Visteon Looks to Asian Growth

On July 30, Visteon Corp. (VC) reported a loss per share of $0.32 in the second quarter from continuing operations, compared to the loss per share of $0.46 in the same quarter of the previous year.

The company is focusing on strengthening its non-Ford businesses and reducing costs in order to attain long-term profitability. The closure of underperforming facilities and the reduction of headcount under the three-year improvement plan are benefiting the company. Both restructuring facilities and overhead reductions would result in cumulative savings of $635 million by the end of 2010.

However, the company's near-term prospects have been dampened by higher costs and a weak automotive market. Moreover, higher restructuring charges are eroding the profits of the company. Thus, we maintain our Hold rating, with a target price of $3.00.

Visteon's primary objective is to reduce its excessive dependence on its earlier parent company, Ford (F). The company has made some progress in this regard by increasingly including other clients in its business mix. The company plans to make Hyundai Motor Co. and Kia Motor Corp. their largest customers, accounting for 28% of its total sales by 2010. It aims to cut down sales to Ford's North American operations to 6% from 15%.

However, Ford still accounts for a significant portion of the company's annual revenue. As a result, constant production cuts and market share losses at Ford are taking a significant toll on Visteon's earnings. Given the slowing U.S. economy and slumping housing market, sales and production in North America are expected to decline in 2008. Growth in the auto industry is likely to be stagnant because of weak demand and pricing.

DSCM What the Doctor Ordered

Drugstore.com's (DSCM) second quarter sales were better than expected, and its net loss of $0.02/share was in-line with consensus estimates. The company also maintained its full-year outlook of $490-$500 million in sales and a net loss of $3.0 million to a net profit of $1.0 million.

The management's strategy to focus on improving profit margins started to take shape in the second half of 2006. We expect these positive trends to continue for the next several quarters. The company's business model should be able to generate stable revenue and cash flow thanks to the large percentage of repeat customer orders, which accounted for 81% of its sales in the second quarter of 2008.

Drugstore.com continues to show consistent sales growth with steady profit margin improvements. As a result, we are boosting our estimates. We are now estimating the company to earn $0.01/share in 2008 and $0.10/share in 2009.