10 Stocks for US Exposure

Given the relatively limited scope of the ASX 200, shouldn’t serious Australian investors be looking for opportunities in international markets?

According to investment management firm Capital Group, approximately 43% of revenues by companies represented in the S&P/ASX 200 Index come from outside Australia.

The ASX Materials Sector receives over 88% of its revenues from outside Australia; the Energy Sector, at 63%; Healthcare stocks, around 83%, with 32% coming from the US. 

Limiting investing choices to home country stocks ignores a major global trend. And Australia is not the only country evidencing the trend. In the US, S&P 500 companies record about 40% of revenues coming from elsewhere.  The figure is even higher for the UK FTSE 100 companies – approaching 77%.

Some ASX stocks are already profiting from a lower AUD and this will continue if the dollar tumbles further. Then, there are companies that will benefit if the US economy kicks into gear. 

The following 10 stocks include five from Healthcare, and five from Materials.  We display a table at the end of the article, which lists some valuation and growth measures. 

CSL Limited (CSL) has been an ASX standout, with share price appreciation of over 1000% over the past ten years. US consumers in need of CSL’s plasma protein therapies or vaccines are not going to wait for better economic conditions – so this stock isn’t leveraged to a US economy. This is not to say CSL’s best days are behind the company. With the exception of one analyst, most are bullish. The lone exception is a Sell rating from Citi, citing increasing competition from 15 new competitive products that could enter the market over the next three years.

In contrast, ResMed Inc. (RMD) makes products to treat sleep disorders and other respiratory disorders.  While sleep apnea is troubling, a US consumer with a high insurance deductible might be willing to put off seeking treatment.  The company is considered a global leader in the sleep disorder market and recently reported solid results for Q3.  Revenues increased 5% while net income and earnings per share were both up 14% over the previous corresponding period (PCP).  Credit Suisse is the exception with a Neutral rating while the others have Buy, Overweight, or Outperform ratings.  The following ten year chart shows the share price performance of these two ASX Health Care giants over the last decade:

A few years back Cochlear Limited (COH) was on track to become the first ASX stock to trade at $100 per share.  Then came a disastrous product recall that analysts feared would open the door to competitors.  Cochlear is considered the gold standard in the field of hearing implants, but at a hefty price.  Analysts are heavily bearish on the company’s prospects, with Thomson/First Call reporting only 2 Strong Buys on the stock last month along with 2 Holds, 7 Underperforms, and 2 Sells.  In theory Cochlear should benefit not only from better economic conditions in the US but also from the aging population.  In practice, the high cost of Cochlear implants has analysts fearing the worst.  In the month of November 2013 analysts from Deutsche Bank, Citi, Credit Suisse, and UBS had Sell or Underperform ratings, citing numerous issues.  One is questionable management growth forecasts for a new implant awaiting regulatory approval both here and in the US.  Another is Chinese competition and finally, Credit Suisse points out that two years later, some Cochlear devices from the recall are still failing.  Contrarians may see a play with Cochlear, but until the company gets its approvals and a more competitive pricing strategy, this one might best be left to the punters.

The final health care stock in the table, SDI Limited (SDI), is a little known small cap with a market cap of only $71 million.  The company makes a variety of products associated with dental restoration and care.  The share  price has risen dramatically with a 97% year over year increase.  With minimal analyst coverage it is hard to discern why, but perhaps investors were anticipating the impact of improvements in a Brazilian subsidiary.   The company’s FY 2013 Full Year results showed net profit after tax vaulted from $2 million in FY 2012 to $4.7 million in FY 2013, a 138% increase.  What may be more impressive is the fact that the company’s strict cost control efforts yielded this result with only a slight increase in revenue, from $56.4 million to $56.6 million.  

If you know how the US health care system works you know that dental insurance is the exception there rather than the rule.  In tough times dental care is often overlooked by US consumers who must bear the cost out of pocket.  This is a stock to watch should conditions in the US continue to improve.  Here is one year price chart for this tiny company, which pays a $0.05 a share dividend.

Aussie investors might want to look at stocks in the Materials Sector with significant exposure to the US.  First off is BHP Billiton (BHP) whose US prospects can be summed up in one word – oil.  

BHP has assets in the shale oil rich Eagle Ford region in Texas and the company is reportedly devoting about 25% of its FY 2014 capital expenditure budget to developing those assets.  In a world turned upside down by the shale oil and gas revolution, there is now a fight underway in the US to overturn legislation banning producers from exporting oil. BHP is also expanding into fertilizer, specifically in a giant potash operation in the Canadian province of Saskatchewan.  Adding petroleum and potash to its product mix is a bold move for the company to further its status as a diversified resources company.

Amcor Limited (AMC) and Brambles Ltd (BXB) are similar in that both provide products needed by a wide variety of businesses – pallets and packaging.  Amcor’s products range from plastic packaging to cardboard boxes and aluminum cans.  As such, improving economic conditions in the US could increase the demand for products that need packaging.  Simple.  Brambles provides what the industry calls “pooling” solutions, which simply means clients share reusable pallets, crates, and containers instead of buying and maintaining them on their own.  Again, an uptick in business activity of all kinds is good for Brambles and things are looking up in the US.  There is a disconnect there now between economic conditions and the share market due to concerns over the US Federal Reserve’s Quantitative Easing program and when it will end.  Traders are tending to equate good economic news as bad news for the stock market as the Fed may begin to taper off QE as the economy improves.

Of all the stocks in our table perhaps the one that stands to benefit most from a stronger US economy is James Hardie Ltd (JHX); and the stellar 5 year expected P/EG and 2 year earnings growth forecast support that view.  Hardie makes fiber cement products for residential and commercial construction ranging from underlayment to siding.  The share price took a sharp turn upward in November 2013 when the company raised its dividend, citing the ongoing recovery in the US housing sector.  Here is a one year chart for JHX.

The company’s Half Year Results showed a year over year 13% revenue increase along with a net profit jump from US$83.5 million a year ago to $US194.1 million.  In October 2013 new home construction permits in the US rose to their highest level in almost six years.  Hardie’s results led to a rash of upgrades to Buy from Hold and from Sell to Neutral, although UBS downgraded JHX to Sell based on valuation concerns.  

The final stock is Incitec Pivot Ltd (IPL), a company that got beaten up from both falling commodity prices and the downturn in construction and mining.  The company makes fertilizer products and industrial explosives.  Incitec’s FY 2013 Full Year results showed a decline of 27% in net profit which management attributed to the strong Australian dollar and weak fertilizer prices.  The world needs to eat and fertilizer prices cannot stay low forever.  The declining dollar should help but IPL gets more than half its revenue from explosives.  However, IPL management did say it anticipates better market conditions in the US mining and construction sectors in 2014.  

Following the earnings release Credit Suisse upgraded the stock from Neutral to Outperform, based on an anticipated improvement in fertilizer prices and a lower Aussie dollar.  This is the only bullish view on the company, although there are as yet no Sell recommendations.  Incitec has a Forward P/E under 10 with a 5 year expected P/EG under 1 along with a two year earnings growth forecast of around 17%.  In addition, the company’s dividend yield is 3.75% with franking credits at 75%.  Finally, the share price is trading below book value, although the company does report substantial intangible “goodwill.”  Here is a one year price chart for IPL.

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