We believe the combination of moderate economic growth, increasing credit demand, and moderately high interest rates are positives for the Brazilian retail banking industry in the short term.

Despite the many positives of the Itau story, we have concerns regarding asset quality deterioration, increasing competition, the volatility of the Brazilian economy, and the impact of high interest rates. As to asset quality, given Itau's rapid loan growth and expansion into lower-income markets, we expect asset quality metrics to deteriorate from current strong levels.

At its current price, Banco Itau trades at 12.6X the 2008 consensus estimate and 11.2X the 2009 consensus estimates, well above the industry medians, also based on consensus estimates. While Itau's consensus estimated growth rate at 14% is above the peer median, Itau's dividend yield at 2.7% is below par.

Given these facts, we think Banco Itau is fully valued and see limited upside. Our $21 price target represents roughly an 11 ½X P/E multiple of our 2009 EPADS estimate of $1.84, providing a PEG (P/E divided by estimated future growth rate) of about 0.8X, roughly in line with the industry median.

TRW Chugs Through Tough Market

TRW Automotive Holdings Corp. (TRW) has excellent long-term prospects, primarily because of the increasing emphasis being put on safety awareness by both government and consumers. The management is re-evaluating the company's cost structure and is keen on undertaking restructuring activities.

However, the company may be affected by constant production cuts by original equipment manufacturers (OEM), pricing pressure, and lower production volumes in North America. Thus, we rate the stock a Hold with a target price of $19.00.

Regulatory measures are likely to be a boon for TRW's Vehicle Stability Control Systems, curtain air bags, occupant sensing systems, electrically assisted power steering systems and tire pressure monitoring systems. The National Highway Safety Traffic Administration proposal to make it mandatory for vehicles to incorporate a direct tire pressure monitoring system should push electronic stability control penetration rates up to 100% by 2011. This leads to a growth opportunity of $1.1 billion in the US market.

TRW has efficiently managed to mitigate the impact of higher raw material costs through cost-cutting and efficient supply chain management. Overall cost cutting amounts to nearly $400 million annually.

It is using joint ventures to enter markets such as China and India. TRW plans to form a joint venture with Sun Vacuum Formers Private Ltd., to manufacture steering wheel systems for the Indian markets. TRW also signed a joint-venture agreement with Automotive Asiatic Co. in Thailand to establish TRW Asiatic Ltd., with a 51% share holding.

Despite TRW Automotive's healthy operating performance, we are concerned with the soft automotive climate. While we applaud the customer diversification achieved by the company, persistent production cuts announced by its OEM customers such as Ford Motor Co. (F) and General Motors (GM) remain a matter of concern.