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Author: tennjed33 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 40  
Subject: Discount Not Large Enough Date: 8/18/2004 9:37 AM
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http://www.thestreet.com/_yahoo/comment/realdeal/10178831.html?cm_ven=YAHOO&cm_cat=FREE&cm_ite=NA

Back-to-school is the second most important shopping season behind the year-end holidays. Even so, that doesn't necessarily mean that now is the right time to load up on the stock.

Sure, Federated is one of the best-managed department-store retailers out there. Its shares have become cheaper, too. They have lost more than 10% of their value since I last highlighted the company on June 16, when I advised against buying the stock. Shares are now down nearly 6% for the year, underperforming the 3.5% decline in the S&P 500.

Retailers in general, though, and Federated in particular, face some pretty big challenges ahead. Tougher comparisons against a successful retail environment last year is one of them. And while a strong balance sheet, good cash flow and sizable repurchase plan may provide support for the stock, its current valuation is still not that compelling, given the outlook. Federated trades at a P/E ratio of 11.7 times this year's consensus earnings-per-share estimate of $3.80, slightly below its long-term average of 12.5.

...

Although personal disposable income is still rising and should improve if the jobs picture brightens, the fiscal and monetary stimulus that boosted consumer spending last year is largely absent in the second half of this year. Higher interest rates have already slowed the torrid pace of mortgage refinancings, and there's no tax relief this year to help either. It was in the third quarter of last year that many households began receiving their $400-per-child tax credit checks.

...

Even so, investors can take much comfort in Federated's improved balance sheet. The company took a 20-cent hit to second-quarter earnings to retire $273 million in long-term debt bearing 8.5%. This will reduce quarterly interest expense by almost $5 million, or about 2 cents per share after tax. The company ended the quarter with a long-term debt-to-capital ratio of just 34.8%, down from 36.9% last year.

In addition, in late July Federated announced a whopping $750 million increase in its share repurchase authorization (bringing the total to about $1 billion), and said it expected to spend $700 million to $900 million of it this year alone. Through the second quarter, Federated had spent just $351 million. This announcement also served to dispel fears that Federated was eyeing a large acquisition.

There's certainly plenty to applaud with Federated. And although the valuation has gotten modestly more interesting, it's hard to find a compelling reason to jump on the shares right now, given the more challenging retail environment.

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