In recent past, the shares of HIG had traded in the 1.3-1.7x book value multiple ranges, supported in part by the share repurchase program. It is difficult to anticipate significant price-to-book value multiple expansion at this point in time due to the challenging environment in the coming quarters.
However, given that the shares are trading at a 41.4% discount to the peer group median price-to-book ratio in spite of ROE being 10.7% above median, we expect some upward movement from the current valuation. As such, our six-month price target of $62.00 per share incorporates values for both the P&C and Life segments at 0.93x to our estimated book value of $67.00 per share as of December 31, 2008. This price target also equates to 6.7x our estimated earnings for the year 2008.
American Axle Driven to Cut Costs
On July 25, American Axle & Manufacturing Holdings Inc. (AXL) reported a net loss of $12.49 per share compared to a net profit of $0.66 per share in the second quarter of 2007. The company's focus on diversification and geographical expansion is helping it to grow.
AXL's recent backlog of new and incremental business, to be launched through 2009 to 2013, is $1.4 billion in future annual sales. About 85% of which has been sourced to AXL's non-US facilities. Following the new labor agreement with United Auto Workers (UAW), the company expects to achieve annual savings in excess of $350 million.
However, weak SUV demand is greatly affecting AXL's sales. Furthermore, high commodity costs and pricing pressure as well as production cuts by original equipment manufacturers (OEM) such as General Motors Corp. (GM) remain causes for concern. Thus, we rate the stock a Hold and set a six-month target price of $5.00.
The company is undergoing a significant expansion of its manufacturing footprint in Asia. In addition, AXL's efforts at diversifying its customer base are generating incremental revenue and should be beneficial in the long term as its dependence on GM decreases.
The company narrowed down its losses by undertaking various restructuring actions to address production cuts by customers in North America. It will reduce installed U.S. production capacity by over 70%.
It has cancelled the 2008 bonus program for all Executive Officers. Beginning the third quarter, its quarterly cash dividend has been reduced by 87% to $0.02 per share. The inventory level will be reduced yielding as much as $75 million of liquidity. The CapEx spending will be reduced to a range of 4%-6%.
D.R. Horton Concerns Continue
We expect D.R. Horton, Inc. (DHI) to report a loss of $0.92 per share in the third quarter, compared to earnings of $0.35 per share in the prior year period. This is due to weaker margins as well as charges for inventory impairments and write-offs of deposits related to land option contracts.
