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We believe the company largely benefits from its extensive diversifications into a variety of businesses including manufacturing, oil and gas drilling services, gaming entertainment, real estate activities, medical product development operations and various other investment activities.
Of late, the company acquired Nation Beef Packaging Company, LLC which added a new dimension to its existing portfolio. Starting the first quarter 2012, the company commenced with its beef processing services, which contributed roughly 74% of the quarter’s revenue.
We believe LUK will benefit from extensive diversifications into a variety of businesses. Moreover, its strategy to grow through acquisitions of companies in crisis increases its profitability.
However, rising cost of cattle, animal health and disease issues remain the prime causes of concern. Geopolitical risks act as major impediments to international trade growth. Beef Processing Services accounted for the major portion of cost of sales in the quarter. Cattle price, which is beyond the company’s control, jeopardizes the revenue contribution from the business, leading to reduced margins.
Moreover, general housing market weakness, investments in volatile materials, intense competition are impediments to steady growth for the company. Anticipating in line results, we maintain a Neutral recommendation.
The current Zacks Consensus Estimate for the second quarter of 2012 is 39 cents, representing a year-over-year decline of 47.30%. Estimates for the fiscal years 2012 and 2013 are at $1.58 and $1.59, respectively.
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