Telefonica Still Called a Hold

We maintain our Hold rating for Telefonica (TEF), the largest telecommunications company in Spain and Latin America. Quarterly results on a sequential basis continue to exceed our expectations. Both the top-line and bottom line improved following recent acquisitions by the company.

However, the environment remains challenging with strong competition, and we are exercising caution about the company's aggressive acquisition strategy, along with the integration process following such initiatives. Telefonica continues to generate strong free cash flow with respectable dividend payout. Also, the stock is trading near its high, reflecting growth projections that may be a stretch.

Furthermore, there is the need to consider the currency exchange rate, which is associated with the Euro vs. U.S. as the dollar may be reaching its lower inflection point. Telefonica is trading at 10.7x our 2008 earnings estimate, which is at a discount to the industry average as well as to the S&P 500 metric. Our six-month price target of $99.00 per ADS is based on 11.8x our 2008 EPADS estimate.

Initiating a Buy on Unilever

For Unilever N.V. (UN), the benefits from the implementation of Path to Growth, Unilever 2010, One Unilever and Accelerating Change strategies, along with the company's strong cash flows are positives for the future prospects of Unilever. In addition, the simplified management structure should improve operational decisions and the one-to-one equivalence between PLC and NV shares should improve financial transparency.

Unilever has global scale with operations in the Europe, North America, Asia, the Pacific, Africa, the Middle East, Turkey and Latin America. Global scale provides cost advantages along with operational efficiencies. Approximately 38% of the total revenue in 2007 was derived from the operations in Europe, 33% from the Americas, and 29% from Asia/Africa. The company holds relatively high market share in many key markets like ice cream in Turkey, laundry detergent in South Africa, and soups & sauces in Indonesia.

With organic sales growth in 2007 at the high-end of the target range, coupled with the stock's correction, compels us to initiate a Buy rating on Unilever (New York shares). Unilever's shares have traded in a P/E multiple range of 11 to 24 over the last five years. We expect the stock's P/E to reach the high-end valuation levels over time. The target price of $39.25 is based on 22 times trailing 12-month earnings.

TRW Auto Strong in Soft Market

TRW Automotive (TRW) has excellent long-term prospects, primarily because of the increasing emphasis being put on safety awareness by both government and consumers. Management is re-evaluating its cost structure and is keen on undertaking restructuring activities.