|Written by GSCR Staff|
|Friday, 14 June 2013 00:26|
So all week we have somewhat been hammering the millennial generation. There has been no harm intended and truth be told, probably more than anything, it is wishing we were 25 years old again. As stated in Monday’s Goldman Guide, the current generation in their 20’s and early 30’s are delaying adulthood to a certain extent, and are huge consumers. The major industry that targets these spenders is technology both with gadgets and applications. Another niche industry that is ‘catering’ more and more to this market segment are coffee producers, particularly chain coffee shops. Finally, these people spend a lot on clothes and fashion, but in a more relaxed and sporty way than prior generations when it comes to going out of the house.
Today, we thought we would shift gears and look at some large or mega cap stocks in a fun ‘competitive’ format with this millennial generation in mind. We will analyze two stocks in each industry, technology, coffee, and sports apparel with a longer term focus in mind as performance for these stocks depends heavily on how and where this particular segment spends its money over the next five to ten years.
Technology: Apple vs. Google
While Apple (NASDAQ – AAPL - $435.96) and Google (NASDAQ – GOOG - $877.00) are clear competitors in mobile and are both very high profile stocks in this sector and the millennial generation has grown up with these names like older generations grew up with GM or Coke. AAPL has been decimated over the last 9 months, while GOOG just keeps on climbing. From a purely abstract evaluation, the internet and virtual reality are still in infancy stages of growth, while gadgets and computers are always bound by size or other limitations. This somewhat esoteric analysis definitely favors Google. From a simple value perspective AAPL has a forward 12-month P/E just above 9, while estimates for GOOG put the metric for that stock above 16. Profitability favors GOOG with a gross margin of 58% versus 40% for AAPL. Finally, operating margin for AAPL is currently at 31% versus 25% for GOOG. While both may be great stocks to add to your portfolio if you can afford them, it might be a unique opportunity to buy Apple.
Coffee: Starbucks vs. Dunkin Donuts
One might think that this pick would be easy, since Starbucks (NASDAQ – SBUX - $65.97) seems to offer everything and anything related to coffee and a posh store atmosphere while Dunkin Donuts, or more formally Dunkin Brand Group, (NASDAQ – DNKN - $41.97) is more of a no frills ‘old school’ style brand. The SBUX approach seems to cater to the millennial high maintenance tastes by offering every kind of coffee, latte, tea, scone, etc under the sun. You can literally hear of a new drink combination every time you stand in line behind someone at Starbucks. Dunkin has done some smart things as well. They have expanded the coffee line up just enough to offer a real choice and added healthier options to the breakfast menu. It still a great place to get a cup of coffee and a donut in a quickly and inexpensively. DNKN has an annual forward P/E of 23, while SBUX has a value of 25 for the same metric, slightly favoring DNKN. Additionally, gross and operating margin for DNKN are 79% and 39% versus 57% and 14% for SBUX for the same metrics. The no-frills but lower costs of Dunkin may grab more millennial customers over the next few years as they’ grow up’ We like DNKN over SBUX—the “everyman” will continue to dominate revenue until the millennials enter the fray. Plus, a higher multiple for its better margins could be in the offing.
Athletic Apparel: Nike vs. Under Armour
Nike (NYSE – NKE - $61.76) is the establishment and Under Armour (NYSE – UA - $59.39) is still the upstart to a certain extent. One key item to consider here is that college sports apparel was the largest sports line in 2012, with over $3.7 billion in sales in 2012 and is expected to remain number one and grow to $4.1 billion by 2017. Nike already has several high profile college teams in its line, including Oregon, its flagship in this arena. Under Armour is making inroads in this area. Something to look out for in the next few years is to see how the entry of Maryland, the school UA is trying to make the Oregon of the East Coast, into the Big Ten conference changes the landscape in big time college football with apparel heavyweights of Ohio State, Michigan, and Penn State. This could have a huge impact on college students and recent college grads in regard to sales of school gear, sports apparel, and clothing if UA steals away schools with current Nike deals. UA is trading at an order of magnitude lower than NKE related to market cap. NKE also has a forward 12-month P/E of 20, compared to 32 for UA. We think the market for both of these companies is boundless, particularly in emerging markets. We like UA here as it operates on with similar margins to NKE at 10% of the size and has an aggressive marketing and high profile athlete deal signing campaign.
Have a great weekend.
Disclosure: Goldman Small Cap Research analysts are neither long nor short these shares but may elect to purchase the stock within the next 48 hours.
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