rose roughly +20% this morning after the world's largest car rental
firm agreed to acquire rival
Dollar Thrifty (
for a modest premium. Investors in Dollar Thrifty can't complain:
shares are now up twenty-fold since plummeting to $2 during the
economic crisis. The deal, which reduces competition, should give
Hertz additional pricing power. And that's a plus for rival
Avis Budget Group (
as well, which also rose more than +10% on the buyout news.
The spike in Hertz's shares is unusual for two reasons. First,
acquirers rarely see their stocks bid up when a deal is announced,
and usually suffer a modest pullback. Also, the deal is likely to
only modestly improve Hertz's profits, probably well less than the
+20% increase reflected in the share price.
In this bullish market environment, even "less bad" is good.
Office Depot (
continues to lose market share to rivals such as
Staples (Nasdaq: SPLS)
, but the retailer's annual loss is set to shrink, according to
Jefferies, which is talking up the stock ahead of Tuesday's
quarterly earnings release. Shares, which rose nearly +8% on
Monday, now trade at an 18-month high.
also rose more than +10% in Monday trading and now trade close to
an all-time high. The appliance maker saw first quarter sales rise
+20% and expects to post banner results throughout the year. Rising
demand in Asia and Latin America get much of the credit, while U.S.
sales are expected to grow at a more moderate pace.
But it may be time to take profits. Whirlpool now expects to earn
$8 or $9 a share this year, which would top the company's record
profits of $8.10 a share earned in 2007. But investors should note
that profits throughout the past decade mostly ranged from $5 to $6
a share. The current strong run rate is surely attributable to a
bounce back in global demand after a period of slack in 2008 and
2009. And since this is a cyclical earnings play, investors tend to
seek the exit when the price-to-earnings ratio (P/E) gets too high.
Shares of Whirlpool now trade for about 13.5 times the mid-point of
management's 2009 profit guidance. Peak-cycle profits on cyclical
stocks typically merit a P/E ratio below 10.
Whirlpool could go on to post solid results next year as well, and
per-share profits could rise yet higher to around $10. But that
still can't justify further gains in this current highflyer.
-- David Sterman
Disclosure: David Sterman does not own shares of any security
mentioned in this article.
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