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Zacks Industry Rank Analysis Highlights: American International Group, FLIR Systems, Genworth Financial, Lincoln National and Northrop Grumman

Zacks.com releases the latest Zacks Industry Rank. Stocks featured in this weeks analysis includes American International Group (NYSE: AIG), FLIR Systems (Nasdaq: FLIR), Genworth Financial (NYSE: GNW), Lincoln National (NYSE: LNC) and Northrop Grumman (NYSE: NOC). 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.

Aerospace continues to be the best ranked sector.

Most of the Zacks #1 Rank ("strong buy") and Zacks #2 Rank ("buy") stocks within this sector derive a significant amount of their revenues from government spending. Two ongoing wars and a sustained focus on homeland security are providing a boost to revenues and earnings for aerospace and defense companies.

Although companies like Northrop Grumman (NYSE: NOC) are very dependent on defense spending, there are companies within this group that also do a large amount of commercial business, such as FLIR Systems (Nasdaq: FLIR).

FLIR designs and manufactures thermal imaging and infrared camera systems. The company's products are used both for surveillance and industrial applications, such as leak detection.

FLIR generated revenues of $242.6 billion in the fourth-quarter, an increase of 31%. (Approximately 47% of sales came from the company's Government Systems' division). Adjusted earnings totaled 30 cents per share, matching expectations.

The company expects the favorable conditions to continue and guided for 2008 earnings between $1.13 and $1.20 per share. Nearly all of the covering brokerage analysts raised their forecast in response, sending the consensus earnings estimate seven cents higher to $1.18 per share.

FLIR is a Zacks #1 Rank stock and is classified in Electronics-Military Systems. NOC is Zacks #2 Rank stocks and are classified in Aerospace/Defense.

Moving on

Shares of American International Group (NYSE: AIG) plunged to a five-year low on Tuesday because of subprime fears.

An SEC filing revealed that the company's model underestimated losses for its AIG Financial Products Corporation and AIG Trading Group subsidiaries (referred to collectively as AIGFP). The revised numbers showed a potential $5 billion loss in November, versus a previously disclosed $1.6 billion decline in valuation.

On Tuesday, AIG responded by stating, "Any losses AIGFP may realize over time as a result of meeting its obligations under these derivatives will not be material to AIG".

So far, the fourth-quarter consensus estimate for AIG is largely unchanged in reaction to the new filing. The consensus earnings estimate calls for the insurance conglomerate to have earned $1.38 per share. This forecast is down two cents from a week ago. The most accurate estimate is more bearish at $1.37 per share. The company will likely report on Feb 28. AIG is a Zacks #3 Rank ("hold") stock.

AIG is not the only insurer to be tied to the subprime crisis. Last week, Genworth Financial (NYSE: GNW) and Lincoln National (NYSE: LNC) all reported write-downs caused by the subprime crisis. GNW incurred a loss of $93 million, LNC wrote down $193 million and PFG realized a loss of at least $57 million. LNC is a Zacks #5 Rank ("strong sell") stock and GNW is a Zacks #4 Rank ("sell") stock.

So why are insurers being affected by subprime?

The answer requires an understanding of their business models. Insurers use actuarial models to determine what future claims may total. Based on these models, claims risk for each client is assessed and a premium is determined. (The higher the risk, the higher the premium.) These premiums are invested so that money paid in can grow over time.

In investing the premium payments, an insurer seeks to accomplish two goals. The first is to provide an extra source of income in addition to the premiums. The second is to ensure that an adequate balance of cash is available each year based on the expected level of claims. Therefore, insurers seek a combination of stocks (long-term growth) and bonds (short and mid-term income).

Given the size of their portfolios and the varied timing of claim payments, insurers need to diversify across various assets. Part of this diversification includes asset-backed securities, which typically pay a higher level of interest. While diversification does help returns over the long-term, the current environment and the structure of some subprime and ALT-A related securities is hurting the portfolios of multiple investors, including insurers.

I previously warned that insurers could be adversely affected by the subprime crisis and thus I'm not surprised to see some companies reporting declines in their investment income. I also think it is probable that the credit crunch will impact first-quarter earnings for these companies.

The trend in earnings estimate revisions supports my hypothesis. During the past four weeks, more estimates have been cut than raised on companies within Insurance-Life, Insurance-Multiline and Insurance-Property/Casualty.

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.

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Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.

The performance of the Zacks Rank portfolios for annual and year-to-date periods are the linked monthly total returns (price changes + dividends) of equal weighted hypothetical portfolios, consisting of those stocks with the indicated Zacks Rank, assuming monthly rebalancing and zero transaction costs. These are not the returns of actual portfolios. The hypothetical portfolios were created at the beginning of each month from January 1988 forward based on the values of the Zacks Rank available to Zacks' clients before the beginning of each month. The portfolios created monthly from 1988 through September 2006 exclude ADRs and are comprised of stocks that have the indicated Zacks Rank and were covered by at least two analysts at the time of the stocks inclusion in the portfolio. Starting in October 2006 and going forward, the portfolios are comprised of all stocks with the indicated Zacks Rank and do not exclude ADRs, which is more reflective of the list of stocks that customers will find on the Zacks web sites. These performance numbers have been audited from 1995 through 2003 by Virchow, Krause & Company, LLP.

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Disclaimer: Past performance does not guarantee future results. Investors should always research companies and securities before making any investments. Nothing herein should be construed as an offer or solicitation to buy or sell any security.

Contacts:

Zacks.com
Charles Rotblut, CFA
Phone: 312-265-9352
Email: pr@zacks.com
Visit: www.Zacks.com

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