While the stock has pulled back some in recent weeks, it remains fairly close to our new net asset value (NAV)-based target price; hence the downgrade. We have, however, raised our earnings estimates to reflect a higher commodity-price deck and other model changes. Our new 2008 and 2009 EPS estimates are $11.39 and $9.83, up from $7.48 and 9.46, respectively. We are decreasing our price objective from $96 to $93 for Clayton Williams' shares.
Clayton Williams reported better than expected second-quarter 2008 adjusted EPS of $4.29, compared to $0.77 in Q2 07 and $0.62 in the previous quarter. In its financial guidance for the rest of 2008, it was stated that natural gas production will decrease by approximately 10 MMcf/d for the remainder of 2008 due to the South Louisiana asset sale in Q1. However, due to the commitment to low-risk developmental drilling in its two oil heavy regions, CWEI is forecasting an increase in oil production of around 31 MM barrels, a 34% increase over 2007 levels.
The company is subject to significant exploration risks. Substantial debt leaves it open to liquidity risks. Oil and gas prices are extremely volatile. Although a good portion of CWEI production is hedged in 2008/2009, adverse prices could lower the company's reserves and make it more difficult to obtain financing and strain its operating results.
Intellon an Intelligent Choice
Intellon Corp. (ITLN) is a fabless semiconductor company that designs, develops, manufactures and markets integrated circuits (ICs) for powerline communications or high-speed communications over existing electrical wiring.
The company's top and bottom-line results beat consensus estimates as home networks continue to grow. The home network market will grow from $8.3 billion in 2004 to 17.1 billion in 2008. Revenue for the quarter was $16.3 million, up 3.8% sequentially and up 68.0% year over year. Gross margin for the quarter was 45.0%, up 140 basis points (bps) from the previous quarter's 43.6%. The margins are trending up and we see the string of quarterly losses ending in the second half of 2008.
ITLN is currently trading at a 12.2x multiple to 2009 estimated earnings. The management expects the next generation HomePlug AV-based IC to be based on a 65 nanometer process and when this takes hold, margins should rise. High Oil and Gas prices tend to hurt overall semiconductor sales, as consumers simply have less to spend on electronics, but we feel home electronics may be the exception here.
Consumers may upgrade home networks rather than take expensive vacations. Regardless of the short-term tail wind of fuel, Intellon should outgrow the broader semiconductor market. We are initiating our coverage of ITLN with a Buy rating, and setting a price target of $8.00, which represents a 17.7x multiple to 2009 earnings.
PetroChina at a High Premium
There has been some weakness in PetroChina Co. Ltd. (PTR) ADRs due to the pullback in crude oil prices, but they are hardly cheap. Based on most conventional valuation metrics, they trade either in line or at a premium to their Chinese and emerging market peers.
Relative to the super majors, the ADRs trade at a significant premium, primarily reflecting the company's leverage to the high-growth Chinese market. But fuel price caps and heavy taxes offset most, if not all, of the Chinese market positives, in our view. As such, we consider current valuation to be fair and prefer staying on the sidelines for now.
Growth prospects are particularly attractive in the downstream and natural gas sectors. Strong growth in China's middle-class and in automobile ownership is expected to fuel consumption of refined petroleum products. The company's steadily growing natural gas volumes, investments in transportation assets and the Chinese government's efforts to promote natural gas as a substitute for coal in power generation provide for attractive long-term growth opportunities.
Our key concern about PetroChina continues to be its long-term crude oil production growth prospects. With more than 35% of its current crude oil volumes coming from the Daqing Oil region, the company is heavily exposed to this region. The Daqing Oil region is the largest crude oil producing area in China, but has significantly matured over the years, and is currently well past its prime. What's more, high crude oil prices are also impacting the near-term outlook for Chinese refining margins.
Unisys Continues Retooling Itself
Unisys Corporation (UIS) reported revenues of $1.34 billion in Q2:FY08, down 2.6% year-over-year (y/y) but up 3.0% quarter-over-quarter (q/q). The year-over-year decline in revenues was due to weakness from financial services clients owing to uncertain economic environment.
EPS of ($0.04) was below consensus estimate of $0.03. F/X (foreign exchange rates) contributed 4% to the revenue growth in the quarter. Service revenues were up 0.9% y/y and 9.0% q/q. Technology sales decreased 14.4% y/y and 12.9% q/q. Gross margin improved to 22.7% from 21.8% in Q2:FY07 and 22.5% in Q1:FY08.
