Tuesday Losers: New York & Co., Pep Boys and Emulex

David Sterman's picture

Tuesday, June 8, 2010 - 11:26am

by David Sterman

Among the biggest losers in Tuesday's early trading are New York & Co. (NYSE: NWY), Pep Boys (NYSE: PBY) and Emulex (NYSE: ELX).

Top Percentage Losers -- Tuesday, June 8, 2010
Company Name (Ticker) Intra-Day Price Intra-Day
% Loss
52-Week High 52-Week Low
New York & Co.
$2.42 -26.2% $6.53 $2.26
Pep Boys (NYSE: PBY) $9.19 -14.4% $13.42 $7.76
Emulex (NYSE: ELX) $9.43 -2.3% $14.34 $7.94

*Table includes companies with minimum market capitalizations of $200 million and three month trading volumes of at least 100,000 shares. All percentage returns are listed as of 11:02AM Eastern Standard Time. Click on ticker symbols for up-to-the-minute price quotes and percentage gain data.

Emulex Deal: Grumbles Now, Smiles Later

Executives at Emulex (NYSE: ELX) can be faulted for bad timing. The company lined up an important deal, but right during a brutal market stretch, and it is now paying the price. The company's shares had fallen -3% on Friday, and another -4% Monday. After the closing bell on Monday, the company announced plans to acquire ServerEngines (and also slightly lowered profit forecasts), pushing shares down another -2% in Tuesday trading. Shares of Emulex are now down more than -30% in the past six weeks.

But as time passes, investors should realize that it’s a pretty savvy move. Emulex, which focuses on chips, servers and software used to tie disparate platforms together in data storage centers, has always sat on a lot of cash. Now, the company is putting it to use. To acquire ServerEngines, which focuses on Ethernet technology, Emulex will pay $78 million in cash, assume $25 million in debt, and issue shares worth roughly $80 million. After the deal, Emulex will still have $175 million in net cash.

Emulex had begun to lag rivals Qlogic (Nasdaq: QLGC) and Broadcom (Nasdaq: BRCM) as those companies invested heavily in R&D. ServerEngines, with 90% of its staff in R&D, quickly moves Emulex back into the game, and once the two firms’ technologies are integrated, should have a much broader suite of products for its data storage clients. (To break it down technically, ServerEngines excels in designing customized chips that optimize the balance of data between a bank of servers, known as blades).

Action to Take --> As with many of these deals, upfront integration costs will dampen profits in the near-term, but strengthen them by fiscal (June) 2012. After the sharp drop in shares during recent weeks, shares are now valued well below the ratios of the company's rivals. Now, it’s up to management to articulate how the company’s new technology platform matches or outpaces its peers. As that happens, and as the company can start to snag more high-profile wins, the valuations should move back up to the peers. Shares are likely to stay range-bound this summer, but as the growth outlook clarifies in a quarter or two, shares should rebound nicely.


New York & Co. Disappoints -- Again

It’s hard to be credible with investors when a company doles out bad news twice in a very short time span. When retailer New York & CO. (NYSE: NWY) released tepid quarterly results book value.

Management failed to specifically state its near-term profit expectations in late May, and they probably should have. Instead, they preferred to dole out a specific forecast two weeks later, and investors have had enough: a sharp sell-off this morning is pushing shares down nearly -25%.

Action to Take --> Shares now sell for well below book value. No matter. Value investors are unlikely to latch on to a company that lacks even basic forecasting skills. There is a sense that this retailer is in disarray, either in need of new management or a buyer. Regardless, stay away from these beaten-down shares.


A Modest Miss and a Big Drop

Who’s to blame: Manny, Moe or Jack? One of these Pep Boys (NYSE: PBY) may have had a hand in a modest quarterly shortfall that saw sales fall -1.5% below analysts’ forecasts. That revenue miss has yielded a -14% plunge in the stock this morning. Shares had already fallen -5% on Friday and another -5% on Monday. This is an unforgiving market where any bad news is being greeted with a pummeling.

This is a clear over-reaction. After all, consumers are only slowly moving back into car dealer showrooms, and most are hanging on to their cars longer and piling up the miles. That’s a secular tailwind in place for all auto parts stores. Pep Boys has been a sector laggard, but has made tangible strides in recent quarters in terms of improved gross margins and lower overhead. Prior to last night’s quarterly report, estimates had been rising steadily - especially for fiscal (January (2012). Analysts will likely trim forecasts a bit, but they’ll still likely be well higher than they were just 60 or 90 days ago.

Action to Take --> Despite the noise, Pep Boys is still poised to boost per-share profits this year around +30%, and see them rise another +30% next year to around $0.75. When investors are in a less fearful mood, they’re bound to re-visit this name, which is now back in its 2009 trading range, even though its cost controls and gross margins have greatly improved since then. As a final point, some believe the company’s real estate assets are worth around $800 million, far above the $500 million market capitalization.

David Sterman does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.