When I was in junior high school in the late 1970s, pessimism
was all around. My friends' parents were uniformly convinced the
United States was in the midst of a great decline that would spell
trouble for my generation. I started to believe it and grew
depressed. Thankfully, an American revival was just around the
corner, with an economic recovery in the 1980s and a subsequent
boom in the 1990s.
And now it's happening again. Everyone I've been speaking to is
expecting a long period of economic pain that will lead to a steady
drop in living standards. But just as the sky wasn't really falling
back then, it isn't now either. It's a bit premature to presume a
profound economic renaissance like the one we saw under Presidents
Ronald Reagan and Bill Clinton, but it's also unwise to buy into
the "America's in decline" scenario. Simply put, economic slowdowns
are necessary to "clear the decks," setting the stage for the next
period of economic expansion.
In this context, it's important to revisit currently-held notions
about consumer-facing businesses. Many of them are trading at
absurdly low valuations, anticipating an extended period of flat
growth. But if you could peer around the corner -- and if you had a
multi-year time frame -- then you'd see a very different picture.
Already depressed -- and profitable
Ford Motor (
as an example. The automaker has been counting on the U.S. and
European markets for roughly three quarters of its profits and
sales (though an aggressive emerging-markets push could soon change
this picture). You would think a primary reliance on U.S. and
European consumers would spell tough times for Ford. After all,
total car and truck sales in North America and Europe are off
roughly 30% to 40% from a half decade ago. Yet Ford is on track to
earn roughly $2 a share this year. If Ford hits this mark, then it
would be a company record. Notably, unemployment levels remain high
and consumer confidence surveys are posting very low readings. Just
imagine what would be possible under different circumstances.
What is Ford's reaction to the gloom?
Bill Clay Ford, along with three company directors, acquired a
collective $900,000 in stock on the open
- In mid-September, it noted that a now-stronger
is setting the stage for a fresh new
- The company's internal sales analyst, George Pipas, told
reporters on Sep. 23 that industry unit sales are trending at its
best levels since April, and
- The automaker just announced plans to hire up to 10,000 more
These actions come as 9% of the U.S. population is officially
unemployed and another 6% aren't even being included in the tally.
Ford is focusing on the other 85% of the workforce that's buying
cars and trucks. The fact that
trade for five times trailing and projected
(about $9.40) shows you just how deep the gloom is over this
Supply below demand
Even as many of these consumer-facing businesses await an upturn in
demand, they're still generating very impressive profits simply by
keeping supply low. For example,
Delta Airlines (
is cutting its least profitable flights, ensuring its remaining
flights fill up more quickly. So in an era of minimal economic
still managed to earn $1.71 in 2010 -- its second-best performance
on record (behind 2007).
A spike in oil prices is crimping profits this year, but oil prices
have recently eased, so analysts expect Delta's
earnings per share (
to reach $1.88 in 2012. You can only imagine what Delta's
profitability will look like with just a modest improvement in
employment trends. Meanwhile, shares trade for four times projected
2012 profits (about $6.65), which is why I think
this stock can double
in a year or two.
A business grows and a stock price shrinks
Let's look at retailer
as another example. The company has a virtually unbroken streak of
exceptional quarterly execution. Management has been laying out
plans and meeting them, again and again. Kohl's sales and profits
have doubled in the past 10 years, yet its stock is right back to
where it was a decade ago.
Of course, the tough economy has a negative effect on Kohl's growth
strategy. The retailer has heavily throttled back plans or new
store openings, and will likely only boost sales 5% this year and
next. Thanks to ongoing
and supply chain improvements, along with a move toward more
higher-margin private-label goods, Kohl's should still be able to
more than 20% in 2011 and nearly 15% in 2012. Trading under 10
times projected (fiscal) 2013 earnings (about $47.74) is a rare
low-point for this widely-held stock. If this is a solid profit
grower in a lousy economy, then imagine what growth would look like
when employment trends finally start to improve.
Risks to Consider:
These stocks sport single-digit multiples simply because it's
unclear when economic conditions will improve. And they may stay
cheap for another year or so, until investors feel the worst has
Action to Take -->
The U.S. economy is stagnant and possibly headed for contraction.
Yet it's important not to conflate near-term economic sentiment
with the longer-term macro backdrop. The U.S. economy has struggled
many times before and invariably has snapped back to life. If you
wait until economic trends improve, then there's a good chance
companies like Ford, Delta and Kohl's won't be available for
single-digit multiples by the time you're ready to buy. The fact
that these companies are solidly profitable even in tough times
speaks volumes about what they can earn when the economy finally
If you're looking for what might improve sentiment toward this
sector, then keep an eye on this coming Thursday's (Oct. 6)
dropped to 391,000 in the week ending Sept. 30, a decrease of
37,000 from the previous week, according to weekly data from the
U.S. Department of Labor. Similarly, the four-week
was 417,000, a decrease of 5,250 from the previous week. Another
week like this and the four-week moving average will likely dip
below 400,000 for the first time since the stock market rout began
on July 22. If the jobless claims start to make a move toward
350,000 by year's end, then a whole lot of investors will most
likely start talking about consumer-facing stocks once again.
-- David Sterman
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
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