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Downgrade of General Dynamics reflects weakness in defense sector

The performance of two key segments of General Dynamics (GD) – combat systems and mission systems – was essentially flat in the December quarter. Though its impact was offset by the strong revenue growth in other divisions, the underlying weakness was evident in the guidance issued by the company’s CEO during the post-earnings presentation.

The Aerospace giant’s shares, which were regaining strength after slipping to a multi-year low a few weeks ago, suffered a fresh jolt before stabilizing in the following days. The stock has been trading almost flat since then.

Though research firm Credit Suisse slashed its rating on the company on Friday, citing the unimpressive guidance, the action did not have any noticeable impact on the stock. The analyst downgraded the company to neutral from outperform and lowered the price target to $184 from $190.

Though Credit Suisse slashed its rating on the company on Friday, it did not have any noticeable impact on the stock

Credit Suisse said the defense contractor might find it difficult to keep pace with its peers under the present circumstances, which according to the brokerage firm marks the ‘greatest peacetime defense upcycle’ in recent times.

The 3.5% revenue growth forecast for the current fiscal year by the company, which manufactures the iconic F-16 fighter jet, falls short of the average estimate for the whole sector. Worse, General Dynamics’ long-term revenue growth forecast, which the company currently pegs at 4.6%, is the lowest for the industry.

Also see: General Dynamics Q4 2018 Earnings Conference Call Transcript

The analyst also raised concerns about the recent acquisition of software firm CSRA by General Dynamics, as the valuation at the time of closing the $9.75-billion deal was too high. Also, the transaction is unlikely to become accretive to the company’s earnings in the near term. According to the bank, the company could have invested that amount in a more effective manner and earned better returns.

Earnings: Aerospace, IT help General Dynamics beat Q4 estimates

Among the other defense firms, Northrop Grumman (NOC) had issued lower than expected full-year guidance while publishing its Q4 earnings reports. Lockheed Martin (LMT) was also cautious while releasing its outlook for 2019, which underscores the muted outlook for the sector.

Over the past twelve months, General Dynamics’ stock lost about 22%. It had a positive start to 2019 and gained 12% so far this year.

 

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Earnings preview: Refranchise to hurt Jack in the Box Q1 revenue

Jack in the Box (JACK) is set to report its first quarter 2019 operating results on Wednesday after market close. The refranchising growth could hurt the company’s top line and average check growth could drive the same-store sales higher. This comes in the midst of the company exploring strategic and financing alternatives to maximize shareholder value.

Wall Street estimates the company to post higher earnings and lower revenues compared to the prior year’s first quarter. EPS is expected to be $1.29 on revenues of $271.52 million, representing an annual increase of 4.90% and decline of 7.80%, respectively. In comparison, during the previous year quarter, the company posted a profit of $1.23 per share on revenue of $294.46 million.

The top line is expected to be hurt by the increase in refranchising. As of September 30, Jack in the Box has refranchised 135 restaurants making the franchise mix at about 94%. The company had already said that it would open system-wide about 25 to 35 new restaurants, the majority of which will be franchise locations.

The same-store sales could increase marginally helped by the average check growth. The company’s long-term goals included the emphasis on improving operations consistency and targeted investments for maximizing returns.

In the first quarter, the company agreed to sell Qdoba, a subsidiary of the company, to certain funds managed by affiliates of Apollo Global Management LLC. The transaction closed on March 21, 2018, and operating results for Qdoba are included in discontinued operations.

Growing no of refranchised restaurants likely to reduce Jack in the Box’s topline in Q4

For the fourth quarter, the company posted a 41.5% dip in earnings due to higher costs and expenses. Revenue dropped by 23.5% due to the increase in refranchising. The company same-store sales increase of 0.8% was driven by average check growth of 2.8%. Jack in the Box completed its refranchising initiative during the quarter with the sale of 8 restaurants in Q4, and now the franchise mix stands at 94%.

For fiscal 2019, the restaurant operator has expected system same-store sales of about flat to up 2%. Also, the company has anticipated returning more than $1 billion through fiscal 2022 to its shareholders in the form of share repurchases and dividends. Capital expenditures were predicted to be $30 million to $35 million.

During mid-December, Jack in the Box said its board of directors and management team is exploring a range of strategic and financing alternatives to maximize shareholder value. Potential alternatives could include, among other things, a sale of the company or executing on the company’s previously announced plans to increase its leverage.

In the absence of a strategic transaction, the company remained committed to its prior plan to have a new capital structure in place by the end of the first half of fiscal 2019. That capital structure could include a securitization or bond issuance.

The company has remained the favorite dish of the analysts as the majority of them recommended a “strong buy” or “buy” rating. Wall Street analysts expect the stock to reach $93.69 per share in the next 52 weeks.

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