With European nations lining up for bailout funds, American economic data piling on evidence of economic slowing, and the latest consumer confidence and spending measures showing a loss of faith, it would seem no seller of goods or services should find favor. Yet, one company's trash, which in this case is the deteriorating environment for retailers, is another company's treasure. These five firms should benefit from the pain of the rest if consumer spending gets tighter. I like some of the names more than others, so pay close attention.
Just over the course of the last week, Spain and Cyprus requested rescue funds from the EU. The positive results of the EU summit should ease the pressure on sovereign debt yields, but not the recession that's emerging in Europe. In the United States, from employment data to manufacturing metrics to consumer spending, there's a bad tone to the sad song of the economy. And last week, the Conference Board's latest take of Consumer Confidence, the Reuters/University of Michigan Consumer Sentiment Index and the latest consumer spending data left much to be desired.
In a desert, one can still find water if he knows where to look. These five stocks represent a refreshing glass of water for when consumer spending dries up. Some are obvious and others you may not have considered, but each should do better than traditional department store retailers like J.C. Penney (JCP) and Sears (SHLD) when times get tough. A few names to consider for a consumer drought are Dollar Tree (DLTR), eBay (EBAY), Amazon.com (AMZN), Wal-Mart (WMT) and Cash America (CSH). Yet, the company specifics show some might be better than others.
Dollar Tree is a discount variety store offering products for sale at a fixed price of a dollar. Dollar Tree has 4,451 stores operating in 48 states and 5 Canadian provinces. It's the perfect destination for cash strapped Americans, which would seem to be a sizeable group that's increasing in numbers these days. Though some might say you get what you pay for, a good number of our countrymen have either had no other choice or are willing to make the tradeoff. And DLTR shares just split 2-for-1, making them more appealing to retail shareholders.
The stock was down Wednesday and Thursday in sympathy with peers, as Family Dollar (FDO) and Dollar General (DG) offered the market reason for concern. Still, RBC Capital Markets analyst Scot Ciccarelli is on record saying the "small box" concept had about 7% of an $830 billion market. As long as the economy slugs along, it would seem the group could continue to take market share from shoppers in need of bottom dollar deals.
Dollar Tree sports a beautiful five-year chart that reflects its success through the economic sluggishness of the period. DLTR trades at a P/E ratio of about 20X our EPS estimate for the next 12 months ($2.67), which is simply based off the average of the analysts' consensus EPS estimates for fiscal year 2013 and 2014, ending in January. That compares well with this year's expected growth rate of 23% and relatively well with Wall Street's consensus 5-year growth forecast of 17.8% (P/E/G ratio of 1.1X). I would use the week's weakness to add to holdings.
eBay provides online platforms, services and tools to help merchants and individuals in online and mobile commerce and payments in the U.S. and internationally. In a difficult economy, the used goods market finds heightened demand, and that's what a whole lot of people use eBay for, to buy and sell used goods. Of course, merchants and individuals also trade new goods via eBay's platforms. Plus, the company's payments system, Paypal, is a major tool for ecommerce.
EBAY trades at 16.6X our earnings per share expectations for the next 12 months, based on the average of the December ending 2012 and 2013 consensus estimates. That's only slightly higher than the EPS expectations of Wall Street for the next two years. I like EBAY's long-term PEG ratio of 1.25X by my calculation; it's not expensive for a company well situated for the day's economy.
Amazon.com also provides an online platform for ecommerce and sells goods of its own on the web as well. Nonstore retailers like Amazon.com have produced regular sales growth rates exceeding other retail segments, clearly illustrating the segment's market share gains as people gravitate to the web and grow more comfortable with ecommerce. Amazon.com also produces and markets its Kindle branded e-readers, including its new tablet computing device, the Kindle Fire. The success of the business model has been plain to see in the company's long-term chart.
Still, I recently raised concern regarding new dynamics in its competitive environment. Target (TGT) stopped selling Amazon's Kindle branded products in its stores, and so I warned investors that if other retailers followed that lead, it could hamper Amazon's performance and its shares. AMZN trades at 89X its 2013 EPS estimate, so it's not cheap, but the 5-year growth projection of analysts' is set at roughly 33%. Still, the PEG ratio that produces (on a 2013 EPS estimate) is still 2.7X. It's my least favorite of the group because of its valuation, but one of my favorite ideas otherwise. Unfortunately, it's not been a secret for quite some time.
Wal-Mart is no secret either. In fact, it's America's most important retailer and one of the nation's largest employers. In my view, it has begun to show less benefit from its traditional market share gains, which have historically come on consumers' trading down the retail ladder. Because it's such an important retailer now, it seems to me to be more closely reflecting broader economic trends in consumer spending. It's like we've accepted a new status quo for America and poverty and discount shopping dominate. I know most of my readers will not agree, but I suppose that's why you are reading me.
Wal-Mart has enjoyed a spike higher since its last earnings report release in mid-May, when it beat the Street's estimates for its fiscal first quarter. The market was enthused by the 2.6% same store sales growth produced by Wal-Mart's namesake division in the U.S. and its total U.S. sales growth of 5.9%. Management attributed the gains to a refocus on low-priced value. The stock has probably already adjusted for the company's fix, so it's my second to least favorite on this list. WMT has a P/E ratio of 13.6X my EPS estimate for the next 12 months ($5.125), which gives it a PEG ratio of 1.6X on an 8.3% long-term growth forecast, a bit pricey for my taste.
The last name on this list, but one of the most interesting, is Cash America Int'l . It's a pawn shop operator baby! What could be better for tough times then a pawn shop operator? It may not be obvious, but that serves to categorize the company within the financial sector. Pawn shops make collateralized loans as their main business operation, but CSH serves the poor in many other ways as well, including check cashing etc. Cash America operates 1,080 locations in the United States and Mexico.
The company looks like a steal based on basic valuation, with a P/E ratio of 8.8X its December 2012 consensus estimate. Analysts see growth this year of 16.5% and 16% over the next five years. With a PEG ratio of 0.5X, the stock would seem to scream buy, but as an analyst I came to understand that there's usually a good reason for a deep discount. I surveyed the "risk factors" in the company's 10K, and found one risk I had considered. The company obviously holds gold in its inventory and so is vulnerable to sudden changes in the price of gold. Also, its short-term loans have come under increasing regulatory scrutiny, and consumer protection advocates are keeping an eye on these types of lenders. Since my outlook for gold is for an increasing price trend, I am put at ease. The company's fee structure may be threatened by consumer advocates, but I think the valuation of the shares more than compensates for it while leaving a value opportunity in place. Thus, CSH remains a stock I would recommend for a hedge against consumer strife and economic trouble.
As you can see, company specifics play an important role in analysis. It should be obvious, but there's no silver bullet investment for a certain situation, not without vetting company specific risks and assessing valuation. That said, I suggest DLTR, EBAY, CSH, WMT and AMZN should be considered in that order and with key risks remaining in focus. None of these stocks should be bought and forgotten, but I currently feel most comfortable with DLTR and EBAY among the five.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.