For Immediate Release
Chicago, IL – April 25, 2012 – Zacks Equity Research highlights Intuitive Surgical, Inc. ( (ISRG - Analyst Report) as the Bull of the Day and Leggett & Platt, Inc. ( (LEG - Analyst Report) as the Bear of the Day. In addition, Zacks Equity Research provides analysis on Bank of America Corporation ( (BAC - Analyst Report), Morgan Stanley ( (MS - Analyst Report) and Citigroup Inc. ( (C - Analyst Report).
Full analysis of all these stocks is available at http://at.zacks.com/?id=2678.
Here is a synopsis of all five stocks:
Bull of the Day:
We upgrade our rating for Intuitive Surgical, Inc. ( (ISRG - Analyst Report) to Outperform. First quarter earnings per share of $3.50 beat the Zacks Consensus Estimate. Gynecology and prostatectomy procedures did well in 2011, as did certain emerging procedures.
Recurring revenue continues to grow as a proportion of sales. In the interim, the installed base of Intuitive is expanding as more hospitals feel compelled to upgrade their technology. Overall, a proper valuation is appropriate given positive factors such as Intuitive's leading position in robotic surgery, a growing list of emerging procedures, barriers to entry, sizeable cash balance and no debt.
We like the company's da Vinci system, particularly its unique status as an enabler of robotic, minimally invasive surgery. Our target price of $701 is based on a P/E of 48.2x our fiscal 2012 EPS estimate.
Bear of the Day:
Leggett & Platt, Inc.'s ( (LEG - Analyst Report) fourth-quarter 2011 earnings of $0.22 per share were up from the prior-period level, but we believe it was inorganic growth primarily spurred by the company's share buyback program. Moreover, during the quarter, Leggett's gross margin contracted 90 basis points to 16.7% due to higher input costs.
Further, the company's operating margin shriveled 470 basis points to 1.5% due to increased selling and administrative expenses. we believe that intense competition from global and regional players, volatility in raw material prices and exposure to adverse foreign currency translations may undermine the company's future growth prospects and profitability.
Currently, we are maintaining a long-term Underperform recommendation on the stock. Our target price of $20.00, 15.3x 2012 EPS, reflects this view.
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Making Sense of Bank Earnings Is Not Easy
Looking at the first quarter 2012 earnings releases of the major U.S. banks, you can see hefty accounting-related gains or losses are primarily responsible for the outsized differences between reported and 'recurring' numbers (as calculated by analysts and others). In addition, the difficulty in accounting adjustments and consequently the difference in calculations results in several 'recurring' numbers.
If we take a look at the big Wall Street firms that reported last week, we can see that their first quarter numbers were positively or negatively impacted by certain accounting adjustments and several one-off items. Though identifying these items was not difficult, analysts were not in agreement with respect to interpretation.
Bank of America Corporation’s ( (BAC - Analyst Report) first quarter profit declined 68% from the year-ago quarter because of a $4.8 billion accounting charge. Excluding the charge, its earnings per share would have been substantially better than the consensus expectation. We at Zacks recorded the company as having come out with a big positive surprise, though others have treated the company's multiple supposedly non-recurring items differently.
In the case of Morgan Stanley ( (MS - Analyst Report), on a reported basis, first-quarter loss from continuing operations came in at 5 cents per share, compared with an income of 51 cents in the year-ago quarter. The deterioration was due to a hefty accounting-related impact on its revenues during the reported quarter. But as with BAC, the company's reported numbers turn into a strong positive surprise once adjusted for these accounting-related numbers. Excluding the accounting-related charge, the company posted 27% growth in earnings from continuing operations.
Citigroup Inc.’s ( (C - Analyst Report) 95-cents-a-share earnings came in lower than 99 cents earned in the year-ago quarter. Accounting charges of $1.3 billion was included in the result, causing the company to miss the consensus expectation of $1.01 per share. However, excluding accounting charges and many other one-off items, the company surpassed the consensus estimate.
It makes sense to adjust the banks' reported GAAP earnings for non-recurring items that do not have a direct bearing on its underlying business. But the process is far from simple. Take the example of one such accounting adjustment that has been constant in recent bank earnings: the debit-valuation adjustment (DVA).
The DVA relates to the value of the bank's debt during the period. According to this accounting measure, banks are allowed to mark some of their debt to market. To simplify, if the market value of their debt instruments decrease, it can be interpreted as a decline in liabilities and reported as earnings. The reasoning for this rule postulates that the bank can realize gains by buying back its own debt instruments at a lower value. So the bottom line here is that higher risk of a bank’s defaulting on its debt implies bigger DVA gain.
Most of the firms actually do not buy back their own debt instruments, but they certainly report DVA gains if they recognize market value declines. The firms do this by widening credit spreads in the swaps market. Now, widening credit spreads implies deterioration in the credit-worthiness of a bank.
So, should the investors be happy with the incremental earnings, at the cost of worsening credit-worthiness of banks?
Get the full analysis of all these stocks by going to http://at.zacks.com/?id=2649.
About the Bull and Bear of the Day
Every day, the analysts at Zacks Equity Research select two stocks that are likely to outperform (Bull) or underperform (Bear) the markets over the next 3-6 months.
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