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Zacks #1 Stocks on the Move 03/31/2015

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Analyst Blog

Intrexon-Merck KGaA Team Up for CAR-T Cancer Therapies

Posted Tue Mar 31, 06:26 pm ET

by Zacks Equity Research

Intrexon Corporation XON and Merck KGaA’s MKGAF biopharmaceutical business Merck Serono announced the signing of an exclusive strategic collaboration and license agreement for the development and commercialization of chimeric antigen receptor T-cell (CAR-T) cancer therapies.

Terms of the Deal

Per the deal, Intrexon will receive research funding from Merck KGaA for the first two targets of interest selected by the latter. Moreover, Intrexon is eligible to receive up to $826 million in development, regulatory and commercial milestones and tiered royalties on product sales, apart from an upfront payment of $115 million. Intrexon is also entitled to further payments upon achievement of certain technology development milestones.

With this collaboration, Intrexon provides Merck KGaA with exclusive access to its proprietary and complementary suite of technologies, including the RheoSwitch platform. While Merck KGaA will nominate targets for developing CAR-T products, Intrexon will be responsible for all platform- and product development-based activities until the submission of investigational new drug (IND) application.

In this scenario, Intrexon’s partner ZIOPHARM Oncology ZIOP will bear the burden of any additional research and development expenditure. Once the candidates progress to the IND stage, the programs will be transferred to Merck KGaA for further development and commercialization. Merck KGaA will take the lead during the IND filing, pre-IND interaction with regulatory bodies, clinical development and commercialization.

Intrexon and ZIOPHARM will equally share the upfront and milestone payments, royalties and other economic provisions under the former’s collaboration with Merck KGaA.

However, Intrexon retains the right to explore targets independently. ZIOPHARM and Intrexon may conduct research and development on other CAR-T candidates, with Merck KGaA having the opportunity to opt-in during clinical development.

Both Intrexon and partner ZIOPHARM believe that their oncology programs are positioned to benefit hugely from the collaboration with Merck KGaA. Not only should the alliance expedite the development of their synthetic immuno-oncology pipeline, Merck KGaA’s expertise in the field of oncology and market presence should help the commercialization of potential products under the collaboration.

Intrexon carries a Zacks Rank #1 (Strong Buy). Another well-ranked stock in the health care sector is Cytokinetics, Inc. CYTK. It carries the same rank as Intrexon.

Raytheon to Collaborate with Estonia on Cyber Security

Posted Tue Mar 31, 06:24 pm ET

by Zacks Equity Research

Raytheon Company RTN and the Estonian Ministry of Defense have agreed to collaborate for cyber security.

The collaboration took place during the recent visit of Mikk Marran, Permanent Secretary of the Estonian Ministry of Defense, to Washington. Detailed areas for cooperation will be discussed when Raytheon and Estonia Ministry of Defense’s representatives meet in Tallinn. Initially, it will focus on improving the country’s cyber defense capabilities.

Through this collaboration, Raytheon, along with the information technology infrastructure of Estonia, expects to address the challenges to cyber threats that every country is currently facing. Raytheon expects to realize huge benefits from this collaboration, going forward.

At the macro level, there has been a gradual shift in defense spending patterns. Demand seems to have shifted toward high-tech intelligence equipment, cyber security, from conventional big guns and heavy armor.

In light of the security breaches and rising threats, the U.S. government has realized the need for cyber security. Consequently, higher investments in cyber defense and cutting-edge defense systems have been suggested by the FY16 defense budget proposal. The Pentagon has proposed a funding of $5.5 billion for cyber security upon realizing that the weapons program in the U.S. is exposed to cyber attacks.

Raytheon has also been spending heavily on its technology and acquiring companies in the field of cyber security to strengthen its portfolio of cyber defense solutions. In Nov 2014, it acquired surveillance and cyber security company, Blackbird Technologies to boost its intelligence business and open opportunities for exploring the prospects of cyber.

Thus Raytheon now boasts a strong portfolio of cyber security defense solutions, which benefits it tremendously as evident from the latest collaboration.
Raytheon, however, struggled to register new bookings in the fourth quarter that stood at $7,109 million compared with $7,517 million in the year-ago period, reflecting a 5.4% decline. Total backlog at the end of 2014 was $33.57 billion, down 0.3% year over year.

Raytheon has a Zacks Rank #4 (Sell). Better-ranked stocks in the same sector are Northrop Grumman Corp. NOC, Rockwell Collins Inc. COL and Spirit AeroSystems Holdings, Inc. SPR, each carrying a Zacks Rank #2 (Buy).

RenaissanceRe Banks on Acquisitions, Cat Losses a Drag

Posted Tue Mar 31, 06:19 pm ET

by Zacks Equity Research

We issued an updated research report on RenaissanceRe Holdings Ltd. RNR on Mar 30, 2015.

Last month, the company reported fourth-quarter 2014 earnings that surpassed the Zacks Consensus Estimate but declined year over year on lower revenues and increased expenses. While lower premiums earned and decline in net investment income pulled down revenues, higher acquisition and corporate costs led to the year-over-year increase in expenses.

RenaissanceRe has been undertaking prudent inorganic growth strategies to enhance its operations. Toward this end, the company acquired Platinum Underwriters Holdings, Ltd. earlier this month. The deal is expected to enhance book value, improve earnings per share and boost the long-term value of the business for its stakeholders. Additionally, the company’s principal joint ventures position it well to enhance its underwriting capabilities and are working with capital partners to improve cedings.

The company has also been witnessing a rise in gross premiums written over some years. Although gross premiums written decreased in 2014, the setting up of some large financial lines in mortgage insurance raises optimism. Notably, both the Lloyd’s segment and specialty reinsurance segment performed well in 2014 recording an increase in gross premiums written.

Moreover, RenaissanceRe deploys capital efficiently to enhance shareholders’ value. Toward this end, the company’s’ board of directors approved an increase in its share repurchase program in Nov 2014 and hiked its quarterly dividend in Feb 2015. RenaissanceRe also scores strongly with the credit rating agencies.

The aforementioned positives are causing analysts to raise their estimates. Over the last 30 days, the Zacks Consensus Estimate for 2015 moved up 1.5% to $8.70 per share. The Zacks Consensus Estimate for 2016 also increased 1.2% to $9.32 per share over the same period.

However, natural catastrophes have been hampering RenaissanceRe’s profits since 2008. Subsequently, underwriting income and combined ratio have been under pressure. Moreover, a continued softening of market conditions has largely impacted premiums from managed catastrophes. The unpredictable nature of such weather-related events continues to raise caution for the upcoming quarters, thereby posing operating risks.

Also, the investment portfolio of RenaissanceRe is exposed to the weak credit and capital markets. Declining total returns on the fixed maturity investment portfolio led to lower net investment income. Concern regarding this metric persists as it remains vulnerable to interest rate risk. Moreover, RenaissanceRe faces substantial competition in the catastrophe insurance and reinsurance segments that limits its market share, particularly in the emerging markets.

RenaissanceRe currently carries a Zacks Rank #3 (Hold). Better-ranked stocks in the property and casualty space include Allied World Assurance Company Holdings, AG AWH, Arch Capital Group Ltd. ACGL and Heritage Insurance Holdings, Inc. HRTG. All three stocks sport a Zacks Rank #1 (Strong Buy).

Keurig (GMCR) Boosts K-Cup Portfolio with Reily Foods Deal

Posted Tue Mar 31, 06:17 pm ET

by Zacks Equity Research

Closely following the expansion of manufacture and distribution deal with Dunkin’ Brands Group Inc. DNKN and Dr Pepper Snapple Inc DPS, last month, Keurig Green Mountain Inc. GMCR entered into a multi-year manufacturing and distribution agreement with Reily Foods Company of New Orleans, LA.

Per the agreement, Keurig Green Mountain will have the exclusive right to manufacture three varieties of hot beverages — New England brand coffee, New Orleans Famous French Market brand coffee, and Luzianne brand iced tea pods — in K-Cup packs for Keurig hot brewing systems.

The new K-Cup packs will be available from fall 2015 in at-home and away-from-home channels in the United States and Canada.

Keurig Green Mountain produces coffees, teas and other hot beverages which are sold in K-Cup and Vue portion packs. These portion packs can be used on single-serve Keurig brewers for making hot beverages.

After gaining success and attaining dominance in the single-serve brewing category for making hot beverages, the specialty coffee retailer is now stepping into the cold beverage market. The new Keurig brewer — Keurig Cold Machine — which will make sodas, sports drinks and other beverages at the touch of a button, is scheduled to be launched soon. Like its coffee machines, the cold machine would also use pods for the various drinks.

Meanwhile, to increase its brand power, Keurig Green Mountain has entered into a 10-year partnership with the beverage giant The Coca Cola Company KO and Dr Pepper Snapple. Under the deal, the coffee maker will exclusively produce Coca-Cola and Dr Pepper branded pods for the Keurig Cold Machine to make cold beverages. Coca-Cola will also work with Keurig Green Mountain to develop and launch the latest version of Keurig single-cup brewer.

Through these agreements, Keurig Green Mountain, carrying a Zacks Rank #3 (Hold) is aligning with major beverage brandsto support a range of consumer choices and taste profiles under its single-cup brewing system.

Fortune Brands Adds Norcraft to Cabinet Business

Posted Tue Mar 31, 06:14 pm ET

by Zacks Equity Research

In line with its strategy of achieving growth through acquisitions, Fortune Brands Home & Security, Inc. FBHS announced that it has penned a deal to buy kitchen and bathroom cabinetry producer, Norcraft Companies Inc. Shares of the company jumped 6.1% following the announcement.

This acquisition, which is anticipated to close in the second quarter of 2015, will cost Fortune Brands $25.50 per share, with an enterprise value of nearly $600 million. The company intends to sponsor this deal with its current credit facility.

Further, Fortune Brands plans to extend a tender offer for all Norcraft shares over the next fortnight, after which the latter will become part of the former’s cabinet business. However, the entire deal is subject to various terms and conditions, including the tender of a majority of Norcraft’s stock.

Fortune Brands currently carries a Zacks Rank #4 (Sell). The company recently posted its fourth-quarter 2014 results, wherein both top and bottom lines came in below expectations.

The company’s quarterly adjusted earnings from continuing operations of 44 cents per share soared 37.5% year over year but fell short of the Zacks Consensus Estimate of 50 cents. Net sales advanced 7.8% year over year to $1,039.6 million, backed by growth witnessed in most segments. However, sales missed the Zacks Consensus Estimate of $1,131 million.

Coming back to yesterday’s announcement, the addition of Norcraft to Fortune Brands is likely to benefit both companies, as it will combine two premium cabinet businesses. Norcraft, which reported annual sales of $376 million in 2014, is renowned for its solid relations in the dealer network along with its spectacular management.

With its robust experience, Norcraft is likely to enhance Fortune Brands’ growth by expanding its product range and market reach. On the other hand, Norcraft will leverage Fortune Brands’ strong resources and scale of operations. Overall, both the companies are deemed to be a complementary fit, which will likely drive results and boost shareholder value.

Fortune Brands has been keen on achieving growth via strategic acquisitions, given its solid balance sheet which provides it with financial flexibility. As evidence, the company recently acquired Sentry Safe, a leading manufacturer of personal safes. The acquisition is expected to widen the offerings of the company’s Master Lock division, while adding to its leading market position and strong consumer base worldwide.

Stocks to Consider

Better-ranked stocks in the retail sector include Restoration Hardware Holdings, Inc. RH, Ross Stores Inc. ROST and The Kroger Co. KR, each with a Zacks Rank #2 (Buy).

IBM Announces $3B IoT Investment for Enterprise Market

Posted Tue Mar 31, 06:12 pm ET

by Zacks Equity Research

IBM Corporation IBM has recently announced its investment plans regarding Internet of Things (IoT) for the enterprise market. The company plans to invest $3 billion over the next four years to set up a new IoT unit as well as a cloud-based open platform for clients and ecosystem partners to build IoT solutions.

The investment mainly targets expansion in the enterprise IoT business with IBM’s new industry-specific cloud data services and developer tools. We believe that the latest investment will support IBM’s Smarter Planet and Smarter Cities.

With this investment plan, this Zacks Rank #3 (Hold) company plans to target three key areas for enterprise development. IBM aims to expand its IoT Cloud Open Platform for Industries by offering new analytics services that clients, partners and IBM will use to design and deliver vertical industry IoT solutions.

In addition, the company expects to promote the Bluemix IoT Zone by offering new IoT services as part of its Bluemix platform-as-a-service. This will help users integrate IoT data with cloud and deploy IoT apps.

IBM will also invest in the expansion of the ecosystem of IoT partners — AT&T, ARM, Semtech and The Weather Company — to ensure secure and seamless integration of data services and solutions on its open platform.

Why IoT?

Call it a digital or industrial revolution, IoT is here to stay and offer lucrative business opportunities to IT vendors. The IoT concept foresees billions of connected devices and systems with applications ranging from sensors and mobile devices to home appliances and cars.

According to market research firm IDC, the worldwide market for IoT is poised to surge 133% to $3.04 trillion in 2020. In addition, the number of IoT-connected units will reach approximately 30 billion in 2020. Apart from IDC, research firm Gartner expects a boom in the IoT market and expects mainstream adoption to accelerate as per its annual "Hype Cycle" report.

Further, Business Intelligence estimates that among the three major markets — enterprise, consumer, government — the largest market will be that of enterprise, accounting for 40% of the total IoT device market in 2019, representing 9.1 billion devises. In addition, spending on enterprise IoT products and services is expected to reach $255 billion globally by 2019 representing a 5-year CAGR of 40%.

Therefore, it is not surprising that technology giants are flocking to the scene to grab their share of the IoT for enterprise market.

Companies in the IoT Business

Apart from IBM, another major company which is investing significantly is Cisco Systems, Inc. CSCO. Last year, the network equipment manufacturer announced investment of $150 million over the next two to three years to support IoT startups worldwide. Reportedly, the company believes that IoT for enterprise has the potential to reach $14.4 trillion by 2022, which leaves a huge scope for IT vendors to capitalize on the current boom.

Further, the world’s largest mobile chipset developer, Qualcomm Inc. QCOM is making its presence felt in the IoT market by acquiring companies that already have a strong foothold in this space. In 2014, the company announced the acquisition of U.K.-based CSR plc, which is expected to boost Qualcomm’s growth categories like Internet of Everything (IoE) and automotive infotainment by enhancing product portfolio and increasing channels and customer base. (Read more: Qualcomm to Acquire CSR; Eyes Internet of Things Market)

Another semiconductor maker, MagnaChip Semiconductor Corp. MX, also joined the bandwagon with the launch of its process technology that supports low-power IoT applications and targets end markets such as mobiles, wireless sensors, wearables and energy harvesting. (Read more: MagnaChip Aims for Internet of Things with New Technology)


We believe that stiff competition among companies will foster organic growth in the IoT market and make it the next platform for the proliferation of information technology, especially in the enterprise market. While this technology also comes with significant drawbacks such as security issues, lack of proper standards (and hence privacy issues), and leads to over-dependence on technology, we are hopeful that future advancement, further technological development and increased awareness among end users will drive adoption going forward.

Archer Daniels (ADM) to Buy European Oil Bottling Company

Posted Tue Mar 31, 06:10 pm ET

by Zacks Equity Research

Moving ahead with its strategy of enhancing returns by focusing on growing its core business and making strategic acquisitions, Archer Daniels Midland Company ADM penned a deal to buy a privately-owned oil bottling company, AOR N.V. Though the financial terms of the deal were not disclosed, it is subject to regulatory approvals.

A leading company in the European packaged oils industry, AOR is a bottler and distributor of edible oils in Europe. The customers of this Antwerp, Belgium-based company are spread across Europe, mainly in the northwest regions including Belgium, the Netherlands and Luxembourg. The company also has a substantial export business. The primary brands sold by the company include Oilio and Coroli.

The acquisition of this European company is expected to open doors for Archer Daniels’ entry into the continental European retail and foodservice markets. Additionally, it will provide avenues to export value-added products across the globe. This will help the company to expand its product offerings as well as its customer base in Europe, providing opportunities for enhanced returns.

Apart from expanding into newer markets, this acquisition is likely to boost the demand for oils produced by Archer Daniels’ European units.

Archer Daniels has been strategically undertaking steps to manage its business portfolio, as evident from its actions involving the smooth integration of the WILD Flavors acquisition, the divestment of its South American fertilizer business and agreements to sell its global cocoa business to Olam and chocolate business to Cargill.

These are likely to help the company in realizing value from its businesses and invest the same in the best possible resources to enhance returns and minimize earnings volatility.

Archer Daniels currently holds a Zacks Rank #3 (Hold). Better-ranked stocks in the same sector include Adecoagro S.A. AGRO and Amira Nature Foods Ltd. ANFI, both carrying a Zacks Rank #2 (Buy). Another stock worth considering in the related food industry is SUPERVALU Inc. SVU with a Zacks Rank #2.

Alcoa to Curtail Smelting at Brazilian Facility

Posted Tue Mar 31, 06:03 pm ET

by Zacks Equity Research

Aluminum giant, Alcoa Inc. AA announced that it will curtail the remaining 74,000 metric tons of capacity at its Sao Luis facility in Brazil. In the upstream portfolio, Alcoa continues to take strategic actions, including reduction of high-cost operating smelting capacity, to create a globally competitive commodity business.

Once the Sao Luís facility is curtailed, Alcoa will have about 740,000 metric tons, or 21%, of its smelting capacity, offline. The procedure is expected to be complete by Apr 15, 2015. As a result of the curtailment the company expects to incur restructuring-related charges in the first quarter between $10 million and $15 million after-tax, or 1 cent per share.

On Mar 6, 2015, the company stated that it will evaluate 500,000 metric tons of smelting capacity and 2.8 million metric tons of refining capacity for possible curtailment, closure or sale. This curtailment adds to the 85,000 metric tons of capacity idled at Sao Luis in May 2014 and the 12,000 metric tons curtailed in Oct 2014. However, Alcoa stated that the refinery at Sao Luis will continue normal operations and will remain unaffected. .

Alcoa aims to move down the global aluminum cost curve to the 38th percentile and the global alumina cost curve to the 21st percentile by 2016. These actions will be taken in consultation with its stakeholders, and after thoroughly reviewing and determining the best outcome for them.

Few days ago, Alcoa also announced that it intends to cut 443,000 metric tons per year (mtpy) of alumina refining capacity at the Suralco facility in Suriname. Suralco, which is a part of the Alcoa World Alumina and Chemicals group of companies, is owned 60% by Alcoa and 40% by Alumina Limited. The curtailment is expected to be complete by Apr 30, 2015. The company remains committed to working with the Suriname government in order to find the best solution for the Suralco facility.

Alcoa currently carries a Zacks Rank #3 (Hold).

Better-ranked companies in the mining space include NovaCopper Inc. NCQ, Energy Fuels Inc. UUUU and Denison Mines Corp. DNN. While NovaCopper and Energy Fuels sport a Zacks Rank #1 (Strong Buy), Denison Mines holds a Zacks Rank #2 (Buy).

Genworth Suffers Weakness in LTC Business, Estimates Down

Posted Tue Mar 31, 06:01 pm ET

by Zacks Equity Research

We issued an updated research report on Genworth Financial Inc. GNW on Mar 30, 2015.

Genworth incurred loss in the fourth quarter that compared unfavorably with the Zacks Consensus Estimate and year-ago earnings due to substantial loss at its long-term care (LTC) business. With respect to the earnings trend, the company delivered a negative surprise in three of last four quarters with an average beat of -384.1%.

Genworth has been witnessing lower sales due to the introduction of products and pricing changes in the U.S. Life Insurance Division implemented over the past couple of years. Long-term care insurance sales continue to deteriorate. Moreover, loss ratios of long-term care insurance business have been increasing over the past several years and have ranged from 63% to 129% over the last five years.

Loss ratio in 2014 deteriorated 6,300 basis points year over year due to loss recognition testing in the fourth quarter and comprehensive claims review in the third quarter.

Additionally, investment results continue to witness a downturn, with 2014 not being an exception. While net investment income witnessed about 1% decline, annualized weighted-average investment yields declined 10 basis points due to lower reinvestment yields on higher average invested assets. Given a soft interest rate environment, we do not expect any immediate turnaround in investment results.

This Zacks Rank #5 (Strong Sell) life insurer is witnessing downward estimate revisions over the last 60 days as almost all the estimates moved south. The Zacks Consensus Estimate moved down by 26.7% to $1.01 for 2015 and 12.7% to $1.24 for 2016.

Stock to Consider

While we presently avoid Genworth, some better-ranked life insurers are American Equity Investment Life Holding Co. AEL, Universal American Corp. UAM and Voya Financial, Inc. VOYA. All these stocks sport Zacks Rank #2 (Buy).

Kimco and RioCan Buy Stake in Each Other's JVs

Posted Tue Mar 31, 05:58 pm ET

by Zacks Equity Research

In a significant development, Kimco Realty Corporation KIM, the New Hyde Park, NY-based retail real estate investment trust (“REIT”) and RioCan Real Estate Investment Trust (“RioCan”), the largest REIT in Canada, have inked a mutually beneficial strategic deal.

As per the agreement, the Canadian REIT will acquire 50% interest in Kimco through two joint venture (“JV”) Canadian properties, Brentwood Village and Grand Park; while the U.S. REIT will acquire 80% stake of RioCan in the JV shopping center Montgomery Plaza in the Dallas/Fort Worth area.

Located at Calgary, Alberta, Brentwood Village is a grocery-anchored shopping center covering a gross leasable area of 294,310 square feet. The other property, Mississauga, Ontario-based Grand Park, is a new-format retail property spanning 118,637 square feet. Acquisition of remaining stakes in these two high-quality properties in a fiercely competitive market is likely to benefit RioCan going forward.
On the other hand, the U.S.-based Montgomery Plaza is a 465,011-square feet shopping center. Kimco’s acquisition of interest in this property not only reflects an excellent relationship between the two REITs, but is also likely to support the company’s goal of reducing the number of its JV properties. Further, this deal will add value to Kimco’s prominent portfolio in the core markets.

Currently, Kimco carries a Zacks Rank #3 (Hold).

Investors interested in the retail REIT may consider stocks like Acadia Realty Trust AKR, American Realty Capital Properties, Inc. ARCP and National Retail Properties, Inc. NNN. All these stocks hold a Zacks Rank #2 (Buy).

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