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Published: May 28, 2010
Among the biggest winners in Friday's early
trading are Martek Biosciences (Nasdaq: MATK), Quiksilver (NYSE:
ZQK) and Krispy Kreme (NYSE: KKD).
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Martek Biosciences surges on Strong Results
“Firing on all cylinders.” That’s always the goal of very
company, and a boast that Martek Biosciences (Nasdaq: MATK)
can make right now. Cylinder one is a +14% jump in sales for the
company’s line of fatty acids that are used to boost the health
profile of infant formula and other foodstuffs. Cylinder two is
the company’s acquired Amerifit division, which sells health and
wellness supplements to major retail chains. Taken together, the
two cylinders fueled a +34% jump in sales. That robust report is
sending shares up +16% in Friday trading following release of
the company's second-quarter results after Thursday's close.
Annual sales for Martek had been stuck at around $350 million
for each of the last two years. But the combination of organic
and acquired growth should push sales up toward the $450 million
mark in the current fiscal year (October), and perhaps above
$500 million by next year. In recent months, the company has
made a big push into international markets, most notably in
China.
As an added kicker, Martek is conducting clinical trials in
hopes of proving that DHA, one of its primary fatty acids, is
helpful in reducing memory loss in senior citizens while also
boosting heart function. That could prove to be a fairly
substantial new market for the company.
Action to Take --> Martek
is set to boost profits roughly +20% next year to around $1.75 a
share. But that understates the company’s earning power. The
company is depreciating a large manufacturing facility in South
Carolina, and amortizing the Amerifit acquisition. Excluding
those non-cash items, actual
free cash flow could approach $2.50 a share. Even with
today’s pop, shares trade at just 10 times that figure. Shares
surpassed the $20 mark today, but could approach $30 once the
company’s growth drivers come into sharper focus.
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Quiksilver Delivers
As
we noted in our profile of the retail sector Thursday, it
pays to stick with those names that are pulling away from the
competition. There’s no need to chase struggling retailers
simply because their stocks are very cheap. We suggested
Kohl’s (NYSE: KSS) and Aeropostale (NYSE: ARO) as
examples of effective retailers that are boosting both the top
and bottom lines.
But you may also want to consider retailers that have little
top-line momentum right now, but hefty bottom-line momentum.
Surfer-focused retailer Quiksliver (NYSE; ZQK) fits that bill.
Sales are falling at a low single-digit clip, but rising gross
margins are pushing profits up at a fast pace. Quiksilver just
topped profit forecasts by a wide margin for the third straight
quarter, which is pushing shares up +10% on Friday.
Surf apparel is a very discretionary item, so sales are unlikely
to substantially rebound for at least another year or two. But
when they do, Quiksilver should be a profit machine: The
retailer earned at least $0.74 a share in fiscal (October) 2006,
2007 and 2008. And gross margins look even better now than they
did then. So don’t focus on the near-term, as Quicksilver is
unlikely to earn more than $0.30 a share in fiscal 2011.
Instead, look out to fiscal 2012 and 2013, when per-share
profits might rise +50% each year as the retailer finally
benefits from impressive sales leverage.
Action to Take --> From a
top-down view, there’s little to be excited about in retail at
the moment, so there’s no need to chase these rallying shares
right now. More than likely, shares are going to stay in the $5
range, and will only start to rebound later in the year when
employment numbers improve and retail stocks move back into the
fore.
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Krispy Kreme Continues to Re-Ascend
Roughly six years ago, Krispy Kreme (NYSE: KKD) was seen
as the next hot food chain. Shares hit $50 as analysts predicted
an ever-expanding store base and ever-rising same-store sales.
The first assumption seemed logical. But the second assumption
was clearly naïve, and as management continued to open new
stores at a rapid pace, over-saturation led to a steady decline
in same-store sales. Before long, the donut maker was reeling
under too much debt and too much
overhead.
By 2009, shares lost more than -95% of their value, down to
nearly $1, and many assumed that Krispy Kreme would need to
declare bankruptcy. At that point, the board brought in a
turnaround specialist to pare expenses, close
underperforming stores and re-build the tarnished brand. That
plan is working. Krispy Kreme just announced a $4.5 million
first quarter profit and a +3.6% jump in same store sales.
That’s helping push shares up nearly +9% in Friday trading.
The turnaround has taken place under the radar, as analysts no
longer bother to follow the food chain. But management is
pushing ahead in anonymity anyway, announcing plans to once
again start expanding the store base. Presumably, this round of
expansion will be more measured and sales and profits can grow
at a respectable pace. Right now, shares are fully valued at
more than 20 times projected profits, but as the expansion
strategy is more deeply articulated, growth rates may inspire
analysts to jump back on and talk up the “new growth story.”
Action to Take --> Better
to get a firm sense of the company’s specific store expansion
plans, and what that might mean for company profits a few years
down the road. Today’s gain probably captured most of the
near-term upside.
-- David Sterman
Staff Writer
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