Earnings season is in full swing, which means we get a frequent opportunity to revisit past recommendations from the Bargain Hunting page.
Mindful that readers don't visit every page on the site (although we strongly urge that they do), we have taken the opportunity to re-post the commentary we provided on our Headline Hits page in the past week that relates to companies we previously profiled as Bargain Hunting candidates.
Stay tuned for additional updates this week on Whole Foods (WFMI), CVS/Caremark (CVS), Starbucks (SBUX), Expedia (EXPE) and Interline Brands (IBI).
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McDonald's (MCD) - from July 24:
The earnings report from McDonald's (MCD 52.37, -0.13) this morning was a matter of formality. Accordingly, don't let the negative response fool you.
The market isn't disappointed that McDonald's second quarter profit of $0.71 was only in line with expectations. After all, it was just last week that McDonald's indicated the market should raise its earnings expectations for the second quarter, claiming its profit was expected to be $0.71 per share, excluding non-recurring items but including a two cent foreign currency benefit. At the time the consensus EPS estimate stood at $0.67.
Quite simply, then, the second quarter result was in line with the company's raised guidance and serves as another reminder that McDonald's continues to execute in admirable fashion.
With that in mind, and understanding that McDonald's is a prime beneficiary of a weaker dollar with 64% of sales derived outside the U.S., we continue to maintain the bullish opinion we have held on the stock since highlighting it as a Bargain Hunting candidate in July 2004.
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Corning (GLW) - from July 25:
In reviewing the second quarter earnings report from Corning (GLW 26.19), it is important to keep in mind that its stock has gained 8% in the past two months and is up 40% year-to-date. Given that performance it is easy to understand why there were high expectations ahead of the results.
Corning topped the second quarter consensus EPS estimate of $0.32 by two cents on a 13% increase in sales to $1.42 billion. Its stock is indicated nearly 5.0% lower, though, as the latter was just shy of estimates.
In brief, the report from Corning can be characterized as good, but not great. That consideration has invited the selling interest, as has the indication on the call that the company expects some executive selling of the stock in coming weeks. Also, Corning noted its tax rate guidance is changing to 14% to 15%, yet it didn't provide any update in the press release on a full-year earnings forecast.
We continue to like Corning's stock for long-term investors, but we'd let the dust settle before buying on today's dip.
The company commented that its telecommunications business was weaker than expected in the second quarter with sales declining 7% to $438 million. Its Display Technologies segment, however, registered a 32% jump in sales to $610 million. Rounding out the top-line performance were its Environmental and Life Sciences segments where sales increased 26% to $191 million and 4% to $78 million, respectively.
Corning's third quarter EPS guidance of $0.34-0.37 before special items brackets the current consensus estimate of $0.36. LCD volume is expected to grow 10-15% for the wholly-owned business and 5-10% at Samsung Corning Precision Glass Co. Corning added that some of the second quarter volume strength may have been the result of an earlier-than-expected build in the LCD industry supply chain. Telecommunication segment sales are anticipated to be up 10% sequentially in the third quarter while Environmental Technologies segment sales are forecasted to be flat.
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Gap, Inc. (GPS) - from July 27:
Apparel retailer Gap (GPS 16.91) hasn't done much to impress its investors for quite some time now. That reality forced the ouster of former CEO Paul Pressler in January. In the interim, the company's search for a new CEO has been a closely-watched affair. That search ended last night, and true to form, Gap failed to impress with it's announcement that it has named Glenn Murphy Chairman and CEO.
Mr. Murphy, 45 years old, certainly isn't a marquis name in the industry like Mickey Drexler or Ralph Lauren. In fact, Murphy's executive background doesn't include any work in the apparel industry. For the past six years he has been CEO of Shoppers Drug Mart, Canada's largest drugstore chain. Prior to that, Murphy held leadership posts at a retail and wholesale food company and a major book retailer.
To be fair most reports indicate that Mr. Murphy has a very good reputation as a merchandiser and manager. Whether he can apply those traits successfully to a struggling apparel retailer, which is much bigger than any company he has run, is the $64,000 question. Mr. Murphy is betting that he can as he intends to buy 150,000 shares of Gap in the next few weeks.
Glenn Murphy's appointment to the CEO position evokes a sense of wait-and-see. It isn't the news that should leave you thinking you need to rush in and buy the stock. At the same time, Murphy's solid reputation in the retail industry should pre-empt any decision to sell the stock at this juncture based on the CEO news.
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Avon Products (AVP) - from July 31:
For a company whose aim is to help others look pretty, Avon (AVP 35.58, -3.27) sure did put up some less than attractive numbers for its second quarter. Impacted by restructuring costs, an increase in interest expense, and a sharp jump in advertising expense, Avon's net income dropped 25% to $112.7 million or $0.26 per diluted share.
Reuters Estimates has informed Briefing.com that an EPS figure of $0.38, which excludes costs of implementation of the company's product line simplification program and restructuring charges, is the one that is comparable to the consensus estimate of $0.42. The line on the report then is that Avon came up short of earnings estimates. Shares of AVP are down sharply as a result.
Including today's loss the stock is still up 15% since we highlighted it on our Bargain Hunting page in April 2006 as a contrarian investment idea. It had gained as much as 35% at its 52-week high.
Although Avon was clear in communicating in late-2005 that its restructuring would be a multi-year process, we aren't inclined to pound the table on the stock today.
Avon is spending a lot on advertising and it isn't getting a lot of bang for all those bucks. To wit, advertising expense in the second quarter rose 74% to $93 million while Beauty sales were up 14% and Active Representatives increased 9.0%. Avon said it plans to boost its full-year advertising expense by 50% to $375 million, up from a prior forecast for an increase of 35%.
Separately, North America revenue was flat in the second quarter while the number of active representatives jumped 4.0%. To its credit Avon delivered double-digit revenue growth in all other regions with the exception of Asia-Pacific. Active representatives increased by a high single-digit percentage in Latin America, Western Europe, Middle East & Africa, and in Central & Eastern Europe.
We appreciate the point that the heavy investment is necessary to protect Avon's long-term competitive position, but the easy money has been made in relation to the enthusiasm surrounding the restructuring.
The stock isn't the contrarian play that it used to be as the market is becoming more demanding about seeing better operating results and fewer charges. It should prove more challenging now for AVP to move higher until that combination becomes more apparent.
--Patrick J. O'Hare, Briefing.com
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