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Zacks #1 Stocks on the Move 07/28/2014

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Analyst Blog

Will Russia & China Issues Weigh on McDonald's (MCD) Sales?

Posted Mon Jul 28, 07:30 pm ET

by Zacks Equity Research

McDonald’s Corp. (MCD) has been in the limelight for the past few days for the wrong reasons. Earlier it was China and this time it is Russia. Irrespective of the countries, the impact on the company’s reputation, traffic and revenue is certainly a concern.

Reportedly, the Russian consumer protection agency has filed a lawsuit against the company in Moscow court stating that the company is selling food that contains more fat and carbohydrates than the permissible standards in Russia. Per the agency, some food items like Caesar wraps and salads had microbial contamination, which can cause food poisoning. Several other items like cheeseburger, Filet-o-Fish, and vanilla and chocolate milkshakes also have calorific values two to three times higher than allowed by national regulations.

Why the Onslaught?

Some analysts hint that the lawsuit comes in the wake of high tensions between Moscow and Washington. On Jul 16, 2014, President Obama imposed some restrictions on Russia that hit the nation’s largest oil producer Rosneft and other energy, financial and defense firms. These regulations would primarily restrict Russian giants’ access into the U.S markets.

Also, the measures would close medium and long-term dollar funding for the two largest banks – Gazprombank and Vnesheconombank – and energy companies – OAO Novatek and Rosneft. In response, Russian president, Vladimir Putin reportedly stated that the new sanctions imposed by U.S on Russia would lead to a dead end.

McDonald’s International Woes Continue

Besides being plagued by adverse impacts of a sluggish domestic economy, the company has been suffering as a result of diverse problems in its international markets.

In 2003, France had boycotted McDonald’s in order to protest against the war in Iraq. In April this year, the company had to suspend its work at its three Crimean restaurants owing to heightened tensions between Russia and the West.

Meanwhile, Shanghai Husi Food Co., a supplier of meat for McDonald’s, was found reusing meat that had fallen on the factory floor as well as mixing fresh and expired meat.  This incident incurred the wrath of food regulators. The company reportedly apologized and announced a change in meat suppliers.

As a matter of fact, several other food chains like Yum! Brands, Inc. (YUM), Burger King Worldwide, Inc. (BKW) and Papa John's International Inc. (PZZA) had also bought meat from this supplier and have therefore decided to remove the products from their offerings.

Many other food scandals overseas have hit the meat and dairy industries in recent years, like the one involving the sale of chicken injected with excessive levels of antibiotic drugs.

Bottom Line

We believe that the latest setback could adversely impact McDonald’s international sales especially at a time when its comparable sales in the U.S. are suffering due to declining consumer spending in a sluggishly recovering economy. McDonald’s has a Zacks Rank #4 (Sell).

Goldman Sachs (GS) to Reach MBS Settlement with FHFA

Posted Mon Jul 28, 07:00 pm ET

by Zacks Equity Research

Goldman Sachs Group, Inc. (GS) has been attempting mediation with the Federal Housing Finance Agency (FHFA) – the conservator of government-sponsored enterprises (GSEs) Freddie Mac (FMCC) and Fannie Mae (FNMA), per a Wall Street Journal report.

According to the settlement talks, the bank will pay between $800 million and $1.25 billion to FHFA, in order to compensate its faulty mortgage-practices in 2005–2007. The settlement will exonerate Goldman Sachs from the accusation of selling flawed mortgage-backed securities (MBS) to Freddie Mac and Fannie Mae during the pre-crisis period.

Notably, the upper range of $1.25 billion meets the amount which Morgan Stanley (MS) recently agreed to pay for settling the claims made against it by the FHFA. Following suit, several other big banks entered into similar types of settlements with the FHFA.

Amid the housing-market collapse, the FHFA was established as an independent regulator to oversee the housing-finance market. It aims at safeguarding investors’ interest and providing a secured investment environment. Back in 2011, the FHFA had accused 18 banks of selling faulty mortgage securities to Fannie Mae and Freddie Mac. As of now, FHFA has been successful in reaching 15 settlements, totaling about $16.1 billion, with the lenders.

The latest settlement will come as a breather for Goldman Sachs, resolving a major legal hassle which has been troubling it for quite some time.

Currently, Goldman Sachs holds a Zacks Rank #2 (Buy).

Magellan Midstream Ups Distribution, Maintains Growth Trend

Posted Mon Jul 28, 06:35 pm ET

by Nilanjan Choudhury

Pipeline operator Magellan Midstream Partners L.P. (MMP) raised its second quarter 2014 cash distribution by 4% sequentially and 20% year over year to 64 cents per unit ($2.56 per unit annualized).

The cash distribution is up 388% since its initial public offering (IPO) in the beginning of 2001. Magellan Midstream’s new distribution is payable on Aug 14 to unitholders of record as on Aug 4, 2014.

Tulsa, OK-based Magellan Midstream is a master limited partnership (“MLP”) that owns and operates a diversified portfolio of energy infrastructure assets. The partnership primarily transports, stores and distributes refined petroleum products. The oil distributor conducts its operations in three segments: Refined Products, Crude Oil and Marine Storage.

The proposed hike in distribution at Magellan Midstream is in sync with its goal of raising the annual distribution by 20% in 2014 and 15% in 2015. The partnership has a proven history of distribution growth with 49 quarterly increases since inception.

Magellan Midstream, which is slated to report its second quarter results on Aug 5, has bolstered its cash flows recently on the back of benefits from acquired assets and growth projects, escalating demand for petroleum products and improved tariff rates.

Magellan Midstream currently carries a Zacks Rank #1 (Strong Buy), implying that it is expected to significantly outperform the broader U.S. equity market over the next one to three months.

Apart from Magellan Midstream, one can look at Valero Energy Partners L.P. (VLP), Atlas Pipeline Partners L.P. (APL) and NuStar Energy L.P. (NS) as good buying opportunities. While Valero Energy Partners holds a Zacks Rank #1, Atlas Pipeline Partners and NuStar Energy both carry a Zacks Rank #2 (Buy).

Novartis Division Gets European Approval for Simbrinza

Posted Mon Jul 28, 06:30 pm ET

by Zacks Equity Research

Novartis’ (NVS) ophthalmology division, Alcon, received encouraging news when Simbrinza was approved by the European Commission.

Simbrinza has been approved in Europe to decrease elevated intraocular pressure (IOP) in adult patients with open-angle glaucoma or ocular hypertension for which monotherapy provides insufficient IOP reduction.

Alcon conducted two pivotal six month phase III studies to evaluate safety and efficacy of Simbrinza administered twice daily in patients with open-angle glaucoma or ocular hypertension who were insufficiently controlled on monotherapy or were already using multiple IOP-lowering medications. Both studies met their primary endpoints.

Alcon will launch Simbrinza in the UK in the third quarter of 2014. Thereafter, it will be launched in other European markets later in 2014 and in 2015. We note that Simbrinza was approved by the FDA in 2013.

The approval does not surprise us as the Committee for Medicinal Products for Human Use (CHMP) had issued a positive opinion to Simbrinza in May 2014.

Meanwhile, we cautiously watch Novartis' efforts to realign its portfolio in order to focus on its core portfolio of pharmaceuticals, eyecare and generics. We believe Novartis’ recent deal to acquire oncology products from GlaxoSmithKline (GSK) and the divestiture of the Vaccines business is a step in the right direction. It will broaden Novartis’ portfolio and enable it to focus better on its core capabilities besides contributing immensely to the top line.

Novartis, a large-cap pharma, currently carries a Zacks Rank #3 (Hold). Right now, Allergan (AGN) and AbbVie (ABBV) look well positioned among the large-cap pharmas. While Allergan carries a Zacks Rank #1 (Strong Buy), AbbVie is a Zacks Rank #2 (Buy) stock.

Freeport (FCX) to Resume Exports from Indonesian Subsidiary

Posted Mon Jul 28, 06:25 pm ET

by Zacks Equity Research

Freeport-McMoRan Inc. (FCX) has signed a Memorandum of Understanding (MOU) with the government of Indonesia which has granted it the approval to resume operations at its Indonesian subsidiary PT Freeport Indonesia (PT-FI). With its export permit, Freeport stated that it will resume full operations immediately, with concentrate shipments expected to start in Aug 2014 from the Grasberg mine in Papua.

Under the MOU, PT-FI has agreed to increase royalties to 4% for copper and 3.75% for gold from the existing rates of 3.5% and 1%, respectively. PT-FI will also have to provide a $115 million assurance bond to support its commitment for smelter development.

In Jan 2014, the government introduced a regulation regarding export duties to incorporate reduced rates for copper concentrate exports for companies engaged in smelter development. Under a revised regulation introduced in Jul 2014, Freeport will pay a 7.5% duty on its copper concentrate exports, but the rate drops to 5% when development progress exceeds 7.5%, and eventually becomes 0% once investment in the project exceeds 30% of total cost.

Per the MOU, the government and PT-FI have agreed to negotiate an amended Contract of Work (COW), to be completed over the next six months, to address provisions related to the size of concession area, royalties and taxes, domestic processing and refining, divestment, local content and continuation of operations post-2021.     

Freeport currently holds a Zacks Rank #3 (Hold).
Other mining companies with a favorable Zacks Rank include Atlatsa Resources Corp. (ATL), Kazakhmys PLC (KZMYY) and Alcoa Inc. (AA). All of them hold a Zacks Rank #2 (Buy).

JPMorgan to Divest $1.3B Debt Portfolio to Sankaty

Posted Mon Jul 28, 06:20 pm ET

by Zacks Equity Research

In a drive to downsize its non-core businesses, JPMorgan Chase & Co. (JPM) has decided to vend its loans and securities portfolio, valued at nearly $1.3 billion to Sankaty Advisors, the credit affiliate of Boston-based Bain Capital LLC. The news was reported by Financial Times.

This divestiture of JPMorgan’s Global Special Opportunities Group (GSOG) portfolio is in line with the bank’s strategy of raising capital and lowering down investments made with their own money so as to comply with the regulatory requirements.

Again, for Sankaty, which has been eyeing big commercial bank portfolios for some time, this deal may prove out to be the right strategy, complementing its existing product range.

The Global Special Opportunities Group portfolio comprises mezzanine loans in North America and Europe, and securities in Australia and Asia. The division, with headquarters in Hong Kong, has attracted investment firms which are interested in bolstering their presence in Asia.

Notably, many big financial investment managers such as The Carlyle Group LP (CG), Kohlberg Kravis Roberts & Co. (KKR) and The Blackstone Group L.P.’s (BX) credit arm – GSO Capital Partners LP – had targeted the debt portfolio of JPMorgan, but in vain. Sankaty, with $24.0 billion in assets under management, eventually won out.

In recent times, JPMorgan has been streamlining its operations to increase focus on core businesses. In July, the bank announced the divestiture of its corporate dealing services business. Further in April, the company sold its 401(k) record-keeping business and Retirement Plan Services business to Great-West Financial.

Prior to that, in March, JPMorgan inked an agreement with Mercuria Energy Group Limited for sale of its physical commodity trading business at a price of $3.5 billion. The latest divestiture is strategically in sync with its scheme of pruning non-essential operations and emphasizing on its main businesses.

Currently, JPMorgan sports a Zacks Rank #3 (Hold).

Jabil Circuit Authorizes New $100M Share Repurchase Program

Posted Mon Jul 28, 06:15 pm ET

by Zacks Equity Research

Leading provider of electronic manufacturing services, Jabil Circuit Inc. (JBL) recently announced that its board of directors has authorized the repurchase of up to $100.0 million worth of the company’s common stock. This program will expire on Aug 31, 2015.

Jabil’s strong financial position and encouraging cash flow allows management to raise its shareholder wealth through a regular quarterly dividend of 8 cents per share and share repurchases.

In the third quarter of fiscal 2014, the company‘s cash and cash equivalents were up 95.6% sequentially to $1.32 billion. During the quarter, debt fell 20.9% on a quarter over quarter basis, thus improving the overall financial position.

In the third quarter, Jabil repurchased 3.6 million shares at a total cost of approximately $65.0 million. The company had $70.0 million remaining under the $200.0 million repurchase program, which was scheduled to expire on Aug 31, 2014.

During the quarter, Jabil completed the divestiture of its aftermarket services business in the quarter, which is expected to boost growthin the core operations over the long term. Jabil forecasts fiscal 2015 earnings to be in the range of $1.65 to $1.95 per share, driven by improving business trends and new bookings.

We believe that the new share repurchase program will improve the confidence of the shareholders post the disengagement from Blackberry (BBRY). It will also improve  bottom line  in 2014.

Although management’s 2015 guidance is encouraging, we believe that the disengagement from Blackberry will adversely affect top line and margins over the next couple of quarters.

Nevertheless, Jabil’s increasing association with Apple (AAPL) is expected to boost its growth prospects. Additionally, estimated strong growth from the Nypro acquisition, restructuring benefits and customer wins will help Jabil to compete with the likes of Flextronics (FLEX) in 2014 and 2015.

Currently, Jabil has a Zacks Rank #1 (Strong Buy).

Kellogg Company (K) Raises Quarterly Dividend to 49 Cents

Posted Mon Jul 28, 06:10 pm ET

by Zacks Equity Research

The board of directors at Kellogg Company (K) recently declared a quarterly dividend of 49 cents per common share, up from 46 cents paid previously.

The 6.5% increase is in line with the cereals and snack company’s plans to hike dividend, announced in April, beginning third-quarter 2014.

The quarterly dividend is equivalent to an annual dividend of $1.96 per share, up from $1.84 paid previously. The new dividend will yield approximately 3.0% annually.

The increased dividend is payable on Sep 15, 2014, to shareholders on record on Sep 2.

Kellogg is also due to report its second-quarter results later this week.

In the second quarter, management expects to return to positive top-line growth after recording sales decline in the previous two quarters. The company expects volume trends to improve over the remainder of the year driven by significant increase in brand building investments.

Kellogg has strong commercial programs in place and plans to increase investments in core categories, with key programs scheduled to start in the second quarter. Moreover, price mix is expected to remain positive throughout the year.

However, adjusted operating profit is expected to decline slightly due to higher brand building investment. Brand building investments are expected to increase in a high single-digit range in the quarter, followed by further increase during the third quarter. Adjusted currency neutral earnings are expected to be approximately $1.02 per share, flat with the comparable last-year quarter.

Other Stocks to Consider

Kellogg currently carries a Zacks Rank #4 (Sell). Better-ranked food stocks include Treehouse Foods, Inc.(THS), Premier Foods plc (PRRFY) and Pinnacle Foods Inc.(PF). While Treehouse Foods sports a Zacks Rank #1 (Strong Buy), Premier Foods and Pinnacle Foods have a Zacks Rank #2 (Buy).

Can Ameriprise (AMP) Keep Its Earnings Streak Alive?

Posted Mon Jul 28, 06:05 pm ET

by Zacks Equity Research

Ameriprise Financial, Inc. (AMP) is scheduled to release second-quarter 2014 results tomorrow, Jul 29, after the market closes.

In the preceding quarter, Ameriprise delivered a 9.1% positive earnings surprise on the back of higher revenues, driven by strong assets under management (AUM) growth. Moreover, the company reported earnings beats in all four trailing quarters, with an average surprise of 6.6%.

Can Ameriprise maintain its earnings streak this quarter? Or will it disappoint? Let us see how things are shaping up for this announcement.

Factors to Impact Q2 Results

Dealing primarily in asset management and advisory businesses, Ameriprise does not face substantial threat from the overall sluggish and low interest rate environment. The company derives nearly more than 60% of its revenues (as of 2013) from fees.

Further, we believe that the overall strong equity market will continue to drive re-engagement of retail clients this quarter. Moreover, a strong AUM pipeline as well as rising demand for advisory services should benefit revenue growth.

On the other hand, the company’s aggressive marketing and advertising strategy will lead to a steady increase in general and administrative expenses. Also, Ameriprise’s continual recruitment of experienced advisors will expectedly elevate the compensation expenses. So we do not foresee any reversal in the rising expense trend this quarter.

Ameriprise’s quarterly activities failed to impress analysts. Hence, the Zacks Consensus Estimate for the quarter remained unchanged at $1.99 per share over the last 7 days.

Earnings Whispers

Our proven model does not conclusively show that Ameriprise is likely to beat the Zacks Consensus Estimate in the second quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 (Hold) for this to happen. Unfortunately, this is not the case here as you can see below.

Zacks ESP:  The Earnings ESP for Ameriprise is 0.00%. This is because both the Most Accurate estimate and the Zacks Consensus Estimate stand at $1.99.
Zacks Rank: Ameriprise’s Zacks Rank #2 increases the predictive power of ESP. However, we also need to have a positive ESP to be confident of an earnings surprise call.  

Stocks That Warrant a Look

Here are a few asset managers that you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this quarter.

Fortress Investment Group LLC (FIG) has an Earnings ESP of +17.65% and carries a Zacks Rank #3 (Hold). It is scheduled to report results on Jul 31.

Oaktree Capital Group, LLC (OAK) has an Earnings ESP of +6.90% and carries a Zacks Rank #2. It is slated to report results on Jul 31.

The Earnings ESP for The Carlyle Group LP (CG) is +4.55% and it carries a Zacks Rank #3. It is expected to report results on Aug 6.

Goldcorp's (GG) Cerro Negro Mine Has First Gold Production

Posted Mon Jul 28, 06:00 pm ET

by Zacks Equity Research

Goldcorp’s (GG) Cerro Negro mine in Argentina’s Santa Cruz province has achieved first gold production. The gold mine poured the first gold on schedule and within the company’s capital cost guidance range. It is one of Goldcorp’s significant development projects.
The initial dore bar weighing roughly 100 kilograms was produced at the high-grade mine containing an estimated 317 ounces of gold. The milestone was reached safely amid a run of more than 4.1 million man-hours without a lost-time accident. 
Goldcorp’s shares rose roughly 3.5% last Friday to close at $28.20. The stock is up around 32% so far this year. 
The Cerro Negro mine, which Goldcorp acquired in 2010, remains on track for commercial production by the end of 2014. Goldcorp expects the mine to produce between 130,000 and 180,000 ounces of gold this year. Moreover, initial capital costs for the mine have been cut by $100 million and are now forecast to be between $1.6 billion and $1.7 billion. 
Cerro Negro is expected to significantly contribute to Goldcorp's performance in the years ahead. Proven and probable gold mineral reserves for the mine were 5.74 million ounces as of Dec 31, 2013.
Goldcorp’s growth drivers lie in its vast array of development and exploration projects. It has an impressive lineup of such projects.
Apart from Cerro Negro, Goldcorp’s other major development projects include the Eleonore and Cochenour projects in Canada. Eleonore is expected to start production in late 2014 while first gold production from Cochenour is expected to start in fourth-quarter 2014. With these projects at hand, Goldcorp is well placed to deliver on its target of achieving 50% production growth over the next two years.
Goldcorp has the highest leverage to spot gold prices due to its completely unhedged position. It should benefit from facility expansion, cost containment and productivity improvement measures.
Goldcorp is a Zacks Rank #3 (Hold) stock.
Other gold mining companies having favorable Zacks Rank include AngloGold Ashanti Ltd. (AU), Sibanye Gold Ltd. (SBGL) and Timmins Gold Corp. (TGD). All of them hold a Zacks Rank #1 (Strong Buy).

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