Q3 Contracting, a unit of the West Construction Services segment of Primoris Services Corporation (PRIM) has secured a new three year contract from Xcel Energy. The contract covers gas distribution work in the Denver area. The work, under the contract, will begin immediately.

The contract will result in a net revenue increase of over $80 million over the next three year period and includes an option for an additional two years. The contract will significantly raise the level of the work.

Primoris, which belongs to the building and heavy construction industry along with Chicago Bridge & Iron Company N.V. (CBI), Orion Marine Group, Inc (ORN) and Dycom Industries Inc. (DY), reported revenues of $410 million in first-quarter 2013, up around 41% year over year. The results were ahead of the Zacks Consensus Estimate of $351 million. Roughly 19% of the rise was attributable to organic growth with the remaining 22% coming from the acquisitions of Sprint, Saxon, Q3C, and FSSI.

Primoris’ West Construction Services segment recorded sales of $207.7 million, up 31% from the year-ago quarter, led by increased revenues at Rockford, partly offset by a revenue decline in the ARB Industrial division.

For full-year 2013, Primoris expects substantial contributions from the recent acquisitions. The company remains optimistic about its business lines for the near term as well as the long term.

Dallas, Tex.-based Primoris is a specialty contractor and infrastructure company which serves diverse end markets. The company also provides a wide range of construction, fabrication, maintenance, replacement, water and wastewater, and engineering services to major public utilities, petrochemical companies, energy companies, municipalities, and other customers.

Primoris currently retains a short-term Zacks Rank #1 (Strong Buy).
 

Recently KBR Inc. (KBR) received a front-end engineering and design (FEED) contract from Pacific NorthWest LNG Ltd, a subsidiary of PETRONAS - Malaysia’s state-owned oil company, and Japan Petroleum Exploration Co., Ltd. (JAPEX). The contract will be executed for a world scale LNG project in British Columbia. KBR will also enter into a partnership with JGC Corporation for the project.

The project is targeted towards processing shale gas produced in the North Montney region of British Columbia into LNG and providing detailed engineering work for LNG plant with an annual capacity of 12 million tons. Though the financial details of the contract were not disclosed, the size and volume of the project envision a significant revenue increase for the company. In addition, it will also help KBR with better resource allocation among other projects currently ongoing in British Columbia.

During the last few quarters, a number of new contracts have been showering upon KBR. Two of them were turnaround contracts. These include a contract from a leading chemical company to perform turnaround services for its pyrolysis gasoline (pygas) unit on the US Gulf Coast and another from Suncor Energy Inc. (SU) to provide turnaround services for its refinery in Edmonton, Canada.

Massive new supplies of natural gas have been discovered in the U.S., which lead the domestic price to fall nearly 70% below international price. These low prices are creating a windfall for businesses that are big consumers of it and thus will also fetch big profits for the companies that help them expand. KBR is an industrial construction and engineering businesses that specialize in hydrocarbon, chemical and petrochemical industries and is benefiting extensively from the demand boost for its services. This demand shows no sign of abating in the near future given the exceptional prospects for additional new contracts over the next 7 to 10 years as demand for low price gasoline continues.

Under such a prospective scenario, we expect KBR stocks to experience a revision and show a rising trend in coming quarters. It is to be noted that KBR also recently hit a 52 week high level on May 15, with a price of $32.82, beating its previous high of $32.65 attained on March 28, 2013.

KBR currently has Zacks Rank #3 (Hold). Other stocks from the same sector that look promising include Michael Baker Corporation (BKR) with a Zacks Rank #1 (Strong Buy), and Harris & Harris Group, Inc. (TINY) with a Zacks Rank # 2 (Buy).

The Dow Chemical Company (DOW) has launched the beta version of the Dow Lab Safety Academy website at the Council for Chemical Research 2013 Annual Meeting in Arlington, Va. The beta version creates a digital learning environment that shares Dow’s best-in-class industrial safety culture and practices in a fast and accessible format.

The Dow Lab Safety Academy includes a number of videos demonstrating the guidelines for safety of the lab for a number of real life scenarios and are grouped under four comprehensive lab safety categories. The website of the Dow Safety lab provides the best safety practices like chemical reactivity worksheet and an incident alert template.

The academy provides material that is very relevant to academic researchers, with modules that focus on the types of safety issues that are generally encountered by all. It also offers excellent resources for students and those working in the chemical industry.

Dow has joined premier research universities to improve safety awareness and practices in the departments of chemistry, chemical engineering, engineering and materials as a part of its laboratory safety initiative that it launched in 2012. Dow is working with the students and faculty of U.C. Santa Barbara (UCSB), University of Minnesota, and Pennsylvania State University to identify areas of improvement and help in having a sustainable culture of laboratory safety.

In order to make the website more user-friendly and to improve upon its content, Dow will seek help from its partner universities and other users. Dow also shares safety best practices with its competitors with a view to improving university safety as well as its customers, national labs or anyone conducting materials research.

Dow reported its first-quarter 2013 results last month. The company’s profit soared roughly 33% year over year to $550 million or 46 cents a share on the strength of its agriculture science business, which witnessed record sales of seeds and crop protection products. Excluding one-time items, Dow earned 69 cents a share in the quarter, up from 61 cents a year ago, beating the Zacks Consensus Estimate of 60 cents.

Dow will focus on organically growing its attractive businesses and driving earnings growth, leveraging its feedstock strength. The company will also continue to pursue its cost reduction strategy while reducing debt and maximizing shareholder returns. However, Dow does not see a material improvement in the macroeconomic environment this year.

Dow currently holds a Zacks Rank #3 (Hold).

Other companies in the chemical industry having favorable Zacks Rank are Shin-Etsu Chemical Co., Ltd. (SHECY), Celanese Corporation (CE) and Methanex Corporation (MEOH). All of them retain a Zacks Rank #1 (Strong Buy).
 

Zacks Investment Research upgraded AO Smith Corp. (AOS) to a Zacks Rank #1 (Strong Buy) on May 21, 2013.

Why the Upgrade?

A series of events taking place in quick succession in Apr 2013 helped the shares of AO Smith rise 11.5% since the beginning of the month till date. Upward revision in earnings estimates has been witnessed subsequent to the company’s release of its first quarter 2013 financial results on Apr 23, 2013.

AO Smith posted adjusted earnings per share of 96 cents that far exceeded the Zacks Consensus Estimate of 38 cents. Revenue in the first quarter grew 8.7% year over year as sales from North American operations rose 7.2% while from Rest of the World increased by 11.4%.

Talking of expenses and margins, cost of sales as a percentage of revenue fell 342 basis points while gross margin went up by the same magnitude in the quarter. Operating margin came in at 15.2% as against 12.2% in the year-ago quarter.

Management of AO Smith provided an encouraging outlook for 2013. The company’s businesses, especially its replacement water heater business in North America is expected to flourish. Housing market recovery is likely to boost sales in the U.S. while expansion in global markets is expected to add to the growth momentum. Adjusted earnings per share would be within the $3.40-$3.56 range as against $3.25-$3.45 expected earlier.

Prior to the earnings release, AO Smith in April declared a 20% increase in its quarterly dividend rate that settled at 24 cents per share and a two-for-one stock split. Also, the company announced the closure of manufacturing operations at its Fergus, Ontario, residential water heater facility. This measure was undertaken to bring residential and light commercial water heating operations under one roof and to increase the competitiveness of the operation.

Solid upbeat results posted by AO Smith in its trailing four quarters have a positive average of 13.3%. Outlook remains bright for the company as the Zacks Consensus Estimate for AO Smith went up in the last 30 days. For 2013, the estimate has increased by 4.7% to $1.80 and by 2.0% to $2.06 for 2014.

Other Stocks to Consider

AO Smith Corp. is a $3.7 billion industrial electrical equipment maker. Other stocks that are worth a look in the industry are ABB Ltd. (ABB), Capstone Turbine Corp. (CPST) and Emerson Electric Co. (EMR).
 

Specialty industrial services provider, Team, Inc. (TISI), recently lowered its earnings guidance for fourth quarter fiscal 2013 ending May 31. Considering the opening stock price on May 20, the day on which the company revised its earnings estimate downwards, shares have fallen around 12.5% to a closing price of $35.00 on May 21.

Apart from providing industrial services, Team Inc. also inspects and assesses piping systems and vessels used in refining, petrochemical, power, pipeline and other heavy industries.

Outlook for Fourth Quarter Fiscal 2013

Team Inc. presently expects fourth quarter earnings between 52 cents and 60 cents per share, down from its earlier guidance of 69 cents to 84 cents. Management believes that lower profit margins would adversely hit the company’s previous earnings guidance. It currently expects gross margins to be 200 bps lower than its previous guidance. Management also expects to report slower growth in revenues due to fewer big turnaround projects.

In addition, management believes that the company would be adversely hit during the quarter due to cost and utilization challenges. It further stated that its results would be poorly affected due to considerable growth in resources, thereby causing an imbalance between cost and utilization level.

Outlook for Fiscal 2014

The company currently expects its fiscal 2014 revenues to be around $790 million with earnings of about $2.00 per share. Management also expects to derive significant advantages from business expansion, thereby delivering organic growth of 10%.

Moreover, management is confident that it will be able to strike a balance between its various resources and restore its current operating and utilization rate to historical rates in the next fiscal.  

Other Stocks

Team Inc. currently carries a Zacks Rank #4 (Sell). Some other stocks within the sector worth mentioning are AMN Healthcare Services Inc. (AHS), Cardtronics Inc. (CATM) and CTPartners Executive Search Inc. (CTP), each carrying a Zacks Rank #2 (Buy).
 

Itron, Inc. (ITRI) has signed a five-year contract with British Gas for comprehensive managed services. As per the contract, Itron will share its expertise to serve more than 1.25 million customers of British Gas in the UK to support electricity prepayment services.

According to the new deal, Itron will provide a B2B customer support call center, prepayment vending transaction management, meter data management, data reporting, technical support and consulting services. It will also increase the level of efficiency, quality of service and customer satisfaction facilitating modern and smart metering standards.

Itron’s Managed Services offers electricity prepayment solution which includes collection and processing of prepayment meter data as well as issuing prepayment keys, providing tariff updates and solution support to consumers. Moreover, Itron’s in-home vending service enables customers to purchase and add credit to their meter from their home rather than visiting a retail outlet.

British Gas has already entrusted Itron with its Managed Services. The renewed contract will assist British Gas to continue delivering market-leading solutions to its existing and new customers and help it to remain focused on its core business operations.

Itron, which belongs to the electrical equipment industry along with Ametek Inc. (AME), Teradyne Inc. (TER) and Agilent Technologies Inc. (A), recently entered into a strategic alliance with a Brazilian technology company, Choice. Both the companies will integrate and jointly market a non-technical loss (NTL) solution to utilities around the world.

Liberty Lake, Wash.-based Itron Inc., along with its subsidiaries, is one of the principal technology providers to the energy and water industries worldwide. It produces electricity, gas, water, and heat meters, data collection and utility software solutions along with various other associated metering products for residential, commercial and industrial, and transmission and distribution customers.

Itron currently retains a short-term Zacks Rank #5 (Strong Sell).

 

Rexnord Corporation (RXN), a mechanical components manufacturer, reported weak results for the fourth quarter of fiscal 2013, with adjusted earnings per share of 32 cents, declining 15.8% year over year. However, earnings beat the Zacks Consensus Estimate of 31 cents by a penny.

In fiscal 2013, Rexnord reported adjusted earnings per share of 98 cents, increasing by a penny over the year-ago earnings as well as beating the Zacks Consensus Estimate of 97 cents.

Revenue: Revenue in the reported quarter was flat at $540.3 million, compared with $540.1 million revenue recorded in the year ago quarter. Core sales increased revenue by 1.0% in the quarter, while foreign currency exchange reduced revenue by 1.0%. Revenue missed the Zacks Consensus Estimate of $545.0 million by 0.9%.

On a segmental basis, revenue from Process & Motion Control was recorded at $313.9 million, declining from $324.7 million recorded in the fourth quarter of fiscal 2012. Water Management’s revenue came in at $179.7 million, against $145.0 million in the year-ago comparable quarter.

Revenue for fiscal 2013 amounted to $2,005.1 million, compared with $1,944.2 million in fiscal 2012. The 3.0% increase in revenue was facilitated by a 4.0% increase in the revenue from acquisitions, which was slightly offset by 1.0% decline due to foreign currency exchange. Revenue lagged the Zacks Consensus Estimate of $2,019.0 million by 0.7%.

Costs/Margins: Adjusted EBITDA in the quarter was $115.0 million, against $113.1 million recorded in the year-ago quarter. This led to a 40 basis point increase in the EBITDA margin to 21.3%. Selling, general and administrative expenses, as a percentage of sales, were recorded at 20.1%, declining 70 basis points year over year.

In fiscal 2013, adjusted EBITDA was recorded at $405 million, increasing 5.0% year-over-year, leading to a 40 basis point increase in adjusted EBITDA margin to 20.2%.

Balance Sheet: Exiting the fourth quarter of fiscal 2013, Rexnord’s cash and cash equivalents were recorded at $524.1 million, almost double the $298.0 million recorded in the fiscal fourth quarter 2012. Long-term debt stood at $1,962.3 million, compared with $2,413.4 million recorded in the comparable quarter.

Outlook: Based on the current results, management expects a 1.0%-3.0% increase in the core sales for fiscal 2014. Adjusted EPS is expected to lie in the range of $1.10 to $1.18. For the fiscal first quarter 2014, sales are expected to be in the range of $489.0 million to $499.0 million, with adjusted EPS in the range of 17 cents to 19 cents.

Rexnord currently bears a Zacks Rank #3 (Hold). Other stocks worth a look in the industry are AO Smith Corp. (AOS), carrying a Zacks Rank #1 (Strong Buy). Also, Broadwind Energy, Inc. (BWEN) and Generac Holdings Inc. (GNRC) carry a Zacks Rank #2 (Buy) each.

We remain Neutral on Wynn Resorts Limited (WYNN) following announcement of strong first-quarter 2013 results last month. However, competitive pressure in Macau keeps us on the sidelines.

Why the Reiteration?

On Apr 25, 2013, Wynn Resorts reported its first-quarter 2013 adjusted earnings of $2.03 per share, which breezed past the Zacks Consensus Estimate of $1.55 by 31.0% as well as the prior-year earnings of $1.33 per share by 52.6%. The earnings upside can be attributed to a strong mass market business in Macau, continued demand in the Las Vegas market and operational efficiency. Net revenue grew 5.0% year over year to nearly $1.4 billion bolstered by a respective 4.4% and 6.6% increase in Macau and Las Vegas revenues.

Macau, which is one of the largest gaming destinations in the world, has been sluggish in the recent past. Wynn Macau experienced weakness for three consecutive quarters in 2012. However, the situation seems to have improved buoyed by the mass market boom in the recently reported quarter. Moreover, its pipeline project in the Cotai region of Macau is expected to expand Wynn’s operations in Macau further.

At Las Vegas, the company is experiencing an uptrend as leisure demand continues to improve with a gradual recovery of the U.S. economy. Management remains hopeful as average daily rates are trending higher. Also, in the domestic market, Wynn seeks to build properties in higher-priced U.S. markets like Philadelphia and Boston where room rates are very high.

However, despite these enthusiastic facts, some concerns prevent us from being too optimistic on the stock. Fierce competition in Macau, the only Chinese city where gambling is legal and which accounts for around 70% of the company’s revenues, remains a blemish on Wynn’s scorecard.

The company’s upcoming project at Cotai in Macau will also face extreme peer pressure from several Chinese casino operators and the U.S.-based company Las Vegas Sands Corp. (LVS). Another U.S.-based casino giant, MGM Resorts International (MGM) is also slated to come up with a casino-resort in Cotai.

Wynn Resorts currently carries a Zacks Rank #2 (Buy). Another player in the same industry, Monarch Casino & Resort Inc. (MCRI) also looks attractive at current levels with a Zacks Rank #1 (Strong Buy) .
 

On May 21, we maintained a Neutral recommendation on the food and beverage giant, PepsiCo, Inc. (PEP) on the back of solid first-quarter 2013 results. However, sluggishness in the American beverage business is a concern.

Why the Neutral Recommendation?

PepsiCo’s first-quarter earnings of 77 cents beat both the Zacks Consensus Estimate as well as the year-ago results driven by productivity gains from restructuring activities, strong margins as well as solid organic top-line growth. Organic revenues increased 4.4% driven largely by strong performance of snacks and encouraging international growth. PepsiCo is boosting its existing brands and categories with stepped-up marketing and innovations which is driving organic revenue growth and market share gains. The company also retained its 2013 outlook.

Following the solid first-quarter results, the estimate revisions were mostly biased upwards. The Zacks Consensus Estimate for 2013 rose 0.5% to $4.41 per share while that for 2014 increased 0.2% to $4.79 over the last 60 days. In fact, PepsiCo has beaten the Zacks Consensus Estimate continuously for the past four quarters.

Overall, we are encouraged by the company’s strong brand portfolio, its product and geographic diversity and solid cash flow generation. Year 2012 was a turning point for PepsiCo. In this year the company increased its investments in brand building, market execution and innovation, improved productivity and efficiency, and drove significant cash flow generation. All these initiatives will not only intensify its foundation for further growth but also give the company a competitive advantage over its peers.

However, we prefer to remain on the sidelines until we see some meaningful impact of these investments on the operating results. Moreover, the company’s North American beverage business has been consistently delivering sluggish results, especially the colas. Changing consumer preferences, increasing health consciousness, rising obesity concerns, possible new taxes on sugar-sweetened beverages and growing regulatory pressures are affecting the company’s carbonated beverage sales. Though PepsiCo has increased marketing investments and is driving package and product innovation to boost its American beverage business, we prefer to wait until we see a substantial turnaround. The continuously challenged consumer spending environment is another negative factor.

PepsiCo currently carries a Zacks Rank #3 (Hold). Rival, The Coca-Cola Company (KO), carries a Zacks Rank #2 (Buy). Other consumer staples companies that are currently doing well include Flower Foods, Inc. (FLO), carrying a Zacks Rank #1 (Buy) and General Mills, Inc.(GIS), carrying a Zacks Rank #2 (Buy).

With the $16.4 trillion debt ceiling getting restored on May 19, alarm bells have started tolling across the country to address this highly politicized and polarizing issue to give it a fresh lease of life.

However, calming the frayed nerves, the U.S. Treasury has confirmed recently that higher-than-expected tax receipts and a hefty one-time payment by Fannie Mae to the tune of about $59.4 billion has deferred hitting the debt ceiling until at least the Labor Day.

But will delaying the inevitable be really helpful for the U.S. unless some corrective measures are implemented? Let us dig a little deep to find answers to these questions.

The History

The U.S. Treasury has defined the debt limit as "the total amount of money that the U.S. government is authorized to borrow to meet its existing legal obligations, including Social Security and Medicare benefits, military salaries, interest on the national debt, tax refunds, and other payments."

The financial prudence behind having a debt ceiling lies in the fact that it allows a form of accountability and enables the government to borrow further to meet its revenue shortfall, thereby giving it an opportunity to identify and target the underlying causes for the overspending. Or is it?

If having the diction of debt ceiling would have helped, the U.S. would not have required modifying it again and again. History reveals that since 1960 Congress has acted 78 separate times to permanently raise, temporarily extend, or revise the debt limit – 49 times under Republican presidents and 29 times under Democrats. So the obvious question then arises: Is the debt ceiling at all required?

The Fallout

The government seemed to have learned from its past mistakes, and the U.S. had a balanced federal budget with expenses tallying exactly with income in 2001.

But, as they say, ‘History repeats itself’ -- the U.S. economy again fell back in to the trap primarily due to three factors: the Bush-era tax cuts that added roughly $2 trillion to the national debt over the last decade; the Gulf wars in Iraq and Afghanistan, which added an additional $1.1 trillion; and the Great Recession, which led to the collapse of several financial giants like Lehman Brothers and Merrill Lynch, which was later acquired by Bank of America Corp. (BAC). Several other banks like JPMorgan Chase & Co. (JPM), Goldman Sachs (GS) and Morgan Stanley (MS) also felt the after-effects of the prolonged Great Recession.

The situation snowballed in to a crisis in 2011 when a periodic increase in debt ceiling was stalled by the Republicans, demanding a significant cut in federal spending. The crisis was eventually averted by the intervention of the President, but not until the U.S. had its casualty of a credit rating downgrade by Standard & Poors.

The stage is again set for a showdown this fall, but the question remains: Is the U.S. prepared to riseup at last or sink further down?

The Lifeline    

Although time is the best judge for this trillion-dollar question, the U.S. economy got a lifeline when data from the Treasury revealed that receipts for the six-month period ending Mar 2013 aggregated $1.2 trillion, up 12.4% year over year, versus a government spending of $1.8 trillion. This is equivalent to a year-to-date budget deficit of about $600 billion, the lowest since 2008.

The better-than-expected revenues were attributable to higher income tax payments, up 14.7% year over year, and improved corporate profit taxes, up 18.6% year over year, in addition to a significant contribution from Fannie Mae.

A relatively smaller yet noteworthy factor that pushed the revenue receipts was the underlying growth in the economy. Primarily, a dip in unemployment figures and ever-increasing stock price indices are the positive signs.

This averted possible ‘extraordinary measures’ by the Treasury as of now, allowing the federal government to finance its operations for about two months even after reaching the debt ceiling. These include 1) suspension of the sale of State and Local Government Series Treasury securities; 2) redemption of existing and the suspension of new investments in pension funds like the Civil Service Retirement and Disability Fund and the Postal Service Retirees Health Benefit Fund; 3) suspension of reinvestment of the Government Securities Investment Fund and 4) suspension of reinvestment of the Exchange Stabilization Fund.

But will the Treasury be eventually forced to utilize these measures if an amicable solution of raising the debt limit is not reached between the Republicans and Democrats sometime in September.

As a separate cushion, the Republicans have deftly passed a bill that would allow the government to pay interest on debts as well as prop up Social Security payments, even if a status quo is maintained for the federal borrowing limit. Although the bill promises to prevent any missed obligations that could trigger a formal default and pre-empt any potential debilitating shock to the economy, it eventually raises the debt limit by pushing these payments outside its purview.

In other words, it would be detrimental to the economy, earning it the vicious tag of a "default" by another name, probably due to which the White House has promised to veto it.

The Epilogue

No matter what the warring political parties do, the thorny issue of a potential crisis due to a debt-ceiling hit still persists. The short-term initiatives are likely to offer a temporary respite, but the ramifications could lead a death-blow to the economy unless a balanced fiscal policy is eked out.

As the U.S. stocks continue their unrelenting rally of reaching new all-time highs in most major indices, the market might be vulnerable to a correction any time soon. Only time will tell whether debt-ceiling alarm bells are indeed trigger for such an incident.