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Here are highlights from Monday's Analyst Blog:
Walgreen's Opening More Stores
Maintaining a pristine balance sheet, the management of the largest national retail pharmacy chain, in terms of revenue and profitability, Walgreen Co. (NYSE: WAG | Quote | Chart | News | PowerRating) continues with its new store expansion strategy. However, the management is also implementing a more aggressive strategy that includes acquisitions.
In addition, pharmacy profits are being pressured due to lower reimbursements on some generic drugs and additional pricing pressure from Wal-Mart (NYSE: WMT), which has entered the retail generic marketplace. In response, the management is trying to better utilize the existing store space and drive increased customer traffic through its stores by offering new services like convenient care clinics. The Hold rating on Walgreen is maintained.
The current store expansion plan entails opening approximately 550 stores in fiscal year 2008, for a net increase of about 475 stores after closings and relocations. The management remains on track to achieve the target of operating over 7000 stores by fiscal 2010.
KONG Must Kowtow to Regulators
Kongzhong (Nasdaq: KONG | Quote | Chart | News | PowerRating) is one of the leading providers of wireless value-added services in China. The company's revenue for the second quarter exceeded the market consensus, while its EPS was in line with market expectations. Revenue has increased sequentially for the past four quarters.
Kongzhong has a good chance to benefit from the potential growth of the wireless Internet services in China because of its leading position and balanced WVAS portfolio. The company's bull story, however, is clouded by the unexpected policy changes from Chinese telecom operators and regulation changes from Chinese government. The policy changes from China Mobile (NYSE: CHL | Quote | Chart | News | PowerRating) have resulted in significant decrease of Kongzhong's profitability for two years and will continue to have adverse impact on Kongzhong's profitability in the future.
JC Penney: Good Exit Point
JC Penney Co. (NYSE: JCP | Quote | Chart | News | PowerRating) reported second-quarter EPS of $0.52, which was $0.02 ahead of consensus. For the third quarter, the management expects to earn $0.70-$0.75 per share compared to the previous consensus of $0.76. Despite the government's $600 stimulus checks, the company still reported poor results in the second quarter results with sales down 2.5% and earnings down 33.7%.
Even so, the shares are up about 40 percent off their July lows. We think this rally should be sold. We continue to believe the macro conditions that have negatively affected consumer discretionary spending are not improving. That will weigh on JC Penney's results in the second half of the year. We also believe that consensus estimates are too high and will need to come down. As a result, we are downgrading the stock from Hold to Sell.
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