New Plays At Toys 'R' Us

By Gene G. Marcial

The Pieces Are Worth A Lot
Toys have been a drag at, of all places, Toys 'R' Us (TOY ), which has 1,600 outlets worldwide. Wal-Mart Stores' (WMT ) march has cut into Toys. But despite its lackluster results in 2003, the stock has moved up from 10.37 on Nov. 19 to 15.26 on Mar. 24. Some pros say it's undervalued.

On a sum-of-the-parts basis, Toys is worth 27, says Mark Rowen of Prudential Securities (PRU ), who rates the stock "overweight." Toys' crown jewel -- Babies 'R' Us, with 199 stores -- had operating profits of $202 million in 2003. Toys could spin off Babies as part of a plan to unlock the value of its assets, says Rowen. Babies alone is worth 14 a share, he figures, based on the $227 million he sees it earning in 2004. Toys has hired Credit Suisse First Boston (CSR ) to develop a strategic plan that may include spinning off Babies and unloading other stores and real estate.

On Mar. 3, Toys sold 124 of its 146 Kids 'R' Us stores to Office Depot (ODT ) for $197 million. Lisa Myers of Templeton Global Advisors, which has a 6% stake, says that, despite hard times, Toys still produces huge free cash flow. Kara Cheseby of T. Rowe Price Group (TROW ), which owns 4%, thinks Toys will sell 100 U.S. stores and convert a further 50 into Babies stores, even if it were to spin off the unit. Gary Balter of UBS Securities (UBS ) figures Toys will earn 78 cents a share in 2004, vs. $1.09 in 2003. In 2005, he expects $1.12 (before a spin-off). He rates it a buy.

Note: Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

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