Motorola Keeps Holding Still

Motorola, Inc. (MOT), a leading manufacturer of mobile handsets, network infrastructure and cable products, declared better than expected second quarter 2008 financial results supported by higher mobile handset sales and encouraging performance with its Home & Network Mobility and Enterprise Mobility solutions business segments.

Motorola implemented effective cost-cutting measures, generated positive cash flow from operations, and maintained a respectable net cash position. The management's outlook for the remainder of the fiscal year is also more favorable. The company's Home & Network Mobility and Enterprise Mobility Solutions divisions are expected to contribute more in the future reporting periods.

However, according to our assessment, the company needs to demonstrate sustainable improvements with regard to its ailing mobile devices segment, especially considering increasing competition from 3G smart-phone manufacturers. We maintain our Hold recommendation, but with a higher valuation target due to improved financials.

Motorola is currently at 83.3x P/E multiple to our fiscal 2008 earnings estimates. This represents a significant premium to both the S&P 500 average and the peer group average. However, with respect to P/S and EV/S valuation metrics, the stock is trading meaningfully below the peer average. These valuation discounts are warranted in view the continuing turmoil with respect to its core mobile devices segment and global economic uncertainties. We set a six-month target price of $12, based on a P/S multiple of 0.8x our fiscal 2008 sales estimates an improvement over current valuation levels.

CGX Graphics Should Slow

Consolidated Graphics, Inc. (CGX) reported first quarter EPS of $0.84, down 12.5% year-over-year, due to the negative impact of a weak economy on sales volumes and selling prices. Due to lower-than-expected revenue, the company could not leverage its fixed costs.

However, the company's strategic sales initiatives (national account customers and CGXSolutions) continue to grow and its cash generation remains strong enabling it to invest in strategic acquisitions. We expect decelerating sales and EPS growth in FY09 on weaker same-store sales expectations.

Applying a P/E multiple of about 8.4x to our FY09 EPS estimate, we derive a target price of $41 per share. With a total return potential of less than 10% from the current price, we maintain our Hold recommendation on shares of CGX.

There are several positive factors impacting Consolidated Graphics operating performance, including positive trends being witnessed in the company's nationwide sales. The company actively pursues multi-year printing contracts from large corporations that seek to consolidate commercial print providers.

Another positive factor revolves around the development of value-added services through Consolidated Graphics CGXSolutions. The print-related software and electronic solutions available to customers include proprietary Internet-based software COIN (Custom Ordering Interactive Network) that assists ordering, proofing, workflow management and fulfillment of printed materials.

Its other Internet-based software product, OPAL (Online Private Asset Library) enables the storing, archiving, retrieving and distribution of digital assets such as images, logos and documents from any location through a web browser. The company plans to introduce StoreFront 2.0 in the third quarter of fiscal year 2009.

TC Pipelines Still Bringing It

We are reiterating our Buy recommendation, price objective and estimates for TC Pipelines, L.P. (TCLP) units. The partnership's recent quarterly results, while on the lower side relative to our estimates, were above year-earlier levels.

The year-over-year increase resulted from higher transmission revenue, lower financial charges and increased equity income from Great Lakes, partially offset by a fall in equity income from Northern Border. Importantly, TCLP raised its quarterly distribution by 7.6% year-over-year to the annualized rate of $2.82 per unit.

We continue to like the partnership for the potential addition of quality assets to its portfolio as well as the anticipated volume increases from organic projects.

Our continued positive view of TC PipeLines units reflects its attractive valuation and strong near-term distribution-growth prospects. The potential addition of quality assets from the general partner to TCLP's portfolio over the next few quarters is a major boost to its growth prospects.

The partnership's distribution-growth prospects have significantly improved following the completion of approximately $1.5 billion worth of acquisitions in the recent past. We project that a near-term distribution growth of 8% to 10% can be easily sustained with the current assets.

Despite this much-improved growth profile, TCLP units remain one of the cheapest in our coverage universe. Based on relative yields, TCLP units are currently trading at a yield spread of 453 basis points to the 10-year Treasury yield, at a significant discount to the peer pipeline MLP group's average yield spread of 417 basis points.

Micromet No Longer a Buy

The recent publication of an article containing positive clinical data from an ongoing phase I trial of Micromet Inc.'s (MITI) lead candidate, MT103 for acute lymphoblastic leukemia, in the Journal SCIENCE is positive for the company's proprietary BITE platform technology. We remain positive with the company's strategic direction, and believe several expected milestones expected in the next 6 months represent potential share price catalysts, however we move to a Hold recommendation at current levels.

Despite Micromet's now deeper pipeline of antibody-based products, the early phase of drug development represents a significant degree of risk. In addition to current integration risk related to the merger, the company is exposed to significant clinical development and associated regulatory risk. Barring any expedited approvals from the Food and Drug Administration, unsuccessful clinical trials or delays in the clinical trial process can significantly add to operating expenses and drug development timelines.

In the absence of significant company news, we believe the stock will move in sentiment with the broader biotech sector, which may add to share price volatility over the near term. Micromet currently relies on licensing fees and milestone payments, which depend on with progress or otherwise of associated research and development programs, and stable partnering arrangements, adding to volatility of revenues.

We have valued MITI based on a comparison to other emerging publicly traded companies in the biotech sector engaged in drug development targeting cancer.