Top 3 Consumer Discretionary Ideas

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

With a growing economy (the IMF expects the US economy to grow by 3% in 2014) and unemployment heading south, the consumer discretionary space should outperform the market going forward. Here I will make a short recap of my top three consumer discretionary ideas. This three companies are growing their top-lines with a strong focus on margin expansion. My bet is that they should be returning money to shareholders at an increasing level.  Let's take a look!

Ready to distribute more cash

Six Flags Entertainment (NYSE: SIX) is the world's largest regional theme park operator. The company counts 17 locations in the US, one in Canada and one in Mexico. In 2009, a huge debt pile and lower park attendance forced Six Flags to file Chapter 11.
 
That said, the company emerged from bankruptcy in 2010 with a delevered balance sheet. Under new management, led by turnaround specialist James Reid-Anderson, the company is ameliorating fast. I believe management's 2015 plan of achieving $500 million in modified EBITDA with capital expenditures well below depreciation is doable. If the plan is fulfilled, it could translate to $6 per share in free (and distributable) cash flow.
 
Meanwhile everything is going according to plan. With its top line expected to grow by 4% year-over-year, or YOY, and its EBITDA margin expected to increase to 39.7%, I believe Six Flags looks like a compelling story. The company trades at 2013 12.8 times EV/EBITDA and pays a 5.1% cash dividend yield.

Luxury trading at fair prices

Coach (NYSE: COH) is one of the very few luxury goods companies that (1) Is growing its top-line fast in emerging countries and (2) Is selling for good price. It's currently trading at 2013 8.7 times EV/EBITDA, 15.2 times P/E, and paying a 2.35% cash dividend yield.

Besides, Coach showed that efforts to stabilize its North America business, where sales surged by 7% YOY, are being successful. North America store comps (the most important performance figure in retail) were up 1%, and wholesale declines moderated. Better yet, margin performance was solid, and international markets continued to perform beautifully. In China, a key market, sales were up by 40% and store comps were up by mid-double digits. Good signs didn't end there, the company trusts its brand and announced the acquisition of its European Joint Venture, which operates 18 stores. 

Buy-Hold-Sell

Cinemark (NYSE: CNK) has been through a transitional year. The company has been integrating Rave Cinemas (acquired in late 2012), working on the sale of its Mexican assets and investing heavily in new technologies. Its investment case must be looked at from many perspectives. The company has:

(1) An international growth story. Cinemark is on track to open 125 international screens in 2013, and 100 per year over the next few years.

(2) Numerous margin initiatives. Cinemark leads its industry with 23% adjusted EBTIDA margins, but the company is ready to improve that figure helped by initiatives that include higher 3D penetration.

(3) The potential for cash-flow growth to accelerate next year. As capital expenditures normalize in 2014, going back to the $225-250 million range versus the $325-350 million expected for this year, free cash flow should improve from $74 million to $225 million in 2014.

All of the above taken into account, and given that the company has been ameliorating the performance in the mature US market, I think its a good time to buy Cinemark. The company trades at 7.5 times 2013 EV/EBITDA, 15 times P/E, and pays a 3% cash dividend yield. I would go long now only to sell it when capital expenditures (and free cash flow) goes back to more normal levels (+$200 million).

Bottom line

The companies mentioned above should largely benefit from a consumer-led US recovery. While both Six Flags and Cinemark are companies that I would not hold in my long term portfolio, Coach is one company that is achieving long term sustainable growth. Hence, I do believe Coach deserves to be in any long term portfolio focused on luxury goods. 


Federico Zaldua has no position in any stocks mentioned. The Motley Fool recommends Coach. The Motley Fool owns shares of Coach. 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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