Zacks Bull and Bear of the Day Highlights: Allstate, United Continental, Tractor Supply, Home Depot and Lowe's

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Oct 22, 2012, 09:30 ET

CHICAGO, Oct. 22, 2012 /PRNewswire/ -- Zacks Equity Research highlights Allstate Corp. (NYSE:ALL) as the Bull of the Day and United Continental (NYSE:UAL) as the Bear of the Day. In addition, Zacks Equity Research provides analysis on Tractor Supply Company (Nasdaq:TSCO), The Home Depot Inc. (NYSE:HD) and Lowe's Companies Inc. (NYSE:LOW).

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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:

Bull of the Day:

We are upgrading our recommendation on Allstate Corp. (NYSE:ALL) to Outperform based on significant reduction in catastrophe losses, claims and operating expenses coupled with enhanced premiums that improved the combined ratio, ROE and book value per share so far in 2012. Also, these factors aided the company's second quarter earnings upbeat, substantially outpacing the Zacks Consensus Estimate.

An appreciated investment portfolio boosted the operating cash flow and liquidity. The agency expansions, ratings affirmation, dividend increment, product restructuring and acquisitions validate Allstate's long-term stability. However, initiatives to improve auto and homeowners margins are yet to show effective results, whereas interest volatility poses risks to Allstate Financial's margins.

Though the current volatile economy will continue to impact results, continued synergies are expected from Allstate's industry-leading position, diversification and pricing discipline. All these should augur growth once the markets regain momentum.

Bear of the Day:

We are downgrading our recommendation on United Continental (NYSE:UAL) to Underperform based on concerns over travel demand and pricing, which is expected to result in weak traffic in the third quarter. The company generated a lackluster performance in the second quarter, missing the Zacks Consensus Estimate and year-ago earnings.

Despite the company's aggressive actions to improve profitability, we believe surging fuel prices and the threat of recession in Europe pose downside risks to the stock. Additionally, high non-fuel costs related to fleet optimization and product initiatives, high unionization, new regulations related to advertising, competitive threats and risks pertaining to the successful Continental integration could hurt the company's profitability going forward.

Thus, we have an Underperform rating with the target price of $18, based on 8x our earnings estimate for 2012. The stock is trading at a discount to the peer group as well as the S&P 500 benchmark, based on the forward earnings estimate.

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Earnings Preview: Tractor Supply

Tractor Supply Company (Nasdaq:TSCO) – a leading retail firm and ranch store brand – is scheduled to report its third-quarter 2012 financial results after the market closes on October 24, 2012. The current Zacks Consensus Estimate, for the quarter, is 67 cents per share reflects a year-over-year growth of 15.00%. The estimates in the current Zacks Consensus range between a low of 63 cents and a high of 69 cents a share. Revenue, as per the Zacks Consensus Estimate, is $1,069 million for the quarter.

With respect to earnings surprises, Tractor Supply has topped the Zacks Consensus Estimate over the last four quarters in the range of 1.85%–11.54%. The average surprise over the last four quarters remained at 5.52%.

Second-quarter 2012, a Synopsis

Tractor Supply's posted earnings of $1.45 per share for the second-quarter 2012 growing over 15% from the year-ago period earnings of 58 cents, primarily driven by strong top-line performance and improved margins. Moreover, earnings were ahead of the Zacks Consensus Estimate of $1.39 per share.

Tractor Supply's second-quarter results benefited mainly from the structural improvements made over the years. This enabled the company to adjust its offerings according to customers' demand and to promptly respond to events, such as the early onset of spring in March 2012.

During the recession, Tractor Supply had suffered setbacks as buyers avoided big-ticket purchases, such as mowers; however, the recent quarters witnessed an uptick in results. The company's impressive merchandising improvement strategy along with solid same-store sales trend resulted in high single-digit top-line growth in revenues. Net sales in the quarter improved 9.6% to $1,291.9 million from $1,178.4 million in the prior-year quarter. However, total revenue missed the Zacks Consensus Estimate of $1,302million.

Encouraged by strong second-quarter results, the company raised its 2012 earnings guidance range to $3.58–$3.66 per share compared with its earlier forecast of $3.52–$3.60 per share.

(For full report on earnings study: Tractor Supply Beats on Bottom Line)

Estimate Revisions Trend

Agreement

We do not see any major estimate revisions at this point. Among the 20 estimates, one was revised upward for the third quarter and fiscal 2012, while no movement was seen in the opposite direction in the last 30 days.

However, over the last 7 days, none of the analysts revised their estimates in either direction for the third quarter as well as fiscal 2012.

Magnitude

Due to a few positive estimate revisions in the last 30 days, the Zacks Consensus Estimate for the upcoming quarter and fiscal 2012 inched up by a penny. However, no movement in estimates has been noticed in the last 7 days for third-quarter as well as for fiscal 2012.

Our Recommendation

We believe that Tractor Supply has successfully tweaked merchandise assortment across its stores, which is in line with the prolonged economic downturn. The company has increased the proportion of less discretionary items, such as animal and pet-related products, while reducing shelf space for certain big-ticket merchandise, such as outdoor power equipment.

Moreover, in an effort to boost margins, Tractor Supply is expanding its portfolio of private label brands and focusing on direct sourcing. The company has set a long-term target of generating 25% of sales from private label brands and 13% from strategic direct sourcing. This provides Tractor Supply with a strong upside potential.

However, sluggish economic recovery along with risk of unfavorable weather conditions affecting farmers' business operations are matter of concern. Moreover, due to intense competition from larger retailers such as The Home Depot Inc. (NYSE:HD) and Lowe's Companies Inc. (NYSE:LOW), Tractor Supply may find it difficult to execute and implement new business strategies, which in turn, may impact its operations adversely.

Further, Tractor Supply currently has a price-to-book ratio of 6.48 and price-to-sales ratio of 1.50, which is substantially above the peer group average of 3.16 and 1.16, respectively. In addition, the stock is trading at a premium to its peer group based on forward earnings estimates. We believe the shares are richly valued, and therefore we remain somewhat apprehensive on the stock.

Get the full analysis of all these stocks by going to http://at.zacks.com/?id=2649.

About the Bull and Bear of the Day

Every day, the analysts at Zacks Equity Research select two stocks that are likely to outperform (Bull) or underperform (Bear) the markets over the next 3-6 months.

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