Consumer stocks were flat on average last week, underperforming global indices (S&P 500 +1.2%, Stoxx 600 +0.3%), while the Auto and Consumer Misc group, led by Education stocks, continued to rise. See rotation chart page 7.
· A majority of Auto sector Focus List recommendations are extended. Sundram Fasteners (SMF.IN) and Motherson Sumi Systems (MSY.IN) remain buyable. See a summary of our investment case page 22 & 23.
· Several Consumer Svcs-Education names are showing great fundamental and technical characteristics. Focus BFAM.
o Page 5 – Over 2/3 of these stocks have already advanced significantly from their last consolidation; on average, they are trading 27% above their pivots. Thus, for a majority of these names, we are looking for a consolidation phase before we recommend building a position.
o Page 14 – Top-rated names through the O’Neil lens include
Education (
), Human Soft (HSH.KW), New Oriental Education & Technology (
), Grand Canyon Education (
), and China Maple Leaf Educational Systems (MAPZ.HK).
o Page 8 – BFAM Datagraph – Out of the few buyable names (stocks trading 0-5% from pivot), BFAM offers the best growth profile: EPS Rank of 95 (99 being the best) and SMR Rating of A (A being the best). The stock also displays top technical characteristics: RS Rating of 81 coupled with strong ownership support.
§ BFAM provides workplace child care and early education via 1,041 centers (84% of revenue), family support services for dependents of all ages (13% of revenue), and advisory services for adult learners (3% of revenue) in the U.S., the U.K., and the Netherlands.
§ Sustained revenue and earnings growth (2013-2017 revenue growth of 10% and Stability Factor of 2) is driven by long-term contracts with blue chip customers, new centers, tuition fee increases, and high utilization.
§ Going forward, growth drivers include new lines of business and international expansion. Consensus calls for two-year CAGR of low double-digit revenue and 17% EPS growth.
Weakness in the Beverages-Non-Alcoholic industry group has persisted. FIZZ was removed from our Focus List.
· Page 9 – FIZZ Datagraph – Shares have weakened significantly recently, breaching their 10-WMA on 1.2x average volume. The stock’s RS line moved sharply downward and its A/D Rating declined to 15 from 31 on September 8. The Company’s valuation is a bit stretched with its PE 1.9x the industry average.
News that beverage giant Coca Cola (
) is acquiring Mexican sparkling mineral water brand Topo Chico seems to be dragging the stock down. With this acquisition,
aims to strengthen its sparkling water portfolio, which already consists of Dasani and Smartwater. Year-to-date, sales of sparkling water are up 13%. Topo Chico has outperformed the industry with 28% growth (source: Nielsen). Leveraging
‘s massive distribution network, Topo Chico will be widely available and will compete directly with FIZZ.
As Food weakness has been easing, we looked for leading stocks in the sector and added BUFF to our Focus List last week.
· Leading natural pet food manufacturer in the U.S. and fifth-largest player in the U.S. pet food market.
· Page 10 – BUFF Datagraph – BUFF’s shares continue to trade constructively after breaking out from a 58-week consolidation on September 25. Rising RS line, RS Rating holding above 80 for the past three weeks, and a top A/D Rating of A+ indicate strong accumulation.
· BUFF should continue to deliver double-digit growth revenue as it makes headway into the Food, Drug, and Mass (FDM) channel, coupled with increasing revenue generated through ecommerce. The Company’s entrance into the FDM channel has the potential to add $250M in revenue the first year, which is likely to compensate for declining revenue from superstores.
· Consensus forecasts 9% revenue growth in 2017. As BUFF continues to drive margin expansion through productivity gains and a better product mix, consensus expects EBITDA margins to move toward 30% in the long term versus 22% in 2016. We look for a 15% CAGR for EPS by 2019.
