Tesoro Outlook Remains Strong

We are maintaining our Buy recommendation on Tesoro Corp. (TSO) shares despite expectations of continued near-term margin weakness on the back of high feedstock costs and increased operating expenses.

The company's realized margin during the second quarter was down 52% from the year-earlier level as record crude oil prices and anemic product demand squeezed margins. However, our long-term view of the business remains favorable, as margins appear to have bottomed and valuations have become particularly compelling.

Tesoro's core West Coast refining market has above national-average gasoline demand growth and has consistently maintained higher margins than most of the other parts of the country. The management remains focused on balance sheet improvement and organic growth initiatives. The company's improving financial health enabled management to start returning cash to shareholders.

Looking at the longer-term, Tesoro is reviewing other initiatives such as reducing the cost of energy consumed and emissions generated and allocating capital expenditures to appropriate projects based on priorities. The company is also working to increase its heavy crude throughput to 40% from 30% of total refining throughput by 2012.

Tesoro expects to realize approximately $750 million to $1 billion in operating cash flow savings this year through reduced operating and administrative costs, lower capital expenditures and reduced working capital driven mainly by inventory reduction. The company expects total refining throughput for the third quarter of 2008 to be in the range of 605-645 MBbl/d.

Benchmark Electronics Stays Flat

We maintain our Hold recommendation on the shares of Benchmark Electronics, Inc. (BHE). The company reported a disappointing second quarter as its computing segment fades faster than expected. Citing a faster wind-down of mature projects, the company offered disappointing guidance for the third quarter as well.

We believe that BHE will struggle for the next few quarters, but we remain positive on its non-traditional markets where we expect growth of high margin products. We believe Benchmark is better positioned than its peers in non-traditional markets such as Medical and Test & Instrumentation, helping them buck the trend of slowing growth in outsourcing of electronics manufacturing.

Weak demand and slower product and program transitions has hurt Benchmark's revenue base. Shares of Benchmark are currently trading at 9.8x our 2009 EPS estimate of $1.64, a discount to the industry, but very close to its closest comparables. Although we are disappointed with the magnitude of BHE's Q2 shortfall and guidance for the third quarter, this has already been priced into the stock and it is too late to downgrade the shares.

We are encouraged that the company's bottom-line has held up relatively well compared to the top-line and attribute this to success in new, more profitable, businesses. Our price target of $17.00 represents a P/E multiple of 10.4x our 2009 EPS estimate.

Mack-Cali a Sell on Macro-Factors

Mack-Cali Realty (CLI) is a fully integrated, self-administered, and self-managed office real estate investment trust (REIT). The company reported 2Q FFO (funds from operations) of $0.93 per share compared to $0.88 per share in 2Q07. Results were $0.06 above our estimates and consensus.

The surprise was due to lower overall expenses. Despite a weakening economy, operations held up relatively well; the company reported rental rate increases on new leases and portfolio occupancy held steady. In addition, CLI has limited near term lease expirations. However, we are maintaining our Sell recommendation due to macroeconomic factors.

Office occupancies in the company's core markets have increased at a rapid pace from last year. As such; CLI will have a difficult time holding occupancy and increasing rents. We think suburban office landlords will have a tough time over the next 12 months. National job growth numbers are negative and corporations are not expanding. Office landlords could see substantial cash flow declines as leases roll in 2008 and 2009.

At 10.9x 2008 FFO estimates, CLI trades at an approximate 30% discount to office sector averages. In addition, the company trades at an 11% discount to our NAV (net asset value) estimates. We are setting our price target at $35.00 per share or approximately 10x 2008 FFO estimates.

BE Aerospace Needs Visibility

Domestic (and some foreign) airlines are grounding aircraft, which certainly will have a negative effect on maintenance, repair and overhaul (MRO) revenues. Further, there is fear that the economic malaise evident in the U.S. will become a worldwide phenomenon, and then orders for new aircraft will evaporate -- or at least be stretched out -- ala 9-11.

In addition, the environment for Aerospace/Defense stocks is threatened by the potential, but undeterminable, consequences of the upcoming elections on military expenditures. In light of these conditions, we have continued our Hold opinion for BE Aerospace Inc. (BEAV). Our six-month target price reflects the current climate for these stocks.

Record second quarter net sales of $522.2 million reflect 31.1 percent year-over-year organic growth. The record second quarter operating earnings of $84.3 million increased by 41.7 percent as compared with the second quarter of the prior year; second quarter operating margin of 16.1 percent expanded by 120 basis points compared to the second quarter of the prior year.

Record bookings for the quarter totaled approximately $610 million representing a book-to-bill ratio of approximately 1.2:1; Backlog as of June 30, was a record at approximately $2.4 billion and is up approximately 26 percent compared to June 30, 2007.

On July 28, the company completed its acquisition of Honeywell's (HON)'Consumables Solutions distribution business (HCS) for $1.05 billion which consisted of $901.4 million in cash consideration and six million shares of the company's common stock.

The Company raised its full-year 2008 financial guidance by $0.02 per diluted share to approximately $2.37 per diluted share, excluding the impact of HCS transaction related effects; including the impact of the HCS transaction, the financial guidance for 2008 is $2.22 per diluted share.

Gander Mountain Climbing Slowly

Gander Mountain Co.'s (GMTN) second-quarter sales were in-line with our forecast, but its net loss per share was $0.07 below our estimate. The downside was due to the company's operating costs coming in higher than our forecast.