A Housing, a Media, and a Retail Stock for 2013
Declan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In my first article for 2013, I discussed three stocks from the top gun financial sector for the first half of the year. In the second article, I will discuss three stocks from the other current high flying sector, Consumer Discretionary. Consumer Discretionary is an important bell weather sector for the economy. Strength in discretionary stocks is a marker for surplus cash (or credit?) in the market, which is fundamental to driving a recovery. After a lengthy recession, this leadership is welcome.
Horton Inc. D R
Homebuilder Horton Inc. D R (NYSE: DHI) stuck its head over the parapet in early 2012 and hasn't since seen reason to hide again. New housing starts for November of last year were up 22% from the prior year, although that's still less than half of what they were in 2006. However, this growth marks an important stabilization for the housing market, and an environment in which Horton Inc. D R can work a recovery.
The stock reached its nadir in 2009 at $3.56 a share as homebuilders bore the brunt of the mortgage crash. However, even in the latter part of 2011 the stock struggled at $7.87 following some weak sales data during the summer of 2011. But the company has managed to regain earnings performance after a torrid few years, and even grow market share above its share during peak of the housing market.
In addition, there was a 7% growth in average closing price for homes, although a cancellation rate of 27% remains very high when compared to a reported 9% (NAR figure) from the end of 2010. However, 2012 was the most profitable year since the market crash, with double digit growth in sales and closings from 2011. There was a substantial tax benefit of $713 million for the $956 million in reported net income for the year, so $242 million is a truer reflection of the year's return (above 2011, but below 2010 earnings). Next earnings are due at the end of January, which the company is expecting to be "strong."
Heading into 2013, the company is focused on growing market share through acquisitions and "inventory positioning." While 49% of its market is first-time-buyers, the company has stated a continued interest in 'move-up buyers,' which will protect it from becoming a one trick pony should the first-time-buyer market change. If the stock can continue to drive growth by 5% and take market share, it should support continued price appreciation. However, it will be a number of years before it can report $1.5 billion in net income as it did in 2005, but with a current P/E of 7.4, it's much cheaper than competitors Lennar Corp or PulteGroup, which have P/Es of 14.7 and 45.5, respectively.
The next company, Gannett (NYSE: GCI), operates in media publishing, and is best known for USA TODAY. The stock has spent the past few months basing after a solid run from $14 in August to nearly $20 in September, fueled by earnings, better than expected performance from its online pay walls, and its healthy 4.3% yield.
The company's earnings historically come in around expectations, although the past couple of quarters came in slightly ahead. Accounts Receivable and Day Sales Outstanding are within healthy thresholds, and revenue growth is positive after a series of negative growth quarters. The company is looking for a fall of 6% in ad revenue for Q4, but with net growth of around 10%. In Q3 the company reported its first company-wide circulation revenue increase since early 2007, and acquired 30,000 digital subscribers, up 80% over the prior quarter. However, its print division circulation continued to fall, with double digit losses for its Sunday editions, although 40% of its digital subscribers had switched from print versions.
Growth in digital subscriptions has been organic, with 720,000 digital subscribers on books, although it's unclear how many are paid subscriptions; for example, online registration to USA TODAY requires a Facebook account and no billing. The company actually refused to divulge the breakdown in revenue subscriptions between Digital and Print, which suggests the Digital model is still in the acquisition phase, and not generating any meaningful revenue - at least in comparison to its existing Print subscriptions. Of its Digital subscribers, only 10% of its paying subscribers are on annual plans, so there is a level of vulnerability in having the bulk of paying subscribers tied to only 3-month and 6-month plans. However, it's online payment model is not expected to be running at 100% efficiency until the end of 2013, which may improve the digital subscriber spread to longer subscriptions. The company anticipates that, when the online payment model is running at full tilt, it will add an additional $100 million to operating profit for the year. The company will likely look to monetize digital subscribers through advertising, but at the moment their goal for 2013 is to grow membership.
It's television division was the star of Q3, helped by Olympic and political coverage. The company earned $42 million from its political advertising, and $37 million from the Olympics. The company also saw a 42% growth in auto advertising (another key Discretionary sector) over Q3, so Q4 may still offer a level of robustness in this area .
Total revenue for Q3 was $1.31 billion, with annual revenues of around $5.2 billion, so the aforementioned figures are small fry when the larger picture is considered. Digital subscriptions will be the way forward, but monetizing them in a meaningful way will remain a challenge (and not just for Gannett). However, the company is performing well through its regional media market, and has made a number of acquisitions in the social media space which will help the company build its presence in the 'Breaking News' domain.
Urban Outfitters (NASDAQ: URBN) has been a particularly strong performer in the competitive clothing sector, helped by providing a diversified range of brands. The stock benefited from a recent upgrade, which helped the stock post a new all-time high.
The Christmas period is looking like it will be good for the company, with expectations for the period about par with last year, although the "fiscal cliff" may have delayed spending. Where Urban Outfitters has performed well is in the area of Online Sales. According to Trefis, 38% of Urban Outfitters' business came from its Internet & Catalog business. This compares well to the roughly 26% of business attributed to e-commerce by Gap or American Eagle Outfitters. The remainder of its core business is split between its eponymous store and Anthropologie. It's Free People and other brands account for less than 6% of its business.
Sales for Q3 were up 14%, with an impressive 36% growth rate in direct-to-consumer selling. The latter helped offset a 1% drop in comparable store sales, although returns from online sales to stores are charged against store sales; so this gives a somewhat skewed picture of performance. In reality, same store sales were positive, and the growth rate in online sales would be a few percentage points lower. Overall, according to the company, it was the best Q3 in the company's history. The growth in profit was in large part due to a reduction in merchandise markdowns (another sign of a robust consumer).
Approximately 49 new stores are planned for 2013, spread roughly evenly between Urban Outfitters, Anthropologie, and Free People. It's Free People brand has enjoyed fresh success with its partnership with Nordstrom, although specific figures were lacking, bar an overall 9% growth in brand sales. While the Free People brand is not the primary earner for the company, it has seen strong growth overseas, with a UK online shop launched late last year and plans to expand in Europe. Of the core brands, Free People has been a flag flyer for online sales.
Looking at Q4, the company is expecting the strong growth from October and November to continue. It doesn't expect its leaner inventory (against 2011) to impact on sales, although given the level of discounting emails I received over the holidays I suspect sales will not be as high as the company anticipated. However, online sales is where the growth is at, and Urban Outfitters remains well positioned of the retailers to take advantage.
Three quite diverse consumer companies, all performing well and all reflecting underlying strength by consumers. 2013 may be the year where some of the shackles of the recession can be thrown off.
fallond has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!