Steel Dynamics reports earnings above recent guidance
Steel Dynamics (STLD), one of the largest steel producers in the US, is trading higher by 3% today following earnings late last night. Non-GAAP EPS came in at $0.47, above the high end of the guidance management provided on September 17 at $0.42-0.46. Revenue rose 22.4% year/year to $2.34 bln, which was better than expectations.
In case you're not familiar, STLD operates five steel mills, six steel processing facilities, two iron production facilities, 90+ metals recycling locations and six steel fabrication plants. STLD is what's known as a mini-mill (like Nucor) meaning that it creates steel mostly by using scrap and melting it down to form new steel. This is more efficient than an integrated steel producer (IP), like AKS or X, which makes steel directly from iron ore and coal in an expensive blast furnace. Unlike a blast furnace, mini-mills can easily start and re-start based on demand which keeps costs lower. Also, mini-mills mostly use non-union labor.
The stock has been rising on improving automotive and non-residential construction demand. However, it's M&A that caused the stock to jump in mid-July when STLD announced it would acquire Severstal Columbus for $1.625 bln (deal closed in mid-September). It was a large transaction which increased STLD's annual production capacity by 40% to 11 mln tons. Columbus is one of North America's newest mini-mills with state-of-the-art facilities. The stock market was pleased as the price is substantially below greenfield replacement value and it gives STLD more exposure to high-growth markets in the Southern US and Mexico. While the deal was viewed positively, the stock has been weak recently following Ford Motor's (F) recent warning.
Breaking down the numbers a bit, average product selling price for the company's steel operations increased $7 to $840 per ton in Q3. Also, its consolidated operating income increased 43% sequentially to $189 mln. Compared to Q2, operating income from the company's steel operations increased 28% to $202 mln driven by record quarterly shipments and improved metal spread. Strong demand in automotive, manufacturing and energy markets supported volumes.
Growth in the nonresidential construction market also improved, as evidenced by record shipments of both structural and joist steel during the quarter. During Q3, STLD achieved record volumes in fabrication and steel, even before including the results from its recent acquisition. Despite what STLD sees as elevated levels in terms of steel imports into the US, the strength of underlying demand resulted in record shipments.
Looking ahead, management remains optimistic heading toward the end of the year. Despite recent broader global concerns, STLD notes that the US economy is continuing to improve, inflation remains low and borrowing rates remain at historically attractive levels. STLD continues to be the beneficiaries of strong end markets, such as automotive, manufacturing, transportation and energy. STLD also believes growth in the construction market will continue as evidenced by the increased demand for its construction-related steel products.
McDonald's Golden Arches Tarnished by Weak Operating Results
In reporting a non-GAAP profit of $1.51 per diluted share, McDonald's (MCD 91.59) handily beat analysts' earnings expectations, yet don't let that headline fool you. The overall report from McDonald's and its guidance was quite disappointing.
Revenue declined 4.6% to $6.99 billion (below analysts' expectations), consolidated operating income was down 14%, and earnings per share were basically unchanged from a year ago.
Global comparable sales decreased 3.3% on negative guest traffic in all major segments and the impact of the previously-disclosed meat supplier issue in certain markets in the APMEA region, according to the company. Comparable sales were down 9% in APMEA, down 1.4% in Europe, and down 3.3% in the U.S.
McDonald's said the aforementioned supplier issue accounted for roughly half of its operating income decline while a soft operating performance in the U.S. and certain markets in Europe accounted for the rest.
The company is working to become more efficient from an operating standpoint, more effective from a marketing standpoint, and more attractive for customers with a simplified menu.
Those actions notwithstanding, the turn in business trends in a fiercely competitive industry isn't going to come quickly. Global comparable sales are expected to be negative for October and McDonald's said the internal factors and external headwinds that proved more formidable than expected in the third quarter are anticipated to continue into the fourth quarter.
Shares of MCD are trading 2.0% lower in pre-market action. An attractive dividend yield of 3.70% is expected to offer a measure of support for the stock, which is down 12% from its high in May and down 6% year-to-date, yet it will take a positive turn on the operating side of things -- or confidence that turn is nigh -- to get the stock back in the market's good graces.
Texas Instruments Beats on Top and Bottom Line; Revenue Growth Across Business Segments
Semiconductor manufacturer Texas Instruments (TXN 45.40) is trading modestly higher this morning after reporting Q3 (Sep) results last night. It was better than expected on both the top and bottom lines. TXN reported GAAP EPS of $0.76, up 36% year-over-year while revenue grew by 7.9% year-over-year to $3.50 billion. The company also reported a record gross margin of 58.4% vs 54.8% in the year ago period.
In case you're not familiar, TXN is one of the world's largest semiconductor makers. It's the market leader in terms of digital signal processors (DSPs) and a major supplier of analog semiconductors, which convert real-world signals (sound, temperature, pressure or images) into a stream of digital data that can be processed by other semiconductors, such as embedded processors.
Analog semiconductors are also used to manage power in every electronic device, whether plugged into a wall or running off a battery. Analog products account for about 60% of TXN's revenue and the company has the #1 position in this fragmented market at about 18%.
TXN's other major category is Embedded Processing products, which are the "brains" of many electronic devices. TXN's Embedded Processing products are used in many markets, particularly industrial and automotive. This segment accounts for about 20% of TXN's revenue and the company holds the #2 market position with a 14% market share. This includes digital signal processors (DSPs) and applications processors. DSPs perform mathematical computations almost instantaneously to process or improve digital data while applications processors run an industry-standard operating system and perform multiple complex tasks, often communicating with other systems.
TXN also has an Other segment which includes revenue from smaller product lines, such as DLP (primarily used in projectors to create HD images), ASICs and calculators.
Getting back to the earnings results, Analog revenue increased 11% year-over-year while Embedded Processing revenue increased 6% year-over-year. Its Other segment saw revenue decrease 1% as a result of legacy wireless products being mostly offset by growth in DLP products. Of note, TXN has reported strong gross margin numbers the last two quarters, and said that in both instances, the gross margin was a reflection of the portfolio of Analog and Embedded Processing products. These products have a higher rate of profitability and require less capital compared to wireless products.
Finally, of note on the conference call, the company disclosed that orders in the quarter rose 6% year-over-year to $3.34 billion, and that the book-to-bill ratio was 0.95. The company said the ratio would have been higher if not for conversion to consignment.
On a final note, TXN said that it has returned $4.2 billion to shareholders in the past twelve months through stock repurchases and dividends. Its strategy is to return to shareholders all free cash flow not needed for net debt retirement.
In sum, if you look at the chart you'll notice TXN gapped lower in early October. It turns out the entire Semiconductor sector took a hit when MCHP warned on October 10 that an industry correction had begun, and that effects will be seen more broadly across the industry. That probably lowered expectations a bit for TXN's earnings but they wound up posting some good upside.
AbbVie and Shire Merger Officially Dead
The deal is dead, so say AbbVie (ABBV 54.41) and Shire Pharmaceuticals (SHPG 184.59), which had been slated to merge in a $50 billion plus transaction.
AbbVie rocked the risk arbitrage world last week when it said its Board of Directors was going to convene to reconsider its recommendation to shareholders to vote in favor of the transaction. Shares of SHPG plummeted 30% on October 15 following that news as investors saw the writing on the wall with those second thoughts.
Sure enough, AbbVie's board recommended the next day that its shareholders vote against the transaction, saying the changes made to the tax rules by the Treasury Department on September 22 introduced an unacceptable level of uncertainty and eliminated certain of the financial benefits of the transaction, namely the ability to access current and future global cash flows in a tax efficient manner.
The combined company was going to be domiciled in the U.K. where it would be subject to a much lower tax rate than what would be paid in the U.S.
After a spate of so-called tax inversion deals, the U.S. Treasury Department introduced new tax rules that effectively made tax inversion deals less appealing.
AbbVie bemoaned that move in its press release announcing the termination of the agreement and took the occasion to state its view that the U.S. tax code is outdated and puts global U.S.-based companies at a disadvantage to foreign competitors.
With the breakup of the merger agreement, AbbVie will pay Shire a $1.635 billion break fee.
In a separate announcement, AbbVie said its Board of Directors authorized a new $5 billion stock repurchase program and increased the company's quarterly cash dividend nearly 17% to $0.49 per share. At AbbVie's current stock price, the new dividend payment translates into an attractive dividend yield of 3.60%.
Apple Shines with Fourth Quarter Results and Outlook
If just about everything in IBM's (IBM 169.10) third quarter earnings report was bad, just about everything in Apple's (AAPL 99.76) fiscal fourth quarter earnings report was good.
Apple's revenue increased 12.4% to $42.1 billion, gross margins expanded 100 basis points to 38.0%, net income jumped 12.7% to $8.47 billion, and earnings per diluted share surged 20% to $1.42, aided by the company's share buyback efforts.
CEO Tim Cook summed things up with a simple, yet assertive view that fiscal 2014 was one for the record books for Apple and that the company heads into the holidays with its strongest product lineup ever, only to be followed with the introduction of the Apple Watch in 2015.
The overwhelming success of the iPhone 6 and iPhone 6 Plus powered the fourth quarter results, which is remarkable knowing that their launch came at the end of the quarter.
During the period, Apple moved 39.27 million iPhone units. That was up 12% sequentially, up 16% from the prior-year period, and it generated $23.68 billion in revenue. Mac sales were another bright spot for the company. They totaled 5.52 million units, up 25% sequentially, up 21% year-over-year, and generated $6.63 billion in revenue.
The lone blemishes in the report it seemed were that iPad and iPod sales declined. In particular, iPad sales fell 10% sequentially to $5.32 billion as the number of units sold dropped by 7%, reflecting the cannibalization of that business by the growing popularity of the iPhone. iPod sales declined 7% to $410 million.
Apple made up for any disappointments, though, with some upbeat guidance for the fiscal first quarter that includes an outlook for revenues to be between $63.5 billion and $66.5 billion and gross margins to range from 37.5% to 38.5%. In the same period a year ago, Apple reported revenue of $57.6 billion with gross margins of 37.9%.
Shares of AAPL are indicated 2.0% higher in pre-market action.
Its solid report and outlook, which speak to strong demand for its products and services, should bode well for many of its suppliers, which include the likes of Qualcomm (QCOM 73.27), Avago Technologies (AVGO 77.99), Skyworks Solutions (SWKS 51.86), NXP Semiconductors (NXPI 61.50), and RF Micro Devices (RFMD 10.44).
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