Good Overall Return on Allegheny
Going forward, Allegheny Energy Inc.'s (AYE) positive investment factors include growing earnings, increased market prices, higher generation rates in Pennsylvania, increased retail sales long-term supply agreements, and a reinstated dividend. These factors are partially offset by higher coal costs and decreased rates in West Virginia.
We expect that the company's regulated delivery utility business will provide steady earnings growth, while the generation business will provide an additional boost to earnings. Accordingly, we maintain a Buy recommendation on AYE common stock with a six-month target price of $60.25. Price appreciation to our near-term valuation target, coupled with the recently declared quarterly cash dividend of $0.15 per share after a gap of five years, which we deem sustainable and secure, represents annualized total return potential of 31.0%.
AYE has a series of transmission expansion plans, as well as plans to engage in wind energy. In order to secure its coal dependency, the utility had supply commitments in place for over 95% of its 2008 coal requirements. The company also recently received favorable regulatory rulings.
Additionally, AYE received investment grade credit ratings from Moody's Fitch and Standard & Poor's. The PJM also recently approved Allegheny's Potomac-Appalachian Transmission Highline (PATH) transmission project. The company also finalized the TRAIL project agreement with
American Electric Power (AEP).
Uncertain Times Keep ADI a Hold
We reiterate our Hold recommendation on Analog Devices, Inc. (ADI) as the shares have good long-term potential, but given the uncertain macro economic situation, the valuation seems fair.
Analog Devices derives around half its revenue from the industrial market, which, according to World Semiconductor Trade Statistics (WSTS) data, should continue to exhibit strong growth through 2010. The high-margin communications business has also witnessed steady growth. Analog Devices is a debt-free company, with net cash per share of $4.09. ADI is expected to grow through increased penetration of the existing customer base.
A number of factors will influence semiconductor sales in 2008. The possibility of a recession in the U.S., presidential elections in November and the Olympic games are some of the external factors. The most important internal factor is the possibility of capacity shortage for the manufacture of non-memory chips.
The Management anticipates second quarter revenue of $650-665 million (up 0.1% to 2.4% sequentially). Gross margins are expected to be in the 61% range, while operating expenses are expected to increase slightly.
