Zacks Analyst Blog Highlights: BP Plc, Royal Dutch Shell, Visa, MasterCard and The McGraw-Hill Companies

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Feb 02, 2011, 09:34 ET

CHICAGO, Feb. 2, 2011 /PRNewswire/ -- Zacks.com Analyst Blog features: BP Plc (NYSE: BP), Royal Dutch Shell plc (NYSE: RDS.A), Visa Inc. (NYSE: V), MasterCard Inc. (NYSE: MA) and The McGraw-Hill Companies Inc. (NYSE: MHP).

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Here are highlights from Tuesday's Analyst Blog:

BP Falls Short, Resumes Dividend

BP Plc (NYSE: BP) reported fourth-quarter 2010 earnings of $1.39 per American Depositary Share (ADS), well below the Zacks Consensus Estimate of $1.63. The quarterly result was marginally below the year-earlier profit level of $1.40. We have adjusted earnings for non-operating items for the comparable periods.

Although the company realized higher oil and gas prices and lower depreciation in the quarter, the oil spill incident has hit hard the British oil giant.

The company's revenue increased approximately 14% to $83,988 million from $73,636 million in the year-ago quarter, and handily surpassed the Zacks Consensus Estimate of $65,017 million.

Importantly, the oil giant has resumed its quarterly dividend following its suspension after the Macondo well spill-over in the Gulf of Mexico in April 2010. The company will pay 7 cents per share (or $0.42 per ADS), equivalent to half the amount paid in the year-earlier quarter.

Notably, BP's major competitor, Royal Dutch Shell plc (NYSE: RDS.A) is scheduled to report its fourth quarter earnings later this week.

Our Recommendation

Management remains positive on the company's growth profile and looks forward to a marked recovery as well as consolidation in order to reduce operational risk or oil spill related assignments.

Additionally, the share-swap agreement between BP and Russia's state-operated oil company, Rosneft, enables the former to strengthen its position in the Russian hydrocarbon reserve, which was previously off limits to foreign companies. In the wake of rising global oil demand, we see the U.K. oil major as benefiting from this long-term, strategic alliance with the world's largest hydrocarbon-producing nation.

We see an anticipated slow and gradual economic recovery, an increasing focus on upstream exposures through the trimming of downstream operations and increases in oil prices as boding well for BP. Bob Dudley, the chief executive officer of the company commented that BP would sell two refineries in the U.S. and invest more in oil and gas production.

However, we continue to see near-term headwinds with respect to weak U.S. refining margins and competitive disadvantages versus its European peers. Further, the company depends on property acquisition to expand its resource base. We believe that the company lags in this space in some lucrative regions such as Brazil, West Africa and Asia-Pacific.

Consequently, we retain our long-term Neutral recommendation on the company. BP holds a Zacks #3 Rank (short-term Hold rating).

Earnings Preview: Visa

Global electronic payment processor Visa Inc. (NYSE: V) is scheduled to release its fiscal first quarter results after the market closes on February 2, 2011. The Zacks Consensus Estimate for the first quarter is $1.20 per share, representing growth of about 21.7% over the year-ago quarter.

Following the fourth quarter trends, improved pricing, increased number of processed transactions, higher cross border volumes and a lower share count along with reduced operating expenses are further expected to accelerate growth. However, increasing regulatory compliances, litigation charges and heightened interest costs continue to limit the desired upside.

Agreement with Analysts

Ahead of the earnings release, we do not see much variation in analyst estimates over the past 30 days. A similar trend has been noticed over the past 7 days. Hence, the estimate revision trends and the magnitude of such revisions justify no major changes in the sentiment.

In the last 30 days, only 2 of the 27 analysts have revised their estimates upward for the fiscal first quarter of 2011, although three of the 26 analysts increased their estimates for fiscal 2011, overall providing no directional movement. This implies that the analysts have provided a neutral outlook and do not foresee any significant upward or downward pressure on the results.

However, the neutral approach towards Visa also gives scope for some positive surprises in the first half of 2011, particularly, on achieving better clarity on the potential effects of the ongoing regulations, primarily which requires reduction of interchange fee paid on debit transactions. Moreover, the company is focused on keeping its balance sheet at low risk while also generating strong cash flows, a positive that could increase operational efficiencies by deploying capital through share repurchases and dividend payments.

Magnitude of Estimate Revisions

In the last 90 days, there have not been any significant revisions in the earnings estimate following the fiscal fourth quarter results. However, earnings per share increased by a penny to the current level of $1.20 and $4.79 for fiscal first quarter and fiscal 2011, respectively. However, estimated earnings per share dropped by 6 cents to the current $5.60 for fiscal 2012. This trend reveals a cautious outlook in the analysts' opinion given the lack of clarity once the regulation will be in full implementation by the next fiscal.

Surprise

Going by past trends, we have a slightly mixed opinion about Visa exceeding estimates, given the uncertain regulatory environment hanging around Visa. The company's reported earnings per share exceeded its expectations for all of the last four quarters and has a positive four-quarter average surprise of 4.91%.

Our Take

The Dodd-Frank Act that was enacted in July this year has finally axed the card companies by slashing the interchange fees on debit card transactions. Particularly, card giants, Visa and MasterCard Inc. (NYSE: MA) are reported to be the wary victims of the interchange fee cuts, since being one of the key revenue drivers, this regulation is expected to adversely impact future revenue of the card companies.

During December, the Federal Reserve recommended that the interchange fee on debit transactions, charged by banks on the merchants, should be restricted to about 7–12 cents, against the current average debit card interchange fee of 44 cents or 1.14% of the purchase price. On the other hand, to make matters worse for the card giants, merchants will now have the choice of processing transactions through unrelated networks. A final decision is, however, not expected before April 2011.

These increasing regulatory compliances, competitive pressure, litigation charges and heightened interest costs continue to raise ample caution in the near-term since the adverse financial impact of the recent financial reform remains to be assessed.

However, Visa remains quite strong fundamentally. Moreover, restrictions have further opened up diversification opportunities in the prepaid and eCommerce spheres. While increased free cash flow outlook in 2011 paves way for ample growth opportunities, stock buybacks and dividend increment further enhance investors' confidence. Overall, we believe continued synergies from effective marketing efforts and cost-cutting initiatives along with a healthy market recovery to help drive earnings growth in the long run.

Hence, we currently provide Neutral recommendation on Visa, given the equal measure of caution in the intermediate term. This also corresponds to the Zacks #3 Rank (short-term: Hold).

McGraw-Hill Beats Estimates

The McGraw-Hill Companies Inc. (NYSE: MHP), a publisher and provider of financial information and media services, posted higher-than-expected fourth-quarter 2010 results on the heels of robust performance across Standard & Poor's (S&P's) services and global energy information products. The quarter's results were partially offset by softness witnessed in the education markets.

The quarterly earnings of 55 cents a share beat the Zacks Consensus Estimate of 51 cents, and rose 7.8% from the prior-year quarter. On a reported basis, including one-time items, earnings came in at 50 cents a share, down 5.7% from the year-ago quarter.

The Zacks Consensus Estimate for the quarter remained stagnant prior to the earnings release with only one out 8 analysts following the stock revising the estimate upward in the last 30 days.

McGraw-Hill now expects fiscal 2011 earnings between $2.79 and $2.89 per share. The current Zacks Consensus Estimate for fiscal 2011 is $2.88, which is at the high end of the guidance range.

McGraw-Hill's total revenue of $1,524.1 handily beat the Zacks Consensus Estimate of $1,498 million, and jumped 4.2% from the prior-year quarter aided by growth in the Financial Services segment, offset by a decline at its Education and Information and Media segment.

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