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Monday, October 4, 2010

Hot Stock Picks: Humana, Monsanto, Prudential Financial,Allstate, Time Warner Cable, Tractor Supply

Wal-Mart Stores Inc. (NYSE:WMT - News), the world's largest retailer, said it will team with Humana to offer the cheapest prescription drug plan in the U.S., as the companies seek to take sales of medications from rivals.

Chart for Time Warner Cable Inc Common St
Chart for Allstate Corporation (The) Comm

The companies will begin marketing the plan on Oct. 1 to Americans in Medicare, the U.S. government health program for the elderly and disabled, William Fleming, a Humana vice-president, said in a conference call. The policies, which take effect Jan. 1, will cost $14.80 a month, less than half the average premium this year, and will boost sales for both companies, Fleming said.

Humana is the second-biggest provider of Medicare benefits in the U.S., after UnitedHealth Group Inc. (NYSE:UNH - News), the top plan by sales, and provides standalone prescription plans to 1.7 million people.

Humana's Fleming and John Agwunobi, president of Wal-Mart's health and wellness division, declined to say how many customers the companies expected to add, what profit margin the plans would offer, or how the margin would be divided.

"Humana does expect to gain membership from this plan," Fleming said on the conference call. "Wal-Mart does expect to gain customers."

In a posting on the S&P MarketScope service, Seligman said he sees increased competition among health insurers and others offering standalone Medicare Part D prescription drug plans, following the launch of Humana and Wal-Mart's co-branded plan in 2011. He noted that plan members will have competitively priced co-pays for the generic drugs in the plan, as low as $2 in Wal-Mart pharmacies for preferred generics and at no cost via mail.

"We see the deal giving HUM a strong opportunity to build Part D market share, but we would not be surprised if rival insurers form joint plans with other pharmacy chains," Seligman said.

Monsanto Co.: Morgan Joseph equity analyst Charles Rentschler maintained a hold rating on shares of Monsanto Co. (NYSE:MON - News) on Oct. 1.

On Sept. 28, Monsanto, the world's largest seed company, fell the most in 21 months in New York amid concerns that its new SmartStax corn seeds aren't performing as well as predicted.

Monsanto, led by Chief Executive Officer Hugh Grant, in December promoted SmartStax, its most expensive seed, as "the highest-yielding corn product available." Monsanto is counting on SmartStax to help boost profit as much as 17 percent a year after earnings from Roundup herbicide collapsed as competitors cut prices on generic versions.

Farmers this year planted 3 million acres of the new product, developed with Dow Chemical Co. Monsanto said Sept. 20 that early harvest data showed some SmartStax corn hybrids were missing yield projections.

SmartStax is still expected to yield 5 percent to 10 percent more than so-called triple stacks when all the data are collected partly due to better genetics and insect resistance, Kelli Powers, a company spokeswoman, said in a Sept. 28 interview. Yields also benefit from regulators allowing growers to plant less conventional corn alongside SmartStax, she said.

Corn modified to produce insecticides must be planted alongside conventional corn to prevent bugs from developing resistance to the plant's pesticides.

In a note, Rentschler said that following his Sept. 20 downgrade of Monsanto shares to hold from buy, he updated his financial model, lowering his earnings-per-share (EPS) projection for fiscal 2011 (ending August) to $2.60 from $2.80.

Rentschler predicts Monsanto will report EPS of $2.42 for fiscal 2010, "within the company's most recent guidance," when it reports results on Oct. 6,

"Of primary interest (from the company's Oct. 6 earnings call) should be management's commentary on SmartStax corn seeds, whose apparently disappointing yields at this point in the harvest have sent the shares tumbling over the last two weeks," the analyst said.

Prudential Financial Inc.: Keefe, Bruyette & Woods equity analyst Jeffrey Schuman reiterated an outperform rating and $70 price target on shares of Prudential Financial Inc. (NYSE:PRU - News) on Oct. 1.

On Sept. 30, American International Group Inc. (NYSE:AIG - News), the bailed-out U.S.insurer, agreed to sell two Japanese subsidiaries to Prudential for $4.8 billion.

AIG Star Life Insurance Co. and AIG Edison Life Insurance Co. will be sold with $4.2 billion paid in cash and $600 million in debt, AIG said in a statement distributed through Business Wire.

AIG Chief Executive Officer Robert Benmosche is disposing of assets as rival insurers rebuild capital lost during the 2008 financial crisis. In March, he agreed to sell AIG's American Life Insurance Co. to MetLife Inc. for $15.5 billion. Newark (N.J.)-based Prudential, the second-biggest U.S. insurer, is adding to a Japanese business that produced more than $6 billion in revenue last year.

Allstate: Soleil Securities equity analyst Harry Fong maintained a buy rating and $38 price target on shares of Allstate (NYSE:ALL - News), the largest publicly traded U.S. home and auto insurer, on Sept. 30.

"Since the third quarter came and went without a major hurricane making landfall, we suspect many analysts (who) include a small provision in their (earnings) estimate for hurricanes will revise their earnings estimates higher," Fong wrote in a note. He said his Allstate estimate includes a provision for "average" weather and, at $1.07, was "considerably" higher than the current 80% per share consensus estimate.

"We continue to believe there is further upside for ALL shares due in part to anticipated upward revisions to third-quarter estimates and more importantly to management's commitment to returning the homeowners' business to one that will can earn a 15 percent" return on equity over time, the analyst said.

Time Warner Cable: Kaufman Brothers equity analyst Todd Mitchell maintained a buy rating and $66 price target on shares of Time Warner Cable (NYSE:TWC - News), the second-largest U.S. cable company, on Sept. 30.

In a note, Mitchell said he believes "the fundamental outlook for TWC's financial yields remains intact" and he expects management to announce "a material increase" in its share repurchase efforts, which should have a positive impact on its share price.

Mitchell said he believes Time Warner Cable faces "a particularly difficult competitive dynamic" in its two largest markets: New York City, where Verizon Communications (NYSE:VZ - News) has been aided by the elimination of a customer commitment period on new contracts; and Los Angeles, where DirecTV (NasdaqGS:DTV - News) has made an aggressive marketing push that is translating into market share gains.

For the third quarter, the analyst forecasts total revenue of $4.65 billion, earnings before interest, taxes, depreciation and amortization (Ebitda) of $1.65 billion, and earnings per share (EPS) of 85%. For 2010, he forecasts total revenue of $18.64 billion and Ebitda of $6.8 billion.

"We still believe that the company's relatively modest valuation makes it an attractive investment alternative," Mitchell said.

Tractor Supply: Janney Montgomery Scott equity analyst David Strasser maintained a neutral rating on shares of Tractor Supply (NasdaqGS:TSCO - News), the operator of 967 farm-equipment stores, on Sept. 30. He has a $43 fair value estimate on the shares.

In a note, Strasser said Tractor Supply is "an exciting long-term growth story, in an industry lacking growth." He said that after a meeting with company management, he was more confident that near-term trends remain "solid."

"Our enthusiasm for the stock is driven by a structural margin improvement story, solid long-term store growth prospects, a variety of merchandising and marketing initiatives, and a compelling cash-flow story," he said.

Strasser raised third-quarter estimates for comparable-store sales growth to 4 percent from 3 percent. He raised EPS estimates for the third quarter to 38% from 34%, for the fourth quarter to 57% from 53%, and for 2011 to $2.40 from $2.21.

"We believe it is more prudent to wait for a pullback (in the shares) as valuation is rich and expectations are high," the analyst wrote.

Prudential's John Strangfeld is making his second deal in Japan since taking over as chief executive officer in 2008. The company, which entered the world's second-largest life insurance market in 1987, bought bankrupt carrier Yamato Life Insurance Co. last year after winning an auction for the Tokyo-based firm.

In a brief note, Schuman said he continues to believe the deal is "strategically sensible" for Prudential and carries "limited execution risk."

While the purchase price and targeted cost savings announced in the deal are "better than we assumed," Schuman said purchase accounting adjustments will mean the deal will add less to Prudential's annual earnings per share than he assumed.

The analyst raised a 2011 earnings-per-share estimate to $6.75 from $6.65, assuming the company does not repurchase shares until the second half of 2011, and limited cost savings from the deal until 2012
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