Among the biggest winners in Thursday's early trading are
The Men's Wearhouse (
MW
)
and
Merge Healthcare (Nasdaq: MRGE)
.
.png)
Suiting up
Fast on the heels of a solidquarterly report
last week
from men's clothier
Jos. A Bank (
JOSB
)
rival,
The Men's Wearhouse
released solid quarterly results as well, giving its stock a 15%
lift in early trading today. Sales of $662 million in the fiscal
second quarter ended in July were roughly in line with estimates,
and only modestly higher than a year ago. The anemic growth is
mostly due to store closings: On a same-store sales basis, revenue
jumped a more impressive 4.4%. Management has also done a solid job
of controllinginventory , which invariably leads to fewer discounts
and more robust margins. Gross margins rose 120 basis points to
48.4%.
The Men's Wearhouse exemplifies the trends underway at many
retailers. Customers may still be cautious, but many retailers have
become so much more efficient in terms of inventory management and
pricing strategies thatprofit margins remain at fairly impressive
levels. This sets the stage for very robust profit gains when foot
traffic starts to pick up in an improvingeconomy .
You can already see that kind ofleverage in play for The Men's
Wearhouse. Management now says fiscal (January) 2013earnings
per share (
EPS
) can reach a range of $2.75 to $2.80 (so look for the current
$2.71EPS consensus to rise). That's compared with EPS of $2.38 in
fiscal 2012. Analysts say EPS can top $3 in fiscal 2014, even as
sales are expected to grow less than 5% to around $2.57
billion.
Merge's frustration
When a company stumbles for a quarter or two, itsshares can get
pushed into the doghouse -- and stay there for an extended period.
There are only a few things management can do to resuscitate
shares, and
Merge Healthcare
has now tried two of them. The provider of healthcare imaging
software first went the insider buying route, which
I discussed
here
.
Shares managed to rally 33% since then as many investors came to
see that this this stock was sharply oversold in light of its
still-strong presence in many hospital information technology
departments.
Yet that bounce back wasn't good enough for Merge's management
as shares still remained at roughly half of the52-week high . So in
a further bid to regain the lostmarket value , management has now
decided to look for a buyer for the company. News that Merge has
hired investment bankers is pushing shares up another 5% this
morning.
By my math, this stock is still too cheap, even after today's
gains, as Merge continues to trade at low price/salesmultiples in
an industry that typically receives more robust multiples. The
current $330 million market value equates to just 1.3 times
sales.
Although
GE (
GE
)
and
Philips (
PHG
)
are key competitors -- and unlikely buyers -- other health care IT
firms such as
Cerner (Nasdaq: CERN)
and
Allscripts (Nasdaq: MDRX)
would likely see Merge as a solid strategic fit as hospitals
transition to fully-digitized medical records. Cerner is the more
likely acquirer simply because it is in far healthier shape than
Allscripts right now. This would also be a solid fit for private
equity firms, as the company could be taken private and then
re-introduced into theIPO market at perhaps a far higher price when
Merge's operating metrics are again trending higher.
Action to Take -->
Shares of The Men's Wearhouse pushed past $50 in 2007 when
consumer spending was more robust. We may not see a return to those
kinds of free-sending days, but the company'smargin structure is
now so much more impressive that the company is likely to post net
profits that are even more robust than the boom years of the past
decade. Shares, now trading at $35, represent a much better value
than they did back in 2007, and could make a gradual move back to
that 2007 peak.
Merge Healthcare may actually pull back a bit after today's
gain, as it will likely take several months -- if at all -- to find
a buyer. So don't be put off if share prices don't keep building a
head of steam in the near-term.Buyout or not, Merge Healthcare
looks quite undervalued.
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.