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Stock Analyst Update

The Week in Stocks: Apple Options Probe Deepens

Plus, Blue Nile shines, Avon slides, and Comerica ditches its money-management unit

Morningstar analyst Rod Bare provides an update on Apple's (AAPL) ongoing investigation of its option-granting practices. The company announced Friday that its investigation had found additional irregularities in the way it granted certain options a few years ago. Thus, Apple intends to restate its financial statements and is postponing filing its pending quarterly report until it corrects the problem. Bare isn't changing his fair value estimate in response to the news, though he cautions investors that the stock is likely to remain volatile until the underlying accounting issues are ironed out. As such, he advises investing in the stock only with a full margin of safety.
 Full Analyst Report: Apple

No Doom in Video Gamers Recent Results
Video game publishers Activision (ATVI), Electronic Arts (ERTS), and THQ  posted generally strong results this week. Activision reported better-than-expected sales and profits and raised its earnings guidance for fiscal-year 2007. For its part, Electronic Arts posted better-than-expected revenue on the strength of strong sales of its FIFA World Cup game. On a similar note, THQ also reported strong top-line growth, and management reiterated its forecast for the year. Though Morningstar analyst Norman Young found cause for optimism in these results, particularly in the companies' ability to work through a cyclical trough in the video game industry, he's leaving his fair value estimate for each company unchanged, as the results were more or less in line with his estimates.
 Full Analyst Report: Activision
 Full Analyst Report: Electronic Arts
 Full Analyst Report: THQ

Maintaining Whole Foods' Fair Value
Natural foods grocer Whole Foods'  revenue growth came in a tad light, and management's sales forecast was a bit disconcerting, However, Morningstar analyst Mitchell Corwin is maintaining the company's fair value estimate, as he thinks management is being overly cautious absent telltale signs that performance is slipping. Further, while management's forecast implies that comparable-store sales gains will be lower than expected in 2007, Corwin believes that the long-term growth story remains intact.
 Full Analyst Report: Whole Foods

Blue Nile Glimmers in Second Quarter
Online jeweler Blue Nile  reported exceptional second-quarter results as robust unit growth more than compensated for management's recent move to lower diamond prices. Total sales climbed 29.9% over the year-ago quarter. While management's price-cutting strategy took a toll on gross margins, which fell nearly 3 percentage points versus the year-ago quarter, it prevented overall operating margin deterioration by keeping operating expenses in check. Thus, operating margins sunk by less than 1 percentage point. Morningstar analyst Kim Picciola will be monitoring the company for signs of continued margin deterioration or slowing growth in the back half of the year. However, she still takes a shine to the firm's strategy, which continues to strike a prudent balance between brand-building in the nascent online jewelry market as well as maintaining a focus on profitability.
  Full Analyst Report: Blue Nile

Avon's Second-Quarter Results Not Pretty
As expected, Avon's  second-quarter results were ugly. While sales inched up 5% over the year-ago quarter, operating profit plunged 35% amid contracting operating margins, a $49 million restructuring charge, and $15 million in stock option expenses, among other factors. Nevertheless, Morningstar analyst Lauren DeSanto is leaving her $41 fair value estimate intact, because, despite the dismal results, management's efforts to take costs out of its system appear to be on track. DeSanto also notes continuing positive growth trends in Latin America as well as signs of growth in the potentially lucrative Chinese market. Yet, rising fuel prices continue to stretch Avon's core customer, meaning that Avon has a long road ahead to stabilize its North American business.
 Full Analyst Report: Avon

Strike Hurts Compass Minerals' Second-Quarter Results
Salt producer Compass Minerals International's (CMP) second-quarter results were weighed down by a strike at its Goderich, Ontario, mine, the largest in the world in terms of reserves. The work stoppage shaved 300 basis points from the company's gross margin, pushing earnings lower on a year-over-year basis. However, Morningstar analyst Parvathy Krishnan notes that price realizations have improved impressively, an encouraging trend given that price increases tend to be more lasting than fleeting events, like a strike. Krishnan also believes that the planned increase in capacity at Goderich will help to offset any productivity decline spurred by the work stoppage there. Therefore, she believes the company remains on solid ground and, thus, is leaving her fair value estimate unchanged.
 Full Analyst Report: Compass Minerals

FoxHollow Coughs Up a Profit
Fledgling medical-device maker FoxHollow Technologies  posted its first quarterly profit. Sales rocketed 68% from the prior year thanks to strong demand among physicians for the company's SilverHawk tools, which treat peripheral arterial disease. Efficiency gains and cost-management also provided a boost. Morningstar analyst Julie Stralow was impressed by the results and continues to expect a bright future thanks to a strong product pipeline, among other factors. As such, she's maintaining her fair value estimate.
 Full Analyst Report: FoxHollow

Jury's Ruling Wounds Kinetic Concepts
On Thursday, a jury found that Kinetic Concept's  wound-closure patents, while valid and enforceable, aren't being infringed by rival BlueSky Medical's similar product. As such, BlueSky will be able to continue selling its product and won't have to pay a royalty to Kinetic. Morningstar analyst Julie Stralow thinks the verdict may result in significant pricing pressure while emboldening new firms to enter the negative-pressure wound therapy market with similar products. As a result, Stralow has lowered the firm's fair value estimate significantly.
 Full Analyst Report: Kinetic Concepts

Comerica Ditches Its Money Management Unit
As expected, business bank Comerica sold its struggling asset management unit, Munder Capital Management, to an investor group. Since Morningstar analyst Jaime Black anticipated the sale, she's leaving her fair value estimate unchanged. Black doesn't see big downside to the deal from Comerica's perspective, as the Munder unit failed to gain traction due to poor performance and relatively low realization rates.
 Full Analyst Report: Comerica

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