Results for the tech stocks in last week's preview were a mixed bag, some beats, some misses, some in line. By and large, expectations for tech companies reporting results this week remain high, though. Here's what analysts surveyed by Thomson Financial are anticipating in the way of earnings, as compared to the same period of the previous year.
PetSmart (NASDAQ: PETM) shares are trading higher after an analyst at JP Morgan upgraded the stock to "Overweight" from "Neutral" with a $29 price target. As noted by Eric Buscemi, the analyst cited improving margins and strong area relative to other retail outlets. If you think that the stock won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on PETM.
After hitting a one-year high of $35.01 in September, the stock hit a one-year low of $18.75 in March. PETM opened this morning at $23.51. So far today the stock has hit a low of $22.57 and a high of $23.62. As of 11:30, PETM is trading at $22.89, up $0.68 (3.1%). The chart for PETM looks bullish and steady, while S&P gives the stock its highest 5 STARS (out of 5) strong buy rating.
For a bullish hedged play on this stock, I would consider a July bull-put credit spread below the $20 range. A bull-put credit spread is an options position that combines the purchase and sale of put options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make a 4.2% return in just five weeks as long as PETM is above $20 at July expiration. PetSmart would have to fall by more than 12% before we would start to lose money. Learn more about this type of trade here.
PetSmart (NASDAQ: PETM) issued its Q1 earnings numbers on Wednesday, and the market didn't take too kindly to them. At the time of this writing, the shares were down in after-hours trading by over 3%. I can kind of see why.
Revenues did okay, rising 9% to $1.2 billion. Earnings per share, however, dropped like a rock. Last year, the company booked $0.78 per diluted share; this year, the company did $0.32 per diluted share. However, investors need to realize that there was a gain on an investment in the previous year's quarter that skewed results; backing out the $0.47 per-share benefit gives an earnings number of $0.31 per diluted share in Q1 2007. So, the real earnings growth was rather tepid, and this might explain to some degree why there was a bit of a sell-off after the news, even though, according to Briefing.com, PetSmart beat bottom-line expectations by a penny and did exceed on the top-line as well.
Guidance for Q2 was also an issue, as Briefing.com seemed to indicate that management's growth expectations are not precisely what Wall Street was looking for. For the full year, however, PetSmart is looking to do about what Wall Street wants. If management hits the full-year earnings range of somewhere between $1.51 and $1.59 per share, then the P/E ratio on the stock is around 14. Sure, that isn't expensive, but I don't know if I want to enter a company such as this in the kind of environment we find ourselves in. Yes, pets are important and will be taken care of, but people might cut down on pampering them to excess. Plus, there's a lot of competition out there for your pet dollars. Wal-Mart (NYSE: WMT), Costco (NASDAQ: COST), BJ's (NYSE: BJ), and every supermarket in the country all vie for a slice of the pet market.
MOST NOTEWORTHY: PetSmart, Marsh & McLennan and Pinnacle Airlines were today's noteworthy upgrades:
Banc of America upgraded PetSmart (NASDAQ:PETM) to Buy from Neutral on valuation, as they believe the market is overly negative on the company's cyclicality.
Keefe Bruyette upgraded shares of Marsh & McLennan (NYSE:MMC) to Outperform from Market Perform on increased confidence management will be able to improve margins.
JP Morgan upgraded Pinnacle Airlines (NASDAQ:PNCL) to Overweight from Underweight citing the company's FCF and contract certainty.
OTHER UPGRADES:
Hasbro (NYSE:HAS) was upgraded to Buy from Hold at Needham.
Calyon raised Airtran Holdings (AAI) to Add from Neutral.
Liberty Entertainment (LMDIA) was raised at Merrill to Buy from Neutral.
PetsMart (NASDAQ: PETM), the operator of more than 1000 pet stores, is scheduled to report EPS on March 5.
PETM March option implied volatility is at 55: April at 50 and July at 40; above its 26-week average of 39 according to Track Data, indicating larger near term movement.
Option Update is provided by Stock Specialist Paul Foster of theflyonthewall.com
MOST NOTEWORTHY: Coca-Cola, Novo Nordisk and Equinix were today's noteworthy upgrades:
Bear Stearns upgraded The Coca-Cola Company (NYSE: KO) to Outperform from Peer Perform, as they expect it to post solid earnings short-term with potential upside, and over the long-term due to its upgraded business model.
Bernstein raised its rating on Novo Nordisk AS (NYSE: NVO) to Outperform from Market Perform, as they believe consensus estimates do not reflect the company's growth potential.
Merriman upgraded shares of Equinix Inc (NASDAQ: EQIX) to Buy from Neutral on valuation following the recent sell-off. The firm expects strong Q4 results.
PetsMart (NASDAQ: PETM), the operator of more than 993 pet stores, closed at $23.04 Thursday.
PETM is scheduled to report Q4 EPS on March 5.
Goldman says: "We are upgrading PETM to Buy from Neutral. We expect PETM to embark on a classic transition from a struggling growth retailer in the "productivity ceiling" phase of our retailing cycle to a more returns-focused origination."
PETM overall option implied volatility of 50 is above its 26-week average of 35 according to Track Data, indicating larger movement.
Option Update is provided by Stock Specialist Paul Foster of theflyonthewall.com
PetSmart Inc. (NASDAQ: PETM), the country's largest supplier of all types of pet needs, is taking a $4.7 million write down to exit the horse equipment business in its stores. From now on, PetSmart will concentrate on cats, dogs, ferrets and fish. The company released 3Q 2007 results last week. Net sales were up 1.4% to $1.12 billion, but net income was down $2 million to $29.5 million. PetSmart figures it can turn a bigger profit per square foot by concentrating on smaller sized pet needs, as well as by providing pet services such as grooming and training. Pet services income increased 23% to $111 million for the quarter.
PetSmart also operates in-store Banfield veterinary offices through MMI Holdings, but is in the process of changing the financial arrangements that govern that relationship. PetSmart sold its portion of MMI Holdings Inc. earlier in the year. The proceeds from the sale account for $0.48 per share for the full year projected EPS of $2.05-2.09. To bolster its bottom line, PetSmart has accelerated its stock buyback, purchasing 6.2 million shares for $225 million during 3Q 2007, with plans to purchase another $75 million worth of stock.
Unlike many retailers that are cautious about this holiday shopping season, CEO Phil Francis is optimistic. Shelves once given over to equine equipment are now filled with quicker selling gift items for household pets "to delight the customer."
In addition to its retail functions, PetSmart also operates PetSmart Charities, which sent pet rescue vans and supplies to California to assist with animal evacuations during the recent wildfires. To date, PetSmart's in-store pet adoption program has given the gift of a home and family to more than 3 million pets.
Looks like the so-called "war on Christmas" has begun. Lowe's Cos. (NYSE: LOW) and PetSmart Inc. (NASDAQ: PETS) have angered the American Family Association, a prominent religious conservative group.
The home improvement retailer earned AFA's ire by calling Christmas trees "family trees" in a catalog. A Lowe's spokeswoman, speaking to theCharlotte Observer, called using the term an error that came during the "creative process." Lowe's has profusely apologized and the AFA has apparently forgiven the company. "We appreciate Lowe's for listening to its customers and responding appropriately to our concerns," AFA said on its website.
Gallery: 'Tis the season to boycott: Would Christmas by any other name be so controversial?
MOST NOTEWORTHY: BEA Systems, Nokia, Medco Health, Quest Diagnostics and PetSmart were today's noteworthy downgrades:
Citigroup downgraded shares of BEA Systems (NASDAQ: BEAS) to Hold from Buy on valuation following the $17/share offer by Oracle (NASDAQ: ORCL) as they think a public bidding war for the company is unlikely.
ABN Amro downgraded shares of Nokia Corporation (NYSE: NOK) to Hold from Buy on valuation and believes above consensus Q3 results are already priced into shares.
Wachovia downgraded Medco Health Solutions (NYSE: MHS) to Market Perform from Outperform on valuation.
The firm also downgraded Quest Diagnostics (NYSE: DGX) to Market Perform from Outperform, as they believe the prospects from stabilizing volumes and cost savings are reflected in valuation and Street estimates.
Credit Suisse downgraded shares of PetSmart (NASDAQ: PETM) to Neutral from Outperform citing aggressive pricing at Petco, accelerating growth initiatives, limited visibility around expense management, and lack of consistent results.
OTHER DOWNGRADES:
Methanex Corporation (NASDAQ: MEOH) was downgraded to Sector Underperformer from Sector Performer at CIBC.
MOST NOTEWORTHY: Apple (AAPL), Ariba (ARBA), EMC Corp (EMC), Anadarko Petroleum (APC) and RealNetworks (RNWK) were today's noteworthy upgrades:
Apple Inc (NASDAQ: AAPL) was upgraded to Buy from Hold with a $160 target at Citigroup following yesterday's pullback; they believe Mac should remain strong through year-end, Q3 consensus estimates look conservative and believe production cuts should not be a surprise.
Roth Capital upgraded shares of Ariba (NASDAQ: ARBA) to Buy from Hold as they believe shares work higher over then next few quarters; they expect seasonally strong September and December quarters and believe that revenue bottomed last year.
Goldman added EMC Corp (NYSE: EMC) to its Conviction Buy List, citing Q2 results and multiple product cycles.
Anadarko Petroleum (NYSE: APC) was raised to Market Perform from Underperform at BMO Capital following better than expected Q2 results and guidance.
RealNetworks (NASDAQ: RNWK) was upgraded to Hold from Sell at Soleil on valuation after reporting solid Q2 earnings...
OTHER DOWNGRADES:
PetSmart (NASDAQ: PETM) was upgraded to Outperform from Neutral at Credit Suisse.
BWS Financial raised Xoma (NASDAQ: XOMA) to Buy from Hold.
MOST NOTEWORTHY: PetSmart, Inc (PETM), Google (GOOG), Dr. Reddy's Laboratories Ltd (RDY) and Optimal Group Inc (OPMR) were today's more noteworthy downgrades:
Stifel cut PetSmart Inc (NASDAQ: PETM) to Hold from Buy biting valuation.
First Global downgraded shares of Google Inc (NASDAQ: GOOG) to Market Perform from Outperform.
Morgan Stanley downgraded shares of Dr. Reddy's Laboratories (NYSE: RDY) to Equal-Weight from Overweight after a U.S. court ruling appeared set to block generic competition to Japanese company Eisai Co, Ltd's (ESALY) ulcer drug Aciphex.
B. Riley downgraded shares of Optimal Group (NASDAQ: OPMR) to Neutral from Buy to reflect increasing uncertainty regarding further legal actions, which may be taken by the U.S. Attorney's office against the company...
MOST NOTEWORTHY: Take-Two Interactive Software, Inc (TTWO), Sony Corp (SNE), Sun Microsystems, Inc (SUNW), PetSmart, Inc (PETM) and Constellation Energy Group, Inc (CEG) were today's more notable initiations:
Prudential started Take-Two Interactive Software (NASDAQ: TTWO) with a Neutral rating and $25 target, citing valuation and limited impact from GTA IV for the rating.
Prudential believes Sony Corp (NYSE: SNE) is well-positioned to benefit from digital media revolution in consumer electronics and that operating margins will continue to improve; Sony was initiated with an Overweight rating and $62 target.
Cowen views Sun Microsystems' (NASDAQ: SUNW) valuation full and initiated shares with a Neutral rating.
Pali Capital initiated PetSmart, Inc (NASDAQ: PETM) with a Buy rating and $37 target, room for price optimization as their recent checks suggest that consumers prefer PETM, regardless of price.
Credit Suisse initiated shares of Constellation Energy Group (NYSE: CEG) with an Outperform rating and $94 target.
OTHER INITIATIONS:
Stifel initiated several stocks in the network technology sector: Juniper Networks, Inc (NASDAQ: JNPR) was initiated with a Buy rating and $23 target, while Acme Packet, Inc (NASDAQ: APKT), Cisco Systems (NASDAQ: CSCO) and Polycom, Inc (NASDAQ: PLCM) were initiated with Hold ratings.
First Albany initiated NutriSystem (NASDAQ: NTRI) with a Buy rating and $57 target.
Piper Jaffray started OSI Pharmaceuticals, Inc (NASDAQ: OSIP) with an Outperform rating and $42 target.
MOST NOTEWORTHY: Odyssey Re Holdings Corp (ORH) was today's only notable initiation:
Shares of the reinsurance underwriter Odyssey Re Holdings Corp (NYSE: ORH) was initiated at Citigroup with a Sell rating and $39 target, citing high valuation, the impact from past legacy underwriting business and risk of further SEC investigation related to majority shareholder Fairfax Financial Holdings Ltd (FFH).
OTHER INITIATIONS:
UBS started PetSmart inc (NASDAQ: PETM) with a Neutral rating and $35 target.
Bear Stearns initiated Autodesk inc (NASDAQ: ADSK) with a Peer Perform rating.
B. Riley started Design Within Reach Inc (NASDAQ: DWRI) with a Buy rating and $10 target.
Goldman Sachs resumed coverage of AXA Financial ADS (NYSE: AXA) with a Buy rating.
Credit Suisse started CB Richard Ellis Group Inc (NYSE: CBG) with an Outperform rating and $44 target.
Results for the tech stocks in last week's preview were a mixed bag, some beats, some misses, some in line. By and large, expectations for tech companies reporting results this week remain high, though. Here's what analysts surveyed by Thomson Financial are anticipating in the way of earnings, as compared to the same period of the previous year. 
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Looks like the so-called "war on Christmas" has begun. 
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