Strong U.S. Jobs Growth: Will These Profitable Companies Benefit?

The unemployment rate has dropped for four straight months on the news U.S. employers added 200,000 jobs in December. For the year, 1.6 million non-farm jobs were created (1.9 million total, less 280,000 government jobs lost).

In all, the trend is going in the right direction.

"The job gains cap a six-month stretch in which the U.S. economy generated 100,000 jobs or more in each month -- something that hasn't happened since April 2006," reports the Associated Press.

The unemployment rate dropped to 8.5%, the lowest rate since February 2009. The hourly workweek rose from 34.3 to 34.4. Those underemployed (such as part time workers) dropped from 15.6% last month to 15.2%.

The long-term unemployed, those jobless for 27 weeks and over, lowered to 5.6 million from 5.7 million. This group represents 42.5% of the total unemployed.

Business section: Investing ideas
With a rebounding U.S. job market, the economy might be rebounding faster than initially expected. So we're wondering, which S&P 500 stocks stand to benefit from these trends?

For ideas, we created a list of the top 100 growth stocks in the S&P 500 index. We wanted to identify which of these growth companies have sustainable profits, which is why we turned to the DuPont system of profit analysis.

In case you don't know about the system, here's a quick explanation.

There is a lot more to profitability than whether a company's bottom line is increasing. Profits can come from several sources, with some better than others.

The DuPont system analyzes return on equity (ROE, or net income/equity) profitability by breaking ROE up into three components:

ROE
= (Net Profit/Equity)
= (Net profit/Sales)*(Sales/Assets)*(Assets/Equity)
= (Net Profit margin)*(Asset turnover)*(Leverage ratio)

We focus on companies with the following positive characteristics: Increasing ROE along with:

  • Decreasing leverage, i.e., decreasing Asset/Equity ratio
  • Improving asset use efficiency (i.e., increasing Sales/Assets ratio) and improving net profit margin (i.e., increasing Net Income/Sales ratio)

Companies with all of these characteristics are experiencing increasing profits due to operations and not to increased use of financial leverage.

All of the names mentioned below have positive DuPont trends, and high projected growth rates. Should they be on your watch list?

List sorted by projected earnings growth. (Click here to access free, interactive tools to analyze these ideas.)

1. CONSOL Energy: Engages in the production of multi-fuel energy and provision of energy services primarily to the electric power generation industry in the United States. Wall Street analysts project that the company's earnings will grow by 35.75% over the next five years. MRQ net profit margin at 11.% vs. 5.59% y/y. MRQ sales/assets at 0.125 vs. 0.115 y/y. MRQ assets/equity at 3.549 vs. 3.774 y/y.

2. Peabody Energy (NYSE: BTU  ) : Engages in the exploration, mining, and production of coal. Wall Street analysts project that the company's earnings will grow by 30.99% over the next five years. MRQ net profit margin at 13.46% vs. 12.02% y/y. MRQ sales/assets at 0.174 vs. 0.17 y/y. MRQ assets/equity at 2.211 vs. 2.464 y/y.

3. Caterpillar (NYSE: CAT  ) : Caterpillar manufactures and sells construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives worldwide. Wall Street analysts project that the company's earnings will grow by 23.03% over the next five years. MRQ net profit margin at 7.26% vs. 7.11% y/y. MRQ sales/assets at 0.202 vs. 0.181 y/y. MRQ assets/equity at 5.491 vs. 6.266 y/y.

4. Cerner (Nasdaq: CERN  ) : Designs, develops, markets, installs, hosts, and supports health care information technology, health care devices, and content solutions for health care organizations and consumers worldwide. Wall Street analysts project that the company's earnings will grow by 19.44% over the next five years. MRQ net profit margin at 13.79% vs. 13.16% y/y. MRQ sales/assets at 0.201 vs. 0.196 y/y. MRQ assets/equity at 1.288 vs. 1.304 y/y.

5. Cummins (NYSE: CMI  ) : Designs, manufactures, distributes, and services diesel and natural gas engines, electric power generation systems, and engine-related component products worldwide. Wall Street analysts project that the company's earnings will grow by 17.60% over the next five years. MRQ net profit margin at 9.77% vs. 8.32% y/y. MRQ sales/assets at 0.408 vs. 0.345 y/y. MRQ assets/equity at 2.176 vs. 2.351 y/y.

6. AutoNation: Operates as an automotive retailer in the United States. Wall Street analysts project that the company's earnings will grow by 17.28% over the next five years. MRQ net profit margin at 2.02% vs. 1.74% y/y. MRQ sales/assets at 0.608 vs. 0.571 y/y. MRQ assets/equity at 2.848 vs. 2.858 y/y.

7. CBS (NYSE: CBS  ) : Operates as a mass media company in the United States and internationally. Wall Street analysts project that the company's earnings will grow by 16.29% over the next five years. MRQ net profit margin at 10.04% vs. 9.62% y/y. MRQ sales/assets at 0.129 vs. 0.124 y/y. MRQ assets/equity at 2.638 vs. 2.78 y/y.

Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.


List compiled by Eben Esterhuizen, CFA. Kapitall's Eben Esterhuizen and Rebecca Lipman do not own any of the shares mentioned above. Accounting data sourced from Google Finance.

Motley Fool newsletter services have recommended buying shares of Cummins. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On January 11, 2012, at 6:53 PM, MHedgeFundTrader wrote:

    There is no doubt that the recent jobs data has been absolutely blistering. On January 4, weekly jobless claims plunged by 15,000 to 372,000, well below the 400,000 that is required for a sustainable recovery. The next day, the ADP report delivered a gob smacking 325,000 in job gains for December. Then the big kahuna surprised to the upside, the December non-farm payroll, reporting 200,000 new jobs, taking the unemployment rate to a three year low at 8.5%.

    Are happy days here again? Is it off to the races? More importantly, should we be adding risk positions here in expectation of a continued economic miracle?

    I think not. You all know well that I am a history buff. But I know enough about history to understand that it can be a dangerous thing. Don’t let these numbers lull you into a false sense of security. Any slavish reliance on the past can cause you to become history, if you’re not careful.

    There is no doubt that a seasonal surge in hiring caused by the holidays has created this spike. Normally, governments and agencies smooth these figures through a seasonal adjustment process. The problem arises when the structure of the economy is changing faster than can be reflected in these seasonal adjustments, as it is now.

    A large part of our economy is moving online more rapidly than most people realize. According to comScore, a marketing data research firm, online sales leapt by 15% to $35.3 billion during the November-December holiday period, an all-time high. I speak from a position of authority here as I happen to run one of the most successful financial sites on the Internet, which I kicked off four years ago with a $500 investment.

    Much of this migration is being captured by Fedex and UPS, the nexus at which Internet commerce meets the real world. After all, virtual products require a real world delivery. This explains why the couriers are seeing a booming business in an otherwise flat economy. Fedex hired 10,000 temporary workers to deal with the Christmas surge in 2011, a gain of 18% over the same period last year. UPS added a stunning 55,000, a 10% increase.

    Watch for the other shoe to drop. That will become apparent when that the newly hired become the newly fired, leading to a sudden and rapid deterioration of the jobs data. This could be the information the stock market and other risk assets need to put in a top for the year. The scary part is that this may happen sooner than you think.

    The Mad Hedge Fund Trader

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