U.S. Slump Wears Down Oxford
Oxford Industries, Inc.'s (OXM) first-quarter results came in ahead of our estimates. Unfortunately, it appears the upside was a one-quarter event. Management issued disappointing guidance for the rest of fiscal 2008. We are reducing our estimates for fiscal 2008 and 2009. We maintain our Hold rating on OXM shares.
The investment case for Oxford Industries comes from the company's recognizable brand names and diversified product offerings that generate profitable growth. Its numerous brands and exclusive licenses require it to deliver a diversified product offering. The upshot here is that Oxford is not overly reliant on any one product line for a large portion of its growth. What's more, Oxford has been able to improve its gross margin thanks to the unloading the Womenswear business and the growth of its higher-margin Tommy Bahama business.
Nevertheless, we are concerned with the difficult consumer spending environment, risks associated with the apparel industry, and risks associated with its business model. We believe these risks offset the company's bullish factors.
The shares don't look particularly cheap at 12.4x our fiscal 2008 EPS estimate and 10.9x our fiscal 2009 EPS estimate. OXM trades at a discount to its industry mean and median. We note that the shares have historically traded at a significant discount to the S&P 500. Based on other valuation measures including price-to-book, price-to-sales, and price-to-cash flow, OXM's stock appears to trade at a reasonable valuation relative to its peers. Our target price is $24, which is 13x our fiscal year 2008 EPS estimate.
Telecom Argentina Must Steady
Telecom Argentina S.A. (TEO) is the leading provider of communications in Buenos Aires, Northern Argentina and Paraguay. While the company continues to grow its mobile and data subscriber base, the uncertain economic outlook and challenging competitive environment are considerations that we believe may limit valuation levels.
Furthermore, capital spending is expected to increase materially due to cellular and broadband infrastructure requirements. We maintain our Hold rating until cash flow to debt levels become more favorable on a sustainable basis.
Telecom Argentina continues to perform with inconsistent earnings. Overall operating performance has been overshadowed by significant swings in expenses driven by volatility of the Argentine Peso versus the U.S. Dollar and Euro. However, the ongoing financial restructuring initiative and strong cash flow generation have stabilized the company's liquidity.
Telecom Argentina is trading at 9.5x estimated earnings for fiscal year 2008, which represents a significant discount to the forward P/E ratio of the peer group and S&P 500 averages. Our six-month target price of $19.00 is based on a 2008 P/E multiple of 10x.
Sonic Automotive Slowing
Sonic Automotive, Inc. (SAH) is focused on improving margins by lowering selling, general and administrative (SG&A) expenses. However, Sonic is in an industry experiencing increasing competition and lower car sales. The company is limited in how much more it can cut costs. However, there is a limit as to how far employee costs can be reduced, as employee turnover remains a problem for the company.
Sonic Automotive is operating in a difficult sales environment. Incentive packages are attached to many car models, a sign of continued slow sales. Recently, the domestic automakers have come under considerable pressure, as foreign manufacturers have been benefiting from the introduction of a host of new products.
As a result, should the domestic automakers encounter further market share erosion beyond our expectations, or announce incentive programs larger than expected, we believe Sonic's sales and earnings would be negatively impacted.
