3 Consumer Services Companies Eyeing More Than 10% Upside

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Includes: CVC, HD, SWY
by: Takeover Analyst

We look at a list of consumer services companies with 10% or more upside. They cover diverse industries: food retailing, broadcasting, and home improvement. Two of the companies, Safeway (NYSE:SWY) and Cablevision (NYSE:CVC), are rated weak at a "hold", which is pessimistic by Street standards. Safeway is my preferred pick due to its "underdog" story and low expectations, which has set the bar low for high risk-adjusted returns.

Safeway

Safeway is rated a "hold" and trades at a respective 14.3x and 10.5x past and forward earnings, with a dividend yield of 2.6%. Consensus estimates for Safeway's EPS forecast that it will grow by 10.1% to $1.96 in 2012, and then by 7.1% and 11.9% in the following two years. Assuming a multiple of 14x and a conservative 2013 EPS of $2.05, the rough intrinsic value of the stock is $28.70, implying 30.9% upside.

Despite the Street's pessimism, the company beat consensus in the recent fourth quarter, with higher fuel prices and greater ID business fueling top-line growth. Strong secular trends in the West Coast will further boost confidence when the economy recovers. On the other hand, net debt is expected to increase as ROIC stays roughly flat at 9%.

Cablevision

Cablevision is rated a "hold" and trades at a respective 17.7x and 12.1x past and forward earnings, with a dividend yield of 4%. Consensus estimates for Cablevisions' EPS forecast that it will decline by 4.9% to $0.97 in 2012, and then grow by 26.8% and 31.7% in the following two years. Assuming a multiple of 14x and a conservative 2013 EPS of $1.18, the rough intrinsic value of the stock is $16.52, implying 11.1% upside.

I believe that the company will be a takeover target, given that the Dolan family has tried to purchase the firm several times. With the brand strong and impressive profitability, it would be substantially accretive to most media companies. I recommend investing in the M&A play.

Home Depot

Home Depot (NYSE:HD) is rated a "buy" and trades at a respective 19.8x and 15.3x past and forward earnings, with a dividend yield of 2.4%. Consensus estimates for Home Depot's EPS forecast that it will grow by 15.8% to $2.86 in 2013, and then by 12.6% and 13% in the following two years. Assuming a multiple of 18x and a conservative 2014 EPS of $3.17, the rough intrinsic value of the stock is $57.06, implying 16.1% upside.

Of the last 30 revisions to estimates, all have gone up for a net change of 3.8%. The company, led by strong management, is benefiting from adjacent store closings of rival Lowe's (NYSE:LOW). Home Depot is also 20% less volatile than the broader market, and is thus an attractive defensive investment when factoring in the 2.4% dividend yield.

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

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. Investors are cautioned to perform their own due diligence.