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Zacks #1 Stocks on the Move 09/23/2016

Company Name Symbol %Change
HEALTH INS I HIIQ
5.45%
CLOUD PEAK E CLD
5.14%
VIVUS INC VVUS
4.63%
CRITEO SA-AD CRTO
4.38%
COPA HLDGS S CPA
3.04%

Analyst Blog

Among the top stories this week, Activision Blizzard Inc ATVI launched the highly anticipated title Destiny: Rise of Iron. The maker of Xbox One, Microsoft Corp MSFT announced that by current year-end, it is aiming to buy back $40 billion worth of shares.

A Recap of the Developments

1. Video game publishing giant, Activision Blizzard has released one of the most anticipated titles of the year, Destiny: Rise of Iron for PS4 and Xbox One. Prized at $29.99, Rise of Iron has seen blockbuster response in terms of pre-orders and Activision has called it the “most anticipated expansion for Destiny ever.” Also, Destiny fans will be treated with Destiny  The Collection. Prized at $59.99,The Collection, as the name suggests, is a compilation of all releases of the shooter franchise so far. The combination of Rise of Iron and The Collection has made the release so important. Destiny has been developed by Bungie of Halo fame and published by Activision. First released on Sep 9, 2014, it is a first person shooter game set in a mythical-cum-science fiction world. It is the first title to be released under Activision-Bungie’s 10-year deal. In fact, Destiny holds the record for the being the biggest new franchise launch. Destiny earned over $500 million in just a day of its release. The franchise has an aggregate score of 75/100 on Metacritic while Game Informer has given it 8.75 out of 10. Activision carries a Zacks Rank#2 (Buy).

2. Microsoft will be buying $40 billion worth of shares or 9% of its total market cap by 2016. The Xbox One creator also raised its dividend by 8%. Microsoft has been one of the most active companies in terms of share repurchases. Reportedly, the company has shelled out $140 billion on its buyback programs so far. In 2013, Microsoft had commenced a stock repurchase program, that was also worth the same amount as the current repurchase target. Microsoft carries a Zacks Rank#3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

3. Take Two Interactive TTWO has released NBA 2K17 for PS 3&4, Xbox One, Xbox 360 and Windows PC, carrying a price tag of $59.99. Take Two also released NBA 2K17 Kobe Bryant Legend Edition for $79.99, for both digital and physical version, on Xbox One and PS4. The NBA series is one of the biggest revenue generators for the company. NBA2K16, reportedly, has sold over 8 million copies. At its last earnings call, Take Two said that virtual currency revenues from NBA 2K were the second biggest contributor to bookings from recurrent consumer spending after its super successful Grand Auto Theft Online. For the current fiscal, management expects bookings in the range of $1.5 billion to $1.6 billion with primary contributors being NBA 2K16, NBA 2K17, Grand Theft Auto V, Grand Theft Auto Online and Mafia III. Mafia III is another highly anticipated title, scheduled for release in October.

Performance

The following table shows the price movement of the major video game companies over both the past five trading days as well as the last six months:

Company

Last 5 Days

Last 6 Months

ATVI

-0.18%

36.79%

EA

4.11%

30.22%

GLUU

--3.07%

-28.25%

MSFT

-0.83%

6.86%

NTES

18.24%

68.62%

TTWO

7.32%

29.43%

ZNGA

4.03%

26.22%

 

 

 

 

 

 

 

 

 

 

 

 

 

Over the last five trading sessions, NetEase NTES was up 18.24% while Glu Mobile GLUU was down 3.07%.

Over the last six-month period, NetEase Inc. surged the most — nearly 68.62%. NetEase has been in the news as it was widely anticipated that the Chinese gaming company will divest its news unit to focus on its gaming business. Plus, recently the company reported strong second-quarter 2016 results. The increasing popularity of mobile-based games and the strength of PC games (licensed & self-developed) continue to keep investors interested in the stock. Moreover, growing mobile advertising revenues were an added incentive.

Computer and Technology Sector Price Index

Computer and Technology Sector Price Index

Glu Mobile was down 28.25% over the same time frame due to the underperformance of most of its releases. Also, the company lowered its guidance for 2016. But its significant share repurchase authorization and the much anticipated Taylor Swift game keep hopes alive. It recently purchased Poke Radar. Poke Radar is a community app built by Pokémon Go fans.

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The Dow experienced a strong week of gains, buoyed by the Fed’s decision to leave rates unchanged in September. Japan’s central bank’s decision to control the yield curve also provided a flip to stocks. Additionally, gains arising from developments related to major healthcare deals also lifted benchmarks. Economic data was mixed in nature while oil price movement continued to be volatile.

Last Week’s Performance

The Dow decreased 0.5% last Friday following declines in bank stocks on news that Deutsche Bank AG DB might have to pay a fine of $14 billion to settle a mortgage-backed securities case. Moreover, concerns over crude oversupply weighed on energy stocks, which also had a negative impact on key U.S. indexes.

Additionally, uncertainty remained over the timing of a rate hike ahead of the Fed policy meeting. Meanwhile, the CPI increased 0.2% in August, higher than the consensus estimate of 0.1%.

The Dow gained 0.2% over last week. Apple Inc’s AAPL shares jumped 11.4% for the week, its best rise since October 2011, after the tech-giant experienced strong demand for the new iPhone 7. Meanwhile, rate hike worries continue to inject uncertainty into the markets.

The Dow This Week

The index ended Monday mostly unchanged as investors refrained from making big bets ahead of the two-day policy meetings of the Fed and Bank of Japan (BOJ). Increase in oil prices and strong rise in home-builder confidence had a positive impact on key U.S. indexes. During the weekend, military conflicts in Libya weighed on its crude exports.

Moreover, Venezuelan President Nicolas Maduro said that both OPEC and non-OPEC countries are nearing a deal to control crude production. Both these factors boosted crude prices. According to the National Association of Home Builders and Wells Fargo, builder sentiment touched its highest level since Oct, 2015.

The index increased 0.1% on Tuesday ahead of the two-day policy meetings of the Fed and the BOJ. Inventors eagerly awaited any major policy decisions from the two central banks. Moreover, gains in healthcare stocks offset declines in energy stocks. Tobira Therapeutics, Inc’s TBRA shares jumped 720.9% after Allergan plc AGN decided to acquire the company for $1.7 billion.

Tobira develops products which are used to treat a common liver disease called nonalcoholic steatohepatitis, or NASH. Following this development, shares of Gilead Sciences Inc. GILD, which also develops drugs to treat NASH, rose 3.5%.

While acquisition news boosted the healthcare sector, crude oversupply concerns weighed on energy stocks. Oil prices closed mixed after Colonial Pipeline said that worries over supply disruptions from Gulf Coast refiners have faded as the gasoline line is expected to restart functioning.

The index gained 0.9% on Wednesday after the Fed kept key interest rates unchanged. The FOMC in its policy statement said that argument for a rate hike “has strengthened,” but the central bank waited for “further evidence of continued progress” before raising rates. Although, the lack of a rate hike in September boosted markets, some of its gains were pared following rising expectations of a rate hike in December.

The BOJ’s surprise move to control the yield curve also had a positive impact on both the global and domestic markets. Further, strong decline in crude inventories boosted oil prices, which in turn led gains for energy stocks.

Fed’s decision to keep interest rates unchanged continued to lead the Dow higher on Thursday and the blue-chip index gained 0.5%. However, Fed Chairwoman Janet Yellen’s comments fueled December rate hike chances even further. Meanwhile, sales of existing homes fell 0.9% in August while the Leading Indicators Index decreased 0.2% in September.

Components Moving the Index

Microsoft Corporation MSFT recently announced that by the end of 2016, it plans to buy back $40 billion worth of shares from the secondary market. The company also raised its dividend payout by 8%.

Although the company hasn’t announced an exact date for these developments, the stock repurchase program represents nearly 9% of Microsoft’s total market capitalization of $442.7 billion. Zacks Rank #3 (Hold) rated Microsoft shares were up almost 1% in after-hour trading on Sep 20.  (Read: Microsoft to Repurchase Shares Worth $40B & Boost Dividend)

General Electric Company GE recently received a $1.9 billion contract to power the Hinkley Point C nuclear power station in the U.K. after British Prime Minister Theresa May approved the project following a six-week review. The $24 billion (£18.17 billion) project is the first of its kind in the country in decades and will replace the older coal-fired plants.

Zacks Rank #3 rated General Electric will build two 1,770-megawatt Arabelle steam turbines and generators for the project, which would be sufficient to power 6 million households in the country, meeting about 7% of the total power generation needs for 60 years. (Read: GE Wins Contract to Power Hinkley Point Nuclear Project)

Meanwhile, GE’s unit GE Transportation, recently launched its first ever European digital pilot with DB Cargo, Europe’s largest rail operator. Per the deal, Deutsche Bahn will leverage GE Transportation’s RailConnect 360 Asset Performance Management Solution, enabling locomotive health status updates to enhance efficiency and spot repair issues to avoid any inconvenience due to system failure. (Read: GE's Unit Unveils its First EU Digital Pilot RailConnect 360)

In a separate development, GE has recently completed the divesture of the majority of GE Capital’s restaurant franchise financing assets in the U.S. The assets were sold to three separate buyers. (Read: GE Completes Divesture of Restaurant Finance Assets in US)

International Business Machines Corporation IBM recently launched new software and hardware to make it easier for organizations to switch to hybrid-computing technology, which makes use of both public cloud as well as an on-premise computing setup.  

Zacks Rank #4 (Sell) rated IBM’s new cloud offerings include power systems for the cloud. These include the Power E880C and Power E870C servers that work with OpenStack, a software for automation and cloud management. Additionally, z Systems Operational Insights comprises software as a service (SaaS) offering from IBM that enables the user to analyze cloud operations in order to achieve better performance from applications.

Another new cloud related software release from IBM is IBM Spectrum Copy Data Management and Protect.  IBM claims that the software is capable of managing multitudinous data sets at the same time. (Read: IBM Unveils Hybrid Cloud Offerings to Boost Businesses)

ExxonMobil Corporation’s XOM shares gained 0.92% on the NYSE on Sep 21, after its $2.5 billion bid to acquire Singapore's InterOil Corp. (IOC) was approved by the shareholders of the latter. The merger, which required approval by two-thirds of InterOil shareholders, saw more than 80% of the shareholders vote in favor of the proposed transaction.

The transaction, which is expected to close by the end of September, will result in InterOil stockholders receiving ExxonMobil shares worth $45 for each InterOil share held. Additionally, ExxonMobil will pay $0.90 per million cubic feet equivalent (mcfe) for resources of over 6.2 trillion cubic feet in the Elk-Antelope gas field. The stock holds a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Pfizer Inc. PFE came up with a couple of announcements related to its breast cancer drug, Ibrance and PF-06438179, a biosimilar version of Johnson & Johnson’s  (JNJ) blockbuster drug, Remicade (infliximab).

Zacks Rank #3 rated Pfizer announced that the European Medicines Agency’s Committee for Medicinal Products for Human Use (CHMP) has rendered a positive opinion in favor of the approval of the company’s marketing authorization for Ibrance. Ibrance is under review in the EU for the treatment of women with hormone receptor-positive, human epidermal growth factor receptor 2-negative (HR+/HER2-) locally advanced or metastatic breast cancer.

Pfizer also announced positive top-line data from a phase III confirmatory study – REFLECTIONS B537-02 on PF-06438179 (infliximab-Pfizer). The study hit the primary endpoint and showed that PF-06438179 demonstrated similar efficacy to Remicade as measured by the American College of Rheumatology-20 response at Week 14 of study treatment. (Read: Pfizer (PFE) Breast Cancer Drug Ibrance Wins CHMP Backing)

Performance of the Top 10 Dow Companies

The table given below shows the price movements of the 10 largest components of the Dow, which is a price weighted index, over the last five days and during the last six months. Over the last five trading days, the Dow has gained 1.1%.

Ticker

Last 5 Day’s Performance

6-Month Performance

MMM

+2.6%

+9.5%

GS

+0.6%

+9.1%

IBM

+0.1%

+7.4%

HD

+1%

-1.1%

BA

+3.3%

-0.8%

UNH

+4.2%

+8.8%

MCD

+1.2%

-5.5%

TRV

+2%

+0.7%

JNJ

+1.3%

+10.1%

AAPL

-1.1%

+8%

Next Week’s Outlook

Investors have received much needed respite from the Fed’s decision of not raising rates in September. However, the Fed Chair has strongly indicated that there is a strong possibility that rates will be hiked in December. Meanwhile, domestic economic data, which is the Fed’s compass on the policy count remains mixed if not lackluster. Next week features several major economic releases, including data on consumer confidence, housing, durable orders, personal expenditure and the all important GDP report. The nature of these reports is likely to play a strong role in the movement of markets in the days ahead. 

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JPMorgan Faces Fresh Rounds of Probe in China Hiring Case

Posted Fri Sep 23, 02:11 pm ET

by Zacks Equity Research

The investigation surrounding JPMorgan Chase & Co.’s JPM hiring of relatives and children of Chinese government officials has extended further. Since Aug 2013, the bank has been facing a federal bribery scrutiny. Moreover, just as it was about to settle with the Justice Department and the U.S. Securities Exchange Commission (SEC), another round of enquiry has emerged.

Heightened Investigations & the Charges Ahead

The Federal Reserve and the Office of the Comptroller of the Currency (OCC) have now joined the investigations and are seeking to impose their own penalties, according to people familiar with the matter. The bank has been slapped with charges of inappropriately hiring the children of Chinese officials in order to secure business with Chinese government-run companies. While the Fed is seeking a fine of $62 million from the bank, the OCC is also expected to seek damages for the same.

The question that arises is whether hiring relatives of influential Chinese officials was equivalent to bribing a foreign official to secure business with a government entity. Such malpractice is clearly prohibited under the Foreign Corrupt Practices Act, 1977.

On the other hand, the banking regulators are currently focusing on the breakdown in controls and practices, which made way for the improper hiring. Further, JPMorgan is likely to pay a fine of $200 million to the federal prosecutors in Brooklyn and the SEC, the majority of which is anticipated to go to the SEC.

Nonetheless, JPMorgan has achieved a moral victory by escaping the criminal charges and negotiating a rare prosecution agreement with the prosecutors. However, involvement of the Fed and the OCC has complicated the case’s outcome. It has also raised uncertainties over timing of the settlement.

Regulatory Concerns

Since the fallout from the 2008 financial crisis, regulators have been demanding a tightened control system for the big banks. They further want the banks to increase the oversight over their employees. Banks that have failed to do so have paid tens of billions of dollars in fines. Notably, JPMorgan’s China hiring case represents one of the top settlements being negotiated with the SEC and the federal prosecutors.

Also, it is one of the first major crackdowns on a big bank for violation of the Foreign Corrupt Practices Act. However, JPMorgan is not the only bank charged with such accusations. Last year, The Bank of New York Mellon Corporation BK paid $14.8 million to the SEC for settling similar accusations.

While the Justice Department’s probe is initially focused on JPMorgan, it is expected to extend further to the hiring practices of other banks, including HSBC Holdings plc HSBC and Deutsche Bank AG DB, which have publicly disclosed the existence of such investigations.

Currently, JPMorgan holds a Zacks Rank #4 (Sell). If you want to have a look at some of our better-ranked stocks, you can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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Monsanto (MON) Secures Tech License from Broad Institute

Posted Fri Sep 23, 02:06 pm ET

by Zacks Equity Research

Monsanto Company MON recently secured a global non-exclusive license from The Broad Institute for usage the CRISPR-Cas genome-editing technology. This agreement is expected to improve the company’s genome-editing research, thereby further equipping it with non-imitable germplasm and genome products.

As per the latest authorization provided by The Broad Institute, Monsanto would be able to use the CRISPR-Cas technology in variable agricultural applications. The company would be able to endorse site-directed amalgamation of specific genes and even boost valuable or eliminate unwanted plant characteristics, with the aid of this fresh genome-editing technology. Such techniques would empower plant breeders to deliver new varieties and superior quality of hybrids in the near term. Hence, the new licensing treaty is likely to give rise to an extensive collection of crop developments to global agriculture.

Henceforth, this novel technology license gained by Monsanto is likely to provide more responsible solutions to farmers and assist them in meeting the demands of the soaring global population. Any supplementary detail of the deal has not been publicly disclosed.

We perceive that the aforesaid announcement of this licensing agreement would further raise investors’ confidence toward Monsanto’s stock.

Moving Ahead

Monsanto currently carries a Zacks Rank #3 (Hold). Over the last 60 days, Zacks Consensus Estimate for the stock has remained unchanged for fiscal 2016, however has been revised upwards for fiscal 2017.

Sluggish global economy, lower investments in agricultural inputs, volatile weather patterns, and sturdy competition in grain exports have been putting pressure on agricultural chemical companies like Monsanto.

At this moment, the company largely relies on Bayer AG’s BAYRY all-cash $66 billion buyout deal for strengthening its business in the near term. Both the companies look forward to successfully close the transaction by 2017. Bayer’s latest bid of $128 per share is at premium of 22.8%, over Monsanto’s closing share price of $104.20 per share, as of Sep 22, 2016. Besides, Bayer has pledged to reimburse a break-up fee of $2 billion to Monsanto, in case there is a deal blockage due to regulatory turmoil.

Stocks that Warrant a Look

Some better-ranked stocks within the industry include Limoneira Company LMNR and Cosan Limited CZZ.

Limoneira Company presently sports a Zacks Rank #1 (Strong Buy). Over the preceding 60 days, Zacks Consensus Estimate for the stock has been revised upwards by 42.4% and 5.9%, for fiscal 2016 and 2017, respectively. You can see the complete list of today’s Zacks #1 Rank stocks here.

Cosan Limited currently holds a Zacks Rank #2 (Buy) and the Zacks Consensus Estimate for the stock has been revised upwards by 25% and 43.2%, for 2016 and 2017 respectively, over the last 60 days.

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Natural Gas Rallies to 20-Month High on Shrinking Surplus

Posted Fri Sep 23, 02:05 pm ET

by Nilanjan Choudhury

The U.S. Energy Department's weekly inventory release showed a slightly larger-than-expected increase in natural gas supplies. However, the build was well below historical averages for the 20th week in a row, which further narrowed the supply overhang. Importantly, the commodity’s demand continues to be healthy with record usage for gas-fired power in a late-summer surge. The unseasonably warm weather helped natural gas pop through the $3 barrier for the first time in more than a year.

About the Weekly Natural Gas Storage Report

The Weekly Natural Gas Storage Report – brought out by the Energy Information Administration (EIA) every Thursday since 2002 – includes updates on natural gas market prices, the latest storage level estimates, recent weather data and other market activities or events.

The report provides an overview of the level of reserves and their movements, thereby helping investors understand the demand/supply dynamics of natural gas. It is an indicator of current gas prices and volatility that affect businesses of natural gas-weighted companies and related support plays.

Analysis of the Data: Larger-than-Expected Injection

Stockpiles held in underground storage in the lower 48 states rose by 52 billion cubic feet (Bcf) for the week ended Sep 16, 2016, just above the guidance (of 51 Bcf gain) as per the analysts surveyed by S&P Global Platts, a leading independent commodities and energy data provider.

However, the increase was significantly lower than both last year’s build of 96 Bcf and the 5-year (2011–2015) average addition of 83 Bcf for the reported week.

Following past week’s rise, the current storage level – at 3.551 trillion cubic feet (Tcf) – is now up 140 Bcf (4%) from last year and is sitting 268 Bcf (8%) above the five-year average.

Natural Gas Prices Fall from 20-Month Highs

Pressured by the inventory build, natural gas prices traded down 2.2% to end Thursday at $2.99 per MMBtu. Things were further worsened by predictions of tepid demand with sudden change in forecasts that showed cooler weather ahead.

Earlier in the week, the commodity rose to $3.057 per MMBtu - a level not seen since Jan 2015. This was mostly on the back of successive below-average builds with strong power sector consumption cutting into the year-over-year storage surplus. In fact, natural gas prices have rebounded strongly (by around 90%) since hitting 17-year lows of around $1.6 per MMBtu in the first quarter.

The price strength has translated into major gains for natural gas-weighted companies including the likes of Cimarex Energy Co. XEC, EQT Corp. EQT, Southwestern Energy Co. SWN, Cabot Oil & Gas Corp. COG, Range Resources Corp. RRC and Devon Energy Corp. DVN.

However, each of these firms has a Zacks Rank #3 (Hold), which does not make them screaming buys. In case you are looking for energy names for your portfolio, one could opt for Carrizo Oil & Gas Inc. CRZO. It has a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Long-Term Thesis Positive

Notwithstanding the small weekly setback, natural gas’ fundamentals continue to improve. As discussed above, significantly lower year-over-year injection figures over the past few weeks helped the commodity breach the key psychological level of $3 per MMBtu recently.

With the late summer turning out longer and hotter than normal, natural gas demand has picked up on the back of elevated power sector consumption due to air-conditioning use. Coupled with the easing production from the major shale plays, natural gas prices are set to rise further.

What’s more, rig count has been falling consistently and is now languishing at 89 – compared to almost 200 a year ago and the high of 1,606 reached in 2008. Therefore, production growth is unlikely to resume anytime soon.

In general, sentiment toward natural gas is likely to become more positive in the near future.

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Lockheed Martin: Dividend Up 10.3%, Share Buyback by $2B

Posted Fri Sep 23, 02:03 pm ET

by Aparajita Dutta

In a bid to reward its valuable investors, Lockheed Martin Corp. LMT has once again declared a handsome hike in its quarterly dividend. In the fourth quarter of 2016, the company will pay a dividend of $1.82 per share, up 10.3% from the previous dividend of $1.65.

This makes the company’s annualized dividend worth $6.77 and the consequent dividend yield comes to 2.75%, based on its current price of $246.62.

Interestingly this marks the 14th year in a row when this defense prime has increased its quarterly dividend rate by 10% or more. Management will pay the surged dividend to its shareholders, of record as of Dec 1, 2016; on Dec 30, 2016.

Surely this came in as a significant boost for investors as is evident from the 1.2% surge observed in Lockheed’s share price, following the release of the news.

 The Hiked Share Repurchase Plan

Meanwhile Lockheed Martin’s management also authorized additional share repurchase of $2 billion, bringing the company’s total authorization value to $4.3B for future share repurchases, under its current program.

We note that, during the six months that ended on Jun 26, 2016, Lockheed Martin repurchased 4.5 million shares of its common stock for $1 billion. At that time the company was left with a share repurchase authorization of $2.6 billion.

However, the company is keeping under wraps the number of shares it has purchased so far, and the associated timing of the purchases.

Our View

No doubt the above two announcements that Lockheed Martin has recently made is indicative of the strong capital structure it currently bears. In fact, a meticulous study of the company’s recent cash flow statement reveals the generous amount of cash Lockheed generates; its industry-leading combat equipments have made it the largest defense contractor in the U.S.

Lockheed Martin had returned $5 billion to its stockholders in 2015, the highest amount in the company’s history, representing 120% of its free cash flow for 2015. The company continued with this trend in its last reported quarter as well. In the second quarter of 2016, the company paid dividends of $501 million and repurchased shares worth $501 million, totaling a value of over $1 billion that it returned to its stockholders.

Considering the strong financial position Lockheed Martin currently holds, and the several major contracts that it has been winning; we expect to witness similar dividend hike episodes on the company’s part going forward.

Zacks Rank and Stocks to Consider

Lockheed Martin currently carries a Zacks Rank #4 (Sell). A few better-ranked stocks in the aerospace and defense sector include Engility Holdings, Inc. EGL, Leidos Holdings, Inc. LDOS and Ducommun Inc. DCO.

Engility sports a Zacks Rank #1 (Strong Buy) and has witnessed a 2.32% surge in its last day’s stock price. On average, the company delivered a positive earnings surprise of 12.09% in the trailing four quarters.

Ducommun sports a Zacks Rank #1 and has witnessed a 5.50% surge in its last day’s stock price. On average, the company delivered a negative earnings surprise of 44.58% in the trailing four quarters.

Leidos Holdings sports a Zacks Rank #2 (Buy) and has witnessed a 2.49% surge in its last day’s stock price. On average, the company delivered a negative earnings surprise 6.54% in the trailing four quarters. You can seethe complete list of today’s Zacks #1 Rank stocks here.

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5 Big Retailers With Big Technology Plans

Posted Fri Sep 23, 02:03 pm ET

by Sejuti Banerjea

Yes, some retailers are going out of business. When you see once-popular brands like Aeropostale, American Apparel, Wet Seal and Sports Authority filing for bankruptcy, it can scare investors out of the market. 

Yes, others are shutting down a large number of stores. Macy’s (100 stores), Wal-Mart (154), Walgreen’s (200), J C Penny (73 done, 7 more this year), Office Depot (300 over the next three years) and most recently, Sears Holdings (64) likely top this list.

But isn’t it true that the teen-focused Aeropostale group may have simply misread their customers’ needs? And isn’t it also true that a reduction in stores by the others may be with the view to divert investments elsewhere, where the benefits may perhaps be greater? Or does it mean that it’s all doom and gloom for retail stocks? Let’s find out.

The Retail Sector Is In Transformation Mode

When Amazon AMZN started selling books online, not many would have thought it could create the kind of disruption that it has. Yes, there are other online retailers like eBay, Etsy, Groupon, Blue Nile, etc. But none have really taken the concept to the level that Amazon has, through its technology, its automation, its fulfillment standards, free shipping, Prime loyalty program, devices, you name it. In fact, Amazon has set a certain standard of service that customers, especially millenials, have come to expect. Since they have grown up with technology, they feel comfortable with it. The youngest consumers are important for every seller because this is the demographic that represents the future. And this is the problem, in a nutshell.

Customer Acquisition Has New Dimension

The habit of consuming information online continues to extend to products, practices and prices. When customers don’t spend time researching these things, they increasingly listen to music, watch video, play games and spend time in social networks from their smartphones or other connected devices. Their habits, likes and dislikes are therefore known to big technology players like Facebook, Google, Twitter and Apple AAPL as well as a host of other smaller players. Facebook in particular is important because it has broader appeal across different age groups, and so offers access to them.

Naturally, technology companies don’t share this valuable asset but instead welcome retailers to leverage the knowledge to advertise with them. This is not an ideal situation for retailers since they are losing access to customer data and direct interaction with them, which in turn is affecting things like customization and the ability to compete. But in order to make the most of an unfavorable situation and speed up the process from advertising to sales, they are increasingly using direct-response formats.

Retailers are also trying to strike the right balance between online and offline channels when seeking customer data. While more data makes it easier to serve people, not everyone has the resources and expertise to leverage the data. For instance, recent Forrester Research data reportedly says that retailers use just a third of the data they currently have with only 29% admitting they are good at translating the result of data and analytics into measurable business outcomes. There is also the danger that too much interaction with customers may feel intrusive. Further, not all customers (especially younger ones) like dealing with people, so they may not be looking for the personal touch. This also makes data collection difficult. 

Given the number of options available both online and offline, customers generally have too much choice. So the older model of stocking up on inadequate quantities of a broader selection to target more shoppers may not be that effective today. Selling fewer items that are always in stock is likely to satisfy them more, according to a MasterCard study for 2015.

Inventory Management Has Never Been More Important

At some point or other, we’ve all had this urge: seeing something pretty that we want to pick up immediately. Earlier it used to be in a shop window and these days, it’s generally online. So for a retailer advertising online, it’s very important to be in stock.  When a customer clicks through on an ad, the purchase intention is generally high, but many will move away if it means waiting for the right size or cut. This is especially true in case of commodity-type products or food. The purchase intention will also be depleted if they have to wait too long for fulfillment or are required to pay for shipment. So retailers need to be able to track and transport inventory quickly using efficient logistics and at minimum cost. With minimal scope for personal interaction, customer loyalty boils down to availability and ease of completing the transaction.

Employee Productivity Increases Are A Must

Many retailers are seriously looking at their corporate structures to eliminate unnecessary management layers and speed up operations. Efficient and helpful sales staff that can take on adjacent duties when required and operating in a more flattish structure is the need of the hour. This is because footfall to stores continues to decrease (RetailNext Performance Pulse says that store traffic declined 6.6% in August, following persistent declines in the preceding five months). Therefore, revenue per employee has to be pushed up in other ways, which may be achieved by expanding roles. One example would be by equipping store sales staff with connected devices so they can check online inventory when required and place an order for the customer. Moreover, better-trained and more capable sales staff will also be able to increase conversions in stores, which will help retailers make the most of the traffic declining though it is.

In-Store Experience Remains Important

There are many aspects to the shopping experience that can be worked on and this is one aspect that retailers are spending time and resources on. Apart from adding merchandise and increasing selection, retailers are using technology to track customers and push promotions to them at suitable times, reduce waiting time at the billing counter, enable more variety and security in payment options while also letting them experience the personal element. On the other hand, routine functions such as locating and fetching products or tracking shelf space for replenishing are increasingly being automated. The adoption of beacons has been much slower than initially expected across retailers but IoT is bringing technology to them in other ways.   

Consistency In Online And Offline Experience Is A Challenge

Most large and medium size retailers and big brands have built websites and mobile apps in addition to their retail outlets and those that haven’t are expected to follow soon. In fact, market researchers and industry experts expect 2016 to be a momentous year for omnichannel buildout. While an online presence increases exposure to many more customers, it also calls for a consistent experience across a retailer’s online and offline properties. On the other hand, even large online retailers need offline presence as is clear from Amazon’s plans to open some physical retail stores this year and a 100 pop up stores next year. For retailers, this consistency of experience is a very big challenge because it requires investment in technology at every level, from supply chain management to procurement to stocking, store layout, sales and customer relations, and may in fact require a re-design of the entire process. This won’t get done in a hurry and will require significant investment over the next few years.

Security/Privacy Is A Growing Problem

As retailers do more business online, they will increasingly be subject to many rules and regulations that normally apply to online operators. Most of these regulations relate to the all-important customer data collected, whether in-store or online.

Developments over the past few years have greatly increased awareness of the way customer data is being collected and used leading to concerns about individual privacy. Data breaches at leading retailers have also raised concerns about security and identity theft.

This year saw the EU parliament pass the General Data Protection Regulation (GDPR), which should go into effect by 2018. The law is designed to hand over more control to the person the data relates to and provide a uniform playfield across the region. Data portability across processing systems and an individual’s right to erasure are other things covered. A fine of 20 million euros, or 4% of total global revenue have been approved for non-compliance with some sections, so retailers need to sit up and take notice.

The regulatory requirements vary by state in the U.S. and all over the world, so cross-border retailers have a good amount of work to do here. Needless to say, this will require significant investment in technology.

U.S. Retailers To See International Competition

Some successful international retailers are getting ready to hit the U.S. market. The Irish low-price high-quality apparel and home goods retailer Primark is reportedly looking to open 10 U.S. locations this year. Germany’s Aldi and Lidl are targeting 2K stores each by 2018. 

So given that backdrop, it’s become increasingly important for domestic retailers to take their current introspection a step further by getting as lean and efficient as possible and leveraging technology whenever possible.

Following are five companies that are already working to get there:

Wal-Mart Stores WMT

Wal-Mart isn’t new to ecommerce; the company has been building its capabilities over the past 4-5 years through over a dozen acquisitions and internal innovation. This year alone, it bought a 5% share in China’s JD.com in a deal that will help it reach Chinese customers. More recently, it spent $3.3 billion to acquire Jet.com, a company better known for providing the lowest rate available, that too in a market where Amazon operates. Jet’s attraction was its pricing mechanism that helped customers create smart baskets, with optimal order size, delivery speed and distance to minimize cost. This is technology Wal-Mart will be incorporating in its own business. The company has also started collaborating with technology players. Grocery is a focus area for the company and it now has an alliance with Uber to home deliver groceries in some markets.    

On the other hand, it still has a huge footprint of 4.6K stores strategically located to address 90% of the U.S. population. This is amazing reach that only an online retailer can probably hope for. Since the company has been investing in technology for quite some time, many bits are already in place.

Wal-Mart in one of the first companies to offer the order-online-pickup-at-store facility. It also has the technology to detect when a customer has come for pickup so packaging is started even before she enters the store. This reduces delivery time to about 3.5 minutes, lower than the company’s promised five minutes.

Inventory management continues to improve. In the words of CEO Doug McMillan, "A dynamic connected supply-chain with improved forecasting leveraging predictive analytics can serve customers and reduce cost by merging truckload, pallet, case and each movement.  Accurate inventory placement is a really good way to make money."

Its global technology platform Pangaea comprises smart pricing algorithms that help it manage pricing on large amounts of inventory. This in turn makes it easier to compete with online players. If a competitor has a lower price on any product, Savings Catcher in the Wal-Mart app fetches the customer a gift card for the difference.

But the company also has plans of shedding its low-cost image. This is in line with MasterCard data that shows customers looking for a balance between value and price. The desire to strike a balance is in fact what gets them to research products more. So companies need to understand that higher prices aren’t such a bad thing but need to be supported with relevant information.

The company also has the data now to show that omnichannel shoppers spend an average $2.5K a year compared to $1.4K for in-store-only buyers, so its ecommerce strategies seem to be working. Moreover, it is one of the few retailers seeing its store traffic move up rather than sideways or down.

To compete with Amazon better, Wal-Mart also has the regular 2-day shopping program and its own payment system called Wal-Mart Pay.

And this isn’t all because in January this year, the company open-sourced OneOps, an open source cloud and application lifecycle management platform allowing developers to use off-the-shelf technologies from  Microsoft Azure, Rackspace, AWS and CenturyLink Cloud, as well as any OpenStack cloud in public and private cloud environments to speed up app-building and maintenance. The company has used the technology in house to move applications among multiple clouds and speed up the deployment of product enhancements across locations.

WAL-MART STORES Price

Target Corporation TGT

Target has had out-of-stock issues in 2015 and is hastening to correct the situation by cutting product lines, improving logistics, investing in supply chain efficiency and inventory management. The company is spending on these efforts. In 2015, it spent $1.9 billion. This year will be about even with the amount jumping up to $2.5 billion a year thenceforward.

Rather than buying its way into ecommerce, the company intends to use at least part of the allotted cash to form a tech-focused group, which is being called Goldfish, with around 20 engineers being employed to kick off the effort. 

In Jun 2016, Business Insider found that 31% of U.S. consumers surveyed (38% in urban areas, 30% suburban and 25% in rural areas due to varying technology availability) had shopped for groceries online. Moreover, 10% of them said that the habit had partially or completely replaced their store visits. The main thing in the way of adoption is consumers’ preference to check out their own fresh produce and this is where the order online and pick up at store concept is helping to change shopping habits.

Some other important stats were quoted on refrigeratedfrozenfood.com as follows: “Online grocery sales are predicted to increase 21.1% annually through 2018, according to research from BI Intelligence, a research service from Business Insider, New York, compared to 3.1% for physical supermarkets. In 2015, UK-based Kantar Retail found shoppers spent between 3-4% of their grocery budgets online—up from just 1% three years ago.”

Target has gone a step ahead to encourage people to buy groceries online (currently an $18 billion+ business for the company). It has thrown in certain household, health and beauty, pet and baby products such as diapers and formula that customers can order in addition to groceries. Its delivery partner for the service is Instacart.

The company is also a big user of technology to boost in-store experience. It has deployed beacons across a large number of stores to personalize offers while the customer is inside the store. It is also building radio frequency identification (RFID) tags into apparel to facilitate inventory tracking.

TARGET CORP Price

Home Depot HD

Home Depot is another retailer that picked up online shopping trends early and took measures to leverage its existing stores for order fulfillment. The strategy, which it calls Interconnected Retail is doing extremely well with company officials saying, "As evidence of the success of our interconnected strategy, approximately 42% of our online orders are now leveraging our store footprint for fulfillment and nearly 90% of our online product returns are processed through the convenience of our stores".

The company doesn’t mention exact ecommerce spend, but it has a capex target of $1.6 billion this year. Last year, it built out a massive two million sq foot facility in Ohio (in addition to the 1.1 million sq ft and 900K sq foot facilities in Georgia and California, respectively). These facilities are intended to facilitate 2-day delivery of online-only orders.

Its Sync (acronym for Supply Chain Synchronization) project was fully deployed this year across 12 of its 18 regional distribution centers after a year of pilot use. Management says this is resulting in lower transportation costs and easier fulfillment. Dynamic ETA is another supply chain feature that helps it estimate delivery dates for online orders more accurately.

Around 50% of its digital traffic comes from smartphones and tablets, highlighting the importance of an engaging, interconnected experience. Mobile app enhancements like larger and clearer product images, live mobile chat and a simplified checkout experience are contributing to higher traffic and double-digit online sales quarter upon quarter.

Other initiatives include the customer order management (COM) system and buy online deliver from store (BODFS), both of which will roll out by year-end.

HOME DEPOT Price

Kroger’s KR

The 2014 acquisition of Harris Teeter greatly helped Kroger jump start its omnichannel efforts. Harris Teeter’s online ordering system Express Lane was used to set up Kroger’s own order-online-pickup-at-store tool called ClickList and today both Express Lane and ClickList brands are used across different markets. Customers can drive up to pickup windows and drive off with their package with minimal waiting time. The acquisition also added 200+ stores, further expanding Kroger’s reach.

Perhaps to fend off competition from Lidl, the company has stepped up capex for building new stores and modernizing existing ones. The stores will be equipped to offer its ClickList service not only in Cincinnati where Lidl is building its presence but also in other markets across the country.

In-store enhancementswere started much earlier. As early as in 2012, Kroger launched its QueVision technology platform that uses sensors and predictive analytics to determine customer traffic in the store and when long lines are likely. Managers armed with this data are able to arrange for more cashiers to avoid the rush. The system reportedly helped reduce waiting time from four minutes to less than thirty seconds.

The company also continues to invest in its mobile app to create a seamless experience for customers. As a result, millions of its customers now have digital accounts and a growing number are using its digital tools.

KROGER CO Price

Whole Foods Market WFM

Whole Foods is a high-end grocery chain, which means it needs to convince customers that the high prices are justified. This can only be achieved with much more product information, which in turn can be achieved through a centralized data collection and analytics system. It also needs to convince them that an out-of-stock item is worth waiting for. Here again product information is of utmost importance.

But because the company has grown through acquisitions and has maintained a regional focus, it reportedly has 12 different ERP systems across its several hundred stores. Product data like nutrition information and quality standards is also lying in different locations, making supply chain and inventory management extremely difficult.

The company has therefore gone to Infor (third largest ERP vendor behind only Oracle and SAP) to build out a suitable cloud-based platform.

Competition and changing demand patterns pushed the company to start its new lower-priced 365 stores, but these may just be the perfect place to test the new platform, which is being built from the ground up.

Other than inventory and supply chain, the new system is expected to help the company consolidate product information, not only about things like quantity and weight but also other details such as whether it was responsibly grown.

The company will do away with the four POS systems it currently uses and will henceforth use only OnePOS, thus bringing together disparate data sets and using the information in its digital sales channels and linking it to rewards programs.

Other in-store efforts include greater use of scanners and beacons, new displays, new NFC-enabled terminals and Apply Pay, all with a view to pushing more value to customers, while freeing up staff to personalize the shopping experience. Because the best way to sell premium items is by paying attention to the buyer.

On the delivery front, Whole Foods made an investment in Instacart this year but the size of investment or any other details aren’t public. The companies have partnered since 2014 in a number of markets and the investment could mean closer integration of services.

WHOLE FOODS MKT Price

Conclusion

The MasterCard report on omnichannel shoppers is a clear indication that stores remain extremely important to most customers. It isn’t just the price and product that counts, but also the personalization and social element of shopping in stores that just isn’t available online. The truth is, shopping online can be a bit of a chore, but shopping in the store other than for essentials is also entertainment.

Moreover, the amount of choice available online can at times be confusing, so it’s comforting to be able to simply go where you’ve always gone. After all, you can always pull out your phone and compare prices.

Another thing to keep in mind is the merging of online and offline operations such that the two complement and leverage each other. This is a trend that is likely to continue for years to come. The companies that can best utilize the resources at their disposal and increase the efficiency in their operations will be winners.

All the discussed retailers except Wal-Mart are currently ranked #3 (Hold). Wal-Mart has a Zacks Rank #4 (Sell). But for people with a shorter investment horizon, there are plenty more options. So check out the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here

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General Dynamics' Electric Boat Wins $105M U.S. Navy Deal

Posted Fri Sep 23, 02:02 pm ET

by Zacks Equity Research

Defense prime General Dynamics Corp.’s GD subsidiary Electric Boat Corp., secured a modification contract for Phase 2 of the Sea Dragon Submarines Development program. Valued at $105.5 million, this contract incorporates test planning efforts to support ground and sea-based testing of this submarine.

This contract, awarded by the Supervisor of Shipbuilding Conversion and Repair, Groton, CT, will utilize fiscal 2016 research, development, test and evaluation funds. The work, expected to be completed by Sep 2018, will be executed at the Groton shipyard in Connecticut.

About Sea Dragon Submarine

Electric Boat’s SSN584 Seadragon is a type of nuclear-powered skate-class attack submarine which was launched long back in 1954 and was earlier used to serve the U.S. Navy. Notably, skate-class submarines were the U.S. Navy’s first production run of nuclear powered submarines.

Current Scenario

Attack submarines are designed to seek and destroy enemy submarines and surface ships. Currently the U.S. Navy has three classes of nuclear-powered attack submarines: Virginia-class, Ohio-class and Los Angeles-class. These submarines will be operational until 2070.

Our View

We remind investors that General Dynamics is one of the only two contractors in the world equipped to build nuclear-powered submarines. General Dynamics’ Marine Systems business segment, which manufactures nuclear submarines, has been a consistent contributor to the company’s growth trajectory for quite some time in the past.

Although this segment showed no revenue growth in the second quarter, management has raised its top line expectation from this unit by $100-$200 million, for the year 2016. Surely this indicates significant improvement in this segment’s business performance.

Moreover, President Obama's fiscal year 2017 budget proposal calls for $582.7 billion in funding for the Pentagon, which includes $71.4 billion for R&D and $8.1 billion for submarines (with over $40 billion in the next five years). Going forward, this will definitely boost General Dynamics’ business growth from its nuclear submarines division.

Zacks Rank and Stocks to Consider

General Dynamics currently carries a Zacks Rank #2 (Buy). A few better-ranked stocks in the aerospace and defense sector include Engility Holdings, Inc. EGL, Leidos Holdings, Inc. LDOS and Ducommun Inc. DCO.

Engility sports a Zacks Rank #1 (Strong Buy) and has witnessed a 2.32% surge in its last day’s stock price. On average, the company delivered a positive earnings surprise of 12.09% in the trailing four quarters.

Ducommun sports a Zacks Rank #1 and has witnessed a 5.50% surge in its last day’s stock price. On average, the company delivered a negative earnings surprise of 44.58% in the trailing four quarters.

Leidos Holdings sports a Zacks Rank #2 (Buy) and has witnessed a 2.49% surge in its last day’s stock price. On average, the company delivered a negative earnings surprise 6.54% in the trailing four quarters. You can see the complete list of today’s Zacks #1 Rank stocks here.

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PPG Industries to Sell Interest in PFG Fiber Glass JVs

Posted Fri Sep 23, 02:00 pm ET

by Zacks Equity Research

PPG Industries Inc. PPG said that it has inked a deal to sell its 50% ownership interests in its two PFG Fiber Glass joint ventures (PFG) to Nan Ya Plastics Corp. PPG Industries did not disclose the terms of the transaction and the deal is expected to close by the end of 2016.

Nan Ya Plastics Corp. is affiliated with Taiwan-based Formosa Plastics Group and it currently controls the other 50% ownership interest in the joint ventures.

PFG was formed as an equally-held JV between PPG and Nan Ya back in 1987, with a single production facility in Chia Yi, Taiwan. To meet the increasing demand, a second JV was formed to add a production facility in Kunshan, China in 2001.

PPG Industries’ adjusted earnings of $1.85 per share for the second quarter of 2016 improved 10.8% year over year. Sales in the quarter were fairly consistent with the prior-year quarter figure of $4,064 million. While earnings beat the Zacks Consensus Estimate, sales missed the same. The bottom line was primarily driven by the successful commercialization of innovative products, strong business and cost management as well as earnings-accretive cash deployment.

While PPG Industries is taking steps to cut costs and grow organically, it faces significant currency headwind. Moreover, the company faces macroeconomic challenges and some of its end-markets including heavy-duty equipment and marine still remain sluggish.

PPG Industries currently carries a Zacks Rank #4 (Sell).

Stock to Consider

Some better-ranked stocks in the chemical space include Innophos Holdings Inc. IPHS, Innospec Inc. IOSP, and E. I. du Pont de Nemours and Company DD.

Innophos Holdings sports a Zacks Rank #1 (Strong Buy). The company has expected earnings growth of 48.6% for the current year. You can see the complete list of today’s Zacks #1 Rank stocks here.

Innospec also carrying a Zacks Rank #1, has posted positive earnings surprises in the trailing four quarters.

DuPont, a Zacks Rank #2 (Buy) stock, has also posted positive earnings surprises in the last four quarters.

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ABB Ltd. (ABB) to Upgrade Hydro-Quebec's Transmission Grid

Posted Fri Sep 23, 01:59 pm ET

by Saptarshi Debnath

Swiss technology giant, ABB Ltd. ABB, recently clinched orders over $85 million from utility firm Hydro-Québec (“HQ”) for upgrading the latter’s substations and transmission grid. The latest contract is another major win for ABB’s thriving ultra-high voltage transmission business.

Hydro-Québec Revamps Infrastructure

Canada-based utility company – HQ – has been constantly modernizing its power infrastructure for the past few decades. ABB has been serving as its long-standing partner, delivering state-of-the-art technology required to execute the utility firm’s infrastructure revamp. Currently, the company is upgrading its 800-kilovolt (kV) air-insulated switchgear (AIS) substations and transmission grid, which require sophisticated circuit breakers, power transformers and shunt reactors.

Per the contract, ABB will offer services for the designing, delivering and commissioning of circuit breakers that would boost safety levels. Also, the company will be providing its proprietary 450 megavolt-ampere (MVA) autotransformers and 735 kV shunt reactors for the project. The technology giant boasts of an elaborate cost- and eco-efficient circuit breaker and transformer portfolio, which has earned it a solid reputation among utility companies across the globe.

Power Infrastructure Upgrade: A Key Growth Driver

ABB is one of the best managed industrial infrastructure, power and automation companies in the world, which stands to benefit from investments made toward the upgradation of power infrastructure..Utility companies across the globe are engaged in integrating renewable energy sources with the traditional ones to meet the ever-increasing power demand.

Going forward, ABB anticipates gaining significantly from high investments in ultra high-voltage DC power transmission projects in mature and emerging markets. Also, continuous investments by clients in the maintenance of aging electric infrastructures are driving the company’s growth. In the long run, utility customers are expected to act as one of the strongest catalyst for this Zacks Rank #3 (Hold) stock, the other two being industry and transport & infrastructure.

Stocks to Consider

Better-ranked stocks in the same space include EnerSys ENS, AO Smith Corp. AOS and Schneider Electric SBGSY. All three stocks hold a Zacks Rank #2 (Buy).You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Industrial battery maker, EnerSys has a modest earnings beat history, having surpassed estimates thrice over the four trailing quarters, with an average positive surprise of 2.2%.

Commercial and residential water heating equipment manufacturer, AO Smith Corp., has a robust earnings surprise history, with an average positive earnings surprise of 6.3% over the trailing four quarters, beating estimates all through. 

Energy management and automation solutions provider, Schneider Electric SE, has a modest expected EPS growth rate of 3.1%.

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