Zacks Industry Rank Analysis Highlights: Alon USA Energy, Iomega, Seagate Technology, Sunoco and Western Digital

Business Wire, March 13, 2008

CHICAGO -- Zacks.com releases the latest Zacks Industry Rank. Stocks featured in this week's analysis includes Alon USA Energy (NYSE: ALJ), Iomega (NYSE: IOM), Seagate Technology (NYSE: STX), Sunoco (NYSE: SUN) and Western Digital (NYSE: WDC). To see the Zacks Industry Rank and the trend in earnings estimates revisions for more than 200 industry groups, visit http://at.zacks.com/?id=3154.

Zacks Industry Rank Analysis is written by Charles Rotblut, CFA, Senior Market Analyst for Zacks.com.

Oil topped $110 yesterday. Gasoline prices are averaging $3.23 per gallon nationally, according to the latest AAA survey. Yet, the revisions ratio for Oil Refining & Marketing is 0.47, meaning for every full-year earnings estimate that has been raised, slightly more than two have been cut.

The refiners are being confronted by both higher feedstock costs and slowing demand caused by economic weakness.

Crude prices in the triple-digits translate to higher costs for refiners' primary raw material. In a perfect world, refiners would pass along the price increase and protect their margins. However, gas prices are elastic, which means that demand lessens as the prices rise. (One example of economic theory playing out in real life is the drop in SUV sales.)

The economy is a big reason why refiners cannot fully pass along higher prices. As consumer feel more stretched, they look for ways to save money, such as driving less. Furthermore, declines in freight shipments impact overall demand. Simply put, the more fuel buyers feel stretched, the less pricing power refiners have.

This doesn't mean that refiners completely lack pricing power; if they did, drivers in Seattle would not be paying $3.46 for a gallon of gas1. It does mean that refiners do not have enough pricing power to fully offset their higher feedstock costs.

Brokerage analysts are factoring the current industry environment into their profit projections. During the past few weeks, analysts have lowered their full-year earnings forecasts on multiple refiners including Alon USA Energy (NYSE: ALJ) and Sunoco (NYSE: SUN).

ALJ is a Zacks #5 Rank ("strong sell") stock. SUN is a Zacks #4 Rank ("sell") stock.

Moving on....

The Zacks Industry Rank for Computer-Storage Devices improved after Seagate Technology (NYSE: STX) boosted its fiscal third-quarter guidance.

The company expects adjusted profits between 68 cents and 72 cents per share, six cents higher than its previous guidance. STX credited better-than-expected demand for high-end hard drives. These type of hard drives command better margins. The company did note, however, that overall pricing has been favorable.

Following the announcement, 13 brokerage analysts raised their quarterly forecasts. The consensus earnings estimate now calls for profits of 69 cents per share, a positive revision of six cents. The fiscal 2008 estimate is also higher at $2.71 per share, versus $2.64 per share. In both instances, the majority of the covering analysts raised their projections.

STX is not the only storage company that brokerage analysts have raised forecasts on in recent weeks. The consensus earnings estimates for Iomega (NYSE: IOM) and Western Digital (NYSE: WDC) are also higher.

Despite the current economic slowdown, the amount of electronic data continues to grow, from medical records to downloadable movies. The variety of electronic devices that store data are also widening. WDC stated in its fiscal second-quarter earnings release that 54% of hard drive revenues were for non-desktop PC devices. Even the small SD card in a consumer's phone increases need for storage up to the enterprise level.

IOM is a Zacks #1 Rank ("strong buy") stock. STX and WDC are Zacks #2 Rank ("buy") stocks.

Granted, the price of storage continues to drop, particularly creating pricing pressures for lower end devices. Nonetheless, the overall trends point to sustained growth in the industry.

The interactive Zacks Industry Rank List allows you to see all of the companies, and their Zacks Rank, within more than 200 industries. See the list at http://at.zacks.com/?id=3208.

About Zacks Industry Rank and the Zacks Rank

Zacks Industry Rank is calculated by averaging the Zacks Rank for all covered companies within a given industry. The Zacks Rank is assigned to approximately 4400 stocks and ranges from #1 ("Strong Buy") to #5 ("Strong Sell"). Both the Zacks Industry Rank and the Zacks Rank are quantitative indicators designed to cover periods of 1-3 months.

Since 1988, the Zacks Rank has proven that "Earnings estimate revisions are the most powerful force impacting stock prices." Since inception in 1988, #1 Rank stocks have generated an average annual return of +32%. During the 2000-2002 bear market, Zacks #1 Rank stocks gained +43.8%, while the S&P 500 tumbled -37.6%. Also note that the Zacks Rank system has just as many Strong Sell recommendations (Rank #5) as Strong Buy recommendations (Rank #1). Since 1988, Zacks Rank #5 stocks have underperformed the S&P 500 by 129% annually (+5 % vs. +12%). Thus, the Zacks Rank system allows investors to truly manage portfolio trading effectively.