Consumer Goods: 1 Stock To Buy, 2 To Treat With Caution

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Includes: ADM, KHC, SPLS
by: Takeover Analyst

We look at three firms operating in the consumer goods sector. They cover a range of industries: specialty retailing, food products, and agricultural processors. Staples (NASDAQ:SPLS), the only company not related to the food sector, is preferred on the Street with a "buy" rating. Based on my review of the fundamentals and multiples analysis, I similarly find the most attractive risk/reward for Staples. Note that all ratings mentioned herein have been sourced from T1 Banker.

Staples

Staples is rated a "buy" and trades at a respective 11.2x and 10.3x past and forward earnings, with a dividend yield of 12.6%.

Consensus estimates for Staples' EPS forecast that it will grow by 7.9% to $1.37 in 2012, and then by 8.8% and 12.1% in the following two years. Assuming a multiple of 13x and a conservative 2013 EPS of $1.44, the rough intrinsic value of the stock is $18.72, implying 22.5% upside.

As I described here, the company may take over either Office Depot (NYSE:ODP) or OfficeMax (NYSE:OMX) to improve scale and spread out SG&A costs. Since the company attracts a higher-end market than its two smaller competitors, it could dramatically realize revenue synergies through such takeover activity. Aside from its M&A strategy, Staples is also strong organically. It is able to differentiate itself from its competitors through services that improve the sustainability of revenue streams.

HJ Heinz Company

Heinz (HNZ) is rated around a "hold" and trades at a respective 17.8x and 14.8x past and forward earnings, with a dividend yield of 3.6%.

Consensus estimates for Heinz's EPS forecast that it will grow by 8.1% to $3.33 in 2012, and then by 7.8% and 8.9% in the following two years. Assuming a multiple of 16.5x and a conservative 2013 EPS of $3.53, the rough intrinsic value of the stock is $58.25, implying 9% upside.

Management has done a good job in increasing prices to offset volatile commodity prices. The company also has a strong portfolio of brands and remains focused on improving productivity. On the other hand, a weak housing market has limited the sales momentum for restaurants.

Archer Daniels Midland

Archer Daniels Midland (NYSE:ADM) is rated a "hold" and trades at a respective 14.2x and 10.2x past and forward earnings, with a dividend yield of 2.2%.

Consensus estimates for ADM's EPS forecast that it will decline by 26.2% to $2.56 in 2012, and then grow by 22.3% and 11.2% in the following two years. Assuming a multiple of 12x and a conservative 2013 EPS of $3.08, the rough intrinsic value of the stock is $36.96, implying 15.6% upside.

Conditions weakened during the third quarter, as evidenced by poor global oilseeds margins and lower results in corn. As a result, the company is cutting back on supply and labor. Uncertainty on consumer expenditure will keep leveraged players in this market volatile over at least the next half of 2012.

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