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.
Pactiv Fights Thru Tough Market
We expect Pactiv Corporation (PTV) to report first quarter EPS of $0.33 after the close of market on April 23, down from the prior-year level of $0.43, due to lower gross margin as a result of resin cost increases, and high interest expenses. Moreover, Food Packaging volume remains weak amid sluggish market conditions, and additional price hikes pose a risk of loss of market share.
However, acquisitions, a low level of SG&A expenses, and share buybacks will support profitability. Moreover, as part of its cost-containment efforts, the company commenced a restructuring program in this year, involving consolidation of two small facilities, asset rationalization, and some headcount reduction.
Thus, we maintain our Hold recommendation on shares of PTV. We have valued Pactiv Corporation using a P/E multiple. Currently, the stock is trading at 12.7x our 2008 earnings estimate of $2.07 per share, which is at a discount to the industry median multiple. Pactiv remains a strong brand name with a tremendous market position in both consumer products and foodservice packaging markets.
However, given current market conditions, we do not expect a significant expansion in P/E multiple at this time. Our target price remains $27.25 per share, based on a P/E multiple of approximately 13.2x our 2008 EPS estimate of $2.07.
Updating XL Ahead of Earnings
XL Capital (XL) is expected to release its 1Q08 results on April 22, 2008, with a conference call scheduled the next day. XL's 4Q07 results missed expectations as a result of approximately $1.5 billion associated with losses and writes-downs related to its operating affiliates and investment portfolio.
The shares of XL have been under pressure for quite sometime due to its relationship with Security Capital Assurance (SCA). This has also led to a reduction in the company credit rating by three major rating agencies.
