The GAAP earnings from continuing operations is expected to be $0.43-$0.45, while discontinued operations are expected to fetch another $0.02-$0.03.
ADI shares are currently trading at 18.1x multiple of share price to our 2008 earnings estimate (P/E). A negative mix of business affected margins in the last quarter, which is expected to remain unfavorable for the year. Although ADI has a significant presence outside the U.S., management was cautious about its expectations regarding consumer spending. We are positive about this stock, but feel impelled to echo the caution expressed by management. We are raising the target price to $38.00 (19.8x P/E).
American Axle's Market Weak
We rate the stocks of American Axle & Mfg (AXL) Hold. The company's focus on diversification and geographical expansion is helping it to grow. The company's recent backlog of new and incremental business, to be launched through 2009 to 2013, is $1.4 billion in future annual sales.
However, weak SUV demand is greatly affecting AXL's sales. AXL recently reached a resolution with the United Auto Workers (UAW) to end a strike at its five plants.
The company aims to develop innovative driveline and powertrain system solutions for passenger cars, light trucks and SUVs for the global marketplace. It is undergoing a significant expansion of its manufacturing footprint in Asia. AXL has been benefiting recently from cost savings and an increase in GMT-900 volumes. The company also recently announced a cost-cutting plan that could yield benefits of about $100 million annually. It also plans to close down and idle some of its U.S.-based facilities and will launch new facilities in Brazil, China, Mexico, Poland and Thailand.
But AXL's excessive dependence on
General Motors Corporation (
GM) is worrisome. Rising commodity costs is negatively affecting earnings by at least $20 million annually. The agreement with UAW is expected to cost $398 million to the company. Moreover, AXL expects the strike will lower 2008 sales by $370 million with resulting revenue of $2.5 billion to $2.6 billion.
Currently, AXL's stock is trading at approximately 12.5x our 2009 EPS estimate of $1.25. Its focus on improving its product mix, diversification of client base, and outsourcing to low-cost countries are some of the positives of the stock. We set a six-month target price of $16.50.
Mixed Outlook for ConEd Shares
Stable regulated utility operations, a reasonably strong balance sheet, steady cash flow, regulated electric rate increases, anticipated gains from the sale of generation projects and earnings from non-regulated businesses collectively make Consolidated Edison Inc. (ED) a conservative income-based investment story.
ConEd offers an above-industry-average dividend yield. However, the issues of future electricity sales growth, rising capital expenses and a mounting debt level continue to curb valuation. Accordingly, with a mixed outlook, we maintain our market-neutral Hold recommendation on ConEd common stock with a six-month target price of $41.75. Price appreciation to our near-term valuation target, coupled with the recently increased $0.585 per share quarterly dividend, which appears sustainable assuming modest projected EPS growth, represents annualized total return potential of 14.9%.
Operationally, the planned investment of nearly $2.8 billion to develop the company's transmission and distribution infrastructure in New York City provides additional upside potential to ConEd's growth prospects. Looking ahead, we remain optimistic about stable modest earnings growth given management's focus on core electric operations.
Despite the mixed outlook, we believe ED stock will attract conservative investors seeking a very competitive 5.8% dividend yield with modest EPS growth. As of this report, ED trades at 13.3x and 12.9x, respectively, our 2008 and 2009 earnings per share estimates, or at a moderate discount to its comparable regulated energy distribution utility peers and the broader electric utility industry. Looking ahead through 2008-09, we expect continued stability, albeit with a downward reversion-to-the-historical-mean bias in return-on-equity ROE.
