Staples To Outperform These 2 Bearish Cases

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Includes: ODP, OMX, PG, SPLS, TSN
by: Takeover Analyst

What follows is a list of companies specialized in consumer goods with various degrees of upside. They cover a variety of different industries: food, household products, and specialty retailing. I am most optimistic about Staples due to my faith in a quicker-than-expected recovery. When we hit full employment, greater consumer expenditures will follow and only Staples of the three highlighted herein targets a higher-end market. My main point is that consumers will be more willing to buy pricier items against their substitutes during the full recovery. All ratings are sourced from T1 Banker.

Tyson Foods (TSN)

Tyson trades at a respective 12.2x and 8.4x past and forward earnings with a dividend yield of 0.8%.

Consensus estimates for Tyson's EPS forecast that it will grow by 6.3% to $2.01 in 2012 and then by 15.4% and 4.3% in the following two years. Assuming a multiple of 10x and a conservative 2013 EPS of $2.27, the rough intrinsic value of the stock is $22.70, implying 16.7% upside. The company delivered impressive first quarter results with an EPS of $0.42 and execution across the board. The only area of concern for many investors is, however, the aggravatingly low prices for meat despite reductions in supply. With the investments in emerging markets, I expect this to offset any material downside from low meat prices. Even still, the market is fixated on the bearish case.

Procter & Gamble (PG)

P&G trades at a respective 19.8x and 15.5x past and forward earnings with a dividend yield of 3.1%.

Consensus estimates for P&G's EPS forecast that it will grow by 2.5% to $4.05 in 2012 and then by 8.4% and 8.2% in the following two years. Assuming a multiple of 17x and a conservative 2013 EPS of $4.33, the rough intrinsic value of the stock is $73.61, implying 9.6% upside. Despite all of the hype around Gillette Pro-Glide razor's international debut and the release of Tide Pods, the company still faces considerable competitive pressures. Even still, organic growth of 4% was at the high-end of guidance and set the tone for an excellent year. But with the stock going nowhere over the last half-decade, investors are again fixated on the bearish case. This doubt will limit upside when a full recovery materializes.

Staples (SPLS)

Staples trades at a respective 11.8x and 10.1x past and forward earnings with a dividend yield of 2.7%.

Consensus estimates for Staples' EPS forecast that it will grow by 8.7% to $1.50 in 2013 and then by 9.3% and 16.5% in the following two years. Assuming a multiple of 13x and a conservative 2014 EPS of $1.58, the rough intrinsic value of the stock is $20.54, implying 24.3% upside. The company delivered a strong close to the year with adjusted EPS sequentially growing 5% . Moreover, I believe the bar has been set slightly low for the firm with analysts modeling 9.8% per annum growth over the next half decade - around 100 bps below what is expected for the S&P 500. Management can also cut SG&A, which will unlock significant value as it currently stands at around 20% of revenue. Capex levels, however, are low at 1.5% and management may consider increasing scale through staging a takeover OfficeMax (OMX) and Office Depot (ODP) stores.

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

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