AK Steel (AKS) is trading 7% higher today after guiding to Q4 non-GAAP EPS of $0.05-0.10, which was actually above market expectations. This was a bit of a surprise because another steel producer, Nucor (NUE), guided lower on Tuesday. See our story stock on Tuesday for our analysis. As such, investors were probably expecting the other steelmakers to follow Nucor's lead. But that was not the case with AKS.
In terms of what they do, AK Steel is a steel producer based near Cincinnati. It makes flat-rolled carbon, stainless and electrical steel. It operates eight steel plants, two coke plants and two tube manufacturing plants across six states. The company also has interests in iron ore through its Magnetation LLC joint venture and in met coal through its AK Coal Resources subsidiary.
The company's flat-rolled carbon steel products are sold primarily to automotive manufacturers and to customers in the infrastructure/manufacturing market (electrical transmission, HVAC equipment, appliances). The company also sells coated, cold-rolled, and hot-rolled carbon steel products to distributors, service centers and converters who may further process these products prior to reselling them. Its stainless steel products are sold to suppliers in the automotive industry, to manufacturers of food handling, chemical processing, pollution control, medical and health equipment, and to distributors and service centers. The company sells its electrical steel products to manufacturers of power transmission and distribution transformers, both for new and replacement installation.
Of note, AKS recently made a large acquisition when it acquired Severstal North America's Dearborn, Michigan steel plant for $700 mln. The deal was announced in July 2014 and closed in mid-September. AKS calls it a "transformational" deal as it significantly increases the company's production capacity. AKS shipped 5.28 mln tons of steel in 2013 and they now expect to bump annual shipments above 7.5 mln tons with this deal. This plant was re-named Dearborn Works after the deal closed.
Getting back to the guidance, AKS expects shipments in Q4 of approximately 2.0 mln tons, a 37% increase from the 1.46 mln tons shipped in Q3. Normally, Q4 is a seasonally slower period, however, the expected increase is mostly due to the acquisition of Dearborn Works and continued strong demand from the automotive market. However, its average selling price for Q4 is expected to be down 10% sequentially to approximately $980 per ton as a result of a higher percentage of product shipments to the carbon spot market in Q4. Again, this is principally due to the higher mix of lower-priced hot-rolled coil shipments from Dearborn Works, as well as a general reduction in spot market pricing.
In sum, investors were happy to see AKS provide some good guidance which was a surprise considering Nucor guided lower on Tuesday. Granted, part of the upside may have been analysts not knowing what to expect from the Dearborn Works acquisition, which was quite large, in terms of their models. That deal only recently closed in mid-September and Q4 will be the first full quarter with those results so analysts were kind of shooting in the dark.
That probably does not account for all of the upside. AKS also said that it expects to benefit from substantially lower iron ore, carbon scrap and energy costs in Q4 as compared to Q3. Overall, with the stock being so weak lately, investors were pleased to see some good guidance.
Couche-Tard to Acquire The Pantry
Yesterday's rumor became today's fact as The Pantry (PTRY 36.45, +0.93), a leading independently operated convenience store chain in the southeastern United States, confirmed it has signed a definitive merger agreement with Canada's leading convenience store operator, Alimentation Couche-Tard ("Couche-Tard").
Under the terms of the proposal, Couche-Tard will acquire The Pantry in an all-cash transaction valued at $36.75 per share. Including the assumption of debt, the deal has a total enterprise value of approximately $1.7 billion.
On Wednesday it was reported in The Wall Street Journal that The Pantry was near a deal to be sold. That report sent the stock soaring 23% to $35.52, so don't let the seemingly small premium fool you.
The offer price represents a 27% premium to the unaffected price The Pantry was trading at prior to the aforementioned report.
The transaction is expected to close in the first half of 2015, pending shareholder and regulatory approvals. When complete, more than 1,500 stores will be added to the Couche-Tard network, which includes more than 4,445 stores in the United States operating primarily under the Circle K banner.
Related stocks include Casey's General Stores (CASY 88.11, +0.35), TravelCenters of America (TA 11.13, +0.13), and CST Brands (CST 44.15, -0.12).
Dave & Buster's
Shares of Dave & Busters Entertainment (PLAY) rose as much as 14% yesterday, following strong third quarter financial results that were reported after the close on December 16. Although the company reported a loss of $0.06 per share, it was still $0.03 better than average analyst consensus driven by a 110 basis point improvement year/year in EBITDA to 15%. Additionally, PLAY reported revenues that beat estimates by over $100 million, noting a 14.9% increase year/year.
While many factors went into PLAY's strong performance, these positive results can partially be attributed to a 8.7% increase in comparable store sales following the successful conclusion to its 'Summer of Games' promotion that complimented a pick up in sales from advertising D&B Sports. Together, these initiatives enabled it to outpace the competitive industry benchmark for the tenth consecutive quarter.
PLAY, founded in 1982, owns and operates venues in North America that combine dining with entertainment for both adults and families. Its core concept is to offer its customers the opportunity to "Eat, Drink, and Play" all in one location. A full menu of casual dining food is available, along with a full bar providing alcoholic and non-alcoholic drinks. This is provided together with an assortment of skill and sports-oriented games, video games, interactive simulators, and other traditional games like billiards and shuffle board.
Its revenues are equally split between food and beverage and amusement/entertainment. A key to PLAY's business model is that its entertainment offerings carry a low variable cost component -- consisting mainly of prize redemption -- and contributes a significant percentage of its overall gross margin.
As of September 26, 2014, it owned and operated 70 stores in 27 states and Canada. Its customers are a balanced mix of men and women, primarily between the ages of 21 and 39, and it believes it also serves as an attractive venue for families with children and teenagers.
Until this most recent period, PLAY's revenue and comparable store sales growth has been modest. In FY13 (ending Feb 3, 2013), revenue was up 12% to $608.1 mln and its comparable store sales growth was +3.0%. Then, in FY14, revenue growth decelerated to 4.5% and comparable store sales were up a scant 1.0%. Despite its heavy debt burden, PLAY has remained profitable and cash flow positive.
With that said, PLAY's most recent financial performance is cause for some optimism as its topline growth has accelerated. It plans to continue opening new stores at an annual rate of ~10% of its existing store base which should continue to improve comparable store sales. Looking ahead, increased comparable store sales combined with improved margins could mean its financial results are in position to look much better than recent years. Moreover, low gas prices may add an additional boost for PLAY's sales as consumers see an increase in discretionary income.
Sharp Decline In Oil Hits Kirby Too; Company Lower Fourth Quarter Outlook
Kirby (KEX 88.76) is trading lower pre-market after lowering its fourth quarter guidance expectations, which comes after the recent slide in oil prices. The company came out after the close yesterday and lowered its fourth quarter EPS to $1.10-1.20, down from $1.30-1.40, which comes in below expectations.
Kirby is the premier tank barge operator in the United States, transporting bulk liquid products throughout the Mississippi River System, on the Gulf Intracoastal Waterway, along all three U.S. Coasts, and in Alaska and Hawaii. Kirby's service includes the transporting of petrochemicals, black oil, refined petroleum products and agricultural chemical products by tank barge. Kirby also owns and operates eight ocean-going barge and tug units transporting dry-bulk commodities in United States coastwise trade.
The Company, through its subsidiaries, conducts operations in two business segments: marine transportation (76.4% of total 2013 revenue) and diesel engine services (23.6% of total 2013 revenue). Marine transportation made up 91% of total operating profit in 2013, while diesel made up the rest.
The majority of the change in the company's earnings guidance is a result of changes in its land-based diesel engine services market.
Its production ramp up in that market has not gone as well as expected and demand across its product and service portfolio is being impacted by the sharp decline in crude oil prices which have led to customer cancellations and requests to delay delivery of projects.
Customers have recently begun to reduce their capital spending plans in light of the decline in oil prices and the company expects this to continue into 2015. The reduction in revenue and profit in the land-based diesel engine services market, particularly in the manufacturing of new pressure pumping units, was the most significant factor in the change in anticipated fourth quarter results.
In addition to customer cancellations and requested order deferrals, inbound orders in the land-based diesel engine services business have slowed. Kirby's emphasis on growing the remanufacturing and service aspects of the business remains a key strategy. The service portion of the land-based diesel engine services business is expected to have less volatility through oil and gas cycles.
"In our marine transportation markets, our inland marine utilization is in the low 90% range; however, adverse weather conditions along the Gulf Coast have impacted our fourth quarter performance. In addition, the recent drop in crude oil has affected our customers' feedstock purchasing and trading decisions which impacts not only our efficiency, but also imposes enough uncertainty in the market to reduce transportation pricing momentum. As a result, we expect our inland marine growth rate to moderate going into next year. The globally advantaged feedstock price of domestic producers has not changed with the drop in oil prices, however, the majority of expected benefits from new petrochemical plant openings is likely to occur in 2017 and later."
The stock tanked recently along with just about every other energy stock on the recent slide in oil prices. In mid-September, KEX was near $125/share and is now closer to $80/share. The stock was sliding lower in recent weeks because expectations of slower near-term growth was being built into the stock. However, despite this, KEX remains below all major moving averages,but it will be interesting to see how the stock acts after the open.
Dunkin' Brands Dunks its FY15 Guidance
In a press release this morning, Dunkin' Brands (DNKN 46.22) conceded that 2014 was a "challenging year" for its business. Unfortunately, it doesn't sound as if 2015 is going to be less challenging as the franchisor of more than 11,000 Dunkin' Donuts restaurants and more than 7,400 Baskin-Robbins restaurants has been forced to cut its FY15 earnings growth expectations.
The revision was pinned on a belief that pressures on the consumer, decelerating sales of packaged coffee in its restaurants, and weakness for its joint ventures in Korea and Japan will carry over to 2015.
Given those expectations, Dunkin' Brands is forecasting FY15 revenue growth between 5 percent and 7 percent and adjusted operating income growth between 6 percent and 8 percent. Additionally, U.S. comparable store sales growth is anticipated to increase 1 percent to 3 percent for both Dunkin' Donuts and Baskin-Robbins.
Adjusted earnings, meanwhile, are projected to range from $1.88 to $1.91 per share based on diluted weighted average shares for the full year of 106 million, up 7-9 percent from its FY14 adjusted EPS expectation of $1.75 to $1.76. Free cash flow growth is projected to be greater than 15%.
The company's long-term growth targets included U.S. consolidated comps in the 2-4% range, revenue growth of 6-8%, adjusted operating income growth of 10-12%, adjusted operating margin expansion of 150-200 basis points per year, and 15%+ diluted adjusted EPS growth.
Dunkin' Brands said it is committed to returning to double-digit growth in subsequent years. Hopefully, the same can be said for its stock, which was down 4.1% year-to-date at Wednesday's close.
Shares of DNKN are trading 4.0% lower in pre-market action.
Marathon Oil Slashes 2015 Capital Spending
Crude futures prices are rebounding nicely this morning with 2.0%+ gains for both West Texas Intermediate and Brent. That's all well and good, but even with that rebound, they are still more than 40% below the highs seen this past summer. That steep drop has caused a lot of consternation for the capital markets and a lot of problems for energy-related stocks, including Marathon Oil (MRO 26.67), which is down 36% from the high it hit in early September.
The stark reality is that the decline in oil prices is going to drive a decline in capital spending in 2015 as companies work to protect their bottom line and to offset declines in cash flow that will result from the reduced prices.
After Wednesday's close, Marathon Oil for its part said its 2015 capital, investment and exploration budget will be approximately $4.3 billion to $4.5 billion. That is about 20% lower than 2014 levels and excludes its recently disposed Norway business.
Marathon said its capital program will be oriented around high return investment opportunities in its U.S. resource plays and lower exploration spending. There was a caveat that the capital program will be scalable higher or lower depending on market conditions. Further details will be provided when Marathon Oil reports its fourth quarter results in February.
The news of Marathon Oil's capex budget cut isn't the first and it won't be the last.
The expectation that capital spending budgets would be cut has been a driving factor in the downward slide of many oil services and drilling companies like Schlumberger (SLB 82.88), Transocean (RIG 18.21), Diamond Offshore (DO 38.10), Halliburton (HAL 39.44), and Cameron International (CAM 46.95), all of which are components in the Philadelphia Oil Service Sector Index (OSX).
To be sure, there has been plenty of "sell-the-rumor" action in that space, so today's news from Marathon Oil won't be that much of a surprise. A bounce in the aforementioned stocks (and others in the space) would suggest the news has been largely priced in and could spur some bargain-hunting interest, particularly if oil prices stay up, as traders look to capitalize from the oversold nature of things.
The Market Vectors Oil Services ETF (OIH 35.88) offers a more diversified approach to investing in the industry, mitigating the risk of individual stock selection.
Oracle shares rise 5% following beat on earnings
Oracle (ORCL $43.15 +1.99) shares rise 5% after the company reported second quarter earnings of $0.69 which is higher than expected, while revenues of $9.6 billion which is slightly higher than expected.
ORCL Q2 Software and cloud revenue +5% to $7.3 billion, guidance +5-8%. Cloud software-as-a-service (SaaS), platform-as-a-service (PaaS) and infrastructure-as-a-service (IaaS) revenue was up 45% to $516 million. Hardware Systems revenues were up 1% to $1.3 billion.
GAAP operating income was up 4% to $3.5 billion, and the GAAP operating margin was 37%. "Total Q2 new cloud bookings grew at a rate of more than 140%... By Q4 of this year we expect our new cloud bookings to exceed $250 million...Next fiscal year our new cloud bookings will be well over the billion dollars mark."
On the conference call the company issued guidance. The company sees Q3 rev growth of 4-8% in constant currency, non-GAAP EPS of $0.69-0.74 in constant currency. The company only provided guidance in constant currency due to the unusually high volatility in exchange rates. Larry Ellison said company will sell well over $1 bln of new SaaS and PaaS annual subscriptions during the next fiscal year; Oracle will sell approx the same total dollar amount of new SaaS and PaaS business as Salesforce.com (CRM).
ORCL shares increased 7% YTD. Look for resistance near the 52 week high near the $43.00-43.25 vicinity.