Group 1 acquired 14 import/luxury franchises in 2007 including five BMW, four BMW Mini and three Mercedes-Benz franchises. The company expects these franchises to generate annual revenues of approximately $702.4 million in 2008, exceeding its 2007 acquisition target of $600 million. In addition, Group 1 disposed of 15 underperforming franchises with annual revenues of $154.8 million during 2007.
The company has set a target of acquiring franchises with approximately $200 million annual revenues in 2008. In the first half of 2008, Group 1 completed acquisition of $90.2 million in estimated annual revenues. On August 15, Group 1 Automotive announced that its Board of Directors has authorized a share repurchase program of up to $20 million of the company's common stock.
Group 1 is operating in a difficult industry environment. Falling domestic volumes and higher SG&A expenses continue to put pressure on margins. Oversupply of domestic new vehicles remains the major concern in the industry. Domestic brands constitute 30% of the revenue. In 2008, auto pricing will remain highly competitive. Management feels that pressure on gross margins will continue and that automaker incentive programs will drive sales. Overall, the company expects revenues to be up only 1-2% in 2008.
Carnival Just Cruising Along
We expect Carnival (CCL) and Carnival Plc (CUK) to continue to trade at a premium to its largest competitor over the near-term. However, given our expectation for continuing margin pressures, especially related to significantly higher fuel expenses, we do not feel that material price appreciation is warranted at this time. While the recent pullback in the price of fuel should provide some relief, we note that costs remain significantly higher on a year-over-year basis. We maintain our Hold rating for Carnival.
Although the company's topline has remained relatively resilient during the current economic slowdown, substantial increases in expenses have prevented the company from generating higher earnings. The main driver of the higher expenses, of course, is fuel cost. The management expects that fuel expenses in 2008 will be $752 million greater than in 2007, reducing 2008 earnings by $0.92 per share.
Given the significant impact of fluctuating fuel expenses on the bottomline, we continue to believe that the implementation of a hedging program would be viewed favorably by the Street. The added visibility resulting from a hedging program would enable investors to focus more on operating metrics under the company's control. While Carnival is trading at 13.5x estimated 2008 earnings, Royal Caribbean (RCL) is currently trading at 10.4x estimated 2008 EPS. Our six-month target price of $40 is based on a multiple of 15.0x expected 2008 earnings.
United Feeling Downward Pressure
We are maintaining our Hold on UAL Corp., or United (UAUA), as well as our $10 target price as the industry is still hostage to oil prices since fuel is the largest single expense category on the income statement and we do not expect oil prices to drop significantly in the near term. UAL is expected to report third quarter results in late October.
We are retaining our loss per share estimates at $12 for 2008 and $5 for 2009. Results should reflect moderate revenue growth, based upon higher domestic airfares, reduced domestic capacity and an increased international presence, offset by much higher fuel costs and larger materials, maintenance and purchased services expense.
In the second quarter, UAL reported a $1.19 loss per share before nonrecurring items, due to soaring fuel costs that rose $773 million, or 54% year over year. UAL has strengthened its balance sheet by increasing its cash position by $1.7 billion through a series of transactions. The company pays no dividend.
On September 3, United Airlines reported its preliminary traffic results for August 2008. The company reported an August passenger load factor of 84.5%. Total scheduled revenue passenger miles (RPMs) decreased in August by 5.1% on a capacity decrease of 3.1% in scheduled available seat miles (ASMs) compared with the same period in 2007.
At its current price, UAL shares are down 72% year to date compared to median declines of 34.2% for legacy carriers, 47.1% for the airline industry and 16.1% for the S&P 500. In general, this poor performance for the airline industry reflects expectations of higher fuel costs due to surging oil prices.
Canon ADRs Down to Fair Value
Japan-based Canon, Inc. ADR (CAJ) is one of the leading designers, manufacturers, and marketers of office equipment, cameras, and optical products in the world. The company has been kept at a Hold rating for years, and has recently traded down from the low-to-mid $50s to the low $40s.
