Wednesday, July 19, 2006

Calls of Note Part 2

- Merrill Lynch says that after conversations with several industry insiders at this week's Farnborough Air Show, they are comfortable reaffirming our belief Goodrich (NYSE:GR)'s supply chain remained in good shape during 2Q and appears, from firm's perspective, "well oiled" going into 2H06. Firm believes the pullback (stock down 2.5% YTD and lagging S&P Aerospace Index by 13% YTD) and current valuation create a good buying opportunity ahead of the quarterly release on July 27, pre-market. 2Q estimates may prove conservative.

Firm points out that presently their 2Q EPS estimate of $0.58 for GR is below the Street mean of $0.60. They believe the company is capable of delivering upside to both our and the Street's estimates. Recent, aforementioned conversations provided us added comfort with our forecast for operating margins and mitigated concerns over material supply chain weaknesses in GR's operating segments.

GR is trading at a notable 2-multiple turn discount on an EV/EBITDA basis versus its aerospace peers (GR trading at 6.5X EV/ FY07 EBITDA estimate vs. 8.6X peer average). Firm believes with solid operations and room for upside to full-year forecast, the valuation looks compelling at this point.

Notablecalls: Bold call. Think it can bounce but wouldn't hold below recent lows.

- Thomas Weisel Partners comments on FoxHollow Tech (NASDAQ:FOXH) noting recent diligence with high-volume physicians indicates that referrals continue to increase and SilverHawk procedures continue to grow. Firm expects continued demand for SilverHawk as their clinician contacts have indicated that: 1) procedure volumes continue to increase as a result of a rise in referrals as well as increasing patient and clinical awareness; 2) it remains the preferred therapy as it provides the ability to salvage a vessel without the risk of significant injury, it removes the plaque, and it does not limit re-treatment options; 3) new product introductions will likely see solid adoption; and 4) sales attrition continues but appears manageable.

That being said, although the relative number and rate of newly added sales reps, sales attrition, and difficult comparables are pressuring top-line growth, they believe, and diligence supports, that growth will settle out a solid normalized rate of 25-30% based on strong procedure volumes and utilization.

According to the firm. it is important to note that although there was some concern regarding the Merck relationship given that 2Q06 revenue was pushed out, diligence indicates the relationship remains intact and could prove fruitful in the intermediate term.

Valuation: At 2.3x 2007 estimate of $272mn versus 2.6x 2007 estimates for the small-cap group, valuation remains attractive. Firm believes FOXH shares should trade at a 20-40% premium to the small-cap group.

Notablecalls: Looks like it's bounce time for FOXH. I would not hold below yesterday's low.

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