Volcano Stays Neutral – Analyst Blog
We recently reiterated our Neutral recommendation on Volcano Corporation (VOLC) with a target price of $23.00.
Volcano reported earnings of 10 cents per share in the second quarter of 2010, surpassing the year-ago quarter’s net loss of 11 cents per share. Revenues jumped by 36% to $73.5 million, surpassing the Zacks Consensus Estimate of $69 million as the company witnessed growth across all reporting segments.
Volcano is focused on the development of a wide range of intravascular ultrasound (IVUS) and functional measurement (FM) products. These products aim to enhance the diagnosis and treatment of vascular heart disease by increasing the efficiency of the existing percutaneous interventional (PCI) therapy procedures in the coronary or peripheral arteries.
Volcano derives a major part of its revenues from its IVUS product portfolio. We believe sales of the IVUS products will continue to account for a significant portion of the company’s revenues going forward. IVUS technology is widely used for determining the placement of stents in patients with coronary disease. While the procedure penetration rate in Japan is quite high, the penetration rate in the US for the same type of procedure is relatively low. The low penetration rate in the US provides a lot of scope for increasing its share.
Volcano has a strong portfolio, which should boost the company in the long term. During the reported quarter, the company launched the Primewire Prestige FFR wire and Eagle Eye Platinum IVUS catheters. The company also received CE Mark approval for its first combination of IVUS/therapeutic device (a balloon IVUS catheter–Vibe vascular imaging balloon catheter) and commercial shipment is expected to begin in Europe in the third quarter.
The company continues to execute strategies for driving strong top-line growth in the IVUS/FM market backed by the new product launches, product enhancements and support from partners in marketing and distribution agreements. Moreover, increased acceptance of the Vibe vascular imaging balloon catheter in Europe and approval in Japan and the US should provide further upside to the company. While tight hospital budgets could restrict growth in the near-term, we believe that increasing demand for the company’s products will support strong results going forward.
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Metals and Mining Review – Sept. 2010 – Industry Outlook
OverviewThe Metals & Mining Industry encompasses the extraction (mining), as well as the primary and secondary processing of metals and minerals such as aluminum, gold, precious metals, coal and steel. The industry is oligarchic in structure, with a few producers accounting for the lion’s share of the output. The largest segment of the global metals market is iron and steel, followed by aluminum.
The iron and steel segment comprises more than half the industry in terms of volume. This industry includes metal ore exploration and mining services, iron and steel foundries for smelting, rolling, forging, spinning, recycling, stamping, polishing and plating of iron and steel products such as pipes, tubes, wire, spring, rolls and bars. Luxembourg-based ArcelorMittal (MT), the world’s largest steel producing company, produced 73.2 million tons in 2009, representing 6% of the world's steel output.
The precious metal and mineral industry consists of companies engaged in the extraction and primary processing of gold, silver, platinum, diamond, semi-precious stones, uranium and other rare minerals and ores, along with the cultivation of pearls. Anglo American Plc., the largest gold producer by market capitalization, dominates the gold industry.
Historically, the automotive and construction markets have been the largest consumers of metals, accounting for more than 50% of total demand. Other metal consumers include energy, electrical equipment, agricultural, domestic and commercial equipment and industrial machinery. Large automakers such as General Motors Corporation (GM), Ford Motor Company (F), Toyota Motor Corporation (TM) and Honda Motor Company (HMC) are big consumers of metals, chiefly steel and aluminum.
Outlook
The global metal industry is cyclical, highly competitive and has historically been characterized by overcapacity (excess of supply over demand). Metal producers are subject to cyclical fluctuations in London Metal Exchange prices, general economic conditions and end-use markets. Individual company profitability depends on volume and operating efficiency. Large producers with huge resources are able to discover, develop new deposits and boost reserves, while smaller ones own few mines and concentrate on them.
Mergers and acquisitions (M&A) has historically been a critically important growth strategy for metal companies. While the slow economic recovery is a significant factor in short-term decisions regarding M&A activity, mining companies expect to make acquisitions over the next three years. The M&A activity is also supported by higher metal prices that have strengthened the financial positions of many mining giants.
Geographically, the Asia-Pacific region is witnessing higher production and consumption of metals, especially China and India. Per capita consumption levels in both these countries are calibrating to U.S./European levels, which could -- theoretically, at least -- double metal demand in the longer term. In recent years, capacity growth in China has significantly exceeded the growth in market demand. A continuation of this unbalanced growth trend or a significant decrease in China’s rate of economic expansion could result in the country increasing its metal exports.
Yet, we expect global metal demand to improve in the long term with the recovery of user industries. Developed regions such as the US and Europe are showing signs of recovery. Despite some concerns about its sustainability, China is expected to remain the largest consumer of metals in the future.
Metals in Detail:
Steel
As the major shareholder (about 60%) in the metals market, the steel industry was strongly affected by the global economic downturn. Massive over-capacity is one of the major headwinds for steel, which continues to weigh on prices. Moreover, the industry has witnessed a number of trade disputes involving the U.S., in particular, the imposition of tariffs of up to 30% on imported steel. Rising raw material prices -- iron ore and coal (metallurgical) -- are also a major concern for the steel industry. AK Steel Holding Corporation (AKS), for instance, expects a 65% rise in benchmark iron ore prices in the near term.
Demand in key metal consuming industries such as autos, shipbuilding and construction, continues to remain weak, forcing global metal producers to slacken output levels. While utilization levels have improved recently, steel makers were operating at less than 50% capacity last year. U.S. Steel Corporation (X) -- the eighth largest steel producer in the world, the largest integrated steel producer headquartered in North America and one of the largest integrated flat-rolled producers in Central Europe -- slashed production by almost 37% in 2009, while Korean steel maker POSCO (PKX) had to scale down output by about 10.9%.
Steel demand is reviving slowly, with improving end-markets on the back of a recovering global economy. Steel giant ArcelorMittal and U.S. Steel are restarting furnaces or are planning to in the near future. Industry steel mill utilization rates have increased to above 70%. The current high in steel demand helped reverse losses for the third largest steel maker Steel Dynamics Inc. (STLD) and the largest recycler of steel scrap in the U.S., Nucor Corporation (NUE).
Steel Dynamics’ second-quarter earnings of 22 cents reversed losses of 8 cents recorded in the year-ago quarter. Similarly, Nucor reported a profit of 29 cents per share in the second quarter of 2010, in contrast to a net loss of 43 cents per share in the same quarter of 2009. The World Steel Association expects a 10.7% increase in global steel demand this year and a further 5.3% gain in 2011 compared to 2010 level. The impetus is mostly expected from a surge in Chinese steel demand, which is likely to grow 6.7% to 579 million tons in 2010.
But despite these improving trends, average selling prices are still struggling, as the pace of recovery in the U.S. and global markets is slow at best. The ongoing slowdown has marred prospects in the housing and construction sectors in the near term. AK Steel Holding Corporation (AKS), Nucor and Steel Dynamics have provided a bleak overall near-term price outlook, although they expect end-markets to stabilize.
Collectively, AK Steel, Nucor and ArcelorMittal have a Zacks #4 Rank (Sell) for the short-term (1 to 3 months), while we maintain our Neutral recommendation in the long term for all three, given the outlook for steel. However, Steel Dynamics holds a Zacks #5 Rank (Strong Sell) and has a long-term Underperform recommendation driven by a very weak earnings outlook.
Gold
The outlook for investment is positive overall, with absolute levels of demand likely to remain well supported by continued economic and currency uncertainty, inflation concerns and the search for diversification. In 2009, global gold supply exceeded demand by 15%, reflecting favorable gold prices. However, based on the marginal improvement in the economic environment in 2010, the World Gold Council expects an increase in demand for jewelry, which in turn will help global gold demand. A potential shot in the arm for the precious metal is the expected increase in central bank gold holdings, primarily as a diversification play.
The value and wealth preservation attributes of gold continue to attract investors and consumers. Jewelry and investment demand in non-western markets continues to rebound from the low levels in 2009, while industrial demand has started to recover in response to an improvement in economic conditions. India, which alone consumes nearly 45%−50% of the world gold production, should drive demand for gold along with China in the next half of 2010. Chinese gold demand is expected to double in 10 years. Concerns over the recent European debt crisis have also led to strong buying of gold coins, bars and gold exchange traded funds in particular.
We saw gold demand and prices strengthen in the first six months of 2010, a trend that is likely to remain in place in the rest of the year. Higher prices bode well for gold producers, which should benefit giants such as Barrick Gold (ABX), Agnico-Eagle (AEM) and Goldcorp Inc. (GG). However, gold producers Newmont Mining (NEM) and Kinross Gold Corporation (KGC) suffer from lower ore grades that subdue production levels, increase mining costs and offset the benefits of rising gold prices. Overall, the stock prices of gold producers are not expected to benefit much from this overall favorable commodity-price backdrop. This is reflected in our overall neutral view on the space.
Aluminum
The aluminum industry is highly cyclical, with prices subject to worldwide supply and demand forces along with other influences. Aluminum prices at the LME have plunged around 20% from their April highs to $1,969 per ton. The greatest risk for aluminum producers would be a further decline in aluminum prices.
However, we expect aluminum demand to increase in the long term, outstripping supply growth with the improving end-markets. Leading aluminum producers such as Alcoa Inc. (AA), Paramount Gold and Silver Corporation (PZG) and Aluminum Corporation of China (ACH) should benefit from the improving demand outlook.
In the medium to long term, Alcoa expects aluminum consumption to improve globally with improving automotive and packaging industries, one of the key consumer markets. Aluminum is widely used for packaging, beverage cans, food containers and foil products. The automobile market is also becoming increasingly aluminum intensive, benefiting from the recyclability and the light weight of the metal.
Alcoa now expects demand to grow about 10% to 12% in 2010. The aluminum giant predicts Chinese aluminum consumption to jump 21% and about 6.5% globally (excluding China) in 2010. Currently, Alcoa, Paramount Gold and Silver and Aluminum Corporation of China hold a Zacks #3 Rank (Hold) supported by a long-term Neutral recommendation.
Copper
Copper prices started on a downtrend in early July 2010 and are expected to remain volatile in the near term, which could be a major headwind for copper companies. Revenues and margins for copper producers like Freeport-McMoRan Copper & Gold Inc. (FCX) and Southern Copper Corporation (SCCO) were affected by the recent fall in copper prices and volumes, primarily driven by the slowing economic activities in China.
However, the long-term view is favorable. Market conditions are expected to be positive for copper in the next couple of years due to higher consumption of the metal in the developing nations. Copper companies that have a high leverage to copper prices will benefit immensely from the potential demand in copper in the developing markets.
The near-term headwinds led to the short-term Zacks #4 Rank (Sell) and Zacks #3 Rank (Hold) on Freeport and Southern Copper, respectively. However, both companies have a Neutral recommendation on a positive long-term outlook.
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CE Mark Approval for Endologix – Analyst Blog
Recently, Endologix (ELGX), a developer of minimally invasive treatments for aortic disorders, received CE Mark approval for its expanded offering of Powerlink stent graft products and PowerFit aortic extensions. While the company is planning for a limited launch of the products during the fourth quarter of 2010, full product launch is expected in 2011. Following the approval of the expanded Powerlink products, the targeted patient population is expected to rise by 5%-10%.
Endologix has already received US approval for these products, which are currently in a limited market release. Full product launch is expected in the fourth quarter of 2010. Banking on positive feedback from the physicians during limited launch in the US, the company is expecting a similar response in the European market.
The Powerlink system is the company’s flagship product, which is an endovascular stent graft for the treatment of abdominal aortic aneurysms (AAA). AAA refers to the weakening of the wall of the largest artery in the body, aorta, leading to a balloon-like enlargement. If left untreated, the enlargement continues to increase and can lead to breaking of the artery. In these cases, the overall patient mortality rate is quite high at about 75%, making it a leading cause of death in the US.
Endologix has been looking at developing its product portfolio. Earlier this month, the company entered into a development agreement with Evasc Medical Systems for its balloon expandable stent technology. Thereafter, the company plans to cover the stent with its proprietary ePTFE graft material so that it can be used along with its fenestrated stent graft device, currently in pre-clinical development phase.
Endologix reported $15.7 million in revenues during the second quarter of 2010, up 19% from the year-ago quarter. While revenues from the domestic market increased 12% to $12.8 million, international revenue increased 65% to $2.9 million. We expect revenues to increase based on a strong product portfolio and current pipeline.
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Anadarko Spends $1.22M on Lobbying – Analyst Blog
Oil and natural gas exploration and production company Anadarko Petroleum Corporation (APC) increased its lobbying expenses significantly, during the second quarter 2010, to $1.22 million, from the year-ago level of $520,000. Lobbying expenses, however, saw a marginal decline from $1.3 million in the sequentially preceding quarter.During the reported quarter, Anadarko lobbied to the federal government on a number of issues related to the oil spill from BP Plc’s (BP) Deepwater Horizon oil rig that collapsed into the Gulf of Mexico on April 20, 2010. Anadarko had a minority interest in that project.
During the last quarter Anadarko lobbied with Congress, the White House, the Environmental Protection Agency and the Department of Interior on issues relating to the disaster. The primary purpose of these costly endeavors was to prove to the U.S. administration the company’s negligible role in the accident.
Despite Anadarko’s damage-control efforts, confidence of the shareholders tanked after the accident, as reflected in the fall of the traded price. At the time of the oil spill, the company was trading at $73.79, which plummeted to $36.09 on June 30, 2010, reflecting a decline of $37.70 per share.
The adjusted earnings of Anadarko at the end of the second quarter 2010 were 49 cents a share compared with a net loss of 57 cents per share in the year-ago comparable period. The Zacks Consensus Estimates for third quarter 2010, fiscal year 2010 and fiscal year 2011 are 37 cents per share, $2.01 per share and $2.52 per share, respectively.
Anadarko currently retains a Zacks #3 Rank (short-term Hold rating). We also maintain a Neutral rating on the stock.
Based in Texas, Anadarko Petroleum is an independent oil and gas company engaged in the acquisition, exploration, and production of oil and gas primarily in the United States, the deepwater Gulf of Mexico and Algeria.
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Pepco Does $7.5M Retrofit Deal – Analyst Blog
Pepco Energy Services, a subsidiary of Pepco Holdings Inc. (POM), has won a $7.5 million competitive bid contract to apply energy efficiency retrofit at the One Judiciary Square facility in Washington, D.C. The contract was awarded by the District of Columbia’s Department of Real Estate Services (DRES).
Under the project, Pepco Energy Services will install a building management system, direct digital controls and HVAC upgrades. This project is expected to create 16 full-time construction jobs in the region along with providing financial and energy savings.
The One Judiciary building, owned and operated by the government of the District of Columbia, encompasses an area of 850,000 square feet. The building is one of the primary buildings of the D.C. government and hosts multiple D.C. agencies in mission-critical roles.
Despite the volume and complexity of the scope of internal work that Pepco Energy Services is providing, construction will be completed without disrupting the critical operations at the building. The One Judiciary Square retrofit project demonstrates the D.C. government's commitment towards increasing the district's energy efficiency.
This project is funded by American Recovery and Reinvestment Act capital and will assist the D.C. government in achieving its energy reduction and conservation goals. Construction began in early August and is expected to be completed within 18 months.
Headquartered in Washington, D.C., Pepco Holdings, through its two operating divisions, Power Deliver and Competitive Energy, involves in transmission and distribution of electricity as well as delivery and supply of natural gas.
Pepco Energy Services, a unit of Pepco Holdings, is a leading provider of deregulated energy and energy-related services for residential, small business and large commercial customers. Pepco Energy Services currently provides services to a region extending from North Carolina to Massachusetts and from New York to Tennessee and Illinois.
We have a Zacks #2 Rank for the stock, which indicates a short-term Buy rating. Our long-term recommendation on the stock is Neutral.
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Deere to Sell Wind Energy Business – Analyst Blog
Deere & Co. (DE) announced that it will sell its wind energy business, John Deere Renewables, LLC, to Exelon Corp.’s (EXC) wholly owned subsidiary, Exelon Generation Company. The deal, valued at $900 million, includes a provision for $40 million upon commencement of construction of the advanced development projects.Pursuant to regulatory approvals, the transaction will close by the end of fiscal 2010 and Deere will record an after-tax charge of approximately $25 million in its fourth quarter results. During its third quarter earnings call, Deere had announced its fourth quarter net income guidance of approximately $375 million. The abovementioned charge was not included in the same.
John Deere Renewables invests in, and provides value-added services for, wind project development. These services include comprehensive project development services, wind turbine supply and operation management as well as long-term debt and equity investment for wind energy projects in the U.S. and Canada.
John Deere Renewables’ portfolio comprises 36 completed projects in eight states with an installed, operating wind capacity of 735 megawatt that is enough to power 160,000 to 220,000 households as well as other projects in the pipeline. The pipeline comprises 1,468 megawatts of new wind projects that are, currently, in various stages of development, including 230 megawatts in advanced stages of development.
In 2005, Deere established its wind energy business unit managed by its Credit segment. Since then, the company has invested over $1 billion in financing, development and ownership of wind energy projects. The company spearheads project development, management and financing of wind energy projects in rural U.S. communities.
The wind business was not in line with Deere’s core set of businesses. As a result, in February 2010, the company had divulged that it was weighing strategic options for its wind energy business, which included a possible sale. In this regard, Deere had retained Goldman, Sachs & Co., a wing of The Goldman Sachs Group Inc. (GS), as exclusive financial advisor.
Chicago-based Exelon Corporation is an electric utility company operating through its subsidiaries Generation, ComEd and PECO. The generation business consists of electricity generating facilities, wholesale energy marketing operations and competitive retail supply operations. It has access to more than 38,000 megawatts of electricity and generates electricity through nuclear, fossil and hydroelectric generation facilities. With this acquisition the company will make an entry into the wind power business.
We believe the sale will enable Deere to focus more on its main operation of manufacturing agricultural and construction equipment. We maintain our Outperform rating on Deere supported by Zacks #1 Rank (Strong Buy) on Deere.
Illinois-based Deere & Company is engaged in the production and distribution of agricultural and forestry equipment, construction equipment and engines worldwide. It also provides financial and other related services. The company operates through three segments: Agriculture and Turf, Construction and Forestry, and the Financial Services segment. Deere sells products through branch offices in the U.S. and Canada as well as through distributors and dealers for the resale of products internationally.
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Exactech Adds New Product Lines – Analyst Blog
Exactech Inc. (EXAC), a developer and manufacturer of bone as well as joint restoration products for knee, hip, spine, shoulder and biologic materials, recently acquired multiple spinal product lines from VertiFlex Inc, which develops less intrusive spinal surgery technologies that help preserve motion.
As part of the transaction (terms undisclosed), Exactech acquired the Silverbolt Percutaneous Pedicle Screw System and associated assets. The company believes that these less intrusive VertiFlex products will dovetail well with its own spinal product portfolio, which includes a range of cervical and lumbar fusion products. Exactech’s broader goal is to strengthen its role as a select company in the spinal business with surgically implanted products intended to reduce the length of inpatient stay.
According to Exactech, the Silverbolt Platform offers an innovative breakthrough for less intrusive spine surgery. For its part, VertiFlex stated that the asset divestiture will permit it to dedicate resources to its Superion Interspinous Spacer program. The Superion Interspinous Spacer is a titanium implant which fits into the lumbar spine.
San Clemente-based privately held medical device company VertiFlex is committed to promoting less intrusive and motion preserving technologies for spinal problems. The company is currently conducting a pivotal Investigational Device Exemption (IDE) trial for the next-generation Superion Interspinous Spacer. It was granted CE Mark approval in 2007.
Gainesville-based Exactech develops and markets orthopedic implant devices. Its orthopedic products are utilized in the restoration of bones as well as joints that have degenerated due to disease. Exactech competes with the likes of Wright Medical Group Inc. (WMGI), Stryker Corp. (SYK), Johnson & Johnson (JNJ), and Zimmer Holdings Inc. (ZMH), some of which are much larger in size.
Exactech reported second-quarter fiscal 2010 revenues of $47.6 million, up 10% year over year. Its adjusted earnings per share were 25 cents compared with 26 cents in the year-ago period.
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Goodyear to Buyback Senior Notes – Analyst Blog
Goodyear Tire & Rubber Company (GT) announced its offering to buyback $973 million in senior notes on September 29, 2010. The notes are $388 million in principal amount of 7.857% senior notes due August 15, 2011, $325 million in principal amount of 8.625% senior notes due December 1, 2011, and $260 million in principal amount of 9% senior notes due July 1, 2015.Goodyear has indicated its buyback plan at the time of issuing $1 billion aggregate principal amount of its 8.25% senior unsecured notes, due August 15, 2020, in the middle of this month. The 2020 notes were issued in two phases, $900 million and $100 million. The company intends to fund the debt buyback with the net proceeds from the issuance of 2020 notes.
In the second quarter of the year, Goodyear saw a profit of $31 million or 12 cents per share (excluding special items), in sharp contrast to a loss of $240 million or $1.00 per share (excluding special items) in the same quarter a year ago.
The company has significantly exceeded the Zacks Consensus Estimate of a profit of 4 cents per share during the quarter. The higher profit was led by an impressive rise in tire unit volume, particularly in the company’s North American Tire segment, during the quarter.
Sales during the quarter grew 15% to $4.5 billion, higher than the Zacks Consensus Estimate by $120 million. This reflected a positive impact of $304 million led by a 10% increase in tire unit volume due to a strong global demand.
Sales were also boosted by $161 million from higher sales in other tire-related businesses, mainly third-party chemical sales in North America, and by better price and product mix. These were partially offset by an unfavorable foreign currency translation effect of $37 million.
We are optimistic about Goodyear’s cost-saving actions. The company has succeeded in achieving cost reductions of $2.5 billion by 2009 and has also targeted an additional $1 billion of gross savings by 2012. In addition, the company will benefit from its focus in the emerging markets of Latin America, Eastern Europe and Asia.
However, Goodyear faces pricing pressure from original equipment manufacturers due to weak industry demand. Further, its highly-leveraged balance sheet is worrisome. As a result, Goodyear maintains a Zacks #3 Rank (Hold) rating for the short term (1–3 months) and Neutral recommendation for the long term (6+ months).
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Northern Trust Gets Beijing License – Analyst Blog
Northern Trust Corporation (NTRS) has been granted license for its Beijing Branch Office by the China Banking Regulatory Commission (CBRC). This represents an important step in the company’s expansion plans.
Northern Trust’s new license would permit it to provide client services directly from the Beijing office, instead of offering services from Singapore or Hong Kong. This branch office would provide services including global custody, accounting, performance measurement and investment mandate compliance monitoring to institutional clients in China.
Northern Trust’s association with China is not new. The company started a cooperative relationship with the Bank of Communications in 1999. In 2002, it initiated consultation with China’s National Council for Social Security Fund (NCSSF) as part of its preparation for investment in overseas equities markets. And finally, the company received approval to open a representative office in 2005.
Besides, Northern Trust, in June 2010, Bank of New York Mellon Corporation (BK) also got the authorization from the CBRC to open a banking branch in Beijing to provide services to the company’s institutional clients. Again in July, BNY Mellon received the regulatory approval from CSRC for setting up a joint fund management company with Western Securities in China.
Besides Northern Trust, the major banks that have forayed into the Chinese capital market include JPMorgan Chase & Co. (JPM), Goldman Sachs Group Inc. (GS) and UBS AG (UBS).
This Beijing branch office license would enable Northern Trust to continue growing in the Asia-Pacific region, which has a strong growth potential. This region has experienced an 80% growth in assets under custody in 2009. Northern Trust has already strengthened its operating team in this region by increasing its staff to over 2,000 in the past three years.
China in particular has experienced solid growth in recent times and offers considerable space for expansion in the future. With the license for opening a banking branch in Beijing and approval for a number of JVs, the Chinese establishments are showing their eagerness of converting the country into a global financial hub.
Though growth in asset management and servicing fees based on anticipated improvement in equity markets and higher volumes are expected in the upcoming quarters, we believe that the low interest rates, which appear poised to be sustained for the remaining 2010 and in the first-half of 2011, will continue to restrict its interest margin.
Currently Northern Trust carries a Zacks #3 Rank (Hold), implying no clear directional pressure on the stocks over the next one to three months.
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Stonegate Bank and Southwest Capital Bancshares, Inc. Sign Definitive Merger Agreement
FORT LAUDERDALE, FL--(Marketwire - August 31, 2010) - Stonegate Bank (
August 31, 2010 | Filed Under Mergers and Acquisitions | Leave a Comment