Weakness at Yum! Extends Beyond China
July 11, 2013
Global fast food player Yum! Brands (click ticker for report: ), owner of KFC, Taco Bell, and Pizza Hut, reported weak second quarter results Wednesday afternoon as the Chinese poultry scandal and an outbreak of avian flu weighed on the firm’s sales in China. The company’s revenue fell short of consensus expectations, declining 8% year-over-year to $2.9 billion. Earnings-per-share was even weaker, falling 16% year-over-year to $0.56 per share on an adjusted basis—slightly above consensus estimates. Year-to-date, free cash flow has totaled $257 million or 18% of revenue—a relatively strong number, in our view. The most obvious problem at Yum! Brands remains its China division, specifically KFC. If a tainted poultry scandal weren’t enough, the outbreak of avian flu in
Family Dollar’s “Upside” Surprise Wasn’t Great
July 10, 2013
Off-priced retailer Family Dollar (click ticker for report: ) reported stronger-than-anticipated third quarter results Wednesday morning, led by strong sales of consumables. Revenue at the discount chain increased 9% year-over-year to $2.6 billion, roughly in-line with consensus expectations. Earnings per share actually declined a penny to $1.05, but that figure was better than the consensus estimates which called for a steeper decline. Free cash flow stands at a negative $275 million year-to-date as the company invests heavily in expanding and renovating its store base. The company has engaged in numerous sale-leaseback transactions, so the increase in capital spending has not materially drained the firm’s coffers. Taking a closer look at the numbers, we can see that the quarter was not
Helen of Troy’s Solid Run Continues
July 10, 2013
Consumer products company Helen of Troy (click ticker for report: ) reported strong results for the first quarter of its 2014 fiscal year Tuesday evening. Revenue increased 1.4% year-over-year to $304.5 million, exceeding consensus estimates. Earnings per share advanced at a greater clip, growing 11% year-over-year to $0.82 per share on a non-GAAP basis, easily exceeding consensus expectations. Helen of Troy is one of the few names in the household products arena that trades at a discount to our fair value estimate, and the firm recently scored a rare 9 on the Valuentum Buying Index. On the cost side of the equation, Helen of Troy surrendered to a competitive retail environment, as gross margins declined 90 basis points year-over-year to
China Exports Suffer in June
July 10, 2013
Yet another bearish story came out of China Wednesday morning, this time dealing with negative trade data (shown right). Exports for the month of June dropped 3.1% year-over-year versus a consensus expectation of 4% growth. This compares to anemic 1% growth in May. Imports also fell 0.7% year-over-year compared to a consensus expectation of 8%. Without question, we think it’s safe to say growth slowed in China during May and June. (Image Source: The Wall Street Journal). Though these figures were decidedly bearish regarding the health of economic activity in China, Alcoa (click ticker for report: ) provided bullish commentary on the region just yesterday. In fact, management at Alcoa believes China will drive the lion’s share of global growth
Wolverine Worldwide Rides Acquisition to Strong Results
July 10, 2013
Tuesday morning, footwear company Wolverine Worldwide (click ticker for report: ) reported strong results thanks largely to the company’s acquisition of Collective Brands’ PLG brands in 2012. Valuentum subscribers may remember Collective Brands from the inception of our Best Ideas Newsletter—a position that returned 38% in less than one year—and featured several strong brands such as Sperry Top-Sider, Keds, and Saucony (dragged down by a weak Payless Shoes). Wolverine now owns those premium brands, which helped revenue increase 88% year-over-year to $588 million, roughly in-line with expectations. Excluding acquisition costs, earnings per share rose 10% year-over-year to $0.46, well above consensus estimates. With a new fleet of higher-margin brands, Wolverine’s gross margin increased 320 basis points year-over-year to 41%. Although
Alcoa Is Stuck in Neutral
July 9, 2013
Monday afternoon, industrial bellwether Alcoa (click ticker for report: ) announced solid second-quarter results. Revenue was down 2% year-over-year to $5.8 billion, a tad shy of consensus estimates. Excluding the impact of special items, earnings per share were up one cent year-over-year to $0.07, exceeding consensus estimates. Free cash flow declined slightly year-over-year to $228 million, or 4% of revenue. Engineered Products and Solutions (EPS) Image Source: AA Analyst Presentation Q2 2013 Yet again, Alcoa’s Engineered Products and Solutions business, its largest profit driver, was the standout performer for the quarter. After tax operating income (ATOI) hit a record level of $193 million, up 23% year-over-year, on revenue that only increased 3% year-over-year. The segment registered an all-time high in
Core System Sales Slowed at Intuitive Surgical
July 9, 2013
Shares of da Vinci surgical systems maker Intuitive Surgical (click ticker for report: ) fell in after-hours trading Monday afternoon after the company released weak preliminary results. Fiscal year 2013 second quarter revenue is expected to be 7% higher than the same period a year ago at $575 million—well below the consensus estimate calling for $630 million. Net income is expected to be marginally higher at $160 million compared to $155 million during the same period last year. This net income figure implies earnings per share in the $3.85-$3.87 range, well below consensus estimates calling for $4.29 per share. Management was quick to blame other parties, saying on the press release: “The slowdown in benign gynecologic procedures reflected a number
Fourth of July Weekend Highlights the New Norm for Disney
July 8, 2013
The recently passed Fourth of July weekend once again brought moviegoers several new films to watch. Disney (click ticker for report: ) and Comcast’s Universal (click ticker for report: ) went head-to-head with The Lone Ranger and Despicable Me 2, respectively. The results are in, and the clear winner was Comcast’s Despicable Me 2, which earned a record $142 million during its first five days. The Lone Ranger wasn’t even close, grossing $48.9 million over its first five days—a number that wouldn’t look so bad, except that the film cost Disney an estimated $375 million to create and market. An Uneven Track Record Although we like Disney’s future prospects–given its robust pipeline of films related to The Avengers and Star
Could TV Get Competitive?
July 8, 2013
Compounding worries that internet-based distribution will continue to eat away from traditional cable distributors, Intel (click ticker for report: ), DirecTV (click ticker for report: ), Time Warner Cable (click ticker for report: ), and Charter Communications (CHTR) are seeking deals to over-the-top (OTT) rights from programmers. This matters because OTT rights could give content distributors the ability to deliver TV shows via the internet rather than set-top boxes. If such a dynamic were to take hold, the TV business could become more competitive, as it would allow virtually every participant to offer services everywhere. Thus far, only Best Ideas Newsletter holding Intel has showed that it is serious about offering a broadband TV service, while the previously-mentioned companies are
The 10-year Treasury Yield Keeps Rallying
July 6, 2013
The 10-year Treasury yield jumped an impressive 22 basis points during trading Friday to end the session at 2.73%. We continue to monitor changes in this important benchmark rate because it impacts the decisions of income investors, the financial performance of equities levered to spread income (and often their book values), and the risk-free rate we use in our discounted cash-flow valuation models. US Generic Govt 10 Year Yield Image Source: Bloomberg The risk free rate we use in our valuation models is a weighted average of the long-term historical average of the 10-year Treasury and the current spot rate of the 10-year Treasury. We update the discount rate systematically across our coverage universe periodically when material changes warrant such
