Kmart’s No Blue-Light Special; Agilent Ticker Symbol Says It All

Kmart (KM)

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Jim: Don’t buy

Mike: Don’t buy

Jim: I’m getting tired of this story, Mike. Here’s yet another big, lumbering retailer that’s going nowhere. Kmart, just like Sears and J.C. Penney, is restructuring itself yet again to try to get its earnings and stock price back up. To which I say: Good luck.

Mike: Stop whining, Jim. To me, Kmart today sort of defines the youth movement. For starters, it has a new, 40-year-old chief executive, one Charles Conaway. Also, one of the keystones of Kmart’s new strategy is an Internet site called BlueLight.com, which offers free Internet connections to customers willing to be pitched Kmart products.

Jim: I can tell when you’re being facetious. So please don’t say you like this stock.

Mike: Well, I like the stock the same way I like catfish.

Jim: What, with plenty of ketchup?

Mike: I’m just saying it’s hard to see how either one can swim any lower. Kmart today sells for about $7 a share.

Jim: Which is only about eight times its expected per-share earnings for this year. But that earnings estimate just might get lowered again, because last week Kmart said its second-quarter profit plunged 83% from a year earlier. What a mess for a company with $36 billion in annual sales.

Mike: This is a stock that sold for more than $20 a share seven years ago.

Jim: Look, Kmart darn near went out of business a few years ago. To its credit, it survived by upgrading its drab stores, and by improving the mix of apparel and other merchandise it sells. It also cut deals with people like Martha Stewart to sell their branded merchandise, and that helped lift this discounter’s low-brow image.

Mike: All the way to middle-brow. Now it has again hit a brick wall--and I can identify some of those bricks.

Jim: Go ahead.

Mike: Wal-Mart, Target, Costco. For Kmart, it’s getting really hard to drill through that masonry, and the numbers for July show it. Wal-Mart’s same-store sales--you know, sales for stores open at least a year--rose 7% in July. Costco’s were up 9%, Target 4%.

Kmart? Its sales rose just 2.8%, and they’re up a paltry 0.3% for the year so far. That’s on par with Sears, and I don’t mention Sears at random. The experience of walking into a Kmart has often been among the most depressing in retailing--second only to walking into a Sears.

Jim: Target, in fact, is a good example of why Mr. Conaway has his work cut out for him. Target has a broad selection of merchandise people want, low prices and decent ambience in its stores. It’s somehow even gotten this reputation as being cheap chic.

Mike: Yeah, when we talk about category killers--which is to say, big retailers that essentially take over a whole category of retailing--Kmart is the guy being killed.

Jim: I will say I like what I’ve heard from Conaway so far. He’s already replaced the No. 2 executive at Kmart, who ran things day-to-day, and he wants to emphasize more of the brand names like Martha Stewart that people recognize. He’s also trying to improve Kmart’s inventory controls and update its computer systems to make the company more efficient.

Mike: One of Kmart’s major problems is that it has had outdated technology, which can prevent it from keeping its most popular items in stock. That’s death for a retailer.

Jim: I must say, with the stock at $7 or so, I’m tempted to bet that Mr. Conaway will shape things up some, and give the stock a pop.

Mike: So, you’d buy it?

Jim: Tempted, yes. Seriously? No way. Kmart is not even a work in progress yet. It’s a work on the drawing board, with the exception of a couple of initial moves that we mentioned. I need to see some consistent, strong gains in its monthly sales before I’d buy. Now I know that some Wall Street analysts are even giving Kmart a “strong buy” recommendation based on just what they’ve seen so far, but they must be smoking something.

Mike: There’s also the question of whether this young CEO can handle the job. He came from running a drugstore chain, CVS Corp., but it’s only half Kmart’s size. So really he’s got about as much experience running a big company like Kmart as . . . well George W. Bush has running a big country.

Jim: So, you wouldn’t buy the stock either?

Mike: You’re asking me how I’m going to vote? At least Kmart has managed to make people stop wondering when it’s going out of business. And it might be a more interesting company over the next few years. But making any money with this stock will take a long, long time. And I’d say the smart move for Kmart shoppers is to wait.

Agilent Technologies (A)

Jim: Buy

Mike: Buy

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Jim: I’ll say right off that Agilent Technologies has one of the coolest ticker symbols in the business, because it’s so simple. I can just hear the traders on the floor of the Big Board: “What’s A doing today?” “I’ll take 10,000 A at 43!”

Mike: It’s like having a low lottery number in the military draft. But here’s what I like: This company has a name that tells you exactly what it does.

Jim: Sounds like you really took your facetious pills today. But you’re right: Who comes up with these ridiculous corporate names?

Mike: I believe Agilent hired corporate-name consultants to come up with this, and I’m sure they spent about a million bucks.

Jim: So why don’t you tell us what Agilent really does.

Mike: Agilent makes test and measurement equipment for the communications and electronics industries, and some esoteric products for the health-care and life-sciences industries, and some semiconductors. It’s all the kind of stuff engineers make and only engineers could love.

Jim: All of this used to be part of Hewlett-Packard. But that company, wanting to focus mostly on its computer products, spun off those lines to create Agilent last November.

Mike: In fact, you could almost say this company is Hewlett-Packard, because Agilent inherited all the businesses that derived from the original product lines that Bill Hewlett and David Packard started cobbling together in their legendary Palo Alto garage decades ago.

Jim: Some of our readers might remember that we reviewed Hewlett-Packard itself last year, and we said then that the company should be split up to give its investors a fatter payoff. Our timing was pretty good: A week later Hewlett-Packard announced just that.

Mike: For a while, investors also loved Agilent’s gadgets. After the spinoff, this stock went straight up, and it surpassed $150 a share early this year.

Jim: But then . . .

Mike: But then we had the wreck in tech stocks in March, and the post-March hangover that still hasn’t gone away. If you’d bought Agilent at the time of the spinoff, you still would have been nicely in the black as of a month ago, because the stock was still selling in the $70s.

Jim: But then . . .

Mike: But then Agilent came out with one of the more brutal, honest earnings forecasts you’ll ever see. God bless engineers, I always say--they paint things in black and white. Among other points, Agilent said profit wasn’t going to match what Wall Street expected in part because the company can’t get enough parts to build its gear. It also called its health-care results “unacceptable,” and Monday it slashed 650 jobs from that division to get its costs down.

Even so, I like this company and I’d buy the stock.

Jim: Me, too. There’s no indication that demand for most of Agilent’s products is slowing; quite the opposite, judging by the parts problem. The stock, having gotten hammered, now sells for a reasonable 37 times this year’s estimated per-share profit for its fiscal year ending Oct. 31.

Also, Hewlett-Packard recently distributed its remaining, controlling interest in Agilent, so all of that stock is now on the market and the threat of further dilution is gone.

Mike: Not only that, Agilent has almost no long-term debt.

Jim: So what we have is a company with a diversified line of products that customers want, a clean balance sheet and a stock that’s now attractively priced because the company is suffering temporary problems.

Agilent doesn’t have long-term fundamental defects. So I’d buy now while the getting’s good. Oh, and its ticker symbol is easy to remember.

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Write or e-mail with a stock you would like to see discussed in this column. Peltz (james.peltz@latimes.com) covers the markets and corporate financial trends. Hiltzik (michael.hiltzik@latimes.com) covers technology and entertainment and is the author of the book “Dealers of Lightning: Xerox PARC and the Dawn of the Computer Age” (HarperBusiness). Either can also be reached at Business Section, 202 W. 1st St., Los Angeles, CA 90012.

You can hear a preview of Peltz and Hiltzik’s weekly column Mondays on the KFWB-Los Angeles Times Noon Business Hour on KFWB-AM (980).