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5 Consumer Stocks Outpacing S&P 500 Growth

The S&P 500 Consumer Discretionary Index — made up of companies that tend to be the most sensitive to economic cycles — has soared 6.4 percent this year, as companies such as Time Warner, McDonald's,and Coachfueled some of the highest earnings growth in the S&P 500.

The 11 consumer discretionary companies to report fourth-quarter results so far grew at an average rate of 14.4 percent. This growth, on an earnings per share basis, has far outpaced the S&P 500 as a whole, which has seen average earnings growth slow to its slowest pace in more than two year.

The benchmark index grew at a 3.6 percent rate in the fourth quarter, according to the average of 157 companies reporting so far.

As 2012 unfolds, many of the stocks most sensitive to economic cycles are already beginning to take off, shrugging off the more negative headlines out of Europe as they prove that fundamentally they are strong and their sales have survived the economic slowdown.

Here are five economically sensitive stocks from the S&P 500 Consumer Discretionary Index that have shown some of the strongest fundamental growth so far in 2012.

Time Warner Cable

Company Profile: Time Warner Cable is the second-largest U.S. cable operator, with nearly 15 million customers concentrated in New York, Ohio, North and South Carolina, California and Texas.

The New York-based company had revenue of $19.675 billion in 2011 and pays a quarterly dividend of 56 cents a share. The company also announced a $4 billion share buyback plan when reporting earnings on Jan. 26.

Share Price: $74.51 (Jan. 26 Close)
Year-to-Date Increase: 16 percent
Year-Over-Year Earnings Growth: 40.4 percent
TheStreet Ratings Grade: “Buy”

TheStreet Ratings team says it is unlikely the company will face financial difficulties in the near future and likes that the company trades at a discount relative to other media industry shares.

Standard & Poor's View: Tuna Amobi, an analyst at S&P Capital IQ, has a positive outlook for Time Warner Cable and the media industry.

"With some historically correlated macroeconomic indicators improving further in the past month, we maintain our outlook for continued cyclical outperformance by the media industry," in 2012, he said. "We expect healthy ads rebound, steady subscription growth, emerging content-related revenue streams [and] international growth."

Amboi sees strong residential data and strong long-term upside for the commercial unit.

Coach

Company Profile: Coach is the largest U.S. luxury handbag maker. The New York-based company sells luxury handbags, accessories, footwear, jewelry, travel bags and watches for men and women. The retailer had revenue of $4.159 billion in 2011 and pays a quarterly dividend of 22 cents a share.

Share Price: $68.89 (Jan. 26 Close)
Year-to-Date Increase: 13 percent
Year-Over-Year Earnings Growth: 18 percent
TheStreet Ratings Grade: “Buy”

The company managed to grow both sales and net income at a faster pace than the average competitor in its industry this quarter and has seen improving cash flow, TheStreet Ratings analysts note.

Standard & Poor's View: Analyst Jason Asaeda feels positive about Coach's potential for future growth as the company grows its retail business in Asia and further develops its line targeting men.

Asaeda says he sees favorable long-term prospects "as much based on management's acumen as on global brand potential." Given his optimistic outlook, Asaeda believes the company's shares should trade at a premium to their 10-year historical price-to-earnings ratio and gives the shares a price target of $80 for 2012, 16.1 percent above Jan. 26's closing price.

McDonald's

Company Profile: McDonald's , the world's largest restaurant chain and a top sponsor of the 2012 Olympics in London, operates in more than 100 countries and gets about 60 percent of its revenue abroad. The Oak Brook, Ill.-based company had revenue of $27 billion in 2011 and pays a quarterly dividend of 70 cents a share.

Share Price: $99.18 (Jan. 26 Close)
Year-to-Date Decrease: 1.9 percent
Year-Over-Year Earnings Growth: 15.7 percent
TheStreet Ratings Grade: “Buy”

The Street Ratings analysts like that McDonald's sales and net income have grown and that revenue growth has outpaced its average competitor, however warns that the company has weak liquidity.

Standard & Poor's View: Jim Yin, an analyst at S&P Captial IQ who rates McDonald's a strong buy, sees the potential for the stock to climb 6.7 percent this year. He believes McDonald's value offerings will offset the risks of slowing global growth.

"Although we are concerned about a slowdown in the global economy, we believe consumers are still willing to make small discretionary purchases," Yin wrote in a note. "We also think MCD can gain market share with its wide menu offerings, as some customers trade down."

Yin also remains optimistic about new menu items and the company's potential for continued expansion in international markets, particularly in Asia, the Middle East and Africa.

AutoNation

Company Profile: AutoNationis an automotive retailer based in the Sunbelt region. The company owns and operates 242 new vehicle franchises from 206 stores. The Fort Lauderdale, Fla.-based company had revenue of $13.83 billion last year and set a record for earnings in the fourth quarter.

Share Price: $36.82 (Jan. 26 Close)
Year-to-Date Decrease: 1.6 percent
Year-Over-Year Earnings Growth: 13.3 percent
TheStreet Ratings Grade: “Buy”

TheStreet Ratings team says that while AutoNation managed to grow both sales and net income at a faster pace than the average competitor last quarter, its weak liquidity shows a lack of ability to cover short-term cash needs.

Standard & Poor's View: S&P Capital IQ analyst Efraim Levy, who rates AutoNation at hold, sees continued revenue expansion of about 10 percent this year as new vehicles sales improve.

"Sales should benefit from improved employment levels and credit availability, aging vehicles that need replacement, and an expected increase in industry new product offerings," Levy wrote in a note.

He also believes AutoNation "warrants a premium valuation," based on above-average net margins. He sees the company using its cash flow to support share repurchasing and expansion and possibly debt reduction.

Harley-Davidson

Company Profile: Harley-Davidson, the biggest U.S. motorcycle maker, designs and sells heavyweight cruiser and touring motorcycles and motorcycle parts and accessories globally.

In the most recent quarter, sales in Latin America grew 42 percent. The Milwaukee, Wis.-based company had revenue of $5.312 billion last year and issues a quarterly dividend of 12.5 cents a share.

Share Price: $44.55 (Jan. 26 Close)
Year-to-Date Increase: 14.5 percent
Year-Over-Year Earnings Growth: Earnings grew to 24 cents a share from an 18 cent loss in 2010
TheStreet Ratings Grade: “Buy”

Harley-Davidson managed to grow both sales and net income at a faster pace than the average competitor while maintaining strong liquidity, The Street Ratings analysts note.

Standard & Poor's View: S&P Capital IQ analyst Efraim Levy, who rates Harley-Davidson at hold, sees sales of motorcycles expanding, but warns that he expects revenue and profit to remain constrained as the company pays down loans taken out during a period of lower sales volumes caused by the recent recession.

However, Levy also sees increased efficiencies and restructuring helping Harley-Davidson's operating margin.

"Our hold recommendation reflects our outlook for a sluggish economic recovery, given uncertainties about employment and sovereign debt issues," Levy wrote in a note. "However, we are positive on HOG's cost-cutting efforts" and like the company's "solid" balance sheet.

Additional News: Income Jumps, Spending Slows as Consumers Pull Back

Additional Views: This Company Becoming the Apple of Consumer Stocks

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Disclosures:

TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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