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(Kevin Van Paassen/Kevin Van Paassen/The Globe and Mail)
(Kevin Van Paassen/Kevin Van Paassen/The Globe and Mail)

TheStreet.com

Goldman's 11 best U.S. consumer stocks for 2011 Add to ...

In an accelerating economic recovery, consumer-cyclical stocks tend to outperform. Goldman Sachs ranks the following 11 consumer-related equities "buy" and has several on its Conviction Buy List. They are expected to rise at least 10 per cent and as much as 41 per cent. Below, the stocks are ordered by predicted upside, from plenty to most.

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11. Viacom is an entertainment company, with television and film-studio subsidiaries.

Its stock has risen 43 per cent in the past year, but analysts are still optimistic about the equity's trajectory. Of those covering Viacom's B shares, two thirds rate them "buy" and one third ranks them "hold." Goldman's $46 target implies 10 per cent of upside in the next 12 months. Deutsche Bank is more bullish, forecasting an advance of 25 per cent to $52. In Goldman's latest research note, it stressed the upside potential resulting from a share buyback acceleration and dividend boosts in 2011 and 2012. Goldman previously expected $1.3-billion of buybacks each year, in 2011 and 2012. Viacom is guiding for $1.8-billion of buybacks in 2011 and $2.3-billion in 2012.

10. Staples sells office supplies and furniture through its retail stores and on the Web.

During the past three years, Staples has grown revenue 8.3 per cent annually, on average. Fiscal third-quarter net income increased 7.1 per cent to $289-million and earnings per share stretched 8.1 per cent to 40 cents. The operating margin widened from 7.4 per cent to 8 per cent. Staples will announce fiscal fourth-quarter results on March 3. Its stock is up 9 per cent in three months.

Of researchers covering Staples, 15, or 71 per cent, advise purchasing its shares, five recommend holding and one suggests selling them. Credit Suisse offers the highest 12-month target, at $29, implying 30 per cent of upside. Goldman's $26 target is consistent with a 16 per cent rise. The bank believes that earnings growth bottomed during the third quarter and Staples is due for double-digit earnings per share growth on a share buyback. The bank cites the "tepid employment recovery, slow small business spending trends and secular stagnation in paper and ink consumption" as headwinds to the company that are already priced into its stock. Outperformance or material improvement on any of these fronts will cause investors to pay a higher multiple for Staples, according to Goldman.

9. Nike was removed from Goldman's Conviction Buy List on Jan. 3, but retained its "buy" rating. Goldman still believes that Nike's story is compelling, but is now overly-appreciated by investors. Nike is one of the world's most recognizable brands in footwear, sportswear and apparel.

It has grown sales and earnings per share 4.6 per cent and 7.2 per cent annually, on average, over a three-year period. The stock has risen 29 per cent in the past 12 months, but it now costs 16-times forward earnings and 16-times cash flow, only modest apparel peer group discounts.

Goldman's $95 target suggests another 16 per cent of upside in Nike's shares, which are generally favoured by analysts. Currently, 14 researchers rate them "buy" and six rate them "hold." Nike receives no "sell" ratings. Both Credit Suisse and Barclays are predicting an advance of 21 per cent to $100. Goldman sees multiple sales drivers over the next 12 months, including an accelerating product cycle and exposure to burgeoning international markets, with nearly 50 per cent of sales coming from outside of the U.S. Furthermore, Nike is more insulated from cotton, which is on a run, than many of its competitors and it has a diverse sourcing base, which should help profit margins remain afloat.

8. Starwood Hotels & Resorts owns and operates hotel properties under the St. Regis, W, Westin, Four Points and Sheraton names. Goldman is "bullish on the current hotel cycle" and calls Starwood its "top pick across the coverage space" for an upward cycle that will be "strong and long."

Starwood delivered a third-quarter GAAP loss of $6-million, or three cents a share, but its stock has risen an eye-catching 77 per cent in the past 12 months. Given the outperformance, analysts offer a middling view, with 17, or 58 per cent, rating it "buy" and 12 ranking it "hold."

Goldman cites a recent 8 per cent hotel-cost cut as a permanent, structural boost to profit margins and the stock price. It also believes that Starwood's foothold in India and China put it "in a unique position to not only benefit from intra-country travel in those markets, but also outbound travel" because of brand recognition. Construction data, signaling stagnant hotel supply, and consumer data, pointing to looser purse strings, strengthen the bank's thesis. Following Starwood's analyst day in early December, Goldman boosted its target to $70, implying 18 per cent of upside.

7. Kohl's is a discount department store. It has been an outstanding performer, based on fundamentals, during and since the recession.

Kohl's has expanded sales 3.1 per cent annually, on average, over the past three years as its stock rose 5.6 per cent a year. But, in the past 12 months, investors have favoured specialty retailers leveraged to the economic cycle. Goldman is still bullish on Kohl's due to its accelerated share repurchase program, which it believes will bolster fiscal fourth-quarter earnings per share, which will be announced on Feb. 24. It also sees upcoming brand launches, such as the recently announced Jennifer Lopez and Marc Anthony partnerships, as catalysts for the stock. More relevant: Kohl's trades at a discount to retail peers.

The stock sells for a trailing earnings multiple of 15, a forward earnings multiple of 12, a book value multiple of 1.9 and a cash flow multiple of 9.8, all discounts to multiline retail industry averages. Kohl's 10 per cent trailing 12-month operating margin ranks in the 90th percentile for its industry. A $61 target implies 19 per cent upside.

6. Ford Motor manufactures cars and trucks.

The Dearborn, Michigan-based company reported fourth-quarter results Friday. Ford posted adjusted quarterly earnings of 30 cents, missing analysts' consensus estimate by 38 per cent. Its stock tumbled more than 13 per cent in reaction to the results. Ford beat by a double-digit percentage in the six previous quarters. Ford has an average earnings beat rate of 48 per cent. Its top-line figure, at nearly $32-billion, representing an 8.3 per cent year-over-year decline, beat the consensus target by 14 per cent. Despite a poor report, Goldman is still bullish on Ford's prospects, saying that the EBITDA and free cash flow story is "far from over" at Ford.

Goldman lowered its six-month price target on Ford to $20, still suggesting an attractive 24 per cent return. Goldman has incorporated higher fixed-cost inflation and product development and manufacturing costs into its model. Although these capital outlays have spurred a mass migration out of the stock, Goldman views them as a positive long-term strategic move, which will assist Ford in strengthening product leadership. Ford's stock trades at a trailing P/E of 9.1 and a forward P/E of 7.6, 42 per cent and 65 per cent automotive industry discounts.

5. Dana Holding designs, manufactures and sells automotive and industrial products.

Left for dead during the recession, Dana has mounted an impressive turnaround, shedding debt and bolstering cash. At the end of the third quarter, it held $1.1-billion of cash and $953-million of debt, for a net liquidity position. It announced last week that it had completed the reformation of its capital structure by replacing its secured term loan with $750-million of unsecured notes. Standard & Poor's upgraded the company's debt to BB- earlier in the week, a reassuring sign. Goldman has a $22 price target on Dana, expecting a 25 per cent advance in the next year.

Dana's preliminary 2011 guidance missed Goldman's expectation on the EBITDA front. Goldman considers the $1.30 to $1.40 earnings per share guidance a positive, though. That range exceeded the Wall Street consensus estimate. If Dana is capable of hitting the high end of its range, its stock costs less than 13-times forward earnings, a huge 59 per cent peer discount. Dana's stock has delivered impressive three-year annualized gains of more than 19 per cent. It is up 4 per cent in 2011.

4. Hasbro makes toys and operates a kids-focused television channel.

The company pre-announced fourth-quarter results. It will provide further detail and disclosure on Feb. 7. Goldman lowered its 2010, 2011 and 2012 earnings per share estimates in reaction to the announcement. It also lowered its price target $3 to $59, still predicting an attractive return of 33 per cent in Hasbro shares. Hasbro missed Goldman's quarterly sales estimate, but the bank is still bullish as it feels that Hasbro has entered a "sweet spot with respect to its entertainment-driven strategy." Hasbro recently launched The Hub television channel and ratings have widely exceeded analysts' initial expectations.

Other analysts are also bullish on Hasbro, with 65 per cent advising clients to purchase shares and 35 per cent saying to hold. Piper Jaffray echoes Goldman's Street-high target of $59. Goldman expects earnings to accelerate during the second quarter, but it expects near-term weakness, resulting from an inventory overhang and a weaker-than-anticipated holiday season, which will likely be evident in first-quarter earnings.

3. Abercrombie & Fitch is a specialty retailer focused on the teen demographic.

Abercrombie's fiscal third-quarter adjusted earnings of 56 cents, representing 37 per cent year-over-year growth, beat analysts' consensus target by 11 per cent, signaling business momentum. But, the gross margin declined from 72 per cent to 70 per cent, dismaying analysts. Investment bank Jefferies considers Abercrombie the best cyclical specialty retail play. It is forecasting a rise of 70 per cent to $85. Yesterday, Abercrombie shares rallied an impressive 4.2 per cent as the S&P 500 climbed 0.8 per cent.

Goldman isn't as bullish as Jefferies, but it does expect Abercrombie to outperform in 2011. The bank's $70 price target implies 41 per cent of upside to the stock. Although Abercrombie's stock has gained 60 per cent in the past 12 months, Goldman believes that, on the basis of its gross profit per foot and stock price before the recession, Abercrombie is still notably undervalued and at the onset of a major profit growth cycle as it regains its popularity in the U.S. and expands overseas.

2. Starbucks sells coffee through its branded stores and whole beans, ground and single-serving coffee through a variety of channels.

Starbucks' turnaround story has garnered plenty of attention from Wall Street. The company's stock has surged 45 per cent in the past 12 months, handily outperforming U.S. indices. In response to the eye-catching move and recent spikes in coffee prices, analysts have soured on the stock. Half rate it "buy" and half rate it "hold." Goldman's $44 target, consistent with a 41 per cent return, is the highest on Wall Street. Starbucks is now forecasting 20 cents of commodity inflation for 2011, which will crimp profit margins and earnings at Starbucks.

Despite this negative, Goldman is reiterating its "conviction buy" call. It expects 7 per cent to 10 per cent same-store-sales growth in 2011 and expects margin expansion, in spite of commodity inflation, due to operating leverage and sales initiatives. Since Starbucks has locked in its 2011 coffee prices, it no longer bears near-term commodity risks. Goldman believes that Starbucks is at an inflection point in emerging markets and poised to rapidly expand in that arena over the next few years. It has the highest earnings targets on Wall Street.

1. Phillips-Van Heusen is an apparel manufacturer.

Last week, Jones Apparel pre-announced disappointing numbers, sending Phillips' stock down more than 2 per cent. Goldman urges investors not to throw the baby out with the bath water. A similar phenomenon occurred when Jones missed analysts' consensus for third-quarter earnings. Goldman cited positive comparable trends and recently raised outlook as proof that Phillips remains the preferred equity in the apparel group. It views the pullback as a buying opportunity. A mid-cap with a $3.9-billion market value, Phillips receives "buy" ratings from two-thirds of the analysts covering its stock.

Goldman's $85 target suggests a gain of 46 per cent. Phillips-Van Heusen is an attractively-priced stock, selling for a forward earnings multiple of 12, a book value multiple of 1.6, a sales multiple of 1 and a cash flow multiple of 13, 38 per cent, 67 per cent, 56 per cent and 43 per cent peer discounts.

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