UBS has published a report entitled “US Research” on January 04, 2012. The analysts were Michael Binetti, Kaumil S. Gajrawala, Nik Modi, David Palmer, Robin Farley, Robert Carroll, Michael Lasser, and Roxanne Meyer. The report isn’t publicly available but we will summarize the main points. In this report, they have discussed the most preferred and least preferred stocks in their coverage universe for 2012. Each investment idea included in this report includes an investment thesis as well as current valuation and risks. In this article, we discuss those stocks which offer the greatest upside potential in 2012 from within the Consumer sector.
Foot Locker Inc (FL) has been given an overweight rating by UBS. It says that the recent end to the NBA lockout removed the primary near-term concern for the stock. UBS believes that ongoing compelling footwear innovation from most major brands will continue to drive solid footwear sales through 2012. Furthermore, Foot Locker has made significant improvements to its branded apparel program. UBS estimates that this can add 150-200bps to SSS growth and 30-40bp to gross margins per year over the next two years.
With near-term same store sales visibility improving, UBS believes there is an upside to the consensus EPS. Also with visible margin improvement opportunities, it is expected that investors will be willing to pay a higher P/E for Foot Locker's shares over the next year. UBS’s 14x target P/E is slightly below Foot Locker's five year average P/E of 15x. The company is nearing its target operating margin of 8%, which could cause investors to wonder whether peaking profitability might reverse when sales are slow.
Coca-Cola Enterprises (CCE) has been given an overweight rating by UBS. It says that Coca-Cola Enterprises in 2012 will be a story of fear vs. reality. While the company continues to execute ahead of its peers, the stock has underperformed on fears regarding European macroeconomic headwinds, COGS inflation, and FX exposure. However, the reality is that volumes historically have shown no correlation to GDP, 50% of COGS are concentrate costs (which CCE passes along through price increases), and the company is currently repurchasing 20% of its market cap. UBS believes that CCE will continue to outperform peers in 2012. This will be supported by continued consumption growth in CCE's European markets, an upside from new products (including energy), and the 2012 London Olympics. UBS has given a $30 price target which is 12.5x 2012e EPS of $2.37, implying ~9x 2011e EV/EBITDA. This is roughly in line with Coca-Cola's global bottling peers.
Estee Lauder (EL) has been given an overweight rating by UBS. It says that Estee Lauder will be the next “10 in 10” story i.e. it will have the ability to deliver high quality 10% EPS growth every year thru 2020. This will be driven by accelerated category growth, share gains, white space expansion, positive price/mix, operating leverage and incremental cost savings and an estimated 13-14% EPS growth through 2015. UBS has given the company’s share a price target of $135 based on 27x FY12E EPS of $5.01. While Estee Lauder's high valuation has been the cornerstone of the bear case, UBS notes that the company’s growth adjusted P/E is actually lower than other staples companies.
Kraft Foods Inc. (KFT) has been given an overweight rating by UBS. It says that 2012 is the year in which Kraft Foods separates the company into a US grocery business, the new Kraft Foods (33% of sales and 40% of profit), and its global snacking business "SnackCo" (66% of sales and 60% of profit). UBS believes this separation will generate a boost to the sum-of-the-parts value due to the isolation of a high-margin and high-dividend company (Kraft Foods) from a mid-teens EPS growth entity. UBS $40 price target assumes an 8x 2012E EV/EBITDA multiple for the GroceryCo, and a 12x for the SnackCo. A bull case one-year valuation could be closer to $45 (if we use 2013E EBITDA estimates and the same sum-of-the-parts multiples). In view of UBS, the new Kraft Foods will initially be a cost saving story with solid sales momentum and diminishing input cost pressure. The new grocery company is expected to deliver a mid-to-high single-digit earnings growth in the intermediate term, along with a dividend yield above the peer average (i.e. 4-5%). In addition, the SnackCo will be an advantaged global consolidator in indulgent sweet foods. A reasonable bull-case for this business is that it can go to 12x EV/EBITDA with mid-teens earnings growth potential in the intermediate term. UBS has given a price target of $40 assuming an 8x 2012E EV/EBITDA multiple for the GroceryCo, and a 12x for the SnackCo. Warren Buffett’s Berkshire has the largest position among the 350 funds we are tracking.
Las Vegas Sands Corp. (LVS) has been given an overweight rating by UBS. Las Vegas Sands is UBS’s top pick in the gaming space. The company is well positioned in Macau and Singapore markets. This can be a differentiated growth path through a duopoly in effect until at least 2017. UBS believes Las Vegas Sands remains a leading cash flow generator in Macau with a solid physical footprint that is likely to ensure a market share of above 19% through '12. UBS has given an SOTP-derived price target of $56 based on 10x Las Vegas EBITDA, ~13x-14x Macau EBITDA ($25), and ~17x Singapore EBITDA ($30). These estimates also include the PV of the royalty stream from Las Vegas Sands' Macau operations ($1), PV of Sites 5&6 ($4), and proceeds from the sale of the Four Seasons serviced apartments ($0.50).
Target Corp. (TGT) has been given an overweight rating by UBS stating it as the best 3-5 year EPS growth story among mature broad-line/discount retailers. Catalysts include Target Corp’s sale of its legacy credit card assets during early 2012, increased penetration of REDcard, and a positive execution of the company’s expansion into Canada (stores opening early 2013). UBS has given a $64 price target based on 13x FY12E core EPS of $4.67 (i.e., excluding Canada dilution) and an added $2/share for UBS estimated standalone value of Target Canada. UBS 13x target P/E is in line with TGT's three year average P/E of 13x. Importantly, the REDcard loyalty program, which UBS view as one of Target’s most valuable longer term programs for driving incremental growth, is not included in the current price target. However, if this program is executed properly UBS believes it could add up to $10/share in value. Target Corp currently trades at a 10% discount to the broader market. Steve Cohen’s SAC Capital had $116 million invested in Target at the end of September.
Home Depot Inc. (HD) has been given an overweight rating by UBS due to the company having a very attractive risk-reward profile at its current level. Home Depot’s earnings will be driven by steady comp growth, incremental gross margin gains, handsome expense leverage, consistent share repurchases, and an attractive dividend yield. These factors should move estimates higher over time. Also, Home Depot should benefit from a combination of company-specific initiatives and a stable demand for home improvement. The company also has asymmetric exposure to the housing market where it will benefit from the upside scenario, but not be impeded if trends do not improve. The $45 price target given by UBS reflects 16x UBS’s new CY’12 EPS estimate of $2.76 and is based on a blend of a DCF and multiple analysis. With the potential for estimates moving higher and a 2.8% dividend yield, UBS believes that the stock provides an attractive form of remuneration.
The TJX Companies, Inc. (TJX) has been given an overweight rating by UBS and is UBS’s top pick as it represents the best combination of offense and defense i.e. an asset in an uncertain macro environment. Key catalysts for earnings growth include an expected rebound in Canada and Europe, a bigger than expected benefit from AJ Wright conversions into Marmaxx stores, market share gains as a result of the SYMs bankruptcy, incremental marketing efforts to drive traffic, and the ability to cut inventories further. Square footage is likely to accelerate next year, which could incrementally fuel top line growth. Additionally, an appetite for continued share repurchases and dividend payout should drive value. UBS has given a $68 price target based on 15x '12 estimate of $4.54. UBS’s 15x multiple is above TJX's historical 3-year median of 12.5x and in line with its historical peak multiple. UBS FY12 estimate of $4.54 which is above the consensus of $4.47 is based on +3% comps and 30 bps of operating margin expansion. Karsch Capital initiated a brand new position in TJX during the third quarter.