By Larry Gellar
According to a recent article by CNN, some Fortune 500 companies are looking to hire a number of new employees. As an investor though, the question remains as to whether this is a sign of future stock price increases. Let’s take a look at six companies that plan on increasing their hiring substantially.
JPMorgan Chase & Co. (JPM) is currently looking to add 15,500 more employees. Many of these new openings are in the company’s retail operations, which makes sense in light of increasing demand for personal financial services. Although this is clearly a sign that the business is expanding, it also appears that the stock is undervalued. It is currently trading at a P/E ratio of 8.76, which is below many of its competitors in the banking industry. As discussed in another article, this P/E ratio is about half of what JPMorgan used to trade at during the period from 2005 to 2009. Price-to-book ratio is also much lower than what JPMorgan has traded for in the past. Consider the fact that JPMorgan’s price-to-book ratio is currently 0.91, while in the past it has been between 1.2 and 1.8. Additionally, JPMorgan has had a much higher operating margin in recent months than other banks such as Bank of America (BAC) and Citigroup (C). Note that JP Morgan’s operating margin has been 39.01% compared to 15.29% for Bank of America and 19.80% for Citigroup. This indicates that the company would certainly benefit from an increase in employment.
JPMorgan stock has been hurt recently by debt problems in the eurozone, but the market may have been too punishing. Look for a rebound as the European Union continues to find ways to stabilize the region’s finances. Additionally, JPMorgan shares should benefit from the fact that the company has already prepared for a settlement similar to the one that Bank of America just completed regarding the mortgage-backed securities issued by Countrywide. More specifically, JPMorgan has already accounted for the possibility of a future settlement on its balance sheet, which means the stock should not be overly affected by that type of news going forward. JPMorgan just announced strong earnings so look for this to be a major impact on stock price in the short term.
Best Buy Co. Inc. (BBY), the nation’s largest seller of electronics, plans to hire 13,919 new workers. As pointed out in this article however, it remains to be seen whether Best Buy can compete with retailers that are almost completely online such as Amazon (AMZN). One problem is that in many states, online buyers do not pay sales tax to Amazon. On the other hand, as a retailer with a physical presence, Best Buy’s stores are always required to collect this tax. For purchases of electronics, which have higher sales taxes due to their higher base prices, this difference represents a significant advantage for Amazon.
Best Buy does have its advantages though since brick-and-mortar stores naturally allow potential customers to see what they’re buying and talk to sales associates in person. Valuation-wise, the stock has also been trading at quite a discount to Amazon. Consider the fact that Best Buy’s PEG is 1.03, compared to a PEG of 3.07 for Amazon. Even more outlandish is that Best Buy’s P/E is only 10.03, compared to 92.05 for Amazon.
Another way to consider Best Buy is through comparison with RadioShack (RSH), which runs a very similar business but at about an eighth of the market capitalization. RadioShack’s P/E ratio is even lower (8.21), which suggests that Best Buy may not be so undervalued after all. If anything, it seems that Best Buy isn’t undervalued so much as Amazon possibly being overvalued. Regardless, one piece of news that could benefit Best Buy (BBY) in the future is that, starting September, Netflix (NFLX) customers will have to pay $7.99 more per month if they want to continue watching movies via the streaming service. This should have a positive impact on Best Buy’s DVD sales. Overall, it seems that the most appropriate position for Best Buy is hold.
With 8,320 positions available, General Electric Co. (GE) comes in at a tie for third on CNN’s list. In the past, General Electric has traded very similarly to economic conditions overall, which make it a tough buy in today’s market. Coming off of last week’s poor jobs report, it seems that problems with the U.S. economy are here to stay. This is the type of situation that could hurt GE tremendously. Additionally, it’s hard to say how much 8,320 new positions really means for GE, seeing as it already has 287,000 employees. General Electric’s valuation statistics are fairly average considering today’s market; P/E ratio is 15.54 and operating margin is 11.41%.
At this point in the economic recovery, it would probably be wiser to target more specific sectors that have more opportunity for growth. Over half of General Electric’s revenues now come from financial services though, so it could represent a good addition to a portfolio in need of that sector without all the risk exposure that banking stocks have. Additionally, in this Reuters article General Electric CEO Jeffrey Immelt said that he expects GE’s manufacturing in the U.S. to grow due to “tremendous demand” for key industrial products. Mr. Immelt also emphasized how low General Electric’s labor costs were, saying that labor represented only 10%-20% of the costs involved in making equipment like turbines and engines. Additionally, the CEO went on to say, “Having a great workforce like we do can make your products higher-quality, lower-cost, more productive.” All of this is important because it means that General Electric’s cost will not increase too much as it expands its workforce.
General Electric also figures to benefit from Ben Bernanke’s recent announcement that the Federal Reserve will continue to bolster the economy if necessary. This is important because General Electric is so reliant on the overall economy for share price increases. Additionally, recent declines have put the stock closer to support levels, so look for a rebound to happen soon.
International Business Machines Corp. (IBM), too, is looking for 8,320 new employees. Considering the tremendous upswing that IBM has enjoyed the past couple of years, it is surprising that many of its valuation statistics are still fairly low. Consider its P/E ratio of 14.69 and PEG of 1.20. While there are certainly other big names in technology with even better ratios, there are a few reasons why IBM still has a bit more upside. Assuming IBM can meet expectations for its upcoming earnings report (approximately $3.03), IBM’s trailing twelve-month earnings will increase by $.42. This is a rather large jump, and if P/E ratio stays constant, the stock price could increase by $6 to $7.
Also, IBM could be a good addition to a portfolio in need of some risk management. The stock’s beta is 0.69, which provides an important cushion in an economy that is not running at full potential. The company’s cash flow has turned around quite nicely in recent quarters, and it seems likely that the market is underestimating this company’s financial health. Note that although there was a net cash outflow of $2.147B in the quarter ending June 30, 2010, it has improved every quarter since then to a cash inflow of $2.102B in the quarter ending March 31, 2011. Look for this trend to continue and the stock price to benefit accordingly. IBM’s shares should also improve as the company continues to open up new data centers for use with cloud computing. As explained in this article, IBM will open two new data centers in Japan. These data centers will be mostly geared towards large companies that offer both public and private services. IBM also has data centers in the United States, Canada, and Germany.
Fifth on CNN’s list is Hewlett-Packard Co. (HPQ), which says it currently has 6,583 openings. In many ways, Hewlett-Packard is a cheaper IBM. Hewlett-Packard has a P/E of 8.71 compared to IBM’s P/E of 14.62. Additionally, PEG for Hewlett-Packard is 0.80 compared to 1.20 for IBM. And finally, price-to-sales is 0.57 for Hewlett-Packard, while IBM’s is 2.09. So what makes Hewlett-Packard’s business different from IBM’s? Hewlett-Packard is more on the consumer side of the computer business, being that it sells PCs and its latest release is the TouchPad. Through its acquisition of Palm in 2010, Hewlett-Packard also acquired the webOS operating system, which currently runs on the company’s smartphones and tablets.
As mentioned in this article, Palm’s former CEO Jon Rubenstein believes that Hewlett-Packard has “a really good opportunity to become No. 2 in tablets fairly quickly.” Rubenstein also figures to be a great addition to the HP team due to his prior experience at Palm and Apple (AAPL).
Hewlett-Packard is also planning on bringing webOS to its desktop and notebook computers, which figures to be a rather ambitious move. If all of the company’s projects turn out well, look for HPQ to skyrocket. On the other hand, keep in mind that bringing webOS to personal computers may not be successful considering Microsoft’s stronghold in the market for PC operating systems. Hewlett-Packard will also benefit from the recent announcement that the company captured the No. 1 spot for both U.S. PC sales as well as global PC sales. Indeed, it is hard to imagine this company not trading at higher valuation levels soon.
Retail giant Target Corp. (TGT) has plans to add 6,300 new employees. After a strong June sales report, Target has gotten off to a good start in July despite a poor rest of 2011. Compared to PEG ratios of 1.88 and 1.15 for competitors Costco (COST) and Wal-Mart (WMT) respectively, Target has been trading somewhat cheaply at a PEG ratio of 1.03. This is not too surprising though because investors are keeping a close eye on whether Target will be successful in Canada. Of specific interest to investors has been whether Target’s stores in Canada will be selling food.
As reported by this article, Target Canada president Tony Fisher said recently, “The breadth of our food assortment will vary by market … We’re not a grocer. We don’t try to be a grocer.” On the other hand, Mr. Fisher also said, “Food will definitely be part of our assortment,” so it is clear that food will play an important role in Target’s success in Canada on some level. It seems likely that the market is underestimating how profitable business in Canada could be, so look for Target’s recent stock prices increases to continue.
In fact, Target’s transition to Canada should be quite smooth because at first the company will be running old Zeller's stores and then changing them into Target. It is also important to note that according to Bloomberg, Target has just issued $1 billion in bonds. Target’s regulatory filing says the money will be used to build new stores amongst other things so this is probably linked to Target’s plans in Canada. Another statistic in Target’s favor is a P/E ratio of 12.44, nearly half of what Costco has been trading at. At this point in the economic recovery, it seems that Target is one of the best buys available in the retail industry.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.