Here's an analysis of the big news and price moves in the consumer sector last week, evaluated for buy and sell ideas. Overall, the consumer staples sector SPDR Fund (XLP) ended down 1.2% for the week and consumer discretionary sector SPDR Fund (XLY) ended down 0.7% last week. However, the relatively unchanged indices for the week masked a volatile week in which both SPDRs made 3% to 5% up and down daily moves for four of the five days.
Sirius XM Radio Inc. (SIRI) provides over 135 digital-quality satellite radio channels to over 20 million subscribers in the U.S. and Canada. Its satellite radios are primarily distributed through automakers, retailers, and its website. The stock was down 1.1% for the week, but that masked a volatile week during which it first dropped from $1.89 to the $1.60s, before rebounding back into the $1.90s by the end of the week. We analyzed SIRI exactly one month ago, when the stock was trading in the $2.20s, and indicated the price was too rich at over 55 times then-current earnings and a forward P/E of 27, given that revenue growth is expected to be 6.5% in 2011 and 11.9% in 2012 while earnings are projected to increase only modestly from 3c in 2010 to 7c in 2011 and to 8c in 2012. Furthermore, the company faces strong competition from the likes of Pandora (P), which already has 80 million subscribers compared to SIRI's 20 million subscribers, and it has a high debt load that may limit options going forward. Since our coverage one month ago, the stock has dropped into the $1.60s before closing last week at $1.87. We believe that at this point, the bias is downward as the stock has also breached its 200-day moving average and is poised to continue its march downward as we had indicated earlier.
SodaStream International Ltd. (SODA) is an Israeli manufacturer of home beverage carbonation systems, which transforms tap water into soft drinks and sparkling water. It develops, manufactures and sells the soda maker and exchangeable CO2 cylinders, as well as consumables such as CO2 refills, reusable carbonation bottles and flavors to add to the carbonated water. It was the biggest down mover during the week, plunging 31.9, but it's still up 51.6% YTD.
SODA reported its June quarter on Thursday morning, beating earnings (35c versus 26c) and revenue estimate ($77.4 million versus $72.8 million) and re-affirming guidance for the fiscal year. Furthermore, the company reported good metrics on many other measures such as soda maker sales up 224% year-over-year, CO2 refills up 184%, flavor up 298%, and a gross margin of 53.0% versus 50.7% during the same period in 2010. However, shares sold off due to analyst concerns about emerging competition in the space and over the company’s reaffirming its fiscal year guidance as opposed to raising it, which it has done in prior quarters. At Friday’s closing price of $47.89, SODA trades at current 35 P/E on a TTM basis, and a forward 28 P/E based on fiscal year 2012 projected earnings, while earnings are projected to rise at a 40% compounded growth rate from 88c in 2010 to $1.73 in 2012. While its current P/E is a slight discount to its growth, and the SODA growth story is still very much intact, shares have recalibrated to lower levels, factoring in the lower growth based on the company’s guidance. Its shares have already rebounded 17.1% from the lows on Thursday, and it is most likely that shares will remain range-bound until the company reports reaccelerated growth in revenue and earnings in future quarters. We believe the stock is fairly priced near $40, and would sell it into any rebound into the mid- to high-$50s.
E-commerce China Dangdang Ads (DANG) is a Chinese online retailer offering books and other media, personal care and general merchandise via Dangdang.com. Often called the Amazon (AMZN) of China, DANG is the #2 e-Commerce player in China, behind TaoBao. Its business model is similar to AMZN except that it employs a courier-based delivery system that collects cash on delivery. DANG traded up 7.8% for the week, among the strongest gainers last week in the consumer sector. Its shares trade at over 100 times forward earning of 8c for FY 2012, while revenues are growing at a 60% clip. Looking back at AMZN, its shares traded in the $20-50 range, at a market-cap of $6-15 billion when revenues were in the $400 million range, and it was generating huge and rising losses. DANG in contrast generates $400m in revenue at 60% growth while earnings are flat to up, and it is trading at under $800 million market-capitalization. DANG is down almost 70% from its IPO price while the company fundamentals have been improving since the IPO. We believe that DANG shares are in the buy range, but with the earnings report due on Tuesday, we would wait until after evaluating the report before buying it.
Research in Motion Ltd. (RIMM) is a Canadian manufacturer of Blackberry handheld devices for the mobile communications market. Its shares were among the strongest gainers in the volatility last week, up 5.0%, and in our opinion may have put in a bottom. While RIMM has admittedly been a gigantic train-wreck of late, and it is losing market share fast, but as explained in detail in an article three weeks ago, it still has close to a quarter of the U.S. smart phone market, it is strong in emerging markets, and it has $6 per share in net cash on its books and is expected to generate an additional $10 per share over the next two years. It is at least for now no longer a growth story, but it may be a perfectly fine stock for a value investor, trading at less than 4 forward P/E, after adjusting for the $6 in net cash on its books. We recommended adding RIMM on dips below $25 and stand behind that call.
Youku.com Inc. (YOKU), China's largest video-streaming company, is more popularly known as the YouTube of China. However, in reality it is more a combination of Netflix (NFLX) and YouTube; Netflix, because it offers mostly professionally-generated content licensed from movie studios and TV companies, and YouTube due to its reliance on advertising as a main source of revenue. The stock was among the most volatile in the consumer sector, closing down 8.3% for the week, but that included a 24.9% plunge in the first three days of the week after the company reported its June quarter report on Monday, followed by a 22.0% surge on Thursday and Friday.
Although the company beat analyst revenue and earnings estimates and reported strong year-over-year and quarter-over-quarter improvement, it appears based on the stock’s initial 23.3% plunge after the earnings report that the street was expecting an even stronger beat on the top-line revenue and especially on the bottom-line profit numbers. Furthermore, the company’s forward guidance of $35.9-37.6 million for the September quarter calculates to a strong deceleration in growth. But more importantly, as we explained in detail in an article on August 10, as much as we like to call it the YouTube of China, it faces a far tougher competitive environment than YouTube did in its early days, or even compared to Baidu Inc. Ads (BIDU), China’s version of Google Inc. (GOOG). Specifically, as the video-streaming leader in China, YOKU has to pay studios for licensing their content, then generates revenues based on advertising or a premium fee, while many of its up-and-coming competitors operate below the radar and distribute the same content illegally with zero content-licensing costs. It is these concerns about the potential profitability of its operating model that may be plaguing the stock despite what appears to be a good quarterly report for the June quarter.
Rite Aid Corp. (RAD) operates the third-largest retail drugstore chain in the United States with 4,714 stores in 31 states offering prescription drugs, convenience products and cosmetics. It plunged 10.8% during the week, falling with the market on Monday and Tuesday, but failed to rebound in the latter part of the week like the rest of the market. The company is drowning in a sea of debt and continues losing money. Meanwhile, it continues to push the debt can down the road by extending debt maturities while hoping that its new in-store initiatives generate growth to service the rising debt. We issued a sell on RAD on July 7 in our coverage of second quarter winners and losers when the stock was trading in the $1.30s. With the stock down 20% since our sell rating issued five weeks ago, it is no longer a conviction sell, but we do believe that there are better opportunities in the market and in the retail space.
Credit: Historical fundamentals including operating metrics and stock ownership information were derived using SEC filings data, I-Metrix® by Edgar Online®, Zacks Investment Research, Thomson Reuters and Briefing.com. The information and data is believed to be accurate, but no guarantees or representations are made.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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