By: Ahmed Ishtiaq
Investors are currently going over their strategies for the next year and evaluating the performance of their picks during 2012. The year has been a good one for stocks, and most of the markets have shown considerable gains. The Dow Jones Industrial Average is up 7% this year. The S&P 500 Index has posted returns of 13% while the NASDAQ is up 15% for the year. The trend is expected to continue during the next year as a majority of experts believe 2013 will be a good year for equities. It is expected that the global economy will start to recover during the coming year, and investors will start pouring in.
It is important to pick the right stocks for the portfolio to take advantage of the better performance expected of the equities markets. We have decided to choose four companies based on strong growth prospects and solid performance. We believe these companies will prove to be winners during 2013. We have tried to pick a diverse set of companies in order to achieve some diversification in the portfolio. I will explain one-by-one why these companies will be winners in the next year.
- Qualcomm (NASDAQ:QCOM), semiconductors manufacturer for mobile phones had a brilliant year. The company has a dazzling combination of semiconductor manufacturing and licensing business. The best thing about the company is the segment it caters to. At the moment, the smartphones market is experiencing a boom, which allows the company to achieve phenomenal growth.
- During 2012, the company reported record revenue of $19.1 billion. Although Intel Corp (NASDAQ:INTC) remains the biggest revenue generator in the industry; rapidly growing smartphones market gives Qualcomm a lot of room to grow revenue. On the other hand, Intel is facing the problem of the slowing PCs market.
- It is extremely important for any growing company to have enough cash to fund its future growth. At the moment, the company has free cash flows of $4.7 billion. Despite capital expenditures of over $1 billion; the firm is able to generate solid free cash flows. CAPEX to free cash flows ratio stands at above 4 for the company.
- All of the margins are in double digits for the company. Operating margin of 29.7% is almost double the industry average of 15%, and net margin of 32% is almost five times more than the industry average of 5.7%. In addition, three-year average revenue and EPS growth of 22.4% and 47.7% respectively, make it an extremely attractive pick.
- The most important factor, however, is the future growth. Qualcomm is the exclusive supplier for Apple (NASDAQ:AAPL) and benefits heavily from rising iPhone and iPad sales. Analysts believe iPad and iPhone sales will be much higher during 2013. In addition, smartphone shipments increased by 47% year-over-year during the past quarter. There is a massive growth opportunity for Qualcomm in its respective markets, and I believe the company will grab the opportunity.
- eBay (NASDAQ:EBAY) has had a remarkable recovery during 2012, and the company is proving to be a great comeback story. During the year, the stock price has gone from $30 to above $50 rewarding investors along the way.
- Solid revenue growth over the past three years has revived investor confidence in the company. Three-year average revenue growth for eBay is about 11%. Furthermore, cash flows are solid for the company. After the capital expenditures, the company is able to generate over $2 billion in cash flows. Healthy cash flows will allow the company to fund its future growth.
- Analysts are expecting the company to achieve year-over-year earnings growth in excess of 17% during 2013. Three-year average EPS growth has been about 22% for the company.
- Some shrewd acquisitions and innovations in the marketplace segment have helped eBay change its fortunes. eBay has been able to amass a large number of retail partners, which will allow the company to cater to a wider market in the future.
Mondelez International Inc
- At the start of October, Kraft Foods spun-off its business into two companies; Mondelez International (NASDAQ:MDLZ) and Kraft Foods Group (KRFT). Mondelez operates as a leading player in the global confectionery market, with 15% share of the chocolate market, 30% of the gum category, and 7% of the candy aisle worldwide. In addition, Mondelez also holds dominant share of the biscuit category--controlling 18% of the market, which is far above its two closest peers Kellogg (NYSE:K) (4%) and Campbell Soup (NYSE:CPB) (3%).
- Out of the two companies, Mondelez is the one with attractive growth opportunities. At the moment, the company generates 44% of its revenue from high growth emerging markets. Most of the revenue will come from Latin America and Asia.
- Operating cash flows of about $4.5 billion and free cash flows of over $2.7 billion give the company a strong platform for future growth.
- Snacks is a rapidly growing segment, which will provide future revenue and earnings growth for the company. There is still room for the company to grow in the emerging markets. However, global presence can also have a negative effect on earnings sometimes due to currency fluctuations. In the third quarter, the company suffered due to currency fluctuations and reported less than attractive results.
Margins and Multiples
Instead of talking about the margins and multiples of these companies, I have decided to put these metrics in the table. It should make the reading and comparison easier. Moreover, I have also added columns for industry average multiples and margins for all the companies.
Debt to Equity
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: EfsInvestment is a team of analysts. This article was written by Ahmed Ishtiaq, one of our equity researchers. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.