In order to maintain its footing, AutoZone must overhaul its current business model and boost commercial business. Right now, 84% of the company's business is retail. The high degree of reliance (50%) on private label products could be a hindrance for the commercial business.
As a result, the company could face increased costs on account of higher staffing levels at the store. Standard & Poor's Ratings Services downgraded the corporate credit rating for AutoZone Inc. to BBB from BBB+, following its plans to boost its share buyback program.
Ethanol Boosts Hold-Rated ANDE
The Andersons, Inc. (ANDE) reported first quarter EPS of $0.42, below our estimate of $0.53 and down 17.6% y-o-y, due to higher interest expense and combination of a $3.0 million gain realized in the prior-year quarter on the donation of the company's available-for-sale securities, as well as current period losses of $0.4 million on the company's Deferred Compensation Plan assets.
However, revenue was up a strong 75.4% y-o-y, primarily led by the Grain & Ethanol and the Plant Nutrient Groups. Over the long-term, the company plans to capitalize on the ethanol boom, marketing and risk management services. Nonetheless, the Retail Group is facing tough competition and in the Rail Group, utilization rate of the fleet and high maintenance costs in the lease business remain a concern. We recommend investors to Hold shares of ANDE in their portfolio.
On June 26, the company announced an increase in its full-year 2008 earnings per share guidance. The management now expects 2008 diluted EPS in the range of $4.40 to $4.80, up from the prior expectation of $3.65 to $4.00.
At the current price of $39.22, ANDE stock trades at a P/E multiple of 8.3x our 2008 EPS estimate of $4.49. This is at a discount to the industry median multiple and its peer group. Currently we do not expect a significant expansion in P/E multiple due to ongoing weakness in the Retail and Rail groups. Applying a P/E multiple of about 8.4x our 2008 earnings estimate of $4.49 per share, we derive a target price of $37.50.
Fair Value for PS Business Parks
PS Business Parks' (PSB) portfolio continues to perform relatively well. Many of the company's markets reported year-over-year rental rate increases -- a good sign in a weakening economy. PSB has a strong balance sheet with low debt levels. The dividend, while low compared to peers is adequately covered by operating cash.
National office and industrial markets are holding up for now, although fundamentals are noticeable worsening. Due to its suburban asset base, PSB does not have the growth potential compared to urban office and gateway industrial competitors. We would stick with more defensive REITs in this type of environment, although the company's current valuation and healthy balance sheet with little near term refinancing exposure warrants a Hold rating.
At 11.6x our 2008 FFO [funds from operations] estimates, PSB trades at a significant discount (20%) to office REIT competitors. PSB is valued at an approximate 7% premium to industrial REITs that we cover. We are setting our price target at $52.00 per share, or just under 12x 2008 FFO estimates.
Sonic Foundry Market Challenges
Sonic Foundry (SOFO) shares continue to be weak due to a challenging market for stocks and institutional investors exiting the stock. Better than expected cost savings and a focus on high margin services should help the company pass the break-even point earlier than we initially expected. Should the company be able to meet current expectations, we believe there is significant upside in the stock.
Although not out of the woods, if business tracks as planned the company could turn a small profit forecasted for 2009. Moreover, we were encouraged that SOFO came close to meeting guidance for its second quarter results.
A number of Sonic Foundry's closest competitors are private, or part of a larger company, making comparable valuation difficult. One way to value SOFO is by looking at competitors that have been acquired.
Applying a 6.8 multiple to revenue per share of $0.47 in 2008, we arrive at a price of $3.21. In the comparable group, price-to-sales on current year estimates in the group range from 3.3 to 7.0 with a median of 3.8. Applying the median multiples to SOFO revenues, we arrive at $1.79 on sales per share of $0.47.
Based on these valuations, SOFO should trade between $1.70 and $3.42. However, we believe there is significant risk associated with the shares given level of shortfall in Q1 and the rapid recovery required to meet guidance and avoid the need to raise additional capital.
