UBS Investment Research (UBS) recently published a report entitled “US Research” on December 30, 2011. The report isn’t publicly available but we will be summarizing the main points. In the report, they have listed the most and least preferred stocks for investment in 2012. Discussed below are the least preferred investments from within the Consumer Goods sector.
Under Armour, Inc (UA) has been given an equal-weight rating by UBS. UBS views Under Armour as having an unfavorable risk/reward in early 2012 with reduced EPS visibility and an evidence of unplanned discounting in the fourth quarter. Inventories increased over 60% year-on-year in the third quarter, and key retailers began discounting the brand ahead of plan in December. Elevated discounting to clear inventories makes an upside in EPS in the near future uncertain. Even though Under Armour is a high multiple stock, UBS still sees better risk/reward elsewhere in their coverage universe.. UBS has given the stock a price target of $92 based on 30x FY13E EPS of $3.08 (+31% YOY) and a 30x target P/E which is slightly below Under Armours’ five year average of 32.6x.
Dr. Pepper Snapple Group Inc. (DPS) has been given an equal-weight rating by UBS. It is expected that higher costs and SG&A spending will likely weigh on profitability for Dr. Pepper Snapple in the near-term. In the long-term though, the company should continue to grow volumes through a combination of expanding distribution, increasing coolers and Hispanic migration. The 7Up re-launch and DP10 rollout should support a 4.5% revenue growth in 2012. UBS has given the stock a price target of $40 which is DCF-derived and implies a 13x 2012e EPS (roughly in line with PepsiCo). At current and target valuation, UBS prefers competitors like PepsiCo (PEP) to Dr. Pepper Snaple. Boykin Curry's Eagle Capital is also very bullish about Pepsi with a nearly $350 position at the end of September.
Avon Products (AVP) has been given an underweight-rating by UBS. While sentiment is poor and the valuation seemingly dislocated as compared to peers and its own history, UBS cautions investors that Avon could be a value trap. Importantly, the search for a new CEO will take time likely causing distraction over the coming months. Regardless of who will be Avon’s next CEO, the structural fixes required will be costly. These fixes include an upgrade in IT infrastructure, making rep incentives more competitive and the rising cost of growth in emerging markets. All of these internal challenges come against a backdrop of ongoing weakness in Avon’s key currencies (Brazilian real, Mexican peso and Russian ruble). UBS has given the stock a DCF-derived price target of $17. This implies 11.5x CY 2012 EPS of $1.51.
Hasbro Inc. (HAS) has been given an underweight-rating by UBS. Although Hasbro is a strong generator of free cash flow, UBS views 2012 Street EPS estimates (~5-10% above UBS estimates) as aggressive. This leaves the stock under pressure during 2012 or until peer group estimates are revised downward. Continued uncertainty in Hasbro’s core games and puzzles business could leave the company with excess inventories coming out of the holiday season. UBS has given the stock a $38 price target based on 12x 2012E EPS of $3.14. A 12x target P/E ratio is in line with the relative multiple at which Hasbro shares have traded over the past three years.
Office Depot, Inc. (ODP) has been given an underweight-rating by UBS as it views the company to be facing a challenging combination of cyclical and structural factors. Three years after the heart of the economic downturn, Office Depot is still generating year-on-year declines in sales across all three of its segments. This suggests that there is more at play than just a weak economy. Also, the company's international segment provides exposure to Europe, which should be slower to recover than from other parts of the world. While Office Depot’s shares might not find much upside in a tougher economic scenario, the downside should be supported by the inherent value in the company’s standalone business segments. UBS thinks the risk/reward ratio is balanced at this point. It has been given a $2.50 price target based on a DCF and multiple analysis. This also reflects 4.4x UBS’s CY’12 EBITDA estimate of $319.3 million. Ivory Capital had the largest stake in ODP among the 350+ hedge funds we are tracking.
Aeropostale Inc. (ARO) has been given an underweight-rating by UBS. Aeropostale is expected to continue being a market share donor given the exceptionally promotional environment and its merchandise issues (lack of fashion). As Aeropostale loses market share because of the pricing squeeze, it has no choice but to shift to more fashion. Near-term defensive measures are also limited given high inventories and low intent to repurchase stock. Additionally, the recent exit of Aeropostale’s long term Chairman and former CEO creates uncertainty. UBS has given the stock a price target of $17 based on 14.5x its '12 estimate of $1.17. The UBS multiple is at the midpoint of ARO's 3-year historical median and peak. The $1.17 estimate is slightly below the Street’s $1.18 and is based on a +1% comp and 140 bps of operating margin expansion. Elm Ridge Capital initiated a brand new $20 million position in Aeropostale during the third quarter.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.