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Stock Screen: Growth Stocks - June 22, 2011
Issues defined as “growth stocks” have a number of common traits, but the most important is that their earnings are expected to grow at a faster pace than the broader market over a period of time. With that in mind, Value Line runs a screen in its Selection & Opinion that searches for stocks that meet this key criterion. It focuses on issues that have recorded good per-share earnings gains in recent years and that should continue to do so in the future, such as FEI Company (FEIC), MetroPCS (PCS), Union Pacific (UNP).
To make our list, all stocks had to be ranked 3 (Average), or better, for both Safety and Timeliness (i.e., relative price performance in the year ahead), two of Value Line’s many proprietary rankings. Additionally, all of these companies have managed to increase earnings at a 10%, or better, compounded annual rate over the past five years, which is no easy feat considering that this time span included varying rates of economic growth. We also required at least 10% earnings growth in the current fiscal year and a minimum of 10% projected three- to five-year profit growth. We further limited our list to stocks that had moved up in price by at least 10% in the past 13 weeks, thus ensuring strong relative price momentum in what has continued to be a choppy and volatile equity market.
The resulting list is an interesting mix of names (some surprising, others not), that not only performed well even as economic growth slowed, but are projected by our analysts to have worthwhile earnings growth prospects in the year ahead. Below we highlight some of the stocks from our screen:
FEI Company (FEIC) designs, manufactures, markets, and services products and systems that are used in the research, development, and manufacturing of very small objects; primarily through an understanding of their three-dimensional shape. The company has four primary segments: Electronics, Research & Industry, Services & Components, and Life Sciences.
FEI Company began 2011 with record quarterly results, registering a 32% year-to-year sales, increase while earnings per share tripled. Sales growth was largely fueled by strong demand for its transmission electron microscopes (TEMs). These devices allow imaging, analysis, and measurement of structures one-millionth of a meter in size and smaller, in order to speed up semiconductor and electronics development, and conduct particle analysis for things like cancer and pollution research.
Indeed, government funding for R&D in materials, biotech, and life sciences applications has not been materially hurt by the often sluggish economy, and cell biologists and drug researchers continue to maintain strong spending levels. The Electronics group has also posted stellar sales gains, due to the ongoing rebound in the semiconductor market. Margins remain elevated, which has helped to shore up the bottom-line gains.
The outlook for the rest of this year and next appears promising. We expect the Research and Industry unit to perform well in developed countries, but also experience strong demand from the emerging world, particularly China, the Middle East, and Eastern Europe. The Electronics segment is also likely to post good results moving forward, thanks partly to a strong new product pipeline.
MetroPCS (PCS) is a domestic wireless telco currently serving 8.88 million users. The company holds licenses for wireless spectrum covering a total population of approximately 142 million people in and around many of the largest metropolitan areas in the United States. It provides prepaid service in Atlanta, Boston, Dallas, Detroit, Las Vegas, Los Angeles, Miami, New York, Philadelphia, Sacramento, San Francisco, Tampa, Sarasota, and Orlando. MetroPCS offers 21 services including long distance voice, caller ID, call waiting, visual voicemail, text messaging, mobile Web browsing, push email, and multimedia messaging.
MetroPCS is well suited to keep the top line moving higher. For the March quarter of this year, revenues increased 23% relative to last year’s comparable tally. The company’s net subscriber additions were an impressive 726,000, or 9% of its prior user base. Thanks to effective retention efforts, comparable period account turnover fell 60 basis points, to about 3%. Consumers are taking advantage of the company’s Wireless for All service plans, which combine fees, taxes, unlimited talk, text, and web, all for $40 - $60 a month depending on which add-ons are selected.
We look for some seasonal market softness in the second and third periods of this year, but prospects for the final quarter appear bright, owing to an expanding portfolio of 4G LTE mass-market smartphones. Although costs relating to the 4G LTE network buildout, handset subsidies, and marketing outlays are rising, the pace is less than the increase in revenues, which is creating operating leverage.
Union Pacific (UNP) owns Union Pacific Railroad, the largest railroad in the nation both in track miles and total revenues, with over 32,000 route miles serving the western two-thirds of the United States. The company operates in the Energy, Industrial, Intermodal, Chemicals, Agricultural, and Automotive segments.
We look for Union Pacific to register record earnings for full-year 2011. Weather-related disruptions notwithstanding, the railroad stands to benefit from higher freight demand, coinciding with a slowly strengthening economy and an increase in global trade. UNP might well also realize higher pricing, thanks to ongoing service upgrades and reduced industry capacity. Hence, a fairly large number of the company’s remaining legacy contracts won’t re-price until the December period, meaning that some price realization won’t be felt until 2012.
The railroad is relatively well insulated against rising fuel costs. Indeed, more than 90% of its book of business is reportedly covered by adjustment mechanisms, including surcharges. Still, there is typically a two-month lag between fuel-price changes and pass-throughs. The company is a decent long-term investment play on international trade, thanks to its port service and exposure to export/import goods. It also stands to benefit as rails grab a greater share of intercity freight volume, amid increased highway congestion and greater appreciation for rails’ superior fuel efficiency and low emissions.
To see the results of our screen, limited to those stocks that carry Above-Average scores Timeliness, subscribers can click here. As always, subscribers should carefully review the analyses in Ratings and Reports before committing funds to any particular equity.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.