Management plans to recommend a distribution increase to the Board of Directors for the third quarter. Third quarter earnings are expected to be strong as the partnership hopes to gain from the strong asphalt market. The partnership's margin for the third quarter is expected to be in the range of $15 to $20 per barrel due to much higher asphalt prices and lower feedstock costs.
FIZZ Countering Flat Soda Sales
National Beverage Corp.'s (FIZZ) management is implementing a 'fantasy of flavors' strategy that emphasizes the expansion of a branded beverage portfolio of proprietary distinctive-flavored soft drinks, energy drinks, juices, and other specialty beverages.
Therefore, the company is less vulnerable to the negative carbonated soft drink trend in the U.S. However, in the near-term, input costs are expected to continue rising due to double-digit increases in the prices of aluminum cans and high fructose corn syrup. The Hold rating is maintained.
The stock of National Beverage has traded in a P/E multiple range of 12.6 to 34.3 over the last five years. At the current P/E of 18.6, we find the stock to be attractive, but not compelling since CSD volumes continue to decline and no earnings progress is expected over the next 12 months. The stock s target price is $10, based on a 20 P/E on trailing 12 month earnings.
Tower Group Outlook Lowers
During the second quarter, Tower Group, Inc. (TWGP) announced the acquisitions of Castlepoint Holdings and Hermitage Insurance Group. We expect the transaction to significantly increase the company's capitalization and simplify its current organizational structure. Based on the company's guidance and pending acquisitions, we are adjusting our fiscal 2008 and 2009 EPS targets to $2.95 per share and $3.30 per share, respectively, from $3.00 per share and $3.40 per share, previously.
The shares of Tower Group currently trade at 8.0x our 2008 earnings estimate of $2.95 per share, with a price-to-book of 1.53x to its second-quarter book value of $13.82 per share. Although we believe the company remains well-positioned to continue growing premiums at a rapid clip, we think its aggressive expansion plan in the softening market should in all likelihood experience a worsening within its combined ratios further, modest level of subprime paper in the investment portfolio adds a level of uncertainty over the near term.
The pending digestion of acquisitions precludes us from adjusting our Hold rating on the shares of this company presently. Based on general concerns for the credit quality worthiness of the investment portfolio, given unresolved issues within residential real estate markets throughout the country, we are decreasing our six-month price target to $23.10 per share from $26.55 per share previously.
US Bancorp Without Much Upside
Despite concerns of liquidity and continued turmoil in the credit markets, U.S. Bancorp's (USB) core second-quarter results were slightly ahead of our expectations, driven by an increase in net interest income. The improvement stemmed from growth in higher spread assets and benefited from a liability sensitive balance sheet in a declining rate environment. While we are encouraged to see diversified revenue source, we remain wary of growing credit and margin pressures.
The credit quality has worsened and the company has substantially increased its loan provisions. We reiterate our Hold rating on the shares of USB, but moderate our 2008 and 2009 earnings expectations to $2.35 per share and $2.45 per share, respectively. We think the uncertainties for this company as well as the industry, competitive market conditions and credit quality deterioration potential should continue to weigh upon the shares of USB in 2008 and into 2009.
USB currently trades at 14.4 times the consensus forward estimate. On a price-to-book basis, the shares trade at a 211% premium to the peer median. Relative pricing currently looks attractive on a P/E-to-growth basis, using the consensus forward estimate and the consensus long-term growth rate. Our new six-month price target of $35 equates to approximately 2.93 times our projected book value six-months out, or 14.9 times our 2008 earnings estimate of $2.35 per share. We view the $1.70 per share annual dividend as secure, implying a 6.6% expected total return over that period.
Goodyear Tire Tapping the Brakes
The Goodyear Tire & Rubber Company (GT) is benefiting from a major restructuring program along with lower raw material costs and improved selling prices.
