By Joseph Hogue, CFA
As an investor and analyst, I'm tired of having to play clairvoyant to headline risks from the debt crisis in Europe or hope that government and monetary leaders finally decide to address their structural and financial problems.
Equity markets rose last week on the hope that central banks would be forced to renew stimulus measures as Greek elections and contagion risk threatens further weakness in Europe. The problem is, rates in the developed world have been at historic lows for the last three years, and the Fed and ECB have increased their balance sheets by multiples. The relief rally that may come from policy measures over the next few weeks or months will not solve the problem in Europe.
Fortunately, at least for investors, growth in the United States and the emerging world is still relatively intact. Growth in the U.S. is not inspiring, but should still top 2% this year and China has more than $3 trillion in reserves with which to stimulate its own economy.
The United States relies on exports for approximately 14% of GDP, though eurozone exports are only 14% of the total. Housing in the United States has begun to stabilize and the unemployment picture is looking less bad each month. Further weakness in Europe may act as a headwind on equity markets, but investors can remove much of the risk by looking for companies with strong revenue growth that does not depend on a European rebound.
Red, White and Blue Revenues
Below are four companies with strong revenues almost completely derived from the United States and which should weather the continuing storm in Europe.
United Rentals (URI) is a rental company operating in construction, industrial and residential equipment with a diversified customer market and 100% of revenues from the U.S. and Canada. The shares are off this year's high by more than 26% on fears of renewed weakness in commercial and residential construction but fundamentals remain strong. Rental revenue increased 20.5% in the first quarter on a 6.3% increase in rates and volume growth of 17.8%. Operational efficiency improved as well with a 7.5% increase in the adjusted EBITDA margin.
American Tower (AMT) operates the largest independent holding of wireless communications and broadcast towers in North America. Though the company did receive 26% of 2011 revenues outside the United States, international exposure is in high-growth markets like Mexico, Brazil, Chile, Colombia, India, Peru, Ghana and South Africa. The company easily beat expectations of $0.40 in the first quarter, reporting $0.56 per share. American Tower converted to a REIT structure in January of this year which will give the company a preferential tax treatment and will increase the dividend yield, currently at 1.2%. Revenue increased by 23% in 2011 and is set to do well this year on an increase in lease activity and more towers. The demands for network quality and coverage, especially as the U.S. upgrades to 4G, should drive growth.
Retail and Consumer Services in the United States
Two other stocks geared to domestic consumers with red, white and blue revenues should continue to support their shares. Retail sales have increased by a 6% annualized pace in each month of the first quarter and personal consumption has been strong over the last year. Retailers and companies in the U.S. consumer market should do well as confidence increases with the recovery.
Limited Brands (LTD) operates Victoria's Secret and Bath and Body Works and sees 93% of its revenues from the United States. The price of cotton has come down more than 40% from last year and should help the company control costs and improve margins. Earnings per share of $2.63 for fiscal 2012 were 28.3% higher on sales that grew 7.3% to $10.4 billion from the year prior. The company's two principal brands define their respective retail segments and same-store sales increased 7% in the first quarter. Shares trade for 16.2 times trailing earnings which is under the sector average of 18.6 times.
Life Time Fitness (LTM) operates 105 multi-use sports and athletic facilities in 26 markets in the United States. Revenue has increased an average of 11.5% annually over the last five years and fiscal 2012 earnings per share were up 14.7%. A steep selloff in the shares after a disappointing first quarter led CEO Bahram Akradi to invest more than $750,000 in shares. While the company's return on equity (10.5%) is slightly below the sector average, operational and financial margins are healthy. The trend to growing waistlines in the United States should support growth and the 15.2% short interest may lead to a short squeeze in shares on a surprise quarter.
Free Money from Low Rates
Wednesday's FOMC policy release should keep the free money flowing for Annaly Capital Management (NLY). The real estate investment trust (REIT) borrows on a short-term basis and invests in mortgage securities at longer-term rates. Even with the Fed actions keeping rates low across the yield curve, the company is able to leverage its interest rate spread and provide investors a 13.0% dividend yield. Annaly is more operationally conservative than other mREITs, decreasing its debt-to-equity ratio to 5.8 times in the first quarter. Additionally, its capital investment policy states that at least 75% of total assets must be comprised of high quality mortgage-backed securities or short-term investments. While the housing market in the U.S. is improving marginally, credit to homeowners is still low and prepayment risks should not be a problem for the company. On top of an attractive dividend yield, shares have increased by 5.6% annualized over the last three years.
Disclosure: I am long NLY.