4 Consumer Goods Stocks to Buy in October
When it comes to buying what you know, investors can often find many good stock choices in the consumer goods segment. We asked some of our top contributors covering consumer goods stocks to weigh in on their choice for a stock to buy in October. Read on to see what they had to say.
Steve Symington: My pick for October is lululemon athletica . The yoga apparel specialist is coming off a solid pop after its latest quarterly results and guidance easily beat Wall Street's expectations, but shares still sit around 40% lower than they stood this time last year.
Of course, the decline wasn't entirely without merit: Lululemon investors have endured a number of negative developments over that time, including long-standing inventory repercussions from last year's sheer pants recall, the subsequent resignation of its popular CEO, and a looming proxy battle with its brash, outspoken founder and (now-former) chairman. But with those issues now resolved, I'm convinced a turnaround is looming.
After all, lululemon managed to increase its top line by 13.4% last quarter, has remained solidly profitable despite its troubles, and has over $725 million in cash on its balance sheet with no debt. For that, investors can first thank a 30% increase in comparable-store sales from lululemon's online business, which offset a 5% decline in comps at brick-and-mortar locations. Lululemon's men's segment and kid-centric Ivivva subsidiary both also performed well, with the latter approaching seriously impressive sales of $1,000 per square foot. Both speak volumes for lululemon's ability to diversify and prove it's not just a yoga company.
Lululemon's new CEO, Laurent Potdevin, also previously labeled 2014 as an "investment year," saying they are "building a scalable foundation for our next phase of global growth." If lululemon can return to form once that foundation is set, I think patient investors could be handsomely rewarded.
Tim Beyers: After a strong couple of years, media stocks have started trending downward. Nobody knows that better than AMC Networks chief executive Josh Sapan. His company's stock is down over 14% year-to-date despite having one of the best franchises in entertainment: The Walking Dead.
AMC's zombie drama returns in October, and with it hopes for some insight into what the company has planned for a 2015 spin-off series. There's plenty at stake for both fans and investors. Unlike Netflix, AMC owns distribution rights to the TV show and its spinoffs, as well as the licensing rights to the televised likeness of the survivors we watch each week.
It's a good strategy. In Q2, AMC earned 30% more from syndication and other distribution fees than it did advertising. Owning The Walking Dead makes it easier for the network to weather the whims of fickle ad buyers while providing upside in good times.
Dylan Lewis: At the end of July, Boston Beer reported its Q2 earnings -- 28% top-line growth and a 29% bump in net income over the same quarter last year. Riding some ups and downs in the two months since, the stock has wound up roughly flat since reporting. Granted, revenue growth wasn't as impressive as the previous quarter's 35% jump over Q1 2013 results, but gross margin improvements were encouraging (53.1% vs. 49.2% in Q1).
I don't see the revenue growth decline as a point of concern. The craft brewing movement is still growing and the company is positioning itself to increase efficiency in the hard cider segment, which grew 89% overall in the U.S. in 2013.
The company put in a planning inquiry for a 60-acre apple orchard in upstate New York, presumably with the hopes that it could be used to supply its Angry Orchard brand and feed the domestic craving for hard cider. The brewer has been importing apples from Italy and Germany, according to the Boston Globe. Vertical integration could lead to fatter margins for the brand that owns over 40% of domestic hard cider sales. This is great news, as some analysts estimate Angry Orchard could account for 20% of the company's sales volume by the end of 2015.
Needless to say, I don't see Boston Beer as a bad apple, but rather, a good buy.
Sean O'Reilly: Looking for a strong consumer brand that not only continues to add customers quarter after quarter but is one of the most consistent cash-flow-generating businesses around? Then look no further than Sirius XM Holdings Inc. . The company operates 10 satellites that orbit the Earth and broadcast the companies' stations to subscribers. Not only is the company essentially the only satellite radio company around, but it continues to add loyal customers at a blistering pace.
As of the quarter ended June 30, 2014, Sirius XM had a whopping 26.3 million subscribers, over 80% of whom are long-term subscribers. The remaining customers are called "paid promotional subscribers," most of which just purchased a new car and are enjoying satellite radio for a certain amount of time at no cost. Approximately 45% of these individuals become paying subscribers.
Sirius XM has a lot to offer long-term Foolish investors. While the company is highly leveraged, with total assets of $8.6 billion supporting $7.1 billion of total liabilities as of June 30, 2014, the debt load appears manageable thanks to its estimated $1.1 billion of free cash flow for FY 2014. The best part is that the inherent leverage of the company's balance sheet (and the fact that its satellites are already in orbit) means that as the company continues to add new subscribers the effect can be extremely powerful.
Each subscriber paid the company in FY 2013, on average, $12.27 per month but only cost the company $1.07 per month in customer service and billing expenses to maintain. This has caused Sirius XM's free cash flow to increase from just $415 million in FY 2011 to $927 million in FY 2013. Simply put, as Sirius XM adds more and more subscribers it becomes exponentially more profitable. This fantastic business model coupled with the company's high-quality content makes Sirius XM definitely worth a closer look by Foolish investors.
Editor's note: An earlier version of this article incorrectly stated that Boston Beer had completed the purchase of the apple orchard.
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The article 4 Consumer Goods Stocks to Buy in October originally appeared on Fool.com.Dylan Lewis has no position in any stocks mentioned. Sean O'Reilly has no position in any stocks mentioned. Steve Symington owns shares of Lululemon Athletica. Tim Beyers owns shares of Netflix. The Motley Fool recommends AMC Networks, Boston Beer, Lululemon Athletica, and Netflix. The Motley Fool owns shares of Boston Beer, Netflix, and Sirius XM Radio. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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