Friday - November 11, 2005

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With the holiday travel season approaching, in addition to yet another airline bankruptcy occurring this week, we felt it was an opportune time to check back in with our senior analyst covering the transportation industry, Ann H. Heffron, CFA.

It seems we've talked a lot about hurricanes, but I assume some airlines that do business to Cancun and South Florida were affected by Hurricane Wilma. If so, how, and which ones? Well, you’re right—there have been a lot of hurricanes this season. Disruptions caused by Hurricane Wilma were less disastrous, especially when compared with the devastation wrought by Hurricane Katrina. That said, there was major destruction in Miami, Fort Lauderdale, West Palm Beach, and surrounding areas, which some estimates put as high as $10 billion. Moreover, President Bush has declared the region a major disaster area.

And, as you correctly noticed, the airlines were among those transportation companies most affected. Some estimates put domestic and international flight cancellations at over 2,000, as airports were shut down across the region due to the hurricane. The airline most affected was American Airlines (a unit of AMR Corporation [AMR]), which accounted for roughly half of these cancellations. American Airlines is the sole airline with a hub in Miami, which serves as a major destination, as well as connection point, for Latin America. American Airlines cancelled about 500 flights per day (roughly 13% of AMR’s 3,800 daily flights worldwide) at the height of Wilma. Effects of the hurricane on American’s bottom line should be limited as revenue lost due to flight cancellations should be offset, in part, by the savings on high-cost jet fuel.

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Zacks Equity Research continued...

I had a different question for you regarding bankruptcies, but just when you thought it was safe...

Right! We just had a third airline declare bankruptcy on Monday--FLYi Inc. (FLYIQ), the parent of Independence Air--which was the victim of both a weak strategy as well as high fuel prices, the proximate cause of the bankruptcies of both Northwest and Delta Airlines. A major difference between the bankruptcies of FLYi and those of Delta and Northwest is that FLYi is expected to liquidated, while Northwest and Delta will be restructured. Since liquidation of FLYi should reduce industry capacity, this will be good for domestic airlines, which have been plagued by excess capacity and resultant low fares. And to the extent that Delta and Northwest cut capacity in bankruptcy restructuring (preliminary indications are that each plans to cut around 10-15% of total capacity), this should also have a beneficial influence on industry pricing power.

What expectations are there for holiday travel this year?

That’s a good question, and I can see a couple of countervailing factors at work. First, airlines have raised ticket prices by about 10-15% in an attempt to recover a portion of their higher fuel costs. In addition, domestic airline capacity reductions of roughly 3% have boosted the pricing power of airlines, and limited the availability of discount-fare seats. While higher airfares may scare off consumers, the impact on airlines may be less noticeable due to increased revenues from higher ticket prices.

What Buys and Sells would you recommend for us today?

I have a Sell on UAL Corporation (UALAQ), the parent of United Airlines. The stock is now trading at about $0.50 per share despite the fact that in its SEC filings, the company clearly states that current equity holders will be left with nothing when UAL emerges from bankruptcy. While UAL is benefitting from cost-cutting moves and recently shifted its unfunded pension liability to the Pension Benefit Guaranty Corporation (PBGC), rising oil prices are continuing to hammer earnings. Furthermore, the fundamental problem of overcapacity, and resulting weak airfares, persists. CEO Glenn Tilton stated recently that UAL will exit bankruptcy this fall, and should turn a profit in 2006. We are not quite so optimistic.

I have a buy on CSX Corporation (CSX). Jacksonville, FL-based CSX provides rail freight and intermodal transportation through a rail network of 21,000 miles over which it provides haulage of coal, iron ore, chemicals, automotive products, forest products, agricultural products, metals, fertilizer, consumer products, and minerals in 23 states, the District of Columbia, and two Canadian provinces. An improving domestic economy coupled with increased imports is expected to propel freight volume growth in coal and other sectors, such as food and emerging markets. Moreover, improved pricing due to tight transportation supply and fuel surcharges combined with cost escalation clauses in multi-year customer contracts are driving revenue gains across the board, with the exception of domestic intermodal. Our Buy recommendation on CSX shares reflects its low valuation relative to peers and our expectation of sold, double-digit earnings growth over the next few years.

Finally, in your opinion, what should investors look for regarding transportation through the early part of 2006?

Two major influences on the transportation sector are fuel prices and overall health of the economy. Any significant deterioration in the economy or ratcheting up of fuel prices could have a negative impact on stock prices.

Ann Heffron, CFA is a senior analyst covering the transportation sector.

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MORE FROM ZACKS EQUITY RESEARCH...
 

BULL OF THE DAY

Rackable Systems (RACK) - Strong Margins, Rapid Growth. For full Zacks research report, click here.

 
BEAR OF THE DAY

CNH Global (CNH) - Farm Equipment Sales Woes. For full Zacks research report, click here.

 
ZACKS INDUSTRY OUTLOOK

Connecting to Wire and Cable Products

Despite high raw material costs, earnings estimates for this industry are rising. More...

 
EARNINGS & SECTOR UPDATE

Third Quarter Earnings Scorecard Update

Dirk Van Dijk, Director of Research for Zacks Equity Research says third quarter results have been encouraging, but are not translating into higher expectations for the future. More...

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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: PEG Ratio

This strategy uses the PEG Ratio to find attractively priced stocks poised for price appreciation. The PEG Ratio is simply the P/E (Price divided by Earnings) of a stock divided by its 5-year projected growth rate. Too often investors think of value investing being the antithesis of growth investing. The beauty of using PEG is that you can find value stocks even amongst hot growth stocks.

If you like to use a company's PE ratio to determine its value, you'll love using the PEG ratio. Find out which companies offer the greatest value regardless of growth rate to enjoy stellar returns. Using this indicator in a stock screening strategy can produce stellar profits, such as a +38.9% return in 2004 and continued strong returns in 2005.

Here are four stocks that make the grade for the PEG Ratio Profit Track:

Atwood Oceanics, Inc. (NYSE: ATW) is a Zacks #1 Rank (Strong Buy) company that has a PEG ratio of .26, which suggests the stock is trading at a significant discount. In late July, the Houston-based international drilling contractor posted fiscal third-quarter earnings of 38 cents per share. The result was ahead of the consensus estimate by nearly 9%. Fourth-quarter financial results will be available in early December. To continue your research on ATW, click here.

Lufkin Industries (NASDAQ: LUFK), another Zacks #1 Rank (Strong Buy) name, has a PEG ratio of .44. In mid-October, the company reported third-quarter earnings of 76 cents per share, more than doubling last year's 35 cents and surpassing the consensus estimate by almost 6%. LUFK mentioned that it produced strong bookings, driving substantial growth in sales for the quarter and an even greater expansion in its backlog. To continue your research on LUFK, click here.

RealNetworks, Inc. (NASDAQ: RNWK) recently released its report for the third quarter, announcing a profit, which reversed the previous year’s loss and matched the consensus estimate. The company noted that it continues to make great progress with strong year over year revenue growth, increased profitability and a base of more than 2.2 million paid subscribers, including 1.3 million paid music subscribers. With a PEG ratio of .19, value investors may want to tune into RNWK. To continue your research on RNWK, click here.

Sunterra Corporation (NASDAQ: SNRR) which has a PEG ratio of .55, will report fiscal fourth-quarter earnings in mid-December. In early August, the company posted third-quarter earnings of 24 cents per share, excluding charges. The result was ahead of analysts’ expectations by about 14%. SNRR mentioned that it has continued to deliver record operating profits. To continue your research on SNRR, click here.

To see the full list of stocks that currently pass this winning screen, go to http://at.zacks.com/?id=2294.

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=2295.

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SCREEN OF THE WEEK

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=2289.
 

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The Zacks #1 Rank (Strong Buy) list is always limited to approximately 220 stocks. Four stocks that are currently included in this elite group are: Ceradyne, Unit Corporation, webMethods and Websense.
 

Ceradyne, Inc. (NASDAQ: CRDN) recently released third-quarter earnings of 53 cents per share, topping the consensus estimate by 6% and eclipsing last year’s earnings. The company commented that its record setting results for the quarter were primarily due to ceramic body armor production at an elevated rate and at high quality levels. Earnings estimates for the year ending December 2005 increased five cents, or almost 3%, from one month ago. Continue your research on CRDN at: http://at.zacks.com/?id=2302.

Unit Corporation (NYSE: UNT) recently reported third-quarter earnings of $1.25 per share, outpacing last year’s 54 cents and surpassing the consensus estimate by almost 16%. The company stated that its third quarter results reflect the impact of higher commodity prices and favorable industry conditions. Earnings estimates for the year ending December 2005 moved up 36 cents, or about 9%, from one month ago. Continue your research on UNT at: http://at.zacks.com/?id=2303.

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Zacks Rank continued...

webMethods, Inc. (NASDAQ: WEBM) recently posted fiscal second-quarter non-GAAP earnings of five cents per share, jumping ahead of the consensus estimate by nearly 67% and outperforming the previous year’s second quarter. The company noted that the continued focus on its cost structure has resulted in WEBM reporting the lowest quarterly expenses since the company's initial public offering in February 2000. WEBM’s fourth-quarter forecast is in line with Wall Street estimates. Analysts are projecting earnings of six cents per share, which is 20% above one month ago levels. Continue your research on WEBM at: http://at.zacks.com/?id=2304.

Websense, Inc. (NASDAQ: WBSN) announced third-quarter earnings of 41 cents per share at the end of last month. The result topped analysts’ expectations by nearly 8% and exceeded the year prior total of 29 cents. The company said its solid third quarter results demonstrated the strength of demand for Websense products, with Europe posting particularly strong results, as did the Central and Latin American region. WBSN expects fourth quarter earnings of roughly 42 cents per share. Analysts brought their expectations to the same level, which is one penny above one month ago estimates of 41 cents. Continue your research on WBSN at: http://at.zacks.com/?id=2305.

To see the full list of Zacks #1 Rank stocks (approximately 220 stocks), go to http://at.zacks.com/?id=2297.

The Zacks Rank is a powerful stock indicator whose #1 Strong Buy stocks have risen by an average annual return of 33% since 1988 versus 11.8% for S&P 500.

To help you fully understand how the Zacks Rank works and, more importantly, how you can profit by using the Zacks Rank, we have created a free report - The Zacks Rank - Harnessing the Power of Earnings Estimate Revisions. This valuable information is available at: http://at.zacks.com/?id=2296.

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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.

 
a) Paul Tracy, Editor of StreetAuthority Market Advisor
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First, one of last week's key economic releases -- the Consumer Price Index (CPI) -- showed much stronger inflation than analysts were expecting, with the year-over-year price of consumer goods jumping +4.7%. That's the highest reading for the CPI since the late 1980s. In addition, it's a full percentage point higher than the highest reading witnessed over the past decade. Although a good bit of that jump was due to higher energy prices, the financial markets nonetheless reacted strongly to the news. More specifically, yields on the 10–year bond rose sharply, projecting the likelihood for additional Federal Reserve interest rate hikes in the coming months.

And the past week also brought news of Ben Bernanke's appointment as Chairman of the Federal Reserve. Mr. Bernanke, who was widely viewed as the President's top choice, will replace the outgoing Alan Greenspan in late January. Given that Bernanke has a significant following in Congress, confirmation is expected to be relatively easy.

But Bernanke also has a reputation as a relative dove on interest rates and inflation, especially when compared to current Chairman Greenspan. In fact, he famously earned the nickname "Helicopter Ben" when he once commented that the Fed could stem deflationary forces by dropping money out of helicopters. There has been some fear that Bernanke might be more content with a higher level of inflation than Greenspan and would put a premature halt to the current rate tightening campaign. That too served to ignite Wall Street's inflation fears.

Throughout the ages, one key investment class has always proven to be a reliable hedge against inflationary forces -- gold. During inter-war Germany, for example, as inflation rose to over +1,000% per month, consumers hoarded gold. And as inflation took hold in the U.S. during the 1970s, gold prices shot higher.

With inflation once again on the front pages, gold stocks should offer a solid hedge for investors at least over the next few quarters. With this in mind, in this month's "Sector Spotlight" article Paul Tracy has decided to throw the spotlight on the gold and silver mining industry.

 
SECTOR SPOTLIGHT
Two of Paul Tracy’s favorite gold & silver stocks are:

U.S.-based Newmont Mining (NYSE: NEM) is the largest gold mining company in the world with total reserves of more than 90 million ounces. And while the company is headquartered in the U.S., its operations are scattered in all corners of the globe -- the company has mines in North America, Africa, Australia and across Latin America.

Growth Drivers

Newmont will see solid growth from the recent uptick in gold prices because its production is unhedged. Some producers actually choose to sell part of their production forward in the futures market -- this locks in a pre-set price for the gold they mine and sell.

In the lean years, when gold prices are falling, this offers a benefit. However, when gold prices are rising a large hedge book can severely hurt profitability -- producers' hedge contracts will mean they get a lower average price for their production.

But Newmont's management team has decided not to hedge its production at all. This means that any increase in the price of gold will drop straight to the bottom line in the form of rising profits. Given the recent rise in gold prices, this should allow Newmont to post solid profits in the coming quarters.

Secondly, Newmont has been highly acquisitive in the past. It would not be at all surprising to see the company make more strategic acquisitions, and even further grow its reserve base.

Compania de Minas Buenaventura (NYSE: BVN) is a Peru-based miner of both gold and silver -- the company's annual revenues are relatively evenly split between the precious metals. In addition, BVN produces several important base metals as part of its operations, including zinc and copper.

Growth Drivers

BVN's main growth driver lies in the potential to increase its reserves via new exploration. The company has been exploring for gold and silver in Peru for more than 50 years and has built up a significant database of potential exploration sites. Peru is rich in metals so there remain plenty of opportunities for new finds.

Secondly, BVN has been open to partnering with foreign firms when exploring new potential mines. The company's list of joint venture partners includes some of the largest mining firms in the world, such as Newmont and BHP Billiton. These firms can provide the capital for BVN to develop new projects; BVN also lessens its risk by partnering with large foreign firms.

 
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.
 

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MORE FEATURED EXPERTS...

b) Inflation, What Inflation?

Richard Lehmann doesn’t see long-term interest rates rising substantially until the stock market shows some real life. More...
 

c) Market Gyrations

Steve McKee says enjoy the ride while it lasts. Discover what he means and read this mutual fund expert’s advice. More...
 

OTHER TOOLS FROM ZACKS

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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=2296.

Or view the full list of Zacks #1 Ranked stocks at: http://at.zacks.com/?id=2297.

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

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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 Zacks Performance Rank performance is the total return of equal weighted simulated portfolios consisting of those stocks with the indicated Zacks Rank net of fees. Results reflect the reinvestment of dividends and other earnings. Simulated results do not represent actual trading and may not reflect the impact that economic and market factors might have had on decision-making if an adviser were actually managing a client's money.

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.

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