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Consumer Spending Conundrum

From: James Cramer
Sent: Friday, July 13, 2012 8:49 AM
To: Nicole Urken
Subject: SKS


Merrill goes from hold to sell on Saks…High end again.

Nicole Urken, Mad Money Research Director

From: Nicole Urken
Sent: Wednesday, July 18, 2012 8:04 AM
To: James Cramer
Subject: Re: SKS


Another Saks downgrade today from Goldman, citing challenging macro. Though they see opportunity in Tiffany’s based on sell-off and easy 4Q compares

Negative commentary continues to pour in regarding consumer spending. With the latest disappointing unemployment stats, GDP estimates coming down and sentiment weak, the consumer discretionary sector has remained under pressure. In particular, worries about the high end abound. Earlier this month, Burberry missed its quarter, reflecting a deceleration in luxury spending. A recent slew of downgrades of Saks —the quintessential domestic high-end spending stock — reflects analyst worries about a slowdown. Certainly, opportunity remains in the sector, but how can you a turn in spending with names that are less cyclically dangerous that may continue to fall on intermittent choppiness?

Answer: Look outside the immediate sector with stocks driven by secular forces in addition to cyclical.

As we know, the global payments industry is undergoing a secular shift toward card-based and other electronic payments and away from paper-based payments. This is nothing new, and the well-positioned names Visa and Mastercard have both performed very well. But how about looking at a cheaper alternative, American Express, trading at 12 times earnings per share versus 17 times forward P/E. AmEx, in particular, is levered to high-end customers, and remains a strong play on recovery in consumer spending and travel, as well as the return of the business customer. The company’s lack of exposure to debit cards also shields it from Durbin Amendment impact, and its historically low credit losses continue to benefit results. While the economic recovery has been choppy, American Express is managing expenses and remains well-positioned for a turn. Not to mention that investing in AmEx gives you exposure to the financial sector without some of the messiness of bank earnings.

Another derivative consumer spending name is eBay. The company benefits from the same trends as Amazon which reports on Thursday after the market close. The trend? An increased shift to online purchases. Last year, eBay posted a 15 percent share in the $450 billion-plus ecommerce market, with $69 billion in total merchandise volume. PayPal had a 20 percent share with $119 billion in total payment volume. While the stock has surged, further boosted by its strong quarter last Wednesday, it remains compelling at these levels — certainly much less nosebleed than Amazon on a P/E basis.

Last quarter, a marketplace growth of 15 percent (excluding vehicles) reflected domestic and international acceleration, despite the tougher macro environment and tougher comps. The real driver, though, is PayPal, which remains in unbelievably early stages of growth. This segment is delivering “real innovation, not just promises,” as President and CEO John Donahoe outlined in the call. His description of PayPal frames the segment as an ETF on spending — noting that it touches “all segments of the market on a global scale, from small businesses to large retailers to consumers everywhere.”

In its recently reported quarter, PayPal volume grew 23 percent year-over-year, with remaining long-term opportunities for collaboration with businesses like its point-of-sales product and small business product traction. Given that PayPal is in such a fledging stage of growth, its earnings power is not being fully appreciated — and margins can continue to expand based on leverage from user and transaction growth. Interestingly, mobile is actually a tailwind for eBay even as many companies have struggled to monetize the shift to mobile devices. The company’s early integration of mobile across its services has positioned the company well, and it now expects to generate $10 billion in volume in each segment.

All of this is multiple-enhancing for eBay, which is key. Why? (1) GROWTH: Higher growth names warrant higher multiples. As we have emphasized on "Mad Money," investors are willing to pay more for higher growth, particularly when this growth is scarce. (2) LEVERAGE TO SECULAR TRENDS: Leverage to mobile and online payments is immune from economic uncertainty, which also drives multiple expansion. (3) EXECUTION: The company continues to manage and beat expectations with high transparency. This is key in the Internet space, where many of the companies garnering much interest, like Facebook, have limited public history.

The bottom line: When it comes to discretionary stocks, secular drivers are just as key as cyclical ones. That is what has driven the likes of Petsmart — people will keep spending on their pets regardless of the macro environment! — and Whole Foods — an anti-obesity play. Keep both American Express and eBay on your radar to play consumer spending. I think they are both strong long-term secular and cyclical stories at attractive valuations.



"Inside the Madness" appears twice a week at madmoney.cnbc.com

When this story was published, Cramer's charitable trust owned eBay.

Follow Nicole Urken on Twitter @nicoleurken

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