Economy Keeps Avis a Hold
The near-term outlook for Avis Budget Group (CAR) is difficult to ascertain. The truck rental business is experiencing pricing pressure and the economy is weakening. However, the management is now more focused on operations after the restructuring in 2007.
Revenue enhancement and cost cutting initiatives have been implemented that should fuel significant financial improvements. However, earnings visibility is limited, especially with a deteriorating economy. Therefore, the Hold rating is maintained for Avis Budget Group.
The shares of Avis Budget Group have a limited valuation history due to the recent re-structuring of the parent company (Cendant) through spin-offs and asset sales in 2006. The target is $10.75, based on a 11 P/E multiple on 12 month trailing EPS, which is approximately where a 7% growth company with an average levered balance sheet should be valued as the U.S. economy appears to be entering a recession.
AK Steel to Test Its "Mittal"
We expect AK Steel Holdings' (AKS) cost reduction efforts and renegotiated higher-priced contracts to prevent excessive margin deterioration in light of higher commodity costs. The company has greater product diversification compared to its peers and is focusing on markets and products which have the greatest long-term potential for success.
We believe the company will gain from new projects, higher selling prices, and increased shipment. Hence, we reiterate the Buy rating and raise our six-month target price to $69.00. This is 14.1x our 2008 EPS estimate.
The continued cost containment strategy and reduction of legacy costs has made AK Steel an attractive takeover target. Arcelor Mittal (MT) intends to take it over and is contemplating a $40 per share bid. However, the management has not commented about this transaction at present.
AK Steel has implemented surcharges on flat-rolled carbon and electrical steel products in response to higher raw material and natural gas costs. Moreover, based on strong demand for steel, it expects a double-digit increase in the new contract prices of oriented electrical steel products.
AK Steel has negotiated 12 new-era competitive labor agreements in the last three years and is focusing on cost containment through workforce reductions. Meanwhile, AK Steel redeemed the entire $450 million of 7.9% senior notes due in 2009 in about a six-month period. This has reduced an annualized interest expense by approximately $70 million.
No Reimbursement for Cyberonix
Cyberonics Inc.'s (CYBX) growth expectation has been reduced from the unsuccessful attempt at gaining national reimbursement coverage for the depression indication. The company is looking for a financial partner for the execution of its depression strategy. The future of Cyberonics rests on its only product, the VNS Therapy System, approved for the treatment of epilepsy.
The company's near term focus is on the use of the VNS Therapy System for two indications: epilepsy and depression. The device has the potential to treat other neurological disorders, such as Alzheimer's disease, anxiety, chronic migraine headaches, and bulimia. Research and development efforts of Cyberonics include seeking other VNS indications with/without partners.
The VNS Therapy System is in a position to meet increased demand that currently exists in the global epilepsy market. Its growth opportunities are likely to go up, with about 125,000 new epilepsy cases in the U.S., and about 210,000 new cases in Europe and Japan likely to be diagnosed each year.
We note that the company's reimbursement objectives are not expected to be achieved in the near term. Although the outlook for the epilepsy market still remains positive, most of the huge growth potential was expected from the depression market, which is significantly larger than the refractory epilepsy market.
At its current price of $21.94 per share, CYBX is trading at 4.3x our fiscal year 2009 revenue estimate of $137 million, which is at a premium to the group average multiple of roughly 3.5x. In addition to reduced growth, execution risk related to CYBX's growth plan may limit multiple expansion. Our target price is based on a price-to-revenue multiple of roughly 4.5x FY09 revenue estimate.
Expectations High on Ciena Corp.
We maintain a Hold rating on the shares of Ciena Corp. (CIEN).
