Financially, the company's 9% dividend increase to an annual rate of $1.40 per share in May 2008. This may attract conservative income-seeking investors.
The SRE common stock trades at only 15.0x and 12.1x, respectively, our 2008 and 2009 earnings per share estimates, or at a moderate discount to the natural gas distribution industry. We attribute the stock's current earnings-based discount valuation to the uncertainty surrounding the lack of visibility into regulatory proceedings, declining business from the company s natural gas operations, as well as a below-industry average dividend yield.
We see earnings growth through 2009 driven by impressive profitability at one of its components, San Diego Gas & Electric, Federal Energy Regulatory Commission's approval of the Rockies pipeline project, the joint venture with the Royal Bank of Scotland (RBS) and additional asset sales.
XenoPort Drug May Have "Legs"
We consider XenoPort Inc.'s (XNPT) restless leg syndrome (RLS) drug candidate, XP-13512 (to be called Solzira in the U.S.), to be a potential blockbuster opportunity. The data has been highly encouraging and XP-13512 could launch in late 2009. XenoPort is partnered with GlaxoSmithKline (GSK) for development and commercialization in the U.S. and select countries outside the U.S.
As for now we are holding off on modeling sales in neuropathic pain and migraine until we see more data. However, we believe that if XenoPort can see Solzira to commercialization, it will improve the future partnering plans for other compounds such as XP-19986 for gastroesophageal reflux disease, and allow management to move forward with other candidates such as the intravenous anesthetic XP-20925.
XenoPort stock is down 25 percent year-to-date and some 35 percent on several concerns. We think the market is coming to grips with the power XenoPort's Transported Prodrug technology.
Pfizer's (PFE) Lyrica could represent significant competition to Solzira in the RLS market. The overall market conditions have been poor, specifically with respect to volatile names in the biotechnology market, and even more so with stocks that had outstanding past performance as investors are looking to book profits on their winners.
Our current rating is Hold with a $46 target. We think the company can earn $1.46 in 2011 and potentially $2.63 in EPS in 2012. We feel that $46 a market capitalization of $1.25 billion is a fair value for the current fundamentals. We would be buyers of the stock on additional weakness.
