Primus Guaranty's (PRS) 4Q07 economic results were ($28.0) million, or ($0.62) per diluted share, substantially worse than the estimates. The miss mainly stemmed from a $40.9 million credit event provision. We anticipate that higher provisions and mark-to-market losses due to the challenging credit environment will continue to impact the results for the coming quarters, though the company may be able to grow its credit protection business at attractive prices as the credit spreads continue to widen.
Based on the results, we are moderating our FY08 and FY09 estimates and are downgrading our recommendation on the shares of PRS to Sell from Hold. Since the company has a higher risk profile and we suspect that any change in rating methodology by the rating agencies may result in higher capital requirements or the risk of downgrade of its rating, we feel that the shares should continue to trade below the peer group median multiple for some time.
Our six-month price target of $4.00 per share equates to about 0.43x our June 30, 2008 estimated economic book value of $9.20 per share. This is 4.0x our estimated EPS of $1.00 per share for FY08.
Read the analyst note on PRS.
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