For Immediate Release
Chicago, IL –August 25, 2010 – Zacks Equity Research highlights: JAKKS Pacific (JAKK) as the Bull of the Day and BJ’s Wholesale Club (BJ) as the Bear of the Day. In addition, Zacks Equity Research provides analysis on PPG (PPG), Mohawk (MHK) and Big Lots, Inc. (BIG).
Here is a synopsis of all five stocks:
JAKKS Pacific (JAKK)posted second quarter 2010 results, which were way ahead of the Zacks Consensus Estimate. Although key brands like WWE, Hannah Montana and Pokemon continued to weigh on the company’s sales growth, improving consumer spending and cost-cutting initiatives benefited its profitability. Besides, the company sits on ample cash balance. We remain optimistic about the company’s long-term growth potential with new product launches, possible acquisitions, improved earnings helped by cost-saving measures, resolution of litigation and a strong financial condition to materialize such growth. Hence, we reiterated an Outperform rating on the stock. Our six-month target price of $18.00 equates to about 14.8x our estimate for 2010. The target price implies an expected total return of 20.8% over that period.
BJ’s Wholesale Club (BJ)posted lower-than-expected second-quarter 2010 results. The quarterly earnings of $0.67 per share missed the Zacks Consensus Estimate of $0.73.
The company hinted that the quarter has been challenging, as it faced intense competition from supermarket stores trying to grab market share by going aggressive in their pricing. This compelled BJ’s to make pricing adjustments at the cost of margin. BJ’s forecast a sluggish economic recovery and a weak consumer spending environment in the second half of 2010 that could intensify the competition.
Consequently, the company has taken a conservative stance and lowered its fiscal 2010 guidance. Therefore, we prefer an Underperform recommendation on the stock.
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Housing Sales Plunge, Prices to Follow
While everyone expected Existing Home Sales to drop in July, the drop was far more than expected. In July, used homes sold at an annual rate of just 3.83 million, the lowest level since 1996. That is a plunge of 27.2% from the June pace of 5.26 million, and is 25.5% lower than the year-ago pace of 5.14 million.
The month-to-month decline is actually worse than it appears since the June numbers were revised down from a 5.37 million pace. So relative to where we though used home sales were running, the decline is actually 28.7%. It was also FAR below the consensus expectation for a 4.72 million pace.
Single-family home sales were down 27.1% on the month and down 25.6% year over year. Condo sales were down 28.1% for the month and 24.0% lower than last year. The plunge in sales comes even as the average mortgage rate fell to 4.56% from 4.74% in June and 5.22% last year.
The Party Is Over
So we threw a very expensive party, and now we are suffering from the hangover. The most important thing about existing home sales is not the direct impact that sales have on the economy. That impact is actually very minimal. Nothing is produced when an existing asset changes hands. Most of the economic activity associated with an existing home sale comes from people redecorating after they move into a “new for them” home. That helps stimulate sales for paint makers like PPG (PPG)and carpet companies like Mohawk (MHK).
Relative to the size of the transaction, the effect on the overall economy is minimal. That is not the case with new home sales, each of which generates an enormous amount of economic activity and are traditionally the key to pulling the economy out of recessions.
Expect Falling Prices
Existing home prices are going to fall. If they didn’t, it would mean that the most fundamental of all economic laws, that of supply and demand, has been repealed. And I think the legislation to do that is stalled in committee in the Senate (just kidding). Fortunately, relative to rents and incomes, the price of houses are now roughly in line with historical norms, not wildly inflated the way they were a few years ago.
That, of course, does not mean that housing prices cannot over shoot to the downside, but it does mean that we will probably not see another 30% decline like we have seen since the top of the bubble. However, I would not rule out a decline on the order of 10 to 15% over the next few years.
The consequences of such a decline would be extremely serious. Housing is a very leveraged asset. In the stock market, using all of the 50% margin you normally have available to you is considered being extremely aggressive. In housing, putting 20% down is considered being very conservative. During the bubble, it was common for people to put down less than 5% when buying a home.
As housing prices decline, more and more people will be pushed underwater on their mortgages. While there is no margin clerk with housing, forcing you to put up cash as soon as the home slips below the waves, it does have very serious consequences.
Big Lots Misses on Top Line, Ups
Big Lots, Inc. (BIG) has posted second-quarter 2010 results. The quarterly earnings of 48 cents a share outdid the Zacks Consensus Estimate by a penny, and soared 37.1% from 35 cents in the prior-year quarter on the heels of healthy sales.
The better-than-expected results prompted management to raise its earnings outlook. Big Lots now expects fiscal 2010 earnings in the range of $2.82 to $2.90 per share, up from its previous guidance range of $2.75 to $2.85, and reflects a 19% to 22% growth over $2.37 earned in fiscal 2009.
Big Lots operates as a broad line closeout retailer in the U.S. The company offers food, health, beauty, plastic, paper, chemical and pet products as well as home decorative products and other product lines.
The company’s closeout format provides it an edge over traditional discount retailers as it offers merchandise assortments to customers at very low prices. Total revenues for the quarter rose 5.1% to $1,142.3 million from the prior-year quarter but fell short of the Zacks Consensus Revenue Estimate of $1,148 million.
Big Lots’ point-of-sale register system, store retrofits and new merchandise fixtures position it to drive traffic, meet consumer demand and improve in-store shopping experience.
The company’s comparable-store sales sustained its growth momentum in fiscal 2010. Comps grew by 3.8% in the quarter. Management expects comps to rise between 3.5% and 4.5% in fiscal year 2010.
Get the full analysis of all these stocks by going to http://at.zacks.com/?id=5507.
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BIG LOTS INC (BIG): Free Stock Analysis Report
BJ’S WHOLESALE (BJ): Free Stock Analysis Report
JAKKS PACIFIC (JAKK): Free Stock Analysis Report
MOHAWK INDS INC (MHK): Free Stock Analysis Report
PPG INDS INC (PPG): Free Stock Analysis Report
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