The demand for irrigation equipment is increasing along with food prices, with farmers reaping a faster return on their investments in such technology as center-pivot irrigation and remote monitoring, says C. Schon Williams, Vice President and Senior Equity Research Analyst at BB&T Capital Markets.
“High commodity prices have increased the return on investment for machinery and dramatically shortened the breakeven period,” Williams said. “Farmers see where corn, wheat and soybean prices are and are rushing out to buy agricultural machinery so that they can reap the benefit of the higher commodity prices.”
Williams points to Valmont Industries (VMI) as one of his favorite irrigation equipment companies. He says Valmont is trading at reasonable multiples, its irrigation equipment is one of the favorites among end users and the Energy Policy Act of 2005 benefits its utility-transmission business.
“We have a $130 price target on [Valmont], which would yield 20%, 25% upside from today,” Williams said. “They are doing very well in that irrigation market, and then you’ve got a couple of other catalysts including electrical transmission and a recent acquisition that are due to kick in here over the six to 12 months that should provide some additional upside.”
As businesses reorganize in the current economic environment, business process outsourcing (BPO) and consulting firms are helping them cut costs by evaluating and improving operations, Janney Montgomery Scott Analyst Joseph D. Foresi says.
“High-end prospective customers are much more comfortable moving their work offshore, and in that environment pipelines are starting to get stronger and more deals are getting signed,” Foresi said. “This is something that wasn’t taking place 12 months ago, and certainly not two years ago.”
Foresi points to Cognizant Technology Solutions (CTSH) as a company invested in consulting and outsourcing. He says the rationalization of business practices will continue, and outsourcers could offer attractive risk/reward.
“You have Cognizant, one of the fastest-growing names in the offshore space. And they of course continue to provide upside results and drive revenues higher,” Foresi said. “Finally we’re starting to get constructive on some of the BPO names.”
The emerging economies in Latin America are increasingly using wireless communications, driving high growth multiples for companies levered to data usage in the region, says William Blair Analyst Jim Breen.
“I don’t have outperform ratings for any of the U.S. stocks, mainly because I think growth in Latin America is so much more attractive,” Breen said. “There is competition, but the data penetration is very low, so I think there is potential for more upward movement from data.”
Breen has a “buy” rating on NII Holdings (NIHD), a wireless stock invested in the largest Latin American markets. He says the company is currently upgrading its wireless data network and it targets the post-paid consumers niche.
“I believe the customer base is better positioned to take advantage of this move towards mobile data over time. [NII Holdings is] smaller than the other players, and growing EBITDA in the teens with a valuation lower than some of its peers,” Breen said. “They have got a good track record on that type of buildout.”
Professional staffing firms are benefiting from both increased demand for temporary staffing services and the transition toward a more permanent work force, collecting fees from servicing both needs, says Macquarie Group Analyst Kevin D. McVeigh, CPA.
“These stocks tend to recover earlier than the economy and then enjoy the additional boost as we enter the midcycle of the economy,” McVeigh said. “When the economy is on firmer ground and employers become more confident in the employment outlook, they convert some of those temporary employees to full time.”
McVeigh points to Robert Half International (RHI) as one of his top picks in professional staffing. RHI offers high-end professional staffing services, which tends to do well at this stage of the recovery cycle. McVeigh says he expects 25% to 30% upside from the company’s stock.
“[Robert Half International is] well positioned among small and medium-size clients, so as that part of the market continues to return to growth, we think they are very well positioned to capture additional revenue associated with that growth,” McVeigh said. “They also enjoy good pricing power relative to some of their peers.”
In addition to building new infrastructure, wireless operators tackle broadband capacity constraints by reformatting wireless data plans and restructuring content delivery networks. The companies offering these solutions present investing opportunities, says Andrew Griffin, an Analyst at Bank of America Merrill Lynch.
“There are lots of tricks that the operators can use to reduce loading. Many operators talk about very few users hogging large amounts of capacity, and so they are planning to add limits on how much data a user can use,” Griffin said. “Another way is what’s called content delivery networks, whereby video is stored in exchanges close to the user.”
Griffin points to Alcatel-Lucent (ALU) as his favorite company providing capacity solutions for wireless communications. ALU developed routing for networks, optical switching technology, and ways to measure and ration wireless data based on users’ broadband consumption.
“How do you prevent that heavy user from consuming more data than they should? It’s with a router that’s programmed to monitor how much that guy has been using and calculate when it reaches the limit,” Griffin said. “So Alcatel-Lucent is very much on the ascendancy right now, and we think it has got a very attractive valuation.”
The temporary staffing sector is experiencing secular growth, as businesses increasingly turn to temporary staffing to control costs and make work forces more flexible, says William Blair & Company Analyst Timothy McHugh.
“This is driven in part by the swings in the economy over the last five to 10 years, some of the changes to benefits programs, such as health care, that are driving up with the cost of full-time employees,” McHugh said.
McHugh points to Robert Half International (RHI) and Manpower (MAN) as two of the higher-quality temporary staffing firms, and he says they still trade at revenue multiples that are 20% to 30% below 2004 to 2006 levels.
“I think both of them are well-run franchises that are gaining share, are likely to deliver solid revenue growth during the next few years and are trading at revenue multiples that are below normal midcycle levels for them,” McHugh said.
Although Apple (AAPL) faces competition from companies that are quickly mass producing handsets that use third-party software, the company has so clearly differentiated its product offerings that it’s the clear winner in the wireless handset sector, says William Blair Analyst Anil Doradla.
“Without a doubt Apple is the key leader,” Doradla said. “From my point of view, although it might sound too easy, I believe Apple is still in its infancy in terms of penetrating the wireless space, and there is a lot of room for Apple to continue to grow.”
Doradla says Apple is an iconic leader within the consumer handset space, and the company’s innovation in both hardware and software offerings have helped it emerge as the clear leader in the space.
“Apple, in our opinion, is the only handset vendor that is able to maintain margins when they introduce new handset models,” Doradla said. “The other interesting aspect of Apple is their ability not only to introduce new phone models, but also to discontinue older ones.”
Staffing firms that recruit higher-skilled workers are outperforming their lower-skilled counterparts at this point in the cycle, and they are also enjoying higher margins, says BMO Capital Markets Senior Analyst Jeffrey M. Silber.
“The so-called higher-skilled companies have started to pick up business,” Silber said. “That started maybe about six to nine months after the lower-skilled companies, and we’ve actually seen the stocks of the higher-skilled companies outperform recently.”
Silber points to SFN Group (SFN) as a staffing company benefiting from the current economic situation, and it has workers at both ends of the skill spectrum. SFN also underwent management changes, and its new strategy is more levered toward staffing.
“[SFN‘s] EBITDA margins peaked at 3.7% back in 2007. They’ll probably be back there, if not this year, by next year at the latest,” Silber said. “Even if you don’t believe in the secular growth theory, here is a company that will do better this cycle. The stock has taken a hit recently since they’re seeing revenue growth decelerate, but I think the sell-off was an overreaction and provides a great entry point for investors.”
Wireless communications companies are increasingly pursuing economies of scale in specific market capabilities and niches, leaving behind the vertical integration ideal of previous decades, says Tim Horan, Managing Director and Senior Analyst at Oppenheimer & Co. Inc.
“You don’t try to be all things to all people. You don’t try to control every facet of the service that you sell or manufacture,” Horan said. “It’s a lot cheaper to share a tower between three or four different companies and for the hundreds of wireless service providers globally to buy handsets from three or four global suppliers.”
Horan points to Apple (AAPL) as one successful example of horizontal segmentation in wireless communications. AAPL outsources network and manufacturing, but through its customer-facing innovation it has become a market leader in the space.
“[Apple] outsources the entire manufacturing of the device. It has opened up applications development to the masses organized through its operating system,” Horan said. “All of this has enabled the company to do innovation a lot better than what a vertically integrated company, regional wireless carrier, can ever hope to do.”
Call center volumes and requests for proposals (RFPs) picked up over the last three quarters along with the improving economy. This trend is expected to continue, making the largest vertical within business process outsourcing (BPO) even bigger, says Matthew J. McCormack, an Analyst at BGB Securities.
“There’s only about $50 billion or so of call center work that is outsourced out of roughly $300 billion,” McCormack said. “So there is still an embedded amount of growth just within their existing client base, as more companies decide to outsource more of their business.”
McCormack points to Convergys Corp. (CVG) as his favorite pick among staffing and outsourcing companies levered to call centers. CVG underwent senior management changes, signed a contract with AT&T (T) and displaced IBM (IBM) as the BPO provider for Dun & Bradstreet (DNB).
“[Convergys is] trading less than the group at about 6.4 times,” McCormack said. “You got a new CEO who’s already got the results. He’s focused. The business margins have improved since he has been there, and you have the new wins in the pipeline.”
