Monday, June 19, 2006

Calls of Note Part 5

- Banc of America believes that connector demand remains solid in most end markets and are at least within expectations. While raw material costs continue to provide a headwind in C2Q06, they believe the cost environment is more or less in line with Amphenol (NYSE:APH) and Molex (NYSE:MOLX)'s expectations, while price increases and the recent reversal of commodity price trends may also help. In their opinion, the recent sell-off provides an attractive buying opportunity for both APH and MOLX.

PH and MOLX trade at 18x and 20x 12-month forward P/E (pre-options), compared to post-bubble average of 19x and 22x. Historically, APH trades at 15-25x 12-month forward P/E, with an upward bias recently, and MOLX at 20-25x. We believe recent share sell-off makes valuation more attractive for both stocks.

Notablecalls: Not actionable but good to know category

- Banc of America notes that over the last several weeks, they surveyed 130 Red Hat (NASDAQ:RHAT) partners across all geographies. Firm's goal with this survey is not to try to 'call' the quarter, but rather to help investors get a better sense of the trends around Red Hat's business. While some of RHAT's larger OEM's, a driver of substantial rev, did not participate, they believe this survey still provides a solid snapshot of some of the trends impacting RHAT's business.

Overall, partners remain upbeat and expect their Red Hat biz to grow by +31%, on average in CY06, compared to firm's current CY06 revenue growth estimate of 35%. Pricing pressure from customers was cited as the greatest risk to Red Hat's revenue stream by 35% of the partners, and more than 50% of the partners felt that pricing for RHEL either had to come down or that it would face some pressure from customers down the line.

While Red Hat's partners seem to confirm the company's noteworthy growth opportunity in the core biz in '06, the firm would have liked to see an indication that the biz is accelerating above their forecasts, which is what they believe may be necessary to break the stock out of its current trading range ($25-30). Maintains Neutral.

Notablecalls: RHAT may see some pressure following the call as most investors expect the biz the be accelerating above analyst forecasts. With the shares trading 68x FY06 and 48x FY07 EPS estimate, expect to see some sellers.

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