For Immediate Release
Chicago, IL – October 21, 2010 – Zacks.com Analyst Blog features:McDonald Corporation (MCD), Yum! Brands Inc. (YUM), Domino’s Pizza Inc. (DPS), Altera Corporation (ALTR) and Xilinx Inc. (XLNX).
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Here are highlights from Wednesday’s Analyst Blog:
Earnings Preview: McDonald’s
McDonald Corporation (MCD) is slated to release its third-quarter 2010 results on Thursday, Oct 21, before the market opens. The current Zacks Consensus Estimate for the third quarter is $1.24 per share, representing annualized growth of 8%.
With respect to earnings surprises, over the trailing four quarters, McDonald’s has outperformed the Zacks Consensus Estimate for all the four quarters in a range of 0.89% to 7.29%. The average earnings surprise was a positive 3.19%. This implies that the company has beaten the Zacks Consensus Estimate by the same magnitude over the last four quarters.
Agreement of Estimate Revisions
In the last 30 days, out of 21 analysts covering the stock, 3 analysts raised their third quarter estimates and one analyst has reduced his estimates. Additionally, 4 out of the 23 analysts covering the stock have raised their estimates for full fiscal 2011 and 2 analysts have cut down their estimates.
The analysts have raised their estimates as comparable-store sales jumped 7.0% in July and 4.9% in August, helped by growth in all three operating regions. The analysts were also positively influenced by a favorable currency impact.
However, some analysts remain cautious about the European region performance and have consequently lowered their estimates. In Europe, comparable sales rose only 2.2% in August compared to 5.3% in July.
Business may be hampered if countries where McDonald’s operates adopt economic austerity measures. Moreover, for fiscal 2011, analysts believe wage and commodity inflation is likely.
For fiscal 2010, 2 out of the 22 analysts covering the stock have raised their estimates and 2 have reduced their estimates, thus providing no directional movement.
In the last 7 days, 2 analysts have raised the estimates for the third quarter and fiscal years 2010 and 2011. None of the analysts have made a downward revision to their forecasts for the third quarter and 2010. However, one analyst has moved in the opposite direction for fiscal 2011.
The analysts believe that revenues and margins will grow over the next few quarters through unit expansion and strong comps momentum driven by value offerings as well as the roll-out of premium products.
Food costs are also expected to be favorable. Analysts are thus encouraged by a benign cost outlook for 2010, and expect commodity deflation and minimum pricing to enhance the company’s restaurant margin.
Magnitude of Estimate Revisions
There has been no change in the last 60 days in the earnings estimate of $1.24 for the third quarter as seen from the magnitude of the Consensus estimate trend. Therefore, the analysts expect the company to report in line.
In the past 30 days, earnings estimate for 2010 remained unchanged at $4.51 and for 2011; the same shot up by 1 cent to $4.89, and is now expected at $4.52 for 2010 and $4.90 for 2011. The analysts have raised the estimates as the company reported strong same store sales growth for July and August, particularly in the APMEA market and expects the company to gain market share based on product innovation, as well as new menu offerings and marketing strength.
Our Take
Currently, we expect McDonald’s third quarter results to beat estimates, as the company continues to grow same-store sales while maintaining healthy margins and outperforming competitors. McDonald’s is also shutting down its non-performing restaurants to drive margins.
We reiterate our long-term Neutral rating on McDonald’s. Based on a strong balance sheet and consistent earnings, the stock provides relative safety and moderate growth prospects being exposed to faster-growing international markets. Moreover, the franchising strategy that is predominant in McDonald’s business model helps drive steady cash flow streams, solid margins and returns.
We believe, over the next few quarters, revenues will grow through unit expansion and strong comps momentum. Recently, the company also hiked its dividend by 6 cents to 61 cents. However, stiff competition from other quick-service restaurant operators and macroeconomic factors influencing consumer spending patterns still remain concerns.
One of McDonald’s primary competitors, Yum! Brands Inc. (YUM) has reported adjusted earnings of 73 cents per share for its third quarter 2010, which inched past the Zacks Consensus Estimate by a penny. The earnings increased 5% year over year, mainly on the back of strong performances in its China division.
Domino’s Tops Estimates
Domino’s Pizza Inc. (DPS) reported third quarter 2010 adjusted earnings of 27 cents per share, which inched past the Zacks Consensus Estimate by 2 cents. The company had earned 17 cents in the year-earlier quarter. The increase can mainly be credited to strong sales combined with lesser interest expense and a lower effective tax rate.
Total revenue in the reported quarter increased 14.8% year over year to $347.4 million and comfortably surpassed the Zacks Consensus Estimate of $334.0 million. The growth was mainly volume-driven. In addition, overall revenue benefited from higher same-store sales both within the U.S. and oversees as well as store count growth in international markets.
The company’s overall domestic same-store sales registered robust growth of 11.7% with company-owned units increasing 11.8% and franchises stepping up 11.8%. The improvement was aided by reformulated pizza and the effectiveness of its advertising. In the comparable period last fiscal year, Domino’s had noticed flat domestic same-store sales growth. Same-store sales growth in the international market was 7.0% versus 2.7% in the third quarter of 2009. Global Retail Sales were up 12.5% in the third quarter, or up 12.1% excluding foreign currency impact.
The operating margin at Domino’s plunged 40 basis points (bps) to 27.1% in the reported quarter. However, in proportion to sales, selling, general and administrative expenses dropped 90 bps.
Altera Beats Expectations
Altera Corporation (ALTR) reported sales of $527.5 million in the third quarter of 2010, up 12% sequentially and up 84% year over year.
The results beat the Zacks Consensus Estimate of $526.0 million but were within management’s revised guidance of $516.2 million – $535.0 million. Once again, Altera reported a solid quarter driven by strong demand in telecom and wireless markets propelled by communications infrastructure deployments in China, India and the US.
The sequential growth was broad-based across all vertical markets and geographies. However, Europe witnessed only a slight increase. Both large and small customer categories depicted growth, with the highest growth coming from some of its largest customers.
On a product basis, new and mainstream products grew while mature products were essentially flat. New product sales, accounting for 44% of the total, increased 24% sequentially. New products include 65-nanometer (nm) and 40-nm field-programmable gate arrays (FPGAs) and HardCopy application-specific integrated circuit (ASIC) and the latest complex programmable logic devices (CPLD) family – all products which are in the design win and production ramp phase of their lifecycle.
Mainstream products (including 90-nm FPGAs and HardCopy II – products, which are no longer in the design-in phase and tend to grow or decline with the market), grew 9% sequentially.
In terms of product mix, 40-nm products accounted for 13% of total revenues, up from 10% in the prior quarter. 40-nm FPGA’s grew 53% sequentially. Following the success of 40-nm products, the 28-nm FPGA’s product development continues to be on schedule. Altera broadly released the Stratix V design support and Quartus II in July.
In terms of end-markets, telecom and wireless, the largest market for the company accounting for 45% of total sales, increased 21% sequentially. The second largest market – industrial, military and automotive, accounting for 22% of the total, grew 5%. Networking, computer and storage increased 14%, and other markets grew 3%. With the exception of automotive and consumer, each submarket grew sequentially.
Altera ended the quarter with a book-to-bill ratio of above 1, but incoming orders were not as robust as in past quarters. The semiconductor industry is currently facing supply constraints leading to longer lead times. The company stated that foundry capacity improved in the third quarter, which has led to some improvement in lead times.
However, Altera does not expect lead times for most products to return to normal completely until the end of the fourth quarter, with the exception of 40nm and 65 nm products, which should return to normal by early next year.
Guidance
Going forward, Altera expects sales to be up 3% to 6% in the fourth quarter, assuming an element of inventory accumulation by some customers. Once again, the driver of growth will be telecom and wireless markets.
Communications should continue to grow as China and India upgrade to 3G and U.S. and Japan deploy 4G networks. Networking, computer and storage should increase driven by networking. The automotive, industrial, military and the other markets are forecasted to be flat to slightly down.
The guidance implies a revenue guidance of $543.3 – $559.2 million. Given Altera’s track record of upgrading guidance as the quarter progresses, we can expect an increase in the guidance provided with the earnings results. Gross margin is expected to be flat sequentially at 70% – 71%. In the long-run, Altera targets a gross margin of about 65%.
The company is a leader in the Programmable Logic Devices (PLD) market, which is growing faster than the total semiconductor market. Altera’s main rival is Xilinx Inc. (XLNX). Together, they hold nearly 87% of the programmable logic devices (PLD) market. Altera’s product superiority in the 40-nm node has generated a significant amount of business and 40-nm will be the growth driver of the industry for the next several years.
The strong results and bright outlook have boosted the stock price. Shares of Altera were up 2.20% and closed at $30.15 in after-hours trading. In regular trading, shares were down 0.46% and closed at $29.50.
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