Among the biggest losers in Tuesday's early trading are
New York & Co. (
Pep Boys (
Top Percentage Losers -- Tuesday, June 8,
Company Name (Ticker)
|New York & Co.
|Pep Boys (
*Table includes companies with minimum market
capitalizations of $200 million and three month trading
volumes of at least 100,000 shares. All percentage returns
are listed as of 11:02AM Eastern Standard Time . Click on
ticker symbols for up-to-the-minute price quotes and
percentage gain data.
Emulex Deal: Grumbles Now, Smiles Later
can be faulted for bad timing. The company lined up an important
deal, but right during a brutal market stretch, and it is now
paying the price. The company's shares had fallen -3% on Friday,
and another -4% Monday. After the closing bell on Monday, the
company announced plans to acquire ServerEngines (and also slightly
lowered profit forecasts), pushing shares down another -2% in
Tuesday trading. Shares of Emulex are now down more than -30% in
the past six weeks.
But as time passes, investors should realize that it's a pretty
savvy move. Emulex, which focuses on chips, servers and software
used to tie disparate platforms together in data storage centers,
has always sat on a lot of cash. Now, the company is putting it to
use. To acquire ServerEngines, which focuses on Ethernet
technology, Emulex will pay $78 million in cash, assume $25 million
in debt, and issue shares worth roughly $80 million. After the
deal, Emulex will still have $175 million in net cash.
Emulex had begun to lag rivals
Qlogic (Nasdaq: QLGC)
Broadcom (Nasdaq: BRCM)
as those companies invested heavily in R&D. ServerEngines, with
90% of its staff in R&D, quickly moves Emulex back into the
game, and once the two firms' technologies are integrated, should
have a much broader suite of products for its data storage clients.
(To break it down technically, ServerEngines excels in designing
customized chips that optimize the balance of data between a bank
of servers, known as blades).
Action to Take -->
As with many of these deals, upfront integration costs will dampen
profits in the near-term, but strengthen them by fiscal (June)
2012. After the sharp drop in shares during recent weeks, shares
are now valued well below the ratios of the company's rivals. Now,
it's up to management to articulate how the company's new
technology platform matches or outpaces its peers. As that happens,
and as the company can start to snag more high-profile wins, the
valuations should move back up to the peers. Shares are likely to
stay range-bound this summer, but as the growth outlook clarifies
in a quarter or two, shares should rebound nicely.
New York & Co. Disappoints -- Again
It's hard to be credible with investors when a company doles out
bad news twice in a very short time span. When retailer
New York & CO. (
released tepid quarterly results book value .
Management failed to specifically state its near-term profit
expectations in late May, and they probably should have. Instead,
they preferred to dole out a specific forecast two weeks later, and
investors have had enough: a sharp sell-off this morning is pushing
shares down nearly -25%.
Action to Take -->
Shares now sell for well below book value. No matter. Value
investors are unlikely to latch on to a company that lacks even
basic forecasting skills. There is a sense that this retailer is in
disarray, either in need of new management or a buyer. Regardless,
stay away from these beaten-down shares.
A Modest Miss and a Big Drop
Who's to blame: Manny, Moe or Jack? One of these
Pep Boys (
may have had a hand in a modest quarterly shortfall that saw sales
fall -1.5% below analysts' forecasts. That revenue miss has yielded
a -14% plunge in the stock this morning. Shares had already fallen
-5% on Friday and another -5% on Monday. This is an unforgiving
market where any bad news is being greeted with a pummeling.
This is a clear over-reaction. After all, consumers are only slowly
moving back into car dealer showrooms, and most are hanging on to
their cars longer and piling up the miles. That's a secular
tailwind in place for all auto parts stores. Pep Boys has been a
sector laggard, but has made tangible strides in recent quarters in
terms of improved gross margins and lower overhead . Prior to last
night's quarterly report, estimates had been rising steadily -
especially for fiscal (January (2012). Analysts will likely trim
forecasts a bit, but they'll still likely be well higher than they
were just 60 or 90 days ago.
Action to Take -->
Despite the noise, Pep Boys is still poised to boost per-share
profits this year around +30%, and see them rise another +30% next
year to around $0.75. When investors are in a less fearful mood,
they're bound to re-visit this name, which is now back in its 2009
trading range, even though its cost controls and gross margins have
greatly improved since then. As a final point, some believe the
company's real estate assets are worth around $800 million, far
above the $500 million market capitalization .
-- David Sterman
Disclosure: David Sterman does not own shares of any security
mentioned in this article.