Bullish on Mitsubishi UFJ Finc'l
We are continuing our Buy on Mitsubishi UFJ Financial Group, Inc. or MUFG (MTU), as well as our $12.50 target price. MUFG is expected to report fiscal full-year (March 31) results in late May. We are maintaining our fiscal year EPADS estimates at $0.50 for 2008 and $0.62 for 2009. For 2008, this is broadly in-line with the company's reduced earnings forecast for the year of ¥600 billion (down 25% from ¥800 billion before).
MUFG reported fiscal nine months (December 31) earnings of ¥315 billion, down 54% year-over-year, largely reflecting a ¥341 billion increase in credit costs. This was due to ¥ 55 billion in impairment losses on sub-prime and SIV investments, as well as the absence of a ¥140 billion reversal of the credit loss allowance as occurred in the prior-year period. MUFG completed a ¥150 billion share repurchase plan and raised its annual dividend by 27%.
At its current price based on the consensus estimates for fiscal year ending March 31, 2008 and March 31, 2009, the company is trading at 17.3X and 13.2X, respectively, representing premiums to the P/E medians for the sector. Using another valuation metric (price/book), MUFG is trading at a significant discount to its peer group, as well as its own 1.6X price/book value metric over the last couple of years. Assuming moderate valuation expansion to MUFG's average 1.6X price/book ratio gives a price of $12.50, our target price.
AAR Corp. Expected to Rise
AAR Corporation (AAR) provides goods & services to both the commercial airlines and the military services. On the commercial side, demand for AIR's offerings increases as the fleet of aircraft expands as well as ages. Requirements also grow as the airlines outsource more maintenance, repair and overhaul work. Additionally, for the defense sector, AIR designs and manufactures much-needed mobility products, aircraft internal cargo loading/unloading systems and composite structures.
During the third quarter, AIR's aircraft portfolio declined by two to 37, with 29 aircraft held in joint ventures and eight wholly-owned by
AAON (AAON). Sales to commercial customers increased by 30%, and sales to defense customers grew by 57%, year-over-year. Defense sales represented 39% of consolidated sales, up from 34% a year earlier. Organic sales growth for the quarter was 25% compared to an overall sales growth of 39%; almost all the sales increase from acquisitions occurred in the structure and systems segment.
We maintain our Buy recommendation for AIR and have adjusted our six-month target price slightly upward from $36 to reflect extant P/E ratios in the group of similar aerospace/defense stocks that we have followed while evaluating this stock. The average P/E for the aerospace/defense group is 16.8.
