We remain positive on the Brazilian real estate market for the short-to-medium term outlook. We are expecting a very strong growth in the company?s earnings in 2008 and 2009, thus our estimated P/E is quite attractive. However, we believe the tighter monetary policy in Brazil is just a temporary problem, mainly now that commodities prices are declining.
Currently, Gafisa is trading at 13.4x our 2008 estimated EPS. The valuation is now more attractive as a result of the continued growth on the company?s sales and earnings. However, even if we consider a less optimistic view on the company?s short-term perspectives, the valuation still seems attractive.
We believe Gafisa remains a good short-term alternative, as the potential for growth in the local mortgage business is fantastic, and the huge inventory of land already acquired, construction in progress, bank of land and finished units all point to strong earnings and revenues in future quarters. Our target price of US$42.50 represents a valuation of 18x our 2008 P/E, with a small premium over the industry median due to the company?s huge growth potential.
Buckeye Difficulties Left Behind
We are maintaining our Buy recommendation and target price for Buckeye Partners L.P. (BPL) of $47 per unit. Although the partnership reported lower-than-expected earnings during the second quarter, the volatility that drove the Buckeye Energy Services unit to an operating loss appears to be behind the partnership.
Commodity prices have come off its highs and the back half of the year looks to be much stronger for the recently acquired segment. We expect BPL to grow distributions 6% over the next twelve months to an annualized $3.65 per unit led by cash flow growth from the Kirby Hills II expansion and higher tariffs and terminalling fees through 2009.
Our current positive investment sentiment toward Buckeye Partners is due to the value added from the Lodi Gas Storage acquisition, the ability for increased tariff rates/fees to offset demand destruction and the recent pullback in BPL?s unit price.
Currently Buckeye is trading at a distribution yield of 8.70% with a spread over the benchmark 10-Yr Treasury note of 4.90% (490 basis points). At these levels, BPL seems undervalued. Its high-quality fee-based assets make up the vast majority of its cash flows therefore making the partnership low risk in nature.
On a distribution yield basis, BPL has historically traded with a spread of roughly 3.25% (325 bp) above the 10-Yr Treasury. Our price target of $47 per unit implies a 6% distribution growth rate to $3.65 per unit with a distribution yield of 7.75%. This reflects a 350 basis point spread above our 12 month target 10-Yr Treasury yield of 4.25%. The 12-month target price represents an approximate 26% return and further solidifies our current Buy recommendation.
EA Hits Re-Set on Take-Two
Quoted in a Reuters report this morning that "it no longer believed it could benefit from completing an integration of Take-Two (TTWO) before the holiday shopping season," management at Electronic Arts, or EA (ERTS), has decided to allow its $2 billion bid to buyout Take-Two Interactive to lapse.? Both stocks are down this morning in a lackluster trading session.
Ahead of the announcement, analysts have soured somewhat on EA earnings expectations.? For the September quarter, 4 analysts have ratcheted down estimates in the past month, while 5 have done so for fiscal years 2009 (ending March '09) and 2010.? This follows four straight quarters of positive earnings surprises for the company.
No revisions have been made either up or down for Take-Two in the last 30 days, but the dropped buyout had taken shares of TTWO below $24 for a period this morning.? However, included in the Reuters report was that the two companies remain in talks with one another privately.
