KB Home (KBH)
Upgrades to 3 STARS (hold) from 2 STARS (sell)
Analyst: Thomas Smith, CFA
KB Home on Feb. 13 reported a November-quarter loss per share of 64 cents, including $343 million of pretax inventory and other charges, vs. year-earlier EPS of $3.44. The report was a bit wider than our 58 cents loss estimate. Revenues rose 13% despite challenging market conditions for homebuilders, though order backlog dropped 34%. We project book value will rise in fiscal 2007 (ending November) under KB's new CEO. We are maintaining our $3.75 EPS estimate for fiscal 2007, lowering fiscal 2008's to $5.10 from $6.80, but raising our 12-month target price to $56 from $48 on our updated price-to-book value analysis.
American International Group (AIG)
Maintains 4 STARS (buy)
Analyst: Catherine Seifert
AIG reports $1.47 vs. 14 cents fourth quarter operating EPS, in line with our $1.48 estimate. Full year operating EPS of $5.88 vs. $3.33 reflects the absence of $1.69 in settlement charges, reserve boosts and catastrophe losses. We are encouraged by the 7.2% rise in net written premiums, above many of AIG's peers. We view the shares as undervalued compared with some peers and AIG's own historical averages, but we acknowledge the lack of a near-term catalyst. Our 12-month target price of $80, 13 times our $6.15 2007 estimate, assumes AIG is priced at a premium to peers but below its historical averages.
UnitedHealth Group (UNH)
Maintains 4 STARS (buy)
Analyst: Phillip Seligman
UnitedHealth announces its intention to file its 2006 10-K, second and third quarter 10-Qs, and an amended first quarter 10-Q, by Mar. 15. We expect the filings to help put the stock option overhang behind the company and allow management to focus more on operations. We think this distraction resulted in lower Medicare Advantage enrollment in 2007, and we have been concerned about possible broader execution issues. As the SEC's and other probes have not terminated, we still see risk of filings being amended. However, we are encouraged by the progress that we see. We maintain our 12-month target price at $62.
Longs Drug Stores (LDG) : Ups to 4 STARS (buy) from 3 STARS (hold)
Analyst: Joseph Agnese
Longs Drug Stores reports February same-store sales rose 2.7%, slightly ahead of our expectations. We believe pharmacy same-store sales will continue to be negatively impacted by weaker cough and flu season. However, we see non-pharmacy same-store sales trends benefitting from Longs Drug Stores's remerchandising initiatives. We believe earnings growth will also benefit from acceleration of new store growth and ongoing supply chain initiatives. We are keeping our fiscal year 2008 (Jan.) earnings per share (EPS) estimate of $2.45, and maintain our 12-month target price of $59.
Brocade Communication Systems (BRCD) : Ups to 4 STARS (buy) from 3 STARS (hold)
Analyst: Jay Hingorani
Our buy recommendation assumes faster-than-expected integration of the McData acquisition, with over $100 million in annualized cost savings achieved by the July quarter, one quarter ahead of schedule. We see stable pricing, continued demand for remote backup and business continuity, and lower-than-expected attrition of non-strategic merger related revenues driving share gains and future margins. We are raising our 12-month target price by $1 to $11, based on discounted cash flow analysis, using a weighted-average cost of capital of 11.5% and a terminal growth rate of 3%.
United Natural Foods (UNFI) : Ups to 3 STARS (hold) from 2 STARS (sell)
Analyst: Raymond Mathis
Shares of United Natural Foods have dropped sharply since the announcement of a proposed merger between the company's two largest customers, Whole Foods (WFMI) and Wild Oats (OATS). We believe the combined entity could be large enough to dictate pricing to United Natural Foods. In addition, we think it likely that there will be several store closings where there are overlapping locations. Nonetheless, after falling 23% from a 52-week high of $38.40, we now view the shares as fairly valued. Our risk-adjusted valuation keeps our 12-month target price at $30.