Jubak's Journal
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Turn to cheap, growing consumer stocks
While the stocks of companies such as Gillette are becoming expensive, stocks of less-known companies such as Petsmart remain at reasonable levels, offering investors opportunities.
By Jim Jubak
The technology stocks that have led this rally since March 2003 look increasingly tired. The technology-heavy Nasdaq is down 7% from its Jan. 26 peak. The Philadelphia Stock Exchange Semiconductor Index is down 10% in that period.
And the rotation into sectors where the price-to-earnings ratios are lower and the earnings growth more predictable is under way. Consumer stocks such as PepsiCo (PEP, news, msgs) are up 13% since the Nasdaq started its slump. Sector blue chips such as Procter & Gamble (PG, news, msgs) and Gillette (G, news, msgs) are up 3%.
The usual consumer stock suspects are now trading at very healthy multiples themselves. With a price-to-earnings ratio of 29, Gillette is cheap in comparison to a technology leader such as Texas Instruments (TXN, news, msgs) with its P/E ratio of 45. But a multiple of 25 to 30 is getting pricy for a consumer stock.
So it makes sense to go with less familiar consumer names with earnings growth rates just as attractive as those at the sectors household names and prices that are still reasonable. In this group, look for stocks on the edge of a spurt in earnings growth due to improving profit margins, strategic acquisitions, hot products and better-than-expected revenue growth.
Here are five stocks that fit those categories.
- Petsmart (PETM, news, msgs) reported accelerating earnings growth in the fiscal fourth quarter, thanks to revenue gains from existing and newly opened pet stores and expanding gross margins. Same-store sales increased by almost 8%, and the company opened 60 new stores in the last year. Gross margins improved by 1.3 percentage points. The stock recently sold for about 28 times trailing 12-month earnings per share.
- Mohawk Industries (MHK, news, msgs) is picking up market share in the flooring sector as the carpet maker moves into other flooring categories such as tile. With interest rates now likely to stay low for most if not all of 2004, the company should see better-than-expected demand in its new flooring business as well as continued strength in the replacement market. Flooring industry shipments are likely to grow by 5% to 6% this year, and Mohawk has historically been able to grow at roughly twice the industry rate. The stock trades at just 18 times trailing 12-month earnings per share.
- With its recently completed acquisition of Brazilian battery company Microlite, Rayovac (ROV, news, msgs) has completed its drive to regain global rights to its name (and picked up market share in Latin Americas biggest battery market). That should help Rayovac in its drive to build a global brand to compete with Energizer and Duracell. In addition, Rayovac has just inked a deal to acquire 85% of Chinas Ningbo Baowang Battery, which will expand the companys low-cost manufacturing base in China. The stock trades at 23 times trailing 12-month earnings per share.
- Perrigo (PRGO, news, msgs) has an aggressive strategy to go after a larger share of the generic drug market to go with its big stake in the over-the-counter private-label drugstore segment. The company has stepped up its internal research and development into generics, contracted with an independent R&D company to develop new generics and taken a purchase option on Lannett (LCI, news, msgs), a small generic drug manufacturer. That last move is less a purchase of Lannetts 23 products and pipeline than an effort to gain first to file status on new potential blockbuster generics. The stock now trades at 19 times trailing 12-month earnings per share.
- Wolverine World Wide (WWW, news, msgs) continues to build on the success of its Merrell shoe line in the casual shoe market by acquiring new brands, most recently Sebago, and reviving its classic Hush Puppy and CAT brands. Net sales picked up by 8% in the fourth quarter, and Wolverine increased gross margins by 1.7 percentage points. The company generated $100 million in operating cash flow in the most recent fiscal year and saw its order backlog grow by 20%. The stock trades at 19 times trailing 12-month earnings per share.
Editor's Note: A new Jubaks Journal is posted every Tuesday and Friday.
E-mail Jim Jubak at jjmail@microsoft.com.
At the time of publication, Jim Jubak owned or controlled shares in the following equities mentioned in this column: PepsiCo. He does not own short positions in any stock mentioned in this column.
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