Company Tags: Google (GOOG); Microsoft (MSFT); Office Depot (ODP); Staples (SPLS) Wal-Mart de Mexico (WMMVF); Medarex (MEDX);
11am ET…February 1, 2008 — Comment on Markets, Companies and Events in the News
Google TV…and 3-Position Builders
The morning news is dominated by the Microsoft (MSFT: $32.60) takeover of Yahoo! (YHOO: $28.66), setting the stage for the competitive environment in the online advertising industry. Google (GOOG: $564.30), however, already seems poised for the next generation of media…announcing on January 24th that it would file an application to bid on the 700-meghahertz spectrum being vacated by the television networks re-tooling to digital.
“Google has said it will bid for the so-called C Block of the auction which it could use to offer nationwide wireless broadband service that competes with digital subscriber line service and cable Internet access.” Google TV is only a matter of time. Meanwhile, one cannot help but think Microsoft was a little late in this move.
In this morning’s conference call, Microsoft CEO, Steve Ballmer, said the first overture to Yahoo! was made 18 months ago. Today’s development would have been bigger news 18 months ago…today, it merely reflects what was inevitable, but on a more fundamental level, it is an example of a big company moving too slowly.
There will come a time to buy Google…but not at $564 a share. Today, 32 analysts cover Google, all with a Buy recommendation. This is 7 analysts more than when Google closed north of $700 a share last month. In other words, 7 brokerage firms have been recommending the stock over the last 150 point decline in the stock. If Google’s stock closes below $500 a share, the next technical support doesn’t show up until $450 a share. That would be a buying opportunity, especially since more could go wrong for Google than right in the months ahead.
Three prior stocks are re-visited to provide position builders…Office Depot (ODP: $14.82); Wal-Mart de Mexico (WMMVF: $3.61) and Medarex (MEDX: $9.99). The office supply sector in general has been out of favor for the past year, plus cost-pressures due to expansions of the past have taken their toll on margins. At the same time, the continuing growth in the work-at-home market combined with cost-cutting measures should begin to improve operating margins and same store sales this year.
Within this sector, Office Depot appeared to offer the best value — Gross Margins at 30% are about the same as Staples (SPLS: $23.94) yet operating profit margins are half. As the cost-cutting implemented by CEO, Steve Odland, kicks in, his stated objective is to increase these margins to 7.5% from the current 4.5%. Perhaps the most compelling stat is the P/E, ODP sells for 9 times the consensus EPS estimate of $1.65 versus a multiple of 15 for SPLS. Even cutting that multiple difference in half, to 12, could produce a $20 stock price later this year, or sooner.
ODP is up 7.7 % since last week’s showcase vs. a 2.6% gain for SPLS. See Table Below.
The second position builder is Wal-Mart de Mexico. Wal-Mart USA owns the controlling interest in this Mexico City-based company, which represents 10% of Wal-Mart’s consolidated sales and about 20% of operating income. Working off a 27.2 million share short position in the weeks ahead should propel the stock price due to short covering.
Longer term, we’d envision Wal-Mart USA purchasing the minority ownership interests to make this a wholly-owned subsidiary. That’s the take-out strategy. The graph below shows that the stock hasn’t done much for the past year — and the ‘bet’ is that the combination of (i) covering a short position that the market doesn’t seem to notice (yet); and (ii) a buy-out by Wal-Mart USA will, together, move this stock to north of $5 in the months ahead.
Finally, Medarex has bounced back smartly from its FDA rejection last month. The short interest in this stock is a whopping 30% of shares issued. As better FDA-data is collected in this year’s first quarter, Medarex’ stock price could retrieve most of its lost ground (from recent high of $18/share) by the middle of the year…building a patient position in this stock might pay off.
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