A Fair Value for Federated

Expectations for a Fed rate hike may be eating into share prices in some interest rate-sensitive sectors like autos, but so far, they haven't put a damper on department-store retailers.

For instance, shares of Federated (FD - commentary - Cramer's Take) have risen 6% since January, thanks to relatively strong same-store-sales performance compared to last year, when consumers were nearly paralyzed by the Iraq War. That gain isn't quite as good as the 9% rise in the Dow Jones Broadline retailer index, which was fueled mainly by outsized returns from Kmart (KMRT - commentary - Cramer's Take) and J.C. Penney (JCP - commentary - Cramer's Take), but certainly far better than the 1% increase in the S&P 500.

An improved consumer spending environment, better merchandising and tight inventory controls may help keep Federated's shares in positive territory for a while. However, with the stock now trading at a price-to-earnings ratio of 12.5 times this year's consensus earnings estimate of $4 per share -- right in line with its long-term average -- it doesn't seem to make sense to load up at this price.

An Economy on the Mend

The most recent consumer data appear to provide a favorable backdrop for retail stocks in general. The labor market is finally delivering good news, which bodes well for consumer income and spending for months to come. Stronger-than-expected May nonfarm payrolls expanded 248,000, and both March and April were revised upward, making the three-month average payroll gain comfortably over 300,000. Average hourly earnings rose 0.3% in May, suggesting that May personal income could show a solid gain when reported.

Consumer sentiment is improving as well. The University of Michigan Consumer Sentiment Index for June jumped to 95.2, much better than the modest increase to 90.8 that the consensus was expecting from May's 90.2 level.

But even with Tuesday's benign CPI report -- the core rate for May had a 0.2% increase, right in line with expectations -- it's still just a matter of time before the Fed makes its move on interest rates. With that in mind, it's hard to get excited about owning any department-store stocks in a big way right now. According to a recent report by FTN Midwest Research analyst Jeff Stinson, over the three most recent periods when the Fed was raising the fed funds rate, department stores in general underperformed the S&P 500 immediately before, during and after the rise in rates.

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Odette Galli is a freelance columnist for RealMoney.com. She has been a writer at SmartMoney Magazine and a senior manager at Ark Asset Management, where she co-managed $3 billion in institutional assets. In addition, Galli was a senior vice president at J & W Seligman. At the time of publication, she had no positions in any of the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this commentary represent a recommendation to buy or sell stocks. She welcomes your feedback and invites you to send your comments to [e-mail].