Friday - May 5, 2006

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As Director of Zacks Equity Research, Dirk van Dijk, CFA oversees a plethora of industries and manages over two dozen senior analysts. Though there is a lot on his plate, he is able to see the formation of market trends on a larger scale. We asked him to comment on first quarter earnings season.

Earnings for Q1 seem to be surprising to the positive. What seems to be the main catalyst?

You are right that earnings are once again very strong, and coming in well ahead of expectations. Going into the reporting season, it looked like growth would be slightly below 10%, but so far, the median year-over-year growth rate for companies that have reported (73.4% of the S&P 500 as of the 5/1 close) is 13.0%. Positive surprises are leading disappointments by better than four to one, which is significantly stronger than the just over three-to-one ratio we saw at this point in the 4Q reporting cycle.

More. . .

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Zacks Equity Research continued...

The key reason for the strong earnings is a strong economy. The 4.8% growth in GDP in the 1Q was the strongest we have seen in quite a while, although some of that is simply a bounce-back from the weak 4Q (mostly due to hurricane disruptions).

Do you expect these numbers to modify a bit before earnings season is over?

Well, with almost three-quarters of the earnings reported, I think we have enough of the precincts in to call this election. There might be a little movement downward, (based on which sectors have already mostly reported and those that still have many yet to report), but I doubt it will be significant.

Obviously, Energy's up-cycle continues. But what industries have provided pleasant surprises, in your view?

Yes, Energy is leading the pack again with respect to year-over-year growth, with the median firm reporting 75.5% growth. That is almost 3x as high as the next highest sector, Telecom at 25.7%. That growth rate will not continue for Energy since they will keep hitting tougher and tougher comparisons. Interestingly, Energy has the highest proportion of disappointments to positive surprises, although the positives still out number the negatives by a four-to-three margin.

The biggest positive surprises have come in the Industrial and Materials Sectors. So far, there have been 39 positive surprises in the Industrial sector versus only two disappointments. The median earnings report came in 5.6% higher than expected. Now, that is the level of earnings that was 5.6% higher, so the surprise in year-over-year growth is significantly higher than that. The Materials Sector has positive surprises leading disappointments by 5.5 to one, with a median surprise of 5.0%.

To read the complete Analysts Interview, click http://at.zacks.com/?id=2306.

Dirk van Dijk, CFA is the Director of 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 the latest posts, click here.

 
BULL OF THE DAY

Southern Peru Copper (PCU) - Favorable Global Demand. For full Zacks research report, click here.

 
BEAR OF THE DAY

Overstock.com (OSTK) - Continuing to be Unprofitable. For full Zacks research report, click here.

 
ZACKS INDUSTRY OUTLOOK

Non-Ferrous Mining Has the Top Spot

High commodity prices likely to enhance earnings over the next two to three years. More...

 
EARNINGS TRENDS

Positive Earnings Surprises lead to Upward Estimate Revisions

It is very likely that this will be yet another quarter of double-digit growth. 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: Low Price Stocks

Many investors prefer stocks priced below $20 because the low prices allow them to accumulate more shares. Fortunately, lower prices do not necessarily mean lower quality.

This strategy identifies stocks priced below $20 that are trading at discount valuations and have a Zacks Rank of #1 ("Strong Buy") or #2 ("Buy"). The stocks identified by this search strategy trade at price-to-sales (P/S) multiples of 1.0 or below. The strong Zacks Rank is indicative of positive revisions in earnings estimates.

Combining these characteristics can result in high-dollar returns. In 2005, this strategy generated a stellar +51.9% return.

Here are four stocks that make the grade for the Low Price Stocks Profit Track:

Hooker Furniture Corp. (HOFT) experienced earnings of $1.32 per share over the past 12 months and has a price-to-sales ratio of 0.76. In late March, HOFT announced results for the first quarter. Earnings per share were ahead of analysts’ expectations by almost 11% and exceeded the year-prior result. Net sales increased 6% year-over-year, which HOFT attributed to an increase in incoming orders for imported wood and metal furniture throughout the quarter, coupled with better import product availability. Continue your research on HOFT at : http://at.zacks.com/?id=2290.

Pinnacle Airlines Corp. (PNCL) satisfies the criteria for this Profit Track with a price-to-sales ratio of 0.17 and earnings per share profitability of $2.44 over the past 12 months. The company recently released first-quarter earnings of 61 cents per share, beating analysts’ expectations by about 56% and outperforming last year’s pro forma earnings per share of 55 cents. Continue your research on PNCL at: http://at.zacks.com/?id=2291.

RPM International Inc. (RPM) posted fiscal third-quarter earnings of six cents per share, excluding charges, in early April. The result was ahead of the previous year’s four cents per share, excluding charges, and topped the consensus estimate by 20%. The company also reported record sales of $612.5 million, an 18.6% increase over the year-ago third quarter. RPM has earned $1.22 per share over the past 12 months and it offers a price-to-sales ratio of 0.79. Continue your research on RPM at: http://at.zacks.com/?id=2292.

Xcel Energy Inc. (XEL) recently announced first-quarter earnings from continuing operations of 36 cents per share. The result jumped ahead of analysts’ expectations by 20% and eclipsed the year-prior total. Value investors may find XEL to be appealing based on its price-to-sales ratio of 0.73. The company has seen earnings of $1.29 per share over the past 12 months. Continue your research on XEL at: http://at.zacks.com/?id=2293.

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

Diversification and Portfolio Weighting

Kevin Matras talks about diversification and the importance of an equally dollar weighted portfolio: 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 – Biosite, Inc. (BSTE)

Biosite, Inc. (BSTE) is enjoying growing sales and increasing margins. This has contributed to the company exceeding earnings estimates in six out of the past seven quarters. Six different analysts have raised their numbers for 2006, while five have done so for 2007. Over the past 30 days, this year's estimates have increased 8.5% to $2.29 per share. Read the full analysis on BSTE at: http://at.zacks.com/?id=2505.

Growth & Income – A.G. Edwards, Inc. (AGE)

A.G. Edwards, Inc. (AGE) topped the Street’s estimate by 25.0% in the fourth quarter of fiscal 2006. The company increased revenues for the past three years and grew profits for the past four. AGE’s earnings per share are projected to grow 10.0% over the next 3-5 years. This Zacks #1 Rank stock is currently yielding 1.6% and has a five-year average dividend yield of 1.7%. Read the full analysis on AGE at: http://at.zacks.com/?id=2506.

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Zacks Rank continued...

Momentum – Hercules Incorporated (HPC)

Things are changing at Hercules Incorporated (HPC). HPC is a Zacks #1 Rank stock and reported earnings for the March 2006 quarter on Apr 26, 2006, at 24 cents per share, up 26% from last year’s 19 cents. The report was in line with analysts’ expectations. Sales were about even with a year ago at $527 million, versus last year’s $539 million, but income rose 187% to $26.4 million. Read the full analysis on HPC at: http://at.zacks.com/?id=2507.

Value - The Hartford Financial Services Group, Inc. (HIG)

The Hartford Financial Services Group, Inc. (HIG), a Zacks #1 Rank stock, has topped the Street’s earnings estimate in 14 out of the past 15 quarters, most recently by 22.5%. The company raised its full-year 2006 earnings per share guidance back in late-April. HIG has a price-to-book (P/B) multiple of 1.8. The company has a return on equity of 16%, compared to the industry average of 13%. Read the full analysis on HIG at: http://at.zacks.com/?id=2508.

 
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• Zacks Wealth Management: Own all the Zacks #1 Ranked stocks in a portfolio managed by Zacks. Learn more at: http://at.zacks.com/?id=2555.

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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) Nadine Wong, Editor of BioTech Stock Report
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Okay. The last several weeks for the biotech sector have been nothing to brag about and it’s best to sweep them under the rug. The correction that started at the end of February has continued through April, but it appears that stocks were due for a pause and were driven by profit-taking, concerns about the overall state of the healthcare sector (Medicare reimbursement, stock option expenses), and the unpredictable FDA. Despite, the market’s pessimism, the recent sell-off should spark a new rally in this sector lured with attractive stock valuation. The industry’s fundamentals remain strong and most earnings-driven companies did meet first quarter estimates. Besides there are numerous upcoming drug approval decisions and potential for pick-up in M&A activity should drive new money into the sector.

For instance, with the release of first quarter earnings, Amgen (AMGN), Genentech (DNA) and Genzyme (GENZ) have been hit with a wave of selling, but for these companies, it may be reaching its end.

Amgen reported decent first quarter earnings, but it was not enough to satisfy investors. Nadine Wong and her team think they wanted really positive news to offset the CERA litigation, which will be a drawn out process. Amgen has filed a complaint with the U.S. International Trade Commission (ITC) requesting an investigation of Roche's CERA and a permanent exclusion order prohibiting importation based on an infringement of Amgen's intellectual property. The ITC should decide within 30 days whether to investigate; the investigation process usually takes 15-18 months. Separately, Roche filed three motions in the District Court of Massachusetts in response to Amgen's complaint; a response to these motions is expected by April 25th. At the same time, Roche intends to file CERA’s BLA this month. As a result, investors’ jitters have been reflected in Amgen’s share price, which has exhibited a downtrend and has broken through the 50-, 100-, 200- and 250-day moving averages. Once the market has factored in Amgen’s own earnings growth guidance in the low-to-mid-teens, Amgen shares are likely to recover and show support in the low $70’s before reaching toward the $80 level.

New investors should take advantage of any stock weakness. Wong and her team continue to believe Genentech should represent a core holding as the company remains in a unique position with multiple product launches that represent multibillion dollar opportunities. The company will continue to show potential upside in product sales and earnings given expanding use of Avastin (non-small cell lung cancer) and Herceptin (metastatic breast cancer and front-line breast cancer) in new indications, and the recent market launch for Rituxan in rheumatoid arthritis as well as the anticipated market launch of Lucentis in age-related macular degeneration in the third quarter of 2006. Importantly, the company’s outlook remains robust with projected near-term earnings growth of 45-55% (up from 40-50%) based on revenue growth that Wong and her team expect to be over 30% with improving operating margins to the mid-30s.

As for Genzyme, its earnings’ shortfall was blamed on lower-than-expected sales of three of its drugs: Fabrazyme, Synvisc and Hectorol, and the costs of preparing to launch Myozyme in Europe, the U.S continued clinical trial and manufacturing infrastructure expansion.

Even with the shortfall, yearly guidance for revenues and earnings were reiterated and management has historically been very good with guidance, so there's little reason not to believe them. Besides, Genzyme has a very strong pipeline of drugs in various stages of clinical trial. The drugs (Tolevamer for C. difficile colitis, Myozyme in late-onset patients, Synvisc for additional indications, sevelamer carbonate for earlier stage CKD patients, DX-88 for HAE, and Clolar for adult AML) that make their way through will create a new stream of revenue.

Based on historical valuations, the large-cap biotech group is trading close to historical lows. This implies that concerns about maturing products, upcoming competition, and growth rates are already priced in. And despite the concerns on the lack of leadership at the FDA and several disappointing decisions about product approvals, there are still numerous upcoming potential drug approvals that should drive momentum in the sector. In addition, several products should be filed for approval shortly.

Given that several large pharmaceuticals players are in need to replenish the pipeline to drive future revenue growth and with the recent correction in valuation should increase M&A activity, thereby driving a rally in the sector.

 
About Nadine Wong’s BioTech Stock Report newsletter:

BioTech Stock Report is an `information integrator` specializing in biotechnology stocks. We bring together the mass of medical scientific data that is available and interpret it for you. Each report gives a detailed rationale explaining the technology, examining new products, evaluating their potential, the markets and the likely impact it has on a company’s future. http://at.zacks.com/?id=2397.
 

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MORE FEATURED EXPERTS...

b) The Economy is on a Good Path

Jim Collins says the only major obstacle to stocks appears to be energy prices and any resulting inflation. Read his outlook. More...
 

c) Lasting Trend Changes Thinking

Mutual fund expert Steve McKee says the market’s P/E is still too high. Discover what he means. 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

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

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• Broker Recommendation changes
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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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Regards and Happy Investing,

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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.

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