Benefits for Cleveland Cliffs
Strong industrial growth in China has triggered demand for steel, resulting in higher demand for iron ore. Cleveland-Cliffs, Inc. (CLF) stands to benefit from this continued development. CLF's portfolio of both established and recent iron ore and metallurgical coal assets positions it to capitalize on global industry dynamics in 2008 and beyond.
Our outlook for the Metals industry is positive, and commodity prices are likely to lead to an increase in earnings for metal companies over the next two to three years. We believe stronger commodity prices should significantly boost revenues for CLF. As a result, we rate the shares a Buy with a target of $120.
American Tower Stands Tall
We reaffirmed our Buy recommendation with a higher valuation target for American Tower Corp. (AMT), a leading operator of wireless communications towers in the USA, Mexico and Brazil, following first quarter 2008 financial results, better than our estimates. Overall performance has been driven by substantial demand for more tower space to facilitate high-speed data services and mobile video, in particular 3G and WiMAX technologies.
The company continues to improve on several of its financial metric benchmarks and has sequentially outperformed its peer group on an EBITDA margin basis. Although a substantial level of debt remains concerning, management has provided a financial outlook that operating cash flow is likely to increase 15% in fiscal 2008.
Our long-term view regarding the wireless tower industry remains positive and we believe American Tower is well positioned to capitalize on emerging telecom network deployment opportunities. American Tower is trading at 108.6x our estimated earnings for 2008, which represents a significant premium to the forward P/E ratio for the S&P 500 but at a discount to the peer group average.
Given the improved earnings opportunities for the company (EBITDA), the sustainability and recurring base of its revenue stream, and considering massive ongoing wireless data deployments, we maintain our Buy rating. We also have a higher valuation target of $50 equating to 2008 estimated EV/EBITDA multiple of 23.75x, closer to the peer group average.
A Bit of a Slip for KONG
Kongzhong (KONG) announced a decrease in profits for the first quarter due to rising expenses. Its revenue met market expectations, but its EPS missed the market consensus. Revenue has increased sequentially for the past three quarters.
Although we are not optimistic about its prospects in the near term due to the tough WVAS operating environment, the company still has enough cash to look for another source of revenue growth in the future. The low P/B ratio of the stock can provide some support for its stock price.
Therefore, we are maintaining our Hold recommendation for the stock. Based on our estimate for fiscal year 2008 earnings per ADS, the stock is trading at 25.5x, which is slightly below that of the industry mean. Based on our estimate for fiscal year 2009 earnings per ADS, the stock is trading at 17.7x, which is far below that of the industry mean. Using a P/E multiple of 19.2x our fiscal year 2008 earnings per ADS estimate of $0.26 yields a target price of $5.00.
U.S. Keeps Cooper Tire a Hold
Cooper Tire & Rubber Company (CTB) specializes in the manufacture and marketing of automotive products. A focus on improving product mix and lowering costs is likely to improve the earnings prospects of the company in the long-term. The company is working constantly to increase its capacity in order to meet the rising demand for replacement tires in the high performance and ultra-high performance categories.
The company's International segment is delivering strong performance in both Asia and Europe. However, a challenging North American auto environment makes us rate the stock a Hold with a six-month target price of $13.50.
Currently, CTB is trading at 15.9x our 2008 EPS estimate of $0.80. Initiatives taken by CTB to improve its product mix and cut costs will help the company restore margins in the future.
