COC Keybanc-Feb-26-2010.pdf

Summary Of This Morning's Changes
Rating Changes: Downgrades
Ticker Company Old Rating New Rating
IDA IDACORP, Inc.BUY HOLD
Price Target Changes: Increases
Ticker Company Old Price Target New Price Target
TRW TRW Automotive Holdings Corp.$29.00 $34.00
Estimate Changes: Increases
Ticker Old 2009E New 2009E Old 2010E New 2010E Old 2011E New 2011E
TRW ----$1.76 $2.67 --$3.40
February 26, 2010 KeyBanc
Equity Research Capital Markets
Morning Call Summary - First Edition
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Contents
Summary Of This Morning's Changes............................................................................................................................... 1
On The Morning Call............................................................................................................................................................ 3
IDACORP, Inc. (IDA) — Paul T. Ridzon, Timothy Yee....................................................................................................... 3
Since our February 8, 2010 upgrade of IDA, the shares have appreciated over 11% and traded well above our prior price
target of $33 per share. In the same time period the Philadelphia Utility index has been essentially flat, rising 0.5%. Given
our view that shares are close to fair value, we are reducing our rating from BUY to HOLD.
TRW Automotive Holdings Corp. (TRW) — Brett D. Hoselton, CFA, Matthew Mishan..................................................4
Following TRW Automotive's (TRW-NYSE) earnings release and subsequent conference call, we are reiterating our BUY
rating and raising our price target to $34 from $29 based upon our beliefs that: 1) company sales should continue to
benefit from a gradual recovery to more normalized levels of production over the next several years; 2) TRW may be able
to sustain operating margins 100-200 basis points above their prior range of 4-5%; and 3) structural changes to profitability
in the United States could make possible the use of substantial deferred tax assets, driving a lower tax rate, higher free
cash flow and better earnings. Due to the combination of better than expected 4Q09 results and improved North American
and European light vehicle production assumptions, we are raising our earnings estimate to $2.67 from $1.76 (First Call
consensus $1.86) for 2010. We are introducing an earnings estimate of $3.40 (First Call consensus $2.61) for 2011.
Diamond Foods, Inc. (DMND) — Akshay S. Jagdale, Adam Josephson.........................................................................6
Diamond Foods (DMND-NASDAQ): Acquires Kettle Foods and Reports 2Q10 Results.
OMNOVA Solutions Inc. (OMN) — Michael J. Sison, Douglas Chudy, CFA................................................................... 8
We have good confidence that OMNOVA Solutions (OMN-NYSE) can keep its earnings recovery on track given our belief
that expanded levels of profitability are sustainable in Performance Chemicals, with good leverage to recoverable
normalized volumes, and that the Decorative Products business should be firmly profitable in FY10. We are reiterating our
BUY rating and $9.00 price target.
Applied Industrial Technologies, Inc. (AIT) — Jeffrey D. Hammond, Joshua C. Pokrzywinski....................................9
Applied Industrial Technologies (AIT-NYSE; BUY - $28): Takeaways from Management Meetings - Positive Catalysts Taking
Shape; Competitive Pricing Firming Up as Demand Finds Footing; Some Players Still Irrational, but Supplier Inflation
Likely to Stem the Tide of Discounting; End of Destocking Should Support Return to Rebates in FY11; Maintaining Our
FY10E of $1.10, FY11E of $1.60; Improved Earnings Visibility, Attractive Valuation Support Positive Thesis; Reiterating
BUY Rating and $28 Price Target.
Cogdell Spencer Inc. (CSA) — Karin A. Ford, Jordan Sadler, Austin Wurschmidt..................................................... 10
We expect Cogdell Spencer (CSA-NYSE) to react favorably to news that the Company has initiated a review of strategic
alternatives. While not "currently engaged in any negotiation for a change of control transaction," we view management's
willingness to explore opportunities as a positive step toward potentially closing the value gap between the stock price
($6.50 per share) and NAV ($7.00 per share, assuming a conservative $60 million valuation for Erdman). 4Q results were
solid, as normalized FFOM of $0.16 was $0.03 above consensus and $0.04 above our estimate. We were encouraged that
the beat was driven by a 24% increase in Erdman's fee income. Following two solid consecutive quarters for Erdman, we
were surprised to see disappointing 2010 normalized FFOM guidance of $0.42-$0.50, which is 15% below consensus at the
midpoint. Cogdell's core MOB portfolio performed in line with our expectation; occupancy increased 90 bps sequentially.
In our view, CSA's valuation is attractive with the stock trading at a 6% discount to the health care REITs on a 2010 AFFO
multiple basis and at a 7.8% implied cap rate on the medical office portfolio assuming a $60 million valuation for Erdman.
We are maintaining our BUY rating and $8 price target.
KeyBanc Capital Markets Inc. Disclosures and Certifications...................................................................................... 12
February 26, 2010 Morning Call Summary - First Edition
Page 2
On The Morning Call
IDACORP, Inc. (IDA) — Paul T. Ridzon [phone] [e-mail], Timothy Yee [phone]
[e-mail]
Since our February 8, 2010 upgrade of IDA, the shares have appreciated over 11% and traded well above our prior
price target of $33 per share. In the same time period the Philadelphia Utility index has been essentially flat, rising
0.5%. Given our view that shares are close to fair value, we are reducing our rating from BUY to HOLD.
Rating HOLD
Price $33.89
12-Mo. Price Target NA
Market Cap $1,596.2
Trading Volume 253
Revenues(mm)$960.4
2011E $2.80
2011 P/E 12.1x
2010E $2.75
2010 P/E 12.3x
2009A $2.58
Book Value/Share $28.97
Next Quarter March
Next Quarter E $0.46
FC Mean Quarter $0.42
FC Mean 2011E $2.88
FC Mean 2010E $2.72
Yield 3.5%
Shares of IDA have meaningfully outperformed utility peers since our upgrade on February 8, 2010.
On February 23, management reported 2009 earnings of $2.64 per share. Excluding items we believe are more one-time
in nature, we view earnings as $2.58 per share.
IDA management issued formal 2010 guidance of $2.65-$2.80 per share. This is in line with our upbeat estimate of $2.75
and well above consensus, which was $2.57 at the time.
This is the first time in several years that IDA has issued earnings guidance. We believe the stability offered by the
Company's Idaho regulatory settlement allowed IDA to issue guidance. Absent this settlement, IDA has been subject to
earnings volatility around power pricing and hydro variability. See our February 8 note for a discussion of the Idaho
stipulation.
February 26, 2010 Morning Call Summary - First Edition
Page 3
TRW Automotive Holdings Corp. (TRW) — Brett D. Hoselton, CFA [phone]
[e-mail], Matthew Mishan [phone] [e-mail]
Following TRW Automotive's (TRW-NYSE) earnings release and subsequent conference call, we are reiterating
our BUY rating and raising our price target to $34 from $29 based upon our beliefs that: 1) company sales should
continue to benefit from a gradual recovery to more normalized levels of production over the next several years;
2) TRW may be able to sustain operating margins 100-200 basis points above their prior range of 4-5%; and 3)
structural changes to profitability in the United States could make possible the use of substantial deferred tax
assets, driving a lower tax rate, higher free cash flow and better earnings. Due to the combination of better than
expected 4Q09 results and improved North American and European light vehicle production assumptions, we are
raising our earnings estimate to $2.67 from $1.76 (First Call consensus $1.86) for 2010. We are introducing an
earnings estimate of $3.40 (First Call consensus $2.61) for 2011.
Rating BUY
Price $26.14
12-Mo. Price Target $34.00
Market Cap $3,131.6
Trading Volume 1,424
Revenues(mm)$14,995.0
2011E $3.40
2011 P/E 7.7x
2010E $2.67
2010 P/E 9.8x
2009A $1.26
Book Value/Share $12.58
Next Quarter March
Next Quarter E $0.86
FC Mean Quarter $0.44
FC Mean 2011E $2.68
FC Mean 2010E $1.89
Yield 0.0%
•4Q09 Earnings Beat Street:TRW reported 4Q09 recurring earnings of $1.40, which was significantly better than both
our estimate of $0.68 and the First Call mean estimate of $0.75. Sales increased 20% to $3.4 billion, which were above
both our estimate and the First Call mean estimate of $3.2 billion as well as company guidance. Gross margin increased
770 basis points year-over-year to 11.1%, ahead of both our and First Call expectations.
•2010 Guidance Reflects Conservative European Production Assumptions:Based on planning assumptions of 10.8
million units in North America and 16.0 million units in Europe, full year sales are expected to be $12.3 billion-$12.9
billion. Commentary on the conference call indicated that, while there is visibility in North America, 2H10 production in
Europe remains a concern and the Company is still unable to quantify the impact of improving product mix on sales. We
believe TRW is likely being somewhat conservative as it incorporates a material drop-off in European 2H10 production
and relatively no benefit from product mix. Our general sense following the Detroit Auto Show in January and multiple
earnings conference calls is that: 1) while most forecasts are still being somewhat conservative and modeling a decline,
the decline appears to be getting smaller and trending closer to flat; and 2) company sales are likely to outpace
production driven by improved product mix (i.e., a greater mix of larger, higher-content C, D, & E segment vehicles vs.
smaller, lower-content A & B segment vehicles).
•Structural Improvement in Operating Margin:TRW reported an operating margin of 7.5%, which was significantly
above its 3Q09 operating margin of 5.3% as well as its historic operating margin range of 4-5%. While we do not believe
greater than 7% operating margins are sustainable, TRW may be able to sustain margins 100-200 basis points above
their historical range. 4Q09 operating margin of 7.5% may have been driven higher by some non-recurring customer
settlements. Going forward, TRW will also face increased pension and OPEB costs, as well as increasing compensation
for its employees. Despite sales roughly equivalent to 4Q09, we are modeling 1Q10 operating margins of 6.6%. We are
modeling operating margins of 5.8% and 6.1% for 2010 and 2011, respectively.
•Tax Rate to Improve:As profitability improves across all regions, in particular North America, we are likely to see a tax
rate below the historical range of 40-45%. TRW has a historically high tax rate as a result of good profitability and being
a taxpayer in Europe and Rest of World, while not being able to take a tax benefit for losses in the United States, where
the Company incurs the majority of its debt burden and corporate costs. Going forward, structural changes to profitability
in the United States could make possible the use of substantial deferred tax assets, driving a lower tax rate, higher free
cash flow and better earnings. We are currently modeling a tax rate of 40% in 2010 and 39% in 2011.
•Net Debt Declining:TRW finished 4Q09 with net debt of $1.6 billion, down from $2.1 billion at the end of 3Q09. Going
forward, we believe that TRW's capital markets activity is likely complete and net debt will decline through generation of
free cash flow. We are currently modeling free cash inflows of $400 million in 2010 and $380 million in 2011.
•Raising Estimates:Due to the combination of better than expected 4Q09 results and improved North American and
European light vehicle production assumptions, we are raising our earnings estimate to $2.67 from $1.76 (First Call
consensus $1.86) for 2010. We are introducing an earnings estimate of $3.40 (First Call consensus $2.61) for 2011.
VALUATION
Our $34 price target is based on a P/E of 10x our 2011 earnings estimate of $3.40. TRW is currently trading near 8x our
2011 earnings estimate of $3.40. From 2005-2008, TRW traded at an average 12-month forward P/E of 12x.
RISKS
February 26, 2010 Morning Call Summary - First Edition
Page 4
The most significant risk that could impede the stock from reaching our price target would be a substantial decline in
global light vehicle production.
February 26, 2010 Morning Call Summary - First Edition
Page 5
Diamond Foods, Inc. (DMND) — Akshay S. Jagdale 917-368-2317 [e-mail], Adam
Josephson [phone] [e-mail]
Diamond Foods (DMND-NASDAQ): Acquires Kettle Foods and Reports 2Q10 Results.
Rating BUY
Price $38.71
12-Mo. Price Target $45.00
Market Cap $648.8
Trading Volume 142
Revenues(mm)$570.9
2011E $2.22
2011 P/E 17.4x
2010E $1.88
2010 P/E 20.6x
2009A $1.47
Book Value/Share $11.28
Next Quarter April
Next Quarter E $0.24
FC Mean Quarter $0.22
FC Mean 2011E $2.20
FC Mean 2010E $1.83
Yield 0.5%
Last night, BUY-rated DMND announced the $615 million acquisition of Kettle Foods and its 2Q10 results.Kettle
Foods is known for its premium priced all-natural chips that come in a wide variety of flavors (28 to be precise), and under
its previous owner Lion Capital grew revenue at a roughly 20% CAGR and profit at about a 30% CAGR since 2006. Kettle
has approximately 3% of the U.S. chips market, and its strategy is to position itself as a natural product and to compete
against regional chips makers rather than Frito-Lay. Kettle uses third party distributors, warehouse delivery and has
alliances with DSD networks.
According to DMND's release, on a pro forma basis, Kettle would add more than $250 million in revenue and nearly
double its EBITDA; we estimate Kettle would add about $60 million in EBITDA. We further estimate DMND is paying
roughly 2.5x sales and approximately 10x EBITDA; for perspective, DMND is trading at about 12x our NTM EBITDA
estimate and paid around 10x for Pop Secret. At first glance, we do not consider this price cheap, but we believe DMND is
acquiring a strong and fast-growing chips brand for which a premium multiple is warranted. We believe DMND should be
able to derive significant benefits from this transaction: Kettle Foods will more than double DMND's snack business, giving
DMND more clout with grocery stores and opportunities for cross-promotional spending. (All three products are sold in the
snack aisle at grocery stores.) Two additional opportunities exist, in our view. One is that Emerald has a strong presence
on the east coast while Kettle is well-positioned in the west, which suggests to us an opportunity for DMND to use its
respective sales departments and distribution networks to sell more products in each region (nuts in the west, chips in the
east). Another is that all Emerald products are delivered to customer warehouses (not directly to stores) and have to meet
certain sales/volume minimums. In many instances, smaller customers (mom and pop grocery stores, etc.) are unable to
meet these minimum thresholds. Combining Emerald with Kettle could help substantially in this regard, because Kettle
sells product to many such small customers through third party distributors.
In our view, some key questions regarding the deal are as follows: how long can a brand this size continue growing at a
double-digit pace? What growth is DMND expecting from this brand in future years? Precisely what are the revenue
synergies that DMND hopes to extract from the combination of these three products?
DMND expects the deal will be EPS-accretive in FY11(it just reported 2Q10 results) after accounting for increased
marketing support and financing costs excluding deal and integration costs. The Company plans to fund the deal in part
with a new five-year $600 million credit facility, a share offering and cash on hand. The Company guided for pro forma
FY11 EPS in the range of $2.25-$2.35 (consensus is at $2.20), which we estimate represents roughly 6% accretion
($0.11/share) from the Kettle deal, excluding deal and integration costs. Our accretion estimate is based on a debt/pro
forma EBITDA ratio assumption of about 4.5x, and does not take into account any synergies. Another pertinent question is
what hurdle rate the Company is using for this deal.
DMND also pre-released its 2Q10 results in conjunction with the Kettle announcement: it posted adjusted EPS of $0.48
(slightly topping the consensus estimate of $0.47 and ours of $0.45) and raised its FY10 guidance. Sales were well ahead
of our estimate (added $0.05/share relative to our estimate) and EBIT was largely in line with our estimate despite higher
than expected advertising expense ($4 million, or $0.16/share higher than we had expected). DMND's EPS guidance
increased from $1.75-$1.83 to $1.79-$1.83 (the bottom end came up by $0.04) and, more importantly, its snack net sales
guidance went from $220 million-$230 million to $230 million-$240 million (up $10 million, or 4.4%). DMND reported that
Emerald's grocery store sales grew 53 weeks in the 52 weeks ended January 23, 2010, marking a continuation of
Emerald's recent substantial growth. Emerald sales were helped by greater distribution of "high-velocity" items in grocery
and better penetration at mass merchandisers and drug stores.
VALUATION
Our FY10 and FY11 EPS estimates remain $1.88 and $2.22, respectively, which represent 28% and 18% growth. Our
price target of $45 implies a 24x multiple on our FY10 estimate and a 20x multiple on our FY11 estimate; we believe these
February 26, 2010 Morning Call Summary - First Edition
Page 6
multiples are reasonable given DMND's growth prospects (PEG ratio of 0.9x). On a NTM consensus EPS estimate basis,
DMND is trading at 21x, compared to its peer group of 13.5x.
Risks
Lack of pricing power as a result of competitive pressure, higher than expected corn prices, and slower than expected
growth in Emerald snack nuts are three of the primary risks that could impede the shares from achieving our price target.
February 26, 2010 Morning Call Summary - First Edition
Page 7
OMNOVA Solutions Inc. (OMN) — Michael J. Sison [phone] [e-mail], Douglas
Chudy, CFA [phone] [e-mail]
We have good confidence that OMNOVA Solutions (OMN-NYSE) can keep its earnings recovery on track given
our belief that expanded levels of profitability are sustainable in Performance Chemicals, with good leverage to
recoverable normalized volumes, and that the Decorative Products business should be firmly profitable in FY10.
We are reiterating our BUY rating and $9.00 price target.
Rating BUY
Price $6.15
12-Mo. Price Target $9.00
Market Cap $271.2
Trading Volume 363
Revenues(mm)$869.4
2010E $0.80
2010 P/E 7.7x
2009A $0.61
2009 P/E 10.1x
2008A ($0.05)
Book Value/Share $1.18
Next Quarter February
Next Quarter E $0.10
FC Mean Quarter $0.10
FC Mean 2010E $0.78
FC Mean 2009A $0.61
Yield 0.0%
•1Q10E - On Track:We believe OMN will buck its historical trend of losses in its seasonally weak 1Q. We see EPS at
$0.10 vs. $0.00 last year, with a good rebound in volumes up 10% year-over-year. The Performance Chemicals
business should remain firmly profitable, despite rising petrochemical costs, with operating margins at 8% during the
quarter.
•Performance Chemicals - Healthy:With recent consolidation in the SB latex industry, we believe operating margins
are sustainable in the 10-15% range over the next business cycle. OMN is the only player fully dedicated to serving the
industry, given Dow is looking to divest its SB latex franchise. OMN and Dow combined garner close to 80% market
share in North America.
•Decorative Products - Struggling:Commercial Wall Coverings will likely continue to struggle, but Coated Fabrics and
Decorative Laminates are making progress with cost savings, growth in Asia and market share gains. Wall Covering will
likely need some heavy restructuring to get operating margins to healthy levels. We see segment operating margins
positive in FY10 at 3%, despite very weak demand in Commercial Wall Coverings.
•FY10E - Positive Growth:We believe OMN can keep its earnings recovery on track, with EPS improving to $0.80 in
FY10 vs. $0.61 in FY09. We see free cash flow generation at the $30 million level, with the net debt/leverage ratio at
very healthy levels around 2.0x.
•Earning Power - FY12E:With low single-digit volume growth beyond FY10, we believe OMN has earnings power of just
more than $1.00 per share, or EBITDA of $80 million+.
VALUATION
On a seven-year historical basis, OMN has traded in an average EV/EBITDA multiple low and high range of 7.4-11.0x. At
current levels, the stock trades at an estimated FY10 EV/EBITDA multiple of approximately 5.3x, well below historic levels.
Our 12-month price target of $9.00 is based on a 7.5x multiple on our FY10E EV/EBITDA multiple.
Risks
Primary risks that could impede the stock from reaching our price target include rising raw material costs (natural gas and
crude oil prices), no recovery in industrial production-related end markets, irrational competition, stalled end market
recovery and a "double-dip" economic scenario playing out over the next year.
February 26, 2010 Morning Call Summary - First Edition
Page 8
Applied Industrial Technologies, Inc. (AIT) — Jeffrey D. Hammond [phone]
[e-mail], Joshua C. Pokrzywinski [phone] [e-mail]
Applied Industrial Technologies (AIT-NYSE; BUY - $28): Takeaways from Management Meetings - Positive
Catalysts Taking Shape; Competitive Pricing Firming Up as Demand Finds Footing; Some Players Still Irrational,
but Supplier Inflation Likely to Stem the Tide of Discounting; End of Destocking Should Support Return to
Rebates in FY11; Maintaining Our FY10E of $1.10, FY11E of $1.60; Improved Earnings Visibility, Attractive
Valuation Support Positive Thesis; Reiterating BUY Rating and $28 Price Target.
Rating BUY
Price $22.59
12-Mo. Price Target $28.00
Market Cap $966.4
Trading Volume 175
Revenues(mm)$1,923.1
2011E $1.60
2011 P/E 14.1x
2010E $1.10
2010 P/E 20.5x
2009A $1.52
Book Value/Share $8.54
Next Quarter March
Next Quarter E $0.28
FC Mean Quarter $0.30
FC Mean 2011E $1.50
FC Mean 2010E $1.14
Yield 2.7%
We recently had the opportunity to spend time with AIT's Chief Financial Officer, Mark Eisele, meeting with
investors and walked away with our positive thesis on AIT intact.We continue to believe that AIT will generate strong
leverage amid an industrial recovery, which appears to be underway, and hasten a return to (and beyond) its prior peak
margins. Moreover, we believe that management's cautious tact over the past several quarters has resulted in
well-managed investor expectations, leaving room for upside.
As a number of catalysts begin to fall into place, namely abating competitive pricing pressure and a return to supplier
discounts, we believe AIT is poised to return to earnings growth. In light of improved earnings visibility and what we view
as attractive valuation at the start of the industrial cycle (~14x P/E on FY11E vs. historical range of 12-20x), we continue to
appreciate the developing recovery at AIT. As a result, we are reiterating our BUY rating and $28 price target.
Competitive pressures finding some relief.Industrial distribution markets have been marked by heightened competition
during the downturn, as a slow pace of activity at customers leaves excess time to price shop MRO supplies and irrational
players are willing to lock in aggressive point-of-sale pricing for longer periods (18 months vs. typical 12-month window;
despite the looming inflation threat). That said, we get the sense that a rising tide in capacity utilization metrics has helped
to firm up pricing over the past several weeks. As several of AIT's major competitors are running breakeven to low
single-digit operating margins, we believe pricing will continue to trend upward, particularly given a number of increases by
key suppliers.
Regarding the cost side of the equation, the give-and-take between distributors and suppliers regarding the terms of
volume rebates is always difficult; however, we believe that AIT will be poised to meet rebate benchmarks by FY11. While
there are a number of puts and takes around timing (as inventory sell-through likely takes one quarter to realize the P&L
benefit) and negotiation of rebate levels, the fact that AIT's purchases will likely be up considerably in FY11 (~20%, largely
end of destocking) should auger well for margin trajectory next fiscal year.
Getting more constructive on capital deployment.Like many distributors, AIT runs a conservative balance sheet;
however, given that the Company currently maintains a net cash position (-6% net debt-to-capitalization), we would
anticipate a more aggressive deployment policy over the coming quarters. While working capital investment for the
recovery is crucial, we believe AIT has adequate flexibility to pursue a number of options simultaneously. To that end, we
get the sense that management is considering a resumption of share buyback activity and a dividend increase
($0.15/quarter since September 2007) over the coming quarters. Additionally, we believe the acquisition pipeline has
heated up, as a large number of targets in 2009 proved elusive due to seller expectations but have recently become more
agreeable.
VALUATION
At current levels, AIT shares are trading at 14.1x P/E based on our FY11 estimates. Our $28 price target assumes a 17.5x
P/E on our FY11E; this compares to its historical range of 12-20x P/E.
RISKS
Risks that could impede the stock from achieving our price target include: 1) a prolonged downturn in the industrial
economy; 2) price deflation; and 3) management execution.
February 26, 2010 Morning Call Summary - First Edition
Page 9
Cogdell Spencer Inc. (CSA) — Karin A. Ford [phone] [e-mail], Jordan Sadler (917)
368-2280 [e-mail], Austin Wurschmidt [phone] [e-mail]
We expect Cogdell Spencer (CSA-NYSE) to react favorably to news that the Company has initiated a review of
strategic alternatives. While not "currently engaged in any negotiation for a change of control transaction," we
view management's willingness to explore opportunities as a positive step toward potentially closing the value
gap between the stock price ($6.50 per share) and NAV ($7.00 per share, assuming a conservative $60 million
valuation for Erdman). 4Q results were solid, as normalized FFOM of $0.16 was $0.03 above consensus and $0.04
above our estimate. We were encouraged that the beat was driven by a 24% increase in Erdman's fee income.
Following two solid consecutive quarters for Erdman, we were surprised to see disappointing 2010 normalized
FFOM guidance of $0.42-$0.50, which is 15% below consensus at the midpoint. Cogdell's core MOB portfolio
performed in line with our expectation; occupancy increased 90 bps sequentially. In our view, CSA's valuation is
attractive with the stock trading at a 6% discount to the health care REITs on a 2010 AFFO multiple basis and at a
7.8% implied cap rate on the medical office portfolio assuming a $60 million valuation for Erdman. We are
maintaining our BUY rating and $8 price target.
Rating BUY
Price $6.50
12-Mo. Price Target $8.00
Market Cap $325.5
Trading Volume 281
Revenues(mm)$77.8
2010E $0.56
2010 P/FFO 11.6x
2009A ($1.75)
2009 P/FFO NM
2008A $1.22
Book Value/Share NA
Next Quarter March
Next Quarter E $0.12
FC Mean Quarter $0.13
FC Mean 2010E $0.54
FC Mean 2009A $0.77
Yield 6.2%
4Q09 FFO beats forecasts.CSA reported 4Q09 headline FFOM of $0.17/share and normalized FFOM of $0.16/share,
excluding a one-time settlement of escrow funds from the Erdman acquisition, partially offset by an impairment charge and
$2.6 million of fees related to a strategic review in the quarter. The normalized result was $0.03 above consensus and
$0.04 above our forecast. The variance with our estimate stemmed primarily from better than expected Erdman income.
Guidance is light.Management provided disappointing 2010 FFOM guidance of $0.42-$0.50/share, which is 15% below
consensus of $0.54 at the midpoint; we would expect estimates to come down. The release did not provide any
assumptions underlying guidance, though we suspect that the swing factor is likely Erdman fee income for the year. We
will update our model and thesis after the Company's conference call.
Strategic review commences.We were encouraged to see that Cogdell's management engaged in a strategic
alternative review process in 4Q09. We suspect that the process may include a change of control, dispositions and
acquisitions, and business and portfolio combinations, which could result in value creation for CSA shareholders. Although
the stock has outperformed thus far in 2010, up 14.5% vs. the RMZ up 4.3%, there remains a valuation gap between
CSA's stock and its NAV, as well as its peers. Applying a $60 million asset value for Erdman (based on a 3x multiple on
$20 million of EBITDA), we estimate CSA's core portfolio is trading at a 7.8% implied cap rate today. Cogdell purchased
Erdman for $250 million in March 2008.
Recent cap rates for on-campus medical office building transactions have been in the range of 7.5-8.0%. If we value
Erdman using the 5.5x EBITDA multiple that public engineering and construction companies trade at today, the implied
cap rate on CSA's medical office portfolio would improve to 8.5%. We suspect that there are several well-capitalized public
and private REITs interested in increasing their exposure to medical office buildings; CSA's development and operating
platform is also likely attractive.
Dispositions could prove positive as well. If CSA sells medical office assets, this could demonstrate valuation to the
market and create positive spread investment opportunities between cap rates in the 7% range vs. development yields
above 9% for CSA. A potential sale of Erdman could also remove some uncertainty overhanging the stock; that said, the
timing for an Erdman sale does not seem ideal, since there could be significant upside if health care systems restart
expansion plans as the economy recovers and the reform overhang dissipates.
Erdman has another solid quarter. It appears that the design/build fee income from CSA's Erdman subsidiary improved
in 4Q09 as a result of both top-line growth and further margin improvement. Design build EBITDA (after SG&A) was $7.4
million, an increase of 24% from 3Q's $4.1 million. Erdman's revenues were up 5% sequentially in the quarter, with a 720
bps margin improvement from 9.9% to 17.1%. We will seek more color on trends among Erdman's hospital clients,
including their willingness to expand and views on health care reform.
February 26, 2010 Morning Call Summary - First Edition
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Sequential occupancy reverses trend.CSA's overall core portfolio performed in line with our forecast. CSA's portfolio
occupancy increased 90 basis points sequentially to end 4Q09 at 91% following three consecutive quarters of decline, but
average rent fell 10% to $22.15 psf. We will be interested to hear whether the demand outlook for medical office space
has been negatively impacted by the apparent demise of health care reform, given the previous prospects for a boost in
primary care physician providers and outpatient procedures.
Development and dispositions.The Company remained careful with its capital and did not start any new development
activity in 4Q09. As a result of its strategic review process, the Company put one asset, the Harbison MOB, up for sale in
4Q09; CSA took a $1.4 million impairment on the asset, which now has a book value of $2.2 million.
VALUATION
We value CSA on a relative and absolute basis.
On a relative basis.
•AFFO multiple.CSA is currently trading at 14.1x our 2010 AFFO estimate, a 6% discount to the health care sector
average.
•Implied cap rate.CSA trades at an implied cap rate of 7.8%, which is 80 bps above the health care sector average.
On an absolute basis.
•NAV analysis.Our estimate of CSA's current NAV is $6.97 (cap rate of 7.5%), and the stock currently trades at a 7%
discount to its NAV vs. the health care sector's 31% premium.
•Price target.Our $8 price target reflects a 10% premium to our NAV estimate.
RISKS
Risks that could impede the stock from achieving our price target include a change in the regulatory environment for
health care, a change in the economic environment in CSA's core markets and an increase in new supply. Additional risks
are detailed in the Company's SEC filings.
February 26, 2010 Morning Call Summary - First Edition
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KeyBanc Capital Markets Inc.Disclosures And Certifications
Important disclosures for the companies mentioned in this report can be found at https://key.bluematrix.com/bluematrix/Disclosure.
Reg A/C Certification
The research analyst(s) responsible for the preparation of this research report certifies that:(1) all the views expressed
in this research report accurately reflect the research analyst's personal views about any and all of the subject
securities or issuers; and (2) no part of the research analyst's compensation was, is, or will be directly or indirectly
related to the specific recommendations or views expressed by the research analyst(s) in this research report.
Rating Disclosures
Distribution of Ratings/IB Services
KeyBanc Capital Markets
IB Serv./Past 12 Mos.
Rating Count Percent Count Percent
BUY [BUY]164 44.60 35 21.34
HOLD [HOLD]198 53.80 50 25.25
SELL [UND]6 1.60 1 16.67
Rating System
BUY - The security is expected to outperform the market over the next six to 12 months; investors should consider adding the security
to their holdings opportunistically, subject to their overall diversification requirements.
HOLD - The security is expected to perform in line with general market indices over the next six to 12 months; no buy or sell action is
recommended at this time.
UNDERWEIGHT - The security is expected to underperform the market over the next six to 12 months; investors should reduce their
holdings opportunistically.
The information contained in this report is based on sources considered to be reliable but is not represented to be
complete and its accuracy is not guaranteed. The opinions expressed reflect the judgment of the author as of the date of
publication and are subject to change without notice. This report does not constitute an offer to sell or a solicitation of an
offer to buy any securities. Our company policy prohibits research analysts and members of their families from owning
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other employees, and members of their families may have positions in these securities and may, as principal or agent,
buy and sell such securities before, after or concurrently with the publication of this report. In some instances, such
investments may be inconsistent with the opinions expressed herein. One or more of our employees, other than the
research analyst responsible for the preparation of this report, may be a member of the Board of Directors of any
company referred to in this report. The research analyst responsible for the preparation of this report is compensated,
based in part, on investment banking revenue which may include revenue derived from the Firm's performance of
investment banking services for companies referred to in this report, although such compensation is not based upon
specific investment banking services transactions for these or any other companies. In accordance with industry
practices, our analysts are prohibited from soliciting investment banking business for our Firm.
Copyright 2010, KeyBanc Capital Markets Inc. All rights reserved.
Securities, mutual funds and other investment products are:
•Not Insured by the FDIC.
•Not deposits or other obligations of, or guaranteed by KeyBanc Capital Markets Inc., KeyBank, N.A. or any of
their affiliates.
•Subject to investment risks, including possible loss of the principal amount invested.
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