Friday, Friedman, Billings, Ramsey downgraded Southwestern Energy Co. (SWN) shares to Market Perform from Outperform with a price target of $40, based on valuation. The brokerage increased its 2008 EPS estimate to $1.38 from $1.35, and its 2009 estimate to $1.68 from $1.66.
While analyst Amir Arif continues to like the long-term outlook, he believes that the current valuation is full, the stock is ahead of itself in the short term, and he would look for a pullback to the $35 level before becoming more enthusiastic about the risk/reward over the coming 12 months.
The analyst said that the recent driver for the stock has been improving gas prices and improving initial production rates as the company began increasing its horizontal laterals.
The analyst noted that additional short-term upside, at these levels, on gas prices is most likely limited, and although IP rates can improve further, the marginal improvements will not be, as meaningful, and operating improvements are needed to justify the current valuation.
While the analyst is comfortable that results would improve over time, he believes that the stock is ahead of itself, and better entry opportunities will materialize in the coming 3-6 months.
Currently, the stock is up $0.67 or 1.54% and trading at $44.17.
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