Investing

Value Stocks for Summer & Memorial Day Trends (COF, CHH, XOM, TAP, LUV, DPZ)

Very few people consider the financial ramifications of Memorial Day Weekend as one of the top financial events of the year when it comes to the travel and hospitality industries.  This is the unofficial launch of summer.  Our take is still that 2011 is going to be better than 2010 by our count even if the economic data has softened in recent weeks.  AAA has recently projected that a 0.2% rise will be seen in holiday travel this Memorial Day weekend with some 34.9 million Americans traveling 50 or miles from home. 

The national average price for regular gasoline was $3.91 when AAA released its data this month, but now that is down to about $3.80 according to GasBuddy.  What is interesting is that a majority of those surveyed by AAA said that gasoline prices would not hamper their plans to drive and AAA predicted that the average distance traveled will be 792 miles from home.  A 0.2% travel increase in bodies may not matter, but the 792 miles traveled this coming weekend is 27% higher than the 2010 average distance of 626 miles.  We have reviewed and selected some value stocks that could win based upon these trends that happen to overlap with the themes around Memorial Day weekend and summer in general. 

Our value picks here are Capital One Financial Corporation (NYSE: COF), Choice Hotels International Inc. (NYSE: CHH), Exxon Mobil Corporation (NYSE: XOM), Molson Coors Brewing Company (NYSE: TAP), Southwest Airlines Co. (NYSE: LUV), and somewhat still in Domino’s Pizza, Inc. (NYSE: DPZ).  We have singled each value pick out as to why it is preferred over peers, what the price history and valuations are on each, given size data, and even given estimated projections based upon Thomson Reuters data. You will need to read each carefully as these are all different companies even if the underlying themes overlap a bit here. 

If there is one thing you must have over the summer, and Memorial Day weekend, it is money or credit.  When it comes to Average Joe, Capital One Financial Corporation (NYSE: COF) is our current best value play around money and credit versus peers.  Capital One has survived the credit crunch, its metrics continue to improve, and it seems less affected over the interchange fee fears than peers even if we see lower expected earnings in 2012 versus 2011.  A bonus is that Easter was so late in April and with Memorial Day coming we think it can collect higher interest payments this summer as it looks like cardholders may enter summer with slightly higher credit card balances compare to a year ago.  At $52.50, the 52-week trading range is $36.10 to $56.26, the consensus price target is almost $60.00, and it has a market cap of almost $24 billion.  Capital One currently trades at only about 8-times expected earnings.   

The hospitality sector is not one which trades at cheap multiples when it comes to earnings, and most are stingy when it comes to paying out dividends.  Our current value pick in the hotel and lodging sector is the same one that travellers use for value… Choice Hotels International Inc. (NYSE: CHH).  Choice franchises lodging properties under the brands of Comfort Inn, Comfort Suites, Quality, Clarion, Sleep Inn, Econo Lodge, Rodeway Inn, MainStay Suites, Suburban Extended Stay Hotel, Cambria Suites, and Ascend Collection.  Its franchise hotels at March 31 included more than 6,100 hotels with over 490,000 rooms in the U.S. and internationally and it is still rapidly adding units and rooms.  With shares now back under $35.00 and with a market cap of just under $2.1 billion, its 52-week trading range is $29.25 to $41.42 and analysts have a consensus price target of $39.18. The company also pays above 2% in dividend yields, making it one of the highest dividend payers in the hotel and lodging sector.

Big Oil, a.k.a. Exxon Mobil Corporation (NYSE: XOM), is the big winner when it comes to gasoline and that 27% higher weekend distance is going to matter more than the tiny bump in the number of travelers.  Last year we saw the second quarter revenues of almost $92.5 billion but that is now expected to be over $120 billion.  It is no wonder that Exxon is one of our Ten Stocks To Own For The Next Decade.  It trades at less than 10-times 2011 expected earnings and has a monster stock buyback plan.  With it being ahead of peers in the game of switching to being an oil and natural gas giant rather than just “Big Oil,” we continue to favor Exxon Mobil as our top value stock in oil and gas.  Our only caveat is that Exxon Mobil is already the largest public company with a market cap of over $400 billion. With shares close to $82.00, its 52-week range is $55.94 to $88.23, and the consensus Thomson Reuters price target of analysts is $92.36.

If there is one trend we expect to see rewarded in the coming summer, it is beer even if beer is harder to invest in than you might think and even if cost pressure has been there.  Our current value pick is Molson Coors Brewing Company (NYSE: TAP).  It trades at cheaper multiples than the much larger and more global Anheuser-Busch InBev (NYSE: BUD), has close to the same pullback, and pays a better dividend.  Molson Coors trades at $46.00, has a 52-week trading range of $39.89 to $51.11, and a market cap of about $8.6 billion.  While analysts have a consensus price target of $49.25, our take is that the analysts are understating the upside and we think upside of $55.00 could be seen before valuations get stretched.  This trades at only about 12.5-times expected earnings for 2011.  Its $0.28 dividend gives a superior yield of about 2.4% and its annualized payment of $1.12 compares to estimates of $3.68 EPS this year.  If any of the larger beer companies can make an acquisition of smaller niche growth brands we think it is Molson Coors.

When it comes to airlines, Southwest Airlines Co. (NYSE: LUV) is our top pick for the Steady-Eddie investor with hardly any worries about currencies compared to peers.  That also gives us the best value outcome for the airline and it is one of the few that even bothers to pay a paltry dividend.  Investors need to understand that Southwest is not as leveraged and not as volatile, so the legacy carriers can rally much more if trends improve in oil and in air traffic.  Those same legacy carriers can also fall much more in price.  Southwest trades at about 19-times this year’s expected earnings, but that is not off the chart for an airline.  What we really like is that Southwest has closed its AirTran acquisition and this opened up many new routes that were not previously there.  Losing its sole-737 fleet status here is not a major concern and the cracks in planes issue seems to be behind it.  At $11.81, Southwest has a market cap of $8.8 billion, has a 52-week range of $10.42 to $14.32, and it has a consensus price target of above $16.00.

This one is not alphabetic in order for a simple reason… We only want you now to look at it if its shares pull back by more than 8% from any peak as many of our restaurant and casual dining stocks are at valuations above our own comfort zone… That would be Domino’s Pizza, Inc. (NYSE: DPZ).  We just revisited this as a value stock and it has risen much more than we would have expected when we first covered it at 12-times earnings and with a price then of $18.60 and then again around $21.00 more recently.  The good news is that we now think that Domino’s can go above $25.00. The bad news is that it is already close.  We like Domino’s as a return to normalcy value stock against earnings, but now it is one we can only be very favorable on if its shares get a pullback of 8% or 10%.

JON C. OGG