Switzerland-based pharmaceutical company, Novartis AG (NVS) recently announced positive phase III data from the GLOW 2 study of its pipeline candidate NVA237. The candidate is being studied for the treatment of chronic obstructive pulmonary disease (COPD). The study showed rapid improvement in lung function and symptom relief over one year in COPD patients.

Data from the phase III GLOW 2 study showed that once-daily NVA237 had a rapid onset of action at the first dose, which sustained 24-hour bronchodilation over 52 weeks.

The study also revealed that the once-daily NVA237 was better than placebo in improving lung function, symptom relief and quality of life, while reducing exacerbations. It also increased the percentage of days with no symptoms during daytime.

NVA237’s efficacy in increasing lung function, improving COPD symptoms and reducing exacerbations was found to be similar to open-label tiotropium.

Novartis submitted NVA237 for approval in Europe with the proposed brand name of Seebri Breezhaler. Novartis also plans an early 2014 U.S. filling. Notably, NVA237 was submitted for regulatory approval in Europe and Japan during the third and fourth quarters of last year, respectively. Novartis has a co-promotion agreement with Eisai and Co. Ltd (ESALY) in Japan.

Our Recommendation

Though we are pleased with Novartis’ wide range of products and its efforts to diversify further, we prefer to remain on the sidelines in the long term. We remain concerned about the patent expirations of key drugs like Femara and Diovan. Thus, we have a Neutral recommendation on Novartis. The company carries a Zacks #4 Rank (“Sell” rating) in the short run.

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Alcoa Inc. (AA) announced that it has begun construction of its $90-million, 115,000 square-foot greenfield aluminum lithium expansion project of Lafayatte, Indiana facility that will produce state-of-the-art aluminum lithium alloy. The new facility is expected to start production by the end of fiscal 2014. The company’s investment in the facility is supported by the Indiana Economic Development Corporation.

The newly introduced alloy will help airplane manufacturers produce relatively light weight wings and fuselage without resorting to composite materials. Moreover, the expansion of the facility is expected to create around 75 permanent jobs and about 150 temporary jobs during the period of construction.

The primary target of the company is to help the original equipment manufacturers reduce fuel consumption per seat mile. The expansion will help the company produce more than 20,000 tonnes of aluminum lithium, and cast round and rectangular ingot for rolled, extruded and forged applications.    

Alcoa released its first-quarter 2012 results in April. The company reported earnings of 9 cents per share in the quarter in contrast to a loss of 18 cents in the fourth quarter of 2011. However, it came below the earnings of 27 cents a share recorded a year ago.  

Excluding restructuring charges and other items, Alcoa's profit came in at 10 cents per share, beating the Zacks Consensus Estimate of a loss of 4 cents per share. The impressive results coupled with the company’s bullish outlook pushed up its stock price by 5.4% to $9.82 in after-hours trading. Higher production and volumes as well as improved market conditions drove Alcoa’s results.

Quarterly revenues increased by 0.3% sequentially to $6,006 million and edged up 0.8% over the prior-year quarter. It surpassed the Zacks Consensus Estimate of $5,735 million. The increase in revenues was driven by strong results in Global Rolled Products and Engineered Products and Solutions.

For 2012, Alcoa expects global aerospace market to grow by 3 percentage points to 13% to 14%. The company also expects global growth for the automotive sector to be in the range of 3%-7%, commercial transportation in the range of 1%-5%, packaging in the range of 2%-3%, building and construction in the range of 2.5%-3.5%, and industrial gas turbine in the band of 1%-2%.

The company believes that there will be a deficit in global aluminum supply in 2012. Besides, Alcoa reiterated its expectation that aluminum demand will grow by 7% globally in the year.

Pennsylvania-based Alcoa Inc. is among the world’s leading producers of primary and fabricated aluminum and alumina. It competes with Aluminum Corporation Of China Limited (ACH) and RioTinto plc. (RIO).

We believe that the Alcoa’s cost reduction measures are offsetting the negative impact of higher energy and raw material costs on its profitability to some extent. The company aims to reduce costs in its upstream business and achieve record profits in its mid stream and downstream businesses. It is also divesting underperforming assets through its restructuring program.

Currently, the stock maintains a Zacks #3 Rank, which translates into a short-term (1 to 3 months) “Hold” rating and we have a long-term recommendation of “Neutral” on the shares of the company.

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Standard Motor Product Inc. (SMP) announced that its Board of Directors has approved the repurchase of an additional $5 million of common stock under the existing share repurchase program. The newly approved authorization is an addition to the previously completed $5 million repurchase program authorized by the Board of Directors on August 25, 2011.

Standard Motor will repurchase the shares periodically in the open market or through private transaction. It will be funded by the company’s revolving credit facility.  

The repurchased shares will be considered as treasury stock and will be used for general corporate purposes including the plan for equity compensation. However, the repurchase program can be stopped or suspended at any point of time.

Standard Motor, based in Long Island City in New York was founded in 1919. It is one of the leading manufacturers, distributors and marketers of automotive replacement parts in the U.S. Further it enjoys strong brand recognition globally.

Standard Motor is in an advantageous position due to the recent acquisition of Compressor Works, which is a manufacturer of Temperature Control products with a capacity of $60 million. The acquisition will lead to cost savings and boost earnings of the company in 2012. However, strong competition may ruin the company’s margins. Its competitors include Visteon Corp. (VC) and Denso Corp.

As a result, the company retains a Zacks #3 Rank, which translates into a short-term (1 to 3 months) “Hold” rating and we have a long-term (more than 6 months) “Neutral” recommendation on the stock.

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Costco Wholesale Corporation (COST), one of the leading U.S. warehouse club operators, is slated to report its third-quarter 2012 financial results on Thursday, May 24.

The current Zacks Consensus Estimate for the quarter is 87 cents a share that reflects a growth of 8.8% from the prior-year quarter’s earnings. The estimates in the current Zacks Consensus range between a low of 81 cents and a high of 90 cents a share. The Zacks Consensus revenue estimate is pegged at $22,737 million for the quarter under discussion.

Recap of Second-Quarter 2012

Costco’s second-quarter 2012 earnings of 90 cents a share came ahead of the Zacks Consensus Estimate of 88 cents, and rose 13.9% from 79 cents earned in the prior-year quarter.

The increase in the bottom line was buoyed by double-digit growth in the top line on the back of improved sales of discretionary items, asconsumers seeking discounts started flocking to warehouse clubs.The company’s international operations have been the major driver.

The warehouse retailer’stotal revenue, which includes net sales and membership fee, climbed 10% to $22,967 million from the prior-year quarter, and surpassed the Zacks Consensus Estimate of $22,737 million. Net sales jumped 10.1% to $22,508 million, whereas membership fee rose 7.7% to $459 million.

Costco’s comparable-store sales for the quarter rose 8%, reflecting a comparable sales increase of 8% both at its U.S. locations and international divisions.

Zacks Agreement & Magnitude

The Zacks Consensus Estimate for the third quarter hasn’t shown any movement in the last 30 days, as the upward and downward revisions made by analysts neutralized the impact. Of the 22 analysts following the stock, one analyst revised the estimate upward and another analyst lowered the same in the last 30 days. In the last 7 days too, the Zacks Consensus Estimate remained constant, since an upward revision in the estimate made by 1 analyst did not have a substantial impact. None of the analysts trimmed their estimates in the last 7 days.

Mixed Earnings Surprise History

With respect to earnings surprises, Costcohas missed, met as well as topped the Zacks Consensus Estimate over the last four quarters in the range of negative 0.9% to positive 2.3%. The average remained at positive 0.7%. This suggests that Costco has outperformed the Zacks Consensus Estimate by an average of 0.7% in the previous four quarters.

In the second quarter of fiscal 2012, the earnings beat the Zacks Consensus Estimate by 2.3%, whereas in the first quarter it met the Estimate. In the fourth quarter of 2011, the earnings missed the Estimate by 0.9%, however, in the third quarter it came in line with the same.

Closing Comment

Costco continues to be a dominant retail wholesaler based on the breadth and quality of merchandise it offers. The company’s strategy to sell products at heavily discounted prices has helped it to sustain growth in beleaguered economic conditions as cash-strapped customers continue to reckon Costco as a viable option for low-cost necessities. Having delivered consistent comparable-store sales growth, Costco is strongly positioned in the warehouse club industry.

However, Costco faces stiff competition from Target Corporation (TGT) and Sam’s Club, a division of Wal-Mart Stores Inc. (WMT), which follows a similar business model that pushes through high volumes of merchandise at low prices in membership-only warehouse clubs. Thus, aggressive pricing to gain market share and drive traffic amid stiff competition, may depress sales and margins.

Based on the pulse of the economy, we believe that budget-constrained consumers will remain watchful on their spending and look for discounts. Consequently, we could see competitive pricing, compelling products and innovative ways to attract shoppers.

Given the pros and cons, we maintain our long-term “Neutral” recommendation on the stock. Moreover, Costco holds a Zacks #3 Rank that translates into a short-term “Hold” rating, and correlates with our long-term view.

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Tech Data Corp. (TECD) reported fiscal first quarter 2013 earnings of $1.24 per share, which surpassed the Zacks Consensus Estimate of $1.17 and increased 20.4% year over year.

Quarter Details

Total revenue in the quarter decreased 6.9% year on year to $5.89 billion and missed the Zacks Consensus Estimate of $6.18 billion. Unfavorable foreign currency negatively impacted the top line by 4.0%. Also, revised representation of sales of vendor warranty services and certain fulfillment contracts had a 3.0% negative impact on the quarter’s result.

Net sales in North America and Latin America (representing 42.0% of total sales) dipped 6.0% to $2.5 billion. Excluding Brazil and Columbia and modification in presentation of vendor warranty services and certain fulfillment contracts, sales edged up 2% in the quarter. Net sales in Europe (representing 58.0% of total sales) dropped 7.0% to $3.4 billion. Excluding modification in presentation of vendor warranty services and certain fulfillment contracts, sales inched 1.0% higher.

Gross profit decreased 4.0% year over year to $320.2 million. Gross margin was 5.4% compared with 5.2% in the prior-year quarter. Gross margin expanded primarily due to modification in presentation of vendor warranty services and certain fulfillment contracts.

Selling, general & administrative (SG&A) expenses in the reported quarter were $239.3 million, down 7.1% year over year. This yearly decrease was due to weakness in the euro and proceeds from legal settlement worth $3.7 million.

Reported operating income increased 6.7% year over year to $80.9 million. Operating margin increased from 1.20% reported in last year to 1.37% on the back of lower operating expenses.

At quarter end, the company had approximately $447.0 million in cash compared with $505.2 million in the previous quarter. Total debt at the end of the quarter was $88.7 million versus $105.8 million in the prior quarter. Cash provided by operations during the quarter totaled $8.0 million. During the quarter, Tech Data purchased approximately 783,000 shares for $42.0 million.

Outlook

Tech Data expects sales to remain flat sequentially for America and Europe in local currencies during the second quarter of 2013.

Recommendation

Tech Data, which distributes products manufactured by Apple Inc. (AAPL) and Hewlett-Packard Co. (HPQ), expects IT spending to remain sluggish in fiscal 2013. We believe that Tech Data faces a number of headwinds in the near term, including a volatile European market (approximately 58.0% of revenue), lack of visibility in government spending in the U.S. and the negative effects of the floods in Thailand, which is expected to hurt PC shipments in 2012.

However, we believe that the company's profitability will be driven by higher HDD pricing in the near term. Tech Data's strategy of shifting resources from lower-performing regions to higher-growth regions and cost reductions are expected to drive the long-term growth.

Thus, we maintain our long-term Neutral recommendation on the stock. Currently, the stock holds a Zacks #4 Rank, implying a short-term ‘Sell’ rating.

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The Federal Reserve Bank of New York (“Fed”) postponed the sale of assets under the Maiden Lane III portfolio, acquired from American International Group (AIG), as a part of its strategy to rescue the company from a financial downturn. However, Fed refused to disclose any reason for the delay.

A probable reason for putting the asset sale on hold could be the requirement for greater transparency in the sale process by other brokers and dealers. However, the asset disposal has impacted the company’s share price, which is already on the wane.

Fed rendered BlackRock Inc. (BLK) with the responsibility of auctioning off these assets. The participating brokers and dealers were- Credit Suisse Group AG (CS), Morgan Stanley (MS), Goldman Sachs (GS), Merrill Lynch, the broker-dealer unit of Bank of America Corp. (BAC), Citigroup (C), Nomura Holdings (NMR), Barclays Capital (BCS) and Deutsche Bank (DB). The last date for submitting bids for assets worth $1.67 billion was May 17.

Earlier this month, Fed announced the sale of 16% of AIG’s bad assets valued at $7.5 billion to Barclays Capital and Deutsche Bank for an undisclosed amount. Maiden Lane III portfolio was created in 2008 to provide AIG with $24.3 billion in cash. This was also a part of $182 billion fund approved by the government as a bailout for the company.

Fed conducted a number of auctions earlier this year to sell off AIG’s assets, thereby shedding its residential mortgage-backed securities completely. Recently, it sold TRIAXX collateralized debt obligations, a part of the Maiden Lane III portfolio to Merrill Lynch for an undisclosed price. Presently, AIG has $8.996 billion in rescue loan dues, according to Fed and AIG filings.

The year has not been favorable for AIG given its vigorous asset disposal program for repaying the government debt. Moreover, despite raising funds in the past few quarters and repaying a chunk of its debt, AIG is not yet flexible with respect to capital. However, we expect the company to benefit from its scale of operations and economic recovery.

AIG currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. We also maintain our long term ‘Neutral’ recommendation on its shares.

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Kraft Foods, Inc. (KFT) recently announced that the U.S. Internal Revenue Service (“IRS”) issued a ruling which approves the tax free status to its pending spin-off into two independent public companies.

Kraft Foods is in the process of separating into two independent public companies: a high-growth global snacks business and a high-margin North American grocery business. Global snacks will consist of the current Kraft Foods Europe and Developing Markets units as well as the North American snacks and confectionery businesses. The North American grocery business would consist of the current US Beverages, Cheese, Convenient Meals and Grocery segments and the non-snack categories in Canada and Food Service. The spin-off is expected to be completed before the end of this year.

Following the spin-off, the North American grocery business, which includes popular brands like Oscar Mayer meat and Kraft cheese, will be an independent, public company and will be called Kraft Foods Group, Inc. The Global Snacks unit will be named Mondelez International, Inc.

As per the ruling which will confer tax free status to the spin-off, neither the shareholders nor the company will be taxed on distribution of shares of the new grocery company, Kraft Foods Group. Any cash paid to set off the fractional shares will be taxable as capital gain to the shareholders.

Our Recommendation

We currently have a Neutral recommendation on Kraft Foods. The stock carries a Zacks #3 Rank (a short-term ‘Hold’ rating).

Overall, we are encouraged by Kraft’s strategy of continued cost management, price increases, expansion into emerging markets and continued strong momentum from its designated Power Brands. Further, the split of its North American business is expected to allow Kraft to focus on its distinct strategic priorities and allocate resources optimally. However, we remain concerned about rising input costs and vulnerability to currency translations.

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Dow Chemical Company’s (DOW) wholly owed subsidiary Dow AgroSciences, introduced genetically modified corn strain called POWERCORE in Brazil.  POWERCORE is the first of its kind in Brazil and will prevent pests in corn.

POWERCORE contains five genes stacked in corn for increasing its productivity. It will boost corn yield between 5% and 10% depending on the technological capabilities and weather conditions. The biggest advantage that the Brazilians will get by applying POWERCORE is that the refuge area will be reduced to 5% from 10%.

DOW is a Michigan-based chemical company, whose products are used across a broad spectrum of industries. In the first quarter of 2012, the company posted earnings of 61 cents a share (excluding specific one-time items), surpassing the Zacks Consensus Estimate of 59 cents. However, it was below the year-ago adjusted earnings of 82 cents.

Revenues dropped marginally year over year to $14,719 million, lagging behind the Zacks Consensus Estimate of $15,342 billion. Double-digit growth across agricultural and feedstock/energy businesses were masked by declines in performance materials and performance plastics franchises. 

The Agricultural Sciences division posted sales of $1.8 billion in the quarter, up 14% from the year-ago period. Sales volume increased 12% and price rose 2 % for the division.

Though Dow did not provide any specific financial guidance, it believes economic recovery will gain momentum in the second quarter and the remainder of the year. The company expects to meet its short- and long-term targets irrespective of economic conditions. Moreover, Dow sees an improving U.S. economy citing tailwind from the nation’s rich access to low-cost natural gas. Further, it benefits from strong fundamentals in agriculture and food markets.

However, weaknesses in the electronics and construction end-markets may sustain into the second quarter. Moreover, the company will continue facing challenges in Western Europe due to weak demand and the sovereign debt crisis.

Dow faces stiff competition from EI DuPont de Nemours & Co. (DD). Currently, the stock retains a Zacks #3 Rank, indicating a short-term “Hold” rating and we have a long-term “Neutral” recommendation on the shares of the company.

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We are upgrading our recommendation on Willis Group Holdings plc (WSH) to Neutral from Underperform on the back of solid first quarter results that benefited from improved top line coupled with lower expenses.

Counting on the positives, organic growth in commissions and fees, which forms the major component of Willis’ revenue, continues to post positive numbers. Growth of 2% in the first quarter was driven by strong new business growth and improving premium rates along with other favorable market factors.

Also, the company pursues strategic acquisition, which continues to aid its performances. Willis Italy acquired Broking Italia SRL to augment its presence in Italy. With solid retention levels, new business growth and strategic acquisitions, we expect the company’s top line to increase further.

In order to reduce operating expenses Willis undertook a cost saving initiative in 2008. The operational review was completed in 2011 and cost the company $180 million. Willis expects cost savings of $135 million in 2012, up from approximately $115 million to $125 million expected earlier. 

Willis Group has consistently tried to enhance its shareholders value via dividend increase as well as share buyback. The board has authorized a 3.8% hike in its dividend besides approving a share buyback authorization worth $100 million. With a solid financial position, we expect the company to continue paying back shareholders, thereby retaining investor confidence in the stock. 

On the flip side, The Loan Protector business continues to experience a dip in revenues, adversely impacting the North America segment. The company expects weak performance at the Loan Protector business to continue in 2012.

The company has been experiencing decline in investment income over the past few years, a trend that continued through 2011 and into the first quarter of 2012, due to lower average interest rates. We expect investment income to remain under pressure in the near term as interest rates continue to witness sharp declines across the globe. Nevertheless, Willis Group’s forward hedging program to some extent offset the effect of low interest rates.

The quantitative Zacks #3 Rank (short-term Hold rating) for the company indicates no clear directional pressure on the stock over the near term.

Headquartered in London, United Kingdom, Willis Group Holdings plc and its subsidiaries provide a broad range of insurance brokerage, reinsurance and risk management consulting services to its worldwide clients, both directly and through its associates. Its major competitors are Arthur J Gallagher & Co. (AJG), Aon Corporation (AON) and Marsh & McLennan Companies Inc. (MMC).

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Hormel Foods Corp. (HRL) will be reporting its second-quarter 2012 earnings on Wednesday, May 23, 2012.

The current Zacks Consensus Estimate for earnings per share is 42 cents, representing an annualized growth of 3.86%.  

With respect to earnings surprises over the trailing four quarters, HRL outperformed the Zacks Consensus Estimate in two quarters and was in line in the rest.  Average earnings surprise was 2.62%, implying that the company outperformed the Zacks Consensus Estimate by the same magnitude over the last four quarters.

First Quarter 2012 Highlights

On February 23, Hormel Foods Corporation posted its financial results for the first quarter of 2012 with earnings per share of 48 cents, down 13% compared with 55 cents in the prior-year period and in line with the Zacks Consensus Estimate.

Net earnings reached $128.4 million, down 14% from $148.8 million reported in the first quarter of 2011.

Net sale were $2,039.4 million, up 6.1% y/y, but slightly missing the Zacks Consensus Estimate of $2,047 million. The year-over-year increase was driven by four of the company’s five segments registering sales gain in the quarter. International business also contributed to growth, fueled by strong export sales.

Agreement of Estimate Revisions   

In the last 30 days, one analyst decreased the company’s earnings per share estimates for the second quarter of 2012. However, none increased the same as there was no catalyst for such change. For fiscal 2012, none of the analysts increased or decreased their estimate, and followed a similar trend for fiscal 2013.

Magnitude of Estimate Revisions   

Estimates over the last 30 days remained static at 42 cents per share for the second quarter of 2012.

Estimate for fiscal 2012 remained static at $1.82 over the last 30 days while that for fiscal 2013 showed a similar trend at $1.95. These estimates represented a year-over-year growth of 4.50% and 7.00% for 2012 and 2013, respectively.

Our Take   

Hormel is likely to post encouraging results in the second quarter of 2012 based on the rising prices of its value-added food products. The company’s portfolio of product mix alongside its persistent strategies of retail penetration, brand building and promotional efforts appear impressive.

The company faces stiff competition from ConAgra Foods Inc. (CAG), Kraft Foods Inc. (KFT), and Tyson Foods Inc. (TSN).

We currently maintain a long-term Neutral recommendation on the stock. Hormel has a Zacks #3 Rank, which translates into a short-term (1-3 months) ‘Hold’ rating.

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