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Stock Analyst Update

The Week in Stocks: Big Oil Gushes Profits

Plus, Legg Mason sells off, Fairfax sues hedge funds, and Comcast delivers.

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This week brought a flurry of earnings reports from big oil, with ExxonMobil (XOM), BP (BP), Royal Dutch Shell (RDS.A), and Chevron (CVX) all reporting. Exxon notched a solid 32% year-over-year jump in quarterly profit thanks to robust upstream production and strong refined product demand offsetting contraction in the oil giant's chemical business. Similarly, BP and Royal Dutch Shell reported 30% and 40% profit growth, respectively, for the quarter, driven by higher oil and natural-gas prices and stronger refining margins. BP also unveiled a $1 billion initiative to improve safety at its U.S. refineries and pipelines. While analyst Elizabeth Collins believes that the initiative could erode BP's return on assets, she expects portfolio upgrades and other factors to largely offset any negative effects. Finally, Chevron's second-quarter results paled in comparison with its rivals', with profits rising a mere 19% year over year amid modest 1% production growth and a hurricane-related $300 million charge. Prodigious quarterly profits notwithstanding, Collins and fellow Morningstar energy analyst Justin Perucki have no plans to significantly alter their fair value estimates for these companies, as their models already baked in strong demand and profitability.
 Full Analyst Report: ExxonMobil
 Full Analyst Report: BP
 Full Analyst Report: Royal Dutch Shell
 Full Analyst Report: Chevron 

Legg Mason Disappoints Wall Street, Sells Off
Asset manager Legg Mason (LM) turned in a mixed quarter, observes Morningstar analyst Rachel Barnard. On the plus side, cost efficiencies began to materialize, as Legg trimmed head count by roughly 10% as it went about the process of integrating Citigroup's (C) asset management business, which it recently acquired. Those efficiencies helped push operating margins from continuing operations up toward the 35% that Barnard had forecast. On the down side, Legg shed a higher-than-expected $7 billion in equity assets under management. Nevertheless, Barnard had expected some assets to run off during the integration, so the recent outflows do not alter her long-term view. Thus, the recent sell-off in Legg's stock presents a rare opportunity to invest in the world's largest asset manager--which is home to distinguished nameplates like Royce, Western Asset, and Brandywine, as well as superstar manager Bill Miller--at a cut-rate price.
 Full Analyst Report: Legg Mason

Fairfax Financial to Restate Financials Again
The messy story at this heavily leveraged financial vehicle just got messier. In releasing its second-quarter earnings on Thursday, Fairfax Financial  (FFH) also unveiled plans to cancel a major reinsurance contract and restate its accounting yet again. The day before, Fairfax filed a lawsuit seeking at least $5 billion in damages from a group of hedge funds that the company alleges have been manipulating trading of Fairfax shares. Morningstar analyst Justin Fuller cuts through the murk to find that the company posted solid earnings thanks to healthy underwriting margins and hefty gains on investments in Asian equities. Yet, in light of recent events, Fuller is increasing the firm's risk rating from "above average" to "speculative" while also docking its Stewardship Grade.
 Full Analyst Report: Fairfax Financial

Comcast Delivers Solid Results
Morningstar analyst Michael Hodel takes a look at Comcast's (CMCSA) second-quarter earnings and finds plenty of encouraging signs. Comcast's television and high-speed Internet businesses saw typical seasonality, marked by declining TV-subscriber rolls and flat growth in the number of new high-speed Internet subscribers. But high-speed Internet prices held steady, and Comcast was able to wring more revenue per television customer thanks to the firm's on-demand video service. The company's burgeoning phone business, impending Adelphia acquisition (which will add scale once it closes later this year) and timely stock buybacks (at prices below Hodel's fair value estimate) brighten the picture further.
 Full Analyst Report: Comcast

Cutting Amazon's Fair Value
Amazon's (AMZN) second-quarter results and management guidance made it evident that revenue growth is on track with Morningstar analyst Joe Beaulieu's expectations. However, Beaulieu now believes that there's little chance for the company to meet his previous margin expectations for the next four or five years. As such, he has lowered the stock's fair value.
 Full Analyst Report: Amazon

Netflix Meets Expectations
Beaulieu also reports that Netflix's (NFLX) latest revenue and profitability stats continue to track his expectations. Strong subscriber growth and a high degree of operating leverage continued to drive impressive operating income growth while subscriber churn remained under control. Though Beaulieu still thinks that Netflix's business model remains vulnerable to numerous long-term competitive threats, such as video-on-demand and digital downloads, he doesn't believe those issues pose a grave danger in the near term. Thus, he's sticking with his growth and profitability assumptions for the next few years, while using a large discount rate and demanding a generous margin of safety to his fair value estimate.
 Full Analyst Report: Netflix

HCA Going Private in $33 Billion Deal
HCA (HCA) founder Thomas Frist Jr. and a private-equity consortium announced that they were taking the hospital company private in a $33 billion leveraged buyout deal. Morningstar analyst Indira Garapati thinks the deal is fair for current shareholders, given that it values HCA within $1 of her fair value estimate. Garapati also observes that the purchase could presage similar such deals in the future, as private equity firms are likely to remain enamored with hospital companies' consistently high returns on equity and strong balance sheets (which make them ripe for debt-laden acquisitions).
 Full Analyst Report: HCA

Suburban Propane Acquiring General Partner's Rights
Propane distributor Suburban Propane  (SPH) announced that it's purchasing its general partner's incentive distribution rights (which entitle the general partner to 15% of all incremental per-unit distribution growth) and interests in exchange for 2.3 million common units. At first glance, Morningstar analyst Elizabeth Collins thinks common unitholders are getting the short end of the stick on the deal. Accordingly, Collins is revisiting her fair value estimate with an eye toward slightly reducing it.
 Full Analyst Report: Suburban Propane

Disability Insurer StanCorp Financial Misses 2Q Estimates
StanCorp Financial Group (SFG) missed second-quarter earnings consensus and lowered its full-year earnings guidance by 9%. Yet, Morningstar analyst Dafina Dunmore believes that the group disability insurer's long-term fundamentals remain intact and is, thus, sticking to her fair value estimate. In particular, Dunmore noted that management has been clear about the potential short-term fluctuation in individual disability, group disability, and group life claims. Against that backdrop, Dunmore does not believe that the recent fluctuation in claim levels represents a worrisome crack in the company's traditionally disciplined underwriting practices. That discipline, coupled with smart investment returns and a leading position in the group insurance business, continue to recommend the stock, in Dunmore's opinion. 
 Full Analyst Report: StanCorp

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