Talisman Energy Downgraded – Analyst Blog
We have downgraded Canadian energy explorer Talisman Energy Inc. (TLM) to Underperform from Outperform following the cut in its annual production target for the second time in about two months.
Calgary, Alberta-based Talisman is a major independent oil and gas exploration and production (E&P) company, with operations in North America (primarily Canada) and several international regions.
The company conducts operations in five principal geographic segments: North America (Canada/U.S.), the U.K. (U.K. and the Netherlands), Scandinavia (Norway and Denmark), Southeast Asia (Indonesia, Malaysia, Vietnam and Australia), and Other (North Africa and Trinidad and Tobago).
Last year, daily oil and gas production (before deduction of royalties) averaged 417 thousand barrels of oil equivalent per day (MBOE/d), of which 45% were liquids and 55% natural gas. As of year-end 2010, Talisman had approximately 1.38 billion oil-equivalent barrels in proved reserves, 37% of which were oil and liquids and 63% were natural gas.
Talisman recently cut its annual production target for 2011; the second such reduction in little over two months. The company expects repair work in the North Sea and weather-related issues in Canada to hurt operations and lower average output for the year. This has renewed investor concerns about the energy outfit’s sustainable operational efficiency and execution abilities.
Concerned by the continuing weakness in gas prices, Talisman has lately signed two transactions with South African petrochemicals group Sasol Ltd. (SSL) to sell its natural gas interests in North American shale assets, as the company looks to reposition its portfolio by moving away from dry gas development in North America and concentrate on more oily shale plays. While subscribing to management’s outlook, we believe the realignment of Talisman will take some time to bear results.
Given these headwinds, we expect Talisman to perform below its peers and industry levels in the coming months. As such, we see little reason for investors to own the stock. Our long-term Underperform recommendation is supported by a Zacks #5 Rank (short-term Strong Sell rating).
Partially offsetting these negatives are the company’s high quality asset portfolio and attractive valuation.
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BSD Promotes Hyperthermia Tech – Analyst Blog
Cancer treatment systems maker BSD Medical Corp. (BSDM) recently reported favorable response to its hyperthermia exhibit at the international conference of the American Society for Radiation Oncology (“ASTRO”), organized in Miami Beach.
The topic for the 2011 conference centered around “patient-focused, high-quality, multidisciplinary care,” which provided the spotlight to hyperthermia. Hyperthermia has proven to be the strongest radiosensitizing agent identified until now. It has shown the ability to boost the effectiveness of radiation for many tumors.
ASTRO is the biggest radiation oncology society in the globe and its yearly meeting is the top global scientific conference on the subject. ASTRO has over 10,000 members including radiation oncology nurses, radiation oncologists, radiation therapists and medical physicists.
BSD Medical stated that it was pleased to see the high level of interest in hyperthermia among both domestic and international onlookers as well as distributors. Important trade shows, such as ASTRO, permit BSD Medical to create better understanding of hyperthermia treatment.
The BSD-500 Hyperthermia System is utilized to deliver targeted, therapeutic heat treatment (hyperthermia) using either external or internal applicators. The BSD-500 has received Food and Drug Administration (“FDA”) pre-market approval (“PMA”). Clinical studies have demonstrated that hyperthermia delivered with the BSD-500 can sharply boost the effectiveness of radiation therapy without a major hike in toxicity for many tumors.
The BSD-2000 Hyperthermia System, patented by the company, provides local therapeutic heating (hyperthermia) by administering radiofrequency energy. The BSD-2000 provides dynamic control over the heat applied to the tumor. It has obtained CE Marking approval in the European Union (“EU”). The BSD-2000 is currently limited to investigational use in the U.S. and the company is conducting a clinical study. BSD Medical has applied for a Humanitarian Device Exemption (“HDE”) approval for this system, which is under review with the FDA.
BSD Medical competes with established players like Boston Scientific (BSX) and Angiodynamics (ANGO) in the thermal ablation market. The global market for soft tissue ablation has been estimated to exceed $2.3 billion, offering a significant opportunity for BSD Medical.
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Earnings Preview: Quanta Services – Analyst Blog
Quanta Services Inc. (PWR) is slated to release its third-quarter 2011 results on Wednesday, November 2, 2011. The current Zacks Consensus Estimate for third-quarter earnings per share (EPS) is 24 cents, representing an annualized decline of 18.89%.
Quanta Services’ earnings were ahead of the Zacks Consensus Estimate by 2 cents in the last quarter while had underperformed in the first quarter of 2011 and was in line in third quarter and fourth quarter of 2010 with an average negative surprise of 0.04%.
Second Quarter Highlights
Total revenue for the quarter was $1.01 billion compared with $870.5 million in the prior-year quarter. The result for the quarter includes contribution from Valard acquisition, which wascompleted on October 25, 2010. Consolidated backlog at the end of the quarter was $6.9 billion compared with $6.56 billion at the end of the prior-year quarter.
Electric Power revenue in the quarter was $667.1 million compared with $463.4 million in the prior-year period. Natural Gas and Pipeline revenue came in at $209.7 million compared with $263.1 million, Telecommunications revenue was $106.4 million compared with $117.7 million and Fiber Optic Licensing revenue was $27.8 million compared with $26.4 million.
Agreement of Estimate Revisions
In the last 30 days, out of the analysts providing estimates for the stock, one of the analyst decreased its estimate for the third quarter 2011. None of the analysts changed their estimate for 2011 and 2012.
In the last 7 days none of the analysts changed their estimate for third quarter or for 2011 and 2012.
Magnitude of Estimate Revisions
In the last 30 days, the earnings estimate for 2011 and 2012 remained unchanged while for third quarter decreased from 25 cents to 24 cents. In the last 7 days, none of the analysts have changed their estimate for third quarter or for 2011 and 2012.
Our Take
Telecommunication revenue in the third quarter is expected to be aided by broadband stimulus, 4G and LTE opportunities. The momentum is expected to build with future awards throughout the remainder of 2011 and 2012.
Quanta Services has been witnessing an increased customer spending as they have started to invest in infrastructure with the improving economic environment, leading the company to believe that it has overcome the worst phase of the recession. The company expects to benefit significantly from the ongoing bidding processes in its Natural Gas and Pipeline segment, leading to a continuous increase in the segment’s backlog.
However, in second-quarter 2011,continued delays in large diameter transmission pipeline work, primarily related to regulatory headwinds, declined Natural Gas and Pipeline segment revenue by 20.3%. In Telecommunication, increased bureaucracy and required environmental impact studies for broadband stimulus projects have slowed the start of some of the projects.
We continue to maintain a Neutral rating on Quanta Services for the long term. The company, however, has a Zacks #2 Rank (Buy recommendation) over the next one-to-three months.
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AES Wind Farm in Service – Analyst Blog
The AES Corporation’s (AES) two subsidiaries AES Wind Generation and AES Energy Storage began the commercial operation of their wind generation plant known as AES Laurel Mountain.
The plant comprises 98 megawatt (MW) of wind generation capacity and 32 MW of integrated battery-based energy storage capacity. The 61 wind turbines are mounted on 80-meter towers positioned along a 13-mile stretch of Laurel Mountain located in Randolph and Barbour counties near Elkins, West Virginia.
AES Laurel Mountain is among the first wind generators to supply critical operating reserve capacity to help maintain the reliability of the power grid. With 61 GE 1.6 MW wind turbine generators, the project is supplying emissions-free renewable energy and clean, flexible, operating reserve capacity to the PJM Interconnection which is the largest power market in the world. The facility is expected to supply more than 260,000 MWh of emissions-free, renewable energy each year to the PJM Interconnection.
The project will provide PJM with regulation service, delivering instantaneous response to grid operator requests for power, helping to match generation and demand. The plant’s storage capacity with advanced battery technology will help to optimize the renewable energy generated and will also allow the wind facility to control the ramp rate of generation.
The 32 MW project is AES Wind Generation’s second wind facility that serves the PJM market, following the successful completion of AES Armenia Mountain located in Pennsylvania. Overall, AES Corporation has 72 MW of grid-scale storage resources in operation and construction and more than 500 MW of advanced energy storage projects in development.
Its other projects that are in operation include an 8 MW battery system in the New York Independent System Operator (NYISO) market and a 12MW frequency regulation and spinning reserve solution at AES Gener’s Los Andes substation in Chile.
The AES Corporationhas business exposure to 28 countries around the globe, which insulates it from any region-specific risk. With a base of fossil fuel plants, the company is predominantly involved in long-term contracts, which do not allow for any rate base growth in the near term for its regulated utilities. The company is investing a substantial chunk of funds for capacity expansion in the power hungry regions of Latin America and Asia.
Also AES’ ongoing merger transaction with DPL Inc. (DPL) is a boost for its regulated electricity business and is expected to be a strategic fit. Over the long term, we remain positive on the company and suggest that investors wait for a favorable entry point. The company presently retains a short-term Zacks #2 Rank (Buy). We have a long-term Neutral recommendation on the stock.
The company is expected to release its earnings on November 4, 2011. One of its competitor’s Duke Energy Corporation (DUK) is expected to release its earnings on November 3, 2011.
The AES Corporation is a global power company spread over 28 countries in five continents. AES Corporation operates in two lines of business – Generation and Utilities.
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Earnings Preview: Health Care REIT – Analyst Blog
Health Care REIT Inc. (HCN), a real estate investment trust (REIT) that operates senior housing and health care real estate, is scheduled to report its fiscal 2011 third quarter earnings results before the market opens on November 3. The current Zacks Consensus Estimate for the third quarter is 88 cents per share, representing a year-over-year growth of 11.6%.
Second Quarter Recap
Health Care REIT reported second quarter 2011 recurring FFO (funds from operations) of 90 cents per share, which beat the Zacks Consensus Estimate by 3 cents. 'Funds from Operations' is a widely used metric to gauge the performance of REITs and is obtained after adding depreciation and amortization and other non-cash expenses to net income.
Total revenues during the reported quarter were $381.1 million compared to $153.7 million in the year-earlier quarter. Total revenues for the reported quarter were well ahead of the Zacks Consensus Estimate of $335 million.
Agreement of Analysts
In the last 7 days, there were no earnings estimate revisions for the third quarter as none of the 16 analysts covering the stock has neither increased nor decreased the same. For fiscal 2011, the story is similar as none of the 17 analysts covering the stock has revised the earnings estimates in either direction. This demonstrates that the analysts are extremely circumspect about both the current and the future outlook of the company.
Magnitude of Estimate Revisions
Earnings estimates have remained steady in the last 7 days for the third quarter at 88 cents. For fiscal 2011, earnings estimates have also remained stagnant at $3.39 per share during the same time period, meaning that analysts were overtly cautious about the long-term performance of the company.
Moving Forward
We presently have a Neutral recommendation on Health Care REIT, which currently has a Zacks #4 Rank that translates into a short-term Sell rating. We also have a Neutral recommendation and a Zacks #3 Rank (short-term Hold) for HCP Inc. (HCP), one of the competitors of Health Care REIT.
Health Care REIT Inc. invests across the full spectrum of senior housing and health care real estate properties. Headquartered in Toledo, Ohio, the company also provides an extensive array of property management and development services.
Health Care REIT usually has long-term triple-net leases in senior housing and healthcare real estate properties that insulate it from market volatility and provide a steady source of revenue despite a challenging macroeconomic environment.
In addition, healthcare sector is one of the more recession-proof real estate sectors and has continually fared relatively better than other sectors during the commercial real estate downturn.
Furthermore, an aging Baby Boomer generation’s demand for assisted and independent living facilities should increase in the coming years. With a significant presence in these property types, Health Care REIT is in a relatively stronger position compared to most of its competitors.
However, one of the biggest risks to healthcare focused REITs is government reimbursement rates, which could be reduced in the coming years. Deep cuts in Medicare have been proposed over the next five years by reducing or freezing payments to skilled nursing facilities, hospitals, and other healthcare providers.
With a large portion of revenues being determined by government payout rates, forces beyond the company’s control could negatively affect revenue and operator coverage ratios.
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Earnings Scorecard: Altria – Analyst Blog
Altria Group, Inc. (MO), which engages in the manufacture and sale of cigarettes, smokeless products, and wine in the United States and internationally, announced its financial results for the third quarter 2011 on October 27.
Earnings Review
Altria’s third-quarter earnings came in at 56 centsper share, which were in-line with the Zacks Consensus Estimate. However, it was up 3.7% from the prior-year quarter. The quarter benefited from strong performance of its businesses, new share repurchase, and cost reduction initiatives.
Total revenue exceeded the Zacks Consensus Estimate of $4.4 billion, but declined 4.6% to $6.1 billion, as opposed to the prior-year period. The decline was attributable to lower net revenues from cigarettes, partially offset by higher net revenues from smokeless products, cigars, wine and financial services. Revenue net of excise taxes decreased 3.0% to $4.3 billion in the third quarter of 2011.
During the quarter, Altria completed its $1 billion cost reduction program of 2007 to 2011 and exceeded its $1.5 billion goal versus its 2006 cost base. Altria has now initiated a new $1 billion cost reduction program to deliver $400 million in annualized cost savings by the end of 2013.
Altria estimates total pre-tax restructuring charges in connection with this new program of approximately $375 million. Around $340 million or 11 cents per share would be recorded in the fourth quarter of 2011, and the balance in 2012.
In addition, Altria successfully completed its previously announced 2011 share repurchase program of $1 billion during the third quarter, where Altria repurchased 37.6 million shares at an average price of $26.62. Altria has again planned a new share repurchase program of $1 billion which is intended for completion by the end of 2012.
In August 2011, Altria’s board also raised its regular quarterly dividend by 7.9% to 41 cents per share from 38 cents per share.
(Read our full coverage on this earnings report: Altria In-Line, Gives Outlook)
Agreement of Estimate Revisions
Despite a strong third quarter, the analysts’ community has remained rather unmoved over the past week for the two upcoming quarters as well as fiscal years 2011 and 2012.
Out of the 7 analysts covering the stock for the upcoming quarter, only one analyst has increased its estimates over the past week, while two of them showed a negative trend. For the first quarter of 2012, only one out of 5 analysts increased its estimates, with none reducing their estimates over the same period.
For the current fiscal 2011, two out of 10 analysts have raised their estimates over the past 7-day period, while two of them reduced the same. Similarly, only one out of 10 analysts gave a positive revision for the fiscal 2012, while two analysts revised their estimates downwards for the same period.
We believe that the Altria’s business environment for the remaining 2011 is expected to remain challenging, on the back of the economic pressure and high unemployment.
Magnitude of Estimate Revisions
Therefore, there has been a marginal shift in the estimates over the past 7-day period. The Zacks Consensus Estimate for the fourth quarter of 2011 remains unchanged at 50 cents per share, while the estimates increased by one cent to 49 cents for the first quarter of 2012. For fiscal years 2011 and 2012, the estimates plummeted by a penny to $2.03 per share and $2.18 per share, respectively.
Although the company has been consistently performing well in terms of cost saving programs and share repurchases, we believe that increased smoking restrictions in the U.S. and Europe has had a significant impact on cigarette consumption. Moreover, governmental actions, combined with the diminishing social acceptance of smoking and private actions to restrict smoking, have resulted in reduced cigarette industry volume, and we expect that these factors will continue to reduce cigarette consumption levels.
Altria, which competes withReynolds American Inc. (RAI) and Lorillard, Inc. (LO), currently holds a Zacks #3 Rank. On a long-term basis, we maintain a Neutral rating on the stock, which translates into a short-term Hold rating.
About Earnings Estimate Scorecard
Len Zacks, PhD in mathematics from MIT, proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard” articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at: http://www.zacks.com/education/
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Unilever Sheds Some Culver Brands – Analyst Blog
Unilever Plc.(UL) has decided to get rid of some more of its Alberto Culver brands, and this time it is shedding the Culver Specialty Brands division, which includes Mrs. Dash, Molly McButter, Sugar Twin, Bakers Joy and Static Guard in the US and Canada.
U.S.-based B&G Foods Inc. (BGS) has emerged as an interested buyer, and Unilever has agreed to sell the brands for a return of $325 million in cash.
The world’s leading manufacturer of fast moving consumer goods, Unilever had completed its takeover of Chicago-based Alberto Culver on May 10, 2011 for $3.7 billion.
Unilever agreed to part with Alberto VO5 brand in the United States and to fully shed its own ‘Rave’ hair products to conform to the directions of the United States Department of Justice (DOJ). The DOJ had issued this prerequisite for the buyout of Alberto Culver in order to reduce competition in the US hair care market.
The acquisition added brands like TRESemme and Nexxus, plus Alberto VO5, which Unilever can sell outside the US.
Following the ownership of Alberto, Unilever became the world’s leading company in hair conditioning, the second largest in shampoo and the third largest in styling.
Headquartered in London, Unilever manufactures and sells consumer products in more than 100 countries under brands such as Hellmann’s, Lipton, Surf, Dove, Suave and Vaseline. Unilever had sales of $62 billion in 2010. However, the presence of Procter & Gamble Co. (PG), a strong competitor, concerns us.
Unilever holds a Zacks #3 Rank, which translates into a short-term Hold rating.
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Rite Aid’s Comps Improved – Analyst Blog
Rite Aid Corporation (RAD), a leading drugstore chain operator, reported an increase of 2.9% in same-store sales for the four-week period ended October 22, 2011. Increase in comparable store sales were primarily driven by increased prescription counts and growth at pharmacy and front-end same store sales.
For the month of October, front-end same-store sales inched up 1.3%. Pharmacy same-store sales in the month improved 3.6% despite a 160 basis point headwind from new generic introductions. Prescriptions count also increased 1.3% at comparable stores.
Total drugstore sales increased 2.8% year over year to $1,962.0 million for October 2011. In the four-week period, prescription revenue contributed 69.3% of drugstore sales while third party prescription revenue accounted for 96.4% of pharmacy sales.
For the thirty-four week period ended October 22, 2011, the company reported same-store sales increase of 1.6% with total drugstore sales increasing 1.1% to $16,497.0 million. Same-store sales growth at pharmacy and front-end contributed 1.9% and 1.1%, respectively. Prescription counts registered a growth of 0.3% during the period.
For the thirty four week period ended October 22, 2011, prescription revenue contributed 68.5% of drugstore sales while third party prescription revenue accounted for 96.4% of pharmacy sales.
Rite Aid posted second-quarter loss of 11 cents a share, beating the Zacks Consensus Estimate of a loss of 18 cents per share.
Looking ahead, Rite Aid expects fiscal 2012 revenue to be between $25.8 billion and $26.1 billion based on same-store sales increase of 0.75% to 2.0%. Net loss is now expected to be in the range of $345 million to $495 million (or 40 cents to 56 cents per share).
Headquartered in Camp Hill, Pennsylvania, Rite Aid Corporation operates in a highly fragmented specialty retail sector and faces intense competition from CVS Caremark Corporation (CVS), Walgreen Co. (WAG) and Wal-Mart Stores Inc. (WMT).
Rite Aid Corporation currently has a Zacks #2 Rank, implying a short-term Buy rating on the stock. We hold a long-term Neutral recommendation on the stock.
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Earnings Scorecard: St. Jude – Analyst Blog
Medical devices major St. Jude Medical’s (STJ) adjusted earnings per share of 78 cents for third-quarter 2011 beat the Zacks Consensus Estimate by a couple of cents and exceeded the year-ago earnings of 72 cents.
Third Quarter Revisited
Profit, as reported, climbed 8.7% year over year to $226.5 million (or 69 cents a share) as healthy sales overshadowed special charges related to the restructuring activities at the company’s Cardiac Rhythm Management (“CRM”) division, employee termination, collection risk for accounts receivable and improvement of overseas sales infrastructure.
Revenues soared 11.5% year over year to $1,383 million, also beating the Zacks Consensus Estimate of $1,370 million. The growth was led by double-digit revenue expansion across the company’s Cardiovascular and Atrial Fibrillation businesses.
Revenues from the core CRM division grew just 2% year over year, hamstrung by the beleaguered U.S. ICD market, as reflected by sustained implant volume pressure.
Atrial Fibrillation and Neuromodulation franchises posted healthy growth in the quarter with revenues surging 20% and 10% year over year, respectively. The cardiovascular business had yet another strong quarter with revenues zooming 37%, buoyed by the contribution from the AGA Medical acquisition. St. Jude tightened its earnings forecast for fiscal 2011.
We have discussed the quarterly results at length here: St. Jude Squeaks Past Estimates.
Agreement – Estimate Revisions
Estimates for St. Jude for fiscal 2011 reflect lack of activity over the past week with none (out of total 24 analysts) moving in either direction. Over the past month, 14 analysts have chopped their forecasts for the fiscal with 3 moving in the opposite direction.
For the fourth quarter, 17 (out of 20 analysts) have slashed their estimates over the past 30 days while one raising his/her estimate. There was a solitary downward revision over the past week with no reverse movement.
The bearish sentiment reflects management’s reduced sales forecast and narrowed earnings guidance on account of a less favorable foreign exchange environment, a soft ICD market, and delay in approval and launch of the much-anticipated quadripolar CRT-D system.
Magnitude – Consensus Estimate Trend
Estimate for fiscal 2011 has been static (at $3.27 a share) over the past week while falling by a penny over the past month. For the fourth quarter, estimate (of 84 cents) remained stationary over the last 7 days while declining by 3 cents over the past 30 days.
St. Jude in Neutral Zone
St. Jude is consistently producing revenue growth and positive earnings surprises over the past several quarters. We are impressed by its solid fundamentals, healthy growth trajectory, strong product mix, robust pipeline and cost management initiatives. A spate of new growth drivers (including new products and emerging markets) are expected to offer opportunities for accelerated sales growth over the next few years.
St. Jude is poised for incremental opportunities in CRM on the back of strong product momentum, despite soft market conditions. The company’s Fortify and Unify devices are gaining notable traction and increased penetration of these products should enable it to expand its position in CRM.
St. Jude recently commenced the European roll out of its Unify quadripolar CRT-D system and is currently awaiting approval of the product in the U.S., representing a major growth prospect. St. Jude is currently the only company to offer this technology globally.
The company’s strategic investment in cardiac devices maker CardioMEMS represents another significant opportunity to boost its technologies focused on improving heart failure management.
In Atrial Fibrillation, new irrigated ablation catheters for treating cardiac arrhythmias should help St. Jude sustain the healthy growth through 2011. Growth in St. Jude’s Neuromodulation franchise will be fostered by the expanded adoption of deep brain stimulation (“DBS”) systems. The U.S. approval of the DBS system in Parkinson’s disease (expected in 2012), represents another promising prospect.
Synergies of the AGA Medical acquisition should continue to boost results in Cardiovascular division. St. Jude forayed into the $500 million market for pericardial stented tissue valves with its Trifecta line of valves. Its tissue valve business is currently growing more than 50%.
Among other emerging opportunities, St. Jude expects to commence the European clinical trial of Portico valve in fourth-quarter 2011 and is optimistic about its entry into the European transcatheter aortic valve implant (“TAVI”) market before end-2012.
The company recently unveiled some exciting new opportunities including the percutaneous mitral valve repair (“PMVR”) program, the left atrial appendage (“LAA”) closure system and the new renal denervation catheter for treating resistant hypertension.
However, St. Jude and its compatriots Medtronic (MDT) and Boston Scientific (BSX) are increasingly in a tug-of-war to grab CRM share. Decelerating ICD market growth may continue to weigh on the company’s results.
St. Jude expects the worldwide CRM market to remain challenged and continue to project the market to contract 2% in 2011, thereby hurting its CRM sales. The company has further trimmed its fiscal 2011 CRM sales forecast due to market headwinds and delay in the approval of quadripolar CRT-D in the U.S.
We are also cautious about the dilutive impact of acquisitions and foreign exchange headwinds. Our Neutral recommendation on St. Jude is in agreement with a Zacks #3 Rank (Hold).
About Earnings Estimate Scorecard
Len Zacks, PhD in mathematics from MIT, proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard” articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at http://www.zacks.com/education/.
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Earnings Scorecard: Rent-A-Center – Analyst Blog
Rent-A-Center Inc. (RCII), one of the largest rent-to-own operators, recently delivered better-than-expected third-quarter 2011 results.
Street analysts had nearly a week to ponder the news. In the subsequent paragraphs, we will cover the recent earnings announcement, analysts’ estimate revisions as well as the Zacks Rank and long-term recommendation on the stock.
Earnings Report Review
The quarterly earnings of 60 cents a share beat the Zacks Consensus Estimate of 58 cents, but dropped 3.2% from the prior-year quarter due to higher operating expenses.
Rent-A-Center’s total revenue, comprising store and franchise revenues, grew 6% to $704.3 million from the year-ago quarter, attributable to higher revenue from the RAC Acceptance business, partially offset by the discontinued financial services business.
Total revenue was way ahead of the Zacks Consensus Estimate of $699 million. Comparable-store sales for the quarter inched up 2%.
(Read our full coverage on this earnings report: Rent-A-Center Beats Estimate)
Agreement of Estimate Revisions
Clearly, a mixed sentiment is evident among analysts, following the earnings release. In the last 7 days, 4 out of the 10 analysts covering the stock increased their estimates while 5 lowered the estimate for fourth-quarter 2011. For first-quarter 2012, 1 analyst revised the estimate in the upward direction, while 1 chopped the estimate in the last 7 days.
For fiscal 2011, 5 analysts have increased their estimates in the last 7 days, while 2 lowered the projection. For fiscal 2012, 2 analysts revised their estimate in the upward direction, while 4 lowered the same.
Magnitude of Estimate Revisions
In the last 7 days, the Zacks Consensus Estimate inched down by a penny to 81 cents for the fourth quarter of fiscal 2011, while it came down by couple of cents to 91 cents for first-quarter 2012.
For fiscal 2011, the Zacks Consensus Estimate inched up a penny to $2.88, while it decreased by 6 cents to $3.22 for FY12, in the last 7 days.
The current Zacks Consensus for fourth-quarter 2011 is pegged from a low of 78 cents to a high of 84 cents. For fiscal 2011, the estimates range from $2.85 to $2.91.
Our View
With an extensive network of more than 3,000 stores, Rent-A-Center is the largest rent-to-own operator in the U.S.The sheer geographic reach enables the company to effectively penetrate into its target markets and gain a competitive advantage over its competitors.
The company’s new business model called RAC Acceptance is gaining traction as it enhances consumers shopping experience. When the consumer is denied credit financing for a particular product from the retailer, Rent-A-Center under its RAC Acceptance program acquires that product from the retailer and offers it to the consumer under a rental-purchase transaction.
However, Rent-A-Center’s business is seasonal in nature and typically generates stronger sales during the first quarter characterized by federal income tax refunds, which are used by the company’s customers to exercise early purchase option on the existing rental agreements. As a result, the company is exposed to significant risks if the quarter fails to deliver expected operating performance.
Moreover, the company’s customers remain sensitive to macroeconomic factors including interest rate hikes, increase in fuel and energy costs, credit availability, unemployment levels, and high household debt levels, which may negatively impact their discretionary spending, and in turn, the company’s growth and profitability.
Currently, we have a long-term Neutral rating on the stock. Moreover, Rent-A-Center, which competes with Aaron’s Inc. (AAN) and Advance America, holds a Zacks #3 Rank, which translates into a short-term Hold recommendation.
About Earnings Estimate Scorecard
Len Zacks, PhD in mathematics from MIT, proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard” articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at: http://www.zacks.com/education/
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