Morgan Keegan Downgrades Bed Bath & Beyond

Here’s the bearish case from Morgan Keegan:

We are lowering our rating to Underperform from Market Perform based on valuation and risks to near-term results. We are raising our fiscal year 2006 earnings-per-share estimate to $2.08, predominantly driven by the company’s announcement that it will complete its $400 million share repurchase in fiscal 2006.
Bed Bath & Beyond issued another predictable earnings report last night, although sales growth on a total and comparable basis missed our estimates. Bed Bath & Beyond reported third-quarter earnings per share of 45 cents, in line with our estimate and the company’s guidance issued Sept. 21.
Citing an “extreme” promotional environment, the company reiterated fiscal year 2005 earnings-per-share guidance of $1.89, in line with our estimate but two pennies below the current consensus estimate. The company issued initial guidance for fiscal year 2006, with the underlying assumptions producing earnings per share in the range of $2.08 to $2.10. The guidance is above our prior fiscal year 2006 earnings-per-share estimate of $2.03 but lower than the consensus estimate of $2.19.
The company will lap a tougher comparison in its February quarter, with same-store sales growing 5.1% in fourth quarter of 2004. We believe the discounters in general, and Wal-Mart in particular, could hurt Bed Bath & Beyond’s fourth-quarter results with their aggressive focus on a broader home assortment this holiday season.
Our discount cash flow (DCF) model indicates a fair value for Bed Bath & Beyond shares of $30. We expect the stock to trade down significantly in today’s trading session, but believe there will still be substantial downside potential. The stock closed at 20x our 2006 earnings-per-share estimate of $2.08.

Posted by on December 24th, 2005 at 3:57 pm


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