Retractable syringes maker Unilife Corporation (UNIS) has successfully completed all the required validation tests for its Unifill ready-to-fill (prefilled) syringe, representing the final step in the industrialization process of this unique device.
The achievement underscores that the Unifill syringe is fully compliant with all major regulatory requirements and meets the company’s own standards for device quality, reliability and functionality.
Unilife began initial production of the Unifill syringe at its FDA-approved plant located in York, Pennsylvania, in late March 2011. The company is currently in the process of negotiating with more than 20 pharmaceutical companies who have shown interest in its syringe.
It is anticipated that these pharmaceutical makers will buy from the early production lots, in order to conduct their own formal appraisal of the Unifill syringe in combination with their injectable drugs or vaccines. The completion of the product verification and validation phase opens the way for the product to be shipped to these customers. Unilife plans to commence initial sales in the near future.
Prefilled syringes act as the main drug container for about 50 injectable vaccines and drugs that are marketed by over 20 pharmaceutical companies. Unilife is of the opinion that the pharma market for prefilled syringes is the fastest-growing, relatively uncongested and the most lucrative segment of the global syringes industry.
The first-of-its-kind Unifill syringe is expected to revolutionize the $2.7 billion devices market for prefilled syringes as it is way ahead of the currently available prefilled syringes.
Pennsylvania-based Unilife is a medical devices company that designs, manufactures and sells advanced drug delivery systems. It collaborates with biotech and pharmaceutical companies and explores new devices that could be used with their drugs.
The company has developed a wide array of its own injectable drug delivery products, including retractable syringes. It sells its prefilled syringes to pharmaceutical manufacturers, suppliers of medical products to healthcare facilities and patients who self-administer prescription drugs.
Unilife’s patented syringes provide integrated safety, which is designed to protect patients from needle stick injuries. The company competes with Becton, Dickinson and Company (BDX) among others.
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Recently, we upgraded Myriad Genetics (MYGN) to Outperform with a target price of $27.00.
Myriad is confident of retaining the momentum recorded over the past few quarters going ahead through product portfolio expansion, targeting the companion diagnostic market and expansion into Europe. With respect to new products, Myriad aims to launch at least one new molecular diagnostic product each year.
The company’s tenth product, slated for launch in the second half of 2011, will assist dermatopathologists in determining whether a patient’s mole is benign or a malignant melanoma.
We are also encouraged by Myriad’s recent acquisition of Texas based, privately-held Rules-Based Medicine (RBM) for $80 million in cash. This deal would expand the company’s portfolio to take into its ambit psychiatric disorders, infectious diseases and inflammatory diseases.
According to Myriad, apart from strengthening its strong oncology pipeline it would also have access to RBM’s pipeline that includes tests for anti-psychotic drug safety, hepatitis C drug response and detection of kidney damage in diabetes patients. RBM’s most advanced product under development is in the neuroscience area – VeriPsych that assists physicians in identifying schizophrenics from normal individuals.
Myriad is aiming at establishing itself as a strong player in the companion diagnostic market. In April 2011, the company entered into an agreement with BioMarin Pharmaceuticals to conduct BRCA1 and BRCA2 mutation testing on patients to be enrolled in the latter’s phase I/II clinical study of BMN 673. To establish Bracanalysis as a companion diagnostic for PARP inhibitors, Myriad has also got into agreements with Abbott Laboratories (ABT) and AstraZeneca (AZN).
The European molecular diagnostics market size is about 75% of the US market. Moreover, many US based diagnostic companies derive 30%−50% of overall revenue and profit from international operations. Based on these facts, Myriad is looking at establishing a European presence by early 2012. The company expects to initially target opportunities in Germany, France, Italy, Spain and Switzerland.
The company conducted a market survey of 207 key persons and oncologists across the five targeted countries and found their response for the clinical value of the Bracanylysis, Colaris, Prezeon, OnDose and Prolaris products to be positive.
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We reiterate our Neutral recommendation on TRW Automotive Holdings Corp. (TRW), which is a leading manufacturer of advanced technology products and services for the automotive markets. The company is one of the world’s largest suppliers of automotive systems, modules and components to global automotive manufacturers.
Headquartered in Michigan, U.S., TRW Automotive operates in 26 countries through its subsidiaries. These operations primarily involve the design, manufacture and sale of active and passive safety related products.
The company released its 2011 first quarter results on May 04, 2011. The company reported a net income of $292 million or $2.21 per share, up almost 40% year over year from $209 million or $1.65 per share in the year-ago period. Total revenues improved 15% to $4.11 billion driven by higher global vehicle production volumes and rising demand for TRW's active and passive safety products.
The company is expected to witness significant improvement going forward given its long-term prospects and accretive strategies.
TRW Automotive is globally recognized as one of the largest and most diversified suppliers of automotive systems, modules and components to OEMs and related aftermarkets. In addition, the company continuously seeks to upgrade and improve its vast product portfolio, which is capable of generating top- and bottom-line growth even amidst soft automotive environment. This differentiates the company from many of its peers.
Moreover, the company has seen substantial improvements in its Electric Power Steering (EPS) systems business both domestically and internationally, driven by increased demand for fuel-saving and emission reducing technology.
As a result, TRW has started EPS production from its facilities in Anting, China to support its growing business in the Asia Pacific region. Moreover, TRW Automotive also intends to expand its Nove Mesto nad Vahom plant to support the introduction of EPS sensors and EPS Belt Drive steering systems.
However, high raw material prices, notably steel, have raised the cost of production for the company, thereby affecting its gross margin. Also, steel prices are expected to increase by $25-$30 per ton worldwide within the next couple of months, further raising the cost of production. This may restrict the company’s desired margin expansion plans.
Moreover, another important drawback of TRW Automotive is its high customer concentration. Ford Motor Co. (F), General Motors Company (GM) and Volkswagen AG (VLKAY) account for over 46% of the company’s sales. The loss of any one of these customers or major production cutbacks could significantly impact operations.
Thus, the shares of TRW Automotive are maintaining a Zacks #3 Rank, which translates into a short-term Hold rating.
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Spain has put its mobile telecom licenses on auction for the very first time. The Spanish government will raise roughly €1.45 billion ($2.05 billion) to control budget deficit.
Spain will auction 58 blocks with frequency bands of 800 megahertz (MHz), 900 MHz and 2.6 gigahertz (GHz). Each block of the 800 MHz band will be available for a minimum of €170 million, while 900 MHz and 2.6 GHz blocks will be priced at €169 million and €5 million, respectively. All the licenses are valid until 2030.
Eleven mobile operators are participating in the auction process and have placed their bids for the 270 MHz spectrum. Top contenders are Telefonica SA (TEF), Vodafone Group Plc (VOD) and France Telecom SA (FTE). The small Spanish telecom operators Jazztel and ONO are also bidders.
The fourth largest Spanish mobile operator Yoigo has refrained from participating in the auction as it recently obtained 1800 MHz licenses.
The demand for smartphones is currently on the rise, leading to a growing requirement for wireless data services. Given the surge in data traffic demand, we believe the carriers operating in Spain will try to make the most of this opportunity. Winning frequencies will aid operators to upgrade their wireless network, increase downloading speeds as well as expand their coverage to more consumers, particularly in rural and remote areas.
Further, the Spanish auction will ensure fair competition and prices for the services rendered. Moreover, the small operators would get access to more wavelengths for deployment of their wireless data services.
The auction is ongoing and will last for about a week.
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Dendreon Corporation (DNDN) recently received clearance from the U.S. Food and Drug Administration (FDA) to expand manufacturing facility for its cancer vaccine Provenge, in the U.S. The company’s Los Angeles facility can now be operational with 36 workstations. These facilities will be brought online in a staged manner.
Earlier, in March 2011, Dendreon’s New Jersey facility received FDA clearance. The facility has 48 workstations, some of which are already operational. The LA and NJ facilities, geared for manufacturing Provenge, now total 84. We believe the expanding manufacturing capacity will significantly increase the availability of Provenge which will help Dendreon to meet pent up demand for the vaccine.
The company is also building additional capacity in Atlanta for which the FDA is expected to give its decision in August 2011. All the three facilities are thus expected to be manufacturing commercial material by year end. Hence, the company expects capacity to increase ten fold during 2011.
The company expects 2011 revenues from Provenge in the range of $350 million to $400 million, half of which is expected to be realized in the fourth quarter, once all the facilities become operational. Dendreon expects to have 500 centers, where patients can be treated with Provenge, by the end of 2011.
Unlike traditional vaccines that prevent diseases, Provenge treats by stimulating the body's own immune system to attack cancer cells. Provenge is the first product in the new therapeutic class known as active cellular immunotherapies (ACI).
Prostate cancer is the most common non-skin cancer in men in the U.S. The disease affects more than 2 million men in the US.
We currently have a Neutral recommendation on Dendreon. The stock carries a Zacks #3 Rank (short-term Hold recommendation). We believe that the launch of Dendreon’s potential blockbuster drug, Provenge, has been impressive. Successful commercialization of Provenge is crucial for the financial performance of Dendreon as it can drive the company to profitability.
We are encouraged by the company’s efforts to expand capacity and Centers for Medicare & Medicaid Services’ (CMS) proposed decision to reimburse Provenge for on-label usage, which could subsequently spur sales at Dendreon. However, in the long run, we remain concerned about the company’s dependence on Provenge and the lack of a robust pipeline.
We believe Dendreon has little to fall back on if Provenge fails to keep its promise. We also remain cautious of the continuous uptick in operating expenses.
Moreover, there are products currently under development for treatment of prostate cancer. Johnson and Johnson’s (JNJ) Zytiga (abiraterone acetate) received FDA approval in April 2011 and Medivation’s (MDVN) MDV3100 is in late stage trials. If these products prove to be successful, the prostate cancer market will become more crowded and competitive.
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Wells Fargo & Co. (WFC) has decided to offload its H.D. Vest Financial Services business to Parthenon Capital Partners, a private equity firm. The company has entered into a definitive agreement in this context with Parthenon Capital. However, the terms of the deal were not disclosed.
Wells Fargo had acquired H.D. Vest in 2001. Based in Irving, Texas, H.D. Vest offers investment and financial advisory solutions to over 1.8 million retail investors through an advisor base of over 4,800 securities-licensed tax professionals. Subsequent to the transaction, H.D. Vest's existing management team, headed by Roger Ochs, will continue operating the business.
The deal is a strategic fit for Wells Fargo, which is restructuring its business to optimize its business model. According to the company, the unit fails to align precisely with the business model of Wells Fargo Advisors, the retail brokerage unit of Wells Fargo. However, this sale does not imply a change in the brokerage firm's approach to serving independent advisors through Wells Fargo Advisors Financial Network (FiNet).
While on one hand, Wells Fargo is shedding a business unit, it is also making opportunistic acquisitions for future growth on the other. In May, the company decided to acquire substantially all of the U.S.-based operating assets of Foreign Currency Exchange Corporation, a wholly owned subsidiary of the Bank of Ireland Group (IRE) in an effort to expand its international banking capabilities. This deal is expected to substantially strengthen Wells Fargo's foreign currency exchange capabilities for domestic correspondent banks.
In December 2008, Wells Fargo had acquired Wachovia Corporation, the nation's fourth largest bank, according to its market value in the prior year. The transaction was valued at $12.5 billion to Wachovia common stockholders. Exposed to risky loans, Wachovia began to experience heavy losses in its loan portfolios during the subprime mortgage crisis. At that time, Citigroup Inc. (C) was also in the race to take over Wachovia.
Capital ratios are strong, and the dividend and share buyback initiatives inspire investors' confidence in the stock. Moreover, considering the current economic environment, the recent trend in credit metrics and efforts taken by the company to improve its credit quality, we expect additional reserve releases in the upcoming quarters.
Management continues to focus on opportunities for further cost decreases through efforts implemented on a company-wide basis. In addition to this, with the conclusion of the integration process and continued economic recovery, expenses are likely to decrease, thereby providing opportunities for future earnings growth.
Yet, revenue growth remains challenged at Wells Fargo. Going forward, we believe top-line headwinds would persist given the protracted economic recovery, with lackluster loan growth and legacy mortgage issues. Regulatory issues also seem to cap the company's fee income growth prospects.
Wells Fargo shares retain a Zacks #3 Rank, which translates into a short-term Hold rating. Considering the fundamentals, we are maintaining a long-term Neutral recommendation on the stock.
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The 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, as well as 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.
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.
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 Company (GM), Ford Motor Co. (F), Toyota Motor Corp (TM) and Honda Motor Co. Ltd (HMC) are large consumers of metals, especially steel and aluminum.
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 and develop new deposits, thereby boosting reserves, while the smaller ones devote their attention to fewer mines.
Mergers and acquisitions (M&A) have historically been a critically important growth strategy for mining companies. The year 2009 experienced a lull in M&A activity under the impact of the global economic downturn, with a deal value almost half of 2008. The focus for M&A activity shifted from business growth to business survival, as companies looked to safeguard their teetering balance sheets rather than seeking expansion.
In 2010, fairly unpredictable financial markets dictated metals prices, despite strong underlying fundamentals. In addition, several notable mining accidents have made mine safety a major factor for the industry and regulators. Despite the volatility, gold prices rose 400% over the past ten years and made a record run in 2010, increasing 26% and hitting a high of $1,432 an ounce.
The year 2011 has been unstable for metals so far with double-digit gold sell-offs and rallies during the first quarter. However, investors remain cautiously optimistic regarding the sector. Many analysts predict metal prices will end the year with double-digit growth considering demand is still outstripping supply. Unrest in the Middle East is also driving metal prices. On the down side, the end of the Fed’s QE2 program and overall atmosphere of greater focus on fiscal restraint may limit significant gains.
In an industry plagued with rising energy and raw material costs, increasing productivity and reducing costs are the keys to success. Given the cyclical nature of the metals industry, low-volume, and high-cost producers need to generate sufficient cash or ensure a strong borrowing position during market peaks to survive the market troughs.
Continuing consolidation supports the sector’s ability to influence the price of input costs and companies can also obtain synergies and economies of scale through the operation of vertically integrated raw materials sources. Expansion in low-cost countries will ensure lower labor costs and also help tap their growth potential.
Geographically, the Asia-Pacific region -- in particular China and India -- is witnessing higher production and consumption of metals. 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. China is the world’s largest consumer of metals and is expected to remain so.
Further, developed regions such as the US and Europe are showing signs of recovery, albeit at a moderate pace. Overall, we expect global metal demand to improve in the long term with the recovery of user industries.
Demand as well as production for industrial metals in Japan has been recently affected as factories have been shut in the aftermath of the country’s earthquake and Tsunami. Japan is the biggest buyer of aluminum and the second largest buyer of copper ore. We, however, believe that metal demand will be boosted by the construction industry triggered by the country’s reconstruction efforts.
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As the major shareholder (about 60%) of the metals market, the steel industry was severely bruised by the global economic downturn. However, according to the World Steel Association, world crude steel production in 2010 reached a record 1,414 million metric tons (mmt), an increase of 15% compared with 2009. All the major steel-producing countries and regions showed double-digit growth in 2010. In April 2011, the world crude steel production was 127 million metric tons (mmt), an increase of 5.0% from April 2010.
The U.S. produced 80.6 mmt of crude steel, 38.5% higher than 2009. Of the world’s steel production, US’s share increased to 5.7% from 4.7% in 2009, pushing the country to the third position in 2010 from fifth position in 2009.
The growth trend continued in 2011, with world crude steel production increasing 5.3% in January to 119 mmt from January 2010 levels. United States crude steel production rose smartly by 9.4% to 6.8 mmt compared with January 2010. The US produced 7.1 mmt of crude steel in April 2011, an increase of 2.1% year over year.
Reflecting on 2010 data, we see a sharp increase in revenues and shipments across most companies. Sales of ArcelorMittal (MT), the world’s largest steel-producing company, increased 27.3% year over year to $22 billion in the first quarter of 2011. Steel shipments also increased to 22.0 million metric tons compared with 21.0 million metric tons in the year-ago quarter.
Similarly, sales for U.S. Steel Corp. (X) soared 24.8% to $4.9 billion and steel shipments went up to 5.8 million tons. Nucor Corporation (NUE) recorded a sales increase of 32% to reach $4.83 billion with shipments increasing 9%. Steel Dynamics Inc. (STLD) reported a 29.6% increase in revenues to generate $2.01 billion with shipments rising 4% to 1.5 million tons.
The steel industry is emerging from the gloom of the global recession as is evident from the above figures. However, given its economic sensitivity, we expect global steel demand to improve only gradually, in line with the recovery in the user industries, especially automotive and residential construction.
Although steel prices have been stabilizing since the latter part of 2009, they remain significantly below the pre-crisis levels. We believe that a sustained recovery in steel prices remains uncertain in the backdrop of sluggish economic activity.
Currently, Steel Dynamics has a Zacks #4 Rank (Sell) for the short-term (1 to 3 months) while U.S. Steel holds a Zacks #3 Rank (Hold). ArcelorMittal currently retains a Zacks Rank #3 Rank (Hold). We maintain our Outperform recommendation in the long term for ArcelorMittal and U.S. Steel, while we maintain a long-term Neutral recommendation on Nucor.
As per the World Gold Council, gold prices rose for the tenth consecutive year in 2010, reflecting recovery in key sectors of demand and continued global economic uncertainty. In 2010, gold prices jumped 29%, reaching $1,405 per ounce as of the end of December.
During 2010, the price of gold rose to record levels on several occasions, trading as high as $1,432 per ounce. Gold’s performance was strong and volatility remained low. The World Gold Council suggests that the increase was not only driven by inflationary forces but was also inflated as both the private and public sectors of India and China rushed into the gold market.
Gold demand went up 9% over 2009, showcasing a 10-year high of 3,912.2 tons, driven by the rise in jewelry demand, the revival of the Indian market and strong momentum in Chinese gold demand. Moreover, central banks became net purchasers of gold for the first time in 21 years, hiking the demand for the yellow metal.
Major demand came from India and China. India bought 746 tons, a 69% increase over 2009, and China bought 400 tons of gold jewelry. China bought 179.9 tons of gold in the form of bars and coin, a 70% increase over 2009.
Global gold demand in the first quarter of 2011 totaled 981.3 tons, up 11% year over year from 881.0 tons in the first quarter of 2010. This was largely attributable to the widespread rise in demand for bars and coins, supported by an improvement in jewelry demand in key markets.
The quarterly average gold price hit a new record of $1,386.27/oz (London PM Fix), its eighth consecutive year-over-year increase. Despite a period of price consolidation in the early part of the quarter, it climbed to record highs throughout March and has continued to achieve new highs in April and May.
Gold remained a coveted asset given its long-term supply and demand dynamics and influenced by macro-economic factors. Concerns regarding economic growth in developed countries made gold an attractive and safe investment option. The European sovereign debt crisis made European investors use gold as a currency hedge. Pressure on the US dollar against various currencies coupled with higher inflation expectations in many countries, including India and China, also pushed up gold prices.
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 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. The Chinese gold demand is expected to double in 10 years.
Even though gold price dropped 7% in January this year, it again recorded a rise in February. We believe gold demand and prices will strengthen in 2011. As China and India continue to grow rapidly, their demand for gold will also rise in tandem.
Higher prices bode well for gold producers, which should benefit giants such as Barrick Gold Corporation (ABX), Agnico-Eagle (AEM) and Goldcorp Inc. (GG). However, gold producers like Newmont Mining Corporation (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 favorable commodity-price backdrop. This is reflected in our overall long-term neutral views on the stocks. As major economies continue to recover, investors’ confidence will be restored to invest in stock markets, which could cause gold prices to fall. However this is not going to happen in the near future. We have a Zacks #3 Rank (Hold) on Barrick Gold, Agnico-Eagle, Goldcorp, Kinross Gold Corporation and Newmont Mining.
The aluminum industry is highly cyclical, relating to prices subject to worldwide supply and demand forces along with other influences. The global economic downturn had a historic, negative impact on the aluminum industry, leading to an unprecedented decline in LME-based aluminum prices, weak end markets, fall in demand, increased global inventories, and higher costs of borrowing and diminished credit availability. The economy has however recovered from the crisis of the economic downturn.
Alcoa Inc. (AA) is the world leader in the production and management of primary aluminum. In response to the global economic downturn, the company implemented a number of operational and financial actions to improve its cost structure and liquidity, including curtailing production, halting non-critical capital expenditures, accelerating new sourcing strategies for raw materials, divesting non-core assets, reducing global headcount, suspending its share repurchase program, reducing its quarterly common stock dividend and resorting to other liquidity enhancements.
In 2011, Alcoa plans to restart certain idled potlines at three smelters. These restarts are expected to increase Alcoa’s aluminum production by 137 kmt during 2011 and by 204 kmt on an annual basis thereafter. Such measures are sure to meet anticipated growth in aluminum demand.
Alcoa expects demand for aluminum to grow 12% this year. China, India, Brazil and Russia are all expected to register double-digit increases in aluminum demand. Market conditions for aluminum products in all global markets are expected to improve, particularly in aerospace, automotive and industrial gas turbine.
On the cost side, however, energy prices and currency movements are expected to keep posting challenges. Overall, Alcoa believes that the long-term prospects for aluminum remain bright and envisions that global demand for aluminum will double by 2020.
Since the sudden decline from peak prices in mid-2008, aluminum prices have increased over the last 2 years. In 2010, global aluminum prices increased 13%. Alcoa increased its fiscal 2010 profit on the back of higher prices and continued strengthening in most end markets. Aluminum Corporation of China, or Chalco (ACH) swung back to profit in 2010 after posting a loss in 2009, attributable to increased global aluminum prices.
In the medium-to-long term, aluminum consumption will 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.
Further, the surge in copper price this year is triggering a switch among manufacturers to aluminum. Automobiles, air conditioners and industrial components manufacturers are now shifting toward aluminum, which is more economical.
We expect aluminum demand to increase in the long term, outstripping supply growth with the improving end-markets. China and India are undergoing rapid industrialization. Both these factors are positive for underlying aluminum demand. Leading aluminum producers such as Alcoa, Paramount Gold and Silver Corporation (PZG) and Aluminum Corporation of China should benefit from the improving demand outlook.
Currently, Alcoa holds a Zacks #3 Rank (Hold) supported by our long-term Neutral recommendation, while Paramount Gold and Silver has a Zacks #4 Rank (Sell).
Copper prices have shown a rising trend in 2010 benefiting copper producers like Freeport-McMoRan Copper & Gold Inc. (FCX) and Southern Copper Corporation (SCCO). Although copper demand was down 10% year over year in 2009, global copper demand has since been witnessing growth.
The Chinese demand for copper was still robust and imports of the metal were rebounding, which was supported by steady construction and infrastructure activity in the country. The improvement in copper prices would be supported by limited supply and increased demand from China.
Even though copper prices are at near all-time highs, the outlook for copper prices remains favorable. Not denying the volatility in prices that are bound to remain, we have a bullish stance on copper prices, in the long term. However, as discussed earlier, manufacturers might now resort to aluminum as a substitute.
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. The companies that have a high leverage to copper prices will benefit immensely from the potential demand for the metal in the developing markets.
We currently have a Zacks #3 Rank (Hold) and long-term Neutral recommendation on both Freeport and Southern Copper.
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Sara Lee Corp. (SLE) announced that it has completed its $87 million buyout of Aidells Sausage Co. from Encore Consumer Capital, a private equity firm that invests exclusively in leading consumer products companies. The deal was originally announced on May 5, 2011.
Sara Lee said the deal will help broaden its presence in the premium meats category and strengthen its North American meat business.
Aidells pioneered the premium sausage category and offers a full product line of poultry-based products, such as Chicken & Apple, Cajun Style Andouille and Roasted Garlic & Gruyere Cheese sausages. Aidells also offers a line of meatball products in flavors such as Teriyaki Pineapple and Buffalo-Style.
Management at Sara Lee also revealed that Aidells will form the cornerstone of the newly formed Gourmet Foods group within Sara Lee and will undoubtedly continue to expand holding the leadership position in the premium sausage category.
Earlier this month, Sara Lee said that it had been considering selling its international bakery and North American refrigerated dough businesses. The Downers Grove, Ill., company has already sold several business lines and is in the process of splitting into two companies, one taking care of its North American food businesses and the other focusing on European coffee, tea and bread.
We are encouraged by Sara Lee’s focus on leveraging its consumer brands to generate sales growth in the range of 4% to 5% and earnings growth in the range of 5% to 8% by next year.The company intends to bring in changes in the organizational structure and product portfolio, thereby improving operational efficiency.
Currently SLE holds a Zacks #3 Rank. On a long-term basis, we maintain a Neutral rating on the stock with a short-term Hold rating.
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Warner Chilcott (WCRX) recently announced that there will be a change at the helm of its research & development (R&D) division from the beginning of next year. The need for change arose following the decision of Warner Chilcott’s incumbent R&D chief, Dr. Fawzi, to resign. Warner Chilcott targets women's healthcare, gastroenterology, dermatology and urology markets in the US and Western Europe.
Dr. Fawzi is expected to serve the company in his present capacity until the end of 2011. Warner Chilcott has formed a committee to oversee operations of the R&D division until the unit gets a new head. The committee will be headed by Dr. John King, a member of Warner Chilcott’s Board of Directors since 2005.
Dr. Fawzi has been with Warner Chilcott since October 2009 when the company purchased Procter & Gamble's (PG) global branded prescription pharmaceutical business. Following the purchase, Warner Chilcott entered the gastroenterology market with Asacol (ulcerative colitis) and the urology market with Enablex. The acquisition also added osteoporosis drug Actonel to the company’s portfolio.
However, the western European operations at Warner Chilcott have been hit badly following the loss of patent protection of Actonel in Western Europe late last year. Actonel accounted for approximately 70% of the revenues generated by Warner Chilcott from the Western European markets in 2010.
To counter the loss of revenues, Warner Chilcott announced in April 2011, that it will reorganize its operations in Western European nations such as Belgium, the Netherlands, France, Germany, Italy, Spain, Switzerland and the UK. Warner Chilcott intends to complete the restructuring by mid-2012. As a result of the restructuring, the workforce at Warner Chilcott is expected to be trimmed by approximately 500 employees.
We currently have a Neutral recommendation on Warner Chilcott in the long-run. The stock carries a Zacks #3 Rank (Hold rating) in the short-run. Although the company is facing patent expirations for many of its key drugs, we believe Warner Chilcott’s diversified product base will help withstand the generic threat.
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Lindsay Corporation (LNN) announced results for its fiscal third quarter ended May 31, 2011. The quarter delivered an EPS of $1.20, beating the Zacks Consensus Estimate of 96 cents and 50 cents in the year-earlier quarter.
Total revenue in the quarter increased at a whopping 53% to $153.4 million from $100.1 million in the prior-year quarter, slightly beating the Zacks Consensus Estimate of $153 million.
Total revenue for irrigation equipment increased 58% to $126.9 million. On the domestic front revenue surged 60% year over year to $76.7 million, while revenue for international irrigation perked up 55% year over year to $50.2 million. Infrastructure revenue in the quarter increased 35% year over year to $26.5 million.
Costs and Margins
Cost of goods sold in the quarter increased to $111.9 million from $74.8 million in the year-ago quarter. Gross profit was up 64% year over year to $41.5 million in the quarter. Consequently, gross margin also increased 180 basis points year over year to 27%.
The improvement in gross margins is attributable to higher international irrigation margins and diversified manufacturing including, railroad signals and structures, commercial tubing and contract manufacturing.
Operating expenses increased to $18.4 million in the quarter from $15.2 million in the year-earlier quarter. The increase in expenses was attributable to higher personnel cost and additional expenses due to the acquisitions of Digitec Inc., and WMC Technology Limited.
Another contributing factor was expenses incurred for environmental monitoring and remediation, as a part of the ongoing development and implementation of the EPA work plan at Lindsay's Nebraska facility.
Operating income in the quarter amounted to $23.1 million up from $10 million in the year-ago quarter. Consequently, operating margin increased 510 basis points year over year to 15.1% in the quarter.
Cash and cash equivalent as of May 31, 2011 amounted to $100.6 million, up from $83.5 million, as of May 31, 2010. Receivables amounted to $87.6 million versus $56.8 million as of May 31, 2010.
The company generated $28.3 million of net cash from operating activity. As of May 31, 2011 Lindsay’s backlog was $43.3 million versus $33.9 million as of May 31, 2010.
Long-term debt of the company decreased drastically to $5.4 million as of May 31, 2011, from $9.6 million as of May 31, 2010. The debt-to-capitalization ratio improved further to 2% as of May 31, 2011 from 4% as of February 28, 2011 and 5% as of November 30, 2010.
Lindsay contends that the agricultural markets across the globe continued to perform well throughout the irrigation selling season. Agricultural commodity prices remained high compared to the previous year thereby, benefiting the farmers.
Moreover, the company’s long-term drivers including water use efficiency, population growth, increasing importance of biofuel and improvements in infrastructure safety and security, are expected to remain in the company’s favor.
The United States Department of Agriculture forecasts farm income to increase 19.8% in 2011 compared with 2010, despite a $20-billion jump in production expenses. The 2011 forecast is the second highest inflation-adjusted value for net farm income recorded in the past 35 years.
Lindsay’s irrigation segment will thus benefit from rising farm income and will reflect in 2011 results. The irrigation segment also stands to benefit from a continuing shift from flood irrigation to more efficient systems and exposure to fast-growing international irrigation markets.
On the flipside, the outlook for the infrastructure segment remains unclear due to government budget constraints and a delay in the congressional passage of a new federal highway bill. We thus maintain our Neutral long-term recommendation on Lindsay. The company currently retains a Zacks #2 Rank (short-term Buy recommendation) on the stock.
Omaha, Nebraska-based Lindsay Corporation is a leading designer and manufacturer of self-propelled center pivot and lateral move irrigation systems, which are used principally in agriculture to increase or stabilize crop production while conserving water, energy and labor. The company also manufactures and markets road safety products. The company competes with Valmont Industries Inc. (VMI).
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