Brazilian SABESP Makes a Splash

We are keeping our Buy recommendation on Companhia de Saneamento Basico do Estado de São Paulo, or SABESP (SBS), which provides water and sewage services. The company posted solid results for the first quarter of 2008. With the short-term looking positive, the stock is still trading at an attractive valuation. And as we were expecting, Brazil was recently upgraded to investment grade by Standard & Poor's and by Fitch.

The company has benefited from the strength of the Brazilian real, which is expected to remain strong in the short term. SABESP continues to increase its efficiency indicators and with more aggressive investment budget for the 2007-2010 period, it will help to increase revenues in the medium-term.

Although the outlook for the water utility industry is below average relative to the S&P 500, SABESP continues to be well-positioned as a monopolistic water utility in the state of São Paulo. Its net operating revenues recorded a 5.2% increase year-over-year in Brazilian reals.

SABESP is trading at 9.3x our 2008 EPS estimate. We consider the current discount in SBS valuation compared to industry average to be excessive, and that the company's price/sales ratio is very low. Our view is that SBS should now trade closer to the Bovespa average and hence we set the target price at US$69.50, representing a P/E of 11.5x our 2008 earnings estimate.

Branching Out at Sycamore

Sycamore Networks (SCMR), a leader in intelligent bandwidth solutions for fixed and mobile networks, had earlier in the quarter declared disappointing third quarter fiscal 2008 financial results. The company lost orders from a major customer that impacted overall financial performance. Management indicated that the company's top-line will remain volatile over the near-term. However, over a longer investment time horizon, we believe demand for agile bandwidth management solutions, across different broadband network infrastructure, will return to more profitable levels. Furthermore, Sycamore diversified itself into different segments of the network equipment market with introductions of various high-margin products.

We maintain our Hold recommendation and the same valuation target for Sycamore as we look at its growth potential from a long-term investment perspective. Sycamore is currently trading at 65.6x our fiscal 2009 earnings estimate. This is at a premium to both the S&P 500 and to the peer group (optical telecom equipment manufacturers) average. We believe Sycamore's valuation is based on the future revenue potential relating to new network deployments and expectations for near-term improvement in earnings.

Triumph Group Taking Wing

We continue to keep faith in Triumph Group, Inc. (TGI) and maintain our Buy recommendation. As part of the aerospace/defense sector, TGI stands to gain as the industry is about to enter the 'sweet spot' of this cycle. This is borne-out by the fact that the deliveries of new models are just round the corner and the sales of more mature models are apace. Further, maintenance, repair and overhaul (MRO) of both commercial and military equipment are on the rise.

Although under pressure, the U.S. defense budget remains strong and focused on transformation. Hence, military sales are expected to increase roughly in line with global military budgets. Boeing ( BA) and Airbus are set to deliver approximately 6% more commercial aircraft in calendar 2008 compared to calendar 2007. TGI expects its direct and indirect sales to Boeing and Airbus will benefit from such increases.

Based on the robust fundamentals of the aerospace/defense sector and that of the company, TGI's management offered a projection of sales in range of $1.25 billion to $1.35 billion for 2009. Thus, we believe that TGI remains under-valued at current levels and forecast a calendar-year 2008 projection for TGI of $4.84/share engenders a price of $83.73.