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.