Challenges Restrain MCG Capital

MCG Capital Corporation's (MCGC) fourth quarter 2007 distributable net operating income per share (DNOI) was ahead of estimates but GAAP EPS fell substantially short of the expectation. We anticipate the ongoing disruptions in the capital markets to continue to impact the results in the coming quarters.

Further, with heavy exposure to small and midsized companies, MCGC remains quite susceptible to the economic downturn. MCGC's large dividend has been strong point for the stock so far; however a dividend cut in the coming quarters is possible, given the current capital constraints.

We are maintaining our Hold recommendation on the shares, but are reducing our six-month target price to $8 per share. We noted that the company was not able to renew its $200 million credit-line with Merrill Lynch & Company (MER) and has to repay the outstanding balances by August 31, 2008.

Given the current disruptions in the CLO markets, the company may not be able to raise proceeds from the placement of debt in the CLO market. This liquidity crunch may affect the origination activities in near future. Also, the company is not able to raise fresh equity capital since the stock has been trading below its net asset value (NAV) per share. In view of the above, we cannot rule a dividend cut in the coming quarters.

Remaining Cautious on TELUS

We maintain our Hold rating on TELUS Corporation (TU), the second largest telecommunications provider in Canada. Recent results demonstrate strong wireless and high-speed Internet operating performance, although the introduction of Wireless Number Portability (WNP) increased operating expenses. Nevertheless, we are impressed by management's commitment to return enhanced value to shareholders through continued share buyback programs and increased dividend payouts.

Meanwhile, the business landscape in Canada is changing with major cable and wireless initiatives competing for the same consumer and business customer base. We are encouraged by Telus wireless business prospects, but remain cautious about access line erosion in the wireline segment.

Telus is trading at 13x our 2008 earnings estimate, which represents a discount to the industry group as well as to the S&P 500. On the basis of enterprise value (EV) to EBITDA, the stock is trading at 4.5x estimated 2008 EBITDA, which is at a slight discount to the peer group average.

The competitive landscape in Canada is changing with major cable and wireless initiatives competing for the same consumer and business customer base. We are encouraged by Telus wireless business prospects, but remain cautious about access line erosion in the wireline segment. Hence, we rate the stock as Hold and our US$ 48 six-month target price is based on 13.3x 2008 earnings estimates or 5x EV/EBITDA which approximates comparable benchmark metrics.

Smith Int'l a Valuation Hold

Smith International, Inc. (SII) posted solid first-quarter 2008 results, primarily driven by increased oilfield segment business. On a year-over-year basis, revenue and earnings grew 12.5% and 14.6%, respectively.

The quarterly results show improved oilfield margins and solid free cash flow generation.