Consumer Discretionary: The Next Bull Market?

Includes: MNST, PETM
by: David Silver

Despite the weakness in the U.S. economy, namely the jobs numbers, consumer discretionary stocks have been performing extremely well. Two names that have continued to cross my radar are PetSmart (NASDAQ:PETM) and Monster Beverage (NASDAQ:MNST). Even in a slow economy, consumers are going to spend money on their pets. The energy drink craze in America is far from over, and even more, it is spreading around the world.

PETM has beat the Street's earnings per share forecasts in each of the past four quarters, and estimates for the current quarter (and year) are on the rise as well. PetSmart posted a 7.4% increase in same-store sales in the first quarter, as comparable transactions were positive for the eighth straight quarter. While pet ownership in the U.S. has stayed steady in recent years, spending has climbed in each of the past 10 years, according to the American Pet Products Association.

About 73 million homes, or 62 % of American households, own a pet, according to a 2011-2012 survey by APPA. That was up from 56% of U.S. households in 1988 when the survey was first conducted and unchanged from 62% in 2008. However, spending is expected to rise to $52.9 billion this year from $51 billion last year and from $43.2 billion in 2008. The stock is up more than 50% over the past year, but gross margin and operating margin continue to improve. The company has ample cash on hand and is one the best performing stocks in its sector. Plus, the stock has dividend yield of 0.90% and I expect another dividend increase over the next six months.

Monster Beverage saw a nice pop following a rumor that The Coca-Cola Company (NYSE:KO) was interested in purchasing the energy drink maker; however, those rumors turned out to be false. I do not put it past KO though to get a piece of MNST as the synergies are apparent. The stock missed expectations only once in the past four quarters, falling short in the December quarter by a penny. The price to earnings ratio is a bit rich right now, but I attribute most of that to the KO purchase rumor. MNST currently has a 23% market share in North America and is finally turning a profit overseas, which accounts for roughly 15% of total revenue. Gross margin continues to be on the rise, improving to 53.1% from 52.1% year over year. I expect this to only improve as many of the cost pressures that have hampered the past few quarters are lessening.

So while people may not be out buying cars or luxury goods, consumers are treating their pets to that extra toy, and that can of Monster Energy drinks, instead of a cup of boring old coffee. Any weakness in these stocks as a result of the overall jitteriness stemming from Europe should be viewed as a buying opportunity for the stock. I like PETM to form support at $60 with room to $70 and then $79. For MNST, I expect KO to make a partial acquisition in the coming months; however, with support at $70.00, the stock has room to appreciate to $83 and then $89.

Disclosure: I am long KO.