The Zacks Analyst Blog Highlights: Short Treasury ETF, Pfizer, Merck, United Healthcare and Nordstrom

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May 16, 2011, 09:30 ET

CHICAGO, May 16, 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: Short Treasury ETF (NYSE: TBT), Pfizer (NYSE: PFE), Merck (NYSE: MRK), United Healthcare (NYSE: UNH) and Nordstrom Inc. (NYSE: JWN).

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Here are highlights from Friday's Analyst Blog:

Inflation STILL Tame

The Fed appears to have taken the threat of outright deflation off of the table, but I see little danger of runaway inflation. We seem to be in a bit of a sweet spot. The threat of deflation is gone. The markets are not anticipating a return to high inflation. If they were, they sure would not be willing to lend to the government for 10 years at only 3.20%. A return of under 3.2% per year is not very enticing for locking up your money for ten years.

Bond investors have to be concerned with headline inflation, not core inflation. If inflation were to average over the next ten years what it has averaged over the last ten years (2.5%), the increased amount of goods and services you could get for delaying your gratification for a decade would be less than 1% per year.

At the first hint that inflation is picking up, bond yields can be expected to head much higher. Deflation is the only scenario under which the purchase of long-term treasuries makes sense at these levels. To buy a T-note, you have to be rooting for breadlines and Hoovervilles. By the way, a good way to bet on T-note yields rising is the Short Treasury ETF (NYSE: TBT).

Where Inflation Does Exist

So what areas are showing price increases? Health care costs always seem to run faster than overall inflation, but even they seem relatively well behaved. Medical commodity prices (i.e. drugs) were up 0.5% in April, matching March's rise, after a 0.7% increase in February. Year over year they were up 3.1%.

While Health care inflation continues to run hotter than the economy as a whole, it is also down significantly from historical levels. Part of the reason for that is probably the increasing substitution of generic drugs for name-brand prescriptions. For drugs that are still on-patent, firms like Pfizer (NYSE: PFE) and Merck (NYSE: MRK) are still aggressively raising prices, but they are now losing share to their slightly older drugs that now have to face the free market.

Medical Services prices (i.e. a visit to the hospital) rose just 0.3%, up from a 0.1% increase in March, but lower than the 0.4% rise in February. Year over year, medical service prices are up 2.8%.

(So tell me, how does the current rate of medical inflation justify the double-digit increases we are seeing in health insurance premiums? They don't, but insurance companies still have very concentrated market positions in many states, and the effects of the Health care reform will not really kick in until 2014.)

Yes, health care costs are still higher than the inflation rate elsewhere in the economy, but is far below the average rate of medical inflation in recent years (decades). The next graph shows that health care inflation for both commodities and services is down substantially from a few years ago, but still generally runs much higher than overall inflation. That is at the very core of the long-run budget deficit problem.

HMO Margins Expanding

The differential between the increase in health insurance costs and actual medical inflation suggests that margins should increase significantly for the major HMOs like United Healthcare (NYSE: UNH). The taming of medical inflation is vitally important, as rapidly rising health care costs are the primary factor in the long-term structural budget deficit.

It is the long-term structural deficit that we have to be worried about, not the current big deficit that is mostly due to cyclical factors (reduction in tax revenues and higher automatic stabilizer costs due to high unemployment).

Nordstrom Profits Surge, Revs Short

Nordstrom Inc. (NYSE: JWN) posted earnings growth of 32.7% to reach 69 cents a share in the first quarter of fiscal 2011 from 52 cents per share earned in the year-ago period. Earnings per share beat the Zacks Consensus Estimate of 67 cents a share.

Quarterly Details

Nordstrom's same-store sales and top-line trends were also encouraging. Total revenue grew 12.0% to $2,229 million from $1,990 million in the prior-year period on the heels of a 6.5% growth in same-store sales. Total revenue however fell short of the Zacks Consensus Estimate of $2,240 million.

During the quarter, Nordstrom's same-store sales (including full-line and Direct businesses) jumped 7.8%, driven by the Designer, Jewelry and Men's Apparel categories. Full-line same-store sales growth was driven by strong performances in the Midwest and the South. Same-store sales at Nordstrom Rack increased by 1.2%. The company expects same-store sales to grow in the range of 2% to 4% in fiscal 2011.

Lower buying and occupancy costs led to a 30 basis point (bps) year-over-year expansion in gross margin to 40.4% in the quarter. Conversely, retail selling as well as general and administrative expenses increased $78 million to $697 million in the quarter, primarily due to increased operating expenses as well as higher volume of sales and HauteLook operating expenses and purchase accounting charges. However, credit selling, general and administrative expenses shrunk 40.2% year over year to $55 million. The company expects 2011 gross margin to range from down-to-up 10 basis points.

Consequently, Nordstrom's operating income posted an increase of $53 million year over year to $272 million, while operating margin expanded 120 bps to 12.2%.

Guidance

The company now sees fiscal 2011 earnings per share in the range of $2.80 to $2.95, which represents a decrease of 15 cents from the previous guided range of $2.95 to $3.10.

Nordstrom currently has a short-term Zacks #2 Rank ('Buy') rating. We retain our long-term Neutral recommendation on the company.

Based in Seattle, Washington, Nordstrom Inc. is a leading fashion specialty retailer in the U.S., offering high quality apparel, shoes, cosmetics and accessories for men, women and kids. The company offers both branded and private label merchandise, as well as a private label card, two Nordstrom VISA credit cards and debit cards for Nordstrom purchases.

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