Zacks Analyst Blog Highlights: Gap, Deere, Tractor Supply, Potash, ConocoPhillips and China Petrochemical Corporation

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Mar 01, 2011, 09:30 ET

CHICAGO, March 1, 2011 /PRNewswire/ -- Zacks.com Analyst Blog features: Deere (NYSE: DE), Tractor Supply (Nasdaq: TSCO), Potash (NYSE: POT), ConocoPhillips (NYSE: COP) and China Petrochemical Corporation (NYSE: SNP).

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Here are highlights from Monday's Analyst Blog:

Personal Income Jumps on Tax Cut

In January, Personal Income rose 1.0%, well above the 0.4% rise in December, and a 0.3% increase in November. The increase was far above the 0.3% consensus expectation. However, most of the increase was due to the 2.0% cut in the employee side of the payroll tax.

Payroll taxes, and other contributions to social insurance, are counted as a subtraction from personal income. So if they fall, personal income rises. Of the $133.2 billion increase in overall personal income, $94.9 billion was due to the payroll tax cut.

The components of Personal Income are as important as is the total number. As I noted above, the unusually large jump in January was primarily due to the change in the payroll tax. In total, personal income rose by $133.2 billion, a nice increase from the rise of $56.6 (revised from $54.6) billion in December (seasonally adjusted annual rates, as are all the subsequent numbers on the components of personal income).

Since the reduction in the payroll tax is only for one year, this is not a particularly high-quality source of personal income growth. On the other hand, it is probably of higher quality than government transfer payments (for example Social Security and Unemployment Insurance benefits). Those fell by $11.2 billion in January after increasing by $2.4 billion in December.

In January, private sector wages rose by $14.8 billion, down from a $20.8 billion increase in December. However, there was a big upward revision to the December numbers -- they were originally reported as an increase of $15.5 billion.

Wages in the goods producing sector increased by $10.8 billion in January, up nicely from a $2.5 billion increase in December. Offsetting that, wages in the private service sector were up $4.8 billion versus an increase of $18.2 billion in December. Overall government wages, rose by $1.9 billion after rising $1.0 billion in December.

Private wages and salaries are the most important -- and highest quality -- form of personal income. Government wages have to be paid out of either taxes or government deficits. Government workers do, however, spend their money in the private sector, just like private sector workers do.

Proprietors Income

Another important source of personal income is proprietors income. In other words, what the self-employed and small businesses were earning. That increased by $3.9 billion in January, on top of a $8.2 billion increase in December. Farm proprietors incomes rose by $1.6 billion, on top of a $1.5 billion increase in December. Strong commodities prices have led to a stunning increase in farm incomes. Farm proprietors incomes have risen every month since March, and over that period they are up 64.9%.

The overall strength down on the farm helps explain why the Great Plains states like the Dakotas and Nebraska are weathering the downturn so much better than the rest of the country. It is also a good sign for firms that are tied to the farm economy, such as Deere (NYSE: DE), Tractor Supply (Nasdaq: TSCO) and Potash (NYSE: POT). It also suggests that perhaps Willie Nelson needs to find a different recipient for his charity concerts.

Non-farm proprietors income rose by $2.3 billion, down from a $6.6 billion rise in December. In other words, what we normally think of as small business income is showing signs of getting back on track, but is hardly booming the way farm income is. Farm proprietors income is tiny relative to non-farm at just $58.6 billion versus $1.0339 trillion.

Since June, non-farm proprietors income is up a nice, but hardly exciting 2.6%. Non-farm proprietors income actually peaked back in December of 2006 at $1.1129 trillion, so small business income is still 7.1% below peak levels. On the other hand, it bottomed out in May 2009 at $971.6 billion, so we are now 6.4% above the valley floor.

Conoco in Long-Term Sinopec Deal

Global integrated oil giant ConocoPhillips (NYSE: COP), along with Origin Energy Ltd. entered into a long-term deal with China Petrochemical Corporation (NYSE: SNP), or Sinopec, for the sale of a 15% stake in an Australian gas project. The financial terms of the deal were not disclosed by the companies.

Under the non-binding key commercial terms of the Heads of Agreement, ConocoPhillips-Origin will also deliver liquefied natural gas (LNG) of about 4.3 million tons per annum (MTPA) for two decades to Sinopec.

The stake sale will cut ConocoPhillips and Origin's holdings in the Queensland-based Australia Pacific LNG venture to 42.5% each. Following the alliance with the Chinese oil major––Sinopec––the project is expected to take off in mid-2011 and supply its first cargo in 2015.

The entry of Sinopec into the project will not only lower ConocoPhillips' investment burden, but will also fulfill the growing requirement of customers in China.

The $35.4 billion worth Australia Pacific LNG project is targeted at developing the vast coal-seam gas resources in the Surat and Bowen basins of Australia over the next 30 years. This endeavor also involves the setting up of a 450 km transmission pipeline and a multi-train LNG facility on Curtis Island, near Gladstone.

ConocoPhillips and Origin intend to tap the high demand for natural gas in the Asian belt through this venture. Both companies are focused on building a large-scale new export industry in Queensland. In our opinion, Queensland represents acreage of opportunities for oil and gas companies with bountiful deposits.

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