Stock Watch

5 Stocks Dad Will Love

Dads, you're probably expecting a tie or a set of power tools this Father's Day. If you have enough of those already (or even if you don't), we have a gift you'll really appreciate: Our picks for shares of stock in companies that cater to your tastes.

Many dads, for example, like to fix things around the house, regardless of their skills -- or lack thereof. There's something about attacking a squeaky screen door that a father can't pass up. So perhaps Pop would enjoy some shares of Home Depot (symbol HD), which sees plenty of do-it-yourselfers wandering the aisles.

RELATED LINKS
	5 Stocks to Ride the Real Estate Rebound
	6 Stocks Poised for Big Gains

Yes, even the biggest home-improvement retailer is struggling through the housing slump. Compared with the same period a year ago, sales fell 9.7% during the company's first quarter, which ended May 3. Analysts see earnings falling by 20% this fiscal year, which ends next January, to $1.42 per share. "Anything related to housing is pretty beaten up," says Morningstar analyst Brady Lemos.

Long term, though, things look better. Home Depot can leverage its size to gain market share, mostly at the expense of smaller hardware stores and chains that are unable to make it through the recession. For instance, Ace Hardware, a franchise, closed 125 stores last year. When the economy revives and housing sales improve, Home Depot will be the place new homeowners go for paint and appliances.

In the meantime, Home Depot is coming up with new ways to drive growth. The U.S. market is mostly saturated, so the retailer has set its sights on Mexico, Canada and, to a lesser extent, China by opening new stores in those countries. In addition, Home Depot is trying to increase sales by hiring more-experienced staff and becoming more inviting to female customers, something that rival Lowe's (LOW) gets better marks for.

Looking ahead to next year, HD earnings could climb by 10%, some analysts believe. At its June 16 close of $23.20, Home Depot sells for 16 times estimated fiscal 2009 earnings. The stock is 67% below its record high of $70, reached in 1999.

Men may like cars, but the U.S. automakers are a disastrous pileup of beaten-up stocks. Used cars are another matter. CarMax (KMX), spun off in 2002 by the late, unlamented Circuit City, is the largest used-car dealer. It reached the top spot in just 16 years by putting to rest the used-car-salesmen jokes. "The most important thing that CarMax did was to transform the used-car business from the traditional sleazy way it was done to a much more customer-friendly, transparent experience," says Eric Ende, manager of FPA Perennial fund.

"No-Haggle Pricing" is the signature CarMax practice that endears customers. But even that's not enough to get potential buyers to open their wallets during these tough times. Sales were off 15% for the fiscal year that ended February 28, and earnings plunged 67%. CarMax reports results for the first quarter of its 2010 fiscal year on June 19.

The company has responded by halting new-store openings, shrinking inventory and cutting staff. That may have contributed to the stock's strong performance, up 61% so far this year, to $12.69. CarMax is also seen as a prime beneficiary of the bankruptcy filings of Chrysler and General Motors (GMGMQ.PK). As poor as CarMax sales have been, new-car sales are even worse (about 4% of CarMax's business comes from new-car sales). In addition, CarMax has been able to squeeze profits out of its financing unit. A new federal program enables the company and others that were shut out of the asset-backed securities market last year to sell off their auto loans to investors.

Because earnings are depressed-analysts look for 27 cents a share in the year that ends February 2010-the stock sells for a lofty price-earnings ratio of 47. The P/E may be justifiable if CarMax can generate annual earnings growth of 15% per year after the recession ends, as some analysts predict it will.

JoS. A. Bank Clothiers (JOSB), purveyor of men's suit and dress accessories, has reacted to the recession strategy by marking down its wares severely. The retailer's aggressive "Buy one suit, get two free" promotion moved merchandise. Relative to its competitors, Bank sells clothes at a premium, so the company can afford the markdowns - at least for the time being. "It always had very healthy profit margins so during the recession it could sacrifice some of those margins in order to drive sales," says John Staszak, of Argus Research. He rates the stock a buy.

To conserve cash, the clothier has trimmed the number of new-store openings to just ten to 15 this year. In the past, the company opened four times that number per year. It has also branched out into big, tall and portly men's suits. "That's very wise," says Staszak. "The company shouldn't move into an area unless it sees an attractive market niche, and big, tall and portly is a good one."

But long term, the company has to make sure it doesn't discount its products too much and too often, Staszak says. Customers may get used to the bargain prices and balk at paying up for suits and dress shirts once the economy recovers.

In the first fiscal quarter, which ended May 2, the retailer posted an 11% gain in revenues and a 17% jump in earnings. Same-store sales (sales at stores open for at least one year) rose 4.3%. Investors responded to those surprisingly good numbers by pushing up the stock. At $32.54, it has climbed 24% so far in 2009 but still trades at a reasonable nine times estimated earnings of $3.43 a share for the year that ends next January.

England's Diageo (DEO), seller of such brands as Johnnie Walker, Smirnoff, Guinness and José Cuervo, has held up better than most during the recession. "Among its closest peers, Diageo has the most balanced portfolio of products, with higher exposure to midprice, mainstream brands and less exposure to ultra-premium brands," says Charles Norton, manager of Vice Fund.

Diageo has an enviable customer base. In the U.S., the most profitable spirits market, the typical consumer of Johnnie Walker Black label has an annual income of $100,000 to $120,000 and consumes 2.5 bottles a year. Sure, even these high-end consumers might be feeling pinched and are probably cutting back on Lexuses and five-star hotels. But they're not so down and out that they must skimp on an affordable luxury such as first-rate Scotch.

To be sure, Diageo is feeling the impact of the global economic slowdown. From July 2008 through December 2008 (the first six months of Diageo's June 2009 fiscal year), earnings rose 21%, buoyed by North American sales and a favorable exchange rate between the British pound and other currencies. But when Diageo reported those results in February, it cut its operating-profit growth target for the current fiscal year to a range of 4% to 6%, from 7% to 9%. At the same time, Diageo said it would cut expenses by 100 million pounds ($164 million) and suspend its share-buyback program.

The shares look reasonably priced. At $56.01, Diageo trades at 15 times estimated June 2009 earnings of $3.82 a share. The stock yields 2.8%.

Men can appreciate Eli Lilly (LLY) for its erectile-dysfunction drug Cialis (which accounts for 7% of total sales). But the case for investing in Lilly's stock rests on a robust pipeline of new drugs. "Lilly is still run by a science guy," Brian McMahon, co-manager of the Thornburg Investment Income Builder, says of chief executive officer John Lechleiter, a former research chemist.

Among the drugs currently awaiting regulatory approval are Effient, a blood thinner that will compete directly with Plavix, and injectable Byetta (exenatide), a once-a-week diabetes therapy. And drugs for treating Alzheimer's, cancer and neurological disorders are in various stages of development. Producing and winning approval for new drugs is crucial because several of Lilly's blockbusters will lose patent protection between 2011 and 2013: Zyprexa, an antipsychotic, Cymbalta, an antidepressant, and Evista, for osteoporosis.

Investors haven't shown confidence in the firm's ability to bring the drugs to market, though. The stock, which closed at $32.98, has fallen 18% in 2009. Still, analysts expect Lilly to earn $4.22 a share this year, up from $4.02 in 2008. So the stock sells at just eight times forecasted 2009 earnings, well below the average P/E of 12 for large drug makers, and yields an extraordinarily high 5.9%. McMahon says that Lilly should be able to boost the current annual dividend of $1.96 per share.

• Ask a Question

• Print
• Comments
• Email
• RSS

Reader Comments (2)