For Immediate Release
Chicago, IL – November 16, 2010 – Zacks.com Analyst Blog features: Wendy's/Arby's Group Inc. (WEN), Agilent Technologies' (A), Ametek Inc. (AME), Cognex Corp (CGNX) and Itron Inc (ITRI).
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Here are highlights from Monday's Analyst Blog:
Wendy's/Arby's Disappoints
Wendy's/Arby's Group Inc. (WEN) posted third-quarter 2010 earnings of approximately zero cent per share, which lagged the Zacks Concensus estimate of 4 cents.
Wendy's/Arby's had posted 3 cents a share in the year-earlier quarter. Sales deleverage coupled with higher commodity costs led to the decline in earnings.
Total revenue in the quarter under review tumbled 4.7% year over year to $861.2 million. Sales from company-operated restaurants dropped 5.0% to $766.0 million and franchise revenue dipped 2.1% to $95.2 million. Revenues were hurt by sluggish sales both at Wendy's and Arby's restaurants. Adjusted EBITDA also plunged 19.6% to $100.0 million.
Store Update
At quarter-end, Wendy's had 6,554 restaurants, of which 1,391 were company-owned and 5,163 were franchise-operated.
Arby's ended the quarter with 3,662 restaurants, of which 1,146 were company-owned and 2,516 were franchises.
Outlook
For 2010, Wendy's reduced its same-store sales guidance at North America company-operated restaurants to down 1% from flat, while Arby's same-store sales are expected to be negative, though improvements are likely on a year-over-year basis.
For 2010, Wendy's/Arby's Group now expects adjusted EBITDA to be at the lower end of the previously announced guidance of down 3% to 5% year over year.
Our Take
Wendy's/Arby's Group has outlined a multi-year turnaround plan to improve restaurant operating margins, revitalize comparable-store sales and expand internationally.
While trends at Wendy's appear to be improving evidenced from the October month's result, Arby's continues to face headwinds with sagging comps and falling margins. We see limited upside potential in the stock until an improvement in Arby's performance is clearly visible.
Moreover, an uncertain economy with a high unemployment rate and faltering consumer confidence along with steep competition will likely restrain the company's growth in the near term.
With challenging market conditions and higher commodity costs, we expect earnings of Wendy's/Arby's to remain under pressure in the fourth quarter. However, improvement in some core menu products along with the launch of a cheeseburger line are expected to support its same-store sales, going forward.
The company's initiative of expanding into breakfast at Wendy's has been well received so far and a national roll-out is scheduled for late 2011.
Agilent Has Solid Q4, Ups Guidance
Agilent Technologies' (A) fourth quarter earnings beat the Zacks Consensus by 5 cents, or 8.3%. Revenue growth and margin expansion helped drive results in the last quarter. While the gross margin declined sequentially after 5 quarters of increase, Agilent saw both operating and net margins continuing to expand.
Revenue
Agilent's revenue grew 14.5% sequentially and 35.7% year over year. Excluding the impact of Varian, Agilent's revenues were up 27.3% sequentially and 35.0% from last year, much better than management's expectations of a 16-19% year-over-year increase excluding Varian. While sequential growth was evenly balanced across geographies, increase from the year-ago quarter was varied.
Asia witnessed the strongest growth at 39.5%, followed by Europe, which grew 35.7% and then the Americas, which grew 32.2%. Agilent's strong growth in Asia was fueled by China and India, which grew 37% and 31%, respectively.
All end-markets were up from the year-ago quarter, although the strongest by far was Petro/Chemical testing (up 103.6%), followed by Forensics/Environmental and Academic/Government, both of which grew 81.0%. Food Safety was the only area to see triple-digit sequential growth (up 104.7%), with industrial and semi following closely behind at 92.5% growth. The Communications, Academic/Government and Petro/Chemical testing markets declined sequentially.
Orders
Agilent's orders grew strong by double-digits in the last quarter, compared to both sequential and year-over-year bases. The strength was driven by the Chemical Analysis segment, which saw sequential and year-over-year increases of 14.6% and 68.5%, respectively.
Life Sciences increased 19.7% and 33.0%, respectively from the previous and year-ago quarters. Electronic Measurement was the slowest segment, although here too revenues were up 9.1% and 19.6%, respectively from the previous and year-ago quarters.
Agilent's book-to-bill ratio was positive in all segments, resulting in backlog accumulation.
Margins
The pro forma gross margin for the quarter was 55.2%, down 76 basis points (bps) sequentially and 37 bps from the year-ago quarter. The operating expenses of $572 million were up 9.1% sequentially and 14.6% year over year.
However, the operating margin, at 19.1% continued to expand, increasing 99 bps sequentially and 628 bps from the year-ago quarter. The sequential increase was driven by lower SG&A expenses (as a percentage of sales), partially offset by the slightly higher COGS and R&D expenses (as a percentage of sales). However, the year-over-year comparison was helped by a significant reduction in both SG&A and R&D, partially offset by slightly higher COGS.
The year-over-year increase in operating margin was entirely on account of the Electronic Measurement segment, which saw a margin expansion of 1,361 bps. The Chemical Analysis margin dropped 545 bps, while the Life Sciences margin dropped 35 bps. Both Electronic Measurement and Chemical Analysis margins expanded sequentially.
Net Income
Agilent generated pro forma net income of $228 million, or a 14.4% net income margin compared to $191 million or 13.8% in the previous quarter and $111 million, or 9.5% in the fourth quarter of last year. Our pro forma estimate excludes restructuring charges, acquisition-related costs, amortization of intangibles, impairment of long-lived assets, gain on sale of the network solutions business and other one-time items on a tax adjusted basis.
On a fully diluted GAAP basis, the company recorded a net income of $232 million ($0.66 per share) compared to income of $205 million ($0.58 per share) in the previous quarter and $25 million ($0.07 per share) in the year-ago quarter.
Balance Sheet
The balance sheet shows a net debt position of $1.04 billion. The debt-to-total-capitalization ratio was 54.2%, which is not bad. The interest coverage ratio is 11.2X, which means the company should not have trouble servicing the debt. The interest coverage ratio has continued to increase over the past 3 quarters.
Inventories at quarter-end were up 4.1%, with annualized inventory turns increasing from around 3.5X to 4.0X. Days sales outstanding (DSOs) went down from around 52 to around 50. Agilent generated around $367 million of cash from operations, spent $32 million on capex and $51 million on share repurchases.
Guidance
Agilent expects fiscal first quarter revenue of $1.53 billion to $1.55 billion (a 2-3% sequential decline). The non-GAAP EPS for the quarter is expected to come in at around 55 to 57 cents.
For fiscal 2011, Agilent expects revenues of $6.1 billion to $6.3 billion and non-GAAP earnings of $2.30 to $2.50 a share.
Our Take
We believe Agilent shares will benefit from a strengthening domestic market as well as a growing opportunity pipeline abroad, especially in Asian countries, such as China and India. The company has a very well-diversified business and has prudently supplemented organic growth with acquisitions.
Agilent sports a Zacks #2 Rank, implying a short-term Hold recommendation, similar to competitors such as Ametek Inc. (AME). We are slightly more positive about short-term prospects for competitors Cognex Corp (CGNX) and IItron Inc (ITRI), which are Zacks #1 Ranked (short-term Strong Buy recommendation).
Our longer-term view (3-6 months) remains Neutral at this point, given the softening in the equipment sector, which could have some impact on Agilent's testing business.
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