Costs Hampering Borg Warner

An update has come out on Borg Warner, Inc. (BWA), in which senior auto industry analyst Paul Raman, CFA is restating his Hold rating on the company.  We excerpted the following details:

'Borg Warner is expected to benefit from the growing demand for its strong technology-based product portfolio. About $1.95 billion of new power-train business is expected between 2008 and 2010, which should boost revenues in a significant manner.

'Also, BWA has healthy financials with low debt and has further taken initiatives to maintain margins in the challenging North American industry environment. Currently, shares of BWA are trading at 20.3x our 2007 EPS estimate of $4.98. We are rating BWA's stock a Hold, as the impressive slew of new product launches is burdened with high raw material prices.

'However, due to high raw material costs and price concessions to automotive makers, we rate the shares a Hold, with a target of $106.20. Our cautious approach is reflected in our six-month target price of $106.20, which is derived by using our 2007 EPS estimate, and a forward multiple of 21.3x.'

IDC Upside Limited

The following excerpts explain why Zacks senior service sector analyst Steve Biggs, CFA remains neutral on Interactive Data Corporation (IDC), the business information company:

'Interactive Data Corporation has shown growth in its core pricing and reference data and eSignal businesses as it successfully adds to its offering and integrates acquisitions. A healthy cash flow has allowed it to return cash to shareholders and repurchase stock. However, recent disruptions in the credit markets could constrain spending within its customer base, and the stock is trading at a relatively high valuation.

'Shares of Interactive Data are currently trading at 24.1x our 2008 earnings estimate of $1.30. This multiple represents a discount to industry mean and industry median. We are encouraged by recent results as well as raised 2007 guidance, but believe that there is limited upside to the stock at current levels given the company's dependence on acquisitions, and believe its majority ownership by Pearson will limit its valuation. We, therefore, reiterate our Hold recommendation and set our price target at $32.50, which is based on a multiple of 25.0x 2008 EPS estimate, in-line with the industry median.'

Valuation High on RAI

An update has just come out today on Reynolds American, Inc. (RAI), in which senior tobacco industry analyst Steven Ralston, CFA is restating his Hold rating on the company mostly due to external factors.  We excerpted the following details:

'Reynolds American, Inc. was formed by the merger of R.J. Reynolds (RJR) and the U.S. operations of Brown & Williamson. Management has achieved over $1 billion in integration cost savings and operational synergies from productivity initiatives. Although the cost savings and the new brand portfolio strategy are contributing to earnings, continued volume declines, additional debt from the Conwood acquisition and the class-action status of the Light cigarette suit warrant caution.

'Reynolds American's stock (including RJR) has traded in a P/E multiple range of 6 to 17 over the last five years. The stock maintains a low P/E primarily due to tobacco-related litigation issues. The stock has been even pressured down to a single digit P/E during times of court case losses.

'We expect Reynolds American's stock to trade in a P/E multiple range of 11 to 17. Management has recently increased sales growth targets to the mid-single digits range from prior expectations of low-single-digit growth despite expectations that unit volume growth should continue to decline. The stock is currently trading in the high-end of the historical range at a P/E multiple of 16.1 since improved pricing and productivity initiatives are driving earnings growth. Hence, the Hold rating is maintained. The target price of $72 is 17x 12-month trailing earnings of $4.23.'

Wyeth Worth $50 a Share

The following excerpts explains why Zacks senior pharmaceutical industry analyst Jason Napodano, CFA  remains Neutral on Wyeth Pharmaceuticals (WYE), one of the world's largest research-driven pharmaceutical and healthcare products company:

'Wyeth possesses a strong product offering with key products Effexor XR, Protonix, Prevnar and Enbrel. The company also has a number of intriguing strategic alliances and several potential billion dollar drugs in the late-stage pipeline. These new drugs should help contribute to strong top- and bottom-line growth over the next several years.

'Wyeth's performance over the past several quarters has been solid. Although we were disappointed to hear about the company's recent regulatory setbacks, we believe Wyeth has an impressive pipeline and a good group of core growth drivers. We see the stock as a good core holding in large-pharma. The name is fairly valued at $50 in our view and we maintain our Hold rating on the stock.

'We see the company posting 7-8% earnings growth over the next several years. This is a premium to many of Wyeth's peers such as GlaxoSmithKline (GSK) and Pfizer (PFE). We believe the company offers compelling fundamentals from an industry standpoint that is assuming there are no more Phen-Fen issues. We have a target price of $50 based on roughly 14.1x our 2007 EPS estimate of $3.55.'

Squeezing Sony on Costs

Zacks senior equities analyst Steve Biggs, CFA is reiterating his Sell recommendation on shares of Sony Corp. (SNE), as trends continue to appear difficult and very cost-competitive in its different markets:

'We believe Sony will continue to struggle as it faces competition from innovative digital products and struggles to ramp production of its PlayStation 3. In addition, Sony is facing increasing competition from low-cost manufacturers in Asia as the consumer market slows. We therefore maintain a Sell recommendation on SNE shares and set a $48.00 price target.

'Although Sony has been developing high value-added semiconductors and other in-house digital devices to counter these challenges, these require huge capital investments. Management currently expects to continue its heavy investments in R&D of approximately $4,782.6 million and capital expenditures of $3,826.1 million for fiscal 2007.

'Moreover, Sony has fallen behind its rivals in its traditional core markets such as portable music players, DVD/VCR recorders, and other products in the consumer electronics and computer business, and is currently working aggressively to catch up with its BRAVIA line of LCD televisions. However, competition from low-cost manufacturers is likely to pressure selling prices and margins.'

SGY Going Shopping

Currently rated a Hold by Zacks senior energy analyst Sheraz Mian, Stone Energy Corp. (SGY) looks to be ready to make some deals following its divestment of its Rocky Mountains property holdings:

'Stone recently completed the long-anticipated sale of substantially all of its Rockies properties. The company used part of the sale proceeds for debt reduction, bringing its leverage to a comfortable level.