If we apply a 20x multiple to our 2012 estimate, and then discount back to present day at the aggressive rate of 40% to account for the 60/40 odds of approval we arrive at a fair-value of $5. Our Buy call remains extremely speculative and for high risk tolerant investors only.
Gerdau a Brazilian Value Buy
We are keeping our Buy recommendation on Gerdau S.A. (GGB). The company has been posting good results, and the second quarter 2008 results were excellent. Moreover, high steel prices, the continued high demand for steel in China, the good economic environment in Brazil, and the company?s continued acquisitions of smaller steel producers creates a positive environment for Gerdau.
However, the international economic environment for commodity stocks is deteriorating due to high inflation and interest rates throughout the world and a possible recession in the U.S. Nevertheless we still have a positive outlook for Gerdau, mainly considering its attractive valuation.
The company?s continued investments in different companies should generate huge revenues and earnings growth in the following years. Demand for commodities in general and steel in particular is usually influenced by worldwide economic activity and infrastructure investments. According to the International Iron & Steel Institute, world steel demand in 2008 will continue to grow around 6% to 7%. Additionally, a 100% stock split took place on May 30, which capitalized R$1.7 billion reserves.
Gerdau has been expanding internationally in order to reach new markets. During the second quarter of 2008, Gerdau closed an acquisition of MacSteel, steel operation of Quanex Corporation for $1.5 billion plus the assumption of debt and certain liabilities of approximately $200 million.
Deere Ag Sales Not Enough
Though agricultural equipment sales for Deere & Co. (DE) were up 35 percent in the quarter based on a strong domestic ag industry, the company reported earnings for its July-ended Q308 5 cents lower than its estimate per share: $1.32, whereas the Zacks consensus was $1.37.? This number had not been augmented by analysts in any significant way in the past quarter, but marks the second-consecutive earnings miss for the company.
Shares were punished on the news this morning.? As of mid-day, DE is off over 7 percent, or roughly $5 per share.? Before the announcement, Deere held a Zacks Rank #3 (Hold) with a target price just over $74.? Currently, the shares are trading in the $64 range.
Analysts are expecting fiscal Q4 earnings of $1.15 per share and fiscal 2008 (ending October) earnings of $5.08.? Though the shares have succumbed to near-term pressure in today's market, it remains to be seen if analysts will aggressively ramp down expectations for the rest of the fiscal year.
AXA Group Already at Premium
AXA Group S.A. (AXA) through its subsidiaries provides financial protection and asset management services primarily in Western Europe, North America, the Asia-Pacific region, the Middle East and Africa.
Most business units are performing relatively well given the challenging macro environment so far in 2008. The gradual and stable increase of interest rates worldwide has been supportive to life insurance companies in general, and AXA in particular. AXA Group has positive cash flow in all of its operations, and an increase in interest rates will be positive for the reinvestment of its cash flow.
In addition, higher interest rates will lead to higher profit margins in the company?s guaranteed insurance products. We are forecasting a 5 percent equity return for the market for the next six months.
The stock is currently trading at 8.1x our 2008 EPS estimate, which is higher than its closest peers. As such our recommendation is Hold and our six-month target price is $36.00. At current valuation, AXA is trading at over 10 percent above its peers. While we still think regard AXA as a very well managed company, we do not believe it should be at even higher premiums than this.
Also it might turn out that our forecast for the market turns out to be too optimistic. In this scenario, the life and P&C businesses would not perform as well as we expect, due to lower equity returns and lower fees from its asset management business. Another concern is the uncertainty regarding pricing in the P&C business.
