We applaud the company's move to cut production and lower inventory levels, which helped reduce inventory levels but at the expense of lower earnings and sales. Going forward, the company will have easier comparables.

Besides a global sales recovery, the company will also benefit from future productivity gains driven by several initiatives being implemented until year-end 2008. Despite a challenging operating environment, AG continues to produce positive free cash flow. However, near-term earnings may be negatively impacted by greater spending on engineering and other expenses.

Peet's Coffee & Tea Value Steep

Peets Coffee & Tea, Inc. (PEET) is a growth company in the premium coffee and tea industry. The management is implementing a growth strategy based on product quality and expansion through multiple channels of distribution. The company has exhibited consistent revenue growth since 2002; hence, the stock trades at a premium P/E.

Peet's Coffee & Tea is currently selling at 34.7 times trailing 12 month EPS, reflecting the company's higher-than-average revenue growth profile. Revenue has grown at a 20.1% five year compound annual growth rate (CAGR). Over the last few years, the stock has traded in a P/E range of 30 to 54, though most price action has been contained within the 36 to 47 P/E range.

However, higher commodity costs pressured margins in the fourth quarter of 2007, which resulted in a negative earnings surprise. Despite reporting in-line EPS in the first quarter and an above-expectations second quarter, the management still expects EPS to be at the lower end of the prior guidance range. The Hold rating is retained. The company's pristine balance sheet, store expansion plans, and continued top and bottom line growth should support the stock's high P/E. The target price is $27.75, which is a 38 P/E multiple on 12-month trailing earnings.

ABM Industries Within a Range

ABM Industries, Inc. (ABM) reported third quarter operating EPS of $0.30 -- a 30% increase from the $0.23 reported in the comparable period last year -- due to cost synergies from OneSource and continued margin expansion in Engineering. For the full year 2008, OneSource remains on track to deliver $0.14 of earnings (ex. Integration costs) and $850 million of revenue.

The management lowered its FY08 adjusted EPS guidance to a range of $1.10 to $1.15, down from the prior range of 1.20 to $1.35. The company acknowledged a general decline in discretionary spending for some of its high-margin services. At 19x FY08 earnings, ABM shares look fairly valued. Our recommendation is to Hold shares of ABM.

On August 29, according to company filings, ABM has entered into an agreement to sell substantially all of the operating assets of its Amtech Lighting Services business to Sylvania Lighting Services, a subsidiary of OSRAM SYLVANIA. The management said the proceeds from the sale, as well as amounts anticipated to be realized over time from its accounts receivable, are expected to yield approximately $70 million to $75 million of cash for the company.

For FY08, on a non-GAAP basis, ABM expects diluted earnings to be the range of $1.10 to $1.15, down from the prior range of 1.20 to $1.35. This guidance excludes non-recurring expenses of approximately $60 million or $0.20 per diluted share associated with achieving synergies on OneSource as well as the major financial system upgrade, share service implementation and relocation of corporate headquarters.