After the skies cleared and the true magnitude of Hurricane Sandy was revealed, it was hard to see any opportunity from the disaster...but rebuilding means companies that help bring order to chaos are well positioned, notes Stephen Leeb of Leeb Income Performance.
With Hurricane Sandy already among the world's worst and most expensive disasters, total economic costs will likely go higher.
As investors, we cannot be oblivious to events of such magnitude. However, upon reviewing our portfolios for potential impact from the superstorm and its aftermath, we have to conclude that most of our recommendations are likely to fare well.
There are a few, however, that are particularly well positioned. This is quite true for our collection of industrial companies, most of which rose sharply in the wake of the superstorm.
This leading manufacturing and engineering company is set to benefit from increased activity in most of its business divisions. This should be especially true for its Network Power, Climate Technologies, and Commercial & Residential Solutions divisions, which together account for more than half of total revenues.
Residential and commercial construction is one of the main drivers behind Emerson's growth. We expect improvement here driven by improving numbers pre-Sandy, as well as rebuilding in its aftermath. Emerson's strong emerging markets exposure will also aid growth going forward. Yet, Wall Street expectations for Emerson are still for slowing growth, and valuations are still relatively depressed.
Honeywell International (HON)
Despite being an aerospace/defense company (and with the somewhat muted outlook for defense spending), Honeywell was trading near a 52-week high as we went to print.
The company's third-quarter results and preliminary outlook both boosted shares, but the fact is that the stock had acted well since mid-summer, reflecting an improving outlook for Honeywell's main businesses, including its engine and turbo business for commercial aircraft and auto, UOP (its refining, gas processing, and petrochemical solutions business), and expanding margins.
Over half of Honeywell's products are tied to energy efficiency in one way or another. Its growth, much like Emerson's, is still undervalued, and we reiterate a buy.
A portfolio recommendation since our August issue, Xylem is a company whose growth prospects-and visibility-have improved dramatically since the storm. Xylem is in the water business and has significant exposure to pumps, water management, and the like-all expected to see increased investment in the aftermath of Sandy.
As for improved visibility-Xylem is the company that makes some of the heavy-duty pumps (pumps account for about 16% of the company's total business) that were used to successfully pump water out of flooded NYC tunnels. In one interview, Xylem's chief executive officer, Gretchen McClain, said that the cleanup should boost revenue, but didn't offer an estimate of by how much.
Moreover, its latest reported results were also very strong. Xylem beat earnings estimates by a penny and also outperformed on revenues. It is one of the lowest-yielding stocks in the portfolio, but it's also one of the fastest-growing. Attractively valued, we reiterate a buy here.
Arthur J. Gallagher & Co. (AJG)
One somewhat surprising potential storm beneficiary is the world's fourth-largest insurance broker. As such, the company is in the business of providing insurance brokerage and risk-management services; it does that through a network of subsidiaries.
While most sales are generated by its insurance and brokerage business, a little more than a quarter of the company's revenue comes from risk-management services (claims processing) and from managing corporate investments. In its property-casualty retail area, the company continues to see rate increases across most lines of coverage and across all geographic locations. Such a rate environment is extremely helpful to growth.
The company's organic growth has beaten its peers over the last several quarters, but it has also been aggressively acquiring new businesses. Year to date, Gallagher closed 43 acquisitions with over $170 million in additional revenue. The new businesses were across all of its operating divisions, including five internationally, and its pipeline continues to be strong.
This combination is what makes Arthur J. Gallagher one of the best-run insurance brokers. We reiterate our buy recommendation here.