Makers of discretionary consumer goods are in a sweet spot—and many of their stocks aren’t expensive.
Retail sales grew 3.2% in July from a year earlier, up from June’s 1.2%, a sign that consumer spending is picking up despite the Federal Reserve’s efforts to cut into demand for goods and services. And economists say the good times can continue because the Federal Reserve is almost finished, if not completely through, with raising interest rates to fight inflation.
Given all that, analysts are raising their forecasts for earnings of companies whose products people buy when they have money left over after buying essentials. Those businesses—
General Motors
(ticker: GM),
Ford Motor
(F), and Booking Holdings (
BKNG
) are examples—are more profitable when the economy is growing faster.
The aggregate 2023 forecast for earnings per share at companies in the Invesco S&P 500 Equal Weight Consumer Discretionary exchange-traded fund (
RSPD
), which weights each stock equally and strips out the outsize impact of Amazon.com (AMZN), has risen 10% in the past six months, according to FactSet.
That comes as many consumer-discretionary companies have earned more than expected. Sales have exceeded forecasts, if not by much, and slowing increases in labor and materials costs are helping profit margins surpass estimates.
To find companies that really reflect the strength in this sector, Barron’s screened for those that have seen even higher earnings revisions than that. Since stocks often run higher as forecasts for profits rise, we looked only for those that trade at no more than 20 times the EPS expected for next year. For comparison, the figure for the S&P 500 is 19 times.
In addition to Ford, GM, and Booking, some names that came up are
Caesars Entertainment
(CZR),
MGM Resorts International
(MGM), and
Royal Caribbean Group
(RCL).
Analysts’ consensus forecast for Ford’s 2023 EPS has increased by about 30% in the past six months. Strong results for the second quarter help to explain that. Sales totaled $44.9 billion, compared with the $43.2 billion analysts expected, because prices were higher and more vehicles were sold. Operating margins exceeded forecasts, contributing to a per-share profit of 72 cents, while Wall Street had expected 54 cents.
And the stock is still cheap. It is down from the peak for 2023 it reached in July and trades at just over six times earnings, which is roughly half the multiple it traded at in early 2022, before the Fed started lifting rates.
Estimates of EPS for GM have risen by about 26%. It generated sales in the second quarter of $44.7 billion, higher than the expected $42.1 billion. Even though operating margins fell short of what was expected because costs were higher than expected, GM sold enough cars and had enough revenue to post EPS of $1.91, above the expected $1.86.
The stock, also down from its peak for the year, trades for less than five times earnings, versus about nine times in early 2022.
Forecasts of EPS for Booking, the $112 billion hotel-reservation website, have risen by 10.5%. Sales have grown every year for more than a decade as online travel planning displaces human travel agents.
Starting in 2024, analysts expect annual sales to grow by close to 10% a year for three years to reach $27.7 billion in 2026 according to FactSet. The company has beaten forecasts for 15 of the past 20 quarters. The Wall Street consensus view is that margins should expand, which would unlocking almost 13% annual growth in EPS, bringing the total to $204.52 by 2026. On a call to discuss the latest results, management said Booking is looking for new sources of revenue, and that one possibility is charging fees for payments made on the platform.
The stock trades at about 19.4 times EPS estimates, even after a more than 50% gain this year. That 19.4 is less than two times the 13% profit growth Booking is expected to achieve. The comparable figure for the S&P 500 is about twice expected EPS growth.
Give these stocks a shot.
Write to Jacob Sonenshine at [email protected]
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