Property-Casualty Insurers (STA): Maintains neutral stance
Analyst: Catherine Seifert
We expect the p-c group to remain under pressure Wednesday, and probably until there is more clarity on the extent of insured losses caused by Katrina. Although the insured losses could approach a record $25 billion, the p-c industry has a capital base of nearly $400 billion. Our concern is how the disruption in oil production will impact commercial lines insurers, as well as the general economic disruption from the storm. Our top pick remains Allstate (ALL), which primarily provides personal property and casualty insurance products. Others in the subindustry include the Hartford Financial Services Group (HIG) , Chubb (CB) AIG (AIG ), Safeco (SAFC) and St. Paul Travelers (STA).
Construction & Engineering Stocks (JEC): Reiterates positive outlook
Analyst: Stewart Scharf
Stocks in this sub-industry are trading higher today, which we attribute to expectations of rebuilding projects following Hurricane Katrina. Although we believe the rise is a knee-jerk reaction, we note that Jacobs Engineering Group (JEC), whose share prices are up 8% today, provides services to refining and building infrastructures. Other rising stocks include Fluor (FLR), URS (URS
,) and Shaw (SGR
.) We reiterate our sell opinion on Shaw, despite its 15% gain in price today on news of its talks with Federal Emergency Management Agency on cleanup efforts, reflecting our view of a weak outlook for its environmental work, among other things.
Diversified Chemicals (DOW): Maintains positive fundamental outlook
Analyst: Richard O'Reilly, CFA
We have not changed our view on the diversified chemicals industry following the turmoil from Hurricane Katrina. Dow Chemical tells S&P that its two ethylene facilities in Louisiana suffered no major damage, although it could take some time for one of the facilities to fully restart. FMC (FMC) should not be impacted, since it has no major facilities in the area. But the possibility of higher energy costs would be negative for the overall chemical industry. Oil refinery shutdowns will also impact the supply of petrochemicals to chemical industry customers, at least near term. Still, we see cyclical strength for this group continuing.
Entergy (ETR): Reiterates 3 STARS (hold) Opinion
Analyst: Justin McCann
Despite Katrina's devastating impact on Entergy's service territory and its transmission and distribution system, the energy company's shares have held up relatively well, in our view. Power outages peaked at nearly 1.1 million customers, and still remain at just under a million. Given flooding and blocked access in the area, restoration could take several weeks. It is too early to project Entergy's overall costs, but we expect the bulk of its expenses not covered by insurance to be eventually recovered in rates. We are cutting our 2005 operating earnings per share estimate by 70 cents to $3.95, but keeping our 2006 estimate at $5.05 and our target price at $76.
Rowan Cos. (RDC): Maintains 3 STARS (hold)
Analyst: Stewart Glickman
Rowan said that following an aerial search of the Gulf of Mexico, it fears that one of its missing jackup rigs, the Rowan New Orleans, has capsized and sunk. The rig is insured at $8.5 million and has a book value of $7.4 million. We believe that the earnings impact to Rowan from a potential loss of this jackup would be fairly minimal, since it was the oldest rig in its fleet, and was contracted at a relatively low dayrate compared to the overall 24-rig fleet. We are maintaining our EPS estimates and 12-month target price
of $38 and will update our outlook as further details emerge.
Tenet Healthcare (THC): Maintains 2 STARS (sell)
Analyst: Cameron Lavey, Robert Gold
Tenet Healthcare said its five hospitals in the New Orleans area and one in Mississippi suffered significant damage from Hurricane Katrina, and that three of these have evacuated all patients and staff. The company noted that associated costs will exceed its current insurance coverage. We believe these affected facilities generated a combined $300 million in net operating revenues during the first half of 2005, and we believe interruptions will impact Tenet's sales and earnings into the fourth quarter, with an associated increase in its 2006 capital expenditure budget. We're placing under review our 2005 operational earnings per share estimate of 4 cents. Our 12 month target price remains $9 per share.
Genentech (DNA): Downgrades to 4 STARS (buy from 5 STARS (strong buy)
Analyst: Frank DiLorenzo
Genentech and partner Biogen Idec submitted a supplemental BLA for Rituxan to treat rheumatoid arthritis patients who inadequately respond to anti-TNF medications. The filing is slightly ahead of expectations for the 2005 fourth quarter. Though our stance on Genentech stays positive, we are downgrading the shares due to valuation. The shares have had a sharp runup in 2005 and the company's p-e-to-growth ratio of 1.6 times remains above the peer group average of 1.4 times,
although we continue to like the biotech's long-term prospects. We see EPS of $1.18 in 2005, and $1.66 in 2006. On a net present value analysis, we are lifting our target price by $5 to $100.
ADC Telecommunications (ADCT): Maintains 3 STARS (hold)
Analyst: Ari Bensinger
ADC Telecommunications posted earnings per share for the three months ending in July of 29 cents vs. 3 cents, above our 26 cent estimate, on a 40% sales increase. However, given the company's rapid sales growth in the first half of fiscal year 2005 (ending October), ADC does not expect any seasonal sales strength from early August to late October. While we see strong demand for next generation wireless and fiber products, we believe that ADC's overall sales growth will be hampered by the mature copper connectivity business. We are keeping our fiscal year 2005 earnings per share estimate at 90 cents, but we're lowering our fiscal year 2006 estimate to $1.12 from $1.16. We are also cutting our 12 month target price by $2 to $24 per share.