Bad News Hasn't Stopped The Consumer
From several angles, the picture looks bleak for consumers:
• Unemployment hovers near 10%.
• Up to 25% of homeowners may owe more on their homes than those homes are worth.
• Credit remains difficult to obtain for many borrowers.
But, for now, the stock market is looking past the bad news. Since the end of 2008, the S&P 1500 Consumer Discretionary Index has risen 43%, nearly double the gain of the broader S&P 1500 Index. Over the last six months, the consumer-discretionary index gained 15%, outperforming all other sector indexes.
U.S. retail sales rose 0.5% in January, according to the U.S. Commerce Department, topping expectations and marking the third advance in the last four months. In January, U.S. chain retailers reported a 3.3% rise in same-store sales, the biggest leap in nearly two years. More than 70% of retailers topped Wall Street sales forecasts.
While consumer confidence has trended generally higher in recent months, both the University of Michigan and Conference Board consumer sentiment indexes fell in February, with the Conference Board index plunging to a 10-month low. Both indexes remain well below long-term averages.
Predicting the behavior of consumers, who account for about 70% of U.S. gross domestic product, is difficult. While a sustained surge in consumer spending seems unlikely unless employment rebounds, some uniquely positioned companies appear positioned for good results.
Within the consumer-discretionary sector, an extremely broad group containing industries ranging from hospitality to retail to broadcasting to automobile manufacturing, we recommend six companies — four specialty retailers and two pay-TV providers. Most of these companies have shown resilience in the face of difficult economic conditions, and all offer solid capital-gains potential.
Comcast ($16; CMCSa), the largest pay-TV company in the U.S., has 23.6 million subscribers and makes a habit of exceeding expectations. In the last three quarters, the company topped consensus per-share-profit estimates by 22%, 32%, and 27%. Wall Street expects this year’s per-share profits to slump 2% to $1.23, a target that seems unduly conservative.
In 2009, Comcast added 1.5 million net new subscribers, as gains in high-speed Internet, digital voice, and business services offset a decline in basic video subscribers. The battle for television viewers remains fierce, but Comcast’s new Xfinity program — offering more than 100 high-definition channels, 20,000 video-on-demand choices, and faster Internet — could make the company more appealing to customers. A planned $30 billion joint venture between Comcast and General Electric ($16; GE) — combining Comcast’s portfolio of cable channels with the NBC network, its cable channels, and Universal Studios — should make Comcast more appealing to advertisers. Comcast is a Focus List Buy and a Long-Term Buy.
Shares of DirecTV ($33; DTV) jumped after the company reported better-than-expected profits for the December quarter. The satellite-TV provider earned $0.48 per share excluding a merger-related charge, up 50% and $0.08 above the consensus. Revenue also topped the consensus, jumping 13% to $5.98 billion. For the year, the subscriber count rose 5% in the U.S. and 18% in Latin America. Average revenue per monthly subscriber rose in both regions.
Free cash flow jumped more than 40% for the year, and DirecTV plans to continue sharing its cash with stockholders. The company announced a $3.5 billion stock-repurchase program, which represents more than 10% of total stock-market value at current prices. Over the last three years, DirecTV has reduced its share count at an annualized rate of 7%.
DirecTV has cut its spending aggressively, suggesting it is now willing to sacrifice some top-line growth to boost profit margins. Sharply higher margins for the quarter increase our confidence in the consensus, which projects per-share-profit growth of 53% this year on revenue growth of more than 9%. DirecTV, trading at 15 times the 2010 profit consensus, is a Focus List Buy and a Long-Term Buy.