UnitedHealth Group (UNH) – Bull of the Day
UnitedHealth Group's (UNH) fourth-quarter 2011 earnings came in substantially ahead of the Zacks Consensus Estimate, led by strong revenue growth from the UnitedHealthcare and Optum businesses, partially offset by higher medical costs. The company ended the year 2011 with better performances in virtually every meaningful metric: membership, revenues, MLR, operating margins and cash flow.The company strengthened its key capabilities to respond to the emerging growth opportunities. These initiatives has been taken to expand its Medicaid and Medicare business and for growing the health service business.
Though certain headwinds such as high unemployment, growing medical cost, pressure from Health Care overhaul, etc. remains, we believe the company will beat the odds given its diversified business model with leading market share positions in the Commercial, Medicare and Medicaid markets. A solid balance sheet and a highly conservative investment portfolio will further help it to outperform its peers.
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Western Union Co. (WU) – Bull of the Day
We are reiterating our recommendation on the shares of Western Union Co. (WU) at Outperform prior to its fourth quarter earnings release slated on February 7, 2012. For the first nine months of 2011, Western Union has shown a solid earnings performance.In our view, the company is poised for long-term growth, which is validated by the combination of demographic trends, new market opportunities and its advantages of scale. Several new initiatives like B2B, prepaid, banking, mobile and wu.com also poise the company well for long-term growth. The company also benefits from a continued strong cash flow, allowing shareholders to be rewarded with acquisitions, share buybacks and increased dividends.
Our six-month target price of $23.00 equates to about 12.8x our earnings estimate for 2012. We view the annual dividend of $0.32 per common share as secure, implying an expected return of about 23% over that period. This is consistent with our Outperform recommendation on the stock.
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Lamar Advertising Co. (LAMR) – Bull of the Day
Lamar Advertising Co. (LAMR) reported quite an improvement in the third quarter results with earnings per share of $0.04, exceeding the year-ago reported earnings of $0.01. Net revenue jumped 3.2% y/y and exceeded management's guidance by 1.3%. Moreover, the company's debt level plummeted in the quarter, bringing down the interest expense by 6.2%.Accounting for these positive factors and anticipating further improvements in the advertising market in 2012 in the backdrop of reviving US economy, we upgrade our recommendation on Lamar from Neutral to Outperform. The Zacks estimate for 2012 also represents a significant increase.
The company is currently trading at a Price-to-Cash Flow (P/CF) multiple of 9.0x. We believe
the company will outperform the broader market going forward. Our target price is $35.00, based on P/CF of 10.3x.
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Celgene Corp. (CELG) – Bull of the Day
We are maintaining our Outperform recommendation on Celgene Corp. (CELG) following impressive preliminary results disclosed for the fourth quarter (adjusted EPS up 46%) and full year 2011 (adjusted EPS up 36%). Preliminary adjusted revenues in the final quarter of 2011 came in at $1.28 billion, 22% above the year-ago figure. For 2011, sales came in at $4.8 billion, up 34%.The company also gave a bright outlook for 2012 with adjusted earnings expected to improve by 25%. We believe that Celgene, driven by its oncology portfolio and robust pipeline, should easily achieve the 2012 guidance. We believe that the current price represents an attractive entry point for long-term investors.
Based on 2012 P/E estimates, the stock is trading at 17.4x earnings, compared to the industry average of 28.1. Our target price of $87.00 per share is based on 20.8x our 2012 EPS estimate of $4.18.
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International Paper Co. (IP) – Bull of the Day
International Paper Co.'s (IP) third quarter EPS of $0.92 beat the Zacks Consensus Estimate. The company continues with its merger and acquisition strategy to strengthen its businesses. The merger with Temple-Inland will increase its share of the North American corrugated-packaging market from 27% to 40% and will be accretive to EPS in the first year.Further, International Paper's acquisition of a 75% stake in Andhra Pradesh Paper Mills will help capitalize on the burgeoning demand for paper and packaging products in India. Furthermore, through its joint ventures, International Paper has significant projects underway in Russia and China. These will help the company sustain its earnings growth.
We expect International Paper to continue utilizing its sound cash flow by investing in capital projects, acquisitions and reducing its total debt. Thus, we have upgraded our recommendation from Neutral to Outperform with a target price of $38.00.
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Humana, Inc. (HUM) – Bull of the Day
We are upgrading our recommendation on Humana, Inc. (HUM) to Outperform based on its robust top-line growth, sturdy cash position and favorable acquisitions along with the increased membership guidance. Humana's third-quarter earnings surpassed the Zacks Consensus Estimate and increased guidance for 2011.On January 10, 2012, Humana announced an agreement with St. Vincent's HealthCare, whereby the members of Humana's Medicare Advantage plans will be able to use St. Vincent's programs, facilities and doctors, including cardiologists and other specialists.
Overall, we believe that the efficient growth strategy through acquisitions, stable ratings and a strong investment portfolio will likely attract long-term investors. Our six-month target price of $113.00 equates to 13.4x our earnings estimate for 2011. Combined with the $1.00 per share annual dividend, this target price implies an expected total return of 20.3% over that period.
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MarkWest Energy Partners (MWE) – Bull of the Day
We are upgrading MarkWest Energy Partners (MWE) to Outperform from Neutral, reflecting its promising future prospects. The master limited partnership's (MLP) targeted growth capital investments since 2006 have been driving its strong, long-term volume growth.We continue to like MarkWest for its high-quality and diverse portfolio of midstream assets, as well as its proven track record of supporting producers in the development of shale plays and the steady improvement in its liquidity/cash flow position. Furthermore, with 192% distribution growth since the IPO in May 2002, we are confident of the partnership's total return potential.
As such, we view MarkWest units as an attractive investment and upgrade it to Outperform. Our $66 price objective reflects a multiple of 21.2X trailing twelve-month cash flow.
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WESCO International (WCC) – Bull of the Day
WESCO International (WCC) is one of the largest distributors of electrical products in the U.S. The company's third quarter results beat the Zacks Consensus and forward guidance was encouraging.WESCO's strong market position, the improved conditions in the industrial and utility markets, strengthening construction markets, the global account model, restructuring benefits and the LEAN initiative are strong positives. Therefore, although results bear a positive correlation to GDP growth (which was not that impressive in 2011) and operating margins continue to lag the company's target, we think the time is right to buy the shares.
We therefore upgrade the shares to Outperform from Neutral. We have set a target price of $67 (15.4X P/E), which is a premium to the peer group.
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SM Energy Co. (SM) – Bull of the Day
We believe that SM Energy Company's (SM) emerging core portfolio is a catalyst for visible organic growth over the next several years. The company's earnings in the third quarter more than doubled from the prior-year, buoyed by higher operating income, increased production and recognition of a gain on divestiture activity.The company's Eagle Ford and Bakken assets are key drivers of liquids growth. SM Energy has significant leasehold positions in the leading U.S. shale plays, including the Niobrara, Haynesville and Granite Wash, which we believe will provide the company with multiyear profitable drilling inventory.
Considering these factors, we are maintaining our recommendation at Outperform. Our $94 price objective reflects a multiple of 13.3x the trailing the 12-month cash flow.
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Hilltop Holdings, Inc. (HTH) – Bull of the Day
We are upgrading our recommendation on Hilltop Holdings Inc. (HTH) to Outperform based on its sound capital position along with a risk-free balance sheet, which also paved way for resumption of share buybacks, assisting shareholders' confidence in the stock.The company broke even in the third quarter but surpassed the Zacks Consensus Estimate of a loss and beat the year-ago results. The stability was driven by a higher-than-expected top line that benefited from improved premiums, investment income and net realized gains. However, expenses escalated on higher loss adjusted and underwriting expenses that even deteriorated the combined ratio and resulted in operating cash outflow.
Overall, Hilltop should continue to tread ahead with its strategic approach in order to capitalize on the opportunities that the markets provide on stabilization. Our six-month price target is $10.00 per share, reflecting about 0.8x our book value estimate of $12.34 per share. This is consistent with our Outperform recommendation.
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