Hold Recommendation on BT Group
BT Group Plc (BT) reported a weaker-than-expected third quarter of 2008, with revenues below our estimate but earnings, helped by a lower effective tax rate, were in-line. The company is moving ahead with the expansion of its 21CN network, which has been already rolled out on a limited basis.
BT Global continues to execute well, winning deals valued at 8.6 billion British pounds in the trailing 12-month period. The company has been able to expand EBITDA margins due to its restructuring efforts, although pricing pressure is causing traditional revenues to decline.
Shares of BT are currently trading at 9.7x our 2008 earnings estimate of $4.61 after we have raised our currency expectations for the British pound against the US dollar to $2.025 per pound, compared to our previous $1.95 per pound expectation. While the results for the third quarter of 2008 were weaker than our expectations both on the revenues as well as on the earnings side, we saw some EBITDA margin improvements as the company continues to improve its infrastructure and makes progress on the restructuring front.
We have slightly reduced our revenue estimates for the remainder of 2008 and 2009 because of the revenue miss in the most recent quarter while our earnings estimates are down for 2009 due to effects of restructuring expenses and also the weaker dollar. While our estimates may be conservative, the company is expected to spend around 450 million pounds ($877.5 million) for business restructuring in FY2008.
Advance Auto Parts Faces Challenges
Advance Auto Parts, Inc. (AAP) is a specialty retailer of automotive parts, accessories, and maintenance items. The company primarily caters to the do-it-yourself (DIY) and professional installer markets.
Though it is generating top-line growth by opening new stores, the company is currently facing a challenging industry environment. To combat the difficult industry metrics, AAP has reviewed its business strategies to drive sales, lower costs and increase return on invested capital (ROIC).
Thus we are maintaining a Hold recommendation until costs are contained and same-store sales improve. Currently, shares of Advanced Auto Parts, Inc. are trading at 13.1x our 2008 EPS estimate of $2.70.
We are impressed by AAP's performance in the face of a challenging environment and difficult sales comparisons. AAP is striving hard to increase its square footage growth and the company has healthy cash flow. Our six-month target price of $38 is 14.1x our 2008 EPS estimate.
Moderately Upbeat on Comstock
Comstock Resources (
CRK) reported in-line fourth-quarter 2007 results, as the impact of higher volumes and improved realizations was partially offset by higher costs. Importantly, the company replaced 326% of its 2007 volumes at an attractive unit finding and development cost of $2.60.
Excluding acquisitions, the company replaced 235% of its volumes. Production was up 30% last year and is expected to grow in the mid-teens range this year. We continue to like Comstock shares for its strong production-growth profile and still-attractive valuation. We are keeping our 2008 EPS estimate unchanged and introducing our 2009 estimate at $2.60.
Our price objective -- $37 per share -- and recommendation -- Buy -- remain unchanged. The company's proved offshore reserves at the end of 2007 are estimated at 398 Bcfe as compared to 344 Bcfe at the end of 2006.
