Sustained economic growth, high job openings and a tightening U.S. labor market could present the best conditions for low labor-cost stocks to outperform the broader market in 2022 as companies compete for increasingly scarce skills. As such, perhaps it’s time for investors to add labor cost screening metrics to their stock selection methodologies.
The U.S. labor market has been tightening for months since the second half of 2021. Now, the trend could persist well into 2022 as jobless claims hit record lows, labor participation rates shrink and American companies scramble for permanent employees.
The latest data from the U.S. Bureau of Labor Statistics shows that the economy added 199,000 non-farm jobs in December. Last month, the U.S. unemployment rate declined to 3.9%. This was its first reading below 4% since the pandemic hit.
Most noteworthy, though, is that the economy is almost back to full employment. So, going forward, companies may have to dangle more incentives to fill new openings. Average hourly earnings increased by 0.6% from November to December — a rate which was faster than inflation as seen in a 0.5% increase in the Consumer Price Index for All Urban Consumers. Perhaps, as a critical factor of production, labor is bargaining more for inflation protection. Higher wage growth rates could also shrink corporate earnings margins in 2022.
Using the latest staffing estimates from Stock Rover and the median employee compensation data from each respective companies’ most recent proxy filings, below is a list of seven curated low labor-cost stocks that could remain relatively unscathed in 2022. In fact, they could outperform as labor and employment costs soar higher.
- Apple (NASDAQ:AAPL)
- Dish Network (NASDAQ:DISH)
- Netflix (NASDAQ:NFLX)
- AmerisourceBergen (NYSE:ABC)
- Under Armour (NYSE:UA)
- Coca-Cola (NYSE:KO)
- PayPal (NASDAQ:PYPL)
Low Labor-Cost Stocks to Buy: Apple (AAPL)
First up on this list is the largest publicly listed company by market capitalization in the world: Apple. Surprisingly, this company has some of the consumer electronics industry’s lowest labor cost ratios.
Although the Cupertino giant employs a large staff of around 150,000 employees globally, its latest proxy statement filed on Jan. 6, 2022, shows that the median employee at Apple earns about $68,000 per annum in total compensation. This was calculated including base salaries, bonuses, commissions and share-based compensation.
Apple generated over $365.8 billion in revenue over the past twelve months. Therefore, the company paid just about 3% of its revenue out to cover labor-related expenses. This makes AAPL stock one of the best low-labor-cost stocks to buy on the Nasdaq today.
This attribute is largely thanks to Apple’s asset-light business model, which mostly outsources manufacturing and production functions. The company also has premium pricing and gigantic, growing revenue run rates.
Apple locates most of its research and development and corporate support functions in the United States, where high compensation is paid for professional and engineering talent. Manufacturing and production functions are mostly outsourced to jurisdictions with favorable production and labor economics.
Even if there could be some significant increase in U.S. labor costs in the near future, AAPL stock will most likely be relatively “unaffected” as labor is usually a small component of revenue. Apple’s high operating and net profit margins should remain very intact.
Dish Network (DISH)
Originally a satellite television giant, Dish Network provides internet television services. The company is also a serious player in the growing 5G wireless retail market following its acquisition of Sprint’s prepaid business assets. Dish has spent billions to amass a large portfolio of spectrum licenses over the past decade. Now, it’s building a nationwide wireless network that could provide for reliable recurring revenues and growing cash flows in the future.
Given a small staff complement of about 13,500 employees where the median employee earns about $57,000 per annum, DISH stock is a low labor-cost name that incurs just about 4% of its $18 billion trailing 12-month (TTM) revenue in labor-related expenses.
Wall Street’s consensus rating on DISH stock remains a buy with potential 50% upside over the next twelve months. Analysts remain bullish on the business’s future prospects, more so as the company evolves into a wireless services provider of a booming 5G ecosystem that the emerging metaverse can ride upon.
Rising labor costs may not hurt this pick of the low labor-cost stocks that much in 2022.
Low Labor-Cost Stocks to Buy: Netflix (NFLX)
On-demand video streaming giant Netflix could be another pick of the low labor-cost stocks to buy in 2022. Shares dipped by more than 20% in Thursday’s aftermarket trading after an earnings miss and guidance toned down the market’s high growth expectations for the near future. Shares are down another 20% today. However, Netflix’s business is still growing at a double-digit clip while remaining profitable.
Netflix employs a small staff complement of 9,400 persons spread across the globe. This allows the company to offer relatively high compensation rates of $219,577 to its median employee per year while still making a good profit.
Given Netflix’s $28.6 billion TTM revenue, the company’s labor cost to revenue ratio is a low 7%. In other words, Netflix pays out just $7 for labor out of each $100 earned in revenue per annum. Even if employment costs were to rise substantially in 2022, NFLX stock’s 17.6% net income margin could remain unscathed.
Wall Street expects Netflix to grow its revenues by 14.9% year-over-year (YOY) in 2022. Shares could grow in valuation as cash flows grow and earnings remain positive this year.
Next up on this list of low labor-cost stocks is AmerisourceBergen. A pharmaceutical wholesaler, this company remains one of the United States’ largest distributors of branded, generic and specialty pharmaceutical products to pharmacies, hospital networks and healthcare providers. Together with McKesson (NYSE:MCK) and Cardianal Health (NYSE:CAH), the three giants comprise over 90% of the U.S. pharma wholesale industry. However, ABC stock beats both competitors on labor cost competitiveness.
Given a staff complement of about 42,000 employees and a median employee compensation rate of about $59,388 per annum (which is above Cardinal Health’s $48,291 and McKesson’s $44,374), AmerisourceBergen’s $214 billion revenue over the past twelve months gives it a ratio of 1.17%. That low ratio beats both McKesson and Cardinal Health. ABC also employs the least number of people among the three pharma wholesalers.
But that’s not all. What’s more, ABC stock has a better sales growth outlook of 11% for 2022. Wall Street projects 9% and a 9.4% sales growth for MCK and CAH in 2022, respectively.
Not only does ABC stock have the lowest labor cost per unit of revenue, but it’s also expected to grow revenue at a faster clip than its closest industry peers.
Low Labor-Cost Stocks to Buy: Under Armour (UA)
Apparel designer Under Armour is another one of the low labor-cost stocks for investors to buy as employment costs rise in 2022. The company develops, markets and distributes athletic apparel, footwear and accessories in North America and several other regions. Its wholesale, direct to consumer and e-commerce distribution channels also continue to generate growing revenues without proportionate increases in labor hires.
Most noteworthy, Under Armour’s median employee is a part-time worker in its U.S. retail stores who works 20 hours per week and earns about $12,126 per annum.
To be realistic, though, I ignored the company’s most recent median salary for 2020. This is because the median employee worked for just a few months of the pandemic-stricken year and earned significantly less due to Covid-19 related lockdowns. Under Armour did not annualize its most recently reported median employee compensation.
Given the low median employee compensation, 16,400 estimated employees and $5.6 billion in trailing twelve months (TTM) sales, UAA stock has a relatively low labor-cost ratio of around 4%.
That means the company pays about $4 towards labor-related costs for each $100 in sales. As such, Under Armour has room to absorb rising employment costs if the labor market continues to tighten. UA stock could be a great low labor-cost pick to buy now.
Coca-Cola is one of the largest nonalcoholic beverage entities in the world. What’s more, the company has some of the most favorable compensation policies globally. However, KO stock remains one of the low labor-cost stocks to keep an eye on in 2022.
The company employs about 80,300 persons globally and has generated about $37.8 billion in sales over the past twelve months. Coca-Cola’s median employee earns about $11,342 per annum. This gives the company a ratio of somewhere around 2%. Even if labor costs were to skyrocket in 2022 and beyond, it will take a significant labor crisis for KO stock to suffer from resultant declining margins.
Coca-Cola incurs about $2 per every $100 of sales in labor-related expenses. That low labor expense ratio allows investors in KO to have little concern about rising employment costs in a tight labor market.
Wall Street’s consensus revenue growth estimate for KO stock is a healthy 6% for 2022. Sales will most likely grow at a faster clip than labor costs this year.
Low Labor-Cost Stocks to Buy: PayPal (PYPL)
Last up on this list of low labor-cost stocks is PYPL stock. If Wall Street projections are anything to go by, global payments giant PayPal could experience a strong 18% revenue growth rate this year. Further, much of its topline growth could find its way to the bottom line, even if labor costs were to rise in 2022. That’s thanks mainly to its low labor costs.
PayPal’s median employee compensation is about $83,988 per year, the company reported in its most recent proxy statement. That figure includes benefits, bonuses, overtime, allowances and incentives, including stock-based compensation.
The majority of PayPal’s employees (54%) are located outside the United States. Its total staff complement is over 26,500 employees. Lastly, the company has generated $24.6 billion in trailing twelve months (TTM) revenue. These factors all place PYPL stock among the low labor-cost stocks to buy with a ratio as low as 9%.
On the date of publication, Brian Paradza did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Brian Paradza is an investing enthusiast who was awarded the CFA Charter in 2019. A strong believer in fundamentals-based long-term investing, Brian learns from gurus like Warren Buffett but acknowledges human behavioral tendencies that drive short-term “madness”. You may find him inquisitive as he examines tech investing opportunities, cannabis, blockchains, and the new cryptocurrencies asset class.