In past few years the US economy has been through a rough patch. Earnings were down, spending was down, unemployment was high and so was retrenchment. But we have moved a long way since then, with the economy now showing signs of recovery. In this article I have picked up three stocks which have benefited because of the stabilization of the economy. I anticipate that as the markets gains more strength in the time to come; these stocks should show further upside. The stocks are USG Corporation (NYSE:USG), Automatic Data Processing (NASDAQ:ADP), and Wal-Mart Stores, Inc. (NYSE:WMT). USG’s stock growth parallels the growth of the US housing market. The improving US housing market has supported the company’s last quarter result. On similar lines, the stabilization in the US economy has resulted in more jobs, and this helped Automatic Data’s payroll processing segment. And finally, for Wal-Mart the recovery in the economy has raised the spending power of consumers. Stock of world’s largest retailer has been strong, and with its expansion plans I feel the stock will maintain its upward trend. Let’s discuss these stocks in detail.
The U.S. Housing market is improving at an exceptional rate. The same is evident from the fact that in December 2012 housing starts were up by ~37% y/y and reached 954,000. These starts have reached their highest levels in the last four years. The improvement in the housing sector has simultaneously helped complementary companies such as USG Corporation that manufactures building materials. Better than expected 4Q12 of the company is an outcome of the stabilizing market. USG was able to increase the total revenue for the quarter by ~12% y/y and the net loss was ~$13 million, drastically improved from last year’s ~$100 million for the same period. I am optimistic about the future of the housing market in the U.S. and expect that the auxiliary industries will grow along with it.
For FY13 the total revenue of the company is expected to be ~$3.5 billion with an operating profit of ~$340 million. The estimation is based on three factors. Firstly, because of the improving market and changes in foreclosure regulations the rate of new residential construction will remain at 950,000 units throughout the year. It is to be noted that every 100,000 new starts result in ~200 million square feet of incremental production for the company. Secondly, the new UltraLight premium wallboard that accounted for ~47% of the total wallboard volume will continue to grow in the coming year. And lastly, on average the company’s rivals have already increased their prices by a flat 30% for all of their customers, whereas USG has applied a more conservative approach by adopting rates that vary with different customers. The adoption of this technique leads to an average increase of ~20% in prices that can help USG in acquiring new customers in the future.
Automatic Data Processing
The unemployment rate in the US has been following a decreasing trend and was ~7.8% in the last three months of 2012. This helped Automatic Data Processing increase its revenue, as the major source of the company’s income is processing of payrolls. The company recently declared 2Q13 results, in which the total revenue was up by ~7% y/y. The growth in revenue was mainly driven by employer services and PEO services that increased by ~7% and ~13%, respectively.