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Zacks #1 Stocks on the Move 07/31/2014

Company Name Symbol %Change
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Analyst Blog

Arthur J Gallagher Q2 Earnings Miss Estimates, Revenues Beat

Posted Thu Jul 31, 12:30 pm ET

by Zacks Equity Research

Arthur J Gallagher & Co. (AJG) reported second-quarter 2014 operating net earnings of 70 cents per share, which missed the Zacks Consensus Estimate by a couple of cents and declined 4.1% year over year. Higher expenses affected the results.
 

 

Behind the Headlines

Total revenue of Arthur J Gallagher & Co. amounted $1.2 billion, surpassing the Zacks Consensus Estimate by 22.3% and improving 51.3% year over year. Top-line growth was driven by solid performance in both the segments of Arthur J Gallagher.

Total commissions and fees earned increased 28% year over year to $856.9 million in the reported quarter.

Revenues from clean coal activities of Arthur J Gallagher & Co. increased more than three times in the reported quarter to $262.8 million from $72.2 million in the year-ago quarter.

Arthur J Gallagher & Co.’s total expense rose 57.2% year over year to $1.1 billion in the quarter. The higher expenses was mainly owing to increase in compensation cost and operating expenses, along with a significantly higher cost of revenues from clean coal activities.

Earnings before interest, tax, depreciation, amortization and change in estimated acquisition earnout payables (EBITDAC) in the quarter improved 38% while EBITDAC margin expanded 194 basis points.

Arthur J Gallagher & Co. closed 17 acquisitions with annual revenue of $497.1 million, comparing favorably with 5 acquisitions with annual revenue of $35.9 million in the year-ago quarter.

Segment Results

Brokerage Segment: Total revenue of $742 million increased 34% year over year, driven by a 3.1% improvement in organic commissions and fees in the reported quarter.

Total expense rose 38.3% year over year due to increase in compensation, operating and amortization expense.

Total commissions and fees earned increased 3.1% year over year to $535.3 million in the quarter.

Adjusted EBITDAC improved 42.9% year over year to $213.3 million.

Risk Management Segment: Total revenue amounted to $168.1 million, increasing 9% year over year. Organic fees rose 7.6% from the year-ago quarter.

Total expense in the reported quarter increased 8.5% year over year due to higher compensation and operating expense.

Adjusted EBITDAC increased 8.5% year over year to $28.0 million.

Corporate Segment: Total revenue of $268.6 million increased more than three times from the year-earlier quarter.

Expenses more than doubled to $318.6 million in the quarter.

Financial Update

Total assets of Arthur J Gallagher & Co. at the end of second-quarter 2014 were $10 billion, increasing 46% from $6.86 billion as of the 2013-end.

Cash and cash equivalents improved to $973.5 million at the reported quarter-end from $298.1 million at the end of 2013.

Arthur J Gallagher & Co. Gallagher had $2,225.0 million of borrowings from private placements as of Jun 30, 2014, out of which $100.0 million is due in August 2014. It also had $153.0 million of short-term borrowings under credit facility at the end of the reported quarter.

On Jun 24, 2014, Arthur J Gallagher & Co. entered into a note purchase agreement for $700 million of senior unsecured notes. On June 16, 2014 the insurance broker entered into a revolving loan facility providing funding for the three acquired Australian and New Zealand premium finance subsidiaries.  It comprises four tranches of approximately $210.0 million, of which $139.0 million was outstanding at June 30, 2014.

Zacks Rank

Arthur J Gallagher & Co currents has a Zacks Rank #3 (Hold).

Performance of other Insurance Brokers

Validus Holdings, Ltd. (VR) reported second-quarter 2014 net operating income of $1.39 per share, which missed the Zacks Consensus Estimate by 4.1% but improved 35% year over year.

Brown & Brown Inc. (BRO) posted an operating net income of 38 cents per share for second-quarter 2014, falling short of the Zacks Consensus Estimate by 7.3%. However, the figure marked a year-over-year increase of 8.6% based on higher revenues.

Aon plc’s (AON) second-quarter 2014 operating earnings of $1.25 per share exceeded the Zacks Consensus Estimate of $1.20 and rose 13% year over year.

DIRECTV Q2 Earnings Beat Estimates on Strong Subscriber Gain

Posted Thu Jul 31, 12:25 pm ET

by Zacks Equity Research

The leading U.S satellite TV operator, DIRECTV (DTV) posted second-quarter 2014 financial results wherein both its top and bottom line surpassed the Zacks Consensus Estimate. Higher ARPU and strong margin expansion in the U.S. coupled with strong subscriber addition in the Latin American region may continue to boost business moving ahead.
 
Total revenue came in at $8,109 million, up 5.3% year over year and also above the Zacks Consensus Estimate of $7,700 million. Quarterly GAAP net income was $806 million or $1.59 per share compared with $660 million or $1.18 per share in the year-ago quarter. Moreover, earnings per share of $1.59 breezed past the Zacks Consensus Estimate of $1.52.
 

Quarterly adjusted operating profit before depreciation & amortization (OPBDA) was $2,156 million, up 3.6% year over year. Adjusted operating profit came in at $1,427 million, up 5.7% from the year-ago quarter.

DIRECTV exited second-quarter 2014 with $1,474 million of cash from operations compared with $1,374 million in the prior-year period. At the end of the reported quarter, DIRECTV had $2,290 million in cash & cash equivalents and $18,284 million of outstanding debt on its balance sheet compared with $2,180 million and $18,284 million, respectively, at the end of 2013.
 
DIRECTV U.S. Segment
 
Revenues from this segment totaled $6,272 million, up 5.5% year over year. Quarterly ARPU was $103.3 compared with $98.73 in the year-ago quarter. Quarterly operating profit before depreciation & amortization rose 5.9% to $1,748 million. Operating profit improved 6.3% year over year to $1,319 million.
 
Average monthly subscriber churn rate in the reported quarter was 1.55% as compared with 1.53% in the year-ago quarter. Quarterly net subscriber losses were 34,000 compared with 84,000 in the year-ago quarter. On Jun 30, 2014, the U.S. segment had 20.23 million subscribers, up 1% on an annualized basis.
 
In the U.S., the pay-TV operators are facing intense competition from large telecom operators like AT&T, Inc. (T) and Verizon Communications (VZ). Moreover, availability of low-cost video streaming companies like Netflix Inc. (NFLX) and Hulu will further increase customer churn moving ahead. 
 
DIRECTV Latin America Segment
 
This segment posted revenues of $1,789 million, up 6.1% year over year. Quarterly ARPU was $48.88 as against $51.13 in the prior-year quarter. Quarterly operating profit before depreciation & amortization fell 3.7% to $438 million while operating profit decreased 2.1% to $142 million. 
 
Average monthly subscriber churn rate in the reported quarter was 2.1% versus 3.1% in the prior-year quarter. Quarterly net subscriber addition was 543,000 against 165,000 in the year-ago quarter. As of Jun 30, 2014, DIRECTV’s Latin America segment had approximately 12.472 million subscribers, up 12.6% year over year.
 
DIRECTV currently has a Zacks Rank #3 (Hold).

Pentair (PNR) Q2 Earnings in Line, Revises 2014 Guidance

Posted Thu Jul 31, 12:20 pm ET

by Zacks Equity Research

Pentair plc (PNR) reported second-quarter 2014 adjusted earnings of $1.04 per share, up 13% from 92 cents reported in the year-ago quarter. The results were in line with the Zacks Consensus Estimate.
 
Earnings came close to the upper end of the company’s guidance range of $1.02 to $1.05. Both the reported quarter and the year-ago quarter figures exclude repositioning costs, acquisition and redomicile-related expenses, gain/loss on sale of a business and certain tax items. Including these items, earnings were 82 cents per share in the reported quarter compared with 75 cents in the prior-year quarter.
 
 
 
 
Operational Update
 
Net sales decreased 3% year over year to $1.91 billion and fell short of both the Zacks Consensus Estimare as well as management's guidance of $1.95 billion. Excluding Water Transport, sales in the second quarter stood at $1.82 billion, up 2% year over year.
 
Cost of sales decreased 3% to $1.25 billion in the second quarter from $1.29 billion in the year-ago quarter. Gross profit in the reported quarter was $659 million, down 1% compared with $667 million in the prior-year quarter. Gross margin however expanded 50 basis points (bps) year over year to 34.5% in the quarter.
 
Adjusted operating income increased 5% year over year to $283 million. Operating margin increased 110 bps to 14.8%. Excluding the Water Transport business, adjusted operating income was at $279 million, a 13% increase year over year, while operating margin expanded 150 basis points to 15.2%.
 
Segmental Performance
 
Net sales in the Valves & Controls segment amounted to $634 million, up 2% year over year. Sales in the Energy vertical (60% of the segment sales) remained flat. Sales to the oil & gas industry increased 2% and sales to the power industry increase 1%. However, sales to the mining industry remained a deterring factor, decreasing 8%. Sales in the Industrial vertical (balance 40% of the segment’s sales) increased 6%.
 
Segment adjusted operating profit rose 7% to $89 million from $84 million in the year-ago quarter as price and productivity more than offset inflation during the quarter. Backlog grew 2% sequentially to $1.4 billion.
 
The Process Technologies segment reported revenues of $497 million, up 4% from the year-ago quarter. Sales in the Residential & Commercial vertical increased 10% while sales in the Food & Beverage vertical, dipped 1%. Segment adjusted operating earnings went up 17% year over year to $93 million. Price and productivity more than offset inflation, leading to the improvement. 
 
Sales from the Flow Technologies segment decreased 21% year over year to $378 million. Excluding the Water Transport business, the segment’s sales stood at $300 million, down 2% year over year. Sales in the Residential & Commercial vertical, decreased 1% and sales in the Infrastructure vertical, decreased 11%. Sales in the Food & Beverage vertical went up 2% and in the Industrial vertical grew 6%. Adjusted operating earnings however edged up 1% year over year to $42 million.
 
Revenues in the Technical Solutions segment grew 3% year over year to $409 million. Sales in the Infrastructure vertical increased 33% and in the Residential & Commercial vertical grew 15%. This helped offset a 1% decline in sales in the Industrial vertical and 11% drop in sales in the Energy vertical. Adjusted operating profit increased 10% year over year to $77 million from $70 million in the year-ago quarter.
 
Financial Update
 
As of Jun 28, 2014, cash and cash equivalents were $174.4 million, compared with $265 million as of Dec 31, 2013. The company recorded cash flow from operating activities of $415 million in the first nine month period of 2014, ended Jun 28, 2014, compared with $386.1 million in the prior-year comparable period. Free cash flow was $384 million in the reported quarter.
 
Total debt of the company increased to $2.7 billion as of Jun 28, 2014 from $2.55 billion as of Dec 31, 2013. The company’s debt-to-total-capital ratio stood at 32% as of Jun 28, 2014, compared with 29% as of Dec 31, 2013.
 
Sale of Water Transport Business
 
On Jul 28, 2014, Pentair`s board of directors approved the decision to exit its Water Transport business.
 
Guidance
 
Pentair lowered its adjusted earnings per share (EPS) guidance to the range of $3.65???$3.70 from the previous range of $3.85???$4.00 for full-year 2014. This reflects the exit of the Water Transport Business. The guidance represents an increase of around 220% over 2013 adjusted EPS of $3.05. 
 
The company expects sales to be around $7.15 billion, up 2% over 2013 sales. Pentair also expects free cash flow to remain in excess of 110% of net income in 2014.
 
Additionally, Pentair projects third-quarter 2014 adjusted EPS in the range of 93 cents to 95 cents, up around 15% from the prior-year quarter. Third-quarter revenues are expected to be approximately $1.76 billion, up 3% year over year.
 
Pentair also updated its 2015 earnings per share target to $4.50 from $5.00. This reflects the exit of the Water Transport business, ongoing Energy Capital expenditure deferrals, and ongoing economic headwinds. 
 
Pentair will benefit from the improvement in the North American residential market as well as global food and beverage market, stabilization across Europe, cost synergies from last year’s merger with Tyco Flow and consistent share repurchases. However, a weak Australian economy and fluctuations in exchange rates remain concerns.
 
Pentair delivers industry-leading prodcucts, services and solutions to meet diverse needs of customers related to water and other fluids, thermal management and equipment protection.
 
Pentair currently carries a short-term Zacks Rank #3 (Hold). However, other better-ranked stocks worth a look in the industrial products sector include AO Smith Corp. (AOS), Emerson Electric Co. (EMR) and Powell Industries, Inc. (POWL). All of these carry a Zacks Rank #2 (Buy).

Fortune Brands Delivers Robust Q2 Earnings, Outlook Positive

Posted Thu Jul 31, 12:10 pm ET

by Zacks Equity Research

As the soft trends seen in the beginning of the year turns around with demand and customer traffic picking up industry-wide, Fortune Brands Home & Security Inc. (FBHS) stands out with its robust second-quarter 2014 results, wherein its top and bottom line performances increased year over year. The company reported adjusted earnings per share of 55 cents, which rose 34.1% year-over-year and came in line with the Zacks Consensus Estimate.

 

 

Looking Deeper

Although net sales for the second quarter advanced nearly 10% year over year to $1,142.2 million, it fell short of Zacks Consensus Estimate of $1,169 million. Notably, the company registered a 12% increase in the consolidated home product segment sales, which includes the Kitchen & Bath Cabinetry, Plumbing & Accessories and Advanced Material Windows & Door Systems segments.

Adjusted EBITDA grew nearly 25% to $160.1 million, while EBITDA margin expanded 170 basis points (bps) to 14%. Adjusted operating income came in at $136.8 million, up 27.6% from the year-ago comparable quarter, with adjusted operating margin increasing 170 bps to 12%.

Segment Details

Sales at the Kitchen & Bath Cabinetry segment ascended 19% to $467.9 million, on the back of solid increases in dealer network coupled with robust remodel and repair mix and volumes. The segment reported a 31% rise in adjusted operating income, which came in at $46.3 million.

Plumbing & Accessories segment sales climbed 5% year over year to $340.1 million, supported by strength in the U.S. Wholesale and international channels. Adjusted operating income for the segment climbed 26% to $69.9 million.

Advanced Material Windows & Door Systems sales were up 9% to $192.9 million, as entry door sales witnessed an 11% increase while window sales reflected 7% growth. The segment’s operating profit rose 53% to $15.1 million.

Sales at the Security & Storage segment dropped 5% to $141.3 million, due to a 21% decline in tool storage sales offset marginally by a 1% increase in security sales. Further, this caused adjusted operating income to fall 25% to $19.8 million.

Value Adding Initiatives

During the second quarter, the company made several investments in designing, planning and implementing additional capacity in the plumbing and cabinetry segments. The company aims at making continuous investments to enhance its incremental capacity in order to facilitate sales growth of roughly $6 million in the next 3 years.

Further, the company remains focused on enhancing shareholders'  value through acquiring valuable assets and returning excess cash in the form of dividends and share repurchases. Acquisitions made in the quarter include Sentry Safe, a leading manufacturer of personal safes. The company successfully closed the acquisition for $117.5 million on Jul 29, 2014. Sentry Safe with an estimated annual sales of $150 million will form a part of Master Lock, the number one padlock brand in North America.

The acquisition is expected to widen the offerings of Master Lock while adding to its leading market position and strong consumer worldwide.

Further, the company stated that it has bought back shares worth about $375 million in 2014, with another $112 million worth of repurchases remaining in the cards. Moreover, a day before the earnings release, the company declared a quarterly dividend of 12 cents a share, payable on Sep 17 to shareholders of record as on Aug 29.

Other Financial Details

Fortune Brands ended the quarter with cash and cash equivalents of $145 million, while long-term debt (excluding current maturities) was $595 million. Shareholders’ equity (excluding non-controlling interests) at the quarter end was $2,528.6 million.

Guidance

Based on the assumption that U.S. home products market will grow 6%–8% in 2014 and benefit from the Sentry Safe acquisition, the company forecasts sales to advance 9%–11% for the year, as against 10%–12% predicted earlier.

Adjusted earnings are expected to be in the band of $1.88–$1.96 for 2014, compared with previous projection of $1.90–$1.99 and 2013 earnings per share of $1.50. This includes the impact of both, the Sentry Safe acquisition as well as share buybacks.

Moreover, Fortune Brands is expected to generate free cash flow of $225 million to $250 million in 2014, after excluding the impact of its expected capital expenditures of roughly $130–$140 million slated toward investments in incremental capacity and infrastructure to support multi-year growth.

To conclude, the company anticipates delivering solid growth for 2014 while it expects to accelerate growth in 2015.

Other Stocks to Consider

Fortune Brands currently holds a Zacks Rank #4 (Sell). Better-ranked stocks in the same industry include Restoration Hardware Holdings Inc. (RH) and Williams-Sonoma Inc. (WSM), both holding a Zacks Rank #2 (Buy). Another stock performing well in the broader retail sector is Citi Trends Inc. (CTRN), sporting a Zacks Rank #1 (Strong Buy).

Boston Beer Q2 Earnings, Shares Up on Strong Shipment

Posted Thu Jul 31, 12:02 pm ET

by Zacks Equity Research

Shares of Boston Beer Co. Inc. (SAM) gained 3.2% during yesterday’s trading session after the company posted strong financial results for the second quarter of 2014. The largest craft brewer of the United States posted earnings of $1.88 per share for the quarter that surged 29.7% year over year, and also came well ahead of the Zacks Consensus Estimate of $1.73. Results for the quarter mainly benefited from robust increase in shipments, partially offset by higher advertising, promotional and selling expenses.

Quarterly Discussion

Net revenue soared 28% year over year to $231.6 million and came ahead of the Zacks Consensus Estimate of $220 million, primarily attributable to an increase of 25% in core shipment volume. Moreover, depletions improved by a solid 23% in the quarter gaining from strong depletions rate for the company’s Samuel Adams, Angry Orchard and Twisted Tea brands.

The company believes that robust depletion in the quarter was mainly led by increased media spend, expansion of sales force and other brand support investments. Looking at the recent depletion trends, Boston Beer has raised its 2014 depletion forecast to 20%–24% from the earlier projection of 16%–20%.

The company’s gross profit increased approximately 26.7% year over year to $123.1 million. However, as a percentage of net revenue, it contracted 50 basis points (bps) to 53.1% as the benefit of rise in price was slightly offset by a negative impact from product mix, and higher packaging and ingredient costs.

Advertising, promotional and selling expenses soared nearly 31.4% to $65.9 million because of higher investments in media advertising, point of sale and local marketing, increased costs for extra sales personnel and commissions, and augmented freight to distributors due to higher volumes.

General and administrative expenses grew 11.9% to $16.7 million, primarily due to increase in salary and benefit costs.

Operating income in the quarter came in at $40.5 million, up 26.4% from the year-ago quarter level of $32 million. However, operating margin contracted 20 bps to 17.5% due to reduced gross margin partially offset by lower operating expenses as a percentage of sales.

Balance Sheet

Boston Beer ended the quarter with cash and cash equivalents of $31.3 million. Long-term debt and capital lease obligations excluding current maturities stood at $528 million while stockholders’ equity was $371.7 million. Further, during the first half of 2014, the company generated approximately $38.3 million of cash from operating activities while it deployed nearly $88.5 million toward capital expenditure.

Fiscal 2014 Guidance

Despite posting a solid second quarter result, the company maintained its earlier fiscal 2014 earnings per share guidance of $6.00–$6.40. However, the company expects actual results to deviate from the targeted numbers.

Further, to offset the rise in ingredient, packaging and freight costs as well as increased investments in brands, it anticipates price increase of about 2%. Moreover, gross margin is still projected to range between 51% and 53%.

However, amount to be spent toward advertising, promotion and selling expenses has been raised to $37–$45 million from the previous guidance range of $34–$42 million. Effective tax rate for the period is still projected to be approximately 38%.

The company highlighted plans to incur investments for its existing brands developed by Alchemy & Science in the band of $3–$5 million. These expenses form a part of the projected increases in advertising, promotional and selling expenses for the year.

Further, the company narrowed its estimated capital spending for the year and now expects it to be in the range of $160–$185 million, compared with its previous forecast of $160–$200 million. Moreover, the company stated that the investments related to Alchemy & Science projects are included in the capital spending forecast.

Currently, Boston Beer has a Zacks Rank #1 (Strong Buy). Other stocks worth considering in the industry are Constellation Brands Inc. (STZ), Anheuser-Busch InBev SA/NV (BUD) which is also known as AB InBev and Brown-Forman Corp. (BF.B), all of which carry a Zacks Rank #2 (Buy).

Barrick Gold (ABX) Posts Loss in Q2, Narrows Cost Guidance

Posted Thu Jul 31, 12:00 pm ET

by Zacks Equity Research

Barrick Gold Corporation’s (ABX) adjusted earnings (excluding one-time items) for the second quarter of 2014 plummeted to 14 cents per share from 66 cents in the year-ago quarter but were in line with the Zacks Consensus Estimate. Lower pricing and volumes for both gold and copper led to the decline in earnings. The results were also affected by an impairment charge of $514 million related to the Jabal Sayid copper project.

On a reported basis, net loss in the second quarter was $269 million or 23 cents per share, much narrower than the net loss of roughly $8.6 billion or $8.55 per share in the prior-year quarter. The results include $24 million gains on sale of assets, $31 million in unrealized foreign currency translation losses and $34 million in gains on non-hedge derivative instruments.

Revenues fell 24% year over year to $2,432 million in the reported quarter and missed the Zacks Consensus Estimate of $2,475 million. Average realized price of gold decreased 8.6% year over year to $1,289 per ounce. All-in costs declined 25.4% to $945 per ounce while all-in sustaining costs fell roughly 4.9% to $865 per ounce in the reported quarter.

Gold production fell to 1.5 million ounces from 1.8 million ounces a year ago. Copper production declined to 67 million pounds from 134 million pounds in the prior-year quarter.

Regional Results

North America: The Goldstrike mine in the North American region produced 214,000 ounces of gold in the quarter, up 14.4% year over year, at an average all-in sustaining cost (AISC) of $886 per ounce. The Cortez mine produced 217,000 ounces, down 48% year over year. Production at Pueblo Viejo increased 32% to 161,000 ounces. Production at Lagunas Norte mine declined 12.2% and at Veladero it increased 35% year over year.

Australia Pacific: The region produced 268,000 ounces compared with 465,000 ounces in the year-ago quarter. AISC was $856 per ounce, down from $1,016 per ounce in the year-ago quarter.

African Barrick Gold plc. (ABG): Attributable production of African Barrick Gold in the quarter was 114,000 ounces compared with 122,000 ounces in the year-ago quarter. AISC was $1,105 per ounce in the quarter, down 21.3% year over year.

Financial Position

Cash and cash equivalents were $2,549 million as of Jun 30, 2014, up roughly 5.2% from $2,422 million as of Jun 30, 2013. Total debt was roughly $13 billion, down around 10.1% from $14.4 billion a year ago.

Update on Pascua-Lama Mine

During fourth-quarter 2013, Barrick temporarily suspended construction activities at the Pascua-Lama mine, barring the requisite activities for environmental protection and regulatory compliance. The ramp-down was completed on schedule and budget and the mine is now under care and maintenance. The company expects to incur costs of roughly $300 million in 2014 due to the ramp-down as well as for the environmental and social obligations.

The decision to re-start will depend on certain factors like improved project economics, outlook for metal prices, and reduced uncertainty associated with legal and other regulatory requirements.

During the reported quarter, Barrick entered into a Memorandum of Understanding (MoU) with a group of 15 Diaguita indigenous communities and associations in Chile's Huasco province. As part of the MoU, Barrick will make technical and environmental information about the Pascua-Lama project available to the communities and provide financial resources and materials required to support analysis of this information.

Portfolio Optimization

Barrick continues to take initiatives in order to optimize its portfolio and lower costs. The company has divested non-core assets for proceeds in excess of $1.3 billion since 2012, which has mainly been utilized to reduce debt.

Joint Venture

Barrick, on Jul 13, 2014, agreed to form a joint venture with a Saudi Arabian Mining Co. (Ma’aden) in order to operate the Jabal Sayid copper mine in Saudi Arabia. Both Barrick and Ma’aden will own 50% stake in the joint venture. Ma’aden, which is controlled by the state of Saudi, has agreed to buy 50% interest in the project for $210 million (expected to close in the fourth quarter of 2014).

Guidance

For 2014, Barrick reduced its forecast of AISC, which is now expected to be between $900 and $940 per ounce versus earlier expectations of between $920 and $980 an ounce. The company also reduced its 2014 capital expenditure guidance range by $200 million to $2.2-$2.5 billion from $2.4-$2.7 billion.

Barrick, however, maintained its full-year guidance for gold production of 6-6.5 million ounces. Copper guidance also remained unchanged at 410-440 million pounds and C1 cash costs of $1.90-$2.10 per pound.

Five cornerstone mines are expected to contribute about 60% to the total production in 2014 at an average AISC of $750-$800 per ounce.

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

Some better-ranked stocks in the gold mining industry include AngloGold Ashanti Ltd. (AU), Sibanye Gold Limited (SBGL) and NovaGold Resources Inc. (NG). While AngloGold and Sibanye Gold sport a Zacks Rank #1 (Strong Buy), NovaGold holds a Zacks Rank #2 (Buy).
 

Apache Q2 Earnings In Line, Pulling Out of LNG

Posted Thu Jul 31, 11:58 am ET

by Nilanjan Choudhury

U.S. energy firm Apache Corp. (APA) reported in-line second quarter earnings amid strong North American liquids production growth and higher commodity prices. Earnings per share – excluding one-time items – came in at $1.67, same as the Zacks Consensus Estimate.

However, Apache’s performance deteriorated from the year-ago adjusted profit of $2.04 per share, reflecting asset sales.
 

Revenues of $3,484 million were down 18.4% from the year-ago quarter and were also lower than the Zacks Consensus Estimate of $3,557 million.

Importantly, Apache outlined plans to get out of some LNG projects following pressure from activist investor Jana Partners. Following the in-line earnings and asset sale update, shares of Apache climbed more than 2% during the early hours of regular trading.

Operational Performance

The production of oil and natural gas (excluding divested assets) averaged 550,356 oil-equivalent barrels per day (BOE/d) (60% liquids), up approximately 4% year over year. Apache’s production for oil and natural gas liquids (NGLs) was up roughly 6.8% at 330,561 barrels per day (Bbl/d), while natural gas production of 1,318.8 million cubic feet per day (MMcf/d) was essentially flat from the second quarter 2013 level.

The average realized crude oil price during the second quarter was $103.53 per barrel, representing an increase of 5.1% from the year-ago realization of $98.47. Moreover, the average realized natural gas price during the June quarter of 2014 was $4.18 per thousand cubic feet (Mcf), up 5.3% from the year-ago period.

Apache’s lease operating expenses totaled $613 million, down 21.5% from $781 million in the year-ago quarter.

Balance Sheet & Capital Spending

As of Jun 30, 2014, Apache had approximately $524 million in cash and cash equivalents. The company had a long-term debt of $9,674 million, representing a debt-to-capitalization ratio of 22.8%.

During the three months ended June 30, 2014, Apache’s exploration and development investments (excluding acquisitions) totaled $2,554 million.

Asset Sale Update

Pressured by activist hedge fund Jana Partners LLC, Apache informed that it plans to exit from two major natural gas projects in Australia and Canada. The company emphasized that it is focused on rebalancing its portfolio, targeting predictable and profit-oriented production growth in North America.

As part of this initiative, Apache is evaluating its overseas assets, with a potential sale not ruled out. Last month, the company completed the sale of its interests in deepwater Gulf of Mexico projects to mineral explorer Freeport-McMoRan Copper & Gold Inc.’s (FCX) oil and gas subsidiary for $1.4 billion.  

Zacks Rank & Stock Picks

Apache currently retains a Zacks Rank #3 (Hold), implying that it is expected to perform in line with the broader U.S. equity market over the next one to three months.

Meanwhile, one can look at Jones Energy Inc. (JONE) and Newfield Exploration Co. (NFX) as good buying opportunities. These U.S. upstream energy operators – sporting a Zacks Rank #1 (Strong Buy) – have solid secular growth stories with potential to rise significantly from current levels.

Mosaic's (MOS) Q2 Earnings Trail, Net Down on Weak Pricing

Posted Thu Jul 31, 11:53 am ET

by Zacks Equity Research

Mosaic’s (MOS) profit for second-quarter 2014 slid as it saw a significant decline in pricing for potash in the quarter. The Minnesota-based fertilizer maker's profits tumbled around 42% year over year to $248.4 million or 64 cents per share in the reported quarter from $429.8 million or $1.01 a share a year ago.

Barring one-time items, earnings per share were 70 cents per share, missing the Zacks Consensus Estimate by a couple of cents.

Revenues fell roughly 7% year over year to $2,440.2 million, but managed to squeak past the Zacks Consensus Estimate of $2,398 million. Sales fell as a rise in the Phosphate segment was more than offset by a decline in the Potash unit.

Separately, Mosaic noted that CEO Jim Prokopanko will return from an earlier announced medical leave and resume his duties on Aug 4. Its shares were inactive in pre-market trading.

Segment Highlights

Revenues from Mosaic’s larger Phosphate segment went up around 6% year over year to $1.7 billion in the quarter as higher volumes offset lower finished product prices. Average selling price fell around 3% to $465 per ton in the quarter from $477 per ton last year. The segment’s gross margin rose around 2% to $284 million as lower pricing was more than offset by a decline in raw material costs and higher volumes. Segment sales volumes were up roughly 17% year over year to 3.4 million tons.

Potash division’s sales fell around 22% year over year to $762 million in the quarter as a 27% fall in prices more than offset higher shipment volumes. Sales volumes were flat year over year at 2.5 million tons while selling price fell to $267 per ton from $366 per ton a year ago. Gross margin slid 36% year over year to $250 million, hurt by lower pricing and decreased operating rate.

Financials

Mosaic ended the quarter with cash and cash equivalents of $2.4 billion, down 4% sequentially. Long-term debt was flat sequentially at $3 billion at the end of the quarter. Mosaic’s capital expenditure was $214 million in the reported quarter. Operating cash flow fell 19% year over year to $796 million in the quarter.

Mosaic returned $550 million of cash to its shareholders during the reported quarter. It has completed the repurchase of 52 million shares, representing 12% of its outstanding shares at the end of 2013.

Outlook

Looking ahead, Mosaic envisions strong demand for phosphates and potash to drive phosphate margins and potash prices in the third quarter.

Mosaic expects sales volume for its phosphates business to be between 3.3 million and 3.6 million tons in the third quarter compared with 2.7 million tons achieved a year ago. Average selling price for the quarter is expected to be in the band of $440 to $470 per ton. The segment’s gross margin for the quarter is expected to be in the mid to high teens. Operating rate is expected to approach 90%.

Mosaic foresees sales volume from its potash business in the range of 1.8 million to 2 million tons in the third quarter versus 1.4 million tons a year ago. Average selling price for the quarter is expected in the range of $275 to $295 per ton. The segment’s gross margin is expected to be in the high 20% to low 30% range. Operating rate has been forecast in the low-70% range.

Mosaic, in Mar 2014, completed its takeover of CF Industries’ (CF) phosphate business for $1.4 billion. The acquisition will bring Mosaic’s annual phosphates capacity to roughly 11.5 million tons and provide meaningful operational synergies. Mosaic is progressing well with the integration of the acquired business and is on track to achieve $40 million to $50 million in annual synergies (before-tax) in 2015.

Moreover, Mosaic is also progressing towards completion of its takeover of Archer Daniels Midland's (ADM) fertilizer distribution business and has received the anti-trust clearance in Brazil for the acquisition. The buyout is expected to accelerate Mosaic's existing growth plans in Brazil and expand its annual distribution capability in one of the world’s rapidly growing agricultural regions.

Mosaic also noted that its phosphate joint venture project in Saudi Arabia has secured project financing of $5 billion. The company expects capital expenditure, including the Saudi Arabia project, to be in the band of $1 billion to $1.2 billion for 2014. It also remains focused on achieving $500 million in annual operating cost savings over the next five years.    

Mosaic is a Zacks Rank #3 (Hold) stock.

A better-ranked stock in the fertilizer space is Potash Corp. (POT), sporting a Zacks Rank #2 (Buy).

3D Systems Beats on Q2 Earnings, Raises Revenue Guidance

Posted Thu Jul 31, 11:50 am ET

by Zacks Equity Research

3D Systems Inc. (DDD) reported second-quarter 2014 non-GAAP earnings of 16 cents a share, which surpassed the Zacks Consensus Estimate of 14 cents by 14.3%. However, the company’s adjusted income declined 20% year over year.

On a GAAP basis, earnings came in at 2 cents per share, down 80% from 10 cents in the prior-year quarter. The year-over-year decline in earnings can be attributed to a significant increase in the number of weighted average shares this year.

Quarterly Details

The company reported quarterly revenues of $151.5 million, reflecting a year-over-year increase of about 25%. However, revenues fell short of the Zacks Consensus Estimate of $161 million. The year-over-year upside was driven by increased demand across all its categories, which translated into organic growth of 10%.

Growth was driven by a 126% rise in the demand for designing and manufacturing of printers. Moreover, the continuing placement of advanced 3D printers drove the growth rate of materials to 30% in the quarter.

In the reported quarter, design and manufacturing revenues grew 28% year over year to $144.2 million while print materials revenues improved 30%. Further, service revenues increased 38% while healthcare revenues recorded growth of 46%.

At the end of the quarter, 3D Systems had backlog levels of $31.9 million that included recent printer orders worth $23.1 million. The increased demand for the company's Direct Metal 3D printers drove the upside in backlog levels.

Margins

Gross margin declined 400 basis points (bps) to 47.8% year over year. The significant decline was led by transitional effects of concentrated new product launches, the absorption costs related to products obsolescence and increase in expansion costs.

The operating margin also contracted an astounding 1103 basis points to 2.9% from 13.9% in the prior-year quarter. The decline can be attributed to a significant increase in research and development (R&D) expenditures as well as selling, general and administrative expenses.

Cash and Balance Sheet

3D Systems ended the quarter with cash and cash equivalents of $570.3 million compared with $306.3 million in the past year. Net cash flow from operating activities increased to $19.3 million from $3.4 million in the prior-year quarter.

Acquisitions

During the second quarter, 3D Systems executed several strategic acquisitions to broaden its presence in the high potential 3D printing market. The company acquired Medical Modeling, a leading provider of personalized surgical treatment planning and patient specific medical devices, to create the most comprehensive 3D printing medical device capabilities and enhance its 3D printing digital thread. Further, the company signed a definitive agreement to acquire Robtec, which will provide a strategic sales and service platform and scalable gateway into Latin America.

This apart, the company extended its global reseller channel, adding several key distributors including ScanSource and Konica Minolta. Most recently, the company signed a definitive agreement to acquire Simbionix, the global leader in 3D virtual reality surgical simulation. 3D Systems is pursuing this takeover to extend its healthcare reach with the addition of powerful synergistic technology, experience and domain expertise.

Outlook

Encouraged by the company’s revenue and increasing demand for designed and manufactured printers, management has raised its revenue guidance for fiscal 2014.

Management now expects revenues in the range of $700 million to $740 million versus$680 million to $720 million stated previously.

However, the company reiterated its earnings guidance for fiscal 2014. GAAP earnings per share are expected in the band of $0.44 to $0.56 while non-GAAP earnings per share are anticipated in the range of $0.73 to $0.85.

Management also believes that despite short–run headwinds emerging from increased expenses, the company is favorably positioned to reap considerable benefits from the R&D investments, by the end of 2015.

3D Systems currently has a Zacks Rank #2 (Buy). Some other stocks that also look promising include China Automotive Systems Inc. (CAAS), Meritor, Inc. (MTOR) and Twin Disc (TWIN). All three hold the same Zacks Rank as 3D Systems.

R.R. Donnelley Q2 Earnings Fall Y/Y; Reiterates FY14 Outlook

Posted Thu Jul 31, 11:50 am ET

by Zacks Equity Research

R.R. Donnelley & Sons Co. (RRD) reported second-quarter 2014 non-GAAP earnings of 42 cents per share which were down 6.7% on a year-over-year basis.

Quarter Details

Revenues were up 12.9% year over year to $2.90 billion primarily boosted by the acquisitions of Consolidated Graphics and Esselte operations. Sales on an organic basis increased 0.8% from the year-ago quarter.

Publishing and Retail Services revenues declined 3.6% from the year-ago quarter to $625.9 million in the reported quarter. Of the total decline, 60 basis points (bps) were related to the negative impact of lower pass-through paper sales, which lowered organic sales by 3% year over year. The company witnessed volume declines in books and directories. Pricing pressure in magazines, catalogs and retail inserts also led to the revenue decline.

Variable Print revenues were $957.4 million, up 52.9% from the year-ago quarter. This year-over-year increase was primarily due to the Consolidated Graphics and Esselte acquisitions. On an organic basis, revenues were up 3.2% year over year primarily due to higher volumes.

The Strategic Services segment registered revenues of $687.5 million, up 4.1% from the year-ago quarter. Quarterly organic growth was 3.8% due to organic growth in Logistics (up 10.7% year over year) and sourcing (up 20.6% year over year).

International sales in the second quarter were $631.7 million, down 0.6% from the year-ago quarter. Organic net sales were down 2% in the quarter due to pricing pressures.

Gross margin was 22.9%, down 37 bps from the year-ago quarter primarily due to price erosion and higher wages and other related costs. Moreover, increase in transportation costs and unfavorable product mix were responsible for the margin decline.

Operating expenses increased to $460.7 million from $405.1 million in the year-ago quarter. This year-over-year increase was mainly on account of a rise in selling, general & administrative expenses.

Adjusted non-GAAP operating profit increased 5.5% from the year-ago quarter to $203.7 million. However, operating margin declined 49 bps from the year-ago quarter.

Non-GAAP net earnings for the quarter were $84.6 million or 42 cents per share compared with $83.6 million or 45 cents per share reported in the year-ago quarter. Year-over-year increase in share count led to the earnings decline.

R.R. Donnelley exited the quarter with $288.9 million in cash and cash equivalents versus $308.4 million in the previous quarter. Long-term debt (including current portion) stood at $3.83 billion. Free cash flow for the company was $92.8 million.

Guidance

R.R. Donnelley reiterated its fiscal 2014 guidance. The company expects revenues in the range of $11.5 to $11.8 billion.

Adjusted earnings before interest, tax, depreciation and amortization (EBITDA) are expected in the range of 10.5% to 11.0% for fiscal 2014.  Interest expense is likely to be between $275.0 million and $285.0 million.

Capital expenditure is expected in the range of $225.0 to $250.0 million and free cash flow in the range of $400 to $500 million.

Management expects its service offerings to drive growth, going forward.

Recommendation

R.R. Donnelley reported modest second-quarter results. The strategic acquisitions made by the company positively impacted its top-line performance. Donnelley’s new client wins such as ZAGG Inc (ZAGG) and existing clients such as Williams-Sonoma (WSM) and Office Depot Inc. (ODP) help the company generate incremental revenues.

Nonetheless, we expect R.R. Donnelley to remain under pressure in the near term due to continuing pricing pressure, volatility in raw material prices and increasing competition. Moreover, the increasing adoption of the e-book readers remains a major concern for its legacy printing business.

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