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Here are highlights from Monday's Analyst Blog:
US Bancorp Without Much Upside
Despite concerns of liquidity and continued turmoil in the credit markets, U.S. Bancorp's (NYSE: USB | Quote | Chart | News | PowerRating) 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.
Goodyear Tire Tapping the Brakes
The Goodyear Tire & Rubber Company (NYSE: GT | Quote | Chart | News | PowerRating) is benefiting from a major restructuring program along with lower raw material costs and improved selling prices. However, the company is constantly cutting production on the back of lower demand.
Goodyear has reduced tire production significantly in both North America and Europe. It further plans to close 92 underperforming retail stores. Apart from this, the company also has substantial unabsorbed overhead costs. Weak tire volumes coupled with rising costs compel us to rate the shares a Hold with a target of $16.50.
OmniVision Technologies, Inc.
OmniVision (Nasdaq: OVTI | Quote | Chart | News | PowerRating) is a fabless OEM [an original equipment manufacturer who outsources chip fabrication] of image sensors and support circuitry used within handsets and applications in other mass markets. The Sunnyvale, CA firm is currently rated a Hold with a $15 target price. Shares have fallen from $24+ peak just about one year ago, now trading just over $12 per share.
The shares have traded down over the last two months, but we are reiterating our Hold rating in view of uncertainties in consumer spending and possible market share losses in China.
RAIT Finc'l Trust May Cut Yield
RAIT Financial Trust (NYSE: RAS | Quote | Chart | News | PowerRating) reported good 2Q results with adjusted EPS coming in at $0.54 per share, up about 6% from last quarter. RAS continues to pay off repurchase lines and the company's commercial and residential loans still have low overall delinquencies. The yield is now over 30% and the company continues to cover the dividend ($0.46 per share) with operating cash. Due to the high yield and what we feel is a slightly improving outlook for credit markets, we are continuing our Hold recommendation.
Due to recent share price declines, RAIT represents good value in a battered sector. The company's economic book value was $13.90 at quarter end, up from $10.52 at year end 2007. The company is trading at about .4x economic book. Economic book is a better gauge of a company's value, as it excludes unrealized losses that are in excess of what the company has invested in securitizations. Based on our 2008 Adjusted EPS projections RAIT is trading at 3.3x estimates, well below historical norms and in line with sector averages.
PepsiCo Growth Meets Costs
Strong international growth, productivity improvements, an aggressive share repurchase program, and a strong new product pipeline are driving low double-digit earnings growth for PepsiCo (NYSE: PEP).
Nevertheless, a sluggish domestic carbonated beverage environment, only modest low-single digit volume growth at Frito-Lay, and pressure from higher energy and raw material costs (especially orange and grain costs) are concerns. The Hold recommendation is maintained.
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