Select Comfort Estimates Lowered

Select Comfort Corporation's (SCSS) fourth quarter results came in below the company's bearish mid-quarter guidance. The company's sales trends continue to deteriorate and its profit margins are contracting. In addition, Select Comfort did not provide specific sales and earnings guidance, as it did in previous quarters.

Looking ahead, the company will not provide specific earnings guidance for fiscal 2008. However, the company currently anticipates that net income will be lower than 2007 on flat-to-slightly-lower year-over-year sales. The company plans to open 30 new stores and close at least 15 stores. The company does not anticipate incurring any significant asset impairment or lease-buyout costs associated with the store closures. Additionally, the company plans to remodel 50 stores.

Due to management's gloomy outlook for 2008, we are again lowering our estimates. We maintain our Hold rating on Select Comfort shares, as its shares now price in an extended period of weak results. Select Comfort shares trade at a discount to the industry average. We feel this discount is appropriate given the deterioration in the company's growth. The stock should continue to trade at this discount until its sales trends improve. Our target price is $5, which is about 12 times our 2008 EPS estimate.

Neutral on Puget Energy Buyout

In October 2007, Puget Energy, Inc. (PSD) announced that it will be bought out by a consortium of private investors led by Macquarie Infrastructure Partners, an affiliate of Macquarie Bank Ltd., for $7.4 billion, or $30 per share. PSD's stable earnings from regulated utility operations, growing electric generating capacity with recent regulated rate hikes, low-cost wind power additions, continuing customer growth and the WUTC approval related to Power Cost Only Rate Case (PCORC), collectively justify motivation for a leveraged buyout of PSD.

However, some risks remain in the form of uncertainty over the shareholders and regulatory bodies' approval regarding the merger. The recent $300 million private placement in the 4th quarter of 2007 will provide much-needed cash infusion into the company's weak balance sheet. Accordingly, we maintain a market-neutral Hold recommendation on PSD with a six-month target price of $27.25.

Going forward, until the utility is privatized later in 2008, we believe strong operating and financial results and improving liquidity will continue to help the fundamentals while a reasonable earnings-based-valuation relative to comparable diversified energy distribution utilities support PSD's share price. Price appreciation to our near-term valuation target, combined with the $0.25 quarterly dividend which we deem sustainable and secure based upon reasonable projected payouts represents annualized total return potential of 12.6%.

Improved Outlook for VNUS Medical

VNUS Medical Technologies, Inc. (VNUS) reported better-than-expected fourth quarter results on stronger generator placements, higher ClosureFAST revenues, better gross margin and lower litigation expense.