JPMorgan's Favorite Consumer Stocks For 2012: Part II

by: Insider Monkey

JPMorgan's Noelle V. Grainger published a report on December 9th and came up with a list of stocks in the consumer space which he thinks will outperform their respective industries as well as the market. The report isn't publicly available but we will provide the highlights of Grainger's top picks. Keep in mind that this is a continuation of an earlier published article.


Despite adverse macro conditions, this market sector is not expected to slow down in terms of top line growth. The market has shown that there have been no increases in cancellations or an increase in attrition. Corporate rates are likely to perform better, indicating mid-single digit increases, which is better than current values.

Wyndham Worldwide (NYSE:WYN) has been picked as the best stock due to a current under-appreciation of its ability to generate cash flow, a solid balance sheet, and absence of large risks. Its stock is currently trading at $35.84 per share and can trade at $46 whilst current earnings per share of $2 are forecasted to continue rising. Wyndham has a market capitalization of $5.5 billion.


JPMorgan forecasts that the slow employment and wage growth rates of 2011 will continue over the next year. This is why they recommend that investors pick stocks which are less prone to volatile sales and margins like Yum Brands (NYSE:YUM).

Brinker International (NYSE:EAT) has impressed JPMorgan by showing off its 'bigger not better' idea, which rests solely on improving the employee/customer satisfaction. A new kitchen system initiative is the sole focus of the company and it is expected to generate an increase in prices by 4.5% along with a growth in earnings per share. Its stock is currently trading at $23.78 and is expected to go north of $31. Earnings per share of $1.52 are expected to reach $2.25 by the end of 2012. Brinker International has market capitalization of $1.9 billion.

Retailing- Broadlines, Apparel & Footwear:

JPMorgan recommends a balanced approach in stocks for 2012 with an overweight rating given to Macy’s (NYSE:M) and J.C. Penney (NYSE:JCP) respectively, due to long-term core holding and turnaround opportunities in these companies. An underweight rating has been given to Kohl’s (NYSE:KSS), which is expected to be used only as a source of funds. The next year is expected to be promotional for moderate department stores as competition is likely to increase. The eurozone crisis is expected to have a negative impact on high-end spending while escalating unemployment levels will hurt middle/low end spending for this group.

Macy’s (M) has been voted as the best pick by JPMorgan partly due to its cheap retail trades and sustained momentum in the top-line. Continued promotional competition is likely to increase in 2012 but can be offset by Macy’s if it continues to focus on brand, price, and quality. Macy’s is expected to repurchase much of its shares in the next year due to an availability of excess free cash flow. The current price per share of Macy’s is at $32.95 and has a target price of $36. It has a market capitalization of $13.8 billion and earnings per share of $2.11

Retailing- Hardlines/Discounters:

With the excessive store expansion by retailers, only a few are now able to reap the benefits of crowded stocks. These companies are dependent on the domestic market due to their macro-driven characteristics. JPMorgan believes that consumers will remain conservative in the first quarter of 2012. Coupled with the slowdown in job creation, it is best to remain defensive about these stocks due to a presence of large uncertainties.

Costco (NASDAQ:COST) is the best idea for 2012 due to the presence of a strong growth in sales, notable merchandising tactics, and value-oriented consumers. Core component growth is expected to be in the mid-single-digit for this group. Also, growth in sales and an increase in membership fees are expected to increase earnings. Currently, the stock price of Costco is at $88.06 and has a target price of $94. Earnings per share of $3.4 are expected to go north of $4.44 next year. Market capitalization for Costco is $38.16 billion.

Retailing- Specialty:

The sluggish consumer confidence and uncertainty around new fashion is a trend that will continue on to 2012. Despite this weakness in the demand side, the supply side will show a highly promotional environment with companies benefiting with better positioning. Lower costs of cotton in the second half of 2012 and high costs of labor will determine the profits from this market segment, with growth expected from an expansion in Europe, Asia, and Canada. Retailers will be able to increase returns with the closure of underperforming mall-based stores.

Ulta Salon, Cosmetics & Fragrance (NASDAQ:ULTA) is the best pick of this industry due to its ability to double the store-base and a strong competitive position. With the shift towards specialty stores, Ulta will benefit from a competitive advantage due to its broad product selections, a continued addition of prestige brands, and an improved loyalty program. An additional benefit- the company has new store openings at 30% lower volume than mature stores, giving the company a 3-5% increase in annual comp growth. The shares of ULTA are being traded at $72.93 and JPM has a target price of $80. Its current earnings per share of $1.17 are predicted to double by the end of next year. Ulta has a market capitalization of $4.5 billion.


This market segment is expected to show continued profit growth in the medium term, showing resilience to the economic recession. With the absence of a large competition (there being only three major players in the U.S. market), each company has projected a target of continued medium-term profit growth coupled with generous dividends.

Reynolds American (NYSE:RAI) is the best pick for this market segment due to a forecasted growth in EPS over the medium term. JPMorgan believes that if the company focuses on its portfolio of brands, reduces its cost base, and repurchases equity, it can generate value to shareholders. The current price per share is $41.63 and earnings per share of $2.49 are expected to see a moderate increase while the market capitalization currently stands at $24.27 billion.

Household & Personal Care Products:

The developed markets have shown continued weakness despite the growth in emerging markets. The upcoming year is expected to show sluggish development in markets with low-end consumers being the weak point; JPMorgan is expecting a slowdown in the growth of EPS. Despite the low economic performance, pricing and cost inflation will be beneficial for the economy and this sector, generating greater revenue and even productivity.

Procter & Gamble (NYSE:PG) is selected as the top pick of this industry due to an expected growth and acceleration in core earnings growth for 2012. Its shares are currently trading at $64.84 and are expected to reach a target price of $75 in the next year. Procter & Gamble has a market capitalization of $178.4 billion and earnings per share of $3.95, which are expected to rise.

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