Plexus Upgraded to Neutral – Analyst Blog

We are upgrading our recommendation on Plexus Corp. (PLXS) from Underperform to Neutral. In the recently concluded first quarter, Plexus reported mixed results, where the company’s bottom line beat the Zacks Consensus Estimate by 3 cents though the top line lagged the revenue estimate of $532.0 million.

Plexus has been witnessing a healthy pipeline of program wins coupled with global expansion and improving end-market demand. During the first quarter, Plexus won 28 new programs in the manufacturing solutions group, which are expected to generate approximately $203.0 million in annualized revenue when production ramps.

As an engineering-focused EMS (Electronic Manufacturing Services) player, Plexus is well positioned to benefit from the increasing outsourcing trend among the Medical, and Industrial and Defense/Aerospace OEMs (Original Equipment Manufacturer). Plexus has been able to achieve strong organic growth from these two sectors, as Industrial & Commercial showcased an increase of 600 basis points in fiscal 2011 as a percentage of total revenue.

Medical also grew significantly as a percentage of sales, up 100 basis points in fiscal 2011. We believe that significant new business wins in these two sectors (58.0% of $203.0 million) will continue to drive revenue growth going forward.

Moreover, the recently concluded Kontron deal will also boost revenue from the Industrial & Commercial sector going forward. We believe that strength in these two sectors will also drive top-line growth over the long term.

Additionally, Engineering agreements generate higher margins and help improve the company’s overall profitability. The partnership with The Coca-Cola Company (KO) is expected to deliver incremental revenues and represents a significant deal win for the company.

Plexus has also been expanding its manufacturing footprint in low-cost regions, establishing its presence in Mexico, Malaysia and China. During the first half of fiscal 2012, Plexus expects to announce the construction of a larger facility in Oradea, Romania to replace the leased buildings. We believe that Plexus’ policy of shifting production from higher-cost to lower-cost regions will boost profitability going forward.

However, the EMS industry is expected to grow at a sluggish rate over the next several years, primarily because it is a mature segment that is being fed by a progressively lower number of outsourcing opportunities. According to data from market research firm IHS, the global EMS Industry grew approximately 10.1% to $206.8 billion in fiscal 2011.

However, the outlook for 2012 is flat and the research firm expects the industry to grow at single-digit rate through 2015. The industry is primarily hampered by overcrowding in consumer electronics (computer, communications and consumer) market, which remains a concern for a small player such as Plexus, going forward.

Additionally, Plexus’ significant exposure to the slowing Networking and Communications industry remains a concern for us. The company also faces foreign currency fluctuation risks, as more than 45.0% of the revenue comes from international operations.

Another weak point for Plexus is the customer concentration. Plexus depends on a few large customers for a major part of its revenues. Given the competitive nature of the industry, the loss of any one of its key customers, or individual projects with these customers would severely impact Plexus results going forward.

Plexus has been plagued by supply chain constrains due to natural disasters in Japan and Thailand during fiscal 2011. Moreover, due to the lack of long-term supply agreements, these shortages are expected to continue in fiscal 2012.

Raw material and component part supply shortages and delays in deliveries can also result in higher rates. Rising raw material prices and reduced consumer spending could negatively affect sales and profitability going forward.

We believe that stabilizing end markets, new business opportunities, particularly in the industrial/commercial and medical sector and global expansion will drive growth over the long term. We also believe that a gradual improvement in the overall U.S. market will boost Plexus’ top line going forward.

Currently, Plexus has a Zacks #3 Rank, which implies a Hold rating in the short term.


 
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Xcel Energy to Increase Rate – Analyst Blog

Xcel Energy Inc. (XEL) got a nod from The Minnesota Public Utilities Commission to hike its electricity prices by 2.7%, according to media reports.

However, the increase is less than half of what the company had filed for. Therefore, Xcel Energy will have to pay back its customers about $30 as it has been charging them higher over the last 15 months. Nevertheless, the customers’ burden will increase from what they have paid in 2010.

Xcel Energy also stated that burden on electricity bills of residential customers will reduce by $2 from May while the burden will lower by 2% for commercial-industrial customers.

Xcel Energy also has been trying to lower the electricity cost burden on its customers across the states in which it provides electricity. Recently, Public Utility Commission of Texas had approved Xcel Energy’s lowering of Texas residential bills of 1,000 kilowatt-hours by $3.53 beginning April 1. The cost burden will further decrease with summer rates to be implemented form June 1.  Residential bills of 1,000 kilowatt-hours will then be lowered by $4.81.

Xcel Energy posted fourth quarter earnings of 29 cents per share, a penny below the Zacks Consensus Estimate while fiscal 2011 earnings came in at $1.72 per share, 3 cents above the Zacks Consensus Estimate. The results reflect higher electric margins due to weather and rate increases in various states. However, these were partially offset by expected increases in operating and maintenance expenses, depreciation, interest expense and property taxes.

The Zacks Consensus Estimate for first quarter 2012 is 39 cents per share. For full years 2012 and 2013, the Zacks Consensus Estimates are $1.84 and $2.17 per share, respectively.

We like the continued growth in Xcel’s renewable energy portfolio and the development of its transmission line projects. Furthermore, the company aims to improve regulatory recovery by adopting multi-year rate plans in all its jurisdictions. However, we do not find any near-term catalyst, thus leaving little room for further upside.

We retain our Neutral recommendation on Xcel Energy Inc. The quantitative Zacks #4 Rank (short-term Sell rating) for the company indicates slight downward pressure on the stock over the near term.

Based in Minneapolis, Minnesota, Xcel Energy is an electricity and natural gas company, with operations in eight Western and Midwestern states. The company competes with peers like American Electric Power Co. (AEP).


 
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Torchmark Corp Stays Neutral – Analyst Blog

We are reiterating our Neutral recommendation on the shares of the life and health insurer, Torchmark Corp. (TMK). Though we are optimistic about the company’s life insurance business, its underperforming health insurance business keeps us on the sidelines.

Torchmark distributes its Life and Health products primarily via its subsidiaries American Income Life Insurance Co. (“AIL”), Direct Response operation at Globe Life and Liberty National Life (“LNL”). While AIL and direct response have performed strongly over the last several years, LNL has lagged behind.

In the recently concluded quarter, AIL net life sales increased 11% on the back of a 12% increase in agents over the prior year. This was the result of the management’s aggressive actions to bring about a turnaround in sales.

These initiatives are progressing well, and for 2012 management is currently projecting 12%–14% growth. Given its niche in the organized labor market, where the competition is less, we believe the unit is uniquely poised to post increased sales.

Torchmark’s Globe Life also enjoys competitive advantage over its peers on account of an experienced team and effective cost control measures. While Direct Response continues to grow its traditional direct mail and insert media distribution, management is also trying to develop new distribution platforms like the Internet and social networking sites. The company expects a 6% growth in life sales at its Direct Response channel.

Torchmark is also aligning its business operations to focus on more profitable business lines. The company sold its subsidiary United Investors Life (UIL), which primarily marketed fixed and variable annuity products, generating low returns.  

However, Torchmark’s subsidiary LNL has not been able to contribute meaningfully to the company earnings. Over the past 16 years, life premiums have grown by only $2 million. Moreover, the life underwriting margin in 2011 was $5 million lower than what it was 16 years ago. The underperformance of this channel was primarily due to its cost structure, which was characterized by high, fixed acquisition costs.

Though the company has taken a number of initiatives like changing the compensation structure as well as appointing new managers, the challenge to grow remains and we don’t expect this distribution channel to contribute meaningfully to the company’s earnings in the near term.

Its Health business also remains a weak spot. The lack of growth was due to discontinued sales of limited-benefit hospital-surgical health products in 2010 as well as due to a decline in agent count.

Though Medicare Supplement remains the largest contributor to total health premium, increased competition has dampened the sales of this product in recent years, resulting in premium declines in each successive year. We do not expect much growth from this segment as management continues to focus on growing its more profitable life business.

Despite the top-line pressure, we expect the company to manage its bottom-line earnings through its solid capital management strategy. With an expected free cash flow of $350–$360 million for 2012, we anticipate continual buyback activity, which would boost earnings.

Based in Birmingham, Alabama, Torchmark closely competes with Prudential Financial Inc. (PRU), Unum Group (UNM) and others. The stock currently retains a Zacks #3 Rank, which translates into a short-term Hold’ rating. 


 
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CF Industries Downgraded to Neutral – Analyst Blog

We are downgrading our long-term recommendation on CF Industries Holdings Inc. (CF) to Neutral from Outperform based on the cautious outlook of the company about the demand levels for phosphate in the first half of 2012, rising raw material costs and unfavorable weather conditions affecting the yield of the products.

CF is exposed to cyclical and seasonal changes. During the fourth quarter of 2011, fertilizer markets experienced softness in seasonal demand, along with the global uncertainties leading to steep declines in the prices of grains and nutrients.

Natural gas is the key input in the production of nitrogen fertilizer products like urea, ammonia, ammonium nitrate, etc. It formed about 45% of the cost of producing ammonia in 2011. The market price for natural gas in North America is highest in the world creating further pressure on the margins of the company.

CF Industries faces intense pricing competition from both domestic and foreign fertilizer producers. Its domestic competitors, such as Agrium Inc.(AGU), Potash Corp. of Saskatchewan Inc. (POT) Koch Industries Inc., Mosiac and Simplot, have significant command in the marketplace.

China, being the world’s largest producer and consumer of fertilizers, influences global fertilizer prices. Russia and Ukraine have a greater leverage on the global urea price as they are the world’s largest producer and consumer of fertilizers.

In February 2012, CF industries released its fourth-quarter 2011 results. The company reported fourth-quarter EPS of $6.66 per share, missing the Zacks Consensus estimate by a penny. For fiscal 2011, net earnings came in at $21.98 per share versus $5.34 per share in fiscal 2010.

Total sales of $1.72 billion in the reported quarter increased 38.8% from $1.24 billion in the prior-year quarter. In fiscal 2011, total sales were $6.1 billion, compared with $4 billion in 2010. The company’s Nitrogen segment achieved record sales of $5 billion in the year, reflecting an increase of 57% from the previous year.

CF’s outlook for North American crop nutrient market remains positive. Strong demand and tight inventories are expected to support crop prices and continuing high levels of plantings, particularly corn in 2012.

This tight inventory balance is expected to support high corn prices for the next several years, providing farmers with a compelling incentive to plant corn. The company projects U.S. farmers will plant 93.5 million acres of corn in 2012, an increase of 1.6 million acres from 2011.

Management projects higher capital expenditures of approximately $400 million in 2012 compared with 2011 due to an increased pace of planned maintenance and support expansion plans at existing facilities, announced in August 2011. Front-end engineering and design studies for expansion projects are in the process and should lead to investment decisions in the second half of 2012.

CF Industries is one of the largest manufacturers and distributors of nitrogenous and phosphatic fertilizer products in the world. Currently, the company has a Zacks #3 Rank on its shares, which translates into a short-term (1 to 3 months) “Hold” rating and we maintain a “Neutral” recommendation on the shares for the long- term (more than 6 months).


 
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Refining Losses Hurt PetroChina – Analyst Blog

Chinese energy giant PetroChina Co. Ltd. (PTR) announced 2011 earnings of RMB 133.0 billion or RMB 0.73 per diluted share, compared with RMB 140.0 billion or RMB 0.76 per diluted share a year earlier. Earnings per ADR came in at $11.41 (exchange rate: US$1.00 = RMB 6.4, 1 ADR = 100 shares), lower than the Zacks Consensus Estimate of $12.47.

The negative comparisons can be primarily attributable to government caps on fuel prices that eroded refining margins. This was somewhat offset by robust performance from the Beijing-based company’s ‘Exploration and Production’ segment on the back of higher oil prices and stronger volumes amid robust domestic energy demand.

PetroChina’s total revenue for the year totaled RMB 2,003.8 billion, an increase of 36.7% from the year-earlier period.

Upstream

PetroChina, the world's biggest listed oil producer ahead of Exxon Mobil Corp. (XOM), posted strong upstream output growth during the twelve months ended December 31, 2011. Crude oil output rose 3.3% from the year-ago period to 886.1 million barrels (MMBbl), while marketable natural gas output was up 7.9% to 2,396.4 billion cubic feet (Bcf).

In particular, average realized crude oil price during 2011 was $104.20 per barrel, representing an increase of 42.9% from $72.93 per barrel in the previous year. This drove the upstream (or exploration & production) segment profit by 42.8% to RMB 219.5 billion.

Downstream

PetroChina’s refinery division processed 984.6 MMBbl during the twelve-month period, up from 903.9 MMBbl in 2010. The company produced 5.690 million tons of synthetic resin in 2011 (a rise of 2.5% year over year), besides manufacturing 3.467 million tons of ethylene (down 4.1% from 2010). It also produced 87.2 million tons of gasoline, diesel and kerosene during the period, as against 79.5 million tons a year earlier.

However, the company’s ‘Refining & Chemicals’ business registered an operating loss of RMB 61.9 billion, as against the year-earlier period profit of RMB 7.8 billion, hurt by PetroChina’s inability to shift the burden of rising oil costs to its consumers, as mandated by the state policy of keeping a lid on gasoline and diesel prices.

In marketing operations, the state-owned group sold 145.53 million tons of gasoline, diesel and kerosene during January–December 2011, an increase of 20.4% year over year.

Liquidity & Capital Expenditure

At the end of 2011, PetroChina’s cash balance was RMB 61.2 billion, while cash flow from operating activities was RMB 290.2 billion. Capital expenditure for the period reached RMB 284.4 billion, up 3.0% from the year-ago level.

2012 Guidance

Going forward, leverage to the fast growing Chinese market and the turnaround in energy demand is expected to be the main growth drivers for PetroChina. Being one of the two Chinese integrated oil companies, PetroChina – together with Sinopec (SNP) – is well-positioned to capitalize on these favorable trends. The company’s 2012 results are likely to benefit from increased production, firm energy prices and contributions from overseas asset additions.

PetroChina aims to boost overall output by around 3% this year, driven by overseas asset acquisition. In particular, the company is readying a war chest of at least $60 billion to snap up oil and gas properties abroad over the next decade to tide over the refining losses. China’s dominant crude producer has projected an investment of RMB 300.0 billion in 2012, up 5.5% year-over-year.

Further, PetroChina intends to step up its efforts to unlock the huge unexploited domestic shale gas reserves (natural gas trapped within dense sedimentary rock formations) to usher in an era of energy independence for the country. In fact, the energy major expects its annual shale gas production to reach 1.5 billion cubic meters by 2015, or 23% of total Chinese natural gas supply.

Rating & Recommendation

PetroChina ADRs currently retain a Zacks #3 Rank, which translates into a short-term Hold rating. We are also maintaining our long-term Neutral recommendation on the stock.


 
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Zynga Partners Martha Stewart – Analyst Blog

Zynga Inc. (ZNGA) is setting up a new home for Martha Stewart in its popular Facebook game Castleville. Zynga recently entered into a partnership with Martha Stewart Living Omnimedia, to introduce an avatar of the American entrepreneur in the game from March 28 to mid-April 2012.

This will enable the Castleville players to interact with Martha as well as visit her kingdom.  Players will also be able to participate in different activities, such as Easter egg hunt and win special in-game goodies. This partnership is much similar to Zynga’s last year partnerships with companies such as Coca Cola (KO) and MasterCard (MA).

Of late, Zynga  has been looking for different ways to boost its sales, particularly from Facebook, which generates more than 90% of its gross revenue. Zynga primarily generates revenue through the in-game sale of virtual goods in exchange of Facebook credits, which is a form of virtual currency. However, Facebook charges a hefty 30% of virtual goods sales, which has been hurting profitability in recent times.

Apart from virtual goods sales, Zynga also earns revenue through banners and brand advertisings. However, advertisement (8.8% of the total revenue in fourth quarter) forms a very small part of the overall revenue. Further, Zynga also suffers from low subscriber monetization base.

Recently, the company has been toying with the idea of reward advertising. Reward advertising refers to a business model where companies are allowed to advertise in-game for a fee. In turn, the advertiser offers in-game items to the players, along with rewards and energy’s (in the case of CityVille). When the players reach a certain game level, they are asked to click on the advertisement to win these gifts in order to proceed to the next level.

This business model has been particularly beneficial for gaming companies such as Zynga, as the addictive nature of these games compels the players to follow the directives of the advertiser. The company earns a significant amount of revenue through this.

Moreover, the risk of losing subscriber remains minimum, as the game provider does not charge any fee. Through this innovative technique, Zynga has been successfully in generating incremental revenues from CityVille, which boasts of 26 million subscribers.

Zynga plans to roll out the reward advertising business model to its other popular games including FarmVille. We believe that reward advertising will significantly boost its top-line growth going forward. The partnership with Martha Stewart is also expected to boost Zynga’s subscriber base as well as its brand awareness, which will increase its monetization efforts going forward.

However, we believe that Zynga will continue to face stiff competition from Electronic Arts Inc. (EA) in the social gaming space. Further, we believe that Zynga needs to monetize its services and games faster in order to remain competitive going forward.

Until this happens, we remain Neutral on the stock over the long term (6-12 months). Currently, Zynga has a Zacks #3 Rank, which implies a Hold rating in the near term.


 
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Delay in Forest Drug FDA Action Date – Analyst Blog

Forest Laboratories, Inc. (FRX) will be facing a delay where the approvability status of one of its pipeline candidates is concerned. The company recently announced that the US Food and Drug Administration (FDA) has extended its action date for aclidinium bromide by three months.

Forest Labs and partner Almirall are looking to get aclidinium bromide approved for the maintenance treatment of chronic obstructive pulmonary disease (COPD).

We note that last month, aclidinium bromide had received a positive recommendation from the FDA’s Pulmonary-Allergy Drugs Advisory Committee (PADAC). The committee voted 12 to 2 in favor of approving aclidinium bromide for the maintenance treatment of COPD. The committee also voted unanimously in favor of the efficacy and 10-3 in favor of the safety of the 400 ug twice daily dose.

With the FDA pushing out the action date by three months, a response regarding the approvability of the candidate should now be out by July. The agency has not asked for additional data.

Forest Labs currently has another candidate, linaclotide, under FDA review. Linaclotide, which is partnered with Ironwood Pharmaceuticals (IRWD), is under review for the treatment of constipation-predominant irritable bowel syndrome and chronic constipation. A response on linaclotide should be out in June 2012.

Forest Labs needs to build its portfolio as the company is facing a major patent cliff now that its key revenue generator, Lexapro, is facing generic competition. While Teva (TEVA) launched its generic version of Lexapro recently, Mylan (MYL) is marketing an authorized generic version of the product.

Moreover, Forest Labs’ Namenda will face generic competition in early 2015 putting another $1+ billion at risk. That puts a lot of pressure on the pipeline to come through.

We currently have a Neutral recommendation on Forest Labs.


 
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Compuware Ties with Rosetta – Analyst Blog

Compuware Corporation (CPWR) recently announced a strategic partnership with Rosetta, which is an independent brand within the Publicis Groupe of global agencies and a member of the Compuware Partner Network.

The partnership is designed to enable customers to ensure that their e-commerce sites are production-ready and perform well in production.

Rosetta will now incorporate Compuware Application Performance Management (APM) solutions into its product offering will complement Rosetta’s existing technology in e-commerce, mobile platforms and systems integration.

In addition, the APM solutions from Compuware will enable Rosetta’s customers to benefit from deploying Rosetta enterprise e-commerce applications that are easily available and quite efficient.

The APM solutions from Compuware will also enable the monitoring, analysis, reporting and alerting services to integrate with and complement Rosetta's enterprise class e-commerce applications.

Meanwhile, in 2009, Compuware launched – Compuware 2.0 initiative with the aim of generating steady top-line and bottom-line growth. The company targets categories such as APM and secure collaboration.

Consistent with this strategy, Compuware divested its Quality and Testing business and acquired Gomez, which offers web application performance management services through Software as a Service (SaaS) platform. Gomez SaaS also complemented the existing on-premises Vantage APM solutions from Compuware.

Gomez SaaS, combined with Vantage now offers a comprehensive view of the performance of applications across the enterprise and through the Internet for every end user. In fiscal 2012, Compuware will continue to advance, integrate and support all its APM solutions under the unified brand name of Gomez.

We continue to maintain a Neutral recommendation on Compuware. Our Neutral recommendation is supported by Zacks #3 Rank, which translates into a short-term rating of Hold.


 
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Medco-ESRX Deal Irks Supervalu – Analyst Blog

The leading grocery chain and heavyweight pharmacy retailer Supervalu Inc. (SVU) is now an addition to the list of many pharmacy companies for whom the takeover of Medco Health Solutions (MHS) by Express Scripts Inc. (ESRX) did not go down well. Supervalu made its view public along with other retail giants urging the takeover would leave "only two significant competitors in a highly concentrated industry."

The National Association of Chain Drug Stores (of which Supervalu is a member), the National Community Pharmacists Association, and few retail pharmacy companies have filed a lawsuit at US District Court for the Western District of Pennsylvania appealing that the merger should be stopped.

Express Scripts wants to takeover Medco Health Solutions for $29.0 billion. The two pharmacy chains are big players in the field of Pharmacy Benefit.

Given the large purchasing power, the Pharmacy Benefit Managers (PBM) negotiate and reduce employers, government agencies and other clients’ spending on prescription drugs.

If the merger takes place, St. Louis-based Express Scripts and New Jersey-based Medco would create the largest U.S. PBM, controlling prescriptions of more than one in three Americans. Thus, the pharmacy groups are worried that the merger will hurt several retail pharmacy chains, specialty chains and huge employers who need pharmacy benefits.

We note, earlier this year that another retail bigwig Walgreen Company (WAG) had refrained from renewing its license with Express Scripts.

Therefore, customers who were registered with Express Script had to refill their prescriptions at new pharmacies or pay for them out of their own pocket. 

Supervalu’s Shop n Save with 50 stores in Illinois and Missouri, and 34 pharmacies planned to hire more workers and enhance its pharmacy services to welcome patients with Express Scripts prescription plans.

It has urged the Express Script customers to transfer prescriptions well ahead of time, as then the pharmacist at the Shop n Save stores can arrange for the medicines in advance.

Supervalu holds a Zacks #3 Rank that implies a short term Hold Rating.


 
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PACCAR Launches New Trucks – Analyst Blog

With a view to improving its product lines, PACCAR Inc. (PCAR) has launched high technology aerodynamic trucks at the Mid-America Trucking Show in Louisville, Kentucky. It took nearly 4 years and $400 million to launch these trucks under the Kenworth T680 and Peterbilt 579 brand names.

The trucks, powered with the company’s own fuel efficient and high horse-power diesel engines, have a cab width of 2.1 meter. These trucks form part of the heavy-duty class-8 segment and are available at low price.

In the fourth quarter of 2011, PACCAR achieved a record Class 8 retail market share of 28.1% in the U.S. and Canada. Class 8 industry retail sales in the U.S. and Canada improved 56% to 197,000 units in 2011 from 126,000 in 2010.

The company reported earnings of 91 cents per share in the quarter, up from 46 cents per share in the year-ago quarter and the Zacks Consensus Estimate of 79 cents per share. Net sales and financial service revenues in the quarter surged 58% to $4.85 billion, which is the highest quarterly revenue in the company’s history. It also exceeded the Zacks Consensus Estimate of $4.21 billion.

PACCAR expects the truck market to improve in 2012 driven by recovery in the housing market. With the improvement of the truck market and introduction of new vehicles, revenues are expected to reach higher levels in the coming quarters.

Based in Bellevue, Washington, PACCAR Inc., is the third largest manufacturer of heavy-duty trucks (with a capacity of more than 15 metric tons) in the world after Volvo and Daimler. It has substantial manufacturing exposure to light/medium trucks (with a capacity of 6–15 metric tons). The company also provides customer support for its products with the supply of aftermarket parts, finance and leasing services.

PACCAR has two principal business segments: 1) Truck and Other and 2) Financial Services. It competes with companies like Volvo (VOLVY) and Daimler (DDAIF). Currently, the company retains a Zacks #3 Rank on its stock, implying a short-term Hold rating.


 
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