Mergers Not Only Positive For Software Companies

The proposed merger between SAP (SAP - Snapshot Report) and Business Objects (BOBJ), announced over the weekend, put the spotlight on the business intelligence software market. Among the independent companies still left standing, Cognos (COGN) is rumored to be a likely takeover target.

Trading on merger speculation is extremely risky, but COGN could see its shares appreciate even without an acquisition offer. The company recent reported fiscal second-quarter profits of 31 cents per share, a penny above expectations and 19% above year-ago levels. Revenues rose 10% to $252.4 million, driven in part by a 12% increase in license revenues. Gross margins widened by 200 basis points to 79.1%. The company is seeing customers standardizing on Cognos 8 and has version 8.3 in beta. (Our software analyst, Abdul Saleh, believes that version 8.3, which is currently in beta, could provide an additional catalyst for the stock.)

Based on the strength of its second-quarter results, COGN boosted its fiscal 2008 outlook. The company now expects revenues to be in the range of $1.075 billion to $1.100 billion and earnings per share to total between $1.66 to $1.76. Previously, the company had forecast revenues of $1.065 billion to $1.085 billion and earnings per share of $1.66 to $1.73. The majority of the covering brokerage analysts raised their full-year profit forecasts in response, sending the consensus estimate four cents higher to $1.79 per share.

Last week, P.F. Chang's China Bistro (PFCB - Snapshot Report) slashed its third-quarter guidance. The company said that same-store sales at its namesake restaurants and at Pei Wei decreased 1.6% and 1%, respectively, during the third quarter. (The decrease at the Bistro locations included the impact of a 2-3% price increase.) Adding to the downward pressure on the bottom line, the company also said that it incurred higher wages, repairs and restaurant supplies. As a result, PFCB expects third-quarter revenues to have totaled $270.8 million and per share earnings to be within a range of five to seven cents. Previously, the company had guided for revenues of $273 million and per share profits of above 25 cents.

Not surprisingly, brokerage analysts were quick to cut their full-year forecasts. The downward revisions caused an eight-cent drop in the consensus estimate to $1.26 per share.

PFCB's warning follows the fourth consecutive earnings miss by fast-food chain operator CKE Restaurants (CKR) and a warning by Ruby Tuesday (RT - Snapshot Report).

A few weeks ago, CKR reported second-quarter earnings of 18 cents per share; brokerage analysts had been expecting 20 cents per share. The company was adversely affected by both higher food prices (including beef, cheese and soft drink syrup) and higher occupancy and operating costs. The 0.4% decrease in consolidated revenues did not help earnings either. The majority of the covering brokerage analysts cut their full-forecasts in reaction to the report.

RT said that first-quarter same-store sales at company owned restaurants plunged 4.8% during its fiscal first quarter. The company blamed "continued high gas prices, higher interest rates, and competitive value promotion" for the poor performance. RT now expects fiscal first-quarter profits to total 21 cents per share when it reports this afternoon.

The economy is having an impact on consumer spending and higher food prices are a drag on earnings, especially for restaurant chains that lack the ability to pass along the higher costs to consumers. Although the outlook for restaurants appears to be somewhat mixed overall (over the past four weeks, a total of 44 full-year earnings estimates have been raised and 47 have been cut), the companies that seem to be faring the best in the current environment are the fast food chains. About of the recent positive revisions have been concentrated in just three companies: McDonald's (MCD - Analyst Report), Panera Bread (PNRA - Snapshot Report) and Yum! Brands' (YUM - Analyst Report).

YUM reported third-quarter earnings on Monday afternoon. The company earned 50 cents per share, six cents above expectations and 20% above year-ago levels. U.S. same-store sales were essentially flat, but company realized strong growth in China. It also announced plans to open Taco Bell restaurants in Mexico with the hopes that its "American" menu will provide an attractive alternative to traditional Mexican food. YUM raised its full-year guidance to profits of $1.65 per share, a penny above then the consensus estimate. Four of the six covering brokerage analysts adjusted their forecasts in response, boosting the consensus estimate to $1.65 per share.

The New York Times reported on Tuesday that New York regulators are proposing a requirement for insurance companies to set aside reserves to cover damage caused by a severe hurricane. The reserves would come out of premium payments. Insurers are unhappy because under current federal tax law, the money set aside in the reserves would not be tax deductible.

Ironically, the lack of a severe hurricane in North America might just help insurance company profits this year. Over the past several days, brokerage analysts have upped their full-year forecasts on multiple property and casualty insurers and reinsurers including AllState (ALL - Analyst Report), Chubb (CB - Snapshot Report), Ace Limited (ACE - Analyst Report), Travelers (TRV - Snapshot Report) and XL Capital (XL - Analyst Report).

The upward revisions likely reflect the relatively calm hurricane season, increased premiums and the rebound in the U.S. equity markets. Investors should note while none of the insurers have changed their third-quarter guidance, three or more brokerage analysts have raised their forecasts on 11 different companies - a bullish sign.

Zacks Premium and ZacksElite subscribers can view the Zacks Industry Rank List at http://www.zacks.com/zrank/zrank_inds.php. This interactive list allows you to see all of the companies, and their Zacks Rank, within more than 200 industries. Shown below is the Zacks Sector Rank List, which shows the trend in estimate revisions on a broader scale.

¹The Zacks Rank universe is comprised of all companies for which brokerage analysts publish earnings estimates.