Kmart Corp., the nation's No. 3 retailer, said Tuesday it plans to buy back as much as $1 billion of its stock.
Should investors follow suit, or shop elsewhere?
"This is exactly the kind of company we like to see repurchasing stock," said David R. Fried, a Malibu money manager and editor of the Buyback Letter ( 459-9196), which tracks corporate buybacks. "They're at least halfway through a turnaround and cash flow, profits and profit margins are starting to increase."
Kmart stock has surged from a low of just under $6 in early 1996, when Wall Street feared the company might be headed for financial ruin. After peaking last year at $20.88, the stock sank again last fall with the rest of the market, then rebounded.
It now trades at a price-to-earnings ratio (price divided by per-share earnings for the last four quarters) of about 16, well below the U.S. blue-chip average as measured by the Standard & Poor's 500 index.
On Tuesday, the stock rose 81 cents to close at $17.19 on the New York Stock Exchange.
"Management has articulated a good vision for the future," Fried said. "And the size of this announcement is impressive--about $1 billion for a company with a market cap of around $8 billion. More than 10% of the shares outstanding--that's a nice vote of confidence."
To revitalize its business, Kmart has spun off "superfluous operations" and built up its brand name with moves such as a Martha Stewart marketing tie-in, Fried said. "They're out of the danger zone. So far this management team is delivering on its turnaround."
In another big buyback announcement on Tuesday, Chicago-based Bank One Corp., the fifth-largest U.S. bank, said it will repurchase as much as 5.5% of its outstanding stock, worth about $4 billion at its current price of $61.13, over the next few years.
Fried's top picks among companies that have made recent buyback announcements or are already buying back shares include: OfficeMax Inc., the retail chain; Spartan Motors Inc., which makes chassis for firetrucks and other specialty vehicles; Ryder System Inc., the truck rental company; and Boeing Co., the aerospace giant.
"Value"-oriented investors--who seek to find shares underappreciated by the market--often use buybacks as a way to spot stocks with long-term potential.
But there's good reason to be careful: Though companies invariably say investors are unjustly neglecting their shares, management sometimes makes these announcements simply to hype its own stock, analysts warn. So investors would be wise to keep tabs on whether companies are following through on their buyback promises.
Research firm Birinyi Associates found that, between 1985 and 1995, only 44% of the 1,155 companies that announced share repurchases fully completed them. The study also found that an additional 343 buybacks were not publicly announced.
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Shopping for Value
Kmart Corp., which announced a major stock-repurchase program Tuesday, has seen its shares go on a wild ride since the start of 1998. David R. Fried, editor of The Buyback Letter, says now could be an opportune time for investors to jump in.
Tuesday's close: $17.19
Although Fried says he is encouraged by signs of a turnaround at Kmart, he gives his top ratings to these companies, which have announced or are undertaking stock buybacks:
Ticker Tuesday Projected 1999 3-to-5-year Company symbol close P/E* ratio projected EPS** growth Boeing BA $43.69 24 16% OfficeMax OMX 11.63 13 20 Ryder System R 25.88 12 11 Spartan Motors SPAR 5.25 9 4
*Price-to-earnings ratiobased on previous 12 months' earnings
**Earnings per share
Sources: Bloomberg News, Bridge