The Zacks Analyst Blog Highlights: Dell, OfficeMax, Office Depot, Staples and Novartis

Zacks

For Immediate Release

Chicago, IL – August 10, 2012 – Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include Dell Inc. (DELL), OfficeMax Inc. (OMX), Office Depot Inc. (ODP), Staples Inc. (SPLS) and Novartis AG (NVS).

 

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Here are highlights from Thursday’s Analyst Blog:

Dell Helps Mars Rover’s Landing

 

NASA reported that the Mars rover, which set out on November 26, 2011, made a safe landing thanks to the support from Dell Inc. (DELL).  NASA scientists hailed Dell, saying that the landing was the ‘most complicated portion of the mission.’

Two NASA High Performance Computing (:HPC) clusters running Dell PowerEdge servers conducted the data analysis for NASA. The Mars rover, Curiosity, is the largest rover ever sent to explore Mars. Curiosity is being managed and controlled by NASA’s Jet Propulsion Laboratory (:JPL) in Pasadena, California, which is using Dell HPC clusters.

NASA’s Curiosity rover was aided by Galaxy and Nebula, the Dell HPC clusters to analyze the vast amounts of test data that were necessary for the rover to successfully enter the Martian atmosphere and land safely. This was a key achievement for Dell, building its experience in space research and improving its prospects with government departments.

Government aside, the company is also launching multiple solutions for the Small & Medium Business (SMB) segment. Dell’s SMB segment has performed particularly well in the first quarter of 2013 and it appears that its server, software, storage and any other offerings capable of facilitating transition to the cloud will be snapped up by SMB customers. The success in this segment is because SMBs take quick decisions and there is less process involved in the approval.

Moreover, to woo customers from different segments of the society and to diversify its customer base, Dell has also introduced the Predictive Analytics-Based Decision Support System for schools and universities. This is basically a decision support system that helps to personalize the learning environment for students and enhances expertise in planning, management and reporting.

The solution helps in managing and accumulating student’s data among different schools, which in turn is used by parents and educators to develop different skillsets in students. This should be a steady and dependable source of revenue as education is a recession-proof business.

However, macroeconomic factors, currency and competitive challenges remain headwinds for Dell’s overall performance. Moreover, the company faces certain sales execution issues, which may delay the revenue recognition process. This apart, some modest accounting issues along with volatility in the currency market may also affect the company’s business.

Currently, Dell has a Zacks #4 Rank, which implies a short-term Sell rating.

 

 

Earnings Scorecard: OfficeMax

 

OfficeMax Inc. (OMX), a leading distributor of office supplies and paper, print and document services, technology products and solutions, as well as office furniture, posted its second-quarter 2012 results on Thursday, August 2, 2012. Here we will discuss the company’s scorecard based on the recent announcement of its earnings, subsequent estimate revisions by analysts as well as the Zacks Rank and long-term recommendation for the stock.

Last Quarter Synopsis

OfficeMax posted better-than-expected second-quarter 2012 results. Its quarterly earnings of 12 cents a share surpassed the Zacks Consensus Estimate by 5 cents and also improved substantially from 7 cents earned in the prior-year quarter, on the back of effective cost management.

Total sales dropped 2.7% to $1,602.4 million year over year, and also fell short of the Zacks Consensus Estimate of $1,638 million.

This office supplies retailer now expects third-quarter sales to remain even with or marginally higher compared with the prior-year period, including the adverse impact of foreign currency translation. Sales for fiscal 2012 are projected to be flat with the prior year, including the negative impact of foreign currency translation and excluding the extra week in 2011, which resulted in incremental sales of about $86 million.

(Read our full coverage on this earnings report: OfficeMax Beats on Bottom Line)

Agreement of Estimate Revisions

For the third-quarter 2012, out of 10 estimates, five were revised upwards while three went down. However, for the fourth-quarter 2012, only one estimate went up and four estimates were trimmed in the last 7 days.

As for fiscal-year 2012 and 2013, the estimates were unidirectional, reflecting seven estimates (out of 10) and six estimates (out of 9) moving up, respectively, in the last 7 days.

What Drives Estimate Revisions

Following the company’s strong second-quarter 2012 financial results, most of the estimates were revised upwards for the upcoming quarter.

OfficeMax’s solid second quarter 2012 results on the back of cost containment efforts and improved gross margins, compelled the analysts to increase their estimates. Moreover, the company’s announcement of paying out dividend, after a pause of three and a half years, signified OfficeMax’s ability to generate free cash flow. This impressed the analysts to a great extent.

However, Retail segment sales fell 5.7% to $723.6 million, reflecting a decline of 1.8% in comparable-store sales due to lower store transactions and adverse impact of foreign currency translation. The U.S. comparable-store sales fell 1.3%. Subsequently, some of the analysts remained on the back foot.

For fiscal year 2012, positive sentiment among the analysts was palpable, following management’s expectation of cash flow from operations to exceed capital expenditure, which is projected to be approximately $75 million to $85 million for the year. With respect to guidance, the company now expects fiscal 2012 sales to be flat and operating margin to be in line with or slightly higher than 1.7% rate attained in the prior year.

Moreover, OfficeMax is repositioning itself to stay afloat in a difficult consumer environment. The company is containing costs, closing underperforming stores and focusing on providing innovative products and services, which should contribute to margin improvements.

The company should gain from recent growth initiatives, which include the ImPress copy and print and Ctrlcenter PC services, janitorial and sanitation supply, category management, and managed print businesses. The company’s digital as well as technology and document solutions are also gaining traction, which, we believe, will continue in the long term. Therefore, the analysts remained positive for the coming years.

Magnitude of Estimate Revisions

The Zacks Consensus Estimate for the third quarter of 2012 remained unchanged at 25 cents in the last 7 days. However, for the fourth quarter, earnings fell by a penny to 13 cents per share, in the last 7 days.

For the fiscal year 2012 and 2013, the Zacks Consensus Estimate improved by 5 cents and 3 cents to 73 cents and 79 cents, respectively, in the last 7 days.

Conclusion

The company is focused on the issue of optimal store site in order to boost store productivity. OfficeMax intends to focus more on improving sales per square foot through an increase in customer traffic and converting them into potential buyers by targeted advertising, ongoing sales training and customer-oriented initiatives. The company has initiated control center technology services to assist customers with PC maintenance, removal of viruses, etc.

However, OfficeMax faces stiff competition from office supply retailers, such as Office Depot Inc. (ODP) and Staples Inc. (SPLS), and wholesale clubs, discount stores, mass merchandisers, computer and electronics superstores on attributes such as store format, pricing strategy and in-stock consistency. This may weigh upon the company’s results.

Consequently, we maintain our long-term ‘Neutral' recommendation on the stock. However, OfficeMax carries a Zacks #2 Rank implying short-term Buy rating for the next 1-3 months.

 

Novartis-Penn Join for Cancer R&D

 

Novartis AG (NVS) recently entered into a global collaboration agreement with the University of Pennsylvania (Penn) to further their research on targeted chimeric antigen receptor (CAR) immunotherapies for the treatment of cancer.

The parties will also set up a new research and development facility called the Center for Advanced Cellular Therapies (:CACT) at Penn to develop and produce CARs. This will help them to boost the discovery and development process of additional therapies using CAR immunotherapy.

As per the multi-year global collaboration agreement, Novartis purchased the exclusive rights of CART-19, a novel investigational CAR therapy, which is being studied in a pilot clinical trial.

We note that results from a clinical study of CART-19 showed effectiveness in three patients with advanced chronic lymphocytic leukemia, who previously underwent multiple courses of chemotherapy and biological therapy. Two of these patients were in complete remission for more than a year into the trial, whereas the third patient maintained partial remission for more than seven months. Novartis, along with Penn, will be initiating a phase II clinical trial on CART-19 in the fourth quarter this year.

In lieu of the worldwide rights to CART-19 and other CARs developed under this program, Novartis will make an up-front payment, finance research and establishment costs of CACT and make other milestone payments on the achievement of certain clinical, regulatory and commercial milestones. The company will also be liable to make royalty payments.

Our Take

We are encouraged by Novartis’ collaboration with Penn in the areas of cancer research. We believe that Penn’s innovative CAR technology and Novartis’ global exposure will together bring a new era in cancer treatment.

Currently, we have a Neutral recommendation on Novartis. The company carries a Zacks #3 Rank (Hold rating) in the short run.

 

 

 

 

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Read the analyst report on DELL

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