Friday - December 30, 2005

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Investers have come a long way throughout 2005. Therefore, we decided to dedicate our final analyst interview of the year to the transportation industry. Senior analyst Ann H. Heffron, CFA was on hand to give us her take on the industry going into 2006.

The transportation industry naturally covers a wide array of sectors. Which do you see as the strongest group going into 2006?

Well, from a fundamental perspective, I like the Air Freight, Railroads, and Transportation Services sectors. Air Freight includes such companies as FedEx Corporation (FDX) and United Parcel Service (UPS), while Railroads include the major rail providers in the U.S. and Canada, such as Burlington Northern Santa Fe (BNI) and CSX Corporation (CSX).

As to Transportation Services, this covers companies such as C.H. Robinson Worldwide, Inc. (CHRW) and Expeditors International of Washington, Inc. (EXPD), both of which provide non-asset-based logistics services. This means these companies do not own transportation assets. Rather, these companies purchase transportation services from direct (asset-based) carriers and resell those services to their customers. By consolidating shipments from multiple customers and concentrating buying power, these companies are able to negotiate favorable buy rates from the direct carriers, while at the same time offering lower sell rates than customers would otherwise be able to negotiate themselves.

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Zacks Equity Research continued...

Conventional wisdom says buying airline stocks is only good for day-trading. But is there any hope for growth with low-cost carriers such as or Frontier Airlines (FRNT)?

I’d say one has to be very nimble to play in the airline sector, no matter if one is considering a low-cost carrier, a regional carrier, or a legacy airline, such as AMR Corp. (AMR), parent of American Airlines. This is an extremely volatile sector that has experienced a number of bankruptcies in the last few months, driven in part by the spike in fuel prices following Hurricanes Katrina and Rita. Ironically, legacy carrier AMR’s stock is up over 100% during the past year, while smaller carriers XJT and FRNT are down 35% and 20%, respectively.

Do you expect transportation stocks to come back stronger the further away we get from the disastrous hurricanes from last summer?

Actually, in general, the transportation stocks have performed very well since recently bottoming out in late September following the hurricanes. The Dow Jones Transportation average reached an interim low of 3,581.45 on September 20, 2005 and has since risen almost 18% to close at 4,223.93 on December 28, 2005. This has not occurred across all sectors evenly, though most sectors are up, with the exception of shipping.

Are there any Buy or Sell recommendations you'd care to make for us today?

I have a sell on UAL Corporation (UALAQ.OB), 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, Florida-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.

Ann H. Heffron, CFA is a senior analyst covering the transportation industry for Zacks Equity Research.

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MORE FROM ZACKS EQUITY RESEARCH...
 

BULL OF THE DAY

AtheroGenics, Inc. (AGIX) - Potential Blockbuster Drug. For full Zacks research report, click here.

 
BEAR OF THE DAY

Albertson`s, Inc. (ABS) - More Downside Risk. For full Zacks research report, click here.

 
ZACKS INDUSTRY OUTLOOK

Drillers Digging Up Profits

Growth in energy industries should come from smaller companies in 2006. More...

 
EARNINGS & SECTOR UPDATE

Earnings Forecasts Favor Mega-Caps

Director of Research Dirk Van Dijk says that last week marked the first time 2006 revisions outnumbered 2005. 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: 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 continues to handedly beat the S&P 500.

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

Briggs & Stratton Corp. (NYSE: BGG), a producer of air-cooled gasoline engines for outdoor power equipment, has a PEG ratio of 0.82 and a price/sales multiple of 0.74. The firm announced third-quarter earnings of 9 cents per share, exceeding analyst expectations by 50%. The company saw sales rise to $511.7 million—a 17% increase year-over-year. A $72.7 million year-over-year increase in revenue was linked to sales from its acquisition of Murray Inc. assets, which was completed in February. To continue your research on BGG, click here.

Frontier Oil Corp. (NYSE: FTO) announced fiscal third-quarter earnings of $1.91 per share. The result eclipsed last year’s 44 cents and topped the consensus estimate by 17.2%. 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 0.72. To continue your research on FTO, click here.

Maverick Tube Corp. (NYSE: MVK) is a Zacks #1 Rank stock with a PEG ratio of 0.71 and a five-year average return on assets of 9.6%. MVK has beat estimates in seven out of the last eight quarters, exceeding expectations by 21.1% in the last quarter. Estimates for both 2005 and 2006 have been trending higher. For 2006, the consensus estimate is up a staggering 34.2% when compared to estimates of three months ago. The company stated in early December that it had completed a recent stock buyback of more than 6.2 million shares. To continue your research on MVK, click here.

The Timken Company (NYSE: TKR) is a global manufacturer of bearings, alloy and specialty steel and related components. TKR meets the criteria of this profit track with its current ratio of 1.52 and a debt/equity level of 0.38. In late October, the company announced that it has raised its fiscal 2005 earnings outlook to $2.55-$2.65 per share from its prior estimate of $2.40-$2.55. Timken has exceeded estimates for four consecutive quarters, by an average margin of 12.8%. The company’s most recent quarterly profit more than doubled due to strength from its global industrial business. To continue your research on TKR, 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

Using Common Sense to Manage your Portfolio

Kevin Matras looks at the 'short ratio' as a market sentiment indicator and shows how to use it for finding winning stocks: http://at.zacks.com/?id=2289.
 

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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 – Apple Computer, Inc. (AAPL)

Apple Computer, Inc. (AAPL) has regained its status as a premier growth company by introducing several cutting edge consumer products. This has enabled the computer maker to beat analysts' estimates for 11 consecutive quarters and post over 100% year-over-year growth in the last nine quarters. Read the full analysis on AAPL at: http://at.zacks.com/?id=2505.

Growth & Income – Jones Lang Lasalle Inc. (JLL)

Jones Lang Lasalle Inc. (JLL) has exceeded analyst expectations in seven of the last eight quarters, by an average margin of 100.5%. Earnings per share are forecasted to grow 13.5% over the next 3-5 years. International opportunities in China and India offer additional growth opportunities. Read the full analysis on JLL at: http://at.zacks.com/?id=2506.

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Zacks Rank continued...

Momentum – Intevac (IVAC)

Everybody needs more hard drive space. And set to benefit from that need is Intevac (IVAC). Sales are growing strong, analysts are revising their profit projections upwards, and the market is rewarding the company’s momentum with impressive gains. Read the full analysis on IVAC at: http://at.zacks.com/?id=2507.

Value - WPS Resources Corporation (WPS)

WPS Resources Corporation (WPS), a Zacks #1 Rank stock, is currently trading at a highly discounted valuation, with a price-to-book multiple of 1.8. The company recently raised its fiscal year EPS guidance, pushing estimates upward for both this year and next. WPS currently yields 4.0%. Read the full analysis on WPS at: http://at.zacks.com/?id=2508.

 
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.

Zacks Rank Resources

• View All Zacks #1 Rank stocks: Go to: http://at.zacks.com/?id=2297.
   
• Free Zacks Rank Guide: Learn how to use the Zacks Rank to pick more profitable stocks. Get the guide:  http://at.zacks.com/?id=2296.
   
• Zacks Advisor: Discover Ben Zacks' hand picked #1 Rank stocks on his Timely Buys list at: http://at.zacks.com/?id=2532.
   
• Zacks Wealth Management: Own all the Zacks #1 Ranked stocks in a portfolio managed by Zacks. Learn more at: http://at.zacks.com/?id=2533.

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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) Ian Wyatt, Editor of the Growth Report
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Google inked the AOL deal Microsoft first courted, securing a growing dominance over the software giant in search.

There's a new sheriff in town and his name isn't Mr. Softee. It's Eric Schmidt, CEO of Google (GOOG), and he's now clearly more than a mere David to Microsoft's (MSFT) Goliath. Late Tuesday, Google and Time Warner Inc. agreed to a $1 billion investment by Google in exchange for a 5 percent stake in AOL that includes a broader advertising relationship between the two, including video content from AOL and a newly announced instant-messaging arrangement. Under a deal, Google would highlight AOL's Web properties while remaining the exclusive search engine for AOL subscribers, with AOL continuing to sell ads through Google.

Yet, the more interesting part of this deal involves what it will not offer Microsoft. Left on the sidelines, Microsoft claim no longer claim it has the chops to cut it in big time search - while it also loses the immediate leg up it needs in the online advertising wars. AOL will continue to sell Google's, rather than Microsoft's, search ads, thus remaining Google's biggest customer, contributing roughly $420 million to Google's sales, equal to about 10 percent of the search giant's reported revenue in 2005.

Microsoft had been negotiating a possible deal with Time Warner for access to AOL since the beginning of 2005, though executives had hinted that the structure of such a deal would have impacted AOL's, and thus Time-Warner's, reported net earnings - a sacred cow now that investor Carl Icahn is nipping at Time-Warner's heels for more profitability. Moreover, despite Microsoft's hoard of cash, any possible deal for AOL did not include an equity stake in the online business.

Instead, Google will not only pony up the $1 billion for 5 percent of AOL, this deal now completes the offensive move Google set in motion in 2002 when it replaced AOL's then online advertising network, now owned by Yahoo (YHOO), with its own ad network - thereby all but taking that business away from Microsoft not once, but twice!

 
About Ian Wyatt’s Growth Report newsletter

Ian Wyatt provides insightful analysis, market commentary, and favorite recommendations on a timely basis in "Growth Report" newsletter. Try it free for 30 days and see if you can improve your investment performance. http://at.zacks.com/?id=2534.
 

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MORE FEATURED EXPERTS...

b) Trading Places?

Ron Rowland and his team, from the All Star Fund Trader newsletter, explain that the inverted yield curve could be a predictor of a recession. More...
 

c) Profits Soar at Eagle Materials

Richard Moroney, editor of the Upside newsletter, says Eagle Materials’ decent earnings growth should continue even as the housing market slows. 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.

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 to help take definitive action to improve your portfolio's performance. Did we mention it's free? Get started now!

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

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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 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.

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.

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