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5 stocks boosted by a weak dollar
Companies like Terex and Corn Products are seeing improving sales overseas thanks to the declining dollar. But it pays to look beyond traditional weak-dollar plays.
By Jim Jubak
The cheaper dollar is starting to kick in, giving a welcome boost to U.S. exports.
The December survey by the Institute for Supply Management had good news for U.S. manufacturing in general: The survey of purchasing managers at more than 400 industrial companies, released on Jan. 4, showed manufacturing activity climbing to 58.6 in December from Novembers 57.8. Any number above 50 shows that the manufacturing sector is expanding, and the December number was the highest in four months.
But the ISM index that tracks new orders jumped even more strongly, to 60 in December from 54.7 in November. December is typically a weak month for new orders, so the jump most likely is a sign that overseas customers are stepping up their orders for U.S. goods because the dollar them cheaper. In the last 12 months the dollar has dropped 7% against the euro and 5% against the yen.
The strength in the ISM survey builds on the good news on factory goods orders reported for November by the Commerce Department. Orders for November climbed by 1.2%, according to the departments report issued on Jan.5. This marked a significant improvement from the 0.9% growth reported for orders in October.
The Commerce Department report showed that the good news about orders wasnt spread around evenly, though. Orders for computers and electronic products fell almost 6%, while orders for defense sector equipment tumbled the most, a huge 31.7% after climbing 18.3% in October. Demand for all non-defense capital goods rose by 7.1%. The transportation sector, on the other hand, continued its hot growth, with demand for transportation goods climbing 8.8%.
The way to profit
So how do investors profit from this export-led but uneven manufacturing boom thats building on the sectors recovery?
By finding U.S. exporters faced with stiff competition from non-dollar economies. A weak dollar will give these companies a boost in 2005.
By picking exporters that pay their bills for raw materials, labor and the other costs in dollars. You certainly dont want to own shares of a company thats seeing its weak-dollar advantage eroded by having to pay its costs in a currency that's appreciating against the dollar.
And by looking beyond the obvious to include not just manufacturers but also the companies that'll make more money by shipping larger volumes of exports.
Here are the three picks I made during my Wednesday appearance on CNBCs "Morning Call."
Putting aside doubts
Terex (TEX, news, msgs) is a classic weak-dollar export pick. The company barely managed to survive the last downturn in the construction equipment industry. But survive it did, largely by buying even more financially troubled equipment firms for rock-bottom prices. That strategy took Terex from an industry also-ran to No. 3 in the world behind only Caterpillar (CAT, news, msgs) and Japans Komatsu.
Terex was slow off the mark in 2002, with shares showing a 36% loss as investors worried about the heavy debt load that the company had taken on to buy those failing competitors. They also wondered if Terex could make the transition from a bundle of separate companies to an integrated business that could capture the economies of scale so important to making a profit in the construction equipment sector. Those doubts seem to have been put aside as the stock took off in 2003. It continued its run into 2004 with a 67% gain last year.
Despite that huge run, the stock still trades at a price-to-sales ratio of just 0.5. Its price-to-earnings ratio is just 18.3 based on projected 2004 earnings and 12.9 on projected 2005 earnings. The key to that low P/E ratio even after the stocks strong gains? Earnings per share are expected to grow by nearly 40% in 2005 after a 72% gain in 2004. Our StockScouter rated the stock a 10 out of a possible 10 on Jan. 5.
All things corn
Corn Products International (CPO, news, msgs) turns corn into such things as corn starch (used to make paper and textiles), high fructose corn syrup (used in soft drinks), glucose corn syrup (used in hundreds of food products) and high maltose corn syrup (used in sports drinks and candy.) Byproducts, themselves pretty profitable, include corn oil, corn feed and corn protein (both used in animal feeds).
The company looks set to get a big boost to profit margins (and sales). A big increase in the U.S. corn crop, caused in part as farmers switch to corn from soy beans to escape the latest rust outbreak, should lead to lower corn prices and lower costs for Corn Products. A weaker dollar should increase sales overseas and increase earnings as revenues in stronger currencies are translated back into dollars on the companys books. Our StockScouter rated the stock a 6 on Jan. 5.
Growth where it counts
UTi Worldwide (UTIW, news, msgs) reported earnings for its October quarter on Dec. 7 that were about 11% above Wall Street expectations. Earnings per share climbed 51% from a year earlier and net revenue rose 29%. The big story, and the reason the company is one of my weak-dollar export picks, is that 64% of the companys net revenue came from Asia-Pacific, Africa and Europe. The Asia-Pacific region was the biggest source of gross revenue for the company in the quarter (and accounted for 15% of net revenue), while the fastest revenue growth came from Africa (27% of net revenue) as a result of the June acquisition of International Healthcare Distributors. Our StockScouter rated the stock a 7 on Jan. 5.
In my two exclusive picks just for CNBC.com on MSN readers Ive taken a longer view of the weak dollar. A depreciating U.S. currency will be with us for quite a while, so it makes sense to invest at least part of a weak-dollar position in companies that'll benefit from the boom in exports for the next five years or more.
To me that spells railroads.
2 exclusive picks
Burlington Northern Santa Fe (BNI, news, msgs) has had the ability to raise prices while delivering mediocre service. Thats the advantage of having Union Pacific (UNP, news, msgs), a truly troubled railroad, as your major competitor, and of operating when companies are desperate to get their goods to customers.
But what excites me about Burlington Northern in the long term is that the company is about 90% of the way to double-tracking its major transcontinental route. When the job is done, the company will be able to move a train to Los Angeles from Chicago without having to push it onto a siding to wait for an oncoming train to clear the tracks. Multiple trains will be able to travel on the same track, at different speeds, and going in different directions. And that should bring a huge boost to efficiency and profit margins. Investors waiting for that can look forward to near-term earnings per share growth of 30% in 2004 and 20% in 2005. Our StockScouter rated the stock a 6 on Jan. 5.
Greenbrier (GBX, news, msgs), with a market cap of $536 million, is riding the coattails of the railroads' 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. Its leasing division owns about 11,000 cars. Wall Street projects earnings growth of 35% for Greenbiar in the fiscal year that ends in August and 26% growth for fiscal 2006. The stock trades at 18.4 times projected fiscal 2005 earnings and 14.6 times projected fiscal 2006 earnings. Our StockScouter rated the stock a 9 on Jan. 5.
Editor's Note: A new Jubaks Journal is posted every Tuesday and Friday.
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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