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   December 9, 2013 @ 5:49 PM EST
TODAY'S COMMENTS
5:04pm The Mosaic Company Mosaic did not waste any time in lining up an agreement to purchase a good chunk of the...
Share Repurchase by Carol Levenson, CFA
Mosaic did not waste any time in lining up an agreement to purchase a good chunk of the restricted Class A shares held by various Cargill trusts as a result of the Cargill spinoff. As you may recall, Mosaic was prohibited from repurchasing shares until November 26. Today the company announced an agreement to repurchase 43.3 million shares from the so-called "MAC Trusts" starting with 21.7 million shares on January 8. The rest of the shares will be purchased in increments after that in seven equal installments. At the current stock price, the total cost will approach $2 billion. Furthermore, the company said it is "evaluating other shareholder return options" for the new year as it moves towards its "more efficient" balance sheet. For "more efficient," of course, substitute "weaker." Please see our report dated November 12, 2013.
4:48pm Mosaic Company Mosaic did not waste any time in lining up an agreement to purchase a good chunk of the...
Share Repurchase by Carol Levenson, CFA
Mosaic did not waste any time in lining up an agreement to purchase a good chunk of the restricted Class A shares held by various Cargill trusts as a result of the Cargill spinoff. As you may recall, Mosaic was prohibited from repurchasing shares until November 26. Today the company announced an agreement to repurchase 43.3 million shares from the so-called "MAC Trusts" starting with 21.7 million shares on January 8. The rest of the shares will be purchased in increments after that in seven equal installments. At the current stock price, the total cost will approach $2 billion. Furthermore, the company said it is "evaluating other shareholder return options" for the new year as it moves towards its "more efficient" balance sheet. For "more efficient," of course, substitute "weaker." Please see our report dated November 12, 2013.
4:28pm MGM Mirage MGM was found "suitable" by staff investigators for the Mass. gambling commission in its bid to...
Regulatory Development by Kim Noland
MGM was found "suitable" by staff investigators for the Mass. gambling commission in its bid to build a resort casino in Springfield, MA. We always viewed MGM as the frontrunner for the western MA license and now it is the sole applicant (voters in the other host communities rejected the casino proposals including one from Mohegan Tribal for Palmer). Although the members of the commission could reject the staff recommendation, we think MA will go ahead and approve the MGM resort. As we had mentioned in our recent report (11/5/13) MGM is finding growth opportunities in various spots although by far the best ones seem to be in Asia due to outstanding growth of Macau and Cotai. In the meantime, we think an MGM resort in western MA is likely to draw well from the CT corridor and take share from Mohegan and Foxwoods.
3:50pm AAL American Airlines Group takes off today as AMR Corp. emerges from bankruptcy and closes its merger with US...
Merger by Vicki Bryan
American Airlines Group takes off today as AMR Corp. emerges from bankruptcy and closes its merger with US Airways. We applaud all those on both sides of the transaction for making it happen, and continue to expect the combination to generate convincing, sustainable improvement in revenue and profits via better quality service benefiting its passengers, employees, and business partners as well as its investors. It's also good to see more of the skeptics jump aboard today as well, joining our "outperform" rating on American which we initiated back in February (see our report "Congratulations! Now For The Hard Part?" on 2/19/13). Of course, we also recently cautioned that "life is short, and so are honeymoons" (see "All Together Now" on 11/13/13). American's new very capable management under CEO Doug Parker now must execute as advertised while operating in a 24/7 environment, and it could take two years or more to see the finished product. Suffice to say, expectations are extraordinarily high with the threat of disappointment a lurking nemesis. That said, we think early performance indications over the first year will be encouraging, since we expect to see progress map more closely with Delta's merger integration success versus United's disappointing troubles which squandered most if not all of its initially promising merger benefits. Mr. Parker clearly already has faced down innumerable grueling challenges over his past 11 years as CEO with critical successes and stumbles with major airline mergers, failed and successful corporate takeover bids, and prickly long term labor issues. The fact that he actually seemed to learn so much from his mistakes--and change accordingly to ensure success with consensus and collaboration--already sets him worlds apart from AMR's former management, a very good omen that this time will actually be different for AMR's beleaguered employees. We will have more discussion in an upcoming report. Maintain "outperform."
2:26pm Ingles Markets Ingles Markets (IMKTA) had another strong year. Adjusting for the extra week in last year's...
Earnings by Evan Mann, CFA
Ingles Markets (IMKTA) had another strong year. Adjusting for the extra week in last year's fiscal fourth quarter, sales showed modest gains on an improvement in store traffic. The grocery gross margin benefited from cost savings related to the new distribution center and an improved sales mix. And thanks to last June's debt refinancing, interest expense is headed lower. For the fourth quarter ended September 28, sales decreased 4.5% to $949 million due to one less week in the period relative to last year. But adjusted for the extra week and excluding volatile gasoline, sales were up 1.8% on a 1.3% gain in grocery same store sales. Fourth quarter adjusted EBITDA fell 6% to $55.3 million. For fiscal 2013, adjusted EBITDA was up 1.2% to $216 million. Leverage and rent adjusted leverage were 4.2x and 4.5x. IMKTA ended the year with $17 million of cash and an undrawn $175 million credit facility. We will update our projections and review our rating shortly.
1:25pm Alpha Natural Resources Every bit of liquidity helps. This morning, Alpha Natural Resources (ANR) agreed...
Asset Sale by Evan Mann, CFA
Every bit of liquidity helps. This morning, Alpha Natural Resources (ANR) agreed to sell its 50% stake in Alpha Shale Resources to Rice Energy for $300 million. Total consideration consists of $100 million in cash and $200 million of Rice common stock. (Earlier today, Rice Energy filed a registration statement for a planned initial public offering.) If successfully completed, this transaction will boost ANR's balance sheet cash, put a valuation on the company's Marcellus natural gas investment (ANR's initial contribution in 2010 was 7,500 acres of land in Pennsylvania and $30 million in cash), and enable the company to participate in the potential upside from the Rice Energy platform. As we noted in our recent ANR report (11/05/13), the company ended the third quarter with $2 billion of liquidity ($1.02 billion of cash and $0.9 billion of revolver availability), but expected liquidity to decline somewhat at year end due to anticipated fourth quarter cash outlays. We expect coal market conditions to remain under pressure, especially for metallurgical coal, over the near to intermediate term. Until we see more signs of stabilization, we maintain our underperform rating.
11:38am McDonald's Corporation This morning McDonald's announced another month of lackluster comparable-store...
Sales by Carol Levenson, CFA
This morning McDonald's announced another month of lackluster comparable-store sales. (All references are to comparable-store sales.) Global sales in November rose a mere 0.5% and are up only 0.4% year-to-date in a tough comparison with a 3.4% increase in the prior year period. While the Asia/Pacific, Middle East, and Africa (APMEA) segment has been running negative all year, mainly because of Japan, sales in the U.S. turned negative for the first time since June. U.S. sales fell 0.8% and are barely positive year-to-date. In Europe strength in the U.K., France, and Russia continue to offset weakness in Germany. The U.S. has been the most disappointing segment of late, and the company has begun citing competitive activity as a factor, something one seldom hears from McDonald's. This is exacerbated by flat traffic trends in the fast-food sector. MCD will attempt to regain momentum in the U.S. through providing better customer service and emphasizing value as well as its usual menu innovations. Anecdotal data point: We stopped going there when they dropped the Angus Burger.
11:33am Tesoro Late Friday, Tesoro Corp. announced it has closed on the drop-down of the second group of...
Asset Sale by Philip C. Adams, CFA
Late Friday, Tesoro Corp. announced it has closed on the drop-down of the second group of Carson/Wilmington logistics assets ("Los Angeles Logistics Assets") to Tesoro Logistics LP. Cash received was $650 million, in the middle of the $600-700 million estimate provided on November 7. TSO noted that since the June 1 acquisition of the Carson refinery and logistics assets, TSO has received $1.1 billion of net cash proceeds from the two drop-down transactions, nearly half of the $2.4 billion purchase price.
10:15am Del Monte Foods The big news in Del Monte's second fiscal quarter (ended Oct 27) was the sale of its Consumer...
Earnings by Kim Noland
The big news in Del Monte's second fiscal quarter (ended Oct 27) was the sale of its Consumer business that owns the iconic Del Monte brand of fruits and vegetables for net proceeds of near $1.7 billion (see our report dated Oct 17). The repeated analyst question on the second quarter call was whether these proceeds would be used to repay debt (leverage is in the high 6x range). Management said it had 12 months to decide whether to reinvest (before being required to repay bank loans) and appeared to be looking for possible acquisitions for its remaining business Pet products. In the meantime, quarterly results were decent (at least for Pet) with a net sales increase of 11% (largely due to Natural Balance acquisition) and adjusted EBITDA increase of 14%. Stay tuned for more details on the quarter and pro forma numbers depending on company announcements of use of proceeds.
TODAY'S REPORTS
Investment Grade
Kroger  (with Analyst's Data Sheet) With its fiscal third quarter, reported last week, Kroger extended its string of quarters with growth in identical-store sales excluding fuel (IDs) to a remarkable...
A Decade Of Growth by Carol Levenson, CFA
High Yield
Claire's Stores  (with Analyst's Data Sheet) Claire's Stores' (CLE) fiscal 2013 third quarter results were disappointing both in terms of same store sales and margins.
Sales Shortfall by Evan Mann, CFA
Windstream Corporation  (with Analyst's Data Sheet) How much credence do you lend to management's comments at an investment conference? If it is Jeffrey Gardner, the President and CEO of...
On The Prowl Again? by Dave Novosel, CFA
FRIDAY'S COMMENTS (12/6/2013)
12:10pm Claire's Stores Claire's Stores' (CLE) fiscal third quarter results were disappointing, hurt by a decrease in...
Earnings by Evan Mann, CFA
Claire's Stores' (CLE) fiscal third quarter results were disappointing, hurt by a decrease in customer traffic and a difficult year over year comparison for "One Direction" related licensed merchandise. Sales for the quarter ended November 2 were down 1.8% to $357 million as lower same store sales were partly offset by new store openings. The adjusted EBITDA margin contracted 340 basis points due to an increase in the occupancy rate, an increase in markdowns, spending for newly launched stores and e-commerce platforms, and increased store payroll. As a result, adjusted EBITDA fell 20% to $52.5 million while LTM leverage was 8.2x and rent adjusted leverage was 8.1x. CLE ended the quarter with $97 million of liquidity, inventory levels were moderately higher at quarter end due to weaker than anticipated sales, and the nine months free cash flow shortfall widened. We will update our projections and review our ratings shortly.
8:56am Sears Sears Holdings (SHLD) provided its shareholders with a holiday stocking stuffer. This morning, the...
Spinoff by Evan Mann, CFA
Sears Holdings (SHLD) provided its shareholders with a holiday stocking stuffer. This morning, the retailer announced the filing of a registration statement with the Securities and Exchange Commission for the spin-off of its Lands' End business to SHLD shareholders. In late October, the company noted it was evaluating the separation of its Lands' End and Sears Auto Center businesses, so today's announcement shouldn't come as a big surprise. As we articulated previously, we continue to view SHLD as a struggling retailer in the process of undergoing an orderly liquidation. We remain skeptical regarding the company's longer term credit prospects. We reiterate our underperform rating.
FRIDAY'S REPORTS (12/6/2013)
Investment Grade
Southern Company, Alabama Power  (with Analyst's Data Sheet) Earlier this week Alabama Power, one of the regulated utility subsidiaries of Southern Company, issued $300 million of 10-year...
Southern Tiger by Philip C. Adams, CFA
First Horizon National Corp.  (with Analyst's Data Sheet) First Horizon National Corp. has made progress since the financial crisis. The Memphis-based bank has pared down exposure to...
More Stress Tests by Kathleen Shanley, CFA
High Yield
Homebuilding  (with Analyst's Data Sheet) We have warned investors all year that the pace of the burgeoning housing market recovery is threatened by overzealous price increases by homebuilders, which...
It's Not That Easy Folks by Vicki Bryan
TransDigm  (with Analyst's Data Sheet) In keeping with its top priority, TransDigm (TDG) continues to be acquisitive. Earlier this week, TDG announced the purchase of Airborne Systems for $250 million.
Still Acquisitive  by Evan Mann, CFA
Gimme Credit will not publish on Monday, December 23, 2013 - Friday, January 3, 2014. Christmas and New Year's Holiday.

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Dec 9, 2013 | Associated Press
VB on New American Airlines Emerges As Deal Closes Q - "He's at the peak of 'happy' right now. He's got to keep the unions happy; he's got to keep the computers running; he's got to keep the balloon in the air."
Dec 9, 2013 | DBR High Yield Weekly
EM on Discouraging Q - Sears report featured
Dec 8, 2013 | Philadelphia Inquirer
VB on Aramark lays groundwork for a third IPO Q - "We have expected Aramark to raise much more, potentially as much as $3 billion. Aramark still offers reasonable upside nevertheless via steady operating improvement over the next year..."
Dec 6, 2013 | New York Times
VB on A Tricky Airline Merger, but With Labor's Blessing Q - "AMR's creditors, employees, business partners, investors and even its competitors had remained distinctly concerned about AMR's dubious prospects as a stand-alone carrier..."
Dec 6, 2013 | The Wall Street Journal
Review and Outlook: The Enduring Ratings Racket Q- Meanwhile, outside the world of political favoritism, firms like CreditSights, Rapid Ratings, Gimme Credit and others also publish research on credit risk.
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