Hold Fifth Third Bank Shares

With assets of nearly $111.0 billion and over 21,600 employees, Fifth Third Bancorp (FITB) has been consistently ranked in the 20 banks in the country on numerous metrics. The Cincinnati-based company operates 18 affiliates, with 1,227 full-service banking centers, including 102 bank Mart locations and 2,211 ATMs in several Southern and Central states (east of the Mississippi River).

FITB currently trades at 11.3 times the consensus forward estimate (versus 12.7x at the time of our last full report), a 6% discount to the peer group median (versus a 9% premium at that time). On a price-to-book basis, the shares trade at 16.6% premium to the peer median, versus a 25% premium in our last full report.

Relative pricing looks attractive on a P/E-to-growth (PEG) basis, using the consensus forward estimate and the consensus long-term growth rate. FITB's PEG ratio is 0.66, a 56% discount to the 1.50 median for the peer group (versus nearly 1% premium previously). On a price-to-book basis, the 16.6% premium looks a bit stretched given an ROE at par with the peer median.

We have adjusted our 2008 earnings expectations to reflect the company's 4Q07 and full-year results and 2008 earnings guidance, as we think the uncertainties overhanging this company as well as the industry have yet to be eliminated. We also think the rating downgrade will weigh upon its shares for several quarters to come.

Near-Term, Neutral on Health Net

Health Net, Inc. (HNT) is one of the nation's largest publicly traded, multiregional managed care companies, offering a full range of healthcare services through its HMO and PPO networks and government-sponsored programs. HNT reported 4Q07 net income of $123.4M (up 46%y/y) or EPS of $1.10, in line with expectations. Total revenue in 4Q07 was $3.6B, up 11.7% y/y, compared with $3.2B in 4Q06.

The result was characterized by strong cash flow from operations despite a higher medical loss ratio of 82.6% (up 90 basis points y/y). Commercial membership declined, which was consistent with HNT's repositioning of its business towards small and mid-size markets, focusing on Medicare.

We have valued HNT on a forward price/earnings (P/E) basis, as well as in comparison to similar firms in the healthcare sector. Our $51 price target is derived using a multiple of 12.3x FY08 EPS of $4.14. We retain our Hold rating at current levels.

Lower Sales Hamper Sonic Auto

Sonic Automotive, Inc. (SAH) is a large automotive retailer that is focused on improving margins by lowering selling, general and administrative (SG&A) expenses. However, Sonic is in an industry which is experiencing increasing competition and lower car sales.

Sonic Automotive's major focus is on reducing inventory; regaining control over selling, general, and administrative expenses (SG&A); improving operational performance; and reducing debt levels. Consistent inventory management improved the new vehicle days to 48 days and reduced the used vehicle days to 37 days. Inventory levels are about 14 days below the industry average for new cars.

The company is focusing on higher-margin luxury brands and on reducing underperforming dealerships. Luxury and imported cars account for 83% of the total revenues. The company's goal is $800 million in revenues annually.

Currently, shares of Sonic Automotive are trading at 6.8x our 2008 EPS estimate of $2.89. We rate the stock a Hold. The six-month target price for Sonic is $22, which is 7.6x 2008 EPS.

Sanderson Farms Kept a Hold

Sanderson Farms, Inc. (SAFM) is the fourth largest poultry processing company in the U.S. The improved efficiencies at the company's poultry complexes in Georgia and Mississippi, along with the opening of the new facility in Waco, Texas, should enhance improve unit operating costs and increase production levels in fiscal 2008.

In addition, current favorable market prices for the company's chicken products are adding to the top-line. However, grain costs are expected to continue increasing in 2008 and depress margins and earnings.

On February 26, 2008, Sanderson Farms reported results for the first fiscal quarter ending January 31, 2008. Earnings per share were $0.30 per diluted share versus a loss of $0.14 per diluted share in the year ago period. Net sales increased 23.9% to $363 million reflecting pricing improvements.

Market prices for whole chickens, boneless breasts, wings and legs quarters increased 10.3%, 6.7%, 12.2% and 30.4%, respectively. At the same time, costs for corn and soybean meal increased 12.9% and 39.9%, respectively. The gross margin expanded 393 basis points (bps) to 7.1% versus 3.1% in the year-ago comparable period. The operating margin expanded to 3.2%.

Due to the company's volatile earnings and loss reported in fiscal 2006, the stock is best valued on a price-to-sales basis. During the last five years, the stock has traded in the range of 0.33 to 0.94 times sales.

There is considerable commodity risk involved with the production of chicken products, both on the pricing of end-products and the costs of feed, processing and storage. With Sanderson's stocks currently trading at 0.51 time sales, the target is a mid-range valuation at a 0.55 price-to-sales ratio or $40 per share. Coverage is initiated with a Hold rating.

Buy Rating Still Fits BioMarin

BioMarin Pharmaceutical, Inc. (BMRN) develops enzyme therapies for serious chronic genetic disorders and other diseases and conditions. Its leading product, Aldurazyme, is used for treating the ultra-rare genetic disorder mucopolysaccharidosis-I (MPS-I) while its second product, Naglazyme, is approved for the treatment of MPS-VI.

Recently, the company received FDA approval for its third product, Kuvan, for the treatment of PKU. Strong sales of Kuvan, coupled with accelerating sales of both Aludrazyme and Naglazyme, will drive the company to profitability in 2008 and beyond.

We upgraded the stock in early August 2005. Since then, the stock has more than quadrupled. We continue to believe that both Aldurazyme and Naglazyme will make significant contributions to the company's top-line growth in the coming years.