Notable Calls
RSS feedNotablecalls@gmail.com
Tuesday, October 31, 2006
Calls of Note Part 3
Bear Stearns is commenting on Alnylam Pharma (NASDAQ:ALNY) after Merck (NYSE:MRK) announced its acquisition of Sirna Therapeutics (RNAI) at $13/share or $1.1bil, a 102% premium to RNAI's closing price on Oct. 30th, 2006 of $6.45. As Alnylam's closest comp, Sirna is advancing its lead candidate, Sirna-027, an siRNA drug targeting age-related macular degeneration (AMD), to phase 2 testing by year-end 2006.
Bear notes that Alnylam previously held two collaborations with MRK for RNAi drugs, which were consolidated in July, 2006. Under the current provisions of the collaboration, ALNY will receive R&D reimbursement from MRK earlier than under the prior agreement, and will have co-promote options for three out of nine Merck siRNA programs.
Firm believes the acquisition demonstrates the tremendous interest in RNAi therapeutics among major pharmaceutical companies, and remind investors that Alnylam has achieved collaborations with Novartis, Medtronic, Biogen Idec, and Merck, among others.
In firm's view, Alnylam's substantial IP position around siRNA drugs, and its demonstration of pioneering work for systemic application of its siRNA drug candidates now make it the leading RNAi company, and sole publicly traded pure play in the RNAi field.
Notablecalls: ALNY closed at $16.60 but following the RNAI news it traded close to $21 in after mkt. I think the $21-$22 level will be the maximum ALNY will reach in the n-t. Anything above that should have traders looking for cracks in buy interest.
Bear notes that Alnylam previously held two collaborations with MRK for RNAi drugs, which were consolidated in July, 2006. Under the current provisions of the collaboration, ALNY will receive R&D reimbursement from MRK earlier than under the prior agreement, and will have co-promote options for three out of nine Merck siRNA programs.
Firm believes the acquisition demonstrates the tremendous interest in RNAi therapeutics among major pharmaceutical companies, and remind investors that Alnylam has achieved collaborations with Novartis, Medtronic, Biogen Idec, and Merck, among others.
In firm's view, Alnylam's substantial IP position around siRNA drugs, and its demonstration of pioneering work for systemic application of its siRNA drug candidates now make it the leading RNAi company, and sole publicly traded pure play in the RNAi field.
Notablecalls: ALNY closed at $16.60 but following the RNAI news it traded close to $21 in after mkt. I think the $21-$22 level will be the maximum ALNY will reach in the n-t. Anything above that should have traders looking for cracks in buy interest.
Calls of Note Part 2
- Goldman Sachs is adding IntercontinentalExchange (NYSE:ICE) to their Conviction Buy List saying selling in the wake of the recent lock-up expiration has pressured the shares, even as fundamentals have continued to exceed expectations. Recent strength has been broad-based across futures and OTC products, shaking off threats from NYMEX and concern over potential dislocation in the natural gas markets. As a result, they are raising their estimates to reflect increased confidence in 2007 growth and see 34% of upside in the shares to new 12-month price target of $110 (from $79). Firm's Street-high 2007 earnings estimate of $3.05 reflects their assumption for approximately 25% growth in underlying drivers, which they believe is conservative.
Catalyst: Firm expects the release of October OTC commissions on Thursday (in conjunction
with a positive, but uneventful earnings report) to be a positive catalyst for the stock.
Notablecalls: This one is so much better than the CSCO call. The tgt goes up nicely and the rationale behind the raise is sound. I expect to see some buy interest in ICE but would keep it on a tight leash as the chart is telling me it may want to go lower before moving up.
Catalyst: Firm expects the release of October OTC commissions on Thursday (in conjunction
with a positive, but uneventful earnings report) to be a positive catalyst for the stock.
Notablecalls: This one is so much better than the CSCO call. The tgt goes up nicely and the rationale behind the raise is sound. I expect to see some buy interest in ICE but would keep it on a tight leash as the chart is telling me it may want to go lower before moving up.
Calls of Note Part 1
- Goldman Sachs is adding Cisco Systems (NASDAQ:CSCO) to the Americas Conviction Buy List.
Three key points: 1) Cisco expects to gain share in routing market from major competitors over the next two years on the back of new product introductions. 2) Video on the network holds the potential to drive network traffic growth from 70-100% per year to 200-300%, a trend that would help underpin its long term growth rate for 3-5 years. 3) They believe that in 2008, there is the potential for greater operating leverage as Cisco will likely be able to reign in its pace of spending on sales. Firm's $29 price target implies 21% potential upside.
Catalysts: 1) November 8, 2006 - October quarterly results and forward guidance should support Cisco's growth outlook. 2) Evidence of new product traction in routing. 3) Share repurchase should boost earnings growth rate.
Firm's price target assumes a 20X multiple on FY2008 EPS of $1.42. They believe a 20X multiple is justified by Cisco's ability to grow sales 15-20% in FY2007 and 10-15% over the next 3-5 years.
Notablecalls: This is what RBC Capital had to say about CSCO this AM: Longer-term prospects remain strong for Cisco considering our view of router market acceleration and emerging market growth. Near-term, we are looking for broadly inline revenues for the seasonally weaker FY1Q07 which closed Saturday. And for a stock that is up almost 33% in the last three months we would wait for a better entry point considering our view that the company may post a book-to-bill less than 1.0.
I must say, Goldman sure has big set of cojones to recommend CSCO after the recent run-up. Don't see this as actionable. Sorry.
Three key points: 1) Cisco expects to gain share in routing market from major competitors over the next two years on the back of new product introductions. 2) Video on the network holds the potential to drive network traffic growth from 70-100% per year to 200-300%, a trend that would help underpin its long term growth rate for 3-5 years. 3) They believe that in 2008, there is the potential for greater operating leverage as Cisco will likely be able to reign in its pace of spending on sales. Firm's $29 price target implies 21% potential upside.
Catalysts: 1) November 8, 2006 - October quarterly results and forward guidance should support Cisco's growth outlook. 2) Evidence of new product traction in routing. 3) Share repurchase should boost earnings growth rate.
Firm's price target assumes a 20X multiple on FY2008 EPS of $1.42. They believe a 20X multiple is justified by Cisco's ability to grow sales 15-20% in FY2007 and 10-15% over the next 3-5 years.
Notablecalls: This is what RBC Capital had to say about CSCO this AM: Longer-term prospects remain strong for Cisco considering our view of router market acceleration and emerging market growth. Near-term, we are looking for broadly inline revenues for the seasonally weaker FY1Q07 which closed Saturday. And for a stock that is up almost 33% in the last three months we would wait for a better entry point considering our view that the company may post a book-to-bill less than 1.0.
I must say, Goldman sure has big set of cojones to recommend CSCO after the recent run-up. Don't see this as actionable. Sorry.
Paperstand
The WSJ’s „Ahead of the Tape” column discusses Valero (VLO), whose stock remains 23% below where it was at the start of August. That might make it a good time to buy. The main reason for the Valero stock tumble was that everybody built up inventories of gasoline and other energy products in expectation of more big hurricanes, which hammered refineries in ’04 and ‘05. With no big hurricanes this year, there is plenty of fuel on hand. That has pushed down profits. Refining margins are much lower than they were earlier this year. But they are still far higher than they were in the late ‘90s, says Howard Simons of Bianco Research, and they seem unlikely to go down much more. That is b/c US refineries still need to run at close to full capacity just to keep up with demand. Moreover, it seems unlikely that refiners will add much new capacity in the years ahead. So supply may be outstripping demand for the moment, but that might not last. "Over the long term, the refinery business is still a good business to be in," says Mr. Simons.
Barron’s Online “Inside Scoop” section highlights record sales by Travelzoo (TZOO) head honcho Ralph Bartel, that indicate more turbulence ahead for the already volatile shares. Late last week, Bartel, who has served as Chmn, CEO and president since founding Travelzoo in ‘98, sold 990K shares for $33.5m. His brother Holger Bartel, a Travelzoo EVP and director, sold 10K shares for $338K.
Monday, October 30, 2006
Calls of Note Part 5
Baird is positive on BioMarin Pharma (NASDAQ:BMRN) ahead of results (Nov 1), raising their tgt to $20 from $18.
This comes after surveying physicians treating patients with MPS VI.
The feedback leadsthem to believe their initial Naglazyme estimates were too low and the firm is raising their 2006 Naglazyme revenue estimate to $43.5M at the upper end of BMRN's guidance and raising 2007-2010 estimates to $69.7M, $94.4M and $119.0M and $143.7M, respectively.
In that Naglazyme's dose is weight-based, the primary catalyst for firm's upward revision is higher-than-expected patient weight. Management's original Naglazyme guidance was predicated on an assumed average patient weight of 20 kg. In speaking with a few high-volume centers between the US and Europe, they believe patient weight may exceed the assumed 20 kg average. Indeed, one large European center indicated average patient weight was 30 kg. For perspective, a 25 kg patient would bring approximately $335k in annual revenue, rather than originally modeled $270k figure.
Notes they are buyers of BMRN in front of the quarter.
Notablecalls: I would not be surprised to see some buy interest in BMRN today.
This comes after surveying physicians treating patients with MPS VI.
The feedback leadsthem to believe their initial Naglazyme estimates were too low and the firm is raising their 2006 Naglazyme revenue estimate to $43.5M at the upper end of BMRN's guidance and raising 2007-2010 estimates to $69.7M, $94.4M and $119.0M and $143.7M, respectively.
In that Naglazyme's dose is weight-based, the primary catalyst for firm's upward revision is higher-than-expected patient weight. Management's original Naglazyme guidance was predicated on an assumed average patient weight of 20 kg. In speaking with a few high-volume centers between the US and Europe, they believe patient weight may exceed the assumed 20 kg average. Indeed, one large European center indicated average patient weight was 30 kg. For perspective, a 25 kg patient would bring approximately $335k in annual revenue, rather than originally modeled $270k figure.
Notes they are buyers of BMRN in front of the quarter.
Notablecalls: I would not be surprised to see some buy interest in BMRN today.
Calls of Note Part 4
- Stifel comments on on NutriSystem (NASDAQ:NTRI) noting it's a company that has been a phenomenal success story, having just completed a quarter in which it reported $155 million in revenue and added 235,000 new customers. The firm has long questioned the annuity value of NTRI's business and have been dead wrong on the stock but continue to believe they are dead right on the long-term prospects. To be sure, they note that if they are wrong about the annuitized value of the business, they believe 20x forward earnings is not expensive for its growth.
Firm believes the weight loss industry is one based on the psychological manipulation of vulnerable customers and, because of this, they pay close attention to marketing campaigns. NTRI has had phenomenal success growing this business but it is the basis of the industry that makes competition such a significant long- term risk.
There is a $120 billion pharmaceutical company named Sanofi-Aventis which has a product named Rimonabant, a drug which has shown significant promise in trials for the treatment of obesity. The drug also may help manage good/ bad cholesterol, type-2 diabetes, and nicotine addiction. Rimonabant is already being sold in Europe under the name Acomplia and is awaiting FDA approval in the U.S
On Sanofi's scheduled Tuesday morning earnings call, they believe investors should be focused on the success of Acomplia in Britain since its June 28 launch, an update on the launch in six other European countries in mid- October, and an update on FDA approval status in the U.S. The consensus view is that FDA approval will not occur by year-end 2006 as originally projected and could be pushed into early 2007. Given their belief that dieters are quick to try a new magic potion, Stifel believes NTRI investors should pay close attention to news out of Sanofi over the next several months, starting Tuesday.
As an aside, on October 12, the chief pharmacist for Aetna, an insurer of 8.3 million Americans spoke positively about the Sanofi-Aventis diet drug at the 2006 Obesity Congress, raising hopes that the U.S. insurer may include coverage for the drug. Firm believes health coverage for the Sanofi diet drug could make it a compelling alternative to existing uncovered diet programs.
Maintains Hold on NTRI.
Notablecalls: Oh boy! Oh Scott! That's what I call research! I'd be tempted to put out a small short position in NTRI today as the chart seems to be agreeing with Stifel here.
Firm believes the weight loss industry is one based on the psychological manipulation of vulnerable customers and, because of this, they pay close attention to marketing campaigns. NTRI has had phenomenal success growing this business but it is the basis of the industry that makes competition such a significant long- term risk.
There is a $120 billion pharmaceutical company named Sanofi-Aventis which has a product named Rimonabant, a drug which has shown significant promise in trials for the treatment of obesity. The drug also may help manage good/ bad cholesterol, type-2 diabetes, and nicotine addiction. Rimonabant is already being sold in Europe under the name Acomplia and is awaiting FDA approval in the U.S
On Sanofi's scheduled Tuesday morning earnings call, they believe investors should be focused on the success of Acomplia in Britain since its June 28 launch, an update on the launch in six other European countries in mid- October, and an update on FDA approval status in the U.S. The consensus view is that FDA approval will not occur by year-end 2006 as originally projected and could be pushed into early 2007. Given their belief that dieters are quick to try a new magic potion, Stifel believes NTRI investors should pay close attention to news out of Sanofi over the next several months, starting Tuesday.
As an aside, on October 12, the chief pharmacist for Aetna, an insurer of 8.3 million Americans spoke positively about the Sanofi-Aventis diet drug at the 2006 Obesity Congress, raising hopes that the U.S. insurer may include coverage for the drug. Firm believes health coverage for the Sanofi diet drug could make it a compelling alternative to existing uncovered diet programs.
Maintains Hold on NTRI.
Notablecalls: Oh boy! Oh Scott! That's what I call research! I'd be tempted to put out a small short position in NTRI today as the chart seems to be agreeing with Stifel here.
Calls of Note Part 3
We have two firms commenting on Sandisk (NASDAQ:SNDK) this morning:
- Baird notes checks as of late last week indicate very weak NOR flash bookings for the month of December, in sharp contrast with Q3, and suggesting a drastic reduction in lead times. NOR flash trends tend to correlate with other commodity semiconductor products and represents an indicator of general end demand. Several semiconductor companies are already implementing tight expenses control and/or hiring freezes, per firm's checks. In NAND flash, they are receiving additional feedback about weak iPod 8GB nano sales, suggesting further pricing weakness in November.
Weakness in December bookings problematic for Q1 revenue and gross margin guidances. Current slowdown induced by weakening consumer demand rather previous supply issues, in firm's view.
They are reducing estimates and price target on SNDK. Tgt goes to $60 from $68. Firm's new
2007 GAAP EPS estimate is $2.14, down from $2.30.
- UBS notes NAND Spot and Contract pricing are down -60% and -58% YTD and is generally
consistent with their model. Modest Spot activity in recent weeks with the most recent trend being one of firming points to supply/demand balance into the holidays. They believe this balance and beneficial exposure to handsets, digital cameras, and MP3s favors near-term SNDK accumulation.
Views Q3 guidance for 50-60% bit growth with 15-20% ASP decline as an exceptionally solid outlook that at this juncture in the quarter looks beatable. They are modeling $980M (+30% q/q, +31% y/y) in sales and $0.81 in pro forma EPS. Without a trial jump in SG&A (mkting/promos) to $93M (prior est $69.5M), EPS est would be $0.89.
UBS believes SNDK is executing well to a sound strategy of driving down costs, driving up functionality, and sparking elasticity of demand and new applications, the most significant being NAND cards in handsets. As it does so, they are seeing rivals struggle, divert capacity, and in some cases quit the market.
Reits Buy and ups tgt to $75 from $70. No changes to ests.
Notablecalls: I suspect we will see some weakness in SNDK early on. Baird's comments sound much more convincing.
- Baird notes checks as of late last week indicate very weak NOR flash bookings for the month of December, in sharp contrast with Q3, and suggesting a drastic reduction in lead times. NOR flash trends tend to correlate with other commodity semiconductor products and represents an indicator of general end demand. Several semiconductor companies are already implementing tight expenses control and/or hiring freezes, per firm's checks. In NAND flash, they are receiving additional feedback about weak iPod 8GB nano sales, suggesting further pricing weakness in November.
Weakness in December bookings problematic for Q1 revenue and gross margin guidances. Current slowdown induced by weakening consumer demand rather previous supply issues, in firm's view.
They are reducing estimates and price target on SNDK. Tgt goes to $60 from $68. Firm's new
2007 GAAP EPS estimate is $2.14, down from $2.30.
- UBS notes NAND Spot and Contract pricing are down -60% and -58% YTD and is generally
consistent with their model. Modest Spot activity in recent weeks with the most recent trend being one of firming points to supply/demand balance into the holidays. They believe this balance and beneficial exposure to handsets, digital cameras, and MP3s favors near-term SNDK accumulation.
Views Q3 guidance for 50-60% bit growth with 15-20% ASP decline as an exceptionally solid outlook that at this juncture in the quarter looks beatable. They are modeling $980M (+30% q/q, +31% y/y) in sales and $0.81 in pro forma EPS. Without a trial jump in SG&A (mkting/promos) to $93M (prior est $69.5M), EPS est would be $0.89.
UBS believes SNDK is executing well to a sound strategy of driving down costs, driving up functionality, and sparking elasticity of demand and new applications, the most significant being NAND cards in handsets. As it does so, they are seeing rivals struggle, divert capacity, and in some cases quit the market.
Reits Buy and ups tgt to $75 from $70. No changes to ests.
Notablecalls: I suspect we will see some weakness in SNDK early on. Baird's comments sound much more convincing.
Calls of Note Part 2
- Piper Jaffray is positive on Crocs (NASDAQ:CROX) following recent visit to co's China manufacturing facilities.
Firm thinks Crocs is at an inflection point in terms of cost leverage as diversification of product offering, sales channel, and geography provide catalysts for pricing power and margin expansion.
They are highly encouraged by the growing demand for the Crocs brand and rapidly expanding
distribution through both first-party and third-party doors in Asian markets. The company is opening branded retail outlets in high-growth markets, establishing a brand presence similar to the kiosk-model in domestic markets. Based on a population and assumed market potential, the firm estimates the company is in less than 10% of the total potential doors (est. near 11,500) in the Asian region.
Firm is raising their price target from $40 to $47. They think visibility around FQ4 sales and FQ1-FQ2 bookings is largely improved, providing support to firm's valuation objective. Additionally, they maintain an upward bias to earnings estimates.
Notablecalls: CROX reports earnings after the close on Thursday, November 2. Note that Baird is out previewing the qtr saying that for Q206 , CROX reported a $0.17 positive surprise, and they believe another large upside surprise is likely; however, they also believe that an earnings surprise is already in the stock, and they would remain on the sidelines, especially as Q406 is likely to be down from Q306 and as FY07 visibility remains limited. I would think about cashing in some chips ahead of the qtr. Possiblity into the buy interest following Piper's tgt raise.
Firm thinks Crocs is at an inflection point in terms of cost leverage as diversification of product offering, sales channel, and geography provide catalysts for pricing power and margin expansion.
They are highly encouraged by the growing demand for the Crocs brand and rapidly expanding
distribution through both first-party and third-party doors in Asian markets. The company is opening branded retail outlets in high-growth markets, establishing a brand presence similar to the kiosk-model in domestic markets. Based on a population and assumed market potential, the firm estimates the company is in less than 10% of the total potential doors (est. near 11,500) in the Asian region.
Firm is raising their price target from $40 to $47. They think visibility around FQ4 sales and FQ1-FQ2 bookings is largely improved, providing support to firm's valuation objective. Additionally, they maintain an upward bias to earnings estimates.
Notablecalls: CROX reports earnings after the close on Thursday, November 2. Note that Baird is out previewing the qtr saying that for Q206 , CROX reported a $0.17 positive surprise, and they believe another large upside surprise is likely; however, they also believe that an earnings surprise is already in the stock, and they would remain on the sidelines, especially as Q406 is likely to be down from Q306 and as FY07 visibility remains limited. I would think about cashing in some chips ahead of the qtr. Possiblity into the buy interest following Piper's tgt raise.
Calls of Note Part 1
- Deutsche Bank is upgrading Komag (NASDAQ:KOMG) from Hold to Buy on upside from new opportunities. Firm views Komag's desktop business as more stable now that it is qualifying on 95mm programs with Samsung. In addition, they view Komag as very well positioned to expand into the 65mm/notebook market, which is growing faster than desktop. As Komag ramps new customers and products, and delivers on results, they expect the shares to move higher. Firm's $48 price target is based on 10x FY07 EPS, and the firm believes Komag could earn $5.00 in FY08.
They view Samsung as adding further stability to Komag's 95mm business and as buffering potential share losses at Seagate in 2008. At Samsung's current unit levels, analysis suggest 10% share at Samsung could drive an additional 1.5M units/Q (4% above 3Q06 levels). In addition, the firm views Komag as very well positioned to expand into the 65mm/notebook market and take share by leveraging its scale to deliver high-quality, low-cost products. At 5% share of the 65mm market, Komag could see an additional 3M units/Q (8% above 3Q06 levels).
Samsung has also been the fastest growing desktop HDD vendor this year, with C1Q06 units up 21% Y/Y and C2Q06 units up 62% Y/Y, outstripping Hitachi (20% and 36%, respectively), and Western Digital (15% and 16%), although Samsung is growing off of a smaller base than
Western Digital.
Komag currently trades at 7.7x DB FY07 estimate of $4.75, at a discount to its 3-year median FTM P/E of 10x. Firm expects the shares to trade higher as Komag ramps new customers and new 65mm media.
Notablecalls: As regular readers know I don't usually like highlighting rating changes on this page but this one may be actionable. Would not chase the frist upward brust, though. Think the stock needs to clear the $38 level in the coming days in order to move further up.
They view Samsung as adding further stability to Komag's 95mm business and as buffering potential share losses at Seagate in 2008. At Samsung's current unit levels, analysis suggest 10% share at Samsung could drive an additional 1.5M units/Q (4% above 3Q06 levels). In addition, the firm views Komag as very well positioned to expand into the 65mm/notebook market and take share by leveraging its scale to deliver high-quality, low-cost products. At 5% share of the 65mm market, Komag could see an additional 3M units/Q (8% above 3Q06 levels).
Samsung has also been the fastest growing desktop HDD vendor this year, with C1Q06 units up 21% Y/Y and C2Q06 units up 62% Y/Y, outstripping Hitachi (20% and 36%, respectively), and Western Digital (15% and 16%), although Samsung is growing off of a smaller base than
Western Digital.
Komag currently trades at 7.7x DB FY07 estimate of $4.75, at a discount to its 3-year median FTM P/E of 10x. Firm expects the shares to trade higher as Komag ramps new customers and new 65mm media.
Notablecalls: As regular readers know I don't usually like highlighting rating changes on this page but this one may be actionable. Would not chase the frist upward brust, though. Think the stock needs to clear the $38 level in the coming days in order to move further up.
Sunday, October 29, 2006
Barron's Summary
Barron’s cover story discusses technology sector outlook. When analysts do survey corporate computing buyers, the CIOs indicate they will increase spending at the same 6-8% rate of the past few years. But tech-spending growth has actually exceeded that pace in recent months. With SepQ results in for about a 1/3 of tech co’s, they have surpassed expectations. Paul Wick's team at Seligman and Info Fund has one of the best records among large tech funds over the past few years. Mr. Wick favors ASML, CYMI, KLAC, MFE, STX, SYMC and SNPS. Pans include APCC, AVCI, CCI, DELL, NTES, NYT, KNOT and WBMD. 10 most widely held tech stocks are MSFT, CSCO, IBM, INTC, VZ, T, HPQ, GOOG, BLS and ORCL.
Blair Levin, a Managing Director at Stifel Nicolaus suggests that AT&T (T) may buy EchoStar (DISH). Also, DirecTV (DTV) may be a loser, as there are questions about its long term growth prospects.
Canadian Natural Resource (CNQ) stock, now 53, looks enticing. The shares could hit the 60s in a year and go much higher in the long run. The company might be takevoer bait, too.
Despite the Tellabs (TLAB) disappointing revenue outlook for the fourth quarter, the next three years look bright. The shares could climb more than 40% over that span.
DaimlerChrysler (DCX) shares are likely to be dead money right now. And they're likely to stay that way until definitive signs emerge of a Chrysler comeback or a corporate divorce.
According to the “The Trader” column, Glass Lewis, in a study to be released this week, tracked the regulatory filings in which co’s disclose option grants. Sarbox mandated that co’s report option awards to the SEC within 2 days of the grants in so-called Form 4 filings. Lots of co’s routinely miss the deadline, with rare enforcement action by regulators. Glass Lewis makes the case that filing Form 4s late and dating an options grant in the past when the stock price was much lower in itself can be suspicious. Glass Lewis names 9 co’s whose grants seem suspicious under this light. PLCE, HANS, ORLY, DRIV, AHM, WBSN, SIMG, KERX and MDTL are on the list.
“Technology Trader” section compares Dell (DELL) and H-P (HPQ). Dell shares have fallen 23% this year, while H-P's have risen 34.4% as HP has dethroned Dell as top computer maker for the first time in nearly 3 years. Nevertheless, Dell stock has garnered the attention of some of the most respected institutional value investors, who believe the marketplace's deeply skeptical attitude toward Dell is too extreme to be accurate. Some have begun to sense a turnaround in the next year or two. In the 2Q, the respected long-term value managers at Southeastern Asset Mgmt added 39.2m shares. "We think they still have significant advantages as far as inventory and distribution costs," says Kevin Grant, of Oakmark Fund. "We think that, over time, this business model and this strong co will succeed."
Blair Levin, a Managing Director at Stifel Nicolaus suggests that AT&T (T) may buy EchoStar (DISH). Also, DirecTV (DTV) may be a loser, as there are questions about its long term growth prospects.
Canadian Natural Resource (CNQ) stock, now 53, looks enticing. The shares could hit the 60s in a year and go much higher in the long run. The company might be takevoer bait, too.
Despite the Tellabs (TLAB) disappointing revenue outlook for the fourth quarter, the next three years look bright. The shares could climb more than 40% over that span.
DaimlerChrysler (DCX) shares are likely to be dead money right now. And they're likely to stay that way until definitive signs emerge of a Chrysler comeback or a corporate divorce.
According to the “The Trader” column, Glass Lewis, in a study to be released this week, tracked the regulatory filings in which co’s disclose option grants. Sarbox mandated that co’s report option awards to the SEC within 2 days of the grants in so-called Form 4 filings. Lots of co’s routinely miss the deadline, with rare enforcement action by regulators. Glass Lewis makes the case that filing Form 4s late and dating an options grant in the past when the stock price was much lower in itself can be suspicious. Glass Lewis names 9 co’s whose grants seem suspicious under this light. PLCE, HANS, ORLY, DRIV, AHM, WBSN, SIMG, KERX and MDTL are on the list.
“Technology Trader” section compares Dell (DELL) and H-P (HPQ). Dell shares have fallen 23% this year, while H-P's have risen 34.4% as HP has dethroned Dell as top computer maker for the first time in nearly 3 years. Nevertheless, Dell stock has garnered the attention of some of the most respected institutional value investors, who believe the marketplace's deeply skeptical attitude toward Dell is too extreme to be accurate. Some have begun to sense a turnaround in the next year or two. In the 2Q, the respected long-term value managers at Southeastern Asset Mgmt added 39.2m shares. "We think they still have significant advantages as far as inventory and distribution costs," says Kevin Grant, of Oakmark Fund. "We think that, over time, this business model and this strong co will succeed."
Friday, October 27, 2006
Calls of Note Part 3
- Goldman Sachs is adding Tim Hortons (NYSE:THI) to Americas Conviction Buy List.
Firm notes that on July 17 they downgraded Tim Hortons to Neutral on concerns of overhang from the completion of the Wendy's spin - not fundamentals. With the passing of this event, they are adding Tim Hortons to the Americas Buy/Conviction Buy List and see 3 catalysts to drive shares to $34 price target. Central to this is firm's view that starting in 4Q2006, sales strength should begin to show better flow-through to EPS with the abatement of various cost inhibitors, such as one-timers, IPO-related costs, and higher revenues, to offset costs from the Guelph distribution center. They expect 20% upside and for momentum to accelerate in the name near-term.
Catalysts:
1) Continued SSS strength - Further pricing action in various markets (they estimate 1-2% lift) and the breakfast sandwich roll-out in Canada (they estimate another 2-3% lift) should maintain strong SSS momentum.
2) Expense confusion surrounding 3Q ends, 4Q starts anew - IPO-related expenses, one-timers and the delayed leverage from the Guelph distribution ramp clouded 3Q. GS expects that when 4Q results are reported, the underlying earnings power of the business will materialize.
3) Share repurchases - Tim Hortons' buyback program could ultimately be $0.03-$0.04 accretive to EPS in 2007.
Notablecalls: Actionable call alert! I think THI will see some buy interest today.
Firm notes that on July 17 they downgraded Tim Hortons to Neutral on concerns of overhang from the completion of the Wendy's spin - not fundamentals. With the passing of this event, they are adding Tim Hortons to the Americas Buy/Conviction Buy List and see 3 catalysts to drive shares to $34 price target. Central to this is firm's view that starting in 4Q2006, sales strength should begin to show better flow-through to EPS with the abatement of various cost inhibitors, such as one-timers, IPO-related costs, and higher revenues, to offset costs from the Guelph distribution center. They expect 20% upside and for momentum to accelerate in the name near-term.
Catalysts:
1) Continued SSS strength - Further pricing action in various markets (they estimate 1-2% lift) and the breakfast sandwich roll-out in Canada (they estimate another 2-3% lift) should maintain strong SSS momentum.
2) Expense confusion surrounding 3Q ends, 4Q starts anew - IPO-related expenses, one-timers and the delayed leverage from the Guelph distribution ramp clouded 3Q. GS expects that when 4Q results are reported, the underlying earnings power of the business will materialize.
3) Share repurchases - Tim Hortons' buyback program could ultimately be $0.03-$0.04 accretive to EPS in 2007.
Notablecalls: Actionable call alert! I think THI will see some buy interest today.
Calls of Note Part 2
Several firms are commenting on Intersil (NASDAQ:ISIL) after the co last night announced the immediate departure of President and COO Lou DiNardo.
- CIBC notes that given the high regard with which DiNardo is held both within the analog (HPA) industry and on Wall Street, they expect ISIL shares to see some softness today.
The firm is surprised by DiNardo's hasty departure as he was considered by many (including CIBC) to be current CEO Rich Beyer's heir apparent. ISIL continues to have a solid management bench and bright prospects, but, in their opinion, DiNardo will be missed.
As a core member of one of the industry's premier mgmt teams, DiNardo was, in firm's view, a key driver behind ISIL's strong fundamental performance over the past two years. He helped successfully expand ISIL's presence in the critical handset and notebook end markets, among others.
Despite the departure of his two top lieutenants over the past 12 months-- current SMTC CEO Mohan Maheswaran and now DiNardo--we expect CEO Beyer to push forward with his current (successful) game plan of taking market share while growing ISIL's served addressable market.
- Merrill Lynch notes the departure yesterday of President and Chief Operating Officer Lou DiNardo is both surprising and disappointing. Firm's checks following the announcement suggest that the departure was driven by a disagreement between Mr. DiNardo on one hand, and CEO Rich Beyer and the board of directors on the other, regarding Mr. DiNardo's operating management of Intersil since ascending to the COO job ten months ago. Mr. DiNardo has been an important and visible contributor to Intersil's success since joining the company in 2004.
The resulting challenges are several. First, Rich Beyer must step back into a day-to-day management roll, something that he'd ceded to Mr. DiNardo and claimed to be interested in moving away from. Picking up where Mr. DiNardo left off could be tough. Secondly, Mr. DiNardo is well regarded within the analog IC business, and minimizing the hit to morale within Intersil will be important.
In fairness, the firm believes Rich Beyer is the architect of Intersil as it looks now, and all of the big decisions - selling WiFi, buying Xicor - were his. ML thinks he's capable of meeting the challenge that he's created by dismissing Mr. DiNardo, and on that basis they maintain their positive recommendation on the stock. However, they can't deny that much of Intersil's recent operational excellence is attributable to the efforts of Lou DiNardo. Getting someone else into place with similar talent and energy is we believe now job 1 for Intersil's management.
Notablecalls: Expect to see weakness in ISIL. The stock was down 2% in after hrs trading and I suspect there will be more weakness today and in the next couple of days.
- CIBC notes that given the high regard with which DiNardo is held both within the analog (HPA) industry and on Wall Street, they expect ISIL shares to see some softness today.
The firm is surprised by DiNardo's hasty departure as he was considered by many (including CIBC) to be current CEO Rich Beyer's heir apparent. ISIL continues to have a solid management bench and bright prospects, but, in their opinion, DiNardo will be missed.
As a core member of one of the industry's premier mgmt teams, DiNardo was, in firm's view, a key driver behind ISIL's strong fundamental performance over the past two years. He helped successfully expand ISIL's presence in the critical handset and notebook end markets, among others.
Despite the departure of his two top lieutenants over the past 12 months-- current SMTC CEO Mohan Maheswaran and now DiNardo--we expect CEO Beyer to push forward with his current (successful) game plan of taking market share while growing ISIL's served addressable market.
- Merrill Lynch notes the departure yesterday of President and Chief Operating Officer Lou DiNardo is both surprising and disappointing. Firm's checks following the announcement suggest that the departure was driven by a disagreement between Mr. DiNardo on one hand, and CEO Rich Beyer and the board of directors on the other, regarding Mr. DiNardo's operating management of Intersil since ascending to the COO job ten months ago. Mr. DiNardo has been an important and visible contributor to Intersil's success since joining the company in 2004.
The resulting challenges are several. First, Rich Beyer must step back into a day-to-day management roll, something that he'd ceded to Mr. DiNardo and claimed to be interested in moving away from. Picking up where Mr. DiNardo left off could be tough. Secondly, Mr. DiNardo is well regarded within the analog IC business, and minimizing the hit to morale within Intersil will be important.
In fairness, the firm believes Rich Beyer is the architect of Intersil as it looks now, and all of the big decisions - selling WiFi, buying Xicor - were his. ML thinks he's capable of meeting the challenge that he's created by dismissing Mr. DiNardo, and on that basis they maintain their positive recommendation on the stock. However, they can't deny that much of Intersil's recent operational excellence is attributable to the efforts of Lou DiNardo. Getting someone else into place with similar talent and energy is we believe now job 1 for Intersil's management.
Notablecalls: Expect to see weakness in ISIL. The stock was down 2% in after hrs trading and I suspect there will be more weakness today and in the next couple of days.
Calls of Note Part 1
- Deutsche Bank comments on Intuitive Surgical (NASDAQ:ISRG) noting the co delivered upside across the board for 3Q. Management continues to execute seamlessly in capturing the robotic surgery market opportunity with uptake increasing across specialties. Though urology remains the biggest growth driver for the company, uptake in gynecology remains swift and the firm believes continued momentum in this arena will be critical to growth in system placements over the next several quarters.
ISRG reported 3Q revenue of $95.8m, +57% yr/yr and comfortably ahead of DB forecast and consensus, both at $88m, despite a typically slow 3Q. EPS were $0.45, well ahead of forecast and consensus. In light of the 3Q upside, management once again raised guidance, and the firm has increased their forecasts.
The company sold 42 net new da Vinci robots in the quarter, exceeding DB forecast of 40 systems. The company sold 4 upgrades (hospital converting older system to the newer da Vinci S). A growing number of hospitals are purchasing second systems (12 in 3Q), reflecting strong utilization trends and expansion into new procedures at these centers. During the quarter, the UPenn hospital system purchased three systems (total of four at hospital) and Beaumont Hospital bought two units (total of three at hospital) in their efforts to establish robotic surgery "centers of excellence", and the firm would not be surprised to see other institutions follow suit. Internationally, the company continues to make inroads in large markets, having placed the first da Vinci system in mainland China during 3Q.
Maintains $140 tgt on Buy rating.
Notablecalls: Correct me if I'm wrong but didn't ISRG make $0.44 in EPS in Q206 and $0.55 in Q305? That doesn't make the $0.45 headline number too flashy, does it? Guess that's the main reason the stock failed to hold the initial gains in after hrs trade.
ISRG reported 3Q revenue of $95.8m, +57% yr/yr and comfortably ahead of DB forecast and consensus, both at $88m, despite a typically slow 3Q. EPS were $0.45, well ahead of forecast and consensus. In light of the 3Q upside, management once again raised guidance, and the firm has increased their forecasts.
The company sold 42 net new da Vinci robots in the quarter, exceeding DB forecast of 40 systems. The company sold 4 upgrades (hospital converting older system to the newer da Vinci S). A growing number of hospitals are purchasing second systems (12 in 3Q), reflecting strong utilization trends and expansion into new procedures at these centers. During the quarter, the UPenn hospital system purchased three systems (total of four at hospital) and Beaumont Hospital bought two units (total of three at hospital) in their efforts to establish robotic surgery "centers of excellence", and the firm would not be surprised to see other institutions follow suit. Internationally, the company continues to make inroads in large markets, having placed the first da Vinci system in mainland China during 3Q.
Maintains $140 tgt on Buy rating.
Notablecalls: Correct me if I'm wrong but didn't ISRG make $0.44 in EPS in Q206 and $0.55 in Q305? That doesn't make the $0.45 headline number too flashy, does it? Guess that's the main reason the stock failed to hold the initial gains in after hrs trade.
Color on quarter: Microsoft (NASDAQ:MSFT)
Pretty uneventful quarter from Microsoft (NASDAQ:MSFT):
- Goldman Sachs notes Microsoft reported first (Sept) fiscal-quarter results that were above expectations, with EPS of $0.35 vs GS $0.32 estimate. Revenue growth of 11% was above GS 8% estimate. Full-year guidance is about the same as before.
Management does not appear to have increased the range of expectations for the remaining quarters of the year, mostly just flowed through first-quarter upside. Second-quarter (December) revenue guidance is in line with firm's expectations but EPS of $0.22-$0.24 is below our $0.26 estimate, possibly reflecting both the lower accretion (smaller than originally expected Dutch Tender offer) and also perhaps some greater product launch costs. With no material changes to full-year estimates, this quarter may be less eventful than prior earnings reports.
Deferred revenues were down $810 million sequentially, not as bad as the $1.1 billion decline they had assumed. With new products upcoming, they think better news is ahead of growth, and maintain Buy rating and Conviction List Buy.
- JP Morgan notes the first quarter looks a little better than expected on cost discipline, and while the Q2 guidance was sloppy--this was largely expected. More importantly, we saw what appear to be solid bookings for Office (firm second product catalyst following the timely Vista delivery) and MSFT was able to re-affirm rev. and EPS for the year. With the Q1 hurdle behind the company, the firm continues to expect the stock to outperform as we near revenue and EPS acceleration in 2H-07.
1) Xbox units looked light and MSFT appears to be behind on its targets, 2) net the deferrals, operating margin targets for Q2 look low, 3) weak search rev. again hurt MSN, 4) unearned saw a re-allocation lines, 5) MSFT maintained PC targets for the year-despite a weaker Q1 and 6) full yr. guidance tweaks up 2H margins.
Assuming CY07E EPS of $1.63, Microsoft currently trades at 17x,a discount to the peer group, which trades at roughly 23x CY07E EPS. At current levels, they believe the stock largely discounts the risk associated with the story and represents a highly attractive risk/reward investment in several large and diverse software markets. As such, they rate Microsoft an Overweight.
Notablecalls: Not actionable but good to know category.
- Goldman Sachs notes Microsoft reported first (Sept) fiscal-quarter results that were above expectations, with EPS of $0.35 vs GS $0.32 estimate. Revenue growth of 11% was above GS 8% estimate. Full-year guidance is about the same as before.
Management does not appear to have increased the range of expectations for the remaining quarters of the year, mostly just flowed through first-quarter upside. Second-quarter (December) revenue guidance is in line with firm's expectations but EPS of $0.22-$0.24 is below our $0.26 estimate, possibly reflecting both the lower accretion (smaller than originally expected Dutch Tender offer) and also perhaps some greater product launch costs. With no material changes to full-year estimates, this quarter may be less eventful than prior earnings reports.
Deferred revenues were down $810 million sequentially, not as bad as the $1.1 billion decline they had assumed. With new products upcoming, they think better news is ahead of growth, and maintain Buy rating and Conviction List Buy.
- JP Morgan notes the first quarter looks a little better than expected on cost discipline, and while the Q2 guidance was sloppy--this was largely expected. More importantly, we saw what appear to be solid bookings for Office (firm second product catalyst following the timely Vista delivery) and MSFT was able to re-affirm rev. and EPS for the year. With the Q1 hurdle behind the company, the firm continues to expect the stock to outperform as we near revenue and EPS acceleration in 2H-07.
1) Xbox units looked light and MSFT appears to be behind on its targets, 2) net the deferrals, operating margin targets for Q2 look low, 3) weak search rev. again hurt MSN, 4) unearned saw a re-allocation lines, 5) MSFT maintained PC targets for the year-despite a weaker Q1 and 6) full yr. guidance tweaks up 2H margins.
Assuming CY07E EPS of $1.63, Microsoft currently trades at 17x,a discount to the peer group, which trades at roughly 23x CY07E EPS. At current levels, they believe the stock largely discounts the risk associated with the story and represents a highly attractive risk/reward investment in several large and diverse software markets. As such, they rate Microsoft an Overweight.
Notablecalls: Not actionable but good to know category.
Paperstand
The WSJ reprots, citing ppl familiar with the matter, that Cemex (CX) is lining up an acquisition of Rinker (RIN) amid a flurry of deal discussions in the sector, say. Rinker has a mkt cap of nearly $10bn.
Barron’s Online discusses Dell (DELL), whose shares have fallen 23% this year. Based on ests by Gartner, Dell probably had its worst quarterly growth in PCs in the co's history in the 3Q. Nevertheless, Dell stock has garnered the attention of some of the most respected institutional value investors, who believe the mktplace's deeply skeptical attitude toward Dell is too extreme to be accurate. Dell shares have climbed 15.9% since hitting a low on July 21 as some sense a turnaround in the next year or two. In the 2Q, Southeastern Asset Mgmt, Dell's 2nd-largest holder after Chmn Michael Dell himself, added 39.2m shares of the co for a total of 111m shares, just under 5% of the co. Other buyers include funds managed by Barclays Global Investors, State Street and Vanguard Group. "We think they still have significant advantages as far as inventory and distribution costs," says Kevin Grant, who helps manage $6bn in assets in Harris Associates' The Oakmark Fund. "We think that over time this business model and this strong co will succeed."
“Inside Scoop” section reports that several weeks agi Saks (SKS) Chmn R. Brad Martin was nabbing profits selling the luxury-retailer's stock. Now he's buying up depressed shares of First Horizon National (FHN) where he also serves on the board. Martin, a First Horizon director since ‘94, spent nearly $9.6m to purchase 250K shares of the co on the open mkt earlier this week, increasing his stake fivefold to nearly 300K shares.
Barron’s Online discusses Dell (DELL), whose shares have fallen 23% this year. Based on ests by Gartner, Dell probably had its worst quarterly growth in PCs in the co's history in the 3Q. Nevertheless, Dell stock has garnered the attention of some of the most respected institutional value investors, who believe the mktplace's deeply skeptical attitude toward Dell is too extreme to be accurate. Dell shares have climbed 15.9% since hitting a low on July 21 as some sense a turnaround in the next year or two. In the 2Q, Southeastern Asset Mgmt, Dell's 2nd-largest holder after Chmn Michael Dell himself, added 39.2m shares of the co for a total of 111m shares, just under 5% of the co. Other buyers include funds managed by Barclays Global Investors, State Street and Vanguard Group. "We think they still have significant advantages as far as inventory and distribution costs," says Kevin Grant, who helps manage $6bn in assets in Harris Associates' The Oakmark Fund. "We think that over time this business model and this strong co will succeed."
“Inside Scoop” section reports that several weeks agi Saks (SKS) Chmn R. Brad Martin was nabbing profits selling the luxury-retailer's stock. Now he's buying up depressed shares of First Horizon National (FHN) where he also serves on the board. Martin, a First Horizon director since ‘94, spent nearly $9.6m to purchase 250K shares of the co on the open mkt earlier this week, increasing his stake fivefold to nearly 300K shares.
Thursday, October 26, 2006
Calls of Note Part 2
And now for today's favourite fade opporunity:
- Citigroup is upgrading Business Objects (NASDAQ:BOBJ) to Buy from Hold following strong results announced last night.
According to Citi BOBJ reported stellar 3Q06 results with licence revenues of $131.6m (CIR: $122.0m), total revenues of $310.4m (CIR: $295.1m; BOBJ guidance: $293m-$298m), pro forma EBITA of $53.0m (CIR: $43.7m) and pro forma EPS of $0.41 (CIR: $0.34; BOBJ guidance $0.32-$0.35).
The strong set of numbers and increase to 4Q06 guidance is an indication that the business is back on track. Management appears confident about the general environment, upgrade opportunit,y and Johnson Controls shows it is winning all important standardisation deals. After a frustrating 2Q06 wobble the firm notes they have renewed confidence in management's ability to execute and are upgrading the stock to reflect the strong fundamentals and consensus increases that are likely. They have increased their price target to $45 which reflects a modest 8% growth rate and 20% operating margin in their DCF model (both of which should be more than achievable).
Notablecalls: Yeah, Q2 was weak. Several deals failed to close. Fortunately for the co, the deals closed in Q3, helping to produce a qtr that was somewhat stronger than analysts were expecting. The funniest part? Citi downgraded BOBJ on July 26. Just before things got better. I think the money that helped the stock to move from sub-$20 will be looking for an exit. Getting out while things look good makes sense. There has been talk of a possible acquisition and I must say the valuation already reflects it, thus making it less likely. Think one needs to put BOBJ on the radar looking for cracks in buy interest above $36 level.
- Citigroup is upgrading Business Objects (NASDAQ:BOBJ) to Buy from Hold following strong results announced last night.
According to Citi BOBJ reported stellar 3Q06 results with licence revenues of $131.6m (CIR: $122.0m), total revenues of $310.4m (CIR: $295.1m; BOBJ guidance: $293m-$298m), pro forma EBITA of $53.0m (CIR: $43.7m) and pro forma EPS of $0.41 (CIR: $0.34; BOBJ guidance $0.32-$0.35).
The strong set of numbers and increase to 4Q06 guidance is an indication that the business is back on track. Management appears confident about the general environment, upgrade opportunit,y and Johnson Controls shows it is winning all important standardisation deals. After a frustrating 2Q06 wobble the firm notes they have renewed confidence in management's ability to execute and are upgrading the stock to reflect the strong fundamentals and consensus increases that are likely. They have increased their price target to $45 which reflects a modest 8% growth rate and 20% operating margin in their DCF model (both of which should be more than achievable).
Notablecalls: Yeah, Q2 was weak. Several deals failed to close. Fortunately for the co, the deals closed in Q3, helping to produce a qtr that was somewhat stronger than analysts were expecting. The funniest part? Citi downgraded BOBJ on July 26. Just before things got better. I think the money that helped the stock to move from sub-$20 will be looking for an exit. Getting out while things look good makes sense. There has been talk of a possible acquisition and I must say the valuation already reflects it, thus making it less likely. Think one needs to put BOBJ on the radar looking for cracks in buy interest above $36 level.
Calls of Note Part 1
- Lots of comments on Red Hat (NASDAQ:RHAT) today after Oracle announced its intentions to enter the enterprise Linux paid support market, specifically providing support for code based on Red Hat Enterprise Linux. As part of Oracle's announcement, it suggested that it would be offering support for Red Hat Enterprise Linux customers at a discounted price ranging from 50% to 60% off Red Hat's published list pricing for RHEL ES and AS.
- JMP Securities is reducing their rating on Red Hat from Market Outperform to Market Perform. While they believe Red Hat remains well positioned to benefit from the proliferation of open source software, the depth of Oracle's announcement regarding its entry into the Linux support market is likely to create an overhang on Red Hat's shares. In particular, Oracle's suggesting that it has developed a technical network capable of supporting and migrating Red Hat customers. Its endorsement from a number of channel partners and its aggressive pricing are likely to make selling conditions quite difficult for Red Hat over the near term. Absent hard evidence suggesting that Oracle's efforts are proving less than successful, the firm believes Red Hat's shares may remain under pressure. The firm is lowering their FY07 operating cash flow estimate from $0.91 per share to $0.85 per share and FY08 operating cash flow estimate from $1.15 per share to $1.02 per share. They are reducing FY07 EPS estimate from $0.52 to $0.50, in line with consensus, and FY08 EPS estimate of $0.70 to $0.61, $0.05 below consensus. Using the aftermarket price of $16.33, Red Hat trades at a FY08 P/FCF estimate of 18x.
- Deutsche Banks thinks the likely impact on pricing and Oracle's position within the IT data center could significantly cap Red Hat's fundamental growth and valuation multiple. Firm maintains Hold rating while lowering estimates and target price to $15.
Oracle has an expansive support organization to create a competitive offering. In addition, it is clear from the press releases that a number of major customers and partners (Southern Co, McKesson, Dell, Intel, IBM) appear to be endorsing Oracle's Linux offering. Even if Oracle does not have immediate success with its offering, they believe the 50% price discount to Red Hat will likely enable Red Hat customers to be aggressive in gaining pricing concessions vs. Red Hat.
Firm likens the situation to Microsoft's competitive threat to Symantec and McAfee in 2005. While it is still unclear what Microsoft's impact will be on SYMC and MFE's business,
SYMC/MFE EV/FCF multiples compressed roughly 56% from a peak of 20x/19x in Dec '04 to 10x/8x in April '05. The impact on RHAT is unclear, but they believe further multiple compression is possible. At $16.33 (after-market indication) RHAT is trading at 15x reduced forecasts. This still represents a premium to the group.
Notablecalls: I would not play RHAT for a bounce today. Think there will be more downgrades
over the next couple of days that will force the price even lower. But I do think that RHAT will become a nice bounce candidate after that as ORCL's entry will take some time and will not have an immediate effect on RHAT's results. Also, check out how MFE performed in 2005.
- JMP Securities is reducing their rating on Red Hat from Market Outperform to Market Perform. While they believe Red Hat remains well positioned to benefit from the proliferation of open source software, the depth of Oracle's announcement regarding its entry into the Linux support market is likely to create an overhang on Red Hat's shares. In particular, Oracle's suggesting that it has developed a technical network capable of supporting and migrating Red Hat customers. Its endorsement from a number of channel partners and its aggressive pricing are likely to make selling conditions quite difficult for Red Hat over the near term. Absent hard evidence suggesting that Oracle's efforts are proving less than successful, the firm believes Red Hat's shares may remain under pressure. The firm is lowering their FY07 operating cash flow estimate from $0.91 per share to $0.85 per share and FY08 operating cash flow estimate from $1.15 per share to $1.02 per share. They are reducing FY07 EPS estimate from $0.52 to $0.50, in line with consensus, and FY08 EPS estimate of $0.70 to $0.61, $0.05 below consensus. Using the aftermarket price of $16.33, Red Hat trades at a FY08 P/FCF estimate of 18x.
- Deutsche Banks thinks the likely impact on pricing and Oracle's position within the IT data center could significantly cap Red Hat's fundamental growth and valuation multiple. Firm maintains Hold rating while lowering estimates and target price to $15.
Oracle has an expansive support organization to create a competitive offering. In addition, it is clear from the press releases that a number of major customers and partners (Southern Co, McKesson, Dell, Intel, IBM) appear to be endorsing Oracle's Linux offering. Even if Oracle does not have immediate success with its offering, they believe the 50% price discount to Red Hat will likely enable Red Hat customers to be aggressive in gaining pricing concessions vs. Red Hat.
Firm likens the situation to Microsoft's competitive threat to Symantec and McAfee in 2005. While it is still unclear what Microsoft's impact will be on SYMC and MFE's business,
SYMC/MFE EV/FCF multiples compressed roughly 56% from a peak of 20x/19x in Dec '04 to 10x/8x in April '05. The impact on RHAT is unclear, but they believe further multiple compression is possible. At $16.33 (after-market indication) RHAT is trading at 15x reduced forecasts. This still represents a premium to the group.
Notablecalls: I would not play RHAT for a bounce today. Think there will be more downgrades
over the next couple of days that will force the price even lower. But I do think that RHAT will become a nice bounce candidate after that as ORCL's entry will take some time and will not have an immediate effect on RHAT's results. Also, check out how MFE performed in 2005.
Color on quarter: FormFactor (NASDAQ:FORM)
Several firms are commenting on FormFactor (NASDAQ:FORM) after the co released in-line results but guided down:
- Goldman Sachs notes their call to buy the stock into earnings was terrible. However, weaker than anticipated guidance doesn't change their view that FormFactor is the best positioned SPE company over the intermediate-term. They would therefore aggressively buy the stock on weakness, as they believe: 1) growth opportunities for FormFactor are better than for any other SPE company and most other Semi companies; 2) share weakness post the report has left the stock under-valued, as the firm believes FormFactor can achieve $125m in quarterly sales and $0.50 in quarterly EPS or ~$2.00 in annualized run-rate EPS when capacity ramps in 2007; and 3) the stock is heavily shorted (8% of shares are short), creating the possibility of a gap up in the stock as the market begins to refocus on the intermediate-term growth prospects.
They see ~15% upside to 12-month price target of $50, which is based on a 25X multiple applied to ~$2.00 in annualized run-rate EPS.
- Deutsche Bank says they are cutting estimates after weak guidance for the December quarter. The firm had confirmed the delay with the new NAND product prior to the earnings release and view it as a short term issue. But attributing the slower growth to a delay in
the 70nm DRAM design shrink came out of the blue. Firm recommends accumulating the
stock for the new product story in 2007.
New products should support strong growth next year assuming the base DRAM business benefits from design shrink. They think the new Harmony product (one of two new products) alone could add $50-75 million in sales next year. KGD (Known Good Die) is the other new product segment.
Firm thinks the Harmony technology is proven at 200mm and FORM is shipping cards to Hynix. The 300mm product will move into production in the second half. Channel checks point to 300mm integration issues with the tester but nothing that appears to be a show stopper.
Tgt goes to $45 from $47 with Buy rating maintained.
- JP Morgan notes Management indicated that the current high level of profitability being experienced by DRAM manf was causing them to delay their transition to the 70nm tech node. This reasoning is hard to accept and the firm believes the weakness in the DRAM outlook is more likely attributed to a slower than expected adoption of DDR2 DRAM. They suspect expectations for a fast DDR2 adoption rate caused those manf to order more new probe cards than was actually necessary in C1H06, and that those same DRAM manf are now working through those cards. This will only have a short term effect on FormFactor's outlook and, absent any incremental competitors coming on the scene, new product design dynamics for DRAM should continue to support FormFactor's longer term DRAM probe card revenue growth rate.
Book To Bill declined to .93, the lowest level since C4Q04 This increases the likelihood for the company to miss guidance and is likely to limit stock outperformance in the near term. Management stated that lead times have declined moderately as the new factory has ramped, but the fim does not believe the company's ability to turn more business during the quarter is enough to offset the declining order outlook.
Reiterates Neutra nnd would stay on the sidelines at this time due to the lower than parity book to bill ratio and increasing nearness to the seasonally weak C1Q07 for memory. These factors lead the firm to believe there is unacceptable level of risk associated with the stock given its significant valuation premium vs. coverage universe. They would either prefer to wait for a lower stock price or for near term fundamentals to improve before becoming more positive on the stock.
Notablecalls: I agree with JP here. High profitability hasn't been an issue for the DRAM sector for a long time. FORM has been a semi darling, beating ests over and over again. Now that they stumbled, some of the hot money will leave the stock causing significant pressure. Altought the general sentiment is still bullish and supportive, I would not be looking to play a bounce in this one.
- Goldman Sachs notes their call to buy the stock into earnings was terrible. However, weaker than anticipated guidance doesn't change their view that FormFactor is the best positioned SPE company over the intermediate-term. They would therefore aggressively buy the stock on weakness, as they believe: 1) growth opportunities for FormFactor are better than for any other SPE company and most other Semi companies; 2) share weakness post the report has left the stock under-valued, as the firm believes FormFactor can achieve $125m in quarterly sales and $0.50 in quarterly EPS or ~$2.00 in annualized run-rate EPS when capacity ramps in 2007; and 3) the stock is heavily shorted (8% of shares are short), creating the possibility of a gap up in the stock as the market begins to refocus on the intermediate-term growth prospects.
They see ~15% upside to 12-month price target of $50, which is based on a 25X multiple applied to ~$2.00 in annualized run-rate EPS.
- Deutsche Bank says they are cutting estimates after weak guidance for the December quarter. The firm had confirmed the delay with the new NAND product prior to the earnings release and view it as a short term issue. But attributing the slower growth to a delay in
the 70nm DRAM design shrink came out of the blue. Firm recommends accumulating the
stock for the new product story in 2007.
New products should support strong growth next year assuming the base DRAM business benefits from design shrink. They think the new Harmony product (one of two new products) alone could add $50-75 million in sales next year. KGD (Known Good Die) is the other new product segment.
Firm thinks the Harmony technology is proven at 200mm and FORM is shipping cards to Hynix. The 300mm product will move into production in the second half. Channel checks point to 300mm integration issues with the tester but nothing that appears to be a show stopper.
Tgt goes to $45 from $47 with Buy rating maintained.
- JP Morgan notes Management indicated that the current high level of profitability being experienced by DRAM manf was causing them to delay their transition to the 70nm tech node. This reasoning is hard to accept and the firm believes the weakness in the DRAM outlook is more likely attributed to a slower than expected adoption of DDR2 DRAM. They suspect expectations for a fast DDR2 adoption rate caused those manf to order more new probe cards than was actually necessary in C1H06, and that those same DRAM manf are now working through those cards. This will only have a short term effect on FormFactor's outlook and, absent any incremental competitors coming on the scene, new product design dynamics for DRAM should continue to support FormFactor's longer term DRAM probe card revenue growth rate.
Book To Bill declined to .93, the lowest level since C4Q04 This increases the likelihood for the company to miss guidance and is likely to limit stock outperformance in the near term. Management stated that lead times have declined moderately as the new factory has ramped, but the fim does not believe the company's ability to turn more business during the quarter is enough to offset the declining order outlook.
Reiterates Neutra nnd would stay on the sidelines at this time due to the lower than parity book to bill ratio and increasing nearness to the seasonally weak C1Q07 for memory. These factors lead the firm to believe there is unacceptable level of risk associated with the stock given its significant valuation premium vs. coverage universe. They would either prefer to wait for a lower stock price or for near term fundamentals to improve before becoming more positive on the stock.
Notablecalls: I agree with JP here. High profitability hasn't been an issue for the DRAM sector for a long time. FORM has been a semi darling, beating ests over and over again. Now that they stumbled, some of the hot money will leave the stock causing significant pressure. Altought the general sentiment is still bullish and supportive, I would not be looking to play a bounce in this one.
Paperstand
The WSJ reprots that accelerating the buyout boom and putting some of the world's biggest public co’s in reach, Blackstone Group has decided to increase the size of the world's largest private-equity fund to $20bn. The move by Blackstone, which already had raised a record $15.6bn for the fund from investors, secures bragging rights for now in an industry that has several other giants looking to create funds of $15 bn or more. Investment strategists who compile lists of potential tgts in recent weeks have pointed to Home Depot (HD), Dell (DELL), and Texas Instruments (TXN). In Europe, investment bankers point to other big names, including BT Group (BTY) and Unilever (UN).
According to the WSJ, with Detroit's auto industry struggling through its darkest days in decades, some big investors are betting billions of dollars that the auto-parts sector is poised for a comeback. At Lear (LEA), investor Wilbur Ross says his deal to acquire its $3.5bn N-American interiors business "should be resolved in the next few days, no later than next week." Mr. Ross says he has signed confidentiality agreements with eight other suppliers. "It seems like the whole components business is for sale," he said. Another hedge fund, Pardus Capital Mgmt, has spent $109m this year to acquire 14% of Visteon’s (VC) stock, making it that supplier's 2nd-largest shareholder.
“Heard on the Street” column discusses Wild Oats Markets (OATS), which long has seemed like a plate of cold leftovers next to Whole Foods Market (WFMI). But it may just be the tastier stock. That conclusion was bolstered by the stock mkt's reaction to last week's news that Wild Oats wouldn't renew the contract of CEO Perry Odak and yesterday's announcement that he had quit. Though Mr. Odak had led the co through a 5-year turnaround, the stock price rose both times. Mr. Odak was criticized for being too timid in trying to grab customers who favor Whole Foods' sprawling stores. "Investors would be happier to see a mistake being made being too aggressive in new-store formats than to see the opposite, which is them being too conservative," says Eric J. Larson, of Piper Jaffray.
Barron’s Online discusses UnitedHealth (UNH), saying the co may find clear skies again. In March, allegations started flying that CEO William McGuire and others unfairly benefited from backdated stock-option grants. Last week, McGuire stepped down as Chmn and agreed to depart as CEO on Dec. 1 after an internal report found that millions of stock options were likely improperly backdated at the co during his tenure. Certainly, the report could add gas to shareholder lawsuits and probes by the DEC, the DOJ and Minnesota's attorney general, which could cost United in fines and settlements. But the stock already reflects these widely known concerns. Despite its woes, UnitedHealth remains an earnings machine, generating profit growth that is more than double that of the broader stock mkt. And with a cheap multiple and uncertainty about the stock-options scandal fading, the shares appear attractive."The stock is severely depressed and it's not justified," says Christopher Bonavico, manager of the Delaware Select Growth Fund. "When I look at where United's earnings could be in 3 years, this stock looks dramatically cheap."
“Inside Scoop” section reports that Morgan Stanley and Goldman Sachs units have both taken profits in IntercontinentalExchange (ICE) as the stock surged. Goldman Sachs has lowered its stake in the co to 4.7%, or 2.7m shares, down from 7.5%, or 4.26m shares. Morgan Stanley also disclosed on Oct. 24 that it had lowered its stake in ICE to 4.23%, or 2.4m shares, down from 7.4%, or 4.2m shares.
Sharesleuth.com has real nasty piece on UTEK (UTK). Last time they highlighted Xethanol (XNL), that saw its shares drop sharply after the post. Read whole story here.
Wednesday, October 25, 2006
Calls of Note Part 2
- Goldman is adding Western Union (NYSE:WU) to their Conviction Buy List with a price target of $25, implying 25% return potential. With solid 3Q2006 results and the beginning signs of stabilization in domestic and Mexico transactions now behind us, the firm believes the myopic focus on near-term trends should begin to slowly fade, and Western Union's compelling international expansion opportunities, the strength of its highly productive agent network, and its industry-leading 25% return on invested capital should garner more serious attention. They expect the December quarter to mark a trough for fundamentals, and recommend building positions in WU now.
Key catalysts for the stock are: (1) A potential preferable outcome from the hearing with the Arizona Superior court on October 30. 2) Further evidence in the December quarter (particularly post-elections) of stabilization in Mexico and domestic transaction trends.
Notablecalls: Expect to see buying interest in WU today and in the coming days. Picks in GSCO's Conviction Buy list have performed pretty well.
Key catalysts for the stock are: (1) A potential preferable outcome from the hearing with the Arizona Superior court on October 30. 2) Further evidence in the December quarter (particularly post-elections) of stabilization in Mexico and domestic transaction trends.
Notablecalls: Expect to see buying interest in WU today and in the coming days. Picks in GSCO's Conviction Buy list have performed pretty well.
Calls of Note Part 1
- Prudential notes that according to Mercury, Intel (NASDAQ:INTC) MPU ASPs have declined by 22% over the past 12 months, after enjoying a 3 year period of stability. Drilling down further into the Mercury data reveals 2 concerning trends:
1) In the desktop MPU segment, ASPs declined by 23% over the past 1.5 yrs, and the emergence of "Midrange" MPUs (priced at new ASPs in the "seam" between historical Performance and Value price points) appears to be cannibalizing high end MPU sales. Our concern is that this segment continues to cannibalize high end MPUs, causing continued price erosion in the desktop MPU stack.
2) In the mobile MPU segment, ASPs declined by 21% over six quarters, with price pressures in both low-end and high-end segments.
Firm thinks that the ASP erosion is driven by 1) the high-end MPU is providing more functionality than the mainstream consumer needs or is willing to pay for, and 2) after struggling in 2002, AMD has emerged with both a product cycle and material capacity for the first time in perhaps a decade. They don't expect these dynamics to materially change and expect continued ASP erosion for Intel.
Firm remains concerned about Intel ASPs and margins.They remain Underweight the stock.
Notablecalls: Not actionable but good to know category.
1) In the desktop MPU segment, ASPs declined by 23% over the past 1.5 yrs, and the emergence of "Midrange" MPUs (priced at new ASPs in the "seam" between historical Performance and Value price points) appears to be cannibalizing high end MPU sales. Our concern is that this segment continues to cannibalize high end MPUs, causing continued price erosion in the desktop MPU stack.
2) In the mobile MPU segment, ASPs declined by 21% over six quarters, with price pressures in both low-end and high-end segments.
Firm thinks that the ASP erosion is driven by 1) the high-end MPU is providing more functionality than the mainstream consumer needs or is willing to pay for, and 2) after struggling in 2002, AMD has emerged with both a product cycle and material capacity for the first time in perhaps a decade. They don't expect these dynamics to materially change and expect continued ASP erosion for Intel.
Firm remains concerned about Intel ASPs and margins.They remain Underweight the stock.
Notablecalls: Not actionable but good to know category.
Color on quarter: Cymer (NASDAQ:CYMI)
Several tier-1 firms are defending Cymer (NASDAQ:CYMI) this AM after the co issued in-line results but lowered Q4 guidance:
- Merrill Lynch notes Cymer's record 3Q results were in-line with expectations but the 4Q outlook fell short due to advanced laser shipment delays to 1Q07. Although disappointed with the pushouts, the firm believes this is a one quarter timing issue, rather than a change in fundamentals. Momentum should resume in 2007, both for revenues and margin expansion. Thus, they see weakness in the stock is a buying opportunity as are raising 2007 estimate and reiterate their Buy rating and $59 PT.
Cymer reported 3Q EPS of $0.68 above our $0.65 consensus estimate on 6% Q/Q revenue growth. Gross margins improved to 49.6% from 47.9% Q/Q. ASPs were up 10% to $1,064K. Higher utilization of light sources drove consumables (service and spares) to record levels at 50% of sales on a growing installed base.
3Q Orders of $142 million increased 11% Q/Q, slightly above ML's $140mm estimate. Cymer guided 4Q revenues to decline 5-7% Q/Q and gross margins of 48% due to XLA 300 (immersion) pushouts. These carry higher ASPs and margins so the impact on 4Q is large, but shipments should occur in 1Q07.
Firm lowered their 2006 estimates to reflect the XLA 300 pushouts from $2.45 to $2.30. 2007 estimate increases from $3.00 to $3.05 driven by operating margin expansion. They are initiating 2008 EPS estimate of $3.55.
- JP Morgan notes Cymer reported in line C3Q06 results ($0.72 PF/$0.68 GAAP) with decent margin expansion and impressive cash flow. Relative to C4Q06 guidance, this is the
first major disappointment that the co overtly missed in quite some time. While it is tempting to get negative on this story given the deep pot hole from a near-term fundamental momentum perspective, they are not. Cymer demonstrated its business model potential in C3Q06 with GMs at 50% and $50 million of free cash flow. Based on the probability of consistent above-average growth and secular margin expansion, combined with sudden valuation contraction, they are maintaining their OW rating and recommend buying the stock on weakness, aggressively in the low $40's or worse.
At $39.50 (post close), CYMI shares trade at 12.3x C2007 PF EPS estimate of $3.20 versus
universe average of 13.2x. Despite a near-term momentum pause in the rate of Cymer's financial progression, given the gestating immersion story, expanding secular margins, and laser-based litho growing as a percentage of total lithography market, the firm expects CYMI shares to offer secular above-average EPS growth potential, which should drive stock price outperformance over time.
Notablecalls: CYMI's a keeper here. No question about. JP's wrong here saying it's the first miss in quite some time. CYMI has guided "down" several times over the last 18 months. And it always bounces as the more savvy traders know there is still lots of demand for their tools. Just take a look at ASP's up 10%! CYMI's a winner here. Buying it down 12% will most likely make you money.
- Merrill Lynch notes Cymer's record 3Q results were in-line with expectations but the 4Q outlook fell short due to advanced laser shipment delays to 1Q07. Although disappointed with the pushouts, the firm believes this is a one quarter timing issue, rather than a change in fundamentals. Momentum should resume in 2007, both for revenues and margin expansion. Thus, they see weakness in the stock is a buying opportunity as are raising 2007 estimate and reiterate their Buy rating and $59 PT.
Cymer reported 3Q EPS of $0.68 above our $0.65 consensus estimate on 6% Q/Q revenue growth. Gross margins improved to 49.6% from 47.9% Q/Q. ASPs were up 10% to $1,064K. Higher utilization of light sources drove consumables (service and spares) to record levels at 50% of sales on a growing installed base.
3Q Orders of $142 million increased 11% Q/Q, slightly above ML's $140mm estimate. Cymer guided 4Q revenues to decline 5-7% Q/Q and gross margins of 48% due to XLA 300 (immersion) pushouts. These carry higher ASPs and margins so the impact on 4Q is large, but shipments should occur in 1Q07.
Firm lowered their 2006 estimates to reflect the XLA 300 pushouts from $2.45 to $2.30. 2007 estimate increases from $3.00 to $3.05 driven by operating margin expansion. They are initiating 2008 EPS estimate of $3.55.
- JP Morgan notes Cymer reported in line C3Q06 results ($0.72 PF/$0.68 GAAP) with decent margin expansion and impressive cash flow. Relative to C4Q06 guidance, this is the
first major disappointment that the co overtly missed in quite some time. While it is tempting to get negative on this story given the deep pot hole from a near-term fundamental momentum perspective, they are not. Cymer demonstrated its business model potential in C3Q06 with GMs at 50% and $50 million of free cash flow. Based on the probability of consistent above-average growth and secular margin expansion, combined with sudden valuation contraction, they are maintaining their OW rating and recommend buying the stock on weakness, aggressively in the low $40's or worse.
At $39.50 (post close), CYMI shares trade at 12.3x C2007 PF EPS estimate of $3.20 versus
universe average of 13.2x. Despite a near-term momentum pause in the rate of Cymer's financial progression, given the gestating immersion story, expanding secular margins, and laser-based litho growing as a percentage of total lithography market, the firm expects CYMI shares to offer secular above-average EPS growth potential, which should drive stock price outperformance over time.
Notablecalls: CYMI's a keeper here. No question about. JP's wrong here saying it's the first miss in quite some time. CYMI has guided "down" several times over the last 18 months. And it always bounces as the more savvy traders know there is still lots of demand for their tools. Just take a look at ASP's up 10%! CYMI's a winner here. Buying it down 12% will most likely make you money.
Paperstand
According to the WSJ, some investors are starting to think Clear Channel Comm. (CCU) might be ripe for a family-led buyout. But like many media co’s, Clear Channel has been hurt in recent years by a soft ad mkt, which arrived just as the industry faced greater competition from rivals such as satellite radio and iPods. Ppl familiar with the situation say CEO Mark Mays is frustrated by the stock's inability to push much past $30. Meanwhile, Clear Channel's performance has put the co on the radar of some activist investors. The California Public Employees' Retirement System added Clear Channel to its corporate focus list this year, citing concerns such as the stock's underperformance over the past 5 years. And recent filings show that Highfields Capital Mgmt has taken a 1% stake in the co. The situation has many observers speculating the Mays family's next move may involve some kind of deal to take the co private.
“Heard on the Street” column discusses Comcast (CMSCA), whose shares hit 52w high yesterday. The co will report 3Q earnings tomorrow that are expected to show strong sales. Comcast is set to unveil Fearnet, a collection of horror movies and other scary programming that the co plans to make available on its Internet portal, its VOD service and to cellphone users. Moves like Fearnet also tend to reassure investors that Comcast isn't about to use its high-priced shares to launch another huge takeover bid, as it did in its ill-fated effort to take over Disney in ‘04. Rumors have been circulating for weeks that Comcast has in its crosshairs co’s ranging from SprintNextel (S) to Yahoo (YHOO). Such a move by Comcast would likely depress shares b/c, as with the Disney bid, it would indicate mgmt was unsettled about cable's long-term future. Indications the co isn't interested in major acquisitions right now should have the opposite effect.
According to the Barron’s Online, lately, there's been a buzz in the mkt about electronic derivatives exchanges such as the International Securities Exchange (ISE) and Intercontinental Exchange (ICE) following the CME's $8bn offer for the CBoT. "Portfolio managers are saying that no sector is experiencing so much change and growth," says Richard Herr, of Keefe, Bruyette & Woods. Article suggests that an investor should buy exchange stocks b/c profit margins are high and fee-rich derivatives volumes are growing fast and show no signs of slowing down. Those factors should drive earnings growth at derivatives exchanges for at least 12 more months.
“Inside Scoop” section reports that 3 investment firms have recently wrapped up purchases of shares of Chipotle Mexican Grill (CMG). In the past 2 weeks, Oz Mgmt, Deephaven Capital Mgmt and Atticus Capital have each disclosed stakes in Chipotle's class A or class B shares.
“Heard on the Street” column discusses Comcast (CMSCA), whose shares hit 52w high yesterday. The co will report 3Q earnings tomorrow that are expected to show strong sales. Comcast is set to unveil Fearnet, a collection of horror movies and other scary programming that the co plans to make available on its Internet portal, its VOD service and to cellphone users. Moves like Fearnet also tend to reassure investors that Comcast isn't about to use its high-priced shares to launch another huge takeover bid, as it did in its ill-fated effort to take over Disney in ‘04. Rumors have been circulating for weeks that Comcast has in its crosshairs co’s ranging from SprintNextel (S) to Yahoo (YHOO). Such a move by Comcast would likely depress shares b/c, as with the Disney bid, it would indicate mgmt was unsettled about cable's long-term future. Indications the co isn't interested in major acquisitions right now should have the opposite effect.
According to the Barron’s Online, lately, there's been a buzz in the mkt about electronic derivatives exchanges such as the International Securities Exchange (ISE) and Intercontinental Exchange (ICE) following the CME's $8bn offer for the CBoT. "Portfolio managers are saying that no sector is experiencing so much change and growth," says Richard Herr, of Keefe, Bruyette & Woods. Article suggests that an investor should buy exchange stocks b/c profit margins are high and fee-rich derivatives volumes are growing fast and show no signs of slowing down. Those factors should drive earnings growth at derivatives exchanges for at least 12 more months.
“Inside Scoop” section reports that 3 investment firms have recently wrapped up purchases of shares of Chipotle Mexican Grill (CMG). In the past 2 weeks, Oz Mgmt, Deephaven Capital Mgmt and Atticus Capital have each disclosed stakes in Chipotle's class A or class B shares.
Color on quarter: Amazon.com (NASDAQ:AMZN)
Several firms are commenting on Amazon.com (NASDAQ:AMZN) after the co announced its Q3 earnings and issued guidance:
- Bear Stearns notes revenues of $2.31B (up 24.2% YoY) was ahead of their/Street estimates of $2.26 / $2.25B. Excluding FX, revenues grew 23.1% YoY. After normalizing for Harry Potter 6 and attachment sales in 3Q05, YoY growth approached 26% YoY, driven by outperformance in the international segment, which grew the top line by 28.5% YoY to $1.05B or 26%, excluding FX. Gross margin stood at 23.8%, ahead of firm's estimate of 23.0%. Pro Forma operating income was $72M, or 3.1% margin, ahead of their estimate of 2.8%. GAAP EPS was $0.05, ahead of firm/street estimates of $0.03.
Amazon increased full year revenue guidance, the midpoint of which implies accelerating revenue growth for 2006. However, the midpoint of the Pro Forma operating income guidance of $180M-$270M for 4Q06 was 4% below firm's expectations, implying that Amazon is anticipating higher than anticipated pressure on gross margins in the quarter, offset by the decline in the growth rate of technology and content costs. Maintains Outperform.
- Deutsche Banks maintains HOLD rating on shares of Amazon after the company in their view reported in-line to slightly better 3Q results (near the top-end of previously issued guidance). Sentiment on the stock was once again meaningfully negative heading into the quarter as investors fretted about margin contraction and slowing top-line growth. However the solid quarterly performance put these concerns to rest, thereby pushing shares up 15% in after-market the firm is encouraged by the upside delivered by Amazon, they think that the stock likely gives back the overnight gains (into the mid-$30s range). Considering that firm's views for 4Q & 2007 operating profitability remain largely unchanged (save for higher revs), they think that investors wait for incremental bottom-line upside to aggressively step up in the stock.
Spending on technology and content increased 44%Y/Y to $156mn, lower than their estimate of $160mn and a slower growth rate than previous quarters of 60%+. Firm highlights that technology spend as a percent of revenue decreased from 7.1% in the last quarter to 6.8% in this quarter suggesting that Amazon is beginning to leverage its substantial investment spend and that its reinvestment in the business is nearing completion.
However, sales & marketing spend did jump to $63mn in the quarter (2.7% of sales) and represented an acceleration in Y/Y growth to 50% (vs. 25-30% in previous quarters). Deutsche does not believe this is the start of a long-term trend. Given the substantial new product roll-outs, e.g. Prime, Unbox, Web services etc. Amazon has stepped up its efforts to market these products to consumers/businesses and raise awareness.
Firm's 4Q06 revenues are now $3.8bn (up from $3.70bn), representing 28% Y/Y growth. New proforma (cash-tax) adjusted EPS is $0.49 (vs. $0.50 previously). For 2007, they now expect revenues of $12.4bn and pro forma EPS of $1.24 vs. previous Rev/EPS estimate of $11.900/$1.24. Raise Price Target to $35 (from $31).
- Goldman Sachs notes that neither 3Q2006 results nor the updated outlook changes their long-term view on growth or valuation. Results continued to highlight increasing costs of
growth with stable 23% (ex FX) yoy revenue growth but a 34% yoy decline in operating income. A 50% yoy increase in marketing (2x eBay) leaves them to question the sustainability of revenue growth if and when Amazon tapers spending to expand margins. Firm has no meaningful estimate changes but are moving to a 12-month price target of $35 versus prior year-end 2006 price target of $30.
The stock will likely be strong in the near term due to short covering, a view that margins and ROIC have bottomed, and investors trading around the positive holiday season rhetoric through Thanksgiving. Several factors could make the gains short lived: 1) a realization that AMZN lowered the previous 4Q2006 margin outlook again; 2) margins post the seasonal expansion of 4Q will decline qoq in 1Q and will likely not improve enough in 2007 without a corresponding revenue slowdown to warrant a higher valuation; and 3) competitive and secular issues continue to increase.
Maintains Neutral.
Notablecalls: Deutsche called the fade in YHOO last week. I didn't think it would work but it did. Think they will be right about AMZN too. A 15% move is a bit excessive in case of AMZN. Especially if there are still legit concerns regarding margins. Shorting AMZN is likely a money-maker.
- Bear Stearns notes revenues of $2.31B (up 24.2% YoY) was ahead of their/Street estimates of $2.26 / $2.25B. Excluding FX, revenues grew 23.1% YoY. After normalizing for Harry Potter 6 and attachment sales in 3Q05, YoY growth approached 26% YoY, driven by outperformance in the international segment, which grew the top line by 28.5% YoY to $1.05B or 26%, excluding FX. Gross margin stood at 23.8%, ahead of firm's estimate of 23.0%. Pro Forma operating income was $72M, or 3.1% margin, ahead of their estimate of 2.8%. GAAP EPS was $0.05, ahead of firm/street estimates of $0.03.
Amazon increased full year revenue guidance, the midpoint of which implies accelerating revenue growth for 2006. However, the midpoint of the Pro Forma operating income guidance of $180M-$270M for 4Q06 was 4% below firm's expectations, implying that Amazon is anticipating higher than anticipated pressure on gross margins in the quarter, offset by the decline in the growth rate of technology and content costs. Maintains Outperform.
- Deutsche Banks maintains HOLD rating on shares of Amazon after the company in their view reported in-line to slightly better 3Q results (near the top-end of previously issued guidance). Sentiment on the stock was once again meaningfully negative heading into the quarter as investors fretted about margin contraction and slowing top-line growth. However the solid quarterly performance put these concerns to rest, thereby pushing shares up 15% in after-market the firm is encouraged by the upside delivered by Amazon, they think that the stock likely gives back the overnight gains (into the mid-$30s range). Considering that firm's views for 4Q & 2007 operating profitability remain largely unchanged (save for higher revs), they think that investors wait for incremental bottom-line upside to aggressively step up in the stock.
Spending on technology and content increased 44%Y/Y to $156mn, lower than their estimate of $160mn and a slower growth rate than previous quarters of 60%+. Firm highlights that technology spend as a percent of revenue decreased from 7.1% in the last quarter to 6.8% in this quarter suggesting that Amazon is beginning to leverage its substantial investment spend and that its reinvestment in the business is nearing completion.
However, sales & marketing spend did jump to $63mn in the quarter (2.7% of sales) and represented an acceleration in Y/Y growth to 50% (vs. 25-30% in previous quarters). Deutsche does not believe this is the start of a long-term trend. Given the substantial new product roll-outs, e.g. Prime, Unbox, Web services etc. Amazon has stepped up its efforts to market these products to consumers/businesses and raise awareness.
Firm's 4Q06 revenues are now $3.8bn (up from $3.70bn), representing 28% Y/Y growth. New proforma (cash-tax) adjusted EPS is $0.49 (vs. $0.50 previously). For 2007, they now expect revenues of $12.4bn and pro forma EPS of $1.24 vs. previous Rev/EPS estimate of $11.900/$1.24. Raise Price Target to $35 (from $31).
- Goldman Sachs notes that neither 3Q2006 results nor the updated outlook changes their long-term view on growth or valuation. Results continued to highlight increasing costs of
growth with stable 23% (ex FX) yoy revenue growth but a 34% yoy decline in operating income. A 50% yoy increase in marketing (2x eBay) leaves them to question the sustainability of revenue growth if and when Amazon tapers spending to expand margins. Firm has no meaningful estimate changes but are moving to a 12-month price target of $35 versus prior year-end 2006 price target of $30.
The stock will likely be strong in the near term due to short covering, a view that margins and ROIC have bottomed, and investors trading around the positive holiday season rhetoric through Thanksgiving. Several factors could make the gains short lived: 1) a realization that AMZN lowered the previous 4Q2006 margin outlook again; 2) margins post the seasonal expansion of 4Q will decline qoq in 1Q and will likely not improve enough in 2007 without a corresponding revenue slowdown to warrant a higher valuation; and 3) competitive and secular issues continue to increase.
Maintains Neutral.
Notablecalls: Deutsche called the fade in YHOO last week. I didn't think it would work but it did. Think they will be right about AMZN too. A 15% move is a bit excessive in case of AMZN. Especially if there are still legit concerns regarding margins. Shorting AMZN is likely a money-maker.
Tuesday, October 24, 2006
FTN Midwest Securities on HDD's
- People at FTN Midwest Securities have issued a nice summary on HDD names:
Firm notes that with six drive makers producing notebook drives, the segment continues to be one of the most dynamic and competitive segments of the HDD market.
Although demand is solid and notebook shipments are expected to be up 25-30% in 2006, notebook drive pricing has remained aggressive in 3Q. The desire by relatively new entrants STX and WDC to gain share and Asian incumbents, particularly Hitachi GST, to stem share losses has led to aggressive price declines.
Outside of the overall strength of the notebookmarket, the biggest takeaway from their perspective is WDC design wins and the likely share gains in 3Q and 4Q that go along with them.
With fundamentals improving entering the seasonally strong CY4Q and Seagate (NYSE:STX) shares trading at historically low levels (8x FTN's CY07E of $2.66), they believe this to be an attractive entry point for investors. Firm is maintaining their BUY rating on STX and $31 price target. They believe that STX will disproportionately benefit in the long term fromthe Maxtor acquisition as well as underlying growth in the utilization of hard drives. Longterm catalysts for growth are 1) a more stable pricing environment particularly in the enterprise and desktop segments, 2) increased scale via share gains, 3) product depth, and leading technology position. They also believe that downside is relatively limited at these levels. Using STX’s two year low sales multiple, they estimate that downside is limited to $17 (.81x FY07 sales estimate).
FTN is also bullish on Western Digital (NYSE:WDC) given share gains in the desktop segment and the significant strides it has made to close the technology gap with announced volume production of 160 GB per platter desktop drives and 80 GB per platter, PMR based, notebook drives. Firm believes that the long term positives with this story clearly outweigh the shorter term negatives and are maintaining BUY rating and $24 price target. WDCshares are currently trading at 8x CY07E of $2.01, a discount to its mean forward year multiple of 12x. Using WDC’s two year low sales multiple, they estimate that downside is limited to $11 (.48x FY07 sales estimate).
Although they like the risk reward proposition with HDD OEMs, the firm is less bullish on theircomponent suppliers who could feel the negative impacts of the excess inventories
accumulated throughout 2006 into the historically strong December quarter. Despite the recent sell off of Komag (NASDAQ:KOMG), they would remain on the sidelines as the draw down of excess drive inventories could potentially overlap with 2007 challenges including industry wide and company capacity additions, the loss of Maxtor’s enterprise business, and the potential negative impacts of adoption of 160 GB per platter and PMR. Additionally, share gains by Samsung whose media procurement model does not includeKOMG remains a concern.
They are also uncomfortable recommending Hutchinson Technology (NASDAQ:HTCH) at this point. Firm continues to be concerned that HTCH may lose share as STX transitions acquired revenue streams to its procurement model which they believe favors HTCH competitor Magnecomp. They also believe that new component reducing advances in technology including 160 GB and PMR could hurt HTCH if weakness with higher cap drives persists.
Overall, FTN's checks in Asia indicate that drive demand and sales were generally inlinewith expectations for the quarter. Unlike US and European distributors, Asia distributors continue to see excess inventories.
Channel pricing appears to be more aggressive in Asia than in the US or Europe. Expectations for 4Q remain positive with contacts having “good” visibility for October and November order. Solid but not robust PC demand was complemented by strong gaming console orders reinforcing our thesis that end market demand is not the major stumbling block for the HDD industry. Ongoing market share battles continue to be a cause for concern but contacts see improvements in inventory andpricing indicating that the worst should be over.
Notablecalls: Nice little summary for the investment types out there. None of this stuff is outright actionable but it sure does help with the overall picture. This is also about the first time I have highlighted FTN Midwest on this page. Welcome to the club, guys! Hope to see more of you here.
Firm notes that with six drive makers producing notebook drives, the segment continues to be one of the most dynamic and competitive segments of the HDD market.
Although demand is solid and notebook shipments are expected to be up 25-30% in 2006, notebook drive pricing has remained aggressive in 3Q. The desire by relatively new entrants STX and WDC to gain share and Asian incumbents, particularly Hitachi GST, to stem share losses has led to aggressive price declines.
Outside of the overall strength of the notebookmarket, the biggest takeaway from their perspective is WDC design wins and the likely share gains in 3Q and 4Q that go along with them.
With fundamentals improving entering the seasonally strong CY4Q and Seagate (NYSE:STX) shares trading at historically low levels (8x FTN's CY07E of $2.66), they believe this to be an attractive entry point for investors. Firm is maintaining their BUY rating on STX and $31 price target. They believe that STX will disproportionately benefit in the long term fromthe Maxtor acquisition as well as underlying growth in the utilization of hard drives. Longterm catalysts for growth are 1) a more stable pricing environment particularly in the enterprise and desktop segments, 2) increased scale via share gains, 3) product depth, and leading technology position. They also believe that downside is relatively limited at these levels. Using STX’s two year low sales multiple, they estimate that downside is limited to $17 (.81x FY07 sales estimate).
FTN is also bullish on Western Digital (NYSE:WDC) given share gains in the desktop segment and the significant strides it has made to close the technology gap with announced volume production of 160 GB per platter desktop drives and 80 GB per platter, PMR based, notebook drives. Firm believes that the long term positives with this story clearly outweigh the shorter term negatives and are maintaining BUY rating and $24 price target. WDCshares are currently trading at 8x CY07E of $2.01, a discount to its mean forward year multiple of 12x. Using WDC’s two year low sales multiple, they estimate that downside is limited to $11 (.48x FY07 sales estimate).
Although they like the risk reward proposition with HDD OEMs, the firm is less bullish on theircomponent suppliers who could feel the negative impacts of the excess inventories
accumulated throughout 2006 into the historically strong December quarter. Despite the recent sell off of Komag (NASDAQ:KOMG), they would remain on the sidelines as the draw down of excess drive inventories could potentially overlap with 2007 challenges including industry wide and company capacity additions, the loss of Maxtor’s enterprise business, and the potential negative impacts of adoption of 160 GB per platter and PMR. Additionally, share gains by Samsung whose media procurement model does not includeKOMG remains a concern.
They are also uncomfortable recommending Hutchinson Technology (NASDAQ:HTCH) at this point. Firm continues to be concerned that HTCH may lose share as STX transitions acquired revenue streams to its procurement model which they believe favors HTCH competitor Magnecomp. They also believe that new component reducing advances in technology including 160 GB and PMR could hurt HTCH if weakness with higher cap drives persists.
Overall, FTN's checks in Asia indicate that drive demand and sales were generally inlinewith expectations for the quarter. Unlike US and European distributors, Asia distributors continue to see excess inventories.
Channel pricing appears to be more aggressive in Asia than in the US or Europe. Expectations for 4Q remain positive with contacts having “good” visibility for October and November order. Solid but not robust PC demand was complemented by strong gaming console orders reinforcing our thesis that end market demand is not the major stumbling block for the HDD industry. Ongoing market share battles continue to be a cause for concern but contacts see improvements in inventory andpricing indicating that the worst should be over.
Notablecalls: Nice little summary for the investment types out there. None of this stuff is outright actionable but it sure does help with the overall picture. This is also about the first time I have highlighted FTN Midwest on this page. Welcome to the club, guys! Hope to see more of you here.
Calls of Note Part 4
- UBS thinks Sapient (NASDAQ:SAPE) could be viewed as a logical acquisition target because:: 1) SAPE now has an independent chairman, 2) business model attractiveness (high-end service offerings coupled with balanced onshore/offshore delivery model), 3) buyers could benefit from sizeable revenue & cost synergies (which would enhance the accretiveness of the acq), 4) attractive valuation, 5) an efficient path to creating shareholder value given SAPE's execution issues.
Firm analyzed SAPE from the perspective of both strategic and financial buyers. Their merger model suggests that at a 10% EV/EBITDA discount to peers (implied takeout price of $7.80/sh), SAPE would be EPS-accretive in yr 1 by anywhere from 0.3% for IBM to about 9% for CTSH & Capgemini. LBO model indicates potential IRR of 26% for financial buyers at $7/sh.
In firm's view, macro demand for SAPE's core consulting/SI services and onsite/offshore model remains strong, as evidenced by the co's recent pre-announcement of revs at or above the high end of guidance. To support their positive thesis (i.e., shares are undervalued on the basis of core earnings power), they will be looking to catch up with the new CEO/CFO on strategic priorities soon.
Maintains Buy and ups tgt to $8.50 from $8.
Notablecalls: I think this one is a pretty powerful call. I also like the fact they will catch up with the CEO/CFO as it means we will have at last one more positive note on SAPE in the coming weeks. Actionable call!
Firm analyzed SAPE from the perspective of both strategic and financial buyers. Their merger model suggests that at a 10% EV/EBITDA discount to peers (implied takeout price of $7.80/sh), SAPE would be EPS-accretive in yr 1 by anywhere from 0.3% for IBM to about 9% for CTSH & Capgemini. LBO model indicates potential IRR of 26% for financial buyers at $7/sh.
In firm's view, macro demand for SAPE's core consulting/SI services and onsite/offshore model remains strong, as evidenced by the co's recent pre-announcement of revs at or above the high end of guidance. To support their positive thesis (i.e., shares are undervalued on the basis of core earnings power), they will be looking to catch up with the new CEO/CFO on strategic priorities soon.
Maintains Buy and ups tgt to $8.50 from $8.
Notablecalls: I think this one is a pretty powerful call. I also like the fact they will catch up with the CEO/CFO as it means we will have at last one more positive note on SAPE in the coming weeks. Actionable call!
Calls of Note Part 3
- Banc of America notes Eagle Test Systems (NASDAQ:EGLT) shares have been under pressure recently anticipating weak analog commentary from TXN (55% of EGLT's June quarter sales) in light of pre- announcements/weak numbers from other analog players.
TXN's 3Q06 earnings call highlighted few positive comments: 1) company'scommentary implies most weakness expected in the December quarter is tied to wireless handset market (35% of September quarter sales), in turn suggesting relative stability initshigh performance analogbusiness(18% of September quarter sales), and 2) analog inventories remain under control. Management views analog as a growth segment and the firm estimates TXN's high performance analog market share at 21% and overall analog share at 15-16%.
EGLT supplies test solutions to TXN's high performance analog segment. Texas Instrument was their largest customer in FY2005, about 44% of sales. TXN has spent roughly 80% of their 2006 estimated cap-ex of $1.3B at the end of 3Q06.
Maintains Buy and $23 on EGLT.
Notablecalls: Not actionable but good to know category.
TXN's 3Q06 earnings call highlighted few positive comments: 1) company'scommentary implies most weakness expected in the December quarter is tied to wireless handset market (35% of September quarter sales), in turn suggesting relative stability initshigh performance analogbusiness(18% of September quarter sales), and 2) analog inventories remain under control. Management views analog as a growth segment and the firm estimates TXN's high performance analog market share at 21% and overall analog share at 15-16%.
EGLT supplies test solutions to TXN's high performance analog segment. Texas Instrument was their largest customer in FY2005, about 44% of sales. TXN has spent roughly 80% of their 2006 estimated cap-ex of $1.3B at the end of 3Q06.
Maintains Buy and $23 on EGLT.
Notablecalls: Not actionable but good to know category.
Calls of Note Part 2
- UBS is lowering estimates for United Surgical Partners (NASDAQ:USPI) to reflect a more conservative outlook going into 3Q results. Firm's 3QE EPS now $0.28 vs. $0.31 previously, FY'06E $1.15 vs. $1.18 and FY'07E $1.40 vs. $1.55 prior. Revised estimates now include the sale of partial ownership interest in Surgis centers to NFP hospital partners and low-single-digit s.s. rev growth at consolidated facilities.
Firm expects USPI will use the 3Q results call to reset LT expectations for s.s. rev growth from 9-12% to a range that is more likely to be in the mid-single digits. They also expect the company may be somewhat conservative in setting 2007 EPS guidance given the potential for a sale of Surgis assets in the near future.
With stock trading at ~ 18x revised $1.40 FY'07 EPS estimate, which includes more conservative growth projections (low to mid single digit s.s. revs) and no accretion from capital reinvestment accretion (expect FCF of $100m in '07E), they believe the potential resetting of expectations should be viewed positively, especially with the stock down nearly 40% from highs earlier this year.
Maintains Neutral and $29 tgt.
Notablecalls: Expect USPI stock to experience weakness in the coming days. Not a high conviction short, though.
Firm expects USPI will use the 3Q results call to reset LT expectations for s.s. rev growth from 9-12% to a range that is more likely to be in the mid-single digits. They also expect the company may be somewhat conservative in setting 2007 EPS guidance given the potential for a sale of Surgis assets in the near future.
With stock trading at ~ 18x revised $1.40 FY'07 EPS estimate, which includes more conservative growth projections (low to mid single digit s.s. revs) and no accretion from capital reinvestment accretion (expect FCF of $100m in '07E), they believe the potential resetting of expectations should be viewed positively, especially with the stock down nearly 40% from highs earlier this year.
Maintains Neutral and $29 tgt.
Notablecalls: Expect USPI stock to experience weakness in the coming days. Not a high conviction short, though.
Calls of Note Part 1
- Bear Stearns comments on NVIDIA (NASDAQ:NVDA) after Mercury Research released 3Q chipset data on Monday. The key takeaway was NVIDIA's significant share gain, from 12% in 2Q to 17% in 3Q. In AMD chipsets, NVIDIA's share increased from 52% to 61%. NVIDIA also benefited from the overall strength in AMD chipsets, which increased 41% QoQ to 19.6M units, greater than AMD's MPU shipment growth of 18% QoQ to 14.8M units, likely due to Dell preparing for its AMD-based system ramp in 4Q. Overall, NVIDIA's chipset shipments increased 66% QoQ to 12.3M units (98% of which were AMD chipsets).
The data clearly shows that the AMD-ATI merger did not impact NVIDIA's chipset business in 3Q. Based on current design win activity, the firm believes there is unlikely to be any meaningful impact in the next two quarters as well. NVIDIA's share gain in AMD chipsets came at the expense of SIS and ATI, whose shares went from 9% to 3%, and 27% to 23%, respectively. Meanwhile, in the Intel chipset space, ATI's share declined significantly as expected, from 8% to 2%. ATI exiting the Intel chipset market clearly presents an opportunity for NVIDIA to ramp up its Intel chipset business next year.
They remain comfortable with their above-consensus estimates for NVIDIA. Firm reiterates their Outperform rating and $37 price target. Apart from the momentum in chipsets, which they believe is be here to stay and grow, they expect NVIDIA's competitive lead in desktop GPUs to continue into next year and in fact widen, as well as its share gain in notebook GPUs to continue next year. They also expect continued gross margin expansion in upcoming quarters.
Notablecalls: Not actionable but good to know category.
The data clearly shows that the AMD-ATI merger did not impact NVIDIA's chipset business in 3Q. Based on current design win activity, the firm believes there is unlikely to be any meaningful impact in the next two quarters as well. NVIDIA's share gain in AMD chipsets came at the expense of SIS and ATI, whose shares went from 9% to 3%, and 27% to 23%, respectively. Meanwhile, in the Intel chipset space, ATI's share declined significantly as expected, from 8% to 2%. ATI exiting the Intel chipset market clearly presents an opportunity for NVIDIA to ramp up its Intel chipset business next year.
They remain comfortable with their above-consensus estimates for NVIDIA. Firm reiterates their Outperform rating and $37 price target. Apart from the momentum in chipsets, which they believe is be here to stay and grow, they expect NVIDIA's competitive lead in desktop GPUs to continue into next year and in fact widen, as well as its share gain in notebook GPUs to continue next year. They also expect continued gross margin expansion in upcoming quarters.
Notablecalls: Not actionable but good to know category.
Color on quarter: Texas Instruments (NYSE:TXN)
Several firms are commenting on Texas Instruments (NYSE:TXN) after the co issued not-so-strong results and mixed guidance last night:
- Merrill Lynch notes Texas Instruments is a well-run company that is running out of margin leverage in an end market that is beginning to slow. It is a great company, but it has not been a money making investment for more than a year now. Firm expects the flat performance in the stock to continue.
The stock continues to be reasonably valued but no more, in firm's view. TI's status as default large-cap semiconductor holding, combined with the 17x earnings multiple, should keep the stock from going down, but they don't see where multiple expansion comes from. As the September quarter results illustrate, TI is operating at peak margins already.
Looking at the numbers, their 2007 GAAP earnings estimate settles at $1.89 on revenue growth of 10%. YoY operating earnings growth is 11%, but the per-share growth is higher as a result of TXN's continued aggressive stock buyback activity. Firm thinks consensus estimates may not be adequately factoring that in. They are initiating a 2008 earnings estimate of $2.20. Maintains Neutral.
- JP Morgan notes they believe guidance for 4Q06 is aggressive as book to bill was the
lowest in five years and the company is expecting higher turns than 3Q06. Firm also believes revenue and gross margins should decline again during 1Q07 as the inventory correction spills over in to 2007.
Notes they will consider upgrading TXN stock once they see evidence of a bottom in gross margins, which could happen during 1H07.
As a result, they are lowering C06 revenue estimate from $14.5 billion to $14.4 billion but raising C06 EPS estimate from $1.67 to $1.68 due to lower shares. Firm is also lowering C07 revenue and EPS estimates from $15.1 billion and $1.79 to $14.6 billion and $1.71.
TXN is trading at 3.4X its C06E sales, near the mid point of its historic range of 3.0 to 4.0 times sales. Firm is concerned on downside risk to estimates and therefore is reiterating Neutral rating.
- Goldman Sachs notes they remain cautious on TI's fundamentals and on the stock as inventory continues to plague the industry and believe another shoe could drop for TI, which would pressure its sales and margins. Firm prefer to recommend cyclical stocks like TI, when margins are nearing cyclical trough, allowing for operating leverage. While TI has done a good job improving its margin profile, they view current margins as being at their cyclical peak. Hence, the firm maintains SELL rating on the stock.
- Citigroup notes that TXN's guidance still leaves room for shortfall in analog revenues and corporate GM; mid-q update on 12/11/06 now a potential negative.
Handsets cited as concern, but the firm is not too worried given solid units at operators and OEMs. Analog not cited as a concern, but they ARE worried given -2% to -4% average decline cited by peer group.
Gross margin performing better than 4Q04, but downside exists to implied guidance given analog concerns and high inventories.
They anticipate near-term downside, in line with their cautious view stated on 10/09/06. But the firm continues to like TI on a long-term basis and notes that the inventory spike in 3Q04 marked a bottom in TXN. Would view any pullback as simply an enhanced buying opportunity. Maintains Buy and $36 tgt.
TI pointed to handsets as the main culprit behind its weak guidance. Specifically, inventory build at NTT Docomo, exacerbated by application processor share incursion by Renesas, is driving the weakness. Europe and North America were also cited as being sub-seasonal.
Recent results from handset vendors (Motorola and Nokia, as well as US operator Cingular) do not point to end-demand issues. We conclude therefore that TI is suffering mainly from inventory and share issues. Based on current information, significant uncertainty about TI's near-term outcomes in handsets persists.
Longer-term, the firm has concerns about the negative impact of Renesas' incursion into TI's share. However, we note that with TI's superior market share in 3G to date, they would have to lose 30% share at NTT Docomo to Renesas in order to grow below industry growth rates.
Notablecalls: Dose of reality from TI! Expect the shares to move lower in the coming months.
- Merrill Lynch notes Texas Instruments is a well-run company that is running out of margin leverage in an end market that is beginning to slow. It is a great company, but it has not been a money making investment for more than a year now. Firm expects the flat performance in the stock to continue.
The stock continues to be reasonably valued but no more, in firm's view. TI's status as default large-cap semiconductor holding, combined with the 17x earnings multiple, should keep the stock from going down, but they don't see where multiple expansion comes from. As the September quarter results illustrate, TI is operating at peak margins already.
Looking at the numbers, their 2007 GAAP earnings estimate settles at $1.89 on revenue growth of 10%. YoY operating earnings growth is 11%, but the per-share growth is higher as a result of TXN's continued aggressive stock buyback activity. Firm thinks consensus estimates may not be adequately factoring that in. They are initiating a 2008 earnings estimate of $2.20. Maintains Neutral.
- JP Morgan notes they believe guidance for 4Q06 is aggressive as book to bill was the
lowest in five years and the company is expecting higher turns than 3Q06. Firm also believes revenue and gross margins should decline again during 1Q07 as the inventory correction spills over in to 2007.
Notes they will consider upgrading TXN stock once they see evidence of a bottom in gross margins, which could happen during 1H07.
As a result, they are lowering C06 revenue estimate from $14.5 billion to $14.4 billion but raising C06 EPS estimate from $1.67 to $1.68 due to lower shares. Firm is also lowering C07 revenue and EPS estimates from $15.1 billion and $1.79 to $14.6 billion and $1.71.
TXN is trading at 3.4X its C06E sales, near the mid point of its historic range of 3.0 to 4.0 times sales. Firm is concerned on downside risk to estimates and therefore is reiterating Neutral rating.
- Goldman Sachs notes they remain cautious on TI's fundamentals and on the stock as inventory continues to plague the industry and believe another shoe could drop for TI, which would pressure its sales and margins. Firm prefer to recommend cyclical stocks like TI, when margins are nearing cyclical trough, allowing for operating leverage. While TI has done a good job improving its margin profile, they view current margins as being at their cyclical peak. Hence, the firm maintains SELL rating on the stock.
- Citigroup notes that TXN's guidance still leaves room for shortfall in analog revenues and corporate GM; mid-q update on 12/11/06 now a potential negative.
Handsets cited as concern, but the firm is not too worried given solid units at operators and OEMs. Analog not cited as a concern, but they ARE worried given -2% to -4% average decline cited by peer group.
Gross margin performing better than 4Q04, but downside exists to implied guidance given analog concerns and high inventories.
They anticipate near-term downside, in line with their cautious view stated on 10/09/06. But the firm continues to like TI on a long-term basis and notes that the inventory spike in 3Q04 marked a bottom in TXN. Would view any pullback as simply an enhanced buying opportunity. Maintains Buy and $36 tgt.
TI pointed to handsets as the main culprit behind its weak guidance. Specifically, inventory build at NTT Docomo, exacerbated by application processor share incursion by Renesas, is driving the weakness. Europe and North America were also cited as being sub-seasonal.
Recent results from handset vendors (Motorola and Nokia, as well as US operator Cingular) do not point to end-demand issues. We conclude therefore that TI is suffering mainly from inventory and share issues. Based on current information, significant uncertainty about TI's near-term outcomes in handsets persists.
Longer-term, the firm has concerns about the negative impact of Renesas' incursion into TI's share. However, we note that with TI's superior market share in 3G to date, they would have to lose 30% share at NTT Docomo to Renesas in order to grow below industry growth rates.
Notablecalls: Dose of reality from TI! Expect the shares to move lower in the coming months.
Paperstand
The WSJ’s „Tracking the Numbers” column discusses Berkshire Hathaway (BRKA), saying that at $100,000 the shares of the co could be the cheapest most-expensive stock around. Despite its high price, some analysts say Berkshire, which now owns some 50 businesses ranging from underwear maker Fruit of the Loom to auto insurer Geico, has room to climb. "It's a 75-cent dollar right now," says Justin Fuller, of Morningstar, meaning it is about 25% undervalued. Mr. Fuller values the stock around $129,000 a share. The stock trades at a relatively inexpensive 1.6x its book value.
“Heard on the Street” column discusses banks with sizable exposure to Las Vegas. With the economy showing signs of slowing, investors may think the best play is to toss away shares of regional banks, including Zions Bancorp (ZION) and Western Alliance (WAL). Investors may win with that play in the short run, but they could lose a pretty big pot by failing to hold on to what they have for the long term. Brad Milsaps, of Sandler O'Neill, said a slowdown in home building in the Las Vegas metropolitan area will have a ripple effect on the 42 banks operating there. "In the near term you definitely have pressure," Mr. Milsaps said. But Mr. Milsaps can't ignore the gambling capital's long-term growth prospects, which he says should bode well for banks. "If there are problems in Vegas for one bank, the unfortunate thing is the perception may be that other banks in the mkt have problems as well," he said. "That may or may not be the case."
Barron’s “Inside Scoop” section reports that two directors at Western Alliance (WAL) have raised their stakes. In transactions on Oct. 19 and 20, directors William S. Boyd and M. Nafees Nagy bought a total of 79K Western Alliance shares for $2.6m. Boyd, who was the founder of Bank of Nevada, made the bulk of the purchases, shelling out $2.4m. The latest buys bring Boyd's total holdings in the co to 734K shares, or 3.2%. His daughter, Marianne Boyd Johnson, who is also a director, holds 4.6m shares, or about a 20.3% stake.
“Heard on the Street” column discusses banks with sizable exposure to Las Vegas. With the economy showing signs of slowing, investors may think the best play is to toss away shares of regional banks, including Zions Bancorp (ZION) and Western Alliance (WAL). Investors may win with that play in the short run, but they could lose a pretty big pot by failing to hold on to what they have for the long term. Brad Milsaps, of Sandler O'Neill, said a slowdown in home building in the Las Vegas metropolitan area will have a ripple effect on the 42 banks operating there. "In the near term you definitely have pressure," Mr. Milsaps said. But Mr. Milsaps can't ignore the gambling capital's long-term growth prospects, which he says should bode well for banks. "If there are problems in Vegas for one bank, the unfortunate thing is the perception may be that other banks in the mkt have problems as well," he said. "That may or may not be the case."
Barron’s “Inside Scoop” section reports that two directors at Western Alliance (WAL) have raised their stakes. In transactions on Oct. 19 and 20, directors William S. Boyd and M. Nafees Nagy bought a total of 79K Western Alliance shares for $2.6m. Boyd, who was the founder of Bank of Nevada, made the bulk of the purchases, shelling out $2.4m. The latest buys bring Boyd's total holdings in the co to 734K shares, or 3.2%. His daughter, Marianne Boyd Johnson, who is also a director, holds 4.6m shares, or about a 20.3% stake.
Monday, October 23, 2006
Calls of Note Part 6
- Ryan Beck & Co comments on American Science & Engineering (NASDAQ:ASEI) after GovExec.com reported that the Congress allocated about $50 million to the U.S. Agency for International Development (USAID) to provide security systems to scan commercial cargo leaving and entering the West Bank and the Gaza Strip. The article describes the selection of Chemonics International, a private consulting firm with close government ties that is involved in projects in a substantial number of countries to improve economic conditions and living standards.
The firm has spoken to representatives of ASEI and Chemonics but were unable to confirm a contract award as of Friday.
Apparently, Chemonics solicited and received proposals from a number of suppliers and, according to the article, has selected equipment from ASEI and Nuctech, ASEI's partner in China under an agreement where ASEI supplies Z Backscatter modules for installation on Chinese-built vehicle chassis.
On the other front, the U.S. Air Force has begun the process that we think should lead to an order for an OmniView Gantry System for installation at Charleston Air Force Base in South Carolina. This would likely be identical to those ordered recently for use at the Port of Charleston and for the King's Bay Ballistic Missile Submarine Base in Georgia.
Firm is not revising forecasts at this time; however, based on recent disclosure of 240 Z Backscatter systems deployed, they think that F07 is shaping up as a very solid year from a financial point of view. Reiterates Outperform rating and 12-month price target of $72 per
share.
Notablecalls: I like this call. I think it's actionable.
The firm has spoken to representatives of ASEI and Chemonics but were unable to confirm a contract award as of Friday.
Apparently, Chemonics solicited and received proposals from a number of suppliers and, according to the article, has selected equipment from ASEI and Nuctech, ASEI's partner in China under an agreement where ASEI supplies Z Backscatter modules for installation on Chinese-built vehicle chassis.
On the other front, the U.S. Air Force has begun the process that we think should lead to an order for an OmniView Gantry System for installation at Charleston Air Force Base in South Carolina. This would likely be identical to those ordered recently for use at the Port of Charleston and for the King's Bay Ballistic Missile Submarine Base in Georgia.
Firm is not revising forecasts at this time; however, based on recent disclosure of 240 Z Backscatter systems deployed, they think that F07 is shaping up as a very solid year from a financial point of view. Reiterates Outperform rating and 12-month price target of $72 per
share.
Notablecalls: I like this call. I think it's actionable.
Calls of Note Part 5
- Bear Stearns notes they view Noble's (NYSE:NE) achievements in cost management in the third quarter as a differentiating factor compared to many other offshore drillers.
The company had previously sailed through the second quarter with less unexpected downtime and shipyard delays than most of its peers, and it continued to keep contract drilling expenses in check in 3Q06.
Due in part to contract provisions requiring operators to pay for certain instances of downtime, the company is also expecting to benefit from a reduction in unpaid shipyard days (projected to decline by 29% in 2006 and by approximately 25% in 2007). Firm is raising their 2006 EPS estimate to $5.28 from $4.95 mainly to reflect reduced 4Q06 cost expectations. They maintain their 2007 EPS estimate at $9.65 and are introducing 2008 EPS estimate at $13.50.
They continue to rate Noble Outperform with a 2007 year-end price target of $95. While a leveraged buyout is unlikely for now, the fact that NE is undervalued (at 7.1x estimated 2007 EPS and 5.1x estimated 2008 EPS) is hard to deny.
Noble's strategy of reducing its shallow water Gulf of Mexico exposure and increasing its
deepwater drilling focus has positioned the company to maximize its earnings potential in the current business cycle. On a 2007 EV/EBITDA basis, Noble trades at a 5.1x multiple, a discount to Transocean's 6.6x multiple and in line with Diamond Offshore's 4.5x and GlobalSantaFe's 5.2x.
Notablecalls: Expect to see some buy interest in NE today.
The company had previously sailed through the second quarter with less unexpected downtime and shipyard delays than most of its peers, and it continued to keep contract drilling expenses in check in 3Q06.
Due in part to contract provisions requiring operators to pay for certain instances of downtime, the company is also expecting to benefit from a reduction in unpaid shipyard days (projected to decline by 29% in 2006 and by approximately 25% in 2007). Firm is raising their 2006 EPS estimate to $5.28 from $4.95 mainly to reflect reduced 4Q06 cost expectations. They maintain their 2007 EPS estimate at $9.65 and are introducing 2008 EPS estimate at $13.50.
They continue to rate Noble Outperform with a 2007 year-end price target of $95. While a leveraged buyout is unlikely for now, the fact that NE is undervalued (at 7.1x estimated 2007 EPS and 5.1x estimated 2008 EPS) is hard to deny.
Noble's strategy of reducing its shallow water Gulf of Mexico exposure and increasing its
deepwater drilling focus has positioned the company to maximize its earnings potential in the current business cycle. On a 2007 EV/EBITDA basis, Noble trades at a 5.1x multiple, a discount to Transocean's 6.6x multiple and in line with Diamond Offshore's 4.5x and GlobalSantaFe's 5.2x.
Notablecalls: Expect to see some buy interest in NE today.
Calls of Note Part 4
- Citigroup Semiconductor Equipment team notes that most investors remain focused on "how long will it last" rather than "how bad will it get". While this process has begun in the back-end (TER's orders -41% Q/Q), it simply has yet to occur in the front-end and must for the firm to be more positive . This week's sensitivity analysis suggests front-end tool orders have downside of ~45% over the next several Qs. This is based on a top-down assumption that chip units decline ~12% from current levels as inventory clears the channel - more comparable to C1997-1998 than C2004 which they feel was more of a mid-cycle correction in the middle of what has been a ~4 year long upturn.
Among those reporting thus far, chip inventory is up ~38% Y/Y (13% ex INTC). Because Y/Y
variations in chip inventory typically lag changes in chip production levels by ~6mos, the firm would expect at least two more Qs of significant Y/Y inventory build (through CQ1:07) since factory production cuts began only recently. Remains cautious on group, KLAC top idea.
Notablecalls: I continue to be very cautious regarding the Semi space. Not actionable but good to know category.
Among those reporting thus far, chip inventory is up ~38% Y/Y (13% ex INTC). Because Y/Y
variations in chip inventory typically lag changes in chip production levels by ~6mos, the firm would expect at least two more Qs of significant Y/Y inventory build (through CQ1:07) since factory production cuts began only recently. Remains cautious on group, KLAC top idea.
Notablecalls: I continue to be very cautious regarding the Semi space. Not actionable but good to know category.
Calls of Note Part 3
- Merrill Lynch is upgrading Garmin (NASDAQ:GRMN) to Buy from Neutral with a tgt of $60. Firm believes the personal navigation devices (PND) market remains robust and Garmin will retain its dominant market position through at least 2008.
New players must gain shelf space at the large retailers, but given lead time requirements, retailers have largely chosen their products for the holiday season and in our opinion, the SKUs will lean toward Garmin products. Most introduced products, with the exception of TomTom, lack the functionality and form factor to compete with Garmin's products. It is firm's opinion that the market, as well as Garmin's competition, underestimate the difficulty in creating a product that translates the mapping data into an accurate, user-friendly format.
They agree with the rest of the Street and investors that margins will decline; however, where we differ is the pace of margin deterioration. In avionics, Garmin is the low-cost disruptor and will be a significant player (threat) to incumbent players. Firm expects Garmin to achieve FAA Part 25 certification in the next two to three years and take a meaningful position on larger business jets in the future.
Firm is raising their 2006 EPS forecast to $2.05 from $1.89, which is above management's revised forecast of "to exceed $1.95" (post-split). They are also raising 2007 EPS forecast to $2.50 from $2.25, which is significantly above current consensus of $2.29.
Notablecalls: Are you convinced by this call? Can't say I am. GRMN has a history of selling off after gapping up. Would keep a close eye on the stock above the $51 level in order to spot cracks in buy interest.
New players must gain shelf space at the large retailers, but given lead time requirements, retailers have largely chosen their products for the holiday season and in our opinion, the SKUs will lean toward Garmin products. Most introduced products, with the exception of TomTom, lack the functionality and form factor to compete with Garmin's products. It is firm's opinion that the market, as well as Garmin's competition, underestimate the difficulty in creating a product that translates the mapping data into an accurate, user-friendly format.
They agree with the rest of the Street and investors that margins will decline; however, where we differ is the pace of margin deterioration. In avionics, Garmin is the low-cost disruptor and will be a significant player (threat) to incumbent players. Firm expects Garmin to achieve FAA Part 25 certification in the next two to three years and take a meaningful position on larger business jets in the future.
Firm is raising their 2006 EPS forecast to $2.05 from $1.89, which is above management's revised forecast of "to exceed $1.95" (post-split). They are also raising 2007 EPS forecast to $2.50 from $2.25, which is significantly above current consensus of $2.29.
Notablecalls: Are you convinced by this call? Can't say I am. GRMN has a history of selling off after gapping up. Would keep a close eye on the stock above the $51 level in order to spot cracks in buy interest.
Paperstand
The WSJ reprots that Cisco (CSCO) is entering the video-conferencing mkt with a high-end system that continues the co's push beyond networking equipment. Listed co’s with competing products include H-P (HPQ) and Polycom (PLCM). Only 10-15% of Cisco's customers have the necessary communication infrastructure in place now, said Cisco VP Marthin DeBeer. Customers may have to buy extra capacity from their service providers to use the systems, he said. Lee Doyle, of IDC, estd that fewer than 100 of the new-wave telepresence systems have been installed world-wide. Elliot Gold, of TeleSpan, added that co’s can adopt less-sophisticated forms of video conferencing for as little as $7K, putting the Cisco system into a narrow niche. "I don't see it being a big seller," Mr. Gold said. One alternative to installing systems in-house would be for execs to use services that install and rent time on the Cisco hardware, said David Willis, of Gartner.
Notablecalls: Last Week Barron’s suggested that Cisco could eat Polycom (PLCM) and Radvision (RVSN) mkt share. See here.
“Heard on the Street” column discusses Goodyear (GT) saying that so far the co’s massive strike hasn't punctured its stock. Goodyear's stock is being bolstered by 2 things: The belief by investors that Goodyear's unionized workers will be forced to make big concessions, as has happened in other labor battles recently, from the airlines to auto parts. And signs that the tire business in general is poised for a boost from falling oil prices. "I think most of us expect mgmt will be able to reach a satisfactory arrangement with labor that will include lower costs and improved productivity," says George Putnam III, of New Generation Advisers. "This may be just a necessary step in the restructuring of the US operations," Mr. Putnam adds. "We don't set targets, but I'd hope to see the stock in the low 20s at least over the next year or so." Mr. Putnam also doesn't expect the strike to last long.
The NY Post has learned that in a bid to out-cool Apple (AAPL), Microsoft (MSFT) approached the ultra-snarky Pitchfork blog about supplying content to its Zune digital music player, but was rebuffed by the music hipster haven. The talks with Pitchfork were aimed at both giving Microsoft some indie credibility and taking advantage of the Zune's wifi capabilities by allowing users to zap reviews and other site content to each other, sources said. Unfortunately for Microsoft, Pitchfork didn't bite. "They asked us about generating new content with them or creating a new section on our site specifically for Zune visitors, but it wasn't something we were interested in pursuing," Pitchfork Editor-in-Chief Ryan Schreiber told The Post.
Calls of Note Part 2
- UBS believes Hewlett-Packard (NYSE:HPQ) is set to outline new operating margin targets in the 9% range at its Dec. 12th analyst meeting in NY. As a result, the firm believes investor psychology will start moving toward a $3.00 EPS figure for calendar 08, which they believe could drive shares through the mid $40's applying a 15-17x multiple (in line with the market/modest premium).
Checks suggest HP momentum continues in PCs, printers & in the enterprise, making operating margin targets of 7.5-8.0% look too conservative for FY07. They believe HP will update those targets on its 4Q06 earnings call, perhaps making firm's FY07 estimate of $2.50 look conservative.
For FY07 their estimate of $2.50 is based on 6% revenue growth to $96.4B & operating margin of 8.6% (factors in the Mercury Interactive acquisition). Given firm's view that margins can top 9% long-term & revenue should continue to grow in the mid-single digits, they are initiating an FY08 estimate of $2.85 based on 5% growth to $100.8B & operating margin of 9.1%.
UBS is adjusting their price target to $50 (was $44) still based on 17-18x forward EPS but now based on new FY08 estimate of $2.85. They believe that HP's faster growth & higher margins warrant a premium to Dell.
Notablecalls: Interesting call from UBS. I'd keep this one on a tight leash (stop) and watch the volume. Lately, I was seen several high profile calls like this one fail miserably in the s-t. If the vol jumps and there is no move in the price, get out fast or even take the other side of the trade.
Checks suggest HP momentum continues in PCs, printers & in the enterprise, making operating margin targets of 7.5-8.0% look too conservative for FY07. They believe HP will update those targets on its 4Q06 earnings call, perhaps making firm's FY07 estimate of $2.50 look conservative.
For FY07 their estimate of $2.50 is based on 6% revenue growth to $96.4B & operating margin of 8.6% (factors in the Mercury Interactive acquisition). Given firm's view that margins can top 9% long-term & revenue should continue to grow in the mid-single digits, they are initiating an FY08 estimate of $2.85 based on 5% growth to $100.8B & operating margin of 9.1%.
UBS is adjusting their price target to $50 (was $44) still based on 17-18x forward EPS but now based on new FY08 estimate of $2.85. They believe that HP's faster growth & higher margins warrant a premium to Dell.
Notablecalls: Interesting call from UBS. I'd keep this one on a tight leash (stop) and watch the volume. Lately, I was seen several high profile calls like this one fail miserably in the s-t. If the vol jumps and there is no move in the price, get out fast or even take the other side of the trade.
Calls of Note Part 1
- Morgan Stanley comments on Amgen (NASDAQ:AMGN) saying CMS may change reimbursement for "bundled" drugs as soon as November 1st in an effort to target Amgen's practice of tying price on Neulasta to Aranesp volume. Amgen's ability to offer discounts on Neulasta while maintaining Aranesp reimbursement (average sales price or ASP has been constant) has been key to the company's rapid share gains from J&J's Procrit (a superior dosing profile is also important). Firm suspects that CMS is most likely to issue guidance to unbundle these drugs, but that this guidance will be open for public comments before implementation, meaning there will be no impact until 2008 (but creating an additional overhang on Amgen's highly profitable erythropoietin business).
Currently, this issue is likely not on most investor radar screens, but Amgen faces risk both in the courts (J&J is suing for violating anti-trust laws) and at CMS. However, as the CERA trial nears and the focus on competitive threats to the anemia franchise intensifies, bundling and ASP have the potential to become another overhang on the business. Furthermore, loss of bundling leverage could slow the Vectibix launch versus ImClone's Erbitux.
Firm maintaint their Equal-weight rating and $72 tgt.
Notablecalls: That's certainly not good news. Neulasta and Aranesp are both important high margin drugs for AMGN and negative changes there will hurt the bottom line. The chart however looks like the stock in on the road to recovery (AMGN has fought several overhangs over the past 18 months) so I would not overstay my welcome on the short side. Sometimes charts top fundamentals. This may be an example of that.
Currently, this issue is likely not on most investor radar screens, but Amgen faces risk both in the courts (J&J is suing for violating anti-trust laws) and at CMS. However, as the CERA trial nears and the focus on competitive threats to the anemia franchise intensifies, bundling and ASP have the potential to become another overhang on the business. Furthermore, loss of bundling leverage could slow the Vectibix launch versus ImClone's Erbitux.
Firm maintaint their Equal-weight rating and $72 tgt.
Notablecalls: That's certainly not good news. Neulasta and Aranesp are both important high margin drugs for AMGN and negative changes there will hurt the bottom line. The chart however looks like the stock in on the road to recovery (AMGN has fought several overhangs over the past 18 months) so I would not overstay my welcome on the short side. Sometimes charts top fundamentals. This may be an example of that.
Sunday, October 22, 2006
Barron's Summary
Barron’s discusses Jones Apparel (JNY), whose shares trades at $33 a share, or 13 times 2007 estimates. If the company beats earnings forecasts in coming quarters, the multiple could expand and its shares could rally toward 40.
According to the Barron’s, well-run and with excellent footholds in several electronics-testing markets, Agilent (A) is worth a look. Its shares should rise 15% over the next year.
At a current stock price of $39, Barnes & Noble's (BKS) valuation compares favorably with that of recent retailer buyouts. Shareholders would likely reap at least a 25% premium.
A trade idea highlighted in „The Trader” column: The quantitative and derivatives strategists at Credit Suisse took note last week of the severe outperformance of software vs semiconductors in the past 9 months. The Software HOLDERS (SWH) has outperformed the Semiconductor HOLDERS (SMH) by 25 percentage points since spring. In the past 5 years, these ETFs have had an 80% correlation, but with wide swings in relative performance over shorter periods. The CS researchers were recommending buying the SMH and shorting the SWH to play a reversion to the sectors' average relationship over the next 8-12 months. These swings can always go farther than expected, but the current divergence is nearing extremes hit only twice in the past 5 years, after which it reversed dramatically.
„The Trader” column also highlights Integrated Device Technology (IDTI), which recently acquired ICS. The stock has thrived as earnings momentum surged and it digested the ICS merger, trading at 14.81 on Fri. The stock today looks at least as attractive as it did last Nov. Back then, its earnings for the MarFY were expected to be around 71c a share; the present forecast is for $1.03, and at least one large investor in IDT thinks the Street-high est of $1.20 is more likely, with upside from there into the following FY. If so, the shares are rather inexpensive, at 12x F’07 earnings. One of the major expected benefits of the ICS merger was the ability to push ICS' chip production through IDT's spare plants. Those dividends have yet to kick in fully, say IDT bulls.
“Technology Trader” column discusses Nokia (NOK) and Motorola (MOT). For 4 years, Nokia repeatedly has missed the latest trends in cellphone designs, first clamshells, now thinness. But the co with the most cutting-edge phones might not have the most upside. Nonetheless, it has hung on to its dominant 36% global phone-mkt share. Nokia's long-term financial outlook is brighter. Next year the co's net is expected to rise about 18%, vs 15% at Motorola. Moto's thin phones didn't help the co's profitability in the 3Q. "What's important to shareholders is having a reasonable operating profit, and that's what Nokia has focused on," says Albert Lin, of AmTech. He has a Buy rating on Nokia and thinks it could hit $25. Moto is rated Hold.
Fund holdings highlighted: GE, MSFT, PFE, HBC, AMGN, SNY, TRI, NZT, BUD and AMP.
Friday, October 20, 2006
Calls of Note Part 2
Prudential taking a look at the valuation of Phelps Dodge (NYSE:PD). Firm values PD at $182 in liquidation as $10 for free cash, $135 for operations and $37 for exploration and development. The $135 equates to 6x 2007E of $22.48 at $3.00 copper and $20 spot moly or 9x 2009E of $14.77 at $2.00 copper and $8 spot moly. PD would earn $28.23 in 2007 and $33.64 in 2009 if today's $3.50 copper and $27 per pound spot moly prevailed in those years.
Firm value PD's stake in Tenke Fungurume at $25 per share, Kisanfu copper-cobalt also in Congo at $5 and the other eleven exploration properties on slide 73 of the 3-16-06 webcast at $7.
Plausible buyers "outside the radar" might include Norilsk Nickel (produces 2.5% of world copper), Rusal, Severstal, Lakshmi Mittal personnally or metal trader Glencore as a white knight.
Firm expects a strategic buyer to pay fullest value, not an LBO type relying on debt, as the copper market does not appear liquid enough to hedge out a $20+ billion transaction nor exploration efforts.
Notablecalls: So the <$100 stock is worth $182 today? We are going to see additional $2-$4 pt upside today in addition to $20 pt move in the past weeks. Actionable call!
Firm value PD's stake in Tenke Fungurume at $25 per share, Kisanfu copper-cobalt also in Congo at $5 and the other eleven exploration properties on slide 73 of the 3-16-06 webcast at $7.
Plausible buyers "outside the radar" might include Norilsk Nickel (produces 2.5% of world copper), Rusal, Severstal, Lakshmi Mittal personnally or metal trader Glencore as a white knight.
Firm expects a strategic buyer to pay fullest value, not an LBO type relying on debt, as the copper market does not appear liquid enough to hedge out a $20+ billion transaction nor exploration efforts.
Notablecalls: So the <$100 stock is worth $182 today? We are going to see additional $2-$4 pt upside today in addition to $20 pt move in the past weeks. Actionable call!
Calls of Note Part 1
Citigroup calling UnitedHealth (NYSE:UNH) their new top pick with 60% 12-mo upside. Firm's opinion is that strong forecast future EPS growth present an opportunity to invest in a best-of-breed company at a peer group multiple that is depressed. With the options investigation complete, they expect investors to shift focus back to fundumentals. UNH is the best positioned MCO in key product areas, namely CDHP and seniors market.
UNH results confirm moderate cost trends with co. now expecting total medical costs at 7%-7.5% for the year. Favorable trend due to lower utilization of medical services. For 2007, UNH is pricing to 7%-8% even though cost trend is decelerating, leaving room for upside to guidance.
United exceeded Street expectations, reporting $0.79 EPS, +30% y-y. Company reiterated 15% EPS growth for 2007 off new 2006 guidance of $2.95-$2.97. Firm raising their 2006 EPS to $2.97 and maintain 2007-2009 EPS of EPS $3.45, $4.05 and $4.70, respectively.
Maintains Buy and $81 price tgt.
Notablecalls: The stock made its move yesterday. However, positive comments from Citi (and other firms) should drive some upside today too.
UNH results confirm moderate cost trends with co. now expecting total medical costs at 7%-7.5% for the year. Favorable trend due to lower utilization of medical services. For 2007, UNH is pricing to 7%-8% even though cost trend is decelerating, leaving room for upside to guidance.
United exceeded Street expectations, reporting $0.79 EPS, +30% y-y. Company reiterated 15% EPS growth for 2007 off new 2006 guidance of $2.95-$2.97. Firm raising their 2006 EPS to $2.97 and maintain 2007-2009 EPS of EPS $3.45, $4.05 and $4.70, respectively.
Maintains Buy and $81 price tgt.
Notablecalls: The stock made its move yesterday. However, positive comments from Citi (and other firms) should drive some upside today too.
Color on quarter: SanDisk (NASDAQ:SNDK)
Mixed opinions on SanDisk (NASDAQ:SNDK) following results.
- Citigroup downgrading SNDK to Hold from Buy as the catalysts are not emerging as expected. While the headline numbers were positive, important details raised concerns. Pricing -25% vs. firm's -18%, gross margins 260 bps below their est., op income missed their est. by $2M despite $8M of royalty upside, and interest income added $0.03 not in their model.
Firm expects estimate revision trends, an important catalyst, to go against their expectation. A more cautious stance on 4Q06 and 1Q07 pricing and margins results in lower 4Q06E and 2007E EPS. Firm expects Street EPS to decline modestly as well.
Lower estimates yield a lower target price and less upside. Firm reduces their 2007E EPS to $2.84 from $2.97 and price target to $66 on unchanged multiples.
- Goldman offering explanation to their $46 price tgt: (1) a 25X multiple applied to 2007E product EPS of ~$0.80, and (2) their estimate of the present value of royalties of ~$25/share, assuming SanDisk is able to add licensees and thus grow royalties at ~5% in perpetuity. Given rich valuation and their expectation of weaker pricing heading into earnings, firm says they should have downgraded the stock. However, the sell off post the results will reduce potential downside. This, coupled with the volatility of the stock, makes them hesitant to downgrade now. However, firm would not buy the stock on a pullback as they see weak supply/demand dynamics in 2007 given significant incremental supply and less potential incremental demand. Further, they believe SanDisk's comment that NAND is less profitable than DRAM, as well as similar commentary from Samsung, Novellus, ASML and Micron, should cause investors to question their bullish SPE view.
- UBS offering very contrary view, shaking their heads in disbelief about the stock's sell-off in the afterhours.
Firm views Q3 guidance for 50-60% bit growth with 15-20% ASP decline as an exceptionally solid outlook, and are raising their sales est to $980M (from $939M), and pro forma EPS estimate to $0.81 (from $0.78). Excluding an unexpected jump in SG&A for marketing and promotions to around $93M (prior est $69.5M), their new EPS est would have been $0.89.
Firm believes SNDK is executing well to a sound strategy of driving down costs, driving up functionality, and sparking elasticity of demand and new applications, the most significant being NAND cards in handsets. As it does so, firm is seeing rivals struggle, divert capacity, and in some cases quit the market.
Notablecalls: Look, NAND is taking the same way that DRAM has used to take for quite some time - oversupply & pricing pressure. Tough to like the stock in a situation like this. That said, SNDK is a bouncer and that's what I think the stock will do today too.
- Citigroup downgrading SNDK to Hold from Buy as the catalysts are not emerging as expected. While the headline numbers were positive, important details raised concerns. Pricing -25% vs. firm's -18%, gross margins 260 bps below their est., op income missed their est. by $2M despite $8M of royalty upside, and interest income added $0.03 not in their model.
Firm expects estimate revision trends, an important catalyst, to go against their expectation. A more cautious stance on 4Q06 and 1Q07 pricing and margins results in lower 4Q06E and 2007E EPS. Firm expects Street EPS to decline modestly as well.
Lower estimates yield a lower target price and less upside. Firm reduces their 2007E EPS to $2.84 from $2.97 and price target to $66 on unchanged multiples.
- Goldman offering explanation to their $46 price tgt: (1) a 25X multiple applied to 2007E product EPS of ~$0.80, and (2) their estimate of the present value of royalties of ~$25/share, assuming SanDisk is able to add licensees and thus grow royalties at ~5% in perpetuity. Given rich valuation and their expectation of weaker pricing heading into earnings, firm says they should have downgraded the stock. However, the sell off post the results will reduce potential downside. This, coupled with the volatility of the stock, makes them hesitant to downgrade now. However, firm would not buy the stock on a pullback as they see weak supply/demand dynamics in 2007 given significant incremental supply and less potential incremental demand. Further, they believe SanDisk's comment that NAND is less profitable than DRAM, as well as similar commentary from Samsung, Novellus, ASML and Micron, should cause investors to question their bullish SPE view.
- UBS offering very contrary view, shaking their heads in disbelief about the stock's sell-off in the afterhours.
Firm views Q3 guidance for 50-60% bit growth with 15-20% ASP decline as an exceptionally solid outlook, and are raising their sales est to $980M (from $939M), and pro forma EPS estimate to $0.81 (from $0.78). Excluding an unexpected jump in SG&A for marketing and promotions to around $93M (prior est $69.5M), their new EPS est would have been $0.89.
Firm believes SNDK is executing well to a sound strategy of driving down costs, driving up functionality, and sparking elasticity of demand and new applications, the most significant being NAND cards in handsets. As it does so, firm is seeing rivals struggle, divert capacity, and in some cases quit the market.
Notablecalls: Look, NAND is taking the same way that DRAM has used to take for quite some time - oversupply & pricing pressure. Tough to like the stock in a situation like this. That said, SNDK is a bouncer and that's what I think the stock will do today too.
Color on quarter: Google (NASDAQ:GOOG)
We have the analyst community singing praise for the Google (NASDAQ:GOOG) after the co reported strong results yesterday.
- Goldman Sachs out with note titled ""Business is very... good" - major understatement", suggesting investors to buy stock with 30% upside to their new price tgt of $595 (up from $525). Firm hihlights superior growth highlights new products, new partners and better monetization even in a seasonally weak quarter. Flat qoq margin despite record hiring should alleviate concerns about the cost of Google's recent deals. New, large growth opportunities remain: new ad formats (pay per call, display, and video) and more penetration of the top 500 advertisers.
Firm sees following catalysts that could unfold to unlock the value we see in Google shares over the next year: 1) a strong holiday season benefiting from continued advertiser demand, seasonal strength in traffic, recent product launches (Checkout's 1st holiday season), and new deals such as MTV; 2) improvement in international RPS as it narrows the gap versus domestic levels; 3) benefits from monetizing new partnerships to be launched in 2007, including eBay, MySpace, and Intuit; and 4) growth from new advertising formats such as display, video (via YouTube, MySpace, and proprietary sites), pay per call and pay per acquisition.
- JP Morgan sees plenty of positives that still haven't been priced into the stock, even at the $460 in the afterhours:
1) Google's EBITDA margins could actually rise over time -- Consensus opinion on Google has always held that Google's margins have to come down over time. Firm has been contrarians on this point to the extent that they've modeled EBITDA margins flat over time. But now, they're modeling them rising modestly over time.
2) As a near-term point, if retail this holiday season is shaping up to be exceptionally strong, then Google could be a major beneficiary -- firm believes retail is one of the largest advertising verticals on Google in terms of revenue.
3) Google's commitment to cash acquisitions in the future - rather than stock - as firm views that currency as undervalued.
4) The option value with Google -- in terms of new products and new market opportunities -- is still significant. Firm would point to Google News, Google Calendar, Google Maps, Gmail, Picasa, and even Google Video. Successful product innovation = mind share = market share = market cap, and the best product innovation in the Internet sector today clearly belongs with Google.
5) Firm considers that a $460 GOOG that trades at 38X our 2007E GAAP EPS of $12.20 and 30X our 2008E GAAP EPS of $15.12 is reasonable.
Notablecalls: Hard to find one single cautious line from the reviews. We'll just have to wait for Henry Bloget to do his thing. Have to say, the results were strong across the board. Still, look at what YHOO did the day after. Can't compare them just like that (heck, we've even got YHOO downgrade on GOOG's results), but think GOOG will get faded today.
- Goldman Sachs out with note titled ""Business is very... good" - major understatement", suggesting investors to buy stock with 30% upside to their new price tgt of $595 (up from $525). Firm hihlights superior growth highlights new products, new partners and better monetization even in a seasonally weak quarter. Flat qoq margin despite record hiring should alleviate concerns about the cost of Google's recent deals. New, large growth opportunities remain: new ad formats (pay per call, display, and video) and more penetration of the top 500 advertisers.
Firm sees following catalysts that could unfold to unlock the value we see in Google shares over the next year: 1) a strong holiday season benefiting from continued advertiser demand, seasonal strength in traffic, recent product launches (Checkout's 1st holiday season), and new deals such as MTV; 2) improvement in international RPS as it narrows the gap versus domestic levels; 3) benefits from monetizing new partnerships to be launched in 2007, including eBay, MySpace, and Intuit; and 4) growth from new advertising formats such as display, video (via YouTube, MySpace, and proprietary sites), pay per call and pay per acquisition.
- JP Morgan sees plenty of positives that still haven't been priced into the stock, even at the $460 in the afterhours:
1) Google's EBITDA margins could actually rise over time -- Consensus opinion on Google has always held that Google's margins have to come down over time. Firm has been contrarians on this point to the extent that they've modeled EBITDA margins flat over time. But now, they're modeling them rising modestly over time.
2) As a near-term point, if retail this holiday season is shaping up to be exceptionally strong, then Google could be a major beneficiary -- firm believes retail is one of the largest advertising verticals on Google in terms of revenue.
3) Google's commitment to cash acquisitions in the future - rather than stock - as firm views that currency as undervalued.
4) The option value with Google -- in terms of new products and new market opportunities -- is still significant. Firm would point to Google News, Google Calendar, Google Maps, Gmail, Picasa, and even Google Video. Successful product innovation = mind share = market share = market cap, and the best product innovation in the Internet sector today clearly belongs with Google.
5) Firm considers that a $460 GOOG that trades at 38X our 2007E GAAP EPS of $12.20 and 30X our 2008E GAAP EPS of $15.12 is reasonable.
Notablecalls: Hard to find one single cautious line from the reviews. We'll just have to wait for Henry Bloget to do his thing. Have to say, the results were strong across the board. Still, look at what YHOO did the day after. Can't compare them just like that (heck, we've even got YHOO downgrade on GOOG's results), but think GOOG will get faded today.
Thursday, October 19, 2006
Calls of Note Part 2
- Several firms are commenting on Altria Group (NYSE:MO) after the co moved back the date of its 3Q2006 earnings release one day to October 25 with a conference call scheduled for 2:00 p.m. EST. The new earnings release date falls on the same day as a planned informal board meeting. Most find this date change unusual as the company does not tend to move its earnings call and typically reports earnings the day after Kraft Foods, which is reporting on October 23.
- Goldman believes the most likely scenario we will see on October 25 is Altria's management reiterating the company's commitment to a break-up and announcing that the Board has approved resumption of a modest share repurchase program. Firm believes that a spin-off announcement is not likely at this point because the Schwab certification is still pending. Given the Board's conservative stance so far, they envision Altria waiting until the Schwab case is decertified by the 2nd Circuit Court of Appeals before endorsing the breakup, which they believe could take 12-18 months.
They see a neutral to slightly positive reaction to Altria's share price if a share repurchase program is indeed announced. On the positive side, if the company uses 100% of its free cash flow after dividends to fund a share buyback, accretion to earnings could be $0.05-$0.10 in 2007. On the negative side, however, an announcement of a share repurchase could further confirm that the spin-off is delayed until the Schwab certification is overturned.
- Citigroup notes that although difficult to predict exactly what the reasoning may be behind this decision, they believe the most likely reason is that the Board will announce the tax free spin-off of Kraft Foods (KFT). Although there could be other reasons, possibly an acquisition, they are maintaining their thesis that MO's Board realizes that it must act now and spin-off Kraft Foods since there is risk in waiting.
Therefore, they strongly encourage investors to buy MO ahead of 10/25, reiterating Buy rating and $94 price target.
Notablecalls: Yet again we see Goldman hedging their bets. Lucky for us, Citi has a strong opinion what to do with the stock.
- Goldman believes the most likely scenario we will see on October 25 is Altria's management reiterating the company's commitment to a break-up and announcing that the Board has approved resumption of a modest share repurchase program. Firm believes that a spin-off announcement is not likely at this point because the Schwab certification is still pending. Given the Board's conservative stance so far, they envision Altria waiting until the Schwab case is decertified by the 2nd Circuit Court of Appeals before endorsing the breakup, which they believe could take 12-18 months.
They see a neutral to slightly positive reaction to Altria's share price if a share repurchase program is indeed announced. On the positive side, if the company uses 100% of its free cash flow after dividends to fund a share buyback, accretion to earnings could be $0.05-$0.10 in 2007. On the negative side, however, an announcement of a share repurchase could further confirm that the spin-off is delayed until the Schwab certification is overturned.
- Citigroup notes that although difficult to predict exactly what the reasoning may be behind this decision, they believe the most likely reason is that the Board will announce the tax free spin-off of Kraft Foods (KFT). Although there could be other reasons, possibly an acquisition, they are maintaining their thesis that MO's Board realizes that it must act now and spin-off Kraft Foods since there is risk in waiting.
Therefore, they strongly encourage investors to buy MO ahead of 10/25, reiterating Buy rating and $94 price target.
Notablecalls: Yet again we see Goldman hedging their bets. Lucky for us, Citi has a strong opinion what to do with the stock.
Calls of Note Part 1
We have several interesting comments on SimpleTech (NASDAQ:STEC) this morning:
- Thomas Weisel Partners believes shares of SimpleTech were down sharply (10.3%) on
Wednesday (October 18) due to speculation that the company had controller failures in its industrial flash products, which could result in significant share loss at Cisco, STEC's largest customer in this segment. In firm's view, a forecast of a dramatic reversal of fortune in this segment is highly improbable.
STEC has significantly improved its profitability in recent quarters by increasing its penetration of the industrial flash segment (currently approximately 25% of sales and doubling y/y), which carries gross margins in excess of 50%. Firm believes much of the gains have resulted from Sandisk's departure from this market nearly two years ago.
They believe the speculation of product issues at Cisco and share loss to ST Micro is unrealistic due to the following reasons. 1) SimpleTech has been in volume at Cisco for multiple quarters, and it is unlikely that a controller issue would emerge on already mature volume products. 2) they believe that SimpleTech's industrial flash products support multiple (likely 10-plus) business lines at Cisco, so a problem (if there were one), would likely have a local and not broad effect. Maintains Peer Perform.
- CIBC is reiterating their SO on STEC, while increasing price target (from $6.50 to $10) and estimates. Firm's checks indicate that STEC's commercial OEM flash traction and NAND-in-PC prospects are better-than-expected, and thus, they view Wednesday's pullback as a strong buying opportunity.
Firm believes Wed's 10% decline was due to fears that STM is taking NAND- server-drive share at Cisco. However, checks indicate CSCO qualified STM in 4Q05 ONLY as a 2nd source, and STEC's pole position (~80% share) is secure. Moreover, they expect STEC's '07 CSCO revs to double to $60M+.
At ~18x firm's new '07 EPS est ($0.45), STEC trades at an ~18% discount to its peers (22x). Rather, they feel STEC should command a premium PE due to its growing & relatively-unopposed penetration of high-margin/visibility OEM flash markets and its coveted-lead in the emerging NAND-SSD-in-PC space.
Notablecalls: Take a look at STEC's chart. Things like these do NOT turn on a dime. STEC may bounce today but I think we may see some selling before it does. One to keep on the radar.
- Thomas Weisel Partners believes shares of SimpleTech were down sharply (10.3%) on
Wednesday (October 18) due to speculation that the company had controller failures in its industrial flash products, which could result in significant share loss at Cisco, STEC's largest customer in this segment. In firm's view, a forecast of a dramatic reversal of fortune in this segment is highly improbable.
STEC has significantly improved its profitability in recent quarters by increasing its penetration of the industrial flash segment (currently approximately 25% of sales and doubling y/y), which carries gross margins in excess of 50%. Firm believes much of the gains have resulted from Sandisk's departure from this market nearly two years ago.
They believe the speculation of product issues at Cisco and share loss to ST Micro is unrealistic due to the following reasons. 1) SimpleTech has been in volume at Cisco for multiple quarters, and it is unlikely that a controller issue would emerge on already mature volume products. 2) they believe that SimpleTech's industrial flash products support multiple (likely 10-plus) business lines at Cisco, so a problem (if there were one), would likely have a local and not broad effect. Maintains Peer Perform.
- CIBC is reiterating their SO on STEC, while increasing price target (from $6.50 to $10) and estimates. Firm's checks indicate that STEC's commercial OEM flash traction and NAND-in-PC prospects are better-than-expected, and thus, they view Wednesday's pullback as a strong buying opportunity.
Firm believes Wed's 10% decline was due to fears that STM is taking NAND- server-drive share at Cisco. However, checks indicate CSCO qualified STM in 4Q05 ONLY as a 2nd source, and STEC's pole position (~80% share) is secure. Moreover, they expect STEC's '07 CSCO revs to double to $60M+.
At ~18x firm's new '07 EPS est ($0.45), STEC trades at an ~18% discount to its peers (22x). Rather, they feel STEC should command a premium PE due to its growing & relatively-unopposed penetration of high-margin/visibility OEM flash markets and its coveted-lead in the emerging NAND-SSD-in-PC space.
Notablecalls: Take a look at STEC's chart. Things like these do NOT turn on a dime. STEC may bounce today but I think we may see some selling before it does. One to keep on the radar.
Color on quarter: Apple Computer (NASDAQ:AAPL)
Mostly positive comments on Apple Computer (NASDAQ:AAPL) following results:
- Piper Jaffray thinks the formula is working. The 68m iPods sold in the past five years (39m of those were sold in the last 12 months) are translating to the resurgence in the Mac platform with worldwide Mac market share increasing from 2.1% in March of 2006 to 2.8% today. They believe in 6 months the halo effect will expand beyond a simple iPod-to-Mac correlation into a four-way relationship with iPod, Mac, iPhone, and iTV benefiting from each other's success. If this plays out, Apple's growth rate should accelerate in 2007.
While the firm was modeling for Mac to benefit from pent-up & back-to-school demand in September, the magnitude of the pent-up & back-to-school demand exceeded our expectations. They view December as the "rubber hits the road" quarter for Mac, given December will not benefit from as much pent-up demand from the Intel transition.
The company shipped 8.7m iPods in the quarter, which was above the "in-print" consensus
iPod unit estimate for the quarter of 8.6m. Most importantly, Mac units were also ahead of the Street's 1.47m consensus expectation, coming in at 1.61m.
The company's outlook for the December quarter is GAAP EPS of $0.70- $0.73, which includes $0.03 of stock-based comp expense, leading to proforma EPS of $0.73-$0.76 on $6,000m-$6,200m vs. Street estimates of $0.77 on $6,455m. The Street had generally been expecting Apple would provide conservative guidance, but the firm would note that the company has exceeded its revenue outlook by an average of 8% over the last 7 quarters.
Reits Outperform and $99 tgt.
- JP Morgan notes that as they anticipated, robust Mac shipments were the highlight in the
quarter, with 56% growth in notebooks. Overall growth of 30% exceeded market growth of 7% for the quarter. Surprisingly, even with this strength Apple exited the quarter with lower than normal channel inventory levels.
iPod shipments of 8.73 million in the September quarter were a bit short of firm's estimate of 8.78 million. Nevertheless, this was likely better than consensus expectations, and management's commentary around demand patterns exiting the quarter was encouraging.
They are adjusting their estimates upward primarily to reflect more conservative iPod unit and ASP assumptions. But this could reverse once Apple's branded cell phone is launched, since this product is not included in firm's model.
The stock is currently trading at 23x calendar 2007 EPS (ex-options) estimate. Firm expects the iPod's momentum to improve through the holiday season as we get a full quarter of the sales from the refreshed products. In addition, they believe the company's Mac share gains will continue to gain momentum over the next year. As a result, they are reiterating Overweight rating.
- Banc of America notes that one major issue they identified was gross margins. - mgt did indicate that gross margins would be down q/q about 100 basis suggesting that firm's thesis on recent product price cuts negatively impacting margins is appropriate - though they
believe that they may have overestimated the magnitude. Net, the firm is modestly increasing their gross margins by 10-30 basis points in the back half of the year, though largely offset by higher op ex, leaving operating margin little changed.
Near-term, a reversal of negative sentiment (helped by better iPods) will help support the stock. As they look out to MacWorld in Jan 07, they see a plethora of potential product launches to keep investors engaged in the long-term story. Firm retains Buy rating with the potential of product launches, plus continue strength in CPUs, as the major catalysts, with a key focus on MacWorld product launches.
Notablecalls: I suspect some pretty large short poistions were built ahead of the results. Most of these will now be covered. The logic behind these positions was that there would be a gap between the iPod and the iPhone that the co would have hard time filling. Didn't happen this time. I continue to suspect it will happen in CQ4.
- Piper Jaffray thinks the formula is working. The 68m iPods sold in the past five years (39m of those were sold in the last 12 months) are translating to the resurgence in the Mac platform with worldwide Mac market share increasing from 2.1% in March of 2006 to 2.8% today. They believe in 6 months the halo effect will expand beyond a simple iPod-to-Mac correlation into a four-way relationship with iPod, Mac, iPhone, and iTV benefiting from each other's success. If this plays out, Apple's growth rate should accelerate in 2007.
While the firm was modeling for Mac to benefit from pent-up & back-to-school demand in September, the magnitude of the pent-up & back-to-school demand exceeded our expectations. They view December as the "rubber hits the road" quarter for Mac, given December will not benefit from as much pent-up demand from the Intel transition.
The company shipped 8.7m iPods in the quarter, which was above the "in-print" consensus
iPod unit estimate for the quarter of 8.6m. Most importantly, Mac units were also ahead of the Street's 1.47m consensus expectation, coming in at 1.61m.
The company's outlook for the December quarter is GAAP EPS of $0.70- $0.73, which includes $0.03 of stock-based comp expense, leading to proforma EPS of $0.73-$0.76 on $6,000m-$6,200m vs. Street estimates of $0.77 on $6,455m. The Street had generally been expecting Apple would provide conservative guidance, but the firm would note that the company has exceeded its revenue outlook by an average of 8% over the last 7 quarters.
Reits Outperform and $99 tgt.
- JP Morgan notes that as they anticipated, robust Mac shipments were the highlight in the
quarter, with 56% growth in notebooks. Overall growth of 30% exceeded market growth of 7% for the quarter. Surprisingly, even with this strength Apple exited the quarter with lower than normal channel inventory levels.
iPod shipments of 8.73 million in the September quarter were a bit short of firm's estimate of 8.78 million. Nevertheless, this was likely better than consensus expectations, and management's commentary around demand patterns exiting the quarter was encouraging.
They are adjusting their estimates upward primarily to reflect more conservative iPod unit and ASP assumptions. But this could reverse once Apple's branded cell phone is launched, since this product is not included in firm's model.
The stock is currently trading at 23x calendar 2007 EPS (ex-options) estimate. Firm expects the iPod's momentum to improve through the holiday season as we get a full quarter of the sales from the refreshed products. In addition, they believe the company's Mac share gains will continue to gain momentum over the next year. As a result, they are reiterating Overweight rating.
- Banc of America notes that one major issue they identified was gross margins. - mgt did indicate that gross margins would be down q/q about 100 basis suggesting that firm's thesis on recent product price cuts negatively impacting margins is appropriate - though they
believe that they may have overestimated the magnitude. Net, the firm is modestly increasing their gross margins by 10-30 basis points in the back half of the year, though largely offset by higher op ex, leaving operating margin little changed.
Near-term, a reversal of negative sentiment (helped by better iPods) will help support the stock. As they look out to MacWorld in Jan 07, they see a plethora of potential product launches to keep investors engaged in the long-term story. Firm retains Buy rating with the potential of product launches, plus continue strength in CPUs, as the major catalysts, with a key focus on MacWorld product launches.
Notablecalls: I suspect some pretty large short poistions were built ahead of the results. Most of these will now be covered. The logic behind these positions was that there would be a gap between the iPod and the iPhone that the co would have hard time filling. Didn't happen this time. I continue to suspect it will happen in CQ4.
Color on quarter: AMD (NYSE:AMD)
Several firms are commenting on AMD (NYSE:AMD) after disappointing results announced yesterday. I see at least one downgrade:
- Merrill Lynch notes AMD is still taking unit share away from Intel, but is doing it at the cost of pricing and margins. What's happening here is that AMD is continuing to add output at the same time that Intel has freshened its own product offering and supported that with plenty of capacity and even more inventory. The result is a battle to keep fabs full.
Looking into 2007, firm's preliminary work suggests that Intel and AMD are going to add wafer capacity at a rate between 15% and 17%, with AMD citing a target of more than 30% on the conference call yesterday. That for an end market that might grow at 10% if the Vista upgrade cycle materializes. They think that 2007 is likely to turn into a contest between the two processor makers to see who can weather the most financial pain. AMD, unfortunately, has just levered up its balance sheet and reduced its ability to weather pain with purchase of ATI.
Long-term share gain potential is still there, and at a likely opening price of $21 or $22 today the firm doesn'tthink that the stock is likely to decline much further. Making money on the stock for the next twelve months is going to be difficult, though - especially once ATI is wrapped in, AMD will be lucky to show $1.00 in earnings next year. The stock looks fully valued.
- Goldman Sachs notes downside to their EPS estimate was caused by a significant shortfall in gross margins (51.4% versus firm's 58% estimate), which was primarily attributable to weak ASPs in the desktop segment.
Firm believes AMD's report reinforces their long-held view that investors should not own cyclical stocks at historical peak margin levels, as margins have declined for several quarters after reaching previous peak levels in late 2005, and the stock has declined accordingly. They would not establish short positions in AMD given what is likely to be a significant sell-off in the stock post earnings, and they would not establish long positions in Intel (Neutral) given the recent run-up in the stock. However, the firm continues to recommend a long Intel/short AMD pair trade, as they believe Intel is better positioned entering 2007 given its competitive new products and improved cost structure. Firm is concerned that AMD's debt and depreciation are ramping significantly in 2007, which raises the bar for execution. Yet, many factors outside of the company's control could negatively impact its P&L, including a difficult pricing environment like we saw in CY3Q2006.
Firm sees about 20% downside to our 12-month price target of $19.
- Prudential is the only bull of the bunch noting this quarter, investors were reminded that AMD competes with a well- capitalized Goliath that spends 4x what AMD does on R&D and is benefiting from a refreshed product cycle.
Near term, they think that the recent gross margin miss and the risk associated with the pending ATYT acquisition will limit the opportunity for P/E multiple expansion...
However, given the disappointing quarter, and that they can find few investors who anticipate a smooth integration with ATYT, it seems that sentiment could be at a nadir. Assuming a successful integration with ATYT, at $20, the combined entity would be trading at an EV/Sales ratio of 1.3x, the lowest level of any stock in firm's universe of coverage, suggesting limited downside from that level.
Conversely, the long term upside potential is compelling - AMD appears to have smashed Intel's stranglehold on the PC MPU market. With competitive products and capacity, AMD may well be on its way from 20% to 50% of the market.
Firm thinks AMD trades between $20 and $25 in the intermediate term, and remains Neutral Weight the stock.
Notablecalls: There is no trade here. What would you pay for a stock that has maybe $1.00 EPS power and is bound to face one heck of a fight with a Goliath that has net profit the size of it's opponents revenue. Would you pay 20x? Or maybe 15x?
- Merrill Lynch notes AMD is still taking unit share away from Intel, but is doing it at the cost of pricing and margins. What's happening here is that AMD is continuing to add output at the same time that Intel has freshened its own product offering and supported that with plenty of capacity and even more inventory. The result is a battle to keep fabs full.
Looking into 2007, firm's preliminary work suggests that Intel and AMD are going to add wafer capacity at a rate between 15% and 17%, with AMD citing a target of more than 30% on the conference call yesterday. That for an end market that might grow at 10% if the Vista upgrade cycle materializes. They think that 2007 is likely to turn into a contest between the two processor makers to see who can weather the most financial pain. AMD, unfortunately, has just levered up its balance sheet and reduced its ability to weather pain with purchase of ATI.
Long-term share gain potential is still there, and at a likely opening price of $21 or $22 today the firm doesn'tthink that the stock is likely to decline much further. Making money on the stock for the next twelve months is going to be difficult, though - especially once ATI is wrapped in, AMD will be lucky to show $1.00 in earnings next year. The stock looks fully valued.
- Goldman Sachs notes downside to their EPS estimate was caused by a significant shortfall in gross margins (51.4% versus firm's 58% estimate), which was primarily attributable to weak ASPs in the desktop segment.
Firm believes AMD's report reinforces their long-held view that investors should not own cyclical stocks at historical peak margin levels, as margins have declined for several quarters after reaching previous peak levels in late 2005, and the stock has declined accordingly. They would not establish short positions in AMD given what is likely to be a significant sell-off in the stock post earnings, and they would not establish long positions in Intel (Neutral) given the recent run-up in the stock. However, the firm continues to recommend a long Intel/short AMD pair trade, as they believe Intel is better positioned entering 2007 given its competitive new products and improved cost structure. Firm is concerned that AMD's debt and depreciation are ramping significantly in 2007, which raises the bar for execution. Yet, many factors outside of the company's control could negatively impact its P&L, including a difficult pricing environment like we saw in CY3Q2006.
Firm sees about 20% downside to our 12-month price target of $19.
- Prudential is the only bull of the bunch noting this quarter, investors were reminded that AMD competes with a well- capitalized Goliath that spends 4x what AMD does on R&D and is benefiting from a refreshed product cycle.
Near term, they think that the recent gross margin miss and the risk associated with the pending ATYT acquisition will limit the opportunity for P/E multiple expansion...
However, given the disappointing quarter, and that they can find few investors who anticipate a smooth integration with ATYT, it seems that sentiment could be at a nadir. Assuming a successful integration with ATYT, at $20, the combined entity would be trading at an EV/Sales ratio of 1.3x, the lowest level of any stock in firm's universe of coverage, suggesting limited downside from that level.
Conversely, the long term upside potential is compelling - AMD appears to have smashed Intel's stranglehold on the PC MPU market. With competitive products and capacity, AMD may well be on its way from 20% to 50% of the market.
Firm thinks AMD trades between $20 and $25 in the intermediate term, and remains Neutral Weight the stock.
Notablecalls: There is no trade here. What would you pay for a stock that has maybe $1.00 EPS power and is bound to face one heck of a fight with a Goliath that has net profit the size of it's opponents revenue. Would you pay 20x? Or maybe 15x?
Paperstand
According to the WSJ, a long-suppressed study finding elevated rates of many cancers among workers at IBM (IBM) was published in Environmental Health, a peer-reviewed online scientific journal. IBM has fought for several years to prevent release of the study done by Richard Clapp, a Boston University professor of environmental health. The study analyzes data collected by IBM itself on the ages and causes of death of nearly 32K ppl who had worked at IBM and died between 1969 and 2001. Mr. Clapp got hold of the data, known as IBM's "Corporate Mortality File," as an expert witness who analyzed it for lawyers in California. They had sued IBM on behalf of a number of workers at a disk-drive plant in San Jose who got cancer. Although the plaintiffs settled after several lost their lawsuits, Mr. Clapp sought to publish his analysis.
The WSJ’s “Heard on the Street” column discusses Wal-Mart (WMT), saying that if the co announces next week that it will slow its expansion in the US, investors are likely to applaud. The co has grown at a ravenous pace, building hundreds of stores each year to increase its dominance of the nation's retailing. This year, it will erect as many as 370 US stores to keep up with its typical annual sq-ft growth rate of 8%. But in recent years, Wall St. has become increasingly concerned that Wal-Mart's new stores are stealing sales from its older outlets. Another worry: the higher costs of opening stores in mkts where it isn't already dominant. Some investors and analysts prefer that Wal-Mart throttle back on its growth by next year or ‘08, diverting money that would otherwise be spent on expansion to shareholder-friendly uses such as share buybacks and dividend increases or more extensive remodeling of older stores. Should Wal-Mart signal at its annual session with analysts next week that this will happen, the stock likely will get a pop.
Barron’s Online is out saying that with a trio of blockbuster drugs in its stable, Genentech (DNA) has emerged as one of the most successful biotech co’s in America. And despite a richly deserved premium to the broader mkt, the stock still paints a pretty picture, trading near record-low multiples for this co. "Just look at how fast Genentech's earnings are growing," says Luis Cortez, of Essex Investment Mgmt. "They are expected to grow dramatically faster than the S&P 500 as Avastin goes through a period of reacceleration. So even with the premium, the stock still looks attractive to me."
“Inside Scoop” section reports that Second Curve Capital started snapping up shares of Encore Capital (ECPG) in anticipation of more consumer-loan defaults late last year. Now the hedge fund is banking on a private-equity buyout of the debt collector. Second Curve spent nearly $5.7m to purchase 470K shares during the Q3, increasing its stake to 17.2%. Second Curve CEO Thomas Brown says "we like the debt-collection space" as consumer indebtedness has risen over the past 10-15 years. Brown also notes that "credit-card co’s are increasingly looking to co’s like Encore to sell off debt." "As Americans," Brown says, "we maintain a very healthy appetite for not paying." He says that Encore is a leader among peers in pricing the acquisition of default-loan portfolios and in managing those accounts.
The WSJ’s “Heard on the Street” column discusses Wal-Mart (WMT), saying that if the co announces next week that it will slow its expansion in the US, investors are likely to applaud. The co has grown at a ravenous pace, building hundreds of stores each year to increase its dominance of the nation's retailing. This year, it will erect as many as 370 US stores to keep up with its typical annual sq-ft growth rate of 8%. But in recent years, Wall St. has become increasingly concerned that Wal-Mart's new stores are stealing sales from its older outlets. Another worry: the higher costs of opening stores in mkts where it isn't already dominant. Some investors and analysts prefer that Wal-Mart throttle back on its growth by next year or ‘08, diverting money that would otherwise be spent on expansion to shareholder-friendly uses such as share buybacks and dividend increases or more extensive remodeling of older stores. Should Wal-Mart signal at its annual session with analysts next week that this will happen, the stock likely will get a pop.
Barron’s Online is out saying that with a trio of blockbuster drugs in its stable, Genentech (DNA) has emerged as one of the most successful biotech co’s in America. And despite a richly deserved premium to the broader mkt, the stock still paints a pretty picture, trading near record-low multiples for this co. "Just look at how fast Genentech's earnings are growing," says Luis Cortez, of Essex Investment Mgmt. "They are expected to grow dramatically faster than the S&P 500 as Avastin goes through a period of reacceleration. So even with the premium, the stock still looks attractive to me."
“Inside Scoop” section reports that Second Curve Capital started snapping up shares of Encore Capital (ECPG) in anticipation of more consumer-loan defaults late last year. Now the hedge fund is banking on a private-equity buyout of the debt collector. Second Curve spent nearly $5.7m to purchase 470K shares during the Q3, increasing its stake to 17.2%. Second Curve CEO Thomas Brown says "we like the debt-collection space" as consumer indebtedness has risen over the past 10-15 years. Brown also notes that "credit-card co’s are increasingly looking to co’s like Encore to sell off debt." "As Americans," Brown says, "we maintain a very healthy appetite for not paying." He says that Encore is a leader among peers in pricing the acquisition of default-loan portfolios and in managing those accounts.
Wednesday, October 18, 2006
Calls of Note Part 1
- TWP says they were recently surprised to see Volterra (NASDAQ:VLTR) parts on multiple high-end Conroe desktop motherboards. Although volumes are likely to be small in 4Q, in the tens of thousands of dollars, according to firm's contact, the high-end boards are currently in production and shipping. Penetration of this socket serves as solid confirmation of Volterra's superior performance and efficiency in high-end applications.
Volterra management has not focused on desktop when discussing growth opportunities. While they believe it is unlikely that Volterra will enjoy material contribution from desktop in 2007, they are hopeful that as performance requirements become more challenging, following the trajectory of server, graphics and notebook, desktop may emerge as a fourth significant end market.
Volterra's industry leading products lead the way for "digital power". TWP believes Volterra's unique approach to voltage regulation with a highly integrated mixed-signal solution allows the company to address high-end sockets (i.e., VR11, high-end graphics, etc.) at compelling price points. They expect Volterra to continue innovating and paving the way for "digital power" with ensuing product generations.
Reiterates Outperform
Notablecalls: Not actionable but good to know category.
Volterra management has not focused on desktop when discussing growth opportunities. While they believe it is unlikely that Volterra will enjoy material contribution from desktop in 2007, they are hopeful that as performance requirements become more challenging, following the trajectory of server, graphics and notebook, desktop may emerge as a fourth significant end market.
Volterra's industry leading products lead the way for "digital power". TWP believes Volterra's unique approach to voltage regulation with a highly integrated mixed-signal solution allows the company to address high-end sockets (i.e., VR11, high-end graphics, etc.) at compelling price points. They expect Volterra to continue innovating and paving the way for "digital power" with ensuing product generations.
Reiterates Outperform
Notablecalls: Not actionable but good to know category.
Color on quarter: Yahoo! (NASDAQ:YHOO)
Yahoo! (NASDAQ:YHOO) has yet again failed to please the analyst community with their quarterlies:
- Piper Jaffray says Yahoo is facing two important trends, both causing the company to lose market share. The first, the search monetization gap, is well understood and we believe will be narrowed next year. The second, however, is a new trend where Yahoo's share of display ad dollars is also declining, primarily because, in firm's opinion, Yahoo has not kept up with user trends. The verticalization of the web and the growth of the social networking sites have been happening over the past two years, and Yahoo may have missed earlier opportunities to react to these trends. The optimistic view would suggest that given Yahoo's wherewithal, brand and global reach, it should be able to catch up with the industry. Firm cautiously shares this view but also believes a transition period, which may require some structural changes, could be ahead. Thus, while the stock is not expensive, the multiple is likely to remain depressed as long as growth is notably lagging the industry and a successful transition is yet to happen. Given Yahoo's franchise, they still believe the company is a valuable long term holding, but they would only opportunistically accumulate the stock on pullbacks, as the firm doesn't expect major appreciation in the near term.
They are lowering their estimates significantly given the weak Q4 guidance and slower branded ad growth as Yahoo is faced with fragmented competition. These change result in 2007 revenue, EBITDA, and proforma EPS estimates coming down 7%, 11%, and 8% to
$5.43B, $2.24B, and $0.91, respectively.
- Deutsche Bank says they remain on the sidelines on shares of Yahoo! and believe shares will be range-bound at the mid-$20 levels, with valuation support likely coming in the low $20 range. They think the stock likely fades as investors further dig into weakness in display ads and search revenues, with additional growth challenges (Panama, more MySpace ad impressions) on the horizon in 2007.
In firm's opinion, the business prospects facing Yahoo! appears to be worse than expected (following 3Q results), as evidenced by slowing growth in 3Q branded ad revs (+28% Y/Y in 3Q) and substantial paid search weakness (+16% Y/Y vs. 25%-plus growth in 2Q). While the
company contends that the branded ad business represents the weakness at the company, they think that the search deceleration (ongoing into 4Q) is clearly the bigger variance to the top-line performance (offset by cost cuts to achieve the bottom-line). In fact, search growth will likely be closer to 5%-8% growth in 4Q, implying sizable market share losses. While the firm is again reducing their 4Q and 2007 forecasts, they think that several issues remain
The company's key segments are undergoing a challenging transition. Firstly its branded ad business faces pressure from lower pricing and additional inventory from the MySpaces and YouTubes of the world, hindering Yahoo!'s ability to maintain its above market growth rates in display ads. Meanwhile, search growth is decelerating, led by declining RPS (market share losses only exacerbate the search revenue slowdown). The launch of Panama v2.0, which should help address monetization, is not expected to benefit RPS until 2H 2007.
Tgt goes to $24 from $25. Maintains Hold.
Notablecalls: RBC believes YHOO shares are halfway through a bottoming phase. I agree. While DB thinks the shares will be faded, I don't think there is a trade here just yet.
- Piper Jaffray says Yahoo is facing two important trends, both causing the company to lose market share. The first, the search monetization gap, is well understood and we believe will be narrowed next year. The second, however, is a new trend where Yahoo's share of display ad dollars is also declining, primarily because, in firm's opinion, Yahoo has not kept up with user trends. The verticalization of the web and the growth of the social networking sites have been happening over the past two years, and Yahoo may have missed earlier opportunities to react to these trends. The optimistic view would suggest that given Yahoo's wherewithal, brand and global reach, it should be able to catch up with the industry. Firm cautiously shares this view but also believes a transition period, which may require some structural changes, could be ahead. Thus, while the stock is not expensive, the multiple is likely to remain depressed as long as growth is notably lagging the industry and a successful transition is yet to happen. Given Yahoo's franchise, they still believe the company is a valuable long term holding, but they would only opportunistically accumulate the stock on pullbacks, as the firm doesn't expect major appreciation in the near term.
They are lowering their estimates significantly given the weak Q4 guidance and slower branded ad growth as Yahoo is faced with fragmented competition. These change result in 2007 revenue, EBITDA, and proforma EPS estimates coming down 7%, 11%, and 8% to
$5.43B, $2.24B, and $0.91, respectively.
- Deutsche Bank says they remain on the sidelines on shares of Yahoo! and believe shares will be range-bound at the mid-$20 levels, with valuation support likely coming in the low $20 range. They think the stock likely fades as investors further dig into weakness in display ads and search revenues, with additional growth challenges (Panama, more MySpace ad impressions) on the horizon in 2007.
In firm's opinion, the business prospects facing Yahoo! appears to be worse than expected (following 3Q results), as evidenced by slowing growth in 3Q branded ad revs (+28% Y/Y in 3Q) and substantial paid search weakness (+16% Y/Y vs. 25%-plus growth in 2Q). While the
company contends that the branded ad business represents the weakness at the company, they think that the search deceleration (ongoing into 4Q) is clearly the bigger variance to the top-line performance (offset by cost cuts to achieve the bottom-line). In fact, search growth will likely be closer to 5%-8% growth in 4Q, implying sizable market share losses. While the firm is again reducing their 4Q and 2007 forecasts, they think that several issues remain
The company's key segments are undergoing a challenging transition. Firstly its branded ad business faces pressure from lower pricing and additional inventory from the MySpaces and YouTubes of the world, hindering Yahoo!'s ability to maintain its above market growth rates in display ads. Meanwhile, search growth is decelerating, led by declining RPS (market share losses only exacerbate the search revenue slowdown). The launch of Panama v2.0, which should help address monetization, is not expected to benefit RPS until 2H 2007.
Tgt goes to $24 from $25. Maintains Hold.
Notablecalls: RBC believes YHOO shares are halfway through a bottoming phase. I agree. While DB thinks the shares will be faded, I don't think there is a trade here just yet.
Color on quarter: Intel (NASDAQ:INTC)
Analysts are mostly positive on Intel (NASDAQ:INTC) after the co issued its Q3 report last night:
- Merrill Lynch notes that for once, Intel delivered results that were largely in line with their expectations. On the positive side, the ramp of new products is proceeding as they thought. Product mix is still improving, reductions in operating cost are significant, and market share losses should reverse in the desktop and mobile markets. On the negative side, share losses in server processors are likely to continue, and manufacturing capacity appears excessive.
Intel's management has effectively capped the stock price for the short term by refusing to discuss business recovery plans in any detail beyond the current quarter. That said, the factors that have propelled the stock to $21 during the past few months are still in place. It's not reasonable to expect much multiple expansion from Intel, but they think the street is still underestimating earnings potential for 2007. At $1.30 in forecasted earnings the stock would still be at less than 20x earnings at $25. Firm continues to be buyers of the stock.
One important point for investors trying to understand the likely trajectory of market share in 2007 is it's the product that matters. The reality is that Intel has highly competitive 65nm products in both the desktop and notebook markets while AMD will only just be getting ready to ship 65nm late this year or early next. That's what matters, and that's what should be reflected in PC OEM comments and processor market share as we move through 2007.
- JP Morgan notes gross margins declining during 1H07E, reiterate Neutral. While they are
positive on capex cuts, restructuring and better products, they remain Neutral on INTC due to belief that gross margins should decline to the high-40% range during 1H07 due to record inventory, higher start up costs, and higher depreciation. As soon as the firm believes gross margins are close to bottoming, their outlook on INTC could become more optimistic.
Raising estimates, but below Consensus. Firm is raising their C06 revenue and EPS estimates from $35.0 billion and $0.74 to $35.1 billion and $0.82. They are maintaining C07 revenue estimate of $37.0 billion but raisingC07 EPS estimate from $0.94 to $1.05, below Consensus of $1.10.
INTC is trading at 3.5X C06E sales, below the mid-point of a historical range of 3.0X-5.0X sales. JP Morgan remains Neutral due to belief in risk of estimate cuts driven by lower gross margins.
- Goldman Sachs notes that while inventory levels remain high and the report likely didn't meet heightened expectations, they believe the results underscore that the company is better positioned entering 2007 than it was entering 2006, both in terms of its competitive positioning and its cost structure. Management also appears to be taking a disciplined approach to capex, announcing its 3rd cut to the budget this year. While the firm expects margins to continue to improve as a result of these actions, they believe the stock is already reflecting this improvement as it is trading at 21x estimated normalized EPS of ~$1.00. They therefore do not recommend the name to absolute return investors, although they recommend Intel on a relative basis versus AMD given expectation of share gains. The firm is raising their FY2007 EPS estimate to $1.10 from $0.90 as they are now modeling in the restructuring. Maintains 12-month price target of $22.
Notablecalls: Note that Goldman downgraded the stock yesterday. I continue to be negative on INTC as I see no quick fixes to their problems. The historically high margins are not likely to return. Plus there is no real growth. Just a commodity business.
- Merrill Lynch notes that for once, Intel delivered results that were largely in line with their expectations. On the positive side, the ramp of new products is proceeding as they thought. Product mix is still improving, reductions in operating cost are significant, and market share losses should reverse in the desktop and mobile markets. On the negative side, share losses in server processors are likely to continue, and manufacturing capacity appears excessive.
Intel's management has effectively capped the stock price for the short term by refusing to discuss business recovery plans in any detail beyond the current quarter. That said, the factors that have propelled the stock to $21 during the past few months are still in place. It's not reasonable to expect much multiple expansion from Intel, but they think the street is still underestimating earnings potential for 2007. At $1.30 in forecasted earnings the stock would still be at less than 20x earnings at $25. Firm continues to be buyers of the stock.
One important point for investors trying to understand the likely trajectory of market share in 2007 is it's the product that matters. The reality is that Intel has highly competitive 65nm products in both the desktop and notebook markets while AMD will only just be getting ready to ship 65nm late this year or early next. That's what matters, and that's what should be reflected in PC OEM comments and processor market share as we move through 2007.
- JP Morgan notes gross margins declining during 1H07E, reiterate Neutral. While they are
positive on capex cuts, restructuring and better products, they remain Neutral on INTC due to belief that gross margins should decline to the high-40% range during 1H07 due to record inventory, higher start up costs, and higher depreciation. As soon as the firm believes gross margins are close to bottoming, their outlook on INTC could become more optimistic.
Raising estimates, but below Consensus. Firm is raising their C06 revenue and EPS estimates from $35.0 billion and $0.74 to $35.1 billion and $0.82. They are maintaining C07 revenue estimate of $37.0 billion but raisingC07 EPS estimate from $0.94 to $1.05, below Consensus of $1.10.
INTC is trading at 3.5X C06E sales, below the mid-point of a historical range of 3.0X-5.0X sales. JP Morgan remains Neutral due to belief in risk of estimate cuts driven by lower gross margins.
- Goldman Sachs notes that while inventory levels remain high and the report likely didn't meet heightened expectations, they believe the results underscore that the company is better positioned entering 2007 than it was entering 2006, both in terms of its competitive positioning and its cost structure. Management also appears to be taking a disciplined approach to capex, announcing its 3rd cut to the budget this year. While the firm expects margins to continue to improve as a result of these actions, they believe the stock is already reflecting this improvement as it is trading at 21x estimated normalized EPS of ~$1.00. They therefore do not recommend the name to absolute return investors, although they recommend Intel on a relative basis versus AMD given expectation of share gains. The firm is raising their FY2007 EPS estimate to $1.10 from $0.90 as they are now modeling in the restructuring. Maintains 12-month price target of $22.
Notablecalls: Note that Goldman downgraded the stock yesterday. I continue to be negative on INTC as I see no quick fixes to their problems. The historically high margins are not likely to return. Plus there is no real growth. Just a commodity business.
Paperstand
According to the WSJ, the Chicago Mercantile Exchange (CME) and the Chicago Board of Trade agreed to join forces to form the world's largest financial mkt, one that will dwarf exchanges in the US and Europe, even the NYSE. The CME announced plans to buy the smaller CBOT (BOT) for about $8bn.
Barron’s Online discusses Nokia (NOK), saying that investors worried that Nokia's clunky phones can't withstand Moto's (MOT) style lead, are valuing the Finnish giant way below Moto, assigning its stock a forward P/E multiple of 13x next year's expected earnings, below not only Moto's 18x, but also the avg 15x forward P/E multiple of the S&P's 500. But the co with the most cutting-edge phones, at the end of the day, might not be the best investment. In the 4 years that Nokia has repeatedly missed the latest trends in cellphone designs- first clam shells, now thinness- it's nonetheless hung on to its dominant 30% mkt share in phone sales globally. By sidestepping the costly battle to create the hippest phone, and instead cutting prices in Asia, a booming mkt, Nokia has kept operating profit in its mobile phones division higher than Moto's. The co's financial outlook is brighter as a result: EPS will rise faster next year for Nokia, at about 18%, vs 15% growth for Motorola. And Nokia bulls can take heart: Moto's thin phones didn't help the co much this week, as it reported sales of 54m units, below expectations. "What's important to shareholders is having a reasonable operating profit, and that's what Nokia has focused on," says Albert Lin, of AmTech.
“Inside Scoop” section reports that falling commodity prices have pressured oil and natural-gas co’s as of late, but a hedge fund is gushing over shares of GMX Resources (GMXR) after the co announced positive results from several new wells. Peter Seldin, a managing member of investment firm Centennial Energy Partners, shelled out $4.8m for 142K GMX shares in transactions from Oct. 3 to 4, and Oct. 13 to 16. Centennial focuses solely on energy and energy-related sectors and seeks out stocks that are trading at a discount to their intrinsic value, according to StreetSight.net.
Color on quarter: Motorola (NYSE:MOT)
Several firms are commenting on Motorola (NYSE:MOT) after the co released its Q3 results last night:
- Morgan Stanley notes that the bears will point to slower growth than the competition and lower ASPs, while the bulls, the firm among them, will point to the step-up in operating margins and expectations for a rebound on new products in Q4. They recommend using weakness stemming from the disappointing quarter as a buying opportunity ahead of what should be a return to better execution in coming quarters.
Sales of $10.6 billion missed our $11.1 estimate due to an inventory correction for iDEN handsets, a lack of 3G products in Europe, reduced average handset prices, and weak wireless infrastructure spending in Europe. MS expects these issues to be resolved in Q4 on the launch of new handsets at Sprint, more high-end handsets in the mix including 3G in Europe, and some seasonal improvement for infrastructure. The firm trims their estimates slightly -- C2007 drops to $1.63 from $1.68 -- on a slight reduction to market share estimates.
The handset market continues to surprise to the upside, and they think it has a few more quarters to go. Maintains Overweight.
- Deutsche Bank notes that as is often the case with Motorola decent quarters are often masked by small misses in one segment. In last night's results, there were two missing pieces. First, weak capex from Motorola's GSM carriers in Europe. Firm believes this is a relatively small piece of business for Motorola, and was likely to decline with time anyway. A bigger concern was the weakness in orders from Sprint (presumably) ahead of the launch of dual-mode iDen/CDMA phones. While obviously this is a concern for the quarter, we think over time weakness in iDen will be offset by gains on the CDMA side.
Deutsche thinks it is significant that the company was able to improve operating margins in its handset business despite the softness of its higher margin product. The company deserves credit for making some significant strides in delivering on its promised operating margin improvements. Firm points out that the company was able to launch GSM and CDMA versions of the KRZR simultaneously in Q3 and will launch GSM and CDMA versions of the MotoFone in Q4, feats unthinkable only a year ago.
In their view, the fundamental thesis for Motorola has not changed. The company is improving margins, gaining share and generating a tremendous amount of cash. Most importantly, they still have the most compelling line of handsets on the market. Barring something exciting from Finland, they think Motorola should continue to outperform as we enter the Christmas shopping season. Maintains Buy.
- CIBC: Has MOTO lost its mojo? The firm thinks not. Investors need to ask--can Samsung, LG
and others keep up? In any given quarter they can take away from MOT's upside, but in the long run they lose. And when MOT bounces back, it will be at higher operating margins. They believe it's time to buy.
Clearly not the most inspiring quarter, although MOT delivered bottom-line results in line with the Street at $0.34 despite the top-line shortfall ($10.6B vs. firm's $11.4B and Street $11.1B). iDEN handset delays ahead of new dual CDMA/iDEN models and a slowdown in EMEA GSM spending were the cause. They continue to see MOT's handset portfolio as the pace setter and expect the company to bounce back as the new KRZR, RIZR, FONE handsets ramp in 4Q.
CIBC is adjusting their 2006 revenue and EPS estimates to $43.4B and $1.33 from $44.4B and $1.35 and 2007 estimates to $45.0B and $1.52 from $46.3B and $1.56. Firm is introducing FY08 estimates of $47.3 billion and $1.79. Reiterates SO rating and $28 price target.
Notablecalls: There is no question of what to do with MOT here - you gotta buy the common right here. The stock started to sell off couple of days ahead of results, the results disappointed and now we have several tier-1 firms defending it - thats a good recipe for a bounce. Be the trading chef.
- Morgan Stanley notes that the bears will point to slower growth than the competition and lower ASPs, while the bulls, the firm among them, will point to the step-up in operating margins and expectations for a rebound on new products in Q4. They recommend using weakness stemming from the disappointing quarter as a buying opportunity ahead of what should be a return to better execution in coming quarters.
Sales of $10.6 billion missed our $11.1 estimate due to an inventory correction for iDEN handsets, a lack of 3G products in Europe, reduced average handset prices, and weak wireless infrastructure spending in Europe. MS expects these issues to be resolved in Q4 on the launch of new handsets at Sprint, more high-end handsets in the mix including 3G in Europe, and some seasonal improvement for infrastructure. The firm trims their estimates slightly -- C2007 drops to $1.63 from $1.68 -- on a slight reduction to market share estimates.
The handset market continues to surprise to the upside, and they think it has a few more quarters to go. Maintains Overweight.
- Deutsche Bank notes that as is often the case with Motorola decent quarters are often masked by small misses in one segment. In last night's results, there were two missing pieces. First, weak capex from Motorola's GSM carriers in Europe. Firm believes this is a relatively small piece of business for Motorola, and was likely to decline with time anyway. A bigger concern was the weakness in orders from Sprint (presumably) ahead of the launch of dual-mode iDen/CDMA phones. While obviously this is a concern for the quarter, we think over time weakness in iDen will be offset by gains on the CDMA side.
Deutsche thinks it is significant that the company was able to improve operating margins in its handset business despite the softness of its higher margin product. The company deserves credit for making some significant strides in delivering on its promised operating margin improvements. Firm points out that the company was able to launch GSM and CDMA versions of the KRZR simultaneously in Q3 and will launch GSM and CDMA versions of the MotoFone in Q4, feats unthinkable only a year ago.
In their view, the fundamental thesis for Motorola has not changed. The company is improving margins, gaining share and generating a tremendous amount of cash. Most importantly, they still have the most compelling line of handsets on the market. Barring something exciting from Finland, they think Motorola should continue to outperform as we enter the Christmas shopping season. Maintains Buy.
- CIBC: Has MOTO lost its mojo? The firm thinks not. Investors need to ask--can Samsung, LG
and others keep up? In any given quarter they can take away from MOT's upside, but in the long run they lose. And when MOT bounces back, it will be at higher operating margins. They believe it's time to buy.
Clearly not the most inspiring quarter, although MOT delivered bottom-line results in line with the Street at $0.34 despite the top-line shortfall ($10.6B vs. firm's $11.4B and Street $11.1B). iDEN handset delays ahead of new dual CDMA/iDEN models and a slowdown in EMEA GSM spending were the cause. They continue to see MOT's handset portfolio as the pace setter and expect the company to bounce back as the new KRZR, RIZR, FONE handsets ramp in 4Q.
CIBC is adjusting their 2006 revenue and EPS estimates to $43.4B and $1.33 from $44.4B and $1.35 and 2007 estimates to $45.0B and $1.52 from $46.3B and $1.56. Firm is introducing FY08 estimates of $47.3 billion and $1.79. Reiterates SO rating and $28 price target.
Notablecalls: There is no question of what to do with MOT here - you gotta buy the common right here. The stock started to sell off couple of days ahead of results, the results disappointed and now we have several tier-1 firms defending it - thats a good recipe for a bounce. Be the trading chef.
Tuesday, October 17, 2006
Calls of Note Part 5
- Canaccord Adams is out with a technical call on SiRF Tech (NASDAQ:SIRF) noting that after rallying through 2005, SIRF shares peaked in a bull trap above the $40.00 level last winter. Since then, the shares have been under distribution, as shown by the series of consistently lower highs on trend. Recent trading, however, suggests that this downtrend is over and the shares are starting to recover. Following a summer bounce, the shares declined through September, but earlier this month, the shares dipped below $20.00 and then quickly rebounded. This set a higher low that indicated increased investor support is strong at that level, while the MACD has suggested that momentum is starting to turn positive. Yesterday, the shares started to rebound, indicating that selling pressure is easing. A break through $23.75, a former support level, would confirm that a new advance is underway. Firm's $30.00 technical price objective is based on a 50% retracement of the shares' previous downtrend and a test of their 200-day moving average, although investors should note that initial resistance is possible at the shares' previous high near $27.25. BUY SIRF WITH A $19.75 STOP
Notablecalls: For you technically oriented out there.
Notablecalls: For you technically oriented out there.
Calls of Note Part 4
- Citigroup comments on KLA-Tencor (NASDAQ:KLAC) after the co announced it has substantially completed its internal investigation into prior option grant practices. Monetarily, KLAC expects charges not to exceed ~$400MM with all charges non-cash (book value not impacted).
As the firm expected, no current executive was implicated in any wrongdoing (although they note Chairman Ken Levy could still be at risk). This should be seen as a big positive by investors worried about current management stability.
While a significant step in the right direction, KLAC remains in a self-imposed blackout period for stock buyback (or any broader balance sheet re-work) pending filing of regulatory documents. In order to file documents, the firm believes a meaningful amount of heavy lifting in terms of accounting + external audit work remains to be completed - suggesting a ~6-10 week timeline for filing.
KLAC remains firm's top idea for new money as big restructuring boosts margins; C2007 EPS has upside to ~$3.85 (~25% upside to Citi (ex SBC), ~60% above consensus).
Notablecalls: Citi sure continues to be positive on KLAC.
As the firm expected, no current executive was implicated in any wrongdoing (although they note Chairman Ken Levy could still be at risk). This should be seen as a big positive by investors worried about current management stability.
While a significant step in the right direction, KLAC remains in a self-imposed blackout period for stock buyback (or any broader balance sheet re-work) pending filing of regulatory documents. In order to file documents, the firm believes a meaningful amount of heavy lifting in terms of accounting + external audit work remains to be completed - suggesting a ~6-10 week timeline for filing.
KLAC remains firm's top idea for new money as big restructuring boosts margins; C2007 EPS has upside to ~$3.85 (~25% upside to Citi (ex SBC), ~60% above consensus).
Notablecalls: Citi sure continues to be positive on KLAC.
Calls of Note Part 3
- Citigroup notes PBMs are off about 20% from their highs on two risks could temper 1st-time '07 EPS guidance below consensus & cut long-term growth prospects.
MAIN RISK: Heightened price competition at retail drugstores led by WMT healthcare
initiative could cut PBM mailorder sales and retail PBM profits if retail drug prices fall below copay (so PBM card not used).
Citigroup Investment Research's Drugstore analyst sees low risk of WAG, CVS entering WMT
price war.
SECONDARY: PBMs revenue may be cut without commensurate expense cut if a pricing benchmark "AWP" is cut as part of a legal settlement.
Firm's analysis of the language of the settlement suggests mid-late '07 implementation; however CVS sees 1Q-2Q07 implementation. MHS says their contracts protect them from AWP change; ESRX, CMX haven't committed impact to Street. AWP goes away 2 yrs, so any PBM hit temporary.
Also a giant wave of new generics will come on the market in the coming next 12 months including a benefit PBMs will continue to reap by selling inventory of Plavix that was launched at-risk and may still be sold retail even with the injunction. In that regard, the low- priced generics getting even less expensive is the "undertow" of lost opportunity for PBMs that is more than offset by the "wave" of new drugs that are hitting the market.
Citi recommends the purchase of PBM stocks Caremark (CMX), Express Scripts (ESRX), and Medco Health Solutions (MHS).
Notablecalls: This is NOT a trading call, but I suspect it will work like one. Charts of ESRX and CMX look way extended and I happen to know that some traders I consider to be very smart money have already taken positions in these stocks.
MAIN RISK: Heightened price competition at retail drugstores led by WMT healthcare
initiative could cut PBM mailorder sales and retail PBM profits if retail drug prices fall below copay (so PBM card not used).
Citigroup Investment Research's Drugstore analyst sees low risk of WAG, CVS entering WMT
price war.
SECONDARY: PBMs revenue may be cut without commensurate expense cut if a pricing benchmark "AWP" is cut as part of a legal settlement.
Firm's analysis of the language of the settlement suggests mid-late '07 implementation; however CVS sees 1Q-2Q07 implementation. MHS says their contracts protect them from AWP change; ESRX, CMX haven't committed impact to Street. AWP goes away 2 yrs, so any PBM hit temporary.
Also a giant wave of new generics will come on the market in the coming next 12 months including a benefit PBMs will continue to reap by selling inventory of Plavix that was launched at-risk and may still be sold retail even with the injunction. In that regard, the low- priced generics getting even less expensive is the "undertow" of lost opportunity for PBMs that is more than offset by the "wave" of new drugs that are hitting the market.
Citi recommends the purchase of PBM stocks Caremark (CMX), Express Scripts (ESRX), and Medco Health Solutions (MHS).
Notablecalls: This is NOT a trading call, but I suspect it will work like one. Charts of ESRX and CMX look way extended and I happen to know that some traders I consider to be very smart money have already taken positions in these stocks.
Calls of Note Part 2
- UBS comments on Apple (NASDAQ:AAPL) noting surveys and checks continue to show that demand for MacBooks remains strong, with strength continuing even beyond the back to school season. In line with firm's expectations, recent store visits and surveys continue to show solid demand for the new Apple MacBook, as well as the MacBook Pro, which they believe bodes well for fiscal 4Q Mac sales and future results (note Apple reports fiscal 4Q results on Wednesday, October 18th after the close). During firm's checks over the past few months, representatives at CompUSA, as well as at Apple stores, continue to see solid demand for the MacBooks, with checks this month indicating that MacBook strength has continued beyond the peak back to school spending season, which ended in mid-September.
Online wait times for MacBooks just recently fell to 24 hours after holding in the 5-7 business day range throughout the back to school season and checks show the education segment should also lend support to Apple's fiscal 4Q estimates given July is when new school district annual budgets come into play. With the education segment accounting for approximately 25% of US Mac unit sales and new products featuring Intel processors shipping, UBS believes fiscal 4Q could see solid growth especially for MacBooks and new iMacs. They note that recent NPD data placed retail Mac unit growth at 43% y/y in August (vs. market growth of 36%) with notebooks up 63% driven by solid demand for MacBooks.
Firm continues to expect Apple to upgrade MacBook Pros with new Core 2 Duo processors for the holidays. For calendar 2007, checks also indicate Apple may be working on "ultra-portable PCs" and even notebooks equipped with NAND flash memory in addition to or in the place of hard disk drives, which can offer users an "Instant-On" functionality for booting. They believe these new products could be available at some point next calendar year, but they are not in firm's current model.
Notablecalls: Just some additional background info ahead of results. Not actionable.
Online wait times for MacBooks just recently fell to 24 hours after holding in the 5-7 business day range throughout the back to school season and checks show the education segment should also lend support to Apple's fiscal 4Q estimates given July is when new school district annual budgets come into play. With the education segment accounting for approximately 25% of US Mac unit sales and new products featuring Intel processors shipping, UBS believes fiscal 4Q could see solid growth especially for MacBooks and new iMacs. They note that recent NPD data placed retail Mac unit growth at 43% y/y in August (vs. market growth of 36%) with notebooks up 63% driven by solid demand for MacBooks.
Firm continues to expect Apple to upgrade MacBook Pros with new Core 2 Duo processors for the holidays. For calendar 2007, checks also indicate Apple may be working on "ultra-portable PCs" and even notebooks equipped with NAND flash memory in addition to or in the place of hard disk drives, which can offer users an "Instant-On" functionality for booting. They believe these new products could be available at some point next calendar year, but they are not in firm's current model.
Notablecalls: Just some additional background info ahead of results. Not actionable.
Calls of Note Part 1
- Merrill Lynch is raising their 12-month price target on Cymer (NASDAQ:CYMI) from $45 to $59 based on 19-20x new 2007 estimate of $3.00 up from $2.80. Cymer is well positioned to benefit from favorable unit/bookings forecasts from its main lithography customers and further operational momentum driving higher 2007 estimates. Firm believes Cymer should continue to outperform even in a modest industry slowdown.
Cymer's dominant market share provides leverage as the mix shift to ArF (>90% share), immersion and double exposure technology drive higher deep-UV units and ASPs. The consumables (service & spares) business (~45% of sales) aids sustainable earnings growth due to the growing installed base and high margins. Increasing operating efficiencies also are resulting in higher margins.
Cymer's direct laser customers have been booking at a rate that implies 5-10 more units/ quarter potential in 2007 than firm's model. Merrill is raising their 2007 sales estimates from $610 million (up 9% Y/Y) to $633 million (up 13% Y/Y) and gross margins from 52.7% to 53.6%. Laser unit shipment estimate increases to 322 lasers for 2007 (vs. 302 previously) up from 298 in 2006. These could prove conservative given Cymer's high market share and improving execution.
Two potential catalysts around the corner:
Cymer could signal an improving outlook when it reports 3Q results on 10/24 after the close given the order trends at its customers. Management is holding an Analyst Day at its headquarters on Nov. 2 and could revise its operating targets upward, while providing more clarity into volume & pricing opportunities for 2007. Merrill believes these two events are potential positive catalysts for the stock.
Notablecalls: CYMI has had a nice run already and while I think the note makes sense I would not overstay my welcome in this one.
Cymer's dominant market share provides leverage as the mix shift to ArF (>90% share), immersion and double exposure technology drive higher deep-UV units and ASPs. The consumables (service & spares) business (~45% of sales) aids sustainable earnings growth due to the growing installed base and high margins. Increasing operating efficiencies also are resulting in higher margins.
Cymer's direct laser customers have been booking at a rate that implies 5-10 more units/ quarter potential in 2007 than firm's model. Merrill is raising their 2007 sales estimates from $610 million (up 9% Y/Y) to $633 million (up 13% Y/Y) and gross margins from 52.7% to 53.6%. Laser unit shipment estimate increases to 322 lasers for 2007 (vs. 302 previously) up from 298 in 2006. These could prove conservative given Cymer's high market share and improving execution.
Two potential catalysts around the corner:
Cymer could signal an improving outlook when it reports 3Q results on 10/24 after the close given the order trends at its customers. Management is holding an Analyst Day at its headquarters on Nov. 2 and could revise its operating targets upward, while providing more clarity into volume & pricing opportunities for 2007. Merrill believes these two events are potential positive catalysts for the stock.
Notablecalls: CYMI has had a nice run already and while I think the note makes sense I would not overstay my welcome in this one.
Paperstand
LINK: How a hedge fund vanishes.
Barron’s Online „Inside Scoop” section highlights GenTek (GETI), whose shares have soared to a 52w high after the run-up in oil prices earlier this year boosted the diversified industrial-supply maker's sales of petroleum-refining chemicals. One of its major institutional shareholders, however, still believes that there is plenty of value left in the stock. On Oct. 10, Pamet Capital Mgmt shelled out a total of $14.8m for GenTek stock, buying 524K shares. The investment firm now owns 17.65% of GenTek's outstanding shares.
Monday, October 16, 2006
Calls of Note Part 6
Piper Jaffray's Gene Munster and Michael J. Olson out on Sonic Solutions (NASDAQ:SNIC), saying that they have found that Picasa, a free, digital photo software download from Google, is licensing Sonic's burning engine. This enables users to organize, edit, and burn photos to a CD or turn photos into a slideshow and burn it to DVD.
Sonic stated in the June quarter conference call that it recently signed another deal with Google, in which it would integrate Sonic's technology, leverage the Roxio brand, and its large media savvy user base. Sonic could not give details of the deal, but did say that its relationship with Google will impact the model in 2006. This is another example of Sonic's continued efforts to partner with best-in-class companies and brands to leverage the company's multi-channel distribution network.
Piper found Sonic mentioned in two help/support links. The first relates to the question of spyware within third party software and states: "An example of third party software is Picasa's CD/ DVD burning component that is supplied by Sonic." The other example is found in the script of a user that was trying to burn a DVD and was seeking help from a support link. The script included the text:
ORIGINAL FILENAME="PRIMOSDK.DLL" INTERNAL NAME="PrimoSDK"
LEGAL COPYRIGHT="Copyright 2002 Sonic Solutions."
Notablecalls: Nice work, Gene and Micheal! However, I'm not sure about the financial impact - while Picasa is very neat & convenient, I don't think it is very widely used. Wouldn't call this note actionable.
Sonic stated in the June quarter conference call that it recently signed another deal with Google, in which it would integrate Sonic's technology, leverage the Roxio brand, and its large media savvy user base. Sonic could not give details of the deal, but did say that its relationship with Google will impact the model in 2006. This is another example of Sonic's continued efforts to partner with best-in-class companies and brands to leverage the company's multi-channel distribution network.
Piper found Sonic mentioned in two help/support links. The first relates to the question of spyware within third party software and states: "An example of third party software is Picasa's CD/ DVD burning component that is supplied by Sonic." The other example is found in the script of a user that was trying to burn a DVD and was seeking help from a support link. The script included the text:
ORIGINAL FILENAME="PRIMOSDK.DLL" INTERNAL NAME="PrimoSDK"
LEGAL COPYRIGHT="Copyright 2002 Sonic Solutions."
Notablecalls: Nice work, Gene and Micheal! However, I'm not sure about the financial impact - while Picasa is very neat & convenient, I don't think it is very widely used. Wouldn't call this note actionable.
Calls of Note Part 5
CIBC out on Novellus (NASDAQ:NVLS), saying that looking past the current momentum trade, they see intensifying reasons to sell/short NVLS into '07: 1) NVLS has lost focus in its high margin, core CVD business, and lost share at key accounts; 2) it is more exposed than most to big '07 capex cut at Intel; and 3) Downward pressure on gross margin.
Firm's checks point to critical losses at Texas Instr (low-k CVD), and Samsung (oxide CVD). They view this as the death knell of NVLS' low-k tool ($70M/yr, 5% rev) with last key customer UMC following suit. Loss at Samsung indicative of increasing competitive gap with AMAT's new Producer tool.
NVLS' above-industry exposure to big Intel capex cut in '07 yet another negative. Intel is a 10%-15% customer for NVLS, compared to <10% style="color: rgb(255, 0, 0);">
Notablecalls: Lots of notes on semis today. I don't think CIBC will move NVLS, rather I'd put it in the good to know but not actionable category.
Firm's checks point to critical losses at Texas Instr (low-k CVD), and Samsung (oxide CVD). They view this as the death knell of NVLS' low-k tool ($70M/yr, 5% rev) with last key customer UMC following suit. Loss at Samsung indicative of increasing competitive gap with AMAT's new Producer tool.
NVLS' above-industry exposure to big Intel capex cut in '07 yet another negative. Intel is a 10%-15% customer for NVLS, compared to <10% style="color: rgb(255, 0, 0);">
Notablecalls: Lots of notes on semis today. I don't think CIBC will move NVLS, rather I'd put it in the good to know but not actionable category.
Calls of Note Part 4
ThinkEquity out on VIVUS (NASDAQ:VVUS), saying that they believe the upcoming presentation and review of Qnexa Phase II clinical trial data at the North American Association for the Study of Obesity (NAASO), a major scientific meeting targeted at obesity, for the first time should be one of the final steps in completing the transformation of Vivus into a potential important player in the obesity market. The next steps are updates on toxicology studies, formulation, and a special protocol assessment by the FDA. Firm continues to believe VVUS shares are undervalued based on the potential of Qnexa alone with a free call-option on the broad, late-stage product pipeline.
Though the positive Phase II Qnexa clinical trial results that showed a placebo-adjusted mean weight loss of 20.3 pounds or 8.6% at six months without plateauing have been shown before, additional clinical data points could be shared. The most important development, in firm's view, is that Qnexa data will be reviewed and discussed by Dr. Kishore Gadde of the Duke University Medical Center at an obesity-focused scientific forum for the first time.
Firm has learned that the society only accepts six abstracts as a podium presentation and the Qnexa data are one of them. They believe a presentation in front of a major obesity-focused research and clinical audience along with the expected SPA for the Phase III program by YE06/early 2007 should complete the outlook on Vivus as a major player in the obesity market.
While Qnexa has taken center stage, firm believes Vivus' proprietary pipeline of products targeted at sexual disorders also represents potentially monetizable assets. Of these the most advanced are Evamist, a differentiated estrogen that could be approved by YE07, and Testosterone MDTS for female hypoactive sexual desire disorder, an SPA which could be approved by early 2007.
Firm has Buy rating on the shares with $9 price target.
Notablecalls: Nothing new in this note. However, such a high price target may bring buying interest if the note gets some attention. One to watch today.
Though the positive Phase II Qnexa clinical trial results that showed a placebo-adjusted mean weight loss of 20.3 pounds or 8.6% at six months without plateauing have been shown before, additional clinical data points could be shared. The most important development, in firm's view, is that Qnexa data will be reviewed and discussed by Dr. Kishore Gadde of the Duke University Medical Center at an obesity-focused scientific forum for the first time.
Firm has learned that the society only accepts six abstracts as a podium presentation and the Qnexa data are one of them. They believe a presentation in front of a major obesity-focused research and clinical audience along with the expected SPA for the Phase III program by YE06/early 2007 should complete the outlook on Vivus as a major player in the obesity market.
While Qnexa has taken center stage, firm believes Vivus' proprietary pipeline of products targeted at sexual disorders also represents potentially monetizable assets. Of these the most advanced are Evamist, a differentiated estrogen that could be approved by YE07, and Testosterone MDTS for female hypoactive sexual desire disorder, an SPA which could be approved by early 2007.
Firm has Buy rating on the shares with $9 price target.
Notablecalls: Nothing new in this note. However, such a high price target may bring buying interest if the note gets some attention. One to watch today.
Calls of Note Part 3
Citigroup's Timothy M Arcuri is calling KLA-Tencor (NASDAQ:KLAC) top idea for new money (by wide margin) due to: 1) closure of options issue (potentially by month-end), 2) big internal restructuring that should boost margins, and 3) big upside to C2007 EPS. Firm's new sensitivity analysis suggests KLAC's C2007 EPS has upside to ~$3.85 (including ~$1.5B stock buyback). This is ~25% upside to their estimate and ~60% upside to consensus.
Firm's two key investment thesis are: 1) big internal restructuring that should boost margins and 2) potential for big EPS accretion driven by a large recapitalization/share buyback.
For the first part of analysis, firm models various upside scenarios for KLAC's C2007 revenue line. Historically, firm's analysis shows that the ratio of the average of 2Qs of KLAC's bookings (annualized) divided by forward 12-mo revenues results in a bookings to sales metric of roughly 0.925. Applying this historical average to their bookings for KLAC's Sept and Dec Q bookings, firm arrives at an estimate for C2007 revenue. Additionally, if we assume that Sept and Dec Q orders are collectively flat compared to June Q (currently firm models down 5-7%) and apply a similar bookings to sales metric, their analysis drives an additional ~$100MM of revenue. According to the firm, this analysis suggests KLAC's potential EPS accretion, solely from restructuring, ranges from ~$0.60-0.70 per share.
For the second part of their analysis, firm assesses the potential impact on EPS from a big recapitalization -- a likely scenario, in their view, given KLAC's overcapitalized balance sheet affords it flexibility in levering up to execute a large share buyback. In addition to the debt-financed share buyback, firm assumes KLAC will buy back additional shares financed by its existing cash balance as well.
Combining the two portions of their sensitivity analysis, firm summarizes two upside case scenarios. This analysis suggests KLAC's C2007 EPS has upside to ~$3.85, or ~25% upside to firm's estimate and ~60% upside to consensus.
Notablecalls: Citi is really pounding the table on KLAC. 60% upside to consensus? Nice way to catch some attention, Timothy. Expecting to see interest in the shares.
Firm's two key investment thesis are: 1) big internal restructuring that should boost margins and 2) potential for big EPS accretion driven by a large recapitalization/share buyback.
For the first part of analysis, firm models various upside scenarios for KLAC's C2007 revenue line. Historically, firm's analysis shows that the ratio of the average of 2Qs of KLAC's bookings (annualized) divided by forward 12-mo revenues results in a bookings to sales metric of roughly 0.925. Applying this historical average to their bookings for KLAC's Sept and Dec Q bookings, firm arrives at an estimate for C2007 revenue. Additionally, if we assume that Sept and Dec Q orders are collectively flat compared to June Q (currently firm models down 5-7%) and apply a similar bookings to sales metric, their analysis drives an additional ~$100MM of revenue. According to the firm, this analysis suggests KLAC's potential EPS accretion, solely from restructuring, ranges from ~$0.60-0.70 per share.
For the second part of their analysis, firm assesses the potential impact on EPS from a big recapitalization -- a likely scenario, in their view, given KLAC's overcapitalized balance sheet affords it flexibility in levering up to execute a large share buyback. In addition to the debt-financed share buyback, firm assumes KLAC will buy back additional shares financed by its existing cash balance as well.
Combining the two portions of their sensitivity analysis, firm summarizes two upside case scenarios. This analysis suggests KLAC's C2007 EPS has upside to ~$3.85, or ~25% upside to firm's estimate and ~60% upside to consensus.
Notablecalls: Citi is really pounding the table on KLAC. 60% upside to consensus? Nice way to catch some attention, Timothy. Expecting to see interest in the shares.
Calls of Note Part 2
Prudential previews Apple's (NASDAQ:AAPL) September Q earnings. Firm expects Apple to post upside to street estimates for the SepQ, driven by Mac strength and favorable component cost declines. They are modeling revenue of $4.8B and EPS of $0.55, ahead of consensus estimates of $4.7B and $0.51.
Firm is more cautious on the outlook for the DecQ and think that iPod sales and overall margin could fall short of investor expectations. They see upside to iPods as limited given the absence of new product offerings and increasing competition from MSFT's mid-Nov launch of Zune. Firm sees recent price cuts to Apple's iMac and video iPods, combined with recent rises in component costs placing pressure on Apple's margin.
Firm expects Apple to introduce two cell phone models in the MarQ, including one smart phone with integrated video and music capability, and a slimmer phone with music capability. Their checks indicate that Apple will produce these phones in limited quantities initially due to concerns over market acceptance and battery life.
Notablecalls: Expect some pressure on AAPL. While the co is always guiding conservatively, I dont think the mkt is as cautious on Dec qtr as Prudential is.
Firm is more cautious on the outlook for the DecQ and think that iPod sales and overall margin could fall short of investor expectations. They see upside to iPods as limited given the absence of new product offerings and increasing competition from MSFT's mid-Nov launch of Zune. Firm sees recent price cuts to Apple's iMac and video iPods, combined with recent rises in component costs placing pressure on Apple's margin.
Firm expects Apple to introduce two cell phone models in the MarQ, including one smart phone with integrated video and music capability, and a slimmer phone with music capability. Their checks indicate that Apple will produce these phones in limited quantities initially due to concerns over market acceptance and battery life.
Notablecalls: Expect some pressure on AAPL. While the co is always guiding conservatively, I dont think the mkt is as cautious on Dec qtr as Prudential is.
Calls of Note Part 1
Cowen is adding Broadcom (NASDAQ:BRCM) to the Focus List as they believe the worst of the inventory correction is behind us, and the company is well positioned for a strong recovery starting in Q406 and continuing into 2007.
Firm's checks indicate the company will likely see strength in Q4 from several key markets including Bluetooth, cellular baseband, 802.11n as well as 802.11g WLAN, LCD TV, Server I/O chipsets, GigE switching, and multimedia. As such, firm is raising their Q4 revenue estimates from $935M (4% Q/Q growth), to $948M (5% Q/Q growth), and above consensus of $945M. They are raising 2007 EPS estimate from $1.40 to $1.45, above consensus of $1.42. They continue to view Broadcom as having one of the best secular growth stories in their coverage universe, given the company's multiple product cycles including 802.11n, GigE switching, Bluetooth, LCD TV, and 3G cellular. Firm expects the shares to outperform the market by 50% over the next 12 months.
The company has completed its independent internal review of historical options granting programs and has submitted its proposed restatement for review by the SEC; with the recent retirement of CFO Bill Ruehle, firm believes the company is now positioned to move beyond the options issue; a significant positive, in their view.
Notablecalls: BRCM will see some interest on this note, it could move as much as full point.
Firm's checks indicate the company will likely see strength in Q4 from several key markets including Bluetooth, cellular baseband, 802.11n as well as 802.11g WLAN, LCD TV, Server I/O chipsets, GigE switching, and multimedia. As such, firm is raising their Q4 revenue estimates from $935M (4% Q/Q growth), to $948M (5% Q/Q growth), and above consensus of $945M. They are raising 2007 EPS estimate from $1.40 to $1.45, above consensus of $1.42. They continue to view Broadcom as having one of the best secular growth stories in their coverage universe, given the company's multiple product cycles including 802.11n, GigE switching, Bluetooth, LCD TV, and 3G cellular. Firm expects the shares to outperform the market by 50% over the next 12 months.
The company has completed its independent internal review of historical options granting programs and has submitted its proposed restatement for review by the SEC; with the recent retirement of CFO Bill Ruehle, firm believes the company is now positioned to move beyond the options issue; a significant positive, in their view.
Notablecalls: BRCM will see some interest on this note, it could move as much as full point.
Sunday, October 15, 2006
Barron's Summary
According to the Barron’s, US Steel (X) shares, recently in the mid-60s, could fetch up to $100 in a takeover bid. But even if none materializes, good profits should propel them past $80 within a year.
At 64.50, J&J (JNJ) trades for 16x ‘07 ests. Based on historical multiples of earnings and cash flow, and a sum of the parts, the shares could be worth 77.
According to the Barron’s, Wall St. is pumped about water, and for good reason. Globally, the $365bn business is burgeoning as countries spend billions to repair and build infrastructure to funnel clean water to ppl and industry. Some experts think $1.5trln in capital spending could flow into the sector in the next 5 years, promising a steady stream of business for a host of co’s, from pump makers to water utilities. The mkt, which encompasses residential and industrial water and wastewater treatment and services, is growing by 4-6% a year in developed countries, and as much as 15% in emerging mkts. Co’s mentioned in the article include: GE, ITT, SZE, WTR, PNR, WTS, VE, SBS, AWR and UU.
“The Trader” section discusses NetRatings (NTRT), which received buyout offet last week. The mkt has already determined that $16 appears too low a price, pulling the stock up on the news. The shares finished Fri at 16.76. One money manager who has owned the stock for years calculates that an acquisition of the public shares would be accretive to VNU's owners up to a $25-per-share buyout price. The difference between $16 and $25 for NetRatings' 15m public shares amounts to $135m. The private-equity firms just paid $11bn for VNU in May. Barron’s expects pressure from shareholders and negotiations to make up some of the gap between $16 and $25 before this story concludes.
Also in “The Trader” section is discusses Agco (AG), whose stock is up 65% this year, despite (or is it b/c of?) the disdain of the sell side. There's only one Buy rating among 10 analysts to go with two Sells, and short interest is heavy around 10% of the share float. B/c of a P/E ratio above 18 based on ‘07 forecasts, the stock may not appear cheap. But looking at enterprise value to cash flow, it's a good deal less expensive than Deere (DE), which itself still seems attractive. Buying the weaker players in a concentrated mkt sector can be risky. But in this case, the sour sentiment toward Agco and its impressive stock-price momentum might earn it the benefit of the doubt.
China's telecom-equipment makers have survived on a near-starvation diet of orders from phone operators as they wait, and wait, for Beijing to issue licenses for 3G mobile-phone services. Now, after at least 2 years of delay, 3G's moment of truth in China may be only a few months, or even weeks, away. And that could mean a rush of orders for the gear makers next year, boosting earnings and stock prices. Only US listed co mentioned is GrenTech (GRRF) that sells equipment to boost mobile signals.
“Technology Trader” section discusses Cisco (CSCO) that plans to enter videoconferencing mkt. Its mkt entry next week hardly will cheer videoconference vendors like Polycom (PLCM) and Radvision (RVSN). In addition to a high-def picture, the Cisco system will have a very low price tag. Over time, Cisco thinks its solution could get cheap enough to be bundled into consumer television sets. Neither Polycom nor Radvision are cheap stocks. At 27 bucks, Polycom trades at 45x its trailing 12 months' EPS. At just under 19, Radvision goes for 27x trailing earnings.
Fund manager top holdings include: GE, CSCO, GOOG, GS, PEP, WFC, UBS, MEL, TROW and OXY.
Friday, October 13, 2006
Calls of Note Part 5
Friedman, Billings, Ramsey is out with an interesting piece on online brokers in light of Bank of America's move to "$0 Commission", which has once again ignited fears over a price war among online brokers--fears they believe are misplaced. In fact, history suggests that the online brokerage industry move to lower commissions rates has been calculated and has created shareholder value each step of the way. A review of average commission rates shows a decline of 31% since 2000--a trend that would be worse if not for the increase in higher fee option trading. With such a backdrop, many believe this will ultimately result in zero fees. Despite the intense pricing pressure on commission rates, the successful online brokers have actually
thrived as a result of diversifying their business models and being able to drive down incremental costs. As a result, revenues and profitability are at all-time highs--contradicting the fears of those focused simply on commission pricing pressure. With such scale and efficiency advantages over potential rivals--in trading, cash management, and lending products- firm believes that TD Ameritrade (NASDAQ:AMTD), E*TRADE (NYSE:ET), and Schwab (NASDAQ:SCHW) are well positioned going forward, even if the industry moves to zero commissions.
To isolate the more recent price-cutting period beginning in 2004, the all-in average commission rate of online brokers under coverage has fallen 18%. When adjusting for E*TRADE's sale of its professional trading segment in 4Q05, which increased its average commission rate after the divestiture, the average rate drop of the group has fallen even more at 23%. While many assume this is a reflection of the eroding economics of the business,
the opposite is true. Much of the decline in commission rates was a function the brokers passing on the efficiency gains realized to customers, while the rest is a reflection of the change in the business model that has increased the profitability of accounts while at the
same time being able to offer lower trading costs to customers.
Despite the drop in commission rates, revenue per account is up 46% and, more importantly, profit per account is up 87% since 2003. This trend underscores the move across the industry to diversify revenues into cash management, lending, and asset management sources. So, while brokers are often willing to lower commission rates drive account and asset growth, the trade-off is in higher fee and spread income, which more than offsets the loss of transaction revenues. All together, earnings growth on average is up 87%.
Notablecalls: Traders are happy with lower commissions, brokers are also happy.. one big happy family!
thrived as a result of diversifying their business models and being able to drive down incremental costs. As a result, revenues and profitability are at all-time highs--contradicting the fears of those focused simply on commission pricing pressure. With such scale and efficiency advantages over potential rivals--in trading, cash management, and lending products- firm believes that TD Ameritrade (NASDAQ:AMTD), E*TRADE (NYSE:ET), and Schwab (NASDAQ:SCHW) are well positioned going forward, even if the industry moves to zero commissions.
To isolate the more recent price-cutting period beginning in 2004, the all-in average commission rate of online brokers under coverage has fallen 18%. When adjusting for E*TRADE's sale of its professional trading segment in 4Q05, which increased its average commission rate after the divestiture, the average rate drop of the group has fallen even more at 23%. While many assume this is a reflection of the eroding economics of the business,
the opposite is true. Much of the decline in commission rates was a function the brokers passing on the efficiency gains realized to customers, while the rest is a reflection of the change in the business model that has increased the profitability of accounts while at the
same time being able to offer lower trading costs to customers.
Despite the drop in commission rates, revenue per account is up 46% and, more importantly, profit per account is up 87% since 2003. This trend underscores the move across the industry to diversify revenues into cash management, lending, and asset management sources. So, while brokers are often willing to lower commission rates drive account and asset growth, the trade-off is in higher fee and spread income, which more than offsets the loss of transaction revenues. All together, earnings growth on average is up 87%.
Notablecalls: Traders are happy with lower commissions, brokers are also happy.. one big happy family!
Calls of Note Part 4
Citigroup notes that GTECH, a wholly-owned subsidiary of Lottomatica announced that the company has agreed to acquire Creative Games Int'l, a provider of instant lottery tickets based in the US (sale price not disclosed).
GTECH's entry into the instant ticket biz is not a surprise as co had expressed an interest to enter the mkt post-Lottomatica. On the margin, a new competitor with deep pockets, but limited experience, is a modest negative for Scientific Games (NASDAQ:SGMS).
Short-term impact should be minimal due to long-term nature of instant contracts & limited no. of SGMS' instant contracts up for rebid in the near-term. That said, longer-term impact could be more meaningful, but manageable in our opinion. Italy contract (w/LTO) potentially at risk, but not until 2010.
GTECH may find it difficult to penetrate the market due to SGMS' strong product offerings (innovative products, proprietary brands, & co-op services) & industry leading growth rates and CGI's limited market share (< 5% in the US).
Notablecalls: In case there is some weakness in SGMS shares today, now you know why. Dont expect it, though, as the impact on SGMS seems to be too small.
GTECH's entry into the instant ticket biz is not a surprise as co had expressed an interest to enter the mkt post-Lottomatica. On the margin, a new competitor with deep pockets, but limited experience, is a modest negative for Scientific Games (NASDAQ:SGMS).
Short-term impact should be minimal due to long-term nature of instant contracts & limited no. of SGMS' instant contracts up for rebid in the near-term. That said, longer-term impact could be more meaningful, but manageable in our opinion. Italy contract (w/LTO) potentially at risk, but not until 2010.
GTECH may find it difficult to penetrate the market due to SGMS' strong product offerings (innovative products, proprietary brands, & co-op services) & industry leading growth rates and CGI's limited market share (< 5% in the US).
Notablecalls: In case there is some weakness in SGMS shares today, now you know why. Dont expect it, though, as the impact on SGMS seems to be too small.
Calls of Note Part 3
Deutsche Bank out on Comverse (NASDAQ:CMVT), noting that A few weeks ago we attended the CTIA Wireless 2006 Conference in Los Angeles, and took the opportunity to do some field checks around Comverse. Additional due diligence performed in the following weeks has led us to believe that the business continues to be strong, and the soon to launch new Integrated Messaging platform is now mature enough to generate solid demand in '07.
Firm continues to see several new Comverse bright spots to watch that are starting to generate growth: MMSC, MAG, push-mail and ringback tones among others. All our company business checks have come in strong, with the only weak spot being the ringtone market where the company does not play.
Firm's field checks during and after the conference support their view that the company's bookings recognition criteria are being applied more stringently. They believe this is important because in their calculation organic backlog growth declined again sequentially to 10% from 15% last quarter, which otherwise would seem to indicate a slowdown in business momentum. If indeed the backlog recognition criteria have somewhat become more strict (and they think not likely in effect for two entire quarters), then the yearly comparables become less relevant.
Maintains Buy rating with $37 tgt they as are increasingly encouraged that the business is strong and continues not to be impacted from the ongoing stock options investigation.
Notablecalls: While nothing materially new, it looks as the guys frm Deutsche did do some due diligence. They have been right on the stock and I agree with them that the stock is heading north. From trading perspective, expect a small pop, but that's about it.
Firm continues to see several new Comverse bright spots to watch that are starting to generate growth: MMSC, MAG, push-mail and ringback tones among others. All our company business checks have come in strong, with the only weak spot being the ringtone market where the company does not play.
Firm's field checks during and after the conference support their view that the company's bookings recognition criteria are being applied more stringently. They believe this is important because in their calculation organic backlog growth declined again sequentially to 10% from 15% last quarter, which otherwise would seem to indicate a slowdown in business momentum. If indeed the backlog recognition criteria have somewhat become more strict (and they think not likely in effect for two entire quarters), then the yearly comparables become less relevant.
Maintains Buy rating with $37 tgt they as are increasingly encouraged that the business is strong and continues not to be impacted from the ongoing stock options investigation.
Notablecalls: While nothing materially new, it looks as the guys frm Deutsche did do some due diligence. They have been right on the stock and I agree with them that the stock is heading north. From trading perspective, expect a small pop, but that's about it.
Calls of Note Part 2
Wachovia previewing Zimmer Holdings (NYSE:ZMH) ahead of 3Q06 results. ZMH is counting on its recently launched hip products to provide an acceleration in revenue growth, most notably its new ceramic-on-ceramic hip and large head metal-on-metal hips. In firm's view, the quarter hinges primarily on how much penetration ZMH was able to achieve with these products in what they continue to view as a "mix-adverse" hospital market.
Firm evaluated the sensitivity of ZMH's revenue to hard bearing penetration. At 10%, 20%, and 30% hard bearing penetration of ZMH's U.S. hip sales, hip growth would be 7%, 9%, and 12%, respectively, and total revenue would be $816MM (firm's current estimate), $822MM, and $829MM, respectively. Since consensus calls for $830MM, they believe it implies around 30% hard bearing penetration. Given that competitors have seen hard bearing penetration peak in the 30-50% range after having these products on the market for several years, reaching 30% in one quarter seems challenging to the firm.
Firm expects continued weakness in ZMH's knee category and forecast 7% growth in Q3 2006, up from 4.5% growth in H1 2006 due to currency tailwinds and an easier comp. In addition to facing SYK's Triathlon and BMET's Vanguard knees, ZMH must now fend off Smith & Nephew's new Journey knee with its decade-old NexGen knee. ZMH's Gender Solutions knee should help eventually but likely will not be out until Q4 2006.
Given the recent run-up in ZMH shares, firm believes investors will be disappointed by anything less than stellar Q3 2006 results. In their view, a revenue miss as small as $5MM might be enough to send the stock down sharply and even an in-line quarter might not drive the stock meaningfully higher. With their lingering concern about a revenue miss, firm recommends that investors take some profits before ZMH reports its third quarter results.
Firm has Underperform rating on the stock with $55-$59 valuation range.
Notablecalls: With the Underperform rating Wachovia is expected to be negative. However, they do make some good points and the stock is due for some profit taking. Would be looking to short this one after the open.
Firm evaluated the sensitivity of ZMH's revenue to hard bearing penetration. At 10%, 20%, and 30% hard bearing penetration of ZMH's U.S. hip sales, hip growth would be 7%, 9%, and 12%, respectively, and total revenue would be $816MM (firm's current estimate), $822MM, and $829MM, respectively. Since consensus calls for $830MM, they believe it implies around 30% hard bearing penetration. Given that competitors have seen hard bearing penetration peak in the 30-50% range after having these products on the market for several years, reaching 30% in one quarter seems challenging to the firm.
Firm expects continued weakness in ZMH's knee category and forecast 7% growth in Q3 2006, up from 4.5% growth in H1 2006 due to currency tailwinds and an easier comp. In addition to facing SYK's Triathlon and BMET's Vanguard knees, ZMH must now fend off Smith & Nephew's new Journey knee with its decade-old NexGen knee. ZMH's Gender Solutions knee should help eventually but likely will not be out until Q4 2006.
Given the recent run-up in ZMH shares, firm believes investors will be disappointed by anything less than stellar Q3 2006 results. In their view, a revenue miss as small as $5MM might be enough to send the stock down sharply and even an in-line quarter might not drive the stock meaningfully higher. With their lingering concern about a revenue miss, firm recommends that investors take some profits before ZMH reports its third quarter results.
Firm has Underperform rating on the stock with $55-$59 valuation range.
Notablecalls: With the Underperform rating Wachovia is expected to be negative. However, they do make some good points and the stock is due for some profit taking. Would be looking to short this one after the open.
Calls of Note Part 1
Cowen says their checks indicate that GSM carriers worldwide including Cingular, T-Mobile, and China Mobile are getting ready to launch GPS-based location based services (LBSs) in 2007, with Cingular likely to move first in 1H07, followed likely by T-Mobile and China Mobile.
Firm believes SiRF (NASDAQ:SIRF) is well positioned as the key GPS chipset supplier for handsets used in the LBS offering, and that there is upside to their, and Street, 2007 estimates, driven by the volume ramp in handsets. With the stock having declined to the low-$20 range, they view the risk/reward as attractive and recommend investors take advantage of the share weakness to build positions as they expect the shares to outperform the market by 40% over the next 12 months.
Based on firm's checks with industry sources, they believe GSM operators worldwide are finally getting to launch GPS-based LBS in 2007, with Cingular likely to launch in 1H07, followed by T-Mobile and China Mobile. SiRF has significant design wins with key handsets OEMs including Motorola, Samsung, and RIM, and should benefit significantly from such LBS launches.
SiRF is expected to report Q3 earnings results on October 19. Firm expects Q3 results to be in line with consensus estimates of $63M/$0.22. For Q4, given the seasonal slowdown in the month of December for the PND business, firm expects the company to guide for only modest growth, which could be slightly below the consensus estimate of $68M (8% growth).
Notablecalls: The note started out very strong.. and then they are telling us that co could guide down 4Q? At least now we know that if the co does guide down there is at least one analyst going to defend the stock. That alone may help the stock ahead of the earnings.
Firm believes SiRF (NASDAQ:SIRF) is well positioned as the key GPS chipset supplier for handsets used in the LBS offering, and that there is upside to their, and Street, 2007 estimates, driven by the volume ramp in handsets. With the stock having declined to the low-$20 range, they view the risk/reward as attractive and recommend investors take advantage of the share weakness to build positions as they expect the shares to outperform the market by 40% over the next 12 months.
Based on firm's checks with industry sources, they believe GSM operators worldwide are finally getting to launch GPS-based LBS in 2007, with Cingular likely to launch in 1H07, followed by T-Mobile and China Mobile. SiRF has significant design wins with key handsets OEMs including Motorola, Samsung, and RIM, and should benefit significantly from such LBS launches.
SiRF is expected to report Q3 earnings results on October 19. Firm expects Q3 results to be in line with consensus estimates of $63M/$0.22. For Q4, given the seasonal slowdown in the month of December for the PND business, firm expects the company to guide for only modest growth, which could be slightly below the consensus estimate of $68M (8% growth).
Notablecalls: The note started out very strong.. and then they are telling us that co could guide down 4Q? At least now we know that if the co does guide down there is at least one analyst going to defend the stock. That alone may help the stock ahead of the earnings.
Paperstand
The WSJ reprots, citing ppl familiar with the matter, that Avenue Capital Group, a hedge fund specializing in distressed debt, is in advanced talks to sell almost 20% of itself to the asset-mgmt arm of Morgan Stanley (MS) in a deal that values Avenue at between $1.5-2bn. Avenue, with assets under mgmt of $12bn, is apparently the latest hedge fund to sell a piece of itself to a Wall Street firm, part of the transformation of hedge funds from small, one-man shows to institutionalized organizations.
The WSJ’s “Heard on the Street” column discusses Wachovia (WB), which now owns Golden West Financial. But the pressure is building on the expansion-hungry bank to demonstrate that it can gracefully digest the gargantuan deal. Early clues will emerge Mon, when Wachovia reports 3Q results. Many investors remain skeptical, despite 5 months of sweet-talking led by CEO G. Kennedy Thompson. One concern: Signs of the deflating real-estate bubble are increasingly evident at
Barron’s Online suggests that no matter how divided Congress is after the Nov election, Democrats and Republicans already agree on one thing: guzzling expensive foreign oil is dangerous business. That's why investors in fuels other than oil, from coal to wind, are bound to be long-term winners unless oil prices fall well below $50 per barrel. Sen. Barack Obama has been an outspoken advocate of turning coal into liquid fuel, writes Kevin Book, of FBR. Committees in the House and Senate support expanding loan guarantees for coal-to-liquid technology. Among the co’s that would benefit if loan guarantees are extended: Rentech (RTK), which develops technology that converts hydrocarbons, coal and natural gas, into alternative fuels. One small co that should benefit, Mr. Book says: Fuel Tech (FTEK), which develops air pollution control technologies that utilities and industrial facilities can use to cut nitrogen oxide emissions. "More emissions requirements means utilities have to retrofit and spend more money, which is good for contractors, good for co’s that make flue gas scrubbers and catalytic converters," Book says.
“Inside Scoop” section reports that Richard C. Perry, the co-founder and president of Perry Capital, bought a total of 33K shares of Sears Holdings (SHLD) for his hedge fund. Mr. Perry is also a director at Sears. Perry Capital's transactions in Sears Holdings shares have accurately predicted the stock's movement in the past, says Ben Silverman, director of research at InsiderScore.com.
Thursday, October 12, 2006
Calls of Note Part 5
- JP Morgan notes that while the September quarter is rarely great for Microsoft (NASDAQ:MSFT), and there may be moving pieces around estimates, this should be more than offset by several positive data points on the upcoming Office and Vista product cycles they
expect to get on the Q1 call and shortly thereafter. Firm looks for an acceleration in EPS growth to over 20% beginning in the March quarter--which should get discounted in the stock over the next few months and they remain buyers of Microsoft.
Based on positive data from the release candidate programs, the firm is increasingly comfortable that Vista will be released on time or very close. As a result, they believe it is likely that MSFT announces technology protection/upgrade rights for the holiday season. Under the program, consumers who purchase PCs with Windows OS in the holiday season prior to the Vista launch would be provided with vouchers/coupons which they can redeem for a Vista upgrade when the new OS is available.
With most people focused on Vista, they believe the Office 2007 product cycle could prove to be the dark horse as there is considerable pent-up demand for the new product and many organizations did not upgrade to Office 2003. Information Worker unearned increased 22% YoY in the second half of FY06--a positive early indicator for Office 2007 and we look for strong IW bookings in Q1. Given bookings strength and pent up demand for the release,
the firm believes Office 2007 could drive upside to their IW targets for CY07.
Should we get positive data on the Vista release and strong Office bookings, it will more than offset the influence of numbers moving around Q1 in firm's view. With the stock trading at 17x CY07 EPS of $1.63 vs. coverage universe at 23x, they expect MSFT stock to be fueled both by multiple expansion as we near accelerating growth in Q3 and believe positive revisions are likely as we get into the back half of the year. Reiterates Overweight rating.
Notablecalls: Not actionable but good to know category
expect to get on the Q1 call and shortly thereafter. Firm looks for an acceleration in EPS growth to over 20% beginning in the March quarter--which should get discounted in the stock over the next few months and they remain buyers of Microsoft.
Based on positive data from the release candidate programs, the firm is increasingly comfortable that Vista will be released on time or very close. As a result, they believe it is likely that MSFT announces technology protection/upgrade rights for the holiday season. Under the program, consumers who purchase PCs with Windows OS in the holiday season prior to the Vista launch would be provided with vouchers/coupons which they can redeem for a Vista upgrade when the new OS is available.
With most people focused on Vista, they believe the Office 2007 product cycle could prove to be the dark horse as there is considerable pent-up demand for the new product and many organizations did not upgrade to Office 2003. Information Worker unearned increased 22% YoY in the second half of FY06--a positive early indicator for Office 2007 and we look for strong IW bookings in Q1. Given bookings strength and pent up demand for the release,
the firm believes Office 2007 could drive upside to their IW targets for CY07.
Should we get positive data on the Vista release and strong Office bookings, it will more than offset the influence of numbers moving around Q1 in firm's view. With the stock trading at 17x CY07 EPS of $1.63 vs. coverage universe at 23x, they expect MSFT stock to be fueled both by multiple expansion as we near accelerating growth in Q3 and believe positive revisions are likely as we get into the back half of the year. Reiterates Overweight rating.
Notablecalls: Not actionable but good to know category
Calls of Note Part 4
- Jefferies notes they are maintaining Buy rating on Yahoo! (NASDAQ:YHOO) given its attractive valuation ahead of what they believe will be a soft quarter. While they expect the stock to continue to languish short-term, the firm would expect it to finally start working in late 4Q/early 1Q07.
Firm is lowering their Q306 estimates following management's comments that slowing growth in the autos and finance verticals will cause 3Q results to come in at the low-end of guidance. They believe this is most likely Yahoo!-specific, and not a prelude to a wider economic slowdown, particularly that autos benefited from aggressive employee discounts last year, which were not offered this year. Yahoo!'s branded advertising, which the firm has been pegging at Y/Y growth of 35% in 3Q seems to be the most impacted and likely to come in closer to 30%.
Based on their proprietary tracking of keyword pricing, they believe that (CPC) search pricing was flat to slightly down sequentially. Growth should therefore be coming from volume and monetization.
Firm expects management to tighten its guidance range for FY06 towards the low-end or possibly lower it further. The launch of "Panama" and the seasonally strong 4Q should serve as catalysts medium-term. Investors with a horizon of at least 6-12 months should build positions ahead of these events.
Tgt goes to $39 from $43.
Notablecalls: Not actionable but good to know category.
Firm is lowering their Q306 estimates following management's comments that slowing growth in the autos and finance verticals will cause 3Q results to come in at the low-end of guidance. They believe this is most likely Yahoo!-specific, and not a prelude to a wider economic slowdown, particularly that autos benefited from aggressive employee discounts last year, which were not offered this year. Yahoo!'s branded advertising, which the firm has been pegging at Y/Y growth of 35% in 3Q seems to be the most impacted and likely to come in closer to 30%.
Based on their proprietary tracking of keyword pricing, they believe that (CPC) search pricing was flat to slightly down sequentially. Growth should therefore be coming from volume and monetization.
Firm expects management to tighten its guidance range for FY06 towards the low-end or possibly lower it further. The launch of "Panama" and the seasonally strong 4Q should serve as catalysts medium-term. Investors with a horizon of at least 6-12 months should build positions ahead of these events.
Tgt goes to $39 from $43.
Notablecalls: Not actionable but good to know category.
Calls of Note Part 3
- Merrill Lynch comments on Par Pharma (NYSE:PRX) saying that as a result of restatement issues (it has yet to file a 10-Q for 2Q06;) and management changes, they believe that investors will become increasingly focused on strategic options that the company may pursue to maximize shareholder value. One viable option the firm sees would be a sale of the generic business, which could raise a significant amount of cash that could be reinvested into Par's emerging specialty branded business and/or returned to shareholders in some way. Firm believes that the value of the generic business could be similar to or higher than the company's entire market cap.
In firm's view, competitive pressures and a consolidating customer base will continue to drive consolidation in the generic sector. As a significant player in the largest, most profitable market in the world (the U.S.), they believe that several players would, at least in theory, be interested in acquiring the unit. A look at recent transactions suggests that Par could fetch $600mn - $1.2bn (roughly 1x-2x 2006E generic sales). Par's relatively low margins, product concentration risk, and other factors may bias the theoretical value of Par's generic business towards the lower end of that range. Note that Par's market cap is roughly $600mn.
Maintains Buy.
Notablecalls: Merill is making a powerful call. Expect to see buy interest but also note that the chart is telling me it's probably not wise to overstay one's welcome.
In firm's view, competitive pressures and a consolidating customer base will continue to drive consolidation in the generic sector. As a significant player in the largest, most profitable market in the world (the U.S.), they believe that several players would, at least in theory, be interested in acquiring the unit. A look at recent transactions suggests that Par could fetch $600mn - $1.2bn (roughly 1x-2x 2006E generic sales). Par's relatively low margins, product concentration risk, and other factors may bias the theoretical value of Par's generic business towards the lower end of that range. Note that Par's market cap is roughly $600mn.
Maintains Buy.
Notablecalls: Merill is making a powerful call. Expect to see buy interest but also note that the chart is telling me it's probably not wise to overstay one's welcome.
Calls of Note Part 2
- Morgan Stanley comments on CB Richard Ellis Group (NYSE:CBG) after news the co will be added to the S&P 500 Index after the market's close on Thursday, October 12 replacing BellSouth, which is being acquired.
It is estimated that index funds will have to acquire about 18.2 million shares. The 20-day average trading volume has been about 940,000, and buying demand could last 20 days. The firm thinks the stock will rally on the news, and they expect there will be significant demand over the next month to support the stock at its current price and at higher prices.
They reiterate Overweight investment rating and believe that CB Richard Ellis is well-positioned to achieve long-term earnings growth targets. Firm believes the recent pullback represents a good buying opportunity, even after the recent rally from lows. They think any selling into strength is premature ahead of 3Q06 earnings, which should exceed expectations, and support the stock. However, they still see risks associated with the almost 28% exposure of Americas' investment sales, which the firm believes is priced into the current valuation.
Notablecalls: You never buy the first day of the S&P addition. One can even consider shorting the common if it trades up more than say 10% in the pre mkt. But as MS notes, there will be significant demand over the next month, meaning the bias will be to the upside now. One to keep on the radar.
It is estimated that index funds will have to acquire about 18.2 million shares. The 20-day average trading volume has been about 940,000, and buying demand could last 20 days. The firm thinks the stock will rally on the news, and they expect there will be significant demand over the next month to support the stock at its current price and at higher prices.
They reiterate Overweight investment rating and believe that CB Richard Ellis is well-positioned to achieve long-term earnings growth targets. Firm believes the recent pullback represents a good buying opportunity, even after the recent rally from lows. They think any selling into strength is premature ahead of 3Q06 earnings, which should exceed expectations, and support the stock. However, they still see risks associated with the almost 28% exposure of Americas' investment sales, which the firm believes is priced into the current valuation.
Notablecalls: You never buy the first day of the S&P addition. One can even consider shorting the common if it trades up more than say 10% in the pre mkt. But as MS notes, there will be significant demand over the next month, meaning the bias will be to the upside now. One to keep on the radar.
Calls of Note Part 1
Several firms are commenting on Sandisk (NASDAQ:SNDK) ahead of results:
- Thomas Weisel Partners is downgrading SNDK to SP from SO and removing their PT as its risk-reward profile appears less attractive ahead of a likely 1H07 NAND oversupply and challenges in retaining FLSH's DoK business. Although 3Q/4Q should be solid, they are stepping to the sidelines for now.
Firm expects 1H07 NAND prices to fall sharply (below $10/GB) due to supply increases and the typical seasonal demand slump. They believe there is no near term killer app that can soak up supply, and it seems Vista's NAND effect on PCs and laptops will not be enough to boost 1H07 demand.
While they love the FLSH acquisition, the firm believe SNDK may have a tough time
retaining DoK customers (e.g. Kingston & Verbatim), who do not want to ODM at their biggest competitor. Considering that DoK represents ~60% of FLSH (~$600M+), its attrition could make for a bumpy integration.
- Citigroup notes NAND fundamentals in 3Q06 were solid and remain firm entering 4Q06, a favorable nt backdrop for execution-advantaged SNDK.
Incr 3Q06, 4Q06, 2007 ests. 3Q bit growth up 300 bps to 27%, price/MB 200 bps more benign at -18% w/GM to hit high end of Mgt guidance. Revs/EPS now $733/$0.58 vs. St of $729/$0.54. 4Q06 revs/EPS to $989/$0.81 from $973/0.77 on higher base, higher GM but lower bit growth for conservatism.
Expect shares to trade well nt, as 3Q and 4Q Street ests appear low, though 1Q07 seasonality and 2007 supply are risks. That said, dour sentiment for SNDK's 1Q07 despite absence of last year's DRAM conversions and draconian 1Q07 pricing expectations suggest anything better than worst case = upside.
No change to $69 target price on modestly higher 2007 Ests, as the firm deflates valuation multiples on supply cautiousness. $69 target offers 21% upside. No change to FLSH or SFUN estimates.
- Deutsche Bank is raising SNDK's ests. heading into the results, as they believe 3Q guid. was conservative and their checks suggest that retail prices & vols have been orderly, cell phone secular trend is still intact, & 3Q for Taiwanese flash product makers has been great. But, given that shares are up ~20% since last earnings, some upside is likely already expected by market. Given that they are now ahead of street on 3Q, firm's bias would still be for the stock to be up after earnings. They retain Hold & $51 P/T due to full valuations and weak C07 NAND outlook.
Firm now models bits sold +37% QoQ, ASPs down ~19% QoQ, and GAAP GMs of 36.6% (vs. guid. +20-25% QoQ; -19% QoQ, and 32.5-34.5% resp). Ex-ESO, 3Q EPS goes to 62c (from 51c; cons 55c). They predict C07 ASP decline of 50-55%, similar to C06 (~55-60%). SNDK faces material margin compression risk in C07 given less steep cost reduction (~40% as no incremental help from 300mm/MLC).
Notablecalls: This AM, SNDK will gap down due to the TWP downgrade. Would be looking to buy
the stock for a bounce around the 54-55 level. Notice how both Citi and DB are upping their ests. That should fuel the bounce.
- Thomas Weisel Partners is downgrading SNDK to SP from SO and removing their PT as its risk-reward profile appears less attractive ahead of a likely 1H07 NAND oversupply and challenges in retaining FLSH's DoK business. Although 3Q/4Q should be solid, they are stepping to the sidelines for now.
Firm expects 1H07 NAND prices to fall sharply (below $10/GB) due to supply increases and the typical seasonal demand slump. They believe there is no near term killer app that can soak up supply, and it seems Vista's NAND effect on PCs and laptops will not be enough to boost 1H07 demand.
While they love the FLSH acquisition, the firm believe SNDK may have a tough time
retaining DoK customers (e.g. Kingston & Verbatim), who do not want to ODM at their biggest competitor. Considering that DoK represents ~60% of FLSH (~$600M+), its attrition could make for a bumpy integration.
- Citigroup notes NAND fundamentals in 3Q06 were solid and remain firm entering 4Q06, a favorable nt backdrop for execution-advantaged SNDK.
Incr 3Q06, 4Q06, 2007 ests. 3Q bit growth up 300 bps to 27%, price/MB 200 bps more benign at -18% w/GM to hit high end of Mgt guidance. Revs/EPS now $733/$0.58 vs. St of $729/$0.54. 4Q06 revs/EPS to $989/$0.81 from $973/0.77 on higher base, higher GM but lower bit growth for conservatism.
Expect shares to trade well nt, as 3Q and 4Q Street ests appear low, though 1Q07 seasonality and 2007 supply are risks. That said, dour sentiment for SNDK's 1Q07 despite absence of last year's DRAM conversions and draconian 1Q07 pricing expectations suggest anything better than worst case = upside.
No change to $69 target price on modestly higher 2007 Ests, as the firm deflates valuation multiples on supply cautiousness. $69 target offers 21% upside. No change to FLSH or SFUN estimates.
- Deutsche Bank is raising SNDK's ests. heading into the results, as they believe 3Q guid. was conservative and their checks suggest that retail prices & vols have been orderly, cell phone secular trend is still intact, & 3Q for Taiwanese flash product makers has been great. But, given that shares are up ~20% since last earnings, some upside is likely already expected by market. Given that they are now ahead of street on 3Q, firm's bias would still be for the stock to be up after earnings. They retain Hold & $51 P/T due to full valuations and weak C07 NAND outlook.
Firm now models bits sold +37% QoQ, ASPs down ~19% QoQ, and GAAP GMs of 36.6% (vs. guid. +20-25% QoQ; -19% QoQ, and 32.5-34.5% resp). Ex-ESO, 3Q EPS goes to 62c (from 51c; cons 55c). They predict C07 ASP decline of 50-55%, similar to C06 (~55-60%). SNDK faces material margin compression risk in C07 given less steep cost reduction (~40% as no incremental help from 300mm/MLC).
Notablecalls: This AM, SNDK will gap down due to the TWP downgrade. Would be looking to buy
the stock for a bounce around the 54-55 level. Notice how both Citi and DB are upping their ests. That should fuel the bounce.
Paperstand
According to the WSJ, Yahoo (YHOO) is in talks to acquire Facebook. But ppl familiar with the matter say that talks aren't making much progress. While discussions are continuing, no purchase of the closely held Facebook social-networking site is imminent. They say a deal is unlikely unless Yahoo increases its roughly $1bn offer or changing business conditions made Facebook's mgmt more inclined to sell.
The WSJ’s “Heard on the Street” column discusses eBay (EBAY), saying that trouble seems to be following the co, even as far as China. Late last month, the CEO of eBay's Chinese unit resigned abruptly. eBay also is in talks to sell part or all of its Chinese operations to Hutchinson’s media flagship, Tom Group. Such a sale would be a setback for eBay, which invested $100m last year to further its ambitions in China. A deal would foster the perception among stock-mkt investors of "how difficult and challenging the China mkt has been for them," says Mark Mahaney, of Citigroup. "It would be perceived as a negative."
Barron’s Online suggests that recently resurgent healthcare stocks may be ignoring the risks if Democrats recapture the House of Representatives and gain ground in the Senate in Nov's mid-term elections. While it's difficult to assess the investment risks of future political activity, it's clear that Democrats support an array of policies that could zap some healthcare stock sectors, especially pharmas, by adding new regulations, putting more generic drugs on the mkt and controlling prices Medicare pays for drugs. "Healthcare is the most politically charged area of the mkt," says Jack Ablin, of Harris Private Bank. Just the prospect of Democrats banging their drums could take a toll on large drug makers like Pfizer (PFE) and health insurers Humana (HUM) and WellCare (WCG). "With the election around the corner, healthcare investing could become increasingly treacherous," Ablin added. "There will be lots of jawboning on this issue," says Barbara Ryan, of Deutsche Bank. "There will be a lot of headlines, but very little follow through."
“Inside Scoop” section reports that Atticus Mgmt, a hedge fund, which owns a 9.97% stake in Phelps Dodge (PD), had "met with several potential investors, including private equity firms and strategic buyers, to discuss each firm's possible interest in pursuing an acquisition of [Phelps Dodge]."
The WSJ’s “Heard on the Street” column discusses eBay (EBAY), saying that trouble seems to be following the co, even as far as China. Late last month, the CEO of eBay's Chinese unit resigned abruptly. eBay also is in talks to sell part or all of its Chinese operations to Hutchinson’s media flagship, Tom Group. Such a sale would be a setback for eBay, which invested $100m last year to further its ambitions in China. A deal would foster the perception among stock-mkt investors of "how difficult and challenging the China mkt has been for them," says Mark Mahaney, of Citigroup. "It would be perceived as a negative."
Barron’s Online suggests that recently resurgent healthcare stocks may be ignoring the risks if Democrats recapture the House of Representatives and gain ground in the Senate in Nov's mid-term elections. While it's difficult to assess the investment risks of future political activity, it's clear that Democrats support an array of policies that could zap some healthcare stock sectors, especially pharmas, by adding new regulations, putting more generic drugs on the mkt and controlling prices Medicare pays for drugs. "Healthcare is the most politically charged area of the mkt," says Jack Ablin, of Harris Private Bank. Just the prospect of Democrats banging their drums could take a toll on large drug makers like Pfizer (PFE) and health insurers Humana (HUM) and WellCare (WCG). "With the election around the corner, healthcare investing could become increasingly treacherous," Ablin added. "There will be lots of jawboning on this issue," says Barbara Ryan, of Deutsche Bank. "There will be a lot of headlines, but very little follow through."
“Inside Scoop” section reports that Atticus Mgmt, a hedge fund, which owns a 9.97% stake in Phelps Dodge (PD), had "met with several potential investors, including private equity firms and strategic buyers, to discuss each firm's possible interest in pursuing an acquisition of [Phelps Dodge]."
Wednesday, October 11, 2006
Calls of Note Part 3
- Baird notes Sigma Designs' (NASDAQ:SIGM) lock in Microsoft-based IP STBs is now paying off, with key telcos announcing yesterday their advanced STBs are now ready for volume shipments. Ramps at Motorola, Cisco, Philips, Tatung, including the first U.S.-based ramp with AT&T, should provide significant momentum to Sigma's top line this quarter and next. UWB chipset strategic to further assert Sigma's leading position in advanced media processors.
Key set-top box vendors including Cisco, Motorola, Philips, and Tatung announced yesterday that their advanced IP set-top boxes based on Microsoft's IPTV Edition Software platform are now ready for volume deployment.
All advanced IP set-top boxes supporting Microsoft's IPTV Edition Software platform are based on Sigma Designs' SoC, in firm's view.
Motorola's VIP series set-top boxes (Sigma Designs inside) are now shipping in volume to several telcos worldwide, ahead of firm's estimate, including at AT&T which represents the first U.S.-based IP STB deployment for Sigma. This Motorola IP set-top box will also ship
at a leading Japan-based telco, among other wins.
Philips' IP set-top box will launch this fall at British Telecom, ahead of firm's original expectation. Cisco IP set-top boxes will be deployed by Deutsche Telekom and AT&T. Both set-top box brands are using Sigma Designs' 8634 chip.
Net, they think this quarter and next could see significant revenue momentum for Sigma Designs. Trading at only 13x C2007 GAAP EPS estimate of $1.15, valuation remains compelling. Reiterates Outperform rating, $21 price target.
Notablecalls: Not actionable but good to know category. I don't really have a feel for SIGM, but I think we won't see a big upside move following these comments.
Key set-top box vendors including Cisco, Motorola, Philips, and Tatung announced yesterday that their advanced IP set-top boxes based on Microsoft's IPTV Edition Software platform are now ready for volume deployment.
All advanced IP set-top boxes supporting Microsoft's IPTV Edition Software platform are based on Sigma Designs' SoC, in firm's view.
Motorola's VIP series set-top boxes (Sigma Designs inside) are now shipping in volume to several telcos worldwide, ahead of firm's estimate, including at AT&T which represents the first U.S.-based IP STB deployment for Sigma. This Motorola IP set-top box will also ship
at a leading Japan-based telco, among other wins.
Philips' IP set-top box will launch this fall at British Telecom, ahead of firm's original expectation. Cisco IP set-top boxes will be deployed by Deutsche Telekom and AT&T. Both set-top box brands are using Sigma Designs' 8634 chip.
Net, they think this quarter and next could see significant revenue momentum for Sigma Designs. Trading at only 13x C2007 GAAP EPS estimate of $1.15, valuation remains compelling. Reiterates Outperform rating, $21 price target.
Notablecalls: Not actionable but good to know category. I don't really have a feel for SIGM, but I think we won't see a big upside move following these comments.
Calls of Note Part 3
- Baird notes Sigma Designs' (NASDAQ:SIGM) lock in Microsoft-based IP STBs is now paying off, with key telcos announcing yesterday their advanced STBs are now ready for volume shipments. Ramps at Motorola, Cisco, Philips, Tatung, including the first U.S.-based ramp with AT&T, should provide significant momentum to Sigma's top line this quarter and next. UWB chipset strategic to further assert Sigma's leading position in advanced media processors.
Key set-top box vendors including Cisco, Motorola, Philips, and Tatung announced yesterday that their advanced IP set-top boxes based on Microsoft's IPTV Edition Software platform are now ready for volume deployment.
All advanced IP set-top boxes supporting Microsoft's IPTV Edition Software platform are based on Sigma Designs' SoC, in firm's view.
Motorola's VIP series set-top boxes (Sigma Designs inside) are now shipping in volume to several telcos worldwide, ahead of firm's estimate, including at AT&T which represents the first U.S.-based IP STB deployment for Sigma. This Motorola IP set-top box will also ship
at a leading Japan-based telco, among other wins.
Philips' IP set-top box will launch this fall at British Telecom, ahead of firm's original expectation. Cisco IP set-top boxes will be deployed by Deutsche Telekom and AT&T. Both set-top box brands are using Sigma Designs' 8634 chip.
Net, they think this quarter and next could see significant revenue momentum for Sigma Designs. Trading at only 13x C2007 GAAP EPS estimate of $1.15, valuation remains compelling. Reiterates Outperform rating, $21 price target.
Notablecalls: Not actionable but good to know category. I don't really have a feel for SIGM, but I think we won't see a big upside move following these comments.
Key set-top box vendors including Cisco, Motorola, Philips, and Tatung announced yesterday that their advanced IP set-top boxes based on Microsoft's IPTV Edition Software platform are now ready for volume deployment.
All advanced IP set-top boxes supporting Microsoft's IPTV Edition Software platform are based on Sigma Designs' SoC, in firm's view.
Motorola's VIP series set-top boxes (Sigma Designs inside) are now shipping in volume to several telcos worldwide, ahead of firm's estimate, including at AT&T which represents the first U.S.-based IP STB deployment for Sigma. This Motorola IP set-top box will also ship
at a leading Japan-based telco, among other wins.
Philips' IP set-top box will launch this fall at British Telecom, ahead of firm's original expectation. Cisco IP set-top boxes will be deployed by Deutsche Telekom and AT&T. Both set-top box brands are using Sigma Designs' 8634 chip.
Net, they think this quarter and next could see significant revenue momentum for Sigma Designs. Trading at only 13x C2007 GAAP EPS estimate of $1.15, valuation remains compelling. Reiterates Outperform rating, $21 price target.
Notablecalls: Not actionable but good to know category. I don't really have a feel for SIGM, but I think we won't see a big upside move following these comments.
Calls of Note Part 2
- Citigroup believes business trends at NutriSystem (NASDAQ:NTRI) are strong and expect 3Q new customer growth of up 80% (vs guidance of up 78%) and EPS of 52c vs 47c-50c guidance. If the company achieves our ests, it would imply NTRI's core women's biz and men's initiatives (quarterbacked by Dan Marino) are doing well. This would provide improved visibility into NTRI's l-t growth prospects.
Given the recent stock run-up (up 30% in the last few weeks), the stock could trade off on good 3Q results (like it did last Q when it reported 7c EPS upside). In this case, the firm would aggressively buy shares on potential stock weakness.
NTRI is a cheap (~24x '07 EPS) hyper-growth stock, which is still in the early stage of its growth cycle. NTRI is the top pick within firm's coverage universe.
Firm is raising their 3Q06 EPS estimate from $0.49 to $0.52 and FY06 EPS by 2c to incorporate the strong trends in new customer growth despite a 15% increase in CAC in 2H06. They anticipate strong trends from the men's program due to the addition of Dan Marino as a spokesperson in July.Firm believes that new customer growth was strong even though the summer months are generally not a strong dieting season.
Target is raised to $95 from $85.
Notablecalls: Note that Kaufman upped their tgt to $100 yesterday. NTRI failed to hold the early gain. Will see how Citi fares. Expect to see a pop.
Given the recent stock run-up (up 30% in the last few weeks), the stock could trade off on good 3Q results (like it did last Q when it reported 7c EPS upside). In this case, the firm would aggressively buy shares on potential stock weakness.
NTRI is a cheap (~24x '07 EPS) hyper-growth stock, which is still in the early stage of its growth cycle. NTRI is the top pick within firm's coverage universe.
Firm is raising their 3Q06 EPS estimate from $0.49 to $0.52 and FY06 EPS by 2c to incorporate the strong trends in new customer growth despite a 15% increase in CAC in 2H06. They anticipate strong trends from the men's program due to the addition of Dan Marino as a spokesperson in July.Firm believes that new customer growth was strong even though the summer months are generally not a strong dieting season.
Target is raised to $95 from $85.
Notablecalls: Note that Kaufman upped their tgt to $100 yesterday. NTRI failed to hold the early gain. Will see how Citi fares. Expect to see a pop.
Paperstand
According to the WSJ, just as Microsoft (MSFT) is about to roll out the latest version of its cash-cow Office applications, Google (GOOG) is beefing up efforts that could win away some of the customers Microsoft is targeting. Google's latest move, expected to be announced today, is a plan to bundle its existing word-processing and spreadsheet offerings, online applications that ppl can use through their Web browsers, under the name Google Docs & Spreadsheets and more tightly weave them together. The services, which are available free, offer more-limited functions than Microsoft's word processor and spreadsheet programs. The co is targeting avg consumer users and organizations such as universities as it continues to expand email, calendar, spreadsheet and word-processing services that overlap with Microsoft offerings.
“Heard on the Street” column discusses AMR (AMR), sayng that as airlines have scrambled to slash costs and raise fares over the past few years, rising fuel prices have masked much of their progress. Now, fuel is acting as a white knight for the industry, falling in price just as airlines are coping with slowing rev growth. Airline stock prices have been inching up in recent weeks despite carriers' warnings that business suffered after English police in August busted up a suspected plot to bomb airplanes over the Atlantic. Even though some travelers are being scared away, investors have concluded that any decline in fliers is more than overcome by the drop in fuel prices. Fuel accounts for 20-30% of the operating costs for an airline, so price declines have an immediate effect on the bottom line. In the case of AMR’s American Airlines, each $1 drop in the price of a barrel of oil saves about $80m in annual operating costs. The falling price of oil "is much more positive than the terror warning is negative" for the industry, said S&P's analyst Jim Corridore.
The WSJ’s “Insider Track” section reports that ConAgraFoods (CAG) President and CEO Gary Rodkin is required to own co stock but doesn't necessarily have to buy any shares. Nevertheless, he has been stocking up this year. Mr. Rodkin reported buying 75K shares of the co last week and now owns 150K co shares, valued at nearly $3.8m. EVP Robert Sharpe Jr. reported buying 11K shares the same day to bring his ownership to 45K shares. "These purchases were really made based on their belief in the co and the direction it's taken," said ConAgra spokesman Chris Kircher.
According to the Barron’s Online, if democrats win control of the US House of Representatives next month, as many pundits are now predicting, the shares of Verizon (VZ) and AT&T (T) could very well take a hit. These 2 phone giants have beaten the mkt handily this year, with Verizon stock up 21.8%, and AT&T up 31.4%. But investors may not be so cheery if a House with Minority Leader Nancy Pelosi at the helm decides to resuscitate a legislative proposal known in the corridors of Capitol Hill as "'Net neutrality." This Democratic-led proposal would in essence forbid the new phone co’s from charging a fee to Web sites that fill up Internet connections with high bandwidth traffic.
“Inside Scoop” section reports that Breeden Partners, a fund started by former SEC Chmn Richard Breeden, disclosed that it now owns a 5.24% stake in the Applebee’s (APPB), or 3.9m shares.
DigiTimes reports that Dell (DELL) has sent a request for quotation (RFQ) to panel makers for 19” widescreen LCD monitor panels. The sources also indicated that Taiwan-based AU Optronics (AUO) and Chi Mei Optoelectronics (CMO) are expected to win the orders from Dell.
Calls of Note Part 1
- Goldman Sachs notes Ciena's (NASDAQ:CIEND) analyst day did not remove the bearish perception that business will slow over the next 12 months. The firm disagrees and sees lowered expectations creating a buying opportunity.
Firm believes 27% top-line growth is very achievable in FY07, vs. consensus of 22%. 1) While not willing to offer FY07 sales guidance, the CEO in Q&A said - and the firm reconfirmed this - that FY06 sales growth should NOT be the peak growth rate for Ciena, implying that the FY07 sales growth rate could exceed FY06's 30%+ rate. 2) Management stressed the point that Ciena has the potential to unlock strong operating leverage. In FY06 sales are tracking for 32% growth, and operating expense are down 10% yr/yr. There is more leverage to go. 3) Big picture, there is a disconnect in the market if YouTube is getting taken out at $1.6 bn because video will be big and Target and Wal-Mart are talking with media companies about risk to DVD sales due to the threat of internet distribution and Ciena, a main bandwidth vendor, is seeing investor concern that it may see slower growth a year from now.
Maintains Buy and $42 tgt.
Notablecalls: Note that Goldman was out positive on CIEND Oct 5 calling for a very positive analyst day. That didn't materialize and the stock got hit. Goldman continues to pound the table and I suspect that will create a moderate bounce.
Firm believes 27% top-line growth is very achievable in FY07, vs. consensus of 22%. 1) While not willing to offer FY07 sales guidance, the CEO in Q&A said - and the firm reconfirmed this - that FY06 sales growth should NOT be the peak growth rate for Ciena, implying that the FY07 sales growth rate could exceed FY06's 30%+ rate. 2) Management stressed the point that Ciena has the potential to unlock strong operating leverage. In FY06 sales are tracking for 32% growth, and operating expense are down 10% yr/yr. There is more leverage to go. 3) Big picture, there is a disconnect in the market if YouTube is getting taken out at $1.6 bn because video will be big and Target and Wal-Mart are talking with media companies about risk to DVD sales due to the threat of internet distribution and Ciena, a main bandwidth vendor, is seeing investor concern that it may see slower growth a year from now.
Maintains Buy and $42 tgt.
Notablecalls: Note that Goldman was out positive on CIEND Oct 5 calling for a very positive analyst day. That didn't materialize and the stock got hit. Goldman continues to pound the table and I suspect that will create a moderate bounce.
Tuesday, October 10, 2006
Calls of Note Part 5
- Goldman is removing Intel (NASDAQ:INTC) from the Americas Conviction Buy List, as the stock is nearing their $22 12-month target price post strong share performance over the past several months. Further, they do not expect Intel to report significant upside to CY3Q06 earnings, which given aggressive Street expectations, may pose some near-term risk to the stock. Intel has increased 13% since the firm added it to the Americas Conviction Buy List on 6/26/2006, versus the S&P 500 performance of up 8%. The stock has declined 13% over the past 12 months, versus the S&P 500 performance of up 13%.
Firm would look for a pullback in the stock post the company's CY3Q06 earnings report on 10/17/2006 to be more aggressive on the shares, as they remain very much convinced about Intel's ability to improve margins in the coming quarters. The greatest risk to near-term more cautious view on the stock is significant upside to 2007 Street EPS estimates.
Notablecalls: INTC's a sell, INTC's a sell....
Firm would look for a pullback in the stock post the company's CY3Q06 earnings report on 10/17/2006 to be more aggressive on the shares, as they remain very much convinced about Intel's ability to improve margins in the coming quarters. The greatest risk to near-term more cautious view on the stock is significant upside to 2007 Street EPS estimates.
Notablecalls: INTC's a sell, INTC's a sell....
Calls of Note Part 4
- Jefferies notes that Infosys Tech (NASDAQ:INFY) will kick off September earnings for the offshore segment of our IT services coverage with FQ2 results early AM Oct 11. Overall, the firm feels that September could represent the best quarter ever not only for INFY but the entire offshore IT sector.
They are upping their estimates above guidance ahead of Sept Q earnings, given belief that the depth and breadth of demand for offshore is actually strengthening from current record levels.
Strong net hiring growth last quarter (up 11% sequentially), coupled with accelerating demand for anything offshore should translate into strong q/q absolute dollar increases to revenue for INFY in September. This view is underscored by June quarter results, which showed sequential acceleration from March. Given the nature of offshore IT services, where growth from new customers ramps steadily over several quarters, they feel follow through from last quarter will be evident in September results.
Firm believes solid results out of INFY should augur well for other industry players, both in terms of financial performance and improving investor sentiment. While other leading players such as Cognizant (CTSH) likely have little to no multiple expansion as part of the investment case, several Tier Two offshore vendors, including Kanbay (KBAY), Patni (PTI and Syntel (SYNT), should also benefit from improving demand and seasonally stronger margins and could experience some multiple expansion from current levels.
INFY tgt goes to $57 from $47.
Notablecalls: Nice call from Jeffco. May see a small pop in INFY early on.
They are upping their estimates above guidance ahead of Sept Q earnings, given belief that the depth and breadth of demand for offshore is actually strengthening from current record levels.
Strong net hiring growth last quarter (up 11% sequentially), coupled with accelerating demand for anything offshore should translate into strong q/q absolute dollar increases to revenue for INFY in September. This view is underscored by June quarter results, which showed sequential acceleration from March. Given the nature of offshore IT services, where growth from new customers ramps steadily over several quarters, they feel follow through from last quarter will be evident in September results.
Firm believes solid results out of INFY should augur well for other industry players, both in terms of financial performance and improving investor sentiment. While other leading players such as Cognizant (CTSH) likely have little to no multiple expansion as part of the investment case, several Tier Two offshore vendors, including Kanbay (KBAY), Patni (PTI and Syntel (SYNT), should also benefit from improving demand and seasonally stronger margins and could experience some multiple expansion from current levels.
INFY tgt goes to $57 from $47.
Notablecalls: Nice call from Jeffco. May see a small pop in INFY early on.
Calls of Note Part 4
Goldman has a summary of datapoints from the Semi field:
MICROPROCESSORS AND GRAPHICS (INTC+, AMD-, NVDA-)
Checks indicate that Intel's quad core roadmap is likely to remain quite competitive through at least 2HCY07, with relatively attractive power per watt metrics. Despite speculation to the contrary, they believe that nVidia (NASDAQ:NVDA) will not participate in either a new video iPod or a redesigned Sony PSP.
ANALOG (IRF+, VLTR-, ISIL-)
Checks show International Rectifier (NYSE:IRF) has gained share (mostly likely from Intersil) in server platforms. Firm believes Volterra recently lost a bid for GPU power management to a low-cost competitor from Taiwan.
MEMORY (MU-)
Despite checks showing healthy DRAM pricing trends throughout 2006, they believe Micron (NYSE:MU) will not benefit from this pricing strength, and continue to recommend investors go long global DRAM and underweight Micron.
Introducing GPU monitor; CPU and memory monitors
Goldman is also introducing the GPU monitor, which they will use to track near-term demand and inventory trends as with the CPU and memory monitors. Significant price upticks were noted for mainstream GPUs, consistent with strong entry-level PC demand. CPU pricing declined most steeply for AMD notebooks and high-end desktops, likely given competition from Intel.
Notablecalls: Not actionable but good to know category.
MICROPROCESSORS AND GRAPHICS (INTC+, AMD-, NVDA-)
Checks indicate that Intel's quad core roadmap is likely to remain quite competitive through at least 2HCY07, with relatively attractive power per watt metrics. Despite speculation to the contrary, they believe that nVidia (NASDAQ:NVDA) will not participate in either a new video iPod or a redesigned Sony PSP.
ANALOG (IRF+, VLTR-, ISIL-)
Checks show International Rectifier (NYSE:IRF) has gained share (mostly likely from Intersil) in server platforms. Firm believes Volterra recently lost a bid for GPU power management to a low-cost competitor from Taiwan.
MEMORY (MU-)
Despite checks showing healthy DRAM pricing trends throughout 2006, they believe Micron (NYSE:MU) will not benefit from this pricing strength, and continue to recommend investors go long global DRAM and underweight Micron.
Introducing GPU monitor; CPU and memory monitors
Goldman is also introducing the GPU monitor, which they will use to track near-term demand and inventory trends as with the CPU and memory monitors. Significant price upticks were noted for mainstream GPUs, consistent with strong entry-level PC demand. CPU pricing declined most steeply for AMD notebooks and high-end desktops, likely given competition from Intel.
Notablecalls: Not actionable but good to know category.
Calls of Note Part 3
- Merrill Lynch is raising their price objective on Business Objects (NASDAQ:BOBJ) to $43 from $32 to reflect healthy fundamentals, seasonal tailwinds and multiple expansion. Quarterly checks suggest strong performance for BI and data integration, while current 4Q forecasts offer ample room for revenues and EPS upside.
Much of the recent strength in the stock comes from speculation Business Objects is an imminent acquisition target. While the firm believes such a scenario is possible, they hesitate to value the stock purely on takeout speculation. Nonetheless, valuation leaves room for upside purely on fundamentals.
Current migration activity within the extensive installed base appears to be driving momentum for new product sales. They expect improvement from Europe with steady acceleration expected into Q4. With strong seasonal spending trends, 3Q eamings expected later this month and a User Conference in early November; they see sufficient catalysts to drive the stock higher in coming weeks.
Notablecalls: Were it a smaller firm issuing the call, I would disregard it due to the run the stock has had. But in Merrill's case, there may be enough following the create some additional buy interest. Don't overstay your welcome, though.
Much of the recent strength in the stock comes from speculation Business Objects is an imminent acquisition target. While the firm believes such a scenario is possible, they hesitate to value the stock purely on takeout speculation. Nonetheless, valuation leaves room for upside purely on fundamentals.
Current migration activity within the extensive installed base appears to be driving momentum for new product sales. They expect improvement from Europe with steady acceleration expected into Q4. With strong seasonal spending trends, 3Q eamings expected later this month and a User Conference in early November; they see sufficient catalysts to drive the stock higher in coming weeks.
Notablecalls: Were it a smaller firm issuing the call, I would disregard it due to the run the stock has had. But in Merrill's case, there may be enough following the create some additional buy interest. Don't overstay your welcome, though.
Calls of Note Part 2
- Jefferies thinks the decision by News Corp. to take the content distribution services for MySpace in-house, and Google's purchase of YouTube should have no bearing on Akamai's (NASDAQ:AKAM) forward results.
AKAM shares have been weak recently on concerns that the company had lost MySpace as a customer. While Akamai provides content services for Fox that can be accessed through MySpace, MySpace is not a significant Akamai customer. Google's acquisition of YouTube is likely a non-event for Akamai as well.
think MySpace is a pilot customer of Akamai. Firm's review of the content source servers at MySpace indicate that Akamai provides limited amounts of static content hosting for the MySpace site, mostly video ads, "MySpace Specials", and user images. It's probable that Akamai provides consulting services to MySpace as well, but the entire contract is probably immaterial for Akamai. As such, we think recent investor concerns regarding a spillover effect to Akamai from Vitalstream's (VSTR) loss of MySpace as a customer are overblown.
Google acquisition of YouTube should have no effect on Akamai. Firm believes Akamai, at most, provides small amounts of consulting services to YouTube. Therefore, any decision by Google to content distribution in-house will likely be a non-event for Akamai.
Maintains Buy and $59 tgt.
Notablecalls: Maybe it's just that AKAM has had its run? Of course, the story is far from broken but stocks tend to top before the actual slowdown happens. From a trading perspective, I don't think AKAM will bounce on this call.
AKAM shares have been weak recently on concerns that the company had lost MySpace as a customer. While Akamai provides content services for Fox that can be accessed through MySpace, MySpace is not a significant Akamai customer. Google's acquisition of YouTube is likely a non-event for Akamai as well.
think MySpace is a pilot customer of Akamai. Firm's review of the content source servers at MySpace indicate that Akamai provides limited amounts of static content hosting for the MySpace site, mostly video ads, "MySpace Specials", and user images. It's probable that Akamai provides consulting services to MySpace as well, but the entire contract is probably immaterial for Akamai. As such, we think recent investor concerns regarding a spillover effect to Akamai from Vitalstream's (VSTR) loss of MySpace as a customer are overblown.
Google acquisition of YouTube should have no effect on Akamai. Firm believes Akamai, at most, provides small amounts of consulting services to YouTube. Therefore, any decision by Google to content distribution in-house will likely be a non-event for Akamai.
Maintains Buy and $59 tgt.
Notablecalls: Maybe it's just that AKAM has had its run? Of course, the story is far from broken but stocks tend to top before the actual slowdown happens. From a trading perspective, I don't think AKAM will bounce on this call.
Calls of Note Part 1
Going to highlight couple of additional comments on the Google (NASDAQ:GOOG)/ Youtube deal:
- CIBC believes YouTube is a great deal for Google due to potential synergies and YouTube's leading social networking platform.
Google brings 1) a large network of advertisers; 2) a system for targeting online consumers that result in higher monetization and CPMs; 3) global infrastructure and hardware investments to scale YouTube's bandwidth and storage needs; and 4) new "search over video" technology.
With nearly $10B in cash and marketable securities at the end of 2Q06, Google has the ability to pay $1.5-$2B for such a deal with more than enough cash cushion left over for capex. That said, Google management indicated that the transaction would be slightly dilutive initially. Firm estimates the transaction is roughly dilutive by $0.15 if YouTube is breakeven to net income in 2007. Based on their preliminary estimates and channel checks, YouTube has the potential to generate $150-$300M in ad revenues in '07 or 08, and it could prove highly accretive if Google finds a way to monetize the traffic with solid execution and new technology in 2-3 years.
In CIBC's opinion, the deal is potentially a big blow to Yahoo! (NASDAQ:YHOO), which recently lost in bidding for a Dell distribution deal and for the search monetization rights to MySpace. According to channel checks, the bid for YouTube was competitively bid by Yahoo!, MSN and others, but ultimately, Google s victory may hint that they are better positioned to monetize these emerging platforms, not to mention the advantage of having a $10B warchest.
They believe the deal illustrates the continued friction between old media /content (TWX, NWS, VIAB, NWSA) and new media/Internet distribution (GOOG, YHOO). Firm believes old media companies may be disadvantaged as new media companies consolidate Web 2.0 platforms and social networks.
- Morgan Stanley notes that $1.65B in GOOG shares is A LOT to pay for a startup with negligible revenue, however...as they were / are positive about eBay's Skype acquisition, they are positive about YouTube (which, based on deal terms, should be dilutive by 1-2% for CQ4). YouTube supports an impressive 72MM unique global users (up 23x Y/Y, per comScore), and 4.7B page views (up 103x Y/Y). In addition, the company indicated 100MM+ video views + 65K uploads daily. All in, YouTube has created a very effective way to distribute new forms of media and engage users.
Firm believes traditional media companies, inspired by rapid ramp in quality / usage + community / ranking / feedback of user-generated video, have realized a pressing need to use the Internet as a distribution channel. In their view, the opportunity has the potential to be measured in billions of dollars in annual revenue within 2-4 years. Per IAB (Interactive Advertising Bureau), US search advertising revenue ramped from $285MM in 2001 to $4B in 2004 (estimated at $6B+ in 2006E) owing to effective monetization of Internet content (words) by Google / Yahoo! - similar ramps will occur in Internet video.
Reiterate positives view on Google - the firm likes big bets that are strategically sound, especially when the majority of short-term number crunchers think the bets are crazy. Google has been analyzing its search queries for years and building its base of servers - they buy Google's view that we are entering an 'Internet video revolution' - and with Monday's announcements, Google just improved its hand and also helped push 'the revolution' forward. In addition, Google improved its weak position in the social networking area. No change in firm's Google estimates for now, but probability for upside in C2008 / C2009 has increased.
Maintains Overweight.
Notablecalls: Not actionable but good to know category. Check out my comments from yesterday.
- CIBC believes YouTube is a great deal for Google due to potential synergies and YouTube's leading social networking platform.
Google brings 1) a large network of advertisers; 2) a system for targeting online consumers that result in higher monetization and CPMs; 3) global infrastructure and hardware investments to scale YouTube's bandwidth and storage needs; and 4) new "search over video" technology.
With nearly $10B in cash and marketable securities at the end of 2Q06, Google has the ability to pay $1.5-$2B for such a deal with more than enough cash cushion left over for capex. That said, Google management indicated that the transaction would be slightly dilutive initially. Firm estimates the transaction is roughly dilutive by $0.15 if YouTube is breakeven to net income in 2007. Based on their preliminary estimates and channel checks, YouTube has the potential to generate $150-$300M in ad revenues in '07 or 08, and it could prove highly accretive if Google finds a way to monetize the traffic with solid execution and new technology in 2-3 years.
In CIBC's opinion, the deal is potentially a big blow to Yahoo! (NASDAQ:YHOO), which recently lost in bidding for a Dell distribution deal and for the search monetization rights to MySpace. According to channel checks, the bid for YouTube was competitively bid by Yahoo!, MSN and others, but ultimately, Google s victory may hint that they are better positioned to monetize these emerging platforms, not to mention the advantage of having a $10B warchest.
They believe the deal illustrates the continued friction between old media /content (TWX, NWS, VIAB, NWSA) and new media/Internet distribution (GOOG, YHOO). Firm believes old media companies may be disadvantaged as new media companies consolidate Web 2.0 platforms and social networks.
- Morgan Stanley notes that $1.65B in GOOG shares is A LOT to pay for a startup with negligible revenue, however...as they were / are positive about eBay's Skype acquisition, they are positive about YouTube (which, based on deal terms, should be dilutive by 1-2% for CQ4). YouTube supports an impressive 72MM unique global users (up 23x Y/Y, per comScore), and 4.7B page views (up 103x Y/Y). In addition, the company indicated 100MM+ video views + 65K uploads daily. All in, YouTube has created a very effective way to distribute new forms of media and engage users.
Firm believes traditional media companies, inspired by rapid ramp in quality / usage + community / ranking / feedback of user-generated video, have realized a pressing need to use the Internet as a distribution channel. In their view, the opportunity has the potential to be measured in billions of dollars in annual revenue within 2-4 years. Per IAB (Interactive Advertising Bureau), US search advertising revenue ramped from $285MM in 2001 to $4B in 2004 (estimated at $6B+ in 2006E) owing to effective monetization of Internet content (words) by Google / Yahoo! - similar ramps will occur in Internet video.
Reiterate positives view on Google - the firm likes big bets that are strategically sound, especially when the majority of short-term number crunchers think the bets are crazy. Google has been analyzing its search queries for years and building its base of servers - they buy Google's view that we are entering an 'Internet video revolution' - and with Monday's announcements, Google just improved its hand and also helped push 'the revolution' forward. In addition, Google improved its weak position in the social networking area. No change in firm's Google estimates for now, but probability for upside in C2008 / C2009 has increased.
Maintains Overweight.
Notablecalls: Not actionable but good to know category. Check out my comments from yesterday.
Paperstand
According to the WSJ, for Dolan family, the time appears ripe for its $7.9bn bid to take Cablevision (CVC) private: The co has been beating most phone co’s and satellite-TV operators in the battle for video, phone and Internet customers. That's also why the bid could fail. The Dolans have taken Cablevision shareholders on a financial roller-coaster ride over the years, and some institutional investors say they are reluctant to sell now that the outlook is brightening. "I'm getting tired of mgmt and private-equity firms trying to steal co’s from underneath our noses, and I think this is another example of that," says John Linehan, of T. Rowe Price, which holds more than 2m Cablevision shares. "Shareholders have been asked to sit through a fairly fallow period of time. As things are beginning to look up, a lot of our upside is being taken away from us."
According to the WSJ’s “Heard on the Street” column, when Vodafone (VOD) recently named Vittorio Colao as its deputy CEO, many investors viewed it as a rare bright spot for a co battling a string of negative developments, a limp stock price and angry shareholders. But some investors say the arrival this week of Mr. Colao, a seasoned and respected manager, is just one of a number of reasons why they now view Vodafone as a stock worth having another look at. Not only is the stock cheap by some measures, supporters say, but Vodafone also is showing some signs that it might be able to withstand the competitive pressures on call prices better than previously thought. And, the co is working to address other concerns, including dumping operations in some countries that aren't viewed as core. "There's been a real sea change in the past 2 or 3 months, where the news has been consistently good," says Adam Steiner, of SVG Investment Managers, which started buying the co's shares about 6 months ago and now owns about $33.7m of Vodafone's stock.
According to the Barron’s Online “Inside Scoop” section, Warren Buffet’s Berkshire Hathaway (BRKA) is adding to its stake in USG (USG) after investors razed the building-materials stock amid concerns over the housing mkt. Berkshire spent more than $17.1m to purchase 371K shares of USG in the open mkt. Berkshire increased its holdings to 17.07m shares, or a 19% stake. Lon Juricic, founder of StreetInsider.com, says that Buffett "has been quite aggressive with the stock being that the whole group is down because of the homebuilding and housing bubble. "It shows that he has quite a lot of faith in USG; that he sees something there that maybe a lot of other ppl don't," he adds.
According to the WSJ’s “Heard on the Street” column, when Vodafone (VOD) recently named Vittorio Colao as its deputy CEO, many investors viewed it as a rare bright spot for a co battling a string of negative developments, a limp stock price and angry shareholders. But some investors say the arrival this week of Mr. Colao, a seasoned and respected manager, is just one of a number of reasons why they now view Vodafone as a stock worth having another look at. Not only is the stock cheap by some measures, supporters say, but Vodafone also is showing some signs that it might be able to withstand the competitive pressures on call prices better than previously thought. And, the co is working to address other concerns, including dumping operations in some countries that aren't viewed as core. "There's been a real sea change in the past 2 or 3 months, where the news has been consistently good," says Adam Steiner, of SVG Investment Managers, which started buying the co's shares about 6 months ago and now owns about $33.7m of Vodafone's stock.
According to the Barron’s Online “Inside Scoop” section, Warren Buffet’s Berkshire Hathaway (BRKA) is adding to its stake in USG (USG) after investors razed the building-materials stock amid concerns over the housing mkt. Berkshire spent more than $17.1m to purchase 371K shares of USG in the open mkt. Berkshire increased its holdings to 17.07m shares, or a 19% stake. Lon Juricic, founder of StreetInsider.com, says that Buffett "has been quite aggressive with the stock being that the whole group is down because of the homebuilding and housing bubble. "It shows that he has quite a lot of faith in USG; that he sees something there that maybe a lot of other ppl don't," he adds.
Monday, October 09, 2006
- Goldman believe Nokia's (NYSE:NOK) new ultra-thin handset platform has been pushed back until Spring 2007 (versus their expectations of an end-2006 launch date). With Nokia already suffering from gaps in its line-up during 3Q as Motorola drives the RAZR deep into the mid-end, and with rival vendors launching a strong slate of new products for the holiday season and beyond, they believe this delay exposes the company to increasing risks.
In their view the chances of a 2004-type market share collapse are slender. Nokia continues to launch attractive high-end products with ground-breaking functionality, and its low-end portfolio (backed by the company's broad distribution) remains solid. However, until mid-end product holes are plugged, the most likely outcome is that Nokia's near-term market share, ASP and gross margins will be in line with or lower than consensus estimates, and the stock will tread water despite its discounted valuation. Firm is cutting EPS by EUR0.01 in 3Q and 4Q (to EUR0.23 and EUR0.30) to reflect these risks, and they are now EUR0.01 below 3Q consensus. 2006E EPS is unchanged as they exclude the cost of CDMA restructuring. 2007E EPS of EUR1.15, Neutral rating and EUR18 price target are unchanged but the firm believes investors will require patience to realise the implied 17% potential upside.
Notablecalls: Motorola is eating Nokia's lunch. I've seen some of the new phone models Nokia plans to release soon. Fighting the likes of RAZR with brick-like phone that has a 4GB HDD just wont do it. Nothing sexy about it.
In their view the chances of a 2004-type market share collapse are slender. Nokia continues to launch attractive high-end products with ground-breaking functionality, and its low-end portfolio (backed by the company's broad distribution) remains solid. However, until mid-end product holes are plugged, the most likely outcome is that Nokia's near-term market share, ASP and gross margins will be in line with or lower than consensus estimates, and the stock will tread water despite its discounted valuation. Firm is cutting EPS by EUR0.01 in 3Q and 4Q (to EUR0.23 and EUR0.30) to reflect these risks, and they are now EUR0.01 below 3Q consensus. 2006E EPS is unchanged as they exclude the cost of CDMA restructuring. 2007E EPS of EUR1.15, Neutral rating and EUR18 price target are unchanged but the firm believes investors will require patience to realise the implied 17% potential upside.
Notablecalls: Motorola is eating Nokia's lunch. I've seen some of the new phone models Nokia plans to release soon. Fighting the likes of RAZR with brick-like phone that has a 4GB HDD just wont do it. Nothing sexy about it.
Calls of Note Part 6
- Goldman is adding AllianceBernstein (NYSE:AB) to the Americas Conviction Buy List. AB ought to benefit from exposure to both institutional assets and solid international fund flows, which we believe isn't fully reflected in consensus estimates or valuation. Recent data points affirm strength in international fund flows, AB's maximum exposure within the retail fund channel. Further, with a solid global institutional client base, which features a favorable asset mix shift and stickier (than retail) assets, AB's discount to the group is undeserved. Firm sees 20% potential upside to our ~$82 price target. Their 06/07 EPS estimates of $3.73 and $4.43 are above consensus.
Catalyst 1) AuM figures reported next week. Forecasting $650 bn in total AuM at 3Q-end, a +16% annualized increase. 2) 3Q EPS (reports late Oct.) ought to show signs of momentum in the institutional channel; expect earnings ahead of consensus. 3) As investors look into 2007 and 2008, $5 in earnings power is realistic given current trends and AuM levels, which would comfortably translate into a $90 stock by the end of 2008 and $82 12-months out. Investors may revisit AB during 4Q2006.
Notablecalls: Expect to see buy interest in AB. Think this one may have up to couple of pts in it over the next days.
Catalyst 1) AuM figures reported next week. Forecasting $650 bn in total AuM at 3Q-end, a +16% annualized increase. 2) 3Q EPS (reports late Oct.) ought to show signs of momentum in the institutional channel; expect earnings ahead of consensus. 3) As investors look into 2007 and 2008, $5 in earnings power is realistic given current trends and AuM levels, which would comfortably translate into a $90 stock by the end of 2008 and $82 12-months out. Investors may revisit AB during 4Q2006.
Notablecalls: Expect to see buy interest in AB. Think this one may have up to couple of pts in it over the next days.
Calls of Note Part 5
- Merrill Lynch is raising their 12-month price target on Research in Motion (NASDAQ:RIMM) from $110 to $135, based on applying RIM's 3-yr average forward PE of 28x on CY08 EPS estimate of $4.86. In firm's opinion the new Blackberry Pearl platform extends RIM's earnings momentum till at least 2008, warranting a longer term view on the stock.
Why the firm continues to favor RIM?
RIM's new Pearl smartphone is a unique combination of design and functionality and can be a game changer like Apple's iPod and Motorola's RAZR.
The Pearl benefits from RIM's superior back-end network and software (Slipstream) capabilities, which enable faster web, GPS, search and multimedia features.
Pearl expands RIM's market to 4x larger consumer space. Of the ~80mn smartphones sold in the past year (per IDC), firm estimates only 20% were sold for enterprise applications (RIM's traditional base) while remaining were purchased by consumers. They believe RIM's addressable market could grow substantially (IDC projects 33% CAGR till 2010) and believe RIM could also grow its market share from the current 7% level. We estimate for every 1mn BlackBerry handsets sold beyond our 8.9mn handset shipment projection for FY08, EPS could grow by 7%.
T-Mobile said on Friday that Pearl sales are well ahead of all internal forecasts. Overall firm's positive view on the stock is based on firm's expectations for successful forthcoming launches at Cingular (November) and Verizon (in 2007) as well as other variants of the Pearl, including a full (QWERTY) keyboard in 2007. They also expect a thinner version of the 87xx BlackBerry device, aimed at enterprise segment, to be released next year.
Maintains Buy.
Notablecalls: While RIMM looks extended, this note will create some buy interest.
Why the firm continues to favor RIM?
RIM's new Pearl smartphone is a unique combination of design and functionality and can be a game changer like Apple's iPod and Motorola's RAZR.
The Pearl benefits from RIM's superior back-end network and software (Slipstream) capabilities, which enable faster web, GPS, search and multimedia features.
Pearl expands RIM's market to 4x larger consumer space. Of the ~80mn smartphones sold in the past year (per IDC), firm estimates only 20% were sold for enterprise applications (RIM's traditional base) while remaining were purchased by consumers. They believe RIM's addressable market could grow substantially (IDC projects 33% CAGR till 2010) and believe RIM could also grow its market share from the current 7% level. We estimate for every 1mn BlackBerry handsets sold beyond our 8.9mn handset shipment projection for FY08, EPS could grow by 7%.
T-Mobile said on Friday that Pearl sales are well ahead of all internal forecasts. Overall firm's positive view on the stock is based on firm's expectations for successful forthcoming launches at Cingular (November) and Verizon (in 2007) as well as other variants of the Pearl, including a full (QWERTY) keyboard in 2007. They also expect a thinner version of the 87xx BlackBerry device, aimed at enterprise segment, to be released next year.
Maintains Buy.
Notablecalls: While RIMM looks extended, this note will create some buy interest.
Calls of Note Part 4
- Deutsche Bank is commenting on the possibility of Palm (NASDAQ:PALM) being an acquisition target.
Adding it all up, they think an acquisition of Palm is unlikely, but they cannot rule it out. For the right buyer, with a genuine need for a better software platform it could make sense, but that buyer would have to justify the premium to their own shareholders.
Palm would offer a buyer:
A fading, but still highly regarded, product line in the Treo A software design team with demonstrated expertise At least $300 million in tax losses, perhaps more in the hands of a
larger company.
At current prices, Palm is within acceptable multiple range of recent transactions. For instance, Motorola recently acquired Symbol for roughly 20x LTM EBIT. As it stands now the firm thinks the company is fully valued, and they have no reason to believe that a deal is imminent. So they are not changing their estimates or rating. Firm cautions investors that even inexpensive' stocks can go down.
They also note that time is not on Palm's side. Or to put it another way, if a deal were to happen they think it would happen sooner rather than later. First, the competitive environment is clearly deteriorating. As RIM demonstrated with its strong guidance two weeks ago, Palm is in line to feel more than its share of the competitive pressure. RIM can at least stand behind its service offering as a barrier to entry, Palm has no such platform. Second, over time a strategic buyer looking for a software fix would get closer to its own solutions. Finally, the company's tax losses are subject to change of control clauses. Since many of these losses came with the acquisition of Handspring, they can be extinguished if Palm is in turn acquired less than three years after that took place.
Maintains Hold and $14 tgt.
Notablecalls: Not actionable but good to know category.
Adding it all up, they think an acquisition of Palm is unlikely, but they cannot rule it out. For the right buyer, with a genuine need for a better software platform it could make sense, but that buyer would have to justify the premium to their own shareholders.
Palm would offer a buyer:
A fading, but still highly regarded, product line in the Treo A software design team with demonstrated expertise At least $300 million in tax losses, perhaps more in the hands of a
larger company.
At current prices, Palm is within acceptable multiple range of recent transactions. For instance, Motorola recently acquired Symbol for roughly 20x LTM EBIT. As it stands now the firm thinks the company is fully valued, and they have no reason to believe that a deal is imminent. So they are not changing their estimates or rating. Firm cautions investors that even inexpensive' stocks can go down.
They also note that time is not on Palm's side. Or to put it another way, if a deal were to happen they think it would happen sooner rather than later. First, the competitive environment is clearly deteriorating. As RIM demonstrated with its strong guidance two weeks ago, Palm is in line to feel more than its share of the competitive pressure. RIM can at least stand behind its service offering as a barrier to entry, Palm has no such platform. Second, over time a strategic buyer looking for a software fix would get closer to its own solutions. Finally, the company's tax losses are subject to change of control clauses. Since many of these losses came with the acquisition of Handspring, they can be extinguished if Palm is in turn acquired less than three years after that took place.
Maintains Hold and $14 tgt.
Notablecalls: Not actionable but good to know category.
Calls of Note Part 3
- Citigroup is lowering their 4Q06/1Q07 estimates for Texas Instruments (NYSE:TXN), as near-term order conditions have softened, manifesting in a recently implemented hiring freeze.
Firm's fieldwork suggests TI has recently implemented a hiring freeze, pointing to a less certain outlook for 4Q06/1Q07 as the cause. This hiring freeze is not division specific, suggesting the concerns are not necessarily limited to specific chip types.
Above trend analog sales are reverting back to trend line, resulting in below seasonal progression in 4Q06. US retail weakness in DLP HD-TV's adds to concerns. Handset risk exists given shortfalls in Nokia supply chain.
As a result of this lowered outlook, they expect near- term pressure on TI shares, to the advantage of trading-oriented investors. Longer-term investors ought to also consider using pressure as a buying opportunity given favorable outlook for the company in 2007. Firm sees downside risk to about $27 (the low-end of its trading range), but upside to about $36 (the high-end), making risk reward favorable by a 1:1.25 ratio.
Maintains Buy.
Notablecalls: I should have called the note from JP Morgan (Oct 5) actionable! But still, as I noted back then, TXN stock will be lower is couple of months for sure. TXN continues to be the canary in the Semi mine.
Firm's fieldwork suggests TI has recently implemented a hiring freeze, pointing to a less certain outlook for 4Q06/1Q07 as the cause. This hiring freeze is not division specific, suggesting the concerns are not necessarily limited to specific chip types.
Above trend analog sales are reverting back to trend line, resulting in below seasonal progression in 4Q06. US retail weakness in DLP HD-TV's adds to concerns. Handset risk exists given shortfalls in Nokia supply chain.
As a result of this lowered outlook, they expect near- term pressure on TI shares, to the advantage of trading-oriented investors. Longer-term investors ought to also consider using pressure as a buying opportunity given favorable outlook for the company in 2007. Firm sees downside risk to about $27 (the low-end of its trading range), but upside to about $36 (the high-end), making risk reward favorable by a 1:1.25 ratio.
Maintains Buy.
Notablecalls: I should have called the note from JP Morgan (Oct 5) actionable! But still, as I noted back then, TXN stock will be lower is couple of months for sure. TXN continues to be the canary in the Semi mine.
Calls of Note Part 2
Two firms comment on Intel (NASDAQ:INTC) over the weekend:
- Prudential thinks that Intel MPU shipments came in at above seasonal rates for the SepQ, but that these were partially offset by a more challenging ASP environment during the quarter.
As a result they are raising Q3 revenue estimate to $8.6 billion from $8.3 billion, and EPS estimate to $0.19 from $0.17.
Firm's PC Hardware team's analysis indicates PC unit growth to slow to 6% in 2007 from 10% in 2006. They also think that Intel will lose share to AMD at Dell, translating to about 4% of the market. Firm is modeling 2% PC unit growth for Intel in 2007. They are raising their 2006 EPS estimates (including options expense) to $0.79 from $0.75, but lowering their 2007 EPS estimate to $1.05 from $1.07.
Firm notes they remain concerned about MPU capacity and pricing for the PC-MPU industry in general, and share loss and margins for Intel specifically. Remains Underweight on Intel with a $16 price target.
- JP Morgan is raising the White Flag....and Intel estimates. Their checks indicate Intel experienced upside in both its processor and chipset business in the September quarter and as a result they believe the company grew its revenues above the mid-point of its guidance for a 4%-11% QoQ increase and above firm's prior estimate of up 6% QoQ.
While they are positive on the share gains, they believe most of the upside was from lower-margin low-end processors and chipsets. As a result, firm's 3Q06 gross margin estimate of 48% remains below company guidance of 49%.
Although they are raising estimates on Intel, the firm remains Neutral on the stock due to belief that gross margins should remain in the high-40% range through 1H07 due to record inventory, aggressive pricing, and higher depreciation.
As a result, they raising C06 revenue and EPS estimates from $34.7 billion and $0.71 to $35.0 billion and $0.74. Firm is maintaining C07 revenue estimate of $37.0 billion, but is slightly increasing EPS estimate from $0.90 to $0.94. They note their C07 EPS estimate of $0.94 is well below Consensus of $1.10.
Maintains Neutral.
Notablecalls: So while Q3 results will be moderately OK due to BTS seasonality, the views on 2007 are growing more negative. I still think INTC is a sell around current levels.
- Prudential thinks that Intel MPU shipments came in at above seasonal rates for the SepQ, but that these were partially offset by a more challenging ASP environment during the quarter.
As a result they are raising Q3 revenue estimate to $8.6 billion from $8.3 billion, and EPS estimate to $0.19 from $0.17.
Firm's PC Hardware team's analysis indicates PC unit growth to slow to 6% in 2007 from 10% in 2006. They also think that Intel will lose share to AMD at Dell, translating to about 4% of the market. Firm is modeling 2% PC unit growth for Intel in 2007. They are raising their 2006 EPS estimates (including options expense) to $0.79 from $0.75, but lowering their 2007 EPS estimate to $1.05 from $1.07.
Firm notes they remain concerned about MPU capacity and pricing for the PC-MPU industry in general, and share loss and margins for Intel specifically. Remains Underweight on Intel with a $16 price target.
- JP Morgan is raising the White Flag....and Intel estimates. Their checks indicate Intel experienced upside in both its processor and chipset business in the September quarter and as a result they believe the company grew its revenues above the mid-point of its guidance for a 4%-11% QoQ increase and above firm's prior estimate of up 6% QoQ.
While they are positive on the share gains, they believe most of the upside was from lower-margin low-end processors and chipsets. As a result, firm's 3Q06 gross margin estimate of 48% remains below company guidance of 49%.
Although they are raising estimates on Intel, the firm remains Neutral on the stock due to belief that gross margins should remain in the high-40% range through 1H07 due to record inventory, aggressive pricing, and higher depreciation.
As a result, they raising C06 revenue and EPS estimates from $34.7 billion and $0.71 to $35.0 billion and $0.74. Firm is maintaining C07 revenue estimate of $37.0 billion, but is slightly increasing EPS estimate from $0.90 to $0.94. They note their C07 EPS estimate of $0.94 is well below Consensus of $1.10.
Maintains Neutral.
Notablecalls: So while Q3 results will be moderately OK due to BTS seasonality, the views on 2007 are growing more negative. I still think INTC is a sell around current levels.
Paperstand
According to the WSJ, citing ppl familiar with the matter, the Dolan family, which controls Cablevision Systems (CVC), has offered to buy out the public shareholders of the co in a deal that values the co at about $7.9bn. The offer comes 16 months after the family, led by Cablevision Chmn Charles F. Dolan and his son, CEO James L. Dolan, made an offer to buy the co's cable unit and spin off its other assets. That offer was resisted by a special committee of Cablevision's board, which found the price and structure of the deal inadequate for Cablevision's public shareholders.
The WSJ reports thah a declaration in a lawsuit between SCO Group (SCOX) and IBM (IBM) raises new questions about whether Microsoft or some of its execs indirectly assisted SCO's legal front against the Linux OS. In the sworn statement, the founder of investment firm BayStar Capital Mgmt testified that he made the investment after several Microsoft execs had said their co would guarantee BayStar's investment in some way. The document raises questions of whether Microsoft indirectly helped SCO pay a law firm led by David Boies. The declaration of Lawrence Goldfarb, who describes himself as BayStar's "managing member," was prepared Sept. 13 and was later filed by IBM along with a motion in the case. Mr. Goldfarb testifies that Richard Emerson, a Microsoft SVP, approached him "sometime in ‘03" about investing in SCO. Mr. Emerson, who is no longer with Microsoft, "stated that Microsoft wished to promote SCO and its pending lawsuit against IBM and the Linux OS. But Microsoft did not want to be seen as attacking IBM or Linux," Mr. Goldfarb testified.
The WSJ reports thah a declaration in a lawsuit between SCO Group (SCOX) and IBM (IBM) raises new questions about whether Microsoft or some of its execs indirectly assisted SCO's legal front against the Linux OS. In the sworn statement, the founder of investment firm BayStar Capital Mgmt testified that he made the investment after several Microsoft execs had said their co would guarantee BayStar's investment in some way. The document raises questions of whether Microsoft indirectly helped SCO pay a law firm led by David Boies. The declaration of Lawrence Goldfarb, who describes himself as BayStar's "managing member," was prepared Sept. 13 and was later filed by IBM along with a motion in the case. Mr. Goldfarb testifies that Richard Emerson, a Microsoft SVP, approached him "sometime in ‘03" about investing in SCO. Mr. Emerson, who is no longer with Microsoft, "stated that Microsoft wished to promote SCO and its pending lawsuit against IBM and the Linux OS. But Microsoft did not want to be seen as attacking IBM or Linux," Mr. Goldfarb testified.
Calls of Note Part 1
- Wachovia is positive on Intuitive Surgical (NASDAQ:ISRG) following Robotic Surgery Symposium. According to the firm both podium presentations and conversations with clinicians at the symposium in Chicago last week supported firm's thesis on ISRG. The symposium, which focused mainly on cardio-thoracic and general surgery, was attended by over 160 surgeons from a wide range of specialties. Many surgeons at hospitals with installed da Vinci Systems indicated that their hospitals are nearing purchases of second or third systems to support additional usage.
Adoption of da Vinci continues to build in prostatectomy (one speaker expects 40% penetration by the end of 2006, ahead of management guidance of 35%), hysterectomy (firm confirmed their market size estimate of 250,000 complex-benign and cancerous cases), and bariatric surgery (where the learning curve with da Vinci is 5 cases vs. 42 for laparoscopy). All of these procedures benefit from the extreme precision that da Vinci provides.
Hitachi's second generation robotic prototype was discussed in a presentation. This device is MRI guided with its use limited to tying knots in sutures thus far. It has just entered the regulatory approval process in Japan but remains years behind ISRG both in terms of capabilities and regulatory approval. Another competitor offers a robot-assisted catheter system but this is perhaps more complementary than competitive.
Wachovia believes that continued adoption of da Vinci in hysterectomies and bariatric surgeries will support increased system and instrument sales for the next few years. For Q3 2006, they expect ISRG to handily beat consensus revenue and EPS targets and would continue to be buyers of ISRG.
Valuation Range: $120 to $132
Notablecalls: ISRG watchers, spot anything new in the note? I sure didn't. Expect a small pop following the comments. Just because ISRG is a former mo-mo play.
Adoption of da Vinci continues to build in prostatectomy (one speaker expects 40% penetration by the end of 2006, ahead of management guidance of 35%), hysterectomy (firm confirmed their market size estimate of 250,000 complex-benign and cancerous cases), and bariatric surgery (where the learning curve with da Vinci is 5 cases vs. 42 for laparoscopy). All of these procedures benefit from the extreme precision that da Vinci provides.
Hitachi's second generation robotic prototype was discussed in a presentation. This device is MRI guided with its use limited to tying knots in sutures thus far. It has just entered the regulatory approval process in Japan but remains years behind ISRG both in terms of capabilities and regulatory approval. Another competitor offers a robot-assisted catheter system but this is perhaps more complementary than competitive.
Wachovia believes that continued adoption of da Vinci in hysterectomies and bariatric surgeries will support increased system and instrument sales for the next few years. For Q3 2006, they expect ISRG to handily beat consensus revenue and EPS targets and would continue to be buyers of ISRG.
Valuation Range: $120 to $132
Notablecalls: ISRG watchers, spot anything new in the note? I sure didn't. Expect a small pop following the comments. Just because ISRG is a former mo-mo play.
Color on rumor: Google (NASDAQ:GOOG)
Couple of firms are commenting on news that Google (NASDAQ:GOOG) is in active talks to acquire YouTube for approx. $1.6bn.
- Merrill Lynch notes YouTube has 46% of user visits to online video sites (100mn videos a day), versus 11% for Google (per Hitwise). Google/YouTube would have a strong user position in the rapidly growing video advertising market, expected to reach $640mn in 2007 and grow to $1.5bn by 2009 (per eMarketer). Ownership of video traffic would help Google capture a bigger portion of advertising revenues from video content distribution deals (Viacom deal signed early Aug.), although content owners would still likely keep the majority.
Firm would view acquisition as positive on 3 of the 4 components of their acquisition evaluation criteria, including: 1) fit with core business (Google's ad network could help fill video ad space), 2) management experience in new business (Google has a large and growing video site) and 3) growth opportunity (video is the second biggest Internet advertising growth driver behind local, in ML's view).
Assuming a $1.6bn acquisition value, a 20% share of the 2009 video ad market for YouTube, 30% operating margins for video and a 30% tax rate, the firm estimates that Google would
be paying 25x potential 2009 net income.
Much of the content on YouTube is free, and many video clips are copyrighted material from traditional media companies. Google could be responsible for filtering out copyrighted material or negotiating revenue sharing partnerships with the owners before aggressively monetizing YouTube. On a positive note, the large YouTube user base could help Google sign new content partnerships.
Maintains Buy on GOOG
- Citigroup thinks the most releveant dpoints re: YouTube: 1) it currently ranks as the 17th most visited Website in the world; 2) its videos are viewed 100mm+ times daily; 3) its biz model is entirely based on advertising, and new advertisers include Cingular, Nestle & American Express; & 4) it is reportedly close to break-even.
Were the deal to take place, the negatives for GOOG: 1) It would be a radical departure from its M&A strategy, which has been almost exclusively based on tuck-in technology deals; 2) Per firm's 08/18 Internet M&A report, the $1.6B would also be almost equal to GOOG's entire M&A spend to date; & 3) It would acknowledge that Google Video has failed to gain sufficient traction.
The clear positive for GOOG -- synergies between the world's 3rd largest user generated content site and arguably one of the world's largest and most scalable advertising/computer networks could be enormous.
Notablecalls: I guess it would be positive for GOOG if they bought YouTube. After all, $1.6 bln is just peanuts for the co. And the service YouTube offers is phat. I know I have lost myself there for hours at a time. The only problem I see with this merger is that in order for GOOG to monetize the thing, they need to apply some pretty harsh censorship. And that could kill the whole concept.
- Merrill Lynch notes YouTube has 46% of user visits to online video sites (100mn videos a day), versus 11% for Google (per Hitwise). Google/YouTube would have a strong user position in the rapidly growing video advertising market, expected to reach $640mn in 2007 and grow to $1.5bn by 2009 (per eMarketer). Ownership of video traffic would help Google capture a bigger portion of advertising revenues from video content distribution deals (Viacom deal signed early Aug.), although content owners would still likely keep the majority.
Firm would view acquisition as positive on 3 of the 4 components of their acquisition evaluation criteria, including: 1) fit with core business (Google's ad network could help fill video ad space), 2) management experience in new business (Google has a large and growing video site) and 3) growth opportunity (video is the second biggest Internet advertising growth driver behind local, in ML's view).
Assuming a $1.6bn acquisition value, a 20% share of the 2009 video ad market for YouTube, 30% operating margins for video and a 30% tax rate, the firm estimates that Google would
be paying 25x potential 2009 net income.
Much of the content on YouTube is free, and many video clips are copyrighted material from traditional media companies. Google could be responsible for filtering out copyrighted material or negotiating revenue sharing partnerships with the owners before aggressively monetizing YouTube. On a positive note, the large YouTube user base could help Google sign new content partnerships.
Maintains Buy on GOOG
- Citigroup thinks the most releveant dpoints re: YouTube: 1) it currently ranks as the 17th most visited Website in the world; 2) its videos are viewed 100mm+ times daily; 3) its biz model is entirely based on advertising, and new advertisers include Cingular, Nestle & American Express; & 4) it is reportedly close to break-even.
Were the deal to take place, the negatives for GOOG: 1) It would be a radical departure from its M&A strategy, which has been almost exclusively based on tuck-in technology deals; 2) Per firm's 08/18 Internet M&A report, the $1.6B would also be almost equal to GOOG's entire M&A spend to date; & 3) It would acknowledge that Google Video has failed to gain sufficient traction.
The clear positive for GOOG -- synergies between the world's 3rd largest user generated content site and arguably one of the world's largest and most scalable advertising/computer networks could be enormous.
Notablecalls: I guess it would be positive for GOOG if they bought YouTube. After all, $1.6 bln is just peanuts for the co. And the service YouTube offers is phat. I know I have lost myself there for hours at a time. The only problem I see with this merger is that in order for GOOG to monetize the thing, they need to apply some pretty harsh censorship. And that could kill the whole concept.
Saturday, October 07, 2006
Barron's Summary
Barron’s cover highlights Cisco (CSCO), whose CEO John Chambers at a meeting with analysts said that several mkts look ripe enough to nourish its next growth spurt: oil-rich nations looking to wire their ppl; telephone and cable providers locked in an arms race for Internet gear; corporations bundling e-mail and voice messaging on their networks and a coming flood of Internet video traffic. Anyone of these new mkts could be worth $10bn in annual sales to Cisco within 5 years. Chambers says even he is surprised by the co's early success in these new ventures. "We are winning almost all the new jump balls," he says. "We will become the leading co as the network enables all forms of communication." Since early August, the shares have risen almost 40%. Yet, at 18.8x next year's estd earnings, the stock sports a lower P/E multiple than most other networking shares. As sales and profits begin to flow from new customers and new mkts, Wall St. is likely to raise its stock-price tgts. A number of analysts think the shares easily could tack on another 15%.
Mutual fund special report highlights several fund managers picks. Those include TGT, HD, LM, AB, MMM, VZ, T, BLS, VE, CSCO, CCL, IGT, C, WMT, TOT, ADBE, ERTS, ORCL, HDB, BBV, TELN and LFC.
According to the Barron’s, Sotheby's (BID) shares have soared more than 85% this year, to $34. But, with plenty of life left in the art mkt, they could hit $40. They're cheap compared with stocks of other luxury firms.
Bargain hunters should firmly resist the online-gambling stocks, despite recent declines of about 60%. One could lose an arm trying to catch these falling knives. Stocks particulary mentioned include partyGaming, SportingBet, Neteller, FireOne and CryptoLogic (CRYP).
The shares of Western Union (WU) are off to a slow start, hurt by a clouded outlook for money transfers over the Mexican border. But patient investors could well enjoy a stock climb of 14% or more.
“Follow Up” section highlights American Real Estate Partners (ACP), saying that billionaire Carl Icahn continues to deliver for shareholders of the co. Icahn's forte is buying undervalued assets, often in bankruptcy, and then selling them when business conditions improve. Investors have done well to ride with Icahn. The stock is up 5-fold in the past 3 years. ACP may reap additional profits as Icahn capitalizes on new opportunities, but the shares aren't cheap anymore.
Mutual fund special report highlights several fund managers picks. Those include TGT, HD, LM, AB, MMM, VZ, T, BLS, VE, CSCO, CCL, IGT, C, WMT, TOT, ADBE, ERTS, ORCL, HDB, BBV, TELN and LFC.
According to the Barron’s, Sotheby's (BID) shares have soared more than 85% this year, to $34. But, with plenty of life left in the art mkt, they could hit $40. They're cheap compared with stocks of other luxury firms.
Bargain hunters should firmly resist the online-gambling stocks, despite recent declines of about 60%. One could lose an arm trying to catch these falling knives. Stocks particulary mentioned include partyGaming, SportingBet, Neteller, FireOne and CryptoLogic (CRYP).
The shares of Western Union (WU) are off to a slow start, hurt by a clouded outlook for money transfers over the Mexican border. But patient investors could well enjoy a stock climb of 14% or more.
“Follow Up” section highlights American Real Estate Partners (ACP), saying that billionaire Carl Icahn continues to deliver for shareholders of the co. Icahn's forte is buying undervalued assets, often in bankruptcy, and then selling them when business conditions improve. Investors have done well to ride with Icahn. The stock is up 5-fold in the past 3 years. ACP may reap additional profits as Icahn capitalizes on new opportunities, but the shares aren't cheap anymore.
Friday, October 06, 2006
Calls of Note Part 5
BofA notes that at the EADV meeting in Rhodes, Greece, Abbott (NYSE:ABT) presented impressive Ph III psoriasis (PsO) data from its international CHAMPION trial. Humira's PASI 75 (75% improvement from baseline), at 4 months, was statistically significant to both methotrexate (MTX) and placebo.
Although the Humira efficacy is impressive, the placebo rate is much higher than expected. Firm believes the net PASI 75, allows a better comparison. Additionally, CHAMPION didn't allow dose escalation of MTX if patients reached a PASI 50 and the curve for MTX still seemed to be increasing at 4 months, which they believe could overestimate the benefit to MTX. Compared to Enbrel's Ph III PsO data (approved for PsO in 2003), however, Humira still looks to have better short-term clearance. Humira tolerability also looked relatively clean.
Based on IMS monthly data, 3Q06 looks light for Amgen's (NASDAQ:AMGN) Enbrel and firm thinks that Humira's PsO data could gain some incremental market share (5%) among the early dermatology adopters in 2006, but will not meaningfully impact Enbrel's market share until Humira is FDA approved for PsO. Firms feel the biggest hurdle for Humira will be reimbursement, which should improve after approval (likely in 2H07).
Firm is positive on AMGN over the long term and believes AMGN represents the best value opportunity in large-cap biotech (~17x P/E) as much of the CERA risk appears priced in.
Notablecalls: Not actionable but good to know category.
Although the Humira efficacy is impressive, the placebo rate is much higher than expected. Firm believes the net PASI 75, allows a better comparison. Additionally, CHAMPION didn't allow dose escalation of MTX if patients reached a PASI 50 and the curve for MTX still seemed to be increasing at 4 months, which they believe could overestimate the benefit to MTX. Compared to Enbrel's Ph III PsO data (approved for PsO in 2003), however, Humira still looks to have better short-term clearance. Humira tolerability also looked relatively clean.
Based on IMS monthly data, 3Q06 looks light for Amgen's (NASDAQ:AMGN) Enbrel and firm thinks that Humira's PsO data could gain some incremental market share (5%) among the early dermatology adopters in 2006, but will not meaningfully impact Enbrel's market share until Humira is FDA approved for PsO. Firms feel the biggest hurdle for Humira will be reimbursement, which should improve after approval (likely in 2H07).
Firm is positive on AMGN over the long term and believes AMGN represents the best value opportunity in large-cap biotech (~17x P/E) as much of the CERA risk appears priced in.
Notablecalls: Not actionable but good to know category.
Calls of Note Part 4
Piper Jaffray raising estimates and price tgt on Polycom (NADSAQ:PLCM) on strong demand in voice and video. Firm believes Polycom closed out a solid quarter with strong demand for video endpoints and IP phones more than offsetting modestly disappointing Federal and Network Infrastructure demand. Firm's checks with video conferencing distributors and value-added resellers revealed surprisingly favorable results in North America (56% of sales in Q2) and most of their contacts were also upbeat with respect to Q4 demand.
Given the favorable feedback firm picked up from their channel contacts, they believe Polycom will be able to exceed Q3 consensus revenue and EPS estimates, grow backlog on a sequential basis and guide above the current consensus estimates for Q4.
Firm believes Polycom will be introducing a High Definition video conferencing system within the next month and feedback regarding the quality of this new system has been exceptionally good. They also believe Polycom will be introducing a new IP only MCU relatively soon and anticipate this new video bridge will help the company regain growth in its infrastructure business. Firm anticipates these two new products and the recently introduced HD phones and Skype certified speaker phone will gain traction in 2007 and could provide an incremental boost to the company's growth rate.
Notablecalls: Beat and raise sounds good, but that's what the mkt is expecting from Polycom. Not actionable, but good to know.
Given the favorable feedback firm picked up from their channel contacts, they believe Polycom will be able to exceed Q3 consensus revenue and EPS estimates, grow backlog on a sequential basis and guide above the current consensus estimates for Q4.
Firm believes Polycom will be introducing a High Definition video conferencing system within the next month and feedback regarding the quality of this new system has been exceptionally good. They also believe Polycom will be introducing a new IP only MCU relatively soon and anticipate this new video bridge will help the company regain growth in its infrastructure business. Firm anticipates these two new products and the recently introduced HD phones and Skype certified speaker phone will gain traction in 2007 and could provide an incremental boost to the company's growth rate.
Notablecalls: Beat and raise sounds good, but that's what the mkt is expecting from Polycom. Not actionable, but good to know.
Calls of Note Part 3
Deutsche Bank notes that as expected, Starbucks' (NASDAQ:SBUX) upbeat analyst day saw the company raise its long-term stores target, with the target increased from 30k to 40k (20k each in US/non-US) from the current 12.4k stores. Extensive discussion was also focused on new products (hot food to be rolled out to 6.5k US stores through 2008, vending machines, iTunes alliance) and international expansion plans (focusing on China, Brazil, India, Russia, Egypt).
SBUX reaffirmed '06 & '07 guidance metrics, including store growth (2.4k in 2007), comps growth (3-7%), EPS ($0.72-0.73 for '06 and $0.87-0.89 for '07) and capex ($950-1bn '07). LT targets over the next 3-5 years were reaffirmed at 20% annual rev. growth and 20-25% EPS growth. Firm maintains their EPS estimates ($0.73 '06 and $0.90 '07) and LT growth projections (21% EPS CAGR from 2006-10).
As firm had expected, SBUX also announced the end of its monthly comps reports. Firm views this constructively, as they continue to believe it will reduce share price volatility around the report dates and enhance focus on LT performance, eliminating a report with little relevance to valuation.
Following the strong share price performance during Thursday's meeting, we could see a short-term pull-back on elimination of monthly comps. Firm would view any related material weakness as possibly creating attractive entry points.
Notablecalls: Out of several (positive) notes on Starbucks I chose Deutsche's as they had been right in their preview and they seem to be the only ones with something else to say other than praise for the company. With the stock just below the 52-week highs, I dont think the market is going to be as "constructive" on elimination of monthly comps announcements as Deutsche is. Looking for a pullback after $5 run in two days.
SBUX reaffirmed '06 & '07 guidance metrics, including store growth (2.4k in 2007), comps growth (3-7%), EPS ($0.72-0.73 for '06 and $0.87-0.89 for '07) and capex ($950-1bn '07). LT targets over the next 3-5 years were reaffirmed at 20% annual rev. growth and 20-25% EPS growth. Firm maintains their EPS estimates ($0.73 '06 and $0.90 '07) and LT growth projections (21% EPS CAGR from 2006-10).
As firm had expected, SBUX also announced the end of its monthly comps reports. Firm views this constructively, as they continue to believe it will reduce share price volatility around the report dates and enhance focus on LT performance, eliminating a report with little relevance to valuation.
Following the strong share price performance during Thursday's meeting, we could see a short-term pull-back on elimination of monthly comps. Firm would view any related material weakness as possibly creating attractive entry points.
Notablecalls: Out of several (positive) notes on Starbucks I chose Deutsche's as they had been right in their preview and they seem to be the only ones with something else to say other than praise for the company. With the stock just below the 52-week highs, I dont think the market is going to be as "constructive" on elimination of monthly comps announcements as Deutsche is. Looking for a pullback after $5 run in two days.
Calls of Note Part 2
JP Morgan is trimming estimates on analog/mixed-signal companies on weaker than expected September quarter bookings. Elevated inventory levels, concerns over end demand and a lower-end mix have yielded lower orders, in their opinion. Firm now expects a below seasonal December quarter for the industry.
Computing and consumer markets are likely to suffer the most on an inventory correction while industrial markets should experience seasonal softness.
Firm expects International Rectifier (NYSE:IRF) to meet their and consensus 1Q07 estimates. Looking ahead to 2Q07 (Dec), firm is lowering their estimates from $358M/$0.56 to $348M/$0.52 compared to consensus estimates of $356M/$0.54. Driving their 2% Q/Q revenue growth estimate, which is below normal seasonality of 3-4%, is the delay in Sony's PS3 launch, cooling off in aerospace and defense, and auto slowdown.
Firm expects Maxim Integrated (NASDAQ:MXIM) to meet their 1Q estimates which is roughly in-line with street. Looking forward to 2Q07, they are trimming their estimates from $520M/$0.36 to $510M/$0.35 versus consensus of $514M/$0.35. Firm believes inventory and order mix mismatch will be corrected in 4Q barring unexpected cancellations, resulting in pushout of the missed Sept quarter sales to Dec quarter.
For Intersil (NASDAQ:ISIL) firm is trimming their 3Q estimates from $195M/$0.26 to $193M/$0.25. Looking ahead to 4Q, firm is again trimming estimates (inc. options) from $200M/$0.27 to $195M/$0.26 (EPS excluding options is $0.32) compared to consensus at $203M/$0.34. They are modeling a modest 1% sequential growth versus normal seasonality of 4-5% on seasonal strength in consumer, offset by inventory correction in optical, DSL, and displays.
Firm expects Linear Technology (NASDAQ:LLTC) to meet their and consensus 1Q07 estimates of $293M/$0.37 on seasonal strength in computing, offset by weakness in communication and seasonal softness in industrial. Looking forward to 2Q (Dec), they are trimming estimates from $305M/$0.39 to $295M/$0.37, virtually flat Q/Q compared to 4-5% seasonal growth. Consensus estimates are $303M/$0.38. Driving their estimates is their expectation of seasonal improvements in consumer and computing markets, offset by continued weakness in communication, and slightly lower GM at 78% on mix change.
Notablecalls: Yet another rock thrown at the semi space. Combined with lousy results from Micron, would not be surprised to see weakness in aforementioned companies and in broader semi space.
Computing and consumer markets are likely to suffer the most on an inventory correction while industrial markets should experience seasonal softness.
Firm expects International Rectifier (NYSE:IRF) to meet their and consensus 1Q07 estimates. Looking ahead to 2Q07 (Dec), firm is lowering their estimates from $358M/$0.56 to $348M/$0.52 compared to consensus estimates of $356M/$0.54. Driving their 2% Q/Q revenue growth estimate, which is below normal seasonality of 3-4%, is the delay in Sony's PS3 launch, cooling off in aerospace and defense, and auto slowdown.
Firm expects Maxim Integrated (NASDAQ:MXIM) to meet their 1Q estimates which is roughly in-line with street. Looking forward to 2Q07, they are trimming their estimates from $520M/$0.36 to $510M/$0.35 versus consensus of $514M/$0.35. Firm believes inventory and order mix mismatch will be corrected in 4Q barring unexpected cancellations, resulting in pushout of the missed Sept quarter sales to Dec quarter.
For Intersil (NASDAQ:ISIL) firm is trimming their 3Q estimates from $195M/$0.26 to $193M/$0.25. Looking ahead to 4Q, firm is again trimming estimates (inc. options) from $200M/$0.27 to $195M/$0.26 (EPS excluding options is $0.32) compared to consensus at $203M/$0.34. They are modeling a modest 1% sequential growth versus normal seasonality of 4-5% on seasonal strength in consumer, offset by inventory correction in optical, DSL, and displays.
Firm expects Linear Technology (NASDAQ:LLTC) to meet their and consensus 1Q07 estimates of $293M/$0.37 on seasonal strength in computing, offset by weakness in communication and seasonal softness in industrial. Looking forward to 2Q (Dec), they are trimming estimates from $305M/$0.39 to $295M/$0.37, virtually flat Q/Q compared to 4-5% seasonal growth. Consensus estimates are $303M/$0.38. Driving their estimates is their expectation of seasonal improvements in consumer and computing markets, offset by continued weakness in communication, and slightly lower GM at 78% on mix change.
Notablecalls: Yet another rock thrown at the semi space. Combined with lousy results from Micron, would not be surprised to see weakness in aforementioned companies and in broader semi space.
Calls of Note Part 1
Citigroup out positive on Allegheny Technologies (NYSE:ATI), raising price tgt to $83 from $80, noting the company's concentration in late/non-cyclical markets, and organic growth prospects. ATI's mix of specialty alloys and fabricated products are more differentiated and defensible than exchange-traded base metals, while operating margins and visibility into 2007/08 are superior to carbon steel. In a tough cyclical environment and following a searing "rotational sector meltdown," ATI would be the first Metals stock firm would buy, and the last one they would sell.
Firm highlights following catalysts:
* Stainless steel: Demand continues to surprise. The International Stainless Steel Forum (ISSF) recently raised its 2006 global production forecast to 27.8 mln T, up +14.3% YoY, with melting capacity at nearly full utilization. This reflects a strong capital goods cycle, and heavy investment in oil & gas production/refining, chemical plants, and India/China infrastructure. While surcharge hikes have been common, reflecting higher nickel input costs, ATI notched two base price increases during the seasonally-slow summer period.
* Electrical steel: Prices, volumes are rising. ATI is seeing strong shipment growth in grain-oriented electrical steel, which is used in transformers and power distribution equipment. This is being driven by the electrification of China, plus grid upgrades in the US. ATI is targeting 20% shipment growth in 2007, from 100 kT this year. Electrical steel transaction prices are climbing, as indicated by AK Steel (AKS).
* Proprietary 2003 alloy: Displacing high-nickel austenitic steels. ATI has been taking share with its proprietary, 2003 lean duplex stainless alloy (3% nickel) in offshore oil&gas and chemical processing applications that have typically been the province of higher-nickel 316 alloys (10% nickel). This material is stronger, more corrosion resistant, and cheaper in an era of +$10/lb nickel prices. This material recently achieved qualification under the demanding NORSOK Norwegian offshore oil&gas standards for use in welded pipe & tube.
* Titanium expansion: Taking flight. ATI is expanding aggressively in Titanium sponge and mill products, which should boost shipments from 25 mln lbs in 2005 to 44 mln lbs in 2008, and above 60 mln lbs longer term. This is arguably the most attractive growth market in Metals, driven by aerospace builds, broad- based industrial penetration of light metals, and burgeoning corrosion markets. Demand is likely to run at roughly 8% long-term, while supplies remain critically tight. ATI is ramping internal sponge capacity, at aerospace grades. The Phase I expansion is running at full power with 6 sponge furnaces running. The Phase II expansion is set for 1Q/07 and Phase
III for 1Q/08, while the greenfield Utah plant is in engineering. Current expansion plans through 2008 (not including the greenfield site) could be worth as much as $1.40 to EPS, or $18/share at a 14x multiple. It is important to note that Titanium currently accounts for only 20% of revenues.
Notablecalls: The whole metals sector was very strong yesterday. In case of any signs of continued strength ATI would be my first pick as Citi is really pounding the table on the recent darling that has been trading sideways for the last months.
Firm highlights following catalysts:
* Stainless steel: Demand continues to surprise. The International Stainless Steel Forum (ISSF) recently raised its 2006 global production forecast to 27.8 mln T, up +14.3% YoY, with melting capacity at nearly full utilization. This reflects a strong capital goods cycle, and heavy investment in oil & gas production/refining, chemical plants, and India/China infrastructure. While surcharge hikes have been common, reflecting higher nickel input costs, ATI notched two base price increases during the seasonally-slow summer period.
* Electrical steel: Prices, volumes are rising. ATI is seeing strong shipment growth in grain-oriented electrical steel, which is used in transformers and power distribution equipment. This is being driven by the electrification of China, plus grid upgrades in the US. ATI is targeting 20% shipment growth in 2007, from 100 kT this year. Electrical steel transaction prices are climbing, as indicated by AK Steel (AKS).
* Proprietary 2003 alloy: Displacing high-nickel austenitic steels. ATI has been taking share with its proprietary, 2003 lean duplex stainless alloy (3% nickel) in offshore oil&gas and chemical processing applications that have typically been the province of higher-nickel 316 alloys (10% nickel). This material is stronger, more corrosion resistant, and cheaper in an era of +$10/lb nickel prices. This material recently achieved qualification under the demanding NORSOK Norwegian offshore oil&gas standards for use in welded pipe & tube.
* Titanium expansion: Taking flight. ATI is expanding aggressively in Titanium sponge and mill products, which should boost shipments from 25 mln lbs in 2005 to 44 mln lbs in 2008, and above 60 mln lbs longer term. This is arguably the most attractive growth market in Metals, driven by aerospace builds, broad- based industrial penetration of light metals, and burgeoning corrosion markets. Demand is likely to run at roughly 8% long-term, while supplies remain critically tight. ATI is ramping internal sponge capacity, at aerospace grades. The Phase I expansion is running at full power with 6 sponge furnaces running. The Phase II expansion is set for 1Q/07 and Phase
III for 1Q/08, while the greenfield Utah plant is in engineering. Current expansion plans through 2008 (not including the greenfield site) could be worth as much as $1.40 to EPS, or $18/share at a 14x multiple. It is important to note that Titanium currently accounts for only 20% of revenues.
Notablecalls: The whole metals sector was very strong yesterday. In case of any signs of continued strength ATI would be my first pick as Citi is really pounding the table on the recent darling that has been trading sideways for the last months.
Thursday, October 05, 2006
Calls of Note Part 4
- Jefferies is positive on Advanced Magnetics (NASDAQ:AMAG) after conducting a survey of 33 U.S.-based nephrologists to assess the market potential for AMAG's lead product ferumoxytol. Based on survey results, they revised their ferumoxytol revenue build.
Key survey results: 1) Survey respondents predicted higher- than-expected utilization of ferumoxytol across the key Stage 3 " 5 CKD patient populations. Surprisingly, respondents also predicted modest utilization in Stage 1 and 2 CKD - but we do not include this in our model; 2) Assuming both ferumoxytol (est. approval 1H08) and potential competitor Ferinject (est. approval 2H08/1H09) are commercialized in the U.S., nephrologists predicted higher ferumoxytol utilization vs. Ferinject across each and every stage of CKD, with significantly higher use anticipated in Stages 3 " 5.
Based on survey results, the firm is increasing their FY08 - FY10 ferumoxytol ests. to $34M, $99M and $192M from $24M, $79M, and $131M, respectively. FY08 - FY10 EPS ests. increase to ($0.95), $1.33 and $4.58 from ($1.17), $1.00 and $2.64, respectively.
Price tgt goes to $73 from $42.
Notablecalls: That's a hefty tgt raise. Expect AMAG to see some real buy interest following the comments. But do note the drug in question is still in Phase 3 trials. Were these to disappoint.... Just don't overstay your welcome. The data will be announced in Q406 or Q107.
Key survey results: 1) Survey respondents predicted higher- than-expected utilization of ferumoxytol across the key Stage 3 " 5 CKD patient populations. Surprisingly, respondents also predicted modest utilization in Stage 1 and 2 CKD - but we do not include this in our model; 2) Assuming both ferumoxytol (est. approval 1H08) and potential competitor Ferinject (est. approval 2H08/1H09) are commercialized in the U.S., nephrologists predicted higher ferumoxytol utilization vs. Ferinject across each and every stage of CKD, with significantly higher use anticipated in Stages 3 " 5.
Based on survey results, the firm is increasing their FY08 - FY10 ferumoxytol ests. to $34M, $99M and $192M from $24M, $79M, and $131M, respectively. FY08 - FY10 EPS ests. increase to ($0.95), $1.33 and $4.58 from ($1.17), $1.00 and $2.64, respectively.
Price tgt goes to $73 from $42.
Notablecalls: That's a hefty tgt raise. Expect AMAG to see some real buy interest following the comments. But do note the drug in question is still in Phase 3 trials. Were these to disappoint.... Just don't overstay your welcome. The data will be announced in Q406 or Q107.
Calls of Note Part 3
- Banc of America thinks Emmis Communications' (NASDAQ:EMMS) results scheduled for Oct 10 will be ugly. Thats's what they are saying right in the title.
Domestic radio revenue likely will be well short of their $72M estimate on key market weakness and recent programming changes. Firm projects EMMS' domestic radio revenue to decline 5% in FY2Q07. However, they believe that domestic radio revenue could be down as much as 10% YoY. EMMS' 3 largest markets (accounting for ~71% of domestic radio revenue) were down ~4% in the June-August time frame. AND the company underperformed its markets by nearly 500bp in FY1Q07 due to continued ratings weakness in L.A. and NYC. Overall ratings share declines continued in Arbitron's Spring '06 book (down 6%), and the recent format flip (8/17) at KZLA-FM could add downward pressure on revenue growth in FY2Q07 and FY3Q07.
Despite the likelihood that Emmis remains a public entity, they don't expect management to resume its normal practice of providing revenue guidance. They remain cautious on the stock as EMMS is levering up in the face of weak fundamentals. Leverage PF for the special dividend will be ~6.5x. And they expect YoY revenue declines to continue through the balance of FY07.
Maintains Neutral and $13 tgt.
Notablecalls: I don't dare to call this one actionable. But I wouldn't want to be long the common into earnings either.
Domestic radio revenue likely will be well short of their $72M estimate on key market weakness and recent programming changes. Firm projects EMMS' domestic radio revenue to decline 5% in FY2Q07. However, they believe that domestic radio revenue could be down as much as 10% YoY. EMMS' 3 largest markets (accounting for ~71% of domestic radio revenue) were down ~4% in the June-August time frame. AND the company underperformed its markets by nearly 500bp in FY1Q07 due to continued ratings weakness in L.A. and NYC. Overall ratings share declines continued in Arbitron's Spring '06 book (down 6%), and the recent format flip (8/17) at KZLA-FM could add downward pressure on revenue growth in FY2Q07 and FY3Q07.
Despite the likelihood that Emmis remains a public entity, they don't expect management to resume its normal practice of providing revenue guidance. They remain cautious on the stock as EMMS is levering up in the face of weak fundamentals. Leverage PF for the special dividend will be ~6.5x. And they expect YoY revenue declines to continue through the balance of FY07.
Maintains Neutral and $13 tgt.
Notablecalls: I don't dare to call this one actionable. But I wouldn't want to be long the common into earnings either.
Paperstand
The WSJ’s „Heard on the Street” column discusses Ford (F), saying that as the co attempts another turnaround, one item drawing particular scrutiny is the auto maker's tightening cash situation, which has already forced the co to eliminate its dividend and could prompt asset sales or other moves in the near future. Ford is starting its latest restructuring with a sizable cash cushion, roughly $23bn, down from $25bn at the start of ‘06 and will likely keep declining for the rest of this year and next. Analysts and ratings firms say the cost of shrinking Ford is growing as the auto maker ponies up severance packages, early-retirement offers and buyout plans in an attempt to eliminate about 44K workers. Ford CFO Don Leclair says the co's gross auto cash position will drop by year's end to about $20bn. The restructuring costs, combined with massive vehicle-production cuts and expected and ever-increasing quarterly losses, will keep eating away at Ford's cash, making asset sales of brands like Jaguar or Land Rover, or even Ford Motor Credit, more inevitable, say analysts. "In going through a turnaround like this, it is clear Ford will consume a lot of cash in ‘06 and ‘07. They will use a lot of cash before the plan kicks in," said Bruce Clark, senior vice president at Moody's Investors Service. "Well, if it doesn't begin to take, they will still be burning cash, and if they need another one of these, they won't have the financial cushion any longer. They simply have to get it right this time," Mr. Clark said.
Barron’s Online discusses Carnival (CCL), whose stock is up nearly 33% from a 52w low in June. The stock has been bid up by investors attracted by a low valuation, the recent drop in oil prices and a relatively uneventful hurricane season. Certainly, Carnival and its stock still face possible headwinds with talk of a slowing US economy that some analysts fear could turn into a recession next year. Yet with profits set to start climbing again in ‘07, the stock still has room to travel. "Anyone with a 12-24 month horizon can make money," says Chris Scheuer, senior analyst with Thrivent Investment Mgmt, citing Carnival's predictable top-line growth, attractive margins and good ROIC. "Carnival is also buying back stock and raising its dividend," Scheuer says. "And that's a nice combination." Adds Tim Fidler, of Ariel Capital Mgmt, "This is a world class co with a low valuation."
“Inside Scoop” section reports that three Goldman Sachs (GS) insiders including its CFO, have started taking profits from the stock in recent weeks as it climbed to new all-time highs. Goldman CFO David A. Viniar, EVP Kevin W. Kennedy, and James Johnson, a director, have sold a total of $17.7m in stock since Sept. 13. Ben Silverman, of InsiderScore.com, says that insiders have been accurate in spotting short-term price retrenchments in Goldman Sachs' share price with their past sells.
Calls of Note Part 2
- JP Morgan notes their checks indicate orders for Texas Instruments' (NYSE:TXN) analog business (37% of 2Q06 sales) have declined recently due to a reduction in lead times and excess inventory, resulting in a book to bill below 1.0 for the first time since the last inventory correction in 2004.
They believe most of the reduction in bookings is for TI's analog business due to an inventory correction, with some reduction in bookings from the wireless end market due to share loss in Japan to Renesas. They do not believe the push-outs are company specific as recently several TI competitors such as Maxim, National Semiconductor and Microchip have negatively pre-announced and/or reported declines in bookings.
Firm notes they been Neutral on TXN stock due to concern that the company's extended lead times earlier in the year might lead to double ordering and an inventory correction, and it appears their fears are becoming realized.
They would note the previous inventory correction led to a roughly 20% reduction in TI's estimates. As a result, they expect the company's revenue and gross margins to be below normal seasonality for the next two quarters.
Due to the declining book to bill, the firm is lowering their C06 revenue and EPS estimates from $14.6 billion and $1.71 to $14.5 billion and $1.67. They are also lowering C07 revenue and EPS estimates from $15.8 billion and $1.88 to $15.1 billion and $1.79.
Notablecalls: TXN is the canary in the Semi mine. Consensus estimates are still way too high and have to be taken down. Think the stock (and the whole Semi space) is going to be lower in couple of months.
They believe most of the reduction in bookings is for TI's analog business due to an inventory correction, with some reduction in bookings from the wireless end market due to share loss in Japan to Renesas. They do not believe the push-outs are company specific as recently several TI competitors such as Maxim, National Semiconductor and Microchip have negatively pre-announced and/or reported declines in bookings.
Firm notes they been Neutral on TXN stock due to concern that the company's extended lead times earlier in the year might lead to double ordering and an inventory correction, and it appears their fears are becoming realized.
They would note the previous inventory correction led to a roughly 20% reduction in TI's estimates. As a result, they expect the company's revenue and gross margins to be below normal seasonality for the next two quarters.
Due to the declining book to bill, the firm is lowering their C06 revenue and EPS estimates from $14.6 billion and $1.71 to $14.5 billion and $1.67. They are also lowering C07 revenue and EPS estimates from $15.8 billion and $1.88 to $15.1 billion and $1.79.
Notablecalls: TXN is the canary in the Semi mine. Consensus estimates are still way too high and have to be taken down. Think the stock (and the whole Semi space) is going to be lower in couple of months.
Calls of Note Part 1
- Banc of America i previewing Apple (NASDAQ:AAPL) noting that ar this point, they believe that Sept iPod units will be around 8 million, helped by sell in of new products. Firm is at 8.4 million. They believe that CPUs will be approx 1.5 million units, whereas they are currently at 1.4 million units. MacBooks remain the key driver of unit growth in CPUs. Net, the firm sees upside to Street estimates by over $100 million in revs and some modest EPS upside, for the Sept Q. It is unclear what type of disclosure Apple will give below revs for the Sept Q, given its pending options issue. For the Dec quarter, they believe that Apple can deliver 1.5 million to 1.6 million CPUs (we are 1.4) and approx 15 million iPods (we are 15.8), with some tension to the downside. Firm believes that Street estimates are achievable for the Dec quarter, but do not offer much upside. They believe that guidance will likely fall below Street estimates for Dec, if Apple provides guidance, given its pending option issue. They do not see any additional product launches until Jan.
- Prudential is initiating coverage of Apple Computer this AM with a Neutral Weight rating and a $74 price target, based on a 25x multiple on FY'08 EPS estimate of $2.97.
Forecasting Apple to grow its Mac share from ~2.5% to ~4% over the next two years. Near-term catalysts include: 1) the new product ramp based on Intel architecture, 2) recent iMac price cuts, and 3) the potential for an expanded relationship with Best Buy and Circuit City.
Firm's checks indicate Apple has plans for a cellular phone in the near future. We estimate that every 1 point of share in this market represents $0.20-$0.30 of earnings power for the company. However, they are concerned that the combination of a slowing media player market and increased competition from Microsoft adds risk to Apple's iPod margin and market share.
They see risk/reward balanced at current price levels and will remain on the sidelines until they get better visibility into the competitive dynamics of the media player space and/or into new product ramps.
Notablecalls: These two comments appear neutral-to-negative to me. AAPL possibly guiding down for Q4? Hmmm! Also, Prudential notes they are concerned about the combination of a slowing media player market and increased competition from Microsoft.
- Prudential is initiating coverage of Apple Computer this AM with a Neutral Weight rating and a $74 price target, based on a 25x multiple on FY'08 EPS estimate of $2.97.
Forecasting Apple to grow its Mac share from ~2.5% to ~4% over the next two years. Near-term catalysts include: 1) the new product ramp based on Intel architecture, 2) recent iMac price cuts, and 3) the potential for an expanded relationship with Best Buy and Circuit City.
Firm's checks indicate Apple has plans for a cellular phone in the near future. We estimate that every 1 point of share in this market represents $0.20-$0.30 of earnings power for the company. However, they are concerned that the combination of a slowing media player market and increased competition from Microsoft adds risk to Apple's iPod margin and market share.
They see risk/reward balanced at current price levels and will remain on the sidelines until they get better visibility into the competitive dynamics of the media player space and/or into new product ramps.
Notablecalls: These two comments appear neutral-to-negative to me. AAPL possibly guiding down for Q4? Hmmm! Also, Prudential notes they are concerned about the combination of a slowing media player market and increased competition from Microsoft.
Color on options investigation: Apple Computer (NASDAQ:AAPL)
Several firms are commenting on Apple Computer (NASDAQ:AAPL) after the co said on Wednesday an internal investigation found irregularities with its past stock option grants, prompting the immediate resignation of a former chief financial officer from the board of directors. The company also said Chief Executive Steve Jobs was aware of some of the stock option grants, but he did not benefit from those grants and was unaware of the accounting implications:
- Goldman Sachs thinks the results of Apple's independent investigation of its stock options grants removes the largest overhang by clearing current management of any misconduct. Theannouncement does not change firm's positive view on Apple's fundamentals but it does give them greater confidence that non-operational issues will not negatively impact the stock. They also believe this removes the potential that Apple would need to delay its earnings report, scheduled for October 18, due to the inquiry. Firm's estimates and price target are unchanged.
- UBS notes that while the SEC has not opened its own formal investigation, they believe the financial impact on Apple will be minimal. Apple continues to believe it is likely that it will need to restate historical financials for non-cash charges, but the review indicates no evidence of irregularities after a January 2002 grant in question.
While CEO Steve Jobs was aware of some favorable grant dates, he did not receive or benefit from these grants. It seems that he was likely unaware of the accounting implications (deduced from Apple's disclosures). While we may hear a bit more about this issue in the news, the firm continues to operate under the view that Jobs is on solid ground based on the current facts. Maintains Buy and $92 tgt.
Notablecalls: Looks like a non-event to me.
- Goldman Sachs thinks the results of Apple's independent investigation of its stock options grants removes the largest overhang by clearing current management of any misconduct. Theannouncement does not change firm's positive view on Apple's fundamentals but it does give them greater confidence that non-operational issues will not negatively impact the stock. They also believe this removes the potential that Apple would need to delay its earnings report, scheduled for October 18, due to the inquiry. Firm's estimates and price target are unchanged.
- UBS notes that while the SEC has not opened its own formal investigation, they believe the financial impact on Apple will be minimal. Apple continues to believe it is likely that it will need to restate historical financials for non-cash charges, but the review indicates no evidence of irregularities after a January 2002 grant in question.
While CEO Steve Jobs was aware of some favorable grant dates, he did not receive or benefit from these grants. It seems that he was likely unaware of the accounting implications (deduced from Apple's disclosures). While we may hear a bit more about this issue in the news, the firm continues to operate under the view that Jobs is on solid ground based on the current facts. Maintains Buy and $92 tgt.
Notablecalls: Looks like a non-event to me.
Wednesday, October 04, 2006
Calls of Note Part 4
- JP Morgan notes they have been Neutral on Altera (NASDAQ:ALTR) stock due to concern that Altera's extended lead times earlier in the year might have led to double ordering, and it appears their fears are becoming realized. Firm also expects flattish sequential revenue growth for 4Q06
While their checks indicate the company experienced strong bookings in 3Q06 from the consumer and computing end markets (combined 23% of 2Q06 revenue), they believe the company experienced sluggish bookings in its communications and industrial segments (combined 77% of 2Q06 revenue).
As a result, the firm is lowering C06 revenue and EPS estimates from $1.31 billion and $0.78 to $1.30 billion and $0.76. They are also lowering C07 revenue and EPS estimates from $1.50 billion and $1.01 to $1.46 billion and $0.96.
ALTR is trading at 19X new C07 EPS estimate of $0.96, the low end of its historic range of 20X-35X EPS. Maintains Neutral.
Notablecalls: Not actionable but good to know category.
While their checks indicate the company experienced strong bookings in 3Q06 from the consumer and computing end markets (combined 23% of 2Q06 revenue), they believe the company experienced sluggish bookings in its communications and industrial segments (combined 77% of 2Q06 revenue).
As a result, the firm is lowering C06 revenue and EPS estimates from $1.31 billion and $0.78 to $1.30 billion and $0.76. They are also lowering C07 revenue and EPS estimates from $1.50 billion and $1.01 to $1.46 billion and $0.96.
ALTR is trading at 19X new C07 EPS estimate of $0.96, the low end of its historic range of 20X-35X EPS. Maintains Neutral.
Notablecalls: Not actionable but good to know category.
Calls of Note Part 3
- Piper Jaffray is cautious on Intersil (NASDAQ:ISIL) noting that over the past several months, there has been a growing cloud of uncertainty surrounding the PC and related markets (e.g., optical storage). While they believe 3Q06 revenue guidance could be intact, they are increasingly concerned about revenue projections for 4Q06. Although the firm recognizes that PC demand has recovered somewhat from depressed levels in 2Q06, they believe PC/Optical Storage demand could be less than seasonal, especially in 4Q06 due to the Vista delay and shift in consumer spending from PC-related products toward FPTVs/DSCs/PMPs.
Intermediate term, they believe Intersil's focus markets could become more competitive, especially notebooks. Based on recent analysis and checks into the global power management market, the firm believes the design cycle for 2007 notebooks has become more competitive with traditionally dominant players like Maxim and Intersil now facing incremental competition from Texas Instruments and Richtek.
Given NT concerns, the firm is lowering their 4Q06 revenue growth estimate from 6% Q/Q to 3% Q/Q ($206.8MM to $201.0MM) and non-GAAP EPS from $0.34 to $0.32. They are also lowering oCY06 and CY07 non-GAAP EPS estimates from $1.23 to $1.22 and $1.45 to $1.29, respectively.
Target goes to $25 from $29. Maintains Mkt Perform.
Notablecalls: Expect to see further weakness in ISIL today. I'm betting about 1 pt.
Intermediate term, they believe Intersil's focus markets could become more competitive, especially notebooks. Based on recent analysis and checks into the global power management market, the firm believes the design cycle for 2007 notebooks has become more competitive with traditionally dominant players like Maxim and Intersil now facing incremental competition from Texas Instruments and Richtek.
Given NT concerns, the firm is lowering their 4Q06 revenue growth estimate from 6% Q/Q to 3% Q/Q ($206.8MM to $201.0MM) and non-GAAP EPS from $0.34 to $0.32. They are also lowering oCY06 and CY07 non-GAAP EPS estimates from $1.23 to $1.22 and $1.45 to $1.29, respectively.
Target goes to $25 from $29. Maintains Mkt Perform.
Notablecalls: Expect to see further weakness in ISIL today. I'm betting about 1 pt.
Calls of Note Part 2
- Merrill Lynch is out with a curious little note on Genentech (NYSE:DNA) saying NDC, a third-party prescription data provider, restated Avastin, Herceptin, and Rituxan sales data to significantly below that which was previously reported by NDC for April through August 2006. If the new data are correct then Genentech's cancer drugs could meaningfully miss consensus and firm's estimates in 3Q. However, the firm cannot identify a fundamental reason for such substantial weakness even with two fewer selling days in 3Q, which will hurt sales by only 4%. Thus, while they now believe there is a greater chance for sales weakness in 3Q, they believe the NDC data may be overstating the downside risk to sales estimates.
ML estimates there is one fewer selling day in 3Q06 as compared to 2Q06. In addition, because of changes to Genentech's distribution network, the company has stated that there will be another lost selling day. Thus, with 49 total selling days in 3Q06 vs. 51 in 2Q06, they estimate a 4% effect on sales, which would not be enough to explain a miss of the magnitude suggested by the revised NDC data.
They await further clarity and reiterate Buy rating.
Notablecalls: There are severals firms out there today with positive comments on DNA. I do think this note from ML outweighs them all. Think we will see some weakness in DNA today.
ML estimates there is one fewer selling day in 3Q06 as compared to 2Q06. In addition, because of changes to Genentech's distribution network, the company has stated that there will be another lost selling day. Thus, with 49 total selling days in 3Q06 vs. 51 in 2Q06, they estimate a 4% effect on sales, which would not be enough to explain a miss of the magnitude suggested by the revised NDC data.
They await further clarity and reiterate Buy rating.
Notablecalls: There are severals firms out there today with positive comments on DNA. I do think this note from ML outweighs them all. Think we will see some weakness in DNA today.
Calls of Note Part 1
- Keefe, Bruyette & Woods' Lauren Smith is adjusting her mid-cap broker estimates in front of 3Q earnings. Biggest downward changes to 3Q are for COWN/ TWPG due to soft equity underwriting in 3Q. Fine-tuning Piper 3Q estimate lower largely due to lower equities revenue. Modestly increasing Jefferies estimates on stronger M&A performance. Raymond James and Greenhill estimates are unchanged.
Ms. Smith is lowering her Q306 EPS estimate for Cowen (NASDAQ:COWN) from $0.14 to $0.06 given what has proven to be a very weak quarter for investment banking, in particular equity underwriting as well as private placement activity. She has also therefore fine-tuned her capital markets assumptions given the lower underwriting activity. As such firm's full year 2006 estimate decreases from $1.02 to $0.93. 2007 estimate remains unchanged at $1.30 at this time.
Investment banking activity is weaker than originally forecast though she points to what seemingly remains a pretty healthy pipeline of activity. She is forecasting investment banking revenues of $29.8 mil compared to $39.5 mil. in the prior quarter. Ms. Smith estimates from secondary data sources that the company was on half the number of private placement transactions this quarter versus last; the company ultimately finished the quarter lead manager on just two deals (one an IPO) and co-manager on just three deals
versus 9 in the prior quarter.
Notablecalls: KBW's 06 EPS est for COWN is now almost 15% below consensus. Would not be surprised to see some weakness today.
Ms. Smith is lowering her Q306 EPS estimate for Cowen (NASDAQ:COWN) from $0.14 to $0.06 given what has proven to be a very weak quarter for investment banking, in particular equity underwriting as well as private placement activity. She has also therefore fine-tuned her capital markets assumptions given the lower underwriting activity. As such firm's full year 2006 estimate decreases from $1.02 to $0.93. 2007 estimate remains unchanged at $1.30 at this time.
Investment banking activity is weaker than originally forecast though she points to what seemingly remains a pretty healthy pipeline of activity. She is forecasting investment banking revenues of $29.8 mil compared to $39.5 mil. in the prior quarter. Ms. Smith estimates from secondary data sources that the company was on half the number of private placement transactions this quarter versus last; the company ultimately finished the quarter lead manager on just two deals (one an IPO) and co-manager on just three deals
versus 9 in the prior quarter.
Notablecalls: KBW's 06 EPS est for COWN is now almost 15% below consensus. Would not be surprised to see some weakness today.
Color on news: Imclone Systems (NASDAQ:IMCL)
Couple of tier-1 firms are commenting on Imclone Systems (NASDAQ:IMCL) after Dow Jones said dissident shareholder Carl Icahn refused to support an all-stock, $36-a-share offer made by a "major international pharmaceutical co" in September:
- Goldman Sachs notes they expect the dispute between Mr. Icahn and the Imclone board will continue for some time which could lead to negative investor sentiment and potential departure of key Imclone employees. Nevertheless, the firm believes the intrinsic value of Imclone, supported by Erbitux, approximates $27/share. Future share appreciation will be largely dependent on sales growth and clinical results. With the closing price of $27.07 on 10/3/06, there is essentially no value assigned to the potential new indications of Erbitux with combined potential over $1 Billion as well as the pipeline with 6 products in Phase 1 or 2 trials.
Imclone shares may react positively to the disclosure that there was a bid of $36. However, significant share appreciation will depend largely on data from ongoing Phase 3 studies to expand the indications of Erbitux. They expect Phase 3 data on refractory and second-line colorectal cancer (CRC) in 4Q2006 and first-line CRC in 1Q2007. Phase 3 data on Erbitux for first line lung cancer ($1.0 Billion potential) and pancreatic cancer ($0.3 Billion potential) are also expected in 2007.
- Morgan Stanley continues to be cautious on IMCL saying the disclosure of an outside bidder may give the stock short-term support, but given that this offer appears no longer on the table, and according to the disclosure, it was the highest bid and likely predated several recent negative events for Erbitux, they suspect that short-term negative pressure on the stock may continue.
Overhangs for the stock include: 1) the launch of Amgen's Vectibix, 2) management uncertainty, 3) board controversy, 4) Yeda patent overhang, 5) risk of losing a patent case with Repligen, and 6.) weak Erbitux IMS trends going into 3Q. The rejection of a $36 bid suggests to us that investors will need to wait for more clinical trial data (CRYSTAL trial is next potential positive catalyst in early 1Q) before seeing positive returns.
Maintains Equal Weight and $38 tgt.
Notablecalls: Morgan Stanley Steven Harr makes an excellent point regarding the timing of the bid and recent negative events. But on the other hand, we must assume Mr. Icahn knew what he was doing when he rejected the $36 offer. Think the stock will gap up today by 1-2 pts and then have tough time keeping the gains over the next couple of days. Possible shorting oppy.
- Goldman Sachs notes they expect the dispute between Mr. Icahn and the Imclone board will continue for some time which could lead to negative investor sentiment and potential departure of key Imclone employees. Nevertheless, the firm believes the intrinsic value of Imclone, supported by Erbitux, approximates $27/share. Future share appreciation will be largely dependent on sales growth and clinical results. With the closing price of $27.07 on 10/3/06, there is essentially no value assigned to the potential new indications of Erbitux with combined potential over $1 Billion as well as the pipeline with 6 products in Phase 1 or 2 trials.
Imclone shares may react positively to the disclosure that there was a bid of $36. However, significant share appreciation will depend largely on data from ongoing Phase 3 studies to expand the indications of Erbitux. They expect Phase 3 data on refractory and second-line colorectal cancer (CRC) in 4Q2006 and first-line CRC in 1Q2007. Phase 3 data on Erbitux for first line lung cancer ($1.0 Billion potential) and pancreatic cancer ($0.3 Billion potential) are also expected in 2007.
- Morgan Stanley continues to be cautious on IMCL saying the disclosure of an outside bidder may give the stock short-term support, but given that this offer appears no longer on the table, and according to the disclosure, it was the highest bid and likely predated several recent negative events for Erbitux, they suspect that short-term negative pressure on the stock may continue.
Overhangs for the stock include: 1) the launch of Amgen's Vectibix, 2) management uncertainty, 3) board controversy, 4) Yeda patent overhang, 5) risk of losing a patent case with Repligen, and 6.) weak Erbitux IMS trends going into 3Q. The rejection of a $36 bid suggests to us that investors will need to wait for more clinical trial data (CRYSTAL trial is next potential positive catalyst in early 1Q) before seeing positive returns.
Maintains Equal Weight and $38 tgt.
Notablecalls: Morgan Stanley Steven Harr makes an excellent point regarding the timing of the bid and recent negative events. But on the other hand, we must assume Mr. Icahn knew what he was doing when he rejected the $36 offer. Think the stock will gap up today by 1-2 pts and then have tough time keeping the gains over the next couple of days. Possible shorting oppy.
Paperstand
According to the WSJ, insiders at Diamond Foods (DMND) keep coming back for more. Since the co went public last year, execs and directors periodically have bought shares in the open mkt, but never so many at one time as they did last week. 3 co insiders, including CEO Michael J. Mendes, bought a total of 14,625 shares for more than $200K.
Barron’s Online „Inside Scoop” section reprots that two hedge fund partners known for their conservative investing style are making an aggressive bet on a small tech co, Multi-Fineline Electronix (MFLX). But investors may want to be wary of the buying activity at the M-Flex. Michael A. Roth and Brian J. Stark have spent nearly $100.36m on behalf of Stark Investments, in order to build a stake of more than 4.5m shares, or 18.4% of M-Flex's outstanding shares. Ben Silverman, of InsiderScore.com, says Roth and Stark, who met each other while attending Harvard Law School, "early on identified an opportunity here" to buy shares. But, "there's not a lot of near-term visibility…and obviously the mkt feels the acquisition is not in the best interest of the co," Silverman says. M-Flex missed earnings ests for 2 consecutive quarters and is facing margin pressure after its largest customer Motorola (MOT) (which makes up 80% of its sales) announced significant price reductions.
Tuesday, October 03, 2006
Calls of Note Part 4
- Merrill Lynch is yet again cautious on Agere (NYS:AGR) following negative pre-announcement from Marvell (MRVL). Firm thinks MRVL saw significant order declines and cancellations in September suggesting that seasonal pickup is weaker expected in the HDD industry. Production trends at AGR's customers in July and August suggest that AGR's storage business in the Sep-06Q is tracking well below firm's forecast. If production trends at Agere's customers don't improve significantly in September, they think Sep-06Q estimates could be at risk.
Overall unit production at AGR's (35% HDD exposure) customers declined by 7% in July and August (first 2 months of Sep-06Q) compared to April and May (first months of Jun-06Q). Even after adjusting the data for share shifts at MXO in Q2, the firm estimates that AGR's units declined by about 2% in the months of July and August on a Q/Q basis. This is well below ML's current forecast of 10% growth in Agere's storage business for the Sep-06Q.
MRVL's new forecast implies a 20% decline in its storage revenues in the Oct06Q suggesting that orders have come to a stand still in September. It's possible that MRVL's customers (especially 2.5" customers) built aggressively in August expecting a seasonal pickup which did not materialize. Given the magnitude of the miss, the firm thinks it's reasonable to expect MRVL's storage revenues to rebound in Q4 although the magnitude of the rebound will
depend on the health of the PC market.
Notablecalls: First, check my comments on AGR from Sept 6. ML was out cautious on AGR but I didn't dare the call it outright actionable then. I was lucky as the shares took a 1pt hit and then rallied 2.5 pts over the next 10 days. AGR will take a hit today and will bounce again. That bounce will most likely prove to be shortable. Also, notice the comments on MRVL regarding the possible rebound in Q4. That will help MRVL to bounce today.
Overall unit production at AGR's (35% HDD exposure) customers declined by 7% in July and August (first 2 months of Sep-06Q) compared to April and May (first months of Jun-06Q). Even after adjusting the data for share shifts at MXO in Q2, the firm estimates that AGR's units declined by about 2% in the months of July and August on a Q/Q basis. This is well below ML's current forecast of 10% growth in Agere's storage business for the Sep-06Q.
MRVL's new forecast implies a 20% decline in its storage revenues in the Oct06Q suggesting that orders have come to a stand still in September. It's possible that MRVL's customers (especially 2.5" customers) built aggressively in August expecting a seasonal pickup which did not materialize. Given the magnitude of the miss, the firm thinks it's reasonable to expect MRVL's storage revenues to rebound in Q4 although the magnitude of the rebound will
depend on the health of the PC market.
Notablecalls: First, check my comments on AGR from Sept 6. ML was out cautious on AGR but I didn't dare the call it outright actionable then. I was lucky as the shares took a 1pt hit and then rallied 2.5 pts over the next 10 days. AGR will take a hit today and will bounce again. That bounce will most likely prove to be shortable. Also, notice the comments on MRVL regarding the possible rebound in Q4. That will help MRVL to bounce today.
Calls of Note Part 3
- Goldman Sachs notes that despite a disturbing number of yellow flags from the HDD supply chain in the form of negative preannouncements by Marvell, Komag, Innovex and a disappointing outlook from Xyratex, they still expect Seagate (NYSE:STX) to reach consensus forecasts. Specifically, they think the preannouncements are more about share shifts and inventory corrections than underlying HDD demand for the industry or Seagate. In fact, they continue to expect normal seasonality in the back half of the calendar year and have already seen encouraging signs in the Asia supply chain that reinforce that view.
Firm sees Marvell's lower revenue outlook for the October quarter as driven by an already-expected inventory drawdown at Western Digital and lower orders to Marvell from other hard drive companies that had earlier built up inventory jockeying for Maxtor share. With share positions stabilizing, much of the noise should smooth out in the
seasonally-stronger December quarter.
They would take advantage of weakness in STX shares on the back of Marvell's preannouncement. Low fundamental expectations and a low valuation imply that Seagate could bounce appreciably as it reports in-line September-quarter results.
Notablecalls: Catching STX down 1-1.5 pts in the pre mkt would make a nice trade. Wishful thinking?
Firm sees Marvell's lower revenue outlook for the October quarter as driven by an already-expected inventory drawdown at Western Digital and lower orders to Marvell from other hard drive companies that had earlier built up inventory jockeying for Maxtor share. With share positions stabilizing, much of the noise should smooth out in the
seasonally-stronger December quarter.
They would take advantage of weakness in STX shares on the back of Marvell's preannouncement. Low fundamental expectations and a low valuation imply that Seagate could bounce appreciably as it reports in-line September-quarter results.
Notablecalls: Catching STX down 1-1.5 pts in the pre mkt would make a nice trade. Wishful thinking?
Calls of Note Part 2
- Bear Stearns is positive on XM Satellite (NASDAQ:XMSR) after recently completing an extensive check of a number of retailers across the country that suggested 3Q retail gross adds may have been better than firm's original expectations. As a result, they are raising their net adds for the platform to 325k from 270k previously.
Availability of the Audiovox Xpress and Roady2 were spotty in certain locations, suggesting that sales were higher than expected. However, the sporadic shortages likely would translate into either lower sales in 4Q or higher SAC due to air-shipments. Reduced power levels on the FM-mods are not resulting in higher complaints currently, but the sales reps are still suggesting professional installation for $50-$70.
Following the recent FCC re-certification of the FM-mod radios, they think XM will again be able to advertise efficiently in the crucial 4Q. Moreover, Oprah's addition would enhance consumer interest and awareness. While the FM-mod power levels and the installation requirement have not yet impacted retail sales, it is possible that 4q could be affected by sporadic shortages. As such, they are maintaining their FY net adds estimate of 2.2 mn subs and expect XM to end the year with ~8.1 mn subs. However, the firm will continue to closely monitor the retail channel for trends on the FM-mod issue.
Maintains Outperform.
Notablecalls: Bear's estimate was Street low anyway.
Availability of the Audiovox Xpress and Roady2 were spotty in certain locations, suggesting that sales were higher than expected. However, the sporadic shortages likely would translate into either lower sales in 4Q or higher SAC due to air-shipments. Reduced power levels on the FM-mods are not resulting in higher complaints currently, but the sales reps are still suggesting professional installation for $50-$70.
Following the recent FCC re-certification of the FM-mod radios, they think XM will again be able to advertise efficiently in the crucial 4Q. Moreover, Oprah's addition would enhance consumer interest and awareness. While the FM-mod power levels and the installation requirement have not yet impacted retail sales, it is possible that 4q could be affected by sporadic shortages. As such, they are maintaining their FY net adds estimate of 2.2 mn subs and expect XM to end the year with ~8.1 mn subs. However, the firm will continue to closely monitor the retail channel for trends on the FM-mod issue.
Maintains Outperform.
Notablecalls: Bear's estimate was Street low anyway.
Calls of Note Part 1
- Goldman Sachs has added Aetna (NYSE:AET) to the Americas Conviction Buy List, reflecting their expectation for near-term stock upside on 3Q2006 earnings. Firm sees ~18% upside to their 6-month price target of $46 (up from $44), based on 14.2X 2007 EPS. They believe sentiment will continue to improve as Aetna demonstrates stabilization in its commercial underwriting and benefits from the conservative reserving approach it took with its 2Q2006 results. Likewise, their annual employer survey results find Aetna continuing to show strong momentum in its ranking among national account employers relative to other carriers, which the firm believes will translate to strong January 2007 fee-based (ASO, non-risk) national account gains.
While Aetna will continue to face competitive pressure on its core commercial business, the firm thinks 3Q2006 results will help to show that the price and cost trend pressures are more reflective of industry competitive pressures as opposed to "company specific" problems. They therefore believe the market over-reacted to the 2Q2006 trend issues at Aetna specifically, while "under-reacting" to the potential risks ahead for the higher valuation names in the commercial group.
Aetna trades at 12.5X 2007 EPS of $2.85, a more than 10% discount to the commercial managed care average forward P/E, as investor concerns linger on the question of whether the company is an "aggressive pricing outlier" relative other companies, as some have argued.
Notablecalls: Not going to call this one actionable. AET's far too big to be moved by a call like this one. Also, the stock is starting to look weak.
While Aetna will continue to face competitive pressure on its core commercial business, the firm thinks 3Q2006 results will help to show that the price and cost trend pressures are more reflective of industry competitive pressures as opposed to "company specific" problems. They therefore believe the market over-reacted to the 2Q2006 trend issues at Aetna specifically, while "under-reacting" to the potential risks ahead for the higher valuation names in the commercial group.
Aetna trades at 12.5X 2007 EPS of $2.85, a more than 10% discount to the commercial managed care average forward P/E, as investor concerns linger on the question of whether the company is an "aggressive pricing outlier" relative other companies, as some have argued.
Notablecalls: Not going to call this one actionable. AET's far too big to be moved by a call like this one. Also, the stock is starting to look weak.
Color on news: Skyworks Solutions (NASDAQ:SWKS)
Several firms are commenting on Skyworks Solutions (NASDAQ:SWKS) after the co announced it is immediately ceasing its baseband operations and will focus completely on its core RF business:
- CIBC is saying they see this as a very positive move with management removing an underperforming asset that in their opinion would always be at a disadvantage to its much larger competitors.
Removing the baseband business will not only provide direct transparency to Skyworks' RF businesses, but will also remove a highly volatile business that took a disproportionate amount of resources (expected savings of $70M annually). FY07 EPS target was put at $0.55-$0.60.
Management's new FY07 top-line guidance of $820-$840M is above firm's previous estimate of $817.5M, which still included a contribution from baseband. They've already been looking for upside to their FY07 projections and believe there are enough design wins in place to support the outlook.
FIrm is raising their price target to $9 from $7; maintains SO.
- Merrill Lynch is somewhat more cautious saying they applaud Skyworks'decision to exit the baseband business and give credit to management for its cost cutting actions. While they expect the stock to trade up, given the nature of the wireless IC industry, secular trends in the company's end markets, and Skyworks' operating history, they see risk to management's FY07 outlook. The firm therefore maintains Neutral rating.
In an unusual move for an RF semiconductor company, Skyworks guided for full year revenue and EPS. Despite the good cost cutting news, the firm still has several concerns regarding Skyworks. TI is targeting its single chip phone, LoCosto, at the low-end handset market, which will likely erode SWKS' transceiver opportunity over the next few years. Also, they're hearing that the company could lose EDGE transceiver share at Samsung to Silicon Labs. Share loss at Nokia gives them concern as well, and they believe that the company's progress in 3G transceiver silicon is lagging.
Notablecalls: So, SWKS will most likely gap up and then at best hold the gains. Just as Merrill noted, the RF co's tend to overpromise and under deliver.
- CIBC is saying they see this as a very positive move with management removing an underperforming asset that in their opinion would always be at a disadvantage to its much larger competitors.
Removing the baseband business will not only provide direct transparency to Skyworks' RF businesses, but will also remove a highly volatile business that took a disproportionate amount of resources (expected savings of $70M annually). FY07 EPS target was put at $0.55-$0.60.
Management's new FY07 top-line guidance of $820-$840M is above firm's previous estimate of $817.5M, which still included a contribution from baseband. They've already been looking for upside to their FY07 projections and believe there are enough design wins in place to support the outlook.
FIrm is raising their price target to $9 from $7; maintains SO.
- Merrill Lynch is somewhat more cautious saying they applaud Skyworks'decision to exit the baseband business and give credit to management for its cost cutting actions. While they expect the stock to trade up, given the nature of the wireless IC industry, secular trends in the company's end markets, and Skyworks' operating history, they see risk to management's FY07 outlook. The firm therefore maintains Neutral rating.
In an unusual move for an RF semiconductor company, Skyworks guided for full year revenue and EPS. Despite the good cost cutting news, the firm still has several concerns regarding Skyworks. TI is targeting its single chip phone, LoCosto, at the low-end handset market, which will likely erode SWKS' transceiver opportunity over the next few years. Also, they're hearing that the company could lose EDGE transceiver share at Samsung to Silicon Labs. Share loss at Nokia gives them concern as well, and they believe that the company's progress in 3G transceiver silicon is lagging.
Notablecalls: So, SWKS will most likely gap up and then at best hold the gains. Just as Merrill noted, the RF co's tend to overpromise and under deliver.
Color on warning: Marvell Tech (NASDAQ:MRVL)
Several firms are commenting on Marvell (NASDAQ:MRVL) after the co issued a warning last night:
- Deutsche Bank notes that while MRVL's exposure to the HDD segment does present rev growth
challenges in the near and LT,they continue to expect a reacceleration in growth in F4Q and beyond as it continues to be a broad-based mkt share gainer (PS3, cell phones, printers, etc). The shares are likely to remain range bound in the mid-teens given current headwinds, but they believe LT investors can use this period as an entry point. Maintains Buy.
MRVL also announced that its internal ESO investigation found that actual measurement dates in the past likely differ from the recorded grant dates. While not a large surprise given MRVL failed to file full F2Q financials, this announcement does reiterate additional risk to the share price and mgmt.
Tgt goes to $23 fronm $27 as FY07 and FY08 rev & PF EPS ests are lowered to $2.25b/$0.71 and $2.92b/$0.77 versus prior $2.38b/$0.85 and $3.21b/$0.93.
- Morgan Stanley notes they continue to believe MRVL will trade in a volatile sideways
pattern for 2-3 months until a) the impact of the semiconductor cycle is more completely understood b) investors incorporate the dilution from the Intel acquisition c) investors understand why the Intel acquisition is a solid strategic move. Firm notes they have been anticipating a $17-$20 trading range for MRVL, but given the magnitude of the revision, in the very short run MRVL likely trades below the low end of this range as short-term investors expecting a more rapid recovery sell their stock in disappointment.
They lowered their C06 adjusted EPS to $0.72 from $0.85. Firm's C2007 and C2008 adjusted EPS have been lowered to $0.98 and $1.54, respectively.
Firm notes they continue to be bullish on MRVL over the long-run and the company's strong competitive positioning and favorable secular forces should become a more important stock driver as cyclical challenges fade.
Maintains Overweight and lowers tgt to $33 from $34.
- TWP comments on the warning noting that according to management, HDD customers
accounted for the majority of the $60mn shortfall because of softer-than-expected seasonality and inventory with top customers. In firm's view, this may be because of WDC and notebook PC customers. WDC, its primary desktop PC customer, accounted for 16% of revenue in F2Q07, and its inventory increased 15% q/q in the June quarter. The balance of the shortfall may be the result of share shifts in the notebook PC market, where STX has been aggressive in ramping its mobile HDDs-at the expense of Toshiba (11% customer) and Hitachi (9%).
They are lowering their F3Q07 estimates to $515mn and $0.13 compared to prior estimates of $582mn and $0.19. As a result, FY07 estimates go from $2.28bn and $0.82 to $2.19bn and $0.74. Firm is maintaining FY08 estimates of $2.63bn and $0.92. In firm's view, the excess inventory situation may be short term in nature and we expect a resumption of growth in
F4Q07.
MRVL shares trade at 25.5x firm's CY07 EPS estimate and 5.4x TEV CY07 sales estimate. Given MRVL's consistent growth outlook and good operational fundamentals, they believe that the shares appear attractively valued and reiterate Outperform rating on MRVL shares.
Notablecalls: MRVL traded down 18% in after mkt. That feels somewhat excessive as the warning was somewhat expected. Also, MRVL is a notorious bouncer. Think the stock has a fair chance of ending the say with a 10% loss.
- Deutsche Bank notes that while MRVL's exposure to the HDD segment does present rev growth
challenges in the near and LT,they continue to expect a reacceleration in growth in F4Q and beyond as it continues to be a broad-based mkt share gainer (PS3, cell phones, printers, etc). The shares are likely to remain range bound in the mid-teens given current headwinds, but they believe LT investors can use this period as an entry point. Maintains Buy.
MRVL also announced that its internal ESO investigation found that actual measurement dates in the past likely differ from the recorded grant dates. While not a large surprise given MRVL failed to file full F2Q financials, this announcement does reiterate additional risk to the share price and mgmt.
Tgt goes to $23 fronm $27 as FY07 and FY08 rev & PF EPS ests are lowered to $2.25b/$0.71 and $2.92b/$0.77 versus prior $2.38b/$0.85 and $3.21b/$0.93.
- Morgan Stanley notes they continue to believe MRVL will trade in a volatile sideways
pattern for 2-3 months until a) the impact of the semiconductor cycle is more completely understood b) investors incorporate the dilution from the Intel acquisition c) investors understand why the Intel acquisition is a solid strategic move. Firm notes they have been anticipating a $17-$20 trading range for MRVL, but given the magnitude of the revision, in the very short run MRVL likely trades below the low end of this range as short-term investors expecting a more rapid recovery sell their stock in disappointment.
They lowered their C06 adjusted EPS to $0.72 from $0.85. Firm's C2007 and C2008 adjusted EPS have been lowered to $0.98 and $1.54, respectively.
Firm notes they continue to be bullish on MRVL over the long-run and the company's strong competitive positioning and favorable secular forces should become a more important stock driver as cyclical challenges fade.
Maintains Overweight and lowers tgt to $33 from $34.
- TWP comments on the warning noting that according to management, HDD customers
accounted for the majority of the $60mn shortfall because of softer-than-expected seasonality and inventory with top customers. In firm's view, this may be because of WDC and notebook PC customers. WDC, its primary desktop PC customer, accounted for 16% of revenue in F2Q07, and its inventory increased 15% q/q in the June quarter. The balance of the shortfall may be the result of share shifts in the notebook PC market, where STX has been aggressive in ramping its mobile HDDs-at the expense of Toshiba (11% customer) and Hitachi (9%).
They are lowering their F3Q07 estimates to $515mn and $0.13 compared to prior estimates of $582mn and $0.19. As a result, FY07 estimates go from $2.28bn and $0.82 to $2.19bn and $0.74. Firm is maintaining FY08 estimates of $2.63bn and $0.92. In firm's view, the excess inventory situation may be short term in nature and we expect a resumption of growth in
F4Q07.
MRVL shares trade at 25.5x firm's CY07 EPS estimate and 5.4x TEV CY07 sales estimate. Given MRVL's consistent growth outlook and good operational fundamentals, they believe that the shares appear attractively valued and reiterate Outperform rating on MRVL shares.
Notablecalls: MRVL traded down 18% in after mkt. That feels somewhat excessive as the warning was somewhat expected. Also, MRVL is a notorious bouncer. Think the stock has a fair chance of ending the say with a 10% loss.
Paperstand
The WSJ’s „Heard on the Street” column discusses General Motors (GM), saying that the co’s momentum could stall in 2H06. For the past few weeks, GM has been touting the progress of its turnaround, and after slashing its hourly payroll and launching new SUVs, the auto maker appears headed for a substantial improvement in its Q3 earnings. But investors shouldn't necessarily take that as a green light for buying GM stock. Some analysts believe GM may not be able to sustain the rev increases that have helped turn around earnings in the 1H06, especially now that the economy is showing signs of slowing down and GM has planned for significant production cuts in the 2H06. "From a stock perspective, I think the fundamentals are deteriorating, or at least have peaked," said Ron Tadross, of BofA.
The Barrons’ “Inside Scoop” section reports that David J. Bronczek, CEO and president of FedEx (FDX) sold 27K shares for a total of $3m. But Jonathan Moreland, director of research at InsiderInsights.com, says that he finds the exercising and holding of options by five other FedEx insiders in the past two months "more intriguing" than Bronczek's open-market selling. The five insiders exercised and held onto a total of 14,788 shares with a total mkt value of $492K.
The NY Times discusses more and more crowded animated movie sector. Filmmakers plan to release 17 movies in ‘06, compared with 11 in ‘05. Pixar is now part of Disney (DIS), having been acquired earlier this year. DreamWorks (DWA), meanwhile, is still publicly traded and is unlikely to be sold anytime soon, analysts say. DreamWorks must also manage Wall St. One reason DreamWorks’ stock is trading at a low price is that analysts are concerned that a DreamWorks investor, Paul G. Allen, will activate his option to sell shares to the public. Asked by analysts last month if Mr. Allen had activated that option, DreamWorks’ president, Lewis Coleman, said DreamWorks did not have to disclose that information, but had 90 days to respond to Mr. Allen. “In our view, these comments are vague and cryptic enough to suggest that certainly the answer could be yes,” a Prudential analyst, Katherine Styponias, wrote in a report last month. By all accounts, article suggests, DreamWorks and Pixar should be in a good spot to weather the uncertainty.
According to the DigiTimes, citing sources, foundries are bracing for a weak 4Q with inventory issues likely to last through the 1Q07. OmniVision's decreased orders with TSMC as an indication of weak demand for the foundry sector. According to some institutional investors who have visited TSMC recently, the foundry does not have an optimistic outlook for the 4Q, and inventory may last until the 1Q07. Although demand from the motherboard and notebook sectors has grown strong, PC-related ICs account for only 1/3 of foundries' rev. But demand from the communications and consumer electronics sectors, both of which combine for half of the revs for foundries, is weaker compared to previous years.
The Barrons’ “Inside Scoop” section reports that David J. Bronczek, CEO and president of FedEx (FDX) sold 27K shares for a total of $3m. But Jonathan Moreland, director of research at InsiderInsights.com, says that he finds the exercising and holding of options by five other FedEx insiders in the past two months "more intriguing" than Bronczek's open-market selling. The five insiders exercised and held onto a total of 14,788 shares with a total mkt value of $492K.
The NY Times discusses more and more crowded animated movie sector. Filmmakers plan to release 17 movies in ‘06, compared with 11 in ‘05. Pixar is now part of Disney (DIS), having been acquired earlier this year. DreamWorks (DWA), meanwhile, is still publicly traded and is unlikely to be sold anytime soon, analysts say. DreamWorks must also manage Wall St. One reason DreamWorks’ stock is trading at a low price is that analysts are concerned that a DreamWorks investor, Paul G. Allen, will activate his option to sell shares to the public. Asked by analysts last month if Mr. Allen had activated that option, DreamWorks’ president, Lewis Coleman, said DreamWorks did not have to disclose that information, but had 90 days to respond to Mr. Allen. “In our view, these comments are vague and cryptic enough to suggest that certainly the answer could be yes,” a Prudential analyst, Katherine Styponias, wrote in a report last month. By all accounts, article suggests, DreamWorks and Pixar should be in a good spot to weather the uncertainty.
According to the DigiTimes, citing sources, foundries are bracing for a weak 4Q with inventory issues likely to last through the 1Q07. OmniVision's decreased orders with TSMC as an indication of weak demand for the foundry sector. According to some institutional investors who have visited TSMC recently, the foundry does not have an optimistic outlook for the 4Q, and inventory may last until the 1Q07. Although demand from the motherboard and notebook sectors has grown strong, PC-related ICs account for only 1/3 of foundries' rev. But demand from the communications and consumer electronics sectors, both of which combine for half of the revs for foundries, is weaker compared to previous years.
Monday, October 02, 2006
Calls of Note Part 6
- Stanford comments on Verisign (NASDAQ:VRSN) saying that as they noted earlier on Friday, Senate Commerce Committee Chairman Ted Stevens (R-Alaska) and Ranking Democrat Daniel Inouye (D-Hawaii) wrote to the U.S. Commerce Department this morning urging it to delay approval of VeriSign's six-year extension to run the .com domain.
While the final decision still belongs to the Commerce Department, the firm believes the Senators' letter is likely to result in the Commerce Department holding off on approving VeriSign extension.
The delay could last into early 2007, when the Senate Commerce Committee plans to examine a variety of issues related to the Internet Corporation for Assigned Names and Numbers (ICANN).
At this point the firm would not expect the .com contract to be put out for competitive bids, but there could be modifications to the contract's automatic 7% rate increases and the strong renewal expectancy in 2012.
Notablecalls: Take a look at the intraday chart on VRSN from Friday and you'll see when the comments hit. Not actionable but good to know category for now.
While the final decision still belongs to the Commerce Department, the firm believes the Senators' letter is likely to result in the Commerce Department holding off on approving VeriSign extension.
The delay could last into early 2007, when the Senate Commerce Committee plans to examine a variety of issues related to the Internet Corporation for Assigned Names and Numbers (ICANN).
At this point the firm would not expect the .com contract to be put out for competitive bids, but there could be modifications to the contract's automatic 7% rate increases and the strong renewal expectancy in 2012.
Notablecalls: Take a look at the intraday chart on VRSN from Friday and you'll see when the comments hit. Not actionable but good to know category for now.
Calls of Note Part 5
- On 30 September 2006 the US Congress passed H.R. 4954 the Safe Port Act, a bill seeking to improve maritime and cargo security. A number of amendments were attempted but only one, relating to Internet gambling, made it through. The measure, "The Unlawful Internet Gambling Enforcement Act of 2006", prohibits acceptance of any payment instrument for unlawful Internet gambling.
The casualty list includes: PartyGaming (stock down 60 percent in Europe), Sportingbet (down 64 percent), 888 (down 45 percent) and gaming software provider Playtech (down 55 percent). Austria's bwin.com Interactive Entertainment fell as much as 22 percent in the first few minutes of trading.
The worst-hit US-listed counterpart is most likely Optimal Group (NASDAQ:OPMR). The co has already issued a PR release saying the news will have significant negative impact on the results of its FireOne Group Plc subsidiary. Optimal Group holds 76 percent of FireOne Group, a provider of payment processing services for the online gaming industry.
Soleil is downgrading OPMR to Hold from Buy saying the unexpected has happened, and the greatest risk to the OPMR story has come to fruition. Firm's model now reflects OPMR retaining the full breadth of the FireOne business through the end of 2006 and the first half of 2007. Should the Fed offer it's interpretation earlier than the 270 day limit, they will adjust their estimates accordingly. Therefore, 2006 estimate remains unchanged at $1.24, but 2007 estimate drops dramatically, from $1.60 to $0.75.
Notablecalls: Expect OPMR shares to be under considerable pressure today. Also, Cryptologic (NASDAQ:CRYP) will likely get hit. The co is a software and services provider to theInternet gaming market.
The casualty list includes: PartyGaming (stock down 60 percent in Europe), Sportingbet (down 64 percent), 888 (down 45 percent) and gaming software provider Playtech (down 55 percent). Austria's bwin.com Interactive Entertainment fell as much as 22 percent in the first few minutes of trading.
The worst-hit US-listed counterpart is most likely Optimal Group (NASDAQ:OPMR). The co has already issued a PR release saying the news will have significant negative impact on the results of its FireOne Group Plc subsidiary. Optimal Group holds 76 percent of FireOne Group, a provider of payment processing services for the online gaming industry.
Soleil is downgrading OPMR to Hold from Buy saying the unexpected has happened, and the greatest risk to the OPMR story has come to fruition. Firm's model now reflects OPMR retaining the full breadth of the FireOne business through the end of 2006 and the first half of 2007. Should the Fed offer it's interpretation earlier than the 270 day limit, they will adjust their estimates accordingly. Therefore, 2006 estimate remains unchanged at $1.24, but 2007 estimate drops dramatically, from $1.60 to $0.75.
Notablecalls: Expect OPMR shares to be under considerable pressure today. Also, Cryptologic (NASDAQ:CRYP) will likely get hit. The co is a software and services provider to theInternet gaming market.
Calls of Note Part 4
- Piper Jaffray is positive on Smith Micro (NASDAQ:SMSI) saying that based on their monthly handset channel check, they believe Verizon continued to push sales of music enabled handsets due to the recent launch of music-enabled Motorola KRZR, Nokia 6315i, continued sales strength of LG's Chocolate phone, and a price cut for the Samsung A930. With the increasing number of music phones, they believe this trend bodes well for sales of Smith Micro's Music Essential Kits ("MEKs").
While it was clear Verizon store managers were still strongly promoting its V CAST music service and enjoying strong sales of music-enabled handsets such as the LG Chocolate phone and the LG VX 8300, firm's checks also indicated store sales people were more proactively educating customers about MEKs during September. They believe sales of Smith Micro MEKs posted stronger sales during the September quarter.
Reits Outpeform and $18 tgt.
Notablecalls: Not actionable but good to know category.
- Piper Jaffray comments also on Motorola (NYSE:MOT) saying their checks indicated strong North American trends. With new products launching, they believe Motorola is well-positioned to grow its dominant share during Q406. Global checks also indicate solid trends for Motorola. FIrm believes Q406 estimates could prove conservative and maintain Outperform rating.
While firm's checks noted increasing competition from Samsung and LG, they believe Motorola maintained its dominant market share in North America. Further, with Sprint introducing new thin Motorola products such as the Q, KRZR, and RAZR during Q406 combined with the launch of several new Motorola products for the leading North American carriers this holiday season, they believe Motorola should maintain and may even grow its dominant North American market share during Q406.
Due to channel checks and increasing confidence in Motorola continuing to gain global market, the firm believes Motorola is well-positioned for the seasonally strong holiday season and their Q406 estimates could prove conservative.
Maintains Outperform and $27 tgt.
Notablecalls: Not actionable but good to know category.
While it was clear Verizon store managers were still strongly promoting its V CAST music service and enjoying strong sales of music-enabled handsets such as the LG Chocolate phone and the LG VX 8300, firm's checks also indicated store sales people were more proactively educating customers about MEKs during September. They believe sales of Smith Micro MEKs posted stronger sales during the September quarter.
Reits Outpeform and $18 tgt.
Notablecalls: Not actionable but good to know category.
- Piper Jaffray comments also on Motorola (NYSE:MOT) saying their checks indicated strong North American trends. With new products launching, they believe Motorola is well-positioned to grow its dominant share during Q406. Global checks also indicate solid trends for Motorola. FIrm believes Q406 estimates could prove conservative and maintain Outperform rating.
While firm's checks noted increasing competition from Samsung and LG, they believe Motorola maintained its dominant market share in North America. Further, with Sprint introducing new thin Motorola products such as the Q, KRZR, and RAZR during Q406 combined with the launch of several new Motorola products for the leading North American carriers this holiday season, they believe Motorola should maintain and may even grow its dominant North American market share during Q406.
Due to channel checks and increasing confidence in Motorola continuing to gain global market, the firm believes Motorola is well-positioned for the seasonally strong holiday season and their Q406 estimates could prove conservative.
Maintains Outperform and $27 tgt.
Notablecalls: Not actionable but good to know category.
Calls of Note Part 3
- Merrill Lynch believes there are 5 key reasons to be BUYING Cubist Pharma (NASDAQ:CBST):
1) the stock is trading at a significant discount to the potential of Cubicin, 2) CBST will likely be profitable in 3Q & has significant earnings leverage, 3) they are confident that management's decision on "what's next" will create rather than dilute value for investors, 4) Cubicin is becoming established as a new standard of care for serious bacterial infections, and 5) they believe concerns about resistance should decline.
In a worst case scenario, if Cubicin sales peaked in '07, the firm estimates Cubist stock is trading at a 5% discount to the value of the drug. Based on their peak sales they estimate Cubist is trading at a 30-49% discount to Cubicin's current fair value.
Firm expects Cubist to report its first profitable quarter on a GAAP basis in 3Q. Depending on Cubist's long-term strategy, they believe the company could reduce expenses by $30 MM to $55 MM per year, which could increase profitability by $0.45 to $0.85 and add $5 to $13 of value assuming historical pharma multiples
Investors are concerned about what "Act 2" will be, but Merrill believes management is more likely to create value for investors than significantly dilute shareholders. There are a select few synergistic drugs potentially available for license or acquisition, but if Cubist is unable to build its pipeline externally, they believe it will reduces expenses, maximize cash flow, & package the company for acquisition.
Reits Buy and $35 tgt.
Notablecalls: While there was considerable buy interest in CBST already on Friday (following Jeffco's comments), I suspect comments from Merrill will provide another upward push.
1) the stock is trading at a significant discount to the potential of Cubicin, 2) CBST will likely be profitable in 3Q & has significant earnings leverage, 3) they are confident that management's decision on "what's next" will create rather than dilute value for investors, 4) Cubicin is becoming established as a new standard of care for serious bacterial infections, and 5) they believe concerns about resistance should decline.
In a worst case scenario, if Cubicin sales peaked in '07, the firm estimates Cubist stock is trading at a 5% discount to the value of the drug. Based on their peak sales they estimate Cubist is trading at a 30-49% discount to Cubicin's current fair value.
Firm expects Cubist to report its first profitable quarter on a GAAP basis in 3Q. Depending on Cubist's long-term strategy, they believe the company could reduce expenses by $30 MM to $55 MM per year, which could increase profitability by $0.45 to $0.85 and add $5 to $13 of value assuming historical pharma multiples
Investors are concerned about what "Act 2" will be, but Merrill believes management is more likely to create value for investors than significantly dilute shareholders. There are a select few synergistic drugs potentially available for license or acquisition, but if Cubist is unable to build its pipeline externally, they believe it will reduces expenses, maximize cash flow, & package the company for acquisition.
Reits Buy and $35 tgt.
Notablecalls: While there was considerable buy interest in CBST already on Friday (following Jeffco's comments), I suspect comments from Merrill will provide another upward push.
Calls of Note Part 2
- FBR is reiterating their Outperform rating and $22 price target on TeleTech Holdings (NASDAQ:TTEC) and adding the company to the FBR Top Picks List as their focus has shifted to those enterprise services stocks posed to benefit from globalization trends. TTEC continues to secure more business from both new and existing clients, due to the widespread adoption of outsourcing due to domain expertise and efficiencies, having added several new clients during the quarter and announced expansion with others. Firm also continues to believe opportunity exists with the stock as consensus estimates are 30% below guidance due to the uncertainty around Newgen. At 7.8x CY07 EBITDA versus the peer group at 8x, they continue to believe the shares represent one of the best risk/ rewards in firm's coverage universe and remain buyers of the shares.
Firm believes TTEC is positioned for a strong CY07 as the recent client wins in healthcare, media, and communications continue to show the company's ability to seize the organic growth trends in the outsourcing market. TTEC's strong product offering is also proving advantageous in securing more business from existing clients, as the company continues to see relationships expand within its customer base.
Notablecalls: Expect to see some buy interest following FBR's comments.
Firm believes TTEC is positioned for a strong CY07 as the recent client wins in healthcare, media, and communications continue to show the company's ability to seize the organic growth trends in the outsourcing market. TTEC's strong product offering is also proving advantageous in securing more business from existing clients, as the company continues to see relationships expand within its customer base.
Notablecalls: Expect to see some buy interest following FBR's comments.
Calls of Note Part 1
- Morgan Stanley comments on Semiconductor Industry Association (SIA) August revenue data released on Sept 30.
On a three-month-average basis, revenues of $20.5 billion were 2% higher than their estimate, and this represents a recovery from July, when revenues were 2% below firm's estimate. On a quarter-over-quarter and year-over-year basis, revenue growth remained relatively consistent, with 4% sequential (versus 3% in July) and 11% year-over-year (versus 12% in July) growth. While revenues in the month of September will be critical to how the overall quarter turns out, based on the July and August data, the firm currently expects the third quarter to grow 4%-6% sequentially and 5%-8% on a year-over-year basis. These growth rates compare with flat sequential and 10% year-over-year growth in the second quarter.
Quarter-to-date (July/August versus April/May), the overall semiconductor industry grew 7% sequentially on 4% unit growth and a 3% increase in average selling prices (ASPs). Within the major product categories, strength was led by DRAMs (up 19%) and MPUs (up 17%), which clearly reflects the seasonal uptick in PC build rates after a weak second quarter. However, after a 42% comparison in July (versus April), the growth rate in August slowed to 6% (versus May). Provided September represented relatively normal seasonality, then the MPU sector would grow at a low double-digit sequential rate in the third quarter, and AMD (NYSE:AMD) should exceed consensus estimates, while Intel (NASDAQ:INTC) would likely report in line to slightly higher than consensus results.
While NAND flash (up 8%), standard logic (up 8%), discretes (up 4%), and optoelectronics (up 4%) were generally in line with the growth rate of the overall semiconductor industry, most of the other major product segments have declined sequentially during the first two months of the quarter. NOR flash (down 6%) and DSPs (down 4%) represented the weakest segments, and the firm believes this reflects an inventory correction in the cellular phone supply chain.
Overall, they expect the number of negative earnings surprises in the third quarter to increase about threefold sequentially (to 35%-45% of all semiconductor companies). Given the sharp increase in negative earnings surprises, coupled with a deceleration in year-over-year growth rates and what will likely prove to be a decline in average operating margins for the overall semiconductor industry, the firm would expect the strong advance enjoyed by most semiconductor stocks during the last two months to succumb to profit taking in October.
Notablecalls: No real surprises in the SIA data. I hear Citi beating their chest on AMD/INTC saying SIA data confirms their thesis that Sept qtr will be strong. So what? It's the weakness in Dec qtr and beyond I'm worried about.
On a three-month-average basis, revenues of $20.5 billion were 2% higher than their estimate, and this represents a recovery from July, when revenues were 2% below firm's estimate. On a quarter-over-quarter and year-over-year basis, revenue growth remained relatively consistent, with 4% sequential (versus 3% in July) and 11% year-over-year (versus 12% in July) growth. While revenues in the month of September will be critical to how the overall quarter turns out, based on the July and August data, the firm currently expects the third quarter to grow 4%-6% sequentially and 5%-8% on a year-over-year basis. These growth rates compare with flat sequential and 10% year-over-year growth in the second quarter.
Quarter-to-date (July/August versus April/May), the overall semiconductor industry grew 7% sequentially on 4% unit growth and a 3% increase in average selling prices (ASPs). Within the major product categories, strength was led by DRAMs (up 19%) and MPUs (up 17%), which clearly reflects the seasonal uptick in PC build rates after a weak second quarter. However, after a 42% comparison in July (versus April), the growth rate in August slowed to 6% (versus May). Provided September represented relatively normal seasonality, then the MPU sector would grow at a low double-digit sequential rate in the third quarter, and AMD (NYSE:AMD) should exceed consensus estimates, while Intel (NASDAQ:INTC) would likely report in line to slightly higher than consensus results.
While NAND flash (up 8%), standard logic (up 8%), discretes (up 4%), and optoelectronics (up 4%) were generally in line with the growth rate of the overall semiconductor industry, most of the other major product segments have declined sequentially during the first two months of the quarter. NOR flash (down 6%) and DSPs (down 4%) represented the weakest segments, and the firm believes this reflects an inventory correction in the cellular phone supply chain.
Overall, they expect the number of negative earnings surprises in the third quarter to increase about threefold sequentially (to 35%-45% of all semiconductor companies). Given the sharp increase in negative earnings surprises, coupled with a deceleration in year-over-year growth rates and what will likely prove to be a decline in average operating margins for the overall semiconductor industry, the firm would expect the strong advance enjoyed by most semiconductor stocks during the last two months to succumb to profit taking in October.
Notablecalls: No real surprises in the SIA data. I hear Citi beating their chest on AMD/INTC saying SIA data confirms their thesis that Sept qtr will be strong. So what? It's the weakness in Dec qtr and beyond I'm worried about.
Sunday, October 01, 2006
Barron's Summary
Barron's cover story discusses airlines, saying that it may be time for investors to reconsider their understandable aversion to US airline stocks. The industry may be in its best shape ever b/c of wrenching cost cuts at mainline carriers such as American Airlines (AMR), Continental Airlines (CAL), United (UAUA) and US Airways (LCC), that have made them competitive with low-cost operators like Southwest (LUV) and JetBlue (JBLU). US airlines notched one of their most profitable quarters ever in the 3 months ended in June, despite punishing oil prices in the range of $70-75 a barrel. The reasons: lower cost structures, restrained capacity growth and a robust economy. The just-concluded Q3 looks good, but not as strong as the Q2. For the 1st time since '00, the industry could be profitable in the seasonally weak Q4, owing in part to the recent sharp drop in oil prices and the loosening of federal rules on liquids in carry-on luggage. The outlook for '07 looks bright, barring a sharp economic slowdown. In fact, next year could be the most profitable ever for airlines. Other stocks mentioned include: ALK, AAI and FRNT.
Barron's discusses home builders, saying that unlike in past housing cycles, when co's borrowed heavily from banks, home builders today also use options and off-balance-sheet joint ventures to buy land. When times were flush, these financing vehicles enabled the industry to expand without bulking up its debt. But now that the housing mkt has weakened, land options and joint ventures could come back to haunt some co's, their financial partners and the broader economy, not to mention stockholders. At NVR (NVR), Lennar (LEN), Hovnanian (HOV) and Beazer (BZH), land-option deposits represent a hefty chunk of book value. At Standard Pacific (SPF) and KB Home (KBH), joint ventures account for much of book value.
As PetSmart (PETM) opens 100 new stores a year and aggressively adds pet hotels, sales and profit margins should climb steadily. The stock could rise 25% or more.
"The Trader" column discusses McDonalds (MDC), which is inviting shareholders to flip burgers for burritos. The co is about to distribute the 50.9% of Chipotle (CMG) it owns to shareholders, in exchange for McDonald's shares. Investors have until midnight Thu to tender their MDC shares and receive Chipotle shares in an as yet unfinalized ratio that will give them approximately a 10% discount on the stock. Of course, there are multiple catches. One is that b/c many more shares are likely to be tendered than there are Chipotle shares available to go around, the number of shares in CMG will be prorated. Shawn Collins, of Citigroup, emphasizes that forecasting the proration factor is tough, and arbitrage funds have been busily playing this trade for a month. Still, he ests that investors will receive about 1 Chipotle share for every 5 McDonald's shares tendered. So, there's no sure-thing, highly profitable trade in tendering lots of McDonald's shares to get CMG at a discount. But, Collins notes, retail investors who tender 100 shares or fewer will automatically get Chipotle shares without being prorated, at close to a 10% discount. This could be attractive for anyone looking to take profits in recently strong McDonald's shares by trading them for Chipotle stock below mkt price. Also note that, based on past transactions, after the exchange offer in a split-off, the stock of the parent has tended to decline modestly in the days and weeks after, while the former subsidiary shares tend to rise.
According to the Barron's, with time almost up for Nasdaq (NDAQ) to decide whether it should bid for the LSE, it's clear that investors in Europe's largest stock mart, and its mgmt, can't expect anyone to offer more than the current stock price. Nasdaq itself can ill afford to improve on the price it has paid in building up its 25.1% LSE stake without destroying value for its shareholders. Under UK takeover laws, Nasdaq must make a bid for LSE at a minimum price of $23.18 a share, the price it paid when it last bought shares. The stock trades around that level, valuing the London exchange at 25x earnings for '07. That never looked cheap. But it looks even less so now. In the latest trading update, the LSE's growth looks as if it is stabilizing rather than accelerating. Its number of new issues and avg yield from trades on its electronic trading platform SETS have dipped, reflecting the business' cyclical nature, rather than high growth, as some may still believe.
Barron's discusses home builders, saying that unlike in past housing cycles, when co's borrowed heavily from banks, home builders today also use options and off-balance-sheet joint ventures to buy land. When times were flush, these financing vehicles enabled the industry to expand without bulking up its debt. But now that the housing mkt has weakened, land options and joint ventures could come back to haunt some co's, their financial partners and the broader economy, not to mention stockholders. At NVR (NVR), Lennar (LEN), Hovnanian (HOV) and Beazer (BZH), land-option deposits represent a hefty chunk of book value. At Standard Pacific (SPF) and KB Home (KBH), joint ventures account for much of book value.
As PetSmart (PETM) opens 100 new stores a year and aggressively adds pet hotels, sales and profit margins should climb steadily. The stock could rise 25% or more.
"The Trader" column discusses McDonalds (MDC), which is inviting shareholders to flip burgers for burritos. The co is about to distribute the 50.9% of Chipotle (CMG) it owns to shareholders, in exchange for McDonald's shares. Investors have until midnight Thu to tender their MDC shares and receive Chipotle shares in an as yet unfinalized ratio that will give them approximately a 10% discount on the stock. Of course, there are multiple catches. One is that b/c many more shares are likely to be tendered than there are Chipotle shares available to go around, the number of shares in CMG will be prorated. Shawn Collins, of Citigroup, emphasizes that forecasting the proration factor is tough, and arbitrage funds have been busily playing this trade for a month. Still, he ests that investors will receive about 1 Chipotle share for every 5 McDonald's shares tendered. So, there's no sure-thing, highly profitable trade in tendering lots of McDonald's shares to get CMG at a discount. But, Collins notes, retail investors who tender 100 shares or fewer will automatically get Chipotle shares without being prorated, at close to a 10% discount. This could be attractive for anyone looking to take profits in recently strong McDonald's shares by trading them for Chipotle stock below mkt price. Also note that, based on past transactions, after the exchange offer in a split-off, the stock of the parent has tended to decline modestly in the days and weeks after, while the former subsidiary shares tend to rise.
According to the Barron's, with time almost up for Nasdaq (NDAQ) to decide whether it should bid for the LSE, it's clear that investors in Europe's largest stock mart, and its mgmt, can't expect anyone to offer more than the current stock price. Nasdaq itself can ill afford to improve on the price it has paid in building up its 25.1% LSE stake without destroying value for its shareholders. Under UK takeover laws, Nasdaq must make a bid for LSE at a minimum price of $23.18 a share, the price it paid when it last bought shares. The stock trades around that level, valuing the London exchange at 25x earnings for '07. That never looked cheap. But it looks even less so now. In the latest trading update, the LSE's growth looks as if it is stabilizing rather than accelerating. Its number of new issues and avg yield from trades on its electronic trading platform SETS have dipped, reflecting the business' cyclical nature, rather than high growth, as some may still believe.
Archives
June 2006 July 2006 August 2006 September 2006 October 2006 November 2006 December 2006 January 2007 February 2007 March 2007 April 2007 May 2007 June 2007 July 2007 August 2007 September 2007 October 2007 November 2007 December 2007 January 2008 February 2008 March 2008 April 2008 May 2008 June 2008 July 2008 August 2008 September 2008 October 2008 November 2008 December 2008 January 2009 February 2009 March 2009 April 2009 May 2009 June 2009 July 2009 August 2009 September 2009 October 2009 November 2009 December 2009
