With the recent announcement about positive employment figures, investors can capitalize on the subsequent rise in consumer expenditures by opening long positions in Mattel (MAT), Johnson Controls (JCI), and Nike (NKE). These consumer goods companies are all rated highly on the Street and all have solid fundamentals.
From a multiples perspective, Johnson Controls is the cheapest of the three. It trades at a respective 13.9x and 10x past and froward earnings. This auto parts producer, however, lacks the dividend yield that Barbie-maker Mattel offers at 3.9%. Mattel trades at a respective 14.9x and 12x past and forward earnings; Nike trades at a respective 22.1x and 17.9x past and forward earnings.
Mattel has had great momentum in both the top- and bottom-lines. An economic upswing will expand margins with improved pricing power more than offsetting any input inflation. Going forward, major catalysts for the firm include Planes, Superman, and Batman toys. Management is highly committed to returning free cash flow to shareholders with $536M worth of shares repurchased in 2011. The company is also doing well in moving around negative FX headwinds, as evidenced by the 230 bps y-o-y expansion of gross margins in the fourth quarter. Finally, the company is continuing to penetrate the market with market share up by roughly 100 bps.
Consensus estimates for Mattel's EPS forecast that it will grow by 8.7% to $2.37 in 2012 and then by 11.4% and 8.3% in the following two years. Modeling a CAGR of 9.5% for EPS over the next three years and then discounting backwards by a WACC of 9% yields a fair value figure of $36.48, implying 14.9% upside.
Auto parts maker Johnson Controls similarly had strong recent quarterly results. The company is well positioned to benefit gain from increased demand for energy efficiency. It is the global leader in auto batteries. With that said, near-term visibility is clouded by the fact that a majority of the firm's business comes from Europe while margins are trending poorly.
Consensus estimates for Johnson Controls' ESP forecast that it will grow by 13.6% to $2.75 in 2012 and then by 22.5% and 22% in the following two years. Assuming a multiple of 13.5x and a conservative 2013 EPS of $3.31, the rough intrinsic value of the stock is $44.69, implying 33.2% upside.
Apparel producer Nike is similarly well positioned to benefit from improved pricing power. The NIKE+ FuelBrand, in particular, represents a major catalyst in securing the company's market dominancy. Nike has been implementing a social networking promotional campaign to boost demand.
Consensus estimates for Nike's EPS forecast that it will grow by 12.3% to $4.93 in 2012 and then by 17.8% and 16% in the following two years. Assuming a multiple of 21.5x and a conservative 2013 EPS of $5.77, the rough intrinsic value of the stock is $124.06.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
