AutoZone (NYSE: AZO - option chain) shares opened higher this morning, but are virtually unchanged as of midday after the company reported fourth quarter earnings that missed estimated by 2 cents ($3.88 vs $3.90). Profits rose 12% year over year, including a 0.6% increase in same store sales, but this was partially attributed to a quarter that was one week longer. However, with the current shaky economy, this stock did pretty well, so it might be a safe place to invest. 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 AZO.
AZO opened this morning at $128.00. So far today the stock has hit a low of $127.69 and a high of $134.14. As of 12:20, AZO is trading at $131.00, up 21 cents (0.2%). The chart for AZO looks bullish and S&P gives AZO a 3 STARS (out of 5) hold ranking.
For a bullish hedged play on this stock, I would consider a December bull-put credit spread below the $100 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 5.3% return in three months as long as AZO is above $100 at December expiration. AutoZone would have to fall by more than 23% before we would start to lose money. Learn more about this type of trade here.
AZO hasn't been below $100 at all in the past year and has shown support around $115 recently. Brent Archer is an options analyst and writer at Investors Observer.
DISCLOSURE: Mr. Archer owns and/or controls diversified portfolios of long and short stock and option positions that may include holdings in companies he writes about. At publication time, Brent neither owns nor controls positions in AZO.
Earnings reports continue to dribble in as the quarter winds down. Much of the attention this week will be on homebuilders KB Home (NYSE: KBH) and Lennar Corp. (NYSE: LEN) as investors look for any sign that the housing sector has bottomed (home sales numbers are also due out this week; see below). Analysts surveyed by Thomson Financial anticipate that both companies will report that they narrowed their losses in the most recent quarter.
KB Home's expected $1.25 per share loss, on revenue of $725.5 million, compares to the previous quarter loss of $3.30 and to a year-ago loss of $6.19. However, KB Home's losses in the past few quarters have been deeper than expected. The Los Angeles-based homebuilder's long-range earnings growth forecast is 10.5%, less than the S&P 500. Analysts continue to recommend holding KB Home, and have for at least 120 days. Shares, however, reached a new 52-week high of $31.69 on Friday, and they are up 10.5% year to date.
Lennar is expected to post a loss of 52 cents per share, on revenue of $1.1 billion. That compares to the previous quarter's per-share loss of 76 cents and to a year-ago loss of $3.25. While Lennar also has tended in the past few quarters to miss expectations, the Miami-based company managed a positive surprise in the first quarter of 2008. Lennar's long-range earnings growth forecast is 10.3%, about the same as KB Home's. Analysts also recommend holding Lennar. Friday, shares of Lennar also reached a 52-week high, $27.75, but they are down 6.4% year to date.
Morgan Keegan upgraded Marvell Tech (NASDAQ: MRVL) to Outperform from Market Perform based on valuation and sustainable growth.
Merrill upgraded Lehman (NYSE: LEH) to Neutral from Underperform and said the government bailout of the GSE's removes "considerable uncertainty" in the residential mortgage markets and that the housing market is now closer to a bottom. The analyst believes the environment has improved for Lehman to attract equity capital needed and that loss expectations are reflected in valuation.
Lehman downgraded shares of Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) to Equal Weight from Overweight after the U.S. government said it will place Fannie and Freddie into a conservatorship. Citigroup also downgraded shares to Sell from Buy following the federal government's plan to place the GSEs into conservatorship as they believe both Fannie and Freddie will no longer be managed to maximize common shareholder returns.
Nokia (NYSE: NOK) was cut to Hold from Buy at Deutsche Bank. The firm downgraded shares following the company's guidance reduction and believes the forecast could still be optimistic.
AutoZone (NYSE: AZO) is the leading U.S. retailer and distributor of automotive replacement parts and accessories. Each store carries an extensive product line for cars, sport utility vehicles, vans and light trucks. Most outlets provide commercial credit and prompt delivery of products to repair shops. AutoZone operates more than four thousand stores in the U.S., Puerto Rico and Mexico.
The company pleased investors earlier in the month, when it reported fiscal Q1 EPS of $2.02 and revenues of $1.46 billion. Analysts had been expecting $1.91 and $1.44 billion. The news popped the shares out of a November "cup" into the December "handle" of a Cup & Handle formation. The price is now showing signs of completing the pattern with a bullish rise from the right-hand side of the "handle".
Brokers recommend the shares with four "strong buys", twelve "holds" and three "sells". Analysts see a 12% average annual growth rate, through the next five years. The AZO P/E ratio (13.86), PEG ratio (1.12), Price to Sales ratio (1.25), Price to Cash Flow ratio (10.11), Price to Free Cash Flow ratio (11.30), EPS Growth rate (16.76%), Return on Assets (12.74%), Return on Investment (23.61%) and Return on Equity (170.49%) compare favorably with industry, sector and S&P 500 averages. Institutional investors hold about 95% of the outstanding shares. The stock is one of those used to calculate the S&P 500 Index. Over the past 52 weeks, it has traded between $103.40 and $140.29. A stop-loss of $106.90 looks good here.
The country's largest automotive parts and accessories company, AutoZone Inc. (NYSE: AZO) posted record sales and earnings for 1Q FY 2008. Net sales increased 4.5% to $1.5 billion. Same store sales increased 1.3%. Net income increased 7% to $132.5 million, and gross profit margin improved slightly.
Operating expenses increased slightly, but this additional cost was offset by a much larger reduction in net inventory per store. AutoZone uses a supplier-owned pay-on-scan inventory control system in order to maximize inventory efficiency and reduce cost of goods sold.
During 1Q the company repurchased $350 million worth of stock at an average price of $121 per share, quite a bargain given that the stock recently traded at just under $130 before retreating to $124.
MOST NOTEWORTHY: The small-cap bank sector, Waste Connections, Warnaco Group and Intersections were today's noteworthy upgrades:
Lehman upgraded the small-cap bank sector to Neutral from Negative as they expect the group to benefit from the decline in short-term interest rates and the steeping yield curve. The firm upgraded Associated Banc-Corp (NASDAQ: ASBC), Pacific Capital Bancorp (NASDAQ: PCBC) and Westpac Banking Corp (NYSE: WBK) to Equal Weight from Underweight.
Friedman Billings added Waste Connections (NYSE: WCN) to its Top Picks list. The firm believes the company can outperform the group and overall market in an economic downturn.
Warnaco Group (NASDAQ: WRNC) was upgraded to Overweight from Neutral at JP Morgan on valuation and growth potential.
JMP Securities' checks indicate that Intersections (NASDAQ: INTX) is on track to meet EPS expectations for the quarter and is well positioned to beat their 2008 EPS estimate of 80c. The firm raised shares to Strong Buy from Outperform.
AutoZone, Inc. (NYSE: AZO) implied volatility elevated into mid September earnings per share (EPS) and outlook: AutoZone is expected to report earnings per share on September 18. AZO management will be speaking at Goldman Sachs Group, Inc. (NYSE: GS) 14th Annual Retailing Conference on September 6. AZO September option implied volatility of 36 is above its 26-week average of 25, according to Track Data, suggesting larger price risks.
Cisco Systems, Inc. (NYSE: CSCO) implied volatility flat into September 5 analyst meeting:Cisco is recently up 40 cents to $31.83. CSCO will be holding an analyst meeting in San Jose, CA, on September 5. BAMO says, "we believe the meeting will be used to showcase CSCO's growing technology platform and emphasize the company's mantra of the network as the IT platform." CSCO September option implied volatility of 26 is near its 26-week average of 28, according to Track Data, suggesting non-directional risk.
Daily options update is provided by Stock Specialist Paul Foster of theflyonthewall.com.
MOST NOTEWORTHY: Marvel Entertainment (MVL), AutoZone (AZO), Home Depot (HD), Molson Coors (TAP) and Semtech (SMTC) were some of today's noteworthy upgrades:
Matrix upgraded Marvel Entertainment (NYSE: MVL) to Buy from Hold as they don't think the company's improving performance is reflected in its falling stock price. They think Marvel represents a good entry point at current levels.
Kevin Dann upgraded shares of AutoZone (NYSE: AZO) to Buy from Hold on valuation and highlighted their belief that AutoZone may not be seeing as much sales weakness as investors expect. They recommend taking advantage of the recent share weakness and raised their target to $135 from $125.
Gabelli recommends Home Depot (NYSE: HD) as a long-term buy with a $43 target, upgraded shares from Hold, with the Supply division uncertainty now eliminated. They view the sale positively, even at the lower price.
JP Morgan upgraded Molson Coors (NYSE: TAP) to Overweight from Neutral, and believes Molson will monetize its solid balance sheet and free-cash flow yield to benefit the shareholders. They also consider valuation to be attractive.
Semtech (NASDAQ: SMTC) was upgraded to Outperform from Market Perform at William Blair following the strong Q2 report and outlook...
OTHER UPGRADES:
Big Lots (NYSE: BIG) was upgraded to Market Outperform from Market Perform at Avondale.
Richard Rhodes, professional trader, money manager and editor of The Rhodes Report was one advisor who accurately forecast the recent decline and moved into short positions going into this past week.
And while he sees the potential for a near-term bounce, this week's action leads the advisor to say, "A major trading high has formed, which will lead to a -10% to -20% correction...perhaps deeper."
He explains, "If there was ever a 'bell' to signal the end of an intermediate or long-term rally; we think the decline from the S&P 500 high of 1565 to yesterday's low at 1465 suffices as such."
The constriction of credit and liquidity, he notes, has led to very poor advance/decline figures. As such, he suggests being a seller during any rallies that result fro the "month-end bullish pattern and short-term oversold condition."
Indeed, even in his Long Only Portfolio – a portfolio that as its name implies only holds long position – he now says, "We are going to a very rare, but very prudent 'no position' stance." As for his Long/Short Portfolio, he says, "We are now aggressively short."
MOST NOTEWORTHY: Dendreon Corp (DNDN), Cubic Corp (CUB), Endo Pharmaceuticals (ENDO), Northrop Grumman (NOC) and Royal Dutch Shell (RDS.A) were today's notable downgrades:
JMP Securities downgraded shares of Dendreon Corp (NASDAQ: DNDN) to Market Underperform from Market Perform based on the company's uncertain product pipeline and the recent SEC filing that revealed that certain officers and directors are facing potential shareholder lawsuits regarding trading activities.
Friedman Billings cut Cubic Corp (AMEX: CUB) to Underperform from Market Perform on valuation.
RBC Capital downgraded Endo Pharmaceuticals (OTCBB: ENDP) to Sector Perform from Outperform following the company's withdrawal of guidance pertaining to its NDA for the Ketoprofen patch.
Northrop Grumman (NYSE: NOC) was cut to Neutral from Overweight at JP Morgan on valuation. UBS cut Royal Dutch Shell to Neutral from Buy on valuation...
OTHER DOWNGRADES:
Robinson Humphries downgraded Ruby Tuesday (NYSE: RT) to Neutral from Buy.
Montgomery downgraded shares of Taleo Corp (NASDAQ: TLEO) to Hold from Buy.
Credit Suisse downgraded AutoZone (NYSE: AZO) to Neutral from Outperform.
MOST NOTEWORTHY: The auto parts retail sector, Electronics Arts (ERTS), Cinemark Holdings (CNK) and Monster Worldwide (MNST) were today's more noteworthy initiations:
Wachovia initiated coverage on AutoZone (NYSE: AZO), Advance Auto Parts (NYSE: AAP) and O'Reilly Automotive (NASDAQ: ORLY) with Outperform ratings. The firm sees upside for AutoZone from share buybacks, Advance Auto Parts from improved cost control and margins, and O'Reilly Automotive from share gains and fundamental performance.
First Albany started Electronic Arts (NASDAQ: ERTS) with a Buy rating and sees significant upside in the first-half of 2008.
BMO Capital started Cinemark (NYSE: CNK) with an Outperform rating, citing Cinemark's internal growth opportunities as well as its international opportunities in Latin America.
American Tech started Monster Worldwide (NASDAQ: MNST) with a Neutral rating, saying fundamentals and the macro backdrop remain uncertain...
OTHER INITIATIONS:
Bernstein initiated coverage on Google (NASDAQ: GOOG) and eBay (NASDAQ: EBAY) with Outperform ratings and a $635 target and $39 target, respectively, and Amazon.com (NASDAQ: AMZN), InterActive Corp (NASDAQ: IACI) and Yahoo! (NASDAQ: YHOO) with Market Perform ratings and a $65 target, $38 target and $29 target, respectively.
MOST NOTEWORTHY: AutoZone, Inc (AZO), Blue Nile, Inc (NILE), MetLife, Inc (MET), Analog Devices, Inc (ADI) and Advanced Micro Devices (AMD) topped out today's list of noteworthy downgrades:
Citigroup cut AutoZone (NYSE: AZO) to Hold from Buy with a $145 target based on valuation.Gabelli also downgraded shares of AutoZone to Hold from Buy.
Lehman downgraded shares of Blue Nile (NASDAQ: NILE) to Equal Weight from Overweight, citing valuation and competitive concerns from Amazon.com (AMZN), which may look to strengthen their position in the diamond engagement market.
MetLife (NYSE: MET) was cut to Neutral from Buy on valuation.
Analog Devices Inc (NYSE: ADI) was cut by Credit Suisse and JP Morgan to Neutral from Outperform, by Sanders Morris to Neutral from Buy and by Merrill Lynch to Sell from Neutral after the company reported weak Q2 results.
Matrix downgraded Advanced Micro Devices (NYSE: AMD) to Strong Sell from Hold based on the loss of market share to Intel Corp's (INTC) new products...
Earnings reports continue to dribble in as the quarter winds down. Much of the attention this week will be on homebuilders .gif){kind=logo}
Analysts had been expecting $1.91 and $1.44 billion. The news popped the shares out of a November "cup" into the December "handle" of a Cup & Handle formation. The price is now showing signs of completing the pattern with a bullish rise from the right-hand side of the "handle".
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AutoZone, Inc.
Richard Rhodes, professional trader, money manager and editor of 
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