Chunghwa Telecom a Solid Buy

We maintain our Buy recommendation and the same valuation target for Chunghwa Telecom Co. Ltd. (CHT), the largest integrated telecom operator in Taiwan, ahead of its second quarter fiscal 2008 earnings results.

Robust growth of Internet & Data and Wireless value-added services boosted the sustainable long-term business prospects for the company. We believe the gradual migration to 3G mobile technology is likely to benefit the company?s financials moving forward.

Since the telecom subscriber base of Taiwan is near saturation, Chunghwa has undertaken initiatives, in synergy with its strong balance sheet, to implement a next-generation converged-IP network as it expands coverage outside Asia. This new endeavor enables the company to provide services in different regions of Europe and the U.S.A.

Chunghwa Telecom is trading at 17.9x our estimate for 2008 earnings, which represents a premium to both the S&P 500 and the peer group (which includes other Asian telecom carriers) average. With respect to other selected valuation metrics, the stock is also trading at a premium over its peer group median. We believe this valuation level reflects the company?s leading position in the broadband market and continued growth in mobile services and high speed FTTB offerings.

According to our assessment, the stock is modeled to trade above the S&P 500 average since growth rates in Asia continue to remain well above the worldwide averages. We set the valuation target to $28 based on 19.6x our forward fiscal 2008 earnings estimate.

PG&E to Remain Market Neutral

We maintain a market-neutral Hold recommendation on PG&E Corporation (PCG) common stock with a six-month target price of $41.25. Price appreciation to our near-term valuation target, coupled with a quarterly cash dividend of $0.39 per share, which we deem secure and sustainable, given reasonable projected payouts and the accretive effect of share repurchases, represents annualized total return potential of 12.9%.

Going forward, positive investment factors, including favorable decisions from California Public Utilities Commission (CPUC) and Federal Energy Regulatory Commission (FERC) including a CPUC authorized 11.35% return-on-equity (ROE) until 2010, long-term supply agreements, diversification into alternative power sources and infrastructure improvement programs such as the Cornerstone, Smart Meter and Tesla generating stations, will be partially offset by risks including rising natural gas prices, increased purchased power cost, higher pension costs, settlement of regulatory assets and an over-leveraged balance sheet.

The company has $13 billion of planned capital expenditures in the pipeline for the period 2008-2011, including approximately $3.7 billion in 2008. Dependence on external financing continued through the first quarter of 2008 when the Utility issued $600 million of long-term debt to finance its capital expenditures and working capital needs. However, on the other hand, the company redeemed over $454 million of long-term debt and $114 million of commercial paper in the first half of 2008.

As a result, Standard & Poor?s recently raised its corporate credit rating on the company to stable, citing favorable regulatory developments which continue to lower the company?s cost of capital. In 2008, CPUC reaffirmed the authorized ROE of 11.35% until 2010 as well as 52% equity ratio for 2008. Furthermore, the company increased its common stock dividend in 2008 to an annual rate of $1.56 per share, and currently yielding 3.9%.

Valspar Coats Over Rough Patch

In the third quarter, Valspar Corp.?s (VAL) diluted earnings per share were $0.44 as compared to $0.52 per share in the same quarter of the previous fiscal. Total revenues increased 7.2% to $957.7 million, helped primarily by increased sales due to acquisitions and currency effects.

Improved pricing and product mix, along with the positive benefits of the restructuring activity and acquisitions, are helping to realize sales gains. Presently, the company?s fastest growing markets are China, Latin America and Eastern Europe.

The management is currently using Lean Six Sigma to drive productivity in the corporation. However, a slumping housing market slowed demand for architectural and wood coating products. Moreover, higher raw material costs are eroding margins for the company. These prompt us to rate the stock a Hold with a six-month target price of $22.50.

The industrial paints business is also posting strong numbers on the back of an industrywide recovery and global sourcing. Valspar?s relationship with large retailers such as Lowe?s Companies Inc. (LOW) a U.S.-based retail chain of home improvement and appliance stores remains a steady source of demand.

The company?s discretionary spending on items other than employment costs is down 10% year-over-year. The capital spending was down by 45% for the third quarter of fiscal 2008 and will be down 40% year-over-year in fiscal 2008. The company anticipates capital spending of approximately $45 million in fiscal 2008.

EL Gets Boost from Outside U.S.

International sales gave The Estee Lauder Companies Inc. (EL) a good looking fiscal fourth quarter, which included earnings per share of 61 cents that bettered the consensus at 57 cents. The result also improved 36% from the previous year?s 45 cents. Net sales advanced 14% to $2.01 billion.