Hold Buckeye Partners' Volatility
We are maintaining our Hold recommendation and price objective on Buckeye Partners (BPL) units as we continue to believe that current valuation adequately reflects Buckeye's middling growth prospects. The partnership's recent quarterly results were on the weaker side, reflecting lower-than-expected volumes and an increase in number of LP units.
However, the partnership's revenue was up significantly, buoyed by contributions from the Lodi Gas Storage and Farm & Home acquisitions. Importantly, the partnership raised its quarterly distribution by 1.5% sequentially to the annualized run rate of $3.40 per unit.
On a distribution yield basis, BPL common units are currently trading at a modest premium to the peer pipeline MLP group average (lower yield = higher value). This represents a 307 basis points spread over the 10-year Treasury bond, compared to the peer group's average spread of 326 basis points.
Our unchanged target price of $47 reflects a 6% distribution growth to $3.60 per unit over the next twelve months and a target yield of 7.60%. Our yield assumption is based on a 310 basis point spread over our 10-year Treasury bond yield expectation of 4.50%.
Wait on Post Property's Review
Post Properties (PPS) reported mediocre 1st quarter results, with recurring FFO [funds from operations, a key real estate investment trust -- or REIT -- metric] per share missing our estimates by $0.02 per share. The miss was due to expenses increasing faster than we projected.
The company is currently in a strategic review process which might include an outright sale of the company. Post received one bid in early January, and the company is most likely in active negotiations with several parties. Post has traded at an unwarranted premium to sector averages due to persistent buyout rumors, although shares have fallen due to the length of the process which has been going on since January.
With the company giving no news as to the status of talks, shares will trade in a narrow range until some announcement is made. We recommend investors hold the shares until the company finishes its explorations of strategic alternatives. We think $47.00 per share is the high end to any offer that the company will receive and a more realistic offer will value the company in the low 40s. We are setting our price target at 19x 2008 estimates or $37.00 per share.
Await Vital Images Launches
Vital Images (VTAL) reported Q1 EPS that were a penny below our estimate on roughly in-line revenue. Results continue to be impacted by the slowdown in the computed tomography and IT/PACS [picture archive and communications systems] markets.
We lowered our FY08 revenue and EPS estimates and also lowered our FY09 revenue and EPS estimates. Management lowered its FY08 guidance.
