Thursday, April 19, 2007

Color on quarter: Labor Ready (NYSE:LRW)

Couple of firms comment on Labor Ready (NYSE:LRW) after the co released better than expected Q1 results last night, driving the stock up over 25% in after hours action:

- Goldman Sachs notes LRW's released 1Q07 results last night, management revised 2007 guidance upwards; they had anticipated a negative revision. GSCO notes they were surprised by 1) better gross margin driven by lower workers comp expense, 2) completion of the existing and a new $100m buy back program, and 3) improving same store growth trends in February and March which management believes is a sign of end market stabilization. However the firm maintains their conviction that another leg down in residential construction employment is a matter of WHEN not if, contrary to the company's outlook for a slight 2H07 recovery.

GSCO's revised 2007 EPS estimate of $1.26 is up 15% but remains 10+% below guidance reflecting their belief that the stabilizing trends the company has seen over the last 6-8 weeks are not sustainable. While they recognize in the near-term shorts will likely not be rewarded, they maintain Sell rating with a $15 tgt (up from $13).

- Stifel notes they are raising their '07 EPS estimate to $1.36 from $1.25 and '08 EPS estimate to $1.48 from $1.40. While on the surface, their revised estimates appear bullish, they believe that it is still too early to call a positive turn at LRW. Firm's and the company's outlook for the top line is essentially unchanged and almost all of the upside to the EPS outlook that management provided was due to lower workers' compensation expenses, other cost controls, and significant share buybacks.

Same branch sales trends in 1Q06 were robust, up 11% y-o-y, and quickly deteriorated throughout both the quarter and the rest of 2006. In firm's view, the positive trends as 1Q07 progressed had more to do with easier comps than a significant improvement in the market. They believe that the uncertainty in the overall economy and the construction environment indicates that LRW's outlook beyond 2Q07, which has limited top line visibility, could be optimistic. Residential builders have not called a bottom, business investment spending has come under pressure and consumer spending could come down if discretionary income declines.

Stifel believes that the stock could get ahead of itself in the near term due to the revised EPS outlook. Although LRW's newly authorized $100 million stock buyback could provide support for the shares, any significant upward stock price movement could be unsustainable unless economic growth accelerates and the construction market rebounds.

Notablecalls: Goldman was out negative on LRW just ahead of results (please see the archives) but the chart at that time didn't indicate weakness. Based on that, I didn't call it actionable. After closing around $18, the stock traded as high as $23.50 in after hours action as shorts were squeezed to death. I suspect that if you can get a fill around $23-$23.50, you'll make money shorting LRW today. There will likely be another leg down in housing and LRW will get hurt.

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