Tower Reduces Subprime Exposure
Tower Group Inc.'s (TWGP) aggressive geographic expansion plan has come at a time of intensifying competition and rate softening in the broader property-casualty market. Presently, we maintain a Hold rating on the shares.
However, we appreciate management's move to reduce subprime exposure by selling off the risky investments. Also certain investments that had unrealized losses have now been written down. We believe that these transactions will help to strengthen the company's balance sheet over time.
Although we believe the company remains well-positioned to continue growing premiums at a rapid clip, we think its aggressive expansion plan in the softening market should in all likelihood experience a worsening within its combined ratios further, modest level of subprime paper in the investment portfolio adds a level of uncertainty over the near term.
The shares of Tower Group currently trade at 8.0x our 2008 earnings estimate of $3.00 per share (a 29.2% discount to the peer group), with a price-to-book of 1.79x to its 1Q08 book value of $13.34 per share (a 49.0% premium to the peer group, which we believe reflects the superior historical growth and ROE trends).
Based on general concerns for the credit quality worthiness of the investment portfolio, given unresolved issues within residential real estate markets throughout the country, we are decreasing our six-month price target to $26.55 from $28.50 per share previously. We maintain a Hold rating on the shares
Risks Keep Schering-Plough a Hold
We expect a significant decline in sales of on Schering-Plough Corporation's (SGP) cholesterol drugs Vytorin and Zetia, following recent negative comments at American College of Cardiology. While we continue to be believers in the long-term future of the company, we see a significant amount of near-term risk and recommend that investors Hold at the current price.
Aside from the problems with the cholesterol business, Schering-Plough does offer compelling reasons for investors to remain interested. The company is forming alliances, acquiring products, and maintaining prudent cost-control.
Assuming the integration of Organon BioSciences produces the incremental revenue and cost-synergies management hopes for and Schering delivers on its productivity initiatives, we think EPS can grow at a CAGR of 11 percent through 2012.
Its aggressive plan to rein in costs, if successful, should grow EPS in the double digits through 2012. In order for this to materialize however, management will need to cut headcount and trim resources all the while integrating Organon.
It is very difficult to gauge where prescriptions are headed in the cholesterol JV, and until there s more clarity on this we feel it's unlikely the shares will show a significant move up. The stock currently trades at 12.9x our 2008 EPS estimate of $1.49.
