United Continental and US Airways Troubled by Fuel Costs
July 22, 2011
United Continental (UAL) reported a second-quarter net profit of roughly $1.49 per share Thursday (net income fell 12%), excluding special items, with passenger revenue advancing over 10% compared to the same period a year ago – unit passenger revenue improved 9% from the prior year period. The airline continues to face the burden of rising fuel costs, as second-quarter fuel expense increased a whopping 45% on a year-over-year basis. Unit costs, excluding special items advanced over 11%, driving lower profits from the prior-year period. We view United Continental’s liquidity position as adequate, with $8.6 billion in unrestricted cash, cash equivalents and short-term investments on hand as of the end of the second quarter. We’re also quite pleased with the carrier’s continued
Honeywell Posts Strong 2Q Results, Raises Full-Year Guidance
July 22, 2011
Honeywell (HON) reported second-quarter results Friday that showed strong sales growth and solid earnings expansion. The firm’s top-line expanded 15% in the period (7% organic growth), while earnings per share jumped over 40% from the same quarter a year ago thanks to a 70 basis-point expansion of segment margins to 14.3% in the quarter. Despite the strong quarter, we are maintaining our view that Honeywell is fairly valued at this time in the mid $50s, low $60s per share. The key driver fueling the growth in the quarter was solid performance in the firm’s aerospace commercial aftermarket (up 21% in the period) reflecting strong spare sales and higher aircraft utilization rates. Total aerospace sales advanced 6% from the same period
Closely Watching McDonald’s for an Entry Point
July 22, 2011
This article appeared on Seeking Alpha. Please view disclosures: https://seekingalpha.com/article/280998-closely-watching-mcdonalds-for-an-entry-point We like McDonald’s (MCD): The Golden Arches’ future looks as bright as its past.There’s little need for us to explain to investors the story behind McDonald’s. At the end of 2011, McDonald’s will have over 33,500 restaurant locations nationwide, and total sales (including franchisees, which don’t count for McDonald’s Corp.) will likely exceed $100 billion. We think a discounted-cash flow method is the most effective way to determine the intrinsic value of a company in order to determine what investors should pay for shares. In the spirit of the transparency of our process, we make our discounted cash-flow valuation model template, which can be used to value any operating (non-financial) company,
Merck’s Shares Look Undervalued
July 21, 2011
A version of this article appeared on Seeking Alpha’s website: https://seekingalpha.com/article/280602-mercks-shares-look-undervalued As part of our process, we employ a discounted cash-flow model to arrive at a fair value estimate for every company within our equity coverage universe. In Merck’s (MRK) case, we think using a discounted cash-flow model is the best tool for valuation. We outline below our valuation summary for Merck and offer up our model template to investors if they are interested in using it to value any operating (non-financial) company they wish. This model template can be found at DCF Valuation Model Template. Valuation Summary We think Merck’s shares are worth $43 each based on our discounted cash-flow process. We’re forecasting revenue expansion in the low-double-digits for fiscal
AMR’s Second-Quarter Results: Good News for the Shorts
July 21, 2011
AMR Corp. (AMR), the parent of American Airlines, reported dismal second-quarter results Tuesday, as the rapid escalation in fuel prices pushed it into a deep loss during the period. Though revenue rose 8% from the same period a year ago, the company reported a net loss of $286 million, or $0.85 per share, which compares to a net loss of $0.03 per share last year. Due largely to its fuel-inefficient fleet, the carrier paid nearly 31% more in fuel costs during the period from last year’s quarter, amounting to an incremental $500 million-plus headwind. American’s mainline load factor fell 0.3 percentage points from the year ago period, suggesting that demand is not keeping up with capacity additions. We maintain our bearish
Are Boeing’s Competitive Advantages Waning? We Think So.
July 20, 2011
Michael J. Mauboussin, when working at CSFB in 2002, published an excellent piece on the concept of an economic moat. Warren Buffet is often given the credit of coining the term. Morningstar (MORN) and other research firms like Valuentum (via its ValueCreation rating) have embraced this compelling idea, embedding the concept in their research framework. In this article, we discuss whether we think Boeing (BA) has lost its moat, in light of the recent split-order of 460 planes from American Airlines (AMR). First of all, we think the market is completely misunderstanding the long-term implications of the recently announced and massive AMR order to replace its narrowbody fleet (which was split between Boeing and Airbus). Though receiving orders is, in itself, positive, this particular order comes at the expense of Boeing’s exclusivity with AMR — the carrier currently flies
Altria Reports Second-Quarter Results
July 20, 2011
Altria (MO) reported its second-quarter results Wednesday. Adjusted earnings advanced 6% from the prior-year quarter and are now on pace to increase 5.4% for the full year (its pace through the first half). Income from the firm’s cigarettes segment increased nearly 3% on an adjusted basis, with Marlboro delivering sequential retail share growth of 0.4 percentage points. Both Copenhagen and Skoal also showed improving market share in the period. Altria is not immune to economic malaise, as it indicated that the business environment for 2011 will likely remain challenging, as adult consumers face personal financial pressure and high unemployment. However, the firm reiterated its full-year guidance for adjusted earnings in the range of $2.01 and $2.07, which reflects growth of
AMR Likely to Split Massive Order Between Boeing, Airbus
July 20, 2011
This article appeared on Seeking Alpha. Please view disclosures: https://seekingalpha.com/article/280307-amr-likely-to-split-massive-order-between-boeing-airbus As we outlined a few weeks ago in “AMR’s Big Order to Pressure Cash Flow, Boeing in Precarious Position,” we indicated the increasing likelihood that AMR (which holds American Airlines) may split a massive $15 billion-plus order between Boeing (BA) and Airbus to replace its aging fleet of narrowbodies. This would represent a huge shift at the major carrier, as AMR currently flies all-Boeing aircraft. Verbatim from our July 1 report: Boeing is in a rather precarious position. Airbus has claimed all along that it will capture customers currently flying the 737 with its A320neo (new engine option), an upgrade to its A320 that has the option to sport more fuel-efficient engines. The
Best Idea Apple Reports Fantastic Third Quarter
July 19, 2011
Apple (AAPL) reported its fiscal third-quarter results after the market close Tuesday, and they were fantastic. The firm’s top- and bottom-lines exceeded both consensus and our expectations, and we continue to believe that there is further upside to the shares. We added them to our Best Ideas List June 17, a trading session before its near-term bottom at about $310 per share. The stock surged to over $400 per share during after-hours trading Tuesday, and we will continue to monitor its trading activity in the coming weeks to see if taking a slice of our position off the table may be warranted. We will update our subscribers before we take any action. Apple posted quarterly revenue of $28.6 billion and earnings per
Yield Outlook Deteriorates for Airline Stocks
July 19, 2011
This article appeared on Seeking Alpha. Please view disclosures: https://seekingalpha.com/article/280098-yield-outlook-deteriorates-for-airline-stocks As we had outlined in our industry primer for airlines, the yield (pricing) environment for the group is treacherous and remains under perpetual pressure. The International Air Transport Association [IATA] released its July 2011 Airline Business Confidence Survey. Importantly, the IATA commented on the outlook for yields, which we reproduce below: While both passenger and cargo transport businesses saw improving yield performance during the second quarter of 2011, the trend is flattening. With demand-supply conditions weakening and concerns that markets may not bear further fare/rate rises, prospects for yields over the year ahead look flat. With over 80% of respondents reporting increased input costs during Q2, clearly high fuel costs have
