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These 3 Unstoppable Stocks Have Plenty of Room to Run

By Lee Samaha – Dec 16, 2021 at 9:42AM

Key Points

  • UPS is demonstrating that it's got a handle on expanding its profit margin.
  • Goodyear's acquisition of Cooper Tires is a transformational deal.
  • Alphabet remains a great value opportunity.

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A look at three very different companies and why they are all buys for 2022.

It's been an excellent year for investors in UPS (UPS), Google owner Alphabet (GOOGL), and Goodyear (GT), but don't let that deter you from the idea that all three will have another strong year in 2022. Going into the New Year, all three look like excellent values. Here's why.

1. UPS is taking advantage of its growth opportunity

It's no secret that e-commerce volumes were booming even before the pandemic created a whole new generation of online shoppers. That's excellent news for the package delivery companies. However, it doesn't come without challenges. For example, business-to-consumer (B2C) deliveries can be expensive to deliver and are often inefficiently packaged. As such, the big question is whether UPS can generate volume growth and maintain or grow profit margin.

A person is holding three brown-boxed packages.

Image source: Getty Images.

The solution to the problem appears simple: Be more selective on the type of deliveries and customers you want because there's plenty of volume growth to go around. That's pretty much the approach that UPS is taking right now with its transformation strategy and CEO Carol Tomé's "better, not bigger" framework.

The transformation strategy focuses on revenue generation from e-commerce deliveries, healthcare, and high-growth international markets -- particularly the small and medium-sized business (SMB) market. Meanwhile, "bigger, not better" implies utilizing existing assets better and being more selective on deliveries.

The good news is that it appears to be working. For example, UPS management forecasts its key U.S. domestic package margin will be 10.5% in 2021, a figure that's already at the bottom end of its targeted range (10.5%-12%) for 2023 fueled by 10.9% volume growth in the SMB market in the third quarter. Management is doing an excellent job of increasing revenue per piece vs. cost per piece, and the 2023 targets look well within reach. 

With UPS seemingly winning the war on margin, investors can expect even more revenue growth to drop into earnings, and UPS stock can continue to do well for investors.

2. A good year for Goodyear

Investing in tire stocks means investing in a mature low-growth industry. As such, earnings growth prospects don't come from organic revenue growth in developed countries. Instead, earnings growth comes from acquisitions, cost-cutting, and investing in higher-growth developing markets.

Two automobile tires.

Image source: Getty Images.

That's pretty much the rationale behind Goodyear's acquisition of Cooper Tires in 2021. Buying Cooper immediately builds scale and strengthens Goodyear in the Chinese original equipment manufacturer (OEM) market and the key U.S. replacement market. Moreover, combining the two companies means Goodyear's management can generate cost synergy. The initial plan was to generate $165 million in cost synergy within two years, but management recently raised that estimate to $250 million. 

As such, Wall Street analysts have the new Goodyear generating $20 billion in revenue, $1.7 billion in operating profit, and $780 million in free cash flow in 2023. Those are big numbers for a company with a market cap of just $6.2 billion. In addition, around 80% of the company's sales will come from the relatively stable replacement market. The OEM market should improve as the semiconductor shortage abates and automotive production improves. Goodyear's excellent stock run has plenty of potential to continue in 2022.

3. Alphabet

Investors should never underestimate Google's dominant position in search, nor its potential to grow Google Cloud. Alphabet is still reliant on its Google Services (Google search, YouTube ads, Google Network) for its earnings, but Google Cloud is well on the way to long-term profitability.

A keyboard with a button marked "search."

Image source: Getty Images.

For example, Google Services generated $24 billion in operating income in the third quarter, and even though Google Cloud lost $644 million in the quarter, its revenue grew 45%. The loss was reduced from $1.2 billion in the same quarter of 2020. Moreover, Google Cloud is only loss-making because management incurs significant operating expenses to build the infrastructure needed to support long-term recurring revenue from computing services and storage.

As such, earnings from search will support the development of Google Cloud and investments in speculative business lumped together as "other bets." It's an advantageous position to be in, not least because Alphabet generates vast amounts of cash flow.

Wall Street analysts expect Alphabet to generate a whopping $235 billion in free cash flow over the next three years. As astonishing as these figures are, it's still equivalent to 12% of Google's current market cap of nearly $2 trillion. It's a reasonable valuation for a high-growth company with such a dominant market position.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Lee Samaha has no position in any of the stocks mentioned. The Motley Fool owns and recommends Alphabet (A shares) and Alphabet (C shares). The Motley Fool has a disclosure policy.

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