Cutting Sell-Rated Comerica
We continue to note that though Comerica, Inc. (CMA) is trying to achieve product and geographical diversification, the U.S. regional bank still derives a significant portion of its business from Michigan. Deterioration in the credit environment in general and in that area in particular, continues to hurt credit metrics and put pressure on the bottom line.
The Commercial Real Estate portfolio of the bank is a bigger concern, since almost 70 percent of these loans are in California, Michigan and Florida, which are under severe stress currently. We thus expect continued loan losses and higher provisions in the coming quarters. Based on Comerica's first-quarter results and our concerns for further credit deterioration, we have moderated our fiscal 2008 and 2009 expectations to $2.71 per share and $3.42 per share respectively.
Our new six-month price target of $34 is based on a multiple of 12.5x our projected 2008 EPS. With an annual dividend of $2.64 per share, the target price implies a negative 4.8 percent expected total return over the period. We thus maintain our Sell recommendation on the stock.
Optimistic on Energy Conversion
We remain optimistic about Energy Conversion Devices, Inc.'s (ENER) long-term potential success in the high growth alternative energy industry, given increased activity in solar power projects. The maker of thin-film flexible solar laminate products achieved profitability for the first time in the third quarter since it went public in 1969. The company is also developing and expanding its solar business while exiting other non-core businesses.
High and volatile global energy prices, in combination with declining technology costs, have renewed interest in alternative energy stocks, thereby pushing many valuations higher in volatile markets. With the company achieving break-even profitability during the second-half of fiscal 2008, and expected continued positive EPS through 2008-09, the stock is expected to trade at much attractive P/E multiples through 2008.
Nevertheless, we note the stock is highly volatile, pending the sale of its Cobasys joint venture. Additionally, despite increasing product revenue, the internal restructuring processes and several recent contracts, we question the profitability potential of licensing royalties.
Moreover, a history of negative profit margins and operating income without meaningful valuation metrics collectively show potential for moderate-to-high returns, but with high risk. Accordingly, we maintain a speculative Buy recommendation and a six-month target price of $74 on the stock.
Alcatel-Lucent Too Optimistic?
French-American telecom equipment provider Alcatel-Lucent (ALU) is progressing on its restructuring plans by cutting costs and streamlining it management, although the related expenses continue to hurt earnings. We have cut our revenue and earnings estimates for 2008 due to the continued pricing pressure and the geographic mix, as the company competes to grow in Asia based on price.
Telecommunications companies continue to be the largest group in terms of mergers and acquisitions, which has helped Alcatel-Lucent's penetration as companies try and consolidate with a single vendor. The creation of a clear No.
