9 Fairly Valued Mid-Cap Consumer Discretionary Dividend Growth Stocks: Part 2B

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Includes: DKS, EAT, FL, GNTX, MDP, PII, POR, THO, TUP, WSM
by: Chuck Carnevale

Summary

Mid-cap stocks are often overlooked by investors and not widely covered on Wall Street.

I consider it a mistake because there are many mid-sized companies that are attractive long-term investment opportunities.

This article focuses specifically on dividend paying consumer discretionary mid-cap stocks.

Introduction

Mid-cap stocks are often overlooked by investors and not widely covered on Wall Street or many financial websites and blogs. However, I consider it a mistake because there are many mid-sized companies that are attractive long-term investment opportunities.

Moreover, in the general sense, smaller companies tend to have more room to grow than their larger more well-known counterparts. Consequently, if a larger total return is part of your investment objectives, then high quality growing mid-caps might be just the ticket.

Although mid-caps generally have more room to grow, not all mid-caps are growing enterprises. In fact, mid-cap companies can be found in virtually every industry or sector, and like all companies, possess their own unique characteristics and fundamental metrics. Some mid-caps are growth stocks, some are dividend growth stocks and some offer high-yield and everything in between. Therefore, as it is with all stocks, selectivity is the key to success.

This article focuses specifically on dividend-paying consumer discretionary mid-cap stocks. Even though some of the following names are relatively small, most of them are widely recognized companies. Furthermore, regardless whether your investment objective is growth or yield, there may be something in the following group for everyone.

9 Fairly Valued Mid-Cap Consumer Discretionary Dividend Growth Stocks

The following portfolio review summarizes the 9 fairly valued mid-cap dividend growth stocks in the Consumer Discretionary sector. The portfolio review lists them by ticker, name, credit rating, sector, dividend yield, market cap and long-term debt to capital.

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Since many readers may not be familiar with each of these mid-cap selections, I offer the following overview of each of the nine research candidates. Courtesy of S&P Capital IQ, I also included a short business description on each. Additionally, I have provided earnings and price correlated historical F.A.S.T. Graphs on each with a calculated return forecast out to 2017 based on what I considered the most appropriate valuation reference line.

F.A.S.T. Graphs™ Tutorial

In order for the reader to get the maximum benefit from the following presentation, I offer a short tutorial illustrating the various components presented in a F.A.S.T. Graphs™. To accomplish this, I will present each component of the graph separately as I rebuild an entire graph. I have chosen Tupperware Brands Corporation, Inc. (NYSE:TUP) as my tutorial example.

My first screenshot reflects a plotting of earnings per share. The green shaded area represents a mountain chart of the company's earnings over the time frame drawn. The orange valuation reference line contains two important aspects.

The first aspect is a multiple of earnings (P/E ratio) that is listed in the orange colored rectangle (red circle) in the FAST FACTS to the right of the graph. In this example, the orange line represents a P/E ratio of 15. In other words, any time the stock price touches the orange line anywhere on the graph in this example it will be trading at a P/E ratio of 15.

The second aspect of the orange line is the slope, which is equal to the earnings growth rate. In this example, the orange line is increasing at the earnings growth rate (the green rectangle in FAST FACTS) of 7.3% (yellow circle). Although there is some cyclicality with earnings in between, this growth rate is calculated as the annualized growth from the first year's earnings per share to the last year on the graph.

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With my second screenshot, I overlay monthly closing stock prices. This illustrates how stock prices move in conjunction with earnings over the long run. Moreover, periods of overvaluation (when price is above the orange line), fair valuation (when price is touching the orange line) and undervaluation (when price is below the orange line) is clearly revealed. Most importantly, since stock price tracks earnings, it is clear that the company's earnings achievement is what drives the capital appreciation component (growth portion) of total return.

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This next screenshot adds a second valuation reference line (the dark blue line) which is the calculated normal P/E ratio for the time frame drawn. In this example, the normal P/E ratio line represents a multiple of 13.4 (red circle). With both of these valuation reference lines on the graph, a clear perspective of a range of valuation (in this example, that range is a P/E ratio of 13.4-15) is revealed for analysis.

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This next screenshot adds a plotting of the company's dividends per share prior to being paid out of earnings. The area below the light green line (it appears white to many people) represents the portion of earnings paid out to shareholders. Therefore, the company's dividend payout ratio ((NYSE:POR)) for any historical year is graphically presented for instant reference.

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This next screenshot presents a second dividend reference. The light green shaded area above the orange line indicates the same dividends seen above after they have been paid out to shareholders. This light green shaded area (dividends paid) represents the dividend income component of total return. Therefore, a F.A.S.T. Graphs™ reveals dividends in two ways: First, prior to being paid out of earnings, and then after they have been paid out of earnings.

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The complete F.A.S.T. Graphs™ presented below illustrates the earnings and price relationship, offers two valuation reference lines and graphically presents the company's dividend payout ratio and dividends after they are paid out to shareholders. Most importantly, a perspective of the company's current valuation relative to fundamentals is clearly illustrated.

Tupperware Brands Corp.

"Tupperware Brands Corporation operates as a direct-to-consumer marketer of various products across a range of brands and categories worldwide. The company engages in the manufacture and sale of design-centric preparation, storage, and serving solutions for the kitchen and home, as well as a line of cookware, knives, microwave products, microfiber textiles, water-filtration related items, and an array of products for on-the-go consumers under the Tupperware brand name.

It also manufactures and distributes skin and hair care products, cosmetics, bath and body care, toiletries, fragrances, jewelry, and nutritional products under the Avroy Shlain, NaturCare, Nutrimetics, Fuller, BeautiControl, Armand Dupree, Fuller Cosmetics, and Nuvo brands.

The company sells its products directly to distributors, directors, managers, and dealers. The company was formerly known as Tupperware Corporation and changed its name to Tupperware Brands Corporation in December 2005.

Tupperware Brands Corporation was founded in 1996 and is headquartered in Orlando, Florida."

Investment Thesis

I offer Tupperware Brands Corporation as primarily a valuation and high current yield opportunity. Earnings have been weak in fiscal 2015 and that is expected to continue but at a lower rate for fiscal 2016. Nevertheless, that weakness is reflected in the price and current low valuation. However, management has been taking action to reinvigorate growth going forward. Consequently, Tupperware Brands Corporation is also offered as a potential turnaround.

Importantly, the company reports quarterly earnings on April 20, 2016. Therefore, it might be prudent to wait for the earnings announcement. On the other hand, the stock has recovered nicely since the beginning of 2016, and a good quarterly report could carry it farther.

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Meredith Corp. (NYSE:MDP)

"Meredith Corporation operates as a diversified media company that focuses primarily on the home and family marketplace in the United States. It operates in two segments, Local Media and National Media.

The Local Media segment consists of 16 owned television stations, such as 7 CBS affiliates, 5 FOX affiliates, 2 MyNetworkTV affiliates, 1 NBC affiliate, 1 ABC affiliate, and 1 independent station, as well as 1 operated television station. This segment also includes 13 Websites, 13 mobile-optimized Websites, and 38 applications focused on news, sports, and weather-related information.

The National Media segment publishes magazines for women. This segment publishes approximately 20 subscription magazines that include Better Homes and Gardens, Parents, Family Circle, Allrecipes, EveryDay with Rachael Ray, Martha Stewart Living, Shape, and FamilyFun, as well as approximately 130 special interest publications under approximately 80 titles.

Its portfolio also includes Parenting and Babytalk magazines; and approximately 50 Websites, 30 mobile-optimized Websites, and 20 applications. In addition, this segment provides digital and customer relationship marketing services, such as specialized marketing products and services to America's companies; and a consumer database, as well as is involved in brand licensing and other related operations.

The company was founded in 1902 and is headquartered in Des Moines, Iowa."

Investment Thesis

Meredith Corporation is primarily offered as a high-yield, fairly valued dividend growth opportunity. The company has raised its dividend every year since 2000 and their payout ratio was increased in fiscal year 2012, and has held steady since at a range of 50% to 60%. Therefore, this research candidate might be of interest to investors looking for above-average current yield with dividend growth potential.

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Brinker International (NYSE:EAT)

"Brinker International, Inc., together with its subsidiaries, engages in the ownership, development, operation, and franchise of casual dining restaurants worldwide. As of December 23, 2015, it owned, operated, or franchised 1,646 restaurants comprising 1,595 restaurants under the Chili's Grill & Bar brand name and 51 restaurants under the Maggiano's Little Italy brand.

Brinker International, Inc. was founded in 1975 and is based in Dallas, Texas."

Investment Thesis

I offer Brinker International, Inc., as an attractively valued dividend growth and total return opportunity. Additionally, I am encouraged by the fact that they initiated their first dividend in fiscal 2006, and although earnings faltered during the Great Recession, the company increased their dividend each year since instituting one. My one caveat is the company's high debt to capital ratio. However, the company produces ample cash flows to service debt and to continue covering dividends, in my opinion.

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Williams-Sonoma Inc. (NYSE:WSM)

"Williams-Sonoma, Inc. operates as a multi-channel specialty retailer of various products for home. It operates through two segments, E-commerce and Retail. The company offers cooking, dining, and entertaining products, including cookware, tools, electrics, cutlery, tabletop and bar, outdoor, furniture, and a library of cookbooks under the Williams-Sonoma brand, as well as home furnishings and decorative accessories under the Williams-Sonoma Home brand; and furniture, bedding, bathroom accessories, rugs, curtains, lighting, tabletop, outdoor, and decorative accessories under the Pottery Barn brand.

It also provides products designed for creating spaces where children could play, laugh, learn, and grow under the Pottery Barn Kids brand; line of furniture, bedding, lighting, decorative accents, and others for teen bedrooms, dorm rooms, study spaces, and lounges under the PBteen brand; and mixed clean lines, natural materials, and handcrafted collections under West Elm brand.

In addition, the company offers a range of assortments of lighting, hardware, furniture, and home décor inspired by history under the Rejuvenation brand; and women's and men's accessories, small leather goods, jewelry, key item apparel, paper, entertaining and bar, home décor, and seasonal items under the Mark and Graham brand. It markets its products through e-commerce Websites, direct mail catalogs, and specialty retail stores.

As of January 31, 2016, the company operated 618 stores comprising 571 stores in 43 states, Washington, D.C., and Puerto Rico; 27 stores in Canada; 19 stores in Australia; and 1 store in the United Kingdom, as well as 48 franchised stores and/or e-commerce Websites in various countries in the Middle East, the Philippines, and Mexico.

Williams-Sonoma, Inc. was founded in 1956 and is headquartered in San Francisco, California."

Investment Thesis

I consider Williams-Sonoma, Inc. fully valued but not excessively overvalued at current levels. However, the company has historically commanded a premium valuation and the stock currently has momentum coming off of lows set earlier this year. The company offers a moderate current yield, good growth potential and a debt to capital ratio of zero. Although I think this research candidate is investable currently, prudent investors might wait for a slightly better entry point.

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Gentex Corp. (NASDAQ:GNTX)

"Gentex Corporation designs, develops, manufactures, and markets automatic-dimming rearview mirrors and electronics for the automotive industry; dimmable aircraft windows for the aviation industry; and commercial smoke alarms and signaling devices for the fire protection industry worldwide.

It offers automotive products, including interior and exterior electrochromic automatic-dimming rearview mirrors, automotive electronics, and interior and exterior non-automatic-dimming rearview mirrors with electronic features for automotive passenger cars, light trucks, pick-up trucks, sport utility vehicles, and vans for original equipment manufacturers, tier one automotive mirror manufacturers, and various aftermarket and accessory customers.

The company also provides photoelectric smoke detectors and alarms, audible and visual signaling alarms, electrochemical carbon monoxide detectors and alarms, and bells and speakers for use in fire detection systems in office buildings, hotels, and other commercial and residential establishments.

Gentex Corporation sells its fire protection products directly, as well as through sales managers and manufacturer representative organizations to fire protection and security product distributors, electrical wholesale houses, and original equipment manufacturers of fire protection systems.

The company was founded in 1974 and is headquartered in Zeeland, Michigan."

Investment Thesis

I present Gentex Corporation as an attractively valued dividend growth stock. I was attracted to the consistency of their long-term operating history and the resilience they demonstrated during the Great Recession in spite of the industries they operate in. Their dividend record has been consistent providing a compound annual growth rate of 13% since they initiated one in 2003. However, they did freeze their dividend in fiscal 2010. Nevertheless, valuation is attractive, growth is expected to be above-average and the company's debt to capital ratio is only 11%.

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Polaris Industries Inc. (NYSE:PII)

"Polaris Industries Inc., together with its subsidiaries, designs, engineers, manufactures, and markets off-road vehicles, snowmobiles, motorcycles, and on-road vehicles in the United States, Canada, Western Europe, Australia, and Mexico. It operates through three segments: Off-Road Vehicles (ORVs)/Snowmobiles, Motorcycles, and Global Adjacent Markets.

The company provides ORVs, including all-terrain vehicles and side-by-side vehicles for recreational and utility use; snowmobiles, such as independent front suspension, long travel rear suspension, hydraulic disc brakes, liquid cooling for brakes, and a three cylinder engine models; V-twin cruiser motorcycles; on-road quadri cycles and light duty commercial vehicles; and technical riding gears for the snowmobile and motorcycle industries. It also produces or supplies various replacement parts and accessories consisting of winches, bumpers/brush guards, plows, racks, mowers, tires, pull-behinds, cabs, cargo box accessories, tracks, and oils for ORVs; covers, traction products, reverse kits, electric starters, tracks, bags, windshields, oils, and lubricants for snowmobiles; and saddle bags, handlebars, backrests, exhaust, windshields, seats, oil, and various chrome accessories for motorcycles.

In addition, the company sells recreational apparel, such as helmets, jackets, pants hats, goggles, gloves, boots, bibs, and leathers through a network of independent dealers and distributors, as well as through polaris.com, indianmotorcycle.com, klim.com, kolpin.com, cyclecountry.com, proarmor.com, timbersled.com, hammerheadoffroad.com, and 509films.com sites.

It markets its products under the RANGER, RZR, RANGER Crew, Polaris RUSH, Victory Vision, Victory Cross Roads, Cross Country, Indian Chief Classic, Indian Chief Vintage, Indian Chieftain, Roadmaster, Scout, Scout Sixty, Victory Magnum, and Hammerhead Off-Road brand names.

Polaris Industries Inc. was founded in 1987 and is headquartered in Medina, Minnesota."

Investment Thesis

I was attracted to Polaris Industries Inc. because recent weak earnings brought their stock price down from an excessively high valuation to very attractive valuation levels. Additionally, price recovery off of lows since the beginning of 2016 is encouraging. The company is a Dividend Contender on Seeking Alpha author David Fish's CCC lists because it has raised its dividend for 21 consecutive years. The company offers a moderate dividend payout ratio and debt to capital is attractive at only 31%.

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Thor Industries Inc. (NYSE:THO)

"Thor Industries, Inc., through its subsidiaries, designs, manufactures, and sells a range of recreational vehicles, and related parts and accessories primarily in the United States and Canada. It operates through two segments, Towable Recreational Vehicles and Motorized Recreational Vehicles.

The company offers travel trailers under the trade names of Airstream International, Classic Limited, Sport, Flying Cloud, Land Yacht, and Eddie Bauer, as well as sells the Interstate and Autobahn Class B motorhomes; and conventional travel trailers and fifth wheels under the trade names, such as Sequoia, Cameo, Elevation, Cruiser, ReZerve, Sunset Trail, Zinger, Montana, Springdale, Hideout, Sprinter, Outback, Laredo, Alpine, Bullet, Fuzion, Raptor, Passport, Cougar, Coleman, Kodiak, Aspen Trail, Voltage, Landmark, Bighorn, Sundance, Elk Ridge, Trail Runner, Cyclone, Prowler, Wilderness, Shadow Cruiser, Fun Finder, Sportsmen, Vision, Spree, MXT, Venom, Durango, SportTrek, and Sonic.

It also manufactures and sells luxury fifth wheels under the Redwood, Carriage, D Mobile Suites, and Fullhouse trade names; gasoline and diesel Class A and Class C motorhomes under the Four Winds, Hurricane, Windsport, Chateau, Challenger, Tuscany, Outlaw, Axis, Vegas, Palazzo, and A.C.E trade names; lightweight travel trailers and specialty products under the Camplite and Quicksilver trade names, as well as certain private label names; and equestrian recreational vehicle products with living quarters under the Premiere, Silverado, Ranger, Laredo, Trail Boss, and Trail Hand trade names.

In addition, the company manufactures and sells aluminum extrusions and specialized component products to recreational vehicles and other manufacturers. It markets its recreational vehicles through independent dealers.

Thor Industries, Inc. was founded in 1980 and is based in Elkhart, Indiana."

Investment Thesis

Thor Industries, Inc. has demonstrated exceptional long-term growth with the exception of the Great Recession. Additionally, recovery post recession has been exceptional. The company is attractively valued, offers a moderate yield, has little debt and above-average long-term growth potential. Therefore, I consider this research candidate an attractively valued total return opportunity.

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Foot Locker Inc. (NYSE:FL)

"Foot Locker, Inc. operates as an athletic shoes and apparel retailer. The company operates in two segments, Athletic Stores and Direct-to-Customers.

The Athletic Stores segment retails athletic footwear, apparel, accessories, and equipment under various formats, including Foot Locker, Lady Foot Locker, Kids Foot Locker, Champs Sports, Footaction, and SIX:02, as well as Runners Point, and Sidestep. As of January 30, 2016, it operated 3,383 primarily mall-based stores in the United States, Canada, Europe, Australia, and New Zealand.

The Direct-to-Customers segment sell athletic footwear, apparel, equipment, team licensed products, and private-label merchandise through Internet Websites, mobile sites, and catalogs. This segment operates sites for eastbay.com, final-score.com, eastbayteamsales.com, and sp24.com, as well as footlocker.com, ladyfootlocker.com, six02.com, kidsfootlocker.com, champssports.com, footaction.com, footlocker.ca, footlocker.eu, runnerspoint.com, and sidestep-shoes.com.

The company also provides franchise licenses to operate its Foot Locker stores in the Middle East and the Republic of Korea; and Runners Point Germany. It operates 64 franchised stores.

The company was founded in 1879 and is headquartered in New York, New York."

Investment Thesis

I selected Foot Locker, Inc. as a fairly valued dividend growth stock with an emphasis on growth. The company offers a moderate but rapidly growing current yield, has a debt to capital ratio of only 5% and is expected to grow at double-digit rates over the intermediate and longer term.

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Dick's Sporting Goods (NYSE:DKS)

"Dick's Sporting Goods, Inc. operates as a sporting goods retailer primarily in the eastern United States. It provides hardlines, including sporting goods equipment, fitness equipment, golf equipment, and hunting and fishing gear products; apparel; and footwear products and accessories.

The company also owns and operates Golf Galaxy, Field & Stream, Chelsea Collective, and True Runner specialty concept stores; and e-commerce Websites, such as DICKS.com, golfgalaxy.com, fieldandstreamshop.com, and caliastudio.com.

As of January 30, 2016, it operated 644 Dick's Sporting Goods stores, 73 Golf Galaxy stores, and 19 Field & Stream stores. The company was formerly known as Dick's Clothing and Sporting Goods, Inc. and changed its name to Dick's Sporting Goods, Inc. in April 1999.

Dick's Sporting Goods, Inc. was founded in 1948 and is headquartered in Coraopolis, Pennsylvania."

Investment Thesis

I consider Dick's Sporting Goods, Inc. currently fully valued, if not moderately overvalued. However, the company has historically commanded a premium valuation and the stock currently has momentum coming off of lows set earlier this year. The company has no debt and is expected to grow rapidly over the intermediate and longer-term time frames.

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Summary and Conclusions

The Consumer Discretionary Sector is comprised of businesses that sell what are considered nonessential goods and services to the general public. However, just because a good or service is nonessential, it does not mean that it is not in high demand by consumers. Nevertheless, Consumer Discretionary businesses can be problematic during economic downturns.

On the other hand, the good ones tend to recover and often rapidly once the economy turns around. That is clearly evidenced by the nine research candidates included in this article. Therefore, I offer the above Consumer Discretionary research candidates primarily from the perspective of growth and dividend growth.

In part 2C, I will turn my attention to higher-yielding mid-cap companies for those investors seeking higher dividend income. The primary research candidates I will present in part 2C will cover mid-cap REITs with emphasis on current yield and current valuation.

Disclosure: Long TUP,EAT,MDP,WSM,FL,GNTX,THO

Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.

Disclosure: I am/we are long TUP,EAT,MDP,WSM,FL,GNTX,THO.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.