There is significant cost-cutting in the styrenics business. Near-term ethylene conditions are firm, and the company has a competitive advantage.
Currently, NOVA is valued at 8.5x our 2008 estimate of $3.17. On January 31, 2008, the company reported fourth quarter earnings of $1.51, versus a loss of $0.11 last year. Revenue increased from $1.64 billion to $1.80 billion. In the fourth quarter, sharply increasing feedstock costs for United States Gulf Coast (USGC) producers led to industry price increases for ethylene and polyethylene.
These price increases expanded margins for NOVA Chemicals since the company's Alberta-based feedstock costs increased at a lower rate. Improvement was also primarily due to higher polyethylene selling prices and sales volumes. We rate the stock a Buy with a target of $35. This is 11.1x our 2008 estimate.
Parsing Hold-Rated Primus Guaranty
Primus Guaranty Ltd. (PRS) is scheduled to release its earnings results for 4Q07 on February 5, 2008. 3Q07 earnings miss was mainly due to losses in the credit arbitrage trading activity by its credit hedge fund Harrier. PRS has now decided to close this fund. We anticipate higher mark-to-market losses in 4Q07 and in 2008, due to the challenging credit environment; though the company may be able to grow its credit protection business at attractive prices as the credit spreads continue to widen.
Ahead of the results release, we are keeping our FY07 and FY08 estimates unchanged and are installing our FY09 estimate at $1.90 per share. Ahead of the 4Q07 results release, we are keeping our FY07 and FY08 estimates unchanged and are installing our FY09 estimate at $1.90 per share. At the current price level, the shares of PRS are trading at 0.64x its 3Q07 book value of $6.89 per share; at a 3.3% discount to the peer group median, which looks somewhat attractive given a ROE of 13.2, a 2.5% premium to the peer group median of 12.9.
Though the company has a higher risk profile, we feel that the shares should trade close to the peer group median multiple of in view of its superior rating. Our six-month price target of $5.00 per share equates to about 0.67x our June 30, 2008, estimated book value of $7.50 per share and about 3.4x our estimated EPS of $1.48 per share, for FY08. Our recommendation on the shares of PRS remains unchanged at Hold.
