Retirees are usually looking to invest in companies with secure long-term growth prospects so they can enjoy a stress-free stream of income in their old age. If that describes your current investment goals, you might want to consider railroad Norfolk Southern (NSC 0.39%), outboard motor and boat company Brunswick (BC -0.89%), and tool maker Stanley Black & Decker (SWK -0.01%). Let's take a look at why all three offer investors a compelling mixture of security and growth in the coming years.
Norfolk Southern
The investment case for Norfolk Southern rests on three factors. First, it's a way to gain exposure to long-term growth in the economy. Railroads are the arteries of the U.S. industrial economy; as long as goods are produced and transported throughout the U.S., there will be demand for rail freight.
Second, railroads offer investors the security of an almost unassailable market position. CSX and Norfolk Southern act as an effective duopoly on the east coast, and the railroads own their infrastructure. That's not something you can say about the trucking industry.
Image source: Getty Images.
Third, railroad investors have enjoyed stellar returns in the last few years largely because of the wide-scale adoption of precision scheduled railroading (PSR) management techniques. Essentially, PSR aims to run the same amount of freight but use fewer assets.
Under PSR, freight tends to be run between two fixed points on a network at fixed times instead of the hub-and-spoke model. In the PSR model, prices tend to be adjusted to fit the scheduled routes. Whereas, in the hub-and-spoke model cars can be left idle in hubs as they wait to be added to trains. Switching to PSR often allows railroads to close hubs, reduce terminal dwell, and increase freight car velocity.
The evidence shows that PSR works, and investors in Norfolk Southern hope that the railroad's adoption will allow it to play catchup with rival CSX -- an early PSR adopter. Indeed, management is guiding toward a run rate operating ratio of 60% by the end of 2021. Since the operating ratio is simply operating expenses divided by revenue, that implies an operating margin of 40% -- pretty near CSX's operating margin.
Data by YCharts
With the railroads expecting PSR to be a multi-year margin growth opportunity, Norfolk Southern has the chance to grow earnings for many years to come.
Brunswick
On top of considering their investments, retirees probably consider what to do with their leisure time. If boating is one of those considerations, then Brunswick and its boat brands will already be familiar. That said, it's actually Brunswick's propulsion (outboard motors) and parts and accessories segments that make the bulk of its earnings.
Data source: Brunswick presentations. Chart by author.
Brunswick's earnings received a boost in 2020, with social isolation measures encouraging spending on home and leisure activities like boating. As such, the company is tracking ahead of its three-year targets initially laid out in Feb 2020. Indeed, at its recent investor day presentation, management upgraded its 2022 targets.
| Brunswick Guidance |
Current 2022 Target |
Initial 2020 Target |
|---|---|---|
|
Revenue |
$5.7 billion to $5.9 billion |
$4.9 billion to $5.2 billion |
|
EPS |
$8.25 to $8.75 |
$6.25 to $7.25 |
|
Free Cash Flow |
$425 million to $475 million |
$425 million to $475 million |
|
Total operating margin |
15% to 16% |
14% to 15% |
Data source: Brunswick presentations.
The pandemic has given Brunswick the opportunity to open up new customers to boating. According to the investor day presentation, management plans to build on that by releasing new products and "technology-enabled experiences accompanying the broadening consumer appeal of the marine lifestyle."
The pandemic has opened up boating to a younger demographic. Image source: Getty Images
With three of the top four recognized boat brands (Sea Ray, Bayliner, and Boston Whaler), a 45% market share in propulsion in the U.S. with its Mercury brand, and a supportive parts and accessories business, Brunswick is well placed to grow earnings over the long term. Meanwhile, the midpoint of its 2022 EPS target puts the stock at just 12 times its 2022 estimated earnings.
Stanley Black & Decker
The iconic tools company is another beneficiary of the stay-at-home trend, as consumers have flocked to buy its DIY tools during the lockdowns. Stanley's management plans to build on that momentum by developing its highly regarded consumer-focused brands such as Black & Decker and Craftsman. In addition, the more professionally focused brands like Stanley and DeWalt have an opportunity to benefit from a red-hot housing market and a recovering construction market.
Image source: Getty Images.
Moreover, Stanley's long-term growth prospects aren't just about power tools and the new generation of customers interested in DIY. Stanley also makes engineered fasteners likely to be used in electric vehicles. It's likely to purchase the remaining 80% it doesn't own of lawn and garden products company MTD -- a deal that would be complementary to Stanley's existing outdoor products and drive growth in the category. The company has plenty of long-term growth prospects.
