Morgan Stanley's 10 Consumer Stocks to Buy for the Long Term

NEW YORK (TheStreet) -- Navigating the world of equities can be troublesome when investors have to consider oil prices, currency swings, Fed policy translations, geopolitics and other factors that are put into play. But there are plenty of consumer companies that could differentiate themselves for the long term, despite these macro factors.

Morgan Stanley analysts identified "high-quality companies likely to strengthen and extend a sustainable competitive advantage," resulting in a "30 for 2018" list. The analysts put forth their best investment ideas "in their sectors at times of market dislocations or uncertainty." The stocks are considered suitable for holding for a three-year time period, according to the report, issued Thursday.

"Our driving principle was to create a list of companies whose business models and market positions would be increasingly differentiated by 2016," the report said.

"The main criterion is sustainability -- of competitive advantage, business model, pricing power, cost efficiency, and growth. We selected the companies that scored best on these criteria," the report said. The analysts also took into account capital structure, shareholder remuneration, as well as environmental, social and governance principles, which can "shed light on a management team's approach to sustainable and responsible governance over the very long term."

Here are Morgan Stanley's top picks for the consumer industry. We paired the investment bank's views with ratings from TheStreet Ratings for comparison. And when you're done be sure to check out Morgan Stanley's health care picks.

TheStreet Ratings, TheStreet's proprietary ratings tool, projects a stock's total return potential over a 12-month period including both price appreciation and dividends. Based on 32 major data points, TheStreet Ratings uses a quantitative approach to rating over 4,300 stocks to predict return potential for the next year. The model is both objective, using elements such as volatility of past operating revenues, financial strength, and company cash flows, and subjective, including expected equities market returns, future interest rates, implied industry outlook and forecasted company earnings.

Buying an S&P 500 (SPY) stock that TheStreet Ratings rated a "buy" yielded a 16.56% return in 2014, beating the S&P 500 Total Return Index by 304 basis points. Buying a Russell 2000 (IWM) stock that TheStreet Ratings rated a "buy" yielded a 9.5% return in 2014, beating the Russell 2000 index, including dividends reinvested, by 460 basis points last year.

Note: Year-to-date returns are based on May 15, 2015, closing prices.

AMZN Chart
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1. Amazon (AMZN)
Market Cap: $198 billion
Year-to-date return: 37.2%
Morgan Stanley Rating/Price Target: Overweight/$450 PT

Morgan Stanley said: Amazon's accelerating revenue growth, expanding gross margins and improving profitability leave us bullish on the core e-commerce business. Its cloud computing business, Amazon Web Services (AWS), is another incremental growth driver. We believe Amazon is unique among large-cap Tech and Retail companies because of its strong brand recognition, customer loyalty (aided by growing Prime membership), a growing base of recurring revenue, and a strong competitive moat.

TheStreet Ratings: Hold, C
TheStreet Ratings said:
"We rate AMAZON.COM INC (AMZN) a HOLD. The primary factors that have impacted our rating are mixed -- some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its solid stock price performance, robust revenue growth and largely solid financial position with reasonable debt levels by most measures. However, as a counter to these strengths, we also find weaknesses including deteriorating net income, disappointing return on equity and feeble growth in the company's earnings per share."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • Compared to its closing price of one year ago, AMZN's share price has jumped by 45.83%, exceeding the performance of the broader market during that same time frame. Although AMZN had significant growth over the past year, our hold rating indicates that we do not recommend additional investment in this stock at the current time.
  • Despite its growing revenue, the company underperformed as compared with the industry average of 19.4%. Since the same quarter one year prior, revenues rose by 15.1%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
  • Net operating cash flow has increased to -$1,499.00 million or 40.08% when compared to the same quarter last year. Despite an increase in cash flow, AMAZON.COM INC's average is still marginally south of the industry average growth rate of 40.62%.
  • The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed when compared to that of the S&P 500 and the Internet & Catalog Retail industry. The net income has significantly decreased by 152.8% when compared to the same quarter one year ago, falling from $108.00 million to -$57.00 million.
  • Current return on equity is lower than its ROE from the same quarter one year prior. This is a clear sign of weakness within the company. Compared to other companies in the Internet & Catalog Retail industry and the overall market, AMAZON.COM INC's return on equity significantly trails that of both the industry average and the S&P 500.

 

COST Chart COST data by YCharts

2. Costco Wholesale (COST)
Market Cap: $63.7 billion
Year-to-date return: 2.2%
Morgan Stanley Rating/Price Target: Overweight/$163 PT

Morgan Stanley said: We view Costco as one of the best-positioned companies in all of Retail. We favor strong cultures and mission-driven businesses -- and in our view, Costco embodies both. In contrast to 99% of the industry, in which retailers hope their key customers shop frequently with greater basket sizes, customers pay Costco for the right to shop in their stores. For the customer, the anchor is the consistent value that the shopping experience delivers. That this model continues to work is borne out by strong membership renewal figures. Customers appreciate these attributes and most of them profess their loyalty to Costco by renewing their memberships every year. Costco's EBIT per member has risen every year except for 2009. We argue that the company's unmatched value proposition should continue driving even stronger results.

Though Millennials spend the least, they are the fastest growing segment. Gen Xers and Baby Boomers spend the most and should remain the greatest contributors to growth over the next 10 years. Costco is already seeing its business expand via delivery services like Instacart and Google Express and is indifferent as to how members shop its warehouses.

TheStreet Ratings: Buy, A+
TheStreet Ratings said:
"We rate COSTCO WHOLESALE CORP (COST) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, impressive record of earnings per share growth, compelling growth in net income, notable return on equity and good cash flow from operations. We feel its strengths outweigh the fact that the company shows low profit margins."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • COST's revenue growth has slightly outpaced the industry average of 0.2%. Since the same quarter one year prior, revenues slightly increased by 4.4%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • COSTCO WHOLESALE CORP has improved earnings per share by 28.6% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, COSTCO WHOLESALE CORP increased its bottom line by earning $4.66 versus $4.63 in the prior year. This year, the market expects an improvement in earnings ($5.24 versus $4.66).
  • The company, on the basis of net income growth from the same quarter one year ago, has significantly outperformed against the S&P 500 and exceeded that of the Food & Staples Retailing industry average. The net income increased by 29.1% when compared to the same quarter one year prior, rising from $463.00 million to $598.00 million.
  • Current return on equity exceeded its ROE from the same quarter one year prior. This is a clear sign of strength within the company. Compared to other companies in the Food & Staples Retailing industry and the overall market, COSTCO WHOLESALE CORP's return on equity exceeds that of both the industry average and the S&P 500.
  • Net operating cash flow has increased to $900.00 million or 26.22% when compared to the same quarter last year. In addition, COSTCO WHOLESALE CORP has also modestly surpassed the industry average cash flow growth rate of 20.66%.

 

DLPH Chart DLPH data by YCharts

3. Delphi Automotive (DLPH)
Market Cap: $25.2 billion
Year-to-date return: 20%
Morgan Stanley Rating/Price Target: Overweight/$105 PT

Morgan Stanley said: A "mega-supplier" in the making. We believe Delphi is one of only a handful of global automotive suppliers that can become so big and powerful over time that they can sit alongside or even above the OEM in the automotive supply chain. We call this select class "Tier-0 mega suppliers."

Solid near-term performance plus potential to be a long-term disruptor. Management has shown that it is able and willing to stay on a path that delivers near-term earnings improvement and shareholder value while keeping an eye on long term growth through technology disruption. Delphi thus displays all characteristics of a "Tier-0 supplier," which fortifies our conviction that it can achieve revenue growth CAGR of 8% through 2017 vs. industry growth of 3%; operating margins of 14% by 2017, which would be close to best-in-class; and potential for upside surprise if it can close on its strong pipeline of M&A.

TheStreet Ratings: Buy, A+
TheStreet Ratings said:
"We rate DELPHI AUTOMOTIVE PLC (DLPH) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its notable return on equity and solid stock price performance. We feel its strengths outweigh the fact that the company has had sub par growth in net income."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The company's current return on equity greatly increased when compared to its ROE from the same quarter one year prior. This is a signal of significant strength within the corporation. Compared to other companies in the Auto Components industry and the overall market, DELPHI AUTOMOTIVE PLC's return on equity significantly exceeds that of both the industry average and the S&P 500.
  • DELPHI AUTOMOTIVE PLC' earnings per share from the most recent quarter came in slightly below the year earlier quarter. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, DELPHI AUTOMOTIVE PLC increased its bottom line by earning $4.43 versus $3.89 in the prior year. This year, the market expects an improvement in earnings ($5.37 versus $4.43).
  • Looking at where the stock is today compared to one year ago, we find that it is not only higher, but it has also clearly outperformed the rise in the S&P 500 over the same period, despite the company's weak earnings results. Turning our attention to the future direction of the stock, it goes without saying that even the best stocks can fall in an overall down market. However, in any other environment, this stock still has good upside potential despite the fact that it has already risen in the past year.
  • Regardless of the drop in revenue, the company managed to outperform against the industry average of 4.6%. Since the same quarter one year prior, revenues slightly dropped by 2.6%. The declining revenue appears to have seeped down to the company's bottom line, decreasing earnings per share.
  • The gross profit margin for DELPHI AUTOMOTIVE PLC is rather low; currently it is at 22.25%. Regardless of DLPH's low profit margin, it has managed to increase from the same period last year. Despite the mixed results of the gross profit margin, DLPH's net profit margin of 5.50% compares favorably to the industry average.

EL Chart EL data by YCharts

4. Estee Lauder Co.  (EL)
Market Cap: $33.7 billion
Year-to-date return: 16.7%
Morgan Stanley Rating/Price Target: Overweight/$98 PT

Morgan Stanley said: We believe that favorable channel, geographic, product category, and brand mix at Estée Lauder will support sustainable top- and bottom-line outperformance vs. Household & Personal Care peers longer term. Compared to HPC peers, EL has much greater exposure to high-growth and higher-margin areas with respect to channel and geographic mix. We estimate that nearly half of EL's sales and 69% of profit are derived from high-growth areas including emerging markets, specialty retail and freestanding stores, e-commerce and travel retail, which we expect to grow at a double-digit rate in aggregate in the long term.

Finally, we believe EL has a unique opportunity to drive significant shareholder value through potential self-help levers, such as (1) working capital opportunities, (2) margin improvements, (3) leveraging a strong balance sheet for M&A or share repurchases, and (4) an opportunity to lower its tax rate. Post the installation of SAP recently, EL now has greater visibility into working capital and cost-cutting opportunities, and we have seen EL pursue more M&A and share repurchases recently, giving us greater confidence in management's focus on these self-help levers.

TheStreet Ratings: Buy, A-
TheStreet Ratings said:
"We rate LAUDER (ESTEE) COS INC (EL) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its increase in net income, revenue growth, notable return on equity, expanding profit margins and good cash flow from operations. Although no company is perfect, currently we do not see any significant weaknesses which are likely to detract from the generally positive outlook."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The net income growth from the same quarter one year ago has greatly exceeded that of the S&P 500, but is less than that of the Personal Products industry average. The net income increased by 27.6% when compared to the same quarter one year prior, rising from $213.20 million to $272.10 million.
  • Despite its growing revenue, the company underperformed as compared with the industry average of 9.2%. Since the same quarter one year prior, revenues slightly increased by 1.2%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • The return on equity has improved slightly when compared to the same quarter one year prior. This can be construed as a modest strength in the organization. When compared to other companies in the Personal Products industry and the overall market, LAUDER (ESTEE) COS INC's return on equity exceeds that of the industry average and significantly exceeds that of the S&P 500.
  • The gross profit margin for LAUDER (ESTEE) COS INC is currently very high, coming in at 84.42%. It has increased from the same quarter the previous year. Along with this, the net profit margin of 10.54% is above that of the industry average.
  • Net operating cash flow has slightly increased to $391.30 million or 1.11% when compared to the same quarter last year. Despite an increase in cash flow, LAUDER (ESTEE) COS INC's cash flow growth rate is still lower than the industry average growth rate of 16.31%.

 

HLT Chart HLT data by YCharts

5. Hilton Worldwide (HLT)
Market Cap: $29.1 billion
Year-to-date return: 13%
Morgan Stanley Rating/Price Target: Overweight/$34 PT

Morgan Stanley said: We maintain that the U.S. lodging industry is earlier in the cycle than many believe, and we view Hilton as best positioned to benefit.

We favor Hilton based on best-in-class positioning, leadership, and optionality. (1) Positioning: Hilton generates more EBITDA from owned hotels than peers do, which implies more operating leverage. It is the largest hotel operator in the world, across diverse price points, so network effects along with strong execution are helping it generate some of the strongest unit growth (6-7%) in the industry: Hilton's current pipeline comprises 240,000 rooms, more than 50% of which are under construction, which makes up ~20% of total hotel rooms under construction globally (Hilton's current footprint is only 5%). (2) Leadership: Blackstone (BX), the preeminent investor in Lodging, owns 45% of Hilton. The company also hired the management team of Host Hotels when it LBO'd in 2007. Since then, Hilton has grown its number of rooms by 45% (vs. Marriott (MAR) +34%, Starwood (HOT) +30%), while more than doubling its rewards members to 44 million. (3) Optionality: Hilton's asset ownership allows it to take advantage of rising real estate values, which it has done recently -- selling the Waldorf Astoria in NYC for $2 billion (32x EBITDA) and the Hilton Sydney for $354 million (15x EBITDA). In addition, Hilton generates ~12% of EBITDA today from timeshare; although it has moved to an asset-light model, we'd argue that neither timeshare nor the owned business may be necessary to Hilton long-term. We think Hilton could start paying a dividend, perhaps as soon as 2H15, and now that Blackstone's ownership is below 50%, Hilton is eligible for S&P 500 inclusion.

TheStreet Ratings: Hold, C-
TheStreet Ratings said:
"We rate HILTON WORLDWIDE HOLDINGS (HLT) a HOLD. The primary factors that have impacted our rating are mixed ? some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its revenue growth, impressive record of earnings per share growth and compelling growth in net income. However, as a counter to these strengths, we find that the company's profit margins have been poor overall."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The revenue growth came in higher than the industry average of 7.4%. Since the same quarter one year prior, revenues slightly increased by 10.0%. This growth in revenue appears to have trickled down to the company's bottom line, improving the earnings per share.
  • HILTON WORLDWIDE HOLDINGS has improved earnings per share by 25.0% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past year. We feel that this trend should continue. This trend suggests that the performance of the business is improving. During the past fiscal year, HILTON WORLDWIDE HOLDINGS increased its bottom line by earning $0.68 versus $0.22 in the prior year. This year, the market expects an improvement in earnings ($0.82 versus $0.68).
  • The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Hotels, Restaurants & Leisure industry. The net income increased by 21.9% when compared to the same quarter one year prior, going from $123.00 million to $150.00 million.
  • Investors have apparently begun to recognize positive factors similar to those we have mentioned in this report, including earnings growth. This has helped drive up the company's shares by a sharp 30.09% over the past year, a rise that has exceeded that of the S&P 500 Index. Setting our sights on the months ahead, however, we feel that the stock's sharp appreciation over the last year has driven it to a price level which is now relatively expensive compared to the rest of its industry. The implication is that its reduced upside potential is not good enough to warrant further investment at this time.
  • The gross profit margin for HILTON WORLDWIDE HOLDINGS is rather low; currently it is at 24.89%. Regardless of HLT's low profit margin, it has managed to increase from the same period last year. Despite the mixed results of the gross profit margin, the net profit margin of 5.77% trails the industry average.

 

LB Chart LB data by YCharts

6. L Brands (LB)
Market Cap: $25.8 billion
Year-to-date return: 1.9%
Morgan Stanley Rating/Price Target: Overweight/$96 PT

Morgan Stanley said: Significant U.S. and international sales growth opportunities, consistent execution and EBIT margin expansion potential drive our 10%-plus 5-year EPS CAGR outlook, which we view as conservative. We see over $5 in EPS power in 2018 with many foreign markets yet unpenetrated. We believe LB is operated better today than ever before.

Victoria's Secret currently has ~27% U.S. intimate apparel market share, which we expect to increase slowly over time. We also forecast continued growth in other categories, specifically PINK, sport and swim. We believe PINK alone represents a $3 billion opportunity from ~$1.8 billion today in North America.

LB has proved its international operations are replicable, scalable, capital-light and extremely profitable. Specifically, we think China could be a $1 billion business at POS within 5 years. Mexico could also generate $1.5 billion at POS from essentially zero today.

TheStreet Ratings: Buy, B
TheStreet Ratings said:
"We rate L BRANDS INC (LB) a BUY. This is driven by multiple strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its notable return on equity, expanding profit margins, growth in earnings per share, compelling growth in net income and revenue growth. We feel these strengths outweigh the fact that the company has had generally high debt management risk by most measures that we evaluated."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • Compared to other companies in the Specialty Retail industry and the overall market, L BRANDS INC's return on equity significantly exceeds that of both the industry average and the S&P 500.
  • 47.83% is the gross profit margin for L BRANDS INC which we consider to be strong. It has increased from the same quarter the previous year. Along with this, the net profit margin of 13.88% is above that of the industry average.
  • L BRANDS INC has improved earnings per share by 14.5% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, L BRANDS INC increased its bottom line by earning $3.49 versus $3.05 in the prior year. This year, the market expects an improvement in earnings ($3.73 versus $3.49).
  • The net income growth from the same quarter one year ago has greatly exceeded that of the S&P 500, but is less than that of the Specialty Retail industry average. The net income increased by 15.3% when compared to the same quarter one year prior, going from $490.00 million to $565.00 million.
  • Despite its growing revenue, the company underperformed as compared with the industry average of 12.4%. Since the same quarter one year prior, revenues slightly increased by 6.6%. Growth in the company's revenue appears to have helped boost the earnings per share.

 

NKE Chart NKE data by YCharts

7. Nike (NKE)
Market Cap: $90.3 billion
Year-to-date return: 9.2%
Morgan Stanley Rating/Price Target: Overweight/$105 PT

Morgan Stanley said: We believe Nike benefits from secular and company specific drivers as the leader in the global athletic apparel and footwear. Rising global incomes lead to more prevalent sports participation and a larger global athletic apparel market.

As the company becomes increasingly international (from 58% of sales today), consumers demand more premium product, and more of the business shifts toward Nike's own retail and online channels -- which we expect to drive operating margins higher over time. Combined with Nike's healthy share buyback, this should generate robust EPS growth in the low teens or higher, and we see returns on equity at or above 20%.

Other catalysts could boost Nike's growth. Major global events including the 2016 Olympics in Brazil and 2018 World Cup in Russia are key areas for Nike's growth, particularly Brazil. We believe Nike is well positioned digitally, and success in the wearable tech category could be a boon for Nike as consumers opt to be more active and demand more athletic goods.

TheStreet Ratings: Buy, A+
TheStreet Ratings said:
"We rate NIKE INC (NKE) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its solid stock price performance, impressive record of earnings per share growth, compelling growth in net income, revenue growth and largely solid financial position with reasonable debt levels by most measures. Although no company is perfect, currently we do not see any significant weaknesses which are likely to detract from the generally positive outlook."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • Investors have apparently begun to recognize positive factors similar to those we have mentioned in this report, including earnings growth. This has helped drive up the company's shares by a sharp 40.55% over the past year, a rise that has exceeded that of the S&P 500 Index. Regarding the stock's future course, although almost any stock can fall in a broad market decline, NKE should continue to move higher despite the fact that it has already enjoyed a very nice gain in the past year.
  • NIKE INC has improved earnings per share by 18.7% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, NIKE INC increased its bottom line by earning $2.98 versus $2.70 in the prior year. This year, the market expects an improvement in earnings ($3.54 versus $2.98).
  • The net income growth from the same quarter one year ago has greatly exceeded that of the S&P 500, but is less than that of the Textiles, Apparel & Luxury Goods industry average. The net income increased by 16.0% when compared to the same quarter one year prior, going from $682.00 million to $791.00 million.
  • Despite its growing revenue, the company underperformed as compared with the industry average of 9.9%. Since the same quarter one year prior, revenues slightly increased by 7.0%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • NKE's debt-to-equity ratio is very low at 0.10 and is currently below that of the industry average, implying that there has been very successful management of debt levels. To add to this, NKE has a quick ratio of 1.59, which demonstrates the ability of the company to cover short-term liquidity needs.

 

SBUX Chart SBUX data by YCharts

8. Starbucks (SBUX)
Market Cap: $76.2 billion
Year-to-date return: 5.9% (stock split on April 9, 2015)
Morgan Stanley Rating/Price Target: Overweight/$53 PT

Morgan Stanley said: We believe Starbucks remains a best-in-class secular growth story, with significant potential for revenue growth and margin expansion in the near and long term. After learning from missteps in 2008/09, Starbucks has demonstrated consistent revenue and EPS growth over the past five years and is poised to continue at 15-20%, one of the strongest rates among its restaurant peers, on our forecasts.

Not only does Starbucks benefit from an addictive and habitual core business (coffee), we also see multi-channel growth opportunities within its sub-brands. Through a string of acquisitions, Starbucks has filled out its product offering to include tea, food and health and wellness products. Starbucks is now beginning to leverage these multiple channels through retail and grocery. Further, as a clear early leader in mobile pay and ordering, Starbucks should be able to garner a disproportionate share of usage on the platform and win increased loyalty and frequency. Aside from sales drivers, strong unit economics support rapid growth in Asia and solid growth in the Americas.

TheStreet Ratings: Buy, B+
TheStreet Ratings said:
"We rate STARBUCKS CORP (SBUX) a BUY. This is driven by a few notable strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth, solid stock price performance, impressive record of earnings per share growth, compelling growth in net income and notable return on equity. We feel its strengths outweigh the fact that the company shows low profit margins."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The revenue growth came in higher than the industry average of 7.4%. Since the same quarter one year prior, revenues rose by 17.8%. This growth in revenue appears to have trickled down to the company's bottom line, improving the earnings per share.
  • Investors have apparently begun to recognize positive factors similar to those we have mentioned in this report, including earnings growth. This has helped drive up the company's shares by a sharp 41.52% over the past year, a rise that has exceeded that of the S&P 500 Index. Turning to the future, naturally, any stock can fall in a major bear market. However, in almost any other environment, the stock should continue to move higher despite the fact that it has already enjoyed nice gains in the past year.
  • STARBUCKS CORP has improved earnings per share by 17.9% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, STARBUCKS CORP turned its bottom line around by earning $1.36 versus -$0.01 in the prior year. This year, the market expects an improvement in earnings ($1.57 versus $1.36).
  • The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Hotels, Restaurants & Leisure industry. The net income increased by 15.9% when compared to the same quarter one year prior, going from $426.90 million to $494.90 million.
  • The company's current return on equity greatly increased when compared to its ROE from the same quarter one year prior. This is a signal of significant strength within the corporation. Compared to other companies in the Hotels, Restaurants & Leisure industry and the overall market, STARBUCKS CORP's return on equity significantly exceeds that of both the industry average and the S&P 500.

 


WBA Chart WBA data by YCharts

9. Walgreen Boots Alliance (WBA)
Market Cap: $94.3 billion
Year-to-date return: 13.5%
Morgan Stanley Rating/Price Target: Overweight/$91 PT

Morgan Stanley said: Potential for 15% annual earnings growth through F2020. Walgreens Boots Alliance is the largest U.S. drug retailer by store count, accounting for ~21% of total prescriptions in 2014. While over the last few years WBA's operating metrics have lagged its largest peer, under a new management team and the leadership of CEO Stefano Pessina we see opportunities for WBA to successfully turn around the company, lower its cost structure, drive margin expansion and reaccelerate top line growth. Notably, if successful, we estimate the company could close a large portion of the ~340 bps margin gap to rival CVS Health (CVS) translating to over 15% annual earnings growth through F2020.

WBA's global footprint and joint venture with AmerisourceBergen (ABC) make it one of the largest scale purchasers of generics globally. This has been a significant source of synergies and helps offset to general reimbursement pressure in the U.S. pharmaceutical market. M&A opportunities could provide additional upside.

TheStreet Ratings: Buy, A+
TheStreet Ratings said:
"We rate WALGREENS BOOTS ALLIANCE INC (WBA) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, compelling growth in net income, largely solid financial position with reasonable debt levels by most measures, good cash flow from operations and solid stock price performance. We feel its strengths outweigh the fact that the company has had somewhat disappointing return on equity."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The revenue growth greatly exceeded the industry average of 0.2%. Since the same quarter one year prior, revenues rose by 35.5%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Food & Staples Retailing industry. The net income increased by 185.2% when compared to the same quarter one year prior, rising from $716.00 million to $2,042.00 million.
  • Net operating cash flow has increased to $1,306.00 million or 18.29% when compared to the same quarter last year. Despite an increase in cash flow, WALGREENS BOOTS ALLIANCE INC's average is still marginally south of the industry average growth rate of 20.66%.
  • The current debt-to-equity ratio, 0.59, is low and is below the industry average, implying that there has been successful management of debt levels. Despite the fact that WBA's debt-to-equity ratio is low, the quick ratio, which is currently 0.60, displays a potential problem in covering short-term cash needs.
  • Looking at where the stock is today compared to one year ago, we find that it is not only higher, but it has also clearly outperformed the rise in the S&P 500 over the same period. Although other factors naturally played a role, the company's strong earnings growth was key. Looking ahead, the stock's rise over the last year has already helped drive it to a level which is relatively expensive compared to the rest of its industry. We feel, however, that the other strengths this company displays justify these higher price levels.

 

 

 

DIS Chart DIS data by YCharts

10. Walt Disney (DIS)
Market Cap: $187.2 billion
Year-to-date return: 17.1%
Morgan Stanley Rating/Price Target: Overweight/$110 PT

Morgan Stanley said: Strong multi-year content outlook, rooted in past intellectual property acquisitions. Over the last few years, Disney's M&A strategy has primarily focused on acquiring "pure" content (rather than distribution) assets, spending ~$15 billion in aggregate to acquire Pixar, Marvel and Lucasfilm. Disney is now earning returns on this capital investment, with acquired "franchise" properties anchoring a robust film slate (e.g. Avengers, Star Wars). We project that Star Wars VII will help replace declining Frozen-related revenue, leading the studio to roughly repeat in F2016 the record EBIT levels seen in F2014 (~$1.6 billion). Longer term, we expect the combination of Marvel, Pixar and Lucasfilm franchises, plus Frozen, should continue to support a $1 billion-plus annual EBIT level in F2017 and beyond.

We believe Disney's ability to monetize its intellectual property is unmatched in U.S. Media, with intellectual property (most commonly) generated in the film studio, then used to drive earnings across the Theme Parks, Consumer Products, Media Networks and Interactive segments. With secular concerns rising in the TV ecosystem, Disney's diversification stands out.

TheStreet Ratings: Buy, A+
TheStreet Ratings said:
"We rate DISNEY (WALT) CO (DIS) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, growth in earnings per share, increase in net income, notable return on equity and good cash flow from operations. We feel its strengths outweigh the fact that the company shows low profit margins."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • DIS's revenue growth has slightly outpaced the industry average of 4.4%. Since the same quarter one year prior, revenues slightly increased by 7.0%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • DISNEY (WALT) CO has improved earnings per share by 13.9% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, DISNEY (WALT) CO increased its bottom line by earning $4.25 versus $3.38 in the prior year. This year, the market expects an improvement in earnings ($5.04 versus $4.25).
  • The company, on the basis of net income growth from the same quarter one year ago, has significantly outperformed against the S&P 500 and exceeded that of the Media industry average. The net income increased by 10.0% when compared to the same quarter one year prior, going from $1,917.00 million to $2,108.00 million.
  • The return on equity has improved slightly when compared to the same quarter one year prior. This can be construed as a modest strength in the organization. In comparison to the other companies in the Media industry and the overall market, DISNEY (WALT) CO's return on equity significantly exceeds that of the industry average and is above that of the S&P 500.
  • Net operating cash flow has increased to $2,918.00 million or 15.47% when compared to the same quarter last year. In addition, DISNEY (WALT) CO has also modestly surpassed the industry average cash flow growth rate of 15.04%.

 

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