Zacks Analyst Blog Highlights: Western Digital, Amphenol, Linear Technology, Walgreen and CVS Caremark

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Jan 20, 2011, 09:30 ET

CHICAGO, Jan. 20, 2011 /PRNewswire/ -- Zacks.com Analyst Blog features: Western Digital Corp. (NYSE: WDC), Amphenol Corporation (NYSE: APH), Linear Technology (Nasdaq: LLTC), Walgreen (NYSE: WAG) and CVS Caremark Corporation (NYSE: CVS).

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Here are highlights from Wednesday's Analyst Blog:

Western Digital Surpasses Expectations

Western Digital Corp. (NYSE: WDC) reported fiscal second quarter 2011 earnings of 96 cents per share, comprehensively beating Zacks Consensus Estimate of 58 cents per share. Earnings decreased 48.1% year-over-year but it increased 14.3% sequentially.

Western Digital's revenue of $2.48 billion also surpassed Zacks Revenue Estimate of $2.35 billion. Management cited that the better-than-expected results reflected on solid execution and improvement in hard drive industry conditions compared with the previous two quarters. However, revenues went down 5.3% when compared with the same quarter of prior year.

Quarter in Detail

Hard drive unit shipments increased 5.5% to 52.2 million year-over-year.

Cost of revenue increased marginally 3.5% to $2.0 billion from the year ago quarter.

Both gross profit and net profit gave a gloomy picture as they decreased 30.9% to $475 million and 47.6% to $225 million, respectively, compared on a year over year basis. Joining the league, operating profit also decreased 49.3% to $240 million on a year over year basis.

However, contradictory to the trend in the last quarter, net profit recorded a sequential increase in the reported quarter. All the three, namely gross profit, net profit and operating profit increased 8.7%, 14.2% and 13.7%, respectively, on a sequential basis.

Management expects to continue its focus on quality, reliability, product availability, low-cost structure and is looking to utilize the opportunities by matching production with true customer demand. Moreover, management believes that there is ample opportunity for profitable growth in the industry and Western Digital remains committed to improve the financial performance over the long-term.

Amphenol Beats Zacks Estimate

Amphenol Corporation (NYSE: APH) posted net income of $131.1 million or 74 cents per share in the fourth quarter of fiscal 2010 compared with a net income of $87.6 million or 50 cents per share in the year-earlier quarter, beating the Zacks Consensus Estimate of 73 cents.

Based in Connecticut, Amphenol designs, manufactures and markets electronic and fiber optic connectors, cable and interconnect systems.

Sales came in at $949.9 million, up 25% from the year-earlier quarter and surpassed the Zacks Consensus Estimate of $948 million. The results beat management's guidance range of $933 million-$948 million. The unfavorable movement in foreign currency exchange rates negatively affected sales by $4.2 million in the fourth quarter of 2010 compared with the year-earlier quarter.

The growth in sales in the reported quarter was attributed to strengthening demand in markets, which includes Industrial, Mobile Devices and Military Aerospace.

Product wise, Interconnect products generated sales of $891 million, up 28.2% year over year. Cable products generated sales of $58.9 million, down 6.8% year over year.

Management stated that Amphenol continues to fuel its growth opportunities with the help of diversification combined with a focus on developing enabling technologies for customers both organically and through acquisitions.

Gross margin improved to 32.6%, slightly up from 31.8% in the year-earlier quarter. Operating margin improved to 20.1% in the quarter from 18.3% in the year-earlier quarter.

Linear Tech Beats but Guides Lower

Linear Technology (Nasdaq: LLTC) reported second quarter earnings of 62 cents, beating the Zacks Consensus by 4 cents. Earnings were up 4.2% sequentially and 87.2% year over year. However, Linear's guidance continued to disappoint, driven by lower orders that weighed heavily on investor sentiment. As a result, the shares slumped 3.82% after-hours.

Revenue

Linear reported revenue of $383.6 million, down 1.3% sequentially, up 49.6% year over year and within management's guidance range of a 0-4% sequential decline. Street expectations were pegged below the middle of the guided range, at around $379 million, when Linear reported earnings.

Although details on the quarter are not available, as Linear will not be having the conference call until later today, it appears that the softness in end demand continues. This is surprising, considering the fact that Linear stated on the call last month that customers were holding back orders because lead times had increased. It was felt that as lead times got back to historical levels, orders too would be back.

Our sources indicated that Linear picked up some market share during the past year and we think the company was not equipped to handle the increased demand, which was the reason for expanding lead times.

Linear has now stated that lead times are back to the historical 4-6 week range, as promised. It also added that customers perceived sufficient product availability and were therefore keeping their internal inventories down. Therefore, although orders were starting to trickle in, they showed yet another decline in the last quarter. Bottom line, demand appears sluggish to our mind, possibly because of continued softness in the consumer and computing markets. We expect the situation to improve in the next quarter.

Margins

The gross margin for the quarter was 78.5%, flat sequentially and up 250 bps from the comparable quarter of the prior year. We note that ASPs have been trending upward over the preceding 5 quarters (excluding the last quarter for which information is not yet available). We think the gross margin expansion from the prior year was at least partially on account of the significantly higher ASP. And if Linear's earlier comments are anything to go by, this trend should continue. The offsetting factor here appears to be the additional capacity that Linear has brought online, the negative effect of which should continue only until utilization picks up again. There were no one-time items in the last quarter.

Operating expenses of $100.0 million were slightly lower than the previous quarter's $100.3 million. However, the operating margin of 52.4% was down 23 bps sequentially, as R&D expenses increased as a percentage of sales. The operating margin was up a whopping 732 bps from last year, almost equally attributable to lower cost of sales, R&D and SG&A expenses as a percentage of sales.

The net income for the quarter was $143.7 million or 37.5% of sales, compared to $137.3 million or 35.3% in the previous quarter and $75.5 million or 29.5% of sales in the year-ago quarter.

There were no one-time adjustments in the last quarter. Therefore, the GAAP net income was same as pro forma at $143.7 million (62 cents per share) up from $137.3 million (59 cents per share) in the September 2010 quarter and $75.5 million (33 cents per share) in the December quarter of last year.

Balance Sheet

Inventories jumped 10.3%, although inventory turns dropped again to 5.1X from 5.7X. Days sales outstanding (DSOs) went down by 5 to around 43. The company ended with cash of $3.22 per share, down from $4.27 at the start of the quarter.

Guidance

The guidance for the fiscal third quarter was extremely disappointing, with Linear expecting revenue and earnings to decline 6-10% sequentially. Normalizing for the 14-week fiscal second quarter, this implies a sequential revenue decline of 0.9% and a sequential earnings decline of 7.0%.

In summary

Linear Technology is a very well-run company. Management has skillfully navigated the company through the downturn (as it has done in past downturns). Consequently, even with reinstatement of base pay and increase in profit-sharing, profitability has continued to improve. However, recent results are evidence of weak demand and the guidance indicates that the softness will continue for at least another quarter. Lead times coming in is a positive in our opinion, so as demand improves, Linear will deliver the kind of growth rates we are more accustomed to seeing.

Drug Retailers Target Flu Season

Although the severe H1N1 alarm will not mark this year's flu season, drug retailers such as Walgreen (NYSE: WAG) and CVS Caremark Corporation (NYSE: CVS) are gearing up to tackle this year's flu season. Walgreen's is preparing to provide flu shots to more customers and has also increased advertising to meet the objective.

According to the company, the major difference between this year's flu season compared to last year is associated with the flu shot required – currently, a person will be requiring one flu shot covering both the seasonal and the H1N1 strain compared to two separate shots.

Moreover, the Center for Disease Control and Prevention (CDC) now recommends flu shots for everyone over six months of age whereas last year, the emphasis was on seniors and others with compromised immune systems. While manufacturers have made over 40 million doses this year, Walgreen's is intending to deliver 15 million flu shots (priced at $30) compared to 7 million last year.

According to a recent CDC report, flu activity is steadily increasing in the US with 8 states witnessing widespread outbreaks of influenza cases. However, a recent survey done by CVS pharmacy shows that 56% of respondents have not received the shots while 93% are aware that flu cases have been reported during the season.

The companies are trying to reach out to these people who have not yet taken the shots as the month of February, which is just around the corner, witnesses the maximum incidence of flu cases.

To meet its objective, Walgreen's has increased the number of certified immunizing pharmacists and nurse practitioners by 10,000 to reach 26,000. Through the end of the first quarter, approximately 5.6 million flu shots were administered, higher than the year-ago period which was marked by the H1N1 pandemic.

The company is undertaking the steps to become a prominent player in the $40 billion total immunization market. We are encouraged to note that apart from the federal government, Walgreen's provides more flu shot immunizations than any other single entity in the US.

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