However, corporate expansion is likely to slow throughout 2008, and we expect vacancies to increase, even in the best Central Business Districts. We expect share appreciation to be minimal in the near term and set our price target at $95, which is 15.5x 2008 FFO estimates.
Anglo American Value Priced In
We are maintaining a Hold recommendation on Anglo American (AAUK). The company is benefiting from strong demand for commodities around the globe and increase production. However, risks to global economic growth remain, and the strength of the South African rand could have a significant impact on future earnings.
The fundamental support for commodity prices is strong GDP growth worldwide, in particular the ongoing industrialization of China, Russia, and India. While the pace of growth of countries such as China will probably slow in the future compared with the last several years, it will still be well above that of the average growth rate of industrialized countries. Management is confident that commodity prices will remain strong this year and ruled out a slowdown in demand from China.
The combination of exchange rate unpredictability and acquisition uncertainty will make it difficult to forecast earnings. As such, it would increase the company's risk premium, and hence reduce the amount investors are willing to pay for its shares. M&A is a double edged sword for Anglo American: it is good for the industry, but two potential deals -- BHP Billiton Ltd.'s (BHP) bid for Rio Tinto PLC (RTP) and Companhia Vale do Rio Doce's (RIO) with Xstrata PLC -- would create a new class of miners far larger than Anglo American.
Still Ambivalent on AmBev
We are keeping our Hold recommendation on Companhia de Bebidas das Americas, or AmBev (ABV), which is the largest beverage company in South America, producing beer, soft drinks, sports drinks, iced tea and bottled water. The 2000 merger of Brazil's top two beverage firms, Companhia Cervejaria Brahma and Companhia Antarctica Paulista formed AmBev. The company is headquartered and operates primarily in Brazil.
AmBev has operations in Argentina, Chile, Venezuela, Uruguay, Bolivia, and Paraguay; it began expanding into Central America and Peru in 2003. The company is also the exclusive distributor of Pepsi beverage products in Brazil, though beer remains its core business.
Presently, AmBev is trading at 24.5x our 2008 EPS estimates, higher than the industry mean of 17.3x. Excluding the company's goodwill amortization, its 2008 P/E would be close to 15.4x, close to the industry median and the S&P average.
All considered, we are keeping our current Hold recommendation on ABV. In our opinion, ABV's valuation should be at 16.5x EPS estimate without the goodwill amortization, in line with the industry median. Our target price is $77.50.
Burlington Northern at Full Value
We are continuing our Hold on Burlington Northern Santa Fe Corporation (BNI), but increasing our target price to $110. BNI reported 2008 first quarter diluted EPS of $1.30, up 18% year over year and $0.08 above the $1.22 consensus and Zacks estimates, as revenues came in higher than we expected due to record quarterly revenue growth and volumes for Ag Products and Coal.
We are raising our 2008 diluted EPS estimate to $6.05 from $5.90, a bit higher than the company's earnings guidance of roughly $6.00 per share. Revenues should benefit from fuel surcharges and rate increases, partially offset by significantly higher unhedged fuel costs and flat-to-modestly-lower volumes. We believe BNI's $1.28 annual dividend is safe.
At its current price, the stock is trading at par compared to the industry median P/Es for 2008 and 2009, but is trading well above the industry median on price/book. Moreover, BNI's PEG ratio (P/E divided by the expected earnings growth rate) now matches the industry median. Accordingly, we believe the stock is fully valued. Our Hold recommendation is based upon a six-month target price of $110, or 16X our 2009 diluted EPS estimate of $6.90.
Limited Upside for Denbury
We keep our Hold rating on oil and gas exploration company Denbury Resources, Inc. (DNR), primarily since the stock's valuation has powered up significantly in the recent past to reflect the continued strength in crude oil prices. We also remain concerned about growing cost pressures in the company's operations.
