by Larry Gellar
We’ve identified 5 stocks that analysts are growing optimistic about. General Electric and DuPont are two portfolio stalwarts that investors should certainly consider. On the other side of the spectrum, upstart Groupon has many investors wondering how much the Internet sensation is actually worth. Meanwhile, Avon is in the midst of a corporate shakedown. Let’s see what specifically has been happening with these 5 stocks:
Credit Suisse increased its earnings estimates for General Electric (GE) through 2013. The firm says that the company’s energy products are becoming more profitable and set the stock’s price target at $25. Meanwhile, General Electric-owned NBC agreed to a new deal with the NFL that will keep Sunday Night Football on its network. On the other hand, Fox (owned by News Corp. (NWSA)) and CBS (CBS) got new deals also.
General Electric Healthcare has also been making headlines. The company is working with the engineering consulting firm M + W Group to build pharmaceutical factories in Latin America and the Middle East. Described in further detail here, the plan will put General Electric in competition with more traditional drug companies. Here’s what General Electric’s Olivier Loeillot had to say about all this: “There will be more competition. We see ourselves as an enabler. There is huge market demand and this will be a big pillar of our business over the next 5-10 years.”
One important competitor for General Electric is Siemens (SI). That stock is cheaper using price to earnings, price/earnings to growth, and price to sales, although General Electric has the better margins. Investors should note that this stock has a beta of 1.95.
BMO upgraded Avon (AVP) to Outperform and set the stock’s price target at $25. Meanwhile, the stock has been up big since it was announced that CEO Andrea Jung would be stepping down. Investment Underground was dead-on last Winter in calling for Jung's departure from Avon. She’ll become executive chairman, and the company has a variety of problems that’ll need to be taken care of by the new CEO. The biggest issues are in the emerging markets, where computer difficulties have hurt business significantly.
Even Avon’s business model in the U.S. has come under question, and an investigation of potential bribery in China has also been a distraction. The company has said that there are no internal candidates for the CEO job, due in part to the lack of a Chief Operating Officer. As for valuation metrics, Avon is in the middle of L’Oreal (OTCPK:LRLCY) and Revlon (REV) for price to earnings and price to sales ratios. Avon margins are a bit weak – 63.52% gross and 11.26% operating. Cash flows have been problematic too, with $131.7 million flowing out during 2010 and $191.7 million flowing in during the first 9 months of 2011. Outflows have been primarily caused by changes in working capital and dividend payments. In fact, Avon’s current dividend yield is 5.6%.
Keybanc initiated coverage of Cintas (CTAS) at Buy with a price target of $36. Many aspects of the company are expected to grow, and it appears this growth is happening with safety in mind. Discussed here, the company’s facility in Chester, VA just received the state’s highest recognition for occupational safety and health. Here’s what Howard Baron, the facility’s general manager had to say: “To say I’m proud of my team would be an understatement! It’s a great accomplishment that is deserved by a great group of employee-partners.”
Meanwhile, Cintas CEO Scott Farmer has been in the news for his massive purchase of the company’s stock. Mr. Farmer claims that when the market as a whole went down, CTAS stock was unfairly punished. On the other hand, it’s worth noting that Zacks recently downgraded CTAS. A mediocre economy makes it tough to rate anything a Buy right now, and Zacks believes that higher prices for cotton and energy could hurt this company. One important competitor for Cintas is G&K Services (GKSR). That stock is cheaper than Cintas using both price to earnings and price to sales. Cintas has the better margins though – those numbers are 42.39% gross and 12.01% operating.
Many firms have initiated coverage of Groupon (GRPN), with the majority saying 'Buy' and others saying 'Hold'. Price targets have been set between the mid- and high-20s, and many firms believe that the company will grow rapidly. On the other hand, some on Wall Street thought that Groupon’s analyst ratings would be higher. Groupon’s problems, like many other Internet IPOs these days, are centered on questions about the company’s upside and business model. Additionally, other Internet companies that are larger may be able to squash Groupon in the future.
One competitor to keep an eye out for is Paypal, owned by eBay (EBAY). PayPal president Scott Thompson had some pretty confident words here, and the idea is that PayPal may be able to use other parts of its business to outdo Groupon. Investors should note that Groupon’s price to sales ratio is 11.53, compared to just 5.67 for Google (GOOG). Groupon’s gross margin of 85.45% is terrific, but operating margin is actually -30.53%. Cash flows have been good, though - $106.52 million came in during 2010 and $125.1 million came in during the first 9 months of 2011. Cash from operating activities has been strong, although there were also significant inflows from financing.
Jefferies raised their earnings estimates for DuPont (DD), as corporate guidance was more optimistic than expected. As described here, analysts are also pretty excited about DuPont’s partnership with Evogene. The two companies will continue to work together to improve corn and soybean yield for farmers, and these agricultural products are an important part of DuPont’s business. For example, Realm Q is one herbicide that DuPont is about to release, and its advantage is that farmers can put it on right away rather than wait until crops are grown to a certain point. DuPont also acquired Danisco lately, and the company announced that that segment’s margins are on the rise. Cost-cutting and new product lines have been the major causes, although it is worth noting that some of DuPont’s businesses have been hurt significantly by macroeconomic problems.
DuPont’s biggest competitors are BASF (OTCQX:BASFY) and Dow Chemical (DOW). DuPont’s price to earnings and price to sales ratios are higher than both of those other stocks, and that can be explained by DuPont’s superior margins. As for cash flows, $242 million came in during 2010, while $1.513 billion flowed out during the first 9 months of 2011. That’s partially due to acquisitions, although cash from operating activities has also suffered.