3 Buys, 1 Sell Among AIG's Top Picks

by: Rash Menaria

American International Group, Inc. (NYSE:AIG) is one of the biggest international insurance organizations, serving customers in more than 130 countries. The following is a list of AIG's top equity buys in the December quarter, as reported in their most recent 13F filing.



Shares Held as on 09/30/2011

Shares Held as on 12/31/2011

Change in shares

Applied Materials Inc.





Vonage Holdings Corporation





United Parcel Service Inc.





American Express Company





Starbucks Corp.





Jones Apparel Group Inc.





Tempur Pedic International Inc.





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I believe Starbucks, American Express and Applied Materials are good long candidates among above stocks. However, one stock in the above list where I have a sell rating is United Parcel Services.

Starbucks is the leader in specialty coffee retailing, with approximately 17,000 stores worldwide. There are 11,000 stores in the US and 6,000 stores internationally, mostly in Canada, Japan and the UK. The company operates in 4 segments; US stores, International stores, the Consumer Products Group, which sells products outside of Starbucks, and Seattle's Best Coffee.

Following strong 1Q 2012 results, I am incrementally more positive on Starbucks. Despite commodity headwinds, it posted an impressive sales increase of 9% y-y. Americas and Asia Pacific posted strong sales with 9% and 28% increase in sales respectively. China momentum is expected to continue as it sees increased acceptance of the brand with 250,000 loyalty program members. Its relatively new CPG business characterized by low capital and high margins is also going strong. CPG reported a 72% increase in revenues. Further to ease its cost pressures, SBUX has locked in most of its coffee needs up to 2013.

I believe SBUX is likely to continue this momentum with further loyalty investments, new product offerings such as Blonde Roast Coffee and Evolution Fresh and CPG segment (Via instant and K-Cup) gaining traction fueling its long term growth opportunities.

American Express Company is a leading global payments and travel company. It provides charge and credit payment products and travel-related services to consumers and businesses. The company's business remains concentrated in the U.S. which accounts for 70% of revenues.

Despite concerns about slowing billing business, AXP's management indicated that January trends did not show further slowing in Europe or global business. According to the management, AXP is expected to tighten its spending trends and control expenses going forward in 2012. It has set a target of achieving pre-crisis expense ratio levels of 67% against current levels of 75%.

I believe AXP is well positioned to capitalize on the transformation happening in the payments industry with alternative payments and new initiatives. Management noted that online payments growth on AXP network outgrew the industry indicating market share gains. Serve, their digital wallet seems to be gaining incremental demographic consumers and remains a key element of their alternative payments strategy.

I believe American Express' unique spend-centric business model gives it a clear advantage over its competitors' lend-centric model. With the current trading levels at the lower end of its historical range and strong revenue and earnings prospects in the coming quarters, I recommend a buy.

Applied Materials, Inc. provides manufacturing equipment, services, and software to the semiconductor, flat panel display, solar photovoltaic and related industries worldwide. It operates four business segments; Silicon Systems Group, Applied Global Services segment, Display segment and Energy and Environmental Solutions segment.

2011 was a difficult year for semiconductor stocks in general, and AMAT in particular. AMAT's SSG revenues declined and it faced market share losses. However, I believe its Display and EES segments demand has hit bottom now and is unlikely to deteriorate any further. Higher capex guidance by semiconductor large caps indicate a likely recovery in the semiconductor industry in 2012, and AMAT is well-positioned to capitalize on this situation, driven by a beneficial mix shift in Wafer Fabrication Equipment (PVD, CVD, etch and CMP) and growth potential in solar and flat panel displays. Further, increased innovation in transistor fabrication is expected to benefit AMAT, because of its significant market share in front end fabrication equipment.

After several quarters of resource diversion and share loss in its WFE, I believe AMAT's share price has bottomed out. AMAT is refocusing on the semiconductor business, with a better WFE mix and improved cost structures across all its businesses. As the semiconductor industry recovers, AMAT is well-positioned to outperform its peers.

United Parcel Service Inc. is one stock in the above list which I would recommend selling. UPS is a package delivery company, providing transportation and logistics services in the United States and worldwide. It operates in three segments, U.S. Domestic Package, International Package and Supply Chain and Freight.

UPS is expected to face several headwinds in the near term. Domestic volume growth is likely to be stunted due to unfavorable economic condition. Cost pressures are expected to increase due to rising pension expense and challenges in productivity realization. Despite significant volume growth in international package business, recession in eurozone and exchange rate concerns are likely to offset this, leading to slower revenue growth. All these factors translate into a slower EPS growth than consensus estimates. The current trading multiple also seems to be on the higher side of the historical range. With a modest outlook in the medium term, cost headwinds in 2012 and macro trends in Europe the reward to risk over near term is not appealing enough.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.