As such, we are slightly raising our estimates for the third and fourth quarters. Our fiscal 2008 EPS estimate goes from $1.49 to $1.52, which is at the low end of PetSmart's guidance. We think the current macroeconomic situation will force consumers to increase savings in order to service or pay down current debt. As consumers increase savings, consumption will decline, and that will put additional pressure on retailers. We maintain our Hold rating on PETM shares, as the valuation still looks fair.
PetSmart shares currently trade at 16.0x our fiscal year 2008 EPS estimate and 14.5x our fiscal year 2009 EPS estimate. At its current valuation, PETM shares appropriately reflect the company's attractive market position and long-term growth opportunities, in our view. Our target price is $26, which is 15x to 16x our fiscal year 2009 EPS estimate.
Dow Chemical Under Pressure
The Dow Chemical Company (DOW) is the largest producer of plastics and second leading chemical company in the world. The vertically integrated operations of the company lower costs. There are significant operational synergies between the basics and the performance segments.
More than 2,500 of the company's downstream products are created from raw materials produced in Dow plants across the world. Financials are solid. Stronger demand in Europe, Asia Pacific, Latin America, India, Middle East and Africa has more than offset the continued economic slowdown in North America.
Moreover, price gains have largely offset significant increases in feedstock and energy costs. Dow's merger with Rohm and Haas (ROH) will further consolidate its higher-margin and higher-growth specialty businesses and reduce the volatility in earnings and cash flow.
However, high raw material costs have forced the company to temporarily idle or reduce production at several of its plants. Further, DOW has a high exposure to the commodity chemical cycle. We expect earnings to remain under pressure and rate the stock a Hold with a target of $35.
Dow will construct a state-of-the-art membrane chloralkali production facility in Freeport, Texas, as several of Dow's existing chlor-alkali assets in Freeport are facing obsolescence. The facility will provide long-term reliable supply of chlorine for derivative products when it begins operations in 2011. Dow's current business profile has an anticipated growth rate of about 4% from 2008 to 2012.
Patterson-UTI: Good Entry Point
We are maintaining our Buy recommendation for Patterson-UTI Energy, Inc. (PTEN) shares following strong quarterly results, reflecting a much-improved land-drilling environment. We expect a significant uptick in onshore actively levels later this year, which should help improve utilization and spot dayrates.
Patterson-UTI is expected to be a key beneficiary of this improving macro backdrop, given its industry-leading idle capacity. We have raised our estimates (2008: $2.25 vs. $2.15; 2009: $2.80 vs. $2.60) to reflect utilization and dayrate gains in the coming quarters. Our unchanged $40 price objective reflects 2009 P/E and EV/EBITDA multiples of 14.3x and 6.2x, respectively, both well within historical trading ranges.
Patterson-UTI used the most recent drilling downturn to make significant upgrades to its drilling fleet. As a result, the company has upgraded its drilling rig fleet, including the deployment of new and equivalent rigs to meet customers' demands for increasingly complex wells. In the most recent quarter, the company introduced three new IDEAL rigs, which followed two rigs in the first quarter of 2008.
Our expectation of continued strength in rig count reflects the fact that the number of wells drilled needs to increase to keep pace with rising demand, steep decline rates, and lower quality reservoirs. The company is in excellent financial health and is increasingly returning greater amounts to shareholders through a growing dividend and buybacks. Based on most conventional valuation metrics, the stock is cheap at current levels.
Torchmark Not Badly Burned
The second quarter EPS of Torchmark Corporation (TMK) missed our expectations by a penny.
Based on the results for the quarter and the general company guidance, we are maintaining our earnings expectation for 2008 and are installing our early 2009 earnings expectation. We remain hesitant about the impact of recessionary conditions on TMK's life insurance markets.
However, we believe that a lower debt-to-capital ratio coupled with a free cash flow expectation of $350 million for 2008 will position TMK for strategic acquisition or repurchases in 2009. This should lend a positive support to the shares.
Currently, the shares trade at 1.73x the 2Q08 book value of $33.35 per share. The shares now appear a bit expensive on a relative basis to the peer group, as the broader markets and the shares of this company specifically have experienced a pullback.
