The Zacks Analyst Blog Highlights: Caterpillar, Eaton, Deere, Cummins and Allstate Corporation

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Aug 02, 2011, 09:30 ET

CHICAGO, Aug. 2, 2011 /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: Caterpillar (NYSE: CAT), Eaton (NYSE: ETN), Deere (NYSE: DE) Cummins (NYSE: CMI) and Allstate Corporation (NYSE: ALL).

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Here are highlights from Monday's Analyst Blog:

GDP vs. Corporate Profits: A True Disconnect?

Friday's dismal GDP data -- particularly the downward revisions to prior quarters -- has even the most bullish of market strategists (myself included) starting to wonder about the increased probability of a double-dip into recession territory.

Normally, to check my biases, I try to ask myself tough questions that assume I could be wrong about the continued strength of the recovery. Last month, I laid out very simple and clear arguments for said continuation.

Then, just when I needed it most, a very pointed question came across my radar this morning that is a good counterpoint to my optimism and that must be addressed. Writing on SeekingAlpha Sunday, G.C. Mays proposed that "The Relationship Between Corporate Profits and U.S. GDP Growth Appears to Have Ended."

The Global Economy's Changing Dynamics

Mays draws on the last ten years of data to paint the picture of a divergence he calls "astonishing." Here is his summary of that picture:

"Between the first Quarter of 2001 and 2006, a simple correlation showed that corporate profits explained 98.4 percent of domestic GDP growth. However, the most recent five years beginning with the first quarter of 2006 the correlation between corporate profits and domestic GDP growth breaks down as corporate profits only explain 10.1 percent of domestic GDP growth."

Mays seems to understand well the not-so-mysterious force behind this evolving disconnect. He explains that with over 45% of S&P 500 company sales coming from outside the US, lots of corporate profits are not entering into the GDP calculation.

"This is due primarily to the growing middle class in emerging and developing markets," he says. Exactly what I have been preaching as blessing for the past two years.

One Man's Bearish Data Is Another Man's...

So while I was at first alarmed by his thesis -- and thinking there was some terrible structural problem with our economy, similar to the credit bubble of the last decade -- I was relieved to find that what Mays finds to be a problem, I welcome as an unstoppable reality of the global economy that, while not perfect, is fueling growth and opportunity for billions of people.

What's wrong with Emerging Markets fueling growth? According to Mays it's that American companies are essentially creating jobs and demand in these economies via a cheaper labor source. And he believes this is ultimately bad for the US economy and its work force.

I'm not smart enough to know whether or not he's right about that. I just accept the reality that if manufacturers like Caterpillar (NYSE: CAT), Eaton (NYSE: ETN), Deere (NYSE: DE) and Cummins (NYSE: CMI) can find opportunity in countries that want to grow their cities and economies -- and that have billions of people clamoring for the fruits and lifestyles of the developed world -- then who am I to say it's not right?

Progress is certainly still profitable and if we can make money following a historic mega-trend that benefits billions of people searching for a better life, I'm all about that. The opportunities will only grow for the rest of this decade as the world's population surges to 9 billion by 2050.

Allstate Lags on CAT Losses

Allstate Corporation's (NYSE: ALL) second quarter operating loss of $1.23 per share came in modestly lower than the Zacks Consensus Estimate of a loss of $1.53 but lagged the year-ago quarter's earnings of 81 cents per share.

Results for the quarter reflected higher catastrophe (CAT) losses that also led to increased claims expenses coupled with lower average premiums and policies-in-force in Property-Liability insurance unit and lower investment income. However, prudent capital management and strong liquidity were quite impressive during the reported quarter. This is reflected from growth in book value per share and improved combined ratio, excluding the effect of catastrophes.

Allstate's net loss for the reported quarter came in at $620 million or $1.19 per share, compared to net income of $145 million or 27 cents per share in the prior-year quarter, reflecting a substantial decline. Operating loss, which excludes realized net capital gains and losses from the sale of investments as well as accruals on unhedged derivative instruments, plunged to $642 million compared to operating income of $441 million.

Allstate reported total net revenue growth of 5.6% year over year to $8.08 billion and also exceeded the Zacks Consensus Estimate of $6.91 billion. Besides, property-liability insurance claims and claims expenses spiked 34.8% year over year to $6.36 billion while operating costs and expenses inched up 1.6% year over year to $802 million.

Additionally, catastrophe losses for the reported quarter escalated to $2.34 billion, contributing 36.2 point to the combined ratio but were substantially higher than $636 million in the year-ago period. During the reported quarter, Allstate experienced 33 catastrophe loss events including five tornadoes, three wildfires and 25 hailstorms.

Outlook

Management expects to maintain the profitability of the auto business and improve homeowners' profitability, resulting in an underlying combined ratio outlook of 88% to 91% for 2011.

Allstate is taking strategic actions to reduce losses for Allstate business from catastrophes through enhanced property catastrophe reinsurance program, non-renewals, stricter underwriting guidelines, increased deductibles and discontinuance of selected lines of coverage, including earthquake.

We anticipate continued benefits from Allstate's diversification, superior financial strength rating and proactive approach to investment. These factors have helped Allstate gain the second-largest personal lines writer position in the US.

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