However, we believe that the company is being too optimistic in its assessment of the timing of the restructuring as it may take a few quarters longer than anticipated for it to regain its foothold in the marketplace fraught with increasing competition.

Despite the setbacks, which also include possibility of a consumer-driven recession in the U.S., we believe the shares have incorporated all the negatives surrounding the company and the industry. We therefore rate ALU a Hold with a target price of $7.50.

Brazil's TAM Airline Now a Sell

We downgraded Brazil's leading airline, TAM S.A. (TAM) to Sell from Hold, after the company reported worse-than-expected results in the first quarter, hurt by rising fuel prices and higher operating costs related to the lack of adequate infrastructure in the Brazilian airports.

While growing competition in the Latin American airline industry will certainly affect the company results in the following quarters, TAM also continues to face adverse effects of the accident that occurred at Congonhas airport in Sao Paulo, last July. With global oil prices hitting one record after another and the recent rate hike announced in Brazil, problems only multiply for TAM.

Despite its efforts to increase its international presence and to expand its business segments, TAM will be affected by the emergence of Oceanair and Azul at the domestic level. Even worse, we do not expect the difficulties caused by the complete failure of the Brazilian airports infrastructure to improve in the short-term.

We have a target price of $18 on TAM, which represents a valuation of between 10x and 10.5x our 2008 P/E, with a huge discount to the industry median due to the specific problems in the Brazilian airline industry.

PetSmart Looks Toward Second Half

Despite PetSmart, Inc.'s (PETM) solid long-term outlook, we remain concerned about increasing competition and near-term risks faced by the largest U.S. specialty pet retailer with its expansion strategy. The company reiterated its full-year guidance of $1.51 to $1.59 a share even after forecasting a disappointing second quarter, assuming that its results will improve in the second half of the year.

We continue to believe that PetSmart will find it difficult to meet its guidance, given the slowdown in consumer discretionary spending and cut our forecast to $1.52 to $1.46 per share for 2008. PetSmart operates in a highly competitive environment and must continuously find ways to differentiate itself from a host of other retailers.

In addition, the company's aggressive expansion plan is sure to encounter unexpected costs and unforeseen delays that could lead to lower margins and slower growth. The success of PetSmart's long-term expansion will depend on its ability to find suitable store locations.

At its current valuation, PETM shares appropriately reflect the company's attractive market position and long-term growth opportunities, in our view. We keep our Hold rating on the stock.