Barclays has published its equity outlook for 2012. The report is dated December 13th and written by Stuart Linde and his equity research team. Their outlook on the retail sector is negative and they recommend a below benchmark exposure. Here we will discuss their top picks for the US retail sector.
Abercrombie & Fitch Co. (ANF) is in the retail soft line space with a market cap of $4.26 Billion. ANF is currently priced at $46.57 per share but Barclays have projected a target share price of $65.00 per share. The business should benefit from closing of unprofitable stores, expense leveraging and annualization of new stores opened in 2H2011, and margin recovery from lower costs. However, in the retail space, Barclays mentions that the US and global recovery will play key roles in the appreciation of ANF. The stock is currently rated as overweight, but the sector is neutral.
Brinker International (EAT) is one of the largest operators/franchisors in the casual dining space with a market cap of $1.97 Billion. EAT’s current price per share is $24.35 whereas Barclay’s estimated target price per share is at $32.00. Barclays expects improving fundamentals in 2012, hence a shift from quick service to casual dining. Barclays believes at least a 50bp of operating margin expansion in 2012 with benefit from modest menu pricing and lower labor cost. EAT is currently trading at 12x whereas the current casual dining peer group average is 14x.
CVS Caremark Corp. (CVS) operates a leading pharmacy benefit manager (PBM) business and convenient stores. CVS has a market cap of $49.07 Billion. CVS’s current price per share is $37.05 and Barclays expects this share price to stand at $44.00. Barclays believes both sets of business units should perform well in 2012 leaving behind the weak set of results for the PBM business in much of 2011. The contract with AETNA should start reaping more benefits after the downturn period in 2011. CVS is currently trading at P/E Multiple of 12x, with its 5 year historical average being 12.6x. Jonathan Jacobson’s Highfields Capital had more than $400 million in CVS at the end of the third quarter.
Macy's Inc. (M) is a leading player in the department store space with a market cap of $13.56 Billion. M’s current share price of $31.03 is expected to swell to a target share price of $35.00 according to Barclays. Macy’s is expected to generate $1.7 billion in free cash flow in 2012 which should provide the opportunity to repay maturing debt, and use excess cash to return value to shareholders through share repurchase. Despite this favorable free cash flow position, Macy’s continues to trade at 10.8x compared to the Barclays Capital Broadlines/ Department Store average of 14.4x.
Nike Inc. (NKE) is a leading player in the Athletic Footwear & Apparel space with a market cap of $44.49 Billion. The current share price is $93.67, however Barclays estimated target share prices is $125.00. The Summer Olympics have historically been a strong driver for the Athletic
Footwear & Apparel industry, notably for Nike Inc. Specifically, Nike stock has had an outstanding relative performance to the S&P 500 in each of the last five Summer Olympic years (24.5% on average), and Barclays expect the same next year. Nike is currently trading at 16.6x which is a decline of 8.5% from its high of 18.1x in December 2010.
O'Reilly Automotive Inc. (ORLY) is a leader in the aftermarket auto parts space with a market cap of $10.14 Billion. The company’s current share price is $79.88 and Barclays projected target price per share is $100.00. Despite a negative outlook on the sector, Barclays has rated this stock as overweight, largely due to their bullish stand on its consistent earnings growth, sector-leading long-term growth profile, and still-strong industry dynamics. Fundamentals for the commercial side of the business are particularly robust and O’Reilly’s industry-leading position in commercial should allow it to continue to gain market share.
Bed Bath & Beyond (BBBY) is in the retail hard lines space with a market cap of $14.95 Billion. BBBY’s current share price is $61.22 and Barclays estimated target price per share is $70.00. BBBY has been and continues to be one of the most consistent retailers across the U.S. It enjoys this consistency not only in Retail Hard lines but in other areas of retail as well. The stock has been rated as overweight. Stephen Mandel’s Lone Pine Capital had more than $300 million in BBBY at the end of September.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
