For the past six months stocks in the services sector have seemed to fly under the radar. I have not heard much about this sector, or maybe I have just been overshadowed with the Technology sector with the recent Facebook (FB), Google (GOOG), Research In Motion (RIMM), and Apple (AAPL) ordeal. Or perhaps it was the Financial sector that caught my eye with its huge up and down swings that have provided many investors quick short-term gains. Whichever the case the Services sector has several good choices and I have narrowed it down to four of my favorites that are on the rise and pay dividends:
Limited Brands, Inc. (LTD) operates in the specialty retail business. The Company focuses on women's intimate and other apparel, beauty and personal care product categories. The current market price is $41.86 with a one-year analyst price target of $45.05. This represents a 7.62% upside potential not including its current dividend yield of 2.39%. Limited Brands has a solid balance sheet with EPS of 2.94 (76.39% growth for the year). LTD appears to be undervalued with its PEG of 0.9 and its 66.11% EPS quarterly growth rate.
Compared to its direct competitors LTD performs much better with no signs of a slowdown.
Despite its phenomenal performance and 52-week price change of 43.70%, LTD's trailing P/E of 14.3 represents a 22% discount to its five-year average of 18.4. If the Trailing P/E returned to historical form, the stock would trade at $53.36.
Other factors that have contributed to LTD's growth, and I feel will continue are; store openings, sub-brand expansion, and new product launches. Limited Brands also seeks to expand aggressively in Canada and internationally. The company already generates sales at two and a half times the U.S. average and new initiatives like marketing, joint venture possibilities, less emphasis on third-party brands, and store segmentation may accelerate its already tremendous growth. Usually when stocks rise so much they taper off, but not LTD. This company seems to have only scratched the surface of the market and continues its growth while sporting its 4-star S&P rating. This is a fantastic stock with lots more room to grow.
McDonald's Corporation (MCD) franchises and operates McDonald's restaurants in the global restaurant industry. These restaurants serve a varied, limited, value-priced menu in more than 100 countries around the world. The current market price is $99.2 with a one-year analyst price target of $107.81. This represents a 8.68% upside potential not including its current 2.83% dividend yield. This stock has increased nearly 11% since I last mentioned it in my article here, and I believe it is even better positioned today than in October.
Compared to its competitors MCD performs much better and as I stated earlier, is even better positioned now than before.
McDonald's has a 52-week price change of 34.51% and boasts a 5-star S&P rating. McDonald's currently trades above its 50-day and 200-day moving average of $97.71 and $88.91 respectively.
MCD announced Q4 EPS of $1.33 beating analyst consensus of $1.30. Total revenues rose 9.8%, with global sales up 7.5%. It appears that the company is still gaining market share with its "Plan to Win" corporate strategy even in this shaky economy. I believe MCD will continue to see incremental sales growth from its expanding menu items that target more affluent customers and also from its ongoing restaurant modernization efforts. MCD has continued sustained growth domestically and internationally, despite the turmoil in the European Union. If this company can continue to grow in the face of a great recession the company should continue to see growth if an expanding economy. Another factor attributing to growth is the growing dependence on quick and affordable food in our fast paced lives. I believe this is a great stock to own.
Family Dollar Stores, Inc. (FDO) operates a chain of more than 7,000 general merchandise retail discount stores in 44 states, providing primarily consumers with a selection of merchandise in neighborhood stores. The current market price is $56.12 with a dividend yield of 1.51% and a PEG of 1. Although FDO trades relatively in line with estimates, I believe it could see another 52-week price change of 34.85%.
Family Dollar Store's sales in receivables of 0.2 is substantially shorter than the Discount Stores Industry average of 4.1. Also, compared to the Discount Stores Industry, FDO is currently trading at a significant discount based on both Trailing P/E and Forward PEG.
Family Dollar's zone pricing, improvement in inventory shrink, and focus on global sourcing initiatives are expected to boost the gross margin and an improved expense structure at the urban stores will likely lead to a potential upside to operating margin. For FY 2012 net sales are expected to increase by 9.5% to $9.36B, up from $8.55B in 2011.Growth is also expected to rise due to its accelerated pace of expansion and its aggressive store remodel program. For fiscal year 2012, analysts estimate that FDO will earn $3.63 and in 2013 will grow by 16% to $4.20. The fact that the company is providing customers with persuasive values and shopping convenience while aggressively managing its cost structure, FDO is expected to see a forward three-year CAGR of 17%. This stock is a healthy choice for any portfolio and with a beta of 0.40 is a safe bet.
The Home Depot, Inc. (HD) is a home improvement retailer. The Home Depot stores sell an assortment of building materials, home improvement and lawn and garden products and provide a number of services. The current market price is $44.51 with a dividend yield of 2.61%. In the past year, the stock has hit a 52-week low of $28.13 and 52-week high of $45.50 with a 52-week return of 21.17%. Despite the housing crisis putting 2011 home sales at the worst in history I believe HD has weathered the worst of the storm.
HD's current revenue growth of 2.3% is substantially above its five-year average of -3.6% which shows great signs of improvement in the near future. Based on Trailing P/E, HD currently trades at a 5% discount to its Home Improvement Retailers Industry peers. Despite the discounted price, HD's fundamentals are relatively in-line or better than its peers.
Positive arguments in regard to this stock include: low financial risk on account of the stock's liquidity, huge market capitalization, large cash balance, and excellent credit rating. There have also been positive indicators for the near term include improving trends in California and Florida. Not only does Home Depot have an unmatched brand name and presence domestically, but an international expansion provides HD with long-term growth opportunity. From 2008-2011 HD posted a three-year rate of decline in sales of 4.1%, but sales are expected to increase 2.8% in 2012 and 2.3% in 2013. Despite the fear and uncertainty in the housing market I believe its diverse portfolio and strong fundamentals will lead it to further growth this year and beyond.