Looking Ahead - April 26, 2017 - Norfolk Southern Earnings Report
If you want to get a line on economic activity in the U.S., the railroad operators often provide a good place to look. CSX Corp just set a nice bar with its recent earnings report. Investors will be curious to see if Norfolk Southern can do the same when it reports before the open on Wednesday.
Biotech stocks surge after Novartis signals more deal-making for early stage assets
Biotechnology stocks are leading the market higher today. The SPDR S&P Biotech ETF (XBI) is up 2.2% while the large cap heavy iShares Nasdaq Biotechnology (IBB) is up 1.6% versus a 0.6% gain the S&P 500.
The primary catalyst appears to be comments from Swiss drug giant Novartis (NVS), who reported first quarter results this morning. Novartis said it will continue to aggressively strengthen its internal pipeline with early stage acquisitions and in-licensing deals. Novartis noted that the price of assets has gone up in the sector so it is going 'upstream', or into earlier stage assets to find value. Novartis typically focuses on assets in the $2-5 billion range. This is notable because M&A is inherently important in the biotech industry where the biggest players are flush with cash and hungry for growth with serious business development initiatives.
Novartis beat first quarter earnings estimates this morning and reaffirmed its fiscal 2017 outlook. Novartis delivered sales growth across all divisions in constant currency as growth drivers, including Cosentyx and Entresto, more than offset generic erosion, while oncology sales grew 7%. Novartis will report Phase II data from its CAR-T Juliet trial treating DLBCL (diffuse large B-cell lymphoma) at a conference on June 14. This is competition to Kite Pharma's (KITE) CAR-T treatment AxiCel. Positive phase II results for Kite's drug sent the stock surging in late February. Both Kite and Novartis are looking to have the first CAR-T therapy on the market this year.
Biogen (BIIB +5%) is also helping sentiment in the space today. The stock is up 5% after beating first quarter estimates on the top and bottom line. Spinraza sales were $47 million, well above estimates. Biogen markets the first ever drug approved for Spinal Muscular Atrop[hy (SMA) for Ionis (IONS +4%).
Of course, the risk-on nature of the current market is also helping speculation in higher risk biotech stocks.
Looking at upcoming earnings from large cap biopharma, Amgen (AMGN) will report tomorrow afternoon while AbbVie (ABBV), AstraZeneca (AZN), Bristol Myers (BMY) and Celgene (CELG) will report on Thursday morning.
Tyson Foods buys midwest-based APFH for $40.25/share; Announces non-protein business sales
This morning, shares of AdvancePierre Foods (APFH 40.23, +3.56) trade about 9.71% higher in reaction to a buyout offer from prepared food manufacturer Tyson Foods (TSN 65.19, -0.20 -0.31%). TSN offered $4.2 billion, or about $40.25 per share in cash, in a deal which is expected to be immediately accretive to TSN's earnings.
As mentioned, the two parties announced a merger agreement pursuant to which a subsidiary of TSN will launch a tender offer to acquire all of APFH's outstanding common shares for $40.25 per share in cash.
The total enterprise value of the transaction, which has been approved by the Boards of Directors of both companies, is about $4.2 billion, including $3.2 billion in equity value and $1.1 billion in assumption of APFH debt. The offer price represents a 31.8% premium to APFH's closing price on April 5, 2017, the most recent unaffected trading day, and a 41.6% premium to the company's 60-day volume-weighted average trading price ending on April 5, 2017.
Additionally, funds affiliated with Oaktree Capital Management, L.P., which own about 42% of the outstanding shares of APFH common stock, have entered into a tender and support agreement pursuant to which those funds have agreed to tender their APFH shares pursuant to the tender offer.
TSN expects the deal to be immediately accretive to EPS on both a GAAP and cash basis, excluding one-time costs. Further, TSN expects the transaction will result in cost synergies of about $200 million, to be fully realized within three years. Cost synergies will be created by a consolidated manufacturing footprint, procurement efficiencies, distribution network consolidation, and addressing redundant sales and marketing functions and duplicative corporate overhead. The transaction is expected to generate revenue synergies over time by utilizing TSN's product innovation platform and portfolio of brands to drive growth across APFH's leading sandwich, entre, and snack categories.
Ahead of this announcement, last night in a press release TSN announced the exploring of the sale of three non-protein businesses. In February, TSN announced its strategy to sustainably feed the world with the fastest growing portfolio of protein packed brands. As the company focuses on its growth and value creation, it is exploring the sale of its Sara Lee Frozen Bakery business, the Kettle business and Van's.
Shares of TSN appear to be retreating at the moment after enjoying modest gains early in the session. Still, the stock holds up slight gains both YTD, +4.4%, and in April +5.2%.
T-Mobile US Climbs After Reporting First Quarter Results
T-Mobile US (TMUS 66.96, +1.03) is higher by 1.6% after reporting first quarter results that may not be comparable to estimates.
The wireless carrier reported first quarter earnings of $0.80 per share on an 11.0% year-over-year increase in revenue to $9.61 billion, which was just below market expectations. T-Mobile expects that its revenue growth rate led the industry for the 15th consecutive quarter.
The company added 1.1 million customers to continue a streak of four years of quarterly additions of at least one million. T-Mobile had 914,000 total branded postpaid net additions, expecting to be the industry leader for the fifth consecutive quarter. Postpaid phone churn declined 15 basis points to year-over-year to 1.18%, which was a record.
The company expanded its bandwidth during the first quarter, acquiring 31 MHz of spectrum for $8 billion to quadruple its low-band holdings. Furthermore, the company won 45.0% of 600 MHz spectrum sold at an auction.
The solid start to the year puts T-Mobile on track to add between 2.8 million and 3.5 million customers, which is up from previous guidance for additions between 2.4 million and 3.4 million.
T-Mobile expects that its capital expenditures will be between $4.80 billion and $5.10 billion in 2017.
Whirlpool Comes Up Short of Q1 Estimates and Lowers FY17 Outlook
Whirlpool (WHR 179.85, +5.05, +2.9%) is the world's leading major appliance manufacturer. Consequently, the company always draws increased attention when it reports its earnings results.
Whirlpool did just that after Monday's close, posting its results for the March quarter. They were disappointing, yet the sting of that news looks to have been diminished by the understanding that the shortfall was related more to fixable issues of Whirlpool's own doing and not so much due to weak demand.
First quarter net sales were $4.8 billion, up 3.7% from the same period a year ago and ahead of analysts' average expectation. Adjusted earnings per diluted share of $2.50, however, came up shy of analysts' average expectation and were 4.9% below last year.
The earnings shortfall stemmed in part from the negative impact from product price/mix and raw material inflation. Those headwinds were offset partially by cost productivity and unit volume growth.
Net sales were up in all regions, with the notable exception of Europe, Middle East and Africa (EMEA), where they slipped 16.7% to $1.0 billion. In North America, net sales jumped 8.3% to $2.6 billion; meanwhile, they surged 16.0% to $818 million in Latin America and increased 12.9% to $419 million in Asia.
The trouble in the EMEA region was related to some currency and demand weakness in the UK, as expected, but it was the challenges Whirlpool faced integrating its acquisition of Italian appliance maker Indesit that caused the real problems.
That integration effort, it was said, was at peak complexity during the quarter, which had the residual effect of creating a temporary disruption in the region's supply chain network and product availability.
Whirlpool expects to get the integration issues worked out and for operating margins in the region to improve sequentially in the second quarter and into the second half of 2017.
Still, Whirlpool was forced to temper investors' earnings expectations for fiscal 2017 as a result of the integration issues. The company now expects to report ongoing business earnings per diluted share between $14.75 and $15.50 versus its prior guidance of $15.25 to $16.25. It left its FY17 free cash flow guidance unchanged at approximately $1.0 billion.
On a related note, Whirlpool continues to expect full-year industry unit shipments in the U.S. to increase by 4-6%. Elsewhere, industry unit shipments are now expected to be flat to up 2% in EMEA, flat in Brazil, and flat to up 2% in Asia.
Shares of WHR initially traded lower in Monday's after-hours action, yet they have reversed course in striking fashion today, helped in part by RBC Capital Markets reiterating its Top Pick recommendation on the stock after the report.
Caterpillar trades up on Q1 earning/guidance; stock above $100 for first time since late 2014
Caterpillar (CAT) is trading sharply higher (+7%) this morning after reporting Q1 earnings above market expectations. It's the first time the stock has traded above $100 since late 2014. You're probably familiar with Caterpillar, but maybe not aware of everything they do, so let's provide some quick background.
CAT is a major manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives. The company principally operates through its three product segments - Construction Industries, Resource Industries and Energy & Transportation - and also provides financing and related services through its Financial Products segment.
As you can imagine, CAT's results are materially affected by economic conditions globally and regionally. Demand for its products tends to be cyclical and can be significantly reduced in periods of economic weakness and lower levels of government and business investment. The energy, transportation and mining industries are major users of CAT's products, including the coal, iron ore, gold, copper, oil and natural gas industries. Customers in these industries frequently base their decisions to purchase on the expected future performance of these industries, which in turn are dependent in part on commodity prices.
Turning to the Q1 results, non-GAAP EPS exactly doubled YoY to $1.28, while revenue rose 3.8% year/year to $9.82 bln. Both results were better than market expectations. In terms of FY17 guidance, CAT sees EPS of approximately $3.75 and revenue of $38-41 bln. These estimates are well above prior guidance of $2.90 and $36-39 bln, respectively.
CAT says there are encouraging signs, with promising quoting activity in many of its markets and retail sales to users turning positive for both machines and Energy & Transportation for the first time in several years. In fact, for the first time in more than two years, same quarter sales and revenues increased.
Overall, CAT says it's seeing signs of recovery in several of the industries it serves. However, geopolitical and market uncertainty along with volatility in commodity prices continue to present risks for the rest of the year. CAT is also benefiting from its significant cost reduction and restructuring actions. Manufacturing facility consolidations are a big part of its restructuring efforts. These actions have improved cash flow and further strengthened its balance sheet.
In sum, this was a good quarter for Caterpillar. Investors are bidding the stock higher on the solid Q1 beat and the increase in 2017 guidance. Overall, the stock chart looks pretty positive. The stock gapped up in early November, then it has basically traded sideways (also known as consolidating) since then. When a stock consolidates a gap higher for several months as is the case here, then moves sharply higher as it is today to a new 52-week high, that often means that another leg higher is possible.
However, keep in mind, CAT is pretty cyclical so a downturn in the economy will send the stock lower. The stock has a history of being up and down. However, CAT seems pretty positive on the balance of 2017.
McDonald's Jumps to New Record High After Beating Expectations
McDonald's (MCD 138.32, +4.09) has jumped 3.1% in pre-market after beating first quarter expectations. The early jump has placed the stock at a fresh all-time high.
The fast food giant reported above-consensus first quarter earnings of $1.47 per share on revenue of $5.68 billion, which fell 3.9% year-over-year, but was ahead of market expectations.
The first quarter report showed the 11th consecutive decline in revenue, but McDonald's has now beat bottom-line expectations for eight consecutive quarters.
Global comparable sales increased 4.0% year-over-year, which was well ahead of the company's estimates for growth of 1.5%. It is worth noting that the first quarter had one fewer operating day than the same quarter one year ago.
U.S. comparable sales rose 1.7%, drawing continued strength from the launch of All Day Breakfast. The results have been supported by adjustments to the company's value menu options and sales of different sized Big Mac sandwiches. Segment operating income jumped 13.0%.
International Lead segment sales grew 2.8% year-over-year due to continued momentum in the U.K. and successful launch of All Day Breakfast in Canada. Segment operating income increased 2.0%.
High Growth segment sales rose 3.8% due to a strong showing in China and positive results across the segment. Segment operating income surged 36.0% with roughly half of the increase due to lower depreciation expense due to the accounting treatment of the pending sale of businesses in China and Hong Kong.
After Lam Research's Strong Quarter, ICHOR Follows Suit With Upside Guide
For those familiar with ICHOR (ICHR), a manufacturer of fluid delivery systems for the semicap industry, it probably doesn't come as much of a surprise that it delivered upside guidance for Q1 and Q2 after the close last night. As followers of the stock are aware, its largest customer by far is Lam Research (LRCX), at around 55% of total revenue. Back on April 18, that company delivered outstanding fiscal Q3 results and also issued upside guidance for its Q4. During its earnings conference call, management commented that its business has never been stronger financially. Naturally, the strong tailwinds behind LRCX's business are also providing a major lift to ICHR's business.
Taking a look at ICHR's new outlook, it guided for Q1 EPS of $0.57 vs. the $0.56 Capital IQ Consensus and revenue of $148.7 million compared to the $146.32 million consensus. Rewinding back to its Q4 report on February 9, ICHR guided for Q1 EPS of $0.52-$0.58 and revenue of $140-$150 million. That guidance was well ahead of consensus estimates at that time ($0.50/$133.15 million). The fact that it is tracking towards the high end of its guidance, that was already far ahead of estimates, is a good indicator of just how strong business is. On a growth basis, this equates to robust year/year revenue growth of 103%.
ICHR also provided impressive upside guidance for Q2, seeing revenue of $152-$162 million vs. the $139.8 million consensus. At the mid-point, this guidance reflects year/year growth of 65%. In the guidance press release, management didn't provide any commentary regarding the outlook. However, it did announce that its 1Q17 results would be released on May 11 with a conference call to follow at 4:30 ET.
Also, looking back at recent quarterly results and listening to the earnings call for both ICHR and LRCX, it's clear that there are a couple main catalysts driving this growth. First, there is a robust and ongoing ramp of 3D NAND products. Demand for NAND in the solid state drive (SSD) and embedded markets continues to be very healthy. On LRCX's Q3 conference call, it stated that its customers are investing in new 3D wafers and are entering new 3D technology conversions. Also, the continuing recovery of DRAM has been a positive factor for both companies. And looking ahead, ICHR believes that it is still in early days in terms of the technology inflection points with multiple pattering and FinFET.
In sum, the semicap market is red-hot right now and there are a number of growth catalysts ahead that should continue to drive solid growth for ICHR and its customers.