by Mark Bern, CPA CFA
Many readers will know that I tend to focus on dividend-paying companies rather than growth stocks, and may wonder why I am wandering outside of my preferred area of interest. There are companies that I look at, as part of my industry and competitor research, that catch my interest. I generally don’t invest in growth or even write about pure growth plays very often, but when the list of interesting companies that fit this category grows beyond three, I feel it’s time to share what I’ve come across.
Some of these entries will not come as surprises but others may be in spaces to which many haven’t given much consideration. Of course, all projections are predicated on the sovereign debt crisis in Europe being contained and not causing a global recession. These companies should thrive in a global economy that continues to grow slowly.
Apple, Inc. (NASDAQ:AAPL) is probably not a surprise to anyone. Over the last five years Apple has grown earnings at an average annual clip of 70 percent. Consensus for 2012 earnings growth is about 12 percent, and I think that number is low. The September quarter results disappointed, and I see this as a great opportunity for investors. My reasoning is that many potential iPhone buyers held off purchases while waiting for the newer version iPhone 4S. iPhone sales were about 17 million units compared to expectations for about 20 million. Earnings per share still increased by about 50 percent over the same period in 2010. How does that justify a price-to-earnings ratio under 15? The iPhone 4S sales set records early-- and I expect most, if not all, of the shortfall from last quarter to boost this quarter’s results.
I also think that the consensus estimate for the entire year is low by about 80 percent. If I’m right, and the December quarter figures result in a positive surprise, the fear that Tom Cook can’t perform will be short lived. Apple closed at $405 on Friday, December 30, 2011. I see this stock easily topping $500 in 2012.
Apache Corporation (NYSE:APA) is an oil and gas exploration and production company with operations in the U.S., Canada, Australia, Argentina, Egypt and the North Sea. Earnings per share for Apache have grown by an average of over 22 percent per year over the last ten years. In my opinion, the price is depressed due to the extremely low natural gas prices. There is also a perception that a weaker global economy in the first quarter of 2012 will result in lower crude prices. About 70 percent of revenues come from oil production, though. However, commodity prices are only half of the formula and are also very likely temporary.
The other factor that affects the bottom line is production volumes. In 2012, the company expects to increase production by more than ten percent. Management is also expecting production growth averaging about nine percent per year through 2015. That is well above the average for the industry, which is struggling to grow by one or two percent per year. I expect crude prices to rebound when driving season hits again in 2012. Combined with the healthy production growth, Apache could provide some hefty upside surprises!
Cummins Inc. (NYSE:CMI) designs and manufactures diesel engines for the truck, auto, bus and industrial markets. Foreign sales account for 64 percent of the total with operations in 160 countries around the world. The company has averaged about 30 percent growth in earnings per share over the last five years. That will probably drop to around 20 percent over the next five years on average per year.
The trailing twelve month price-to-earnings ratio is just 10.3 and the price is down off its 52-week high by about 28 percent. Even if earnings “only” grow by 12 percent in 2012, if you add the dividend of 1.8 percent, I would expect the P/E ratio to be closer to the historic levels of 14. The company is likely going to earn close to $10 per share in 2012. The current price is $88.02-- you can do the math.
EZCORP, Inc. (NASDAQ:EZPW) is a chain of pawn shops that makes loans to individuals on personal property. I don’t expect the rate at which the economy is recovering to improve much in 2012, and thus, I expect this industry to continue to thrive. EZ has seen average annual cash flow growth of 30 percent and earning per share growth of 41 percent over the last five years. Yet the P/E ratio is under 11. In 2012, I expect investors to be pleasantly surprised by the continued strong growth and for the stock’s price to set a new high over $40. The current price is $26.37.
Halliburton Co. (NYSE:HAL) is one of the world’s largest energy industry services providers with operations in approximately 80 countries. Earnings growth has averaged 17 percent over the past five years and I expect that rate to increase over the next five years, with a 2012 increase closer to 20 percent. The P/E is currently about 12.5 and should rise by mid-2012-- in my opinion, to at least 15. The shale leases in North America are mostly 'use it or lose it' leases, so the companies that have paid for the drilling rights must drill within the next few years to get any return on investment. That is creating substantial demand for on-land drilling services. Also, the re-opening of Gulf of Mexico drilling will also be a boon for HAL. The dividend is skimpy at only one percent, but this is a growth play and the growth potential is substantial. I expect the stock to reach as high as $55 or $60 over the 12-18 months. The current price is $34.51.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.