Bumping Up Ests on Commerce Bank
Commerce Bancshares' (CBSH) 1Q08 diluted operating earnings (excluding the transactions related to VISA) of $0.63 per share were two pennies ahead of our estimate. Earnings were driven by stable net interest margin and strong growth in non-interest revenue (Bank card and trust fees had a solid growth during the quarter), while the expenses remained under control. Credit metrics remained stable during the quarter.
After reviewing the results, we are increasing our FY08 earnings estimate to $2.90 per share but are maintaining our FY09 estimate at $3.20 per share. We maintain our Hold recommendation on the shares of CBSH with a six-month target price of $42.00 per share.
The quantitative Zacks Rank for CBSH is currently 4 (down from 3), indicating a slight downward pressure on the shares over the near term. Short interest is currently 7.5 days, versus 6.1 days previously.
Our six-month price target of $42 per share equates to a P/B multiple of 1.9 times our estimated book value per share six months out (now September 2008) and also equates to 14.5 times our 2008 earnings estimate of $2.90 per share. With the $1.00 per share annual dividend, the target price implies a 6.3% expected total return over the period. Our rating on the shares therefore, remains unchanged at Hold.
Neutral on Small-Cap HEICO
Maintenance, repair and overhaul (MRO) of both commercial and military equipment is at a heightened level because of increased usage, which engenders a vibrant aftermarket. In addition, rising fuel costs are forcing the airlines to find ways to cut other expenses. Both of these drivers offer significant opportunities for HEICO Corp. (HEI) to expand & flourish.
However, while robust levels of revenues and income are envisioned for HEI over the balance of the decade, we believe that HEI is close to fairly valued at current levels, and therefore have maintained our strong HOLD opinion. Aside from original equipment manufacturers (OEM) and their subcontractors/suppliers, HEICO purportedly is the world's largest independent manufacturer of jet engine and aircraft component replacement parts approved for use by the Federal Aviation Administration (FAA).
HEI has the highest P/E ratio and the highest PEG ratio of the aerospace/defense supplier group. One of the reasons that investors are willing to pay up for HEI may be that (at least) two of its principal clients Lufthansa and American Airlines (AMR) have equity investments in the company, which would indicate that HEI has secured some pretty powerful clients. (witness the $76.0 million of Minority Interests on the Balance Sheet).
On the other hand, HEI has a Goodwill-to-Equity ratio of 0.81, which we find bothersome. Further, the current economic malaise may keep even well-positioned stocks like HEI from rising.
Ball Corp. Kept Contained
We expect Ball Corporation (BLL) to report first quarter EPS of $0.67 before the market opens on April 24, down 14.1% from the year-ago level of $0.78, due to lower margins. Going forward, Ball's earnings should benefit from strong packaging fundamentals amid growing beverage can demand, as well as its cost containment efforts through closing non-core operations.
Nevertheless, the Metal Food and Household Products Packaging, Americas unit is suffering from continued lower food can volumes and a difficult pricing environment. Also, soft prices (due to market overcapacity) and low volume are limiting margin expansion in the company's PET [polyethylene terephthalate, a common plastic] business.
