think we are moving to that tipping point of how that technology is going to be mission-critical to hospitals, physicians, to the entire health care space, in general,” he said. “Technologies make more happen out of less. Technology also helps these hospitals and physicians save money, and they are facing a lot of margin pressures from a variety of places.”
Carpio likes M*Modal IP LLC (MODL), a company that offers speech-recognition software, which has combined with MedQuist, a transcription service. MODL now offers technology that can use software to create a preliminary transcript, which then can be edited and sent back to the doctor, who continues to send the standard dictation on the digital recording to the transcription company.
“That makes it more efficient, but also it makes that transcript quotable, such that they can then mine that transcript for data for an EMR and other systems,” Carpio said. “The other thing M*Modal is doing is they’re working with a lot of the EMR companies and trying to ensure that their technology is tied to iPhones and iPads.”
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The increasing monetization ability of the Chinese Internet continues to drive the sector in the near term, including different business models, such as search, online gaming and e-commerce, says Wendy Huang, an Analyst at the Royal Bank of Scotland Group plc.
“Currently, the monetization of the Chinese Internet sector is still way below that of the U.S. level. So I think in China they still have some room to increase in terms of the revenue per user, and also in terms of the monetization ability of the different models,” she said.
Huang picks Baidu, Inc. (BIDU), a major Internet company and online traffic generator, as her best choice for investors, who are looking for solid earnings in 2012. She says Baidu has more than 400 million monthly active users and user penetration higher than 90%.
“I would say Baidu is still enjoying the high traffic growth and also their search business model still has several years to go in terms of revenue growth and earnings growth. So the high scalability of the search business model will still help Baidu in the next one to three years,” she said.
Alternative mutual fund strategies are the fastest-growing segment in the industry as investors look for different ways to get equity-type returns while trying to minimize risk in the current volatile macro environment, says Michael R. West, Senior Partner and Chief Executive Officer of BPV Capital Management.
“At the end of the day, the average investor was relatively flat to down for the last decade. That’s an expensive decade. Many people rode it up and rode it down, and some people were lucky in timing it,” he said. “What we would argue is there has to be a more thoughtful way, which is you can get those equity-type returns without taking that level of risk.”
West says he is not excited right now about opportunities in Europe, however, the domestic equity market is showing some signs of improvement, so he has a meaningful position in the domestic equity market. He advises investors to think about investing differently than in the past, and focus less on trends, and more on how to get a return and hedge against the downside.
“If you have a strategy that’s appropriately allocated in the right buckets, and you have enough buckets and those buckets don’t all act the same way at the same time, you may not have massive equity returns when the market’s going straight up, but you are likely to mitigate your downside risk,” West said.
The overriding theme of federal stimulus is expected to continue to drive multiples higher in many names in the health care IT sector for at least the next couple of years as a tailwind for the industry, says Gene Mannheimer, Managing Director, Equity Research at Auriga USA, LLC.
“So even though the stimulus bill was signed in 2009, February 17, and the goal is to get 90% or better of hospitals and doctors on EMRs by 2015, we have already seen delays and extensions,” he said. “I would say that we are going to see further extensions and the majority of health IT purchasing will occur probably this year and next year.”
Mannheimer recommends Computer Programs & Systems (CPSI), which he says has an interesting niche in the small hospital market, with facilities that have less than 100 beds, and typically, are in rural areas of the U.S. He has a “buy” rating on CPSI with the stock at $55, and his target at $68.
“What’s nice about that market is it’s underpenetrated, unlike the larger hospitals that have 90% penetration. In other words, most of the large hospitals are already using some EMR product, and it’s essentially replacement market,” he said. “At CPSI, the segment, it’s about 50% penetrated. So there’s a lot more inherent opportunity there in the market.”
