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Zacks #1 Stocks on the Move 07/24/2014

Company Name Symbol %Change
VERITEQ CORP VTEQ
9.17%
E COMMERCE C DANG
5.59%
BANCO MACRO BMA
4.66%
HANESBRANDS HBI
4.20%
KAISER ALUMI KALU
3.51%

Analyst Blog

AvalonBay Q2 FFO Tops Estimates on Revenues, Outlook in Line

Posted Thu Jul 24, 02:40 pm ET

by Zacks Equity Research

Aided by growth in rental rates, AvalonBay Communities Inc. (AVB) reported second-quarter 2014 funds from operations (FFO) of $1.71 per share that came 3.0% ahead of the Zacks Consensus Estimate.

FFO per share also climbed 10.3% from the prior-year quarter figure, driven by improved performance of its newly developed and acquired communities.

Total revenue of this residential real estate investment trust (REIT) increased 6.1% year over year to $413.8 million and surpassed the Zacks Consensus Estimate of $405 million. Results were driven by the existing and stabilized development communities as well as the Archstone acquisition.

Quarter in Detail

Same-store rental revenues increased 3.1% year over year to around $330.0 million, thanks to a 3.2% escalation in average rental rates, partly dwarfed by a 0.1% fall in economic occupancy. Same-store operating expenses climbed 3.6% year over year to $100.0 million and consequently, same-store NOI rose 2.8% year over year to $230.0 million.

AvalonBay sold two wholly owned communities – Oakwood Philadelphia (acquired as part of the Archstone acquisition) for nearly $28.9 million, leading to a gain of around $3.3 million (GAAP); and Avalon Danvers, located in Danvers, MA, for $108.5 million, resulting in a gain of $41.0 million (GAAP).

Besides, the company completed developing three communities for a total cost of $191.1 million and commenced construction of four communities for an estimated capital cost of $421.4 million.

Liquidity

As of Jun 30, 2014, AvalonBay had no borrowings outstanding under its $1.3 billion unsecured credit facility. The company had around $519.1 million in unrestricted cash and cash in escrow as of that date. Moreover, the company’s annualized net debt-to-EBITDA was 5.5 times for the second quarter.

Outlook

AvalonBay anticipates core FFO per share to range in $1.69 – $1.75 for third-quarter 2014 and $6.73 – $6.87 for full year 2014, following adjustments for the recognition of its promoted interest and other non-routine items. Notably, both the Zacks Consensus Estimates of $1.72 for the third quarter and $6.77 for full year 2014 falls within the ranges provided.

Our Viewpoint

We believe that going forward, the company’s FFO per share would experience solid contribution from development deliveries. Moreover, favorable demographics along its markets keep us optimistic about its growth prospects.

However, with a number of projects in the market nearing completion, we anticipate the supply to increase in the near term. This may temper the growth momentum of occupancy levels and put pressure on rents.

AvalonBay currently carries a Zacks Rank #3 (Hold). We presently look forward to the results of other residential REITs – Equity Residential (EQR), Essex Property Trust Inc. (ESS) and UDR, Inc. (UDR), which are scheduled to report in the upcoming weeks.


Note: FFO, 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.

Wyndham Beats Q2 Earnings on RevPAR Growth; Ups EPS Guidance

Posted Thu Jul 24, 02:35 pm ET

by Zacks Equity Research

Leading hospitality company, Wyndham Worldwide Corporation’s (WYN), second-quarter adjusted earnings of $1.17 per share beat the Zacks Consensus Estimate of $1.13 by 3.5% which, we believe, was due to better-than-expected revenues.

Further, quarterly earnings were up 19.4% year over year led by strong performance by the company’s Lodging as well as Vacation Ownership businesses and share repurchase activities.

 


Net revenue grew 7.2% year over year to $1.34 billion in the quarter, beating the Zacks Consensus Estimate of $1.33 billion by 0.8%. Solid revenue growth in all the three operating segments aided quarterly sales.

Inside the Headline Numbers

Wyndham has three operating segments — Lodging, Vacation Exchange and Rentals and Vacation Ownership. All the segments have both domestic and international operations.

Wyndham’s Lodging segment revenues grew 8.0% year over year to $283.0 million in the quarter, driven by 8.8% rise in domestic revenue per available room (RevPAR).

Systemwide RevPAR grew 5.6% in the quarter. The increase reflects an 8.8% domestic increase, partially offset by 4.3% decline in international RevPAR, which primarily reflects unfavorable currency movements.

Adjusted EBITDA for the second quarter of 2014 was $87 million, a 12% increase from the prior-year quarter, primarily due to higher RevPAR.

Revenues from the Vacation Exchange and Rentals segment were up 7.0% year over year to $402.0 million. However, in constant currency, segment revenues increased 3%.

Vacation rental revenues went up 17.0% year over year to $217.0 million, while Exchange revenues remained stable year over year at $168 million. Excluding the impact of foreign currency and acquisitions, Vacation Rental revenues were up 6.0%, due to 4.9% increase in transaction volume and 1.2% rise in the average net price per vacation rental. Exchange revenues remained flat as 1.7% increase in average number of members was offset by 1.8% decline in exchange revenue per member.

Revenues from the Vacation Ownership segment rose 7.0% year over year to $673.0 million, driven by higher gross Vacation Ownership Interest (VOI) sales and a lower loan loss provision. Gross VOI sales were up 3% year over year to $496.0 million, gaining from 1.0% rise in tour flow and 1.1% increment in volume per guest along with a rise in tele-sales upgrades.

Adjusted EBITDA grew 15.0% year over year to $185 million during the quarter, buoyed by increased revenues.

Share Repurchase

Wyndham has bought back approximately 2.3 million shares for $170 million during the second quarter of 2014. From Jul 1 through Jul 23, 2014, the company repurchased an additional 0.5 million shares for $37 million. The company's remaining share repurchase authorization is worth $311 million as of Jul 23, 2014.

Guidance for 2014

Wyndham maintained its revenue guidance for 2014. The company expects revenues within $5.250–$5.350 billion. However, the company has raised its adjusted EBITDA guidance. Adjusted EBITDA is expected to be within $1.230–$1.245 billion, up from $1.215–$1.240 billion expected earlier.

The company has raised its earnings guidance for 2014. The company now anticipates adjusted earnings per share within the range of $4.34–$4.44, up from $4.23–$4.33. The Zacks Consensus Estimate for 2014 stands at $4.34.

Our Take    

Overall, Wyndham’s strong developmental pipeline, significant international exposure and transition to a growing fee-for-service-based business are expected to spur growth. Shareholder-friendly steps, such as dividend hike, also inspire optimism about the stock. However, excessive exposure to the European economy and slowdown in business momentum owing to decline in consumer spending in North America may act as headwinds.

Wyndham currently has a Zacks Rank #2 (Buy). Some well-performing stocks in the same sector include Extended Stay America, Inc. (STAY), Starwood Hotels & Resorts Worldwide Inc. (HOT) and Hilton Worldwide Holdings Inc. (HLT). All these stocks have the same Zacks Rank as Wyndham.

Linear Technology Beats on Q4 Earnings on Increased Volumes

Posted Thu Jul 24, 02:30 pm ET

by Zacks Equity Research

Linear Technology Corp. (LLTC) reported fourth-quarter 2014 earnings of 54 cents, beating the Zacks Consensus Estimate by 3 cents. The results were aided by higher volumes and lower interest expense which was partially offset by higher tax rate.

Revenues

Linear reported revenues of $365.4 million, up 11.6% year over year and 5.0% sequentially. Average selling price (ASP) was $1.90, up from $1.83 in the prior quarter. Also, fourth-quarter revenues also came ahead of the Zacks Consensus Estimate of $363.0 million and were at the higher end of the company’s guidance. The increase was due to stronger sales across automotive, industrial and communications markets.

Book-to-bill ratio was positive in the quarter and bookings increased sequentially in all major markets, especially automotive and industrial markets.

By end market, industrial continued to be the largest area, contributing 44% of the total fourth-quarter bookings, up from 43% in the previous quarter. The communications and automotive markets declined 1% each to 19%, while consumer end market contributed 3% of the total fourth-quarter bookings, up from 2% in the prior quarter. Computer, however, accounted for 9%, flat with the last quarter.

Margins

Gross margin for the quarter was 76.0%, up 30 basis points (bps) sequentially and 90 bps from the year-ago quarter.

Operating expenses of $106.2 million were up 7.4% from the year-ago quarter’s $98.9 million. Operating margin of 47.0% was up 80 bps sequentially and 210 bps year over year. As a percentage of sales,research and development (R&D) as well as selling, general and administrative (SG&A) expenses decreased.

The quarter’s GAAP net income was $129.7 million or earnings of 53 cents per share compared with $117.6 million or 48 cents in the previous quarter and $101.9 million or 43 cents in the year-ago quarter. Excluding expenses related to debt discount amortization but including stock-based compensation expenses, pro-forma earnings per share were 54 cents, up from 50 cents in the previous quarter and 44 cents in the year-ago quarter.

Balance Sheet

Linear exited the fourth quarter with cash, cash equivalents and marketable securities of approximately $1.01 billion, down $749.9 million from the prior quarter. The cash balance decreased due to the use of $845.1 million to redeem all of its outstanding 3.00% Convertible Senior Notes. Account receivables were $173.3 million, down from $182.0 million in the prior quarter.

Management repurchased 650,000 shares worth $29.0 million. Additionally, Linear will pay a cash dividend of 27 cents per share on Aug 27, 2014 to stockholders of record on Aug 15

Guidance

Management provided limited guidance for the first quarter of fiscal 2015. The company expects improved bookings momentum in all the end markets in the first quarter and therefore predicts revenues to increase 1% to 3% sequentially or 8% to 11% year over year. The Zacks Consensus Estimate for revenues for the first quarter is pegged at $371.0 million.

Conclusion

The company reported a decent quarter, with both the top line and bottom line exceeding our expectations. The company’s business is well-diversified among core markets, such as industrial, automotive and communications infrastructure. However, its computing business has been hit by weakness in the PC and notebook markets.

Management expects improved bookings momentum in all its end markets in the near term, indicating stronger revenues in the upcoming quarter.

Linear carries a Zacks Rank #1 (Strong Buy). Other better-performing stocks that are worth considering include STMicroelectronics NV (STM), Intel (INTC) and NVIDIA Corporation (NVDA). All these stocks sport a Zacks Rank #1 (Strong Buy).

Will Cerner Corp. (CERN) Miss Earnings Estimates?

Posted Thu Jul 24, 02:23 pm ET

by Zacks Equity Research

Cerner Corporation (CERN) is set to release its 2014-second quarter results today, after the closing bell. In the last quarter, the company posted a neutral surprise. Let’s see how things are shaping up for this announcement.

Growth Factors This Past Quarter

Cerner is the largest pure-play HCIT company and its wide footprint, large reference-able client base and composite array of solutions make it an ideal candidate for investors seeking an exposure to the HCIT industry. The company continues to be a winner in the market for hospital clinical information technology with a significant presence in the rapidly growing ambulatory clinical IT market.

However, Cerner faces fierce competition from reputed names including Allscripts Healthcare Solutions (MDRX), athenahealth (ATHN), and Quality Systems (QSII). The intensity of competition may pressure both pricing and margin.

For the second quarter of 2014, Cerner anticipates revenues between $790 and $830 million while adjusted earnings are expected between 36 and 37 cents per share, including share based compensation expense. These compared with the Zacks Consensus Estimates of $810 million and 36 cents for revenues and earnings per share, respectively for the quarter.

Earnings Whispers?

Our proven model does not conclusively show that Cerner is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank of #1, 2 or 3 for this to happen. That is not the case here as you will see below.

Zacks ESP:  Earnings ESP, the difference between the Most Accurate Estimate of 36 cents and the Zacks Consensus Estimate of the same, stands at nil.

Zacks Rank #3 (Hold): The combination of Cerner’s Zacks Rank #3 (Hold) and nil ESP makes surprise prediction difficult. We caution against stocks with Zacks #4 and #5 Ranks (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.

CA Beats Q1 Earnings, Misses Revenues, FY15 Outlook Modest

Posted Thu Jul 24, 02:20 pm ET

by Zacks Equity Research

CA Inc. (CA) reported first-quarter fiscal 2015 adjusted earnings (excluding amortization, other gains and software development costs capitalized but including stock-based compensation) of 62 cents per share, which beat the Zacks Consensus Estimate of 57 cents.

 

Quarter Details

CA’s revenues of $1.07 billion decreased 2.4% from the year-ago quarter and lagged the Zacks Consensus Estimate of $1.08 billion. The year-over-year decline was primarily due to 1.4%, 11.2% and 2.7% decline in Subscription and maintenance revenues (85.0% of total revenue), Professional Services revenues (8.1%) and Software fees and other revenues (6.9%), respectively.

Moreover, on a segment basis, revenues from CA’s Mainframe Solutions were down 0.8% on a year-over-year basis to $614.0 million. Revenues from Enterprise Solutions and Services decreased 2.7% and 11.2% year over year to $368.0 million and $87.0 million, respectively. Enterprise Solutions sales decreased primarily due to lower sales of new products. On the other hand, Services revenues were hit primarily by lower-than-expected professional services engagements with government agencies.

North America and International revenues were down 2.7% and 1.8%, respectively, from the year-ago period. The company also witnessed 9.1% decrease in bookings.

Nonetheless, CA witnessed a number of deal signings from customers such as Telephone Data Systems, Staples (SPLS) and Otter Products and added customers such as America Latina Logistica, Tata Sky and the National Cancer Institute in Brazil. Other than these, Fujitsu Services Limited in the U.K. will use CA's server monitoring, network monitoring and automation solutions according to a deal signed during the quarter.

Moving on, CA reported adjusted income from continuing operations before interest and income taxes (including stock-based compensation but excluding other one-time items) of $407.0 million, up 4.1% year over year. As a percentage of revenues, adjusted income from continuing operations before interest and income taxes were up 236 basis points primarily due to a decrease in operating expenses, as a percentage of revenues, of the same magnitude on a year-over-year basis.

CA’s adjusted net income from continuing operations came in at $273.7 million compared with $338.3 million per share reported in the year-ago quarter.

CA exited the quarter with cash, cash equivalents and investments of $3.255 billion compared with $3.252 billion in the previous quarter. The company’s total long-term debt (including current portion) came in at $1.77 billion. CA generated $166.0 million in cash from operating activities.

Moreover, during the reported quarter, CA repurchased around 1.7 million shares for $50.0 million and paid $111.0 million as dividends.

Fiscal 2015 Guidance

CA issued fiscal 2015 outlook. For fiscal 2015, the company expects total revenue to decline in the range of 2.0% to 1.0% to $4.34 to $4.40 billion in constant currency. The Zacks Consensus Estimate for fiscal 2015 is pegged at $4.39 billion. CA expects non-GAAP earnings per share from continuing operations to decrease in the range of 21.0–19.0% to $2.42–$2.49 in constant currency, better than the Zacks Consensus Estimate of $2.35.

The company expects cash flow from operations to increase in a range of 5.0–12.0% to $1.04–$1.11 billion in constant currency.

Our Take

CA reported mixed first-quarter results wherein the bottom line beat the Zacks Consensus Estimate but the top line fell short of the consensus mark. The year-over-year comparisons were not favorable either. CA’s major revenue generating segments were adversely affected during the reported quarter primarily due to lower-than-expected sales of new products. The company also provided a modest outlook for the fiscal 2015.

Nonetheless, we believe that the breadth of its products and the increased efficiency offered by them will help attract customers across sectors, lending stability to the business model. We are positive about CA’s increased cloud exposure. A decent renewal rate, modest cash position and share repurchase also appear encouraging.

On the other hand, increasing competition from International Business Machines (IBM) and Hewlett Packard (HPQ) and exposure to Europe remain the near-term headwinds.

CA, currently, has a Zacks Rank #4 (Sell).

Hershey Earnings In Line; High Dairy Costs Dent Gross Margin

Posted Thu Jul 24, 02:15 pm ET

by Zacks Equity Research

The Hershey Company’s (HSY) second-quarter 2014 results were in line with the preliminary numbers announced last week. Moreover, management continues to expect its fiscal 2014 results to be at the lower end of its long-term targets due to higher-than-expected dairy costs, as announced last week.

Hershey’s second-quarter adjusted earnings of 76 cents per share were in line with the Zacks Consensus Estimate and were within the preliminary range of 75 to 77 cents released last week.

Earnings grew 5.6% from the prior-year quarter as lower brand building and advertising costs made up for weak gross margins and lower-than-expected sales in the U.S.

The adjusted earnings mainly exclude acquisition/transaction costs, pension income, and expenses related to Hershey’s supply chain and cost savings program — Project Next Century.

 

Revenues Improve Sequentially; U.S. Sales Soft

Net sales of $1.58 were also in line with the Zacks Consensus Estimate. Net sales increased 4.6% year over year in line with the preliminary numbers. Positive volume growth and market share gains pulled up the top line.

However, though sales improved sequentially from a weaker first quarter, performance in the U.S. fell short of management’s expectations due to soft retail trends.  In the U.S., sales increased 4.4%.

Currency hurt revenues by 0.7 percentage points, lower than the last quarter. Organically, sales increased 5.3% in the quarter.

High Dairy Costs Severely Dent Gross Margins

Hershey’s adjusted gross margin for the quarter declined 230 basis points (bps) to 45.4%, due to higher input costs, mainly dairy and an unfavorable sales mix, which offset productivity gains and improved efficiencies from supply chain initiatives.

The costs of Hershey’s key ingredients like dairy, nuts, cocoa and sugar have increased dramatically so far this year and are expected to rise further in the coming quarters.

The higher costs are expected to dent the company’s margins which prompted the guidance cut last week (discussed below). The costs of other inputs — packaging, fuel, utilities and transportation — are also rising.

In fact, in 2014/2015, the overall cost environment for food commodities is expected to be under pressure due to domestic and worldwide agricultural supply and demand imbalance and other macroeconomic factors.

Excluding advertising, selling, marketing and administrative expenses (SM&A) were almost flat in the second quarter of 2014 as gains from a foreign exchange currency contract offset higher selling and employee related costs. SM&A includes investments in non-advertising brand-building and go-to-market capabilities in both the U.S. and international markets.

Advertising spend declined around 5% from the prior-year quarter. Despite lower advertising costs, operating margin declined 60 bps in the quarter to 17.7% due to weak gross margins.

2014 Outlook

Last week, the company announced price increases for its chocolates and candies in response to rising input costs of its key ingredients. As a result, the company announced that it expects its fiscal 2014 results to be at the lower end of its previous targets.

Effective from Jul 15, the company raised wholesale prices by approximately 8% across its instant consumable, multi-pack, packaged candy and grocery lines. Direct buying customers will be exempted from the raised prices until Aug 12.

Management does not expect the price increases to have any material positive impact on 2014 results.

However, in anticipation of volume elasticity due to price rises, management lowered its top-line expectations last week. 2014 net sales growth guidance was reduced to the lower end of the long-term target range of 5–7% (including currency headwinds). Previously, the company was expecting it to remain within the range.

Adjusted earnings for 2014 are also expected at the lower end of the previously provided range of $4.05–$4.13. 2014 adjusted earnings per share growth will be around the lower end of its long-term target of 9–11% versus prior expectation of its remaining within the range.

Moreover, gross margins are expected to decline slightly from the year-ago levels due to greater-than-anticipated commodity cost headwinds. Previously, Hershey expected gross margins to increase around 20 bps. The gross margin guidance cut last week was the second time this year that Hershey slashed the figure. At the first-quarter conference call, the company lowered gross margin expectations from a 50 bps rise to 20 bps in anticipation of higher dairy costs and a less favorable sales mix. Commodity costs are expected to be higher in 2014 than the last year.

It seems management is trying to combat the sharp rise in input costs through reduced advertising spend.

Concurrent with the second-quarter press release, management lowered the advertising expense (as a percentage of revenues) guidance from a mid single-digit range to a low single-digit range. The company will continue to incur advertising costs to support core brands as well as product launches in both U.S. and international markets. SM&A (excluding advertising) expenses are expected to increase at a lower rate than the top line.

The financial outlook excludes benefits from the pending Shanghai Golden Monkey acquisition (expected to close in the second half).

Other Stocks to Consider

Hershey carries a Zacks Rank #4 (Sell).Better-ranked food stocks include Treehouse Foods, Inc. (THS), PepsiCo, Inc. (PEP) and Pinnacle Foods Inc. (PF).While Treehouse Foods sports a Zacks Rank #1 (Strong Buy), Pepsi and Pinnacle Foods have a Zacks Rank #2 (Buy).

Facebook Beats on Q2 Earnings; Mobile Ad Growth Impressive

Posted Thu Jul 24, 02:10 pm ET

by Zacks Equity Research

Facebook Inc. (FB) reported impressive second-quarter 2014 results, which again reflected its growing dominance in the mobile advertising market. Earnings of 30 cents per share were much better than the Zacks Consensus Estimate of 26 cents. Revenues also comfortably beat the Zacks Consensus Estimate of $2.80 billion. Shares increased 5.51% in after-hours trading.

Revenues

Revenues (excluding the foreign exchange effect) surged 60.5% from the year-ago quarter to $2.51 billion. The strong revenue performance was aided by robust advertising revenues that jumped 67.4% from the year-ago quarter to $2.68 billion.

Advertising revenues were driven by increasing mobile engagement, higher number of marketers, continuing investment in new products and robust performance of its newsfeed ads.

Mobile ad revenues soared 151.0% year over year and accounted for 62.0% of ad revenues, up from 59.0% in the previous quarter. Ad revenues from desktop increased 8.0% on a year-over-year basis.

Mobile-only Monthly Active Users (MAU) was 399 million at the end of the second quarter compared with 219 million in the year-ago quarter and 341 million in the previous quarter.

As of Jun 30, 2014, Facebook’s MAU improved 14.0% year over year to 1.32 billion. Mobile MAUs increased 31.0% year over year to 1.07 billion. Daily Active Users (DAU) increased 19.0% year over year to 829 million. Mobile DAUs went up 39.0% year over year to 654 million.

Ad impressions declined 25.0% on a year-over-year basis, primarily due to lower ad volumes on mobile devices. However, average effective price per ad soared 123.0% from the year-ago quarter driven by favorable mix shift toward high-priced newsfeed ads.

Average revenue per user (ARPU) increased 32.0% year over year to $2.24. India became the second largest Facebook using nation in the world, after MAUs crossed 100 million in April. (Read: India: World’s 2nd Largest Facebook User)

Payments and other fees increased 9.0% year over year to $234.0 million in the reported quarter. Payments revenues from games grew approximately 1.0% on a year-over-year basis.

Product Updates

In April, Facebook launched a location tracking mobile app Nearby Friends for Apple’s (AAPL) iPhone and Google’s (GOOGL) Android-based smartphones. (Read: New App, Payments Service to Boost Facebook).

During the quarter, Facebook announced a number of new features in its F8 global developer conference, which reflected its continuing focus on improving user engagement and monetization on mobile.

The social network announced a mobile ad network called Facebook Audience Network (FAN), to deliver ads to third-party apps. The network significantly expands Facebook’s total addressable market (TAM). (Read: Facebook Offers New Features at F8)

In June, Facebook launched Slingshot, a smartphone photo and video sharing app, which was touted as a prospective competitor to Snapchat. (Read: Facebook Releases Slingshot; Battle with Snapchat Heats Up)

The company updated its Paper app, which added special Trending section highlighting news and photos. (Read: Facebook Updates Paper App with Trending Section).

Margins

Total cost and expenses as percentage of revenues plunged to 52.2% from 69.0% reported in the year-ago quarter. Research & development, marketing & sales and general & administrative expenses decreased 210 bps, 250 bps and 270 bps, respectively.

Lower-than-expected increase in operating expenses drove operating margin, which improved from 31.0% in the year-ago quarter to 47.8% in the second quarter. Net income was $788.0 million or 30 cents per share compared with $331.0 million or 13 cents in the year-ago quarter.

 

Balance Sheet & Cash Flow

Facebook exited the quarter with cash & cash equivalents and marketable securities of $11.45 billion compared with $12.63 billion in the previous quarter. The company generated $1.34 billion of cash flow from operating activities compared with $1.29 billion in the previous quarter. Free cash flow was $872.0 million compared with $922.0 million in the last quarter.

Acquisitions

Facebook recently agreed to acquire San Francisco-based video advertising company, LiveRail. We believe that the acquisition will enable Facebook to offer better quality video ads around the web in the long run. (Read: Facebook to Boost Video Ads with LiveRail Acquisition)

Most recently, Facebook completed the Oculus VR acquisition. Oculus acquired a couple of companies recently that will boost its product portfolio in the long run (Read: Facebook’s Oculus Acquires RakNet)

Guidance

Facebook expects to carry on with its investments for improving the quality, engagement and value of its ads and products, which will further boost advertisers’ demand over the long term.

Management expects that year-over-year revenue growth rate will decline due to tough comparisons through the second half of 2014. Total expenses are expected to increase approximately 30.0% to 35.0% (down from 40.0% to 45.0%) for 2014. Capital expenditure is likely to be in the range of $2.0 to $2.5 billion for 2014.

For 2015, Facebook expects operating expenses to jump significantly due to acquisition costs related to WhatsApp and Oculus as well as continuing investments on products, workforce and infrastructure.

The company believes that new initiatives and products like Instagram, autoplay video and the FAN will take some time to contribute meaningfully to revenue growth. However, Facebook remains positive over their long-term growth prospect.

Our Take

Facebook has gained significant traction in its mobile ad business within a very short span of time. This combined with the massive user base and its ability to track personal details over time makes it a formidable force in the online ad market.

We believe that Instagram’s growing popularity and the new initiatives such as Internet.org will continue to boost Facebook’s user base in the long run. Moreover, the new products like Slingshot and FAN will help the company to grow ad revenues amid intensifying competition from Google and Twitter (TWTR).

However, overdependence on advertising revenues for growth can be a headwind. We note that both WhatsApp and Oculus are long-term growth opportunities. The Internet.org initiative is also long-term focused. Hence, lack of revenue diversification remains a major concern in the near term.

Moreover, higher investments on product and infrastructure development will hurt profitability.

Currently, Facebook has a Zacks Rank #4 (Sell).

Allied World Q2 Earnings Miss on Lower Underwriting Income

Posted Thu Jul 24, 02:05 pm ET

by Zacks Equity Research

Allied World Assurance Company Holdings, AG (AWH) reported second-quarter 2014 operating income of 76 cents per share. Earings lagged the Zacks Consensus Estimate by 13.6% and fell 22.4% year over year.

The quarter experienced lower premiums written in the Reinsurance segment, weak underwriting performances and a decline in the investment income. Total expense also escalated in the quarter.

Including net realized investment gains of 77 cents and foreign exchange loss of 1 cent, the property and casualty insurer reported a net income of $1.52 per share, rebounding from the year-ago loss of 2 cents per share.

Operational Performance

Net premiums written of Allied World declined 4.7% year over year to $553.9 million in the reported quarter.

Net investment income declined 2.2% to $36.8 million year over year due to the net loss incurred in the private securities portfolio.

Total revenue increased 5.3% year over year to $574 million driven by higher premiums earned. However, results missed the Zacks Consensus Estimate by 5%.

The total expense increased 15% year over year to $501 million due to increase in net losses and loss expenses, acquisition costs as well as general and administrative expenses.

Underwriting income declined 40.3% year over year to $51.9 million. Combined ratio deteriorated 750 basis points (bps) to 90.3%

Allied World also purchased new global property catastrophe protection to reduce single catastrophic loss in major zones.
     
Segment Update

Gross premiums written at the US Insurance segment increased 11.1% year over year. This rise was driven by growth in the general casualty, inland marine as well as representations and warranties insurance, which more than offset a continued decrease in healthcare insurance.

Underwriting loss of $7.1 million compared unfavorably with the year-ago income of $7.5 million. The combine ratio deteriorated by 710 bps year over year.

Gross premiums written at the International Insurance segment grew 6.2% year over year due to overall growth, which included new insurance business lines in Europe in aviation and marine cargo.

Underwriting income decreased 27.8% year over year. The combine ratio deteriorated by 1100 bps year over year.

Gross premiums written at the Reinsurance segment fell 19.1% due to lower premiums across most lines of business.

The underwriting income declined 24.1% year over year. The combine ratio deteriorated by 590 bps year over year.

Financial Update

Allied World exited the second quarter of 2014 with cash and cash equivalents of $762.8 million, up 12% from 2013-end.

Total assets were $12.7 billion, up 6% from Dec 31, 2013.

Shareholder’s equity was $3.7 billion, up 4.6% from 2013-end level.

Allied World’s book value per share increased 3.6% from 2013-end level to $36.98 per share as of Jun 30, 2014.

Return on the company's investment portfolio improved 1.4% as of Jun 30, 2014, driven by net realized investment gains and net investment income compared with a loss in the year-ago quarter.

Capital Management

Allied World spent $70.9 million to repurchase 1.9 million shares. Its board of directors approved a new $500 million share buyback program.

In addition, the board approved a 35% hike in dividend and four quarterly dividends of 22.5 cents per share in May. The first one was paid on Jul 2.

Performance of Other Property and Casualty Insurers

While ACE Limited (ACE) outperformed the Zacks Consensus Estimate, RLI Corporation’s (RLI) earnings were in line with the expectation. However, The Travelers Companies Inc.’s (TRV) missed the Zacks Consensus Estimate on higher-than-expected catastrophe losses.

Zacks Rank

Allied World Assurance Company currently has Zacks Rank #3 (Hold).

Equifax Beats on Q2 Earnings Estimates; FY14 Outlook Modest

Posted Thu Jul 24, 02:00 pm ET

by Zacks Equity Research

Equifax Inc. (EFX) reported second-quarter 2014 adjusted earnings per share from continuing operations of 96 cents, which came ahead of the Zacks Consensus Estimate by a couple of cents. Earnings were up 4.4% from the year-ago quarter.

 

Quarter Details

Equifax’s revenues of $613.9 million were up 4.6% year over year and were relatively in line with the Zacks Consensus Estimate. The year-over-year increase resulted from revenue growth in most of its business segments.

Segment-wise, total U.S. Consumer Information Solutions revenues were up 2.0% from the year-ago quarter to $264.1 million. Among sub-segments, growth was recorded in the Consumer Financial Marketing Services segment (up 7.0%) and Online Consumer Information Solutions (up 4.0%), which offset the 15.0% revenue decline in the Mortgage Solutions Services.

International revenues (including Europe, Canada and Latin America) were up 18.0% year over year to $153.4 million, primarily due to 53.0% growth in the Europe segment which more than offset the 3.0% decline in revenues from Canada Consumer segment and 1.0% decline in revenues from Latin America. Revenues from Europe included the contribution from the TDX Group acquisition.

Revenues from the Workforce Solutions segment fell 3.0% on a year-over-year basis to $119.4 million, primarily due to a 6.0% decline in revenues from Verification Services which more than offset a 1.0% increase in revenues from Employer Services.

North American Personal Solutions contributed $54.0 million to revenues, reflecting a 5.0% year-over-year improvement. North American Commercial Solutions generated $23.0 million of revenues, and were up 1.0% on year-over-year basis.

Equifax’s operating margins came in at 27.3% compared with 26.9% reported in the year-ago quarter, primarily due to the effect of the acquisitions. Adjusted net income came in at $119.7 million or 96 cents per share compared with $113.4 million or 92 cents reported in the year-ago quarter.

Equifax exited the quarter with $91.7 million in cash and cash equivalents, compared with $101.4 million in the previous quarter. Total long-term debt (including current portion) stood at $1.56 billion. During the quarter, the company paid dividends per share of 25 cents and repurchased stocks worth $49.0 million.

Guidance

Considering the recent domestic and international business activities, current foreign exchange rates and the expected slowdown in mortgage activities, management expects revenues in the third quarter to range between $620.0 million and $625.0 million (mid-point $622.5 million), while the Zacks Consensus Estimate is pegged at $621.0 million. Earnings are forecasted between 96 cents and 99 cents (mid-point 97.5 cents). The Zacks Consensus Estimate is pegged at 98 cents.

Equifax also provided its fiscal 2014 forecast. The company expects is revenues to range between $2.440 billion and $2.465 billion and earnings in the range of $3.81 to $3.91 per share. The Zacks Consensus Estimate for revenues is pegged at $2.455 billion while that for earnings stands at $3.84.

Our Take

Equifax reported modest second-quarter results. While the bottom line beat the Zacks Consensus Estimate, the top line came in line with the consensus mark. Nonetheless, the company’s revenues increased on a year-over-year basis aided by strong growth across most of its business segments. The company also provided a modest third-quarter and fiscal 2014 guidance.

Management’s efforts such as strategic initiatives for product innovation, expansion of data assets through acquisitions and continuous share gains in North America were encouraging.

Given the company’s strong correlation to consumer and financial markets as well as its U.S. and European exposure, we see a gradual improvement in results. Moreover, improving mortgage environment could be a positive for the stock. However, stiff competition from Automatic Data Processing Inc. (ADP), Fiserv Inc. (FISV), Moody’s Corp. (MCO) and uncertainty in the mortgage sector are the concerns.

Currently, Equifax has a Zacks Rank #2 (Buy).

Sigma-Aldrich (SIAL) Beats on Earnings, Misses on Revenues

Posted Thu Jul 24, 01:53 pm ET

by Zacks Equity Research

Lab chemical and life sciences company Sigma-Aldrich (SIAL) posted higher profits in second-quarter 2014 on increased sales, supported by continued healthy momentum in its Applied business unit.

Sigma-Aldrich reported second-quarter earnings of $1.11 per share, an increase of 13% from 98 cents reported in second-quarter 2013. Adjusted earnings in the reported quarter were also $1.11 per share compared to $1.05 per share a year ago, an increase of 6%. It beat the Zacks Consensus Estimate by a penny.

Revenues and Margins

Sales for the quarter were up 3% year over year to $701 million but missed the Zacks Consensus Estimate of $705 million. Organic sales gain in the quarter was 2%, while changes in foreign currency exchange rates had an unfavorable impact of 1%.

Operating income increased 10.8% from the year-ago quarter to $184 million. Adjusted operating margin for the reported quarter was 26.4%, up 30 basis points from a year ago, despite headwinds from currency translations.

 

 

Segment Highlights

The Research Business division’s sales increased 1% year over year to $357 million in the quarter. Though sales in the division remained flat organically, changes in currency translation had a positive impact of 1%.

Research sales in the Academic/Government/Hospitals segment fell by low single digits from the same period last year. Though sales in the U.S. improved, academic sales remained weak in both the Europe, Middle East and Africa (EMEA) and Asia Pacific (APAC) regions.

Also, organic sales growth in the Pharma segment remained flat in the second quarter with low single-digit growth in the U.S. and EMEA.

Gains were witnessed across the U.S region due to improved academic and pharma environment while sales fell in the EMEA region on weak academic spending.

Applied unit’s sales rose 7% (6% organically) to $172 million. The gain was driven by high single-digits rise on an organic basis in diagnostics and testing business with contribution from all regions, led by solid performance in the APAC region. Organic sales growth in the Industrial segment remained in low single digits.

Sales from the SAFC Commercial segment were up 2% (1% organically) to $172 million over the second quarter of 2013. Currency translations impacted sales positively by 2% while divestitures decreased sales by 1%.

Sales fell in low-to-mid single digits organically in the Life Science Products business while Life Science Services saw a double-digit rise on gains in Biopharma services. However, Hitech sales remained flat due to weakness in LED precursors.

Financials

Sigma-Aldrich exited the quarter with cash and cash equivalents of $810 million. Long-term debt was flat year over year at $300 million. Debt-to-capital ratio was 10% as of Jun 30, 2014, compared with 11% as of Dec 31, 2013. Operating cash flow increased around 6.7% year over year to $287 million for the first six months of 2014.

Sigma-Aldrich repurchased 900,000 shares during the first half of 2014 for $85 million. It expects to continue to buy back shares to offset dilution associated with stock-based compensation.

Outlook

Sigma-Aldrich retained its previous outlook for the second half of 2014.  The company now expects adjusted earnings per share for 2014 in the range of $4.32 to $4.40 compared to the previous range of $4.30 to $4.40. The current corresponding Zacks Consensus Estimate stands at $4.37 per share.

Moreover, the company envisions low single-digit overall organic sales gain in 2014. It foresees low-to-mid single-digit sales gain in its Research unit for the second half. Sales in Applied and SAFC Commercial divisions are expected to rise in the mid-single digits.

Operating cash flow for 2014 has been projected to exceed $600 million. Free cash flow for the year has been forecast to exceed $475 million. Capital expenditures are expected to be around $130 million for 2014. Adjusted operating income margin has been projected to increase by roughly 50 basis points.

Sigma-Aldrich currently carries a Zacks Rank #4 (Sell).

Better-ranked stocks in the specialty chemicals space include Green Plains Inc. (GPRE), Minerals Technologies Inc. (MTX) and BioAmber Inc. (BIOA). While Green Plains and Minerals Technologies sport a Zacks Rank #1 (Strong Buy), BioAmber holds a Zacks Rank #2 (Buy).

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