Federated Faces More Trouble Ahead

Using sales at the low end of Federated's projected range of $6 billion to $6.1 billion, and lower margins than most of Wall Street has projected, I expect Federated to earn $2.22 a share in 2007.

Although analysts might not agree with my prognosis (that's fine with me), it appears investors do. Federated's stock is priced at a sharp discount to its peers. Shares, at about $39.75, trade at a cheap 14.8 times forward consensus earnings estimates for 2007 and 17.9 times my estimate. That compares with a department store average of 19.7 times earnings.

If I'm wrong and Federated is able to ramp sales and convert customers, the stock is a bargain. But I expect investors to continue to be disappointed by more warnings throughout the year as sales languish and margins deteriorate.