Buy Brazilian Builder Gafisa
We are keeping our Buy recommendation on Gafisa S.A. (GFA). First quarter 2008 results were positive. The short-term outlook remains promising as the company's sales are strong and the emergence of a domestic mortgage market has been fueling the Brazilian construction sector.
We believe the less benign monetary policy in Brazil is just a temporary problem. The potential for growth in the local mortgage business is fantastic, and the huge inventory of land already acquired, construction in progress, bank of land and finished units all point to strong earnings and revenues in future quarters.
Currently, Gafisa is trading at 14.2x our 2008 estimated EPS. The valuation is now more attractive as a result of the continued growth on the company's sales and earnings. We remain positive on the Brazilian real estate market for the short-to-medium term outlook.
We are expecting a very strong growth in the company's earnings in 2008, thus our estimated P/E is quite attractive. However, even if we consider a less optimistic view on the company's short-term perspective, the valuation still seems attractive.
We believe Gafisa remains a good short-term play. Our target price of US$62.00, represents a valuation of 20x our 2008 P/E, in line with the industry median.
Integrated Device Stays a Hold
Semiconductor OEM [original equipment manufacturer] Integrated Device Technology (IDTI) should benefit from higher sales of its Grantsdale chipset and new products in the current quarter. However, positive developments in the communications sector are not likely to last long.
Even though the acquisition of Integrated Circuit will increase the size of the firm by 40 percent, we remain concerned that the addition of SigmaTel, Inc.'s PC audio division could hurt IDT's margins.
We expect share upside to be limited until the state of the world economy is a little clearer. Shares are likely to trade in line with the industry group in the near-term. We continue to rate shares of IDT a Hold with a target price of $12.
Woes Continue for CarMax
CarMax, Inc. (KMX), the largest U.S. retailer of used cars, continues to face a difficult environment, largely due to aggressive incentives from manufacturers of new vehicle.
Our outlook for the Auto and Auto Parts Sector industry is Negative and we recommend investors to under-weight auto stocks for the time being. Declining value of used cars in a weak economy and higher funding cost at the CarMax Auto Finance is eroding the company's margins. Moreover, lower earnings, a conservative guidance for 2009, along with higher valuation make us apprehensive about the stock's performance in the near term.
