By Larry Gellar
Today we’ll be taking a look at the latest rating downgrades from Wall Street analysts. Abercrombie & Fitch and TJX Companies are both competitive retailers, but we think one of them is better positioned for the future. Meanwhile, AFLAC and Huntington Bancshares are hurting due to headwinds affecting the financial industry as a whole. Oracle could be hit in anticipation of reduced software spending. Let’s see what specifically has been happening with these stocks:
Brean Murray downgraded Abercrombie & Fitch (ANF) from Buy to Hold. The firm also cut earnings estimates for Abercrombie & Fitch due to expectations that margins will be lower. In fact, Abercrombie & Fitch stock has been sliding for some time now. While shares were trading for over $75 a share back in October, the current stock price is just above $45. Regardless, value metrics like price to earnings and price to sales ratios are still pretty high for Abercrombie & Fitch compared to American Eagle Outfitters (AEO) and Gap (GPS).
Abercrombie & Fitch’s gross margin of 62.94% is still much better than the competition, although operating margin of 9.03% is a tad low. Nevertheless, the Trefis Team over at Forbes still thinks Abercrombie & Fitch could see a rebound. The idea behind that article is that the situation in Europe is improving, and Abercrombie & Fitch could be a huge beneficiary. Other trends like cost-cutting and improving sales in individual stores also figure to help out this stock. Free cash flows are actually in the red for the first three quarters of fiscal year 2012, so Abercrombie & Fitch will need to turn that around to get investors back on board.
UBS downgraded AFLAC (AFL) from Neutral to Sell due to exposure to the European debt situation. In fact, sovereign debt problems have been hurting AFLAC for some time now. The stock was trading for over $55 a share in April, but now the stock price is bouncing between $40 and $45. While events in Europe are certainly a concern for AFLAC, the location that will actually affect this company more is Japan. Approximately three-fourths of AFLAC’s revenue comes from the Asian country, and CEO Dan Amos remains optimistic about the company’s operations. Here’s what he told Bloomberg recently:
We have achieved all of our targets and our sales are actually running way ahead of target, as we said in the third quarter, and we expect them to continue.
In particular, AFLAC is benefiting from a return to normalcy in Japan as the country continues to recover its tsunami disaster. Compared other providers of accident and health insurance, AFL stock is pretty low for price to earnings and price/earnings to growth. Margins are also attractive – those numbers are 25.12% gross and 14.16% operating. Meanwhile, cash flows for AFLAC are very strong. The company brought in $7.486 billion of operating cash flow during the first 3 quarters of 2011, which left plenty of money for stock repurchases and dividends.
Guggenheim downgraded Huntington Bancshares (HBAN) from Buy to Neutral due to valuation. Regardless, Huntington Bancshares is part of an exclusive group of bank stocks that could see big returns in 2012. The key here is that Huntington Bancshares isn’t big enough to be hurt by new regulations and global economic problems, and it isn’t small enough to be particularly risky. That’s certainly a winning combination, but investors haven’t really caught on yet. Believe it or not, the stock is trading at the same price that it did in August.
Compared to other bank stocks like Fifth Third (FITB), KeyCorp (KEY), and JPMorgan Chase (JPM), Huntington Bancshares is admittedly trading at somewhat of a premium. Price to earnings ratio is 11.49 and price to sales ratio is 2.07. Quarterly revenue growth of 11.40% and operating margin of 35.67% should be taken as a sign that this stock is here to stay.
As for operating cash flows, Huntington Bancshares brought in $840.82 million during 2010 and $1.386 billion during the first 3 quarters of 2011. That’s allowed the company to pay down debt and give its shareholders handsome dividends. Dividend yield is currently 2.80%. With a beta of 2.57 though, this stock could be volatile.
BMO Capital Markets downgraded Oracle (ORCL) from Outperform to Market Perform due to reduced software spending. This has been particularly true for companies’ bigger middleware projects, and BMO’s price target for Oracle is $30. Regardless, Oracle continues to offer a strong product mix. For instance, it just released a new version of its Database Firewall software. Here’s what Oracle’s Vipin Samar had to say:
With new MySQL support, Oracle Database Firewall extends the combination of databases that organizations can secure across their enterprise. The improved reporting capabilities automate time-consuming regulatory compliance reporting functions.
Despite good releases like this one, ORCL stock has suffered the past few months. While the stock was trading for nearly $34 a share in November, the current price is just above $27. In fact, that’s made Oracle’s price to earnings and price/earnings to growth ratios more attractive compared to other big software names like IBM (IBM), Microsoft (MSFT), and SAP (SAP). Speaking of SAP, Oracle remains in the midst of a rather important lawsuit with that company. The judge for the case is now saying that Oracle will either have to take $272 million award from SAP or start a new trial entirely. Potential investors should keep in mind that Oracle’s margins are very strong compared to competitors – those numbers are 77.87% gross and 36.96% operating.
Goldman Sachs downgraded TJX Companies (TJX) from Buy to Neutral and took it off their Conviction Buy list. It was a valuation call, and Goldman Sachs’ price target for TJX is $72. That might come as a surprise to some investors because TJX actually just posted some terrific December sales. Most importantly, same-store sales were up 9% compared to December 2010. In fact, TJX has been doing well for quite some time now. The stock was trading for about $50 per share in August, but now the price is over $65. That was high enough for the company’s board of directors to agree to a stock split.
As a discount retailer, TJX is benefiting from numerous trends including shaky consumer confidence. It’s a business model that has TJX trading at significantly higher price to earnings, price/earnings to growth, and price to sales ratios than stores like Kohl’s (KSS), Macy’s (M), and Target (TGT). Margins aren’t terrific for TJX though – those numbers are 27.08% gross and 10.27% operating. As for operating cash flows, TJX had $1.976 billion flow in during fiscal year 2011, and $830 million flow in during the 3 quarters after that. Dividend investors should note that this stock has a 1.10% dividend yield.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.