In today’s daily we have covered stock research on David Jones (SELL).

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The S&P 500 was down 3.82points or 0.19%on Tuesday.  The S&P 500 and Nasdaq ended lower, with biotech shares among the biggest drags after Federal Reserve Chair Janet Yellen raised concerns about stretched valuations in that area. In the monetary policy report accompanying her congressional testimony, Yellen said that "equity valuations of smaller firms as well as social media and biotechnology firms appear to be stretched."

The S&P Smallcap 600 Index trades at 26 times reported profit and the Nasdaq Biotechnology Index has a multiple of more than 500. The broader S&P 500 has a price-earnings ratio of 18, the highest level since 2010. Gold was down another $14 to $1,292 per troy ounce, it’s lowest in nearly a month. Gold fell $32 on Monday in its biggest one day drop this year. Pandora Media Inc., which trades at more than 160 times projected earnings, fell 1.2 percent. Facebook Inc. and TripAdvisor Inc., which rallied more than 98 percent in 2013, lost at least 1 percent.


Pandora Daily Chart (Source – Thomson Reuters)
 
S&P ASX 200was down by 0.1points on Tuesday and closed at 5511.3 points.Atlas Iron has announced the official opening of its Mt.Webber mine in WA’s Pilbara region. The official opening follows the start of mining activity in Dec 2013. Carsales.com Ltd (CRZ) has completed its investment in Stratton Finance which has been funded by existing cash reserves and non-syndicated debt facility. Fleetwood has appointed Bradley Denison as its managing director, he was the existing CFO and company secretary of Fleetwood.

Perpetual Limited announced its funds under management as at 30th Jun 2014 were $29.8 billion with net inflows of $0.2 billion for the quarter. Webjet has announced the acquisition of SunHotels Group which is a substantial online hotel provider in Europe.  Iron ore was up 0.1 per cent to trade at $US98.00 a tonne. Oil prices dropped by as much as $US2 due to rising Libyan supplies. Copper prices ended at $US7130 a tonne, up 0.14 per cent and bouncing off a two-week low of $US7078.25 hit earlier in the session. The top performer on the ASX 200 was Whitehaven Coal ending up 5.08%.


Whitehaven Daily Chart (Source – Thomson Reuters)

The top gainers on ASX 200 were:- 



Stock of the Day – David Jones  (DJS)

S&P Dow Jones Indices have recently announced that it will be removing David Jones (DJS) from the S&P/ASX 200, subject to the final court approval of the proposed scheme of arrangement under which the company will be acquired by Woolworths Holdings Limited. David Jones will be replaced by Greencross Limited  (GXL) in the S&P/ASX 200 after the close of trading on July 18, 2014.


DJS Financial Highlights  (Source – Company Reports)

Scheme meeting of David Jones was held in Sydney on 14^th July, 89.64% of David Jones shareholders were present and voting (either in person or by proxy). 96.81% of votes were cast in favor of the resolution. We are inclined to believe that Woolworths’s management suggestion that it’s a$130m synergy estimate is conservative. On private label, the higher price point and lower import duty on Australian apparel means that DJS should be able to generate a high gross margin at price points offering good value within an upper end Australian department store context.


DJS Operating Income (Source – Company Reports)

We do however think it could take a number of seasons for Woolworth’s private label to gain brand equity in Australia. Woolworth’s has included no gains from rationalization of store space in its synergies, this appears to be an opportunity given that DJS seems over spaced. We believe that the property value can be unlocked from the property portfolio given : A) The A$612 is a two year old valuation, excluding potential upside should the Market Street property be redeveloped from 11 floors to 20. B) Both the two Sydney and two Melbourne stores could be consolidated into one store in each city.


DJS Operating Income (Source – Company Reports)

The internet has lowered barriers to entry across the retail landscape and this is evidenced by relatively low sales growth reported by David Jones despite a resurgence in consumer confidence and rising house values. We expect competition for discretionary consumer dollar will rise as the market increasingly fragments with international retailers looking to enter the Australian market, utilizing online and limited show case store networks. We put a SELL recommendation on the stock at the current price of $3.98.
  

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