BJ's Wholesale Club (NYSE: BJ - option chain) shares are falling today despite reporting second-quarter profit that beat estimates and announcing a share buyback. This is possibly because discretionary item spending slowed. If you think this stock won't be rising too far in the coming months, then it could be a good time to look at a bearish hedged play on BJ or similar companies like COST.
This morning, BJ opened at $38.60. So far today the stock has hit a low of $37.11 and a high of $38.98. As of 12:45, BJ is trading at $37.99, down $2.69 (-6.6%). The chart for BJ looks neutral and S&P gives BJ a neutral 3 STARS (out of 5) hold ranking.
For a bearish hedged play on this stock, I would consider an October bear-call credit spread above the $45 range. A bear-call credit spread is an options position that combines the purchase and sale of call options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make a 7.5% return in two months as long as BJ is below $45 at October expiration. BJ's would have to rise by more than 18% before we would start to lose money.
BJ hasn't been above $45 at all in the past year and has shown resistance around $43 recently.
Brent Archer is an options analyst and writer at Investors Observer. At publication time, Brent neither owns nor controls positions in BJ.
Kendle International (NASDAQ: KNDL) provides a range of clinical development services to the biopharmaceutical industry. Offerings include clinical trial management, clinical data management, statistical analysis, medical writing, regulatory consulting and publication services. The company has expertise in a range of therapeutic areas, including oncology, cardiovascular disease, inflammation and central nervous system disorders. Kendle's Early Stage segment focuses on Phase I operations. The Late Stage unit handles Phase II through IV clinical trials, regulatory affairs, and biometrics offerings. Covance (NYSE: CVD) and Parexel International (NASDAQ: PRXL) are major competitors.
The firm surprised the Street earlier in the month, when it reported Q2 EPS of 52 cents and revenues of $127 million. Analysts had been looking for 46 cents and $115.3 million. The EPS figure was a company record. Management also guided FY08 EPS to $2.00-$2.15 ($1.90 consensus) and FY08 revenues to $490-$500 million ($468.76M consensus). Ladenburg Thalmann subsequently reiterated its "buy" recommendation and boosted its price target to $51.
It should come as no surprise that banking is a cyclical business. After the bubble bursts, there is always lots of hand wringing and vows to be more rigorous in underwriting. Then the bubble refills and people start to worry more about losing market share to companies with less disciplined underwriting approaches. This leads to a free-for-all as everybody scrambles for market share by lowering their credit standards. The bad loans don't get paid back and the cycle starts anew.
In the past, the Fed has been able to recapitalize banks during the down times by cutting interest rates. Since banks were tightening their credit terms, the interest rates on loans remained high or got even higher. But with the lower interest rates, the amount that banks paid depositors immediately dropped. As a result, the spread between loan and deposit rates widened and the resulting net interest revenue helped to replenish banks' capital.
That is sort of happening now. Since the Fed cut rates from 5.25% to 2%, banks' net interest margins have widened. A look at Citigroup Inc.'s (NYSE: C) most recent quarterly statement reveals that between Q2 2007 and Q2 2008 its net interest margin climbed from 2.41% to 3.18%. During that same time, the average amount Citi charged for loans declined slightly from 6.41% to 6.21% but the rates it paid depositors fell much more -- from 4.42% to 3.30%. Unfortunately, I said it's sort of happening now because the wider spread is not generating enough additional capital to offset Citi's writedowns.
Heinz (NYSE: HNZ), famous maker of thick-and-rich ketchups and other foodstuffs, is due to report first-quarter results on Thursday. So, what might be in store for the company? Are we looking at a lot of growth for the bottom line?
Well, according to Earnings.com, analysts aren't looking for much growth at all. Last year at this time, Heinz served up 63 cents per share. Wall Street seems to be looking for three measly pennies of growth! Can Heinz beat the 66 cents per share that analysts believe it will report?
Looking at some past price history, I can't say that I'm overly optimistic that Heinz will beat the expectations by too much (if it beats at all, that is). Remember that consumer-products companies are having one heck of a time with inflation. Raising prices is key to survival, but those higher price-tags must be accepted by the consumer base.
Increased marketing spending also is important during times like these since many businesses want to see if they can capture some market share while the competition is hurting.
So investors will want to carefully evaluate the margins and volume of sales when Heinz issues its earnings release. This has been par for the course for businesses such as Hershey (NYSE: HSY), Kraft (NYSE: KFT), Campbell Soup (NYSE: CPB), PepsiCo (NYSE: PEP), and General Mills (NYSE: GIS).
Hewlett-Packard Corp. (NYSE: HPQ) reported very decent quarterly results Tuesday after the market close. The world's currently-largest PC maker reported a net profit gain of $2.03 billion, up from the year-ago period gain of $1.78 billion on the back of a $28 billion quarter in sales.
The company's EPS was 86 cents, beating analyst estimates of 84 cents. In news that was not shocking, 68% of HP's sales were from overseas markets, although that was a drop of 2% from the Q2 period. HP, like many manufacturers, has its wings spread out so far in global markets that it was able to weather the U.S. market downturn.
HP guided its Q4 sales at over $30.2 billion, although CEO Mark Hurd indicated that his company's introduction of sleep laptop designs was making a splash worldwide. "You've got a lot of places around the planet where the only access to the digital content out there is through a notebook and a wireless card ... we have a significant opportunity.''
He's right. How many households are transforming to a multi-notebook, wireless environment without a desktop in sight? In addition to that, HP's global finesse and product mix is continuing to beat competitor Dell, Inc. (NASDAQ: DELL), even though Dell wants to change that.
U.S. stock futures were higher Wednesday morning, indicating markets could start on a positive note after two days of declines. Good results from Hewlett-Packard helped lift sentiment, overshadowing financial sector concerns, despite new worries over Fannie and Freddie. Oil remained steady ahead of inventory report later today.
Hewlett-Packard (NYSE: HPQ) shares are rising over 3% in premarket trading after the computer maker reported a 14% rise in fiscal third-quarter earnings and issues current-quarter earnings guidance that exceeded analyst estimates. Tech shares could get a boost from H-P.
Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) remain in focus due to concerns that a government bailout of the two firms is inevitable and would mean wiping out investors. Freddie Mac on Tuesday was forced to pay its steepest borrowing premium in 10 years, which is raising fresh concerns about its ability to withstand the housing and credit crisis without government help.
eBay Inc. (NASDAQ: EBAY) is cutting fixed-price seller listing fees. eBay will now charge 35 cents to list any number of the same types of fixed-price items. This is a dramatic change from charging fees based on item price.
Saks (NYSE: SKS - option chain) shares are falling today after the company reported second-quarter losses of $31.7 million, or $0.23 a share, this morning, less than analysts' estimates of -0.17. The company also forecast lower operating margins. If high-end retailers are hurting, then there is definitely some behavior of the average American consumer that is changing as well. If you think this stock won't be rising too far in the coming months, then it could be a good time to look at a bearish hedged play on SKS.
This morning, SKS opened at $10.60. So far today the stock has hit a low of $9.60 and a high of $10.61. As of 12:10, SKS is trading at $9.92, down $1.30 (-11.6%). The chart for SKS looks neutral while S&P gives SKS a positive 4 STARS (out of 5) buy ranking.
For a bearish hedged play on this stock, I would consider a November bear-call credit spread above the $12.50 range. A bear-call credit spread is an options position that combines the purchase and sale of call options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make an 11.1% return in three months as long as SKS is below $12.50 at November expiration. Saks would have to rise by more than 26% before we would start to lose money. Learn more about this type of trade here.
SKS hasn't been above $120 since late June and has shown resistance around $12 recently. Brent Archer is an options analyst and writer at Investors Observer.
DISCLOSURE: Mr. Archer owns and/or controls diversified portfolios of long and short stock and option positions that may include holdings in companies he writes about. At publication time, Brent neither owns nor controls positions in SKS.
Fuqi International (NASDAQ: FUQI) designs, develops and sells precious metal jewelry in the People's Republic of China. It offers rings, bracelets, necklaces, earrings and pendants made from such precious metals as platinum, gold, palladium and karat gold. The company also manufactures jewelry with diamonds and other precious stone inlays, as well as gold coins and gold bars. Fuqi International was founded in 2001 and is headquartered in Shenzhen.
The firm surprised the Street last week, when it reported Q2 EPS of 25 cents and revenues of $66.9 million. The Street had been looking for 20 cents and $62.8 million. Management also guided Q3 EPS to 26-27 cents (21 cent Street), Q3 revenues to $75-$77 million ($70.6M Street), FY08 EPS to $1.07-$1.09 ($1.08 Street) and FY08 revenues to $325-$333 million ($314.2M Street).
U.S. stock futures were lower Tuesday morning, indicating stocks would likely start the same. Investors' concerns about the financial sector dampened sentiment, but oil prices continued to decline and could offset some of the negative mood. Still, housing and inflation data are on tap before the market opens today. And of course earnings with The Home Depot already beating investors' expectations this morning but with Staples issuing a warning.
A day after smaller Lowe's (NYSE: LOW) reported a profit drop, The Home Depot (NYSE: HD) followed suit, reporting a 24% profit decline for the second quarter. It held onto its earnings outlook as second-quarter net fell 24% to $1.2 billion, or 71 cents per share. Sales declined 5.4% to $21 billion. Analysts had projected earnings per share of 61 cents on revenue of $20.58 billion. Home Depot shares rose 2% in premarket trading.
Other retailers scheduled to release earnings include discounter Target (NYSE: TGT) -- could it follow Wal-Mart's results? -- while Hewlett-Packard (NYSE: HPQ) is to report after the close -- AP preview.
Meanwhile, Staples, Inc. (NASDAQ: SPLS) issued a profit warning, saying that "Challenging market conditions continued during the company's second quarter, resulting in weaker than anticipated results in Staples' pre-acquisition business." Staples said sales increased approximately 3% and earnings per share decreased approximately 15% yoy. Shares of Staples declined nearly 6.5% in premarket trading.
BWAY Holding Company (NYSE: BWY), headquartered in Atlanta, is a leading North American manufacturer and distributor of metal and rigid plastic containers for the industrial and consumer products markets. The Metal Packaging segment specializes in steel paint cans, aerosol cans, pails and ammunition boxes. The Plastics Packaging unit provides injection-molded and blow-molded bottles and drums for petroleum products, agricultural chemicals, paints, inks, edible oils, adhesives and sealants. The ICL Industrial Containers division is Canada's leading supplier of plastic and steel pails. Ball Corporation (NYSE: BLL) and Crown Holdings (NYSE: CCK) are major competitors.
The firm surprised the Street last week, when it reported fiscal Q3 EPS of 41 cents and revenues of $274 million. Analysts had been looking for 28 cents and $271.6 million. In discussing the successful quarter, the CEO noted increased productivity, better cost containment and the effects of new products. Management also guided FY08 EPS to 70-75 cents, versus Street consensus of 53 cents.
Lowe's Cos. (NYSE: LOW) shares are little changed after the second-largest home improvement retailer reported better-than-expected second quarter earnings. They still should be avoided.
Earnings fell 7.9% to $938 million, or 64 cents a share. Sales rose 2.4% to $14.5 billion, up from $14.2 billion in the second quarter of 2007. The results surpassed the 56-profit and $14.12 billion in revenue expected by Wall Street. Nonetheless, the company continues to face a tough slowdown and gave disappointing third quarter guidance.
"We are encouraged by our results and our continued market share gains, but the macro economic factors pressuring consumers and the ongoing challenges and uncertainty of the financial markets suggest a cautious sales forecast for the balance of fiscal 2008 is prudent," said Chief Executive Robert A. NIblock in the earnings release.
Lowe's opened 23 new stores in the last quarter and expects to open 38 new stores during the current one. Is now really the right time to be adding so many new stores? There is a housing crisis, right? Square footage is expected to grow by 10%. The company is spending $34 million opening new locations.
Moreover, comparable same-store sales are expected to drop 5% to 7%, which Bloomberg says is less than what some analysts forecast. Earnings per share will be 27 to 31 cents in the quarter versus 43 cents a year earlier. Analysts had expected 33 cents. Profit for the year is seen at $1.48 to $1.56. Wall Street consensus is for $1.50.
For now, investors would be wise to avoid Lowe's and Home Depot Inc. (NYSE: HD), which reports tomorrow, until the housing market rebounds. That won't be until next year at the earliest.
Lehman Brothers Holdings Inc. (NYSE: LEH) is poised to lose $2.6 billion and it's trying to dump $40 billion worth of real estate from its books. The Wall Street Journal reports that Guy Moszkowski, a Merrill Lynch & Co., Inc. (NYSE: MER) analyst thinks Lehman could lose $2.6 billion -- while others expect a mere $1.8 billion loss. Lehman normally reports in mid-September but it may pre-announce earnings this month.
I always find it interesting when analysts -- particularly those who work for banks with their own problems -- offer bearish earnings outlooks for their competitors. But I have met Moszkowski and I found him to be both very smart and a straight shooter. The Journal reports that he "more than doubled his loss projection to $2.6 billion and predicts that Lehman will take a $4.5 billion hit from write-downs." It quotes him as saying that an additional markdown up to 20% related to Lehman's remaining $64 billion in mortgage and commercial real-estate exposure "seems like a lot but can't be ruled out." If that were to happen, Lehman might need to raise more capital.
Speaking of that real estate, FT.com reports that Lehman is in talks to dump $40 billion worth of commercial real estate assets and securities. FT.com reports that there is a wide gap in what the potential buyers -- Blackstone Group (NYSE: BX) and BlackRock (NYSE: BLK) -- and Lehman think those assets are worth. It also reports that the assets in question consist of mortgages and mortgage-backed securities that Lehman valued at $29.4 billion at the end of May and real estate assets then valued at $10.4 billion.
U.S. stock futures turned higher Monday morning despite a dip in the dollar and oil prices rising somewhat. Investors may focus on the financial sector again following some news while they await housing data later today. More inflation data is due Tuesday.
UnionBanCal (NYSE: UB) accepted a sweetened bid from Mitsubishi UFJ Financial Group (NYSE: MTU). After rejecting two previous offers, UB accepted MTU's offer to pay $3.5 billion, or $73.50 a share, for the remaining 35% portion of the California bank that it doesn't already own. UB shares are trading 11.85% higher in premarket action.
Staying in financials, Lehman Brothers (NYSE: LEH) may see some action after The Wall Street Journal said some analysts believe it could lose $1.8 billion during the quarter. LEH shares are 2% lower in premarket trading. Meanwhile, Barron's said a government recapitalization of Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) is almost inevitable, wiping out investors -- and management. Shares are 2% and 6% lower respectively in premarket trading.
Lowe's (NYSE: LOW), the home improvement retail chain, reported results this morning. Lowe's profit fell for the fourth straight quarter as the biggest U.S. housing slump since the Great Depression slowed spending. Net income declined 7.9% to $938 million, or 64 cents a share, exceeding analysts' estimates by 8 cents. Sales rose to $14.5 billion from $14.2 billion. Lowe's raised guidance, but stayed within estimates.
Rival home improvement chains Home Depot Inc. (NYSE: HD) and Lowe's Companies Inc. (NYSE: LOW) are scheduled to report quarterly results this week. Not surprisingly, given the ongoing housing slump, analysts surveyed by Thomson Financial on average expect both companies to post earnings lower than in the same period a year ago. For Home Depot, that's 61 cents per share, down 20.8%, and for Lowe's, 56 cents per share, down 16.4%. Meanwhile, cabinet maker American Woodmark Corp. (NASDAQ: AMWD), for whom Home Depot and Lowe's are major distributors, is also expected to report lower earnings: 11 cents per share, down 67.6%.
The presidential campaigns have prompted much discussion of energy policy and alternative energy sources. Some solar-energy-related concerns are scheduled to report this week, and expectations seem to be high. Trina Solar Ltd. (NYSE: TSL) is expected to report 81 cents per share earnings, up 67.9%; ReneSola Ltd. (NYSE: SOL) is expected to post earnings of 32 cents per share, up 62.5%; and Suntech Power Holdings Co. (NYSE: STP) is expected to have earnings of 32 cents per share, up 21.9%. Even China Sunergy Co. Ltd. (NASDAQ: CSUN) is expected to have swung to a profit of 3 cents per share, from a per-share loss of 14 cents a year ago.
BJ's Wholesale Club (NYSE: BJ - option chain) shares are falling today despite reporting second-quarter profit that beat estimates and announcing a share buyback. This is possibly because discretionary item spending slowed. If you think this stock won't be rising too far in the coming months, then it could be a good time to look at a bearish hedged play on BJ or similar companies like COST.
It should come as no surprise that banking is a cyclical business. After the bubble bursts, there is always lots of hand wringing and vows to be more rigorous in underwriting. Then the bubble refills and people start to worry more about losing market share to companies with less disciplined underwriting approaches. This leads to a free-for-all as everybody scrambles for market share by lowering their credit standards. The bad loans don't get paid back and the cycle starts anew.
U.S. stock futures were higher Wednesday morning, indicating markets could start on a positive note after two days of declines. Good results from Hewlett-Packard helped lift sentiment, overshadowing financial sector concerns, despite new worries over Fannie and Freddie. Oil remained steady ahead of inventory report later today.
U.S. stock futures were lower Tuesday morning, indicating stocks would likely start the same. Investors' concerns about the financial sector dampened sentiment, but oil prices continued to decline and could offset some of the negative mood. Still, housing and inflation data are on tap before the market opens today. And of course earnings with The Home Depot already beating investors' expectations this morning but with Staples issuing a warning.
Rival home improvement chains 
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