TheStreet.com's Jim Cramer says that as consumers try to stretch their dining dollar, Darden, Yum! and McDonald's will benefit.
We all know we are overstored in this country and over-restauranted. There are tons of players -- so many that the competition got too hard. Now they collapse. That Uno might miss a payment, that Bennigan's and Steak & Ale are going away, that Bakers Square and Village Inn have filed for bankruptcy: All say the industry is in big trouble.
We read all of these horrible articles every day about restaurants, and yet we see that the stocks of Yum! and Darden hang in great, particularly the first, which gave hideous guidance and yet is now higher than it was before it told people commodity costs were hurting it. McDonald's? How many stocks just hit their 52-week high?
The unemployment rate is a relatively modest 5.5%. But that's because companies have figured out how to convert full-time employees who have benefits like health care into part-time ones who lack benefits and whose hours can be cut back at will. This is a great deal for companies and a lousy one for workers. And it is ultimately bad for investors.
The New York Times reports that 3.7 million Americans have seen their full-time jobs cut to part-time ones -- the highest number on record (the government started keeping track of this over 50 years ago). This record joins a host of others we've seen this year: record gasoline prices (over $4 a gallon), record Federal budget deficits ($490 billion for 2009), record Federal borrowing ($9.8 trillion soon to hit $10.6 trillion), a record decline in housing prices (15.8%), and a record weak dollar (down 71% to $1.5757 since January 2001 when one euro bought 92 cents).
The newly minted part-time workers are largely Hispanic men. Specifically, the Times points out that 73% of those who were forced into part-time work from the spring of 2007 to the spring of 2008 were men and 35% percent were Hispanic. The industries with the most part-time jobs were construction (28%), retail (14%) and professional and business services (13%).
The Times brings the part-time statistics to life with interviews. Here are two:
Baird upgraded Buffalo Wild Wings (NASDAQ: BWLD) to Outperform from Neutral following strong Q2 results as they expect comps momentum, operating leverage, and potentially favorable chicken wing costs to support healthy trends in 2H08.
RBC Capital upgraded Myriad Genetics (NASDAQ: MYGN) to Outperform from Sector Perform citing solid core molecular diagnostics growth and increased confidence that the spin-out will generate better shareholder value.
Analyst downgrades:
Citigroup downgraded shares of Wyeth (NYSE: WYE) to Sell from Hold following the disappointing bapineuzumab data and lowered their target to $39 from $49.
Molson Coors (NYSE: TAP) was downgraded to Neutral from Overweight at JP Morgan.
Sony (NYSE: SNE) was downgraded to Underweight from Neutral at HSBC.
Analyst initiations:
Citigroup initiated Intercontinental Exchange (NYSE: ICE) with a Hold rating and $112 target. The firm believes regulatory concerns and a potential deceleration in energy trading volumes could limit upside in the stock near-term.
Banc of America assumed Walgreen Co. (NYSE: WAG) with a Buy rating and $38 target and believes fewer new pharmacies openings removes an impediment to higher ROIC.
Walgreens (NYSE: WAG) shares are trading higher today after Credit Suisse upgraded the stock to "Outperform," from "Neutral," saying that plans to limit store growth and cut down on spending should lead to better earnings. 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 WAG.
After hitting a one-year high of $48.09 in September, the stock hit a one-year low of $31.25 earlier this month. WAG opened this morning at $32.55. So far today the stock has hit a low of $32.26 and a high of $33.48. As of 1:45, WAG is trading at $33.30, up $0.97 (3.0%). The chart for WAG looks bearish and steady, while S&P gives the stock a neutral 3 STARS (out of 5) hold rating.
For a bullish hedged play on this stock, I would consider an August bull-put credit spread below the $30 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 one month as long as WAG is above $30 at August expiration. Walgreens would have to fall by more than 10% before we would start to lose money. Learn more about this type of trade here.
MOST NOTEWORTHY: P.F. Chang's, ViroPharma and CSX Corp were today's noteworthy upgrades:
Jefferies upgraded shares of P.F. Chang's (NASDAQ: PFCB) to Buy from Hold to reflect the company's capital preservation focus, which they believe will drive a best-in-class free cash flow yield in 2009. Despite upgrading shares, Jefferies lowered their target price to $28 from $31.
Thomas Weisel raised ViroPharma (NASDAQ: VPHM) to Overweight from Market Weight on valuation as they believe the sell-off on the Lev Pharmaceuticals (LEVP) acquisition is unwarranted. The firm raised their target price to $15 from $10.
Merrill upgraded CSX Corp. (NYSE: CSX) to Buy from Neutral based on valuation and improved results.
OTHER UPGRADES:
Borg-Warner (NYSE: BWA) was upgraded to Outperform from Neutral at Baird.
Credit Suiise raised Walgreen (NYSE: WAG) to Outperform from Neutral.
Rite-Aid (NYSE: RAD), a competitor of CVS (NYSE: CVS) and Walgreen (NYSE: WAG), tanked Thursday. By the end of the trading session, the pharmacy's stock declined almost 23% on heavy volume. Yes, it was a horrible day in the market overall, but don't blame the market at large. Rite-Aid is simply a company to avoid, and its latest earnings data show why.
According to the AP, Rite-Aid booked a loss of $0.20 per share for its fiscal first quarter versus a profit of $0.04 per share in the year-ago period. There are some growing pains going on here, since Rite-Aid is attempting to integrate its purchase of Brooks Eckerd. That acquisition propelled the company to top-line revenue growth of 48%. Unfortunately, analysts were looking for the company to lose only $0.09 per share. The significant differential made investors feel justified in punishing the stock. Heck, I'll bless the sell-off myself.
It'll be a long time before Rite-Aid finally turns its ship around. The next fiscal year will bring more losses, and with strong competition out there from CVS and Walgreen, the road ahead for management won't be for the faint of heart. This is truly a speculator's stock. I took a look at a post I wrote on Rite-Aid back near the beginning of April. At that time, the stock was priced at about $2.89 per share. As of Thursday's close, the shares were trading for $1.35. The Rite-Aid story belongs in the horror genre, and its stock is best left to those professionals who don't mind losing money. Individual investors? This company isn't for you, in my opinion.
Disclosure: I don't own any company mentioned; positions can change at any time.
Walgreen (NYSE: WAG) reported sluggish Q3 numbers last week. Net sales increased a little under 10% to $15 billion. Net income increased a whopping two pennies to 58 cents per diluted share (the term "whopping" is used here sarcastically). According to this article, Walgreen met top-line expectations but missed the bottom-line call by a penny.
Gross margin remained relatively stable, but the net margin dropped to 3.8% in the quarter compared to 4.1% in the previous year's similar period. But same-store sales increased 3.4%, which is a decent number. Also, operational cash flow jumped over 19% to $2.5 billion. That's excellent; it's always good to see cash coming in. It helps mitigate the tepid earnings expansion. Walgreen did well with its cash-flow statement last time around as well. Walgreen management cited the economy as a factor in its earnings stats and highlighted the fact that it cut back on expenses, including advertising. Making sure costs don't get out of hand is important, but I'd be careful about eliminating too much of the advertising budget. Competing with CVS Caremark (NYSE: CVS), Rite-Aid (NYSE: RAD), and the pharmacy at Wal-Mart (NYSE: WMT) obligates brand-building and differentiation.
Walgreen's Q3 wasn't beyond awesome, but it was solid enough. The stock is only down slightly as I write this. As a long-term play on the need for drugstores, it's not a bad way to go.
Disclosure: I don't own any company mentioned; positions can change at any time.
Though the quarter is winding down, there are still earnings reports to come, including Walgreen Co. (NYSE: WAG) and Kroger Co. (NYSE: KR). Both companies are expected to report profit growth this coming week.
Walgreen is expected by analysts surveyed by Thomson Financial to report third-quarter earnings of 59 cents per share, up 6.8% from the same period of last year, on revenue of $15.1 billion. The company has provided positive surprises in four of the past five quarters -- by two cents in the previous quarter.
Based in Deerfield, Ill., Walgreen is the largest drug store chain in the U.S. in terms of sales, and has more than 6,200 stores in the U.S. and Puerto Rico. In the past year, the company's revenues were $53.7 billion and its net income totaled $2.0 billion. Its long-term EPS growth forecast is 14.0%, which is less than the retail industry average, as well as less than that of rival CVS Caremark (NYSE: CVS). The consensus recommendation of analysts has recently shifted from hold to buy Walgreen.
The share price is up 4.0% since the beginning of the year, and up from 11.6% from a year ago. It trades at a P/E ratio of 20.68. Shares closed Friday at $41.35.
MOST NOTEWORTHY: Walgreen, Crown Castle and Brunswick were today's noteworthy initiations:
Thomas Weisel started shares of Walgreen (NYSE: WAG) with an Overweight rating and $43 target. The firm is positive on WAG's steady cash flow and solid growth profile.
Merriman believes Crown Castle (NYSE: CCI) is a core wireless holding given its high-margin, predictable recurring revenue model. They believe shares can trade to the $49-$51 range assuming management continues to execute on its free cash flow growth target. Shares were assumed with a Buy rating.
KeyBanc initiated Brunswick (NYSE: BC) with a Hold rating and expects the recreational marine market to be challenging given weakening consumer spending trends.
OTHER INITIATIONS:
Citigroup initiated Gerdau AmeriSteel (NYSE: GNA) with a Buy rating and $21 target.
Piper assumed Teradyne (NYSE: TER) with a Neutral rating and $14 target.
International Speedway (NASDAQ: ISCA) was initiated at Stephens with an Overweight rating and $50 target.
EMC (NYSE:EMC) Cut To Market Perform from Outperform at Bernstein, according to24/7 Wall St. The financial website also reports that Netflix (NASDAQ:NFLX) Raised to Overweight at Lehman.
Thomas Weisel initiates Walgreen (NYSE:WAG) as "overweight" according to Briefing.com. Friedman Billings has taken Symantec (NASDAQ:SYMC) off its "best picks" list.
"Shares of Walgreen (NYSE: WAG) have come under pressure in recent months, reflecting a slowdown in sales because of a weakening economy and intensifying competition," notes Richard Moroney.
The editor of Dow Theory Forecasts adds, "However, Walgreen's long-term prospects remain appealing, and the stock is attractively valued. Walgreen is a Long-Term Buy." Here is his review.
"Big, strong, and healthy, Walgreen is the largest U.S. drugstore chain as measured by revenue and the second-largest based on store count.
"The company operates more than 6,200 stores in 48 states and Puerto Rico and plans to boost the count to 7,000 by fiscal 2010 ending August. Walgreen sees long-term potential for about 13,000 U.S. stores. Prescriptions generate about 65% of total sales, with the rest coming from general merchandise.
"In fiscal 2007, both pharmacy and general merchandise sales growth outpaced the industry average, and Walgreen increased market share in nearly all of its core categories.
"Socially Responsible Investing (SRI) is no longer relegated to a tiny corner of the investment landscape; indeed, according to the Social Investment Forum, SRI now accounts for $2.7 trillion, up more than 18% since 2005," says Chuck Carlson.
Here, the editor of The DRIP Investor offers five stock that both rank high for their social responsibility and also stand out based on more traditional earnings and valuation analysis.
"The Social Investment Forum estimates that more than one in every 10 dollars under professional management in the U.S. is involved in SRI investing. What is driving the growth in SRI?
"One factor is the increasing numbers of women and younger investors among the investor populace have fueled demand for SRI investments.
"In addition, we see an increased focus on environment, social, and corporate governance issues. Further, widely publicized stories concerning global warming as well as various corporate governance issues, have caused many investors to reconsider how they deploy their investment capital.
CVS Caremark (NYSE: CVS), a big competitor of both Walgreen (NYSE: WAG) and Rite Aid (NYSE: RAD), released its Q1 earnings last week. They were very good, and they reminded me that I probably need to throw a drugstore chain's stock in my core portfolio as a long-term play on the increasing health-care needs of the baby boomers (and every other demo, for that matter).
Looking through the reported growth rates, you can see that we're talking best-of-breed here. Revenues were up over 60%, and adjusted earnings per share increased over 18%, coming in at $0.55. The Caremark merger has obviously proven to be a good move. Same-store sales rose 3.9%, benefited in part by the early appearance of Easter in March.
According to earnings.com, CVS Caremark basically matched earnings expectations. That's okay, though, I don't think you can hold it against this big brand name. As of this writing, CVS is near a 52-week high. Buying at the 52-week high is always a dicey thing, but if you plan on holding for years, it wouldn't be that much of a concern. Shorter-term traders would need to wait for a pullback. But I like the first quarter results for CVS, and I think the stock is poised to do well over time. And like I said at the beginning, this really may be a stock for the core portion of an individual's investment program -- a true buy-and-hold idea.
Disclosure: I don't own shares in any company mentioned here; positions can change at any time.
TheStreet.com's Jim Cramer says that as consumers try to stretch their dining dollar, Darden, Yum! and McDonald's will benefit.
The unemployment rate is a relatively modest 5.5%. But that's because companies have figured out how to convert full-time employees who have benefits like health care into part-time ones who lack benefits and whose hours can be cut back at will. This is a great deal for companies and a lousy one for workers. And it is ultimately bad for investors.
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