Playtex pops; Hovnanian rises; Lyondell leaps; Digital Power spikes; Group 1, Sonic get eyed

By Ronda Fears

Memphis, July 13 - Battery maker Energizer Holdings Inc.'s purchase of hygiene product maker Playtex Products Inc. for $1.9 billion, including debt, was a tangible event that traders said spurred buying activity in several consumer-related sectors, but not all players were so ebullient amid falling retail and home sales.

Lyondell Chemical Co. got another big bounce on thinking that with the bidding war for Huntsman Corp. over, Access Industries will make a play for it. Rumors that Occidental Petroleum Corp. has sold its entire share stake in Lyondell to Russian-born billionaire Len Blavatnik's Access could lead to a deal announcement as early as Monday, by one trader's account. Even with the stock at a new high, he said "they could bring $55 to $60." The stock (NYSE: LYO) leaped by 48 cents, or 3.73%, to $41.16.

Hovnanian Enterprises Inc. shot up on rumors that famed investor Warren Buffett was establishing a position, which many think would signal a beginning of the end of the sector's slump as that is his general investment strategy. Traders said the idea sparked massive short covering in the group and other big gainers were Lennar Corp., Pulte Homes Inc. and Centex Corp.

Hovnanian (NYSE: HOV) added $1.98, or 11.96%, to $18.53. Lennar (NYSE: LEN) gained $1.26, or 3.59%, to $36.40. Pulte (NYSE: PHM) rose 83 cents, or 3.69%, to $23.31. Centex (NYSE: CTX) advanced $2.05, or 4.93%, to $43.67.

Other consumer product names related closely to the housing sector also were on the rise with that thought line implanted in the market's psyche, one trader added.

"If the housing slump is over, then all the product suppliers and home improvement type names will do better as well," he remarked, specifically mentioning Standard Pacific Corp. "I am not altogether convinced but there were a lot of buyers out today."

Black & Decker Corp. was one pulling back on concerns Friday that a 7% spike the day before, based on takeover rumors, was premature and perhaps highly unfounded. Merrill Lynch cut the stock to neutral from buy, saying the stock has reached its price target and, moreover, that a potential takeover did not make sense. The stock (NYSE: BDK) pulled back by $1.12, or 1.16%, to $95.21.

Other retailers also were getting attention as potential buyout candidates, such as TJX Cos. Inc. and Target Corp. Call option volume this week in TJX signaled the retailer may be in play, according to a trader on the West Coast. He said Target continued to gain on sentiment that activist investor William Ackman of Pershing Square Capital Management, which reportedly has taken a position of more than 5%, will be putting pressure on Target to boost stockholder value. Target (NYSE: TGT) added a dime to $70.14, following a 7% advance the day before. TJX (NYSE: TJX) gained 98 cents, or 3.42%, to $29.60.

Not everyone was so optimistic, however.

"I sold off every bit of retail paper I had into the rally this week," said a source at a big special situations shop in New York. Noting that June retail sales fell the sharpest in two years, he continued, "I do not believe that we are at the bottom of this cycle. Now, a year from now I might be a buyer again, but I think we are that far away from the trough."

He was just as skeptical about the housing slump reaching a bottom but said he sold out of that sector at the end of 2006.

Playtex, Energizer climb

Energizer is paying $18.30 per share in cash to buy Playtex - an 18% premium over Thursday's market - and said it may continue to look for other purchases.

Playtex (NYSE: PYX) gained $2.44, or 15.72%, to $17.96.

Energizer (NYSE: ENR) also advanced, adding 91 cents, or 0.85%, to $107.64.

St.Louis-based Energizer said it anticipates the Playtex acquisition will boost its fiscal 2008 results. Westport, Conn.-based Playtex reported sales for the last 12 months through March 2007 of $641 million.

Neil DeFeo, chief executive of Playtex, said Energizer offered a good premium. "For our employees, it means becoming a part of a much larger consumer products business with the scale and resources to thrive in an increasingly competitive environment," DeFeo said.

Energizer CEO Ward Klein said in the press release the companies have similar customers and distribution channels in the United States and Canada, adding the acquisition may lead to others.

Digital Power spikes

On remarks from Energizer that it may still be on the hunt for acquisitions, a trader saw big buying in Digital Power Corp., which makes switching power supplies and converters to industrial, telecommunication, data communication, medical and military industries.

Digital Power might not be a target for Energizer, he said, but the news sparked buying in the digital battery maker.

"This [Digital Power] was running with Energizer. I think it could run to $3 and above," the trader said. "They are making profit and could become a good play as mobile computing becomes the rage this fall."

Digital Power shares (Amex: DPW) shot up 43 cents, or 30.5%, to close at $1.84.

"I've been holding this one for a while and have seen little to no volume and little movement since late March," the trader said. "We got a big move today [Friday] on nice volume and that makes you feel a lot better."

Car dealerships hunt deals

The above trader also mentioned hearing chatter that Houston-based car dealership Group 1 Automotive Inc. is on the hunt for acquisitions, so he sees the weakness in the stock as a buying opportunity. He also sees the company as a possible takeover target by the likes of rival Sonic Automotive Inc.

"It makes a lot of sense that there is going to be more consolidation in the [car dealership] industry," the trader said, noting that both Group 1 and Sonic have been making acquisitions.

"Personally, I like Group 1 better, mainly because it's more under-valued in my opinion. I have a $45 target on that one. Sonic is closer to fair value as I see it, but still probably a good one to pick up."

Group 1 (NYSE: GPI) on Friday slipped by a nickel to $40.31.

Sonic (NYSE: SAH) lost 22 cents to close at $29.92.

The trader said there was chatter that Group 1 chief executive Earl Hesterberg, who came to the dealership in 2005 after sales stints at Ford Motor Co. and Nissan Motor Corp., has "a reputation for shaking the trees."

He's dumped six underperforming domestic car dealerships, bought others - including three import franchises in the United States and six in the United Kingdom that are expected to generate $303.1 million in annual sales - and improved the integration of the company's network.

"Now he's ready to buy more," the trader said, citing remarks from Hesterberg at an industry conference in Houston earlier in the week. "He supposedly said his target is to add $600 million in sales this year."

Jackson Hewitt hit onerous

Jackson Hewitt Tax Services Inc., despite trouble at the tax preparer and some hefty hits to the stock in recent months, could be a prime takeover target, by another buyside source's thinking.

The stock has been hit hard by a high-profile U.S. Justice Department lawsuit and subsequent Internal Revenue Service review, weak sales growth in the 2007 tax season, concern that one of the company's bank partners might pull its business and aggressive competition from H&R Block Inc.

But this buysider reckons that all the bad news has been priced into the stock and added, "Can any long thesis be complete without an LBO section these days?"

"In the case of Jackson Hewitt, I believe it's actually an intriguing possibility that the current valuation certainly enables a possible buyout," he said.

"With the stock now trading at a about 7.5x my estimate of fiscal 2008 EBITDA, I believe a deal could easily be done at $40, which would imply a multiple of about 9.6x fiscal 2008 EBITDA, which would be at the low end of deals being done today - involving companies with greater capital intensity and less predictable free cash flow, I might add.

"While a buyout certainly isn't integral to my thesis, it does help to demonstrate how inexpensive the stock currently is."

The stock (NYSE: JTX) lost 33 cents on Friday, or 1.1%, to close at $29.56.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.