I used the following criteria to generate a list of GARP (Growth at a Reasonable Price) consumer stocks for further research.
Price to Earnings < 20
5-year Avg EPS Growth > 15%
5-year Avg Revenue Growth > 10%
Return on Equity > 15
TTM Net margin > 10
- Debt to Equity < .5
After generating a short list of candidates, I investigate further to determine the quality of the earnings (accelerating vs. decelerating), and the consistency of margins and return on equity. Once bitten, twice shy-- I also remove Chinese companies.
|DORM||Dorman Products, Inc.||Auto Parts||677.93||14.06||37.23|
|NPK||National Presto Industries Inc.||Appliances||748.07||11.77||108.33|
|RGR||Sturm, Ruger & Co. Inc.||Sporting Goods||440.43||16.1||23.12|
|SHOO||Steven Madden, Ltd.||Textile - Apparel Footwear & Accessories||1466.61||19.44||51.38|
|TRLG||True Religion Apparel Inc.||Textile - Apparel Clothing||728.09||16.54||28.28|
|UFS||Domtar Corporation||Paper & Paper Products||3973.61||6.66||94.82|
Not sure it means anything, but interestingly, this screen returned all small caps with the exception of Canadian company Domtar which is a mid cap.
Dorman (NASDAQ:DORM) supplies hard-to-find parts for the automotive aftermarket. With EPS growth of 22% annually over the last 5 years, it can be bought for a trailing PEG of .7. Not only have revenues increased every year for the last ten, they have actually accelerated with earnings following suit. At 10.7, net margin is at a historical high. The company may be benefiting from the same trend that's boosted other auto parts retailers like Autozone (NYSE:AZO) and O'Reilly (NASDAQ:ORLY), which is the tendency for spendthrift consumers to repair their existing automobile rather than buy new.
National Presto Industries (NYSE:NPK) is a maker of small kitchen appliances best known for its products popular with the infomercial set including the FryDaddy, Saladshooter food slicer, and Pizzazz pizza maker. With a 5 year EPS growth rate of 27%, the PEG is only .4, but it's not so attractive looking forward as growth slowed notably in 2010 and revenues have gone flat. Though the company pays a nearly 1% yield which it has raised consistently for over a decade, a payout ratio of 90% means the dividend could be in jeopardy if growth doesn't pick back up.
Sturm, Roger and Co. (NYSE:RGR) is a firearms manufacturer. Its 5 year average growth rate of 117% is wildly distorted by a banner year in 2009, when second amendment hysteria reached a fever pitch. Net margins were in the low single digits most of last decade. The fundamentals here have not been consistent enough for me to consider investing.
Steve Madden (NASDAQ:SHOO) designs men's and women's footwear sold mostly to younger consumers at upscale retail outlets. 5 year EPS growth of 34% and a 20 P/E equals a PEG of .6. The shoe business has been a hot place to be lately, with companies like Deckers (NYSE:DECK) and Timberland (NYSE:TBL) having nice runs. While Steve Madden's earnings took a minor hit during the 2008 downturn, they have mostly marched onwards and upwards, lifting both margins and return on equity.
True Religion Apparel (NASDAQ:TRLG) specializes in premium denim stocked by upscale retailers worldwide. The EPS growth rate of 16% gives the stock a PEG of about 1, making it the least attractive valuation on the list based on trailing growth rates. Free cash flow stands out as being very strong, however earnings momentum seems to be waning. Can the brand hold the attention of fickle consumers?
Domtar Corp (DTR) is the leading producer of uncoated freesheet paper in North America. The company also operates paper distribution facilities. Earnings per share of $14 are at essentially the same level as they were in 2006, with lots of volatility in between. This appears to be due to a large jump in the shares outstanding which were used to finance the acquisition of Weyerhauser's fine paper business. Lots of uncertainty here in my opinion.
The most attractive business to me is Steve Madden. The big question is, is the consumer really back?? I'll be looking at Madden again this summer if we get a serious correction in the market.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.