Analyst Slaps ‘Sell’ Rating on Public Storage After Stock Rise

Since March, Public Storage Inc.’s stock has seen a steady increase, from around the $30 a share range to a 52-week high of $38.74 set on Sept. 4. Last week, with the stock still hovering near that price, Morgan Stanley analyst Greg Whyte who missed the rally with an “equal-weight,” or neutral, rating on the Glendale-based self-storage company cut his rating to “underweight,” the equivalent of “sell.”

The problem with Public Storage?

None, really, according to Whyte, except that its stock costs too much.

While “management is definitely achieving strong occupancy traction,” he said in his report, continued improvement in operating fundamentals is already built into the stock.

Public Storage has used a combination of discounts and advertising to increase occupancy levels at its self-storage facilities, Whyte said.

But it can expect further pressure on rents, high capital expenditures and lower margins going forward because consumers have been conditioned to expect discounts in the pricing of storage leases.

In issuing the downgrade, Whyte actually raised his price target on the stock to $32.50 a share. The company had long since blown through his previous $31 target.

The analyst also issued a cautious report last week on the entire real estate investment trust industry, based on current high valuations.

Community shopping centers and apartment REITs, in particular, were downgraded, including a cut in the rating of PS Business Parks Inc. to “equal-weight” from “overweight.”

Public Storage owns about 44 percent of PS Business Parks, which rents commercial and industrial storage space and sells insurance to tenants.

Kate Berry

Future Shocks

Things are definitely not looking up in the municipal bond market, according to Los Angeles money manager Payden & Rygel Inc., which issued its second-half outlook last week.

Payden is bearish on four out of the eight sectors it tracked, including tax-backed issuances, airports, higher education and health care. It gave a positive review to only one, water and sewer. The other three sectors, surface transportation, public power and housing, were rated stable.

“The themes of this outlook are familiar: insufficient revenues to support existing expenditures, rising health care and social services costs and reduced state aid,” the report said, adding that state and local governments continue to struggle with budget pressures while awaiting an economic recovery.

“State officials once again overestimated revenues in their forecasts and scrambled to close budget gaps at fiscal year end,” the report said.

In no sector did the political outlook for raising new money look positive, according to Payden.

To take one example, school districts are struggling with budget cuts but having a hard time finding replacement funding. Facing the Proposition 13 requirement of two-thirds voter approvals to raise taxes, 10 of 19 local school-funding proposals in California went down to defeat in May, the report noted including in wealthy Manhattan Beach, where private fund-raising efforts have been successful. In Hermosa Beach, a $300,000 school district shortfall was partially pared with a fund raiser, and officials there were planning to continue those efforts to stave off program cuts.

Anthony Palazzo

Cut Loose

GKM Ventures, a Los Angeles-based venture capital fund, has become independent after its New York-based affiliate, investment banking firm Gerard Klauer Mattison, was acquired by BMO Financial Group of Toronto.

GKM Ventures will continue to utilize the research staff at the newly formed Harris Nesbitt Gerard, and intends to tap into BMO Financial Group’s resources as well, said John Morris, the venture group’s managing director.

GKM Ventures will continue to focus its investments on later-stage information technology companies in California, he said.

Before the acquisition, GKM Ventures was affiliated with but not owned by Gerard Klauer Mattison.

Michael Thuresson

In the Chips

Conexant Systems Inc. is back in Orange County’s billion-dollar club, but can the chipmaker stay there?

In the past year, shares of Conexant have nearly tripled, bringing the company’s market value to $1.6 billion as of last week.

That could be as good as it gets.

“It will depend on whether they’re going to get upside for all those numbers,” said Drake Johnstone, an analyst who covers Conexant for Richmond, Va.-based Davenport & Co.

That’s analyst-speak for whether or not Newport Beach-based Conexant can beat Wall Street’s expectations with upcoming quarterly results.

After a long restructuring, Conexant’s quarterly conference calls have gotten less painful than they used to be, back when the company was bogged down in losses and slumping sales.

For the June quarter, Conexant reported a 14 percent rise in sales to $151 million from a year earlier. The company’s operating profit was $3.2 million, versus a $9.2 million loss a year earlier.

Dwight Decker, Conexant’s chief executive, has been beating the drum lately.

He recently told an industry trade magazine he’s looking to take on Irvine-based Broadcom Corp. and others in the chip market for high-speed modems, set-top boxes and other devices.

“We see ourselves competing with Broadcom or TI (Texas Instruments) or STMicroelectronics,” Decker said. “It might turn out over the next couple of years that there’s a lot of interest in exactly the kind of market that Conexant plans to focus on.”

But some analysts say they’re not so sure Conexant has many surprises in store.

“Conexant continues to derive approximately half of its quarterly revenues from analog modems, which is a slow-growth business,” wrote Brett Miller, an analyst with A.G. Edwards Inc., in a research note.

That’s pretty much where Conexant started out. The company, which spun off from what then was Rockwell International Inc. in 1999, cornered the market for analog modem chips in the early 1990s. Then came acquisitions and diversification, and, more recently, downsizing.

Orange County Business Journal