We recommend holding the shares and have a target price of $47, representing 12.5x our $3.75 ('0.992) 2008 EPS estimate.
Metabasis Comeback Too Early
Metabasis Therapeutics, Inc. (MBRX) is a biopharmaceutical company that engages in the discovery and development of drugs for chronic diseases involving pathways in the liver. In July 2007, the company suffered two major setbacks when its lead drug, CS-917, failed to meet the primary endpoint in a phase IIb trial, and Schering-Plough terminated its agreement for the development of pradefovir. Both products were in mid- to late-stage trials.
The shares plummeted 54% in response to the news and the company has yet to recover from these setbacks. Although Metabasis reported positive results on core pipeline candidates, MB07803 and MB07811, we believe that investor confidence is not likely to return until the company enters into suitable partnership deals for its candidates. We maintain our Hold rating on the stock with a price target of $1.50.
Central Garden & Pet Costs Up
Central Garden & Pet Company (CENT) produces, innovates, and markets pet, lawn, and garden products under leading brands. In fiscal 2007, the company generated 53% of net sales and 95% of operating income from the Pet Products segment, which markets Four Paws, TFH, Nylabone, and Interpet pet supplies; Wellmark insect control products; and Kaytee bird and small animal food. The company also markets Oceanic and All-Glass Aquariums, and Kent Marine saltwater aquarium supplies.
Management is addressing a difficult environment of adverse weather and higher costs, which have affected sales and profitability. The benefits from the strategy of expanding the operating margin through a positive mix shift towards higher margin products and the optimization of the supply chain has been delayed.
Higher grain costs are negatively impacting profitability. Management has lowered both sales and earnings guidance for fiscal 2008. However, the stock's decline discounts much of the negative developments. Therefore, the shares of Central Garden & Pet are rated a Hold.
AFLAC Steadies with Japan
AFLAC Incorporated (AFL) is a leading underwriter of supplemental medical insurance products in the United States and Japan. In the U.S., the company markets and administers its products primarily through its subsidiary, American Family Life Assurance Company of Columbus, and holds the leading share of supplemental health policies sold at the policyholders worksites.
Although it is a U.S. based-company, AFL derived nearly 71% of its $15.4 billion 2007 revenue from its Japanese operations (AFLAC Japan) and the rest from its domestic operations. We remain encouraged by the outlook for AFL's Japan operations, as sales through the new channels (Banks and Japan Post network) are expected to gather momentum this year.
After reviewing 2Q08 results, we are maintaining our FY08 and FY09 estimates and our Hold rating on the shares of AFL, with a six-month target price of $62.00 per share. The shares are currently trading at a price-to-book multiple of 3.60x, a 77% premium to the peer group median of 2.04x.
Crown Castle Remains a Buy
We maintain our Buy rating, but reduce the valuation target for Crown Castle (CCI), a leading operator of wireless communications towers in the USA and Australia. We believe recent weakness in the stock price is related to general global equity market conditions and not necessarily impacted by any changes to company's financial fundamentals.
Overall performance is expected to be driven by substantial demand for more tower space to facilitate high-speed data services -- in particular, 3G mobile technologies, mobile video and new WiMAX deployments. The merger with Global Signal has provided better-than-expected cost synergies.
Although a substantial level of debt remains concerning, management guided that its recurring cash flow per share is forecasted to increase 25% through fiscal 2008. Our long-term view regarding the wireless tower industry remains positive, and we believe the company is well positioned to capitalize on emerging telecom network deployment opportunities.
Epicor Software Guidance Down
Epicor Software's (EPIC) solutions automate and integrate critical business information across the entire value chain so that customers, suppliers, partners and employees can collaborate on competing more effectively in the global marketplace.
