JP Morgan is making an interesting call on Big Lots (NYSE:BIG) this morning downgrading the shares to Neutral from Overweight while lowering tgt to $27 (prev. $28)
Firm notes they have déjà vu concerns ahead of Big Lots 1Q EPS print tomorrow and accordingly are downgrading the stock to Neutral from Overweight. Importantly, while they think BIG will handily exceed their estimate/Street consensus for 1Q EPS, they also believe that this is likely discounted given the company’s excellent track record over the past 3 years (avg. $0.07 beat over the last 12 quarters). Moreover, any 1Q upside could be trumped by cautious commentary on 2Q09 sales – similar to August 2008 when BIG cautioned that sales QTD were soft (BIG dropped 7.1% vs. SPX +0.4% that day). Finally, BIG has outperformed the market more than four-fold year-to-date, with shares up ~75% (RLX +17%) and sentiment – both buy-side and sell-side – has noticeably improved since March. Net, the firm doesn’t find the risk/reward as compelling today and are moving to the sidelines ahead of the print.
Learning From retail peers – sell on the news, déjà vu concerns. The market isn’t rewarding companies for EPS upside, in JP Morgan's view, with retailers including BJ, KSS, JCP, HD, AAP, and PETM topping Street estimates on earnings day, but watched the stock close in the red. As such, they are concerned that BIG may not be immune to the “sell on the news” trade and believe shares may come under pressure on Thursday despite a solid print. Further, they believe that the selling pressure on the stock may be exacerbated if Big Lots takes a cautious tone on 2Q top-line trends – reminiscent of the 2Q08 EPS print where results topped the Street by $0.06, but a downbeat forward sales outlook sent shares down 7.1% on the day (SPX +0.4%
Too much sell side (and buy side) love. At the time of JP Morgan's upgrade in early March, sell side support was noticeably less evident with only a 40% “Buy” rating ratio and short interest stood at 22.0%. Today, that “Buy” ratio stands at 62% and short interest has been cut almost in half to 14.0%. This “sea change” in sentiment makes the firm nervous given the aforementioned run-up in the stock. Accordingly, they think the risk-reward equation may balance (for the time being) and they're moving to the sidelines on the stock.
Lowering 2Q09 and FY09 EPS outlook. JP Morgan is lowering their 2Q outlook from $0.31 to $0.29 (Street at $0.30) based on a tough cycle against two closeouts in 2Q08 and difficult stimulus comparisons in June.
Notablecalls: A very elegant call on JP Morgan's part. The analyst, Charles Grom and his team are not only taking their 2Q09 estimates down but are giving their clients (and investors in general) a roadmap on what to expect if indeed BIG does guide down. Excellent work.
Talking to one contact who thinks BIG will get a -5% hair cut on this call.
PS: Also note Pali is out cautious on BIG saying they remain on the sidelines, as 1) they see some risks, especially in Q2, that may bring in below consensus numbers and 2) they believe the stock is reasonably valued after its recent run.
Firm notes they have déjà vu concerns ahead of Big Lots 1Q EPS print tomorrow and accordingly are downgrading the stock to Neutral from Overweight. Importantly, while they think BIG will handily exceed their estimate/Street consensus for 1Q EPS, they also believe that this is likely discounted given the company’s excellent track record over the past 3 years (avg. $0.07 beat over the last 12 quarters). Moreover, any 1Q upside could be trumped by cautious commentary on 2Q09 sales – similar to August 2008 when BIG cautioned that sales QTD were soft (BIG dropped 7.1% vs. SPX +0.4% that day). Finally, BIG has outperformed the market more than four-fold year-to-date, with shares up ~75% (RLX +17%) and sentiment – both buy-side and sell-side – has noticeably improved since March. Net, the firm doesn’t find the risk/reward as compelling today and are moving to the sidelines ahead of the print.
Learning From retail peers – sell on the news, déjà vu concerns. The market isn’t rewarding companies for EPS upside, in JP Morgan's view, with retailers including BJ, KSS, JCP, HD, AAP, and PETM topping Street estimates on earnings day, but watched the stock close in the red. As such, they are concerned that BIG may not be immune to the “sell on the news” trade and believe shares may come under pressure on Thursday despite a solid print. Further, they believe that the selling pressure on the stock may be exacerbated if Big Lots takes a cautious tone on 2Q top-line trends – reminiscent of the 2Q08 EPS print where results topped the Street by $0.06, but a downbeat forward sales outlook sent shares down 7.1% on the day (SPX +0.4%
Too much sell side (and buy side) love. At the time of JP Morgan's upgrade in early March, sell side support was noticeably less evident with only a 40% “Buy” rating ratio and short interest stood at 22.0%. Today, that “Buy” ratio stands at 62% and short interest has been cut almost in half to 14.0%. This “sea change” in sentiment makes the firm nervous given the aforementioned run-up in the stock. Accordingly, they think the risk-reward equation may balance (for the time being) and they're moving to the sidelines on the stock.
Lowering 2Q09 and FY09 EPS outlook. JP Morgan is lowering their 2Q outlook from $0.31 to $0.29 (Street at $0.30) based on a tough cycle against two closeouts in 2Q08 and difficult stimulus comparisons in June.
Notablecalls: A very elegant call on JP Morgan's part. The analyst, Charles Grom and his team are not only taking their 2Q09 estimates down but are giving their clients (and investors in general) a roadmap on what to expect if indeed BIG does guide down. Excellent work.
Talking to one contact who thinks BIG will get a -5% hair cut on this call.
PS: Also note Pali is out cautious on BIG saying they remain on the sidelines, as 1) they see some risks, especially in Q2, that may bring in below consensus numbers and 2) they believe the stock is reasonably valued after its recent run.
I frequently shop at Big Lots searching for values. What I'm finding out is that many of their prices have increased by a constant 20%. This seems to be right across the board. Coke is selling for $1.25 while Walmart is selling it for $1.00. A food item I paid $2.00 for a month ago now goes for $2.50.
ReplyDeleteWhat I'm saying is, Big Lots is no longer a :value store'. It pricing itself to be in competition with WalMart and sometimes with the local Kroger. Go figure. It's losing it's base.