Thursday, Credit Suisse downgraded American Reprographics Co. (ARP) shares to Neutral from Outperform with a price target of $10.
Analyst McVeigh said that balanced risk-reward of +15%/-10% drives Neutral rating from Outperform. The analyst downgraded the stock based on what he believes is a more balanced risk-reward given the recent 185% gain from an extremely oversold position, versus +25% S&P 500 since March 11.
The analyst believes the period of outsized gains is mostly behind us near-term and would wait for a better entry point, given the 15% upside to his price target of $10. Both the strong first quarter free cash flow and reaffirmed 2009 free cash flow guidance has removed any overhang in the ARP stock over concerns about its debt covenants, which is more than reflected in the company's current valuation, in the analyst's opinion.
The analyst is not making any changes to his model, which suggests that American Reprographics can generate $65 million-$75 million of free cash flow in 2009, or 15%-18% yield. 2009 guidance for operating cash flow and EPS of $70 million-$90 million and $0.50-$0.75 was reaffirmed when American Reprographics reported first quarter on May 8.
The reaffirmed guidance reinforced the analyst's view that despite macro weakness and tight credit causing a severe, prolonged slowdown in both residential and nonresidential construction, management has executed efficiently.
Currently, ARP is down $0.31 or 3.78% and trading at $7.90.
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