On the morning of 23 October, global growth bellwether stock, Caterpillar (NYSE:CAT), not only exceeded earnings expectations, but also raised its forward outlook for 2015. US markets took off, with the Dow Jones Industrial Average (DJIA) rising over 250 points within hours, and closing the day up 216.
Throughout the recent volatility there has been one positive constant – the health of the US economy. Last week the IMF raised its 2014 GDP growth forecast for the US from its June 2014 prediction of 1.7% to 2.2%.
Despite the declining US stock market, it is interesting to note that most economic forecasters have not slashed forecasts for the US economy. The United States is not a major exporter, with exported goods accounting for only 14% of economic activity. It is the US consumer that drives the economy, accounting for 70%.
Analysts expected a drop in the latest Thomson Reuters/University of Michigan index of consumer sentiment, but despite Ebola fears and other worries, the index actually rose to 86.4; its highest level since the pre-GFC days back in 2007. The U.S. unemployment rate has dropped to its lowest level in six years – 5.9% – and the number of applicants for unemployment benefits is at a 14 year low.
In addition, housing starts beat analyst expectations in the latest reading and low mortgage rates are attracting not only new home buyers, but also existing home owners looking to refinance. US manufacturing production also ticked up, after falling in the prior month.
Perhaps the brightest spot for US consumers is an early Christmas present – the dramatic declines in the price of oil and natural gas. Lower prices at the pump and lower heating costs in the coming winter equal more money in the pockets of consumers. Experts tell us a single penny drop in the price of a gallon of gas in the US means approximately $1 billion in added discretionary income. A report from Morgan Stanley analysts recently claimed US household incomes could see a boost of $40 billion year over year should gas prices remain at or near current levels. Right now the price of Brent Crude is hovering around $85 per barrel while the price of US based West Texas Intermediate (WTI) is flirting with $80 per barrel.
Much has been written of late about ASX stocks that stand to benefit from the declining AUD. Here we will look at some ASX stocks that could directly benefit from a potential US consumer spending uplift. The following table lists one standout retail stock, and five health care stocks that could get a revenue bump from US operations.
The selection of health care stocks may come as a surprise, but these are companies that offer health care products for non-life threatening conditions. Health care costs have risen dramatically in the US for years and employers, who are the major providers of health care insurance coverage in the US, have been hard hit. In response, deductibles and co-pays have risen substantially, making discretionary health care purchases beyond the reach of many cash-strapped consumers. In addition, new health care legislation in the US has made coverage more affordable for those who had no access to employer-provided coverage. In short, in coming years the number of US consumers with health insurance coverage will increase, with the potential of 30 million new insureds. Here then is our table.
52 Week % Change
2 Year Earnings Growth Forecast
5 Year Average Earnings Growth
5 Year Total Shareholder Return
Fisher & Paykel Healthcare
Breville Group Ltd (BRG) makes a broad variety of premium-priced consumer appliance and other products in Australia and New Zealand, North America, and the “Rest of the World” (Europe, Asia Pacific, South America, and the Middle East.) In February 2013 Breville investors learned the company would lose its distribution agreement with GMCR Canada – the owner of single-serve coffee system, Keurig. Breville reportedly derived 10% of its revenue from that agreement, which terminated as of June 2013. The share price recovered following the announcement but was rocked again when the company announced the surprising resignation of its CEO following the release of Full Year 2014 results. Here is a two year price movement chart for Breville.
As expected, the loss of the distribution agreement resulted in a drop in profit of 1.6% but the company is expected to rebound in 2015. Breville now derives close to 40% of its earnings from the US, where its market share has room to grow. The company reports that 30% of its US sales are generated online. US distribution channels are at the high end, with well-known retailers Williams Sonoma, Nordstrom’s, and Bloomingdale’s among them. If the American consumer chooses to spend the potential largesse from the gas price drop, Breville products are likely to benefit. The company pays a fully franked dividend with a yield of 3.9%. Breville shareholders have been rewarded with a five year annual average rate of total shareholder return of 37.4% and a three year return of 31.3%.
With a market cap of only $77.8 million, Australia-based dental products manufacturer SDI Limited (SDI) is the smallest stock in our table. The company develops and manufactures specialist dental materials, primarily for restorative use, and exports about 90% of its products. SDI Full Year 2014 results saw a 15% revenue increase and a 38% profit increase, with 20.7% of the revenue increase coming from Brazilian operations. SDI products are used in about 100 countries and the company announced plans in its annual report to target the US market for expansion.
Very few US employers offer dental insurance as part of their coverage packages and for those that do the benefits are meager at best. With a P/E of only 12.04, SDI is the closest thing to a bargain stock in our table. Over two years, the share price is up 200%. Here is the chart.
The cost of the implants offered by Cochlear Limited (COH) can range from US$40,000 to $100,000. Most insurance plans cover much of the cost but the out-of-pocket expense after deductibles and ancillary charges is often more than the average US consumer can bear. Unlike the one-time cost of hearing aids, cochlear implants involve follow-on therapy sessions that may have insurance limits on them. This is another reason consumers in need who have not considered implants may be willing to do so.
Note that despite its past troubles with product recalls and increasing competition from Advanced Bionics, Cochlear has a very healthy earning growth forecast of more than 35% over two years. In September 2014 the company launched an aggressive Hearing Awareness Initiative, beginning in New York City. The goal is to ensure consumers are aware that Cochlear products are not just for the profoundly hard of hearing. The company now has treatment options available to improve varying degrees of hearing loss.
Regardless of whether or not the potential of more disposable income leads to an increase in near term sales, the aging population bodes well for Cochlear’s future. After the disastrous product recalls in 2011 that future was very much in doubt. A five year price movement chart for Cochlear’s stock suggests investors do see future growth. Here is the chart.
The remaining three stocks in the table all target the same medical condition – obstructive sleep apnea (OSA). The largest by market cap is ResMed Inc. (RMD), based in the US but trading on the Australian Stock Exchange. ResMed sells its devices for treating sleep apnea in more than 100 countries around the world. The devices are basically ventilating machines which when combined with a face mask allow continuous positive airway pressure; hence the term CPAP machines.
New Zealand based Fisher & Paykel (FPH) is less than half the size of ResMed by market cap ($7.3b vs $2.7b) but the company sells similar products in similar markets. However, FPH is more broadly diversified with offerings in respiratory and acute care, including neonatal resuscitators. Over the past five years, investors in the two companies have seen similar share price movements. Here is a price chart comparing the two.
ResMed reports quarterly results and for Q1 of FY 2015 the company announced a 6% revenue increase, welcome news to investors disappointed in ResMed’s Full Year 2014 revenues, which were essentially flat.
Fisher & Paykel reported Full Year 2014 results back in May, posting record numbers for both revenues – up 12% – and net profit after tax (NPA) – up 26%. On 20 August the company revised its forward guidance for FY 2015 upward. Fisher & Paykel already generates about 42% of its revenue in North America and has opened a manufacturing facility in Mexico to better serve that market.
The final share in the table is Somnomed Limited (SOM) whose share price is up more than 100% year over year. This company also treats sleep apnea, but with a dramatically different approach. Somnomed’s principal product line is something called SomnoDent, which is basically a dental mouthpiece that keeps air passages open to allow unrestrictive breathing. The device is far less intrusive than the masks attached to a machine that pumps air to keep breathing passages open. In addition, the devices are less expensive.
The company also has a product to treat bruxism (teeth grinding) called SomnoBrux. Somnomed is currently in 24 countries serving a reported 175,000 customers. In FY 2014, 53% of the company’s sales came from the United States and company management has invested heavily in dental sales and service distribution operations. Somnomed reported Full Year 2014 results on 21 August and although revenues increased close to 30%, net profit fell close to 31%. Investors paid little heed and the share price continued to tread water, even after the announcement that one of its newest devices had received Medicare approval in the US. Then on 16 October the company revised forward guidance, expecting record levels in FY 2015 and the stock price spiked substantially. Here is a three month chart for SOM.
Speculating that US consumers will spend more on the kinds of consumer products produced by Breville seems a reasonable assumption, given the potential increases in discretionary income. Making the same bet on health care stocks might seem like a bit of a punt. But then three months ago who would have dreamed the price of Brent Crude would fall from over US$110 per barrel to $85?
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