Story Stock – 04/03/2002

Oxford Health (OHP) 41.00 -0.51: With the major averages solidly lower today, it never hurts to reassess a solid defensive investment. In our November 6th review of Oxford Health, we were positive on the shares with the price around 26. Since then, OHP has returned roughly 59% which raises the question of whether it remains attractive at current levels. Based on the company’s fourth quarter enrollment activity, management believes it will experience 2% commercial enrollment growth in 2002. While 2% growth is far from staggering, it does compare favorably with management’s prior expectation of a 1 to 2% decline. In addition, the projection does not include membership from its previously announced MedSpan acquisition that it hopes to complete by the end of its first quarter. So how do the shares look fundamentally? Based on current prices, OHP trades at 12.4x estimates for the current year and 10.9x forward projections. With projected earnings growth (not membership growth) of approximately 14% this year and a longer-term projected growth rate in the same ballpark, we continue to view the shares as attractive at current levels. As a rule, health care stocks have fared well during the recent market downturn. We expect the group to continue outperforming as long as investors remain uneasy about the macro-economic and corporate earnings picture. In the specific case of OHP, we believe downside should be limited due to the company’s improving fundamental outlook. Oxford Health remains a Briefing.com Value Core holding. — Mike Ashbaugh, Briefing.com

Darden Restaurants (DRI) 37.30 -0.93: Last night, Darden Restaurants reported that same-restaurant sales for March were flat at Olive Garden and up 1-2% at Red Lobster– its core concepts. In short, those performances were considered disappointing for several reasons. First, they were well below the February period when same-restaurant sales at Olive Garden and Red Lobster were up 6-7% and 12-13%, respectively. Secondly, both concepts experienced guest count declines in March. And third, the March results were below the 3-5% increase the company forecasted for fiscal Q4 (May) same-restaurant sales. Armed with those considerations, the market took a dim view of DRI when trading began today as the stock dropped more than 2 1/2 points, hitting an intra-day low at 35.60. DRI, however, is well off its lows, and Briefing.com thinks that, too, deserves some added insight. First, the March results shouldn’t have been interpreted as that big of a negative surprise. Following its Q3 earnings report, DRI said on March 22 that same-restaurant sales growth in March would be below its forecast for quarterly same-restaurant sales growth due to the timing of promotions and other factors that can affect month-by month growth. One of the “other factors” alluded to was that the Easter weekend– a historically weak sales period– fell in March this year versus April last year. Altogether, Darden estimates that changes in advertising timing and the Easter season adversely affected same-restaurant sales at Olive Garden by approx. 6% and approx. 1% at Red Lobster. Another factor aiding DRI’s recovery effort was the breach of support at 36.70, which prompted renewed buying interest among technically-oriented investors. That level, we would add, was successfully tested on March 25, and ignited a 13% rally in DRI over the next three sessions. The rally, however, ended almost as quickly as it began as concerns in the broader market regarding the pace of the nascent economic recovery undercut the stock. Although DRI has staged a fairly impressive comeback today, Briefing.com thinks those same concerns will continue to act as a restraining influence over the near-term and we would expect DRI to encounter some formidable resistance at its 50-day simple moving average (40.08).– Patrick J. O’Hare, Briefing.com

Skechers (SKX) 21.08 +2.17: The good news keeps coming in for this maker branded footwear for men, women and children. Skechers is quite popular among youths. The company says it expects Q1 EPS to exceed the First Call consensus estimate of $0.34 by at least 25%. Briefing.com has been bullish on the stock for a while now. It’s up 44% since being added to our Core Growth List. Management attributes this upside to the company’s ability to offer a broad array of attractively priced and stylish footwear as well as effective advertising campaigns. Also, its early spring product lines enjoyed strong consumer acceptance across all product categories. Even before this announcement, the company was expected to earn $1.50 per share this year for a reasonable p/e of 14x. This should improve a bit as analysts move estimates higher. Still looks like a solid investment here….Who else may benefit? Vans (VANS 11.84 +0.17) is in a similar market segment. A couple of weeks ago, the company warned for the current quarter which sent the stock to a 3-month low. But it’s a popular brand with the youth market. Like Skechers, it has a spring release of two new styles: Dogtown and Z-Boys. Finally, Vans is expecting its back-to-school product next year to be among the best in its history….Finally, Fossil (FOSL 26.55 +0.08) is another to watch (no pun intended). It’s products (mostly watches and accessories) are different, but it’s similar to SKX with an attractive p/e of 15.5x. It too is popular among younger buyers and has been showing momentum recently. — Robert J. Reid, Briefing.com

DuPont (DD) 47.70 +0.35: Dow component, DuPont, expects underlying earnings for the first quarter to exceed $0.51 per share, which is the high end of current First Call earnings estimates and comfortably ahead of the current consensus estimate of $0.47. The chemical company attributed its positive surprise to lower fixed costs across most of its reporting segments and somewhat stronger early season sales in its production agriculture business. If DD had stopped there, the market’s response to its news might have been more exuberant, but alas, DD had more to say, and what it said wasn’t exactly cause for unbridled celebration. The specific disclosure from the company that has tempered the market’s enthusiasm was an admission that, despite some firming in a number of DD’s chemical and materials businesses versus the prior quarter, there is still some uncertainty about the timing of a broad-based recovery in end user demand. Frankly, that is a disappointing statement because the market, at this juncture, needs/wants to hear guidance from corporate America that complements the improving economic data and suggests the economy is on track for a strong recovery. Knowing that DD serves a diverse number of end markets from agriculture to electronics, its cautious-sounding statement on end user demand doesn’t do that. In fact, it has given investors reason to be concerned that the recent improvement in the data pertaining to the manufacturing sector may simply be a case of restocking the shelves rather than an indication of a sustained pickup in end demand. Time will ultimately tell which is the case, but the Fed, for one, seems pre-occupied with that unanswered question. To that end, while DD’s uncertainty over the timing of a broad-based recovery in end user demand is disappointing in its own right, it may give the Fed added reason to sit tight at its FOMC meeting in May.– Patrick J. O’Hare, Briefing.com

Technical Levels : In terms of the fundamental backdrop, not much has changed this week. Investors continue to have an eye out for earnings warnings and recent developments in the Middle East have not helped matters either. From a strictly technical perspective, it’s worth noting that volume picked up somewhat for yesterday’s poor performance. To the downside, we’ll continue to look for important support at 1800 though the prospects of failure here on a closing basis appear to have improved. If the index does indeed fail at 1800, look for subsequent support at 1777/1782 followed by another notable level at 1766/1769. Should the 1800 level hold on a closing basis, watch for initial resistance points at 1818/1822 and 1833/1835 followed by more significant overhead at 1845/1850. In the attached table, we touch on several individual issues in addition to key levels on which traders will focus. — Mike Ashbaugh, Briefing.com

Stocks to Watch : The futures are pointing to a moderately higher open as a number of companies are guiding higher….PeopleSoft’s (PSFT 25.16) surprise preannouncement and Oracle’s miss last month leads Goldman Sachs to conclude that enterprise application software is not as healthy as it had thought. Goldman is lowering estimates on a bunch of names…..Merrill Lynch’s Joe Osha says that it is now clear that the strength in Intel (INTC 30.03) business earlier in the qtr has dissipated which leads him to believe that OEMs are releasing unsold parts into the mkt; expects INTC to set the Q2 bar conservatively, with a rev target of flat to down 5%….A couple of retailers are guiding higher: Jones Apparel (JNY 34.23) expects to exceed previous Q1 earnings guidance of $0.62-$0.64 (consensus $0.62) while Skechers (SKX 18.91) expects to exceed Q1 EPS consensus by at least 25%….Hollywood Ent. (HLYW 17.08) is raising its outlook for Q1/FY02 based on strong improvement in same store sales….Salomon Smith Barney is downgrading Parker-Hannifin (PH 48.78) to Neutral from Outperform based on operational problems and a modest decline in end-mkt demand….S&P 500 futures currently 2.9 points above fair value, the Nasdaq 100 futures are 8 points above fair value while the Nasdaq 100 PMI is +5.06.. — Robert J. Reid, Briefing.com