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.

Mike: Right, but they also have problems. At the top of the list: One of their competitors is fast gaining on them.

Jim: You must be referring to Guidant Corp., and it’s come on strong lately with new products that Medtronic doesn’t yet have, and via acquisitions. That’s not only given Guidant a market share of some 30%, it’s also stalled Medtronic’s sales.

Mike: Not exactly what Medtronic’s investors wanted to hear.

Jim: You got it. Before mid-July, Medtronic’s stock had jumped a handsome 27% for the year to date. But when its competitive problems forced Medtronic in early August to warn that its upcoming earnings would fall short, the stock plunged 10% in a single day.

Mike: Now, Medtronic continually claims to Wall Street that it’s got new products in the pipeline that will soon be out and help them recover their position in this industry. So the question is: Do you believe them? And even if you do, can they recover their lost market share?

Jim: The big product these days is a dual-chamber defibrillator. Guidant has had its version on the U.S. market for months, and it’s been a big seller. But on Monday, the government approved Medtronic’s version of that device. Medtronic now expects to start to recover its lost ground.

Mike: Boy, there’s a big “maybe.”

Jim: Even so, I believe Medtronic is a proven winner and that its new product will be well-received. Also, the population is aging fast.

The stock soared on Monday on news of the approval--up $6.06 to $57. It’s trading at about 40 times Medtronic’s expected earnings per share for its fiscal year ending next April 30. That’s well above the market’s multiple, but not out of sight for a high-tech medical company. And the stock is still 22% below its 1998 peak. I’d take the plunge.

Mike: Not me. A couple of factors complicate the issue--which often happens with companies that sell arcane products like dual-chamber defibrillators. How many investors want to own two or three manufacturers of dual-chamber defibrillators? Many want just one, so they’ll often try to pick one winner in such a sector, and they put all their chips on that player. In this case, I think they’ve been betting on Guidant.

Jim: And ignoring the market leader?

Mike: Medtronic has a lot riding on its new products. A lot could go wrong.

Now, it’s true that there’s been a lot of merging in the medical devices industry lately, and there probably will be more consolidation at a smart pace.

Jim: Not again!

Mike: Sorry. My point is: Where is Medtronic going to end up when the smoke clears?

Jim: I’ll tell you where: still dominant. They’ll probably be buying smaller operators to expand their product line, and that’s important, because their main customers are health maintenance organizations, or HMOs, that are constantly demanding lower prices for each item. So volume counts here.

Mike: If Medtronic buys companies with its stock, though, that would mean dilution of the shares and a short-term hit to its stock.

Jim: True. But that’s short-term. Long-term, this company still has a premier research-and-development team, and Medtronic’s big size means it can maintain a healthy R&D; budget to keep the pipeline full.

Mike: I would shy away from this stock. It’s been a good company. It’s had a great record. But there’s more risk accumulated in this stock than people realize. Medtronic is in an industry in which great benefits go to the company that’s leading the parade, and right now that’s not Medtronic.

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Do you have a stock you would like to see discussed in this column? Michael Hiltzik can be reached at michael.hiltzik@latimes.com; James Peltz can be reached at james.peltz@latimes.com. Or write to either at Business Section, Times Mirror Square, Los Angeles, CA 90053.

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Bed Bath & Beyond, Monday: $22.75

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Medtronic, Monday: $57.00