Tuesday, June 13, 2006

Interesting Call of The Day - Hartmarx (AMEX:HMX)

Brean Murray's Gary M. Giblen is defending Hartmarx (AMEX:HMX) saying the shares appear to be pricing in a large 2Q06 miss and 2006 guide-down, which they conclude is not going to happen. In this vein, the analogy to the shares of Jos. A. Bank (JOSB), which have plummeted 35% since the company's poor results on June 8, is erroneous, in their analysis. Firm believes investors should buy now given 1) their distinct sense of pent-up institutional demand for HMX shares once 2Q06 is out of the way, 2) 2Q06 reporting date is only about two weeks away, and 3) six months of proactive cautionary management outlook given for 1H06/3Q06, which clearly has already caused short-term investors to exit.

HMX is now a "single-digit midget," trading at 9.5x P/E on already recently trimmed 2Q06 and 2006 estimates, which still reflect 16% YoY earnings growth. HMX is at a 30-35% discount to book value adjusted for the approximate value of the Hickey Freeman and Hart Schaffner Marx brands, which are not on the balance sheet because they were the basis of the 1879 founding of the company rather than acquired.

Menswear, particularly tailored and upper end as is Hartmarx's predominant focus, has been generally reported as strong; e.g., Phillips-Van Heusen recently beat 1Q06 expectations and upped its annual outlook. Hartmarx's No. 1 and 2 customers, Dillard's (20% of sales) and Nordstrom (11%), have reported strong recent quarterly and monthly results, and in fact have cited menswear as a top-performing category.

If HMX traded at the median comparable forward PEG of 0.95x rather than the bottom of the group 0.60x, it would translate to a P/E 16x and be in line with firm's $12 target price.

Notablecalls: Looks like a valid call.

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