Upgrading Dillard's to a Hold
Dillard's, Inc. (DDS) reported disappointing fourth quarter earnings that were $0.12/share below our estimate. Despite these results and weak sales trends, we are upgrading DDS shares from Sell to Hold.
Our more optimistic view on the stock comes from activist shareholders that could gain an audience with Dillard's management team. Specifically, Barington Capital Group and Clinton Group, which own a combined 5.3% of DDS, have become more aggressive in urging Dillard's to improve its ownership structure, hold management accountable and unlock shareholder value.
Thus far, Dillard's has ignored its activist shareholders, but that may not be the case for long. Barington has already stated that it will attempt to elect four members to Dillard's board of directors in May.
The company's recent results show that Dillard's operations continue to struggle. We are estimating further declines over the next few years. Its stock price reflects this view. The shares are currently trading at a P/E ratio of 70.6x our fiscal 2008 EPS estimate and 37.5x our 2009 EPS estimate.
If the company were to take the appropriate measures to improve its operations, however, it could expand its operating margin from 0.5% to 4%. That would bring it in-line with competitors JC Penney Company (JCP), Macy's (M), and Target (TGT). With flat revenue growth and an operating margin of 4%, Dillard's would have earnings power of $2 per share.
Using an EPS estimate of $2, the stock is trading at about 9x, which is a reasonable valuation. As such, we rate the stock a Hold with a six-month target price of $20.
Chalco's Value Chain Balanced
Aluminum Corporation of China, Ltd. or Chalco (ACH) announced higher revenues but lower earnings in 2007, mainly due to production increases in primary aluminum products and alumina price declines. Although the gloomy outlook for the worldwide economy in 2008 will continue to pressure the price of alumina and aluminum, Chalco should continue to benefit from strong alumina and aluminum demand in China. Chalco has an integrated industry chain to leverage the increasing demand of Aluminum in China.
The gloomy outlook for the worldwide economy in 2008 will continue to pressure the price of alumina and aluminum. We continue to view the company as having the best balanced value chain in China's aluminum industry. Chalco announced its financial results for year 2007. Under Chinese accounting rules, for 2007, its total revenue was RMB 76.18 billion, up 17.51% over 2006. Its net profit for 2007 was RMB10.23 billion, down 13.65% from 2006.
Moreover, the company plans to continue to aggressively increase its production capacity. Chalco's domestic acquisitions and offshore projects are also on the right track. EPS for 2007 was RMB 0.82 ($2.81 per ADS), down 21.15% over 2006. Given its overall positive prospects, we are maintaining our Buy recommendation on Chalco shares. Using a P/E multiple of 13x our fiscal year 2009 earnings per ADR estimate, yields a target price of $45, which we believe reflects the company's growth prospects.
Market-Leader Varian a Buy
Varian Semiconductor Equipment Associates, Inc. (VSEA) engages in the design and manufacture of semiconductor processing equipment used in the fabrication of integrated circuits. September top and bottom-line results were in line with consensus estimates.
VSEA has superior technology and remains several product generations ahead of competitors. As nodes transition to 90 nanometers, VSEA remains the strongest solution for ion implementation.
