The Zacks Analyst Blog Highlights: Freeport McMoRan, Peabody Energy, Joy Global, Caterpillar and Kroger

Sep 16, 2011, 09:30 ET from Zacks Investment Research, Inc.

CHICAGO, Sept. 16, 2011 /PRNewswire/ -- 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: Freeport McMoRan (NYSE: FCX), Peabody Energy (NYSE: BTU), Joy Global (Nasdaq: JOYG), Caterpillar (NYSE: CAT) and Kroger (NYSE: KR).


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Here are highlights from Thursday's Analyst Blog:

Factory Output Rises in August

Given the weather influences on Utility Utilization, and thus the total, it is important to look at how Manufacturing alone is doing. Factory utilization rose to 75.0% from 74.7% in July, but that was only after July was revised down from 75.0%, so it would be equally valid to see factory utilization as being unchanged. June was also revised down to 74.4% from 74.6%. Factory utilization is up from 72.6% a year ago, and the cycle (and record) low of 64.4% in June 2009. That is still well below the long term average level of 79.0%, so, as with total capacity, we still have a long way to go on the factory utilization level.

Total capacity rose by 0.9% over the last year, but most of that expansion came in the Mine and Utility segments. Manufacturing capacity is up 0.4% from a year ago. Increased capacity is a headwind for increased capacity utilization, but at the current level it is a breeze, not a gale, particularly for manufacturing. For most of the last two years we have seen year over year declines in capacity, but now that is turning around. While shrinking capacity makes it easier to use the remaining capacity at a higher level, it is not a good sign for the economy. It represents a permanent loss rather than a temporary idling of the country's economic potential.

Mines were working at 90.8% of capacity in August, up from 89.9% in July and from 89.0% in June. A year ago they were operating at 87.7%, and the cycle low was 79.0%. We are actually now above the long term average of 87.4% of capacity. When we are at or above the long term average, minor fluctuations should not be a big macro concern. Since there is a lot of operating leverage in most mining companies, this probably means very good things for the profitability of mining firms with big U.S. operations like Freeport McMoRan (NYSE: FCX) and Peabody Energy (NYSE: BTU). Mine capacity increased 2.0% year over year, making the year over year increase in capacity utilization even more impressive.

As depreciation is more than just an accounting exercise when it comes to mining equipment, the high operating rates are also good news for the equipment makers like Joy Global (Nasdaq: JOYG) and Caterpillar (NYSE: CAT), although the U.S. is a relatively small part of their overall business.

Utility utilization plunged to 78.7% from 81.2% in July and 79.4% in June. A year ago Utilities were operating at 82.8%, We are far below the long term average utilization of 86.6%. We are actually now below the 2009 low of 79.2%! Increasing utility utilization faces a headwind because our power plant capacity has actually been increasing even faster than our mine capacity, up 2.7% year over year. The sharp drop for the month though has more to do with weather than the increase in capacity.

CPI Up 0.4%, Core Up 0.2%

The relative pricing strength in energy commodities year over year suggests that it would be a good idea to be over weighted in the energy sector. Energy service prices, like electricity and piped gas service are much better contained, rising 0.4% in both August and July after declining 1.1% in June and rising 0.6% in May. Year over year, energy services prices are up just 1.0%. In other words, the pain has been at the pump, not in the plug.

Oil prices have been very volatile. The price of gasoline seems to be tracking the price of Brent, which is the world benchmark, much more than the price of WTI, which is the historic U.S. benchmark. WTI has declined significantly in the recent market turmoil, but Brent much less so.

Food prices have been a bit more problematic than overall inflation, but nothing like energy commodities. They rose 0.5% in August on top of a 0.4% rise in July, and from a rise of 0.2% in June.  Year over year food prices are up 4.6%. However, year over year food prices at the grocery store are rising faster than restaurant prices, and those are a lot less discretionary than going out to eat.

Grocery store inflation was 0.6%, matching the increase in July and up from a 0.2% increase in June. Year over year "food at home" inflation is 6.0%. That is hardly Zimbabwe, but it is higher than the rest of the economy. That sort of pace would take a serious bite out of consumers' wallets.

Due to poor harvests in several important areas of the world last year, most notably due to droughts in Russia, and floods in Pakistan and Australia, agricultural commodity prices have been rising sharply. Given the floods in the Midwest earlier in the year, and now a severe drought in the South, I suspect we are going to see a lousy harvest this year, and that will probably lead to more food price inflation in the fall.

In the short term, though, meat prices may fall as ranchers send cattle to slaughter since they can't graze them on parched land. Enjoy the cheap meat for the grill this summer, because you will more than pay for it later on.

Many of the key agricultural futures have doubled over the last year or so. So far they have had relatively little impact on consumers shopping at Kroger's (NYSE: KR), but that might be beginning to change. The actual cost of raw wheat is a very small fraction of the actual cost of a loaf of bread, so one would not want to exaggerate the likely impact of higher prices in the commodity pits on prices at the checkout counter. That is not as true elsewhere in the world, and rising food prices have already started to cause unrest in some countries.

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