The Zacks Analyst Blog Highlights: Hewlett-Packard, Sears Holdings, J.M. Smucker, GameStop Corporation and Amazon.com

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Aug 19, 2011, 09:30 ET

CHICAGO, Aug. 19, 2011 /PRNewswire/ -- 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: Hewlett-Packard (NYSE: HPQ), Sears Holdings (Nasdaq: SHLD), J.M. Smucker (NYSE: SJM), GameStop Corporation (NYSE: GME) and Amazon.com Inc (Nasdaq: AMZN).

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Here are highlights from Thursday's Analyst Blog:

H-P Reports, Plans to Sell PC Biz

A funny thing happened on the way to tech giant Hewlett-Packard's (NYSE: HPQ) fiscal 3rd quarter 2011 earnings report, which was supposed to have come out after the closing bell Thursday. When reports leaked that H-P was planning to spin-off its PC business and was seeking to purchase British-based software firm Autonomy for $10 billion, this forced the company to report earlier than expected.

Confirmed by Hewlett-Packard was that it is indeed spinning off its entire PC business -- on both the Consumer and Enterprise sides. This marks a ground-shifting reversal for the company, which in 2002 became the biggest player in the PC market with its purchase of Compaq. H-P also said it will be doing away with its webOS business.

Oh, and by the way, H-P posted adjusted earnings of $1.10 per share on revenues of $31.2 billion in the quarter, beating the Zacks Consensus Estimates of $1.09 and $31.1 billion, respectively. H-P also lowered its full-year revenue guidance from $129-130 billion down to $127.2-127.6 billion.

In another bloody day of regular trading, HPQ shares tumbles roughly 6%. After hours, the sell-off continues -- the shares are down another 2.4% as of the writing of this article.

CEO Leo Apotheker appears to be focused on increasing profit margins by both selling off the company's PC unit and its pursuit of Autonomy, which specializes in Enterprise-side information management software. While profit margins in the PC business remain in the mid-single digits, H-P's Enterprise business sees 15% profit margins. The company expects the spin-off will take place within the next 12-18 months.

Inflationary Pressures & No Jobs

We have a range of economic data on the docket today, from jobs and inflation to housing and leading indicators. And Europe is again in the news for the all the wrong reasons. With Europe's leaders unable to come up with anything other than band-aid solutions, we'd better get used to Europe as a recurring source of headline risk.

Europe's problems have the potential to pose a systemic challenge to the U.S. economy. But I don't think we will reach that stage. The common currency project is way too important to the German and French economies. Sooner or later, they will have to get behind proposals for further fiscal integration in the Euro Zone. Short of some measure of fiscal federalization that would make Germany in effect back-stop the entire debt issue, it is inconceivable that the current fears will go away.

The debt problem on this side of the Atlantic is no less dire. But we know that a long-term solution to the U.S.'s problem lies in robust economic growth. But the near-term picture remains uncertain and at best provides for sub-par growth. This morning's data provides for more of the same, both on the CPI as well Jobless Claims fronts.

The CPI number was a tad hotter than expected on the headline basis, but the 'core' number was about inline with expectations. Given the broader decelerating trend in the economy and the recent pullback in commodity prices, inflation will likely have less staying power than would otherwise be the case. However, persistent 'hot' CPI readings will make it difficult for the Fed to contemplate further quantitative easing, even if it is inclined to go that route.

I am not terribly concerned about the CPI number, but I must concede that the Jobless Claims report turned out to be quite disappointing. Weekly Jobless Claims increased by a greater than expected 9 thousand for the week to 408 thousand. The prior-week's tally was revised upwards to 399 thousand. The relatively more stable 4-week average dropped by about 4 thousand last week to almost 403 thousand.

It is clearly disappointing to see the weekly claims number jump back above the 400 thousand level where it has remained consistently since April, except for one week. The only saving grace -- and I am really trying hard here -- is for the prior-week's number to stay below the 400 thousand level despite the upward revision. In absolute numbers, the extent of the 'miss' is not by much, but the change in direction is worrying.

The overall tone of this morning's earnings reports is also on the negative side. We got weaker-than-expected results at Sears Holdings (Nasdaq: SHLD), as the retailer continued to struggle in its ongoing efforts to align its business model to the tough retail environment. J.M. Smucker (NYSE: SJM) came out with better-than-expected recurring earnings, but fell short of revenue expectations. The maker of Folger's coffee and Jif peanut butter continued facing margin pressures on account of high green coffee prices.

GameStop Reports Weak Q2

Weak schedule of new software title releases and lower sales made GameStop Corporation (NYSE: GME), the video game and entertainment software retailer, to post soft second-quarter 2011 results.

The quarterly earnings of 22 cents a share came down 15.4% from 26 cents earned in the prior-year quarter. However, the earnings were a penny ahead of the Zacks Consensus Estimate.

According to the market research firm, The NPD Group, the gaming industry appears to be the latest victim of the recent economic turmoil in the U.S.as the industry contracted by 26.0% in the month of July. Further, July's decline marked the industry's third-straight month when sales of video games' software, hardware, and accessories in the U.S. shrunk in double digits.

The Zacks Consensus Estimate came down by a penny prior to the earnings release due to downward revision in the estimates made by 5 out of 17 analysts covering the stock in the last 30 days. None of the analysts have raised their projections.

Management Guided

Moving forward, for the third quarter of 2011, GameStop anticipates comparable-store sales to be in the range of 2% to 4%. GameStop expects earnings in the range of 38 cents to 41 cents per share.

For fiscal year 2011, the company stood by its earlier guidance and anticipates earnings in the range of $2.82 to $2.92 per share, reflecting an increase of 6.4% to 10.2% over the last fiscal.

GameStop trimmed its fiscal 2011 comparable-store sales guidance. The company now expects comparable-store sales to increase in the range of 1.0% to 3.0%, reflecting a revenue growth of 4.5% to 6.5%. Earlier the company forecasted a 3.5% to 5.5% increase in comparable-store sales.

Investment Rationale

GameStop, which faces stiff competition from Amazon.com Inc. (Nasdaq: AMZN), is well positioned to benefit from the gaming products and PC amusement software market. The company follows a strategy of store extensions in productive regions and offers the largest collection of games.

Further, GameStop is a significant player in the used gaming products market. The company provides a wide array of used video game products for both current and previous generation platforms. In addition, the market for these products has been resilient to the recent economic downturn.

Moreover, GameStop recently completed the incorporation of GameStop Impulse on its website. In recent times, there has been a sharp rise in consumer spending on digital download, mobile gaming apps, social network games and used games. In such a scenario, GameStop Impulse will help the company to strengthen its foothold.

Going forward, with the increasing demand for online social gaming, the video game industry is marking changes in business dynamics. Moreover, the social gaming market is witnessing healthy growth due to its social and interactive environment compared with the conventional platforms.

However, the decrease in new game releases, deferred discretionary purchases and pricing pressure might dent results for the company. Further, the recent technological advancements have made the industry highly aggressive as buyers now have multiple options to obtain video game accessories and softwares for gaming systems and computers.

Currently, we have a long-term Neutral rating on GameStop. Moreover, GameStop holds a Zacks #3 Rank, which translates into a short-term Hold recommendation, also correlates with our long-term view.

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