The global economy is on the move. Asia and other emerging markets are posting stellar growth. In fact, several countries are having to raise interest rates to prevent over-heating of their economies. The US and other industrialized economies are lagging behind. However, growth in the US is perking up. Manufacturing and service industries are beginning to grow at a nice clip. The employment picture in the US isn't as bright. Although it is improving, employment is still lagging growth. I expect US GDP will grow around 3.5% in 2011. I expect the unemployment rate will remain high, finishing the year around 9%.
There are many companies that will benefit from the growing global economy. These companies get revenue from the US and many other parts of the world. The four companies I have picked are global, large-cap stocks. I expect large-caps to outperform this year due in part to the economic uncertainty that still exists. All of the companies pay a dividend, returning at least some cash to shareholders.
Here is a closer look at each of the four companies poised to benefit from global growth.
Applied Materials (AMAT)
Applied Materials is one of the world's largest suppliers of fabrication equipment to semiconductor, LCD and solar PV cell manufacturers. The company has a strong position in China where the solar industry is growing rapidly. Applied Materials supplies the fabrication equipment to companies making semiconductors and LCD screens for TV's and mobile devices. The mobile device sector is rapidly growing as more people consume data on the go. The LCD television makers are struggling to gain pricing power and margins are being compressed. However, this is a benefit to Applied Materials because their fabrication equipment can actually reduce manufacturing costs for the TV makers.
Applied Materials has a very economically sensitive business. Revenues crashed in 2009 while the world was mired in recession. Revenues and profit margins have surged as the global economy has picked up steam. Applied Materials has a globally diverse revenue stream.
|Region||Percent of Rev|
Source Zacks Investment Research
The stock trades at a forward P/E of 13.13 and has a dividend yield of 1.7%. Applied Materials has very little debt, only $204 million. The company has grown revenue an annualized 6.4% over the past five years. Applied Materials is poised for further growth as the global economy continues to expand. The company operates in fast growing segments of the economy that should continue to grow over the next several years. Zacks Investment Research recently upgraded shares of Applied Materials to an outperform.
Waste Management (WM)
Waste Management is a trashy stock of epic proportions. I mean that in the best possible way. The company is the leader of waste solutions in the United States. Waste Management also has a growing business in China, where garbage has become a national problem. It's a known fact that as the economy expands waste expands along with it. Think of a factory that increases production. All production produces waste, and the more a factory produces the more waste it produces as well. An improving global economy will benefit Waste Management, not only will volumes increase, pricing power will increase as well.
In addition, Waste Management is leading the charge in recycling solutions. After collecting and processing recyclables the company is able to sell those to producers to be transferred back into the economy.
Waste Management was recently the subject of a Just One Stock article on Seeking Alpha; Just One Stock: The High Yielder Central to Waste Industry Transformation. The stock trades at 18.54 times forward earnings. Waste Management is a dividend stock, yielding 3.34%. It has grown its dividend at an annualized rate of 9% over the past five years.
Waste Management invests a lot in research. This should pay off for the company as it becomes a leader in new recycling and environmental solutions. Growth in the US economy coupled with a burgeoning trash problem in China should set Waste Management on a growth path for several years to come.
Illinois Tool Works (ITW)
Illinois Tool Works manufactures a wide range of diversified industrial products and equipment. The stock was one of my five picks for 2011. See Five Stock Picks for the New Year. The company holds over 19,000 active patents and makes everything from seat belt fasteners to countertops. Illinois Tool Works has exposure to the construction market but not much to the housing market.
The stock is up 27% in the last twelve months but has lagged other industrials. It trades at a forward P/E of 14.46. ITW has a dividend yield of 2.5%. The dividend has grown an annualized 16.3% over the past five years. Revenues have grown an annualized 4.8% over the past five years. The stock should benefit from the rebounding global economy.
Tyco International (TYC)
Tyco International was the subject of a Barron's article last week; A Leaner and Cleaner Tyco; January 29, 2011. The article argues that Tyco hasn't been properly rewarded for its makeover and improving business since the departure of disgraced CEO, Dennis Kozlowski. The company has been shedding less profitable assets. Tyco has three business segments; security systems, fire protection, and flow control. The security systems segment is its largest. Last year Tyco bought Brink's Home Security Holdings to pair with its own ADT. Commercial construction hasn't been as battered as residential construction. This has helped Tyco post improving numbers since the recession. Still, Tyco would be sensitive to any downturn in the economy. Tyco has the ability to cross-sell throughout its three segments. This is becoming a focus of the company going forward.
The stock is up 30% over the last twelve months but has lagged its peers. It trades at a forward P/E of 15.5 and yields 1.84%. Revenue has only grown at an annualized .4% over the past five years, but that reflects the shedding of some assets. Cash flow has grown at an annualized 5.5% over the past five years. As the global economy improves and commercial construction continues to grow, Tyco is poised to perform.
Here is a breakdown of the numbers for all four recommendations.
|Market Cap||21.8 B||17.9 B||27.3 B||23.7 B|
|5 Year Div. Growth Rate||24.60%||9.10%||16.30%||-7.20%|
|Return on Equity||15.73%||238.82%||68.40%||140.00%|
|Revenue TTM*||9.55 B||12.33 B||15.46 B||17.24 B|
|Operating Cash Flow FYE||1.72 B||2.36 B||2.15 B||2.66 B|
|Capex FYE||169 M||1.18 B||247 M||1.28 B|
|Capex/Cash Flow FYE||0.1||0.5||0.11||0.48|
|5 Year Rev. Growth Rate||6.40%||-1.20%||4.80%||0.40%|
|5 Year Cash Flow Growth Rate||-3.80%||-0.40%||-1.20%||5.50%|
|Net Profit Margin||9.82%||8.43%||9.62%||6.65%|
|Current Assets||6.77 B||2.57 B||6.33 B||6.82 B|
|Return on Assets||8.57%||4.70%||9.40%||4.17%|
|Long-term Debt||204.27 M||8.84 B||2.74 B||3.63 B|
Data provided by Charles Schwab & Co.
*Data provided by I-Metrix
All four of these companies are positioned to outperform during a global economic recovery. All four have exposure to the US and many other parts of the world. One risk is that the US recovery will stall or re-enter recession. I see the chances of another recession in the US as remote for the near-term. Most likely the US will continue to grow at a nice but less-than-stellar GDP of between 3% and 4%. A faster than expected job recovery would add fuel to these four stocks. If we see a surprise drop in the unemployment rate these stocks could really take off. Still, as long as the global recovery continues, these stocks will outperform.