I-Flow to Move with the Crowd

I-Flow Corp. (IFLO) reported second-quarter EPS that beat our estimate by a penny on roughly in-line revenue. We lowered our fiscal 2008/fiscal 2009 EPS estimates. The company's move to profitability before was more so from operational controls than greater-than-expected topline growth. IFLO decided to devote resources in 2007 to expand sales growth. The acquisition of AcryMed gives the company another significant growth opportunity that exists in general surgical site care management.

The management expects the company to turn profitable excluding any non-cash purchase accounting adjustments related to the AcryMed acquisition for the second half of 2008 on roughly 20% growth in total revenue with growth from the Acute Care business that has been lowered to 23% from 25% and Regional Anesthesia growth that has been revised down again to 17% from 20%. The management still left the door open for IFlow to be profitable for the full year.

At its current price of $9.83 per share, IFLO is trading at 1.5x our 2009 revenue estimate, below the average group multiple of roughly 2.0x. Due to the expected growth from new product releases and leverage expected from the sales force expansion that is tempered by the broader slowdown in surgical procedure volumes, we believe a valuation that is no better than in-line to the group is appropriate. At roughly 1.7x our 2009 revenue estimate, our price target moves to $10.50.

CastlePoint High for Tower Group

CastlePoint Holdings Ltd's (CPHL) 2Q08 results were $0.35 per share, a nickel below our expectation.

During the quarter, CPHL announced its acquisition by Tower Group (TWGP), which is expected to close during 3Q08. This will eliminate the dual CEO role of Michael Lee in both TWGP and Castle Point. We maintain a Buy rating on the shares of CPHL as the price offered by TWGP offers a premium over CPHL's current price which is enhanced by the time left before the close.

Based on 2Q08 results and company guidance, we have moderated our FY08 earnings expectation to $1.75 per share from $1.80 per share, respectively, but maintained our FY09 earnings expectation at $2.10 per share. We would expect current profitability and operation efficiency measures to be sustainable, if not exhibit some improvement over the coming quarters, as the company continues to expand into the US.

In addition, we would anticipate the tax rate to increase to 7-9% range. At the current level, the shares of CastlePoint trade at 1.00x the 2Q08 book value of $11.05 per share. We envision the price-to-book value multiple 1.10x (the second lowest peer price-to-book value) over the next six-months. We are maintaining our six-month price target at $12.65 per share, based on our estimated book value of $11.50 per share by the end of 3Q08 and the pending price offer to acquire the shares of CPHL by Tower.

Banco Itau Warrants Caution

We are maintaining our Hold on Banco Itau Holding Financeira S.A. (ITU). The company reported second quarter net earnings of R$2,079 million before nonrecurring items, up 8% year over year and meeting our estimate.

Net revenues rose only 9% year over year and 7% sequentially as a strong advance in net interest income was somewhat offset by weak growth in banking fees, partly due to regulatory changes prohibiting certain types of fees. We are raising our diluted EPADS estimates to $1.65 from $1.58 for 2008 and to $1.91 from $1.84 for 2009. We expect solid loan growth and improved productivity to drive earnings gains, with this partially offset by higher loss provisions as Itau expands into higher risk loans. We believe Itau's dividend is safe.

At its current price, Banco Itau trades at 10.6X the 2008 consensus estimate and 9.5X the 2009 consensus estimates, well above the industry medians, also based on consensus estimates. While Itau's consensus estimated growth rate at 14% is above the peer median, Itau's dividend yield at 3.2% is below par.

Given these facts, we think Banco Itau is fully valued and see limited upside. Our $18 price target represents roughly a 9 'X P/E multiple of our 2009 EPADS estimate of $1.91, providing a PEG (P/E divided by estimated future growth rate) of about 0.7X, roughly in line with the industry median.

Cameron Int'l Estimates Upped

Weakness in oil prices continues to weigh on Cameron International Corp. (CAM) shares and the rest of the group. In the last four weeks alone, the stock is down approximately 10%, modestly lower than the peer group's average of 11%. Despite the pullback, the stock is far from cheap and commands a premium valuation relative to its oilfield service peers.

As such, we are maintaining our Hold recommendation. We have raised our earnings estimates, however, to reflect the positive guidance and still favorable operating environment.