• Mar 6, 2014
    3:52 PM

    Cerberus to Buy Safeway: Report

    The Wall Street Journal is reporting that private equity firm Cerberus has agreed to buy grocery chain Safeway (SWY) for more than $9 billion, subject to board approval. Safeway, the second-largest supermarket chain, has sold several assets in the past two years, including its Canadian operations. The Cerberus deal could be announced after the market closes.

    Safeway shares were trading flat after the Journal story was published. They had spiked on Wednesday as preliminary news of a deal leaked out.

     

  • Mar 6, 2014
    3:05 PM

    Lululemon: Back Off Track Suit, There’s A New Sheriff In Town

    Here at STW, we’ve covered Lululemon (LULU)–a lot. The good, the bad, the neutral and of course, we’ve thrown in more yoga metaphors than you can shake a stick at for good measure.

    Today, however, it’s not all about Lululemon. But it is about athletic apparel as Canaccord Genuity’s Camilo Lyon takes a look at sentiment on Lululemon alongside competitors Nike (NKE) and Under Armour (UA).

    In the note, Lyon writes that the athletic apparel industry is poised to grow this year as more consumers jump on the sportswear as everyday apparel bandwagon. We’re thinking: the velour track suit craze of the 2000s meets today’s fabrics, styles and cuts. We’re also hoping this craze doesn’t grow to involve clothes with messages like “Juicy” scrawled across the hiney.

    Getting back to that note: Lyon noted that all three companies could benefit from a potential ease in duty costs:

    We believe there is a potential for duty costs from Vietnam to materially ease in 2016 on exports to the U.S. Currently duty rates range from 32%-35% and the expectation is that those costs could go to zero. If this comes to fruition, we believe it would be a significant benefit.

    Regarding Lululemon, Lyon noted that an increase in marketing could help bring customers back to its stores and revive its market-share lead. Lyon also considers the addition of more quality assurance technicians a positive. He explains:

    Lululemon now has offices in Hong Kong and Taiwan to monitor the quality of the outgoing garments, and is testing its production runs with greater frequency. As such, we expect product flow improvements to happen over the course of 2014, resulting in a gradual and sequentially improving comp trajectory.

    Shares of Lululemon have dropped 1% to $49.37 at 3 p.m. today. Nike has gained 1.2% to $78.34, while Under Armour is down 0.5% at 115.53.

  • Mar 6, 2014
    2:48 PM

    Gilead Sciences: Looking for Answers, Finding Silence

    The trading day started out like any other for Gilead Sciences (GILD).

    Deutsche Bank’s Robyn Karnauskas and Alethia Young released a report yesterday reiterating Gilead’s Buy rating and noting that the market didn’t seem to be giving it credit “for success on their future pipeline.” Gilead also announced last night that it would sell $4 billion in debt, an offering that Maxim’s Jason Kolbert called “very positive and accretive to Gilead.” Even Bernstein’s Geoffrey Porges and team offered positive comments on Gilead, suggesting that Gilead has “a number of viable options in development to sustain revenue, cash flow and growth, underscored by their commitment to building the “third leg of the stool” with their oncology franchise, and their early stage pipeline and potential strategic bolt-on acquisitions.”

    Just after the open, Gilead was up 0.7%. Then the selling started, slowly at first. By noon it was down 0.5%; by 1 p.m. it was off 2.3%. By 2:34 p.m., Gilead was off 4.1% at $79.49, and the iShares NASDAQ Biotechnology Index (IBB) had dropped 2.5% to $261.60, despite Biogen Idec (BIIB) getting upgraded by BMO Capital Markets and Barclays touting Alexion Pharmaceuticals (ALXN). This chart shows the damage over the course of the day.

    So what caused the plunge? No one really knows. This piece from Bespoke Investment Group, which speculates about the potential for a biotech bubble, could be at fault. Or it could be something happened to Gilead that hasn’t made it’s way into view yet. Or it could be nothing at all. ISI Group’s Mark Schoenebaum explains:

    I’ve been asked dozens of times in past hour why biotech is selling off. The honest answer is I really have no explanation.

    In general, my thoughts on the biotech sector have been that a massive sell-off is unlikely, but that a more modest correction is, in theory possible, since all the stocks now trade above conservative DCF analyses. However, PE multiples are still undemanding and suggest that if a sustained sell off (not just a single day move) were to occur, it’s unlikely to be dramatic or sustained.

    If nothing else, the day just got a little more exciting.

  • Mar 6, 2014
    1:19 PM

    Darden Restaurants: So Long Investor Day, Hello Face-to-Face

    Darden shares jumped 2.2% higher after the restaurant operator announced it would get out of the kitchen and meet investors personally, cancelling its March 28 Investor Day.

    Bloomberg

    The jump recoups just a fraction of the losses earlier this week, after embattled Darden missed third-quarter expectations and made a disappointing fourth-quarter forecast, and repeated its plans to sell or spin off its Red Lobster chain, which some people don’t think goes far enough to reverse the stock’s decline owing to slumping sales.

    Two investors are pushing for strategic changes including a spinoff of Olive Garden and Red Lobster as a single company, and the creation of a REIT. A spinoff of Red Lobster by itself, which owns half the company’s real estate, would obviously hurt any REIT initiative. (Darden’s other restaurants include LongHorn Steakhouse and Bahama Breeze).

    At the meetings, Darden will try to persuade people that Olive Garden, which would represent 60% of its revenue after any Red Lobster spinout, is turning around more quickly than people think. The recent evidence shows that’s not the case. Still, the meetings will shake out friendly shareholders, who believe management and feel the 4.3% yield protects them from further downside.

    Peter Saleh of Telsey Advisory Group assumes that Darden sells or spins off Red Lobster in the next three to six months. “At that point, the activists will have failed to break the company up, and will sell the stock.” In that event, then, investors might flee to an alternative like, say, Texas Roadhouse (TXRH), which trades at 20 times forward earnings, with estimated long-term earnings growth of 13.2%, versus Darden’s 18 times earnings and 9% earnings growth. Saleh thinks Darden is worth $45, somewhat less than today’s price, given “execution risk in spinning out Red Lobster.”

  • Mar 6, 2014
    1:10 PM

    Anadarko Petroleum: Never Mind the Tronox Liability, Time to Buy

    By now, we all know the Anadarko Petroleum (APC) story. Before Anadarko bought Kerr-McGee, Kerr McGee spun off Tronox, which kept the legal liabilities from its business. Tronox filed for bankruptcy, and now Anadarko might have to pay as much as $14 $4 billion in damages.

    Agence France-Presse/Getty Images

    As a result, Anadarko has lagged, well, just about everyone during the past 12 months. Its gained just 5.2% during that period, while Cabot Oil & Gas  Range Resources (COG) has risen 12%, Range Resources (RRC) has advanced 8.3%, EOG Resources (EOG) has jumped 52% and Pioneer Natural Resources (PXD) has surged 59%.

    Argus analyst Michael Burke, however, thinks it’s time to Buy Anadarko. He explains why:

    Our upgrade reflects Anadarko’s prospects for 5% to 7% annual production growth through 2020 and its industry-leading exploration program. We also like the company’s substantial base of reserve assets, which management should be able to develop or monetize to boost shareholder value.

    Our former HOLD rating had been based on our view that potential liabilities in the Tronox case would keep pressure on [Anadarko] shares. However, proceeds from recent asset divestitures have eased our concerns about the impact of any future settlement.

    Shares of Anadarko have gained 0.7% to $85.98 today at 1:08 p.m., while Cabot Oil & Gas has jumped 1.3% to $34.99, Range Resources has risen 0.8% to $84.05 and EOG Resources has advanced 0.5% to $191.39. Pioneer Natural Resources has fallen 0.3% to $198.32.

  • Mar 6, 2014
    11:23 AM

    Good News for Gold Miners: Country Risk Improving

    One of the biggest risks to gold miners like Newmont Mining (NEM), Goldcorp (GG) and Barrick Gold (ABX)–besides the lower price of gold–has been that the country’s that house their mines will make life difficult for them.

    Alistair MacDonald/The Wall Street Journal

    In fact, it’s one of the big reasons that Newmont has had a tough time this year–Indonesia wants Newmont to convert gold ore into metal in country. So even though the SPDR Gold ETF (GLD) has gained 12% so far this year and the Market Vectors Gold Miners ETF (GDX) has risen 26%, Newmont has gone up just 8% in 2014. Barrick Gold has advanced 10% and Goldcorp has jumped 27%.

    The good news: Country risk elsewhere seems to be improving. JPMorgan’s John Bridges explains:

    The Fraser Institute in Canada polls mining industry participants on the conditions they are seeing in 112 countries and regions, and compiles data into a format that we find useful to compare risk within the mining sector…The average Fraser PPI score improved for our coverage companies. Weighted average of scores using regional NPVs at 5% discount improved 9% over the last survey for our gold companies.

    Newmont gets a boost from Peru’s score, which rose from 42 to 48.5, and also from improvements in Africa, as “investors get more comfortable with mining in less developed
    countries,” Bridges says. Barrick, too, could also benefit from improvement in Peru. Argentina deteriorated, but that could be on the verge of changing this year–and give Goldcorp’s prospects a boost.

    Shares of Newmont Mining have gained 1.3% to $24.91 at 11:16 a.m. today, while Barrick Gold has ticked up 0.3% to $20.43, Goldcorp has risen 0.7% to $27.69, the Market Vectors Gold Miners ETF has gone up 0.7% to $26.69 and the SPDR Gold ETF is up 0.7% at $129.80.

  • Mar 6, 2014
    10:54 AM

    Bank of America: Now That’s One Way to Boost Profits

    Banking isn’t what it once was. Just ask Bank of America (BAC). For years it’s been trying to find a way to make offering checking accounts a money maker again. Now it thinks it’s found a way.

    AFP/Getty Images

    The Wall Street Journal has the details on Bank of America’s plans:

    Bank of America Corp. on Thursday will start offering a new checking account, capping a four-year effort to boost revenue from its most basic banking product without alienating customers and lawmakers.

    The checkless account, for customers with low balances, will charge a set monthly fee of $4.95, but won’t allow overdrafts. The product was designed to create a consistent revenue stream and lower the bank’s costs while also cutting out high and much-criticized fees for overdrawing. The new account’s monthly fee can’t be waived.

    Bank of America has spent the past few years overhauling the way it charges its customers, in large part due to public and regulatory pressure. Low interest rates and new regulations also have cut into the income of all banks, driving them to look for more creative ways to generate revenue

    Bank of America has gained 1.1% to $17.44 at 10:51 a.m., while Citigroup (C) has risen 1.2% to $49.99, JPMorgan Chase (JPM) has advanced 1.2% to $58.83 and Wells Fargo (WFC) is up 0.7% at $47.40.

  • Mar 6, 2014
    10:41 AM

    Tiffany: Luxury Ain’t Dead

    Luxury may be dead, but Tiffany (TIF), which was upgraded by Citigroup today, isn’t.

    Reuters

    Citigroup’s Oliver Chen and team explain why they upgraded Tiffany:

    We upgrade [Tiffany] to Buy given our conviction on the prospects for improving same store sales driven by the influence of new mgmt. & design teams, more targeted product, & commercially focused marketing. We also expect the stock to go higher given lower product costs & stabilizing trends in silver fashion jewelry driving continued gross margin upside. Positive wealth effect (given S&P +30% in 2013) and improved macros should help drive consumer spending. In addition to our positive near-term views, [Tiffany] is structurally healthy for the long-term given: global mix (52% of revs outside Americas), 5-7% store growth vs. 0-3% peer average, 2013E free cash flow of $300mm and op. margins of 20% going steadily higher.

    And while Tiffany isn’t exactly cheap–it currently trades at 25.65 time trailing 12-month earnings–its attractiveness as a potential M&A target could provide some downside protection, Chen says.

    Shares of Tiffany have gained 0.8% to $93.77 at 10:40 a.m., while Coach (COH) has risen 0.5% to $48.37, Ralp Lauren (RL) is little changed at $161.50 and Michael Kors (KORS) has dropped 0.4% to $98.55.

  • Mar 6, 2014
    10:29 AM

    ExxonMobil: Stalled Again

    Yesterday, ExxonMobil (XOM) reminded investors once again why it’s been dead money for the past year.

    ExxonMobil forecast lower production slower production growth, didn’t discuss asset sales and even its capital spending forecast, though lower, was higher than the market forecast. Combine that with the decision to suspend a Ukrainian project, and it’s little wonder shares of Exxon Mobil fell 2.8% yesterday, and have returned just 7.5% during the past 12 months. That’s better than Chevron’s (CVS) 0.4% return, but lags ConocoPhillips’ (COP) 20% return.

    Morgan Stanley’s Evan Calio and Manav Gupta explain what needs to happen to get ExxonMobil heading in the right direction:

    [ExxonMobil] guided towards free cash inflection after intensive upstream capital spending program. [ExxonMobil] expects a FCF inflection in 2014-2017 driven by: (1) upstream volume production growth; (2) improved profitability mix; (3) capex rollover and (4) higher contribution from downstream & chemicals. In 2013, [ExxonMobil] used cash on balance sheet, asset sales and leverage to fund its buybacks ($16Bn) and dividends ($10.8Bn). As a result, total debt at the end of 2013 was $22.7Bn, up by $11.1Bn y/y and cash was down $4.9Bn y/y. Assuming $5.5Bn lower “off-peak” capex, [ExxonMobil] will need $11Bn annual inflection to support current distributions without using the balance sheet. Assuming [ExxonMobil] hits their production targets (inconsistent with last 6 yrs), we believe [ExxonMobil] will need ~$120 Brent price to fund current distributions ($12Bn buybacks and ~$11Bn of dividends) without using the balance sheet (which they clearly could lever). In our view, FCF inflections can drive relative performance; however, the FCF must drive incremental shareholder returns (buybacks/dividends) or growth.

    Shares of ExxonMobil have dropped 0.4% to $93.46 today at 10:25 a.m., while ConocoPhillips has gained 0.3% to $66.50 and Chevron has risen 0.5% to $115.04.

  • Mar 6, 2014
    10:08 AM

    Biogen Idec: More Pipeline Success, More Upside

    What do you do with a stock that has doubled during the past year? Upgrade it, of course, which is just what BMO Capital Markets has done with Biogen Idec (BIIB).

    Shares of Biogen Idec have gained 104% during the past 12 months of trading, trumping the 101% rise in Regeneron Pharmaceuticals (REGN), the 83% gain in Gilead Sciences (GILD), the 49% advance in Celgene (CELG) and the 36% gain in Amgen (AMGN).

    BMO’s Jim Birchenough explains why he lifted his rating on Biogen Idec:

    We are upgrading our rating on [Biogen Idec] to Outperform from Market Perform and increasing our price target to $422 following our detailed pipeline review. Based on $1B+ prospects for ELOCTATE/ALPROLIX and $5B+ prospects for ISIS-SMN-Rx in SMA, we project above consensus EPS from 2015 through 2018 with a four-year EPS CAGR of 23% vs. prior estimate of 15%. Opportunities in myotonic dystrophy, Alzheimer’s, SPMS, IPF, and in remyelination could each be even larger, and we believe that strong biologic rationale and some degree of scientific validation exists for each program. While it is difficult to predict 100% pipeline success, we believe that [Biogen Idec] has established a strong track record for pipeline development and believe that more programs will succeed than fail.

    At today’s price, that $422 target leaves 20% of upside in Biogen Idec shares.

    Shares of Biogen Idec have gained 3.5% to $351.01 today at 10:01 a.m., while Regeneron has risen 1.1% to $349.36, Amgen has advanced 0.7% to $127.02, Gilead Sciences is off 0.2% at $82.69 and Celgene is little changed at $163.20.

About Stocks To Watch

  • Earnings reports, corporate strategies and analyst insights are all part of what moves stocks, and they’re all covered by the Stocks to Watch blog. We also look at macro issues, investor sentiments and hidden trends that are affecting the market. Stocks to Watch gives you the full picture of the U.S. stock markets, all day long.

    The blog is written by Ben Levisohn, a former stock trader who has covered financial markets for the Wall Street Journal, Bloomberg and BusinessWeek.

    Write to Ben at Ben.Levisohn@barrons.com

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