3 Long-Process Companies for the Long Run

Most of us are familiar with the too-often regurgitated statistic: Consumers account for 70 percent of gross domestic product. When a little deductive reasoning is applied, the stat seems to imply that as the consumer goes, so goes the economy.  

Well, consumers aren't going very well these days, so don't expect the economy to go very well either, say the pro-consumerists. They point to the personal savings rate, which rose to 4 percent in May, as proof. They say having too much savings is bad because it leads to the paradox of thrift (or savings), which goes on to say that if everyone saves then aggregate demand will fall. Lower demand, in turn, will lower aggregate savings because of a decrease in consumption and economic growth – a vicious circle, indeed.

More than meets the eye
That is, if it were true; it's not. Our economy is more than purchases of McDonald's hamburgers, Ford F-150s, Apple iPads, and their relation to GDP. In fact, GDP only represents final output of goods and services.

When gross output – a measure of the value of output at all stages of production – is factored in, the consumer becomes a little more inconsequential. In 2008 (the latest data), gross output totaled $26.6 trillion, while GDP totaled $14.4 trillion. The numbers suggest that business spending is at least as influential as consumer spending on economic health.

Paradox of thrift becomes even less paradoxical when you consider that savings doesn't mean consumption is forever foregone; it simply means that consumption today is postponed in favor of consumption in the future. In the meantime, the added savings enables even more future consumption, because savings is the source of capital formation. When the savings rate is high, the economy is blessed with a larger, cheaper capital stock, which leads to a higher level of output and consumption down the road.

But more down-the-road output and consumption requires more investment in longer-cycle processes -- the processes that are really responsible for improving productivity and living standards.

Consider the 1990s: New investment in telecommunications and the Internet ratcheted up wealth and prosperity to unseen heights, turning names like Intel, Cisco Systems, and Microsoft into must-have investments. Only after this longer-process, capital-investment boom had taken hold where consumers able to spend more on cars, housing, clothing, travel, and entertainment.

You've got the capital, I've got the time
Today's low-interest-rate, higher-savings environment should prove to be an advantage to longer-process, capital-intensive businesses. That is, if you get them at the right price. Some, you can. The following three stocks cannot only be purchased at the right price, but their experience and leading positions within their respective industries suggest today's downturn (i.e., buying opportunity) is likely temporary.

Source: Capital IQ, a division of Standard & Poor's.

This trio isn't as sexy as the Internet infrastructure stocks of yesteryear, but their businesses help toward lifting the wealth curve, nonetheless. Terex's bailiwick is construction and infrastructure equipment manufacturing; Jacob specializes in construction engineering, design, and consulting; while Textron makes hay in smaller aircraft manufacturing (Citation and Bell Helicopters) and defense contracting – all of which contribute production goods that make future consuming possible.  

Competition, or lack thereof, is another advantage to investing in long-process firms. Investors generally prefer shorter processes to longer ones; thus, the first processes sought often require the shortest time frames.

Competition is keen in retail because production cycles are short. Wal-Mart (NYSE: WMT) might be the big boy on the block, but during its genesis, it took Sam Walton a lot less capital to start Wal-Mart than it did someone like Fred Smith to start capital-intensive Federal Express (NYSE: FDX). Not coincidently, FedEx has fewer competitors and higher barriers to entry than Wal-Mart.  

So, don't chide the consumer for spending less and saving more; thank him for his role in providing lower-cost capital for long-process, wealth-improving firms like Terex, Jacobs Engineering, and Textron.