Consumer Goods Stocks to Consider Buying

David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

If you are interested in buying into a full recovery, you should consider purchasing shares of consumer goods companies. The problem is that many analysts have already articulated a bullish thesis on macro trends, and the upside may have been lost. I thus recommend looking at multiples and corporate strategy. Below, I review several clothing and apparel producers with this perspective in mind.

Is Aeropostale (NYSE: AEO) A "Buy"?

Aeropostale, the shopping mall-based specialty retailer, has seen its profits beat analyst expectations. It is particularly important to note that this wasn't due to uncontrollable market trends (and fashion consumers can be very fickle) but can be widely attributed to a successful strategy of differentiating their own products from the competition. In the fourth quarter of 2012, sales soared 27% while CapEx and production expenses declined. Store performance rose by double-digits, and most peers selling their products also exceeded market trends. The company now is looking for even bigger growth domestically, with a plan for 175 or more factories and higher budgets for advertising.

At a respective 16.3x and 11.3x past and forward earnings, the company looks reasonably priced. Zumiez (NASDAQ: ZUMZ), a niche producer of sports-related apparel (often for skateboarders), trades at around the same past and forward multiples but has a greater growth curve ahead that is not being considered. This is reflected in how it trades at less than two-thirds the PEG ratio that Aeropostale has at 0.9x. Analysts forecast Zumiez growing by a rate of 18.9% annually over the next five years, which, in my view, is considerably high given just a 10.6% rate over the past five.

Assuming Zumiez meets expectations, 2016 EPS will come out to $2.66, which, at a multiple of 15x, translates to a future stock value of $39.90. Discounting backwards by 10% yields a present value that is at around a 23% premium to the current market assessment. This doesn't provide a significant margin of safety, so I recommend combining an investment in Zumiez with Aeropostale. The latter generates a free cash flow yield of 11.8%, has no debt on the balance sheet, and has a consensus price target that is 34%+ above its current price. I also believe the company is owed a recovery after falling nearly 50% from its 52-week high given that it has produced strong results by its own efforts.

Nike (NYSE: NKE): Pros & Cons

Nike managed to exceed expectations on all fronts, top and bottom, even with macro troubles in the European and Chinese markets; and they delivered massively impressive U.S. results. They not only managed to outperform analyst expectations but also consumer expectations by slashing prices. While this obviously cut into margins, I believe it will help build a sustainable stream of free cash flow when it locks in new customers that will be more willing to take a price hike in a rebounding economy.

Nike, after all, has reduced the number of headwinds that shareholders face. In Oregon, Nike's "home," state legislators agreed to not make any changes to the company's tax burden in return for Nike agreeing to expand its workforce by around 500. The Oregon legislators also called a special meeting just for Nike’s case, which shows how much weight the apparel producer carriers. Bordering and nearby states are expected to give even better terms for the company, so there is competition for corporate favors, if you will.

In terms of strategy, Nike has also had had enormous success with sales. It sold Cole Haan to Apex Partners for $570 million and Umbro, the highly successful English sportswear equipment supplier, for $225 million to Brand Group. Both transactions are expected to close at the end or beginning of 2012 and 2013, respectively. All this good news helped cover up a decline in sales, specifically in China, where the emerging market is changing fashion styles. Nevertheless, Nike also didn’t fail to impress their shareholders who received the company’s trend of double-digit dividend increases (17% in this case).

With that said said, Nike is very expensive at a respective 22.2x and 17.7x past and forward earnings. While it has a cash-rich balance sheet, as evidenced by a virtual absence of long-term debt and a current ratio of 3x, the company will have to continue to outperform expectations to cover for a reasonable multiples decline. If Zumiez, which is on a terrific growth curve, can trade at around 16x, the downside is significant. Nike is only forecasted for 9.3% annual EPS growth over the next five years, which is more or less in-line with what was achieved in the past five years. So, I recommend staying on the sidelines or only buying on dips.

TakeoverAnalyst has no position in any stocks mentioned. The Motley Fool recommends Nike. The Motley Fool owns shares of Nike. 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. This article was written by the staff of TakeoverAnalyst, which does not intend on opening a position in the next 48 hours.

blog comments powered by Disqus