Even so, the difficult macro conditions make difficult to forecast when JC Penney will be able to achieve normalized earnings. As such, we remain neutral on the stock. Our six-month target price is $36, or 10.8x our fiscal 2009 EPS estimate.
Zumiez Trading at Fair Value
Zumiez, Inc. (ZUMZ) is scheduled to report second quarter results on August 21. We maintain our Hold rating on the stock. We are keeping our second-quarter estimates of $92.4 million in sales and EPS of $0.07, but we are lowering our estimates for the second half of the year.
We are forecasting a weak consumer into 2009 because macro headwinds (housing, debt and food/energy prices) will persist for some time. We previously believed that teen apparel retailers like Zumiez would be able to work through these conditions because teens are not directly affected by falling house prices, tightening credit standards and higher energy prices.
However, recent sales trends would indicate otherwise. It appears that parents have cut back on the discretionary spending for their kids. As a result, we now expect Zumiez?s sales and earnings growth to be tempered for the next few quarters. Our 2008 EPS estimate goes from $0.92 to $0.86 and our 2009 EPS estimate goes from $1.09 to $1.00.
The stock is now trading at about 17x our 2008 EPS estimate and 14x our 2009 EPS estimate. This valuation looks attractive relative to Zumiez?s historical forward P/E ratio around 40x. Given the company?s long-term earnings growth rate of 18%, the valuation looks fair and not particularly compelling.
As such, we remain neutral on the stock and expect it to track the return of the overall market for the next six months. Our target price is $15, or 15x our fiscal 2009 EPS estimate.
MarkWest Good News Priced In
MarkWest Energy Partner, L.P. (MWE) reported blow-out second-quarter results on the back of solid performance across the core operating areas. The partnership?s Southwest segment?s operating income nearly doubled from the year-ago level, while that for the other two segments were up more than 50% each.
Importantly, MarkWest raised its quarterly distribution by 18.9% year-over-year to the annualized rate of $2.52 per unit. The current level of distribution, announced prior to the second-quarter 2008 results, represents a 5% sequential and 18.9% year-over-year increase.
While its distribution-growth prospects and risk profile are attractive, we believe that these positives are already reflected in its premium valuation relative to the peer group, thereby maintaining our Hold rating.
With its low-risk and stable cash flow generating assets, MarkWest offers investors an opportunity to capture income growth through steadily rising cash distributions and capital appreciation. Over the last few years, the partnership has consolidated its position in the midstream business, achieved through a combination of organic efforts and accretive acquisitions.
Recently, MarkWest strengthened its local position by acquiring gas-gathering assets located in the Pittsburg County, southeast Oklahoma, from Petroquest Energy for $41.3 million. As part of the agreement, MarkWest would invest up to $15 million in 2008 and another $13 million in 2009 to support the development of Petroquest?s Woodford Shale and coal bed methane operations. Petroquest is the primary producer supporting these gathering systems, which currently produce approximately 45 MMcf/d of natural gas.
For MarkWest, this investment represents another high-quality expansion of its Woodford operation. Also in August, the partnership entered into a long-term agreement with Newfield Exploration Co. (NFX) for the acquisition and operation of certain existing gathering and compression assets located in the Texas panhandle for approximately $9 million.
UBS Further Writedowns Likely
We are maintaining our Hold on UBS AG (UBS). In line with earnings guidance issued on July 4, UBS posted a net loss from continuing operations of CHF415 million for the second quarter.
This largely reflected US$5.1 billion in losses related to US residential real estate and other credit positions and US$900 million in provisions for auction rate securities, partly offset by a CHF3.8 billion tax credit. We are changing our estimates for 2008 and 2009 by $0.20, partly due to dilution caused by the CHF15.6 billion rights offering in June. Our new estimate for 2008 is a loss per share of $3.10 and for 2009 earnings per share of $2.65.
Positively, UBS continues to reduce its credit market risk positions, including the recent $15 billion sale of mortgage securities to BlackRock (BLK).
