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5 stocks inflation will help
Plenty of people bemoan inflation. But some companies will benefit by providing equipment to alleviate tight supply and meet rising demand.
By Jim Jubak
Fears of higher inflation may send the financial markets into a tizzy. Signs of increasing inflation may force the Federal Reserve to raise interest rates more quickly than it would like. And certainly no consumer looks forward to paying more for goods and services.
But inflation isnt entirely a bad thing. It enables companies with market-leading products to raise prices and increase profits. It takes the pressure off CEOs to cut costs, which they often do by firing workers.
For companies that make the equipment that enables other companies to increase production, inflation can be a sign of good times to come. Thats because part of inflation, at least, is a result of too much demand chasing too little supply. The rising prices that make up inflation are a measure of this imbalance and of specific bottlenecks in the economy. The imbalance creates a market for products that increase supply or remove bottlenecks, such as trucks, railroad cars, restaurant equipment, steel pipe for oil wells and air-conditioning systems for new buildings.
Inflation is good news for companies that add capacity to the economy, exactly what the companies I discussed on CNBC's "Morning Call" Wednesday do.
Stocks that'll benefit
Paccar (PCAR, news, msgs) makes trucks sold under the Kenworth and Peterbilt names in the United States. Earnings per share, which have grown at an annual average of just 4.2% for the last five years, are projected to explode by 43% this year and 19% in 2005 as a growing economy demands more trucks to ship goods.
Trucking volumes continued to accelerate in April from the already high growth rates in the first quarter. Trucking companies in the both the less-than-truckload and truckload segments are increasing their capital budgets to buy more trucks in the face of tight capacity.
Truck sales volumes, which ran at near historic levels in April, should show a seasonal downtick into the fall, and then pick up again in October as trucking companies begin placing new orders for delivery in 2006. New Environmental Protection Agency rules on truck engine pollution should also help drive demand.
Paccar holds about 23% of the U.S. market for heavy-duty trucks. The stock trades at 16 times trailing earnings per share.
Back in the hunt
Vertias DCG (VTS, news, msgs) helps the oil industry find and recover more oil and gas by acquiring, processing and interpreting geological data on potential and existing oil fields. And with oil prices up and supply tight, the oil industry is back in the hunt for new reserves and increased production from existing fields.
Recently, company after company has been raising capital spending budgets. Analysts expect that increased spending to produce a huge swing in earnings for Veritas, with earnings per share growth of 42% for the fiscal year that ends in July and 31% for fiscal 2005. Its shares trade at 27 times projected fiscal 2004 earnings per share.
Middleby (MIDD, news, msgs) makes and services cooking and warming equipment for all kinds of restaurants, from fast food to full service to hotel. After two slow years, Middleby is on a roll. Existing customers are picking up their spending, and the company is riding a wave of new products that accounted for better than 40% of revenue in the most recent quarter.
New products that Middleby introduced recently cut energy consumption and speed up cooking time by about 25%. With seven new product lines in the pipeline, the momentum is likely to continue. Analysts are projecting 25% growth in earnings per share this year and 17% in 2005. Middleby trades at 24 times trailing earnings per share.
Exclusive CNBC.com picks
Maverick Tube (MVK, news, msgs) sells the solid-steel equivalent of Veritass intellectual property to the oil and gas industry. Maverick makes the specialized steel pipe used in oil and gas wells, so the company is a direct beneficiary of any increase in drilling activity.
In early May the U.S. oil rig count stood at 1,162, up 12% from a year ago. The Canadian rig count was up a whopping 69% year-to-year. Wall Street analysts are projecting a 218% increase in earnings per share this year. The shares trade at 17 times trailing earnings per share and at just 11 times projected 2004 earnings per share.
Watsco (WSO, news, msgs) is the largest independent distributor of air conditioning equipment, parts and supplies with $1.2 billion in annual sales and 6% of the market.
While its hard to see growth picking up in the residential market, since housing sales are near peak levels, the light commercial market that Watsco serves should see a pickup as companies expand to meet growing demand. As a distributor, Watsco is set up to benefit from the introduction of new air-conditioning products, such as the new line from Whirlpool (WHR, news, msgs), that seek to capitalize on the demand for energy efficiency and quiet operation.
Wall Street analysts are projecting earnings per share growth of 19% in 2005. That would be an improvement on the companys already stellar long-term record of 17% compounded annual earnings per share growth over the last 10 years. The shares trade at 18 times trailing earnings per share.
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 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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