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“Crossing Wall Street” Market Review Urges Caution

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Take Advantage of the Drop in BBBY

On Wednesday, Bed Bath & Beyond (NYSE:BBBY) reported fiscal Q2 earnings of 98 cents per share which was four cents below Wall Street’s estimate. If you recall, when the previous earnings report came out in June, the company warned investors that Q2 earnings would range between 97 cents and $1.03 per share. At the time, Wall Street had been expecting $1.08 per share, so the stock got chopped for a 17% loss the next day.

So Bed Bath & Beyond’s warning was accurate. Interestingly, net income fell by 2.2%, but earnings-per-share increased from 93 cents to 98 cents per share thanks to fewer outstanding shares. BBBY seems to be one the few companies that truly reduces their share base. Total revenue rose 12.05% to $2.593 billion. The key retailing metric, comparable store sales, rose by 3.5%, which is a decent number.

The problem with Bed Bath & Beyond right now is that the company has become overly reliant on discount coupons in order to get people in the door. That’s fine during a recession when there’s a lot of pressure on you to clear out your shelves. But now that the economy isn’t so dire and the housing sector is showing some tentative signs of recovery, they need to have greater pricing power.

Bed Bath & Beyond’s net profit margin dropped from 9.91% for last year’s second quarter to 8.65% for this year’s Q2. Put it this way—a falloff in margins like that turns a sales increase of 14.57% into an increase in profits of 0%. It’s hard to fight against the discounting tide.

But the most important news was the forecast for Q3 and the entire year. Bed Bath & Beyond sees Q3 earnings ranging between 99 cents and $1.04 per share. The Street had been expecting $1.02, so it was still within range. The company kept their full-year guidance the same, between the high single digits and the low double digits. Investors, however, reacted very negatively, and the stock dropped nearly 10% on Thursday.

While I’m concerned about the company’s overuse of coupons, I still like BBBY a lot. They overcame the housing bust, which was much more serious than this. To reflect the selloff, I’m lowering my Buy Below on Bed Bath & Beyond to $67 per share. This is a very good company.

Oracle Is a Good Buy

After the closing bell on Thursday, Oracle (NASDAQ:ORCL) reported fiscal Q1 earnings of 53 cents per share, which matched Wall Street’s forecast. Personally, I was expecting much more. This was a decent increase from last year’s Q1, when Oracle earned 48 cents per share. The trouble spot was on the top line. Oracle’s sales fell by 2% to $8.18 billion, which was $230 million below the Street’s forecast.

Like a lot of companies, Oracle got dinged by currency costs. The strong dollar puts the squeeze on all that money flowing back to the United States. Oracle said that adjusting for currency cost them three cents per share in earnings.

The good news is that Oracle’s licensing revenue rose by 5% last quarter. This is important because it’s probably a good sign of future revenue. Unfortunately, this growth is a slight drop-off from the 7% rate in the previous quarter. Still, Oracle’s CFO said “we’re off to a good start in the new year,” and I have to agree.

On the conference call, Oracle said it expects Q2 earnings ranging between 59 and 63 cents per share and sales growth of flat to 4%. The Street had been expecting 61 cents per share and 4.7% growth. So the outlook was mostly within expectations. I think traders were nervous about this earnings report, as shares of ORCL pulled back on Wednesday and Thursday, but these numbers allay any worries I had. Oracle is a very solid buy up to $35 per share.

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