In an extensive research report from Morgan Stanley on 11/20/11, US Equity Strategy: Important Dynamics and a Strategy to Outperform, one of the sectors with recommended stocks was “consumer discretionary”. The four recommended stocks are Yum! Brands Inc. (YUM), CBS Corp. (CBS), Coach Inc. (COH), and McDonald’s Corp. (MCD).
Let’s look at their earnings growth rates, other fundamentals, and charts, to identify which might be good investments, at what prices.
Yum! Brands Inc. (YUM, $54.51) has 37,000 worldwide restaurants, including KFC, Pizza Hut, Taco Bell, Long John Silver’s and A&W All-American. Yum!’s percent of long-term debt to capitalization has averaged 79.37% for the past three years, per a November 19, 2011 Standard & Poor’s research report. That’s just too high for my taste.
Compare that to Coach Inc.’s (COH, $59.88) 3-year average long-term debt to cap. ratio of 1.49%. Coach is a marketer of fine accessories and gifts for women and men. The company’s projected consensus earnings (EPS) 3-year growth rate is 59% from FY2011 through FY2014, and the 2012 price earnings ratio (PE) is 17.4. Standard & Poor’s gives Coach stock a Strong Buy, 5-Star recommendation and a 12-month target price of $77 in a Nov. 19, 2011 research report.
“Coach is the number one luxury accessories brand in the U.S., with an estimated 20% share of this estimated $9.3 billion market. This sub-segment of the handbag/accessories market remains one of the best-performing categories at retail. COH has been able to outpace industry growth….” — Standard & Poors Research, Nov. 19, 2011.
91% of Coach stock is owned by institutions. The dividend yield is 1.50%.
Coach stock peaked in the low $50's in May 2007, dropped to $11 in March 2009, and has most recently traded between $46 – $68 since it broke past $45 in October 2010. Look for the stock to trade $59 – $66 near-term, but if the stock market gets weaker, Coach stock could easily drop to the low $50's.
This is a good stock for growth investors, but a lucky purchase at $53 would favor both traders and growth investors.