Hold BT Group, Near Term
BT Group Plc (BT) is expected to report in-line 4Q08. It reported a weaker-than-expected 3Q08, with revenues below our estimate, but earnings, helped by a lower effective tax rate, were in line.
The company is moving ahead with the expansion of its 21CN network. The company rolled out its wholesale broadband services on the 21CN network recently. BT Global continues to execute well, winning deals valued at £8.6 billion in the trailing 12-month period. The company has been able to expand EBITDA margins due to its restructuring efforts, although pricing pressure is causing traditional revenues to decline.
Shares of BT are currently trading at 9.4x our 2009 earnings estimate of $4.69 after we have raised our currency expectations for the British pound against the US dollar to $2.025 per £1, compared to our previous $1.95 per £1 expectation. We believe BT should trade at 9.86x our fiscal 2009 earnings estimate, which gives us a target price of $46.25 over the next six months. We continue to rate shares of BT a Hold and continue to believe that BT will perform well in the US Markets, as the US dollar has remained weak against the British pound and euro and as most of its revenues come from Europe.
We have slightly reduced our revenue estimates for the remainder of 2008 and 2009 because of the revenue miss in the most recent quarter, while our earnings estimates are down for 2009 due to effects of restructuring expenses and also the weaker dollar. The cost-cutting measures, capital expenditures in new wave initiatives, the progress of launch of BT Vision and large deal wins give us confidence that the company is moving in the right direction. Furthermore, BT's relatively low level of debt compared to its assets size and pension fund surplus of £1 billion will enable the company to divert its cash flow towards share buybacks in 2008 and beyond.
FEMSA (FMX) Looks Encouraging
We are reiterating our Buy recommendation on Fomento Economico Mexicano, S.A. de C.V. also known as FEMSA (FMX). The company posted positive results for the first quarter 2008, including a good performance in the key Mexican market. Coca-Cola FEMSA's results were particularly encouraging, including good results in Brazil and Argentina and more positive numbers in Mexico. FEMSA Comercio continues to post quite encouraging results, a trend that has been going on for many quarters. Finally, the company was able to compensate higher raw material costs reducing administrative expenses.
Currently, FEMSA is trading at 17.7x our 2008 EPS estimate, slightly above the industry mean and median. The company has a decent medium-term growth potential, since Latin America is one of the most promising areas for the beverage industry, due to favorable demographic trends and the still positive economic outlook. Additionally first quarter results were positive, in-line with the expectation, including a considerable improvement in the key Mexican market. We must not forget that the slow down and a recession in the U.S. economy is indirectly affecting the Mexican economy.
However, the company's geographic diversification is already paying off, since the outlook for Latin America remains promising for the short term. We are particularly encouraged by the continued expansion of the Oxxo chain, the better-than-expected results for Coca-Cola FEMSA (KOF) and the positive outlook for the Kaiser brewer in Brazil. All considered we are reiterating our Buy recommendation on FMX, with a P/E multiple 20x on our 2008 earnings estimates. Thus, our target price is $48.25.
Good Entry Point for Sciele
Sciele Pharma, Inc. (SCRX) is a specialty pharmaceutical company engaged in the sale of prescription products for the treatment of cardiovascular, metabolic, obstetrical and gynecological, and pediatric and gastroenterological conditions and disorders. The company's broad focus and deep product pipeline offer substantial growth opportunities over the next several years.
Moreover, Sciele received a boost in January when the FDA approved the company's new Sular formulation.
