The Zacks Analyst Blog Highlights: Bank of America, JPMorgan Chase, Goldman
Sachs, Morgan Stanley and Wendy's
CHICAGO, May 23, 2013
CHICAGO, May 23, 2013 /PRNewswire/ --Zacks.com announces the list of stocks
featured in the Analyst Blog. Every day the Zacks Equity Research analysts
discuss the latest news and events impacting stocks and the financial markets.
Stocks recently featured in the blog include Bank of America Corp. (NYSE:BAC),
JPMorgan Chase & Co. (NYSE:JPM), Goldman Sachs (NYSE:GS), Morgan Stanley
(NYSE:MS) and The Wendy's Co. (Nasdaq:WEN).
Get the most recent insight from Zacks Equity Research with the free Profit
from the Pros newsletter: http://at.zacks.com/?id=5513
Here are highlights from Wednesday's Analyst Blog:
Debt-Ceiling Alarm Bell Tolls
With the $16.4 trillion debt ceiling getting restored on May 19, alarm bells
have started tolling across the country to address this highly politicized and
polarizing issue to give it a fresh lease of life.
However, calming the frayed nerves, the U.S. Treasury has confirmed recently
that higher-than-expected tax receipts and a hefty one-time payment by Fannie
Mae to the tune of about $59.4 billion has deferred hitting the debt ceiling
until at least the Labor Day.
But will delaying the inevitable be really helpful for the U.S. unless some
corrective measures are implemented? Let us dig a little deep to find answers
to these questions.
The U.S. Treasury has defined the debt limit as "the total amount of money
that the U.S. government is authorized to borrow to meet its existing legal
obligations, including Social Security and Medicare benefits, military
salaries, interest on the national debt, tax refunds, and other payments."
The financial prudence behind having a debt ceiling lies in the fact that it
allows a form of accountability and enables the government to borrow further
to meet its revenue shortfall, thereby giving it an opportunity to identify
and target the underlying causes for the overspending. Or is it?
If having the diction of debt ceiling would have helped, the U.S. would not
have required modifying it again and again. History reveals that since 1960
Congress has acted 78 separate times to permanently raise, temporarily extend,
or revise the debt limit – 49 times under Republican presidents and 29 times
under Democrats. So the obvious question then arises: Is the debt ceiling at
The government seemed to have learned from its past mistakes, and the U.S. had
a balanced federal budget with expenses tallying exactly with income in 2001.
But, as they say, 'History repeats itself' -- the U.S. economy again fell back
in to the trap primarily due to three factors: the Bush-era tax cuts that
added roughly $2 trillion to the national debt over the last decade; the Gulf
wars in Iraq and Afghanistan, which added an additional $1.1 trillion; and the
Great Recession, which led to the collapse of several financial giants like
Lehman Brothers and Merrill Lynch, which was later acquired by Bank of America
Corp. (NYSE:BAC). Several other banks like JPMorgan Chase & Co. (NYSE:JPM),
Goldman Sachs (NYSE:GS) and Morgan Stanley (NYSE:MS) also felt the
after-effects of the prolonged Great Recession.
The situation snowballed in to a crisis in 2011 when a periodic increase in
debt ceiling was stalled by the Republicans, demanding a significant cut in
federal spending. The crisis was eventually averted by the intervention of the
President, but not until the U.S. had its casualty of a credit rating
downgrade by Standard & Poors.
The stage is again set for a showdown this fall, but the question remains: Is
the U.S. prepared to riseup at last or sink further down?
Although time is the best judge for this trillion-dollar question, the U.S.
economy got a lifeline when data from the Treasury revealed that receipts for
the six-month period ending Mar 2013 aggregated $1.2 trillion, up 12.4% year
over year, versus a government spending of $1.8 trillion. This is equivalent
to a year-to-date budget deficit of about $600 billion, the lowest since 2008.
The better-than-expected revenues were attributable to higher income tax
payments, up 14.7% year over year, and improved corporate profit taxes, up
18.6% year over year, in addition to a significant contribution from Fannie
A relatively smaller yet noteworthy factor that pushed the revenue receipts
was the underlying growth in the economy. Primarily, a dip in unemployment
figures and ever-increasing stock price indices are the positive signs.
This averted possible 'extraordinary measures' by the Treasury as of now,
allowing the federal government to finance its operations for about two months
even after reaching the debt ceiling. These include 1) suspension of the sale
of State and Local Government Series Treasury securities; 2) redemption of
existing and the suspension of new investments in pension funds like the Civil
Service Retirement and Disability Fund and the Postal Service Retirees Health
Benefit Fund; 3) suspension of reinvestment of the Government Securities
Investment Fund and 4) suspension of reinvestment of the Exchange
But will the Treasury be eventually forced to utilize these measures if an
amicable solution of raising the debt limit is not reached between the
Republicans and Democrats sometime in September.
As a separate cushion, the Republicans have deftly passed a bill that would
allow the government to pay interest on debts as well as prop up Social
Security payments, even if a status quo is maintained for the federal
borrowing limit. Although the bill promises to prevent any missed obligations
that could trigger a formal default and pre-empt any potential debilitating
shock to the economy, it eventually raises the debt limit by pushing these
payments outside its purview.
In other words, it would be detrimental to the economy, earning it the vicious
tag of a "default" by another name, probably due to which the White House has
promised to veto it.
No matter what the warring political parties do, the thorny issue of a
potential crisis due to a debt-ceiling hit still persists. The short-term
initiatives are likely to offer a temporary respite, but the ramifications
could lead a death-blow to the economy unless a balanced fiscal policy is eked
As the U.S. stocks continue their unrelenting rally of reaching new all-time
highs in most major indices, the market might be vulnerable to a correction
any time soon. Only time will tell whether debt-ceiling alarm bells are indeed
trigger for such an incident.
Wendy's Upgraded to Outperform
We upgrade our recommendation on The Wendy's Co. (Nasdaq:WEN) from Neutral to
Outperform based on decent first-quarter 2013 results reported earlier this
month and increased earnings guidance despite volatility in the US
quick-service restaurant industry.
Why the Upgrade?
On May 8, Wendy's posted decent first quarter results and also increased its
bottom line expectation for 2013. Even amid a volatile US quick-service
restaurant industry marked by faltering consumer confidence and heightened
competition, Wendy's expects to record increased year-over-year profitability
in each of the first three quarters of 2013, buoyed by sales leverage and cost
In its recently-concluded first-quarter 2013, Wendy's reported adjusted
earnings of 3 cents per share, beating the Zacks Consensus Estimate as well as
the year-ago earnings by a penny. Earnings in the quarter received a boost
from top-line growth and margin expansion at the company-operated restaurants.
The company's 'Right Price, Right Size Menu' initiative also pushed up
earnings during the quarter. Wendy's continues to gain market share, driven by
price value proposition and premium limited period offerings.
The company also raised its earnings per share guidance to reflect net cost
savings from debt refinancing. Its adjusted earnings per share are now
expected to be within the range of 20–22 cents per share, up from the prior
expectation of 18–20 cents per share. The revised adjusted earnings per share
range represents an estimated year-over-year increase of 18%–29%.
Basically, the company is in a transition mode since the sale of its
counterpart Arby's brand in 2011. Management expects to incur lower overhead
expenses as it will only have to support a single brand. Going forward,
several of its growth initiatives like elimination of unprofitable operations,
restaurant reimaging, and expansion in domestic and overseas markets should
bode well for Wendy's.
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