3 stocks ready for the recovery
Emerson Electric, Baker Hughes and PNC Financial are well positioned for growth as the global economic recovery takes hold.
By Stephanie Link, TheStreet
Global economies and equity markets have improved significantly from their March 2009 lows. Manufacturing activity continues to improve, the global banking system has strengthened and corporate earnings have recovered significantly.
Simply put, the last three years of easy global fiscal and monetary policy (including the Federal Reserve's massive QE2 program in the United States) not only rescued the world economies from one of the most severe recessions, but have provided the stimulus for growth. Commodities have surged, GDP has recovered and the consumer has remained resilient.
Of course, all is not perfect. China continues to try to slow its economy, European debt remains problematic and Japan has endured an incredible personal and economic tragedy. But a recovery is evident, and I see three stocks that should benefit as economic growth continues to pick up.
The first is Emerson Electric (EMR), a late-cycle industrial company that operates in 5 businesses -- process management, industrial automation, network power, climate technologies and tools and storage. Its focus is on providing superior technology with exceptional service. Its broad product portfolio and technologies help make its customers smarter, more efficient, more productive and more competitive.
I like this industrial because it is positioned well for above-average growth (due to its 30% exposure to emerging markets), positive operating leverage (strong demand and lean cost structure mean strong earnings leverage) and attractive valuation (shares are down 7% in the past week). Its recent quarter was very strong, with revenue growth of 18%, organic growth of 14%, earnings growth of 38% and nearly a 2% increase in margins.
I expect the company to continue to create value for shareholders -- over the past 3 years, Emerson has spent $5 billion on dividends and buybacks while also investing $4.2 billion in new acquisitions and building future growth. My target for the stock is $65.
The next idea is Baker Hughes (BHI), one of the largest oil service companies in the world. I expect that over the next several years the oil service industry will benefit from the increased capital expenditure budgets of the large integrated oil companies (Chevron (CVX), Exxon (XOM), etc.) that are a direct result of higher commodity prices. As demand for services improves, pricing in both the U.S. and around the world will move higher, providing better revenues and earnings for Baker Hughes.
Its deepwater portfolio also provides the company with solid growth prospects and diversification. And the integration of the BJ Services acquisition provides cost and revenue synergies that support earnings even if the recent oil price correction sticks. The stock trades at 15 times forward estimates, which is attractive at this point in the cycle. My target is $90.
The final recovery stock is PNC Financial (PNC). After three years of underperformance, mortgage markdowns and balance sheet improvement, I believe the bank sector is in the early stages of its recovery. PNC is one of the highest quality banks out there and really is a plain vanilla sort of bank (the majority of its revenues are tied to spread investing).
It's the 6th-largest U.S. bank with Midwest exposure, a region heavily exposed to the manufacturing industries -- an area that has seen significant improvement (autos, industrials and factory orders are all vastly improved). As a result, PNC's revenues are poised to grow faster than those of its peers. It also has sizable cross-selling synergies and opportunities from its 2008 acquisition of National City, and has already taken $1.8 billion out of costs.
As the economy improves, credit costs will continue to decline, reserves will be released and the company can focus on lending -- commercial and industrial loans improved 4% in its last quarter -- and I expect this space to continue to improve in the recovery. PNC trades at a discount to its historical price-to-book and price-to-earnings basis, and it will be one of the first banks to raise its dividends -- a positive catalyst. My target is $70.
Editor's note: As part of a partnership with PBS's Nightly Business Report, TheStreet's Stephanie Link appeared on NBR Tuesday (watch video and read transcript) to discuss stocks that are positioned for growth as the economic recovery takes hold.
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Bill Stiritz owns more than 5% of the company, and has experienced an estimated $145 million in paper losses on his investment.
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