For Immediate Release
Chicago, IL – October 25, 2010 – Zacks.com Analyst Blog features:Delta Air Lines (DAL), Amazon.com (AMZN), Chipotle Mexican Grill Inc. (CMG), Biogen Idec Inc. (BIIB) and Roche Holdings Ltd. (RHHBY).
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Here are highlights from Friday's Analyst Blog:
Delta Beats, but Shares Don't Lift Off
Delta Air Lines (DAL), the second largest U.S. airline, declared its third quarter adjusted earnings of $1.10 which easily surpassed the Zacks Consensus Estimate of 95 cents on strong international and travel demand. Including special items, net income increased to $363 million or 43 cents per share compared with a net loss of $161 million or 19 cents in the year-ago quarter.
Guidance
Going forward in the fourth quarter, the company sees strength through the holiday period and expects solid year over year unit revenue growth. Delta Air Lines expects operating margin to be in the range of 6%–8 % for the fourth quarter and consolidated unit cost to decline 3%-5% from the year-ago level.
Our Analysis
We are encouraged by improving revenue trends and a global recovery. With the successful integration of the Northwest acquisition, Delta Air Lines' investments in new products and network as well as continued efforts to strengthen its balance sheet, we believe the company is favorably positioned to take advantage of the economic recovery.
However, we remain cautious on the company due to its leveraged balance sheet and rising fuel prices. In addition, a unionized workforce and competitive threats keep us on the sidelines. Hence, we are currently maintaining our long-term Hold rating, supported by the Zacks #3 Rank (Hold).
Amazon Growth to Continue
Amazon.com's (AMZN) third quarter earnings (including an $18 million gain from non-operating investment activity) beat the Zacks Consensus Estimate by 3 cents, or 6.3%. However, excluding this gain, results would have fallen a penny short.
Revenue clearly did not disappoint, beating the Zacks Consensus by 2.8%. Therefore, the lackluster earnings may be attributed entirely to Amazon's continued investment in fulfillment centers and infrastructure build-out that should help drive growth going forward.
Although investors did not treat the results with enthusiasm (the shares dropped 3.86% in after-hours trading), we agree with management's strategy and continue to believe that investment at this time will help meet the strong demand it continues to see.
Revenue
Revenue of $7.56 billion was up 15.1% sequentially and 38.7% year over year (at the high-end of management guidance).
Approximately 55% of sales were generated in North America, representing sequential and year-over-year increases of 14.9% and 45.1%, respectively. The balance came from the International segment, which grew 15.4% sequentially and 31.8% year over year.
The revenue growth was attributable to a 41% increase in units and an increase in active customer accounts to 121 million. Amazon also benefited from higher third-party sales, which are a percentage of revenue earned by its partners on goods sold in its online marketplaces. Active seller accounts stayed above 2 million, with seller units at 34% of total units sold on Amazon properties.
Key strategies for driving revenue growth remain a vast selection, competitive pricing, free shipping, user experience on Amazon properties and the Amazon Prime program.
Segment Details
Amazon's North America Media business increased 20.2% sequentially and 12.7% year over year. Overall media sales were strong across the board, with particular strength in books. However, the year-over-year growth was impacted by tougher comps on the music side, particularly with respect to Michael Jackson and Beatles titles.
The Electronics and General Merchandise (EGM) business in North America increased 11.3% sequentially and 79.9% from a year ago. This was again the strongest year-over-year growth in the last two years. The company records ebook sales through Kindle devices under this segment and it looks as if this business continues to do well during the quarter. We believe that additional color on the pricing rather than just the number of books sold would enable a better estimation of book sales.
The International segment was up 15.4% sequentially and 31.8% year over year. The media business (23% of total revenue) grew 13.5% sequentially and 16.0% year over year. EGM, which was around 22% of total revenue grew 17.5% sequentially and 54.5% year over year. The addition of new product categories, better selection within categories, competitive prices and stronger sales from Prime contributed to the increase.
Chipotle Beats Zacks Estimate
Chipotle Mexican Grill Inc. (CMG) posted robust third quarter 2010 results that topped the Zacks Consensus expectation on the heels of strong top-line growth buoyed by higher traffic count and new restaurant openings.
The quarterly earnings of $1.52 per share outpaced the Zacks Consensus Estimate of $1.30, and soared 40.7% from $1.08 in the prior-year quarter.
Chipotle said that revenues for the quarter rose 23.0% to $476.9 million driven by new restaurant openings and increase in comparable-store sales. The reported revenues also outperformed the Zacks Consensus Estimate of $461 million.
Comparable-store sales growth has been decelerating since second-quarter 2008 – when it increased 7.1% – although it remained positive, showing resilience in a sluggish environment. After reaching the lowest point of 1.7% in the second-quarter 2009, comps have been on the rise. Comparable-stores sales climbed 11.4% in the quarter under review, reflecting a sequential increase of 270 basis points, a more than three-fold rise from the prior-year quarter.
Restaurant operating margin expanded 220 basis points to 27.7%, reflecting a 20-basis point (bps) (as a percentage of total revenue) drop in food, beverage and packaging costs, 70-bp decline in both labor and occupancy and 50-bp fall in other operating costs. The margin also benefited from comparable restaurant sales growth.
Total operating margin increased from 14.1% in the third quarter of 2009 to 16.3% in the current quarter, driven by a 40-bp dip in depreciation and amortization cost and 30-bp plunge in pre-opening cost, partially offset by a 70-bp rise in general and administrative expense.
Biogen, Roche Revise Deal
Biogen Idec Inc. (BIIB) and Roche Holdings Ltd. (RHHBY) recently announced that they amended their deal related to antibodies targeting CD20. The agreement covers products like Rituxan (rituximab) approved for the treatment of non-Hodgkin's lymphoma (NHL), chronic lymphoid leukemia (CLL), and rheumatoid arthritis (RA), ocrelizumab in mid-stage trails for multiple sclerosis (MS) and GA101 in late stage trials for NHL and CLL.
Per the amended agreement, Roche will now be responsible for the development and commercialization of ocrelizumab. Biogen will receive tiered, double-digit royalties on the US sales of the drug. The companies have also decided that the commercialization of ocrelizumab will not affect their current profit-sharing arrangement for Rituxan.
Moreover, Biogen's share of profit/loss associated with the US development and commercialization of GA101 has been increased to 35% from 30%. Roche will receive a catch-up payment of about $10 million from Biogen for the expenses borne by Roche to date on the development of GA101, as earlier Biogen was paying 30% of the development costs. Further, on the achievement of certain sales milestones for GA101, Biogen's co-promotion profit-share on Rituxan will come down to 35% from 40%.
Neutral on Biogen
We currently have a Neutral recommendation on Biogen, which is supported by a Zacks #3 Rank (short-term Hold rating). This agreement marks the end of a long standing dispute ongoing between the two companies.
Although Biogen's core business should remain stable in the coming quarters, we believe investor focus will remain on the occurrence of additional cases of progressive multifocal leukoencephalopathy (PML) associated with the use of MS drug Tysabri.
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