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business newsTarget's Quarterly Report Met With Limited Enthusiasm
By
Josh Lipton May 19, 2010 3:45 pm
Market gurus debate the merits of betting on the consumer.
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Minneapolis-based Target reported first-quarter earnings of $0.90 per share, which clocked in $0.03 better than the Thomson Reuters forecast. Revenues rose 5% to $15.59 billion, in line with what the CFA-certified number crunchers on the Street had forecasted.
The company reported a 2.8% increase in comparable-store sales, a key measure of retail health.
For his reaction, we spoke with Jason Asaeda, an equity analyst at S&P, who liked what he heard.
“I thought it was a good report,” the analyst tells Minyanville. “I was encouraged by the strength in the sales of higher margin categories like clothing,” and he added that the company is doing a much better job now at convincing customers that they can find good deals at their stores.
“For a long time, people assumed Walmart (WMT) had better pricing, but Target has always been competitive in pricing and now they are doing a better job at getting the word out,” says Asaeda, who rates the company a Buy with a price target of $60.
As we write here in early afternoon, though, investors don’t look too impressed by the message from the head honchos at Target: The stock is up 0.2%.
Asaeda says the underwhelming response of investors is due, in part, to executives at Target choosing to remain cautious in their forecasted view of consumer spending in discretionary categories, looking ahead.
“You don’t want to be over-inventoried at the end of the year,” he says. “It’s much better to plan conservatively.”But the lack of enthusiasm for Target reflects a broader trend: Recently, to a lot of stock pickers, retailers aren’t looking as attractive.
The SPDR S&P Retail (XRT), which includes Netflix (NFLX), Casey’s General Stores (CASY), Jos. A. Bank Clothiers (JOSB), and O’Reilly Automative (ORLY), enjoyed a rip roaring run: up 50% in the past 12 months versus a 23% gain for the S&P 500.
But, as some old guy our mom listens to likes to say, the times are a-changin’: The XRT, in the past month, has slipped 6.5%. In contrast, the more defensive Consumer Staples SPDR (XLP) is down 2.3%.
“Consumer Discretionary has lost some relative strength here,” says Burt White, LPL’s chief investment officer. “It had a huge run, but there has been a sell off of that higher beta, more overbought sector.”
Some market pros we talked to today, like Art Hogan at Jefferies, remain bullish on Consumer Discretionary names, pointing to commodity prices tumbling, with oil crashing from $85 to $68, which he says boosts discretionary spending power.
“In large part, we have ignored some of the best news we have had in two years over the last two weeks because we are laser-focused on what is going on in the eurozone,” Hogan says. “We’re not thinking about the fact that we had a great earnings season and our economic data calendar continues to get more constructive every day.”
But Sam Stovall, the chief investment strategist of Standard & Poor’s Equity Research, says that he’s remaining more neutral-minded right now on Consumer Discretionary. He rates it Market Weight.
“Right now, with the markets being in semi-free fall, and with the primary worry being that weakness in Europe leads to dragging down other economies, it is best to wait on the sidelines until this correction runs its course,” Stovall says. “I don’t think we’re going into a new bear market, but I do think we will experience a 10% to 15% correction overall.”
Stovall points out that valuation doesn’t scream with opportunity, either: Consumer Discretionary stocks in the S&P 500 are trading at 16.2 times estimated 2010 earnings versus 14 times for the broader market.That doesn’t mean Stovall has tucked into a defensive crouch, however: He rates Consumer Staples, Utilities, and Telecom all Underweight.
In fact, playing defense is tricky right now for equity investors as Dr. Ed Yardeni of Yardeni Research notes.
The market guru points out that Overweighting Consumer Staples is risky since the strength of the dollar is bound to hurt their earnings. Health Care remains challenged, he tells clients, by the uncertainties created by recently passed legislation that will increase the power of the federal government over the industry.
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