Looking Ahead - July 27, 2016
In the rush of earnings reporting after Tuesday's close and before Wednesday's open, there is one report that will stand out above all others: the report from Apple.
Centene [CNC] trades lower in reaction to Q2 print despite revenue growth, guidance raise
Managed Health Care provider Centene (CNC 67.89, -7.37) trades 9.8% lower this afternoon in reaction to the company's mostly in-line Q2 report and raised FY16 guidance. All told, the quarter was not all that bad as revenues grew 97.9% versus last year and earnings per share (EPS) was aided by a $0.19 benefit related to the risk adjustment and reinsurance reconciliations under the Affordable Care Act in connection with our health insurance marketplace business.
To that end, EPS came in at $1.29, excluding the Health Net acquisition expenses and amortization of acquired intangible assets. Further, revenues were $10.9 billion versus $5.5 billion last year. As mentioned, management owed the growth to the acquisition of Health Net as well as the impact from expansions, acquisitions or new programs in many of their covered states in 2015.
Additionally, CNC reported managed care memberships of 11.4 million, a 6.8 million member increase, or +148% versus last year. Further, CNC's health benefits ratio was 86.6% in Q2 vs 89.1% in the prior year.
Looking ahead, CNC now sees FY16 EPS of $4.20-4.55 versus prior guidance of $4.00-4.35. CNC also raised its revenue guidance for FY16 to $39.4-40.0 billion from $39.0-39.8 billion. They also noted adjusted diluted EPS excludes the Health Net acquisition related expenses of $1.00 to $1.05 per diluted share and amortization of acquired intangible assets of $0.50 to $0.55 per diluted share.
Shares hold onto the steep losses from the morning as the broader market - Dow Jones Industrial Average (-0.42%), S&P 500 (-0.24%), Nasdaq Composite (-0.07%) - and the broader sector (XLV 74.63, -0.28 -0.37%) both display pressure.
United Technologies [UTX] Nears One-Year High After Earnings Beat
Dow component United Technologies (UTX 107.03, +2.38) reported better than expected results for the second quarter, sending its shares higher by 2.3% to levels not seen since last July.
The industrial heavyweight delivered above-consensus earnings of $1.82 per share on a 1.3% year-over-year increase in revenue to $14.87 billion.
The uptick in revenue was driven by one percent point of organic growth and one percent point of net acquisition growth-offset by one percentage point of unfavorable foreign exchange translations.
Looking at the segment breakdown, UTC Climate, Controls & Security revenue ticked up 0.1% year-over-year to $4.46 billion, Pratt & Whitney revenue grew 3.7% to $3.81 billion, UTC Aerospace Systems revenue increased 2.3% to $3.72 billion, and Otis revenue was unchanged at $3.10 billion.
UTC Climate, Controls & Security operating profit margin improved to 20.4% from 19.1% while margins in remaining segments contracted. Otis operating profit margin declined to 19.3% from 20.5%, Pratt & Whitney operating margin declined to 11.9% from 13.3%, and UTC Aerospace Systems operating margin slipped to 15.9% from 16.0%. The overall adjusted segment operating profit margin declined to 16.9% from 17.2%.
The solid second quarter prompted United Technologies to increase the low end of its full-year earnings guidance range by $0.15. The company now expects full-year earnings between $6.45 and $6.60 per share on revenue between $57.00 billion and $58.00 billion.
McDonald's [MCD] Drops on Q2 Comp Sales Disappointment
Up 32% over the last 52 weeks through Monday, it was plain to see that McDonald's (MCD 123.35, -4.05) has impressed investors with its turnaround efforts. This morning, however, they are looking a little less impressed knowing that McDonald's second quarter comparable sales growth wasn't quite as robust as expected.
This news came to light in McDonald's second quarter earnings report, which showed revenues declining 4% (-1% excluding currency translation) to $6.26 billion and diluted earnings per share decreasing 1% (+1% excluding currency translation) to $1.25.
Excluding strategic charges totaling $0.20 per share and prior-year restructuring charges of $0.04 per share, diluted earnings per share were up 13% in constant currencies.
McDonald's surpassed analysts' average earnings per share expectation, although it missed with its comparable sales growth.
Specifically, McDonald's said global comparable sales rose 3.1%, driven by positive comparable sales in all segments: U.S. (+1.8%); International Lead (+2.6%); High Growth (+1.6%); and Foundational (+7.7%).
Analysts' average growth estimate for global comparable sales was in the neighborhood of 3.5%. The bigger disappointment, though, was the U.S. segment, where the average comparable sales growth estimate, according to media reports, was north of 3.0%.
McDonald's said its All Day Breakfast and McPick 2 offerings remained drivers of the comparable sales growth in the U.S., but that there was a softening in industry growth during the quarter.
That revelation and the lower-than-expected comparable sales have undercut the stock this morning.
McDonald's remains confident in its turnaround approach, but with price competition heating up in the quick service restaurant industry and McDonald's sporting a stretched valuation at roughly 22x estimated FY16 earnings, its stock may find it difficult for the time being to show some breakout momentum.
Caterpillar [CAT] Recovers Back Into Positive Territory Following Earnings/Guidance
Caterpillar (CAT 79.72 +1.03) reported second quarter earnings of $1.09 per share, excluding non-recurring items, which topped expectations. On the top line, revenues fell 16.0% year/year to $10.34 billion, which also beat expectations.
The year/year decrease in revenue was primarily due to lower sales volume resulting from continued weak commodity prices globally and economic weakness in developing countries. While sales for both new equipment and aftermarket parts declined in all segments, most of the decrease was for new equipment. Unfavorable price realization also contributed to the decline.
Sales declined in all regions in the quarter and in all segments. Mining, oil and gas, and rail industries remain challenged.
However, the company does has strong balance sheet -- Maintained $0.77 per share dividend (announced June 8, 2016).
Looking ahead, however, guidance was weakened some...
For fiscal year 2016, the company forecasted its outlook closer to bottom end of prior guidance; sees EPS at $3.70, excluding non-recurring items, and revenue in the range of $40-42 billion.
More specifically, co said, "The outlook for 2016 that we provided with our first-quarter financial results in April expected sales and revenues in a range of $40 to $42 billion. At the midpoint of that range, profit was expected to be $3.00 per share, or $3.70 per share excluding restructuring costs. Over the past quarter, economic risks have persisted and, as a result, our current expectations for 2016 sales and revenues are closer to the bottom end of that outlook range."
Caterpillar also said, "World economic growth remains subdued and is not sufficient to drive improvement in most of the industries and markets we serve. Commodity prices appear to have stabilized, but at low levels. Global uncertainty continues, and the recent Brexit outcome and the turmoil in Turkey add to risks, especially in Europe."
Under Armour [UA] trades a bit higher on Q2 earnings; international and footwear led the way
Under Armour (UA) is trading slightly higher today after reporting Q2 earnings/guidance this morning. In terms of quick background, Under Armour is an athletic brand which makes performance footwear, apparel and equipment.
The brand's moisture-wicking fabrications are engineered in many different designs and styles for wear in nearly every climate to provide a performance alternative to traditional products. Its products are sold worldwide and worn by athletes at all levels, from youth to professional, on playing fields around the globe, as well as by consumers with active lifestyles.
UA also offers the Under Armour Connected Fitness platform which powers the world's largest digital health and fitness community through a suite of applications: UA Record, MapMyFitness, Endomondo and MyFitnessPal. UA's strategy is focused on engaging with these consumers and increasing awareness and sales of UA products.
UA's revenue is generated primarily from the wholesale channel with sales to national, regional, independent and specialty retailers. UA also generates revenue from its Direct-to-Consumer channel, which includes its brand and factory house stores and websites, from product licensing and from digital platform licensing and subscriptions and digital advertising through its Connected Fitness business.
Turning to the Q2 results, non-GAAP EPS came in at $0.01, slightly below market expectations. Revenue rose 27.7% year/year to $1.0 bln, in-line with market expectations. In terms of guidance, while UA reaffirmed prior FY16 revenue guidance of approximately $4.925 bln, the revenue guidance for Q3 at +20% was seen as a bit of a disappointment. Gross margin for Q2 dipped to 47.7% from 48.4% in the prior year period, primarily due to sales mix driven by strong growth in footwear and international, partially offset by improved product cost margins.
Breaking down the results further, UA sells its products via wholesale (non-UA stores like Finish Line or sporting goods retailers) and via Direct-to-Consumer (its own UA-branded stores and online). Wholesale revenue grew 27% YoY to $635 mln, while Direct-to-Consumer revenue grew 28% to $321 mln, so the growth was well-balanced. UA has made international expansion a high priority. International revenue, which represented 15% of total Q2 revenue, grew 68% YoY.
Within product categories, apparel revenue increased 19% to $613 mln, led by growth in men's training, women's training and golf. Footwear revenue jumped 58% to $243 mln, primarily reflecting the continued success of the basketball category led by the Curry signature basketball line as well as growth in running and cleated categories. Accessories revenue increased 21% to $101 mln, driven primarily by growth in bags and headwear.
In its largest category of apparel, UA continues to add more dimension with a sport category focus and UA says it's incredibly proud of the success of its international and footwear growth drivers. With the opening of 60 new international Under Armour stores so far this year, including doors on two new continents this quarter, UA's international business continues to expand and to resonate with the global athlete. The Stephen Curry signature line has continued to drive strong momentum for the brand and its pinnacle football product, the Highlight Cleat, continues to lead the market.
In sum, while the Q3 guidance was a bit disappointing, investors seem to be focusing on the positives: international growth and footwear. Also, the Curry signature basketball line is selling quite well. After trading mostly sideways over the past year, this stock has shown good momentum over the past month. Investors seem fairly happy overall with the Q2 results.
Check Point Software [CHKP] set for slightly lower open despite Q2 beat
Check Point Software (CHKP) is indicated to open approximately -2% lower this morning (albeit on very thin pre-market volume) after the company reported Q2 results that were moderately above investor expectations.
As most investors are probably aware, CHKP is a security software & hardware company. Starting out in 1993 as a provider of firewall security, the company in the decades since has broadened its product offering into a platform featuring more than 80 security modules. While CHKP is a mature company and may have been overshadowed in recent years by faster-growing, next-generation security providers such as Palo Alto Networks (PANW) and FireEye (FEYE), CHKP continues to grow (albeit at single-digit rates) and roll out new high-end products. In particular, its line of software blades has been quite successful, and the company is expanding into newer threat areas such as mobile and data center security.
This morning the company reported Q2 sales that rose +7% to $423 million, which was slightly above expectations. EPS rose +10% to $1.09, which was two cents above expectations. Deferred revenues rose +14% year-over-year to $892 million, and software blades subscription revenues rose at an even faster pace, up +21% year-over-year to $93 million.
Within the press release, the company's CEO stated that: "We had a good second quarter with results toward the high-end of our expectations. Our newly launched security appliance lines optimized for threat prevention were embraced by customers and resulted in a marked increase in unit sales. In addition, our advanced threat prevention and zero-day malware protection software experienced high-growth and contributed to the acceleration in our software blades subscriptions revenues."
The company's Q2 conference call began at 8:30 AM ET this morning.
Texas Instruments [TXN] Spikes After Earnings Beat
Texas Instruments (TXN 71.15, +4.93) reported better than expected results for the second quarter, sending its shares higher by 7.4% in pre-market action.
The semiconductor manufacturer reported above-consensus earnings of $0.76 per share on a 1.3% increase in revenue to $3.27 billion, which also surpassed estimates.
Gross margin improved to 61.2% from 58.2% in the same quarter a year ago. The company noted that manufacturing efficiency contributed to the improvement. Operating profit grew 11.0% to $1.12 billion and net income jumped 12.0% to $779 million.
Trailing 12-month free cash flow improved 7.0% to $3.90 billion, which represents 30.0% of revenue.
Looking at the segment breakdown, Embedded Processing showed the sharpest growth with revenue jumping 9.0% to $755 million, leading to a 40.0% surge in operating profit to $189 million. Analog revenue was essentially unchanged at $2.04 billion, but operating profit improved 6.0% to 771 million. Other revenue declined 4.0% to $474 million while Other operating profit increased 7.0% to $157 million.
Going forward, the company expects to generate third-quarter earnings between $0.81 and $0.91 per share, which is on the top end of analysts' average estimates. Third-quarter revenue is expected between $3.34 billion and $3.62 billion, which is a little ahead of market expectations.