We reiterate our long-term Neutral recommendation on Viacom Inc. (VIAB). The company reported mixed financial results for the second quarter of fiscal 2013. While the net income beat the Zacks Consensus Estimate, revenues fell below the same.
Why Kept at Neutral?
We believe that Viacom is well positioned for long-term growth as it continues to benefit from its predominantly cable networks-based business model, hit movie releases, and monetization of contents from multiple distribution platforms. Viacom significantly improved its viewership ratings for its immensely popular Nickelodeon and MTV channels. In the reported quarter, the viewership rating was up 7% year over year compared with a stiff fall of 30% over the last one year.
Viacom is offering video-on-demand websites to AT&T Inc. (T)’s U-Verse customers, Time Warner Cable Inc. (TWC) and DIRECTV (DTV) subscribers to watch their content online, thereby driving their new TVEverywhere service for the years to come.Viacom immensely benefits from its agreement to distribute digital content to online video streaming companies. Management is hopeful that it will be able to expand its digital content distribution deals, both in the U.S. and internationally in the near future.
However, in the last quarter, the Filmed Entertainment segment suffered a blow due to a significant drop in the carryover and catalog revenues. At present, more than 90% of the company’s operating income is coming from its pay-TV networks. However, the U.S. pay-TV industry is facing severe challenges from online video providers.Meanwhile, the stock price has soared nearly 54% in the last year and is currently trading at the high-end of its 52-week price range. We believe Viacom is currently fairly valued.Viacom currently has a Zacks Rank #3 (Hold).
Mylan Inc. (MYL) recently announced the launch of its generic version of AbbVie Inc.'s (ABBV) cholesterol management drug, TriCor (fenofibrate, 48 mg and 145 mg tablets). Mylan launched the drug after receiving final approval from the US Food and Drug Administration regarding the Abbreviated New Drug Application (ANDA) for its generic version of the drug.
We remind investors that Mylan is not the first to enter the US market with its generic version of TriCor. In Nov 2012, Lupin Ltd. had launched its generic version of TriCor. According to IMS Health, TriCor (48 mg and 145 mg) generated US revenues of approximately $1.2 billion for the 12 months ending Mar 31, 2013.
Mylan has a strong generic product portfolio and pipeline. As of May 17, 2013, Mylan had 178 ANDAs pending FDA clearance, targeting $83.1 billion in sales annually. Mylan believes that about 34 of these pending ANDAs are first-to-file opportunities, representing $22.4 billion in branded sales. The revenue figures are as per IMS Health for the 12 months ending June 30, 2012.
Mylan carries a Zacks Rank #3 (Hold). Mylan’s geographic reach and product depth, along with a robust generic pipeline, are contributing to its overall growth.
However, we remain cautious of the company’s lackluster performance in Europe, the Middle East and Africa. Additionally, as most of the large branded drugs are due to lose patent exclusivity within the 2017–2018 period, we have little visibility on the growth prospects of generic companies like Mylan beyond that timeframe.
Currently, companies like Santarus, Inc. (SNTS) and Jazz Pharmaceuticals (JAZZ) look attractive with both being Zacks Rank #1 (Strong Buy) stocks.
Global insurance and reinsurance company, XL Group Plc (XL) introduced the Motor Truck Cargo Coverage Solutions to enhance its inland marine business, under its Property and Casualty segment. The new coverage caters to the mid-to-large sized trucking business in North America.
The motor truck cargo coverage is provided by XL Specialty Insurance Company (admitted) and Indian Harbor Insurance Company (non-admitted).
The Motor Truck Cargo Coverage Solutions offers a customized solution to the customers’ needs as it has been designed as per the suggestions and requirements of the brokers and the insureds. It provides flexible limits for 23 additional coverages, 22 optional endorsements, multiple reporting options and payment plans. Insureds can avail the coverage on a full policy limit, primary, excess and participation through either admitted or non-admitted paper.
The 23 coverages include contract penalty, employee tools and work clothing, expediting expense, extra expense, fire protection systems, freight charges, loss adjustment expenses, business property, public emergency service charges, right and duty to defend, reimbursement for returning stolen property, shippers control of damaged goods, unintentional errors and omissions, and virus, harmful or similar instructions.
The 22 optional endorsements include contingent coverage for freight forwarders and brokers, destination market value, employee theft, single deductible across multiple coverage forms, cargo rust or corrosion protection and temperature control system breakdown coverage.
In order to expand its Property and Casualty business, earlier this month, XL Group launched a marine coverage option named ShipShape Plus that insures luxury and mega yachts. This coverage is an enhancement to the ShipShape launched in Mar 2013 and offers more refined protection to its customers.
Net premiums written by the Property and Casualty operations of XL Group in the first quarter of 2013 was approximately $1.5 billion, up 7.8% year over year. We expect the launch of the motor truck cargo coverage solutions to improve the client base of XL Group, thereby helping the company to write more business.
Among others, the ACE Group, a leading multiline property and casualty insurer under ACE Limited (ACE), launched an agriculture property and casualty insurance business— ACE Agribusiness in Apr 2013.
In its weekly release, Houston-based oilfield services company Baker Hughes Inc. (BHI) reported an unchanged U.S. rig count (number of rigs searching for oil and gas in the country), as a recovery in the number of natural gas rigs was offset by a fall in the oil rig count.
The Baker Hughes’ data, issued since 1944, acts as an important yardstick for drilling contractors like Transocean Ltd. (RIG) , Diamond Offshore Drilling Inc. (DO) , Ensco plc (ESV) , etc. in gauging the overall business environment of the oil and gas industry.
Analysis of the Data
Weekly Summary: Rigs engaged in exploration and production in the U.S. totaled 1,769 for the week ended May 17, 2013, same as the previous week’s count.
The current nationwide rig count is more than double the lowest level reached in recent years (876 in the week ended Jun 12, 2009), though it is way below the prior-year level of 1,986. It rose to a 22-year high in 2008, peaking at 2,031 in the weeks ending Aug 29 and Sep 12.
Rigs engaged in land operations descended by 3 to 1,693, offshore drilling was up by 2 to 52 rigs, while inland waters activity increased by 1 to 24 units.
Natural Gas Rig Count: The natural gas rig count – which recently slumped to its lowest point since Jun 1995 – increased for the first time in 4 weeks to 354 (a gain of 4 rigs from the previous week). Despite the weekly improvement, the number of gas-directed rigs is down by 56% from its 2012 peak of 811. In fact, the current natural gas rig count remains 78% below its all-time high of 1,606 reached in late summer 2008. In the year-ago period, there were 600 active natural gas rigs.
Oil Rig Count: The oil rig count – that rocketed to a 25-year high of 1,432 in Aug last year – fell by 4 to 1,408. Nevertheless, the current tally is well above the previous year’s rig count of 1,382. It has recovered strongly from a low of 179 in Jun 2009, rising 7.9 times.
Miscellaneous Rig Count: The miscellaneous rig count (primarily drilling for geothermal energy) at 7 remained unchanged from the previous week.
Rig Count by Type: The number of vertical drilling rigs fell by 10 to 462, while the horizontal/directional rig count (encompassing new drilling technology that has the ability to drill and extract gas from dense rock formations, also known as shale formations) was up by 10 to 1,307. In particular, horizontal rig units – that reached an all-time high of 1,193 in May 2012 – slipped by 3 from the last week’s level to 1,096.
Zacks Rank: As of now, Transocean, Diamond Offshore and Ensco are all Zacks Rank #3 (Hold) stocks, implying that these are expected to perform in line with the broader U.S. equity market over the next one to three months.
Recently, AXIS Capital Holdings Limited (AXS) declared that it will redeem all of its outstanding preferred shares which consist of 4 million of its 7.25% Series A Preferred Shares, par value $0.0125 per share and liquidation preference $25 per share. It represents $100 million in aggregate liquidation preference as on Jun 19, 2013. The redemption price is $25 per Preferred Share plus all declared and unpaid dividends through the redemption date.
Last week, AXIS Capital priced an offering of 8 million shares of 5.50% Series D Preferred Shares, par value $0.0125 per share and a liquidation preference at $200 million or $25 per share. Furthermore, AXIS Capital granted a 30-day option to the underwriters to buy up to 1.2 million additional Series D Preferred Shares. The proceeds from this $200 million issuance were deployed to redeem the outstanding Series A preferred securities and for general corporate purposes, including share buybacks.
Concurrent to the announcement, credit rating agency, A.M. Best allotted a debt rating of “bbb–” to the Series D non-cumulative redeemable preferred shares of AXIS Capital with a positive outlook. Fitch Ratings allotted a 'BBB' rating to the issue.
AXIS Capital reported first quarter 2013 earnings of $1.92 per share which breezed past the Zacks Consensus Estimate of $1.19 per share. Following the solid first quarter, most of the estimates were revised upward. The Zacks Consensus Estimate for 2013 moved to $5.05, representing a year-over-year improvement of 59.3%. For 2014, the Zacks Consensus Estimate is currently pegged at $4.65 per share, representing a year-over-year decline of 7.96%.
Among others in the industry, Homeowners Choice Inc. (HCI) declared cash dividends of 5.833 cents per share on its Series A Cumulative redeemable preferred shares in Mar 2013, for the months ending Mar 31, Apr 30 and May 31, 2013.
AXIS Capital currently carries a Zacks Rank #1 (Strong Buy). Among other stocks, Montpelier Re Holdings Ltd. (MRH) and American Safety Insurance Holdings Ltd (ASI) share the same Zacks Rank and appear impressive.
Shares of Owens-Illinois, Inc. (OI) reached a new 52-week high of $29.16 on Tuesday, May 21, 2013. The new high was primarily driven by expected benefits from higher pricing, modest improvement in volumes, restructuring actions, cost savings as well as its growth strategy in South America.
This manufacturer of glass containers has delivered a robust one-year return of about 48.69% and year-to-date return of about 35.83%. Average volume of shares traded over the last three months was approximately 1.3 million shares.
Owens-Illinois has been delivering positive earnings surprises over the past four quarters with an average surprise of 6.60%. This Zacks Rank #3 (Hold) stock has a market cap of $4.75 billion and a long-term expected earnings growth rate of 9.05%.
Owens-Illinois will benefit from the restructuring actions undertaken in North American and Asia-Pacific regions in 2012, global structural cost reductions as well as its growth strategy in South America. Furthermore, a new furnace in Brazil in late 2012 will lead to volume growth and logistics savings in the region.
Owens-Illinois has embarked on a multi-year asset optimization program in Europe, which includes elimination of underperforming assets, and reduction of idle capacity. The company outlines investment in low cost additional capacity and enhancement in quality, speed and flexibility. This is expected to lead to improvements in profits in Europe in the second half of 2013.
Weak 1Q13 Earnings, But Improved Outlook
Owens-Illinois’ first-quarter 2012 earnings per share of 60 cents were down 18% from the year-ago earnings of 73 cents per share, but up 7% from the Zacks Consensus Estimate of 56 cents. Improved operating profits in South America and Asia-Pacific were offset by weak economic conditions in Europe.
Despite a weak first quarter dragged down by Europe, the company expects strong contribution from the emerging regions and stable market conditions in North America to continue to support growth while macroeconomic uncertainty in Europe will remain a deterring factor. The company expects overall modest volume growth in 2013, and higher prices to counter higher material costs. Adjusted earnings are expected in the range of $2.60 to $3.00 per share.
The Zacks Consensus Estimate for 2013 is currently at $2.78 per share, reflecting a 5.23% year over year growth and within the company’s guidance.
Other Stocks to Consider
Other stocks in the containers industry that are currently performing well and have a good visibility include Berry Plastics Group, Inc. (BERY), Graphic Packaging Holding Company (GPK) and UFP Technologies, Inc. (UFPT) with a Zacks Rank #2 (Buy).
The board of directors of W. R. Berkley Corp. (WRB) has approved an 11% dividend hike representing new annualized rate of 40 cents per share. The first increased dividend, at a quarterly rate of 10 cents, will be paid on Jul 2, 2013 to stockholders of record as of Jun 11, 2013.
This property and casualty insurer has maintained its track record of increasing dividend over the years. The recent dividend hike represents the eighth consecutive increase from 12 cents paid in 2005.
The dividend hike is primarily supported by W.R. Berkley’s strong balance sheet, low debt ratio and its ability to generate healthy cash flow.
During the same time last year, the company had approved a 12.5% hike in its annual dividend.
Nevertheless, W.R. Berkley is one such company in the U.S. property and casualty industry, with a low dividend yield. Following the increased dividend, the stock will provide a dividend yield of 0.80%, which is much lower when compared with its peers.
W.R. Berkley has started a number of new specialty units since early 2006 in order to position itself for the turn of the insurance cycle. It was on account of these units along with moderate premium increases that Berkley witnessed a growth in net premium written in recent years.
W.R. Berkley is also witnessing a continuous improvement in the insurance market. We are fairly positive towards W.R. Berkley’s stock at this moment. Shareholder returns will continue to be positive due to dividend payouts, share repurchases and business growth. By virtue of its high return on equity, few intangibles, low leverage, sound underwriting and limited exposure to volatility, the stock is uniquely poised to benefit from a turn in the cycle.
We believe these positive fundamentals will position the company to continue to pay dividend in future.
Among other property and casualty insurers, recently the shareholders of ACE Limited (ACE), at the extraordinary general meeting held on May 16, 2013, approved the board’s proposal to hike the quarterly dividend by 4% to 51 cents.
Also, tthe board of directors of Assurant Inc. (AIZ) authorized an increase of 19% in its dividend. The company will now pay a quarterly dividend of 25 cents per share.
W.R. Berkley currently retains a Zacks Rank #3 (hold). Montpelier Re Holdings Ltd. (MRH), carrying Zacks Rank #1 (Strong Buy) is worth considering.
Medical technology major Boston Scientific Corporation (BSX) was hit by another patent tiff when Germany-based OrbusNeich Medical Inc. and its subsidiary, OrbusNeich Medical GmbH enforced the seizure of more than 190 stent systems from the company.
The latest dispute challenging Boston Scientific is associated with the patent infringement proceedings against the company in the Dusseldorf Regional Court. According to OrbusNeich, Boston Scientific violated the preliminary injunction of the Court which prohibits it from marketing and selling certain line of stents in Germany.
The affected stent lines include Small Vessel, Small Workhorse and Workhorse Stents under the company’s PROMUS Element, PROMUS Element Plus, OMEGA, TAXUS Element, SYNERGY and Promus PREMIER portfolio. According to the Court’s Apr 30, 2013 ruling, the geometric pattern of these affected stent lines infringe OrbusNeich’s patent EP1341482.
The stent systems were found at the premises of Boston Scientific’s German subsidiary Boston Scientific Medizintechnik GmbH in Ratingen on May 15. OrbusNeich has filed parallel patent infringement lawsuits in The Netherlands and Ireland. OrbusNeich is also seeking more definitive action in the form of a permanent injunction and damages.
Last week, Boston Scientific received a patent infringement complaint from Vascular Solutions Inc. (VASC), a provider of medical devices for coronary and peripheral vascular procedures. Vascular Solutions has filed the complaint in the U.S. District Court for the District of Minnesota.
According to Vascular Solutions, Boston Scientific infringed three patents owned by it. The complaint alleges, among other things, that the production and sale of Guidezilla guide extension catheter by Boston Scientific, which gained the 510(k) clearance from the U.S. Food and Drug Administration (FDA) in Mar 2013, infringes the patent landscape of Vascular Solutions’ GuideLiner catheter.
Amid several patent issues, Boston Scientific carries a Zacks Rank #3 (Hold). Other medical sector stocks that warrant a look are Conceptus Inc. (CPTS) carrying a Zacks Rank #1 (Strong Buy) and Becton Dickinson and Company (BDX), carrying a Zacks Rank #2 (Buy).
Sales worries continue for Caterpillar Inc. (CAT) as worldwide sales of the construction and mining equipment behemoth declined 9% for the three months ending Apr 2013. This marked the fifth consecutive month of declining sales following disappointing first quarter 2012 results.
Caterpillar sales started their downhill journey in Dec 2012, hurt by tougher year-earlier comparisons and rising inventories of unsold equipment. Caterpillar had earlier witnessed negative sales growth in Apr 2010 and since then enjoyed a stint of positive growth, benefiting from strong equipment demand both domestically as well as in the emerging markets.
So far in 2013, Caterpillar’s sales have declined 4% in Jan, 13% in Feb and 11% in March. In Apr 2013, Caterpillar witnessed declines across all regions barring Latin America, which held its own with 28% growth. Latin America has shown a considerable improvement in April compared to the 3% growth in both Jan and Feb and 12% rise in March. Demand for construction and infrastructure projects has spurred equipment demand in Brazil as it prepares for the 2014 World Cup and 2016 Olympic Games.
In North America, the company's largest market in terms of geography, the sales decline of 18% in Apr was the lowest so far in 2013. In Asia, sales declined 20%, in tandem with the decline of 26% in Feb and 24% in March pulled down by weak demand from China. Sales in EAME registered a drop of 3% from the high single digit decline in the preceding two months, but still disappointing compared to the 1% climb in Jan. In ROW (Rest of the World) sales dipped 5%.
Reciprocating & Turbine Engine Retail sales went down 5% year over year globally, an improvement from the 7% decline in Jan and Feb and 6% in March. Among the end markets, sales to the transportation sector were the only bright spot with 8% growth. Other markets remained in the red with the sales to the power sector being the worst affected with a 11% decline followed by industrial and petroleum sector dipping 7% and 6%, respectively.
Caterpillar’s first quarter results were also disappointing as revenues dipped 17% year over year to $13.2 billion and earnings per share slumped 45% to $1.31, primarily due to reduced mining demand and decline in inventory. Citing weak demand for its mining equipment, Caterpillar has trimmed its sales outlook to a range of $57 to $61 billion from the previous range of $60 to $68 billion. Caterpillar now expects to earn $7.00 per share in 2013, down from the earlier projection of earnings between $7.00 and $9.00 per share.
Even though Caterpillar will benefit from the recovery in the U.S. construction sector, the recent loss of sales momentum, declining backlog, negative impact of the European debt crisis and slowdown in economic growth in China remain concerns. Caterpillar currently retains a Zacks Rank #4 (Sell). Other stocks in the industrial products sector with a favorable Zacks Rank are H&E Equipment Services Inc. (HEES), Alamo Group, Inc. (ALG) and CNH Global NV (CNH), all carrying Zacks Rank #2 (Buy).
A.M. Best Co. has confirmed the Financial Strength Rating (FSR) and Issuer Credit Rating (ICR) of Montpelier Reinsurance Ltd. (Montpelier Re). Montpelier Re is a wholly owned subsidiary of Montpelier Re Holdings Limited (MRH). The rating agency provided an FSR of “A” (Excellent) and ICR of “a” to Montpelier Re. It also affirmed the ICR of “bbb” and debt ratings of Montpelier Re Holdings. All the ratings carried a stable outlook.
The rating affirmation came on the back of a number of factors. These include the company’s solid risk-adjusted capitalization, superb long-term operating performance, a well-diversified business portfolio, strong competitive position, a management team with much expertise and strong enterprise risk management structure.
However, the rating agency pointed out that being a global property catastrophe focused reinsurer, the company is vulnerable to low frequency, high severity losses which partially offsets the positives. Nevertheless, this aspect is taken care of by the company’s robust risk-adjusted capital levels.
The stable outlook assigned on the ratings of Montpelier Re was on account of the company’s financial flexibility, capital market accessibility and favorable rate environment in its targeted line of business.
A.M. Best stated that an upward revision in the ratings or outlook can take place if the company continues to maintain strong risk-adjusted capital levels and consistently delivers strong operating profitability compared to its peers.
Rating affirmations from credit rating agencies play an important part in retaining investor confidence in the stock as well as maintaining the creditworthiness in the market. We believe that the company’s present score with the credit rating agencies will help it write more business going forward.
Earlier in Sep 2012, Fitch Ratings upgraded the ratings on Montpelier Re Holdings and its subsidiary, Montpelier Re. The senior unsecured debt ratings of MRH was upgraded to “BBB+” from “BBB” and the Insurer Financial Strength (IFS) rating of Montpelier Re was upgraded to “A” from “A–”.
Montpelier currently carries a Zacks Rank #1 (Strong Buy). Among others in the industry, AXIS Capital Holdings Limited (AXS), Global Indemnity plc (GBLI) and Homeowners Choice Inc. (HCI) carry the same Zacks Rank and appear impressive.
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