Analyst Picks and Pans

Analyst Picks and Pans: Kohl's, ITW, Hospital Stocks


Kohl's Corp. (KSS)

Thomas Weisel Partners upgrades to overweight from marketweight

Thomas Weisel Partners analyst Liz Dunn said on June 1 that Kohl's is selling compelling merchandise at great prices.

"By focusing on offering value up front," Dunn said, "they (Kohl's) are giving customers an incentive to buy at the planned promotional price and have significantly less clearance to work through at the end of the season."

Kohl's has seen weaker competitors close stores and has been able to gain market share, Dunn said, especially from Mervyn's bankruptcy. Kohl's plans to open 36 stores acquired out of Mervyn's bankruptcy liquidation, Dunn said, and many of the stores are in new markets for Kohl's. "The stores will open in the fall and are expected to open quite strongly," Dunn said.

Kohl's has been posting declines in same-store sales, or sales at stores open at least one year. But those declines are less than what competitors like Macy's Inc. (M) and J.C. Penney Co. (JCP) recorded, which indicates Kohl's is gaining market share from its rivals.

Meanwhile, Dunn said Kohl's is focusing on cutting costs, but still hasn't laid off employees, nor does it appear Kohl's has plans to do so.

Illinois Tool Works Inc. (ITW)

Credit Suisse upgrades to outperform from neutral

Shares of Illinois Tool Works have declined to appealing levels and the company appears well-positioned for both stronger profit as well as acquisitions at bargain-basement prices, said Credit Suisse analyst Jamie Cook on June 1.

Cook said in a client note that the current share price provides "an attractive entry point for investors in one of the highest quality, shorter cycle industrial names." Since Oct. 12, 2007, stock in the Glenview, Ill., industrial products maker has fallen 52 percent. Meanwhile, profitability is rising.

"Margins are expected to double from 5% in the first quarter to 10% to 11% in the fourth quarter reflecting restructuring benefits, stable markets and less acquisition headwind," Cook wrote.

She also called the company a "skilled acquirer," adding that with "a 24.5% net debt to capital ratio and forecasted free cash flow north of $1 billion for the year, (Illinois Tool Works) will use this downturn to buy good assets at trough valuations."

Acute-care hospital stocks

Deutsche Bank upgrades sector view to positive from neutral, raises ratings on four stocks

Deutsche Bank analyst Darren Lehrich upgraded his outlook for acute care hospitals on June 1, citing the prospects for health care reform, better industrywide expense control, and a slowdown in bad debt growth.

Separately, Lehrich boosted his rating for Community Health Systems Inc. (CYH), Health Management Associates Inc. (HMA), LifePoint Hospitals Inc. (LPNT), and Tenet Healthcare Corp. (THC) to buy from hold. He reaffirmed a buy rating on Universal Health Services Inc. (UHS).

"Despite recent strength in hospital stocks, we believe the sector still has compelling upside from current levels," he said, citing better efforts at controlling labor costs and a relatively stable mix of patients and income. The latter has helped mitigate bad debt, which is the amount of debt a hospital incurs from treating uninsured or underinsured patients and has been unable to collect.

"One critical component of our sector upgrade relates to our belief that traditional fundamental investors may become drawn to the sector based on the secular theme of health care reform," he said. The ultimate outcome of any reforms, including near-universal health coverage, should benefit the hospital industry, he said. He expects major legislation on the issue this year.

Still, one of the biggest risks for the industry remains bad debt, he said, considering the unpredictable unemployment situation and recession.


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