Rents Kept High for Macerich Co.

The Macerich Company (MAC) reported strong 1Q08 results; FFO [funds from operations] came in at $96.0 million or $1.09 per share -- an increase of 13% over the comparable period in 2007. FFO growth was driven by higher revenues from the company's operating portfolio. Despite the current economic downturn in the U.S., the company's portfolio of high-end malls continues to perform at a high level.

Mall tenant sales continue to increase and the company is still re-leasing space at significantly higher rents. We expect rental rates to continue increasing as rents roll over in 2008 as the company's malls are concentrated in highly desirable locations around the country. In addition, MAC has a large development pipeline with good expected yields.

However, consumer spending is beginning to weaken at a rapid pace, and even the best malls will begin suffer in the coming quarters. Operationally, there are signs that the company's portfolio is starting to feel the effects of a stagnant economy and decreased consumer spending patterns. We rate the shares a Hold due to the uncertain retail environment.

Shares have dropped over the past three months due to a general sector sell-off. The company is currently valued at 11.9x our 2008 FFO estimates, slightly below sector averages and, due to a recent sell off, now a 25% discount to our calculated net asset value. We are setting our six-month price target at 11.5x 2008 estimates or $60.00 per share.

Sunoco Logistics' Limited Upside

We are maintaining our Hold recommendation on Sunoco Logistics Partners, L.P. (SXL) units ahead of the partnership's second-quarter results. The partnership's last quarterly results were strong and were accompanied by an 8.5% year-over-year increase in quarterly distribution to the annualized rate of $3.58 per unit.

However, we believe that these positives are already reflected in its premium valuation relative to the peer group, thereby offering limited upside from current levels. Our preferred names in this space remain Enterprise Products Partners LP (EPD), NuStar Energy LP (NS) and TC PipeLines LP (TCLP).

With its low-risk and stable cash flow-generating energy infrastructure assets, SXL offers investors an opportunity to capture income growth through steadily rising cash distributions and capital appreciation. We also believe that the partnership's synergistic relationship with Sunoco Inc. (SUN) benefits it.

In April, Sunoco bought a refined products pipeline system in Texas and other related assets from ExxonMobil Corp. (XOM) for roughly $200 million. The transaction is expected to be immediately accretive to the partnership's cash distribution.

We are also concerned on valuation grounds. On a distribution yield basis, SXL common units are currently trading at a premium to its peer pipeline MLP group average. This represents a 367 basis-point (bps) spread over the 10-year Treasury bond, compared to the peer group's average spread of 377 bps. As such, we see limited room for upside from current levels. In addition, Sunoco Logistics close relationship with its general partner remains a source of concern.

Our new $45 target price (down from $50) reflects an annualized distribution run rate of $3.83 per unit, 7.00% above current levels, and a target yield of 8.50%. Our yield assumption is based on a 400 bps spread over our 10-year Treasury bond yield expectation of 4.50%.

Growing Spectranetics a Hold

Spectranetics Corporation (SPNC) acquired the endovascular business of Kensey Nash and launched a new Lead Locking Device. SPNC also announced the settlement of intellectual property dispute with Medtronic (MDT).

The company continues to drive revenue growth in the high double-digits from the successful initiatives at driving greater awareness and acceptance in using laser technology to treat cardiovascular disease. The rental program is leading to greater laser placements, which is driving disposable products' revenue higher.

New products like the TURBO-Booster are expected to help the company penetrate further or expand targeted markets. In particular, the TURBO-Booster allows SPNC to participate fully in above the knee procedures that in the U.S. comprise according to SPNC two-thirds of all endovascular procedures in the leg.

The risks to growth include such items as a possible increase in competition in the atherectomy market, possible disruption to operations from the relocation and consolidation of U.S. operations, and the increase in SG&A and R&D spending.

At its current price of $9.72 per share, SPNC is trading at 3.1x our current fiscal year revenue estimate of $106 million, which is at a discount to the group average multiple of roughly 3.5x. We believe the stock is fairly valued at 3.5x our 2008 revenue estimate. Our target price is therefore $11.00.