Notable Calls
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Thursday, August 31, 2006
Calls of Note Part 4
- Ryan Beck & Co comments on Analogic Corp (NASDAQ:ALOG) saying that since the ban on carrying liquids aboard aircraft was put into effect, the Transportation Security Administration (TSA) has observed a 20% increase in the number of checked bags on flights originating in the United States. Separately, the test of the ALOG's COBRA scanner for carry-on bags has been extended.
Opportunities for ALOG are increasing, in ´firm's view, as some bottlenecks have been noted at domestic airports due to the increased volume of checked bags. They think this puts pressure on TSA to accelerate the already planned upgrade of systems currently installed as well as to acquire additional systems to improve the ability to detect explosives and increase screening speed. Furthermore, new technology like ALOG's COBRA could enable rapid screening of carry-on bags and certification could result in TSA purchases of the device earlier than they anticipate in our financial forecasts.
ALOG shares (which reflect $18.50+ of cash per share) are currently valued at an EV/F07E EBITDA multiple of about 8.5x.
Notablecalls: Not actionable but good to know category.
Opportunities for ALOG are increasing, in ´firm's view, as some bottlenecks have been noted at domestic airports due to the increased volume of checked bags. They think this puts pressure on TSA to accelerate the already planned upgrade of systems currently installed as well as to acquire additional systems to improve the ability to detect explosives and increase screening speed. Furthermore, new technology like ALOG's COBRA could enable rapid screening of carry-on bags and certification could result in TSA purchases of the device earlier than they anticipate in our financial forecasts.
ALOG shares (which reflect $18.50+ of cash per share) are currently valued at an EV/F07E EBITDA multiple of about 8.5x.
Notablecalls: Not actionable but good to know category.
Calls of Note Part 3
- Banc of America note their significantly revised estimates for Career Education Corporation (NASDAQ:CECO) are built on the company's revised reporting of its five college divisions. Each of those divisions is in a fluid state right now as can be seen in the significant changes in growth and profitability. Thus, firm's outlook for each of these fluid segments is based on myriad assumptions regarding several equally fluid operating metrics -- starts, population, student earning rate and profitability. As a consequence, they have limited confidence in their below Consensus estimates. Of course, they have greater doubt that the Consensus outlook will be achieved as it embeds a more optimistic outlook for some combination of the college divisions.
The analyst notes that if forced to distill firm's outlook into one sound byte, it would be - operating stability (population and profitability) is achieved within the next twelve months with no signs of material growth thereafter. That somewhat sanguine outlook may be sufficient to entice patient, value-oriented investors to invest in CECO. Yet, they reiterate rating of Neutral as not only is operating uncertainty significant, but regulatory clouds should continue to loom large for at least twelve more months. Maintains $21 tgt.
Notablecalls: BofA has been bearish on the education names for quite a while and must say they have been right. I'm not sure the call is actionable but it will put a cap on any bounce CECO is trying to put together here.
The analyst notes that if forced to distill firm's outlook into one sound byte, it would be - operating stability (population and profitability) is achieved within the next twelve months with no signs of material growth thereafter. That somewhat sanguine outlook may be sufficient to entice patient, value-oriented investors to invest in CECO. Yet, they reiterate rating of Neutral as not only is operating uncertainty significant, but regulatory clouds should continue to loom large for at least twelve more months. Maintains $21 tgt.
Notablecalls: BofA has been bearish on the education names for quite a while and must say they have been right. I'm not sure the call is actionable but it will put a cap on any bounce CECO is trying to put together here.
Calls of Note Part 2
- Stifel Nicolaus & Co visited with the senior management of Foster Wheeler (NASDAQ:FWLT) August 29 at their Clinton, New Jersey base of operations.
According to the firm, CEO Ray Milchovich, age 56, and CFO John LaDuc, age 63, are fighters, having worked for firms that experienced a combination of labor, competitive or cyclical troubles. Firm sought an understanding of how they would steer a business in a period of prosperity.
CEO Ray Milchovich, was the CEO of a Wisconsin steelmaker at age 29, and then CEO of Kaiser Aluminum, both of which ran into a combination of labor, competitive or cyclical troubles. As a result, the firm thinks he understands how to manage a business through adversity, and believes he has done a great job of turning FWLT around the past few years.
CFO John LaDuc, age 63, who was also at Kaiser before FWLT, seems a tough, devil-in-the-details type of financial chief, focused on cash flow, which is a change from FWLT's prior financial management.
Cash in excess of debt at 2Q06 was $138 million and the net asbestos liability was $79 million, down from $196 million in 2005. For almost 75 years, FWLT has seen its EBIT ROIC rise 50+% above WACC every 35 years, and the last such cycle began in the early 1970s.
Guidance is absent, but management expressed confidence about the backlog and margin. 2Q06 backlog and long-term historical burn rates suggest 3Q06- 2Q07 theoretical revenues of $4.15 billion (83% burn), up 63% y/y, versus firm's estimate of $3.45 billion, up 36% y/y, which may prove low.
All else being equal, if E&C segment margins stay at 15.5% through 2007, firm's 2006 EPS estimate would be $2.44 instead of $1.90, and 2007 would be $4.14 instead of $2.95. They're leaving estimates unchanged, because margins are high versus history, though not unusually so for strong commodity price eras.
Eestimates FWLT could have an EBIT ROIC of 20% to 40% for the 2006 to 2008 period, consistent with other high-quality E&C firms. At the low end of the industry P/E of 20x-25x 2007E, the firm derives a target price in one year of $63, unchanged from prior views, and rates FWLT Buy.
Notablecalls: This note may create some buying interest in FWLT in the coming days.
According to the firm, CEO Ray Milchovich, age 56, and CFO John LaDuc, age 63, are fighters, having worked for firms that experienced a combination of labor, competitive or cyclical troubles. Firm sought an understanding of how they would steer a business in a period of prosperity.
CEO Ray Milchovich, was the CEO of a Wisconsin steelmaker at age 29, and then CEO of Kaiser Aluminum, both of which ran into a combination of labor, competitive or cyclical troubles. As a result, the firm thinks he understands how to manage a business through adversity, and believes he has done a great job of turning FWLT around the past few years.
CFO John LaDuc, age 63, who was also at Kaiser before FWLT, seems a tough, devil-in-the-details type of financial chief, focused on cash flow, which is a change from FWLT's prior financial management.
Cash in excess of debt at 2Q06 was $138 million and the net asbestos liability was $79 million, down from $196 million in 2005. For almost 75 years, FWLT has seen its EBIT ROIC rise 50+% above WACC every 35 years, and the last such cycle began in the early 1970s.
Guidance is absent, but management expressed confidence about the backlog and margin. 2Q06 backlog and long-term historical burn rates suggest 3Q06- 2Q07 theoretical revenues of $4.15 billion (83% burn), up 63% y/y, versus firm's estimate of $3.45 billion, up 36% y/y, which may prove low.
All else being equal, if E&C segment margins stay at 15.5% through 2007, firm's 2006 EPS estimate would be $2.44 instead of $1.90, and 2007 would be $4.14 instead of $2.95. They're leaving estimates unchanged, because margins are high versus history, though not unusually so for strong commodity price eras.
Eestimates FWLT could have an EBIT ROIC of 20% to 40% for the 2006 to 2008 period, consistent with other high-quality E&C firms. At the low end of the industry P/E of 20x-25x 2007E, the firm derives a target price in one year of $63, unchanged from prior views, and rates FWLT Buy.
Notablecalls: This note may create some buying interest in FWLT in the coming days.
Calls of Note Part 1
- I suspect the call of the day comes from Morgan Stanley saying their scenario analysis indicates a favorable risk-reward profile for Momenta Pharma (NASDAQ:MNTA) going into the remanded Teva/Amphastar vs. Sanofi-Aventis case (scheduled for October 10th; decides whether Lovenox patents are upheld). If the court upholds the previous decision of inequitable conduct (decisions could come within weeks), there is potential for significant upside as a meaningful hurdle towards M-enoxaparin approval is overcome. In contrast, the firm believes the downside is limited due to widely held street expectations of a full trial, which pushes the timelines for a final legal decision back by 12-18 months.
In this scenario analysis, the firm looked at the two outcomes of the remand decision.
Scenario 1) Bear Case: Judge Pfaelzer rules in favor of Sanofi-Aventis, leading to a full trial. In this scenario, the calculated Lovenox value is approximately equal to the implied Lovenox value. In firm's opinion, this is the scenario that is currently priced into the stock.
2) Bull Case: Judge Pfaelzer finds inequitable conduct and rules in favor of Teva/Amphastar. This scenario could result in 50% upside.
They note that the there is a potential that the street may move closer to assigning a 50/50 probability to the potential outcome as we get closer to the October date. If this occurs, the stock could see up to 25% upside before the trial starts.
Notablecalls: Actionable call! This one will move already in the pre mkt. I suggest you buy as much stock as you can. See no problem paying upto $0.50-0.60 above the close.
In this scenario analysis, the firm looked at the two outcomes of the remand decision.
Scenario 1) Bear Case: Judge Pfaelzer rules in favor of Sanofi-Aventis, leading to a full trial. In this scenario, the calculated Lovenox value is approximately equal to the implied Lovenox value. In firm's opinion, this is the scenario that is currently priced into the stock.
2) Bull Case: Judge Pfaelzer finds inequitable conduct and rules in favor of Teva/Amphastar. This scenario could result in 50% upside.
They note that the there is a potential that the street may move closer to assigning a 50/50 probability to the potential outcome as we get closer to the October date. If this occurs, the stock could see up to 25% upside before the trial starts.
Notablecalls: Actionable call! This one will move already in the pre mkt. I suggest you buy as much stock as you can. See no problem paying upto $0.50-0.60 above the close.
Paperstand
The WSJ's "Heard on the Street" column discusses IAC/InterActive (IACI), saying that over the past decade, CEO Barry Diller has done some 100 deals valued at $20bn to create IAC, a hodgepodge of Web co's. But as shares of other Internet co's have soared, Wall St. has had a weak stomach for IAC. Now some investors feel that IAC is finally getting it right as it refocuses on Internet searches and other businesses that depend on Web-ad sales. Until recently, IAC's Internet businesses relied mostly on transactions, particularly those in the travel business. Last summer, IAC spun off its travel arm, Expedia, and at about the same time spent $1.7bn to acquire Ask Jeeves. IAC has made Ask the centerpiece of its Internet strategy. Mr. Diller readily admits that he is changing his Internet strategy as he goes along. "God knows we have plenty of money with which to screw up," he says, referring to IAC's $1.1bn in available cash. If Mr. Diller's bet is successful, IAC's shares would be an attractive buy. They have been bouncing around in the $24-30 range for about 2 years. The mkt cap is now $9.5bn. The P/E ratio is 16.7x projected '07 earnings, excluding option expenses. Google's (GOOG) ratio is 30.7 and Yahoo's (YHOO) is 35.8.
Barron's Online highlights Cooper Companies (COO), whose stock is down 42% since hitting a record high in Mar'05, the stock has sharply lagged the S&P 500 index amid falling profits, lost mkt share and dimming financial forecasts. Cooper has faced challenges absorbing the contact-lens maker Ocular Sciences, which Cooper purchased last year for $1.2bn. And Cooper has been slow to launch a new type of extended-wear contact lens rapidly cornering the mkt. Yet with P/E multiples bouncing off 3-year lows and new types of contact lenses expected to resuscitate falling profits next year, Cooper offers value investors an eye-catching opportunity. "The stock is at an inflection point," says J.C. Davies, manager of Rochdale Darwin Portfolio. "Expectations are low and so are multiples. But there is a lot of potential for upside opportunities with the launch of these new contact lenses." Or as Lawrence Keusch, an analyst at Goldman Sachs, puts it, "This is a good value turnaround story."
According to the "Inside Scoop" section, Warburg Pincus may have heard a little voice in its head telling the private-equity firm to buy more shares of Nuance Comm. (NUAN). Never mind the facts that shares of theco are far off their highs, that Warburg is already the co's largest shareholder, and that Nuance insiders are selling. However, this month was the first time Warburg ventured into the open mkt to buy Nuance shares. The bulk of Warburg's holdings were acquired through a series of private-financing transactions. Noting Warburg's reputation in the private-equity world, Jonathan Moreland, director of research at InsiderInsights.com, says: "I think it is a bullish sign that Warburg was not quick to cash out their gains" earlier this year. "These guys are obviously long-term owners and now when the stock is down, far from panicking they are loading up again," adds Moreland, though he would question why Nuance execs have not followed suit.
Barron's Online highlights Cooper Companies (COO), whose stock is down 42% since hitting a record high in Mar'05, the stock has sharply lagged the S&P 500 index amid falling profits, lost mkt share and dimming financial forecasts. Cooper has faced challenges absorbing the contact-lens maker Ocular Sciences, which Cooper purchased last year for $1.2bn. And Cooper has been slow to launch a new type of extended-wear contact lens rapidly cornering the mkt. Yet with P/E multiples bouncing off 3-year lows and new types of contact lenses expected to resuscitate falling profits next year, Cooper offers value investors an eye-catching opportunity. "The stock is at an inflection point," says J.C. Davies, manager of Rochdale Darwin Portfolio. "Expectations are low and so are multiples. But there is a lot of potential for upside opportunities with the launch of these new contact lenses." Or as Lawrence Keusch, an analyst at Goldman Sachs, puts it, "This is a good value turnaround story."
According to the "Inside Scoop" section, Warburg Pincus may have heard a little voice in its head telling the private-equity firm to buy more shares of Nuance Comm. (NUAN). Never mind the facts that shares of theco are far off their highs, that Warburg is already the co's largest shareholder, and that Nuance insiders are selling. However, this month was the first time Warburg ventured into the open mkt to buy Nuance shares. The bulk of Warburg's holdings were acquired through a series of private-financing transactions. Noting Warburg's reputation in the private-equity world, Jonathan Moreland, director of research at InsiderInsights.com, says: "I think it is a bullish sign that Warburg was not quick to cash out their gains" earlier this year. "These guys are obviously long-term owners and now when the stock is down, far from panicking they are loading up again," adds Moreland, though he would question why Nuance execs have not followed suit.
Wednesday, August 30, 2006
Paperstand
Barron's Online discusses Eaton Vance (EV), saying that the co's execs can stand on mountaintops to brag about the performance of their mutual funds. But investors have kept the stock in the valley below. Over the past year, Eaton Vance stock only inched up 4%, while a Thomson Financial index of asset managers gained 16% in the same period. Yet the co has an expanding palette of funds, separately managed accounts, and institutional relationships. It also has an enviable debt-free balance sheet for possible acquisitions. In its Q3 ended in July, a period when the S&P's 500 index sank nearly 3%, Eaton Vance increased its assets under mgmt by 14% to $120bn. The industry boosted assets by roughly 10% in the same period compared to a year ago. That's why Eaton Vance could surprise investors with earnings growth and stock price appreciation in the coming months, even if the stock mkt cools. With shares trading at a slight discount to competitor Nuveen Investments, and a possible dividend hike this fall, the shares look attractive. "If [Eaton Vance] can continue to generate 10% organic growth [in assets], the stock will continue to be revalued up, and earnings will continue to surprise despite mkt action," says Ryan Caldwell, of Waddell & Reed.
"Inside Scoop" section reports that 3 longtime Medtronic (MDT) directors purchased shares of the medical-devices maker, which has been giving investors heart palpitations amid concern over the health of the defibrillator mkt. 5 days ago, Jack Schuler, Michael Bonsignore and William Brody collectively spent $1.34m to buy 29K shares in the first open-mkt purchases by Medtronic insiders in over 2 years. With the stock hammered, Ben Silverman, director of research at InsiderScore.com, says "the directors' buying is a nice show of confidence." "It's a good long-term signal," he adds. "When you look at buying like this with 2 years of guidance, these [directors] feel very comfortable with the guidance and position as to where the co is going."
The NY Times reprots that Altria (MO) board will meet today to discuss Kraft Foods (KFT) spinoff. Wall St. analysts who follow Altria say they expect the co, which has been planning an overhaul since '04, to take its time in making a final decision on the timing of what would be one of the largest tax-free corporate spinoffs. "This board is highly conservative and they will exercise caution in every way you can imagine," said Christine Farkas, of Merill Lunch. One possible concern for Altria’s board is the risk that tobacco plaintiffs’ lawyers may try to get an injunction blocking a spinoff of Kraft, arguing that a disposition of the food company’s assets would represent a "fraudulent conveyance." Altria is expected to spin off its 88% stake in Kraft by giving its shareholders 1.46bn Kraft shares; stockholders would receive 0.70 share of Kraft for each share of Altria that they own.
The NY Post reprots that another large investor in Bally Total Fitness (BFT) has been granted access to the co's confidential financial information, fueling further speculation that the nation's largest health club chain could get a last-minute cash infusion before it tumbles into bankruptcy. Liberation Investment Group, which owns 11.2% of Bally, said it had executed a confidentiality agreement with the ailing health club and was interested in arranging "an extraordinary corporate transaction" such as an acquisition, sale of the co, reorganization or recapitalization. Pardus Capital Mgmt, Bally's largest shareholder with a 14.8% stake, last week entered into a similar confidentiality agreement with the co.
"Inside Scoop" section reports that 3 longtime Medtronic (MDT) directors purchased shares of the medical-devices maker, which has been giving investors heart palpitations amid concern over the health of the defibrillator mkt. 5 days ago, Jack Schuler, Michael Bonsignore and William Brody collectively spent $1.34m to buy 29K shares in the first open-mkt purchases by Medtronic insiders in over 2 years. With the stock hammered, Ben Silverman, director of research at InsiderScore.com, says "the directors' buying is a nice show of confidence." "It's a good long-term signal," he adds. "When you look at buying like this with 2 years of guidance, these [directors] feel very comfortable with the guidance and position as to where the co is going."
The NY Times reprots that Altria (MO) board will meet today to discuss Kraft Foods (KFT) spinoff. Wall St. analysts who follow Altria say they expect the co, which has been planning an overhaul since '04, to take its time in making a final decision on the timing of what would be one of the largest tax-free corporate spinoffs. "This board is highly conservative and they will exercise caution in every way you can imagine," said Christine Farkas, of Merill Lunch. One possible concern for Altria’s board is the risk that tobacco plaintiffs’ lawyers may try to get an injunction blocking a spinoff of Kraft, arguing that a disposition of the food company’s assets would represent a "fraudulent conveyance." Altria is expected to spin off its 88% stake in Kraft by giving its shareholders 1.46bn Kraft shares; stockholders would receive 0.70 share of Kraft for each share of Altria that they own.
The NY Post reprots that another large investor in Bally Total Fitness (BFT) has been granted access to the co's confidential financial information, fueling further speculation that the nation's largest health club chain could get a last-minute cash infusion before it tumbles into bankruptcy. Liberation Investment Group, which owns 11.2% of Bally, said it had executed a confidentiality agreement with the ailing health club and was interested in arranging "an extraordinary corporate transaction" such as an acquisition, sale of the co, reorganization or recapitalization. Pardus Capital Mgmt, Bally's largest shareholder with a 14.8% stake, last week entered into a similar confidentiality agreement with the co.
Tuesday, August 29, 2006
Comment: Aventine Renewable Energy (NYSE:AVR)
I mentioned Aventine Renewable Energy (NYSE:AVR) on August 25 in connection with Friedman, Billings, Ramsey's positive note (link). I suspected the shares may have some additional downside in them and unfortunately for the shareholders AVR took another 2 pt hit the following day. The shares rebounded nicely and are showing some signs of bottoming.
Soleil Securities Group's Ian Horowitz downgraded his rating on AVR to Hold from Buy on August 28 saying that although they have raised their EPS estimates for AVR significantly since their recent quarter and subsequent discussions with management, they are lowering their tgt to $25 from $45.
Fim notes that management has a stated visible path toward expansion and has the locations and EPC firms as well as the technology provider to allow expansion from the current 140mmgy of owned capacity to 606.5mmgy, and are looking to build out the company's capacity to 1bgy and increase marketing to 1bgy by 2010 (for a total of 2bgy owned and represented capacity). Although these are visible production possibilities, the company does not have the balance sheet to follow through on this expansion plan beyond the pre-funded 56.5mmgy dry mill at Pekin. Management has yet to determine the appropriate avenue for funding their expansion goals
As of this morning (Monday, August 28) over 21mln shares that were purchased in a pre-IPO round in December at $12, are available for sale, providing selling shareholders with an approximate 100% return based on Friday's closing price. Firm notes we could see extended selling pressure on the name as these shareholders look to book profits.
Briefing.com is taking a look at AVR today:
AVR Aventine Renewable Energy -- Taking a Look
Ethanol stocks have been weak lately on lower oil prices so we thought we'd take a look at the sector to see if there were any names at attractive valuations. Aventine Renewable Energy is a recent IPO that has been struggling since its debut. There was a lot of buzz about this ethanol producer just two months ago. It priced on Jun 29 at at $43, at the high end of the expected $40-43 range. It opened for trading at $41.75 that day and has been in a steep decline ever since. The co is aggressively building up its capacity. It currently has capacity for 150 mln gallons, and its marketing alliance partners have capacity of 520 mln gallons, for a total current capacity of 670 mln gallons. The co is constructing a 56.5 mln gallon dry mill at its Pekin, IL facility and the co has announced additional projects with capacities totaling 550 mln gallons. AVR is profitable and looks attractive on a valuation basis. The co is expected to earn $2.04 this yr and and $2.44 next yr for attractive p/e's of 12.1x and 10.1x. Also, 1H06 revenue rose 95% yr/yr to $756.4 mln... It's worth noting that in Soleil's downgrade of the stock yesterday that over 21 mln shares that were purchased in a pre-IPO round in Dec in the low teens are now available for sale. As such, there could be some near term weakness, but the stock has shown some resiliency the past couple of days. It's a name to keep on the radar if crude oil prices remain high. Mkt cap $1.0 bln, avg vol 475k.
Notablecalls: One to keep on the radar! Notice the co is indeed profitable!
Soleil Securities Group's Ian Horowitz downgraded his rating on AVR to Hold from Buy on August 28 saying that although they have raised their EPS estimates for AVR significantly since their recent quarter and subsequent discussions with management, they are lowering their tgt to $25 from $45.
Fim notes that management has a stated visible path toward expansion and has the locations and EPC firms as well as the technology provider to allow expansion from the current 140mmgy of owned capacity to 606.5mmgy, and are looking to build out the company's capacity to 1bgy and increase marketing to 1bgy by 2010 (for a total of 2bgy owned and represented capacity). Although these are visible production possibilities, the company does not have the balance sheet to follow through on this expansion plan beyond the pre-funded 56.5mmgy dry mill at Pekin. Management has yet to determine the appropriate avenue for funding their expansion goals
As of this morning (Monday, August 28) over 21mln shares that were purchased in a pre-IPO round in December at $12, are available for sale, providing selling shareholders with an approximate 100% return based on Friday's closing price. Firm notes we could see extended selling pressure on the name as these shareholders look to book profits.
Briefing.com is taking a look at AVR today:
AVR Aventine Renewable Energy -- Taking a Look
Ethanol stocks have been weak lately on lower oil prices so we thought we'd take a look at the sector to see if there were any names at attractive valuations. Aventine Renewable Energy is a recent IPO that has been struggling since its debut. There was a lot of buzz about this ethanol producer just two months ago. It priced on Jun 29 at at $43, at the high end of the expected $40-43 range. It opened for trading at $41.75 that day and has been in a steep decline ever since. The co is aggressively building up its capacity. It currently has capacity for 150 mln gallons, and its marketing alliance partners have capacity of 520 mln gallons, for a total current capacity of 670 mln gallons. The co is constructing a 56.5 mln gallon dry mill at its Pekin, IL facility and the co has announced additional projects with capacities totaling 550 mln gallons. AVR is profitable and looks attractive on a valuation basis. The co is expected to earn $2.04 this yr and and $2.44 next yr for attractive p/e's of 12.1x and 10.1x. Also, 1H06 revenue rose 95% yr/yr to $756.4 mln... It's worth noting that in Soleil's downgrade of the stock yesterday that over 21 mln shares that were purchased in a pre-IPO round in Dec in the low teens are now available for sale. As such, there could be some near term weakness, but the stock has shown some resiliency the past couple of days. It's a name to keep on the radar if crude oil prices remain high. Mkt cap $1.0 bln, avg vol 475k.
Notablecalls: One to keep on the radar! Notice the co is indeed profitable!
Attention!
NC will be on vacation on Wednesday and will resume posting somewhat later than usual Thursday morning.
Calls of Note Part 5
- Goldman Sachs is adding Reliance Steel (NYSE:RS) to the Americas Investment Buy List in the context of firm's Attractive coverage view. They believe that the recent 40% decline in the share price as of early May has created an excellent buying opportunity in this best in class service center. Firm estimates an upside potential of around 60% compared to 12-month target price estimate of $48 (raised from $44). They believe the market does not fully appreciate Reliance Steel's earnings potential post the Jorgensen acquisition. In addition, they are also raising estimates to account for the recent acquisition of Yarde Metals and a richer product mix. Expects further upside due to its diversified product mix, wide geographic footprint, and strong demand from its three key end markets: non-residential construction, aerospace, and energy.
Firm believe the stock has been hurt by the seasonal slow down and volatility in the overall market, particularly in the steel sector. However, as the company delivers potentially strong results over the next couple of quarters, they expect the stock to react positively. Prices for most of Reliance products remain strong, and demand from its key markets remain exceptionally healthy.
Notablecalls: This one will move on the call. Would not chase but this one could do a full point.
Firm believe the stock has been hurt by the seasonal slow down and volatility in the overall market, particularly in the steel sector. However, as the company delivers potentially strong results over the next couple of quarters, they expect the stock to react positively. Prices for most of Reliance products remain strong, and demand from its key markets remain exceptionally healthy.
Notablecalls: This one will move on the call. Would not chase but this one could do a full point.
Calls of Note Part 4
- Piper Jaffray is out with an interesting note saying they believe online backup will be the next major trend in consumer PC security. They believe the focus on the McAfee (NYSE:MFE) and Symantec (NASDAQ:SYMC) stories will shift to online backup in 2007. Data backup is a growing concern for consumers. Only ~4% of PC users currently use backup on regularly basis.
Sensitivity to model: SYMC - Online backup could increase Symantec's 2007 revenue by 5%, and increase EPS 7%. In FY08, the impact could be +12% on revenue and +14% on EPS.
Firm believes data backup is a growing concern for consumers. In August, Apple Computer estimated that only 25% of consumers have backed up their computers at least one time, and 4% of consumers back up on a scheduled basis. Bottom line is backup has become increasingly
important over the last five years as consumers have been stockpiling photos and digital music onto their home computers. To put this trend in perspective, digital camera sales have grown 28% over the past five years (source: PMA & IDC), and portable music players have grown 110% over the same period (source: NPD).
Believes AOL will be first to market. Today AOL offers backup to CD/DVD or external drive. Expect an online offering from its partnership with FarStone Technology late in 2006. Symantec will be second to market. Symantec plans to release Norton 360 security suite sometime between late in 2006 and the end of March '07. Given the firm has not seen the Norton 360 beta, which was to be released by the end of the summer, they expect Norton 360 will be available in March of '07. Believes McAfee will be third to market. Today, McAfee offers backup to CD/DVD or external drive.
Anticipated Pricing. While the above companies have not announced the amount of storage and pricing, the average pricing for 10GB from current players (AT&T, Carbonite.com, and GoDaddy.com) is an outrageous $179 per year. Firm believes 10GB is minimal amount of storage to generate meaningful consumer interest. When the security companies go live with online backup, they expect the pricing will be similar to Carbonite.com pricing, perhaps $50-$100 per year.
Notablecalls: Interesting note. One for the investor types.
Sensitivity to model: SYMC - Online backup could increase Symantec's 2007 revenue by 5%, and increase EPS 7%. In FY08, the impact could be +12% on revenue and +14% on EPS.
Firm believes data backup is a growing concern for consumers. In August, Apple Computer estimated that only 25% of consumers have backed up their computers at least one time, and 4% of consumers back up on a scheduled basis. Bottom line is backup has become increasingly
important over the last five years as consumers have been stockpiling photos and digital music onto their home computers. To put this trend in perspective, digital camera sales have grown 28% over the past five years (source: PMA & IDC), and portable music players have grown 110% over the same period (source: NPD).
Believes AOL will be first to market. Today AOL offers backup to CD/DVD or external drive. Expect an online offering from its partnership with FarStone Technology late in 2006. Symantec will be second to market. Symantec plans to release Norton 360 security suite sometime between late in 2006 and the end of March '07. Given the firm has not seen the Norton 360 beta, which was to be released by the end of the summer, they expect Norton 360 will be available in March of '07. Believes McAfee will be third to market. Today, McAfee offers backup to CD/DVD or external drive.
Anticipated Pricing. While the above companies have not announced the amount of storage and pricing, the average pricing for 10GB from current players (AT&T, Carbonite.com, and GoDaddy.com) is an outrageous $179 per year. Firm believes 10GB is minimal amount of storage to generate meaningful consumer interest. When the security companies go live with online backup, they expect the pricing will be similar to Carbonite.com pricing, perhaps $50-$100 per year.
Notablecalls: Interesting note. One for the investor types.
Calls of Note Part 3
- ThinkEquity comments on Amazon.com (NASDAQ:AMZN) after the co announced a board authorization to retire up to $500 million of common stock in the next 24 months, "through open market transactions, privately negotiated transactions or transactions structured through an investment banking institution or a combination of the foregoing." "The company may do so if it believes its shares are undervalued," Amazon's release said. What would constitute "undervalued" is unclear, but firm's analysis suggest that the retirement of $400 million of stock by year end 2007 would have no effect on the value of the shares.
Since the shares currently sell at about 40x this year's EPS of $0.74 (assuming taxes at "normal" rates, rather than the 12%-13% that the company will report under GAAP), and 28x next year's $0.96, the effect on EPS should be almost nothing. That is, for each dollar of shares repurchased, the company would incur/save about $0.03 of after-tax interest expense. Thus, for the current year (at an annual rate), retiring shares would reduce EPS by more in higher interest expense than the reduced shares would raise it. For next year, for which the firm estimates "normally taxed" EPS of $0.96, the effect on EPS would be a rounding error.
In the belief that the growth in the company's "investments" in Technology and Content will slow materially in coming quarters and that those "investments" will begin to produce a return in 2007, they continue to rate the shares ACCUMULATE; 12-month price target remains $33.
Notablecalls: So the $500 mln buyback is just makeup on a bulldog. Big surprise. Not actionable but good to know category.
Since the shares currently sell at about 40x this year's EPS of $0.74 (assuming taxes at "normal" rates, rather than the 12%-13% that the company will report under GAAP), and 28x next year's $0.96, the effect on EPS should be almost nothing. That is, for each dollar of shares repurchased, the company would incur/save about $0.03 of after-tax interest expense. Thus, for the current year (at an annual rate), retiring shares would reduce EPS by more in higher interest expense than the reduced shares would raise it. For next year, for which the firm estimates "normally taxed" EPS of $0.96, the effect on EPS would be a rounding error.
In the belief that the growth in the company's "investments" in Technology and Content will slow materially in coming quarters and that those "investments" will begin to produce a return in 2007, they continue to rate the shares ACCUMULATE; 12-month price target remains $33.
Notablecalls: So the $500 mln buyback is just makeup on a bulldog. Big surprise. Not actionable but good to know category.
Calls of Note Part 2
- Frederick Ziegel from Soleil's Mackinac Research initiates coverage of iPass (NASDAQ:IPAS) with a Buy rating and an $8 target price derived from firm's DCF analysis. The target price also correlates to a 23 multiple applied to firm's 2008 EPS estimate of $0.34 per share, which they believe is ultimately achievable given the uniqueness of the iPass Mobile Office service offering. According to Ziegel, the next 2-3 quarters mark a pivotal period for IPAS as they try to offset declining dial-up Internet access revenues with broadband/ security software/services revenues, eliminate $5 million per quarter of cash operating expenses, shift from usage-based to flat rate pricing which has some interesting (positive) revenue implications, drive more revenues through channel partners and interact with activist shareholders who currently own 14% of the stock. If they execute successfully, they believe iPass can return to mid- teens revenue growth and low-teens operating margins in 2008. Someone is going to unlock the value.
Notablecalls: IPAS has an interesting niche offering and from time to time I have been positive on the co. The stock has gotten hit badly over the last 3-4 months and I believe that at current levels it's worth taking a look at.
Notablecalls: IPAS has an interesting niche offering and from time to time I have been positive on the co. The stock has gotten hit badly over the last 3-4 months and I believe that at current levels it's worth taking a look at.
Calls of Note Part 1
- Bear Stearns comments on Apple Computer (NASDAQ:AAPL) saying we are approaching AAPL's expected product launch season. Firm sees 3 key issues regarding new devices: 1) extending AAPL's technological lead, 2) refreshing/upgrading existing users, and 3) expanding the market (i.e., new users). The real key is continuing the "oh wow" factor that has lead to iPod leadership, i.e., they expect to be surprised/impressed. While the main risk always remains on over-anticipation from investors, continued innovation from Apple should warrant a higher multiple and the firm still views AAPL as a compelling 2H06 play.
Firm sees potential for advances on a number of fronts, but the key for Apple remains continued innovation (new features, capabilities), as they would view mere iPod capacity bumps as disappointing. Firm's expectations for new products include: new iPod shuffles with potential enhancements such as smaller form factor, multiple colors, and a text-based screen, possibly wireless; new iPod nanos with more capacity (4GB/8GB of NAND flash memory), enhanced durability (i.e., more scratch-resistant), multiple colors, and even potential for wireless capabilities; multiple new products that are video-centric, including devices that are handheld-sized (e.g., refresh of 5th-generation iPod), tablet-sized (e.g., a "true " widescreen video iPod), as well as wall-sized for home entertainment (e.g., incorporating iPod technology into an HDTV device to provide a "big iPod " in the living room); video content (in conjunction with new devices), such as an iTunes movie rental service along with deals with major content providers/studios; new Intel-based Mac computers, including new Mac mini with greater media center functionality (e.g., DVR, wireless streaming of video, native iPod dock), new iMac, and a MacBook Pro update with Intel's Core 2 Duo processor (Merom).
Though Apple hasn't sent "teaser " invitations yet for any special event, which it typically sends out a week in advance of the events, the firm expects initial announcements in early September, with more to follow in October, and potentially through Macworld on January 8, 2007.
There are no changes to their EPS ests of $2.16 for FY06, $2.70 for FY07, and $3.15 for FY08. Views the valuation as attractive in front of product catalysts and consumer seasonality. Firm's CY06 target of $88 reflects a P/E of 28x on CY07 oper EPS and adding net cash/sh of ~$12.
Notablecalls: For you Apple fans out there. NOT actionable but good to know category.
Firm sees potential for advances on a number of fronts, but the key for Apple remains continued innovation (new features, capabilities), as they would view mere iPod capacity bumps as disappointing. Firm's expectations for new products include: new iPod shuffles with potential enhancements such as smaller form factor, multiple colors, and a text-based screen, possibly wireless; new iPod nanos with more capacity (4GB/8GB of NAND flash memory), enhanced durability (i.e., more scratch-resistant), multiple colors, and even potential for wireless capabilities; multiple new products that are video-centric, including devices that are handheld-sized (e.g., refresh of 5th-generation iPod), tablet-sized (e.g., a "true " widescreen video iPod), as well as wall-sized for home entertainment (e.g., incorporating iPod technology into an HDTV device to provide a "big iPod " in the living room); video content (in conjunction with new devices), such as an iTunes movie rental service along with deals with major content providers/studios; new Intel-based Mac computers, including new Mac mini with greater media center functionality (e.g., DVR, wireless streaming of video, native iPod dock), new iMac, and a MacBook Pro update with Intel's Core 2 Duo processor (Merom).
Though Apple hasn't sent "teaser " invitations yet for any special event, which it typically sends out a week in advance of the events, the firm expects initial announcements in early September, with more to follow in October, and potentially through Macworld on January 8, 2007.
There are no changes to their EPS ests of $2.16 for FY06, $2.70 for FY07, and $3.15 for FY08. Views the valuation as attractive in front of product catalysts and consumer seasonality. Firm's CY06 target of $88 reflects a P/E of 28x on CY07 oper EPS and adding net cash/sh of ~$12.
Notablecalls: For you Apple fans out there. NOT actionable but good to know category.
Paperstand
According to the WSJ's "Heard on the Street", despite the appearance of turmoil, it may be time to think about buying shares of L-3 Comm. (LLL). Despite the recent corporate shocks, the co looks set to expand faster than its defense counterparts, giving bulls reason to bet that the stock has plenty of room to rise. Always quirky b/c of its eclectic portfolio of defense and homeland-security products and its frenetic acquisition strategy, L-3 has become a highly speculative play. Frank Lanza, the co's Chmn and CEO, died in June 6. The day his death was announced, L-3's stock jumped nearly 5%, on conjecture that the co would become an acquisition tgt. The conventional wisdom was that, deprived of the founder's vision, L-3 would have to be sold intact or parceled off. Mgmt sought to quell such rumors, saying L-3 has enough critical mass and growth potential to go it alone. No sale appears to be in the offing, but that hasn't damped some investors' enthusiasm. "The stock is significantly undervalued right now," says Matthew Halbower, of Deephaven Capital Mgmt, hedge-fund firm with about $3bn in assets that is a significant institutional investor in L-3. "One thing that has kept the stock languishing is the lack of a full-time leader and the perceived lack of strategic direction. We expect that to get resolved in Sep." George Shapiro of Citigroup sees the stock at $93.
Barron's Online reprots that since the beginning od August, the head of Ameristar Casinos (ASCA) has laid down $2.9m for shares of the casino operator. Craig H. Neilsen, CEO and Chmn of Ameristar, purchased 150K shares in three separate purchases. Neilsen's purchase was also his first purchase of Ameristar stock on the open mkt since the co went public in '93. This level of insider ownership, particularly by a CEO, "is always a good thing," says Ben Silverman, director of research at InsiderScore.com. "You can almost look at it as a historically family-owned business."
Barron's Online reprots that since the beginning od August, the head of Ameristar Casinos (ASCA) has laid down $2.9m for shares of the casino operator. Craig H. Neilsen, CEO and Chmn of Ameristar, purchased 150K shares in three separate purchases. Neilsen's purchase was also his first purchase of Ameristar stock on the open mkt since the co went public in '93. This level of insider ownership, particularly by a CEO, "is always a good thing," says Ben Silverman, director of research at InsiderScore.com. "You can almost look at it as a historically family-owned business."
Monday, August 28, 2006
Calls of Note Part 4
Couple of firms have interesting comments on Semis (especially the PC side of things) this AM:
- Friedman, Billings, Ramsey notes that datapoints from their Taiwan Semiconductor Bus Tour are best characterized as mixed, but PC data among the most bullish. Broadly speaking, they still think estimates are at some risk for the group as a whole, and prefer to see estimates come down before buying for 2007. Firm thinks the late July rally was based on hopes of improvement, which based on checks last week, and recent commentary by ADI, NSM, and MRVL, doesn't appear to be materializing. That said, they do expect to be buyers of the group later in the year, once more bad news is out of the way.
PC segment data indicates more optimism following a tough 1H. Bad news in the PC sector may be nearing an end. Firm believes 3Q motherboards are now up 15% - 19% QOQ versus earlier 20% -25% expectations, due to a slow start to the quarter. Business is however expected to improve in September, with initial motherboard forecasts appearing to reflect better than seasonal conditions for 4Q. Notebook units are expected to be up 20% QOQ in 3Q, with inventory burn now complete. Net, these initial datapoints appear to point to stabilizing conditions within the PC sector. As a result, the firm has upgraded ratings on INTC and NVDA, and raised estimates on AMD.
Notablecalls: Not actionable but good to know category.
- Banc of America notes that their latest checks within the PC supply chain suggest that business trends for Intel (NASDAQ:INTC) are tracking to expectations (+8% Q/Q rev growth at the mid-pt). And while still early, given the back-end loaded nature of the Sept. qtr, checks imply that the seasonal build is tracking to expectations, and that Intel's new products are ramping up to plan, with demand in many instances coming in stronger than expected.
Despite recent concerns regarding availability of Intel's latest chipset (Broadwater), checks indicate no evidence of any production issues/shortages. Although demand for Broadwater has been tracking stronger than expected, checks indicate that Intel has been able to ship 2+ million units of Broadwater since introduction in mid-June, which we believe is consistent to slightly ahead of the targeted ramp up of its new Core 2 Duo processors (incl. Conroe). As evidence of the strong demand for Conroe, the firm believes some customers have been willing to look to 'marry' Intel's older chipset (Lakeport) with Conroe in order to meet upside demand.
Checks in retail suggest that Intel will likely start a more prominent ad campaign sometime in Sept, and is likely to spend ~$100m for Core 2 Duo branding and over $100m in co-op marketing to support OEM-driven branding. This should alleviate concerns regarding lack of awareness for Intel's new brand.
Notablecalls: Think that the BofA note may cause some buy interest in the whole PC-related sector. Depending on how high the FBR upgrade on INTC will gap the shares today, I'd possibly be a buyer. Probably not a daytrade.
- Friedman, Billings, Ramsey notes that datapoints from their Taiwan Semiconductor Bus Tour are best characterized as mixed, but PC data among the most bullish. Broadly speaking, they still think estimates are at some risk for the group as a whole, and prefer to see estimates come down before buying for 2007. Firm thinks the late July rally was based on hopes of improvement, which based on checks last week, and recent commentary by ADI, NSM, and MRVL, doesn't appear to be materializing. That said, they do expect to be buyers of the group later in the year, once more bad news is out of the way.
PC segment data indicates more optimism following a tough 1H. Bad news in the PC sector may be nearing an end. Firm believes 3Q motherboards are now up 15% - 19% QOQ versus earlier 20% -25% expectations, due to a slow start to the quarter. Business is however expected to improve in September, with initial motherboard forecasts appearing to reflect better than seasonal conditions for 4Q. Notebook units are expected to be up 20% QOQ in 3Q, with inventory burn now complete. Net, these initial datapoints appear to point to stabilizing conditions within the PC sector. As a result, the firm has upgraded ratings on INTC and NVDA, and raised estimates on AMD.
Notablecalls: Not actionable but good to know category.
- Banc of America notes that their latest checks within the PC supply chain suggest that business trends for Intel (NASDAQ:INTC) are tracking to expectations (+8% Q/Q rev growth at the mid-pt). And while still early, given the back-end loaded nature of the Sept. qtr, checks imply that the seasonal build is tracking to expectations, and that Intel's new products are ramping up to plan, with demand in many instances coming in stronger than expected.
Despite recent concerns regarding availability of Intel's latest chipset (Broadwater), checks indicate no evidence of any production issues/shortages. Although demand for Broadwater has been tracking stronger than expected, checks indicate that Intel has been able to ship 2+ million units of Broadwater since introduction in mid-June, which we believe is consistent to slightly ahead of the targeted ramp up of its new Core 2 Duo processors (incl. Conroe). As evidence of the strong demand for Conroe, the firm believes some customers have been willing to look to 'marry' Intel's older chipset (Lakeport) with Conroe in order to meet upside demand.
Checks in retail suggest that Intel will likely start a more prominent ad campaign sometime in Sept, and is likely to spend ~$100m for Core 2 Duo branding and over $100m in co-op marketing to support OEM-driven branding. This should alleviate concerns regarding lack of awareness for Intel's new brand.
Notablecalls: Think that the BofA note may cause some buy interest in the whole PC-related sector. Depending on how high the FBR upgrade on INTC will gap the shares today, I'd possibly be a buyer. Probably not a daytrade.
Calls of Note Part 3
- ThinkEquity is positive on aQuant (NASDAQ:AQNT) after meeting with co's new CFO, Wayne Wisenhart. Firm expects the investment community to undergo a period of adjustment while Mr. Wisenhart, who began four months ago, gets up to speed on the industry and investors get used to his style. While new to the media/advertising industry and AQNT, Mr. Wisenhart has over 30 years of experience in telecommunications, where he provided financial and operational leadership to a number of successful growth companies, including regional wireless carrier Western Wireless. Western Wireless' stock price appreciated approximately eightfold during his tenure as the company's CFO, from January 2003 to September 2005, and the company met or exceeded guidance for eight out of nine reporting quarters. Furthermore, Mr. Wisenhart was part of the management team that sold Western Wireless to ALLTEL for approximately $6 billion.
Firm continues to believe that AQNT will be one of the long-term "winners" in the Internet advertising sector and that shares should trade at a premium versus peers, given the strength of its business and its high growth rate. AQNT shares are currently trading at 16x EV/2006E EBITDA vs. 43% 2006E EBITDA growth or 13x EV/2007E EBITDA vs. 23% EBITDA growth. 12- month price target of $36 is based on 21x EV/2007E EBITDA.
Notablecalls: While I think AQNT is a mover the note belongs to not actionable but good to know category.
- JMP Securities is reiterating Market Outperform rating on PortalPlayer (NASDAQ:PLAY), raising their target price from $12 to $15. Firm is raising their FY07 revenue and GAAP EPS estimates from $189.5 million and $0.36 to $212.8 million and $0.55, assuming an incremental $23 million in revenues and $0.19 in earnings from PLAY's accelerating growth in the non-Apple media player business from SanDisk, Philips, and also potentially MSFT's upcoming Zune media player.
Firm retail channel checks reveal that SanDisk's PortalPlayer-based MP3 player is picking up market share through aggressive pricing for its feature-packed media players. For example, the upcoming SanDisk 8Gbyte media player will retail for $250; identical in price to Apple's lower density 4Gbyte iPod. According to NPD consumer market research data, SanDisk market share in MP3 players increased from 3% in 2Q05 to almost 10% in 2Q06. Industry channel checks also reveal that retailers are preparing for MSFT's upcoming Zune media player, which likely will be powered by PLAY's media player chip, given the close existing MSFT-PLAY relationship and PLAY's design win in Vista Notebook media processors. They note that every 1 million units increase in PLAY's media player chips will likely contribute $0.05 to $0.08 in incremental EPS for PLAY in 2007.
Notablecalls: What can I say. Notes like this one make me all fuzzy and warm inside. PLAY may have 10% upside in it over the next couple of weeks. Around 50c of it may come today.
Firm continues to believe that AQNT will be one of the long-term "winners" in the Internet advertising sector and that shares should trade at a premium versus peers, given the strength of its business and its high growth rate. AQNT shares are currently trading at 16x EV/2006E EBITDA vs. 43% 2006E EBITDA growth or 13x EV/2007E EBITDA vs. 23% EBITDA growth. 12- month price target of $36 is based on 21x EV/2007E EBITDA.
Notablecalls: While I think AQNT is a mover the note belongs to not actionable but good to know category.
- JMP Securities is reiterating Market Outperform rating on PortalPlayer (NASDAQ:PLAY), raising their target price from $12 to $15. Firm is raising their FY07 revenue and GAAP EPS estimates from $189.5 million and $0.36 to $212.8 million and $0.55, assuming an incremental $23 million in revenues and $0.19 in earnings from PLAY's accelerating growth in the non-Apple media player business from SanDisk, Philips, and also potentially MSFT's upcoming Zune media player.
Firm retail channel checks reveal that SanDisk's PortalPlayer-based MP3 player is picking up market share through aggressive pricing for its feature-packed media players. For example, the upcoming SanDisk 8Gbyte media player will retail for $250; identical in price to Apple's lower density 4Gbyte iPod. According to NPD consumer market research data, SanDisk market share in MP3 players increased from 3% in 2Q05 to almost 10% in 2Q06. Industry channel checks also reveal that retailers are preparing for MSFT's upcoming Zune media player, which likely will be powered by PLAY's media player chip, given the close existing MSFT-PLAY relationship and PLAY's design win in Vista Notebook media processors. They note that every 1 million units increase in PLAY's media player chips will likely contribute $0.05 to $0.08 in incremental EPS for PLAY in 2007.
Notablecalls: What can I say. Notes like this one make me all fuzzy and warm inside. PLAY may have 10% upside in it over the next couple of weeks. Around 50c of it may come today.
Calls of Note Part 2
- ThinkEquity comments on BioCryst Pharmaceuticals (NASDAQ:BCRX) saying that among the abstracts for the upcoming ICAAC meeting, workers from UT-Galveston are planning to present poster V-2041a, entitled, "Injectable Peramivir Promotes Survival in Mice and Ferrets Injected with Highly Pathogenic Avian Influenza A/Vietnam/1203/04 (H5N1)". The Interscience Conference on Antimicrobial Agents and Chemotherapy (ICAAC), biotech's premier conference for anti-infective drugs, will be taking place September 27-30 in San Francisco.
Firm notes that while no abstract data is available on the ICAAC Web site, they believe the
positive nature of these in vivo results is clear from the presentation title. They note that the historic failure of Peramivir in Phase III trials has led many investors to believe that the molecule is not a potent antiviral agent, a notion which this data clearly rejects. Furthermore, this data fulfills half of the requirements for approval under the auspices of Bioshield II, allowing government stockpiling and use by the public in a pandemic scenario.
Reiterates BUY rating; firm values BCRX shares by applying an industry-average sales multiple of 6 and a 30% discount rate to 2012 Fodosine revenue estimate of $393M, and add $10 per share in Peramivir value to reach a one-year price target of $21 per share.
Notablecalls: May see a quick pop in BCRX.
- Goldman Sachs notes that following up on their downgrade note from Thursday (8/24) where they added Par Pharma (NYSE:PRX) to the America's Investment Sell List, firm's channel contacts have confirmed AstraZeneca to have Troprol XL product (25mg only) in Par's warehouse (consistent with investor speculation), implying Par as the likely choice of authorized generic (AG) should a generic launch take place (Sandoz currently has approval on the 25mg representing 24% of sales). Overall, the Toprol XL opportunity may support some near-term upside to estimates (pending better visibility into launch timing) but the firm believes this is likely, at least in part, already reflected in the recent run in shares (up 32% since July 7).
No change to outlook on shares or 12-month price target of $17.50 (based on implied P/E and EV/EBITDA multiples of 13.6X and 7.7X), and implies some modest downside potential over the next year.
Notablecalls: Not sure what to do with this one. I would risk 25c to see if this one has some further legs.
Firm notes that while no abstract data is available on the ICAAC Web site, they believe the
positive nature of these in vivo results is clear from the presentation title. They note that the historic failure of Peramivir in Phase III trials has led many investors to believe that the molecule is not a potent antiviral agent, a notion which this data clearly rejects. Furthermore, this data fulfills half of the requirements for approval under the auspices of Bioshield II, allowing government stockpiling and use by the public in a pandemic scenario.
Reiterates BUY rating; firm values BCRX shares by applying an industry-average sales multiple of 6 and a 30% discount rate to 2012 Fodosine revenue estimate of $393M, and add $10 per share in Peramivir value to reach a one-year price target of $21 per share.
Notablecalls: May see a quick pop in BCRX.
- Goldman Sachs notes that following up on their downgrade note from Thursday (8/24) where they added Par Pharma (NYSE:PRX) to the America's Investment Sell List, firm's channel contacts have confirmed AstraZeneca to have Troprol XL product (25mg only) in Par's warehouse (consistent with investor speculation), implying Par as the likely choice of authorized generic (AG) should a generic launch take place (Sandoz currently has approval on the 25mg representing 24% of sales). Overall, the Toprol XL opportunity may support some near-term upside to estimates (pending better visibility into launch timing) but the firm believes this is likely, at least in part, already reflected in the recent run in shares (up 32% since July 7).
No change to outlook on shares or 12-month price target of $17.50 (based on implied P/E and EV/EBITDA multiples of 13.6X and 7.7X), and implies some modest downside potential over the next year.
Notablecalls: Not sure what to do with this one. I would risk 25c to see if this one has some further legs.
Paperstand
The WSJ reports that eBay (EBAY) has signed a deal allowing Google (GOOG) to exclusively display text advertisements on eBay's auction Web sites outside the US. Under the deal, which will be announced today, eBay and Google will begin testing the advertising arrangements in early '07. The accord also calls for the co's to cooperate in developing "click to call" initiatives, which allow consumers to call merchants and advertisers directly using connections displayed in the ads. The co's said they reached a multiyear agreement and will share ad rev on certain components of the deal.
According to the Barron's Online, institutional players are buyng shares of Take-Two (TTWO). Italian bank Unicredito Italiano reported it had built a 5.06% stake in Take-Two with 3.65m shares. On Aug. 14, Icahn Mgmt disclosed it had acquired 800K Take-Two shares during the quarter ending June 30. The firm is led by billionaire financier Carl Icahn who is known for his activism in pressuring mgmt to unlock shareholder value. No insider has sold shares since Sep'05 or purchased shares since Feb'02.
Over the weekend one analyst in Fox News highlighted Under Armour (UARM), saying it will go up 25% by Super Bowl.
Notablecalls: Usually analysts in Fox News highlight large cap stocks. UARM has mkt cap of $1.66bn and it's a mover. Stock has fallen almost 20% recently and has formed a bottom. It may move up a few points in upcoming week or two.
Calls of Note Part 1
- The Merrill Lynch Focus 1 Committee has added Freescale (NYSE:FSL) to its list. That's
consistent with firm's Buy rating, which is based on the following factors: 1) share gains in multiple end markets, 2) expectations for margin improvement, 3) strong cash flow generation and 4) attractive valuation.
Firm notes Freescale was not that profitable or well positioned when it spun out. There were concerns surrounding the company's ability to maintain its position as Motorola's key handset IC supplier. Other concerns centered around Freescale's ability to generate margin improvement, especially in the broadly diversified transportation division. The result was valuation that has yet to catch up with comparable firms.
As it's turned out, Freescale's management has done a much better job of tightening down the company's focus and improving profitability than anyone expected. Margins have exceeded the company's initial targets set at the time of the spinout, and the company has shown itself capable of not only holding onto market share in its key segments, but gaining in some cases.
Firm's $35.50 target price would put FSL on 18x their 2007 estimate, which they believe is reasonable given the potential for margin expansion. The price objective is also supported by the fair value suggested by firm's returns model.
Notablecalls: I would not be surprised to see some buy interest in FSL today. Merrill has a large following and they do move stocks. Also, the note, while containing no new information, makes a good point.
consistent with firm's Buy rating, which is based on the following factors: 1) share gains in multiple end markets, 2) expectations for margin improvement, 3) strong cash flow generation and 4) attractive valuation.
Firm notes Freescale was not that profitable or well positioned when it spun out. There were concerns surrounding the company's ability to maintain its position as Motorola's key handset IC supplier. Other concerns centered around Freescale's ability to generate margin improvement, especially in the broadly diversified transportation division. The result was valuation that has yet to catch up with comparable firms.
As it's turned out, Freescale's management has done a much better job of tightening down the company's focus and improving profitability than anyone expected. Margins have exceeded the company's initial targets set at the time of the spinout, and the company has shown itself capable of not only holding onto market share in its key segments, but gaining in some cases.
Firm's $35.50 target price would put FSL on 18x their 2007 estimate, which they believe is reasonable given the potential for margin expansion. The price objective is also supported by the fair value suggested by firm's returns model.
Notablecalls: I would not be surprised to see some buy interest in FSL today. Merrill has a large following and they do move stocks. Also, the note, while containing no new information, makes a good point.
Sunday, August 27, 2006
Barron's Summary
Barron's cover discusses housing mkt, saying that the broad selloff in housing shares may have created bargains among builders, home-improvement retailers and others. many home builders now trade around book value, and some, like MDC Holdings (MDC), Hovnanian Enterprises (HOV) and WCI Communities (WCI), languish at a discount to book value. Book value generally has acted as a floor for the stocks, and have given investors a buying opportunity. Countrywide Financial (CFC) has come under pressure lately. Countrywide looks tempting b/c it now trades for just 7x projected '06 profits of $4.40 and for 1.4x BV, giving it the lowest valuation among major financial stocks. The co has long been mentioned as a takeover tgt. In a letter to fund shareholders last month, Legg Mason's Bill Miller admitted he was "wrong" and early on the group, but said he's sticking with such stocks as Centex (CTX) and Pulte (PHM) "b/c we think the bottom is near or within squinting distance." Stephen Kim, of Citigroup, notes that many investors view the home-building stocks as "dead money" b/c the housing mkt may not stabilize for another year or 2. He favors Lennar (LEN), KB Homes (KBH) and Toll (TOL), but notes that investors tend not to differentiate much in both bull and bear mkts. According to the article, Levitt (LEV) is an intriguing, low-profile Florida builder whose shares now trade for around 11, just 63% of its BV of $17.50 a share. "This co takes orange groves and turns them into small towns," says Alan Fournier, of Pennant Capital. Other stocks mentioned include: BDK, MAS, SHW, LOW, HD, MHK, WHR, ETH, FBN and H.
Fund manager likes HOT, HLT and BEE.
Barron's suggests that investors sitting on profits in surging broker stocks might want to lighten up b/c the bullish operating cycle for these Wall St. firms has about run its course. Article mentions Bear Sterns (BSC), Goldman Sachs (GS), Lehman Brothers (LEH), Morgan Stanley (MS), Merrill Lynch (MER) Citigroup (C) and JP Morgan (JPM).
Dell's (DELL) plans for boosting customer service are a clear step in the right direction. But it still faces daunting challenges, both in the US and overseas.
Barron's discusses Anadigics (ANAD), whose stock is down some 40% this year amid a general slump in telecom. Article suggests that the shares could more than double as the co's financial performance continues to improve.
An activist investor, James Mitarotonda's Barington Companies Equity Group, will keep the pressure on Warnaco (WRNC) to perform. It needs it. The shares jumped recently and should go further as James Mitarotonda dives in.
"The Trader" column discusses CBS (CBS), which shares are up 14% since the co announced hirin Katie Couric as news anchor. According to the article, the more solid reason to give CBS shares a look is that it represents one of the most undervalued cash-flow streams from radio, TV stations and billboard advertising available. And, even better, mgmt is doing what it can to realize some of that value and share it with stockholders. CBS trades for less than 9x its EV to cash flow. Comparable co's to each individual CBS segment routinely fetch substantially higher multiples. CBS, in fact, has been divesting radio stations, and recently sold 15 of them in 4 mkts for 14x trailing EBITDA. CSFB analyst William Drewry says he expects CBS will continue to sell radio stations, perhaps another 25. He figures the co will return the cash to shareholders via a buyback. There is "an arbitrage opportunity inherent in CBS shares," writes Drewry, given the gap between its own multiple and the valuations the co is realizing from asset sales. Of course, CBS isn't about to liquidate the co and tap all this implied value. But the disparity is evidence that there's a floor to the stock's valuation and ample room for multiple expansion over time. Adding it together, a value for CBS in the low- to mid-30s doesn't seem all that challenging. With its 2.3% dividend yield, the possible return gets that much more interesting.
"Follow Up" section discusses SonoSite (SONO) saying that sometimes investors are too quick to walk out on a co after it misses Wall Street's expectations. Take SonoSite, the leading producer of hand-carried ultrasound medical-imaging equipment. Its shares have plunged more than 20% following a narrow miss on the Street's JunQ ests. It doesn't take a high-tech diagnostic tool to find a buying opportunity in these shares. SonoSite's devices remain compelling, they're cheaper and just as powerful as some ultrasound machines the size of dishwashers, and the co is bolstering its distribution efforts. Jan D. Wald, who follows SonoSite for AG Edwards, figures the stock can jump by more than 45% in the next 12 months, to 44.
"Plugged In" column discusses Comcast (CMCSA) and its involvement in airwave auction. It's a Fridays Barron's Online article. Read here.
Fund manager likes HOT, HLT and BEE.
Barron's suggests that investors sitting on profits in surging broker stocks might want to lighten up b/c the bullish operating cycle for these Wall St. firms has about run its course. Article mentions Bear Sterns (BSC), Goldman Sachs (GS), Lehman Brothers (LEH), Morgan Stanley (MS), Merrill Lynch (MER) Citigroup (C) and JP Morgan (JPM).
Dell's (DELL) plans for boosting customer service are a clear step in the right direction. But it still faces daunting challenges, both in the US and overseas.
Barron's discusses Anadigics (ANAD), whose stock is down some 40% this year amid a general slump in telecom. Article suggests that the shares could more than double as the co's financial performance continues to improve.
An activist investor, James Mitarotonda's Barington Companies Equity Group, will keep the pressure on Warnaco (WRNC) to perform. It needs it. The shares jumped recently and should go further as James Mitarotonda dives in.
"The Trader" column discusses CBS (CBS), which shares are up 14% since the co announced hirin Katie Couric as news anchor. According to the article, the more solid reason to give CBS shares a look is that it represents one of the most undervalued cash-flow streams from radio, TV stations and billboard advertising available. And, even better, mgmt is doing what it can to realize some of that value and share it with stockholders. CBS trades for less than 9x its EV to cash flow. Comparable co's to each individual CBS segment routinely fetch substantially higher multiples. CBS, in fact, has been divesting radio stations, and recently sold 15 of them in 4 mkts for 14x trailing EBITDA. CSFB analyst William Drewry says he expects CBS will continue to sell radio stations, perhaps another 25. He figures the co will return the cash to shareholders via a buyback. There is "an arbitrage opportunity inherent in CBS shares," writes Drewry, given the gap between its own multiple and the valuations the co is realizing from asset sales. Of course, CBS isn't about to liquidate the co and tap all this implied value. But the disparity is evidence that there's a floor to the stock's valuation and ample room for multiple expansion over time. Adding it together, a value for CBS in the low- to mid-30s doesn't seem all that challenging. With its 2.3% dividend yield, the possible return gets that much more interesting.
"Follow Up" section discusses SonoSite (SONO) saying that sometimes investors are too quick to walk out on a co after it misses Wall Street's expectations. Take SonoSite, the leading producer of hand-carried ultrasound medical-imaging equipment. Its shares have plunged more than 20% following a narrow miss on the Street's JunQ ests. It doesn't take a high-tech diagnostic tool to find a buying opportunity in these shares. SonoSite's devices remain compelling, they're cheaper and just as powerful as some ultrasound machines the size of dishwashers, and the co is bolstering its distribution efforts. Jan D. Wald, who follows SonoSite for AG Edwards, figures the stock can jump by more than 45% in the next 12 months, to 44.
"Plugged In" column discusses Comcast (CMCSA) and its involvement in airwave auction. It's a Fridays Barron's Online article. Read here.
Friday, August 25, 2006
Calls of Note Part 4
- Roth Capital notes that yesterday, Hyperion (NASDAQ:HYSL) filed a noteworthy 8-K disclosing that its Board established variable compensation for executive officers based on license- revenue performance targets. Certain members of senior management, including all of its named executive officers, will receive cash awards of ranging from $230k-$990k and fully-vested restricted stock awards ranging from 3,500-15,000 shares of Hyperion common stock on June 30, 2008 "provided the Company achieves certain license revenue objectives."
Firm notes that although they would have preferred that the Board combine these license- revenue objectives with specific operating-margin targets, they are struck by the very explicit Board directive that the executive team supercharge the company's heretofore lackluster license-revenue growth. Apparently the Board wants the entire management team focused on license-revenue growth. The last noteworthy performance target was set by the Board in 2002 and targeted a 12% operating margin and a $35/share stock; at the time, these
seemed like barely attainable "reach" goals, but that the team was surprisingly quick to achieve them. Yep, compensation matters!
They maintain Buy rating and price target of $38, reflecting a P/E of 20x FY2008E and 13x FCF, which is slightly above the peer group.
Notablecalls: Not actionable but interesting to know category. For you investors out there.
Firm notes that although they would have preferred that the Board combine these license- revenue objectives with specific operating-margin targets, they are struck by the very explicit Board directive that the executive team supercharge the company's heretofore lackluster license-revenue growth. Apparently the Board wants the entire management team focused on license-revenue growth. The last noteworthy performance target was set by the Board in 2002 and targeted a 12% operating margin and a $35/share stock; at the time, these
seemed like barely attainable "reach" goals, but that the team was surprisingly quick to achieve them. Yep, compensation matters!
They maintain Buy rating and price target of $38, reflecting a P/E of 20x FY2008E and 13x FCF, which is slightly above the peer group.
Notablecalls: Not actionable but interesting to know category. For you investors out there.
Calls of Note Part 3
- Friedman, Billings, Ramsey notes they believe much of the industry's recent underperformance relates to concerns regarding long-term oversupply. In order to help investors better assess this issue, the firm expanded their proprietary plant-by-plant model to reflect the vast number of capacity addition proposals currently out in the market. However, they believe that the demand side of the equation remains vastly underappreciated by most investors and expect the U.S. government to significantly increase the Renewable Fuels Standard in 2007, which should be a positive catalyst for the stocks. Firm reiterates Overweight rating on the sector with Outperform-rated Aventine Renewable Energy (NYSE:AVR) and VeraSun (NYSE:VSE) their top recommendations.
Given the strong political backing for ethanol, driven by energy security concerns, agricultural interests, and environmentalists, they expect Congress to increase the Renewable Fuels Standard in 2007, lending long-term support to ethanol prices and, they expect, materially improving investor sentiment. Excess supply above mandated volumes should result in lower ethanol prices, which would result in incremental discretionary demand. Firm's 2008+ price forecasts assume oversupply in the market and that ethanol trades at only about $0.35/gallon above wholesale gasoline.
Firm notes that over the past two weeks, AVR has lost roughly 20% of its value, they believe largely due to concerns regarding the August 28th lock-up expiration on 20.8 million private placement shares. The stock is currently the cheapest in the group and, in firm's view, should trade up following the lock-up's expiration.
Notablecalls: Fascinating! But utterly useless as well. At least today. This thing may lose an additional 10% in mkt cap just like that. To catch a bounce in this one, look for a strong volume day with some block trades (200-500K shares) crossing the tape. This means the insiders most eager to sell have sold their shares to inst buyers (usually strong hands).
Given the strong political backing for ethanol, driven by energy security concerns, agricultural interests, and environmentalists, they expect Congress to increase the Renewable Fuels Standard in 2007, lending long-term support to ethanol prices and, they expect, materially improving investor sentiment. Excess supply above mandated volumes should result in lower ethanol prices, which would result in incremental discretionary demand. Firm's 2008+ price forecasts assume oversupply in the market and that ethanol trades at only about $0.35/gallon above wholesale gasoline.
Firm notes that over the past two weeks, AVR has lost roughly 20% of its value, they believe largely due to concerns regarding the August 28th lock-up expiration on 20.8 million private placement shares. The stock is currently the cheapest in the group and, in firm's view, should trade up following the lock-up's expiration.
Notablecalls: Fascinating! But utterly useless as well. At least today. This thing may lose an additional 10% in mkt cap just like that. To catch a bounce in this one, look for a strong volume day with some block trades (200-500K shares) crossing the tape. This means the insiders most eager to sell have sold their shares to inst buyers (usually strong hands).
Calls of Note Part 2
- We have a couple of firms commenting on Celgene (NASDAQ:CELG):
* Baird notes their Q206 hematologist survey shows solid Revlimid patient share gains, and they believe expectations for 2006 are quite doable. However, with big expectations for increased penetration in 2007, they worry that early increases in safety signals may temper uptake next year. Firm continues to model 2007 Revlimid revenue well below consensus and remain cautious on CELG shares.
Firm notes that since Revlimid's greater adoption by physicians, they have seen more reports of adverse events. In firm's survey, 70% (up from 50%) of hematologists have seen AEs in their Revlimid patients. Again, the proportion of physicians reporting these events is rather unsurprising, given the clinical trial data, but what stands out from the survey data are possibly significant AEs, including sepsis, thrombosis, neuropathy and myelosuppression.
With 2007 consensus expectations (~$840M) presupposing a sizeable up-tick in patient share, they continue to monitor safety experience, and model just $624M in Revlimid revenue next year. At its current premium valuation, CELG appears priced to meet or exceed consensus
expectations. Reiterates Neutral rating.
* Citigroup notes they have conducted an analysis of Revlimid's potential gross margins and conclude that due to premium pricing, high potency, lower royalty obligations, and lower COGS than Thalomid, Revlimid's GMs could approach ~97% at full commercial manufacturing scale vs. Thalomid's estimated 84%. At full scale, they anticipate that Revlimid's COGS could be 1-3% w/additional 1% royalty obligations to a third party for intellectual property rights. Whereas Revlimid posted 92% GM in Q2, each 100bp improvement could contribute $0.01, $0.02 and $0.03 to non GAAP EPS in '07-'09, respectively. This would boost firm's target price by ~$1 based on '08 financial estimates.
Celgene remains Citi's best large-cap idea and they encourage investors to use the recent 18% profit-taking pullback as an entry point. Maintains Buy and $58 tgt.
Notablecalls: Not actionable but good to know category.
* Baird notes their Q206 hematologist survey shows solid Revlimid patient share gains, and they believe expectations for 2006 are quite doable. However, with big expectations for increased penetration in 2007, they worry that early increases in safety signals may temper uptake next year. Firm continues to model 2007 Revlimid revenue well below consensus and remain cautious on CELG shares.
Firm notes that since Revlimid's greater adoption by physicians, they have seen more reports of adverse events. In firm's survey, 70% (up from 50%) of hematologists have seen AEs in their Revlimid patients. Again, the proportion of physicians reporting these events is rather unsurprising, given the clinical trial data, but what stands out from the survey data are possibly significant AEs, including sepsis, thrombosis, neuropathy and myelosuppression.
With 2007 consensus expectations (~$840M) presupposing a sizeable up-tick in patient share, they continue to monitor safety experience, and model just $624M in Revlimid revenue next year. At its current premium valuation, CELG appears priced to meet or exceed consensus
expectations. Reiterates Neutral rating.
* Citigroup notes they have conducted an analysis of Revlimid's potential gross margins and conclude that due to premium pricing, high potency, lower royalty obligations, and lower COGS than Thalomid, Revlimid's GMs could approach ~97% at full commercial manufacturing scale vs. Thalomid's estimated 84%. At full scale, they anticipate that Revlimid's COGS could be 1-3% w/additional 1% royalty obligations to a third party for intellectual property rights. Whereas Revlimid posted 92% GM in Q2, each 100bp improvement could contribute $0.01, $0.02 and $0.03 to non GAAP EPS in '07-'09, respectively. This would boost firm's target price by ~$1 based on '08 financial estimates.
Celgene remains Citi's best large-cap idea and they encourage investors to use the recent 18% profit-taking pullback as an entry point. Maintains Buy and $58 tgt.
Notablecalls: Not actionable but good to know category.
Calls of Note Part 1
- Piper Jaffray comments on Tractor Supply (NASDAQ:TSCO) saying they believe 3Q sales trends remain sluggish, lowering FY06 revenue estimate. Checks point to continued softness in outdoor power equipment, big-ticket items. Firm remains confident in their 3Q EPS of $0.48, however, they are modestly lowering their same- store sales forecast to 2.5%. They believe that gross margin trends remain healthy as the company continues to benefit from a favorable product mix shift and increased private label and direct sourced product. For the full year, they are forecasting total sales near the low end of the company's guidance range to reflect a challenging consumer spending environment for big-ticket items.
In recent circulars and store visits, the firm noticed an increased emphasis on smaller- ticket and higher-margin categories like apparel and pet/equine, which they believe will provide sales stability in a slower consumer spending environment. The company has expanded its apparel set in 165 stores and it appears to be receiving a greater emphasis even in stores that have not been reset.
Firm maintains Outperform rating saying they are modeling an acceleration in comp- store sales growth and margin expansion in FY07 as the company comes up against easier comparisons and the product mix continues to shift toward higher-margin categories.
Tgt goes to $58 from $63.
Notablecalls: Look, you have a retailer that's trading 18-19x 06 EPS and 15-16x 07 EPS and then you have a firm saying things are starting to slow down. It's a bad combo for the bulls. The stock has gotten hit lately and is trading near 52 wk lows. Today, it will see some pressure. Then it will bounce bc there are some that will be covering into this weakness. But overall, there is very little upside to this stock. Short any bounces.
In recent circulars and store visits, the firm noticed an increased emphasis on smaller- ticket and higher-margin categories like apparel and pet/equine, which they believe will provide sales stability in a slower consumer spending environment. The company has expanded its apparel set in 165 stores and it appears to be receiving a greater emphasis even in stores that have not been reset.
Firm maintains Outperform rating saying they are modeling an acceleration in comp- store sales growth and margin expansion in FY07 as the company comes up against easier comparisons and the product mix continues to shift toward higher-margin categories.
Tgt goes to $58 from $63.
Notablecalls: Look, you have a retailer that's trading 18-19x 06 EPS and 15-16x 07 EPS and then you have a firm saying things are starting to slow down. It's a bad combo for the bulls. The stock has gotten hit lately and is trading near 52 wk lows. Today, it will see some pressure. Then it will bounce bc there are some that will be covering into this weakness. But overall, there is very little upside to this stock. Short any bounces.
Paperstan
According to the WSJ's "Ahead of the Tape" column, the housing mkt is deteriorating, but many private-equity firms and hedge funds still see real estate as a game worth playing. For some proprietary-trading desks at investment banks and hedge funds, one of the better guides to that game is a report from Citigroup's Citigroup Global Markets that came out within the past few weeks highlighting stocks that have substantial real-estate value relative to the total value of their enterprise. Many of the co's on the list are restaurant chains, including Bob Evans Farms (BOBE), Denny's (DENN) and Lone Star Steakhouse & Saloon (STAR). Also high on the list, produced by Citi senior analyst Jonathan Litt, are health-care co's including Tenet healthcare (THC), Capital Senior Living (CSU) and Genesis HealthCare (GHCI). Mr. Litt has a good track record. Of the 103 co's he singled out in a similar list last year, 14 were acquired or part of mergers. Those acquired co's generated an avg return of 30.2% between the time he pointed them out and the time they were taken over. Among them was one of the biggest takeover tgts ever, HCA (HCA). The overall list outperformed the S&P 500, he says. More deals from the latest list have been popping up. The last week of July, Buffets agreed to buy Ryan's Restaurant Group (RYAN), one of Mr. Litt's top picks, for $876m, a 49.3% premium to the closing price the previous day. "We bought shares the day after we saw the [latest] report," says a senior trader at the bank of a Citi competitor.
According to the Barron's Online, a multibillion dollar auction of US airwaves is under way in Washington, and the big surprise is the aggressive bidding by the nation's cable co's, led by a consortium controlled by Comcast (CMCSA), the biggest. Total bids are now a staggering $13bn. Comcast's bids, which topped $2bn this week, are the clearest sign yet that the cable giant may plan to own and operate its own wireless network, perhaps someday offering a bundle of video, Internet and phone services that work at home and on the road, via advanced cellphones. That may be bad news for dominant cellphone providers, such as the Verizon Wireless, having to fight a new challenger in mkts that have already seen aggressive price competition. But the good news for Comcast is that investors have enough confidence in CEO Brian Roberts to believe any network buildout will be done at a pace that won't drastically erode Comcast's cash flow anytime soon. "If done wisely and in a rational manner, this could be an important new area of growth for them," says Warren Koontz, manager of the Loomis Sayles Large Cap Value Fund, which owns Comcast shares.
"Inside Scoop" section highlights Extra Space Storage (EXR), whose CEO Kenneth Woolley has shelled out $5.6m to buy 340K shares of the co. After his recent buying spree, Woolley beneficially owns about 1.8m shares of Extra Space, or 3.4% of the co's 51.8m outstanding shares.
According to the Barron's Online, a multibillion dollar auction of US airwaves is under way in Washington, and the big surprise is the aggressive bidding by the nation's cable co's, led by a consortium controlled by Comcast (CMCSA), the biggest. Total bids are now a staggering $13bn. Comcast's bids, which topped $2bn this week, are the clearest sign yet that the cable giant may plan to own and operate its own wireless network, perhaps someday offering a bundle of video, Internet and phone services that work at home and on the road, via advanced cellphones. That may be bad news for dominant cellphone providers, such as the Verizon Wireless, having to fight a new challenger in mkts that have already seen aggressive price competition. But the good news for Comcast is that investors have enough confidence in CEO Brian Roberts to believe any network buildout will be done at a pace that won't drastically erode Comcast's cash flow anytime soon. "If done wisely and in a rational manner, this could be an important new area of growth for them," says Warren Koontz, manager of the Loomis Sayles Large Cap Value Fund, which owns Comcast shares.
"Inside Scoop" section highlights Extra Space Storage (EXR), whose CEO Kenneth Woolley has shelled out $5.6m to buy 340K shares of the co. After his recent buying spree, Woolley beneficially owns about 1.8m shares of Extra Space, or 3.4% of the co's 51.8m outstanding shares.
Thursday, August 24, 2006
Paperstand
The WSJ's "Heard on the Street" column discusses Corning (GLW), saying that the co may offer window of opportunity. Corning shares plummeted this summer as the mkt slowed for LCDs used in flat-panel televisions and laptops. The Corning stock lost $13bn in mkt value since April, ceding most of the gains made earlier this year amid optimism about rising demand for ever-larger flat-panel televisions. Now some long-term stock pickers are finding this a judicious buying opportunity, believing in the strength of Corning's core LCD business as well as new products aimed at making diesel vehicles run more cleanly and speeding the discovery of new drugs. "At the current stock price, we think of them as call options because we are buying on the display and telecom businesses, which we think are in good shape for at least the next 6-12 months," said Christopher Baggini, manager of the $500m Gartmore US Growth Leaders Fund and the $500m Gartmore Growth Fund. "We think the stock could hit $30 if those call options work for us." Mr. Baggini believes the display business has gone from a hypergrowth phase, which bucks seasonal trends, to high growth. "Seasonality becomes your friend as you move into the 2H06, with back-to-school and Christmas purchases, which is good for TV, laptop and flat-panel purchases," he said.
The WSJ's "Tracking the Numbers" column discusses Alcatel (ALA) and Lucent (LU) pending merger, saying that sometimes even cheap is too dear. Investors seem to be feeling that way about Alcatel's pending acquisition of Lucent, a deal that when it was unveiled offered no premium to Lucent shareholders. The rub: Lucent may not provide value to Alcatel commensurate with what Alcatel is paying for it. Lucent shareholders stand to get about 39% of the shares of the new combined co. But an analysis suggests Lucent may contribute significantly less than 39% of the new co's operating income and sales. The two telecom-equipment makers say they're focusing on strategic and long-term considerations rather than issues like the amount of rev each side brings to the combination. But financial-performance disparities raise the possibility that some Alcatel shareholders might think the co is overpaying. Both co's shareholders will vote on the deal Sept. 7. For a fresh perspective on the merger's value, one can combine the two co's earnings for the past 12 months, strip out one-time items, convert Alcatel's results from euros to dollars based on the exchange rate at the end of the period and compare each co's results to the whole. Doing so shows that in the last year, Lucent has contributed $8.7bn, or just shy of 33%, of the co's combined $26.4bn in rev. For operating income, the percentage was just under 35%; for net income, it was also about 35%. Those percentages drop sharply if the calculations account for the fact that Lucent's earnings benefit from money contributed by its employee pension plan, whose returns say nothing about Lucent's ability to run its core operations. Of Lucent's $910 million in operating income over the past year, $507 million came not from its operations, but from the income generated by its retiree plans. Strip out those earnings, and only 19% of the companies' combined operating income comes from Lucent.
According to the WSJ, Qualcomm (QCOM) and Intel (INTC) are clashing on a crucial new battleground: wireless access to the Internet. Both co's are racing to develop new technologies to better permit consumers to connect wirelessly to the Web, whether by cellphone, laptop, handheld gadget, or potentially even devices such as MP3 players and video cameras. This month, Intel scored a first big victory when SprintNextel (S) said it would spend up to $3bn to build a new network based on the technology that Intel is backing. The battle puts on a collision course two chip giants that had little to do with each other for two decades. The prize for Intel: a new chance to build bigger mkts for its microprocessors, not just in laptops but in new pocket-sized gadgets and consumer-electronics devices. The widening of Internet access gives Intel an opportunity to try to wrest from Qualcomm the position of wireless standard-setter. Whoever prevails in the face-off, consumers will end up with yet more options to connect to the Web. Today, they mostly rely on wired high-speed Internet connections from cable and phone co's. While the technologies Intel and Qualcomm are pushing are still untested on a large scale, they promise to give ppl new ways to get online at work, in the backyard, in a park, almost anywhere, and eventually with a whole array of new devices.
According to the Barron's Online, activist shareholder Pirate Capital has been successfully rattling the cage at PW Eagle (PWEI). The hedge fund plans to follow up by buying even more of the plastic-pipe maker's high-flying shares. Pirate Capital has already spent $59m to garner a stake of 2.52m shares, or 21.2%, as PW Eagle's largest shareholder.
Barron's Online out saying that with the US economy less healthy than a year ago, Big Pharma looks like a good prescription for investors. Up 7.3% so far this year, the AMEX Pharma Index has outpaced the S&P's 500 index, something that hasn't happened since '02. Sure, skeptics have reason to be doubtful of the sector, which is just a shadow of its former self. Merck (MRK) faces thousands of lawsuits over Vioxx. More patent expirations are on the way. And Bristol-Myers (BMY) last month hit a roadblock trying to keep a cheaper-priced generic version of Plavix off the mkt, and faces a DoJ investigation. Still, there's good reason for optimism. Pipelines have bulked up. The new Medicare prescription-drug plan helped boost sales. And last month, Merck, Abbot (ABT), Pfizer (PFE) and others beat earnings expectations and hiked financial outlooks. Another important point: Drug makers remain immune to rising gas prices and slower consumer spending. Valuations and dividend yields, meanwhile, look enticing. "A lot of things have come together to generate pretty good returns for these stocks and it should continue," says Derek Taner, of AIM Global Health Care Fund. "Those returns might not prove to be dramatic. But investors will see the sector outperform."
The WSJ's "Tracking the Numbers" column discusses Alcatel (ALA) and Lucent (LU) pending merger, saying that sometimes even cheap is too dear. Investors seem to be feeling that way about Alcatel's pending acquisition of Lucent, a deal that when it was unveiled offered no premium to Lucent shareholders. The rub: Lucent may not provide value to Alcatel commensurate with what Alcatel is paying for it. Lucent shareholders stand to get about 39% of the shares of the new combined co. But an analysis suggests Lucent may contribute significantly less than 39% of the new co's operating income and sales. The two telecom-equipment makers say they're focusing on strategic and long-term considerations rather than issues like the amount of rev each side brings to the combination. But financial-performance disparities raise the possibility that some Alcatel shareholders might think the co is overpaying. Both co's shareholders will vote on the deal Sept. 7. For a fresh perspective on the merger's value, one can combine the two co's earnings for the past 12 months, strip out one-time items, convert Alcatel's results from euros to dollars based on the exchange rate at the end of the period and compare each co's results to the whole. Doing so shows that in the last year, Lucent has contributed $8.7bn, or just shy of 33%, of the co's combined $26.4bn in rev. For operating income, the percentage was just under 35%; for net income, it was also about 35%. Those percentages drop sharply if the calculations account for the fact that Lucent's earnings benefit from money contributed by its employee pension plan, whose returns say nothing about Lucent's ability to run its core operations. Of Lucent's $910 million in operating income over the past year, $507 million came not from its operations, but from the income generated by its retiree plans. Strip out those earnings, and only 19% of the companies' combined operating income comes from Lucent.
According to the WSJ, Qualcomm (QCOM) and Intel (INTC) are clashing on a crucial new battleground: wireless access to the Internet. Both co's are racing to develop new technologies to better permit consumers to connect wirelessly to the Web, whether by cellphone, laptop, handheld gadget, or potentially even devices such as MP3 players and video cameras. This month, Intel scored a first big victory when SprintNextel (S) said it would spend up to $3bn to build a new network based on the technology that Intel is backing. The battle puts on a collision course two chip giants that had little to do with each other for two decades. The prize for Intel: a new chance to build bigger mkts for its microprocessors, not just in laptops but in new pocket-sized gadgets and consumer-electronics devices. The widening of Internet access gives Intel an opportunity to try to wrest from Qualcomm the position of wireless standard-setter. Whoever prevails in the face-off, consumers will end up with yet more options to connect to the Web. Today, they mostly rely on wired high-speed Internet connections from cable and phone co's. While the technologies Intel and Qualcomm are pushing are still untested on a large scale, they promise to give ppl new ways to get online at work, in the backyard, in a park, almost anywhere, and eventually with a whole array of new devices.
According to the Barron's Online, activist shareholder Pirate Capital has been successfully rattling the cage at PW Eagle (PWEI). The hedge fund plans to follow up by buying even more of the plastic-pipe maker's high-flying shares. Pirate Capital has already spent $59m to garner a stake of 2.52m shares, or 21.2%, as PW Eagle's largest shareholder.
Barron's Online out saying that with the US economy less healthy than a year ago, Big Pharma looks like a good prescription for investors. Up 7.3% so far this year, the AMEX Pharma Index has outpaced the S&P's 500 index, something that hasn't happened since '02. Sure, skeptics have reason to be doubtful of the sector, which is just a shadow of its former self. Merck (MRK) faces thousands of lawsuits over Vioxx. More patent expirations are on the way. And Bristol-Myers (BMY) last month hit a roadblock trying to keep a cheaper-priced generic version of Plavix off the mkt, and faces a DoJ investigation. Still, there's good reason for optimism. Pipelines have bulked up. The new Medicare prescription-drug plan helped boost sales. And last month, Merck, Abbot (ABT), Pfizer (PFE) and others beat earnings expectations and hiked financial outlooks. Another important point: Drug makers remain immune to rising gas prices and slower consumer spending. Valuations and dividend yields, meanwhile, look enticing. "A lot of things have come together to generate pretty good returns for these stocks and it should continue," says Derek Taner, of AIM Global Health Care Fund. "Those returns might not prove to be dramatic. But investors will see the sector outperform."
Wednesday, August 23, 2006
Calls of Note Part 4
- JP Morgan notes that yesterday, the Semiconductor International Capacity Statistics (SICAS) organization published 2Q06 worldwide integrated circuit wafer fab capacity and utilization. Total industry utilization increased 1% QoQ from 90% in 1Q06 to 91% in 2Q06, above firm's expectation of 87%.
Utilization rates are a primary driver of gross margins and they believe overall utilization rates peaked at 92% in 4Q05 due to seasonal increases in demand and a modest inventory build. The 92% peak utilization rate is roughly in line with the average peak utilization rate of 93% during the previous four upturns.
Firm believes the higher than expected 2Q06 utilization was due to an inventory build. They believe utilization rates should decline during 2H06 due to inventory burn, which should result in downward pressure on gross margins and downside to consensus estimates.
They are reiterating their neutral stance on the semiconductor sector as it appears several leading indicators such as utilization rates, year over year growth rates, EPS estimates and pricing have peaked. Firm's top picks remain Overweight rated Microchip and Marvell.
Notablecalls: Color me bearish for 2007.
Utilization rates are a primary driver of gross margins and they believe overall utilization rates peaked at 92% in 4Q05 due to seasonal increases in demand and a modest inventory build. The 92% peak utilization rate is roughly in line with the average peak utilization rate of 93% during the previous four upturns.
Firm believes the higher than expected 2Q06 utilization was due to an inventory build. They believe utilization rates should decline during 2H06 due to inventory burn, which should result in downward pressure on gross margins and downside to consensus estimates.
They are reiterating their neutral stance on the semiconductor sector as it appears several leading indicators such as utilization rates, year over year growth rates, EPS estimates and pricing have peaked. Firm's top picks remain Overweight rated Microchip and Marvell.
Notablecalls: Color me bearish for 2007.
Calls of Note Part 3
- Friedman, Billings, Ramsey has some positive things to say about Formfactor (NASDAQ:FORM) as their recent checks in Taiwan suggest that FORM is at least a year ahead of competition, and thus not seeing any pricing pressure. Not only has Phicom (CY05 revenues of ~$50M) lost a significant market share at Hynix, some of which won by FORM, they believe that it has recently lost a significant market share at Elpida, helping FORM to further solidify its market share there. Elpida is currently FORM's #1 customer, accounting for 20%-25% of overall revenues. However, the firm believes that Micronics Japan Co. (MJC), a Japanese competitor with CY05 revenues of ~$40M, has recently been able to gain some traction at PowerChip (~15%-20% customer at FORM) for DDR2, though they believe that MJC's advance probe card is frequency limited, a factor that actually limited its penetration into Samsung (for DDR2) earlier this year.
Firm remains comfortable with their current estimates, though do not rule out upside, and encourage investors to accumulate on any pull back as FORM remains one of the best differentiated mid cap names in coverage universe.
Notablecalls: Not actionable but good to know category.
Firm remains comfortable with their current estimates, though do not rule out upside, and encourage investors to accumulate on any pull back as FORM remains one of the best differentiated mid cap names in coverage universe.
Notablecalls: Not actionable but good to know category.
Calls of Note Part 2
- Merrill Lynch comments on Cubist Pharma (NASDAQ:CBST) after Theravance (NASDAQ:THRX) announced th´at phase III telavancin studies in skin infections achieved the primary endpoint of non-inferiority vs. vancomycin, but did not show superiority in patients with resistant (MRSA) infections.
Firm notes the Telavancin data were in-line with their expectations but not strong enough to
support the bear case on Cubist that telavancin will replace Cubicin (CBST's drug) use in skin infections or compete directly with Cubicin in its large niche of bacteremia and endocarditis. They expect Cubist stock to rally now that the overhang of telavancin data is removed. Reiterates BUY.
They believe that a second 1x/day antibiotic will help expand the market for Cubicin, with both Cubist and Theravance/Astellas sales forces will be detailing physicians about the benefits of 1x/day IV antibiotics. Ultimately, they expect telavancin approval and commercial launch will help both drugs capture market share from vancomycin, benefiting Cubist in the long-term. Head-to-head comp less likely; bact/endo market safe.
Notablecalls: Think the news removes a significant overhang and I would not be surprised to see CBST trade up as much as 10% on the news.
Firm notes the Telavancin data were in-line with their expectations but not strong enough to
support the bear case on Cubist that telavancin will replace Cubicin (CBST's drug) use in skin infections or compete directly with Cubicin in its large niche of bacteremia and endocarditis. They expect Cubist stock to rally now that the overhang of telavancin data is removed. Reiterates BUY.
They believe that a second 1x/day antibiotic will help expand the market for Cubicin, with both Cubist and Theravance/Astellas sales forces will be detailing physicians about the benefits of 1x/day IV antibiotics. Ultimately, they expect telavancin approval and commercial launch will help both drugs capture market share from vancomycin, benefiting Cubist in the long-term. Head-to-head comp less likely; bact/endo market safe.
Notablecalls: Think the news removes a significant overhang and I would not be surprised to see CBST trade up as much as 10% on the news.
Calls of Note Part 1
- Piper Jaffray notes that after two consecutive months of shrinkage in the non-residential
construction pipeline, the ABI (Architectural Billings Index) for the month of July moved back to positive territory, indicating pipeline growth. The ABI has the most direct overlap with customers of Autodesk's (NASDAQ:ADSK) AEC division, which accounts for ~15% of revenue.
CY06 will likely prove to be a tug-of-war between investors concerned about the smaller 2004 product retirement pool and investors confident that new seat growth will offset any upgrade-related slowdown. There are two primary sources of new seat growth: 1) new engineer hiring due to increased project pipelines, and 2) product activation technology. One way to look at the potential for new seat growth is the Architectural Billings Index (ABI), which tracks non-residential project pipelines. In general, the ABI has been strong through the first half of CY06, indicating a growing project pipeline for the remainder of the year. The index was down slightly in May (49.6) and June (49.2), but bounced back into positive territory in the month of July. The July ABI was 51.8 (details on pg 2). Any number greater than 50 indicates an increase in pipeline.
Maintains Outperform and $47 tgt.
Notablecalls: Not actionable but good to know category. This note will have no impact on the share price but since I have been following the story (check the archives), I thought to highlight it.
construction pipeline, the ABI (Architectural Billings Index) for the month of July moved back to positive territory, indicating pipeline growth. The ABI has the most direct overlap with customers of Autodesk's (NASDAQ:ADSK) AEC division, which accounts for ~15% of revenue.
CY06 will likely prove to be a tug-of-war between investors concerned about the smaller 2004 product retirement pool and investors confident that new seat growth will offset any upgrade-related slowdown. There are two primary sources of new seat growth: 1) new engineer hiring due to increased project pipelines, and 2) product activation technology. One way to look at the potential for new seat growth is the Architectural Billings Index (ABI), which tracks non-residential project pipelines. In general, the ABI has been strong through the first half of CY06, indicating a growing project pipeline for the remainder of the year. The index was down slightly in May (49.6) and June (49.2), but bounced back into positive territory in the month of July. The July ABI was 51.8 (details on pg 2). Any number greater than 50 indicates an increase in pipeline.
Maintains Outperform and $47 tgt.
Notablecalls: Not actionable but good to know category. This note will have no impact on the share price but since I have been following the story (check the archives), I thought to highlight it.
Paperstand
The WSJ's "Long&Short" column discusses provate equity latest actions. Lately bunches of companies are experiencing every teenager's nightmare: They're holding parties that no one attends. Last week, Jones Apparel (JNY) took itself off the block when private-equity firms wouldn't meet its price. This month has seen a spate of similarly failed auctions, big-screener Imax (IMAX), biotech ImClone (IMCL), auto-parts retailer Pep Boys (PBY) and fitness-club chain Bally Total Fitness (BFT). After the relentless drumbeat about how much cash the deal-happy private-equity world is sitting on, why are so many of these public auctions stumbling? "There's a little bit of hype about taking companies private. I heard the other day that someone wants to take Microsoft private, which is absurd," says Barry Ritholtz, who runs his own investing-strategy boutique. But the spate of failed deals "makes you wonder, what are these things really worth?" So why do co's put themselves out there? It's like including the phrase "Date me, I'm desperate" in your Match.com entry.
According to the WSJ's "Heard on the Street" column, in today's energy-stock sector, investors might want to borrow a credo from Watergate-era reporters: Follow the money. Thanks to soaring energy prices, the world's biggest oil and natural-gas co's are sitting on mountains of cash. Exxon Mobile (XOM) had more than $32bn in its coffers at the end of June. At the same time, Royal Dutch Shell,Chevron (CVX) and BP (BP) had a total of more than $26bn in cash. So, where will that money go? While shareholders likely will benefit from higher dividends and share repurchases, a big chunk of the cash will go toward building infrastructure projects required to get the next generation of oil and gas out of the ground, refined and brought to mkt. That is good news for engineering co's such as Jacobs Engineering Group (JEC), Foster Wheeler (FWLT), Chicago Bridge&Iron (CBI) and McDermott (MDR), which are seeing a buildup in backlogs of multiyear projects. "We're going to have to spend more capital to increase energy supplies," says John Segner, manager of the $1.5bn AIM Energy Fund. "And I think we're in the very early innings of doing that." This thesis led him to add Chicago Bridge stock to his fund's portfolio last fall.
According to the WSJ's "Tracking the Numbers" column, Sovereign Bancorp's (SOV) stock has been stuck in neutral all summer but could soon slip into reverse. The reason: Banco Santander Central Hispano (STD) is poised to stop its daily purchases of hundreds of thousands of the bank's shares. In early June, Sovereign sold a nearly 20% stake in itself to Santander for $27 a share, about 27% above where the stock was trading at the time. The sale was part of an investment agreement that allows the Spanish bank to keep buying Sovereign shares until its stake hits 24.99%. Since then, Santander has been snapping up millions of dollars in shares, sometimes more than 600K in a single day. These purchases, made in the open mkt, routinely account for 30% or more of the daily trading volume in Sovereign shares. That buying has put a floor under Sovereign's stock price, which has hovered between $20 and $21, despite some analysts' doubts about the strength of the bank's business. The Spanish support is about to come to an end, if it hasn't already: As of Friday, the last day Santander disclosed its buying activities, the bank's Sovereign stake had climbed above 24.8%. Assuming the same buying pace, Santander is about to hit the 24.99% or has already done so, according to BofA analyst Kenneth Usdin. When Santander stops buying, Sovereign's shares could come under pressure, or at least trade in line with other banks. "I think it could weigh on the stock in the short term," Joseph Fenech, an analyst for Sandler O'Neill, said of the end of Santander's share purchases. "The stock really hasn't gone up, even though Santander has been aggressively buying. I wouldn't be surprised to see some weakness heading into September."
Barron's Online discusses favorably BP (BP), whose shares have fallen 3% since the co announced Aug. 6 it would cut production in Alaska's Prudhoe Bay to patch a leak and fix corrosion. BP's largest competitors, save ConocoPhillips, are up about 2% in the same period. The Alaska shutdown was the latest in a list of recent setbacks, from a deadly Texas refinery fire to deepwater-rig damage. But those factors are already in the stock, the worst performer among Big Oil shares in the past 12 months. In fact, investors may well have overreacted, alarmed by the drop in oil and natural-gas prices during the past 2 weeks. Now BP shares look reasonably priced, especially considering Alaska is less than 3% of BP's expanding global production. "BP has been caught napping at the wheel," says Fadel Gheit, of Oppenheimer, of the Alaska situation. "But the investor will put [the shutdown] aside because it will not have a meaningful impact on earnings. It is a hiccup."
According to the Barron's Online, Saks' (SKS) Chmn has sold nearly 2.3m shares of the operator of dept-store chains for a total of $34.4m following a disappointing Q2 report. Saks was identified as a potential tgt for a private-equity offer after Bon-Ton Stores agreed to acquire Saks' Northern dept-store division for $1.1bn last Oct. But Jonathan Moreland, director of research at InsiderInsights.com, says that Chmn's selling seems to signal that a buyout is not on the horizon. "The idea of a private-equity firm scooping [Saks] up for much more than it's trading for, given the chmn's transactions, is just not likely," Moreland says.
According to the WSJ's "Heard on the Street" column, in today's energy-stock sector, investors might want to borrow a credo from Watergate-era reporters: Follow the money. Thanks to soaring energy prices, the world's biggest oil and natural-gas co's are sitting on mountains of cash. Exxon Mobile (XOM) had more than $32bn in its coffers at the end of June. At the same time, Royal Dutch Shell,Chevron (CVX) and BP (BP) had a total of more than $26bn in cash. So, where will that money go? While shareholders likely will benefit from higher dividends and share repurchases, a big chunk of the cash will go toward building infrastructure projects required to get the next generation of oil and gas out of the ground, refined and brought to mkt. That is good news for engineering co's such as Jacobs Engineering Group (JEC), Foster Wheeler (FWLT), Chicago Bridge&Iron (CBI) and McDermott (MDR), which are seeing a buildup in backlogs of multiyear projects. "We're going to have to spend more capital to increase energy supplies," says John Segner, manager of the $1.5bn AIM Energy Fund. "And I think we're in the very early innings of doing that." This thesis led him to add Chicago Bridge stock to his fund's portfolio last fall.
According to the WSJ's "Tracking the Numbers" column, Sovereign Bancorp's (SOV) stock has been stuck in neutral all summer but could soon slip into reverse. The reason: Banco Santander Central Hispano (STD) is poised to stop its daily purchases of hundreds of thousands of the bank's shares. In early June, Sovereign sold a nearly 20% stake in itself to Santander for $27 a share, about 27% above where the stock was trading at the time. The sale was part of an investment agreement that allows the Spanish bank to keep buying Sovereign shares until its stake hits 24.99%. Since then, Santander has been snapping up millions of dollars in shares, sometimes more than 600K in a single day. These purchases, made in the open mkt, routinely account for 30% or more of the daily trading volume in Sovereign shares. That buying has put a floor under Sovereign's stock price, which has hovered between $20 and $21, despite some analysts' doubts about the strength of the bank's business. The Spanish support is about to come to an end, if it hasn't already: As of Friday, the last day Santander disclosed its buying activities, the bank's Sovereign stake had climbed above 24.8%. Assuming the same buying pace, Santander is about to hit the 24.99% or has already done so, according to BofA analyst Kenneth Usdin. When Santander stops buying, Sovereign's shares could come under pressure, or at least trade in line with other banks. "I think it could weigh on the stock in the short term," Joseph Fenech, an analyst for Sandler O'Neill, said of the end of Santander's share purchases. "The stock really hasn't gone up, even though Santander has been aggressively buying. I wouldn't be surprised to see some weakness heading into September."
Barron's Online discusses favorably BP (BP), whose shares have fallen 3% since the co announced Aug. 6 it would cut production in Alaska's Prudhoe Bay to patch a leak and fix corrosion. BP's largest competitors, save ConocoPhillips, are up about 2% in the same period. The Alaska shutdown was the latest in a list of recent setbacks, from a deadly Texas refinery fire to deepwater-rig damage. But those factors are already in the stock, the worst performer among Big Oil shares in the past 12 months. In fact, investors may well have overreacted, alarmed by the drop in oil and natural-gas prices during the past 2 weeks. Now BP shares look reasonably priced, especially considering Alaska is less than 3% of BP's expanding global production. "BP has been caught napping at the wheel," says Fadel Gheit, of Oppenheimer, of the Alaska situation. "But the investor will put [the shutdown] aside because it will not have a meaningful impact on earnings. It is a hiccup."
According to the Barron's Online, Saks' (SKS) Chmn has sold nearly 2.3m shares of the operator of dept-store chains for a total of $34.4m following a disappointing Q2 report. Saks was identified as a potential tgt for a private-equity offer after Bon-Ton Stores agreed to acquire Saks' Northern dept-store division for $1.1bn last Oct. But Jonathan Moreland, director of research at InsiderInsights.com, says that Chmn's selling seems to signal that a buyout is not on the horizon. "The idea of a private-equity firm scooping [Saks] up for much more than it's trading for, given the chmn's transactions, is just not likely," Moreland says.
Tuesday, August 22, 2006
Calls of Note Part 3
- BB&T Capital Markets is positive on Hub Group (NASDAQ:HUBG) after hosting a field trip to HUBG's corporate headquarters in Downer's Grove, IL. Overall, they had a positive meeting with management and came away feeling much more comfortable with regards to both intermodal volume growth as well as the company's need to increase asset ownership. Firm is confident that HUBG continues to have substantial margin improvement opportunities, particularly over the next 4--8 quarters. Finally, they are optimistic regarding the outlook for growth at the company's truck brokerage and drayage divisions.
Firm notes they look for growth in truck brokerage and drayage, continued strong pricing in the company's core intermodal product and strict cost controls to drive double digit EPS growth over the next 2--3 years.
They believe that margin improvement will be driven by: 1) growth in its more profitable truck brokerage business, 2) growth in its more profitable drayage business and in the percentage of its total drayage moves that are handled internally, and 3) continued strict cost controls.
Firm thinks intermodal volume growth will likely remain sluggish. This is due to four
factors: 1) an irrational competitor with low pricing, 2) tight industry capacity, 3) continued rail service issues and 4) a conscious decision to reduce its auto exposure. These four factors will likely continue to weigh on volume growth over the near term. That being said, HUBG's stock has generated significant momentum over the last three years despite lackluster volume growth. Firm suspects that this could be true going forward as well.
New 2006--2008 EPS estimates are $1.10, $1.28 and $1.41, up from $1.09, $1.15 and $1.22,
respectively. Firm's new 2006--2008 operating margin forecasts (as a percent of total net revenue) are 34.1%, 35.3% and 35.8%, up from 33.5%, 33.7% and 34.1%, respectively.
Tgt goes to $33 from $30. Maintains Buy.
Notablecalls: Putting on my nostalgic hat again. At my old trading desk, after reading the note I would most certainly go into 'all your HUBG belongs to me' mode. This stock is a mover and you want be in it.
Firm notes they look for growth in truck brokerage and drayage, continued strong pricing in the company's core intermodal product and strict cost controls to drive double digit EPS growth over the next 2--3 years.
They believe that margin improvement will be driven by: 1) growth in its more profitable truck brokerage business, 2) growth in its more profitable drayage business and in the percentage of its total drayage moves that are handled internally, and 3) continued strict cost controls.
Firm thinks intermodal volume growth will likely remain sluggish. This is due to four
factors: 1) an irrational competitor with low pricing, 2) tight industry capacity, 3) continued rail service issues and 4) a conscious decision to reduce its auto exposure. These four factors will likely continue to weigh on volume growth over the near term. That being said, HUBG's stock has generated significant momentum over the last three years despite lackluster volume growth. Firm suspects that this could be true going forward as well.
New 2006--2008 EPS estimates are $1.10, $1.28 and $1.41, up from $1.09, $1.15 and $1.22,
respectively. Firm's new 2006--2008 operating margin forecasts (as a percent of total net revenue) are 34.1%, 35.3% and 35.8%, up from 33.5%, 33.7% and 34.1%, respectively.
Tgt goes to $33 from $30. Maintains Buy.
Notablecalls: Putting on my nostalgic hat again. At my old trading desk, after reading the note I would most certainly go into 'all your HUBG belongs to me' mode. This stock is a mover and you want be in it.
Calls of Note Part 2
- Bear Stearns is out with an upgrade on XM Satellite (NASDAQ:XMSR) taking their rating to Outperform from Underperform. Firm believes that the wave of negative catalysts that have plagued the company over the previous months has finally subsided; in fact, they believe the company is about to experience a positive wave of catalysts, led by the impending FCC authorization for their devices.
After the precipitous decline in XMSR over the past three months, the firm believes that the market has over-adjusted for the concerns in the marketplace.
Firm highlights several Investment Points which support the change in their thesis on the company, including: survey work showing continued strong demand, their anticipation that guidance will be raised, and a bolstered management team.
1) FCC approval for XM's FM modulation units (they would expect in late Aug/ early Sept)
2) The commencement of shipping units for back-to-school / 4Q inventories The unshackling of the marketing rollout, which had been hampered by the FCC mod issues
3) Availability of Helix and Innos in quantity, at potentially lower MSRPs than Sirius' new line
4) Increase in market share (demand), per NPD data (as spurred by the marketing and new products)
5) Management exposure to Street - as the co completes its operational issues, they believe it will open up to the Street (particularly meeting new President & COO Nate Davis), further expounding on the positives of the XM story
6) Launching of Oprah (in September)
7) Raising (narrowing upward) guidance in October when the co reports, due to the
achievements above
8) Resolution of the recording rights & royalties issues
10) Further OEM penetration commitments (probably 1Q07)
Bear Stearns notes their new model is built conservatively, estimating: 16.5 mn subs by 2010 (vs. XM's expectation of high teens), declining OEM conversion rates, modest retail market share, higher churn rates, minimal ARPU growth, and lower SAC deceleration.
2007 target price of $17 is based on DCF valuation and supported by discounted EPS and FCF/Share analyses, as well as a Sirius EV/Sub comparative basis, all of which yield valuations in the $17-$18 range. Firm would expect a FCC approval to be followed shortly by manufacturing and shipment in volume in plenty of time for the big 4Q season. An improved marketing team coupled with the demand indicated by survey work, indicates a rebound in the 4Q for the company.
Notablecalls: As most of you already know that while I don't like highlighting upgrades/downgrades on this page, it's when I see something like this one, I usually end writing it up. Bear has been dead right on XMSR in the recent past and I think they may me right this time as well. You have a $11 (and change) stock here today that will be a close to $13 stock in the coming days. Prime example of an actionable upgrade.
After the precipitous decline in XMSR over the past three months, the firm believes that the market has over-adjusted for the concerns in the marketplace.
Firm highlights several Investment Points which support the change in their thesis on the company, including: survey work showing continued strong demand, their anticipation that guidance will be raised, and a bolstered management team.
1) FCC approval for XM's FM modulation units (they would expect in late Aug/ early Sept)
2) The commencement of shipping units for back-to-school / 4Q inventories The unshackling of the marketing rollout, which had been hampered by the FCC mod issues
3) Availability of Helix and Innos in quantity, at potentially lower MSRPs than Sirius' new line
4) Increase in market share (demand), per NPD data (as spurred by the marketing and new products)
5) Management exposure to Street - as the co completes its operational issues, they believe it will open up to the Street (particularly meeting new President & COO Nate Davis), further expounding on the positives of the XM story
6) Launching of Oprah (in September)
7) Raising (narrowing upward) guidance in October when the co reports, due to the
achievements above
8) Resolution of the recording rights & royalties issues
10) Further OEM penetration commitments (probably 1Q07)
Bear Stearns notes their new model is built conservatively, estimating: 16.5 mn subs by 2010 (vs. XM's expectation of high teens), declining OEM conversion rates, modest retail market share, higher churn rates, minimal ARPU growth, and lower SAC deceleration.
2007 target price of $17 is based on DCF valuation and supported by discounted EPS and FCF/Share analyses, as well as a Sirius EV/Sub comparative basis, all of which yield valuations in the $17-$18 range. Firm would expect a FCC approval to be followed shortly by manufacturing and shipment in volume in plenty of time for the big 4Q season. An improved marketing team coupled with the demand indicated by survey work, indicates a rebound in the 4Q for the company.
Notablecalls: As most of you already know that while I don't like highlighting upgrades/downgrades on this page, it's when I see something like this one, I usually end writing it up. Bear has been dead right on XMSR in the recent past and I think they may me right this time as well. You have a $11 (and change) stock here today that will be a close to $13 stock in the coming days. Prime example of an actionable upgrade.
Calls of Note Part 1
- Thomas Weisel Partners has some positive things to say about Sandisk (NASDAQ:SNDK) after spending time with co's management.
Firm's key takeaways are 1) Sandisk's cost per MB is likely to improve significantly in the coming quarters, 2) the pending M-Systems acquisition should have significant synergies and improve Sandisk's flash sourcing and/or royalty position, in firm's view, and 3) Sandisk appears confident it will be able to utilize MLC flash in the emerging SSD-based notebook market. Sandisk refrained from comments regarding short-term trends but acknowledged that Apple order activities at major flash vendors will have a significant impact on price stability for the duration of 2006. TWP continues to believe Sandisk is well positioned for significant long-term growth.
Firm reiterates their Outperform rating on the shares of Sandisk and view the acquisition as a near-term and long-term positive: 12-month $100 price target is based on 33x 2007 EPS estimate of $3.03 and a 1.25x PEG ratio on expected 26% EPS growth in 2007, which they believe is reasonable given Sandisk's leadership position in the flash memory industry and
likelihood of further positive estimate revisions.
Notablecalls: Back at my old trading desk I would be all over SNDK, pushing it higher in the pre mkt to dump the thing after the open. Think SNDK can move up today.
Firm's key takeaways are 1) Sandisk's cost per MB is likely to improve significantly in the coming quarters, 2) the pending M-Systems acquisition should have significant synergies and improve Sandisk's flash sourcing and/or royalty position, in firm's view, and 3) Sandisk appears confident it will be able to utilize MLC flash in the emerging SSD-based notebook market. Sandisk refrained from comments regarding short-term trends but acknowledged that Apple order activities at major flash vendors will have a significant impact on price stability for the duration of 2006. TWP continues to believe Sandisk is well positioned for significant long-term growth.
Firm reiterates their Outperform rating on the shares of Sandisk and view the acquisition as a near-term and long-term positive: 12-month $100 price target is based on 33x 2007 EPS estimate of $3.03 and a 1.25x PEG ratio on expected 26% EPS growth in 2007, which they believe is reasonable given Sandisk's leadership position in the flash memory industry and
likelihood of further positive estimate revisions.
Notablecalls: Back at my old trading desk I would be all over SNDK, pushing it higher in the pre mkt to dump the thing after the open. Think SNDK can move up today.
Paperstand
The Wall Street Journals "Heard on the Street" column is out saying that Wall St. is increasingly asking questions about Dell's (DELL) Kevin Rollins. Since Mr. Rollins became CEO in Jul'04, the world's largest PC maker by number of PCs shipped has hit a series of speed bumps. In the past 5 quarters, Dell has missed earnings and sales projections several times and posted disappointing financial results. On top of that, the co has grappled with poor customer service, personnel defections and the recall of 4.1m laptop batteries that potentially could overheat and burst into flames. Overall, co's once-robust stock is down about 60% since Mr. Rollins took over. Now, the Street is openly wondering if the fault for Dell's woes lies with the CEO. Some large institutional investors have sold Dell stock, including Fidelity Investments, Wellington Mgmt, and OppenheimerFunds. "Clearly, [Mr. Rollins] has to take some responsibility," says Sunil Reddy, a fund manager at Fifth Third Asset Mgmt unit of Cincinnati's Fifth Third Bancorp, which manages $22bn. While Mr. Reddy says his funds don't own Dell stock, Fifth Third had about 442K Dell shares as of late Jun. Andrew Neff, of Bear Stearns, adds that Dell needs to get a "real sense of urgency. You're going to need that either from Kevin Rollins or his successor." And so far, Mr. Neff says, "you're not seeing that" from Mr. Rollins. The analyst rates Dell a Peer Perform.
According to the WSJ, an investor group including Harbert Mgmt reported a 10.2% stake in Gateway (GTW) and said it sent a letter to the co offering assistance in enhancing shareholder value. The move comes as Gateway has battled fierce competition and a lethargic stock price. Once a computer highflier known for its use of distinctive boxes spotted with cow markings, Gateway has a mkt cap of $543m. In the letter, the Harbert group said it was writing to request a meeting to discuss how it can assist in the co's effort to "drive the business and build value at Gateway." The group said, "We believe our backgrounds with consumer brands as founders, CEOs and strategic investors can add horsepower to your current efforts to recruit the best possible leadership."
According to the Barron's Online, US Mobility's (USMO) metrics are signaling "SOS" as the largest US paging co's subs and rev continue to fall drastically. But one hedge-fund manager isn't distressed. David Abrams, a USA Mobility director since Nov'04, disclosed that his fund Abrams Capital Partners and its investment partners have spent nearly $29.6m to purchase more than 1.4m shares in the open mkt from Aug. 11 through 16. SEC filings show Abrams Capital beneficially owns about 3.9m shares, or 14.4% of USA Mobility.
According to the WSJ, an investor group including Harbert Mgmt reported a 10.2% stake in Gateway (GTW) and said it sent a letter to the co offering assistance in enhancing shareholder value. The move comes as Gateway has battled fierce competition and a lethargic stock price. Once a computer highflier known for its use of distinctive boxes spotted with cow markings, Gateway has a mkt cap of $543m. In the letter, the Harbert group said it was writing to request a meeting to discuss how it can assist in the co's effort to "drive the business and build value at Gateway." The group said, "We believe our backgrounds with consumer brands as founders, CEOs and strategic investors can add horsepower to your current efforts to recruit the best possible leadership."
According to the Barron's Online, US Mobility's (USMO) metrics are signaling "SOS" as the largest US paging co's subs and rev continue to fall drastically. But one hedge-fund manager isn't distressed. David Abrams, a USA Mobility director since Nov'04, disclosed that his fund Abrams Capital Partners and its investment partners have spent nearly $29.6m to purchase more than 1.4m shares in the open mkt from Aug. 11 through 16. SEC filings show Abrams Capital beneficially owns about 3.9m shares, or 14.4% of USA Mobility.
Monday, August 21, 2006
Calls of Note Part 4
- Oppenheimer notes that UK-based Pipex will begin deploying Airspan (NASDAQ:AIRN) equipment for the first of a multi-phase WiMAX rollout later this year, with an official announcement possible next month. This is earlier than we had expected, and recently, Pipex has begun to provide more detail about rollout plans in additional metro markets. In the context of Sprint's "blessing" of WiMAX as its 4G technology and Pipex Wireless's significant spectrum holdings, we wonder if the decision by Pipex and Intel to spin-off a subsidiary of the UK operator earlier this year is prologue to a possible acquisition of Pipex Wireless by British Telecom. As far as they know, Airspan is the only provider supplying WiMAX equipment to Pipex Wireless.
Firm sees some option value in the potential for a UK deal not reflected in Airspan's current price.
They note the shares have begun to recover but they think there is too much Yozan risk priced in; at the same time, we think not enough upside related to WiMAX's recent momentum gains in major metropolitan areas is reflected in AIRN. This is not to suggest that Airspan is without risk " it remains a high-risk "story" stock. Firm just thinks the story is getting better. With the shares at 0.6x 2007 revenue forecast and less than 10x a preliminary 2008 earnings per share forecast of $0.25, they see more upside than down.
And with a market cap of less than $100 million they also view Airspan as a potential take-out target.
Maintains $8.50 tgt (guess what the rating is).
Notablecalls: Like the note. Would risk 10 cents just for the hell of it.
Firm sees some option value in the potential for a UK deal not reflected in Airspan's current price.
They note the shares have begun to recover but they think there is too much Yozan risk priced in; at the same time, we think not enough upside related to WiMAX's recent momentum gains in major metropolitan areas is reflected in AIRN. This is not to suggest that Airspan is without risk " it remains a high-risk "story" stock. Firm just thinks the story is getting better. With the shares at 0.6x 2007 revenue forecast and less than 10x a preliminary 2008 earnings per share forecast of $0.25, they see more upside than down.
And with a market cap of less than $100 million they also view Airspan as a potential take-out target.
Maintains $8.50 tgt (guess what the rating is).
Notablecalls: Like the note. Would risk 10 cents just for the hell of it.
Calls of Note Part 3
- Goldman comments on Ford (NYSE:F) saying the shares essentially shrugged off news of a massive 21% yoy 4Q production cut, even with most of the cut on high-profit truck platforms. Firm suspects investors have been buying Ford shares now and waiting to ask questions later to avoid missing a GM-style, restructuring-fueled run. But they think risk is now to the downside, with the stock up 33% in a month, firm's estimations that shares are pricing in ambitious cost cutting and asset sales, plus clear evidence fundamentals are worsening.
Goldman thinks risk in Ford shares is now to the downside for 4 reasons:
1) Shares are pricing in a lot. Firm's new 2007 EPS of -$0.05 already includes about $4bn in 2006 and 2007 cost cutting. They think a revised "Way Forward" plan may boost that figure by $1.0bn - $1.5bn (EPS impact of $0.32 - $0.64). Selling Jaguar by year-end 2006 (ambitious) could boost 2007 EPS by another $0.25. That gets us to a potential 2007 EPS of $0.84, which at 9X is $7.56, 5% below the current share price.
2) Upside at Ford from alliances seems dubious. Goldman doubts any alliance materially improves fundamentals for at least 3-4 years. They think scenarios that have GM shunning Ghosn, Bill Ford resigning, and Ghosn stepping down from NisRen to run Ford seem far fetched and are not stable ground for making a Ford "Buy" case.
3) Much of what propelled GM shares YTD - diminished risk of a Delphi strike and a Chapter 11 filing, and a strong truck-lead product cadence - does NOT apply to Ford. In fact, Ford's product cadence is worsening as truck pressures quickly mount.
4) It warrants noting that massive production cuts to key platforms (F-Series, SUVs) evidence a business in secular decline. Further employee cuts and plant closings under a new Way Forward plan do nothing to slow an eroding top line.
Notablecalls: Goldman is not the only bear this morning. F stock is trading down 2% in pre mkt trading. Would have expected a bigger haircut following the Goldman call. But we may still get it it.
Goldman thinks risk in Ford shares is now to the downside for 4 reasons:
1) Shares are pricing in a lot. Firm's new 2007 EPS of -$0.05 already includes about $4bn in 2006 and 2007 cost cutting. They think a revised "Way Forward" plan may boost that figure by $1.0bn - $1.5bn (EPS impact of $0.32 - $0.64). Selling Jaguar by year-end 2006 (ambitious) could boost 2007 EPS by another $0.25. That gets us to a potential 2007 EPS of $0.84, which at 9X is $7.56, 5% below the current share price.
2) Upside at Ford from alliances seems dubious. Goldman doubts any alliance materially improves fundamentals for at least 3-4 years. They think scenarios that have GM shunning Ghosn, Bill Ford resigning, and Ghosn stepping down from NisRen to run Ford seem far fetched and are not stable ground for making a Ford "Buy" case.
3) Much of what propelled GM shares YTD - diminished risk of a Delphi strike and a Chapter 11 filing, and a strong truck-lead product cadence - does NOT apply to Ford. In fact, Ford's product cadence is worsening as truck pressures quickly mount.
4) It warrants noting that massive production cuts to key platforms (F-Series, SUVs) evidence a business in secular decline. Further employee cuts and plant closings under a new Way Forward plan do nothing to slow an eroding top line.
Notablecalls: Goldman is not the only bear this morning. F stock is trading down 2% in pre mkt trading. Would have expected a bigger haircut following the Goldman call. But we may still get it it.
Calls of Note Part 2
- Baird has some interesting comments on Millennium Pharma (NASDAQ:MLMN) saying their latest hematologist survey shows that Velcade is maintaining its position in all lines of multiple
myeloma, and it appears to have improved its position as a promising treatment in NHL. With over half of physicians stating they will increase Velcade use, we could see upside in 2H, 2006.
Firm's recently-fielded hematologist survey (July 2006) indicates that Velcade is both holding its own in MM (despite concerns over the impact of Revlimid) and is actually gaining physician mind-share in NHL.
Specifically, in front-line MM, Velcade has maintained its 12% market share, and continues to hold on to 60%+ and 40%+ shares in the second- and third-line settings, respectively. Velcade was also named as a promising new treatment strategy by 41% of ASCO attendees (56% of non-attendees), indicating that physicians appear to continue to think highly of the drug. Surprisingly, despite data showing utility as an induction agent (for stem-cell transplant), Velcade barely registers at 6% use rate in this front-line setting.
Fundamentally, the important question for MLNM is whether physicians will increase their use of Velcade. In firm's survey, the answer appears to be a clear "yes." Of surveyed hematologists, 53% stated that they were planning to increase their Velcade use, consistent with Q106. Notably, only 3% stated they would decrease use, which could bode well for 2H, 2006 Velcade sales.
Baird is currently maintaining $11 tgt and Neutral rating.
Notablecalls: MLNM has been pretty strong over the past 6 months and this may have discounted some of the heightened potential of Velcade. But still, expectations are still quite modest. This one may see some upside in the n-t. Not a high conviction call.
myeloma, and it appears to have improved its position as a promising treatment in NHL. With over half of physicians stating they will increase Velcade use, we could see upside in 2H, 2006.
Firm's recently-fielded hematologist survey (July 2006) indicates that Velcade is both holding its own in MM (despite concerns over the impact of Revlimid) and is actually gaining physician mind-share in NHL.
Specifically, in front-line MM, Velcade has maintained its 12% market share, and continues to hold on to 60%+ and 40%+ shares in the second- and third-line settings, respectively. Velcade was also named as a promising new treatment strategy by 41% of ASCO attendees (56% of non-attendees), indicating that physicians appear to continue to think highly of the drug. Surprisingly, despite data showing utility as an induction agent (for stem-cell transplant), Velcade barely registers at 6% use rate in this front-line setting.
Fundamentally, the important question for MLNM is whether physicians will increase their use of Velcade. In firm's survey, the answer appears to be a clear "yes." Of surveyed hematologists, 53% stated that they were planning to increase their Velcade use, consistent with Q106. Notably, only 3% stated they would decrease use, which could bode well for 2H, 2006 Velcade sales.
Baird is currently maintaining $11 tgt and Neutral rating.
Notablecalls: MLNM has been pretty strong over the past 6 months and this may have discounted some of the heightened potential of Velcade. But still, expectations are still quite modest. This one may see some upside in the n-t. Not a high conviction call.
Calls of Note Part 1
- ThinkEquity comments on Move (NASDAQ:MOVE) reiterating their Buy rating and $9 price tgt. Firm notes MOVE shares have been under pressure recently in sympathy with a sagging housing market. While sentiment is negative, the underlying fundamentals and trends for MOVE are perhaps stronger than ever, creating an excellent buying opportunity for a long-term sector winner, in firm's view. MOVE's current investment phase should begin driving top-line momentum and operating leverage heading into FY07 as the company completes the transition to CPC pricing, launches its community products and introduces new Web site features like mapping upon the 4Q06 data center move.
As a media business, MOVE's keys are audience size/growth and advertising demand both of
which have been trending strongly. MOVE's Web site traffic grew 5% in July/ June (source: Comscore) and advertising demand has been accelerating as real estate professionals are seeking greater efficiencies in higher-return marketing channels, e.g., the Internet, in the face of a housing downturn. Not only should MOVE, as the dominant on-line real-estate destination, continue to benefit from the overall growth of users/ad dollars online, evidence suggests that a weakening housing market may be a catalyst for its business.
MOVE trades at 10x FY07E EV/EBITDA vs. FY07E EBITDA growth of 153%. Firm's price target of $9 assumes 27x FY07E EV/EBITDA vs. a projected three-year EBITDA growth rate of over 100%.
Notablecalls: Not actionable but good to know category.
As a media business, MOVE's keys are audience size/growth and advertising demand both of
which have been trending strongly. MOVE's Web site traffic grew 5% in July/ June (source: Comscore) and advertising demand has been accelerating as real estate professionals are seeking greater efficiencies in higher-return marketing channels, e.g., the Internet, in the face of a housing downturn. Not only should MOVE, as the dominant on-line real-estate destination, continue to benefit from the overall growth of users/ad dollars online, evidence suggests that a weakening housing market may be a catalyst for its business.
MOVE trades at 10x FY07E EV/EBITDA vs. FY07E EBITDA growth of 153%. Firm's price target of $9 assumes 27x FY07E EV/EBITDA vs. a projected three-year EBITDA growth rate of over 100%.
Notablecalls: Not actionable but good to know category.
Paperstand
According to the WSJ's "Heard on the Street" column, despite a recent swoon in eBay's (EBAY) share price, Wall St. seems willing to give CEO Meg Whitman the benefit of the doubt. EBay's merchants beg to differ. Some of those who sell merchandise through the co's Web site recently have called for drastic action and mgmt change at the co. They are particularly upset at the deterioration in the co's flagship auction site, where they say they are seeing fewer transactions and declining sale prices. "EBay's core [auction] performance is suffering tremendously," says Steve Grossberg, a longtime videogame seller on eBay. He says he now lists an item 4x on avg in order to sell it, up from two listings two years ago. Adds Andy Mowery, an eBay seller of home and garden gear: "It is time for new leadership at eBay." Yet investor sentiment toward Ms. Whitman remains sanguine. "The problems eBay's got are a function of the fact that they're a large co," says Ken Smith, a portfolio manager at Munder Capital, which owns eBay shares. "I don't think mgmt change is necessitated."
According to the Barron's Online "Inside Scoop" section, defense stocks may have seen some bearish investor sentiment lately, but two directors at DynCorp International (DCP) recently spent nearly $2.1m on the open market fortifying their holdings of the government securities-services contractor.
According to the Barron's Online "Inside Scoop" section, defense stocks may have seen some bearish investor sentiment lately, but two directors at DynCorp International (DCP) recently spent nearly $2.1m on the open market fortifying their holdings of the government securities-services contractor.
Barron's Summary
Barron's cover discusses Aetna (AET), which shares hit a 52w low on Aug.1, shortly after Aetna disappointed Wall St. with its Q2 earnings. Though the stock has rebounded to about 36.50, it's still down about 23% since the start of the year. Some investors and analysts see plenty of value, however. According to the article, there's good reason to believe that Aetna's problems aren't as bad as the bears portray them. For one thing, predicts Jay Leopold, of Legg Mason Capital Mgmt, Aetna will be able to fix the MCR problem. "They will be able to correct the medical cost issues they face over time," probably within 12 months. Analysts say that there's room to raise premiums. Jay Nogueira, of T. Rowe Price, which as of June 30 held 3.1m shares of Aetna, says that, while "things didn't quite break their way" on the medical-cost ratio, the co made up for it by reducing overhead costs. The quarter, he adds, was "not an unmitigated disaster, the way the market is treating it." Matthew Borsch, of Goldman Sachs, who upgraded the shares the day after Q2 earnings came out, calls the selloff "overdone, leaving an attractive risk/reward" ratio. His six-month tgt is 40.
Barron's discusses Ameriprise Financial (AMP) which came public at 34.34, and now trades for 45.50, or a modest 14x earnings. But the stock could be worth 57 as the co's strategic moves yield results.
If sales of variable annuities in Japan continue to slide, Hartford Financial's (HIG) profit growth will sputter. Bears think that could keep valuations cheap.
The Trader column suggests that the builder's rally is likely just an enjoyable summer zephyr. Larry Jeddeloh, chief investment officer at money manager TIS Group, did buy shares of Toll Brothers (TOL) and Ryland Group (RYL), but he notes that it's a quick trade to take advantage of a likely short-term rally. "My gut feeling" is that there is another leg down for this group, he adds, as the stocks typically fall significantly below book value before they rally on a sustainable basis.
Follow Up section reviews Procter&Gamble (PG) and PepsiCo (PEP) articles. Article suggests that P&G is still fine, despite feaars and new boss should keep fizz in Pepsi.
Technology Trader section highlights story about small defense stocks, notably UIC and AH, ones that should outperform. Article was highlighted in Barron's Online Friday. Read here.
Barron's discusses Ameriprise Financial (AMP) which came public at 34.34, and now trades for 45.50, or a modest 14x earnings. But the stock could be worth 57 as the co's strategic moves yield results.
If sales of variable annuities in Japan continue to slide, Hartford Financial's (HIG) profit growth will sputter. Bears think that could keep valuations cheap.
The Trader column suggests that the builder's rally is likely just an enjoyable summer zephyr. Larry Jeddeloh, chief investment officer at money manager TIS Group, did buy shares of Toll Brothers (TOL) and Ryland Group (RYL), but he notes that it's a quick trade to take advantage of a likely short-term rally. "My gut feeling" is that there is another leg down for this group, he adds, as the stocks typically fall significantly below book value before they rally on a sustainable basis.
Follow Up section reviews Procter&Gamble (PG) and PepsiCo (PEP) articles. Article suggests that P&G is still fine, despite feaars and new boss should keep fizz in Pepsi.
Technology Trader section highlights story about small defense stocks, notably UIC and AH, ones that should outperform. Article was highlighted in Barron's Online Friday. Read here.
Friday, August 18, 2006
Calls of Note Part 2
- Banc of America notes that as previewed, Dell announced an expanded relationship with AMD (NYSE:AMD) to incl. desktops and 2 way servers.
Somewhat different from firm's expectations. The primary points of difference were: 1) AMD would be used (at least initially) only in Dimension desktops, and (as implied by Dell management) for the consumer market only; 2) the absence of a notebook announcement; and 3) the earlier than anticipated desktop launch (Sept).
An earlier than anticipated ramp, but not the rocket launch some had envisioned. Firm's analysis implies that AMD is unlikely to witness a material boost to its Sept. qtr results by virtue of the desktop win related to Dell's low end consumer systems - which they estimate would contribute roughly $8-10m in sales - likely at lower than corporate average ASPs and margins. In addition, we also believe that, similar to Dell, AMD will likely incur some start-up costs (mostly op-ex) from the ramp of the new business, which may impact AMD's profitability in Sept/Dec.
Somewhat different from firm's expectations. The primary points of difference were: 1) AMD would be used (at least initially) only in Dimension desktops, and (as implied by Dell management) for the consumer market only; 2) the absence of a notebook announcement; and 3) the earlier than anticipated desktop launch (Sept).
An earlier than anticipated ramp, but not the rocket launch some had envisioned. Firm's analysis implies that AMD is unlikely to witness a material boost to its Sept. qtr results by virtue of the desktop win related to Dell's low end consumer systems - which they estimate would contribute roughly $8-10m in sales - likely at lower than corporate average ASPs and margins. In addition, we also believe that, similar to Dell, AMD will likely incur some start-up costs (mostly op-ex) from the ramp of the new business, which may impact AMD's profitability in Sept/Dec.
Firm notes they haven't heard the last of AMD-Dell yet. The modest start notwithstanding, the relationship with Dell does have the potential to broaden beyond low end desktops. Additionally, they still expect Dell to broaden the use of AMD processors into notebooks in the Dec qtr.
Likely less negative for Intel. By extension, the announcement implies less of an impact to Intel's n-t est. as the initial ramp is targeted at low end consumer desktops - a segment that is likely least profitable to Intel.
- Stifel notes that last night's announcement expands AMD's presence beyond 4-way servers and into Dimension desktop's targeting consumers. Desktops using AMD's processors are expected to launch next month.
Notably, AMD CEO Hector Ruiz stated in the recent AMD/ATI conference call that each point of additional MPU market share achieved equates to $300 million at a 60% plus gross margin. Recent data show AMD to have 17.9% PC market share, 20.8% desktop share, and 11.5% laptop share.
Dell reported having a world-wide market share of 19.3% at quarter- end and a dominating 34.2% share of the U.S. market. Dell also reported average total revenue per unit of $1,460 in 2Q, up from $1,430 last quarter, and below the 2Q05 average of $1,480.
While very positive for AMD, Dell's announcement fell short of expanding its relationship into laptops, although we would expect an announcement of this type to come later this year. At this early stage it is difficult to quantify the near-term financial impact to AMD as no specifics were given as to the types or numbers of models that will be using its processors.
If one assumes roughly a million desktop units could be shipped during the fourth quarter with an average CPU price of $72, AMD could see a top line benefit of $72 million. Given firm's expected 4Q net margin of roughly 11%, AMD would see $0.015 a share accretion in 4Q under this scenario. They believe an additional $0.01 a share contribution could result from new Dell server business.
Despite the positive news regarding inroads at Dell, they continue to rate shares of AMD Hold as current announcements, along with predicted future laptop announcements, were largely expected.
Notablecalls: AMD is likely to trade down on this. But the downside is most likely limited.
Calls of Note Part 1
- Piper Jaffray notes that within the last several days Dell has changed the layout of its website for customized PC buying. There are various versions of Dell's website that can currently be accessed by those looking to configure a PC: some versions of the site still have the option to upgrade Sonic's software, while other versions no longer offer an upgrade option.
The change to Dell's website could have no impact on Sonic Solution (NASDAQ:SNIC)'s September quarter revenue or as much as a negative 10% impact. The earnings impact for September could range from no impact to a negative $0.05 impact. In the June quarter, Dell accounted for 24% of Sonic's revenue. Sonic's Dell revenue is comprised of per unit royalties and upgrade revenue. Firm estimates upgrade revenue accounts for about half of overall Dell-related revenue. The reason the firm believes the impact to Sonic is less than 12% (i.e. half of the 24% of Dell revenue) is that Dell is now contractually obligated to increase Sonic's per unit royalty if there are changes to the layout of the Dell site that in any way negatively impact Sonic's upgrade revenue.
The change to Dell's website could have no impact on Sonic Solution (NASDAQ:SNIC)'s September quarter revenue or as much as a negative 10% impact. The earnings impact for September could range from no impact to a negative $0.05 impact. In the June quarter, Dell accounted for 24% of Sonic's revenue. Sonic's Dell revenue is comprised of per unit royalties and upgrade revenue. Firm estimates upgrade revenue accounts for about half of overall Dell-related revenue. The reason the firm believes the impact to Sonic is less than 12% (i.e. half of the 24% of Dell revenue) is that Dell is now contractually obligated to increase Sonic's per unit royalty if there are changes to the layout of the Dell site that in any way negatively impact Sonic's upgrade revenue.
The key question is the following: Is Dell obligated to make up the entire shortfall in upgrade revenue, or only a portion of the shortfall? At this time, the firm does not know the answer.They believe that if this continues, it will have an ongoing impact on Sonic's number, but given Dell's history in making frequent changes to its website, they are taking a wait-and-see approach to quarters beyond the September quarter. History suggests Dell will compensate Sonic or change the website in a way that is favorable to Sonic, but history would also suggest Sonic will have a small miss in the September quarter.
Last fall Sonic went through a similar situation when Dell moved Sonic's position in the website layout (but still offered upgrades). This resulted in 1% negative impact on Sonic's December quarter revenue.
Maintains Outperform and $25 tgt.
Notablecalls: Nice piece of research guys! Think SNIC will trade down today.
Color on quarter: Marvell Tech (MRVL)
Several firms commenting on Marvell Tech (NASDAQ:MRVL) following somewhat weaker than expected results (rev side) and guidance issued last night:
* Oppenheimer notes the co reported July quarter revenues of $574mm versus consensus of $582.9mm and guidance of $580-585mm. Company attributed the miss to weakness to in the PC/Desktop and 802.11n segments as the firm had noted before. On the Positive side, MRVL began consumer shipments of its WLAN segment into PS3, has design wins in its Avago Printer business beyond H-P (HPQ), grew its GbE switch business suggesting share gains.
MRVL also guided Q3 to continuing PC/Desktop (GbE client) and 802.11n weakness, despite, strength in the GbE consumer and Avago printer business. Company guided Q3 top line up 1% QoQ to $580mm vs firm's estimate of $617mm (cons $623mm), gross margins in line with prior 53.4% guidance. MRVL lowered its FY07(Jan) revenue outlook from $2.37-2.43bn to $2.27-2.29bn. Firm believes part of the conservatism is driven by MRVL seeing high PC/desktop inventory (GbE client) build and weakness in the 802.11n with channel stuffing by BRCM and ATHR.
* Oppenheimer notes the co reported July quarter revenues of $574mm versus consensus of $582.9mm and guidance of $580-585mm. Company attributed the miss to weakness to in the PC/Desktop and 802.11n segments as the firm had noted before. On the Positive side, MRVL began consumer shipments of its WLAN segment into PS3, has design wins in its Avago Printer business beyond H-P (HPQ), grew its GbE switch business suggesting share gains.
MRVL also guided Q3 to continuing PC/Desktop (GbE client) and 802.11n weakness, despite, strength in the GbE consumer and Avago printer business. Company guided Q3 top line up 1% QoQ to $580mm vs firm's estimate of $617mm (cons $623mm), gross margins in line with prior 53.4% guidance. MRVL lowered its FY07(Jan) revenue outlook from $2.37-2.43bn to $2.27-2.29bn. Firm believes part of the conservatism is driven by MRVL seeing high PC/desktop inventory (GbE client) build and weakness in the 802.11n with channel stuffing by BRCM and ATHR.
Firm is maintaining their Buy rating, lowering 12-month price target to $25 from $33. Longer term they believe MRVL is one of the best positioned semiconductor companies and the handset part of the story is yet to begin.
* Deutsche Bank notes that despite numerous strong product cycles, MRVL could not escape its exposure to the soft PC mkt (HDD & client GbE) as indicated by its soft F2Q revs and F3Q outlook. After a lackluster F3Q, the firm expects MRVL's growth to reaccelerate in F4Q and beyond as it continues to be a broad-based mkt share gainer. As much negative news is factored into today's valuation, they recommend investors use the current pause in growth as a buying opportunity. Reiterates Buy.
Tgt goes to $27 from $30.
Notablecalls: MRVL's a notorious bouncer and I expect nothing less from the stock after the open. Just a trade, though.
Color on quarter: Dell Computer (DELL)
- Dell Computer (NASDAQ:DELL) threw investors yet another curveball last night announcing weak results (in-line with pre-announce) & an informal SEC investigation related to how it books revenue and other accounting matters. Stock took a 5% hit in after hours trading. I think there are two firms out with notes that describe the the Dell situation - one in long-term and one from trading perspective. Guess which is which!
* Merrill Lynch notes Dell reported in line with its negative preannouncement. The business is decelerating and incremental margins are step-function negative.
Key questions are: 1) When will the top line stabilize? 2) How does a company with historically modest operating leverage miss earnings by 30%+ on a mere 2% top line miss? 3) Are the forces causing margin deterioration reversible over a predictable timeframe? Firm notes they'd need more conviction in 1 and 3 to get excited.
* Merrill Lynch notes Dell reported in line with its negative preannouncement. The business is decelerating and incremental margins are step-function negative.
Key questions are: 1) When will the top line stabilize? 2) How does a company with historically modest operating leverage miss earnings by 30%+ on a mere 2% top line miss? 3) Are the forces causing margin deterioration reversible over a predictable timeframe? Firm notes they'd need more conviction in 1 and 3 to get excited.
Although management wouldn't talk about it, they suspect a cut in development funds from Intel to Dell explains a large chunk of the margin miss. Management also blamed aggressive pricing and said it would ease a bit going forward, though competitors didn't seem to notice much change in the first place. Weak demand in corporate PCs, better execution from competitors, less than expected component cost declines, and rising opex from Dell's efforts to fix customer service all combined for a margin squeeze in the quarter. Hard to reconcile alternating stance on elasticity Management's commentary on pricing has tended to alternate by quarter between an intention to get more and then less aggressive and seemingly back and forth again. All the while the goal of optimizing elasticity appears elusive and the common theme has been decelerating growth. This reinforces firm's view that pricing is neither the diagnosis nor the cure for Dell's difficulties. Instead, they believe the challenges are structural. See no need to rush into the stock Firm's margin and growth matrix suggests a margin snapback is needed to make the argument for owning the stock. They're not convinced. Neutral.
* Deutsche Bank notes Dell announced a highly-anticipated expanded relationship with AMD for desktop systems. More unexpected was an informal SEC investigation into Dell's revenue recognition, and that Dell's internal investigation has uncovered issues related to certain past periods (pre-FY06). Firm has raised their FY07 EPS to $1.05 from $1.00, and raised price target to $25 from $24.
Management cited slower ASP declines in components as putting a squeeze on margins this quarter, although when questioned would not give specifics. Despite significant price declines in processors (market pricing), they believe Dell suffered from fewer marketing dollars from Intel, which likely hurt results Q/Q. Perhaps not coincidentally, Dell announced an expanded relationship with AMD and will use AMD processors in its Dimension desktops starting in September.
Dell also announced that it received a notice in August 2005 from the SEC indicating an informal investigation into Dell's revenue recognition and other accounting and financial reporting matters for certain past periods. While responding to the request, which was made a year ago, Dell discovered information that raises potential issues around certain prior periods (pre FY06). Dell does not believe these issues will have a material impact on its financial position.
So what's really going on? Deutsche believes Dell saw the brunt of a transition of volume from Intel to AMD this quarter, and may feel the effects of this in the coming quarter. Although management would not comment on its relationship with Intel, they believe Dell likely lost significant "co-marketing" dollars from Intel this quarter, either as a result of Dell's decision to start using AMD processors or resulting from AMD's lawsuit against Intel. Firm believes the net effect was higher components costs for Dell on processors Q/Q, despite ASP declines in the larger market. Over the next quarter or two, they believe Dell could see a lingering impact from this transition, but that over the long term, Dell will benefit from the inclusion of AMD in its product line up. In addition, this move allows Dell to enter the AMD based PC and server markets, which to a large extent, have been dominated by HP. This move could create pressure on HP's PC margins as the firm believes it earns significantly higher margins on AMD based systems then Intel based systems (less competition).
Deutsche thinks the product transition issues around Intel/AMD will work themselves through and they expect Dell to try to offset higher overall processor costs in F2H07 through cost reductions in components, structural material and warranty costs. With the shares currently trading at 16x CY07 EPS x-cash, they believe the risk/reward is weighted to the upside, with most of the negative news factored into Dell's share price. Continues to view Dell as the best way to play a Vista-driven corporate upgrade cycle.
Notablecalls: Both firms make a good point. While I feel Merrill is right about the secular changes taking place in the industry, I feel Deutsche is pushing the right short-term trading buttons. One for the brave - buy DELL for a bounce today.
Paperstand
The WSJ's "Heard on the Street" column discusses British Sky Broadcasting (BSY), saying that investors in the co's shares who are concerned that CEO James Murdoch is spending too heavily should note: like father, like son. Just as his father, News Corp (NWS) Chmn Rupert, has done many times, James is taking steps that incur short-term losses in pursuit of a longer-term strategy, say analysts, fund managers and News Corp. execs. This year and over the next 3 years, James is spending about $1.33bn to expand into broadband Internet and telephony, a move aimed at fending off competition from telecom co's that are increasingly encroaching on BSkyB's television turf and capturing a large part of fast-growing mkt. It is the biggest investment James has made outside of television since he became CEO. Investors knew about a coming broadband push, but the cost of the venture surprised them. When James explained that it would lower profits by £400m over 3 years, BSkyB shares fell 4%. BSkyB's broadband and telephone strategy is seen as crucial as competition intensifies among cable, satellite and telecom providers. What the industry calls "triple play", offering customers their television, broadband and telephone services all at once and on one bill, is increasingly popular with consumers, and BSkyB risks losing customers if it isn't able to offer all three.
The NY Times reports that hedge funds place big bets on hurricane season. According to the Reinsurance Association of America, $23bn in capital has been raised for new or existing reinsurers since Hurricane Katrina. Hedge funds and private equity firms have led the way in the $7.3bn that has been pumped into Bermuda start-up co's and $3.6bn in "sidecars", special-purpose entities through which hedge funds give additional capital to existing reinsurers. That compares with no new start-ups or sidecars in the 12 months before Katrina, says Frank Nutter, president of the RAA. That hedge funds are suddenly reinsurance experts should be no surprise. Insurers and reinsurers try to create models to determine potential claims they may have to pay, and the co's price premiums accordingly. Having just suffered a 1-in-100 kind of year, the insurance industry can justify increasing premiums to the stratosphere. At the same time, the statistical probability of another 1-in-100 kind of year happening moves further away, the insurers reason. Premiums for the Gulf Coast are up 100-200% since the storms of '05.
According to the Barron's Online, despite an ongoing military campaign in Iraq and threats posed by Iran, N-Korea and rogue terrorist groups, the rate of growth of US defense spending is expected to slow down in the coming years. That may mean that some of the best investments may not be the large defense conglomerates, but stocks of smaller contractors with projects in the hundreds of millions, not billions, projects that may more easily avoid the chopping block. They include names such as $552.84m-mkt cap United Industrial (UIC), which makes computer-controlled reconnaissance planes, or $1.9bn Armor Holdings (AH), which retrofits Humvees with battlefield shielding. "The rev growth of United and some other small-cap vendors could be at least 3x that of Boeing (BA) and the other [big defense contractors]," says Michael Lewis, of BB&T. And mid- and smaller-cap co's do contract work for Boeing and others. What trickles down from the conglomerates could be meaningful rev to niche vendors, says John Burke, of Weiss Research's MoneyandMarkets.com. This focus on smaller co's comes at a time when larger co's will surely feel the acute pain of fiscal belt-tightening. Defense spending increases of 4-5% a year over the next several years mark a slowing from prior years, says Lewis. The Bush administration's request for roughly $500bn for this year and next, including supplementary funding for Iraq, is at the upper end of defense spending for the last two generations, says Loren Thompson of Lexington Institute. There is no time in the last several decades when defense spending has been much higher than it is today,'' he says.
Barron's Online reports that insiders are trimming back on Scotts Miracle-Gro (SMG), suggesting the near-term growth outlook may not look so rosy. Members of the founding family of predecessor co Stern's Miracle-Gro Products (which merged with lawn-care co Scotts in '95) and a longtime co director have grossed nearly $8.2m by selling 213K Scotts shares since the beginning of the month. Ben Silverman, director of research at InsiderScore.com, says: "Selling on weakness is certainly never a positive," given mgmt's "disappointing forecast" and economic headwinds.
The NY Post reports that two women who were once top executives at DHB Industries (DHBT.PK) were arrested yesterday on charges they made millions in ill-gotten gains by cooking the books of the co. Dawn Schlegel, DHB's CFO until she resigned early this year, and Sandra Hatfield, the co's COO before she stepped down late last year, turned themselves in to FBI agents early yesterday.
The NY Times reports that hedge funds place big bets on hurricane season. According to the Reinsurance Association of America, $23bn in capital has been raised for new or existing reinsurers since Hurricane Katrina. Hedge funds and private equity firms have led the way in the $7.3bn that has been pumped into Bermuda start-up co's and $3.6bn in "sidecars", special-purpose entities through which hedge funds give additional capital to existing reinsurers. That compares with no new start-ups or sidecars in the 12 months before Katrina, says Frank Nutter, president of the RAA. That hedge funds are suddenly reinsurance experts should be no surprise. Insurers and reinsurers try to create models to determine potential claims they may have to pay, and the co's price premiums accordingly. Having just suffered a 1-in-100 kind of year, the insurance industry can justify increasing premiums to the stratosphere. At the same time, the statistical probability of another 1-in-100 kind of year happening moves further away, the insurers reason. Premiums for the Gulf Coast are up 100-200% since the storms of '05.
According to the Barron's Online, despite an ongoing military campaign in Iraq and threats posed by Iran, N-Korea and rogue terrorist groups, the rate of growth of US defense spending is expected to slow down in the coming years. That may mean that some of the best investments may not be the large defense conglomerates, but stocks of smaller contractors with projects in the hundreds of millions, not billions, projects that may more easily avoid the chopping block. They include names such as $552.84m-mkt cap United Industrial (UIC), which makes computer-controlled reconnaissance planes, or $1.9bn Armor Holdings (AH), which retrofits Humvees with battlefield shielding. "The rev growth of United and some other small-cap vendors could be at least 3x that of Boeing (BA) and the other [big defense contractors]," says Michael Lewis, of BB&T. And mid- and smaller-cap co's do contract work for Boeing and others. What trickles down from the conglomerates could be meaningful rev to niche vendors, says John Burke, of Weiss Research's MoneyandMarkets.com. This focus on smaller co's comes at a time when larger co's will surely feel the acute pain of fiscal belt-tightening. Defense spending increases of 4-5% a year over the next several years mark a slowing from prior years, says Lewis. The Bush administration's request for roughly $500bn for this year and next, including supplementary funding for Iraq, is at the upper end of defense spending for the last two generations, says Loren Thompson of Lexington Institute. There is no time in the last several decades when defense spending has been much higher than it is today,'' he says.
Barron's Online reports that insiders are trimming back on Scotts Miracle-Gro (SMG), suggesting the near-term growth outlook may not look so rosy. Members of the founding family of predecessor co Stern's Miracle-Gro Products (which merged with lawn-care co Scotts in '95) and a longtime co director have grossed nearly $8.2m by selling 213K Scotts shares since the beginning of the month. Ben Silverman, director of research at InsiderScore.com, says: "Selling on weakness is certainly never a positive," given mgmt's "disappointing forecast" and economic headwinds.
The NY Post reports that two women who were once top executives at DHB Industries (DHBT.PK) were arrested yesterday on charges they made millions in ill-gotten gains by cooking the books of the co. Dawn Schlegel, DHB's CFO until she resigned early this year, and Sandra Hatfield, the co's COO before she stepped down late last year, turned themselves in to FBI agents early yesterday.
Thursday, August 17, 2006
Calls of Note Part 3
- Merrill Lynch notes PMC-Sierra (NASDAQ:PMCS) filed form 10-Q for Q206 two days after the company announced delays in filing due to option grant related errors. The company also filed 10-K/A for 2005 and 10-Q/A for Q106 with restated financials last night. PMCS announced previously that its audit committee, chaired by NVLS's CFO Mr. William Kurtz, found no evidence of deliberate misconduct by the company's executives or staff.
However, the committee concluded that PMCS used incorrect measurement dates for certain grants prior to 2001. As a result of these errors, PMCS has restated its balance sheets as of 12/31/2002 and all subsequent periods. On the positive side, there were no restatements of income statements or statements of cash flows.
HP accounts for almost 10% of PMCS' sales and the firm views HP's Q3 results as a positive for the stock. In particular, PMCS has high exposure to color laser printers and EVA line of storage systems, which HP highlighted as areas of strength.
Despite the near term set back at Passave, they continue to like PMCS for its exposure to high growth markets such as FTTx and China 3G. PMCS core business should continue to benefit from stable telecom spending and 4Gb transition in storage. Firm expects Passave revenues to stabilize in Q4 and begin to grow again in Q107. Valuation is compelling at 14x CY07 FCF estimate. Reiterates Buy with a $10 price target.
Notablecalls: Expect to see some buy interest already in the pre mkt.
- William Blair comments on Sonic Corp (NASDAQ:SONC) after the co announced its intent to repurchase up to 25.5 million shares (about 30% of shares outstanding) at a price of between $19.50 and $22.00 via a modified Dutch auction for a total of up to $560 million, with the auction expiring on September 22.
The repurchase is contingent upon the completion of new credit facilities to both facilitate the repurchase and replace current credit lines. Firm had initially estimated the transaction would be accretive up to a 7.5% interest rate on the debt. With details provided yesterday in an SEC filing, it appears the new credit lines will likely be above that rate, resulting in EPS dilution to firm's fiscal 2007 estimates.
Specifically, management is projecting a $675 million term facility with an interest rate of LIBOR plus 200 to 225 basis points (about 7.625%) and a $100 million revolver at LIBOR plus 175 basis points (about 7.25%). Importantly, all of the company's existing debt of $120 million will be refinanced at the higher rate, versus a current rate of LIBOR plus 50 to 100 basis points.
As such, if the entire repurchase is consummated at $22 per share, the company will use the entire $675 million term facility as well as $12 million under the revolver, resulting in an increase of net-debt-to-capital from 27% to approximately 80%. The impact to fiscal 2007 is therefore likely to be dilutive by approximately $0.09 to $0.12, bringing firm's number to a pro forma $0.91 to $0.94 versus current estimate of $1.03, although the impact would obviously be less extreme should interest rates reverse course. Firm's number excludes a projected $0.015 penalty related to early extinguishment of debt.
Firm continues to believe Sonic is on track to meet August quarter expectations for a 3% to 5% comp yielding EPS of $0.28 to $0.29. A particularly hot summer is likely to bolster high-margin ice cream sales, in firm's opinion, and they note that dairy costs remain very favorable (down about 19% year-over-year). Continues to believe Sonic is one of the most proprietary and well-run concepts within the quick-service space, with industry-leading financial returns and the opportunity to double its restaurant base.
Maintains Outperform.
Notablecalls: So the repurchase is dilutive to 2007 EPS? And the stock is trading around $22, the high end of the auction range? Think it will come down somewhat.
However, the committee concluded that PMCS used incorrect measurement dates for certain grants prior to 2001. As a result of these errors, PMCS has restated its balance sheets as of 12/31/2002 and all subsequent periods. On the positive side, there were no restatements of income statements or statements of cash flows.
HP accounts for almost 10% of PMCS' sales and the firm views HP's Q3 results as a positive for the stock. In particular, PMCS has high exposure to color laser printers and EVA line of storage systems, which HP highlighted as areas of strength.
Despite the near term set back at Passave, they continue to like PMCS for its exposure to high growth markets such as FTTx and China 3G. PMCS core business should continue to benefit from stable telecom spending and 4Gb transition in storage. Firm expects Passave revenues to stabilize in Q4 and begin to grow again in Q107. Valuation is compelling at 14x CY07 FCF estimate. Reiterates Buy with a $10 price target.
Notablecalls: Expect to see some buy interest already in the pre mkt.
- William Blair comments on Sonic Corp (NASDAQ:SONC) after the co announced its intent to repurchase up to 25.5 million shares (about 30% of shares outstanding) at a price of between $19.50 and $22.00 via a modified Dutch auction for a total of up to $560 million, with the auction expiring on September 22.
The repurchase is contingent upon the completion of new credit facilities to both facilitate the repurchase and replace current credit lines. Firm had initially estimated the transaction would be accretive up to a 7.5% interest rate on the debt. With details provided yesterday in an SEC filing, it appears the new credit lines will likely be above that rate, resulting in EPS dilution to firm's fiscal 2007 estimates.
Specifically, management is projecting a $675 million term facility with an interest rate of LIBOR plus 200 to 225 basis points (about 7.625%) and a $100 million revolver at LIBOR plus 175 basis points (about 7.25%). Importantly, all of the company's existing debt of $120 million will be refinanced at the higher rate, versus a current rate of LIBOR plus 50 to 100 basis points.
As such, if the entire repurchase is consummated at $22 per share, the company will use the entire $675 million term facility as well as $12 million under the revolver, resulting in an increase of net-debt-to-capital from 27% to approximately 80%. The impact to fiscal 2007 is therefore likely to be dilutive by approximately $0.09 to $0.12, bringing firm's number to a pro forma $0.91 to $0.94 versus current estimate of $1.03, although the impact would obviously be less extreme should interest rates reverse course. Firm's number excludes a projected $0.015 penalty related to early extinguishment of debt.
Firm continues to believe Sonic is on track to meet August quarter expectations for a 3% to 5% comp yielding EPS of $0.28 to $0.29. A particularly hot summer is likely to bolster high-margin ice cream sales, in firm's opinion, and they note that dairy costs remain very favorable (down about 19% year-over-year). Continues to believe Sonic is one of the most proprietary and well-run concepts within the quick-service space, with industry-leading financial returns and the opportunity to double its restaurant base.
Maintains Outperform.
Notablecalls: So the repurchase is dilutive to 2007 EPS? And the stock is trading around $22, the high end of the auction range? Think it will come down somewhat.
Calls of Note Part 2
- Citigroup notes that post soft Q2 results and the surprise announcement of a delay in its search engine "fix," Yahoo! (NASDAQ:YHOO) shares retreated as much as 25%. While the firm viewed that delay as a material negative, they believe that YHOO shares over-corrected. The top three questions on YHOO now are: 1. Can the company deliver against its new deadline? 2. Can the "fix" materially improve YHOO's fundamentals? And 3. To what extent is this "fix" already assumed in Street estimates? Based on extensive channel checks and firm's proprietary analysis of search revenue drivers, answers are: 1. A Probable Yes; 2. A Definitive Yes -- for every 100 bps improvement in YHOO's click-thru rates, EPS can increase by approx $0.04/$0.05; and 3) Street '07 estimates appear to have only modest expectations built in re: the search engine "fix." Further, they see YHOO, given its sustainable 20% EBITDA growth outlook, trading at an unjustifiably small premium to media stocks. So they reit their Buy and $40 tgt.
Notablecalls: I continue to be bullish on YHOO at current levels.
- Citigroup anticipates that Altria (NYSE:MO)'s Board of Directors could announce a dividend increase of at least 10% on 8/30. The stock should trade up on this news. Like clockwork, MO has announced dividend increases during its August Board meeting. Since 1994, MO's Board has increased its dividend 11 times.
In the past, MO mgmt has stated a desire to increase dividends in-line with earnings growth. Although a 10%-plus dividend increase is somewhat higher than its expected '06 earnings growth, they believe this is very probable given the large amount of cash on the company's balance sheet and because MO wants to keep investors interested in the stock until the break-up of the company begins in the next couple of months. Also, a dividend increase is a good use for its cash given that the company's share buyback program will be postponed until the full break-up of the company is completed. A 10% increase results in an attractive 4.4% dividend yield. Firm reiterates their Buy rating and $94 price tgt.
Notablecalls: Not actionable but good to know category. Best way to play this one? Short the common if the div hike is less than 10%.
Notablecalls: I continue to be bullish on YHOO at current levels.
- Citigroup anticipates that Altria (NYSE:MO)'s Board of Directors could announce a dividend increase of at least 10% on 8/30. The stock should trade up on this news. Like clockwork, MO has announced dividend increases during its August Board meeting. Since 1994, MO's Board has increased its dividend 11 times.
In the past, MO mgmt has stated a desire to increase dividends in-line with earnings growth. Although a 10%-plus dividend increase is somewhat higher than its expected '06 earnings growth, they believe this is very probable given the large amount of cash on the company's balance sheet and because MO wants to keep investors interested in the stock until the break-up of the company begins in the next couple of months. Also, a dividend increase is a good use for its cash given that the company's share buyback program will be postponed until the full break-up of the company is completed. A 10% increase results in an attractive 4.4% dividend yield. Firm reiterates their Buy rating and $94 price tgt.
Notablecalls: Not actionable but good to know category. Best way to play this one? Short the common if the div hike is less than 10%.
Calls of Note Part 1
- Citigroup notes that with Amgen (NASDAQ:AMGN)'s stock trading at only 15-16x firm's fiscal 2007 EPS est, they believe current levels represent an attractive buying opportunity. Firm expects several upcoming events this fall that may represent catalysts for the stock. These events include: the approval of Vectibix (previously, pmab) for advanced colorectal cancer (PDUFA date of 9/28/06); additional clinical data for Vectibix as well as other pipeline products; and developing legal activity surrounding the EPO patent infringement case against Roche. Despite the cautious FDA environment, they continue to believe Vectibix is positioned to gain FDA approval. Further, firm's legal consultant believes the Amgen v. Roche case could be accelerating in its path towards resolution since a court trial may be scheduled prior to approval of CERA (PDUFA date of 2/20/07). If Judge Young advances this case to trial, they believe this would be viewed favorably by investors as it would suggest a potential timely resolution.
Maintains Buy and $100 tgt.
Notablecalls: Semi-actionable. Nothing new here. Would not hold below $66.
- Citigroup has an interesting note on software space. Firm notes BEAS and CRM each threw us some rope last night, beating expectations and giving bullish guidance. INTU options investigation is complete. Whew. Sentiment has been very poor, but the + indicators are trickling in. With results showing decent demand, we could start to see a sector rotation into software. Heading into the fall, the firm would look to the small and mid-cap, higher growth names, CRM, ADBE, ADSK and RHAT, as well as the earnings leverage stories, INTU, BEAS and TIBX, as they expect these to show more upside in a rally than ORCL / MSFT, even though ORCL led off the turn with a strong Q4. Sentiment has not completely turned, but they expect to see seasonal improvement as the software universe benefits from: the Q4 budget flush, consolidation/M&A valuations, and performance in the newer technology areas such as SaaS, Open Source, and SOA. Firm believes the software upturn may start early this year - before Labor Day.
Firm notes that historical monthly price performance for a basket of 20 software names between January 1985 and June 2006 shows that over the past 20 years, July has been the worst month for software stock performance. Firm believes that this is due to a number of factors including the seasonally light second quarter performance for license generating companies, product cycles that tend to favor either the end of the year or the beginning of the year, and what they call the sentiment factor. October, November, and December are the months with the strongest performance across software stocks. With this in mind, they recommend that investors tee up for the fall and think about redeploying some of the cash into higher-growth, BUY rated names.
Notablecalls: Not actionable but good to know category.
Maintains Buy and $100 tgt.
Notablecalls: Semi-actionable. Nothing new here. Would not hold below $66.
- Citigroup has an interesting note on software space. Firm notes BEAS and CRM each threw us some rope last night, beating expectations and giving bullish guidance. INTU options investigation is complete. Whew. Sentiment has been very poor, but the + indicators are trickling in. With results showing decent demand, we could start to see a sector rotation into software. Heading into the fall, the firm would look to the small and mid-cap, higher growth names, CRM, ADBE, ADSK and RHAT, as well as the earnings leverage stories, INTU, BEAS and TIBX, as they expect these to show more upside in a rally than ORCL / MSFT, even though ORCL led off the turn with a strong Q4. Sentiment has not completely turned, but they expect to see seasonal improvement as the software universe benefits from: the Q4 budget flush, consolidation/M&A valuations, and performance in the newer technology areas such as SaaS, Open Source, and SOA. Firm believes the software upturn may start early this year - before Labor Day.
Firm notes that historical monthly price performance for a basket of 20 software names between January 1985 and June 2006 shows that over the past 20 years, July has been the worst month for software stock performance. Firm believes that this is due to a number of factors including the seasonally light second quarter performance for license generating companies, product cycles that tend to favor either the end of the year or the beginning of the year, and what they call the sentiment factor. October, November, and December are the months with the strongest performance across software stocks. With this in mind, they recommend that investors tee up for the fall and think about redeploying some of the cash into higher-growth, BUY rated names.
Notablecalls: Not actionable but good to know category.
Color on quarter: Hewlett-Packard (HPQ)
Several firms are commenting on Hewlett-Packard (NYSE:HPQ) after the co posted its CQ2 results last night. I'm going to highlight one very positive note from JP Morgan and one somewhat less positive one from Deutsche:
* JP Morgan notes Hewlett-Packard reported another solid quarter, handily exceeding street expectations. Revenues of $21.89 billion exceeded their estimate and consensus of 21.80 billion. The company's EPS of $0.52 exceeded the consensus expectations of $0.47. Nevertheless, after adjusting for extraordinary items (higher than expected other income, lower share count, and a higher tax rate), the number is actually $0.49. This is in-line with firm's recently raised above-consensus expectations. While they had anticipated the company would exceed consensus expectations, the sources of upside were a surprise. Instead of margin upside from printing as they anticipated, the company exceeded expectations with stronger enterprise, PC and services margins. Firm believes the PC margin upside was most encouraging, as it proves that HP is not suffering from the same ailments as Dell. In their opinion, it also suggests that Dell will have a harder time reversing this shift in the competitive landscape than most currently believe.
Firm was also once again surprised that the company's profit strength came more from the gross margin line than from reduced operating expenses. In fact, the company's gross margin of 24.8% exceeded estimate by 62 basis points. One of the most resilient bearish arguments against the HP story is that the company is simply enjoying the benefits of operating expense reductions, benefits that are presumably finite in nature. It now appears that most of the company's upside versus expectations is coming from significant improvements in execution, and these can be far more sustainable than a simple restructuring program. Most important, the gross margin improvements are coming from segments that have been historically weak for the company.
As the holes in the bearish arguments continue to expand, they believe it will become increasingly apparent to investors that HP is becoming a fundamentally different company. Furthermore, with every quarter of upside they believe it is becoming clear that the earnings power of the new HP is far greater than has been understood by many. At 13x firm's calendar 2007 EPS estimate, HP is trading at a 9% discount to the SandP 500. With steadily improving earnings power and likely multiple expansion from increasing confidence in management, they expect the shares to continue to outperform the peer group average. Firm is reiterating their Overweight rating, and HP remains top pick in the coverage universe.
* Deutsche Bank notes margin performance was impressive and beat their estimates with gross margins of 24.8% and op margins of 7.6% (vs. DB at 24.0% and 7.0%, respectively). In addition, IPG unit growth was strong with units up 15% Y/Y (consumer units +13% Y/Y & commercial units +23% Y/Y), suggesting HP is taking share (most likely from LXK). Surprisingly, PC margins improved Q/Q despite slowing unit and revenue growth. Management also announced a $6B share repurchase program which will support future EPS and be well received by investors.
Also, Some Negatives
HP posted its' lowest revenue growth rate of 5.6% Y/Y (in constant currency) in five quarters (vs. 8.5% Y/Y in 1Q06 and 7.7% Y/Y in 2Q06). In addition, they expect increasing competition to challenge future revenue growth as Dell begins sourcing AMD chips- decreasing HP's cost advantage and product differentiation. Further, PSG revenue growth of 8% Y/Y (+5% desktop and +14% notebook) slowed from 10% in the prior Q (NB units slowed considerably). IPG revenue growth of 5% Y/Y was flat sequentially (despite improving FX impact). It appears HP is moving down market in IPG as HW revenue was weak despite strong printer unit growth (suggesting the high-end is saturated & offers little growth).
Ups tgt to $34 but maintains Hold rating.
Notablecalls: HPQ has a history of extending moves following earnings. While the results were strong I don't think this will be the case today. IPG margins came in weaker than expected (according to my back of the envelope est IPG represents 50% of HPQ's profits) and the overall revenue growth is slowing. Also, the acquisition of MERQ tells me HPQ management is worried about future growth. Color me bearish for 2007.
* JP Morgan notes Hewlett-Packard reported another solid quarter, handily exceeding street expectations. Revenues of $21.89 billion exceeded their estimate and consensus of 21.80 billion. The company's EPS of $0.52 exceeded the consensus expectations of $0.47. Nevertheless, after adjusting for extraordinary items (higher than expected other income, lower share count, and a higher tax rate), the number is actually $0.49. This is in-line with firm's recently raised above-consensus expectations. While they had anticipated the company would exceed consensus expectations, the sources of upside were a surprise. Instead of margin upside from printing as they anticipated, the company exceeded expectations with stronger enterprise, PC and services margins. Firm believes the PC margin upside was most encouraging, as it proves that HP is not suffering from the same ailments as Dell. In their opinion, it also suggests that Dell will have a harder time reversing this shift in the competitive landscape than most currently believe.
Firm was also once again surprised that the company's profit strength came more from the gross margin line than from reduced operating expenses. In fact, the company's gross margin of 24.8% exceeded estimate by 62 basis points. One of the most resilient bearish arguments against the HP story is that the company is simply enjoying the benefits of operating expense reductions, benefits that are presumably finite in nature. It now appears that most of the company's upside versus expectations is coming from significant improvements in execution, and these can be far more sustainable than a simple restructuring program. Most important, the gross margin improvements are coming from segments that have been historically weak for the company.
As the holes in the bearish arguments continue to expand, they believe it will become increasingly apparent to investors that HP is becoming a fundamentally different company. Furthermore, with every quarter of upside they believe it is becoming clear that the earnings power of the new HP is far greater than has been understood by many. At 13x firm's calendar 2007 EPS estimate, HP is trading at a 9% discount to the SandP 500. With steadily improving earnings power and likely multiple expansion from increasing confidence in management, they expect the shares to continue to outperform the peer group average. Firm is reiterating their Overweight rating, and HP remains top pick in the coverage universe.
* Deutsche Bank notes margin performance was impressive and beat their estimates with gross margins of 24.8% and op margins of 7.6% (vs. DB at 24.0% and 7.0%, respectively). In addition, IPG unit growth was strong with units up 15% Y/Y (consumer units +13% Y/Y & commercial units +23% Y/Y), suggesting HP is taking share (most likely from LXK). Surprisingly, PC margins improved Q/Q despite slowing unit and revenue growth. Management also announced a $6B share repurchase program which will support future EPS and be well received by investors.
Also, Some Negatives
HP posted its' lowest revenue growth rate of 5.6% Y/Y (in constant currency) in five quarters (vs. 8.5% Y/Y in 1Q06 and 7.7% Y/Y in 2Q06). In addition, they expect increasing competition to challenge future revenue growth as Dell begins sourcing AMD chips- decreasing HP's cost advantage and product differentiation. Further, PSG revenue growth of 8% Y/Y (+5% desktop and +14% notebook) slowed from 10% in the prior Q (NB units slowed considerably). IPG revenue growth of 5% Y/Y was flat sequentially (despite improving FX impact). It appears HP is moving down market in IPG as HW revenue was weak despite strong printer unit growth (suggesting the high-end is saturated & offers little growth).
Ups tgt to $34 but maintains Hold rating.
Notablecalls: HPQ has a history of extending moves following earnings. While the results were strong I don't think this will be the case today. IPG margins came in weaker than expected (according to my back of the envelope est IPG represents 50% of HPQ's profits) and the overall revenue growth is slowing. Also, the acquisition of MERQ tells me HPQ management is worried about future growth. Color me bearish for 2007.
Color on quarter: salesforce.com (CRM)
Lots of positive commentary on salesforce.com (NYSE:CRM) after the co reported strong Q2 results:
*Piper Jaffray notes new subscribers in the quarter were 57K, versus their estimate of 45K and Street consensus of 48K. Management stated that the upside to the subscriber number was the result of strength across the entire business; management provided no additional details on each line of business.
On the call, management announced that CFO Steve Cakebread no longer plans to retire at the end of the calendar year, as previously announced. Although exact reasons for the change of mind were not discussed, they believe this is positive news for the company. In firm's opinion, Cakebread's thoroughness and willingness to spend the time and money to ensure strict compliance with GAAP and SEC regulations has been invaluable and one of the keys to the company's success to date.
Reits Mkt Perform rating but ups tgt to $33 from $24.
* RBC Capital notes all key metrics (revenue, FCF, net subs) in Q2/07 were ahead of their forecast. Firm believes salesforce.com continues to benefit from an expanding market in SFA (Sales Force Automation), with limited direct competition for the on demand delivery platform. Eventually, they believe the company will need to demonstrate more success with customer support and marketing to maintain this level of growth, but this doesn't appear to be an issue near-term. At more than 22x CY/ 07 FCF estimate of $1.25, they maintain Sector Perform rating and Average Risk qualifier.
Subscription and support revenue of $106.7 million exceeded firm's estimate by $2.6 million, reflecting 63% Y/Y growth. ASP's remained flat at $71/mon. Record net new subscribers of 57,000 exceeded their estimate by 10,000, reflecting 63% Y/Y growth. Based on the deferred revenue analysis, Q2/07 bookings increased 19% Q/Q from $107 million to a record $127 million. Some of the company's bookings are not reflected on the balance sheet, so this analysis is not complete.
Based on EV/CY07Rev, CRM trades at 4.4x $690 million estimate - a premium to firm's software on demand group average of 3.3x. On a P/E basis, CRM trades at 118x CY/07 estimate of $0.43 - a premium to the group average of 29x. They believe most investors are valuing CRM based on FCF (free cash flow) projections, since bookings are collected well in advance of revenue recognition. Firm's 12-month price target of $35 assumes the shares will trade at 28x our CY/07 free cash flow estimate of $1.25. This multiple is consistent with the company's growth expectations and group average. As the company matures and the subscription base expands, they believe pro forma earnings will become a more important valuation criteria.
* Goldman Sachs thinks the shares of salesforce.com are likely to move higher given the surprising jump of net new subscribers, up 39% over last year with 57,000 net new subscribers. This tends to be a lumpy metric but was nevertheless very encouraging. Revenues were up 64%. Software stocks more broadly may be helped by the better July quarter reports last night from BEA, HP and salesforce.com. Oracle should be next important data point on the health of the software sector, with an August quarter, but data points will be backend loaded for Oracle.
Salesforce.com's business is a subscription business, so the stock appears more attractively valued when looked at on a DCF or price to FCF versus P/E. They use a triangulation on all three in arriving at their 12 month price targets. At the $28.32 close, the shares were trading at 118X calendar 2007 EPS estimate of $0.24 per share (including ESOs) and EV to adjusted FCF was 23.3X versus the group median of 19.1X. Firm's DCF value rolled forward 12 months is $33, consistent with forward price target. The shares are close to price target and rated Neutral.
* Morgan Stanley (the Bear on CRM) notes salesforce.com released very strong numbers for their FY2Q07, headlined by 57K net new subscribers in the quarter. However, guidance for the quarter and year does not seem to incorporate this higher subscriber growth level, leaving the firm wondering whether it was 1Q or 2Q that marked the trend going forward. A higher subscriber forecast lifts firm's one-year price target to $28 per share, but the current intrinsic valuation remains at $24, below current trading prices. They remain Underweight on CRM.
salesforce.com's total revenue guidance for FY3Q07 of $126 to $128m and for FY07 of $488 to $493m would indicate significantly lower net new subscriber additions in the second half of the year, by firm's calculations. By their estimates, salesforce.com could hit the high end of guidance with just over 20K net new subscribers. While the company has traditionally been conservative with guidance, this level of conservatism along with commentary on the conference call downplaying the significance of the net new subscriber numbers, leaves the firm wondering whether it was 1Q or 2Q that marks the subscriber trend going forward. Non-GAAP EPS guidance of $0.04 to $0.05 for FY3Q07 and $0.19 to $0.21 would indicate no further margin expansion in the second half by their calculations. Management has stated they are looking to invest into growth, rather than seek further leverage at this point in the company's growth cycle.
Notablecalls: While I think CRM posted strong results, the shares are up 25% from July lows (35%+ accounting for the after hrs move) implying little further upside. Morgan Stanley is also making a good point regarding guidance.
*Piper Jaffray notes new subscribers in the quarter were 57K, versus their estimate of 45K and Street consensus of 48K. Management stated that the upside to the subscriber number was the result of strength across the entire business; management provided no additional details on each line of business.
On the call, management announced that CFO Steve Cakebread no longer plans to retire at the end of the calendar year, as previously announced. Although exact reasons for the change of mind were not discussed, they believe this is positive news for the company. In firm's opinion, Cakebread's thoroughness and willingness to spend the time and money to ensure strict compliance with GAAP and SEC regulations has been invaluable and one of the keys to the company's success to date.
Reits Mkt Perform rating but ups tgt to $33 from $24.
* RBC Capital notes all key metrics (revenue, FCF, net subs) in Q2/07 were ahead of their forecast. Firm believes salesforce.com continues to benefit from an expanding market in SFA (Sales Force Automation), with limited direct competition for the on demand delivery platform. Eventually, they believe the company will need to demonstrate more success with customer support and marketing to maintain this level of growth, but this doesn't appear to be an issue near-term. At more than 22x CY/ 07 FCF estimate of $1.25, they maintain Sector Perform rating and Average Risk qualifier.
Subscription and support revenue of $106.7 million exceeded firm's estimate by $2.6 million, reflecting 63% Y/Y growth. ASP's remained flat at $71/mon. Record net new subscribers of 57,000 exceeded their estimate by 10,000, reflecting 63% Y/Y growth. Based on the deferred revenue analysis, Q2/07 bookings increased 19% Q/Q from $107 million to a record $127 million. Some of the company's bookings are not reflected on the balance sheet, so this analysis is not complete.
Based on EV/CY07Rev, CRM trades at 4.4x $690 million estimate - a premium to firm's software on demand group average of 3.3x. On a P/E basis, CRM trades at 118x CY/07 estimate of $0.43 - a premium to the group average of 29x. They believe most investors are valuing CRM based on FCF (free cash flow) projections, since bookings are collected well in advance of revenue recognition. Firm's 12-month price target of $35 assumes the shares will trade at 28x our CY/07 free cash flow estimate of $1.25. This multiple is consistent with the company's growth expectations and group average. As the company matures and the subscription base expands, they believe pro forma earnings will become a more important valuation criteria.
* Goldman Sachs thinks the shares of salesforce.com are likely to move higher given the surprising jump of net new subscribers, up 39% over last year with 57,000 net new subscribers. This tends to be a lumpy metric but was nevertheless very encouraging. Revenues were up 64%. Software stocks more broadly may be helped by the better July quarter reports last night from BEA, HP and salesforce.com. Oracle should be next important data point on the health of the software sector, with an August quarter, but data points will be backend loaded for Oracle.
Salesforce.com's business is a subscription business, so the stock appears more attractively valued when looked at on a DCF or price to FCF versus P/E. They use a triangulation on all three in arriving at their 12 month price targets. At the $28.32 close, the shares were trading at 118X calendar 2007 EPS estimate of $0.24 per share (including ESOs) and EV to adjusted FCF was 23.3X versus the group median of 19.1X. Firm's DCF value rolled forward 12 months is $33, consistent with forward price target. The shares are close to price target and rated Neutral.
* Morgan Stanley (the Bear on CRM) notes salesforce.com released very strong numbers for their FY2Q07, headlined by 57K net new subscribers in the quarter. However, guidance for the quarter and year does not seem to incorporate this higher subscriber growth level, leaving the firm wondering whether it was 1Q or 2Q that marked the trend going forward. A higher subscriber forecast lifts firm's one-year price target to $28 per share, but the current intrinsic valuation remains at $24, below current trading prices. They remain Underweight on CRM.
salesforce.com's total revenue guidance for FY3Q07 of $126 to $128m and for FY07 of $488 to $493m would indicate significantly lower net new subscriber additions in the second half of the year, by firm's calculations. By their estimates, salesforce.com could hit the high end of guidance with just over 20K net new subscribers. While the company has traditionally been conservative with guidance, this level of conservatism along with commentary on the conference call downplaying the significance of the net new subscriber numbers, leaves the firm wondering whether it was 1Q or 2Q that marks the subscriber trend going forward. Non-GAAP EPS guidance of $0.04 to $0.05 for FY3Q07 and $0.19 to $0.21 would indicate no further margin expansion in the second half by their calculations. Management has stated they are looking to invest into growth, rather than seek further leverage at this point in the company's growth cycle.
Notablecalls: While I think CRM posted strong results, the shares are up 25% from July lows (35%+ accounting for the after hrs move) implying little further upside. Morgan Stanley is also making a good point regarding guidance.
Notablecalls - Paperstand
The CNET News reports that Dell (DELL) is expected to announce Thu that it's expanding its partnership with the AMD (AMD) to include with new AMD-based servers, desktops and laptops. Dell already scrapped its longtime Intel (INTC) exclusivity in May, committing to sell a 4-processor server with AMD's Opteron by the end of the year. That's a relatively high-end niche for the computer maker, but sources familiar with the co's plans expect a broader alliance to be announced Thu afternoon, when Dell reports quarterly results. One source expected Dell to announce plans to sell dual-processor Opteron servers, a segment of the mkt with much higher sales volumes than for 4-processor machines. Another expected the alliance to include desktop and notebook computers as well. In the server arena, a likely option is be a rack-mounted model 3.5 inches thick, a size that permits useful features such as moderate storage capacity and redundant power supplies.
The WSJ reports that RR Donnelley (RRD) is entertaining offers to be bought by leveraged buyout firms. The co, with a mkt cap of $7.4bn, is a logical tgt for these buyout shops, which seek co's with steady cash flows that can be used to pay down debt used to fund an acquisition. At least 2 buyout groups are considering offers. One group is comprised of Carlyle Group, Madison Dearborn Partners and Thomas H. Lee Partners. A second bidding group includes Blackstone Group and Texas Pacific Group.
Barron's Online highlights Nike (NKE), saying that hammered by the resignation of a CEO and soft sales in Europe and Japan that contributed to last quarter's disappointing financial results, Nike's stock has tumbled 15% since hitting a 52-w high in Dec. Certainly, Nike remains a respected name among consumers, and a marketing marvel to boot, thanks to big-name endorsements from the likes of Michael Jordan and Brazilian soccer star Ronaldinho as well as years of arresting television ads with the tag line, "Just Do It." Moreover, the stock certainly looks cheap. But the shares could continue to languish, however, amid tighter consumer spending, rising competition overseas from lower-cost products, and general anxiety over the state of the US athletic shoe mkt. "The stock doesn't seem to have a driver behind it," says David Heupel, manager of the Thrivent Large-Cap Growth Fund. "We don't see a lot of downside, but the stock will stay in the $80 range."
Barron's Online reports that Carl Icahn has once again taken a shine to shares of ImClone (IMCL), buying 1.5m shares for $46.3m after the biotech took a beating when it called off its search for a buyer. Icahn's purchases were made on Aug. 11, 14 and 15, and boosted his stake to 10.3m shares, or 12.3%. Ben Silverman, director of research at InsiderScore.com, said that Icahn's purchases is "indicative of him feeling that the stock is undervalued." The Aug. 11 filing said Icahn's representatives had been in talks with ImClone about its business and operations, and that ImClone had asked Icahn to be a director, which Icahn has not yet made a decision about. "I don't think there is hostility there if they invited him to join the board," says Silverman. Silverman adds that the aggressiveness of Icahn's most recent spate of buying is a "very positive sign for the stock right now."
Notablecalls: The NY Post started imaginary Hedge Fund few weeks ago. It's entertaining. Get todays comment here.
The WSJ reports that RR Donnelley (RRD) is entertaining offers to be bought by leveraged buyout firms. The co, with a mkt cap of $7.4bn, is a logical tgt for these buyout shops, which seek co's with steady cash flows that can be used to pay down debt used to fund an acquisition. At least 2 buyout groups are considering offers. One group is comprised of Carlyle Group, Madison Dearborn Partners and Thomas H. Lee Partners. A second bidding group includes Blackstone Group and Texas Pacific Group.
Barron's Online highlights Nike (NKE), saying that hammered by the resignation of a CEO and soft sales in Europe and Japan that contributed to last quarter's disappointing financial results, Nike's stock has tumbled 15% since hitting a 52-w high in Dec. Certainly, Nike remains a respected name among consumers, and a marketing marvel to boot, thanks to big-name endorsements from the likes of Michael Jordan and Brazilian soccer star Ronaldinho as well as years of arresting television ads with the tag line, "Just Do It." Moreover, the stock certainly looks cheap. But the shares could continue to languish, however, amid tighter consumer spending, rising competition overseas from lower-cost products, and general anxiety over the state of the US athletic shoe mkt. "The stock doesn't seem to have a driver behind it," says David Heupel, manager of the Thrivent Large-Cap Growth Fund. "We don't see a lot of downside, but the stock will stay in the $80 range."
Barron's Online reports that Carl Icahn has once again taken a shine to shares of ImClone (IMCL), buying 1.5m shares for $46.3m after the biotech took a beating when it called off its search for a buyer. Icahn's purchases were made on Aug. 11, 14 and 15, and boosted his stake to 10.3m shares, or 12.3%. Ben Silverman, director of research at InsiderScore.com, said that Icahn's purchases is "indicative of him feeling that the stock is undervalued." The Aug. 11 filing said Icahn's representatives had been in talks with ImClone about its business and operations, and that ImClone had asked Icahn to be a director, which Icahn has not yet made a decision about. "I don't think there is hostility there if they invited him to join the board," says Silverman. Silverman adds that the aggressiveness of Icahn's most recent spate of buying is a "very positive sign for the stock right now."
Notablecalls: The NY Post started imaginary Hedge Fund few weeks ago. It's entertaining. Get todays comment here.
Wednesday, August 16, 2006
You've got mail! - Entrust (ENTU)
Reader S.A. writes:
I read your blog everyday. I think it's great. Can you provide information on Entrust (NASDAQ:ENTU)? With consolidation in the security sector, I think its worth watching. Thanks for running a great blog.
NC writes:
I read your blog everyday. I think it's great. Can you provide information on Entrust (NASDAQ:ENTU)? With consolidation in the security sector, I think its worth watching. Thanks for running a great blog.
NC writes:
Entrust, Inc. is a global provider of security software that secures digitalidentities and information. The Company is engaged in the design, production and sale of policy and access management software products and related services for securing digital identities and information. Entrust software and the associated services enable businesses and governments around the world to conduct high-value, highly sensitive transactions, over wired and wireless networks including the Internet. Over 1,450 enterprises and government agencies in more than 50 countries use Entrust solutions to help secure the digital lives of their citizens, customers, employees and partners.
(Source: Reuters)
Summary of recent analyst comments:
- Avondale Partners' P. Sean Jackson issued a lenghty industry report on the current state of internet security on August 3. In the note he highlighted ENTU several times:
HSPD-12. According to this presidential directive, by October 27, 2006, all federal government employees and contractors will be required to have a standard smart card to be used for physical access as well as computer access. If agencies do comply on time (a big if given agencies do not have a budget for it), companies like ActivIdentity, SafeNet, and Entrust will get a significant boost. This legislation will affect over 15 million individuals and will result in over $1 billion of security spend.
FFIEC Legislation. In November 2005, the Federal Financial Institutions Examination Council (FFIEC) instituted a directive stating that banks need to offer a two-factor authentication method by the end of 2006. While this directive really has no meat to it yet, firm's checks indicate that banks are taking it seriously to at least strengthen their authentication. Ultimately, they believe this will result in more token penetration by business online banking users, and additional layers of software authentication by retail online banking customers. Companies benefiting from this legislation include RSA, Vasco, Secure, and Entrust.
EMC Buying RSA - Who's Next? The significant part of this news is not necessarily that RSA got bought, but that it got bought for 44x 2006 earnings and 5x revenue by a company (EMC) whose synergies are not clear with most RSA's business. Also, the fact that it was a competitive bid suggests that another acquisition might not be far off. Companies that are also in the user authentication space that might be in play include Secure, Vasco, ActivIdentity, and Entrust.
Jackson also notes there has been a lot of consolidation in the security sector over the last 3-4 years. Like many tech areas, much of the consolidation was the result of an overflow of venture money coming into the space in the late 1990's, which resulted in a glut of small security companies. Coupled with the tech recession of 2001-2002, there were a lot of security companies available for sale through 2003.
After 2003, the acquisitions began to get larger and have more impact. The tech environment was improving, and the security bellwhethers were no longer focused on internal issues, but being more aggressive in looking for growth. More importantly, customers began desiring to work with fewer security vendors. This made the critical to have as broad a solution as possible to meet all the security needs of the customer. Symantec was the poster child for this strategy as it gobbled up 21 companies between 2002-2006 to strengthen its presence first in the enterprise security market and then the administrative and storage markets.
The company that probably made the greatest transformation due to an acquisition strategy was SafeNet. Between January 2002 and the end of 2005, SafeNet made 9 acquisitions growing from a company that recorded $16m in revenue in 2001 to an expected $284m in revenue in 2006. While SafeNet's target government market was different than Symantec's targeted enterprise market, the same market dynamics were happening. The customer was weary of dealing with many point product vendors and wanted more integrated solutions.
In recent times, many well established security companies are choosing to forgo the public markets and agree to become part of a larger organization. This is evidenced by the fact that despite security being one of the stronger tech segments in the last five years, the last IPO was Netscreen in 2001. Companies that could have accessed the public markets and chose not to include Brightmail (acquired by Symantec in 2004 for $370m), Sybari (acquired by Microsoft in 2005 for $412m), and most recently CipherTrust (pending acquisition by Secure Computing for approximately $200m).
What's next. Going forward, the firm expects to see even more consolidation on a bigger scale. Security is becoming a mainstream topic, and many buyers will likely come from outside the security world as they attempt to find not just growth, but also better synergies with their existing technology. More than ever, CIOs are asking what security precautions are being embedded in applications and the infrastructure solutions. Cisco has been at the forefront of this integration and has been an active acquirer in security. On the desktop side, Microsoft is following the same strategy in buying solutions that make sense to offer with its core products. The recently announced EMC deal with RSA Security is an example of an acquisition of a market leader within security, and they expect more transactions of this type going forward.
- Wedbush Morgan Securities' Horacio Zambrano issued some comments on ENTU after the co reported its Q2 results on July 21. Wedbush dropped their coverage on ENTU on August 14 due to analyst departure:
Zambrano maintained a Hold rating on ENTU but lowered price target from $4 to $3 based on EV/sales comparables. He noted Entrust's Q2 results point to a healthy core business and modest momentum in its emerging products. Believes the acquisition of Business Signatures is generally a good move for Entrust as it signals a change to their current strategy. It should strengthen IdentityGuard's appeal to financial institutions, but he was concerned that RSA's dominance in this market may hinder short-term results. Firm's new price target reflected a 1.3x EV/sales multiple on $120m '07 sales estimate, representing a 35% discount to InfoSecurity peer group, which is trading at a median of roughly 2.0x '07 sales estimates. They adjusted their enterprise value to take into account a cash balance of roughly $25m post today's acquisition. Believed that given the company's size, the highly competitive nature of its growth markets, and recent execution performance, the 35% discount is merited.
Notablecalls: Can't say I'm a big fan of ENTU as the co has failed to produce any growth over the past 4-5 years. Profitability has been weak. It may be a potential takeover target but thats no reason for owning a stock.
Calls of Note Part 3
- Goldman Sachs is adding Advance Auto Parts (NYSE:AAP) to their Conviction Buy list (in place of PetSmart), reflecting the stock's attractive risk/reward profile. The market is dismissing the potential for meaningful earnings growth at Advance, valuing the stock well below the hardlines sector average as sales trends are closing in on cyclical troughs. The stock has begun to shrug off bad news, tracking flattish in the face of downward guidance last week. Firm believes that store-level execution remains intact, and looking 3-6 months ahead see easing sales comparisons, easing gas price compares, and further expense reduction, as well as unit growth and operating margin expansion potential.
Same-store sales comparisons begin to ease in the fourth quarter, as gas price comparisons begin to moderate as well. Note that expense dollars have been well controlled, underlying gross margin expansion continued in an otherwise soft second quarter, and working capital remains in fine shape, limiting downside risk.
Firm's 12-month price target of $35 is based on a two-tier framework utilizing 1) relative P/E valuation across multiple earnings scenarios, and 2) DCF valuation.
Notablecalls: Not actionable but good to know category.
Same-store sales comparisons begin to ease in the fourth quarter, as gas price comparisons begin to moderate as well. Note that expense dollars have been well controlled, underlying gross margin expansion continued in an otherwise soft second quarter, and working capital remains in fine shape, limiting downside risk.
Firm's 12-month price target of $35 is based on a two-tier framework utilizing 1) relative P/E valuation across multiple earnings scenarios, and 2) DCF valuation.
Notablecalls: Not actionable but good to know category.
Calls of Note Part 2
- UBS notes they continue to favor shares of System Memory market player SanDisk (NASDAQ:SNDK) owing to the exposure it offers to the rapidly growing role of NAND flash expansion cards into wireless handsets, and the prospects for improving NAND market fundamentals and investor sentiment when Apple refreshes its holiday MP3 line up.
SanDisk and its partner Toshiba continue to demonstrate NAND market leadership in terms of MLC and new product innovation, and we believe the acquisition of M-Systems and its x4, U3, embedded handset NAND and other technologies is likely to extend this leadership over the next several years.
Firm believes SanDisk guidance and Street expectations are based on historic seasonal patterns that fail to fully incorporate the growing role of wireless handset demand for NAND, especially into the holiday build cycle. They also note the good elasticity of demand due to aggressive cost cutting on the part of SanDisk/Toshiba.
UBS' $70 target is based on 28x current options burdened C2007E EPS of $2.50. Firm assigns a 2 predictability level owing to uncertainties in consumerdemand and competition from new rivals. Reits Buy.
Notablecalls: Nothing new here. But given the positive sentiment we saw yesterday I would not be surprised to see some additional strenght.
- Morgan Stanley is lowering their one-year price target on salesforce.com (NYSE:CRM) to $27 from $31, as an increasingly competitive On-Demand CRM market leads them to reduce firm's long-term operating margin assumptions. While the stock is down from its highs and may have priced in some of our concerns about the sustainability of net new subscriber growth due to last year's spike in large customer wins, increasing competition from larger vendors such as Microsoft, Oracle and SAP keeps them Underweight on the name.
A detailed scenario analysis, incorporating our preliminary estimates around the AppExchange business opportunity, suggests salesforce.com is now trading above firm's current base case intrinsic value for the company. However, they show a wide variance between bear case ($14), base case ($24), and bull case ($39) scenarios due to the nascent nature of both salesforce.com and the software-as-a-service (SaaS) market itself.
Aanalysis suggests that salesforce.com's core CRM business targeting small and mid-sized businesses and an On-Demand application platform targeting the long thin tail of vertical specific application functionality can support a core value of $24 today, with a one-year price target of $27. However, the stock may still see further downward pressure as investors' expectations about the long-term nature of salesforce.com's business continue to evolve and the competitive pressures from Microsoft's Dynamics offering and a resurgent Siebel On-Demand, now under Oracle's control, reach a crescendo in 2007.
Notablecalls: This may put a cap on CRM's recent run. Would not want to be long here.
SanDisk and its partner Toshiba continue to demonstrate NAND market leadership in terms of MLC and new product innovation, and we believe the acquisition of M-Systems and its x4, U3, embedded handset NAND and other technologies is likely to extend this leadership over the next several years.
Firm believes SanDisk guidance and Street expectations are based on historic seasonal patterns that fail to fully incorporate the growing role of wireless handset demand for NAND, especially into the holiday build cycle. They also note the good elasticity of demand due to aggressive cost cutting on the part of SanDisk/Toshiba.
UBS' $70 target is based on 28x current options burdened C2007E EPS of $2.50. Firm assigns a 2 predictability level owing to uncertainties in consumerdemand and competition from new rivals. Reits Buy.
Notablecalls: Nothing new here. But given the positive sentiment we saw yesterday I would not be surprised to see some additional strenght.
- Morgan Stanley is lowering their one-year price target on salesforce.com (NYSE:CRM) to $27 from $31, as an increasingly competitive On-Demand CRM market leads them to reduce firm's long-term operating margin assumptions. While the stock is down from its highs and may have priced in some of our concerns about the sustainability of net new subscriber growth due to last year's spike in large customer wins, increasing competition from larger vendors such as Microsoft, Oracle and SAP keeps them Underweight on the name.
A detailed scenario analysis, incorporating our preliminary estimates around the AppExchange business opportunity, suggests salesforce.com is now trading above firm's current base case intrinsic value for the company. However, they show a wide variance between bear case ($14), base case ($24), and bull case ($39) scenarios due to the nascent nature of both salesforce.com and the software-as-a-service (SaaS) market itself.
Aanalysis suggests that salesforce.com's core CRM business targeting small and mid-sized businesses and an On-Demand application platform targeting the long thin tail of vertical specific application functionality can support a core value of $24 today, with a one-year price target of $27. However, the stock may still see further downward pressure as investors' expectations about the long-term nature of salesforce.com's business continue to evolve and the competitive pressures from Microsoft's Dynamics offering and a resurgent Siebel On-Demand, now under Oracle's control, reach a crescendo in 2007.
Notablecalls: This may put a cap on CRM's recent run. Would not want to be long here.
Calls of Note Part 1
- The Merrill Lynch Focus 1 Committee has added Qualcomm (NASDAQ:QCOM) to its list. This is consistent with firm's Buy rating on Qualcomm, which is based on the following factors: 1) Attractive valuation, 2) A play on 3G wireless deployments, and 3) Strong earnings growth, and substantial cash flow generation. Earnings expected to grow significantly They expect EPS to grow 26% per annum between 2006 and 2008, driven mainly by deployment of 3G networks. Firm expects 3G handset pricing to drop significantly, to the $150 mark, over the next few quarters and the variety and availability of attractive phones to improve. In firm's view, this should drive 3G adoption, benefiting Qualcomm.
With the stock down ~18% YTD, they believe shares of Qualcomm present a good buying opportunity. Firm highlight an attractive valuation, with $2.33 (ex-options) in 2008 EPS (mid-cycle for 3G deployment) the basis of their $60 price objective.
Near-term risks exist:
Firm highlights some near term risks: 1) in October 2006, an administrative judge is expected to rule in Broadcom's patent infringement complaint against Qualcomm, with the worst case ruling (unlikely) preventing Qualcomm from selling its semiconductor products in the US, 2) In April 2007 Nokia's agreement with Qualcomm over 3G (WCDMA) royalty rates expires, and at this point of time it neither vendor is willing to compromise. Should Nokia stop paying Qualcomm royalties, Qualcomm's earnings could drop by 10-15% next year.
With the stock down ~18% YTD, they believe shares of Qualcomm present a good buying opportunity. Firm highlight an attractive valuation, with $2.33 (ex-options) in 2008 EPS (mid-cycle for 3G deployment) the basis of their $60 price objective.
Near-term risks exist:
Firm highlights some near term risks: 1) in October 2006, an administrative judge is expected to rule in Broadcom's patent infringement complaint against Qualcomm, with the worst case ruling (unlikely) preventing Qualcomm from selling its semiconductor products in the US, 2) In April 2007 Nokia's agreement with Qualcomm over 3G (WCDMA) royalty rates expires, and at this point of time it neither vendor is willing to compromise. Should Nokia stop paying Qualcomm royalties, Qualcomm's earnings could drop by 10-15% next year.
Notablecalls: This call will help QCOM today. However I suspect there will be a shorting oppy after the open.
Color on quarter: Applied Materials (AMAT)
- Several firms are commenting on Applied Materials (NASDAQ:AMAT) after the co reported its July qtr results and announced guidance for October qtr:
*RBC notes July bookings were up 7% (mid-point of guidance). July revenues were strong at $2.54B and GAAP EPS were $0.33, better than their model of $0.31. Pro-forma EPS of $0.35 excluded stock-comp expense, an acquisition charge, and a tax refund.
Order guidance for October better than expected: Management guided for orders to be flat +/-2%. Firm had been modeling a decline of 7-8%. Flat panel orders look to be better than our model and while checks indicate semi orders tracking down 10%, or so, guidance suggests closer to 5%. Management acknowledged a slowdown and commented that memory orders will remain strong for the foreseeable future, consistent with firm's view.
Nancy Handel announced her retirement and plans to leave Applied Materials effective on January 5th, after 21 years with the company. While, it is never good news to see a CFO leave, the firm is not concerned about the financials.
Stock opinion: It was healthy to hear management acknowledge the challenging order environment. However, it would have been better for management to guide orders down and get more of the bad news out of the way. Firm hopes that management is not working too hard for the October order book at the expense of January: a concern that could weigh on the stock over the next few months. They continue to recommend that investors buy the stock on weakness for a rally later in the year/early next year.
*Goldman Sachs notes that while management did acknowledge a softening in business conditions at customers, they did not get the level of capitulation they were hoping for from the call as flattish order guidance does not fully reflect the weakening in fundamentals they expect beginning in CY3Q2006.
As a result the firm is maintaining their Neutral rating on the stock and would wait to be more aggressive until: 1) they see a more pronounced management capitulation on the cycle, driven by weakening fundamentals, 2) order declines over the coming quarters drive incremental Street estimate cuts, as they continue to view current Street estimates as too optimistic, (3) Applied's margins approach trough levels, which is one of the criteria of our framework for investing in cyclical stocks. Further, the firm would look for evidence of pricing discipline as opposed to price cuts as incentives to drive orders, thus allowing for margin expansion in future periods.
No change to 12-month tgt of $15.
*Deutsche Bank notes Applied Material's F3Q06 (Jul) results beat expectations, but F4Q06 guidance and a more cautious tone suggests a cyclical peak. Firm believes that a combination of FPD, and logic and foundry weakness could precipitate a business decline beginning in C4Q06. Reiterates expectation of a digestion period beginning toward year-end, extending into 2007, and believes Applied's results and commentary reinforce this view. Maintains Hold rating.
Firm values AMAT in the middle of the 15x to 22x range of C2007 EPS estimates they use to value SCE stocks. $19 price target equates to ~16.5x C2007 EPS of $1.15 (excluding $0.12 in stock compensation expense).
Notablecalls: AMAT looks like dead money to me. Its not even a trading stock as there is zero volatility.
*RBC notes July bookings were up 7% (mid-point of guidance). July revenues were strong at $2.54B and GAAP EPS were $0.33, better than their model of $0.31. Pro-forma EPS of $0.35 excluded stock-comp expense, an acquisition charge, and a tax refund.
Order guidance for October better than expected: Management guided for orders to be flat +/-2%. Firm had been modeling a decline of 7-8%. Flat panel orders look to be better than our model and while checks indicate semi orders tracking down 10%, or so, guidance suggests closer to 5%. Management acknowledged a slowdown and commented that memory orders will remain strong for the foreseeable future, consistent with firm's view.
Nancy Handel announced her retirement and plans to leave Applied Materials effective on January 5th, after 21 years with the company. While, it is never good news to see a CFO leave, the firm is not concerned about the financials.
Stock opinion: It was healthy to hear management acknowledge the challenging order environment. However, it would have been better for management to guide orders down and get more of the bad news out of the way. Firm hopes that management is not working too hard for the October order book at the expense of January: a concern that could weigh on the stock over the next few months. They continue to recommend that investors buy the stock on weakness for a rally later in the year/early next year.
*Goldman Sachs notes that while management did acknowledge a softening in business conditions at customers, they did not get the level of capitulation they were hoping for from the call as flattish order guidance does not fully reflect the weakening in fundamentals they expect beginning in CY3Q2006.
As a result the firm is maintaining their Neutral rating on the stock and would wait to be more aggressive until: 1) they see a more pronounced management capitulation on the cycle, driven by weakening fundamentals, 2) order declines over the coming quarters drive incremental Street estimate cuts, as they continue to view current Street estimates as too optimistic, (3) Applied's margins approach trough levels, which is one of the criteria of our framework for investing in cyclical stocks. Further, the firm would look for evidence of pricing discipline as opposed to price cuts as incentives to drive orders, thus allowing for margin expansion in future periods.
No change to 12-month tgt of $15.
*Deutsche Bank notes Applied Material's F3Q06 (Jul) results beat expectations, but F4Q06 guidance and a more cautious tone suggests a cyclical peak. Firm believes that a combination of FPD, and logic and foundry weakness could precipitate a business decline beginning in C4Q06. Reiterates expectation of a digestion period beginning toward year-end, extending into 2007, and believes Applied's results and commentary reinforce this view. Maintains Hold rating.
Firm values AMAT in the middle of the 15x to 22x range of C2007 EPS estimates they use to value SCE stocks. $19 price target equates to ~16.5x C2007 EPS of $1.15 (excluding $0.12 in stock compensation expense).
Notablecalls: AMAT looks like dead money to me. Its not even a trading stock as there is zero volatility.
Notablecalls - Paperstand
The WSJ's "Heard on the Street" column discusses Bristol-Myers Squibb (BMY) and its CEO, Peter Dolan. During his 5 years as CEO, Mr. Dolan has overcome a series of controversies, ranging from a financial scandal to research failures and questionable deals. But some shareholders aren't inclined to let Mr. Dolan off the hook for the co's latest setback: the loss of marketing exclusivity over its best-selling drug, the blood thinner Plavix, 5 years ahead of schedule. Complaints about Mr. Dolan have surfaced often during his tenure, and the board has always steadfastly stood behind him. Directors believe the CEO fixed his inherited problems, bolstered internal controls and amassed a strong research pipeline. Nor do board members expect anything will result from the FBI's surprise raid. The co issued a statement from Bristol-Myers Chmn James D. Robinson III saying Mr. Dolan "has the full and complete confidence of the Board." Article highlights statements by several unsatisfied investors, some of them former BMY workers.
According to the WSJ, Morningstar (MORN), disclosed that 9 co insiders were currently in trading plans to sell some of the co's stock. Chmn and CEO Joe Mansueto had announced his sales plan in a letter to shareholders earlier this year, and he hinted then that other Morningstar managers might follow suit.
Barron's Online highlights Allstate (ALL), which currently is in a price war with other insurers. The battles are everywhere. Geico's trademark gecko boasted cheap prices this week from a banner pulled by a small plane near Wall Street's canyons. A Progressive (PGR) Web ad offered this stark observation: You have no idea what your car insurance should cost. None of this bodes well for the future of Allstate shares, which are up 4% since the beginning of the year, a better performance than some competitors. Allstate, moreover, is dropping some hurricane policies and paying more than $800m to transfer remaining hurricane risk to reinsurers. To replace that rev, Allstate needs new low-risk, low-cost customers, especially in auto insurance, its bread-and-butter business. And as direct-sales competitors with fewer agents and lower costs slash premiums, Allstate must respond and its '06 earnings could represent a cyclical peak. So while Allstate shares may still look cheap, they could be dead money in the near term. "Allstate has unsustainably high returns on equity" as rivals "offer deeper discounts and more coverage for less," says Joshua Shanker, a Citigroup analyst who recently downgraded Allstate shares.
According to the WSJ, Morningstar (MORN), disclosed that 9 co insiders were currently in trading plans to sell some of the co's stock. Chmn and CEO Joe Mansueto had announced his sales plan in a letter to shareholders earlier this year, and he hinted then that other Morningstar managers might follow suit.
Barron's Online highlights Allstate (ALL), which currently is in a price war with other insurers. The battles are everywhere. Geico's trademark gecko boasted cheap prices this week from a banner pulled by a small plane near Wall Street's canyons. A Progressive (PGR) Web ad offered this stark observation: You have no idea what your car insurance should cost. None of this bodes well for the future of Allstate shares, which are up 4% since the beginning of the year, a better performance than some competitors. Allstate, moreover, is dropping some hurricane policies and paying more than $800m to transfer remaining hurricane risk to reinsurers. To replace that rev, Allstate needs new low-risk, low-cost customers, especially in auto insurance, its bread-and-butter business. And as direct-sales competitors with fewer agents and lower costs slash premiums, Allstate must respond and its '06 earnings could represent a cyclical peak. So while Allstate shares may still look cheap, they could be dead money in the near term. "Allstate has unsustainably high returns on equity" as rivals "offer deeper discounts and more coverage for less," says Joshua Shanker, a Citigroup analyst who recently downgraded Allstate shares.
Tuesday, August 15, 2006
Interesting Call of The Day - MoSys (MOSY)
Stanford Financial Group's Chris Chaney notes that given MOSYS (MOSY)'s recent pullback, they encourage investors to BUY MOSY shares ahead of what they believe will be significant customer announcements in 2H06.
MOSY shares are down approximately 22% since late July due to disappointing 2H06 guidance issued on its Q206 conference call held August 2. Compared to its recent high of $9.30 in early May, MOSY shares are down 38%, and today represent a 47% discount to $11 price target.
While the company's cautious guidance for 2H06 understandably shakes investors, the firm believes the sell-off is overdone. Although the timing of 2 license deals has been pushed back (not cancelled), and revenue recognition issues (not cash flow) have plagued 2H06, they note that the level of customer engagements has not softened. Firm believes the company continues to pursue a high level of customer activity which will result in Classic Macro and Technology licensing in 2H06.
Catalysts for 2H06. Chaney believes there are at least two events near-term and several more scheduled for Q406 which should regain investor interest, and renew investor confidence in the MOSY story. During Q306, the firm expects to see an announcement detailing the recent technology license which slipped into from Q2 to Q3 and at least one other IDM technology license deal announced before the end of Q3. In Q406, they expect to hear of at least 2 major 65nm foundry partnerships, at least 1 major IDM technology license, 1-2 1T-Flash deals and Classic Macro license announcements. And, they think Nintendo will announce the Wii in 2H October or early Nov. In addition, the firm believes the still un-named license contract that slipped into Q3 was likely worth over $2 mil in license fees, and will be for a major hand-held gaming platform which will go into production and earn royalties in 2H07. Thinks this deal could be as, if not more, significant than MOSY's current contract with Nintendo. Valuation looks attractive here. MOSY trades at a 20% discount to its peer group on both a pure P/E basis, and a 50% discount on a cash-adjusted P/E basis.
Notablecalls: I don't dare to call this one actionable but it's interesting enough to put MOSY on the radar. Ultimately it's a takeover candidate. Note that in 2004 a larger competitor attempted to buy MOSY for $14. The bid failed due to opposition of acquirers board.
MOSY shares are down approximately 22% since late July due to disappointing 2H06 guidance issued on its Q206 conference call held August 2. Compared to its recent high of $9.30 in early May, MOSY shares are down 38%, and today represent a 47% discount to $11 price target.
While the company's cautious guidance for 2H06 understandably shakes investors, the firm believes the sell-off is overdone. Although the timing of 2 license deals has been pushed back (not cancelled), and revenue recognition issues (not cash flow) have plagued 2H06, they note that the level of customer engagements has not softened. Firm believes the company continues to pursue a high level of customer activity which will result in Classic Macro and Technology licensing in 2H06.
Catalysts for 2H06. Chaney believes there are at least two events near-term and several more scheduled for Q406 which should regain investor interest, and renew investor confidence in the MOSY story. During Q306, the firm expects to see an announcement detailing the recent technology license which slipped into from Q2 to Q3 and at least one other IDM technology license deal announced before the end of Q3. In Q406, they expect to hear of at least 2 major 65nm foundry partnerships, at least 1 major IDM technology license, 1-2 1T-Flash deals and Classic Macro license announcements. And, they think Nintendo will announce the Wii in 2H October or early Nov. In addition, the firm believes the still un-named license contract that slipped into Q3 was likely worth over $2 mil in license fees, and will be for a major hand-held gaming platform which will go into production and earn royalties in 2H07. Thinks this deal could be as, if not more, significant than MOSY's current contract with Nintendo. Valuation looks attractive here. MOSY trades at a 20% discount to its peer group on both a pure P/E basis, and a 50% discount on a cash-adjusted P/E basis.
Notablecalls: I don't dare to call this one actionable but it's interesting enough to put MOSY on the radar. Ultimately it's a takeover candidate. Note that in 2004 a larger competitor attempted to buy MOSY for $14. The bid failed due to opposition of acquirers board.
Calls of Note Part 4
- Friedman, Billings, Ramsey adding Accredited Home Lenders (NASDAQ:LEND) to ther Top Picks list, asthey believe the recent sell-off is overdone and current price levels offer a potentially attractive investment return. Firm notes their reasoning is supported by tandem beliefs that LEND will continue to have one of the most profitable mortgage banking platforms in our coverage universe, despite the expectation of a deteriorating margin as a result of the strategy shift, as well as one of the most conservative management teams.
Firm recognizes that earnings visibility will be limited in the near-term, given the AIC acquisition and the implementation of the new pricing strategy; however, they believe that there is the potential for significantly higher earnings in '07 due to the accretive nature of the AIC acquisition. Over the course of the past week, the shares have sold off approximately 25%, making current levels an attractive entry point. With the shares currently trading at 1.1x book value, their lowest valuation in the company's history, and supported by recent M&A transactions, the firm reiterates their Outperform rating and $42 price target.
Recent transactions support valuation. Despite the strategy shift, they expect LEND to maintain leading profitability and excellent credit performance, while possessing both attractive origination and servicing platforms. Notes SAX, which is less profitable but possesses both servicing and origination platforms, recently sold for an estimated 1.2x book value.
Notablecalls: Expect to see a bounce in LEND. Don't overstay your welcome.
Firm recognizes that earnings visibility will be limited in the near-term, given the AIC acquisition and the implementation of the new pricing strategy; however, they believe that there is the potential for significantly higher earnings in '07 due to the accretive nature of the AIC acquisition. Over the course of the past week, the shares have sold off approximately 25%, making current levels an attractive entry point. With the shares currently trading at 1.1x book value, their lowest valuation in the company's history, and supported by recent M&A transactions, the firm reiterates their Outperform rating and $42 price target.
Recent transactions support valuation. Despite the strategy shift, they expect LEND to maintain leading profitability and excellent credit performance, while possessing both attractive origination and servicing platforms. Notes SAX, which is less profitable but possesses both servicing and origination platforms, recently sold for an estimated 1.2x book value.
Notablecalls: Expect to see a bounce in LEND. Don't overstay your welcome.
Calls of Note Part 3
- Banc of America is initiating a host of steel names:
* United States Steel Corporation (NYSE:X) is initiated with Buy rating and $75 tgt. Firm notes their contrarian call is based on view that steel fundamentals should remain fairly strong heading into 2007. While some datapoints suggest that prices could weaken, they believe the industry will be proactive in cutting production and reducing inventories to maintain supply-demand balance. Firm believes peak prices and EPS will be realized in 2007. X is also well positioned to benefit from strategic catalysts in a consolidating industry. Firm believes X trades at a 35-40% discount to its breakup value.
Fixed cost leverage a plus, as long as steel prices go up. US Steel's higher fixed cost base translates into higher EPS leverage when steel prices are going up. Given their positive industry view for 2007, they believe X stock is well positioned for a recovery.
Cash flow options should support stock. Given firm's EPS forecasts, US Steel should be able to generate in excess of $2 billion of free cash flow in 2006 and 2007. US Steel's underleveraged balance sheet provides flexibility to pursue strategic opportunities. In addition, they expect the company to maintain its share repurchase program.
* Steel Dynamics (NASDAQ:STLD) is initiated with Neutral and $64 tgt. Firm's EPS forecasts are $7.10 for 2006, $7.25 for 2007, and $5.00 (normalized). At this point in the cycle, they believe risk-reward in the stock warrants a neutral. While STLD is well positioned for growth and could be a beneficiary of industry consolidation, the stock may continue to pullback near term. They'd view the stock more positively in the high $40 range ahead of a potential year end rally.
Robust growth pipeline. Steel Dynamics should benefit from its leverage to nonresidential construction through its flat rolled and structural steel businesses. The company also has a full pipeline of growth projects including the expansion of the Columbia City mill and addition of downstream finishing capabilities. Steel Dynamics is also realizing synergies from the recent Roanoke acquisition. In the future, the company may consider a West Coast greenfield mill or expansion of its Pittsboro bar mill.
Free cash flow to drive shareholder returns. In firm's view, STLD has become a more cash flow driven story. Despite a higher capital spending outlook, they expect Steel Dynamics to generate $400mm+ of cumulative free cash flow in 2006 and 2007. Most free cash will be used to fund growth investments, but some capital being returned to shareholders too. Management interests are well aligned with shareholders.
Note: NUE is initiated with Neutral and $54 tgt.
Notablecalls: Was talking to a technically oriented trader this AM and he said that several steel names have a bouncy feel to them. He'll be looking at X as this one's got the best rating.
* United States Steel Corporation (NYSE:X) is initiated with Buy rating and $75 tgt. Firm notes their contrarian call is based on view that steel fundamentals should remain fairly strong heading into 2007. While some datapoints suggest that prices could weaken, they believe the industry will be proactive in cutting production and reducing inventories to maintain supply-demand balance. Firm believes peak prices and EPS will be realized in 2007. X is also well positioned to benefit from strategic catalysts in a consolidating industry. Firm believes X trades at a 35-40% discount to its breakup value.
Fixed cost leverage a plus, as long as steel prices go up. US Steel's higher fixed cost base translates into higher EPS leverage when steel prices are going up. Given their positive industry view for 2007, they believe X stock is well positioned for a recovery.
Cash flow options should support stock. Given firm's EPS forecasts, US Steel should be able to generate in excess of $2 billion of free cash flow in 2006 and 2007. US Steel's underleveraged balance sheet provides flexibility to pursue strategic opportunities. In addition, they expect the company to maintain its share repurchase program.
* Steel Dynamics (NASDAQ:STLD) is initiated with Neutral and $64 tgt. Firm's EPS forecasts are $7.10 for 2006, $7.25 for 2007, and $5.00 (normalized). At this point in the cycle, they believe risk-reward in the stock warrants a neutral. While STLD is well positioned for growth and could be a beneficiary of industry consolidation, the stock may continue to pullback near term. They'd view the stock more positively in the high $40 range ahead of a potential year end rally.
Robust growth pipeline. Steel Dynamics should benefit from its leverage to nonresidential construction through its flat rolled and structural steel businesses. The company also has a full pipeline of growth projects including the expansion of the Columbia City mill and addition of downstream finishing capabilities. Steel Dynamics is also realizing synergies from the recent Roanoke acquisition. In the future, the company may consider a West Coast greenfield mill or expansion of its Pittsboro bar mill.
Free cash flow to drive shareholder returns. In firm's view, STLD has become a more cash flow driven story. Despite a higher capital spending outlook, they expect Steel Dynamics to generate $400mm+ of cumulative free cash flow in 2006 and 2007. Most free cash will be used to fund growth investments, but some capital being returned to shareholders too. Management interests are well aligned with shareholders.
Note: NUE is initiated with Neutral and $54 tgt.
Notablecalls: Was talking to a technically oriented trader this AM and he said that several steel names have a bouncy feel to them. He'll be looking at X as this one's got the best rating.
Calls of Note Part 2
- ThinkEquity notes recent contacts with multiple industry experts revealed insights into the bull/bear debate on Akamai (NASDAQ:AKAM). While the company faces pertinent challenges that they will continue to monitor, they are positive on Akamai's growth prospects for the foreseeable future. Firm had an opportunity to discuss new technology with Akamai's Chief Scientist, Tom Leighton, and they believe that Akamai's new offers will address the changing internet infrastructure. Checks confirm a solid pipeline at Akamai. Maintainw Accumulate and $42 price target.
Why a CDN vs. DIY? Akamai's management and customers agree that performance is a main driver for CDNs. Nevertheless, our sources indicate three main drivers for CDNs: disaster recover (security), streaming media (expensive set-up costs), and bursting. Large organizations-at times a mix of DIY, dual-source CDN. Some large organizations use a combination DIY model and 2 CDN sources. Profitable economics for digital media. According to Akamai management, distribution of digital media (video) may hurt a percentage point in gross margin, but the business is profitable and operating margins should benefit.
Akamai's Dynamic Content Accelerator-meeting the needs of AJAX, encrypted traffic. Some traffic types, like AJAX and encrypted traffic, are difficult to cache. Akamai has an important offer for the performance and security of AJAX and encrypted sites.
P2P-lots of promise, lots of issues. The firm has found a lot of optimism among industry participants around peer-to-peer (P2P) networking; however, they have found an equal number of security products that are intent on blocking it. They do not see an imminent threat from P2P.
Web 2.0-likely to be a softer bust than the .com bust or a non-event for Akamai. A number of industry participants believe that there will be a rationalization of new Internet companies (e.g., social networking) and worry that Akamai's growth may slow. Firm believes that Akamai's customer base has longer staying power and that any rationalization is likely to be far less significant than the .com bust. Finding Akamai customers is fairly easy to do with a name server look-up. The method is accurate approximately 75%-80% of the time according to Akamai.
Firm reiterates their view that Akamai is the best way to play the managed service growth in application networking. They see little risk to Akamai's growth in the near term. Sources indicate a full pipeline for Akamai. Firm is maintaining their Accumulate rating as the current valuation seems to have priced the near-term upside.
Notablecalls: Not actionable but good to know category. AKAM has been a smart bet over the past year. Berko has gotten is quite right.
Calls of Note Part 1
- Merrill Lynch is positive on New River Pharma (NASDAQ:NRPH) after Shire (NASDAQ:SHPGY) and Barr (NYSE:BRL) settled patent litigation regarding Adderall XR, NRP104's soon to be predecessor. The settlement will prevent Barr from launching a generic version of Adderall XR until April 1, 2009. But, importantly, the settlement will give New River and Shire more than 2 years to transition patients to NRP104 from Adderall XR, assuming an early '07 launch. Firm believes this significantly reduces the risk related to the upcoming FDA decision and Shire's commitment to the NRP104 launch and transition, which now must be completed by 1Q09.
The bear case that Shire is not committed to NRP104 should be significantly eroded by Shire's settlement with Barr on Adderall XR generics. There will be generic competition for Adderall XR by 2Q09, which increases the importance of quickly transitioning patients from Adderall XR to NRP104 ahead of generic launches. NRP104 should be less susceptible to generic erosion because of differentiated safety, efficacy, abusability and overdose protection. Firm expects a rapid launch and transition for Shire to ensure that its patients are on NRP104, prior to generic Adderall XR launch.
Merrill continues to believe that NRP104 will be receive an approvable letter with minor label revisions or full approval by its October 6 PDUFA date.
Notablecalls: I think NRPH will trade up today. The only problem is that NRPH may gap up hard and then do nothing.
- Piper Jaffray is increasing our price target for Business Objects (NASDAQ:BOBJ) shares from $25 to $32 based on opinion that shares continue to trade at an attractive valuation and that the situation might not be as bad as they originally thought from an execution standpoint. While the firm feels it is unlikely the shares rapidly return to previous highs, they believe end-of-year seasonal strength in software and continued consolidation in the enterprise software sector could limit near-term downside risk.
BOBJ shares continue to trade below the peer group median multiples on a P/E, Ex-Cash P/E, EV/Sales, and FCF basis. Firm believes the current valuation, combined with the company's strong overall market position, healthy maintenance revenue streams, and takeout potential contribute to upside potential. Firm believes downside risk should be limited to $19, representing a P/E of approximately 11.2x FY07 EPS and 1.1x EV/'07 sales, with upside potential approaching our price target of $32.
Piper believes the recent M&A activity in the software space could also provide a floor. Firm notes they looked at recently announced and closed acquisitions in the software space (see Table 1) and calculated a median multiple of 3.6x trailing revenues for these deals. Assuming 3.6x trailing 12-month revenues leads to a value of approx. $43.12 per BOBJ share. Maintains Outperform.
Notablecalls: While the note makes a ton of sense I suspect the shares will have difficult time surpassing $27 level. Also, take a look at the high september put volume.
The bear case that Shire is not committed to NRP104 should be significantly eroded by Shire's settlement with Barr on Adderall XR generics. There will be generic competition for Adderall XR by 2Q09, which increases the importance of quickly transitioning patients from Adderall XR to NRP104 ahead of generic launches. NRP104 should be less susceptible to generic erosion because of differentiated safety, efficacy, abusability and overdose protection. Firm expects a rapid launch and transition for Shire to ensure that its patients are on NRP104, prior to generic Adderall XR launch.
Merrill continues to believe that NRP104 will be receive an approvable letter with minor label revisions or full approval by its October 6 PDUFA date.
Notablecalls: I think NRPH will trade up today. The only problem is that NRPH may gap up hard and then do nothing.
- Piper Jaffray is increasing our price target for Business Objects (NASDAQ:BOBJ) shares from $25 to $32 based on opinion that shares continue to trade at an attractive valuation and that the situation might not be as bad as they originally thought from an execution standpoint. While the firm feels it is unlikely the shares rapidly return to previous highs, they believe end-of-year seasonal strength in software and continued consolidation in the enterprise software sector could limit near-term downside risk.
BOBJ shares continue to trade below the peer group median multiples on a P/E, Ex-Cash P/E, EV/Sales, and FCF basis. Firm believes the current valuation, combined with the company's strong overall market position, healthy maintenance revenue streams, and takeout potential contribute to upside potential. Firm believes downside risk should be limited to $19, representing a P/E of approximately 11.2x FY07 EPS and 1.1x EV/'07 sales, with upside potential approaching our price target of $32.
Piper believes the recent M&A activity in the software space could also provide a floor. Firm notes they looked at recently announced and closed acquisitions in the software space (see Table 1) and calculated a median multiple of 3.6x trailing revenues for these deals. Assuming 3.6x trailing 12-month revenues leads to a value of approx. $43.12 per BOBJ share. Maintains Outperform.
Notablecalls: While the note makes a ton of sense I suspect the shares will have difficult time surpassing $27 level. Also, take a look at the high september put volume.
Notablecalls - Paperstand
The NY Times reports that the Jones Apparel (JNY), plans to abandon its months-long auction after failing to find a buyer willing to meet its price. The move, which could be announced as early as today, would be the first time that a major retail co had been forced to cancel a prominent auction at a time of intense interest in the sector by private equity firms, which have spent billions to buy retail co's.
The WSJ reports that Berkshire Hathaway (BRKA) bought shares of Sanofi-Aventis (SNY) and appeared to have sold shares in Lexmark Intl (LXK). In a securities filing listing its top stock holdings, Berkshire reported owning 488K ADRs of Sanofi-Aventis as of June 30. Berkshire didn't report owning the stock in a filing covering the three months ended March 31. Also absent from the Berkshire's latest list of stocks were Gap (GPS) and Johnson & Johnson (JNJ). Berkshire's March 31 filing reported 10m Gap shares and 2m J&J shares.
The WSJ's "Heard on the Street" column questions Motorola (MOT) margins, that may be Razr-thin. Motorola wowed its annual gathering of Wall St. and industry analysts last month in Chicago: New gadgets, with names like Krzr and Rizr, quickly helped persuade some investors that the co could expand on the success of its sleek Razr. The co has posted impressive global mkt-share gains, rising to 22% from 18% over the past year, making it No. 2 after Nokia, which has a 33% global share. Motorola is trading at about 15x estd earnings for '07. This is a slightly richer per-share multiple than Nokia, which trades at about 13x forward earnings. While the stock may see more lift in the coming months as new phones get rolled out, not everyone is happy. Some long-term investors are concerned that the excitement over the Razr's offspring is overdone. They note that the co's flagship phone has done little to boost margins. To wit: Motorola's handset business had a 9.9% operating margin, before the Razr's appearance in late '04, when the overall co was losing money. Five quarters and 50m Razrs later, the margin is just 11.2%, compared with Nokia's operating margin of about 16%. "They have the marketing and promotion right, but with limited margin expansion, you have to value [based on] expectations," said Patricia Wilson, of Widows Investment Partnership, which manages $189m of assets as part of the Lloyds TSB Group. Ms. Wilson thinks that the intense competition to provide feature-packed phones at ever lower prices, especially in emerging mkts, will continue to eat into profits across the handset industry. She advised the fund to sell its holdings in Motorola in the Q1, when it reached her price tgt of $24, and the partnership turned a profit.
Barron's Online reports that Fortress Investment Group and a slew of insiders are seeing their investments in newly public Aircastle Limited (AYR) take flight. Altogether, Fortress and a slew of execs and directors doled out $12.95m to acquire 561K shares, primarily during last Tuesday's IPO. Ben Silverman, director of research at InsiderScore.com, says, "The IPO has performed nicely in spite of the recent terror threat involving airlines. In one sense it shows the strength of the business model here."
The WSJ reports that Berkshire Hathaway (BRKA) bought shares of Sanofi-Aventis (SNY) and appeared to have sold shares in Lexmark Intl (LXK). In a securities filing listing its top stock holdings, Berkshire reported owning 488K ADRs of Sanofi-Aventis as of June 30. Berkshire didn't report owning the stock in a filing covering the three months ended March 31. Also absent from the Berkshire's latest list of stocks were Gap (GPS) and Johnson & Johnson (JNJ). Berkshire's March 31 filing reported 10m Gap shares and 2m J&J shares.
The WSJ's "Heard on the Street" column questions Motorola (MOT) margins, that may be Razr-thin. Motorola wowed its annual gathering of Wall St. and industry analysts last month in Chicago: New gadgets, with names like Krzr and Rizr, quickly helped persuade some investors that the co could expand on the success of its sleek Razr. The co has posted impressive global mkt-share gains, rising to 22% from 18% over the past year, making it No. 2 after Nokia, which has a 33% global share. Motorola is trading at about 15x estd earnings for '07. This is a slightly richer per-share multiple than Nokia, which trades at about 13x forward earnings. While the stock may see more lift in the coming months as new phones get rolled out, not everyone is happy. Some long-term investors are concerned that the excitement over the Razr's offspring is overdone. They note that the co's flagship phone has done little to boost margins. To wit: Motorola's handset business had a 9.9% operating margin, before the Razr's appearance in late '04, when the overall co was losing money. Five quarters and 50m Razrs later, the margin is just 11.2%, compared with Nokia's operating margin of about 16%. "They have the marketing and promotion right, but with limited margin expansion, you have to value [based on] expectations," said Patricia Wilson, of Widows Investment Partnership, which manages $189m of assets as part of the Lloyds TSB Group. Ms. Wilson thinks that the intense competition to provide feature-packed phones at ever lower prices, especially in emerging mkts, will continue to eat into profits across the handset industry. She advised the fund to sell its holdings in Motorola in the Q1, when it reached her price tgt of $24, and the partnership turned a profit.
Barron's Online reports that Fortress Investment Group and a slew of insiders are seeing their investments in newly public Aircastle Limited (AYR) take flight. Altogether, Fortress and a slew of execs and directors doled out $12.95m to acquire 561K shares, primarily during last Tuesday's IPO. Ben Silverman, director of research at InsiderScore.com, says, "The IPO has performed nicely in spite of the recent terror threat involving airlines. In one sense it shows the strength of the business model here."
Monday, August 14, 2006
Calls of Note Part 3
- ThinkEquity notes they had the chance to test Verizon Wireless' Chocolate phone, and we believe it is selling very well. Verizon Wireless plans to put increasing emphasis on its music phones, boding well for Smith Micro's (NASDAQ:SMSI) near-term revenue prospects. In the future, they expect Verizon Wireless and other carriers to offer some version of Smith Micro's QuickLink Music, which is a more direct assault by mobile phone operators on iTunes. Longer term, they believe Smith Micro's biggest success will be in StuffIt Mobile.
Having said that, the firm checked some Verizon Wireless stores in Midtown Manhattan and it is clear that the Chocolate phone is selling very well. It was sold out in some places, and almost sold out at others. Likewise, research suggests that a very large percentage of those buying a Chocolate phone also buy the $30 Verizon music essentials kit, made by Smith Micro.
Therefore, even though they believe the Chocolate phone has an unusually poorly designed interface versus the BlackBerry standard, it appears to be selling extremely well and should bolster Smith Micro's near-term prospects.
More importantly, however, they believe StuffIt has a shot at becoming "must have" software for every cell phone. It could compress 40% of the basic resource software suite, and up to 30% of traffic such as pictures, music and video. As Mike Lazaridis at Research In Motion has shown (and the firm believes), that capability would be a gold mine. The math here is simple: 1bn handsets a year, assuming $0.25 per copy, is $250m or $10 per share, virtually all of it falling to pretax income. In their opinion, while this is likely outside our 12-month investment horizon, it could yield a $200 stock at a decent 20x multiple.
Maintains Buy and 12-month $20 tgt.
Notablecalls: $200 tgt sounds unbelievable. But it's bound to draw attention. I don't dare to call this one actionable but one to keep on the radar.
Having said that, the firm checked some Verizon Wireless stores in Midtown Manhattan and it is clear that the Chocolate phone is selling very well. It was sold out in some places, and almost sold out at others. Likewise, research suggests that a very large percentage of those buying a Chocolate phone also buy the $30 Verizon music essentials kit, made by Smith Micro.
Therefore, even though they believe the Chocolate phone has an unusually poorly designed interface versus the BlackBerry standard, it appears to be selling extremely well and should bolster Smith Micro's near-term prospects.
More importantly, however, they believe StuffIt has a shot at becoming "must have" software for every cell phone. It could compress 40% of the basic resource software suite, and up to 30% of traffic such as pictures, music and video. As Mike Lazaridis at Research In Motion has shown (and the firm believes), that capability would be a gold mine. The math here is simple: 1bn handsets a year, assuming $0.25 per copy, is $250m or $10 per share, virtually all of it falling to pretax income. In their opinion, while this is likely outside our 12-month investment horizon, it could yield a $200 stock at a decent 20x multiple.
Maintains Buy and 12-month $20 tgt.
Notablecalls: $200 tgt sounds unbelievable. But it's bound to draw attention. I don't dare to call this one actionable but one to keep on the radar.
Calls of Note Part 2
- Ryan Beck notes that at the Farnborough Air Show, Airbus management stated that they hoped to make an announcement on the resolution of problems with wiring harnesses that were behind the earlier news of A380 production delays. The delays caused Hexcel (NYSE:HXL) to caution that 2H06 and 1H07 results could be impacted. Although Airbus management has not made an official announcement as of yet, an article in the September 8, 2006 edition of Flight International magazine reviews changes at Airbus in relation to the A380 workforce. About 1,200 people have been added to the program, and all 3,800 now involved in the program are working through the traditional European holiday break in August to rectify problems relating to the wiring harnesses and undertake other out-of-sequence work.
In relation to A380 delays, the firm recently surveyed a number of contractors and learned that Airbus has advised them to maintain deliveries as planned. This is not likely the case for all contractors; however, they believe the impact to HXL will depend on how many of its customers have been told to continue on schedule and how many have been advised to defer deliveries.
At the present time, they think it is premature to make any adjustments to forecasts. Firm's current estimates reflect the worst-case scenario presented by HXL management in June. If Airbus management decides to comment on the ramp-up in A380 production, they may have to revisit their forecast for an upward revision.
Maintains Outperform rating and $24 12-month price target based on an EV/EBITDA multiple of about 10x our forecast for 2007, which they believe is appropriate, as it is in the range for industrial materials companies, reflects the risks as we head toward 2008 and the opportunities for rapid growth as the aerospace business goes through a secular shift to composite materials. Firm continues to believe this is a 2008 story with a number of potential catalysts likely between now and then that could improve visibility and prospects for revenue and earnings growth.
Notablecalls: Considering HXL has been murdered partly because of A380 production delays one may consider picking up some stock here as the problems seem to be alleviating.
In relation to A380 delays, the firm recently surveyed a number of contractors and learned that Airbus has advised them to maintain deliveries as planned. This is not likely the case for all contractors; however, they believe the impact to HXL will depend on how many of its customers have been told to continue on schedule and how many have been advised to defer deliveries.
At the present time, they think it is premature to make any adjustments to forecasts. Firm's current estimates reflect the worst-case scenario presented by HXL management in June. If Airbus management decides to comment on the ramp-up in A380 production, they may have to revisit their forecast for an upward revision.
Maintains Outperform rating and $24 12-month price target based on an EV/EBITDA multiple of about 10x our forecast for 2007, which they believe is appropriate, as it is in the range for industrial materials companies, reflects the risks as we head toward 2008 and the opportunities for rapid growth as the aerospace business goes through a secular shift to composite materials. Firm continues to believe this is a 2008 story with a number of potential catalysts likely between now and then that could improve visibility and prospects for revenue and earnings growth.
Notablecalls: Considering HXL has been murdered partly because of A380 production delays one may consider picking up some stock here as the problems seem to be alleviating.
Calls of Note Part 1
- JP Morgan notes Dell Computer (NASDAQ:DELL) is scheduled to report its fiscal second (July) quarter results on Thursday, August 17 after the market close. The company already preannounced a shortfall for the quarter and is unlikely to give detailed guidance. As a result, investors may have to wait until the analyst meeting on September 13 for any incremental catalysts.
The earnings report may reveal some further details on the sources of Dell's current operational difficulties. In particular, it will be important to determine how much of its PC weakness has now spread to the corporate segment from the previously weak U.S. consumer business.
In addition, although the company may not provide much commentary on the issue, it will be important to understand how much of its margin shortfall resulted from a reduction in vendor subsidies from Intel versus incrementally aggressive product pricing. Firm suspects the former played a significant role, which would imply that Dell's pain is not evenly distributed amongst its competitors in the form of competitive pricing.
The health of Dell's enterprise segment is also a key unknown at this time. They fear that the company's current weakness in corporate PCs may hamper its ability to cross-sell enterprise solutions, and if this did not occur in the second quarter, it could represent an incremental risk factor for coming quarters.
The earnings report may reveal some further details on the sources of Dell's current operational difficulties. In particular, it will be important to determine how much of its PC weakness has now spread to the corporate segment from the previously weak U.S. consumer business.
In addition, although the company may not provide much commentary on the issue, it will be important to understand how much of its margin shortfall resulted from a reduction in vendor subsidies from Intel versus incrementally aggressive product pricing. Firm suspects the former played a significant role, which would imply that Dell's pain is not evenly distributed amongst its competitors in the form of competitive pricing.
The health of Dell's enterprise segment is also a key unknown at this time. They fear that the company's current weakness in corporate PCs may hamper its ability to cross-sell enterprise solutions, and if this did not occur in the second quarter, it could represent an incremental risk factor for coming quarters.
JP Morgan continues to believe that major structural and strategic actions are necessary to begin a bottoming process for the stock. These changes should include, but not be limited to the following: substantial changes in business leadership structure; significant refinements to the direct model in the consumer space; restructuring initiatives to lower discretionary spending and product cost structure; and aggressive attempts to exploit the microprocessor industry's profit pool (i.e., a more substantial move to AMD).
Firm notes they doubt that Dell will discuss any of these potential operational and strategic changes in detail on the conference call, as the company's analyst meeting next month may represent a more appropriate forum for these issues.
Dell is trading at 16x calendar 2007 EPS ex-options estimate or 17x including options. They believe pressures on the share price may go unabated until the company takes the aforementioned actions. HP remains their top pick.
Notablecalls: Not actionable but good to know category. May want to cover the DELL short suggested last week.
- Piper Jaffray is positive on Apple Computer (NASDAQ:AAPL) following spending time talking to 16 developers at WWDC regarding their thoughts on the Intel transition one year after it began. While there are some concerns from industry analysts that the Intel transition will negatively impact Mac application development, the firm believes their conversations point to the opposite conclusion. 14 of 16 developers said Windows running on a Mac will positively impact Mac application development. 14 of the 14 developers who have ported an application from PowerPC to Universal Binary said the process was easier than they had expected.
The Intel transition was announced in June-05 and the first Intel-based Macs were released in Jan-06; since the original announcement more than 3,000 applications have been written in Universal Binary. Moreover, since the release of the first Intel Macs in Jan-06, it took Apple only 210 days to unveil the final Intel hardware, the Mac Pro, which was released at WWDC '06.
Firm maintains Outperform and $99 tgt.
Notablecalls: Not actionable but good to know category.
Genentech (DNA): Color on Herceptin delay
Several firms are commenting on Genentech (NYSE:DNA) after the FDA extended Herceptin's sBLA action date for use in the adjuvant breast cancer setting by 90 days. The Agency deemed additional information requested for the application to be a major amendment, making the PDUFA date " which had been August 17 " now November 17:
* Baird notes they don't see the news as a big deal as Herceptin is already the gold standard in the adjuvant setting. As they have noted extensively, Herceptin's uptake in this setting was dramatic and immediate when the data were first detailed at ASCO in 2005. Recalls the drug's penetration of node positive/Her2 positive patients had been in the low double-digits pre-ASCO 2005, but shot up to near 80% (79% to be exact) right after ASCO 2005.
That said, they do think Avastin will very much benefit from a label expansion in lung and breast cancers (expected October 11 and November 22, respectively). Firm's survey work with physicians has indicated more moderate uptake of Avastin " especially in breast cancer, citing reimbursement and lack of FDA approval as the two most important reasons for not treating breast cancer patients with Avastin. With DNA indicating some potential for slippage to the November 22 front-line breast PDUFA date, they think some additional degree of risk has been added to the story here. Remains rated Neutral on DNA shares.
* Goldman notes they do not believe the delay was due to any major concern on safety and efficacy of Herceptin based on previously released Phase 3 data. The turnover and extra caution of FDA reviewers may have led to the delay as we have seen with multiple drugs in the last year. The FDA application on Herceptin is also relatively large, with over 3,000 patients. The primary endpoint was disease-free survival which generally requires more documentation than overall survival. Management indicated that the FDA requested more mature data on progression for about 400 patients. The company has responded to the request with supporting data.
Firm thinks there might be slight downside to Genentech shares because most investors expected FDA approval. However, there has been significant off-label use of Herceptin in adjuvant breast cancer after presentation of the robust Phase 3 data in 6/05. They do not expect the delay to have major impact on Herceptin sales nor EPS. Maintains Buy rating and Neutral coverage view.
* Baird notes they don't see the news as a big deal as Herceptin is already the gold standard in the adjuvant setting. As they have noted extensively, Herceptin's uptake in this setting was dramatic and immediate when the data were first detailed at ASCO in 2005. Recalls the drug's penetration of node positive/Her2 positive patients had been in the low double-digits pre-ASCO 2005, but shot up to near 80% (79% to be exact) right after ASCO 2005.
That said, they do think Avastin will very much benefit from a label expansion in lung and breast cancers (expected October 11 and November 22, respectively). Firm's survey work with physicians has indicated more moderate uptake of Avastin " especially in breast cancer, citing reimbursement and lack of FDA approval as the two most important reasons for not treating breast cancer patients with Avastin. With DNA indicating some potential for slippage to the November 22 front-line breast PDUFA date, they think some additional degree of risk has been added to the story here. Remains rated Neutral on DNA shares.
* Goldman notes they do not believe the delay was due to any major concern on safety and efficacy of Herceptin based on previously released Phase 3 data. The turnover and extra caution of FDA reviewers may have led to the delay as we have seen with multiple drugs in the last year. The FDA application on Herceptin is also relatively large, with over 3,000 patients. The primary endpoint was disease-free survival which generally requires more documentation than overall survival. Management indicated that the FDA requested more mature data on progression for about 400 patients. The company has responded to the request with supporting data.
Firm thinks there might be slight downside to Genentech shares because most investors expected FDA approval. However, there has been significant off-label use of Herceptin in adjuvant breast cancer after presentation of the robust Phase 3 data in 6/05. They do not expect the delay to have major impact on Herceptin sales nor EPS. Maintains Buy rating and Neutral coverage view.
*Merrill Lynch notes that since data on Herceptin use in adjuvant breast cancer were reported at ASCO '05, quarterly US Herceptin sales have more than doubled to $331 MM from $152 MM and the annual run rate has increased to $1.3 BB from $610 MM. Firm estimates that about 96% of the increase is related to Herceptin use in the adjuvant setting. Therefore, a 3 month delay in official FDA approval of the adjuvant regimen will not impact Herceptin sales because the drug is already standard of care.
According to Merrill, it is likely there will be a similar regulatory review delay for Avastin in breast cancer. FDA has requested additional data from the ECOG 2100 phase 3 trial that comprises the sBLA application, but according to DNA's 10Q, those data are unlikely to be available to give FDA enough time to review before the November 22 PDUFA date. Because Genentech had previously indicated a delay was a possibility, they adjusted their Avastin growth estimates for 2006 and 2007 accordingly, so an official announcement of a delay would not affect estimates. Maintains Buy and $100 tgt.
Notablecalls: The logical thing here would be to buy the stock down 2-3 pts but I suspect the thing may have some more downside as there is now hightened risk to Avastin in breast cancer. Not willing to step in front of this train.
Notablecalls - Paperstand
The WSJ's "Heard on the Street" column out saying that reinsurers may prove a good bet. Worries about the shares of reinsurance firms this hurricane season might just be a tempest in a teapot. Of the roughly $83bn in insured losses from natural disasters world-wide last year some $40bn was paid out by reinsurers, according to reinsurance broker Guy Carpenter & Co., a unit of Marsh & McLennan (MMC) "The reinsurance industry took it on the chin," says Joshua Shanker, of Citigroup. But bold investors might be smart to bet that fears of another record storm season are exaggerated. The stocks of many reinsurers are trading at skimpy multiples of their projected profits. Some Wall St. bargain hunters sniff an opportunity because the stocks are priced as if last year's record storm season is the new norm. Federal forecasters warned last week that despite a relatively quiet start to this year's storm season, they still expect above-avg hurricane activity. Shares of reinsurers are down more than 4% on avg this year. "There's a fear of record hurricanes again this year that's easy to understand but also probably irrational," said Richard Pzena, of Pzena Investment Mgmt and manager of the $5.7bn John Hancock Classic Value Fund. He began investing in reinsurers like RenaissanceRe (RNR) and IPC Holdings (IPCR) last year. "It's one of these very big upside areas with potentially very little downside."
Barron's Online reports that Copper River Mgmt, a famed short-selling hedge fund, is taking a long-term position in Sealy (ZZ). Marc Cohodes, the portfolio manager of Copper River, disclosed that the fund has accumulated a 5.1% stake in Sealy.
Barron's Online reports that Copper River Mgmt, a famed short-selling hedge fund, is taking a long-term position in Sealy (ZZ). Marc Cohodes, the portfolio manager of Copper River, disclosed that the fund has accumulated a 5.1% stake in Sealy.
Notablecalls - Barron's summary
Barron's cover story discusses funds. Top fund managers bet on GS, AYE, ECOL, BRKA, TS and PD. One manager has shorted AMZN.
Fund manager picks highlighted, including: NVS, BMY, GSK, BIIB, MEDI, MLNM, CEGE, MEDX, DCGN and IVGN. pans include SGP, DNA and AMGN.
Barron's highlights Whole Foods Market (WFMI), saying that the stock's P/E multiple of 29, though higher than other food retailers', is down from 50 and close to where it was before a powerful rally starting in 2003. "You look back on the history of this wonderful co and it goes through these hiccups," says Jack Robinson, of Winslow Green Growth Fund, who has owned the stock since the early '90s and has been buying up more at recent levels. His prediction: The shares will double in the 3-5 years.
Barron's discusses TALX (TALX), which shares have been pummeled by several negatives. A potentially big one surfaced on June 28, when the co disclosed that the Federal Trade Commission had launched an initial inquiry into whether acquisitions it made had hurt competition in the employment-verification and unemployment-tax consulting businesses. Article suggests that if the FTC inquiry soon goes away, TALX stock could hit 29 in a year. If it lingers, the stock will skid further.
The Trader column discusses Saks (SKS), which is unloved stock among investors. But it has confounded skeptics by getting good prices for its Northern dept stores and Parisian chain. The stock has delivered nice returns in a sloppy tape for high-end consumer names, and looks as though it has room for more. Javier Epstein, president of Renaissance Capital Mgmt, advocated owning Saks last fall and remains a fan. He points out that Saks' divestitures pulled in $2.1bn, 1/3 more than most analysts estd they'd fetch. Including a $4 special cash dividend in May, Saks shares have returned more than 8% since our Nov column. Epstein figures that shareholders have a couple of ways to win. With 54 Saks Fifth Avenue Stores and 50 Saks Off Fifth locations still in hand, the co has a mkt value of $2.1bn, $2.7bn in annual sales and will have $2 a share in net cash once it finishes the sale of its Parisian chain. Mgmt should get Saks' weak cash-flow margin closer to its industry peer levels near 8% and its revs to $3bn, according to Epstein. If it's successful, that equates to more than $300m in cash flow and a hypothetical share price of $23, vs $15.75 recently. Epstein thinks the sale of non-Saks units could make the co attractive to a strategic buyer and not just private-equity types. Real estate alone, mostly the New York flagship store, could be worth $9-10 a share.
Fund manager picks highlighted, including: NVS, BMY, GSK, BIIB, MEDI, MLNM, CEGE, MEDX, DCGN and IVGN. pans include SGP, DNA and AMGN.
Barron's highlights Whole Foods Market (WFMI), saying that the stock's P/E multiple of 29, though higher than other food retailers', is down from 50 and close to where it was before a powerful rally starting in 2003. "You look back on the history of this wonderful co and it goes through these hiccups," says Jack Robinson, of Winslow Green Growth Fund, who has owned the stock since the early '90s and has been buying up more at recent levels. His prediction: The shares will double in the 3-5 years.
Barron's discusses TALX (TALX), which shares have been pummeled by several negatives. A potentially big one surfaced on June 28, when the co disclosed that the Federal Trade Commission had launched an initial inquiry into whether acquisitions it made had hurt competition in the employment-verification and unemployment-tax consulting businesses. Article suggests that if the FTC inquiry soon goes away, TALX stock could hit 29 in a year. If it lingers, the stock will skid further.
The Trader column discusses Saks (SKS), which is unloved stock among investors. But it has confounded skeptics by getting good prices for its Northern dept stores and Parisian chain. The stock has delivered nice returns in a sloppy tape for high-end consumer names, and looks as though it has room for more. Javier Epstein, president of Renaissance Capital Mgmt, advocated owning Saks last fall and remains a fan. He points out that Saks' divestitures pulled in $2.1bn, 1/3 more than most analysts estd they'd fetch. Including a $4 special cash dividend in May, Saks shares have returned more than 8% since our Nov column. Epstein figures that shareholders have a couple of ways to win. With 54 Saks Fifth Avenue Stores and 50 Saks Off Fifth locations still in hand, the co has a mkt value of $2.1bn, $2.7bn in annual sales and will have $2 a share in net cash once it finishes the sale of its Parisian chain. Mgmt should get Saks' weak cash-flow margin closer to its industry peer levels near 8% and its revs to $3bn, according to Epstein. If it's successful, that equates to more than $300m in cash flow and a hypothetical share price of $23, vs $15.75 recently. Epstein thinks the sale of non-Saks units could make the co attractive to a strategic buyer and not just private-equity types. Real estate alone, mostly the New York flagship store, could be worth $9-10 a share.
Friday, August 11, 2006
Calls of Note Part 5
- Morgan Stanley has a very good comment on Analog Devices (NYSE:ADI) noting that like 2004 they would buy ADI on the weakness. The nature, set-up, and timing of these results is very similar to August 2004, when the last semiconductor industry cyclical downturn caused a miss and ADI opened down 7% the next day and closed down only 1%. ADI then went on to advance 23% over the next 3 months.
Cyclical pressures caught up to ADI earlier than expected and drove a 2% revenue shortfall and an EPS miss. firm's F2007 adjusted EPS estimate moves from $2.35 to $2.15. Management is executing to their investment thesis about driving margins higher through improved mix and restructuring, but the reduced revenue outlook is offsetting the benefits of management's actions. ADI should ride out a cyclical downturn better than many of its peers due to its pricing power and diversified customer base.
ADI's P/E multiple is at historically low levels and at a discount to the average semiconductor stock. ADI is trading 13.8x reduced C07 adjusted EPS estimate of $2.31 and this compares with the average semiconductor stock at 16.4x and ADI's historical forward P/E range of 17x-35x.
Firm notes they were pleased to see ADI take advantage of the depressed stock price by buying back 2.5% of its outstanding shares in the quarter (9.3MM shares at an average price of $32.80).
Cyclical pressures caught up to ADI earlier than expected and drove a 2% revenue shortfall and an EPS miss. firm's F2007 adjusted EPS estimate moves from $2.35 to $2.15. Management is executing to their investment thesis about driving margins higher through improved mix and restructuring, but the reduced revenue outlook is offsetting the benefits of management's actions. ADI should ride out a cyclical downturn better than many of its peers due to its pricing power and diversified customer base.
ADI's P/E multiple is at historically low levels and at a discount to the average semiconductor stock. ADI is trading 13.8x reduced C07 adjusted EPS estimate of $2.31 and this compares with the average semiconductor stock at 16.4x and ADI's historical forward P/E range of 17x-35x.
Firm notes they were pleased to see ADI take advantage of the depressed stock price by buying back 2.5% of its outstanding shares in the quarter (9.3MM shares at an average price of $32.80).
Similar to C2004 the financial markets have done a good job of anticipating the disappointment of yet another industry downturn. ADI has declined 22% from its year to date high in February 2006. The current situation appears very similar to August 2004, when the semiconductor industry was in the early innings of a cyclical downturn and ADI reported an earnings miss for Q3 F2004 (July) and a weak outlook. As of August 12, 2004, ADI had declined 34% from its year-to-date high. The company reported a $0.02 adjusted EPS miss (and a 4% revenue miss) after the market closed on August 12, 2004 and on August 13, 2004 with 2.9x the average 30 day volume, ADI initially traded down 7% to an intraday low of $31.36 before closing down only 1% from the prior day's close at $33.57. During the next 3 months ADI subsequently advanced 23% despite very weak company and industry fundamentals. In other words, the 34% decline in ADI before the earnings disappointment on August 12, 2004 had more than discounted the cyclical downturn for ADI, and we suspect the stock this time around is also already discounting a large amount of bad news. Like 2004, they would buy on the weakness.
Notablecalls: Actionable call! I expect ADI to see a pretty nice bounce today. Anything below $29 level is a strong buy.
Calls of Note Part 4
- Prudential has some harsh things to say about Pacific Sunwear of California (NASDAQ:PSUN) following disappointing results and guidance issued last night. PSUN reported Q2/06 EPS of $0.14, in line with firm's estimate, at the low end of guidance of $0.14 to $0.15, and below consensus of $0.15. Management guided to Q3/06 EPS of $0.22 to $0.30. Firm has lowered their 2006 estimate to $1.00 from $1.47 and their 2007 estimate to $1.15 from $1.65. Firm is reducing their price target to $15 from $16.
They note that PSUN's negative flow through margin on their miss to sales truly does astound them. Firm is are hitting their numbers hard - $1.00 estimate for 2006 and $1.15 for 2007 assume an 8% operating margin versus the company's five year average of about 12%. The average low multiple of the last 3 years is 12.6x, implying a $15 price target, but they can't say they have a lot of confidence in it and they have no desire to step up to the shares here. The inventories are still high, and it didn't sound like management is at all in an expense cutting mode; on the contrary, the firm heard a lot about investing in One Thousand Steps and the new store prototype. More importantly, though, it doesn't sounds like management has the pulse on the positioning of either the PacSun or the d.e.m.o business. For that reason, they think it is likely the earnings will remain under pressure through at least the second half of 2006.
Maintains Neutral Weight.
Noteablecalls: Not actionable but very entertaining! Hope PSUN management gets to read the note.
They note that PSUN's negative flow through margin on their miss to sales truly does astound them. Firm is are hitting their numbers hard - $1.00 estimate for 2006 and $1.15 for 2007 assume an 8% operating margin versus the company's five year average of about 12%. The average low multiple of the last 3 years is 12.6x, implying a $15 price target, but they can't say they have a lot of confidence in it and they have no desire to step up to the shares here. The inventories are still high, and it didn't sound like management is at all in an expense cutting mode; on the contrary, the firm heard a lot about investing in One Thousand Steps and the new store prototype. More importantly, though, it doesn't sounds like management has the pulse on the positioning of either the PacSun or the d.e.m.o business. For that reason, they think it is likely the earnings will remain under pressure through at least the second half of 2006.
Maintains Neutral Weight.
Noteablecalls: Not actionable but very entertaining! Hope PSUN management gets to read the note.
Color on quarter: First Marblehead (FMD)
* ThinkEquity notes that by any measure, they can conclude that First Marblehead's (NYSE:FMD) June quarter was a blow-out, surpassing their revenue estimate by nearly $9 million and EPS estimate by $0.11, net of an $0.18 tax benefit. Strong securitization volumes and yields, and a continuation in the positive scale leverage from greater utilization of existing infrastructure, were responsible for the superior quarterly results. Firm is raising their revenue and net income per share estimates and 12-month target price on FMD shares as a result of strong continuing momentum in a fast-growing market segment.
The company facilitated securitizations of $756 million of private student loans, which generated $115.4 million of service revenues, for a 15.3% yield. Last year, in the June quarter, FMD facilitated securitizations of $740 million of private student loans, generating $90.5 million of service revenues for a yield of 12.23%. Yields improved due to demand for ABS securities by the fast-growing student loan securitization market, as well as increases in open market interest rates.
As a result of this superior performance, the firm is raising their estimates of revenue and net income per share for FY07 to $695.4 million (up from a previously estimated $649.3 million) and $4.54, from $4.04, respectively. Firm is also raising their 12-month price target to $65.00 from $60.00, calculated as a valuation of 14.5x FY07 estimate of $4.54, in line with FMD's growth and P/Es in the private student loan industry. Reits Buy.
* FBR notes First Marblehead produced better than expected results on higher revenues, lower expenses, and a one-time tax benefit. Firm is encouraged by the still strong facilitation volumes and expense discipline shown in the seasonally slow quarter, but higher pre-payments caused residual write-downs for the second straight quarter - supporting their concerns regarding residual valuation. In any case, they believe the upcoming quarter will be a defining period for the company as it will face its first serious lending season with increased competition, and should give us more clarity into the trust as more loans season. With a lack of guidance from management at this time and concerns over trust performance, the firm is maintaining their Underperform rating. Firm is raising their price target $1 to $36 to reflect the benefit of the company's new tax strategy.
Notablecalls: FMD reported results last night and I thought to highlight the opinions of the most bullish firm (Think) and the most bearish firm (FBR). ThinkEquity's tgt of $65 is currently Street high with FBR's $36 Street low. I personally would not be surprised to see FMD surpass the $50 level today as short interest is still quite high. Suspect the shorts will step in around the $52-$54 level to chop the thing down.
The company facilitated securitizations of $756 million of private student loans, which generated $115.4 million of service revenues, for a 15.3% yield. Last year, in the June quarter, FMD facilitated securitizations of $740 million of private student loans, generating $90.5 million of service revenues for a yield of 12.23%. Yields improved due to demand for ABS securities by the fast-growing student loan securitization market, as well as increases in open market interest rates.
As a result of this superior performance, the firm is raising their estimates of revenue and net income per share for FY07 to $695.4 million (up from a previously estimated $649.3 million) and $4.54, from $4.04, respectively. Firm is also raising their 12-month price target to $65.00 from $60.00, calculated as a valuation of 14.5x FY07 estimate of $4.54, in line with FMD's growth and P/Es in the private student loan industry. Reits Buy.
* FBR notes First Marblehead produced better than expected results on higher revenues, lower expenses, and a one-time tax benefit. Firm is encouraged by the still strong facilitation volumes and expense discipline shown in the seasonally slow quarter, but higher pre-payments caused residual write-downs for the second straight quarter - supporting their concerns regarding residual valuation. In any case, they believe the upcoming quarter will be a defining period for the company as it will face its first serious lending season with increased competition, and should give us more clarity into the trust as more loans season. With a lack of guidance from management at this time and concerns over trust performance, the firm is maintaining their Underperform rating. Firm is raising their price target $1 to $36 to reflect the benefit of the company's new tax strategy.
Notablecalls: FMD reported results last night and I thought to highlight the opinions of the most bullish firm (Think) and the most bearish firm (FBR). ThinkEquity's tgt of $65 is currently Street high with FBR's $36 Street low. I personally would not be surprised to see FMD surpass the $50 level today as short interest is still quite high. Suspect the shorts will step in around the $52-$54 level to chop the thing down.
Calls of Note Part 2
- Stifel Nicolaus & Co notes shares of Shuffle Master (NASDAQ:SHFL) have traded off over 18% since the beginning of July. They have been asked by a couple of investors what the cause has been. Below are the three main reasons why the shares have traded lower, in firm's view:
1) CA Gaming Compacts-The governor of California is going through and renegotiating gaming compacts with many of the tribes in the state. But until these compacts are negotiated this could be a negative for SHFL since the governor wants each seat at multi-terminal games to be counted towards the current 2,000 slot machine max. If the tribes are forced to remove the multi-terminal games, this could put pressure on SHFL's revenues.
2) RFID and IGT-Last week, SHFL announced that it sold its remaining 50% ownership in the patents related to ENPAT to IGT. Combining the sale of the first 50% with the newer one, SHFL will receive in excess of $16M. SHFL will also get a 17.5% royalty on future revenues that exceed $17.4M. Firm believes that selling off the remaining 50% interest spooked investors for two reasons. First, some investors might look at this sale and say SHFL is in a serious cash crunch and needed the money to pay down its debt related to its Stargames acquisition. Second, since SHFL sold off its RFID patents some speculative investors who thought SHFL was going to be acquired might be alarmed that a possible acquisition won't be completed.
3) Shorts Have a Strangle-Short interest on SHFL is still high at 20% of the float. With the S&P down since the beginning of July and SHFL having a beta of 2.4, it is not a surprise the shares have been hit so hard. The shorts still point to the fact that management has taken on too much debt and the balance sheet is beat up. In addition, shorts still make the case that they shouldn't pay as high of a multiple as they have in the past since the company now receives only 35% of its revenues from leasing agreements (was 65% four years ago).
Firm believes that SHFL is the best positioned gaming company to capture the growth that should come from Macau over the next five years. They continue to forecast EPS growth of 25%"30% in each of the next two years due to: 1) favorable table trends especially in Macau, 2) new product launches that should benefit casino operators, 3) placement of new proprietary table games, 4) the continued domestic poker boom, and 5) contribution from Stargames.
Shares of SHFL are trading at 19.8x FY07 EPS estimate of $1.34 (pre-FAS 123). SHFL's forward multiple is now behind the rest of the gaming manufacturer group even though their future growth potential is much larger, in firm's view. They believe that SHFL will be able to grow earnings in the 25%-35% over the next several years as the company capitalizes on the growing international growth opportunities. $42 target price implies that SHFL shares can trade at 31.3x FY07 pre-FAS 123 estimate, in line with its EPS growth rate.
Notablecalls: Looking at the reasons said to be behind the recent weakness I'd say the decline is overdone. One must of course take into consideration the possibility there is something out there not known to Stifel. But overall I think SHFL is set to bounce as most of the problems are now known to the public. Would not hold below $26, though.
1) CA Gaming Compacts-The governor of California is going through and renegotiating gaming compacts with many of the tribes in the state. But until these compacts are negotiated this could be a negative for SHFL since the governor wants each seat at multi-terminal games to be counted towards the current 2,000 slot machine max. If the tribes are forced to remove the multi-terminal games, this could put pressure on SHFL's revenues.
2) RFID and IGT-Last week, SHFL announced that it sold its remaining 50% ownership in the patents related to ENPAT to IGT. Combining the sale of the first 50% with the newer one, SHFL will receive in excess of $16M. SHFL will also get a 17.5% royalty on future revenues that exceed $17.4M. Firm believes that selling off the remaining 50% interest spooked investors for two reasons. First, some investors might look at this sale and say SHFL is in a serious cash crunch and needed the money to pay down its debt related to its Stargames acquisition. Second, since SHFL sold off its RFID patents some speculative investors who thought SHFL was going to be acquired might be alarmed that a possible acquisition won't be completed.
3) Shorts Have a Strangle-Short interest on SHFL is still high at 20% of the float. With the S&P down since the beginning of July and SHFL having a beta of 2.4, it is not a surprise the shares have been hit so hard. The shorts still point to the fact that management has taken on too much debt and the balance sheet is beat up. In addition, shorts still make the case that they shouldn't pay as high of a multiple as they have in the past since the company now receives only 35% of its revenues from leasing agreements (was 65% four years ago).
Firm believes that SHFL is the best positioned gaming company to capture the growth that should come from Macau over the next five years. They continue to forecast EPS growth of 25%"30% in each of the next two years due to: 1) favorable table trends especially in Macau, 2) new product launches that should benefit casino operators, 3) placement of new proprietary table games, 4) the continued domestic poker boom, and 5) contribution from Stargames.
Shares of SHFL are trading at 19.8x FY07 EPS estimate of $1.34 (pre-FAS 123). SHFL's forward multiple is now behind the rest of the gaming manufacturer group even though their future growth potential is much larger, in firm's view. They believe that SHFL will be able to grow earnings in the 25%-35% over the next several years as the company capitalizes on the growing international growth opportunities. $42 target price implies that SHFL shares can trade at 31.3x FY07 pre-FAS 123 estimate, in line with its EPS growth rate.
Notablecalls: Looking at the reasons said to be behind the recent weakness I'd say the decline is overdone. One must of course take into consideration the possibility there is something out there not known to Stifel. But overall I think SHFL is set to bounce as most of the problems are now known to the public. Would not hold below $26, though.
Calls of Note Part 1
- Thomas Weisel Partners notes that earlier this week, they visited with Cerner (NASDAQ:CERN) management at its corporate headquarters in Kansas City: Overall, they were generally impressed with the company's focus on expanding its operating margin (with the help of its Bedrock initiative) and with its strong competitive positioning and automated cabinet strategy. Firm continues to believe that the shares do not reflect the company's growth prospects, the potential increase in margins and a decrease in capital expenditures. The shares trade below firm's DCF-based current fair value estimate range of $50 to $52. Reiterates Outperform investment rating.
The company's Bedrock initiative is one of the keys to future margin expansion, in their view. In simple terms, Bedrock represents the latest technology developed by Cerner to help decrease implementation times and cost. As this technology is rolled out, Cerner will share some of the cost savings with customers (in the form of lower prices) as it incurs less labor costs. By reducing its pricing and reducing implementation times, Cerner will address certain customer concerns that view Cerner as expensive and difficult to install.
Notablecalls: Not actionable but good to know category.
The company's Bedrock initiative is one of the keys to future margin expansion, in their view. In simple terms, Bedrock represents the latest technology developed by Cerner to help decrease implementation times and cost. As this technology is rolled out, Cerner will share some of the cost savings with customers (in the form of lower prices) as it incurs less labor costs. By reducing its pricing and reducing implementation times, Cerner will address certain customer concerns that view Cerner as expensive and difficult to install.
Notablecalls: Not actionable but good to know category.
Color on quarter: NVIDIA (NVDA)
Several firms are commenting on NVIDIA (NASDAQ:NVDA) following results and guidance released last night. The overall tone of the comments is cautiously poisitive:
*Goldman Sachs maintains Neutral rating on Nvidia as the stock is trading close to their 12-month price target of $22. Firm is ticking up their FY2007 (Jan) EPS to $1.06 from $0.99 on higher sales, but leaving FY2008 and FY2009 estimates unchanged at $1.06 and $1.13. Relative to their expectations going into the quarter, they view Nvidia's top-line growth opportunity as slightly better but its gross margin potential as slightly worse, which nets out to no change in out-year EPS estimates.
*Goldman Sachs maintains Neutral rating on Nvidia as the stock is trading close to their 12-month price target of $22. Firm is ticking up their FY2007 (Jan) EPS to $1.06 from $0.99 on higher sales, but leaving FY2008 and FY2009 estimates unchanged at $1.06 and $1.13. Relative to their expectations going into the quarter, they view Nvidia's top-line growth opportunity as slightly better but its gross margin potential as slightly worse, which nets out to no change in out-year EPS estimates.
Nvidia's robust guidance lends credibility to recent speculation that Nvidia's chipsets may be designed into Dell's upcoming PCs based on AMD CPUs, as Nvidia commented on continued near-term gains with chipsets on the AMD platform. However, longer term, they expect gross margins to plateau rather than increase towards 45% as the company expects. This is because 1) the vast majority of GPU sales are already derived from the high margin GeForce 7 family, thus the contribution from a richer mix has largely played out, and 2) they expect Nvidia's chipset business mix to move from predominantly AMD-based to mostly Intel-based over the next 1-2 years, and believe the realizable margins for Intel-based chipsets are lower, given that Intel is a formidable competitor in that space, while AMD was historically not a competitor in the AMD-based chipset space.
*Deutsche Bank notes they have no holes to poke in NVDA's underlying biz, which was quite strong (all segments grew QoQ) in a relatively weak PC environment. Notably, NVDA stated that F2Q was back-end loaded (typical) with strong pick-up in demand in 2nd week of July that remains unabated (implying normal PC seasonality in 3Q). Inventories were slightly higher, but the firm is not concerned ahead of seasonally strong period.
*Bear Stearns notes NVIDIA's Jul-Q revenues of $687.5M (+0.8% QoQ) were above their estimate of $668M (-2.0% QoQ) and a tad above guidance of flat revenues. The company did not provide any other financials due to the ongoing options review. Firm estimates GM was better than expected and increased 50-100 bps, above guidance and their estimate of flat GM, and estimate that pre-option EPS was $0.30, above their estimate of $0.26 and consensus of $0.27. The company reported solid performance across its business units.
Firm notes they are maintaining their constructive stance on NVDA as they expect continued competitive strength in GPUs, improvement in PC builds in 3Q, near-term strength in chipsets due to Dell, and growth drivers outside the PC business (Sony PS3, wireless and workstation). However, they are maintaining Peer Perform rating given the strong recent move in the stock (up 37% as of Thursday's close from its low in mid-July).
Notablecalls: NVDA traded down 1.5 pts in after market action as market participants were not happy about the options investigation. Thats what you get when you buy a stock that has bounced 37%. Overall, solid results and guidance on the revenue side should help the stock today.
Notablecalls - Paperstand
The WSJ's "Tracking the Numbers" column discusses Movie Gallery (MOVI), saying that a happy ending may prove tough. More than half the stock-mkt value of Movie Gallery disappeared after the film-rental chain reported a large and unexpected Q2 loss. Now the really bad news for shareholders: Coming attractions could include another horror show. To avoid a sequel to yesterday's bloodletting, Movie Gallery must dramatically cut its debt, massively boost its cash flow or at least get more breathing room from its lenders. Otherwise, the co faces another day of reckoning in early '07, an analysis of its finances shows. For months, Movie Gallery has had problems with its debt covenants, the financial thresholds it must meet to stay in good graces with its lenders. In March, the co got its banks to relax those levels temporarily so that it could stay in compliance with them throughout '06. Without that relief, the co would already have violated its covenants, tantamount to a default. But that relief runs out in '07, and Movie Gallery must go back to meeting the old, stricter covenant levels, a hurdle that its current financial performance suggests is too high. One covenant requires Movie Gallery to keep its net debt, or debt minus cash on hand, to a certain level in relation to its EBITDA. A back-of-the-envelope calculation shows the co's net debt right now is about 4.63x its EBITDA for the last 12 months. That is within the relaxed maximum level of 5.75 that Movie Gallery must meet, but in 1Q07, once the current relief ends, that maximum will drop to 2.25x EBITDA. To be in compliance then, Movie Gallery would have to either double its EBITDA, cut its debt in half, or achieve some combination of major changes on both. "They've got to do something," said Michael Pachter, of Wedbush. "I would think their restructuring is going to have to be something with a cash generator. They have to pay debt down."
Barron's Online highlights Nordstrom (JWN), which shares are down 20% sinc Jan.30 on anxiety over consumer spending in the coming months, weak women's apparel sales and fears that profits have hit a plateau. Yet high-end shoppers are still paying up for designer fashions. And with a cheap P/E multiple, new store openings speeding up and plenty of room to expand, Nordstrom's shares seem like a bargain. "It's cheap relative to its potential," says Bob Mitchell, of Northern Growth Equity Fund. "A solid operator, if anything, it should take mkt share. I think you would want to pay a premium for it."
Barron's Online reports that three insiders at Revlon (REV), including billionaire Chmn Ronald Perelman, plunked down $1.13m to purchase nearly 1.04m class A shares in the open mkt since Mon. These are the first insider purchases in 2 years. Given the dramatic decline in the stock, insider buying is a "reasonably bullish sign," says Jonathan Moreland, director of research at InsiderInsights.com. "The biggest plus of this insider buying is it would seem to suggest that bankruptcy is less likely than if you hadn't seen these transactions."
DigiTimes repors that forthcoming Dell's (DELL) AMD-based (AMD) notebooks, which are expected to be available in late Oct or early Nov, will be equipped with ATI (ATYT) Mobility Radeon graphics chips. Although it will not be the first time for the mkt to get AMD-based notebooks with ATI GPUs inside, Dell's offering will be the first launched after AMD's recent announcement of acquiring ATI. Dell's decision to use ATI GPUs in AMD-based notebooks indicates that the impact of AMD's acquisition of ATI on the PC industry will likely start intensifying in the near future.
Barron's Online highlights Nordstrom (JWN), which shares are down 20% sinc Jan.30 on anxiety over consumer spending in the coming months, weak women's apparel sales and fears that profits have hit a plateau. Yet high-end shoppers are still paying up for designer fashions. And with a cheap P/E multiple, new store openings speeding up and plenty of room to expand, Nordstrom's shares seem like a bargain. "It's cheap relative to its potential," says Bob Mitchell, of Northern Growth Equity Fund. "A solid operator, if anything, it should take mkt share. I think you would want to pay a premium for it."
Barron's Online reports that three insiders at Revlon (REV), including billionaire Chmn Ronald Perelman, plunked down $1.13m to purchase nearly 1.04m class A shares in the open mkt since Mon. These are the first insider purchases in 2 years. Given the dramatic decline in the stock, insider buying is a "reasonably bullish sign," says Jonathan Moreland, director of research at InsiderInsights.com. "The biggest plus of this insider buying is it would seem to suggest that bankruptcy is less likely than if you hadn't seen these transactions."
DigiTimes repors that forthcoming Dell's (DELL) AMD-based (AMD) notebooks, which are expected to be available in late Oct or early Nov, will be equipped with ATI (ATYT) Mobility Radeon graphics chips. Although it will not be the first time for the mkt to get AMD-based notebooks with ATI GPUs inside, Dell's offering will be the first launched after AMD's recent announcement of acquiring ATI. Dell's decision to use ATI GPUs in AMD-based notebooks indicates that the impact of AMD's acquisition of ATI on the PC industry will likely start intensifying in the near future.
Thursday, August 10, 2006
Calls of Note Part 3
- Roth Capital is out commenting MicroStrategy's (NASDAQ: MSTR) 10-Q, saying they are very pleased to see that its impressive 22% y/y growth in support revenue was driven by customer growth and NOT price increases. The disclosure gives them more confidence that MicroStrategy can continue to book strong growth in support revenue and should displace fears that the company is reaping benefits that are 1x in nature.
Another positive disclosure was that the company repurchased another 74k shares of its stock in Q3 for $6 million. From May 1 to August 1, share count has declined 4% from 13.3 mln to 12.8 million. The company reiterated for the second time that it may use debt financing to fund future share repurchases.
In firm's view, the 10-Q's disclosures are encouraging about the company's efforts to build brand awareness, hire aggressively in sales, and penetrate new geographies; we consider these moves a good leading indicator of future license-revenue growth.
Maintains Buy and $110 price tgt.
Notablecalls: expecting to see interest in MSTR shares today. It is always a good sign for software company to grow recurring revenue base - and that's exactly what the company did according to the 10-Q.
Another positive disclosure was that the company repurchased another 74k shares of its stock in Q3 for $6 million. From May 1 to August 1, share count has declined 4% from 13.3 mln to 12.8 million. The company reiterated for the second time that it may use debt financing to fund future share repurchases.
In firm's view, the 10-Q's disclosures are encouraging about the company's efforts to build brand awareness, hire aggressively in sales, and penetrate new geographies; we consider these moves a good leading indicator of future license-revenue growth.
Maintains Buy and $110 price tgt.
Notablecalls: expecting to see interest in MSTR shares today. It is always a good sign for software company to grow recurring revenue base - and that's exactly what the company did according to the 10-Q.
Calls of Note Part 2
- Banc of America is negative on Countrywide Financial (NYSE:CFC) after the co reported July monthly Y-o-Y 19% decline in production volume. More ominous for 2H06's outlook was the 19.2% Y-o-Y pipeline decline and the fall in credit report and appraisal activity; which are strong predictors of future originations.
July's negative data furthers firm's concern that CFC's origination volume dependent earnings are meeting growing headwinds from the incipient mortgage origination decline. With modest foreshadowing headcount reductions and Morgan Stanley's (MS) acquisition announcement of Saxon Capital seeming to confirm a deteriorating competitive situation, the firm now foresees increased prospects of management lowering guidance and/or earnings falling below firm's current estimates. That said however, they prefer to wait for more data points before they revise their already below-guidance EPS estimates of $4.38 and $4.64 for '06 and '07.
Eroding earnings visibility has prompted the firm to trim their tgt from $35 to $30. Even with yesterday's 8.7% decline, they think the market has not fully priced in the negative impact to CFC of sustained volume pressure and an eventual corrosion in mortgage credit risk perceptions. With a potential downside of 10%, they reiterate Sell rating.
Notablecalls: I suspect CFC may have some downside in it over the next days or weeks.
July's negative data furthers firm's concern that CFC's origination volume dependent earnings are meeting growing headwinds from the incipient mortgage origination decline. With modest foreshadowing headcount reductions and Morgan Stanley's (MS) acquisition announcement of Saxon Capital seeming to confirm a deteriorating competitive situation, the firm now foresees increased prospects of management lowering guidance and/or earnings falling below firm's current estimates. That said however, they prefer to wait for more data points before they revise their already below-guidance EPS estimates of $4.38 and $4.64 for '06 and '07.
Eroding earnings visibility has prompted the firm to trim their tgt from $35 to $30. Even with yesterday's 8.7% decline, they think the market has not fully priced in the negative impact to CFC of sustained volume pressure and an eventual corrosion in mortgage credit risk perceptions. With a potential downside of 10%, they reiterate Sell rating.
Notablecalls: I suspect CFC may have some downside in it over the next days or weeks.
Could someone please provide research department of Piper Jaffray after hours prices?
Anthony N. Gikas from Piper Jaffray is downgrading Imax (NASDAQ:IMAX) to Underperform from Market Perform and cutting price tgt to $6 from $11 after the disappointing results and failure to sell the company, citing the following catalysts: 1) visibility on fundamentals is limited; 2) sale of company was misguided; 3) new signings have slowed; 4) poor performance of recent films; 5) reduced earnings expectations for CY06/CY07; 6) vast change to strategy presents execution risk; and 7) IMAX may not be able to meet capital requirements necessary to develop and launch new digital IMAX systems.
Notablecalls: This is exactly the kind of research note we do NOT like to see - cutting shares to Underperform AFTER the news and the collapse in share price when there is no downside to your price tgt. Could someone please provide research department of Piper Jaffray after hours prices? Anthony, the shares closed at $6.17 in after hrs trading!
Notablecalls: This is exactly the kind of research note we do NOT like to see - cutting shares to Underperform AFTER the news and the collapse in share price when there is no downside to your price tgt. Could someone please provide research department of Piper Jaffray after hours prices? Anthony, the shares closed at $6.17 in after hrs trading!
Calls of Note Part 1
- Deutsche Bank traveled with SiRF (NASDAQ:SIRF) management yesterdat. Firm continues to believe that the long-term outlook for SIRF remains intact. On its most recent conf call they stated their belief that the wireless segment would begin to grow later this year with revenue ramping in 1H07. This is the most definitive statement yet from them over the timing of demand for GPS in the wireless sector.
A trip to Costco reveals that the Magellan PND products now use SiRF Star3. With Magellan now a customer SiRF has wins with all the top PND OEMs as welll as new entrants. They also expect growth in consumer demand as PND ASPs drop below $300. Firm expects to see bundled GPS/Bluetooth and GPS/DVB-H product ins 2007. Views these offerings as good niches for the company.
With demand beginning for the Christmas and (Street-centered) concerns over competition dwindling they think SIRF shares remain undervalued. Over a 2-3 year horizon the firm believes the company can maintain a 40% growth rate as GPS penetration into wireless and consumer electronics increases (although we are currently modeling only 20% growth). Maintains Buy rating.
Notablecalls: Not actionable but good to know category.
- Banc of America notes that both XM Satellite (NASDAQ:XMSR) and Sirius (NASDAQ:SIRI) should soon begin to resume manufacturing 'plug-and-play' radios for retail, but firm's concern is that neither company will be able to find a FCC approved solution that will appeal to consumers - there is risk to our retail subscriber estimates, as they believe up to half of the retail market could 'vanish'. Firm's discussions with industry contacts have led them to believe that the products that might be shipped could result in HIGH RETURNS/CHURN. The options for XM & Sirius seem to be boiled down to 2 poor solutions: 1) a more cumbersome installation - requiring a wire into the car's antenna (XM might lean this way) or 2) producing units with FM transmitters that are fully FCC compliant, but that have a weaker signal (e.g., Sirius' Sportster4). Notes that both companies continue to look for more viable consumer solutions. But the clock for 4Q is ticking.
Firm's 'worst case' retail scenario implies limited downside risk for XMSR but 55% downside potential for SIRI shares. They estimate that roughly 50% of retail units rely on wireless FM transmitters (not hardwired or directly connected) - and thus, they estimate that up to half of the retail market could 'vanish'. If this were to happen, they est. that XMSR & SIRI would be worth ~$11 and $1.75, respectively.
A trip to Costco reveals that the Magellan PND products now use SiRF Star3. With Magellan now a customer SiRF has wins with all the top PND OEMs as welll as new entrants. They also expect growth in consumer demand as PND ASPs drop below $300. Firm expects to see bundled GPS/Bluetooth and GPS/DVB-H product ins 2007. Views these offerings as good niches for the company.
With demand beginning for the Christmas and (Street-centered) concerns over competition dwindling they think SIRF shares remain undervalued. Over a 2-3 year horizon the firm believes the company can maintain a 40% growth rate as GPS penetration into wireless and consumer electronics increases (although we are currently modeling only 20% growth). Maintains Buy rating.
Notablecalls: Not actionable but good to know category.
- Banc of America notes that both XM Satellite (NASDAQ:XMSR) and Sirius (NASDAQ:SIRI) should soon begin to resume manufacturing 'plug-and-play' radios for retail, but firm's concern is that neither company will be able to find a FCC approved solution that will appeal to consumers - there is risk to our retail subscriber estimates, as they believe up to half of the retail market could 'vanish'. Firm's discussions with industry contacts have led them to believe that the products that might be shipped could result in HIGH RETURNS/CHURN. The options for XM & Sirius seem to be boiled down to 2 poor solutions: 1) a more cumbersome installation - requiring a wire into the car's antenna (XM might lean this way) or 2) producing units with FM transmitters that are fully FCC compliant, but that have a weaker signal (e.g., Sirius' Sportster4). Notes that both companies continue to look for more viable consumer solutions. But the clock for 4Q is ticking.
Firm's 'worst case' retail scenario implies limited downside risk for XMSR but 55% downside potential for SIRI shares. They estimate that roughly 50% of retail units rely on wireless FM transmitters (not hardwired or directly connected) - and thus, they estimate that up to half of the retail market could 'vanish'. If this were to happen, they est. that XMSR & SIRI would be worth ~$11 and $1.75, respectively.
They do not think a liquidity crisis is imminent for either company under even the 'worst case' retail scenario. XM can tap $400M in credit facilities to meet funding needs ($250M from a group of banks and $150M from GM). And both companies could encourage subscribers to prepay by offering discounts or look to engage in sale-leaseback financing with existing satellites. A greater % of subscribers from the OEM channel likely means slower market penetration and slightly lower profitability.
Sat radio group could remain under pressure until there is more clarity regarding the FCC issue - still prefer XMSR / lowering SIRI px tgt. to $4. Firm believes SIRI's premium valuation is unwarranted - the company is simply behind XM in the churn "curve" and will see a spike in 2007, as current OEM promo subs convert or churn - also 8% of SIRI subs are simply "accelerated / not yet active". Furthermore, SIRI has set lofty goals for investors, in firm's view (e.g., positive FCF in '07) - they prefer XMSR in an environment where the viability of the satellite radio model is increasingly questioned.
Firm's call today in a nutshell: The "solution" to the FCC issue could damage retail demand. If they reduce their retail gross add estimates for 4Q06 and beyond by 50%, they estimate that downside to fair value estimate for XMSR is limited but downside to fair value estimate for SIRI is 55% - they continue to recommend the XMSR/SIRI pair.
Notablecalls: Not actionable but good to know category. Think SIRI may see some additional downside pressure today but shorting a sub-$4 stock...
Color on Sparlon non-approvable letter
Several firms are commenting on Cephalon (NASDAQ:CEPH) after the FDA issued a non-approvable letter on Sparlon last night:
*Robert W. Baird & Co notes they would use any such short-term decline to add to positions, as Sparlon was never to be the most important product introduction in 2006-2007, in their view. Firm notes they had viewed Sparlon, if approved, as second-line ADHD therapy due to its modest efficacy and questionable positioning based on safety. Sparlon offered only modest profit margins due to the planned use of the JNJ Concerta salesforce to detail the product to primary care physicians.
Notes their Outperform rating is based on our belief that the new product introductions of Vivitrol (already launched), Fentora and Nuvigil, along with the prescription growth of Provigil, will drive above- average EPS growth. It is possible that the launch of Vivitrol is ahead of plan, as evidenced by the recruitment of over 2,000 physicians to the "VIP-3" program in just seven weeks and ALKS's statement that production is running all-out at capacity of $150+ million.
*Robert W. Baird & Co notes they would use any such short-term decline to add to positions, as Sparlon was never to be the most important product introduction in 2006-2007, in their view. Firm notes they had viewed Sparlon, if approved, as second-line ADHD therapy due to its modest efficacy and questionable positioning based on safety. Sparlon offered only modest profit margins due to the planned use of the JNJ Concerta salesforce to detail the product to primary care physicians.
Notes their Outperform rating is based on our belief that the new product introductions of Vivitrol (already launched), Fentora and Nuvigil, along with the prescription growth of Provigil, will drive above- average EPS growth. It is possible that the launch of Vivitrol is ahead of plan, as evidenced by the recruitment of over 2,000 physicians to the "VIP-3" program in just seven weeks and ALKS's statement that production is running all-out at capacity of $150+ million.
Maintains Outperform and $80 tgt.
*Merrill Lynch notes that while the timing was unexpected (FDA action date had been 8/22), they do not believe investors will be very surprised by this news in light of the recent negative FDA Advisory Committee meeting on the product (March). Firm's model did not include sales or expenses associated with Sparlon.
CEPH expects approval of Fentora on 9/25 and launch in early 4Q, which will trigger launch of BRL's generic Actiq. Firm believes the success of Fentora in the face of generic Actiq will be a crucial driver for the stock. On Nuvigil, the company has been in active discussions with the FDA (different division than Sparlon) and remains confident in the product's approvability (action date is 12/29).
Maintains Neutral.
* CIBC notes CEPH submitted hi-res photos and expert opinion suggesting the purported SJS case was likely a post-viral rash. However, the FDA did not agree, and suggested that CEPH conduct large safety (15K+ pts) trials for Sparlon, but did not indicate additional safety data would lead to approval.
Firm believes there is now additional risk that the FDA will require stronger wording regarding SJS risk on the label for Nuvigil, and, perhaps, Provigil. However, based on extensive physician experience with Provigil, they do not anticipate a significant impact on use or sales of either Provigil or Nuvigil.
Although they believe the loss of Sparlon will reduce CEPH's CNS franchise growth in '08, reduced Sparlon spend raises their EPS est in '07. CEPH should be down on the news, and they expect it to settle into range-bound trade with enthusiasm over Fentora balanced by concerns over long-term growth.
Maintains Sector Performer rating.
Notablecalls: CEPH took a 10% hit in after hrs trading. I suspect we may see a downgrade today or in the coming days that will take the shares down as much as 15%. Must admit I don't see a shorting oppy here nor do I have a feel where/when to buy this one.
Notablecalls - Paperstand
The WSJ's "Heard on the Street" column discusses box-office mkt, saying that this year's 4% upswing at the domestic box office is more than just a welcome relief to beleaguered movie-theater chains. The theater industry's ups and downs in recent years have largely been outside the view of investors, as only two major players, Regal Entertainment (RGC) and Carmike Cinemas (CKEC), are publicly traded. But, a handful of co's are considering public debuts. For example, Madison Dearborn Capital Partners, which owns Cinemark, is considering taking the combined Cinemark-Century public. Probably the biggest potential initial public offering would be AMC Entertainment. 2.5 years after taking the co private, its owners, a consortium of private-equity firms are considering taking AMC public. The deal could be valued at $3-4bn. The fast-growing theater-advertising co, National CineMedia, is owned jointly by Regal, AMC, and Cinemark. Theater advertising grew almost 21% in '05 and with additions like original celebrity interviews and behind-the-scenes footage from current releases, National CineMedia's retooling of its preshow entertainment segment, seems to be going over well. As a result, some investors say they would look kindly on any National CineMedia offering, which according to analysts could be valued at $2bn or so. For now, investors in Regal, which owns 50% of the cinema-ad co, are getting half of CineMedia's rev, a fact that could help explain the recent performance of Regal's stock, which is up 5% since the spring. "Ppl are investing in Regal in part because they like the National CineMedia business," says Gordon Hodge, media analyst at Thomas Weisel.
Barron's Online highlights natural gas stocks, saying that with war on multiple fronts and terror threats to oil supplies looming globally, investing in the geopolitical safe haven of US-based natural gas exploration should have newfound appeal. Without rebels threatening supply or new govt restrictions on exploiting reserves, domestic gas producers could become acquisition tgts and should benefit if natural gas prices continue to recover from the multi-year low they hit in July. And there are several reasons they should: inclement weather, like the recent heat wave, can deplete supplies. In addition, N-American reserves are dwindling and expensive to extract, and natural gas prices have not kept pace with the rise in oil prices. Among the US explorers and producers focused on natural gas, co's with attractive valuations and operations include EOG Resources (EOG) and Newfield Exploration (NFX). "The [energy stocks] that have been overlooked are natural gas stocks," says Eric Bolling, an independent trader at the NYMEx. "
According to the Barron's Online, gambling icon Jack Binion has wasted no time in betting on Wynn Resorts (WYNN), putting down $30.2m for the casino operator's shares one month after he was appointed Chmn of subsidiary Wynn Intl. In 1994, Jack Binion established the privately held Horseshoe Gaming Holding, which he sold to Harrah's Entertainment for $1.45bn in '04. Ben Silverman, director of research at InsiderScore.com, points out that Binion's purchase of 438K shares at prices ranging from $68.32-69.14 each adds to the 1.06m shares Binion already held in the co before becoming Chmn of Wynn Intl. "[Binion] is a guy who knows the industry as well as anybody," Silverman says, "He's hitching his horse to [Wynn Resorts] both in terms of what he's doing with his time and energy as a individual, and what he's doing with some of his money."
Barron's Online highlights natural gas stocks, saying that with war on multiple fronts and terror threats to oil supplies looming globally, investing in the geopolitical safe haven of US-based natural gas exploration should have newfound appeal. Without rebels threatening supply or new govt restrictions on exploiting reserves, domestic gas producers could become acquisition tgts and should benefit if natural gas prices continue to recover from the multi-year low they hit in July. And there are several reasons they should: inclement weather, like the recent heat wave, can deplete supplies. In addition, N-American reserves are dwindling and expensive to extract, and natural gas prices have not kept pace with the rise in oil prices. Among the US explorers and producers focused on natural gas, co's with attractive valuations and operations include EOG Resources (EOG) and Newfield Exploration (NFX). "The [energy stocks] that have been overlooked are natural gas stocks," says Eric Bolling, an independent trader at the NYMEx. "
According to the Barron's Online, gambling icon Jack Binion has wasted no time in betting on Wynn Resorts (WYNN), putting down $30.2m for the casino operator's shares one month after he was appointed Chmn of subsidiary Wynn Intl. In 1994, Jack Binion established the privately held Horseshoe Gaming Holding, which he sold to Harrah's Entertainment for $1.45bn in '04. Ben Silverman, director of research at InsiderScore.com, points out that Binion's purchase of 438K shares at prices ranging from $68.32-69.14 each adds to the 1.06m shares Binion already held in the co before becoming Chmn of Wynn Intl. "[Binion] is a guy who knows the industry as well as anybody," Silverman says, "He's hitching his horse to [Wynn Resorts] both in terms of what he's doing with his time and energy as a individual, and what he's doing with some of his money."
Wednesday, August 09, 2006
Calls of Note Part 4
- Merill Lynch notes Palm (NASDAQ:PALM) is underutilizing its considerable cash balance and the board should consider an aggressive share repurchase program, in their opinion. Palm stock is down 43% from its recent highs while the company holds over $5 in cash/share or 35% of current market value. Increasing leverage could support a larger buyback and. could be sustained with Palm's strong and consistent cash flow generation ($119mn in free cash flow, up 22% YoY, in recent FY06.)
Another critical, albeit more modest, use of cash could be for Palm to develop its own next-gen operating system (OS) for the consumer-focused Treo smartphone. We believe the relationship with current OS vendor Access is not fruitful and has led to delays that could impact Palm's long-term competitiveness. If, like Apple, Palm intends to differentiate through software and ease of use, ownership of the OS is crucial, in firm's opinion.
With four new Treo product cycles, the firm believes Palm can maintain a lead in the smartphone market that Gartner projects to grow at a 72% CAGR over next four years. While competition is increasing, they believe Palm stock, trading at <10x forward PE ex cash, well discounts the risks. Furthermore, Palm could be an attractive acquisition target for PC vendors looking to diversify into mobile handsets; or a target even for mobile handset vendors who want to expand in the high-end smartphone space. Firm's $19 DCF-derived price objective (eqv. to 16x forward PE) may be conservative as shares show theoretical upside to $25 on EV/EBIT basis vs. comps.
Maintains Buy.
Notablecalls: I expect PALM to trade up today.
Another critical, albeit more modest, use of cash could be for Palm to develop its own next-gen operating system (OS) for the consumer-focused Treo smartphone. We believe the relationship with current OS vendor Access is not fruitful and has led to delays that could impact Palm's long-term competitiveness. If, like Apple, Palm intends to differentiate through software and ease of use, ownership of the OS is crucial, in firm's opinion.
With four new Treo product cycles, the firm believes Palm can maintain a lead in the smartphone market that Gartner projects to grow at a 72% CAGR over next four years. While competition is increasing, they believe Palm stock, trading at <10x forward PE ex cash, well discounts the risks. Furthermore, Palm could be an attractive acquisition target for PC vendors looking to diversify into mobile handsets; or a target even for mobile handset vendors who want to expand in the high-end smartphone space. Firm's $19 DCF-derived price objective (eqv. to 16x forward PE) may be conservative as shares show theoretical upside to $25 on EV/EBIT basis vs. comps.
Maintains Buy.
Notablecalls: I expect PALM to trade up today.
Calls of Note Part 3
- Banc of America expect a challenging Q2 when PetSmart (NASDAQ:PETM) reports results August 15. Firm estimates a 3% comp and EPS of $0.26, vs. consensus of $0.28 and mid single digit comp guidance. Notes they like the long term story but believe near term choppiness could present a better entry point.
ACNielsen POS data show accelerating pet consumables sales, but the data has a low 10-20% correlation with PETM comps. The data show a stronger 50% correlation with supermarket comps, which have been improving. And PETM does not even report POS to AC Nielsen.
Central Garden & Pet's (CENT) Q2 pet supply results were disappointing. Retailers cut discretionary goods orders in favor of consumables on weaker consumer demand. July rebounded, but that is more likely due to CENT's expanded Target (TGT) relationship and other share gains than underlying category strength.
ACNielsen POS data show accelerating pet consumables sales, but the data has a low 10-20% correlation with PETM comps. The data show a stronger 50% correlation with supermarket comps, which have been improving. And PETM does not even report POS to AC Nielsen.
Central Garden & Pet's (CENT) Q2 pet supply results were disappointing. Retailers cut discretionary goods orders in favor of consumables on weaker consumer demand. July rebounded, but that is more likely due to CENT's expanded Target (TGT) relationship and other share gains than underlying category strength.
CENT is rolling out 80 Animal Planet co-branded SKUs to TGT stores (1400+). This follows TGT's premium food line launch in February and suggests stepped up merchandising efforts for TGT in the space.
Hill's Science Diet Q2 trends were strong, but that is likely share shift as Iam's/Eukanuba cited competitive activity with its weak trends.
Firm's 3% comp estimate factors in 26% growth in energy FQ2. Their regression has a 91% correlation b/w PETM's comps and growth in energy over a 4-yr period (73% over a 5-yr period). Thinks any deviation from that trend would come at the expense of gross margin.
Maintains Neutral and $24 tgt.
Notablecalls: I don't think the weakness at PETM should come as any surprise to investors. The best shorting opportunity was presented when co's closest competitor PETC was acquired with a hefty premium on July 14. PETM gapped up almost 10% and then gave back the gain and then some. Would not be surprised to see some additional weakness ahead of Aug 15 but I think downside is somewhat limited. Unless PETM guides down for Q3 the shares should bounce.
Calls of Note Part 2
- UBS notes they are currently attending the Search Engine Strategy conference (8/7-8/10). Yahoo's (NASDAQ:YHOO) presentation on Tuesday focused on new detail and a first demo of Panama, its new paid search platform. YHOO reiterated that the front-end application and back-end code will be rolled out in 4Q, and that "it will decide in the next few weeks" if the new search ranking methodology will be introduced in 4Q06 or 1Q07.
Firm believes there was widespread confusion about the timing of the new ranking system, and that many investors were concerned it could slip further into '07 -or even not get done at all. Given the demo they saw, conversations with YHOO, advertisers, ad agencies, and the fact that YHOO may still release it in 4Q06, they believe there is little chance for a delay beyond 1Q07. UBS does not believe YHOO intended to communicate anything different in regards to timing.
However, confusion around the issue has clearly impacted the stock. Firm believes Tuesday's presentation was a positive step forward for YHOO and should help improve investor sentiment. In speaking with Yahoo, they believe that much of the speculation and conjecture regarding the originally announced delay were incorrect, and added that additional testing time with advertisers (not-internal problems) was the main reason behind the 2Q delay announcement.
Firm thinks it is unlikely that the new search ranking platform will be introduced in 4Q06, and is much more likely to happen in early 1Q07. Regardless, monetization improvements will ramp gradually after introduction, so it is not likely to meaningfully impact revenue in the short-term.
Maintains Buy and $39 tgt.
Notablecalls: When YHOO reported its Q2 results on July 18 the stock fell around 1.5 pts on weaker than expected earnings/guidance. It fell another 5 pts during and after the conference call as management pushed back the launch of Panama. So you now see why the stock jumped over 1 pt yesterday as analysts called their best clients straight from the conference room. While I think Panama will not likely be launched in Q4 UBS makes a good point about investor sentiment. I suspect YHOO can move higher from here.
Firm believes there was widespread confusion about the timing of the new ranking system, and that many investors were concerned it could slip further into '07 -or even not get done at all. Given the demo they saw, conversations with YHOO, advertisers, ad agencies, and the fact that YHOO may still release it in 4Q06, they believe there is little chance for a delay beyond 1Q07. UBS does not believe YHOO intended to communicate anything different in regards to timing.
However, confusion around the issue has clearly impacted the stock. Firm believes Tuesday's presentation was a positive step forward for YHOO and should help improve investor sentiment. In speaking with Yahoo, they believe that much of the speculation and conjecture regarding the originally announced delay were incorrect, and added that additional testing time with advertisers (not-internal problems) was the main reason behind the 2Q delay announcement.
Firm thinks it is unlikely that the new search ranking platform will be introduced in 4Q06, and is much more likely to happen in early 1Q07. Regardless, monetization improvements will ramp gradually after introduction, so it is not likely to meaningfully impact revenue in the short-term.
Maintains Buy and $39 tgt.
Notablecalls: When YHOO reported its Q2 results on July 18 the stock fell around 1.5 pts on weaker than expected earnings/guidance. It fell another 5 pts during and after the conference call as management pushed back the launch of Panama. So you now see why the stock jumped over 1 pt yesterday as analysts called their best clients straight from the conference room. While I think Panama will not likely be launched in Q4 UBS makes a good point about investor sentiment. I suspect YHOO can move higher from here.
Calls of Note Part 1
Several firms are commenting on Cisco Systems (NASDAQ:CSCO) after the co released its FQ4 results and provided above consensus F2007 guidance:
* Goldman Sachs thinks Cisco's shares are undervalued, as the stock does not reflect the company's double digit sales growth potential and margin sustainability. Firm's above consensus earnings forecast reflects an acceleration in high margin routing (20% of sales) based on increased carrier demand related to video driving stronger internet traffic growth, stable high single digit switching (35% of sales) growth based on our proprietary model of the market, and continued share gains in advanced technologies (25% of sales). Thei margin forecast is also strong based on view of Cisco's barriers to competitors and price stability in switching, its largest line of business. Firm sees a 45% return from last nights close to our $25 target, based on a 19x multiple on CY2007 EPS forecast of $1.34, justified by Cisco's growth rate.
Goldman believes the following catalysts will move the Street towards their bullish view of Cisco's growth potential, positively impacting Street estimates and the multiple: 1) September 6, 2006 - investor day will likely offer investors data that supports a stable gross margin outlook and strong sales growth outlook. 2) November 8, 2006 - October quarterly results and forward guidance should support Cisco's growth outlook. 3) Aggressive share repurchase should boost earnings growth rate.
* Morgan Stanley notes large-cap tech companies hitting on nearly all cylinders are rare even in the best of times, and Cisco's ability to produce solid results and far-better-than-expected guidance in the current choppy demand environment is not to be discounted, in firm's opinion. Affirmatively answering questions about growth and profitability should make Cisco a key investment for tech investors heading into the second half of the year, and the firm reiterates their Overweight-rating and $26 price target.
Notes they were buyers of shares ahead of the quarter and they are buyers today. Results and guidance reinforce our thesis that the proliferation of network devices in the home, at the enterprise, and across service provider networks combined with increasing bandwidth demand should deliver revenue growth of 12-15% and stable operating margins for Cisco for the next several years.
Reits Overweight.
* UBS believes CSCO's backlog of ~$3B helped company provide guidance of 11%-13% y/y for Oct qtr. This may be viewed as a slight short term positive as CSCO has narrowed its guidance range for a seasonally challenging October quarter from the long term range of 10%-15% y/y.
* Goldman Sachs thinks Cisco's shares are undervalued, as the stock does not reflect the company's double digit sales growth potential and margin sustainability. Firm's above consensus earnings forecast reflects an acceleration in high margin routing (20% of sales) based on increased carrier demand related to video driving stronger internet traffic growth, stable high single digit switching (35% of sales) growth based on our proprietary model of the market, and continued share gains in advanced technologies (25% of sales). Thei margin forecast is also strong based on view of Cisco's barriers to competitors and price stability in switching, its largest line of business. Firm sees a 45% return from last nights close to our $25 target, based on a 19x multiple on CY2007 EPS forecast of $1.34, justified by Cisco's growth rate.
Goldman believes the following catalysts will move the Street towards their bullish view of Cisco's growth potential, positively impacting Street estimates and the multiple: 1) September 6, 2006 - investor day will likely offer investors data that supports a stable gross margin outlook and strong sales growth outlook. 2) November 8, 2006 - October quarterly results and forward guidance should support Cisco's growth outlook. 3) Aggressive share repurchase should boost earnings growth rate.
* Morgan Stanley notes large-cap tech companies hitting on nearly all cylinders are rare even in the best of times, and Cisco's ability to produce solid results and far-better-than-expected guidance in the current choppy demand environment is not to be discounted, in firm's opinion. Affirmatively answering questions about growth and profitability should make Cisco a key investment for tech investors heading into the second half of the year, and the firm reiterates their Overweight-rating and $26 price target.
Notes they were buyers of shares ahead of the quarter and they are buyers today. Results and guidance reinforce our thesis that the proliferation of network devices in the home, at the enterprise, and across service provider networks combined with increasing bandwidth demand should deliver revenue growth of 12-15% and stable operating margins for Cisco for the next several years.
Reits Overweight.
* UBS believes CSCO's backlog of ~$3B helped company provide guidance of 11%-13% y/y for Oct qtr. This may be viewed as a slight short term positive as CSCO has narrowed its guidance range for a seasonally challenging October quarter from the long term range of 10%-15% y/y.
While CSCO has solid near term visibility given higher backlog, they still believe organic revenue growth will be 12% y/y in F07 vs. 11% in 06. Firm doesn't see the macro environment supporting a much higher organic growth in 07 over 06.
Firm values CSCO at 18x CY07 option adjusted EPS est. of $1.20 ($1.14 prev). They believe CSCO will continue to trade at 18x-20x range if organic rev growth is in the 10-15% range w/ stable margins. In order for CSCO to trade >20x multiple, the organic rev growth will likely have to exceed 15% w/ stable margins.
Maintains Neutral and $21 tgt.
Notablecalls: Nice results from CSCO. While the switching biz was bit softer than expected the overall picture looks to be positive. Other than that, I have to side with UBS here. Think CSCO can go as high as $19.50 or even $20 in the coming days but that's about it. Color me bearish for 2007.
Notablecalls - Paperstand
The WSJ's "Heard on the Street" column discusses natural gas stocks. Soaring crude prices in recent years have pushed the stocks of energy co's into the stratosphere and into many investors' portfolios. But investors shouldn't overlook natural gas, which also has seen prices climb. Despite recent volatility in natural-gas prices, there is ample reason to believe the stock prices of co's like Anadarko Petroleum (APC), Devon Energy (DVN) and XTO Energy (XTO) that focus on drilling for gas might still have room to grow after trailing oil-co shares since the beginning of the year. Until a couple weeks ago, natural-gas prices had been beaten down by an excess of the cleaner-burning fuel in US storage. But, thanks to spiking demand from over-taxed utilities during the recent heat wave, gas was pulled out of storage in July for the first time ever in summer months. Amid the tumult for natural-gas prices, the case for higher, sustainable natural-gas prices has been getting stronger. That could spell opportunity for some bargain-hunting investors who have the mettle to ride out price shocks and the curiosity to look beyond crude. Even after the run up, "gas looks a bit cheap," says Ron Muhlenkamp, who owns shares of Anadarko, Devon and Houston Exploration in his $3bn Muhlenkamp Fund. "Unless we outlaw winter or heat waves in the summer, demand should continue to be on the high side. I don't think the sustainability of healthy prices is yet reflected in these stocks."
Barron's Online reports that Hess (HES) execs are guzzling profits by selling shares of the integrated-oil co even as oil prices traipse around record highs. Six execs, including Chmn and CEO John B. Hess, sold nearly 225K shares for $11.8m since July 31.
Barron's Online reports that Hess (HES) execs are guzzling profits by selling shares of the integrated-oil co even as oil prices traipse around record highs. Six execs, including Chmn and CEO John B. Hess, sold nearly 225K shares for $11.8m since July 31.
Tuesday, August 08, 2006
Calls of Note Part 3
- Merrill Lynch notes that Hess (NYSE:HES) stock has performed very well the last 2 years, but they think it has more room to run.
Currently, HES's stock trades at a 2007 P/E of 7.5x vs. its average US based peers at 8.6x. In 2007, the firm is modeling 12% upstream volume growth and modestly higher M&R (Marketing & Refining) profitability, which assumes higher refining utilization offsetting lower estimated crack spreads. Given volume growth, HES's EPS will rise 5% in '07E, which they view as conservative (using $65/bbl WTI and $6.25/Mcf HH). If they had used NYMEX strip pricing ($78.84/bbl and $9.42/Mcf as of 8/7/06), EPS would be up 44%. Yes, HES is an oil leveraged producer.
Upstream: Visible volume growth, greater R/P, and wildcat optionality
Next year, HES has production growth via Okume, Phu Horm, Pangkah Gas, but it's also involved in DeepH2O GOM wildcats(Pony, Ouachita, Tubular Bells), which are drilling or will be delineating, that, in our opinion, are value-adding. HES has disposed of mature or shorter cycle time assets and increased its R/P to 8.3 years. Firm also expects increased activity in Libya, announced development plans at West Med in Egypt and more infill/exploitation activity in the US, e.g., the Bakken Shale. Lastly, its 28% Shenzi non-op working interest was validated when Repsol bought BP's for $2.2B (who had the same exposure).
Downstream and Marketing (M&R)
An East Coast focused operator that generates strong free cash flow. HOVENSA operations (with Venezuela's PDVSA) have been stable and operational issues that affected 2Q06 rectified. The Port Reading, NJ refiner fills a niche roll in the NY Harbor market. Marketing has proven to be a stable business for HES and Energy Trading should provide some upside in a favorable weather environment.
Currently, HES's stock trades at a 2007 P/E of 7.5x vs. its average US based peers at 8.6x. In 2007, the firm is modeling 12% upstream volume growth and modestly higher M&R (Marketing & Refining) profitability, which assumes higher refining utilization offsetting lower estimated crack spreads. Given volume growth, HES's EPS will rise 5% in '07E, which they view as conservative (using $65/bbl WTI and $6.25/Mcf HH). If they had used NYMEX strip pricing ($78.84/bbl and $9.42/Mcf as of 8/7/06), EPS would be up 44%. Yes, HES is an oil leveraged producer.
Upstream: Visible volume growth, greater R/P, and wildcat optionality
Next year, HES has production growth via Okume, Phu Horm, Pangkah Gas, but it's also involved in DeepH2O GOM wildcats(Pony, Ouachita, Tubular Bells), which are drilling or will be delineating, that, in our opinion, are value-adding. HES has disposed of mature or shorter cycle time assets and increased its R/P to 8.3 years. Firm also expects increased activity in Libya, announced development plans at West Med in Egypt and more infill/exploitation activity in the US, e.g., the Bakken Shale. Lastly, its 28% Shenzi non-op working interest was validated when Repsol bought BP's for $2.2B (who had the same exposure).
Downstream and Marketing (M&R)
An East Coast focused operator that generates strong free cash flow. HOVENSA operations (with Venezuela's PDVSA) have been stable and operational issues that affected 2Q06 rectified. The Port Reading, NJ refiner fills a niche roll in the NY Harbor market. Marketing has proven to be a stable business for HES and Energy Trading should provide some upside in a favorable weather environment.
No longer a turnaround, but an upstream growth story with good downstream operations and marketing. So, it's diversified. Maintains Buy.
Notablecalls: While I don't think Merrill's note highlights anything not known to market participants, it may be enough to get the stock moving.
Calls of Note Part 2
- Several firms are commenting on Apple Computer (NASDAQ:AAPL) today following the World Wide Developers Conference (WWDC) held yesteday:
*Banc of America notes they believe that most investors had anticipated the new operating system in the March Q, so the release date will either be in-line or about a month later than expectations. The firm had modeled in 20% y/y software and other rev growth for the next three quarters, so they might move some revs (~$20 million) from near-term quarters to the March and June '07 quarters, assuming no additional upside from other sources such as iPod. However, they believe that we could see upside to their iPod unit volumes in 2H06 of 24 million units.
Apple also announced the final product conversion to Intel - high-end desktop and server. The firm doesn't anticipate tremendous unit volumes, but some ASP improvement in desktops as a result of these products. More importantly, Apple now has all products moved to Intel.
From a stock perspective, they believe that Leopard will help further the long- term advantages of Apple over PC market, though near term they believe that investors expected more product releases at this event, so they think NT investors were/will be disappointed. Firm expects more iPod news in Sept. No changes to estimates, rating (Buy) and TP - $79.
* TWP notes Apple held its WWDC 2006 in San Francisco on August 7, which, compared to previous events, was somewhat disappointing, in their view.
Apple announced the completion of Intel transition with the introduction of Mac Pro and new Xserve, both of which feature Quad 64-bit Xeon processors. Mac Pro is available immediately for $2,499 onward and is about 2x faster and $800 cheaper than its predecessor. The new Xserve will be available in October 2006 and is expected to be 5x faster and cost $1,000 less than its predecessor. Firm notes that Apple is pricing these new high-end Macs below competitors, thus, it could be a sales driver; however, some new third-party application software is still unavailable until year-end, so they believe that there could be a slow uptake from the pro-market until all necessary software is available.
*Banc of America notes they believe that most investors had anticipated the new operating system in the March Q, so the release date will either be in-line or about a month later than expectations. The firm had modeled in 20% y/y software and other rev growth for the next three quarters, so they might move some revs (~$20 million) from near-term quarters to the March and June '07 quarters, assuming no additional upside from other sources such as iPod. However, they believe that we could see upside to their iPod unit volumes in 2H06 of 24 million units.
Apple also announced the final product conversion to Intel - high-end desktop and server. The firm doesn't anticipate tremendous unit volumes, but some ASP improvement in desktops as a result of these products. More importantly, Apple now has all products moved to Intel.
From a stock perspective, they believe that Leopard will help further the long- term advantages of Apple over PC market, though near term they believe that investors expected more product releases at this event, so they think NT investors were/will be disappointed. Firm expects more iPod news in Sept. No changes to estimates, rating (Buy) and TP - $79.
* TWP notes Apple held its WWDC 2006 in San Francisco on August 7, which, compared to previous events, was somewhat disappointing, in their view.
Apple announced the completion of Intel transition with the introduction of Mac Pro and new Xserve, both of which feature Quad 64-bit Xeon processors. Mac Pro is available immediately for $2,499 onward and is about 2x faster and $800 cheaper than its predecessor. The new Xserve will be available in October 2006 and is expected to be 5x faster and cost $1,000 less than its predecessor. Firm notes that Apple is pricing these new high-end Macs below competitors, thus, it could be a sales driver; however, some new third-party application software is still unavailable until year-end, so they believe that there could be a slow uptake from the pro-market until all necessary software is available.
Apple also previewed the new Leopard with 64-bit support and several new features like Time Machines, Spaces, Mail and iChat. This will not be launched, however, until spring 2007 versus firm's expectations of fall 2006 or by the end of the year at the latest. This could stall Mac uptake somewhat in the holiday season.
The major disappointment in conference was the lack of iPod refresh, and they believe that investors were expecting at least some type of refresh. This implies no new catalyst for the back-to-school season, which is a major consumer buying season. Firm would not, however, rule out a pre-holiday refresh for iPods, but for now, they are reducing their iPod estimates for F4Q06. Notes that their revenue and EPS estimates are now in line with the Street, which are at the high end of guidance. Maintains Peer Perform.
* Morgan Stanley says there were no conceptual surprises at Apple's Worldwide Developers Conference. The event stayed true to its developer roots in only focusing on new Professional product - including an Intel-based Mac Pro Desktop and Xserve Server. If Apple is able to ramp volume of the new Mac Pro, upside exists to September Q Mac forecast. Channel inventory remains low for Apple's Nano product (less than a week of 4GB Nano inventory according to distributor checks) - pointing to potential new product over the next month.
Notablecalls: I suspect AAPL may trade down today.
Notablecalls - Paperstand
The WSJ reports that Sprint Nextel (S) is expected to announce as early as today it is choosing WiMax to build a new wireless Internet network in the coming years. The move would mark a significant win for backers of the new technology, such as Intel (INTC) and Motorola (MOT), while it would be a setback for wireless pioneer Qualcomm (QCOM), which is behind a rival technology. WiMax is a technology that can spread a wireless Internet signal over several miles, a long-range version of the popular short-range Wi-Fi. Analysts say building a nationwide WiMax network could cost Sprint between $1bn and $4bn.
The WSJ's "Heard on the Street" column highlights Countrywide Financial (CFC) and its CEO Angelo R. Mozilo, who rarely misses a chance to remind ppl that he has been in the business for more than 50 years. Now he has a sobering message for investors about the near-term outlook for housing and mortgages: Buckle your seat belts. "I've never seen a soft landing in 53 years," Mr. Mozilo told. To minimize shocks, Countrywide is tapping on the brakes as the housing mkt cools and competition among lenders intensifies. This more cautious stance follows a growth spurt that increased Countrywide's annual home-mortgage lending to $491bn last year from $66.7bn in 2000. The 2nd-largest home lender, Wells Fargo (WFC), shows no sign of slowing. If current trends continue for another few quarters, Wells may regain the No. 1 mortgage spot it lost to Countrywide 2 years ago. Countrywide's fans take Mr. Mozilo's warning as a comforting sign that he won't chase growth at the expense of profit. "It's entirely appropriate to have a little more caution" on housing, said Mark R. Patterson, a managing director of NWQ Investment Mgmt. NWQ, which has about $32bn under mgmt, holds a stake of more than 4% in Countrywide. Mr. Patterson added: "Countrywide has demonstrated through many cycles that they can handle hard times as well as good times."
According to the Barron's Online, 7 execs and directors at Anheuser-Busch (BUD) grossed $29m by selling nearly 580K shares, of which 66% were acquired through options, in the open mkt. An additional 63K shares were sold to cover transaction costs. This is the highest level of selling by Anheuser-Busch insiders in the Q3 in the past 5 years. Michael Painchaud, managing director of research at Market Profile Theorems, says "your sense of awareness in changes in analyst behavior or changes in technical behavior should be heightened."
Sharesleuth.com posted yesterday its first investigative story. First victim is Xethanol (XNL), which bills itself as a biotechnology-driven ethanol co that can turn wood chips, corn stalks and paper sludge into cheap alternative fuel. But a Sharesleuth.com investigation found no evidence that Xethanol has produced significant quantities of ethanol from those raw materials. Combine that with Xethanol’s announcement that it’s poised to become one of the first co's to commercialize that technology, a sort of Holy Grail in the renewable-energy world, and you’ve got the type of inconsistency that Sharesleuth seeks to uncover with its stories. At Xethanol, Sharesleuth discovered that the shareholders whose names appeared in the co’s SEC filings over the past year and a half included no fewer than 8 current or former stock brokers who have been the subjects of disciplinary actions by the SEC, the NASD or other regulatory bodies. Sharesleuth also learned that one of Xethanol’s two conventional ethanol plants, a facility it once called its Biomass Technology Center, has been idle for more than a year and no longer has water or sewer service, two prerequisites for testing or production. Other things that caught attention include: The co’s minimal spending on R&D; An absence of scientists on its staff; The relatively low price it paid for the outside technology upon which its waste-to-ethanol dreams are based; Key alliances with 2 co's founded by the same person, a former stock broker who now functions as a financial consultant and promotor. Accordingt o the article, Mark Cuban is short in XNL stock and also short 25 000 shares of UTEK (UTK), because of its relationship to Xethanol.
Notablecalls: XNL dropped 5.93% yesterday in after hours trading. Because story is pretty ugly, I believe that shares trade even lower... much lower.
The WSJ reports that Martha Stewart agreed to pay $195K and accept a 5-year ban on serving as a director of a public co to settle civil insider-trading charges with the SEC. The settlement also forbids Ms. Stewart from involvement for 5 years in certain corporate activities at Martha Stewart Living Omnimedia (MSO), such as financial reporting and auditing. The SEC agreement ends a 5-year saga for Ms. Stewart and her co over her Dec'01 sale of ImClone (IMCL) stock.
Notablecalls: So, anyone know why she was in jail?
The WSJ's "Heard on the Street" column highlights Countrywide Financial (CFC) and its CEO Angelo R. Mozilo, who rarely misses a chance to remind ppl that he has been in the business for more than 50 years. Now he has a sobering message for investors about the near-term outlook for housing and mortgages: Buckle your seat belts. "I've never seen a soft landing in 53 years," Mr. Mozilo told. To minimize shocks, Countrywide is tapping on the brakes as the housing mkt cools and competition among lenders intensifies. This more cautious stance follows a growth spurt that increased Countrywide's annual home-mortgage lending to $491bn last year from $66.7bn in 2000. The 2nd-largest home lender, Wells Fargo (WFC), shows no sign of slowing. If current trends continue for another few quarters, Wells may regain the No. 1 mortgage spot it lost to Countrywide 2 years ago. Countrywide's fans take Mr. Mozilo's warning as a comforting sign that he won't chase growth at the expense of profit. "It's entirely appropriate to have a little more caution" on housing, said Mark R. Patterson, a managing director of NWQ Investment Mgmt. NWQ, which has about $32bn under mgmt, holds a stake of more than 4% in Countrywide. Mr. Patterson added: "Countrywide has demonstrated through many cycles that they can handle hard times as well as good times."
According to the Barron's Online, 7 execs and directors at Anheuser-Busch (BUD) grossed $29m by selling nearly 580K shares, of which 66% were acquired through options, in the open mkt. An additional 63K shares were sold to cover transaction costs. This is the highest level of selling by Anheuser-Busch insiders in the Q3 in the past 5 years. Michael Painchaud, managing director of research at Market Profile Theorems, says "your sense of awareness in changes in analyst behavior or changes in technical behavior should be heightened."
Sharesleuth.com posted yesterday its first investigative story. First victim is Xethanol (XNL), which bills itself as a biotechnology-driven ethanol co that can turn wood chips, corn stalks and paper sludge into cheap alternative fuel. But a Sharesleuth.com investigation found no evidence that Xethanol has produced significant quantities of ethanol from those raw materials. Combine that with Xethanol’s announcement that it’s poised to become one of the first co's to commercialize that technology, a sort of Holy Grail in the renewable-energy world, and you’ve got the type of inconsistency that Sharesleuth seeks to uncover with its stories. At Xethanol, Sharesleuth discovered that the shareholders whose names appeared in the co’s SEC filings over the past year and a half included no fewer than 8 current or former stock brokers who have been the subjects of disciplinary actions by the SEC, the NASD or other regulatory bodies. Sharesleuth also learned that one of Xethanol’s two conventional ethanol plants, a facility it once called its Biomass Technology Center, has been idle for more than a year and no longer has water or sewer service, two prerequisites for testing or production. Other things that caught attention include: The co’s minimal spending on R&D; An absence of scientists on its staff; The relatively low price it paid for the outside technology upon which its waste-to-ethanol dreams are based; Key alliances with 2 co's founded by the same person, a former stock broker who now functions as a financial consultant and promotor. Accordingt o the article, Mark Cuban is short in XNL stock and also short 25 000 shares of UTEK (UTK), because of its relationship to Xethanol.
Notablecalls: XNL dropped 5.93% yesterday in after hours trading. Because story is pretty ugly, I believe that shares trade even lower... much lower.
The WSJ reports that Martha Stewart agreed to pay $195K and accept a 5-year ban on serving as a director of a public co to settle civil insider-trading charges with the SEC. The settlement also forbids Ms. Stewart from involvement for 5 years in certain corporate activities at Martha Stewart Living Omnimedia (MSO), such as financial reporting and auditing. The SEC agreement ends a 5-year saga for Ms. Stewart and her co over her Dec'01 sale of ImClone (IMCL) stock.
Notablecalls: So, anyone know why she was in jail?
Calls of Note Part 1
- Banc of America is cautious on Dell Computer (NASDAQ:DELL) lowering their tgt to $22 from $25 as firm's 2008 EPS estimate goes below consensus (from $1.61 to $1.20. Consensus $1.30).
Firm notes that recent strength in Dells stock, despite the negative pre-announcement, suggests that investors view the most recent of many earnings misses as the bottom. However, the firm thinks that the weakest areas of the PC market are corporate (esp. desktops) in developed markets such as the US, Western Europe and Japan, and they expect this trend to continue for the next several quarters. Moreover, Dell has disproportionate market exposure in these markets which are particularly weak.
Further, they don't think Dell's to be announced AMD based systems solve Dell market/geographic challenges (too much exposure to corporate and developed countries, not enough to consumer and developing countries). Hence, they do not think that Dell will see a snap back in either revs or margins, and believe that investor expectations assume such a snap back.
Firm notes a trend over the past 18 months that Dell's stock has had several positive moves after negative pre-announcements or poor quarters, based on investor expectations of finding a bottom. These expectations or scenarios have ultimately proved to be disappointing.
Finally, with the pending launch of Vista, they believe that HPQ is a better play than Dell, since Dell has a relatively small consumer exposure (less than 20%), compared to HP (~40%).
Maintains Neutral.
Notablecalls: On one hand BAC's call makes sense. The stock has gone vertical lately and these moves rarely hold. On other hand I do think Vista will prove to be a major force that will initiate an upgrade cycle. Most PC's can't handle Vista (2 GB of RAM needed). Think in the very short-term the risk continues to be to the downside. Would risk $.50.
- JP Morgan comments on the resignation of Omnivision's (NASDAQ:OVTI) co-founder and head of sales, Raymond Wu, saying it will likely weigh on OVTI stock today.
Mr Wu resigned to pursue other interests. Based on conversations with OVTI representatives, the firm believes Mr Wu's resignation was not anticipated, though they have expressed the view that the company may have outgrown his skill-set. His responsibilities will be divided between Jess Lee (VP, mainstream products) and Hasan Gadjali (VP,advanced products).
Mr Wu still has financial skin in the game through earnings. Mr Wu's announced resignation comes after the close of F1Q07 and will take effect on August 31st, after earnings have been reported. As of June 26th, Mr Wu owned ~245,000 shares (directly and via a trust) and he is restricted from selling shares (ex 10b5-1) until his resignation is effective.
According to JP Morgan the resignation does not signal a deterioration of OVTI's immediate prospectsw. However, OVTI's organization and procedures are immature, and the loss of a key executive introduces longer-term execution risk, in firm's view.
They are maintaining Overweight Rating. In their view the risks associated with OVTI are overly priced in with the stock trading at 9.8 times CY07 PF EPS of $1.88, a 49% discount to the mean of coverage. OVTI is sitting on $6.19 per share of cash and trades at an ex-cash P/E multiple of 7.2 times CY07E cash PF EPS estimate of $1.70.
Notablecalls: I've never seen these things severly hurt a stock. Think one can be an opportunistic buyer around recent lows ($17ish).
Firm notes that recent strength in Dells stock, despite the negative pre-announcement, suggests that investors view the most recent of many earnings misses as the bottom. However, the firm thinks that the weakest areas of the PC market are corporate (esp. desktops) in developed markets such as the US, Western Europe and Japan, and they expect this trend to continue for the next several quarters. Moreover, Dell has disproportionate market exposure in these markets which are particularly weak.
Further, they don't think Dell's to be announced AMD based systems solve Dell market/geographic challenges (too much exposure to corporate and developed countries, not enough to consumer and developing countries). Hence, they do not think that Dell will see a snap back in either revs or margins, and believe that investor expectations assume such a snap back.
Firm notes a trend over the past 18 months that Dell's stock has had several positive moves after negative pre-announcements or poor quarters, based on investor expectations of finding a bottom. These expectations or scenarios have ultimately proved to be disappointing.
Finally, with the pending launch of Vista, they believe that HPQ is a better play than Dell, since Dell has a relatively small consumer exposure (less than 20%), compared to HP (~40%).
Maintains Neutral.
Notablecalls: On one hand BAC's call makes sense. The stock has gone vertical lately and these moves rarely hold. On other hand I do think Vista will prove to be a major force that will initiate an upgrade cycle. Most PC's can't handle Vista (2 GB of RAM needed). Think in the very short-term the risk continues to be to the downside. Would risk $.50.
- JP Morgan comments on the resignation of Omnivision's (NASDAQ:OVTI) co-founder and head of sales, Raymond Wu, saying it will likely weigh on OVTI stock today.
Mr Wu resigned to pursue other interests. Based on conversations with OVTI representatives, the firm believes Mr Wu's resignation was not anticipated, though they have expressed the view that the company may have outgrown his skill-set. His responsibilities will be divided between Jess Lee (VP, mainstream products) and Hasan Gadjali (VP,advanced products).
Mr Wu still has financial skin in the game through earnings. Mr Wu's announced resignation comes after the close of F1Q07 and will take effect on August 31st, after earnings have been reported. As of June 26th, Mr Wu owned ~245,000 shares (directly and via a trust) and he is restricted from selling shares (ex 10b5-1) until his resignation is effective.
According to JP Morgan the resignation does not signal a deterioration of OVTI's immediate prospectsw. However, OVTI's organization and procedures are immature, and the loss of a key executive introduces longer-term execution risk, in firm's view.
They are maintaining Overweight Rating. In their view the risks associated with OVTI are overly priced in with the stock trading at 9.8 times CY07 PF EPS of $1.88, a 49% discount to the mean of coverage. OVTI is sitting on $6.19 per share of cash and trades at an ex-cash P/E multiple of 7.2 times CY07E cash PF EPS estimate of $1.70.
Notablecalls: I've never seen these things severly hurt a stock. Think one can be an opportunistic buyer around recent lows ($17ish).
Monday, August 07, 2006
Calls of Note Part 6
- Goldman Sachs notes Hansen Natural (NASDAQ:HANS) reported 2Q2006 EPS of $0.28, well below their $0.34 estimate and only slightly above a $0.27 consensus (when excluding estimate). This is likely to disappoint market participants that were likely hoping to see earnings in the $0.31-0.32 range at a minimum. There are two drivers behind the miss relative to expectations. First, expenses were $0.04 higher from both packaging innovation (COGS) and merchandising spending (SG&A) due to renegotiated shelf programs and new merchandisers. Second, $0.02 of the miss came as sales growth of 83% was short of our 95% estimate. The slower sales growth was likely due in part to slowing distribution expansion in advance of the transition to Budweiser wholesalers, but offset in part by some inventory building.
The stock could open down 15% as in-line earnings are disappointing in this situation. Goldman is preliminarily lowering their estimates by $0.04 to $0.34 for 3Q2006 and $0.28 for 4Q2006 to reflect slower distribution expansion, a bit less organic growth, and an assumption that merchandising support spending will remain high over the balance of the year (though this last assumption could prove conservative pending what they hear of the conference call). Firm's new FY2006 estimate is $1.12, and are reducing out-year estimates to $1.81 for 2007, $2.35 for 2008, $2.84 for 2009 and $3.37 for 2010, reflecting 32% average growth from the lower base.
Tgt goes to $55 from $62.5.
Notablecalls: Note to Goldman: HANS traded has down 20% in pre mkt. How many energy drinks did you see on the shelves 2 yrs ago? How many are there now? Think HANS' margins will hold?
The stock could open down 15% as in-line earnings are disappointing in this situation. Goldman is preliminarily lowering their estimates by $0.04 to $0.34 for 3Q2006 and $0.28 for 4Q2006 to reflect slower distribution expansion, a bit less organic growth, and an assumption that merchandising support spending will remain high over the balance of the year (though this last assumption could prove conservative pending what they hear of the conference call). Firm's new FY2006 estimate is $1.12, and are reducing out-year estimates to $1.81 for 2007, $2.35 for 2008, $2.84 for 2009 and $3.37 for 2010, reflecting 32% average growth from the lower base.
Tgt goes to $55 from $62.5.
Notablecalls: Note to Goldman: HANS traded has down 20% in pre mkt. How many energy drinks did you see on the shelves 2 yrs ago? How many are there now? Think HANS' margins will hold?
Calls of Note Part 5
- Prudential is negative on Nike (NYSE:NKE) after attending the WSA Shoe Show in Las Vegas, NV on August 1st and 2nd. Firm believes the athletic business is struggling with a drop off in basketball and the entire performance category in favor of fashion athletic.
After speaking with retailers at the show they are hearing that even NKE's Jordan and Air Force 1 brands, which have been two of the strongest selling brands in the athletic category, are seeing a slowdown. As the fashion/non-athletic business has been uptrending the firm is seeing lower price point shoes gain in importance with consumers. While Nike has recently entered the low profile market they remain cautious on the opportunity due to the competition in the market place and Nike's late entrance.
While business in EMEA and Japan has been promotional and difficult for Nike, the U.S. business has been a standout performer. Firm believes a slowdown in the U.S. could hold back Nike's multiple.
Foot Locker (FL), Nike's largest customer, though less than 10% of total sales, reported second quarter sales on August 3rd and noted persistent weakness in Europe and a softening trend in the US. FL also cut Q2 guidance in half and now expects $0.15 - $0.17 versus consensus of $0.29.
Finish Line (FINL) began seeing a softening in its basketball business this year along with difficulty anniversarying the strength in Nike Shox from the prior year. When the retailer announced the first quarter, management noted that inventories were high and the company would be promoting and canceling orders to bring inventory back in line.
In addition, Genesco (GCO) came out with a negative earnings pre-announcement before the shoe show, noting weakness in its urban businesses, which is heavily weighted towards basketball.
Shoe Carnival (SCVL), also a Nike customer, announced Q2 sales on August 3rd and noted athletic was below expectations, with basketball and classics particularly week.
Prudential is lowering their price target on Nike to $85 from $92 using a 14.3x multiple of calendar 2007 EPS. Maintains Neutral Weight.
Notablecalls: This is an actionable call. I think NKE is a disaster waiting to happen and I would not be surprised to see the co warn.
After speaking with retailers at the show they are hearing that even NKE's Jordan and Air Force 1 brands, which have been two of the strongest selling brands in the athletic category, are seeing a slowdown. As the fashion/non-athletic business has been uptrending the firm is seeing lower price point shoes gain in importance with consumers. While Nike has recently entered the low profile market they remain cautious on the opportunity due to the competition in the market place and Nike's late entrance.
While business in EMEA and Japan has been promotional and difficult for Nike, the U.S. business has been a standout performer. Firm believes a slowdown in the U.S. could hold back Nike's multiple.
Foot Locker (FL), Nike's largest customer, though less than 10% of total sales, reported second quarter sales on August 3rd and noted persistent weakness in Europe and a softening trend in the US. FL also cut Q2 guidance in half and now expects $0.15 - $0.17 versus consensus of $0.29.
Finish Line (FINL) began seeing a softening in its basketball business this year along with difficulty anniversarying the strength in Nike Shox from the prior year. When the retailer announced the first quarter, management noted that inventories were high and the company would be promoting and canceling orders to bring inventory back in line.
In addition, Genesco (GCO) came out with a negative earnings pre-announcement before the shoe show, noting weakness in its urban businesses, which is heavily weighted towards basketball.
Shoe Carnival (SCVL), also a Nike customer, announced Q2 sales on August 3rd and noted athletic was below expectations, with basketball and classics particularly week.
Prudential is lowering their price target on Nike to $85 from $92 using a 14.3x multiple of calendar 2007 EPS. Maintains Neutral Weight.
Notablecalls: This is an actionable call. I think NKE is a disaster waiting to happen and I would not be surprised to see the co warn.
Calls of Note Part 4
- JP Morgan is reiterating their Overweight rating on shares of Avnet (NYSE:AVT) and adding the company to the JPMorgan Focus List with a six month price target of $24 (10x $2.40 FY07 EPS estimate). Firm's target multiple is slightly above current levels but in-line with publicly traded peers as well as within long-term average levels.
Over the past two months shares have retraced back to April 2005 levels and in firm's view investors are not giving AVT credit for the cost synergies the company has realized post the Memec acquisition as well as appear a bit overly pessimistic on the company's organic growth.
By their calculations AVT's fundamentals are likely to exceed prior cycle peaks in FY07 in terms of revenues, EPS, efficiency, balance sheet velocity and returns. Firm concedes they're fighting a difficult tide of less than stellar datapoints regarding the current state of demand across the semiconductor supply chain, but believes seasonal factors should provide some modest level of stability that should benefit AVT.
In their view the largest risk factor is demand. Overall, JPM's US Semiconductor and Enterprise Hardware Teams have largely held their 2006 industry revenue forecasts inline (6% to 9% growth) since January while firm's supply chain demand model now registers 2006 OEM order growth of roughly 13% y/y (vs. 7% y/y back in January '06).
Firm realizes adding the stock to the Focus List this close to reporting 4Q06 results (reporting on Wednesday morning) likely leads some to view this as nothing more than a call on the quarter. They note that while they are constructive on the prospects for this quarter ($0.01 ahead of the street at $0.59 including option expense) as well as for next quarter, their higher than street estimates for FY07 ($2.40 vs. $2.23 consensus) are reflective of belief that cost cutting over the next twelve months is the larger driver of earnings performance relative to the need for better than normal end demand to lift profits.
Notablecalls: Not actionable but good to know category. The stock has come down hard over the past months and may have some upside in it. Just a trade.
Over the past two months shares have retraced back to April 2005 levels and in firm's view investors are not giving AVT credit for the cost synergies the company has realized post the Memec acquisition as well as appear a bit overly pessimistic on the company's organic growth.
By their calculations AVT's fundamentals are likely to exceed prior cycle peaks in FY07 in terms of revenues, EPS, efficiency, balance sheet velocity and returns. Firm concedes they're fighting a difficult tide of less than stellar datapoints regarding the current state of demand across the semiconductor supply chain, but believes seasonal factors should provide some modest level of stability that should benefit AVT.
In their view the largest risk factor is demand. Overall, JPM's US Semiconductor and Enterprise Hardware Teams have largely held their 2006 industry revenue forecasts inline (6% to 9% growth) since January while firm's supply chain demand model now registers 2006 OEM order growth of roughly 13% y/y (vs. 7% y/y back in January '06).
Firm realizes adding the stock to the Focus List this close to reporting 4Q06 results (reporting on Wednesday morning) likely leads some to view this as nothing more than a call on the quarter. They note that while they are constructive on the prospects for this quarter ($0.01 ahead of the street at $0.59 including option expense) as well as for next quarter, their higher than street estimates for FY07 ($2.40 vs. $2.23 consensus) are reflective of belief that cost cutting over the next twelve months is the larger driver of earnings performance relative to the need for better than normal end demand to lift profits.
Notablecalls: Not actionable but good to know category. The stock has come down hard over the past months and may have some upside in it. Just a trade.
Notablecalls - Paperstand
The CNET News reports that Sybase (SY) plans to introduce a data integration suite on Mon, to enable customers to access real-time, historical and outside data from disparate databases via one tool. The Sybase Data Integration Suite bundles together four existing products: Sybase Replication, Sybase Data Federation, Sybase Search and Sybase Real-Time Events.
The WSJ reports that AmerisourceBergen (ABC) is near a deal with Kindred (KND) to combine their institutional pharmacy units into a co with a mkt cap of $1-1.5bn.
The NY Post discusses A Consulting Team (TACX), which is set to held AGM on Aug. 22. Article concentrates on $8.54 per share buyout offer by Helios & Matheson. H&M offered in March to buy CEO's 43% stake for $8.54 a share. With the shares then selling for a mere $4.60 on the open mkt, the offer amounted to a stupefying 86% "control premium" over the price available to investors. Article suggests that it would be nice to hear CEO Shmuel BenTov explain at the shareholder meeting just how thoroughly he checked out the claims and credentials of H&M, a co with red flags sticking out of it in all directions, from bank balances that the accounting firm PricewaterhouseCoopers was unable to reconcile in a recent due diligence audit to the sudden departure of the CEO earlier this year, to the co's close involvement with shady Indian stock promoters, who own 15% of its shares.
The WSJ reports that AmerisourceBergen (ABC) is near a deal with Kindred (KND) to combine their institutional pharmacy units into a co with a mkt cap of $1-1.5bn.
The NY Post discusses A Consulting Team (TACX), which is set to held AGM on Aug. 22. Article concentrates on $8.54 per share buyout offer by Helios & Matheson. H&M offered in March to buy CEO's 43% stake for $8.54 a share. With the shares then selling for a mere $4.60 on the open mkt, the offer amounted to a stupefying 86% "control premium" over the price available to investors. Article suggests that it would be nice to hear CEO Shmuel BenTov explain at the shareholder meeting just how thoroughly he checked out the claims and credentials of H&M, a co with red flags sticking out of it in all directions, from bank balances that the accounting firm PricewaterhouseCoopers was unable to reconcile in a recent due diligence audit to the sudden departure of the CEO earlier this year, to the co's close involvement with shady Indian stock promoters, who own 15% of its shares.
Calls of Note Part 3
- Piper Jaffray notes recent news from the two major providers of feature film downloads (Movielink and Cinemanow) related to the incorporation of the ability to burn downloaded content to DVD has increased Street interest in the download & burn model and how it will impact entertainment content distribution.
While the firm do not expect to see significant growth in the download & burn market in CY06, Sonic Solutions (NASDAQ:SNIC) is well positioned as a facilitator of this model and will benefit as this becomes a commonly accepted distribution platform.
Piper believes download & burn will prove to be a popular method for buying/renting feature film and other video content (TV, etc.), given this model addresses two inherent consumer demands: 1) convenience -- better than going to video store or CE retailer, and 2) familiarity - DVD has been the fastest growing and most popular distribution format in history; more than 80% of U.S. TV households have one or more DVD player. Clearly, other entertainment content distribution models are in the works, but they believe the majority of consumers tend to flock to what they perceive to be easiest and most familiar. Major players like Amazon are likely to move into download video this year and could incorporate DVD burning.
Sonic will play a significant role in the success or failure of the download & burn model. The company is a provider of the core DVD burning technology (AuthorScript) and has created a framework for content providers to offer a download & burn model by making its burning engine interoperable with many different kinds of copy protection that can secure content, even after it has been burned to DVD.
Maintains Outperform and $25 tgt.
Notablecalls: Not actionable but good to know category. This note will have zero impact on share price in the s-t.
While the firm do not expect to see significant growth in the download & burn market in CY06, Sonic Solutions (NASDAQ:SNIC) is well positioned as a facilitator of this model and will benefit as this becomes a commonly accepted distribution platform.
Piper believes download & burn will prove to be a popular method for buying/renting feature film and other video content (TV, etc.), given this model addresses two inherent consumer demands: 1) convenience -- better than going to video store or CE retailer, and 2) familiarity - DVD has been the fastest growing and most popular distribution format in history; more than 80% of U.S. TV households have one or more DVD player. Clearly, other entertainment content distribution models are in the works, but they believe the majority of consumers tend to flock to what they perceive to be easiest and most familiar. Major players like Amazon are likely to move into download video this year and could incorporate DVD burning.
Sonic will play a significant role in the success or failure of the download & burn model. The company is a provider of the core DVD burning technology (AuthorScript) and has created a framework for content providers to offer a download & burn model by making its burning engine interoperable with many different kinds of copy protection that can secure content, even after it has been burned to DVD.
Maintains Outperform and $25 tgt.
Notablecalls: Not actionable but good to know category. This note will have zero impact on share price in the s-t.
Calls of Note Part 2
- ThinkEquity is calling for a trading opportunity in Optimal Group (NASDAQ:OPMR) noting they believe that the risk for Optimal if adverse online gaming legislation passes is overly discounted. Furthermore, they believe the odds of passage during this congressional session are extremely low given the calendar and legislative priorities. Accordingly, the firm suspects a near-term trading opportunity may be upon us. Remains attracted to the FireOne business, which drives the significant majority of Optimal's profits and cash flow. Firm anticipates relatively in-line earnings but have less conviction regarding their revenue assumption. However, the legislative overhang, which may soon subside, and valuation considerations trump near-term fundamentals, within reason.
With the sharp correction in the shares and the company's strong cash position and free cash flow, they believe it would be prudent for Optimal's Board to consider aggressively increasing its share repurchase authorization. Firm's sensitivity analysis suggests the potential for significant earnings accretion. At the current share price, the repurchase of 5M shares (about 19% of O/S shares) would cost approximately $74M or about 67% of Optimal's available cash, and would be $0.22 accretive, or 14%, relative to FY07 EPS estimate.
Notablecalls: Note that OPMR will release its Q2 results tonight. Still wanna go long?
With the sharp correction in the shares and the company's strong cash position and free cash flow, they believe it would be prudent for Optimal's Board to consider aggressively increasing its share repurchase authorization. Firm's sensitivity analysis suggests the potential for significant earnings accretion. At the current share price, the repurchase of 5M shares (about 19% of O/S shares) would cost approximately $74M or about 67% of Optimal's available cash, and would be $0.22 accretive, or 14%, relative to FY07 EPS estimate.
Notablecalls: Note that OPMR will release its Q2 results tonight. Still wanna go long?
Calls of Note Part 1
- Prudential believes that the ramp of Intel's latest desktop offering, Core 2 Duo (code-named Conroe), will be slower than expected due to brand confusion and chipset tightness.
Firm thinks that the transition of Intel's desktop performance brand from Pentium to Core 2 Duo is creating some confusion in the market. Some Pentium MPUs are now at price points historically held by its value-branded Celeron MPUs! For the performance desktop category, they think that customers are asking the question "why spend $180 for a Conroe when you can get a Pentium for $80?"
Furthermore, recent press about Conroe chipset (965G) issues, along with GM Sean Maloney's comments about chipset tightness at the Conroe launch indicates a higher risk on the Conroe ramp.
In addition to these concerns, the firm still remains concerned that high inventories at Intel will lead to further gross margin erosion, and that Dell could make a major shift to AMD on the client side.
Continues to believe that Street estimates are too high - firm's CY07 EPS estimate of $0.90 is $0.15 below consensus. Remains Underweight the stock with a $14 price target.
Firm thinks that the transition of Intel's desktop performance brand from Pentium to Core 2 Duo is creating some confusion in the market. Some Pentium MPUs are now at price points historically held by its value-branded Celeron MPUs! For the performance desktop category, they think that customers are asking the question "why spend $180 for a Conroe when you can get a Pentium for $80?"
Furthermore, recent press about Conroe chipset (965G) issues, along with GM Sean Maloney's comments about chipset tightness at the Conroe launch indicates a higher risk on the Conroe ramp.
In addition to these concerns, the firm still remains concerned that high inventories at Intel will lead to further gross margin erosion, and that Dell could make a major shift to AMD on the client side.
Continues to believe that Street estimates are too high - firm's CY07 EPS estimate of $0.90 is $0.15 below consensus. Remains Underweight the stock with a $14 price target.
Notablecalls: Pru has been negative on INTC for quite some time. The call is not actionable but hard to ignore as it highlights the biggest problem Intel is facing today - even if they lower prices the consumer won't be so willing to buy their stuff. A Pentium for $80 sounds a bit fishy (is it obsolete?) and a Conroe for $180 too expensive compared to AMD.
- Soleil Securities Group's Peter C. Friedland comments on SiRF Tech (NASDAQ:SIRF) saying that although Q4 remains a ways off, he believes the current Q4 consensus revenue estimate looks high, calling for 8% sequential growth, up from 10% sequential growth expected in Q3. While the firm believes SiRF should clearly benefit from strong holiday-related demand in the PND market, which accounts for 40%-50% of revenue, they believe that SiRF captures most of the sequential growth from this seasonal effect during Q3. Therefore, since the analyst has modeled in just flattish sequential revenue growth for Q4, his Q4 numbers are below consensus.
Bottom-line: Given the recent sell-off in SIRF shares, and with the stock now trading at a forward PE of roughly 20x, Mr. Friedland believes the risk-reward at current levels has shifted more toward the positive side than before. However, given the sensitivity of SIRF shares to quarterly results and guidance, he believes Q4 consensus could potentially pose an issue when SiRF provides its Q4 guidance with Q3 results in October. Maintains Hold.
Notablecalls: Not actionable but good to know category. Maybe SIRF is a short in the $24 area but surely not here.
Notablecalls - Barron's summary
Barron's discusses International Paper (IP), saying that earnings surprises at IP may finally be pleasant. There's speculation about a dividend hike, and analysts see the share hitting 40, up from 34 last week.
Barron's discusses Archer Daniels Midland (ADM), the largest, ethanol refiner, that has seen its shares surge 68% this year. But that stock, at a recent 42, may now be 15% overvalued.
Dell (DELL) shares are down nearly 45% in the past year, to 22, and bears see them fallings as low as 16. But bold speculators could profit nicely if Dell addresses its key problems.
According to the Barron's, the iShares Silver Trust may be the best play on silver, which could climb to $20 an ounce next year. Article suggests that silver producers, like: Apex Silver (SIL), Coeur d'Alene Mines (CDE), Hecla Mining (HL), Pan American Silver (PAAS), Silver Standard Resources (SSRI) and Silver Wheaton (SLW) may also have upside.
"The Trader" column highlights UAL (UAUA), saying that airlines have turned out to be bad investments in history, yet, a pretty persuasive case can be made for UAL, at least for a trade, as some temporary overhangs on the stock lift and its opportunity for a radically improved '07 comes into view. Industry fundamentals are strong. Load factors and yields continue to climb. UAL reported Q2 domestic mainline rev gains of 19.7% last week, while the corporate load factor rose to 87.7%. Without assuming huge gains in traffic, free cash flow in '07 could approach $950m. United has a cash position of $5.1bn and growing, a radically reduced debt load and no unfunded pension liabilities. Other airlines got a break last week when Congress passed new pension regulations, but United didn't need them. As the stock makes its way toward investors who are focused on the bulge in free cash flow that seems imminent in '07, it could make up plenty of the ground it's ceded to its peers. Even given all the standard caveats about airline stocks and vulnerability to an oil spike, Merrill Lynch analyst Michael Linenberg's price target in the mid-30s doesn't seem like a big stretch.
Atheros Comm. (ATHR) profiled favorably in "Technology Trader" column. Article questions that weren't the Goliaths of the industry supposed to squash these little guys? Intel (INTC) was supposed to dominate WiFi with its Centrino package deals, Broadcom (BRCM) was supposed to integrate WiFi into its chips for broadband modems, Texas Instruments (TXN) was supposed to bundle WiFi into its handset silicon. Texas Instruments and Conexant (CNXT) have pulled back from the mainstream WiFi market. Agere (AGR) is long gone. Atheros has taken share from all those guys. CEO Craig Barratt attributes his co's success to two things: a fast-moving technology mkt and some cost-competitive products. WiFi standards keep turning over at a fast rate, as the wireless networking technology improves in bandwidth and mobility. Big chip makers have trouble keeping up with WiFi while they focus on their higher-priority products. Price matters, too. Atheros makes sure that its WiFi products remain small and low-cost. At about 17, the shares of Atheros trade at a bit more than 18.5x the First Call consensus forecast for next year's earnings. That multiple also is less than the WiFi mkt's likely annual growth rate.
Fund manager picks highlighted, top10 holdings include: JPM, BAC, XOM, EOG, COP, PFE, ETR, WMB, WM and BAX. Fund managers most recent buys are CSCO and MOT.
Barron's discusses Archer Daniels Midland (ADM), the largest, ethanol refiner, that has seen its shares surge 68% this year. But that stock, at a recent 42, may now be 15% overvalued.
Dell (DELL) shares are down nearly 45% in the past year, to 22, and bears see them fallings as low as 16. But bold speculators could profit nicely if Dell addresses its key problems.
According to the Barron's, the iShares Silver Trust may be the best play on silver, which could climb to $20 an ounce next year. Article suggests that silver producers, like: Apex Silver (SIL), Coeur d'Alene Mines (CDE), Hecla Mining (HL), Pan American Silver (PAAS), Silver Standard Resources (SSRI) and Silver Wheaton (SLW) may also have upside.
"The Trader" column highlights UAL (UAUA), saying that airlines have turned out to be bad investments in history, yet, a pretty persuasive case can be made for UAL, at least for a trade, as some temporary overhangs on the stock lift and its opportunity for a radically improved '07 comes into view. Industry fundamentals are strong. Load factors and yields continue to climb. UAL reported Q2 domestic mainline rev gains of 19.7% last week, while the corporate load factor rose to 87.7%. Without assuming huge gains in traffic, free cash flow in '07 could approach $950m. United has a cash position of $5.1bn and growing, a radically reduced debt load and no unfunded pension liabilities. Other airlines got a break last week when Congress passed new pension regulations, but United didn't need them. As the stock makes its way toward investors who are focused on the bulge in free cash flow that seems imminent in '07, it could make up plenty of the ground it's ceded to its peers. Even given all the standard caveats about airline stocks and vulnerability to an oil spike, Merrill Lynch analyst Michael Linenberg's price target in the mid-30s doesn't seem like a big stretch.
Atheros Comm. (ATHR) profiled favorably in "Technology Trader" column. Article questions that weren't the Goliaths of the industry supposed to squash these little guys? Intel (INTC) was supposed to dominate WiFi with its Centrino package deals, Broadcom (BRCM) was supposed to integrate WiFi into its chips for broadband modems, Texas Instruments (TXN) was supposed to bundle WiFi into its handset silicon. Texas Instruments and Conexant (CNXT) have pulled back from the mainstream WiFi market. Agere (AGR) is long gone. Atheros has taken share from all those guys. CEO Craig Barratt attributes his co's success to two things: a fast-moving technology mkt and some cost-competitive products. WiFi standards keep turning over at a fast rate, as the wireless networking technology improves in bandwidth and mobility. Big chip makers have trouble keeping up with WiFi while they focus on their higher-priority products. Price matters, too. Atheros makes sure that its WiFi products remain small and low-cost. At about 17, the shares of Atheros trade at a bit more than 18.5x the First Call consensus forecast for next year's earnings. That multiple also is less than the WiFi mkt's likely annual growth rate.
Fund manager picks highlighted, top10 holdings include: JPM, BAC, XOM, EOG, COP, PFE, ETR, WMB, WM and BAX. Fund managers most recent buys are CSCO and MOT.
Friday, August 04, 2006
Calls of Note Part 2
- Goldman Sachs is positive on Hansen (NASDAQ:HANS) saying they would advise investors to take advantage of weakness in the shares Thursday, August 3 heading into next Monday's second-quarter report, August 7. Hansen appears poised to deliver sales upsides driven by estimated 125% growth for its energy drink division. Firm also believes the consensus is underestimating gross margins, as they anticipate sequential improvement owing to the seasonality of the high-margin energy drink division relative to the lower-margin warehouse division.
There are two near-term issues that might emerge on the tele-conference, in firm's view, for which investors should be prepared. First, the transition to Bud wholesalers may cause some noise in sales. It is possible that shipments lag depletions as phased-out distributors sell off their inventory. Second, the pace of distribution gains could slow in advance of the transition. Per-outlet sales growth remains strong, but total sales growth could slow owing to less rapid increases in availability (the firm has already worked this into their forecast). In the unlikely (but possible) event that this noise impacts the second quarter or second half, they would step in aggressively. Neither of these possibilities should have any bearing on long-term earnings power as the Bud distributors should deliver substantial distribution gains starting next year.
Firm maintains their Buy rating and $62.50 noting their 2007 EPS estimate of $2.06 is about $0.60 above the consensus average.
Notablecalls: The note is causing some buy interest in the pre mkt but ultimately I don't think it's that meaningful.
There are two near-term issues that might emerge on the tele-conference, in firm's view, for which investors should be prepared. First, the transition to Bud wholesalers may cause some noise in sales. It is possible that shipments lag depletions as phased-out distributors sell off their inventory. Second, the pace of distribution gains could slow in advance of the transition. Per-outlet sales growth remains strong, but total sales growth could slow owing to less rapid increases in availability (the firm has already worked this into their forecast). In the unlikely (but possible) event that this noise impacts the second quarter or second half, they would step in aggressively. Neither of these possibilities should have any bearing on long-term earnings power as the Bud distributors should deliver substantial distribution gains starting next year.
Firm maintains their Buy rating and $62.50 noting their 2007 EPS estimate of $2.06 is about $0.60 above the consensus average.
Notablecalls: The note is causing some buy interest in the pre mkt but ultimately I don't think it's that meaningful.
Color on quarter: Invitrogen (IVGN)
- Several firms are commenting on Invitrogen (NASDAQ:IVGN) after the co yet again announced poor results and lowered guidance:
* JP Morgan notes that with the imbroglio over 2Q results in the midst of an unforgiving earnings season certain to stir up another round of selling (shares are trading down substantially in the after market), the obvious question is what to do from here. While they believe that many had anticipated soft results, in particular for BioProduction, the cursory reaction to revised guidance (1-4% organic growth this year), softness in BioDiscovery, and overall skepticism surrounding the FY outlook (for example, FCF guidance of $200mm, when YTD FCF is only $25mm) will likely be swift and unforgiving, in particular, when coupled with broader issues surrounding management credibility.
For a host of reasons, the firm remains cautiously optimistic, noting that valuation remains the most compelling argument for those contemplating a decision to buy. Assuming an opening price of $54, shares will trade at 14.0x adj. 2007 EPS proj. of $3.85 (incl. FAS 123R), a 25% discount to the broader group of life science tool and bioproduction companies, and by far the cheapest name in firm's group. On a sales multiple, the numbers are equally compelling, with shares trading at 2.2x fwd revs, a significant discount for a company with operating margins projected to reach ~24% this year.
Firm maintains Overweight rating.
* UBS notes they are disappointed by the fact that company management was not more forthcoming at the June 15 analyst day. As such, they believe that some investors will lose patience and expect to see a sharp decline (~15% or more) in IVGN shares at the market open. Given that life sciences companies typically trade in a range of 15-25x forward earnings, they believe that IVGN shares should see a floor at ~ 14 xs 2007 EPS estimate of $3.85 or ~$54.
Firm lowers their 2006-07 sales ests to $1.27B and $1.35B (was $1.32B and $1.44B), and pro forma EPSe (ex-options) to $3.27 and $3.85 (was $3.51 and $4.06). IVGN shares may trade down 10-15%, but could see a floor at $53-54 (~14x 07 EPSe; implies a ~7% free cash flow yield). Despite the lumps, end markets are solid and the firm remains buyers of IVGN shares, especially on weakness.
Maintains Buy but cuts tgt to $75 from $82.
* Deutsche Bank's key takeaways include: 1) Reduced guidance likely provides floor for FY06 results and appears to be very conservative, which is encouraging given recent performance relative to expectations, 2) $500 million share repurchase provides significant support 3) Despite recent poor performance we believe that IVGN management will take the necessary strategic steps to return the company to a more positive growth trend, and given valuation, strong CF generation and the large share repurchase, the firm would be aggressive buyers of IVGN at these levels.
Reits Buy and lowers tgt to $75.
Notablecalls: I think there is no question of what to do with the stock here. Anything below $56 level is a strong buy. Note that the first time IVGN announced its problems (Oct 2005) the shares fell around 12%. This time, with the problems known to many and with some expecting a cut to guidance the shares fell 15% in after market trading. I think IVGN will finish the day with a 7-10% decline. Thats a range of $56-$58.
* JP Morgan notes that with the imbroglio over 2Q results in the midst of an unforgiving earnings season certain to stir up another round of selling (shares are trading down substantially in the after market), the obvious question is what to do from here. While they believe that many had anticipated soft results, in particular for BioProduction, the cursory reaction to revised guidance (1-4% organic growth this year), softness in BioDiscovery, and overall skepticism surrounding the FY outlook (for example, FCF guidance of $200mm, when YTD FCF is only $25mm) will likely be swift and unforgiving, in particular, when coupled with broader issues surrounding management credibility.
For a host of reasons, the firm remains cautiously optimistic, noting that valuation remains the most compelling argument for those contemplating a decision to buy. Assuming an opening price of $54, shares will trade at 14.0x adj. 2007 EPS proj. of $3.85 (incl. FAS 123R), a 25% discount to the broader group of life science tool and bioproduction companies, and by far the cheapest name in firm's group. On a sales multiple, the numbers are equally compelling, with shares trading at 2.2x fwd revs, a significant discount for a company with operating margins projected to reach ~24% this year.
Firm maintains Overweight rating.
* UBS notes they are disappointed by the fact that company management was not more forthcoming at the June 15 analyst day. As such, they believe that some investors will lose patience and expect to see a sharp decline (~15% or more) in IVGN shares at the market open. Given that life sciences companies typically trade in a range of 15-25x forward earnings, they believe that IVGN shares should see a floor at ~ 14 xs 2007 EPS estimate of $3.85 or ~$54.
Firm lowers their 2006-07 sales ests to $1.27B and $1.35B (was $1.32B and $1.44B), and pro forma EPSe (ex-options) to $3.27 and $3.85 (was $3.51 and $4.06). IVGN shares may trade down 10-15%, but could see a floor at $53-54 (~14x 07 EPSe; implies a ~7% free cash flow yield). Despite the lumps, end markets are solid and the firm remains buyers of IVGN shares, especially on weakness.
Maintains Buy but cuts tgt to $75 from $82.
* Deutsche Bank's key takeaways include: 1) Reduced guidance likely provides floor for FY06 results and appears to be very conservative, which is encouraging given recent performance relative to expectations, 2) $500 million share repurchase provides significant support 3) Despite recent poor performance we believe that IVGN management will take the necessary strategic steps to return the company to a more positive growth trend, and given valuation, strong CF generation and the large share repurchase, the firm would be aggressive buyers of IVGN at these levels.
Reits Buy and lowers tgt to $75.
Notablecalls: I think there is no question of what to do with the stock here. Anything below $56 level is a strong buy. Note that the first time IVGN announced its problems (Oct 2005) the shares fell around 12%. This time, with the problems known to many and with some expecting a cut to guidance the shares fell 15% in after market trading. I think IVGN will finish the day with a 7-10% decline. Thats a range of $56-$58.
Calls of Note Part 1
- Citigroup notes that over the past two years when BEA Systems (NASDAQ:BEAS) has pre-announced quarterly results (either above or below guidance) they have done so after the market close on the second business day following the quarter close (which would have been Wednesday, August 2nd). Firm notes they saw a similar set-up with BEAS' shares heading into F1Q as we are seeing heading into its 2Q report. Namely BEAS' shares have declined to roughly the same mid-$11 price level as they did heading into F1Q results. Following solid 1Q results, BEAS shares rallied 13% the following day (vs. NASDAQ down 1%); Citi thinks inline 2Q results may result in a similar but more sustainable move given it's heading into the seasonally stronger 2H and a period when the market has historically been friendlier.
Firm notes that over the past year BEA has added its AquaLogic product suite and its Communications platform product to its product portfolio. They think this is a stronger product set than they have had in the last several years based on both internal development and the acquisitions of Plumtree and Fuego.
Average 12% share appreciation in C2H over the past four years; in each of the last four calendar years BEA shares have appreciated (21% in 2002, 13% in 2003, 8% in 2004 and 7% in 2005). With BEA shares down 13% since the end of June, the firm thinks the stage is set for a strong rally the remainder of 2006.
Forward P/E valuation of 21x at the lower-end of historical trading range of 16x-29x.
Maintains Buy and $15 tgt.
Notablecalls: Not actionable but good to know category. Some may disagree.
- CIBC notes that while Abraxis BioSciense (NASDAQ:ABBI) shares may be washed out but is the story really scrubbed clean? Perhaps, but is ABRAXANE, for which management again lowered sales guidance, worth $1.6B? Not in firm's book or at least not yet given solid but not stellar sales to date and a multitude of uncertainties on timing of additional indications, European partnering strategy, etc.
Firm values APPX's generic business at $2.1B or 17.5X '07E EPS (3.0X sales), both group multiples. This implies valuation of ABRAXANE and ABBI's pre- clinical pipeline of $1.6B. Those dineros buy a lot these days in BioPharma, whole companies ALKS, CBST, MYOG, HGSI, ZGEN, MDCO, MOGN.
Note the co. seems to have corrected the excess inventory that led to subpar ABRAXANE numbers YTD. Revised guidance of $170.0MM-$190.0MM implies 50% sequential jump from true run rate unlikely even with AZN's muscle behind the drug, which isn't coming cheap, 22% straight off the top.
For now they generously maintain their peak WW ABRAXANE sales estimate of $1.0B, though now assume peak is hit in 2012 vs. 2010. Generic business remains solid but incapable of moving financials meaningfully. Lowering 12-18 month price target to $26 from $31 to reflect lower ABRAXANE value.
Maintains Sector Performer.
Notablecalls: Not actionable but good to know category. ABBI has been a controversial name and I'd stay away from it.
Firm notes that over the past year BEA has added its AquaLogic product suite and its Communications platform product to its product portfolio. They think this is a stronger product set than they have had in the last several years based on both internal development and the acquisitions of Plumtree and Fuego.
Average 12% share appreciation in C2H over the past four years; in each of the last four calendar years BEA shares have appreciated (21% in 2002, 13% in 2003, 8% in 2004 and 7% in 2005). With BEA shares down 13% since the end of June, the firm thinks the stage is set for a strong rally the remainder of 2006.
Forward P/E valuation of 21x at the lower-end of historical trading range of 16x-29x.
Maintains Buy and $15 tgt.
Notablecalls: Not actionable but good to know category. Some may disagree.
- CIBC notes that while Abraxis BioSciense (NASDAQ:ABBI) shares may be washed out but is the story really scrubbed clean? Perhaps, but is ABRAXANE, for which management again lowered sales guidance, worth $1.6B? Not in firm's book or at least not yet given solid but not stellar sales to date and a multitude of uncertainties on timing of additional indications, European partnering strategy, etc.
Firm values APPX's generic business at $2.1B or 17.5X '07E EPS (3.0X sales), both group multiples. This implies valuation of ABRAXANE and ABBI's pre- clinical pipeline of $1.6B. Those dineros buy a lot these days in BioPharma, whole companies ALKS, CBST, MYOG, HGSI, ZGEN, MDCO, MOGN.
Note the co. seems to have corrected the excess inventory that led to subpar ABRAXANE numbers YTD. Revised guidance of $170.0MM-$190.0MM implies 50% sequential jump from true run rate unlikely even with AZN's muscle behind the drug, which isn't coming cheap, 22% straight off the top.
For now they generously maintain their peak WW ABRAXANE sales estimate of $1.0B, though now assume peak is hit in 2012 vs. 2010. Generic business remains solid but incapable of moving financials meaningfully. Lowering 12-18 month price target to $26 from $31 to reflect lower ABRAXANE value.
Maintains Sector Performer.
Notablecalls: Not actionable but good to know category. ABBI has been a controversial name and I'd stay away from it.
Color on options backdating: Apple Computer (AAPL)
- Several firms are defending Apple Computer (NASDAQ:AAPL) as the co announced that it will delay the filing of its 10-Q for the June quarter as result of the company's ongoing internal options backdating investigation. Apple's management and the audit committee of the board of directors have agreed that the company will have to restate prior results to record non-cash charges for compensation expense related to options.
* JP Morgan notes that in other words, it appears the company's internal investigation found evidence of improper options backdating. This is clearly unwelcome news for the story.
Firm believes it is extremely unlikely that Steve Jobs' was responsible for any backdating irregularities. They believe this is the most important question for investors in this case. At Apple, all options grants are determined and approved by a compensation committee made up of independent members of the board of directors, and Steve Jobs has never had any official role in this process.
There is little data available to determine the likely financial consequence of the investigation, but in firm's opinion, the nature of the issue suggests it will be limitedt o a non-cash accounting charge on prior earning s. As a result, the key remaining uncertainty is when the company will complete the investigation and release its 10-Q.
Looking beyond the options investigation, they expect iPod business momentum to accelerate as we enter the seasonally stronger months with new products and we believe the company's Mac share gains are set to accelerate rapidly over the same time period.
Maintains Overweight.
* Morgan Stanley says that while the news may create stock volatility near-term, it's important to note: 1) the time period of the internal stock option grant investigation has not changed (1997-2001) from what was stated in the June 29 release; 2) FY05 and FY06 earnings are unlikely to change, in firm's opinion; 3) findings are a result of a company (not SEC) initiated investigation; and 4) Apple's management team and board of directors are intensely focused on finalizing the proactive investigation and restating financial statements as soon as possible.
With continued strength in MacBook demand and new product announcements over the next few months, they continue to view upward revisions as likely over the next two quarters.
Maintains Overweight.
Notablecalls: If you can catch AAPL down 5-6% on the news in the pre mkt, just take the chance and buy the stock.
* JP Morgan notes that in other words, it appears the company's internal investigation found evidence of improper options backdating. This is clearly unwelcome news for the story.
Firm believes it is extremely unlikely that Steve Jobs' was responsible for any backdating irregularities. They believe this is the most important question for investors in this case. At Apple, all options grants are determined and approved by a compensation committee made up of independent members of the board of directors, and Steve Jobs has never had any official role in this process.
There is little data available to determine the likely financial consequence of the investigation, but in firm's opinion, the nature of the issue suggests it will be limitedt o a non-cash accounting charge on prior earning s. As a result, the key remaining uncertainty is when the company will complete the investigation and release its 10-Q.
Looking beyond the options investigation, they expect iPod business momentum to accelerate as we enter the seasonally stronger months with new products and we believe the company's Mac share gains are set to accelerate rapidly over the same time period.
Maintains Overweight.
* Morgan Stanley says that while the news may create stock volatility near-term, it's important to note: 1) the time period of the internal stock option grant investigation has not changed (1997-2001) from what was stated in the June 29 release; 2) FY05 and FY06 earnings are unlikely to change, in firm's opinion; 3) findings are a result of a company (not SEC) initiated investigation; and 4) Apple's management team and board of directors are intensely focused on finalizing the proactive investigation and restating financial statements as soon as possible.
With continued strength in MacBook demand and new product announcements over the next few months, they continue to view upward revisions as likely over the next two quarters.
Maintains Overweight.
Notablecalls: If you can catch AAPL down 5-6% on the news in the pre mkt, just take the chance and buy the stock.
Notablecalls - Paperstand
According to The Wall Street Journal, managers of "value" mutual funds can be a finicky bunch when it comes to investing, because their goal is to buy stocks on the cheap. A year ago, many were sitting on record piles of cash and saying that stocks were overvalued. Now, they appear to be diving back in. In recent months, some value-fund managers have started pouring cash back into the mkt. For individual investors, it marks an important shift because it suggests that at least some investment pros think they are starting to spot decent prices. Value funds are particularly worth watching because in recent years they have enjoyed a healthy winning streak, mostly topping "growth" funds for the one-, three- and five-year avg annual periods.
The WSJ's "Heard on the Street" column discusses Ford (F), saying that the chatter in the financial mkts is that selling struggling luxury brands like Jaguar or a piece of its credit unit might be job one in Ford's soon-to-be remodeled "Way Forward" turnaround plan. This week the co tapped Kenneth Leet, a longtime investment banker, to explore possible asset sales and alliances. A spokeswoman says the co "has no imminent plans" for any divestitures or alliances. But Mr. Leet's presence is generating speculation among investors and industry observers that one or more of the co's European premium brands, Land Rover, Volvo, Aston Martin and Jaguar, could be shopped. At the same time, there are rumblings that selling a portion of the co's healthier Ford Motor Credit could yield more proceeds. Either step, while not easy, could be crucial to Ford's effort to exit from its worst businesses and mend its core N-American operations. Like rival General Motors (GM), Ford is facing a combination of steep employee-benefit bills, sagging mkt share, rising borrowing costs and disappointing financial results. "They're in a tough spot," says John Novak, an auto-stock analyst with Morningstar who advises investors to consider buying Ford shares, if they fall to $4.70. "Selling brands or part of Ford Credit is something they should consider."
Barron's Online discusses flash memory sector, saying that flash memory chips have gained in popularity with the rise of digital music players. The technology is increasingly used to store pictures in digital cameras. Flash memory combines the best features of HDDs and the DRAM chips used for a PC's main memory. Like a HDD, flash memory retains information when the power to a computer is turned off, but like DRAM, it can be as much as 50 times as fast as disks. Sales of the kind of flash memory chips used in the iPod should grow 16% this year, to $12.3bn, faster than expected overall chip sales growth of 10% globally, according to IC Insights. But it's quite possible the next 6 months will see a business tsunami of sorts, a rising tide of memory chip inventories that will depress prices and hurt memory chip manufacturers such as Samsung Electronics, Micron (MU), and tool makers that sell to them, such as Lam Research (LRCX). Flash chip makers have been rapidly adding manufacturing capacity. At the end of the day, flash is a commodity, just like all memory technologies, and oversupply can crush prices and profitability. There may be a small bright spot in co's with design innovations that give them some pricing power, such as SanDisk (SNDK). But the rush by competitors to win the business of Apple and others may well leave too many chips on hand, echoing an inventory correction that damaged chip makers in late '04. "If you're pushing all this product out of these chip factories into the mkt, it's like a wave," says Tim Arcuri, of Citigroup, describing the rising tide of inventories across the chip business. "If it gets bought, there's no problem, but if it hits a wall, it will reverberate back upon you in 6 months' time."
Barron's Online reports that insider buying at Goodman Global (GGL) has been heating up, even as investor enthusiasm has cooled off significantly since the heating, ventilation and air-conditioning unit-maker went public in April. On July 31 and Aug. 1, 10 Goodman execs, including the co's CEO and CFO, spent a total of $2m to buy 162K shares.
The DigiTimes held interview with SigmaTel (SGTL) CEO Ron Edgerton. Mr Edgerton told that "I think that our printer solutions will do well in the 2H06, progressively increasing their contribution to SigmaTel's business. Digital-camera solutions also have a good perspective, but it will be a little bit longer before they begin generating high sales. Their time will likely come in the 1H07. In fact, we are now transferring some technologies from the digital-camera project and putting them into our core MP3 product. We think that our next-generation multimedia chip will incorporate some image processing technologies, such as color-space conversion and compression, as a way of ensuring video quality." CEO also stated that the co does not sell anything directly to Apple (AAPL). However the co sells to Asustek and Asustek uses SigmaTel products (STMP3550 chip) in iPod Shuffles. Asustek currently contributes about 10% of SigmaTel revenues. rest of teh interwiev discusses patents, with CEO saying that "we have over 300 patents filed or issued, and many of them were filed 2-3 years ago. As you may know, it takes about 2-3 years in the US for a patent to be processed by the patent office, so every qrtr, we issue a significant number of patents. That makes it more and more difficult for our competitors to design products around our patents." "Additionally, we acquired a set of original MP3 patents known as the Moon-Hwang patents, and we think they help to reinforce our pioneering position in the MP3 mkt. These patents are actually system-level patents, and we believe that they cover all MP3 players manufactured in China. This helps us to protect our investments in this business."
Thursday, August 03, 2006
Calls of Note Part 4
- ThinkEquity believes Dell Computer (NASDAQ:DELL) will use AMD (NYSE:AMD) processors for up to 20% of its PCs, increasing AMD revenues by $500m in CY07. Firm expects the announcements to come during DELL's September 12 analyst meeting, with boxes ready to be shipped. They are confident that this will occur and as such, we are adding this to their estimates. Additionally, they think AMD is winning share versus Intel on performance (not price) and seeing stable ASPs. Major OEMs (including and beyond IBM) are slated to increase AMD's share, particularly in servers.
* Based on these sizeable share gains, the synergies and strategic importance of ATI, and the extremely low valuation, the firm strongly recommends that investors buy AMD shares at these levels. Firm notes that if they could upgrade AMD higher than BUY, they would.
* Based on these sizeable share gains, the synergies and strategic importance of ATI, and the extremely low valuation, the firm strongly recommends that investors buy AMD shares at these levels. Firm notes that if they could upgrade AMD higher than BUY, they would.
* Believes AMD will begin supplying MPUs for DELL PCs. Firm's sources in the supply chain have indicated that DELL will use AMD processors for shipments in 4Q06 and CY07. This could represent substantial upside to AMD's revenues they believe it could increase revenues in CY07 by $500 million. When ATI begins taking meaningful share from NVDA in this business (2H07), revenues could increase even further.
* Firm believes the announcements could come at DELL's analyst meeting. They believe the announcement of AMD processors for desktops will come during DELL's September 12 analyst meeting, with boxes ready to be shipped. Thinks DELL AMD notebooks will be shipped in 1QCY07.
* Firm notes they are so confident of this new DELL business that they are raising estimates:
Rev: 3QCY06 remains at $1,335.0 million; CY06 from $5,353.5 million to $5,453.5 million; CY07 from $5,800 million to $6,200 million. EPS: 3QCY06 remains at $0.35; CY06 from $1.45 to $1.49; CY07 from $1.75 to $2.00.
Rating remains BUY. Raising price target from $27 to $30.
* Firm notes they are now significantly above the Street consensus:
Revs: 3QCY06 at $1,305.0 million; CY06 at $5,281.4 million; CY07 at $5,877 million. EPS: 3QCY06 at $0.23; CY06 at $1.11; CY07 at $1.29.
Notablecalls: Think this is an actionable call. Analyst sure has conviction & conviction is what I like coming from an analyst.
Calls of Note Part 3
- Jefferies is upgrading Cogent (NASDAQ:COGT) to Buy from Underperform as they believe Q2 results represent the bottom. Revenue recognition on large existing contracts provides a high degree of visibility into at least a few quarters of strong sequential growth. In addition, the award activity over the next year should improve markedly from the previous year.
Cogent missed firm estimates by a significant margin, reporting revenue and operating EPS of $13.2MM and $0.05, respectively, vs. near consensus estimates of $27.2MM and $0.10. Shifts in revenue to the second half of 2006 due to revenue recognition were the primary reason for the shortfall.
There were positives on the call. Firm learned that the company has won over $10MM of additional smaller contracts, of which some can likely be recognized as revenue in 2006. Management disclosed their expectation of another Venezuela contract in Q4 associated with the Presidential election. Cogent also disclosed that the delays in revenue recognition associated with DHS were not due to any technical problems with the system and that a portion of the revenue from these shipments should be recognized in 2H06. Finally, management offered greater visibility by supplying EPS guidance for the year of $0.39- 0.42, excluding FAS 123 and legal expenses of approximately $0.06 by our estimates.
Cogent missed firm estimates by a significant margin, reporting revenue and operating EPS of $13.2MM and $0.05, respectively, vs. near consensus estimates of $27.2MM and $0.10. Shifts in revenue to the second half of 2006 due to revenue recognition were the primary reason for the shortfall.
There were positives on the call. Firm learned that the company has won over $10MM of additional smaller contracts, of which some can likely be recognized as revenue in 2006. Management disclosed their expectation of another Venezuela contract in Q4 associated with the Presidential election. Cogent also disclosed that the delays in revenue recognition associated with DHS were not due to any technical problems with the system and that a portion of the revenue from these shipments should be recognized in 2H06. Finally, management offered greater visibility by supplying EPS guidance for the year of $0.39- 0.42, excluding FAS 123 and legal expenses of approximately $0.06 by our estimates.
Notes COGT likely opens lower than its close due to Q2 results. Based on the $4 of cash per share and C07 operating EPS estimate of $0.46, which excludes interest income, the stock is trading below 20x if COGT opens below $13. While the perceived risk is quite high at the moment, they believe buying COGT under 20x C07 operating EPS estimate is an excellent value. Firm's price tgt in $15.
Notablecalls: As you all know I don't like highlighting upgrades/downgrades on this page but I think this one bears watching. First of all, Jeffco has been dead right on COGT with their Underperform rating. Secondly, COGT's biggest chearleader Morgan Stanley is downgrading the shares today. If that's not capitulation then what is? This may very well be a bottom for COGT.
Calls of Note Part 2
- UBS notes Sun's (NASDAQ:SUNW) potential reminds them of Xerox 4-5 years ago when the market was skeptical of new CEO Anne Mulcahy who cut costs while benefiting from new products & monetizing assets. Many aspects of the potential turnaround seem familiar such as both have large, sticky customer bases, high market share, hidden assets, bloated cost structure & solid cash flow potential.
Unlike Xerox, Sun's turnaround may be quicker since it doesn't have to worry about high debt levels. Xerox also had to deal with earnings restatements. With Sun's net cash position and current revenue growth, it seems much stronger than Xerox was a few years ago & solid new products could help drive quicker improvement.
Firm also notes they just met with CEO Jonathan Schwartz who seems serious about cost cutting & believe he (& CFO Mike Lehman) have a better handle on Sun's cost structure than many believe. Firm believes shares can gain momentum as investors become more comfortable with management's plan & see sustainable improvements with new products.
Unlike Xerox, Sun's turnaround may be quicker since it doesn't have to worry about high debt levels. Xerox also had to deal with earnings restatements. With Sun's net cash position and current revenue growth, it seems much stronger than Xerox was a few years ago & solid new products could help drive quicker improvement.
Firm also notes they just met with CEO Jonathan Schwartz who seems serious about cost cutting & believe he (& CFO Mike Lehman) have a better handle on Sun's cost structure than many believe. Firm believes shares can gain momentum as investors become more comfortable with management's plan & see sustainable improvements with new products.
Firm's $6.25 target is based on about 1.3x FY07 EV/sales, slightly below Sun's pre-bubble range when margins were in the 10% range. Believes shares represent a compelling value. Reiterates Buy-2 rating.
Notablecalls: Not actionable but good to know category.
- Merrill Lynch notes that according to their industry sources, the tentative agreement between UPS (NYSE:UPS) and its pilots includes an immediate pay increase of nearly 18% for Captains, and 18%-25% for First Officers, effectively moving their pay in line with FedEx. Firm estimates the contract, which would be effective until December 2011, includes annual pay increases of 3%, and a 4% increase in 2012 (the year after the contract becomes amendable), above the 1.5% increase every 18 months under the prior contract. They estimate the immediate pay boost at approximately $88 million (or 6 cents per share).
ML believes the tentative union contract modifies UPS's defined benefit plan, whereas pilots retiring after the age of 60 will receive an annual payment of $3,000 per each year of service. Firm thinks this could result in a $7.2 million (less than one cent per share) cost in the first year, assuming that half of the 212 15-year Second Officers, and a nominal 5% of the 912 15-year Captains retire.
Maintains Sell rating.
Notablecalls: Additional costs? Can't be good news.
Calls of Note Part 1
- Thomas Weisel Partners comments on Rackable Systems (NASDAQ:RACK) after management meetings and numerous calls with investors: The general summary they can provide after two days with management is that the Rackable story is not very well understood by the investment community and that firm's bullish outlook on the company's prospects (35-40%-plus top-line growth for several years with expanding margins seems likely) appear well justified, with strong long-term pipeline of opportunity apparently in place.
To summarize and answer the primary investor concerns they are hearing:
* Rackable is not losing one or more of its "Big 3" customers: All three are still ordering; Amazon was down as expected after strong rollouts, and one of the other two is pausing to re-evaluate Intel.
* Rackable is unlikely to lose significant business and margin due to the Woodcrest transition: Rackable wins on TCO, which is unchanged regardless of competitor or future processor chosen. Management has actually seen less aggression from Dell lately, but it is possible this could change, thus, continued steady gross margin guidance of 22-24% (long-term goal still 25-28%).
* Operating margins are NOT on a steady downward trend: Higher infrastructure spend is limiting operating margin while new salespeople ramp in the near term- TWP expects return to higher end of target 12-15% range once leverage is achieved (versus 10% assumption for 3Q06).
* Growth opportunities in new areas remain numerous: Large ($5mn) recent storage win a sign of things to come in that new market. Large 10%-plus deals in government and financial services appear on tap for 2007, while penetration of mid-level customers continues (50% q/q growth in the most recent quarter with five incremental $1mn-plus customers).
Valuation appears to be attractive: When accounting for the strong expected growth rate, shares appear to be trading at an attractive valuation of 15.4x 2007E EPS of $1.25, which represents just a 0.4x PEG rate, well below the peer group of 1.5x CY07E PEG.
Notablecalls: Not actionable but good to know category. RACK looks like a broken story providing only occasional trading opportunities.
To summarize and answer the primary investor concerns they are hearing:
* Rackable is not losing one or more of its "Big 3" customers: All three are still ordering; Amazon was down as expected after strong rollouts, and one of the other two is pausing to re-evaluate Intel.
* Rackable is unlikely to lose significant business and margin due to the Woodcrest transition: Rackable wins on TCO, which is unchanged regardless of competitor or future processor chosen. Management has actually seen less aggression from Dell lately, but it is possible this could change, thus, continued steady gross margin guidance of 22-24% (long-term goal still 25-28%).
* Operating margins are NOT on a steady downward trend: Higher infrastructure spend is limiting operating margin while new salespeople ramp in the near term- TWP expects return to higher end of target 12-15% range once leverage is achieved (versus 10% assumption for 3Q06).
* Growth opportunities in new areas remain numerous: Large ($5mn) recent storage win a sign of things to come in that new market. Large 10%-plus deals in government and financial services appear on tap for 2007, while penetration of mid-level customers continues (50% q/q growth in the most recent quarter with five incremental $1mn-plus customers).
Valuation appears to be attractive: When accounting for the strong expected growth rate, shares appear to be trading at an attractive valuation of 15.4x 2007E EPS of $1.25, which represents just a 0.4x PEG rate, well below the peer group of 1.5x CY07E PEG.
Notablecalls: Not actionable but good to know category. RACK looks like a broken story providing only occasional trading opportunities.
Color on quarter: Starbucks (SBUX)
Several firms are commenting on Starbucks (NASDAQ:SBUX) after the co released weaker than expected comp numbers and uninspiring guidance last night:
* Deutsche Bank notes store expansion and same store sales +6%, plus modest margin upside, drove a spot-on quarter. However, a slowdown in July same store sales stole the show as the introduced complexity from serving newer items slowed transaction growth. We expect the shares to react negatively to an emerging reality: growth may come harder as the company moves further away from its core coffee business.
Tomorrow will be only a modest reckoning: selling pressure in the shares by value players who no longer see value. Or short term reaction to a dim Wall Street view of weaker than expected July comps. Longer-term, we are concerned that this company may be transitioning from a great global grower with a unique, unassailable franchise to reactive, real estate 'reacher' that builds stores and adds non-core products to get growth, but does not quite have the means to sustain once the capital investment is made. The implications for returns are quite onerous. Firm notes they have never quite been able to reconcile how to make economic sense of the rapid store build. Qualitatively, it doesn't matter whether it's going up in Indonesia or Indochina. Growth zealots be forewarned: it's awfully hot in some of those BRICS (Brazil, Russia, India, China) management refers to as the growth portals for this millennium. And if Mr. Gore and others are right, it's getting warmer. Now that doesn't make me reach for a nice hot cup of coffee. Spot on quarter, but +4% July comp highlights valuation risk Despite the big headline miss on July same store sales (+4% vs. our +6% estimate), the quarter came in at firm's expectations, and broadly speaking, growth prospects are still attractive. In our view, the July comp highlights the risks we discussed in their initiation research- the potential slowing of domestic sales growth and the potential for revaluation of the shares to reflect it. Expects the stock to come in on this news, and possibly remain under pressure for the near-term, unless or until same store sales trends re-accelerate.
In short, they are not condemning SBUX as a broken story. Far from it. They are simply pointing out that this quarter's mixed news is a key example of why SBUX, at current valuation, is a risky investment proposition. No growth story is perfect, but they believe SBUX has been priced for perfection for some time. Firm expects some considerable downward pressure on the shares and volatility over the coming few months as the capacity constraint issue plays out and share valuation adjusts. At some point, they expect an attractive buying opportunity to present itself.
Firm is maintaining their F2007 ests, Hold rating but lowers $37 from $38.
* Deutsche Bank notes store expansion and same store sales +6%, plus modest margin upside, drove a spot-on quarter. However, a slowdown in July same store sales stole the show as the introduced complexity from serving newer items slowed transaction growth. We expect the shares to react negatively to an emerging reality: growth may come harder as the company moves further away from its core coffee business.
Tomorrow will be only a modest reckoning: selling pressure in the shares by value players who no longer see value. Or short term reaction to a dim Wall Street view of weaker than expected July comps. Longer-term, we are concerned that this company may be transitioning from a great global grower with a unique, unassailable franchise to reactive, real estate 'reacher' that builds stores and adds non-core products to get growth, but does not quite have the means to sustain once the capital investment is made. The implications for returns are quite onerous. Firm notes they have never quite been able to reconcile how to make economic sense of the rapid store build. Qualitatively, it doesn't matter whether it's going up in Indonesia or Indochina. Growth zealots be forewarned: it's awfully hot in some of those BRICS (Brazil, Russia, India, China) management refers to as the growth portals for this millennium. And if Mr. Gore and others are right, it's getting warmer. Now that doesn't make me reach for a nice hot cup of coffee. Spot on quarter, but +4% July comp highlights valuation risk Despite the big headline miss on July same store sales (+4% vs. our +6% estimate), the quarter came in at firm's expectations, and broadly speaking, growth prospects are still attractive. In our view, the July comp highlights the risks we discussed in their initiation research- the potential slowing of domestic sales growth and the potential for revaluation of the shares to reflect it. Expects the stock to come in on this news, and possibly remain under pressure for the near-term, unless or until same store sales trends re-accelerate.
In short, they are not condemning SBUX as a broken story. Far from it. They are simply pointing out that this quarter's mixed news is a key example of why SBUX, at current valuation, is a risky investment proposition. No growth story is perfect, but they believe SBUX has been priced for perfection for some time. Firm expects some considerable downward pressure on the shares and volatility over the coming few months as the capacity constraint issue plays out and share valuation adjusts. At some point, they expect an attractive buying opportunity to present itself.
Firm is maintaining their F2007 ests, Hold rating but lowers $37 from $38.
* Bear Stearns notes they expect investors to treat the sales slowdown as a macro-related slowing. The 4% comp is the slowest since December 2001 and the first monthly same store sales gain below 6% since that time. Firm expects SBUX shares to correct sharply but would be a buyer on weakness. Notes that historically buying SBUX shares at 30x forward pre-option earnings has proved lucrative. Their pre-option FY 2007 EPS estimate is $0.98 ($0.87 post option estimate plus estimated $0.11 option impact) suggesting that $29-$30 would be an attractive entry point. The long term prospects for the company are underscored by another acceleration of expansion plans - FY 2006 openings were bumped to 2,000 and a FY 2007 goal for 2,400 openings was established. Firm continues to rate SBUX shares Outperform.
* Goldman Sachs notes the focus will be on the disappointing July SSS trend (4% versus GS estimate 6%) which showed further multi-year deceleration. The company offered an explanation which included bottlenecks in the AM daypart due to a greater sales mix of cold blended beverages. Firm believes economic factors are also to blame.
They expect significant downward pressure on shares today as the market establishes a new multiple reflective of a more modest SSS expectation (expect 4% for August). Importantly, the overall growth profile of the company remains unchanged as the company is accelerating unit development again in 2007. SSS slowdown notwithstanding, Firm is maintaining their Buy rating on shares. They continue to believe Starbucks' business fundamentals remain tops in the industry (return on invested capital of ~18%), growth opportunities, particularly internationally, remain robust and EPS visibility remains high. Firm has lowered their price target to $38 (from $44) and have made modest EPS revisions to reflect a more moderate sales outlook. New 2006, 2007, and 2008 EPS estimates are $0.72, $0.89, and $1.09, all down 1c from prior estimates.
Notablecalls: Must say I don't have a clear view what to do with SBUX here. The stock is a notorious bouncer but it seems people are becoming gradually unwilling to pay $4 for coffee. Macro issue. Think it may have some more downside in it. Would not be surprised to see a downgrade today or in the coming days.
Notablecalls - Paperstand
The CNET News reports that after numerous class action lawsuits and criticism from advertisers, the major Web search co's finally announced on Wednesday plans to work together with two industry groups to quantify click fraud. The Interactive Advertising Bureau and the non-profit Media Rating Council said they are teaming with Google, Yahoo, Microsoft, Ask.com, LookSmart and others to form the Click Measurement Working Group. The group's mission is to establish guidelines for what constitutes valid clicks and invalid clicks on ads. Guidelines can help the industry measure how prevalent click fraud really is. Third-parties who sell click-fraud combatting services to advertisers claim that click fraud rates are as high as 30%.
Barron's Online discusses coal stocks, saying that some coal co shares slipped more than 20%, given temporary fears about ample supplies and temperate weather weakening demand. But some coal miners have differentiated themselves and their stocks still look attractive, given long-term projections for coal demand growth. Consol Energy (CNX) produces natural gas and coal. The price of gas is recovering from fears of oversupply given the national heat wave. And Peabody Energy (BTU), with a small percentage of sales outside the US, hopes to boost its exposure to high-growth coal demand in China and India with a proposed acquisition in Australia. "If you have a long-term time horizon… coal power demand is growing," says Basu Mullick, manager of the Neuberger Berman Partners Fund. "The cheapest source of power is coal."
According to the Barron's Online, Dow Chemical (DOW) CEOAndrew Liveris spent $688K to buy 20K of the co's shares, boosting his stake to 186K shares, while CFO Geoffrey Merszei paid $511K on 15K shares, increasing his stake to 42K shares. Corporate vice president and general counsel Charles Kalil spent $342K to buy 10K shares. Kalil now holds 32K Dow shares. Ben Silverman, director of research at InsiderScore.com, says that the cluster of buys after last week's price plunge may mean that insiders at Dow "feel that the bad news is baked into the stock."
Barron's Online discusses coal stocks, saying that some coal co shares slipped more than 20%, given temporary fears about ample supplies and temperate weather weakening demand. But some coal miners have differentiated themselves and their stocks still look attractive, given long-term projections for coal demand growth. Consol Energy (CNX) produces natural gas and coal. The price of gas is recovering from fears of oversupply given the national heat wave. And Peabody Energy (BTU), with a small percentage of sales outside the US, hopes to boost its exposure to high-growth coal demand in China and India with a proposed acquisition in Australia. "If you have a long-term time horizon… coal power demand is growing," says Basu Mullick, manager of the Neuberger Berman Partners Fund. "The cheapest source of power is coal."
According to the Barron's Online, Dow Chemical (DOW) CEOAndrew Liveris spent $688K to buy 20K of the co's shares, boosting his stake to 186K shares, while CFO Geoffrey Merszei paid $511K on 15K shares, increasing his stake to 42K shares. Corporate vice president and general counsel Charles Kalil spent $342K to buy 10K shares. Kalil now holds 32K Dow shares. Ben Silverman, director of research at InsiderScore.com, says that the cluster of buys after last week's price plunge may mean that insiders at Dow "feel that the bad news is baked into the stock."
Wednesday, August 02, 2006
Color on quarter: CheckFree (CKFR)
- Shares of CheckFree (NASDAQ:CKFR) got clobbered in after market trading as the co reported lower than expected transaction growth. The guidance itself wasn't all that bad. We have several firms out defending the shares:
* D.A. Davidson notes that despite many investors' shaken confidence, they still believe we are early in the growth cycle of the Internet bill payment industry. While seasonality may become a new trend, the firm notes that none of the reporting vendors have reported that the growth slowdown has continued into the current quarter. CKFR remains the undisputed heavyweight in Internet bill payment. Davidson believes the aftermarket reaction last night was extreme. At $33.50, the stock trades at the very attractive multiples of 17x and 8.8x current year EPS and EBITDA and at 15x new fiscal 2008 estimate and at 7.6x EV/2008 EBITDA. Firm is lowering their target multiple from 30x to 25x FY 2007 EPS to reflect newer risk and competitive valuation levels. New price target is $55, down from $65. Maintains our BUY rating.
* JP Morgan says they are sticking with their Overweight after the quarter view and believe anticipated share weakness on the back of disappointing F4Q results and guidance reported last night will create an excellent buying opportunity to invest in a high-quality name in CKFR.
Reported $0.39 missed consensus of $0.41, but included $0.01 from a higher tax rate. Revenue of $225M was short of us/consensus of $229M/$230M due to a surprise deceleration of q/q trans. growth to 3% vs. firm's 7% target. They view the transaction issue as temporary and not a new trend as July volumes have bounced back. Pricing, sub growth and attrition remain normal and believe banks continue to rely heavily on bill pay to retain/acquire new customers, so they believe the long-term case for mid-twenties secular trans. growth holds.
New FY07 guidance of $1.90-$1.94 is shy of consensus of $1.93, but ahead of firm's $1.86 view. We're raising our est. to $1.90, which implies a normalized 19-20% yoy growth rate excl. TransPoint, putting CKFR at the higher-end of growth among its peers. F1Q guidance is weak again, but they view it as conservative and the 2H hockey stick is doable with scale and buy-backs as a buffer.
* Jefferies notes that an industry-wide pause in online payment activity during the June quarter should prove anomalous and already seems to be rebounding. Nevertheless, market skepticism has led to one of the most attractive valuations in memory for market leader CheckFree.
The shares traded at ~$34 in the aftermarket yesterday, yielding an all-time low valuation: 15.7x firm's CY2007 EPS estimate compared to the historic low of 19.3x. Moreover, this multiple does not account for CheckFree's $4 per share in net cash. On an EV/EBITDA basis, the valuation also looks quite low, at 8.4x CY2007 projection. Finally, the comparison to other payment processing peers is quite favorable based on the aftermarket quotations. Versus peers, the implied multiple is 16% below average on a PE basis and 14% on an EV/EBITDA basis. Even so, the firm ise adjusting their price target for CheckFree stock to $59 from $62 on account of peer group multiple contraction.
Firm believes the market is overreacting to the 4Q06 disappointment and believes today's price offers a rare entry point in the stock of a premium growth franchise at a steep discount valuation.
Notablecalls: Tricky situation. On one hand CKFR shares now look cheap. On the other hand even the management couldn't give any reasonable explanation for the miss in transaction growth. Note that both DGIN and ORCC had similar problems. Must say I did find some comfort in comments that transaction trends have rebounded to normal levels in July. Maybe it's just an anomaly. Think CKFR will bounce. Not quite sure it will happen today but rather in the coming weeks.
* D.A. Davidson notes that despite many investors' shaken confidence, they still believe we are early in the growth cycle of the Internet bill payment industry. While seasonality may become a new trend, the firm notes that none of the reporting vendors have reported that the growth slowdown has continued into the current quarter. CKFR remains the undisputed heavyweight in Internet bill payment. Davidson believes the aftermarket reaction last night was extreme. At $33.50, the stock trades at the very attractive multiples of 17x and 8.8x current year EPS and EBITDA and at 15x new fiscal 2008 estimate and at 7.6x EV/2008 EBITDA. Firm is lowering their target multiple from 30x to 25x FY 2007 EPS to reflect newer risk and competitive valuation levels. New price target is $55, down from $65. Maintains our BUY rating.
* JP Morgan says they are sticking with their Overweight after the quarter view and believe anticipated share weakness on the back of disappointing F4Q results and guidance reported last night will create an excellent buying opportunity to invest in a high-quality name in CKFR.
Reported $0.39 missed consensus of $0.41, but included $0.01 from a higher tax rate. Revenue of $225M was short of us/consensus of $229M/$230M due to a surprise deceleration of q/q trans. growth to 3% vs. firm's 7% target. They view the transaction issue as temporary and not a new trend as July volumes have bounced back. Pricing, sub growth and attrition remain normal and believe banks continue to rely heavily on bill pay to retain/acquire new customers, so they believe the long-term case for mid-twenties secular trans. growth holds.
New FY07 guidance of $1.90-$1.94 is shy of consensus of $1.93, but ahead of firm's $1.86 view. We're raising our est. to $1.90, which implies a normalized 19-20% yoy growth rate excl. TransPoint, putting CKFR at the higher-end of growth among its peers. F1Q guidance is weak again, but they view it as conservative and the 2H hockey stick is doable with scale and buy-backs as a buffer.
* Jefferies notes that an industry-wide pause in online payment activity during the June quarter should prove anomalous and already seems to be rebounding. Nevertheless, market skepticism has led to one of the most attractive valuations in memory for market leader CheckFree.
The shares traded at ~$34 in the aftermarket yesterday, yielding an all-time low valuation: 15.7x firm's CY2007 EPS estimate compared to the historic low of 19.3x. Moreover, this multiple does not account for CheckFree's $4 per share in net cash. On an EV/EBITDA basis, the valuation also looks quite low, at 8.4x CY2007 projection. Finally, the comparison to other payment processing peers is quite favorable based on the aftermarket quotations. Versus peers, the implied multiple is 16% below average on a PE basis and 14% on an EV/EBITDA basis. Even so, the firm ise adjusting their price target for CheckFree stock to $59 from $62 on account of peer group multiple contraction.
Firm believes the market is overreacting to the 4Q06 disappointment and believes today's price offers a rare entry point in the stock of a premium growth franchise at a steep discount valuation.
Notablecalls: Tricky situation. On one hand CKFR shares now look cheap. On the other hand even the management couldn't give any reasonable explanation for the miss in transaction growth. Note that both DGIN and ORCC had similar problems. Must say I did find some comfort in comments that transaction trends have rebounded to normal levels in July. Maybe it's just an anomaly. Think CKFR will bounce. Not quite sure it will happen today but rather in the coming weeks.
Color on mid-quarter update: Adobe Systems (ADBE)
- Mostly positive comments on Adobe Systems (NASDAQ:ADBE) after the co released an in-line mid-quarter update. Adobe's intra-quarter update guided FY06 Q3 revenues and EPS to the previously targeted ranges of $580M-$610M and $0.25-$0.27.
RBC Capital notes that with no direction given as to high-end or low-end, they believe this to be "middle of", as last quarter's intra-quarter update clearly stated they would meet low-end of the range.
While this is a positive for the company, they are expecting some of the top-line revenue to be attributed to a currency tail-wind, which they estimate at approximate $7M. Regardless, Street sentiment over the past few weeks had factored in a low-end quarter, which now seems unlikely.
Based on common themes in the software sector this quarter, the firm would expect EPS to be in the mid to high-end of the company's targeted range, benefiting from a lower share count and higher interest income than the company previously guided to. As the product cycle continues to age, investors will be clearly focused on the company's planned launch of Acrobat 8 in Q4 and CS3 in Q2 of next year.
With 5-weeks remaining in the quarter, they believe the focus on the call will surround the regional release cycle for the two upcoming products, the associated expenses, and R&D efforts for cross-platform (MacTel) development.
Reits Outperform and $36 tgt.
Notablecalls: I think ADBE's mid-quarter update was positive and I expect the shares to trade around $30 level today. Any price above $30.50 levels makes it a short. But most likely not a daytrade.
RBC Capital notes that with no direction given as to high-end or low-end, they believe this to be "middle of", as last quarter's intra-quarter update clearly stated they would meet low-end of the range.
While this is a positive for the company, they are expecting some of the top-line revenue to be attributed to a currency tail-wind, which they estimate at approximate $7M. Regardless, Street sentiment over the past few weeks had factored in a low-end quarter, which now seems unlikely.
Based on common themes in the software sector this quarter, the firm would expect EPS to be in the mid to high-end of the company's targeted range, benefiting from a lower share count and higher interest income than the company previously guided to. As the product cycle continues to age, investors will be clearly focused on the company's planned launch of Acrobat 8 in Q4 and CS3 in Q2 of next year.
With 5-weeks remaining in the quarter, they believe the focus on the call will surround the regional release cycle for the two upcoming products, the associated expenses, and R&D efforts for cross-platform (MacTel) development.
Reits Outperform and $36 tgt.
Notablecalls: I think ADBE's mid-quarter update was positive and I expect the shares to trade around $30 level today. Any price above $30.50 levels makes it a short. But most likely not a daytrade.
Notablecalls - Paperstand
The Wall Street Journal "Heard on the Street" column discusses SprintNextel (S), saying that it might be time for investors grit their teeth and dial into shares of the co. The co hasn't gotten a great response lately, with its share price falling about 19% since a high in April. Investors have soured on above-avg subs turnover, clumsy mgmt of investor expectations and the daunting chore of wading through the meshed financial statements of two big co's. Amid a slide this week, even fans of the stock aren't predicting a jolt tomorrow when the co reports its 2Q results. But hold the phone. Now that the US wireless business is dominated by 3 giants, Cingular Wireless, Verizon Wireless and Sprint Nextel, these co's costs quietly have been dropping faster than the prices the co's charge customers. With Sprint Nextel expecting $41bn in sales this year, even modest cost control can boost free cash flows in a big way. After surveying this triumvirate, a growing herd of bulls see a decent case for Sprint Nextel ringing up ample profits over the next few years for investors who have the gumption to buy the stock now. "The things that are keeping ppl out of the shares today are short-term issues," says Michael Hodel, of Morningstar who gives the co his highest rating in the sector and has a $28 fair-value est on its shares. "It's a co that's cheap today, but will also likely have a lot of cash flow and be a dominant player for a long time in the wireless business."
According to The WSJ's "Tracking the Numbers" column, some execs are reaching for an odd tactic in an expanding battle against short sellers. The execs, at smaller co's that often don't trade on big exchanges, are pushing shareholders to lock away their physical stock certificates so the short sellers can't get their hands on the shares. Stock trading rarely involves the actual exchange of physical stock certificates anymore, because Wall St. trades and tracks most stocks electronically. But in a perhaps quixotic effort, the execs hope they can short-circuit the short sellers by rounding up stock certificates and taking them out of the electronic loop. The activity is legal, and many investors and scholars argue it helps share prices to adjust to changes in a co's outlook. But a number of execs, at co's like Fairfax Financial Holdings (FFH) and Overstock.com (OSTK) argue short sellers are manipulating their shares. They are challenging the shorts with lawsuits, private investigations and publicity campaigns. Few co's have been able to prove improper trading, but the stock-certificate effort is a sign the battle between short sellers and aggrieved execs is widening. By getting shareholders to take physical possession of their stock, the execs hope, brokers won't be able to lend the shares out to short sellers. "The problem is shorting has gotten to be so popular that there's no accountability," says Wes Christian, of Christian, Smith & Jewell.
The NY Times reports that Kohlberg Kravis Roberts & Co and Silver Lake Partners appeared close to a deal last night to acquire the semiconductor unit of Philips Electronics. People involved in the deal said the two firms would pay about €8bn, or more than $10.2bn, for the unit, surpassing bidders that included the Texas Pacific Group and the Blackstone Group, and a group that included Bain Capital.
Barron's Online discusses Tiffany (TIF), saying that the co's little blue boxes have inspired generations of consumers in search of luxury, romance and elegance. But investors have been singing the blues as of late. Though the luxury retailer has been registering double-digit growth rates in international sales in Asia and Europe, the stock underperformed the mkt because of concern over the health of consumer spending that pressured Q1 sales in the US. Tiffany shares are down 18% so far this year. But the stock is attractively valued for long-term investors given Tiffany's global brand power and improving fundamentals. More innovative, modern jewelry sold at higher prices, remodeled flagship stores and aggressive advertising should help drive sales in the 2H06, particularly in the US with easier same-store sales comparisons. The co also continues to buy back shares. "For a couple years Japan was an albatross," but Tiffany has taken advantage of the improving economy by offering more gold and colored gems to trend-conscious Japanese women, says Larry Babin, of Victory Capital Mgmt. While the US retail mkt has shown cracks recently, Babin says "we think [Tiffany] is a brand that's going to survive and prosper."
Barron's Online reports that Technology Crossover Ventures, a technology venture capital firm, has bought 2.45m shares for $50m, or $19.99 each, on the open mkt, adding to its burgeoning trove of Netflix (NFLX) stock. The purchases boosted TCV's Netflix holdings to 13.2m shares, a 19.7% stake.
Tuesday, August 01, 2006
Calls of Note Part 1
- Morgan Stanley reits their Underweight rating and $85 tgt on Garmin (NASDAQ:GRMN) ahead of results (Aug 2). Firm notes that evidence of Tom Tom product delays in Europe might signal a share shift to Garmin in 2H06. However, recent announcements from Pioneer, Philips and Fujitsu-Siemens confirm their expectation that Garmin will face increased competition in the PND market from established CE companies in 2H06E and that this might put further pressure on PND pricing, market share and margins going into FY07E.
Firm is raising their FY06E US market PND estimate from 1.9 mm to 2.5 mm, and reducing European estimate from 8.3 mm to 8.0 mm, bringing their forecast for global market PND units to ~ 11 mm. They have also increased their assumption for GRMN's PND market share to 23.6%, implying GRMN sells 2.5 mm PNDs in FY06E.
At 24.8x FY06E EPS, they believe the market is pricing in a bullish scenario for PND unit growth and GRMN market share for FY06E. A recent history of stock price underperformance in spite of positive earnings surprises implies that high expectations are likely baked into stock price.
Notablecalls: Morgan Stanley has been dead wrong on GRMN. Would you buy a PND from Pioneer, Philips or Fujitsu-Siemen? Ok, maybe Philips. But not from the other two. I think the fact of Mother Morgan capitulating ahead of results will provide us with one upside day. Yesterday's high should work as a trigger. Also check out the note from Soleil yesterday.
Firm is raising their FY06E US market PND estimate from 1.9 mm to 2.5 mm, and reducing European estimate from 8.3 mm to 8.0 mm, bringing their forecast for global market PND units to ~ 11 mm. They have also increased their assumption for GRMN's PND market share to 23.6%, implying GRMN sells 2.5 mm PNDs in FY06E.
At 24.8x FY06E EPS, they believe the market is pricing in a bullish scenario for PND unit growth and GRMN market share for FY06E. A recent history of stock price underperformance in spite of positive earnings surprises implies that high expectations are likely baked into stock price.
Notablecalls: Morgan Stanley has been dead wrong on GRMN. Would you buy a PND from Pioneer, Philips or Fujitsu-Siemen? Ok, maybe Philips. But not from the other two. I think the fact of Mother Morgan capitulating ahead of results will provide us with one upside day. Yesterday's high should work as a trigger. Also check out the note from Soleil yesterday.
Preview of Adbe Systems (ADBE)' mid-quarter update
- Couple of firms are commenting on Adobe Systems (NASDAQ:ADBE) ahead of firm's mid-quarter update scheduled for tonight:
* JP Morgan notes that as they say Leopards can not change their spots, and the firm has felt that way with Adobe the last three years. They did not agree that Creative Suite somehow caused Adobe to stop being a product cycle company when the stock was flying high, and still believe the product cycle will be the main driver going forward. That means to us that the August quarter should be the bottom in fundamentals before getting better with launch of Acrobat 8 in November quarter.
Any remaining sluggishness should show up now, setting table for improvement: there is no doubt that May was a weak quarter, and macro environment as shown by Dell pre-results are still lackluster. But the firm believes whatever weakness might be left should be factored in when management does intra-quarter update tonight. Adobe's customers are loyal and tend to upgrade and with the largest revenue generating products being upgraded over the November 2006-May 2007 time frame they believe things will get better after the August quarter.
JP Morgan continues their belief that a new Acrobat version plus seasonality likely provides about $50M of sequential lift in November, not the roughly $80 currently shown in consensus. So wthey think estimates still need adjustment before the stock can show steady improvement.
They are expecting $594.4M/$0.26 compared to consensus of $593M/$0.26 for the August quarter.
* UBS notes that based on field checks throughout the quarter which showed continued softness in creative product sales ahead of the Spring 2007 new product rollout, they would not be surprised to see ADBE bias its guidance towards the low end of the range. On the Acrobat front, the firm expects typical seasonality to be slightly be more pronounced this Q, as the new version is set to ship in F4Q.
Firm is modeling the low end of that range for sales ($585m), but the high end ($0.27) for EPS as they expect more cost synergies as the Macromedia expenditures continue to get rationalized. This compares to consensus of $593m and $0.26.
* JP Morgan notes that as they say Leopards can not change their spots, and the firm has felt that way with Adobe the last three years. They did not agree that Creative Suite somehow caused Adobe to stop being a product cycle company when the stock was flying high, and still believe the product cycle will be the main driver going forward. That means to us that the August quarter should be the bottom in fundamentals before getting better with launch of Acrobat 8 in November quarter.
Any remaining sluggishness should show up now, setting table for improvement: there is no doubt that May was a weak quarter, and macro environment as shown by Dell pre-results are still lackluster. But the firm believes whatever weakness might be left should be factored in when management does intra-quarter update tonight. Adobe's customers are loyal and tend to upgrade and with the largest revenue generating products being upgraded over the November 2006-May 2007 time frame they believe things will get better after the August quarter.
JP Morgan continues their belief that a new Acrobat version plus seasonality likely provides about $50M of sequential lift in November, not the roughly $80 currently shown in consensus. So wthey think estimates still need adjustment before the stock can show steady improvement.
They are expecting $594.4M/$0.26 compared to consensus of $593M/$0.26 for the August quarter.
* UBS notes that based on field checks throughout the quarter which showed continued softness in creative product sales ahead of the Spring 2007 new product rollout, they would not be surprised to see ADBE bias its guidance towards the low end of the range. On the Acrobat front, the firm expects typical seasonality to be slightly be more pronounced this Q, as the new version is set to ship in F4Q.
Firm is modeling the low end of that range for sales ($585m), but the high end ($0.27) for EPS as they expect more cost synergies as the Macromedia expenditures continue to get rationalized. This compares to consensus of $593m and $0.26.
While estimates could trend lower post the update, the firm believes the market is underestimating the revenue potential of the upcoming Acrobat product cycle but even more so underestimating the revenue upside checks lead them to believe is possible with the launching of its new creative offerings in the Spring of 2007.
Maintains Buy and $46 tgt.
Notablecalls: Wish we had some tier-2 firm upgrade the shares today gapping the stock up $50c. Would be a nice short. Think maybe the Prudential init with Overweight and $39 tgt will do.
Notablecalls - Paperstand
The Wall Street Journals "Heard on the Street" column discusses Walt Disney (DIS), saying that in his first 10 months on the job, Disney CEO Robert Iger launched into a frenzy of deal making and corporate reshaping that helped drive the stock price more than 20% higher. Now, as the dust settles, investors have shifted their gaze to next year, and some don't like what they see, prompting a string of analyst downgrades and est tweaks. But while the bears have flagged a variety of concerns, from tough earnings comparisons at Disney's theme parks to the rising cost of sports rights, a number of swing factors in the next year could come to the rescue. Among them: a recent round of cost-cutting at Disney's movie studio, the blockbuster performance of "Pirates of the Caribbean" and a shift in the amortization of the co's deal with the NFL. Kathy Styponias, of Prudential, says the current consensus is missing these fundamental factors. She recently bucked the bearish trend with an Overweight rating. "There is significant upward bias to Disney's F'07 growth rate," Ms. Styponias said. Ms. Styponias believes the stock will continue to outperform for three reasons: No other entertainment conglomerate has articulated its strategy as well as Disney; the co has a strong focus on ROIC; and there are few alternatives to put money to work. Janna Sampson, a portfolio manager at Oakbrook Investments, which manages about $1bn and holds 645K Disney shares for its clients, adds, "The stock was so depressed at the end of Michael Eisner's term that the rebound just brought us back to the realm of normality, rather than taking us to any level of concern."
The CNET reports that AMD (AMD) is still making strides in the server mkt at Intel's (INTC) expense as the larger co waits to see if a new processor can reverse its slide. AMD on Mon said it increased its share of the x86 server processor mkt to 25.9%, a number confirmed by Mercury Research's Dean McCarron, who tracks mkt share figures. Intel now holds 72.9% of the overall mkt for x86 processors, while AMD has 21.6%.
According to the WSJ, IBM (IBM) is expanding its use of AMD chips, a boon to AMD as rival Intel steps up a counterattack. IBM was the first big maker of server systems to adopt AMD's Opteron microprocessor, introduced in Apr'03. The computer maker initially focused only on high-performance applications, while competitors such as Hewlett-Packard (HPQ) and Sun Micro (SUNW) pushed Opteron more widely. At an event in NY today, however, IBM is announcing five new servers for mainstream business applications that will use a new version of the Opteron expected in several weeks. The announcement follows Dell's decision in May to adopt Opteron for high-end systems. IBM, Dell and H-P say they also plan to use a new Intel chip, code-named Woodcrest, that increases the performance of the Intel Xeon line that is most widely used in low-end servers. But some computer users continue to demand Opteron. "Clearly there are customers that have asked us for this processor capability, and we listened to the marketplace," said Susan Whitney, general manager of IBM's System X product line.
DigiTimes reports, citing sources at Taiwan notebook maker, that Dell (DELL) will launch a wide-range of AMD notebooks in the 4Q, targeting all mkt segments from low end to high end and offering models that use AMD Sempron and Athlon 64 processors, as well as Turion 64 x2 CPUs. The first AMD-based models, which will likely be launched in late Oct or early Nov, will be 15.4" notebooks manufactured by Quanta Computer for the consumer notebook mkt. Then, Dell will introduce 17" AMD-based models at the end of the year.
Barron's Online reports that Altria Group (MO) CEO Louis Camilleri recently unloaded $2.8m in shares of the co. Ben Silverman, director of InsiderScore.com, notes that whenever investors see selling on historic strength like Camilleri, "that's a good-time to take a look at whether you as an investor feel it's time to take profits."
Color on quarter: Whole Foods (WFMI)
- Several firms are commenting on Whole Foods (NASDAQ:WFMI) after the company managed to put out the most confusing earnings release of the year. Even the analysts can't figure it out.
* Thomas Weisel Partners notes FY07 guidance was essentially in line with firm's preview; however, they believe the sales component is conservative. Firm views their FY07 sales estimate of 25%, with comps of 10%, as achievable given the acceleration in square footage growth and the additional week in FY07. It appears that Whole Foods is not anticipating any additional sales from the acceleration in square footage and/or is generally being conservative with its preliminary guidance. Because of their above-guidance FY07 sales estimate, the firm is anticipating that higher pre-opening expenses will only marginally pressure operating income growth. FY07 EPS estimate of $1.65 (19% y/y growth) is below firm's sales growth on slightly higher pre-opening expenses, higher stock-based compensation expense and lower interest income.
Given the solid 3Q06 results in a difficult consumer environment, solid guidance combined with the stock's 21% decline since May 1 (including the after market trading) versus the S&P retail index, down 10% during the same time period, the firm believes the valuation appears particularly attractive at 32x FY07 EPS estimate of $1.65 (using the after market stock price of $53.50). They believe Whole Foods is not an ordinary company. Thinks WFMI has a high multiple because, unlike nearly every other retailer, the company has more than 15 years of solid growth ahead. Maintains Outperform.
* Goldman Sachs notes Whole Foods reported solid 3Q sales and better-than-expected EPS but ambiguously tempered 2007 expectations on increased preopening costs. Firm is lowering their fiscal 2007 EPS estimate only $0.02 to $1.65, still 17% year-over-year growth. They had expected the shares, after having declined 28% year-to-date, to rally on the 3Q but instead they are down 6% in the aftermarket. They are not likely to trade much lower--the calendar 2006 P/E is 36--but a trading rally may have to wait until more clarity on preopening costs is provided on the 4Q call in November.
Factoring in the aftermarket decline, Whole Foods' shares have fallen 32% year-to-date, and now trade at 36 times calendar 2006 EPS, 15%-20% below two- and three-year historical averages--the multiple on calendar 2007 EPS is only 31. The PEG rate is also below two for the first time in over four years. Goldman is lowering their price target $3 to $67.34 largely to reflect lower near-term EPS and P/E multiples under firm's risk/reward approach. This would still represent upside of 24% from the aftermarket. At this point, investors must find a compelling entry point; this could well be below $50, a sub 30 muliple on next year. Maintains Neutral.
* JP Morgan says that fundamentally, Whole Foods still offers growth that is higher than all of the companies they cover (15-20% FY07E sales growth and likely a lower % in EPS - say roughly 15%). This affords the stock a higher multiple. In the short-term, though, comps have slowed slightly in 2H06E (9.4% for Q306, adjusted w/o Easter/July 4). See Table 4. Also, new store openings relative to a signed lease pipeline that is 86 deep, are taking longer than anticipated to physically open 3 of 4 new are expected at the end of Q406E and WFMI subtlety stepped away from its 15-20% sq. ft. growth rate target for FY07E (just set at the end of Q206). All in, there is not likely material risk to EPS forecasts, while double-digit growth is sustainable. This is more than the firm can say for most companies. The stock is simply too expensive, particularly given subtle changes to current expectations in comps and sq.Maintains Underweight.
* Thomas Weisel Partners notes FY07 guidance was essentially in line with firm's preview; however, they believe the sales component is conservative. Firm views their FY07 sales estimate of 25%, with comps of 10%, as achievable given the acceleration in square footage growth and the additional week in FY07. It appears that Whole Foods is not anticipating any additional sales from the acceleration in square footage and/or is generally being conservative with its preliminary guidance. Because of their above-guidance FY07 sales estimate, the firm is anticipating that higher pre-opening expenses will only marginally pressure operating income growth. FY07 EPS estimate of $1.65 (19% y/y growth) is below firm's sales growth on slightly higher pre-opening expenses, higher stock-based compensation expense and lower interest income.
Given the solid 3Q06 results in a difficult consumer environment, solid guidance combined with the stock's 21% decline since May 1 (including the after market trading) versus the S&P retail index, down 10% during the same time period, the firm believes the valuation appears particularly attractive at 32x FY07 EPS estimate of $1.65 (using the after market stock price of $53.50). They believe Whole Foods is not an ordinary company. Thinks WFMI has a high multiple because, unlike nearly every other retailer, the company has more than 15 years of solid growth ahead. Maintains Outperform.
* Goldman Sachs notes Whole Foods reported solid 3Q sales and better-than-expected EPS but ambiguously tempered 2007 expectations on increased preopening costs. Firm is lowering their fiscal 2007 EPS estimate only $0.02 to $1.65, still 17% year-over-year growth. They had expected the shares, after having declined 28% year-to-date, to rally on the 3Q but instead they are down 6% in the aftermarket. They are not likely to trade much lower--the calendar 2006 P/E is 36--but a trading rally may have to wait until more clarity on preopening costs is provided on the 4Q call in November.
Factoring in the aftermarket decline, Whole Foods' shares have fallen 32% year-to-date, and now trade at 36 times calendar 2006 EPS, 15%-20% below two- and three-year historical averages--the multiple on calendar 2007 EPS is only 31. The PEG rate is also below two for the first time in over four years. Goldman is lowering their price target $3 to $67.34 largely to reflect lower near-term EPS and P/E multiples under firm's risk/reward approach. This would still represent upside of 24% from the aftermarket. At this point, investors must find a compelling entry point; this could well be below $50, a sub 30 muliple on next year. Maintains Neutral.
* JP Morgan says that fundamentally, Whole Foods still offers growth that is higher than all of the companies they cover (15-20% FY07E sales growth and likely a lower % in EPS - say roughly 15%). This affords the stock a higher multiple. In the short-term, though, comps have slowed slightly in 2H06E (9.4% for Q306, adjusted w/o Easter/July 4). See Table 4. Also, new store openings relative to a signed lease pipeline that is 86 deep, are taking longer than anticipated to physically open 3 of 4 new are expected at the end of Q406E and WFMI subtlety stepped away from its 15-20% sq. ft. growth rate target for FY07E (just set at the end of Q206). All in, there is not likely material risk to EPS forecasts, while double-digit growth is sustainable. This is more than the firm can say for most companies. The stock is simply too expensive, particularly given subtle changes to current expectations in comps and sq.Maintains Underweight.
* Citigroup is lowering their tgt to $60 from $70. Maintains Hold.
Notablecalls: NOTE TO WFMI MANAGEMENT: STOP ISSUING CONFUSING PRESS RELEASES. EVENTUALLY IT WILL KILL YOUR MKT MULTIPLE! What do I think the stock will do? I think it stays in the $50-$55 range.
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