Potash Still Considered Buyable
Potash Corp. (POT) has leverage in higher fertilizer application rates, higher crop plantings, increasing demand for biofuels and rising crop prices. The company is located in low cost areas and its financials are solid. Hence, we rate the stock a Buy with a target price of $250. This is 18.9x our 2008 estimate.
Potash Corporation enjoys significant cost advantage with regard to raw materials. All potash produced by the company in Saskatchewan is in the area, where extensive potash deposits are found. Moreover, the company has lower cost nitrogen operations in Trinidad due to the long-term, lower-cost gas contracts with Natural Gas Company of Trinidad and Tobago Limited as well as a proximity to the U.S. market.
In response to the rising prices of potash products, the company has engaged in the expansion and development of projects that will raise annual operational capacity to capture a significant share of the growth in global demand.
On August 7, Potash Corporation announced that the unionized employees at its Allan Division, Cory Division and Patience Lake Division operations of Saskatchewan have started strikes after four days of mediation that failed to resolve the key contract issues, primarily centered on profit-sharing demands by the union. The striking employees are members of United Steelworkers (USW), and are responsible for underground mining operations, milling, and shipping activities on the surface.
Linear Tech in a Straight Line
Linear Technology Corporation (LLTC) is a leading OEM of analog and mixed signal semiconductors. June quarter revenue was in-line with consensus expectations, while the EPS exceeded. Forward guidance is for a 0-2% revenue growth in the next quarter.
The shares are currently trading at a 15.7x multiple of our 2009 earnings estimate (P/E). Linear Technology has an attractive business model that features some of the most favorable margins within the technology sector. The company grew sales 30% coming off the last down-cycle in 2005, and 4% in fiscal year 2006. Growth tapered off in fiscal 2007, as management continued to pursue only those business lines that afforded gross margins at the level historically enjoyed by the company.
As a result, cash flow has been very consistent. Linear has around $967 million in cash and short-term investments ($4.36 a share). The management continues to pay a dividend, and recently raised the amount to $0.21 per share. Historically, the company has done extremely well during economic downturns; therefore the stock should continue to do well as the cycle dips.
We view LLTC as one of the lowest risk stocks in the technology sector. We are reiterating our Hold rating and target price of $35.00 (16.7x P/E). The company has a stockholders' deficit. Consequently, the TTM ROE (trailing 12-month return on equity) is negative (-81.0%).
PartnerRe Attractively Priced
PartnerRe, Ltd's (PRE) 2Q08 operating earnings of $183.8 million or $3.39 per diluted share were substantially ahead of our estimates. The results benefited from a moderate level of incurred losses, strong investment income growth, and a weakening U.S. dollar, which were slightly offset by a softening in reinsurance pricing and higher costs.
After reviewing 2Q08 results, which were higher-than-expected, on operating basis, we are slightly increasing our FY08 and FY09 estimates to $10.87 per share and $10.10 per share respectively. At the current price, the shares of PRE trade at 0.98x its 2Q08 book value of $70.22 per share, well below the middle of its 10-year range, and at a 22.5% discount to the peer group median.
We expect some expansion in the multiples in the coming quarters based on PRE's superior capitalization, strong underwriting results, and diversified portfolio, somewhat offset by an above average risk profile and financial leverage.
Our six-month price target of $76.00 per share reflects a slightly expanded multiple of approximately 1.05x to our estimated December 2008 book value of $72.30 per share. It also equates to approximately 7.0x our earnings estimate for FY08. Combined with the annual dividend of $1.84 per share, this target price implies a return of about 11.2% over the period.
We expect PRE to continue delivering strong results for the coming quarters based on its excellent underwriting abilities, strong capitalization, solid ratings and reputation in the market, despite some softening in the non-life reinsurance pricing and higher costs, though we suspect that the current negative sentiment for the financials as a whole may somewhat weigh on the share price momentum. We are maintaining our Buy recommendation on the shares.
Manpower Strength Continues
Manpower, Inc. (MAN) exhibited strong earnings growth in 2006 and 2007. In the first two quarters of 2008, earnings exceeded expectations by a cumulative $0.14. Our Buy rating on the shares is maintained.
Strong cash flow allows management to return value to shareholders in the form of share repurchases. In 2007, Manpower generated a 22% improvement in free cash flow, up to $341 million and repurchased 6.1 million shares for $430.5 million.
