Earnings Preview: Chipotle, CME Group, NYSE, Disney, Kellogg, Expedia

Earnings Preview: Chipotle, CME Group, NYSE, Disney, Kellogg, Expedia

Earnings Preview: Chipotle, CME Group, NYSE, Disney, Kellogg, Expedia

February 5th is a big earnings day. Many large S&P 500 companies will be reporting Q4 earnings. We provided an earnings preview for several companies earlier, now we highlight some other prominent companies. Below we provide an earnings preview for Chipotle Mexican Grill, Inc. (NYSE: CMG), CME Group Inc (NASDAQ: CME), NYSE Euronext (NYSE: NYX), The Walt Disney Company (NYSE: DIS), Kellogg Company (NYSE: K), and Expedia Inc (NASDAQ: EXPE).


After A Tough Year, Odey Asset Management Finishes 2021 On A High

For much of the past decade, Crispin Odey has been waiting for inflation to rear its ugly head. The fund manager has been positioned to take advantage of rising prices in his flagship hedge fund, the Odey European Fund, and has been trying to warn his investors about the risks of inflation through his annual Read More

Chipotle Mexican Grill, Inc. (NYSE:CMG) is scheduled to report Q4 2012 on 2/5 after the market close. With Q4 EPS pre-released in the range of $1.92-$1.97, investor attention will likely shift to the company’s efforts to rekindle SSS growth momentum in 2013. Analysts at Wells Fargo Securities are looking for EPS of $1.97 (Street at $1.95), the high end of the company’s pre-release range of $1.92-$1.97. Q4 SSS were also pre-released up 3.8%. They expect investors to focus on : (1) Chipotle Mexican Grill, Inc. (NYSE:CMG) strategy to rekindle SSS momentum in 2013 (marketing, catering, new products) (2) new unit productivity trends and development color and (3) margin prospects given CMG’s outlook for mid-single digit commodity inflation and likely low-single digit pricing in 2013. Wells Fargo analysts recently lowered their FY 2012 EPS estimate to $8.77 from $8.99 and 2013E EPS to $10.15 from $10.54, valuation range moves to $315-325 from $270-280.

The analysts modeled approximately 4% SSS growth in 2013, which representing the company’s weakest SSS performance since 2009, would still rank among the strongest performances in the sector. Chipotle reported Q4 2012 SSS growth of 3.8%, the company’s lowest SSS number since Q1 2010. Their 4.3% 2013 SSS growth estimate is based on: (1) the still meaningful SSS contribution from development in new markets (approximately 31%) over the past three years, which have historically generated above-system-average SSS; (2) increased throughput during the peak lunch and dinner hours; and (3) approximately 1.3% menu pricing to offset the strong likelihood of continued protein cost inflation in 2013.

Chipotle has characterized a 2013 menu price increase as “likely” and expects it would take place mid-year. CMG stated on its Q3 2012 earnings call that based on its outlook for continued commodity inflation, it was “open” to a price increase in 2013. At a Jan. 17 investor conference, management stated that a price increase is “likely” and pointed to “mid-year” for the expected timing.

CME Group Inc (NASDAQ:CME) is reporting quarterly earnings on Tuesday after the close. Analysts at Stifel Nicholas recently reduced their 4Q12 EPS estimate by $0.03 to $0.63 on lower-than-expected 4Q futures ADV. This brings their FY12 estimate to $3.02, down from $3.05 previously. They also have reduced their FY13 estimate to $3.13 from $3.36, due in large part to a lower ADV forecast, as Stifel is now modeling 3.5% ADV growth, down from 5% previously. Sitfel has established their initial FY14 estimate of $3.55.

CME’s January volumes remain relatively soft, but analysts at Wells Fargo have noticed an uptick in the back half of the month. Average daily volume (ADV) of 11.4MM contracts was up 18% sequentially, but well below their Q1 2013 estimate of 12.8MM contracts. All asset classes are underperforming relative to their estimates. Positively, interest rate volumes have picked up noticeably from early January and they think this trend can continue as the macro environment continues to improve and investors keep a close eye on the Federal Reserve for any changes in policy. Q1 2013 bias is lower given the January metrics.

Volumes were up across the board from December, with the exception of Equities. Consolidated ADV was up 18% sequentially, but down 2% yr/yr. On a mo/mo basis, interest rates were up 46%, equities down 21%, foreign exchange up 9%, energy up 26%, ag up 17%, and metals up 35%. The decline in equities ADV was particularly surprising given the 8% sequential improvement in the cash market during the month.

Open interest closed the month significantly higher from December, which is typically the case to start the year due to December roll periods and holidays. Month-end open interest of 78MM was up from 70MM in December, though OI is still down 10% from the end of January 2012. CME Group Inc (NASDAQ:CME) should include its rate per contract for the three months ending in December in its Q4 earnings report.

NYSE Euronext (NYSE:NYX) is reporting Q4 earnings on February 5th. Analysts at Credit Suisse  recently reduced their 4Q EPS estimate to $0.37 (old: $0.42). Accounting for no further share repurchase activity, full year 2013-2015 EPS estimates are now $2.10, $2.40 and $2.55 (old: $2.15, $2.55 and $2.80). They adjusted their target price to $33 (old: $26) to account for ICE’s recent acquisition offer.

What’s New & Most Incremental? 1) Less favorable derivatives mix shift to end the year (more B-Clear); 2) Mixed revenue capture trends–stronger in European cash but weaker in U.S. cash; and 3) Meaningful less stock buyback activity given the recent merger announcement.

Derivatives Trading

European derivatives volumes weaker ex. BClear. During the December quarter, European derivatives volumes averaged 3.5 million contracts per day. Bclear volumes accounted for 35% of this quarter’s activity, up from 24% last quarter. Excluding Bclear, ADV of 2.3 million contracts was down 21% yr/yr and down 10% qtr/qtr.

Consolidated U.S. equity options volumes increase; NYX market share improved too. During the fourth quarter, overall volumes in multi-listed equity and ETF U.S. options averaged 14.3 million contracts per day (-8% yr/yr, +4% qtr/qtr) as volumes bucked the seasonal weakness on fiscal cliff uncertainty. NYSE’s market share in non-proprietary multi-listed products improved to 28% from 26% during the third quarter.

Cash Trading

European cash volumes decline. Trading activity in European cash equities fell 11% from last quarter and was down 26% from last year during 4Q. Looking forward, the analysts expect continued pressure on revenue capture trends here as the European equities market structure landscape continues to evolve (e.g., interoperability, more algo activity) and competition remains high.

U.S. cash equities volumes sluggish too. U.S. consolidated cash equity volumes averaged a weak 6.1 billion shares per day in the December quarter, down 18% from year-ago levels but up 2% from third quarter levels. 4Q consolidated volume by tape: Tape A -18% yr/yr, Tape B -33%, Tape C -6%.

U.S. cash market share stable. NYSE Euronext (NYSE: NYX)’s matched market share of U.S. equity volumes was 24% in the fourth quarter, a touch lower than 3Q. 4Q market share by tape: Tape A: 31%, Tape B: 21%, Tape C: 11%.

Revenue Capture Trends Mixed. With the company’s monthly update, NYSE Euronext (NYSE: NYX) provided a snapshot of preliminary pricing trends across the franchise for 4Q. Revenue capture trends were mixed during the December quarter. U.S. cash RPC was stable qtr/qtr and fell short of expectations—the analysts were hoping for some rebound here on the back of recent pricing actions.

In Europe, cash RPC increased by 8% and much better than anticipated–the analysts attribute the rebound to currency tailwinds, less in the way of SLP activity and mix shift related to open/close auctions. U.S. options RPC came in a touch lower than Credit Suisse anticipated–the estimates could be proven conservative if the company rounded down in today’s released revenue capture.

The Walt Disney Company (NYSE: DIS) will report Q1 earnings on Tuesday. After reviewing trends Deutsche Bank’s F1QE EPS of $0.77 remains unchanged (Street $0.77), and they believe that Disney will report in line-to-ahead with ESPN ad sales improving later in F1Q, Park trends seemingly remaining healthy, Wreck It Ralph doing well int’l, and in particular given mgmt’s early Dec positive commentary around F1Q (better ESPN ad revenue) when typically negative datapoints would be offered if the Street was too high. Perhaps more importantly, investors will turn from the challenged F1Q13 to healthy CY13 growth. They expect F1Q13 4.5% revenue growth to $11.260b, EBIT -5.7% to $2.306b and EPS -3.8% to $0.77.

Disney has wrapped up new affiliate deals with 40% of its distribution over the past few months including Cablevision, Charter, Cox, AT&T/U-verse and Comcast/ESPN hitting CY13 and Comcast/ABC for CY14. This leaves DISH, DTV and the NCTC spread over the next 3 years in this renewal cycle, another 50% of distribution. This should drive strong affiliate revenue growth in 2013 and sustain a higher pace in 2014 and beyond than the final years of the prior renewal cycle given the steady high-single digit increases embedded in the new deals. CY13 has little incremental ESPN sports rights increases, then CY14/CY15 has MLB, NFL and BCS renewals, while NASCAR and Premiere League likely ends.

Amongst its more significant contracts, from 2016-2021 ESPN has just NBA and Big-10 renewals. Overall, investors now have significant visibility for Media Networks through 2021. Mgmt remains bullish on Parks margin expansion as FY14 and beyond benefit from prior major capex projects, sustaining growth until Shanghai enhances FY16. Film has LT visibility with Avengers 2, Pirates 5 and Star Wars 7 in 2015. CP should leverage the robust brand portfolio.

The analysts expect revenue +5% Y/Y, EBIT -6% and EPS -4% (shares flat Y/Y on buybacks offset by 40m Lucasfilm shares). They estimate The Walt Disney Company (NYSE: DIS)’s Broadcasting EBIT +9% Y/Y, Cable Nets -19%, Theme Parks +18%, Film -41%, CP +14% and Interactive $+48m Y/Y.

Advertising should improve to +2% at ABC vs -11% in F4Q (on PT ratings -9% vs -25% in F4Q), +8% at TV stations vs +2% in F4Q (due to political); +1% at ESPN vs flat in F4Q (return of NBA) and +8% at ABC Family vs +5% in F4Q (improved ratings).

ESPN affiliate rev should grow 7% (cash fees up 5%) for total ESPN revenue +4% while costs are expected +9% due to $60m in new NCAA contracts and 20 more NBA games Y/Y.

At Theme Parks, part of the New Year’s holiday shifts from F1Q to F2Q, impacting EBIT by $30m.  They expect US attendance +2% (Disneyland +10% on Cars Land, Disney World +1%) and per caps +7%; Hotel Occupancies -2% (additional rooms at WDW Art of Animation), per caps +5% plus $100+m of incremental cruise ship revenue, driving 7% US rev growth and 10% EBIT growth. FX headwinds moderate at Int’l parks; DBe rev +3%, EBIT +9% on costs +2%.

The Walt Disney Company (NYSE: DIS)’s film unit faces tough home video comps against Pirates 4, Captain America, Cars 2, The Help and The Lions King, which was hugely profitable with 100% of its amortization burned off having been released in 1995.

CP revenue is est. +11% Y/Y, benefitting from Avengers and Spider Man merch while Interactive will post a positive quarter on the Epic Mickey release and a slight seasonal benefit from Lucasfilm.

Kellogg Company (NYSE: K) EPS results will be delivered on Tue., Feb 5th. Deutche Bank analysts expect opr EPS of $0.69, excl. est. $0.02 of upfront charges and any Pringles integration items. They model 12-13% sales growth (primarily Pringles) with EBIT up 5% to $430 mil. Mgmt. will host a conf. call at 9:30 am EST.

Management Guidance:
—- 4Q12 —-
· Cereal Sales: Kellogg Company (NYSE: K)  has seen a ‘strong start’ in October and is ‘well-positioned’ for 4Q.

· Pringles Sales: Sales performance ‘stronger’ than expected and K also seeing ‘better performance’ from supply chain and cost structure / Growth reflects merchandising activity and distribution gains.

· International: Kellogg Company (NYSE: K) has seen ‘progressive improvement’ through the year following a ‘difficult start’.

· Europe: Expect a ‘better’ top-line result in 4Q but a ‘continued’ internal profit decline.
· Asia: Improved results in 3Q, largely due to better performance in Australia / ‘Expect better growth across the region’ in 2H (not updated)

· Latin America: Operating profit impacted in 3Q by trade inventory reductions in Mexico, which partially reflected seasonal timing between 3Q and 4Q (but is partly more structural) / Non-Mexico businesses performed ‘strongly’ in 3Q.

· Upfront Costs: Higher YOY in 4Q.

· Inflation: K continues to see ‘higher commodity costs’ in 2H12, including in 4Q.

· Supply Chain Investments: Level of investment was increased in 3Q11 ($70mm of total $100mm in spending during 2011 was in 2H11), so will lap higher costs in 2H12 (since investment in 2012 is more evenly divided) (unchanged).

· Brand-building: Will be higher YOY in 4Q following +HSD increase in 3Q and decline in 1H12.

—- 2012 —-
· EPS: Reported range of $3.18-$3.30, including $0.07-$0.10 in total one-time items. Pro-forma range of $3.28-$3.37 (vs. prior pro-forma range of $3.30-$3.39).

· FX: -$0.05 headwind (vs. -$0.06 previously)

· Recall: -0.06 headwind

· Internal Net Sales: +2-3% YOY growth (unchanged).

· Price/Mix: Will grow YOY, but expected to be ‘partially offset’ by volume decline (not updated)

· Volume: Volume to ‘decline’ YOY (not updated vs. 2Q, but guidance before that was -1% to -2%)

· Gross Margin: Down a little more than -150 bps YOY, including Pringles

· Pringles: -40 bps impact, but K taking steps to increase margins over time.

· Recall: -20 bps impact

· Underlying GM: Down approximately -100 bps YOY (excl. Pringles and recall)

· Internal EBIT: -4% to -6% YOY (vs. -2% to -4% previously), which reflects the impact of the recall.

· Inflation: Expect 7% COGS inflation (unchanged), but ‘might be a little bit above that’.

· Productivity: Slightly above 3% of COGS (roughly in-line with 3-4% long-term target) (unchanged)

· Brand-building: Increase ‘at a rate equal to or greater than sales growth’, which will be ‘skewed to the second half of the year’ and includes big investments in Asia/LatAm (unchanged)

· Incentive Comp: ‘We have a pay for performance culture as a company and clearly my bonus is not looking that good for 2012…[but] not expecting anything like the 2010/2011 dynamic where the bonus program was cut in 2010 and caused an issue for 2011’ (not updated)

· Innovation: Target of nearly $900mm, due to ‘much stronger’ pipeline than 2011 (unchanged)

· Supply Chain Investments: Spending was a headwind in 1H, but will be a tailwind in 2H (due to timing of investments in 2011) / View $100mm as step-up in cost structure (additional people, higher depreciation from additional capital, etc) and do not expect it to come out again.

· Interest Expense: $260mm

· Tax Rate: ~29% (unchanged sequentially vs. ~30% before that), due to discrete tax benefit during 2Q

· Share Repurchase: Due to Pringles, Kellogg Company (NYSE: K) plans to limit share repurchase to proceeds received from option exercises for ~2 years (prior plan was to repurchase remaining $650mm left on $2.5bn 3-year authorization) (unchanged) / Typically look to drive +2% growth per year from share repurchase.

· Cash Flow: $1.1bn to $1.2bn, including Pringles (unchanged), which could be at the ‘high-end’ depending on timing / Includes +$140-$150mm Pringles working capital adjustment.

· Working Capital: ‘This will be an area of focus for us over the balance of the year as we plan to reduce inventory by lowering production in our plants.’ (unchanged)

· Inventory: Expect ‘some adverse impact’ flowing through COGS over the ‘next couple quarters’ as a result of negative operating leverage from reducing production to bring down inventories. (unchanged)

· Capital Spending: 4% of sales (vs. 4-5% of sales previously) and compared to the long-term target of 3-4% (unchanged), with spending more weighted towards 2H.

· Debt Paydown: Reduced debt by -$350mm in 3Q.

· Upfront Costs: $0.10-$0.12, ‘consistent’ with prior years.

· SAP reimplementation: Cost of $20-$30mm, with the benefits beginning to be recognized in 2013 (not updated).

—- 2013 —-
· EPS: +5-7% growth off reported 2012 base of $3.18-$3.30. Pro-forma range of $3.74-$3.94 (including +$0.25-$0.30 benefit from pension costs)

· Integration Costs: Pro-forma EPS excludes $0.11-$0.15 in Pringles integration costs

· Pension Benefit: Pro-forma EPS includes $0.25-$0.30 benefit due to pension accounting change

· Sales: +7% YOY growth

· Inflation: 6% COGS inflation

· Europe: K remains ‘cautious’ on Europe into 2013, with ‘early signs of improvement’ in the UK and France tempered by a ‘difficult environment’ in Southern Europe.

· Lapping Recall: Lap Mini-Wheats recall, which reduced 3Q12 EPS by -$0.06, operating profit growth by -6pts and gross margins by -60 bps (-20 bps impact on the full year).

· Innovation: ‘Even more’ innovation in 2013 than in 2012.

—- Pringles Acquisition —-
· FY12 Accretion: +$0.06 – $0.08 net accretion excluding one-time costs (but including impact from curtailed share repo program, reduces EPS by $0.05).

· Total One-time Items: -$0.07 to -$0.10 impact.
· Gross Accretion: +$0.11 – $0.13.

· FY13 Accretion: +$0.10 – $0.12 net accretion excluding one-time costs (but including impact from curtailed share repo program, reduces cumulative EPS by $0.12-$0.13) (updated)

· Gross Accretion: +$0.22 – $0.25.

· One-time Costs: $160-$180mm in total / $70-$90mm in 2012, a ‘lesser amount’ in 2013, and the ‘remainder’ in 2014 (not updated)

· Amortization: K ‘still working through’ amortization and balance sheet valuations.

· Synergies: ‘At least’ $10mm in 2012, ‘more’ in 2013, and $50-$75mm per year thereafter (not updated) / ‘Good visibility’ to synergies, which are largely cost-based, though K thinks there is the potential for ‘meaningful’ revenue synergies (which are not built into deal financials) (not updated)

· Financing: K used approximately $2bn in debt (short-term and long-term) at ‘low rates of financing’ and some international cash (~$0.5bn) to fund the deal.

· Sales: ~$1.5bn in sales during its FY11 (ended June)

· EBITDA: ~$243mm in EBITDA during its FY11 (ended June)

· Margins: ‘We intend to improve the margins at Pringles over time.’

· Business Trends: ‘This business has been growing at a strong mid-single-digit rate on average over the last few years.

· Closing: Deal closed on 5/31/12.

· Snacks: ‘After this deal our snacks and cereal business will be of very similar size’ / Pringles almost triples international snacks business (not updated)

· Impact on L/T Growth Algorithm: ‘We view this as an element of enabling us to deliver our long-term growth algorithm as a company, to ensure that we’re on track with that.’ (not updated)

· Tax Rate: Pringles will ‘benefit’ K’s tax-rate over the longer-term, due to ‘tax-efficient structures’ that are in place.

· Transition Services Agreement: K expects to discontinue its TSA with P&G ‘on schedule’.

· Capacity: Pringles has been ‘a little constrained’ on capacity / ‘Will take a year or so’ to get capacity online to enable K to ‘drive the business even harder.’

—- Long-term Annual Growth Targets —-
· Internal Net Sales: +3-4%

· Core RTE Cereal: +LSD
· Snacks: +MSD
· NA Frozen: +MSD
· Developing RTE Cereal: +MSD
· Emerging RTE Cereal: +HSD

· Internal Operating Profit: +4-6%
· EPS: +7-9% (currency-neutral basis)
· Dividend: Between 40% and 50% of reported net income (current plan)

Expedia Inc (NASDAQ: EXPE)  will report earnings on Tuesday, 2/5 AMC. Stifle Nicholas has PF EPS of $0.62, which is is marginally below the Street. Expedia does not provide booking/revenue guidance, only offering guidance for low double-digit EBITDA growth for the year, which implies $165-$180mn of EBITDA in 4Q vs. Stifel $176mn estimate. They believe that upside to 4Q EBITDA is likely.

Expedia Inc (NASDAQ: EXPE) typically offers an annual outlook for EBITDA growth. Consensus estimates forecast almost 16% EBITDA growth vs. our 14% estimate for 2013. The question for investors is whether the company embraces a mid-teens growth outlook this early in the year. Management was conservative with the initial 2012 outlook of mid single-digit growth which increased through the year to low double-digit growth (current expectations of 12%) which includes an estimated 250bp contribution from the VIA Travel acquisition and a reversal.

Stifel is doubtful of Expedia Inc (NASDAQ: EXPE) mid-teens growth outlook, and view high single-digits to low double-digits forecast as more likely. That said, given the improving booking trends and measured margin expansion at Expedia coupled a with a likely conservative outlook, they view it unlikely that shares are overly pressured on a lower outlook at this time. Shares have reacted very positively to the last three earnings reports as the company demonstrates continued progress in hotel bookings.

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