Thursday, July 06, 2006

Calls of Note Part 3

- Piper Jaffray is lowering their tgt on Getty Images (NYSE:GYI) to $71 from $83 following a survey of 197 U.S. image buyers. Getty perceived to have the best overall offering, but pricing appears to be a serious concern - some buyers reducing usage.

When asked how much more buyers would be willing to pay for RF imagery, 18% indicated they have already reduced their usage because of high prices and 49% said they will look elsewhere if Getty raises prices again. Similar response rates were given for RM imagery.

Increasing competition, threat from Micropayment sites, and limited traction from Getty's subscription product, leaves the firm increasingly concerned about Getty's U.S. growth prospects.

35% of buyers said they use micropayment sites today and 30% said they would consider using them in the future. We believe the micropayment sales could potentially cannibalize Royalty Free sales. Additionally, 53% of buyers indicated that they have seen increased promotional activity over the previous 6 months.

Notablecalls: Expect to see downside in GYI stock today and possibly over the next weeks. I wish Piper had come out with the note couple of months ago.

- Bear Stearns thinks ortho multiples are close to a bottom (16.7x NTM EPS) - the stocks may rebound off of the recent lows considering that most of the macro issues are known. However, they continue to believe that multiple expansion will be unlikely over the short term due to the lack of obvious positive catalysts. Current valuations may represent attractive entry points for longer term investors but in firm's opinion, the group may be rangebound due to overhanging concerns about future earnings and pricing power.

Firm's view on recon pricing may differ from consensus. They believe pricing is in a cyclical trough with US pricing a function of 3 factors: 1) the industry's appetite to discount in order to gain share, 2) geographic competitive environments and 3) surgeon preferences. They do not believe collective bargaining efforts by hospitals or declines in financial incentives/consulting contracts to surgeons will have a measurable impact on pricing. Firm continues to project WW recon market growth of 8% to 9%.

In an attempt to put current valuations in perspective, they correlated historical ortho multiple troughs with the corresponding industry operating environments. The current environment does not appear to be nearly as bad as the mid-1990's when ortho traded at a ~15.7x 10 year low and pricing was lower than it is today.

For exposure to ortho investment, firm's single Outperform recommendation remains Stryker (NYSE:SYK). SYK's top line is only 38% exposed to recon sales and they believe performance of the non-recon businesses (Spine, Trauma, MedSurg) will continue to offset the drag from ~8% recon growth. In addition, they believe there is enough P&L leverage to bridge 12% top line to 20% EPS growth in each of the next two years.

Notablecalls: Not actionable but good to know category. I think the ortho names are buyable. I'm just not sure when. Expect to see some of the co's warning in the coming month.

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