Zacks Bull and Bear of the Day Highlights: Discover Financial Services, Kirkland's, Inc., Fastenal, Endo Pharmaceuticals Holdings and Medical Systems

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Apr 13, 2011, 09:30 ET

CHICAGO, April 13, 2011 /PRNewswire/ -- Zacks Equity Research highlights: Discover Financial Services (NYSE: DFS) as the Bull of the Day and Kirkland's, Inc. (Nasdaq: KIRK) the Bear of the Day. In addition, Zacks Equity Research provides analysis on Fastenal Co. (Nasdaq: FAST), Endo Pharmaceuticals Holdings Inc. (Nasdaq: ENDP) and Medical Systems (Nasdaq: AMMD).

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Here is a synopsis of all five stocks:

Bull of the Day:

Discover Financial Services (NYSE: DFS) first quarter earnings were substantially ahead of the Zacks Consensus Estimate. The growth in the loan loss reserve release as well as gains from the payments business drove the credit card sales volumes.

In addition, higher consumer spending and merchant acceptance also contributed to the increase. Recently, Discover also completed the acquisition of Student Loan Corp., which further enhanced its already strong student loan portfolio. The company's extensive network, sound capital position and cost containment initiatives will help accentuate growth over the long term.

Our six-month target price of $29.00 equates to 10.9x our earnings estimate for 2011. Given the expected annual cash dividend of $0.08, this price target implies an expected total return of 20.4% over that period. This is consistent with our Outperform recommendation on the shares.

Bear of the Day:

Kirkland's, Inc. (Nasdaq: KIRK) again reported weak fourth-quarter 2011 results with earnings of $0.70, which was 35.2% below the prior-year quarter. The company's susceptibility to the global economic downturn, coupled with stiff competition, severely undermines the company's future growth prospects and profitability.

The company expects comparable store sales to be flat or marginally negative for fiscal 2011. For the first quarter of 2011, the company expects sales to be in the range of $94 million to $96 million. Comparable same-store sales are expected to decline in the high single-digit range.

Our long-term Underperform recommendation on the stock indicates that it would perform well below the broader market. Our target price of $14.00, 11.3X 2012 EPS, reflects this view.

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Fastenal Beats Estimates

Fastenal Co. (Nasdaq: FAST) reported a profit of $79.5 million in the first quarter of 2011, up 42% from $56.0 million in the year-ago quarter. This translates into earnings of 54 cents per share, which has surpassed the year-ago earnings of 38 cents per share by 42.1%. Reported earnings also beat the Zacks Consensus Estimate of 51 cents per share.

Net sales for the quarter totaled $640.6 million, up 23% year over year driven by an improvement in sales to the company's manufacturing customers as well as non-residential construction customers of the company.

Fastenal's first quarter sales also exceeded the Zacks Consensus Estimate of $626 million. During the quarter, daily sales to the manufacturing customers increased 15.5% and that to the non-residential construction customers rose 17.7%.

During the quarter, Fastenal opened 37 stores, leading to a total of 2,522 stores as of March 31, 2011. The company intends to open 150 to 200 stores during 2011, which is equivalent to an annualized rate of 6.0% to 8.0%.

Fastenal recorded average store sales of $74,400 per month in this quarter versus $62,700 per month in the first quarter of 2010. The company aims to push its average store sales to $125,000 per month going forward.

Gross profit rose 25.4% to $333.4 million in the quarter from $265.9 million in the prior year. However, gross margin spiked marginally to 52.0% from 51.1% in the corresponding quarter of 2010.

Endo Pharma Buying American Medical

In a bid to diversify its business and bolster its urology portfolio, Endo Pharmaceuticals Holdings Inc. (Nasdaq: ENDP), a US-based specialty healthcare solutions company which develops branded products and specialty generics, will purchase American Medical Systems (Nasdaq: AMMD), a leading pelvic-health devices provider, for $2.9 billion or $30.00 per share in cash.

The offer price is 34% above the April 8, 2011, closing price of American Medical. The $2.9 billion consideration includes the assumption of a $312 million debt by Endo Pharma. The deal, expected to close in the third quarter of 2011, has been approved by the boards of both companies.

Endo Pharma anticipates the deal to be accretive to its adjusted earnings with immediate effect following closure. Moreover, the deal is expected to boost Endo Pharma's 2012 and 2013 adjusted earnings by $0.60 and $0.80 per share, respectively.

The merger is also expected to result in cost savings of at least $50 million by 2013. The synergies relate to procurement, manufacturing and selling, general and administrative costs. The merged entity is expected to end 2011 with revenues (on an adjusted basis) of approximately $3 billion. Following the closure of the deal, approximately 4,000 employees are expected to be employed in the combined company.

We note that the impending purchase of American Medical is the fourth major acquisition for Endo Pharma over the last one year. Endo Pharma completed three major acquisitions in 2010 to bolster its business. In December 2010, Endo acquired privately held generic company Qualitest Pharmaceuticals for $1.2 billion. During 2010, Endo Pharma also bought Penwest Pharmaceuticals Co. and HealthTronics Inc., a provider of urology products and services.

We believe that these acquisitions along with the impending purchase of American Medical are steps towards countering the loss of revenues due to the generic threat (especially to its lead drug Lidoderm) hanging over Endo Pharma.

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