Jefferies & Co.
MOST EVERY DATA POINT RECENTLY points to further deterioration in the consumer macroenvironment in the U.S., and we do not expect meaningful improvement in the near term. Therefore, we are reducing opinions on some more discretionary names to Underperform as we believe they could have even further to fall, preferring more defensive names for investors interested in mostly domestic consumer stocks.
We are reducing our estimates and opinions on three of our more discretionary names, Helen of Troy /zigman2/quotes/205565021/composite HELE -0.97% (ticker: HELE), Lifetime Brands /zigman2/quotes/202777463/composite LCUT +0.81% (LCUT) and Blyth (BTH), all of which are rated at Underperform.
Weak sales at key household goods retailers coupled with severe warnings already from household durable peers such as Libbey (LBY), which is rated at Underperform, and Newell Rubbermaid /zigman2/quotes/209507510/composite NWL +0.22% (NWL), which is not rated, indicate that we are seeing yet another leg down in consumption patterns in December.
Further, with diminishing incomes (due to overall economic weakness and rising unemployment rates) and the outlook for rising savings rates as households repair balance sheets following the unprecedented erosion of wealth recently due to real-estate and capital-markets deflation, we expect consumer spending to remain constrained for some time.
For now, we believe investors focused on mostly domestic businesses should consider companies in less-economically dependent market niches such as Chattem (CHTT) and Scotts Miracle-Gro /zigman2/quotes/200553749/composite SMG -0.15% (SMG) in the mid-cap arena, as well as FGX International Holdings Limited (FGXI) for smaller-cap investors and Clorox /zigman2/quotes/206443229/composite CLX -0.18% (CLX) for larger-cap investors. All four companies are rated at Buy.
Longer term we also like selected global direct sellers such as Tupperware Brands /zigman2/quotes/209009040/composite TUP -3.37% (TUP) and Herbalife /zigman2/quotes/201199224/composite HLF -0.37% (HLF) for mid-cap investors, as well as Avon Products (AVP) for larger-cap investors, since we believe they are exposed to the secular growth markets of the world and should be somewhat cushioned by the income opportunity they afford. In addition, they provide decent yield support in the 3%-4% range. We rate these companies at Buy.
We also believe Central European Distribution Corp (CEDC), as both Poland's and Russia's largest vodka company, is defensive as well with bright long-term growth prospects. While we rate it at Buy, we note that the global direct sellers and Central European Distribution are trading at historically low multiples given investor concerns about currency and emerging markets volatility, so it will likely take a meaningful change in investor sentiment for those stocks to work, even if company specific fundamentals remain favorable, the timing of which is difficult to predict. In the meantime, we would wait for fourth-quarter earnings to get a fundamental update given limited intraquarter visibility.
Douglas M. Lane, CFA
-- Per E. Ostlund, CFA
-- Andrew M. Tseng, CFA
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