Novellus Sees Improving Trends – Analyst Blog
Novellus Systems (NVLS) reported fourth quarter earnings that missed the Zacks Consensus by 2 cents, or 4.4%. Both revenue and margins were better than guided, although the tax rate was much higher.
Shares were up just 0.32% in after-hours trading, as the upside is likely to be short-lived, given that semi capex spending is not expected to be exceptional this year. In line with market expectations, heavy-weights Intel Corp (INTC), Taiwan Semiconductor Manufacturing Company (TSM) and Globalfoundries are expecting to spend less this year.
Revenue
Novellus reported revenue of $306.7 million, down 7.8% sequentially and 26.4% year over year, better than management’s guidance range of $$260-290 million and street expectations of $277.2 million.
Revenue by Geography
Asia remained the largest contributor to Novellus’ revenues in the last quarter, with a 53% revenue share. However, revenues from Asia were down 7.8% sequentially and 37.1% from a year ago. The sequential decline was due to weakness in Japan and Korea, which were down 44.7% and 12.2%, respectively.
The Greater China region rebounded after a weak third quarter, growing 13.1%. Overall, Greater China, Korea and Japan contributed 27%, 20% and 6% of quarterly revenue, respectively.
Approximately 35% of revenue came from the U.S., which was down 10.4% sequentially and up 3.0% year over year. Novellus is very strongly positioned here and should see improvement as market conditions improve.
Europeaccounted for the remaining 12% of revenue, which was flat sequentially sequentially and down 32.1% year over year.
Sequential fluctuations in revenue from different geographies is not that indicative of Novellus’ performance, since a certain amount of lumpiness is natural given the high-value low-volume equipment that it sells.
Orders
Orders were up 26.4% sequentially and down 30.1% year over year. In the last quarter, Novellus saw its orders touch $286.9 million. Backlog increased 4.6%. Novellus did not mention the lead time, so we assume that it remained at 12-16 weeks, slightly higher than the normal 12-week range.
Margins
The pro forma gross margin for the quarter was 46.8%, down 145 basis points (bps) from the previous quarter’s 48.2% and at the higher end of the guided range of 46% (+/- 1%). Novellus’ long-term target of 52-54% seems very far away right now and given that the semi capex market is likely to remain depressed, there may not be much improvement until the back half of 2012.
Operating expenses of $89.2 million were down 3.6% sequentially and 6.0% year over year. The operating margin was 15.2%, down 282 bps from 18.0% recorded in the previous quarter and down 1,113 bps from 26.3% reported in the year-ago quarter. As a percentage of sales, all expenses except R&D increased both sequentially and year over year. R&D was flat sequentially after increasing very significantly in the previous quarter.
Net Income
Novellus reported pro forma net income of $30.8 million or a 10.9% net income margin, compared to $50.5 million or 16.5% in the previous quarter and $94.3 million or 24.5% in the year-ago quarter.
Including restructuring charges, a one-time gain from the trial with Linear Technologies (LLTC), gain on the sale of an IAG building, merger-related costs and the associated tax impact, the GAAP net income was $38.5 million or 56 cents a share compared to $51.1 million or 73 cents in the September 2011 quarter and $81.5 million or 89 cents a share in the December quarter of 2010.
Balance Sheet
Inventories were down 1.4%, with inventory turns going from 2.9X to 2.8X. Days sales outstanding (DSOs) went from 66 to 61. Novellus ended with cash and short term investments of $918.7 million ($13.80 per share), up $182.1 million during the quarter. In the last quarter, Novellus generated $84.7 million in cash from operations, spending $10.0 million on capex and $9.4 million on share repurchases.
Guidance
For the first quarter, Novellus expects orders to be up 20-30%, with shipments coming in at $300-330 million. Revenues are expected to grow 6-17% to $300-330 million, much better than street expectations of around $288 million. As a result, gross margins will go up to 47% (+/- 1%).
Based on a tax rate of 10% (+/- 2%) and a share count of 76 million, the GAAP earnings are expected to come in at 71 to 86, including a one-time tax benefit of 21 cents. Therefore, the non-GAAP EPS of 50 to 71 cents is much better than the Zacks Consensus of 50 cents.
Our Take
Novellus’ fourth quarter results were better than expected, due to stronger demand from both foundry and logic customers. Management appeared optimistic on account of the upcoming PC refresh cycle driven by the adoption of solid state drives for notebooks. Novellus expects these trends, along with 3D NAND and mobile DRAM to drive demand at both logic and foundry customers.
While the increase in orders is welcome at any time, the more encouraging takeaway was the growth in backlog, which saw double-digit declines in the two preceding quarters.
Add to this, the company’s strong market position, and broad exposure to both Asian and U.S.-based manufacturers. We think this positioning will play a key role in 2012 and beyond.
We therefore have a short-term (1-3 months) Strong Buy recommendation on the shares.
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Novellus Sees Improving Trends – Analyst Blog
Novellus Systems (NVLS) reported fourth quarter earnings that missed the Zacks Consensus by 2 cents, or 4.4%. Both revenue and margins were better than guided, although the tax rate was much higher.
Shares were up just 0.32% in after-hours trading, as the upside is likely to be short-lived, given that semi capex spending is not expected to be exceptional this year. In line with market expectations, heavy-weights Intel Corp (INTC), Taiwan Semiconductor Manufacturing Company (TSM) and Globalfoundries are expecting to spend less this year.
Revenue
Novellus reported revenue of $306.7 million, down 7.8% sequentially and 26.4% year over year, better than management’s guidance range of $$260-290 million and street expectations of $277.2 million.
Revenue by Geography
Asia remained the largest contributor to Novellus’ revenues in the last quarter, with a 53% revenue share. However, revenues from Asia were down 7.8% sequentially and 37.1% from a year ago. The sequential decline was due to weakness in Japan and Korea, which were down 44.7% and 12.2%, respectively.
The Greater China region rebounded after a weak third quarter, growing 13.1%. Overall, Greater China, Korea and Japan contributed 27%, 20% and 6% of quarterly revenue, respectively.
Approximately 35% of revenue came from the U.S., which was down 10.4% sequentially and up 3.0% year over year. Novellus is very strongly positioned here and should see improvement as market conditions improve.
Europeaccounted for the remaining 12% of revenue, which was flat sequentially sequentially and down 32.1% year over year.
Sequential fluctuations in revenue from different geographies is not that indicative of Novellus’ performance, since a certain amount of lumpiness is natural given the high-value low-volume equipment that it sells.
Orders
Orders were up 26.4% sequentially and down 30.1% year over year. In the last quarter, Novellus saw its orders touch $286.9 million. Backlog increased 4.6%. Novellus did not mention the lead time, so we assume that it remained at 12-16 weeks, slightly higher than the normal 12-week range.
Margins
The pro forma gross margin for the quarter was 46.8%, down 145 basis points (bps) from the previous quarter’s 48.2% and at the higher end of the guided range of 46% (+/- 1%). Novellus’ long-term target of 52-54% seems very far away right now and given that the semi capex market is likely to remain depressed, there may not be much improvement until the back half of 2012.
Operating expenses of $89.2 million were down 3.6% sequentially and 6.0% year over year. The operating margin was 15.2%, down 282 bps from 18.0% recorded in the previous quarter and down 1,113 bps from 26.3% reported in the year-ago quarter. As a percentage of sales, all expenses except R&D increased both sequentially and year over year. R&D was flat sequentially after increasing very significantly in the previous quarter.
Net Income
Novellus reported pro forma net income of $30.8 million or a 10.9% net income margin, compared to $50.5 million or 16.5% in the previous quarter and $94.3 million or 24.5% in the year-ago quarter.
Including restructuring charges, a one-time gain from the trial with Linear Technologies (LLTC), gain on the sale of an IAG building, merger-related costs and the associated tax impact, the GAAP net income was $38.5 million or 56 cents a share compared to $51.1 million or 73 cents in the September 2011 quarter and $81.5 million or 89 cents a share in the December quarter of 2010.
Balance Sheet
Inventories were down 1.4%, with inventory turns going from 2.9X to 2.8X. Days sales outstanding (DSOs) went from 66 to 61. Novellus ended with cash and short term investments of $918.7 million ($13.80 per share), up $182.1 million during the quarter. In the last quarter, Novellus generated $84.7 million in cash from operations, spending $10.0 million on capex and $9.4 million on share repurchases.
Guidance
For the first quarter, Novellus expects orders to be up 20-30%, with shipments coming in at $300-330 million. Revenues are expected to grow 6-17% to $300-330 million, much better than street expectations of around $288 million. As a result, gross margins will go up to 47% (+/- 1%).
Based on a tax rate of 10% (+/- 2%) and a share count of 76 million, the GAAP earnings are expected to come in at 71 to 86, including a one-time tax benefit of 21 cents. Therefore, the non-GAAP EPS of 50 to 71 cents is much better than the Zacks Consensus of 50 cents.
Our Take
Novellus’ fourth quarter results were better than expected, due to stronger demand from both foundry and logic customers. Management appeared optimistic on account of the upcoming PC refresh cycle driven by the adoption of solid state drives for notebooks. Novellus expects these trends, along with 3D NAND and mobile DRAM to drive demand at both logic and foundry customers.
While the increase in orders is welcome at any time, the more encouraging takeaway was the growth in backlog, which saw double-digit declines in the two preceding quarters.
Add to this, the company’s strong market position, and broad exposure to both Asian and U.S.-based manufacturers. We think this positioning will play a key role in 2012 and beyond.
We therefore have a short-term (1-3 months) Strong Buy recommendation on the shares.
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More Publishers Opt for EA’s Origin – Analyst Blog
Electronic Arts Inc.’s (EA) bid to go digital is being well-complemented by its online game download platform, Origin. Recently, seven other game publishers have chosen Origin for download and purchase of titles published by the company. With the addition of these publishers, Origin now has 21 publishers on board, whose games are being made available through its online platform.
Apart from Warner Bros., Interactive Entertainment, THQ Inc. (THQI), Capcom, Trion Worlds and Robot Entertainment that were already present, Origin’s newest additions include Focus Home Interactive, Iceberg Interactive, Strategy First, Macro Games, Selectsoft and Legendo Entertainment.
Origin was launched in June 2011 and since then it has roped in 9.3 million users. The top selling games that are available through Origin include the recently launched MMO Star Wars: The Old Republic, Battlefield 3, Need for Speed The Run and the ever-popular FIFA 12 among other renowned games from EA’s stable. Additionally, popular games from other publishers include Warner Bros.’s Batman: Arkham City, Saints Row: The Third from THQ and Rift from Trion Worlds.
Incidentally, approximately 40% of sales of Star Wars: The Old Republic was through Origin. Moreover, in the recently concluded quarter, EA’s full game downloads reported a staggering 442.0% yearly growth, which was primarily driven by downloadable content from Origin.
Additionally, EA’s digital revenue surged 79.0% year over year to $377.0 million in the third quarter and contributed 23.0% of total revenue, increasing significantly from 15.0% reported in the year-ago quarter. Strong growth from mobile and other handheld revenues and downloadable content (DLC) drove digital revenue growth in the reported quarter.
Gamers’ preferences have been changing to the digitized format and playing games through smartphones and tablets continues to gain popularity. Moreover, online social games have been changing the gaming industry rapidly.
Although consumers continue to buy games that can be downloaded to consoles or computers, digital downloads, used game sales and game rentals are gaining popularity. We believe that given EA’s variety of titles and massive fan following, it is better equipped to gain traction in the digital format than most of the other new players.
EA has been shifting its focus to the digital format and combined with its diversified portfolio and strong product pipeline, it is expected to drive top-line growth going forward. We believe that its high-quality titles, increasing online exposure and social games guarantee market share gains over the long term.
However, the gloomy macro-economic environment, increasing competition and weak video game sales results over the last 12 months compel us to remain cautious in the near term. Competition from Activision Blizzard Inc. (ATVI), Zynga Inc. (ZNGA) and new entrant International Game Technology (IGT) may act as the other headwinds going forward.
We have a Neutral recommendation on Electronic Arts over the long term (for the next 6 to 12 months). Currently, Electronic Arts has a Zacks #3 Rank, which implies a Hold rating in the short term.
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More Publishers Opt for EA’s Origin – Analyst Blog
Electronic Arts Inc.’s (EA) bid to go digital is being well-complemented by its online game download platform, Origin. Recently, seven other game publishers have chosen Origin for download and purchase of titles published by the company. With the addition of these publishers, Origin now has 21 publishers on board, whose games are being made available through its online platform.
Apart from Warner Bros., Interactive Entertainment, THQ Inc. (THQI), Capcom, Trion Worlds and Robot Entertainment that were already present, Origin’s newest additions include Focus Home Interactive, Iceberg Interactive, Strategy First, Macro Games, Selectsoft and Legendo Entertainment.
Origin was launched in June 2011 and since then it has roped in 9.3 million users. The top selling games that are available through Origin include the recently launched MMO Star Wars: The Old Republic, Battlefield 3, Need for Speed The Run and the ever-popular FIFA 12 among other renowned games from EA’s stable. Additionally, popular games from other publishers include Warner Bros.’s Batman: Arkham City, Saints Row: The Third from THQ and Rift from Trion Worlds.
Incidentally, approximately 40% of sales of Star Wars: The Old Republic was through Origin. Moreover, in the recently concluded quarter, EA’s full game downloads reported a staggering 442.0% yearly growth, which was primarily driven by downloadable content from Origin.
Additionally, EA’s digital revenue surged 79.0% year over year to $377.0 million in the third quarter and contributed 23.0% of total revenue, increasing significantly from 15.0% reported in the year-ago quarter. Strong growth from mobile and other handheld revenues and downloadable content (DLC) drove digital revenue growth in the reported quarter.
Gamers’ preferences have been changing to the digitized format and playing games through smartphones and tablets continues to gain popularity. Moreover, online social games have been changing the gaming industry rapidly.
Although consumers continue to buy games that can be downloaded to consoles or computers, digital downloads, used game sales and game rentals are gaining popularity. We believe that given EA’s variety of titles and massive fan following, it is better equipped to gain traction in the digital format than most of the other new players.
EA has been shifting its focus to the digital format and combined with its diversified portfolio and strong product pipeline, it is expected to drive top-line growth going forward. We believe that its high-quality titles, increasing online exposure and social games guarantee market share gains over the long term.
However, the gloomy macro-economic environment, increasing competition and weak video game sales results over the last 12 months compel us to remain cautious in the near term. Competition from Activision Blizzard Inc. (ATVI), Zynga Inc. (ZNGA) and new entrant International Game Technology (IGT) may act as the other headwinds going forward.
We have a Neutral recommendation on Electronic Arts over the long term (for the next 6 to 12 months). Currently, Electronic Arts has a Zacks #3 Rank, which implies a Hold rating in the short term.
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Railroad Industry Stock Outlook – Feb. 2012 – Industry Outlook
The U.S. Freight Railroads performed exceptionally well in 2011 despite difficult weather conditions and an extremely volatile U.S. economy. Solid commodities volumes, effective cost management, and improved rail efficiency helped U.S railroads to continue their strong performance.
The railroads are gaining momentum over the trucking industry due to significant rise in fuel costs of truckers. Currently, the railroads are carrying more cargos, which is helping them gain market share.
During fiscal 2011, the railroads benefited from strong pricing gain reflecting both solid yield improvement and higher fuel surcharges. Shipments of construction components, lumber and motor vehicle volumes increased over 30% year over year. Petroleum product shipment rose 29% year over year.
Importantly, industry players are now more confident that this excellent performance will get further momentum during fiscal 2012. In the first half of January 2012, total rail carloads increased 5.5% year over year, of which intermodal volume rose 7.4%.
Here are some of the key attributes of the U.S. railroad industry:
- The Railroad industry is characterized as high barriers to entry. It is not easy to lay railway tracks and start shipments. The rail operators need to spend a significant amount of money as capital expenditures to maintain safety and technical improvements. Association of American Railroads (AAR), the main trade body of the industry, reported that the freight railroads together have spent a record high of $12 billion in 2011 for manpower recruitment, installation of new rail tracks and other capital projects.
- There are six large freight railroad operators in the U.S., and they actually enjoy a duopolistic situation. While the western part is controlled by Union Pacific and Burlington Northern Santa Fe, the eastern part is controlled by CSX Corp. and Norfolk Southern. On the other side, Canadian Pacific and Canadian National control inter-country rail shipment between the U.S. and Canada. This duopolistic situation helps freight railroad operators to reap maximum benefit from rising prices as overall demand for the economy grows.
- The U.S. government has taken several measures to boost American manufacturing while raising its exports. At present, the U.S. railroad industry commands less than 50% of total freight in America indicating huge opportunity to increase market share. In fact, the railroad industry is gaining market share from the trucking industry. On average, railroads are 300% more fuel efficient than the trucks. We expect fuel cost to go up in future, which may drastically shift the industry dynamics in favor of the railroads.
- The U.S. government decided to scale back its ruling that makes it mandatory for freight rails to install new anticollision technology called “Positive Train Control.” The latest government decision will save approximately $500 million for the industry and may enable every freight rail operators to increase its respective free cash flow by around 20%-25%.
Freight Railroad - an Economic Growth Driver
Freight rail is a “derived demand” industry and rail services are tied to the demand for the products that railroads haul. Rail traffic, therefore, acts as a solid barometer for the overall health of the economy.
Several railroad operators have expressed their confidence that growth rate of business volume in 2012 will exceed the U.S. GDP and industrial production growth rate. Similarly, core pricing gains in 2012 will also exceed inflation.
In 2011, core pricing of railroads improved 4.5% - 5% year over year. This strong pricing environment was primarily driven by a significant improvement of intermodal segment pricing. We believe rail transportation companies will continue to push price increase toward their customers throughout 2012.
Investment by railroad operators for product and service improvement is far ahead than other transportation industries. Very few U.S. industries can match with the railroad operators with respect to high capital investment rate. Investments in capacity, innovations and use of several state-of-the-art technologies led to service improvements and enhanced reliability.
Greater overall freight volume across the freight railroad networks, massive surge in coal and automotive shipments, significant increase in oil deliveries from the Bakken area of North Dakota to refineries on the Gulf Coast, and a sharp rebound in many end markets are expected to fuel the future growth of the Railroad industry. Nevertheless, despite this impressive growth, some near-term concerns still persist.
Carload Volume Yet to Reach the Pre-Recession Level
Although business volume increased in the last year, this is still below the pre-recession 2008 level. The current state of volatile economy in the U.S. and abroad may keep railroad’s top-line growth under pressure in the near future, with most sectors unable to fully recover from the global economic recession. Railroads are particularly sensitive to economic conditions.
Coal Demand Worries
In September 2011, Alpha Natural Resources and Walter Energy, the two large coal mining companies forecasted a decline in coal shipments in near future. The current global volatility that affected mining activities, the sudden drop in demand from the Asian markets sighting problems over quality along with harsh weather conditions in the Pacific region have resulted in a major setback for these coal companies.
Lower natural gas prices and higher utility stockpile levels have also raised their concerns. This is a big blow to rail operators as they banked mostly on these coal producers for shipments to domestic as well as international markets.
Legal Tussles
For a long time, the pricing practice of the U.S. freight railroads is a major cause of tussle with captive shippers, who ship their products through railroad and do not have effective alternatives for shipping. These companies are predominantly from electric utilities, chemical, agricultural and mining sectors.
Congress has discussed about railroad price regulation but so far did not approve any new rules. In June 2011, the U.S. Surface Transportation Board, the federal agency that regulates railroads, discussed the issue in details. We believe if the regulators decide to scrap pricing power, the major freight rail carriers will be severely affected.
OPPORTUNITIES
The railroad industry as a whole offers a number of attributes that are difficult to ignore from the standpoint of investors.
Discretionary Pricing Power: The freight railroad operators function in a seller’s market enjoying pricing power since 1980 when the U.S. government adopted the Staggers Rail Act. The idea was to allow rail transporters to hike price on captive shippers like electric utilities, chemical and agricultural companies in order to improve profitability of the struggling railroad industry. As a result of the Staggers Rail Act, the railroads are hiking their freight rates on an average by nearly 5% per annum while maintaining a double digit profit margin.
Competitive Advantage: From the customers’ point of view, rail transport is cheaper and fuel-efficient than truck and ship transport. As a result, railroads are gaining market share from other means of transport. Several truck operators went bankrupt during the peak recessionary period that helped railroads to become default freight transporters for mid-to-long distances.
Technical Superiority: Overall, investment by railroad operators for product and service improvement is far ahead than other transportation industries. Investments in capacity, innovations and use of several state-of-the-art technologies have led to service improvements and enhanced reliability. AAR claims that freight rail transporters together invested a significant amount of $44 billion in the previous two years for railroad track expansion and maintenance.
Currently, we remain Neutral on Union Pacific Corp. (UNP), Kansas City Southern (KSU), CSX Corp. (CSX), Norfolk Southern Corp. (NSC), Canadian Pacific Railway Ltd. (CP) and Canadian National Railway Co. (CNI). However, due to strong growth momentum of the industry, our long-term view remains positive for all these Class 1 freight railroad operators.
WEAKNESSES
Despite the above mentioned positives, the freight railroad industry, like other industries, also has some structural weaknesses. These are as follows:
Government Regulations: Railroads are subject to the ratification of laws by Congress that could increase regulation of the industry. A 2010 report presented by the U.S. Senate Commerce Committee stated that the discretionary pricing power enjoyed by the Class I freight rail transport companies are putting excessive pressure on freight customers.
The Senate Commerce Committee headed by Sen. John D. Rockefeller has opined that the railroads have become financially stable and a higher transportation rate is actually impacting household budgets. It remains to be seen how the railroad industry maintains growth if any adverse changes occur related to its discretionary pricing policy.
Capital Intensive Nature: Railroad is a highly capital intensive industry that requires continued infrastructure improvements and acquisition of capital assets. Moreover, industry players access the credit markets for funds from time to time. Adverse conditions in credit markets could increase overhead costs associated with issuing debt, and may limit the companies’ ability to sell debt securities on favorable terms.
Unionized Labor: Most of the railroad operator’s employees are unionized and are covered by collective bargaining agreements. These agreements are bargained nationally by the National Carriers’ Conference Committee. In the railroad industry, negotiations generally take place over a number of years. Failure to negotiate amicably could result in strikes by the workers resulting in loss of business.
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U.S. Bancorp to Buy Trust Biz – Analyst Blog
U.S. Bancorp (USB) is making a strategic acquisition for its institutional trust and custody division. The company through its lead bank, U.S. Bank National Association, has entered into a definitive agreement to buy from Union Bank, N.A. its institutional trust business that offers services to retirement plans, labor management trusts and registered investment advisors.
Union Bank is a subsidiary of UnionBanCal Corp., which is owned by Mitsubishi UFJ Financial Group Inc. (MTU). Terms of the transaction were not disclosed.
The deal is a strategic fit for both U.S. Bancorp and Union Bank. For U.S. Bancorp, the acquisition will bring in approximately 4,300 client relationships representing $42 billion in assets under administration. The purchase will expand the company’s footprint and boost its market share in retirement plan, labor management trust and registered investment advisor business segments.
On the other hand, Union Bank plans to strategically augment its banking, global treasury management, asset management, brokerage, corporate trust and institutional custody business segments nationwide. Hence, the sale would help the company to reinvest capital in its core business.
Recent Acquisitions
U.S. Bancorp seems to be on an acquisition spree. Recently, the company’s lead bank, U.S. Bank National Association, agreed to acquire the Indiana corporate trust business of UMB Bank, a subsidiary of UMB Financial Corporation (UMBF). The deal will expand its trust business and is expected to be accomplished on March 2, 2012. However, the terms of the agreement were not disclosed by the company.
Last week, through its lead bank, U.S. Bancorp acquired the banking operations of BankEast, a subsidiary of BankEast Corporation, in a deal assisted by the Federal Deposit Insurance Corporation. BankEast is based in Knoxville, Tennessee.
For U.S. Bancorp, the deal is a strategic fit as the community banking model of BankEast is quite attractive and the deal would help it to expand in the Tennessee market. The 10 branches of BankEast in the Knoxville area will raise U.S. Bank’s total branch count in Tennessee to 91.
Our Take
U.S. Bancorp has a well-balanced business model, with non-interest revenue representing nearly half of its total revenue. Its results have been driven by a combination of acquisitions and organic growth. Also, we expect continued investments in core banking and fee-based operations to generate long-term revenue growth.
Going forward, we expect U.S. Bancorp to benefit from its diversified revenue base and strategic acquisitions, thereby posting growth in core earnings going forward. Yet, a tardy economic recovery and a low interest rate environment along with regulatory issues remain our concern.
U.S. Bancorp shares maintain a Zacks #2 Rank, which translates into a short-term Buy recommendation.
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U.S. Bancorp to Buy Trust Biz – Analyst Blog
U.S. Bancorp (USB) is making a strategic acquisition for its institutional trust and custody division. The company through its lead bank, U.S. Bank National Association, has entered into a definitive agreement to buy from Union Bank, N.A. its institutional trust business that offers services to retirement plans, labor management trusts and registered investment advisors.
Union Bank is a subsidiary of UnionBanCal Corp., which is owned by Mitsubishi UFJ Financial Group Inc. (MTU). Terms of the transaction were not disclosed.
The deal is a strategic fit for both U.S. Bancorp and Union Bank. For U.S. Bancorp, the acquisition will bring in approximately 4,300 client relationships representing $42 billion in assets under administration. The purchase will expand the company’s footprint and boost its market share in retirement plan, labor management trust and registered investment advisor business segments.
On the other hand, Union Bank plans to strategically augment its banking, global treasury management, asset management, brokerage, corporate trust and institutional custody business segments nationwide. Hence, the sale would help the company to reinvest capital in its core business.
Recent Acquisitions
U.S. Bancorp seems to be on an acquisition spree. Recently, the company’s lead bank, U.S. Bank National Association, agreed to acquire the Indiana corporate trust business of UMB Bank, a subsidiary of UMB Financial Corporation (UMBF). The deal will expand its trust business and is expected to be accomplished on March 2, 2012. However, the terms of the agreement were not disclosed by the company.
Last week, through its lead bank, U.S. Bancorp acquired the banking operations of BankEast, a subsidiary of BankEast Corporation, in a deal assisted by the Federal Deposit Insurance Corporation. BankEast is based in Knoxville, Tennessee.
For U.S. Bancorp, the deal is a strategic fit as the community banking model of BankEast is quite attractive and the deal would help it to expand in the Tennessee market. The 10 branches of BankEast in the Knoxville area will raise U.S. Bank’s total branch count in Tennessee to 91.
Our Take
U.S. Bancorp has a well-balanced business model, with non-interest revenue representing nearly half of its total revenue. Its results have been driven by a combination of acquisitions and organic growth. Also, we expect continued investments in core banking and fee-based operations to generate long-term revenue growth.
Going forward, we expect U.S. Bancorp to benefit from its diversified revenue base and strategic acquisitions, thereby posting growth in core earnings going forward. Yet, a tardy economic recovery and a low interest rate environment along with regulatory issues remain our concern.
U.S. Bancorp shares maintain a Zacks #2 Rank, which translates into a short-term Buy recommendation.
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Ross Sales Up, Boosts Outlook – Analyst Blog
The largest off-price apparel and home fashion chain in U.S., Ross Stores Inc. (ROST) came out with stronger-than-expected sales and same store sales numbers for the month of January, as well as for the fourth quarter of fiscal 2011.
Ross Stores’ same-store sales for the four weeks ended January 28, 2012 grew 5% compared with a rise of 3% and 8% recorded for the same period in 2010 and 2009, respectively. The company’s same-store sales for the fourth quarter surged 7% versus an increase of 4% and 10% posted in the fourth quarter of 2010 and 2009, respectively.
For fiscal 2011, the company’s same store sales was up 5%, flat with the 2010 same store sales and down from an increase of 6% reported in 2009.
Ross Stores’ sales in January 2012 jumped 10% from the year-ago comparable period (four weeks ended January 29, 2011). Net sales in January reached $483 million versus $441 million reported last year.
For the fourth quarter of fiscal 2011, Ross Stores reported net sales of 2.398 billion, representing an increase of 12% from $2.145 billion in the year-ago period. The company’s full-year sales were up 9% to $8.608 billion from $7.866 billion for fiscal 2010.
Among the merchandise categories, the company’s Juniors, Shoes and Children’s categories showed remarkable performances in January, driving sales and same-store sales results for the month. Region-wise, the company witnessed substantial growth in Florida and the Mid-Atlantic regions.
The good performance in January and for the fourth quarter together with the company’s strong financial position drove management to announce its 18th consecutive annual dividend hike, raise its fourth quarter and fiscal 2011 earnings per share targets and initiate first quarter and fiscal 2012 same store sales and earnings guidance.
Ross Stores declared a quarterly dividend of 14 cents per share, representing an increase of 27% from the previous dividend. The raised dividend is payable on March 30, 2012, to shareholders of record as of February 17, 2012.
The company’s policy of constantly raising dividends and buying back shares not only illustrates its strong financial and cash flow position, but also shows its focus on improving shareholder returns.
During fiscal 2011, the company bought back nearly 11.3 million shares at a total cost of $450 million. The company currently has an authorization worth $450 million remaining under its share repurchase program, which it plans to complete in fiscal 2012.
Following the encouraging January sales results, Ross Stores has also increased its fourth quarter earnings per share guidance to 84 cents – 85 cents, representing a 22% to 23% increase from the 69 cents per share earned in the fourth quarter of fiscal 2010. In December 2011, the company had raised its earnings guidance in the range of 82 cents - 83 cents per share.
The increase in fourth quarter guidance resulted in the company’s earnings per share forecast for fiscal 2011, now shifting to a range of $2.85 to $2.86 with an expected growth rate of 23% to 24%, compared with $2.31 per share reported in fiscal 2010.
The current Zacks Consensus Estimate for the fourth quarter and fiscal 2011 are 84 cents per share and $2.85 per share, respectively, which are both at the lower end of the company’s revised guidance.
Further, anticipating the fiscal 2011 gains to continue into 2012, the company stated that its same store sales for fiscal 2012 (52 weeks ending January 26, 2013) will grow in the 1% to 2% range, compared to 5% gains in the prior two years.
The company’s earnings per share guidance for fiscal 2012 (53 weeks ending February 2, 2013), including one additional week, is in the range of $3.12 to $3.27, representing a growth rate of 9% to 14%. The company expects the additional week to add about 8 cents - 9 cents per share to 2012 earnings per share. The Zacks Consensus Estimate of $3.20 per share for fiscal 2012 is near the mid-point of the company’s forecast.
For the first quarter of fiscal 2012, the company expects same store sales to increase 1% to 2%, compared with gains of 3% and 10% recorded in the first quarter of 2011 and 2010, respectively. Earnings per share for the first quarter will be in the range of 82 cents - 86 cents, with an expected growth rate of 11% to 16% from 74 cents earned in the first quarter of 2011. The current Zacks Consensus Estimate for first quarter 2012 is 84 cents per share, which is at the mid-point of the company estimated earnings per share.
Ross Stores is scheduled to release its February 2012 sales on March 1, 2012, followed by the fourth quarter and fiscal 2011 results on March 15, 2012.
Ross' shares maintain a Zacks #2 Rank, which translates into a short-term Buy rating. Our long-term recommendation on the stock remains Outperform. The company primarily competes with the likes of Kohl's Corp. (KSS), The TJX Companies Inc. (TJX) and Wal-Mart Stores Inc. (WMT).
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Ross Sales Up, Boosts Outlook – Analyst Blog
The largest off-price apparel and home fashion chain in U.S., Ross Stores Inc. (ROST) came out with stronger-than-expected sales and same store sales numbers for the month of January, as well as for the fourth quarter of fiscal 2011.
Ross Stores’ same-store sales for the four weeks ended January 28, 2012 grew 5% compared with a rise of 3% and 8% recorded for the same period in 2010 and 2009, respectively. The company’s same-store sales for the fourth quarter surged 7% versus an increase of 4% and 10% posted in the fourth quarter of 2010 and 2009, respectively.
For fiscal 2011, the company’s same store sales was up 5%, flat with the 2010 same store sales and down from an increase of 6% reported in 2009.
Ross Stores’ sales in January 2012 jumped 10% from the year-ago comparable period (four weeks ended January 29, 2011). Net sales in January reached $483 million versus $441 million reported last year.
For the fourth quarter of fiscal 2011, Ross Stores reported net sales of 2.398 billion, representing an increase of 12% from $2.145 billion in the year-ago period. The company’s full-year sales were up 9% to $8.608 billion from $7.866 billion for fiscal 2010.
Among the merchandise categories, the company’s Juniors, Shoes and Children’s categories showed remarkable performances in January, driving sales and same-store sales results for the month. Region-wise, the company witnessed substantial growth in Florida and the Mid-Atlantic regions.
The good performance in January and for the fourth quarter together with the company’s strong financial position drove management to announce its 18th consecutive annual dividend hike, raise its fourth quarter and fiscal 2011 earnings per share targets and initiate first quarter and fiscal 2012 same store sales and earnings guidance.
Ross Stores declared a quarterly dividend of 14 cents per share, representing an increase of 27% from the previous dividend. The raised dividend is payable on March 30, 2012, to shareholders of record as of February 17, 2012.
The company’s policy of constantly raising dividends and buying back shares not only illustrates its strong financial and cash flow position, but also shows its focus on improving shareholder returns.
During fiscal 2011, the company bought back nearly 11.3 million shares at a total cost of $450 million. The company currently has an authorization worth $450 million remaining under its share repurchase program, which it plans to complete in fiscal 2012.
Following the encouraging January sales results, Ross Stores has also increased its fourth quarter earnings per share guidance to 84 cents – 85 cents, representing a 22% to 23% increase from the 69 cents per share earned in the fourth quarter of fiscal 2010. In December 2011, the company had raised its earnings guidance in the range of 82 cents - 83 cents per share.
The increase in fourth quarter guidance resulted in the company’s earnings per share forecast for fiscal 2011, now shifting to a range of $2.85 to $2.86 with an expected growth rate of 23% to 24%, compared with $2.31 per share reported in fiscal 2010.
The current Zacks Consensus Estimate for the fourth quarter and fiscal 2011 are 84 cents per share and $2.85 per share, respectively, which are both at the lower end of the company’s revised guidance.
Further, anticipating the fiscal 2011 gains to continue into 2012, the company stated that its same store sales for fiscal 2012 (52 weeks ending January 26, 2013) will grow in the 1% to 2% range, compared to 5% gains in the prior two years.
The company’s earnings per share guidance for fiscal 2012 (53 weeks ending February 2, 2013), including one additional week, is in the range of $3.12 to $3.27, representing a growth rate of 9% to 14%. The company expects the additional week to add about 8 cents - 9 cents per share to 2012 earnings per share. The Zacks Consensus Estimate of $3.20 per share for fiscal 2012 is near the mid-point of the company’s forecast.
For the first quarter of fiscal 2012, the company expects same store sales to increase 1% to 2%, compared with gains of 3% and 10% recorded in the first quarter of 2011 and 2010, respectively. Earnings per share for the first quarter will be in the range of 82 cents - 86 cents, with an expected growth rate of 11% to 16% from 74 cents earned in the first quarter of 2011. The current Zacks Consensus Estimate for first quarter 2012 is 84 cents per share, which is at the mid-point of the company estimated earnings per share.
Ross Stores is scheduled to release its February 2012 sales on March 1, 2012, followed by the fourth quarter and fiscal 2011 results on March 15, 2012.
Ross' shares maintain a Zacks #2 Rank, which translates into a short-term Buy rating. Our long-term recommendation on the stock remains Outperform. The company primarily competes with the likes of Kohl's Corp. (KSS), The TJX Companies Inc. (TJX) and Wal-Mart Stores Inc. (WMT).
KOHLS CORP (KSS): Free Stock Analysis Report
ROSS STORES (ROST): Free Stock Analysis Report
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HSBC to Move US Fund Unit to Dublin – Analyst Blog
On Thursday, The Wall Street Journal reported that HSBC Holdings Plc. (HBC) is planning to shift its US fund administration division to Ireland. The primary reason behind this move is to control costs and reorganize the company’s businesses.
HSBC’s plan to relocate its fund services operations to Dublin is expected to lead to retrenchment of nearly 200 employees in New York. However, the final decision regarding retrenchment of employees is likely to be taken over the next couple of quarters.
The fund administration unit is a part of HSBC’s Securities Services business and offers accounting and valuation services, corporate and statutory compliance, and fund transfers. Though the company will continue to provide services to a portion of its clients from Dublin, others have been advised to look for other fund administrators.
Moreover, this is a part of HSBC’s long-term strategy to bring down its operating expenses. Back in May 2011, the CEO of the company had announced plans to reduce the operating expenses by $3.5 million by the end of 2013 through restructuring and contraction of its global business.
Though US remain an important market for HSBC, this is not the first time that the company is revamping its operations here. Last year, the company had announced the sale of its 195 non-strategic branches to First Niagara Financial Group Inc. (FNFG) and its credit card business to Capital One Financial Corporation (COF).
HSBC’s decision to scale back its operations from the US stems from the fact that the company is facing tough regulatory and economic environment in this country. Following the financial crisis in 2008, various new regulations and low interest rates are affecting the profitability in the banking sector.
Additionally, as a result of low corporate-tax rate and proximity to Europe, Ireland is gradually becoming a preferred destination for many companies to set up businesses and expand the existing operations.
Further, HSBC is not new in Ireland. The company provides corporate banking, private banking, fund administration and insurance services through its 400 employees in that country. Therefore, we believe that HSBC’s plan to move its fund administration business to Dublin will benefit the company in the long run. The company will be able to gain market share in Ireland and this would further improve the company’s financials.
Currently, HSBC retains a Zacks #4 Rank, which translates into a short-term ‘Sell’ rating.
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