After the Correction, These Stocks Look Even More Attractive
Phew! The stock market recently has calmed down after a highly volatile first six weeks of 2016. While we may not be out of the woods, the sky-is-falling panic seems to have been overblown. Let’s use this breather to review three recommendations from late last year and assess if they’re still worthy.
Boeing (NYSE: BA), which I recommended in December, has fallen sharply since then, for two reasons. First, investors’ rising concerns about economic growth in China and India led them to dump Boeing, which expects strong demand for commercial aircraft from those countries for years to come. Second, the U.S. Securities & Exchange Commission last week announced that it was looking into Boeing’s use of “program accounting” methods for its 747 and 787 Dreamliner lines. While the SEC may decide there’s no problem, the cloud cast over the company led to another selloff.
#-ad_banner-#In my view, both issues are legitimate concerns, but ones to which the market overreacted. China and India are not in or near recessions; they remain in strong growth modes, albeit slower than expected. Their orders for commercial aircraft are booked years in advance and are not expected to slow considerably as a result of their current economic situation. And the SEC investigation is still preliminary and probably does not involve illegality; it’s more of a matter of interpretation of generally accepted accounting principles. The worst-case scenario is that Boeing may have to reduce its estimates of future cash flows from the projects, which are partly determined by program accounting. That could cause analysts and investors to downgrade the stock.
However, Boeing remains one of the two major wide-body aircraft makers in the world, as well as a defense and space powerhouse. The selloff has more than taken into account the negative impact of China, India and the SEC news. At current prices, its shares are cheap — and the stock yields 3.9%. For investors able to stomach some volatility and be patient, this is a great buy now.
FedEx (NYSE: FDX), featured in this article, remains the #1 player in express delivery and freight delivery in the United States. FedEx has the wind in its sails in the form of the massive shift from brick-and-mortar retail to ecommerce. While the delivery industry is highly competitive, FedEx is well-positioned to continue to post steady sales and earnings growth, not only over the long term but in 2016 and 2017 thanks to the resilient U.S. economy — including prospects for better-than-expected consumer spending, boosted by low unemployment and consumer debt.
The company also should reap benefits from its current concerted effort to improve profit margins in its Express business (which accounts for more than half of the FedEx’s revenue) through greater efficiencies such as relying on outsourced transportation in some international markets. Earnings also will be boosted this year by historically low gasoline prices, which benefit both ground and air transport units.
Since my writeup, FedEx reported stronger-than-expected earnings for its second quarter and announced a major extension to its ongoing share-buyback program. The company’s financial strength and cash generation remains a positive, and if the global economic outlook starts looking a little rosier relative to the current gloomy projections, FedEx shares could really take off.
FedEx shares currently trade at only 12.8 times analysts’ consensus estimate for earnings per share in fiscal 2016 (ending May 2016), which I consider an attractive entry point for this global leader.
L-3 Communications (NYSE: LLL), also recommended here, is a global leader in sophisticated communications systems that integrate digital audio, video and data in mission-critical military aircraft around the world. L-3 is a research & development powerhouse whose products include sophisticated avionics and display technologies; high-quality simulators and trainers; laser-based weapons; sensors and power systems.
Defense and anti-terrorism spending worldwide is focused on information technology and communications technologies, so L-3 should experience strong demand for its products for years. The U.S. Department of Defense accounts for about two-thirds of revenue, so the bipartisan budget agreement boosting Pentagon spending was a boon for L-3.
In late January, the company announced fourth-quarter earnings of $2.29 per share, easily beating analysts’ consensus estimate of $2.02 per share thanks to strong performance from its communications unit.
At recent levels, L-3 shares trade at only 12.6 times analysts’ consensus estimate for 2016 earnings per share, a bargain for this quality company. And as an added bonus, L-3 — which enjoys a solid balance sheet and strong cash flow — just boosted its quarterly dividend to 70 cents a share from 65 cents a share, the 12th straight annual increase; the stock now yields 2.2%.
Risks To Consider: Boeing and FedEx are vulnerable to signs of economic weakness — especially a U.S. recession; Boeing could be hurt if the regulatory investigation results in findings more incriminating than expected. L-3’s earnings could be harmed by austerity measures at governments with high defense budgets.
Action To Take: Buy Boeing under $130, FedEx under $140 and L-3 Communications under $125.
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