Hold Canadian National Railway
We are maintaining our Hold on Canadian National Railway Company (CNI), or CN, but raising our target price to $48. CN reported fourth quarter earnings of C$444 million before nonrecurring items, down 6% year over year but above our estimate due to a 28% reduction in labor costs from lower stock-based compensation.
CN's operating ratio improved 10 basis points, falling to 62.1%. Revenues declined 3% to C$1.9 billion, reflecting a stronger Canadian dollar and weakness in forest products (off 19%) from an anemic US housing market and automotive (down 4%). Positively, pricing continued strong (rate increase per unit up 4%).
We expect these trends to continue over the near term. Our 2008 diluted EPS estimates remains US$3.65. CN recently increased its dividend by 10%. CN is a solid company, with a stronger-than-average balance sheet, operating margin, and ROE. However, CN's projected five-year earnings growth rate is modestly lower than the industry median, though its dividend is above average.
Our six-month target price of $48 is roughly 13X our 2008 EPS estimate, providing a PEG ratio (P/E divided by the estimated earnings growth rate) of 1.1X. This is in line with the industry median.
Oxford Industries Fairly Priced
The current economic environment continues to impact Oxford Industries, Inc.'s (OXM) businesses negatively. This caused management to issue first quarter and fiscal year 2009 EPS guidance that was below market expectations as well as our estimates.
For the first quarter, Oxford expects net sales of $265-$270 million and diluted EPS of $0.55-$0.60. For the fiscal year, the company is projecting net sales of $1.01-$1.06 billion and diluted EPS of $2.35-$2.50. Its shares, which are trading at 9.6x our 2009 EPS estimate, appear to discount the company's weak business trends. While this valuation appears cheap, we think it is too early to become positive on the stock because there is still a chance that its results could decline more than we expect.
The three-month period ended May 4, 2007, which was not a reported quarter, had net sales of approximately $292 million and diluted earnings per common share of approximately $0.95. For fiscal year 2008, the company is projecting net sales in the range of $1.01 billion to $1.06 billion and diluted earnings per common share are projected to be between $2.35 and $2.50.
We note that OXM shares have historically traded at a significant discount to the S&P 500. Based on other valuation measures including price-to-book, price-to-sales, and price-to-cash flow, OXM's stock appears to trade at a reasonable valuation. Thus, we rate OXM shares a Hold with a target price of $24, which is 10x our fiscal year 2009 EPS estimate.
Good Value on Focus Media
Focus Media (FMCN) announced strong revenue and earnings growth for the fourth quarter of 2007. Revenue exceeded the market consensus, and EPS missed the consensus. Although the company's blended gross margin declined due to the contribution of the lower-margin Internet advertising and in-store businesses, FMCN is well-positioned to leverage the great growth opportunity of out-of-home advertising market in China.
We think its current stock price doesn't reflect the growth prospects of the company.
