An uncertain global economic environment has me seeking out some of the best non-cyclicals out there, which is why I’m interested in Provident Financial (LSE: PFG) in March. Provident is a subprime lender that works with the millions of Britons who are unserved by mainstream lenders due to low credit scores, no credit scores or low incomes. Truth be told, the economic situation of many of these customers is unchanged whether unemployment is at 4% or 10%, which means Provident can be reasonably assured of steady returns even during dramatic economic downturns.
This was clear during 2007/09 when Provident was able to maintain return on equity (RoE) from 45%-46% annually. And a conservative outlook to business means a healthy balance sheet with low leverage and a well-covered 4.35% yielding dividend covered 1.35 times by earnings. Consider me interested.
Experian (LSE: EXPN) is in a similar position. The global credit check provider enjoys reliable revenue growth throughout the economic cycle as consumers are always applying for credit cards, mortgages, student loans and more. And Experian, as the biggest provider in a sector with high barrier to entry for competitors, is a safe choice with its dominant position all but assured.
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The company also has enviable growth prospects thanks to exposure to Brazil, its biggest market behind the US and UK. The reliability of revenue from credit checks is obvious in the last quarter as Experian recorded 8% year-on-year sales growth in Brazil despite the economic downturn there.
And now for the bad news
But here are two highly cyclical business that have enjoyed what I believe is a premature bump to share prices following Trump’s election victory in America. That’s why the two FTSE 100 firms I’d flee in March are Barclays (LSE: BARC) and Intercontinental Hotels Groups (LSE: IHG).
Barclays shares have risen 28% since November on analysts predicting a rollback of financial regulations, a cut to US corporate tax rates and an infrastructure stimulus programme that could spur enormous growth for banks with high US exposure.
Barclays does indeed have high exposure to the US through Barclaycard credit cards and its transatlantic investment bank, but I still don’t think its time to buy the troubled lender. For one, returns from the group’s enormous investment bank still lag their cost of capital. Low returns from the investment bank together with the £44bn in bad assets on the books kept RoE in the nine months to September at a meagre 4.4%. Profits and dividends both heading in the wrong direction together with the cyclical nature of the business will keep me away from Barclays for now.
IHG, which owns Holiday Inn among other globe-spanning brands, has performed wonderfully since the end of the Financial Crisis. Management’s decision to sell directly owned hotels to franchisees ensures stable revenue streams and an asset-light business model that can return wads of cash to shareholders.
Unfortunately, we may be reaching a peak in the economic cycle, which is bad news for hotels highly dependent on business and leisure travel alike. IHG’s revenue per room, the key industry metric, was only up 1.3% year-on-year in Q2. This, together with a rapidly growing supply of rooms worldwide, leads me to believe it may be downhill from here for the stock if the global economy maintains sluggish growth.
