The Zacks Analyst Blog Highlights: Valero Energy, CST Brands, SM Energy, Regis and China Petroleum & Chemical

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For Immediate Release
 
Chicago, IL – September 23, 2013 – 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 Valero Energy Corporation (VLO-Free Report), CST Brands Inc. (CST-Free Report), SM Energy Company (SM-Free Report), Regis Corporation (RGS-Free Report) and China Petroleum & Chemical Corp. (SNP-Free Report).
 
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Here are highlights from Friday’s Analyst Blog:

Valero Energy Partners Files IPO
 
Valero Energy Corporation (VLO-Free Report) announced that its subsidiary Valero Energy Partners LP filed a document with regulators for an initial public offering of its common units to raise around $345 million. However, the number of shares in the offering and their price has not yet been disclosed. Valero Energy Partners LP intends to list its common units on the New York Stock Exchange under the symbol "VLP".

Valero Energy Partners LP was formed to operate pipelines and terminals for the transportation of crude oil and refined petroleum products. Assets in the partnership would include crude and refined-products pipelines and terminals in three systems, which serve Valero's Port Arthur refinery, its McKee plant in the Panhandle and its Memphis refinery.

Valero is moving ahead with the formation of the master limited partnership (MLP) owing to significant financial benefits. An MLP can raise money from the bourses but is taxed only at the unit holder level. These are exempted from paying corporate income taxes.

Valero is the largest independent refiner and marketer of petroleum products in the U.S. It has a refining capacity of 3 million barrels per day across 16 refineries located throughout the U.S., Canada and the Caribbean.

Valero spun off 80% stake of its retail arm – CST Brands Inc. (CST-Free Report) – through a tax-advantaged distribution to shareholders, to unlock value in May 2013. The spin-off generated an immediate net cash benefit of $500 million, after shelling out $220 million in taxes. We feel the move would help the company to concentrate on its industry-specific strategies.

We remain upbeat on Valero for the remainder of 2013 and foresee attractive opportunities that will position it uniquely among refiners to grow earnings and cash flow per share going forward. Additionally, Valero’s string of growth projects and operational improvement will drive free cash flow generation in 2013. However, second quarter earnings and revenues fell on an annual basis, due mainly to lower refining margins in each of the company’s regions and higher refining operating expenses.

Valero holds a Zacks Rank #3, which is equivalent to a short-term Hold rating. Other energy sector stocks that are expected to significantly outperform the equity markets in the next one to three months are Zacks Rank #1 (Strong Buy) SM Energy Company (SM-Free Report) and China Petroleum & Chemical Corp. (SNP-Free Report).
 
Regis Downgraded to Underperform

On Sep 18, 2013, we downgraded our long-term recommendation on Regis Corporation (RGS-Free Report), the owner, operator and franchisor of hairstyling and hair-care salons worldwide, to Underperform following weak fourth-quarter fiscal 2013 results.

Why the Downgrade?

Estimates for Regis have been declining after it reported fourth-quarter fiscal 2013 results on Aug 27, 2013. Regis announced lackluster fourth-quarter results, missing the Zacks Consensus Estimate for both earnings and revenues. The company’s adjusted earnings of 6 cents per share missed the Zacks Consensus Estimate of 10 cents by 40% and the comparable year-ago quarter’s earnings of 36 cents by 83.3% due to lower top line and higher costs. Moreover, the company posted an average negative earnings surprise of 69.31% over the past four quarters.

In the fourth quarter, total revenue declined 5.0% year over year to $502.3 million, missing the Zacks Consensus Estimate by 2.3%. Regis’ revenues have been reeling under pressure for the past few quarters owing to the decline in comparable sales (comps) and lower traffic.

Following the release of fourth-quarter results, the Zacks Consensus Estimate has been reduced, as analysts are apprehensive of the stock’s performance. The Zacks Consensus Estimate for fiscal 2014 fell by 41.7% to 21 cents, over the past 30 days. The company now has a Zacks Rank #5 (Strong Sell).

Cause for Concern

Owing to the continuous fall in guest count, the company has been witnessing declining comps for the past 20 quarters. Although the company has undertaken several sales-building initiatives, we believe that the sluggish comps trend will continue to affect its performance until the customer-visit patterns completely rebound especially in the U.S.

In the ensuing quarters, the company will incur increased expenses due to its various sales-driven initiatives. Profit is also expected to be under pressure due to the stretching of the company’s normal working hours, which in turn will lead to higher labor costs.

As the company’s major international company-owned salons are located primarily in the U.K., the challenging retail environment in the region will continue to be a headwind. Apart from this, continuous changes in fashion trends are a risk for a company that earns revenues through providing latest haircuts and styling.

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