Pepsi Bottling Upgraded to a Buy
Pepsi Bottling Group, Inc. (PBG) continues to execute well in a difficult soft drink environment. Contrary to competitors, volumes and net revenues are growing in every geographic region. The lackluster carbonated soft drinks (CSD) environment in North America is being addressed with a robust pipeline of new products and new initiatives in the refreshment and hydration categories. With the stock trading in the low-end of the historical valuation range, the stock is upgraded to Buy.
PBG's management is highly motivated and focused on the efficient manufacture and distribution of Pepsi-Cola products. Management's execution of business strategies has been superior to that of other major bottlers. While net revenue per case has been strong in the U.S., the company is expanding in higher growth geographies like Russia.
The company's stock has traded in a wide P/E multiple range of 12 to 27 over the last five years. However, during times of low single-digit volume growth, the P/E range has been between 12 and 19. At the current P/E of 14.2, the stock is attractive, despite near-term weakness in North America.
Significant upside potential in Pepsi Bottling Group's stock is expected when CSD volumes, possibly by unseasonably warm weather in 2008 after an unseasonably cool 2007, increase. The target price is based on a 16 P/E on trailing 12 month earnings; therefore, the target price is $35.25.
Keep Buying Mitsubishi Financial
We are continuing our Buy on Mitsubishi UFJ Financial Group, Inc. - ADR (or MUFG), (MTU). We are reducing our 2009 fiscal year earnings per average diluted share estimate to $0.60 from $0.62. This is broadly in line with the company's earnings forecast for the year of ¥640 billion, up 2% from the prior year. We expect results to continue to reflect global economic slowing and turmoil in the credit markets. MUFG completed a ¥150 billion share repurchase and raised its annual dividend by 27%.
MUFG reported fiscal year earnings of ¥629 billion, down 28% year over year, largely reflecting a 61% increase in credit costs and a ¥152 billion negative swing in net losses from equity securities to ¥25 billion loss from a ¥127 billion gain a year earlier.
We believe MUFG shares represent an attractive value as MUFG is trading at a discount to its peer group based on price/book value, as well as a discount to its own 1.6X average price/book value metric over the last couple of years. Assuming moderate valuation expansion to MUFG's average 1.6X price/book ratio gives a target price of $12.50.
Target $250 for Potash Corp.
Potash Corp. (POT) is the world's leading producer of potash and the world's largest fertilizer producer. The company has leverage to higher fertilizer application rates, higher crop plantings, increasing demand for biofuels and rising crop prices. The company is located in low-cost areas and financials are solid. Hence, we rate the stock a Buy with a target price of $250.
Moreover, the company has lower-cost nitrogen operations in Trinidad due to the long-term, lower-cost gas contracts with Natural Gas Company of Trinidad and Tobago Limited as well as proximity to the U.S. market.
