Zacks Analyst Blog Highlights: Kraft Foods, Public Storage, ValueClick, Digital River and Google - Press Releases

For Immediate Release

Chicago, IL – November 8, 2010 – Zacks.com Analyst Blog features: Kraft Foods Inc. (KFT), Public Storage (PSA), ValueClick Inc. (VCLK), Digital River Inc. (DRIV) and Google Inc. (GOOG).

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Here are highlights from Friday's Analyst Blog:

Kraft Misses but Reaffirms Guidance

Kraft Foods Inc. (KFT) delivered third quarter results with earnings of 43 cents per share, which were below the Zacks Consensus Estimate of 48 cents by 10.4% and year-ago earnings of 55 cents by 21.8%. Lower profits were primarily attributable to lower tax rate in 2009 and acquisition-related costs.

However, on a reported basis, earnings for the quarter plunged 11.3% to 47 per share compared with 53 cents per share in the year-ago quarter.

Revenue and Operating Income

Quarterly net revenue spiked 26.2% to $11.9 billion, boosted completely by the Cadbury acquisition which was partially offset by 2.3% due to unfavorable currency translation and 0.2% by divestitures. However, combined organic net revenues grew 2.1%, driven by 2.0% and 0.1% organic net revenue growth at Kraft Foods' base business and Cadbury, respectively.

Operating income advanced 13.4% to $1519 million in the quarter, including a 22.5% benefit from Cadbury's operations, partially offset by a negative 6.1% impact from integration and acquisition costs and 2.9% due to unfavorable currency. Excluding these factors, operating income at Kraft Foods' base business was flat year-over-year.

Segment Details

In the North American segment, quarterly net revenues jumped 9.3% to $5.8 billion, powered by a 7.8% impact from the Cadbury acquisition and 0.7% from favorable currency translation, which was partially offset by 0.3% impact from divestitures. However, combined organic net revenues grew 1.0% in the quarter.

European net revenues rose 29.0% to $2.9 billion in the quarter, reflecting a 36.0% benefit from the Cadbury acquisition and a negative 2.6% impact from currency translation. Combined organic net revenues grew 1.7%. Developing Markets net revenues shot up 69.8% to $3.3 billion in the quarter, portraying a 66.1% impact from the Cadbury acquisition and an unfavorable impact of 3.7% from currency translation. However, combined organic net revenues grew 7.4%.

Other Financial Updates

Kraft exited the quarter with cash and cash equivalent of $2,288 million, long-term debt of $29,571 million and inventory of $5,735 million.

Guidance

Kraft reaffirmed its fiscal 2010 combined organic net revenues growth target to 3%–4% annually, reflecting the regularizing of Cadbury's trade inventory practices and aggressive advertising expenditure.

Kraft has re-affirmed fiscal 2010 earnings guidance (excluding one-time items) of at least $2.00 per share.

Public Storage Misses Estimates

Public Storage (PSA), a top real estate investment trust (REIT) operating self-storage facilities, reported third quarter 2010 FFO (funds from operations) of $1.69 per share, compared with $1.44 in the year-earlier quarter. Fund from operations, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income.

The increase in year-over-year FFO was primarily due to several non-recurring items, excluding which FFO for third quarter 2010 was $1.35 per share compared with $1.30 in the year-ago quarter. Third quarter 2010 recurring FFO missed the Zacks Consensus Estimate by 3 cents.

During the reported quarter, Public Storage recorded an increase in total revenue to $422.8 million from $412.1 million in the year-earlier quarter. Total revenues for the reported quarter were well ahead of the Zacks Consensus Estimate of $395 million.

Same-store revenues increased 1.2% year over year to $365.1 million during the quarter, while net operating income climbed 0.2% to $245.7 million. The increase in same-store revenues was primarily due to a 1.6% increase in average occupancy, partially offset by a 0.5% dip in realized rent per occupied square foot. Occupancy in the same-store portfolio was 91.0% at quarter-end versus 89.6% in the prior-year period. Realized annual rent per occupied square foot decreased from $12.73 in the year-earlier quarter to $12.66 in the reported quarter.

ValueClick Beats Zacks Estimate

ValueClick Inc. (VCLK) reported strong third quarter results, comprehensively beating the Zacks Consensus Estimate of 14 cents. Earnings (including stock-based compensation but excluding one-time items) were 23 cents per share, down 23.3% year over year from 30 cents reported in the prior-year quarter. The reported earnings per share were above ValueClick's guidance range of 18 cents to 19 cents.

Revenues

Revenues inched up 1.5% year over year to $106.8 million, but achieved 7.2% sequential growth. Revenues were above management's guidance range of $100.0 to $104.0 million and the Zacks Consensus Estimate of $103.0 million.

Revenues were primarily driven by strong growth in the Affiliated Marketing segment (27.8% of total revenue), which posted revenue growth of 13.0% on a year-over-year basis to $29.8 million. The growth was driven by higher transactional volumes in the commission junction marketplace, in which ValueClick holds the number one position.

Owned and operated revenues (33.6% of total revenue) increased 20.0% year over year to $35.9 million in the quarter.

Media (31.2% of total revenue) grew 7.8% year over year to $33.3 million in the quarter, in line with management's guidance of up mid-single-digits to low double-digit growth for the third quarter.

Technology (7.4% of the revenue) revenues increased 19.7% year over year to $7.9 million in the quarter.

Operating Performance

Gross margin declined 180 basis points to 73.3% in the third quarter, primarily due to higher cost of sales and higher revenue.

Excluding amortization of intangible assets, operating expenses decreased 6.2% year over year to $50.6 million (47.4% of revenue) from $53.9 million (51.2% of revenue) in the prior-year period. Lower sales and marketing (5.5% year over year) and general and administrative (26.3% year over year) spending were responsible.

Operating income (excluding stock-based and amortization expenses) increased 10.0% year over year to $27.7 million, primarily based on lower operating expenses. Operating margin expanded 200 basis points to 26.0% in the third quarter.

Adjusted EBITDA (including stock-based compensation) increased 8.9% year over year to $29.4 million and was 27.5% of revenues in the third quarter. This was above ValueClick's guidance range of $27.0 to $28.0 million or 27.0% of revenue at the midpoint.

Balance Sheet

ValueClick exited the third quarter with no long-term debt. Cash and cash equivalents were $147.5 million compared with $171.7 million in the previous quarter. ValueClick repurchased 1.3 million shares of its common stock for $13.2 million. The company's board of directors increased the share repurchase program by $68.6 million, extending the authorization to $100.0 million of common stock.

Guidance

For the fourth quarter of 2010, ValueClick expects revenues in the $122–$126 million range.

Year-over-year, the company expects revenue from Media to grow in the mid-to-high single-digit percentage range. Affiliate Marketing is expected to increase in the low double-digit percentage range. Owned & Operated websites are expected to increase in the low twenties percentage range. Technology is expected to be in the low double-digit range in the fourth quarter.

Adjusted EBITDA is expected to be in the range of $39.0–$40.0 million, which represents an adjusted EBITDA margin of 32% at the midpoint. Earnings on a GAAP basis are expected to be in the range of 22 cents to 23 cents per share, while earnings on a non-GAAP basis are expected to be in the range of 27 cents to 28 cents per share.

Management expects to sustain double-digit growth in the Affiliated Marketing and Media segments for fiscal 2011 through market share gains over the long term.

Our Take

We continue to maintain a Neutral rating on a long-term basis (6–12 months) due to a weak macro environment, customer concentration and increasing competition from Digital River Inc. (DRIV) and Google Inc. (GOOG)

However, strong growth in affiliate and media businesses, international expansion and aggressive share repurchase activity will boost profitability going forward. Currently, ValueClick has a Zacks #3 Rank, which implies a short-term Hold rating (1–3 months).

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