Our $17 six-month target price on RC2 is based on a multiple of 9x our 2008 earnings estimate.
Modest Strength from Hercules Cap
Hercules Technology Growth Capital (HTGC) reported 1Q08 net income at $0.34 per share, an increase of 23.5% on a year-over-year basis. The company also raised its quarterly dividend to $0.34 per share, a rise of 13% from $0.30 per share in the previous quarter.
However, we remain concerned that the overall economic slowdown may affect the growth witnessed in the technology sector (HTGC's focus sector), during the past quarters. While the credit quality has remained strong so far, we cannot rule out slight moderation in the coming quarters. We continue to maintain a Hold rating on the shares.
Based on 1Q08 results, we have adjusted the FY08 and FY09 estimates to $1.17 per share and $1.33 per share, respectively. HTGC currently trades at 6.2x the consensus forward estimate, a 21% discount to the peer group median. On a price-to-book basis, HTGC trades at 0.68x, a 3% discount to the peer group median, versus 6% discount in April.
The shares currently yield 16.1% (based simply on annualizing its latest dividend), but we expect the dividend to increase over the next couple of years as HTGC grows its investment portfolio and re-leverages its balance sheet. The yield currently is below its peer group median.
Relative pricing looks attractive on a P/E-to-growth (PEG) basis, using the consensus long term growth rate. HTGC's PEG ratio is 0.42, a 55% discount to the 0.92 median for the peer group. On a price-to-book basis also, the 3% discount looks attractive given an ROE of 18% above median.
Our six-month price target of $9.00 per share equates to 0.72x our estimated book value six months out (now September 2008), and 7.6x our FY2008 earnings estimate. The company has increased its dividend by 13% to $0.34 per share, implying about 14.7% expected total return over the six-month period.
AGCO Trading at Rich Valuation
We expect AGCO Corp. (AG) to report second quarter EPS of $0.90, up 34.3% y-o-y, amid continued strong profit growth in the South America and EAME regions. We expect North American operations to report a profit rebound in the second half of FY08 on the back of favorable currency translation and double-digit sales growth.
The global demand for biofuels and animal protein should result in record corn plantings and increased farm equipment purchases. We reiterate our Hold recommendation on shares of AG. Our target price is $51.00, which is about 14.9x our 2008 estimate of $3.42.
There is a likelihood of greater demand for combines in North America (NA) as a result of higher corn prices. This should lead to increased sales for the Massey Ferguson brand. Given the increased need for ethanol in U.S. gasoline, the demand outlook for corn appears favorable. As a result, the long-term demand for North American combines is likely to increase along with higher corn plantings. The sharp rise in corn prices should boost farm income.
An increase in farm income creates conditions for a better-than-expected upgrade cycle for farm equipment. Higher corn, wheat, and soybean prices have led to increased NA farm income that resulted in increased equipment purchases.
The company will also benefit from future productivity gains driven by several initiatives being implemented until year-end 2008. These projects would result in annual cost savings of $14 million or $0.15 per share. Importantly, AG continues to produce positive free cash flow.
However, these strategic initiatives are a drag on near-term EPS growth. The management noted that strong global demand for industrial and farm equipment is putting pressure on AGCO's supply chain. The company expects this situation to persist in 2008. Finally, while the fundamentals remain extremely positive, the valuation is rich.
