Zacks Bull and Bear of the Day Highlights: Plains All American Pipeline LP, Federated Investors, JPMorgan, Wells Fargo and Deutsche Bank
CHICAGO, Oct. 5, 2011 /PRNewswire/ -- Zacks Equity Research highlights Plains All American Pipeline LP (NYSE: PAA) as the Bull of the Day and Federated Investors (NYSE: FII) as the Bear of the Day. In addition, Zacks Equity Research provides analysis JPMorgan (NYSE: JPM), Wells Fargo (NYSE: WFC) and Deutsche Bank (NYSE: DB).
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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:
Plains All American Pipeline LP (NYSE: PAA) maintained its strong performance from the first quarter, with its revenues increasing across the board. Going forward, the partnership expects the strong performance to continue into the second half of 2011, and therefore raised its EBITDA forecast for 2011. This bullishness has also prompted analysts to raise their estimates for this year.
The 2011 Zacks Consensus Estimate has risen to $4.22 from $3.85 in the last 30 days. We believe the partnership's low-risk and stable revenue stream will continue to give its earnings and cash flows a high degree of certainty.
Also, the partnership's strong balance sheet provides ample flexibility for higher distributions to unitholders along with pursuing its internal and acquisition-oriented growth projects. We move to an Outperform recommendation for PAA.
Federated Investors' (NYSE: FII) second-quarter 2011 earnings were in line with the Zacks Consensus Estimate. Results reflected decreased top-line growth, increase in voluntary fee waivers, and increased operating expenses. These negatives were further offset by a rise in fixed income and equity assets as well as higher assets under management (AUM).
The regulatory backdrop, volatile equity markets and slow economic growth are anticipated to keep earnings under pressure. Therefore, we maintained our Underperform recommendation on the stock.
Our six-month target price of $17.00 equates to about 11.0x our earnings estimate for 2011. We view the $0.96 per common share annual dividend as secure, implying an expected negative return of about 4.6% over that period.
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Slipping in Greece
The Greek economy is deeply uncompetitive, and as a result it has been running massive trade deficits since it adopted the Euro. In the process, it has gone deeply into debt to the rest of the world, particularly to the other countries in Europe.
The normal result of deep and persistent trade deficits -- particularly in a small open economy -- would be for the currency to depreciate, and thus make imports more expensive and exports more competitive. However, since Greece does not have its own currency, that adjustment mechanism by definition cannot work. So how could Greece get out of this mess?
- The debt could be forgiven, through a debt exchange program that imposed very steep haircuts on the holders of the debt, and much steeper than have been negotiated so far. That, however, would threaten the solvency of many big European banks (the big U.S. banks like JPMorgan (NYSE: JPM) and Wells Fargo (NYSE: WFC) have minimal direct exposure to Greece; however, they do have substantial exposure to those European banks).
- The Euro could weaken substantially. That would make Europe, and by extension Greece, more competitive versus the rest of the world. However, Greece is only a tiny part of the overall Euro-area GDP, and such a weak Euro would not be in the interest of the core of Europe. Germany and the Netherlands are certainly competitive enough at the current level of the Euro. The key trade-off in weakening your currency is that it tends to lead to higher levels of inflation. Also, since foreign exchange markets are always relative value markets, a weak Euro means a strong U.S. dollar. Greece is not the only country in the world that runs chronic massive trade deficits -- the U.S. runs one that is equal to all the other trade deficits in the world. And a strong dollar is the last thing the U.S. economy needs right now.
- Somehow productivity in Greece could surge, while Greek workers got no benefit from the increase in productivity. That would cause unit labor costs to drop and make the country more competitive. The chances of that happening anytime soon on the scale needed are so low as to approach a mathematical impossibility.
- Greece could continue to pursue a policy of internal devaluation. This is what the core of Europe has been demanding: austerity and more austerity. The idea is that it would push Greek unemployment up to the point where Greeks would be so desperate for work that they would take extremely low wages. Think third-world wages, not low U.S. wages here. That is a very long, slow, and extremely painful process. In the short-to-medium term, it simply depresses the Greek economy more, and that makes it even harder for them to service their debts.
The final option would be for Greece to leave the Euro and go back to the Drachma. That would be a messy divorce. Bank deposits in Greece would be converted to Drachma from Euros, but the value of the Drachma would be far less than the Euro. As people saw that coming, they would all rush to take their money out of Greek banks and put it in banks that would remain on the Euro.
While there is no exact precedent for a country doing this, the best analogy would be what happened to Argentina when it abandoned its currency board, which had effectively pegged to Argentinean Peso to the U.S. Dollar. This would cause very big losses among the European banks, on par with the haircuts discussed above. The key difference would be that Greece would be effectively imposing them, rather than simply trying to get the banks to voluntarily write off billions of Euros.
The core governments of Europe would probably have to step in with something that looks very much like the U.S. TARP program to recapitalize the banks. The German government would have to prop up Deutsche Bank (NYSE: DB), the French would have to prop up Societe General and the program size would probably total as much or more than the U.S. had to deal with in 2008 and 2009.
However, with a super-cheap Drachma, Greece would instantly become more competitive. A hotel room on Crete that currently costs 50 Euros a night now would cost, say, 25 Euros. Germans and French take a lot of vacations, and they would be much more likely to take them in the Greek Isles.
It would not be a painless path for Greece by any means. The cost of anything they imported -- very significantly including oil -- would soar. While lots of others would come to Greece to vacation, no Greek could dream of vacationing abroad. Still, after a rough year or so following the abandonment of the dollar peg by Argentina, the Argentine economy has recovered nicely.
Get the full analysis of all these stocks by going to http://at.zacks.com/?id=2649.
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