Outlook on Consumer Stocks: Use Discretion

Posted: Nov 24, 2011 12:01 AM

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.

CBS Corporation (CBS, $24.26) is a media company. CBS operates in segments, including Entertainment (television and films), Cable Networks (Showtime and more), Publishing (Simon & Schuster), Local Broadcasting (television and radio) and Outdoor (advertising).

CBS stock has a projected consensus earnings (EPS) 3-year growth rate of 132% from 2010 through 2013. The 2012 price earnings ratio is 10.6 and the dividend yield is 1.65%. With $14 billion in 2010 revenues, CBS qualifies as an undervalued large-cap growth stock.

The stock is still recovering from the 2008 Financial Meltdown. The ten-year high was $40.58 in 2002. It will likely bounce briefly between $23 and $26 before continuing its retracement to the recent high of $29 in July 2011. In a weak stock market, CBS stock could easily bounce below $22.

CBS at $23 would make a great buy for both traders and long-term growth investors. The very low PE and strong annual earnings growth help to minimize the overall price risk.

I wrote about McDonald’s stock on August 27, 2011:

“McDonald’s Corporation franchises and operates restaurants in more than 100 countries around the world. McDonald’s had sales of $24 billion and net income of $4.9 billion in 2010.

McDonald’s stock hasn’t had a major share price correction since the impending second Gulf War of ’03. The stock didn’t even blink during the 2008 Financial Meltdown; it simply traded within its established trading range as if nothing was going on in the stock market.”

McDonald’s Corp (MCD, $92.65) has projected consensus earnings (EPS) growth of 13%, 9% and 10% for fiscal years 2011 through 2013. The 2012 PE is 16.2 and the dividend yield is 3.02%.

If I wanted to buy McDonald’s stock as a long-term growth & income investor, I’d put in a buy at $90 and see if the market brings it to my doorstep.

In summary, of these consumer discretionary stocks, I would ignore Yum! Brands for more attractive opportunities, I’d buy McDonald’s at $90 for long-term growth and income, I’d buy CBS Corp. at $23 for a short-term trade or a long-term growth stock, and I’d buy Coach stock for either a trade or long-term growth if it dropped to $53.

As always, readers should consult their investment and tax advisors to determine suitability, risk and taxation.

Crista Huff, Goodfellow, LLC