Friday, March 02, 2012

Andrew Breitbart Dead: Who Will Slither Forward On His Sleazy Path?

Andrew Breitbart was a successful entrepreneur before he dropped dead Thursday on a Brentwood, Calif. street — possibly due to a heart attack. His means of ascent was the practice of sleaze. And since his allies derived such benefit from that, it’s likely that someone else will fill the void left by his passing.

His money came from selling advertisements to the people who visited his web sites — launched in 2009 – that went by names such as Big Journalism, Big Hollywood and Big Government.

His three sleaziest accomplishments were as follows:
  • Weiner. In May 2011, Breitbart posted “salacious” photos sent to women online by former U.S. Rep. Anthony Weiner (D-N.Y.). Weiner apologized to Breitbart for his initial claim that Weiner’s Twitter account had been hacked according to the Los Angeles Times. In this case, I’d argue that Weiner was even sleazier than Breitbart.
  • ACORN. Video-sting operator, James O’Keefe — posing as a pimp along with a female co-conspirator in the role of prostitute — made an undercover video of Acorn workers “apparently offering advice on how to evade taxes and conceal child prostitution,” reports the New York Times. Breitbart’s “accomplishment” was to publish that video on his web site and it went “viral,” according to the Times.
  • Sherrod. In 2010, Breitbart helped get Agriculture Department official, Shirley Sherrod, fired. He edited a video clip to make it appear that Sherrod had discriminated against a white farmer but the full video showed that “she had eventually helped the farmer and that she had learned from the experience — that all people must overcome their prejudices,” reports the Times. In my view, this was the worst of these three claims to fame.
Breitbart’s sudden death has unleashed a chorus of praise from the remaining Republican presidential candidates. According to the Los Angeles Times, Rick Santorum, Mitt Romney and Newt Gingrich “all paid tribute on Twitter.” And — remember her? – Sarah Palin’s Facebook page exclaimed that Breitbart was “a warrior who stood on the side of what was right.”

Au contraire, Sarah – Breitbart’s greatest accomplishments are a litany of what’s most wrong with American politics! His supporters regret Breitbart’s passing because his unique brand of social media political sleaze aligned with two Republican values:
  • Destroying perceived enemies. Republican presidential candidates have a long history of the effective use of videos to destroy opponents — starting with George H. W. Bush’s 1988 Willie Horton ad that help stop Michael Dukakis. And there is no doubt that Breitbart’s supporters would have loved him to be around to deploy that same sleazy magic to take the wind out of Commander-in-Chief Barack H. Obama’s re-election campaign.
  • Making money. Republicans also admire someone who can make money. In that area. Breitbart — whose anchor site,, had 1.7 million unique visitors in January 2012, according comScore (SCOR), was pretty large — although less than half the size of his mentor, Matt Drudge’s site that attracted over 4 million visits that month. But according to 24/7 Wall Street, Breitbart’s site was worth $4 million in October 2011, a mere 4% of the $93 million value of Drudgerport.
Given these deeply-ingrained Republican values, someone will surely come along to take Breitbart’s place.

But nobody will be able to take over his talent at Twittering. For example, when the late Senator Ted Kennedy passed, Breitbart Tweeted: ”Rest in Chappaquiddick” and called Kennedy “a special pile of human excrement,” according to AP.

So when you cast your ballot for Willard Mitt Romney in November, remember Mitt’s Tweet: “Ann and I are deeply saddened by the passing of @AndrewBreitbart: brilliant entrepreneur, fearless conservative, loving husband and father.”

Tuesday, December 06, 2011

Repair Your Portfolio With AutoZone Shares

AutoZone (NYSE: AZO) reported earnings Tuesday and Advance Auto Parts (NYSE: AAP) reported last month. Which auto parts retailer had the better quarter and should you invest in either?

To answer that, one of the first questions to consider is the growth rate of the auto parts industry. And the answer to that is that the auto parts industry is growing at about the same rate as the general economy -- rising at a 2.6% annual rate since 2006 to $41.9 billion in 2011 while generating a 7.2% profit margin on $3 billion in net income, according to IBISWorld.

That rate is expected to slow to 1.3% growth through 2016. Over the last couple of years, a drop in consumer disposable income due to the recession let more people to fix their own vehicles. But as the economy recovers, more people are expected to pay mechanics to fix their cars and the industry will be sustained by demand from commercial vehicle owners.

The two biggest players in the industry are AutoZone with 19.6% market share and Advance with 14.9%.

Prior to its earnings announcement Tuesday, analysts were expecting AutoZone to report rapid revenue and EPS growth. Specifically, revenues were expected to grow 5.5% to $1.89 billion and analysts expected EPS to rise 18% to $4.45 a share.

And Tuesday's report blew through those expectations. After all, AutoZone reported a 7.3% revenue increase to $1.92 billion and EPS that spiked 24% to $4.68. Underlying this performance was a 4.6% boost in same store sales and some new store openings -- 17 in the U.S. and two in Mexico.

This brought AutoZone's total store count to 4,832 -- including 4,551 stores in the U.S. and 281 stores in Mexico. Profit was also aided by lower distribution costs and a drop in so-called shrink expense -- e.g., employee stealing.

This is not the first quarter that AutoZone has been growing nicely. For example, in its fourth quarter, AutoZone net income rose 12.1%, in the third quarter it was up 12.1% again, and before that net income rose 20%, according to Narrative Science. Advance also did well but it's not growing as fast as AutoZone.

Specifically, in its third quarter report -- released November 9, Advance reported a 4% increase in sales of $1.46 billion (meeting expectations) on adjusted EPS of $1.41 a share -- a whopping 23 cents ahead of Thomson Reuters I/B/E/S forecasts. That growth was aided by "higher same-store sales and new store openings," according to Reuters.

So here's what the investment choice between AutoZone and Advance boils down to:
  • AutoZone: fast growing, fat margins; slightly expensive stock. AutoZone's sales have risen 9.6% in the past 12 months to $8.1 billion while its net income rose 15% to $849 million -- yielding an industry-beating 10.5% net margin. Its PEG (where a PEG of 1.0 is considered fairly priced) of 1.18 is a bit pricey on a P/E of 17.4 and expected earnings growth of 14.7% to $25.87 in its fiscal year 2013.
  • Advance: fast growing, fair margins; somewhat pricey stock. Advance's sales have increased 9.5% in the past 12 months to $6.1 billion, while net income has increased 28% to $375 million – yielding an industry-lagging 6.2% net margin. Its PEG of 1.14 is slightly over-valued on a P/E of 14.7 and expected earnings growth of 12.9% to $5.61 in 2012.
AutoZone is the winner in this auto parts faceoff. It's growing and has market-beating margins thanks to its ability to meet cost reduction targets. And given its track record of beating earnings growth targets, its stock should benefit from future upside surprises.

Monday, December 05, 2011

Discounters Dollar General and 99 Cents Only Stores Selling at Premium

With the economy in the doldrums, there must be millions of people looking to buy what they need at the lowest possible price. But if people don't need what the discount stores sell, then they might pass despite the low price.

This is the dilemma that faces investors considering whether to buy shares of discounters Dollar General (NYSE: DG) and 99 Cents Only (NYSE: NDN). Are these two doing better due to the economic slowdown? Are they likely to exceed future analyst expectations? If so, should you invest?

These dollar stores sell products that manufacturers can't sell in the higher-priced retail stores. But surprisingly, the sales growth among dollar stores has come from affluent consumers.

Sure most of their customers are low-wage earners -- the New York Times reported that 42% earn no more than $30,000; financial anxiety among people earning over $70,000 is driving demand. As Dollar General's CEO, Rick Dreiling, told the Times, those affluent consumers make up 22% of its sales and the vast majority of its growth.

Dollar General was expected to continue to do well -- but it blew through estimates. After all, analysts were looking for it to report Monday a 10.8% increase in revenues to $3.57 billion and a 23% increase in EPS to 48 cents. And Monday it reported an 11.5% revenue increase to nearly $3.6 billion while it reported EPS of $0.50 -- two cents higher than expected.

In announcing Monday's earnings, Dreiling raised its earnings expectations for the full year. As he stated in the announcement, Dollar General's same store sales increased 6.3% for the third consecutive quarter and "we are raising our full year adjusted earnings per share guidance to the range of $2.29 to $2.32."

Competitor, 99 Cents Only Stores  -- it operates 289 discount stores of which 74% are in California and the rest in Texas, Arizona, and Nevada -- had a strong fiscal second quarter when it reported November 10 -- but not as good as Dollar General's report.

99 Cents' revenue was up 8.8% to $363 million and its profit rose a strong 17% to $15.1 million. But its 21 cents a share fell a penny short of analysts' expectations even as sales were 2% above forecasts.

So here's what the investment choice between Dollar General  and Warnaco boils down to:
  • Dollar General: fast growing, fair margins; expensive stock. Dollar General's sales have risen 10.5% in the past 12 months to $13.7 billion while its net income soared 85% to $654 million -- yielding a thin 4.8% net margin. Its PEG (where a PEG of 1.0 is considered fairly priced) of 1.36 is a pricey on a P/E of 21 and expected earnings growth of 15.5% to $2.64 in fiscal year 2013.
  • 99 Cents Only Stores: growing, fair margins; pricey stock. 99 Cents Only Stores' sales have increased 5.1% in the past 12 months to $1.48 billion, while net income has increased 23% to $77 million – yielding a decent 5.2% net margin. Its PEG of 1.60 is over-valued on a P/E of 20 and expected earnings growth of 12.5% to $1.29 in fiscal 2012.
These two discount retailing stocks are selling at a premium. If forced to choose one, I would go with Dollar General because it is growing faster and it less over-priced. But there is no rush to buy their shares -- consider them more closely the next time the market plunges on bad news from the Eurozone.

Friday, December 02, 2011

Try on PVH for Size, Leave Warnaco on the Rack

Demand in emerging markets for prestigious U.S. brands is turning the mundane clothing industry into a fast grower. And that trend is helping PVH (PVH) and Warnaco (WRC) to post strong financial results. But should you invest in either stock?

Thanks largely to exports, the global apparel manufacturing industry is big and growing. In 2011, IBISWorld estimates that sales will total $449 billion, 3% higher than in 2010. And exports account for a whopping 69% of the total.

The clothing manufacturing location varies by price level. Less expensive apparel is made in developing regions of Asia and South America while "designers, large wholesalers and retailers are predominantly located in Europe, the United States and developed Asian countries, such as Hong Kong and Japan," according to IBISWorld.

PVH is benefiting from exports of its Tommy Hilfiger and Calvin Klein brands in international markets. And that explains how its third quarter results exceeded expectations when it reported Thursday after the bell.

Its results were great and the stock is up 3% in after-hours trading. For example, its adjusted EPS of $1.89 beat forecasts by 8 cents; its revenues climbed 6.6% to $1.65 billion compared to the same quarter in 2010 and that figure was $10 million higher than expectations. PVH's best brands were Tommy Hilfiger whose sales rose 17% and Calvin Klein that enjoyed an 11% increase.

Warnaco enjoyed growth in its most recent report -- also benefiting from international demand. Its third quarter sales rose 8% to $645.1 thanks to international sales (up 16%) and so-called direct-to-consumer (up 31%) demand growth. The bad news was that its U.S. sales were down 3%.

And Warnaco's adjusted earnings met analysts' estimates. More specifically, Warnaco earned $1.07 per share -- 2.9% more than in 2010.
So here's what the investment choice between PVH and Warnaco boils down to:
  • PVH: fast growing, thin margins; slightly expensive stock. PVH sales have risen 93% in the past 12 months to $5.6 million while its net income plunged 68% to $251 million -- yielding a thin 4.6% net margin. Its PEG (where a PEG of 1.0 is considered fairly priced) of 1.07 is a bit pricey on a P/E of 16.1 and expected earnings growth of 15% to $5.87 in fiscal year 2013.
  • Warnaco: fast growing, good margins; fairly pricey stock. Warnaco sales have increased 13.7% in the past 12 months to $2.5 billion, while net income has soared 44.5% to $165 million – yielding a decent 6.7% net margin. Its PEG of 1.15 is slightly over-valued on a P/E of 13.5 and expected earnings growth of 11.7% to $4.50 in 2012.
Neither of these stocks is a screaming buy because their valuations on expected earnings growth are not cheap. However, PVH has done a better job of exceeding expectations and its current valuation is relatively low. But PVH has work to do in trimming weak brands and boosting its margins.

If management makes progress on that front, I'd expect the stock to rise -- particularly if it can keep beating expectations. By contrast, Warnaco stock looks like it could hover in a trading range until management can find an EPS growth catalyst.

Thursday, December 01, 2011

Fossil Can Make Your Portfolio Come Alive

There are plenty of people in emerging markets who are delighted to buy watches to let the world know about their newly acquired wealth. If that growth is higher than analysts expect, then investors might be able to profit from investing in leading watchmakers such as Movado Group (MOV) and Fossil (FOSL). But is the industry attractive and growing? And are these two stocks priced low enough to create a margin for error? 

The watch industry has different segments based on price ranges. At the very top are Exclusive watches in the $10,000 and above category --  its Concord brand is a leader there. And at the bottom are mass market watches that sell for less than $55, according to Movado's 2011 10K.

Movado is a leader in the so-called premium category -- these are quartz-analog watches that sell in the $500 to $1,499 range. Made mostly in Switzerland, premium watches have gold or stainless steel finishes. Movado competes with Gucci, Rado and Raymond Weil.

Fossil is similarly well-positioned in the higher-price ranges. And despite competition from cell phones that give people the time of day wherever they may be in the world, people appear to be gobbling up these watches because they show off the newly acquired wealth of the wearers.

Movado blew through earnings expectations when it reported earnings Thursday. Analysts were expecting an 8.5% sales increase to $133.4 million -- but it reported 16% growth to $143 million. Analysts had forecast EPS of $0.43 per share -- but Movado reported adjusted EPS of $0.65 cents a share -- a whopping 22 cents more than expected. Behind the growth was strong demand growth for Movado watches.

Fossil reported much faster third quarter growth on November 8th. Fossil's revenues rose a whopping 22.7% to $642.9 million -- $700,000 more than analysts expected. And its EPS of $1.09 were six cents above analysts' expectations.

But all was not well with Fossil. The strong dollar has led to higher watch prices and this has reduced demand from consumers in recession-hit economies. The result is that Fossil cut ist earnings outlook by three cents a share to a range from  its $1.75 to $1.78 -- that makes analysts' $1.78 a share target look tougher for Fossil to hit, according to Reuters.

So here's what the investment choice between Movado and Fossil boils down to:
  • Movado: growing, unprofitable; fairly expensive stock. Movado sales have risen 9.3% in the past 12 months to $427 million while it lost $10 million. Its PEG (where a PEG of 1.0 is considered fairly priced) of 1.11 is pricey on a forward P/E of 19.4 and expected earnings growth of 17.4% to $0.81 in fiscal year 2013.
  • Fossil: fast growing, wide margins; fairly price stock. Fossil sales have increased 31% in the past 12 months to $2.4 billion, while net income has soared 83% to $273 million – yielding a slim an attractive 11.7% net margin. Its PEG of 0.96 is slightly under-valued on a P/E of 21.4 and expected earnings growth of 22.2% to $5.53 in 2012.
If you think that the last 12 months are good predictors of the future, then you should invest in Fossil because it is enjoying rapid growth, wide margins, and trades at an attractive price. By contrast, Movado has been growing more slowly, losing money, and is over-valued.
However, the predictions of future results for both companies suggest that Fossil is likely to stumble while Movado's upward momentum is going to continue. I would give the edge to Fossil because its past performance suggests that it has a good chance of blowing through lowered expectations.

Wednesday, November 30, 2011

Wait For Market Break To Suit Up in Jos. Bank Shares

With unemployment at 9% do the out-of-work buy new suits to interview for scarce jobs or do they hold on to their dwindling cash and make do with their old duds? One way to answer that question is to look at the men's apparel retailers such as Jos. Bank (NYSE: JOSB) and Men's Warehouse (NYSE: MW) -- back in May I thought this one was too pricey. Should you suit up your portfolio with the shares of either company?

The men's clothing retailing industry is large -- $9 billion -- but it has gotten smaller in the last year at a 1.3% rate, according to IBISWorld. Behind this drop is the weak economy that crimps demand. As IBISWorld wrote: "Sinking consumer sentiment, brought about by skyrocketing unemployment and a slowdown in personal disposable income growth" cuts into demand for men's clothing.

However, IBISWorld expect the industry to grow slightly -- at a 2.3% annual rate through 2016 as the economy recovers.

And Men's Wearhouse and Jos. Bank are among the biggest players with market share of 20.2% and 10.3%, respectively.

Based on this analysis suggesting a tight link between the state of the economy and the change in sales at these men's retailing industry leaders, their recent financial results could well be a barometer of the state of the American consumer. 

And by that measure -- it looks like that consumer is in surprisingly healthy shape. Prior to Jos. Bank's Wednesday's earnings announcement, analysts expected a strong performance. They were looking for a 13.1% revenue boost to $196 million and EPS of $0.51 per share.

But Jos. Bank exceeded those expectations handily -- reporting a 21% sales pop to $210 million and EPS of $0.54 -- three cents more than expected. Behind the great results were a 14.6% increase in same-store sales and a 28.6% boost to sales from so-called direct sales.

When it last reported its fiscal second quarter, Men's Wearhouse did even better.Its adjusted EPS of $1.11 beat analysts' expectations by seven cents and its revenues climbed 22% to about $656 million thanks to its 2010 acquisition of two British corporate uniform companies and sales increases from its retail, tuxedo rental, and alteration business units.

So here's what the investment choice between Jos. Bank and Men's Wearhouse boils down to:
  • Jos. Bank: fast growing, good margins; fairly expensive stock. Jos. Bank sales have risen 11.4% in the past 12 months to $915 million while its net income rose 20.6% to $91 million -- yielding a slim net margin of 4%. Its PEG (where a PEG of 1.0 is considered fairly priced) of 1.29 is pricey on a P/E of 15.6 and expected earnings growth of 12.1% to $3.91 in fiscal year 2013.
  • Men's Wearhouse: growing, slim margins; somewhat pricey stock. Men's Wearhouse sales have increased 10% in the past 12 months to $2.3 billion, while net income has soared 47% to $95 million – yielding a slim net margin of 4.1%. Its PEG of 1.16 is slightly over-valued on a P/E of 15.1 and expected earnings growth of 13% to $2.49 in fiscal 2013.
I am not jumping up and down about either of these stocks. They are both a bit expensive but Jos. Bank has much wider profit margins than Men's Wearhouse. And that means that if its sales grow faster than expected, its earnings will grow even faster than the same sales growth boost would induce at Men's Wearhouse. 

I would look for a broad market dip to buy shares of Jos. Bank and hold off on Men's Wearhouse. But the good news for the broad economy is that if these two are bellwethers, their rapid sales growth bodes well for the future.

Tuesday, November 29, 2011

Take a Spoonful of Ralcorp Stock

Do people eat more cereal during a recession? And if so, is there an investment opportunity in the stock of leading ready-to-eat (RTE) cereal makers Ralcorp (NYSE: RAH) and Kellogg (NYSE: K)? The hedge fund that famously popped Enron's bubble, Highfields Capital Management, is loading up on Ralcorp shares. Should you follow?

Highfields Capital Management asked a question about Enron's financial statements during an April 2001 conference call. In response to the question, then-CEO, Jeff Skilling, called Highfields' analyst Richard Grubman an unprintable expletive that begins with 'a' and ends with 'e'. 

Highfields made a fortune shorting Enron and recently Highfields turned its money-making sights on Ralcorp -- boosting its stake in Ralcorp by 200% to 1.5 million shares in the three months between June 2011 and September 2011.

Why might Highfields be interested in an industry as mature as RTE cereal? According to IBISWorld, it's growing steadily despite economic turbulence. Over the last five years, it's grown at an average rate of 3.2% and it is expected to end 2011 with $13.3 billion in revenue -- 1.9% above its 2010 level. Moreover, IBISWorld predicts the industry will grow at a 2% annual rate through 2016.

But Ralcorp is hardly the industry leader. That spot goes to Kellogg with 34.2% of the market to Ralcorp's 13.9%, according to IBISWorld. And Kellogg gained that lead by winning when it comes to the industry key success factors such as advertising, filling up retail shelves with different varieties, and economies of scale in purchasing and manufacturing.

Could Highfields be attracted to Ralcorp's financial performance? It looks like the interest is in a possible buyout. That's because Ralcorp postponed its fiscal fourth quarter earnings report from November 8th to November 29th so it could calculate the accounting impact of its spinoff of its cereal division -- Post Foods, according to Dow Jones Newswires. This could affect ConAgra Foods Inc.'s (NYSE: CAG) bid to acquire Ralcorp.

Meanwhile, Ralcorp narrowed the range of its expected fiscal year earnings to a range between $5.21 and $5.27 a share -- it had previously forecast 2011 earnings ranging from $5.20 to $5.35. And earlier in November, analysts were expecting Ralcorp to report an 11.1% EPS increase to $1.40 on an 8% rise in sales to $1.2 billion, according to Narrative Science.

Kellogg's third quarter results were  a big disappointment to its investors. It reported a 14% decline in earnings to 80 cents a share -- nine cents short of analysts' expectations. Kellogg attributed this to supply chain investments. Meanwhile, Kellogg revenue rose 4.9% to $3.31 billion but fell $10 million short of expectations, according to ActiveInvestor.

So here's what the investment choice between Ralcorp and Kellogg boils down to:
  • Ralcorp: growing modestly, narrow margins; expensive stock. Ralcorp sales have risen 4% in the past 12 months to $4.7 billion while its net income fell 28% to $225 million -- yielding a low net margin of 4.8%. Its PEG (where a PEG of 1.0 is considered fairly priced) of 1.33 is pricey on a P/E of 20 and expected earnings growth of 15.1% to $6.03 in fiscal year 2012.
  • Kellogg: shrinking, decent margins; over-priced stock. Kellogg sales have fallen 1.4% in the past 12 months to $13 billion, while net income has soared 2.9% to $1.2 billion – yielding a decent 9.1% net profit margin. Its PEG of 3.06 is very expensive on a P/E of 15 and expected earnings growth of 4.9% to $3.54 in fiscal 2012.
Ralcorp is the better tasting of these two stocks. It is still over-priced so it would only make sense to buy its shares now if you think -- as Highfields probably does -- that ConAgra will make a bid for the company at a higher price. Kellogg seems to be blundering despite its market dominance -- as a result, its stock is tremendously over-valued.

If forced to pick one -- I'd buy Ralcorp.