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Zacks #1 Stocks on the Move 04/17/2014

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Analyst Blog

Athlon Energy Prices Share Issue

Posted Thu Apr 17, 07:24 pm ET

by Nilanjan Choudhury

Fort Worth, TX-based Athlon Energy Inc. (ATHL) has priced an underwritten public offering of 12,875,000 common shares – upsized from the original offering size of 11,000,000 shares – at $40.00 a piece, with a 30-day over-allotment option for an additional 1,931,250 shares. The offering, which was announced on Apr 15, is likely to close on Apr 23.

The oil and liquids-rich natural gas explorer plans to use the net proceeds from this offering, together with the amount generated from a senior notes offering, to pay for the pending acquisitions, as well as for corporate purposes.

Athlon Energy, which went public in Aug last year, is an independent exploration and production company engaged in the acquisition, finding, and development of unconventional onshore oil and gas properties. The company’s operations are concentrated primarily in the Permian Basin in West Texas.

With holdings of around 100,000 net acres in the eastern portion of the Permian Basin and approximately 30 years of vertical drilling inventory, Athlon Energy’s asset portfolio is primed for high production growth and peer-leading returns.

Earlier this month, Athlon Energy agreed to acquire certain producing and undeveloped properties spread over 23,500 net acres in northern Midland basin from five different sellers for a combined $873 million in cash.

The to-be-bought assets in the Texas counties Martin, Upton, Andrews and Glasscock – adjacent to Athlon Energy’s existing fields in the region – holds an estimated 250 million oil-equivalent barrels (MMBOE) in reserve potential and will add 4,800 BOE (67% oil) to the outfit’s daily production. The properties would also add 425 ‘highly prospective’ horizontal drilling locations to Athlon Energy’s inventory.

However, as is the case with other independent exploration and production companies, Athlon Energy’s results are directly exposed to oil and gas prices, which are inherently volatile and subject to complex market forces. Realized prices could differ significantly from our estimates, thereby affecting the company’s revenues, earnings and cash flow.

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

However, some better-ranked domestic upstream energy stocks include Range Resources Corp. (RRC), Miller Energy Resources Inc. (MILL) and Whiting Petroleum Corp. (WLL). While Range Resources and Miller Energy Resources hold a Zacks Rank #1 (Strong Buy), Whiting Petroleum carries a Zacks Rank #2 (Buy).

Updated Research Report on Liberty Global

Posted Thu Apr 17, 07:20 pm ET

by Zacks Equity Research

On Apr 16, 2014, we issued an updated research report on Liberty Global plc. (LBTYA).

Except for the last quarter, Liberty Global has delivered negative earnings surprise in all the three quarters last year, with an average beat of negative 63.53%. The company reported mixed financial results for the fourth quarter of fiscal 2013 with the bottom line beating the Zacks Consensus Estimate but the top line missing the same.

In the coming years, we expect Liberty Global’s revenues to benefit from a ‘triple play’ of video, broadband, and telephone offering, as it signs up more “bundled” customers in Europe and Latin America. At the end of the fourth quarter of 2013, Liberty Global had approximately 2 million TiVo Inc. (TIVO) platform-based video subscribers with a quarterly net addition of 200,000 subscribers.

In Jun 2013, Liberty Global completed the full acquisition of the British cable MSO, Virgin Media. The takeover places Liberty Global as the largest cable TV MSO (multi service operator) in the world. In the U.K., the merged entity poses serious competitive threat to British Sky Broadcasting Group plc and BT Group plc. (BT).

Notably, Virgin Media decided to offer the video-subscription service of the online video streaming service provider Netflix, Inc. (NFLX). With this, web-based services will be integrated into the cable system for the first time in the global pay-TV industry.

Additonally, the board of directors of Liberty Global decided to authorize a $4.5 billion share buy-back program over the next two years.

The company is predominantly operating in Europe, which is currently the most vulnerable region economically. Ongoing debt crisis in several European countries may significantly affect the future prospects of Liberty Global. The company is gradually shifting focus to western Europe and some Latin American countries.

However, recessionary pressure is most severe in these regions. A low per capita income may stall people from spending more on exorbitant high-speed bundled communication services and HD-DVR-based digital video services.

Liberty Global is currently trading at significantly higher multiples with respect to several valuation metrics compared with the industry average and the S&P 500. We believe that this high level of valuation may restrict above-market gain anytime soon.

Liberty Global currently has a Zacks Rank #3 (Hold).

Updated Research Report on A&F

Posted Thu Apr 17, 07:15 pm ET

by Zacks Equity Research

On Apr 16, 2014, we issued an updated research report on Abercrombie & Fitch Co. (ANF) following the company’s better-than-expected fourth-quarter fiscal 2013 bottom-line results.

This casual apparel retailer posted robust fourth-quarter fiscal 2013 bottom-line results wherein its earnings of $1.34 per share surpassed the Zacks Consensus Estimate of $1.04 per share. Better-than-expected results were primarily due to a lower tax rate that gained as the major chunk of earnings were derived from across national borders as well as higher expense savings stemming from the ongoing profit improvement initiatives.

We are impressed with Abercrombie’s second consecutive quarter of upbeat bottom-line performance.  With a surprising turnaround driven by its focus on executing long-term strategic plans, the company provided an impressive guidance for fiscal 2014.

The company now expects significant improvement in its business in 2014 and beyond. Therefore, it projects fiscal 2014 earnings in the range of $2.15–$2.35 per share, implying year-over-year growth of 12%–23%. Currently, the Zacks Consensus Estimate is pegged at $2.37 per share, which lies above the company’s higher-end guidance range.

Furthermore, we believe that management’s sustained focus on expanding global operations and improving cash flows, while maintaining a healthy balance sheet, bode well for the future.

However, the company’s comparable-store sales (comps), which shows disappointing results for the past eight quarters, prevents us from becoming more constructive on the stock.

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

Other Stocks to Consider

Some better-ranked stocks in the apparel/shoe retail space include American Apparel Inc. (APP), Foot Locker Inc. (FL) and Bebe Stores Inc. (BEBE). All of these have a Zacks Rank #2 (Buy).

Nokia Unit, Cellcom in LTE Pact

Posted Thu Apr 17, 07:10 pm ET

by Zacks Equity Research

Nokia Corporation’s (NOK) wholly-owned subsidiary Nokia Solutions and Networks (“NSN”) has recently cut a deal with one of Israel’s leading telecom operators, Cellcom.

Per the deal, NSN will supply 4GLTE equipment to Cellcom which will also support the LTE advanced network technology. However, the financial terms of the contract have not been disclosed.

Cellcom plans to complete the deployment of 4GLTE network technology across its entire footprint by the end of 2014. However, this endeavor is subject to regulatory approvals and availability of frequency. Earlier, Cellcom had teamed up with rival carrier Pelephone on LTE network partnership, which has also been delayed due to regulatory issues. This is a matter of concern for NSN as delays in 4GLTE rollout may mar the company’s business prospects in Israel.

A few months back, NSN won a major contract in Russia. VimpelCom Ltd. (VIP), the third largest telecom operator in Russia, selected NSN to provide equipment and services for its 4G LTE (Long-Term Evolution) network deployment plans. Moreover, aggressive 4GLTE network rollout across China coupled with higher capital spending on network upgrades in India, Korea and Indonesia may drive the company’s top line going forward.

NSN has also received a major 4G LTE network upgrade contract of nearly $416 million from EE, a leading U.K.-based wireless operator. The contract entails NSN to implement its Single radio access network (RAN) Advanced solutions to allow mobile operators to set up different network standards (radio technologies) on a shared multi-purpose hardware.

NSN’s 4GLTE equipment is widely used by carriers and popularity wise, are positioned after Ericsson (ERIC) and Huawei. In the recently concluded fourth-quarter 2013, the NSN segment generated $4.2 billion in revenues, up 20% sequentially. Hence, we believe that such continuous contract wins will help the company boost its top line in the forthcoming quarters.

Notably, Nokia decided to vend its core mobile handset and services division to Microsoft Corp. (MSFT). The deal is expected to close within a couple of months. Post the divestiture, NSN will become the company’s chief business division with approximately 90% of the total revenue.

Nokia currently carries a Zacks Rank #1 (Strong Buy).

Ensco Orders 2 Advanced Jackups

Posted Thu Apr 17, 07:05 pm ET

by Zacks Equity Research

On Apr 15, 2014, oil and natural gas driller Ensco plc (ESV) declared that it has placed order for ENSCO 140 and ENSCO 141− two high-specification jackup rigs. The jackups – that are expected to be delivered by the middle of 2016 − will have differentiated technology and specific designs, for complying with most of the regulatory standards in the Middle East.

There is a considerable demand for jackups of differentiated technology and design.  Ensco stated that ENSCO 140 and ENSCO 141 will mainly be used for drilling operations in the Middle East. Apart from complying with the requirements in the Middle East, the rigs also fulfill the required standards outside the region. Thus, the company added that the jackups can also be utilized for drilling purposes outside the Middle East as well.

Ensco has projected the total construction expenses of ENSCO 140 and ENSCO 141 at $430.0 million. The company believes that both the rigs will help customers drill oil and gas fields at reasonable costs.

U.K.-based Ensco is a leading supplier of offshore contract drilling services to the oil and gas industry. Effective Dec 23, 2009, Ensco has shifted its corporate headquarters from Delaware, U.S. to London. Ensco currently carries 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 oil and gas drilling sector like Helmerich & Payne Inc. (HP), Pioneer Energy Services Corp. (PES) and Seadrill Partners LLC (SDLP). Helmerich & Payne and Pioneer Energy Services sport a Zacks Rank #1 (Strong Buy), while Seadrill Partners holds a Zacks Rank #2 (Buy).

CVS Caremark Upped to Buy

Posted Thu Apr 17, 06:55 pm ET

by Zacks Equity Research

On Apr 16, Zacks Investment Research upgraded CVS Caremark Corporation (CVS) to a Zacks Rank #2 (Buy) from a Zacks Rank #3 (Hold).

Why the Upgrade?

The long-term expected earnings growth rate for this Rhode Island-based integrated pharmacy service provider is 13.4%. Moreover, CVS has delivered positive earnings surprises in all of the last 4 quarters with an average beat of 3.5%.

CVS reported its fourth-quarter and full-year 2013 results on Feb 11, 2014. Adjusted earnings per share came in at $1.12, beating the Zacks Consensus Estimate of $1.11 by 0.90% and exceeding the prior-year earnings by 15.8%.

Earnings were primarily aided by healthy top-line growth of 4.6% in the reported quarter, which was largely driven by a combined force of 5.2% year-over-year increase in net revenues from the Pharmacy Services segment and 5.6% rise in net revenues from the Retail Pharmacy segment.

With respect to segment performance, net revenues from CVS's Pharmacy Services segment increased 5.2% to $19.6 billion in the fourth quarter, principally driven by drug cost inflation, new products and new clients in the specialty pharmacy business.

On the other hand, same-store sales increased 4.0% over the prior-year quarter, with a 6.8% rise in pharmacy same-store sales. This contributed to the 5.6% rise in net revenues at the Retail Pharmacy segment to $17.2 billion.

Based on its strong performance, CVS raised its first-quarter 2014 adjusted earnings guidance to the range of $1.03–$1.06 per share. This new guidance is higher than the previous estimation by 7 cents and thereby, equates to adjusted EPS growth of 24.25% to 28.25%.

CVS also expects its consolidated revenues to increase 4.25% to 5.5% in the first quarter. Moreover, the company has raised its free cash flow guidance to the band of $5.5–$5.8 billion from $5.1–$5.4 billion guided earlier.

The Zacks Consensus Estimate for earnings for 2014 remained flat at $4.47 per with no downward revision over the last 30 days. For 2015, however, one estimate was revised upward over the same time frame, raising the Zacks Consensus Estimate by 0.2% to $5.02 per share.

Other Stocks to Consider

In the broader drug retail/wholesale space, Rite Aid Corp. (RAD), Spartan Stores Inc. (SPTN) and Herbalife Ltd. (HLF) are performing well. While Rite Aid and Spartan Stores hold a Zacks Rank #1 (Strong Buy), Herbalife retains a Zacks Rank #2 (Buy).

ABIOMED's Impella RP Bags CE Mark

Posted Thu Apr 17, 06:50 pm ET

by Zacks Equity Research

Leading provider of heart support technologies, ABIOMED, Inc. (ABMD) secured the CE Mark approval to market its Impella RP (Right Peripheral) heart pump in the European Union. Shares of ABIOMED climbed 2.8% following the announcement last week, to close at $24.48 till the last closing date.

ABIOMED’s Impella RP is a percutaneous heart pump that can be planted into the heart via the femoral artery in the thigh without the need for a surgical procedure. It is designed to access the heart’s right ventricle via the vena cava to provide temporary ventricular support for patients with right ventricular failure.

The device delivers over 4 liters of blood per minute from the lower right atrium to the pulmonary artery. As a result, the Impella RP enables surgeons to treat right ventricular dysfunction in a minimally invasive manner.

Impella RP is the latest in ABIOMED’s line of Impella heart pumps. Impella 2.5, Impella 5.0, Impella CP and Impella LD have already secured the U.S. Food and Drug Administration (FDA) pre-market approval. The Impella RP, however, is not currently cleared for sale or use in the U.S.

Last month, ABIOMED had announced successful completion of patient enrolment in the Recover Right clinical trial of its Impella RP in the U.S. The company plans to use the results from the trial to apply for a Humanitarian Device Exemption (HDE) approval, for which it has already received a Humanitarian Use Device (HUD) approval in Jul 2012.

Following the commercial European availability of the new Impella RP device, ABIOMED anticipates the FDA go-ahead by Feb 2015. The company plans to introduce this novel product into its established hospital installed base.

ABIOMED is witnessing strong demand for its Impella line of products as an increasing number of patients are being treated with these devices. Impella utilization thus continues to grow at an impressive pace, with the last reported quarter posting double-digit rise in Impella revenues.

ABIOMED presently carries a Zacks Rank #3 (Hold). Some better-ranked stocks worth a look in the medical instruments industry are Syneron Medical Ltd. (ELOS), Delcath Systems, Inc. (DCTH) and Accuray Inc. (ARAY). While Syneron Medical and Delcath Systems sport a Zacks Rank #1 (Strong Buy), Accuray retains a Zacks Rank #2 (Buy).

Packaging Corp. to Settle Suit at $17.6M

Posted Thu Apr 17, 06:45 pm ET

by Zacks Equity Research

Packaging Corporation of America (PKG) recently agreed to settle a civil, class action lawsuit filed in 2010 by Kleen Products by paying $17.6 million into a settlement fund in exchange of dismissal of all the charges leveled against it.. The agreement will be finalized post approval by the U.S. District Court for the Northern District of Illinois.

Kleen Products led the class action lawsuit against leading North American manufacturers of containerboard. There were eight other defendants in the suit, including International Paper (IP), Weyerhaeuser Co. (WY) and Smurfit-Stone Container Corp., which was acquired by Rock-Tenn (RKT) in 2011.

The Lawsuit

In 2005, the containerboard industry was marked by high barriers to entry and an oligopolistic structure. The industry was prone to anti-competitive behavior owing to a small number of manufacturers and inelastic product demand. The defendants were integrated suppliers of containerboard products to the plaintiffs.

Plaintiffs alleged that the defendants repeatedly engaged in a coordinated arrangement to impose capacity constraints and subsequently hiked prices of containerboard products in the market. This resulted in an artificial shortage in the industry at a time of promising macroeconomic environment when product demand was steadily rising, resulting in significant market impact.

During 2005–2010, there were unprecedented number of plant shutdowns and capacity cutbacks. Prices across the board were increased eight times during this period, aggregating to a price-hike of over 50% without any underlying cost justifications.

In 2010, the plaintiffs, led by Kleen Paper, filed a class action lawsuit against Packaging Corporation and other defendants. The plaintiffs alleged that the said anti-competitive actions harmed their business and deprived them of the benefits of free and unrestricted competition in the market. They sought damages to the extent of three times the losses they sustained, as well as litigation costs.

The Agreement

Per the agreement, Packaging Corp. will pay the designated amount into a settlement fund to clear off its name from the lawsuit. A reserve fund will be created in the first-quarter 2014 financial statements of this Zacks Rank #3 (Hold) stock, creating an after-tax charge of $11.3 million or 11 cents per share.

Although Packaging Corp. still denies the legitimacy of the plaintiff’s allegations, the decision was made in the best interests of shareholders and was driven by the need to avoid substantial legal costs and the uncertainty caused by such litigation.

Updated Research Report on PACCAR

Posted Thu Apr 17, 06:40 pm ET

by Zacks Equity Research

On Apr 11, 2014, we issued an updated research report on PACCAR Inc. (PCAR). This Zacks Rank #2 (Buy) stock posted a 30.68% rise in earnings to 94 cents per share in the fourth quarter of 2013 from 72 cents in the same quarter of 2012, surpassing the Zacks Consensus Estimate of 92 cents.

Revenues in the quarter increased 15% to $4.6 billion, surpassing the Zacks Consensus Estimate of $4.3 billion. The increase in earnings was attributable to the increase in truck and aftermarket parts sales along with pre-tax profits in financial services.

PACCAR enjoys a strong market share and expects a boost in sales due to the ongoing replacement of the aging truck population. The company is also well positioned in the key non-U.S. markets through its investments. However, it faces high competition in the commercial trucks market and the Financial Services segment.

PACCAR is also significantly dependent on its suppliers for providing the requisite raw materials. Any shortage in supply or increase in raw material prices can adversely affect the company’s margins.

PACCAR reported positive earnings surprises in 2 of the trailing 4 quarters with an average beat of 1.2%. The Zacks Consensus Estimate for the company’s 2014 earnings is $3.64 per share, up 10.38% over 2013.

Key Picks From the Sector

Some other automobile stocks worth considering are Tesla Motors Inc. (TSLA), Fox Factory Holding Corp. (FOXF) and Toyota Motor Corp. (TM). Toyota carries a Zacks Rank #1 (Strong Buy), while Tesla and Fox Factory carry a Zacks Rank #2.

Glaxo Looking into Misconduct Charges

Posted Thu Apr 17, 06:35 pm ET

by Zacks Equity Research

GlaxoSmithKline (GSK) recently responded to investigations and charges of misconduct in Jordan and Lebanon. Glaxo clarified that it is taking a number of steps to address the issue. The company disclosed that it is looking into allegations brought against some of its employees in these countries. For this, the company is using both internal and external teams. However, the investigations are not over yet.

We note that this is not a one-off misconduct charge surfacing at Glaxo. In 2013, there were a number of breaches in Glaxo’s sales and marketing policies (161 violations), most of which resulted in written warnings (113) and even some dismissals (48).

Glaxo is also facing investigations and charges of fraudulent behavior and ethical misconduct leveled by Chinese government authorities. The investigation is still ongoing; it is likely that a number of employees working at Glaxo were engaged in fraudulent practices.

Our Take

We note that the Emerging Markets and Asia Pacific (EMAP) market – of which China and the Middle East/Africa are a part – contributed more than 25% to Glaxo’s revenues in 2013.

We remind investors that Pharmaceuticals and Vaccines sales were adversely affected (by 4%) in 2013 due to the ongoing investigation in China.  Revenues generated in China were down 18% in 2013. We are thus concerned about a potential decline in Glaxo’s revenues in the Middle East/Africa region. Pharmaceuticals sales in the region were up 5% in 2013 to £1,018 million. We believe that any strict action enforced against Glaxo will impact the company’s top line in the long term.

Glaxo currently holds a Zacks Rank #3 (Hold). Some better-ranked stocks in the healthcare sector include AbbVie Inc. (ABBV), Allergan Inc. (AGN) and Johnson & Johnson (JNJ). All three sport a Zacks Rank #2 (Buy).

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