ISM Data Signals Expansion In The Services Sector

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 |  Includes: ADP, BRS, LUV, PEG, RAD, USAT
by: Kapitall

Summary

The US services sector expanded more than expected in May.

We screened service sector stocks for encouraging inventory trends and positive price-to-earnings growth ratio.

Stocks with PEGs below 1 (undervalued) are listed below.

The US services sector expanded more than expected in May, according to the latest reading from the Institute for Supply Management's non-manufacturing index. Gains in new orders lifted the index to 56.3 last month, above the 55.5 estimate and up from 55.2 in April. New orders within non-manufacturing industries rose to 60.5 in May, increasing 2.3% from the 58.2 reading recorded in April.

The ISM reading came on the heels of payroll processor Automatic Data Processing Inc.'s (NASDAQ:ADP) monthly national employment report, which showed a decline in private sector job growth. In May, the private sector created 179,000 jobs, falling from the 215,000 that were added in April; Reuters reports analysts expected employment to increase by 210,000.

Stocks responded positively to the ISM reading, moving up Wednesday morning after opening at session lows. The better-than-expected ISM reading inspired us to look for investment opportunities among the services sector.

We began with a list of US stocks belonging to the sector, which we then screened for encouraging inventory trends since new orders played a crucial role in boosting May's reading. Specifically, we looked for stocks that experienced faster growth in quarterly revenue year-over-year than growth in quarterly inventory year-over-year and a decrease in inventory as a percentage of current assets. If these stocks were exhibiting positive inventory trends before May, it's possible that last month's uptick in new orders will help them sustain momentum through the next quarter.

For our final screen, we looked for stocks that were undervalued according to the price/earnings to growth ((NYSE:PEG)) ratio. This valuation ratio divides a stock's price-to-earnings (P/E) ratio by its annual earnings growth to show investors how much shares are worth compared to the company's expected earnings. If a stock has a PEG ratio below 1, it suggests that the stock is undervalued. We were left with four stocks on our list.

Click here for the full, interactive chart.

1. Bristow Group, Inc. (NYSE:BRS): Provides helicopter services to the offshore energy industry primarily in Europe, West Africa, North America, Australia, and internationally. Market cap at $2.65B, most recent closing price at $74.41.

PEG at 0.94.

Revenue grew by 6.14% during the most recent quarter ($412.33M vs. $388.47M y/y). Inventory grew by -4.84% during the same time period ($161.06M vs. $169.25M y/y). Inventory, as a percentage of current assets, decreased from 23.71% to 20.08% during the most recent quarter (comparing 3 months ending 2013-12-31 to 3 months ending 2012-12-31).

2. Southwest Airlines Co. (NYSE:LUV): Operates as a passenger airline that provides scheduled air transportation in the United States. Market cap at $18.9B, most recent closing price at $27.20.

PEG at 0.83.

Revenue grew by 6.14% during the most recent quarter ($4,428M vs. $4,172M y/y). Inventory grew by -0.43% during the same time period ($467M vs. $469M y/y). Inventory, as a percentage of current assets, decreased from 11.1% to 10.48% during the most recent quarter (comparing 3 months ending 2013-12-31 to 3 months ending 2012-12-31).

Click here for the full, interactive chart.

3. Rite Aid Corp. (NYSE:RAD): Operates retail drugstores in the United States. Market cap at $8.26B, most recent closing price at $8.27.

PEG at 0.88.

Revenue grew by 2.2% during the most recent quarter ($6,597.46M vs. $6,455.24M y/y). Inventory grew by -5.1% during the same time period ($2,993.95M vs. $3,154.74M y/y). Inventory, as a percentage of current assets, decreased from 71.55% to 69.87% during the most recent quarter (comparing 13 weeks ending 2014-03-01 to 13 weeks ending 2013-03-02).

4. USA Technologies Inc. (NASDAQ:USAT): Supplies cashless, remote management, reporting, and energy management solutions to the unattended point of sale market principally in the United States. Market cap at $77.51M, most recent closing price at $2.24.

PEG at 0.06.

Revenue grew by 19.03% during the most recent quarter ($10.57M vs. $8.88M y/y). Inventory grew by -29.92% during the same time period ($1.71M vs. $2.44M y/y). Inventory, as a percentage of current assets, decreased from 25.87% to 15.65% during the most recent quarter (comparing 3 months ending 2013-12-31 to 3 months ending 2012-12-31).

Click here for the full, interactive chart.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: Kapitall is a team of analysts. This article was written by Mary-Lynn Cesar, one of our writers. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.