By Larry Gellar
Today we’ll be taking a look at the latest analyst upgrades. American Eagle (NYSE:AEO) and Under Armour (NYSE:UA) represent two apparel plays that investors should certainly consider. Meanwhile, TripAdvisor (NASDAQ:TRIP) is an interesting Internet spinoff. Additionally, Domino’s Pizza (NYSE:DPZ) can make for a good defensive play. Energizer (NYSE:ENR) has seen a big upgrade from Morgan Stanley on its earnings outlook. Let’s see what specifically has been happening with these 5 stocks:
Argus Research raised both earnings estimates and price target for Domino’s Pizza, noting that the company’s operating expenses should be lower than previously expected. Also good news is that Domino’s is starting a big expansion in Louisville. Over 100 new people will be hired. Here’s what one Domino’s franchisee Greg Neichter had to say: “The growth of the community and success of Domino’s allows us to build on our franchise, so we can continue to do what we do best — make great pizzas and deliver them with exceptional service.” Furthermore, Domino’s CEO Patrick Doyle remains extremely confident. Potential investors should check out this video, where Doyle comments that Domino’s is “recession-resistant.” One important competitor for Domino’s Pizza is Papa John’s (NASDAQ:PZZA). That stock has lower price-to-earnings, price/earnings to growth, and price-to-sales ratios, in part because of its relatively low operating margin. In fact, Domino’s operating margin is 15.37%, while Papa John’s is only 7.23%. As for Domino’s cash flows, $5.55 million flowed in during 2010, while $15.87 million flowed out during the first 9 months of 2011. That turnaround was partly caused by lower operating cash flow, but also the company embarked on an aggressive stock repurchase program.
American Eagle Outfitters was upgraded by both Piper Jaffray and Jeffries due to strong business trends and stabilizing cotton costs. In fact, one of those strong business trends is the company’s aggressive expansion into the Middle East. Stores are being opened up in Morocco, Jordan, and Egypt for the first time. Furthermore, new stores are being added to Saudi Arabia and Lebanon. This is all done through American Eagle’s partner M.H. Alshaya, and it’s a wise idea because it ensures that American Eagle has a first-mover advantage in the Middle East. Investors should note that American Eagle’s operations in the U.S. aren’t nearly as profitable because the industry is so competitive here. With apparel stores trying to outdo each other on promotions, margins are suffering. Important competitors for American Eagle are Abercrombie & Fitch (NYSE:ANF), Gap (NYSE:GPS), and Pacific Sunwear of California (NASDAQ:PSUN). Price-to-earnings, price/earnings to growth, and price-to-sales ratios are pretty high for American Eagle because investors have driven up the stock price. Meanwhile, American Eagle’s margins are pretty strong, with gross margin at 37.39% and operating margin at 9.48%. As for cash flows, $26.37 million flowed out during fiscal year 2011, and $287.31 million flowed out during the 9 months after that.
Morgan Stanley upgraded Energizer to Overweight, noting that the company’s solid earnings visibility will improve its price-to-earnings ratio. One example of that earnings visibility can be found here. Accounts receivable and days’ sales outstanding are both strong for Energizer as well as more traditional measures such as revenue growth. As for recent Energizer news, it appears that the company’s management is taking a big pay cut. With earnings down significantly from 2010 and lower than expectations, Energizer’s top executives are slated to be paid a lot less this year. Meanwhile, Alan Hoskins has been named president and CEO of Energizer Household Products. Here’s what Energizer CEO Ward Klein has said about the promotion: “Having been with Energizer for 29 years, Alan has broad experience in senior leadership positions throughout Energizer. Under Alan's leadership, our Asian operations have demonstrated significant growth over the past four years.” Important competitors for Energizer include Panasonic (PC), Procter & Gamble (NYSE:PG), and Spectrum Brands (NYSE:SPB). Energizer has a pretty high price-to-earnings ratio compared with those other stocks, partly caused by its strong margin (46.34% gross and 14.58% operating). Dividend investors will probably prefer Panasonic or Procter & Gamble, however – their dividend yields are 1.50% and 3.10% respectively.
Bank of America Merrill Lynch upgraded TripAdvisor to Buy, noting that the company should experience high growth and continue to have strong margins. In fact, investors considering a TripAdvisor purchase should take a look at this article. TripAdvisor used to be a part of Expedia (NASDAQ:EXPE), and it essentially operates as a web site where people can post reviews on various things related to travel. By taking advantage of social networking and search engine optimization, TripAdvisor has become a rather popular web site. Revenue comes from both click-based and display advertising, and travel-related businesses pay a lot for advertising because each potential travel customer is so valuable. If there is one reason to be concerned about TripAdvisor, it’s that the company relies a lot on search engine companies like Google (NASDAQ:GOOG). That’s certainly a problem, but TripAdvisor’s strong relationship with Expedia should help counterbalance that. Important competitors for TripAdvisor include HomeAway (NASDAQ:AWAY), Orbitz Worldwide (NYSE:OWW), and priceline.com (NASDAQ:PCLN). TripAdvisor has the best margins out of those companies by far – gross margin is 98.40% and operating margin is 46.70%. At 36.90% and 45.00% respectively, HomeAway and priceline.com have better quarterly revenue growth, however. Because TripAdvisor was so recently a part of Expedia, investors should note that financial statements currently are unavailable.
Robert Baird upgraded Under Armour to Outperform, noting the company’s strong product mix. In fact, more information about Under Armour’s product mix can be found here. Under Armour’s new Micro G shoes could steal market share away from Nike (NYSE:NKE). Furthermore, Under Armour stands to benefit from its larger focus on the U.S. at a time when Europe is facing serious debt issues. Under Armour also made a lucrative deal with the NBA recently. The NBA will allow its players to wear their jerseys in Under Armour commercials, and Under Armour already has Brandon Jennings, Derrick Williams, and Kemba Walker signed up. The NBA and Under Armour also have plans to fix up community basketball courts throughout the U.S. Besides Nike, Under Armour also competes with Adidas (OTCQX:ADDYY) and Columbia Sportswear (NASDAQ:COLM). Those stocks have much lower price-to-earnings and price-to-sales ratios since investors expect Under Armour to have some serious growth ahead of it. Under Armour also has better margins than Adidas and Columbia – those numbers for Under Armour are 48.19% gross and 10.41% operating. As for cash flows, $16.57 million came in for Under Armour during 2010 and $136.01 million flowed out during the first 9 months of 2011.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.