What follows is a list of consumer companies with various degrees of upside. All four of these companies have impressive brands and thus should be considered as a way to hedge against macro uncertainty. I find that Kraft (KFT) has the strongest investment case due to how its impressive growth is complemented with a 3% dividend yield and a beta of 0.5. Management is also top notch at the company and has properly explored strategic alternatives as a way of unlocking value. Starbucks (SBUX) is perhaps the most speculative investment of the stocks mentioned herein. Despite its history of saturating the market, Starbucks is now expanding into grocery stores and analysts still see an impressive growth trajectory.
Kraft trades at a respective 19.7x and 14x past and forward earnings with a dividend yield of 3%. Consensus estimates for Kraft's EPS forecast that it will grow by 10% to $2.52 in 2012 and then by 11.1% in both of the following two years. Assuming a multiple of 17x and a conservative 2013 EPS of $2.76, the stock would hit $46.92 for 19.5% upside.
During the first quarter of 2012, Kraft delivered excellent returns with a 6% rise in organic revenue. Even Europe was up 7% organically. Kraft has been taking away market share from its competitors, which will place in a particularly attractive position when the economy fully recovers. With the company splitting into two companies, management will be able to focus more on its core businesses and improve return on invested capital. I rate the company a "buy".
PepsiCo trades at a respective 16.5x and 15x past and forward earnings with a dividend yield of 3.2%. Consensus estimates for PepsiCo's EPS forecast that it will decline by 6.6% to $4.11 in 2012 and then grow by 8% and 8.8% in the following two years. Assuming a multiple of 17x and a conservative 2013 EPS of $4.41, the stock would hit $74.97 for 12.5% upside.
Many investors have called for the ousting of Chairman & CEO Indra Nooyi. During her tenure, she has seen Coca-Cola (KO) make impressive market share gains while PepsiCo lagged behind. Over the last 5 years, the stock has gone nowhere despite a powerful brand. With a dividend yield of 3.2%, management has showcased confidence over free cash flow. Even still, more strategic endeavors and global penetration would go a long way in making up for missed opportunities. The potential for a shakeup makes an investment worthwhile.
Sara Lee (SLE)
Sara Lee trades at a respective 157.2x and 21.2x past and forward earnings with a dividend yield of 2.1%. Consensus estimates for Sara Lee's EPS forecast that it will grow by 16.7% to $0.91 in 2012 and then by 14.3% and 16.3% in the following two years. Assuming a multiple of 17x and a conservative 2013 EPS of $1.01, the stock would fall to $17.17 for 22% downside.
This household product marketer is relatively near its 52-week high but has limited volatility to make it a worthwhile play on the full recovery. It is 10% less volatile than the broader market, which means that risk-adjusted returns won't be, on average, as high as those of stocks with higher betas. The 2.1% dividend yield is also behind some peers that are trading at lower multiples, like Clorox (CLX). Accordingly, I recommend a "hold" on Sara Lee for now and perhaps buying if shares near the 52-week low.
Starbucks trades at a respective 32.1x and 23.9x past and forward earnings with a dividend yield of 1.2%. Consensus estimates for Starbuck's EPS forecast that it will grow by 22.4% to $1.86 in 2012 and then by 24.7% and 21.6% in the following two years. Assuming a multiple of 20x and a conservative 2014 EPS of $2.78, the stock would be roughly at fair value.
The company is led by the arguably the best management in its field. Billionaire Howard Schultz was able to create one of the most powerful brands by saturating the market. Through pushing products into grocery stores, he now has a powerful well to cross-sell different revenue streams. While Starbucks remains a risky bet due to the high multiples that it trades at, I don't see these multiples depressing to normal levels of 16x.