FedEx Estimates Get Cut

An update has just come out today on FedEx Corporation (FDX), in which senior logistic industry analyst Ann H. Heffron is restating her Hold rating on the company.  We excerpted the following details:

'We are maintaining our Hold on FedEx Corporation, but reducing our target price to $100. FDX reported 2008 second quarter (November 30) EPS of $1.54, down 19% year-over-year, but in-line with revised guidance of $1.45-$1.55 issued on November 16. We are cutting our diluted EPS estimates to $6.40 from $6.90 for fiscal 2008 (May 31) and to $7.25 from $7.75 for 2009.

'FDX continued its previously reduced 2008 EPS guidance of $6.40-$6.70 (down from $6.70-$7.10), noting that fuel surcharges are lagging higher fuel costs and the weak economy is hurting the LTL freight and US domestic express package segments. FDX's remedial actions include cost-control measures and cuts in capital spending. We believe FDX's dividend is safe.

'At its current price, FedEx is trading at a discount to its peer group median based on P/E, on par with the industry median for price/sales, and below the industry for price/book. The company's consensus projected earnings growth rate matches the industry median, and its operating margin and leverage (as measured by debt/total capital) are the same as the peer group.

'FDX trades at a discount to its closest peer, United Parcel Services (UPS), as measured by P/E, price/sales, and price/book, reflecting UPS's higher operating margin, profitability, and dividend yield. We see limited upside potential over the next six months and reiterate our Hold rating. Our $100 six-month price target is based on approximately 14X our fiscal year 2009 diluted EPS estimate of $7.25, providing a PEG (P/E divided by estimated future growth rate) of roughly 1.2X, in-line with the median for the industry.'

Mixed Bag with Sepracor

The following excerpts explain why Zacks senior healthcare industry analyst Jason Napodano, CFA remains cautious on Sepracor, Inc. (SEPR), the pharmaceutical company:

'Sepracor, Inc. engages in the discovery, development, and commercialization of products primarily for the treatment of respiratory and central nervous system (CNS) disorders. The company posted strong profitability in 2006, up from negative EPS in 2005. However, results over the past several quarters demonstrate the challenges Sepracor faces with both its key products.

'Xopenex is hampered by changes to reimbursement under the CMS program and Lunesta is unable to gain share in the face of generic Ambien. That said, changes to CMS policy and an international launch of Lunesta could reinvigorate growth in 2008. We see $28 as fair value.

'Business fundamentals have been mixed over the past several quarters. Lunesta growth has been a disappointment and with several new sleep medications coming to the market in the next few years we fail to see what ever drives market share gains above 15%. As such, we find it hard to believe Sepracor's stock will outperform while Lunesta treads water.

'Xopenex sales were a disappointment during the third quarter based on a challenging reimbursement environment. Management is working with Congress to improve the policy regarding Xopenex but we fail to see why investors should make a bet on a decision at this time.

'For Lunesta, management must continue to work on expanding the label and differentiating the product from generic Ambien. As such, maybe Sepracor management is right to pull back on the heavy promotional expense for Lunesta. The drug already has very high brand awareness, and without a new competitor to face in 2008 perhaps trends will improve.

'We are anxious to see Sepracor put its cash to work. Management plans to exit 2007 with over $950 million on the books. Until we have more confidence in the pipeline or in the possibility that Lunesta and Xopenex will perform better in 2008, we would avoid the name. Our price target is $28.'

Tyco Target $40

A Hold recommendation, earlier issued to electronic components manufacturer Tyco Electronics Ltd. (TEL) by Zacks senior electronic industry analyst Ken Nagy, CFA, has been maintained. Here we excerpted certain parts from his latest update:

'Tyco Electronics is an OEM of passive electronic components. The company separated from Tyco International on June 29, 2007. September quarter revenue was in-line with consensus estimates, although the EPS exceeded. Forward guidance is for a 10-12% sequential increase in organic sales.

'We expect the divestiture of the power systems business and de-emphasis on several computing products to contain revenue growth. Margin improvements are likely to occur once restructuring activities are completed. The debt level appears high. We believe the longer-term prospects are bright, however, we prefer to take a wait-and-see approach for the time being. TEL shares are currently trading at a 15.0x multiple of our 2008 earnings estimate (P/E).

'The company has operations all over the globe, which negates a dependence on any particular geography. However, it is significantly leveraged to the automotive and computing verticals, which are relatively low-growth markets. TEL has a smaller exposure to the higher-growth, more volatile handset and consumer markets.

'Management will likely find a strategy to balance growth and stability, but the primary focus for the time being is improving profitability. We are optimistic about TEL shares, but prefer to be on the sidelines until visibility improves. We are reiterating our Hold rating and $40 price target (16.3x 2008 earnings estimate).' 

Acquisition for NOV

Reiterating his bullish case for National-Oilwell Varco, Inc. (NOV), Zacks oil industry analyst Sheraz A. Mian explains why the future looks bright for one of the largest manufacturers of drilling equipment in the world:

'We are maintaining our Buy recommendation on NOV shares following its acquisition of Grant Prideco (GRP), in a $7.37 billion stock-and-cash deal. While there is some concern in the market regarding the quality dilution of NOV's product portfolio following the acquisition given GRP's exposure to the relatively soft North American onshore drilling scene, we do not put much stock in such fears.

'The strategic rationale of the transaction is compelling given the lack of product overlap and GRP's growing international footprint (approximately half of GRP's backlog at the end of the third quarter came from international markets, up from less than one third at the beginning of the year). Additionally, both companies enjoy market leading positions in their respective product lines. On the whole, the acquisition results in an oilfield machinery powerhouse enjoying a very strong cyclical leverage.

'This is the reasoning behind our continued bullish view on NOV shares. Our unchanged $85 price target reflects 2008 P/E and EV/EBITDA multiples of 18.2x and 9.4x, both well within historical trading ranges. We believe that the company's strong late-cycle leverage and its dominant market share position justify the valuation premium.'

Hold Federal Realty

An update has just come out today on Federal Realty Investment Trust (FRT), in which real estate analyst Greg Sukenik is restating his Hold rating on the company. We bring you the following details:

'Federal had a good 3Q07, as FFO of $0.92 per share was in line with our estimates. Rental growth on new/renewal leases continues to accelerate and overall portfolio occupancy is still above 95%. FRT is one of the best positioned strip mall REITs with top assets in high-growth areas of the country.

'We rate FRT a Hold due in part to valuation, which on a P/FFO basis is highest in the sector. Consumer spending has held up reasonably well despite pressure from declining home prices and rising energy costs. Although, there are signs that this holiday shopping season is shaping up to be one of the worst in years. FRT owns shopping centers in high income areas of the country, with a concentration of assets in Washington D.C., Boston, Philadelphia and California.

'The company's price/FFO multiple is now 50% higher than the Zacks strip retail center average of 15x our 2007 FFO estimates. We are starting to see signs that spending is slowing as consumers are burdened with falling home values.