Keep Buying Manpower Shares
Manpower (MAN) has exhibited strong earnings growth in 2006 and in 2007. In the latest reported quarter, earnings exceeded expectations by $0.10. Margins continue to expand and the share repurchase program continues. In addition, the Right Management unit appears to have turned the corner and will contribute to the company's growth going forward.
Therefore, due to strong operating performance and attractive valuation, the Buy rating is maintained. Manpower continues to execute its key strategies of elevating and broadening client relationships while improving efficiency through speed and quality.
The company also provides assistance and employment strategies to HR managers as they seek skilled employees to fulfill permanent, temporary and contract positions. Manpower provides employee training and outplacement services.
Manpower is currently trading at 11.2 times trailing 12-month earnings. Over the last five years, Manpower stock has traded in a P/E range of 11 to 30; however, the stock has traded at a P/E multiple above 24 only during periods of cyclical earnings decline. The target of $73.50 is based on a 15 P/E on trailing 12-month earnings.
Maintain a Hold on Kroger
Kroger Company's (KR) fourth quarter sales were $325 million above our forecast, and EPS were $0.02 ahead of our estimate. Higher food and gas prices helped boost identical supermarket sales, which increased 8.2% with fuel and 5.3% without fuel. As we expected, fourth quarter gross margins contracted 130 basis points. Despite strong fourth quarter results, Kroger issued guidance below consensus and our estimate.
For fiscal 2008, Kroger anticipates earnings of $1.83 - $1.90 per diluted share. The company said it expects that earnings per share growth will be driven by strong identical sales, a slight improvement in non-fuel operating margins, and fewer shares outstanding. Identical supermarket sales growth is expected to be in the range of 3% to 5%, excluding fuel sales. We are reducing our 2008 EPS estimate by $0.04 and our 2009 EPS estimate by $0.09.
The stock looks fairly valued at current levels. Kroger shares are trading at 13.6x our fiscal year 2008 EPS estimate and 12.4x our fiscal year 2009 EPS estimate. We think this valuation is fair and believe the stock's performance over the next six months will track the return of the S&P 500. As such, our target price is $26.50, or about 14x our fiscal year 2008 EPS estimate. We maintain our Hold rating.
Cosan's Short-Term Outlook Unsure
We are keeping our Hold recommendation on Cosan Limited (CZZ). The company has a great medium-term outlook, the ethanol business is robust and Brazil is in a unique position to become a leader in this fast growing industry. Additionally, Cosan is well-positioned to keep leading the consolidation of this industry in Brazil. Sugar and ethanol prices have been appreciating in the last months, however the short-term outlook remains uncertain due to excess production of sugar, the difficult international economic environment and the continued strength of the Brazilian currency.
Finally, the confusing restructuring plan was not well received by the market. At its current price, the stock trades at 66.6x our 2008 earnings estimates. Nevertheless, all the industry is trading really high due to the long-term growth potential. The short-term outlook for the sugar and ethanol business remains uncertain and the announced corporate restructure is not helping to increase the level of confidence in the company's management team.
However, we have to consider that the medium-to-long-term outlook for the Brazilian sugar and ethanol industry is very positive and that demand will continue to increase fast all around the world in the following years, particularly for ethanol. Additionally, Cosan is well positioned to lead the consolidation of this segment in the Brazilian market.
