Thursday - November 10, 2005
 Want to view the archive of past issues? Go to: http://at.zacks.com/?id=2337. Manage Profit from the Pros subscription: 1. ZACKS EQUITY RESEARCH Our senior analyst covering large-cap banks, Scott Jaggers, CFA, has given us some helpful words regarding what incremental interest rate increases from the Fed has done for the banking industry. For this and more on the topic of banks, we had him answer some of our specific questions. How is the banking industry being impacted by the recent Florida hurricanes? If we look at forecasting assigning multiples to come up with a price of how much these storms are costing banks in Florida…the main thing to take away from this is that everyone is disregarding Wilma and Alpha as one-time items. After Hurricane Katrina hit the Gulf Coast, perhaps certain banks made special loan provisions for the third quarter, depending on the size of the bank, for expected losses that have yet to materialize. Of course, for any banks with significant financial problems before the storms hit, this would be a different story. But no companies in my coverage fall under this category. Also, Hurricane Wilma was not as devastating as Hurricane Katrina, and even so, if third quarter earnings wind up missing estimates by a penny or two, no one’s going to be too concerned about it. Perhaps Florida banks with branches in other areas can take up the slack? Sure. These things shift around. Banks are big on insurance, and most lease their facilities anyway, so nobody’s going to really lose out if a few branches in Florida get destroyed. Keep in mind I’m still referring to the large-cap banks in my coverage; a small bank with its entire livelihood in, say, Key West might actually have some real problems. For banks in my coverage, though, people still have to do their banking, so if a bank shuts down, the customer will track down a different branch and do his business there. Again, the situation in New Orleans is the one that might have a serious negative impact. If that city doesn’t come back strong--which I simply just can’t imagine, personally--you may see banks located there experiencing lots of trouble. Perhaps banks in New Orleans would need to transfer business to somewhere in Texas, say. Then again, if New Orleans grows as big or even bigger than it was previously, many banks could do exceptionally well. Building in the region would take money, so loans would increase as development there would take place. So that’s a real wild card down there. More. . .
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - We are more concerned about what will be the long-term impact to the economy from the hurricanes. Although most lodging companies have been very forthcoming on the impact from property disruptions and damage, we remain concerned about the consumer psyche. Consumer confidence has plunged, and it remains to be seen how pricing can hold up if demand falters heading into 2006. A tightening of budgets by businesses in an inflationary environment would also likely put a crimp on occupancy and pricing for the industry. That being said, we believe these risks have largely been priced into the lodging companies, which are now trading at much lower multiples than just a few months ago. Again, the situation in New Orleans is the one that might have a serious negative impact. If that city doesn’t come back strong--which I simply just can’t imagine, personally--you may see banks located there experiencing lots of trouble. Perhaps banks in New Orleans would need to transfer business to somewhere in Texas, say. Then again, if New Orleans grows as big or even bigger than it was previously, many banks could do exceptionally well. Building in the region would take money, so loans would increase as development there would take place. So that’s a real wild card down there. As far as Florida goes, though, we clearly see extra losses in the near term, which everyone will disregard. Money will come in from the insurance companies, too, which is also a good thing. Bottom line: everybody seems to be talking about this issue, but it’s not making much of an impact, at least for banks in our coverage. What do you feel is the biggest issue regarding large-cap banks right now? Interest rates remain a key discussion. We continue to expect additional rate increases from the Fed at this point, with Fed Funds rising to 4% by year's end, then perhaps a slowing pace after that, rising to perhaps 4.5% by the first quarter '06. Expectations are key, as banks can manage interest rates more effectively when they can predict them. Outgoing Fed Chair Greenspan’s slow-and-steady approach has been good for margins overall, and his expected replacement, Ben Bernanke, I think can be counted on to be on board with this approach. The shape of the yield curve has been problematic for most, however. The Fed can control the short end of the curve with some precision, but the market clearly sets the long end. At this point, short rates have been rising for a year and a half, with Fed Funds up a 325 basis points. The long end has not followed suit, though, and the curve has flattened dramatically. The spread between 90-day bills and 10-year bonds is currently about 60 basis points (bps), versus a 340 bps average in June of 2004. While this is lower than the 20-year average of 180 bps, it could clearly get worse--the slope was negative as recently as early 2001. It's very hard to predict, but you never know--we may get an inverted curve or a flat curve for a short time. For each of the three times over the past 20 years there has been a negative spread, it only happened for a very short time each time. But even a short period with a negative spread can make for an ugly quarter or two. Looking at the longer-term, it seems credit quality has kept up quite well. What's your take on this? Actually, credit quality has been amazingly good for several quarters in a row now. In my model--and I know I'm not alone in doing this--I draw this hockey stick that I keep pushing out further with every good quarter. We're all doing it, all of us analysts, even though we're well aware that the drop-off is definitely coming at some point. Well, now with Sarbanes-Oxley legislation, banks are no longer being allowed to smooth earnings over time. One of the main points of this law was to keep companies from hiding assets and smoothing their earnings, but for banks, smoothing credit through loss provisions has always been a legitimate GAAP practice. Banks are unique in doing this. It's one of the reasons a company like Bank of America (BAC) could normally charge off $1 billion and not have it show up on the company's income statement. But Sarbanes-Oxley auditors have gotten much more rigorous--they now say banks can't record loss provisions without directly attributing them to specific loans. Therefore, when losses start coming in, the charge-offs will have to be made up with larger provisions rather than smaller ones. Banks that have done surprisingly well lately might surprise to the negative going forward, when earnings might realistically suffer for a time until provisions can be put back on the books. This would lead to analysts not being able to tell if their forecasts are too high or too low. I read an article by a pretty well-known analyst lately that said banks are going to get clobbered due to this, and that estimates are currently 5-10% too high. From what I've seen so far, this looks to be true. Provisions seem to have gone up across the board. And for banks with heavier commercial loan concentration--which usually get higher valuations than those with higher mortgage concentration--their losses might be much, much bigger if they can't reserve funds for smoothing earnings. Investors should be aware of what impact this may have, and act accordingly. For me, I'm expecting the drop in credit quality to come a bit sooner now because of this; I don't think I'll be pushing out that hockey stick going forward. Scott Jaggers, CFA is a Zacks senior analyst covering large-cap banks and the finance industry. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - BULL OF THE DAY TRM Corp. (TRMM) - Consolidating ATM Market. For full Zacks research report, click here. Pogo Producing (PPP) - Lacking Organic Growth Prospects. For full Zacks research report, click here. In the Homestretch Industry Rank for the Week of November 7
2. PROFIT TRACKS 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… This Profit Track goes to the heart of fundamental investing by finding companies with healthy earnings. The main ingredients are the search for Earnings Growth and Net Profit Margins. Then for good measure we make sure earnings estimates are moving higher which is a strong indicator of future performance and that brokerage firms are positively rating the stock. Earnings are the single most important metric for a company. Combine that with a healthy Net Profit Margin and you find a screen that has generated a cumulative return of +425% since January 2001. During the first half of 2005, this screen continued its winning ways with a +13.8% return. Advisory Board Co. (NASDAQ: ABCO) reported fiscal second-quarter earnings in late October. The result topped last year’s second quarter and matched the consensus estimate. The company noted that its performance was driven by cutting-edge research agendas and continued program innovation, which led to strong renewal performance and continued growth across ABCO’s program portfolio. The company, which has a net margin of .16, managed to produce annual earnings growth of about 15% above the previous year. To continue your research on ABCO, click here. AAR Corp. (NYSE: AIR) generated impressive earnings growth of 400% last year over the previous year. The company, a worldwide leader in supplying aftermarket products and services to the global aerospace/aviation industry, reported fiscal first-quarter earnings of 15 cents per share in late September. The result surpassed the consensus estimate by about 7% and eclipsed last year's first-quarter earnings. The company stated that sales and earnings growth for the quarter were driven by increased sales in the Aviation Supply Chain, Maintenance, Repair & Overhaul and Structures & Systems segments. To continue your research on AIR, click here. Champion Enterprises, Inc. (NYSE: CHB) posted third-quarter earnings of 20 cents per share in mid-October, matching analysts’ expectations and outperforming the year prior total. The company stated that the third quarter was marked by continued progress toward attaining its goals of improved margins and modular growth. CHB experienced earnings growth of almost 120% for its most recently completed year versus the previous year. To continue your research on CHB, click here. Western Sierra Bancorp (NASDAQ: WSBA) is a profitable company as evidenced by its net margin of .20. WSBA has also demonstrated solid year-over-year growth with the full year 2004 posting earnings growth of nearly 20% above the year prior. In mid-October, the company announced GAAP earnings of 59 cents per share for the third quarter. The result improved on last year’s 49 cents and outpaced the consensus estimate by almost 2%. To continue your research on WSBA, click here. 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=2359 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Creating a Custom Consensus of your Winningest Screens Kevin Matras combines some of his winningest strategies to create a Custom Consensus screen: http://at.zacks.com/?id=2360. 3. ZacksAdvisor.com TIMELY BUY of the WEEK Here you`ll discover a Zacks #1 Ranked stock hand selected by
Ben Zacks to outperform the market over the next 30 to 90 days.
This week`s Timely Buy is… AstraZeneca (AZN) AstraZeneca (AZN) engages in the research, development, manufacture, and marketing of prescription pharmaceuticals, as well as the supply of healthcare services worldwide. It provides medicines designed to fight disease in areas of medical need, such as cancer, cardiovascular, gastrointestinal, infection, neuroscience, and respiratory. Perhaps the strongest of all AstraZeneca drugs is Seroquel (for schizophrenia). Seroquel continues to gain market share against its chief competition Zyprexa (Eli Lilly), Risperdal (Johnson & Johnson), and Geodon (Pfizer). The U.S. Food & Drug Administration (FDA) approval the drug last year for bipolar I disorder (recurring episodes of mania and depression), and an increased dosing cycle approval to a 12-week regimen. We are optimistic on future trends for Seroquel throughout 2005. The company will likely ring up total sales of nearly $2.7 billion in 2005, growing to over $4 billion in 2008 More...
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Recent third quarter 2005 earnings were above expectations. The company said its net profit for the three months to Sept. 30 came to US$1.23 billion (euro1.02 billion) over the three months to Sept. 30, up from US$1.14 billion a year ago. Revenue rose to US$5.8 billion (euro4.83 billion) from US$5.6 billion as sales of its five key products -- Nexium, Crestor, Symbicort, Arimidex and Seroquel -- increased by a combined 25 percent. AstraZeneca said it now expects earnings per share for the full year between $2.85 and $2.95. Valuation is highly attractive given the superior growth rate. We see AstraZeneca being able to deliver a four year CAGR of 16.4%, significantly above that of all other large-cap pharmaceuticals (ex. Schering-Plough). Strong bottom-line growth is driven by a combination of growing revenues, moderating operational costs and aggressive share buybacks. The stock currently trades at 16.3x 2005 EPS, about a 10% premium to the peer-group. However, given the expected 16% growth in 2006 we believe that AstraZeneca still offers upside the remainder of the year. The shares will begin to trade at a discount to the peer-group in late 2006/early 2007 unless the shares move to above $50. The company is also working on reducing costs to drive profitability beyond 2005. AZN should continue to see selling, general and administrative (SG&A) costs decline as a percent of total revenue for the next several years. Additionally, gross margins should continue to expand, given the ramp in key blockbuster products. Share buy-backs are also a significant driver of the bottom-line. The company has $3 billion in buy-backs authorized for the next year. The company has a solid record of beating consensus earnings estimates. Over the past four quarters, AZN has come in ahead of expectations each time. They surpassed views by anywhere from 1% to 41%. Given the magnitude of their recent earnings beat, it is likely that this momentum will continue for the next few quarters. When a company this large exceeds expectations by such a big amount, it is worthwhile to take notice.
4. FEATURED EXPERTS Here we cast the spotlight on a timely Featured Expert commentary that recently appeared on Zacks.com. Following the article you will find previews of other profitable commentaries with insights and recommendations from leading investment experts.
Inflation hits highest level since 1991! Oil prices hover above $60 per barrel! Gold prices continue to rise! A quick glance at newspaper headlines may leave you with the impression that blood is running in the streets. While the statements above are correct, they should not yet drive you to panic. Energy prices get plenty of press, but energy represents less than 8% of all consumer spending. Energy prices rose 12% from August to September, driving the Consumer Price Index (CPI) up 1.2% for the month. The 4.7% year-over-year increase in CPI represented the biggest jump since 1991. But core inflation, which excludes the effects of food and energy rose a modest 2% year-to-year in September. Inflation reduces the purchasing power of money, making it harder for consumers to buy goods and services, and for businesses to expand. Over the last decade, inflation averaged 2.5%, versus the 30-year average of 4.4%. Economists continue to debate the root cause of inflation. While experts have put forth many conflicting theories about what makes prices rise, everyone seems to agree that inflation affects consumers and producers at all levels of the economy. Inflation is usually measured by observing changes in prices of a basket of goods and services. The most commonly cited U.S. inflation measure is the Consumer Price Index (CPI), which reflects the price of hundreds of items purchased by the average household. While the CPI reflects changes in the prices of common goods and services purchased by consumers, the Producer Price Index for Finished Goods (PPI) represents the average change in the price of finished goods sold by producers to other businesses. In September, spikes in energy and food prices drove the PPI up 6.7% from the year-earlier period, the largest increase in nearly 15 years. While the PPI excluding energy and food rose just 2.5% in September, any sustained increases in energy or food prices could pass through into other sectors, which could in turn exert upward pressure on overall wholesale and retail prices. The PPI does not reflect labor costs, which represent about two thirds of production costs. Compensation costs rose 3% in the September quarter, the slowest growth since the March 1999 quarter. Why should investors pay attention to inflation? Because it directly affects their returns. Stocks have historically performed better during periods of low inflation, and inflation erodes all investment returns by reducing the purchasing power of future cash flows. Some other financial phenomena associated with inflation are detailed below:
To control inflation, the Federal Reserve on Nov. 1 raised short-term interest rates for the 12th time since June 2004. In its October meeting, the Fed raised its inflation forecasts, citing high energy prices in the near term and a rise in economic growth next year during the rebuilding process. Recent CPI and PPI data suggest a modest buildup of inflationary pressures. A substantial rise in core inflation would be cause for concern, and Richard Moroney and his team intend to watch the data closely. But the Fed appears willing to continue raising interest rates, and core inflation is unlikely to rise above the 30-year average of 4.4%. Citigroup (NYSE: C) the preeminent global financial services company with some 200 million customer accounts in more than 100 countries, provides consumers, corporations, governments and institutions with a broad range of financial products and services, including consumer banking and credit, corporate and investment banking, insurance, securities brokerage, and asset management. Coventry Health (NYSE: CVH) is a managed health care company operating health plans under the names Coventry Health Care, Coventry Health and Life, HealthAmerica, HealthAssurance, HealthCare USA, Group Health Plan, SouthCare, Southern Health, Carelink Health Plans, and WellPath. The Company provides a full range of managed care products and services including health maintenance organization, point-of-service, preferred provider organization products, and Medicare and Medicaid products. The Company also administers self-insured plans for large employer groups. Energen (NYSE: EGN) is a diversified energy holding company engaged in natural gas distribution and oil and natural gas exploration and production activities. The Corporation's utility subsidiary, Alabama Gas Corporation, is the largest natural gas distribution utility in the State of Alabama. The Corporation's oil and gas exploration and production activities are conducted by its subsidiary, Taurus Exploration, Inc. and its subsidiary. Get clear Buy, Hold and, yes, SELL advice from one of the nation’s oldest and most successful investment newsletters. Our in-depth analysis and advice have been helping subscribers weather market volatility since 1946. http://at.zacks.com/?id=2406. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - John Reese says the Hot List is easily outpacing the market’s gains since the last newsletter issue. More... Dr. Edward Olmstead believes the market will attempt to challenge the 2005 highs. Discover his option play of the month. More... OTHER TOOLS FROM ZACKS At the heart of Zacks Investment Research is the Zacks Rank investment philosophy that continues to vastly outperform the market. Our Zacks #1 Rank (Strong Buy) List has produced the following results for investors:
And just as importantly, our #5 Ranked stocks (Strong Sells) have 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=2350. Or view the full list of Zacks #1 Ranked stocks at: http://at.zacks.com/?id=2351. FREE PORTFOLIO TRACKER Do you believe that these events affect stock prices?
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Zacks #1 Stocks on the Move 05/21/2013
| Company Name | Symbol | %Change |
|---|---|---|
| SCIENTIFIC L | SCIL | 8.00% |
| SUMMER INFAN | SUMR | 6.63% |
| RADIANT LOGI | RLGT | 6.38% |
| FEDERAL MOGU | FDML | 5.99% |
| NEW ORIENTAL | EDU | 5.54% |
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