Jefferies Top Stocks to Buy Based on Significant Margin Expansion

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With many of the companies in the S&P 500 having margins approaching all-time highs, and implied S&P 500 correlations approaching post-crisis lows, it is becoming harder to make a bullish case for the S&P that is predicated on higher margins and easier to make the case for single-name outperformance. The analysts at Jefferies thought it an opportune time to offer up the stocks in their coverage universe with the most compelling margin expansion opportunities.

The Jefferies equity research analysts were asked to present the stocks in which they had the highest conviction for the likelihood of margin expansion. The bottom line for investors: margin expansion often translates to earnings growth. That growth often translates to higher share prices. Here are the top stocks to buy that could produce significant margin expansion.

Abbott Laboratories (NYSE: ABT) is expected to increase margins from revenue estimates that are above those of Wall Street, especially in nutrition and established pharmaceuticals, but also from cost improvement initiatives that are tracking ahead of schedule, particularly in nutrition and diagnostics. The Jefferies price target for the stock is $44. The Thomson/First Call estimate is lower at $39. Investors are paid a 1.6% dividend.

Autodesk Inc. (NASDAQ: ADSK) should benefit from a significant internal corporate transition, as the company shifts from predominantly indirect sales (85% of revenue) to predominantly direct sales on a recurring revenue basis. The Jefferies price target for the stock is $42, and the consensus is at $41.

Deckers Outdoor Corp. (NASDAQ: DECK) ) margins are nearing an inflection point as the company cycles past difficult year-over-year comparisons. Also, sheepskin prices should begin to ease, which is critical as the company uses it for some of its top-selling products. Jefferies has a $100 price target on the stock, the high target on Wall Street, and it would represent a 65% gain for investors. The consensus number is at $63.

Edwards Lifesciences Corp. (NYSE: EW) is the medical device company most exposed company to transcatheter aortic valve replacement (TAVR), which replaces the aortic valve through a catheter and does not require an open surgical procedure. Jefferies believes the procedure has substantial opportunity to become the preferred approach to treat disease of the aortic valve. Its price target for the stock is $85, while the consensus is posted at $76.

Freeport-McMoran Copper & Gold Inc. (NYSE: FCX) is expected to see copper volume growth and a copper price recovery in the next few years that will drive margins and cash flow. Jefferies expects copper prices to reach new highs as the market goes into deficit later in the decade, especially since the barriers to entry in copper are far higher than many other commodities. The Jefferies price target is $40, and the consensus is at $36.50. Investors receive a solid 3.7% dividend.

JDS Uniphase Corp. (NASDAQ: JDSU) is expected to see an increase in software content on its CommTest business, which should drive margins through a positive shift in its core business. Additionally, distress at competitor Oclaro Inc. (NASDAQ: OCLR) could result in revenue and market share gains for the company and could lead to better industry pricing. Jefferies has an $18 price target, and the consensus is at $16.

SanDisk Corp. (NASDAQ: SNDK) is expected to see industry changes that are driving favorable industry NAND flash memory supply and demand balance, and it should support pricing, revenues and margins. Jefferies expects to see price stability for the company’s products in a historically volatile market. The Jefferies price target for the stock is $71. The consensus target is posted at $70. Investors receive a 1.5% dividend.

Texas Instruments Inc. (NASDAQ: TXN) should see margins rise as utilization increases along with analog chip demand, and as National Semiconductor, which was acquired in late 2011, continues to distribute more of its product through the company’s salesforce. The Jefferies target for this venerable tech company is $48, and the consensus target is much lower at $38.40. Investors receive a solid 3% dividend.

While the thought of margin expansion may draw a yawn from many people, it is one of the key factors in a company increasing the bottom line. The higher the margins, the higher the earnings. With the market at all-time highs, it makes sense to look for companies that can grow their earnings going forward.

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