Event: On Monday Wall Street firm, Oppenheimer downgraded shares of Bed Bath & Beyond (BBBY) to perform from outperform. The analyst following the company cited concerns about key product cycles nearing an end including sales of single cup coffee machine, Keurig – a big seller for Bed Bath & Beyond. In addition the analyst expressed concern over future discounting and use of coupons to drive traffic at stores. Shares fell on Tuesday by more than 3% on the news, but are still up 18% since the start of the year. On Wednesday after the market closes the company reports results for the quarter ending August 31, 2012.
Analysis: The downgrade of the stock appears to be a bit of a reach. While it is true that Keurig sales may have reached a peak, the company could experience an upswing thanks to unexpected growth and enthusiasm in the domestic real estate market. Supporting that growth is the Federal Reserve’s QE Infinity program. Analysts expect profits to grow by 10% from the current fiscal year ending February 28, 2013 to the next. Those estimates are likely to be conservative not to mention the company has exceeded estimates in each of the last 4 quarters. The consumer is holding strong despite concern to the contrary. Shares of Bed Bath & Beyond trade for 15 times current fiscal year estimated earnings.
Action: Look for Bed Bath & Beyond to exceed estimates when it reports after the bell on Wednesday. I would own a call option on this one using Tuesday’s share price drop as a buying opportunity.