What follows is a list of consumer services firms that cover a variety of industries: Home improvement, gaming and apparel retailing. The Street is most bullish about International Game Technology (IGT) given the market's lack of appreciation over international market share gain. Based on my review of the fundamentals and multiples analysis, I agree with this sentiment. All ratings are sourced from T1 Banker.
Lowe's is rated around a "hold" on the Street and trades at a respective 20x and 15.2x past and forward earnings with a dividend yield of 2%.
Consensus estimates for Lowe's EPS forecast that it will grow by 12.5% to $1.62 in 2012 and then by 10.5% and 20.1% in the following two years. Assuming a multiple of 16x and a conservative 2013 EPS of $1.75, the rough intrinsic value of the stock is $28. The firm has struggled to out-compete competitor Home Depot (HD). Accordingly, it has slowed expansion particularly in areas near to its rivals' stores. With that said, free cash flow yield is positioned to more than double as expenses come down and greater advertising drives volumes. Margins are meaningfully expanding and the ATG Stores acquisition will help establish a secure presence online. I advise that investors consider an investment in Home Depot before Lowe's, but the latter has the potential for higher risk-adjusted returns due to its uncertain prospects.
International Game Technology
IGT is rated a "buy" on the Street and trades at a respective 16.7x and 12.6x past and forward earnings with a dividend yield of 1.6%.
Consensus estimates for IGT's EPS forecast are that it will grow by 7.5% to $1 in 2012 and then by 19% and 8.4% in the following two years. Assuming a multiple of 15x and a conservative 2013 EPS of $1.15, the rough intrinsic value of the stock is $17.25, implying 14.8% upside. The company recently brought in a new CFO, in addition to shuffling up management generally. Gaming companies have historically shown a positive track record of success following such changes. The company further has seen strong global penetration, particularly in Asia. The stock has fallen by 13.8% for the year to date and is near the 52 week low - technical indicators are pointing in its favor. I recommend that investors aggressively acquire shares to exploit this behavorial anomaly. The fundamentals of IGT are sound and will be buoyed up by a recovery.
Abercrombie & Fitch (ANF)
A&F is rated around a "hold" on the Street and trades at a respective 21.8x and 13.9x past and forward earnings with a dividend yield of 1.5%.
Consensus estimates for A&F's EPS forecast are that it will grow by 13.7% to $2.33 in 2012 and then by 48.9% and 32% in the following two years. Assuming a multiple of 15x and a conservative 2013 EPS of $3.43, the rough intrinsic value of the stock is $51.45, implying 6.5% upside. The company had a strong third quarter performance with same-store sales growth of 5%. EPS of $0.27 further was at the high-end of guidance. The second half of 2012 is gearing up to be an inflection since management is targeting peak promotions when cotton prices are expected to decline. Business, however, is fundamentally uncertain given the fickleness of consumer trends. I would recommend that investors steer away from an investment due to poor operational trends and demand uncertainty.
Additional disclosure: We seek IR business from all of the firms in our coverage, but research covered in this note is independent and for prospective clients. The distributor of this research report, Gould Partners, manages Takeover Analyst and is not a licensed investment adviser or broker dealer.