Consumers will continue to spend in 2004, partly thanks to generous tax refunds that should result from last year's changes in tax law -- and thus consumer-discretionary stocks are a place to be. That's the word from Thomas Graves, group head of the Standard & Poor's analysts covering stocks in the consumer-discretionary sector, which S&P recommends investors overweight.
Of the roughly 200 stocks S&P covers in this sector, 19 are listed as buys, Graves reports. They range from retailers Best Buy (BBY ) and Neiman-Marcus Group (NMG.A ) to homebuilder Lennar (LEN ) and advertising-related stocks such as Gannett (GCI ) and Omnicom Group (OMC ).
Of the big media-merger news involving Comcast (CMCSAand CMCSK ) and Disney (DIS ), Graves says S&P continues to have a buy on Comcast but only a hold on Disney, and he thinks Disney is unlikely to get a takeover bid significantly above its current share price.
These were some of the points Graves made in an investing chat presented Feb. 17 by BusinessWeek Online and S&P on America Online, in response to questions from the audience and from BW Online's Jack Dierdorff. Edited excerpts follow. A full transcript is available from BusinessWeek Online on AOL at keyword: BW Talk.
Note: Thomas Graves is a Standard & Poor's equity analyst. He has no affiliation with or ownership interest in any companies under discussion. Other S&P affiliates may provide services to the companies under discussion. He is a registered representative of Standard & Poor's Securities, Inc.
Q: Tom, the market came back from the long weekend with a bang -- will we have more of the same?
A:We believe that the trend of the market will generally be up. We see much of today's favorable price activity being due to the flurry of merger activity that we've been seeing recently.
Q: Speaking of the mergers, what do you think of Comcast (CMCSAand CMCSK ) and Disney (DIS ) now, as investments?
A:We have continued to keep a buy recommendation on shares of Comcast. We believe that it will remain disciplined in the price that it will pay for an acquisition and that its business prospects are generally favorable. On shares of Disney, we have a hold recommendation, which reflects our view that Disney is unlikely to get a takeover bid significantly above the current Disney share price.
Q: How about the consumer-discretionary sector in general? You see consumers continuing their big spending?
A:We believe that consumers will continue to support growth in the overall economy, and we expect that near-term spending will be fueled by tax-law changes that went into effect last year. In particular, we look for consumers to receive sizable tax refunds from their 2003 tax returns. In summary, we continue to recommend that investors overweight their equity holdings toward the consumer-discretionary sector.
Q: What are some of your favorites among the consumer names?
A:We currently have buy recommendations on approximately 19 stocks within the consumer-discretionary sector. Among our favorites are Best Buy (BBY ), Neiman-Marcus Group (NMG.A ), and Lennar (LEN ).
Q: That's 19 buys out of how many you and your team cover? Is there any common thread among the "buy" names in your universe?
A:We cover roughly 200 stocks within the consumer-discretionary sector, which is part of S&P's overall equity coverage in the U.S. of roughly 1,200 stocks. The biggest theme on our buy list is probably toward advertising-related stocks. We expect that 2004 will be a good year for ad spending, and among the stocks that we recommend purchasing are Gannett (GCI ), Omnicom Group (OMC ), and Viacom class B shares (VIA.B ).
Q: Where do the business prospects look best?
A:Our group of buy recommendations within the consumer-discretionary sector represents a very diversified portfolio. Rather than placing a large emphasis on one industry, we have determined that it's advisable to select stocks from a variety of areas within the sector, ranging from specialty retail to housing.
Q: Do you see Time Warner (TWX ) doing better, as far as improved media growth?
A:Time Warner should benefit from an improved advertising environment. But it is important to realize that TWX's revenue and profit come from a variety of areas, including cable TV and Internet access subscriptions, movies, and advertising.
Q: Do you hear anything about Time Warner spinning off AOL?
A:There doesn't seem to be a lot of visibility on that prospect currently. We believe that Time Warner is trying to improve the results of the AOL business, partly through gaining additional high-speed subscriptions. However, we don't rule out the idea that Time Warner could look to sell or spin off the AOL division at some point in the future.
Q: Do you follow restaurant stocks?
A:Yes, we do. We have a buy opinion on two restaurant stocks. These are Ryan's Family Steak House (RYAN ) and P.F. Chang's China Bistro (PFCB ).
Q: From restaurants to fast food: Big Mac -- McDonald's (MCD )?
A:We have a hold opinion on shares of McDonald's. It recently reported that systemwide sales increased 17% in the month of January. However, we believe that the valuation on McDonald's shares is appropriate, given our view that the company has modest long-term growth prospects overall.
Q: Do you have any low-price stocks to suggest? Should share price per se be a factor in deciding on a stock?
A:When referring to a low-price stock, I assume perhaps that you mean a stock that is priced at below $10 per share. In our view, the price of an individual share is not necessarily indicative of a stock's being attractive or unattractive. It's always important to look at the stock price compared to a variety of other factors.
That being said, we're recommending at least one issue under $10. That's La Quinta Corp. (LQI ), which is a unit as opposed to a common stock, and on which we have a buy recommendation.
Q: Do you have an opinion on CVS (CVS )? Any other drug chains, such as Walgreen (WAG ) or Rite Aid (RAD )?
A:Shares of Walgreen currently have a buy opinion. This makes the stock one of our favorites within the consumer-staples sector. On CVS, we have a accumulate opinion, which means that we look for outperformance over the S&P 500-stock index from the stock over the next 12 months. We don't have an analyst opinion on shares of Rite Aid.
Q: During the holiday shopping season, luxury outdid discount -- is this a trend you see continuing as applied to retailers' stocks?
A:We generally believe that demand for luxury goods will continue to outpace overall retail spending, at least for the near term. In part, we attribute this to the recent strength of the stock market, whereby individuals who own a significant amount of stock are generally feeling more wealthy as a result of the increase in stock prices, which likely boosts their propensity to spend.
Q: How about clothiers?
A:We have a buy recommendation on at least one apparel-related stock, that being Quiksilver (ZQK ).
Q: What about the elephant in the consumer market? Any slowdown for Wal-Mart (WMT )?
A:We expect that Wal-Mart will continue to gain market share among U.S. consumers, partly through the opening of new stores. Also, we believe that a significant portion of U.S. consumers continues to be price-sensitive when making their buying decisions. And Wal-Mart is well positioned to benefit from this. We currently have a hold opinion on the stock.
Q: Costco (COST )?
A:We see Costco's business being in a growth mode, and we expect earnings for the year ending August, 2004, being up about 12% from the prior year's level. Our opinion on the stock is that we recommend holding the shares but do not recommend new purchases.
Q: How about Fred's (FRED )?
A:Fred's is a discount retailer with more than 400 stores. We expect it to generate strong earnings per share growth in the fiscal year ending January, 2005. However, we believe the stock is adequately priced currently.
Q: Any choices for teenage apparel?
A:Among the stocks we cover, we believe that Quiksilver is best situated to benefit from clothing purchases by teenage or young-adult consumers. Among other companies that appeal to young adults, we have an accumulate opinion on shares of Pacific Sunware of California (PSUN ).
Q: What's your opinion on Home Depot (HD )? And Lowe's (LOW )?
A:We have an accumulate opinion on shares of both Home Depot and Lowe's. In our view, these companies should benefit from the large amount of housing-sales activity that has been going on in recent years.
Q: Any suggestion on Michaels Stores (MIK )?
A:We have an accumulate opinion on shares of Michaels Stores. Same-store sales in January exceeded our expectations. We think Michaels could further strengthen its industry-leading status in 2004 through improved in-stock positions, marketing, and merchandising, as well as ongoing store relocations.
Q: Any companies you like besides Best Buy that sell the latest in electronic gear?
A:Another stock we like, which is connected to consumer electronics, is Harman International (HAR ). This company is a provider of high-quality, high-fidelity audio products and electronic systems for the consumer and professional markets, including sales to automobile manufacturers. We have a buy recommendation on shares of Harman (see BW Online, 2/18/04, "What's Driving Harman's Success").
Q: If you buy or build a house, you have to furnish it -- any recommendations in the area of furniture or appliances?
A:Among furniture or appliance-related stocks, our favorite would be Black & Decker (BDK ), on which we have a buy opinion. We expect it to post strong earnings-per-share growth in 2004, and we consider the stock to be among the most attractive within our consumer-discretionary sector coverage. Among makers of larger appliances, we have a hold opinion on Maytag (MYG ) and Whirlpool (WHR ).
Q: An idea on Sysco (SYY )?
A:We have a buy opinion on shares of Sysco. It continues to focus on eliminating less profitable customer accounts while expanding its reach through acquisitions and internal growth.
Q: What do you think of Procter & Gamble (PG ) and American Standard (ASD )?
A:We have a buy opinion on shares of Procter & Gamble. Given its industry-leading volume trends, diverse business portfolio, and growth opportunities, we view the stock as attractive.
We also have a buy opinion on shares of American Standard. Recent results reflected strength in residential air conditioning, bath and kitchen, and vehicle controls, which outweighed still-soft commercial air-conditioning markets.
Q: Time to sum up, Tom -- quick advice for investors keen on consumer stocks? Or any more names?
A:As I said, our advice is for equity investors to overweight their holdings of consumer-discretionary stocks. As for individual stocks that we like, some of the buy recommendations within the sector that we have not mentioned yet include D.R. Horton (DHI ), eBay (EBAY ), Fortune Brands (FO ), Group 1 Automotive (GPI ), and SCP Pool (POOL ).
Edited by Jack Dierdorff