The Zacks Analyst Blog Highlights: H.J. Heinz, Campbell Soup, Pilgrim's Pride, Zynga and Electronic Arts

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Feb 21, 2012, 09:30 ET

CHICAGO, Feb. 21, 2012 /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 H.J. Heinz (NYSE: HNZ), Campbell Soup (NYSE: CPB), Pilgrim's Pride (NYSE: PPC), Zynga Inc. (Nasdaq: ZNGA) and Electronic Arts Inc (Nasdaq: EA).

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Here are highlights from Friday's Analyst Blog:

Fed Views Justified by Econ Reports

This morning's benign inflation reading and reports of Congressional agreement to extend the payroll tax cut may not be enough power stocks higher. But this rally defied predictions thus far, so I wouldn't be overly surprised if stocks start heading higher later this afternoon ahead of the President's Day weekend.

The Consumer Price Index (CPI) for January came broadly in-line with market expectations, up 0.2% on the 'headline' after December's 'unchanged' reading. 'Core' CPI, which strips out food and energy, also matched expectations, up 0.2% after the 0.1% increase in December. The year-over-year readings were 2.9% for the 'headline' and a tad hotter for the 'core' reading at 2.3%. In December, the year-over-year CPI readings were 3% and 2.2% for the 'headline' and 'core,' respectively.

Any way you look at the inflation numbers, it doesn't seem to be problematic. The Fed pays close attention to the inflation picture, but its statement following the January FOMC statement characterized price pressures as 'subdued.' Today's CPI reading not only confirms the Central Bank's assessment, but also leaves open the door for further quantitative easing should conditions warrant.

Minutes of the last Fed meeting released earlier this week showed a divided FOMC on the need for additional quantitative easing. But the fact remains that the committee has supporters of further easing.

We will also get the Conference Board's Leading Economic Indicators for January, but the release is unlikely to be a major market mover today. In another favorable development, Congress appears on track to extend the payroll tax cut for the rest of the year, on an unusually bipartisan basis. Please recall that the earlier three-month extension late last year followed an extremely noisy and rancorous debate. In addition to the tax cut extension, the package includes extended unemployment benefits, and a Medicate reimbursement fix.

On the earnings front, we have positive surprises from H.J. Heinz (NYSE: HNZ) and Campbell Soup (NYSE: CPB) this morning. But Pilgrim's Pride (NYSE: PPC), the chicken processor, missed expectations.

Zynga Gears Up to Turn Publisher

After reporting lackluster fourth quarter results, hurt by higher game development costs, social game maker Zynga Inc. (Nasdaq: ZNGA) is gearing up to turn publisher, much akin to its closest competitor Electronic Arts Inc (Nasdaq: EA).

According to a recent report from Bloomberg, Zynga is expected to launch a new publishing program in March this year that will allow third party developers to showcase their games as well as advertise on the company's platform.

The publishing program is somewhat similar to Zynga's direct-to-customer platform "Zynga Live" or Project Z, which was unveiled in October last year. Zynga Live allows customers to play games from anywhere (web or mobile) without accessing through Facebook or any other social networking site.

Zynga primarily generates revenue through the in-game sale of virtual goods in exchange of Facebook credits, which is a form of virtual currency. Much of Zynga's success is attributed to the massive popularity of Facebook, which generates more than 90% of Zynga's gross revenue.

However, Facebook charges a hefty 30% of this revenue, which has been a bone of contention for many developers such as Zynga over the last couple of years. It is rumored that in light of such a scenario, Zynga launched its standalone portal Farmville.com in an attempt to distance itself from Facebook.

We believe that the idea of foraying into the publishing arena will not only reduce Zynga's dependence on Facebook but also diversify its revenue base going forward. As per details of the program available from Bloomberg, third party developers will still have to pay a fee to Facebook (since most of the developers use Facebook Credit), but Zynga will also get a percentage of sales for its services, which is expected to drive its advertising revenue going forward.

We also believe that, through the publishing program, Zynga will be able to further expand its existing game portfolio, without incurring significant in-house game development costs. However, we believe that publishing is an uncharted area for Zynga and the company will face stiff competition from EA, which is already a dominant player in the publishing business.

In a bid to further diversify its revenue stream, Zynga also entered into a partnership with toy maker Hasbro. Under the terms of the agreement, Hasbro will develop toys and games based on Zynga's most popular titles like FarmVille, CityVille and Mafia Wars and will pay a licensing fee based on sales. We believe that this new source of revenue will further boost Zynga's top line going forward.

We remain Neutral over the long term (6-12 months). Currently, Zynga has a Zacks #2 Rank, which implies a Buy rating over the near term (1-3 months).

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