Goldman Sachs: 2013 Buy-Rated Stocks with Share Repurchase, Yield

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While a handful of analysts expect the S&P 500 index to breach the record 1,565.15 close reached on October 9, 2007, I believe the market performance in 2013 could be uneven given the need for continued legislative action in Washington. On Thursday, January 10, the S&P reached a five-year closing high of 1472.12, which is only 6 percent lower than the above-mentioned record high.

Data from FactSet Research indicates the earnings growth rate for S&P 500 companies is expected to be a paltry 0.2% for 2013, if one excludes the financial sector. Therefore, estimates for the S&P index will need to be reduced at some point if corporate earnings hit a near-term 2013 ceiling. Market participants are finally seeing decreased expectations come to fruition in shares of Apple, and I expect a similar process will manifest with the S&P 500 if the current earnings season fails to deliver. Technology analyst Gene Munster of Piper Jaffray has finally begun to trim his price target on Apple, first from $910 to $900, and now from $900 to $875.

Given the potential for an unsettling market environment, I believe it’s worthwhile to consider a recent equity research report authored by Robert Boroujerdi, a Goldman Sachs partner and Americas co-director. In a note to clients, Boroujerdi highlights 23 of the firm’s buy-rated companies that 1) have the added tailwind of EPS accretion through share repurchases and 2) a healthy dividend yield. Specifically, Goldman believes each of the listed equity securities is more attractive than bonds and should be owned by investors seeking an added level of safety.

Among the 23 securities which meet the Goldman criteria, here are three of my top picks which offer the greatest upside on a fundamental basis, in addition to the EPS accretion and dividend yield tailwinds.

Coca-Cola Enterprises (NYSE: CCE)

This publicly-traded company is the Western European bottling partner for the global Coca-Cola brand. Shares have risen more than 30% in the past 52 weeks as the company benefited from market share gains in Europe and sponsorship of both the London 2012 Olympic Games and Euro 2012 soccer championship.

On December 18, CCE management provided a business update and 2013 guidance to investors through a formal press release. The company reaffirmed its full-year earnings per share guidance of $2.20–$2.24, with results expected at the higher end of the range. Additionally, management states it expects fiscal 2013 earnings per share to increase 10 percent on a comparable and currency neutral basis.

Based on management guidance and the earnings accretion from share repurchases, I believe shares of Coca-Cola Enterprises could rise in the mid-to-high teens (15–19%) during the course of the next 12 months. Barron’s also highlighted Coca-Cola Enterprises in a Saturday, October 20 feature piece titled Where to Find Dividends That Grow.

Coca-Cola Enterprises will release fourth-quarter 2012 earnings before the market opens on Thursday, February 7. The company’s 2012 fiscal year ended on December 31.

Lowe’s Companies (NYSE: LOW)

With a market capitalization of $40 billion, Lowe’s is the second largest home-improvement retailer in the world behind the venerable Home Depot. Shares of Lowe’s have risen more than 36 percent in the past 12 months, with a substantial portion of the gains coming in the latter part of 2012. Lowe’s shareholders have benefited from management’s efforts to decrease SG&A and capital expenditure, which has resulted in overall gross margin improvement. Investors are also betting that a continued improvement in the U.S. housing market will increase Lowe’s top-line sales.

Goldman Sachs believes Lowe’s earnings could increase by 8 percent alone in 2013 simply due to the company’s share repurchase initiatives. When combined with a dividend yield of 1.8 percent, shareholders could see a total return of nearly 10 percent given all other variables remain constant.

Lowe’s fiscal year ends on the Friday nearest the end of January. The company is scheduled to release fourth-quarter and full year 2012 results on Monday, February 25.

Wyndham Worldwide (NYSE: WYN)

Goldman Sachs believes shareholders of Wyndham Worldwide could earn a total return of nearly 12% during calendar year 2013 when considering the company’s 1.6% dividend yield and expected EPS accretion of 10%. Shares of the Parsippany, New Jersey based hotel operator have risen more than 40% in the last 12 months. The company is benefitting from a strong vacation rental business and continues to expand both domestically and internationally. On September 14, Wyndham announced an acquisition of Shell Vacations, which operates 19 managed resorts in North America.

In addition to meeting the criteria for EPS accretion, Goldman added Wyndham Worldwide to its Conviction Buy list on December 10, citing the improved health of the U.S. consumer and growth in the vacation rental market.

<table> <tbody> <tr> <td> </td> <td><strong>Coca-Cola Enterprises</strong></td> <td><strong>Lowe's Companies</strong></td> <td><strong>Wyndham Worldwide</strong></td> </tr> <tr> <td><strong>Market Cap</strong><span> ($)</span></td> <td>9.6 B</td> <td>40.3 B</td> <td>7.9 B</td> </tr> <tr> <td><strong>P/E Ratio</strong></td> <td>14.8x</td> <td>21.3x</td> <td>21.9x</td> </tr> <tr> <td><strong>Beta</strong></td> <td>1.3</td> <td>1.1</td> <td>3.0</td> </tr> <tr> <td> </td> <td> </td> <td> </td> <td> </td> </tr> <tr> <td><strong>EPS Accretion</strong></td> <td>11.1%</td> <td>8.0%</td> <td> 9.8%</td> </tr> <tr> <td><strong>Ann. Dividend/Yield</strong></td> <td>$0.64/1.9%</td> <td>$0.64/1.8%</td> <td>$0.92/1.6%</td> </tr> <tr> <td><strong>Accretion + Yield</strong></td> <td><strong>13.0%</strong></td> <td><strong>9.8%</strong></td> <td><strong> 11.4%</strong></td> </tr> <tr> <td> </td> <td> </td> <td> </td> <td> </td> </tr> <tr> <td><strong>Jan. 11 Closing Price</strong></td> <td>$33.49</td> <td>$35.83</td> <td>$56.02</td> </tr> <tr> <td><strong>Goldman Target Price</strong></td> <td>$39.00</td> <td>$38.50</td> <td>$62.50</td> </tr> <tr> <td><strong>Accretion + Yield Ranking</strong></td> <td>4 out of 23</td> <td>7 out of 23</td> <td>5 out of 23</td> </tr> </tbody> </table>

Railroad sector downgrade: Fundamentals need to come first

On January 10, Goldman Sachs decreased its expectations for the overall railroad industry by downgrading the sector to Neutral from Attractive. The analysts at Goldman believe other industries have greater leverage to a rebound in global trade for 2013, and made this announcement despite having included North American railroad operators CSX (NYSE: CSX) and Norfolk Southern (NYSE: NSC) on their list of 23 buy-rated securities only a few weeks prior.

The Jacksonville, Florida based CSX and the Norfolk, Virginia based Norfolk Southern both meet Goldman’s criteria of at least 5 percent total return through combined dividend yield and share repurchase. Norfolk Southern pays a higher dividend and its buyback plan is more significant than CSX, therefore it is positioned higher on the list.

However, shares of CSX have fallen more than 10% in the past 52 weeks, compared to a 16% decline for Norfolk Southern. I felt readers should be aware of Goldman’s change in posture, as it reaffirms the view that stock selection needs to occur primarily on a fundamental basis.

In conclusion, readers should use the information provided in this article as a valuable but secondary resource for their portfolio allocation decisions, as lukewarm or weak fundamentals will likely outweigh the benefits of synthetic earnings accretion. Having said that, share repurchases could offer added stability in the event of strong fundamentals, such as is the case of Coca-Cola Enterprises.

Thanks for reading, and consider subscribing to my posts for more Fool ideas on outperforming the market. Requests for future articles may be submitted to

Additional reading: Fool readers interested in learning more about share repurchases may reference Buybacks Could Boost 2013 Performance ($AAPL, $JPM, $MCD, $PM).

johnmacris has no position in any stocks mentioned. The Motley Fool recommends Lowe's Companies. 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!

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