Volumes Keep Goodyear a Hold

The Goodyear Tire & Rubber Company (GT) is one of the largest tire manufacturing companies worldwide. Goodyear Tire is benefiting from a major restructuring program along with lower raw material costs and improved selling prices. However, weak tire volumes compel us to rate the shares a Hold with a target of $28.50.

On April 25, 2008, Goodyear Tire & Rubber reported 2007 first quarter results. In the quarter, excluding special items, net income from continuing operations was $0.60 per share, compared to a loss of $0.61 per share in the prior-year quarter. The company sales were $4.9 billion, a 10% increase from the same quarter in 2007, offsetting lower volumes with higher prices and a richer product mix with favorable currency translation ($341 million).

Revenue per tire rose 7%, but weak OEM volumes in North America and weak replacement volumes in North America and Europe offset some of this benefit. North American sales fell 1%, European sales rose 16%, Latin American sales rose 29%, and Asia Pacific sales rose 21%. The company is now two-thirds through its $2 billion cost-cutting program.

Currently, shares of the company are trading at 10.2x our 2008 EPS estimate of $2.67. We believe the emergence of a healthier balance sheet and noticeably better sales from emerging markets will help earnings. Further, the restructuring initiatives undertaken and the savings from the new labor agreement will boost the future earnings. However, we rate the stock a Hold, with a six-month target price of $28.50, which implies a P/E 11x our 2008 EPS estimate.

Starwood Hotels Target Increased

We maintain our Buy rating for Starwood Hotels and Resorts Worldwide (HOT) following the release of strong Q1 financial results. We consider the companyâ?s significant exposure to international markets to be a positive attribute that should help Starwood to weather the economic downturn in the U.S. market. We continue to believe that Starwood deserves a premium valuation, given the companyâ?s well-positioned portfolio. Starwood is currently trading at approximately 10.9x our 2008 EBITDA estimate.

Marriott International Inc. (MAR) currently trades at approximately 10.8x our 2008 EBITDA estimate. Starwoodâ?s stock had declined from near $75 per share in mid-July to under $40 per share in mid-January. Some of the decline during the summer was likely in response to the tightening credit markets, and the perceived difficulties now present in obtaining financing for private-equity buyouts. As Starwood was seen by many on the Street as a potential takeout candidate, we believe the decline has in large part removed the buyout-premium that was likely reflected in HOTâ?s share price.

We believe that the pullback during last fall was likely the result of an increased focus by investors on the companyâ?s vacation ownership business, which has to some extent overshadowed the strength in the companyâ?s hotels operations. Most recently, concerns over the overall health of the economy, along with uncertainties regarding consumer spending going forward, led to further share price declines.

Shares of Starwood have gained approximately 20% year-to-date, and are currently 37% above the low point reached in January. Even following the rebound, we continue to consider shares of Starwood Hotels to be attractive. We have increased our price target from $53 to $60, based on an enterprise value/EBITDA multiple of 12x our 2008 EBITDA estimate. 

Can Celera Group Deliver?

Celera Group, formerly Celera Genomics Group (CRA), is one of the two business segments of Applera Corporation. It has significant capabilities and expertise in proteomics, bioinformatics and genomics.

Celera divested its small molecule drug programs in the fourth quarter of fiscal 2006 and filed a registration statement with the SEC on the planned separation of Celera from Applera in February 2008. The recent acquisitions of Berkeley HeartLab and Atria will enable the company to achieve profitability in 2009. Following its decision to focus on the molecular diagnostics market, Celera acquired full ownership of Celera Diagnostics.

The companyâ?s decision to divest off its small molecule drug development programs will result in significant cost savings in the near future. Additionally, the company used its cash reserve to acquire Berkeley HeartLab and Atria Genetics in the first half of 2008 for a combined price of $215 million. The acquisitions are expected to be accretive in fiscal 2008 and we expect Celera to break-even on a non-GAAP basis in 2008. The acquisitions provide the company with a rich and diversified revenue base.

At the end of March 2008, the company had almost $340 million in cash and equivalents. The company expects to end fiscal 2008 with $330 million - $340 million in cash and cash equivalents. Our financial model shows the company will break-even on a non-GAAP basis in 2008 and achieve profitability on a GAAP basis in fiscal 2009.

We expect the company to actively hunt for new opportunities to utilize its tremendous cash position. Our price target of $15 corresponds to a P/S multiple of 8.5x our 2010 sales figure of $210 million, discounted at 20 percent for two years. Our model assumes shares outstanding of 83.2 million in 2010. The P/S multiple represents a significant discount to the industry P/S multiple.

We would like to see evidence of the company's ability to successfully integrate and leverage the commercial operations of Berkeley and Atria before we recommend the shares. As such, we maintain our Hold rating on the stock with a price target of $15.  

Growth Slowing for Ingram Micro

Ingram Micro Inc.â?s (IM) first quarter sales were $246 million below our estimate, and its EPS were $0.01 below our estimate. The lower-than-expected results were due to continued weakness in North America and Europe. Also, management's EPS guidance for the second quarter was in-line with our estimate thanks to share repurchases. We think that Ingram Micro will be able to deliver solid operating leverage over the long term.

However, we believe the company could disappoint in the near term because of slowing economic growth in North America and Europe, as well as industry-wide pricing pressures. As a result, we are reducing our estimates for 2008 and 2009. The company expects sales of $8.50 billion to $8.75 billion and net income of $59 million to $64 million, $0.34 to $0.37 per diluted share. These estimates do not include costs related to the company's expense reduction plans.

Currently, Ingram Micro expects charges of $2-$4 million in the second quarter with $9-$11 million in the third quarter. Ingram Micro shares trade at 9.6x our 2008 EPS estimate and 8.9x our 2009 EPS estimate. While this valuation may appear cheap, we think it represents a fair value, relative to its peers and long-term earnings growth rate.