We are maintaining our Hold on Con-way Inc. (CNW), but reducing our target price to $48 following a weak first quarter. CNW's EPS was $0.54, up 7% year-over-year, but below the $0.60 consensus and our $0.65 estimate as costs came in higher than estimated. We are cutting our 2008 EPS estimate from $3.65 to $3.20 (the midpoint of management's newly revised guidance of $3-$3.40, down from $3.40-$3.80 before).
While the Contract Freighters, Inc. (CFI) purchase and volume gains will aid EPS growth, headwinds include pricing pressures, lower fuel surcharge revenue, and higher fuel and payroll costs. CNW recently completed the $60 million acquisition of Chic Holdings Ltd, one of China's fastest-growing third-party logistics firms with revenues of $55 million in 2006.
We believe CNW's $0.40 dividend is safe. CNW's stock is trading generally on a par with its LTL peer-group median based on 2008 and 2009 consensus estimated earnings, and at a more substantial premium based upon price/book. CNW's return on equity (ROE) leads the group and its operating margin and dividend yield are above average. Negatively, CNW's 50% debt-to-capital ratio is the highest in the LTL group, and exposes the company to interest rate risk.
Given these factors, we believe that at this point in time the shares are trading at fair value. Our Hold recommendation incorporates a valuation of $48 per share, which is 12X our diluted 2009 EPS estimate of $4, providing a PEG ratio (P/E divided by estimated future growth rate) of 0.9X, in-line with the LTL median.
Read the full analyst report on CNW.
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