Saturday, December 10, 2011
MF Global Disaster
MF Global DisasterTrading with other people's money
Collapse of the world's financial system
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Yum! Brands, Inc. Zacks Momentum Buy Stock
Company Description
Yum! Brands, with its subsidiaries, operates as a quick service restaurant in the United States and internationally. The company's restaurants include, KFC, Taco Bell and Pizza Hut. Yum! was founded in 1997 and has a market cap of $27 billion.
YUM has been a top performer in 2011, handily beating the averages with a fresh all-time high. That movement comes on strong international growth, on display in November with strong Q3 results that came in ahead of expectations.
Third-Quarter Results
Revenue for the period was up 14% from last year to $3.27 billion. Earnings also looked good, coming in at 83 cents, one penny ahead of the Zacks Consensus Estimate.
The big story out of YUM is the company's growth in Asia, where it has been aggressively expanding its presence. Same-store sales in China were up an eye-grabbing 19%.
Results on the domestic front were a little flat, with same-store sales down 3% from last year. The laggard of the group was Taco Bell, losing market share from stiff competition like McDonalds and Subway. That's important because Taco Bell accounts for about 60% of the company's domestic operating profit.
Estimates
We didn't see much movement in estimates off the good quarter, with the current year holding at $2.85 and the next-year estimate pegged at $3.19, a 12% growth projection.
Valuation
With a PEG ratio of 1.67, YUM trades at a premium to the benchmark of 1 for value.
12-Month Chart
On the chart, shares have been on the move since October, recently jumping into a new all-time high. Look for support from the trend on any weakness.
This Week's Momentum Zacks Rank Buy Stocks
Credit Acceptance Corp (CACC) continues to trade strong in the volatile market, recently hitting a new all-time high on another good quarter. With estimates on the rise and a bullish growth projection, this Zacks #1 Rank stock has plenty of upward momentum. Read Full Article.
Silicon Motion Technology Corp. (SIMO) has posted huge gains in 2011, up more than 300% after recently crossing the $20 mark. With estimates on the rise and a bullish growth projection, this Zacks #1 Rank stock is a small capper out of technology with plenty of momentum. Read Full Article.
Stamps.com, Inc. (STMP) has seen big gains over the last few months, recently hitting a new all-time high after reporting another strong quarter. With estimates on the rise and a bullish growth projection, this Zacks #1 Rank stock will deliver momentum to your portfolio. Read Full Article.
Americas Car Mart (CRMT) just surged into a new all-time high after reporting another strong quarter that included a 12% earnings surprise. With estimates on the rise and a bullish growth projection, this Zacks #1 Rank stock has plenty of momentum. Read Full Article.
Chart of the Day - Madison Square Gardens (MSG)
End the Fed [Audiobook, Unabridged] by Ron Paul & Bob Craig
Publisher: Hachette Audio; Unabridged edition (September 16, 2009) | ISBN: 1600248667 | Language: English | Audio CD in MP3 / 128Kbps | 350 MB
At first glance, abolishing the Federal Reserve and returning to the gold standard seems a quaintly eccentric idea, but Texas congressman Paul presents a plan to eliminate our country's central bank, and return to a private banking system, that's both serious and plausible. The questionable aspects involve Paul's predicted results: not only will ending the Fed eliminate inflation (the government cannot print more money than it has gold reserves), but also business booms and busts, wars, income inequality, trade imbalances and the growth of government. Further, and perhaps most important, it would "disempower the secretive cartel of powerful money managers who exercise disproportionate influence over the conduct of public policy." Paul tends to gloss over those periods in history, including the Panic of 1907, in which private banking and the gold standard were law: "the bad reputation of nineteenth century American banking... is largely the result of... propaganda agitating for the creation of the Fed." With respect to "secretive cartels," Paul takes up the interesting question of whether J.P. Morgan is in fact preferable to Ben Bernanke. An engaging response to big-government solutions for the financial crisis, this knowledgeable and opinionated look at U.S. economics, from a firebrand public servant, should provoke much thought.
click here for audio
John Murphy’s Ten Laws of Technical Trading
John Murphy is the Author of a few of my favorite books. He is a legend in the field of Intermarket Analysis. His website, Stockcharts.com is one of the best out there – I use it everyday.
When people ask me what they can do to start learning some Technical Analysis – I always say the same thing, “Read Technical Analysis of the Financial Markets and then read Intermarket Analysis“, both by John Murphy.
He is one of the best that ever did it. These are his Ten Laws of Technical Trading:
1. Map the Trends
Study long-term charts. Begin a chart analysis with monthly and weekly charts spanning several years. A larger scale map of the market provides more visibility and a better long-term perspective on a market. Once the long-term has been established, then consult daily and intra-day charts. A short-term market view alone can often be deceptive. Even if you only trade the very short term, you will do better if you’re trading in the same direction as the intermediate and longer term trends.
2. Spot the Trend and Go With It
Determine the trend and follow it. Market trends come in many sizes – long-term, intermediate-term and short-term. First, determine which one you’re going to trade and use the appropriate chart. Make sure you trade in the direction of that trend. Buy dips if the trend is up. Sell rallies if the trend is down. If you’re trading the intermediate trend, use daily and weekly charts. If you’re day trading, use daily and intra-day charts. But in each case, let the longer range chart determine the trend, and then use the shorter term chart for timing.
3. Find the Low and High of It
Find support and resistance levels. The best place to buy a market is near support levels. That support is usually a previous reaction low. The best place to sell a market is near resistance levels. Resistance is usually a previous peak. After a resistance peak has been broken, it will usually provide support on subsequent pullbacks. In other words, the old “high” becomes the new low. In the same way, when a support level has been broken, it will usually produce selling on subsequent rallies – the old “low” can become the new “high.”
4. Know How Far to Backtrack
Measure percentage retracements. Market corrections up or down usually retrace a significant portion of the previous trend. You can measure the corrections in an existing trend in simple percentages. A fifty percent retracement of a prior trend is most common. A minimum retracement is usually one-third of the prior trend. The maximum retracement is usually two-thirds. Fibonacci retracements of 38% and 62% are also worth watching. During a pullback in an uptrend, therefore, initial buy points are in the 33-38% retracement area.
5. Draw the Line
Draw trend lines. Trend lines are one of the simplest and most effective charting tools. All you need is a straight edge and two points on the chart. Up trend lines are drawn along two successive lows. Down trend lines are drawn along two successive peaks. Prices will often pull back to trend lines before resuming their trend. The breaking of trend lines usually signals a change in trend. A valid trend line should be touched at least three times. The longer a trend line has been in effect, and the more times it has been tested, the more important it becomes.
6. Follow that Average
Follow moving averages. Moving averages provide objective buy and sell signals. They tell you if existing trend is still in motion and help confirm a trend change. Moving averages do not tell you in advance, however, that a trend change is imminent. A combination chart of two moving averages is the most popular way of finding trading signals. Some popular futures combinations are 4- and 9-day moving averages, 9- and 18-day, 5- and 20-day. Signals are given when the shorter average line crosses the longer. Price crossings above and below a 40-day moving average also provide good trading signals. Since moving average chart lines are trend-following indicators, they work best in a trending market.
7. Learn the Turns
Track oscillators. Oscillators help identify overbought and oversold markets. While moving averages offer confirmation of a market trend change, oscillators often help warn us in advance that a market has rallied or fallen too far and will soon turn. Two of the most popular are the Relative Strength Index (RSI) and Stochastics. They both work on a scale of 0 to 100. With the RSI, readings over 70 are overbought while readings below 30 are oversold. The overbought and oversold values for Stochastics are 80 and 20. Most traders use 14-days or weeks for stochastics and either 9 or 14 days or weeks for RSI. Oscillator divergences often warn of market turns. These tools work best in a trading market range. Weekly signals can be used as filters on daily signals. Daily signals can be used as filters for intra-day charts.
8. Know the Warning Signs
Trade MACD. The Moving Average Convergence Divergence (MACD) indicator (developed by Gerald Appel) combines a moving average crossover system with the overbought/oversold elements of an oscillator. A buy signal occurs when the faster line crosses above the slower and both lines are below zero. A sell signal takes place when the faster line crosses below the slower from above the zero line. Weekly signals take precedence over daily signals. An MACD histogram plots the difference between the two lines and gives even earlier warnings of trend changes. It’s called a “histogram” because vertical bars are used to show the difference between the two lines on the chart.
9. Trend or Not a Trend
Use ADX. The Average Directional Movement Index (ADX) line helps determine whether a market is in a trending or a trading phase. It measures the degree of trend or direction in the market. A rising ADX line suggests the presence of a strong trend. A falling ADX line suggests the presence of a trading market and the absence of a trend. A rising ADX line favors moving averages; a falling ADX favors oscillators. By plotting the direction of the ADX line, the trader is able to determine which trading style and which set of indicators are most suitable for the current market environment.
10. Know the Confirming Signs
Include volume and open interest. Volume and open interest are important confirming indicators in futures markets. Volume precedes price. It’s important to ensure that heavier volume is taking place in the direction of the prevailing trend. In an uptrend, heavier volume should be seen on up days. Rising open interest confirms that new money is supporting the prevailing trend. Declining open interest is often a warning that the trend is near completion. A solid price uptrend should be accompanied by rising volume and rising open interest.
“11.”
Technical analysis is a skill that improves with experience and study. Always be a student and keep learning.
- John Murphy
"Do The Right Thing" For Trade Breakouts
Often in life, the right action is the hardest to take. The same dynamic occurs in trading. For most traders it is extremely difficult to buy tops and sell bottoms, because from a very early age we are conditioned to look for value and buy "cheap," while selling "dear." This is why, although most traders proclaim their love for trading with the trend, in reality, the majority love to pick tops or bottoms. While these types of "turn" trades can be very profitable, turn trading can sometimes seem like a Sisyphean task, as price trends relentlessly in one direction, constantly stopping out the bottom and top pickers.
Most traders are reluctant to buy breakouts, for fear of being the last one to the party before prices reverse with a vengeance. So, how can they learn to trade breakouts confidently and successfully? The "do the right thing" setup is designed to deal with just such a predicament. It tells the trader to buy or sell when most ingrained lessons are against doing so. Furthermore, it puts the trader on the right side of the trend, at the times when many other traders are trying to fade the price action. Read on as we cover this strategy and show you some examples of how it can be used.
Do the Right Thing
In the "do the right thing" strategy, the capitulation of top and bottom pickers in the face of a massive buildup of momentum, forces a covering of positions, allowing you to exit profitably within a very short period of time after putting on a trade.
"Do the right thing" employs a rarely used indicator in FX called the commodity channel index (CCI), which was invented by Donald Lambert in 1980 and was originally designed to solve engineering problems regarding signals. The primary focus of CCI is to measure the deviation of the price of the currency pair from its statistical average. As such, CCI is an extremely good and sensitive measure of momentum and helps us to optimize only the highest probability entries for our setup.
Without resorting to the mathematics of the indicator, please note that CCI is an unbound oscillator, with a reading of +100 typically considered to be overbought and any reading of - 100 considered oversold. For our purposes, however, we will use these levels as our trigger points, as we put a twist on the traditional interpretation of CCI. We actually look to buy if the currency pair makes a new high above 100 and sell if the currency pair makes a new low below -100. In "do the right thing" we are looking for new peaks or spikes in momentum that are likely to carry the currency pair higher or lower. The thesis behind this setup is that, much like a body in motion will remain so until it's slowed by counter forces, new highs or lows in CCI will propel the currency farther in the direction of the move, before new prices finally put a halt to the advance or the decline.
Rules for the Long Trade
1. On the daily or the hourly charts, place the CCI indicator with standard input of 20.
2. Note the very last time the CCI registered a reading of greater than +100 before dropping back below the +100 zone.
3. Take a measure of the peak CCI reading and record it.
4. If CCI once again trades above the +100 and if its value exceeds the prior peak reading, go long at market at the close of the candle.
5. Measure the low of the candle and use it as your stop.
6. If the position moves in your favor by the amount of your original stop, sell half and move the stop to breakeven.
7. Take profit on the rest of the trade when the position moves to two times your stop.
Rules for the Short Trade
1. On the daily or the hourly charts, place the CCI indicator with standard input of 20.
2. Note the very last time the CCI registered a reading of less than -100 before poking above the -100 zone.
3. Take a measure of the peak CCI reading and record it.
4. If CCI once again trades below the -100 and if its value exceeds the prior low reading, go short at market at the close of the candle.
5. Measure the high of the candle and use it as your stop.
6. If the position moves in your favor by the amount of your original stop, sell half and move the stop on the remainder of the position to breakeven.
7. Take profit on the rest of the trade when position moves to two times your stop.
CCI Setup On Longer Time Frames
In the daily chart of the EUR/USD pair (Figure 1) we see that the former peak high above the CCI +100 level was recorded on Sept. 5, 2005, when it reached a reading of 130. Not until more than three months later on Dec. 13, 2005, did the CCI produce a value that would exceed this number.
Throughout this time, we can see that EUR/USD was in a severe decline with many false breakouts to the upside, that fizzled as soon as they appeared on the chart. On Dec. 13, 2005, however, CCI hit 162.61 and we immediately went long on the close at 1.194,5 using the low of the candle at 1.1906 as our stop. Our first target was 100% of our risk, or approximately 40 points. We exited half the position at 1.1985 and the second half of the position at two times our risk at 1.2035. Our total reward-to-risk ratio on this trade was 1.5:1, which means that if we are only 50% accurate, the setup would still have positive expectancy. Note also that we were able to capture our gains in less than 24 hours, as the momentum of the move carried our position to profit very quickly.
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| Figure 1: Do the Right Thing CCI Trade, EUR/USD |
| Source: FXtrekIntellichart |
For traders who do not like to wait nearly a quarter of a year between setups, the hourly chart offers far more opportunities for the "do the right thing" setup. It is still infrequent, which is one of the reasons that makes this setup so powerful; the common wisdom in trading is "the rarer the trade, the better the trade." Nevertheless, it occurs on the hourly charts far more often than on the dailies.
In Figure 2, we look at the hourly chart of the EUR/USD between March 24 and March 28 of 2006. At 1 p.m. on March 24, the EUR/USD reaches a CCI peak of 142.96. Several days later at 4 a.m. on March 28, the CCI reading reaches a new high of 184.72. We go long at market on the close of the candle at 1.2063. The low of the candle is 1.2027 and we set our stop there.
The pair consolidates for several hours and then makes a burst to our first target of 1.2103 at 9 a.m. on March 28. We move the stop to breakeven to protect our profits and are stopped out a few hours later, banking 40 pips of profit. As the saying goes, half a loaf is better than none, and it is amazing how they can add up to a whole bakery full of profits, if we simply take what the market gives us.
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| Figure 2: Do the Right Thing CCI Trade, EUR/USD |
| Source: FXtrekIntellichart |
CCI Setup On Shorter Time Frames
Figure 3 shows a short in the USD/CHF. This example is the opposite of the approach shown above. On Oct. 11, 2004, USD/CHF makes a CCI low of -131.05. A few days later, on Oct.14, the CCI prints at -133.68. We enter short at market on the close of the candle at 1.2445. Our stop is the high of that candle at 1.2545. Our first exit is hit just two days later at 1.2345. We stay in the trade with the rest of the position and move the stop to breakeven. Our second target is hit on Oct. 19, no more than five days after we've entered the trade.
The total profit on the trade? 300 points. Our total risk was only 200 points, and we never even experienced any serious drawdown, as the momentum pulled prices farther down. The key is high probability, and that is exactly what the "do the right thing" setup provides.
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| Figure 3: Do the Right Thing CCI Trade, USD/CHF |
| Source: FXtrekIntellichart |
Figure 4 shows another example of a short-term trade, this time to the downside in the EUR/JPY. At 9 p.m. on March 21, 2006, EUR/JPY recorded a reading of -115.19 before recovering above the -100 CCI zone. The "do the right thing" setup triggered almost perfectly five days later, at 8 p.m. on March 26. The CCI value reached a low of -133.68 and we went short on the close of the candle. This was a very large candle on the hourly charts, and we had to risk 74 points as our entry was 140.79 and our stop was at 141.51.
Many traders would have been afraid to enter short at that time, thinking that most of the selling had been done, but we had faith in our strategy and followed the setup. Prices then consolidated a bit and trended lower until 1 p.m. on March 27. Less than 24 hours later we were able to hit our first target, which was a very substantial 74 points. Again we moved our stop to breakeven. The pair proceeded to bottom out and rally, taking us out at breakeven. Although we did not achieve our second target overall, it was a good trade as we banked 74 points, without ever really being in a significant drawdown.
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| Figure 4: Do the Right Thing CCI Trade, EUR/JPY |
| Source: FXtrekIntellichart |
When "Do the Right Thing" Does You Wrong
Figure 5 shows how this setup can go wrong and why it is critical to always use stops. The "do the right thing" setup relies on momentum to generate profits. When the momentum fails to materialize, it signals that a turn may be in the making. Here is how it played out on the hourly charts in AUD/USD. We note that CCI makes a near-term peak at 132.58 at 10 p.m. on May 2, 2006. A few days later at 11 a.m. on May 4, CCI reaches 149.44, prompting a long entry at .7721. The stop is placed at .7709 and is taken out the very same hour. Notice that instead of rallying higher, the pair reversed rapidly. Furthermore, as the downside move gained speed, prices reached a low of .7675. A trader who did not take the 12-point stop, as prescribed by the setup, would have learned a very expensive lesson, as his losses could have been magnified by a factor of three. Therefore, the key idea to remember with our "do the right thing" setup is, "I am right or I am out!"
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| Figure 5: Do the Right Thing CCI Trade, AUD/USD |
| Source: FXtrekIntellichart |
The Bottom Line
"Do the right thing" allows traders to trade breakouts confidently and successfully. CCI can put you on the right side of a trade when many others are trying to fade the price action. However, this setup only works if you apply it along with disciplined stops to protect you from major losses if the expected momentum fails to materialize.
Consumer Staples Stock Outlook - Dec. 2011: KO , PEP , KFT , KMB , PG , HNZ , UL , SVU , WMT , LO , K , SLE
Stocks in the Consumer Staples sector performed their traditional defensive role as the broader equity markets came under pressure over concerns about the prolonged weak U.S. economy and the debt crisis in Europe. Shares of consumer staples companies, accounting for a total of about 11.4% of the S&P 500 Index, were up 5.3%, compared with a 3.3% drop for the S&P 500. In 2010, the sector index grew 10.7% versus a 12.8% increase for the S&P 500 index.The consumer staples companies are typically able to buck sluggish economic growth as food, beverage, household products and cosmetics companies that manufacture and market non-durable consumables, are considered essential to daily life, such as food, drink, toothpaste, deodorants, toilet paper, etc.
Although, staples’ earnings are expected to the continue the uptrend of the last quarters going forward, margins will remain under pressure due to elevated food prices.
Road Ahead
As referred to earlier, the macro-economic environment remains uncertain. However, we have seen that product demand has remained relatively stable for the companies that are more exposed to fast-growing emerging markets in comparison to the slow-growing developed markets. Moreover, favorable foreign exchange translation and lower production costs in developing markets led to higher operating margins than the U.S. Therefore, consumer staples companies have outperformed despite the challenges facing the U.S. and Europe.
Beverage companies, such as The Coca-Cola Company (KO) and PepsiCo Inc. (PEP) are showing keen interest in the emerging markets of India and China, as the developed markets are nearing saturation.
Coca-Cola has already invested over $1 billion in the last 18 years and remains very optimistic about its Indian operations. Last week, Coca-Cola, along with its bottling partners, announced an investment of $2 billion to build consumer marketing, infrastructure and brands in India. The investment will start in 2012 and will continue over the next five years.
PepsiCo had invested $500 million in India in 2008 and expects to triple its revenues over the next five years.
The largest packaged food maker, Kraft Foods Inc. (KFT), following its takeover of Britain based chocolates and confectionary company Cadbury Plc also expects to invest in the biscuits, candy and gum categories in India. Kraft also foresees sales growth for its own brands, like Oreo cookies and Tang powdered drink mix, which have already created its own space in India. Besides India, Kraft is also aggressively investing in Brazil, Russia, China and Indonesia.
However, the jobless recovery continues to remain in place, though there has been some modest improvement lately, primarily impacting beverages, tobacco, food, and hygiene items, sales of which have been hit hard by unemployment. Further, the unemployment scenario is expected to remain relatively high in 2012. We thus believe that the private label goods, which are comparatively cheaper than the branded items, will attract consumers, at the cost of growth of branded goods.
Further, the substantial rise in raw material prices remains a drag on margins of most of the companies in this sector.
Therefore, to survive in an environment of escalating prices, many companies in the consumer staples sector have "right-sized" portions and packages of their products to push higher prices to consumers. PepsiCo Inc. reduced the Lay's "Family Size" potato-chip bag from 16 ounces to 14 ounces in 2009, due to rising prices of raw materials. HJ Heinz Co. (HNZ) has also reduced the portions of its several products, including its flagship Heinz 57 sauce, which now comes in a 4-ounce smaller package with no reduction in price. The reason behind this reduction remains the rising cost of tomatoes.
It is expected that higher wheat costs will begin to affect cereal and bakery product prices over the next few months, causing prices to rise. In spite of the price hike, these companies bring out new innovative products to cater to the ever-changing demands of customers.
Heinz Ketchup’s Dip & Squeeze product was a breakthrough dual-function ketchup package for the foodservice industry and the launch of Simply Heinz Tomato Ketchup for the retail market. From the first plastic ketchup bottle to Top-Down and Fridge Door Fit, Heinz continues to lead the industry in ketchup packaging innovation.
Health, beauty and other products also remain well positioned as they constantly introduce new products especially targeted at young women. Unilever plc (UL) has recently launched ‘Dove Ultimate Go Sleeveless’ which claims that its specialized moisturizers can give women better-looking underarms in five days.
Likewise, the top global beauty and direct selling brand, Avon Products continues to revolutionize the beauty industry by launching innovative, first-to-market products using Avon-patented technology. The flagship Avon Color brand sells 4 tubes of lipcolor every second. Besides, its brands like Skin So Soft continue to evolve to meet today’s personal care needs.
Among discounters, Supervalu Inc. (SVU) has developed its retail operations primarily through new store development, adding merchandise to the existing stores and increasing the number of replacement food distribution centers. The company currently plans to invest in 80 to 90 primary store remodels and open 80 to 90 Save-A-Lot stores by fiscal 2012. The company’s ‘8 Plays to Win’ strategy is gaining traction to improve Supervalu’s price positioning. Increased discipline and analytical tools are helping to advance hyper local retailing initiatives, which appears to be having a positive impact on the company’s customers' shopping experience.
Wal-Mart Stores, Inc. (WMT) announced earlier this year its new "Walmart To Go" home delivery system where customers will be able to order specific items offered on their website such as groceries, toiletries and household supplies. To generate employment and to protect the environment, Walmart also planned to install solar-power panels in more than 60 stores in California, which means that 75% of Walmart stores will have solar power. Through this solar program, Walmart has cut down its energy expenses by more than a million dollars, and created hundreds of new full-time jobs.
OPPORTUNITIES
Though temporarily impacted by inflation, staples companies are generally flush with cash and have the wherewithal to withstand the current economic headwinds. Procter & Gamble Co. (PG) is one of the better-positioned companies in this space, with a strong track record of acquisitions, and despite a soft retail environment, recent volume growth has exceeded expectations. The company generated approximately $9.9 billion in free cash flow in fiscal 2011 - a free cash flow productivity of 84%. The company also repurchased $7 billion worth of shares in fiscal 2011 and increased its quarterly dividend by 9% in April, paying $5.8 billion in dividends to shareholders in fiscal 2011.
Procter & Gamble also continues to see healthy growth rates in developing markets. In fiscal year 2011, the company experienced unit volume increases in all reportable segments due to investments in innovation and market expansions, such as Olay and Head & Shoulders in Brazil, Gillette Guard in India. The results thus led to inflated guidance for net sales and organic sales (based on solid volume momentum, partially offset by product mix and pricing) in the range of 5%–9% and 3%–6%, respectively, for fiscal year 2012.
The first quarter of 2012 also brought innovative premium-priced products in both mature and emerging markets such as Pantene treatments in Asia, Vicks Nature Fusion and Olay Pro-X Clear in North America, fragrances in Prestige such as Gucci Guilty; and market expansions, such as Pampers Super Dry Premium in China, Oral-B in Western Europe, and ProGlide in Asia, which fuelled more than 30% growth in the region.
Procter & Gamble also remains committed to improving the company’s position in the faster growing developing markets, which currently represent only 30% of its total sales. The company also believes that the developing market could catch up with the combined value of North America and Europe by the next decade.
However, margins were impacted by higher commodity costs and unfavorable product mix, which resulted in an unanticipated earnings headwind of about 25 cents per share in fiscal 2011 or nearly a 7 percentage point drag on earnings per share growth versus our going-in expectations. Nevertheless, the company’s expansion of its portfolio of brands, both through internal development and acquisition remains encouraging. On a long-term basis we are Neutral on the stock, and on a short-term basis the stock has a Zacks #3 Rank which implies a Hold rating.
We can also see better-than-expected third-quarter 2011 results of $1.76 for Lorillard, Inc. (LO), as the company continues to outperform in terms of volume and retail shipments, despite difficult macro-economic environment.
Further, the new Newport Non-Menthol launch and the flagship Newport Menthol business continued to improve in the quarter. Despite such launches, Lorillard managed to control its promotional spending.
However, there have been significant increases in cigarette-related taxes which might impact the company’s cigarette volume and sales due to lower consumption levels, a shift in sales from manufactured cigarettes to other tobacco products and a shift from the premium price to the mid-price or low-price cigarettes.
In spite of the above difficulties, management continued to return capital to shareholders through share repurchases and dividends. In August 2011, the company’s Board approved a new share repurchase program to repurchase up to $750 million of its outstanding common stock. Previously, Lorillard completed repurchases under its $1.4 billion share repurchase program announced on August 20, 2010.
Kimberly-Clark Corporation (KMB) is one of the world’s leading manufacturers of health and hygiene products, and commands a strong portfolio of well-established brands. In the most recent third quarter 2011, the company’s adjusted earnings came in at $1.26 per share, in line with the Zacks Consensus Estimate. However, the adjusted earnings increased 11% from the prior-year earnings on the back of all time high sales growth, cost savings, a lower share count and a reduced tax rate.
However, operating profit declined, as cost inflation more than offset efficiency initiatives. Increasing cost inflation has resulted from the tight supply for raw materials used in the production and strong global demand, particularly in China, though cost inflation has decreased for the full year 2011 to a range of $575 million to $625 million, compared with the previous expectation of $650 million to $750 million, resulting from lower pulp costs. The company has also reduced its 2011 volume estimates for the developed markets due to the current market turmoil.
Nevertheless, Kimberly-Clark's plans to direct its surplus cash flow toward increasing dividends and repurchasing shares. Moreover, Kimberly-Clark is also focusing on reducing cost and improving margin.
These initiatives have led to cost savings of about $240 million in 2009 and about $370 million in 2010. It also led to sales growth and $90 million in cost savings in the third-quarter 2011. Our outlook for the stock remains neutral, supported by the Zacks recommendation as well as the short-term Zacks Rank.
WEAKNESSES
The packaged and processed food-maker Kellogg, Inc. (K) posted weak third-quarter 2011 earnings of 80 cents per share, which lagged the Zacks Consensus Estimate by 10.1% and the prior-year earnings by 11%, on the back of economic slowdown, increased cost of goods sold, increased supply-chain costs and reinstatement of incentive compensation costs.
The cost of commodities, energy and fuel soared and peaked in the quarter, exceeding expectations. Gross margins and operating margins also plummeted by 270 and 310 basis points, respectively, in the third quarter of 2011 due to mounting costs. Besides, the investments in the supply chain infrastructure across the U.S. network added to gross margin pressure, resulting in increased logistic costs, and reduced operating leverage.
Kellogg also expects gross margin to remain under pressure in fiscal 2011 and be down approximately 100 basis points compared to 2010. Kellogg has also narrowed its internal operating profit guidance to a range of down 2% to 4% for the year 2011 due to the impact of third quarter results and expected continued investments in the supply chain during the remainder of the year.
Though the company has shown compelling signs of improvement in the third quarter, particularly in the top-line growth, the weak margin outlook is expected to continue weighing on its earnings prospects.
In addition, Kellogg has a highly leveraged balance sheet. Though the company generates substantial amounts of cash, it has significant uses for that cash in dividend payouts and interest on its heavy debt load. The company’s debt load, though by all means very manageable, has increased by 4-year CAGR (2006-2010) of 13%. The recent downtrend in the company’s earnings estimates, a reflection of its weak earnings outlook, is showing up in our long-term Underperform recommendation on the shares. We also have a Zacks #5 Rank on the stock, indicating its weak near-term earnings picture.
Sara Lee Corporation (SLE) also faces tremendous inflationary pressure and severe competition from several branded and private label products, being a global manufacturer and marketer of high-quality brand products. While combating the high price of coffee and meat by raising prices, the company is sacrificing volume. Moreover, strict regulations imposed by several authorities as well as inherent risks associated with the food industry like contamination, wastage and recall of products affect sales and the confidence of customers.
Although Sara Lee registered decent first quarter 2012 earnings of 18 cents per share, exceeding the Zacks Consensus Estimate by a penny, we do not see any compelling reason that will hold the top line at decent levels. The company is undertaking strategic disinvestments to cope with higher expenses. It is also planning to split itself into two businesses, though the spin-off is subject to clearance under several regulations.
For fiscal 2012, Sara Lee affirmed its earnings guidance to be in the range of 89 cents to 95 cents per share, amidst unfavorable foreign currency exchange rates and the reclassification of North American Foodservice Beverage as a discontinued operation. Thus, Sara Lee holds a Zacks #3 Rank implying a short-term Hold rating. On a long-term basis, we maintain a Neutral rating on the stock.