Sell Reiterated on CONSOL
Despite a recent run-up in the share price of coal mining company CONSOL Energy, Inc. (CNX), Zacks equities analyst Neil Malkin reiterates his Sell rating on the shares. The following excerpts explain his position:
'We maintain our current rating of Sell for CONSOL Energy. Their recent run-up in stock price, nearly 20% since late October, creates opportunities for a pull due to profit taking and uncertainty regarding the U.S. economy. Although the Buchanan Mine is scheduled to be re-entered in late January, it is still uncertain as to how long repairs will take. Moreover, Consol faces additional downside risk related to the volatility in U.S. coal prices that they are heavily tied to. Our fourth quarter and full year 2007 EPS guidance remain unchanged at $0.45 and $1.86 per share, respectively.
'We have decided to use a fairly simplistic discounted cash flows (DCF) valuation as our method for putting a fair value, and thus a six-month target price, on Consol's shares. Our first assumption is that net income overstates the cash flow available to shareholders by 10%. This is due to factors mentioned above.
'Second, the model will not account for earnings being retained and reinvested in the business. The model will instead assume that earnings are paid out at the end of every year and not reinvested in the business. The growth rates will be lowered to counterbalance this effect.
'As mentioned above, all of the earnings numbers are subsequently reduced by 10% to more accurately reflect cash available to shareholders. The resulting value for the shares is just under $48. Adjusting that to a six-month target price at a 10% annual rate of return gives an approximate price of $50 per share.'
On the Sidelines with XTO
The following excerpts explain why Zacks energy sector analyst Sheraz A. Mian prefers to remain on the sidelines of XTO Energy, Inc. (XTO), the independent oil and gas producer:
'XTO Energy remains well positioned to maintain its impressive production-growth momentum in 2008, with an anticipated 17% increase in production volumes for the year. However, we are continuing our Hold rating on XTO ahead of the company's fourth quarter 2007 results as we believe that the strong production-growth rate and competitive cost structure are already reflected in the stock's premium valuation relative to the peer group.
'On November 14, 2007 XTO announced a 5-for-4 stock split to be distributed in the form of a stock dividend. The company also declared that it would maintain its quarterly cash dividend of $0.12 per share ($0.48 per share annual dividend), effecting a 25% dividend increase. This was paid on December 13 to shareholders of record as of November 28, 2007.
