2012: A Margin Odyssey
PRODUCT MARKETING THEME
Normalized Earnings Potential in a Recovery
Scenario
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If we told you that gaming stocks reflect a recovery in 2010 but that cruise
lines assume a continued recession, would you be surprised? Our analysis
reveals that significant investment opportunities remain in even the most
cyclical and defensive sectors.
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In this report we examined stabilized margins in three years, considering
capacity and demand changes, as well as pricing issues. With the economy
showing signs of life, and a sense of normalcy returning to the credit
markets, we believe investors are rightly asking which stocks have run too
far and which ones still present value. As we discover and detail, the
likelihood of a recovery is not consistent within sectors, which we believe
creates an opportunity.
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In tackling this issue, the intent of this report is not to divine whether the
market's recent upward move is just another bear market rally or the start of
a new secular bull market. Our U.S. equity research analysts detail a
bottom-up approach to quantifying the normalized profit margins and
earnings power for their sectors and major stocks three years hence as the
economy moves closer to trend growth. While we recognize that the
recovery may not follow historical patterns and that some industries may not
achieve true “normalized” earnings power within three years, we believe that
using a consistent timeframe will help investors evaluate the investment
opportunities across sectors.
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Within sectors, we see the most upside potential within basic materials and
financials while large parts of the energy and consumer discretionary spaces
seem to embed overly aggressive recovery assumptions. On pages 2 and 3,
we outline the potential across sectors and industries at a high level using
our heat map methodology. On page 4, we highlight the most compelling
stock opportunities on the upside and downside. Our strategy and economic
teams provide the key macro framework, addressing the output gap and its
potential to pressure pricing power and earnings potential.
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Finally, our Delta One team has created two stock baskets (Bloomberg
tickers: CSUSMGNL and CSUSMGNS). The first one is a long portfolio of
names with the most attractive long-term opportunities the Delta One
analysts have identified (GR, TK, CE, NUE, NKE, CVS, CCL, CKR, PEP,
MO, ETR, IVZ, BAC, PFG, KEY, CYH, AMGN, AGN, EMC, INTC). The
second one is a short basket including the stocks where we see the most
potential downside (F, HAR, DRYS, SHLD, AEO, FL, WYNN, TSO, GHL,
MDC, TOL, LAMR, LRCX, RIMM).