For Immediate Release
Chicago, IL –September 1, 2010 – Zacks Equity Research highlights: AutoNation (AN) 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 International Paper (IP), Berkshire Hathaway (BRK.B) and Winn-Dixie Stores Inc. (WINN).
Here is a synopsis of all five stocks:
AutoNation (AN) remains focused on improving its product mix and cost-cutting initiatives. The company's profit increased 36% in the second quarter of 2010 and surpassed the Zacks Consensus Estimate by $0.02 per share.
Cost reduction revolved around lower interest expense, disciplined operations and inventory management. The company's strong new vehicle unit sales are expected to be boosted further by its recent acquisitions of three dealerships.
These factors have led us to upgrade our recommendation on the stock from Neutral to Outperform and set a target price of $28.
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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Home Prices Rise in June, But…
I would attribute most of the recent strength in home prices to the homebuyer tax credit. The Case Schiller numbers are the gold standard for tracking housing prices, but it is very tardy data. These numbers are for June, and are actually a three-month moving average of April, May and June. Those were the peak months for the impact of the tax credit on existing home sales. People had until June 30 to close on their houses, and they had to agree to the transaction by April 30.
That pulled sales into those months that might otherwise have happened in July or August. The credit was up to $8,000, so almost nobody would want to close their deal in early July and simply leave that money on the table. The tax credit is a textbook example of a third-party subsidizing a transaction. When that happens, both the buyer and the seller will get some of the benefit. The buyer gets his when he files his tax return next year, the seller gets hers in the form of a higher price for the house.
Since the tax credit is now over, that artificial prop to housing prices has been taken away. Sales of existing houses simply collapsed in July, dropping 27.2% on the month. At the same time, the inventory of homes for sale actually increased by 2.5%. That one-two combination sent the months of supply to a new record high of 12.5 months.
It was not until inventories climbed above the six month mark that prices started to fall. They really collapsed as the months of supply moved into the double digits. The extensive government support for the housing market, including the tax credit, but also the Fed buying up $1.25 Trillion in mortgage paper to artificially depress mortgage rates, helped boost sales and bring the months of supply back down. Now that support is over, and the months of supply far exceed the worst we saw during the heart of the bust.
The tax credit was not a very effective means of stimulus, but it did help prop up prices, and that is a pretty important accomplishment, even if it proves to be ephemeral. The credit cost the government about $30 billion. A large part of that money went to people who would have bought anyway, but perhaps would have done so in July or August rather than May or June. To the extent it rewarded people for doing what they would have done anyway, it did nothing to stimulate the economy.
Also, turnover of existing houses really does not do a lot to improve the economy. It is the building of new houses that generates economic activity. A used house being sold does not generate more sales of lumber by International Paper (IP) or any of the building products produced by Berkshire Hathaway (BRK.B). It does not put carpenters and roofers to work.
Winn-Dixie EPS Beats, Rev Misses
Winn-Dixie Stores Inc. (WINN) reported fiscal 2010 fourth-quarter results after the closing bell on Monday. Net income jumped 48.8% to $14.0 million or 25 cents per share from $9.4 million or 17 cents per share in the year-ago period. Quarterly earnings also surpassed the Zacks Consensus Estimate of 13 cents. The growth in earnings was mainly attributable to an extra week of sales and absence of a significant income tax expense recorded in the year-ago period.
Quarterly Details
Winn-Dixie’s sales grew 1.8% year-over-year to $1.75 billion, missing the Zacks Consensus Estimate of $1.79 billion. The year-over-year growth was primarily the result of an additional week in fiscal 2010. Same-store sales declined 5.2% year-over-year mainly due to increased competition, conservative approach towards promotions and higher sales of generic drugs, compared to branded ones.
Gross profit rose 1.6% year-over-year to $508.4 million, while gross margin dipped 10 basis points (bps) to 29.1%. The decline in margins was primarily caused by cost inflation in certain categories, which Winn-Dixie was unable to pass on entirely due to a competitive pricing environment.
Winn-Dixie’s other operating and administrative expenses increased 3.2% to $493.0 million mainly due to higher payroll and occupancy costs related to the extra week. Consequently, operating income slipped 24.7% year-over-year to $14.2 million from $18.9 million in the year-ago period, while operating margin dipped 30 bps to 0.8%.
Get the full analysis of all these stocks by going to http://at.zacks.com/?id=5507.
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AUTONATION INC (AN): Free Stock Analysis Report
BJ'S WHOLESALE (BJ): Free Stock Analysis Report
BERKSHIRE HTH-B (BRK.B): Free Stock Analysis Report
INTL PAPER (IP): Free Stock Analysis Report
WINN-DIXIE STRS (WINN): Free Stock Analysis Report
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