Est Reduced on Buy-Rated NuStar
NuStar Energy (NS) posted solid first-quarter results on the back of increased throughput and higher storage lease revenue. While distribution was not raised, largely due to the recent CITGO transaction that closed during the quarter, we expect strong growth in the coming quarters given the very comfortable coverage ratio.
We continue to like the partnership for its diversified asset base, strong distribution-growth prospects, and attractive valuation. A strong pipeline of organic growth projects and contribution from acquisitions provide the partnership with an above peer group average distribution coverage ratio. We estimate that the partnership can sustain distribution-growth in the 8%-9% annually over the next few years.
On a distribution yield basis, NS common units are trading at a discount to the peer pipeline MLP group average (higher yield = lower value). This represents a 351 basis points (bps) spread over the 10-year Treasury bond, compared to the peer group's average spread of 318 bps. Given the partnership's comfortable distribution coverage ratio, improved distribution-growth prospects following separation from Valero Energy (VLO) and expected completion of a number of growth projects in the near term, and the 25% general partner distribution split, we continue to see upside from current levels.
Our new $59 price objective, reduced from $64 before, reflects a distribution run rate of $4.33 per unit and yield of 7.40%. Our yield assumption is based on a 290 bps spread, inline with other faster growing MLPs, over our 10-year Treasury bond yield expectation of 4.50% over the next 12 months.
Energizer's Debt Level Upped
Energizer Holdings, Inc. (ENR) is experiencing top-line growth both through organic growth in the razor blade and battery businesses, and through the acquisition of Playtex. In order to complete the Playtex acquisition and refinance existing Playtex debt, Energizerâ?s debt level significantly increased, which could impair the companyâ?s financial condition. At the end of calendar 2007, long-term debt stood at $2.69 billion versus $1.37 billion in the year-ago period.
The balance sheet is highly leveraged with debt being 77% of total capitalization. With the Playtex acquisition, debt rose above the critical 3.5 times cash flow level, which required (by debt covenant) a 75 basis point interest rate penalty. Energizer does not pay a dividend. Therefore, the share repurchase program has been curtailed as management concentrates in lowering the debt level. Guidance for integration savings, originally estimated to be $57 million, has been raised to $70 million.
During the last five years, a period of relatively stable earnings growth, Energizer Holdings stock has traded in a P/E range of 11.9 to 22.5. At the current P/E of 16.3, we find the stock somewhat attractive despite the share repurchase program having been curtailed as management concentrates in lowering the debt level. We maintain the target price of $105.50, which is based on a 20 P/E on trailing 12-month earnings.
Events Keep Grupo Televisa a Buy
We are keeping our Buy recommendation on Grupo Televisa S.A. de C.V.'s (TV) global depositary shares (GDS). After a few quarters of disappointing results during 2007, fourth quarter 2007 figures were better-than-expected and first quarter 2008 operating results were positive.
First quarter net income was undermined by higher financial costs. However, the outlook for the media industry remains positive in 2008, due to the U.S. Presidential campaign and the Olympic Games. Moreover, the new investments in the telecom area and the gambling business are quite encouraging and should keep on growing in the following quarters.
Currently, Grupo Televisa trades at 16.8x our 2008 earnings estimates, a small discount to the industry mean. The company still has a dominant position in the Mexican market, and has been expanding to the U.S. markets and to Europe. Moreover, Televisaâ?s new investments in the gambling business, telephony and in Internet content are very encouraging.
