Acorda Therapeutics Now a Sell
We downgrade Acorda Therapeutics, Inc. (ACOR) to Sell from Hold, as we believe the shares are significantly overvalued at the current level, and expectations for profitability and future cash flow are entirely too high. We believe alternative medications and a high side-effect profile will keep Fampridine-SR as a niche-use drug only. With the stock now trading at over $30, a market capitalization of nearly $1 billion, we see a period of basing and profit taking over the long catalyst-lacking summer.
The second phase III trial (MS-F204) of Fampridine-SR offered up positive results to improve the walking ability of patients with all four types of multiple sclerosis (MS). However, we remain unconvinced that the drug will see significant use upon approval. The next major catalyst for Acorda shares will be the presentations of the full MS-F204 data perhaps in September 2008, followed by the New Drug Application (NDA) filing early in 2009.
Our model assumes an approval and launch of Fampridine-SR in early 2010. We forecast profitability based on the ramp of Fampridine-SR in 2010. Our 2012 fully-taxed EPS forecast is $2.10. We arrive at our $22 target by applying a biotech-like 25x multiple (peer-average) on this figure and discounting back to present day at 20 percent.
Upped Target on Hold-Rated GATX
We are continuing our Hold on GATX Corporation (GMT), but raising our target price to $50. GATX posted first quarter diluted EPS of $0.90, up 38% year over year, well above consensus of $0.68 and our $0.71 estimate.
We are maintaining our 2008 diluted EPS estimate at $3.30 and initiating our 2009 estimate at $3.50. We expect results to reflect higher lease rates, strong utilization, and a lower effective tax rate, with EPS benefitting from a $200 million share repurchase plan.
GATX is one of the largest railcar and locomotive lessors in North America, and is a leasing service provider to over 1,000 customers, most of which have solid credit profiles. Furthermore, GATX continues to experience strong utilization rates in its railcar operations. The company maintains a relatively conservative balance sheet, has strong cash flow, and an attractive dividend yield.
At its current price, GATX is now trading at 14.2X estimated 2009 diluted EPS, a 4% premium to the industry based on 2009 consensus estimates. Our target price of $50 represents roughly a 14 ¼X P/E multiple of our 2009 EPS estimate of $3.50, providing a PEG ratio (P/E divided by estimated future growth rate) of 1.1X, in line with the median for the industry.
Nova Chemical Not Quite Super
Nova Chemical's (NCX) earnings are driven by a relatively strong ethylene and polyethylene market and cost-cutting in the styrenics business. However, higher oil and gas prices are driving feedstock cost of the company.
Nova derives all its revenues from the plastics and chemical business. This makes it more sensitive to the cyclical nature of the plastic and chemical industry as compared to the peers who are diversified. The slowing economy is likely to result in lower prices and volumes. Apart from this, higher debts and low free cash flows raise concern as well. As a result, we rate the stock a Hold with a target of $28.00.
We are optimistic about Nova's long-term prospects as it stands to benefit from the ethylene and styrenics up-cycle. Moreover, Nova continues to increase production of high-margin advanced Sclairtech polyethylene. Nova is also concentrating on cost-reductions and business restructuring.
Although Nova's business conditions are improving, operating rates in ethylene chain are still below the 92-93% range, which is essential for a sustainable recovery in pricing power. The global ethylene cycle could have a cyclical decline beyond 2008; based on 8% average annual supply increases over 2009-2011 versus 4% demand increases.
Currently, Nova is valued at 9.0x our 2008 estimate of $3.05 and we set a target of $28.00. This is 9.2x our 2008 estimate.
Construction Exposure for ABM
ABM Industries (ABM) that provides basic janitorial services for many organizations, reported second quarter EPS of $0.26, which was $0.02 ahead of our expectations. There were several factors that positively impacted earnings including cost synergies from OneSource, higher Security sales from new accounts, and continued penetration of existing Engineering customers.
For the full-year 2008, OneSource remains on track to deliver $0.14 of earnings and $850 million of revenue. Given the better-than-expected second quarter earnings, we have increased our FY08 EPS estimate to $1.28 from $1.27. Investors should Hold shares of ABM in their portfolio.
On an operating basis, ABM reported second quarter EPS of $0.26, which was $0.02 ahead of our expectations. While Engineering has provided an upside surprise the last two quarters, we expect the weakness in commercial construction activity to dampen second half growth.
For FY08, on a non-GAAP basis, ABM expects earnings to be the range of $1.20 to $1.35. This guidance excludes non-recurring expenses of approximately $60 million or $0.20 per share associated with achieving synergies on OneSource as well as the major financial system upgrade, share service implementation and relocation of corporate headquarters.
For the purposes of our forecast, we are excluding these costs since we deem them to be non-recurring in nature. On a GAAP basis the company expects FY08 diluted earnings per share to be in the range of $1.00 to $1.15. Our third quarter EPS estimate is $0.41 (non-GAAP), which is $0.02 higher than the street consensus forecast of $0.39.
American Capital Downgraded
We are lowering our rating on the shares of American Capital Strategies, Ltd. (ACAS) to a Hold from a Buy after the company's core 1Q08 operating results fell three cents shy of our expectations.
