3 consumer cyclicals to buy for growth

A recent survey by The MoneyLetter of consumer goods stocks found three stocks favoured by securities analysts on both sides of the border.

Beating fiscal 2019 third-quarter sales forecasts, apparel manufacturing stock Canada Goose Holdings Inc.(TSX—GOOS; NYSE—GOOS) showed growth driven by wholesale upside, strong organic direct-to-consumer (DTC), expansion into new markets (mainly China), and store growth.

Cyclical consumer goods stocks

Analysts see 2019 as a good year for cyclical consumer goods stocks.

US-based Credit Suisse analysts Michael Binetti, K.C. Katten, Zachary McCullough and Louis Rizzuto raise their fiscal 2019 EBITDA (earnings before interest, taxes, depreciation, and amortization) estimate to $235 million from $225 million. They maintain their ‘Outperform’ stance and $100 target share price.

While the analysts note that EBITDA for the quarter increased by approximately 60 per cent, the stock “pulled back due to less-than-expected” gross margin expansion (impacted by the Ontario minimum wage increase).

However, the analysts think concerns over the gross margin are “overblown” given that Canada Goose has a different cost cycle, as it owns a percentage of its manufacturing in Canada and produces jackets for 2019 fall and winter early to optimize efficiencies in its manufacturing facilities. The analysts note that gross margin has room to expand and cost concerns will normalize.

A doll, toy and game manufacturing stock to buy

Seeing upside from the toy lines Princess and Arena, New York-based Goldman Sachs analyst Michael Ng sees cyclical consumer stock Hasbro Inc. (NASDAQ—HAS) as set to return to 2017 revenue levels by 2020. The analyst models 2020 revenue of $5.4 billion. The analyst assigns the stock a ‘Buy’ recommendation along with a $99 target share price.

The analyst notes: “2020 should benefit from the late 2019 theatrical releases of Star Wars Episode IX and Frozen 2, a full-year of benefit from Power Rangers (versus nine months in 2019) and Magic: The Gathering Arena (versus three months to six months in 2019).

“Given Nerf’s challenges in 2018, we are encouraged by its new product initiatives such as Nerf innovation (Nerf Gamer initiatives largely launch in mid-2019). There are also easing headwinds from the Toys “R” Us liquidation.

“In our view, the margin headwinds in 2019 are largely related to growth investments including marketing and product development costs for MTG Arena.

“Our 2019 revenue estimate of $4.9 billion is largely unchanged.”

Raymond James: Canadian Tire will ‘outperform’

Raymond James Financial analyst Kenric Tyghe says that despite weaker-than-expected comparable sales growth in key banners, Canadian Tire Corp. Ltd. (TSX—CTC.A) reported a beat on adjusted EPS of $4.78, versus consensus of $4.69.

Despite discount-heavy product prices, most notably at the company’s Sport Chek subsidiary, the company’s retail gross margins increased by 38 basis points due to improved promotional efficacy. The analyst gives the cyclical consumer goods stock an ‘Outperform’ rating and a $175 target share price, down from a previous $181.

The analyst goes on to say: “Canadian Tire’s fourth quarter 2018 revenue increase of 5.5 per cent to $4.132 billion reflected weaker-than-expected same-store-sales (SSS) at CTR of 0.2 per cent, FGL Sports Ltd. of 2.5 per cent, and Mark’s of 1.8 per cent.

“Through the end of November, consolidated comp sales increased 3.5 per cent, but for the quarter only increased 0.8 per cent, largely on a lack of true Canadian winter weather through most of December. The fourth quarter 2018 weather headwind, was compounded by a very tough Dec-2017, when the weather was borderline comical in a broad swath of Canada.

“In terms of CTFS another very strong gross average credit card receivables growth (11.6 per cent) quarter, largely driven by late-cycle growth of new actives (on traction of the compelling Triangle Rewards value proposition), was at best met with a pause by investors. While the absolute and relative growth (with no real change in deemed risk profile) is a concern, the call provided some valuable additional colour, which we believe helps better reconcile the growth (and perceived risks).

“Adjusted EBITDA of $588.1 million, represented a three-basis point margin decrease to 14.2 per cent (versus our 13.6 per cent margin estimate), and came in below consensus of $590.8 million (versus our $576.2 million estimate). The EBITDA margin performance was driven by the higher gross margins on relatively flat selling, general and administrative margins.”

Canadian Tire, which boasts approximately 1,700 retail and gasoline outlets (and Financial Services and CT REIT segments), is one of Canada’s largest and most iconic retailers. This blue chip stock’s other retail banners include Mark’s Work Warehouse, Sport Chek, and recent addition Helly Hansen, which it purchased in July 2018.

This is an edited version of an article that was originally published for subscribers in the March 2019/Second Report of The MoneyLetter. You can profit from the award-winning advice subscribers receive regularly in The MoneyLetter.

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