3 Stocks To Buy, 4 To Avoid In Consumer Sector

Includes: AVP, CHD, CL, CLX, EL, ENR, PG
by: Insider Monkey

UBS Research Analyst Nik Modi and Associate Analysts Benjamin Schmid and Rusell Miller published a report titled “US Household & Personal Care Playbook: Who has the Flex-Ability? EL Remains #1” on Jan 03, 2012. In this report, they have analyzed US Household & Personal Care sector and identified stocks that are likely to perform well in 2012. This article discusses these stocks.

Avon Products (NYSE:AVP) has been assigned a ‘Neutral’ rating by UBS, with a price target of $17. Sentiments for this company are poor, while valuation remains cheap compared to its peers and to its own history. There are numerous concerns with respect to the company that should be noted before classifying it as a value stock. Avon products is still searching for its new CEO, which may take some time. This may result in a delay in redefining the focus of the company. There are some structural changes where significant cost allocation is required; such as up-gradation of IT infrastructure, incentivizing reps in a more competitive manner and addressing the rising cost of growth in the emerging markets. In addition to these factors, Avon also faces the brunt of operational currency depreciation in its key areas: Brazil, Mexico and Russia. As a result it is justified for company to trade at forward P/E of 9.8x near its 10-year low forward P/E of 9.7x.

Church & Dwight (NYSE:CHD) has been assigned a ‘Neutral’ rating by UBS, with a price target of $44. Church & Dwight manufactures and markets a range of personal care and household products mainly under the Arm & Hammer brand name, while other well known trademarks are Trojan and Nair. The stock has been a recent performer backed by its aggressive capital allocation activities. Buybacks and doubling of dividends have revised its valuations on the higher side (currently at 19x forward P/E). As a result, at current valuations, the stock does not have an attractive risk to reward profile; hence UBS’s Neutral stance on the stock. Although, Church & Dwight has been unable to find bigger acquisitions in recent years, analysts believe that the company would keep its priorities regarding capital allocation in favor of acquisitions. If not so, then it would increase dividends and buyback shares. For 2012, analysts expect more buy backs from the company.

Clorox (NYSE:CLX) has also been assigned a ‘Neutral’ rating by UBS, with a price target of $69. Analysts expect the stock to trade range-bound over the coming months as Carl Icahn continues to offload his stake in the company. Moreover, at current valuation of 17x the CY2012 EPS, the stock presents an unattractive risk-to-reward profile. However, there remains an upside to FY12 EPS and the years to come due to bleach compaction, rationalization of trash bag prices (as Pactiv becomes more profit oriented) and a moderation in input costs.

Colgate-Palmolive (NYSE:CL) has also been given a ‘Neutral’ rating by the UBS, with a price target of $88. Although 2011 was not a year of remarkable improvement for the company, the stock still continued to perform well as investors gave it the benefit of doubt.UBS has some concerns about the company’s ability to deliver 10% EPS growth without compromising its reinvestment ratio. Colgate is pursuing cost-cutting initiatives in 2012. Moreover, the company plans to create "regional hubs" which might cause some disruption in revenues. Currently the stock trades at a forward P/E ratio of 16.7x compared to its 10-year average of 18.8x. Jim Simons’ Renaissance Technologies had $200 million in CL at the end of September.

Energizer Holdings (NYSE:ENR) is picked as UBS’s favorite value idea in the sector and has been given a ‘Buy’ rating, with a price target of $92. Energizer is expected to lead the overall battery industry with its rational pricing strategy (6-7% price increase across its US

battery business). This will improve its EPS and accelerate free cash flow generation which may convince management to buy back stock aggressively. The company repurchased 3.7 M shares in FY2011, while another 4 M are expected to be repurchased during FY12. UBS thinks Energizer Holdings should now consider giving dividends. Although the company has significant room to cut costs, currently, this might not be of utmost priority to the management.

Estée Lauder (NYSE:EL) has been given a ‘Buy’ rating by UBS, with a price target of $135. Although the company seems expensive with a forward P/E ratio of 20, the stock is trading more in line with its peers on a growth adjusted basis. Analysts expect Estee Lauder to post the highest growth in the group and simultaneously invest heavily in expansions. On the other hand, macroeconomic data is heading in a negative direction for the industry during 2012. It should also be noted that the company derives only 5% of its revenues from China, while Europe and US have contributed to over 80% of company's profit growth last year.

Procter & Gamble (NYSE:PG) has been given a ‘Buy’ rating by UBS, with a price target of $72. P& G’s C-suite has been very adamant regarding boosting its productivity. P&G targets a 20% EBIT growth in the second half of this year. If the company meets its targets, analysts will revise their longer-term EPS estimates on the higher side. Analysts believe Procter & Gamble’s management is aware that accelerating EBIT growth (which has been sluggish over the past 3 years) will eventually lead to improvement in its valuations. UBS has forecasted an 8.5% EBIT growth for FY12, driven by cost cutting initiatives, a focus on EBIT growth, and a conservative input cost budget. Warren Buffett had a huge position in PG 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.