Estimates Upped on Hanger Ortho

Hanger Orthopedic Group, Inc. (HGR) produced better-than-expected fourth quarter results, helped by strong 8% same-center growth and a lower tax rate. SG&A expense was higher than expected but that was due to increased performance-related compensation costs. The company is guiding for $0.70-$0.72 in 2008 EPS and revenues of $670-$680 million.

Another Medicare fee increase will help 2008 results. We are raising our estimates on the out-performance, and our 2008 EPS estimate is a penny above the company's range.

As the market leader, HGR has economies of scale unmatched by other competitors. To further drive awareness and market share in a 1%-2% volume growth market, the company's field force provides extensive education to physicians. To build relationships, the company is attempting to become a one-stop shop by offering a comprehensive total care package to patients that physicians can rely upon.

We believe the company should trade in-line with comparables. Our target remains at $11.50, or roughly 16x our expected 2008 EPS of $0.74, in-line with the industry 1.2x median P/E/G and comparables 1.4x 2008 P/E/G average.

Moody's Weathering the Storm

Moody's Corporation (MCO) has a solid franchise in the rating of debt instruments and has also established a strong franchise in credit research. However, weakness in the U.S. residential mortgage and related markets has begun to take a toll on the company, leading to a projected double digit revenue decline in 2008. Although we don't expect a meaningful rebound in mortgage related business over the near-term, strong international revenue growth and other businesses should help MCO weather the storm.

Moody's shares are currently trading at a P/E of 16.4x our 2008 EPS estimate of $2.21, a significant discount to the industry. A slowdown in residential mortgages and deteriorating credit market conditions are responsible for this decline in stock price as investors have grown increasingly concerned about MCO's outlook. We believe that Moody's remain a solid franchise and will show substantial growth over the long-term with its diversified business model and international growth.

However, we also believe that the company will face continued pressure from negative headlines and the fear of more regulatory oversight for the foreseeable future. We, therefore, maintain a Hold recommendation on the shares of MCO with a target price of $38 based on a P/E multiple of 17.2x our 2008 EPS estimate. This P/E is towards the low-end of its five-year historical trading range of 14x 30x forward earnings, reflecting continued risks associated with the home mortgage market.

Strong Demand for CELL Continuing

Brightpoint, Inc. (CELL), a leading distributor of devices and logistic services to the wireless industry, declared fourth quarter 2007 financial results significantly above our estimates. This was primarily due to increased demand for high-tech mobile devices, ongoing global expansion initiatives, and flexible supply-chain management systems. Two recently consummated acquisitions are sustaining the organic growth of Brightpoint's business-facilitated improved gross margins.

The company plans to bolster its higher margin logistic services to manufacturers and wireless carriers, and believes its mobile handset distribution opportunities remain strong, especially for 3G wireless devices in emerging markets. However, recent weakness in the global economy may generate some short-term sales fluctuations. Furthermore, the company's first quarter is typically soft from a sales perspective due to seasonality effects.

CELL is trading at 13.7x to our estimated earnings for 2008, which represents a significant discount to both the forward P/E ratio for the S&P 500 and the peer group. We believe the share price will remain supported as it is correlated with overall demand of mobile handsets on a worldwide basis.

The company is progressing with its higher margin logistic business opportunities and warrants a premium based on growth rates in emerging markets. With respect to the P/S and EV/S metrics, the stock is trading below the industry average. Given the improved earnings opportunities for the company, we maintain a Buy rating with a $16 six-month target price based on a P/S multiple of 0.25x our fiscal 2008 sales estimate.

Surge Continues for DRS Technologies

As a pure-play defense contractor, DRS Technologies, Inc. (DRS) is a leading supplier of defense electronic systems with exposure to the high-growth C4ISR area of the defense budget. Various multi-year contracts within the defense sector further strengthened the company's position as a key supplier in the tactical secure communications marketplace. Looking ahead, the acquisition of Engineered Support Systems also bodes well for the outlook of the company.

As of this report, DRS common stock trades at 14.8x our current fiscal year 2008 earnings per share estimate, or at a significant discount to comparable defense electronics suppliers, or at 13.9x our forward fiscal year 2009 EPS estimate. Likewise, the stock also trades at significant discounts to its defense industry peers based upon relative multiples of sales, cash flow and book value.

Accordingly, with an attractive valuation across multiple financial metrics and a bullish outlook, we maintain our Buy recommendation on DRS with a six-month target price of $58, or 16.3x and 15.3x, respectively, our FY 08 and FY 09 EPS estimates. Price appreciation to our near-term valuation target, coupled with the recently instated $0.03 per share quarterly dividend which we deem very sustainable and secure represents annualized total return potential of 20.6%.

Alnylam Still in Early Stages

Alnylam Pharmaceuticals (ALNY), is a biopharmaceutical company developing novel therapeutics based on RNA interference, or RNAi technology. The year 2007 was an exciting and a transformative one for the company. The multimillion dollar deal with Roche changed its financial landscape and eased concerns regarding the company's operational cash flow.

The company also successfully advanced its first candidate, ALN-RSV01, into phase II trials and combined its technical know-how and intellectual property with that of Isis Pharmaceuticals (ISIS) to launch Regulus Therapeutics. Regulus will seek to develop and commercialize micro-RNA therapeutics.

We maintain our Hold rating on Alnylam shares with a target price of $36. The company was hard at work to validate the RNAi technology. Merck's (MRK) $1.1 billion dollar acquisition of Sirna Therapeutics, a rival of Alnylam, in 2006 and the Nobel prize in physiology or medicine for 2006 being awarded jointly to Andrew Z. Fire and Craig C. Mello for their discovery of RNA interference-gene silencing by double-stranded RNA were early pointers to the value this new technology held. The acquisition of Sirna also opens up the opportunity for other RNAi companies like Alnylam to be acquired by big pharma or biotech companies.

However, we remind investors that both Sirna and Alnylam are early-stage development companies. With just one candidate in clinical stage development, we are hesitant to project any product related revenues for Alnylam before 2010. Though the company's balance sheet is in good shape, valuation of the company at current levels remains a bit of a concern.

We value Alnylam using relative valuation metrics. The most comparable peers for Alnylam are Sirna Therapeutics and Isis Pharmaceutical. Market cap for Sirna was $923 million when it was bought by Merck for $1.1 billion. Market cap for Isis Pharmaceutical is $1.32 billion. As such, we come up with a $36 price target with a market cap of $1.58 billion for ALNY.

 

Newly Bullish on Net Servicos

We are changing our recommendation on Net Servicos (NETC) from Hold to Buy. We are encouraged by its solid operating results during 2006, the first half of 2007, and the better-than-expected numbers for the fourth quarter of 2007.

We expect this trend to continue in the short term due to the current positive economic environment in Brazil. The outlook for Brazilian real in the short term remains positive, and that will help to reduce interest expenses in the following quarters. Additionally, its voice service and broadband product's performance remains highly encouraging. Currently, NETC is trading with a valuation of 20.4x our 2008 expected earnings.

It is important to remember that the company has a long tradition of weak results. However, we are convinced that NETC is now in a positive cycle that should include continued growth in its subscriber base, positive cash flow generation and increasing net income, mainly after the fourth quarter 2007 good results.

Additionally, we are highly encouraged by the performance and the outlook for the voice service product and the continued growth in the broadband segment. Finally, we believe the company is in a unique position to benefit from the continued growing demand for cheap telecommunication products and reliable broadband devices in Brazil. Our target is $15.25, representing a P/E around 25x our 2008 earnings estimates, closer to the industry mean. 

Mitsubishi Financial Rates a Buy

We are continuing to have our Buy rating on Mitsubishi UFJ Financial Group, Inc. (MTU), as well as our $12.50 target price. MUFG reported fiscal nine months (December 31) earnings of 315 billion yen, down 54% year over, largely reflecting a 341 billion yen increase in credit costs. This was due to 55 billion yen in impairment losses on sub-prime and SIV investments, as well as the absence of a 140 billion yen reversal of the credit loss allowance as occurred in the prior-year period.

We are continuing our fiscal year (March 31) EPADS estimates at $0.50 for 2007 and $0.62 for 2008. For 2007, this is broadly in line with the company's reduced earnings forecast for the year of 600 billion yen (down 25% from 800 billion yen before). Positively, MUFG recently completed a 150 billion yen share repurchase plan and raised its annual dividend by 27%.

At its current price based on the consensus estimates for fiscal year ending March 31, 2008 and March 31, 2009, the company is trading at 16.8x and 12.9x, respectively, representing premiums to the P/E medians for the sector. Using another valuation metric (price/book), MUFG is trading at a significant discount to its peer group, as well as its own 1.6X price/book value metric over the last couple of years. Assuming moderate valuation expansion to MUFG's average 1.6x price/book ratio gives a price of $12.50, our target price. 

Sell Alpharma During Transition

Alpharma, Inc. (ALO) is a pharmaceutical company with operations in human and animal pharmaceuticals. With the sale of the generics business and the upcoming sale of the API business, Alpharma is focusing on establishing itself as a specialty pharmaceuticals company.

We expect 2008 to be another transitional year for the company with earnings declining significantly mainly due to increased SG&A spending related to the launch of Flector Patch. In the absence of any potential catalysts, investor focus will remain on the launch and acceptance of Flector Patch.

Although we expect earnings to rebound in 2009, we believe that the shares will remain under pressure over the coming quarters as the company works on maintaining Kadian growth and on ramping up Flector Patch sales. The company recently entered into an agreement for the sale of its API business for $395 million - this deal makes sense as the API business had been struggling over the past couple of years. The transaction is expected to close in the second quarter of 2008.

With the loss of revenues and operating income from the API business, we expect the deal to be EPS dilutive in 2008. However, we are leaving our model unchanged for the time being as the company will provide updated guidance following the closing of the transaction. Although the company is working on establishing long-term growth, a lot depends on its ability to execute its plans successfully.

Alpharma shares are currently trading at 62.2x our estimated calendar year 2008 EPS of $0.40. We believe the shares are overvalued at current levels. We rate the stock a Sell with a $20 price target. Our price target is based on 30.8x our 2009 EPS estimate.

Pressure on Aftermarket Tech Gains

Aftermarket Technology Corp. (ATAC) is the largest re-manufacturer of transmissions worldwide, with an 8% market share. Both the logistics and drive-train segments are well set for future growth, which makes us optimistic. However, soaring raw material prices and demand for concessions by a few customers such as Ford (F), DaimlerChrysler (DAI), Honda (HMC) and Cingular (T) -- all four comprising 81% of sales -- are expected to keep margins under pressure.

On February 12, 2008, Aftermarket Technology Corp. reported results for the fourth quarter of 2007. In the quarter, earnings from continuing operations were $0.41 per diluted share compared to $0.42 per diluted share for the fourth quarter in 2006. Sales increased to $134.6 million, an increase of 5.5% from $127.6 million for the same period in 2006. For 2007, earnings from continuing operations increased to $1.81 per diluted share compared to $0.81 per diluted share in 2006.

In 2008, earnings from continuing operations are anticipated to range between $1.60 and $2.00 per share. The company also expects to generate revenues of $550 million to $625 million in 2008. Currently, shares of Aftermarket are trading at 12.3x our 2008 EPS estimate of $2.09. Hence, we recommend a Hold and set a six-month target price of $30, which is14.4x our 2008 EPS estimate.

Telmex Downgraded to a Sell

We are changing our recommendation on Telefonos de Mexico or Telmex (TMX) from Hold to Sell. Fourth quarter 2007 results were lower than expected, and Mexican domestic growth has stalled. Expansion in other Latin American regions, particularly Brazil, is expected to continue in the near future.

Meanwhile, the company still needs to increase the profit margins of its acquired units, which are currently well below that of its Mexican business. Its valuation seems excessive if compared to other Latin American operators, and the difficult economic environment in the U.S. is a source of concern.

TMX is trading at 10x our 2008 earnings estimate, which represents a significant discount to the forward P/E ratio for the S&P 500 and the industry average. TMX's P/E discount mainly reflects slow projected growth for the Mexican local phone business as well as uncertainty surrounding the impact of recent acquisitions to further expand in Latin America, and the uncertain business environment is some Latin American countries.

However, if we consider the EV/2007 EBITDA valuation, the stock does not seem to be undervalued at all. Its price/sales ratio is also well above the industry mean. Indeed, we continue to have a positive outlook for Latin American economic growth, but the difficult economic environment in the U.S. should have a negative impact on Mexico in the very short-term, and the company is still highly dependent on its Mexican performance.

All considered we are changing our current recommendation on TMX from Hold to Sell.