Monday - January 30, 2006

Want to view the archive of past issues? Go to: http://at.zacks.com/?id=2314.

Manage Profit from the Pros subscription:
* Free Subscription: http://at.zacks.com/?id=2311
* Change of address: http://at.zacks.com/?id=2315
* Unsubscribe: http://at.zacks.com/?id=2313
 

Back to top

We've been speaking with metals and mining analyst Michael Schrage, CFA quite a bit lately, in relation to the fluxuating prices of gold, copper and other precious metals mined by companies within his coverage. Today, however, we are restricting the discussion to the coal industry.

How is the coal industry faring now that we've started seeing warmer weather this winter?

So far, no coal companies have reported in my group yet. Definitely we'll know more in a couple weeks. But the general background remains favorable despite the warm weather. Heating degree days are down about 1.5% versus the latest month, and down about 1% versus the latest 12 months. For this past November, this figure was actually down 3.7%.

The good news is that the days supply of inventory at the utilities is pretty low. Right now, it is below 40 days, which is the lowest it's been in many years. So coal remains pretty tight at this time. As you probably know, coal is also used for electricity production. Electricity generation is up 3.7% over the latest 12 months, though it is down slightly in the latest month. All in all, demand continues in an upward trend, and coal supplies remain fairly tight.

More. . .

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

Back to top

 
Zacks Equity Research continued...

So how are earnings expectations looking at this time?

Expectations are, in general, pretty good. One or two companies look like they may report weakish quarters - I'm thinking particularly about Arch Coal (ACI) and Massey Energy (MEE). These companies have experienced some problems related to railroad transportation and individual production issues with some of their mines. But the leaders in this group, such as Peabody Energy (BTU), should have a very strong quarter. Consolidated Coal (CNX) should also have a strong quarter.

Generally, the outlook for 2006 is favorable, as well. I expect good earnings for most companies in this group. For instance, Arch Coal had 2005 earnings of $0.80, and expects $4.00 in 2006. CONSOL had earnings of $2.85 this year and expects $4.50 next year. BTU has $3.00 earnings in '05 and should bring in roughly $4.25 this time next year. Earnings trends look positive for all of 2006.

That said, coal prices are mixed. Western coal prices, which have been in much higher demand than Eastern coal, are very strong - up over 200% from this time last year. Eastern coal prices are sort of toppy here, and are down roughly 5-7% over the past few months. Lately, Eastern coal prices have been going sideways to down. But Western coal has really been benefiting from the big credits it receives from its lower sulfur emissions. Central Appalachian coal trades at about $58 per ton, down about 6% from last year. Northern Appalachian prices are down about 12% from last year. But ultimately, prices are still at fairly hefty levels, so the industry is still making good money.

Have you noticed any improvements to the transportation issue since we last talked about this in mid-November?

Railway transportation still remains an issue, but it is getting resolved. Railways are currently spending capital to beef up their unit train capabilities and increase their capacity, so we're not seeing many of the same difficulties we did in 2005. The main problem was the inability of the rail industry to handle the large surge in demand for Western coal. There had been some track problems, and the overall industry had been slow to respond to this increased demand.

Going forward, we should continue to see improvement in railroad activity, especially considering ACI.

In the wake of two recent coalmining tragedies, do you foresee any added regulations taking place in the industry?

Fortunately, in regard to these incidents, the public coal companies have come out pretty well, all things considered.

None of them have experienced any major problems. Clearly this is a high-risk business, and a company like CONSOL knows it needs to be very careful, as they've had a couple outages. But certain improvements, such as using cell phones or other communication devices, make sense. Increasing the amount of oxygen available to the miners makes sense. In general, these companies try to remain very conservative and try to be prudent in what they're doing.

As far as regulations, I think there is pretty good legislation for this industry right now. The far bigger concern right now is the difficulty in finding new miners to do the work. Perhaps the negative publicity in relation to the two recent tragedies might further work against this issue of having a lack of miners overall, which could have an effect on production rates.

Surprisingly, with such an accelerated coal market recently, coal production in the U.S. is only up about 1%. Actually, this figure is even less than that - 0.7%. In West Virginia it's up 2%, but in Kentucky and Pennsylvania it's down 2%.

Wyoming is up 3%. So as you can see, and as I mentioned before, coal remains in a tight situation presently.

What companies in your coverage are you favoring these days?

Well, I'm still sticking with my MLPs [master limited partnerships] as my favorite stocks at this time. Companies like Natural Resource Partners (NRP), Penn Virginia (PVR) and Alliance Resource Partners (ARLP) haven't done as well as the group in general, but they are benefiting from higher pricing and all have very valuable properties. NRP, in particular, had been weak. It is now yielding 6% on its current price, and it has raised its dividend for what I believe is the 12th or 13th consecutive quarter.

Other companies in this space are trading at between 12-18x

2006 expected earnings. In particular, Massey Energy (MEE) is one company I will be taking a hard look at soon. Massey has been a laggard in the group, as it has experienced production and transportation problems. But it's been trading way down at around $39, when the high was around $57. So as soon as this company reports and I can examine what the company says, you will likely see an upgrade on shares of Massey.

Michael Schrage, CFA is a senior analyst covering the metals and mining sectors for Zacks Equity Research.

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

Back to top

 
MORE FROM ZACKS EQUITY RESEARCH…

Analyst Blog - NEW!

Get real-time market insights from Zacks Equity Research Analysts. To see their latest posts, click here.

 
BULL OF THE DAY

SAP A.G., ADS (SAP) - Continues to Grow. For full Zacks research report, click here.

 
BEAR OF THE DAY

AGCO Corp. (AG) - Low Demand in South America. For full Zacks research report, click here.

 
ZACKS INDUSTRY OUTLOOK

E-commerce Clicking

E-commerce put together another solid performance in the 2005 holiday shopping season. More...

 
EARNINGS & SECTOR UPDATE

Midweek Update

So far, 134 firms have reported for the fourth quarter, with 78 positive surprises and 28 disappointments. More...

Back to top

Zacks.com is proud to share with you some of the best trading strategies that truly allow you to Profit from the Pros. Today we highlight...
 

Profit Tracks: Discounted Fundamental Strength

Fundamental strength is often a key criterion for many investors. A strong balance sheet and a history of profitability indicate that a company has the ability to meet its obligations and the flexibility to pursue opportunities for growth. Therefore, such stocks are often perceived as having a lower level of risk.

The lower level of risk often results in higher valuations. Occasionally, however, the markets undervalue a stock relative to its company's fundamental strength. When this occurs, opportunities for profits are created. This Profit Track identifies such opportunities.

Backtesting results show just how successful this Profit Track has been. Double-digit returns have been achieved during each of the past four years. In 2005, this strategy continued to handedly beat the S&P 500.

 
Here are four stocks that make the grade for the Discounted Fundamental Strength Profit Track:

Bassett Furniture Industries, Inc. (BSET) has a current ratio of 2.13 and low debt as indicated by its debt/equity level of 0.02. The company recently announced fiscal ourth-quarter earnings of 25 cents per share, excluding charges. The result topped last year's 24 cents and beat the consensus estimate by 25%. BSET noted that it was pleased with its improvement in continuing operating earnings and the solid performance posted by its upholstery division and imported products within its wood division. Continue your research on BSET at: http://at.zacks.com/?id=2254.

Frontier Oil Corp. (FTO) reported third-quarter earnings of $1.91 per share in early November. The result eclipsed the consensus estimate by about 17% and outpaced the year ago earnings. This marked the most profitable quarter in Frontier's history. The company commented that the record quarterly earnings were attributable to outstanding diesel and gasoline crack spreads, wide crude oil differentials and improved refinery utilization. FTO has low levels of debt as evidenced by its debt/equity level of 0.32. The firm has a PEG ratio of 0.79. Fourth-quarter results will be available in late February. Continue your research on FTO at: http://at.zacks.com/?id=2255.

Guitar Center, Inc. (GTRC) satisfies the criteria of this Profit Track with a current ratio of 2 and a debt/equity level of 0.27. The company recently released fourth-quarter sales figures. Consolidated net sales increased 19.8% to $562.0 million from the previous year's $468.9 million. Comparable Guitar Center store sales increased 4.6% for the quarter. The rest of the financial results for the fourth quarter will be available in mid-February. Continue your research on GTRC at: http://at.zacks.com/?id=2256.

Children's Place Retail Stores, Inc. (PLCE) recently posted December sales totals. Comparable store sales for The Children's Place stores increased 11% on top of a 21% increase for the same period last year. Total consolidated sales advanced 8% year-over-year. The company's current ratio is 1.93 and it has no debt as evidenced by its debt/equity level of zero. Continue your research on PLCE at: http://at.zacks.com/?id=2257.

To see the full list of stocks that currently pass this winning screen, go to: http://at.zacks.com/?id=2258.

All the Profit Track strategies were created and backtested using the Research Wizard software from Zacks Investment Research. If you like this screening strategy, but want to narrow down the list of stocks and even improve the performance, then you should start a free trial to this powerful stock picking tool. Learn more about the Research Wizard free trial offer and our new special report “Top 10 Stock Screening Strategies” at: http://at.zacks.com/?id=2307

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

 
SCREEN OF THE WEEK

Increasing P/Es for Stocks on the Move

Kevin Matras looks at increasing P/E Ratios for spotting potential price and earnings trends: http://at.zacks.com/?id=2259.
 

Back to top

Every day on Zacks.com we highlight four Zacks Rank Buy stocks. Each individual stock is chosen based on how well they match the criteria for the four main schools of investing: Aggressive Growth, Momentum, Growth & Income and Value.
 

Aggressive Growth - TETRA Technologies, Inc. (TTI)

TETRA Technologies, Inc. is posting strong earnings growth due to record energy prices and aggressive capital expenditures. Estimates for 2006 have increased dramatically over the past 90 days. Over that time frame, estimates have risen over 25% to $2.26 per share. Read the full analysis on TTI at: http://at.zacks.com/?id=2510.
 

Growth & Income - Chemed Corporation (CHE)

By paying a dividend in 138 straight quarters, along with a history of beating estimates, Chemed Corporation was one of four Growth & Income Zacks Rank Buy Stocks featured last week. Read the full analysis on CHE at: http://at.zacks.com/?id=2511.

More...

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

Back to top

 
Zacks Rank continued...

Momentum - Schlumberger (SLB)

A stock on the move, Schlumberger delivered its fifth straight quarterly earnings surprise and quickly gapped its way to new 52-week highs. Riding the demand for oilfield services, SLB announced fourth quarter earnings of $1.05 per share, up 77.9% from the same period a year ago. Read the full analysis on SLB at: http://at.zacks.com/?id=2512.
 

Value - Seagate Technology (STX)

After profits nearly doubled in the second quarter of fiscal 2006, Seagate Technology has raised its earnings guidance for the full year, and became one of four Value Zacks Rank Buy Stocks featured last week. Read the full analysis on STX at: http://at.zacks.com/?id=2513.
 

Zacks Rank Resources

• View All Zacks #1 Rank stocks: Go to: http://at.zacks.com/?id=2266.
   
• Free Zacks Rank Guide: Learn how to use the Zacks Rank to pick more profitable stocks. Get the guide: http://at.zacks.com/?id=2267.
   
• Zacks Advisor: Discover Ben Zacks' hand picked #1 Rank stocks on his Timely Buys list at: http://at.zacks.com/?id=2538.
   
• Zacks Wealth Management: Own all the Zacks #1 Ranked stocks in a portfolio managed by Zacks. Learn more at: http://at.zacks.com/?id=2539.

Back to top

Here we cast the spotlight on a timely Featured Expert commentary that recently appeared on Zacks.com.

 
Paul Tracy, Editor of StreetAuthority Market Advisor

In 1894, from a small, cramped workshop in San Francisco, Charles Fey designed a simple and seemingly unremarkable mechanical device, dubbing his invention the "Liberty Bell." Fey sold the first of his machines to a small bar and restaurant in Reno, Nevada for the princely sum of $2. These were humble beginnings indeed for what would soon become one of the world's most profitable and popular products. Within a few years of creating and selling that first machine, Fey's invention had proved so popular, in fact, that he was unable to make enough machines to satisfy demand. By the early 20th century, manufacturers the world over were beating a path to his door, trying to buy licensing rights for Liberty Bell.

The Liberty Bell was, of course, the world's first slot machine. Fey designed a simple coin-operated machine with three spinning reels. Each reel contained pictures of hearts, diamonds, spades and a cracked Liberty Bell modeled after Pennsylvania's most famous landmark. The machine accepted only nickels and paid out a pre-set amount when different symbols lined up on the reels. The jackpot: 50 cents for three Liberty Bells.

Slots proved a popular addition for bars, restaurants and clubs but didn't hit the casino scene in a big way until roughly four decades years later. It was then, in the late 1940s, that famed casino tycoon Bugsy Siegel was looking for a way to occupy women accompanying primarily male gamblers in his Flamingo casino in Las Vegas. Enter the slot machine: The Flamingo's first machines were similar to the old Liberty Bell -- simple mechanical devices with three spinning reels.

But slot machines are no longer just a simple sideshow to Craps, Blackjack and Poker or a barroom diversion. Rather, slots have become the main attraction in most casinos. In fact, by the late 1990s slot machines already accounted for roughly 70% of the average casino's total winnings. Even better, slots are largely unmanned and don't require additional expenditures for dealers or croupiers.

And modern technology is making slots ever more popular for the casino operators. Microchips, electric reels and even video displays gradually supplanted Fey's mechanical reels by the 1990s. Nowadays, some slots are even hooked up to machines at casinos hundreds of miles away via a secure network.

All this modern innovation has served to dramatically increase the variety of slot machine games available to bettors. Some of the most popular machines these days are multi-jackpot systems that combine the contributions of thousands of slots located at different casinos into a single, huge jackpot. These jackpots often run easily into the millions. Also popular are machines based on various movie themes or popular card games such as Poker and Blackjack. Newer, even more entertaining games continue to attract more gamers to the machines.

But casinos aren't the only companies that are making a fortune from the popularity of slots. The slot machine manufacturing industry is also well positioned to benefit from growing slot machine revenues. This industry is an attractive one for investors for a variety of reasons, including:

High barriers to entry -- Slot machines must be tested thoroughly and must comply with local and state government-imposed licensing regulations. Smaller players would have trouble competing with incumbents due to the high costs of complying with such strict regulations.

Non-Price-Sensitive Customers -- The amount casinos pay for a machine pales in comparison to the winnings a casino can bring in from a machine in just a few short weeks. As such, casinos don't mind paying a premium price for more popular, well-known machines.

"Leased-Machine" Business -- Traditionally, slot manufacturers have made money by simply selling machines. Increasingly, however, they're sharing in the profitability of the machine itself by leasing the machines directly to casinos in exchange for a percentage of the wagers (or casino winnings) from those machines. This provides slot machine makers with a more consistent, stable revenue stream -- one that's less dependant on casinos constantly replacing machines and ordering new machines.

New Jurisdictions -- More and more locales are being opened up to casino gaming. In addition, slots are now finding their way into racetracks and off-track betting facilities -- areas where they've been traditionally banned. This should continue to fuel solid growth for slot machine makers in the coming years.

Better still, most stocks in this industry are now trading at a significant discount to their 2004/05 highs, handing investors a great opportunity to invest at far more attractive prices. The culprit: a temporary lull in new jurisdictions opening up to slot machines. What's more, back in 2003/04 casinos spent big on new machines, switching from coin-operated slots to cashless "ticket" machines. With that enormous upgrade cycle now largely complete, many casinos reduced their spending on new slot machines during 2005.

This slowdown will prove temporary. For starters, during 2006 several new markets are likely to open up for slots -- this will clearly spell new demand. Secondly, slot machine leasing contracts are gaining in popularity. Under these contracts, the manufacturers are no longer reliant upon the casino replacement cycle. Revenues from such contracts are spread out over time, allowing the manufacturers to continually profit from their machines.

The slot machine industry is relatively concentrated in the hands of a few well-established players. And in the text that follows, Tracy highlights two of his favorite plays on the booming slot machine business.

 
International Game Technology (IGT)

Business Overview

IGT is the world's largest slot machine manufacturer. In addition to basic slot machine sales, the company generates half of its revenues by leasing machines to casinos in exchange for a percentage of the net win. This gaming business provides the firm with a recurring stream of high-margin revenues. Thanks to steady expansion in recent years, IGT now draws income from nearly 40,000 machines installed throughout casinos in key gaming markets around the globe.

More recently, IGT has also diversified its operations into other promising new technologies, including high-tech player tracking systems and -- through its acquisition of WagerWorks -- the rapidly growing world of online gaming.

Growth Drivers

As the replacement cycle for ticket-in-ticket-out technology -- machines that instantly print a receipt for redemption at the cashier rather than spitting out coins -- nears completion, IGT's domestic sales have slowed from the torrid growth rates the firm has been seen in prior years. However, the company's overseas sales remain strong, particularly in Japan. In fiscal 2005, IGT shipped more than 91,000 units abroad -- a sharp +37% increase over fiscal 2004. This increasing volume drove international product revenues up +43% to $472 million.

With continued construction in markets like Macau -- which many have billed to be the next Las Vegas -- the international outlook remains bright. However, there are also reasons to believe that IGT's domestic revenues will begin to accelerate.

To begin, slot machine technology is advancing rapidly -- from tiered video bonus rounds to high-resolution plasma screens -- and replacement waves are needed to put the next generation of games in front of players. Furthermore, players' tastes can change quickly, and the life span of the average game is shrinking, meaning newer games like the increasingly popular multi-line penny slots must continually be rolled out. Finally, new gaming jurisdictions are providing another avenue for growth as cash-strapped states embrace gaming as a way to generate millions in tax revenues. The introduction of gaming in Pennsylvania alone is expected to result in an initial market for more than 35,000 new slot machines.

All of this should translate into higher unit sales for IGT going forward. And with a stronger pricing environment in North America, revenues per unit have been on the rise as well.

Product sales account for just half of IGT's total revenues. The firm generates the rest via its extensive gaming operations. IGT has leased tens of thousands of slot machines -- many of which are linked to wide-area multi-million dollar progressive jackpots -- to casinos in exchange for a share of the proceeds. IGT receives a cut of every coin pumped into these slots, resulting in recurring revenues that climbed to a record $1.2 billion last year. As IGT's industry-leading installed slot machine base continues to expand, this segment of the business should help drive the company's top and bottom lines sharply higher.

 
WMS Industries (WMS)

Business Overview

WMS makes, sells and leases slot machines of many different varieties. The firm's product range includes video slot machines, wide-area progressive machines, video poker devices and even automatic lottery and Bingo machines. WMS is either the second or third largest player in the various slot categories in which it participates. WMS is either the second or third largest player in the various slot categories in which it participates.

Growth Drivers

Going forward, WMS will benefit from many of the same growth drivers that are powering strong gains for other firms in the industry, including IGT. The company believes it will be a solid second to IGT in terms of market share in each of its key markets. In a sense, the slot market is shaping up as a duopoly between WMS and IGT. When taken together, the two firms control roughly 80-90% of the North American slot market.

As new markets for gaming open up in 2006, WMS is likely to continue getting its fair share of floor space. This is particularly true given the company's promising line of new machines and existing relationships with casino operators like Harrah's. As the replacement market for machines heats up in 2006, WMS will benefit handsomely.

 
About Paul Tracy's StreetAuthority Market Advisor newsletter

The StreetAuthority Market Advisor is an invaluable resource for self-directed investors. With a keen focus on fundamental analysis and an eye for undervalued stocks, editor Paul Tracy sorts through thousands of investing opportunities each week and brings you only those with the greatest potential for both near- and long-term gains. Rather than the news, the Market Advisor delivers profitable investment guidance that you can act on today to improve your own portfolio. http://at.zacks.com/?id=2413.

OTHER TOOLS FROM ZACKS

Back to top

At the heart of Zacks Investment Research is the Zacks Rank investment philosophy that continues to vastly outperform the market. Our Zacks #1 Ranked (Strong Buys) have produced the following results for investors:

• +33% average annual return since 1988 versus +11.8% for S&P 500
• Outperformed S&P 500 in 16 of the last 17 years
• +43.8% total return from 2000 to 2002 - the worst bear market in over 60 years.
• +18% in 2005 (through September 30)

And just as importantly, the Zacks #5 Rank stocks (Strong Sell) List has alerted investors as to which stocks to dump from Their portfolios to avoid unnecessary losses.

To truly take advantage of the Zacks Rank, you need to first understand how it works. That's why we created the free special report: Zacks Rank Guide: Harnessing the Power of Earnings Estimate Revisions. Download a free copy now to prosper in the years to come by visiting: http://at.zacks.com/?id=2309.

Or view the full list of Zacks #1 Ranked stocks at: http://at.zacks.com/?id=2266.

FREE PORTFOLIO TRACKER

Do you believe that these events affect stock prices?

• Broker Recommendation changes
• Earning Estimate revisions
• Earnings Announcements
• Zacks Rank changes

If you answered yes, then how are you staying on top of these changes for your stocks? If you are one of the 45,000 investors who wake up every morning to the Daily Portfolio Updates emails from Zacks.com, then you are all set. If not, then sign up now to get this vital information sent to you daily and improve your portfolio's performance. Did we mention it's free? Get started now by going to: http://at.zacks.com/?id=2310

We hope you enjoyed this issue of "Profit from the Pros", And we look forward to visiting with you again next week.

REFER-A-FRIEND

If you enjoy this e-mail newsletter, then please pass it along to a friend. Simply forward them the link below to sign up for their own free subscription. If you're reading a forwarded copy, sign up for your own, so you get this wealth of information every week. Just click here. THANKS!

Regards and Happy Investing,

Charles Rotblut, CFA

Senior Market Analyst
Zacks.com

p.s. What is the mission for Zacks Profit from the Pros? Click here to find out how we will help you become a more successful investor.

*The S&P 500 Index is a well-known, unmanaged index of the prices of 500 large-company common stocks, mainly blue-chip stocks, selected by Standard & Poor's. The S&P 500 Index assumes reinvestment of dividends but does not reflect advisory fees. An investor cannot invest directly in an index.

Disclaimer: Past performance does not guarantee future results. Investors should always research companies and securities before making any investments. Nothing herein should be construed as an offer or solicitation to buy or sell any security.

To contact us by mail:

Zacks Investment Research
Attn: Profit from the Pros
155 N. Wacker Drive, 6th Floor
Chicago, IL 60606

To unsubscribe from receiving "Profit from the Pros" e-mail newsletter, click here.