Brian Nelson

Kellogg’s Cutbacks Coming Home to Roost; Posts Weak Third Quarter and Outlook

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Kellogg (K) reported poor third-quarter results Thursday that showed significant operating-profit declines. We were disappointed by the quarter and even more with the firm’s outlook, but we think our fair value estimate adequately captures the downward revision. We are staying pat at a $48 per share fair value estimate. The firm’s revenue advanced 5%, with internal growth at 3% in the quarter. Sales in North America jumped 4% led by its frozen foods business (its cereal business was flat in the quarter). Kellogg’s international business also did quite well, expanding roughly 7% from the same quarter last year. The firm noted that Latin America is building momentum, with internal net sales growth in the region coming it at 9% during the … Read more

A Tale of Two Teen Retailers: Abercrombie & Fitch, Aeropostale

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On Thursday, Abercrombie & Fitch (ANF) and Aeropostale (ARO) reported third-quarter sales. The resulting stock price performace from the two was completely opposite: Abercrombie fell sharply, while Aeropostale shot up significantly. We think Abercrombie now represents a bargain under $59 per share, but we are waiting for the technicals to firm before diving into the shares in the portfolio of our Best Ideas Newsletter. We think Aeropostale is fairly valued, even after the big move. Let’s dig into the reports of both of the companies. Abercrombie was weighed down by poor results in Europe, Japan and Canada, with the company noting negative comps for its flagship stores in the regions. Though by itself, such news wouldn’t cause the massive 20%+ price … Read more

Qualcomm Reports Strong Fiscal Fourth Quarter on Proliferation of Smartphones

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On Wednesday, Qualcomm (QCOM) posted solid fiscal fourth-quarter results that showed record revenues, earnings, and MSM (Mobile Station Modem) chipset shipments. We are maintaining our $53 fair value estimate. The firm’s revenue performance was particularly impressive. Its top line jumped 39% on a year-over-year basis and 14% sequentially thanks to strong growth in CDMA-based (code division multiple access based) MSM shipments. Qualcomm continues to reap the benefits of sales of smartphones (like Apple’s iPhone and devices using Google’s Android software), which use its chips, and adoption of 3G technology, which depends on the firm’s patents for CDMA technology. Growth of 3G in emerging markets continues to be strong, and according to Wireless Intelligence, emerging-market 3G connections increased nearly 40% in … Read more

Kraft Shows Off Pricing Power in Third Quarter; Raises 2011 Outlook

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Kraft (KFT) reported excellent third-quarter results Wednesday that showed significant pricing expansion. The firm raised its outlook for 2011, and we are maintaining our above-market fair value estimate. The firm’s top-line advanced 11.5% led almost exclusively by organic expansion, which was 8.4% in the quarter. We loved that 7 percentage points of the growth was pricing, which signals to us the strength of Kraft’s competitive advantages and pricing power. Volume and mix contributed the balance of the growth. The company noted that momentum is accelerating in North America, that operating results in Europe remain strong, and that it is seeing double-digit growth in developing markets—all positive news. Kraft’s adjusted operating income jumped over 12% thanks to pricing growth, productivity enhancements, … Read more

Excellent Third-Quarter Results from Eastman Chemical

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Eastman Chemical (EMN) recently posted an impressive third quarter. Earnings per share was relatively flat, with net income down slightly. Revenue was up nearly 5%, but the high raw material costs prevented any margin expansion. Regardless, these numbers were higher than expected, and Eastman Chemical was able to navigate one of the most challenging macroeconomic quarters in recent memory effectively. The revenue mix is still slightly tilted in favor of North America; however, earnings are higher overseas and we expect the continued build outs in Korea and acetate tow demand in Asia to continue to be key business drivers, as they were in the third quarter. Eastman also continues to invest in the future via strategic acquisitions. In the third quarter, the firm acquired … Read more

Clorox Posts Fiscal First-Quarter Results; Reaffirms 2012 Outlook

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Clorox (CLX) reported fiscal first-quarter results Wednesday that showed declining sales in its US categories and higher commodity costs. We weren’t that impressed with the performance, but we are maintaining our fair value estimate. The firm’s revenue expanded 3% on mostly volume growth thanks to product innovation. Revenue increased in three of its four reportable segments, with International (all countries outside of the US) revealing 9% sales expansion. Clorox continues to gain traction in its Argentina business and rolled out Glad in China. Its Lifestyle segment (dressings and sauces, water filtration, global natural personal care, etc.) experienced 6% volume growth during the quarter led by double-digit volume growth in its Burt’s Bees business. Clorox also noted strength in its new … Read more

Pfizer Reports Decent Third-Quarter Results; Loss of Exclusivity on Blockbuster Drug Lipitor Concerning

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Pfizer (PFE) reported strong third-quarter results Tuesday that showed decent top-line growth thanks to favorable foreign exchange and solid income expansion due to excellent cost controls, which offset product losses of exclusivity. We are maintaining our fair value estimate. Pfizer’s top line jumped 7%, which was driven almost entirely by favorable foreign exchange (international revenue growth was 15%; 4% operational with the balance forex). US revenues continue to decline and also fall as a percentage of total revenue (now 40%, was 44%). Operationally, Pfizer experienced the strongest growth in nutrition, animal health (due to the addition of legacy King products), and consumer healthcare.  Revenue from its largest segment, Primary Care, was essentially flat, while sales from its second-largest segment, Specialty … Read more

Republic Services Puts Up Nice Third Quarter; Best Organic Revenue Growth Since 2008

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Garbage-hauler Republic Services (RSG) posted nice third-quarter results that showed the best organic top-line expansion in years and double-digit operating-income and earnings-per-share increases. We are retaining our position in our Best Ideas portfolio and see no reason to change our fair value estimate at this time. The firm’s core pricing advanced 0.7% in the period (slightly lower than management’s expectations), while fuel surcharges and commodities pricing added another 1.2% and 1.7%, respectively, to top-line growth. Republic’s municipal solid waste landfill prices increased 3%, which improved sequentially. Core volume also nudged up slightly in the period, excluding the San Mateo and Toronto contract losses–the ninth consecutive quarter of volume improvement. Importantly, the volume increase compares to a 2.5% decrease in the year-ago … Read more

Precision Castparts Reports Strong Fiscal Second Quarter; Aerospace Growth Remains Impressive

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Precision Castparts (PCP) reported solid fiscal second-quarter results Thursday that showed strong sales and profit expansion. Though we liked the firm’s results, we’ll be looking to trim our position in our Best Ideas portfolio in the coming weeks, solely as a means of rebalancing our porfolio. Our fair value estimate remains unchanged. The metal casting-maker’s third-quarter revenue advanced 19% from the same period a year ago on the heels of strong growth from its Investment Cast Products, Forged Products, and Fastener Products segments, the latter jumping 27%. The company’s top-line was driven by accelerated commercial production rates, market share gains, and a number of acquisitions that closed in the quarter, the latter bolstering its exposure to the oil and gas … Read more

Visa Provides Investors with Underrated Growth Prospects

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Although the Durbin Amendment had yet to go in effect, Visa (V) reported a terrific fourth quarter, which has made us even more bullish about the firm’s near-term and long-term prospects. Due to a better than expected outlook for 2012, and a favorable ruling by the Fed regarding the Durbin Amendment, we think Visa is now worth $126 per share, roughly a 25% premium to where the stock currently trades. Management focused on returning cash to shareholders What really sticks out about Visa’s fiscal 2011 performance is the dedication to return cash to shareholders. In addition to increasing the quarterly dividend by 47% to 22 cents, Visa bought back over $2 billion worth of shares. And on top of that, the firm announced … Read more