Wednesday - March 1, 2006

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Many public utility companies within the coverage of senior analyst Jon Kolb are being published with Buy recommendations lately. We got a better sense of what is behind the general optimism after speaking with him recently.

What are some of the timely issues in the world of public utilities these days?

U.K.-based National Grid's (NG) takeover of KeySpan (KSE) Monday for $42 per share is the most recent major industry event. Since rumors emerged in mid-February that KeySpan was on the block, which was subsequently confirmed by the company, National Grid's $42/share offer represented a 16% premium for KSE shareholders.

Looking ahead through 2006 and into '07, given European privatizations and some U.S. domestic distressed assets, we may see another case of a global powerhouse with a rich valuation and seeking growth taking over a U.S. regional ute with an attractive geographic footprint in a favorable regulatory environment.

More. . .

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Zacks Equity Research continued...

So are you favoring consolidation prospects for utes based in Europe, the U.S., or does it matter?

Any M&A deal with a nice premium is a positive for investors, regardless of the location of the companies involved. Consolidation among U.S. utilities continues to heat up following the repeal of the Public Utilities Holding Company Act last summer, and we expect more deals in 2006 and beyond. Specifically, we would look for mergers between large electric utilities or acquisitions of smaller gas and electric utes by larger firms looking to expand into new geographic regions.

Can this M&A activity be traced to companies trying to regionally diversify in order to avoid major losses like those seen after the Gulf Coast storms last year?

Utilities are seeking growth through increased market share in attractive regions, vertical integration in the power generation and gas distribution processes, more favorable regulatory treatment, and geographic diversification of operations across several states. Yes, in part this is in order to avoid natural disasters like Entergy (ETR) saw with Katrina, or FPL Group (FPL) saw during the 2004 hurricane season, or just abnormal weather conditions in general.

So what specific companies do you see being major players in this?

Other New England-based utes may be attractive targets for utes looking to pick up market share ahead of the closing of the National Grid/KeySpan transaction. Nationwide, Southern Company (SO), Dominion Resources (D), Entergy (ETR) and/or DTE Energy (DTE) may be aggressive acquirers. Attractive targets may include Calpine (CPN), Dynegy (DYN), El Paso (EP), First Energy (FE), Aquila (ILA) and/or Williams (WMB). Consolidated Edison (ED) may also come into play as a merger or acquisition candidate. Recall, too, that ConEd was also interested in KeySpan.

Over the past 12 to 18 months, we've already seen corporate marriages between FPL Group & Constellation Energy (CEG), Duke Energy (DUK) & Cinergy (CIN), and Exelon (EXC) & Public Service Enterprise Group (PEG). Over the next 12 to 18 months, we feel that investors could do a lot worse than holding a few of these names, collecting 3% to 5% dividend yields and waiting for a nice premium offer on the stock price.

Jon Kolb is a senior analyst covering the utilities sector for Zacks Equity Research.

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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

Palm, Inc. (PALM) - Growth in Smartphone Market. For full Zacks research report, click here.

 
BEAR OF THE DAY

Telesp Celular (TCP) - Fierce Competition in Brazilian Wireless. For full Zacks research report, click here.

 
ZACKS INDUSTRY OUTLOOK

Zacks Industry Rank for the Week of Feb 27

More companies are enjoying price power, which improves prospects for earnings growth. More...

 
EARNINGS TRENDS

Earnings Growth Expected to Slow in the First Quarter

Director of Research Dirk Van Dijk says fourth quarter earnings grew at double digits, but the string looks likely to come to an end in the first quarter. More...

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Zacks.com offers three unique weekly commentaries that all further our mission to help you Profit from the Pros. Today is the latest installment of Screen of the Week from Kevin Matras. Each week, Kevin shares with you another winning screen he has discovered using the Research Wizard software from Zacks Investment Research. Learn more about the Research Wizard at: http://at.zacks.com/?id=2335.
 

“Finding Growth Stocks at Excellent Values”

This week’s screen has something for both Growth Investors and Value Investors.

Growth Investors focus on companies with great earnings growth, but that alone isn’t good enough for many stock pickers any more. They want good growth at reasonable prices (low P/E’s).

And while Value Investors focus on low P/E stocks, too many are low because they lack earnings power.

So instead, try combining the best of both worlds and focus on the companies with the highest growth rates and the lowest P/E ratios.

The screen I’m running this week is as follows:

• Companies with 5-Year Historical Growth Rates in the top 20 percentile of all companies. (Using a Uniform Rank of 1-99 (99 being the best growth rates), I screened for stocks ranked 80 or better.)
   
• Companies that also happened to have the lowest P/E’s – lower than 80% of all other companies. (Using a Uniform Rank of 1-99 again (this time 99 having the lowest P/E’s), I screened for stocks ranked 80 or better.)
   
• I then required those stocks to be trading at or above $5, ... with average daily trading volumes of 100,000 shares or more.
   
• And a Zacks Rank of #2 or better. (Only ‘buys’ and ‘strong buys’ allowed).

For the week of Feb 27, 2006, there are 15 companies that passed this screen. Here are three from the list that look great:

Incidentally, this screen backtested very well. And while it wasn’t designed to be a trading strategy per se’ (15-20 stocks is a lot of stocks to trade every month), this screening strategy beat the market every year for the last five years (2001 thru 2005). (I ran a series of tests over the last five-year time span, using a four-week rebalancing period. Each run was rebalanced over a different set of four-week periods to eliminate coincidence and verify robustness.) http://at.zacks.com/?id=2335

Discover all the Free Screening Tools on Zacks.com at: http://at.zacks.com/?id=2336.

Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.

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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 – Encore Wire Corporation (WIRE)

Encore Wire Corporation (WIRE) has exceeded earnings estimates in four out of the past five quarters, with the latest quarter coming in 275% above expectations. Over the past 30 days, estimates for 2006 have increased 26.5% to $1.91 per share. Read the full analysis on WIRE at: http://at.zacks.com/?id=2498.
 

Growth & Income – REGAL-BELOIT CORPORATION (RBC)

REGAL-BELOIT CORPORATION (RBC) has exceeded the consensus earnings estimate for the past four quarters. Fourth-quarter 2005 profits for this Zacks #1 Rank stock nearly tripled when compared to the prior year’s period. On Feb 8, 2006, RBC issued first-quarter 2006 earnings per share guidance above analysts' expectations. The company recently declared its 183rd consecutive dividend. RBC is currently yielding 1.3% and has a five-year average dividend yield of 2.2%. Read the full analysis on RBC at: http://at.zacks.com/?id=2499.

More...

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Zacks Rank continued...

Momentum – American Science and Engineering, Inc. (ASEI)

American Science and Engineering, Inc. (ASEI), a Zacks #1 Rank Stock, is being rewarded by the market for management’s successes. Read the full analysis on ASEI at: http://at.zacks.com/?id=2500.
 

Value – Metrologic Instruments, Inc. (MTLG)

Metrologic Instruments, Inc. (MTLG), a Zacks #1 Rank stock, has topped the consensus earnings estimate in five of the past six quarters by an average margin of 31.1%. Record financial results for the full year and the fourth quarter of 2005 led MTLG to issue full-year 2006 guidance above analysts' estimates. The company has a price-to-book (P/B) multiple of 2.9 and a return on equity (ROE) of 16%. Read the full analysis on MTLG at: http://at.zacks.com/?id=2501.

 
Zacks Rank Resources

• View All Zacks #1 Rank stocks: Go to: http://at.zacks.com/?id=2383.
   
• Free Zacks Rank Guide: Learn how to use the Zacks Rank to pick more profitable stocks. Get the guide: http://at.zacks.com/?id=2545.
   
• Zacks Advisor: Discover Ben Zacks' hand picked #1 Rank stocks on his Timely Buys list at: http://at.zacks.com/?id=2546.
   
• Zacks Wealth Management: Own all the Zacks #1 Ranked stocks in a portfolio managed by Zacks. Learn more at: http://at.zacks.com/?id=2547.

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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) Richard Moroney, Editor of Dow Theory Forecasts
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The market has been chopping around with a negative bias for the last four weeks due to fears that the Fed is not close to being done raising interest rates. Yesterday, Wall Street decided that Bernanke didn’t matter quite so much. Crude oil futures fell below the psychologically important $60 level and retail sales data for January were quite strong. This boosted the market because if the U.S. consumer is OK, then the economy is OK.

Meanwhile, the aggressive profit taking in the leadership sectors of energy, commodities and precious metals has continued, forcing some of our favorite names back to their 200-day exponential moving averages. This is a classic support level where institutions like to pick up shares and it tends to produce at least a few bounces even if it doesn’t ultimately hold. Thus, Gregory Spear and his team are using this capitulatory pullback to add some high-quality energy names today.

• Energy prices and energy stocks. Rising energy demand from China, India, and other developing nations explains much of the surge in oil prices in 2004 and 2005.
• Commodity prices and materials stocks. Rising overseas demand has triggered much-improved prices for materials.
• Foreign stock markets, especially such resource-oriented markets as Canada and Australia.
• U.S. transportation stocks. Airfreight, trucking, and railroad companies have benefited from a healthy U.S. economy and growth in export and import volumes.
• U.S. capital-equipment stocks. As foreign customers have boosted capital spending, U.S. equipment providers have benefited.

All five of these areas weakened in recent weeks, though U.S. transportation stocks have already rebounded to all-time highs. If the other four can rebound to new highs, it would suggest that recent weakness was merely profit-taking, that the bullish case for the global economy remains intact. With protracted downturns in these areas, however, new leadership will be necessary to sustain the U.S. bull market.

 
A Sampling of the Long-Term Buy List:

Harris (HRS) is an international company focused on communications equipment for voice, data and video applications. The company structures its operations around five operating divisions, which divisions have been organized on the basis of specific communications technology and markets. For the most part, each operating division has its own marketing, engineering, manufacturing and service organization. The company produces most of the products it sells, except for certain broadcast products sold by the Broadcast Communications Division.

Hartford Financial Services (HIG) is one of the nation's largest investment and insurance companies, offers a complete line of insurance and financial service products to customers all over the world. The company is a provider of automobile and homeowners coverages; commercial property and casualty insurance; reinsurance; and a variety of life insurance, investment products, employee benefits, group retirement plans and institutional liability funding products.

Home Depot (HD) is the one of world's largest home improvement retailer. The company offers a level of service unprecedented among warehouse-style retailers. Home Depot stores cater to do-it-yourselfers, as well as home improvement, construction and building maintenance professionals. The Home Depot currently operates in the USA, Canada, Chile, Puerto Rico, and Argentina. The company also operates EXPO Design Centers across the U.S. and Villager's Hardware in New Jersey.

Norfolk Southern Corp. (NSC) a Virginia-based holding company, owns two major freight railroads, Norfolk Southern Railway Company and Norfolk Western Railway Company, which operates in numerous states, the District of Columbia and the Province of Ontario.

PepsiCo (PEP) consists of: Frito-Lay Company, Pepsi-Cola Company, and Tropicana Products. PepsiCo brands are among the best known and most respected in the world and are available in countries and territories throughout the world. PepsiCo's success is the result of superior products, high standards of performance, distinctive competitive strategies and the high integrity of its people.

 
About Moroney’s Dow Theory Forecasts newsletter

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
 

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MORE FEATURED EXPERTS...

b) 2006 is Shaping up to be Positive

Jim Collins says even if the Fed raises rates another half percent, we would still be in a low-moderate interest rate environment. More...
 

c) Inflation Seems to be Under Control

Don Dion explains that inflation jitters have been calmed. Read his outlook and mutual fund profile. 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:

• +32.5% average annual return since 1988 versus +11.8% for S&P 500
• Outperformed S&P 500 in 17 of the last 18 years
• +43.8% total return from 2000 to 2002, which was the worst bear market in over 60 years.
• +18% in 2005

And just as importantly, the Zacks #5 Rank (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=2332.

Or view the full list of Zacks #1 Ranked stocks at: http://at.zacks.com/?id=2279.

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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.

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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