Zacks Bull and Bear of the Day Highlights: Aetna, McDermott International, Kellogg, General Mills and Ralcorp Holdings
CHICAGO, Nov. 23, 2011 /PRNewswire/ -- Zacks Equity Research highlights Aetna Inc. (NYSE: AET) as the Bull of the Day and McDermott International (Nasdaq: MDR) as the Bear of the Day. In addition, Zacks Equity Research provides analysis on Kellogg, Inc. (NYSE: K), General Mills, Inc. (NYSE: GIS) and Ralcorp Holdings Inc. (NYSE: RAH).
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Full analysis of all these stocks is available at http://at.zacks.com/?id=2678.
Here is a synopsis of all five stocks:
Aetna Inc.'s (NYSE: AET) third quarter 2011 results exceeded the Zacks Consensus Estimate. Declining utilization, strong performance across all the product lines, disciplined pricing and medical cost trends powered the earnings upside.
Aetna is making very good progress in its Medicare business. The lifting of the CMS sanctions in June and the acquisition of Genworth's Medicare Supplement business will advance its Medicare platform. Aetna is also aggressively looking to generate incremental fee revenues by managing the infrastructure necessary for care organizations. Aetna is growing its international business for diversification benefits.
Moreover, its deployment of $1.2 billion for acquisitions will gear it fully for the changed environment after the implementation of the Health Care law. A solid balance sheet, in-target range of debt and adequate liquidity provide strength.
Following a third quarter earnings miss and disappointing outlook for 2012, we are maintaining our Underperform recommendation for McDermott International (Nasdaq: MDR) shares. The company recently reported lower-than-expected EPS for the September quarter, adversely affected by higher costs and weak activity in the Middle East.
McDermott has already warned that its margins will suffer next year due to lower marine activity and fabrication work. Near-term bookings remain lumpy at McDermott, as the current uncertain environment has hurt the economics of building new oil and gas infrastructure. Additionally, the transfer of the power generation and government operations has left McDermott with a less diversified business, thereby heightening its risk profile.
These factors are reflected in our continued Underperform recommendation on the company's shares. Our $11 price objective reflects 2012 P/E multiple of 10.2x.
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Kellogg Slips to Sell
Following the third quarter 2011 earnings, we have downgraded our recommendation on Kellogg, Inc. (NYSE: K) to Sell from Hold.
Kellogg posted weak third-quarter 2011 earnings of 80 cents per share, which lagged the Zacks Consensus Estimate by 10.1% and the prior-year earnings by 11%, on the back of economic slowdown, increased cost of goods sold, increased supply-chain costs and reinstatement of incentive compensation costs.
The cost of commodities, energy and fuel soared and peaked in the year, exceeding the expectations. Gross margins and operating margins also plummeted by 270 and 310 basis points, respectively, in the third quarter of 2011 due to mounting costs. Besides, the investments in the supply chain infrastructure across the U.S. added to the gross margin pressure, resulting in increased logistic costs, and reduced operating leverage.
Kellogg also expects gross margin to remain under pressure in fiscal 2011 and be down approximately 100 basis points compared to 2010. Kellogg has also narrowed its internal operating profit guidance to a range of down 2% to 4% for the year 2011 due to the impact of third quarter results and expected continued investments in supply chain during the remainder of the year.
Though the company has shown signs of improvement in the third quarter, particularly in the top-line growth, the results do not inspire in a challenging environment. Thus, the company has reaffirmed its 2011 internal sales guidance growth in the range of 4% to 5%. Earnings are also expected to remain flat for 2012.
In addition, Kellogg has a highly leveraged balance sheet, and is focused on continued reinvestment in the brands, as well as optimizing its business model and global organization. All these activities require huge cash investment. Though Kellogg has a strong cash-generating capability, but it is utilized to repurchase shares or pay dividends.
Additionally, Kellogg needs to finance the interest obligations on its long-term debts, which have increased at a 4-year CAGR (2006-2010) of 13%; whereas Kellogg had a total debt of approximately $5.3 billion and total equity of $2.3 billion, at the end of October 1, 2011.
Though the company has provided greater visibility in achieving its long-term profit growth targets with its continued spending on cost-reduction initiatives, we believe that intense competition from other established players and high debt load undermine the company's future growth prospects.
Agreement of Analysts
For the current fiscal 2011, 16 out of 17 analysts covering the stock lowered their estimates over the past 30 days, while 15 out of the 19 analysts reduced their estimates for fiscal 2012. Thus, there are no positive catalysts to drive the stock.
Magnitude of Estimates Revisions
For fiscal 2011, the estimates plummeted from $3.48 to $3.38 over the past 30 days, while the analysts lowered their estimates from $3.78 to $3.57 in fiscal 2012.
Kellogg, which competes with General Mills, Inc. (NYSE: GIS) and Ralcorp Holdings Inc. (NYSE: RAH), holds a Zacks #4 Rank, translating into a short-term Sell rating.
Get the full analysis of all these stocks by going to http://at.zacks.com/?id=2649.
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