Zacks Bull and Bear of the Day Highlights: Caterpillar, Eastman Kodak, Goldman Sachs, J.P. Morgan and Lockheed Martin
CHICAGO, May 13, 2011 /PRNewswire/ -- Zacks Equity Research highlights: Caterpillar Inc. (NYSE: CAT) as the Bull of the Day and Eastman Kodak (NYSE: EK) the Bear of the Day. In addition, Zacks Equity Research provides analysis on Goldman Sachs (NYSE: GS), J.P. Morgan (NYSE: JPM) and Lockheed Martin (NYSE: LMT).
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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:
Caterpillar Inc.'s (NYSE: CAT) first-quarter EPS jumped to an all-time quarterly record of $1.84 from $0.36 in the year-ago quarter, driven by higher sales volume. Revenues surged 57% to $12.95 billion due to continued economic growth and improvement in machine demand.
For 2011, Caterpillar expects revenues in the range of $52 billion to $54 billion and EPS of $6.25 to $6.75, the highest profit in the company's history. Caterpillar's strong brand name, pricing power and global dealer network enable it to take advantage of the growing need for infrastructure development worldwide.
The company's planned capital expenditure of $3 billion will boost its long-term potential. The Bucyrus acquisition will position Caterpillar as the #1 mining equipment manufacturer in the U.S. We have upgraded our recommendation from Neutral to Outperform based on its record first-quarter performance and increased guidance.
We maintain an Underperform recommendation on Eastman Kodak (NYSE: EK) on the basis of a competitive market situation, where the company encounters aggressive price competition for all its products and services. The pressure of overcapacity in film industry and digital transition also poses a risk.
The company's huge exposure to volatile products is also a matter of concern as the rise in raw material prices and currency fluctuations may affect profitability. Moreover, Kodak's huge dependence on third party manufacturers and external suppliers may impact its product reliability and raise its cost.
We maintain our Underperform recommendation, which indicates that the stock will perform below the broader market. We are using estimated book value per share of $0.031 and P/B multiple of 81.2x to arrive at a target price of $2.50.
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Debt-Ceiling Insurance Needed?
I am getting increasingly concerned that Congress will not pass an increase in the debt ceiling before it is too late and the U.S. Government will default, at least temporarily, on its obligations. To be clear, I do not think this is the most likely outcome -- not by a long shot. However, the odds of it happening are no longer negligible.
If this were to happen, the results could well be disastrous. After all, T-notes are considered the safest investments in the world, at least with respect to getting your principal back and the interest payments made on time; they are always subject to interest rate risk. They are the very bedrock of the world financial system.
What This Would Mean For...Just About Everything
The U.S. government is a far more important player in the world financial system than Lehman Brothers or Bear Stearns ever dreamed of being. Heck, the U.S. government is even more important than Goldman Sachs (NYSE: GS) or J.P. Morgan (NYSE: JPM).
Yes, the Treasury has enough revenue coming in from tax collections to be able to service the debt, if it were to place paying interest payments at the front of the line. However, to drop overall spending to the current level of tax revenues overnight would be a massive shock to the system. Bond holders in China might get paid, but what about the soldiers fighting in Afghanistan? Would Social Security checks go out on time?
Would doctors and hospitals be reimbursed for the Medicare services they performed? Would Lockheed Martin (NYSE: LMT) get paid on time for the aircraft they are making for the Pentagon? Will we have to release prisoners from Federal Prison? Will Pell grants still go out, and will new student loans be made? Will the college students depending on that funding have to drop out of school?
Worse Than the Financial Collapse
The immediate reduction in federal spending would be about $1.3 trillion. That is almost 10% of GDP. In the GDP accounting, that would cause approximately a 10% drop in real GDP. To put that into perspective, the drop in real GDP from the peak of the last business cycle in the fourth quarter of 2007, to the low point of the recession in the second quarter of 2009, was just 4.14%.
If Congress were to let the debt ceiling be hit, the drop in the stock market would likely be even worse than the decline we suffered in the second half of 2008 and into 2009. Based on strong earnings growth -- and growth that has been significantly better than expected -- the market has largely recovered from that drop.
I don't think the market is particularly overvalued trading at just 13.9x expected 2010 earnings (S&P 500, bottom up expectations of $96.75) and just 12.2x 2012 expectations (bottom up estimate of $109.79). Estimates have been rising in response to the better-than-expected earnings, not just for this year but for next year as well, with about twice as many upward revisions as cuts over the last four weeks. The earnings yields of 7.19% and 8.20% -- based on 2011 and 2012 earnings, respectively -- are extremely attractive relative to the 10-year T-note of just 3.19%.
In other words, the underlying fundamentals of the market are still sound. However, it does not look like the market has priced in the possibility of a disaster. Make no mistake, that is exactly what a failure to raise the debt limit would be.
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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