Q113: Stable Demand Despite Tough Macro; Raise Ests/Target Price
to $16 (from $15) on Gross Margin
$0.12 in Q1 EPS Matched $0.12 CSE/Consensus On Better Gross
Margin & Lower SG&A With Inline Revenue, Despite $0.02
Higher Tax Rate Hit. $136.9M in Q1 revenue fell 0.8% YoY (+1.2% in
constant currency (CC)), worse vs. Q4's flat growth, (stable vs.
Q4's +1.1% CC growth); it about matched $137.9M Credit Suisse
)/$137M consensus. US grew 4.5% YoY (vs. Q4's 4.6%). Europe fell
18.5% (-7.7% CC) YoY, worsening vs. Q4's -14.7% (but slightly
better vs. -8.5% CC). Asia/Pac revenue fell 6.5% YoY (vs. Q4's flat
growth) on weakening in China. 7.1% Adjusted EBIT margin rose
220bps YoY (vs. Q4's +400 YoY) and exceeded 6.0% CSE/6.5% implied
consensus on higher gross margin (+120 bps YoY vs. Q4's +210
bps)/lower D&A. $0.12 EPS matched $0.12 CSE/consensus despite
$0.02 hit from higher tax rate.
Business Tone "Stable". Management described business levels
(even in Europe) as "stable" despite heightened global economic
Q2 Revenue Trends About Stable In Constant Currency, But A Bit
Light Vs. CSE/Consensus; Gross Margin Pick Up Expected Early Q2
weekly YoY revenue trends averaged -2% YoY growth (+1% CC),
slightly worse than Q1's -0.8% YoY due to currency. We think early
Q2 revenue trends are consistent with Q2 revenue falling below
prior $145M CSE/consensus; however, management expects similar Q2
YoY gross margin expansion vs. Q1's.
Raising Ests. On Higher Gross Margins, Despite Lower Revs. We
are reducing our revenue estimates, but a higher gross margin
forecast increases FY13E EPS to $0.63 from $0.57 and FY14E to $0.79
from $0.71. We are also raising our FY15E EPS to $1.02 (from
Maintaining OP Rating, Increase Target Price to $16 From $15. We
expect RECN's share price in coming months to fluctuate with
economic sentiment, but believe shares offer relatively strong
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