Plus, Anheuser-Busch forges promising alliance, Intuit strikes a deal, and more.
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Applebee's APPB last week reported relatively weak November comparable sales. The grill and bar chain's same-restaurant sales fell 3.1% for the four weeks ending on Nov. 19, down from the 0.8% and 1.2% declines in the September and October periods, respectively. Morningstar analyst John Owens is a little disappointed with the weakening sales trend that's played out over the last few months, especially given the drop in gas prices and the chain's recent rollout of new menu items from celebrity chef Tyler Florence. However, Owens points out that Applebee's was lapping a menu price increase of approximately 1% and a higher-priced promotion during the last two weeks of the November 2005 period. The prior-year period also benefited from an additional week of advertising. Nevertheless, Owens thinks increased competition in casual dining may have weighed on Applebee's results as well, with rivals ratcheting up their use of coupons, discounts, and value promotions. Thus, while he's still optimistic about the company's long-term prospects and maintaining his fair value estimate for now, Owens will continue to keep a very close eye on its future performance.
Anheuser-Busch to Import InBev Brands
Morningstar analyst Matthew Reilly thinks Anheuser-Busch BUD made a wise strategic move in reaching an agreement with InBev to import, distribute, and promote several InBev brands, primarily European imports, including Stella Artois, Beck's, Bass, Hoegaarden, and Leffe, effective Feb. 1. Although the economic terms of the deal have not been released, explaining why Reilly is leaving his fair value estimate in place, he thinks the agreement puts Anheuser-Busch in a better position to leverage its unparalleled distribution network in the U.S. And while the volume of the InBev brands was equivalent to only about 1.5% of Anheuser-Busch's total domestic output, Reilly points out that the inclusion of the brands should pacify the company's growth-starved distributor base and provide a source of incremental earnings. What's more, since Anheuser-Busch has opted to import and distribute only those brands that are unlikely to compete with its core offerings or products from Grupo Modelo (in which the company has a 50% interest), he thinks that the cannibalization risks are manageable at worst.
Inuit Acquires Internet-Banking Provider Digital Insight
On Thursday, Intuit INTU announced that it was acquiring Digital Insight DGIN, a provider of online banking applications for small banks and credit unions, for $1.35 billion. Morningstar analyst Irina Logovinsky believes two principal factors informed Intuit's decision to purchase Digital Insight. First, Intuit gains a new customer base, including 1,700 financial institutions and millions of online banking customers. Second, the company can better protect itself from competitive threats like online banking. During Intuit's analyst day held in September, management highlighted a survey indicating many consumers and small businesses prefer using Internet banking as a means of tracking their finances rather than the company's then-existing solutions. By acquiring Digital Insight, Intuit would be able to capitalize on these end-user preferences. Logovinsky's chief qualm with the deal is its steep price, which translates to more than five times Digital Insight's estimated 2006 annual sales and represents a hefty premium over Morningstar analyst Mark Weber's fair value estimate for that firm. Since Logovinsky thinks Intuit's generous offer offsets the potential benefits of the deal, she's maintaining her fair value estimate for Intuit. Meanwhile, Weber is raising his fair value estimate for Digital Insight to approximate Intuit's per-share offer price.PAGEBREAK
Are Mild Semiconductor Chip Cycles Here to Stay?
The latest data suggest that the semiconductor industry has had 17 quarters of continuous year-over-year growth since the trough of the previous cycle. Inventory corrections in the second half of 2004 were resolved in less than a year, with no single quarter exhibiting negative year-over-year growth. Morningstar analyst Larry Cao believes that the many underlying factors behind this trend are structural in nature. For instance, Cao believes chipmakers are now better at managing capacity expansion and inventory. What's more, the absence of killer applications has reduced the chipmakers' reliance on a single end market while increasing semiconductor content in consumer, automotive, medical equipment, and industrial applications has taken up the slack left by communications-equipment makers. Taken together, Cao believes these factors argue that mild chip cycles are here to stay for the foreseeable future and, thus, believes there will be fewer opportunities for deep-value commodity plays. For that reason, among others, balanced end market demand is a common theme underlying the investment thesis of Cao's top picks in the semiconductor sector.
Jeffrey Ptak, CPA, CFA, is a stock analyst with Morningstar. He does not own shares in any of the securities mentioned above.