It would be an understatement to say the first half of 2022 was a bloodbath for consumer discretionary stocks. Approximately $1.8 trillion in market value disappeared through the end of June, with the S&P 500 Consumer Discretionary Index down 33%.
It was the worst first-half performance by the sector on record.
“‘As consumers continue to pull in their horns, I think that these stocks can go lower,’ said Matt Maley, chief market strategist for Miller Tabak + Co,” Bloomberg reported.
However, just because consumer discretionary stocks are badly gored doesn’t mean you throw the baby out with the bathwater. Wall Street still likes consumer discretionary stocks.
Here are three of the most popular.
Everi Holdings
Everi Holdings (EVRI) is a Las Vegas-based company that operates two businesses: Games and Financial Technology Solutions for the casino and iGaming industries. Everi’s casino customers generated $10 billion in revenue in the first quarter through its gaming and fintech products.
In Q1 2022, its revenues jumped 26% to $175.6 million, its net income rose 54% to $31.5 million, and its free cash flow (FCF) increased 19% year-over-year to $51.6 million. The company’s Games business accounted for 56% of its first-quarter revenue, with its Fintech business generating the rest.
Approximately 76% of its trailing 12-month (TTM) revenue of $528 million was recurring. Over the past five-and-a-half years, it’s grown by 13% compounded annually. The same applies to its adjusted earnings before interest, taxes, depreciation and amortization (EBITDA).
From a valuation perspective, its TTM FCF is $166.8 million. Based on a market cap of $1.65 billion, it has an FCF of 10.1%. I consider anything above 8% to be in value territory.
As for Wall Street, nine analysts are covering EVRI. All nine rate it a Buy. The median target price is $30, 67% higher than where it’s currently trading.
Academy Sports and Outdoors
Academy Sports and Outdoors (ASO) is a Texas-based sporting goods and outdoor retailer that’s expanding at a fast pace. It recently opened its 13th store in Florida in Panama City. Its expansion plans call for 80 to 100 store openings over the next five years. That will bring its store total to at least 340 locations in 16 or more states.
The sporting goods industry is pretty resilient. Its growth is solid, if not spectacular. According to Statista, the sporting goods stores market in the U.S. is estimated to be $67.2 billion. Over the past five years (2017-2021), it grew 5.1% annually.
Recession or no recession, people will get outside and participate in sports. Just ask Nike (NKE) if that’s the case.
On June 23, Academy launched its latest private label men’s activewear brand, Right of Way (R.O.W.). The men’s line retails for $19.99 to $34.99. The company generated $342 million in the first quarter from apparel sales. Its private label brands likely accounted for a healthy slice.
In 2022, the company expects net sales of at least $6.43 billion with adjusted earnings per share of $6.55. Its TTM FCF through the end of April was $470 million. That’s an FCF yield of 12.9%.
Of the 11 analysts who cover ASO stock, all 11 rates it a buy with a median target price of $52, 22% higher than its current share price.
Holley
If you cover stocks long enough, you realize that despite the number of listed companies falling over the years, you can’t know every one of them.
That’s the case with Holley (HLLY), a Kentucky producer of electronic fuel injection and other high-performance automotive aftermarket products for car and truck enthusiasts. A market estimated to be $36 billion and growing for years to come.
In 2021, Holley’s sales were $693 million, 2-3x its nearest competitor. Of this, approximately $117 million was from its direct-to-consumer (DTC) business. Since 2014, it’s grown its DTC revenue by 42% annually. Over these eight years, it’s also made 16 acquisitions, demonstrating that it can grow organically and through M&A.
Based on its current growth, it ought to hit revenue of $1 billion in 2024.
Part of the reason I’m unfamiliar with Holley is that it became a public company last July through its combination with Empower Ltd., a special purpose acquisition company created by MidOcean Partners, a New York-based alternative asset manager specializing in middle-market private equity. Holley itself was owned by Sentinel Capital Partners, who remain the largest shareholder holding 53.1%.
Although Holley’s share price is down almost 10% YTD, it’s still up a couple of dollars from Empower’s October 2020 IPO. Of the nine analysts that cover Holley’s stock, eight rates it a buy with a median target price of $15, 26% above its current share price.
All three stocks will face some revenue pressures in the event of a recession, but they’re all cheap based on their long-term potential. All three should be on your radar if you're an aggressive investor.
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