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Zacks #1 Stocks on the Move 04/16/2014

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Analyst Blog

Talisman Energy: Sell This Troubled Company

Posted Wed Apr 16, 04:20 pm ET

by Nilanjan Choudhury

On Apr 15, Zacks Investment Research downgraded Canadian energy explorer Talisman Energy Inc. (TLM) to a Zacks Rank #5 (Strong Sell).

Why the Downgrade?

We expect investor sentiment towards Talisman to remain lukewarm, considering its maintenance/production issues and operational problems. We further believe that Talisman’s policy shift towards the promising North American oil and liquids rich areas will take some time to bear results.

Detailed Analysis

With core operations in the North Sea, Talisman has been adversely affected by the recent tax hike in the region, along with maintenance/production issues that have created investor concerns about the company’s sustainable operational efficiency and execution abilities.

Talisman’s extensive natural gas exposure raises its sensitivity to gas price fluctuations, compared to its more diversified independent peers with higher oil production. The company, which derives more than half of its reserves/production from natural gas, has seen its sales and income fluctuate in recent times on the back of volatile gas prices.

Talisman has operations in several international regions. As such, the company is exposed to risks associated with doing business abroad. Such risks include embargoes and/or expropriation of assets, exchange rate risks, terrorism and political/civil sentiment.

Apart from successful exploration activities, Talisman also depends on property acquisitions to expand its resource base. The company may find it difficult to complete accretive transactions in the future, which could negatively impact its growth rate.   

Stocks That Warrant a Look

While we expect Talisman Energy to perform below its peers and industry levels in the coming months and see little reason for investors to own the stock, one can look at Range Resources Corp. (RRC), EOG Resources Inc. (EOG) and Miller Energy Resources Inc. (MILL). While Range Resources holds a Zacks Rank #1 (Strong Buy), EOG Resources and Miller Energy both carry a Zacks Rank #2 (Buy).

Dynavax Starts Phase III Study on Heplisav-B

Posted Wed Apr 16, 04:10 pm ET

by Zacks Equity Research

Dynavax Technologies Corp. (DVAX) commenced a new phase III study (HBV-23) on its hepatitis B vaccine candidate, Heplisav-B. Dynavax is seeking to get Heplisav-B approved in the U.S. and EU.

The randomized, active-controlled, HBV-23 (n=8,000) study will randomize (2:1) patients to receive a 2-dose series of Heplisav-B and 3-dose series of GlaxoSmithKline’s (GSK) Engerix-B.

The primary endpoints of the study are for evaluation of the overall safety of the candidate and demonstrate the non-inferiority of the seroprotection rate induced by Heplisav-B compared with Engerix-B at week 28 in type II diabetes patients.

Secondary endpoints include safety profile of Heplisav-B with respect to specific outcomes and assessment of immunogenicity in subpopulations.

HBV-23 is a large safety and immunogenicity study, which is designed to address the complete response letter (CRL) issued in Feb 2013. This study will provide safety database that will be adequate to support licensure. This study is expected to complete enrolment by the end of 2014, with follow-up likely to be completed by the fourth quarter of 2015.

Dynavax faced hindrances both in the U.S. and Europe in getting Heplisav-B approved. We note that Dynavax suffered a setback in Jun 2013 when the U.S. Food and Drug Administration (FDA) asked for additional safety data in response to a meeting with the agency to discuss the CRL received earlier in 2013 on Heplisav-B.

In Feb 2014, Dynavax withdrew its MAA for Heplisav-B as the Day 180 List of Outstanding Issues provided by the EMA suggested that the current safety database for Heplisav-B is too small to rule out a risk of less common serious adverse events. Dynavax decided to withdraw its MAA as the required time period for response under the regulatory process is not adequate to collect the clinical data.

Dynavax does not have any marketed product in its portfolio. We expect investor focus to remain on Heplisav-B.

Dynavax carries a Zacks Rank #2 (Buy). Others stocks that look attractive include Amgen (AMGN) and Sucampo Pharmaceuticals, Inc. (SCMP). Both of these sport a Zacks Rank #1 (Strong Buy).

Pioneer Natural Divests Alaska Unit

Posted Wed Apr 16, 04:00 pm ET

by Zacks Equity Research

 Oil and gas company Pioneer Natural Resources Company (PXD) announced the divestment of its Alaska subsidiary to Caelus Energy Alaska LLC for cash proceeds of $300 million. The company expects to recognize a non-cash loss of about $30 million associated with the sale when it reports earnings for the first quarter of 2014.

Pioneer Natural Resources is a large independent oil and gas exploration and production company, headquartered in Dallas, TX with operations in the U.S. The company’s oil-weighted reserves base and large drilling inventory (over 20,000 liquids rich drilling locations in low-risk resource plays) with significant resource potential are catalysts to unlock value for shareholders. The company offers a deep inventory of high-return, liquids-leveraged drilling opportunities.

For 2014, Pioneer plans to spend $3.3 billion in total. Of this, the company has planned drilling capex of $3 billion and capital for vertical integration of $0.3 billion. An amount of $2.2 million has been allocated for the northern Spraberry/Wolfcamp area; $205 million has been set aside for the southern Wolfcamp joint venture area, $545 million for Eagle Ford shale and $100 million for other assets.

However, the company’s long-term production and reserve growth depends to a certain extent on its acquire-and-exploit mode. Pioneer might therefore find it difficult to complete accretive transactions in the future, which could negatively impact its growth rate.

Pioneer Natural Resources 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 consider better-ranked players in the energy sector like Flotek Industries Inc. (FTK), Helmerich & Payne Inc. (HP) and Exterran Holdings, Inc. (EXH). All these stocks sport a Zacks Rank #1 (Strong Buy).

Highwoods Inks Lease Deal in Nashville

Posted Wed Apr 16, 03:50 pm ET

by Zacks Equity Research

Raleigh, NC-based real estate investment trust (REIT), Highwoods Properties Inc. (HIW) inked a lease deal with an existing customer for 91,000 square foot of space at Highwoods Plaza II in Nashville. The deal, which is long term in nature, reflects the decent demand for the company’s properties in this area.

This space was previously occupied by LifePoint Hospitals (vacated in Feb 2014) for which Highwoods recently constructed a 203,000 square foot build-to-suit facility. The abovementioned deal reflects a net extension of 32,000 square feet of space by this current customer and with this, Highwoods has been able to relet 71% of the former LifePoint space. The company also has discussions underway for leasing the remaining 43,000 square feet of space.

As a matter of fact, the Nashville market is recuperating well from a tepid economy and is experiencing growth in population as well as employment. Its economy is diverse and has significant growth potential. Wage income is also improving while there is rising demand for premium quality office space. Particularly, the Brentwood submarket, where Highwoods Plaza II is situated, had a vacancy of just 6% as of Mar 31.  

We believe Highwoods' efforts to improve its portfolio base pave the way for bottom-line growth in the future. In particular, the company has been focusing on shifting its portfolio mix to high growth markets and offloading its asset base in non-core markets. Moreover, efficiency in releting space is encouraging and this particular deal helps secure an additional ten years of lease term.

Highwoods is scheduled to report its first-quarter 2014 results on Apr 29, after the closing bell. The Zacks Consensus Estimate for funds from operations (FFO) for the quarter is currently pegged at 71 cents, reflecting a year-over-year increase of nearly 6.0%.

Highwoods currently carries a Zacks Rank #3 (Hold). Investors interested in the REIT industry may also consider stocks like Cousins Properties Incorporated (CUZ), Duke Realty Corporation (DRE) and Public Storage (PSA). All three stocks have a Zacks Rank #2 (Buy).

Note: FFO, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income.

AGL Resources Hits New High on Solid Q1 Prospect

Posted Wed Apr 16, 03:40 pm ET

by Zacks Equity Research

Energy services holding company, AGL Resources Inc. (GAS) hit a 52-week high of $51.63 on Apr 15. In the past three months, the company witnessed over 10% growth in share price, supported by robust trading volumes. The company recently crossed the psychologically important $50 per share mark for the first time.

This recent positive momentum is attributable to the bullish first quarter expectations announced last week. AGL Resources anticipates operating earnings from its wholesale services segment to significantly surpass earlier projections. Segment earnings are expected at $270.0 million, indicating a massive jump from $29.0 million reported a year ago. Segment EPS is expected to be $1.53 compared with 8 cents a year ago.

AGL Resources added that its distribution and retail operations could exceed estimates, on a combined basis. The better-than anticipated earnings data is due to increase in natural gas demand led by the unusually cold weather that persisted through the first quarter.

Other factors like a solid dividend yield of 3.88%, near-monopoly status in its area of operation, best-in-class cost control and recession-proof business model all work in favor of this premier electric utility firm.

With earnings release just around the corner (expected to report on Apr 29), brokerage firms are also showing confidence in AGL Resources. Over the last 30 days, current quarter estimates have grown nearly 21% to $1.85 per share. Currently, the company has an Earnings ESP of +2.16%, another sign of a beat in the upcoming earnings.

AGL Resources climbed the rank ladder from Zacks Rank #3 (Hold) a month ago to its current Zack Rank #1 (Strong Buy). Moreover, it belongs to a well positioned industry – Gas Distribution Utilities (Zacks Industry Rank of 22 out of more than 250 industries). All these factors support the recent bullishness and hint at further good news for AGL Resources.

Other Stocks to Consider

In addition to AGL Resources, investors interested in this industry may also consider Delta Natural Gas Company, Inc. (DGAS), Chesapeake Utilities Corporation (CPK) and Gas Natural Inc. (EGAS). While Delta Natural sports a Zacks Rank #1, Chesapeake Utilities and Gas Natural hold a Zacks Rank #2 (Buy).

Ford European March Sales Up 12% Y/Y

Posted Wed Apr 16, 03:30 pm ET

by Zacks Equity Research

Ford Motor Co. (F) witnessed a 12% year-over-year increase in March sales in Europe. The company’s sales improvement surpassed the industry’s growth rate of 10% in the month.

Ford sold 147,100 vehicles in the Euro 20 region, reflecting an increase of 12.1% year over year. Sales amounted to 159,900 across all the 50 European markets it covers, representing a 5.3% increase.

March 2014 marked the tenth consecutive month of European sales growth for Ford. The company’s share in the Euro 20 market increased 0.2% year over year to 8.9% in the month.

Ford’s sales in the first quarter of 2014 went up 11.2% to 297,900 vehicles in the Euro 20 region, while the industry growth rate was 8%. In the quarter, Ford sold 332,600 vehicles in all the 50 European markets it covers representing a 4.9% year-over-year increase. Fiesta and Focus were the highest-selling Ford vehicles in Europe in the quarter.

First-quarter 2014 was the fourth consecutive quarter of European sales growth for Ford. The company’s share in the Euro 20 market increased 0.3% year over year to 8% in the quarter.

The year-over-year improvement was driven by the company’s strategic investments, new vehicle launches and business expansion with retail and fleet customers. Ford plans to launch 10 new vehicles in 2014.

In the first quarter of 2014, Ford’s sales to retail and fleet customers in Europe soared to 73% of total sales.  The company’s commercial vehicle sales increased 10% to 50,000 vehicles. Ford’s market share inched up 0.2% to 10.4%, marking the highest since 1998. However, the company’s sales to daily rentals and dealer registrations declined to 27% from 28% in the first quarter of 2013.

In the U.K., Ford’s largest European market, total vehicle sales increased 13% year over year in March and 11% in the first quarter of 2014. In Germany, the company recorded a 19% hike in sales in March and 24% in the quarter.

Ford also announced that it has increased the daily production of Fiesta at its Cologne plant by 200 units to 1,850 units, in order to meet the rising demand.

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

Better-ranked automobile stocks worth considering are Tesla Motors, Inc. (TSLA), PACCAR Inc. (PCAR) and Fox Factory Holding Corp (FOXF). All the stocks carry a Zacks Rank #2 (Buy).

Will Walgreens Relocate to Europe?

Posted Wed Apr 16, 03:20 pm ET

by Zacks Equity Research

Despite majority of its exposure gained in the U.S., leading drug retailer Walgreen Co. (WAG) has been pressurized by an influential group of its investors including Goldman Sachs (GS) and hedge funds Jana Partners, Corvex and Och-Ziff to relocate itself to Europe, according to a Financial Times article. Per the source, following Walgreens’ initial refusal to consider relocation, these investors requested the Chicago-based retail pharmacy chain to reconsider the whole matter as a strategy to reduce its corporate tax burden.

According to these investors who own almost 5% stake in Walgreens, this tactic, known as tax inversion, will be beneficial for Walgreens in drastically reducing its taxable income which it has to pay in the U.S. – a country with one of the top corporate tax rates in the world. They requested Walgreens to use its impending $16 billion acquisition of Switzerland-based pharmacy-led health and beauty group Alliance Boots GmbH to re-domicile its tax base in Europe.

Notably, in Aug 2012, Walgreens acquired a 45% equity interest in Alliance Boots GmbH for $6.7 billion and is expected to purchase the remaining 55% over a six-month period beginning Feb 2, 2015 for an approximate value of $9.5 billion in cash and stock.  

According to the source, last month, analysts at UBS noted that while the corporate tax rate for Walgreens was as high as 37.5%, the same was a mere 20% for Alliance Boots. As a result, with application of the inversion strategy, Walgreens may be able to increase its earnings per share by 75%.

However, from Walgreens’ point of view, the decision may not remain as easy as it seems, taking into consideration the political pressure it would face while relocating.

In the last reported quarter, Walgreens opened/acquired 28 stores. As of Feb 28, 2014, the company operated in 8,681 locations in 50 states, the District of Columbia, Puerto Rico and Guam and the U.S. Virgin Islands, including 8,210 drugstores (138 more compared with the year-ago period). The company also operates worksite health and wellness centers, infusion and respiratory service facilities, specialty pharmacies, mail service facilities, e-commerce business and Take Care Health Systems.

Walgreens currently has a Zacks Rank #3 (Hold). While we choose to remain on the sidelines regarding WAG at present, drug retailers like Rite Aid Corp. (RAD) and CVS Caremark Corp. (CVS) are worth considering. While Rite Aid holds a Zacks Rank #1 (Strong Buy), CVS Caremark carries a Zacks Rank #2 (Buy).

FDA Clears Boston Scientific's Heart Devices

Posted Wed Apr 16, 03:10 pm ET

by Zacks Equity Research

Boston Scientific Corporation (BSX) continues to remain in the headlines with its innovations and product launches. Recently, the company won the U.S. Food and Drug Administration (FDA) approval for a bunch of defibrillators and heart failure devices. According to the company, this latest line of advanced devices will successfully help Boston Scientific to further strengthen its foothold in the ever-growing and still untapped cardiac medical devices market.

The aforementioned devices comprise the Mini family of defibrillators including Dynagen Mini and Inogen Mini ICD, and the X4 line of quadripolar CRT-Ds (cardiac resynchronisation therapy with defibrillator function) – Dynagen X4 and Inogen X4.

With the X4 line of quadripolar CRT-Ds which have the largest battery capacity in the industry and sport a six-year warranty, Boston Scientific expects to offer 70% more pacing options that could effectively target the unmet need for high capture thresholds and phrenic nerve stimulation. On the other hand, the new Mini ICDs are claimed to be 20% smaller by volume and 24% thinner than their competitive products thereby providing more patient comfort. According to the company, these ICDs are helpful in treating life-threatening arrhythmias of the heart.

With an abysmal number of nearly 400,000 out-of-hospital cardiac arrests that occur each year in the U.S. alone, we expect these newly approved products of Boston Scientific to successfully address the untapped patient population and reduce the cost of healthcare.

Despite challenging economic conditions, competitive environment, pressure on core segments and a larger-than-expected currency headwind, Boston Scientific has managed to successfully move on with its strong pipeline of products.The company has begun the year 2014 on a good note with the launch of the OffRoad Re-Entry Catheter System in the U.S and the receipt of a CE mark in Europe for its WallFlex Esophageal Stent in February.

Thereafter, Boston Scientific obtained the CE mark for its REBEL Platinum Chromium Coronary Stent System and Ingevity MRI Pacing Leads in March. Earlier this month, the company also got the FDA and CE mark approval for the Expect Slimline (SL) Needle which will be used for Endoscopic Ultrasound-Fine Needle Aspiration (EUS-FNA) procedures.

Currently, Boston Scientific carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the medical product sector areEnzymotec Ltd. (ENZY), St. Jude Medical Inc. (STJ) and Edwards Lifesciences (EW). Enzymotec sports a Zacks Rank #1 (Strong Buy) while St. Jude Medical and Edwards carry a Zacks Rank #2 (Buy).

FDA Nod for Covidien's Kangaroo Feeding Tube

Posted Wed Apr 16, 03:00 pm ET

by Zacks Equity Research

Covidien plc (COV), a leading global healthcare products company, recently secured the U.S. Food and Drug Administration (FDA) approval for its Kangaroo feeding tube with Integrated Real-time Imaging System (IRIS) technology. Shares of Covidien rose 1.3% since the announcement to close at $69.90 yesterday.

The Kangaroo feeding tube introduced by Covidien is the first-of-its-kind camera-equipped disposable feeding tube. The device is designed to enhance patient safety by providing visual support in the placement of small bore feeding tubes – a procedure which is currently blinded.

The IRIS technology features a camera integrated with a small bore feeding tube that streams a real-time video back to the Kangaroo IRIS monitor, thus providing visual information to clinicians. This information aids them to identify key areas of a patient’s anatomy during the placement of a tube. The system also enables medical professionals to save images from the live stream and make notes associated with the image.

Before the Kangaroo feeding tube with IRIS technology became available, feeding tube placement was often done blindly. Such a procedure carries the risk of misplacing the feeding tube into the patient’s airway, which can potentially result in a punctured lung or even death.

The Kangaroo feeding tube with its highly advanced IRIS technology has given light to an otherwise commonplace, blinded procedure, steering it to a new direction that facilitates clinicians to ensure standard quality of care.

In addition to the FDA clearance in the U.S., the Kangaroo feeding tube with IRIS technology is also approved for use in Europe, Japan, Canada and Australia. The Kangaroo IRIS monitor is currently programmed with seven languages: English, Spanish, French, German, Italian, Portuguese and Dutch.

Currently, Covidien carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the medical products industry that are worth a look include Enzymotec Ltd. (ENZY), St. Jude Medical Inc. (STJ) and Owens & Minor Inc. (OMI). Enzymotec carries a Zacks Rank #1 (Strong Buy), while St. Jude Medical and Owens &Minor retain a Zacks Rank #2 (Buy).

Accuray Upped to Buy

Posted Wed Apr 16, 02:50 pm ET

by Zacks Equity Research

On Apr 16, Zacks Investment Research upgraded Accuray Incorporated (ARAY) to a Zacks Rank #2 (Buy) from a Zacks Rank #3 (Hold).

Why the Upgrade?

The earnings estimates for this California-based developer of radiosurgery and radiation therapy systems have been revised upward following its improved fiscal 2014-second quarter results released on Jan 30.  

Accuray reported adjusted loss per share of 7 cents for the quarter, narrower than the Zacks Consensus Estimate loss of 20 cents by 65.0% and the prior-year quarter's loss by 82.5%.

Year-over-year loss narrowed primarily due to robust top-line improvement of 20% from the year-ago period. Of the total revenue, Accuray's product revenues surged 36% in the reported quarter to $45.1 million, while service revenues totaled $48.5 million, representing an increase of 9%.

This happens to be the first quarter since the acquisition of TomoTherapy when the company has achieved year-over-year revenue growth. This revenue improvement is attributable to the company's strength in order backlog, along with internal improvements related to Accuray's revenue conversion management process.

In the second quarter, Accuray's total gross profit amounted to $38.2 million, increasing 43% year over year. Gross margin of 40.8% also reflected an improvement of 660 basis points (bps). Of the total gross margin, Accuray saw an enhanced product gross margin of 44.7%, resulting from higher volume and stronger average selling prices.

The company's service revenue margin also increased by 1020 bps in the reported quarter, on account of improvement in TomoTherapy Systems reliability, which drove lower parts consumption and sales of higher margin service contracts.

Based on its encouraging performance, Accuray raised its total revenue expectation for fiscal 2014 to $340-$350 million from the previous range of $325-$345 million. The Zacks Consensus Estimate of $344 million for the fiscal year lies within the current expected revenue range of the company.

The Zacks Consensus Estimate for fiscal 2014 was revised upward by 24% to a loss of 54 cents over the last three months. However, the Zacks Consensus Estimate for fiscal 2015 was revised downward by 43% to a loss of 10 cents over the same time frame.

Other Stocks to Consider

In the medical instruments space, Delcath Systems, Inc. (DCTH), Syneron Medical Ltd. (ELOS) and Hologic Inc. (HOLX) are performing well. While Delcath and Syneron sport a Zacks Rank #1 (Strong Buy), Hologic retains a Zacks Rank #2 (Buy).

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