Zacks Bull and Bear of the Day Highlights: Discover Financial Services, Universal Technical Institute, American International Group, General Motors and Krispy Kreme Doughnuts
CHICAGO, April 5, 2011 /PRNewswire/ -- Zacks Equity Research highlights Discover Financial Services (NYSE: DFS) as the Bull of the Day and Universal Technical Institute (NYSE: UTI) the Bear of the Day. In addition, Zacks Equity Research provides analysis on American International Group (NYSE: AIG), General Motors (NYSE: GM) and Krispy Kreme Doughnuts Inc. (NYSE: KKD).
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Discover Financial Services (NYSE: DFS) first quarter earnings were substantially ahead of the Zacks Consensus Estimate. The growth in the loan loss reserve release as well as gains from the payments business drove the credit card sales volumes.
In addition, higher consumer spending and merchant acceptance also contributed to the increase. Recently, Discover also completed the acquisition of Student Loan Corp., which further enhanced its already strong student loan portfolio. The company's extensive network, sound capital position and cost containment initiatives will help accentuate growth over the long term.
Our six-month target price of $29.00 equates to 10.9x our earnings estimate for 2011. Given the expected annual cash dividend of $0.08, this price target implies an expected total return of 20.4% over that period. This is consistent with our Outperform recommendation on the shares.
Universal Technical Institute's (NYSE: UTI) average enrollment rose 8.5% but dropped 690 basis points sequentially. The rate of fall in the new enrollments accelerated to 13% during the most recent quarter, following a decline of 5% in fourth-quarter 2010.
Management warned that enrollment of new students for fiscal 2011 will be below the prior-year level due to regulations proposed by the Department of Education, and will consequently result in a single-digit revenue growth.
Hence, we maintain our Underperform rating on the stock. We have a long-term Underperform recommendation on the stock. Our target price of $16.00, 12.5X 2011 EPS, reflects this view.
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Pay Czar Freezes TARP CEO Payouts
U.S. Treasury's pay czar said on Friday that cash payments of chief executive officers (CEOs) at three firms will not increase this year from the 2010 levels. The reason being, these firms are still under the Troubled Asset Relief Program (TARP) for not clearing their bailout money. However, the mix of stock salary and long-term restricted stock was not fixed.
This could be viewed as one of the safest ways to protect taxpayers' money circulating in these institutions.
Companies Under Consideration
The latest pay restrictions will apply to insurance giant American International Group (NYSE: AIG), troubled automaker General Motors (NYSE: GM) and its former financing arm, Ally Financial Inc., previously known as GMAC Inc.
It was a close call for the CEO of another major bailed-out company, Chrysler Group. The company would also have come under the pay restrictions had it not been acquired by Italy's Fiat S.P.A. Now, Chrysler's CEO will be directly compensated by Fiat.
Extent of Cash Pay Limit
According to the Treasury, cash compensation levels for the top 25 executives at these firms will decrease about 18% in 2011. Also, the total compensation will drop 1.3% from the prior-year level.
Without identifying the executives by name, the acting pay czar Patricia Geoghegan, who took over for Kenneth Feinberg in September 2010, said that top-paid executives at AIG, Ally Financial and GM will receive $10.5 million, $9.5 million and $9 million, respectively.
Why Restrict?
Cash bonuses are very risky in the short term, considering market volatility. If a company incurs huge losses caused by executives and decides to penalize them, cash bonuses will not be immediately recoverable.
We have already seen how the risk-taking attitude of many executives led to the latest financial crisis. As executives received most of their awards in the form of cash, they did not bother addressing the possible aftermath of their risk-taking.
Krispy Kreme Reports Loss
Krispy Kreme Doughnuts Inc.'s (NYSE: KKD) posted a loss of 2 cents during the fourth quarter of fiscal 2011, below the Zacks Consensus Estimate of profit of 4 cents and year ago earnings of 1 cent per share. The lower-than-expected results were due to higher input costs. Total revenue climbed 5.7% year over year to $86.8 million, as all the four segments reported an increase in revenues.
The company's full-year income was $7.6 million or 11 cents, compared with loss of $0.2 million or zero cents per share in fiscal 2009. In fiscal 2011, total revenue jumped 4.5% to $362.0 million driven by same-store sales growth of 4.0%.
During the quarter, segment-wise, the company stores revenues inched up 1.9% to $61.8 million, Domestic franchise revenues spiked up 10.2% to $2.2 million, International franchise revenues upped 10.4% to $5.1 million and KK Supply Chain revenues (including sales to company stores) were up 13.9% to $45.8 million.
For nine consecutive quarters, same-store sales at company stores rose 2.2%. Domestic franchise same-store sales grew 4.6%, while International franchise same store sales declined 11.1%.
Direct operating expense, as a percentage of total revenue, surged 120 basis points to 87.4% and general and administrative expenses expanded 50 basis points to 6.9%. As a result, operating income dropped 62.5% to $0.9 million.
Interest expense reduced $1.0 million from the prior-year quarter to $1.3 million due to a decline in debt liability.
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