Two Growth Stocks in a Low-Growth Economy

Includes: AA, JBLU, NAV
by: StreetAuthority

By David Sterman

After a sharp plunge in 2009, many companies are reporting vastly improved results this year. But until the economy is firmly in growth mode, further profit gains may be hard to come by. But a small minority of companies is in the midst of a profit spurt that shows no signs of a slowdown.

I decided to set about to look for these impressive growth stories, screening for companies that are expected to boost profits by at least +40% in 2011. And to whittle the list down, I eliminated any company worth less than $1.5 billion. They must also sport price-to-earnings (P/E) ratios below 12 times next year's projected profits. Last, I eliminated banks and financial services companies from the list as analysts have an especially hard time accurately forecasting future profits in this sector.

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The 26 stocks that made cut represent some clear themes. A number of them operate coal mines and are now benefiting from improved pricing for coal that should support robust earnings per share (EPS) growth in 2011. In a similar vein, the steel and aluminum producers are also expected to benefit from both higher volumes and better pricing, as I noted in a recent profile of Alcoa (NYSE: AA).

Outside of those sectors, a few other companies caught my attention, as they are likely to benefit from changing conditions in their industries. Let's take a look...

Navistar (NYSE: NAV)

This maker of trucks, buses, RV chassis and other big rigs has received a bit of luck. Just as its military division is set to slow down after completing a big contract to supply armored vehicles for the wars in Iraq and Afghanistan, its commercial division is kicking into high gear. The economic slowdown of the last few years led truck buyers to hold off on purchases, and as a result, the age of the average truck is near an all-time high, according to analysts at Sterne Agee. In addition, dealer inventories are now quite lean and that's setting the stage for an expected surge in truck orders in 2011, which will be bolstered by ever-tightening emissions regulations.

While the economy was in a funk, Navistar looked to cut costs in every corner of the business. The net result: "Depending on volume, (expectation of 240,000 units for 2011), Navistar expects to achieve a higher level of profitability than during past cycles," wrote Sterne Agee analysts in a recent report.

In the past five years, Navistar has earned a little more than $4 a share on two occasions. Sterne Agee thinks EPS will exceed $5 a share next year, and that shares should trade for 12 times that profit view, with a price target in the low $60s. That represents roughly +50% upside from current levels.

JetBlue (Nasdaq: JBLU)
If you've traveled by air recently, you've probably noticed that airplanes are flying with fuller loads these days. It's all about supply and demand. Major carriers took many planes out of service in 2008 and 2009, and passenger volumes have begun to rise since then. After being repeatedly burned in past cycles when the major carriers deployed too many planes -- right at a time when demand slowed -- the whole industry has shown a lot more discipline this time around.

It vows to add planes back into the system at a slow pace, making sure that the supply of airline seats remains just below demand levels. And that is enabling the carriers to push through fare increases, which are now roughly +20% higher than a year ago, according to the Airline Transport Association.

While most airline carriers are in the midst of a nice profit rebound, JetBlue seems to be the biggest beneficiary of the new industry economics. The low-cost carrier is likely to see profits double this year and rise another +40% to +50% in 2011 to around $0.60 a share. But the carrier is getting little credit: Shares are right in the middle of the 52-week range and trade for less than 10 times next year's profits.

After years of torrid growth, JetBlue is likely to settle into a moderate +10% growth phase in coming years (sales growth is more robust this year due to very easy comparisons from 2009 when demand for air travel slumped). But that +10% growth should be sufficient to push profit growth at twice that pace. That's because JetBlue's infrastructure investments are largely completed, and any new revenue is more rapidly flowing to the bottom line.

Shares of JetBlue hit $30 back in 2003 when investors first fell in love with the company's instant popularity among consumers. The investor honeymoon ended a while ago, and shares have lost -80% of their value since that peak even as consumer loyalty to the JetBlue brand remains very strong.

Back in 2003, the carrier earned $0.64 a share, but profits have been weak ever since as management continually tinkered with pricing. That tinkering is now complete, which is why analysts expect EPS to finally rebound back to that 2003 peak. If JetBlue can deliver on forecasts, investors are likely to return to this success story.

One of the charms of low P/E stocks is that they are more likely to hold their own if the market slumps anew and investors first look to shed high P/E stocks. And if the market strengthens, economically-sensitive names like JetBlue and Navistar are likely to find much favor among investors seeking a nice combination of value and growth.

Disclosure: Neither David Sterman nor StreetAuthority, LLC hold positions in any securities mentioned in this article.

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