Zacks Analyst Blog Highlights: Votorantim Celulose, Dean Foods, SAP A.G. and Wal-Mart

Business Wire, April 20, 2006

CHICAGO -- 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: Votorantim Celulose (NYSE:VCP), Dean Foods (NYSE:DF), SAP A.G. (NYSE:SAP) and Wal-Mart (NYSE:WMT). See the latest posts to the Analyst Blog by visiting http://at.zacks.com/?id=2673

Here are highlights from Wednesday's Analyst Blog:

CPI & the Fed

This morning the CPI came in at up 0.4%, while the core CPI, which assumes that people don't eat or drive, came in at up 0.3%. The core CPI is less volatile than the headline number, and is generally considered a better gauge for monitoring monetary policy, while headline affects how consumers actually feel. The headline numbers were in line with expectations, while the core was a tick higher. Yesterday, the minutes from the March Fed meeting came out, and those - combined with comments from several lower level (i.e. not Bernanke) Fed officials - led the market to assume that the situation is now "one and done." In other words, the odds have increased that the May move on Fed Funds to 5.0% is more likely to be the last.

For quite a while, we have been assuming that the Fed is much closer to the end of its tightening cycle than the beginning. While we have considered a June move a possibility, it was, in our mind, less than 50%, and the recent comments seemed to confirm this. Even with commodities (oil, all metals, etc.) going through the roof, it is very clear now that we will not be going on to 5.5% or 5.75% on Fed Funds any time soon. I have to admit to being surprised at the strength in the market reaction to this. While good news, it is not exactly stunning to think that after 16 straight upward moves, even from a ridiculously low starting point, that the Fed would take a rest.

The lags that are always present in the effect of monetary policy, combined with the evidence that the party in the housing market is over, indicate that there is a real danger that continued increases would go too far and really slow down the economy. Generally it takes at least six months for a change in Fed Funds to work its way through to the real economy, and it often takes as long as nine months. If it becomes clear that other parts of the economy are picking up the slack from the weakening housing market, and higher energy and commodity prices are bleeding through to the rest of the economy, the Fed could always resume its upward moves after a pause of a few months.

VCP Upped to Buy

We are changing our recommendation on Votorantim Celulose (NYSE:VCP) from Hold to Buy. We were particularly encouraged by the better-than-expected first quarter results, including higher margins due to increasing efficiencies, higher ROE, and sound cash flow generation. Particularly interesting was that the great result was achieved within a challenging business environment. Additionally, the positive outlook for domestic interest rates in Brazil, the company's high dividend payout, and the attractive valuation should drive the stock up in the short term.

During the first quarter of 2006, world pulp producers' inventories reached just 32 days of supply, quite low for historical standards. Consumers' inventories in Europe reached 26 days of supply, the lowest level since April 2000. Considering those levels, we see little chance for lower pulp prices in the short term. Additionally, world shipments of pulp in February surged to 101% of installed capacity and market demand increased by 5% year-over-year. China had the largest increase in demand, which was up 24% from February 2005.

We believe the demand for pulp will remain heated in the short term, mainly considering that announcements of capacity closures in North America and in China are expected, due to low competitiveness and environmental problems. According to PPPC (Pulp and Paper Products Council) estimates, around 0.6 million tons of pulp were taken off the market in 2005 and another 1.1 million could leave in 2006. In the medium term, we expect new facilities to start operating and increase production capacity, but it will take at least two years for any reasonable effect in the international pulp prices.

Downgrade on Dean Foods

Management at Dean Foods (NYSE:DF) took definitive actions in 2005 to improve shareholder value. Specifically, management focused on the branded products business, reduced SKUs, and integrated the strategic acquisitions in the Dairy Group. In 2006, management is in the process of implementing SAP (NYSE:SAP). However, rising commodity costs and increased debt are clouding near-term outlook. In addition, the stock reacted negatively to the announcement of it being added to the S&P 500. Hence, the stock is expected to be a market performer and is rated a Hold.

Higher commodity costs have continued to hamper operating margin expansion. Not only have raw material price increases affected the company, but also the increase in resin and fuel costs over the last several quarters has pressured margins. Fuel costs are expected to continue to increase in the coming quarters and remain challenging particularly in the first half of 2006.