The Zacks Analyst Blog Highlights: Canon, Toyota Motor, Nidec, Dynegy and Duke Energy

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Aug 26, 2014, 09:30 ET

CHICAGO, Aug. 26, 2014 /PRNewswire/ -- Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include the Canon Inc. (NYSE:CAJ-Free Report), Toyota Motor Corp. (NYSE:TM-Free Report), Nidec Corp. (NYSE:NJ-Free Report), Dynegy Inc. (NYSE:DYN-Free Report) and Duke Energy Corp. (NYSE:DUK-Free Report).

Today, Zacks is promoting its ''Buy'' stock recommendations. Get #1Stock of the Day pick for free.

Here are highlights from Monday's Analyst Blog:

3 Stock Picks for Japan's Deflationary Worries

Japan will continue to provide monetary stimulus in order to combat deflation. Speaking at Jackson Hole last Saturday, Bank of Japan (BoJ) governor Haruhiko Kuroda said monetary easing would continue for "some time" until deflation was tackled conclusively.

Kuroda-Speak

Kuroda said that the current policy to tackle deflation utilizing easy monetary policy had met with success. Speaking on the sidelines of the global central banking conference, he said large-scale asset purchases would continue.

However, Kuroda admitted that Japan remained doubtful about whether the BoJ would be able to meet its inflation target of 2%. The need to create expectations that prices will rise is crucial because it would lead industry to increase wages. This is an important step in Japan's struggle with deflation in the long term, Kuroda said.

Rise in Consumer Prices

The BoJ first introduced monetary stimulus measures in April last year. The central bank promised to expand its monetary base using asset purchases as part of a quantitative easing program. Kuroda aims to increase consumer inflation to 2% within a two-year timeframe. This is crucial for the economy's health in the long term given the fact that the country had faced 15 long years of deflation.

When first introduced, monetary stimulus measures were particularly effective. In April, Japan raised its consumption tax from 5% to 8%, the first such increase in 17 years. The Bank of Japan estimates that this hike contributed 2 percentage points to May's core inflation. Excluding the effect the consumption tax, consumer inflation increased 1.3%.

Kuroda had then acknowledged that inflation would decline over the next few months, wearing out the impact of the consumption tax hike. As the impact of a weak yen on the cost of imports declines, inflation is expected to dip in the months ahead.

Wage Increases Elusive

However, an increase in wages is key to the economy's well-being in the long term. Kuroda said: "Some kind of mechanism, a 'visible' hand, is necessary for wages to rise." Aggressive monetary stimulus is possibly the important method being used to affect an increase in wages.

This particularly significant because growth in income is failing to keep up with inflation. Average overall monthly earnings increased 0.4% in June on a yearly basis, compared to a 0.6% increase in May. Excluding fresh food, consumer prices increased 3.3% on a year-over-year basis in June. Kuroda's statement that monetary easing would continue probably relates to the fact that a desired increase in wages has not been achieved up to now.

At the same time, Kuroda said the Japanese economy was continuing to improve. Stimulus measures were having a noticeable impact on economic conditions. Labor market conditions were getting better and investment was on the rise.

Our Choices

There is evidence to bear out the fact that the economy has benefited as a result of monetary easing. Moreover, the central bank is determined to continue stimulus measures till it achieves its targets. Below we present three such stocks, each of which also has a good Zacks Rank.

Canon Inc. (NYSE:CAJ-Free Report) is an industry leader in professional and consumer imaging equipment and information systems. The company operates through three business divisions. Its office segment offers products such as copiers, complex machines and printers.

The industrial equipment segment develops, manufactures and sells semiconductor, micrographics and optical disk filing systems. Canon's imaging systems offers products such as digital cameras, lenses and broadcasting equipment.

Canon holds a Zacks Rank #2 (Buy) and has expected earnings growth of 7.3%. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 16.

Toyota Motor Corp. (NYSE:TM-Free Report) has three business divisions: automobiles, finance and another segment focusing on housing, information and communications. The company recorded earnings of ¥185.34 per share ($3.64 per ADR) in first-quarter fiscal 2015 (ending Jun 30, 2014), beating ¥177.32 per share ($3.58 per ADR) in first-quarter fiscal 2014 (ending Jun 30, 2013).

Earnings per ADR surpassed the Zacks Consensus Estimate of $3.07. The Japanese automaker posted consolidated net income of ¥587.8 billion ($5.76 billion) for first-quarter fiscal 2015, improving from ¥562.2 billion ($5.68 billion) in the year-ago quarter.

The company currently holds a Zacks Rank #2 (Buy) and has expected earnings growth of 6.4%. It has a P/E (F1) of 9.47.

Nidec Corp. (NYSE:NJ-Free Report) and its subsidiaries are primarily engaged in the design, development, manufacturing and marketing of small precision motors, mid-size motors as well as machinery and power supplies. Nidec also produces other products, which include auto parts, pivot assemblies and encoders.

The company's manufacturing operations are located primarily in Asia and Nidec has sales subsidiaries in Asia, North America and Europe. It also has manufacturing locations in Thailand, China, Singapore, Indonesia and Vietnam.

Apart from a Zacks Rank #2 (Buy), Nidec has expected earnings growth of 48.9%. It has a P/E (F1) of 22.79.

The BoJ governor has emphasized that monetary easing will continue until economic targets are met. This is good news for the economy and will encourage further investment, resulting in the targeted increase in wages. This is why these three stocks are good choices for your portfolio.

Dynegy Buying Duke, Energy Capital Partners' Assets

Houston-based power company Dynegy Inc. (NYSE:DYN-Free Report) has struck two separate deals to acquire several coal and gas power generation plants from Duke Energy Corp. (NYSE:DUK-Free Report) and private-equity firm Energy Capital Partners to enhance its foothold in two less regulated eastern U.S. markets. These transactions, worth a combined $6.25 billion, pushed Dynegy's shares by 8.75% in Friday's trading session to close at $32.32.

The Deals

Dynegy will pay $2.8 billion in cash for 11 power plants in the Midwest and a retail business owned by Duke Energy. These include Killen, Stuart, Conesville, Miami Fort, Zimmer, Hanging Rock, Washington, Fayette, Lee and Dicks Creek. The company is also buying ownership interests in plants in New England, Pennsylvania and the Midwest from Energy Capital Partners for $3.45 billion in cash as well as stock.

Holding a market cap of $3.24 billion, Dynegy has plans to issue about $5 billion in new unsecured bonds and $1.25 billion in equity and equity-linked securities to fund the acquisitions. The deals are slated to wrap up by the end of the first quarter of 2015.

The Synergies

The acquired assets will add 12,500 megawatts (MW) of generating capacity, doubling Dynegy's total output to about 26,000 MW. The addition of these portfolios will enable Dynegy to have a significant hold in the PJM (Pennsylvania, New Jersey, Maryland) and New England markets. Of the new generating capacity, 5,053 MW will comprise gas-fueled plants, while another 3,793 MW of capacity will come from environmentally compliant coal generation units.

The deals are expected to boost Dynegy's portfolio in the Northeast and New England to comprise about 60% of total megawatts versus 18% presently.

Financially, the company expects the deals to triple its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) in 2015 while lifting its free cash flow to $4 a share per share in 2015 and beyond. Dynegy also expects the deals to provide $500 million in tax savings, $200 million in related efficiencies and cost savings of more than $40 million per year.

The acquisitions will also help Dynegy to reduce its overhead costs by 34% to $1.10 per MW hour of electricity produced.

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