The Zacks Analyst Blog Highlights: American Eagle, Kohls, Wal-Mart, Conn's and hhgregg

Zacks

For Immediate Release

Chicago, IL – August 7, 2013 – Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include American Eagle (AEO-Free Report), Kohls (KSS-Free Report), Wal-Mart (WMT-Free Report), Conn's (CONN-Free Report) and hhgregg (HGG-Free Report).

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Here are highlights from Tuesday’s Analyst Blog:

What’s for Sale in Retail?

Retail shares have been hot performers in 2013.  The SPDR S&P 500 Retail ETF was up over 30% year to date at writing.   The sector has performed strongly on the back of pent up demand, the impact of wealth creation generated by higher stock and housing prices, and refinance activity.   Improved home sales may also be providing some spill over support, as consumer buy items related to improvement and remodel.  The sector has posted a hot return despite lackluster wage growth and unexciting labor demand trends.

Macro headwinds:

Looking forward, the retail sector faces a number of macro headwinds.  Although home sales are still increasing, refinance activity has slowed materially, real disposable income growth is anemic, and the savings rate has been falling. Refinance activity is down over 55% from its December peak, real disposable income rose only 0.6% y/y in June, and the savings rate is depressed near a cycle low at 4.4%.  Increases in the savings rate tend to coincide with slower retail sales.

Macro headwinds may get some play given American Eagle (AEO-Free Report) recently guided its profit outlook lower. The strong rally in the sector does not leave a lot of room for disappointment. Given the macro headwinds and strong performance, it may be worth reviewing valuation and opportunities in the retail sector.

12 month forward PE ratio:

The retail space is extremely large, so this article will focus on a handful of retailers across the apparel, department store, wholesale, and electronic space. 

A company’s PE ratio can be used as one measure of valuation.  Generally speaking, a high PE ratio can imply the stock is richly valued, while low PE ratios can suggest the stock is cheap.  The PE ratio measures how much the market is willing to pay for a company’s earnings.  Examining forward 12 month PE multiples, Kohls (KSS-Free Report) and Wal Mart (WMT-Free Report) have the largest discounts to their averages and electronics retailers Conn's (CONN-Free Report) and hhgregg (HGG-Free Report) recorded the biggest premiums to their averages, although CONN and HGG have been public for a short period of time.  WMT and KSS appear cheap, while CONN and HGG seem expensive. CONN and HGG are also Zacks Rank #1 (Strong Buy) stocks and the market may be paying up for their strong upward trend in earnings revisions.

 

PEG Ratio:

Since investors seem very willing to price retailers with PE ratios ahead of their average, it might be worth looking at the PE ratio in relationship to the growth in earnings per share – the PEG ratio.   If growth in earnings is strong, a higher PE ratio could be justified.

Today, Zacks is promoting its ''Buy'' stock recommendations. Get #1Stock of the Day pick for free.

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