The Zacks Analyst Blog Highlights: IBM, Royal Dutch Shell, Swift Energy, Linn and Warren Resources

Zacks

For Immediate Release
 
Chicago, IL – January 27, 2014 – 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 the IBM Corp. (IBM-Free Report), Royal Dutch Shell plc (RDS.A-Free Report), Swift Energy Co. (SFY-Free Report), Linn Co. LLC (LNCO-Free Report) and Warren Resources Inc. (WRES-Free Report).
 
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Here are highlights from Friday’s Analyst Blog:

IBM Sells Server Biz to Lenovo
 
IBM Corp. (IBM-Free Report) finally agreed to sell its low end X86 server business to Chinese PC maker Lenovo for $2.30 billion. Of the total deal price, nearly $2.07 billion will be paid in cash and the rest in Lenovo stock.
 
Lenovo had been in talks with IBM over the proposed sale for quite some time. Last year, the deal did not materialize owing to differences on valuation. At that time, IBM had quoted approximately $4.0 billion to $6.0 billion for the unit, while Lenovo was unwilling to spend more than $2.5 billion.
 
However, IBM’s growing challenges in the hardware segment improved Lenovo’s bargaining power. In the recently concluded fourth quarter, IBM’s hardware revenues declined 26.1% from the year-ago quarter.
 
Management noted that the company is facing headwinds related to Power, storage and X86 server unit in the hardware segment, which negatively impacted results.
 
Shell Lowered to Underperform
 
On Jan 20, 2014, we downgraded Europe’s largest oil company Royal Dutch Shell plc (RDS.A-Free Report) to Underperform from Neutral. Our revised investment thesis is supported by a Zacks Rank #5 (Strong Sell).
 
Why the Downgrade?
 
Following Shell’s fourth-quarter profit warning, we see the integrated player as a risky bet that ordinary investors should exit.
 
Detailed Analysis
 
The Hague-based Shell has cautioned investors that hike in exploration costs, lower oil and gas output, along with weak performance by the company’s refining unit, will adversely impact its fourth quarter results.
 
We are also concerned about Shell’s relatively heavy downstream exposure, which leaves it less diversified than its integrated peers. As such, the group’s results remain greatly exposed to refining/marketing margins. Shell’s downstream operations have struggled recently due to weak demand for fuel, leading to lower returns in this segment.
 
As usual, we remain worried about Shell being the most gas-focused among the major companies in the sector, with more than half of its current production from the commodity. Given natural gas’ volatile fundamentals, this remains a key area of concern, in our view.
 
Finally, Shell projects investment of more than $40 billion in 2014, quite high by industry standards. This is expected to substantially increase the group’s leverage and deteriorate its credit metrics during the current downturn. Additionally, the increasing capital intensity of its operations may result in reduced returns going forward.
 
Stocks That Warrant a Look
 
While we expect Shell to perform below its peers and industry levels in the coming months and see little reason for investors to own the stock, one can look at Swift Energy Co. (SFY-Free Report), Linn Co. LLC (LNCO-Free Report) and Warren Resources Inc. (WRES-Free Report). These U.S. upstream energy operators – sporting a Zacks Rank #1 (Strong Buy) – have recorded solid growth and have the potential to rise significantly from the current levels.
 
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