Banco de Chile Fully Valued

We are maintaining our Hold on Banco de Chile (BCH), but raising our target price to $52. BCH posted fourth quarter net earnings of Ch$78,715 million, up 86% year-over-year. We expect Banco de Chile's strong results over the past few years to moderate.

Specifically, we expect gains in the efficiency ratio to slow from its past torrid pace, and outsized increases in non-interest income to diminish. As a result, we believe that EPS growth over the next few years will slow to 13%, down from the 35% witnessed over the 2002-07 period.

Results were aided by strong loan growth (up 15%) and a 110 basis-point increase in the margin to 4.7%, as well as robust gains in securities brokerage on volume increases, trends we expect to continue over the near term. The merger with Citigroup, Inc.'s (C) Chilean banking operations became effective on January 1, 2008, with Citibank now holding a 10.44% interest in BCH.

We are raising our 2008 diluted EPADS estimate to $5.15 from $4.34 for 2008, largely due to the depreciation of the US$ against the Chilean peso. We believe the dividend is safe.

At its current price, BCH is trading at a P/E of 11.6X the 2008 consensus EPS estimate, a 14% premium to the industry median P/E of 10.2X based on 2008 consensus estimates (versus a 3% premium at the time of our last report on January 11, 2008), but above its main competitor, Banco Santander Santiago (SAN).

BCH's growth prospects are below average (consensus estimate of five per cent over the next three to five years versus 12% for the industry), while its dividend yield of 8.8% is well above the industry median. Given these facts, we believe BCH is fully valued at present. Our $52 target price represents a 10X P/E of our 2008 EPADS estimate of $5.15.

Impacts Felt by American Axle

American Axle & Manufacturing Holdings, Inc.'s (AXL), focus on diversification and geographical expansion is helping the company to grow. Weak SUV demand is greatly affecting AXL's sales. Furthermore, high commodity costs and pricing pressure from OEMs remain causes for concern.

Currently, AXL's stock is trading at approximately 14.0x our 2008 EPS estimate of $1.60. AXL's focus on improving its product mix, diversification of its client base, and outsourcing to low-cost countries are some of the positives associated with the stock. Meanwhile, American Axle is also being negatively impacted by rising commodity costs, as it does not have the opportunity to pass them on to the OEM customers. This is negatively affecting earnings by at least $20 million annually.

In fact, General Motors (GM) and other OEM customers are demanding constant concessions from suppliers in the form of lower prices. The overall costs of the company under its UAW accords are about three times its competitors' costs and some of the plants have not been profitable for years. Therefore, the company needed to close plants or reduce wages to as low as $14 per hour.

However, some 3,650 UAW workers went on strike at American Axle's plants in Michigan and New York on February 26, 2008 due to the company's current offer of sharply reduced wages. The disagreement between the UAW workers and the company has not yet been resolved.

On February 1, 2008, American Axle & Manufacturing reported 2007 fourth quarter results. The company reported a net loss of $0.50 per share compared to a net loss of $3.74 per share in the fourth quarter of 2006. Sales were reported at $755.3 million in the quarter, down from $781.1 million a year ago. Sales to mid-size truck and SUV markets were down 1.4%. Non-GM sales represented 20% of total sales. Content per vehicle increased 2%.

Due to production cuts by GM, pricing pressure from OEMs, and high commodity prices, we rate the stock a Hold. Using our fiscal year 2008 earnings estimate and a forward multiple of 14.7x, we value the stock at $23.50.

Competition Keeps Optimer a Hold

Optimer Pharmaceuticals (OPTR) is a biopharmaceutical company specializing in anti-infective drug development and commercialization. The company has two phase III drug candidates: Difimicin for Clostridium difficile-associated diarrhea (CDAD), and Prulifloxacin for infectious diarrhea. Although we are optimistic about the prospect of both candidates in terms of FDA approval and subsequent commercialization, we remain concerned about the competition both candidates will face in the antibiotic market, if approved.

Optimer is a company with limited sources of revenue, and is largely dependent on the success of its lead product candidate Difimicin and, to a lesser degree, Prulifloxacin.