Magic Formula Investing (MFI) is probably most popular for digging up attractively priced and quality small-cap stocks that have been overlooked or misunderstood by the market. Small-caps are usually not covered by a lot of analysts and not talked about on CNBC, yet small-cap value has been the best performing equity group historically.

The book behind MFI, Joel Greenblatt's The Little Book that Beats the Market, confirms that this group also performs better using the strategy's principles. While the book's analysis showed the top MFI stocks of any size outperforming the S&P 500 by 18.5% annually, limiting to just the largest 1,000 stocks reduced outperformance to 11.2% annually.

Recent earnings results by Ralcorp (RAH) and AIPC (AIPC) have been met with a positive response from investors. Both companies delivered improved earnings growth with flat volume pulled lower by price deflation. Of course, it doesn't hurt that the stock market has gone negative and defensive stocks like food companies are by their nature more in favor during tough economic times.

Treehouse Foods (THS), Ralcorp and AIPC are the best pure plays in the food manufacturing sector that focus on private label manufacturing. Treehouse continues to add companies and categories (recent Sturm Foods purchase) and is positioned as the top private label focused company. Ralcorp acquired Kraft Foods (KFT) Post cereal division and so far has struggled to deliver positive results.

By Erin Swanson

Consumer behavior has changed rapidly throughout this global economic slowdown, affecting both discretionary spending, as well as consumers' purchases of everyday staples such as food. That said, we still believe there are some names in this space that are worthy of investors' attention. In this article, we'll take a brief look at the current dynamics of the packaged food space, and review our top two picks.

(TRMB) Trimble Navigation’s Earnings Report Disappoints Again

Trimble Navigation’s (TRMB) third quarter earnings missed consensus estimates by $0.02. Both GAAP and non-GAAP earnings were within management’s guided range.
 
Seasonality typically causes huge sequential fluctuations in both revenue and margins. As a result, management generally compares results on a year-over-year basis. In our discussion, we will include both sequential and year-over-year comparisons, wherever possible.
 
Revenue of $277.5 million was up 2.9% sequentially and 3.5% year over year, exceeding the high-end of the guided range of $265-270 million (flat to down 1% sequentially). The results reflect a very slow recovery, since E&C, the largest segment continues to be impacted by the recession in North America and Europe and technology spending in other areas also remains limited.
 
Revenue by Segment
 
E&C unit revenue of $154.3 million was up 3.3% sequentially and 8.2% year over year. E&C usually witnesses strength in the first two quarters of the year and declines in the last two. Therefore, the strength in the last quarter was in spite of normal seasonal trends and driven by double-digit year-over-year growth in survey instruments and machine control products.

The survey business has a larger international exposure, which is a positive in terms of revenue growth. The recession-driven weakness continued across the U.S. and Europe, while other international markets performed better. China remained a source of strength in the last quarter. The most important markets within E&C are heavy and highway, large-scale commercial, smaller-scale commercial and housing in that order.

The heavy and highway and survey instruments businesses have held up relatively better than others in the past few quarters. Although commercial and residential markets remain depressed, there are increasing signs of an upturn in 2010.
 
TFS revenue of $57.2 million was up 2.7% sequentially and down 1.9% from the fourth quarter of 2008. The segment, which is largely driven by the agricultural market, is particularly weak in the second and third quarters, with revenue stabilizing in December and jumping up in March. Consequently, the sequential increase is in line with seasonal trends, while the year-over-year decline is mostly due to difficult comparisons.

The year-ago quarter was strong; as farmers invested in technology with a view to improve yields. This season, revenue is being affected by tight lending conditions in Brazil (an important market for Trimble), difficult weather conditions in somecountries, as well as a general reaction to economic uncertainties. These conditions were partially offset by stronger sales of geographic information systems (GIS).
 
TMS revenue of $38.0 million was down 4.1% sequentially and 5.1% over the comparable quarter of the prior year. Demand at larger fleet owners continued to strengthen in the last quarter, added to the three major wins in the third quarter. However, smaller fleet-owners remained cautious.
 
The AD segment generated 10% of revenue, up 12.0% sequentially and 3.2% from the year-ago quarter. Although the segment has been on a decline due to weaker sales of embedded products, the quarter benefited from the completion of some Applanix-related contracts, as well as favorable comps (since the fourth quarter of 2008 was particularly weak for the segment).
 
Revenue by Geography
 
North America remains the largest segment for Trimble, with a 50% revenue share. However, the segment continued to weaken in the last quarter due to recessionary weakness and lack of stimulus-driven spending. Europe generated 23% of revenue, up 12.7% sequentially and down 0.8% year over year. Asia/Pacific jumped to a 9% revenue share, increasing 22.2% sequentially and 40.5% year over year, driven mainly by China. The rest of the world contributed 8% of revenue, increasing 37.2% sequentially and 18.3% year over year.
 
Margins
 
The pro forma gross margin for the quarter was 49.7%, down 177 basis points (bps) from the previous quarter’s 51.5%. The gross margin was up 198 bps from the year-ago quarter. The sequential decline was the combined effect of poor product mix in the AD segment, investment in the user conference in China and increased investments in JV activities.
 
Operating expenses of $104.2 million were up 5.4% sequentially. The operating margin was 12.2%, down 266 bps sequentially and up 198 bps year over year. The sequential decline was attributable to higher expenses (as a percentage of sales).

Specifically, COGS as a percentage of sales was up 177 bps, R&D up 60 bps, G&A up 19 bps and S&M up 10 bps. The GAAP operating margins by unit were E&C 10.0% (down 411 bps sequentially), TFS 27.8% (down 151 bps), TMS 11.0% (up 250 bps) and the AD segment 12.8% (down 510 bps). On a year-over-year basis, the E&C margin was up 839 bps and TMS up 268 bps, while both TFS and AD were down. E&C margins were impacted by lower sales, while AD was impacted by poorer mix.
 
Restructuring and cost control efforts had a positive impact on both gross and operating margins in the last quarter.
 
Net Income
 
The pro forma net income was $18.0 million, or a 6.5% net income margin compared to $23.8 million, or 8.8% in the previous quarter and $23.1 million, or an 8.6% net income margin in the prior-year quarter. The pro forma calculations in the last quarter exclude restructuring charges, acquisition-related costs, amortization of intangibles and a foreign currency transaction loss on a tax-adjusted basis. Our pro forma estimate may not match management’s presentation due to the inclusion/exclusion of some items that were not considered by management.
 
On a fully diluted GAAP basis, the company recorded a net profit of $9.5 million ($0.08 per share) compared to $15.6 million ($0.13 per share) in the previous quarter and a net profit of $13.7 million ($0.11 per share) in the prior-year quarter.
 
Balance Sheet
 
Inventories were down 10.2% to $144.0 million, while annualized inventory turns were up slightly from around 3.3X to around 3.9X. Days sales outstanding (DSOs) went down slightly from around 68 to around 67. Cash generated from operations was $55.5 million. The company ended with a cash and investments balance of $273.8 million, yielding a net cash position of $122.8 million. This compares to a net cash position of $70.6 million in the previous quarter. The company spent $3.2 million on capex and $1.2 million on acquisitions in the fourth quarter. There were no share buybacks.
 
Guidance
 
Management expects fourth quarter revenue of $308-313 million (up 11-13% sequentially). The mid point of the guidance range is expected to bring GAAP earnings of $0.19-$0.21 per share and non GAAP earnings of $0.30-$0.32 per share. The one-time charges excluded for the calculation of non-GAAP EPS are amortization of intangibles (approximately $14 million) and the impact of stock-based compensation ($4.9 million). Both the GAAP and non GAAP EPS use a tax rate of 27-29% and a share count of 123.5 million.
 
Management expects all segments to improve in 2010 if current conditions hold good. E&C, TMS and TFS solutions for the agricultural market are expected to be up double-digits.

Read the full analyst report on "TRMB"
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Trimble Navigation’s (TRMB) third quarter earnings missed consensus estimates by $0.02. Both GAAP and non-GAAP earnings were within management’s guided range.
 
Seasonality typically causes huge sequential fluctuations in both revenue and margins. As a result, management generally compares results on a year-over-year basis. In our discussion, we will include both sequential and year-over-year comparisons, wherever possible.
 
Revenue of $277.5 million was up 2.9% sequentially and 3.5% year over year, exceeding the high-end of the guided range of $265-270 million (flat to down 1% sequentially). The results reflect a very slow recovery, since E&C, the largest segment continues to be impacted by the recession in North America and Europe and technology spending in other areas also remains limited.
 
Revenue by Segment
 
E&C unit revenue of $154.3 million was up 3.3% sequentially and 8.2% year over year. E&C usually witnesses strength in the first two quarters of the year and declines in the last two. Therefore, the strength in the last quarter was in spite of normal seasonal trends and driven by double-digit year-over-year growth in survey instruments and machine control products.

The survey business has a larger international exposure, which is a positive in terms of revenue growth. The recession-driven weakness continued across the U.S. and Europe, while other international markets performed better. China remained a source of strength in the last quarter. The most important markets within E&C are heavy and highway, large-scale commercial, smaller-scale commercial and housing in that order.

The heavy and highway and survey instruments businesses have held up relatively better than others in the past few quarters. Although commercial and residential markets remain depressed, there are increasing signs of an upturn in 2010.
 
TFS revenue of $57.2 million was up 2.7% sequentially and down 1.9% from the fourth quarter of 2008. The segment, which is largely driven by the agricultural market, is particularly weak in the second and third quarters, with revenue stabilizing in December and jumping up in March. Consequently, the sequential increase is in line with seasonal trends, while the year-over-year decline is mostly due to difficult comparisons.

The year-ago quarter was strong; as farmers invested in technology with a view to improve yields. This season, revenue is being affected by tight lending conditions in Brazil (an important market for Trimble), difficult weather conditions in somecountries, as well as a general reaction to economic uncertainties. These conditions were partially offset by stronger sales of geographic information systems (GIS).
 
TMS revenue of $38.0 million was down 4.1% sequentially and 5.1% over the comparable quarter of the prior year. Demand at larger fleet owners continued to strengthen in the last quarter, added to the three major wins in the third quarter. However, smaller fleet-owners remained cautious.
 
The AD segment generated 10% of revenue, up 12.0% sequentially and 3.2% from the year-ago quarter. Although the segment has been on a decline due to weaker sales of embedded products, the quarter benefited from the completion of some Applanix-related contracts, as well as favorable comps (since the fourth quarter of 2008 was particularly weak for the segment).
 
Revenue by Geography
 
North America remains the largest segment for Trimble, with a 50% revenue share. However, the segment continued to weaken in the last quarter due to recessionary weakness and lack of stimulus-driven spending. Europe generated 23% of revenue, up 12.7% sequentially and down 0.8% year over year. Asia/Pacific jumped to a 9% revenue share, increasing 22.2% sequentially and 40.5% year over year, driven mainly by China. The rest of the world contributed 8% of revenue, increasing 37.2% sequentially and 18.3% year over year.
 
Margins
 
The pro forma gross margin for the quarter was 49.7%, down 177 basis points (bps) from the previous quarter’s 51.5%. The gross margin was up 198 bps from the year-ago quarter. The sequential decline was the combined effect of poor product mix in the AD segment, investment in the user conference in China and increased investments in JV activities.
 
Operating expenses of $104.2 million were up 5.4% sequentially. The operating margin was 12.2%, down 266 bps sequentially and up 198 bps year over year. The sequential decline was attributable to higher expenses (as a percentage of sales).

Specifically, COGS as a percentage of sales was up 177 bps, R&D up 60 bps, G&A up 19 bps and S&M up 10 bps. The GAAP operating margins by unit were E&C 10.0% (down 411 bps sequentially), TFS 27.8% (down 151 bps), TMS 11.0% (up 250 bps) and the AD segment 12.8% (down 510 bps). On a year-over-year basis, the E&C margin was up 839 bps and TMS up 268 bps, while both TFS and AD were down. E&C margins were impacted by lower sales, while AD was impacted by poorer mix.
 
Restructuring and cost control efforts had a positive impact on both gross and operating margins in the last quarter.
 
Net Income
 
The pro forma net income was $18.0 million, or a 6.5% net income margin compared to $23.8 million, or 8.8% in the previous quarter and $23.1 million, or an 8.6% net income margin in the prior-year quarter. The pro forma calculations in the last quarter exclude restructuring charges, acquisition-related costs, amortization of intangibles and a foreign currency transaction loss on a tax-adjusted basis. Our pro forma estimate may not match management’s presentation due to the inclusion/exclusion of some items that were not considered by management.
 
On a fully diluted GAAP basis, the company recorded a net profit of $9.5 million ($0.08 per share) compared to $15.6 million ($0.13 per share) in the previous quarter and a net profit of $13.7 million ($0.11 per share) in the prior-year quarter.
 
Balance Sheet
 
Inventories were down 10.2% to $144.0 million, while annualized inventory turns were up slightly from around 3.3X to around 3.9X. Days sales outstanding (DSOs) went down slightly from around 68 to around 67. Cash generated from operations was $55.5 million. The company ended with a cash and investments balance of $273.8 million, yielding a net cash position of $122.8 million. This compares to a net cash position of $70.6 million in the previous quarter. The company spent $3.2 million on capex and $1.2 million on acquisitions in the fourth quarter. There were no share buybacks.
 
Guidance
 
Management expects fourth quarter revenue of $308-313 million (up 11-13% sequentially). The mid point of the guidance range is expected to bring GAAP earnings of $0.19-$0.21 per share and non GAAP earnings of $0.30-$0.32 per share. The one-time charges excluded for the calculation of non-GAAP EPS are amortization of intangibles (approximately $14 million) and the impact of stock-based compensation ($4.9 million). Both the GAAP and non GAAP EPS use a tax rate of 27-29% and a share count of 123.5 million.
 
Management expects all segments to improve in 2010 if current conditions hold good. E&C, TMS and TFS solutions for the agricultural market are expected to be up double-digits.

Analysts at Citigroup maintain their "hold" rating on PNC Financial Services Group Inc (NYSE: PNC), while adjusting their estimates for the company. The target price for PNC has been reduced from $63 to $60.

PNC Financial Services has announced that it has reached an agreement with the regulators to repay its outstanding $7.6 billion of TARP preferred stock to the government and issue $3 billion worth of common stock. This morning, PNC also announced its agreement to sell its Global Inv Servicing (GIS) business to BNY Mellon for $2.3 billion.

According to Citigroup, “PNC has been very disciplined on credit, so the company should be well positioned with the exception of the fact that it has made several acquisitions in past couple years including Mercantile, Sterling, Yardville, and most recently National City which increase high risk exposures.” Citigroup has raised its EPS estimates for 2010 from $3.40 to $4.20 and reduced EPS estimates for 2011 and 2012 from $5.75 to $5.00 and from $6.10 to $5.35, respectively.

More Analyst Ratings here

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