Markets
Cruisin' for a Bruisin'
Gravity rules. Shares of these companies rode the '03 rally and are headed right back down.
By David Landis, Contributing Editor
From Kiplinger's Personal Finance magazine, February 2004
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Pardon us for playing party poopers, but we feel compelled to note that 91% of all U.S. stocks have risen since March 2003. Now, does that really make sense?
You know it doesn't. Whenever the market heats up, a few (well, maybe more than a few) undeserving stocks always get swept along for the ride. Your aim should be to make sure that you're not cozying up to any of those losers-in-waiting when they finally drive off the road. You should also try to temper any enthusiasm for buying that may have built up as you watched them pick up speed over the past year.
Consider, with a skeptical eye, five well-known companies, all of which have seen their share prices climb moderately to substantially since the rally began. If you own one or more of these stocks, the prudent course might be to cash in your shares now, before the investment community comes to its senses and beats you to the punch.
Keep in mind that if the rally continues, chances are that these stocks will rise, too. In any case, we think you'll find better opportunities elsewhere.
Weak brew
Beer is not the bubble-in-any-environment business performer some investors think it is. It has been slowly losing market share to spirits. Beer shipments fell slightly in 2003, in part because of unusually cool weather in the U.S. Results should improve in 2004, if for no other reason than easy comparisons with the lackluster 2003 numbers.
But not every beer producer will share equally in the rebound. In the fiercely competitive premium-light-beer category, Anheuser-Busch's Bud Light is the 800-pound gorilla. Miller Brewing Co. has had surprising success with its advertising campaign that touts Miller Lite's lower carbohydrate count. Then there's Coors Light, which accounts for about 75% of U.S. sales for Adolph Coors (RKY), the nation's third-largest brewer. The current ad campaign for Coors Light, nearly two years old, has resulted in only a slight gain in market share. And Coors cannot match the advertising budgets or distribution muscle of its two larger competitors. About 30% of the beer consumed in the U.S. is sold by wholesalers who distribute only Anheuser-Busch products. Despite plans to introduce a new low-carb beer of its own in 2004, Coors profits may be under pressure for some time because of a "deteriorating competitive position," warns Legg Mason analyst Mark Swartzberg, who rates the stock a hold.
An improving economy should boost beer sales, particularly in bars and convenience stores. A warmer spring and summer than last year's would be another plus. Goldman Sachs analyst Marc Cohen predicts that sales of premium-light beers will rise about 3% in 2004. But he forecasts flat volume over the next five years for Coors.
Coors shares are not terribly expensive. At $58, the stock sells at just 12 times the 2004 consensus profit estimate of $4.79 per share, according to Thomson First Call. But the stock's price-earnings ratio has almost always been below that of the overall market (and below that of Anheuser-Busch) and is likely to stay that way given Coors's anemic growth prospects. Cohen says Coors is worth only $54 per share and rates the stock "underperform." Legg Mason's Swartzberg sees the stock "heading into the $40s again over the coming months." Coors officials declined to comment.
Discounter troubles
Too bad every day can't be Christmas. Toys "R" Us earns virtually all of its profit in the fourth quarter, when its well-stocked stores become a prime destination for shoppers. The rest of the year, though, a toy is just another thing to pick up while shopping for ketchup or toothpaste. No wonder Wal-Mart now has a bigger share of the retail toy business than Toys "R" Us. Smith Barney analyst Bill Sims rates the stock (TOY) a sell, primarily because of the company's vulnerability to "encroachment" by discounters.
The toy business has been brutal lately for specialty retailers. FAO, parent company of FAO Schwarz, emerged from bankruptcy in 2003, then went back in, and Disney is trying to unload its chain of stores. Toys "R" Us has been fighting back by redesigning its stores to attract customers year-round. It has also been increasing the number of higher-profit, private-label products it carries, as well as those it sells exclusively. The company has also decided that if customers won't come to its stores, it will take its stores to customers. It plans to open toy departments in 2,300 Albertson's grocery stores by mid 2004.
Spokeswoman Ursula Moran says the company's share of the U.S. toy market is rebounding after hitting a low point in the late 1990s: "We are demonstrating that coexistence with the discounters is possible." She also notes that the Babies "R" Us chain is showing healthy growth, as are overseas toy sales.
The stock, which sold for $8 in March 2003, now fetches $11 (the all-time high is $43). It trades at a low nine times estimated earnings of $1.18 per share for the year ending January 2005. But until the retailer proves it can lure customers back to its stores, investors won't have much fun with Toys "R" Us.
More hills to climb
Sensing that the public and regulators are fed up with financial scandals, many companies are cleaning up their act. Computer Associates International, for one, revamped its board of directors, switched to more conservative accounting of revenues and chose to include the cost of employee-stock options in its profit calculations. But the corporate-software provider has a few more hills to climb before it reaches the high road. In October, its chief financial officer and two other executives resigned when an audit revealed that the company had prematurely booked certain revenue in its 2000 fiscal year. Computer Associates (CA) also faces an ongoing investigation by the Department of Justice and the Securities and Exchange Commission. With this inquiry and the company's controversial history, "there's just too much risk," says Morningstar analyst Mike Trigg, who rates the stock a sell. "We just don't know what other skeletons are in the closet."
Chairman and CEO Sanjay Kumar recently promised to set a "gold stand-ard" in corporate governance. However, he is one of three executives who were granted a $1.1-billion stock award in 1998, some of which was returned after shareholders sued. The company also angered some shareholders by paying "greenmail" to investor Sam Wyly, who received $10 million to settle a 2002 proxy fight.
A CA spokesman notes that, despite these issues, analysts are generally high on the stock. Indeed, given the sunny outlook for corporate technology spending, 12 of 17 analysts tracked by Thomson First Call rate it a buy or strong buy. And the shares have nearly doubled over the past year, to $24.
Software for mainframe computers, the firm's primary business, is a slow-growing but steady business because the cost of switching providers is very high. CA has branched out into security and storage, but faces strong competition from EMC, IBM and others. Morningstar's Trigg figures that the stock is worth $20 a share, but he wouldn't pay more than $10 for it until the uncertainties are resolved.
Peculiar problems
Traditional department stores, such as Dillard's, have ceded so many lines of business to discounters that they now sell little more than clothing, cosmetics and home furnishings. Unfortunately, these kinds of products are particularly vulnerable when the economy struggles. No wonder, then, that Dillard's has seen its sales numbers (for stores open at least a year) decline in 18 of the past 23 months.
An expanding economy should brighten prospects for 2004, but Dillard's (DDS) won't necessarily be among the beneficiaries. "The company's peculiar problems are so acute that it will continue to struggle," says A.G. Edwards analyst Robert Buchanan, who rates the stock a sell. Buchanan faults the 333-store chain for being too late to mark down slow-selling merchandise, which results in bloated inventories and end-of-season closeouts at fire-sale prices. He forecasts a loss of $69.1 million, or 83 cents per share, in the fiscal year that ends in February 2005. He also calculates that interest payments in the fiscal year ending February 2004 will amount to $174 million -- more than the year's estimated operating profit of $105 million. "If I were [chairman and CEO] Bill Dillard, I would be concerned," he says. Mounting losses could make suppliers reluctant to sell goods on credit, putting the company in a bind. A spokesperson for Dillard's declined to comment.
At $16, Dillard's shares trade at just 60% of their book value (versus an industry average of about four times book value). Some analysts speculate that the company would fetch a hefty premium in a takeover. But the Dillard family maintains a controlling interest through its 99% ownership of Class B shares -- which entitle them to elect two-thirds of the board of directors -- and the family has expressed no interest in selling. Absent a change of owners, many analysts recommend avoiding the shares. "We increasingly believe that Dillard's is relegated to a second-tier competitor," says Credit Suisse First Boston's Michael Exstein, who rates the shares "underperform."
Roaring dot-com
Although we've seen only the faintest signs of a jobs recovery, happy days seem to be here again for Monster Worldwide. It operates Monster.com, the biggest job-recruitment advertising site on the Web. Monster's stock (MNST), which has nearly tripled since last March, appears to factor in full employment and then some.
Monster.com makes money by charging companies for help-wanted ads on its site and for related services. The Internet business accounts for about 65% of Monster Worldwide's revenues. The rest comes from creating recruitment advertising in other media, such as newspapers, and from the world's largest Yellow Pages advertising agency, TMP Worldwide. The sluggish economy has hobbled those two businesses, however. In the third quarter, Monster.com revenues were up 4%, but the recruitment-advertising business was off 20%, and the Yellow Pages segment was down 2% in a traditionally strong quarter.
A surge in the economy would be wind at the back of all of Monster's businesses. But Standard & Poor's analyst Mark Basham says any benefits from a better economy will probably be offset by the loss of two major sources of traffic, America Online and MSN. Monster had had deals in which it paid the two Internet powerhouses for sending subscribers to its site, but both recently signed exclusive deals with rival job site CareerBuilder.com. Now, says Monster spokesman Bob Jones, "we think there are different ways that didn't exist back then to build up traffic on the Internet," such as purchasing search-engine ads that appear when key terms are entered.
AOL and MSN accounted for about 20% of Monster.com's traffic, so going it alone introduces new risks. Meanwhile, Monster faces increasing competition from Yahoo!'s HotJobs.com and others, in addition to CareerBuilder.com. At the end of the third quarter, "unique" (repeat) visitors -- a key measure of Monster's Internet traffic -- were down 9% from the same period a year earlier, and Monster's market share had fallen to 36% from 51%.
S&P's Basham sees no increase in sales in 2004 and earnings of 40 cents per share -- well below the consensus estimates of 9% revenue growth and earnings of 58 cents per share. But even using the higher profit number, Monster, at $22, sells at 38 times earnings. That's a price better suited to a surefire jobs recovery than one that may or may not be just getting started.
--Reporter: Katy Marquardt