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Monday, July 31, 2006
Interesting Call of The Day - Marchex (MCHX)
Standford Financial Group's Clayton F. Moran is out with an interesting comment on Marchex (NASDAQ:MCHX) noting the stock has been cut in half due to: 1 nil a lack of financial upside to estimates; 2 nil the overall stock market weakness including a rotation away from technology; 3 nil seasonal slowness in Internet activity and stock performance; 4 nil concerns about a second quarter miss.
Moran believes the current stock price represents a great buying opportunity. Marchex will report on Tuesday August 8, after trading. He expects the results will be in-line with current street consensus (revenues of $32 million, OIBDA of $9.7 million and adjusted EPS of $0.11). This could result in a relief rally as some investors fear a miss.
The summer is the seasonally slowest period for Internet activity and Internet stock performance. We anticipate that this stock will begin to recover as investors turn their attention to the end-of-the-year holiday period, which will likely remind them that online, and especially search, advertising continues to grow rapidly.
Marchex is developing a local advertising network online through the integration of its zip code and direct navigation sites with its recently purchased open list local search engine. We believe that along with enhancements to its websites, the local orientation of many of the sites will drive growth over the next several years.
Marchex is a high-growth Internet stock trading at a nonilgrowth Radio multiple. Marchex is currently valued at only 11x 2006E OIBDA while mature, no-growth media assets like radio are valued at 10x. If the stock continues to languish, the analyst believes private-equity and/or other media companies may find it attractive.
His price target remains $25 per share. Recommends investors Buy MCHX at current levels.
Notablecalls: Looks like an interesting call.
Moran believes the current stock price represents a great buying opportunity. Marchex will report on Tuesday August 8, after trading. He expects the results will be in-line with current street consensus (revenues of $32 million, OIBDA of $9.7 million and adjusted EPS of $0.11). This could result in a relief rally as some investors fear a miss.
The summer is the seasonally slowest period for Internet activity and Internet stock performance. We anticipate that this stock will begin to recover as investors turn their attention to the end-of-the-year holiday period, which will likely remind them that online, and especially search, advertising continues to grow rapidly.
Marchex is developing a local advertising network online through the integration of its zip code and direct navigation sites with its recently purchased open list local search engine. We believe that along with enhancements to its websites, the local orientation of many of the sites will drive growth over the next several years.
Marchex is a high-growth Internet stock trading at a nonilgrowth Radio multiple. Marchex is currently valued at only 11x 2006E OIBDA while mature, no-growth media assets like radio are valued at 10x. If the stock continues to languish, the analyst believes private-equity and/or other media companies may find it attractive.
His price target remains $25 per share. Recommends investors Buy MCHX at current levels.
Notablecalls: Looks like an interesting call.
Calls of Note Part 5
- CIBC thinks Coventry's (CVH) stock should have been up on Friday, because it beat expectations handily on the strength of a much better than expected commercial MLR, and CVH's quarter displayed none of the pricing or cost issues discussed by Aetna that spooked the market on Thursday.
Pricing exceeded cost trends by 370 basis points this quarter; the huge positive spread should narrow over the rest of the year, but Coventry's guidance is conservative, since it assumes the spread essentially disappears over the next two quarters, and the firm sees no reason why this should occur.
Coventry sounded more optimistic about the competitive environment in Western Pennsylvania than it has in some time, a sharp contrast to Aetna's commentary on other markets. It's easy to make generalizations, but Blue Cross pricing strategies are different in every market.
Firm notes they would have liked to see CVH raise full-year guidance more, since 2Q operating metrics were so strong, but they recognize the company's history of conservative forecasts, and its desire for a few more months of data on the new PDP program, and the sustainability of lower cost trends. Reits Sector Outperformer and $67 tgt.
Notablecalls: Mixed feelings about this one. I think it may bounce but the move won't be big.
Pricing exceeded cost trends by 370 basis points this quarter; the huge positive spread should narrow over the rest of the year, but Coventry's guidance is conservative, since it assumes the spread essentially disappears over the next two quarters, and the firm sees no reason why this should occur.
Coventry sounded more optimistic about the competitive environment in Western Pennsylvania than it has in some time, a sharp contrast to Aetna's commentary on other markets. It's easy to make generalizations, but Blue Cross pricing strategies are different in every market.
Firm notes they would have liked to see CVH raise full-year guidance more, since 2Q operating metrics were so strong, but they recognize the company's history of conservative forecasts, and its desire for a few more months of data on the new PDP program, and the sustainability of lower cost trends. Reits Sector Outperformer and $67 tgt.
Notablecalls: Mixed feelings about this one. I think it may bounce but the move won't be big.
Calls of Note Part 4
- Goldman is adding Jabil Circuit (NYSE:JBL) to the Americas Conviction Buy List with a 6-month $28 price target. Jabil has had a strong track record of positive earnings revisions and execution. However shares have come under pressure due to "3 strikes": 1) a new restructuring program, 2) execution missteps, and 3) an ESO backdating investigation. Firm believes that shares of JBL have pulled back to levels that make it attractive if the company can get earnings back on track - they believe it can. Firm's $28 target price implies 21% upside from current levels. FY4Q2006 (August) earnings report in late September and a traditional 4Q rally should serve as catalysts to move shares higher.
Jabil will report FY4Q06 results on September 26, 2006. Management has set expectations that its 3 execution problems in FY3Q06 would continue through the end of fiscal 2006 with improvement in fiscal 2007. Goldman believes that the company will positively surprise on these operational issues potentially leading to EPS upside relative to guidance, consensus and estimates. Second, Jabil has rallied in/around the fourth calendar quarter 8 out of the last 10 years, outperforming the S&P500 during all of those rallies.
Notablecalls: I would not be surprised to see a bounce in JBL.
Jabil will report FY4Q06 results on September 26, 2006. Management has set expectations that its 3 execution problems in FY3Q06 would continue through the end of fiscal 2006 with improvement in fiscal 2007. Goldman believes that the company will positively surprise on these operational issues potentially leading to EPS upside relative to guidance, consensus and estimates. Second, Jabil has rallied in/around the fourth calendar quarter 8 out of the last 10 years, outperforming the S&P500 during all of those rallies.
Notablecalls: I would not be surprised to see a bounce in JBL.
Calls of Note Part 3
- Soleil's Peter C. Friedland is out with a good call on Garmin (NASDAQ:GRMN) saying that despite disappointing Q2 results thus far from the PND group " TOM2, SIRF, NVT and TA6 " they believe these stocks have been affected by issues that shouldn't impact Garmin. In fact, they believe the key datapoint from these reports for Garmin is that NAVTEQ reported 40% sequential growth in Q2 PND unit volume.
Given that Garmin is a key NAVTEQ PND customer, and that the firm believes Garmin has held its own in market share during the quarter, they believe it is reasonable to assume that Garmin posted at least 40% sequential PND unit growth, which is well above the 20% in Soleil's model. Therefore, assuming the stronger PND unit volume, and factoring in a modest haircut to their numbers based on recent weakness in the overall recreational marine market, they believe Garmin should post Q2 revenue of at least $400 million and EPS of $1.00-$1.05, well above the consensus $378 million and $0.94.
Notablecalls: I'm not sure Soleil has the following to generate a meaningful bounce but I think the note provides a roadmap of what kind of number GRMN is expected to post.
Given that Garmin is a key NAVTEQ PND customer, and that the firm believes Garmin has held its own in market share during the quarter, they believe it is reasonable to assume that Garmin posted at least 40% sequential PND unit growth, which is well above the 20% in Soleil's model. Therefore, assuming the stronger PND unit volume, and factoring in a modest haircut to their numbers based on recent weakness in the overall recreational marine market, they believe Garmin should post Q2 revenue of at least $400 million and EPS of $1.00-$1.05, well above the consensus $378 million and $0.94.
Notablecalls: I'm not sure Soleil has the following to generate a meaningful bounce but I think the note provides a roadmap of what kind of number GRMN is expected to post.
Calls of Note Part 2
Bear Stearns comments on Whole Foods (NASDAQ:WFMI) saying they believe consensus EPS for 2007 remains at risk. By their estimates, the 2007 EPS of $1.66 ($0.06 above our est.) implies WFMI will realize margin expansion despite a planned acceleration in store openings combined with the prospect of moderating comp. Firm's $1.60 est assumes 20% sales growth (on 9.2% comp store sales) and a flat operating margin of 5.6%. 3Q06 $0.34 EPS estimate and 11.1% comp are in line with consensus.
Believes WFMI has benefited from strong macro factors that lessened price consciousness and increased aspirational spending. However, compelling evidence suggests all segments of consumer spectrum are moderating spending. Firm remains most concerned over the broader implications of a decelerating Target comp and the sustained traffic erosion occurring at most casual diners, which bodes poorly for WFMI customer base, in their opinion.
The premium valuation exposes stock price to further pressure as sales and earnings growth appears poised to decelerate. Current valuation ignores several risks (moderating mid- to high-end consumer, likelihood of a comp deceleration, gross margin and competitive pressures.) Finally, dramatic growth in foodservice has changed underlying business model, increasing the exposure to cyclical factors while adding operational complexity. Maintains Underperform.
Notablecalls: I like this call. I believe WFMI will end up lower today.
Believes WFMI has benefited from strong macro factors that lessened price consciousness and increased aspirational spending. However, compelling evidence suggests all segments of consumer spectrum are moderating spending. Firm remains most concerned over the broader implications of a decelerating Target comp and the sustained traffic erosion occurring at most casual diners, which bodes poorly for WFMI customer base, in their opinion.
The premium valuation exposes stock price to further pressure as sales and earnings growth appears poised to decelerate. Current valuation ignores several risks (moderating mid- to high-end consumer, likelihood of a comp deceleration, gross margin and competitive pressures.) Finally, dramatic growth in foodservice has changed underlying business model, increasing the exposure to cyclical factors while adding operational complexity. Maintains Underperform.
Notablecalls: I like this call. I believe WFMI will end up lower today.
Calls of Note Part 1
- Goldman Sachs notes Oracle CEO Larry Ellison continues to signal his intention to compete against Red Hat (NASDAQ:RHAT), most recently in a Forbes interview noting that Oracle can offer support for Red Hat Linux and has rights to redistribute the product. Firm continues to believe Oracle will soon announce intentions to redistribute a Red Hat compatible product, possibly for free and also offer support services for this product at a fraction of the price of Red Hat.
Firm would avoid Red Hat's stock until Oracle announces its Linux strategy. Delivering a Red Hat compatible Linux distribution makes Oracle even more of a competitive threat than delivering comparable technology or a different ("non-standard") distribution as Novell has done. Red Hat Enterprise Linux has over 80% market share. They believe Oracle is motivated to preempt Red Hat's progression up the infrastructure stack as a database and middleware vendor by disrupting Red Hat's business model but not harming the Red Hat Linux distribution which Oracle needs to be successful to counter Microsoft.
Notes their negative view on Red Hat seems to be a minority view among sell side analysts. Feel confident the bulls will be proven to have been overly bullish and to have disregarded the risks Oracle presents in this market. Maintains Sell.
Notablecalls: Mixed feelings about this one. On one hand its not news. On the other hand
Goldman has a large customer base and RHAT trades 55x 06 EPS and 40x 07 EPS. I want to see some weakness in RHAT before taking action. If this one starts rolling over it will be ugly.
- Bear Stearns think recent strong Q2 reports by Standard & Poor's and Fitch bode well for Moody's Corp (NYSE:MCO). In Q2, S&P posted 19% revenue growth (organic) while Fitch rose 16%. Both companies exhibited robust top-line growth amid fears of a slowdown in debt issuance. Moody's reports Q2,06 results this Wednesday, August 2.
Firm expects Moody's to benefit from the same factors cited by its competitors---solid structured finance growth (with CDOs up big---offsetting a more-subdued RMBS performance) and sharp gains in the investment grade and HY categories. However, keep in mind that the top-line comparison for Moody's (Q2,05: +25%) is more difficult than those for S&P (+14%) or Fitch (+21%). They lifting their Q2 EPS estimate by $0.03 to $0.58, and 2006 estimate to $2.11. This more than reverses $0.02 estimate cut following MCO's Investor Day in early-June.
Notes they realize that their estimate tweaks are a bit late as MCO shares are up over 10% in the past week. They also think a fresh round of regulatory rumbling this week could take the wind out of MCO's and MHP's respective sails. Indications are that the Senate Banking Committee could act on a ratings agency bill this Wednesday. Maintains Peer Perform.
Firm would avoid Red Hat's stock until Oracle announces its Linux strategy. Delivering a Red Hat compatible Linux distribution makes Oracle even more of a competitive threat than delivering comparable technology or a different ("non-standard") distribution as Novell has done. Red Hat Enterprise Linux has over 80% market share. They believe Oracle is motivated to preempt Red Hat's progression up the infrastructure stack as a database and middleware vendor by disrupting Red Hat's business model but not harming the Red Hat Linux distribution which Oracle needs to be successful to counter Microsoft.
Notes their negative view on Red Hat seems to be a minority view among sell side analysts. Feel confident the bulls will be proven to have been overly bullish and to have disregarded the risks Oracle presents in this market. Maintains Sell.
Notablecalls: Mixed feelings about this one. On one hand its not news. On the other hand
Goldman has a large customer base and RHAT trades 55x 06 EPS and 40x 07 EPS. I want to see some weakness in RHAT before taking action. If this one starts rolling over it will be ugly.
- Bear Stearns think recent strong Q2 reports by Standard & Poor's and Fitch bode well for Moody's Corp (NYSE:MCO). In Q2, S&P posted 19% revenue growth (organic) while Fitch rose 16%. Both companies exhibited robust top-line growth amid fears of a slowdown in debt issuance. Moody's reports Q2,06 results this Wednesday, August 2.
Firm expects Moody's to benefit from the same factors cited by its competitors---solid structured finance growth (with CDOs up big---offsetting a more-subdued RMBS performance) and sharp gains in the investment grade and HY categories. However, keep in mind that the top-line comparison for Moody's (Q2,05: +25%) is more difficult than those for S&P (+14%) or Fitch (+21%). They lifting their Q2 EPS estimate by $0.03 to $0.58, and 2006 estimate to $2.11. This more than reverses $0.02 estimate cut following MCO's Investor Day in early-June.
Notes they realize that their estimate tweaks are a bit late as MCO shares are up over 10% in the past week. They also think a fresh round of regulatory rumbling this week could take the wind out of MCO's and MHP's respective sails. Indications are that the Senate Banking Committee could act on a ratings agency bill this Wednesday. Maintains Peer Perform.
Notablecalls: See that 200 day moving average around $57 level? Thats where I expect the shares to stall. Vertical moves like that (almost) never hold.
Notablecalls - Paperstand
According to The Wall Street Journal, Verizon Wireless is releasing a cellphone that doubles as a music player and has a design similar to the popular iPod. The phone, dubbed the "Chocolate," is another effort by wireless carriers to encourage consumers to use mobile handsets as MP3 players. All the major US cellular carriers have launched services that let consumers download music and ring tones to their phones or transfer them from their PCs. But cellphone co's now are edging further into the turf of music players by designing handsets with prominent playback buttons and more storage space for songs. The Verizon Wireless handset, made by LG Electronics, will be in stores Aug. 7 and will be exclusive to the carrier. "Verizon's model seems to be going after Apple and iTunes more than anything else we've seen," says Linda Barrabee, of Yankee Group.
The WSJ reports that Northrop Grumman (NOC) has put its navigation-systems division on the block. The unit could fetch between $800m and $1bn. Last week, Raytheon (RTN) said it hired Credit Suisse to explore a sale or spinoff of its civilian-airplane division.
The WSJ's "Tracking the Numbers" column discusses Nortel (NT), saying that the co has billions of dollars in valuable credits that could aid its financial recovery. Trouble is, there is disagreement over whether those credits, the co's largest asset, should still be on its balance sheet. A recent report from research firm Glass, Lewis & Co. says that co's string of losses suggests it might need to write down the value of tax credits earned in past years that have been held over to offset tax liabilities on future earnings. The co hasn't done so, citing the likelihood of near-term profits. Such a write-down could wipe out Nortel's shareholder equity, or the total of its assets less its liabilities. Nortel expects higher rev this year and is taking a series of steps intended to bring its operations back to profitability. But any improvement would follow a series of losses in recent years, and those losses are an important factor in determining how to book the tax credits, Glass Lewis and other accounting observers say.
Barron's Online reports that a longtime Caterpillat (CAT) director, Juan Gallardo, doled out $7.7m to buy 110K shares in the open-mkt Thursday boosting his direct holdings to 204K shares. The dollar value of Gallardo's purchase was the most any Caterpillar insider spent to acquire shares at one time. "This is a big standout," says Mark LoPresti, of Thomson Financial, because Gallardo has tended to make small transactions of 7K shares or less at a time. His only other large insider transaction took place in Oct'00, which preceded a 34% gain 6 months thereafter.
The WSJ reports that Northrop Grumman (NOC) has put its navigation-systems division on the block. The unit could fetch between $800m and $1bn. Last week, Raytheon (RTN) said it hired Credit Suisse to explore a sale or spinoff of its civilian-airplane division.
The WSJ's "Tracking the Numbers" column discusses Nortel (NT), saying that the co has billions of dollars in valuable credits that could aid its financial recovery. Trouble is, there is disagreement over whether those credits, the co's largest asset, should still be on its balance sheet. A recent report from research firm Glass, Lewis & Co. says that co's string of losses suggests it might need to write down the value of tax credits earned in past years that have been held over to offset tax liabilities on future earnings. The co hasn't done so, citing the likelihood of near-term profits. Such a write-down could wipe out Nortel's shareholder equity, or the total of its assets less its liabilities. Nortel expects higher rev this year and is taking a series of steps intended to bring its operations back to profitability. But any improvement would follow a series of losses in recent years, and those losses are an important factor in determining how to book the tax credits, Glass Lewis and other accounting observers say.
Barron's Online reports that a longtime Caterpillat (CAT) director, Juan Gallardo, doled out $7.7m to buy 110K shares in the open-mkt Thursday boosting his direct holdings to 204K shares. The dollar value of Gallardo's purchase was the most any Caterpillar insider spent to acquire shares at one time. "This is a big standout," says Mark LoPresti, of Thomson Financial, because Gallardo has tended to make small transactions of 7K shares or less at a time. His only other large insider transaction took place in Oct'00, which preceded a 34% gain 6 months thereafter.
Colour on BMY's Plavix news
Several firms are commenting on Bristol-Myers Squibb (NYSE:BMY) as after the market close on Friday, Maryland Assistant Attorney General Meredyth Andrus announced on behalf of the state attorneys general with whom Bristol had entered into a consent order in 2003, that the AGs "object to and will not approve" the proposed settlement of the Plavix patent litigation. The state AGs did not disclose the basis for their rejection.
* JP Morgan notes the companies - Bristol, sanofi and Apotex - can either return to court to litigate the patent dispute, or they can draft a new proposed settlement agreement for review by the FTC and the state AGs. It would be a violation of both the FTC and state consent orders for Bristol to go forward with a settlement without approval of the antitrust enforcement authorities, and the company would undoubtedly face severe legal penalties were they to attempt such a maneuver.
The likelihood of the FTC and state AGs approving a settlement agreement containing more than a nominal ($2 million) reverse payment appears very low.
If the parties decide not to continue negotiating a settlement, two big questions arise: 1) when in Judge Stein's apparently now very busy calendar will the trial be re-docketed, and 2) will Apotex launch at risk? Firm understands that the schedule of Judge Stein, to whom the Plavix case was assigned, has become fairly tight through the fall, it could easily be six months to a year before a decision is available, followed by the inevitable appeal. The significance of this timing could be lowered considerably if Apotex decides to launch generic clopidogrel at risk. The company apparently began producing an inventory of generic product and was approaching distributors about carrying it when the proposed settlement was announced. Whether this was a bluff remains to be seen.
Launching at risk would be a "bet-the-company" endeavor for Apotex, but the firm has a reputation for aggressiveness. Such a move would gut Bristol's Plavix revenues, and there would be little the company could do about it in the short term.
* Morgan Stanley (who was one of the few to voice skepticism on the proposed settlement early on) notes they believe that the most viable option for BMY is to abandon the settlement and to instead go back to court to try the Plavix case. Given this scenario, a trial date would still need to be set which may take up to a year. Assuming BMY loses the case and taking into consideration the time involved in completing such trials, the earliest we could see a generic Plavix would be 2009. This is 2 years before the Plavix patent expires and according to firm'scalculations, the resulting impact from an NPV basis would be around $1.00- $1.25, corresponding to a share value between $22-$24.
* Banc of America notes that although they view an 'at risk' launch as a low probability event, particularly ahead of a district court decision, they would note that this scenario would be downside to their estimates. Firm estimates that the NPV different between a Plavix patent win or loss as less than $1, assuming no generic competition until the completion of the appellate process. However, with US Plavix sales representing over 20% of BMY's current EPS, NT generic competition would represent $1-2 of downside to firm's $24 price target.
* JP Morgan notes the companies - Bristol, sanofi and Apotex - can either return to court to litigate the patent dispute, or they can draft a new proposed settlement agreement for review by the FTC and the state AGs. It would be a violation of both the FTC and state consent orders for Bristol to go forward with a settlement without approval of the antitrust enforcement authorities, and the company would undoubtedly face severe legal penalties were they to attempt such a maneuver.
The likelihood of the FTC and state AGs approving a settlement agreement containing more than a nominal ($2 million) reverse payment appears very low.
If the parties decide not to continue negotiating a settlement, two big questions arise: 1) when in Judge Stein's apparently now very busy calendar will the trial be re-docketed, and 2) will Apotex launch at risk? Firm understands that the schedule of Judge Stein, to whom the Plavix case was assigned, has become fairly tight through the fall, it could easily be six months to a year before a decision is available, followed by the inevitable appeal. The significance of this timing could be lowered considerably if Apotex decides to launch generic clopidogrel at risk. The company apparently began producing an inventory of generic product and was approaching distributors about carrying it when the proposed settlement was announced. Whether this was a bluff remains to be seen.
Launching at risk would be a "bet-the-company" endeavor for Apotex, but the firm has a reputation for aggressiveness. Such a move would gut Bristol's Plavix revenues, and there would be little the company could do about it in the short term.
* Morgan Stanley (who was one of the few to voice skepticism on the proposed settlement early on) notes they believe that the most viable option for BMY is to abandon the settlement and to instead go back to court to try the Plavix case. Given this scenario, a trial date would still need to be set which may take up to a year. Assuming BMY loses the case and taking into consideration the time involved in completing such trials, the earliest we could see a generic Plavix would be 2009. This is 2 years before the Plavix patent expires and according to firm'scalculations, the resulting impact from an NPV basis would be around $1.00- $1.25, corresponding to a share value between $22-$24.
* Banc of America notes that although they view an 'at risk' launch as a low probability event, particularly ahead of a district court decision, they would note that this scenario would be downside to their estimates. Firm estimates that the NPV different between a Plavix patent win or loss as less than $1, assuming no generic competition until the completion of the appellate process. However, with US Plavix sales representing over 20% of BMY's current EPS, NT generic competition would represent $1-2 of downside to firm's $24 price target.
Believes Bristol has pushed out potential generic competition on Plavix by roughly one year through this settlement process. They are maintaining their $24 price target. Rating stays at Neutral.
Notablecalls: I expect BMY to get hit following the news. Considering the pressure the stock experienced following the DOJ news last week I think the downside is already somewhat muted. I'd be an opportunistic buyer around $22.5 level. Note that most firms see $1-$2 risk to their tgts. Just a bounce play. BMY's becoming a mess. Don't want to overstay my welcome.
Notablecalls - Barron's Summary
Barron's cover story discusses China economic in general. No stocks mentioned.
Barron's highlights Epoch Investment Partners (EPHC), which assets under mgmt have returned 17.2% after fees for the past 3 years, vs 11.2% for the S&P's 500. CEO says that if they can continue to perform for clients as they build the firm out, there is no reason why the firm can't become a $10-12bn entity in a 3-5 year period. CEO's best picks include DVA, OMM, CMCSK, BG and AMD.
According to the Barron's Coach (COH) is down sharply, to 27-28 this year, on concerns about consumer spending. The near-term downside is about 10%, but the upside could be more than 25% in a year.
Barron's discusses El Paso (EP), saying that the stock has rebounded to 15.60, from 3.45, but the gains are far from over. The stock is likely to trade up to 20, based on earnings growth and the value of the co's reserves.
According to the Barron's, Tetra Tech (TTEK) stock's recent dip looks like a buying opportunity. The shares could climb by about one-third over the next year, to 20, as demand stays strong and profit margins improve.
"Sizing Up Small Caps" column discusses Range Resources (RRC), which is extracting natural gas from unconventional sources like tight sands, coal beds and shale. Analysts peg Range's '06 cash flow at $3.50 a share and over $4.60 for '07. Based on those numbers, shares are trading somewhat below those of the co's peers, while Peter Vig, of RoundRock Capital, figures they deserve a premium. In 18 mo's, he expects the stock to trade at $40. Mr Vig also likes Denbury Resources (DNR), exploration and production co heavily weighted toward oil. The consensus puts Denbury's cash flow at $3.50 a share this year and around $4 next. So at 32 and change, the stock is going for 9.3x this year's estimate and 8.2x next, a fair notch above its peers. But Denbury, pure and simple, is unique. The co lays claim to the biggest reserves of carbon dioxide for tertiary oil recovery east of the Mississippi. In fact, from East Texas to Florida, Denbury's reserves are the only significant known natural source of CO2. Mr. Vig sees the stock at $45 in 12 mo.
Notablecalls: Peter Vig highlighted EGN in a last week Barron's. EGN moved from 38 to 42 in a week. Expect to see similar moves in RRC and DNR.
Technology Trader column discusses semi sector, saying that the PC semiconductor business is getting competitive in ways that may be better for consumers than investors. Intel (INTC) and AMD (AMD) are battling brilliantly on price and technology, but growth in their PC end-mkt has decelerated. So even though Intel may look like a cheap stock, more diversified semi issues look like better bets these days. Instead of Intel, investors might instead take a gander at microcontroller maker Microchip (MCHP); the analog semiconductor vendors Linear Technology (LLCT) and Analog Devices (ADI); and the wireless chip giant Texas Instruments (TXN). "I don't think it really makes sense to own Intel or AMD when there's a price war," says Adam Parker, of Sanford C. Bernstein.
Barron's highlights Epoch Investment Partners (EPHC), which assets under mgmt have returned 17.2% after fees for the past 3 years, vs 11.2% for the S&P's 500. CEO says that if they can continue to perform for clients as they build the firm out, there is no reason why the firm can't become a $10-12bn entity in a 3-5 year period. CEO's best picks include DVA, OMM, CMCSK, BG and AMD.
According to the Barron's Coach (COH) is down sharply, to 27-28 this year, on concerns about consumer spending. The near-term downside is about 10%, but the upside could be more than 25% in a year.
Barron's discusses El Paso (EP), saying that the stock has rebounded to 15.60, from 3.45, but the gains are far from over. The stock is likely to trade up to 20, based on earnings growth and the value of the co's reserves.
According to the Barron's, Tetra Tech (TTEK) stock's recent dip looks like a buying opportunity. The shares could climb by about one-third over the next year, to 20, as demand stays strong and profit margins improve.
"Sizing Up Small Caps" column discusses Range Resources (RRC), which is extracting natural gas from unconventional sources like tight sands, coal beds and shale. Analysts peg Range's '06 cash flow at $3.50 a share and over $4.60 for '07. Based on those numbers, shares are trading somewhat below those of the co's peers, while Peter Vig, of RoundRock Capital, figures they deserve a premium. In 18 mo's, he expects the stock to trade at $40. Mr Vig also likes Denbury Resources (DNR), exploration and production co heavily weighted toward oil. The consensus puts Denbury's cash flow at $3.50 a share this year and around $4 next. So at 32 and change, the stock is going for 9.3x this year's estimate and 8.2x next, a fair notch above its peers. But Denbury, pure and simple, is unique. The co lays claim to the biggest reserves of carbon dioxide for tertiary oil recovery east of the Mississippi. In fact, from East Texas to Florida, Denbury's reserves are the only significant known natural source of CO2. Mr. Vig sees the stock at $45 in 12 mo.
Notablecalls: Peter Vig highlighted EGN in a last week Barron's. EGN moved from 38 to 42 in a week. Expect to see similar moves in RRC and DNR.
Technology Trader column discusses semi sector, saying that the PC semiconductor business is getting competitive in ways that may be better for consumers than investors. Intel (INTC) and AMD (AMD) are battling brilliantly on price and technology, but growth in their PC end-mkt has decelerated. So even though Intel may look like a cheap stock, more diversified semi issues look like better bets these days. Instead of Intel, investors might instead take a gander at microcontroller maker Microchip (MCHP); the analog semiconductor vendors Linear Technology (LLCT) and Analog Devices (ADI); and the wireless chip giant Texas Instruments (TXN). "I don't think it really makes sense to own Intel or AMD when there's a price war," says Adam Parker, of Sanford C. Bernstein.
Friday, July 28, 2006
Color on quarter: RealNetworks (RNWK)
RealNetworks (NASDAQ:RNWK) will be on the casualty list today as the co failed to meet analyst estimates:
* Goldman is lowering their 6-month price target to $7.50 ($8.00) due to their 35% and 20% reductions in 2006E and 2007E EBITDA given a 42% miss in 2Q2006 and outlook for weaker than expected profitability for the full year due to greater operating expenses as RNWK invests to compete in a highly competitive market. Valuation is extended as shares trade well above firm's price target and at 27x 2007E EBITDA, a 52% premium even to Google at 18x despite Google's 20% -25% long-term growth vs. 15% for RNWK. Lower 2006 revenue guidance to $370mn from $372.5mn implies a $3.5mn reduction in 2H2006 top line expectations. The results and the outlook result in lower EBITDA, creating increased uncertainty around profitability in 2007.
Goldman reiterates their Sell rating as they expect 2Q2006 results and an ~35% reduction in 2006E EBITDA to put downward pressure on RNWK shares given results were below expectations and a lowered outlook only makes an expensive stock, on an absolute and relative basis, look more expensive. Shares are trading almost 200% above the sector on 2007E multiples, which the firm believes is unwarranted given declining EBITDA vs. the sector's 25%-plus EBITDA growth. Strong growth in games could fuel investor optimism in the potential of this segment; however, they continue to believe that competition is only likely to heighten in this area and growth could diminish without acquisitions.
* Stifel notes the stock will likely pull back, particularly if market refocuses on valuation metrics outside of EV/revenues: RNWK has risen from $8 to ~$10 this year on very little news, perhaps a result of the company's buyback or investor optimism that RNWK will use its balance sheet to become the next JAMDAT, Akamai, or a company with hidden patent value. Given an extremely high valuation on traditional metrics (104x 2007 cash adjusted EPS excl. MSFT proceeds and 38x 2007E EBITDA) in combination with potentially aggressive guidance, they believe the shares are subject to a pullback. RNWK trades at 2.3x EV/revenues, the firm believes somewhat reasonable based on a sum-of-the-parts. Maintains Hold.
* Oppenheimer notes the company added roughly 50,000 music subscribers in 2Q vs. an average of 150,000 new subscribers for the past four quarters (total paid subscriber count was flat QoQ at 2.4mm). Music subscribers increased 41% YoY, while music revenues grew only 21%, indicating lower music segment ARPU. Firm believes the slowdown may indicate a lasting market preference for end-to-end systems such as Apple's iPod. Microsoft recently announced it is launching a similar end-to-end service in late 2H.
Games segment revenues were up 55% YoY, though likely 23% YoY organically. Firm believes the company is likely to see continued success in monetizing its games franchise through mobile and retail channels, as well as through the inclusion of in-game advertising.
The company bought back 2.1mm shares at an average price of $9.43. Believes the company has roughly $80mm outstanding in its share buyback authorization. Reits Neutral rating.
Notablecalls: I expect RNWK to go sub-$9 today. The valuation is sky high and without any sub growth it can only mean lower price for the stock. I must note that I did like the growth number the co put out for their Games segment. I suspect this one has better margins than the Music one. But that won't have any real impact in the s-t.
Goldman reiterates their Sell rating as they expect 2Q2006 results and an ~35% reduction in 2006E EBITDA to put downward pressure on RNWK shares given results were below expectations and a lowered outlook only makes an expensive stock, on an absolute and relative basis, look more expensive. Shares are trading almost 200% above the sector on 2007E multiples, which the firm believes is unwarranted given declining EBITDA vs. the sector's 25%-plus EBITDA growth. Strong growth in games could fuel investor optimism in the potential of this segment; however, they continue to believe that competition is only likely to heighten in this area and growth could diminish without acquisitions.
* Stifel notes the stock will likely pull back, particularly if market refocuses on valuation metrics outside of EV/revenues: RNWK has risen from $8 to ~$10 this year on very little news, perhaps a result of the company's buyback or investor optimism that RNWK will use its balance sheet to become the next JAMDAT, Akamai, or a company with hidden patent value. Given an extremely high valuation on traditional metrics (104x 2007 cash adjusted EPS excl. MSFT proceeds and 38x 2007E EBITDA) in combination with potentially aggressive guidance, they believe the shares are subject to a pullback. RNWK trades at 2.3x EV/revenues, the firm believes somewhat reasonable based on a sum-of-the-parts. Maintains Hold.
* Oppenheimer notes the company added roughly 50,000 music subscribers in 2Q vs. an average of 150,000 new subscribers for the past four quarters (total paid subscriber count was flat QoQ at 2.4mm). Music subscribers increased 41% YoY, while music revenues grew only 21%, indicating lower music segment ARPU. Firm believes the slowdown may indicate a lasting market preference for end-to-end systems such as Apple's iPod. Microsoft recently announced it is launching a similar end-to-end service in late 2H.
Games segment revenues were up 55% YoY, though likely 23% YoY organically. Firm believes the company is likely to see continued success in monetizing its games franchise through mobile and retail channels, as well as through the inclusion of in-game advertising.
The company bought back 2.1mm shares at an average price of $9.43. Believes the company has roughly $80mm outstanding in its share buyback authorization. Reits Neutral rating.
Notablecalls: I expect RNWK to go sub-$9 today. The valuation is sky high and without any sub growth it can only mean lower price for the stock. I must note that I did like the growth number the co put out for their Games segment. I suspect this one has better margins than the Music one. But that won't have any real impact in the s-t.
CIBC defending Focus Media (FMCN)
- CIBC is defending Focus Media (NASDAQ:FMCN) noting that yesterday, FMCN shares declined 9% following a competitor s informal comments concerning the high-end of 07 Street estimates being potentially too high. Because this followed a company visit in China, and these comments were not written in a formal note, CIBC thinks this added to the confusion. They think any estimate concerns are overblown and would use weakness as a buying opportunity ahead of the quarter.
Notes they have been aware that one of the prominent analysts covering the stock based his Street-high revenue and EPS estimates on aggressive assumptions of a currency revaluation in 07. Excluding the RMB appreciation factor, they think these estimates could be in line with the rest of the Street.
Channel checks from our recent China trip suggest advertising growth remains robust, and Focus networks are becoming widely accepted as one of the strongest media formats for brand advertisers and media buyers. Meetings with top ad agencies buyers suggest that Focus continues to gain market share among budgets, and is only now becoming more mainstream, suggesting that pricing should remain strong.
Firm also believes that weakness in Baidu.com shares, down 21% yesterday, also had an indirect impact. BIDU sold off after reporting 2Q revenue that did not exceed Street estimates, even though revenues increased 180% y/y, and EPS exceeded on better margins. However, that stock had been trading at a 67X PE vs. 27X for FMCN, based on 07 estimates. Moreover, these two companies businesses are hardly related (search vs. outdoor advertising), while a significant portion of BIDU's revenue comes from local businesses, whereas FMCN's revenues are almost all national/multinational.
FMCN represents CIBC's best defensive name if the US economy were to see slower economic growth. Trading at 25x 07 EPS estimate, with 90% EPS growth forecast this year, and 70% growth next year, they believe investors are not fully "sold" on the Focus story and currently doubt existing Street estimates. Reits Sector Outperformer rating. Tgt remains at $74.
Notablecalls: One to watch today for a bounce.
Notes they have been aware that one of the prominent analysts covering the stock based his Street-high revenue and EPS estimates on aggressive assumptions of a currency revaluation in 07. Excluding the RMB appreciation factor, they think these estimates could be in line with the rest of the Street.
Channel checks from our recent China trip suggest advertising growth remains robust, and Focus networks are becoming widely accepted as one of the strongest media formats for brand advertisers and media buyers. Meetings with top ad agencies buyers suggest that Focus continues to gain market share among budgets, and is only now becoming more mainstream, suggesting that pricing should remain strong.
Firm also believes that weakness in Baidu.com shares, down 21% yesterday, also had an indirect impact. BIDU sold off after reporting 2Q revenue that did not exceed Street estimates, even though revenues increased 180% y/y, and EPS exceeded on better margins. However, that stock had been trading at a 67X PE vs. 27X for FMCN, based on 07 estimates. Moreover, these two companies businesses are hardly related (search vs. outdoor advertising), while a significant portion of BIDU's revenue comes from local businesses, whereas FMCN's revenues are almost all national/multinational.
FMCN represents CIBC's best defensive name if the US economy were to see slower economic growth. Trading at 25x 07 EPS estimate, with 90% EPS growth forecast this year, and 70% growth next year, they believe investors are not fully "sold" on the Focus story and currently doubt existing Street estimates. Reits Sector Outperformer rating. Tgt remains at $74.
Notablecalls: One to watch today for a bounce.
Color on quarter: Digital River (DRIV)
Couple of firms are out positive on Digital River (NASDAQ:DRIV) following results and guidance announced last night:
* Piper Jaffray notes Digital River had solid Q2 results highlighted by 39% revenue growth. DRIV continues to experience strong revenue growth driven by broadband adoption and increasing migration of software publisher online. The focus of the call, however, was on DRIV's comments that it has secured "significant incremental business." Firm believes one of these clients is Microsoft (DRIV indicated one partner could be a 10% partner in 2007). While DRIV will spend incremental dollars to ramp up these new major relationships in 2006, they have raised their 2007 revenue growth assumptions and expect solid operating leverage in 2007, and believe their estimates will likely prove conservative. Firm believes DRIV remains one of the most attractive stocks in their universe and believes that increased visibility into the new relationships and the diversification of DRIV's business model away from Symantec should provide for multiple expansion. Reiterates Outperform rating and $56 price target (14x 2007 EBITDA).
* Deutsche Bank says they maintain their Buy rating on shares of DRIV post in-line 2Q results. Firm thinks there could be significant client wins ahead as infrastructure and integration has already begun ahead of the launch . There is still plenty of existing business to be had with existing customers as well (Symantec). Shares are off 5% in aftermarket trading to $38, with concerns about 3Q guidance (lower tax rate), which they believe is unwarranted. Firm remains buyers as shares are currently trading at 20x 2007E EPS, vs. the e-commerce group trading at 23x 2007E EPS.
While guidance nudged up a bit again ($305mn vs. firm's $301mn estimate for 2006), they do think the major opportunity lies in new customer wins and international expansion at Digital River. On the 2006 EPS front, the company guided to $1.74, vs. our $1.73 estimate previously. As such, firm's investment thesis remains in tact, they continue to believe that the potential for e-commerce outsourcing deals (both new and existing), in addition to continued e-commerce/broadband penetration, favors Digital River over the next several years.
For the first time, the company talked about new significant business they have won or high expectation to win, both on its release and the conference call. While the firm believes in the short term (next two quarters) the company will likely incur higher operating expenses to build out the core infrastructure to support more business, these new clients should provide additional diversification (outside of AV) and further validates the value proposition at Digital River. Price tgt remains at $58.
Notablecalls: I think the 2pt sell-off we saw in DRIV in after mkt trading was just plain wrong. I expect this one to be squeezed higher today
* Piper Jaffray notes Digital River had solid Q2 results highlighted by 39% revenue growth. DRIV continues to experience strong revenue growth driven by broadband adoption and increasing migration of software publisher online. The focus of the call, however, was on DRIV's comments that it has secured "significant incremental business." Firm believes one of these clients is Microsoft (DRIV indicated one partner could be a 10% partner in 2007). While DRIV will spend incremental dollars to ramp up these new major relationships in 2006, they have raised their 2007 revenue growth assumptions and expect solid operating leverage in 2007, and believe their estimates will likely prove conservative. Firm believes DRIV remains one of the most attractive stocks in their universe and believes that increased visibility into the new relationships and the diversification of DRIV's business model away from Symantec should provide for multiple expansion. Reiterates Outperform rating and $56 price target (14x 2007 EBITDA).
* Deutsche Bank says they maintain their Buy rating on shares of DRIV post in-line 2Q results. Firm thinks there could be significant client wins ahead as infrastructure and integration has already begun ahead of the launch . There is still plenty of existing business to be had with existing customers as well (Symantec). Shares are off 5% in aftermarket trading to $38, with concerns about 3Q guidance (lower tax rate), which they believe is unwarranted. Firm remains buyers as shares are currently trading at 20x 2007E EPS, vs. the e-commerce group trading at 23x 2007E EPS.
While guidance nudged up a bit again ($305mn vs. firm's $301mn estimate for 2006), they do think the major opportunity lies in new customer wins and international expansion at Digital River. On the 2006 EPS front, the company guided to $1.74, vs. our $1.73 estimate previously. As such, firm's investment thesis remains in tact, they continue to believe that the potential for e-commerce outsourcing deals (both new and existing), in addition to continued e-commerce/broadband penetration, favors Digital River over the next several years.
For the first time, the company talked about new significant business they have won or high expectation to win, both on its release and the conference call. While the firm believes in the short term (next two quarters) the company will likely incur higher operating expenses to build out the core infrastructure to support more business, these new clients should provide additional diversification (outside of AV) and further validates the value proposition at Digital River. Price tgt remains at $58.
Notablecalls: I think the 2pt sell-off we saw in DRIV in after mkt trading was just plain wrong. I expect this one to be squeezed higher today
Notablecalls - Paperstand
The Wall Street Journals "Heard on the Street" column discusses Chico's FAS (CHS), saying that the co has been so successful that there may not be many new customers left to attract. After becoming one of the stock mkt's top performers over the past decade, Chico's shares have fallen more than 50% since reaching a high Feb. Street's sudden snub has irked Chico's CFO Charlie Kleman, who assailed critics in an investor conference this month. "Certainly the Chico's brand is more mature than it was 3-5 years ago, but we do not believe it is by any means mature," he fumed. The reversal in Chico's fortune revolves around the question of whether the co can sustain its success as the expansion of its original brand slows while the co develops 3 other brands it has created or acquired in the past 3 years. "We continue to view Chico's as a core retail holding and recommend investors capitalize on the recent pullback," wrote Lauren Cooks Levitan, of Cowen, in a research note to investors this month.
The WSJ's "Tracking the Numbers" column discusses General Motors (GM), which has been a popular trade for short sellers. At the beginning of this year, 17% of GM's outstanding shares were sold short, up from 10% five months earlier. Large household-name co's rarely see the short-interest percentage in their stocks climb above single digits, but given GM's woes, the shorts felt they had a sure thing. That sure thing has turned into a pileup of wrecked trades: GM shares are up 60% over the past few months, making it the top performer among the component co's of an otherwise sideways-moving DJIA. A rally in a shorted stock hurts the short seller, who sometimes must pay higher fees on the borrowed stock or, in a worst-case scenario, buy the stock back at its higher price and close out the trade, registering a loss. "It was a very popular short at the beginning of the year, but since April, it's been working against you," says Joseph Amaturo, of Calyon. "There's a fair amount of pain." Adds a hedge-fund manager who has lost money betting against GM: "Earlier this year, you couldn't go to a dinner without someone pitching you an idea on shorting GM...but there's been a giant sucking sound of hedge funds losing money" in the past few months.
Barron's Online discusses Electronic Arts (ERTS), whose stock is up 15% since Jun 26. Some believe that this is a signal some believe the worst is over. Still, substantial uncertainties remain in this videogame cycle. Will Sony (SNE) ship enough units of its PlayStation 3 machine this holiday season in the US? Will gamers shell out as much as $600 for the thing? At the same time, development costs are going up, up, up. EA's R&D is expected to rise 20% this year while sales decline slightly. With an uncertain marketplace and escalating costs, it'll be no slam-dunk for EA to hit a home run with each game, and do it profitably. For that reason, it may make more sense to buy call options to exploit potential upside to EA's August earnings report, rather than buying the stock outright right now. "The transition [to new consoles] is always more painful than you thought it would be," says Mike Sansoterra, a technology analyst with Principal Global Investors. In addition, he says, "EA still has to show they can control costs," which is difficult when, "this is becoming more like the movie business, where you have to have a blockbuster with each title."
The NY Post has learned that while Time Warner (TWX) is set to unveil the details on a plan to make many of the features at America Online free, behind the scenes the media giant is weighing much bolder moves to transform the troubled Internet unit. In recent weeks the co has once again approached major tech and media co's to discuss possible partnerships, and internally the co has been weighing a plan to spin off a portion of AOL, perhaps as much as 20%, to public shareholders. The plan to make AOL's e-mail and Web services available free to high-speed Internet users was presented to Time Warner's board yesterday, and will be unveiled publicly on Aug. 2.
The WSJ's "Tracking the Numbers" column discusses General Motors (GM), which has been a popular trade for short sellers. At the beginning of this year, 17% of GM's outstanding shares were sold short, up from 10% five months earlier. Large household-name co's rarely see the short-interest percentage in their stocks climb above single digits, but given GM's woes, the shorts felt they had a sure thing. That sure thing has turned into a pileup of wrecked trades: GM shares are up 60% over the past few months, making it the top performer among the component co's of an otherwise sideways-moving DJIA. A rally in a shorted stock hurts the short seller, who sometimes must pay higher fees on the borrowed stock or, in a worst-case scenario, buy the stock back at its higher price and close out the trade, registering a loss. "It was a very popular short at the beginning of the year, but since April, it's been working against you," says Joseph Amaturo, of Calyon. "There's a fair amount of pain." Adds a hedge-fund manager who has lost money betting against GM: "Earlier this year, you couldn't go to a dinner without someone pitching you an idea on shorting GM...but there's been a giant sucking sound of hedge funds losing money" in the past few months.
Barron's Online discusses Electronic Arts (ERTS), whose stock is up 15% since Jun 26. Some believe that this is a signal some believe the worst is over. Still, substantial uncertainties remain in this videogame cycle. Will Sony (SNE) ship enough units of its PlayStation 3 machine this holiday season in the US? Will gamers shell out as much as $600 for the thing? At the same time, development costs are going up, up, up. EA's R&D is expected to rise 20% this year while sales decline slightly. With an uncertain marketplace and escalating costs, it'll be no slam-dunk for EA to hit a home run with each game, and do it profitably. For that reason, it may make more sense to buy call options to exploit potential upside to EA's August earnings report, rather than buying the stock outright right now. "The transition [to new consoles] is always more painful than you thought it would be," says Mike Sansoterra, a technology analyst with Principal Global Investors. In addition, he says, "EA still has to show they can control costs," which is difficult when, "this is becoming more like the movie business, where you have to have a blockbuster with each title."
The NY Post has learned that while Time Warner (TWX) is set to unveil the details on a plan to make many of the features at America Online free, behind the scenes the media giant is weighing much bolder moves to transform the troubled Internet unit. In recent weeks the co has once again approached major tech and media co's to discuss possible partnerships, and internally the co has been weighing a plan to spin off a portion of AOL, perhaps as much as 20%, to public shareholders. The plan to make AOL's e-mail and Web services available free to high-speed Internet users was presented to Time Warner's board yesterday, and will be unveiled publicly on Aug. 2.
Thursday, July 27, 2006
Color on quarter: Mattson Tech (MTSN)
- While it seems that most investors and analysts were waiting for Mattson Tech (NASDAQ:MTSN) to report a strong qtr and upside guidance it seems all they got was yet another disappointment. The co pushed out gross margin recovery by another 6 months. I don't see any downgrades but several firms are cutting their tgts.
* Deutsche Bank notes Mattson delivered strong 2Q06 orders and revenue, but disappointed on GM, and 3Q06 guidance followed the same trend. Further penetration of Japan and a resurgence of older 300mm tool demand depressed GM, extending the time to the 46% GM goal by two quarters (to 2Q07).
Firm maintains their Buy rating on MTSN, but cuts their price target to $10, or ~19x C2007 EPS estimate of $0.51 (excluding ~$0.03 in stock option expenses).
* Citigroup notes that margins continue to disappoint with targets pushed out another six months with competitive pricing pressure (they believe) more of a culprit than MTSN suggesting; working capital mgmt remains disappointing.
Product mgns have not improved in ~2 yrs despite better product mix + move to flexible outsourced model - these executional issues obscure share gains with new Suprema tool. Firm notes that share gains took them off Sell, but execution must improve dramatically to take them off Hold. Ests tweaked, tgt $10 to $9 - Reit Hold.
* Stifel notes that while they suspected that there may be some downside risk to their gross margins forecast, they were disappointed to see the company's final 40.5% result.
The weak margins can be attributable to two main reasons, 1) a pickup in some of Mattson's older but lower margin products in the quarter (which they had suspected), and 2) SAB101 revenue recognition policies, where deferrals could have a near term negative impact to margins (which they did not anticipate).
Unfortunately, they firm believes that these pressures will continue at least through the September quarter, and possibly in the December quarter as well. With all these aspects in mind, we are not changing their revenue forecasts for 2006 or 2007, but are lowering EPS estimates due to the lower margin profile.
Given the current stock price, they see limited downside ($7) risk, and hence will maintain Buy rating. Along with our EPS reduction, they are lowering price target to $12 from $14, which reflects approximately 3.0x book value, and is in line with firm's more cautious outlook for the industry.
While they still believe Mattson can be a long-term outperformer (which it has shown on the market share side), they believe it needs to bolster its margin profile before they can apply a premium multiple to the name.
Notablecalls: I fully expect MTSN to trade down today. Maybe as much as a full point.
* Deutsche Bank notes Mattson delivered strong 2Q06 orders and revenue, but disappointed on GM, and 3Q06 guidance followed the same trend. Further penetration of Japan and a resurgence of older 300mm tool demand depressed GM, extending the time to the 46% GM goal by two quarters (to 2Q07).
Firm maintains their Buy rating on MTSN, but cuts their price target to $10, or ~19x C2007 EPS estimate of $0.51 (excluding ~$0.03 in stock option expenses).
* Citigroup notes that margins continue to disappoint with targets pushed out another six months with competitive pricing pressure (they believe) more of a culprit than MTSN suggesting; working capital mgmt remains disappointing.
Product mgns have not improved in ~2 yrs despite better product mix + move to flexible outsourced model - these executional issues obscure share gains with new Suprema tool. Firm notes that share gains took them off Sell, but execution must improve dramatically to take them off Hold. Ests tweaked, tgt $10 to $9 - Reit Hold.
* Stifel notes that while they suspected that there may be some downside risk to their gross margins forecast, they were disappointed to see the company's final 40.5% result.
The weak margins can be attributable to two main reasons, 1) a pickup in some of Mattson's older but lower margin products in the quarter (which they had suspected), and 2) SAB101 revenue recognition policies, where deferrals could have a near term negative impact to margins (which they did not anticipate).
Unfortunately, they firm believes that these pressures will continue at least through the September quarter, and possibly in the December quarter as well. With all these aspects in mind, we are not changing their revenue forecasts for 2006 or 2007, but are lowering EPS estimates due to the lower margin profile.
Given the current stock price, they see limited downside ($7) risk, and hence will maintain Buy rating. Along with our EPS reduction, they are lowering price target to $12 from $14, which reflects approximately 3.0x book value, and is in line with firm's more cautious outlook for the industry.
While they still believe Mattson can be a long-term outperformer (which it has shown on the market share side), they believe it needs to bolster its margin profile before they can apply a premium multiple to the name.
Notablecalls: I fully expect MTSN to trade down today. Maybe as much as a full point.
Color on quarter: Business Objects (BOBJ)
- The analyst community is surprised following stronger than expected results and guidance issued by Business Objects (NASDAQ:BOBJ) last night. Note that 20 days ago the co gave a pretty dismal profit warning for the qtr, causing the stock to sell off badly. We have at least one firm upgrading the shares this morning.
* CSFB is out upgrading their rating to Outperform from Neutral.
* Merrill Lynch notes that although still a solid miss, Business Objects' 2Q results came in significantly better than preannounced results. Management lowered its 2006 outlook to reflect the weaker 2Q but the above revised consensus expectations appear reasonable. Europe was down 8% Y/Y and represented the most significant source of weakness, while APAC turned in flat Q/Q results showing signs of stability. Though the company closed just 4 deals over $1mn, the 113 deals over $100K compared favorably to 96 in 2Q06. Americas delivered strong results across all product segments.
Firm is raising their forecasts modestly to adjust for 2Q results and improving operating efficiencies. For 2006 they are raising revenues to $1,21mn from $1.20bn and raising Pro Forma EPADR (ex option expense) to $1.51 from $1.40. For 2007 trimming sales to $1.32bn from $1.43bn and raising EPADR by $0.05 to $1.65. Reiterates Buy opinion and $32 price objective.
* Goldman Sachs thinks investors are likely to be somewhat relieved Business Objects' reported 2Q results were not as ominous as they first appeared in the negative preannouncement July 6 (pro forma EPS actually in management's initial guidance range). However, in firm's view, management's more optimistic outlook for the remainder of the year assumes that the problems executing in EMEA and closing large transactions were relatively short-term in nature and can be fixed quickly. The company is reassessing its forecasting methods and close rate assumptions and believes new incentives can spur more rapid upgrades to XI release 2 in the installed base. While they are encouraged, efforts to improve execution could take a few quarters, and they continue to believe that the BI market is becoming more competitive, particularly as Microsoft and SAP make more aggressive moves with their own attractively priced bundled capabilities. 3Q is seasonally slow and improvement may be more weighted to 4Q. Ups their price tgt to $26 from $24. Maintains Neutral.
* Banc of America remains buyers of the stock under the premise that the major issues in Europe, including potentially higher sales org attrition and slower migration spending for the new XI Release 2 products, can be overcome by the end of the year. Maintains Buy and $30 tgt.
Notablecalls: My jaw almost dropped when I first saw the number BOBJ had put out. I bet that Citi analyst that downgraded the shares yesterdat morning had a restless night. I suspect the shares will trade higher today but will have difficult time surpassing the levels reached in after hrs trading. But surely the bottom is in for this one. Going higher in the coming weeks.
* CSFB is out upgrading their rating to Outperform from Neutral.
* Merrill Lynch notes that although still a solid miss, Business Objects' 2Q results came in significantly better than preannounced results. Management lowered its 2006 outlook to reflect the weaker 2Q but the above revised consensus expectations appear reasonable. Europe was down 8% Y/Y and represented the most significant source of weakness, while APAC turned in flat Q/Q results showing signs of stability. Though the company closed just 4 deals over $1mn, the 113 deals over $100K compared favorably to 96 in 2Q06. Americas delivered strong results across all product segments.
Firm is raising their forecasts modestly to adjust for 2Q results and improving operating efficiencies. For 2006 they are raising revenues to $1,21mn from $1.20bn and raising Pro Forma EPADR (ex option expense) to $1.51 from $1.40. For 2007 trimming sales to $1.32bn from $1.43bn and raising EPADR by $0.05 to $1.65. Reiterates Buy opinion and $32 price objective.
* Goldman Sachs thinks investors are likely to be somewhat relieved Business Objects' reported 2Q results were not as ominous as they first appeared in the negative preannouncement July 6 (pro forma EPS actually in management's initial guidance range). However, in firm's view, management's more optimistic outlook for the remainder of the year assumes that the problems executing in EMEA and closing large transactions were relatively short-term in nature and can be fixed quickly. The company is reassessing its forecasting methods and close rate assumptions and believes new incentives can spur more rapid upgrades to XI release 2 in the installed base. While they are encouraged, efforts to improve execution could take a few quarters, and they continue to believe that the BI market is becoming more competitive, particularly as Microsoft and SAP make more aggressive moves with their own attractively priced bundled capabilities. 3Q is seasonally slow and improvement may be more weighted to 4Q. Ups their price tgt to $26 from $24. Maintains Neutral.
* Banc of America remains buyers of the stock under the premise that the major issues in Europe, including potentially higher sales org attrition and slower migration spending for the new XI Release 2 products, can be overcome by the end of the year. Maintains Buy and $30 tgt.
Notablecalls: My jaw almost dropped when I first saw the number BOBJ had put out. I bet that Citi analyst that downgraded the shares yesterdat morning had a restless night. I suspect the shares will trade higher today but will have difficult time surpassing the levels reached in after hrs trading. But surely the bottom is in for this one. Going higher in the coming weeks.
Goldman comments on Baidu.com (BIDU)
- Goldman Sachs comments on Baidu.com (NASDAQ:BIDU) noting the company reported 2Q2006 gross revenue of 192mn RMB (up 175% yoy), which was slightly below both firm's 193mn RMB forecast and the high end of guidance at 193mn RMB. Exceptional growth was driven by 69% yoy growth in new advertisers with spending per advertiser up 30% yoy. Despite robust growth and significant upside in EBITDA margins, they believe results are negative for the stock given that investors have set an aggressive bar for Baidu to exceed in order to justify the stock's current valuation, which is at a 100%-plus premium to both premier Chinese and US Internet companies including Google, a fast-growing US company.
Firm thinks the shares will likely be under pressure given that in-line revenue should temper investor expectations, combined with a pending lock-up of 16mn shares (10 day average is ~3.3mn) on 8/13/2006. A 100%+ premium EV/EBITDA multiple to Google (especially given the typical Chinese company discount) generally implies that investors need to see revenue outperformance to drive the shares higher. A significant stock pullback could create a more opportunistic entry point. Firm is raising their top and bottom-line expectations, which result in a slightly higher 6-month price target of $70 vs. $67 previously. Significant margin expansion from current levels may be less likely given the investment opportunities, capex ramp, and increased competition.
Based on an after-market close of $78.50, BIDU shares have ~10% downside and continue to trade at a significant premium to its US and Chinese peers at a 2007E P/E and EV/EBITDA of 49X and 37X vs. the US medians at 27X and 11X and the Chinese medians at 20X and 14X, respectively.
Notablecalls: Notice how it bounced off the 200 day moving average in after hrs trading. This is the level it needs to hold. Bet Stevie went home unhappy but I suspect he has bigger plans with BIDU. Expect to see some takeover chatter develop in the coming days/weeks.
Firm thinks the shares will likely be under pressure given that in-line revenue should temper investor expectations, combined with a pending lock-up of 16mn shares (10 day average is ~3.3mn) on 8/13/2006. A 100%+ premium EV/EBITDA multiple to Google (especially given the typical Chinese company discount) generally implies that investors need to see revenue outperformance to drive the shares higher. A significant stock pullback could create a more opportunistic entry point. Firm is raising their top and bottom-line expectations, which result in a slightly higher 6-month price target of $70 vs. $67 previously. Significant margin expansion from current levels may be less likely given the investment opportunities, capex ramp, and increased competition.
Based on an after-market close of $78.50, BIDU shares have ~10% downside and continue to trade at a significant premium to its US and Chinese peers at a 2007E P/E and EV/EBITDA of 49X and 37X vs. the US medians at 27X and 11X and the Chinese medians at 20X and 14X, respectively.
Notablecalls: Notice how it bounced off the 200 day moving average in after hrs trading. This is the level it needs to hold. Bet Stevie went home unhappy but I suspect he has bigger plans with BIDU. Expect to see some takeover chatter develop in the coming days/weeks.
Notablecalls - Paperstand
According to The Wall Street Journal, 5 major telecom-equipment vendors are set to announce today major changes to their next-generation network technology to help telecom operators accelerate their introduction of features that combine phone, television and Internet services. The co's, Cisco (CSCO), Lucent (LU), Motorola (MOT), Nortel (NT) and Qualcomm (QCOM), have been working for the past year to revise their systems to meet Verizon Wireless's requirements. But they are planning to sell the new technology to other carriers as well. Carriers rolling out new multimedia features are expected to spend billions of dollars in coming years on new Internet-based technology, known as IMS, for Internet Protocol Multimedia Subsystem.
The WSJ's "Heard on the Street" column discusses favorably Automatic Data Processing (ADP), saying that it has a huge and growing stash of cash that could keep investors happy, and a business model that could help it beat other stocks if interest rates keep rising. "This stock is cheap here," says Brandt Sakakeeny, an analyst with Deutsche Bank. Mr. Sakakeeny rates the stock a Buy. The "reputational black eye" the co suffered recently might be why it has underperformed in the past 2 weeks, says Gary Bisbee, an analyst with Lehman Brothers who gives the stock an Overweight rating.
Barron's Online discusses Borders Group (BGP), whose shares are down 15% YTD. A bottom-feeding investor might see opportunity in these beaten-down shares. And Borders is taking steps to boost earnings and mollify investors. The co is remodeling its nearly 480 domestic superstores, closing or rebranding its underperforming Waldenbooks chain, and luring customers with its Borders Rewards loyalty program. But analysts say that despite the co's best efforts, a downbeat book sector coupled with an overall weak retail environment will continue to damp Borders' earnings as weak wage growth and high gasoline prices put pressure on bookworms. Deutsche Bank analyst Dave Weiner says, "In a nutshell, I like what [Borders] is doing with the remodels, but I don't think investors are going to reward those anytime soon given the headwinds [Borders] is fighting."
The WSJ's "Heard on the Street" column discusses favorably Automatic Data Processing (ADP), saying that it has a huge and growing stash of cash that could keep investors happy, and a business model that could help it beat other stocks if interest rates keep rising. "This stock is cheap here," says Brandt Sakakeeny, an analyst with Deutsche Bank. Mr. Sakakeeny rates the stock a Buy. The "reputational black eye" the co suffered recently might be why it has underperformed in the past 2 weeks, says Gary Bisbee, an analyst with Lehman Brothers who gives the stock an Overweight rating.
Barron's Online discusses Borders Group (BGP), whose shares are down 15% YTD. A bottom-feeding investor might see opportunity in these beaten-down shares. And Borders is taking steps to boost earnings and mollify investors. The co is remodeling its nearly 480 domestic superstores, closing or rebranding its underperforming Waldenbooks chain, and luring customers with its Borders Rewards loyalty program. But analysts say that despite the co's best efforts, a downbeat book sector coupled with an overall weak retail environment will continue to damp Borders' earnings as weak wage growth and high gasoline prices put pressure on bookworms. Deutsche Bank analyst Dave Weiner says, "In a nutshell, I like what [Borders] is doing with the remodels, but I don't think investors are going to reward those anytime soon given the headwinds [Borders] is fighting."
Wednesday, July 26, 2006
Interesting Call of The Day - Digital Insight (DGIN)
- Stephens is out defending Digital Insight (NASDAQ:DGIN) noting the stock is off roughly 25% today on three items--slowing billpay trends, the defection of some growth shareholders, and a resellers' comments this morning that it may move business from DGIN to in-house products.
Firm is upgrading DGIN to Overweight from Equal-Weight based on one simple theory-the news flow on this name the last 24 hours should not dictate a 25% share price decline, and they expect future news flow to lead to a $30+ stock price. DGIN has a 90+% recurring revenue model, billpay trends have rebounded to past levels thus far in July, and on the reseller agreement with FIS going away, they have in-depth knowledge of this contract and believe FIS makes too much money on the agreement to cancel it.
Furthermore, the contracts between DGIN and FIS mean FIS can't just pull the business. Firm's $36 target is based on a multiple of 28x our FY07 pro forma EPS estimate (DGIN has traded at a forward P/E multiple range of 21x-34x historically). One can argue this assumed multiple is high in light of the peer average of 23x, but DGIN's cash balance is relatively higher (roughly $3/share) and they see more upside to Digital's numbers than its peers.
Notablecalls: While I expected DGIN to trade down today, the 25% sell-off comes to me as a surprise. Outsourced online banking apps mkt isn't going away any time soon.
Firm is upgrading DGIN to Overweight from Equal-Weight based on one simple theory-the news flow on this name the last 24 hours should not dictate a 25% share price decline, and they expect future news flow to lead to a $30+ stock price. DGIN has a 90+% recurring revenue model, billpay trends have rebounded to past levels thus far in July, and on the reseller agreement with FIS going away, they have in-depth knowledge of this contract and believe FIS makes too much money on the agreement to cancel it.
Furthermore, the contracts between DGIN and FIS mean FIS can't just pull the business. Firm's $36 target is based on a multiple of 28x our FY07 pro forma EPS estimate (DGIN has traded at a forward P/E multiple range of 21x-34x historically). One can argue this assumed multiple is high in light of the peer average of 23x, but DGIN's cash balance is relatively higher (roughly $3/share) and they see more upside to Digital's numbers than its peers.
Notablecalls: While I expected DGIN to trade down today, the 25% sell-off comes to me as a surprise. Outsourced online banking apps mkt isn't going away any time soon.
Color on quarter: Amazon.com (AMZN)
- Several firms commenting AMZN results with the emphasis on disappointing profitability:
* Prudential notes that profit margins deteriorated precipitously in the quarter, due to increased spending on technology, free shipping, a product mix shift, as well as $20 million of costs associated with the termination of the Toysrus.com contract. The company raised its FY'06 revenue guidance, but lowered its operating income guidance by $80 million. Firm is taking its numbers down and lowering price tgt to $25 from $30. Reiterates Underweight.
* Goldman Sachs notes that Amazon reduced its operating profit guidance by 15% including Toys R Us and by ~7% excluding Toys R Us, which appears to be a departure from a return to double-digit incremental operating margin. This apparent increased investment vs. the prior plan likely eliminates what could have developed into a potentially more constructive view if the shares reached the low $30s. As such, our thesis remains relatively unchanged. They believe Amazon valuation remains ahead of its fundamentals, while the company needs to resolve several company-specific issues (i.e., its proprietary toy offering as well as its digital strategy) and simultaneously show stronger incremental margins before we can consider becoming more positive on the stock.
* Citigroup says they are more negative. Revenue and unit trends are robust, but the growth is coming at increased cost. Excl. TRUS impact, N. America gross margin down 60 bps Y/Y and International gross margin down 130 bps Y/Y. Increasingly aggressive pricing and shipping promotions are the culprits. Still no clear signs of ROI on all that Tech & Content spend.
Notablecalls: Anyone still doubting that AMZN has became just an usual retailer instead of high-growth internet company? The question is, when will the valuation reflect this. Todays sharp decline will surely take it closer there.
* Prudential notes that profit margins deteriorated precipitously in the quarter, due to increased spending on technology, free shipping, a product mix shift, as well as $20 million of costs associated with the termination of the Toysrus.com contract. The company raised its FY'06 revenue guidance, but lowered its operating income guidance by $80 million. Firm is taking its numbers down and lowering price tgt to $25 from $30. Reiterates Underweight.
* Goldman Sachs notes that Amazon reduced its operating profit guidance by 15% including Toys R Us and by ~7% excluding Toys R Us, which appears to be a departure from a return to double-digit incremental operating margin. This apparent increased investment vs. the prior plan likely eliminates what could have developed into a potentially more constructive view if the shares reached the low $30s. As such, our thesis remains relatively unchanged. They believe Amazon valuation remains ahead of its fundamentals, while the company needs to resolve several company-specific issues (i.e., its proprietary toy offering as well as its digital strategy) and simultaneously show stronger incremental margins before we can consider becoming more positive on the stock.
* Citigroup says they are more negative. Revenue and unit trends are robust, but the growth is coming at increased cost. Excl. TRUS impact, N. America gross margin down 60 bps Y/Y and International gross margin down 130 bps Y/Y. Increasingly aggressive pricing and shipping promotions are the culprits. Still no clear signs of ROI on all that Tech & Content spend.
Notablecalls: Anyone still doubting that AMZN has became just an usual retailer instead of high-growth internet company? The question is, when will the valuation reflect this. Todays sharp decline will surely take it closer there.
Color on quarter: Digital Insight (DGIN)
- Digital Insight (NASDAQ:DGIN) will be on the casualty list today as the company last night failed to beat & raise. Also, subs number was way below analyst ests.
* JP Morgan notes DGIN mgmt maintained their FY06 $243-245M and $1.05-1.07 proforma guidance, even with rev upside in 2Q. 3Q guidance of $61-61.5M and $0.26-0.27 is below the Street consensus of $62/$0.27 EPS, likely pressuring DGIN share price today.
DGIN added just 66K bill pay subs in the qtr, well below firm's 125K estimate, and couldn't explain the variance. DGIN monthly rev per customer of $2.33 was below estimates for $2.35 as bill pay shortfall could not offset ongoing online banking pricing pressure. Banking sub adds of 211K were above 190K est.
Although DGIN continues to execute well, uncontrollable factors such as bank customer MandA can reduce revenue growth via lost subscribers. Firm is more perplexed by the bill pay customer shortfall, which may be a one quarter anomaly, but with shares richly priced at 30X FY06 EPS, we likely see the stock decline today. Maintains Neutral.
* Merrill Lynch notes that following DGIN's 2Q06 results and conference call, they think investors will focus on what looks like a slowdown in online bill payment adoption. DGIN only added 66k new online bill payment uses in 2Q vs. an avg. of 125k over the prior three qtrs. Competitor Online Resources (ORCC) also experienced a slowdown while bill payment stats at large banks were generally solid in the qtr.
At this point, the firm doesn't have a great explanation for the slowdown at DGIN and ORCC. Perhaps it's an anomaly; maybe large banks are taking customers from small banks; maybe biller direct is gaining share vs. bank centric models. Nevertheless, they think the slowdown along with mixed financial results will keep DGIN shares range bound in the near-term, especially considering the stock's premium multiple.
* D.A. Davidson notes that sisappointingly, DGIN lost six Internet banking contracts, net, in the quarter, (15 were lost to merger activity). 211,000 new IB users adds was mediocre, while 66,000 new bill pay adds was poor. Clearly client losses account for most of the shortfall, however, seasonality appears to be playing a more substantial role.
Expects investors in the near term will focus on the negatives; lending, bill pay growth, and bank M&A. However, DGIN is sheltered from significant impact given its large client base, recurring revenue, and newer product partnership strategy. Firm would not be sellers into today's likely weakness.
Maintains NEUTRAL rating, but adjusting price target from $37 to $35, which represents 27x 2007 EPS estimate (or 25x excluding cash) and an EV/2007 EBITDA multiple of 13x.
Notablecalls: I would not be surprised to see DGIN stock down 10% today. With this rich valuation the co will have to do better than just half analyst est of sub adds. But don't get me wrong, I like the co. I just happen to think the stock is expensive.
* JP Morgan notes DGIN mgmt maintained their FY06 $243-245M and $1.05-1.07 proforma guidance, even with rev upside in 2Q. 3Q guidance of $61-61.5M and $0.26-0.27 is below the Street consensus of $62/$0.27 EPS, likely pressuring DGIN share price today.
DGIN added just 66K bill pay subs in the qtr, well below firm's 125K estimate, and couldn't explain the variance. DGIN monthly rev per customer of $2.33 was below estimates for $2.35 as bill pay shortfall could not offset ongoing online banking pricing pressure. Banking sub adds of 211K were above 190K est.
Although DGIN continues to execute well, uncontrollable factors such as bank customer MandA can reduce revenue growth via lost subscribers. Firm is more perplexed by the bill pay customer shortfall, which may be a one quarter anomaly, but with shares richly priced at 30X FY06 EPS, we likely see the stock decline today. Maintains Neutral.
* Merrill Lynch notes that following DGIN's 2Q06 results and conference call, they think investors will focus on what looks like a slowdown in online bill payment adoption. DGIN only added 66k new online bill payment uses in 2Q vs. an avg. of 125k over the prior three qtrs. Competitor Online Resources (ORCC) also experienced a slowdown while bill payment stats at large banks were generally solid in the qtr.
At this point, the firm doesn't have a great explanation for the slowdown at DGIN and ORCC. Perhaps it's an anomaly; maybe large banks are taking customers from small banks; maybe biller direct is gaining share vs. bank centric models. Nevertheless, they think the slowdown along with mixed financial results will keep DGIN shares range bound in the near-term, especially considering the stock's premium multiple.
* D.A. Davidson notes that sisappointingly, DGIN lost six Internet banking contracts, net, in the quarter, (15 were lost to merger activity). 211,000 new IB users adds was mediocre, while 66,000 new bill pay adds was poor. Clearly client losses account for most of the shortfall, however, seasonality appears to be playing a more substantial role.
Expects investors in the near term will focus on the negatives; lending, bill pay growth, and bank M&A. However, DGIN is sheltered from significant impact given its large client base, recurring revenue, and newer product partnership strategy. Firm would not be sellers into today's likely weakness.
Maintains NEUTRAL rating, but adjusting price target from $37 to $35, which represents 27x 2007 EPS estimate (or 25x excluding cash) and an EV/2007 EBITDA multiple of 13x.
Notablecalls: I would not be surprised to see DGIN stock down 10% today. With this rich valuation the co will have to do better than just half analyst est of sub adds. But don't get me wrong, I like the co. I just happen to think the stock is expensive.
Color on quarter: Cymer (CYMI)
- Several firms are commenting on Cymer (NASDAQ:CYMI) following disappointing results and guidance announced last night. Surprisingly, we even have one firm upgrading the shares of heels of the news.
* Banc of America upgrades the shares to Buy from Neutral noting they had beencautious on the stock due to valuation. With the stock down over 25% since May (vs. -4% for the S&P500), they now think it's a good time to accumulate shares. Lithography remains firm's favorite segment as they believe adoption of new set of technologies (ArF/immersion) will increase ASP. Thinks these price increases will even mitigate any decline in unit shipments.
Unlike ASML, CYMI has about 85% market share and hence share gains will not fuel significant top-line growth; but the rising ASP's coupled with the company's relatively new business model should help the company maintain a high-20's operating margin and improve bottom line. Expect service revenues to grow.
Weakness in June bookings and backlog, down 5% and 7% respectively, will likely pressure the stock short term. But, they are confident that CYMI's market share dominance will track the lithography market trends over multiple quarters.
CYMI has pulled back over 25% since May. Firm is cutting 2007 EPS estimates from $4.12 to $3.03 on more conservative margin and ASP assumptions. Applying a 13x multiple on FY07 estimates, and adding back excess cash to they arrive at a price target of $45.50 (down from $55.50). Believes CYMI can easily support a 12x multiple as rising ASP's offset and decline in units to continue revenue growth.
* Prudential is lowering their tgt to $63 from $68 but maintains Overweight rating. Notes there is no change to their core thesis that deep UV lithography segment will grow faster than the equipment sector as a whole. Investors are concerned with the low level of backlog, but the firm expects orders and backlog will recover in 3q.
Firm is lowering FY07 estimates because the non-systems revenue could start to slow as utilization rates dip. New CY07 revenue estimate is $717M, down from $770M. Non-systems revenues trend with utilization rates, which they expect will take a slight dip in 3q due to seasonality. They $63 price target is based on 20 times new CY07 estimate of $3.30.
Notablecalls: CYMI is the fist mid-cap, growth Semi Equip name to warn. Is CYMI the canary in the coal mine? Note that on call, the co said that over last several weeks, sentiment in Semiconductor sector has become cautious but was quick to note that it's still seeing robust and growing demand and does not appear that customers have over-ordered. I suspect there will be traders looking to buy this one for a bounce but I expect te bounce will not last for long as CYMI will not be the only Semi name to warn.
* Banc of America upgrades the shares to Buy from Neutral noting they had beencautious on the stock due to valuation. With the stock down over 25% since May (vs. -4% for the S&P500), they now think it's a good time to accumulate shares. Lithography remains firm's favorite segment as they believe adoption of new set of technologies (ArF/immersion) will increase ASP. Thinks these price increases will even mitigate any decline in unit shipments.
Unlike ASML, CYMI has about 85% market share and hence share gains will not fuel significant top-line growth; but the rising ASP's coupled with the company's relatively new business model should help the company maintain a high-20's operating margin and improve bottom line. Expect service revenues to grow.
Weakness in June bookings and backlog, down 5% and 7% respectively, will likely pressure the stock short term. But, they are confident that CYMI's market share dominance will track the lithography market trends over multiple quarters.
CYMI has pulled back over 25% since May. Firm is cutting 2007 EPS estimates from $4.12 to $3.03 on more conservative margin and ASP assumptions. Applying a 13x multiple on FY07 estimates, and adding back excess cash to they arrive at a price target of $45.50 (down from $55.50). Believes CYMI can easily support a 12x multiple as rising ASP's offset and decline in units to continue revenue growth.
* Prudential is lowering their tgt to $63 from $68 but maintains Overweight rating. Notes there is no change to their core thesis that deep UV lithography segment will grow faster than the equipment sector as a whole. Investors are concerned with the low level of backlog, but the firm expects orders and backlog will recover in 3q.
Firm is lowering FY07 estimates because the non-systems revenue could start to slow as utilization rates dip. New CY07 revenue estimate is $717M, down from $770M. Non-systems revenues trend with utilization rates, which they expect will take a slight dip in 3q due to seasonality. They $63 price target is based on 20 times new CY07 estimate of $3.30.
Notablecalls: CYMI is the fist mid-cap, growth Semi Equip name to warn. Is CYMI the canary in the coal mine? Note that on call, the co said that over last several weeks, sentiment in Semiconductor sector has become cautious but was quick to note that it's still seeing robust and growing demand and does not appear that customers have over-ordered. I suspect there will be traders looking to buy this one for a bounce but I expect te bounce will not last for long as CYMI will not be the only Semi name to warn.
Color on quarter: Sigmatel (SGTL)
- Couple of firms are commenting on Sigmatel (NASDAQ:SGTL) after the co announced its results and divesture of audio codec business.
* JP Morgan is lowering their C06 revenue estimate from $186.0 million to $160.8 million and C07 revenue estimate from $245.0 million to $182.0 million. However, they are raising C06 EPS estimate from ($1.72) to ($1.32) and C07 EPS estimate from ($1.03) to ($0.84) due to lower taxes.
The audio codec business had gross margins of 40%, below average corporate gross margins of 45% for 2Q06. Firm views the divestiture as a positive for SigmaTel as it raises gross margins and improves the company's liquidity.
Although inventory days decreased 45 days QoQ from 185 days to 140 days, they remain well above the long term target of 60 days and the firm remains concerned on Sigmatel's higher inventory levels. The company commented overall MP3 demand for 2Q06 appears lower than expected, which has hurt end market sales. Firm notes, even market leader Apple's iPod shipments declined 5% QoQ from 8.5 million units in 1Q06 to 8.0 million units in 2Q06. Expects MP3 player demand to recover seasonally but are concerned some excess inventory could be left in the channel.
Sigmatel is trading at 0.8X C06 sales, below the low end of its normal trading range of 1X-3X sales. Firm remains concerned regarding Sigmatel's share loss and additional risk to estimates. Reiterates Neutral rating.
* Jefferies notes SGTL reported Q2 revenue of $44MM (+33% Q/Q), ahead of their estimate and consensus of $42MM. SigmaTel's 3600 product accounted for 15% of rev in Q2 driven by the ramp of Samsung's YP-Z5 and Creative ZEN V.
Co announced the sale of its audio codec business to IDT for $72MM in cash plus $8MM of balance sheet items. Given the current runrate of the audio codec business in Q2 ($8.6MM), SigmaTel received roughly 2-2.5x sales for this transaction. Although this transaction goes against SigmaTel's diversification strategy, they believe SigmaTel received an extremely attractive price and the cash from the deal provides much needed liquidity.
Firm's tgt of $4.50 is a slight premium to SGTL's cash/share of roughly $3.75 in Q3:06. Maintains Hold.
Notablecalls: Short term I expect SGTL to top out around $5 level. Longer term this may be the beginning of a turnaround.
* JP Morgan is lowering their C06 revenue estimate from $186.0 million to $160.8 million and C07 revenue estimate from $245.0 million to $182.0 million. However, they are raising C06 EPS estimate from ($1.72) to ($1.32) and C07 EPS estimate from ($1.03) to ($0.84) due to lower taxes.
The audio codec business had gross margins of 40%, below average corporate gross margins of 45% for 2Q06. Firm views the divestiture as a positive for SigmaTel as it raises gross margins and improves the company's liquidity.
Although inventory days decreased 45 days QoQ from 185 days to 140 days, they remain well above the long term target of 60 days and the firm remains concerned on Sigmatel's higher inventory levels. The company commented overall MP3 demand for 2Q06 appears lower than expected, which has hurt end market sales. Firm notes, even market leader Apple's iPod shipments declined 5% QoQ from 8.5 million units in 1Q06 to 8.0 million units in 2Q06. Expects MP3 player demand to recover seasonally but are concerned some excess inventory could be left in the channel.
Sigmatel is trading at 0.8X C06 sales, below the low end of its normal trading range of 1X-3X sales. Firm remains concerned regarding Sigmatel's share loss and additional risk to estimates. Reiterates Neutral rating.
* Jefferies notes SGTL reported Q2 revenue of $44MM (+33% Q/Q), ahead of their estimate and consensus of $42MM. SigmaTel's 3600 product accounted for 15% of rev in Q2 driven by the ramp of Samsung's YP-Z5 and Creative ZEN V.
Co announced the sale of its audio codec business to IDT for $72MM in cash plus $8MM of balance sheet items. Given the current runrate of the audio codec business in Q2 ($8.6MM), SigmaTel received roughly 2-2.5x sales for this transaction. Although this transaction goes against SigmaTel's diversification strategy, they believe SigmaTel received an extremely attractive price and the cash from the deal provides much needed liquidity.
Firm's tgt of $4.50 is a slight premium to SGTL's cash/share of roughly $3.75 in Q3:06. Maintains Hold.
Notablecalls: Short term I expect SGTL to top out around $5 level. Longer term this may be the beginning of a turnaround.
Notablecalls - Paperstand
According to The Wall Street Journal, citing ppl familiar with the matter, Blackstone Group is considering a possible bid to top the $21.3bn leveraged buyout of hospital chain HCA (HCA). Deliberations over a bid, which is far from certain, are still in the early stages, and Blackstone hasn't yet invited other private-equity firms to join any potential offer.
The WSJ reports that to maintain his family's representation on the board of TD Ameritrade (AMTD), Chmn J. Joe Ricketts agreed to acquire millions of co shares. His purchase last week of nearly $114m of stock suggests he views this as a good time to meet that obligation. According to Chris Long, an analyst for data provider Washington Service, Mr. Ricketts's insider purchase was the largest by an individual executive or director at any company in more than a year.
The NY Post has learned that the auction for The Jones Apparel Group (JNY) is near death over price and concerns about the health of the co's brands, which include Jones New York, Anne Klein and Nine West. Two bidders, including Bain Capital, are still interested in acquiring the co, but the likelihood of reaching an agreement has diminished considerably in recent weeks, as price remains an obstacle. "I wouldn't say the Jones auction is dead," one person said. "But it's on life support." Jones' board is said to want no less than $34 a share, well above the co's current stock price.
Tuesday, July 25, 2006
Color on quarter: SNDK, CNET
- While the results from Sandisk (NASDAQ:SNDK) surprised the Street analyst commentary leaves me with only one question: Do we have to short it already in the pre mkt or can we wait a couple of days?
* Deutsche Bank notes SNDK posted better than expected (DB, Street, & market) 2Q results, but guided to weaker than expected (Street) 3Q. As they expected, it brought down full year royalty guidance and ASP guidance (though, still above industry peers - reason for some caution). Unless street believes guidance is conservative, 2H06 estimates are likely to come down. Firm continues to believe that SNDK is fairly valued with plenty risks (litigation, low price-visibility, structural NAND deterioration with new entrants, and consumer exposure), and retains Hold rating and $40 P/T.
* JP Morgan notes a strong quarter has been immediately priced into the stock, which traded up 19% on high volume post yesterday's $40.20 close to $48.20 (approximately 28% for the day vrs the SandP up 1.7%). Firm is incrementally positive because SNDK appears to be winning share and improving its business model, even during cyclical and seasonal weakness. SNDK looks set for a typically strong year-end, providing CE spending holds up. The margin outlook is buoyant through year-end, but could turn down slightly in 1H07 when Fab 3 yields peak and SNDK turns back to Samsung for non-captive supply, in firm's view. Capex associated with Fab 4 becomes a consideration in late 2007, which may weigh on the multiple somewhat.
Maintains Neutral Rating. If SNDK opens at the $48.20 indicated last night, SNDK will be trading at 17.1 times revised FY07 PF EPS of $2.82, a 13% discount to the mean of firm's coverage universe and a PEG of 1.2x on a 14% '05-'07 PF EPS CAGR. The multiple looks reasonable compared with SNDK's historical trading range (12.5-34.7x 2-year NTM P/E).
* Goldman says the stock had been trading significantly below our $46 price target and was likely over shorted into the call so the strong CY2Q2006 results should drive the stock closer to our price target. However, soft guidance will likely prevent the stock from trading too far above firm's price target as the guidance dampens hopes for a robust CY2H2006 in NAND as some had hoped. Theyprefer Intel (Buy), Marvell (Buy), and FormFactor (Buy) for when the group bottoms, likely later this summer, as they would wait on SNDK until we get better clarity on if/when additional licensees may be added, given that the royalty stream is the main driver of valuation.
- Stifel notes that contrary to investor concern, CNET Networks (NASDAQ:CNET) beat revenue expectations after the close last night. Other than cash position, the company did not provide any further financial details due to the ongoing options investigation. 3Q revenue guidance was above expectations, full-year outlook was reiterated and no longer looks as back-end weighted as it had previously.
Traffic growth continued to slow during the quarter with page views down 5% overall, but up 12% excluding Webshots, which commands disproporationately lower revenue/page.
Firm sees a greater potential of a company sale due to the options scandal and continue to see a potential takeover value of $13+. In their view, CNET shares offer old-media valuation with new-media growth - reiterates Buy rating and $11.50 price target.
Notablecalls: Stifel is about the only firm out positive on CNET this morning. Couple of firms, including Piper and RBC are lowering their tgts to $9. Still, I think CENT is one to watch as it's one of the last remaining pure-play internet content providers. They have 30+ mln users which is a lot.
* Deutsche Bank notes SNDK posted better than expected (DB, Street, & market) 2Q results, but guided to weaker than expected (Street) 3Q. As they expected, it brought down full year royalty guidance and ASP guidance (though, still above industry peers - reason for some caution). Unless street believes guidance is conservative, 2H06 estimates are likely to come down. Firm continues to believe that SNDK is fairly valued with plenty risks (litigation, low price-visibility, structural NAND deterioration with new entrants, and consumer exposure), and retains Hold rating and $40 P/T.
* JP Morgan notes a strong quarter has been immediately priced into the stock, which traded up 19% on high volume post yesterday's $40.20 close to $48.20 (approximately 28% for the day vrs the SandP up 1.7%). Firm is incrementally positive because SNDK appears to be winning share and improving its business model, even during cyclical and seasonal weakness. SNDK looks set for a typically strong year-end, providing CE spending holds up. The margin outlook is buoyant through year-end, but could turn down slightly in 1H07 when Fab 3 yields peak and SNDK turns back to Samsung for non-captive supply, in firm's view. Capex associated with Fab 4 becomes a consideration in late 2007, which may weigh on the multiple somewhat.
Maintains Neutral Rating. If SNDK opens at the $48.20 indicated last night, SNDK will be trading at 17.1 times revised FY07 PF EPS of $2.82, a 13% discount to the mean of firm's coverage universe and a PEG of 1.2x on a 14% '05-'07 PF EPS CAGR. The multiple looks reasonable compared with SNDK's historical trading range (12.5-34.7x 2-year NTM P/E).
* Goldman says the stock had been trading significantly below our $46 price target and was likely over shorted into the call so the strong CY2Q2006 results should drive the stock closer to our price target. However, soft guidance will likely prevent the stock from trading too far above firm's price target as the guidance dampens hopes for a robust CY2H2006 in NAND as some had hoped. Theyprefer Intel (Buy), Marvell (Buy), and FormFactor (Buy) for when the group bottoms, likely later this summer, as they would wait on SNDK until we get better clarity on if/when additional licensees may be added, given that the royalty stream is the main driver of valuation.
- Stifel notes that contrary to investor concern, CNET Networks (NASDAQ:CNET) beat revenue expectations after the close last night. Other than cash position, the company did not provide any further financial details due to the ongoing options investigation. 3Q revenue guidance was above expectations, full-year outlook was reiterated and no longer looks as back-end weighted as it had previously.
Traffic growth continued to slow during the quarter with page views down 5% overall, but up 12% excluding Webshots, which commands disproporationately lower revenue/page.
Firm sees a greater potential of a company sale due to the options scandal and continue to see a potential takeover value of $13+. In their view, CNET shares offer old-media valuation with new-media growth - reiterates Buy rating and $11.50 price target.
Notablecalls: Stifel is about the only firm out positive on CNET this morning. Couple of firms, including Piper and RBC are lowering their tgts to $9. Still, I think CENT is one to watch as it's one of the last remaining pure-play internet content providers. They have 30+ mln users which is a lot.
Color on quarter: NTRI, RNOW
- Citigroup is defending NutriSystem (NASDAQ:NTRI) after the co announced its Q2 results last night. Stock traded down 13.5% in after market.
Firm notes stellar 2Q06 results indicate NTRI is in the early stages of its growth cycle. NTRI reported 2Q EPS of 53c and beat First Call consensus by 7c. NTRI had 168k new direct custs vs. guidance of over 155k custs. Importantly, the 2Q conf call revealed NTRI's Men's program could provide a very significant new market opportunity for NTRI (perhaps as big as women's).
The company announced the President/COO George Jankovic would be resigning due to family health issues after nearly 4 years with the company. Thomas Connerty, who has been with the company since November 2004 will serve as Chief Marketing Officer and EVP of Product Development effective July 25, 2006 (CEO Michael Hagan will assume the title of President). Firm notes CEO Michael Hagan will maintain his active role (as he has in the past) in marketing and operations. Overall, they do not view the changes as negative, given Mr. Connerty's background in the diet industry (previously served as Vice President of Direct Marketing at Nautilus) and role in creating and implementing a direct marketing program, which has contributed to NutriSystem's rapid growth over the past two years. Believes Mr. Connerty would make a solid CMO.
Firm is raising their EPS estimates by 27c each in '06-'08, respectively, to reflect the updated guidance and strong trends. Also raising long-term (2006-2010) EPS growth rate to 30% from 29% previously given new EPS estimates.
Tgt goes to $95 from $90. Reiterates Buy.
- While several firms are out cautious on Rightnow Tech (NASDAQ:RNOW) I chose to highlight the ones out in defense. Why? Because historically RNOW has been a bouncing stock.
*Deutsche Bank notes that with shares trading down in the after-market (likely due to excessive investor attention to near-term revenue and EPS guidance), they recommend investors look to RNOW's strong bookings (up 30% in 2Q and 49% YTD) and cash flow (up 168% in 2Q and 123% YTD) to asses business health. And while they acknowledge that an extended average contract length (now 30 vs. 24 months) inflates total bookings, the shift away from perpetual deals (15% of bookings YTD vs. 29% in 1H05) artificially lowers bookings results. Moreover, current bookings growth of 35% YTD illustrates the health in bookings despite a shift toward perpetual deals.
The company confirmed that it continues to hire aggressively with over 20% annual organic growth in quota carrying reps (QCR) at 124 reps and over 100% growth in open employment QCR positions currently. Management reiterated its bookings and cash flow guidance and stated that the pipeline is the best it's ever been.
FCF estimates for 2006 and 2007 are unchanged and they reiterate Buy rating and $22 PT. Using an after-market price of $12.50, shares are trading at 14x '07 FCF estimates (inline with the group). Firm believes these levels are compelling given RNOW's high-growth profile (40-50% bookings growth vs. the group grows in the low-teens).
* JMP Securities notes the bookings miss and lower guidance caused the stock to trade down 22% in the after-market. While the quarter was disappointing, they are not unduly concerned about RightNow's fundamentals. Although the business is lumpy, the firm believes RightNow has an industry leading on demand customer service product, little direct competition and strong free cash flow generation. Free cash flow was $0.13 per share versus estimate of $0.11 and $0.04 per share in the year ago quarter. Maintain their 2006 free cash flow estimate of $0.65 and ups 2007 free cash flow estimate from $0.70 to $0.75, primarily due to a lower assumed cash tax rate. As the on demand comps have fallen significantly, the firm reduces their price target from $23 to $18, representing a 2007 price to free cash flow multiple of 20x, in line with the peer group median.
Maintains Mkt Outperform rating.
Firm notes stellar 2Q06 results indicate NTRI is in the early stages of its growth cycle. NTRI reported 2Q EPS of 53c and beat First Call consensus by 7c. NTRI had 168k new direct custs vs. guidance of over 155k custs. Importantly, the 2Q conf call revealed NTRI's Men's program could provide a very significant new market opportunity for NTRI (perhaps as big as women's).
The company announced the President/COO George Jankovic would be resigning due to family health issues after nearly 4 years with the company. Thomas Connerty, who has been with the company since November 2004 will serve as Chief Marketing Officer and EVP of Product Development effective July 25, 2006 (CEO Michael Hagan will assume the title of President). Firm notes CEO Michael Hagan will maintain his active role (as he has in the past) in marketing and operations. Overall, they do not view the changes as negative, given Mr. Connerty's background in the diet industry (previously served as Vice President of Direct Marketing at Nautilus) and role in creating and implementing a direct marketing program, which has contributed to NutriSystem's rapid growth over the past two years. Believes Mr. Connerty would make a solid CMO.
Firm is raising their EPS estimates by 27c each in '06-'08, respectively, to reflect the updated guidance and strong trends. Also raising long-term (2006-2010) EPS growth rate to 30% from 29% previously given new EPS estimates.
Tgt goes to $95 from $90. Reiterates Buy.
- While several firms are out cautious on Rightnow Tech (NASDAQ:RNOW) I chose to highlight the ones out in defense. Why? Because historically RNOW has been a bouncing stock.
*Deutsche Bank notes that with shares trading down in the after-market (likely due to excessive investor attention to near-term revenue and EPS guidance), they recommend investors look to RNOW's strong bookings (up 30% in 2Q and 49% YTD) and cash flow (up 168% in 2Q and 123% YTD) to asses business health. And while they acknowledge that an extended average contract length (now 30 vs. 24 months) inflates total bookings, the shift away from perpetual deals (15% of bookings YTD vs. 29% in 1H05) artificially lowers bookings results. Moreover, current bookings growth of 35% YTD illustrates the health in bookings despite a shift toward perpetual deals.
The company confirmed that it continues to hire aggressively with over 20% annual organic growth in quota carrying reps (QCR) at 124 reps and over 100% growth in open employment QCR positions currently. Management reiterated its bookings and cash flow guidance and stated that the pipeline is the best it's ever been.
FCF estimates for 2006 and 2007 are unchanged and they reiterate Buy rating and $22 PT. Using an after-market price of $12.50, shares are trading at 14x '07 FCF estimates (inline with the group). Firm believes these levels are compelling given RNOW's high-growth profile (40-50% bookings growth vs. the group grows in the low-teens).
* JMP Securities notes the bookings miss and lower guidance caused the stock to trade down 22% in the after-market. While the quarter was disappointing, they are not unduly concerned about RightNow's fundamentals. Although the business is lumpy, the firm believes RightNow has an industry leading on demand customer service product, little direct competition and strong free cash flow generation. Free cash flow was $0.13 per share versus estimate of $0.11 and $0.04 per share in the year ago quarter. Maintain their 2006 free cash flow estimate of $0.65 and ups 2007 free cash flow estimate from $0.70 to $0.75, primarily due to a lower assumed cash tax rate. As the on demand comps have fallen significantly, the firm reduces their price target from $23 to $18, representing a 2007 price to free cash flow multiple of 20x, in line with the peer group median.
Maintains Mkt Outperform rating.
Calls of Note Part 1
- Friedman, Billings, Ramsey comments on Formfactor (NASDAQ:FORM) noting that following Phicom's disappointing 2Q results from late last week, they believe there is a fear in some investors that FORM could also disappoint when it reports 2Q results on Thursday, July 27th, after the close.
Firm notes that that Hynix was the largest customer at Phicom, and following the recent agreement with FORM, investors should not be surprised to see the 50%-plus QOQ decline in Phicom's 2Q06 revenues as the firm believes FORM has been a clear winner at Hynix.
Additionally, with a new product introduction at Phicom missing deadlines, they believe there is even more share gain opportunity for FORM going forward. To that end, they expect FORM to meet or exceed 2Q revenue/pro forma/GAAP EPS estimates of $88M/$0.33/$0.27, which is at the high end of company's guidance range, and compared to the consensus estimates of $88M/$0.34/$0.28. Firm also expects the company's 3Q guidance to meet their already revised (up) estimates of $93M/$0.35/$0.28, respectively.
Reits Outperform.
Notablecalls: Not actionable but good to know category.
- Piper Jaffray is positive on Apple Computer (NASDAQ:AAPL) saying that in light of the results of our 200 person study of iPod users, they believe that Mac market share will rise over the next 12 months. Firm found that 9% of iPod users with PCs indicated that they plan to switch to a Mac in the next 12 months (a 9% "Halo Effect").
According to Piper in Nov. '04 they conducted a study of 200 iPod users throughout the United States and found that 10% of PC users planned to switch from PC to Mac within the next 12 months. During the 12 months following the survey, worldwide Mac market share increased from 1.8% to 2.5%, according to IDC's quarterly data. However, the announcement of the transition to Intel chips in Jun-05 caused Mac sales to slide and market share decreased over the next several quarters. As Apple completes the Intel transition in the next several months, the firm is confident that Mac market share will begin to increase again.
Maintains Outpeform and $99 tgt.
Notablecalls: Not actionable but good to know category.
- UBS is out somewhat cautious on Google (NASDAQ:GOOG) saying they believe that rev booked as Google sites rev is incrementally lower "quality" than previously thought. Firm now understands that there is TAC associated with some of this rev, it does not represent only "organic" growth, and is susceptible to competitive pressures. Also, generally assumed TAC rate calculations do not take into account TAC associated with Google sites rev.
This is important as it explains how some distribution deals flow through the income statement in unexpected ways. While the "bounty", or "installation" fees are generally booked as sales and marketing costs, the rev share portion of these deals will generally flow through as TAC. Of course, the amount of TAC from toolbar and other dist. deals is difficult to quantify.
Believes that most investors calculate TAC rates by dividing the absolute TAC by Google Network rev (e.g. 2Q TAC rate equals 78.8%). They think this is misleading, as the denominator does not reflect rev booked as Google sites rev. Therefore the "true" TAC rate is lower than 78.8%. This also explains why Google reports TAC as a percentage of total ad rev.
According to firm, while this knowledge does not change otheir estimates, it does incrementally lower their view of the "quality" of revenue from Google sites versus previous understanding.
Maintains Neutral and $460 tgt.
Notablecalls: I think GOOG is in a vulnerable position and statements like this may pressure the shares.
- Banc of America is lowering year-end 2006 and 2007 subscriber estimates for XM Setellite (NASDAQ:XMSR) to 8.2M (from 8.3M) and 10.8M (from 11.0M), respectively. Toyota's relationship with XM is strong, but they now believe the big factory installation ramp-up will occur with model year 2008 vehicles rather than 2007 vehicles.
BUT they still believe XMSR has more upside than SIRI. SIRI's EV is 44% larger
than XM's. This valuation premium looks unjustified for several reasons:
Retail growth was weak for the satellite radio category as a whole in 2Q and the FCC issue could linger for both companies. June data from NPD showed YoY growth of just 4% for 2Q. And product availability could be an issue for BOTH providers in 3Q until the FCC issue is resolved.
Also, both management teams have credibility issues, but only XM has signaled any
intention of addressing this. XM has taken several steps in recent weeks to address its organizational structure in an effort to improve execution (new customer service vendors, more marketing professionals, new COO). Meanwhile, Sirius management misled investors on the FCC issue.
Notablecalls: Looks like there is more downside in store for XMSR if it breaks the recent low.
Firm notes that that Hynix was the largest customer at Phicom, and following the recent agreement with FORM, investors should not be surprised to see the 50%-plus QOQ decline in Phicom's 2Q06 revenues as the firm believes FORM has been a clear winner at Hynix.
Additionally, with a new product introduction at Phicom missing deadlines, they believe there is even more share gain opportunity for FORM going forward. To that end, they expect FORM to meet or exceed 2Q revenue/pro forma/GAAP EPS estimates of $88M/$0.33/$0.27, which is at the high end of company's guidance range, and compared to the consensus estimates of $88M/$0.34/$0.28. Firm also expects the company's 3Q guidance to meet their already revised (up) estimates of $93M/$0.35/$0.28, respectively.
Reits Outperform.
Notablecalls: Not actionable but good to know category.
- Piper Jaffray is positive on Apple Computer (NASDAQ:AAPL) saying that in light of the results of our 200 person study of iPod users, they believe that Mac market share will rise over the next 12 months. Firm found that 9% of iPod users with PCs indicated that they plan to switch to a Mac in the next 12 months (a 9% "Halo Effect").
According to Piper in Nov. '04 they conducted a study of 200 iPod users throughout the United States and found that 10% of PC users planned to switch from PC to Mac within the next 12 months. During the 12 months following the survey, worldwide Mac market share increased from 1.8% to 2.5%, according to IDC's quarterly data. However, the announcement of the transition to Intel chips in Jun-05 caused Mac sales to slide and market share decreased over the next several quarters. As Apple completes the Intel transition in the next several months, the firm is confident that Mac market share will begin to increase again.
Maintains Outpeform and $99 tgt.
Notablecalls: Not actionable but good to know category.
- UBS is out somewhat cautious on Google (NASDAQ:GOOG) saying they believe that rev booked as Google sites rev is incrementally lower "quality" than previously thought. Firm now understands that there is TAC associated with some of this rev, it does not represent only "organic" growth, and is susceptible to competitive pressures. Also, generally assumed TAC rate calculations do not take into account TAC associated with Google sites rev.
This is important as it explains how some distribution deals flow through the income statement in unexpected ways. While the "bounty", or "installation" fees are generally booked as sales and marketing costs, the rev share portion of these deals will generally flow through as TAC. Of course, the amount of TAC from toolbar and other dist. deals is difficult to quantify.
Believes that most investors calculate TAC rates by dividing the absolute TAC by Google Network rev (e.g. 2Q TAC rate equals 78.8%). They think this is misleading, as the denominator does not reflect rev booked as Google sites rev. Therefore the "true" TAC rate is lower than 78.8%. This also explains why Google reports TAC as a percentage of total ad rev.
According to firm, while this knowledge does not change otheir estimates, it does incrementally lower their view of the "quality" of revenue from Google sites versus previous understanding.
Maintains Neutral and $460 tgt.
Notablecalls: I think GOOG is in a vulnerable position and statements like this may pressure the shares.
- Banc of America is lowering year-end 2006 and 2007 subscriber estimates for XM Setellite (NASDAQ:XMSR) to 8.2M (from 8.3M) and 10.8M (from 11.0M), respectively. Toyota's relationship with XM is strong, but they now believe the big factory installation ramp-up will occur with model year 2008 vehicles rather than 2007 vehicles.
BUT they still believe XMSR has more upside than SIRI. SIRI's EV is 44% larger
than XM's. This valuation premium looks unjustified for several reasons:
Retail growth was weak for the satellite radio category as a whole in 2Q and the FCC issue could linger for both companies. June data from NPD showed YoY growth of just 4% for 2Q. And product availability could be an issue for BOTH providers in 3Q until the FCC issue is resolved.
Also, both management teams have credibility issues, but only XM has signaled any
intention of addressing this. XM has taken several steps in recent weeks to address its organizational structure in an effort to improve execution (new customer service vendors, more marketing professionals, new COO). Meanwhile, Sirius management misled investors on the FCC issue.
Notablecalls: Looks like there is more downside in store for XMSR if it breaks the recent low.
Notablecalls - Paperstand
The Wall Street Journal reports, citing ppl familiar with the matter, that Honda (HMC) is expected to announce Tue morning at a major air show in Oshkosh, Wisconsin, plans to crack America's small business jet mkt. It wasn't immediately clear whether Honda is going to unveil specific business plans for its 4-5 passenger twin-engine jet, the Honda Jet. But those individuals said the co will likely at least tout that it is ready to make the final push to realize its 20-year dream to become a jet aircraft maker by trying to obtain official certification of the aircraft by the FAA.
According to the CNET News Symantec (SYMC) and Yahoo (YHOO) on Tue plan to announce a partnership to help secure consumers online, according to public relations representatives for Yahoo. The arrangement between the two co's will include "some new security offerings" according to an e-mail sent to reporters by Yahoo's pr agency.
According to the Barron's Online, Morgan Stanley Investment Mgmt disclosed that it now owns about 9.5m class A shares of New York Times (NYT), or a 6.6% stake, after paying a total of $34.2m for 1.4m additional shares.
CNET News discusses SCO Group (SCOX) and IBM (IBM) court battle. A Utah judge dealt the SCO a significant blow in June by throwing out more than 180 of the co's specific allegations of IBM programmers moving proprietary Unix code to Linux, or otherwise misbehaving. When SCO fired back last week with a filing that seeks to reverse that decision, it salted its justification with a few instances of IBM actions that SCO believes show its case. SCO accuses IBM of intentionally destroying evidence. "Weeks after SCO filed its lawsuit, IBM directed 'dozens' of its Linux developers within its Linux Technology Center and at least ten of its Linux developers outside the LTC to delete the AIX and/or Dynix source code from their computers. One IBM Linux developer has admitted to destroying Dynix source code and tests, as well as pre-Mar'03 drafts of source code he had written for Linux while referring to Dynix code on his computer," SCO said in the filing.
Notablecalls: Expect to see some interest in SCO shares. I'm not a legal expert, but "destroying evidence" sounds bad for IBM.
According to the CNET News Symantec (SYMC) and Yahoo (YHOO) on Tue plan to announce a partnership to help secure consumers online, according to public relations representatives for Yahoo. The arrangement between the two co's will include "some new security offerings" according to an e-mail sent to reporters by Yahoo's pr agency.
According to the Barron's Online, Morgan Stanley Investment Mgmt disclosed that it now owns about 9.5m class A shares of New York Times (NYT), or a 6.6% stake, after paying a total of $34.2m for 1.4m additional shares.
CNET News discusses SCO Group (SCOX) and IBM (IBM) court battle. A Utah judge dealt the SCO a significant blow in June by throwing out more than 180 of the co's specific allegations of IBM programmers moving proprietary Unix code to Linux, or otherwise misbehaving. When SCO fired back last week with a filing that seeks to reverse that decision, it salted its justification with a few instances of IBM actions that SCO believes show its case. SCO accuses IBM of intentionally destroying evidence. "Weeks after SCO filed its lawsuit, IBM directed 'dozens' of its Linux developers within its Linux Technology Center and at least ten of its Linux developers outside the LTC to delete the AIX and/or Dynix source code from their computers. One IBM Linux developer has admitted to destroying Dynix source code and tests, as well as pre-Mar'03 drafts of source code he had written for Linux while referring to Dynix code on his computer," SCO said in the filing.
Notablecalls: Expect to see some interest in SCO shares. I'm not a legal expert, but "destroying evidence" sounds bad for IBM.
Monday, July 24, 2006
Calls of Note Part 6
- Prudential is very positive on The TJX Companies (NYSE:TJX) after an opportunity to walk a store and have a few hours with Carol Meyrowitz, President of TJX, Jeff Naylor, CFO, and Sherry Lang, IR.
Firm believes the story is clicking and the upside is really positioned to flow going forward. Basically what TJX is doing is going through each business to make sure they have the right fashion/content, the right/hot brands, and they are doing more of the buying off price rather than up front so they are building the margin.
At the same time, TJX is maniacally focused on cost reduction opportunities, and basically no stone is being left un-turned. The women's sportswear comp is already accelerating, the home business has improved, and the better brands won't even begin hitting until August. Firm thought Bob's looked markedly improved and it sounds like Carol Meyrowitz thinks AJ Wright can be an 8% margin business.
Prudential continues to think the TJX story offers excellent upside potential in 2006 and 2007. Averaging the trough (7.6% in 2004) and peak (9.8% in 1999) operating margin since 1999 yields an operating margin of 8.7%. If one applies that operating margin to our 2007 sales, the earnings would be $2.07 versus published estimate of $1.80. Even if TJX can just attain their operating margin goals by 2007 - which boil down to a total company operating margin of 8.0% versus published 7.6% estimate - they still see $0.10 upside, or $1.90 in earnings power. Applying the average high multiple of the last 3 years of 16.8x yields a $32 stock price.
Reits Overweight and $32 tgt.
Notablecalls: Not actionable but good to know category.
Firm believes the story is clicking and the upside is really positioned to flow going forward. Basically what TJX is doing is going through each business to make sure they have the right fashion/content, the right/hot brands, and they are doing more of the buying off price rather than up front so they are building the margin.
At the same time, TJX is maniacally focused on cost reduction opportunities, and basically no stone is being left un-turned. The women's sportswear comp is already accelerating, the home business has improved, and the better brands won't even begin hitting until August. Firm thought Bob's looked markedly improved and it sounds like Carol Meyrowitz thinks AJ Wright can be an 8% margin business.
Prudential continues to think the TJX story offers excellent upside potential in 2006 and 2007. Averaging the trough (7.6% in 2004) and peak (9.8% in 1999) operating margin since 1999 yields an operating margin of 8.7%. If one applies that operating margin to our 2007 sales, the earnings would be $2.07 versus published estimate of $1.80. Even if TJX can just attain their operating margin goals by 2007 - which boil down to a total company operating margin of 8.0% versus published 7.6% estimate - they still see $0.10 upside, or $1.90 in earnings power. Applying the average high multiple of the last 3 years of 16.8x yields a $32 stock price.
Reits Overweight and $32 tgt.
Notablecalls: Not actionable but good to know category.
Calls of Note Part 5
BB&T Capital Markets reiterates Buy rating and $64 12-month price target on MSC Industrial Direct (AMEX:MSM). Firm thinks MSM's multiple is again at levels that have generated significant investor interest in the past, making for an outstanding entry point.
Notes they've seen this show before. On July 21, MSM finished the day with a rolling weighted 12-month forward P/E of 16.6x. The multiple has been this low on only two recent occasions: in April (finished month at 15.8x) and September (finished month at 17.2x) of 2005.
In the first case, MSC's stock rallied from around $26--$27 to $38--$39 at its peak three months later. In the second, the shares rose from $32--$33 to $53--$54 six months later.
Directionally, MSC has softened with industrials; in order of magnitude, it has fared worse. It is off 28.4% since May 5, versus an average slide for firm's 13 industrial names of 19.4% and a dip in the S&P 500 of 6.4%.
Orders out of Kennametal (8%-plus) continue to point to strong metalworking demand. MSC's earnings report of June 29 was a fair bit better than that of its distribution "Big 3" peers, Grainger and Fastenal. MSC has a unique opportunity at this point in the cycle to accelerate sales growth and dial back spending as a result of the J&L transaction. This stock should be performing better than its peers, not worse.
Notablecalls: MSM is a bounce candidate.
In the first case, MSC's stock rallied from around $26--$27 to $38--$39 at its peak three months later. In the second, the shares rose from $32--$33 to $53--$54 six months later.
Directionally, MSC has softened with industrials; in order of magnitude, it has fared worse. It is off 28.4% since May 5, versus an average slide for firm's 13 industrial names of 19.4% and a dip in the S&P 500 of 6.4%.
Orders out of Kennametal (8%-plus) continue to point to strong metalworking demand. MSC's earnings report of June 29 was a fair bit better than that of its distribution "Big 3" peers, Grainger and Fastenal. MSC has a unique opportunity at this point in the cycle to accelerate sales growth and dial back spending as a result of the J&L transaction. This stock should be performing better than its peers, not worse.
Notablecalls: MSM is a bounce candidate.
Calls of Note Part 4
- Goldman Sachs notes that reports late Sunday evening suggest that HCA (NYSE:HCA) has reached a preliminary agreement with a private equity investors group led by Bain Capital and KKR for a leveraged buyout of the company that values HCA at $51 share, 6% above Friday's close and 22% above the company's 52-low from mid-June. The reported terms value HCA at 8.0x current estimate of 2006 EBITDA and roughly $830,000 per bed. This compares to 7.7x and $580,000 per bed for the hospital sector.
Within the sector, the firm highlights Triad Hospitals (NYSE:TRI). At 6.5x 2006 EBITDA Triad has the lowest EBITDA valuation in the hospital group. Applying HCA's 8.0x potential acquisition multiple to TRI would imply a $53 equity value or 32% appreciation from Friday's close. Firm reaffirms Buy rating on Triad and $50.50 price target.
Notablecalls: Expect to see some interest in TRI this morning.
- Morgan Stanley is defending Amylin Pharma (NASDAQ:AMLN) as investor concern has risen about a potential link between Byetta and pancreatitis (inflammatory damage to the pancreas).
Firm notes they examined the FDA's Adverse Event Reporting System (AERS) and medical literature for links between Byetta and pancreatitis. While there are 42 reports of pancreatitis in Byetta's AERS database, most are duplicative or from patients with an obvious etiology (e.g. gallstone, pancreatic mass, other drugs), and after adjusting for these factors, they find only nine cases (most have limited information, and may also have other risk factors). With almost 200,000 patients on Byetta, this rate is lower than the baseline 17 per 100,000 rate in the general population.
The FDA, physicians, and the general public are all sensitive to safety issues around drugs after recent setbacks such as Vioxx. However, the firm exits their review less concerned and with our investment thesis intact ($40-$50 trading stock for 2006 with potential to double in 3-5 years). They have not spoken with the company and look forward to Monday evening's earnings call, but would use meaningful weakness as a buying opportunity.
Reits Overweight.
Notablecalls: Not actionable but good to know category.
Within the sector, the firm highlights Triad Hospitals (NYSE:TRI). At 6.5x 2006 EBITDA Triad has the lowest EBITDA valuation in the hospital group. Applying HCA's 8.0x potential acquisition multiple to TRI would imply a $53 equity value or 32% appreciation from Friday's close. Firm reaffirms Buy rating on Triad and $50.50 price target.
Notablecalls: Expect to see some interest in TRI this morning.
- Morgan Stanley is defending Amylin Pharma (NASDAQ:AMLN) as investor concern has risen about a potential link between Byetta and pancreatitis (inflammatory damage to the pancreas).
Firm notes they examined the FDA's Adverse Event Reporting System (AERS) and medical literature for links between Byetta and pancreatitis. While there are 42 reports of pancreatitis in Byetta's AERS database, most are duplicative or from patients with an obvious etiology (e.g. gallstone, pancreatic mass, other drugs), and after adjusting for these factors, they find only nine cases (most have limited information, and may also have other risk factors). With almost 200,000 patients on Byetta, this rate is lower than the baseline 17 per 100,000 rate in the general population.
The FDA, physicians, and the general public are all sensitive to safety issues around drugs after recent setbacks such as Vioxx. However, the firm exits their review less concerned and with our investment thesis intact ($40-$50 trading stock for 2006 with potential to double in 3-5 years). They have not spoken with the company and look forward to Monday evening's earnings call, but would use meaningful weakness as a buying opportunity.
Reits Overweight.
Notablecalls: Not actionable but good to know category.
Calls of Note Part 3
- Deutsche Bank is positive on Corporate Executive Board (NASDAQ:EXBD) ahead of results saying they are forecasting 2Q06 revs of $110.0mm and pre-FAS123R EPS of $0.52, in line with the Street. They expect the company to post another strong quarter with results ahead of forecasts for contract value and revs (at least 28%+ YoY growth for each), as well as for operating income, net income, and EPS.
Given strong contract value growth trends (+29-30%) they have witnessed through 1Q06, they think the stage is set for a probable increase in revenue guidance (to +27-28%) when the company reports 2Q06 results. Firm expects EXBD to reiterate bottom line guidance for 2H06, and to raise its year-end targets by any amount of upside it reports for 2Q06. Based on EXBD's April release, current 3Q06 forecast of $116.0mm (+24 YoY) in revs and $0.58 pre-FAS123R EPS (in line with the Street) is in line with the company's targeted range and looks very
achievable.
Reits Buy and $125 tgt.
Notablecalls: Expect to see a bounce around the 200 MA level.
Given strong contract value growth trends (+29-30%) they have witnessed through 1Q06, they think the stage is set for a probable increase in revenue guidance (to +27-28%) when the company reports 2Q06 results. Firm expects EXBD to reiterate bottom line guidance for 2H06, and to raise its year-end targets by any amount of upside it reports for 2Q06. Based on EXBD's April release, current 3Q06 forecast of $116.0mm (+24 YoY) in revs and $0.58 pre-FAS123R EPS (in line with the Street) is in line with the company's targeted range and looks very
achievable.
Reits Buy and $125 tgt.
Notablecalls: Expect to see a bounce around the 200 MA level.
Calls of Note Part 2
Several firms are defending Halliburton (NYSE:HAL) this morning:
*Bear Stearns notes Halliburton reported 2Q06 EPS of $0.48 vs. BSC and consensus estimates of $0.49. Firm believes that last Friday's 8% decline in HAL shares was due to investors' disappointment with "in-line " results. Believes investors were looking for HAL to beat estimates in a more convincing fashion. HAL's earnings results may have added to growing skepticism regarding continued growth in North America.
Within the context of this business environment, it is not surprising that Halliburton announced that it is now pursuing a spin-off of KBR to Halliburton shareholders. In light of KBR's weak results and a difficult IPO market, a pure spin-off may be a better alternative. Although the company has not ruled out the possibility of an IPO (particularly if the OSX rebounds), it is no longer regarded as a necessary first step. Halliburton intends to seek a ruling from the IRS regarding the tax-free status of the transaction prior to a spin-off, and estimates the process will take six to nine months to complete. Firm believes the spin-off will unlock each division's true value, and ultimately lead to a higher stock market value for the stand-alone Energy Services Group.
*Bear Stearns notes Halliburton reported 2Q06 EPS of $0.48 vs. BSC and consensus estimates of $0.49. Firm believes that last Friday's 8% decline in HAL shares was due to investors' disappointment with "in-line " results. Believes investors were looking for HAL to beat estimates in a more convincing fashion. HAL's earnings results may have added to growing skepticism regarding continued growth in North America.
Within the context of this business environment, it is not surprising that Halliburton announced that it is now pursuing a spin-off of KBR to Halliburton shareholders. In light of KBR's weak results and a difficult IPO market, a pure spin-off may be a better alternative. Although the company has not ruled out the possibility of an IPO (particularly if the OSX rebounds), it is no longer regarded as a necessary first step. Halliburton intends to seek a ruling from the IRS regarding the tax-free status of the transaction prior to a spin-off, and estimates the process will take six to nine months to complete. Firm believes the spin-off will unlock each division's true value, and ultimately lead to a higher stock market value for the stand-alone Energy Services Group.
Believes the current sell-of is overdone and that Halliburton shares represent a compelling investment opportunity. Maintains 2006 EPS estimate of $2.05 and 2007 EPS of $2.55, and continues to rate HAL shares Outperform.
*UBS says they think the sell off in the shares on recent weeks and specifically in response to earnings is overdone and given its competitive growth rate and returns its valuation is extremely attractive.
Firm notes mgmt reiterated its growth outlook and sees continued strength in both N American and international markets. The US market continues to grow despite concerns about gas prices. HAL saw strength both on and offshore in 2Q:06 which could continue through 2007. Their estimate for 2006 rises $.02 to $2.14 and estimate for 2007 rises to $2.71 from $2.53. The driver of the changes is stronger expected ESG revenues and slightly higher margins offset by more conservative assumptions for KBR, especially on the G&I side of the business in Iraq and a flatter backlog in E&C than expected.
Reits Buy and $50 tgt.
Notablecalls: HAL may prove to be a nice bounce candidate over the coming days.
Calls of Note Part 1
- Merrill Lynch would buy both Theravance (NASDAQ:THRX) and Cubist (NASDAQ:CBST) for the upcoming telavancin data. Firm believes that owning the pair into the data provides a natural hedge for current owners of each stock. Also, because they estimate that THRX is discounting a low probability of positive telavancin data and CBST is discounting a high probability of at least positive data, the firm believes there could be upside for both in the most likely scenario of telavancin demonstrating it is non-inferior to standard of care with positive trends.
THRX provides investors with a strong risk/reward opportunity with about $3 of downside risk and $13 of potential upside. Firm projects an expected return upon data release of 13%. The most likely outcome from the telavancin study is that the drug shows a trend toward superiority in patients with MRSA. In this case, the drug could achieve sales of $500 MM and the stock would be worth $26.
Believes the stock could range from $20 to $36/share, depending on the outcome. Importantly, a higher stock price would raise the chances that GSK will exercise its option to purchase half of THRX's outstanding shares at $54.25 in July '07.
THRX provides investors with a strong risk/reward opportunity with about $3 of downside risk and $13 of potential upside. Firm projects an expected return upon data release of 13%. The most likely outcome from the telavancin study is that the drug shows a trend toward superiority in patients with MRSA. In this case, the drug could achieve sales of $500 MM and the stock would be worth $26.
Believes the stock could range from $20 to $36/share, depending on the outcome. Importantly, a higher stock price would raise the chances that GSK will exercise its option to purchase half of THRX's outstanding shares at $54.25 in July '07.
Merrill estimates CBST is pricing in a high probability of positive telavancin data that would cause Cubicin growth to slow beyond 2007, which they think is unlikely. Firm estimates $2-4 of downside if telavancin shows superiority to standard of care, but $3-5 of upside if telavancin is non-inferior to vancomycin, which is the most likely outcome.
Notablecalls: THRX's telavancin is set to compete with CBST's Cubicin in treating serious skin infections (cSSSI). Analysts generally expect phase 3 telavancin data to be released in late Aug or early Sept. Not actionable but good to know category.
- Piper Jaffray comments on Apple Computer (NASDAQ:AAPL) after Microsoft confirmed that it will be launching music and entertainment products under the "Zune" name. While the company did not provide details on the specific product categories that would fall within the Zune family, a Microsoft made MP3 player that will compete with the iPod is widely expected. Another market segment that could be addressed by Zune is portable gaming. Microsoft offerings under the Zune name are expected by the end of CY06.
Firm believes the Zune initiative is a sign that Microsoft believes in the importance of the portable music market and has become uncomfortable with its partners'(Creative, iriver, Samsung, etc.) failures in gaining market share on Apple. They do expect Microsoft will be able to take some of Apple's 75% MP3 player market share away, but to what extent it is too early to say.
There has recently been a lot of talk about the potential for a Microsoft MP3 player and clearly Microsoft is rich with resources to compete with Apple. Microsoft's entertainment and devices division, led by Robbie Bach, is working on an end- to-end digital music hardware and software ecosystem to compete with Apple's iPod+iTunes. Piper does not believe, however, that the yet-to-be-seen Microsoft offering will be a worthy opponent for the iPod. One significant indication is that Windows Media-enabled MP3 players have been in the market for three years and have been unable to grow their roughly 25% market share. Additionally, they expect Apple will release new/upgraded iPods this fall that will likely push the envelope in innovation and ease-of-use.
Maintains Outperform and $99 tgt.
Notablecalls: Not actionable but good to know category.
Notablecalls - Paperstand
The NY Times reports that HCA (HCA) was close to a deal last night to sell itself to a consortium of private equity investors for about $21bn. The investors would also take on about $10.6bn of HCA’s debt, making the deal the largest leveraged buyout in history. The buyout group is led by Thomas Frist Sr., the founder of HCA, and his son, Thomas F. Frist Jr., who are, respectively, the father and brother of Senator Bill Frist, the majority leader. The other investors are Bain Capital, Kohlberg Kravis Roberts & Co and Merrill Lynch's private equity arm. With a value of $31.6 billion the deal would be even larger than Kohlberg Kravis Roberts’ $25 billion acquisition of RJR Nabisco in 1989.
The Wall Street Journal reports, citing ppl familiar with the matter, that AMD (AMD) plans to pay about $5.4 billion to buy ATI Technologies (ATYT) in what would be one of the biggest-ever acquisitions of a semiconductor maker. The co's were in late stages of negotiations Sun, with a deal likely to be announced as early as Monday morning. ATI had a mkt cap of about $4.2bn as of Fri. The consideration from AMD is expected to be mostly in cash, with the remainder comprised of AMD shares.
THe WSJ's "Tracking the Numbers" column discusses Bunge (BG), highlighting co's low-quality earnings. The co's financial statements are known for their complexity and have often carried one-time items that benefit the bottom line, causing some analysts to question the quality and sustainability of the earnings. Meanwhile, Bunge's free cash flow has been negative for 3 of the past 4 years. Bunge has a "black-box perception" in financial mkts, John McMillin, of Prudential, said during Bunge's Q1 earnings conference call earlier this year. He later added in a research note on the co: "We know a low-quality earnings stream when we see one."
Deerfield Mgmt, a hedge fund, has been making healthy purchases of Par Pharmaceutical's (PRX) stock, even as the drug maker's shares appear far from the path to recovery. Deerfield, which specializes in the health-care sector, disclosed that its holdings now exceeded 10% of Par's outstanding shares, up from a 5% stake the fund held in May.
The Wall Street Journal reports, citing ppl familiar with the matter, that AMD (AMD) plans to pay about $5.4 billion to buy ATI Technologies (ATYT) in what would be one of the biggest-ever acquisitions of a semiconductor maker. The co's were in late stages of negotiations Sun, with a deal likely to be announced as early as Monday morning. ATI had a mkt cap of about $4.2bn as of Fri. The consideration from AMD is expected to be mostly in cash, with the remainder comprised of AMD shares.
THe WSJ's "Tracking the Numbers" column discusses Bunge (BG), highlighting co's low-quality earnings. The co's financial statements are known for their complexity and have often carried one-time items that benefit the bottom line, causing some analysts to question the quality and sustainability of the earnings. Meanwhile, Bunge's free cash flow has been negative for 3 of the past 4 years. Bunge has a "black-box perception" in financial mkts, John McMillin, of Prudential, said during Bunge's Q1 earnings conference call earlier this year. He later added in a research note on the co: "We know a low-quality earnings stream when we see one."
Deerfield Mgmt, a hedge fund, has been making healthy purchases of Par Pharmaceutical's (PRX) stock, even as the drug maker's shares appear far from the path to recovery. Deerfield, which specializes in the health-care sector, disclosed that its holdings now exceeded 10% of Par's outstanding shares, up from a 5% stake the fund held in May.
Sunday, July 23, 2006
Notablecalls - Paperstand - Barron's
Barrons' cover story discusses general mkt condition and highlights ten stocks they recommend to buy, due low valuation. Those stocks include Chevron (CVX), Cisco (CSCO), Dow Chemical (DOW), General Electric (GE), Home Depot (HD), Lehman Brothers (LEH), Nestle, News Corp. (NWS), Vodafone (VOD) and Wal-Mart (WMT).
Barron's highlights Excelsior Large Cap Growth fund top holdings: GOOG, CELG, CMX, AMX, EXPD, ZMH, AAPL, QCOM, EBAY and AGN.
Barron's discusses ITC Holdings (ITC), saying that at 29, the co trades for 30x '06 ests. The shares could rally 20% in the next 2 years as profits rise. ITC is the nation's 10th largest and only publicly traded stand-alone transmission concern, which is poised to capitalize on regulatory changes that favor such independent entities. ITC focuses exclusively on the transporting of electric power, serving a population base of almost 10m customers in the metropolitan Detroit area and southeastern Michigan.
According to the Barron's, the housing mkt in Las Vegas may be overvalued by 42%. When it eventually tumbles, pinched residents are apt to curb their visits to Station Casinos (STN). The stock could be halved.
Notablecalls: The phrase "stock could be halved" sure does look ugly. Expect to see a steep (5-10%) drop in STN Monday morning.
According to the Barron's, Ashland (ASH) shares could be worth at least 20% more, if co spinoffs deliver the promised results. Putting all parts together and deducting corporate overhead at a multiple of 10x, Kip Meyer, of Advisory Research, arrives at a value of $5.83bn, or $81 a share. Such a valuation might interest private equity players as well: Morgan Stanley listed Ashland as a possible LBO candidate in a recent screening.
The "Follow Up" section discusses Yahoo (YHOO), saying that Barron's liked Yahoo at 29 and they like it more at 25. Yahoo took nosedive last week, when the co missed earning ests and delayed its search-engine advertising system. Larry Haverty of Gabelli Global Multimedia Trust has recommended that value-account clients at Gabelli buy Yahoo at these levels, noting that "unless Panama doesn't work at all, any problems with it are discounted." He calls the stock an "extraordinarily strong buy" at 13x trailing cash flow and sees the shares climbing to the high 30s, and possibly over 40.
Barrons' "Sizing Up Small Cap" section discusses favorably Energen (EGN), whose Alagasco unit is the largest gas utility in the state of Alabama. Regulators in Alabama are fairly accommodating, allowing Alagasco to earn an above-avg 13.15-13.65% ROE. For all of this year, Peter Vig, of RoundRock Capital, expects Energen to earn around $3 a share. Next year, he's looking for about $3.90. So the stock, at $38, is going for less than 10x the '07 est. Co's mgmt guidance for the year is $3.10-3.30 a share and $3.80-4.20 for next year. The shares are worth at least $50 or so, Mr. Vig reckons, if valued at a modest 13x his next year's est.
Barrons' "Technology Trader" section discusses Amgen (AMGN), saying that competition is growing for the co's cash-cow products. In Europe rivals are readying generic-style copies of its pioneering products. In US courts, Amgen fighting Roche Holding, which plans to sell a red-blood-cell-boosting treatment in America. And a more formidable rival in the EPO wars looms: Novartis (NVS). "We will have EPO in the European mkt, no question," Daniel Vasella, Novartis's CEO said to the Barron's. The EPO products from Novartis and Stada would compete directly against J&J (JNJ), which sells Eprex under license from Amgen. Novartis also has an indirect anti- Aranesp play; it owns a 1/3 of Roche, which sells CERA, a long-acting EPO product, in mkts outside the US. Amgen is trying to stop CERA from coming to America, by asserting its US EPO and Aranesp patents.
Notablecalls: No new information, biotech traders/investors know it all.
Barron's highlights Excelsior Large Cap Growth fund top holdings: GOOG, CELG, CMX, AMX, EXPD, ZMH, AAPL, QCOM, EBAY and AGN.
Barron's discusses ITC Holdings (ITC), saying that at 29, the co trades for 30x '06 ests. The shares could rally 20% in the next 2 years as profits rise. ITC is the nation's 10th largest and only publicly traded stand-alone transmission concern, which is poised to capitalize on regulatory changes that favor such independent entities. ITC focuses exclusively on the transporting of electric power, serving a population base of almost 10m customers in the metropolitan Detroit area and southeastern Michigan.
According to the Barron's, the housing mkt in Las Vegas may be overvalued by 42%. When it eventually tumbles, pinched residents are apt to curb their visits to Station Casinos (STN). The stock could be halved.
Notablecalls: The phrase "stock could be halved" sure does look ugly. Expect to see a steep (5-10%) drop in STN Monday morning.
According to the Barron's, Ashland (ASH) shares could be worth at least 20% more, if co spinoffs deliver the promised results. Putting all parts together and deducting corporate overhead at a multiple of 10x, Kip Meyer, of Advisory Research, arrives at a value of $5.83bn, or $81 a share. Such a valuation might interest private equity players as well: Morgan Stanley listed Ashland as a possible LBO candidate in a recent screening.
The "Follow Up" section discusses Yahoo (YHOO), saying that Barron's liked Yahoo at 29 and they like it more at 25. Yahoo took nosedive last week, when the co missed earning ests and delayed its search-engine advertising system. Larry Haverty of Gabelli Global Multimedia Trust has recommended that value-account clients at Gabelli buy Yahoo at these levels, noting that "unless Panama doesn't work at all, any problems with it are discounted." He calls the stock an "extraordinarily strong buy" at 13x trailing cash flow and sees the shares climbing to the high 30s, and possibly over 40.
Barrons' "Sizing Up Small Cap" section discusses favorably Energen (EGN), whose Alagasco unit is the largest gas utility in the state of Alabama. Regulators in Alabama are fairly accommodating, allowing Alagasco to earn an above-avg 13.15-13.65% ROE. For all of this year, Peter Vig, of RoundRock Capital, expects Energen to earn around $3 a share. Next year, he's looking for about $3.90. So the stock, at $38, is going for less than 10x the '07 est. Co's mgmt guidance for the year is $3.10-3.30 a share and $3.80-4.20 for next year. The shares are worth at least $50 or so, Mr. Vig reckons, if valued at a modest 13x his next year's est.
Barrons' "Technology Trader" section discusses Amgen (AMGN), saying that competition is growing for the co's cash-cow products. In Europe rivals are readying generic-style copies of its pioneering products. In US courts, Amgen fighting Roche Holding, which plans to sell a red-blood-cell-boosting treatment in America. And a more formidable rival in the EPO wars looms: Novartis (NVS). "We will have EPO in the European mkt, no question," Daniel Vasella, Novartis's CEO said to the Barron's. The EPO products from Novartis and Stada would compete directly against J&J (JNJ), which sells Eprex under license from Amgen. Novartis also has an indirect anti- Aranesp play; it owns a 1/3 of Roche, which sells CERA, a long-acting EPO product, in mkts outside the US. Amgen is trying to stop CERA from coming to America, by asserting its US EPO and Aranesp patents.
Notablecalls: No new information, biotech traders/investors know it all.
Friday, July 21, 2006
Color on Microsoft (NASDAQ:MSFT)'s results
- Microsoft (NASDAQ:MSFT) is getting mostly positive comments from analysts this morning:
- JP Morgan notes MSFT saw two items favorably impact results in Q4, both driving Client to be $150M ahead of firm's target and the upside to their model. First, PC shipments, as reported by Gartner came in at +11% at the higher end of co. guidance and second, MSFT saw a resurgence in Com. and Retail licensing which grew 6% yoy, the first growth in years-- a positive in front of the Vista release in the Fall. Client also saw an $89M favorable impact from the shift to recognizing rev. on sell in vs. sell through.
MSFT also saw a significant uptick in unearned income, which grew to $10.9B ahead of target of $10.2B with the $1.9B seq. increase the largest the firm has seen in years.
- JP Morgan notes MSFT saw two items favorably impact results in Q4, both driving Client to be $150M ahead of firm's target and the upside to their model. First, PC shipments, as reported by Gartner came in at +11% at the higher end of co. guidance and second, MSFT saw a resurgence in Com. and Retail licensing which grew 6% yoy, the first growth in years-- a positive in front of the Vista release in the Fall. Client also saw an $89M favorable impact from the shift to recognizing rev. on sell in vs. sell through.
MSFT also saw a significant uptick in unearned income, which grew to $10.9B ahead of target of $10.2B with the $1.9B seq. increase the largest the firm has seen in years.
Beyond the strong bookings, the key event on the release is the announcement of $40B to be returned to shareholders with $20B near term in a modified Dutch auction. Firm assumes it will get completed at or near $24.75 per share, slightly ahead of the 90 day avg. of $24.50, which will result in roughly an 8% decrease in shares outstanding. The $40B is above the $20-30B they estimated MSFT would announce in their "First Step in the Road to Recovery" piece earlier this month, and is the driver for the roughly $0.06 raise to FY07 EPS guidance.
Firm's new EPS for FY07 is $1.46 +15% yoy, while FY08 is $1.72 +18%. The stock will move towards the upper end of the tender range near term, and will likely settle in the $24 range by late August. With Q1 numbers that look conservative, and an accelerating EPS story in 2H-07 and into FY08, they'd expect the stock to outperform as we near the December quarter and get closer to the major Vista and Office releases.
- Friedman, Billings, Ramsey MSFT notes MSFT reported a solid quarter with revenue and EPS upside, strong guidance, and a significant tender offer. The company announced a $20 billion tender offer, coupled with a new $20 billion share repurchase program; this is a smart use of the company's excess cash, should buoy the stock, and sends a positive message to investors. Firm's thesis remains intact - they believe the company is embarking on a significant multi-year product cycle which should drive accelerating revenues (11% in FY06 to 13% in FY07). Maintains Outperform and $32 price target.
- UBS notes that given the negative sentiment heading into last night's call, the performance in the quarter in and of itself would have been enough to push the shares higher today. However, by management finally heeding investor's call to action to return even more cash to shareholders with its announced $20b tender offer, firm's see this gesture as potentially leading to a reversal in investor sentiment as far as Microsoft is concerned. Guidance for FY07 implies a top line growth rate of 13% at the mid point, which compares to 11% growth in FY06, with operating income growing faster than sales in the back half of the fiscal year. As well, while many are focused on the fact that Vista could be delayed again and as such be a negative catalyst, we note that based on management's commentary and our own analysis, even a 1 quarter delay in Vista (although still expected to launch for businesses in November and consumers in January), would only impact sales for the year by $200m-$400m. Sees next Thursday's analyst day as being another positive catalyst for the shares and would expect more granularity regarding what type of return the incremental investments being made in FY07 could potentially drive for the company over the next 2-3 years.
Maintains Buy and $31 tgt.
Notablecalls: Nice qtr. Nice gesture. Don't expect the stock to move much above the levels reached in after mkt trading. It will take some time to turn this tanker around.
Color on Google (NASDAQ:GOOG)'s results
Several firms are commenting on Google (NASDAQ:GOOG) this morning after the co reported its Q2 estimates last night:
- Piper Jaffray says the second quarter is seasonally slow for search and, while they believe Google did gain some market share, search volume alone would not have created 9% sequential revenue growth. Piper believes Google's relentless focus on innovation both increased user activity, and hence paid clicks, and expanded advertiser coverage and monetization. The result was a highly respectable growth rate, not strongly above expectations as we had seen in 2005, but more appropriately balanced and still well above the market. This balanced growth creates more stability for the stock as Street expectations come closer in predicting Google's outcome, while upside still exists.
The premium that investors will pay for Google will not come from expectations of massive upside and analyst models changing dramatically, but rather from the fact that a $10b revenue company can still grow sales and profits at more than 75% y/y. Would be active buyers of Google ahead of what typically is much stronger second half.
Maintains Outperform and $600 tgt.
- Bear Stearns notes that in what has been a tough quarterly reporting season start for the Internet names, Google managed to hit Street expectations. While merely hitting Street expectations may not be overly impressing on the surface, what's probably most impressive was that the company continues to invest for the future while hitting near term goals. Firm thinks that Google's continued impressive market share gains, strong monetization, and rapid innovation indicate that so far their capital investments are paying off, and with competitors scrambling to catch up, they have no reason to think otherwise for the foreseeable future.
Maintains Outperform and $525 tgt.
- Goldman reiterates Buy rating with 25%-plus upside. Street estimates should move up given the outperformance vs. consensus, which should reinforce the strong secular growth outlook and be a net positive for valuation. Google's growth (just below heightened expectations) reinforces firm's view of continued strong secular industry trends, which should be more attractive to investors in a slowing cyclical environment. Google's ability to maintain its typical 800-1100 bp qoq growth spread vs. Yahoo! (at the low end due to affiliate search, see Exhibit 2) reflects its ability to leverage the Search Productivity Cycle to drive superior monetization.
- Prudential believes that Google will continue to post hyper-growth rates in the near term, which will, in turn, lead to further upside in the shares. In firm's opinion, an investment in Google is, in effect, an ownership stake in a company with maximum exposure to the online advertising market's fastest growing format. Therefore, they reiterate Overweight rating on GOOG and raise price target to $520 (from $500).
Notablecalls: Google won't move much higher from current levels until the co can show some serious FCF growth.
- Piper Jaffray says the second quarter is seasonally slow for search and, while they believe Google did gain some market share, search volume alone would not have created 9% sequential revenue growth. Piper believes Google's relentless focus on innovation both increased user activity, and hence paid clicks, and expanded advertiser coverage and monetization. The result was a highly respectable growth rate, not strongly above expectations as we had seen in 2005, but more appropriately balanced and still well above the market. This balanced growth creates more stability for the stock as Street expectations come closer in predicting Google's outcome, while upside still exists.
The premium that investors will pay for Google will not come from expectations of massive upside and analyst models changing dramatically, but rather from the fact that a $10b revenue company can still grow sales and profits at more than 75% y/y. Would be active buyers of Google ahead of what typically is much stronger second half.
Maintains Outperform and $600 tgt.
- Bear Stearns notes that in what has been a tough quarterly reporting season start for the Internet names, Google managed to hit Street expectations. While merely hitting Street expectations may not be overly impressing on the surface, what's probably most impressive was that the company continues to invest for the future while hitting near term goals. Firm thinks that Google's continued impressive market share gains, strong monetization, and rapid innovation indicate that so far their capital investments are paying off, and with competitors scrambling to catch up, they have no reason to think otherwise for the foreseeable future.
Maintains Outperform and $525 tgt.
- Goldman reiterates Buy rating with 25%-plus upside. Street estimates should move up given the outperformance vs. consensus, which should reinforce the strong secular growth outlook and be a net positive for valuation. Google's growth (just below heightened expectations) reinforces firm's view of continued strong secular industry trends, which should be more attractive to investors in a slowing cyclical environment. Google's ability to maintain its typical 800-1100 bp qoq growth spread vs. Yahoo! (at the low end due to affiliate search, see Exhibit 2) reflects its ability to leverage the Search Productivity Cycle to drive superior monetization.
- Prudential believes that Google will continue to post hyper-growth rates in the near term, which will, in turn, lead to further upside in the shares. In firm's opinion, an investment in Google is, in effect, an ownership stake in a company with maximum exposure to the online advertising market's fastest growing format. Therefore, they reiterate Overweight rating on GOOG and raise price target to $520 (from $500).
Notablecalls: Google won't move much higher from current levels until the co can show some serious FCF growth.
Notablecalls - Paperstand
The Wall Street Journals "Heard on the Street" column discusses Wal-Mart (WMT), saying that the co's bid to remake itself weighs on sales. Other factors are $3-a-gallon gasoline and high utility bills. The world's largest retailer by sales is attempting a sweeping makeover aimed at paring its inventory and labor costs while enticing affluent customers, some of whom now buy groceries in its stores, to spend more in other areas. As part of that effort, Wal-Mart will remodel nearly half its US stores over the next year. Pulling this off will be no small feat for a retailer with more than $300bn in annual sales. Even CEO Lee Scott has acknowledged that missteps may occur. The result of so much upheaval in many of Wal-Mart's 3,900 US stores is additional pressure on the retailer's already-tepid sales gains, some analysts and investors say. That, coupled with Merrill Lynch's July 13 downgrade of the stock to Neutral from Buy, has pushed the stock down about 9% so far this month. The price could fall further in coming months if sales actually decline, as some anticipate, and put pressure on earnings. "While external economic factors such as rising gas prices and higher interest rates are certainly acting as a head wind, the impact on same-store sales from Wal-Mart's remodeling efforts and other remerchandising initiatives cannot be dismissed as negligible," says Charles Grom, of JP Morgan.
According to the Barron's Online, ValueAct has been aggressively buying shares of Valeant Pharma (VRX) since April, plunking down $92.8m to purchase nearly 10.08m shares.
According to the NY Post, The New York Board of Trade is in early talks about a possible merger with the IntercontinentalExchange. Investment bankers working for the Nybot and ICE have held discussions recently about a possible combination, which could take several forms including ICE purchasing the downtown exchange for as much as $900m.
Thursday, July 20, 2006
Calls of Note Part 1
- Stifel believes the sell-off was overdone in Yahoo! (NASDAQ:YHOO) and also believes a sector relief rally may be in the midst with eBay's numbers last evening. Also, they expect strength from GOOG tonight.
At $25.20, Yahoo! trades at 24x 2007 FCF and 20X 2008 FCF. Yahoo! also trades at 10x 2007 EBITDA and 8.7x 2008 EBITDA. Yahoo! is now approaching the EBITDA multiple of the traditional media industry (which we calculate at just below 9x 2007). The distinct difference remains that Yahoo! is growing organically at 29% compared to traditional media at 7% and Yahoo!'s entire asset base has stable terminal value unlike many in traditional media (i.e., newspapers, etc.).
If one were ever looking for exposure to this sector, to the advertising category within the sector, and specifically to Yahoo!, now is the time, in firm's view. Notes they maintained they Buy rating because they like the franchise and thought they would be given an opportunity to get very aggressive on the name without shifting ratings around. Firm believes the market has offered opportunity in one day's time and believes the allocation of dollars away from the sector has allowed for compelling long-term opportunities. Would be aggressive buyers of YHOO on the open this morning, all else being equal.
Buy, $37 tgt.
Notablecalls: Would not be surprised to see YHOO bounce a bit. Also note that there is a mid-level rumour circling trading desks that YHOO is a takeover candidate. The New York Times has a piece on it.
At $25.20, Yahoo! trades at 24x 2007 FCF and 20X 2008 FCF. Yahoo! also trades at 10x 2007 EBITDA and 8.7x 2008 EBITDA. Yahoo! is now approaching the EBITDA multiple of the traditional media industry (which we calculate at just below 9x 2007). The distinct difference remains that Yahoo! is growing organically at 29% compared to traditional media at 7% and Yahoo!'s entire asset base has stable terminal value unlike many in traditional media (i.e., newspapers, etc.).
If one were ever looking for exposure to this sector, to the advertising category within the sector, and specifically to Yahoo!, now is the time, in firm's view. Notes they maintained they Buy rating because they like the franchise and thought they would be given an opportunity to get very aggressive on the name without shifting ratings around. Firm believes the market has offered opportunity in one day's time and believes the allocation of dollars away from the sector has allowed for compelling long-term opportunities. Would be aggressive buyers of YHOO on the open this morning, all else being equal.
Buy, $37 tgt.
Notablecalls: Would not be surprised to see YHOO bounce a bit. Also note that there is a mid-level rumour circling trading desks that YHOO is a takeover candidate. The New York Times has a piece on it.
Color on Alliance Data (NYSE:ADS)'s results
Alliance Data (NYSE:ADS) posted strong results last night and we have several firms issuing very positive commentary:
- JP Morgan notes ADS posted really strong 2Q results of $491M/$0.77, a full $0.11 ahead of firm's above consensus Cash EPS estimate of $0.66 (ex stock comp), representing 32% and 57% revenue and Cash EPS growth, respectively. Nearly half of upside attributed to 'active' execution rather than 'passive' macro trends.
Firm is raising their estimates: FY06 and FY07 Cash EPS estimates (ex. stock comp) to $2.91 and $3.16, respectively, (previously $2.87 and $3.05). FY06 guidance up $0.15, reflecting the 2Q beat and appears conservative @ $2.75+.
Management was bullish on the call and addressed our concerns that 1H06 charge-offs would create a tougher compare in '07 by sticking with its LT 18% EPS growth view for FY07, implying ~$3.25. Firm is assuming a lower FY07 target to buffer against the risk of a much weaker consumer and to leave room for upside.
JP Morgan maintains their Overwreight rating on strong underlying business momentum and beatable FY06 guidance. They believe shares can reach new highs on the beat and bullish tone.
- Merrill Lynch notes that even though the Street was clearly expecting some upside, they think ADS still significantly beat even the most bullish expectations delivering 2Q06 cash EPS of $0.77 (+57% y/y) ahead of firm's $0.65 estimate and the $0.63 consensus estimate. Key operating metrics across all of ADS' businesses were ahead of our expectations. Importantly, ADS also suggested that the company anticipates at least 18% cash EPS growth in '07. Merrill thinks this demonstrates the high level of visibility in ADS' business model and supports the argument that the stock should trade closer to transaction processing peers, rather than at a sharp discount. Reits Buy rating.
- Bear Stearns is raising their 06 cash EPS estimate to $2.80 from $2.70 and 07 cash EPS estimate to $3.30 from $3.20. Thinks the company's guidance for 3Q06 and the full year is conservative. Despite more difficult comps in 07, the company is confident that it can maintain the traditional growth model of 12%/15%/18%.
ADS is seeing no signs of a consumer slowdown nor any deterioration in credit quality. The company's pipeline of potential business remains strong. Bear maintain an Outperform on the shares of ADS. ADS has consistently exceeded expectations and they expect the trend to continue. Firm is introducing a year end 07 price target of $75 (based on 10-11x preliminary 08 EBITDA and operating EBITDA estimates).
Notablecalls: Notice how JP Morgan suggests ADS stock should reach new highs on the beat and bullish tone? The current high (07/03/06) is almost 7 points higher. One to watch today and in the coming days.
- JP Morgan notes ADS posted really strong 2Q results of $491M/$0.77, a full $0.11 ahead of firm's above consensus Cash EPS estimate of $0.66 (ex stock comp), representing 32% and 57% revenue and Cash EPS growth, respectively. Nearly half of upside attributed to 'active' execution rather than 'passive' macro trends.
Firm is raising their estimates: FY06 and FY07 Cash EPS estimates (ex. stock comp) to $2.91 and $3.16, respectively, (previously $2.87 and $3.05). FY06 guidance up $0.15, reflecting the 2Q beat and appears conservative @ $2.75+.
Management was bullish on the call and addressed our concerns that 1H06 charge-offs would create a tougher compare in '07 by sticking with its LT 18% EPS growth view for FY07, implying ~$3.25. Firm is assuming a lower FY07 target to buffer against the risk of a much weaker consumer and to leave room for upside.
JP Morgan maintains their Overwreight rating on strong underlying business momentum and beatable FY06 guidance. They believe shares can reach new highs on the beat and bullish tone.
- Merrill Lynch notes that even though the Street was clearly expecting some upside, they think ADS still significantly beat even the most bullish expectations delivering 2Q06 cash EPS of $0.77 (+57% y/y) ahead of firm's $0.65 estimate and the $0.63 consensus estimate. Key operating metrics across all of ADS' businesses were ahead of our expectations. Importantly, ADS also suggested that the company anticipates at least 18% cash EPS growth in '07. Merrill thinks this demonstrates the high level of visibility in ADS' business model and supports the argument that the stock should trade closer to transaction processing peers, rather than at a sharp discount. Reits Buy rating.
- Bear Stearns is raising their 06 cash EPS estimate to $2.80 from $2.70 and 07 cash EPS estimate to $3.30 from $3.20. Thinks the company's guidance for 3Q06 and the full year is conservative. Despite more difficult comps in 07, the company is confident that it can maintain the traditional growth model of 12%/15%/18%.
ADS is seeing no signs of a consumer slowdown nor any deterioration in credit quality. The company's pipeline of potential business remains strong. Bear maintain an Outperform on the shares of ADS. ADS has consistently exceeded expectations and they expect the trend to continue. Firm is introducing a year end 07 price target of $75 (based on 10-11x preliminary 08 EBITDA and operating EBITDA estimates).
Notablecalls: Notice how JP Morgan suggests ADS stock should reach new highs on the beat and bullish tone? The current high (07/03/06) is almost 7 points higher. One to watch today and in the coming days.
Color on Apple (NASDAQ:AAPL)'s results
Apple Computer (NASDAQ:AAPL) is likely going to be the highlight of the day with at least one tier-1 firm upgrading the shares and several others issuing positive comments:
- Merrill Lynch upgrades their rating to Buy from Neutral saying they believe risk/reward in shares of Apple has improved. Firm highlights 8 reasons for the upgrade:
1) increased confidence in Mac share gains, causing firm's LT estimates to rise; 2) firm's top concern (iPod deceleration) is waning as monthly growth rates are stabilizing and the problem of slowing iPod sales is now well understood by investors (has become part of the consensus view); 3) the overhang from the stock option timing investigation is diminishing with management saying it does not expect restatements; 4) June Q's operating leverage suggests margin expansion ahead; 5) most of the Intel transition risk is past now that 75% of units are Intel-based; 6) although the potential for iPod phone is not news, its financial impact is not in consensus estimates and the fact that management publicly alluded to it (albeit indirectly) on the conference call reinforces the possibility that its introduction could be near enough to influence consensus estimates within the next 12 months (hecks suggest not earlier than C1Q07); 7) the company is entering the seasonally strong back to school and holiday retail selling periods which should contain product refreshes; 8) firm expects the Street to switch from a focus on F2007 estimates (ending September) to F2008 over the next 6 months, supporting valuation.
- Piper Jaffray note the better-than-expected Mac number (1.33m vs. Street at 1.25m) is evidence that Apple is exiting the turbulence of the Intel transition. Firm expects over the next several quarters Mac market share will inch upward driven by the full availability of Intel-based Macs, a renewed Mac ad campaign and the halo effect.
Pod units were in line with firm's 8.0m preview at 8.1m. While iPod units were down from 8.5m in March, they view the iPod number as stable. Firm believes the market for MP3 players remains under-penetrated and they estimate approximately 12% of people in the U.S. have an iPod. Expects to see the iPod numbers reaccelerate with new products and seasonality in the back half of 2006.
According to the firm, the Street should not be surprised by the revenue guide-down, which we believe is largely related to timing of new iPods. They believe Apple's guidance suggests a new iPod late in the September quarter or in October. The Street had been mixed on whether a new iPod would make it out in the September quarter. The Street was looking for $5.0b in revenue for September, while guidance calls for $4.55b. Firm attributes $200m of the lowered estimates to timing of the new iPod and the balance to Apple's conservatism.
Maintains Outperform and $99 tgt.
- JP Morgan notes Apple's Mac shipments of 1.33 million for the June quarter were above firm's recently raised 1.27 million unit estimate. The upside was driven by the new MacBook, which contributed to annual notebook growth of 61%.
Apple managed to ship 8.11 million iPod units in the quarter, versus o8.01 million estimate. They continue to believe iPod shipments will remain somewhat subdued in the September quarter, as Apple reduces channel sell-in ahead of its nano and video iPod refreshes in September/October. As a result they are forecasting iPod units of 8.45 million for the quarter, representing a fairly modest sequential growth rate of 4%.
Firm continues to believe that the company will introduce new nanos in the September quarter, followed by a video iPod refresh shortly after. They have not yet determined if the next video iPod refresh will be the long-awaited wide screen version of the product, as the initial refresh may simply be a capacity upgrade. Nevertheless, they suspect the widescreen version will be launched shortly thereafter in any case.
Speculation has begun to swirl that not only will Apple introduce new nanos but also feature film content at the WWDC on August 7. This would be significantly earlier than they are expecting and would alleviate concerns regarding Apple's ability to ramp new products in time for the holiday season.
Overall, Apple's earnings report should come as welcomed relief to investors. The stock is currently trading at 22x calendar 2006 EPS ex-options estimate. Firm expects the iPod's momentum to resume as we enter the seasonally stronger months with new products, and they believe the company's Mac share gains are set to accelerate rapidly over the same time period. Reiterates Overweight rating.
Notablecalls: Nice squeeze in after mkt trading. I fully expect the shares to top out around the $60 level. Yes, AAPL did manage to beat the Mac sales ests. But only by about 50,000. We need more than that to call it an Halo effect.
- Merrill Lynch upgrades their rating to Buy from Neutral saying they believe risk/reward in shares of Apple has improved. Firm highlights 8 reasons for the upgrade:
1) increased confidence in Mac share gains, causing firm's LT estimates to rise; 2) firm's top concern (iPod deceleration) is waning as monthly growth rates are stabilizing and the problem of slowing iPod sales is now well understood by investors (has become part of the consensus view); 3) the overhang from the stock option timing investigation is diminishing with management saying it does not expect restatements; 4) June Q's operating leverage suggests margin expansion ahead; 5) most of the Intel transition risk is past now that 75% of units are Intel-based; 6) although the potential for iPod phone is not news, its financial impact is not in consensus estimates and the fact that management publicly alluded to it (albeit indirectly) on the conference call reinforces the possibility that its introduction could be near enough to influence consensus estimates within the next 12 months (hecks suggest not earlier than C1Q07); 7) the company is entering the seasonally strong back to school and holiday retail selling periods which should contain product refreshes; 8) firm expects the Street to switch from a focus on F2007 estimates (ending September) to F2008 over the next 6 months, supporting valuation.
- Piper Jaffray note the better-than-expected Mac number (1.33m vs. Street at 1.25m) is evidence that Apple is exiting the turbulence of the Intel transition. Firm expects over the next several quarters Mac market share will inch upward driven by the full availability of Intel-based Macs, a renewed Mac ad campaign and the halo effect.
Pod units were in line with firm's 8.0m preview at 8.1m. While iPod units were down from 8.5m in March, they view the iPod number as stable. Firm believes the market for MP3 players remains under-penetrated and they estimate approximately 12% of people in the U.S. have an iPod. Expects to see the iPod numbers reaccelerate with new products and seasonality in the back half of 2006.
According to the firm, the Street should not be surprised by the revenue guide-down, which we believe is largely related to timing of new iPods. They believe Apple's guidance suggests a new iPod late in the September quarter or in October. The Street had been mixed on whether a new iPod would make it out in the September quarter. The Street was looking for $5.0b in revenue for September, while guidance calls for $4.55b. Firm attributes $200m of the lowered estimates to timing of the new iPod and the balance to Apple's conservatism.
Maintains Outperform and $99 tgt.
- JP Morgan notes Apple's Mac shipments of 1.33 million for the June quarter were above firm's recently raised 1.27 million unit estimate. The upside was driven by the new MacBook, which contributed to annual notebook growth of 61%.
Apple managed to ship 8.11 million iPod units in the quarter, versus o8.01 million estimate. They continue to believe iPod shipments will remain somewhat subdued in the September quarter, as Apple reduces channel sell-in ahead of its nano and video iPod refreshes in September/October. As a result they are forecasting iPod units of 8.45 million for the quarter, representing a fairly modest sequential growth rate of 4%.
Firm continues to believe that the company will introduce new nanos in the September quarter, followed by a video iPod refresh shortly after. They have not yet determined if the next video iPod refresh will be the long-awaited wide screen version of the product, as the initial refresh may simply be a capacity upgrade. Nevertheless, they suspect the widescreen version will be launched shortly thereafter in any case.
Speculation has begun to swirl that not only will Apple introduce new nanos but also feature film content at the WWDC on August 7. This would be significantly earlier than they are expecting and would alleviate concerns regarding Apple's ability to ramp new products in time for the holiday season.
Overall, Apple's earnings report should come as welcomed relief to investors. The stock is currently trading at 22x calendar 2006 EPS ex-options estimate. Firm expects the iPod's momentum to resume as we enter the seasonally stronger months with new products, and they believe the company's Mac share gains are set to accelerate rapidly over the same time period. Reiterates Overweight rating.
Notablecalls: Nice squeeze in after mkt trading. I fully expect the shares to top out around the $60 level. Yes, AAPL did manage to beat the Mac sales ests. But only by about 50,000. We need more than that to call it an Halo effect.
Color on eBay (NASDAQ:EBAY)'s results
Analysts are generally positive on eBay (NASDAQ:EBAY) following results and guidance issued last night:
- UBS notes they think eBay's stock has likely found a support level. While 2Q results and guidance were only in-line, they think that should be good enough for now. The company spent quite a bit of time qualitatively describing how changes in the presentation of core listings and new pricing for Store Inventory listings should lead to improved conversions, higher GMV growth, and stronger overall performance. Basically, the company is getting back to basics in the sense that it is refocusing on driving consumers to core auction-style listings. While the firm is slightly raising their estimates, they would wait until they see proof that the change in listing structure and fees is having the desired impact in the core business before getting more positive on the stock. Rates the stock Neutral. Firm's tgt is $35.
- JP Morgan notes they are encouraged by the buyback announcement as they believe it indicates management confidence in its ability to execute its strategic plan. Also, funding the program with working capital will allow the company to maintain a flexible balance sheet. eBay's upcoming price increases for Store Inventory Format (SIF) listings are intended to encourage sellers to use the core listing format with higher frequency. Such a shift in listing format has the potential to improve conversion rate and auction velocity. Firm's current estimates do not reflect any major improvement in rev/listing and as such they see potential upside. Reits Overweight.
- Goldman Sachs recommends buying eBay shares as they expect the stock to be driven by multiple expansion as 2Q06 results and 2nd derivative changes reinforce firm's 20%-25% 07-10E EPS growth rate and 2007E EPS of $1.30, while the current 21x P/E implies low-teen growth. Several trends should alleviate investor growth rate and estimate concerns: A likely bottom in the rate of yoy revenue/listing declines given the price changes and initiatives to drive a better mix, an expected acceleration in organic growth in 3Q and potentially overall revenue growth, and in 2Q06, accelerating trends in Germany, Korea, and Motors, an acceleration in total listings growth to 35%, and an acceleration in GMV growth. A $2bn share buyback program and an implied FX headwind in guidance vs. the current tailwind are also positive. Reiterates Buy.
Notablecalls: I was surprised to see EBAY's core transaction revs so strong. Thats also the reason why the shares were up in after market trading. Must agree with UBS. Short term bottom is in.
- UBS notes they think eBay's stock has likely found a support level. While 2Q results and guidance were only in-line, they think that should be good enough for now. The company spent quite a bit of time qualitatively describing how changes in the presentation of core listings and new pricing for Store Inventory listings should lead to improved conversions, higher GMV growth, and stronger overall performance. Basically, the company is getting back to basics in the sense that it is refocusing on driving consumers to core auction-style listings. While the firm is slightly raising their estimates, they would wait until they see proof that the change in listing structure and fees is having the desired impact in the core business before getting more positive on the stock. Rates the stock Neutral. Firm's tgt is $35.
- JP Morgan notes they are encouraged by the buyback announcement as they believe it indicates management confidence in its ability to execute its strategic plan. Also, funding the program with working capital will allow the company to maintain a flexible balance sheet. eBay's upcoming price increases for Store Inventory Format (SIF) listings are intended to encourage sellers to use the core listing format with higher frequency. Such a shift in listing format has the potential to improve conversion rate and auction velocity. Firm's current estimates do not reflect any major improvement in rev/listing and as such they see potential upside. Reits Overweight.
- Goldman Sachs recommends buying eBay shares as they expect the stock to be driven by multiple expansion as 2Q06 results and 2nd derivative changes reinforce firm's 20%-25% 07-10E EPS growth rate and 2007E EPS of $1.30, while the current 21x P/E implies low-teen growth. Several trends should alleviate investor growth rate and estimate concerns: A likely bottom in the rate of yoy revenue/listing declines given the price changes and initiatives to drive a better mix, an expected acceleration in organic growth in 3Q and potentially overall revenue growth, and in 2Q06, accelerating trends in Germany, Korea, and Motors, an acceleration in total listings growth to 35%, and an acceleration in GMV growth. A $2bn share buyback program and an implied FX headwind in guidance vs. the current tailwind are also positive. Reiterates Buy.
Notablecalls: I was surprised to see EBAY's core transaction revs so strong. Thats also the reason why the shares were up in after market trading. Must agree with UBS. Short term bottom is in.
Color on Intel (NASDAQ:INTC)'s results
Several firms are commenting on Intel (NASDAQ:INTC) following results and guidance announced last night. Opinions vary from side to side. Not seeing any upgrades/downgrades, though:
- Merrill Lynch says nothing from the conference call has changed their view that Intel is at the beginning of a major product cycle. That's enough in their opinion to justify owning the stock for the intermediate term, and the firm remains buyers with a $25 target. Given extremely negative investor sentiment for semiconductor stocks in general, and the stage set for what they believe will be increases in the Philadelphia Semiconductor Index for the remainder of the year, they think that Intel's stock is likely to rise from here.
Intel's management is not doing nearly what it should to rebuild investor confidence. Competitive new products are on the way, which is good, but rather than taking the pain necessary to position itself as well as possible for 2007, Intel's management has instead chosen to prop up margins for the intermediate term by running inventory to extraordinary levels while claiming that nothing is amiss. That's a shame, because the competitive progress that Intel might otherwise show in Q3 is being buried under a mountain of older, less profitable products.
Maintains Buy.
- Friedman, Billings, Ramsey notes Intel posted weak results, as widely expected, and took the opportunity to lower the bar even more than the firm had anticipated, providing more reasonable guidance for 2H06. However, a steep rise in inventory has now, they believe, shifted concerns from slow business conditions and aggressive guidance to the potential for production cuts (and lower margins) later in the year. Moreover, given lowered estimates, INTC is now no longer at a steep discount to the group (at 15x CY07 non-GAAP EPS, essentially the same multiple as TXN). The firm therefore maintains their Market Perform rating, and are lowering price target from $22 to $19 on lower estimates.
- Prudential is certainly among the most bearish saying they estimate that Intel lost 100 bps of revenue share to AMD during the quarter. Firm also estimates cash flow from operations dropped below $1 billion during the quarter. This was not enough to fund capex ($1.5 b), dividends ($582 m) and share repurchases ($1.0 b). Thinks that high inventories of legacy (Pentium) desktop products leave Intel with 2 options that put margins at further risk: 1) write the legacy inventory down, or 2) sell the products at more aggressive price points or risk losing share.
Intel has upgraded its product suite, but has an inventory problem, in firm's view. They think that the stock will drift toward their $14 price target as the company works through its inventories and the Street comes around to the notion that its new normalized gross margins are around 50%, 600 bps below the average over the past 12 years. Reiterates Underweight rating.
- JP Morgan notes they believe Intel will gain share, but they need to see a bottom in gross margins to become more positive on the stock. While the firm is positive on capex cuts and share gains, Intel's record inventory, sluggish demand, and aggressive guidance lead them to believe further downside exists to gross margins. The record inventory is the biggest concern as the last time Intel's inventory was above 95 days, the company's gross margins fell to 37%. Traditionally INTC stock bottoms and peaks with gross margins.
Notablecalls: I think Merrill will prove to be right in the short term. I expect INTC to trade up from here as the big bad event (earnings/guidance) is now behind us. In the intermediate term I think Prudential will be spot on with their $14 tgt. Longer term who knows what may happen. I suspect AMD may have won some battles but will eventually lose the war.
- Merrill Lynch says nothing from the conference call has changed their view that Intel is at the beginning of a major product cycle. That's enough in their opinion to justify owning the stock for the intermediate term, and the firm remains buyers with a $25 target. Given extremely negative investor sentiment for semiconductor stocks in general, and the stage set for what they believe will be increases in the Philadelphia Semiconductor Index for the remainder of the year, they think that Intel's stock is likely to rise from here.
Intel's management is not doing nearly what it should to rebuild investor confidence. Competitive new products are on the way, which is good, but rather than taking the pain necessary to position itself as well as possible for 2007, Intel's management has instead chosen to prop up margins for the intermediate term by running inventory to extraordinary levels while claiming that nothing is amiss. That's a shame, because the competitive progress that Intel might otherwise show in Q3 is being buried under a mountain of older, less profitable products.
Maintains Buy.
- Friedman, Billings, Ramsey notes Intel posted weak results, as widely expected, and took the opportunity to lower the bar even more than the firm had anticipated, providing more reasonable guidance for 2H06. However, a steep rise in inventory has now, they believe, shifted concerns from slow business conditions and aggressive guidance to the potential for production cuts (and lower margins) later in the year. Moreover, given lowered estimates, INTC is now no longer at a steep discount to the group (at 15x CY07 non-GAAP EPS, essentially the same multiple as TXN). The firm therefore maintains their Market Perform rating, and are lowering price target from $22 to $19 on lower estimates.
- Prudential is certainly among the most bearish saying they estimate that Intel lost 100 bps of revenue share to AMD during the quarter. Firm also estimates cash flow from operations dropped below $1 billion during the quarter. This was not enough to fund capex ($1.5 b), dividends ($582 m) and share repurchases ($1.0 b). Thinks that high inventories of legacy (Pentium) desktop products leave Intel with 2 options that put margins at further risk: 1) write the legacy inventory down, or 2) sell the products at more aggressive price points or risk losing share.
Intel has upgraded its product suite, but has an inventory problem, in firm's view. They think that the stock will drift toward their $14 price target as the company works through its inventories and the Street comes around to the notion that its new normalized gross margins are around 50%, 600 bps below the average over the past 12 years. Reiterates Underweight rating.
- JP Morgan notes they believe Intel will gain share, but they need to see a bottom in gross margins to become more positive on the stock. While the firm is positive on capex cuts and share gains, Intel's record inventory, sluggish demand, and aggressive guidance lead them to believe further downside exists to gross margins. The record inventory is the biggest concern as the last time Intel's inventory was above 95 days, the company's gross margins fell to 37%. Traditionally INTC stock bottoms and peaks with gross margins.
Notablecalls: I think Merrill will prove to be right in the short term. I expect INTC to trade up from here as the big bad event (earnings/guidance) is now behind us. In the intermediate term I think Prudential will be spot on with their $14 tgt. Longer term who knows what may happen. I suspect AMD may have won some battles but will eventually lose the war.
Notablecalls - Paperstand
Barron's Online discusses Merck (MRK), saying that driven by new drugs, recent court victories and a hike in earnings ests, the stock has jumped 40% since hitting a 10-year low in Oct. Sure, Merck faces thousands of lawsuits over the safety of Vioxx. Sales of the cholesterol drug Zocor are plunging. And Wall St. remains unconvinced that Merck's profits will start climbing again in '07, as CEO Richard Clark promised in Dec'05. But with consensus earnings ests falling below the co's guidance, Wall St. does not fully appreciate Merck's positives, such as new products likely to generate bigger than expected sales and cost cuts. "The street has massively underestimated Merck's underlying fundamental improvement," says Jami Rubin, of Morgan Stanley. "Earnings expectations have steadily risen. Business trends are better. Plus, the pipeline has performed better than expected." "I see upside if this co hits its targets," she adds.
According to the Barron's Online, value connoisseur and billionaire investor Carl Icahn sees the light at Vector Group (VGR) and has been buying up tarnished shares of the discount tobacco manufacturer. Icahn paid $5.06m for 320K Vector shares within the past month, acquiring shares in the open mkt for the first time since winter '02. The purchases increased Icahn's holdings to 11m shares, or 22% of Vector's 49.9m outstanding shares. Last month, Icahn received 1.2m shares when Vector redeemed 6.25% convertible notes due in Jul'08. This included a gift of 262K shares as an incentive to do so. Ben Silverman, director of research at InsiderScore.com, says Icahn's "buying is certainly interesting in that he just picked up a decent swap of stock by converting notes and now he's back buying on the open mkt."
According to the Barron's Online, value connoisseur and billionaire investor Carl Icahn sees the light at Vector Group (VGR) and has been buying up tarnished shares of the discount tobacco manufacturer. Icahn paid $5.06m for 320K Vector shares within the past month, acquiring shares in the open mkt for the first time since winter '02. The purchases increased Icahn's holdings to 11m shares, or 22% of Vector's 49.9m outstanding shares. Last month, Icahn received 1.2m shares when Vector redeemed 6.25% convertible notes due in Jul'08. This included a gift of 262K shares as an incentive to do so. Ben Silverman, director of research at InsiderScore.com, says Icahn's "buying is certainly interesting in that he just picked up a decent swap of stock by converting notes and now he's back buying on the open mkt."
Wednesday, July 19, 2006
Calls of Note Part 5
SunTrust notes they recently reviewed a June 2006 presentation made by the Joint Non-Lethal Weapons (NLW) Directorate regarding the investment plan for non-lethal weapons and capabilities for fiscal years 2007 through 2013. In this presentation, the firm identified at least $120 million in funding for programs with direct lines to Ionatron (NASDAQ:IOTN)'s products (this does not necessarily mean that IOTN will receive all $120 million), and for the first time in an unclassified, official DoD presentation, the terms Laser Guided Energy and Laser Induced Plasma were explicitly mentioned as possible solutions.
While the firm still expects IOTN to remain an R&D company for the next couple of years, incremental data points such as those seen in this presentation could build significant support for the stock.
Reits Buy and $13 tgt.
Notablecalls: Expect IOTN to see significant buy interest today. Would not chase it above $7 level, though.
While the firm still expects IOTN to remain an R&D company for the next couple of years, incremental data points such as those seen in this presentation could build significant support for the stock.
Reits Buy and $13 tgt.
Notablecalls: Expect IOTN to see significant buy interest today. Would not chase it above $7 level, though.
Calls of Note Part 4
- Bear Stearns is defending Digitas (NASDAQ:DTAS) following weak Q2 results and guidance issued last night:
Firm notes the three small client losses were due to consolidations to ad holding companies and to aQuantive. Importantly Digitas management reiterated that their major client relationship are very strong and no business at top ten clients have moved to competitors or are in review. In fact management went as far as to say that their relationship with American Express is the strongest it has ever been.
The real disappointment was the expected pullback in spending by GM and Delta where issues at those companies are leading to a 14% decline in their spending in 2006 at Digitas, versus expectations for flat growth at the beginning of the year.
Client concentration has always been an issue with this stock as volatility in spending levels at the larger clients can have huge ramifications on earnings. The good news is that this client concentration is declining, with the top ten relationships down another 4 points in Q2 versus Q1, to 65%. American Express is steady at about 25% of revenues with good growth in the quarter, GM is down to 16% of revenues (from 20% in Q1) and Delta is still about 3%. While these relationships appear strong, challenges in the auto and airline industries seem to be impacting the spending levels at both GM and Delta to a much greater degree than anticipated.
Bear Stearns notes that in their history of covering this stock dating back to its IPO, they have seen instances where a top client has pulled back meaningfully only to see Digitas a few quarters later rebound to its robust growth levels as newer client relationships ramp up. Firm upgraded DTAS stock two weeks ago when they determined that concerns over the American Express relationship possibly being in review were unfounded. Notes they were aware of some volatility in smaller client relationships, so the lose of the three small clients is not a big surprise.
While earnings growth will be muted in the next several quarters, they believe Digitas' competitive position in a robust macro backdrop, along with its healthy cash balance and the possibility of a sale of the company, should make any stock weakness at the open a good buying opportunity.
Maintains Outperform rating but takes tgt to $13 from $15.
Notablecalls: I think DTAS will prove to be a nice bounce play around the open. Piper is downgrading the shares to Mkt Perform from Outperform and they are way late to the party. Suspect this will create the selling pressure needed for the stock to bounce.
Firm notes the three small client losses were due to consolidations to ad holding companies and to aQuantive. Importantly Digitas management reiterated that their major client relationship are very strong and no business at top ten clients have moved to competitors or are in review. In fact management went as far as to say that their relationship with American Express is the strongest it has ever been.
The real disappointment was the expected pullback in spending by GM and Delta where issues at those companies are leading to a 14% decline in their spending in 2006 at Digitas, versus expectations for flat growth at the beginning of the year.
Client concentration has always been an issue with this stock as volatility in spending levels at the larger clients can have huge ramifications on earnings. The good news is that this client concentration is declining, with the top ten relationships down another 4 points in Q2 versus Q1, to 65%. American Express is steady at about 25% of revenues with good growth in the quarter, GM is down to 16% of revenues (from 20% in Q1) and Delta is still about 3%. While these relationships appear strong, challenges in the auto and airline industries seem to be impacting the spending levels at both GM and Delta to a much greater degree than anticipated.
Bear Stearns notes that in their history of covering this stock dating back to its IPO, they have seen instances where a top client has pulled back meaningfully only to see Digitas a few quarters later rebound to its robust growth levels as newer client relationships ramp up. Firm upgraded DTAS stock two weeks ago when they determined that concerns over the American Express relationship possibly being in review were unfounded. Notes they were aware of some volatility in smaller client relationships, so the lose of the three small clients is not a big surprise.
While earnings growth will be muted in the next several quarters, they believe Digitas' competitive position in a robust macro backdrop, along with its healthy cash balance and the possibility of a sale of the company, should make any stock weakness at the open a good buying opportunity.
Maintains Outperform rating but takes tgt to $13 from $15.
Notablecalls: I think DTAS will prove to be a nice bounce play around the open. Piper is downgrading the shares to Mkt Perform from Outperform and they are way late to the party. Suspect this will create the selling pressure needed for the stock to bounce.
Notablecalls - Paperstand 2
According to the WSJ, HCA (HCA) was negotiating a massive leveraged buyout that would have been among the largest in history, but the deal fell apart in its final stages during the past few days. The co convened a special board committee to study the offer for a buyout by a group of private-equity firms. But the co's debt load of $11bn made it difficult for lending banks and prospective buyers to offer a price that was high enough to satisfy the co. There was a 10% price difference between the two sides.
Notablecalls: As HCA talks fail, private equity may seek other hospital operators to take over (THC, LPNT, CYH, HMA, TRI, UHS, MGLN, AMSG, MDTH).
Calls of Note Part 3
- Wachovia is cautious on Radiation Therapy Services (NASDAQ:RTSX) after Medicare chief Herb Kuhn made comments that could create speculation that radiation oncology reimbursement could be cut when the Deficit Reduction Act provision for diagnostic imaging cuts are implemented in 2007. The DRA specifies that freestanding diagnostic imaging centers will be paid no more than hospital outpatient departments for certain diagnostic imaging procedures. Specifically, Mr. Kuhn was asked, Could you please tell me if radiation therapy is included in these cuts. Mr. Kuhn responded, Yes, that is included under DRA. As the firm understands it, Mr. Kuhn gave no further clarification to his answer.
Firm notes they are not very concerned by the CMS comments. They suspect that Mr. Kuhn was referring to diagnostic imaging procedures performed in a radiation oncology center, but excluding diagnostic and screening mammography. Given the DRA wording, they believe that the imaging cuts most likely will be applied to diagnostic imaging procedures only (and not to therapeutic procedures utilizing imaging technology). As the firm has noted in the past, RTSX derives less than 2% of its revenue from diagnostic imaging procedures noted in the DRA.
Believes that RTSX shares could trade between $36 and $40 over the next 12 months. Maintains Outperform.
Notablecalls: Expect to see some pressure on RTSX stock. Nothing drastic, though.
- Merrill Lynch reiterates Buy rating and $40 tgt on Osi Pharma (NASDAQ:OSIP) as they believe there is likely to be upside to ex-US Tarceva sales projections when Roche reports on Thursday, expenses related to the eye business may be aggressively cut when OSI reports earnings at the end of July, and Genentech's recent report of US Tarceva sales, suggests the drug is doing better than expected.
Firm projects sales of $52 - 53 MM, which is above consensus of about $48 MM. Importantly though, ex-US sales may be even stronger than it seems because Tarceva is not even being sold yet in Italy or the UK because those countries have not yet approved pricing. They expect pricing approvals there to occur by 4Q06, which should provide further upside to ex-US sales.
Notablecalls: OSIP looks like it wants to go higher from here. Would risk $0.50.
Firm notes they are not very concerned by the CMS comments. They suspect that Mr. Kuhn was referring to diagnostic imaging procedures performed in a radiation oncology center, but excluding diagnostic and screening mammography. Given the DRA wording, they believe that the imaging cuts most likely will be applied to diagnostic imaging procedures only (and not to therapeutic procedures utilizing imaging technology). As the firm has noted in the past, RTSX derives less than 2% of its revenue from diagnostic imaging procedures noted in the DRA.
Believes that RTSX shares could trade between $36 and $40 over the next 12 months. Maintains Outperform.
Notablecalls: Expect to see some pressure on RTSX stock. Nothing drastic, though.
- Merrill Lynch reiterates Buy rating and $40 tgt on Osi Pharma (NASDAQ:OSIP) as they believe there is likely to be upside to ex-US Tarceva sales projections when Roche reports on Thursday, expenses related to the eye business may be aggressively cut when OSI reports earnings at the end of July, and Genentech's recent report of US Tarceva sales, suggests the drug is doing better than expected.
Firm projects sales of $52 - 53 MM, which is above consensus of about $48 MM. Importantly though, ex-US sales may be even stronger than it seems because Tarceva is not even being sold yet in Italy or the UK because those countries have not yet approved pricing. They expect pricing approvals there to occur by 4Q06, which should provide further upside to ex-US sales.
Notablecalls: OSIP looks like it wants to go higher from here. Would risk $0.50.
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.
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.
Calls of Note Part 1
- Merrill Lynch notes that after literally years of market speculation but no real confirmation, our team's checks have confirmed that Dell is likely to launch AMD (NYSE:AMD)-based desktop and notebook PCs. Based on the information the firm has, the launch will likely be in the fourth quarter of the year. Although if they're correct, they wouldn't be surprised to see AMD talk about the products on its upcoming earnings call. Firm's Asian analyst Tony Tseng indicates that the desktop products are likely to come from Taiwan-based ODM Mitac. Quanta is the most likely partner on the notebook side, although confirmation of that development has been more difficult.
According to the firm it would be a mistake to conclude that a broader Dell relationship dramatically changes the picture for AMD. To the extent that AMD-based products help Dell recover, some of the gains would likely come at the expense of other AMD-based products. On the other hand, it's true that access to Dell's channel could give AMD a shot at enterprise client business that it hasn't had until now. AMD's tough near-term prospects but solid long-term story balance out, at least for now - Neutral on the stock and expect it to trade sideways for the intermediate term.
Notablecalls: Not actionable but good to know category.
- Thomas Weisel says they are expecting Synaptics (NYSE:SYNA) to report June quarter revenue and EPS in line with or slightly below firm's estimates of $43.6mn (up 8% q/q) and $0.14 (versus consensus of $42.8mn, up 6%, and $0.14). Company guidance was for "up to 10%" q/q revenue growth in the quarter.
Despite well publicized overall market weakness, they remain comfortable that Synaptics grew its notebook business (about 90% of sales) in the quarter, however, for three reasons: 1) checks continue to indicate Synaptics is likely gaining modest share from its largest competitor, Alps Electric; 2) Synaptics notebook revenue has not historically exactly mimicked notebook ODM sales and shipments; and 3) checks also indicate modest uptake of the higher ASP dual-mode touchpad, which should help abate blended ASP erosion.
Checks suggest solid September Quarter awaits: Firm has modeled revenue to increase 23% q/q to $53.6mn and EPS of $0.23, modestly above consensus of $49.6mn and $0.20 and company guidance of 10-20% top-line growth.
Reits Outperform noting that although 2Q could prove soft, tey remain positive on SYNA's longer-term competitive position and growth prospects. Firm believes the shares remain attractive, trading at 18x CY07 EPS estimate of $1.10.
Notablecalls: I suggest you don't buy SYNA until they report Q2 results and takes another 10-20% hit.
According to the firm it would be a mistake to conclude that a broader Dell relationship dramatically changes the picture for AMD. To the extent that AMD-based products help Dell recover, some of the gains would likely come at the expense of other AMD-based products. On the other hand, it's true that access to Dell's channel could give AMD a shot at enterprise client business that it hasn't had until now. AMD's tough near-term prospects but solid long-term story balance out, at least for now - Neutral on the stock and expect it to trade sideways for the intermediate term.
Notablecalls: Not actionable but good to know category.
- Thomas Weisel says they are expecting Synaptics (NYSE:SYNA) to report June quarter revenue and EPS in line with or slightly below firm's estimates of $43.6mn (up 8% q/q) and $0.14 (versus consensus of $42.8mn, up 6%, and $0.14). Company guidance was for "up to 10%" q/q revenue growth in the quarter.
Despite well publicized overall market weakness, they remain comfortable that Synaptics grew its notebook business (about 90% of sales) in the quarter, however, for three reasons: 1) checks continue to indicate Synaptics is likely gaining modest share from its largest competitor, Alps Electric; 2) Synaptics notebook revenue has not historically exactly mimicked notebook ODM sales and shipments; and 3) checks also indicate modest uptake of the higher ASP dual-mode touchpad, which should help abate blended ASP erosion.
Checks suggest solid September Quarter awaits: Firm has modeled revenue to increase 23% q/q to $53.6mn and EPS of $0.23, modestly above consensus of $49.6mn and $0.20 and company guidance of 10-20% top-line growth.
Reits Outperform noting that although 2Q could prove soft, tey remain positive on SYNA's longer-term competitive position and growth prospects. Firm believes the shares remain attractive, trading at 18x CY07 EPS estimate of $1.10.
Notablecalls: I suggest you don't buy SYNA until they report Q2 results and takes another 10-20% hit.
Notablecalls - Paperstand
According to The Wall Street Journal, British Sky Broadcasting (BSY) is in talks with Time Warner (TWX) to acquire AOL UK, BSkyB CEO James Murdoch said. BSkyB also unveiled an aggressive drive into the UK broadband mkt, earmarking higher-than-expected capital expenditures to cover the cost of signing up new customers.
According to the WSJ, General Motors (GM) will step up discounts on certain models in the U.S. beginning today, but the No. 1 U.S. auto maker says "there is no nationwide blowout sale ... planned" to match last summer's "Employee Discounts for Everyone" promotion.
Barron's Online discusses Symantec (SYMC), which shares have lost more than half of their value since Veritas merger was announced in Dec'04. However, investors' ire has been transforming into "begrudging acceptance" says Merrill Lynch software analyst Edward Maguire. "My view is the worst is behind them, [and] I am getting an increasing sense of longer-term bullishness…about what Symantec is doing about understanding problems customers are facing." After a seasonally slow JunQ, Symantec heads into a stronger product cycle that should spur top-line growth with new consumer and business security software, as the co addresses operational glitches and aggressively buys back stock. Symantec is trading at an attractive valuation given the stock's depreciation and strong cash flow. Tougher mkt conditions combined with product delays and reduced forecasts kept downward pressure on the stock over the past 2 years. So now Maguire says "it's logical for investors to want to take a wait-and-see approach."
According to the Barron's Online, Blue Harbour Group, a hedge fund, disclosed in a SEC filing last Fri that it now holds 6.4m shares of Reader's Digest Association (RDA), up from the 4.8m shares the fund held in mid-Feb, increasing its stake to 6.7% from 4.97%.
According to the NY Post, The AmEx yesterday halted trading in Globetel Comm. (GTE), the tiny outfit with an unlikely plan to use aluminum blimps to carry cellphone signals, and moved to delist the co's shares from the mkt. The Amex move comes after a series of articles in The Post exposed the co's aggressively hyped business claims and muddled mgmt connections. The co issued press releases implying that ex-Secretary of State Henry Kissinger was indirectly involved in Globtel via a London-based investment group called Rubikon Partners. But Kissinger told The Post he had no involvement with either Rubikon Partners or Globetel, and his name was subsequently removed from the Rubikon Web site.
The DigiTimes reports that notebook makers are facing poor order visibility for the 2H06, as clients are reluctant to place long-term large-volume orders amid a price war between Intel and AMD. The sources pointed out that orders from the channel usually are placed every month for more than 10K units each time, but now the orders come once every one or two weeks for small quantities of 2K-3K units. Customers are trying to avoid losses, as holding inventory could be dangerous due to the price competition between Intel and AMD. Although notebook makers remain optimistic about demand for the 2H06, they will have to tolerate their clients' short-term small-scale orders.
According to the WSJ, General Motors (GM) will step up discounts on certain models in the U.S. beginning today, but the No. 1 U.S. auto maker says "there is no nationwide blowout sale ... planned" to match last summer's "Employee Discounts for Everyone" promotion.
Barron's Online discusses Symantec (SYMC), which shares have lost more than half of their value since Veritas merger was announced in Dec'04. However, investors' ire has been transforming into "begrudging acceptance" says Merrill Lynch software analyst Edward Maguire. "My view is the worst is behind them, [and] I am getting an increasing sense of longer-term bullishness…about what Symantec is doing about understanding problems customers are facing." After a seasonally slow JunQ, Symantec heads into a stronger product cycle that should spur top-line growth with new consumer and business security software, as the co addresses operational glitches and aggressively buys back stock. Symantec is trading at an attractive valuation given the stock's depreciation and strong cash flow. Tougher mkt conditions combined with product delays and reduced forecasts kept downward pressure on the stock over the past 2 years. So now Maguire says "it's logical for investors to want to take a wait-and-see approach."
According to the Barron's Online, Blue Harbour Group, a hedge fund, disclosed in a SEC filing last Fri that it now holds 6.4m shares of Reader's Digest Association (RDA), up from the 4.8m shares the fund held in mid-Feb, increasing its stake to 6.7% from 4.97%.
According to the NY Post, The AmEx yesterday halted trading in Globetel Comm. (GTE), the tiny outfit with an unlikely plan to use aluminum blimps to carry cellphone signals, and moved to delist the co's shares from the mkt. The Amex move comes after a series of articles in The Post exposed the co's aggressively hyped business claims and muddled mgmt connections. The co issued press releases implying that ex-Secretary of State Henry Kissinger was indirectly involved in Globtel via a London-based investment group called Rubikon Partners. But Kissinger told The Post he had no involvement with either Rubikon Partners or Globetel, and his name was subsequently removed from the Rubikon Web site.
The DigiTimes reports that notebook makers are facing poor order visibility for the 2H06, as clients are reluctant to place long-term large-volume orders amid a price war between Intel and AMD. The sources pointed out that orders from the channel usually are placed every month for more than 10K units each time, but now the orders come once every one or two weeks for small quantities of 2K-3K units. Customers are trying to avoid losses, as holding inventory could be dangerous due to the price competition between Intel and AMD. Although notebook makers remain optimistic about demand for the 2H06, they will have to tolerate their clients' short-term small-scale orders.
Tuesday, July 18, 2006
Calls of Note Part 6
- Piper Jaffray notes Blue Harbour Group, a hedge fund led by former KKR partner Clifton Robbins, increased its ownership in CSK Auto (NYSE:CAO) to 7.65% following the purchase of one million shares over the past two weeks (paying an average price of $11.62). The group now owns 3.35 million shares. The increased ownership from this investor may spur LBO speculation after the recent activity in hardlines retail. While the valuation appears attractive on many metrics (free cash flow yield of 16.5% on FY06E, EV/FY06 EBITDA of 6.2x), they do not believe that a leveraged buyout is likely in the near term due to an ongoing accounting investigation and soft fundamental trends.
Based on what the firm believes to be an increasingly difficult macro environment, and with two weeks remaining in CSK's 2Q, they are lowering their same-store sales estimate from -1% to -2%. They are also reducing 2Q EPS estimate by $0.03 to $0.36 (consensus at $0.38). Believes that low-income consumers are being pressured by increasing gas prices, rising interest rates, and weak job growth. In firm's view, this may be negatively affecting sales trends, especially as CSK tends to have a more discretionary product mix that is susceptible to trends in low-income consumer spending.
Based on what the firm believes to be an increasingly difficult macro environment, and with two weeks remaining in CSK's 2Q, they are lowering their same-store sales estimate from -1% to -2%. They are also reducing 2Q EPS estimate by $0.03 to $0.36 (consensus at $0.38). Believes that low-income consumers are being pressured by increasing gas prices, rising interest rates, and weak job growth. In firm's view, this may be negatively affecting sales trends, especially as CSK tends to have a more discretionary product mix that is susceptible to trends in low-income consumer spending.
Maintains Mkt Perform but lowers tgt to $12 from $13.
Notablecalls: Not actionable but good to know category.
Calls of Note Part 5
- Stifel has interesting comments on Broadcom (NASAQ:BRCM) noting that for its second quarter results, because of the ongoing audit and the uncertainty of the firm's cost and expense structure, the company will report only revenue, its cash position, and give only revenue guidance for the third quarter. No EPS or other income statement data will be provided.
With the options issue hanging over its head and with the macro environment showing some signs of a weaker consumer market, or maybe just normal summer seasonality following a stronger than normal first quarter, the firm believes Broadcom will likely be prudently conservative in its third quarter guidance. The Street consensus is currently for sequential growth of about 5%, which generally matches their forecast. However, they believe this growth rate was likely a best case scenario and would not be surprised by guidance closer to flat sequentially.
Notablecalls: Would not be surprised to see some weakness in BRCM following the call. Note that BRCM is scheduled to release results on Thursday.
With the options issue hanging over its head and with the macro environment showing some signs of a weaker consumer market, or maybe just normal summer seasonality following a stronger than normal first quarter, the firm believes Broadcom will likely be prudently conservative in its third quarter guidance. The Street consensus is currently for sequential growth of about 5%, which generally matches their forecast. However, they believe this growth rate was likely a best case scenario and would not be surprised by guidance closer to flat sequentially.
Notablecalls: Would not be surprised to see some weakness in BRCM following the call. Note that BRCM is scheduled to release results on Thursday.
Calls of Note Part 4
- Oppenheimer & Co notes that on or before the PDUFA date of July 24, they expect the FDA to approve Encysive (NASDAQ:ENCY)'s Thelin for the treatment of pulmonary arterial hypertension (PAH). Recalls that the FDA issued an Approvable Letter to Encysive's original application in March. Subsequently, Encysive submitted a complete response in May, which the agency accepted and designated as a Class 1 resubmission (thus triggering a 2-month review from the May 25 filing date).
Firm notes they have always been confident in Thelin's approvability based on the statistically significant benefit demonstrated by the drug in a large Phase III trial (STRIDE-2) operated under an SPA, as well as the established utility of this drug class (endothelin antagonists) against PAH. Moreover, firm's confidence is enhanced by the recent positive recommendation for approval in the EU on June 2 and the FDA's acceptance of Encysive's response as a two-month Class 1 resubmission on June 15 (as opposed to a six-month Class 2 or an outright non-acceptance).
Despite firm's real-options valuation analysis being heavily skewed toward conservative commercial scenarios, they still believe there is significant value in shares of ENCY. Reits Buy and $9 tgt.
Notablecalls: Not actionable but good to know category. I must say I did like how GTOP reacted following positive call from RBC yesterday.
Firm notes they have always been confident in Thelin's approvability based on the statistically significant benefit demonstrated by the drug in a large Phase III trial (STRIDE-2) operated under an SPA, as well as the established utility of this drug class (endothelin antagonists) against PAH. Moreover, firm's confidence is enhanced by the recent positive recommendation for approval in the EU on June 2 and the FDA's acceptance of Encysive's response as a two-month Class 1 resubmission on June 15 (as opposed to a six-month Class 2 or an outright non-acceptance).
Despite firm's real-options valuation analysis being heavily skewed toward conservative commercial scenarios, they still believe there is significant value in shares of ENCY. Reits Buy and $9 tgt.
Notablecalls: Not actionable but good to know category. I must say I did like how GTOP reacted following positive call from RBC yesterday.
Calls of Note Part 3
- Bear Stearns comments on Echostar Communications (NASDAQ:DISH) noting DISH has a strong day yesterday finishing at $32.52, up $1.89 or 6.17%. Firm believes that the stock performed well because of an article in the Los Angeles Times which mentioned that there was speculation at last week's Allen & Co.'s Sun Valley conference that "Murdoch was close to making a deal to buy Echostar Communications Corp."
Despite the article, and today's strong performance, firm maintain their view that a merger between DirecTV and Echostar would not gain regulatory approval. Firm's legal and regulatory checks in DC continue to suggest that key regulators do not believe that multichannel video competition has changed substantially since late 2002, when the original deal was rejected by the DOJ and the FCC. Neither cable nor the telcos have made meaningful inroads into rural areas, and the Internet is not yet capable of delivering the kind of multichannel video offering needed to compete directly with DBS.
Finally, they note that in 2002, the FCC commission, which included Kevin Martin (current FCC Chairmen), rejected the deal in a 5-0 vote. To change his original opinion, Martin would need to see substantive change in the marketplace before he would approve a newly-proposed merger. There seems to be little evidence of such change at this time. Additionally, the firm believes that it is very unlikely that Chairmen Adelstein and Copps would approve such a merger.
Maintains Underperform on DISH.
Notablecalls: Bear's call makes sense. Additionally, I know a couple of (real) smart hedgies that are leaning against DISH on yesterday's jump. Wouldn't want to bet against them.
Despite the article, and today's strong performance, firm maintain their view that a merger between DirecTV and Echostar would not gain regulatory approval. Firm's legal and regulatory checks in DC continue to suggest that key regulators do not believe that multichannel video competition has changed substantially since late 2002, when the original deal was rejected by the DOJ and the FCC. Neither cable nor the telcos have made meaningful inroads into rural areas, and the Internet is not yet capable of delivering the kind of multichannel video offering needed to compete directly with DBS.
Finally, they note that in 2002, the FCC commission, which included Kevin Martin (current FCC Chairmen), rejected the deal in a 5-0 vote. To change his original opinion, Martin would need to see substantive change in the marketplace before he would approve a newly-proposed merger. There seems to be little evidence of such change at this time. Additionally, the firm believes that it is very unlikely that Chairmen Adelstein and Copps would approve such a merger.
Maintains Underperform on DISH.
Notablecalls: Bear's call makes sense. Additionally, I know a couple of (real) smart hedgies that are leaning against DISH on yesterday's jump. Wouldn't want to bet against them.
Calls of Note Part 2
- Morgan Stanley comments on Semi space noting that thus far, the number of negative earnings surprises has been limited, but the sharp and fairly indiscriminate sell-off in stocks that has occurred in the last few months suggests that the number of negative surprises will increase in Q3 and/or downward revisions are likely. However, most stocks have already discounted a lot of bad news, and a near-term rally will likely occur as earnings season unfolds. As more news that is negative develops during the summer, further weakness would be likely, with an important SOX low in the 350-400 range.
Long-term valuations have become attractive for most stocks, and the firm believes that an important low will likely be reached as downward earnings revisions are made during the next few months. Currently, they believe that the third-quarter consensus revenue and/or EPS estimates for AMD, Broadcom, Intel, International Rectifier, Intersil, LSI Logic, SanDisk, and SiRF look high, while the estimates for Atheros and TI appear to be too low.
Notablecalls: Not actionable but good to know category.
- Thomas Weisel Partners notes that following multiple checks into the MP3 supply chain, they are modestly lowering their Sigmatel (NASDAQ:SGTL) revenue and EPS estimates to reflect a more aggressive pricing environment, somewhat softer-than-expected 3600/FM tuner traction and a mixed near-term MP3 player environment. Checks suggest that the 3600 video continues to be hindered by delays, crimping broader-based adoption. The 3600 represented 10% of revenue last quarter and had only begun to ship to key strategic OEM customers, such as Samsung and Creative.
Given their expectation of an ongoing slow new product adoption in an aggressive pricing environment, the firm continues not to see profitability as a near-term possibility. Believes the shares are fairly valued, trading at 0.8x firm's price CY06 sales forecast, which is discount to the peer median of 1.6x.
Notablecalls: Not actionable but good to know category.
Long-term valuations have become attractive for most stocks, and the firm believes that an important low will likely be reached as downward earnings revisions are made during the next few months. Currently, they believe that the third-quarter consensus revenue and/or EPS estimates for AMD, Broadcom, Intel, International Rectifier, Intersil, LSI Logic, SanDisk, and SiRF look high, while the estimates for Atheros and TI appear to be too low.
Notablecalls: Not actionable but good to know category.
- Thomas Weisel Partners notes that following multiple checks into the MP3 supply chain, they are modestly lowering their Sigmatel (NASDAQ:SGTL) revenue and EPS estimates to reflect a more aggressive pricing environment, somewhat softer-than-expected 3600/FM tuner traction and a mixed near-term MP3 player environment. Checks suggest that the 3600 video continues to be hindered by delays, crimping broader-based adoption. The 3600 represented 10% of revenue last quarter and had only begun to ship to key strategic OEM customers, such as Samsung and Creative.
Given their expectation of an ongoing slow new product adoption in an aggressive pricing environment, the firm continues not to see profitability as a near-term possibility. Believes the shares are fairly valued, trading at 0.8x firm's price CY06 sales forecast, which is discount to the peer median of 1.6x.
Notablecalls: Not actionable but good to know category.
Calls of Note Part 1
- Piper Jaffray notes the Architectural Billings Index (ABI) was down in June, showing the second negative score in a row for the pipeline of non-residential architects. The ABI has the most direct overlap with Autodesk (NASDAQ:ADSK)'s AEC division, which is ~15% of revenue.
While the ABI was negative again in June, it was only slightly negative at 49.2. At this time we are not alarmed by the slight dip below 50 because it indicates only a slight shrinkage of the project pipeline, but the firm will watch this metric closely over the next several months.
While the ABI is a worthwhile metric,they believe in the past month the Street has overreacted to the slight downturn in the index. Firm emphasises the change in the index is only a fractional downturn. In general, they believe Autodesk's end markets remain healthy.
* ABI is an indicator that provides a look into the 6- month pipeline of ~300 architectural firms and their expectations for non- residential construction activity in the U.S. Over the last 12 quarters the average quarterly ABI has had a correlation of 0.86 with Autodesk's design solutions revenue.
Notablecalls: ADSK may have some more downside in it but I would wait til it breaks recent lows.
- Citigroup notes their checks suggest that 2FQ has been yet another challenging quarter for Dell Computer (NASDAQ:DELL) due to decelerating end market growth and aggressive pricing by competitors who have significantly improved their relative cost structures during the past five years. They believe demand has been more challenging in the U.S. while competitive pricing has been more challenging in Europe (versus the company's expectations).
Firm believes lower than expected U.S. demand simply reflects decelerating corporate and government end market growth following three above-trend years. They expect this deceleration to continue into the first half of 2007 until comparisons get easier and installed base age moves back above average. Sales to corporate and government customers in the U.S. and Western Europe represent more than 50% of Dell's total revenue. Checks also suggest that Dell has not enjoyed as much price elasticity within U.S. consumer this quarter as the company had hoped. Perhaps past tech support and product quality challenges are overriding price in the minds of prospective consumer PC buyers. Sources suggest that Dell has walked away from a number of deals in Europe due to aggressive pricing by HP.
Believes Dell is likely to announce 2FQ07 EPS below consensus of $0.32. We remain at $0.30. We note that the company's annual shareholders' meeting, which is scheduled for this Friday, has been used to update quarterly earnings in three of the past five years.
Notablecalls: Not actionable but good to know category.
While the ABI was negative again in June, it was only slightly negative at 49.2. At this time we are not alarmed by the slight dip below 50 because it indicates only a slight shrinkage of the project pipeline, but the firm will watch this metric closely over the next several months.
While the ABI is a worthwhile metric,they believe in the past month the Street has overreacted to the slight downturn in the index. Firm emphasises the change in the index is only a fractional downturn. In general, they believe Autodesk's end markets remain healthy.
* ABI is an indicator that provides a look into the 6- month pipeline of ~300 architectural firms and their expectations for non- residential construction activity in the U.S. Over the last 12 quarters the average quarterly ABI has had a correlation of 0.86 with Autodesk's design solutions revenue.
Notablecalls: ADSK may have some more downside in it but I would wait til it breaks recent lows.
- Citigroup notes their checks suggest that 2FQ has been yet another challenging quarter for Dell Computer (NASDAQ:DELL) due to decelerating end market growth and aggressive pricing by competitors who have significantly improved their relative cost structures during the past five years. They believe demand has been more challenging in the U.S. while competitive pricing has been more challenging in Europe (versus the company's expectations).
Firm believes lower than expected U.S. demand simply reflects decelerating corporate and government end market growth following three above-trend years. They expect this deceleration to continue into the first half of 2007 until comparisons get easier and installed base age moves back above average. Sales to corporate and government customers in the U.S. and Western Europe represent more than 50% of Dell's total revenue. Checks also suggest that Dell has not enjoyed as much price elasticity within U.S. consumer this quarter as the company had hoped. Perhaps past tech support and product quality challenges are overriding price in the minds of prospective consumer PC buyers. Sources suggest that Dell has walked away from a number of deals in Europe due to aggressive pricing by HP.
Believes Dell is likely to announce 2FQ07 EPS below consensus of $0.32. We remain at $0.30. We note that the company's annual shareholders' meeting, which is scheduled for this Friday, has been used to update quarterly earnings in three of the past five years.
Notablecalls: Not actionable but good to know category.
Notablecalls - Paperstand
The Wall Street Journal discusses UnitedHealth (UNH), saying that a cloud hangs over the co as several probes look into its past options-granting practices. But some investors say it is a high-quality co at a depressed stock price, and they have been buying. The co's shares have lost 25% of their value since Dec. Much of the tumble occurred after questions first surfaced in March about whether the timing of some stock options granted to CEO William McGuire and other execs in previous years allowed them to profit unfairly. "We've always thought it was a great co, but we never thought we'd get it back at these prices," says Glenn Greenberg, of Chieftain Capital Mgmt, which now owns more than 14m UnitedHealth shares. Before April, Chieftain held 1% of its $4.5bn portfolio in UnitedHealth shares. Since then, Chieftain has channeled 15% of its assets into the stock, buying a total of 1% of UnitedHealth's stock.
The WSJ's "Heard on the Street" column discusses favorably Source Interlink (SORC), which fills retailers shelves with magazines, DVDs and CDs. After a spate of acquisitions, Source Interlink has seen its modest profit margins slip in recent quarters. That hurt the company's stock price and drew scads of short-sellers betting on a further stock drop. But, the stock at $11, some spy an opportunity. The business, currently being shopped, could be bought in coming months at a 20% or greater premium by deep-pocketed private-equity funds. Even without a sale, cost cutting alone at recently acquired units could boost profits over the next year or two. With expected sales of nearly $2bn this year, modest margin improvement can make a big difference to the bottom line of a small co (mkt cap stands at $573m). "They generate a lot of free cash flow already, and we think margin improvement will create a lot of upside," says Derek Anguilm, of Westcore Small-Cap Opportunity Fund. Mr. Anguilm has a per-share tgt in the "high teens."
According to the Barron's Online, Harold C. Simmons, the Chmn and CEO of Titanium Metals (TIE), shelled out a total of $7.1m for 275K shares in purchases on July 13 and 14. "Simmons is an investor and a stakeholder. He wants to control as much of the stock as possible," says Ben Silverman, director of research at InsiderScore.com. "Obviously, with the stock pulling back so much since its last split [on May 17th], Simmons felt this was a good opportunity to be buying again at value."
The WSJ's "Heard on the Street" column discusses favorably Source Interlink (SORC), which fills retailers shelves with magazines, DVDs and CDs. After a spate of acquisitions, Source Interlink has seen its modest profit margins slip in recent quarters. That hurt the company's stock price and drew scads of short-sellers betting on a further stock drop. But, the stock at $11, some spy an opportunity. The business, currently being shopped, could be bought in coming months at a 20% or greater premium by deep-pocketed private-equity funds. Even without a sale, cost cutting alone at recently acquired units could boost profits over the next year or two. With expected sales of nearly $2bn this year, modest margin improvement can make a big difference to the bottom line of a small co (mkt cap stands at $573m). "They generate a lot of free cash flow already, and we think margin improvement will create a lot of upside," says Derek Anguilm, of Westcore Small-Cap Opportunity Fund. Mr. Anguilm has a per-share tgt in the "high teens."
According to the Barron's Online, Harold C. Simmons, the Chmn and CEO of Titanium Metals (TIE), shelled out a total of $7.1m for 275K shares in purchases on July 13 and 14. "Simmons is an investor and a stakeholder. He wants to control as much of the stock as possible," says Ben Silverman, director of research at InsiderScore.com. "Obviously, with the stock pulling back so much since its last split [on May 17th], Simmons felt this was a good opportunity to be buying again at value."
Monday, July 17, 2006
Calls of Note Part 6
- BMO Capital Markets' Brian Piccioni is negative on ATI Tech (NASDAQ:ATYT)notes that according to a report by the usually reliable Inquirer (http://www.theinquirer.net/default.aspx?article=33072 ) a recent Intel product roadmap indicated the company will no longer be using ATI Integrated Graphics Processor (IGP) chipsets in its desktop motherboards. As the firm has noted repeatedly, they estimate 20% of ATI's PC related revenues are associated with IGP business it largely inherited from Intel when the latter decided to temporarily exit the low end chipset business as it reallocated and upgraded its manufacturing resources. Although these IGPs are decidedly low margin products, they estimate the loss of this business could trim EPS by roughly 50%.
What the firm does not know, however, is what portion of ATI's chipset business is associated with Intel Desktop motherboards, although they suspect it is a significant relationship. In any event, Intel's possible decision could suggest the company is aggressively pursuing the business, which they continue to expect will be largely repatriated. The good news is that, because low end IGP products have such low margins, the possible loss of this business would result in ATI's Gross Margins increasing, which is the spin te firm would predict the bulls would use to position this potential development.
Maintains Underperform and $10 tgt.
What the firm does not know, however, is what portion of ATI's chipset business is associated with Intel Desktop motherboards, although they suspect it is a significant relationship. In any event, Intel's possible decision could suggest the company is aggressively pursuing the business, which they continue to expect will be largely repatriated. The good news is that, because low end IGP products have such low margins, the possible loss of this business would result in ATI's Gross Margins increasing, which is the spin te firm would predict the bulls would use to position this potential development.
Maintains Underperform and $10 tgt.
Notablecalls: Not sure what to say about this one.
Calls of Note Part 5
- Raymond James notes that in another piece of evidence that growth restaurant stocks may be nearing a capitulation bottom, Barron's magazine published very negative articles on both PF Chang's and Panera Bread (NASDAQ:PNRA) this weekend.
PFCB - before the likely downdraft this morning as a result of the Barron's article - is selling at less than 8x 2006 EBITDA and an extraordinary 6.2x firm's 2007 EBITDA projection. These cash flow valuation levels have historically been seen with restaurant stocks experiencing material financial pressures, which is not the case at PFCB.
PFCB continues to produce exceptional returns on new unit capital. It has a $1.91 per share of net cash on its most recent balance sheet, and they estimate yearend cash will be $3.20 per share. Firm believes longer term investors will be well rewarded by purchases at current levels, and reiterates Outperform rating. Firm's continuing $44.50 price target equates to an 8.7x EV/EBITDA valuation on 2007 forecast. This is still well below the stock's historical cash flow valuation levels.
Notablecalls: I expect PNRA to bounce after the initial weakness. Check out the action in PNRA after CIBC upgraded their rating on June 22.
PFCB - before the likely downdraft this morning as a result of the Barron's article - is selling at less than 8x 2006 EBITDA and an extraordinary 6.2x firm's 2007 EBITDA projection. These cash flow valuation levels have historically been seen with restaurant stocks experiencing material financial pressures, which is not the case at PFCB.
PFCB continues to produce exceptional returns on new unit capital. It has a $1.91 per share of net cash on its most recent balance sheet, and they estimate yearend cash will be $3.20 per share. Firm believes longer term investors will be well rewarded by purchases at current levels, and reiterates Outperform rating. Firm's continuing $44.50 price target equates to an 8.7x EV/EBITDA valuation on 2007 forecast. This is still well below the stock's historical cash flow valuation levels.
Notablecalls: I expect PNRA to bounce after the initial weakness. Check out the action in PNRA after CIBC upgraded their rating on June 22.
Calls of Note Part 4
- RBC Capital notes the lack of appetite in the market for binary risk has put Genitope (NASDAQ:GTOP) shares at all time lows in advance of what could be its most significant clinical/corporate event -- the second interim analysis of its pivotal Phase III trial. Firm continues to expect positive results for Genitope's MyVax at this interim analysis during the week of July 24, and believes that a statistically significant and clinically meaningful increase in progression-free survival could trigger a re-valuation of the company, driving the stock into the high teens per share. The downside from these prices is more limited given the approximate $3.30 cash per share. Although there is significant binary risk, they believe the risk/reward is highly favorable at current prices.
Assuming upside to $18 and downside to $4, the current $6 share price implies that the market is assigning an 85% probability of a negative outcome. Firm believes this inefficient pricing strongly supports a favorable risk/reward for investors willing to accept binary risk.
Believes that the stock may not get to $18 immediately and there will be significantly liquidity at lower valuations at approximately $12 per share or more. Using a downside value of $4 per share (a small premium to its current cash balance of approximately $3 per share) and an upside value of either $12 or $18 per share, they think the market is currently estimating the probability of success at approximately 15-25%. Firm believes this is extremely low. Even if one assigns a 50% probability of success to the event (which they think is still too low), the stock should be trading above $10 per share given downside to $4 and upside to $18.
Reits Outperform.
Notablecalls: For you gamblers out there. A real falling knife.
Assuming upside to $18 and downside to $4, the current $6 share price implies that the market is assigning an 85% probability of a negative outcome. Firm believes this inefficient pricing strongly supports a favorable risk/reward for investors willing to accept binary risk.
Believes that the stock may not get to $18 immediately and there will be significantly liquidity at lower valuations at approximately $12 per share or more. Using a downside value of $4 per share (a small premium to its current cash balance of approximately $3 per share) and an upside value of either $12 or $18 per share, they think the market is currently estimating the probability of success at approximately 15-25%. Firm believes this is extremely low. Even if one assigns a 50% probability of success to the event (which they think is still too low), the stock should be trading above $10 per share given downside to $4 and upside to $18.
Reits Outperform.
Notablecalls: For you gamblers out there. A real falling knife.
Calls of Note Part 3
- RBC Capital notes their field checks indicate that Cisco (NASDAQ:CSCO) is tracking towards the high end of the guidance range of $7.8 to $7.95 billion for the current quarter ending in July. On the margin, router sales and North American enterprise trends may remain ahead of plan. RBC is conservatively estimating $7.88 billion and $0.28 vs. the consensus of $7.92 billion and $0.28.
After almost two years since its introduction, Cisco's CRS-1 may be helping Cisco regain lost router market share. Specifically, Cisco may be winning a higher percentage of new network deals against Juniper Networks. Firm's contacts highlight that Cisco's share at China Telecom in the recent '06 expansion project has grown to the highest level in recent years. North American enterprise trends (50%) continue to be driven by switch upgrades and VoIP implementations. Services (19%) driven by renewals appear strong this time around.
The back half of the year and 2007 will bring increasing revenue opportunities related to carrier triple play and IPTV, particularly now that Cisco has a comprehensive end-to-end product portfolio for video. Reits Outperform and $23 tgt.
Notablecalls: Hardly a surprise but will add to today's positive sentiment.
After almost two years since its introduction, Cisco's CRS-1 may be helping Cisco regain lost router market share. Specifically, Cisco may be winning a higher percentage of new network deals against Juniper Networks. Firm's contacts highlight that Cisco's share at China Telecom in the recent '06 expansion project has grown to the highest level in recent years. North American enterprise trends (50%) continue to be driven by switch upgrades and VoIP implementations. Services (19%) driven by renewals appear strong this time around.
The back half of the year and 2007 will bring increasing revenue opportunities related to carrier triple play and IPTV, particularly now that Cisco has a comprehensive end-to-end product portfolio for video. Reits Outperform and $23 tgt.
Notablecalls: Hardly a surprise but will add to today's positive sentiment.
Calls of Note Part 2
- Banc of America says that although they expect Intel (NASDAQ:INTC) to meet its June outlook, they think bias will be to the low end on both sales and margins. More importantly, the firm expects an outlook for a seasonal increase in sales (+8% Q/Q) and also for some improvement to GM to 52% +/- few points. Supporting this view are several recent data points that seem to indicate that the PC supply chain (including motherboard makers and distributors) has witnessed better business trends in June than in the preceding months, in turn suggesting some stabilization following a turbulent 1H06. In addition, they also believe that inventory trends for Intel's parts, both internally and in the channel, are headed in the right direction, which has positive implications for future Intel processor demand as the channel seeks to replenish their processor inventory for the second half.
With fundamentals at an inflection point, and valuation attractive, the firm views Intel's stock as a compelling value at current levels. Reits Buy and $25 tgt.
Notablecalls: Not actionable but good to know category.
- Citigroup commentson on Semi Equipment space saying pullins continue to dramatically outnumber pushouts with memory makers like Hynix offering vendors financial incentives to meet aggressive schedules. Checks suggest pullins from Hynix, Taiwan DRAM JV (orders now CQ4:06), Promos and Toshiba with pushouts beyond TSMC still surprisingly limited. Tool suppliers have trimmed CQ4:06 forecasts to their supply chain in recent weeks, but the lack of broad pushouts means CQ3:06 guidance/results are not likely to -- at least initially -- be the disaster the firm feels is necessary to avoid a multi-quarter cyclical downturn/inventory adjustment similar to C2004.
While most investors are negative, valuation is not yet "washed out" and a lack of pushouts means capacity adds remain an overhang. Investor attendance at the Semicon show was higher than they can remember in recent years, with most analyst meetings -- particularly LRCX -- overflowing with investors. While sentiment appears largely aligned toward the negative, recent short interest data suggests short interest is relatively low compared to the past two years for all stocks but LRCX, where short interest is about average compared to 2-year trend. Firm emerges incrementally more bullish on Buys NVLS and FORM and incrementally more cautious on Sells LRCX and AMKR.
Notablecalls: Not actionable but good to know category.
With fundamentals at an inflection point, and valuation attractive, the firm views Intel's stock as a compelling value at current levels. Reits Buy and $25 tgt.
Notablecalls: Not actionable but good to know category.
- Citigroup commentson on Semi Equipment space saying pullins continue to dramatically outnumber pushouts with memory makers like Hynix offering vendors financial incentives to meet aggressive schedules. Checks suggest pullins from Hynix, Taiwan DRAM JV (orders now CQ4:06), Promos and Toshiba with pushouts beyond TSMC still surprisingly limited. Tool suppliers have trimmed CQ4:06 forecasts to their supply chain in recent weeks, but the lack of broad pushouts means CQ3:06 guidance/results are not likely to -- at least initially -- be the disaster the firm feels is necessary to avoid a multi-quarter cyclical downturn/inventory adjustment similar to C2004.
While most investors are negative, valuation is not yet "washed out" and a lack of pushouts means capacity adds remain an overhang. Investor attendance at the Semicon show was higher than they can remember in recent years, with most analyst meetings -- particularly LRCX -- overflowing with investors. While sentiment appears largely aligned toward the negative, recent short interest data suggests short interest is relatively low compared to the past two years for all stocks but LRCX, where short interest is about average compared to 2-year trend. Firm emerges incrementally more bullish on Buys NVLS and FORM and incrementally more cautious on Sells LRCX and AMKR.
Notablecalls: Not actionable but good to know category.
Calls of Note Part 1
Couple of firms commenting on Salesforce.com (NYSE:CRM):
* Baird notes they recently completed their fourth quarterly survey of salesforce.com partners/integrators/clients -- this quarter it represents 54 companies within the salesforce.com ecosystem (40 clients and 14 partners/integrators). Based on the responses, they expect FQ2-07 (July quarter) user additions to be somewhat flat sequentially - firm anticipates 43-47k (lower than current estimate of 48k), roughly in line with the 45k added in Q1.
Based on partner/integrator comments, they heard of fewer large deals in Q2 than in Q1, and heard of one large client (1,500 subscribers) that is expected to leave at the end of the contract. Clients appear to remain highly satisfied -- few would consider a different CRM system if the economy slowed and only a handful would consider a reduction in subscribers. Firm expects FQ2-07 EPS and revenue to be roughly in line with their estimates and guidance (though acknowledge that the stock could trade more on the subscriber additions). Maintains Neutral and $29.
* Cowen notes CRM has been under extreme pressure over the last six weeks as the market has sold off and Microsoft has turned up the volume on its competitive offerings. Based on the divergence between the assumed financial metrics at $22 and firm's potentially conservative earnings model, CRM looks a compelling investment at current levels. Channel checks indicate a material pick up in business in June following a seasonally soft May, and they continue to expect avg. rev per subscriber to tick up on strong sales of Unlimited Edition. Firm believes the market is overly skeptical regarding the company's unique value proposition and its ability to execute.
* Baird notes they recently completed their fourth quarterly survey of salesforce.com partners/integrators/clients -- this quarter it represents 54 companies within the salesforce.com ecosystem (40 clients and 14 partners/integrators). Based on the responses, they expect FQ2-07 (July quarter) user additions to be somewhat flat sequentially - firm anticipates 43-47k (lower than current estimate of 48k), roughly in line with the 45k added in Q1.
Based on partner/integrator comments, they heard of fewer large deals in Q2 than in Q1, and heard of one large client (1,500 subscribers) that is expected to leave at the end of the contract. Clients appear to remain highly satisfied -- few would consider a different CRM system if the economy slowed and only a handful would consider a reduction in subscribers. Firm expects FQ2-07 EPS and revenue to be roughly in line with their estimates and guidance (though acknowledge that the stock could trade more on the subscriber additions). Maintains Neutral and $29.
* Cowen notes CRM has been under extreme pressure over the last six weeks as the market has sold off and Microsoft has turned up the volume on its competitive offerings. Based on the divergence between the assumed financial metrics at $22 and firm's potentially conservative earnings model, CRM looks a compelling investment at current levels. Channel checks indicate a material pick up in business in June following a seasonally soft May, and they continue to expect avg. rev per subscriber to tick up on strong sales of Unlimited Edition. Firm believes the market is overly skeptical regarding the company's unique value proposition and its ability to execute.
Maintains Outperform.
Notablecalls: I would not be surprised to see CRM bounce a bit today. Would not hold below 21.50, though.
Notablecalls: I would not be surprised to see CRM bounce a bit today. Would not hold below 21.50, though.
Notablecalls - Paperstand - Barron's
Barron's discusses favorably Apple (AAPL), saying that Macs, after a major overhaul, are now poised to grab some real mkt share. The new models, featuring Intel chips for the first time, can run both Apple's operating system and Microsoft's Windows. The importance of that could well become evident in the coming back-to-school season, as students who've come to like Apple as a result of iPods consider switching from Windows-based machines like those of Dell (DELL) and Hewlett-Packard (HPQ). That is, Macs at last may enjoy a long-awaited "halo effect" from the success of the iPod. "The stock needs to transform from an iPod stock to a computer stock," says Walter Price, of Alliance Global Investors. That shift may be under way already. As interest in Macs picks up, bulls maintain that the shares will jump anywhere from 45-75% in just the next 12 months.
Notablecalls: Expect to see interest in AAPL. Barrons' cover story usually moves stocks.
Barron's highlights fund manager picks, including YHOO, STN, BYD, LVS, MGM, HET, PNK, IGT, AAPL, HD and SSP.
According to the Barron's, at and change, Panera (PNRA) sells for 31x '06 expected earnings, a big premium to the restaurant group. With sales growth declining, the stock is likely to fall, perhaps by 30%.
Barron's discusses Republic Services (RSG), saying that at around 40 ashare, the co trades for 20x '06 ests and 15x free cash flow. The shares could climb at least 20%, to the high $40s, in a year.
Barrons' "Technology Trader" column says that ImClone (IMCL) has reportedly attracted a couple of bids. The stock trades 38 and change. That's already close to the price that admirers, like Morgan Stanley's Steven Harr, believe ImClone can expect from an acquirer. The bidding deadline supposedly was pushed out to sometime this month, to allow bidders to savor the 2Q sales report scheduled for this coming Thu. But, article suggests, if ImClone's bidders have any brains, they'll also use the extra time to focus on a patent case that ImClone has been defending in a crowded federal district courtroom in Manhattan. That's where Weizmann Institute is claiming that a key patent now licensed to ImClone was stolen earlier from Weizmann scientists. Closing arguments are set for this week. If court finds against ImClone, the co's rev growth could hit a roadblock.
Notablecalls: Considering Imclone has two large and smart holders, Carl Icahn and Bristol-Myers (BMY) one must assume the bidder will have to offer a nice premium to current mkt price.
Notablecalls: Expect to see interest in AAPL. Barrons' cover story usually moves stocks.
Barron's highlights fund manager picks, including YHOO, STN, BYD, LVS, MGM, HET, PNK, IGT, AAPL, HD and SSP.
According to the Barron's, at and change, Panera (PNRA) sells for 31x '06 expected earnings, a big premium to the restaurant group. With sales growth declining, the stock is likely to fall, perhaps by 30%.
Barron's discusses Republic Services (RSG), saying that at around 40 ashare, the co trades for 20x '06 ests and 15x free cash flow. The shares could climb at least 20%, to the high $40s, in a year.
Barrons' "Technology Trader" column says that ImClone (IMCL) has reportedly attracted a couple of bids. The stock trades 38 and change. That's already close to the price that admirers, like Morgan Stanley's Steven Harr, believe ImClone can expect from an acquirer. The bidding deadline supposedly was pushed out to sometime this month, to allow bidders to savor the 2Q sales report scheduled for this coming Thu. But, article suggests, if ImClone's bidders have any brains, they'll also use the extra time to focus on a patent case that ImClone has been defending in a crowded federal district courtroom in Manhattan. That's where Weizmann Institute is claiming that a key patent now licensed to ImClone was stolen earlier from Weizmann scientists. Closing arguments are set for this week. If court finds against ImClone, the co's rev growth could hit a roadblock.
Notablecalls: Considering Imclone has two large and smart holders, Carl Icahn and Bristol-Myers (BMY) one must assume the bidder will have to offer a nice premium to current mkt price.
Friday, July 14, 2006
Calls of Note Part 5
- Baird is positive on Sigma Designs (NYSE:SIGM) saying checks indicate continued momentum for Sigma Designs in the quarter while competition remains muted. A number of recent new product announcements which they believe incorporate Sigma's decoders suggests broad acceptance across a variety of platforms. Gross margin should stabilize in the quarter and create additional second-half earnings leverage.
Sigma Designs currently trades at just 8x firm's calendar 2007 GAAP EPS estimate of $1.15, which indicates a severe disconnect with the company's fundamentals. Reiterates $21 price target and Outperform rating on SIGM shares.
Notablecalls: Expect to see a bounce on the call.
Sigma Designs currently trades at just 8x firm's calendar 2007 GAAP EPS estimate of $1.15, which indicates a severe disconnect with the company's fundamentals. Reiterates $21 price target and Outperform rating on SIGM shares.
Notablecalls: Expect to see a bounce on the call.
Calls of Note Part 4
- Piper Jaffray is out positive on Vertex Pharma (NASDAQ:VRTX) saying they have learned that Bristol Myers is no longer developing its HCV protease inhibitor. Firm views the development as a clear positive for Vertex, as the BMS compound had been rumored to be highly potent, and investors had speculated it could have been a potentially serious competitor to VX-950.
With the exception of Schering Plough's Phase 2 protease inhibitor 503034, which the firm believes has a profile significantly less compelling than VX-950's, there are a few companies with compounds that still need to demonstrate proof-of-concept data to be considered serious competitive threats.
Believes the VX-950 Phase 2 trials are on track. A number of U.S. centers are now open for enrollment (13 centers so far shown on the clinicaltrials.gov website) and dosing in the European trial is expected this month. Feedback from investigators in the trial suggests this trial will enroll rapidly. Piper looks for initial 12-week viral load reduction data by year end, and SVR (sustained viral response) data in 1Q07 from patients that have received 12 weeks of therapy.
Maintains Outperform and $42 tgt on VRTX.
Notablecalls: Expect VRTX to see strong interest today. I would not be surprised to see some interest in other HVC plays including ITMN and IDIX as well. HCV is a major mkt oppy and big pharma needs to be involved. Even if it means buying up the smaller players.
With the exception of Schering Plough's Phase 2 protease inhibitor 503034, which the firm believes has a profile significantly less compelling than VX-950's, there are a few companies with compounds that still need to demonstrate proof-of-concept data to be considered serious competitive threats.
Believes the VX-950 Phase 2 trials are on track. A number of U.S. centers are now open for enrollment (13 centers so far shown on the clinicaltrials.gov website) and dosing in the European trial is expected this month. Feedback from investigators in the trial suggests this trial will enroll rapidly. Piper looks for initial 12-week viral load reduction data by year end, and SVR (sustained viral response) data in 1Q07 from patients that have received 12 weeks of therapy.
Maintains Outperform and $42 tgt on VRTX.
Notablecalls: Expect VRTX to see strong interest today. I would not be surprised to see some interest in other HVC plays including ITMN and IDIX as well. HCV is a major mkt oppy and big pharma needs to be involved. Even if it means buying up the smaller players.
Calls of Note Part 3
- Piper Jaffray is out saying they think it's time to own Bidu (NASDAQ:BIDU). Firm notes many institutional investors have avoided Baidu stock in the past, based on well-placed concerns on unsustainable valuation. They believe the significant strengthening of Baidu's position in China's search market, and the company's continued outperformance now supports the current valuation, which has moderated significantly since the high days post-company IPO. In fact, they believe the stock is worth notably more than the current levels, and thus are raising their rating to Outperform.
Piper notes that their revenue estimates for 2006 have increased by 57%, since they published their first model on Baidu, due to Baidu's much better performance. Similarly, firm's 2007 estimates have gone up by 122% in the same period, making the price target valuation multiple go from 52x (original PE multiple) '07E EPS to the current 55x. Equally important, in firm's view, is that Baidu has cracked the code on China's search, which they believe is different from the U.S. search market, allowing the company to gain a dominant and largely defensible advantage. Google's competitive threat, which they feared for much of last year, seems to have not materialized.
Firm's price tgt goes to $110 from $75.
Notablecalls: Expect BIDU to see strong interest on the call. Bet Stevie's happy.
Piper notes that their revenue estimates for 2006 have increased by 57%, since they published their first model on Baidu, due to Baidu's much better performance. Similarly, firm's 2007 estimates have gone up by 122% in the same period, making the price target valuation multiple go from 52x (original PE multiple) '07E EPS to the current 55x. Equally important, in firm's view, is that Baidu has cracked the code on China's search, which they believe is different from the U.S. search market, allowing the company to gain a dominant and largely defensible advantage. Google's competitive threat, which they feared for much of last year, seems to have not materialized.
Firm's price tgt goes to $110 from $75.
Notablecalls: Expect BIDU to see strong interest on the call. Bet Stevie's happy.
Calls of Note Part 2
- JP Morgan adds Itron (NASDAQ:ITRI) to their Focus List with a price target of $69 (July 31st, 2007), based on an assigned multiple of 25 times FY07 PF EPS, aligned with ITRI's 12-month mean P/E multiple. The price target represents a potential 29.8% return of yesterdays closing price of $53.15.
ITRI is the leading supplier of solid state electric meters (>80% share) and wireless AMR modules (>50%) for water, gas and electricity utilities in N.America. The market is 25-30% penetrated, and penetration should double through 2015, fuelling revenue CAGR of 10%, from which ITRI should derive 15-20% EPS CAGR, owing to leverage of fixed costs and a mix shift to higher margin software.
According to the firm the utilities industry operates with 15-20 year product cycles and ITRI is in a sweet spot. Demand is strong owing to 1) strengthening balance sheets for the utilities industry, 2) regulatory mandates supporting time-of-use based billing, 3) growing industry awareness of the ROI value proposition that comes from automated meter reading.
International opportunities are emerging, representing potential upside to estimates. 80% of the 1.2 billion electric meters outside of the US are likely to be upgraded in the next 10-15 years.
Reits Overweight.
Notablecalls: I suspect it caught the eye of some short-sellers when it broke the 200 day MA. Maybe it will bounce.
- Piper Jaffray is lowering their Lunesta revenues from $170M to $153M based upon slower- than-expected Rx trends. Firm notes they struggle to reach 2006 guidance of $650M on Lunesta given the current Rx trajectory, and lower their 2006 assumption from $700M to $633M. They continue to model Xopenex MDI below $90M guidance, now at $56.5M. They lowered Q2 EPS from $0.10 to $0.07 and lowered 2006 top and bottom lines to $1,213M and $1.21. Continues to be cautious on SEPR as a standalone entity and wonders if SEPR will lower product guidance on its earnings call on July 21, but suspect that the acquisition thesis might resurface after SEPR reports Q2.
Maintains Market Perform and $53 tgt.
Notablecalls: I don't see SEPR experiencing much downside on the call. Prudential was spot on on July 10! SEPR is down 10%+ since then.
ITRI is the leading supplier of solid state electric meters (>80% share) and wireless AMR modules (>50%) for water, gas and electricity utilities in N.America. The market is 25-30% penetrated, and penetration should double through 2015, fuelling revenue CAGR of 10%, from which ITRI should derive 15-20% EPS CAGR, owing to leverage of fixed costs and a mix shift to higher margin software.
According to the firm the utilities industry operates with 15-20 year product cycles and ITRI is in a sweet spot. Demand is strong owing to 1) strengthening balance sheets for the utilities industry, 2) regulatory mandates supporting time-of-use based billing, 3) growing industry awareness of the ROI value proposition that comes from automated meter reading.
International opportunities are emerging, representing potential upside to estimates. 80% of the 1.2 billion electric meters outside of the US are likely to be upgraded in the next 10-15 years.
Reits Overweight.
Notablecalls: I suspect it caught the eye of some short-sellers when it broke the 200 day MA. Maybe it will bounce.
- Piper Jaffray is lowering their Lunesta revenues from $170M to $153M based upon slower- than-expected Rx trends. Firm notes they struggle to reach 2006 guidance of $650M on Lunesta given the current Rx trajectory, and lower their 2006 assumption from $700M to $633M. They continue to model Xopenex MDI below $90M guidance, now at $56.5M. They lowered Q2 EPS from $0.10 to $0.07 and lowered 2006 top and bottom lines to $1,213M and $1.21. Continues to be cautious on SEPR as a standalone entity and wonders if SEPR will lower product guidance on its earnings call on July 21, but suspect that the acquisition thesis might resurface after SEPR reports Q2.
Maintains Market Perform and $53 tgt.
Notablecalls: I don't see SEPR experiencing much downside on the call. Prudential was spot on on July 10! SEPR is down 10%+ since then.
Calls of Note Part 1
- Thomas Weisel Partners comments on considerable industry speculation that AMD (NYSE:AMD) may pursue an acquisition of ATI Technologies (NASDAQ:ATYT), although such an outcome is by no means certain.
In light of AMD's technology road map, and specifically its Torrenza technology, the firm believes that such a merger would not be so far fetched. Firm's analysis indicates a merger would likely be 7-12% dilutive to 2007 EPS estimates based on take-out premiums of 20-40%, assuming no operating synergy and would be neutral to accretive within a couple of quarters assuming synergy. In addition, they expect meaningful longer term synergies based on shared technology road maps.
The key benefits would be 1) accelerating Torrenza adoption into notebook/desktop, 2) bolstering its leadership of ultra-high-end desktop (with 4x4) and 3) enhancing AMD chipsets resulting in platformization, which could grow market share, although with some risk.
Notablecalls: Would not be surprised to see some interest in ATYT following the call.
- UBS comments on Apple Computer (NASDAQ:AAPL) ahead of results noting their checks continue to show solid demand for MacBooks, lending support to their 3Q06 (June end) estimates, offsetting q/q declines for iPods. Firm estimates 3Q06 EPS of $0.42 (consensus $0.44) based on 24% y/y revenue growth (flat q/q) to $4.353B factoring in 7.8mm iPods (+27% y/y) & Mac unit of 1.32mm (+12% y/y).
Last year Apple guided for flat sales for 4Q05, which, in firm's view, makes the consensus view for 13% q/q growth puzzling. They believe AAPL can back slight q/q growth for 4Q06 due to Mac momentum but expect it to cite the usual risks. By now, investors seem well aware of the potential for new iPods to be launched later in calendar '06 than previously expected.
Given that checks seem to back views that new iPods may ship later this year than the firm previously expected, their new 4Q06 estimate is $0.47 vs. $0.50 based on revenue of $4.63B (+26% y/y) vs. $4.8B.
With shares down approximately 17% since the beginning of June, they believe expectations for a smaller sequential boost in iPod sales for Apple's fiscal 4Q06 have worked their way into shares. In addition to adverse stock market and geo-political conditions, the firm also believes shares have been impacted (although to a much lesser extent) by Apple's internal investigation discovering irregularities in the issuance of certain stock option grants.
Maintains Buy but reduces tgt to $77 from $90.
Notablecalls: Not actionable but good to know category.
In light of AMD's technology road map, and specifically its Torrenza technology, the firm believes that such a merger would not be so far fetched. Firm's analysis indicates a merger would likely be 7-12% dilutive to 2007 EPS estimates based on take-out premiums of 20-40%, assuming no operating synergy and would be neutral to accretive within a couple of quarters assuming synergy. In addition, they expect meaningful longer term synergies based on shared technology road maps.
The key benefits would be 1) accelerating Torrenza adoption into notebook/desktop, 2) bolstering its leadership of ultra-high-end desktop (with 4x4) and 3) enhancing AMD chipsets resulting in platformization, which could grow market share, although with some risk.
Notablecalls: Would not be surprised to see some interest in ATYT following the call.
- UBS comments on Apple Computer (NASDAQ:AAPL) ahead of results noting their checks continue to show solid demand for MacBooks, lending support to their 3Q06 (June end) estimates, offsetting q/q declines for iPods. Firm estimates 3Q06 EPS of $0.42 (consensus $0.44) based on 24% y/y revenue growth (flat q/q) to $4.353B factoring in 7.8mm iPods (+27% y/y) & Mac unit of 1.32mm (+12% y/y).
Last year Apple guided for flat sales for 4Q05, which, in firm's view, makes the consensus view for 13% q/q growth puzzling. They believe AAPL can back slight q/q growth for 4Q06 due to Mac momentum but expect it to cite the usual risks. By now, investors seem well aware of the potential for new iPods to be launched later in calendar '06 than previously expected.
Given that checks seem to back views that new iPods may ship later this year than the firm previously expected, their new 4Q06 estimate is $0.47 vs. $0.50 based on revenue of $4.63B (+26% y/y) vs. $4.8B.
With shares down approximately 17% since the beginning of June, they believe expectations for a smaller sequential boost in iPod sales for Apple's fiscal 4Q06 have worked their way into shares. In addition to adverse stock market and geo-political conditions, the firm also believes shares have been impacted (although to a much lesser extent) by Apple's internal investigation discovering irregularities in the issuance of certain stock option grants.
Maintains Buy but reduces tgt to $77 from $90.
Notablecalls: Not actionable but good to know category.
Notablecalls - Paperstand
The NY Times discusses student loan mkt, saying that the escalating costs of higher education may be a burden to young adults and their parents, but they are an opportunity for student loan co's. The article specifically mentions SLM Corp. (SLM), or Sallie Mae. "They’ve built a tremendous amount of scale in a very competitive, low-margin business," said Matt J. Snowling, of FBR. "The asset is very low-yielding, but profitable if it’s done right." Given that educational costs keep rising, nobody expects the student loan mkt to level off anytime soon. "Most of the growth has been in unsubsidized loans, for which you do not need to show financial need," said John Lee, of Student Marketmeasure. "A lot of that money is going to middle-income families and students as loans of convenience as opposed to loans of necessity, so the percentage of students borrowing has expanded."
Barron's Online discusses oil-service stocks, saying that shares of oil and gas service and equipment co's are up about 60% in the past 12 mo. In recent weeks, though, services co's lost value during profit-taking in commodity-tied stocks. Yet the positive long-term outlook for the services industry remains strong: rising global demand for oil and natural gas weighed against the need to replace dwindling supplies. That's why there's still appeal for some large services co's, which provide everything from seismic reserve-measuring systems, like international industry giant Schlumberger (SLB), to fluids used to flush oil from deep wells, such as Smith International (SII). "The number of drilling rigs being added for the next 3 years is a huge number," says Ole Slorer, of Morgan Stanley. "The co's that will benefit from that are the co's that provide drilling-related services."
According to the Barron's Online, Tontine Partners, a hedge fund, raised its stake in Shaw Group (SGR) to 8.5m shares, up from 7.3m shares in mid-May. Tontine now holds a 10.7% stake in the co. In addition, two directors at Shaw have also bought stock in the past week.
Barron's Online discusses oil-service stocks, saying that shares of oil and gas service and equipment co's are up about 60% in the past 12 mo. In recent weeks, though, services co's lost value during profit-taking in commodity-tied stocks. Yet the positive long-term outlook for the services industry remains strong: rising global demand for oil and natural gas weighed against the need to replace dwindling supplies. That's why there's still appeal for some large services co's, which provide everything from seismic reserve-measuring systems, like international industry giant Schlumberger (SLB), to fluids used to flush oil from deep wells, such as Smith International (SII). "The number of drilling rigs being added for the next 3 years is a huge number," says Ole Slorer, of Morgan Stanley. "The co's that will benefit from that are the co's that provide drilling-related services."
According to the Barron's Online, Tontine Partners, a hedge fund, raised its stake in Shaw Group (SGR) to 8.5m shares, up from 7.3m shares in mid-May. Tontine now holds a 10.7% stake in the co. In addition, two directors at Shaw have also bought stock in the past week.
Colour on FRX's Lexapro court win
Several firms commenting on Forest Labs (NYSE:FRX) after Judge Joseph Farnan of the Delaware U.S. District Court ruled in favor of Forest and Lundbeck in the Lexapro patent challenge initiated by Teva/Ivax, thereby confirming validity of Lexapro's key FDA Orange Book listed patent RE 34,712, which expires in March 2012.
* Deutsche Bank notes had the ruling gone in favor of the generic challenger, it would have been devastating to Forest's outlook, as Lexapro currently represents nearly 70% of the company's CY06 revs.
With this significant overhang removed, investors can now focus on the company's fundamentals, which have steadily improved over the past 6-9 months - both in terms of Rx trends and pipeline breadth. Forest has also quietly improved its mid to late-stage development pipeline in the past six months with three notable product in-licensings, including the hypertension drug nebivolol (approvable letter) from Mylan (January), oral antibiotic Orapem from Replidyne (February), and an inhaled, long-acting muscarinic antagonist (LAS34273) for the treatment of COPD from Almirall (April).
Firm maintains their Buy rating and $51 tgt.
* CIBC on the other hand notes that appeal is inevitable and FRX now faces a new Lexapro challenger in Caraco (AMEX:CPD). Decision will likely draw in "sideline" money as was the case with positive outcomes for Lipitor and Plavix,they expect rally will be short-lived as focus shifts to back to fundamentals.
Lexapro decision eliminates big downside to FRX shares though that's quite different than suggesting budding bull case. Elimination of overhang opens up possibility of return to mid-teens forward P/E suggesting low $40's valuation. Maintains neutral stance.
* Merrill Lynch notes that while they believe that investors have been generally confident in Forest's position, they expect the stock to react favorably given the potential downside that could have occurred with a negative ruling. Reiterates Buy. Firm's $55 price objective for Forest assumes that the stock can trade at roughly 17x our C2007E EPS of $3.17 (ex-options).
* Prudential notes a "win" was largely expected to occur, but if FRX would have lost the impact to share price would have been devastating - this possibility has kept at least some investors on the sidelines. Feels that with a "win," FRX shares would rise between 10-15%.
* Goldman Sachs believes this is clearly a positive and the stock will trade meaningfully higher. Firm's estimates and consensus estimates had already included a patent victory, but the valuation had a discount associated with the patent challenge. Their 12-month price target is $44/share. They expect the shares to test these levels. Firm would consider taking profits in the mid-$40s, if the shares pass the price target.
Notablecalls: My gut tells me FRX will not trade much above $44-$45 level.
* Deutsche Bank notes had the ruling gone in favor of the generic challenger, it would have been devastating to Forest's outlook, as Lexapro currently represents nearly 70% of the company's CY06 revs.
With this significant overhang removed, investors can now focus on the company's fundamentals, which have steadily improved over the past 6-9 months - both in terms of Rx trends and pipeline breadth. Forest has also quietly improved its mid to late-stage development pipeline in the past six months with three notable product in-licensings, including the hypertension drug nebivolol (approvable letter) from Mylan (January), oral antibiotic Orapem from Replidyne (February), and an inhaled, long-acting muscarinic antagonist (LAS34273) for the treatment of COPD from Almirall (April).
Firm maintains their Buy rating and $51 tgt.
* CIBC on the other hand notes that appeal is inevitable and FRX now faces a new Lexapro challenger in Caraco (AMEX:CPD). Decision will likely draw in "sideline" money as was the case with positive outcomes for Lipitor and Plavix,they expect rally will be short-lived as focus shifts to back to fundamentals.
Lexapro decision eliminates big downside to FRX shares though that's quite different than suggesting budding bull case. Elimination of overhang opens up possibility of return to mid-teens forward P/E suggesting low $40's valuation. Maintains neutral stance.
* Merrill Lynch notes that while they believe that investors have been generally confident in Forest's position, they expect the stock to react favorably given the potential downside that could have occurred with a negative ruling. Reiterates Buy. Firm's $55 price objective for Forest assumes that the stock can trade at roughly 17x our C2007E EPS of $3.17 (ex-options).
* Prudential notes a "win" was largely expected to occur, but if FRX would have lost the impact to share price would have been devastating - this possibility has kept at least some investors on the sidelines. Feels that with a "win," FRX shares would rise between 10-15%.
* Goldman Sachs believes this is clearly a positive and the stock will trade meaningfully higher. Firm's estimates and consensus estimates had already included a patent victory, but the valuation had a discount associated with the patent challenge. Their 12-month price target is $44/share. They expect the shares to test these levels. Firm would consider taking profits in the mid-$40s, if the shares pass the price target.
Notablecalls: My gut tells me FRX will not trade much above $44-$45 level.
Thursday, July 13, 2006
Notablecalls - General
Interesting Call of The Day - Napster (NAPS) from Craig-Hallum
George Sutton from Craig-Hallum Capital saying an ever-expanding list of legitimate competitors entering and/or seriously considering entry into the online music market, they are becoming convinced that Napster (NASDAQ:NAPS)'s independence could be short-lived.
After new or expanded offerings from Viacom-backed Urge, Yahoo, Rhapsody and well-documented offerings being considered by Microsoft, Amazon and Google, the firm thinks Napster's heretofore advantages - brand-name, subscription-platform and user functionality - will become increasingly less relevant and more commoditized.
The company is in the early stages of a new advertising-led strategy with its "free" Napster.com site. Unfortunately, the initial impact of the free offer will be a slowdown in net new subscriptions, in a seasonally slow subscription-add period (Q2 and Q3). With a need to grow its subscription base nearly four-fold to achieve profitability, slowing adds for any reason will likely force the company's hand.
With $2.38 per share in cash, more than 500K subscribers, a valuable subscription platform and a well-known brand name, they believe the stock is worth well more than its current enterprise value of $30 million. As with any undervalued stock, one has to ask "how will the value be recognized?"
Enter the shareholder activist, ever more common in this very difficult market environment. We would suggest that insider ownership of less than 6% (based on the most recent 2005 proxy statement) presents little resistance. Management has consistently suggested that it has been approached by "many interested parties," some of which the firm would guess and some of which they wouldn't. If this is the case, an activist could help force such discussions to the surface and help recognize the value disparity that exists.
To help quantify our point, an article in the NY Post suggesting that Google and Napster might be in talks pushed the stock up approximately 50% over a one month period (the stock has since more than retraced the move). With its cash position, this stock is poised to see substantial value spikes on incremental news.
Fundamentally, while they expect a couple of weak net new subscriber quarters, they do believe the company will participate as the market moves online (away from store-based CD sales) and feel that better Napster-compatible MP3 product will be available in the Fall, helping correct a major deterrent to growth.
Maintains Buy and $7 tgt.
Notablecalls:
After new or expanded offerings from Viacom-backed Urge, Yahoo, Rhapsody and well-documented offerings being considered by Microsoft, Amazon and Google, the firm thinks Napster's heretofore advantages - brand-name, subscription-platform and user functionality - will become increasingly less relevant and more commoditized.
The company is in the early stages of a new advertising-led strategy with its "free" Napster.com site. Unfortunately, the initial impact of the free offer will be a slowdown in net new subscriptions, in a seasonally slow subscription-add period (Q2 and Q3). With a need to grow its subscription base nearly four-fold to achieve profitability, slowing adds for any reason will likely force the company's hand.
With $2.38 per share in cash, more than 500K subscribers, a valuable subscription platform and a well-known brand name, they believe the stock is worth well more than its current enterprise value of $30 million. As with any undervalued stock, one has to ask "how will the value be recognized?"
Enter the shareholder activist, ever more common in this very difficult market environment. We would suggest that insider ownership of less than 6% (based on the most recent 2005 proxy statement) presents little resistance. Management has consistently suggested that it has been approached by "many interested parties," some of which the firm would guess and some of which they wouldn't. If this is the case, an activist could help force such discussions to the surface and help recognize the value disparity that exists.
To help quantify our point, an article in the NY Post suggesting that Google and Napster might be in talks pushed the stock up approximately 50% over a one month period (the stock has since more than retraced the move). With its cash position, this stock is poised to see substantial value spikes on incremental news.
Fundamentally, while they expect a couple of weak net new subscriber quarters, they do believe the company will participate as the market moves online (away from store-based CD sales) and feel that better Napster-compatible MP3 product will be available in the Fall, helping correct a major deterrent to growth.
Maintains Buy and $7 tgt.
Notablecalls:
Calls of Note Part 4
- ThinkEquity views FDA's rejection of Nastech/Par Pharma's (NASDAQ:NSTK, -30%) version of nasal calcitonin as a positive for Unigene Laboratories (OTCBB:UGNE) shares since it indefinitely delays one potential competitor for Fortical. Firm recalls that there are at least two companies, including Nastech, pursuing approvals for salmon calcitonin and while both are currently held up by Novartis' patent litigation, an FDA rejection means that even if Novartis were to lose the case next year only one could enter the market unlike the two currently assumed in their model. Firm reiterates Buy rating on UGNE shares based on the Fortical ramp up and potential for pipeline advancement. Tgt stands at $7.
Notablecalls: For you gamblers out there.
Notablecalls: For you gamblers out there.
Calls of Note Part 3
- Piper is positive on Intuitive Surgical (NASDAQ:ISRG) after they surveyed 219 members of the Society of Gynecologic Oncology (SGO) that had staff operating privileges at institutions that owned a DaVinci Surgical System (90 hospitals). Firm's goal was to quantify the interest in DaVinci performed hysterectomies and establish early adoption trends. Firm received 69 responses for a 31.5% response rate, indicating a strong interest in this topic.
In the next twelve months, 38.8% of respondents (26 doctors; 5 more plan to start) indicated they will be performing hysterectomies with the DaVinci system. Although off a small base, this group expects to dramatically ramp their volume from an average of 8 in the last 12 months to an average of 27 procedures in the next twelve months, a 242% increase (median ramps from 4 to 20, up 400%).
Based on the survey, the addressable market for DaVinci hysterectomies could be most of the approximately 600,000 domestic procedures performed. Firm previously believed the best new application of the DaVinci would be radical hysterectomy (approximately 50,000 procedures per year), where the enhanced visual precision facilitates cancerous lymph node removal.
Piper notes they think this survey supports a more aggressive growth outlook for 2007 and beyond. While they believe Q2 results will be strong, they will wait to revise their 2006 estimates until after the quarter. Firm's forecasts for 2006 remain slightly above management guidance at 52% revenue growth for the year, and are the highest on the Street.
Firm is increasing their 2007 system sales forecast from 174 systems to 196 systems (up 40 from our 2006 forecast of 156 systems) The result is an increase in total 2007 revenue forecast from $438.3 million to $475.2 million for a 2007 growth rate of 39%, down from 52% forecast for 2006, but still quite robust. Excluding stock compensation expense, 2007 EPS estimate goes from $2.57 to $2.85 (consensus $2.41), up 42% over 2006.
Reits Outperform and $130 tgt.
Notablecalls: I think this call is bound to generate interest in ISRG.
In the next twelve months, 38.8% of respondents (26 doctors; 5 more plan to start) indicated they will be performing hysterectomies with the DaVinci system. Although off a small base, this group expects to dramatically ramp their volume from an average of 8 in the last 12 months to an average of 27 procedures in the next twelve months, a 242% increase (median ramps from 4 to 20, up 400%).
Based on the survey, the addressable market for DaVinci hysterectomies could be most of the approximately 600,000 domestic procedures performed. Firm previously believed the best new application of the DaVinci would be radical hysterectomy (approximately 50,000 procedures per year), where the enhanced visual precision facilitates cancerous lymph node removal.
Piper notes they think this survey supports a more aggressive growth outlook for 2007 and beyond. While they believe Q2 results will be strong, they will wait to revise their 2006 estimates until after the quarter. Firm's forecasts for 2006 remain slightly above management guidance at 52% revenue growth for the year, and are the highest on the Street.
Firm is increasing their 2007 system sales forecast from 174 systems to 196 systems (up 40 from our 2006 forecast of 156 systems) The result is an increase in total 2007 revenue forecast from $438.3 million to $475.2 million for a 2007 growth rate of 39%, down from 52% forecast for 2006, but still quite robust. Excluding stock compensation expense, 2007 EPS estimate goes from $2.57 to $2.85 (consensus $2.41), up 42% over 2006.
Reits Outperform and $130 tgt.
Notablecalls: I think this call is bound to generate interest in ISRG.
Calls of Note Part 2
- First Albany reits their Buy rating on Hyperion Solutions (NASDAQ:HYSL) saying they expect the company to meet or exceed consensus forecasts of $201M revenue and $0.43 PF EPS.
Whereas firm's checks indicated a slow pace of business in the prior two quarters, industry contacts sensed a reinvigorated pace of large deal closure during the June quarter. THey believe this reflects: 1) improved execution and spillover following a soft March quarter; 2) seasonal 4Q strength; and 3) tentatively, increased acceptance of the System 9 product cycle.
If their assessment is correct, HYSL may have closed 2-4 transactions worth over $3M each, plus 2 transactions worth $2M each, and a handful of transactions worth $500K-$1.5M, across diverse verticals and geographies. While the firm is less certain of the overall pace of small/mid-sized transactions, the prospect of improving large-deal success is encouraging.
At 8.8x EV/FTM OCF, HYSL shares trade at a discount to coverage universe at 13.1x.
Notablecalls: Must say I find it hard to believe HYSL is out-executing every competitor in the sector. I suggest you check out what BOBJ had to say last week
Whereas firm's checks indicated a slow pace of business in the prior two quarters, industry contacts sensed a reinvigorated pace of large deal closure during the June quarter. THey believe this reflects: 1) improved execution and spillover following a soft March quarter; 2) seasonal 4Q strength; and 3) tentatively, increased acceptance of the System 9 product cycle.
If their assessment is correct, HYSL may have closed 2-4 transactions worth over $3M each, plus 2 transactions worth $2M each, and a handful of transactions worth $500K-$1.5M, across diverse verticals and geographies. While the firm is less certain of the overall pace of small/mid-sized transactions, the prospect of improving large-deal success is encouraging.
At 8.8x EV/FTM OCF, HYSL shares trade at a discount to coverage universe at 13.1x.
Notablecalls: Must say I find it hard to believe HYSL is out-executing every competitor in the sector. I suggest you check out what BOBJ had to say last week
Calls of Note Part 1
- Shannon Cross & Robert Cross from Soleil's Cross Research comment on Apple Computer (NASDAQ:AAPL) ahead of results saying they have revised their model to reflect higher Mac shipments, somewhat offset by lower iPod sales. Firm believes the MacBook refresh has been very well received and expect strength in that category which should carry over into back-to-school. In addition, they expect strong gross margin for both Macs as well as iPod driven by q/q declines in commodity pricing (panels, flash, power supplies, etc.). Maintains Buy, but are lowering price target to $75 (based on approximately 25x F2007 EPS estimate net of cash interest, plus anestimated $13 per share in cash).
For the quarter, the firm estimates Apple sold 694,000 notebooks, up 40% both q/q and y/y. Believes the MacBook (launched on May 16, half way through the quarter) has been very well received and will remain strong through Christmas. In addition, F3Q was the first full quarter for the MacBook Pro, augmented by the launch of the 17 inch version in late April.
Notablecalls: Not actionable but good to know category.
- Piper comments on Macrovision (NASDAQ:MVSN) noting Q2 DVD unit shipments (North America) were down 6.2% y/y (source: Digital Entertainment Group - DEG). DVD unit shipments were down 1.8% in Q1, which was the first quarter of y/y DVD shipment declines. The DVD industry will likely continue to see declines in unit shipments over the next several quarters, prior to any measurable uptake of high def DVD.
Yet the firm is modeling for Macrovision Q2 DVD protection revenue to increase 9% y/y. They believe Macrovision will benefit from a favorable title mix in Q2. Specifically, most major titles in the quarter were from studios that use Macrovision's analog copy protection (ACP) on a 100% basis.
While actual unit shipments were down y/y in Q2, based on the title mix in the quarter, the firm continues to believe their June quarter DVD segment revenue (~30% of overall) is achievable
Maintains Market Perform and $25 tgt.
For the quarter, the firm estimates Apple sold 694,000 notebooks, up 40% both q/q and y/y. Believes the MacBook (launched on May 16, half way through the quarter) has been very well received and will remain strong through Christmas. In addition, F3Q was the first full quarter for the MacBook Pro, augmented by the launch of the 17 inch version in late April.
Notablecalls: Not actionable but good to know category.
- Piper comments on Macrovision (NASDAQ:MVSN) noting Q2 DVD unit shipments (North America) were down 6.2% y/y (source: Digital Entertainment Group - DEG). DVD unit shipments were down 1.8% in Q1, which was the first quarter of y/y DVD shipment declines. The DVD industry will likely continue to see declines in unit shipments over the next several quarters, prior to any measurable uptake of high def DVD.
Yet the firm is modeling for Macrovision Q2 DVD protection revenue to increase 9% y/y. They believe Macrovision will benefit from a favorable title mix in Q2. Specifically, most major titles in the quarter were from studios that use Macrovision's analog copy protection (ACP) on a 100% basis.
While actual unit shipments were down y/y in Q2, based on the title mix in the quarter, the firm continues to believe their June quarter DVD segment revenue (~30% of overall) is achievable
Maintains Market Perform and $25 tgt.
Notablecalls: I know Piper is defending the stock but if I were long MVSN, I'd be worried!
- Prudential comments on Wyeth (NYSE:WYE) following the unexpected "mid-year business update" Wednesday afternoon, ahead of its earnings that are scheduled for next Thursday.
Regarding guidance, WYE moved '06 EPS to "at least" the top of its prior $2.97 to $3.07 range (consensus has been at $3.08 already).
Regarding pipeline depression drug DVS-233, WYE said it won't now launch the drug until sometime in 2007 - the company also said it is running additional clinical trials, despite the fact that the DVS-233 application to FDA is already in its 7th month of review (out of 10). According to the firm, this raises the spectre that WYE is anticipating it will need the new data either for FDA sign-off (which mgmt said is not the case) or to maximize commercial success, or possibly both.
Raising o2006 EPS estimate by three cents to $3.10, assuming that the "business update" was supposed to be a pre-announcement for the quarter (almost all analyst questions, however, focused on DVS-233) - firm is assuming that spending is lower than they originally forecasted.
While there seems to be no end to the challenges facing the global pharmaceutical industry, these issues are well known and discounted at least partly into the drug names already. Firm's sense is that it won't take much positive news to get investors more excited in the group.
Notablecalls: I don't see WYE moving up on the news. The downside looks limited as well.
Notablecalls - Paperstand
Accordint o The Wall Street Journal, Walt Disney (DIS) is considering several hundred job cuts as part of a restructuring of its movie studio. After a tough run at the box office and the acquisition of Pixar, Disney has said it is shifting its movie strategy to make more Disney-branded movies that appeal to a broad audience. Disney plans to make about 8 Disney-branded movies a year, compared to a previous 5 or 6, as well as one Pixar movie and one Disney Animation movie. The studio meanwhile plans to dramatically scale back its Touchstone label, which was created to make more adult fare, to a couple of movies a year, from a previous 6 or 7.
Notablecalls: I suspect the news may prove to be positive for Dreamworks Animation (NYSE:DWA) a competitor to Pixar.
According to the Barron's Online, Tom Kartsotis, founder and Chmn of Fossil (FOSL), plunked down $7.5m to purchase 428K shares between June 13 and July 11. The shares were priced from $16.81-18.
Barron' Online discusses JC Penney (JCP), which shares have jumped more than 530% hitting bottom more than 5 years ago. But, according to the article, that might be as good as it gets for JC Penney's stock for a while. With a slowdown in consumer spending on the horizon and challenges facing the dept-store giant as its tries to pull off an aggressive expansion, there's a good chance that the stock could languish. "There are better places to put money in the retail sector," says Jonathan Armitage, of Schroder Investment Mgmt. "The co has done an excellent job and their strategy is smart. But things are going to get tougher."
Notablecalls: I suspect the news may prove to be positive for Dreamworks Animation (NYSE:DWA) a competitor to Pixar.
According to the Barron's Online, Tom Kartsotis, founder and Chmn of Fossil (FOSL), plunked down $7.5m to purchase 428K shares between June 13 and July 11. The shares were priced from $16.81-18.
Barron' Online discusses JC Penney (JCP), which shares have jumped more than 530% hitting bottom more than 5 years ago. But, according to the article, that might be as good as it gets for JC Penney's stock for a while. With a slowdown in consumer spending on the horizon and challenges facing the dept-store giant as its tries to pull off an aggressive expansion, there's a good chance that the stock could languish. "There are better places to put money in the retail sector," says Jonathan Armitage, of Schroder Investment Mgmt. "The co has done an excellent job and their strategy is smart. But things are going to get tougher."
Wednesday, July 12, 2006
Calls of Note Part 5
- Morgan Stanley is cautious on Biogen-Idec (NASDAQ:BIIB) after Genentech announced the decision to pursue development of a fully human version of Rituxan. Firm notes that Biogen Idec's profit share on all CD20 antibody sales (Rituxan included) falls by as much as ~25% with a 2nd generation product.
Firm's previous scenario analysis suggested that Biogen Idec's earnings in 2010-12 may be flat with 2007 if the drug launches and performs modestly. Neuromyelitis optica (NMO) could be particularly damaging by providing 1) another path to market and 2) a backdoor into MS taking market share from Avonex (100% economics) and Tysabri (50% economics) versus economics as low as 30% of profits with the CD20 program (including Rituxan).
Additionally, Biogen Idec appears not to agree with Genentech's desire to move forward, suggesting there could be some revision to the current agreement or the decision to move forward may end up in arbitration.
Notablecalls: Actionable call! Suggest you try to get some BIIB short already in the pre market. This one's going lower.
Firm's previous scenario analysis suggested that Biogen Idec's earnings in 2010-12 may be flat with 2007 if the drug launches and performs modestly. Neuromyelitis optica (NMO) could be particularly damaging by providing 1) another path to market and 2) a backdoor into MS taking market share from Avonex (100% economics) and Tysabri (50% economics) versus economics as low as 30% of profits with the CD20 program (including Rituxan).
Additionally, Biogen Idec appears not to agree with Genentech's desire to move forward, suggesting there could be some revision to the current agreement or the decision to move forward may end up in arbitration.
Notablecalls: Actionable call! Suggest you try to get some BIIB short already in the pre market. This one's going lower.
Calls of Note Part 4
- Prudential is out with a quick take on Wolverine World Wide (NYSE:WWW)'s results. WWW turned in EPS of $0.25, ahead of consensus of $0.23. Sales were ahead of firm's expectations and up 10.5%. Merrell was strong while Hush Puppies declined slightly.
Operating margin was 50 bps higher than our estimate as well, though gross margin was down and below expectations offset by better than expected SG&A. Management noted that the GM decline was due to a change in a distributor relationship. Backlog was up 8% dragged down by Bates military orders.
Firm thinks it was a good report, but history tells themn this stock reacts poorly to gross margin declines and slowing backlog regardless of the reason. Over the last 10 years, July has been the poorest performing month for WWW with 7 of 10 years declining and an average relative underperformance of 6.1%.
Notablecalls: Think it's an actionable call.
Operating margin was 50 bps higher than our estimate as well, though gross margin was down and below expectations offset by better than expected SG&A. Management noted that the GM decline was due to a change in a distributor relationship. Backlog was up 8% dragged down by Bates military orders.
Firm thinks it was a good report, but history tells themn this stock reacts poorly to gross margin declines and slowing backlog regardless of the reason. Over the last 10 years, July has been the poorest performing month for WWW with 7 of 10 years declining and an average relative underperformance of 6.1%.
Notablecalls: Think it's an actionable call.
Calls of Note Part 3
- Cowen comments on day one at Semicon saying it yielded little truly incremental for most major larger vendors that had analyst events at the show. General tone pretty good with an undercurrent of uncertainty about the next several Qs. LRCX and KLAC held best analyst events with KLAC effectively pre-announcing a blow out June Q which helped drive the stock sharply up w/ the group. KLAC not seeing any of the classic signs of a downturn at this point. AMAT tone relatively positive but tempered at the edge. Street waiting for vendors to acknowledge slowing but will have to wait in most cases for CCs and Sept guidance. Mgmt teams sensitive to worrisome macros but reflect a pretty solid environment at this point. Visibility remains limited. Firm's favorite names remain KLAC, NEXT and ATMI. Unit play TSRA is event based but looks very interesting here. S.T they'd remain somewhat defensive. Despite a nice move yesterday, it looks too early for a sustained move till heightened uncertainty dissipates.
Notablecalls: Not actionable but good to know category.
Notablecalls: Not actionable but good to know category.
Calls of Note Part 2
- UBS is cutting estimates once again for Dell Computer (NASDAQ:DELL) as they believe the company continues to be impacted by the issues that have adversely impacted sales & profits over the last year. Checks indicate that sales may be slowing further (even after only 6% revenue growth last quarter) given weakness in Europe as well as slower demand in corporate PCs & servers near-term.
Firm is adjusting their 2Q07 estimate to $0.31 from $0.33 (consensus=$0.32) based on revenue growth of 4% to $14B (was $14.2B) vs. consensus of $14.26B, which even includes an incremental $50mm in sales from Alienware. They believe Dell continues to be impacted by competition & adverse mix shifts within the PC market.
Tgt goes to $24 from $26. Maintains Neutral.
Firm is adjusting their 2Q07 estimate to $0.31 from $0.33 (consensus=$0.32) based on revenue growth of 4% to $14B (was $14.2B) vs. consensus of $14.26B, which even includes an incremental $50mm in sales from Alienware. They believe Dell continues to be impacted by competition & adverse mix shifts within the PC market.
Tgt goes to $24 from $26. Maintains Neutral.
Notablecalls: Not actionable but good to know category.
- RBC Capital comments on Google (NASDAQ:GOOG) noting things are solid at co, but they remind investors that 2Q suffers from a seasonal fade in the U.S., even if third party data sources suggest otherwise. In Europe, unseasonably warm weather and the World Cup may have exacerbated the June fade, which is the weakest month of the year for paid search in the region. In addition, the new deal with AOL, which closed March 22nd, may carry higher costs for GOOG. Firm has maintained their long-term rating of Outperform, as we begin to look ahead at 2008 EPS estimates at $15 or more, but would urge patience heading into the results next week.
Notablecalls: I think this is an important call from RBC but I'm not sure it's outright actionable here.
- RBC Capital is positive on WebEx Communications (NASDAQ:WEBX) saying that based on their research, new bookings most likely exceeded internal plans again in Q2/06. As mainstream adoption of web conferencing accelerates, WebEx is a clear benefactor due to its dominant market share position. In addition to positive industry momentum, WebEx is also benefiting from several new growth initiatives including new products, new markets and new channels. Firm considers the shares attractive at current levels and reiterates Outperform rating and $42 price target.
Notablecalls: Like the chart. Think it can move higher.
Calls of Note Part 1
- Jefferies is positive on Neurometrix (NASDAQ:NURO) saying they view the recent weakness as a buying opportunity and would be aggressive buyers of the stock at current levels. Firm expects the company to announce extremely solid 2Q results July 27 and a higher-ASP next generation NC-stat system in 2H06.
A strong sales force and new product launches will drive upside to numbers. The company recently completed its sales hiring process, and currently employs 46 regional sales managers (the company also retains over 500 independent sales reps).
Reits Buy and $41 tgt.
Notablecalls: I feel this one may be actionable. Will be looking for a short-term bounce.
- JP Morgan notes they are cautious on Cogent (NASDAQ:COGT) ahead of 2Q results and are sidelined pending further visibility into revenue opportunities for 2H06. Firm's 2Q revenue and EPS estimates of $27.5mm and PF EPS of $0.09 are slightly below consensus ($0.10/$28mm), however, they believe our 21% q/q revenue ramp may still prove aggressive given the lack of recent contract awards.
The UK ID card program is facing further setbacks and could be delayed, perhaps indefinitely. Recent reports state that the issuance of ID cards may be abandoned and biometric data may instead be collected and stored on a temporary ID register.
Firm believes their prior 50% yoy revenue growth est may prove too aggressive if EU VIS or country specific AFIS programs incur delays. They are thus trimming FY07 revenue growth rate to 34.7%, which assumes one less major contract win (aprx $20mm) and a modest reduction to estimate for revenue in Asia. Firm is now 10% below consensus on revenue and $0.08 lower for FY07 PF EPS. Maintains Neutral.
Notablecalls: Not actionable but good to know.
- JP Morgan is also cautious on IBM (NYSE:IBM) ahead of results saying they expect services signings of approximately $11 billion, which represents a 4% sequential decline and a 25% annual decline off of a strong Q205. Firm is lowering their Global Services revenue estimate slightly to $12 billion from $12.12 billion previously, representing flat year-over-year growth, and we expect margins to remain roughly flat sequentially. Believes IBM's restructuring actions will now serve to maintain, rather than improve margins in coming quarters.
Also, they believe that IBM's high-end server business will remain under pressure, which could compress revenue growth and margins for the division.
Overall, they are modestly lowering their total revenue estimates to account for incremental hardware and services pressures. For 2007, firm's estimates remain below consensus primarily due to belief that IBM's growth expectations are unrealistic given current competitive pressures. Maintains Neutral rating.
Notablecalls: Note that UBS was out yesterday morning cutting their services signings est to $10 bln. I think that at least some of the miss is already priced in at current levels. I'm not calling a bottom here, though.
A strong sales force and new product launches will drive upside to numbers. The company recently completed its sales hiring process, and currently employs 46 regional sales managers (the company also retains over 500 independent sales reps).
Reits Buy and $41 tgt.
Notablecalls: I feel this one may be actionable. Will be looking for a short-term bounce.
- JP Morgan notes they are cautious on Cogent (NASDAQ:COGT) ahead of 2Q results and are sidelined pending further visibility into revenue opportunities for 2H06. Firm's 2Q revenue and EPS estimates of $27.5mm and PF EPS of $0.09 are slightly below consensus ($0.10/$28mm), however, they believe our 21% q/q revenue ramp may still prove aggressive given the lack of recent contract awards.
The UK ID card program is facing further setbacks and could be delayed, perhaps indefinitely. Recent reports state that the issuance of ID cards may be abandoned and biometric data may instead be collected and stored on a temporary ID register.
Firm believes their prior 50% yoy revenue growth est may prove too aggressive if EU VIS or country specific AFIS programs incur delays. They are thus trimming FY07 revenue growth rate to 34.7%, which assumes one less major contract win (aprx $20mm) and a modest reduction to estimate for revenue in Asia. Firm is now 10% below consensus on revenue and $0.08 lower for FY07 PF EPS. Maintains Neutral.
Notablecalls: Not actionable but good to know.
- JP Morgan is also cautious on IBM (NYSE:IBM) ahead of results saying they expect services signings of approximately $11 billion, which represents a 4% sequential decline and a 25% annual decline off of a strong Q205. Firm is lowering their Global Services revenue estimate slightly to $12 billion from $12.12 billion previously, representing flat year-over-year growth, and we expect margins to remain roughly flat sequentially. Believes IBM's restructuring actions will now serve to maintain, rather than improve margins in coming quarters.
Also, they believe that IBM's high-end server business will remain under pressure, which could compress revenue growth and margins for the division.
Overall, they are modestly lowering their total revenue estimates to account for incremental hardware and services pressures. For 2007, firm's estimates remain below consensus primarily due to belief that IBM's growth expectations are unrealistic given current competitive pressures. Maintains Neutral rating.
Notablecalls: Note that UBS was out yesterday morning cutting their services signings est to $10 bln. I think that at least some of the miss is already priced in at current levels. I'm not calling a bottom here, though.
Notablecalls - Paperstand
The Wall Street Journal "Heard on the Street" column suggests that private equity goes shopping for retailers. "There is a lot of private-equity money sloshing around looking for a home," said Patricia Edwards, of Wentworth, Hauser & Violich. "Retailers that have fallen on hard times can offer a good return if it appears they could still generate good cash-flow returns and are underleveraged." Potential buyout targets include JWN, HD, HOTT, PSUN, GPS, PETC, ZLC, BJ and BGP.
Barron's Online recommends investing in the electronic-equipment sector in a increasing interest rate environment. These are mostly small- and mid-cap co's that sell a broad array of technology to overseas mkts, where credit tightening is just starting to take hold, allowing co's to buy some extra time. Stocks mentioned include Agilent (A) and Amphenol (APH). Agilent may reach $42 and Amphenol may go up to $70 over the next 12 months.
According to the Barron's Online, since May 8, five Starbux (SBUX) insiders, including founder and Chmn Howard Schultz and CFO Michael Casey, have either sold, or exercised their options to sell, a total of $75.1m in shares. The bulk of the selling was done by Schultz, who exercised his options to sell 1.7m shares for a total of $62.1m.
Notbalecalls: Nothing actionable, but all good to know.
Tuesday, July 11, 2006
Interesting Call of The Day - Wachovia calling for a trading bounce in semis
Wachovia believes the semis are poised for a trading bounce. Firm notes the SOX was off 11.6% in Q2 2006, marking the worst performance for a Q2 in eight years outside of the market bottom in 2002. The index has declined another 6% since the end of Q2, reaching a new 52-week low of 413. The combination of very depressed investor sentiment and a benign negative preview season have set up a buying opportunity in the group ahead of earnings, in firm's view. They are also encouraged by the positive reaction in TSM (up 1.4% versus a 2.2% loss in the SOX) after the release of strong June monthly sales on July 10, 2006. Beyond a potential trading bounce in the next 2-3 weeks, they believe that increased visibility into the holiday build (August/September) and conviction of consumer spending will be required to drive a more sustainable rally.
Wachovia believes PCs are slightly below typical seasonality, but not as bad as the implications out of INTC and AMD. PC units declined 8.5% sequentially in Q1 and are expected to fall another 5.4% in Q2, according to Gartner Dataquest. (This is slightly below the three-year average of -6.8% in Q1 and -4.9% in Q2) However, on a year-over-year basis, units were up 13.9% in Q1 and are expected to rise 10.1% in Q2.
Short interest in firm's coverage universe has increased 24% over Q1 and 44% during the past year. VLTR, LLTC, IDTI, and MCRL have experienced the largest increase in short interest in Q2, up 82%, 71%, 50%, and 38%, respectively. They do not believe that industry conditions are nearly as bad as feared by investors or indicated by the dramatic increase in short sale activity. Accordingly, they believe the stage is set for a bounce on in-line results and a potentially bigger move for companies that come in ahead of expectations.
Also, the median forward P/E in coverage universe is 18x, or 13% below the level in the same point during the 2004 down cycle.
Top Picks Heading Into Earnings Are: ISIL, LLTC, CRUS, MCRL, IRF and IDTI. Firm sees the best trading opportunity in Micrel (NASDAQ:MCRL), which is 40% off its April 2006 high (versus a 20% drop in the SOX) and has short interest of 8.1 million shares (13% of its float, 6.7x average trading volume, and up 38% from Q1 and 48% in the last year). While Micrel's wireless handset business (19% of sales) has been negatively affected by customer mix (concentration at Samsung and LG), firm's checks suggest stronger trends in networking (27%) and industrial (33%). Wachovia believes Micrel's bookings held steady through Q2, with a book-to-bill likely in the 1.0-1.1 to 1 range. MCRL is trading at a 16x P/E on CY2006E and an EV/S of only 2.5x, representing a 40% discount to its historical average (excluding bubble).
Notablecalls: I have no opinion on the subject. I decided to highlight the call as Kla-Tencor (NASDAQ:KLAC) is on the wires saying they will beat their June qtr bookings target.
Wachovia believes PCs are slightly below typical seasonality, but not as bad as the implications out of INTC and AMD. PC units declined 8.5% sequentially in Q1 and are expected to fall another 5.4% in Q2, according to Gartner Dataquest. (This is slightly below the three-year average of -6.8% in Q1 and -4.9% in Q2) However, on a year-over-year basis, units were up 13.9% in Q1 and are expected to rise 10.1% in Q2.
Short interest in firm's coverage universe has increased 24% over Q1 and 44% during the past year. VLTR, LLTC, IDTI, and MCRL have experienced the largest increase in short interest in Q2, up 82%, 71%, 50%, and 38%, respectively. They do not believe that industry conditions are nearly as bad as feared by investors or indicated by the dramatic increase in short sale activity. Accordingly, they believe the stage is set for a bounce on in-line results and a potentially bigger move for companies that come in ahead of expectations.
Also, the median forward P/E in coverage universe is 18x, or 13% below the level in the same point during the 2004 down cycle.
Top Picks Heading Into Earnings Are: ISIL, LLTC, CRUS, MCRL, IRF and IDTI. Firm sees the best trading opportunity in Micrel (NASDAQ:MCRL), which is 40% off its April 2006 high (versus a 20% drop in the SOX) and has short interest of 8.1 million shares (13% of its float, 6.7x average trading volume, and up 38% from Q1 and 48% in the last year). While Micrel's wireless handset business (19% of sales) has been negatively affected by customer mix (concentration at Samsung and LG), firm's checks suggest stronger trends in networking (27%) and industrial (33%). Wachovia believes Micrel's bookings held steady through Q2, with a book-to-bill likely in the 1.0-1.1 to 1 range. MCRL is trading at a 16x P/E on CY2006E and an EV/S of only 2.5x, representing a 40% discount to its historical average (excluding bubble).
Notablecalls: I have no opinion on the subject. I decided to highlight the call as Kla-Tencor (NASDAQ:KLAC) is on the wires saying they will beat their June qtr bookings target.
Calls of Note Part 5
- Raymond James positive on Arris (NASDAQ:ARRS) noting Comcast recently announced hiring initiatives in several markets to meet installation demand for VoIP services.
Specifically, cable trade press publications report that Comcast intends to hire up to 900 people as it ramps to meet demand for new VoIP telephony services. It was reported that Comcast is targeting 500 people in the San Francisco area and an additional 400 people in New England. The bulk of these new hires will likely be front-line technicians and customer care representatives. Given anecdotal reports that some customers have encountered installation difficulties, these new hires go a long way to fix early customers' snafus.
Firm believe this is a very encouraging anecdote relating to the deployment ramp of VoIP service. Reminds investors that, to date, Comcast has sourced the overwhelming majority of its voice modems (E-MTAs) from Arris.
Reiterates Strong Buy rating with a $15 price target on ARRS based on the stock trading at 17x (represents the mid-point industry multiple for telecom equipment stocks) 2006 EPS estimate of $0.88.
Notablecalls: Buy it for a bounce close to the 200 day moving average.
Specifically, cable trade press publications report that Comcast intends to hire up to 900 people as it ramps to meet demand for new VoIP telephony services. It was reported that Comcast is targeting 500 people in the San Francisco area and an additional 400 people in New England. The bulk of these new hires will likely be front-line technicians and customer care representatives. Given anecdotal reports that some customers have encountered installation difficulties, these new hires go a long way to fix early customers' snafus.
Firm believe this is a very encouraging anecdote relating to the deployment ramp of VoIP service. Reminds investors that, to date, Comcast has sourced the overwhelming majority of its voice modems (E-MTAs) from Arris.
Reiterates Strong Buy rating with a $15 price target on ARRS based on the stock trading at 17x (represents the mid-point industry multiple for telecom equipment stocks) 2006 EPS estimate of $0.88.
Notablecalls: Buy it for a bounce close to the 200 day moving average.
Websense (WBSN) - Color on warning
Several firms are out cautious on Websense (NASDAQ:WBSN) following lackluster billings guidance issued last night:
* ThinkEquity downgrades the shares to Accumulate from Buy noting the co missed its billings guidance for the second quarter in a row. Says they misjudged the level of changes that the new management team would make. While they are positive on the changes, they think the transition will be disruptive in the near term.
Firm's mid-quarter channel checks were very positive on the addition of Roberts. Recent checks reveal skeptical resellers, with some worried about direct deals at the end of the quarter and Websense moving to two-tier distribution. Believes that Websense will resolve these issues, but it may take past the end of the year to regain channel partner enthusiasm.
Tgt goes to $25 from $37.
* Merrill Lynch notes Websense's second consecutive miss underscores transitional challenges prompted by tough competition and a slowing core enterprise market.Websense cited increase in total ASPs and steady renewal rates as evidence of a stable competitive environment. Preliminary results suggest Websense is doing well with its installed base, but price competition from Blue Coat and Surf Control is creating difficulty winning new business and lengthening sales cycles.
Maintains Neutral.
* JP Morgan notes revenue/EPS expected to be in-line, but it is the light billings and potential for shortening deals lengths and compressing margins that are the concern.
Questions over the ability to further shift contract mix to longer term 3 year deals in an uncertain macro environment, along with a need to expand into the more price competitive middle market, and a two tier sales distribution transition in 2H06 to make it happen will provide a cloudy outlook for the stock in firm's opinion.
Cash flow is the next question, as further slowdown is possible: argument for owning the stock has long been valuation on cash flow basis, but if contract length stagnates or even contracts in tougher economic/IT environment then cash flow estimates could keep coming down. Normalizing for option tax benefits last year they now see 2006 FCF growth of 27% from 61% last year, but decelerating further from there.
Reits Underweight rating.
* Deutsche Bank maintains Hold rating but lowers their tgt to $20 from $27 notin that while the shares have a more favorable risk/reward profile following the 43% decline YTD (vs -3% for NASDAQ), otheir scenario analysis suggests additional downside could remain.
* ThinkEquity downgrades the shares to Accumulate from Buy noting the co missed its billings guidance for the second quarter in a row. Says they misjudged the level of changes that the new management team would make. While they are positive on the changes, they think the transition will be disruptive in the near term.
Firm's mid-quarter channel checks were very positive on the addition of Roberts. Recent checks reveal skeptical resellers, with some worried about direct deals at the end of the quarter and Websense moving to two-tier distribution. Believes that Websense will resolve these issues, but it may take past the end of the year to regain channel partner enthusiasm.
Tgt goes to $25 from $37.
* Merrill Lynch notes Websense's second consecutive miss underscores transitional challenges prompted by tough competition and a slowing core enterprise market.Websense cited increase in total ASPs and steady renewal rates as evidence of a stable competitive environment. Preliminary results suggest Websense is doing well with its installed base, but price competition from Blue Coat and Surf Control is creating difficulty winning new business and lengthening sales cycles.
Maintains Neutral.
* JP Morgan notes revenue/EPS expected to be in-line, but it is the light billings and potential for shortening deals lengths and compressing margins that are the concern.
Questions over the ability to further shift contract mix to longer term 3 year deals in an uncertain macro environment, along with a need to expand into the more price competitive middle market, and a two tier sales distribution transition in 2H06 to make it happen will provide a cloudy outlook for the stock in firm's opinion.
Cash flow is the next question, as further slowdown is possible: argument for owning the stock has long been valuation on cash flow basis, but if contract length stagnates or even contracts in tougher economic/IT environment then cash flow estimates could keep coming down. Normalizing for option tax benefits last year they now see 2006 FCF growth of 27% from 61% last year, but decelerating further from there.
Reits Underweight rating.
* Deutsche Bank maintains Hold rating but lowers their tgt to $20 from $27 notin that while the shares have a more favorable risk/reward profile following the 43% decline YTD (vs -3% for NASDAQ), otheir scenario analysis suggests additional downside could remain.
* Jefferies out with the most negative comments saying Q2 billings weakness another sign of decelerating growth at Websense. Consistent with their checks, they believe the company faces a mature core market, growing competition, and ongoing sluggishness in new product sales. They do not see these challenges abating anytime soon.
Days of heady growth at Websense could be more elusive in future quarters. The Q2 billings shortfall marks two consecutive quarters with with preannounced weakness in billings, a trend that could be a harbinger of slowing growth at Websense. Eventually the slower billings growth will begin to pinch the company's revenue and EPS lines, as the flow-through impact of its subscription model becomes absorbed. The company faces an uphill climb as it attempts a product transition into the broader Web security arena, in addition to potential pitfalls as it moves to a 100% distribution sales model. With a mature core market and sluggish new product sales, the firm believes investors should anticipate some continued rough sledding in coming quarters. Firm continues to believe that Websense could embark on an M&A path to reinvigorate growth, although management downplayed such a strategy on yesterday's conference call. Should the company go the M&A route, they remind investors that any deal is likely to be dilutive to Websense's very rich 35%+ operating margin.
Maintains Hold but tgt goes to $18 from $26.
Notablecalls: Given how WBSN stock has reacted to reduced billings guidance in the past I was somewhat surprised by the lack of downside in after market trading. Yet, analyst comments this morning suggest there will be further downside in the shares. Trading almost 4x revenue (Mkt Cap/ 07 revs) the co has to come up with something better than constantly decelerating growth.
Calls of Note Part 4
- First Albany out with an interesting call on Matrixx Initiatives (NASDAQ:MTXX) noting the stock at $15.18 is presently 42% below the 52-week high set on March 2, 2006. Firm thinks it may be the time for investors to start thinking about bottom fishing.
Firm says that although past performance is no guarantee of future performance, the stock has historically exhibited a seasonal run-up from the first week of July through the last week of October. In 2003, that period gain was 98%; in 2004, 38%; and in 2005, 45%. THey believe this price appreciation is an anticipation of flu season and the introduction of new Zicam products. The level and severity of winter flu incidence is what directly affects Zicam product sales.
Notablecalls: Not actionable but good to know cateogry.
- RBC Capital is positive on WebSideStory (NASDAQ:WSSI) saying that based on their research, they expect the co will report robust bookings across all business divisions (HBX, Atomz and V/S) for the June quarter. Considering the current valuation (15x our CY/07 EPS estimate of $0.75), they believe WSSI offers the most compelling risk-to-reward profile in firm's coverage universe.
Notes they are aggressive buyers at these levels. Reits Outperform.
Notablecalls: The call is actually titled "Investors Could Be Surprised". RBC is not a firm to be taken lightly. Keep an eye on WSSI for a bounce.
Firm says that although past performance is no guarantee of future performance, the stock has historically exhibited a seasonal run-up from the first week of July through the last week of October. In 2003, that period gain was 98%; in 2004, 38%; and in 2005, 45%. THey believe this price appreciation is an anticipation of flu season and the introduction of new Zicam products. The level and severity of winter flu incidence is what directly affects Zicam product sales.
Notablecalls: Not actionable but good to know cateogry.
- RBC Capital is positive on WebSideStory (NASDAQ:WSSI) saying that based on their research, they expect the co will report robust bookings across all business divisions (HBX, Atomz and V/S) for the June quarter. Considering the current valuation (15x our CY/07 EPS estimate of $0.75), they believe WSSI offers the most compelling risk-to-reward profile in firm's coverage universe.
Notes they are aggressive buyers at these levels. Reits Outperform.
Notablecalls: The call is actually titled "Investors Could Be Surprised". RBC is not a firm to be taken lightly. Keep an eye on WSSI for a bounce.
Calls of Note Part 3
- ThinkEquity notes Autodesk (NASDAQ:ADSK) shares have been weak recently, likely stemming from excessive concerns over the Architectural Billings Index (ABI), which is being used as a gauge of building activity and ultimately, a need for Autodesk products. Although ABI was down for the month of May, a deeper, more complete analysis suggests a rebound ahead, in firm's view. Additionally, given Autodesk's diversification, North America Architecture spending represents only an estimated 10% of revenues in CY2006. They believe that valuations are compelling, and understate benefits from a number of growth drivers, including strengthening reseller channel, improving competitiveness, healthy product cycle, and emerging region exposure.
Firm is maintaining their $51 price target, based on 35x CY2006 EPS estimate of $1.46.
Notablecalls: I think ADSK is due for the mandatory dead cat bounce.
- Bear Stearns lowers their EPS estimates for Applebee's (NASDAQ:APPB) for 2006 and 2007 to $1.21 and $1.40, respectively. Firm notes that when they previously lowered 2006 EPS in late May, their estimate seemed too close to original guidance of $1.26-$1.30 to account for the softer sales pattern evident for Applebee's and throughout casual dining in recent months. They were being too optimistic in their full year expense estimates.
Firm's new 2006 EPS estimate is premised on flat same store sales for the balance of the year. APPB is scheduled to release new guidance when 2Q earnings are released on July 26th. They expect the company to take a fairly conservative posture given uncertainty about sales.
Maintains Peer Perform rating on APPB shares.
Notablecalls: APPB's chart looks like it may go lower from here. The new EPS ests are a tad below consensus.
Firm is maintaining their $51 price target, based on 35x CY2006 EPS estimate of $1.46.
Notablecalls: I think ADSK is due for the mandatory dead cat bounce.
- Bear Stearns lowers their EPS estimates for Applebee's (NASDAQ:APPB) for 2006 and 2007 to $1.21 and $1.40, respectively. Firm notes that when they previously lowered 2006 EPS in late May, their estimate seemed too close to original guidance of $1.26-$1.30 to account for the softer sales pattern evident for Applebee's and throughout casual dining in recent months. They were being too optimistic in their full year expense estimates.
Firm's new 2006 EPS estimate is premised on flat same store sales for the balance of the year. APPB is scheduled to release new guidance when 2Q earnings are released on July 26th. They expect the company to take a fairly conservative posture given uncertainty about sales.
Maintains Peer Perform rating on APPB shares.
Notablecalls: APPB's chart looks like it may go lower from here. The new EPS ests are a tad below consensus.
Calls of Note Part 2
- Baird recommends Beacon Roofing Suppl (NASDAQ:BECN) as they believe a 3QF06 EPS miss is already factored in. BECN has fallen nearly 30% from its highs and massive short position. BECN trades at less than 10x EV/C2006E EBITDA, while firm's $31 price target represents 13x, without any new acquisitions. No changes to estimates, although the shares appear to be currently valued as though the company will miss 3QF06 by a wide margin, with lower forward estimates. Residential construction trends remain negative, but non-residential and replacement demand should be steady, and they strongly believe in the secular growth story.
From current levels, the firm believes the stock could rise even on a bad earnings report due to the overwhelming short position; nearly 10 million shares or 22% of the float as of June 15. This represents over 17 days to cover based on the stock's 3-month average daily volume. Short interest is up 82% in the past month (+4.4 million shares) and is up 148% in the past 3 months (+5.9 million shares).
Notablecalls: Not actionable but good to know category.
- UBS defends Sandisk (NASDAQ:SNDK) saying they attribute recent weakness to market speculation on push-outs of next-generation Apple iPod platforms and NAND Spot price market weakness that extended from late June into early July. While acknowledging this puts firm's near-term SNDK expectations at risk, they continue to to favor SNDK and the exposure it affords to 3G/multimedia handset demand.
Firm's own checks with North American component suppliers and recent UBS Asia tech team checks has indicated no changes in AAPL iPod development activities, and they thus believe new NAND-based MP3/PMP players are likely still on track for launch a pre-holiday launch at a time of AAPL choosing.
Maintains Buy and $70 tgt.
From current levels, the firm believes the stock could rise even on a bad earnings report due to the overwhelming short position; nearly 10 million shares or 22% of the float as of June 15. This represents over 17 days to cover based on the stock's 3-month average daily volume. Short interest is up 82% in the past month (+4.4 million shares) and is up 148% in the past 3 months (+5.9 million shares).
Notablecalls: Not actionable but good to know category.
- UBS defends Sandisk (NASDAQ:SNDK) saying they attribute recent weakness to market speculation on push-outs of next-generation Apple iPod platforms and NAND Spot price market weakness that extended from late June into early July. While acknowledging this puts firm's near-term SNDK expectations at risk, they continue to to favor SNDK and the exposure it affords to 3G/multimedia handset demand.
Firm's own checks with North American component suppliers and recent UBS Asia tech team checks has indicated no changes in AAPL iPod development activities, and they thus believe new NAND-based MP3/PMP players are likely still on track for launch a pre-holiday launch at a time of AAPL choosing.
Maintains Buy and $70 tgt.
Notablecalls: Not actionable but good to know category.
Calls of Note Part 1
- Banc of America is reducing their revenue and EPS estimates for Arrow (NYSE:ARW) and Avnet (NYSE:AVT) for C2006 and C2007 due to near term weakness at certain mid-range computer OEMs and they assume a more muted forward components outlook.
Despite the modest C2Q06 forecasts, they expect both ARW and AVT to report roughly in line C2Q06 results. Firm's revised estimates are still within management's prior guidance and largely consistent around consensus.
Global semiconductor demand Y/Y growth has remained at 7-8% over the past few quarters, as measured by SIA. Historically, ARW and AVT's component revenue organic growth has been directionally correlated with the semi demand growth. With global semi shipments growth remaining at moderate 7-8%Y/Y lately, the street, and firm's assumptions, for much more robust revenue growth rates at ARW and AVT are likely too optimistic. In addition, a modest demand growth should also provide headwinds for component margin expansion at ARW and AVT.
ARW's tgt goes to $32 from $37 with AVT's going to $22 from $28. Maintains Neutral on both due to valuation.
Notablecalls: Expect to see some additional pressure on both stocks in the coming days.
- UBS says their channel checks on ADC Telecommunications (NASDAQ:ADCT) indicate a slowdown/cut in orders at some 2nd tier passive component suppliers in June/July potentially due to excess FTTP inventory at VZ. Firm also believes there has been a slowing in FTTC spending at DT. They therefore lower y/y sales growth estimates for fiber connectivity from 71%/21% in FY06/07 to 64%/17%, resp.
Firm lowers FY06 and FY07 pro-forma EPS estimates for the combined ADC-Andrew company to $0.90 and $1.06, respectively, from $0.92 and $1.11 previously, and lowers CY07 price target to $18.50 from $20.50.
Notablecalls: Would not be surprised to see some additional weakness today.
Despite the modest C2Q06 forecasts, they expect both ARW and AVT to report roughly in line C2Q06 results. Firm's revised estimates are still within management's prior guidance and largely consistent around consensus.
Global semiconductor demand Y/Y growth has remained at 7-8% over the past few quarters, as measured by SIA. Historically, ARW and AVT's component revenue organic growth has been directionally correlated with the semi demand growth. With global semi shipments growth remaining at moderate 7-8%Y/Y lately, the street, and firm's assumptions, for much more robust revenue growth rates at ARW and AVT are likely too optimistic. In addition, a modest demand growth should also provide headwinds for component margin expansion at ARW and AVT.
ARW's tgt goes to $32 from $37 with AVT's going to $22 from $28. Maintains Neutral on both due to valuation.
Notablecalls: Expect to see some additional pressure on both stocks in the coming days.
- UBS says their channel checks on ADC Telecommunications (NASDAQ:ADCT) indicate a slowdown/cut in orders at some 2nd tier passive component suppliers in June/July potentially due to excess FTTP inventory at VZ. Firm also believes there has been a slowing in FTTC spending at DT. They therefore lower y/y sales growth estimates for fiber connectivity from 71%/21% in FY06/07 to 64%/17%, resp.
Firm lowers FY06 and FY07 pro-forma EPS estimates for the combined ADC-Andrew company to $0.90 and $1.06, respectively, from $0.92 and $1.11 previously, and lowers CY07 price target to $18.50 from $20.50.
Notablecalls: Would not be surprised to see some additional weakness today.
Notablecalls - Paperstand
According to The Wall Street Journal, Sun Micro (SUNW) today is announcing a blade machine along with 2 other new systems, the latest signs of Sun's determination to play a bigger role in selling the popular style of servers that evolved from the PC industry.
The NY Times reports that Hall Financial said that it had amassed 7.63m RadioShack (RSH) shares, worth nearly $134m, or 5.64% stake . Craig Hall, the founder and CEO of Hall Financial, said that his firm intended to "actively review and monitor RadioShack’s financial and strategic direction." It could buy more shares or seek representation on RadioShack’s board of directors, he said.
Barron's Online reports that 7 insiders at Kohl's (KSS) sold more than 3.75m shares for roughly $217m over the past 90 days. Michael Painchaud, managing director of research of Market Profile Theorems, says, "Insiders are using opportunities created by a very optimistic analyst community and a very optimistic trader community to distribute some stock and in an unusually robust fashion relative to history."
The NY Post reports that Take-Two (TTWO) continues to suffer widespread employee defections at its key Rockstar design studio, as at least 10 execs have departed recently.
The NY Times reports that Hall Financial said that it had amassed 7.63m RadioShack (RSH) shares, worth nearly $134m, or 5.64% stake . Craig Hall, the founder and CEO of Hall Financial, said that his firm intended to "actively review and monitor RadioShack’s financial and strategic direction." It could buy more shares or seek representation on RadioShack’s board of directors, he said.
Barron's Online reports that 7 insiders at Kohl's (KSS) sold more than 3.75m shares for roughly $217m over the past 90 days. Michael Painchaud, managing director of research of Market Profile Theorems, says, "Insiders are using opportunities created by a very optimistic analyst community and a very optimistic trader community to distribute some stock and in an unusually robust fashion relative to history."
The NY Post reports that Take-Two (TTWO) continues to suffer widespread employee defections at its key Rockstar design studio, as at least 10 execs have departed recently.
Monday, July 10, 2006
Calls of Note Part 6
- Morgan Stanley is super positive on Schlumberger (NYSE:SLB) saying that while their near term earnings estimates are not that different to consensus, they believe their longer term growth expectations are radically different to consensus thinking.
In firm's view, we currently have unprecedented visibility to demand growth for much of the drilling/technology related service industry, due to the massive expansion in the offshore rig fleet underway and likely strong growth in the offshore rig count. However, what adds extra juice to the SLB outlook is the likely incremental shift from development to exploration capex over the medium term. Firm sees top-line growth of 20-24% through 2011 translating into 28-32% earnings growth. Their $100 18-month target represents 21.5x revised 2008 estimate.
Reits Overweight. Previous tgt was $86.
Notablecalls: I expect this note to generate strong interest in SLB today. Actionable call. $100 tgt lends considerable upside!
In firm's view, we currently have unprecedented visibility to demand growth for much of the drilling/technology related service industry, due to the massive expansion in the offshore rig fleet underway and likely strong growth in the offshore rig count. However, what adds extra juice to the SLB outlook is the likely incremental shift from development to exploration capex over the medium term. Firm sees top-line growth of 20-24% through 2011 translating into 28-32% earnings growth. Their $100 18-month target represents 21.5x revised 2008 estimate.
Reits Overweight. Previous tgt was $86.
Notablecalls: I expect this note to generate strong interest in SLB today. Actionable call. $100 tgt lends considerable upside!
Calls of Note Part 5
- Jefferies says they are aggressive buyers of Iridex (NASAQ:IRIX) at current levels. Firm believes the stock should trade higher on numerous catalysts, including: 1) Friday's Markman rulings; 2) strong 2006 results; 3) the closure of at least one of several potential business development initiatives; and 4) increasing institutional exposure and new product launches.
Friday, the Markman hearing overwhelmingly favored IRIX, where the judge ruled in favor of IRIX on 13 out of 14 counts on their patents. This is a significant positive for IRIX as this should lead to a settlement, whereby SURG would pay significant damages to IRIX.
Reits Buy and $17 tgt.
Notablecalls: Expect IRIX to see some interest.
- Cowen notes that one of Energy Conversion Devices (ENER)'s significant solar PV customers, Solar Integrated Technologies, is currently experiencing working capital challenges. However, the firm does not believe this poses a risk to projected revenues for ENER, because demand from other customers should continue to significantly exceed capacity, even after the second 25MW line ramps up this fall.
SIT accounted for 11% of ENER's F05 (June) revenues. While figures for F06 are not yet available, SIT delivered 3.8MW of PV systems to its customers in CY2005, which equates to about 18% of ENER's CY05 MW shipments. SIT's 2005 annual report was published June 30th. The company cited gross margin and working capital challenges, and the auditors' report includes a "going concern" paragraph. Management also noted that it expects to be in non-compliance with certain covenants under its credit facility for the June quarter. SIT is currently evaluating financing alternatives.
Notablecalls: While Cowen is defending the stock I do think there will be some pressure.
Friday, the Markman hearing overwhelmingly favored IRIX, where the judge ruled in favor of IRIX on 13 out of 14 counts on their patents. This is a significant positive for IRIX as this should lead to a settlement, whereby SURG would pay significant damages to IRIX.
Reits Buy and $17 tgt.
Notablecalls: Expect IRIX to see some interest.
- Cowen notes that one of Energy Conversion Devices (ENER)'s significant solar PV customers, Solar Integrated Technologies, is currently experiencing working capital challenges. However, the firm does not believe this poses a risk to projected revenues for ENER, because demand from other customers should continue to significantly exceed capacity, even after the second 25MW line ramps up this fall.
SIT accounted for 11% of ENER's F05 (June) revenues. While figures for F06 are not yet available, SIT delivered 3.8MW of PV systems to its customers in CY2005, which equates to about 18% of ENER's CY05 MW shipments. SIT's 2005 annual report was published June 30th. The company cited gross margin and working capital challenges, and the auditors' report includes a "going concern" paragraph. Management also noted that it expects to be in non-compliance with certain covenants under its credit facility for the June quarter. SIT is currently evaluating financing alternatives.
Notablecalls: While Cowen is defending the stock I do think there will be some pressure.
Calls of Note Part 4
- UBS is negative on IBM (NYSE:IBM) saying recent checks & a lack of publicly announced deals point toward lower than expected bookings for IBM. For 2Q06, they now expect signings of about $10B vs. $12-$13B previously given a weaker outsourcing market (also a major German Military contract now seems set to close in 2H06). Also, firm's checks point toward some weakness in high-end server sales.
Given bookings & hardware trends (both near-term & long-term), the firm is cutting their estimates. For '06 estimate adjusts to $5.75 from $5.80 factoring in lower services & hardware revenues, partially offset by higher intellectual property income & cost cutting. For '07 estimate adjusts to $6.20 from $6.25 reflecting the impact of lower services bookings this year.
Tgt goes to $82 from $90. Maintains Neutral.
Notablecalls: I think this is an actionable trading call. Pre-mkt shorting opportunity. Cut of such magnitude in signing ests is bound to generate pressure on IBM stock.
Given bookings & hardware trends (both near-term & long-term), the firm is cutting their estimates. For '06 estimate adjusts to $5.75 from $5.80 factoring in lower services & hardware revenues, partially offset by higher intellectual property income & cost cutting. For '07 estimate adjusts to $6.20 from $6.25 reflecting the impact of lower services bookings this year.
Tgt goes to $82 from $90. Maintains Neutral.
Notablecalls: I think this is an actionable trading call. Pre-mkt shorting opportunity. Cut of such magnitude in signing ests is bound to generate pressure on IBM stock.
Calls of Note Part 3
- Prudential is lowering their Lunesta revenue estimates to account for the early plateau in prescription volume. Firm's new 2006 Lunesta estimate of $619M is down from their old estimate of $644M and guidance of $650M. This new forecast assumes growth in the second half of the year coming from Sepracor (NASDAQ:SEPR)'s additional sales reps; downside could exist if SNY's managed care push for Ambien CR gets traction.
Firm's biggest question for management is whether they'll increase spending to reinvigorate Lunesta growth, or cut expenses to make an earnings commitment. They are also decreasing '06 and '07 estimates for Xopenex MDI, with new forecasts of $45M and $185M lower than previous $90M and $226M, respectively.
Updating their accretion/dilution model for SEPR + other large pharma companies shows earnings dilution in all cases with no merger synergies. With sales and R&D cuts, the '08 figures turn dilutive at a share price around $55. Maintains Underweight.
Notablecalls: Double blow to SEPR. Lowering ests on both drugs plus saying there won't be any merger synergies above $55 level. Recall, SEPR has been surrounded by takeover talk for several months. The more optimistic analysts have been calling $75 per share in case of a takeover by larger pharma player.
- JP Morgan adds Metrologic Instruments (NASDAQ:MTLG) to their Weekly Top Picks owing to belief that the company continues to win share of the automated data capture market (bar code scanners and imagers), and the stock is undervalued. Based on concerns that expenses would ramp ahead of revenue, MTLG stock fell sharply when the company revealed a bold strategic investment program in April designed to grow the business at 20-22% CAGR over the next 5 years. In firm's view, the strategy is being introduced from a position of strength, and the costs will grow incrementally - aligned with the revenue ramp, and hence the stock now factors in much of the risk, but not the potential upside if the company executes well. They like this risk-reward trade-off and believe evidence for their positive interpretation will be forthcoming when MTLG releases 2Q results in July or August.
MTLG is trading at 12.9 times firm's revised FY07 PF EPS forecast of $1.19.
Notablecalls: Not actionable but good to know category.
Firm's biggest question for management is whether they'll increase spending to reinvigorate Lunesta growth, or cut expenses to make an earnings commitment. They are also decreasing '06 and '07 estimates for Xopenex MDI, with new forecasts of $45M and $185M lower than previous $90M and $226M, respectively.
Updating their accretion/dilution model for SEPR + other large pharma companies shows earnings dilution in all cases with no merger synergies. With sales and R&D cuts, the '08 figures turn dilutive at a share price around $55. Maintains Underweight.
Notablecalls: Double blow to SEPR. Lowering ests on both drugs plus saying there won't be any merger synergies above $55 level. Recall, SEPR has been surrounded by takeover talk for several months. The more optimistic analysts have been calling $75 per share in case of a takeover by larger pharma player.
- JP Morgan adds Metrologic Instruments (NASDAQ:MTLG) to their Weekly Top Picks owing to belief that the company continues to win share of the automated data capture market (bar code scanners and imagers), and the stock is undervalued. Based on concerns that expenses would ramp ahead of revenue, MTLG stock fell sharply when the company revealed a bold strategic investment program in April designed to grow the business at 20-22% CAGR over the next 5 years. In firm's view, the strategy is being introduced from a position of strength, and the costs will grow incrementally - aligned with the revenue ramp, and hence the stock now factors in much of the risk, but not the potential upside if the company executes well. They like this risk-reward trade-off and believe evidence for their positive interpretation will be forthcoming when MTLG releases 2Q results in July or August.
MTLG is trading at 12.9 times firm's revised FY07 PF EPS forecast of $1.19.
Notablecalls: Not actionable but good to know category.
Calls of Note Part 2
- FBR believes Intel (NASDAQ:INTC) likely achieved the low end of its revenue guidance range for 2Q. While they think consensus estimates come down somewhat, they don't think estimates will come down as much as some had feared, which may act as a short term positive for the stock. However, the firm also thinks that excess inventory has again accumulated in the channel, and the near term demand outlook remains weak, thus creating an overhang for the second half. Net, they would be more inclined to take a positive long-term view on the stock if INTC were to meaningfully lower what the firm believes are extremely aggressive 2H expectations. Based on checks thus far, they don't believe management is ready to throw in the towel, and therefore maintain Market Perform rating.
Notablecalls: Not actionable but good to know category.
- Frederick W. Moran from Stanford Financial Group comments on Audible(NASDAQ:ADBL) ahead of results saying they are concerned that high churn may hinder subscriber gains and revenue growth could moderate.
Firm expects that Audible added about 24,000 net new subscribers during the second quarter, down from 34,000 in the first quarter. This could bring total Audible subscribers to 303,000. According to comScore My Metrix, Audible.com has seen its unique visitors per month fall from 994,000 in March to 734,000 in April to 516,000 in May. Unique visitor traffic may slow further during the summer. Management provided no guidance for the second quarter, but pledged profitability by year end.
It remains unclear when or if Audible will reach profitability. With roughly $1.72 per share in cash (working capital), Audible trades at a premium valuation of 2x revenue and $550 per subscriber despite having no earnings and requirements for cash. Reits Sell and $6 tgt.
Notablecalls: I'm not sure this one is actionable. But I sure wouldn't want to be long ADBL into
results.
Notablecalls: Not actionable but good to know category.
- Frederick W. Moran from Stanford Financial Group comments on Audible(NASDAQ:ADBL) ahead of results saying they are concerned that high churn may hinder subscriber gains and revenue growth could moderate.
Firm expects that Audible added about 24,000 net new subscribers during the second quarter, down from 34,000 in the first quarter. This could bring total Audible subscribers to 303,000. According to comScore My Metrix, Audible.com has seen its unique visitors per month fall from 994,000 in March to 734,000 in April to 516,000 in May. Unique visitor traffic may slow further during the summer. Management provided no guidance for the second quarter, but pledged profitability by year end.
It remains unclear when or if Audible will reach profitability. With roughly $1.72 per share in cash (working capital), Audible trades at a premium valuation of 2x revenue and $550 per subscriber despite having no earnings and requirements for cash. Reits Sell and $6 tgt.
Notablecalls: I'm not sure this one is actionable. But I sure wouldn't want to be long ADBL into
results.
Notablecalls - Paperstand
According to The Wall Street Journals "Heard on the Street" column, after watching interest rates rise for 2 years, a growing number of Americans are transferring their money into high-yielding bank accounts, a trend that is taking its toll on the nation's regional banks. As financial institutions gear up for quarterly earnings reports this month, a number of them have warned investors and Wall St. analysts that results will be hurt by rising rates. And part of the blame is being placed on consumers and businesses who are moving funds from traditional low-interest-bearing accounts to online savings accounts, certificates of deposit and other bank products that are sporting annual rates of more than 5%. "We seem to have passed some threshold between 4.75% and 5% where the depositors' attention is focused on the costs associated with not moving their accounts," says Gary Townsend, of FBR. Stocks mentioned include: CYN, NCC, FITB, CBH, C, CBCF and RBNC.
According to the WSJ, Kraft Foods (KFT) is set to acquire a part of United Biscuits of the UK, in a deal that will give the co control of brands like Ritz crackers in Europe. The largely noncash transaction will be valued at $1.1bn, including Kraft's assumption of some debt and the return of its 25% stake in United Biscuits back to the co.
Barron's Online reports that National Amusements purchased 125K Midway Games (MWY) shares for $968K two weeks ago. Since then, National Amusements has made 3 additional purchases, paying $1.2m for 129K shares on Wednesday, $433K for 40K shares on Thursday, and $166K for 15K shares Friday.
Calls of Note Part 1
- Piper Jaffray is raising their Q2 estimates on Google (NASDAQ:GOOG) based on the following: 1) strong search volumes in Q2; 2) belief that Google gained share in the quarter; and 3) stable search pricing trends. As such, they are increasing theirnet revenue estimate from $1,589M to $1,672M, which implies 8% q/q advertising revenue growth. Firm is also increasing PF EPS estimate from $2.16 to $2.26 or by 5% (consensus is $1,631M and GAAP/PF of $1.94/$2.20)
Firm believes some of the very high estimates on the Street may be too optimistic as the accuracy of ComScore data, on which some of these estimate increases are based, is highly suspect. In fact, they believe it is unlikely that the volume of search increased sequentially by the mid-20s level as ComScore is suggesting. However, they do believe the data is directionally correct and that Q2 was indeed stronger than expected.
Maintains Outperform and $600 tgt.
Notablecalls: Not actionable but good to know category.
- Morgan Stanley comments on Hosp. Supplies & Medical Technology space saying that based what they think is a mispricing of several stocks in firm's coverage universe, they believe management teams could contemplate taking companies private as one possibility, with the hope of bringing them public again when the equity markets are more hospitable. Although they do not know whether managements and boards will elect to pursue this possibility, the overall economics of LBOs (under our assumptions) look quite compelling for the cardiovascular and orthopaedic companies. As such, we wonder if management teams will test their own conviction on future growth prospects and consider LBOs as a viable strategic alternative.
Based on firm's analysis, stocks that look particularly attractive are Boston Scientific (NYSE:BSX) and Biomet (NYSE:BMET). As such, they maintain Overweight rating on both of these names.
Notablecalls: Not actionable but good to know category.
- Citigroup says they now believe chances favor Medicare delaying (probably until FY08) implementation of a proposed overhaul of hospital inpatient pay after a letter issued Friday by key senators. This is more in line with Street consensus.
Nonetheless, a one-year delay could be positive for defibrillator makers Medtronic (NYSE:MDT), Boston Scientific (NYSE:BSX) and St. Jude (NYSE:STJ); and drug-eluting stent makers Boston Scientific (NYSE:BSX) and Johnson & Johnson (NYSE:JNJ).
The proposal threatens to reduce pay to hospitals for drug-eluting stent procedures by up to 34% and for defibrillator implants by 22%-24% Oct. 1. Charles Grassley, Republican chair of the Senate Finance panel with oversight responsibility for Medicare, and the panel's top Democrat, Max Baucus, wrote Medicare Friday calling for a delay of the payment overhaul until '08.
Notablecalls: I suspect the news was out already on Friday.
Firm believes some of the very high estimates on the Street may be too optimistic as the accuracy of ComScore data, on which some of these estimate increases are based, is highly suspect. In fact, they believe it is unlikely that the volume of search increased sequentially by the mid-20s level as ComScore is suggesting. However, they do believe the data is directionally correct and that Q2 was indeed stronger than expected.
Maintains Outperform and $600 tgt.
Notablecalls: Not actionable but good to know category.
- Morgan Stanley comments on Hosp. Supplies & Medical Technology space saying that based what they think is a mispricing of several stocks in firm's coverage universe, they believe management teams could contemplate taking companies private as one possibility, with the hope of bringing them public again when the equity markets are more hospitable. Although they do not know whether managements and boards will elect to pursue this possibility, the overall economics of LBOs (under our assumptions) look quite compelling for the cardiovascular and orthopaedic companies. As such, we wonder if management teams will test their own conviction on future growth prospects and consider LBOs as a viable strategic alternative.
Based on firm's analysis, stocks that look particularly attractive are Boston Scientific (NYSE:BSX) and Biomet (NYSE:BMET). As such, they maintain Overweight rating on both of these names.
Notablecalls: Not actionable but good to know category.
- Citigroup says they now believe chances favor Medicare delaying (probably until FY08) implementation of a proposed overhaul of hospital inpatient pay after a letter issued Friday by key senators. This is more in line with Street consensus.
Nonetheless, a one-year delay could be positive for defibrillator makers Medtronic (NYSE:MDT), Boston Scientific (NYSE:BSX) and St. Jude (NYSE:STJ); and drug-eluting stent makers Boston Scientific (NYSE:BSX) and Johnson & Johnson (NYSE:JNJ).
The proposal threatens to reduce pay to hospitals for drug-eluting stent procedures by up to 34% and for defibrillator implants by 22%-24% Oct. 1. Charles Grassley, Republican chair of the Senate Finance panel with oversight responsibility for Medicare, and the panel's top Democrat, Max Baucus, wrote Medicare Friday calling for a delay of the payment overhaul until '08.
Notablecalls: I suspect the news was out already on Friday.
Saturday, July 08, 2006
Notablecalls - Paperstand - Barron's
Barron's discusses Lions Gate (LGF), saying that through earnings slumped last year, free cash flow has been growing strongly. The shares could climb 30% in the next 12-18 mo's.
According to the Barron's, after a strong run, the General Dynamics (GD) shares are still cheaper than its peers'. With a lightly more generous multiple and small earnings gain, the stock could rise more than 25%.
Barron's suggests that investors who can weather risk should consider insurers' shares. Analysts believe insurers could top earnings ests, and see double-digit stock gains, if the storm season proves mild. Insurers mentioned include: ALL, ACE, IPCR, MRH, RNR, AXS, MXRE, AHL, ENH, PTP and XL.
According to the Barron's in an Apr. 18. conference call of Emmis Comm. (EMMS), CEO Jeff Smulyan exuded: "I'm remarkably upbeat in spite of the mkt, which clearly doesn't look very good." Regarding private-mkt values for radio stations, Smulyan said, "The reality is, what we are seeing is mid-teens valuation for really good asset holdings everybody agrees we had the best assets in the business." Wall Street apparently wasn't convinced. The shares swooned from $15 to $12 the day. Three weeks later, Smulyan filed an offer to take Emmis private at 15.25. At Emmis, the CEO owns 13.7% of the co, but controls 60.4% of their votes through superior Class B shares. Article suggests that the break-up value of the co is close to $30 a share.
According to the Barron's, AMS International (ASMI) shares have bounced around since Mellon HBV Alternative Strategies, an $800m NY-based hedge fund and a 6.1% shareholder, proposed the breakup in Dec. Shareholders have a shot at benefiting no matter which side triumphs. Says Gary Hsueh of CIBC: "Short term, if the activists win, shareholders will have the immediate benefit of the dividend, while if mgmt carries the day and the co stays the course, there's considerable upside in the stock." Hsueh believes the ADRs can hit 25 in the next 12-18 months, and move as high as 31 over the next 2-3 years.
Barron's discusses Business Objects (BOBJ) positively, saying that if CEO does not fix problems fast, the co could find itself squarely in some other co's sights.
Follow up section reviews General Motors (GM) and Vonage (VG) articles. On GM Barron's suggests that past failed alliances should make GM's board and major stockholders ponder. On Vonage, article says, that the story just gets uglier and uglier.
According to the Barron's, after a strong run, the General Dynamics (GD) shares are still cheaper than its peers'. With a lightly more generous multiple and small earnings gain, the stock could rise more than 25%.
Barron's suggests that investors who can weather risk should consider insurers' shares. Analysts believe insurers could top earnings ests, and see double-digit stock gains, if the storm season proves mild. Insurers mentioned include: ALL, ACE, IPCR, MRH, RNR, AXS, MXRE, AHL, ENH, PTP and XL.
According to the Barron's in an Apr. 18. conference call of Emmis Comm. (EMMS), CEO Jeff Smulyan exuded: "I'm remarkably upbeat in spite of the mkt, which clearly doesn't look very good." Regarding private-mkt values for radio stations, Smulyan said, "The reality is, what we are seeing is mid-teens valuation for really good asset holdings everybody agrees we had the best assets in the business." Wall Street apparently wasn't convinced. The shares swooned from $15 to $12 the day. Three weeks later, Smulyan filed an offer to take Emmis private at 15.25. At Emmis, the CEO owns 13.7% of the co, but controls 60.4% of their votes through superior Class B shares. Article suggests that the break-up value of the co is close to $30 a share.
According to the Barron's, AMS International (ASMI) shares have bounced around since Mellon HBV Alternative Strategies, an $800m NY-based hedge fund and a 6.1% shareholder, proposed the breakup in Dec. Shareholders have a shot at benefiting no matter which side triumphs. Says Gary Hsueh of CIBC: "Short term, if the activists win, shareholders will have the immediate benefit of the dividend, while if mgmt carries the day and the co stays the course, there's considerable upside in the stock." Hsueh believes the ADRs can hit 25 in the next 12-18 months, and move as high as 31 over the next 2-3 years.
Barron's discusses Business Objects (BOBJ) positively, saying that if CEO does not fix problems fast, the co could find itself squarely in some other co's sights.
Follow up section reviews General Motors (GM) and Vonage (VG) articles. On GM Barron's suggests that past failed alliances should make GM's board and major stockholders ponder. On Vonage, article says, that the story just gets uglier and uglier.
Friday, July 07, 2006
Calls of Note Part 5
- UBS is very positive on Marathon Oil (NYSE:MRO) saying R&M results should lead to blowout quarter.
Firm has revised their 2Q06/2006/2007 estimates go to $3.85/$10.50/$9.99 from $3.27/$9.96/$9.64, respectively (above consensus). Notably, they expect the Street to materially raise 2Q EPS consensus estimates of $2.93.
Notablecalls: One to watch. Chart looks strong.
Firm has revised their 2Q06/2006/2007 estimates go to $3.85/$10.50/$9.99 from $3.27/$9.96/$9.64, respectively (above consensus). Notably, they expect the Street to materially raise 2Q EPS consensus estimates of $2.93.
Notablecalls: One to watch. Chart looks strong.
Calls of Note Part 4
- Stifel is lowering their 2Q06 EPS estimate on Barnes & Noble (NYSE:BKS)from $0.23 to $0.21, below Street consensus ($0.24) and management's guidance range of $0.22-$0.26. Firm believes sales trends have remained lackluster due to a soft bestseller release schedule across books and music. Management had previously indicated softening sales trend commencing late-April with a modest recovery in early May. Trends in July likely exacerbated by lapping Harry Potter in the year- ago period (July 16, 2005).
Firm's Hold rating centers on belief that the company's dominant market share continues to be implied in the model (reflecting 16x FY06 P/ E estimate and 5.2x FY06 EV/EBITDA estimate). While they see positive gross margin trends continuing in the near term, they are mindful of the improving competition from Borders (remodels and loyalty card momentum).
Notablecalls: I believe this is an actionable call.
Firm's Hold rating centers on belief that the company's dominant market share continues to be implied in the model (reflecting 16x FY06 P/ E estimate and 5.2x FY06 EV/EBITDA estimate). While they see positive gross margin trends continuing in the near term, they are mindful of the improving competition from Borders (remodels and loyalty card momentum).
Notablecalls: I believe this is an actionable call.
Calls of Note Part 3
- Two firms are defending Digitas (NASDAQ:DTAS) with shares down approximately 20% over the past two weeks on what they believe is unfounded speculation over a significant customer loss.
* Piper Jaffray saying they would be aggressive buyers of DTAS at current levels calling the valuation attractive (9x 2007 EBITDA vs. 12x for ad services group).
Firm's talks with American Express on Thursday suggest that Digitas' position as American Express' agency of record for Interactive remains solid. American Express indicated that it is not putting out for bid any of the key areas in which Digitas works with American Express, including the Commercial Credit Card segment. American Express did indicate that they often speak with different agencies about new projects, and the firm believes this could have been an area of confusion.
Further, American Express noted that Digitas is thoroughly integrated into the company's marketing platform and it is highly unlikely that they would suddenly switch to another agency. Maintains Outperform and $16 tgt.
* Deutsche Bank is also defending DTAS noting that on Thursday, the market reacted to reports that American Express is in talks with competing agencies for its commercial card advertising and marketing business currently serviced by Digitas. The portion of the account reportedly up for review may represent between 30-60% of the entire Amex account, which in total accounted for 26% (~$88.5M) of 2005 fee revenue.
Firm says that despite their channel checks with multiple senior-level digital agency execs, they have been unable to validate whether the account is up for review. If a significant piece of Amex was in play, these individuals would likely have heard about it, which leads them to believe that the business up for review is small.
Thinks the stock is currently discounting the worst case scenario. Maintains Buy and $15 tgt.
Notablecalls: Not actionable but good to know category.
* Piper Jaffray saying they would be aggressive buyers of DTAS at current levels calling the valuation attractive (9x 2007 EBITDA vs. 12x for ad services group).
Firm's talks with American Express on Thursday suggest that Digitas' position as American Express' agency of record for Interactive remains solid. American Express indicated that it is not putting out for bid any of the key areas in which Digitas works with American Express, including the Commercial Credit Card segment. American Express did indicate that they often speak with different agencies about new projects, and the firm believes this could have been an area of confusion.
Further, American Express noted that Digitas is thoroughly integrated into the company's marketing platform and it is highly unlikely that they would suddenly switch to another agency. Maintains Outperform and $16 tgt.
* Deutsche Bank is also defending DTAS noting that on Thursday, the market reacted to reports that American Express is in talks with competing agencies for its commercial card advertising and marketing business currently serviced by Digitas. The portion of the account reportedly up for review may represent between 30-60% of the entire Amex account, which in total accounted for 26% (~$88.5M) of 2005 fee revenue.
Firm says that despite their channel checks with multiple senior-level digital agency execs, they have been unable to validate whether the account is up for review. If a significant piece of Amex was in play, these individuals would likely have heard about it, which leads them to believe that the business up for review is small.
Thinks the stock is currently discounting the worst case scenario. Maintains Buy and $15 tgt.
Notablecalls: Not actionable but good to know category.
Calls of Note Part 2
- Bear Stearns is positive on Sandisk (NASDAQ:SNDK) noting their recent checks with companies in the NAND flash supply chain support their expectation that the NAND market should become undersupplied as they progress through 2H06. Factors that should contribute to better supply-demand include continued penetration of NAND in handsets and into emerging areas such as PCs and PMPs, in addition to seasonality and elasticity.
In the very near-term, there remains some excess inventory that needs to be worked through. However, they believe we are close to a supply-demand balance. Though flash inventory remains slightly above normal in the overall supply chain, inventory levels are down compared to the end of 1Q06.
They believe the recent pullback in SNDK presents a great buying opportunity. Despite the near-term ripples, firm's 2H06 thesis remains intact. 2H06 EPS estimate remains above consensus, at $1.57 vs. consensus of $1.41, and implies earnings growth of 80% HoH from 1H06, as they expect solid margin expansion.
Notablecalls: Not actionable but good to know category.
- Goldman Sachs has added American Tower (NYSE:AMT) to their Americas Conviction Buy List. Firm believes investors should take advantage of share price weakness to add onto their positions. In their opinion, the SEC's informal inquiry into the company's option practices has introduced an overhang to the stock such that it now trades at a 20% discount to peers Crown Castle and SBA on P/FCF multiples (based on 2007 estimates).
While they are not sure as to the outcome and timing of the conclusion of the SEC inquiry, they believe the option backdating issue has little bearing operationally. Accordingly, the firm believes this is a stock that investors should plan on holding for a 12-month period to realize the upside to $41 target price as option backdating related issues clear and industry fundamentals once again become the primary driver of value.
In the very near-term, there remains some excess inventory that needs to be worked through. However, they believe we are close to a supply-demand balance. Though flash inventory remains slightly above normal in the overall supply chain, inventory levels are down compared to the end of 1Q06.
They believe the recent pullback in SNDK presents a great buying opportunity. Despite the near-term ripples, firm's 2H06 thesis remains intact. 2H06 EPS estimate remains above consensus, at $1.57 vs. consensus of $1.41, and implies earnings growth of 80% HoH from 1H06, as they expect solid margin expansion.
Notablecalls: Not actionable but good to know category.
- Goldman Sachs has added American Tower (NYSE:AMT) to their Americas Conviction Buy List. Firm believes investors should take advantage of share price weakness to add onto their positions. In their opinion, the SEC's informal inquiry into the company's option practices has introduced an overhang to the stock such that it now trades at a 20% discount to peers Crown Castle and SBA on P/FCF multiples (based on 2007 estimates).
While they are not sure as to the outcome and timing of the conclusion of the SEC inquiry, they believe the option backdating issue has little bearing operationally. Accordingly, the firm believes this is a stock that investors should plan on holding for a 12-month period to realize the upside to $41 target price as option backdating related issues clear and industry fundamentals once again become the primary driver of value.
Notablecalls: What the h*ck is an Americas Conviction Buy List? Must say I have no idea. I just happen to fancy AMT for its chart.
Calls of Note Part 1
- Baird is positive on Xyratex (NASDAQ:XRTX) following recent conversations with management and feedback from resellers/end users. Firm believes Systems business will continue to benefit from NTAP exposure and ramp at new customers, while Infrastructure (hard drive capital equipment) business has incremental opportunities at existing and new customers.
Believes XRTX's Systems business will continue to grow well in healthy enterprise storage market. Firm's Q3 VAR survey suggests strong Q3/Q4 pipeline with particular momentum for NTAP. XRTX should continue to benefit from its exposure to NTAP (~50% overall customer) and host of fast-growing Tier 2 vendors.
Trading at <11x CY07E EPS, they believe shares present an attractive entry point for fairly well-positioned company with solid prospects over the next several years. Maintains Outperform and $40 tgt.
Notablecalls: I'd keep an eye on XRTX over the next week or so. I think it can move higher if the overall tape stays strong.
- Morgan Stanley is defending Multi-Fineline Electronix (NASDAQ:MFLX) after co's merger partner MFS announced that June qtr revenue will be be 28% lower sequentially.
Firm notes they remain confident in their C2Q06 estimates for M-Flex earnings of $0.52 on sales of $132 million. They do not believe the company is experiencing the same weakness as MFS since the companies have minimal model overlap, Motorola's overall handset business appears to have had a solid C2Q06, and M-Flex set a manageable bar with its original C2Q06 guidance. The intrinsic value of MFS has declined since M-Flex announced the acquisition and the firm believes M-Flex management may consider renegotiating deal terms.
Sees the 18% decline in M-Flex shares a an overreaction and expects the stock to move higher when the company reports in line C2Q06 results. The stock is trading at 8x C2007 EPS and the firm expects the company to grow sales 30% annually for the next few years. Maintains Overweight rating.
Notablecalls: Interesting situation. I wonder how many hedgies got short the common after Channel News Asia broke the story yesterday. Buying MFLX for a trade after it fills the Aug-2005 may actually work. I won't call it an actionable call though.
Believes XRTX's Systems business will continue to grow well in healthy enterprise storage market. Firm's Q3 VAR survey suggests strong Q3/Q4 pipeline with particular momentum for NTAP. XRTX should continue to benefit from its exposure to NTAP (~50% overall customer) and host of fast-growing Tier 2 vendors.
Trading at <11x CY07E EPS, they believe shares present an attractive entry point for fairly well-positioned company with solid prospects over the next several years. Maintains Outperform and $40 tgt.
Notablecalls: I'd keep an eye on XRTX over the next week or so. I think it can move higher if the overall tape stays strong.
- Morgan Stanley is defending Multi-Fineline Electronix (NASDAQ:MFLX) after co's merger partner MFS announced that June qtr revenue will be be 28% lower sequentially.
Firm notes they remain confident in their C2Q06 estimates for M-Flex earnings of $0.52 on sales of $132 million. They do not believe the company is experiencing the same weakness as MFS since the companies have minimal model overlap, Motorola's overall handset business appears to have had a solid C2Q06, and M-Flex set a manageable bar with its original C2Q06 guidance. The intrinsic value of MFS has declined since M-Flex announced the acquisition and the firm believes M-Flex management may consider renegotiating deal terms.
Sees the 18% decline in M-Flex shares a an overreaction and expects the stock to move higher when the company reports in line C2Q06 results. The stock is trading at 8x C2007 EPS and the firm expects the company to grow sales 30% annually for the next few years. Maintains Overweight rating.
Notablecalls: Interesting situation. I wonder how many hedgies got short the common after Channel News Asia broke the story yesterday. Buying MFLX for a trade after it fills the Aug-2005 may actually work. I won't call it an actionable call though.
Advanced Micro Devices (NYSE:AMD) - Color on warning
Several firms are cutting their estimates and price tgts on Advanced Micro Devices (NYSE:AMD) following warning issued late last night:
* Banc of America notes that as they previewed twice during the qtr, AMD lowered its June sales forecast to $1.215b (-9% Q/Q), vs. prior est. for sales to be flat to down slightly. Although a shortfall was expected, they believe the magnitude was worse than investors had been anticipating.
Various factors lead the firm to believe that the worse may not yet be behind for AMD. Specifically, they believe that 1) a continued deterioration in AMD channel inventory, 2) difficult comps heading into Q3, which will revert back to a normal 13-week qtr, 3) margin impact from late qtr. price cuts, which will be felt almost entirely in Q3, 4) strong likelihood of share loss to Intel in 2H06, and 5) an elevated cost structure heading into '07, will result in further downward adjustments to AMD's consensus forecast.
Believes that Intel's aggressive price cuts, although not enough to mitigate the weak PC demand, helped stimulate demand for Intel parts vs. AMD's. Consequently, they believe Intel's June qtr sales will likely come in only slightly below consensus forecasts (expects down 9-10%, versus consensus of down 8%).
Firm's tgt goes to $20 from $34. Maintains Neutral.
* Citigroup says notebook sales for AMD were down sequentially for AMD, reflecting finished goods inventories (likely at Acer). Firm points out that notebook ODM's have posted stronger results in June (over April and May), and outlooks for July are improving.
* Banc of America notes that as they previewed twice during the qtr, AMD lowered its June sales forecast to $1.215b (-9% Q/Q), vs. prior est. for sales to be flat to down slightly. Although a shortfall was expected, they believe the magnitude was worse than investors had been anticipating.
Various factors lead the firm to believe that the worse may not yet be behind for AMD. Specifically, they believe that 1) a continued deterioration in AMD channel inventory, 2) difficult comps heading into Q3, which will revert back to a normal 13-week qtr, 3) margin impact from late qtr. price cuts, which will be felt almost entirely in Q3, 4) strong likelihood of share loss to Intel in 2H06, and 5) an elevated cost structure heading into '07, will result in further downward adjustments to AMD's consensus forecast.
Believes that Intel's aggressive price cuts, although not enough to mitigate the weak PC demand, helped stimulate demand for Intel parts vs. AMD's. Consequently, they believe Intel's June qtr sales will likely come in only slightly below consensus forecasts (expects down 9-10%, versus consensus of down 8%).
Firm's tgt goes to $20 from $34. Maintains Neutral.
* Citigroup says notebook sales for AMD were down sequentially for AMD, reflecting finished goods inventories (likely at Acer). Firm points out that notebook ODM's have posted stronger results in June (over April and May), and outlooks for July are improving.
Clearly on a negative pre-announcement, AMD shares will face pressure in coming days. Based on its ROE potential 2006-2008, they find value in AMD's shares at a 2.0x multiple of book or ~$20. This is below firm's value target of $24, and represents mid-teen's return potential for value-oriented investors. All else equal, they would look to become more constructive should AMD's shares fall to those levels, based on current earnings forecasts.
Tgt goes to $26.50 from $33. Maintains Hold.
* Prudential is lowering their GAAP EPS forecast for the JunQ to $0.14 from $0.28, for 2006 to $1.36 from $1.73, and for 2007 to $1.73 from $2.24.
Firm notes their Overweight rating on AMD's stock is based on belief that the PC MPU market is transitioning from an industry that is dominated by one supplier (Intel) with 85%-90% share, to one that looks like a true duopoly, whose natural equilibrium is a 70/30 to 50/50 market share split. Believes the market will reach that level in 3 to 4 years, and that AMD will have $3 to $5 of EPS power.
Near term, they think that concerns over the PC market and a prolonged price war could weigh on the stock. Longer term, they believe that share gains, the potential for Dell as a large customer, and the introduction of a true quad-core MPU will drive the stock.
Tgt is lowered to $40 from $45.
* Merrill Lynch notes AMD's lowered revenue and earnings outlook reflects poor demand as much as anything. Aggregate processor revenue for Intel and AMD now looks set to decline by 14% sequentially while units decline by 10% - that's a lot worse than seasonally normal. Even on AMD's new numbers it still looks to us like the company took market share in the second quarter.
According to the firm, it looks like Intel's attempts to freeze demand by talking up Q3 price cuts are at least partially responsible for the poor Q2 environment. Theyexpect build activity to pick up in Q3 regardless of whether the demand materializes later in the year or not. That's now consensus, but they think it makes sense, and they do think AMD's processor shipments will pick up meaningfully in Q3 as a result.
The next big competitive inflection point for AMD is mid 2007, when AMD launches its first real mobile processor architecture. Until then it looks like quite a fight between the two processor companies, with rapidly expanding manufacturing capacity at AMD to boot.
Much of what's happened has been possible to anticipate given the product strategies at both companies, and the firm thinks that's why AMD has already declined from $40 to $24. Maintains Neutral rating.
Notablecalls: AMD's warning was expected. While some analysts say the magnitude of the warning was worse than expected I must say I disagree. I think AMD is a buy around $18-$19 level. It will not get there today though, I suspect.
Notablecalls - Paperstand
According to The Wall Street Journal, Verizon Comm. (VZ) is inching closer to spinning off its directories business in a deal that could be valued at as much as $13bn. The phone giant, which announced plans to shed its directory business late last year, is days away from filing papers with the SEC that would enable it to spin off the division. Analysts also have interpreted Verizon moves toward shedding its directories to be an indicator that it might use the proceeds to help finance a buyout Vodafone's (VOD) 45% stake in Verizon Wireless.
THe WSJ's "Heard on the Street" column questions taht "is Kirk Kerkorian trying to engineer an effective takeover of General Motors (GM) on the cheap?" If the Renault-Nissan alliance plan materializes, Mr. Kerkorian and his allies would control about 30% of GM. While a minority position, it would give the group a great deal of control, and would come without having to get into the pesky problem of paying a premium to grab a controlling interest. If the deal is structured in a way that it is a stealth takeover by Mr. Kerkorian, "GM will not sign up for that. They're smart enough ppl to look through that," says David Giroux, of T. Rowe.
Barron's Online discusses McDonald's, sayint that the shares may have more room to run. "In these trying times, McDonald's can be counted on for steady growth," says Dan Popowics, of Fifth Third Asset Mgmt.
The LightReading reports that as the fiber access mkt heats up, rumors abound that FiberNet (FTGX) in one co that might be on the block. The CEO denies it, but analysts say the fate of its peers suggests it won't be an independent firm forever. Merriman Curhan Ford analyst Colby Synesael feels any large and publicly held carriers could be potential suitors. FiberNet would probably be valued at 2-3x its annual revs, which were $33.8 million in 2005, he says.
Notablecalls: This piece of news will spark some interest in the stock.
THe WSJ's "Heard on the Street" column questions taht "is Kirk Kerkorian trying to engineer an effective takeover of General Motors (GM) on the cheap?" If the Renault-Nissan alliance plan materializes, Mr. Kerkorian and his allies would control about 30% of GM. While a minority position, it would give the group a great deal of control, and would come without having to get into the pesky problem of paying a premium to grab a controlling interest. If the deal is structured in a way that it is a stealth takeover by Mr. Kerkorian, "GM will not sign up for that. They're smart enough ppl to look through that," says David Giroux, of T. Rowe.
Barron's Online discusses McDonald's, sayint that the shares may have more room to run. "In these trying times, McDonald's can be counted on for steady growth," says Dan Popowics, of Fifth Third Asset Mgmt.
The LightReading reports that as the fiber access mkt heats up, rumors abound that FiberNet (FTGX) in one co that might be on the block. The CEO denies it, but analysts say the fate of its peers suggests it won't be an independent firm forever. Merriman Curhan Ford analyst Colby Synesael feels any large and publicly held carriers could be potential suitors. FiberNet would probably be valued at 2-3x its annual revs, which were $33.8 million in 2005, he says.
Notablecalls: This piece of news will spark some interest in the stock.
Thursday, July 06, 2006
Interesting Call of The Day - ICO Global Comm (NASDAQ:ICOHA), Motient (OTC BB:MNCP)
Jefferies' Romeo Reyes comments on news that Clearwire received a $900 mm financing from Intel and Motorola including $600 mm from Intel Capital.
Mr. Reyes believes the investment was for a non-controlling interest in Clearwire at a valuation north of $0.30 per MHz-POP. The company did not disclose all of the details, but he expects additional details will be forthcoming in the next few weeks.
Reyes thinks that this valuation validates spectrum valuations and represents a premium to the current valuations of ICO Global Comm (NASDAQ:ICOHA) and Motient (OTC BB:MNCP). MNCP currently trades at just $0.15 per MHz-POP while ICOHA trades at just $0.18 per MHz-POP.
Assuming a $0.35 per MHz-POP valuation for the spectrum, the implied share price for MNCP and ICOHA would be north of $25 and $7, respectively. Given the nationwide nature of the spectrum of MNCP and ICO NA, the analyst believes the spectrum should trade closer to $0.50 per MHz-POP.
Investment in Clearwire will act as a catalyst for an additional investment in the ATC/wireless data space, most likely from DBS operators. DTV has stated its intent to announce a wireless broadband strategy before year-end. Reyes believes that strategic investors, such as DTV, may want to cut a deal before the AWS auction as valuations are likely to increase post the auction.
Given the valuable nature of this nationwide spectrum, Mr. Reyes finds the current valuations compelling and would advise investors to take advantage of current weakness.
Notablecalls: Do I know anything about these two co's? No. Does the call sound interesting? Yes! Worth a closer look!
Mr. Reyes believes the investment was for a non-controlling interest in Clearwire at a valuation north of $0.30 per MHz-POP. The company did not disclose all of the details, but he expects additional details will be forthcoming in the next few weeks.
Reyes thinks that this valuation validates spectrum valuations and represents a premium to the current valuations of ICO Global Comm (NASDAQ:ICOHA) and Motient (OTC BB:MNCP). MNCP currently trades at just $0.15 per MHz-POP while ICOHA trades at just $0.18 per MHz-POP.
Assuming a $0.35 per MHz-POP valuation for the spectrum, the implied share price for MNCP and ICOHA would be north of $25 and $7, respectively. Given the nationwide nature of the spectrum of MNCP and ICO NA, the analyst believes the spectrum should trade closer to $0.50 per MHz-POP.
Investment in Clearwire will act as a catalyst for an additional investment in the ATC/wireless data space, most likely from DBS operators. DTV has stated its intent to announce a wireless broadband strategy before year-end. Reyes believes that strategic investors, such as DTV, may want to cut a deal before the AWS auction as valuations are likely to increase post the auction.
Given the valuable nature of this nationwide spectrum, Mr. Reyes finds the current valuations compelling and would advise investors to take advantage of current weakness.
Notablecalls: Do I know anything about these two co's? No. Does the call sound interesting? Yes! Worth a closer look!
Calls of Note Part 4
- FBR is out negative on First Marblehead (NYSE:FMD) saying they have confirmed that Bank of America is now outsourcing new private student loan products to a competitor. While it is impossible to determine the impact to earnings, the fact that one of FMD's long standing partners chose a competitor, raises issues regarding the company's vulnerability to competitors and pricing. Given this news, high levels of concentration risk, high levels of noncash earnings, changes in the federal loan program, concerns regarding credit, and valuation, the firm reiterates Underperform rating.
Although it is impossible to determine the potential impact to FMD at this time, Bank of America is one of the company's most important clients, accounting for approximately 27% of the company's loans. FMD will continue to facilitate the bank's loans issued under the Education Maximizer program as part of the recently signed contract with FMD. Helping to offset the potential volume going to Educap will be the addition of GE and KeyBank as new clients.
Notablecalls: FMD will get hit today. I suspect the recent momentum darling will decline by 2-3 pts. Nice piece of research from FBR!
Although it is impossible to determine the potential impact to FMD at this time, Bank of America is one of the company's most important clients, accounting for approximately 27% of the company's loans. FMD will continue to facilitate the bank's loans issued under the Education Maximizer program as part of the recently signed contract with FMD. Helping to offset the potential volume going to Educap will be the addition of GE and KeyBank as new clients.
Notablecalls: FMD will get hit today. I suspect the recent momentum darling will decline by 2-3 pts. Nice piece of research from FBR!
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.
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.
Calls of Note Part 2
- WR Hambrecht is defending Trident Micro (NASDAQ:TRID) after Thomas Weisel Partners, LLC downgraded the shares yesterday morning, citing what they believe will be share loss into 2007 due to Trident's HiDTV CX chip not sampling until Q3:06 and increasing competitive and pricing pressures which they believe will be evident in the second half of 2006. In addition, Weisel is also specifically citing what they believe to be market share losses at Sharp, one of Trident's top tier customers to Micronas and Broadcom into 2007.
Hambrecht believes that Weisel is likely downgrading near the bottom. They believe that Weisel is likely extrapolating from incomplete information on the overall impact of the single-chip transition and are not factoring in share gains at other Tier I flat panel TV OEMs which the firm has talked about. They continue to believe that Trident will likely report strong results for June and a robust outlook into the September quarter and should represent a great trade into the fall. Reiterates Buy rating and $39.00 price target on shares of Trident Microsystems.
Notablecalls: I'd be looking for a bounce today.
- Soleil's ResearchEquity Research is out on Optimal Group (NASDAQ:OPMR) saying that in their May 9 note, when they reaffirmed their belief that the co's fundamentals were "exceptional," with the stock closing at $15.74, and despite their long-term opinion, they advised clients that the stock would most likely "trade down hard on or about June 11," the date that current online gaming legislation was expected to pass the House of Representatives. On Wednesday, OPMR closed at $13.44, down 15% from firm's May 9 report (versus a decline of 4% in the S&P500 over the same period).
At this point, they feel comfortable recommending that clients either cover their shorts or add to a long position. While there is significant risk that the stock falls another dollar or so if a bill passes the House, considering the long-shot status of possible legislation passing the Senate, the firm feels the potential upside in OPMR's shares significantly outweighs any downside that exists over the next three months. Maintains Buy.
Notablecalls: Not actionable but good to know category.
Hambrecht believes that Weisel is likely downgrading near the bottom. They believe that Weisel is likely extrapolating from incomplete information on the overall impact of the single-chip transition and are not factoring in share gains at other Tier I flat panel TV OEMs which the firm has talked about. They continue to believe that Trident will likely report strong results for June and a robust outlook into the September quarter and should represent a great trade into the fall. Reiterates Buy rating and $39.00 price target on shares of Trident Microsystems.
Notablecalls: I'd be looking for a bounce today.
- Soleil's ResearchEquity Research is out on Optimal Group (NASDAQ:OPMR) saying that in their May 9 note, when they reaffirmed their belief that the co's fundamentals were "exceptional," with the stock closing at $15.74, and despite their long-term opinion, they advised clients that the stock would most likely "trade down hard on or about June 11," the date that current online gaming legislation was expected to pass the House of Representatives. On Wednesday, OPMR closed at $13.44, down 15% from firm's May 9 report (versus a decline of 4% in the S&P500 over the same period).
At this point, they feel comfortable recommending that clients either cover their shorts or add to a long position. While there is significant risk that the stock falls another dollar or so if a bill passes the House, considering the long-shot status of possible legislation passing the Senate, the firm feels the potential upside in OPMR's shares significantly outweighs any downside that exists over the next three months. Maintains Buy.
Notablecalls: Not actionable but good to know category.
Notablecalls - paperstand
According to The Wall Street Journal, Intel (INTC) is investing $600m in Clearwire as part of a $900m investment that could help spur adoption of WiMAX. Motorola (MOT) said it will contribute an unspecified portion of the extra $300m going to Clearwire and pay an additional undisclosed sum to buy Clearwire's hardware business. Clearwire, as a result of the cash infusion, withdrew plans for an IPO. Clearwire is selling wireless Internet access in 26 metropolitan mkts in the US, Ireland, Belgium, Denmark and Mexico. The co's service is based on a precursor to WiMAX but has been expected to convert to the newer technology.
Notablecalls: This news may spark interest in Alvarion (ALVR), which has pacts with Intel to develop and sell WiMax equipment. Also, Clearwire is the largest customer of Alvarion.
The NY Times reports, citing industry executives, that Microsoft's (MSFT) iPod killer in stores by holiday season. Microsoft's digital device would be equipped with at least one feature the iPod lacks: wireless Internet capability that would allow users to download music without being connected to a PC. The device would also have a more advanced video screen.
According to The WSJ's "Heard on the Street" column, already reeling from slowing housing sales and worries about the economy, shares of home builders face another issue: the value of the land on their books. Land values are becoming a flash point for investors and analysts who watch the builders sector. Bears say the co's land might not be worth what they paid for it, which could lead to painful write-downs. "Ppl are looking at book value as a possible floor for the stock prices. The question is 'should that be a floor?' There could be some risk to that book value from land recently acquired or put under option contract," says BofA analyst Daniel Oppenheim. Homebuilders mentioned include: CTX, HOV, TOL, NVR, PHM, BZH and MDC.
Barron's Online discusses Google (GOOG), highlighting several concerns regarding the co. Among those concerns: growing ad competition posed by the likes of Yahoo and Microsoft. Article suggests that as Google cruises toward its earnings announcement on Jul 17, it may be a better idea to play near-term volatility in the stock using Google's options, rather than betting on a business model whose long-term payoff is uncertain.
Barron's Online reports that four insiders at American Eagle Outfitters (AEOS) sold a total of $9.5m in stock during June. Ben Silverman, director of research at InsiderScore.com, says that with the "aggressive profit-taking" by Vice Chmn, "perhaps it's time for investors to also consider their position [in American Eagle stock] and their cost basis and see if it's a good time to take some money off the table," especially since the stock is near an all-time high.
The WSJ reports that in what would mark a dramatic shift in strategy, Time Warner's (TWX) AOL unit is considering offering its entire menu of services, including email, free of charge to anyone with a high-speed Internet connection. If AOL goes ahead with the plan, it could be giving up as much as $2bn in subs rev in a gamble aimed at boosting the Internet service's advertising rev.
The WSJ reports that Valassis Comm. is in advanced negotiations to purchase Advo (AD), for at least $1.1bn.
Notablecalls: Advo has mkt cap of $770m.
Notablecalls: This news may spark interest in Alvarion (ALVR), which has pacts with Intel to develop and sell WiMax equipment. Also, Clearwire is the largest customer of Alvarion.
The NY Times reports, citing industry executives, that Microsoft's (MSFT) iPod killer in stores by holiday season. Microsoft's digital device would be equipped with at least one feature the iPod lacks: wireless Internet capability that would allow users to download music without being connected to a PC. The device would also have a more advanced video screen.
According to The WSJ's "Heard on the Street" column, already reeling from slowing housing sales and worries about the economy, shares of home builders face another issue: the value of the land on their books. Land values are becoming a flash point for investors and analysts who watch the builders sector. Bears say the co's land might not be worth what they paid for it, which could lead to painful write-downs. "Ppl are looking at book value as a possible floor for the stock prices. The question is 'should that be a floor?' There could be some risk to that book value from land recently acquired or put under option contract," says BofA analyst Daniel Oppenheim. Homebuilders mentioned include: CTX, HOV, TOL, NVR, PHM, BZH and MDC.
Barron's Online discusses Google (GOOG), highlighting several concerns regarding the co. Among those concerns: growing ad competition posed by the likes of Yahoo and Microsoft. Article suggests that as Google cruises toward its earnings announcement on Jul 17, it may be a better idea to play near-term volatility in the stock using Google's options, rather than betting on a business model whose long-term payoff is uncertain.
Barron's Online reports that four insiders at American Eagle Outfitters (AEOS) sold a total of $9.5m in stock during June. Ben Silverman, director of research at InsiderScore.com, says that with the "aggressive profit-taking" by Vice Chmn, "perhaps it's time for investors to also consider their position [in American Eagle stock] and their cost basis and see if it's a good time to take some money off the table," especially since the stock is near an all-time high.
The WSJ reports that in what would mark a dramatic shift in strategy, Time Warner's (TWX) AOL unit is considering offering its entire menu of services, including email, free of charge to anyone with a high-speed Internet connection. If AOL goes ahead with the plan, it could be giving up as much as $2bn in subs rev in a gamble aimed at boosting the Internet service's advertising rev.
The WSJ reports that Valassis Comm. is in advanced negotiations to purchase Advo (AD), for at least $1.1bn.
Notablecalls: Advo has mkt cap of $770m.
Calls of Note Part 1
- JP Morgan comments on Apple Computer (NASDAQ:AAPL) noting their Asia team recently released some commentary on the launch dates for the new iPod nanos and the "true" video iPod. For the new nanos, it appears the flash suppliers had expected a launch some time this summer, but now the launch appears more likely later in the September quarter, which supports firm's previously set expectations.
Most important, the checks by the Asia team clearly refute some of the recent chatter over a more substantial delay for the refreshed nanos. With a full ramp in September, Apple should be able to meet the peak demand season in the December quarter.
As for the "true" video iPod (video iPod with a widescreen display), the Asia team cited previous expectations for a launch in the July-August time frame, which was far earlier than firm's expectation for a launch in the December quarter. The Asia team now believes that the product could be launched in the December quarter, though the exact timing of the launch is still unclear. Any further delay in the "true" video iPod's launch may be more closely related to Apple's negotiations with the movie studios than to any technical delays.
Reits Overweight on AAPL.
Notablecalls: Not actionable but good to know category.
- Soleil's SurTerre Research comments on news that privately-held Clearwire Corp, a next- generation WiMAX service provider founded by wireless magnate Craig McCaw, raised $900 million in private funding from Intel and Motorola. According to the firm, this is the largest private investment they've seen in the WiMAX space to date. Notes that Clearwire had previously filed in May 2006 to raise up to $400 million in an IPO to pursue market and network expansion and to acquire wireless spectrum.
In addition to its investment in Clearwire, Motorola also agreed to buy Clearwire's internal equipment subsidiary, NextNet Wireless, for an undisclosed amount. Technically, NextNet was a competitor to Alvarion (NASDAQ:ALVR); however, it's largest customer is Clearwire.
While Alvarion is not a direct beneficiary of this funding, the firm expects this sizable investment to provoke new interest in the WiMAX space.
The timing of this investment is interesting, in their view, as the FCC is scheduled to auction off a new swatch of spectrum for advanced wireless services (AWS-1) in August in a transaction dubbed "Auction 66". This spectrum can support WiMAX and other wireless broadband services. This may be the biggest chunk of wireless spectrum to come available in the U.S., and it could be worth up to $15 billion according to officials.
Notablecalls: If ALVR's chart didn't look as bad as it does right now, I'd buy it for a trade.
Most important, the checks by the Asia team clearly refute some of the recent chatter over a more substantial delay for the refreshed nanos. With a full ramp in September, Apple should be able to meet the peak demand season in the December quarter.
As for the "true" video iPod (video iPod with a widescreen display), the Asia team cited previous expectations for a launch in the July-August time frame, which was far earlier than firm's expectation for a launch in the December quarter. The Asia team now believes that the product could be launched in the December quarter, though the exact timing of the launch is still unclear. Any further delay in the "true" video iPod's launch may be more closely related to Apple's negotiations with the movie studios than to any technical delays.
Reits Overweight on AAPL.
Notablecalls: Not actionable but good to know category.
- Soleil's SurTerre Research comments on news that privately-held Clearwire Corp, a next- generation WiMAX service provider founded by wireless magnate Craig McCaw, raised $900 million in private funding from Intel and Motorola. According to the firm, this is the largest private investment they've seen in the WiMAX space to date. Notes that Clearwire had previously filed in May 2006 to raise up to $400 million in an IPO to pursue market and network expansion and to acquire wireless spectrum.
In addition to its investment in Clearwire, Motorola also agreed to buy Clearwire's internal equipment subsidiary, NextNet Wireless, for an undisclosed amount. Technically, NextNet was a competitor to Alvarion (NASDAQ:ALVR); however, it's largest customer is Clearwire.
While Alvarion is not a direct beneficiary of this funding, the firm expects this sizable investment to provoke new interest in the WiMAX space.
The timing of this investment is interesting, in their view, as the FCC is scheduled to auction off a new swatch of spectrum for advanced wireless services (AWS-1) in August in a transaction dubbed "Auction 66". This spectrum can support WiMAX and other wireless broadband services. This may be the biggest chunk of wireless spectrum to come available in the U.S., and it could be worth up to $15 billion according to officials.
Notablecalls: If ALVR's chart didn't look as bad as it does right now, I'd buy it for a trade.
Wednesday, July 05, 2006
Interesting Call of The Day - Hartmarx (AMEX:HMX) vol 2
Bear Murray's Gary M. Giblen is yet again out in defense of Hartmarx (AMEX:HMX). I highlighted his positive call on HMX on June 13. While the stock did bounce 7-8% over the next couple of days, it got hit badly after the co announced its quarterly results and issued weak guidance.
Giblen notes the July 3 open market purchase of 10,000 shares by Chairman/CEO Homi Patel is meaningful. It is the first material insider purchase since 2004 other than option-related transactions. Insiders have historically demonstrated good timing in buying and selling HMX shares. For example, a 40,000-share buy in 2004 was at the short-term low price of $7.50 per share; the shares were 35% higher five months later.
This reinforces firm's sense that HMX may have bottomed at the $6.00 closing price of June 30, which was one day after the weak earnings/ outlook of June 29 and which may well have been depressed by end-of-quarter portfolio window dressing, as they had anticipated. HMX inched higher on July 3, the first trading day of the new quarter, with Mr. Patel's buy averaging out at a price of $6.01 per share.
Giblen notes that if HMX traded at the median comparable forward PEG of 1.0x rather than the bottom of the group 0.5x, it would translate to a forward P/E of 13x and firm's $11 target price. It has $2 per share in NOLs and a book value of about $10.50 as adjusted for the value of the iconic Hickey Freeman and Hart Schaffner Mart brands, which are not recorded on the balance sheet. Firm also concludes a buyout price would be $14-15 per share and see many logical and well-financed potential acquirers.
Notablecalls: I still think HMX is an interesting situation.
Giblen notes the July 3 open market purchase of 10,000 shares by Chairman/CEO Homi Patel is meaningful. It is the first material insider purchase since 2004 other than option-related transactions. Insiders have historically demonstrated good timing in buying and selling HMX shares. For example, a 40,000-share buy in 2004 was at the short-term low price of $7.50 per share; the shares were 35% higher five months later.
This reinforces firm's sense that HMX may have bottomed at the $6.00 closing price of June 30, which was one day after the weak earnings/ outlook of June 29 and which may well have been depressed by end-of-quarter portfolio window dressing, as they had anticipated. HMX inched higher on July 3, the first trading day of the new quarter, with Mr. Patel's buy averaging out at a price of $6.01 per share.
Giblen notes that if HMX traded at the median comparable forward PEG of 1.0x rather than the bottom of the group 0.5x, it would translate to a forward P/E of 13x and firm's $11 target price. It has $2 per share in NOLs and a book value of about $10.50 as adjusted for the value of the iconic Hickey Freeman and Hart Schaffner Mart brands, which are not recorded on the balance sheet. Firm also concludes a buyout price would be $14-15 per share and see many logical and well-financed potential acquirers.
Notablecalls: I still think HMX is an interesting situation.
Calls of Note Part 5
- Merill Lynch is very positive on LSI Logic Corp (NYSE:LSI) saying that following a series of conversations with management, they continue to believe that LSI has better prospects than the street realizes, especially in the storage end market.
Merrill's estimates are significantly above the street - on the pro-forma basis that First Call is using to calculate consensus, they're looking for $0.60 in earnings this year and $1.00 for 2007 (Consensus stands at $0.44 for 06 and 0.60 for 07).
According to the firm LSI is looking more and more like a storage company now that RapidChip development has been terminated and the DSP business is being sold. They think the pressure is on LSI's consumer business to show material improvement or face some type of material action from top management, and regard that as a good thing.
Investors tend to focus on gross margin, which is fine, but in LSI's case they think the real potential is further down the P&L. LSI was inefficiently run under previous management, and as the current team redeploys assets and people they think that it will be possible to generate revenue growth with very little additional operating cost. Translating that to the numbers, the firm thinks that GAAP operating margin can hit 15% in 2007, up from only 5% for Q106.
Reiterates Buy recommendation and $15 price target.
Notablecalls: I do like this call. Merill has enough following to push the stock higher. Looks actionable.
- Piper Jaffray recommends purchase of shares of Illumina (NASDAQ:ILMN) ahead of strong 2Q:06 results driven by BIG genotyping contract wins. Firm expects Illumina will meet or even potentially beat 2Q:06 revenues of $33 million and GAAP EPS of $0.02, increasing firm's comfort for full year numbers.
Notablecalls: Chart looks strong. May have some upside in it.
Merrill's estimates are significantly above the street - on the pro-forma basis that First Call is using to calculate consensus, they're looking for $0.60 in earnings this year and $1.00 for 2007 (Consensus stands at $0.44 for 06 and 0.60 for 07).
According to the firm LSI is looking more and more like a storage company now that RapidChip development has been terminated and the DSP business is being sold. They think the pressure is on LSI's consumer business to show material improvement or face some type of material action from top management, and regard that as a good thing.
Investors tend to focus on gross margin, which is fine, but in LSI's case they think the real potential is further down the P&L. LSI was inefficiently run under previous management, and as the current team redeploys assets and people they think that it will be possible to generate revenue growth with very little additional operating cost. Translating that to the numbers, the firm thinks that GAAP operating margin can hit 15% in 2007, up from only 5% for Q106.
Reiterates Buy recommendation and $15 price target.
Notablecalls: I do like this call. Merill has enough following to push the stock higher. Looks actionable.
- Piper Jaffray recommends purchase of shares of Illumina (NASDAQ:ILMN) ahead of strong 2Q:06 results driven by BIG genotyping contract wins. Firm expects Illumina will meet or even potentially beat 2Q:06 revenues of $33 million and GAAP EPS of $0.02, increasing firm's comfort for full year numbers.
Notablecalls: Chart looks strong. May have some upside in it.
Calls of Note Part 4
- FBR is lowering their ests on Safenet (NASDAQ:SFNT) noting that while the co ocntinues to execute judiciously on its fertile classified opportunity (Crypto Mod), they believe that the company is still seeing much softness in its commercial business, which represents 20%-25% of revenues in a given quarter. From a product perspective, the commercial business is aimed at both the high-speed communication (SONET encryptors) and borderless divisions.
Although the company is judiciously trying to turn around this domestic business from both product and sales strategies, they believe the transition period could take a bit longer than the firm was previously expecting, as it appears the new line of encryption technology will take some time to gain more widespread customer adoption.
For 2006, to reflect weaker than anticipated commercial business and higher G&A expenses, they are lowering estimates to $279.1 million and $1.23, versus previous estimates of $285.9 million and $1.34, respectively. For 2007, new estimates are $306.1 million and $1.53, versus prior estimates of $316.8 million and $1.70, respectively. Target goes to $18 from $20. Maintains Mkt Perform.
Notablecalls: I think we will see some downside in SFNT over the coming days.
- FBR is cautious on Check Point Software (NASDAQ:CHKP) saying that based on their channel checks, they believe CHKP is seeing a tougher environment inking deal flow than previously expected. While the company continues to generate nice cash flow, repurchase shares, and focus on branching out its core product focus, unfortunately, in the near term, the firm believes CHKP will be facing a very bumpy road. As a result, they are lowering estimates for the June quarter, as well as bringing down the bar for 2006 and 2007.
For 2Q06 (June), they are lowering total revenue and pro forma estimates to $139 million and $0.32 vs. prior estimates of $141 million and $0.33, respectively. For 2006, they are lowering estimates to $580 million and $1.36 vs. prior estimates of $590 million and $1.39. For 2007, new estimates are $626 million and $1.44 vs. prior estimates of $650 million and $1.47. Tgt goes to $19 from $21.
Notablecalls: Not actionable but good to know category. CHKP has gotten hit already.
Although the company is judiciously trying to turn around this domestic business from both product and sales strategies, they believe the transition period could take a bit longer than the firm was previously expecting, as it appears the new line of encryption technology will take some time to gain more widespread customer adoption.
For 2006, to reflect weaker than anticipated commercial business and higher G&A expenses, they are lowering estimates to $279.1 million and $1.23, versus previous estimates of $285.9 million and $1.34, respectively. For 2007, new estimates are $306.1 million and $1.53, versus prior estimates of $316.8 million and $1.70, respectively. Target goes to $18 from $20. Maintains Mkt Perform.
Notablecalls: I think we will see some downside in SFNT over the coming days.
- FBR is cautious on Check Point Software (NASDAQ:CHKP) saying that based on their channel checks, they believe CHKP is seeing a tougher environment inking deal flow than previously expected. While the company continues to generate nice cash flow, repurchase shares, and focus on branching out its core product focus, unfortunately, in the near term, the firm believes CHKP will be facing a very bumpy road. As a result, they are lowering estimates for the June quarter, as well as bringing down the bar for 2006 and 2007.
For 2Q06 (June), they are lowering total revenue and pro forma estimates to $139 million and $0.32 vs. prior estimates of $141 million and $0.33, respectively. For 2006, they are lowering estimates to $580 million and $1.36 vs. prior estimates of $590 million and $1.39. For 2007, new estimates are $626 million and $1.44 vs. prior estimates of $650 million and $1.47. Tgt goes to $19 from $21.
Notablecalls: Not actionable but good to know category. CHKP has gotten hit already.
Calls of Note Part 3
Two firms defending Home Depot (NYSE:HD) today:
* Piper Jaffray saying that following recent meetings with Home Depot management, they are maintaining Outperform rating and $49 price target as they believe the current valuation is overly discounting a slowing housing market (which was factored into Home Depot's FY06 guidance) and the long-term growth prospects of the HD Supply segment.
Investor concerns surrounding the macro environment seemed to dominate the meetings that the firm hosted last week, and these concerns have weighed heavily on HD shares since the beginning of the year (HD shares are down -11.0% compared to a +2.5% gain in the S&P 500)
Historically, the stock performances of the home improvement retailers have improved moving off trough multiples shortly after the conclusion of the Fed tightening cycle. When the firm upgraded HD shares late last year, they were anticipating the conclusion of Fed action in early 2006, but that catalyst has since been pushed out to 2H06 or possibly later.
* Jefferies recommends purchase of HD shares, which are selling at just 10x firm's out year estimate as compared with a 19.7% EPS CAGR over the past five years. Even if a cyclical downturn were to cause a 15% reduction in '07 forecast, the multiple would be only 11.5x.
New home sales, which are fairly cyclical, account for only about 20% of domestic housing turnover, with less-cyclical sales of existing homes having much greater importance. During the past two decades Depot has continued to generate impressive earnings results even during periods of declining new home sales and reduced housing turnover.
While management has provided guidance of 9%-to-14% EPS gains at the beginning of each of the past several years, EPS have actually increased by more than 20% during each of the past four years and again during this year's first fiscal quarter as the company has continually beaten Wall Street expectations.
Notablecalls: Not actionable but good to know category.
* Piper Jaffray saying that following recent meetings with Home Depot management, they are maintaining Outperform rating and $49 price target as they believe the current valuation is overly discounting a slowing housing market (which was factored into Home Depot's FY06 guidance) and the long-term growth prospects of the HD Supply segment.
Investor concerns surrounding the macro environment seemed to dominate the meetings that the firm hosted last week, and these concerns have weighed heavily on HD shares since the beginning of the year (HD shares are down -11.0% compared to a +2.5% gain in the S&P 500)
Historically, the stock performances of the home improvement retailers have improved moving off trough multiples shortly after the conclusion of the Fed tightening cycle. When the firm upgraded HD shares late last year, they were anticipating the conclusion of Fed action in early 2006, but that catalyst has since been pushed out to 2H06 or possibly later.
* Jefferies recommends purchase of HD shares, which are selling at just 10x firm's out year estimate as compared with a 19.7% EPS CAGR over the past five years. Even if a cyclical downturn were to cause a 15% reduction in '07 forecast, the multiple would be only 11.5x.
New home sales, which are fairly cyclical, account for only about 20% of domestic housing turnover, with less-cyclical sales of existing homes having much greater importance. During the past two decades Depot has continued to generate impressive earnings results even during periods of declining new home sales and reduced housing turnover.
While management has provided guidance of 9%-to-14% EPS gains at the beginning of each of the past several years, EPS have actually increased by more than 20% during each of the past four years and again during this year's first fiscal quarter as the company has continually beaten Wall Street expectations.
Notablecalls: Not actionable but good to know category.
Calls of Note Part 2
- UBS is defending AU Optronics (NYSE:AUO) saying that instead of seeking more negative data points and waiting for the Q2 result announcement, they suggest investors accumulate AUO on what they believe is the recent over-correction. With shipments beginning to recover from July, the firm believes the market will begin to look to a H206 recovery despite what they believe will be disappointing Q2 results.
Firm estimates LCD TV prices will fall further by 30%+ in the Q4 shopping season. TV panel price cuts in Q2 may not trigger strong demand immediately, but should lead to high growth in Q406. Stronger seasonal demand will likely lead to a supply/demand balance in late Q3, and potential tightness in Q4.
AUO should remain profitable during this downturn due to its better cost structure and greater scale. Firm expects Q4 earnings to increase significantly because of increasing exposure to Japanese TV brands.
Notablecalls: Not actionable but good to know category.
- Ian Horowitz of Soleil-Fulcrum Research is positive on Aventine Renewable Energy (NYSE: AVR) saying that after the the recent IPO and subsequent sell-off, they are recommending purchasing of Aventine at these levels. At the current price, the stock is trading at 10.4x firm's 2007 EBITDA levels of $135.3mln. Although at first blush the valuation doesn't seem extremely compelling, EBITDA calculation is based off of a 2007 average EtOH selling price of $2.07/gallon. Assuming crude prices remain stable in this range and gasoline maintains a >$2.00 price range, they feel that their 2007 EBITDA number may understate the opportunities available for the ethanol industry over the next several years.
Reits Buy and $45 tgt.
Notablecalls: Memo to analysts in general - Please don't publish calls filled with positive talk if your target price is less than say 25% higher from current market price. It's waste of your own time not to mention the people that go through the notes.
Firm estimates LCD TV prices will fall further by 30%+ in the Q4 shopping season. TV panel price cuts in Q2 may not trigger strong demand immediately, but should lead to high growth in Q406. Stronger seasonal demand will likely lead to a supply/demand balance in late Q3, and potential tightness in Q4.
AUO should remain profitable during this downturn due to its better cost structure and greater scale. Firm expects Q4 earnings to increase significantly because of increasing exposure to Japanese TV brands.
Notablecalls: Not actionable but good to know category.
- Ian Horowitz of Soleil-Fulcrum Research is positive on Aventine Renewable Energy (NYSE: AVR) saying that after the the recent IPO and subsequent sell-off, they are recommending purchasing of Aventine at these levels. At the current price, the stock is trading at 10.4x firm's 2007 EBITDA levels of $135.3mln. Although at first blush the valuation doesn't seem extremely compelling, EBITDA calculation is based off of a 2007 average EtOH selling price of $2.07/gallon. Assuming crude prices remain stable in this range and gasoline maintains a >$2.00 price range, they feel that their 2007 EBITDA number may understate the opportunities available for the ethanol industry over the next several years.
Reits Buy and $45 tgt.
Notablecalls: Memo to analysts in general - Please don't publish calls filled with positive talk if your target price is less than say 25% higher from current market price. It's waste of your own time not to mention the people that go through the notes.
Calls of Note Part 1
- Piper is commenting on Chico's FAS (CHS) saying that desipite the recent weakness in stock they are reluctant to upgrade their rating on CHS shares given concerns that the core Chico's business is showing signs of maturation and therefore placing a greater weight on the company's White HouseBlack Market (just about 20% of sales) and Soma by Chico's divisions to be the growth drivers of the business--the former being quite capable and the latter still very much in a "show me" mode.
Signs that the core Chico's concept is maturing include: 1) moderating same-store sales gains; 2) a dramatic deceleration in store growth; 3) a deceleration in the rate of growth in loyalty program customer sign-ups; and 4) 23% of households with income of $75,000 and higher have a loyal Chico's shopper, up from about one in ten three years ago. Clearly this speaks to Chico's past success, but we believe that the concept may be hitting a saturation point.
Firm is trimming estimates given their view that the core Chico's concept is maturing. Also lowers price target from $33 to $29 but keeping rating at Mkt Perform.
Notablecalls: Given the almost 50% decline from its February high I'm reluctant to call this one an actionable call.
- Stifel Nicolaus is positive on Black Box Corp (NASDAQ:BBOX) saying that at urrent price levels, they believe the co is the most attractive equity in firm's infrastructure universe, offering 58% upside to $61.00 target price. The target price reflects a 14x-15x forward P/E and 9x- 10x EV/EBITDA. BBOX is currently trading at 6.3x F2007E EBITDA.
Firm believes that the long-term outlook for BBOX remains promising. The North American market is strengthening with 5% organic growth in F2006. In 4Q06, voice services grew 17% and data services 8% in North America. Nearly all revenue weakness has been in Europe, which is expected to improve in F2007. Meanwhile, the international operating profit margin is much higher than in North America and improving (14.4% in F2006 vs. 12.7% in F2005 ex one-time items). They have increased their F2007 free cash flow estimate to $3.98 p/s from $3.45 p/s due to lower working capital needs.
They believe that BBOX will explore and consider a stock buyback if the current depressed stock price persists over the intermediate term. Firm calculates that a 2 million share buyback, using about one year's FCF, would increase annual EPS by 8.8%. This is about 50%-70% of their estimate of the EPS contribution from future voice acquisitions. Reits Buy.
Notablecalls: Not actionable but good to know category.
- UBS is lowering 2Q estimates on Intel (NASDAQ:INTC) by 1.6M desktop units and 3Q estimates by 0.4Mu as well as lowered ASP estimates, based on industry checks and analysis of x86 processor growth rates vs end-market growth rates. Firm's longer-term thesis for INTC remains intact, as they continue to expect the opportunity for operating leverage through restructuring and gross margin expansion beyond '07.
Rather than a reflection of poor PC demand, the firm believes the confluence of prior overly optimistic PC food chain expectations, upcoming July price cuts and INTC's new pricing policy to reduce the gray market arbitrage are causing the food chain to focus on entering 2H06 with minimum inventory. This should have positive implications for accelerating INTC MPU shipments from 2H06 into '07.
Maintains Buy and $23 tgt.
Firm also lowers their tgt on AMD (NYSE:AMD) to $29 from $33. Maintains Neutral.
Notablecalls: Nothing new here.
Signs that the core Chico's concept is maturing include: 1) moderating same-store sales gains; 2) a dramatic deceleration in store growth; 3) a deceleration in the rate of growth in loyalty program customer sign-ups; and 4) 23% of households with income of $75,000 and higher have a loyal Chico's shopper, up from about one in ten three years ago. Clearly this speaks to Chico's past success, but we believe that the concept may be hitting a saturation point.
Firm is trimming estimates given their view that the core Chico's concept is maturing. Also lowers price target from $33 to $29 but keeping rating at Mkt Perform.
Notablecalls: Given the almost 50% decline from its February high I'm reluctant to call this one an actionable call.
- Stifel Nicolaus is positive on Black Box Corp (NASDAQ:BBOX) saying that at urrent price levels, they believe the co is the most attractive equity in firm's infrastructure universe, offering 58% upside to $61.00 target price. The target price reflects a 14x-15x forward P/E and 9x- 10x EV/EBITDA. BBOX is currently trading at 6.3x F2007E EBITDA.
Firm believes that the long-term outlook for BBOX remains promising. The North American market is strengthening with 5% organic growth in F2006. In 4Q06, voice services grew 17% and data services 8% in North America. Nearly all revenue weakness has been in Europe, which is expected to improve in F2007. Meanwhile, the international operating profit margin is much higher than in North America and improving (14.4% in F2006 vs. 12.7% in F2005 ex one-time items). They have increased their F2007 free cash flow estimate to $3.98 p/s from $3.45 p/s due to lower working capital needs.
They believe that BBOX will explore and consider a stock buyback if the current depressed stock price persists over the intermediate term. Firm calculates that a 2 million share buyback, using about one year's FCF, would increase annual EPS by 8.8%. This is about 50%-70% of their estimate of the EPS contribution from future voice acquisitions. Reits Buy.
Notablecalls: Not actionable but good to know category.
- UBS is lowering 2Q estimates on Intel (NASDAQ:INTC) by 1.6M desktop units and 3Q estimates by 0.4Mu as well as lowered ASP estimates, based on industry checks and analysis of x86 processor growth rates vs end-market growth rates. Firm's longer-term thesis for INTC remains intact, as they continue to expect the opportunity for operating leverage through restructuring and gross margin expansion beyond '07.
Rather than a reflection of poor PC demand, the firm believes the confluence of prior overly optimistic PC food chain expectations, upcoming July price cuts and INTC's new pricing policy to reduce the gray market arbitrage are causing the food chain to focus on entering 2H06 with minimum inventory. This should have positive implications for accelerating INTC MPU shipments from 2H06 into '07.
Maintains Buy and $23 tgt.
Firm also lowers their tgt on AMD (NYSE:AMD) to $29 from $33. Maintains Neutral.
Notablecalls: Nothing new here.
Notablecalls - paperstand
Barron's Online reports that Pardus Capital Management started to aggressively buy Visteon (VC) shares as they sank near record lows in March. The hedge fund has spent just under $80m to purchase 14.25m so far this year. This gives Pardus a stake of 11.1% of Visteon's 127.98m outstanding shares.
According to the NY Post, Under Armour (UARM) insiders, including founder Kevin Plank and his family, sold 7.7m shares over past several days.
Notablecalls: UARM looks like hype stock, insider fast bailout reminds me TASR and other similar cases.
According to the NY Post, Under Armour (UARM) insiders, including founder Kevin Plank and his family, sold 7.7m shares over past several days.
Notablecalls: UARM looks like hype stock, insider fast bailout reminds me TASR and other similar cases.
Monday, July 03, 2006
Calls of Note Part 5
- UBS is positive on Doral Financial (NYSE:DRL) after WHI announced that its has acquired additional rights from DRL, which enables WHI & DRL to treat prior period mortgage transactions between them as true sales under FAS 140. On a net basis, DRL paid $43m to WHI to clean up the last of the accounting issuess related to DRL's mortgage transactions in Puerto Rico.
Firm is hopeful that up-to-date financials should be available in the next 30-60 days. Believes that Doral's stock may rally in the near-term as the company puts its accounting issues behind it. Post restatement, the firm believes the company will still be well capitalized, and expect the compamy to have developed improved internal controls over its accounting processes, interest rate and derivatives risk management. This should help restore some investor confidence in the stock. Maintains Neutral and $7.50 tgt.
Notablecalls: Looks like an actionable call.
Firm is hopeful that up-to-date financials should be available in the next 30-60 days. Believes that Doral's stock may rally in the near-term as the company puts its accounting issues behind it. Post restatement, the firm believes the company will still be well capitalized, and expect the compamy to have developed improved internal controls over its accounting processes, interest rate and derivatives risk management. This should help restore some investor confidence in the stock. Maintains Neutral and $7.50 tgt.
Notablecalls: Looks like an actionable call.
Calls of Note Part 4
- UBS is lowering their Q2 ests on Louisiana-Pacific (NYSE:LPX) to $0.48, from $0.70. The consensus is $0.55. Firm's 2006/2007 estimates are now $1.80/$0.70 versus previous $2.35/$1.25. There has been some new supply - mainly from the LPX/Canfor JV which started up in 4Q (3% of additional industry capacity). Prices have declined more than expected. The big supply ramp-up started in 4Q06 and is scheduled to go through 2007 and result in close to 20% additional capacity unless there are delays. There will be some plywood closures to offset this but the firm expects a tough market.
LPX had $1.374 billion of cash at the end of 1Q - $12.90/share. The company has 14mm shares left under its repurchase program and last bought stock at $26. Firm would expect the company to buy back stock with a view towards its longer-term value. Maintains Reduce rating.
Notablecalls: While the est cut is a big one I'm not entirely sure the call is actionable. Bears watching.
LPX had $1.374 billion of cash at the end of 1Q - $12.90/share. The company has 14mm shares left under its repurchase program and last bought stock at $26. Firm would expect the company to buy back stock with a view towards its longer-term value. Maintains Reduce rating.
Notablecalls: While the est cut is a big one I'm not entirely sure the call is actionable. Bears watching.
Calls of Note Part 3
Somewhat surprisingly, we have couple of tier-1 firms calling for a trading rally in Semi space. This comes after the Semiconductor Industry Association released revenue data for the month of May.
* Morgan Stanley notes that due to the usual recovery from a seasonally weak first quarter, the second quarter has historically offered the strongest sequential growth rate of the year, and without the adverse impact of MPUs and NAND, the rest of the industry appears to be growing at a historically normal rate. The firm expects most semiconductor companies to report second-quarter earnings results that will atleast meet consensus expectations.
Based on current valuations and belief that near-term fundamentals for the vast majority of companies are generally in line with expectations, they believe that a near-term rally is likely to occur as investors focus on the upcoming earnings season. However, as lead times decline, order momentum slows, and end market demand slows during the seasonally weak summer, they expect another solid and potentially better buying opportunity to exist for the average stock in firm's universe in the weeks ahead.
* Bear Stearns says their supply chain checks indicate improved order activities at the motherboard (MB) suppliers from a PC build stand-point, which makes them incrementally more constructive on PC component suppliers for 3Q. Firm views the MB shipment/forecast as a leading indicator for the PC component suppliers from a build stand-point, though not from an end demand standpoint.
Firm remains positive in INTC and notes that altough AMD shares have sold off, and are not expensive at 17x forward earnings (post option), they believe that the Street has not fully factored in the incremental weakness in June or the extent of the margin pressure because of the aggressive pricing environment.
Notablecalls: Not actionable but good to know category.
* Morgan Stanley notes that due to the usual recovery from a seasonally weak first quarter, the second quarter has historically offered the strongest sequential growth rate of the year, and without the adverse impact of MPUs and NAND, the rest of the industry appears to be growing at a historically normal rate. The firm expects most semiconductor companies to report second-quarter earnings results that will atleast meet consensus expectations.
Based on current valuations and belief that near-term fundamentals for the vast majority of companies are generally in line with expectations, they believe that a near-term rally is likely to occur as investors focus on the upcoming earnings season. However, as lead times decline, order momentum slows, and end market demand slows during the seasonally weak summer, they expect another solid and potentially better buying opportunity to exist for the average stock in firm's universe in the weeks ahead.
* Bear Stearns says their supply chain checks indicate improved order activities at the motherboard (MB) suppliers from a PC build stand-point, which makes them incrementally more constructive on PC component suppliers for 3Q. Firm views the MB shipment/forecast as a leading indicator for the PC component suppliers from a build stand-point, though not from an end demand standpoint.
Firm remains positive in INTC and notes that altough AMD shares have sold off, and are not expensive at 17x forward earnings (post option), they believe that the Street has not fully factored in the incremental weakness in June or the extent of the margin pressure because of the aggressive pricing environment.
Notablecalls: Not actionable but good to know category.
Calls of Note Part 2
- Wachovia is somewhat cautious on Sara Lee (NYSE:SLE) noting that while 6/27's announcement of a European Meats sale and pending Branded Apparel spin bring theco closer to its goal of creating a leaner and more-focused structure, they remain concerned over lingering portfolio weakness. Trends have remained weak through FQ3 (top line down -1.4% on flat volume) and while North America exhibits glimmers of progress (accelerating bakery and meat growth), Europe remains weak and persistent cost pressure has further limited EPS growth. Firm is lowering their FQ4 EPS estimate from $0.32 to $0.28.
While restructuring limits the ability to construct adequate comps, International volumes have declined in two of FY06's three quarters (flat in FQ2) and sales declines accelerated in FQ3. Any positive, early Transformation effects appear most pronounced in North America -- margins have risen +180bps, ytd, and FQ3 sales and margin both expanded (+540bps and +330bps, respectively).
Firm remains on the sidelines and await data points indicating the "new" Sara Lee is driving stable top line and margin expansion. Firm's valuation range of $14-16 reflects their belief that SLE should trade at a 15-20% discount to the packaged food group on a CY2006E P/E basis.
While restructuring limits the ability to construct adequate comps, International volumes have declined in two of FY06's three quarters (flat in FQ2) and sales declines accelerated in FQ3. Any positive, early Transformation effects appear most pronounced in North America -- margins have risen +180bps, ytd, and FQ3 sales and margin both expanded (+540bps and +330bps, respectively).
Firm remains on the sidelines and await data points indicating the "new" Sara Lee is driving stable top line and margin expansion. Firm's valuation range of $14-16 reflects their belief that SLE should trade at a 15-20% discount to the packaged food group on a CY2006E P/E basis.
Notablecalls: While I'm not very familiar with the name the wording of the call and weak chart do suggest there is further downside in store. Calls of Note Part 1
- I haven't been able to confirm this one but I'm hearing Goldman Sachs has reduced their price tgt on Nokia (NYSE:NOK) to EUR18.50 from EUR20.
Notablecalls: Not actionable but good to know category.
- Citigroup notes that while they are currently modeling below-guidance revenues for Intel (NASDAQ:INTC)'s 3Q06 (with the SIA data as evidence), they acknowledge that now that the quarter has closed, the likelihood of a negative pre-announcement from Intel is decreased.
Notablecalls: Not actionable but good to know category.
- Citigroup notes that while they are currently modeling below-guidance revenues for Intel (NASDAQ:INTC)'s 3Q06 (with the SIA data as evidence), they acknowledge that now that the quarter has closed, the likelihood of a negative pre-announcement from Intel is decreased.
The SIA's data for microprocessors shows revenues through May indicate the first 2/3's of the quarter are down 20.4% from the first 2/3's of 1Q06. In order for Intel and AMD to collectively meet their guidance, MPU sales would need to rise 7.9% June/March. Firm notes that the r-squared between Intel/AMD results and the SIA data is >80%, indicating >90% correlation.
However, examining Intel's history, they find no instances of negative pre-announcements post the quarter close. Granted, Intel has always provided mid-quarter updates wherein guidance has been revised. Even so, for instances where Intel pre-announced (even when holding a mid-quarter update), such announcements always fell before quarter-end.
Believes investors should be braced for negative news whether Intel pre-announces or not. They recognize, however, that Apple has been strong for Intel and may be contributing to Intel achieving their guidance. Despite the concerns, they believe much negative news is factored into Intel's shares. Firm reminds investors that Intel appears poised to regain lost share and improve its quarterly ROIC. Continues to have a positive longer-term view and would use any near-term pullback as a buying opportunity.
Notablecalls: Not actionable but good to know category.
- James Gilman of Soleil's Cross Research is out with an interesting note on Red Hat (NASDAQ:RHAT) noting that according to recent reports on industry news sites, Firestar Software, a small privately held company in Boxborough, MA, recently filed a patent lawsuit against Red Hat. The lawsuit claims that JBoss' Hibernate 3.0 infringes on Firestar's patent to interface an object oriented software application with a relational database. The firm does not know the strength of the case against Red Hat. However, until the lawsuit is either dismissed or settled, they think there will be some degree of uncertainty surrounding the stock. Believes this uncertainty may put further downward pressure on the stock, which has traded down 6.4% versus up 2.9% for NASDAQ since June 28 when Red Hat reported disappointing F2Q07 guidance related to JBoss. Reiterates Hold.
Notablecalls: Not actionable but good to know category.
- JP Morgan is yet again out cautious on Chattem (NASDAQ:CHTT) noting that previously, on June 5, they lowered their EPS and revenue forecasts well below consensus given Chattem's two key new products, Icy Hot Pro-Therapy and Selsun Salon, were off to a much weaker than expected start based on AC Nielsen scanner data and our retailer contacts.
In the most recent AC Nielsen scanner data for the four-week period ended June 17, results for these two new products actually worsened. Pro Therapy and Selsun Salon each decelerated substantially from the prior period, by 16.3%, and 22.6% respectively. If these brands do not rebound, the firm thinks there is more risk to below consensus EPS and revenue forecasts, but they are leaving their numbers unchanged at this point and expect more clarity with Q2 EPS on July 10.
Maintains Neutral rating due to valuation.
Notablecalls: While I'm not entirely sure the call is actionable, CHTT is one to watch in case it breaks recent lows.
However, examining Intel's history, they find no instances of negative pre-announcements post the quarter close. Granted, Intel has always provided mid-quarter updates wherein guidance has been revised. Even so, for instances where Intel pre-announced (even when holding a mid-quarter update), such announcements always fell before quarter-end.
Believes investors should be braced for negative news whether Intel pre-announces or not. They recognize, however, that Apple has been strong for Intel and may be contributing to Intel achieving their guidance. Despite the concerns, they believe much negative news is factored into Intel's shares. Firm reminds investors that Intel appears poised to regain lost share and improve its quarterly ROIC. Continues to have a positive longer-term view and would use any near-term pullback as a buying opportunity.
Notablecalls: Not actionable but good to know category.
- James Gilman of Soleil's Cross Research is out with an interesting note on Red Hat (NASDAQ:RHAT) noting that according to recent reports on industry news sites, Firestar Software, a small privately held company in Boxborough, MA, recently filed a patent lawsuit against Red Hat. The lawsuit claims that JBoss' Hibernate 3.0 infringes on Firestar's patent to interface an object oriented software application with a relational database. The firm does not know the strength of the case against Red Hat. However, until the lawsuit is either dismissed or settled, they think there will be some degree of uncertainty surrounding the stock. Believes this uncertainty may put further downward pressure on the stock, which has traded down 6.4% versus up 2.9% for NASDAQ since June 28 when Red Hat reported disappointing F2Q07 guidance related to JBoss. Reiterates Hold.
Notablecalls: Not actionable but good to know category.
- JP Morgan is yet again out cautious on Chattem (NASDAQ:CHTT) noting that previously, on June 5, they lowered their EPS and revenue forecasts well below consensus given Chattem's two key new products, Icy Hot Pro-Therapy and Selsun Salon, were off to a much weaker than expected start based on AC Nielsen scanner data and our retailer contacts.
In the most recent AC Nielsen scanner data for the four-week period ended June 17, results for these two new products actually worsened. Pro Therapy and Selsun Salon each decelerated substantially from the prior period, by 16.3%, and 22.6% respectively. If these brands do not rebound, the firm thinks there is more risk to below consensus EPS and revenue forecasts, but they are leaving their numbers unchanged at this point and expect more clarity with Q2 EPS on July 10.
Maintains Neutral rating due to valuation.
Notablecalls: While I'm not entirely sure the call is actionable, CHTT is one to watch in case it breaks recent lows.
Notablecalls - paperstand
The Wall Street Journal discusses General Motors (GM) and Nissan-Renault alliance, saying that the pact wouldn’t be easy, as past auto pacts show. Article highlights past failured alliances: GM-Fiat, Daimler-Benz-Chrysler and BMW-British Motor Cars.
Notablecalls: On the other hand, Carlos Ghosn has shown that he can run two auto co's at a time. Has he got any magic left for GM?
The NY Post believes that M&A deals could be mkt drivers in 2H06. Some $919bn worth of M&As were announced globally in the 2Q, the busiest deal-making qrtr in more than 6 years. If the pace of the 1H, a total of $1.8 trln in deals, is repeated in the 2H, this would be a record year for M&As. Many bankers aim to use a calmer rate enviornment as an opportunity to make hay while the sun shines. "Ppl are trying extra hard to get deals done before something bad happens," said Deutsche Bank Vice Chmn Rich Thaler.
Notablecalls: On the other hand, Carlos Ghosn has shown that he can run two auto co's at a time. Has he got any magic left for GM?
The NY Post believes that M&A deals could be mkt drivers in 2H06. Some $919bn worth of M&As were announced globally in the 2Q, the busiest deal-making qrtr in more than 6 years. If the pace of the 1H, a total of $1.8 trln in deals, is repeated in the 2H, this would be a record year for M&As. Many bankers aim to use a calmer rate enviornment as an opportunity to make hay while the sun shines. "Ppl are trying extra hard to get deals done before something bad happens," said Deutsche Bank Vice Chmn Rich Thaler.
Sunday, July 02, 2006
Notablecalls - paperstand - Barron's
Barron’s cover story discusses Citigroup (C), saying that the co has put regulatory problems behind it and is beginning to execute on the growth strategy. The stock trades at cheap valuation, just 10.4x ’07 earnings. Citi fans carry stock-price tgts $60+.
Barron’s discusses favorably Newmont Mining (NEM), saying that as the co’s fortunes improve, its stock price should follow suit. The shares could easily be fetching $75-80 in 12-18 mo’s.
As pricing improves throughout the DRAM mkt, stocks of some manufacturers could climb by 30-50%. Infineon (IFX) and Micron (MU) both look poised for big gains.
“The Trader” column highlights Services Acquisition (SVI) that is acquiring the Jamba Juice smoothie chain. The co tgts fast growth and CEO believes that they are also able to boost margins in a few years. According to the article, it's noteworthy that some of the venture-capital investors who sold Jamba to SVI rolled their after-tax profits into SVI shares.
Barron’s discusses favorably Newmont Mining (NEM), saying that as the co’s fortunes improve, its stock price should follow suit. The shares could easily be fetching $75-80 in 12-18 mo’s.
As pricing improves throughout the DRAM mkt, stocks of some manufacturers could climb by 30-50%. Infineon (IFX) and Micron (MU) both look poised for big gains.
“The Trader” column highlights Services Acquisition (SVI) that is acquiring the Jamba Juice smoothie chain. The co tgts fast growth and CEO believes that they are also able to boost margins in a few years. According to the article, it's noteworthy that some of the venture-capital investors who sold Jamba to SVI rolled their after-tax profits into SVI shares.
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