Retail Slowdown Affecting Taubman
Taubman Centers (TCO) reported solid 4Q07 and full-year 2007 results with FFO increasing of 4.8% and 12.5% over comparable periods in 2006. Better-than-expected results were due to rental rate growth at existing malls and contributions from new mall openings and expansions. Retail spending continues to support mall fundamentals, and all operating metrics reported positive results in year-over-year comparisons.
However, the U.S. economy is faltering and consumer spending patterns in early 2008 are not encouraging. We are concerned about retail stocks in an inflationary and weakening economic environment.
Taubman is currently trading 15.8x our 2008 projected FFO [funds from operations] estimates, which is about 21% higher than regional mall sector averages and 30% higher than retail strip FFO averages. We sense that retail stocks could be in for a rougher road and expect a continued pullback as more bad news on the economy comes out. It seems that spending will moderate in the next six months as consumers face increasing energy costs, and a free-falling housing market.
However, operationally, TCO's malls are performing well, and the company's high-end malls consistently outperforms peers. In the near term, we are projecting a relatively stagnant share price and are setting our price target at 17x 2008 FFO estimates or $53.00 per share.
Advanced Auto Opening New Stores
Advance Auto Parts, Inc. (AAP) is a specialty retailer of automotive parts, accessories and maintenance items. The company primarily caters to the do-it-yourself (DIY) and professional installer markets.
Though it is generating top-line growth by opening new stores, the company currently faces a challenging industry environment. To combat the difficult industry metrics, AAP has reviewed its business strategies to drive sales, lower costs and increase return on invested capital (ROIC). Thus, we are maintaining a Hold recommendation until costs are contained and same store sales improve. We set a six-month target price of $38.00. This is 14.6x our 2008 EPS estimate.
Currently, shares of Advanced Auto Parts, Inc. are trading at 13.6x our 2008 EPS estimate of $2.61. We are impressed by AAP's performance in the face of a challenging environment and difficult sales comparisons. AAP is striving hard to increase its square footage growth and the company has healthy cash flow. However, it is witnessing rising SG&A expenses.
As of December 2007, the company operated 3,261 stores in 40 states. About 24% of stores are owned, while the balance is leased. Advance Auto Parts has partnered with PartsAmerica.com to provide online shopping facilities. The company has grown by acquisitions of Western Auto Supply, Discount Auto Parts (DAP), Carport, Trak, and Autopart International.
Expect TAXI to Move with Traffic
Medallion Financial (TAXI) reported its 4Q07 earnings results on March 10, 2008. The results ($0.21 per share) were a penny ahead our estimate and three cents ahead of consensus, primarily due to strong net investment income of $0.14 per share (substantially above our expectations).
