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Given recent concern about easing economic activity, one might feel that reducing exposure to consumer stocks that are sensitive to the waxing and waning of the business cycle is a good idea. Yet, falling energy prices and better job prospects led to a surge in consumer confidence in September, suggesting that another look at this group might be in order.

We started off by looking at the 600 stocks that recently came across the Reuters Select stocks screens and filtering for those from the consumer cyclical sector. This left us with a list of 19 names. (Click here for an Excel sheet comparing these consumer cyclical companies.)

Since we are looking at consumer cyclicals relatively late in the cycle, our next step was to focus on stocks that are trading at reasonable valuations. We accomplished this by filtering for companies with price to earnings (P/E) and P/Sales ratios that are no more than 10 percent above the average for their respective industries. This shortened our list to six names.



We also wanted to incorporate a measure of long-term performance. Hence, our next step was to filter for companies where return on investment [ROI] - net income divided by shareholder equity, long-term debt and other long-term liabilities - was greater than the industry average over the last five years. Of course, we also wanted to identify companies that have maintained a relative advantage of late. As such, we focused on companies where the ROI in the trailing 12-month [TTM] period also outperformed the industry norm. This left us with three names. Auto & truck manufacturer Rush Enterprises Inc. (RUSHA) was the only one where its ROI not only improved in the TTM span from its five-year average, but the magnitude of its advantage over the industry also increased during this time.

Rush Enterprises, which operates a regional sales network for trucks manufactured by Peterbilt, GMC, and Isuzu, in addition to John Deere equipment, recently appeared on the Reuters Select growth screen for Rising Expectations. Even though it has a market capitalization of less than $420 million - low enough to be considered a micro-cap - Rush also appeared on the quality screen for Industry Leaders. The Rising Expectations screen looks for companies that have a history of beating analyst earnings estimates. The Industry Leaders screen seeks to identify companies that stand above the industry average in terms of several key factors, including stock-price performance, profit margins, and balance sheet strength, regardless of the size of the company.

The Rising Expectations screen begins by filtering for companies that have posted upside earnings surprises in each of the last four quarters. Upon investigation, we find that Rush has surpassed the consensus earnings per share [EPS] estimate in each of the last five quarters by between 10 percent and 23 percent.

The company's EPS in the trailing 12-month [TTM] period stand about 49 percent above their year earlier level. Although this is a bit slower than the industry average for this period, it is much faster than the company's own five-year average, as indicated below.


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When looking at the EPS growth figures above, one should note that the company's five-year pace is much faster than the pace for the industry during this time. This superior long-term EPS growth rate enables Rush to meet a core requirement of the Industry Leaders screen.

Rush then had to face the requirement on the Rising Expectations screen that the consensus EPS estimate for the current year must be above where it stood four weeks ago, and the earlier estimate must stand above its reading from another four weeks prior. Analysts have become more bullish on Rush's earnings, helping it to clear this hurdle. The consensus reading has climbed from $2.23 two months ago to $2.26 a month ago to the current $2.27.

Not surprisingly, Rush stock has also edged higher of late, while the average stock in the industry is effectively flat. Over the last month, shares have inched about 1.3 percent higher, outperforming the 0.3 percent industry average. This slight advance also helped to position Rush on both screens: The Rising Expectations screen simply requires that a stock outperform the industry mean in this time frame; the Industry Leaders screen requirement is more stringent, necessitating a gain at least 10 percent better than the norm.

The Industry Leaders screen also requires that a company also have wider profit margins and relatively lower debt levels than the industry averages. Specifically, the screen highlights companies where the TTM net profit margin must be at least 10 percent better than the industry reading. As indicated below, Rush's advantage is closer to 45 percent.


Learn about Profit Margin Ratios

Lastly, we turn our attention to debt ratios. To rank among the Industry Leaders, a company needs to have relatively less debt than its peers. This requirement does not measure an absolute level of debt, but instead considers the total debt to equity ratio and highlights companies where this ratio is below the industry norm. As indicated below, Rush's total debt to equity and long-term debt to equity ratios are both well below the industry readings, suggesting that the company has room to take on more debt to finance expansionary projects, as well as securing Rush's presence on the Industry Leaders screen.


Learn about Financial Condition Ratios

At the time of publication, Erik Dellith did not directly own puts or calls or shares of any company mentioned in this article. He may be an owner, albeit indirectly, as an investor in a mutual fund or an Exchange Traded Fund.

Note: This is independent investment and analysis from the Reuters.com investment channel, and is not connected with Reuters News. The opinions and views expressed herein are those of the author and are not endorsed by Reuters.com.

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Source: Superior Profit Margins Make Rush Enterprises Attractive