Grey Wolf a Buy on Precision

Grey Wolf, Inc. (GW) has agreed to be acquired by Precision Drilling Trust (PDS) in a cash and stock valued at approximately $2 billion. Grey Wolf shareholders will own approximately 25% of the combined entity, to be called Precision Drilling.

In particular, the GWPDS merger creates a North American land drilling powerhouse with 371 drilling rigs. In addition to getting the significant cash payout, GW shareholders benefit from Precision's high-tech systems and technology. While we expect GW shares to essentially track PDS from here onwards, we are keeping our Buy recommendation and price objective unchanged.

The company remains well positioned to capitalize on the improving operating environment given its large idle capacity, which gives it exposure to the rising spot dayrates. Grey Wolf is buying back $150 million worth of its own stock, of which more than 81% has been completed.

Grey Wolf currently markets 122 rigs with 114 rigs under contract. Higher commodity prices encouraged Grey Wolf to expand and upgrade its fleet. Rig 109, a new built-for-purpose Production and Drilling System Rig (PaDSRig) started working recently in Colorado under a three-year term contract. Rig 110, another rig in this category, is expected to be delivered during the fourth quarter of this year.

In addition, the company has signed two-year term contracts for its two mechanical rigs to move to the Bakken Shale play in North Dakota. Under daywork term contracts, Grey Wolf has approximately 12,200 days or an average of 66 rigs contracted for the remaining six months of 2008, and 13,700 days or an average of 38 rigs committed in 2009. Current leading edge bid rates range from $18,000 to $23,500 per day without fuel or top drives.

Public Storage Doing Good Biz

Operationally, Public Storage's (PSA) properties continue to perform relatively well; same-store NOI (net operating income) and rental rates increased in most of the company's US and European markets.

We expect moderate same-store growth to continue throughout the year. In 2Q08, PSA sold 51% of its stake in Shurgard Europe to the New York Common Fund, which will have a negative impact on near-term FFO (funds from operations). Although, the company has plenty of cash to be an active acquirer in a market where pricing for self storage facilities are more attractive.

The overall national economy is weakening, and we expect rental rate increases to moderate in the remaining two quarters of this year. PSA is the dominant player in its sector with a large diversified portfolio spread across the US and now parts of Europe. The company is attractively valued relative to long term growth prospects and underlying NAV (net asset valuation).

Currently the company trades at 16.9x our 2008 FFO estimates, an 8% premium to office, and a 13% premium to self storage REITs in our coverage universe. We still think PSA is the best positioned self storage operator and maintain our Buy rating. We are setting our price target at 18x 2008 estimates or $93.00 per share.

ATA, Inc. a Chinese Hold

We maintain our Hold rating on shares of ATA, Inc. (ATAI) following the release of first-quarter financial results. We believe that shares of ATAI appropriately reflect the opportunities and weaknesses inherent in the company's business at this time. Although we project substantial increases in revenue and earnings next year, we note that the company is still in the early stages of its growth.

We note that the recently completed fiscal year 2008 was the first full-year of profitability for the company. The shares currently trade at a slight premium to a peer group of education services companies. Given the outlook for expanding growth, the company must execute its business plan without significant missteps to justify a premium multiple.

Despite these potential concerns, we consider the growth opportunity to be significant. As the company builds a longer track record as a publicly-held corporation, we expect that many of these concerns will diminish in magnitude. We project that diluted earnings per ADS will increase from $0.11 in fiscal 2008 to $0.58 in fiscal 2009. At present, however, we choose to remain cautious in the near-term. Our price target of $12 equates to a multiple of approximately 16x our fiscal year 2010 earnings estimate. As such, we rate the shares a Hold at this time.

PetSmart Trades at Fair Value

PetSmart, Inc. (PETM) reported better-than-expected second quarter results. It had sales of $1.242 billion, $22 million above consensus, and EPS of $0.30, $0.02 ahead of consensus. The company also reiterated full-year EPS guidance of $1.51-$1.59 and issued EPS guidance of $0.25-$0.29 for the third quarter. We think that the management is setting the expectations bar at an attainable level.