Retailers Ring In The Holidays

12/9/2013


Retailers ring in the holidays

The number of U.S. shoppers visiting brick-and-mortar or online retail stores on Thanksgiving weekend rose 1% from last year to about 141 million, says the National Retail Federation, though shoppers planned to spend an average of $407, down 4% from last year's tally. Online sales rose about 20% on Thanksgiving Day and Black Friday.

Retailers enter the holidays, which generate 20% of the retail industry's annual sales, with some momentum. October sales increased 0.4% from September, surprisingly strong after the government shutdown rattled consumer confidence. However, ShopperTrak sees holiday sales rising just 2%, which would mark the smallest increase since the recession. Retailers could be drawn into the heaviest promotional activity in years, particularly strategies that target lower-income shoppers, a group crimped by weak income growth. Wal-Mart Stores ($81; WMT) and Macy's ($53; M) have conceded that aggressive discounting will cause profit margins to sag. Macy's is a Buy and a Long-Term Buy. Wal-Mart Stores is a B (average).


Anecdotal reports suggest Apple's ($566; AAPL) family of iPads enjoyed brisk sales during the opening weekend of the holiday season. Separately, China Mobile ($54; CHL) has reportedly begun taking preorders for iPhones. China Mobile plans to launch a new mobile-service brand Dec. 18, though the company has not identified the brand. According to one analyst, an iPhone deal with China Mobile could boost Apple's annual per-share earnings by $2.50 to $3.50. Apple is a Focus List Buy and a Long-Term Buy.

Corporate roundup

Dover ($89; DOV) agreed to sell its DEK Printing Machines business for $170 million, with contingencies that could increase the price by $30 million. Dover expects to complete the sale near mid-2014. The stock is a Focus List Buy and a Long-Term Buy.


The European Union fined six banks a total of $2.3 billion to settle charges they manipulated interest rates. J.P. Morgan Chase ($57; JPM) and Citigroup ($52; C) were penalized a combined $202 million. J.P. Morgan plans to fight some of the allegations. J.P. Morgan is a Focus List Buy and a Long-Term Buy. Citigroup is rated A (above average).


Schlumberger ($88; SLB) said a temporary closure of an Iraqi facility will compress earnings per share by about 2%, or $0.02 to $0.03, in the December quarter. Shi'ite Muslim workers and tribesmen damaged offices in Southern Iraq last month after accusing a foreign security adviser of insulting their religion. The consensus projected earnings of $1.37 per share, up 27%, at the time of the announcement. Schlumberger is a Focus List Buy and a Long-Term Buy.

Investors reward dealmakers

Deals are not just being found in retail stores. U.S. companies are paying an average premium of 19% for acquisitions this year, the lowest since at least 1995, according to Dealogic and The Wall Street Journal. Takeover premiums have historically averaged about 30%. Even with interest rates historically low, executives seem reluctant to throw excess cash at companies with market values that have surged on the stock market's run. The number of acquisitions announced by U.S. companies year-to-date is also down 16% to 9,347.

While takeover premiums have trended lower, corporate suitors have been cheered by Wall Street. Through early November, shares of U.S. acquirers have risen an average of 3.6% on the day a deal worth more than $1 billion was announced, according to Dealogic. Shares of Kroger ($42; KR), Mylan ($43; MYL), Thermo Fisher Scientific ($101; TMO), Berkshire Hathaway ($115; BRKb), Amgen ($113; AMGN), Applied Materials ($17; AMAT), and McKesson ($164; MCK) have rallied on news of billion-dollar acquisitions.

This trend runs contrary to studies that have found shares of acquisitive companies tend to lag over the long haul. However, one-day gains don't preclude a longer-term decline. Dealogic's data found that acquirers have averaged one-day gains of 1% on takeover news since 2009. Both Kroger and Mylan are rated Focus List Buy and Long-Term Buy. Berkshire and McKesson are rated A (above average). Amgen and Thermo Fisher are rated B (average). Applied Materials is rated C (below average).


CVS Caremark ($67; CVS) shares rose after the company agreed to pay $2.1 billion for Coram, a medical provider owned by Apria Healthcare Group. Coram offers infusion treatments for nutrition, painkillers, and antibiotics at 85 U.S. locations. CVS says the deal will bolster its specialty-drug business, boosting annual sales by $1.4 billion and adding up to $0.05 per share to profits in 2015. Apria, itself controlled by Blackstone Group ($29; BX), acquired Coram in 2007 for $350 million. CVS expects to complete the deal by March. CVS Caremark is a Buy and a Long-Term Buy.


Shares of Comcast ($49; CMCSa) hover near an all-time high while analysts weigh rumors that the company will attempt to acquire Time Warner Cable ($134; TWC). Comcast is better positioned than Charter Communications ($129; CHTR) to make an all-cash offer for Time Warner, which could fetch $150 per share to $165 per share, or $43 billion to $48 billion. For Comcast, the bigger question is whether it could clear the regulatory hurdles.

While caps on cable-TV market share have been abolished, this deal would also leave Comcast with a significant share of the broadband market — and that, combined with its pay-TV business, could give the broadcasting giant enough influence over U.S. programming to make regulators nervous. More likely, Comcast could become a secondary player in a joint bid with Charter, which has already begun to line up financing for the deal. Cox Communications may also jump into the fray. Comcast is a Buy and a Long-Term Buy.

Health-reform update

The White House launched a revamped website for the federal health exchange. Health officials claim the site can now handle 800,000 visits a day and works more than 90% of the time, compared to just 40% in October. The federal health exchange is used in the 36 states that refused to set up their own exchanges. By the end of March, the White House expects 7 million Americans to acquire health insurance through federal and state exchanges. As of Nov. 2, just 106,000 Americans had signed up for health plans, mostly through the state exchanges.


Rank Changes

Skyworks Solutions ($28; SWKS), already a Long-Term Buy, is being added to the Buy List. Vanguard Short-Term Investment-Grade ($10.75; VFSTX) now has a 1.1% weighting on the Buy List.


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