Business & Finance
Business and Finance
Business and Finance
Wed, July 21, 2010
Tue, July 20, 2010 AvalonBay Communities, Honda Motor, IBM, Lockheed Martin and Martin Marietta Materials
CHICAGO--([ BUSINESS WIRE ])--[ Zacks Equity Research ] highlights: AvalonBay Communities (NYSE: [ AVB ]) as the Bull of the Day and Honda Motor Company (NYSE: [ HMC ]) as the Bear of the Day. In addition, Zacks Equity Research provides analysis on IBM Corp. (NYSE: [ IBM ]), Lockheed Martin (NYSE: [ LMT ]) and Martin Marietta Materials (NYSE: [ MLM ]).
Full analysis of all these stocks is available at [ http://at.zacks.com/?id=2678 ].
Here is a synopsis of all five stocks:
[ Bull of the Day ]:
We are changing our long-term recommendation for AvalonBay Communities (NYSE: [ AVB ]) to Outperform from Neutral, as there is a positive directional movement for earnings estimate as analysts remain upbeat on the stock.
AvalonBay is one of the leading multi-family REITs, focusing primarily on the high barrier-to-entry regions of the U.S, where there are limited new apartment construction activities. In addition, the company has a strong balance sheet with adequate liquidity and limited debt maturities.
Consequently, AvalonBay is better placed than most of its peers to withstand the economic downturn. Our target price of $116.00 at 29.4X 2010 FFO/Share factors in this view.
[ Bear of the Day ]:
Honda Motor Co. (HMC)
Honda Motor Company (NYSE: [ HMC ]) is expanding its business in Asia, growing its global network to increase efficiency and introducing new products to satisfy local markets. However, the economic downturn in the U.S. and Europe continues to negatively affect Honda's operations, especially the Power Products and Other business.
Moreover, Honda's global position is threatened by unfavorable currency exchange rates, flat-to-lower sales in its key markets and increased competition.
Therefore, we are downgrading our recommendation on the stock from Outperform to Underperform with a target price of $28.
Latest Posts on the Zacks [ Analyst Blog ]:
IBM Beats Slightly (Again)
After the bell Monday, IBM Corp. (NYSE: [ IBM ]) reported earnings per share (EPS) of $2.61, marginally beating the Zacks Consensus Estimate of $2.58. Revenues of $23.7 billion rose 2% sequentially, but were roughly $500 million below estimates. Fiscal 2010 EPS expectations were cited as "at least" $11.25 per share, a penny below the Zacks consensus.
IBM has seemingly entered a comfort zone of reporting numbers a shade past analysts' expectations. Its 1.16% positive surprise is close to the 1.6% positive surprise IBM has averaged over the past 4 quarters. Analysts had generally stood pat on earnings estimates, with only one adjusting his or her quarterly and fiscal year estimates upwards and one additional analyst lowering estimates for fiscal 2010. Over the past quarter, only the fiscal year estimate has budged, up 19 cents or 1.7%.
It has been several quarters since IBM has "wowed" analysts with its earnings report, but that said, the company has again proven itself to be a steady ship on often turbulent waters. IBM's $2.61 per share far exceeds 1st quarter EPS of $1.97 and the $2.32 per share in the June quarter a year ago.
These positive results are despite the weakening Euro in the quarter having hurt IBM's sizable overseas sales. Offsetting difficulties in Europe was IBM's strength in Brazil, Russia, India and China (BRIC), where business was up 22%. All major businesses improved in the quarter, including Business Analytics (up 14%), Systems and Technology (up 3%) and Services (up 2%).
However, IBM shares are down over 5% in after-hours trading since the earnings announcement -- more than giving up its Monday gains of 1.37% before the bell. Perhaps working numbers to just beat estimates is not enough for investors this time around.
Basic (But Dismal) Math
aBy process of elimination, if C (Consumer, or Consumption) is not going up, and is likely to go down, causing I to go down from lack of customers, and (X-M, the difference between imports and exports) will not improve since every country wants to have a trade surplus and this country refuses to get serious about reducing oil consumption, then the answer has to be higher G (Government spending). That higher G can either come from higher tax receipts, some of which will come naturally as economic growth resumes, or from deficit spending.
There is no evidence that the markets are having a problem with the current level of the deficit. If the markets were having a problem, then they would be demanding a high interest rate on government debt. I would hardly call the current rate on the 10-year T-note of 2.93% high.
Unless we fall into deflation (which is a real risk), the nominal growth rate of the economy is likely to be much higher than 2.93% over the next 10 years. Thus the current debt is hardly a significant burden.
When Does Government Spending Become a Problem?
Government spending is a call on the real resources of the economy. With the unemployment rate at 9.5% and factory utilization at only 71.4%, it is right now calling on resources that are just sitting idle. Letting resources sit idle is just plain wasteful.
Government spending becomes a real problem, particularly deficit spending, when the private sector needs the resources that the government is using. At that point it becomes inflationary.
But right now, the unemployment rate is not going to go to zero, and factory utilization is not going to go to 100% (it didna™t even during WWII; sometimes machines have to be off line for maintenance). We do not really have to worry about the level of deficit spending becoming inflationary until the level of unemployment drops to a more normal rate, probably south of 6%, and the level of factory utilization at least returns to its long term historical average of 79.2%.
That is the point at which the government will have to go into serious austerity mode and bring the budget into balance, or ideally start to run a small surplus and pay down the debt. The time for that will come, but we are nowhere close to it now.
Not all government spending has equal effects on economic growth. To the extent that government spending is done for projects that have a positive return on investment (ROI), it will do more to help out the economy than simply projects that amount to hiring people to dig holes in the desert and then fill them up again.
There are those who argue that all government spending is, in effect, hole digging and filling. I dona™t think the evidence supports that claim, although I do think that a softer form that says on average, government spending tends to have a lower ROI than private investment, is true. Provided, of course, that the private sector will actually make the investment.
However, given high enough levels of economic slack, even dig-and-fill projects would at the margin add to economic growth. The people doing the digging and filling would have incomes that they would spend elsewhere in the economy.
Government Spending & ROI
As a general rule of thumb, money the government spends by giving Lockheed Martin (NYSE: [ LMT ]) a contract to build more fighter jets will have a lower ROI (one has to go to theories of imperialist exploitation, or technological spin-offs to the civilian economy, to get a positive ROI from military spending. The tech spin-off is plausible, and in some instances large as for example the original defense spending that planted the seeds of the Internet) than contracts with Martin Marietta Materials (NYSE: [ MLM ]) to build infrastructure projects.
Get the full analysis of all these stocks by going to [ http://at.zacks.com/?id=2649 ].
About the Bull and Bear of the Day
Every day, the analysts at Zacks Equity Research select two stocks that are likely to outperform (Bull) or underperform (Bear) the markets over the next 3-6 months.
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