ISM data signals expansion in the services sector

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By Mary-Lynn Cesar for Kapitall.

The US services sector expanded more than expected in May, according to the latest reading  from the Institute for Supply Management's non-manufacturing index. Gains in new orders lifted the index to 56.3 last month, above the 55.5 estimate and up from 55.2 in April. New orders within non-manufacturing industries rose to 60.5 in May, increasing 2.3% from the 58.2 reading recorded in April. 

The ISM reading came on the heels of payroll processor Automatic Data Processing Inc.'s ( ADP ) monthly national employment report , which showed a decline in private sector job growth. In May, the private sector created 179,000 jobs, falling from the 215,000 that were added in April;  Reuters reports analysts expected employment to increase by 210,000.

Stocks responded positively to the ISM reading, moving up Wednesday morning after opening at session lows. The better-than-expected ISM reading inspired us to look for investment opportunities among the services sector. 

We began with a list of US stocks belonging to the sector, which we then screened for  encouraging inventory trends  since new orders played a crucial role in boosting May's reading. Specifically, we looked for stocks that experienced faster growth in quarterly revenue year-over-year than growth in quarterly inventory year-over-year and a decrease in inventory as a percentage of current assets. If these stocks were exhibiting positive inventory trends before May, it's possible that last month's uptick in new orders will help them sustain momentum through the next quarter.

For our final screen, we looked for stocks that were undervalued according to the  price/earnings to growth ( PEG ) ratio . This valuation ratio divides a stock's price-to-earnings (P/E) ratio by its annual earnings growth to show investors how much shares are worth compared to the company's expected earnings. If a stock has a PEG ratio below 1, it suggests that the stock is undervalued.

We were left with four stocks on our list. Do you think these service sector stocks will continue to see encouraging inventory trends in the next quarter? Use this list as a starting point for your own analysis.

Click on the interactive chart to view data over time. 

1. Bristow Group, Inc. ( BRS , Earnings , Analysts , Financials ): Provides helicopter services to the offshore energy industry primarily in Europe, West Africa, North America, Australia, and internationally. Market cap at $2.65B, most recent closing price at $74.41.

PEG at 0.94.

Revenue grew by 6.14% during the most recent quarter ($412.33M vs. $388.47M y/y). Inventory grew by -4.84% during the same time period ($161.06M vs. $169.25M y/y). Inventory, as a percentage of current assets, decreased from 23.71% to 20.08% during the most recent quarter (comparing 3 months ending 2013-12-31 to 3 months ending 2012-12-31).

2. Southwest Airlines Co. ( LUV , Earnings , Analysts , Financials ): Operates as a passenger airline that provides scheduled air transportation in the United States. Market cap at $18.9B, most recent closing price at $27.20.

PEG at 0.83.

Revenue grew by 6.14% during the most recent quarter ($4,428M vs. $4,172M y/y). Inventory grew by -0.43% during the same time period ($467M vs. $469M y/y). Inventory, as a percentage of current assets, decreased from 11.1% to 10.48% during the most recent quarter (comparing 3 months ending 2013-12-31 to 3 months ending 2012-12-31).

3. Rite Aid Corp. ( RAD , Earnings , Analysts , Financials ): Operates retail drugstores in the United States. Market cap at $8.26B, most recent closing price at $8.27.

PEG at 0.88.

Revenue grew by 2.2% during the most recent quarter ($6,597.46M vs. $6,455.24M y/y). Inventory grew by -5.1% during the same time period ($2,993.95M vs. $3,154.74M y/y). Inventory, as a percentage of current assets, decreased from 71.55% to 69.87% during the most recent quarter (comparing 13 weeks ending 2014-03-01 to 13 weeks ending 2013-03-02).

4. USA Technologies Inc. ( USAT , Earnings , Analysts , Financials ): Supplies cashless, remote management, reporting, and energy management solutions to the unattended point of sale market principally in the United States. Market cap at $77.51M, most recent closing price at $2.24.

PEG at 0.06.

Revenue grew by 19.03% during the most recent quarter ($10.57M vs. $8.88M y/y). Inventory grew by -29.92% during the same time period ($1.71M vs. $2.44M y/y). Inventory, as a percentage of current assets, decreased from 25.87% to 15.65% during the most recent quarter (comparing 3 months ending 2013-12-31 to 3 months ending 2012-12-31).

(List compiled by Mary-Lynn Cesar. Accounting data sourced from Google Finance. Quarterly sales data sourced from Zacks Investment Research. All other data sourced from Finviz.)

Kapitall Wire is a division of New Kapitall Holdings, LLC. Kapitall Generation, LLC is a wholly owned subsidiary of New Kapitall Holdings, LLC. Kapitall Wire offers free investing ideas, intended for educational information purposes only. It should not be construed as an offer to buy or sell securities, or any other product or service provided by New Kapitall Holdings, LLC, and its affiliate companies.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



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