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Playing the Capex Game
Posted by: Fede Zaldua (IP Logged)
Date: October 29, 2013 05:21PM

Its no secret that the U.S. economy is already in its growth trajectory and that U.S. corporations are most generally in a strong financial position. This powerful fact added to a falling macro uncertainty level made many analysts think that it might be the time to take a long position into companies that would benefit from a rising level of corporate capex. Above all because, according to Credit Suisse's estimates, U.S. investment has a beta of 2 times with GDP growth. Here you can find a short review of two companies that are poised to benefit as U.S. corporate spending rises.

The Ultimate U.S. Industrial Powerhouse

General Electric (GE), which is held by John Burbank, not only has a 80% exposure to sectors related to corporate spending but also generates 47% of its sales in the U.S., and 21% in Europe. Offering a 3% cash dividend yield and selling for 14.3 times 2014 earnings, I think it might be a good time to make a bet on a company that is involved with almost every sector of the U.S. economy.

On top of an attractive valuation and macro trends you can also find a company which seems to be doing great from an operational standpoint despite its problems at the Energy Management segment where revenues decreased 3% year-over-year (yoy) with almost negligible profits. Most generally, industrial operating profits increased 11% yoy, with top-line growth at all segments but Energy Management. Growth was led by Home & Business Solutions (+28%), Aviation (+18%), and Transportation. Besides, margins at the industrial segment were up by 1.2% yoy to 15.4%. After all, it looks like Welch's (Chairman & CEO from 1981 to 2001) legacy is still intact. General Electric remains at the top of the US corporate ladder.

Simply Cheap

Oracle (ORCL), which is held by Leon Cooperman and Donald Yacktman, looks cheap. Simple as that. The company is the cheapest large capitalization play that could massively benefit from an upward trend in US corporate spending. Oracle has a top-line exposure to corporate spending of 90% and 42% of its sales are generated in the US.

The reason for a Oracle's low price can be found in its below-consensus guidance which largely disappointed market expectations and its very weak performance at the hardware business. A very wise professor of mine used to say “happiness equals reality minus expectations.” This has been true for Oracle's shareholders. The stock has under-performed the S&P 500 by more than 19% year-to-date (year over year).

That said, good news were also present during last quarter results. First of all, Oracle reported first quarter earnings per share (EPS) of $0.59 versus consensus estimates of $0.56 while its license business generated $1.67 billion in revenues (up by 4% year over year) versus consensus estimates of $1.63 billion. Moreover, the company reported operating margins of 44.6%, which were 1% higher than market expectations.

All in all, Oracle is a great company with many opportunities ahead (such as Oracle Fusion Applications and Oracle Engineered systems) and a price that seems to be discounting all the bad news and none of the good ones: Oracle, which holds more than $12.5 billion in cash, sells for 11.3 times 2014 earnings.

Bottom Line

If you want to get exposure to the coming increase in U.S. corporate spending, there is nothing better than getting exposure to very reasonably priced stable companies such as General Electric and Oracle. Just buy and hold, and the U.S. recovery will do the rest.

Guru Discussed: Donald Yacktman: Current Portfolio, Stock Picks
John Burbank: Current Portfolio, Stock Picks
Stocks Discussed: GE, ORCL,
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