Fuel Up with Comstock Resources
We are maintaining our Buy recommendation on Comstock Resources (CRK) for its strong production-growth profile and still-attractive valuation. Fourth-quarter 2007 results were inline with our estimates, with the impact of higher volumes and improved realizations 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 value Comstock shares using net asset values [NAV], which have been updated for its new reserves tally. Keeping in view the company's year-end 2007 proved reserves, upside potential, and its share of Bois d'Arc's reserves, our per share NAV estimate comes to $39.73, up from our previous estimate of $37.33.
Comstock shares currently trade at roughly 90% of our net asset value estimate, compared to the peer group average of about 100%. Our new $40 target, raised from $37 before, is at approximately 100% of our NAV estimate.
Adjustments on Sell-Rated Comerica
4Q07 core diluted earnings of $0.77 per share were substantially below our and consensus estimates for Comerica (CMA). The miss mainly stemmed from a decline in net interest margin (down 23 bps sequentially to 3.43%) and a steep rise in the provision for loan losses (up 140% sequentially to $108 million).
Continuous deterioration in the residential real estate development loan portfolio -- heavily concentrated in the challenging markets of Michigan and California -- resulted in the non-performing assets and net charge-offs increasing significantly to 0.83% (up 24 bps) and 0.50% (up 18 bps), respectively, of total loans at the end of 4Q07. Based on the results and credit quality concerns, we have further moderated our EPS estimates and our six-month target price.
We are maintaining our Sell recommendation on the shares of CMA. CMA currently trades at 11.2x, the consensus forward estimate (versus 9.3x at the time of our last report), at a 7% discount to the large-cap peer group median (versus the same at that time). On a price-to-book basis, the shares are trading at par to the peer median (versus 2% premium at that time).
Relative pricing looks expensive on a P/E-to-growth (PEG) basis, using the consensus forward estimate and the consensus long-term growth rate. CMA's PEG ratio is 1.79x, at a 28% premium to the 1.40 median for the peer group (versus 47% premium earlier).
California Pizza Kitchen a Buy
In our view, California Pizza Kitchen's (CPKI) earnings will decline through most of 2008 as it suffers from declining traffic and rising food and labor costs.
