Thursday, September 21, 2006

Calls of Note Part 4

- Citigroup notes that DHS is expected to announce the award for the Secure Border Initiative contract to the Boeing team, which includes infrared suppliers DRS and Kollsman. This is a multi-year $2 billion contract. 2007 impact should be over $100 million.

The award is a potential negative for FLIR Systems (NASDAQ:FLIR), which dominates the border security market. SBINet should enable DRS and Kollsman to gain share. The firm had observed that given its incumbent position, FLIR had more downside than upside in SBINet.

They expect disappointments to continue (particularly in Q4) and reiterate Sell rating.

Notablecalls: Not sure this is news. But still, I'd watch FLIR in case it starts rolling over.

- Friedman, Billings, Ramsey is transitioning coverage of Broadcom (NASDAQ:BRCM) with an Outperform rating. In addition, they are adding BRCM to the FBR Top Picks list and establishing a $38 price target. In firm's view, most of BRCM's recent top-line disappointment is related to excess inventory as opposed to long-term market growth or BRCM's competitive positioning. They believe that 2007 consensus estimates are likely too conservative. With the stock trading at 19x pro forma FY07 EPS (compared with a trough of 18x in 2004), they believe downside is limited, with multiple expansion likely once growth resumes.

Firm notes that BRCM has grown in excess of 11% in each year of its existence, except 2001. Their bottoms-up forecast analyzes BRCM's prospects by market segment. Believes their above-consensus estimates (17.6% top-line growth, $1.50 EPS) are reasonable given the markets to which BRCM is exposed.

Firm's estimates assume 43% growth in WLAN (due to 802.11n penetration), 45% growth
in Bluetooth (achievable through only a 10% increase in handset penetration), and 13% growth in set top/DTV (on growth in HD, DVR, and new DTV market). They assume only 6% growth in handheld, with Samsung volume offsetting a possible loss of the video iPod; however, upside exists since achieving even a small 1% share would add 4%-5% to BRCM's top line.

Notablecalls: Gutsy call from FBR. I like that. Expect to see some buy interest in BRCM today.

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