Rival home improvement chains Home Depot Inc. (NYSE: HD) and Lowe's Companies Inc. (NYSE: LOW) are scheduled to report quarterly results this week. Not surprisingly, given the ongoing housing slump, analysts surveyed by Thomson Financial on average expect both companies to post earnings lower than in the same period a year ago. For Home Depot, that's 61 cents per share, down 20.8%, and for Lowe's, 56 cents per share, down 16.4%. Meanwhile, cabinet maker American Woodmark Corp. (NASDAQ: AMWD), for whom Home Depot and Lowe's are major distributors, is also expected to report lower earnings: 11 cents per share, down 67.6%.
The presidential campaigns have prompted much discussion of energy policy and alternative energy sources. Some solar-energy-related concerns are scheduled to report this week, and expectations seem to be high. Trina Solar Ltd. (NYSE: TSL) is expected to report 81 cents per share earnings, up 67.9%; ReneSola Ltd. (NYSE: SOL) is expected to post earnings of 32 cents per share, up 62.5%; and Suntech Power Holdings Co. (NYSE: STP) is expected to have earnings of 32 cents per share, up 21.9%. Even China Sunergy Co. Ltd. (NASDAQ: CSUN) is expected to have swung to a profit of 3 cents per share, from a per-share loss of 14 cents a year ago.
If you were paying close attention to this column last week, you would have sidestepped some of the pain and misery investors in many of the stocks discussed have suffered lately. Of late, we have seen the general direction of the markets turn positive, even in the face of news to the contrary.
Perhaps it is because investors have an appetite for stocks, since there seems to be few investment alternatives. Real estate is off limits and the yield on bonds and other fixed-income investments is pathetically low.
The theme for the week ahead is SMOOTH SAILING. In this week's column, we delve into some stocks that will be announcing earnings, and that may benefit from the changing tide of investor sentiment. To be sure, there will be several areas of choppiness as we continue to be bombarded by the stormy realities of a turbulent economy.
Monday, May 19
The chart for Campbell Soup (NYSE: CPB) looks M'm M'm good. Sporting a smooth line with nary a ripple over the past 12 months, management has done a great job at keeping both company earnings and share price up, even in the face of significant food inflation. While shares have been condensing during the past few months, recently they have been rising with a series of higher highs and higher lows. Be on the outlook for earnings of 44 cents per share on revenue expectations of $1.89 billion. Now that I think of it. That's a lot of soup wrapped in tin-plated steel -- one of many materials that has seen its price almost double in the past six months.
MOST NOTEWORTHY: American International Group, Pacific Sunwear, FedEx and Cheniere Energy were today's noteworthy downgrades:
Goldman downgraded American International Group (NYSE: AIG) to Neutral from Buy as they expect market concerns regarding balance sheet pressures and dilutive capital raises to pressure shares.
Citigroup downgraded shares of Pacific Sunwear (NASDAQ: PSUN) to Sell from Buy as they believe Q1 trends are disappointing following the comp results.
Morgan Keegan downgraded FedEx (NYSE: FDX) to Market Perform from Outperform citing the uncertainty related to fuel prices and the economy. RBC
Capital cut Cheniere Energy (NYSE: LNG) to Underperform from Outperform citing the corrected 2007 10K which indicates increased liquidity concerns.
OTHER DOWNGRADES:
Oppenheimer cut Navios Maritime (NYSE: NM) to Perform from Outperform.
Credit Suisse lowered TAL International Group (NYSE: TAL) to Neutral from Outperform.
Vital Signs (NASDAQ: VITL) was downgraded at Piper to Neutral from Buy.
MOST NOTEWORTHY: The Brokers and Asset Managers sector, Pacific Sunwear and Metabasis Therapeutics were today's noteworthy upgrades:
Goldman upgraded the Brokers and Asset Management sector to Attractive from Neutral as they believe an inflection point has been reached for stocks with minimal credit exposure, or where exposure is marked to market. Goldman expects the problem to shift to regional banks and specialty finance from brokers. As such, Goldman upgraded American Express (NYSE: AXP), Metlife (NYSE: MET), Bank of New York Mellon (NYSE: BK), Franklin Resources (NYSE: BEN), Janus Capital (NYSE: JNS) and NYSE Euronext (NYSE: NYX) to Buy from Neutral.
Wachovia upgraded Pacific Sunwear (NASDAQ: PSUN) to Outperform from Market Perform based on valuation, merchandising improvements, operating efficiencies, favorable product mix, and reductions in underperforming categories.
Rodman & Renshaw raised Metabasis (NASDAQ: MBRX) to Outperform from Market Perform on valuation given the potential for MB07803.
OTHER UPGRADES:
HSBC raised Novartis (NYSE: NVS) to Neutral from Underweight.
UBS (NYSE: UBS) was upgraded at Morgan Stanley to Equal Weight from Underweight.
MOST NOTEWORTHY: Motorola, Paccar, Pacific Sunwear, Talbots and RightNow Tech were today's noteworthy upgrades:
Oppenheimer upgraded shares of Motorola Inc. (NYSE: MOT) to Buy from Neutral on valuation, and is positive on the company's free cash flow generation.
Wachovia raised Paccar Inc. (NASDAQ: PCAR) estimates to Market Perform from Underperform based on better-than-expected European performance.
Citigroup upgraded shares of Pacific Sunwear (NASDAQ: PSUN) to Buy from Hold as they believe the demo division divestiture and improving product execution in core PacSun stores could drive accelerating EPS growth.
Citigroup also upgraded shares of Talbots Inc. (NYSE: TLB) to Hold from Sell on valuation but remains concerned about the company's long-term outlook.
Roth Capital upgraded RightNow Technologies (NASDAQ: RNOW) to Buy from Hold, as they are encouraged by RNOW's Q3 results and raised guidance and believes the worst is behind the company.
OTHER UPGRADES:
Goldman added Pfizer (NYSE: PFE) to its Conviction Buy List.
Thomas Weisel upgraded Akamai (NADAQ: AKAM) to Overweight from Market Weight.
Lehman upgraded Harley Davidson (NYSE: HOG) to Equal Weight from Underweight.
Upscale lifestyle products company Urban Outfitters, Inc. (NASDAQ: URBN) reversed the trend among its competitors and posted good 1Q earnings. Total sales for 1Q 2007 increased 16% to $314.5 million, which is a new record. Earnings increased a big 45% to $29.4 million, which works out to diluted EPS $0.17. So far so good, but ... None of Urban Outfitters three current brands posted remarkable increases. Anthropologie sales increased 2%, Free People increased sales by 8%, while its main brand, Urban Outfitters, declined 5%. The big sales increases came from a 30% increase in internet sales, and 12% increase at Free People Wholesale.
If direct-to-consumer sales are the hot ticket, then why did Urban Outfitters, Inc. open six new expensive stores during 1Q, four Urban Outfitters and two Anthropologie? Why does the company plan to open an additional 32 expensive locations during the coming year? Gross profit margins remained essentially flat, but the cost of inventory increased 19% because the new stores have to be stocked. Why not build a more sophisticated internet presence?
Urban Outfitters, Inc. plans to launch a fourth brand in early 2008. This brand will be primarily an upscale home and garden brand. It is unclear how many, if any, of the 32 new stores will belong to this as yet unnamed brand.
Urban Outfitters, Inc. was helped this quarter by one-time federal tax incentives that contributed $0.03 per share to earnings by reducing the corporate tax rate to 22.3%. The rate will return to its normal 36.2% in FY 2008. Still, Urban Outfitters is a bright spot amongst its competitors. American Eagle Outfitters' profits are below expectations, and the stocks for Aeropostale, Pacific Sunwear, and Abercrombie & Fitch are all down. Shares of Urban Outfitters, Inc. closed recently at $25.51, up $0.14.
This post is part of our Battle of the Brands feature. Let us know which brand you prefer, and watch out for more Battle of the Brands posts.
Every time I walk through a mall (not too often these days), I see a new "hip" store of which I was previously unaware. I can always count on a few mainstays, though ... the cell-phone-accessory kiosk manned by overly enthusiastic employees, the tantalizing aroma from Auntie Anne's pretzels, and the always tasteful novelty shops. In most malls, I can typically scope out the latest yuppie fashions in either Gap (NYSE: GPS) or Abercrombie & Fitch (NYSE: ANF) (and often-times both). Despite the encroachment of Hot Topic (NASDAQ: HOTT), Pacific Sunwear of California (NASDAQ: PSUN), and other trendy competitors, these two venerable names have stood the test of time, providing relatively affordable threads for men, women, and kids.
In addition to its eponymous chain, which was started in 1969, GPS runs the Old Navy and Banana Republic chains. The retailer's most recent experiment, Forth & Towne (created to appeal to thirty-something career woman) was a bust and has now been abandoned after 18 months. Same-store sales trends have turned south of late, dropping five percent in fiscal year 2005 and slumping seven percent last year. And during the past 12-month cycle, GPS has seen its quarterly earnings drop more than 35 percent. The stock is well off its highs, having lost two-thirds of its value since early 2000. With technical resistance bearing down in the form of the equity's 10-month and 20-month moving averages, relief might not be in sight for a while.
Landstar Systems Inc (NASDAQ: LSTR) to hold Q1 mid-quarter update conference call at 2pm.
Federal Reserve St Louis Bank President William Poole to speak at 11am, Federal Reserve Governor Kevin Warsh to speak at 2pm.
Tuesday March 6
International Game Technology (NYSE: IGT), a "global company specializing in the design, development, manufacturing, distribution and sales of computerized gaming machines and systems products," to hold its annual shareholder meeting at 1pm.
Wednesday March 7
Saks Inc (NYSE: SKS) to hold Q4 earnings conference call at 10am.
PDUFA date for Abbott Laboratories (NYSE: ABT) Humira, a Tumor Necrosis Factor blocker, which is used to reduce the signs and symptoms of arthritis.
PDUFA date for Merck and Co Incs (NYSE: MRK) Janumet, a treatment for Type 2 Diabetes.
Thursday March 8
Monthly Same Store Sales to be reported by Wal-Mart Stores (NYSE: WMT), Target Corporation (NYSE: TGT), Aeropostale Inc (NYSE: ARO), Kohl's Corporation (NYSE: KSS), Pacific Sunwear of California Inc (NASDAQ: PSUN), Abercrombie & Fitch Co (NYSE: ANF), Gap Inc (NYSE: GPS) Nordstrom Inc (NYSE: JWN) and J.C. Penney Co Inc (NYSE: JCP).
Friday March 9
PDUFA date for Eli Lilly and Company's (NYSE: LLY) Cymbalta, a treatment for depression.
MOST NOTEWORTHY: Home Depot (NYSE: HD) and Google (NASDAQ: GOOG) were the most notable upgrades for the first trading session of 2007.
Home Depot (NYSE: HD) was upgraded to Strong Buy from Hold with a $50 target at Raymond James, expecting that the worst is over in the housing market with hopes 2007 will be a better year.
Google (NASDAQ: GOOG) was added to Stifel Nicolaus' Select List while maintaining its Buy rating, citing Google's growth rate as compared to its peers. Note that Stifel removed eBay (NASDAQ: EBAY) from their Select List.
OTHER UPGRADES:
Bear Stearns upgraded JB Hunt Transport (NASDAQ: JBHT) to Outperform from Peer Perform with a $27 target; the firm expects JB Hunt to Outperform its pure truckload competitors during the downturn and for a potential buyer to surface.
Bear Stearns also upgraded Merck (NYSE: MRK) to Outperform from Peer Perform with a $53 target, based on improved sales growth for Vytorin/Zetia, growth from Junuvia and vaccines, along with pipeline catalysts.
Piper Jaffray upgraded shares of Pacific Sunwear (NASDAQ: PSUN) to Outperform from Market Perform with a $25 target, believing that tight inventory management favors margin improvement and that business at core stores have stabilized.
Calyon upgraded UAL Corp (NASDAQ: UAUA) to Add from Neutral and raised their target to $48 from $35 based on good prospects for 2007.
Earlier in the week we blogged about Wal-Mart's Same-Store Sales miss, saying this was not enough information to signal the awful holiday shopping season the market predicted from the indicator. With more information now available, we thought we would review:
Wal-Mart Stores Inc. (NYSE:WMT) confirmed its preliminary SSS estimate of -0.1%, which at least did not drop further. Competitors Target Corp. (NYSE:TGT) and Costco Wholsesale Corp. (NASDAQ:COST) also announced their SSS numbers, with Target outperforming slightly [+5.9% vs. +5.7%] and Costco underperforming slightly [+5% vs. +5.7%]
High-end retail looked good, with both Federated Department Stores Inc. (NYSE:FD) [+8.4% vs. +4.8%] and Saks Inc. (NYSE:SKS) [+7.2% vs. +6.8%] outperforming
Clothing retailers were mixed, with Guess Inc. (NYSE:GES) [+12.1% vs. +5.6%], Pacific Sunwear of California Inc. (NASDAQ:PSUN) [-3.8% vs. -4.6%] and Hot Topic Inc. (NASDAQ:HOTT) [-4.3% vs. -6.8%] beating consensus estimates, while Abercrombie & Fitch Co. (NYSE:ANF) [-3% vs. +3%], Bebe Stores Inc. (NASDAQ:BEBE) [+5.8% vs. +7.9%] and perennial underperformer Gap Inc. (NYSE:GPS) [-8% vs. -5.4%] fell short of their estimates
Speaking of perennial underperformers, Pier 1 Imports Inc. (NYSE:PIR) [-15.3% vs. -13.6%] and Sharper Image Corp. (NASDAQ:SHRP) [-27% vs. -18%] continued embarrassing their investors.
This adds up to a mixed bag for retailers, with the sector as a whole seeing a good deal of weakness today. This Fly maintains that it is still too early to predict doom and gloom for the whole season, however. The true telling sign for the holiday shopping season will be in consumer electronics, as CIBC World Markets channel checks predict that consumer electronics "won the day" on Black Friday.
MOST NOTEWORTHY: Palm Inc. (PALM) and Pacific Sunwear (PSUN) top today's modest initiation list.
Bank of America initiated coverage of Palm, Inc. (NASDAQ:PALM) with a Buy citing the company's position in the fast growing smartphone market and expectations for upside in new Treo Launches.
Pacific Sunwear of California, Inc. (NASDAQ:PSUN) was initiated at Caris with an Average rating. The firm said shares of Pacific Sunwear should be avoided until the company clears up their inventory and merchandise problems.
OTHER INITIATIONS:
CIBC resumed coverage and upgraded shares of Goldcorp, Inc. (NYSE:GG) to Sector Outperformer from Sector Performer after the firm said the market had not priced in the higher zinc and lead prices.
Nintendo (OTC:NTDOY) was initiated with a Buy rating at Soleil because of its dominant position in the hand-held segment.
Finally, Isis Pharmaceuticals, Inc. (NASDAQ:ISIS) was initiated at Cowen with an Outperform rating. The firm said Isis has a potential "blockbuster" therapeutic in the cholesterol market. They believe Isis could outperform the market by 40% over the next six-to-twelve months.
MOST NOTEWORTHY: Yahoo! (YHOO) and Lockheed Martin (LMT) top today's extensive list of upgrades.
Yahoo!, Inc. (NASDAQ:YHOO) was upgraded at Merrill Lynch to Buy from Neutral on valuation as the company heads into the seasonally-strong period.
Goldman Sachs upgraded Lockheed Martin Corp. (NYSE:LMT) to Buy from Neutral citing valuation, margin expansion and consistent execution.
OTHER UPGRADES:
Pacific Sunwear of California, Inc. (NASDAQ:PSUN) business is bottoming, according to J.P. Morgan. They believe a new CEO could help a recovery, prompting the firm to upgrade the retailer to Neutral from Underweight.
Cephalon, Inc. (NASDAQ:CEPH) was upgraded to Outperform from Market Perform at Leerink Swann. The upgrade was based on increasing confidence in their pain franchise, positive feedback from MEDACorp consultants and increased confidence in earnings power.
Finally, L-3 Communications Holdings, Inc. (NYSE:LLL) was added to Goldman Sachs' Americas Buy List. Goldman cited the above average organic revenue growth, new management strategy and defense contract opportunities.
Rival home improvement chains Home Depot Inc. (NYSE: HD) and Lowe's Companies Inc. (NYSE: LOW) are scheduled to report quarterly results this week. Not surprisingly, given the ongoing housing slump, analysts surveyed by Thomson Financial on average expect both companies to post earnings lower than in the same period a year ago. For Home Depot, that's 61 cents per share, down 20.8%, and for Lowe's, 56 cents per share, down 16.4%. Meanwhile, cabinet maker American Woodmark Corp. (NASDAQ: AMWD), for whom Home Depot and Lowe's are major distributors, is also expected to report lower earnings: 11 cents per share, down 67.6%.
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