On May 22, 2013, the shares of Lockheed Martin Corporation (LMT) hit a 52-week high of $107.93. Lockheed Martin registered positive earnings surprises in three of the last four quarters, with an average beat of 16.56%. Another defense operator L-3 Communications Holdings Inc. (LLL) touched its 52-week high of $87.96 on the same day.

The first quarter 2013 results of Lockheed Martin were higher than our expectation. The outperformance was attributed to better-than-expected sales volume and strong segment operating profit and cash from operations.

Despite the threat of sequestration in the defense budget, the variety of product offerings, strong program execution and cost reduction measures will help the company to sustain its profitability. This defense contractor continues to receive orders from its global customer base and exited the quarter with a total backlog of $77.9 billion.

In addition, Lockheed Martin’s consistent investment in research and development work to improve and introduce products that can address global security needs, will help it to stay ahead of its competitors.

We expect long-term earnings growth of 6.82% on the back of sales growth of 2.5%. The Zacks Consensus Estimate for 2013 is $8.99, reflecting year-over-year growth of 6.36%.

Lockheed Martin has been consistently increasing the value of its shareholders. In the first quarter, the company repurchased 5 million shares for nearly $460 million and paid dividend worth $400 million.

The present valuation reflects that the company’s shares are trading at a discount compared to its peers. The shares of Lockheed Martin currently trade at 11.85x 12-month forward earnings, a 14.5% discount to the peer group average of 13.86x. Its price-to-book ratio of 0.73 is at a 10.97% discount to the peer group average of 0.82.

Lockheed currently retains a Zacks Rank #3 (Hold).  Other companies in the industry which are worth considering are Erickson Air-Crane Incorporated (EAC) and Wesco Aircraft Holdings Inc. (WAIR). The former presently has a Zacks Rank # 1 (Strong Buy) while the latter has a Zacks Rank # 2 (Buy).

Based in Bethesda, Maryland, Lockheed Martin is a global security company that is principally engaged in the research, design, development, manufacture, integration and sustainment of advanced technology systems, products and services.
 

On May 22, we maintained our Neutral recommendation on Verizon Communications Inc. (VZ), owing to its growth opportunities within the telecom sector, strong subscriber additions and expansion of the business line. However, the company faces certain headwinds that will likely hamper the upside movement of the stock. The largest wireless carrier in the North America holds a Zacks Rank #3 (Hold).

Why Maintained?

We believe that Verizon is favorably positioned to display a high level of operating efficiency supported by a favorable revenue mix and investments in key business areas. The company’s robust grip in the wireless segment along with focus on improving the performance of the wireline unit will enable it to register impressive revenue and earnings in the coming quarters.

The company’s fast deployment of the 4G Long Term Evolution (LTE) network plus the launch of attractive data plans are expected to aid its growth momentum. As of Apr 18, 2013, it covered 491 markets and more than 287 million people.

Verizon is also concentrating on acquiring more spectrum licenses in order to support its data services. In this regard, the company received approval from the Federal Communications Commission and entered into spectrum deals with AT&T Inc. (T), T-Mobile USA Inc. and Cricket License Company. Additional spectrum holdings will double Verizon’s capacity as well as enable services at a much higher speed, thereby driving data revenues and boosting its competitive position.

Apart from these, revised pricing plans, strength in the FiOS business segment, lucrative collaborations and healthy financial position will work in favor of the New York headquartered company.

Despite the positives, we prefer to stay on the sidelines owing to risk factors including persistent erosion in access lines, uncertain returns from investments, iPhone subsidies, and intense competition from cable companies and other alternative service providers.

For the second and third quarters of 2013, the Zacks Consensus Estimate for earnings are 73 cents and 74 cents per share, respectively. This reflects respective year-over-year growth of 13.7% and 15.7%.

Other Stocks

Foreign telecom firms that are performing impressively are Brazilian big-shot Telefonica Brasil, S.A. (VIV) and Netherlands-based VimpelCom Ltd. (VIP). Both the stocks carry Zacks Rank #2 (Buy).
 

United Airlines, the wholly owned subsidiary of United Continental Holdings Inc. (UAL) entered into a deal with partner SkyWest Airlines – an affiliate of SkyWest Inc. Per the Capacity Purchase Agreement (CPA) between the two carriers, SkyWest will run 40 Embraer 175 aircraft under the United Express brand.

In late April, United Airlines struck a deal with the Brazilian planemaker Embraer to buy 30 of its E175 planes. The recent contract of United with SkyWest is an addition to the month-ago deal.

The airplanes – which are scheduled to be delivered through 2014 and 2015 – are the first 76-seat jets operating on a regional basis in the United Express fleet. Designed with 12 first-class seats, 16 Economy Plus coach seats with extra legroom, 48 coach seats, wider seats with more aisles space and larger overhead bins, these jets aim to offer a more comfortable flying experience to passengers.

These dual-class aircraft will replace United’s older 50-seat regional jets that are proving expensive due to high fuel prices. With the new airplanes, United will be able to save 10% fuel per passenger as well as emit less harmful gases.

On the other hand, the agreement between SkyWest and Embraer carries the option of purchasing another 100 E175s, making the contract value worth $4.1 billion. If SkyWest decides to go for another 100 sets of E175s, Embraer is estimated to receive an additional $4.1 billion.

United Airlines is in constant endeavor to expand its route network with the most advanced and upgraded aircraft along with rendering top-class services to flyers. Early this week, the company re-launched The Boeing Company’s (BA) 787 Dreamliner aircraft with service between Houston Intercontinental and Chicago O'Hare.

United Continental, which operates in the airline industry with the likes of Delta Air Lines (DAL) and Southwest Airlines Co. (LUV) , currently retains a Zacks Rank #3 (Hold) rating.
 

On May 21, Zacks Investment Research downgraded Tulsa, Okla.-based publicly traded energy pipeline partnership, Magellan Midstream Partners L.P. (MMP) to a Zacks Rank #3 (Hold).

Why the Downgrade?

Magellan Midstream primarily transports, stores and distributes refined petroleum products. The results for the partnership are directly exposed to the refined product demand, which is inherently volatile and subject to complex market forces, thereby affecting the partnership’s revenues, cash flows and distributions.

Moreover, although Magellan Midstream owns an attractive portfolio of energy infrastructure assets that generate stable and recurring fee and tariff-based revenues, unfavorable regulatory changes by the Federal Energy Regulatory Commission (FERC) would impact the partnership’s results. This will also increase the borrowing costs of Magellan Midstream and can depress the market value of its limited partner units.

Besides that, Magellan Midstream, like all other master limited partnerships (MLP), typically depends on equity and debt markets for financial growth. Market turmoil resulting from issues such as the recent subprime crisis, which hinders access to capital markets, might impact its growth prospects.

Additionally, with the growing popularity of renewable sources of energy such as wind and solar, companies associated with traditional sources of energy are facing tough competition. Although expensive, many customers are opting for these sustainable sources of energy for the environmental-friendly nature. This will likely impact the demand for the partnerships’ services.

Stocks to Consider

In the energy sector, three firms that are expected to significantly outperform the broader U.S. equity market over the next one to three months are CNOOC Ltd. (CEO), InterOil Corporation (IOC) and EPL Oil & Gas Inc. (EPL). All three firms currently retain a Zacks Rank #1 (Strong Buy).
 

Earlier this week, American International Group Inc. (AIG) announced its intentions to invest HK$718.1 million or about $92.5 million in PICC Group’s PICC Property and Casualty Co. Ltd. (PICC P&C). The investment will be made through a rights offering. Following the investment, the company will hold a 9.9% stake in PICC P&C.

The investment will be a step ahead in the joint venture (JV) that was announced between AIG and PICC Life Insurance Co. Ltd. (PICC Life) in collaboration with The People’s Insurance Co. of China Ltd. (PICC Group) in Nov 2012. The JV was based upon the condition that AIG will contribute $500 million by buying the H shares of PICC Group. Moreover, AIG will retain at least 75% of the $500 million shares for 5 years post the initial public offering (IPO) of PICC Group, which was initiated last year.

PICC Group is the fourth-largest insurance company in China and a strong market position brightens AIG’sgrowth outlook through this JV. This should also boost the company’s distribution of life and P&C insurance products, thereby escalating growth opportunities in its core businesses. Further, PICC Group has about 69% stake in PICC P&C, which also fortifies AIG position in the China’s P&C insurance market.

Moreover, China’s P&C insurance market is escalating by a healthy 10–15% on an annual basis. This also explains the rationale behind AIG’s investment in PICC P&C, which enjoys about 35% ownership in the P&C insurance market of China.

The complete repayment of the government bailout loan and asset disposals has helped AIG to focus on its core insurance operations and attain a flexible capital position. The progress is also reflected by the modest growth in the company’s financials.

While any robust growth compared with the peer group appears overly ambitious at present, we believe a positive turnaround in the global economy and an improved macro scenario is likely to pave the way for significant growth of AIG.

Along with AIG, its peers such as MetLife Inc. (MET), Cigna Corp. (CI) and Hartford Financial Services (HIG) carry a Zacks Rank #2 (Buy).

Taking advantage of the ongoing low interest rates, auto and home insurer – Allstate Corp. (ALL) announced its intention to prepay some debt, which was previously taken at higher rates, by raising funds at lower rates.

Accordingly, Allstate aims to retire about $1.2 billion of debt that it was scheduled to mature in 2013 and 2014. At the same time, the company also intends to buy back some part of its $4.3 billion debt at a premium. In all, Allstate will redeem about $3.0 billion of debt.

Additionally, funds for the debt repayment will be raised through existing cash coupled with the issuance of some hybrid securities and long-term debt. The issuance of new securities will contain low interest rates, thereby reducing the cost of capital.

Moreover, the refinancing of debt will increase the portion of equity in the capital, which will further strengthen the balance sheet. The new finance arrangement will not only increase capital flexibility but also expand the debt maturity profile to more than 20 years. This leaves ample scope for investment in growth activities in the near to intermediate term.

However, Allstate projects to incur some debt refinancing charges in the second quarter of 2013, which may have some adverse impact on the earnings, although an accurate range remains undisclosed. Overall, the debt refinancing is expected to have insignificant impact on earnings in the upcoming quarters. The share buyback plan is also expected to remain intact.

Apart from debt refinancing charges, Allstate projected pre-tax catastrophe loss of $216 million for the month of April, as announced last week. Catastrophe losses had surged 38.6% to $359 million in the first quarter of 2013 as well. Such expenses weigh heavily on the bottom line and negate the improvement in premiums growth, thereby adversely impacting underwriting results. Hence, management is focusing on proactive capital and risk management processes.

Allstate carries a Zacks Rank #3 (Hold), while other outperformers in the insurance sector include Platinum Underwriters Holdings Ltd. (PTP), Axis Capital Holdings Ltd. (AXS) and Montpelier Re Ltd. (MRH). All these stocks carry a Zacks Rank #1 (Strong Buy).

Atmel Corporation (ATML) recently announced that Secret Labs, a manufacturer of electronic platforms for software developers, have launched the AGENT smart watch, which delivers better power efficiency by using its SAM4S and AVR microcontrollers (MCUs).

With 1.28-inch outdoor-readable display, wireless charging and Bluetooth 4.0, AGENT smart watch is a next generation watch. It features an unparalleled battery life and wireless charging to enhance the overall experience of the user. The smart watch also automatically switches to airplane mode under low battery conditions to extend usage.

Atmel is focusing more on its core microcontroller business with the launch of the latest products as it aims to target high-growth businesses. The use of these high-performance microcontrollers lowers the power consumption by over 50% and is more effective than other competing products available in the market. The tiny AVR MCU in the watch maintains tasks and events while the SAM4S ARM MCU takes care of the operating system and watch applications. The watch includes two way communications to smart phones and includes amazing developer tools.

Based in San Jose, CA, Atmel designs, develops, manufactures and sells integrated circuit (IC) products. These products include microcontrollers, advanced logic, mixed-signal, non-volatile memory and radio frequency (RF) components. Atmel produces non-volatile memory that stores information after power is turned off and combines this with microcontrollers, digital signal processors and other logic to meet the needs of its customers.

Atmel currently has a Zacks Rank #2 (Buy). Other stocks that look promising and are worth considering in the industry are CEVA Inc (CEVA), FormFactor Inc (FORM) and Anadigics, Inc (ANAD), each carrying a Zacks Rank #2 (Buy).

On May 21, 2013, shares of American Express Co. (AXP), also known as AmEx, hit a 52-week high of $75.11. The company reported first-quarter results with a positive earnings surprise of 3.6%. AmEx delivered positive earnings surprise in all of the last 4 quarters with an average beat of 4.1%.

On Apr 18, AmEx reported its first-quarter 2013 operating earnings per share of $1.15. The result comfortably surpassed the Zacks Consensus Estimate of $1.11 and the year-ago quarter earnings of $1.07 a share.

Results reflected improved global card spending, net interest income and the loan portfolio. Further, delinquency rates and yield exhibited stability, partially offset by lower lending balances. Further, moderate top-line growth was supported by strict expense control, which helped the overall increase in bottom line, book value per share and effective capital deployment.

Subsequently, AmEx repurchased shares worth $802.5 million in the first quarter of 2013 as it successfully attained the approval from the Federal Reserve to buy back shares worth $3.2 billion in 2013. Another $1.0 billion worth of share repurchase can be initiated in the first quarter of 2014.

We believe that improved credit trends, new business initiatives, capital flexibility and stable ratings bode well for long-term growth, which is reflected by the consistent dividend hike and accelerated share buybacks.

The company returned 70% of its capital generated, in the first quarter of 2013, to shareholders via share buybacks and dividend payouts. On a cumulative basis, AmEx has distributed 66% of capital generated through dividends and share buybacks since its inception in Dec 1994. This injects ample confidence among the shareholders.

Meanwhile, valuation looks reasonable for AmEx. The shares are trading at 5.2% premium to the peer group average on a forward price-to-earnings basis and 193.8% premium to the peer group average on a price-to-book basis. Both return on equity and return on assets are 306% and 154%, respectively, above the peer group average. Nevertheless, the 1-year return from the stock is 35.6%, much above S&P 500’s return of 28.9%. The overall long-term expected earnings growth rate for this stock is 10.9%, which is slightly below the peer group.

AmEx currently carries a Zacks Rank #3 (Hold). Among others in the industry, Moody’s Corp. (MCO), EuronetWorlwide Inc. (EEFT) and SS&C TechnologiesHoldings Inc. (SSNC) carry a favorable Zacks Rank #2 (Buy) and warrant attention.

Business process and document management company Xerox Corp. (XRX) recently declared a dividend of 5.75 cents per share or 23 cents on an annualized basis. The second quarter 2013 dividend is payable on Jul 31 to shareholders of record as of Jun 28.

Xerox had earlier hiked its dividend payout in first quarter 2013 by 35% year over year. Based on the closing price of $8.81 on May 22, 2013, the dividend affirms a yield of 2.6%. A steady dividend payout is part of the long-term strategy of Xerox to provide attractive risk-adjusted returns to its stockholders.

The company also has a share repurchase program in place, under which it repurchased shares worth $1.05 billion in 2012. Xerox has consistently returned significant cash to its shareholders through dividends and share repurchases. In 2013, the company intends to have similar share repurchase levels as in the previous year.

In addition, Xerox has a healthy liquidity position. Cash and cash equivalents aggregated $993 million at quarter-end. In order to better adapt to the changing market trends, Xerox is continually shifting its business model by expanding its indirect distribution channel and streamlining its supply chain and product portfolio. The company expects these operational changes to yield higher margins going forward, thereby enabling it to maintain its strong market share in Document Technology business.

Headquartered in Norwalk, CT, Xerox is a leader in the development, manufacture, marketing, servicing and financing of document equipment across the world. The company also provides extensive leading-edge document technology, services, software and genuine Xerox supplies for graphic communication and office printing environments of any size.

The company has three segments – Technology, Services and Others. Xerox is looking forward to expanding its offerings through inorganic measures and new acquisitions, which in turn, will help it to add more clients to its portfolio.

Xerox currently has a Zacks Rank #3 (Hold). Other players in the industry worth reckoning include NCR Corp. (NCR), Concurrent Computer Corporation (CCUR), and Mentor Graphics Corp. (MENT), each carrying a Zacks Rank #2 (Buy).

We reiterate our long-term Neutral recommendation on Novatel Wireless Inc. (NVTL) as we believe that the stock is currently fairly valued. The company posted mixed financial results for the first quarter of 2013. While the total revenue was ahead of the Zacks Consensus Estimate, quarterly earnings were below the same.

Why Kept at Neutral?

Revenues declined on an annualized basis, which was mainly attributable to subdued performance in the Mobile Computing Product segment. We do not expect Novatel to achieve profit any time soon. Continuous losses may jeopardize its healthy balance sheet, going forward. Moreover, a highly concentrated customer base is another headwind for the company.

Nevertheless, management is hopeful that the company’s 4G MiFi intelligent hotspots and Expedite embedded solution will achieve meaningful market traction, going forward. The company also expects order backlog for its MiFi 2 to remain strong in the second quarter of 2013.   Novatel currently has a Zacks Rank #2 (Buy).

Risk/Reward Virtually Balanced

Novatel has launched its innovative touchscreen MiFi 2 product with AT&T Inc. (T). The company also launched the MiFi 2 with Canada’s largest LTE service provider, Bell Canada. Novatel also plans to launch the next generation Wi-Fi hotspot with Sprint Nextel Corp. (S) during the second half of 2013. Recently, Verizon Wireless, a subsidiary of Verizon Communications Inc. (VZ), launched Novatel’s MiFi 4620 with an expanded battery backup. Novatel further introduced a second variant of MiFi called MiFi 5510L with Verizon Wireless in the first quarter of 2013, which is more cost effective.

However, we anticipate a gradual increase in competition for Novatel’s MiFi product line. Several latest versions of smartphones have an inbuilt WiFi capability. Low-cost Asian manufacturers, including ZTE and Huawei Technologies, have already launched their own versions of intelligent mobile hot spots. This is exerting competitive pressure on Novatel. Intensifying competition for embedded modules is also a major concern for the company.