Consumer staples in focus as M&A heats up
The consumer staples sector (XLP) is in focus today after a flurry of earnings reports and news of a potential massive merger in the space.
Unilever rejected the proposal saying it fundamentally undervalues the company. Interestingly, Susquehanna said it expects Unilever to accept a deal that would require some health/personal care divestments if the after KHC raises its bid 5-10%.
Investors are applauding the bold move by Kraft Heinz, now valued at $118 billion as the stock has soared 11% to a new all-time highs.
Recall, Warren Buffet and Brazilian Private Equity firm 3G Capital own 26.7% and 23.9% of KHC, respectively. 3G and Mr. Buffet's Berkshire Hathaway (BRK.B) bought Heinz for $23 billion in 2013 and then merged it with Kraft in 2015. 3G is known for running a tight ship. Layoffs and cost cuts would result in significant earnings accretion over time.
Investors have been anticipating another big deal from KHC. In December, reports indicated Kraft Heinz was interested in acquiring Mondelez (MDLZ). The international snack company was created after spinning off the US Kraft business in 2012. Hershey (HSY) rejected an $23 billion acquisition proposal from Mondelez last year.
M&A has always played key role in the consumer staples sector that is starved for growth. It is much easier to acquire growth than it is to develop a strong brand organically. Big CPG companies can acquire growing brands and scale them or merge with other big players in the space to realize significant synergies.
The consumer staples sector (XLP) is trading at a five-month high as M&A has heated up. Last week, Reckitt Benckiser (RBGLY, LSE: RB) announced plans to acquire baby formula maker Mead Johnson (MJN) for nearly $17 billion. Staples were out of favor following the election as investors favored cyclical sectors.
Kimberly-Clark (KMB +4%), Colgate-Palmolive (CL +4%) and Clorox (CLX +3%) are all trading higher today.
Financial results from the sector this morning were generally weak.
Campbell Soup (CPB -6%) reported another soft quarter as organic sales fell 2%. The company has missed on the top line three of the last four quarters.
General Mills (GIS -3.5%) lowered fiscal 2017 guidance due to weakness in the soup and yogurt categories. General Mills now sees adjusted earnings growth of 5-7% excluding foreign exchange impacts, down from 5-8% previously.
J.M. Smucker (SJM -0.6%) reported third quarter adjusted EPS down 2%, in-line with estimates, as sales fell 5%, below estimates. SJM lowered the high end of its fiscal 2017 adjusted earnings guidance.
Looking Ahead - February 21, 2017 - Walmart Earnings Report
The markets are closed Monday in observance of Presidents' Day, but when they re-open on Tuesday, there will be several earnings reports in focus, including one from the world's largest retailer, Walmart.
Walmart Fourth Quarter Earnings Report (Tuesday, February 21, before the open)
*Source: FactSet; Company Filings
DineEquity trades to near 4-year lows after prelim Q4 earnings, announcing CEO departure
After this morning announcing that CEO Julia Stewart would no longer serve in that capacity, shares of Applebee's owner DineEquity (DIN 61.17, -5.38) trade about 8.1% lower.
That's not all she wrote, though, as DIN also gave worse than expected results for the upcoming Q4 print. Specifically, DIN sees Q4 adjusted earnings per diluted share of $1.37 on Applebee's domestic system-wide comparable same-restaurant sales which declined 7.2% in Q4. Also, DIN's IHOP segment is expected to have domestic system-wide comparable same restaurant sales of negative 2.1% for Q4.
As for CEO Stewart, she will resign effective March 2, 2017. In her place, the board of directors has named its current lead director, Richard Dahl, to serve as interim CEO and chairman, effective March 1, 2017, while the board of directors conducts a search for a permanent replacement. Dahl has been with DIN since early-2004, and has served as CEO, COO and CFO at various other companies.
Additionally, the board appointed Caroline Nahas as DIN's lead director to replace Mr. Dahl and Douglas Pasquale to succeed Mr. Dahl as chairman of the audit and finance committee. Upon completion of the chief executive officer search, the DIN board of directors intends to separate the chairman and CEO roles.
The departure of CEO Stewart comes a few months removed from a Q3 report which saw DIN miss on top line revenues and guide Applebee's comparable sales down in addition to guiding franchise profit lower. Those results were compounded on top of the Q2 (from back in early-August) results which were in-line. Also in Q2, DIN lowered its IHOP and Applebee's comparable sales guidance and franchise profit guidance.
While a fair amount of investors were not pleased with the past two fiscal quarter's performances, it's unclear if today's move has quelled the naysayers as the stock sinks to a better than four-year low.
Look for the complete Q4 report on March 1, likely ahead of the open as is typical of DIN.
Farm Equipment Manufacturer Deere Raises Income Forecast, Shares Initially Rise
Deere (DE 110.53 +1.36) reported fiscal first quarter GAAP earnings results this morning of $0.61 per share, which came in above expectations. On the top line, revenues fell 1.5% year/year to $4.7 billion, which came in slightly better than expected. Sales included price realization of 2% and a favorable currency-translation effect of 1%.
The company, however, said that results were pressured by soft conditions in farm and construction equipment sectors. But the company did also note that Deere continues to perform far better than in agricultural downturns of the past.
Equipment net sales in the United States and Canada decreased 8%. Outside the U.S. and Canada, net sales increased 11%, with a favorable currency-translation effect of 1%. Deere's equipment operations reported operating profit of $247 million for the quarter, compared with $214 million in 2016.
The improvement for the quarter was primarily driven by price realization, partially offset by expenses associated with the previously announced voluntary employee-separation program, higher warranty costs and the unfavorable effects of foreign-currency exchange. The current quarter benefited from a gain on the sale of a partial interest in the unconsolidated affiliate SiteOne Landscape Supply.
Looking ahead into the second quarter, the company expects to see revenue growing 1%, which calculates to approximately $7.18 billion and falls above current expectations. For the full fiscal year 2017, the company raised revenue guidance to +4% growth, which calculates to approximately $24.32 billion (from +1%) and tops current Wall Street expectations.
Foreign-currency rates are not expected to have a material translation effect on equipment sales for the year or second quarter. Net sales and revenues are projected to increase about 4% for fiscal 2017 with net income attributable to Deere & Company of about $1.5 billion (up from $1.4 billion).
The company said,"Although the quarter's sales and earnings were somewhat lower than last year, all of our businesses remained solidly profitable. Deere's performance showed further benefits from the sound execution of its operating plans, the strength of a broad product portfolio and the impact of a more flexible cost structure. At the same time, we are seeing signs that after several years of steep declines key agricultural markets may be stabilizing."
VF Corp Modestly Higher Despite Light Revenue and Cautious Guidance
VF Corp (VFC 50.74, +0.37) has climbed 0.7% despite missing revenue expectations and guiding below consensus estimates.
The apparel conglomerate reported in-line fourth quarter earnings of $0.97 per share on a 0.2% year-over-year downtick in revenue to $3.32 billion, which was shy of expectations.
Adjusted gross margin improved 160 basis points to 49.8%, which was a record. The improvement stemmed from pricing, lower product costs, and a mix shift towards higher margin businesses.
Adjusted operating income declined 5.0% to $509 million while adjusted operating margin slipped 90 basis points to 15.3%. Negative currency translations fueled the decline.
Looking at the segment breakdown, Outdoor & Action Sports revenue grew 2.0% to $2.10 billion. Vans revenue grew 14.0%, mostly due to strong growth in Asia Pacific. North Face revenue declined 8.0%, reflecting the impact of bankruptcies in North America and the decision to reduce sales to the off-price channel. Timberland revenue grew 4.0% with European sales growth fueling the increase.
Jeanswear revenue fell 5.0% to $697 million. Wrangler revenue fell 1.0% while Lee revenue tumbled 13.0%. Sales in the Americas saw the sharpest decline while European sales improved.
Imagewear revenue grew 15.0% to $298 million with a 20.0% increase in the Licensed Sports Group pacing the increase. The workwear business saw more modest growth.
Sportswear revenue fell 17.0% to $162 million. Nautica revenue fell 20.0% while Kipling North America revenue declined 2.0%.
Looking ahead, the company expects earnings for the full year will show a low single digit decline from $3.11 per share that was reported in 2016. Gross margin for the full year is expected to be 48.6%.
Cooper Tire & Rubber Climbs After Beating Estimates
Cooper Tire & Rubber (CTB 39.49, +1.79) trades higher by 4.8% in pre-market after reporting better than expected results for the fourth quarter.
The tiremaker delivered above-consensus earnings of $1.28 per share on a 1.1% year-over-year increase in revenue to $783.89 million, which was also ahead of expectations.
Cooper's revenue growth was due to a 23.0% year-over-year increase in international net sales, which increased to $124 million. Segment operating margin improved from -7.3% to 1.1%. Higher unit volume and a favorable price and mix offset the impact of negative currency translations. Domestic unit sales in China surged 88.0% year-over-year, reflecting strength in replacement tire sales and sales to original equipment manufacturers (OEMs).
International operating profit totaled $1 million, up from an operating loss of $7 million one year ago. Favorable raw material costs and higher unit volume drove the improvement.
The company's tire operations in the Americas generated net revenue of $694 million, which was down 2.4% year-over-year. Segment operating margin ticked down to 16.8% from 17.1% one year ago. Unfavorable price and mix drove the decline in sales, which was partially offset by higher unit volume. Light vehicle tire shipments in the U.S. fell 1.0% while full year total light vehicle tire shipments fell 2.5%.
Americas operating profit declined 4.6% year-over-year to $116 million. The decline was due to unfavorable price and mix and higher manufacturing & other costs.
Looking ahead, the company expects to see unit volume growth in all segments during 2017.
Kraft Heinz Confirms Effort to Combine with Unilever
Just a few days after reporting fourth quarter results that were deemed disappointing by investors, Kraft Heinz (KHC) confirmed that it approached Unilever (UN) about tying up to create a leading consumer goods company. Kraft Heinz also confirmed that Unilever rejected its proposal.
Not to be deterred, Kraft Heinz aims to keep pursuing the transaction, which means whatever terms it presented on its initial overture are going to have to be sweetened to get Unilever to do a deal.
That deal is unlikely to come cheaply. Unilever holds a leading position in the consumer goods space, sports a market capitalization of $139 billion, and recorded $55.6 billion in sales in 2016. Kraft Heinz for its part has a market capitalization of $106 billion and recorded $26.5 billion in sales in 2016.
The early verdict from the market is that it likes the idea of these two companies getting together. That is most evident in the fact that shares of KHC, which made the approach, are up 5.0% in pre-market action. Shares of UN, meanwhile, are up 10% as investors are sniffing the prospect of a nice premium.
Kraft Heinz derives roughly 60% of its sales in the United States, versus Unilever, which derives only about 15% of its revenue in the U.S. Accordingly, there is true expansion potential for both companies with a merger since there isn't a huge amount of geographic overlap.
Unilever's product footprint covers the personal care, foods, home care, and refreshment categories while Kraft Heinz is a leader in the food and beverage industry, owning eight brands that have $1 billion+ in retail sales.
Strikingly, shares of Mondelez International (MDLZ) are trading 5% lower in pre-market action, as there had been speculation in the past that Kraft Heinz might look to do a deal with Mondelez. With the writing on the wall today that Unilever is currently the object of Kraft Heinz's merger desire, though, Mondelez is feeling the pinch of being on the outside looking in.
Shares of KHC have risen 18% over the last 52 weeks while shares of UN have dropped 2%.