3 Emerging Brand Plays
Brand power can be a significant factor in driving a company forward. While Nike (NYSE: NKE) and Apple (NASDAQ: AAPL) both offer a line-up of quality products, brand image has been a powerful catalyst behind both companies' success.
Given this, investors may be looking for the next major brand to put money to work. The following are three companies that might best fit this investing thesis:
Under Armour (NYSE: UA) - This company is perhaps a perfect fit for the emerging brand title. Buying Under Armour today may be akin to buying Nike many years ago.
This sports apparel company's business model is easy to understand and straightforward. Top-notch marketing and revolutionary apparel offerings have established Under Armour as a highly desired brand within its market. With a market-cap of a little over $5 billion, it fits firmly into the mid-cap space, while still having plenty of room to continue to grow. Under Armour has been aggressively, and consistently, growing both its sales and net income over the last five years and margins have been ticking up.
Of course, Wall Street investors know all of this, and as a result, the stock is expensive on a valuation basis. Shares trade at a trailing P/E of 53.54, a forward P/E of 33.74, and a PEG ratio of over 2. Year-to-date, UA is already up over 48%. While valuation is important, it needs to be put into context. If Under Armour is indeed the next Nike, an investment today might prove prudent 10 years from now.
There are other near-term catalysts that could continue to propel Under Armour shares. Between March and May, the stock has been trading in a range between roughly $88.00 and $100.00. In recent days, shares have broken above this consolidation area and were last trading above $105.00. If this is a solid breakout, it should be moving higher soon. Also, the company announced a 2-1 stock split on Monday, June 11, which will occur on July 9, to shareholders of record as of June 25.
CEO Kevin Plank said in a statement, "We are proud of the value we have delivered to our stockholders over the long-term, and we believe this stock split may broaden our investor base and improve the trading liquidity of our stock."
However, Under Armour is an expensive stock on almost any valuation metric. It also does not pay a dividend. Hence, Under Armour is a speculative investment. Also, near-term sentiment may be shifting in Under Armour and its recent breakout may fail. Its short interest is above 12% and some traders are clearly skeptical that Under Armour's recent breakout is for real, continuing to look for a pullback.
Obviously, on a longer-term basis, this is totally irrelevant. The company's performance will determine the stock's long-term trajectory. Nevertheless, a strong push higher in the coming weeks would be a very good sign.
Other risks include the broader market, which is completely fixated on the European debt crisis, causing many stocks to trade in lockstep with one another. If the broader market continues to fall, it could drag Under Armour down with it.
Panera Bread (NASDAQ: PNRA) - This company operates in the fast-casual restaurant business. With its bakery-cafe concept, St. Louis-based Panera has carved out a unique niche within its market. The company operates 1,562 company-owned and franchise-operated stores in 40 states and in Ontario, Canada. In addition to the Panera brand, the company also operates under the Saint Louis Bread Co. and Paradise Bakery & Cafe names.
Due to its focus on customer-pleasing ambience, competitive pricing, and high-quality, fresh ingredients, Panera has achieved significant brand loyalty. The Wall Street Journal reported that Panera Bread scored the highest level of customer loyalty among quick-casual restaurants, according to research conducted by TNS Intersearch. The company was also named to BusinessWeek's 2010 list of top 25 "Customer Service Champs," and has been recognized for excellence by numerous other industry outlets.
Panera's success is not only apparent through awards and industry recognition, but also in its stock price. Over the last 5 years, shares have risen more than 200%. During the last year alone, Panera has added a little less than 26% and in 2012, shares are up around 5%.
The company currently has a market cap of roughly $4.4 billion and is showing a strong growth trajectory. In 2008, Panera reported revenues of just under $1.3 billion. By 2011, sales at Panera had risen to over $1.8 billion. In addition to strong top-line growth, the company's net income and margins have also been steadily rising over the last 5 years.
All of this success has transformed Panera into an extremely high quality emerging brand within its market and has rewarded shareholders. The stock trades at a trailing P/E of 30.46, a forward P/E of under 22, and a PEG ratio of 1.32.
Still, Panera, like Under Armour, does not pay dividend and could be considered a speculative stock. It has a relatively small market-cap and it lacks quarterly distributions. While its valuation does not appear to be unreasonable, this would hardly qualify as a “cheap stock.”
Competition in Panera's market is also formidable. Chipotle (NYSE: CMG) is another fast growing emerging brand which could be considered a competitor of Panera, despite some significant differences in restaurant concepts. The two brands compete at similar price-points in the quick-casual segment.
Also, Starbucks (NASDAQ: SBUX) recently acquired La Boulange bakery for $100 million in an effort to boost its food offerings. If Starbucks were to aggressively go after Panera's market with an expanded bakery offering, it could negatively affect the company.
Wynn Resorts (NASDAQ: WYNN) - This company owns and operates casino resort properties, including Wynn Las Vegas, Encore, Wynn Macau, and Encore at Wynn Macau. Wynn is a relatively young company, having only been formed in 2002. Since going public in the same year, Wynn shares have risen more than 670%. Headed by gaming tycoon Steve Wynn, the company has positioned itself as one of the most well-regarded, high quality brands within its industry.
Wynn Resorts is synonymous with luxury, world-class entertainment, and best-in-class gaming facilities. Despite the severe recession which has hurt the Las Vegas market, Wynn's stock has continued to be an outperformer, largely on the strength of its Macau operations.
Macau is one of two special administrative regions of the People's Republic of China and lies on the Pearl River Delta across from Hong Kong. The region is heavily dependent on tourism and gambling, and Wynn's continued success will be largely driven by revenue growth in Macau.
The stock is also leveraged to a recovery in the Las Vegas economy, and by extension, the U.S. housing market. Therefore, Wynn is one way that investors can play a Las Vegas rebound, while also gaining exposure to the rapidly growing Macau market. The stock trades at a trailing P/E of 21.27, a forward P/E of 14.27 and a PEG ratio of 1.16.
This valuation appears more than reasonable given WYNN's long-term growth metrics and high quality brand. If optimism were to pick up in relation to the Las Vegas gaming and entertainment market, Wynn could trade at a considerably higher multiple.
Of course, Wynn is highly exposed to cyclical risks in the economy. A slowdown in the United States and a continued weakening of the U.S. housing market could devastate Las Vegas tourism. During the height of the credit crisis, Wynn traded below $16.00. In addition, a hard landing in China could trigger a real-estate crisis in that country. Any kind of significant deterioration of the Chinese economy would likely be reflected in Wynn's share price.
The company has also recently accumulated a substantial amount of new long-term debt. Under an adverse economic scenario, investors will surely take into account Wynn's high debt levels and the stock could fall much faster than the broader market.
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