While the spotlight often shines on the big tech players, other industries are quietly reaping the rewards of AI’s advancements. From healthcare to manufacturing, artificial intelligence (AI) is enhancing efficiency, driving innovation, and opening up new revenue streams for companies that aren't traditionally considered tech-centric.
This shift creates unique opportunities for investors looking to capitalize on the AI boom without being overly exposed to the volatile tech sector. Below, I have highlighted three non-tech stocks, Costco Wholesale Corporation (COST), Medtronic plc (MDT), and Korn Ferry (KFY), which are leveraging AI to drive growth.
The rapid adoption of AI, particularly generative AI, is evident in the fact that nearly 87% of companies have already deployed or are piloting AI technologies. Businesses are significantly ramping up their investments, with some budgeting upwards of $50 million annually for AI-related activities. AI
This surge in AI adoption isn't just confined to tech giants; it's extending into traditionally non-tech sectors, which are now reaping the benefits of AI integration. For investors, this presents a unique opportunity: while tech stocks have pulled back from their recent highs, sectors like healthcare, manufacturing, and retail are poised for growth thanks to AI.
According to the latest forecast from the International Data Corporation (IDC), worldwide spending on AI is set to more than double by 2028, reaching $632 billion. Moreover, GenAI investments are expected to outpace the broader AI market, boasting a five-year CAGR of 59.2%. By the end of the forecast period, GenAI spending is projected to hit $202 billion, accounting for 32% of total AI expenditures.
Considering these conducive trends, let’s examine the fundamentals of the above-mentioned stocks in detail:
Costco Wholesale Corporation (COST)
COST, along with its subsidiaries, engages in the operation of membership warehouses internationally. The company offers branded and private-label products in a range of merchandise categories, warehouse ancillary, and other businesses. It operates through three segments: United States Operations; Canadian Operations; and Other International Operations.
On August 9, the company paid its shareholders a quarterly dividend of $1.16 per share. With 19 years of consecutive dividend growth, COST pays an annual dividend of $4.64, which translates to a yield of 0.53% at the prevailing price levels. Its four-year average dividend yield is 1.65%. The company’s dividend payments have grown at a CAGR of 23% over the past three years and a 17.9% CAGR over the past five years.
In terms of the trailing-12-month COST’s ROCE and ROTC of 31.64% and 17.72% are 199.2% and 157.6% higher than their respective industry averages of 10.58% and 6.88%. In addition, its trailing-12-month asset turnover ratio of 3.77x compares to the industry average of 0.86x.
For the third quarter of 2024, which ended on May 12, COST's total revenue increased 9.1% year-over-year to $58.52 billion, while its operating income stood at $2.20 billion, up 30.9% year-over-year. Its net income for the quarter amounted to $1.68 billion or $3.78 per share, representing an increase of 29% from the same period last year. Also, the company’s net cash flow from operating activities grew 14.1% from the year-ago value to $8.38 billion.
The consensus revenue estimate of $80.20 billion for the fiscal fourth quarter (ending August 2024) represents a 1.6% increase year-over-year. The consensus EPS estimate of $5.07 for the same quarter indicates a 4.4% improvement year-over-year. The company has an impressive earnings surprise history; it surpassed the consensus EPS estimates in each of the trailing four quarters.
Over the past year, the stock has surged 64.4%, closing the last trading session at $876.20.
COST’s POWR Ratings reflect this robust outlook. The stock has an overall rating of B, which equates to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
COST has a B grade for Momentum and Stability. It is ranked #26 out of 37 stocks in the A-rated Grocery/Big Box Retailers industry. Click here to see the additional ratings for COST (Growth, Value, Sentiment, and Quality).
Medtronic plc (MDT)
Headquartered in Dublin, Ireland, MDT provides healthcare technology solutions. It develops, manufactures, and sells device-based medical therapies to healthcare systems, physicians, clinicians, and patients worldwide. The company operates through four segments: Cardiovascular Portfolio; Neuroscience Portfolio; Medical Surgical Portfolio; and Diabetes Operating Unit.
On August 15, the company’s board of directors approved a second-quarter dividend of $0.70 per share for fiscal year 2025, consistent with the company's previous dividend increase announced in May. The dividend will be paid on October 11, 2024, to shareholders of record as of September 27, 2024.
As a member of the S&P 500 Dividend Aristocrats, MDT has raised its annual dividend for 47 consecutive years. It pays an annual dividend of $2.80 per share, which translates to a yield of 3.30% on the prevailing share price. Also, its four-year average dividend yield is 2.74%.
On August 7, MDT announced that the U.S. Food and Drug Administration (FDA) approved its Simplera™ continuous glucose monitor (CGM). It is the company's first disposable, all-in-one CGM, which is half the size of previous models and easier to use.
Additionally, the company revealed a global partnership with Abbott to create an integrated CGM based on Abbott's latest technology, exclusively compatible with MDT’s smart insulin device. The company will sell this system exclusively and expects the partnership to boost its Diabetes revenue while maintaining its gross margin.
The stock’s trailing-12-month gross profit margin of 65.73% is 15.1% higher than the industry average of 57.09%. Similarly, its 27.98% trailing-12-month EBITDA margin is 372.8% above the industry average of 5.92%. Also, its trailing-12-month levered FCF margin of 16.87% compares favorably to the industry average of 1.22%.
MDT's net sales for the first quarter (ended July 26, 2024) increased 2.8% year-over-year to $7.92 billion. Its non-GAAP operating profit grew 2.3% from the prior year’s quarter to $1.95 billion. The company’s attributable net income rose 31.7% from the year-ago value to $1.04 billion, while its non-GAAP EPS stood at $1.29, up 7.5% year-over-year.
The company has updated its fiscal year 2025 outlook, increasing its revenue growth projection to a range of 4.5% to 5%, up from the previous estimate of 4%-5%. Additionally, it has adjusted its non-GAAP EPS guidance to a new range of $5.42 to $5.50, slightly higher than the prior forecast of $5.40 to $5.50. This revised guidance suggests a 4% to 6% growth in non-GAAP EPS.
Analysts expect MDT’s revenue for the second quarter (ending October 2024) to grow 3.4% year-over-year to $8.26 billion, while its EPS for the same period is expected to increase marginally from the prior year to $1.25. Moreover, the company has topped the revenue and EPS estimates in each of the trailing four quarters, which is excellent.
MDT shares have surged 13.6% over the past nine months to close the last trading session at $85.38.
MDT’s bright prospects are reflected in its POWR Ratings. The stock has an overall rating of B, which translates to a Buy in our proprietary rating system.
It also has a B grade for Stability. Within the Medical - Devices & Equipment industry, it is ranked #26 out of 132 stocks. Click here to see MDT’s ratings for Growth, Value, Momentum, Sentiment, and Quality.
Korn Ferry (KFY)
KFY is a global organizational consulting firm. The company works with organizations to design their structures, roles, and responsibilities. Its businesses include consulting, digital, executive search, professional search & interim, and recruitment process outsourcing (RPO).
KFY's trailing-12-month ROTC of 7.49% is 5.1% higher than the industry average of 7.13%. Likewise, its 9.04% trailing-12-month levered FCF margin exceeds the 6.62% industry average by 36.6%.
The company pays an annual dividend of $1.48 per share, which translates to a yield of 2.12% on the current share price. Its four-year average yield is 1.03%. KFY’s dividend payouts have grown at impressive CAGRs of 42.3% and 24.8% over the past three and five years, respectively.
In the fiscal fourth quarter that ended on April 30, 2024, KFY’s operating income increased 15% year-over-year to $83.48 million with an operating margin of 12.1% (up 220 bps year-over-year). The company reported an adjusted EBITDA of $112.30 million, indicating a 14.8% growth from the prior year quarter.
KFY’s adjusted net income came in at $65.73 million, up 23.9% year-over-year, while its adjusted EPS grew 24.8% from the year-ago value to $1.26.
For the first quarter of the fiscal year 2025, the company’s fee revenue is projected to be between $655 million and $675 million, with diluted EPS anticipated to fall between $1.05 and $1.15. On a consolidated adjusted basis, its EPS is expected to range from $1.07 to $1.17.
Street expects KFY’s EPS for the fiscal first quarter (ended July 2024) to increase 12.9% year-over-year to $1.12, while its revenue for the same period is expected to be $663.84 million. In addition, it surpassed the consensus revenue and EPS estimates in each of the trailing four quarters, which is excellent.
Shares of KFY have gained 34.2% over the past nine months to close the last trading session at $69.14.
It’s no surprise that KFY has an overall rating of B, equating to a Buy in our POWR Ratings system. It has a B grade for Value and Sentiment. Out of 18 stocks in the A-rated Outsourcing - Staffing Services industry, KFY is ranked #4.
Beyond what is stated above, we’ve also rated KFY for Growth, Momentum, Stability, and Quality. Get all KFY ratings here.
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COST shares were trading at $881.00 per share on Wednesday afternoon, up $4.80 (+0.55%). Year-to-date, COST has gained 34.07%, versus a 18.49% rise in the benchmark S&P 500 index during the same period.
About the Author: Shweta Kumari
Shweta's profound interest in financial research and quantitative analysis led her to pursue a career as an investment analyst. She uses her knowledge to help retail investors make educated investment decisions.
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