Hold-Rated Clayton Gets Acquired
On April 14, 2008, Clayton Holdings, Inc. (CLAY) announced that the company has signed a definitive agreement to be acquired by an affiliate of Greenfield Partners, LLC, a private equity firm. The agreement calls for the company to be acquired for $6 per share in cash, or approximately $134 million, plus the repayment of $23.8 million of Clayton's outstanding debt. The transaction is expected to close in the third quarter of 2008, pending shareholder approval.
The company's board of directors has approved the agreement, and the company's largest shareholder, TA Associates, owning approximately 37% of the outstanding stock, has agreed to vote in favor of the transaction. For fiscal 2007, the company reported a decline of 34.4% in revenue to $152.6 million. Gross profit was down 24.8% to $63.1 million. Gross profit margin from continuing operations for 2007 was 41.4% compared to 36.1% in 2006. Adjusted net income from continuing operations was $3.5 million compared to $16.9 million reported in the prior year.
Adjusted net income per share from continuing operations was $0.16 compared to $0.88 in the prior year. The shares have fallen steeply since hitting a 52-week high near $20 in May 2007. However, given the ongoing uncertainty related to Clayton's business operations, along with the fact that the transaction calls for a cash payment, we anticipate that the deal will likely close. Our price target of $6.00 per share reflects the proposed transaction price.
Neutral on ACE, Pre-Earnings
ACE, Ltd. (ACE) intends to release its 1Q08 results after market close on April 29, 2008, with a conference call scheduled for the next day. While recent quarterly results experienced benefits (from net investment income and a favorable prior period development), our concerns for potential pressure on shares that could be experienced over the next couple of quarters outweighs our growth expectations for this company at this time.
We have increased our FY08 earnings expectations, but maintained our FY09 earnings expectation. We maintained our Hold recommendation on the shares, but increased our six-month price target slightly to $60.00 per share.
Despite some of the general softening of casualty lines (which account for roughly two-thirds of ACE's premiums), we expect ACE to show trends in its premiums and earnings. Our six-month price target of $60.00 per share, incorporates a 10.0% premium to the peer group s average price-to-book (given the company s ROE ratios compared to its peers levels), or a 1.15x price-to-book multiple to our estimate for the company s book value of $52.10 per share at June 30, 2008.
In addition, the quantitative Zacks Rank for ACE is currently 3 (down from 2 on February 4, 2008), indicating no clear directional pressure on the shares over the near term. Short interest is currently 1.7 days, versus one day previously.
Can Cosi Meet Expectations?
Cosi, Inc. (COSI) lost control of its operations in 2006 as it rapidly added units to meet Wall Street expectations. Traffic has been declining, a problem that management attributes to lack of proper site selection of stores opened in 2H06, and poor management training, particularly for staffing and maintenance. Volume declines at these restaurants stem from a wide range of issues, including low traffic locations, signage, parking and service defects.
Cosi has replaced several VPs and restaurant managers, and has slowed growth plans for company-owned stores.
