Tuesday, August 08, 2006

Calls of Note Part 1

- Banc of America is cautious on Dell Computer (NASDAQ:DELL) lowering their tgt to $22 from $25 as firm's 2008 EPS estimate goes below consensus (from $1.61 to $1.20. Consensus $1.30).

Firm notes that recent strength in Dells stock, despite the negative pre-announcement, suggests that investors view the most recent of many earnings misses as the bottom. However, the firm thinks that the weakest areas of the PC market are corporate (esp. desktops) in developed markets such as the US, Western Europe and Japan, and they expect this trend to continue for the next several quarters. Moreover, Dell has disproportionate market exposure in these markets which are particularly weak.

Further, they don't think Dell's to be announced AMD based systems solve Dell market/geographic challenges (too much exposure to corporate and developed countries, not enough to consumer and developing countries). Hence, they do not think that Dell will see a snap back in either revs or margins, and believe that investor expectations assume such a snap back.
Firm notes a trend over the past 18 months that Dell's stock has had several positive moves after negative pre-announcements or poor quarters, based on investor expectations of finding a bottom. These expectations or scenarios have ultimately proved to be disappointing.

Finally, with the pending launch of Vista, they believe that HPQ is a better play than Dell, since Dell has a relatively small consumer exposure (less than 20%), compared to HP (~40%).
Maintains Neutral.

Notablecalls: On one hand BAC's call makes sense. The stock has gone vertical lately and these moves rarely hold. On other hand I do think Vista will prove to be a major force that will initiate an upgrade cycle. Most PC's can't handle Vista (2 GB of RAM needed). Think in the very short-term the risk continues to be to the downside. Would risk $.50.

- JP Morgan comments on the resignation of Omnivision's (NASDAQ:OVTI) co-founder and head of sales, Raymond Wu, saying it will likely weigh on OVTI stock today.

Mr Wu resigned to pursue other interests. Based on conversations with OVTI representatives, the firm believes Mr Wu's resignation was not anticipated, though they have expressed the view that the company may have outgrown his skill-set. His responsibilities will be divided between Jess Lee (VP, mainstream products) and Hasan Gadjali (VP,advanced products).

Mr Wu still has financial skin in the game through earnings. Mr Wu's announced resignation comes after the close of F1Q07 and will take effect on August 31st, after earnings have been reported. As of June 26th, Mr Wu owned ~245,000 shares (directly and via a trust) and he is restricted from selling shares (ex 10b5-1) until his resignation is effective.

According to JP Morgan the resignation does not signal a deterioration of OVTI's immediate prospectsw. However, OVTI's organization and procedures are immature, and the loss of a key executive introduces longer-term execution risk, in firm's view.

They are maintaining Overweight Rating. In their view the risks associated with OVTI are overly priced in with the stock trading at 9.8 times CY07 PF EPS of $1.88, a 49% discount to the mean of coverage. OVTI is sitting on $6.19 per share of cash and trades at an ex-cash P/E multiple of 7.2 times CY07E cash PF EPS estimate of $1.70.

Notablecalls: I've never seen these things severly hurt a stock. Think one can be an opportunistic buyer around recent lows ($17ish).

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