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What’s most unusual about the situation in the US is not the performance of its economy but its sharemarket. The S&P 500 Index is up 12% year to date while the Australian sharemarket measured by the S&P ASX200 index has gone nowhere, up just 5%.

The US is expected to grow by just 2.2% for 2013, and into 2014, according to the IMF and the OECD. In comparison, the Australian economy is projected to show GDP growth of 3.75% for 2012, and 3% for 2013.

Comparing the S&P 500 to the ASX 200 XJO provides a classic example of the importance of sentiment. In short, confidence in the US is increasing while confidence here has remained stubbornly low all year.

The Institute of Supply Management (ISM) tracks business confidence in the US. From 1948 until 2012, business confidence in the US has averaged 52.8. The high was 77.5 in 1950 and a low of 20.4 was recorded in 1980. Here are year to date findings for US business confidence through to November 2012.

As you can see from the chart, business confidence in the US is on the up – now at 51.7. 

But it’s American consumers who account for 70% of the US economy. US based business research organisation, the Conference Board, tracks US consumer confidence. Here’s the year to date chart for US consumer confidence:

 

The historical average for this survey is 93.09 with a low reached in early 2009 when the reading sank to 25.3. The index in November sat at 73.7 – reaching the highest level in over four years.

Taken together, the two surveys indicate rising confidence in the outlook for the US economy. 

The outlook in Australia is markedly different. Below is the National Australia Bank’s sentiment index through to September 2012.

The historical average for the NAB Business Index is 6.13 with the high of 21.1 in 2002 and a low of -31.6 in the first month of 2009. The index for October stands at -1. 

Consumer confidence, in comparison, has been more unwieldy – rising to 104.3 in November, a high for the year and above the historical average of 101.85. It’s well above the record low of 64.61 set in November 1990.

Since the sharemarket and sentiment indices are forward indicators, could a US recovery be imminent? And if so, could investing in ASX stocks with US exposure make some sense?  

With this in mind, below is a table of stocks for your watchlist:

Company

Code

Mkt Cap

Dividend Yield

Trailing P/E (Most Recent Quarter)

Forward P/E (2014)

2 Yr Earnings Growth Forecast

Gearing

Year over Year Share Price % Change

BHP Billiton

BHP

$182.1b

3.3%

11.83

10.4

4.3%

42%

-3%

CSL Ltd.

CSL

$25.4b

1.7%

27.15

19.64

15.7%

37%

+69%

Brambles

BXB

$11.2b

3.8%

18.7

14.16

9.9%

104%

+4%

Macquarie

MQG

$10.6b

4.7%

14.81

10.56

23.4%

8.95%

+38%

Amcor

AMC

$9.4b

4.9%

23.6

12.78

7%

115%

+8%

Computershare

CPU

$4.8b

3.3%

30.9

13.5

19.2%

149.1%

+7%

James Hardie

JHX

$3.9b

3.9%

7.0

21

-40.8%

24.4%

+35%

Breville Group

BRG

$745.7m

4.1%

16.8

13.5

14.5%

3.4%

+110%

Infomedia

IFM

$102.4m

6.5%

13.3

12.5

8.4%

0

+9%

Jumbo Interactive

JIN

$81.8m

1,5%

12.1

 

6.8%

2.5%

+600%

 

Most investors should be rightly concerned about overpaying for ASX stocks with US exposure at current prices.  Note that half of these stocks have seen share price increases of more than 10% year over year.  Only BHP Billiton has suffered a share price fall. 

BHP Billiton (BHP) took some heat for its expensive shale gas acquisitions in the United States. The heat was justified as the company took a U$2.7 billion dollar write-down on one of the four shale gas fields purchased.  The shale gas sector in the US has been dubbed “revolutionary,” but as always some businesses overdose with too much of a good thing. In the mad rush for production, supply far outstripped demand and the price of natural gas in the US fell to historic lows. Given the emergence of natural gas as a cleaner alternative to coal, the price will not remain low forever.  

BHP is the sole Australian company with significant shale assets in the top producing regions in the US – Fayettville, Eagle Ford, Haynesville, and the Permian Basin. 

With a dividend yield of 3.3% and a low Forward P/E, BHP remains a Buy with many major brokers.

CSL Limited (CSL) has outperformed despite the strength of the Australian dollar. The ramp up began in February this year when the company lifted forecasted profit by 13% for fiscal year ending June 2012.

In its year end report, net profit after tax rose only 4.5% due to an A$105 million exchange rate loss. The most salient point was the reported U$1 billion in profit from US markets. Here is a one year price chart compared to the ASX 200 XJO:

The company’s Forward P/E of 19.64 seems a bit lofty but November’s announcement of an expected 20% profit increase for 2013 makes the 2 year growth forecast of 15.7% seem realistic. 

CSL is an industry leader in blood plasma products and is benefiting from a newer revenue stream – vaccines.  Its recent positive guidance was attributed to increased royalty revenue from the company’s vaccine products.  Health care at this level is defensive in nature; furthermore the boom in US citizens accessing healthcare coverage due to the Affordable Health Care Act bodes very well for CSL’s future in the US health care market.

Macquarie Group Limited (MQG) operates in banking, financial advisory and funds management around the globe. Its second largest market by number of employees is the US. 

Macquarie’s fundamentals are attractive; it sports a P/EG of 0.59, a 2 year earnings growth forecast of 23.4% and a forward P/E of 10.56.  In addition, the shares are currently trading at around $32, less than book value per share of $35.45.  While it’s true the US stock market has performed well, there is an enormous amount of money sitting on the sidelines.  A full blown economic recovery in the US would benefit Macquarie substantially. 

There’s another reason to consider Macquarie for your watchlist. The company’s alliance with Yellow Brick Road (YBR) sees the two going head to head with the Big Four in the mortgage market.  The Big Four could become the Big Five, as Macquarie joins the club.

Year over year Macquarie has outperformed the ASX Financial Index XFJ and every one of the big four banks.  Here is the chart:

Amcor Limited (AMC) and Brambles Limited (BXB) provide different products to similar customers. Amcor is in the packaging business and Brambles provides reusable pallets, crates and containers via well recognised brands CHEP and IFCO.  The company also offers related logistics services. 

Both companies’ US operations have suffered from slower growth in the US, competitive pressures as well as the high Australian dollar. 

Should a US recovery be on the cards, increased business activity will benefit both Brambles and Amcor (a reported U$1 trillion is currently sitting on company balance sheets waiting for signs of a sustainable recovery).  Here is a one year share price chart for the two companies:

Computershare Limited (CPU) provides investor services to corporate clients. The company is the largest shareholder registry in the world with over 30,000 clients.  Computershare keeps records of legal ownership of investments, manages the dividend distribution process, and handles shareholder meetings including calculating direct and proxy voting results. The company also provides consulting services in the areas of merger and acquisition, capital raises, and corporate restructuring and reorganisation. 

Although the share price is up 7% year over year, its fundamentals are problematic. Net profit after tax fell 40.7% from FY 2011 to FY 2012. Company management claims “transactional activity from corporate actions has dropped to levels not seen since 2004.” 

Signs of a global recovery that bring investors back into the market will benefit Computershare.  However, watch out for its gearing.  Acquisitions have doubled long-term debt between 2011 and 2012. 

James Hardie Industries (JHX) reported less than stellar results for half year 2012.  Net operating profit and earnings per share dropped 35% prompting target price reductions at several analyst firms alongside SELL and UNDERPERFORM recommendations. 

Earnings forecasts have also been cut, which you can see in the negative 2 Year Earnings Growth Forecast.  Deutsche Bank is the only firm with a BUY rating on the stock, citing stability of the dividend yield as the reason.  Given the fact the company is heavily dependent on housing construction in the US, which is improving only slightly, the company’s share price performance is surprising.  Following the Half Year announcement the share price dropped but then began to recover.  Here is the chart:

Breville Group (BRG) makes small electric appliances for consumers; its share price is up 110% this year.  Breville has brand identification in over 50 countries and is a major player in the US and Canada.  For FY 2012, 22.4% of total revenue came from North American operations. NPAT for 2012 rose 44.9%. Breville products are high quality at high prices which suggests room to grow should US consumers begin to spend.  

On 14 November company management announced expected earnings through December 31 to grow by 10% despite less than robust retail conditions globally and increasing competition. Credit Suisse, Macquarie and UBS have BUY or OUTPERFORM ratings on the company. The Forward P/E and 2 Year Earnings forecast suggest Breville can continue to qualify as a growth stock. Some hard core bargain hunters may be a tad put off by the company’s impressive one-year share price movement chart.  Here it is:

Infomedia Limited (IFM) provides information solutions to the after sales parts and service sector of the automotive industry around the world.  Since July of 2012 the company has renewed or reached new agreements with Ford USA, Jaguar, Land Rover, Toyota USA, KIA Motors Portugal, Hyundai Motors Switzerland, and Chevrolet Denmark.

Full Year 2012 results saw sales revenue increase by $3.5 million, but net profit suffered from currency exchange rates, falling $1.6 million.  Despite poor economic conditions and foreign exchange issues, the company’s stock has soared 90% higher year over year.  That increase, however, pales in comparison to what was achieved by little known Jumbo Interactive (JIN).  Here is the chart comparing the two companies:

According to Thompson Reuters only one broker covers Infomedia with a STRONG BUY rating. 

JIN is in the online lottery business in Australia and is setting its sights on the lucrative US market of A$60 billion and the even more lucrative UK market of A$110 billion.  The company recently inked an agreement with Australia’s Tatts Group (TTS) to supply online lottery games for its website. On 28 November Jumbo entered into a 50/50 joint venture with US based Retail Gaming Solutions. The target market is existing lottery retailers in the US and Jumbo will provide its sophisticated Internet and mobile lottery software. 

In December 2011 the United States Department of Justice ruled that state-based lotteries could sell tickets over the internet. State-based lotteries in the US are huge and the CEO of JIN stated the company could easily double or even triple in size if it could crack the market.  If risk excites you, Jumbo Interactive is a stock to watch.  

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