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.

Friday, November 25, 2011

Try On Foot Locker Stock For Size

Everyone needs shoes -- but is there enough growth in demand for shoes for you to make a profit investing in shares of retailers such as Genesco (NYSE: GCO) and Foot Locker (NYSE: FL)?

The footwear retailing industry is big and shrinking. According to IBISWorld, 2011 revenues will total $20 billion but that figure will be 5% below its 2010 level. Underlying that decline is a slow economy. And profitability in the industry is capped by a variety of rivals -- including mass merchandisers, discount stores, and non-traditional retailers who are selling products that are mostly commodities.

Foot Locker is the industry leader while Genesco is much smaller. Specifically, IBISWorld estimates that Foot Locker is the industry leader with 18.7% market share while Genesco controls a mere 3.5%. In 2007, Foot Locker made an unsuccessful bid to acquire Genesco.

Foot Locker's recent financial performance has been good. It earned 43 cents a share -- four cents above expectations when it reported third quarter 2011 results on November 17th. Thanks to sales of running shoes, Foot Locker was able to report its seventh quarter in a row of expectations beating results and its sales of $1.39 billion grew 9% -- a big improvement in a declining industry.

But Genesco is growing even faster than its larger rival. Its third-quarter earnings spiked 54% in its Tuesday report -- its EPS of $1.21 were a whopping 25 cents above expectations and its revenues of $617 million were 33% higher and $22 million more than expected due to strong same-store sales growth (up 12%) and Genesco's acquisition of UK shoe company Schuh Group, according to BusinessWeek

So here's what the investment choice between Foot Locker and Genesco boils down to:
  • Foot Locker: growing strongly, narrow margins; cheap stock. Foot Locker sales have risen 4% in the past 12 months to $5.5 million while its net income spiked 260% to $254 million -- yielding a low net margin of 4.6%. Its PEG (where a PEG of 1.0 is considered fairly priced) of 0.97 is cheap on a P/E of 13.1 and expected earnings growth of 13.5% to $2 in fiscal year 2013.
  • Genesco: rapidly growing, narrow margins; expensive stock. Genesco sales have increased 13.7% in the past 12 months to $2.1 billion, while net income has soared 88.1% to $73 million – yielding a narrow 3.4% net profit margin. Its PEG of 1.34  is expensive on a forward P/E of 18.1 and expected earnings growth of 13.5% to $4.18 in fiscal 2013.
Foot Locker wins this investment foot race on a more reasonable valuation. But I would consider Genesco if it keeps up its zooming earnings growth and its stock price falls along with the general market.

Wednesday, November 23, 2011

Store Your Net Worth with QLogic

All those Facebook pokes and tweets create lots of data that companies need to store and retrieve across far-flung computer networks. To keep up with the growth in all that data, companies need to buy so-called network storage. Does this demand growth mean you should buy shares in two of the biggest network storage vendors -- Brocade Communications Systems (NASDAQ: BRCD) and QLogic (NASDAQ: QLGC)?

The network storage industry is big and growing fast. According to Infonetics Research, in the first quarter of 2011, the so-called Storage Area Network (SAN) switch and adapter market grew 9.8% from the previous year to $755 million. And Infonetics cites the tremendous demand for cloud storage in estimating that the market will grow at a 20% annual rate through 2015 and ending that year at three times its 2011 revenues.

And Brocade and QLogic are significant players there. Brocade claims to have 70% of the SAN market while in 2010 QLogic claimed that it controlled 54.5% of a related market -- Fibre Channel adapters.

Brocade reported better than expected financial results Tuesday and its shares rose 6%. Its quarterly revenue of $550 million and EPS of 16 cents compared favorably to analysts' expectations. According to Barron's those expectations were for revenue of $527 million and EPS of 10 cents a share and Brocade beat them by 4% and 60% respectively.

Moreover, Brocade looks to beat expectations in the current quarter as well. That's because it forecasts revenue in the range of $530 million to $550 million and adjusted EPS ranging from 12 cents to 14 cents -- and both are above analysts' forecasts of $535 million and 11 cents, according to Barron's.

When QLogic reported its second quarter results at the end of October, revenues and EPS were ahead of expectations. QLogic's 2.5% higher revenues of $150.2 million were better than expected and its unchanged-from-2010 adjusted EPS of 28 cents were 2 cents ahead of Zacks Consensus Estimate.

So here's what the investment choice between Brocade and QLogic boils down to:
  • Brocade: barely growing, narrow margins; cheap stock. Brocade sales have increased 2.7% in the past 12 months to $2.2 billion, while net income has plunged, down 57% to $51 million – yielding a narrow 2.4% net profit margin. Its PEG of 0.62 (where a PEG of 1.0 is considered fairly priced) is inexpensive on a forward P/E of 10.1 and expected earnings growth of 16.2% to $0.39 in fiscal 2013.
  • QLogic: growing strongly, wide margins; cheap stock. QLogic sales have risen 8.8% in the past 12 months to $610 million while its net income soared 153% to $145 million -- yielding a whopping net margin of 23.7%. Its PEG of 0.86 is cheap on a P/E of 10.4 and expected earnings growth of 12.1% to $1.17 in fiscal year 2013.
QLogic wins this SAN faceoff. Its valuation is very compelling for a solidly growing company with very attractive profit margins. Brocade seems to be lagging but it could be a takeover target for the likes of Dell (NASDAQ: DELL) and might be an interesting holding for that reason alone.

But based purely on stand-alone fundamentals, QLogic is the better bet.

Tuesday, November 22, 2011

St. Jude Can Keep Your Portfolio Pumping -- But Wait For Price Drop

If your heart is not pumping with a regular rhythm, then you've got yourself a serious problem. But if so -- and you're still reading this -- it may be because you are a customer of the  cardiovascular rhythm management (CRM) industry.

CRM makes devices that doctors implant in your chest -- they give you a nice electric shock to get your heart pumping if it gets off track. And the industry is big -- although shrinking. Should you invest in it? If so, what are the prospects for profit in the stocks of Medtronic (NYSE: MDT) and St Jude Medical (NYSE: STJ).

The CRM market is big but shrinking. According to Medtech Insight, the global CRM market is likely to total $11.4 billion in revenue, down 2% from 2010. The reason for the decline is research that argued CRM products are mis-used and a Department of Justice investigation into the industry.

A January 2011 study in the Journal of the American Medical Association argued that "a substantial percentage of US physicians may not be following evidence-based guidelines" for CRM devices. Though its findings are controversial, the study suggests that some patients may be getting the devices even though that might not be the best treatment for what ails them.

And it that was not bad enough, there is an ongoing DOJ investigation into whether health care providers are improperly billing Medicare for CRM devices.  Specifically, the DOJ is trying to gather evidence of whether providers are improperly billing Medicare for "nonqualified [implantable cardioverter defibrillators] ICD implants." reports Medtech Insight.

Medtronic and St. Jude are big players in this industry. MEdtronic has 45% of the U.S. ICD market and St. Jude has 27%. But a JPMorgan analyst, Michael Weinstein, sees a rapidly contracting market -- he expects the US ICD market to get smaller at a 5.2% annual rate from $4.18 billion in 2010 to $3.38 billion in 2014.

Medtronic has been affected by this contraction. And that contributed to low expectations for its fiscal second quarter 2012 results. FactSet-polled analysts were expecting earnings of 82 cents on revenue of $4.07 billion. The EPS expectations for Tuesday's report was the same as the same period in 2010 while the revenue forecast was up 4.4% from the year before.

Medtronic's actual result was good and the stock is rising in pre-market as a result. Revenue was $4.13 billion -- $40 million higher than forecast and EPS of 84 cents were two cents more than forecast.

St. Jude has been performing more impressively. When it reported results in October, its adjusted EPS of 78 cents for the third quarter beat expectations by six cents a share. And its revenues increased 11.5% to $1.38 billion -- beating the Zacks Consensus Estimate by around $10 million. Although St. Jude had problems in its CRM product line, other products offset the bad news.

So here's what the investment choice between Medtronic and St. Jude boils down to:
  • Medtronic: barely growing, wide margins; expensive stock. Medtronic sales have risen 0.7% in the past 12 months to $16.2 billion, while net income has slipped 0.1% to $3.1 billion – yielding an impressive 19.1% net profit margin. Its PEG of 1.37 (where a PEG of 1.0 is considered fairly priced) is expensive on a P/E of 11.6 and expected earnings growth of 8.5% to $3.73 in fiscal 2013.
  • St. Jude: growing, wide margins; expensive stock. St. Jude sales have sales have risen 10.3% in the past 12 months to $5.56 billion, while net income has increased 16.8% to $907 million -- yielding a solid net margin of 16.3%. Its PEG of 1.34 is expensive on a P/E of 12.9 and expected earnings growth of 9.6% to $3.58 in 2012.
Medtronic and St. Jude are over-valued given their slow expected earnings growth. If forced to choose, I would pick St. Jude because it's growing faster. In light of the never ending drip of nasty global debt rumors, keep an eye on St. Jude for an opportunity to buy its shares at a lower price.

Monday, November 21, 2011

Take a Bite Out of Wendy's Stock; Skip Jack in the Box

During a period of slow economic growth do people buy more fast food? If so, is there an investment opportunity in buying stock in the Quick Service Restaurant (QSR) companies that serve it? A comparison of the earnings of Jack in the Box (NYSE: JACK) -- that reports its third quarter results Monday -- and Wendy's (NYSE: WEN) reveals some answers. 

The QSR market totaled $166 billion and was expected to barely budge in 2011 at a 1% rate to $167.7 billion in 2011, according to a March 2011 report from The report noted that thanks to the economic downturn, there was significant pent up demand -- 40% of consumers were "not dining out or using takeout as often as they would like." And the report speculated that by unleashing that demand, QSR industry revenues would recover rapidly as the economy recovered. 

The biggest player in the industry is McDonald's (NYSE: MCD), according to QSR. In 2010 its sales totaled $32.4 billion -- earning it QSR's top rank -- based in part on the strength of its very high $2.4 million in annual sales per store. Wendy's 2010 sales of $8.3 billion gave it 24% of McDonald's revenues or $1.4 million per store -- and QSR's #4 rank. And Jack in the Box's 2010 sales of $2.9 billion gave it 9% of McDonald's revenues or $1.3 million per store -- and QSR's #15 rank.

In 2010, Wendy's implemented new menu ideas and cut a lagging brand. Among the new ideas were "adding Garden Sensations Salads to the menu and offering a Pair 2 Menu that gave customers a chance to choose among 35 salad combinations for $5," according to QSR. Wendy's also added Natural Cut Fries with Sea Salt -- tossing out its old fries altogether -- and it dumped its Arby’s unit in the first half of 2011.

These changes have contributed to good results. In the third quarter of 2011, Wendy's adjusted EPS of 5 cents a share were a penny ahead of the Zacks Consensus Estimate. Wendy’s total revenue grew 1.8% to $611.4 million in the quarter. This was due to 3% growth in company-owned restaurants and 1.7% more franchise revenues. Its average transaction was up due to "menu improvements [and] brand repositioning," according to Zacks.

Meanwhile, Jack in the Box is good at advertising, it added new items to its menu in 2010, and it added low-priced items. According to QSR, Jack in the Box won "another gold Effie Award for its Jack campaign." Its new menu items included "Breakfast Pita, Pastrami Grilled Sandwich, Really Big Chicken Sandwich, and a Grilled Chicken Sandwich," wrote QSR. And it added low-priced options such as paying $3 for "a Hamburger Deluxe, a small fountain drink, and french fries."

This approach has not been enough to boost its results though. On Monday, before its report, the average analyst estimate was 41 cents a share, up 2.5% the year before. But this positive expectation follows two quarters in a row of disappointing results -- in its fiscal third quarter its reported EPS of 38 cents was 2 cents a share short of expectations and in its second quarter the company missed by 9 cents.

So here's what the investment choice between Wendy's and Jack in the Box boils down to:
  • Wendy's: Shrinking, narrow margins; cheap stock. Wendy's sales have fallen 4.6% in the past 12 months to $2.66 billion, while net income has plunged, down 223% to $2.9 million – yielding a miniscule 0.1% net profit margin. Its PEG of 0.44 (where a PEG of 1.0 is considered fairly priced) is inexpensive on a forward P/E of 22.7 and expected earnings growth of 52% to $0.23 in 2012.
  • Jack in the Box: shrinking, narrow margins; expensive stock. Jack in the Box's sales have dropped 7% in the past 12 months to $2.3 billion while its net income declined 46.4% to $62 million -- yielding a narrow net margin of 2.75%. Its PEG of 1.43 is expensive on a P/E of 17.1 and expected earnings growth of 12% to $1.63 in fiscal year 2012.
Wendy's looks like the winner in this fast food faceoff. But that success depends heavily on a big turnaround in 2012. Jack in the Box looks like it's in pretty rough shape but a better than expected result in its third quarter report could change that.

Friday, November 11, 2011

Watch CBS, Disney Make Your Portfolio Grow

In an economy that's hardly booming, it would seem that people would want to watch TV and go to movies to take their minds off economic hardship. But an entertainment company would need to produce compelling content to snag a big share of those potential viewers.

And if they could, would advertisers be willing to spend to reach them or would they figure that consumers don't have the money to buy their products so why should they bother? These questions come to mind in considering the financial performance of the entertainment industry these days. And here's another: If the entertainment industry is doing well, should you invest in Walt Disney (DIS) and CBS (CBS) -- two of its biggest participants?

These companies get revenues from TV advertising and movies, among other sources. But a look at global TV advertising revenues suggests it's a big market that's growing solidly. According to ZenithOptimedia, advertising revenue on TV was expected to grow at a 2.4% compound annual rate to $191 billion by the end of 2011 and 6% more in 2012 to $202 billion. That would make the market for TV advertising more than twice as large as the second biggest one -- newspaper ads.

The market for movies is much smaller but growing far faster. Pricewaterhousecoopers expects 2011 North America film revenues to hits $40.8 billion in 2011 and to rise at a 5.4% annual rate to $50.3 billion by 2015. And globally, the film industry is growing faster -- 6.2% annually -- from $88.8 billion in 2011 to $113.1 billion in 2015.

Both industries are growing because of more people in emerging markets such as China, India, and Brazil who are watching TV and going to movies.

When Disney reported its fourth quarter earnings Thursday, it blew through estimates on the strength of its other businesses -- cable TV and at U.S. resorts. Specifically, according to Bloomberg, Disney's profit rose 20% in the quarter. Its sales climbed 7% to meet analysts' estimates of $10.4 billion while its adjusted EPS of 59 cents a share beat estimated by four cents. 

Disney benefited most from three factors: fees from pay-TV operators rose, ESPN ratings were up 13% and Disney resorts charged higher ticket prices and added a new cruise ship.

CBS's third quarter report, issued Nov. 3, was not quite as strong. Its net income spiked 38% to $338 million. Its $0.50 per share beat by four cents EPS expectations but its 2% increase in revenue to $3.37 billion fell $60 million short of Wall Street forecasts.  While its advertising revenue held steady at almost $2 billion, CBS received higher licensing and affiliate fees in the quarter.

So here's what the investment choice between DIS and CBS boils down to:
  • Disney: slow growth, strong margins; fairly priced stock. Disney's sales have increased 7.4% in the past 12 months to $41 billion while net income rose 21% to $4.8 billion – yielding a 12.9% net profit margin. Its PEG of 1.03 (where a PEG of 1.0 is considered fairly priced) is reasonably valued on a P/E of 14.68 and expected earnings growth of 14.3% to $3.30 in fiscal 2013.
  • CBS: Decent growth, small margins; cheap stock. Revenues for CBS have grown 8% in the past 12 months to $14 billion while net income jumped 220% to $1.22 billion – yielding an 8.77% net profit margin. Its PEG of 0.75 is pretty cheap on a P/E of 14.24 and expected earnings growth of 18.89% to $2.24 in 2012.
Both of these entertainment companies are performing well and Disney shares are poised to pop in Friday trading. But due to its low PEG, CBS looks like the better value if it keeps beating EPS growth expectations.

Thursday, November 10, 2011

Don't TAP BUD for Your Portfolio

Do people drink less beer during periods of slow economic growth so they can save money or do they drink more to drown their sorrows? The great thing about this question is that there are two publicly traded companies -- Anheuser-Busch InBev (BUD) and Molson Coors (TAP) -- whose earnings we can analyze to gain insight into this question. And here's another: should you invest in either company?

Beer is big business. According to First Research, there are 400 U.S. brewers with $20 billion in annual sales. And it's a highly concentrated market with eight companies controlling 90% of the sales. Among these Anheuser-Busch (Budweiser brands) and MillerCoors (Miller and Coors brands) are the biggest.

The concentration in the industry makes sense given its economics. After all, the costs of buying beer raw materials, brewing, distributing, and advertising are very high and therefore it is easy for a company that isn't gaining market share to fall further behind thanks to the high costs and seek to be acquired by consolidators like InBev.

But there is a parallel trend in the industry -- beer lovers who take advantage of cheap home brewing methods to start their own breweries. There are plenty of craft brewers, brewpubs, and microbreweries that bring the total to 1,753 establishments, according to the Brewers Association.

And craft brewing seems to be more popular than the overall industry. Craft brewer dollar sales rose 15% in the first half of 2011 -- whereas SABMiller expected 2.5% growth for the industry in 2011.

BUD appeared poised to grow faster than the industry when it announced results Wednesday. Analysts expected third quarter 2011 revenue to rise 7% to $9.98 billion; operating profit was forecast to be up 2.1% to $3 billion; net income was poised to climb 3.7% to $1.58 billion; and EPS was estimated to be $0.98 -- four cents higher than in 2010.

But BUD beat all the expectations when it reported Wednesday. Its revenues of $10.22 billion beat expectations by $240 million or 2.4%; its earnings of $1.59 billion were $10 million above expectations, and its EPS of $1.09 was a whopping 11 cents higher than expected.

The big negative in the quarter was that volumes sold in BUD's third quarter slipped 0.2% due to a 0.6% decline in beer and a 6.4% increase in non-beer beverages.

For its part, TAP has already reported declining results. On Nov. 2, it posted a 44% plunge in third quarter net income. Meanwhile, TAP's revenue fell 3% to $2.29 billion on a 4% volume decline to 17.2 million barrels.

The reason revenues did not fall as fast as volume was that some customers were willing to buy more high-priced brew. For example, according to the Associated Press, "higher priced seasonal craft brand extensions, like Blue Moon Summer Honey Wheat and Leinenkugel's Summer Shandy, were popular. But sales of Miller Lite and Miller Genuine Draft fell, as did sales of the company's lowest-priced beers following a price increase."

So here's what the investment choice between BUD and TAP boils down to:
  • Anheuser Busch: shrinking steadily, but high margins; expensive stock. BUD's sales have dropped 1.3% in the past 12 months to $37.8 billion while net income shrank 12.7% to $4.8 billion – yielding a wide 18.02% net profit margin. Its PEG of 2.16 (where a PEG of 1.0 is considered fairly priced) is expensive on a P/E of 22.48 and expected earnings growth of 10.4% to $4.15 in 2012.
  • Molson Coors: growing sales, but shrinking profits, good margins; expensive stock. TAP's sales have gone up 7.3% in the past 12 months to $3.4 billion while net income dropped 8.4% to $620 million – yielding a solid 17.95% net profit margin. Its PEG of 2.9 is very expensive on a P/E of 12.15 and expected earnings growth of 4.2% to $3.66 in 2012.
Both stocks look way too expensive to quaff for your portfolio. But if you want to follow consumer trends, drink craft beer.

Wednesday, November 09, 2011

Macy's Trading At a Discount, Ralph Lauren's Premium Priced

The U.S. economy is limping along at 2.5%, the unemployment rate is 9%, 16 million are looking for full-time work. So retailers must be suffering terribly, right? Not at all. With the wealthy enjoying a great decade, upscale American retailers are booming -- not solely in the U.S. but in Asia and Europe as well. Among those are Ralph Lauren (NYSE: RL) that reports earnings Wednesday and Macy's (NYSE: M). But should you stock up your portfolio with their shares?

Wall Street is expecting some earnings and revenue growth for RL. Specifically, the consensus EPS estimate for its second quarter of $2.24 is expected to be 7.2% higher than in 2010. But revenue is expected to grow much faster -- up 20.1% to $1.84 billion in the quarter.

And RL blew through first quarter 2012 expectations. In August 2011, it reported EPS of $1.90 that were $0.44 higher than analysts polled by Capital IQ.

And a contributing factor was growth in its international revenues. They rose 60% in the first quarter and accouted for 36% of RL's consolidated sales. RL's international growth included expansion in Europe where the company added "new wholesale and retail distribution, [expanded] existing and highly productive locations and [generated sales from] new merchandized categories such as Lauren and accessories," according to RL's Q1 2012 earnings transcript.

But RL is hardly the only upscale retailer that's doing well. Macy's is expected to report higher sales and EPS when it reports Wednesday. FactSet-surveyed analysts expected Macy's to report sales up 4.8% to $5.87 billion and EPS of 16 cents -- double the 2010 figure.

Underyling Macy's financial performance are three key strategic choices regarding pricing, merchandising, and product selection. Specifically, investors will seek details on how consumers are reacting to Macy's higher prices -- to preserve margins as production costs rise; its merchandising strategy of tailoring stores to local markets; and its efforts to "lock up exclusive brands," according to the Associated Press.

So here's what the investment choice between RL and M boils down to:
  • Ralph Lauren: Steady growth, decent margins; expensive stock. Ralph Lauren's sales have increased 13.7% in the past 12 months to $6 billion while net income rose 18.4% to $631 million – yielding a 10.46% net profit margin. Its PEG of 1.62 (where a PEG of 1.0 is considered fairly priced) is expensive on a P/E of 24.7 and expected earnings growth of 15.22% to $7.89 in fiscal 2013.
  • Macy's: Decent growth, thin margins; cheap stock. Macy's sales have increased 6.4% in the past 12 months to $25.7 billion while net income jumped 157% to $1.1 billion – yielding a slim 4.08% net profit margin. Its PEG of 0.93 is cheap on a P/E of 13.18 and expected earnings growth of 14.15% to $3.04 in 2012.
Both stocks have been performing well -- near their 52 week highs -- but Macy's gets the nod due to its far more reasonable valuation.

Tuesday, November 08, 2011

Activision To Hit Gaming Target, EA Could Miss

The electronic gaming industry is in a shooting war between traditional console gamers and social network gaming. With Activision (NYSE: ATVI) reporting its earnings Tuesday, investors can see just how well it's doing. But should you invest in Activision or would Electronic Arts (NASDAQ: ERTS) be a better bet?

And these two companies are in a shooting war. That's because Activision's Call of Duty controls 90% of the so-called shooter segment. and EA wants to take that down to 70%. It’s no secret that EA are directly going after Call of Duty, mainly because the company mentions it at any given opportunity. This latest episode sees EA claiming they want to take Activison’s 90% share of the shooter market down to at least 70%.

As EA's Jens Uwe Intat told ButtonCombo in September, “We will give Activison a hard time in the space. And we have done it when we won back the football category from PES. That’s what we are doing in the shooter space. One of my favourite sayings is ‘Rome wasn’t built in a day’. We might not do it Day One, but we are going to take a decent amount share from Activision. In broad numbers, Activision has 90 per cent of the shooter market, and we want to see that go down to 70. I would be even happier if they were left with 60 per cent.”

Experts agree with EA's assessment of Activision's market position. As Jesse Divnich, an industry expert, told IndustryGamers, the "Call of Duty franchise is outperforming the category's growth, and since release counts have been similar over the year the data would conclude that Call of Duty is both growing the Shooter category while growing its share."

And that category has been growing rapidly. Since 2008, the number of Shooter games sold has been growing at an 8.5% annual rate from 68 million in 2008 to 80 million in 2010. That amounts to $5 billion in revenue -- up from $3 billion in 2006 -- a 13.6% annual rate, according to IndustryGamers.

With all this good news on Activision, you might expect it to be reporting outstanding results for the third quarter. If so, you would be disappointed. That's because analysts expect a 75% drop in earnings per share from 2010. They forecast Activision will earn a penny a share -- down from 4 cents a share the year before .And revenue is expected to be down 25% to $558 million for the quarter compared to the 2010 third quarter.

This decline does not come as  surprise. After all, in September, total U.S. game sales—including videogame console hardware and games—fell 6% to $1.16 billion in the year to date, down 6% from $1.23 billion a year earlier, according to NPD Group. And this decline is due in part to Activision and EA's slow response to social games like Zynga -- whose pending IPO could value it at $20 billion.

Zynga's prospectus indicates that it's outperforming Activision. For example, for the nine months ending Sept. 2011, Zynga's revenues rose 106% to $829 million while its net income fell 35% to $31 million.

But Activision's weak earnings will not be the public's focus Tuesday. Instead, attention will be paid to the debut of Activision latest "Call of Duty" game -- the $60 "Call of Duty: Modern Warfare 3" that will battle for shooter market share with EA's just-released "Battlefield 3."  Both companies are hoping these games will reverse the negative trend.

Meanwhile EA's latest results for its second quarter ended Sept. 30, were better than expected. Its adjusted profit of $17 million was 5 cents a share -- better than the 5 cents a share loss that analysts had projected.

And EA's sales rose 17% to $1.03 billion -- exceeding expectations by over 9%. However, without the adjustments, EA reported a loss of $340 million -- $139 million worse than its 2010 second-quarter loss.

So here's what the investment choice between Activision and EA boils down to:
  • Activision: Strong growth, decent margins; slightly expensive stock. Activision's sales have increased a small 3.9% in the past 12 months to $4.77 billion, but net income has soared, up 270% to $645 million – yielding a 13.8% net profit margin. Its PEG of 1.17 (where a PEG of 1.0 is considered fairly priced) is a bit expensive on a P/E of 24.1 and expected earnings growth of 20.63% to $0.89 in 2012.
  • EA: slow growth, losing money; cheap stock. EA's sales have dropped 1.8% in the past 12 months to $3.86 billion while its net loss declined 59.2% to ($290 million). Its PEG of 0.54 is cheap on a forward P/E of 27.8 and expected earnings growth of 51.47% to $0.88 in fiscal year 2013.
I would rather take a chance on Activision than EA. Both are facing a considerable threat from social gaming to which they are having trouble adapting. But Activision's financial house is in much better order. Nevertheless, if EA achieves its fiscal 2013 earnings goal, it's stock is now screamingly cheap. I think that target could be hard to hit.

In this shooting war, I'd give the edge to Activision.

Monday, November 07, 2011

Take Your Portfolio on a Trip with Priceline, Shun Orbitz

When it comes to booking online travel, (NASDAQ: PCLN) and Orbitz (NASDAQ: OWW) are among the biggest players. But with U.S. economic growth a mere 2.5% in the third quarter, are people cutting back or are they flocking to these sites to save money? And should you invest or avoid these two stocks?

Priceline will report its third quarter earnings after Monday's close and those results are expected to be explosive. Analysts forecast an 85% spike in revenue to $1.42 billion and an 82% EPS rise to $9.02. During its second quarter, 50% of its revenue came from outside the U.S. -- a 90% increase over 2010.

And Priceline must be doing something right because it is growing much faster than the industry. According to an April 2011 eMarketer forecast, online travel sales in the U.S. were expected to increase a relatively paltry 8.5% in 2011 to $107.4 billion -- increasing at a somewhat faster 11% rate in 2012.

I found it interesting that eMarketer expects online travel growth will be mainly due to rising airfares. Specifically, it expects a 5.9% rise in the average amount booked online from $1,145 in 2011 to $1,213 in 2012. Another source of growth is that 4.7% more people are expected to book travel online -- from 93.9 million in 2011 to 98.3 million in 2012.

And Priceline is holding on to its number two market rank as people look to cap how much they pay to travel. As of October 8, 2011, it remained the number two online travel agency -- with 10.11% of visits behind market leader Expedia (NASDAQ: EXPE) with 12.54% and ahead of Orbitz (7.54%), according to Experian Hitwise.

Meanwhile, Orbitz is is growing at half the industry rate. Its net income for the third quarter, reported November 3rd, fell 37% to $11.2 million but its EPS of 11 cents beat analyst estimated by six cents a share. And Orbitz's revenue was up 4% in the quarter to $202.9 million.

But Orbitz seems to be struggling with a range of strategic issues from costs that are too high to legal disputes with suppliers. For example, Orbitz incured $7.3 million in contract labor costs, its marketing expenses rose 8% to $61 million and most troubling -- its overhead costs increased 17% to $67.7 million.

And Orbitz has not been able to include as many travel options as competitors. For example, AMR Corp.(NYSE: AMR)'s American Airlines tried to keep its price display off of Orbitz but recently lost a court fight to do so.

So should you invest in Priceline and avoid Orbitz? Here's why you should consider it:
  • Priceline: rapid growth, highly profitable; reasonably priced stock. Priceline's sales have increased 31.9% in the past 12 months to $3.65 billion while net income rose 7.8% to $720 million -- yielding an impressive 19.8% net profit margin. Its PEG of 1.18 (where a PEG of 1.0 is considered fairly priced) is reasonable on a P/E of 36.4 and expected earnings growth of 30.8% to $28.31 in 2012.
  • Orbitz: slow growth, unprofitable; dirt cheap stock. Orbitz's sales have increased 2.6% in the past 12 months to $772 million while it lost $69 million. Its PEG of 0.09 is extremely cheap on a forward P/E of 24.8 and expected earnings growth of 288% to $0.12 in 2012.
Both Priceline and Orbitz are risky bets at this point -- but for different reasons. Priceline is poised to plunge unless it beats expectations and raises guidance. But based on its recent performance, there is a good chance it will do just that and its price will rise -- when it has beaten in recent quarters, its stock has risen nearly 10% in the aftermath.

Orbitz appears to be in a weak position strategically but it could be a tempting acquisition target for a larger competitor. If it survives through 2012 and actually achieves its earnings growth forecast, its stock would be screamingly cheap at this level. But given its most recent report -- it appears to be having significant management problems.

I would consider investing in Priceline and avoid Orbitz.

Friday, November 04, 2011

KKR and Blackstone Only Good for Insiders

Private-equity firms collect funds from limited partners and couple them with debt to buy companies and sell them -- either to other compaines or to public investors. That's one reason that it is ironic that two of the biggest private equity firms, KKR (NYSE: KKR) and Blackstone Group (NYSE: BX) are publicly traded companies.

As Jerome Kohlberg, the first K in KKR told me in a 2004 interview, private-equity investing was originally called bootstrapping. Kohlberg started this idea while a partner at the now-defunct Bear Stearns.

In bootstraps, he explained, investors purchase control of companies financed largely through bank loans, while giving managers a significant equity stake to link their personal wealth to the companies' financial results. The managers streamline operations and sell the company at a profit within 5 to 7 years.

"I insisted on [Bear Stearns] management having a piece of the equity," says Kohlberg. "I brought up the idea of long-term investments in these bootstraps to the Bear Stearns partners. My proposal was overruled."

Kohlberg who founded KKR in 1976, was also over-ruled by his other KKR partners, Henry Kravis and George Roberts who wanted to put too much debt on acquired companies' balance sheets. So in 1987 he left just as KKR was engaging in conduct that made it famous in Barbarians at the Gate.

Meanwhile, KKR, is now a publicly-traded company that in July 2010 sold so-called common units on the NYSE while removing the shares from Euronext Amsterdam. Those common units are not the same as shares of stock but they give investors some rights to the cash flows from the KKR partnerships.

KKR makes money in two ways. It receives management fees -- in the industry they average 2% -- as a share of the amount of money they raise from limited partners. And KKR gets 20% of the profits it can generate by investing the capital -- known as carry. So if a private equity firm raises $60 billion and generates $10 billion investing that money, it gets $1.2 billion in management fees and $2 billion in carry.

Friday morning, KKR reported results that were not good. Instead of reporting economic net income (ENI) -- a commonly used profit measure in the private equity industry -- it reported an economic net loss (ENL). And that was a step down from the year before. More specifically, KKR's ENL was $592 million in the third quarter compared to $317.3 million ENI in 2010.

But KKR's results were not as bad as expected -- its reported 91 cents a share loss was 11 cents better than the  average loss of $1.02 a share estimated by 12 analysts in a Bloomberg survey. According to KKR, the loss was due to an 8.5% accounting charge for a decline in the market value of investments that KKR is holding and has not yet sold.

Meanwhile, in its latest report, competitor Blackstone Group posted an unexpected loss after an 11% drop in the value of its buyout holdings. In its third quarter, Blackstone reported a loss of $274.6 million, about $230 million worse than the year before. And its loss per unit of 56 cents was 44 cents worse than in 2010.

Since their initial public offerings, Blackstone stock has lost 60% of its value since its 2007 IPO, while KKR's is up 40%. So why are these companies publicly traded? They give partners an easier way to turn their stakes into cash. But does that mean you should buy their common units? Avoid both -- despite their apparently low valuations.
  • Blackstone: rapid growth, unprofitable; very inexpensive stock. Blackstone's sales have increased 75.9% in the past 12 months to $3.42 billion while it lost $156.6 million . Its PEG of 0.19 (where a PEG of 1.0 is considered fairly priced) is cheap on a forward P/E of 8.4 and expected earnings growth of 43.5% to $1.69 in 2012.
  • KKR: fast growth, high margins; dirt cheap stock. KKR's sales have increased 31.4% in the past 12 months to $592 million while net income dropped 60.8% to $388 million – yielding a 66% net profit margin. Its PEG of 0.06 is extremely cheap on a P/E of 7.35 and expected earnings growth of 134% to $1.92 in 2012.
Both of these companies are hard for the average investor to understand. If they actually achieve the kind of earnings growth that analysts expect, however, their shares are extremely inexpensive. The reality is that these private equity firms will do well if investors' appetite for buying the companies they acquired revives.

Unfortunately, there is no evidence that such a fever is anywhere on the horizon.

Thursday, November 03, 2011

Satellite TV's Boom Good for DIRECTV, News Corp

Is satellite TV the wave of the future? After all, it's expensive to dig up the ground and put cables in to emerging markets -- and far cheaper to put a satellite dish in front of your house. A look at DIRECTV (NASDAQ: DTV) and News Corp (NASDAQ: NWSA) shows that the satellite TV business is booming.

Prior to its Thursday morning third quarter earnings report, analysts were expecting a big profit increase over the same period in 2010. Specifically, expectations were for EPS of 73 cents a share -- up from 55 cents in 2010 -- and an 11.7% sales increase to $6.74 billion

But its actual results were a mixed bag. The good news is that DIRECTV enjoyed faster-than-expected sales growth -- up 14% to $6.84 billion. The bad news is that its 27% increase in EPS to 70 cents fell three cents short of expectations.

Interestingly, its revenue growth benefited from new subscribers in emerging markets -- Latin America set "records with 957,000 gross and 574,000 net additions in the quarter while Sky Mexico adds 238,000 net new subscribers," according to its earnings press release.

Meanwhile, News Corp. -- it does cable programming, newspapers, book publishing and films in addition to satellite TV -- reported better than expected adjusted EPS on Tuesday night. While its first-quarter 2012 net income declined 5% due to the cost of closing News of the World and a dropped takeover bid for DIRECTV competitor, British Sky Broadcasting, News Corp's adjusted EPS of 32 cents a share -- three cents more than Factset analysts had expected.

News Corp boosted the performance of its Direct Broadcast Satellite Television unit. Specifically, it reported DBST revenue of $922 million -- up 7.7% -- and DBST operating income of $119 million -- a 45% spike. In the quarter, DBST represented 12% of News Corp revenues and 8.6% of its operating income.

So should you buy shares of DIRECTV and avoid News Corp.'s? No -- you should consider buying both. Here's why:
  • DIRECTV: decent growth, good margins; cheap stock. DIRECTV's sales have increased 11.8% in the past 12 months to $25.57 billion while net income soared 133.3% to $2.47 billion – yielding a 10.1% net profit margin. Its PEG of 0.58 (where a PEG of 1.0 is considered fairly priced) is very cheap on a P/E of 14.76 and expected earnings growth of 25.8% to $4.22 in 2012.
  • News Corp: slow growth, small margins; cheap stock. News Corp's sales have increased 1.9% in the past 12 months to $33.9 billion while net income climbed 17.9% to $3 billion – yielding a 9.2% net profit margin. Its PEG of 0.66 is very cheap on a P/E of 14.82 and expected earnings growth of 22.63% to $1.68 in fiscal 2013.
If forced to choose, I would pick DIRECTV due its greater exposure to the booming satellite TV market. But News Corp. stock looks cheap if it can keep beating expectations.

Peter Cohan has consulted to Rupert Murdoch and has no financial interest in the securities mentioned

Tuesday, November 01, 2011

To Sate Your Stock Thirst, Stick With Dunkin', Shun Starbucks

Dunkin' Brands (NASDAQ: DNKN) touts itself as the people's coffee to Starbucks' (NASDAQ: SBUX) more pompous positioning. But which of these equities will put you in the top 1%?

Dunkin' Brands owns the coffee and food shops, which owns Dunkin' Donuts and the Baskin-Robbins ice cream chain, and it went public about a year ago to cut debt and free up capital for expansion. It's looking to expand from the Northeast, where it gets about 75% of its revenue, to the West Coast and globally.

Moreover, Dunkin has been facing a cost squeeze -- dairy prices are rising and it's struggling with the risk that raising prices to cover the higher costs will turn off its customers.

Prior to its report Tuesday, analysts were expecting Dunkin to report third quarter revenue of $159.3 million and EPS of $0.25. According to its report, Dunkin beat both the revenue and adjusted EPS expectations. More specifically, Dunkin reported $163.5 million in revenue, 2.6% higher than expected, and its $0.28 a share in adjusted EPS was three cents more than expected.

There is not just good news for Dunkin shareholders. While same-store-sales at Dunkin' Donuts are up, that measure barely budged for its Baskin Robbins outlets. Dunkin’ Donuts U.S. comparable store sales rise 6% due both to higher prices per transaction and traffic while Baskin-Robbins U.S. comparable store sales inched up a mere 1.7%. 

Meanwhile, Starbucks reports its earnings Thursday and analysts are predicting a slight increase in sales and adjusted EPS. Specifically, Starbucks is expected to report $2.95 billion in revenue, $90 million more than in 2010, and adjusted EPS of $0.36 -- three cents above its 2010 performance.

In the previous quarter, Starbucks knocked it out of the park. That's when it reported a 33% profit spike to $887.4 million on a 12% revenue rise to $2.93 billion. Not only that, but Starbucks reported EPS of $0.36 four cents more than analysts expected.

Should your portfolio should imbibe Venti Soy Lattes or suck down a large cup of Dunkin' Joe? Stick with the Dunkin'.
  • Dunkin' Brands slow growth, small margins; cheap stock. Dunkin's sales have increased 7.3% in the past 12 months to $595 million while net income dropped 23.3% to $19 million – yielding a 3.19% net profit margin. Its PEG of 0.72 (where a PEG of 1.0 is considered fairly priced) is pretty cheap on a forward P/E of 24.67 and expected earnings growth of 34.1% to $1.18 in 2012.
  • Starbucks: decent growth, healthy margins; expensive stock. Revenues for Starbucks have increased 9.5% in the past 12 months to $11.51 billion while net income jumped 142% to $1.17 billion – yielding a 10.15% net profit margin. Its PEG of 1.43 is expensive on a P/E of 27.87 and expected earnings growth of 19.47% to $1.81 in 2012.
Starbucks makes fine coffee but its earnings growth does not seem to justify the high valuation. Dunkin' stock looks cheap if its 2012 earnings growth forecast is right. Tuesday's report boosts Dunkin's credibility when it comes to exceeding expectations.