Infineon Fights Currency Headwind

Infineon Technologies AG (IFX) reported a weak first quarter of 2008, as the combined pressures of weak DRAM prices, strong euro and weaker demand continued to hinder revenues and operating margins. We were disappointed by the poor showing by the AIM division, which declined sequentially, and Qimonda continued to face a tough DRAM pricing environment.

These combined results have led us to lower our revenue and earnings expectations for the remainder of 2008 and 2009. The AIM division remains the largest contributor in terms of revenues, although it declined 9% sequentially in the first quarter and reported a with a 12.5% EBIT margin. FY08 AIM segment revenues are expected to decline slightly compared to 2007 revenues and EBIT is also expected to decline in 2008 compared to 2007.

The company has decided to reduce its ownership in Qimonda to below 50% in the next two years. This should take away some of the drag on its profitability in the future, although the continued strength of the euro hinders margins at all of its operating segments.

The company, however, remained resolved to achieve 10% EBIT margin by FY09. We continue to rate shares of IFX a Hold, with $8.50 price target over the next six months or 0.63x our 2008 sales estimate.

Impressed with ZymoGenetics

ZymoGenetics, Inc. (ZGEN) is a biopharmaceutical company focused on the discovery, development and commercialization of therapeutic proteins for the prevention or treatment of human diseases. Recent approval of rhThrombin by the FDA and the clinical progress made by the company will drive the value for the company. We believe rhThrombin will provide significant boost to the company's top line growth in the coming quarters.

Other candidates should provide long-term growth for the company. Therefore, we maintain our Buy rating for the company with a price target of $16.

We are optimistic about the prospect of rhThrombin and believe it will capture a fair market share in the thrombin market due to its advantages over existing plasma derived thrombin products. With Bayer Healthcare (BAY) as a marketing partner, we believe sales ramp for rhThrombin will gain traction in the first few quarters.

We are also impressed by the company's strong pipeline, which we believe will provide long-term growth for ZymoGenetics in the years to come. We arrive at our price target of $16 by applying biotech industry average P/S ratio of 10 x, multiplied by our estimated sales of $249 million in 2010, discounted at 30% for two and half years assuming outstanding shares of 80 million.

Ests Upped on Hold-Rated Banco Itau

We are maintaining our Hold on Banco Itau Holding Financeira S.A. (ITU), as well as our $26 target price. Itau reported fourth quarter net earnings of R$1,789 million before nonrecurring items, up 6% year over year and broadly in line with our our estimate.

Results were driven by strong growth in loans and a corresponding increase in net interest income plus a reduction in loan loss provisions. We are increasing our 2008 EPADS to $2.00 from $1.77, largely due to a change in our foreign currency assumptions from depreciation of the US$ against the Brazilian real.

Solid loan growth and improved productivity should drive earnings gains, with this partially offset by higher loss provisions as Itau expands into higher risk loans. We believe Itau's $0.64 annual dividend, which provides a 2.7% yield, is safe.

At its current price, Banco Itau trades at 11.5X the 2008 consensus estimate and 10.1X the 2009 consensus estimate, above the industry medians, also based on consensus estimates. We think Banco Itau is fully valued and see limited upside. Our $26 price target represents roughly a 13X P/E multiple of our 2008 EPADS estimate of $2.00, providing a PEG (P/E divided by estimated future growth rate) of about 1.0X, roughly in line with the industry median.

Ingram Micro Estimates Reduced

Ingram Micro, Inc.'s (IM) fourth quarter sales and earnings were ahead of our estimate and the consensus estimates. Even so, management's guidance for the first quarter was well below the market expectations. Despite the company's soft guidance, we think that Ingram Micro will still be able to deliver solid execution and operating leverage over the long-term. Moreover, demand for information technology products should remain stable over the long term.

However, we believe these long-term positives are offset by near-term issues such as slowing economic growth in North America and Europe, industry-wide pricing pressures and fewer cost-cutting opportunities. As a result, we are reducing our estimates for 2008. Ingram Micro shares trade at 10x our 2008 EPS estimate and 9.4x our 2009 EPS estimate.

While this valuation may appear cheap, we think it represents a fair value, relative to its peers and long-term earnings growth rate. As a result, we think shares of IM will track the performance of the S&P 500 over the next six months. We maintain our Hold rating on the stock. Our target price is $18, or about 10x our 2008 EPS estimate.

Pricing-In Slowdown for NVIDIA

As the only remaining major independent player in the market for Graphic Processing Units (GPUs) used in PCs, NVIDIA (NVDA) is well positioned to benefit from increased graphics requirements with strong momentum in its GeForce products. NVIDIA reported better-than-expected Q4 results and is forecasting sales in Q109 to be better than seasonal.

However, cost-related issues with the new GeForce 8800 GT have taken a toll on margins, which should continue for a few quarters. We remain positive on NVIDIA shares and maintain a Hold rating with a new six-month price target of $28.50.

With slowing spending growth on technology expected, we maintain a Hold rating on NVIDIA shares with a new six-month price target of $28.50. Our new six-month price target of $28.50 represents a multiple of 18.8x our fiscal 2009 EPS estimate and 3.2x our fiscal 2009 revenue estimate. Although above the industry mean, we believe the stock can achieve this due to its industry leading position.

Strayer a Hold on Valuation

While quarterly results in 2006 and 2007 have been above expectations, Strayer Education (STRA) management's guidance for 2007 and 2008 portends continued double-digit growth in EPS. However, single-digit enrollment trends at mature campuses and a rise in the bad debt expense ratio (as the new campus expansion
program has admitted students with lower credit credentials) are unsettling.

In addition, the stock's valuation is at the upper-end of the historical range. Strayer Education is currently selling at 35.3 times trailing 12-month EPS, reflecting the company's revenue and earnings growth profile. Revenues have grown at a 22% five year compound annual growth rate (CAGR). Over the last ten years, the stock has traded in a wide P/E range of 48 to 16.

The target price is $183.25, which is a 41 P/E multiple on 12 month trailing earnings. The rating on the stock of Strayer Education remains a Hold.

One-Drug Alexion Pharma a Hold

Alexion Pharmaceuticals (ALXN) develops novel anti-body therapeutics targeting the severe disease states, including autoimmune and cardiovascular disorders, inflammation and cancer. Alexion is a one-drug biotech firm and is currently riding high on the performance of Soliris (eculizumab), a monoclonal antibody for the treatment of Paroxysmal Nocturnal Hemoglobinuria (PNH). In 2007, the company received FDA approval and European Commission's marketing approval for Soliris to treat all patients with PNH.

We expect Solaris to achieve blockbuster status. However, with no other candidate in clinical development, we maintain our Hold rating on the stock with a target price of $78.

Soliris is the only approved product for PNH and we estimate peak sales for the drug in excess of $1 billion. The tremendous revenue potential is sufficient to drive a company of Alexion's size to strong probability. One problem which Alexion is struggling with at the moment is the lack of any pipeline products. The company suffered a major blow when Proctor & Gamble (PG) terminated the commercialization and development agreement for the company's phase III candidate, pexelizumab.

We arrive at our $78 target price by applying a P/S ratio of 12.1x to our 2011 estimated total revenue of $568.8 million, discounted at 25% for three years. Upside to our target price could come from an earlier than expected ramp up in sales and market approval of Soliris in other markets while reimbursement problem with private payers and Medicare for the higher price of Soliris could represent the downside risk to our target price.

Fertilizer Helping Agrium Grow

Agrium, Inc. (AGU) is growing through acquisition and incremental expansion of existing operations. The proposed UAP acquisition is likely to drive revenues and profits for Agrium on the back of an expanded product line in the major business segment.

On February 13, 2008, Agrium announced fourth quarter and full-year 2007 results. In the fourth quarter, the company reported diluted earnings per share of $1.24 as compared to a loss of $0.47 in the same quarter of the previous year.

Net sales increased 58% to $1,492 million in the fourth quarter 2007. Agrium's gross profit in the fourth quarter more than doubled to $533 million from $231 million a year earlier. Gross profit from the company's wholesale fertilizer business soared to $343 million from $97 million. For the full-year 2007, diluted earnings per share were $3.25, compared to $0.25 per share in 2006. Net sales increased 25.6% to $5,491 million year over year.

Agrium is trading at 16.1x our 2008 estimate of $4.11. Supply/demand is strong for nitrogen and phosphate fertilizers, and the company has high leverage to increasing product prices. The company also has significant free cash flow. As a result, we rate the shares a Buy with a target of $80. This is 19.5x our 2008 estimate.

Keep Marriott a Hold, Near-Term

We continue to rate the shares of Marriott (MAR) a Hold following the release of Q4 financial results. Although we find Marriott's current valuation significantly more intriguing following the pullback of approximately 30% from the highs reached in the spring of 2007, we do not anticipate significant share price appreciation in the near term.

Given the current uncertainty regarding the state of the economy and its potential impact on Marriott's lodging and timeshare businesses, we prefer to remain cautious on the shares at this time. Our $34.25 six-month target price equates to an EBITDA multiple of approximately 10.5x our 2008 EBITDA estimate.

We note that the company lowered its 2008 EPS guidance from a range of $2.10 to $2.25 to a range of $2.00 to $2.10. Further, the company lowered its worldwide comparable 2008 RevPAR [revenue per available room] growth estimate from a range of 5% to 7% to a range of 3% to 5%. This compares to Starwood's (HOT) recently-issued guidance for system-wide RevPAR growth over the same period of 4% to 7%.

Don't Bottom-Fish Ambac Yet

Ambac's (ABK) core 4Q07 operating results were a negative $6.39 per share. The reported net loss was $3.3 billion or a negative $31.85 per share, due to significant writedowns of $5.2 billion on its credit derivatives portfolio. The inability to attract new business (due to rating downgrades), suspension of capital raising program, dividend reduction, increased loan loss provision and resignation of the CEO weigh heavily on the company.

We consider it highly possible that ratings will be downgraded further (per S&P {MHP} and Moody's {MCO}) as the housing market cycle has yet to trough and the strong potential for additional writedown remains. Considering the current economic environment, we anticipate revenue and EPS results would remain under pressure.

We also view future dividend payment as being less secure. Therefore, we are maintaining a Sell rating on the shares with a six-month target price of $7.65.

Dig Deep for Diamond Offshore

While Diamond Offshore's (DO) fourth-quarter 2007 earnings came below our estimates (due to high costs and lower jackup utilization), the company announced another $1.25 per share special dividend, after paying a similar $1.25 per share in the last quarter and $4 per share earlier in 2007. Our continued Buy recommendation on the stock reflects the company's strong leverage on the current cycle and its industry-leading position -- next to Transocean (RIG) -- in the deepwater drilling market.

Diamond's current strong backlog position of $11 billion has improved its earnings visibility substantially. Our unchanged $135 price objective reflects our bullish view of Diamond shares. We have used 2008 P/E and EV/EBITDA multiples of 11.2x and 7.0x, respectively, to arrive at our target price, both well within historical trading ranges and still at a discount to Transocean.

Downgrading UBS Shares to Hold

We are reducing our recommendation on UBS AG (UBS) to Hold from Buy. As pre-announced on January 30, 2008, UBS posted a fourth quarter net loss of CHF12.5 billion, the result of CHF15.6 billion write-down in its US residential mortgage portfolio. More importantly, UBS released details (some for the first time) regarding its risk exposures.

By our count, the company has about US$66 billion in investment risk exposures, including US$27.6 billion in subprime, US$26.6 billion in Alt-A, and US$11.2 billion in reference-linked notes. In addition, UBS has US$2.9 billion of exposure to monoline insurers.

We believe additional write-downs and losses are likely given continuing problems in the US mortgage market, which is the reason for our downgrade. UBS will hold an Extraordinary General Meeting in late February to vote on controversial capital-raising proposals.

Aerospace Defense Cos with Buy Ratings

Continual down days in the market keep us searching for recession-resistant industries in which to invest. Joining us today is Zacks senior equities analyst John Nelson Simon, who is here to give his outlook on the aerospace and defense industries.

In the midst of a soft market and economic downturn, are aerospace and defense stocks still holding up well?

No. They've been hammered. And there are several things that are going on all at the same time. One is the fear that the financial debacle in the United States will flow into the rest of the world, and the demand for travel will decline. And therefore demand for airplanes will also decline. I'm not too sure you can prove one way or the other what's going to happen.

On the defense side, people are concerned of what might happen when there's a different regime in Washington. So those two events have gotten the stocks down to their current levels.

Although some of them have started recovering. I think there's some people out there looking for the bottom to take advantage of. One of the theories I've always used is buy on bad news, and there's always bad news.

Have any of the companies in your coverage reported earnings thus far? And if so, what, if anything, has surprised you?

Well, the earnings of all the companies I have any reason for looking at - the ones that I follow - all were either equal to or better than what everybody had thought they were going to be. And most of them have come out with predictions for the current year, and in fact for even beyond the current year that are fairly optimistic.

But they're all based on the premise that the airlines will take the equipment that they've ordered - which is of course one of the worries, that they won't - and 2) that the Defense department will continue to need upgrades and new equipment, but mostly maintenance, repair and overhaul [MRO]. And quite frankly, I don't know how you couldn't do that. Still there's an obvious concern that something will change when the new regime is in. So there we are.

At this point, do you have any top Buy recommendations in the aerospace and defense space?

I've got four companies that I still have Buys out on: AAR Corp. (AIR), Esterline Technologies (ESL), Ladish (LDSH) and Triumph Group (TGI). Those are all aerospace suppliers, and when I say aerospace, I really mean aerospace/defense. They are companies that provide product which is used in the after-market for both commercial and military equipment.

Of which the U.S. government is obviously the biggest buyer.

Well, that's right - the armed services, in terms of defense, but the airlines in terms of commercial.

There is one other thing that is overhanging these stocks, and that is the uncertainty with the 787. I did go back with an associate of mine and look at what happened when other new airplanes were coming into the market, and a lot of the people who were principal suppliers on the other airplanes - the stocks sank until the first delivery occurred. So that's another event people are holding their breath for.

The 787 is the jumbo aircraft?

No, it's not a jumbo. Not to the extent of things like the 777. But it is a replacement for a multitude of airplanes in the medium-size field. It's not as big as a 777 or something like that. But it's the airplane that Boeing (BA) has designed so that people can fly from point-to-point rather than having to go through a hub.

The bet that Boeing is making is that more people will want to fly point-to-point, even though it might be from a smaller city to a smaller city. Rather than fly on a large airplane and have to go through a hub to get to the remainder of their trip. The second thing I just mentioned is what Airbus is betting on, that people won't mind going through Los Angeles to get another flight to someplace else.

And the truth of the matter is, it's done both ways. The real question is what percentage will be done each way.

John Nelson Simon is a senior analyst covering the aerospace & defense industries for Zacks Equity Research.

CF Industries Holding, Inc.

This fertilizer company had a blow out fourth quarter as the Corn Belt heats up.

CF Industries Holdings, Inc. (CF), a Zacks #1 Rank (Strong Buy), is one of North America's largest manufacturers and distributors of nitrogen and phosphate fertilizers.

The company is headquartered in Deerfield, IL and has nitrogen fertilizer manufacturing facilities in Donaldsonville, LA and Medicine Hat, Alberta; phosphate mining and production operations in Central Florida; and a network of fertilizer distribution terminals and warehouses in the U.S. Midwest.

CF also owns a 50 percent interest in KEYTRADE AG, a global fertilizer trader headquartered in Switzerland.

CF's share of the fertilizer market in key Corn Belt markets is 26 percent for nitrogen and 19 percent for phosphate.

On Feb 7, CF reported fourth-quarter earnings and surprised by 27.43 percent. Profit skyrocketed to $135.4 million, or $2.38 per share, from $8 million, or 14 cents per share, in the year-ago period. The quarter also included a gain of $12.9 million, or 15 cents per share, related to the value of gas derivatives.

The company easily beat the consensus analysts' estimates, which called for $1.75 a share.

Sales soared 62 percent to $852.5 million from $526.4 million in the year-ago period. The tremendous gain came from higher prices and increased nitrogen volumes.

CF also had a great 2007. Full year profit rose to $372.7 million, or $6.57 per share, from $33.3 million, or 60 cents per share, in 2006. Revenue grew to $2.76 billion from $2.03 billion.

'Tightness in this demand-driven market pushed fertilizer prices sharply higher for all of our products,' said Chief Executive Stephen Wilson.

With all the extra cash coming in, the company also announced its quarterly dividend would rise to 10 cents from two cents, payable Feb 29 to shareholders of record on Feb 22.

After fourth-quarter earnings were reported on Feb 7, analysts moved quickly to raise estimates for the first quarter and the full year. In the last week, first quarter consensus estimates rose 28 cents to $1.74 a share from $1.46 a share.

For the full year, in the last week, two out of six covering analysts raised consensus estimates by an average of 45 cents to $8.71 a share from $8.26 a share. That consensus estimate is $2.09 higher than just 60 days ago when the consensus estimate was $6.62 a share.

CF Industries has a P/E of 17.54, which is under the industry average of 19.2.