Zacks Bull and Bear of the Day Highlights: CIGNA Corp's, American International Group, Bank of America, Wal-Mart and Apple
CHICAGO, Aug. 16, 2011 /PRNewswire/ -- Zacks Equity Research highlights CIGNA Corp's (NYSE: CI) as the Bull of the Day and American International Group (NYSE: AIG) as the Bear of the Day. In addition, Zacks Equity Research provides analysis Bank of America (NYSE: BAC), Wal-Mart (NYSE: WMT) and Apple (Nasdaq: AAPL).
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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:
CIGNA Corp's (NYSE: CI) second quarter core earnings were fairly ahead of the Zacks Consensus Estimate, as well as the year-ago quarter's earnings. Better-than-expected results were aided by strong earnings from across the board. EPS also benefited from a lower share count compared with the year-ago quarter.
The company is aggressively expanding its international operations, which will likely drive future growth. Moreover, CIGNA has lower exposure to reform risks than other insurers, and thus has an edge with respect to the Healthcare Reform Act. A strong balance sheet and adequate liquidity will further lead to continued share buybacks, thereby contributing to the bottom line.
Our six-month target price of $49.00 equates to about 9.2x our earnings estimate for 2011. We view $0.16 per common share annual dividend as secure, implying an expected return of about 20.0% over that period. This is consistent with our Outperform recommendation on the shares.
We are downgrading our recommendation on American International Group (NYSE: AIG) to Underperform on weak global cues, sluggish insurance dynamics and consistent cash outflow. The lock-in period for stock offering further holds back the attainment of capital flexibility in the near term. Higher restructuring charges and increasing losses from catastrophes, underwriting and investments along with adverse reserve developments are also affecting stock price declines.
Even the second-quarter earnings lagged the Zacks Consensus Estimate and year-over-year results, although operating earnings were impressive year over year based on some core operating stability. Asset disposals and repayment of a chunk of debt appeared favorable for the ROE and book value growth.
AIG is poised to accentuate its operating and capital leverage upon dilution of government stake though it is a farfetched goal due to absence of any growth catalyst. Risks of execution amid intense competition also prevail.
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Is a Recession Priced In?
Second quarter earnings season is almost over, with 459 -- 91.8% -- of the S&P 500 reports in. With the exception of a handful of financial companies, most notably Bank of America (NYSE: BAC), which had a $12 billion negative swing in net income from last year, this has been another great earnings season.
The year-over-year growth rate for the S&P 500 is 12.2%, way off the 17.5% pace those same 459 firms posted in the first quarter. However, it you exclude the Financial sector, growth is 20.5%, actually up from the 19.8% pace of the first quarter.
With nine sectors now done, the sample of remaining firms is very skewed. Retail alone accounts for 54.4% of all remaining expected earnings, and Tech accounts for an additional 28.4%. Wal-Mart (NYSE: WMT) alone accounts for 24.5% of remaining earnings. Revenue growth for the remaining firms is also expected to slow, rising 3.85% among those yet to report, down from 4.82% they reported in the first quarter.
Valuations Compelling
At the micro level, earnings and valuations, provide plenty of reason to be bullish. This is particularly true when one looks at the prevailing level of interest rates. Currently 192 S&P 500 (38.4%) firms have dividend yields higher than the Friday yield on the 10 year T-note (2.25%), and almost two thirds (324, or 64.8%) yield more than the 5-year note (0.95%).
Keep in mind that 116 or 23.2% of the S&P 500 stocks pay no dividend at all, so no matter how far the market falls, they will still have a 0.0% dividend yield. Many of those companies, such as Apple (Nasdaq: AAPL) with its $76 billion cash hoard, could easily pay a dividend if they wanted to. Of the dividend-paying stocks, 50% yield more than the 10-year and 83.4% yield more than the 5-year.
One thing is absolutely certain: the coupon payment on those notes will never go up, while companies have been raising their dividends at a rapid pace of late. Nearly one quarter of the firms in the S&P 500 have raised their dividend at more than a 10% per year rate over the last five years, and those five years include the worst economic downturn since the 1930's. Almost one third of the dividend payers have increased their dividend by more than 10%.
New Recession Priced In
At the levels we reached by mid-week last week, it was clear to me that the market is pricing in not just slower growth, but an outright recession, either underway or just about to get underway. The market rallied strongly on Thursday and Friday when we got some data to suggest that that was not the case.
On Thursday we got the news that initial claims for unemployment insurance fell again, and are now 5,000 below the key psychological level of 400,000. That implies a pick-up in the pace of job creation in August.
Still not too great levels, and we have a very long way to go in bringing down unemployment to acceptable levels (and an even longer way to go in bringing down long-term unemployment), but it is not consistent with a near-term return to actual recession. That notion was further reinforced on Friday, when retail sales, and especially sales excluding autos, came in much better than expected. Not great on an absolute basis, but much better than expected and not consistent with a near term recession.
Despite that reassurance, the economy remains very fragile, and is thus very susceptible to any outside shocks. There is a potential 8.5 on the Richter scale looming in Europe's problems. There is a very real chance that the euro will not even exist in a few years, or if it does, it will be a diminished version where the common currency only applies to Germany and the Netherlands, and perhaps France. The Greeks and the Italians would go back to having drachma and lira. Getting from here to there has the potential for enormous dislocations, and hence big damage to the European economy. That would inevitably spill over to the U.S.
Get the full analysis of all these stocks by going to http://at.zacks.com/?id=2649.
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