Expected Gains in Specialty Retail Stocks (ODP, OMX, SPLS, BKS, CSTR, BID, TSCO, TITN, PETM, LUX)

The universe of specialty retail stocks is not terribly large, measured either by number of companies or market cap. The entire sector has a market cap of about $310 billion, less than Apple Inc. (NYSE: AAPL) or Exxon Mobil Corp. (NYSE: XOM) alone. The companies represented in this group include pet supply stores, a bookstore chain, a DVD rental chain, office supply stores, a heavy equipment rental chain, an eyewear maker, and an auction house.

The companies we’re looking at include Office Depot, Inc. (NYSE: ODP), Office Max Inc. (NYSE: OMX), Staples, Inc. (NASDAQ: SPLS), Barnes & Noble, Inc. (NYSE: BKS), Coinstar, Inc. (NASDAQ: CSTR), Sotheby’s (NYSE: BID), Tractor Supply Co. (NASDAQ: TSCO), Titan Machinery Inc. (NASDAQ: TITN), PetSmart Inc. (NASDAQ: PETM), and Luxottica Group S.p.A. (NYSE: LUX).

Diversity aside, most of these stocks have very high implied gains, which means either that they are worth a second look or that there is no hope that any will ever hit their targets and that a lower target is soon to come. Which result will occur depends to a large extent on competitors in the same business, the overall economy, and whether consumers regain some of their lost confidence.

All data from Yahoo! Finance, with current prices taken at about noon today.

Office Depot, Inc. (NYSE: ODP) has a median target price of $4.00 from 13 brokers. Shares are trading today at $2.30, for an implied gain of $1.70, or 74%. Office Depot’s forward P/E is 28.5 and the company does not pay a dividend. The stock’s 52-week trading range is $1.75-$6.25, and at today’s price that’s about 31% above its 52-week low, posted earlier this morning, and 63% below the 52-week high.

Analysts didn’t expect much from Office Depot in the third quarter, and the company failed to deliver even that. EPS was break-even compared with an expected EPS of $0.01. Revenue also missed estimates. The implied gain in this stock is purely illusory when you consider its earnings and its immodest forward P/E.

Office Max Inc. (NYSE: OMX) has a median target price of $7.50 from 14 brokers. Shares are trading today at $5.10, for an implied gain of $2.40, or 47%. Office Max’s forward P/E is 7.39 and the company does not pay a dividend. The stock’s 52-week trading range is $3.90-$19.20, and at today’s price that’s about 31% above its 52-week low, posted earlier this morning, and 73% below the 52-week high.

Office Max reported that net income rose last quarter but revenue fell, as a result of cost-cutting measures. The company expects full-year revenue to be flat with last year. The company also plans to continue closing stores. There’s little long-term happiness in store for the company.

Staples, Inc. (NASDAQ: SPLS) has a median target price of $19.00 from 16 brokers. Shares are trading today at $14.69, for an implied gain of $4.31, or 29%. Staples’ forward P/E is 9.58 and the company pays a 2.8% dividend yield. The stock’s 52-week trading range is $11.94-$23.75, and at today’s price that’s about 23% above its 52-week low, posted earlier this morning, and 38% below the 52-week high.

Staples has been rumored as a possible buyer of either Office Depot or Office Max or both. The company’s market cap of $10.5 billion is about 10X the market cap of the other two combined, so such a deal is not out of the question. Staples’ target price is now lower than its 52-week high, a sign that analysts don’t expect a lot of growth. That could either spur the company to go ahead with an acquisition or cause it to sit on its hands.

Barnes & Noble, Inc. (NYSE: BKS) has a median target price of $15.50 from 4 brokers. Shares are trading today at $11.52, for an implied gain of $3.98, or 35%. B&N’s forward P/E is 33.87 and the company pays a huge 8.1% dividend yield. The stock’s 52-week trading range is $10.30-$12.65, and at today’s price that’s about 12% above its 52-week low, posted earlier this morning, and 9% below the 52-week high.

B&N is trying to keep up with Apple Inc. (NASDAQ: AAPL) and Amazon.com (NASDAQ: AMZN) in the e-reader/tablet market. The company is set to announce a new entrant in its Nook device family on Monday. Somehow, taking on the two biggest players in the market with a device that costs more than a comparable device from Amazon and has far less capability than an Apple iPad just doesn’t seem like a long-term winning strategy.

Coinstar, Inc. (NASDAQ: CSTR) has a median target price of $65.00 from 14 brokers. Shares are trading today at $47.35, for an implied gain of $17.65, or 37%. Coinstar’s forward P/E is 12.26 and the company does not pay a dividend. The stock’s 52-week trading range is $37.43-$67.56, and at today’s price that’s about 27% above its 52-week low, posted earlier this morning, and 30% below the 52-week high.

Coinstar has benefited from the recent beating of Netflix Inc. (NASDAQ: NFLX), as the company’s kiosk DVD rentals have become more attractive to customers who have defected from Netflix. The company had to raise its rental price by 20% — to $1.20/movie — to meet the higher fees demanded by media companies. But that rise was far short of the 60% bump Netflix imposed. Rising prices for content will continue to weigh on entertainment businesses like Coinstar and Netflix and increasing competition from Amazon and Wal-Mart Stores Inc. (NYSE: WMT) does not help either.

Sotheby’s (NYSE: BID) has a median target price of $51.00 from 6 brokers. Shares are trading today at $34.45, for an implied gain of $16.55, or 48%. Sotheby’s forward P/E is 10.92 and the company pays a 0.6% dividend yield. The stock’s 52-week trading range is $25.00-$55.67, and at today’s price that’s about 38% above its 52-week low, posted earlier this morning, and 38% below the 52-week high.

Sotheby’s is set to report earnings on Monday, and analysts are expecting an EPS loss of -$0.35 on revenue of $77 million. A recent art auction at competitor Christie’s failed to meet expectations and that has cooled enthusiasm for Sotheby’s shares. A recent spate of Chinese buyers has helped prop the art market, but a somewhat weaker Chinese economy is probably the main cause for the huge potential upside in the company’s stock.

Tractor Supply Co. (NASDAQ: TSCO) has a median target price of $77.25 from 18 brokers. Shares are trading today at $72.26, for an implied gain of $4.99, or 7%. Tractor Supply’s forward P/E is 21.45 and the company pays a 0.7% dividend yield. The stock’s 52-week trading range is $39.91-$74.51, and at today’s price that’s about 81% above its 52-week low, posted earlier this morning, and 3% below the 52-week high.

Tractor Supply operates about 1,100 stores in 44 stores and its target customer is the gentleman farmer. The company’s stock jumped on strong third-quarter results, and another good quarter is expected to follow. Although the implied gain here is relatively small for this group — and the forward P/E is quite high — the company’s fourth-quarter and full-year EPS consensus estimates have been raised in the last week and the next fiscal year is expected to be better than this year by more than 15%.

Titan Machinery Inc. (NASDAQ: TITN) has a median target price of $34.25 from 5 brokers. Shares are trading today at $23.93, for an implied gain of $10.32, or 43%. Titan’s forward P/E is 12.8 and the company does not pay a dividend. The stock’s 52-week trading range is $15.58-$32.03, and at today’s price that’s about 54% above its 52-week low, posted earlier this morning, and 25% below the 52-week high.

Titan beat revenue and EPS estimates for its quarter ending in July, but its full-year estimates didn’t quite hit the consensus estimates. Shares were beaten down to a new 52-week following the mid-September report and have had to claw their way back. The company continues to make acquisitions, and its cash position is strong, with $102 million in cash and equivalents compared with just $32 million in long-term debt.

PetSmart Inc. (NASDAQ: PETM) has a median target price of $50.00 from 15 brokers. Shares are trading today at $47.08, for an implied gain of $2.92, or 6%. PetSmart’s forward P/E is 16.23 and the company pays a 1.2% dividend yield. The stock’s 52-week trading range is $36.55-$48.57, and at today’s price that’s about 29% above its 52-week low, posted earlier this morning, and 3% below the 52-week high.

PetSmart recently raised its third-quarter and full-year guidance, noting that same-store sales should rise 5.5%-6%. That’s a nice boost from the earlier 3%-4% increase. EPS is now targeted at $0.46-$0.48, up from $0.41-$0.45. The stock has already priced these changes in, so unless the company blows out the quarter, it is not likely to jump much above its current target price.

Luxottica Group S.p.A. (NYSE: LUX) has a median target price of $34.55 from 2 brokers. Shares are trading today at $28.46, for an implied gain of $6.09, or 21%. Luxottica’s forward P/E is 16.92 and the company pays a 1.6% dividend yield. The stock’s 52-week trading range is $23.99-$34.43, and at today’s price that’s about 19% above its 52-week low, posted earlier this morning, and 17% below the 52-week high.

Luxottica is the world’s largest maker of eyewear, and makes its high-fashion glasses under licenses from the likes of Ralph Lauren, Chanel, and Prada. It is currently in negotiations with Giorgio Armani to take over the designer’s business next year from a smaller rival. The company is expanding in Brazil and China, two of the best performing economies around.

Paul Ausick