Physicians Formula Facing Lags

Management at Physicians Formula (FACE) continues to implement the growth strategy of focusing on the company's niche in the cosmetics industry and generating sales growth through new product introductions, increased distribution and international expansion. Instead of being driven by changing fashion trends, Physicians Formula differentiates itself by concentrating on a segment of the cosmetics industry that addresses skin imperfections. However, the recent strategy in the third quarter to generate sales by increasing trade spending is concerning.

Since the company's IPO in November 2006, Physicians Formula's stock has traded in a wide P/E range of 16.4 to 46.3. The company has exhibited an above-average sales growth rate, but earnings growth has lagged sales growth due to the incremental cost of being a public company, and the costs required to launch new products and maintain shelf space.

The stock is selling at the low-end of the (albeit short) historical range due to management's strategy to aggressively spend on advertising and promotional activities and the expectation of poor seasonal sales. The target price is $10.25 per share based on a P/E of 21. The Hold rating is maintained.

Stay Bullish on Tesoro Shares

Tesoro (TSO) reported weaker-than-expected fourth-quarter results, reflecting the unplanned outage at the Hawaii refinery and the very weak refining margin environment in all regions of the country, particularly in Tesoro's core of the West Coast region. The company's realized margin during the quarter was down roughly 35% from the year-earlier level as high feedstock costs and relatively moderate product demand ate into margins.

We believe that high feedstock and operating costs will continue to weigh on earnings through the first half of 2008. We are lowering our 2008 estimate ($5.10 vs. $5.95) and introducing 2009 estimate at $5.95.

Despite these relatively weak near-term fundamentals, our long-term macro outlook remains favorable, particularly for the West Coast market. Tesoro's strong leverage to this key market, which got a further boost from the recent Shell refinery acquisition, is particularly valuable.

Valuation has become particularly compelling following the recent sell off, which offers significant upside from current levels. Our new $53 price objective, reduced from $62 before, reflects a 2008 P/E multiple of 10.4x. We believe that Tesoro is better positioned than most of its peers in the current environment given the positive margin outlook for its core West Coast market in the longer term.

NOVA Chemicals' Business Up

NOVA Chemicals' (NCX) earnings in the near-term will be driven by a relatively strong ethylene market and cost cutting in the styrenics business.