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| IN THIS ISSUE – June 25, 2010 | www.bullmarket.com |
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Feature Article By BullMarket.com: Darden Falls Short in FQ4, But Outlook is Upbeat By BullMarket.com: Cramer Recommendation Pushes MarkWest Higher By NextInning.com: Member Q&A - A Look at GLW By BullMarket.com: iPad Sales Continue at Swift Pace
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Darden Falls Short in FQ4, But Outlook is Upbeat Darden reported net income of $116 million, or 81 cents per share, for the quarter ended May 30th, down from $122.8 million, or 87 cents per share, in the final quarter of fiscal 2009. Fourth-quarter sales totaled $1.86 billion, down -5.7% from $1.98 billion in the prior year. The 2009 fiscal quarter had 14 weeks compared to 13 in the recently concluded quarter. The additional fiscal week contributed approximately $124 million of sales to the year-ago period. On a reported basis, combined same-restaurant sales for Olive Garden, Red Lobster and LongHorn Steakhouse were down -2.3% this quarter (13 weeks vs. 13 weeks). On a calendar week comparison, which is consistent with how the Knapp-Track benchmark is calculated, Darden’s blended same-restaurant sales for the fourth quarter were down- 0.9%. This compares to an estimated decline of -1.4% for the Knapp-Track benchmark of U.S. same-restaurant sales, excluding Darden. Darden recognized a -$12.7 million pre-tax reduction in sales during the quarter that management said resulted from a correction to its third-quarter estimate of gift card redemptions. This non-cash charge shaved approximately -5 cents from Q4 EPS. Excluding the pre-tax charge, reported EPS would have equaled 86 cents, which would have been 2 cents short of the 88 cents Wall Street analysts were forecasting. "Our financial performance for the quarter was solid, capping a year of strong earnings growth despite very challenging economic and consumer conditions," said Clarence Otis, chairman and CEO. "The month-to-month sales volatility we saw in our industry during the quarter is an indication that consumers remain cautious. Nevertheless, there was meaningful improvement compared to the beginning of the year." EPS for the full fiscal year increased by 8% to $2.86 from $2.65 in the prior year, which included an additional week. Sales totaled $7.11 billion, -1.4% lower than $7.22 billion in fiscal 2009. Looking ahead, management guided for fiscal 2011 profits to grow by 14% to 17%, which translates into a range of $3.26 to $3.35 per share. The analyst consensus for 2011 was for a profit of $3.26. "We are assuming that blended same-restaurant sales growth for our three large casual dining brands, Olive Garden, Red Lobster and LongHorn Steakhouse, will be between +2% and +3% in fiscal year 2011," said CFO Brad Richmond. "Based on these same-restaurant sales expectations and approximately 70 to 75 net new restaurant openings, total sales growth is expected to be between +5.5% and +6.5%." Olive Garden is the company's largest dining concept. It reported Q4 sales of $848 million, down -4.8% from a year ago. Sales on a same-restaurant basis slipped by -1.5% during the quarter; however, the sales and traffic trends improved in May. Total sales for the year slipped by -1% to $3.32 billion. The company opened 32 net new restaurants during the final quarter. On a percentage of sales basis, food and beverage expenses were lower, but those savings were more than offset by increased restaurant labor expenses, restaurant expenses, SG&A costs, and depreciation expenses, which cut into the profit. The additional week of operation in the prior-year period drove up most costs for all of Darden's concepts in Q4 and was partly responsible for revenue declines. Red Lobster's sales of $663 million were down by -9.6% from the prior-year period. Sales on a same-restaurant basis were off by -1.7%. Full-year sales slipped by -5.3% to $2.49 billion. The company opened four new restaurants in Q4. LongHorn Steakhouse reported a -2.5% decline in Q4 sales to $233 million. Same-restaurant sales, however, grew by 1.8%. Ten new LongHorn units opened. Full-year sales of $882 million were -0.7% lower than fiscal 2009. "During the fourth quarter, estimated same-restaurant guest counts were down -3.2%; however, implied check increased 1.8%. So as a result, same-restaurant sales were down only -1.4%," COO Andrew Madsen told analysts. "Now, this represents continued sequential improvement in both the absolute results and underlying dynamics for the industry. Compared to the third quarter, guest counts improved 90 basis points, check improved 190 basis points, and same restaurant sales improved 280 basis points. In fact, this was the first quarter of check growth for the industry during fiscal 2010." "Stepping back even further, same-restaurant guest counts and sales during the fourth quarter marked the best industry performance in roughly two and a half years since the first quarter of our fiscal 2008. While industry guest counts and sales remain negative, we are encouraged by the continued improvement in both metrics as well as a reduction in the amount of competitive deep discounting so prevalent earlier in the year." Madsen also addressed what impact the oil spill in the Gulf of Mexico might have on Red Lobster. He said the company does source some product from the Gulf region but so far none of its suppliers have been impacted by the spill. "We source the large majority of our seafood product globally, so we have seen very little impact on cost and availability and don't expect to see much adverse impact going forward," he said. Turning to the company's specialty restaurants, Q4 sales at the high-end Capital Grille grew by 9.4% to $64 million, driven by a same-restaurant gain of 4.7%. The company opened three new locations. Total sales for the fiscal year were $242 million. Bahama Breeze Q4 sales slid -2.9% to $38 million. Same-restaurant sales grew by 1.2%. For the full year, sales totaled $130 million. Finally, the company's board voted to increase Darden's quarterly dividend by 28% to 32 cents per share. BMR Take: Take away the non-cash charge and the skewed comparison that results from one more operating week in the year-ago quarter and Darden delivered solid results, though we did think an upside surprise was more likely than the earnings miss. The company's upbeat outlook is encouraging. Investors sold on the headline, as is the norm, but we think Darden is in a good position to deliver solid growth in the new fiscal year. Industry metrics are improving, and Darden is the clear leader in the casual dining sector. Darden is now trading right around the level we exited the stock in April 2009 for an 81.5% gain; however, we think the overall fundamental picture has improved since then, and we'd place a target of about $47 on the stock. The consumer discretionary sector has been very weak recently, and if the weakness continues, Darden is a stock to put back on the radar.
Cramer Recommendation Pushes MarkWest Higher Cramer talked up MarkWest's presence in the Marcellus Shale, and the importance of the natural gas industry and how production in the region is expected to quadruple by the end of 2011. He also said that MarkWest has taken off since the oil spill in the Gulf as people start to realize that natural gas is the country's energy future. (Note that this technically isn't true, as we added the stock to the Recommended List following the BP oil spill after it took a pretty steep drop. We'd also suggest subscribers read our post on the Marcellus Shale from last week before declaring natural gas drilling to be much safer than deep water oil drilling.) The CNBC pundit went on to compare MarkWest to fellow Recommended List selection Kinder Morgan (KMP, $65.50, 0.05). He noted that the company derives 40% of its revenue from fee-based operations and that the rest are mostly hedged through 2011. He added that the dividend is well covered and that the company has room to raise it, pointing to its 1.4x coverage ratio. (Note we wouldn't compare MarkWest to Kinder Morgan outside of them both being midstream MLPs. Kinder Morgan derives a much larger percentage of its business from fee-based operations, and is largely a crude and natural gas pipeline and storage company, while MarkWest is a natural gas gatherer and processor. As for its hedges, 70% of its commodity exposure is hedged in 2010, and about 65% in 2011.) BMR Take: While we wouldn't say Cramer gave the most accurate description of the MarkWest story, we do agree that it is nonetheless a good one. The company is a solid play on the buildout of Marcellus infrastructure, and we like how it is growing the fee-based portion of its business. In addition, the company has done a solid job mitigating its commodity risk, and with a robust coverage ratio, does have room to grow its distribution. It is worth noting, however, that the company does benefit from higher oil prices (via the correlation to NGLs) and the wide gap between those prices and nat gas prices. With the stock right at our current target following a quick 22% rise, we'll likely look to make an adjustment to our rating and/or target price in the future.
Member Q&A - A Look at GLW A) As was the case with a number of tech stocks, there were various news reports during the May correction pointing to weakening demand for GLW. As I caught up from being on vacation during early May and had a chance to look specifically at GLW, I reiterated my positive opinion on the company using its recent Merrill Lynch presentation as the basis. Ahead of the opening on June 9th (GLW had closed the previous day at $17.05), we published the following comments: "During his Merrill Lynch presentation GLW CFO, James Flaws clearly stated that he anticipates GLW will realize double-digit growth rate for LCD glass running through the next two years. According to Flaws, this will be driven by faster replacement rates and by the rapidly expanding middle class in emerging markets (the latter being highly consistent with one of my over-arching theories). I think in addition to this driver, we'll also see continued aggregate growth in solar panels, fiber optics and for GLW's new Gorilla Glass. While most analysts have this sort of revenue growth fairly well anticipated in their models, the thing I think they are missing is my contention that profits will grow faster than revenue. I think this will be driven by better absorption of fixed costs (higher revenues absorb fixed costs more efficiently) and cost reductions implemented by GLW. Based on these opinions, my view of GLW remains bullish and my fair value range has not changed." As it stands today, my opinion remains unchanged. I think GLW is well positioned not only for a strong 2010, but also a strong 2011. In a February 22nd report on solar stocks, I shared my continued bullish outlook for GLW and my contention that the stock was undervalued at its then current price of $17.71 ($17.66 is adjusted for the subsequent dividend payment). In that report, I outlined my case for a fair value range of $22.05 to $28.95 (please see the original report for details). Disclosure: At the time of this publication, out of the companies discussed herein, Paul McWilliams had a long position in GLW.
iPad Sales Continue at Swift Pace More impressively, the pace of sales has actually accelerated. After taking 28 days to sell its first million units and 31 days to sell the next million, it only took 21 days to reach the latest million mark. The iPad is currently available in ten countries. It debuted in the U.S. on April 3rd, and in select international markets at the end of May. "People are loving iPad as it becomes a part of their daily lives," CEO Steve Jobs said in a statement. "We’re working hard to get this magical product into the hands of even more people around the world, including those in nine more countries next month." BMR Take: The unit sales numbers coming out of Apple continue to amaze: 3 million iPads sold in 80 days, 600,000 iPhone 4 pre-orders the first day. Despite the nearly 200% gain we have had in the stock since first adding it to the Recommended List in September 2008, we still find the stock very attractively valued considering its massive cash horde (roughly $46 a share), strong runway of growth, and exceptional execution. We rate the stock a "Buy" with a target of $330, which we still consider conservative.
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