The Ratings Game: The Analyst as Mind Reader

Wayne Hood should drop his gig as Prudential Securities retail analyst and head over to the Tonight Show to revive Johnny Carson's Carnac gimmick. If he were handed an envelope on Monday morning, the exchange would have sounded like this:

The envelope: "A June swoon, a fall drop and a bail out of retail." Hood's answer: Federated Department Stores (FD).

On Thursday, Federated warned that second-quarter and full-year earnings would come in way below expectations due to a drastic slowdown in sales during June. Its stock fell more than 5% yesterday after the company lowered second-quarter earnings expectations to a range between 40 cents and 50 cents a share. That's way less than the 70 cents to 75 cents it previously expected and the 65-cent estimate from Wall Street's analyst community.

Well, Wall Street's analyst community minus Wayne Hood.

On Monday, three days before the warning, Hood cut Federated to hold from buy and trimmed his second-quarter estimate to 51 cents. Out of the hundreds of words in his research note, Hood underlined the following 29: "We believe there is a growing conviction on the part of management that the current weak sales trend will be sustainable through the third and fourth quarters of 2001."

The company's press release on Thursday needed only 23 words to get the same point across. "Federated said that in the wake of continued weak sales, it also is lowering its fall comparable same-store sales expectations to minus 1-2%."

So, is that Waynac or Hoodnac?

Mr. Egg, Meet Mr. Face

In Thursday's early morning hours, Dain Rauscher Wessel analyst Lauri Brunner released a nice note about regional retailer Christopher & Banks (CHBS). She told investors that June same-store sales would grow 6%, but expressed concerns about markdowns. Still, she reiterated a $42 price target and a buy rating. One thing was certain, though: She thought same-store sales would come in at 6%.

A few dozen minutes after Brunner's note hit, C&B reported that June same-store sales rose a mere 4%.

The "One of These Things Is Just Like the Others, Exactly the Same" Award

Last Friday, Lehman Brothers analyst Jeffrey Kessler issued a note called "What is next for Cendant (CD)? We think a lot." In it, the analyst reiterated his strong buy rating, told investors even more could be tacked to the stock's year-to-that-date 105% gain and upped his fiscal 2001 and 2002 EPS estimates by 2 cents. Kessler moved his 2001 earnings-per-share call to $1.02 and his 2002 target to $1.14 -- exactly what the consensus estimate was among analysts polled by Thomson Financial/First Call. Kessler may think a lot of Cendant, but he sure doesn't think a lot differently than anybody else.

Headline of the Week

"June Auto Sales: 'Third Best Year Ever!' Uh, That's Volume not Profit."

Goldman Sachs' Gary Lapidus tossed out this gem in reaction to the auto industry's hype over being on track to sell 17.1 million light vehicles in 2001, based on recent June data. "Lapidus' take: The strong sales came because of aggressive markdowns and surprisingly resilient consumers, so ignore the cheerleading and keep an eye on the bottom line. For his part, Lapidus kept his market perform rating on both General Motors (GM) and Ford (F).

Reader Mailbag: Happy Fun Crazy Land

Quite a few people took the time to comment on last week's The Rating Game, with responses split between CVS (CVS)-related comments in the wake of Credit Suisse First Boston analyst Ed Comeau's prescient upgrade and those who felt UBS Warburg's Jamie Baker was too hard on AirTran (AAI), the airline formerly known as ValuJet.

Here's a look at choice excerpts:

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"When ValuJet entered the Mobile, Ala., market, we were ecstatic, no longer held hostage by the major airlines. Delta (DAL) matched ValuJet across the board. No Saturday night stayovers, $10 cheaper on round-trip fares, double frequent flyer miles, increased the number of flights to Atlanta from five to eight a day, etc. When ValuJet pulled out of the market due to less demand, Mobile faced higher airfares, no specials and five flights a day.

"My company relocated to one of six Southeastern cities where airfare was reasonable. I moved to Knoxville, Tenn., within three months of AirTran's announced service to Atlanta and New York's LaGuardia Airport. Delta's response was a deja vu of what occurred in Mobile. Needless to say, you understand why I am living in Atlanta now." -- C. Gentry

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"Trust me on this, Delta will never, never, ever stick to the no-Saturday stay over. They are the likes of UAL (UAL) and AMR (AMR), or at least they want to be like them. Plus, they will lose money this year and next as they have problems with their unions. AirTran has no problems with unions, flies new Boeing 717s that save 20% to 30% more fuel than the old DC-9s they flew, and for some reason, some warped analyst thinks that Delta can play the same game. They cannot and we will see this "news of a change" disappear come the fall. Delta will reinstate their policy once the winter starts or when they start seeing more business travelers come into the skies." -- J. Bobeck

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"I find it difficult to believe that the drop in CVS' price was due to growth concerns and not facilitated (either in whole or part) by Mr. Comeau's comments. If you think this was his insight alone, then great. I don't buy it." -- G. Takemori

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"Thanks for the commentary, but before you ... take [Ed] out for a Slurpee, remember that CVS' problems are temporary and you should cite that this is an excellent buying opportunity for the longs. Especially those of us who sold at $60 after it failed to break this level three times." -- J. Reale

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"Comeau made a great call -- right for the right reasons. But how can you say he saved investors $17? No one got to sell it at $54.49. The highest they got to sell it was the next day when the highest it traded was $50.50. The stock declined $17. His advice saved investors $13." -- Name Withheld