The Zacks Analyst Blog Highlights: CarMax, KB Home, Yum! Brands, PepsiCo and The Wendy’s

Sep 26, 2011, 09:30 ET from Zacks Investment Research, Inc.

CHICAGO, Sept. 26, 2011 /PRNewswire/ -- Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include: CarMax Inc. (NYSE: KMX), KB Home (NYSE: KBH), Yum! Brands Inc. (NYSE: YUM), PepsiCo Inc. (NYSE: PEP) and The Wendy's Co. (NYSE: WEN).

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Here are highlights from Friday's Analyst Blog:

CarMax Misses, Profits Flat

CarMax Inc. (NYSE: KMX) suffered a profit of $111.9 million or 49 million per share in the second quarter of its fiscal year ended August 31, 2011, which was flat compared with $107.9 million or 48 cents per share earned in the second quarter of prior fiscal year. With this, the used-car retailer missed the Zacks Consensus Estimate by 2 cents per share.

The flat profit was primarily attributable to economic slowdown and lower consumer confidence as reflected in a 2% decline in comparable store used unit sales.

Net sales and operating revenues in the quarter rose 10.5% to $2.59 billion, which was lower than the Zacks Consensus Estimate of $2.63 billion. Total gross profit increased marginally by 1.5% to $354.3 million from $349.1 million in the second quarter of fiscal 2011, mainly reflecting the strong results of wholesale auctions.

Used vehicle sales inched up 66% to $2.02 billion. The rise in sales was mainly attributable to increase in average selling price to $19,408 from $18,084 a year ago as used unit sales fell 2% to 102,825 units.

However, new vehicle sales dipped 8.2% to $46.9 million, reflecting lower confidence in consumer spending. Wholesale vehicle sales surged 38.8% to $457.9 million, driven by continued increase in appraisal traffic as well as appraisal buy rate. Other sales and revenues rose marginally by 4.5% to $68.1 million, mainly driven by decline in third-party finance fees.

KB Home's Results Deteriorate

KB Home (NYSE: KBH) reported a net loss of $9.6 million or 13 cents per share in the third quarter of fiscal 2011, compared with a net loss of $1.4 million or 2 cents per share in the year-ago quarter. 

However, excluding inventory impairments and land option contract abandonment charges of $1.2 million (non-cash), the adjusted net loss was $8.4 million or 11 cents per share, which was much lower than the Zacks Consensus Estimate of a loss of 17 cents per share.

Total revenue fell 27% to $367.3 million, mainly due to a 27% decline in housing revenues to $364.5 million. It was lower than the Zacks Consensus Estimate of $380 million. The decrease in housing revenues reflected a 31% decrease in the number of homes delivered to 1,603 homes, partly offset by a 6% rise in average selling price to $227,400.

Net orders climbed 40% to 1,838 homes from 1,314 homes a year ago. As a percentage of gross orders, the company's cancellation rate was 29% in the quarter compared with 33% in the prior-year period.

The company's backlog totaled 2,657 homes as of August 31, 2011,, up 22% from 2,169 homes as of August 30, 2010. Potential housing revenues from backlog rose 23% to $559.3 million as of August 31, 2011 from $455.3 million as of August 31, 2010, primarily due to higher number of homes in backlog.

The company's homebuilding business (including housing and land) posted an operating income of $1.44 million in the quarter compared with $8.41 million in the third quarter of fiscal 2010.

Yum! Sells Off 2 Brands

Yum! Brands Inc. (NYSE: YUM) has finally found the right candidate for the sale of its brands Long John Silver's and A&W. The company recently inked definitive agreements with two separate buyers led by key franchisee leaders for these divestures. The deal is expected to close in the fourth quarter of 2011 and have no material impact on its earnings or cash flow.           

Long John Silver's will be acquired by LJS Partners LLC, led by a consortium of prominent franchisee leaders and other investors while A&W will be acquired by A Great American Brand LLC, led by a franchisee leader with substantial interests in A&W restaurants.

In January, Yum! Brands announced its intent to sell these brands so that it can focus on expanding the remaining three brands KFC, Pizza Hut and Taco Bell in the U.S, China and other international markets. Goldman, Sachs & Co. was the financial advisor for the divestiture process.

Louisville, Kentucky based Yum! Brands had shaped up in 1998 after spinning off from PepsiCo Inc. (NYSE: PEP). In 2002, Yum! Brands acquired Long John Silver's and A&W for $320 million. These two chains account for 1,630 of the company's 37,000 plus restaurants worldwide. All the restaurants under the two brands are owned and operated by franchisees and are mostly located in the U.S.

We believe, despite a handsome portfolio of restaurants, the two chains failed to perform during the U.S. economic downturn largely due to its lack of international exposure. On the other hand, Yum! Brands' long-term growth thrives on international expansion as well as positioning of its matured and popular brands in the U.S. According to management, Long John Silver's and A&W were not going well with the long-term growth proposition of Yum! Brands.

Yum! is not the only fast food chain looking to vend slower growth brands. The Wendy's Co. (NYSE: WEN) also sold off its sister brand Arby's in June this year. Yum! Brands currently retains a Zacks #3 Rank (short-term Hold rating). We are also maintaining our long-term Neutral recommendation on the stock.

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