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and Michael Hiltzik

Is There a Spring in Bed Bath & Beyond Shares? And What's in Medtronic's Chart?


Stock Exchange gives readers a chance to listen in as staff writers James Peltz and Michael Hiltzik debate the merits of individual stocks and other investments.

Bed Bath & Beyond (BBBY)

Jim: Let's start, Mike, with Bed Bath & Beyond. This is a chain of 150 or so superstores that peddle household accessories, everything from shower curtains to kitchen knives.

Mike: Sounds like one-stop shopping for Norman Bates. But Bed Bath & Beyond isn't exactly unique, right?

Jim: There's one other pure player--Linens 'n Things--but Bed Bath & Beyond faces scores of rivals in various categories, depending on what section of the store we're talking about. They include such giants as Wal-Mart Stores, JC Penney and Dayton Hudson Corp.'s Target and Mervyn's chains, to name just some.

Mike: But if you want everything under one roof....

Jim: Exactly. Bed Bath & Beyond has a great franchise. Its stores are big, and they carry a wide selection. Its prices are attractive, though it's not a discount chain by any means.

Mike: But it's not Bloomingdale's or Neiman Marcus, either.

Jim: That's right, and in recent years Bed Bath & Beyond has been well-managed and a model of consistency in terms of generating earnings growth at the same time it's been aggressively opening new stores. In fact, it recently reported a 31% surge in profit for the fiscal second quarter ended Aug. 30.

Mike: No question, its numbers sparkle. But your voice tells me that a "but" is coming.

Jim: I'm afraid so.

Mike: Spit it out.

Jim: This stock is a tough call. In a nutshell, I'm worried about the housing market and the economy. Bed Bath & Beyond has benefited nicely from the economy's strength in recent years and the related boom in new housing and sales of existing houses. All those trends send people to stores looking for new accessories. But I'm concerned that the economy and housing are headed for a slowdown, and that this stock will slip like someone stepping on a wet bar of soap.

Mike: Not me. I see this as a company that's going to benefit even if the housing market suddenly slows down. It seems to me that when people have to stay in their old houses, a lot will console themselves by buying new furnishings.

Jim: That's what people do when they're stuck in their houses?

Mike: Exactly. If they can't change their house, if they can't relocate, they gussy up what they do have.

Jim: But if the economy slows substantially or goes into an outright recession, people are going to worry about their job security and tighten their belts. They're going to put off redoing the kitchen or the bathroom.

Mike: But think about it: This company doesn't sell big-ticket appliances. They sell fairly inexpensive furnishings. We're not talking about putting in a Sub-Zero refrigerator, but rather about putting new curtains in the kitchen or new rugs in the bathroom.

Jim: Well, I can't challenge your theory, because Bed Bath & Beyond went public in mid-1992, about the time the country was coming out of its last recession.

Mike: Anyway, I don't see a major slowdown in the housing market looming ahead, mainly because we're still going to have low interest rates and mortgage rates.

Jim: It might not be major, but there will be a slowdown. And with investors already skittish about stocks in general, any sign of a drop in the housing market means this stock--which is trading around $23, or a lofty 33 times earnings, by the way--will take a hit. I like this company, but I'd want to revisit Bed Bath & Beyond in, say, six months before I'd consider buying the stock.

Mike: Let me make one other pitch for this stock. The company has virtually no long-term debt, despite its busy expansion. In fact, one might criticize it for not having enough debt.

Jim: That's a criticism?

Mike: Why not leverage the great franchise you mentioned? But I like the stock anyway, because its clean balance sheet is testament to very conservative management. That's not a bad profile when you're talking about chain stores.

Jim: But we've already seen what can happen if Bed Bath & Beyond comes up even a little short. Last June, when the company reported fiscal first-quarter profit that was just a tad shy of expectations, the stock got hammered. Then the whole market went south. The stock's been climbing again recently, but I worry that investors will turn on it again, fairly or unfairly.

Mike: And I would argue that any weakness in the stock will be a buying opportunity.

Medtronic (MDT)

Mike: For a change of pace, Jim, let's look at Medtronic.

Jim: Ugh. You couldn't resist that one, could you, since Medtronic is a pacemaker company?

Mike: No. And I think of Medtronic as a company for people who like eating well and don't like exercising. Ultimately, they can just carry a Medtronic device around.

Jim: Actually, Medtronic makes all kinds of pacemakers, heart defibrillators and other cardiac pacing devices, most of which are implanted inside the body. The company is the industry leader, with about 45% of the U.S. market.

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