American Water Works Company Inc.’s (AWK) unit Pennsylvania American Water announced the completion of its Pittsburg System Upgrade project. The company invested $101 million for this venture. This upgrade project is partly financed by the Pennsylvania Economic Development Financing Authority's (PEDFA) tax-exempt debt.
Per the program, American Water upgraded its Hays Mine Treatment Plant and Becks Run Pumping Station. These initiatives include replacement of gas chlorine with liquid chlorine, upgrading the Monongahela River intake structure and raw water pump station, setting up of 3,000 feet of new 42-inch water main, and completion of water storage and pump station structure and chemical feed facilities. In addition, the company refurbished the E.H. Aldrich Treatment Plant in Elrama, Washington County, and the Arlington Booster Station in the City of Pittsburgh.
The infrastructure upgrade program will enable American Water to provide uninterrupted water supply to its customers and strengthen system competence. These factors will subsequently improve reliability, consumer confidence, public safety while maintaining government water quality regulations.
American Water invested $213.1 million during first-quarter 2013 under its capital spending program. In full-year 2013, the company intends to invest $950 million in various projects to ensure the safety and reliability of its water operations.
It is evident from American Water’s capital spending program that the company currently plans to improve its water distribution assets and installation of modern systems. In recent times, the company invested $3.7 million to upgrade the Scranton Water System for providing uninterrupted service to its customers and increase water flow during firefighting.
American Water’s first-quarter net cash from operating activities was $149.6 million and cash balance as of Mar 31, 2013 was $21.2 million. We believe that the company’s stable financial position along with strategic assets acquisitions encourage it to follow steady infrastructure development activities.
Voorhees, N.J.-based American Water was founded in 1886. The company serves around 14 million people with water and water related services. With 6,700 employees, the company’s market capitalization is $7.58 billion.
American Water currently has a Zacks Rank # 3 (Hold). Other water utilities, which are doing well include American States Water Company (AWR), Consolidated Water Co. Ltd. (CWCO) and Middlesex Water Co. (MSEX). All of them presently carry a Zacks Rank #2 (Buy).
The US Food and Drug Administration (FDA) recently accepted Actavis, Inc.’s (ACT) new drug application for its oral contraceptive candidate. The company is looking to get its progestin-only transdermal contraceptive patch (norethindrone transdermal delivery system) approved for the prevention of pregnancy.
With the FDA granting standard review to the NDA, a response should be out by Dec 27, 2013. The NDA was submitted on Feb 26, 2013 and includes data from a 12-month, multicenter, open-label study.
The once-weekly dosing regimen of the patch could help improve compliance and convenience in progestin-only contraceptive users.
Actavis is working on strengthening its women’s health business. Earlier this year, the company acquired Belgium-based Uteron Pharma. With this acquisition, Actavis gained a portfolio of two late-stage, one mid-stage and several early-stage pipeline candidates.
Uteron’s two-late stage candidates are Levosert, an intrauterine device (IUD) for long-term contraception and the treatment of heavy bleeding and Diafert, a non-invasive immunoassay kit for the determination of the quality of oocyte (egg) during in-vitro fertilization (IVF).
While Levosert is currently under review in several EU countries, Diafert could obtain EU approval later this year. As far as the US is concerned, Levoset is currently in phase III development. Diafert is slated to enter into phase III development this year in the US.
Estelle, Uteron’s mid-stage pipeline candidate, is a contraceptive that could be launched in 2018.
Actavis currently carries a Zacks Rank #3 (Hold). With fewer major patent expiries slated to occur in the next few years, we are encouraged by Actavis’ focus on building its branded and biosimilars pipeline.
In the pharma/biopharma space, companies that currently look well-positioned include Salix Pharmaceuticals, Ltd. (SLXP), Santarus, Inc. (SNTS) and Jazz Pharmaceuticals (JAZZ). All three are Zacks Rank #1 (Strong Buy) stocks.
Independent natural gas operator, Southwestern Energy Company (SWN) recently completed the acquisition of approximately 162,000 net acres in the Marcellus Shale in Pennsylvania from Chesapeake Energy Corporation (CHK). The company financed the acquisition value of approximately $93 million solely from its revolving credit facility.
Southwestern boasts a strong balance sheet with significant liquidity and financial flexibility. Moreover, the company’s continuous endeavor of focusing on return on investment, coupled with its large drilling inventory, uniquely positions it to create significant value for shareholders. Southwestern remains focused on generating economic returns. It is committed to projects returning at least 1.3x the present value index (PVI) and intends to only drill projects that reach that return threshold.
Houston-based Southwestern Energy Company is an independent energy company whose wholly owned subsidiaries are engaged in oil and gas exploration and production, natural gas gathering and marketing. The company is one of the largest producers of natural gas in the U.S., with core Fayetteville Shale properties spreading over 913,502 net acres.
Earlier, Southwestern’s year-end 2012 proved reserves decreased 31.8% and almost 100% of the reserves were natural gas. The decline was due to lower gas prices in 2012. The weak natural gas scenario in the U.S. due to continued oversupply and low demand also compels us to remain sidelined.
Southwestern’s industry-leading holdings in Northern Arkansas’ Fayetteville Shale play offer some of the highest quality natural gas discoveries in North America in recent years. Marcellus and Fayetteville shales also hold ample opportunities for newer natural gas discoveries.
We see the company as well positioned for production growth given its streamlined cost structure, upcoming drilling programs in the Fayetteville and Marcellus shales, and a wide acreage in its New Ventures, especially in the Brown Dense play.
However, we remain apprehensive about the volatile natural gas scenario in the U.S. given the continued oversupply and low demand. Other risk factors include weaker-than-expected commodity prices, technological failures and the lack of a diversified asset base.
The company holds a Zacks Rank #3 (Hold). However, there are other stocks in the oil and gas sector – Enerplus Corporation (ERF) and EPL Oil & Gas, Inc. (EPL) – which hold a Zacks Rank #1 (Strong Buy) and are expected to perform better.
Orchids Paper Products Company (TIS), an integrated manufacturer of tissue paper products, recently announced a 16.7% year over year hike in its annual dividend payout to $1.40 per share on an annualized basis. The second quarter 2013 cash dividend of 35 cents is payable on Jun 21 to shareholders of record as of Jun 7.
Based on the closing price of $23.01 on May 17, 2013, the proposed dividend affirms a healthy yield of 6.1%. A steady dividend payout is part of the long-term strategy of Orchids to provide attractive risk-adjusted returns to its stockholders. In addition, decent dividend increases at periodic intervals from the company have been one of its strong points.
This is the third consecutive quarter in which Orchids has increased its quarterly dividend by 5 cents each. The company had earlier raised the quarterly dividend payout from 25 cents to 30 cents per share or from $1.00 to $1.20 on an annualized basis in Mar 2013. Prior to that, Orchids raised its quarterly dividend in Nov 2012 from 20 cents to 25 cents per share.
The recent dividend hike follows strong quarterly results, with Orchids reporting record net sales of $26.6 million in first quarter 2013. The superior performance was attributable to increased market penetration in the mid- and premium-tier segments, with a diligent focus on new product developments and emphasis on delivering the best-in-class customer service. Orchids also has a healthy liquidity position with a cash balance of $5.5 million at quarter-end, while cash flow provided by operating activities in the reported quarter was $4.2 million.
Orchids manufactures bulk tissue paper (known as parent rolls) and converts parent rolls into finished products, such as paper towels, bathroom tissue and paper napkins. The company primarily sells its products to value retailers and discount retail stores due to their high overall market growth, consistent order patterns and low number of stock keeping units.
Despite its niche market, Orchids faces stiff competition from other players in the industry such as Potlatch Corporation (PCH), Resolute Forest Products Inc. (RFP), and PH Glatfelter Co. (GLT), each carrying Zacks Rank #1 (Strong Buy). Orchids presently have a Zacks Rank #4 (Sell).
Shares of Flextronics International Ltd (FLEX) reached a new 52-week high of $7.39 on Thursday, May 16, 2013. The bullish run reflects Flextronics new initiatives of divesting non-core assets and deployment of new technologies. New programs are expected to boost production volumes by early fiscal 2014.
The closing price of Flextronics on May 16 was $7.22, representing a strong one-year return of about 10.2% and a year-to-date return of about 13.2%. The S&P 500 jumped 27.4% and 12.9%, respectively during the same period. Average volume of shares traded over the last three months stands at approximately 4354.5K.
Flextronics delivered a positive earnings surprise of 15.1% over the past four quarters. This Zacks Rank #3 (Hold) stock has a market cap of $4.78 billion and a long-term expected earnings growth rate of 12.0%.
Modest 4Q Results, Upbeat Guidance
Flextronics reported fourth quarter earnings of 12 cents per share that matched the Zacks Consensus Estimate but declined from 22 cents reported in the year-ago quarter.
Revenues declined 17.0% from the year-ago quarter to $5.30 billion, slightly short of the Zacks Consensus Estimate of $5.45 billion. The year-over-year decline in revenues was due to the winding down of the assembly business with Research In Motion (BBRY).
For the first quarter, Flextronics forecast adjusted earnings in the range of 12 cents to 16 cents per share. Total revenue is expected in the range of $5.3 billion to $5.6 billion.
Key Growth Catalysts
We believe that new program wins and acquisition of Google’s (GOOG) Motorola manufacturing unit in Brazil and Tianjin China will drive growth in Flextronics key revenue segments (Industrial and Emerging Industries & High Velocity Solutions) in the near term.
However, profitability is expected to remain weak due to continuing investments in the near term. Additionally, macroeconomic concerns and weak end-market demand are major concerns. Moreover, the portfolio realignment is expected to hurt Flextronics’ top-line growth in the near term.
The Zacks Consensus Estimate moved down a couple of cents to 12 cents over the past 30 days, reflecting the near-term concerns. For fiscal 2014, the earnings estimate remained steady at 76 cents per share over the past 30 days.
Other Stocks to Consider
Another stock, which provides electronic manufacturing services and is worth considering is Sanmina Corp. (SANM) with a Zacks Rank #2 (Buy).
We are initiating coverage on Domino’s Pizza Inc. (DPZ) with a Neutral recommendation. While we prefer the company’s ability to post solid earnings growth in recent times; strong brand positioning in the U.S. pizza delivery segment, a strong overseas presence and traction in digital ordering, a sluggish macro-environment and higher prices for cheese keep us on the sidelines at the current level.
Why the Neutral Recommendation?
Domino’s is the market leader in the pizza delivery segment in the U.S. and ranks second in the carry-out segment. Internationally, it is the second largest pizza delivery service based on the number of units and sales.
It delivered solid results in 2012 and continued its winning momentum in first-quarter 2013. Both its first-quarter earnings per share and revenues beat the Zacks Consensus Estimates and grew year over year, driven by improved volumes, global market share growth and operating margin expansion.
Domino’s offers immense growth potential worldwide. It continues to post strong same-store sales in the international markets despite volatile macro-economic conditions in the recent past. It has registered 77 consecutive quarters of positive same-store sales in its international business.
Domino’s has been concentrating and investing heavily on technology-driven initiatives like digital ordering to boost its sales over the last three years. Digital ordering has been consistently at the rate of about 5% a year. This is also an important tool to combat the competition from smaller players in the industry.
However, despite these encouraging facts, some concerns prevent us from being too optimistic on the stock. Both a sluggish macro-environment and higher cheese prices can hamper the winning momentum of Domino’s.
Other Stocks to Consider
Others players in the same industry, which look attractive at current levels include The Wendy’s Co. (WEN), The Cheesecake Factory Inc (CAKE) and Burger King Worldwide Inc. (BKW) all carrying a Zacks Rank #2 (Buy).
On May 17, 2013, we reiterated our long-term recommendation on AvalonBay Communities Inc. (AVB) at Neutral. This reflects AvalonBay’s first-quarter earnings, which were marginally ahead of the Zacks Consensus Estimate.
AvalonBay’s first-quarter 2013 core funds from operations (FFO) reached $1.36 per share, a cent above the Zacks Consensus Estimate. Results included the positive impact from community sales and related gains in 2013, a rise in net operating income (NOI) from the Archstone Acquisition, as well as existing and developed communities. However, acquisition costs and increased depreciation associated with the Archstone acquisition acted as the dampeners.
Following the first-quarter results, the Zacks Consensus Estimate for 2013 moved up 2.6% to $6.32 per share over the last 30 days. Also, the Zacks Consensus Estimate for 2014 inched up 1.0% to $6.83 per share in the same time frame. However, we note that this Zacks Rank #3 (Hold) stock has missed the Zacks Consensus Estimate in 2 of the last 4 quarters.
AvalonBay mostly focuses on acquiring and developing premium properties in the high barrier-to-entry regions of the U.S., which gives it a competitive edge. Consistent with this strategy, the company inked a deal with Equity Residential (EQR) to acquire several developed properties and land parcels of Archstone. This acquisition closed in the first quarter of 2013. Particularly, AvalonBay acquired 40% of Archstone’s assets and liabilities and the rest was acquired by Equity Residential.
The assets acquired are located primarily in S.C. and the mid-Atlantic region. The deal can be regarded as a major step toward strengthening its presence in the upscale regions. Moreover, its decent operating platform and prospects for growth in the multifamily sector keep us optimistic.
Nevertheless, the headwind from the Lehman stock holding and the unsettled economic environment are matters of concern. Also, a significant development pipeline increases its operational risks and we believe that the integration of the Archstone deal will take time to materialize. Hence, we have reaffirmed our Neutral recommendation on the stock.
Other REITs to Consider
While we prefer AvalonBay, other REITS that are worth a look include Host Hotels & Resorts Inc. (HST) and Ventas Inc. (VTR), both carrying a Zacks Rank #2 (Buy).
Note: Funds from operations, a widely accepted and reported measure of REITs performance, are derived by adding depreciation, amortization and other non-cash expenses to net income.
BorgWarner Inc. (BWA) announced that it’s leading turbocharging technologies will be deployed in Jaguar Land Rover's new range of four-cylinder gasoline and diesel engines, which are scheduled for launch in 2015. The advanced technology will provide innovative solutions and support future growth of the Jaguar Land Rover.
BorgWarner also plans to expand its production lines and construct a new engineering center in Bradford, UK to support the new Jaguar engine manufacturing centre near Wolverhampton. The new production line will widen the company’s product offerings and include turbochargers for passenger cars. The new engineering center will provide opportunity for application engineering, design, simulation, testing and validation as well as metallurgical labs.
BorgWarner’s new center will receive grant from the UK government's Regional Growth Fund, which encourages private sector investment in England. With this new center, the company plans to provide sustainable employment opportunity in England, thus inducing economic growth.
In furtherance of its ties with the University of Huddersfield, BorgWarner plans to launch a master's degree program in turbocharger engineering in the university. Under this program, the students will get the opportunity to specialize in advanced technology to improve fuel economy, reduce emissions and enhance performance of passenger cars and commercial vehicles.
BorgWarner is a leading manufacturer of powertrain products for the world's major automakers. The company’s products are capable of improving vehicle performance and stability, thus meeting fuel-efficiency and emission standards. It currently holds a Zacks Rank #3 (Hold).
The company operates in 57 locations in 19 countries. These products are manufactured and sold worldwide, primarily to original equipment manufacturers of passenger cars, SUVs, trucks and commercial transportation products. The company’s largest customers include Ford Motor Co. (F), Toyota Motor Corp. (TM) and Honda Motor Co. (HMC).
BorgWarner posted a 1.6% rise in adjusted earnings to $1.30 per share (excluding non-recurring items) in the first quarter of 2013 from $1.28 in the first quarter of 2012. Earning per share surpassed the Zacks Consensus Estimate by 8 cents.
Revenues dipped year over year to 3.2% to $1.85 billion, but were marginally ahead of the Zacks Consensus Estimate of $1.84 billion. The decrease in revenues was driven by a 9% decline in light vehicle production in Europe.
The US Food and Drug Administration (FDA) recently accepted Biogen Idec’s (BIIB) Biologics License Application (BLA) for its hemophilia A candidate, Eloctate (recombinant factor VIII Fc fusion protein).
Biogen had submitted the BLA in Mar 2013. The regulatory filing was based on results from the A-LONG study. FDA approval for Eloctate would represent a significant advancement in hemophilia A treatment in more than two decades. The FDA has granted standard review which means a response regarding the approval status of Eloctate should be out early next year.
We note that Biogen’s hemophilia B candidate, Alprolix, is also under FDA review. With the FDA granting standard review, a response from the agency regarding the approval status of Alprolix should be out in the fourth quarter of this year.
A convenient dosing schedule (supported by a longer duration of action and a suitable safety profile) could help Eloctate and Alprolix capture share from existing products in the hemophilia market. According to Biogen, Eloctate has the potential to reduce the number of intravenous injections by 50 to 100 per year in patients currently on preventive treatment.
We are pleased with the pipeline progress at Biogen. The company received a major boost in late March with the FDA approval of its oral multiple sclerosis drug, Tecfidera. We expect Tecfidera to gain EU approval shortly - the Committee for Medicinal Products for Human Use (CHMP) had issued a positive opinion regarding the approval of Tecfidera in Mar 2013.
Biogen currently carries a Zacks Rank #3 (Hold). At present, companies like Anika Therapeutics Inc. (ANIK), Alexion Pharmaceuticals, Inc. (ALXN) and Alkermes (ALKS) look well-positioned. While Anika is a Zacks Rank #1 (Strong Buy) stock, Alkermes and Alexion are Zacks Rank #2 (Buy) stocks.