The Zacks Analyst Blog Highlights: Dean Foods, Macy’s, Disney, Public Storage and Sovran Self Storage
Here are highlights from Wednesday’s Analyst Blog:
Market to Take a Breather?
It would be reasonable to expect the market to take a breather today after three days of gains that has pushed it to within striking distance of the year’s high reached in the spring. The gains are hard to justify given the absence of any accompanying corporate or economic news, though we did see some sign of life in the labor market last Friday after months of disappointments.
This morning’s favorable productivity and unit labor cost data for the second quarter also appears to confirm some positive movement on that front. But the market seems to be betting that the Fed will come through with its magic wand despite these signs of life in the labor market.
Nobody is ready to be on the wrong side of the hoped-for Fed action. We may see some early indications of the Fed’s thinking from the central bank’s annual Jackson Hole huddle later this month. Optimism has been steadily improving on the European issue as well, though the overall run of recent economic readings from that region are painting a fairly dismal picture. This morning’s growth downgrade from the Bank of England is another sign that the Euro-zone fiscal woes are taking a heavy toll on economic activities.
In earnings updates, we have solid reports from Dean Foods (DF – Analyst Report) and Macy’s (M – Analyst Report) this morning, while Disney’s (DIS – Analyst Report) results after the close on Tuesday mirrored what we have repeatedly seen this reporting season – an earnings beat, but a revenue miss. As of this morning, 65.3% of the 435 S&P 500 companies that have reported results have come ahead of earnings expectations, with a median surprise of 2.7%.
Roughly the same proportion of companies (66.4%) came out with positive earnings surprises in the first quarter, but the median surprise was at 3.6%. What is materially weaker this time around relative to other recent quarters is performance on the revenue side, with 61.9% of the companies coming short of revenue expectations.
It is hard to envision the market continuing to make gains in the absence of fundamental support – something has to give. The market has been defying problematic signs in recent day. But the party eventually comes to an end – always does.
Earnings Scorecard: Public Storage
Public Storage, a leading real estate investment trust (REIT) operating self-storage facilities, reported 2012 second quarter recurring funds from operations (FFO) of $1.62 per share. Recurring FFO for the reported quarter marked a year-over-year increase of 13.3% and beat the Zacks Consensus Estimate by $0.09.
We cover below the results of the recent earnings announcement, as well as the subsequent analyst estimate revisions and the Zacks ratings for the short-term and long-term outlook of the stock.
Earnings Report Review
Public Storage reported second quarter 2012 FFO of $1.38 per share, compared with $1.39 in the year-earlier quarter. The marginal decrease in reported FFO despite improved property operations was primarily due to the adverse impact of foreign currency translations.
During the reported quarter, Public Storage recorded a 5.4% increase in total revenues to $457.7 million from $434.4 million in the year-earlier quarter. Total revenues for the reported quarter were well ahead of the Zacks Consensus Estimate of $430 million.
Earnings Estimate Revisions – Overview
Overall fiscal earnings estimates have moved in both directions for Public Storage since the earnings release, meaning that analysts are circumspect about the long-term performance of the company. Let’s dig into the earnings estimate details.
Agreement of Estimate Revisions
In the last 7 days, 2012 earnings estimates were raised by one analyst out of 19 covering the stock, while four lowered theirs. For 2013, five out of 19 analysts covering the stock revised their estimates upward, while none had reduced it. This indicates no distinctive directional movement for the fiscal year earnings.
Magnitude of Estimate Revisions
Earnings estimates for 2012 have decreased by 3 cents in the last 7 days to $6.29. For 2013, earnings estimates have, however, increased in the same time period by 5 cents to $6.90.
Moving Forward
The long-term earnings estimate picture for Public Storage is neutral. Public Storage is the largest owner and operator of storage facilities in the U.S., which has enabled it to achieve large economies of scale and generate high operating margins.
The Public Storage brand is the most recognized and established name in the self-storage industry with a presence in all the major markets across 38 states in the U.S. In addition, the storage facilities of the company have a high visibility and are usually located in heavily populated areas that improve the local awareness of the brand. The company also has one of the strongest balance sheets in the sector with minimal debt maturities and adequate liquidity.
However, Public Storage operates in a highly fragmented market in the U.S., with intense competition from numerous private regional and local operators. Demand for storage facilities has also witnessed a significant drop from its peak level prior to the recession, as customers have reduced their discretionary spending. This undermines the long-term growth potential of the company.
We maintain our Neutral recommendation on Public Storage, which currently has a Zacks #3 Rank that translates in to a short-term Hold rating. We also have a Neutral recommendation and a Zacks #2 Rank (short-term Buy rating) for Sovran Self Storage Inc., one of the competitors of Public Storage.
Note: FFO, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income.
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