Houston Wire Remains Current
Houston Wire & Cable Co. (HWCC) reported second quarter EPS of $0.44, almost in line with our estimate of $0.43 and 10% above the year-ago level of $0.40, due to the impact of share repurchases. Sales continue to grow from HWCC's continuous penetration in its target markets in the Utility, Infrastructure and Industrial sectors.
Given its investment in expanding the sales force, the private label business and the penetration of three key end markets off a smaller sales base than its peers, we believe HWCC can grow faster than the industry. In the near term, though, we expect 2008 sales growth rate to decelerate compared to the 2007 growth rate and company's long-term growth rate in light of a weaker U.S. economy. Our price target is $17.75, about 10.6x our 2008 EPS estimate.
The industrial market is one of the largest segments of the U.S. economy, comprising a diverse base of manufacturing and production companies. These companies have large, complex plant maintenance, repair and operations (MRO) requirements. Within the infrastructure market, the company is assisting customers to further penetrate the engineering and construction market.
At its current price of $17.06 per share, HWCC is trading at approximately 10.2x our 2008 EPS estimate of $1.67, which is at a slight discount to the industry median multiple. We expect the company to report a year-over-year rebound in 2008 EPS, helped by a sales increase, cost control efforts and share buybacks.
Honda to Accelerate Hybrids
Honda Motor Co. (HMC) is expanding its business in Asia, growing its global network to increase efficiency and introducing new products to satisfy local markets. Further, capacity expansion plans in Asia and a new sales strategy in Japan inspire optimism about Honda's prospects.
However, rising raw material prices and selling and administrative expenses are likely to pressure margins. Moreover, unfavorable currency exchange rates, flat-to-lower sales in its key markets (North America) and increased competition will threaten HMC's global position. Therefore, we maintain our Hold rating with a six-month target price of $30.
The company also expects prices to increase and year over year incentives to decline in fiscal 2009, which will push revenues further. In 2009, in the automobile business, Honda expects to sell 4.08 million units; an increase of 155,000 units from fiscal 2008.
In the motorcycle division, the company anticipates unit sales to reach 10.46 million in fiscal 2009, up 1.14 million units from fiscal 2008. The company also projects unit sales of 6.12 million in the power product and other businesses, an increase of 63,000 units from the previous year.
HMC has witnessed a negative impact of changes in model mix, as significantly high gasoline prices have prompted a shift in demand towards compact cars. Although the company plans to produce compact hybrid cars, rising gasoline prices continue to impact sales in the near term.
Federal Realty May Feel Sag
Federal Realty (FRT) reported 2Q FFO (funds from operations) of $0.96 per share, in line with our estimates and $0.02 above consensus. Operationally, the company's portfolio continues to perform at a high level.
Rental growth on new/renewal leases continues to accelerate and overall portfolio occupancy is still above 95%. FRT is one of the best positioned strip mall REITs in a recessionary environment. The company has top infill assets in high growth areas of the country. In addition, FRT has a solid balance sheet with low debt and plenty of capacity to make strategic acquisitions as the price of shopping centers fall.
We rate FRT a Hold due in part to valuation and economic uncertainty.
