Axis Capital Under Some Pressure
Axis Capital Holdings Ltd.'s (AXS) first-quarter operating earnings were below our expectations from a lower level of premiums written than anticipated, specifically in the reinsurance segment, and a higher level of large individual risk losses worldwide. We continue to view the shares of the company as a Hold.
AXIS remains committed to diversifying its product offerings, and remains well-positioned to take advantage of global opportunities. We believe its diversification by product and geography will help offset some of the pricing declines currently occurring in the insurance industry. Although we think the company has been able to benefit from the hurricane-related price hardening markets of a few years ago, going forward, we would expect additional benefits to be somewhat more limited.
Based on the recent results, we are lowering our 2008 and 2009 earnings expectations to $5.28 per share and $5.20 per share, respectively, from $5.61 per share and $5.40 per share. Shares of Axis continue to be under pressure and currently trade at 5.6x our 2008E EPS, nearly a 6.7% discount to its peer group and off from the 7.5x forward earnings prior to Hurricane Katrina.
On a price-to-book basis, Axis shares trade at a 1.1% premium to is peers, which we suspect is driven by the company s current 2.48% dividend yield. Our six-month price target of $30.25 per share, down from $37.40 per share, incorporates a price-to-book multiple of 0.90x to our fine-tuned diluted book value estimate of $33.60 per share for December 31, 2008. This implies a 2.7% potential total return from current prices.
Hold Duke Realty for High Yield
Duke Realty Corporation (DRE) reported 1Q08 FFO [funds from operations] of $0.58 per share, a $0.04 per share decline from the year ago period and $0.06 below our estimates. Operationally, the company's portfolio is performing relatively well with stable occupancy and modest same property net operating income (NOI) growth.
Although, with the economy slumping and the credit markets still reeling, Duke will struggle to meet our lowered 2008 FFO estimates. Duke is ramping up development at a time when office and industrial leasing will become more difficult. We rate the shares a Hold due to the yield, now over 8%.
The company is attractively valued compared to its peers; Duke is trading at 8.3x 2008 FFO estimates compared to peer group averages of 14.6x 2008 FFO (43% discount) estimates for office REITs and 10.8x 2008 FFO (23% discount) estimates for industrial REITs in the Zacks coverage universe.
We previously had reduced our full year 2008 FFO estimates due to lower asset sale projections ($2.88 per share previously to $2.70 per share). Duke is valued at an approximate 20% discount to our net asset value (NAV) estimates.
