Let the holiday shopping begin! But skip the latest gadget, trendiest fashion or hottest toy. Instead, consider stocks of companies your kids will recognize by their products and services. Although your kids may not fully appreciate the gift now, years (and, we hope, thousands of dollars in profits) later all will be forgiven. If you pick the right stocks, the proceeds can afford your child a really big present, such as a car or an education.
And even if you don’t have kids, you’ll want these five in your own portfolio:
Take a Bite of Apple
The Apple (symbol AAPL) juggernaut continues to roll. Sales for the maker of iPhones, iPads, Macs and iPods increased 67% in the fourth quarter of the fiscal year ended September 25. Earnings rocketed 70%. And sales rose 52% for the fiscal year overall, thanks in great part to the launch of the new iPhone 4 and iPad.
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The engine for growth is still in overdrive. Apple’s profits are propelled by the iPhone, which accounts for the largest share of Apple’s sales (43%). Sales of the iPhone are outpacing competitor Research in Motion’s Blackberry and are dominating the smart-phone market.
Sales of the iPhone are poised for a big pop next year if and when Apple begins selling its ingenious gadget through Verizon Wireless. The move would give Apple access to a potential 82 million new customers. AT&T (T), the wireless carrier with which Apple currently has an exclusive sales arrangement, has 68 million customers (38% of AT&T subscribers use Apple smart phones).
And the iPhone saga isn’t a short story -- today it’s more like the first book in an epic series a la Harry Potter. Apple holds only 14% of the global smart-phone market. What’s more, only 15% of Apple’s sales stem from Asia (excluding Japan). So there’s ample room for growth internationally.
Although Apple’s shares have zoomed 275% since the bear-market bottom to $316.40 per share, the stock remains attractively valued based on its growth prospects and ironclad balance sheet, says Robert W. Baird analyst William Power. He estimates earnings will grow nearly 30% per year over the next three years. Power has a 12-month target price of $410 based on a price-earnings ratio of 17 times fiscal 2012 earnings. Standard & Poor’s has a 12-month target price of $375 based on a P/E of 19 times S&P’s calendar-year 2011 estimate of $19.81. (All prices and related data are as of the December 1 close.)
Getcha Game On
GameStop (GME), the world’s largest video-game retailer, offers good value for the shrewd investor who’s ready to pounce. The stock is undervalued because the market thinks it’s lagging the digital age. But GameStop is selling games online and offering digital video-game downloads.
Software is performing well, despite a slow recovery in international markets. Same-store sales in the U.S. -- a key measure of retail performance -- rose 5.3% in the third quarter. Sales of new video games rose 9%, while overall U.S. video-game sales declined in the quarter. And the company’s focus is selling more-profitable software versus less-profitable hardware.
GameStop is projecting a 19% to 23% increase in fourth-quarter earnings. It trades at eight times next year’s earnings, compared with retailers such as Amazon, Best Buy and Wal-Mart, which trade at 51 times, 11 times and 12 times next year’s earnings, respectively. Credit Suisse analyst Gary Balter has a 12-month target price of $28. The stock currently trades at $20.27 per share.
Channel Up for Profits with Viacom
Cash in on your kids’ favorite shows by investing in Viacom (VIA.B). The owner and operator of MTV Networks, Paramount Pictures, VH1, Nickelodeon and Comedy Central is experiencing a renaissance in advertising. Viacom produces popular shows -- including MTV’s Jersey Shore, Nickelodeon’s Victorious and Comedy Central’s Daily Show with Jon Stewart -- that are scoring high ratings, which Viacom is cashing in on through ad sales.
Ad sales have grown for three consecutive quarters, and Viacom’s executives expect that growth to continue. The company is experiencing strong sales for last-minute commercial spots that carry higher prices. Viacom’s management is optimistic that as the economy recovers, ad sales will rise in 2011. Viacom also expects subscriptions to pick up with the economy.
Fiscal 2010 (the year ended in September) earnings from continuing operations are up 20%. The company began distributing a quarterly dividend in the second quarter and resumed its stock-buyback program this fall. Viacom, at $39.22, trades at 12 times next year’s earnings. Analysts, on average, expect earnings to grow 13% next year to $3.30 per share; they project that earnings will grow 14% in fiscal 2012 to $3.76 per share.
Wish Upon Disney’s Stock
If you’re buying your kids Disney movies and toys, they might also like company stock as a stocking stuffer. With a rebound in advertising and its theme-park business, Disney (DIS) should continue to generate good earnings in fiscal 2011, which ends in September. Analysts expect earnings to increase 17%.
Advertising is picking up across Disney’s broadcast, cable and local TV segments, as the company is seeing strong sales for last-minute commercial spots. Disney has also cut costs in daytime television and news production. (Media networks account for 45% of Disney’s sales.)
On the movie side, Disney has a strong film slate for 2011, including Winnie the Pooh, Cars 2 in 3D (Pixar), Thor and Captain America (Marvel) and Pirates of the Caribbean 4. These should ensure studio profits, not to mention the cash from accompanying toys, T-shirts and the like. (The studios account for 18% of sales.)
The company’s theme-park business, which was hit by the recession, is picking up. Disney is seeing solid bookings for the December quarter for its parks, which account for 28% of sales. Disney has a strong balance sheet and continues to repurchase shares. The stock, at $37.12, trades at 15 times estimated earnings for the fiscal year that ends next September.
The Joy of Pepsi
Put some fizz in your child’s portfolio with PepsiCo (PEP). The snack-food-and-beverage conglomerate is working to refresh its business by investing more in emerging markets such as China.
However, Wall Street is down on the stock. The company lowered its earnings outlook for 2010 based on greater-than-anticipated investment in emerging markets, especially China. But Wall Street’s thinking is too short-term. Pepsi’s investment is a smart move because consumers in emerging markets carry less debt than those in many developed countries and are growing wealthier. Expanding into these markets will also help Pepsi offset any weakness in the U.S. and Western Europe, where consumers are cutting back their spending. (Pepsi currently gets 40% of its revenue outside the U.S. and Canada.)
This year Pepsi acquired its two largest North American bottlers, which should help it adapt to changing consumer tastes and get new products to market faster. It will also help it better control costs, ultimately bolstering profits.
Analyst Carlos Laboy, of Credit Suisse, says Pepsi is one of the cheapest consumer stocks he covers. “It trades below its competitors, and we believe it will still deliver superior earnings growth,” he says. Pepsi trades at 14 times its 2011 earnings estimate, while competitor Coke trades at 17 times next year’s earnings. Based on competitors’ and Pepsi’s own historical P/Es of 19 times to 27 times earnings, Standard & Poor’s has a 12-month price target of $71. The stock, which yields 3.0%, trades at $66.63.
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