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Earnings You Can Count On
By Brian P. Knestout
These companies can deliver double-digit growth even in a sluggish economy.
If the economic slowdown did anything, it unmasked the growth-stock pretenders. Companies once considered paragons of stability watched their growth falter when sales stopped flowing and profits evaporated. A slew of high-tech names in particular -- Cisco Systems, EMC, Intel, Oracle, to name a few -- come to mind as growth companies gone astray.
But dark clouds can have silver linings. When times get tough, the real "ruler" stocks (so-called because the profits of the underlying companies rise in a relatively straight line, regardless of the economic environment) strut their stuff. This is especially so this year, when corporate profits are expected to decline for the first time since 1991.
The difficulty most companies have in achieving steady earnings growth only makes investors want to ante up for companies that can deliver the goods. "Dependable growth warrants a premium in a slow economic environment," says Conrad Herrmann, director of equity research at the Franklin Templeton funds. Rick Malone, a portfolio manager in Reston, Va., for Ferris Baker Watts, puts it another way: "Would you pay more for a car that you know will start up every morning without fail? Damn right you would."
So where are the ruler stocks today? With the help of FactSet Research Systems, a financial-data supplier, we screened the Market Guide database of 10,000 companies to find consistent double-digit growers. We looked for companies with stock-market values of $2 billion and up that had delivered at least five consecutive years of double-digit profit gains. Then, relying on estimates compiled by First Call/Thomson Financial, we narrowed the list to those companies that analysts expect will generate profit growth of at least 10% in 2001. Finally, to eliminate overly expensive stocks, we required that a stock's price-earnings ratio (based on 2001 consensus estimates) be no greater than twice the company's expected earnings-growth rate over the next three to five years.
A mere 28 companies met these grueling requirements. Most are in industries that aren't subject to obsolescence -- those that supply basic needs such as food, clothing and financial help. We list all 28 in the table below. Of these survivors, the following six are especially noteworthy.
Power plug
Independent power producer Calpine (CPN)has had a remarkable run since going public in 1996. Earnings per share have soared from 16 cents that year to $1.11 in 2000. Analysts expect another jump this year, to $1.88 per share. Since its debut, the stock has appreciated 23-fold. Yet Calpine still looks amazingly inexpensive at current prices.
The main reason for Calpine's low price is its exposure to the California energy crisis. Calpine derives about half its earnings from selling power in California. That has tied its fate closely to the state's topsy-turvy power crisis. Among other issues, Calpine hasn't established any reserves to cover the $270 million it's owed by Pacific Gas and Electric, which is in Chapter 11 bankruptcy proceedings.
Amid the chaos, the company is laying the foundation to sustain its growth. It signed $13-billion worth of long-term contracts to provide 2,500 megawatts of electricity in California over the next two decades. That should ease California's power deficit and provide Calpine with a base of stable earnings. The long-term contracts insulate Calpine somewhat from the threat of price caps, fears of which have hurt the stock recently.
Calpine has ambitious expansion plans, aiming to increase its electricity-generation capacity to 70,000 megawatts by 2005, compared with 5,900 today. Such growth won't come easily, because Calpine must raise billions to finance its new plants. Still, the potential payoff is substantial.
Flashing plastic
We mentioned credit card issuer Capital One Financial (COF last year (see "Future Stocks," Sept. 2000), noting its use of technology to tailor its card services to customers and its quickly growing roster of accounts. The economic downturn has done little to temper growth. In Capital One's most recent quarter, accounts jumped at an annual rate of 32%, or roughly 30,000 new accounts per day. Yet the company has only 5% of the domestic card market, giving it room to expand.
Capital One issues cards to carefully selected consumers to minimize the number of cardholders who are likely to default. Some higher-risk customers are offered cards with limited credit lines. While defaults and missed payments have crept up recently, those strategies cushion the impact of bad loans on Capital One's bottom line.
Like other credit card issuers, Capital One's profits will suffer if a recession hits. But if the economy averts a hard landing, the company's strategy will keep it growing quickly in the future and, says Friedman Billings Ramsey & Co. analyst Todd Pitsinger, "enable Capital One to maintain its position as the dominant market-share taker in the industry."
Tech trainer
In order to thrive in a complex world, companies need employees with the right training. For many, that training comes from DeVry (DV). The company has more than 50,000 students in 21 undergraduate and 36 graduate-school campuses in the U.S. and Canada.
Working closely with such companies as AT&T, Intel, Lucent and Motorola, DeVry gears its accredited curriculum to provide the skills employers need most, such as accounting, electronics engineering and information technology. That keeps job-placement rates high (nine out of ten graduates find a job in their field within six months) and keeps new students knocking on the door.
DeVry is starting Internet courses and opening about two new physical campuses a year, raising the number of paying students. Coupled with steady tuition increases, that expansion has helped the company's earnings to grow 20% a year for the past ten years. Ron Baron, manager of Baron Growth fund, has held the stock since its IPO in 1991 and still sings its praises. "The great technical expertise DeVry provides, its innovative curriculum and its high ethical standards make it a great company," says Baron.
Logistical gold
Need to get a container full of sneakers from Shanghai to Los Angeles? More and more companies are turning to Expeditors International of Washington (EXPD)to solve such puzzles. Expeditors is the "gold standard in logistics companies," says Grant Bowers, an analyst at the Franklin Templeton funds.
Expeditors is basically a travel agent for cargo. The company itself owns no airplanes, ships or trains; it simply orchestrates the shipping of goods from one country to another through its 150 offices worldwide. The firm buys cargo space in bulk from airlines and shippers and resells it to customers at lower prices than they would otherwise be able to get. It also helps customers clear shipments through customs.
This low-maintenance strategy dramatically cuts costs and lets the company gear its business to economic cycles. Growing demand for Expeditors' services boosted sales 26% and earnings 58% in the company's most recent quarter over the same period last year. Even if sales slow, says Bowers, Expeditors can wring profits out of falling shipping costs.
Mortgage maven
The Democrats' takeover of the U.S. Senate is good news for Fannie Mae (FNM). Fannie, the government-sponsored corporation that buys mortgages from private lenders to ensure an affordable mortgage market, had been criticized by some Republicans. They questioned the fairness of the implicit government backing that allows Fannie to borrow money at low rates. With Democrats in control of the Senate, political risk has cooled considerably.
That lets investors focus on Fannie Mae's business prospects, which look promising because of the growing number of people buying homes. Due to its government ties, the company can borrow money more cheaply than commercial banks. It uses that money to buy mortgages from other lenders, making money on the difference between income on those loans and the interest it must pay to borrow. Over the past decade, Fannie's profits have grown at the remarkable rate of 23% per year.
As long as the housing market remains healthy, Fannie will continue its winning ways, says Anna Dopkin, manager of T. Rowe Price Financial Services fund. "Management knows how to manage interest-rate and credit risk exceptionally well," says Dopkin.
Corner grocer
In the dog-eat-dog world of the supermarket business, Safeway (SWY) is more than holding its own. Safeway operates about 1,700 stores across the country, and it is a top player in most of its markets.
Safeway's keen eye for acquisitions is fueling a good deal of its growth. The addition of regional chains -- Von's in 1997, Dominick's in 1998 and Randall's in 1999 -- all boosted earnings. The recent purchase of Philadelphia-area Genuardi's supermarkets should do the same.
Despite a strike by workers in northern California last winter, Safeway posted earnings growth of 15% in the first quarter of 2001, mostly by paying careful attention to expenses. "Nobody does it better when it comes to managing costs," says Deutsche Banc Alex. Brown analyst Jonathan Ziegler.
Safeway's shares are down nearly 20% this year, which analysts attribute to the strike and the San Francisco-based chain's presence in power-strapped California. But the strike is history, and Safeway has signed long-term contracts that will keep a lid on its California electricity costs. That makes the stock a tempting target. |
