P&G Won't Outperform
Procter & Gamble's (PG) management is committed to a growth strategy based on driving volume through product innovation and increasing penetration into developing markets and expanding profitability by focusing on higher margin categories. The plan is meeting with success in terms of topline expansion, volume growth, and higher earnings.
Though the Gillette acquisition was accretive to earnings in fiscal 2008, the gross margin was negatively impacted by increased commodity and energy costs. The Hold recommendation is maintained.
Despite two periods of restructuring, Procter & Gamble has traded in a solid P/E multiple range of 17 to 25 over the last 15 years, reflecting the company's higher-than-average growth profile. We do not expect Procter & Gamble stock to outperform until the current impediments to margin improvement abate, specifically, increased promotional spending to combat recently intensified competition and higher raw material costs. The target price of $78.75 is based on a 22.5 P/E on trailing 12-month earnings.
CV Therapeutics Well Supported
The Street is pretty split on CV Therapeutics, Inc. (CVTX) right now. We are in the moderately positive camp, believing that Ranexa will eventually pick up steam after the label expansion(s). We remind investors, there are three separate applications here one for first-line angina, one for a potential anti-arrhythmic claim, and another for use in diabetics with coronary disease. The first-line angina sNDA and the anti-arrhythmic claim look solid in our view.
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Outside of Ranexa, things are progressing nicely. The company exited the second quarter with $274 million in cash and investments. Add in the $70 million from the Menarini deal, and we now expect CVT to exit 2008 with just under $300 million still on the books. If the above applications all pan out, CVT has excellent turnaround potential.
The stock looks well supported at these levels, and the next few months will be pivotal for management. CVT could easily head to over $20 if things come together. Right now all we see is the potential that things come together, and that keeps us at a Hold rating. If that potential starts to turn into a certainty, we would recommend buying the stock. Our target is $14.
BHP Billiton Ironing Wrinkles
BHP Billiton, Ltd. (BHP) is the world's largest diversified resource company with operations in 25 countries. Notwithstanding the associated anti-trust issues, we believe a potential merger between BHP and Rio Tinto (RTP) can deliver synergy benefits and offset rising operating costs, which have been trending upwards.
In addition, the merged company would become the world's largest producer of copper and aluminum and the second-largest provider of iron ore. Nonetheless, given that Rio Tinto rejected the terms of the original proposal, the deal seems far from certain. Moreover, fear of a global economic slowdown leads us to maintain a cautious outlook on the stock. We retain our Hold recommendation on the shares of BHP.
BHP Billiton is well positioned to benefit from continuing strong demand primarily from China and the broader Asian region for commodities such as copper, iron ore, and nickel and continuous supply constraints of most metals. These factors are likely to keep prices at elevated levels.
Further, BHP has a strong balance sheet with healthy cash generation and low debt level (current net debt-to-capitalization ratio of 17.8%). The company generated net operating cash flow of $18.2 billion during FY08, up 13.8% year-over-year. Healthy cash generation will enable BHP to successfully invest in its growth projects.
Currently, the stock is trading at 8.8x our FY09 earnings estimate of $6.39 per ADR. We do not expect a significant expansion in P/E multiple at this time.
