Stocks in the News — week of April 8, 2013 (April 11 update)

Goodfellow LLC’s “Stocks in the News”

seen on Townhall Finance, heard on Ransom Notes Radio

 

New York State Supreme Court Weighs in on Macy’s vs. J.C. Penney Co. and Martha Stewart Living 

Macy’s Inc.’s (M, $44.77) claim of unfair competition against J.C. Penney Co. has been dismissed in the New York State Supreme Court.  Macy’s alleged that J.C. Penney sold Martha Stewart products in violation of an exclusive deal between Macy’s and Martha Stewart.  A breach of contract claim against Martha Stewart Living has yet to be ruled upon.

Macy’s Inc.’s earnings per share expected to grow 12-14% per year for the next three years.  The PE is 11.5, and the dividend yield is 1.79%.  Macy’s is expected to buyback up to 7-8% of outstanding shares per year.  Citi Research says, “Macy’s is our favorite department store stock for 2013.”

Macy’s stock reached a high of $46.65 before the 2008 Financial Meltdown, plummeted to single-digits, and is just now reaching its former high.  The stock broke past resistance at $42 in March, and continues to climb.

Subscribe now and read our recent report on Macy’s Inc.

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Wells Fargo Reports First Quarter Earnings

“Wells Fargo & Co. (WFC, $36.73), the largest U.S. home lender, said lower expenses helped the company post a record profit in the first quarter even as revenue dropped and lending margins narrowed,” reports Bloomberg. First quarter earnings per share came in at 92 cents, ahead of the consensus estimate of 88 cents.

Earnings per share have grown steadily since 2008, and are expected to grow 6-8% per year for the next three years.  Earnings are hampered by the low-interest rate environment, and helped by prospects for loan growth, and lower credit losses.  The dividend yield is 2.72%, and the PE is 10.1.  Wells Fargo’s long-term PE range is typically between 8 and 16.

The stock has been trading mostly between $23-$36 for the last ten years.  It appears ready to immediately break out on the upside. The fundamentals are fairly attractive, though not strong enough to earn a Goodfellow LLC buy recommendation.  From a chartist’s point of view, the stock looks ideal.  (04/12/13)

source:  Bloomberg

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Market Ponders Agilent’s Break-Up Value

“Agilent Technologies Inc. (A, $44.41), with a valuation cheaper than 96 percent of peers, would enrich shareholders by breaking up and focusing on its faster-growing biological- and chemical-testing businesses,” reports Bloomberg.  Agilent’s electronics-testing unit has seen no sales growth in the past decade.  A break-up of the company could unlock shareholder value by allowing the life sciences stock to rise independently of the electronic measurement stock.

Earnings and revenue have been rising nicely for a few years, but earnings per share are expected to fall 7% this year, with a 2% revenue increase.  Earnings are projected to resume growth in 2014 & 2015.  The PE is 15, and typically ranges between 8 and 26.

The stock has been trading between $31-$52 for a few years, currently on an uptrend.  Current shareholders should use stop-loss orders to protect profits.  (04/12/13)

source:  Bloomberg

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PC Shipments Suffer as Tablets Continue to Gain Market Share 

Shipments of personal computers are down a surprising 14% year-over-year in first quarter ’13, much worse than market estimates of -7.7%.  All major geographies and computer companies participated in the decline.  Hewlett-Packard Co. (HPQ, $20.88) saw shipments fall 23%, and will likely lose its dominant position in the PC market to aggressive competitor Lenovo.

Citi Research adds that “HP also continues to lose business services market share.”

On March 21, we said, “sell Hewlett-Packard.”   Earnings per share are still expected to fall about 13% this year, and Wall Street will likely revise that number downward.   The stock price hit a ten-year low in December.  (04/11/13)

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Microsoft Windows 8 Caught in PC Sales Slump  

Microsoft Corp.’s  (MSFT $28.94) Windows 8 is experiencing weak demand based on lower demand for high-priced PC’s and consumer difficulty operating the software.  Citi Research expects this sales trend to turn around in second half 2013 as price points come down on touch hardware.  Microsoft is successfully growing its enterprise, X-box and online businesses.  But with Windows 8 being in a high-profile slump, Citi Research says, “we expect Windows needs to stabilize for the stock to work.”

Earnings per share are currently expected to grow 1%, 13% and 9% over the next three years, although Wall Street might be revising those estimates downward near-term.  Microsoft reports first quarter earnings on Thursday, April 18 after the close.

The stock has been trading sideways for over ten years; currently trading between $26 and $33.  There’s some price support at $28.  The dividend yield is 3.18%.

Citi Research says “Buy” and Goldman Sachs Group says “Sell” Microsoft.  We wouldn’t recommend buying MSFT until earnings growth becomes consistently strong.  (04/11/13)

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S&P Reiterates Buy Opinion on Shares of Kellogg Co.

Standard & Poor’s Research remains bullish on Kellogg Co. (K, $64.28), based on its PE vs. other packaged foods companies.

Earnings per share are expected to grow 7.5% per year for each of the next two years.  However, both years’ estimates include expected benefits from a change in pension accounting.  The PE is 16.7, much higher than the earnings growth rate, and at the top of the PE range for three of the last four years.

The stock broke past long-term resistance in January, and has risen 40% since last summer’s low point.  Given the slow earnings growth, high PE, and recent run-up in the stock, we would avoid additional purchases of Kellogg, and use stop-loss orders to protect capital gains.  (04/11/13)

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Family Dollar Stores Guides Estimates Downward

Family Dollar Stores Inc. (FDO, $60.00) has guided Wall Street earnings estimates downward for the second time this year.  The company expects full year earnings to rise in the low single digits on weak sales and gross margin pressure, down from an earlier forecast of 15% growth.  The operational issues are unique to Family Dollar Stores, and are not harming its competitors, Dollar General and Dollar Tree.

The stock price peaked last summer at $74.73 following a two-year run-up, suffered a big drop on January 3, and has stabilized in the $58-$62 range.  Watch for share price pressure as Wall Street cautions investors to lower expectations.  (04/10/13)

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Realogy Misses Wall Street’s Revenue Target

Realogy Holdings Corp. (RLGY, $43.80), a real estate brokerage, relocation and title company, has pre-announced first quarter results, disappointing Wall Street’s revenue expectations.  Sales will be up about 9% vs. the year-ago first quarter, but about $40 million dollars lower than Wall Street expected.  Company brands include Century 21 and Coldwell Banker.

Realogy took net losses for the last three years; however, Wall Street expects the company to turn a profit in 2013.

The stock price may fall through short-term support at $44 today. Shares  might then stabilize at $42. Expect additional share price pressure as a private equity firm, Apollo, offers 35 million shares of Realogy for sale.  (04/10/13)

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Goldman Sachs Reduces Gold Price Targets Through Year-End 2014

Goldman Sachs Group has reduced forecasts for the price of gold, saying that the 12-year rally is over.  They issued a 3-month price target of $1530, a 6-month target of $1490, and a year-end 2014 target of $1270.  Goldman said, “The fall in prices could end up being faster and larger than our forecast, as aggregate speculative net long positions across Comex futures and gold ETFs remain near record highs.”

Barclays, Credit Suisse and Societe General are among many banks expecting 2014 gold prices to be lower than current prices.  Assets in the SPDR Gold Trust have fallen to a 22-month low.

There’s strong support at $1550, but when the price falls below support, there’s room for a freefall.  (04/10/13)

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J.C. Penney Makes Disappointing CEO Change  

J.C. Penney Co. (JCP, $14.20) has fired problematic Silicon Valley superstar and current CEO Ron Johnson, replacing him with the lackluster former CEO Myron Ullman.  Investors responded by dumping shares today.  While Ron Johnson’s marketing strategies worked miracles for Apple Inc., J.C. Penney shoppers did not welcome his approach, which consisted of minimizing sales promotions* in favor of higher-priced style.

Penney’s board of directors will now have to decide whether to return to a heavy promotional environment, while also considering selling or breaking up the company.  The company is expected to continue losing money for at least the next three years.  

Shareholders should absolutely dump this stock!  Holding onto shares in companies that are losing money is a strategy for losers.  As an investor, think to yourself: would a successful mutual fund manager hold shares in a drowning company?  If the answer is “no”, then you shouldn’t own these shares either!  (04/09/13)

(Author’s note:  As a former wholesaler in Liz Claiborne’s showrooms, it’s a widely known fact that once a store becomes known as a discounter, it cannot reverse its policies because it loses its customer base.  The customers it intends to attract still perceive it as a discounter, and they don’t shop there either.  How the CEO didn’t know this, and how no one effectively delivered this basic piece of industry news to him, is beyond my comprehension.)

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Alcoa Handily Beats First Quarter Earnings Estimates

Alcoa Inc. (AA, $8.39), the largest U.S. aluminum producer, beat Wall Street estimates today with their first quarter earnings.  Analysts expected 8 cents per share, and Alcoa delivered 11 cents per share, excluding items.  The company has shifted its manufacturing focus toward  more profitable products and solutions, filling an increased demand from  the aerospace and auto industries.

Despite sales of $23 billion in 2012, the company earned a meager $191 million net income after a 50% tax rate and weak aluminum pricing.  Earnings per share are expected to climb 21%, 60% and 8% over the next three years.  The PE is 15.7.

However, the stock price is near ten-year lows and shows no sign of recuperating in the near future.  (04/09/13)

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Ford Focus Tops Global Car Sales

The Ford Focus, manufactured by Ford Motor Company (F, $12.90) topped 2012 auto sales as the world looks for smaller passenger cars.  Runners-up were the Toyota Corolla and the Ford F-Series pick-up trucks.  Ford CEO Alan Mulally is the driver behind the company’s effort to compete more effectively around the world.

Earnings per share (EPS) fell in 2012, and are expected to be down a fraction again in 2013, due to economic woes in Europe, a glut on the car market in South America, and margin pressures in China.  The dividend yield is 3.1%.

Ford stock has been trading sideways for three years, currently in a range of $12.00-$14.25.  The extreme bull case for the stock is that it could eventually retrace its 2011 high of $18 per share; and the bear case is a drop to support at $9.  (04/09/13)

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AFLAC to Offset Weakening Yen via Share Repurchases

Insurance giant AFLAC Inc. (AFL, $48.93) is experiencing earnings weakness in the face of plunging Japanese government bond yields and a sharply lower yen.  Earnings per share are expected to fall 4% in 2013.  AFLAC is expected to increase share buybacks in 2014 in order to bolster earnings per share.

After several years of rapid sales and earnings growth, the company expects to grow revenue in the low single-digits this year in its U.S. and Japanese markets.  Sales of cancer and medical insurance policies are being hampered by increased competition from Japanese banks.

The stock price has been trading sideways for four years, most recently experiencing a false breakout in March which fell apart last Friday.  We do not recommend that investors own shares in AFLAC.  (04/08/13)

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General Electric to Buy Lufkin Industries

General Electric Co. (GE, $22.89) will purchase oilfield pump maker Lufkin Industries (LUFK, $88.04) for $3 billion, in a deal expected to close in June.  GE will pay Lufkin shareholders $88.50 per share.  Lufkin shares are up over $20 today on the news.

GE is changing its business mix, paring back entertainment and banking businesses, and focusing on equipment and service to industrial sectors, especially the oil and gas markets.  The company has an enormous cash balance which could fund additional acquisitions of mid-size companies.

GE is expected to grow earnings per share 10% per year for the next three years.  The stock pays a 3.3% dividend.  With no additional upside to Lufkin’s share price before the buyout, and GE shares trading at support levels, shareholders should sell LUFK and buy GE*.  (04/08/13)

* Caution:  GE has a higher long-term debt ratio than we prefer at Goodfellow LLC, and therefore does not receive a featured buy recommendation on our website.

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Weatherford International   WFT

Weatherford Shares Up on GE/Lufkin Buyout News

Weatherford International (WFT, $12.54), a mid-sized service and equipment company in the oil & gas industry, is up today as investors view the stock as a potential buyout target, in the wake of General Electric Company’s (GE) offer to buy Lufkin Industries (LUFK).

Weatherford’s revenues have doubled to $15 billion in the last five years, but earnings have floundered, culminating with a net loss in 2012.  Wall Street expects earnings per share to grow  55%, 48% and 32% in the next three years.  The PE is 13.9.

Weatherford stock crashed from a high of $49 in 2008, and never recovered.  Expect the stock to trade between $11.50 and $13.50 near-term.  Earnings growth and buyout rumors could propel the stock to its next resistance level at $18.  (04/08/13)

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AT&T Inc. (T) reached price resistance at $38 on April 5, at the market close.  The stock will likely trade between $36.50-$38.00 in the near-term.  Price growth has being fueled by telecom’s favored place in the stock  market right now and the current surge in growth & income stocks.  However, we like Verizon Communications (VZ) shares better because of the much higher projected earnings growth rate.  (04/06/13)

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