S&P recommends overweighting the S&P 500 Consumer Discretionary sector. Year to date through February 17, the sector index, which represented 10.9% of the S&P 500 Index, was up 10.1%, compared with an 8.2% rise for the S&P 500. In 2011, this sector index rose 4.4%, versus a flat performance for the 500. There are 32 sub-industry indices in this sector, with Restaurants being the largest at 14.0% of the sector’s market value.
S&P equity analysts’ fundamental outlook on the Consumer Discretionary sector is positive. S&P Economics forecasts U.S. real GDP growth of 2.1% in
2012, and sees consumer spending increasing 2.0%. We anticipate that thematic drivers in 2012 will include technology advances, continued international
expansion, continued market segmentation of the targeted consumer base (demographic considerations, etc.), secular changes in consumer behavior
(online vs. traditional), advances in digital media technology, and further shifts to ROI-driven audience aggregation. According to Capital IQ, the sector
trades at a P/E of 15.3X consensus estimated 2012 EPS, which is greater than the S&P 500’s projected P/E of 13.0X. Its P/E-to-projected-five-year EPS
growth rate (PEG) ratio of 1.0X is below the broader market’s 1.2X. The sector’s marketweighted STARS average of 3.7 (out of 5.0) is slightly below the
average of 3.8 for the S&P 500.
The S&P GICS Consumer Discretionary Index completed a bullish base-on-base pattern early in January and has broken out to all-time highs after taking out 2011’s price highs. However, we view the sector as very overbought, so we see a minor pullback in the near term. Prices have widened the gap between the 17-week and 43-week exponential averages, a bullish sign, in our view. The shorter average remains above the longer average, also a positive sign for the intermediate term, in our opinion. Relative strength versus the S&P 500 remains in a long-term uptrend and the RS line is not far from a new bull market high. Our technical opinion on the Consumer Discretionary sector remains bullish.
In summary, S&P recommends overweighting the S&P Consumer Discretionary sector as strong emerging market revenue growth and a gradually
expanding U.S. economy likely fuel above-average EPS growth, in our view, enabling market outperformance.
FOCUS DIVIDEND STOCKS
Genuine Parts Company (GPC) distributes automotive replacement parts, industrial replacement parts, office products, and electrical/electronic materials in the United States, Puerto Rico, Canada, and Mexico. GPC is trading at $63.58 with a PE of 17.8. It has an equity summary score of 9.4 out of 10 indicating a VERY BULLISH outlook. GPC has a dividend yield of 3.15%. We forecast sales will increase 6.8% in 2012, as we think all GPC’s segments will continue to enjoy growth as the U.S. economy strengthens. Margins should benefit from higher volume and cost-cutting efforts, despite price pressures. We see EPS of $3.92 in 2012. Results in 2012 should benefit from GDP growth, which S&P forecasts at 2.1%. Based on our 2012 EPS estimate, the stock’s recent P/E of 16X is above the average for peers. We think a premium multiple for GPC is warranted by the company’s greater earnings stability. We view GPC as financially strong, earnings quality appears high to us, and an above-average dividend yield adds to total return potential.
Gannett Co., Inc. (GCI) operates as a media and marketing solutions company in the United States and internationally. Its Publishing segment publishes 82 U.S. GCI is trading at $14.93 with a PE of 7.9. It has an equity summary score of 9.2 out of 10 indicating a VERY BULLISH outlook. GCI has a dividend yield of 5.58%. We look for a contraction in print publishing revenues in 2012, although at a slightly slowing rate given a recovering economy in the U.S. We project broadcast revenue growth to accelerate significantly in 2012 due to the U.S. presidential election and 2012 Summer Olympics. Overall, we forecast
revenues to rise 1.1% in 2012, following contraction of 4.1% in 2011. GCI continues to take preemptive action to deal with weakening demand, including testing paid subscription models and multi-platform subscription packages. We believe GCI’s valuation will benefit over the next 12 months from more stable advertising industry trends and benefits we see from potentially strong political and Olympic advertising demand in 2012. Following five years of debt reduction efforts and with strong free cash flow generating capabilities, we look for more aggressive share repurchasing activity and potential dividend hikes. However, our optimism is constrained by what we view as a secular decline in newspaper advertising, especially as only about 21% of the company’s revenues are currently generated by digital operations.
Mattel, Inc. (MAT) designs, manufactures, and markets various toy products. Its products comprise fashion dolls and accessories, vehicles and play sets, and games and puzzles. MAT is trading at $33.53 with a PE of 15.4. It has an equity summary score of 8.3 out of 10 indicating a BULLISH outlook. MAT has
a dividend yield of 3.71%. Although we believe U.S. consumer spending will remain skittish due to high unemployment and economic uncertainty, we see global growth opportunities for MAT’s portfolio of leading toy brands. We look for net sales to rise 3.9% to $6.51 billion in 2012, with growth driven by momentum we see in core brands including Barbie, Fisher-Price, Hot Wheels and American Girl. We also expect top-line benefits from an improving price-value offering in Fisher-Price toys, growing popularity of Monster High, Thomas and Friends, Sing-a-ma-jigs!, and WWE Wrestling. In a still challenging selling environment, we see the company working to gain incremental market share through targeted investments in new products and marketing support. We also believe MAT is doing a good job of closely managing its cost structure. We note that recent cost-cutting efforts have been fruitful, and that additional cost synergies are likely from MAT’s recent acquisition of HIT Entertainment. In addition, MAT has also been able to achieve gross margins of 50% or more in each of the past three years. While our outlook for MAT is positive, we view the shares as appropriately valued at recent levels.
