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Analyst Comments: ENSCO, Cosan, Eli Lilly, Research In Motion, Internap Network, PetroChina, Kinross Gold, HEICO, Canadian Pacific, AutoNation, Oscient Pharma, Equity Residential, Supertex

 October 02, 2008 01:00 PM

Buy ENSCO Int'l On the Dip

Dallas-based ENSCO International, Inc. (ESV) is a leading supplier of offshore contract drilling services to the oil and gas industry. The company's drilling fleet consists of 44 jackup rigs, two ultra-deepwater semi-submersible rigs (ENSCO 7500 and ENSCO 8500), and one barge rig. Additionally, the company has six ultra-deepwater semi-submersible rigs (ENSCO 8500 series) under construction.

ENSCO shares have been beaten down in recent days, broadly inline with its peer group, in response to the commodity-price weakness and overall market turmoil. The stock is down roughly 20% in the last four weeks alone, only modestly better than the 22% drop for offshore drillers (the S&P 500 pulled back roughly 15% during the same time period. While we have liked this name all along, we think that valuation has become even more compelling following the recent sell off. ENSCO is a premier jackup driller in the Gulf of Mexico (GoM) with a growing deepwater exposure and also enjoys strong leverage to the international drilling scene, which continues to remain fairly robust. The company is also in excellent financial health and is actively returning cash to shareholders through dividends and share buybacks.

Brazil's Cosan Downgraded to Sell

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Sao Paulo, Brazil-based Cosan, Ltd. (CZZ) is one of the world?s largest producers of sugar and ethanol. The company is benefiting from Brazil's economic growth and increasing demand of ethanol worldwide; however, this environment will be negatively impacted by the economic crisis in the U.S. Cosan posted weak first-quarter results. Moreover, sugar and ethanol prices have been under pressure in recent months.

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The short-term outlook remains uncertain due to the difficult international economic environment. Although, the recent credit crisis in the U.S. leads to depreciation in Brazilian real, we do not believe this trend to be sustainable in the short term, and as such; the continued appreciation in Brazilian real will undermine Cosan?s competitiveness in the international market.

We also foresee a more difficult moment for the Brazilian auto industry, affecting fuels demand in the country. At its current price, the stock trades at 0.4x the company s book value and 0.9x the company?s 2009 expected sales. However, the very poor short-term results make the P/E valuation as high as 95x for 2010 expected results. All considered, we are changing our recommendation on Cosan from Hold to Sell. Our target price of $6.25 is based on Price/sales 0.7x 2009 sales, closer to the industry mean.

Eli Lilly with Issues to Address

Indianapolis-based Eli Lilly and Co.?s (LLY) leading product is Zyprexa, a treatment for schizophrenia and bipolar disorder. Zypadhera, the trade name in Europe for the long-acting formula of Zyprexa, was recommended for approval by the Committee for Medicinal Products for Human Use in September. We expect to hear back from E.U. regulators within the next few months.

In April and September, Alimta received approval in combination with cisplatin in the E.U. and U.S. for first-line treatment of non-small cell lung cancer. According to the management, the drug currently holds 20% market share in the second-line indication.

We also expect Lilly to follow the approval of Cymbalta with the launch of a DTC campaign for the fibromyalgia indication, which should help to extend the very strong sales growth of the drug. Although we believe the underlying fundamentals of the company remain solid, the recent pipeline setbacks and lack of clarity surrounding antiplatelet drug, Prasugrel will likely limit the upside to the stock. We also believe that sales of Zyprexa will begin to decline in 2008 as generic Risperdal eats into market share. We see little movement in the stock until the above issues are addressed. We rate the stock a Hold with a $47 price target, representing 11.9x our 2008 EPS estimate of $3.95.

RIMM's New Target: $100

Research In Motion, Ltd.?s (RIMM) second quarter fiscal 2009 financial results were slightly below our estimates. The company also revised earnings estimates lower for the next quarter as it believes the ongoing economic slowdown, increased competition, and delays in product launch may result in more conservative levels of earnings growth.

We expect the smart-phone device market to gain momentum should economic conditions improve and as demand for portable wireless access remains firm on a global market basis. In view of the company?s financial condition, we remain comfortable that the company can execute on reaching additional market share, especially in untapped emerging markets.

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