Montpelier Re Holdings Ltd. (MRH) reported second quarter 2011 operating of 8 cents per share, much lower than the Zacks Consensus estimate of 45 cents. Results were way behind earnings of $1.00 in the year ago quarter. Operating income was $5.2 million, plummeting from $72.5 million in the second quarter of 2010.
The quarter suffered largely due to catastrophe losses, resulting from tornado activity in the United States in April and May, lower investment income and higher operating expenses. However, favorable prior year loss reserve movements were a partial offset.
Including net realized investment gains of $5.0 million, net unrealized investment gains of $4.4 million, Net gains from investment-related derivative instruments of $0.2 million, net foreign exchange gains of $2.3 million and net gains from foreign exchange-related derivative instruments of $4.1 million, the company reported net income of $21.2 million or 33 cents per share, compared with $69.9 million or 96 cents per share.
Net insurance and reinsurance premiums earned decreased 0.9% year over year to $194.3 million in the quarter under review.
Underwriting loss in second quarter 2011 totaled $3.8 million, comparing unfavorably with the year ago quarter profit of $59.5 million.
Net investment income in the quarter came in at $17.1 million, 16% lower than the year-ago quarter.
The loss ratio in the fourth quarter was 68.6% compared with 29.4% in the year-ago quarter. Results include $39 million of catastrophe losses partially offset by $20 million of favorable prior year loss reserve movements.
Combined ratio in the quarter was 102.6%, a substantial deterioration from 59.8% in the year-ago quarter.
Montpelier ended the quarter with cash and cash equivalents of $423.5 million, up 82% from 2010-end.
At quarter end, the debt level slightly increased to $327.8 million from 2010-end level of $327.7 million.
Book value per share as of June 30, 2011 was $23.36, 1.6% higher than $23.10 as of March 31, 2011.
During the second quarter of 2011, Montpelier spent $15 million to buy back 811,350 shares.
RenaissanceRe Holdings Ltd. (RNR">RNR) which competes with Montpelier, reported a second quarter operating loss of 21 cents per share, as opposed to the Zacks Consensus Estimate of operating earnings of $1.64, showing a sharp decline from operating earnings of $2.40 per share reported in the year-ago quarter.
Results deteriorated primarily due to losses amounting to $70.8 million arising as a consequence of the U.S. tornadoes. Premiums, particularly from the reinsurance business, improved, reflecting improving market conditions, but the huge catastrophe (CAT) loss more than offset the improvement.
Catastrophe losses coupled with the current pricing environment in the primary insurance market and the stressed economy are expected to restrict top-line growth.
We maintain our Underperform recommendation on Montpelier. The quantitative Zacks #5 Rank (short-term Strong Sell rating) for the company indicates downward pressure on the stock over the near term.
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Synovus Financial Corp. (SNV) reported second-quarter 2011 loss attributable to common shareholders of 6 cents per share, a significant improvement from the loss of 36 cents per share reported in the year-ago quarter and 9 cents in the prior quarter. Moreover, the quarter’s earnings were in line with the Zacks Consensus Estimate.
Including $3.1 million of restructuring charges, net loss attributable to common shareholders was $53.5 million or 7 cents per common share.
Operating net loss decreased to $50.4 million from $242.6 million in the prior-year quarter and $69.3 million in the prior quarter. The recovery was possible due to improved credit trends with a significant decline in credit costs and continued implementation of efficiency initiatives.
Quarter in Detail
In the second quarter of 2011, net interest income decreased 7.6% to $231.0 million from $250.0 million in the year-ago period and plummeted 2.7% from $237.4 million in the prior quarter, due to lower loan balances.
Net interest margin was 3.51%, down by 1 basis point sequentially. However, the margin exceeded 3.34% reported in the prior-year quarter, driven by a decrease in the effective cost of funds.
Synovus’ interest expenses slipped 6.4% sequentially and 34.9% year over year to $57.1 million in the reported quarter.
Non-interest income plummeted 8.3% to $67.8 million in the quarter from $74.0 million in the year-ago period. The decline was attributable to a fall in fee income, lower service charges on deposit accounts and decreased mortgage banking income, partially offset by an upswing in bankcard income brokerage, fiduciary and asset management fees and other non-interest income.
However, non-interest income edged up 5.6% sequentially, mainly due to increased mortgage and brokerage revenues.
Total revenue inched down 7.8% to $298.8 million from $324.0 million in the year-ago period and 0.9% sequentially from $301.6 million in the prior quarter. The decline was attributable to lower net-interest income. Moreover, revenue also lagged the Zacks Consensus Estimate of $305.0 million.
In the second quarter of 2011, total non-interest expenses decreased 14% year over year to $222.4 million. The decline was mainly due to lower foreclosed real estate expense and FDIC insurance and other regulatory fees, lower salaries and other personnel expense, professional fees, data processing expense, net occupancy and equipment expense and other operating expenses.
Total credit costs dropped 10.8% to $157.9 million in the quarter from $177.1 million in the previous quarter. Further, Synovus plans to achieve $75 million in expense savings in 2011, attributed to its efficiency initiatives.
As of June 30, 2011, Tier 1 capital ratio, Tier 1 common equity ratio and tangible common equity/ tangible assets ratio remained modestly in line at 12.8%, 8.4% and 6.6%, respectively, compared with the prior quarter ratios of 12.8%, 8.5% and 6.7%, respectively.
At the end of the reported quarter, total non-performing assets were down 7.7% sequentially and 25.0% year over year to $1.2 billion, impacted by lower inflows. However, net charge-offs increased to $167.2 million in the quarter from $166.9 million in the prior quarter and slipped from $433.1 million in the year-ago period.
Total deposits were $22.9 billion, down $330.9 million from the prior quarter, driven mainly by a planned reduction of national market brokered deposits and a continued wind-down of the Shared Deposits program.
We believe Synovus is in a recovery phase, driven by lower non-performingassets and improving operating efficiencies, which should make the company profitable in the upcoming quarters. Furthermore, the planned expenses savings by the company will act as a positive catalyst for Synovus.
Synovus currently retains its Zacks #3 Rank, which translates to a short-term Hold rating. However, Synovus’ closest competitor - Capital City Bank Group Inc. (CCBG) retains a Zacks #1 Rank (a short-term Strong Buy rating).
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McKesson Corp.’s (MCK) first quarter fiscal 2012 earnings of $1.27 per share (excluding special items) outperformed the Zacks Consensus Estimate by 13 cents and the year-ago earnings by 11 cents. Higher revenues and lower share count helped boost earnings.
Revenues for the quarter climbed 9% to $30.0 billion, inching ahead of the Zacks Consensus Estimate of $29.0 billion. Strong performance of the two segments of the company, aided by the acquisition of US Oncology, led the revenues upside.
Quarter in Detail
McKesson operates through two segments: Distribution Solutions and Technology Solutions. Revenues at the Distribution Solutions segment went up 9% to $29.2 billion in the reported quarter. Strong growth in the US pharmaceutical direct distribution and services revenues led to the upside.
Revenues from the US pharmaceutical distribution business came in at $25.7 billion, 10% higher than the year-ago figure. The increase was primarily due to market growth and the acquisition of US Oncology.
Canadian revenue remained flat at $2.7 billion, due to the impact of government imposed price restrictions on generic drugs. Medical-Surgical distribution revenue climbed 7% to $731 million.
Revenues at the Technology Solutions segment scaled up 6% to $802 million, as a result of better-than-expected achievement of certain customer implementation milestones, as well as the timing of payments from customers.
Within the Technology Solutions segment, service revenue increased 6% to $630 million. While software revenue climbed 7% to $144 million, hardware revenue slid 3% to $28 million in the first quarter of 2012.
Gross profit for the quarter went up 8% to $1.5 billion. McKesson reported a 10% increase in operating expenses, incurring $1.0 billion. Higher operating expenses resulted from the acquisition of US Oncology.
The company repurchased $650 million of common stock in the reported quarter, leaving about $850 million worth of shares to be repurchased under the current share repurchase program.
2012 Outlook Raised
McKesson expects fiscal 2012 earnings (excluding special items) to range between $6.09 and $6.29 per share, increased from the earlier guidance range of $5.99 to $6.19.
The company has decreased its fiscal 2012 tax rate estimate to 32% from 33%, resulting in the increased earnings guidance. The fiscal 2012 Zacks Consensus Earnings Estimate of $6.13 lies within the company’s guidance range.
The earnings guidance excludes the 7 cents that the company expects to incur in relation to the US Oncology acquisition and 47 cents related to amortization of acquisition-related intangible assets.
Additionally, McKesson expects earnings to be weighted toward the second half of fiscal 2012, with fourth quarter 2012 being exceptionally strong.
McKesson continues to expect Technology Solutions revenues to increase slightly in fiscal 2012 compared with fiscal 2011.
With a few blockbuster drugs like Pfizer Inc.’s (PFE) Lipitor and Johnson & Johnson’s (JNJ) Concerta losing patent protection in calendar year 2011, the company expects to record robust generic revenues in fiscal 2012.
For fiscal 2012, McKesson continues to expect cash flow from operating activities to be about $2.0 billion. Capital expenditure and capitalized software are anticipated to lie in the range of $450 – $500 million.
Outperform on McKesson
We currently have an Outperform recommendation on McKesson. McKesson is a major player in the pharmaceutical and medical supplies distribution market.
We believe that several factors like aging population, increased use of generics, and growing demand for specialty pharmaceutical products, especially oncology drugs, should help drive growth in the Distribution Solutions segment.
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Abaxis Inc. (ABAX) reported first quarter 2012 EPS of 10 cents, 37.5% down from the year-ago quarter EPS as well as the Zacks Consensus Estimate of 16 cents.
The decline in EPS was partly driven by an increase in share count from 22,750,000 in year-ago quarter to 23,095,000 in the reported quarter. Effective tax rate in the quarter was 37% compared with 39% in the previous-year quarter.
Net sales during the quarter budged up 3% year over year to $36 million, but missed the Zacks Consensus Estimate of $39 million. The sluggish growth was mainly attributable to a huge 12% fall in international revenues to $6.3 million, partly mitigated by a 7% rise in North America sales to $29.7 million.
Within the customer group, Medical Market revenues witnessed an upside of 11% in the reported quarter to $7.2 million while the Veterinary Market grew 3% to $27.7 million. However, sales from the Other customer group plummeted 30.5% year over year to $1.2 million.
Total consumable sales climbed 5% year over year to $1.4 million. Moreover, instrumental sales spiked 3% year over year to $204,000.
Both medical and veterinary reagent disc sales and total medical and veterinary instrument sales increased 3% to $20.7 million and $7.5 million, respectively, during the first quarter of 2012.
Gross profit in the quarter plunged 2.8% year over year to $19.2 million, leading to 320 basis points (bps) contraction in gross margin to 53.4%.
During the quarter, the company witnessed a 12.2% rise in research and development expenses to $3.5 million. Sales and marketing expenses grew 6.0% to $9.2 million while general and administrative expenses shot up 60.9% to 3.4 million. As a result, operating income decreased 46.2% to $3.2 million, leading to a stupendous 810-bp contraction in operating margin to 8.9%.
Abaxis exited the first quarter with cash and cash equivalents and short-term investments of $108.9 million compared with $98.4 million at the end of June 2010.
Abaxis operates in a niche market of portable medical and veterinary blood analysis systems. Low worldwide penetration provides scope for substantial growth in this niche industry. The company’s margins continues to disappoint based on several challenges. The presence of many big players like Alere (ALR) has made the human and veterinary diagnostic market highly competitive. Furthermore, soft international market is also a headwind for Abaxis.
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Merck KGaA’s (MKGAF) second quarter 2011 results fell short of the Zacks Consensus Estimate on all fronts, although it reported higher year-over-year revenues.
Earnings per share for the second quarter 2011 came in at $1.32, substantively below the Zacks Consensus Estimate of $2.62 and the year-ago earnings of $2.07. Higher operating expenses washed down the gains in revenues to drag the earnings lower.
Revenues for the reported quarter climbed 22.1% to $3,584.7 million, driven primarily by the acquisition of Millipore Corp. last year. However, revenues missed the Zacks Consensus Estimate of $3,642 million.
The company operates under two heads: Pharmaceuticals and Chemicals. The Pharmaceutical division, in turn, functions under two heads, Merck Serono and Consumer Health Care. The Chemical division is split into Merck Millipore and Performance Materials.
Merck Serono’s revenue increased only 2.0% during the quarter. Strong performance from Rebif (up 5.2%) was offset by lower Erbitux sales (down 3.0%). Erbitux sales experienced a decline mainly due to lower sales in Japan.
The Consumer Health Care division’s revenues went up 3.9%, aided by improved sales in European markets.
The Performance Materials division’s revenues slid 6.5% during the second quarter of 2011, due to negative currency impact and the divestment of Crop BioScience business in the first quarter. The Performance Materials division consists of Liquid Crystals business and Pigments business.
Merck KGaA’s Merck Millipore division comprises of three business units – Bioscience, Lab Solutions and Process Solutions. We note that the Bioscience business unit constituted 17% of the division’s total revenue. While the Lab Solutions business unit represented 42%, the balance was contributed by the Process Solutions business unit.
Merck KGaA recorded a 9% increase in research and development expenses during the quarter, primarily due to the increase in expenses in the Chemicals division.
Forecast for 2011
Merck KGaA expects 2011 revenues to lie in the range of €10.0 – €10.4 billion. The company now expects Merck Serono division sales to grow in the range of 1-2% and Consumer Health Care division sales to experience growth in the range of 6-9%.
Further, the Merck Millipore division is anticipated to grow by about 50% and the Performance Materials division to grow 4-6% in 2011.
We currently have a Zacks #3 Rank (short-term Hold rating) on Merck KGaA. We note that during the second quarter of 2011, Merck KGaA submitted an application to the European Medicines Agency (EMA) for the approval of Rebif to treat patients who have experienced a single demyelinating event (an early symptom of the disease) and who stand a high risk of developing multiple sclerosis (MS).
Rebif is currently available worldwide as a treatment for the relapsing versions of MS. The drug primarily faces competition from Biogen Idec’s (BIIB), Tysabri and Avonex and Teva Pharmaceuticals’ (TEVA) Copaxone.
Also, during the quarter, Merck KGaA halted the development of cladribine, which was being evaluated as a treatment for MS. The company’s decision came on the belief that data from the ongoing clinical trials will not be sufficient to address the US Food and Drug Administration’s (FDA) requirements for approval.
The company is of the view that to gain US and EU approval, it will have to conduct a new clinical trial program that would take several years to complete.
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Genworth Financial Inc. (GNW) reported its second quarter operating loss of 15 cents per share, wider than the Zacks Consensus Estimate of a loss of 3 cents. Results were way behind 24 cents earned in the last year. Operating loss for the quarter stood at $74 million, compared with the operating profit of $118 million in the year-ago period.
A substantially higher year-over-year loss at the U.S. Mortgage Insurance segment, partially offset by better results at Retirement & Protection and at International, resulted in the company’s soft performance.
Including net investment losses of $22 million, net loss available to common shareholders was $96 million or 20 cents per share in the reported quarter compared with net income of $42 million or 8 cents per share available to common shareholders in the comparable period last year. The prior year quarter included net investment losses of $76 million.
Genworth’s total revenue improved 10% in the quarter to $2.67 billion from $2.41 billion in the prior-year quarter. An improvement in investment income as well as insurance and investment product fees largely drove the overall revenue improvement.
Premium revenue at Genworth declined 1% year over year to $1.46 billion in the quarter. But, net investment income increased 7% year over year to $881 million.
Retirement and Protection: Net operating income surged 31% year over year to $149 million in the quarter from $114 million in second quarter 2010, led by higher income from the life insurance and Wealth Management businesses.
International: Net operating income increased 2% year over year to $107 million in the quarter from $105 million in the second quarter of 2010. Better profit Lifestyle Protection business led to the improvement.
U.S. Mortgage Insurance: Operating loss widened to $253 million from a loss of $40 million in the prior-year quarter. Continued aging of delinquent loans adversely affected the results.
Corporate and Other: Net operating loss was $77 million in comparison to an operating loss of $61 million in the prior-year period.
At first quarter-end, cash, cash equivalents and invested assets of Genworth stood at $72.2 billion, a tad lower than $72.3 billion at 2010-end.
Genworth’s long-term borrowings decreased to $4.76 billion at the end of the quarter from $4.95 million at 2010 end.
MetLife Inc. (MET), which competes with Genworth, reported second quarter operating earnings per share of $1.24, exceeding the Zacks Consensus Estimate of $1.11 and $1.10 in the year-ago quarter.
The upside was primarily due to strong growth in the International business segment, strong underwriting results as well as higher variable annuity deposits and net investment income. This was partially offset by underperformance at its Banking and the Auto & Home segments, higher expenses and lower-than-expected derivative gains.
We retain our Underperform recommendation on Genworth. The quantitative Zacks #5 Rank (short-term Strong Sell rating) for the company indicates downward pressure on the stock over the near term.
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On July 28, Triumph Group Inc. (TGI) reported encouraging results for the first quarter of fiscal 2012. First-quarter earnings per diluted share came in at $1.00 excluding Vought acquisition expense, showing an improvement from 66 cents in the year-ago comparable quarter. Results also surpassed the Zacks Consensus Estimate of 85 cents
The improvement was attributable to increased year-over-year revenue growth, supported by operating income and margin expansion across all business segments. Significant cash flow generated during the quarter along with stronger balance sheet and backlog also fuelled growth.
In the first quarter of 2012, net sales shot up 108% year over year to $845.1 million, with organic growth reaching roughly 13%.
Segment wise, sales from Aerostructures surged 178.1% to $643.3 million from $231.3 million in the prior-year comparable quarter. Aerospace System revenue grew 13.3% year over year to $133.0 million, while Aftermarket Services increased 17.7% to $70.4 million from $59.8 million in the year-ago quarter.
Operating income in the first quarter accelerated to $105.4 million from $32.9 million during the prior-year quarter. Operating margin increased to 12.5% from 8.1% in first-quarter 2011.
In the first quarter of fiscal 2012, EBITDA jumped 166.8% to $127 million year over year. EBIDTA margin rose to 15% compared with 11.7% in the year- ago quarter.
Income from continuing operations increased 339.6% year over year to $50.9 million in the reported quarter.
Exiting the first quarter, Triumph’s cash and cash equivalents was approximately $36.4 million compared with $39.3 million in the previous quarter. Long-term debt (net of current portion) was up sequentially at $1,068.5 million from $1,011.8 million in the previous quarter.
Cash flow from operations was recorded at $116.3 million (prior to the pension contribution of $25.0 million) up from $ 22.7 million in the year ago quarter. The capital spending plummeted to $ 15.7 million sequentially from $16.9 million in the prior year quarter.
Management bears a favorable outlook for the major markets and expects to enhance current production rates. For fiscal 2012, management anticipates earnings per share from continuing operations to be approximately $4.35 per diluted share excluding integration costs.
Strategic contract wins, a two-for-one stock split and doubling of quarterly dividend reflect the company’s continued commitment toward the share holders.
Based in Wayne, Pennsylvania, Triumph Group offers a variety of products and services to the aerospace industry. The company serves commercial and regional airlines, air cargo carriers, as well as OEMs of commercial, regional, business and military aircrafts. It faces stiff competition from its peers, such as AAR Corp. (AIR) and Goodrich Corp. (GR).
We currently maintain a long-term Outperform recommendation on the stock. Triumph Group has a Zacks #3 Rank, which translates into a short-term Hold rating (1-3 months).
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MetLife Inc. (MET) reported second quarter operating earnings per share of $1.24, surpassing the Zacks Consensus Estimate of $1.11 per share and $1.10 per share in the year-ago quarter. Operating earnings jumped 45% year over year to $1.33 billion from $914 million in the year-ago period.
During the reported quarter, operating earnings per share were adversely impacted by net investment losses of 14 cents and other adjustments of 41 cents. These were partially offset by net derivative gains of 33 cents, income tax benefit of 6 cents and gain from discontinued operations of 3 cents.
As a result, GAAP net income came in at $1.21 billion or $1.13 per share as compared with $1.53 million or $1.84 per share in the prior-year quarter, based on higher share count.
The upside was primarily due to a robust growth in the International business segment, strong underwriting results as well as higher variable annuity deposits and net investment income. This was partially offset by underperformance at its Banking and the Auto & Home segments, higher expenses and lower-than-expected derivative gains. During the reported quarter, MetLife’s total expenses shot up 31% year over year to $15.43 billion.
Total operating revenue for the reported quarter increased 33% year over year to $16.89 billion and also exceeded the Zacks Consensus Estimate of $15.78 billion. MetLife’s premiums grew 41.2% year over year to $9.3 billion, led by ALICO acquisition. Net investment income surged 25.5% year over year to $5.1 billion, while fee revenue substantially grew 32.9% to $1.97 billion.
Total operating earnings from the U.S. business climbed 12% year over year to $908 million. The ascent was attributable to higher earnings from Insurance and Retirement Products and Corporate Benefit Funding (CBF). The U.S. business premiums, fees and other revenues climbed 6% year over year at $7.6 billion driven by modest premium growth in CBF coupled with higher fee revenue in Retirement Products.
Besides, operating earnings surged 22% in Insurance Products coupled with a 48% increase in Retirement Products. Even the CBF witnessed 34% earnings growth based on higher net investment income. These were, however, partially offset by loss in Auto & Home premiums. This segment under MetLife’s U.S. business declined 23.3% year over year to $56 million based on higher-than-expected catastrophe losses of $174 million.
The International segment's operating earnings spiked up $507 million from $142 million in the year-ago quarter. The results reflect strong performance after the ALICO acquisition coupled with growth in Latin America and Japan.
In addition, 28% sales growth was witnessed in Japan while 25% growth was witnessed across all international operations. Despite the catastrophe claims and expenses, Japan contributed about 48% to the international segment’s operating earnings.
MetLife Bank’s operating earnings were $14 million, down 79% from the year-ago quarter, primarily owing to lower mortgage servicing revenue. However, Corporate & Other operating loss was recorded at $100 million, slightly lower from a loss of $108 million in the prior-year quarter, benefiting from higher net investment income.
MetLife’s net investment income increased 24% year over year to $5.1 billion, while net investment portfolio loss was $38 million, down from a year-ago loss of $41 million. Besides, derivative gains shrank to $189 million against $782 million in the year-ago quarter.
MetLife’s total investment portfolio was recorded at $466.2 billion at the end of the reported quarter, up from $359.6 billion at the end of prior-year quarter, primarily due to the influx of ALICO.
As of June 30, 2011, MetLife’s book value per share excluding AOCI increased slightly to $45.31 compared with $44.50 as of June 30, 2010. Reported book value (including AOCI) per share climbed 7% to $48.48 versus $45.51 at the end of year-ago period.
We believe that MetLife’s solid earnings growth also helps it return wealth to shareholders from time to time. Besides, amalgamation of ALICO has immediately become accretive to earnings, although related debt cost will weigh on the bottom line for some time.
While we think MetLife should continue to benefit from its diversified business mix as well as its leading brand, losses in the investment portfolio are likely to impact the results in the upcoming quarters. However, management is also mulling over shedding its banking unit in the near future.
Besides, MetLife’s prime peer, American International Group Inc. (AIG), is expected to release its financial results after the market close on August 4, 2011. Another close competitor, Prudential Financial Inc. (PRU), is scheduled to release its earnings after the market closes on August 3, 2011.
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Westamerica Bancorp. (WABC) announced that its board of directors has authorized a new share repurchase program, under which the company will be able to repurchase up to 2 million common shares through September 1, 2012.
The recent buyback program represents about 7% of Westamerica’s stock outstanding as of June 30, 2011. It will allow the company to repurchase common stock through the open market or privately held negotiations.
Earlier on August 26, 2010, Westamerica’s board of directors had authorized a repurchase of up to 2 million shares by September 1, 2011. Under this plan, the company repurchased 640,000 shares worth $32.0 million during the first half of 2011.
Concurrent with the recent announcement of the share repurchase plan, Westamerica also declared a quarterly cash dividend of 36 cents per share. The dividend is payable on August 19 to the shareholders of record at the close of business on August 8.
According to Westamerica, the share repurchase program would help the company flexibly manage its capital. Additionally, the company’s stable credit quality, substantial profitability and strong capital position would support the buyback plan.
We expect continued synergies from Westamerica’s conservative credit culture and sound balance sheet. Once the market rebounds to a more conducive operating environment, the company will be able to capitalize on opportunities leading to increased top and bottom-line growths. Further, the new share repurchase authorization raises our hopes for enhanced investor confidence.
However, a weak interest rate environment and low investment returns will restrict Westamerica’s bottom-line improvement significantly in the near term.
Westamerica currently retains a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. One of the peers of the company, Western Alliance Bancorporation (WAL) also retains a Zacks # 3 Rank (short-term ‘Hold’ rating).
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Eastman Chemical Company (EMN) reported second-quarter earnings of $2.76 per share, compared with $1.95 per share, a year earlier and beat the Zacks Consensus estimate of $2.60 per share.
Including a $15 million gain in second quarter 2011 from the sale of previously impaired methanol assets in Beaumont, Texas, and $3 million of restructuring charges in second quarter 2010, earnings from continuing operations were $2.90 per diluted share in the reported quarter versus $1.92 per diluted share in the year ago quarter.
With sales improving across all product lines, Revenues climbed 26% year over year to $1.9 billion, driven by higher sales volume and increased selling prices and outpaced the Zacks Consensus estimate of $1.8 billion.
The higher sales volume was attributed primarily to growth in plasticizer product lines, increased demand for acetyl chemicals, the fourth quarter 2010 restart of a previously idled olefins cracking unit at the Texas facility, and strengthened end-market demand primarily in the packaging, transportation, and durable goods markets. The increase in selling prices was in response to higher raw material and energy costs.
Costs and Income
Operating earnings in the second quarter 2011 increased by $54 million to $303 million driven by higher selling prices and higher sales volume and offset by higher raw material and energy costs.
Performance Chemicals and Intermediates: Eastman’s core business segment, contributed largely to total revenue and margins. Sales soared 35% to $729 million on higher volumes and prices.
Sales volumes rose in the quarter due to the restart of a previously idled cracking unit at the company’s Texas facility and growth in plasticizer product lines and also to customer buying patterns for acetyl chemicals.
Selling prices increased due to higher raw material and energy costs and also due to strong demand in the U.S. and tight industry supply. Operating earnings were $88 million compared with $71 million in the year-earlier quarter.
The year-over-year growth was primarily driven by higher selling prices, higher sales volumes and the increased benefits from cracking propane to produce low-cost propylene, more than offsetting increased raw material and energy costs.
Coatings, Adhesives, Specialty Polymers and Inks: The segment’s revenues were $491 million, up 18% year on year driven by growth in volumes and a rise in prices. The higher sales volume resulted from strengthened end-use demand in the packaging, transportation, and durable goods markets, particularly in the U.S.
Operating earnings were $99 million versus $92 million in the prior-year quarter. The increase was due to higher selling prices, higher sales volume and increased benefits from cracking propane to produce low-cost propylene, which more than offset higher raw material and energy costs.
Fibers: Sales from the segment grew 21% to $331 million on an increase in volumes, favorable shift in product mix, and higher selling prices. The favorable shift in product mix was mainly due to higher acetate tow sales volume resulting from higher utilization of the recently completed Korean acetate tow manufacturing facility.
Second-quarter 2011 operating earnings, were $93 million compared with $81 million in the prior year quarter. The increase was primarily due to acetate tow sales volume in Asia-Pacific and higher selling prices partially offset by higher raw material and energy costs.
Specialty Plastics: Revenues jumped 23% to $334 million on increased selling price and higher sales volume.
Operating earnings in second quarter 2011, rose 76.2% to $37 million. Operating earnings increased in the Asia Pacific region due to higher selling prices and in the Europe, Middle East and Africa region due to both higher sales volume and higher selling prices.
Regionally, first quarter revenues grew 26.4% in the United States and Canada to $1004 million and 22.3% to $434 million in the Asia-Pacific. Europe, Middle East and Africa revenues increased 30.3% to $370 million and Latin American revenues increased 6.9% to $77 million.
Cash and cash equivalents stood at $634 million at the end of the second quarter of 2011 versus $435 million at the end of the comparable quarter of 2010. Second-quarter 2011 cash flows included $55 million of a total anticipated $110 million tax payment for the gain on the sale of the PET business completed in first quarter 2011.
During second quarter 2011, share repurchases totaled $103 million.
Based on the strong first half 2011 results, the company expects that it will continue to deliver earnings growth in the second half of 2011.
The results of the second quarter were driven by strong sales volumes and higher prices and Eastman expects the trend to continue into the third quarter as well. It expects to incur costs related to planned and unplanned shutdowns that are expected to be approximately $25 million higher in the second half of 2011 compared with the first half.
Even with these higher costs, Eastman anticipates third quarter 2011 earnings per share to be slightly higher than third quarter 2010 earnings per share of $2.22 and expects full-year 2011 earnings per share to be slightly higher than $9.25.
Eastman Chemical’s diversified chemical portfolio, along with its integrated and diverse downstream businesses, is driving earnings. Eastman benefits from business restructuring and cost-cutting measures. The company has sold unprofitable units and closed down poorly performing ones.
The company, however, faces volatility in raw material and energy costs, higher pension expenses and other growth-related costs.
Currently, Eastman has a short-term (1 to 3 months) Zacks #3 Rank (Hold) and a long-term (6 months and higher) Outperform recommendation.
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