5 years since S&P 500 peak and stocks remain out-of-favor and undervalued
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Deutsche Bank Securities Inc.
Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should
be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should
consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST
CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 072/04/2012.
David Bianco
Strategist
(+1 ) 212 250-8169
david.bianco@db.com
Priya Hariani
Strategist
(+1) 212 250-2766
priya.hariani@db.com
Ju Wang
Strategist
(+1) 212 250-7911
ju.wang@db.com
S&P 500 Key Forecasts
Price 1466.47
2013-end Target 1575
12-month
Target
1575
Next 5%+ move UP
2012E 2013E 2014E
Pro-forma EPS $103.00 $108.00 $115.00
P/E 14.2 13.6 12.8
Related recent research Date
Done deal: S&P target raised to
1575
02 Jan 2013
Moving from if to what's the deal 12 Dec 2012
Strategy issues and advised
positioning into year end
02 Dec 2012
Monthly US Strategy Update 28 Nov 2012
Despite an impressive EPS recovery post US recession and resilience through
Europe's double-dip, the S&P 500 is still 100 pts below its 2007 high. Despite
record high cash balances and low corporate borrowing rates, the trailing S&P
PE languishes at 14 or a 10% discount to its historical norm. Despite recent
disappointment in foreign stocks, commodities and meager prospective returns
in most of fixed income, investors continue to shun US large-cap stocks. The
pendulum should begin to swing back with secular PE expansion in 2013.
Our 2013 end S&P 500 target is 1575 or ~12.5% return with dividends
The New Year’s Day deal Congress passed to avert the fiscal cliff only covers taxes and pushed the spending issues off for a couple of months, but we are pleased that it kept the top dividend and capital gains tax rates low and equal at 23.8%. The dividend tax rate was our chief focus and it staying equal to the capital gains rate puts 1600 within 12-month reach, in our view. But because spending cuts must still be addressed per sequestration and the debt ceiling and also because the tax hikes are right at our 1.25% tolerance for confidence in 1H growth, we raised our 12-month target from 1500 to 1575 on January 2.
We expect decent S&P EPS growth with strong DPS growth in 2013 and 2014
2013E EPS is $108 and 2014E is $115 or 5% and 6.5% growth, respectively. Given low dividend tax rates, we expect the S&P’s payout ratio to rise and 2013E DPS is $35 and 2014E is $39 or ~10% growth in both years. EPS growth should be top-line driven, flat margins, 1-2% share count shrink. A moderate reacceleration in US and global investment spending should spur sales growth.
We expect modest PE expansion, but with upside tail risk
The S&P 500 traded just shy of 14x trailing EPS at 2012 end. Our 1575 S&P target implies a 14.5 trailing PE. Thus our ~12.5% total return estimate for 2013 consists of: 5% EPS growth, 5% PE expansion, 2.5% dividend yield. This is almost too reasonable or too neat and tidy to be right. But if it proves wrong, we think we are most likely surprised to the upside from more PE expansion. PE expansion drivers include: 1) EPS proving resilient with growth in 2013 despite fiscal drags, 2) dividend growth attracting income starved investors, 3) surplus S&P FCF driving continued share count shrinkage, 4) additional buybacks and acquisitions funded with cheap debt issuance and re-leveraging.
Consider lesson of 2012: Risks with calendar dates are risks to be bought
Should investors wait for a sell-off? The two month sequestration delay puts another date with risk on the calendar. But investors seem less prone to panic than in the late summer of 2011 given the S&P’s 30% rally with only shallow dips and experience since then with last minute deals to avert policy disasters.
Thematic and sector strategy: Tilt to global growth stocks with capex exposure
We are OW Financials, Technology and Industrials. We expect strong dividend growth to drive PE expansion at the banks. However, ex. Financials, our preference is for stocks with higher foreign and export sales. Although not the case in 2012, these companies normally deliver stronger EPS growth and returns. We also expect companies exposed to investment spending to benefit from an upturn in global capex as macro uncertainty diminishes and continued Asia growth supports commodity prices and boosts demand for capital goods that enhance living standards and provide cost savings on labor and energy.