3 Recession-Proof Stocks That Reduce Risks for Customers

Don’t judge a company by the industry it belongs to -- certain industrial companies stay relatively resilient in an economic downturn, because their services help minimize risks.

Mar 13, 2014 at 9:35PM
Logo

Source: Stericycle

Industrial stocks are typically perceived as vulnerable in a recession, as their business operations are cyclical. However, this isn't the right way to assess a company's resilience. Companies in the industrials sector that provide products or services that reduce customers' downside risks remain relevant and profitable throughout different economic cycles.

When economic conditions are poor, companies will typically terminate the services of vendors providing discretionary services such as M&A advisory, management consulting, or public relations -- but retain suppliers that address the pain points that are critical to staying in business. Companies like these operating in the industrials space include Stericycle (NASDAQ:SRCL), Ecolab (NYSE:ECL), and Middleby (NASDAQ:MIDD).    

Risk of potential liabilities
Stericycle helps its customers dispose of medical waste, including items such as gloves, syringes, and needles. Its customers; such as hospitals, pharmaceuticals, and blood banks face serious repercussions like legal liabilities and regulatory penalties, if their waste isn't handled properly.

Even if the economy deteriorates, Stericycle's customers are unlikely to switch to a cheaper and unproven vendor because of the huge risks involved. In addition, the highly regulated nature of the industry and the need for a network of collection and processing facilities to serve customers efficiently deter new entrants and protect Stericycle's industry leadership -- it owns a 15% market share.

Stericycle also boasts an impressive financial track record, having increased both its revenue and earnings per share in every single year since 1998. Its unique business model and favorable contractual terms play a key role in this consistency. More than 95% of Stericycle's sales are governed by multi-year long-term contracts, which allow for price increases.

Furthermore, Stericycle has shifted its emphasis to smaller customers (over larger ones) over the past decade. In 1996, small account customers represented one-third of Stericycle's revenue, while they now make up 64% of its sales. During this period, Stericycle more than doubled its gross margin from 21% to 45%, an indication of its stronger bargaining power and the potential for upselling other ancillary services -- such as patient communication and returns management.

Risk of food poisoning and customer dissatisfaction
Ecolab provides sanitation solutions for restaurants, which ensures a minimum level of cleanliness and food safety. These solutions include staff hygiene training, bacteria resistant touch-free dispensers, no-rinse produce wash, and dish washing machine detergents.

Clean tableware doesn't just ensure food safety; it even has a positive effect on customer retention. Ecolab combined the results of a Technomic survey on restaurant consumers and another Bellwether Food study of restaurant same-store sales, and found that restaurants with higher tableware cleanliness satisfaction scores also delivered higher average same-store-sales growth. More importantly, most of the restaurants that rated highly on tableware cleanliness satisfaction use advanced machines and advanced rinse additives from Ecolab.

Ecolab's financial results speak for themselves. It has grown its revenue in every year for the past 10 years, except for 2009 where Ecolab's top line declined by only 4%. Moreover, Ecolab has remained profitable and free cash flow positive during this period.  

Risk of high operating leverage
Restaurants are economically sensitive businesses bearing the brunt of high fixed costs during periods of weak consumer sentiment. Middleby helps food service operators reduce operating leverage with their cooking, warming, and preparation equipment, by cutting labor and utility costs.

Product

source: Middleby

For example, its TurboChef Waterless Steamer combines steaming and cooking functions in one oven without the need for water. According to Middleby, one of its seafood chain customers saved in excess of 400 million gallons of water a year with the use of its TurboChef Waterless Steamer. Other cooking equipment provided by Middleby reduce cooking time, helping to cut down on the number of waitstaff needed.

Middleby's importance to its restaurant customers is further validated by its market leadership and financial track record. Middleby is the top kitchen equipment supplier to casual dining chains, pizza chains, deli's, and steakhouses. Furthermore, it is estimated that one in three restaurants are Middleby's customers.

Similar to Ecolab, Middleby emerged relatively unscathed from the global financial crisis, with its revenue falling by less than 1% in 2009.

Foolish final thoughts
The financial track records of the three companies are the best evidence of their recession-proof characteristics, given that their top lines were relatively unaffected by the 2008-2009 global financial crisis. The key lies in the fact that Stericycle, Ecolab, and Middleby remain relevant to their respective customers because they minimize the risks that will drive customers away from businesses. Of the three, Middleby is particularly attractive, as it helps restaurants survive and even thrive by enhancing their profit margins through improved cost efficiencies.  

The Motley Fool's top stock to check out in 2014
Good stocks emerge unscathed from downturns and recession such as Ecolab, Middleby and Stericycle. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

Mark Lin has no position in any stocks mentioned. The Motley Fool recommends Middleby and Stericycle. The Motley Fool owns shares of Ecolab and Middleby. 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers