Friday, September 23, 2011

Chesapeake Energy Dips 8%

Chesapeake Energy closed down big at near $27.00 Thursday, while oil prices were hit hard on a dismal global outlook. The prospective global economy was affected by weak manufacturing data in Europe and China, forcing traders to seek safer assets. Light sweet crude fell to $81.41 a barrel, while the U.S. dollar rose against a basket of major currencies, potentially hurting future exports for the U.S. Very weak future guidance by the Fed, along with the announcement of the government to carry out "Operation Twist" lead investors to believe that the current economic downturn would not be going away anytime soon.
North American natural gas production has been rapidly increasing, but prices have been declining very sharply as the demand for this resource has just not been there for consumers. The price of this gas has been cut 50% from 3 years ago. This is mainly due to the discovery of new unconventional drilling methods, which have heavily increased production. Stabilizing prices in the upcoming years, along with decreased production should hopefully be able to increase demand and profits for the short term, while a push towards cleaner energy should propel the natural gas industry going forward even further. President Obama has said that natural gas has "enormous" potential as a clean energy alternative to oil. This has lead Chesapeake to increase shale drilling in Canada and in many parts of the U.S., while it is also looking for partners and investors to help with the turnover in certain gas plays. I believe that the natural gas industry going forward will be extremely beneficial to Chesapeake and I feel that they are set up very well to profit from its success.

-Cody Aguado

JOYG Down 9.41 %

The global economic worries have been responsible for JOY Global price worries. Alpha Natural Resource and Walter Energy, recent pessimistic forecast on Coal shipments have upset the market in the last few days.

The focus has shifted to Metallurgical Coal and Iron ore usage, which are crucial in the coal mining market. Metallurgical Coal (Coke) plays a crucial role in the development of iron and steel around the globe. Coke is used to smelt iron ore and other iron bearing materials in blast furnaces, acting as a heat and chemical reducing agent, to produce steel and other hot metals. Approximately 66 % of all steel is manufactured using this method. The recent drop in demand for steel in Asia has been responsible for the lack of demand in coke. Asia’s drop in demand may be a sign of slower growth in this region.

Global prices for iron ore may fall 29 percent to an average $123 a metric ton in 2015 from a record $173 this year, according to the median estimates of 10 analysts surveyed by Bloomberg News. Analyst from Goldman Sachs, are claim that there will be a drop in profitability for all Mining companies.

Despite these worries, Mike Sutherlin, CEO of JOYG, remains optimistic on growth in the International markets. He highlighted the Chinese markets and possibility for expansion In India. However, he did not like the growth prospects for the United States. Right now there is potential upside of 64.0 percent for shares of Joy Global based on the current price of 63.55 and the analysts’ consensus price target of $104.23.

Joy Global closed at 63.81(-6.63,-9.41%).


Wednesday, September 21, 2011

Alcoa Slides

Over the past two months, Alcoa Inc. (AA) has significantly underperformed expectations and is currently trading well below our stop-loss of $12.50. We believe this poor performance can be attributed to lack of growth in the global economy and further concerns about the future of where the economy is heading. Although AA has struggled, we believe the company has taken initiatives to continue to maintain their earnings through 4Q11 and has positioned themselves well to take advantage of economic growth in 2012 and 2013.

Most recently, Alcoa has released plans to put $300M into their Iowa flat rolled aluminum factory in anticipation of further demand from the automotive industry. Major automotive manufacturers as well as airline manufacturers are making the move to aluminum from steel, as they are looking for a more cost-effective solution to steel. Aluminum offers a light-weight alternative that will provide for greater fuel efficiency without sacrificing strength. As of now, automobiles are made with 300 lbs. of aluminum on average. Some experts are anticipating that number will climb to 500 lbs. in the next 10 years. This increase in demand will be a strong driver for Alcoa's top line growth. As well as expanding their Iowa factory, AA reached an agreement with China Power Investment Corp. to develop high end engineered aluminum products to satisfy demand within the automotive, aerospace, packaging, and consumer electronics divisions.

Alcoa also announced the reorganization of their midstream Global Rolled Products business to tap into growth in emerging markets. The shift will allow the company to focus on five global markets: aerospace, ground transportation,packaging, consumer electronics, and defense. As opposed to their prior approach which focused on regions, this approach will allow them to capitalize on growth ahead in a specific end market.

We currently feel that the long-term outlook for Alcoa outweighs the short-term loss we are incurring in our portfolio. Alcoa will release earnings on 10/12/2011. We will continue to monitor AA closely leading up to earnings to ensure that it is in the best interest of our portfolio to maintain our position.

-Jeremy Pellizzari

Coal Outlook Burns JOYG; Typhoon Roke Slams Japan

Coals dismal news has played a key role in the fall of Joy global stock in the last two days. The stock was trading at 70.44 (-5.43,-7.16%) at the close. There is much stipulation that companies in the coal market may have to readjust their forecasts. US companies have seen boosted production in the recent months by strong exports in Japan and South Korea, following floods in Queensland which reduced exports to the region from Australia. Japans lack of hope in Nuclear energy has boosted the usage of coal, as well.

Around the Coal Market:
Alpha Natural Resources (ANR), one of the largest coal suppliers to the United States, adjusted their coal shipment expectations for the full year of 2011, to a range of 102.5 million tons to 109.5 million tons. The company had previously forecasted shipments of 104 million tons to 112 million tons. Both lower metallurgical coal* exports and lower output from mines have impacted the outlook. Alpha closed at 22.30(-4.62, -17.16%).

Walter Energy also predicts weaker metallurgical coal activity in their forecast. Walter see’s consolidated net income per share of $1 to $1.16, where analysts were expecting $3.23.

Major railroad companies CSX, Norfolk Southern, and Union Pacific all slid from this report as well. At 2pm, Typhoon Roke slammed Japan and would later be downgraded to a tropical storm. However, the country has been in recovery mode since March following the devastating Tsunami in late February.

With the combined effects of natural disasters and poor coal outlook, there is some speculation regarding the growth of Asia. Analysts feel that the once proclaimed hot Asian steel market is cooling.

*Metallurgical coal is critical in the steelmaking process. The majority of the world’s raw steelmaking capacity is now in Asia.


Thursday, September 15, 2011

HIG: Upgraded, Despite Irene

Yesterday, both Stern Agee and Credit Suisse upgraded The Hartford (HIG) to buy from neutral.

John Nadel, who has been critical of the stock in past, upgraded HIG because, “Subtracting net debt from the holding company, net statutory capital stands at $14.3 billion as of the second quarter, 2011, or $32.05 per actual common share outstanding,” the analyst said. “If we assumed all warrants/converts that were in the money and were fully exercised, net statutory capital per fully diluted share would total $29.33, again as of the second quarter.” Nadel’s new target price is $29.

Credit Suisse added, “life insurance stocks have traded very poorly thus far in 2011, despite the fact that they don’t face the same level of capital, liquidity, and regulatory constraints as the large banks.”

These upgrades come after HIG announced that Q3 EPS would be impacted by the cost of hurricane Irene. The Hartford “expects pretax catastrophe losses for July and August of $150 million to $250 million, of which $75 million to $175 million comes from Irene. An increase from the third quarter of 2010, in which no hurricanes made landfall in the United States and catastrophe losses were $13 million.”

HIG closed at $18.92, up 16.2% in the four days since its 52-week low on 9/12.


FISV: Closes Acquisition, Continues Announcing New Clients

Yesterday, Fiserv (FISV) closed their acquisition of CashEdge Inc., “a leading provider of consumer and business payments technologies. The transaction is expected to be neutral to adjusted earnings per share in 2011 and accretive to adjusted earnings per share in 2012.”

This move strengthens Fiserv’s position as a one-stop shop for large financial institutions that are looking for IT solutions. Management’s confidence during the Q2 conference call has been validated over the last two weeks as FISV has announced a diverse group of new clients: Fulton Financial Corporation ($16 billion in assets), Heartland multibank holding company ($4B), TruStone credit union ($684M), Ping An Bank in China (1.172RMB/$200M)

Fiserv closed up 1.6% today.