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Zacks #1 Stocks on the Move 09/18/2014

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Analyst Blog

Reinsurance Group OK'd in China, Units Rated by A.M. Best

Posted Thu Sep 18, 04:50 pm ET

by Zacks Equity Research

Reinsurance Group of America, Inc. (RGA) has announced that its one of its units RGA Reinsurance Company has received consent from the China Insurance Regulatory Commission (“CIRC”) to operate a Branch Office in that country’s capital, Shanghai.
The company has been operating in China since 2005, when it opened a representative office in Beijing. 
This approval comes as an opportunity for Reinsurance Group to tap the growing Chinese insurance market. The company plans to penetrate further into the region by offering a wide range of products and services to the Chinese population.
Not only China, the company has a significant presence in Canada, Australia and New Zealand, Asia, and Europe, Middle East and Africa. International expansion at Reinsurance Group is not new. Effort by the company over the last two decades in this direction has produced a well-established and seasoned operation. 
In its Asia business, the company expects growth rates of 15–20% in pre-tax operating income and 10%–15% in net premium by 2016. The company is confident of generating profits consistently from in the in-force business.  
On the same day, A.M. Best undertook rating action on two units of Reinsurance Group. The company’s subsidiaries – RGA Americas Reinsurance Company, Ltd and RGA Atlantic Reinsurance Company, Ltd – wereconferred a financial strength rating of A+ and the issuer credit ratings of “aa-”. The ratings carry a stable outlook.
The ratings acknowledge the importance of the units’ consolidated operating profile, which is projected to represent nearly 40% of the company’s equity and 35% of pre-tax consolidated results. The ratings also take into account strong capital levels of the units, affiliation with the parent company and a high quality investment portfolio.  
The company is contemplating on relocating RGA Americas to Barbados from Bermuda, given its strategic importance to the company. With redomestication, RGA Atlantic will become the direct subsidiary of RGA America. The company anticipates that these units will be instrumental in providing reinsurance (means insurance for insurance) solutions to external clients along with retrocession (reinsurance for reinsurers) of business from other RGA entities. 
However, factors which counter the positive rating are stiff competition faced by the units in global reinsurance market. Moreover, withhigher incidences of the population turning unhealthy or sick (morbidity) in the Asia Pacific region also remains a headwind.
The rating agency will not undertake any positive rating action in the near term. However, a negative rating action may follow if the capital position deteriorates or the units’ overall importance to the group diminishes. 
Reinsurance Group carries a Zacks Rank # 2 (Buy). Other stocks worth considering include China Life Insurance Co. Ltd. (LFC), Lincoln National Corporation (LNC) and Health Insurance Innovations, Inc. (HIIQ). All these stocks carry the same rank as Reinsurance Group. 

Embraer E-175 Jet Wins 50 Republic Airways Orders, Loses 20

Posted Thu Sep 18, 04:45 pm ET

by Zacks Equity Research

The Brazilian jet maker Embraer SA (ERJ) secured a firm order for 50 of its next-generation E-175 aircraft from Indianapolis-based Republic Airways Holdings Inc. (RJET), a U.S. regional operator. The deal is valued at $2.1 billion at list prices. Deliveries of the E-175s are scheduled to start in third quarter 2015 and run until 2017.

The latest contract follows an earlier deal between the two companies reached in January last year, when Republic Airways ordered 47 E-175 aircraft, 34 of which have already been delivered. This contract also had an option of purchasing an additional 47 planes of the same model.

Republic Airways will operate the planes for United Airlines under the United Express brand. United Airlines is the wholly owned subsidiary of United Continental Holdings Inc. (UAL). With the latest order, Republic Airways − one of the first U.S. airlines to fly Embraer E-Jets − will have an E-Jet fleet of 72 E-170s and 151 E-175s.

The Republic Airways order came as a palliative to the company as Embraer simultaneously received a cut in order from Flybe by 20 E-175 jets. Flybe had initially struck a $1.3 billion deal with Embraer in Jul 2010 for 35 E-175 88-seat regional jets. The deliveries were originally scheduled to complete by Mar 2017. Flybe has taken delivery of 11 jets and will only take 4 more. Flybe will however take 24 of Bombardier’s Q400s on a sublease from Republic Airways. The Q400 turboprops are usually slower than the jets, carrying a lesser number of passengers and burning less fuel.

British regional airline, Flybe Group is in the middle of a transformation process to reinstate profitability. Hence, this three-way set of accords involving Republic Airways, Embraer and Flybe has been taken to resolve Flybe’s legacy fleet commitments and secure the right aircraft for its future development. Hence, the 71 seated Q400s as against the 88 seated E175 fit Flybe’s fleet replacement and growth profile.

Embraer is the world's third largest commercial aircraft manufacturer after The Boeing Co. (BA) and Airbus. The company designs, manufactures and sells aircraft and systems under both commercial as well as executive aviation, and defense and security segments.

In the second quarter of 2014, the jet manufacturer delivered a total of 58 jets, up 70.6% sequentially and 13.7% year over year. As on Jun 30, 2014, Embraer had a firm order backlog of $18.1 billion. In terms of aircraft breakdown, the company’s order backlog comprised 167 E-175s, 100 E-175-E2s, 62 E-190s, 50 E-195-E2s, 50 E-190-E2s and 11 E-195s.

Despite a growing order book, we remain concerned about the highly competitive industry that is compelling the company to incur high costs. Moreover, the possibility of order cancellations and a drop in demand for business jets add to the worries.

The company presently holds a Zacks Rank #3 (Hold).

Yum! Brands Downgraded to Strong Sell on China Woes

Posted Thu Sep 18, 04:40 pm ET

by Zacks Equity Research

On Sep 17, 2014, Zacks Investment Research downgraded Yum! Brands, Inc. (YUM) to a Zacks Rank #5 (Strong Sell) based on declining comps due to adverse publicity on account of improper food handling practices by its former supplier, Shanghai Husi.

Why the Downgrade?

Yum! Brands has recently been in the news due to adverse publicity on account of improper food handling practices by its former supplier, Shanghai Husi, a division of OSI, in Jul 2014.

The company stated that it expects its China division comps to decline 13% year over year in the third quarter, primarily due to such negative publicity. Since the scandal, the company has been witnessing sales declines at its KFC and Pizza Hut units in China while its share price dropped 11.3% since July. The company indicated that though sales have started to recover, they continue to be in the negative.

Shanghai Husi Food Co. was reportedly found reusing meat that had fallen on the factory floor as well as mixing fresh and expired meat. This affected consumer confidence, thereby lowering comps.

This is bad news for Yum! Brands, especially as it generates about half of its revenues from China and is battling sluggish comps in the U.S. amid a lower consumer spending environment and a sluggishly recovering economy.

Not surprisingly, analysts continued to significantly revise down their earnings estimates for Yum! Brands. Therefore, the Zacks Consensus Estimate for the third quarter of 2014 nosedived 17.8% to 88 cents per share over the last 60 days. For 2014, the Zacks Consensus Estimate was lowered 8.2% to $3.38 over the same timeframe.

Other Stocks That Warrant a Look

Some better-ranked stocks in the same industry include Chipotle Mexican Grill, Inc. (CMG), Jamba, Inc. (JMBA) and BJ's Restaurants, Inc. (BJRI). While Chipotle and Jamba sports a Zacks Rank #1 (Strong Buy), BJ's Restaurants carries a Zacks Rank #2 (Buy).

Nokia Unit Brings OSS Tools for Cost, Network Management

Posted Thu Sep 18, 04:35 pm ET

by Zacks Equity Research

To enhance network performance as well as to bring down costs, Nokia Corporation’s (NOK) wholly owned subsidiary Nokia Solutions and Networks (“NSN”) is the first to come up with Operations Support System (OSS) tools under the names of Nokia Performance Manager and Nokia Service Quality Manager. 
While Nokia Performance Manager will help carriers efficiently supervise the performance and capacity of 2G, 3G and LTE networks, Nokia Service Quality Manager will allow telecom players to deliver real-time view of service quality across mobile broadband and IT networks.
Nokia Networks believes that the implementation of these tools will lower network management costs by nearly 19% as compared to other traditional business models. The cutting down of network expenses will be brought about by lowering installation, integration and operational costs. 
Moreover, these tools are supported by Nokia Networks’ Global Delivery Centers, thus allowing carriers to select OSS services along with the maintenance and basic services like the Key Quality Indicator (KQI) operation for Service Quality Manager or service management for a fully outsourced service operations center.
Software as a service model is quite popular in the IT industry. However, telecom carriers make huge investments to acquire such software packages. Hence, launch of the OSS software as a Managed Service for the telecom industry will create a new revenue stream for Nokia Networks.
In the second quarter of 2014, Nokia’s NSN segment generated $3.5 billion in revenues, down 7.7% year over year. This segment alone accounts for almost 90% of the company’s revenues. 
Over the last few months, the NSN segment won a series of contracts and also launched a significant number of products. Recently, the company unveiled the first Network Functions Virtualization (NFV) solution for the shipping industry.
Moreover, in the first week of September, Nokia Networks and China Telecom Corp. Ltd. (CHA) jointly launched the world’s first FDD TDD carrier aggregation that will help enhance an operator device chipset’s performance.
Hence, we believe that such service launches coupled with strategic tie-ups will certainly drive the NSN segment’s revenue growth while moving ahead. 
Nokia currently carries a Zacks Rank #3 (Hold).
Other Stocks to Consider
Stocks worth considering in the wireless industry include BlackBerry Limited (BBRY) and Aruba Networks, Inc. (ARUN). Both carry a Zacks Rank #2 (Buy).

Impax Rytary FDA Action Date Extended by Three Months

Posted Thu Sep 18, 04:30 pm ET

by Zacks Equity Research

Impax Laboratories, Inc.‘s (IPXL) branded products division, Impax Pharmaceuticals, announced that the FDA  has extended the review date for the company’s New Drug Application (NDA) for Rytary (IPX066) by three months. The regulatory body will announce its decision by Jan 9, 2015 instead of Oct 9, 2014.

Impax is looking to get Rytary approved for the treatment of patients suffering from idiopathic Parkinson's disease. The company plans to submit for EU approval later this year.

Impax had resubmitted the NDA for Rytary in Apr 2014. However, the company subsequently amended the chemical, manufacturing and control (CMC) section of the resubmitted NDA after the submission of responses to Form 483 observations related to the Taiwan manufacturing facility. The FDA had issued a Form 483 in July this year, after it had inspected the Taiwan facility.

With the amendment being treated as a major change and the submission being made within three months of Oct 9, 2014, the U.S. regulatory body extended the date to review the information. The agency did not ask the company for any other additional information.

We note that Impax has been hampered by quality control issues since 2011. In May 2011, Impax had received a warning letter from the FDA after an inspection of the company’s facility at Hayward, CA. Subsequently, the company received a Form 483.

The company suffered yet another setback when the FDA conducted a re-inspection of the concerned facility in August this year. The outcome of the re-inspection was not positive for Impax and the FDA issued a new Form 483 with 7 observations.

Impax currently carries a Zacks Rank #3 (Hold). Investors looking for better-ranked stocks in the health care sector can consider Mallinckrodt (MNK), Akorn, Inc. (AKRX) and Acura Pharmaceuticals, Inc. (ACUR). While Mallinckrodt and Akorn carry a Zacks Rank #1 (Strong Buy), Acura is a Zacks Rank #2 (Buy) stock.

Cenovus Energy Gives Update on Foster Creek Expansion

Posted Thu Sep 18, 04:20 pm ET

by Zacks Equity Research

Canadian oil company, Cenovus Energy Inc. (CVE) recently announced that it has achieved its first oil production at its Foster Creek phase F expansion. Phase F is expected to add 30,000 barrels per day (bbls/d) of capacity, with production ramping up over the next 12 to 18 months.

By this year end, production from phase F would be approximately 5,000 bbls/d. Phases G and H are under construction and are expected to add another 30,000 bbls/d each with first production anticipated in late 2015 and 2016, respectively. This will take the total expected gross production capacity at Foster Creek to 210,000 bbls/d. Following the completion of phases F, G and H, optimization work is expected to increase total capacity by another 15,000 bbls/d to 35,000 bbls/d.

Cenovus expects F, G and H expansion and optimization projects to be completed with capital costs between $35,000 and $38,000 per incremental barrel. Changes to F, G and H expansion include improvements to the oil and water plant, safety systems, completion designs and the incorporation of recent regulatory changes.

The Foster Creek project has performed consistently since a planned turnaround in late 2013, with production averaging 90% to 95% of plant capacity. In July, production averaged 102,000 bbls/d as volumes were impacted by scheduled maintenance on Cenovus' cogeneration facility. August volumes averaged 119,000 bbls/d and September production continues to be strong. The company estimates a planned partial turnaround later in the month that will have minimal impact on production volumes.

Cenovus anticipates Foster Creek's steam to oil ratio (SOR – measure of steam required to produce one barrel of oil – will range between 2.6 and 3.0 until all phases of F, G and H are complete. At that point, SOR is expected to drop below 2.5. Foster Creek is operated by Cenovus and jointly owned with ConocoPhillips (COP).

Headquartered in Calgary, Alberta, Cenovus is an integrated oil company with ownership interest in two high-quality refineries in Illinois and Texas. Cenovus’ operations include increasing oil projects and growing natural gas and crude oil production in Alberta and Saskatchewan.

Cenovus enjoys the benefits of industry-leading oil sands assets that position it for long-term growth. We believe that the company will remain focused on improving its operational efficiency throughout 2014.

Cenovus currently carries a Zacks Rank #3 (Hold), implying that will 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 Pioneer Energy Services Corp. (PES) and Cameron International Corporation (CAM). Both these stocks currently sport a Zacks Rank #1 (Strong Buy).

Should Agro Group (AGII) Stock Be in Your Portfolio Now?

Posted Thu Sep 18, 04:10 pm ET

by Zacks Equity Research

On Sep 16, Zacks Investment Research upgraded Argo Group International Holdings, Ltd. (AGII) to a Zacks Rank #2 (Buy). Given below are the drivers of the stock and the reasons why it is a good investment pick now.

Why the Upgrade?

Argo Group has witnessed rising earnings estimates on the back of strong second-quarter 2014 results and initiatives at the company. Moreover, this property and casualty insurer delivered positive earnings surprises in the last four quarters, with an average beat of 16.8%.

Argo Group reported earnings per share of $1.00 which surpassed the Zacks Consensus Estimate by 25% and improved 35% year over year. Top line too improved year over year on the strength of higher net premiums.

Underwriting results were solid across all the segments. Combined ratio improved 250 basis points to 95.8% in the quarter. Net favorable prior-year reserve development also compared favorably year over year, thereby improving the combined ratio.

Paid claims remained flat year over year and hence Argo Group expects positive cash flows in the second half of 2014.

With respect to returning value to shareholders, Argo Group spent $23.9 million to buy back 0.5 million shares. In addition, it had $112.2 million remaining under its authorization. Lower share count on account of share repurchases will continue to provide an upside to the bottom line. The company also raised its dividend by 20%.

Book value increased 6.5% from the 2013 end level to $62.80 per share as of Jun 30.

Last month, Alteris Insurance Services, Inc., a subsidiary of Argo Group launched a new specialty insurance program for large water-related entities. Another subsidiary, Argo Group US Inc., invested in technology solutions, Gleason Technology. The company joined forces with SureTec Financial Corp, to provide expanded combined capacity for the middle market contract surety segment. Also, with a new commercial crime insurance product offering, the company added another feather to its management liability insurance.

All the positives put together prompted a rise in the Zacks Consensus Estimate for 2014 and 2015 in the last 60 days. It increased about 1.4% to $3.60 for 2014 as 4 of 5 estimates moved north and by 0.8% to $4.01 for 2015 as 1 of 5 estimates was raised.

Other Stocks to Consider

Investors interested in the property and casualty industry can also consider Mercury General Corporation (MCY), AmTrust Financial Services, Inc. (AFSI) and Federated National Holding Company (FNHC). All these stocks sport a Zacks Rank #1 (Strong Buy).

Brazil Presidential Election: Will Petrobras Gain the Most?

Posted Thu Sep 18, 04:03 pm ET

by Nilanjan Choudhury

The global media spotlight is shining on this week's vote for Scottish independence, and then again in a fortnight when presidential elections will be held in Brazil on Oct 5. Though Scotland’s referendum – on whether the country should remain with the U.K. or become an independent nation – is being intensely scrutinized by the financial press for its economic consequences, the unfolding election drama in the largest country in South America is pulling eyeballs from around the globe as well.

Markets Move on Vote Outlook

For the past few months, Brazil’s equity market has been riding the election wave. When the polls show voter support for incumbent Dilma Rousseff, markets sell off, while improving prospects for opposition candidate Marina Silva sends the iBovespa index higher.

Candidates’ CV

In this Latin American nation, leftist President Dilma Rousseff has come under heavy criticism for Brazil’s dismal economic performance under her leadership, highlighted by recession and increasing inflation. Therefore, her re-election is perceived as the extension of this ‘stagflation’-like situation.

On the other hand, Brazilian Socialist Party presidential candidate Marina Silva is seen as increasingly pro-industry, thereby preferred by investors. The business community is hopeful that her win would not only attract more capital to the country but more importantly, reduce the state intervention in company affairs.

Stocks to Watch

From electric utility Centrais El (EBR) to financial services provider Itau Unibanco Holding S.A. (ITUB), and from plane maker Embraer S.A. (ERJ) to iron-ore producer Vale S.A. (VALE), there are a number of Brazilian equities which would be affected by the fate of the upcoming vote.

However, the one most exposed to the outcome of next month's general election is state-run energy giant Petrobras (PBR).

Petrobras: Outlook Tied to Election

Headquartered in Rio de Janeiro, Petrobras is the largest publicly-traded Latin American oil company, dominating Brazil’s oil and gas sector. It produces substantially all of Brazil’s crude oil and natural gas, accounts for almost all of the country’s refining capacity, is building the country’s natural gas infrastructure and enjoys strong market share positions in the petroleum product and liquefied petroleum gas marketing businesses. While the company no longer operates as a legal monopoly, the size and reach of its operations make it a quasi-monopoly in Brazil.

However, the Brazilian government, the company’s majority shareholder with a 54% stake, has a history of political interference in Petrobras’ affairs. As a result, despite the company’s expertise in deep-water operations, its huge recent discoveries and increase in oil production, Petrobras routinely incurs losses.

In particular, while the upstream business is doing fine, the downstream segment is a drag on the overall results. The government caps the prices of domestic refined products so as to meet the needs of the people. These price regulations do not allow Petrobras to pass high refining costs to consumers.

A win for Marina Silva is construed as a less restrictive environment for the beleaguered Petrobras, which is also battling accusations of political kickbacks. With a change of administration and the resultant end to the previous government’s populist policies, the company is likely to be allowed to raise domestic product prices, thereby helping it to make larger profits and generate sufficient cash. The improved efficiency will then push the stock up from its current Zacks Rank #4 (Sell).

L Brands Initiatives Reap Results, Drives Sales Momentum

Posted Thu Sep 18, 04:00 pm ET

by Zacks Equity Research

L Brands, Inc. (LB) has sustained its focus on cost containment, inventory management, merchandise, and speed-to-market initiatives. It is this focus that we believe have helped it to stay afloat in a sluggish consumer environment. The company’s foray into international markets is likely to bring long-term growth opportunities as overseas stores continue to perform better and generate increased sales volumes.

L Brands commands a market leading position in the lingerie, personal care and beauty segments. We believe that the company’s innovations in merchandise and exclusive assortments have made it a popular name among consumers and set it apart from its peers. The company with its operational efficiencies as well as innovative assortments remains well positioned to capitalize on the same. This is evident from the company’s sales performance so far in the year.

From April to August, L Brands has consistently registered comparable-store sales growth. Within this period, comps growth touched a low of 2% and hit a high of 8%, thereby recording an average growth of approximately 4.8%. Comparable-store sale increased 8% in April, 3% in May, 2% in June, 6% in July and 5% in August.

Given the current macroeconomic environment, monthly sales data for L Brands is also encouraging, reflecting steady growth. The company, within the span of April to August, registered sales growth in the range of 4­–9%, reflecting average growth of approximately 7.4%. The company registered sales growth of 9% in April, 4% in May, 7% in June, 8% in July and 9% in August.

L Brands continues to revamp its business by improving store experience, localizing assortments and enhancing its direct business. We believe these measures will help it to generate incremental sales and increase store transactions through a higher conversion rate. However, the competitive retail landscape and aggressive promotional strategy to gain market share may weigh upon margins.

L Brands currently carries a Zacks Rank #3 (Hold).

Favorably Ranked Stocks

Stocks worth considering in the retail sector include Citi Trends, Inc. (CTRN) sporting a Zacks Rank #1 (Strong Buy), and Lithia Motors Inc. (LAD) and Foot Locker, Inc. (FL) with a Zacks Rank #2 (Buy).

Continental Resources Names Stark as COO and President

Posted Thu Sep 18, 03:50 pm ET

by Zacks Equity Research

Leading Bakken oil producer, Continental Resources, Inc. (CLR) announced that it has appointed Jack Stark as president and chief operating officer. Stark would replace W.F. "Rick" Bott.

Stark joined Continental in 1992 and has served as the company's senior vice president of exploration since 1998. Stark is credited as a pioneer in unlocking unconventional resources in the Rockies, the Bakken, and most recently the SCOOP play in Oklahoma.

The change at the top came when the company facing costly well techniques raised capital expenditure for 2014 by $500 million from the initial forecast. Continental plans to spend $4.55 billion this year, up from the previous forecast of $4.05 billion. This was due to pricey well techniques in North Dakota's Bakken shale formation and a new project in Oklahoma, though the company revised its 2014 production expectations.

Continental cut the top end of the full-year production forecast range, and now expects oil and gas output of 27% to 30% higher than 2013. The company previously expected 2014 production at 26% to 32% higher than last year.

Oklahoma City-based Continental Resources is an independent exploration and production company focused on the Bakken, Cana and Niobrara shale plays. It has leases on nearly 1.1 million acres in the Bakken Shale region.

The company operates in the North, South and Eastern regions of the U.S. Its North region – north of Kansas and west of the Mississippi river – comprises North Dakota Bakken, Montana Bakken, the Red River units and the Niobrara play in Colorado and Wyoming. The first two hold the maximum promise for Continental Resources.

The Southern region includes Kansas and all properties south of Kansas and west of the Mississippi river, and comprises the Anadarko Woodford and Arkoma Woodford plays in Oklahoma.

Continental Resources currently carries a Zacks Rank #3 (Hold). Investors interested in the oil and gas sector could try out better-ranked stocks like Patterson-UTI Energy Inc. (PTEN), Pioneer Energy Services Corp. (PES) and Cameron International Corporation (CAM). All these stocks sport a Zacks Rank #1 (Strong Buy).

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