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Zacks.com featured expert Kevin Matras highlights: Ballantyne Strong, Inc., Herbalife Ltd., iGATE Corp., Quaker Chemical Corp. and Compania Cervecerias Unidas S.A. – Press Releases
Chicago, IL – August 31, 2010 - Stocks in this week's article include Ballantyne Strong, Inc. (AMEX: BTN), Herbalife Ltd. (NYSE: HLF), iGATE Corp. (NASDAQ: IGTE), Quaker Chemical Corp. (NYSE: KWR) and Compania Cervecerias Unidas S.A. (NYSE: CCU). Kevin Matras looks at the powerful combination of Sales Growth and Increasing Profit Margins.
Screen of the Week written by Kevin Matras of Zacks Investment Research:
While everybody understands sales, margins might bring up a few question marks. So let's start at the beginning: first and foremost, sales are THE most important thing to a company. Everything else stems from that. Without sales, there really wouldn't be anything else to analyze. And Sales Growth numbers show you how that company is growing.
However, just because sales are increasing doesn't always mean that profits are increasing too. Sales at the expense of profits does not work. So paying attention to Profit Margins is the next thing we're going to want to look at.
Margin is simply a ratio and the calculation is: Net Income divided by Sales
So if a company's margin is 15% for instance, that means the company's net income is 15 cents for every $1 of sales it makes. But if a company's expenses are growing faster than their sales, this will reduce their margins.
In general, a company with increasing margins is becoming more profitable and is better managed, i.e., their costs are under control.
So definitely look at a company's sales. And of course, look at their earnings. But take a look at their profit margins as well. Are they going up or down? In other words, are they making more on each dollar of sales or less? This is important stuff to know, and could make the difference between investors buying a company's earnings announcement, or selling it.
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Grupo Mexicana de Aviación, which operates through its three subsidiaries, Compañía Mexicana de Aviación (Mexicana), Aerovías Caribe, S.A. de C.V. (Mexicana Click), and Mexicana Inter, S.A. de C.V. (Mexicana Link) declared the indefinite suspension of its operations since 28 August, 2010.
For fiscal 2009, Grupo Mexicana de Aviación contributed 12.63% of Grupo Aeroportuario del Pacífico S.A.B. de C.V.’s (PAC) total revenue. Grupo Mexicana contributed 12.5% and 10.3% of Aeroportuario del Centro Norte S.A.B. de C.V.’s (OMAB) and Grupo Aeroportuario del Sureste S.A.B. de C.V.’s (ASR) total revenue from January to July 2010, respectively. Thus, this seems to be depressing news for the the three Mexican airline operators.
Mexican airline operators have been facing tough times. Along with the economic recession in 2008, Mexican airlines sector was largely hit by the H1N1 virus, which broke out in Mexico in the first half of 2009.
During the economic downturn, the airline industry worldwide was badly hit due to accelerating fuel prices, close to $150 per barrel. Now that fuel prices have gone down to the mid-70s and markets are gradually picking up, Mexican airlines have encountered new problems with regard to suspension of flights.
This issue is expected to have a negative effect on the top-line results of Mexican airline operators as Grupo Mexicana is one of the major airlines.
However, the worldwide airline industry is expected to show positive results in the coming years. The International Air Transport Association (IATA) expects the airline industry to return profits of $2.5 billion in 2010. Thus, we maintain our Neutral recommendation on all the three Grupo Aeroportuario. ADS, PAC and ASR currently retain their short term “Hold” ratings (Zacks #3 Rank) while OMAB retains its “Sell” rating (Zacks #4 Rank).
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Zacks Investment Research China Petroleum and Chemical Corporation (SNP), or Sinopec, targets more than 40% natural gas output for this year based on growing confidence on its gas fields. The company said that Yuanba gas field has similar potential to the neighboring Puguang field’s output. Both the fields are being developed by Sinopec.
While oil production experienced sluggishness in the first half, natural gas production showed solid growth. China is ramping up gas production as it seeks to find alternatives to coal, which emits high carbon levels. It is set to raise the country's energy needs from the current 3% to 10% by 2020.
Puguang field has a proved gas reserve base of 356 billion cubic meters (Bcm), next only to the Sulige field (534 Bcm) in the north of the country, run by PetroChina (PTR). Even though all the reserves at Puguang are not entirely recoverable, it holds enough gas for more than 20 years of stable production based on its current annual production capacity of 10.5 Bcm.
The company plans to produce 6.32 Bcm of gas in the second half of this year, 11% more than in the first half, thereby increasing annual output by over 40% from 2009. To cope with this increased production volume, Sinopec launched commercial operations at its Sichuan-East China pipeline which will pump gas to Shanghai and the prosperous coastal region.
Though Sinopec provides a favorable view for natural gas, the company has been lagging its domestic peers primarily due to its relatively weak upstream asset base and exposure to the heavily regulated downstream sector. We are currently Neutral on Sinopec with the Zacks #3 Rank (Hold).
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Zacks Investment Research Recently, BioMarin Pharmaceutical Inc.’s (BMRN) pipeline received a boost with the US Food and Drug Administration (FDA) granting orphan drug status to its candidate BMN-701, which is being developed to combat Pompe disease.
The investigational new drug (IND) application for the candidate, which has been effective in pre-clinical studies, was accepted by the FDA with clinical trials expected to commence in the first quarter of 2011.
Orphan Drug Status is granted by the FDA to therapies being developed to treat diseases that affect less than 200,000 people in the US. With the FDA granting orphan drug status to its candidate, BioMarin becomes eligible to receive incentives and assistance for developing BMN-701. Moreover, the status grants seven years of market exclusivity to the candidate, if it manages to clear the developmental and regulatory hurdles and reach the market.
Pompe disease is an enzyme disorder characterized by the progressive degeneration of heart and skeletal muscles. The current standard of care is Genzyme’s (GENZ) Myozyme/Lumizyme. The rare disease affects one out of 40,000 people. The incidence of the disease is more pronounced in adults than in infants as indicated by the incidence of one in 57,000 adults as against the incidence of one in 138,000 infants. We believe that the successful development and commercialization of the candidate will boost BioMarin’s top line.
Even though we are pleased with BioMarin’s acquisition of Huxley Pharmaceuticals in 2009, which has added Firdapse to the company’s product portfolio, we remain concerned about the delayed launch of the drug. Furthermore, the disappointing performance of the company’s first approved product–Aldurazyme also concerns us. However, we believe that the company’s other two marketed products, Naglazyme and Kuvan, will continue to perform well in the coming quarters.
We have a short-term Zacks #4 Rank ('Sell') on the shares highlighting the near-tem pressure on the stock, arising mainly because of the delayed launch of Firdapse. This caused the company to trim its revenue projection for 2010. However, the stable long-term outlook leads us to reiterate our long-term Neutral rating.
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Zacks Investment Research Winn-Dixie Stores Inc. (WINN) reported fiscal 2010 fourth-quarter results after the closing bell on Monday. Net income jumped 48.8% to $14.0 million or 25 cents per share from $9.4 million or 17 cents per share in the year-ago period. Quarterly earnings also surpassed the Zacks Consensus Estimate of 13 cents. The growth in earnings was mainly attributable to an extra week of sales and absence of a significant income tax expense recorded in the year-ago period.
Winn-Dixie’s sales grew 1.8% year-over-year to $1.75 billion, missing the Zacks Consensus Estimate of $1.79 billion. The year-over-year growth was primarily the result of an additional week in fiscal 2010. Same-store sales declined 5.2% year-over-year mainly due to increased competition, conservative approach towards promotions and higher sales of generic drugs, compared to branded ones.
Gross profit rose 1.6% year-over-year to $508.4 million, while gross margin dipped 10 basis points (bps) to 29.1%. The decline in margins was primarily caused by cost inflation in certain categories, which Winn-Dixie was unable to pass on entirely due to a competitive pricing environment.
Winn-Dixie’s other operating and administrative expenses increased 3.2% to $493.0 million mainly due to higher payroll and occupancy costs related to the extra week. Consequently, operating income slipped 24.7% year-over-year to $14.2 million from $18.9 million in the year-ago period, while operating margin dipped 30 bps to 0.8%.
Balance Sheet and Cash Flow
Winn-Dixie ended the quarter with cash and cash equivalents of $152.3 million, compared to $182.8 million in the year-ago quarter. During fiscal 2010, the company generated $172.0 million of cash from operating activities and deployed $189.1 million towards capital expenditure. For fiscal 2011, the company plans to utilize $158 million towards capital expenditure, $80 million of which will be spent on the store-remodeling program.
Outlook and Zacks Consensus
Moving forward, Winn-Dixie expects earnings before interest, taxes, depreciation and amortization (EBITDA) to be in a range of $100 million to $130 million in fiscal 2011. The Zacks Consensus Estimate on the company’s earnings for the fiscal presently stands at 31 cents per share, which has remained constant over the past 3 months.
Winn-Dixie, a Zacks #3 Rank (Hold) company, is one of the leading food retailers in the U.S. and currently operates 514 grocery locations, which includes more than 400 in-store pharmacies across Florida, Alabama, Louisiana, Georgia and Mississippi.
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Zacks Investment Research Google Inc. (GOOG) and news provider, The Associated Press (“AP”) have announced an agreement that would allow Google to continue displaying complete AP news stories on Google sites.
While officials from both companies were rather tight-lipped about the details of the transaction, we tend to think that Google has had to give away more than it planned for. It could have agreed to provide information regarding usage patterns of AP content, or it could have agreed to part with a share of advertising dollars, in addition to the upfront payment for AP content agreed upon.
The two companies have been at loggerheads for some time now, as news providers all over the country raised their voice against online news aggregators that were picking up significant advertising revenue, while their own offline channels continued to see business shrink.
Rupert Murdoch, CEO of News Corporation (NWS) was one of the most vociferous opposers to the online news aggregators, such as Google, even threatening to work out more beneficial agreements with competitors, such as Microsoft Corporation (MSFT). However, these threats fell a bit flat, since it soon became apparent that users were loath to pay for news online, especially when they were used to getting it free.
In AP’s case, Google was protected until January this year under a license granted in 2006. Since then, Google has been operating under a temporary license, as the details of the new agreement were worked out by the two. An agreement became particularly important after AP successfully negotiated an agreement with Yahoo Inc. (YHOO).
AP contended that providing Google a license to its content enabled unauthorized users to access the data and publish it on their sites, thereby taking away advertising dollars that should have rightfully accrued to AP. Google maintained that all its efforts were targeted at providing users access to the most relevant data at any given time, depending on the search queries presented.
Google has been working on initiatives, such as Living Stories, Fast Flip and Editors’ Picks that could help increase revenues for news providers, thereby enlisting their support for Google sites.
We view the AP agreement as a big positive for Google, demonstrating the company’s ability to overcome significant obstacles to its success. Note that the China issue was also resolved earlier this year, although it initially looked like it would carry on for some time.
We are also positive about Google’s Android strategy, which is positioning it very strongly in the emerging mobile devices market.
However, Google’s second quarter earnings missed Zacks Consensus expectations and the outlook for the rest of the year remains clouded by concerns in Europe.
Consequently, we are reiterating our Neutral recommendation on the shares. Our short term recommendation is also Hold (as signified by the Zacks Rank of #3), since we do not expect much movement in the shares over the next 1-3 months.
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Company Announces Acquisitions During VMworld 2010 Keynote Outlining IT as a Service Vision; New Technologies Expand vCenter Management Portfolio and Enable More Efficient Provisioning of SaaS Applications for End User Computing
The National Aeronautics and Space Administration (NASA) has awarded a contract worth $120 million to a subsidiary of Raytheon Company (RTN). Per the contract, the subsidiary, Raytheon Technical Services Company, will support facilities and operations for astronaut training at NASA's Johnson Space Center (JSC) and Sonny Carter Training Facility in Houston. The tenure of the contract begins from Oct 1, 2010, and lasts through Sep 30, 2015.
The contract calls for Technical Services Company operating, maintaining, and undergoing engineering services for equipment and software used at the Neutral Buoyancy Laboratory and Space Vehicle Mockup Facility.
Earlier, in April, Raytheon received the NASA Goddard contract to maintain and manage large volumes of sensing data and imagery from space instruments.
Raytheon also received another contract from the Department of Defense. The U.S. Navy has awarded Raytheon a contract worth $11.3 million to provide spare parts for a thermal sight system on a light armored vehicle used by the Marine Corps in Iraq with expected completion scheduled in December 2011.
Raytheon Network Centric Systems in McKinney, Texas, will provide the spare parts for the Improved Thermal Sight System on the Light Armored Vehicle 25-A2 used in Operation Iraqi Freedom and Operation Enduring Freedom.
Subsequent to the second quarter and through Aug 30, Raytheon has already won contract worth $916.5 million from the U.S. Navy.
We expect the company to perform well in the upcoming quarters based on continued contract wins, strong order bookings and backlogs.
We maintain our “Neutral” recommendation on Raytheon. The quantitative Zacks #3 Rank (short-term Hold rating) for the company indicates no clear directional pressure on the shares over the near term.
Based in Waltham Massachusetts, Raytheon Company is one of the largest aerospace and defense companies in the U.S. with a diversified line of military products, including missiles, radars, sensors, surveillance and reconnaissance equipment, communication and information systems, naval systems, air traffic control systems, and technical services. Its closest competitors are The Boeing Company (BA), Lockheed Martin Corporation (LMT) and Northrop Grumman Corporation (NOC).
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