Earnings growth is slowing across many industries. Companies are
struggling since there aren't many costs left to cut, and the clear
headwinds of a still-weak
persist. Yet for a select group of companies, business is booming.
These companies are on track to double, triple or quadruple
from this year to next.
Many banks including
SunTrust Banks (NYSE:
Zions Bancorp. (Nasdaq:
MB Financial (Nasdaq:
are all expected to see their per share profits rise at least 100%
in 2012, largely due to the simple fact that loan losses in 2011
are expected to come off of the books. For the other stocks in the
table below, earnings are expected to rise simply because business
is quite good. Equally impressive: you can buy these stocks for
less than 13 times consensus 2012
A few of these stocks stand out as solid earnings plays -- if they
can deliver on the lofty expectations analysts have placed on them.
1. U.S. Steel (NYSE:
of this steel maker have fallen steadily throughout the first half
of 2011 as the price of steel dropped from $900 a ton in early
April to a recent $750. Even with the drop, U.S. Steel should
continue to see a robust expansion in profits in 2012 as the
company switches to lower cost natural gas at some of its
After losing nearly $3 a share in 2010 (partially attributable to
legacy pension liabilities that are slowly dropping off), per share
profits should rebound to around $2.50 this year and exceed $5 in
2012, according to analysts. As a point of reference, the company
earned a whopping $17 a share in 2008.
Besides the drop in steel prices, shares have also been drifting
lower on concerns the global economy may be slipping back into
. Yet a growing chorus of investors suggests the recent economic
weakness is just a speed bump related to the sudden blow the
Japanese tsunami and nuclear power crisis dealt to the global
supply chain. These investors think the economy will start to look
healthier later this year, perhaps setting the stage for solid
growth in 2012. If that happens, then demand for steel would likely
push prices up toward the $1,000 per ton mark, especially if auto
makers sell more vehicles in 2012. In that scenario, U.S. Steel
could earn a good bit more than the current forecast, with
earnings per share (
approaching $7 or $8. At a recent $46, shares look quite
inexpensive in that context.
2. Manitowoc (NYSE:
This company, which is the world's leading provider of construction
cranes, would also get a material boost from an improving economy.
Earnings have been rebounding after a sharp drop in 2009, and the
trend could continue for several years. This is because even as
Manitowoc is expected to more than triple
in 2012 to around $1.50, that figure still stands well below the
$2.47 earned in 2007. As is the case with U.S. Steel, shares have
pulled back this spring, creating a fresh entry point.
3. Take Two Interactive (Nasdaq:
Video game stocks have been saddled with ever-smaller
) ratios in recent years. Investors have grown concerned that web
browsing and other time-sucking hobbies are leading to diminished
interest in these games. Don't tell that to Take Two, which
continues to produce a steady stream of reliable titles and is on
the cusp of a major upgrade for many of its most popular games.
Of course, it's still a lumpy business. Hot new title releases can
sometimes get bunched together. Management would love to smooth out
its slate of game releases, but that's the nature of video game
development. You have no idea how long it will take to work out all
the kinks in a new game, especially as titles become increasingly
complex. For example, Tale Two's highly-anticipated LA Noir game,
which had an Oscar-like red carpet debut at the Tribeca Film
Festival, had a 2,200 page script involving 400 live actors.
The lumpy release schedule explains why Take Two's profits may dip
below $0.50 in the current
ending March 2012, down from around $1 in fiscal 2011. But analysts
think the company is shaping up to have a banner year in fiscal
2013 because a range of hot new titles (including a new version of
the company's top-selling Grand Theft Auto) should hit the market.
As a result, per share profits may exceed $2, which would be a
company record. It's quite possible the current forecasts are far
too conservative: Take Two has topped estimates by at least 50% for
each of the past four quarters.
It's the breadth of titles and Take Two's ability to repeatedly
generate fresh demand for new versions of its most popular games
that leads analysts to suggest this is the best video game stock to
own. Take Two "has one of the strongest libraries of owned
(intellectual property) in the video game business," note analysts
at Sterne Agee. The firm carries a $21 price target on the stock,
representing 35% upside.
As a final kicker, Take Two carries more than $400 million in NOLs
(net operating loss carryforwards) on its
. These can be used to shield an equivalent amount of future profit
from taxes. This is why some analysts think Take Two would make a
candidate for entertainment firms wanting greater exposure to the
video game market.
Action to Take -->
These three companies represent the best of both worlds: high
growth and low earnings multiples. For investors, this suggests
they could be seen as momentum plays when earnings take off and
defensive plays in a struggling market. All are worth further
consideration from investors.
-- David Sterman
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
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