Jubak's Journal
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5 earnings-growth engines for 2005
Corporate earnings growth is likely to slow next year, which means that companies that still can produce solid growth will stand out.
By Jim Jubak
When anything -- diamonds, oil, left-handed power pitchers -- is in short supply, the price climbs.
Next year, double-digit earnings growth will be the scarce commodity. The economy is expected to grow but at a slower rate, with GDP growth dropping to 3% in the first quarter from a 4% in the third quarter and a projected 4% in the fourth quarter. The projected slowdown will hit consumers and businesses. Consumer spending growth is projected to drop to 3.2% in the first quarter from 5.1% in the third quarter. Business investment growth is projected to plunge to 5% in the first quarter from 13% in the fourth quarter, when companies will spend to take advantage of expiring tax breaks.
And corporate profits and earnings will slow as the economy does. Profit growth hit a 20-year high of 28% in the first quarter and has been falling since. Earnings per share growth for the Standard & Poors 500 stocks is likely to come in near 20% for 2004 but is projected to drop to just 10.6% next year. The big drop will come in the beginning of the year when S&P 500 earnings growth is projected by Thomson First Call to drop to 8.3% in the first quarter and 8.8% in the second quarter after recording a very solid 15.4% increase in the fourth quarter. (Earnings growth is projected to pick up to 12.5% and 12.8% in next year's last two quarters.)
In this environment, companies that can deliver predictable growth at a rate above the 10.6% benchmark for the S&P will get a two-stage boost. First, their earnings growth will lift their stocks. Second, the scarcity of double-digit earnings growth should boost the price-to-earnings ratio that investors are willing to pay for this growth.
In my regular appearance Wednesday on CNBCs "Morning Call," I picked these three stocks for double-digit earnings growth in 2005.
Plowing up profits
Deere (DE, news, msgs). The pessimists think Deere, the worlds largest farm equipment producer, wont hit double-digit earnings growth in the fiscal year that ends in October 2005. Farm equipment sales are cyclical, and Deere has been running at the top of the cycle for too long and is ready to retreat. Thats why theyre calling for just 8.6% earnings growth in fiscal 2005.
I agree that Deeres sales are linked to farmers' income, but I think calling for the end of the farm belt boom in 2005 is just plain wrong. Global demand continues to boom and world grain supplies are low even after record harvests.
Theres a tremendous amount of wiggle room in earnings estimates for Deere in fiscal 2005. The most optimistic among the analysts who follow Deere call for 21% earnings growth in fiscal 2005. It wouldnt take much to push the consensus of 8.6% over the threshold and into double digits. Our StockScouter rated the stock an 8 out of a possible 10 on Dec. 22.
Paccar (PCAR, news, msgs) is expected to see earnings and revenue growth fall in 2005 to less than half of 2004's rates. So why am I recommending this stock? First, the drop that Wall Street expects still means Paccar's revenue will grow 15% and earnings will climb 23%. Second, despite the stocks huge run in 2004, the shares are still cheap based on the fundamentals. They trade at just 16.4 times trailing 12-month earnings and 14.6 times projected earnings. Theyre so cheap because Paccar operates in another cyclical market, and analysts are looking for truck sales to drop from recent peaks.
But that overlooks the size of the backlog in demand for heavy trucks. The average used truck has about 500,000 miles on it, up from 300,000 miles in 2003. With the trucking industry experiencing good times, there are a lot of drivers who'll be looking for new rigs in 2005. Our StockScouter rated the stock a 7 on Dec. 22.
A restructuring pays off
General Electric (GE, news, msgs), the parent of CNBC, is back to the land of double-digit earnings growth. At least thats what CEO Jeff Immelt told Wall Street Dec. 14.
General Electric has certainly stocked up with growth potential during Immelts restructuring, making $40 billion in acquisitions in everything from health care to water systems. And this is the year that Wall Street thinks Immelt can start wringing more growth out of the company.
After growing earnings at what's likely to be something like 2% in 2004, GE is pegged by analysts to produce 13% earnings growth in 2005. At a price-to-earnings ratio on trailing 12-month earnings of 24.3, GE is historically cheap. The stocks average P/E ratio over the last five years is a little over 31. If Immelt can deliver, the stocks multiple is likely to move higher. Our StockScouter rated the stock an 8 on Dec. 22.
Big company stocks like these three arent the only possible source of double-digit earnings growth in 2005. In my two exclusive picks just for CNBC.com on MSN readers Ive gone way down the market capitalization scale from the $393 billion market cap of GE.
Two exclusive picks
Greenbriar Cos. (GBX, news, msgs), with a market cap of $536 million, is riding the coattails of the railroads in their current prosperity. The company makes freight cars and double-stack intermodal (truck to rail to truck) equipment and performs maintenance and repairs on more than 100,000 railcars as well. The companys leasing division owns about 11,000 cars. Wall Street projects earnings growth of 35% for Greenbriar in the fiscal year that ends in August 2005 and 26% growth for fiscal 2006. The stock trades at a P/E ratio of 26.9 on trailing 12-month earnings per share. Our StockScouter rated the stock a 9 on Dec. 22.
Teleflex (TFX, news, msgs) hasnt exactly been burning up the track with its earnings growth lately. Earnings are projected to drop by 3% in 2004. But next year looks much different for this mini-GE doing business in the automotive, industrial, medical, and aerospace sectors. Analysts project that earnings will climb 14.3% in 2005. The stock, which has a market cap of $2.1 billion, trades at 18.7 times trailing 12-month earnings and 17.3 times projected 2005 earnings per share. Our StockScouter rated the stock an 8 on Dec. 22.
I wont be appearing on CNBC next week. See you all in the new year.
Editor's Note: A new Jubaks Journal is posted every Tuesday and Friday. However, Jim will not publish new columns on either Friday, Dec. 24, or Friday, Dec. 31.
E-mail Jim Jubak at jjmail@microsoft.com.
At the time of publication, Jim Jubak did not own or control shares in any of the equities mentioned in this column. He does not own short positions in any stock mentioned in this column.
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