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Consumer-Related Stock Picks
Posted by: Federico Zaldua (IP Logged)
Date: September 17, 2013 09:04PM
Consumer-related businesses are plain simple, and that is what I like about them. Usually, when consumer businesses are able to build a brand, good distribution networks and a fair share of their respective market, they convert themselves into cash-machines for shareholders.
Here are two companies that operate very different types of consumer-related businesses. One of them is a conglomerate of brands that is managed by a team of experienced experts who are focused on delivering top- and bottom-line growth across a diverse array of categories. The other company is a food chain which is also managed by an efficient management team. According to my estimates, they both trade at an undeserved discount.
Betting on an Outstanding Management
Jarden (JAH), the owner of multiple branded consumer product companies (Quickie brushes, First Alert alarms and Volkl skis, among many others), is executing its strategy well, delivering broad-based organic sales growth and gross margin expansion while producing double-digit earnings expansion. Given its conservative valuation, the market may not be fully considering the management's incredible efficiency at producing satisfactory results.
As a matter of fact, second quarter results came well ahead of expectations. Jarden's management was able to leverage its SG&A and repurchase shares in order to reaffirm its year-over-year EPS growth target of 15% to 17% when organic sales grew by just 3.9%. As I just mentioned before, despite good top- and bottom line- results, the market is not giving Jarden's management enough credit. The shares, even when they are up by 38% year-to-date, look cheap selling at 2013 14 times earnings. Above all, after the pending acquisition of Yankee Candle for $1.75 billion, which looks attractive both financially and strategically. Investors such as John Keeley and Ray Dalio must think the same since they are still long on the name.
A Potential M&A Candidate
Jack in the Box's (JACK) investment case resembles Jarden's. At a time when fundamentals continue to strengthen, the market seems to be under-appreciating the company's good earnings prospects. In the case of Jack in the Box, a restaurant operator (Jack in the Box and the Mexican chain Qdoba), the company is accelerating store-level profits and beating EPS estimates.
The closure of many unprofitable Qdoba units (67 year-to-date) and the focus on Jack in the Box's newly acquired markets (from franchisees) where volumes, margins and brand awareness are well above average should help the company's EBITDA growth prospects going forward. As a matter of fact, and according to Oppenheimer, EBIT year-over-year growth between 2013 and 2014 should be as high as 26%.
Trading at 22 times 2013 earnings, Jack in the Box looks like a good turnaround and growth story. Ultimately, with a market capitalization of just $1.75 billion, Jack in the Box also looks like a compelling M&A target for private equity funds or bigger competitors. After all, restaurant chains such as Burger King (BKW) are classic targets for private equity investors. Among others, Jack in the Box is held by Gotham's Joel Greenblatt.
As I mentioned before, consumer-related businesses can convert themselves into cash cows for shareholders. Hence, they are always prone to be M&A targets. Even though I do not expect Jarden to be an M&A target, I do think the company might sell some of its brands as they reach maturity. On the other hand, I do think Jack in the Box could constitute an attractive M&A target going forward.
Guru Discussed: Joel Greenblatt: Current Portfolio, Stock Picks
John Keeley: Current Portfolio, Stock Picks
Stocks Discussed: JAH, JACK, BKW,
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