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   February 1, 2015 @ 8:09 AM EST
FRIDAY'S REPORTS (1/30/2015)
Investment Grade
Nokia  (with Analyst's Data Sheet) Although Nokia's fourth quarter results were generally positive, there were some troublesome issues. Moreover, the outlook for 2015 is not as sanguine as we thought...
Investments Return by Dave Novosel, CFA
High Yield
D R Horton  (with Analyst's Data Sheet) D.R. Horton reported better than expect revenue and profit on Monday for its fiscal first quarter of 2015, ended December 31st, thanks to higher than expected...
Paying The Piper by Vicki Bryan
Penn National Gaming  (with Analyst's Data Sheet) The concept of limited supply has not been applicable to the regional gaming sector for some time as casinos have proliferated country wide. But...
Limited Supply by Kim Noland
FRIDAY'S COMMENTS (1/30/2015)
3:40pm Xerox Xerox reported a 3.3% decline in revenue for the fourth quarter. On a constant currency basis, revenue fell...
Earnings by Dave Novosel, CFA
Xerox reported a 3.3% decline in revenue for the fourth quarter. On a constant currency basis, revenue fell 1%. Results were adjusted for the forthcoming sale of the company's ITO business, which is now treated as a discontinued operation. Similar to prior quarters, the Services segment delivered higher revenue (+1.5%). But unlike the first three quarters of this year, margins were up in this unit, albeit only 10 basis points. The improvement was attributable to productivity enhancements and benefits from its restructuring initiatives. These overshadowed higher expenses associated with its government healthcare Medicaid platform. Revenue in the Document Technology segment plunged 8%, the worst performance we have ever seen in this unit. However, margins rose 280 basis points due to lower pension expenses, lower bad debt expense, a favorable mix, the currency benefits from yen--based purchases, and restructuring savings. Free cash flow for 2014 was $1.2 billion, significantly lower than last year. Higher dividends and increased capital spending were two critical factors. Xerox reduced debt by $175 million, bringing leverage down to 2.6x at year-end. The company does not intend to reduce debt any further this year. Instead it expects to spend roughly $900 million on acquisitions, considerably more than in previous years. Management provided guidance for flat revenue in 2015 when measured in constant currency, or down 3% to 4% with the currency effect. It expects margins to improve 50 basis points in the Services segment, while Document Technology margins are expected to fall at least 100 basis points, but more likely about 180 basis points. The weakness reflects higher pension costs and the effect of currency.
3:24pm Manitowoc Co. It's hardly surprising that Manitowoc reported disappointing fourth quarter results today (see...
Restructuring by Vicki Bryan
It's hardly surprising that Manitowoc reported disappointing fourth quarter results today (see our research comment on 10/10/14) with net income down 38% to just $34 million. Revenue was $1.04 billion (down 6%) and EBITDA was $97.4 million (down 21%), both just shy of our reduced estimates, so leverage settled at a higher than expected 3.8x even with further debt reduction. Manitowoc projected modestly better results for 2015, but we really were most interested that the company has decided to spin off its commercial Foodservice equipment segment into a separate business by the first quarter of 2016. Recall the catalyst for this split was activist shareholder Relational Investors which took an 8.5% MTW equity stake last summer for this specified purpose (see our report "Take The Weight Off, Mannie" on 7/1/14). We are rarely a fan these days of activist shareholder attacks (e.g. Bill Ackman's hounding of leading pharmaceutical innovator Allergan until it was sold off to a decidedly subpar company just to escape the even worse one on its heels working with Mr. Ackman), but in this case it seems clear than the value of both of Manitowoc's segments are worth more as standalone entities, particularly under potentially new and/or more focused management. We assumed a 12.5x multiple of our estimated Foodservice 2015 EBITDA of nearly $300 million and 10x estimated Cranes EBITDA of nearly $200 million, which indicates an implied consolidated enterprise value of $5.32 billion versus the current $4.02 billion today. This indicates a 2015 stock value topping $39 versus less than $19 today and roughly $30 just before Relational took its MTW stake. In the meantime, Manitowoc's to-do list for 2015 is to continue to whittle down costs and debt to bolster profit margins and cash flow and get leverage below 3x by the end of the year as targeted. It's not clear yet what the new capital structure will look like for the two new companies, but management said credit metrics will be the same for both. That indicates more debt ascribed to the more profitable Food Co., so likely significant debt restructuring to fit the split. Manitowoc's expensive 8.5% senior notes due 2020 are up as we expected on positive event risk and trading to an early call in November this year, which seems likely. We will have more discussion an upcoming report. Maintain "outperform."
2:01pm BT Group Fiscal third quarter revenue (ended December 31st) at BT Group fell 2.7%, the worst performance in a...
Earnings by Dave Novosel, CFA
Fiscal third quarter revenue (ended December 31st) at BT Group fell 2.7%, the worst performance in a couple of years. The two problem areas were Global Services (-8%) and Wholesale (-10%), along with the negative impact of foreign exchange movements. Global Services suffered from some contract milestones that benefited last year, while Wholesale was affected negatively by the continued reduction in traditional calls, lines, and circuits revenue. Business segment revenue fell 2% due to fewer business calls and line volumes as customers move to data and VoIP services. But Consumer revenue rose 7%, reflecting the addition of 119K broadband customers and 45K TV customers. While the revenue figures were disappointing, BT Group posted a 150 basis point increase in margins, reflecting ongoing cost reduction initiatives, including 5% lower labor costs. At 33.9%, EBITDA margins were as high as we have ever seen them. The company is on pace to generate free cash flow of GBP1.8 billion in fiscal 2015. More than GBP500 million has been used to reduce debt, driving leverage down to 1.6x. The IAS pension deficit increased to GBP7 billion as of June 30th .primarily because of lower interest rates. Under the new agreement with the Trustee of the BT Pension Scheme, BT Group will pay GBP2 billion into the scheme over the next three years (GBP1.5B, GBP250 mm, and GBP250 mm). BT Group has only GBP600 million of cash, but it could tap into its GBP2.2 billion worth of investments to fund the pension payment. Management had little to say about the deal for EE, but speculation is that a deal may be announced next week.
11:04am Lear Lear (LEA) posted strong fourth quarter adjusted EBITDA, beating the consensus estimate, and reaffirmed its...
Earnings by Evan Mann, CFA
Lear (LEA) posted strong fourth quarter adjusted EBITDA, beating the consensus estimate, and reaffirmed its 2015 guidance. Total sales rose 7% to $4.5 billion reflecting growth in both segments. Seating sales were up 10% to $3.5 billion reflecting higher production for existing platforms and new business as segment adjusted operating income jumped 30% to $203 million from higher sales and margin expansion. Sales at Electrical Power Management Systems were down 1% to $1.1 billion as unfavorable currency translations more than offset new business (sales increased 4% on a currency adjusted basis). EPMS segment adjusted operating income gained 18% to $146 million due to margin improvement. On a consolidated basis, fourth quarter adjusted EBITDA increased 26% to $359 million, ahead of the $344 million consensus estimate. For 2014, adjusted EBITDA of $1.4 billion covered interest 20x and leverage was 1.26x with leverage deteriorating from 0.9x in 2013 due to an acquisition-related increase in debt. For 2014, free cash flow of $503 million was mostly used to fund $477 million of share repurchases and dividends. In November, LEA priced $650 million of 5.25% senior notes due 2025. The auto parts supplier used $350 million of the these proceeds, along with a new $500 million delayed draw term loan, to finance the $850 million Eagle Ottawa acquisition that closed in January. The balance of the net proceeds will be used to redeem the remaining $245 million of 8.125% senior notes due 2020 when they become callable mid-March. For 2015, the company looks for sales of $18.5-19 billion, core operating income of $1.175 -1.225 billion, and free cash flow of $575 million. We expect LEA to maintain investment grade credit ratios and balance share repurchases and acquisitions with its goal of rating upgrades. We maintain our outperform rating.
10:39am Diageo plc Diageo's net sales declined 0.5% in the first half of fiscal 2015 (ended December 31st). The...
Earnings by Dave Novosel, CFA
Diageo's net sales declined 0.5% in the first half of fiscal 2015 (ended December 31st). The consolidation of USL was offset by the unfavorable effect of foreign currency. Measured on an organic basis, net sales fell slightly (-0.1%), as a 2% decline in volume was offset by an increase in price/mix. The volume shortfall was attributable to management's decision to reduce trade inventory in certain markets, the challenging environment in Venezuela and Eastern Europe, and lower shipments of standard brands in the U.S. Given the macroeconomic conditions in several markets, Diageo found it difficult to raise prices, but the mix was beneficial, particularly with respect to its reserve brands. Net sales decreases in North America, Europe, Latin America, and Asia were offset by a huge increase in Africa. However, overall operating margins fell sharply, marked by declines in every region. Marketing expenses as a percentage of sales increased in all regions except Asia Pacific. Despite the lower marketing expenses there, margins in the Asia Pacific region were down dramatically, due to the foreign exchange impact. Although Diageo made some progress regarding working capital usage, free cash flow was still negative in the first half, following two consecutive years where outflows exceeded inflows. The company's hefty dividend is the prime culprit.
8:35am Viacom Viacom's 4.6% revenue increase for its fiscal first quarter (ended December 31st) was better than last...
Earnings by Dave Novosel, CFA
Viacom's 4.6% revenue increase for its fiscal first quarter (ended December 31st) was better than last year's increase and better than the increase for all of fiscal 2014. Media Networks' revenue was up 4.4%, mostly due to higher affiliate fees stemming from rate increases. Improvement in this area compensated for the 6% decline in domestic advertising, which was attributable to lower ratings. Management commented that ratings are suffering from inadequate measurement as viewers are now using multiple platforms. Film revenue increased 5.7%, aided by a strong performance from the theatrical success of Teenage Mutant Ninja Turtles and a 16% gain in home entertainment revenue. Despite the better revenue, operating margins fell 230 basis points. Media Networks' margins were down 240 basis points due to higher programming expenses. The Film segment posted a loss of $49 million, better than the $62 million loss a year ago. Viacom repurchased $750 million of its shares in the quarter and revealed plans to repurchase another $750 million in Q2. The company also added $1 billion of debt. Roughly $600 million of that will be used for notes maturing next month. Leverage hit 3.2x at the end of the quarter, and if VIA maintains the aggressive pace of stock buybacks, leverage is likely to climb even higher by year-end. However, the company indicated that the pace of buybacks will slow in the second half of the year. Management stated that it has sufficient scale, suggesting acquisitions are not a priority.
1:26am Navistar International The SEC announced Thursday evening that it filed a "Subpoena Enforcement Action"...
Legal Development by Vicki Bryan
The SEC announced Thursday evening that it filed a "Subpoena Enforcement Action" against Navistar for "Withholding Documents Based On Improper Privilege Claims in Response to Investigative Subpoenas." It seems that Navistar has been and continues to withhold information the SEC considers critical in its investigation to determine whether Navistar committed fraud by deliberate misstatements and/or material omissions of fact its true progress in what turned out to be a complete failure to meet EPA emissions standards for 2010--a completely self-inflicted catastrophe that caused Navistar to abandon pervasive technology in its entire product line which nearly drove the company to the brink of failure. We are hardly shocked by this SEC action--here's what we said in our research comment on 8/2/12 when the company first revealed the initial SEC probe, "We are not surprised--we have criticized the company's seemingly inadequate disclosure and public representation of material events and information. In our [6/13/12] report "Unraveling" we said 'Navistar's problems are not just hard to solve--it also seems to us like management has deliberately downplayed the seriousness of its situation and the increasing risk that solutions are not imminent.' We also called out the company's failure to disclose that it informed the EPA last October [2011] that EGR was so far from EPA compliance through 2012 and potentially 2013 that Navistar could be forced to shut down and potentially be shut out of the US marketplace and file bankruptcy if the EPA forced its hand. This convinced the EPA to break its own process rules to offset what it believed to be an emergency and initiate the weak $1900 per engine interim penalty to help Navistar stay afloat, a measure which subsequently was vacated by a court ruling in a competitor initiated lawsuit. We said 'we think Navistar should have disclosed such a shockingly close call, especially one still unresolved, yet none of this appears in its press releases, SEC filings, or investor presentations.'" Indeed Navistar has never publicly disclosed that troubling drama even after the information came to light via the EPA's own testimony as a defendant in a landmark lawsuit filed against it by Navistar's competitors. We find it extremely troubling that three years and two new CEOs later--not to mention the reshuffled Board--Navistar still has serious disclosure issues even though rebuilding its credibility is just as vital to its recovery as regaining traction with its still struggling product line. And by the way, serious government probes like this that seem likely to turn out badly for Navistar can be prohibitively expensive to settle, and this is not the only one in the hopper. Recently the EPA's allegation that Navistar sold 7600 noncompliant 2010 models as illegally badged 2009 models has been turned over to the Justice Department. These added to the burgeoning civil lawsuits piling up indicate potentially serious threats to Navistar's rapidly dwindling cash, which we suspect already may be evaporating faster than management projected in what could be a disappointing fiscal first quarter due to close this week (see our research comment on Wednesday). Again, we hope Navistar will offer some insight next Wednesday during its Analyst Day presentation, but we doubt it will report stronger than expected sales and profit trends for the January quarter or even some timely influx of substantial cash from asset sales. It's still struggling engine production units are a hard sell and likely worth much less than book value (much like Navistar overall) and shuttering further capacity will cost millions more." Maintain "underperform.
THURSDAY'S REPORTS (1/29/2015)
Investment Grade
Wells Fargo  (with Analyst's Data Sheet) January hasn't been a great month for banks in the stock market, but shares of Wells Fargo haven't dropped to the same extent as Bank of America, JPMorgan...
To Market, To Market by Kathleen Shanley, CFA
High Yield
Peabody Energy  (with Analyst's Data Sheet) Peabody Energy's (BTU) fourth quarter revenues and adjusted EBITDA were better than consensus expectations.
Aussie Margin Gain by Evan Mann, CFA
Peabody 1/28 
Bombardier 1/16 
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Jan 29, 2015 | The Street
VB on American/US Airways Share, Up 1,000% in Three Years, Take a Break Q - "American may lose passengers as it adds seats to many of the aircraft in its fleet, which translates to higher fares for reduced personal space for flyers."
Jan 28, 2015 | Reuters
KN on Caesar's gets its Chicago bankruptcy in win for Apollo Q - "Kim Noland, an analyst with Gimme Credit, warned earlier this week that if the case was in Delaware, Caesars' plan was likely to unravel."
Jan 27, 2015 | Reuters
KN on Judge to rule Wednesday if Caesars' bankruptcy stays in Chicago Q - "Not only could the Delaware venue assist the claims of the junior creditors, it might cause the restructuring agreement that CEOC has cobbled together..."
Jan 27, 2015 | USA Today
VB on American Airlines sees record profits Q- -" 'New' American's honeymoon is over with the easy wins done and new strategies implemented."
Jan 26, 2015 | DBR High Yield Weekly
KN on Shut Out Q - Mohegan report featured
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