Let’s take a look at analysts’ morning notes.
- Upside for Kellogg (K) despite flat volume: While K’s 4Q10 EPS results were poor in an absolute sense, they were somewhat more favourable than the Street had expected. In fact, K hit the Consensus estimate of $0.51 while also absorbing an unexpected $0.07 EPS hit as a result of an impairment charge. While 1Q11 EPS is expected to be lower year over year, and though K still has much to prove to investors, 4Q results along with what we now see as much more defensible EPS stream suggests to us that the worst may have passed.
- Dow Chemical (DOW) has earnings power: Our price target increases by $1 to $45. Consensus forecasts fail to capture the earnings power Dow has during the next 1-3 years. While some of our above consensus forecasts is driven by Dow Coming and Agriculture we suspect a significant portion of our above consensus forecasts is driven by our view on U.S. petrochemical margins. Dow remains a key overweight, in our view.
- Maintain buy on Merck (MRK): New CEO makes choice to invest in long-term growth opportunities, and not to cut enough costs to achieve short-term EPS targets. Company also raising targets for top line growth. MRK withdrew its long term EPS Compound Annual Growth Rate citing industry pressure, vorapaxar disappointment, and the need to invest. Maintain buy rating based on valuation, dividend yield, increased financial flexibility, late state pipeline potential.
- Foot Locker (FL) poised for growth: FL has pulled back 10% since its peak of $19.75 which we think yields a buying opportunity given our views of continuing footwear momentum, our enthusiasm ahead of 4Q earnings and that the pullback has likely been due to sector rotation/inflation fears which don’t seem rational for FL. We are in the early stages of a turnaround as improved store productivity on comps/better apparel margins should continue to raise modest current operation margins.
- Dow Chemical (DOW) has better than average momentum: Dow’s gross profit increased 21% in 4Q while the rest of the U.S. chemical companies that have reported (24 in total) posted a mid-single digit increase in gross profit. We believe Dow lagged in its recovery from the credit crisis because of the Rohm and Hass integration. Dow’s strong cash flow generation has improved its net debt position. Based on net debt and a trailing twelve months EBITDA, its leverage ratio has declined. A combination of increased cash from operations and a favourable ruling on K-Dow could substantially improve these rations and the potential for an increased dividend.
- Looks favourably at CME Group (CME): Global demand for CME’s products continues to grow. Current activity levels within FX and energy remain robust. Longer term, a more volatile interest environment and contribution from the changing regulatory landscape represent a favourable investment backdrop. Although 2011 growth prospects for margins are more diminished the outlook for the core business continues to be positive.
- Blackstone Group (BX) is shaping up nicely: Trends across BX’s three business segments continue to improve. Management fees are poised to rise based on improving capital formation trends, and performance fees along with transaction fees are highly correlated to an improving macroeconomic backdrop.
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