Newfield Strengthens Reserves
While Newfield Exploration Company's (NFX) fourth quarter 2007 results came in modestly weaker than expected, we reiterate our Buy rating on the stock for its production-growth prospects and diversified asset base. With respect to reserve replacements, the company replaced 350% of its 2007 production, and lengthened its reserve life to 13 years.
Volumes are expected to grow in the high-teen range this year, aided by contributions from development projects currently underway. These we expect will outweigh the impact of oilfield cost inflation.
On February 11, Newfield reported modestly weaker-than-expected fourth-quarter 2007 earnings of $0.64 per diluted share (our estimate was $0.65 per share), compared to $0.86 per diluted share in the prior-year period and $0.76 per diluted share in the previous quarter. We have reduced our 2008 earnings estimate ($2.92 vs. $3.68) and introduced our 2009 estimate at $3.29.
Our continued positive view of Newfield shares reflects the company's steady shift towards domestic long-lived resource plays and positive production-growth profile. Despite some recent strength, in-line with the rest of the group, the stock is still cheap and offers upside from current levels. Our unchanged $55 price objective is based on 5.4x EV/EBITDA ratio (2008) and reflects our belief that there is substantial valuation upside in the stock.
Diversification for Greatbatch
Greatbatch, Inc. (GB) reported Q4 top-line above expectations, primarily due to acquisitions in the quarter. However, EPS was lower-than-expected on lower gross margin and higher operating and acquisition-related expenses, including increased intangibles amortization.
Our 2008 EPS estimates again decline on higher interest expense, acquisition dilution (including higher amortization) and overall higher SG&A and RD&E expenditures. We do see benefits to the diversification and, if management is successful at integrating acquisitions and meeting its operational efficiency goals, EPS growth should benefit in 2009 and beyond.
In February 2008, GB acquired DePuy's France orthopedics facility, further expanding its orthopedics footprint. Although the 2008 acquisitions have not completed accounting valuations and GB cannot provide GAAP EPS estimates, management does expect adjusted 2008 EPS of $1.20-$1.50.
While diversifying beyond a CRM original equipment manufacturer at a quick pace in 2007, the company is taking on integration risk as it moves into new arenas. Management's growth view on 2008 CRM/Neuro is 5%, with the therapy delivery segment (up 12%) and orthopedics (up 10%) becoming the company's growth drivers. Given the expanded diversification, we believe the stock should be valued in-line to the group 2008 P/E/G of 1.5x.
