Zacks Bull and Bear of the Day Highlights: Weyerhaeuser Co., The Western Union Co., McDonald's Corp., Yum! Brands Inc.and The Wendy's Co.
CHICAGO, Nov. 13, 2012 /PRNewswire/ -- Zacks Equity Research highlights Weyerhaeuser Co. (NYSE: WY) as the Bull of the Day and The Western Union Co. (NYSE: WU) as the Bear of the Day. In addition, Zacks Equity Research provides analysis onMcDonald's Corp. (SMP), Yum! Brands Inc. (YUM) and The Wendy's Co.(WEN) .
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Here is a synopsis of all five stocks:
We are upgrading our recommendation on Weyerhaeuser Co. (WY) from Neutral to Outperform based on the high growth the company has achieved, reducing total costs and increasing prices. Also, the company is making an earnest effort to reduce its debt and maintain a healthy debt to equity ratio.
The company's earnings increased a whopping 83% year over year in the third quarter to $0.22 per share. The sales also soared 12.9% year over year to $1,772 million. Operating profits escalated 102% and long-term debt decreased 7.9% year over year. Backlog for Real Estate remains solid.
Our long-term Outperform recommendation on the stock indicates that it will beat the broader U.S. market over the next six to twelve months. Our target price is $32.00 based on 2012 P/E of 68.1x.
We are downgrading our recommendation on The Western Union Co. (WU) to Underperform from Neutral following its third quarter earnings release, in which the company trimmed its full-year 2012 earnings expectations. The company slashed its earnings guidance to a range of $1.60-$1.63 per share from a previous estimate of $1.68-$1.72 per share.
Moreover, stiff competition and a weak global economy is taking a toll on its performance. Western Union is facing compliance-related issues, particularly those linked to its Southwest Border agreement. It has also recently witnessed challenges in its core retail money transfer business in certain key markets.
The company is also facing strong competition from electronic channels of money transfer. On the other hand, Western Union is also facing management issues. Given a host of headwinds, we expect the stock to remain under pressure in the near term.
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McDonald's October Comps Disappoint
McDonald's Corp. (MCD) recorded a decline of 1.8% in global comparable sales (comps) in October 2012, as against year-ago growth of 5.5% and 3.7% in the previous month. McDonald's witnessed a downward movement in all its geographical segments on a yearly basis.
System-wide sales slipped 0.8% but nudged up 0.6% in constant currencies in the month. This was the fast-food restaurant chain's first decline in sales since March 2003.
Apart from the persistent global economic turmoil and peer pressure, tough comparisons arising from the calendar shift led to the comps decline.
In the United States, comps declined 2.2% compared with 5.2% growth recorded in October 2011. This was in the wake of a slowdown in discretionary spending along with heightened competition. Sustained focus on value menu, Monopoly promotion and the recent launch of the Cheddar Bacon Onion premium sandwiches were unable to contain the downward drift.
The rate of decline in Europe was the same as in the U.S., which was in stark contrast to the 4.8% growth recorded in October 2011. A strong performance in UK was undone by a much weaker show in many markets.
Comparable sales dropped further in Asia/Pacific, Middle East and Africa (APMEA), recording a decline of 2.4% as against 6.1% growth in the year-ago month. Japan continues to be a dampener; the country is still recovering from the aftermath of last year's earthquake as consumers are eating out less frequently. To make things worse, China and Australia have also delivered unhealthy performances.
As things stand now, the company is heavily dependent on value options, variety in menu, locally relevant items as well as reimaging programs to drive sales ahead.
Our Take
Oak Brook, Illinois-based McDonald's has performed rather weakly in the recent past, and now the decline in October comps has added to its woes. The implementation of austerity measures in Europe owing to the sovereign debt crisis, commodity cost inflation in the U.S. and decelerating growth in Asia compel us to have a bearish outlook on the stock at the current level.
Although the company is consistently striving to drive profits in these difficult times by resorting to value-proposition and gaining traction in coffee markets, it continues to face tough competition from peers like Yum! Brands Inc. (YUM) and The Wendy's Co. (WEN) in all aspects of its business. Most of the restaurants began to innovate menu regularly, offer at low prices and last but not least, revamp restaurant's interiors.
Further, excessive reliance on the value-menu to retain customers amid an anemic economy could prove detrimental to margins if exercised for a longer period. The prospect of value proposition in the backdrop of curtailed pricing power and increased investments towards media can only restrain profits. The company has had to overlap price increases enforced last year in the latter part of 2012, adding to tougher comparisons.
The effects of the super-storm Sandy on McDonalds' November sales have yet to be assessed. If comps grow at all in November, year-over-year comparison will still be tough given its much stronger year-ago performance.
In the end, we still believe that the company has strong value. McDonald's 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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