Valuation Keeps Eni S.p.A A Hold
We are maintaining our Hold recommendation on Eni S.p.A. (E) ADRs after the company's fourth-quarter results. We continue to believe that the company's positive production-growth profile, capital discipline, and attractive dividend are adequately reflected in its premium valuation relative to its European peers. We are increasingly concerned with Eni's high valuation, relative to its historical norms and as production growth slows, the stock could come under significant pressure.
Eni's net profit for the forth quarter of 2007 was 2,146 million euro, down 276 million euro for the fourth quarter of 2006, or 11.4%, due mainly to a lower operating performance down by 449 million euro, or 9.3%, as a result of a decline in the exploration and production and refining and marketing divisions. This reduction in operating profit was offset in part by a 190 million euro decrease in income taxes reflecting lower profit before taxes and a 1.4 percentage point decline in the group tax rate (from 50.4% to 49%) among other things as a result of a lower share of profit generated by the exploration and production division.
At current levels, Eni ADRs are priced at 9.5x our 2008 earnings estimate, roughly in-line its European peers: Statoil (STO) and Repsol (REP).The ADRs have recently underperformed the peer group, in our view reflecting valuation concerns. We believe that the ADRs could trade in a 9.5x to 10x trading range over the next six months, given the favorable commodity price environment, but see limited upside from current levels despite the healthy growth profile. Earnings momentum may come under pressure during the next quarters as production growth slows to average. Given the already rich valuation by historical standards, we believe ENI may experience some de-rating going forward. Hence, we set a six-month price target of $75.
Competition and Pipeline Concerns for Trubion
Trubion Pharmaceuticals, Inc. (
TRBN) is a clinical stage biopharmaceutical company focused on discovery, development and commercialization of protein therapeutics using its small modular immuno-pharmaceutical (SMIP) technology. However, we are concerned about substantial competitions Trubion will face in the RA and B-cell cancer markets. Trubion's weak pipeline is another reason that we rate its shares a Hold. We are optimistic with the company's SMIP technology and the two candidates TRU-015 and TRU-016 discovered using this technology.
We are also impressed by the collaboration agreement with Wyeth (WYE) with respect to its lead drug candidate TRU-015 and related product candidates. The alliance not only provides much needed cash to advance its pipeline, but also validates the company's technology and research efforts.
