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Bull of the Day
Looking ahead, a base of stable earnings, steady progress at Sempra Energy's (NYSE: SRE | Quote | Chart | News | PowerRating) LNG terminals, regulatory approval of utility rate cases and the Sunrise Powerlink transmission line, operational REX-West, and completion of its first solar power project, collectively support the bullish outlook for SRE.
Furthermore, given a discount in P/E multiples, we maintain our BUY recommendation on SRE with a six-month target price of $45.50.
Price appreciation to our near-term valuation target coupled with a sustainable and secure, recently increased quarterly dividend of $0.39 per share based on low projected earnings payouts represents annualized total return potential of 23.9%.
Bear of the Day
The shares of SLM Corp. (NYSE: SLM), also known as Sallie Mae, sold off sharply on February 26, on the news of the budget proposal by President Obama regarding the elimination of subsidies for student lenders. Further, SLM's 4Q08 core net operating income came in at $0.14 per diluted share, substantially short of our estimate.
Higher funding costs were the primary reason for the lower-than-expected results. However, the performance of the private credit portfolio was better than expected. We expect funding costs to come down slightly once the federally sponsored programs (TALF and Conduit Facility) become operational.
But the proposal for the elimination of private lenders from the student-loan market is a significant threat to the company. As such, we maintain our Sell recommendation on shares of SLM.
We maintain our SELL rating with a lower six-month target price of $7.00.
Recent Analysis from the Analyst Blog
RBS Going Back to Its Roots
As pre-announced on January 19, The Royal Bank of Scotland (NYSE: RBS | Quote | Chart | News | PowerRating) posted a 2008 full-year statutory loss of GBP 24.1 billion, including a goodwill impairment charge of GBP 32.6 billion.
More importantly, the company announced a restructuring plan that will cut GBP 2.5 billion out of its cost base and is aimed at taking RBS back to its roots, centered in the UK with a more limited global operation. RBS will shift primarily GBM assets, consisting of GBP 240 billion of third-party assets, GBP 145 billion of derivative balances and GBP 155 billion of risk-weighted assets, into a non-core division that will be run off over the next 3-5 years, cutting the GBM by 45% of capital employed.
Wendy's: A Tale of Two Brands
It is the best of times and worst of times for Wendy's/Arby's (NYSE: WEN). Fourth quarter financial results indicate the sinking economy is driving value-seeking consumers to Wendy's and away from Arby's. Wendy's/Arby's, formed in September through the merger of Arby's parent, Triarc, and Wendy's, reported that 4Q08 same-store sales at its Wendy's fast-food hamburger chain rose 3.7%, but fell 8.5% at the pricier Arby's roast beef take-out chain.
Excluding one-time charges, 4Q08 EPS was $0.05. Massive impairment charges at Arby's and other non-recurring charges totaling $0.89 per share after-tax pushed EPS to a loss of $0.84 for 4Q08.
Adjusted EBITDA grew 30% year-over-year to $74 million, and EBITDA margin expanded by 270 basis points to 12.3% from 9.6% in 4Q07, as management began to wring G&A overlap from the system post-merger and squeeze labor savings at Wendy's through a new scheduling system.
Cosan a Sweet Brazil Play
We are changing our recommendation on Cosan Limited (NYSE: CZZ | Quote | Chart | News | PowerRating) from Hold to Buy. The devaluation of the Brazilian real against the U.S. dollar has helped the company in posting better operating results in the 2nd quarter.
Moreover, better sugar and ethanol prices are very encouraging. The decrease in supply by India, the 2nd largest producer of sugar, will certainly boost Brazil's sugar exports to the Middle East, where it has faced strong competition.
Cosan is also benefiting from the increasing demand of ethanol worldwide. We believe some kind of deal to boost exports of ethanol to the U.S. is more likely during the Obama administration.
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About the Bull and Bear of the Day
Every day, the analysts at Zacks Equity Research select two stocks that are likely to outperform (Bull) or underperform (Bear) the markets over the next 3-6 months.
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