Hess Corp. Stability Must Emerge

Despite the recent commodity-price induced weakness that has helped improve valuation, we are keeping our Hold recommendation unchanged for Hess Corp. (HES) shares at this stage. The near-term outlook for the stock in particular and the overall group in general remains unfavorable.

We will revisit our outlook for the stock once early signs of stability emerge in the crude oil market, which we believe will be sooner than later. We continue to see upstream momentum at Hess on the back of the company's leverage to high crude oil prices and a large inventory of projects in Brazil, Australia Libya and Ghana.

On September 4, Hess Corporation announced that the Nimblefoot-1 exploration well on Australia's Northwest Shelf discovered natural gas. The well encountered 93 feet of net gas pay. Nimblefoot-1 is the third of four initial exploration wells being drilled on the WA-390-P Permit (where Hess has 100% working interest) in 2008.

Hess has set its 2008 capital spending target at $5 billion (up from its previous guidance of $4.4 billion), out of which $4.9 billion relates to E&P operations. Historically, HES shares have traded at a discount to its peers, based on earnings and cash flow multiples, reflecting the company's track record of underperformance in terms of upstream growth, costs, commodity-price leverage, and balance sheet strength. This trend reversed over the last year as success on the exploration front and strengthened financial health helped improve the company's prospects, helping the stock outperform its peer group and command a valuation premium.

Mylan's Generic Expectations

Mylan, Inc. (MYL) is engaged in the development, manufacture, marketing, licensing, and distribution of generic, branded, and branded generic pharmaceutical products, as well as active pharmaceutical ingredients (APIs). With the acquisition of Merck Generics and Matrix Labs, Mylan is now the third-largest generic pharmaceutical company in the world.

While we expect the Merck Generics acquisition to contribute to long-term growth, near-term execution risks remain. Mylan announced certain strategic initiatives which should help drive long-term growth. But management also stated that they expect 2008-2010 EPS to be negatively impacted by a slower-than-expected new product launch.

The company adjusted EPS guidance for 2008-2010 based on higher expenses and reduced opportunities from patent challenges. We maintain a Hold rating with a $12 price target.

Arpita Dutt contributed to this report.

AvalonBay Not Quite a Buy

Shares of AvalonBay Communities (AVB) dropped nearly 9% on Monday due to a general sector sell-off brought on by the problems in the US financial sector. Operationally, the company's portfolio continues to perform well; AVB posted good results in the 2nd quarter with FFO (funds from operations) per share increasing 8% over the year-earlier period.

Results were $0.02 above consensus and $0.04 above our estimates. However, despite the sell-off, we still rate the shares a Hold due to a still-high comparative valuation and what could be worsening multi-family fundamentals. While new apartment construction is down, more unsold condos and homes are now being rented which adds competition to the company's high end rentals. Additionally, US job growth is falling rapidly, which will negatively affect high-end apartment demand.

Despite an 8%+ price drop on Monday, Avalon Bay continues to trade at a substantial premium to its apartment peer group. AVB currently trades at a 27% premium to the Zacks apartment REIT (real estate investment trust) weighted average 2008 FFO estimates and now a nearly 20% discount to our calculated NAV (net asset value). We are setting our price target at 19x 2008 FFO estimates or $93.00 per share.

Abbott Labs' Pipeline Strong

We expect double-digit EPS growth for Abbott Laboratories, Inc. (ABT) over the next few years driven by strong sales of Humira and the company's rapidly growing vascular business. Several new drug applications have recently been filed with the Food and Drug Administration (FDA), which should accelerate sales in the pharmaceutical business.

Based on our model, the company is expected to deliver double-digit EPS growth through the end of 2012. We believe ABT possesses a low-risk profile and will continue to trade at an industry premium. Accordingly, we reiterate our Buy recommendation with a price target of $65.

Abbott currently trades at 17.9x our 2008 EPS estimate of $3.29. While considerably more expensive than the industry average of 13.6x, we believe the premium is warranted. Abbott offers potentially the strongest combination of growth and relative risk in all of the large-cap pharma space. Abbott has some very strong business segments and a great late-stage pipeline.

Finally, to management's credit, the company has not been associated with many of the issues holding back P/E multiples in large-cap pharma such as drug reimportation and product safety and efficacy issues. The acquisition of Guidant's vascular business is a clear positive in our opinion. Eventually, XIENCE should command significant market share in the DES market as well thanks to the recently presented very positive SPIRIT II and III clinical trial data. This, in addition to recent stabilization in PCI procedure trends and further DES penetration should be significant catalysts to drive the vascular business.

Jason Napodano, CFA, contributed to the report.

Trimble Navigates Tough Terrain

Trimble Navigation, Ltd.'s (TRMB) forward guidance is for a 10-12% sequential decrease in Q3 and a 15-17% growth for the year. International markets will be the key to growth in 2008, as the weak macro situation is likely to have a continued negative impact on E&C (engineering and construction). We believe the share price reflects the value. Consequently, we are reiterating our Hold rating on TRMB shares and a target price of $31.00 (19.9x P/E).

TRMB shares are currently trading at a 18.6x multiple of share price to our 2008 earnings estimate (P/E). International growth, with the exception of Europe, is likely to remain strong. Also, the company operates in markets where there are some large players, including the government, while the consumer exposure is very limited. This should lend some stability to the top line.

Trimble has one of the largest market shares in the U.S., and has had recent success in Europe. Additionally, developing economies in Asia, Africa and Europe are likely to provide further impetus to growth. The strong end markets, success with several new products and improving margins indicate that 2008 will not be too bad a year for the company.

The company's TTM ROE (return on equity) was 42.7% at quarter-end. Operating margins increased in previous quarters, while net margins declined. This situation was reversed in the last quarter, as the company paid off the bulk of its long term debt, which substantially reduced interest expenses. The debt was acquired through the @Road acquisition. Both the asset turnover and equity multiplier increased in the last quarter.