The Zacks Analyst Blog Highlights: ConocoPhillips, Phillips 66, United Continental Holdings, Delta Air Lines and Southwest Airlines
CHICAGO, June 11, 2012 /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 ConocoPhillips (NYSE: COP), Phillips 66 (NYSE: PSX), United Continental Holdings Inc. (NYSE: UAL), Delta Air Lines Inc. (NYSE: DAL) and Southwest Airlines Co. (NYSE: LUV).
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Here are highlights from Friday's Analyst Blog:
Conoco Lowered to Underperform
We are downgrading our recommendation on ConocoPhillips (NYSE: COP) to Underperform from Neutral, on the back of disappointing first-quarter earnings. Financial leverage also deteriorated with a higher debt-to-total capital ratio and lower cash balance.
ConocoPhillips' first quarter earnings and revenue came in below the Zacks Consensus Estimate. The earnings of the Exploration and Production segment fell year over year mainly on account of reduced volumes, higher taxes and lower natural gas prices. Additionally, a dip in refining margins during the quarter pulled down the Refining and Marketing segment profits.
In May 2012, ConocoPhillips completed the spin-off of its refining/sales business into a separate, independent and publicly traded company Phillips 66 (NYSE: PSX). This has left ConocoPhillips with a less diversified business. As a result, the business risk profile of the reorganized ConocoPhillips is weaker than that of the pre-spin-off company.
Moreover, given the substantial investment required to augment upstream operations, any strategic change in the composition of ConocoPhillips' assets will involve considerable capital expenditures, in addition to the planned outlay. This may be significantly burdensome for the company's future cash flows and put pressure on its already strained balance sheet.
Having already divested $20.2 billion of non-strategic assets last year and $1.1 billion in the first quarter of 2012, and plans to offload $10 billion worth of properties this year, the company's output is likely to be affected with production shrinking further.
Our bearish investment thesis on ConocoPhillips also takes into consideration ConocoPhillips' sensitivity to changes in the crude oil price, as well as geopolitical risks associated with international operations and operational challenges. In fact, the pessimism around the stock is well reflected through its estimate revisions.
Currently, the Zacks Consensus Estimate for ConocoPhillips' second-quarter 2012 earnings stands at $1.49 per share, down 38% year over year. Of the 8 estimates, 2 moved downward in the last 30 days, while no upward revision was witnessed. For 2012, the Zacks Consensus Estimate is pegged at $6.40 per share, down 27% year over year.
Given these concerns, we expect ConocoPhillips to perform below its peers and industry levels in the coming months. As such, we see little reason for investors to own the stock. Our long-term Underperform recommendation is supported by a Zacks #5 Rank (short-term Strong Sell rating).
United Upgraded on Solid Outlook
We recently upgraded our long-term recommendation on United Continental Holdings Inc. (NYSE: UAL) from Underperform to Neutral based on future growth prospects. The largest U.S. airline retains the Zacks #3 (Hold) Rank for the short term (1–3 months).
We believe United has resolved to a certain extent the reservation glitches that had taken a toll on the demand for its services in the first quarter, ensuing in higher costs and revenue loss. Reservation glitches occurred in March due to the adoption of a single loyalty program, Mileage Plus, and the transition of the Continental website into the new United website.
The adoption of a single loyalty program has created a new growth opportunity for the company's loyalty business. We believe this segment will be the highest margin-producing business in the long term as United capitalizes on all the benefits of strengthening and expanding networks, widening new memberships and launch of new products like MileagePlus Headliners and the Gift Card Exchange.
Though the company's future growth prospects remain bright based on improving air travel demand, expanding product and services, fleet and network optimization, hedging strategy and the expected merger benefits from Continental Airlines, we believe 2012 will be a critical year owing to the successful integration of Continental Airlines, surging fuel prices, uncertain economic conditions and the threats of recession in Europe.
Additionally, United sees some inflationary pressure in salaries and wages of employees, which will increase the operating cost of the company in the near future. Further, ancillary business (product introductions and improvements) expenses as well as fleet rightsizing initiatives are expected to weigh on the near-term results.
On the liquidity front, United Continental, which gives strong competition to Delta Air Lines Inc. (NYSE: DAL) and Southwest Airlines Co. (NYSE: LUV), continues to have a healthy balance sheet. The company had $7.3 billion in cash and short-term investments, and $500 million in undrawn revolving credit facilities as of March 2012.
Moreover, the Zacks Consensus Estimate projects earnings per share of $3.99 for fiscal 2012, representing a substantial growth of 14.40% annually. The Zacks Consensus Estimate moved up by 20 cents in the last one month, suggesting positive analyst sentiments on the stock.
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