While retail sales have been unimpressive — July sales fell slightly from June levels, the first decline in five months — a few companies provide reasons for optimism. Sales at chain discounters, drugstores, and wholesale clubs grew in July, while clothing, department, and furniture stores saw sales decline.
The back-to-school season is not likely to provide the kicker many sought, as cash-strapped consumers are focusing on necessities and lower-priced goods. However, several retailers — including TJX ($36; NYSE: TJX) — raised profit outlooks.
TJX, which specializes in off-price apparel, delivered same-store-sales growth of 3% in July and 4% in the July quarter. Quarterly per-share profits rose 24% excluding special items to $0.47 per share, a penny higher than the consensus estimate. Wall Street expects about 20% growth in per-share profits in the year ending January. TJX bears watching, but for now is rated Neutral.
Wal-Mart Stores’ ($59; NYSE: WMT) July U.S. same-store sales rose 3.7%, or 3.0% excluding gasoline. The company warned of slower sales growth in August, and the shares fell on the news. But the consensus calls for per-share-profit growth of 12% in fiscal 2009 ending January and 11% in fiscal 2010, targets the discount titan may be able to top. Wal-Mart is a Long-Term Buy.
Powered by strong growth worldwide, McDonald’s ($64; NYSE: MCD) delivered sales growth of 16% (9.5% at constant currency), with same-store sales up 8.0%. The fast-food giant’s affordable meals have captured diners trading down from pricier establishments, and region-specific foods have boosted results overseas. McDonald’s is rated Neutral.
Citigroup ($19; NYSE: C), in a move to provide liquidity for owners of auction-rate securities, said it would repurchase $7.3 billion of the securities and incur a $500 million charge. Citigroup is rated Neutral . . . Hurt by a crumbling housing market, American International Group ($23; NYSE: AIG) posted a worse-than-forecast $5.36 billion loss in the June quarter, reflecting mortgage-related write-downs. AIG reported a per-share loss of $0.51 excluding investment write-downs, versus a gain of $1.77 in the year-earlier period. AIG is rated Neutral . . . Canadian insurer Manulife Financial ($35; NYSE: MFC) reported June-quarter earnings per share of C$0.66, down 7%. Premiums and deposits increased 5% to C$17.26 billion. The company raised its quarterly dividend C$0.02 to C$0.26 per share, payable Sept. 19. Manulife is rated Neutral . . . Fannie Mae ($8; NYSE: FNM) reported a massive June-quarter loss of $2.3 billion, saying it expects more large losses stemming from the increase in home-mortgage defaults. The company also slashed its quarterly dividend to $0.05 per share from $0.35. Fannie May is rated Neutral . . . J.P. Morgan Chase ($38; NYSE: JPM) announced another $1.5 billion write-down of debt securities on top of more than $6 billion in July write-downs. J.P. Morgan is rated Neutral.
Mergers and deals
CVS Caremark ($38; NYSE: CVS) agreed to pay about $2.9 billion in cash, including the assumption of about $300 million in debt, for Longs Drug Stores ($70; NYSE: LDG). CVS is rated Neutral . . . Liberty Media ($14; NASDAQ: LINTA) may be interested in swapping its nearly 3% stake in Time Warner ($16; NYSE: TWX) for the AOL Internet-access business, which would leave Time Warner with the content and advertising business. Time Warner is rated Neutral.
Oil's slippery slope
You can blame most of the recent weakness in energy stocks — the S&P 1500 Energy Sector Index has fallen nearly 19% since the end of June — on a decline in oil prices.
For the first half of the year, energy stocks held up better than most, their rise coinciding with a strong rally in energy prices. But many energy stocks have fallen sharply since oil and natural-gas prices began to drop in early July.
Concerns about slowing demand for crude oil and refined products both in the U.S. and overseas have many investors worried. But below are three reasons why investors should not panic — particularly regarding our top energy stocks.
>> Of the six energy stocks we recommend for purchase, four are in the equipment and services group. While these companies tend to move with oil prices in the near term, their profits depend more on exploration spending than on commodity prices. And most producers continue to spend aggressively.
>> U.S. crude-oil inventories remain well below the average for this time of year, with fewer than 20 days of supply in storage.
>> The futures market projects oil prices will remain above $110 for the next two years. The Wall Street analysts’ consensus isn’t as optimistic, but few expect oil prices to fall to a level that will drive producers to substantially cut capital spending.
The Forecasts Focus List contains two energy stocks. Oceaneering International ($56; NYSE: OII) provides a variety of products and services for oil producers. The second stock, contract driller Transocean ($125; NYSE: RIG), is reviewed below.
Demand for offshore-drilling services remains strong, giving Transocean excellent growth potential. Consensus estimates project per-share profits will rise 69% in 2008 and 15% in 2009. Transocean, the world’s largest offshore drilling contractor, operates in every major drilling region.
A combination of tight global rig supplies and the ongoing discovery of new offshore reserves have driven rig lease rates higher and kept Transocean’s fleet busy. The company’s largest, most expensive rigs are 95% sold out for 2009, and the backlog is growing. Transocean is a Focus List Buy and a Long-Term Buy.