Zacks Bull and Bear of the Day Highlights: Royal Dutch Shell, PetMed Express, Ford, Kellogg and Wal-Mart

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Jan 31, 2011, 09:30 ET

CHICAGO, Jan. 31, 2011 /PRNewswire/ -- Zacks Equity Research highlights: Royal Dutch Shell (NYSE: RDS.A) as the Bull of the Day and PetMed Express (Nasdaq: PETS) as the Bear of the Day. In addition, Zacks Equity Research provides analysis on Ford (NYSE: F), Kellogg (NYSE: K) and Wal-Mart (NYSE: WMT).

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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:

With the economic rebound showing signs of strengthening and oil prices rallying, we expect integrated oil companies such as Royal Dutch Shell (NYSE: RDS.A) to continue to accelerate revenue and earnings growth over the next few quarters.

Apart from the economic recovery, the group's recent results have also benefited from its operational and production efficiency and contributions from growth programs. Royal Dutch Shell has been able to boost returns and remain competitive by embarking on aggressive cost reduction initiatives, exiting unprofitable markets and streamlining the organization.

We believe that the company offers meaningful long-term upside potential for investors and therefore upgrade Royal Dutch Shell ADRs to Outperform from Neutral. Our $83 price objective reflects a 2011 P/E multiple of 10.6x, within the historical trading range.

Bear of the Day:

PetMed Express (Nasdaq: PETS) reported another disappointing quarter with EPS of $0.20, in line with the Zacks Consensus Estimate although lower than the year-ago quarter's $0.25. Revenues continued to slide with a decline in new order sales and fewer new customers.

Moreover, both gross and operating margins declined driven by higher product and advertising costs. This is a big blow for the company, as it depends on advertising to increase its customer base. Moreover, economic uncertainty is taking a toll on the company, forcing consumers to switch to cheaper alternatives.

We do no expect the situation to improve significantly in the near future. We have lowered our estimates for 2012 and reiterate Underperform recommendation.

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Where the Q4 Growth Came From

Within the consumption of goods, consumption of non-durable goods is about twice as large as the consumption of durable goods. However, since people can defer purchase of durable goods like an auto from Ford (NYSE: F) more easily than they can defer purchase of a box of corn flakes from Kellogg's (NYSE: K), durable goods demand is very volatile.

As a result, durable goods tend to "punch above their weight" in determining is the economy is booming or slumping. Durable goods consumption added 1.48 points to growth, up sharply from an addition of 0.54 points in the third quarter and 0.49 points in the second quarter.

The high and accelerating contribution from durable goods is exactly what we want to see at this stage of the recovery (well actually it would have been nice to see it earlier, but I'll take it now). The sector is only 12.87% of PCE and 9.11% of overall GDP, yet it contributed 46.25% of the overall GDP growth in the quarter.

Non-durable goods are 22.78% of PCE and 16.12% of overall GDP. The sector's contribution to growth rose to 0.78 points in the fourth quarter from 0.39 points in the third quarter and 0.31 points in the second quarter. For a "steady Eddie" part of the economy, this is nice, solid and -- importantly -- sustainable level of contribution to growth.

Overall, the Consumer is doing his and her part in getting the economy rolling again. The strong contribution from the consumer service sector is encouraging. All three parts made solid contributions to growth.

While over the long term we can worry that far too much of the overall U.S. economy is dedicated to Consumption and not enough to Investment and Exports, for right now we want to see the Consumer alive and kicking. Without a doubt s/he was in the fourth quarter.

Trade Deficit & Our "Addiction to Oil"

On the other hand, I would not count on a repeat of this sort of massive contribution again in the first quarter or for 2011 as a whole. About half of our overall trade deficit comes from our addiction to imported oil. Unfortunately, a weaker dollar is not likely to help significantly on this front -- when the dollar weakens, the price of oil tends to rise.

However, if we can start to replace imported oil with domestically produced energy we could substantially boost the overall rate of economic growth. While ultimately we would want to do that with renewable sources, such as wind and solar, they mostly produce electricity, and oil is mostly used as a transportation fuel.

We do, however, have very abundant supplies of natural gas, and the technology for using natural gas as a transportation fuel is already very well established. We need to take steps NOW to transition to the use of more natural gas as a transportation fuel to replace oil.

Ethanol really is not that good of an answer since the production of corn to be made into ethanol for fuel requires using a lot of oil. However if we can move to ethanol made from things like saw grass, or the corn stalks that are left over from the corn harvests, that would be a major step forward. Bio-fuels based on algae are also another promising area.

A weaker dollar would help significantly on the other half of the trade deficit, the part that is made up of all the stuff lining the shelves at Wal-Mart (NYSE: WMT). "King Dollar" is a tyrant and needs to be deposed. It will help on reducing imports as foreign goods become relatively more expensive and producers fill demand from domestic production. That does not happen overnight, however.

The trade deficit is a far bigger economic problem than is the budget deficit, particularly over the short and intermediate term. The fact that we are making significant progress in bringing it down is extremely welcome news.

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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