Bearish on Liberty Property Trust

Liberty Property Trust (LRY) slightly beat our funds from operations (FFO) estimates as operations were better than expected in the fourth quarter. Operations are holding up reasonably well. Although, we still rate LRY a Sell despite a low comparative valuation and recent price drops.

We expect rental rates to remain flat through 2008, as the company has assets in office markets that have high vacancies. Additionally, Liberty continues to run a deficit to cash flow, that is, the dividend is not being covered with operating cash.

We expect this trend to continue in 2008 as competition for tenants is expected to become worse in a faltering economy. Finally, Liberty has a large development pipeline that is only mildly pre-leased, and poses a real risk should the economy continue to soften in 2008. At 9.9x our 2008 estimates, Liberty is trading at a discount to pure play office and industrial peers. Office real estate investment trusts (REITs) in the Zacks coverage universe are trading at 14.5x 2008 FFO estimates, while industrial REITs are trading at 13x 2008 estimates.

While the current valuation is compelling, Liberty only has marginal growth prospects in 2008. The company is forecasting little or no FFO growth in 2008 as rental rates increases will be flat or possibly negative. LRY has a large concentration of assets in low barrier, slower growth markets.

The company is diluting earnings through a disposition campaign that should upgrade the portfolio in the long run, although this will inhibit near-term FFO growth. We are also wary of the price paid for RPB and think the company might have overpaid to get into Washington D.C. We think the sell-off will continue and are setting our price target at $24 per share or 7.6x 2008 FFO estimates.

BorgWarner Costs Balance Demand

BorgWarner, Inc. (BWA) is expected to benefit from the growing demand for its strong technology-based product portfolio. About $1.95 billion of new power-train business is expected between 2008 and 2010. Also, BWA has healthy financials with low debt and has further taken initiatives to maintain margins in the challenging North American industry environment.

BWA reaffirmed its 2008 earnings expectation. The company expects to earn $2.85 per share to $3.00 per share for the year. The company also expects to grow annual sales to 8%-10% in 2008, implying sales of $5.75 billion to $5.86 billion. Operating margin is expected to be up from 2007 to 8.5%-9%. The company anticipates lower North American industry vehicle production, relatively flat production in Europe, and growth in Asia.

Currently, shares of BWA are trading at 14.7x our 2008 EPS estimate of $2.84. We are rating BWA's stock a Hold, as the impressive slew of new product launches is burdened with high raw material prices.