Canadian telecom company TELUS Corporation (TU) announced its plans to repurchase 4 million shares. This share buyback program is part of its 15 million share repurchase authorization announced on May 21, 2013.
We believe that the company’s focus on improving balance sheet position is playing a pivotal role in maximizing shareholders returns. Further, the carrier’s attractive market position in the Canadian wireless business also bodes well for long-term synergies.
Telus has so far remained successful in expanding its wireless subscriber base, marketing of smartphones like Apple Inc.’s (AAPL) iPhone, improving churn (customer switch), increasing average revenue per unit, accelerating wireless data services and growing wireline fiber optic networks. As a result, the company expects these parameters to support its financial position without additional financial leverage.
Consequently, the company will see earnings growth on lower financing costs and higher EBITDA of $250 million by 2015. In addition, Telus expects free cash flow growth on reduced cash taxes and employer pension contributions, despite continued investments in the expansion of both wireline and wireless services.
The consistent earnings performance and strong free cash flow has resulted in management’s commitment to return value to shareholders through attractive dividends and share buybacks. The company expects a payout ratio between 55% and 65% of net earnings over the long term.
In May, Telus raised its quarterly dividend to C$0.34 per share from C$0.32, paid previously. The move is in sync with the company’s plan to hike dividend twice every year — expectedly in May and November.
In addition, the company increased its dividend growth program by another three years from 2013 to 2016, with projection of semi-annual dividend growth of approximately 10%. Further, the previously announced two-for-one stock split of common shares was completed on Apr 17.
Going forward, the company also expects its latest repurchase program to increase to $2 billion by 2016. Together with share purchase and dividend payments, the company targets to return up to $6 billion or around C$10 per share through 2013–2016 to its shareholders.
On Jun 14, 2013, we downgraded our long-term recommendation on American Capital, Ltd. (ACAS) to Neutral from Outperform. This was based on the company’s first-quarter 2013 operating earnings, which lagged the Zacks Consensus Estimate.
Why the Downgrade?
American Capital’s declining top line remains a cause of concern. The company’s operating revenues are heavily skewed toward interest and dividend income, which constitutes almost 92% of the total operating revenue. With the recovery in interest rates appearing bleak in the near term, we expect the company’s top line to remain under pressure.
Further, over the past 60 days, estimates have been declining. The Zacks Consensus Estimate for 2013 fell by 11.3% to $1.02 per share. The Zacks Consensus Estimate for 2014 also declined by 7.2% to $1.16 per share. American Capital currently carries a Zacks Rank #3 (Hold).
Other Areas of Concern
American Capital was significantly impacted by the global financial crisis, which limited the company’s access to the debt and equity capital markets. The market disruption and liquidity crisis also dramatically reduced the volume of mergers and acquisitions in the market, thereby affecting the company’s ability to continue generating additional liquidity.
Additionally, a persistent low interest rate environment can adversely affect American Capital’s growth. Moreover, American Capital has investments in privately-held, middle-market businesses that are more susceptible to general market declines, resulting from narrower product lines, smaller market shares, and highly-leveraged capital structures.
Stocks to Consider
Better performing stocks include Gladstone Investment Corporation (GAIN), ICG Group, Inc. (ICGE) and MCG Capital Corporation (MCGC). While Gladstone carries a Zacks Rank #1 (Strong Buy), the other 2 companies have a Zacks Rank #2 (Buy).
Raytheon Company (RTN) has received a sizeable $534.8 million firm-fixed-price contract for the production of Advanced Medium-Range Air-to-Air Missiles (AMRAAM) for the U.S. Air Force and the militaries of Oman and Saudi Arabia. With this contract, the company has become one of the 14 lucky awardees who received an award from the Department of Defense (“DoD”).
Specifically, the company will produce approximately 1,800 missiles of AMRAAM Lot 27 with each piece carrying a price tag of $300,000. Out of the total missiles produced approximately 51% of the missiles will be sold to Oman and Saudi Arabia and the balance 49% will go to the U.S. Air Force. The company expects delivery to be completed by Jan 2016.
To date, the company has supplied AMRAAM missiles to 36 different countries throughout the world.
Meanwhile, Raytheon along with iRobot Corp. (IRBT) and Oshkosh Corp. (OSK) became one of the beneficiaries of 22 separate contract awards given by the DoD. The company received a $22.4 million contract for the supply of 53 ECP-6279 retrofit kits for installation aboard Navy F/A-18 E/F fighter jets and EA-18G electronic warfare aircraft. The company expects delivery to be made by Jul 2015.
A few days back, the company received a follow-on contract from The Boeing Company (BA) for the production of APG-63(V)3 active electronically scanned array radars for the United States Air Force and Air National Guard F-15C aircraft.
Also, the company received a subcontract to provide contractor logistics support to the ground station elements for the U.S. Air Force's fleet of RQ-4 Global Hawk unmanned aircraft systems.
This continuous flow of contracts does not prove that the company is immune to the harsh effects of sequestration and declining defense budgets. Per a media report, military personnel cuts would comprise a major part of the $37 billion sequestration made by the DoD. Particularly, military personnel cuts would amount to $20.3 billion, procurement accounts would be reduced by $9.8 billion, and research funding would decline by $6 billion. Construction, housing and management funds would absorb $1.1 billion of the cuts.
We note that Raytheon is one of the largest aerospace and defense companies in the U.S., and provides a wide array of training, space, logistics and engineering solutions for government and civilian customers. The company has a diversified line of military products, including missiles, radars, sensors, surveillance and reconnaissance equipment, communication and information systems, naval systems, air traffic control systems, and technical services. The sequestration will thus affect the company’s top and bottom line greatly.
That said, Raytheon still enjoys a strong order backlog and increasing bookings. The orders from the DoD have far from dried up. Despite the tough times, as far as federal budgets are concerned, Raytheon will be able to weather the storm on the back of its sheer size and expertise. The company presently retains a short-term Zacks Rank #2 (Buy).
Amgen (AMGN) recently received approval from the US Food and Drug Administration (FDA) for an additional indication for Xgeva (denosumab). The FDA approved Xgeva for the treatment of giant cell tumor of bone (GCTB) that cannot be treated with surgery. Approval was granted for use in adults and skeletally mature adolescents.
Amgen had submitted its regulatory application in the US as well as the EU in Dec 2012. FDA approval was granted after a priority review was conducted.
Xgeva is currently approved for the prevention of skeletal-related events (SREs) in patients with bone metastases from solid tumors. Xgeva sales came in at $748 million in 2012. Amgen has been working on expanding Xgeva’s label into additional indications.
Xgeva is currently in phase III studies for the delay or prevention of bone metastases in patients with adjuvant breast cancer and prevention of SRE in patients with multiple myeloma. Last year, Amgen had received a complete response letter (CRL) from the FDA for its supplemental biologics license application s(BLA) for Xgeva for the delay of bone metastases in prostate cancer.
Denosumab is also approved under the trade name, Prolia, for the treatment of osteoporosis in postmenopausal women at increased risk of fractures or patients who have failed or are intolerant to other osteoporosis treatments.
Prolia is also approved for increasing bone mass in women at high risk for fracture receiving adjuvant aromatase inhibitor therapy for breast cancer and increasing bone mass in men at high risk for fracture receiving androgen deprivation therapy for non-metastatic prostate cancer. In Sep 2012, Prolia gained FDA approval as a treatment for increasing bone mass in men with osteoporosis at high risk for fracture.
Prolia is approved in the EU for the treatment of osteoporosis in postmenopausal women at higher risk of fractures and the treatment of bone loss associated with hormone ablation in men with prostate cancer at higher risk of fractures. Prolia sales were $472 million in 2012.
While approval for the GCTB indication is a positive for the company, we believe the main potential for boosting Xgeva sales lies in gaining approval for the prevention of bone metastases in prostate and breast cancer patients.
Amgen currently carries a Zacks Rank #3 (Hold). Amgen should be able to deliver on its long-term strategy based on expansion in key markets, launch of new manufacturing technologies, and pipeline development. However, nearer-term, we remain concerned about the performance of existing products. We expect 2013 and 2014 to be important years for Amgen with results on several key pipeline candidates.
Companies that currently look well-positioned include Biogen Idec (BIIB), Anika Therapeutics (ANIK), and Alexion Pharmaceuticals (ALXN). While Biogen and Anika are Rank #1 (Strong Buy) stocks, Alexion is a Rank #2 (Buy) stock.
On Jun 15, Zacks Investment Research upgraded Markel Corp. (MKL) to a Zacks Rank #1 (Strong Buy).
Why the Upgrade?
Markel has witnessed rising earnings estimates on the back of strong first-quarter 2013 results. Moreover, this property and casualty insurer delivered positive earnings surprises in the past 4 quarters with an average beat of 119%. The long-term expected earnings growth rate for this stock is 11.8%.
Markel reported first-quarter results on Apr 30. Non-GAAP earnings per share came in at $7.65 per share, surpassing the Zacks Consensus Estimate of $5.46 by 40.1% and year-ago earnings of $4.02 by 35.8%. Solid underwriting results, driven by lower expense ratio, more favorable development of prior-year loss reserves and lower attritional losses, aided the upside.
Operating revenues improved 12% year over year to $820 million fueled by a 6% increase in revenues from insurance operations and a 67% surge in revenues from Markel Ventures.
Premiums benefited both organically as well as inorganically.
Additionally, the company closed the purchase of Alterra Capital Holdings Limited in May 1. The acquisition is expected to strengthen its present specialty insurance business, on the back of Alterra's reinsurance and large account insurance portfolios.
Moreover, to consolidate its underwriting platform, the company added two new businesses -- Markel Global Insurance (large commercial accounts) and Markel Global Reinsurance -- which will be combined with Markel Specialty, Markel Wholesale and Markel International units.
The Zacks Consensus Estimate for 2013 jumped 22% to $24.17 per share as all 4 estimates were revised higher over the last 60 days. For 2014, half of the estimates were revised higher over the same time frame, lifting the Zacks Consensus Estimate by 7.6% to $25.7 per share.
Other Stocks to Consider
Apart from Markel, property and casualty insurers HCI Group, Inc. (HCI), Montpelier Re Holdings Ltd. (MRH) and Platinum Underwriters Holdings Ltd. (PTP) among others, carry a Zacks Rank #1 (Strong Buy) and appear impressive.
InterMune, Inc. (ITMN) recently received encouraging news when the pricing and reimbursement conditions for its sole marketed drug, Esbriet, were approved by the Board of the Italian Drug Agency (AIFA). Esbriet is approved in the EU for the treatment of idiopathic pulmonary fibrosis (IPF), a fatal lung disease.
InterMune mentioned in its press release that around 6,000 to 9,000 patients suffering from mild-to-moderate IPF are currently living in Italy. Once launched, Esbriet will be the first drug to be commercially available in Italy for the treatment of IPF. InterMune expects the reimbursement process of the drug to start within the next few days. Esbriet’s gross ex-factory price is set at around $44,000 per patient, per year and is subject to a mandatory national discount of 9.75%.
Meanwhile, Esbriet has been successfully priced and reimbursed in 11 other European countries apart from Italy, namely, Austria, Belgium, Denmark, France, Germany, Iceland, Luxembourg, Norway, Sweden, England, and Finland. The drug is already launched in all these countries except England and Finland where it will be launched soon. InterMune believes that it will generate revenues from these countries from the second half of this year.
Moreover, InterMune plans to conclude pricing and reimbursement discussions in Ireland shortly and potentially launch the drug there in the third quarter of 2013. The company also expects to provide an update on pricing and reimbursement discussions in Spain and the Netherlands by the end of the year.
InterMune expects to generate around $40−$70 million of Esbriet sales in 2013. The guidance includes $40–$55 million from countries where the product is currently launched and the rest from countries where the drug is yet to be launched.
Though Esbriet is the only approved medicine for IPF, companies like Novartis (NVS) and Sanofi (SNY) are also developing candidates for IPF.
InterMune presently carries a Zacks Rank #3 (Hold). However, biotech stock Elan Corporation, plc (ELN) currently looks more attractive with a Zacks Rank #2 (Buy).
Indicating a continuous strengthening of housing prices, the foreclosure market report – released by RealtyTrac – depicted a marginal rise in overall foreclosure activity in May 2013. According to this leading online marketplace of foreclosure properties, foreclosure filings were up 2% from Apr 2013 but down 28% from May 2012.
This brought the aggregate number of properties receiving default, auction or repossession notices to 148,054. The primary reason for the monthly rise was an increase in bank repossessions (REOs), which was up 11% from Apr 2013 but down 29% from May 2012 with 38,946 properties in May.
In aggregate, 33 states reported a monthly rise in REO activity. Further, from Apr 2013, REO activity rose 9% in non-judicial states and 13% in judicial states.
Additionally, Citigroup Inc. (C) was the lone mortgage servicer – among the 5 banks involved in last year’s national mortgage settlement – to report lower repossessions in May. The other 4 banks including JPMorgan Chase & Co. (JPM), Bank of America Corp (BAC), Ally Financial Inc. and Wells Fargo & Company (WFC) recorded a rise in repossessions.
Moreover, foreclosure starts – default notices issued and foreclosure auctions (depending on the state’s foreclosure procedure) – jumped 4% from Apr 2013 but declined 33% from May 2012 to 72,938 properties in the reported month. Foreclosure starts increased in 26 states on a monthly basis, while 14 states reported the rise on a yearly basis.
The foreclosure problem continued to shift toward judicial states. In the reported month, Florida, Ohio, Maryland, South Carolina and Illinois had 5 of the top 6 foreclosure rates countrywide. In the second position, Nevada was top-ranked among the non-judicial states.
Rise in foreclosure activity is expected continue as mortgage servicers are more confident of getting higher value for foreclosed properties, given the increasing demand for these as well as rise in home prices. Further, according to the S&P/Case-Shiller index of values in 20 cities, the U.S. home prices rose almost 11% in the year through Mar 2013, marking the biggest yearly gain since Apr 2006. However, foreclosure activity is expected to remain volatile, as the processes being used for handling these differ from state to state.
Nevertheless, the stabilizing housing sector, increase in jobs, and low mortgage rates will likely make homeowners avoid foreclosures. Additionally, the rate at which properties are entering the foreclosure procedure is expected to eventually slacken, leading to further rise in housing prices.
The U.S. Energy Department's weekly inventory release showed that crude stockpiles went up, as imports jumped and refiners scaled down their utilization rates. The report further revealed that within the ‘refined products’ category, gasoline stocks rose, while distillate supplies were down from the week-ago level.
The Energy Information Administration (EIA) Petroleum Status Report, containing data of the previous week ending Friday, outlines information regarding the weekly change in petroleum inventories held and produced by the U.S., both locally and abroad.
The report provides an overview of the level of reserves and their movements, thereby helping investors understand the demand/supply dynamics of petroleum products. It is an indicator of current oil prices and volatility that affect the businesses of the companies engaged in the oil and refining industry.
Analysis of the Data
Crude Oil: The federal government’s EIA report revealed that crude inventories jumped by 2.52 million barrels for the week ending Jun 07, 2013, following a decrease of 6.27 million barrels in the previous week.
The analysts surveyed by Platts – the energy information arm of McGraw-Hill Financial Inc. (MHFI) – had expected crude stocks to remain unchanged. A sharp uptick in the level of imports and drop in refinery utilization rates led to the stockpile build-up with the world's biggest oil consumer.
However, crude inventories at the Cushing terminal in Oklahoma – the key delivery hub for U.S. crude futures traded on the New York Mercantile Exchange – were down 759,000 barrels from the previous week’s level to 49.27 million barrels. Stocks are currently just under the all-time high of 51.86 million barrels reached in Jan.
Following the weekly inventory increase, at 393.81 million barrels, current crude supplies are 2.4% above the year-earlier level, and exceeds the upper limit of the average for this time of the year. The crude supply cover was up marginally from 25.7 days in the previous week to 25.8 days. In the year-ago period, the supply cover was 25.1 days.
Gasoline: Supplies of gasoline were up for the first time in 3 many weeks, as domestic consumption weakened and imports spiked. This was partially offset by lower production.
The 2.75 million barrels gain – significantly ahead of analysts’ projections for a 1 million-barrels increase in supply level – took gasoline stockpiles up to 221.55 million barrels. Following this build, the existing inventory level of the most widely used petroleum product is 9.8% higher than the year-earlier level and is above the top half of the average range.
Distillate: Distillate fuel supplies (including diesel and heating oil) were down 1.16 million barrels last week, contrary to analysts’ expectations for a 1.4 million barrels build in inventory level. The decrease in distillate fuel stocks – the first in 3 weeks – could be attributed to stronger demand, lower imports and decline in production.
At 122.11 million barrels, distillate supplies are 1.8% above the year-ago level but are in the lower limit of the average range for this time of the year.
Refinery Rates: Refinery utilization was down 0.9% from the prior week to 87.5%.
A bullish data from the EIA generally acts as a positive catalyst for crude prices and buoy producers, such as Exxon Mobil Corp. (XOM), Chevron Corp. (CVX) and ConocoPhillips (COP). With an improvement in the companies’ ability to generate positive earnings surprises, they can then move higher from their current Zacks Rank #3 (Hold).
Microsoft Corp. (MSFT) recently announced a partnership with Best Buy (BBY) to roll out Windows Stores across the its 500 outlets in the U.S. with an additional 100 in Canada. The terms of the deal were not disclosed.
The stores will feature Windows-based PCs, tablets, Windows Phone, Xbox and various accessories. Unlike the Apple (AAPL) stores at Best Buy, which are approximately 200 square feet, the Windows Stores will be spread across1,500 to 2,200 square feet and Microsoft will train1,200 sales associates.
Additionally, Microsoft will collaborate with Best Buy to open an online version of its Windosw Store to provide customers with updates on marketing campaigns. The new Windows Stores are expected to be operational from June through September.
Microsoft has been dealing with plummeting sales of its Windows 8 operating system. Though its new Windows 8 operating system has sold more than 100 million copies since its launch last October, both tablet and PC sales have been below the company’s expectations.
According to IDC, 49.2 million tablets were shipped worldwide in the first quarter of fiscal 2013. Apple led the market with a 39.6% share, having grown 65.3% from the first quarter of 2012, followed by Samsung with a 17.9% share, Asustek with 5.5% and Amazon with 3.7%. Microsoft is in fifth position with a mere 1.8% market share.
Additionally, IDC estimated that Google’s (GOOG) Android and Apple’s iOS operating systems together held approximately 96.1% of total market share in the first quarter of 2013. But Microsoft’s Windows and Windows RT operating systems accounted for only 3.3% and 0.4% of market share, respectively.
Therefore, Microsoft is leaving no stone unturned to attain incremental revenues, which is reflected in its strategic initiative of opening 500 Windows Stores within Best Buy stores. Earlier this year, the company said that it is transforming several holiday stores into permanent Microsoft retail outlets, which should further boost sales.
Best Buy, a consumer electronics retailer, has been working with Apple for long and has a dedicated floor area for its products. A few months back, Samsung announced a similar three-year deal with Best Buy to open Samsung Experience shops within its stores.
We believe that the platform provided by Best Buy would help Microsoft to increase its sales. For Best Buy, the deal adds more compelling products to its portfolio to better compete against discount giants and online retailers like Amazon (AMZN).
Microsoft remains one of the best-positioned software vendors, given the wide range of its products, emerging markets strength, continued technology deployment at data centers and growth in cloud computing. The company delivered better-than-expected second quarter results with non-GAAP earnings up sequentially. New products across segments, strength in the cloud computing segment and share gains in search combined to generate encouraging results.
Microsoft has a Zacks Rank #3 (Hold). Another stock that has been performing well and is worth considering is Pegasystems (PEGA), carrying a Zacks Rank #1 (Strong Buy).
CenturyLink Inc. (CTL) announced plans to take over a Platform-as-a-Service (PaaS) provider – AppFog, Inc. – for an undisclosed figure. The acquired company will be added to Savvis Inc. – the subsidiary of CenturyLink.
AppFog – which extends custom-made PaaS capabilities to software developers and public cloud services through www.appfog.com – will enhance the product portfolio of Savvis, which renders cloud computing and managed hosting solutions for enterprises. AppFog is being utilized by 100,000 developers and more joining everyday, who roll out more than 150,000 applications.
With this acquisition, AppFog's public cloud PaaS will be combined with savvisdirect online channel, enabling the company to offer private, dedicated deployments to Savvis' enterprise clients. Savvis Cloud suite will also benefit from several programming languages and interoperability between the public and private cloud environments of Portland, Ore.-based AppFog.
CenturyLink management views this acquisition as a growth driver as AppFog's high-quality Platform-as-a-Service offerings along with Savvis' industry-leading infrastructure base will likely create a strong and reliable network of could computing services.
In mid 2011, CenturyLink acquired the information technology (IT) services provider Savvis for $2.5 billion. Since then, the unit has contributed immensely in uplifting the performance level of CenturyLink.
Savvis is on track to enlarge its global foothold with the expansion of 10 data centers within 2013. The subsidiary aims to capture more businesses by increasing its data center wings in strategically suitable and secure locations, boosting the interconnectivity of the company’s core operations.
We believe that the expansion of data centers, launch of new cloud products and lucrative acquisitions will help CenturyLink to generate higher revenues and earnings in the coming months. These initiatives bequeathed several additional benefits like greater scale of operations and increasing productivity, apart from providing the company with a competitive edge over larger telecom carriers like AT&T Inc. (T) and Verizon Communications Inc. (VZ).
CenturyLink, which has business tie-ups with SAP AG (SAP), has a Zacks Rank #3, implying a Hold rating.