Having generated 22 consecutive quarters of double-digit sales growth and ten consecutive quarters with growth in excess of 25%, the stock is fairly valued at a premium P/E. The target price is $46.25, which is a 60 P/E multiple our fiscal year-end earnings estimate.
Cache Downgraded to a Hold
We are downgrading Cache Inc. (CACH) to Hold from Buy. The stock is up about 56 percent year-to-date and 12 percent in the last week in a volatile stock market. After that run up, the stock now trades at a reasonable valuation, in our view. What's more, we think the headwinds affecting the consumer (housing, record levels of debt, and rising food and energy prices) will take its toll on Cache's results for the rest of 2008.
The company's decision to close its poorly performing Lillie Rubin stores was a smart strategic decision that should lead to better results in future quarters. Cache's acquisition of Adrienne Victoria Designs, which is its largest supplier, will help the company improve its direct sourcing efforts and expand its merchandising efforts.
The company's Bear Story is predicated on consumer spending remaining under pressure. While many companies with international operations are doing well, industries largely exposed to the domestic economy are experiencing lower growth rates. Those factors will offset the strength in the company's core Cache store concept, its direct sourcing efforts, and its solid balance sheet should help the company effectively compete in this difficult consumer spending environment.
CACH shares are trading at 25.4x our 2008 EPS estimate and 21.8x our 2009 EPS estimate. We no longer think the stock looks attractive. Our target price is $15, which is 23x our 2009 EPS estimate.
Kraft Foods' Turnaround Success
Kraft Foods Inc. (KFT) is successfully implementing the three-year Turnaround Plan. Management has increased its focus on brand- building and new product initiatives, which resulted in constant currency revenue growth. In mid-February 2008, Berkshire Hathaway (BRK-A) disclosed the ownership of a substantial stake in Kraft Foods. The Buy recommendation is maintained.
With Kraft having been spun-off from Altria Group Inc. (MO) in March 2007, Kraft's management has become more focused on its operational challenges. In order to strengthen the company's presence in various categories and to enhance its position in both developed and developing markets, Kraft has acquired several companies.
Additionally, management has focused the portfolio of brands through divestitures.
Kraft Foods generates strong cash flow that allows management to re-invest in the company and return value to shareholders. Since the company's initial public offering in 2001, management has increased dividend more than 12 percent on a compound annual basis.
Since the stock offering in 2001, the current Kraft stock has traded between a 13 to 22 P/E multiple. With the turnaround in organic revenue growth and positive earnings comparisons expected to begin with the third quarter of 2008, the stock appears attractive. The target price of $37.50 is based on a 20 P/E on this year's earning estimate of $1.88.
Solar Market Keeps MEMC Hot
We reiterate our Buy on MEMC Electronic Materials, Inc. (WFR) shares. The company produces the raw material wafers used by semiconductor manufacturers in the production of integrated circuits (ICs).
The decision to supply wafers to the solar industry is paying huge rewards as demand for polysilicon has raced ahead of supply. The solar business and the 300mm business are both high margin products.
