The Zacks Analyst Blog Highlights: Valero Energy, General Dynamics, The Boeing, Lockheed Martin and Northrop Grumman

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Jun 07, 2011, 09:30 ET

CHICAGO, June 7, 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: Valero Energy Corp. (NYSE: VLO), General Dynamics Corporation (NYSE: GD), The Boeing Company (NYSE: BA), Lockheed Martin Corp. (NYSE: LMT) and Northrop Grumman Corp. (NYSE: NOC).

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Here are highlights from Monday's Analyst Blog:

Valero Upped to Outperform

We have upgraded our recommendation for Valero Energy Corp. (NYSE: VLO) to Outperform from Neutral based on impressive first quarter results as well as improved 2011 earnings visibility.

Valero posted solid first quarter 2011 earnings results on the back of a strong refining margins environment and better feedstock discounts. Company-wide, throughput margins jumped $3.93 per barrel year over year in the quarter owing to higher margins for diesel and jet fuel, along with better discounts for heavy-sour feedstocks on the Gulf Coast and light-sweet crude oils in the Mid-Continent. This favorable margin scenario was reflected across all regions barring the Northeast.

Among all independent refiners, Valero offers the most diversified refinery base with a footprint in all major regions of the U.S., having a refining capacity of 2.6 million barrels per day in its 14 refineries located throughout the U.S., Canada and the Caribbean. The company's impressive refining portfolio, strong balance sheet, accompanied by domestic as well as worldwide diversification make it the most trusted name within the refining space.

With $4.13 billion cash on hand as of March 31, 2011, we believe the company undeniably has the financial flexibility to make acquisitions, thereby expanding its refining footprint. Its growth initiatives, including the new hydrocrackers at the Port Arthur, Texas and St. Charles, Louisiana plants scheduled for third quarter 2012 and fourth quarter 2012, respectively, are expected to boost diesel production and diversify its market exposure.

Importantly, Valero's recently acquired Pembroke refinery in Wales, one of the largest and most complex facilities in Western Europe and with a crude capacity of 220 thousand barrels per day, as well as other major growth projects are expected to lend strong earnings momentum in 2011.

The Pembroke refinery will not only allow greater flexibility in shipping products between the U.K. and the U.S. but also facilitate Valero's trading platform across the Atlantic Basin.

General Dynamics to Cut Jobs

General Dynamics C4 Systems, a business unit of General Dynamics Corporation (NYSE: GD), has announced the laying-off of about 5% of its workers from a workforce of 10,000. The workforce is spread over 200 sites across Canada and the U.S.

The lay-off was precipitated by defense-budget cuts that are forcing the company to streamline its operations. The job cuts would be announced over the next fortnight.

General Dynamics' operating unit, General Dynamics C4 Systems Inc. focuses on the development, design, manufacturing and integration of secure communication, information and technology solutions. C4 Systems is a part of General Dynamics' Information Systems and Technology (IS&T) segment.

General Dynamics was the fourth largest U.S. defense contractor in terms of revenue in fiscal 2010, following sector leaders like The Boeing Company (NYSE: BA), Lockheed Martin Corp. (NYSE: LMT) and Northrop Grumman Corp. (NYSE: NOC). The company is one of the two contractors equipped to build nuclear-powered submarines in the U.S.

General Dynamics' revenue exposure is spread over a broad portfolio of products and services in business aviation; combat vehicles, weapons systems and munitions; shipbuilding design, repair and construction; and information systems, technologies and services. Diversification of revenue through exposure to a number of uncorrelated markets will keep the overall growth momentum steady.

Looking forward, key drivers of growth for the company include a diversified revenue exposure, its stable business of U.S. military vehicles, and strong cash flow generation.

However, the company is largely tied to the U.S. defense budget, where the threat of budget cuts is looming large. Also, we have become slightly cautious about the company's recent G650 crash and risks related to the execution of key projects. The company presently retains a short-term Zacks #3 Rank (Hold) that corresponds with our long-term Neutral recommendation on the stock.

Headquartered in Falls Church, Virginia, General Dynamics engages in mission-critical information systems and technologies; land and expeditionary combat vehicles, armaments and munitions; shipbuilding and marine systems; and business aviation.

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