Notable Calls
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Thursday, November 30, 2006
- Susquehanna Financial notes their recent checks suggest that several North American IDMs have started to sharply reduce wafer starts. This is unsurprising given firm's analysis of industry fundamentals, which suggests that IC unit production is likely to dip from current above-trend levels to more normalized levels over the next several months. They see these as caution signals for semiconductor stocks generally, and continue to see at least 10-15% downside risk to the SOX.
Only two semi industry downturns in the last 30 years have been driven by a drop in demand (defined as multi-quarter negative IC unit growth). However, after more than a year above trendline, we are almost certain to see at least a dip in unit production over the next several quarters. In a worst-case scenario, we could see a drop significantly below the long-term trendline - the last time this happened was in 2001, after IC units had spent the prior 20 months above trendline. IC units have been above trendline for 14 months.
While the firm remains impressed with Texas Instrument's (NYSE:TXN) execution and strong product cycles in 3G and high-performance analog, their checks suggest that the chipmaker is cutting wafer starts at its internal manufacturing facilities, as well as with foundry partners due to worse than anticipated demand from at least one major handset customer, as well as generally slowing analog unit growth. Firm would not be surprised if management takes F4Q06 (December) guidance to the low end of the previous range ($3.46 bln-$3.75 bln/$0.40-$0.47) during the mid-quarter update on December 11.Recommends that investors consider getting more constructive if valuation dips below 16x P/E NTM - the stock currently trades at 17.2x CY07 EPS estimate of $1.70. Negative Factor
Firm is also cautious on AMD (NYSE:AMD).
Notablecalls: Not actionable but good to know category.
Only two semi industry downturns in the last 30 years have been driven by a drop in demand (defined as multi-quarter negative IC unit growth). However, after more than a year above trendline, we are almost certain to see at least a dip in unit production over the next several quarters. In a worst-case scenario, we could see a drop significantly below the long-term trendline - the last time this happened was in 2001, after IC units had spent the prior 20 months above trendline. IC units have been above trendline for 14 months.
While the firm remains impressed with Texas Instrument's (NYSE:TXN) execution and strong product cycles in 3G and high-performance analog, their checks suggest that the chipmaker is cutting wafer starts at its internal manufacturing facilities, as well as with foundry partners due to worse than anticipated demand from at least one major handset customer, as well as generally slowing analog unit growth. Firm would not be surprised if management takes F4Q06 (December) guidance to the low end of the previous range ($3.46 bln-$3.75 bln/$0.40-$0.47) during the mid-quarter update on December 11.Recommends that investors consider getting more constructive if valuation dips below 16x P/E NTM - the stock currently trades at 17.2x CY07 EPS estimate of $1.70. Negative Factor
Firm is also cautious on AMD (NYSE:AMD).
Notablecalls: Not actionable but good to know category.
Calls of Note Part 2
- Banc of America notes they are shifting their stance on homebuilders to neutral from cautious as they are seeing improvement in traffic, affordability, and construction - it was deterioration in these factors that led them to become more cautious in '05. Firm does not expect a smooth upward move, but expect choppiness over the next 12-24 months based on the excess inventory, as it will take time to work through the oversupply. They raising Standard Pacific (NYSE:SPF) to Buy from Sell and Meritage Homes (NYSE:MTH), NVR (NYSE:NVR), Pulte (NYSE:PHM), Ryland (NYSE:RYL), and Toll (NYSE:TOL) to Neutral from Sell.
BAC's Monthly Survey of Real Estate Agents shows improved buyer traffic in 33 out of 39 markets in November relative to October, although traffic is still below the expectations of agents in 38 of the 39 markets. They view traffic as the leading indicator of sales and pricing. Lower mortgage rates, price declines, and higher incomes are helping to ease strained affordability. Firm expects affordability to continue to improve over the coming year.
Tough times ahead for subcontractors; a positive for builders. Homebuilders have shown more discipline, with permits off 32% yr/yr in Oct. Expects continued discipline, which should help inventories and ease construction costs.
A seasonal increase in inventories in the Spring could lead to further pressure on prices and additional cancellations. Higher long-term interest rates would also likely lead to additional weakness.
Firm expects the stocks to trade in a range over the next 3- 6months.
Notablecalls: Historically, housing downturns have lasted between 26 and 52 months with new home unit sales averaging around a 50% decline. Even in best case, we're not there yet. And I'm strongly inclined to believe we are not heading towards the best of outcomes.
BAC's Monthly Survey of Real Estate Agents shows improved buyer traffic in 33 out of 39 markets in November relative to October, although traffic is still below the expectations of agents in 38 of the 39 markets. They view traffic as the leading indicator of sales and pricing. Lower mortgage rates, price declines, and higher incomes are helping to ease strained affordability. Firm expects affordability to continue to improve over the coming year.
Tough times ahead for subcontractors; a positive for builders. Homebuilders have shown more discipline, with permits off 32% yr/yr in Oct. Expects continued discipline, which should help inventories and ease construction costs.
A seasonal increase in inventories in the Spring could lead to further pressure on prices and additional cancellations. Higher long-term interest rates would also likely lead to additional weakness.
Firm expects the stocks to trade in a range over the next 3- 6months.
Notablecalls: Historically, housing downturns have lasted between 26 and 52 months with new home unit sales averaging around a 50% decline. Even in best case, we're not there yet. And I'm strongly inclined to believe we are not heading towards the best of outcomes.
Calls of Note Part 1
- Bear Stearns notes that after meeting with CEO Francis Lee and CFO Russ Knittel, they came away reassured about Synaptics' (NASDAQ:SYNA) growth prospects. As expected, SYNA did not comment on its relationship with AAPL, althouh the firm continues to believe that SYNA has won back some AAPL business. SYNA continues to execute on growing its core notebook business, at the same time, making solid progress in expanding into adjacent market (e.g., has 9 mobile phone wins).
While SYNA did not update its financial outlook, it noted that demand for notebook PCs remains strong, with its dollar content per notebook expected to increase with inclusion of additional touch solutions (LightTouch, Dual Mode) beyond touchpads (~10% of notebook shipped in 1Q07 includedmultiple touch solutions). SYNA also expressed optimism regarding seasonal recovery in MP3 players. As an aside, SYNA noted that it does not expect MSFT Vista delay to have an impact on notebook demand.
While SYNA did not comment on its relationship with AAPL, it noted increasing design activities in MP3 players and mobile phones. In particular, SYNA highlighted growing interest by mobile phone vendors in its user interface solution like Onyx, as input requirements in mobile phones continue to increase owing to incorporation of multimedia features. In addition, SYNA continues to expand into adjacent markets (e.g., mouse/keyboards, remote controls, etc.).
Maintains estimates, Outperform rating and $33 tgt.
Notablecalls: Not actionable but good to know category.
While SYNA did not update its financial outlook, it noted that demand for notebook PCs remains strong, with its dollar content per notebook expected to increase with inclusion of additional touch solutions (LightTouch, Dual Mode) beyond touchpads (~10% of notebook shipped in 1Q07 includedmultiple touch solutions). SYNA also expressed optimism regarding seasonal recovery in MP3 players. As an aside, SYNA noted that it does not expect MSFT Vista delay to have an impact on notebook demand.
While SYNA did not comment on its relationship with AAPL, it noted increasing design activities in MP3 players and mobile phones. In particular, SYNA highlighted growing interest by mobile phone vendors in its user interface solution like Onyx, as input requirements in mobile phones continue to increase owing to incorporation of multimedia features. In addition, SYNA continues to expand into adjacent markets (e.g., mouse/keyboards, remote controls, etc.).
Maintains estimates, Outperform rating and $33 tgt.
Notablecalls: Not actionable but good to know category.
Color on quarter: Synopsys (NASDAQ:SNPS)
As Synopsys (NASDAQ:SNPS) was the only real mover in after hrs trading, I thouhgt to highlight some of the analyst commentary on it this AM:
- JP Morgan notes that although Q406 results were impressive, they continue to rate SNPS shares at a neutral as they await a better entry point to own the stock. At $26 per share after hours, stock is trading at 14x FY 2007 free cash flow, which is at a slight discount to CDNS, and near what they believe is fair value for software companies in this segment.
The firm believes this is the best metric to value stock given its ratable revenue recognition model. Two other factors keep them neutral on the stock as well. First, there have been some rumblings in the semiconductor industry about a possible slowdown as we enter FY 2007, which they believe could impact RandD spending, and adversely affect EDA. Second, backlog in 2006 grew about 5% yoy to $2B while revenue guidance for FY07 is 9% at the mid-point of guidance and company expects Book-to-bill to be greater than 1.0 for the year implying acceleration in orders (bookings) in a year that could get off to a tough start.
- RBC Capital notes the company reported expenses at the low end of the guidance and cited strong progress with its expense reduction initiatives. Lower expenses combined with some slight revenue upside drove the two cents upside. Further, the company provided strong guidance for January Q1: Revenues between $292M-$300M and pro-forma EPS guidance of $0.26- $0.28. The company is benefiting from an extra week in the quarter along with a lower tax rate in FY 2007 (28-29%), however, the main driver of the upside for January is flattish expenses on rising revenues.
The firm is increasing their FY2007 pro- forma EPS estimate from $1.10 to $1.30. About $0.04 is due to the lower tax rate and the remainder is slightly higher revenues and lower expenses. They believe that the company was too conservative last quarter and is now being slightly aggressive with its guidance.
Tgt goes to $26 from $23 with the firm not recommending chasing the stock at its current price
level, as the company does have to deliver on what they consider to be slightly aggressive guidance. Recommends buying on pullbacks.
Notablecalls: Can't say I'm too familiar with the name but judging from analyst commentary and the trading dynamics (the stock had a big run yesterday on top of strong performance since July) I'd be looking for a fading oppy. More aggressive accounts may see opportunity above the $26 level. The EDA cycle is closely tied to the overall Semi cycle and longer term readers already know my views on the latter.
- JP Morgan notes that although Q406 results were impressive, they continue to rate SNPS shares at a neutral as they await a better entry point to own the stock. At $26 per share after hours, stock is trading at 14x FY 2007 free cash flow, which is at a slight discount to CDNS, and near what they believe is fair value for software companies in this segment.
The firm believes this is the best metric to value stock given its ratable revenue recognition model. Two other factors keep them neutral on the stock as well. First, there have been some rumblings in the semiconductor industry about a possible slowdown as we enter FY 2007, which they believe could impact RandD spending, and adversely affect EDA. Second, backlog in 2006 grew about 5% yoy to $2B while revenue guidance for FY07 is 9% at the mid-point of guidance and company expects Book-to-bill to be greater than 1.0 for the year implying acceleration in orders (bookings) in a year that could get off to a tough start.
- RBC Capital notes the company reported expenses at the low end of the guidance and cited strong progress with its expense reduction initiatives. Lower expenses combined with some slight revenue upside drove the two cents upside. Further, the company provided strong guidance for January Q1: Revenues between $292M-$300M and pro-forma EPS guidance of $0.26- $0.28. The company is benefiting from an extra week in the quarter along with a lower tax rate in FY 2007 (28-29%), however, the main driver of the upside for January is flattish expenses on rising revenues.
The firm is increasing their FY2007 pro- forma EPS estimate from $1.10 to $1.30. About $0.04 is due to the lower tax rate and the remainder is slightly higher revenues and lower expenses. They believe that the company was too conservative last quarter and is now being slightly aggressive with its guidance.
Tgt goes to $26 from $23 with the firm not recommending chasing the stock at its current price
level, as the company does have to deliver on what they consider to be slightly aggressive guidance. Recommends buying on pullbacks.
Notablecalls: Can't say I'm too familiar with the name but judging from analyst commentary and the trading dynamics (the stock had a big run yesterday on top of strong performance since July) I'd be looking for a fading oppy. More aggressive accounts may see opportunity above the $26 level. The EDA cycle is closely tied to the overall Semi cycle and longer term readers already know my views on the latter.
Paperstand
According to the Barron’s Online, the basket of apparel stocks tracked by Thomson Financial has been on a roll, jumping 21% over the last 4 months. But since closing at a 5-year high on Nov. 15, the index has dropped 6%. And that may be as good as it gets for Coldwater Creek (CWTR), Claire’s Stores (CLE), AnnTaylor (ANN), Aeropostale (ARO) and other highflying apparel retail stocks. Though pulling back from recent highs, the sector continues to trade at sizable premiums to the broader mkt, reflecting big expectations. But given challenges facing retailers this Christmas and mixed economic indicators, many stocks remain ahead of themselves. "It is not surprising that these stocks are a bit squishy right now," says Bill McVail, retail industry analyst and small-cap portfolio manager at Turner Investment Partners. "We won't know until January how the co’s performed. Add to that the run-up in these stocks, and it's no shock there's been some profit-taking."
“Inside Scoop” section reports that shares of Casual Male (CMRG) are currently trading near a 12-year high, but SAC Capital has loosened its belt and gobbled up nearly 1.3m shares of the co since the end of the third quarter.
Wednesday, November 29, 2006
Calls of Note Part 5
- Merrill Lynch notes SanDisk's (NASDAQ:SNDK) stock has been slipping since Q3 results mainly due to worries about oversupply in the NAND flash market. From a short-term trading standpoint, they think the stock could weaken further as the market continues to digest substantial new supply that is not being offset by any new killer applications. Firm's checks suggest that flash memory demand for the holiday season so far has been seasonally normal, but no more.
Despite their negative bias for the near term, firm's long-term view remains neutral. Certain suppliers, most notably Samsung, have begun to ease their capital spending on the NAND market, which should help alleviate the oversupply situation by the second half of 2007. Firm has trimmed their industry bit growth assumption as a result. Notes that their adjusted EPS estimate for 2007 of $2.50 remains below consensus estimate of $2.77.
From a valuation standpoint, the stock is trading at 18x prospective earnings, which does not look expensive based on the historical trading range (15x to 25x). However, given firm's belief that we are heading into further pricing weakness during the next few quarters, we think a more conservative multiple is warranted. The stock is trading between the normalized fair value ($53) and trough-cycle fair value ($35) based on long term returns model, suggesting
the stock is fairly valued.
Maintains Neutral.
Notablecalls: Expect to see some weakness in SNDK.
Despite their negative bias for the near term, firm's long-term view remains neutral. Certain suppliers, most notably Samsung, have begun to ease their capital spending on the NAND market, which should help alleviate the oversupply situation by the second half of 2007. Firm has trimmed their industry bit growth assumption as a result. Notes that their adjusted EPS estimate for 2007 of $2.50 remains below consensus estimate of $2.77.
From a valuation standpoint, the stock is trading at 18x prospective earnings, which does not look expensive based on the historical trading range (15x to 25x). However, given firm's belief that we are heading into further pricing weakness during the next few quarters, we think a more conservative multiple is warranted. The stock is trading between the normalized fair value ($53) and trough-cycle fair value ($35) based on long term returns model, suggesting
the stock is fairly valued.
Maintains Neutral.
Notablecalls: Expect to see some weakness in SNDK.
Calls of Note Part 4
- Piper Jaffray is somewhat cautious on Amylin Pharma (NASDAQ:AMLN) in the s-t saying that with 7 weeks of Rx data available for 4Q, they are lowering their Byetta sales estimate for 4Q from $147m to $135m. Street consensus for 4Q was $148m, with only 1 of 20 analysts below $140m in 4Q sales.
The most important contribution to firm's estimate revision today is the magnitude of the live sample program (distribution of free 5 ug pens) restarted in late September. Relative to initial projections, they may have underestimated this effect and, while they have focused on the long-term potential for these live samples to stimulate future revenue growth as they convert to revenue-generating 10 ug refills, they may have overlooked the effect of the lost revenue from these pens on 4Q sales. Other Factors To Consider: Channel Fill, Gross-To-Net Adjustments And Holidays.
While the firm acknowledges that the current Byetta run-rate for 4Q will likely fall short of prior estimate, they remain convinced that this is not related to the recent launch of Merck's Januvia, a central bear argument raised against AMLN.
Firm would use any short-term weakness in the stock on revisions to consensus numbers as a buying opportunity.
Notablecalls: Expect to see weakness in AMLN today. Think they are giving the 5ug pens away for no reason or bc they expect to see competition from Januvia. Or are they already seeing weakness after stuffing the channel?
The most important contribution to firm's estimate revision today is the magnitude of the live sample program (distribution of free 5 ug pens) restarted in late September. Relative to initial projections, they may have underestimated this effect and, while they have focused on the long-term potential for these live samples to stimulate future revenue growth as they convert to revenue-generating 10 ug refills, they may have overlooked the effect of the lost revenue from these pens on 4Q sales. Other Factors To Consider: Channel Fill, Gross-To-Net Adjustments And Holidays.
While the firm acknowledges that the current Byetta run-rate for 4Q will likely fall short of prior estimate, they remain convinced that this is not related to the recent launch of Merck's Januvia, a central bear argument raised against AMLN.
Firm would use any short-term weakness in the stock on revisions to consensus numbers as a buying opportunity.
Notablecalls: Expect to see weakness in AMLN today. Think they are giving the 5ug pens away for no reason or bc they expect to see competition from Januvia. Or are they already seeing weakness after stuffing the channel?
Calls of Note Part 3
- FBR notes Pharmion (NASDAQ:PHRM) joins CELG as a biotech Top Pick on the FBR Top Picks list. Firm thinks PHRM should be trading at $32 in the next 12 months, implying 37% appreciation potential. They reach their $32 target by multiplying 2010 EPS estimate of $1.61 by a multiple of 30x and discounting at 20%. Firm's 2010 EPS assumes revenue of $482M, but there could be upside to this number; the company recently guided for revenues to range from $600M to $825M in 2010.
Drivers for outperformance include: further evidence from monthly data that Vidaza can survive - and even grow " with Dacogen now on the market, key presentations at ASH that position Vidaza for further growth, and 1H07 filings in Europe on thalidomide (calling attention to the possibility that approval could double sales from its current run rate of $76 million) and satraplatin in prostate cancer.
Notablecalls: Expect to see some mild buy interest following the call.
Drivers for outperformance include: further evidence from monthly data that Vidaza can survive - and even grow " with Dacogen now on the market, key presentations at ASH that position Vidaza for further growth, and 1H07 filings in Europe on thalidomide (calling attention to the possibility that approval could double sales from its current run rate of $76 million) and satraplatin in prostate cancer.
Notablecalls: Expect to see some mild buy interest following the call.
Calls of Note Part 2
- Thomas Weisel Partners notes that with Coinstar (NASDAQ:CSTR) up sharply, they revisited the story to see if the move was justified.
Coinstar is coming out of a period of heavy investment and appears poised for an earnings breakout. Firm's analysis suggests a two- to three-year earnings growth rate in excess of 20% if opportunities unfold as expected and they get to run-rate EPS estimate of better than $1.45 in the 2008-2009 time frame. However, their initial 2007 estimates failed to encompass management's strategy to return a portion of growth to retail partners.
Although 2007E revenue of $615mn is intact, the firm is scaling back EBITDA from $138mn to $126mn and EPS from $1.26 to $0.99. Management typically shares half of the upside it generates with retail partners and TWP had not initially factored that into their model.
With the stock up 41% since August 1, versus a gain for the Nasdaq of 16%, investors appear to have taken notice of the potential earnings breakout. If one assumes that everything unfolds as expected, Coinstar should reach EBITDA of $160mn sometime in 2009. Assuming a multiple of 8.5x, one gets to a value for the stock of $44 per share. If we discount that back at a required rate of return of 15%, one gets to a current fair value of $32 per share. They like the growth story, but would prefer an entry point below $32 per share. Maintains Mkt Weight.
Notablecalls: The stock has had quite a run and I would not be surprised to see it pull back some more over the next couple of days. Not a high conviction call.
Coinstar is coming out of a period of heavy investment and appears poised for an earnings breakout. Firm's analysis suggests a two- to three-year earnings growth rate in excess of 20% if opportunities unfold as expected and they get to run-rate EPS estimate of better than $1.45 in the 2008-2009 time frame. However, their initial 2007 estimates failed to encompass management's strategy to return a portion of growth to retail partners.
Although 2007E revenue of $615mn is intact, the firm is scaling back EBITDA from $138mn to $126mn and EPS from $1.26 to $0.99. Management typically shares half of the upside it generates with retail partners and TWP had not initially factored that into their model.
With the stock up 41% since August 1, versus a gain for the Nasdaq of 16%, investors appear to have taken notice of the potential earnings breakout. If one assumes that everything unfolds as expected, Coinstar should reach EBITDA of $160mn sometime in 2009. Assuming a multiple of 8.5x, one gets to a value for the stock of $44 per share. If we discount that back at a required rate of return of 15%, one gets to a current fair value of $32 per share. They like the growth story, but would prefer an entry point below $32 per share. Maintains Mkt Weight.
Notablecalls: The stock has had quite a run and I would not be surprised to see it pull back some more over the next couple of days. Not a high conviction call.
Calls of Note Part 1
- RBC Capital's Mark Sue is back commenting on 3Com (NASDAQ:COMS) following news the co will pay $882M to wrap up the remaining 49% of the Huawei-JV (near the high-end of firm's range of $750-$900M). 3com will be left with only $32M in net-cash or $0.08-per/share, an uncomfortable amount considering that 3Com is operating in a net loss.
3Com will need some financing and the uncertainty of the amount and structure may weigh on the shares. Considering RBC's view that 3Com may not be investment grade, they think 3Com will choose a convertible note due in 2011. 3Com may raise up to $500M and the notes may pay interest seminually at a rate of 1% per annum. Firm expects a call spread convert deal with some proceeds ear marked for a potential share buyback.
The JV has been successful from a top-line growth perspective but 3Com will need to provide incentives to key managers in order to sustain the +50% YoY top-line growth. It's a positive that the deal will wrap-up and it does provide some closure but the business uncertainty is now replaced by financing uncertainty and increased execution risk.
So what's this thing worth? Considering the revenue base of almost $850M in CY07 for the JV, 3Com's potential 100% ownership combined with 3Com's estimated base-business of $650M and the remaining cash balance, they believe 3Com's shares may be fully valued at $5.50. With that being said the firm thinks an entry point near $3.50-$4.00 may make it worthwhile for equity-investors looking for some year-end beta. Maintains Sector Perform rating.
Notablecalls: As I suspected, Mark was indeed calling for a fall in COMS' stock price on Nov 6 (check the archives) and it worked out that way. Nice call. For those hoping for a quick bounce, check out the comments on the likely upcoming convert deal. That may limit the upside.
3Com will need some financing and the uncertainty of the amount and structure may weigh on the shares. Considering RBC's view that 3Com may not be investment grade, they think 3Com will choose a convertible note due in 2011. 3Com may raise up to $500M and the notes may pay interest seminually at a rate of 1% per annum. Firm expects a call spread convert deal with some proceeds ear marked for a potential share buyback.
The JV has been successful from a top-line growth perspective but 3Com will need to provide incentives to key managers in order to sustain the +50% YoY top-line growth. It's a positive that the deal will wrap-up and it does provide some closure but the business uncertainty is now replaced by financing uncertainty and increased execution risk.
So what's this thing worth? Considering the revenue base of almost $850M in CY07 for the JV, 3Com's potential 100% ownership combined with 3Com's estimated base-business of $650M and the remaining cash balance, they believe 3Com's shares may be fully valued at $5.50. With that being said the firm thinks an entry point near $3.50-$4.00 may make it worthwhile for equity-investors looking for some year-end beta. Maintains Sector Perform rating.
Notablecalls: As I suspected, Mark was indeed calling for a fall in COMS' stock price on Nov 6 (check the archives) and it worked out that way. Nice call. For those hoping for a quick bounce, check out the comments on the likely upcoming convert deal. That may limit the upside.
Color on news: Pfizer (NYSE:PFE)
Analysts are somewhat devided on what to think about Pfizer's (NYSE:PFE) U.S. sales force cut announced yesterday:
- Prudential notes that over the last few weeks it has been postulated that a sizeable sales force
reduction was in the works at PFE. Firm's understanding is that PFE has about 9,000 reps in the U.S. - a 20% reduction equates to 1,800 reps. Assuming $200K/rep in annual compensation and benefits, PFE stands to save about $360M in SG&A expenses annually.
As a highly profitable industry, the firm has generally felt that drug companies' organizational structures have ballooned over the past several decades, and only in rare circumstances have they had to push through heavy cost reductions. This suggests that PFE - and most of its peers - probably have additional room to cut, but this is likely to be a gradual process of trial and error.
Cost cutting is good, but to the firm the better way to "win" as a drug company is to have a solid pipeline of new drugs in development. PFE spends over $7B a year on R&D which suggests that, at some point, the company will likely have more to brag about. Whether this Thursday's analyst meeting will provide that opportunity is unclear. Maintains Overweight and $30 tgt.
- Morgan Stanley notes PFE announced plans to eliminate 20% of its U.S. sales force, or approximately 2,200 positions as part of its overall goal to achieve a more agile and slimmed down cost structure. The plan does not affect the approximate 20,000 reps outside the U.S. but the firm would expect management to look for opportunities to pare down in the international territories as well.
While great news, the level of savings from this plan of approximately $330 million (or EPS of $0.03) is likely just one step in a series of cost reduction programs that will enable the company to lower its cost base in 2007 and 2008 and hit its high single digit EPS targets.
They applaud management for taking this first really significant step towards reversing the "arms race" and hope that PFE's announcement gives other global pharma companies "cover" to do the same thing. The firm remains Overweight PFE shares and expects the stock to react favorably to the announcement. They also anticipate a relatively upbeat R&D presentation on Thursday for which expectations are relatively low.
- UBS views this as a bold move (and a right one for the industry in general) but they are unsure of how and when the rest of its peer group (especially those with promotion sensitive products and the means to maximize this opportunity) will react.
Firm notes that in comparison to its peer group, a large part of PFE's product portfolio comprises of products that are in the primary care physician domain and many of its key products compete in categories with multiple therapeutic options and likely need continued detailing support. Furthermore promotional support will also be important for growth of new products such as Lyrica, Chantix and Exubera (where PFE is yet to meaningfully channel selling resources).
While PFE believes that this change is to address field force saturation with little impact expected on the sales performance, the firm remains slightly skeptical and believes that in the short term PFE could suffer from being the 1st mover until the playing field levels (with similar cuts from its peer group). UBS notes that when PFE had a modest reduction in its sales force ahead of its restructuring activity (late 2005), there was a significant impact on the number of audited details (as recorded by IMS) with 2005 Y/Y details down 28% and 2006 YTD details down ~20%. Maintains Neutral and $30 tgt.
Notablecalls: Looks like a case of some s-t pain vs. l-t gain. Considering there were rumors regarding a possible sales force reduction ahead of the announcement (I've actually been hearing these for the past 3-4 yrs) I think the upside may be somewhat limited. Not calling this a fading oppy as the R&D meeting scheduled for tomorrow may prolong the optimism.
- Prudential notes that over the last few weeks it has been postulated that a sizeable sales force
reduction was in the works at PFE. Firm's understanding is that PFE has about 9,000 reps in the U.S. - a 20% reduction equates to 1,800 reps. Assuming $200K/rep in annual compensation and benefits, PFE stands to save about $360M in SG&A expenses annually.
As a highly profitable industry, the firm has generally felt that drug companies' organizational structures have ballooned over the past several decades, and only in rare circumstances have they had to push through heavy cost reductions. This suggests that PFE - and most of its peers - probably have additional room to cut, but this is likely to be a gradual process of trial and error.
Cost cutting is good, but to the firm the better way to "win" as a drug company is to have a solid pipeline of new drugs in development. PFE spends over $7B a year on R&D which suggests that, at some point, the company will likely have more to brag about. Whether this Thursday's analyst meeting will provide that opportunity is unclear. Maintains Overweight and $30 tgt.
- Morgan Stanley notes PFE announced plans to eliminate 20% of its U.S. sales force, or approximately 2,200 positions as part of its overall goal to achieve a more agile and slimmed down cost structure. The plan does not affect the approximate 20,000 reps outside the U.S. but the firm would expect management to look for opportunities to pare down in the international territories as well.
While great news, the level of savings from this plan of approximately $330 million (or EPS of $0.03) is likely just one step in a series of cost reduction programs that will enable the company to lower its cost base in 2007 and 2008 and hit its high single digit EPS targets.
They applaud management for taking this first really significant step towards reversing the "arms race" and hope that PFE's announcement gives other global pharma companies "cover" to do the same thing. The firm remains Overweight PFE shares and expects the stock to react favorably to the announcement. They also anticipate a relatively upbeat R&D presentation on Thursday for which expectations are relatively low.
- UBS views this as a bold move (and a right one for the industry in general) but they are unsure of how and when the rest of its peer group (especially those with promotion sensitive products and the means to maximize this opportunity) will react.
Firm notes that in comparison to its peer group, a large part of PFE's product portfolio comprises of products that are in the primary care physician domain and many of its key products compete in categories with multiple therapeutic options and likely need continued detailing support. Furthermore promotional support will also be important for growth of new products such as Lyrica, Chantix and Exubera (where PFE is yet to meaningfully channel selling resources).
While PFE believes that this change is to address field force saturation with little impact expected on the sales performance, the firm remains slightly skeptical and believes that in the short term PFE could suffer from being the 1st mover until the playing field levels (with similar cuts from its peer group). UBS notes that when PFE had a modest reduction in its sales force ahead of its restructuring activity (late 2005), there was a significant impact on the number of audited details (as recorded by IMS) with 2005 Y/Y details down 28% and 2006 YTD details down ~20%. Maintains Neutral and $30 tgt.
Notablecalls: Looks like a case of some s-t pain vs. l-t gain. Considering there were rumors regarding a possible sales force reduction ahead of the announcement (I've actually been hearing these for the past 3-4 yrs) I think the upside may be somewhat limited. Not calling this a fading oppy as the R&D meeting scheduled for tomorrow may prolong the optimism.
Paperstand
The WSJ reports that Novartis (NVS) may be prepared to sell Gerber Products and could have a willing buyer in Nestlé. Gerber and Novartis's medical-nutrition business together would fetch between $4-5bn. Gerber alone would be valued at more than $3bn.
“Inside Track” section reports that 2 hedge funds that demanded an overhaul at Pep Boys-Manny Moe & Jack (PBY) have kept buying shares even after grabbing the steering wheel at the auto-parts retailer. The funds, Pirate Capital and Barington Equity Partners, successfully pushed for the ouster of the co's CEO and used their leverage as major shareholders to win a total of 5 seats on the co's 11-member board. Since then, they have continued to add to their holdings, spending more than $16m in Nov to buy nearly 1.3m Pep Boys shares. Pep Boys Chmn William Leonard, who is serving as interim CEO, bought an additional 40K shares this month.
Barron’s discusses Nintendo (NTDOY), saying that investors better buy the co’s new gaming device Wii than co shares. The shares have more than doubled to $28 in the last 12 months, primarily on the strength of another Nintendo machine, the hand-held Dual Screen, better known as the DS. The DS is expected to propel Nintendo's sales by more than 50% in the year ending March, to $7bn, while driving up profits by 70% or better. But the DS is last year's story, and Nintendo is entering into a year of expected slower growth, with sales up perhaps 9% and operating profit up 18%. For the stock to outperform, the Wii will have to be a winner over many months and years of game sales. Momentum investors will be tempted to bid up the shares to perhaps $35 or more as ests for Wii sales rise, but the real proof will come in how the Wii plays out over the course of ‘07, and that could mean some downside to the ADRs in the near term. "The stock has had a good run and a correction would be welcome," says Christian Takushi, of Swisscanto Asset Mgmt. Nintendo shares could have a 15% or so downside from here, says Takushi.
“Inside Scoop” section reports that hedge fund MMI Investments disclosed holding a 6% stake, or 20.6m shares, of Unisys (UIS).
Tuesday, November 28, 2006
Calls of Note Part 4
Two firms are issuing positive comments on SiRF Tech (NASDAQ:SIRF) this am:
- Morgan Stanley is ugrading their rating to Equal Weight from Underweight as the gap between their 2007 estimates and the consensus 2007 estimates has contracted and recent data suggests the risk of SiRF experiencing a sharper than expected Q1 seasonal drop in the PND market has been reduced (relative to firm's more cautious than consensus expectation).
They have increased their Q4 adjusted EPS estimate to reflect licensing income from the u-Nav agreement (management has not provided guidance on this but the firm believes they have enough information to make the call), and 2007 EPS increase from $0.75 to $0.80 (consensus $1.04) to reflect less of a Q1 seasonal decline and a moderate amount of licensing income. While aggressive and less valuation sensitive investors may look to data points about the emerging handset opportunity as reasons to buy the stock, the firm believes an Equal-weight-V rating is suitable for most investors.
- C.E. Unterberg notes they expect Personal Navigation Devices (PNDs) to be one of the hottest selling electronic gadgets this Christmas, as the size and prices of these devices has come down further, and are crammed with even more features. Firm notes that Garmin (GRMN) expects unit
shipments to rise 30% sequentially in the December quarter, while TomTom projects their unit shipments would grow between 38%-63% Q/Q this quarter, suggesting room for some upside to their and Street estimates for SiRF in Q4.
Additionally cell phone carriers are beginning to roll out services that tap into the GPS capabilities of handsets. Recent press reports indicate that in Paris, drivers will soon be able to use their GPS enabled handsets to locate nearby parking spots. In the U.S. two providers will soon be introducing a service that enables subscribers to be informed when their friends are nearby.
GPS enabled services have so far been delayed due to what is essentially a chicken and egg situation: not enough GPS enabled handsets as there have been limited GPS enabled services and vice versa. SiRF has been working with handset manufacturers for a very long time, and CEUT believes that most of the forthcoming handsets that can tap into these GPS services will use SiRF's GPS solutions. Firm continues to believe that 2007 will be a big year for SiRF's handset business, while in the near-term the increasing adoption by consumers of PNDs continues to drive the company's sales.
Notablecalls: Love the calls. Normally, I'd be all over SIRF but this time I think trading dynamics trump fundamentals.
- Morgan Stanley is ugrading their rating to Equal Weight from Underweight as the gap between their 2007 estimates and the consensus 2007 estimates has contracted and recent data suggests the risk of SiRF experiencing a sharper than expected Q1 seasonal drop in the PND market has been reduced (relative to firm's more cautious than consensus expectation).
They have increased their Q4 adjusted EPS estimate to reflect licensing income from the u-Nav agreement (management has not provided guidance on this but the firm believes they have enough information to make the call), and 2007 EPS increase from $0.75 to $0.80 (consensus $1.04) to reflect less of a Q1 seasonal decline and a moderate amount of licensing income. While aggressive and less valuation sensitive investors may look to data points about the emerging handset opportunity as reasons to buy the stock, the firm believes an Equal-weight-V rating is suitable for most investors.
- C.E. Unterberg notes they expect Personal Navigation Devices (PNDs) to be one of the hottest selling electronic gadgets this Christmas, as the size and prices of these devices has come down further, and are crammed with even more features. Firm notes that Garmin (GRMN) expects unit
shipments to rise 30% sequentially in the December quarter, while TomTom projects their unit shipments would grow between 38%-63% Q/Q this quarter, suggesting room for some upside to their and Street estimates for SiRF in Q4.
Additionally cell phone carriers are beginning to roll out services that tap into the GPS capabilities of handsets. Recent press reports indicate that in Paris, drivers will soon be able to use their GPS enabled handsets to locate nearby parking spots. In the U.S. two providers will soon be introducing a service that enables subscribers to be informed when their friends are nearby.
GPS enabled services have so far been delayed due to what is essentially a chicken and egg situation: not enough GPS enabled handsets as there have been limited GPS enabled services and vice versa. SiRF has been working with handset manufacturers for a very long time, and CEUT believes that most of the forthcoming handsets that can tap into these GPS services will use SiRF's GPS solutions. Firm continues to believe that 2007 will be a big year for SiRF's handset business, while in the near-term the increasing adoption by consumers of PNDs continues to drive the company's sales.
Notablecalls: Love the calls. Normally, I'd be all over SIRF but this time I think trading dynamics trump fundamentals.
Calls of Note Part 3
- Goldman Sachs is adding Quicksilver Resources (NYSE:KWK) to their Americas Buy List saying that while the Barnett Shale is considered by the Street to be one of the top fields for natural gas production growth in the US, they believe that there is controversy as to the quality of acreage in outer-lying parts of the play that has caused Quicksilver Resources shares to be unduly discounted. Current Street expectations are that acreage in the "core" part of the play in northern counties as well as "non-core" Johnson County is attractive, while other counties are unattractive. Firm believes the core and Johnson are more attractive but that there are still attractive drilling opportunities on Quicksilver's acreage. Sees 23% upside to $49 12-month price target.
Catalyst: Goldman believes that the combination of analyst meetings by EOG Resources (Nov.
29), XTO Energy (Jan. 23) and Quicksilver (Feb. 13) will provide both greater detail and focus on the Barnett. They believe that these meetings combined with greater drilling results from Somervell and Bosque counties could lead to a revaluation of Quicksilver shares, which is why the firm is upgrading the stock to Buy from Neutral.
Notablecalls: Expect to see buy interest. Would not chase.
Catalyst: Goldman believes that the combination of analyst meetings by EOG Resources (Nov.
29), XTO Energy (Jan. 23) and Quicksilver (Feb. 13) will provide both greater detail and focus on the Barnett. They believe that these meetings combined with greater drilling results from Somervell and Bosque counties could lead to a revaluation of Quicksilver shares, which is why the firm is upgrading the stock to Buy from Neutral.
Notablecalls: Expect to see buy interest. Would not chase.
Calls of Note Part 2
- Piper Jaffray comments on PetSmart (NASDAQ:PETM) after Wal-Mart opened its first pet grooming facility in Brentwood, TN, with 12 additional facilities expected in the Southeast over the next 12 months.
While the firm anticipates that Wal-Mart will expand its grooming test concept, they do not believe that this service poses a significant near-term threat to retailer PetSmart. Rather, they believe increased interest in and awareness of pet services bodes well for the industry. Firm views PetSmart's facilities as having a competitive advantage through a strong brand name and association with professional grooming service. Checks indicated a $56 price point at Wal-Mart for a full-service grooming package (bathing, clipping, nail trim, and brushing), while a similar service at PetSmart costing customers $45.
Entrance of the nation's largest retailer reflects the attractive growth characteristics of the pet services industry.
Maintains MP rating and $30 tgt on PETM.
Notablecalls: I've heard the validation story before as large players enter the market of lesser competitors. Eventually things get tougher. WMT and TGT have increased their presence in the pet biz over the past couple of yrs and will continue to do so. The grooming (or services business in general) generates margins that are 3x higher than products AND drives traffic. It will hurt PETM in the L-T. I would not be surprised to see some weakness in PETM in the coming days.
While the firm anticipates that Wal-Mart will expand its grooming test concept, they do not believe that this service poses a significant near-term threat to retailer PetSmart. Rather, they believe increased interest in and awareness of pet services bodes well for the industry. Firm views PetSmart's facilities as having a competitive advantage through a strong brand name and association with professional grooming service. Checks indicated a $56 price point at Wal-Mart for a full-service grooming package (bathing, clipping, nail trim, and brushing), while a similar service at PetSmart costing customers $45.
Entrance of the nation's largest retailer reflects the attractive growth characteristics of the pet services industry.
Maintains MP rating and $30 tgt on PETM.
Notablecalls: I've heard the validation story before as large players enter the market of lesser competitors. Eventually things get tougher. WMT and TGT have increased their presence in the pet biz over the past couple of yrs and will continue to do so. The grooming (or services business in general) generates margins that are 3x higher than products AND drives traffic. It will hurt PETM in the L-T. I would not be surprised to see some weakness in PETM in the coming days.
Calls of Note Part 1
- UBS is positive on Apple (NASDAQ:AAPL) saying their checks point toward solid iPod sales for new shuffles & certain nanos along with momentum in Macs and prospects for higher accessories & software longer-term. Firm continues to believe AAPL will launch new products in calendar '07 (not fully reflected in their model) including cell phones, iTV & even ultraportable devices.
Given their findings, the firm is raising their 1Q07 EPS estimate to $0.80 (was $0.78) based on 11% revenue growth (+32% q/q) to $6.4B (was $6.3B) & operating margin of 14.2% factoring in higher iPod unit growth of 18% to 16.56mm (was 15.6mm) and still reflecting Mac unit growth of 44% to 1.8mm.
Given prospects for new iPods and with Mac sales momentum drivng software & peripherals, they are raising their FY07 EPS estimate to $2.84 (was $2.75) based on 23% revenue growth to $23.76B (was $23.25B). For FY08, estimate adjusts to $3.35 from $3.15 based on 18% revenue growth to $28B (was $26.7B).
Reits Buy and ups tgt to $108 from $95.
Notablecalls: This is the second tgt raise above the $100 level. Is it actionable? Most certainly not.
Given their findings, the firm is raising their 1Q07 EPS estimate to $0.80 (was $0.78) based on 11% revenue growth (+32% q/q) to $6.4B (was $6.3B) & operating margin of 14.2% factoring in higher iPod unit growth of 18% to 16.56mm (was 15.6mm) and still reflecting Mac unit growth of 44% to 1.8mm.
Given prospects for new iPods and with Mac sales momentum drivng software & peripherals, they are raising their FY07 EPS estimate to $2.84 (was $2.75) based on 23% revenue growth to $23.76B (was $23.25B). For FY08, estimate adjusts to $3.35 from $3.15 based on 18% revenue growth to $28B (was $26.7B).
Reits Buy and ups tgt to $108 from $95.
Notablecalls: This is the second tgt raise above the $100 level. Is it actionable? Most certainly not.
Color on warning: Palm (NASDAQ:PALM)
Several firms are commenting on Palm (NASDAQ:PALM) following the warning issued last night:
- Merrill Lynch is taking their rating to Neutral from Buy noting that while Palm's design capabilities and valuation (ex ~$5 cash per share) remain attractive, they believe differentiation is getting more difficult vs. integrated (handset+service) rivals like RIM, and larger scale hardware-only competitors like Motorola and Nokia.
Palm cited product certification delays, and the firm believes the major reason was a complete miss (in 2Q) of Treo 750 shipments and a 2 week delay in Treo 680 shipments, both to Cingular. The magnitude of the miss also indicates possible price pressure on Palm's Treo 700p/w. Firm notes Palm's F2Q07 miss follows F1Q07 warning due to price competition from Motorola's Q smartphone, and F4Q06 miss due to delayed launch of European Treo 750v smartphone.
Although the firm sees no near-term catalysts, they believe Palm stock has limited downside from current levels. Palm's four new product cycles, including the recently launched Treo 680 and 750, could also help to revive prospects and sentiment in 2007.
- RBC Capital notes that in its Q1 call, Palm indicated it had already widened Q2 guidance to ''prudently' accommodate delayed product certification. This miss is another blow to investor
confidence in Palm's recovery.
The delay is ill timed, just as Palm faces intensifying competition from $199-$150 ASP Smartphones from RIM, Nokia, Motorola, Samsung HTC. The Treo 750 may now miss the important Christmas season, and its premium price (est. $400) may face resistance (Verizon has recently had to discount the 700w).
Incorporating the delay, RBC's F07 estimates become $1,584M (0% Y/Y growth, formerly 10%) and $0.73 proforma EPS (prior $1,735M and $0.90 EPS). F2008 estimates become $1,766M (11% Y/Y) and $0.84 proforma EPS (prior $1,956M and $0.96). Tgt goes to $15 from $16. Maintains SP rating.
- JP Morgan says that in their view PALM is struggling with bigger issues relating to product cycle, positioning and pricing, in the context of intensifying competition.
The company is under intensifying price-based competitive pressure, and delays in shipping the 680 and 750 could persist into the peak holiday season, crimping sales further. PALM is trading at 20.8 times revised fully taxed FY07 PF EPS of $0.74, a 26% discount to the mean of firm's coverage universe on a current year basis and an ex-cash multiple of 17.2x fully-taxed PF FY07E EPS of $0.60 ($5.05 cash/share). Maintains Neutral.
Notablecalls: Usually these one-time issues are buyable but in PALM's case we have an exception to the rule. They guided down on June 30 and warned on Sept 7. And now warned again, saying "Oops, we're going to miss our biggest qtr." There isn't much investor confidence left after last night. I expect the shares to go sub-$14, maybe even today. The last prints in after hrs trading were around $14.60-$14.70.
- Merrill Lynch is taking their rating to Neutral from Buy noting that while Palm's design capabilities and valuation (ex ~$5 cash per share) remain attractive, they believe differentiation is getting more difficult vs. integrated (handset+service) rivals like RIM, and larger scale hardware-only competitors like Motorola and Nokia.
Palm cited product certification delays, and the firm believes the major reason was a complete miss (in 2Q) of Treo 750 shipments and a 2 week delay in Treo 680 shipments, both to Cingular. The magnitude of the miss also indicates possible price pressure on Palm's Treo 700p/w. Firm notes Palm's F2Q07 miss follows F1Q07 warning due to price competition from Motorola's Q smartphone, and F4Q06 miss due to delayed launch of European Treo 750v smartphone.
Although the firm sees no near-term catalysts, they believe Palm stock has limited downside from current levels. Palm's four new product cycles, including the recently launched Treo 680 and 750, could also help to revive prospects and sentiment in 2007.
- RBC Capital notes that in its Q1 call, Palm indicated it had already widened Q2 guidance to ''prudently' accommodate delayed product certification. This miss is another blow to investor
confidence in Palm's recovery.
The delay is ill timed, just as Palm faces intensifying competition from $199-$150 ASP Smartphones from RIM, Nokia, Motorola, Samsung HTC. The Treo 750 may now miss the important Christmas season, and its premium price (est. $400) may face resistance (Verizon has recently had to discount the 700w).
Incorporating the delay, RBC's F07 estimates become $1,584M (0% Y/Y growth, formerly 10%) and $0.73 proforma EPS (prior $1,735M and $0.90 EPS). F2008 estimates become $1,766M (11% Y/Y) and $0.84 proforma EPS (prior $1,956M and $0.96). Tgt goes to $15 from $16. Maintains SP rating.
- JP Morgan says that in their view PALM is struggling with bigger issues relating to product cycle, positioning and pricing, in the context of intensifying competition.
The company is under intensifying price-based competitive pressure, and delays in shipping the 680 and 750 could persist into the peak holiday season, crimping sales further. PALM is trading at 20.8 times revised fully taxed FY07 PF EPS of $0.74, a 26% discount to the mean of firm's coverage universe on a current year basis and an ex-cash multiple of 17.2x fully-taxed PF FY07E EPS of $0.60 ($5.05 cash/share). Maintains Neutral.
Notablecalls: Usually these one-time issues are buyable but in PALM's case we have an exception to the rule. They guided down on June 30 and warned on Sept 7. And now warned again, saying "Oops, we're going to miss our biggest qtr." There isn't much investor confidence left after last night. I expect the shares to go sub-$14, maybe even today. The last prints in after hrs trading were around $14.60-$14.70.
Paperstand
According to the WSJ’s „Tracking the Numbers” column, Wall St. thrives on risk, so what better investment these days than the subprime-mortgage business. Lenders that make home loans to buyers with troubled credit history sprinted ahead during the housing boom, only to see prospects wane as interest rates rose, home prices fell and borrowers had trouble making payments. With losses mounting and consolidation sweeping the industry, Wall Street, not the banking industry, is emerging as the consolidator. In the past 3 months, Morgan Stanley (MS) agreed to buy Saxon Capital for $706m. Merrill Lynch (MER) struck a $1.3bn deal to buy National City's First Franklin lending unit, and Bear Sterns (BSC) is buying the mortgage unit of ECC Capital for $26m. H&R Block (HRB) recently disclosed it might sell its Option One lending unit, which last year made about $40bn in loans. "Clearly the broker-dealers are leading the charge," says Matthew Howlett of Fox-Pitt Kelton.
According to the “Heard on the Street” column, bad news may be in store for Western telecom-equipment makers hoping to cash in on China's expected $10-30bn investment in new 3G wireless networks over the next 4-5 years. Manufacturers, including Motorola (MOT), Lucent (LU), Nortel (NT) and Ericsson (ERIC), that have long dominated the Chinese mkt are faced with the possibility of losing sizable mkt share. China is expected to try to give its own equipment makers a boost by launching its 3G networks with its own technology standard, called TD-SCDMA, along with other standards. In the past 10 years, Chinese co’s Huawei and ZTE have been expanding aggressively in the global mkt and are ready to compete for 3G equipment contracts at home. China was expected to have made a decision by now on licenses for carriers to upgrade to 3G. That hasn't happened yet, in part b/c tests of the TD-SCDMA technology are taking longer than expected. "When China starts building 3G networks, it will probably have a negative impact on Western vendors," says Ping Zhao, of CreditSights. "Especially if they have hyped up their 3G expectations for China."
Barron’s Online “Inside Scoop” section reports that 4 Crocs (CROX) insiders have been stepping out of the footwear maker's shares, which have nearly doubled since its IPO in Feb. The sellers, who include CEO, a vice president and two directors, sold a total of $54.6m in stock.
Monday, November 27, 2006
Calls of Note Part 7
- ThinkEquity's Jonathan Hoopes notes that on Sept. 25th, his firm raised their Apple (NASDAQ:AAPL) price target to $100 based on an analysis that suggested Apple's strong back-to-school CPU share-gain momentum would carry into the December quarter. Today, they are raising their price target to $110 as our proprietary 'Black Friday' survey of Apple Retail stores across the nation indicates likely upside to our Retail Store revenue estimate of $1.45 billion for fiscal 1Q07. Apple's Retail Store is a clear differentiator and significant catalyst for further CPU share gains and profit margin expansion, in firm's view. Reiterates BUY rating.
According to ofirm's math, Apple Retail Store visitor traffic ranged between 860,000 and 916,000 on Black Friday. Moreover, Apple Retail Store revenues likely ranged between $36 million and $41 million on November 24th. By extension, the holiday season is set to deliver between $813 million and $916 million of revenues for Apple's Retail segment.
Notablecalls: I think the main reason this call will get some attention is because it's the first time AAPL's tgt goes over the $100 level. Expect to see some buy interest but I'd generally be looking for a fading oppy. Especially with this tape.
According to ofirm's math, Apple Retail Store visitor traffic ranged between 860,000 and 916,000 on Black Friday. Moreover, Apple Retail Store revenues likely ranged between $36 million and $41 million on November 24th. By extension, the holiday season is set to deliver between $813 million and $916 million of revenues for Apple's Retail segment.
Notablecalls: I think the main reason this call will get some attention is because it's the first time AAPL's tgt goes over the $100 level. Expect to see some buy interest but I'd generally be looking for a fading oppy. Especially with this tape.
Calls of Note Part 6
-Citigroup notes Hess (NYSE:HES) remains their top pick of the US oil majors. Firm is raising their target price to $68 from $58, to reflect expectations of multiple expansion as management enters the execution phase of a turnaround strategy that matures over the next year.
2006 promises the 1st of a multi-year period of growth in oil & gas prod'n: key projects are running ahead of schedule; 2006 is also a stellar year for reserve replacement and the 4th year of consecutive reserve life growth but captures only a fraction of the resource secured by current management.
The value gap vs its peers is tangible, with HES the only major trading below SEC value. Exploration is an upside; but the shares already ignore a growing list of unbooked discoveries where value is verified by recent transactions.
Credibility is an old excuse for current misvaluation. Execution is the catalyst to force a rerating as the impact of a multi year t/around becomes tangible. If the market does not recognize
this, the firm believes someone else will. Reits Buy.
Notablecalls: The wording of the call is strong enough to give me goosebumps!
2006 promises the 1st of a multi-year period of growth in oil & gas prod'n: key projects are running ahead of schedule; 2006 is also a stellar year for reserve replacement and the 4th year of consecutive reserve life growth but captures only a fraction of the resource secured by current management.
The value gap vs its peers is tangible, with HES the only major trading below SEC value. Exploration is an upside; but the shares already ignore a growing list of unbooked discoveries where value is verified by recent transactions.
Credibility is an old excuse for current misvaluation. Execution is the catalyst to force a rerating as the impact of a multi year t/around becomes tangible. If the market does not recognize
this, the firm believes someone else will. Reits Buy.
Notablecalls: The wording of the call is strong enough to give me goosebumps!
Calls of Note Part 5
- Goldman Sachs is adding Celanese (NYSE:CE) to the Americas Conviction Buy List as they believe shares will trade up to their $29 price target (35% potential upside) as the company continues to demonstrate the resiliency of its earnings stream, justifying a potentially higher multiple. In firm's view, valuation metrics have failed to reflect positive industry fundamentals due to mischaracterization as a pure commodity chemical company and the financial sponsor overhang. A more aggressive debt paydown schedule and a tight acetyls market should lead tobetter-than-expected earnings growth. GS is raising their 2007/2008 EPS estimates by $0.05 to $2.90/$2.95, respectively.
Catalyst: Firm expects the December 13 investor day in New York to be a positive catalyst as they expect management to provide a favorable outlook for acetyls through at least 2009. In addition, the financial sponsor's stake is slowly diminishing, with Blackstone now owing just 15% (or 24 million) of outstanding shares.
Notablecalls: Expect to see buy interest in CE today but keep it on a tight leash as the stock has been vertical lately.
Catalyst: Firm expects the December 13 investor day in New York to be a positive catalyst as they expect management to provide a favorable outlook for acetyls through at least 2009. In addition, the financial sponsor's stake is slowly diminishing, with Blackstone now owing just 15% (or 24 million) of outstanding shares.
Notablecalls: Expect to see buy interest in CE today but keep it on a tight leash as the stock has been vertical lately.
Calls of Note Part 4
- Citigroup reiterates their Buy rating on Marriott International (NYSE:MAR) shares and are increasing their price target to $55 from $48, or 24x '08 EPS. This is below MAR's '07 multiple of 25x, but above its historical average of 21x. Cyclical growth, new unit expansion and aggressive share repurchases are driving strong EPS momentum (+20%/yr for '06- '09), ROIC improvement and valuation expansion versus history. By 2009, Marriott's hotel system should be 16% larger, its average share count 18% lower and ROIC should be in the mid-to-high 20's vs. 20% in 2006.
MAR is an attractive mid-cycle lodging play, as unit growth, share repurchases and timeshare should offset gradual REVPAR deceleration. As such, MAR could sustain faster 3-year earnings growth than its real estate intensive peers (+20% vs. +16% at REITs).
During a comparable period of the last lodging cycle ('95-'97), as the industry transitioned from "early recovery" to "mid-cycle growth", MAR out-performed the S&P 500 over 3-years. MAR shares are up 21% since early October, when Marriott's strong 3Q earnings report alleviated what had been a concern among some investors that lodging fundamentals were weakening. Underlying demand trends remain strong and the '07 outlook is positive.
Notablecalls: Just a chart play. I have no view on the fundamentals. Tight leash.
MAR is an attractive mid-cycle lodging play, as unit growth, share repurchases and timeshare should offset gradual REVPAR deceleration. As such, MAR could sustain faster 3-year earnings growth than its real estate intensive peers (+20% vs. +16% at REITs).
During a comparable period of the last lodging cycle ('95-'97), as the industry transitioned from "early recovery" to "mid-cycle growth", MAR out-performed the S&P 500 over 3-years. MAR shares are up 21% since early October, when Marriott's strong 3Q earnings report alleviated what had been a concern among some investors that lodging fundamentals were weakening. Underlying demand trends remain strong and the '07 outlook is positive.
Notablecalls: Just a chart play. I have no view on the fundamentals. Tight leash.
Calls of Note Part 3
- Merrill Lynch notes that Micron's (NYSE:MU) stock has been mired in the $14 - $15 range since the company's disappointing performance for the Aug-06 quarter, but the firm thinks the stock could move back to the $16 - $17 range in the near term. From a short-term trading standpoint, they think that the increase in memory pricing combined with Micron's underperformance relative to both the SOX and the Dow could drive a catch-up rally.
ML notes they have their doubts about Micron's ability to actually capitalize on the stronger DRAM environment, and that underpins firm's Neutral rating. Micron has struggled to take advantage of the strong operating environment in the DRAM business. The company's performance during the August 2006 quarter was disappointing, as gross margin backslid despite steady pricing. However, they do think that the pricing environment is likely to hold up, especially for leading-edge DDR2 products. Even if Micron ultimately doesn't benefit from the pricing strength, they think it's only a matter of time until the market notices that the only liquid U.S. DRAM play is lagging the market while DRAM pricing continues to firm and the introduction of Vista and its increased memory requirements draws closer.
Notablecalls: ML's Joe Osha has made an actionable call on MU here. I continue to expect MU to move up from current levels.
ML notes they have their doubts about Micron's ability to actually capitalize on the stronger DRAM environment, and that underpins firm's Neutral rating. Micron has struggled to take advantage of the strong operating environment in the DRAM business. The company's performance during the August 2006 quarter was disappointing, as gross margin backslid despite steady pricing. However, they do think that the pricing environment is likely to hold up, especially for leading-edge DDR2 products. Even if Micron ultimately doesn't benefit from the pricing strength, they think it's only a matter of time until the market notices that the only liquid U.S. DRAM play is lagging the market while DRAM pricing continues to firm and the introduction of Vista and its increased memory requirements draws closer.
Notablecalls: ML's Joe Osha has made an actionable call on MU here. I continue to expect MU to move up from current levels.
Calls of Note Part 2
- UBS notes they attended Renewable Energy Corporation's (#3 polysilicon company) field trip to both its solar wafer plant and its analyst meeting in Norway last week where the company suggested polysilicon could likely remain in shortage until 2011. The company also suggested silane gas (key feedstock to make polysilicon) could be in short supply as REC has about 70% share and MEMC (NYSE:WFR) has about 25% share.
Renewable Energy Corporation estimates its new fludized bed reactor (FBR) based polysilicon plant, being built now (production expected in 2H08), will have about 50% less costs than its original Siemens based polysilicon plant. Firm notes that MEMC has been the only polysilicon company with FBR technology for the past 5-10 years.
Also,recent discussions with industry contacts suggest that MEMC has recently re-negotiated its semiconductor wafer contract with Infineon for 2007. They believe MEMC was sucessful in raising prices by 9-10% from its prior contract pricing for both 200mm and 300mm semiconductor wafers.
Maintains Buy and $60 tgt.
Notablecalls: I have highlighted UBS's positive comments on WFR in the past and with good results. While I don't think the price hikes with IFX provide drastic upside to current ests, they do add to the positive perception of the space. The stock has been inching up and looks to be on the verge of another move upward. Think WFR may soon be a $40 stock. Even then UBS' tgt would provide 50% upside.
Renewable Energy Corporation estimates its new fludized bed reactor (FBR) based polysilicon plant, being built now (production expected in 2H08), will have about 50% less costs than its original Siemens based polysilicon plant. Firm notes that MEMC has been the only polysilicon company with FBR technology for the past 5-10 years.
Also,recent discussions with industry contacts suggest that MEMC has recently re-negotiated its semiconductor wafer contract with Infineon for 2007. They believe MEMC was sucessful in raising prices by 9-10% from its prior contract pricing for both 200mm and 300mm semiconductor wafers.
Maintains Buy and $60 tgt.
Notablecalls: I have highlighted UBS's positive comments on WFR in the past and with good results. While I don't think the price hikes with IFX provide drastic upside to current ests, they do add to the positive perception of the space. The stock has been inching up and looks to be on the verge of another move upward. Think WFR may soon be a $40 stock. Even then UBS' tgt would provide 50% upside.
Calls of Note Part 1
Some comments on Wal-Mart (NYSE:WMT) and Black Friday:
- JP Morgan notes WMT posted a negative 0.1% SSS in November - its first monthly comp below 0% in 10+ years (April 1996 @ -0.6%, Easter shift driven). While the results were more/less in-line with expectations (guidance of "flat"; JPM at +0.5%) the firm continues to scratch their heads as to why sales are not improving provided the precipitous drop in gas prices and stable consumer confidence levels. All in, they remain skeptical on the company's ability to change its image on a dime and with this in mind they'll stay Neutral.
While the stock's absolute/relative underperformance over the past 5 years (cumulative loss of ~34% vs. SandP 500 down ~8%) has tempted the firm to get bullish, they do not see a positive catalyst on the horizon. Moreover, while much of the bullish sell-side view emphasizes valuation (trading at a noticeable discount to historical average - resting at 14.9x 2007E EPS, a 33.1% discount to its10-year average), they actually think the stock has been accurately "revalued" by the market given WMT's 1) slowing comp trends, 2) aggressive commitment to sq. ft. growth, 3) augmented risk profile (e.g., merchandise makeover, international expansion, field level management changes), and 4) uninspiring margin performance.
- UBS notes they are somewhat surprised by WMT's Nov. sales given what appeared to be both a conservative plan (which factored in current co.-specific headwinds) and an early/aggressive push for holiday sales. Firm's Blitz day store visits revealed brisk traffic and strong sell-through of special offer items. Perhaps the multitude of rollbacks at WMT did not have the desired, broad shopping effect. Firm thinks this news could result in further near-term weakness in WMT shares.
- Banc of America believes WMT's November weakness was the result of two issues. 1) There simply are not enough registers and parking lots. This time of year, the stores are at or near capacity and it is to difficult to make up for lower prices with enough increased traffic in the month. 2) The aforementioned apparel fashion miss, which hurt October as well as November. Firm believes they were willing to sacrifice the weak November sales, especially considering the weak fashion statement they were making, to try and refocus customers on WMT as the price leader for the holiday season. Believes they guide to 1-3% comps for December, and expects them to hit the high end of the estimate.
Consumer electronics sales were strong this weekend. Contacts that the firm was able to get in touch with, were very bullish about Black Friday and Saturday sales. For BBY and CC, this bodes well. They believe the struggle for both is making up for the accelerated price declines with enough incremental unit growth. At least for the weekend, the firm thinks they succeeded.
- CIBC notes their Black Friday morning store checks in three areas indicated that consumer
electronics retailers are clearly winning wallet share. Home goods and furnishing stores saw less traffic in general. Firm continues to favor BBY and CC and see challenges for WSM.
Crowds were overwhelming at both BBY and CC. At the NYC 86th St. location, we could not even enter the CC store. At BBY, best deals were Insignia (BBY's own) items which were popular in baskets. CC also had long lines for in-store pick-up of on line purchases.
Low traffic in Williams-Sonoma, Pottery Barn, PB Kids and PB Bed & Bath. Generally no deals at WS, PB Kids and PB B&B. BBBY stores were relatively quiet in all locations. Holiday spirit not as strong as WSM stores but holiday decor items definitely available and featured near front of store. Pier 1 Imports was very promotional with full blown holiday sets but again no traffic.
Notablecalls: The consumer is NOT bent up, it's spent up. Not enough registers and parking lots at WMT? What? You're kidding me? I'm not overly negative on the stock, though. Would not be surprised to see a bounce following initial weakness as the negative comps were pretty much expected already. There are some negative comments on the generic program but one should consider the fact it was just rolled out and will take some time to find traction.
- JP Morgan notes WMT posted a negative 0.1% SSS in November - its first monthly comp below 0% in 10+ years (April 1996 @ -0.6%, Easter shift driven). While the results were more/less in-line with expectations (guidance of "flat"; JPM at +0.5%) the firm continues to scratch their heads as to why sales are not improving provided the precipitous drop in gas prices and stable consumer confidence levels. All in, they remain skeptical on the company's ability to change its image on a dime and with this in mind they'll stay Neutral.
While the stock's absolute/relative underperformance over the past 5 years (cumulative loss of ~34% vs. SandP 500 down ~8%) has tempted the firm to get bullish, they do not see a positive catalyst on the horizon. Moreover, while much of the bullish sell-side view emphasizes valuation (trading at a noticeable discount to historical average - resting at 14.9x 2007E EPS, a 33.1% discount to its10-year average), they actually think the stock has been accurately "revalued" by the market given WMT's 1) slowing comp trends, 2) aggressive commitment to sq. ft. growth, 3) augmented risk profile (e.g., merchandise makeover, international expansion, field level management changes), and 4) uninspiring margin performance.
- UBS notes they are somewhat surprised by WMT's Nov. sales given what appeared to be both a conservative plan (which factored in current co.-specific headwinds) and an early/aggressive push for holiday sales. Firm's Blitz day store visits revealed brisk traffic and strong sell-through of special offer items. Perhaps the multitude of rollbacks at WMT did not have the desired, broad shopping effect. Firm thinks this news could result in further near-term weakness in WMT shares.
- Banc of America believes WMT's November weakness was the result of two issues. 1) There simply are not enough registers and parking lots. This time of year, the stores are at or near capacity and it is to difficult to make up for lower prices with enough increased traffic in the month. 2) The aforementioned apparel fashion miss, which hurt October as well as November. Firm believes they were willing to sacrifice the weak November sales, especially considering the weak fashion statement they were making, to try and refocus customers on WMT as the price leader for the holiday season. Believes they guide to 1-3% comps for December, and expects them to hit the high end of the estimate.
Consumer electronics sales were strong this weekend. Contacts that the firm was able to get in touch with, were very bullish about Black Friday and Saturday sales. For BBY and CC, this bodes well. They believe the struggle for both is making up for the accelerated price declines with enough incremental unit growth. At least for the weekend, the firm thinks they succeeded.
- CIBC notes their Black Friday morning store checks in three areas indicated that consumer
electronics retailers are clearly winning wallet share. Home goods and furnishing stores saw less traffic in general. Firm continues to favor BBY and CC and see challenges for WSM.
Crowds were overwhelming at both BBY and CC. At the NYC 86th St. location, we could not even enter the CC store. At BBY, best deals were Insignia (BBY's own) items which were popular in baskets. CC also had long lines for in-store pick-up of on line purchases.
Low traffic in Williams-Sonoma, Pottery Barn, PB Kids and PB Bed & Bath. Generally no deals at WS, PB Kids and PB B&B. BBBY stores were relatively quiet in all locations. Holiday spirit not as strong as WSM stores but holiday decor items definitely available and featured near front of store. Pier 1 Imports was very promotional with full blown holiday sets but again no traffic.
Notablecalls: The consumer is NOT bent up, it's spent up. Not enough registers and parking lots at WMT? What? You're kidding me? I'm not overly negative on the stock, though. Would not be surprised to see a bounce following initial weakness as the negative comps were pretty much expected already. There are some negative comments on the generic program but one should consider the fact it was just rolled out and will take some time to find traction.
Paperstand
According to the WSJ’s „Heard on the Street” column, increasing concerns about devices that open clogged arteries are causing some chest pains on Wall St. Just a few months ago, many analysts were ebullient about these drug-eluting stents. J&J (JNJ), Boston Scientific (BSX) and Abbott (ABT) recently have placed big bets on the mkt, with its roughly $5.4bn in annual sales. The technology has been battered in recent months by safety questions, and some co’s have run into manufacturing and other challenges. There could be new hurdles in coming weeks. Investors and analysts are toning down their enthusiasm, with some even saying the mkt will shrink, as attention turns to a high-profile govt panel that will hold hearings soon on the devices' safety. "The growth prospects for drug-eluting stents are poor, certainly in the immediate and near term, and perhaps even in the longer term," said Robert Goldman, of KeyBanc. Competition is rising and prices are falling, he said, while "safety concerns are exacerbating the problems and making the prospects for the mkt all the worse."
Sunday, November 26, 2006
Barron's Summary
Investors appear to be overvaluing the long-term benefit Vertex (VRTX) will get by being the first to mkt an effective hepatitis C drug. Its shares are worth closer to $30 than $50.
Notablecalls: Actionable!
Fund manager top holdings include DOX, CSE, ERTS, STZ, DVA, GHCI, DOV, OSK, TPX and COH.
Schwab Equity Ratings top 20 includes: HAS, JWN, CAG, NTY, PKD, GRP, AMP, MET, BAX, MCK, CAL, TFX, BMC, HPQ, GEF, SEH, AT, Q, AES and PCG.
Cash-rich co’s in the consumer, energy, home-building and tech sectors all could be tgts of leveraged-buyout firms. LBO tgts mentioned include: GPS, MU, BBBY, NKE, LIZ, EMC, COST, APA, VLO, HES, RIG, AVP, KMB, EL, KBH, DHI, LEN, TOL, MDC, HOV, LLTC, MXIM, ADI, ALTR and XLNX.
ASM Intl. (ASMI) shareholders should do well, regardless of how the dispute with Mellon (MEL) ends. But Mellon investors could suffer unless it makes changes. One bear has a 37 target on Mellon, recently selling close to 41.
“The Trader” column discusses Freeport (FCX) and Phelps Dodge (PD) merger. Stripping out cash on Phelps' balance sheet, the Freeport bid values Phelps at roughly 6x forward earnings, compared with the 25y avg of about 8.3. John Tumazos, of Prudential, sees "plenty of room" for Phelps to rise 15 to 30 a share above Freeport's bid, and has a $170 price tgt on Phelps.
“The Trader” highlights Yum Brands (YUM), saying that for Yum’s shares to climb anew, the co first must improve its bedrock US operation. The fast-growing China business supports valuing that segment at 25-35x forward earnings, but China still drives only 24% of Yum's projected ‘07 operating income, with international accounting for 28% and the US accounting for 48%. Blending the 3 segments, JPMorgan's John Ivankoe reckoned that Yum ought to trade between 16.7x and 20.5x forward earnings. At about 19.7x today, it is already straining the top of that range. Given the diminished odds for a short-term surge, and how rich Yum option prices look compared with those for, say, McDonald's, Goldman Sachs strategist John Marshall has suggested selling OTM calls against the stock as a way to pad yield.
Barron’s recommends to invest in Chinese mobile telecom. China Mobile (CHL), the dominant provider, is still a strong, long-term prospect, though its weaker rival, China Unicom (CHU), could be worth a side bet. China Mobile, with its strong mgmt team, enjoys most of the spoils of a rapidly expanding mkt, which also offers big economies of scale. Meanwhile a politically motivated decision several years ago saddled China Unicom with the task of running two networks: GSM and CDMA. "China Unicom is suffering self-cannibalization," says Marvin Lo, of BNP Paribas. China Mobile, on the other hand, is a "growth co," says Steven Liu, of DBS Vickers. The likely restructuring of the sector is the key reason to buy Unicom. "With Unicom, it's more a story of how it's going to be broken up," says Khiem Do, of Baring Asset Mgmt.
Wednesday, November 22, 2006
Calls of Note Part 2
- Cowen notes that with expectations low entering next week's Capital Markets Daythey would be surprised if Nokia (NYSE:NOK) failed to produce more than anticipated at the event and see the shares reacting well near term to any positive. Firm's long-term caution remains unchanged, however, and they still expect lower ASPs,NSN costs and QCOM-related expenses to weigh moving forward.
Expecting No Major Surprises At CMD - But Few Are. Nokia will be hosting its annual Capital Markets Days on Nov 28-29 in Amsterdam. Cowen expects little change in tone from senior management at the event, perhaps beating expectations fearing worse. They expect NSN integration costs to be the most likely fade to guidance, but note that many now expect that.
Firm sees Nokia issuing a generally constructive outlook for the mobile phone industry (~8-10% y/y) and reiterating 15% q/q unit growth for 4Q06. The ongoing dynamic maximizing revenue/share at the expense of ASP/margins is likely to continue until new phone products arrive and 3G reaches critical mass.
They believe three items loom as potential issues for the stock over next 6-12 months. 1.) "thin" designs are several quarters away 2.) High Nokia-Siemens Networks integration costs might prove EPS dilutive in 1H07, FY07 3.) High expenses related to QCOM.
Firm's new FY08 EUR 1.18 EPS estimate represents a modest 7% increase from their FY07 estimate and is a penny under consensus. Nokia is having a difficult time attracting a higher multiple because of its modest organic growth and margin contraction.
Trading at 14x their new F08 estimate, Nokia still looks attractively valued but without an
obvious catalyst. Remains at Neutral.
Notablecalls: Nokia has been hibernating and needs to come up with some fascinating products to spark investor interest. The problem is that it's still struggling with the thin designs that will be ancient by the time they reach the mkt. It also looks like they are at the wrong end of the Telco capex. But I guess that leaves ample room for surprise.
Expecting No Major Surprises At CMD - But Few Are. Nokia will be hosting its annual Capital Markets Days on Nov 28-29 in Amsterdam. Cowen expects little change in tone from senior management at the event, perhaps beating expectations fearing worse. They expect NSN integration costs to be the most likely fade to guidance, but note that many now expect that.
Firm sees Nokia issuing a generally constructive outlook for the mobile phone industry (~8-10% y/y) and reiterating 15% q/q unit growth for 4Q06. The ongoing dynamic maximizing revenue/share at the expense of ASP/margins is likely to continue until new phone products arrive and 3G reaches critical mass.
They believe three items loom as potential issues for the stock over next 6-12 months. 1.) "thin" designs are several quarters away 2.) High Nokia-Siemens Networks integration costs might prove EPS dilutive in 1H07, FY07 3.) High expenses related to QCOM.
Firm's new FY08 EUR 1.18 EPS estimate represents a modest 7% increase from their FY07 estimate and is a penny under consensus. Nokia is having a difficult time attracting a higher multiple because of its modest organic growth and margin contraction.
Trading at 14x their new F08 estimate, Nokia still looks attractively valued but without an
obvious catalyst. Remains at Neutral.
Notablecalls: Nokia has been hibernating and needs to come up with some fascinating products to spark investor interest. The problem is that it's still struggling with the thin designs that will be ancient by the time they reach the mkt. It also looks like they are at the wrong end of the Telco capex. But I guess that leaves ample room for surprise.
Calls of Note Part 1
- ThinkEquity notes that as they have pointed out numerous times that they believe 802.11 will experience a very high attach rate in cell phones for reasons of cost and indoor coverage.
Cost is the most important, as the firm believes a high percentage of cell phone calls are made where such traffic should rather be carried over unlicensed frequencies in smaller cells. Approximately one billion cell phones are sold per year, and they believe it reasonable to believe that half of the global cell phone sales could contain 802.11 chips within five years.
As such, they believe QUALCOMM (NASDAQ:QCOM) may want to upgrade its 802.11 silicon content from cooperation with Atheros to something internal. In English, that means making an acquisition. So what would QUALCOMM acquire to accomplish this goal?
ThinkEquity thinks privately held Airgo of Palo Alto is the prime candidate. Firm believes a QUALCOMM acquisition of an 802.11 asset would hold negative consequences for Atheros (NASDAQ:ATHR). It appears that if QUALCOMM acquired Airgo, it would then be a matter of time before Atheros ceased deriving the perception of future benefits from QUALCOMM's cooperation.
Having said that, the firm remains positive on Atheros' overall positioning and outlook and Reits Buy with a $30 tgt.
Notablecalls: Not actionable but good to know category.
Cost is the most important, as the firm believes a high percentage of cell phone calls are made where such traffic should rather be carried over unlicensed frequencies in smaller cells. Approximately one billion cell phones are sold per year, and they believe it reasonable to believe that half of the global cell phone sales could contain 802.11 chips within five years.
As such, they believe QUALCOMM (NASDAQ:QCOM) may want to upgrade its 802.11 silicon content from cooperation with Atheros to something internal. In English, that means making an acquisition. So what would QUALCOMM acquire to accomplish this goal?
ThinkEquity thinks privately held Airgo of Palo Alto is the prime candidate. Firm believes a QUALCOMM acquisition of an 802.11 asset would hold negative consequences for Atheros (NASDAQ:ATHR). It appears that if QUALCOMM acquired Airgo, it would then be a matter of time before Atheros ceased deriving the perception of future benefits from QUALCOMM's cooperation.
Having said that, the firm remains positive on Atheros' overall positioning and outlook and Reits Buy with a $30 tgt.
Notablecalls: Not actionable but good to know category.
Color on quarter: Dell Computer (NASDAQ:DELL)
Several firms are commenting on Dell Computer (NASDAQ:DELL) after the tech heavyweight managed to surprise investors with a margin rebound last night:
- Bear Stearns is upgrading their rating to Outperform from Peer Perform saying that while Dell (NASDAQ:DELL) is not out of the woods and has more work to do, there are signs of a turnaround and improved focus on profitability vs. growth. While risk remains given limited visibility and overhang from SEC investigation, after 5 qtrs of disappointing results, the firm senses that the situation has bottomed. Though it may take time to show sustained improvement, they see favorable risk/reward.
As the firm has noted in other cases (HPQ, SUNW), turnarounds in tech can lead to big gains, but they are rarely straightforward and investors must be early. While Dell doesn't meet all their turnaround criteria, they sense less "denial" from Dell. Further, any more missteps could result in mgmt changes at the top, which could also be a positive catalyst. While it's logical to compare Dell vs. HPQ, to them the issue has been Dell vs. Dell. In firm's view, Dell got too big and wasn't ready for the next phase. Moreover, Dell chased revs for the sake of revs, moving away from its mantra of balancing growth/profit/liquidity.
After 7 est. cut in past yr, the firm is raising ests but caution that they think they're directionally right, but there may still be volatility. Firm is raising EPS for FY07 from $1.05 to $1.17 and for FY08 from $1.20 to $1.45. If firm's thesis is right, the stock has potential upside to their $35 target (20x CY08 EPS), though turnarounds often perform better than one thinks.
- Prudential thinks the story has just begun and believe that Dell only partially benefited from its key margin drivers in the OctQ - 1) stable PC pricing and a richer product mix, 2) server/storage product cycles, 3) reduced component costs, and 4) services expansion. Firm expects to see more margin leverage in coming quarters as these initiatives to improve profitability gain traction.
They are modeling Dell to increase operating margin by another 100 bps over the next 2-3 quarters, and then turn further cost reductions into more aggressive pricing to win share.
Firm continues to believe Dell has the best chance in their universe to post upside to consensus estimates over the next several quarters. They are increasing their street high FY08 EPS estimate by $0.11 to $1.61, and are raising price target to $31 frm $28. Dell remains firm' top pick.
- Merrill Lynch notes Dell's growth decelerated to +3% YoY despite an easier compare, which
underscores that margin progress requires a revenue tradeoff (worth making at this stage, in their view). Although aggregate revenues were within 1% of firm's recently lowered model, the mix was different. Desktop revenues missed ML model by 2 points and declined 9% YoY. Mobility beat the ML model by 3 points and grew 9%. Servers beat by 12 points and grew 12%. Storage beat by 5 points and grew 29%. Services missed by 10 points and grew 12%. Software and peripherals missed by 6 points and grew 8%.
Firm's matrix suggests an operating margin snapback above 8% (above 7.5% including FAS123) is needed to make the argument for owning the stock. They are not convinced margins will approach the recent annual peak of 8.6%. Maintains Neutral.
- JP Morgan notes Dell's revenues of $14.38 billion were a bit light relative to their estimate
of $14.45 billion, but EPS of $0.30 exceeded our estimate of $0.24. Without any significant changes to the business model, it appears Dell will choose to continue to harvest profits, and growth may remain tepid for quite some time.
Pricing discipline apparent. Part of the upside was clearly due to Dell's movement away from low-end PCs, and this was the primary reason Dell's unit growth was only 3% compared with HP's 16% unit growth.
Move away from low-end PCs only partly explains the margin rebound. The loss of the Intel subsidy could have been a driver of Dell's margin shortfall last quarter, while this quarter's improvement may have been driven by price concessions from AMD. HP may seek to gain similar price concessions. In firm's view, these concessions for Dell are likely to be matched for HP given the company's similar size and higher AMD-based volumes. As a result, they believe the long-term relative profit improvement for Dell remains questionable. They believe this will either show up as lower margins, or the relative cost compression will hold back the company's overall growth rate.
Even off of upwardly revised estimates, Dell is trading at 17x JPM's calendar 2007 EPS ex-options estimate. Firm believes this valuation is too rich given the uncertainty over future margin levels and tepid growth, and they continue to prefer exposure to Overweight-rated HP.
- Morgan Stanley notes they remain owners with a 12-18 month time horizon; buy on dips. Preliminary numbers better than market anticipated and stock should trade up on news. Longer-term, evidence suggests management is driving business growth and profitability in a more balanced manner. If execution continues, they still believe $1.84+ normalized EPS is doable.
Short-term focused clients should trim into strength. While last night's report was encouraging, the SEC investigation likely remains an overhang on the stock between now and year end. The next meaningful step-up in operating margin is also a couple of quarters out. With these headwinds and lack of a near-term catalyst, the stock is likely range bound near-term. Firm looks to buy on dips to own into Vista-related growth, Analyst day and improved margin catalysts in early 2007. Maintains Overweight and $30 tgt.
Notablecalls: I think DELL can trade briefly over the $27 level this morning but will close below that level. While I'm surprised by the margin upside I remain skeptical regarding additional margin expansion. Also, the news from DELL may put some additional pressure on AMD.
- Bear Stearns is upgrading their rating to Outperform from Peer Perform saying that while Dell (NASDAQ:DELL) is not out of the woods and has more work to do, there are signs of a turnaround and improved focus on profitability vs. growth. While risk remains given limited visibility and overhang from SEC investigation, after 5 qtrs of disappointing results, the firm senses that the situation has bottomed. Though it may take time to show sustained improvement, they see favorable risk/reward.
As the firm has noted in other cases (HPQ, SUNW), turnarounds in tech can lead to big gains, but they are rarely straightforward and investors must be early. While Dell doesn't meet all their turnaround criteria, they sense less "denial" from Dell. Further, any more missteps could result in mgmt changes at the top, which could also be a positive catalyst. While it's logical to compare Dell vs. HPQ, to them the issue has been Dell vs. Dell. In firm's view, Dell got too big and wasn't ready for the next phase. Moreover, Dell chased revs for the sake of revs, moving away from its mantra of balancing growth/profit/liquidity.
After 7 est. cut in past yr, the firm is raising ests but caution that they think they're directionally right, but there may still be volatility. Firm is raising EPS for FY07 from $1.05 to $1.17 and for FY08 from $1.20 to $1.45. If firm's thesis is right, the stock has potential upside to their $35 target (20x CY08 EPS), though turnarounds often perform better than one thinks.
- Prudential thinks the story has just begun and believe that Dell only partially benefited from its key margin drivers in the OctQ - 1) stable PC pricing and a richer product mix, 2) server/storage product cycles, 3) reduced component costs, and 4) services expansion. Firm expects to see more margin leverage in coming quarters as these initiatives to improve profitability gain traction.
They are modeling Dell to increase operating margin by another 100 bps over the next 2-3 quarters, and then turn further cost reductions into more aggressive pricing to win share.
Firm continues to believe Dell has the best chance in their universe to post upside to consensus estimates over the next several quarters. They are increasing their street high FY08 EPS estimate by $0.11 to $1.61, and are raising price target to $31 frm $28. Dell remains firm' top pick.
- Merrill Lynch notes Dell's growth decelerated to +3% YoY despite an easier compare, which
underscores that margin progress requires a revenue tradeoff (worth making at this stage, in their view). Although aggregate revenues were within 1% of firm's recently lowered model, the mix was different. Desktop revenues missed ML model by 2 points and declined 9% YoY. Mobility beat the ML model by 3 points and grew 9%. Servers beat by 12 points and grew 12%. Storage beat by 5 points and grew 29%. Services missed by 10 points and grew 12%. Software and peripherals missed by 6 points and grew 8%.
Firm's matrix suggests an operating margin snapback above 8% (above 7.5% including FAS123) is needed to make the argument for owning the stock. They are not convinced margins will approach the recent annual peak of 8.6%. Maintains Neutral.
- JP Morgan notes Dell's revenues of $14.38 billion were a bit light relative to their estimate
of $14.45 billion, but EPS of $0.30 exceeded our estimate of $0.24. Without any significant changes to the business model, it appears Dell will choose to continue to harvest profits, and growth may remain tepid for quite some time.
Pricing discipline apparent. Part of the upside was clearly due to Dell's movement away from low-end PCs, and this was the primary reason Dell's unit growth was only 3% compared with HP's 16% unit growth.
Move away from low-end PCs only partly explains the margin rebound. The loss of the Intel subsidy could have been a driver of Dell's margin shortfall last quarter, while this quarter's improvement may have been driven by price concessions from AMD. HP may seek to gain similar price concessions. In firm's view, these concessions for Dell are likely to be matched for HP given the company's similar size and higher AMD-based volumes. As a result, they believe the long-term relative profit improvement for Dell remains questionable. They believe this will either show up as lower margins, or the relative cost compression will hold back the company's overall growth rate.
Even off of upwardly revised estimates, Dell is trading at 17x JPM's calendar 2007 EPS ex-options estimate. Firm believes this valuation is too rich given the uncertainty over future margin levels and tepid growth, and they continue to prefer exposure to Overweight-rated HP.
- Morgan Stanley notes they remain owners with a 12-18 month time horizon; buy on dips. Preliminary numbers better than market anticipated and stock should trade up on news. Longer-term, evidence suggests management is driving business growth and profitability in a more balanced manner. If execution continues, they still believe $1.84+ normalized EPS is doable.
Short-term focused clients should trim into strength. While last night's report was encouraging, the SEC investigation likely remains an overhang on the stock between now and year end. The next meaningful step-up in operating margin is also a couple of quarters out. With these headwinds and lack of a near-term catalyst, the stock is likely range bound near-term. Firm looks to buy on dips to own into Vista-related growth, Analyst day and improved margin catalysts in early 2007. Maintains Overweight and $30 tgt.
Notablecalls: I think DELL can trade briefly over the $27 level this morning but will close below that level. While I'm surprised by the margin upside I remain skeptical regarding additional margin expansion. Also, the news from DELL may put some additional pressure on AMD.
Paperstand
According to the WSJ’s „Heard on the Street” column a surge in deals is stoking takeover speculation. Some point to Sprint Nextel (S), Hilton Hotels (HLT), Avis Budget (CAR) and home builders such as Lennar (LEN), Ryland (RYL) and D.R. Horton (DHI) as possible tgts. Private-equity firms are circling home-service co Service Master (SVM), say ppl familiar with the matter.
The WSJ reports that Nov started off with 30 insider sellers and no buyers among co’s in the S&P's broadcasting and cable index, said Mark LoPresti, of Thomson Financial. From the beginning of Sept through early Nov, insiders in Mr. LoPresti's study sold $32.3m of shares, while spending $91K on purchases. Univision Comm. (UVN), Liberty Global (LBTYA) and TiVo (TIVO) had the largest sales by dollar value. Cable and broadcast industry insiders headed Mr. LoPresti's list for bearishness in two metrics, the "head count" metric in which individual sales are tabulated, and another measure designed to compare sales and buying. "When I see an industry kind of take the lead in one of the metrics, and they're not a very active industry to begin with, I usually take notice," said Mr. LoPresti. "When you see this ... you want to look at the last time you saw something like this." The last time this industry's insiders behaved similarly was in ‘96, Mr. LoPresti said. "After that activity, the S&P broadcasting and cable index fell about 23%" in the next 9 months, he said.
Barron’s Online discusses Mentor (MNT), whose stock is up 41% since May. Yet Mentor faces some lofty expectations. And with the stock flirting with new highs and steep multiples, its premiums leave little room for disappointment. "We believe we are at a point of peak investor sentiment," says Alexander Arrow, of Lazard. "Silicone approval is the most important thing to happen to the industry in a decade. But the expected conversion rate to silicone is significantly higher than we expect, and over the next year, we don't see any catalysts for the stock."
“Inside Scoop” section reports that Google (GOOG) insiders trim back on sales. Insider sales, judging by the number of shares, have tapered off this year. So far in ‘06 Google execs and directors grossed more than $3.7bn by selling 9.4m shares on the open mkt. In ‘05 they sold 16.7m shares for nearly $4.7bn. From the Aug. 19, ‘04, IPO through the end of that year, insiders sold nearly 8.6m shares for $929.4m.
Tuesday, November 21, 2006
Calls of Note Part 7
- CIBC notes that when they initiated coverage of Goldman Sachs (NYSE:GS) on March 1, 2006, some were taken aback by their enthusiastic price target of $195, as the stock was then at $143. The stock is now close to $200 and the firm israising their price target once again, based upon the same valuation methodology but an even higher 2006 year-end book value estimate and a higher 2007 estimate outlook. Firm's thesis remains simple: Goldman will have the highest revenue growth of the group as they had dominant market share in the fastest growth and highest margin businesses such as M&A, commodities, distressed investing, and the most commanding presence in JC (Japan and China) of all its investment banking peers. They believe the highest correlation to outperformance amongst the brokers is with revenue growth and that Goldman will continue to grow faster than its peers due to its franchise position. In addition, while they do not project future gains from its Principal Investing portfolio, the firm believes that 2007 and 2008 will look much of the same way 2006 did in terms of additional earnings upside from investment gains.
CIBC believes that while some investors may question whether the exceptionally strong 2006 results create too difficult comparisons in 2007, they believe that Goldman has a proven track record of deploying its capital. A higher capital base should not be a concern for investors, as company management has stated recently that investment opportunities are the best they have ever seen.
Tgt is upped to $250 from $205.
Notablecalls: GS stock was up around 1 pt in after hrs trading following the call. I think it has a fair shot of hitting $200 today. That's where it is most likely to pull back. It's a kind of a trading rule (in a world of no rules) that round numbers act as resistance when reached the first time.
CIBC believes that while some investors may question whether the exceptionally strong 2006 results create too difficult comparisons in 2007, they believe that Goldman has a proven track record of deploying its capital. A higher capital base should not be a concern for investors, as company management has stated recently that investment opportunities are the best they have ever seen.
Tgt is upped to $250 from $205.
Notablecalls: GS stock was up around 1 pt in after hrs trading following the call. I think it has a fair shot of hitting $200 today. That's where it is most likely to pull back. It's a kind of a trading rule (in a world of no rules) that round numbers act as resistance when reached the first time.
Calls of Note Part 6
- UBS notes their global memory and end market checks are leading them to increase their sales and EPS estimates for Micron (NYSE:MU). Firm's F1Q07 sales estimate is increasing to $650M from $625M, with EPS advancing to $0.21 from $0.20 (pro forma $0.22). They believe the company is benefiting from stronger than expected PC demand, contract pricing increases, and solid NAND production ramp.
From a commodity PC DRAM perspective, what they believe to be a generally healthy demand environment for desktop and notebook PCs that ship in a "Vista Ready" configuration of 1GByte of DRAM or more continues to provide support for DRAM ASPs. DDR2 pricing in particular is seeing more of this ASP support relative to DDR as more recently launched PC platforms only support the former. With an estimated two thirds of PC DRAM production centered on DDR2, the firm believes Micron is maintaining pace with the industry's migration to DDR2.
They are also increasing F2007 EPS estimate to $1.20 from $1.15 (pro forma $1.25) owing to slightly more favorable GM assumptions as MU pulls down inventory in wireless areas, benefits from mix improvements, and accelerating DRAM and NAND cost decreases.
DRAM Spot and contract pricing are up 35% and 41% YTD, with a Spot premium of 9%. Contract pricing continues to rise into Nov Qtr end and should support higher financial projections, while DRAM spot appears to be reaching a near-term floor and argues an extension of this strength through
yearend.
Maintains Buy and $24 tgt.
Notablecalls: I've been positive on MU since Nov 14 and looks like the call made by Bear Stearns continues to play out. The stock shot up following the call but has been coming in over the past couple of days. I think UBS comments will produce the needed bounce. Actionable call alert!
From a commodity PC DRAM perspective, what they believe to be a generally healthy demand environment for desktop and notebook PCs that ship in a "Vista Ready" configuration of 1GByte of DRAM or more continues to provide support for DRAM ASPs. DDR2 pricing in particular is seeing more of this ASP support relative to DDR as more recently launched PC platforms only support the former. With an estimated two thirds of PC DRAM production centered on DDR2, the firm believes Micron is maintaining pace with the industry's migration to DDR2.
They are also increasing F2007 EPS estimate to $1.20 from $1.15 (pro forma $1.25) owing to slightly more favorable GM assumptions as MU pulls down inventory in wireless areas, benefits from mix improvements, and accelerating DRAM and NAND cost decreases.
DRAM Spot and contract pricing are up 35% and 41% YTD, with a Spot premium of 9%. Contract pricing continues to rise into Nov Qtr end and should support higher financial projections, while DRAM spot appears to be reaching a near-term floor and argues an extension of this strength through
yearend.
Maintains Buy and $24 tgt.
Notablecalls: I've been positive on MU since Nov 14 and looks like the call made by Bear Stearns continues to play out. The stock shot up following the call but has been coming in over the past couple of days. I think UBS comments will produce the needed bounce. Actionable call alert!
Calls of Note Part 5
- Citigroup notes Novellus Systems (NASDAQ:NVLS) traded up ~8% today as checks suggest a growing view among buyside investors that NVLS is a potential M&A target - either for private equity or a larger competitor. Recent cancellation of attendance at two conferences (LEH and CS) has fueled this view.
While their analysis of financial and strategic fits indicates TEL (#2 equipment supplier) as a plausible consolidator in a competitive takeover, they view a TEL/NVLS deal as being unlikely given cross-border M&A has historically proven difficult + TEL's success at integrating acquisitions in the past is mixed.
With respect to private equity interest, firm's work (in conjunction w/ input from Citi's risk arb team) indicates a NVLS deal under typical debt/equity assumptions and a ~25% equity premium would drive only ~11% IRR, or well below the typical 20-30% hurdle rate for PE deals - even in this environment.
Maintains Hold and $32 tgt on NVLS.
Notablecalls: There was some serious action in NVLS yesterday but I think Citi's comments will put a cap on that move.
While their analysis of financial and strategic fits indicates TEL (#2 equipment supplier) as a plausible consolidator in a competitive takeover, they view a TEL/NVLS deal as being unlikely given cross-border M&A has historically proven difficult + TEL's success at integrating acquisitions in the past is mixed.
With respect to private equity interest, firm's work (in conjunction w/ input from Citi's risk arb team) indicates a NVLS deal under typical debt/equity assumptions and a ~25% equity premium would drive only ~11% IRR, or well below the typical 20-30% hurdle rate for PE deals - even in this environment.
Maintains Hold and $32 tgt on NVLS.
Notablecalls: There was some serious action in NVLS yesterday but I think Citi's comments will put a cap on that move.
Calls of Note Part 4
- FBR notes their recent checks have provided more color with regard to expected NVIDIA (NASDAQ:NVDA) and PLAY content in upcoming iPod designs. They believe NVDA has been designed into the upcoming video iPod, and that PLAY has been designed out (both consistent with prior speculation). Firm also believes that PLAY has been designed into the upcoming iPhone (which they don't think is in consensus). They also believe that NVDA's acquisition of PLAY gives it an inside track at providing an integrated applications / video processor in a future video iPod for 2008. Net, they expect combined PLAY and NVDA music player revenue of $280 million in 2007, following the close of the PLAY acquisition, with the potential for further revenue from an enhanced Apple relationship in the future.
Firm believes the next generation video iPod will use NVDA's video processor and Samsung's application processor. Check also confirmed that PLAY's application processor would be designed out of the video iPod, to be replaced by Samsung. firm alsos believe NVDA will provide the video processor, displacing BRCM, due to NVDA's advantage of lower power consumption. While NVDA's participation in the iPod is not a complete surprise by now, it's also not in current estimates. Firm expects $100 million in incremental 2007 revenue from the video iPod, assuming 14 million units in 2007.
Notablecalls: NVDA being designed into the iPod is not news. Nor is news that PLAY has been designed into the upcoming iPhone. NVDA looks pretty much as RIMM looked yesterday. But I suspect the call isn't powerful enough to create such buy interest. Anyone disagree?
Firm believes the next generation video iPod will use NVDA's video processor and Samsung's application processor. Check also confirmed that PLAY's application processor would be designed out of the video iPod, to be replaced by Samsung. firm alsos believe NVDA will provide the video processor, displacing BRCM, due to NVDA's advantage of lower power consumption. While NVDA's participation in the iPod is not a complete surprise by now, it's also not in current estimates. Firm expects $100 million in incremental 2007 revenue from the video iPod, assuming 14 million units in 2007.
Notablecalls: NVDA being designed into the iPod is not news. Nor is news that PLAY has been designed into the upcoming iPhone. NVDA looks pretty much as RIMM looked yesterday. But I suspect the call isn't powerful enough to create such buy interest. Anyone disagree?
Calls of Note Part 3
- JP Morgan's Jay Deahna is making another call on Cymer (NASDAQ:CYMI) saying it's an above-average secular growth story driven by its leading-edge lasers that is fueling revenue growth and gross margin expansion. Also, the company has extensive tactical programs underway to drive GM expansion beyond the "mix" effect. Further, Cymer has an improving business model that ranks 6th out of 15 equipment companies in firm's Operating Effectiveness/Wealth Creation (OE/WC) analysis and a high margin service and spares business that comprises roughly 50% of revenues. As such, they see CYMI shares as a solid offensive and defensive story and the likelihood of a C4Q06 upside order surprise by ASML should enhance confidence in solid EPS growth for Cymer in 2007.
Consensus for 2007 EPS is $2.76 vs. JPM at $3.20. Firm expects consensus to rise as their lithography thesis unfolds and immersion gains momentum. They believe consensus underestimates the growth prospects and stickiness of Cymer's revenue potential and gross margin expansion through a steady mix shift to its higher value-add/ASP and higher margin systems. If capital spending declines in 2007, EPS estimates may be high.
Notablecalls: I'd be looking to play CYMI off of the ASML call as ASML is CYMI's largest customer. And you already know what Jay said about units.
Consensus for 2007 EPS is $2.76 vs. JPM at $3.20. Firm expects consensus to rise as their lithography thesis unfolds and immersion gains momentum. They believe consensus underestimates the growth prospects and stickiness of Cymer's revenue potential and gross margin expansion through a steady mix shift to its higher value-add/ASP and higher margin systems. If capital spending declines in 2007, EPS estimates may be high.
Notablecalls: I'd be looking to play CYMI off of the ASML call as ASML is CYMI's largest customer. And you already know what Jay said about units.
Calls of Note Part 2
- JP Morgan's Jay Deahna is making a call on ASML Holdings (NASDAQ:ASML) saying they believe consensus is deeply wrong on ASML's 2007 and beyond EPS potential. The likelihood of a positive C4Q06 bookings pre-announcement, based mainly on new customer wins in Taiwan and Japan in early to mid December, should be the next catalyst to start bringing consensus up for 2007. Reiterates OW rating and top pick status on ASML from a near-term cyclical and secular perspective.
ASML provided C4Q06 order guidance or 65 or more units. Firm believes ASML is likely to receive initial volume orders (i.e., new customers) from both Nanya and Toshiba in C4Q06, which should drive overall orders into the 80 unit range, enough for a positive pre-announcement. Feedback from Japan indicates that the Nikon immersion tools are running slow and ASML is likely to establish a decent initial volume position at Toshiba, which needs to place orders now to enter volume production for Flash in the 55nm range using immersion in mid 2007.
In thei view, ASML shares are undervalued and the company's strong business model is not fully reflected in the stock price. ASML shares trade at 13.3x firm's C2007 EPS estimate of EUR1.52/$1.90 (assuming a 1.25x exchange rate) versus group average of 14.6x, a discount that they believe is unwarranted.
Notablecalls: This call was actionable yesterday. If indeed you decide to play it, keep it on a tight leash.
ASML provided C4Q06 order guidance or 65 or more units. Firm believes ASML is likely to receive initial volume orders (i.e., new customers) from both Nanya and Toshiba in C4Q06, which should drive overall orders into the 80 unit range, enough for a positive pre-announcement. Feedback from Japan indicates that the Nikon immersion tools are running slow and ASML is likely to establish a decent initial volume position at Toshiba, which needs to place orders now to enter volume production for Flash in the 55nm range using immersion in mid 2007.
In thei view, ASML shares are undervalued and the company's strong business model is not fully reflected in the stock price. ASML shares trade at 13.3x firm's C2007 EPS estimate of EUR1.52/$1.90 (assuming a 1.25x exchange rate) versus group average of 14.6x, a discount that they believe is unwarranted.
Notablecalls: This call was actionable yesterday. If indeed you decide to play it, keep it on a tight leash.
Calls of Note Part 1
- RBC Capital notes the fourth-quarter mobile devices sell-thru indications remain favorable and they are increasing their unit assumptions for Motorola (NYSE:MOT) from 62M to 62.5M units. However, the mix of handsets may not be tracking towards firm's original expectations and they are reducing their ASP assumptions from $138 to $134. Subsequently, they are adjusting revenues for 4Q06 from $12B to $11.9B vs. consensus of $12B. EPS remains unchanged at $0.38 vs. consensus of $0.39.
With price driven growth likely to remain a persistent theme going forward, they will be utilizing a lower forward-multiple for the wireless-handset vendors. Firm's new price-target for Motorola decreases from $26 to $28 or 18x CY07 earnings. Growth from emerging-regions, a methodical-ramp in WCDMA, and a greater- acceptance of mid-tier and low-end phones may limit the expansion of mobile-device ASPs as we enter 2007.
Firm recently surveyed 200 retailers across the U.S. via telephone and the data points to strong-demand for wireless phones as we approach the holidays. The popular-phones for Motorola are the RAZR and SLVR with price often cited as the primary factor after brand. Thus far they believe order and shipment trends for Motorola remain strong; it's the mix that concerns the firm. The venerable RAZR, now over two-years old, has moved from a high- end to a mid-range and now to an entry-level phone, priced at $49 with a service plan.
The slide in ASPs for Motorola is not that bad when compared to Nokia, which is suffering from a weak mid-tier product-line and a ramp in emerging-markets, two major-factors impacting ASPs.
Notablecalls: Well, this is exactly what I talked about on Nov 6. The phones aren't selling unless the price is cut in half. Most likely this won't affect MOT's bottom line this qtr, but it will start hurting by Q107. I don't view this as a trading call but it does reinforce my neg views on the space.
With price driven growth likely to remain a persistent theme going forward, they will be utilizing a lower forward-multiple for the wireless-handset vendors. Firm's new price-target for Motorola decreases from $26 to $28 or 18x CY07 earnings. Growth from emerging-regions, a methodical-ramp in WCDMA, and a greater- acceptance of mid-tier and low-end phones may limit the expansion of mobile-device ASPs as we enter 2007.
Firm recently surveyed 200 retailers across the U.S. via telephone and the data points to strong-demand for wireless phones as we approach the holidays. The popular-phones for Motorola are the RAZR and SLVR with price often cited as the primary factor after brand. Thus far they believe order and shipment trends for Motorola remain strong; it's the mix that concerns the firm. The venerable RAZR, now over two-years old, has moved from a high- end to a mid-range and now to an entry-level phone, priced at $49 with a service plan.
The slide in ASPs for Motorola is not that bad when compared to Nokia, which is suffering from a weak mid-tier product-line and a ramp in emerging-markets, two major-factors impacting ASPs.
Notablecalls: Well, this is exactly what I talked about on Nov 6. The phones aren't selling unless the price is cut in half. Most likely this won't affect MOT's bottom line this qtr, but it will start hurting by Q107. I don't view this as a trading call but it does reinforce my neg views on the space.
Paperstand
The WSJ reports that as utilities Suez (SZE) and Gaz de France hammer out the final terms of their planned €44.22bn ($56.72bn) combination ahead of a key Suez board meeting tomorrow, a rising number of shareholders are threatening to reject the deal, an embarrassing potential outcome for both co’s and the French govt, which helped organize it. In the past few weeks, US and European institutional investors with holdings amounting to more than 15% of Suez's capital have signed individual letters to Suez mgmt to protest the terms of the deal.
Barron’s „Inside Scoop” section reprots that Chmn Owen Kratz at Helix Energy Solutions (HLX) shelled out $2.1m for 70K shares. Helix CEO and President Martin R. Ferron bought 20K shares. He spent a total of $621K.
Monday, November 20, 2006
Analyst out on MRU (UNCL)
Analysts commenting on UNCL's earnings report, released last week. Sanders Morris Harris notes that the greater than expected loss was attributable to higher expenses, particularly advertising costs, which does not concern the firm too much b/c these expenditures are necessary investments in building the brand. More importantly, the MyRichUncle brand is gaining appeal among students leading to increasing loan originations. Thanks to solid business in Oct and Nov, UNCL now has over $100m in private loans, which is enough to securitize. According to ThinkEquity mgmt said it plans to do its first securitization of approximately $120m in loans in the MarQ. Firm ests this securitization will take place early in C'07. Think introduces their F´08 EPS est of $0.28. Both SMH and Think continue to rate UNCL shares as a Buy with SMH tgt at $9.
Calls of Note Part 5
Merrill is raising their 12-month price target on Research in Motion (NASDAQ:RIMM) to $165 from $135 on stronger than expected trends in RIM's new consumer Pearl smartphone. S
Firm expects an imminent launch of the Pearl at Cingular, with some stores indicating shipments as early as this week. Cingular is largest US wireless carrier, and Pearl launch could support F4Q (Feb) outlook.
Pearl's thin form factor is a major shift from RIM's previous bulkier models, and they believe it is creating a strong buzz in Europe. IDC projects Western Europe smartphone sales to grow at 38% CAGR till 2010, ~1.4x faster than the 28% CAGR for overall market. Over 14 European carriers have launched the Pearl incl. Vodafone, O2 and T-Mobile.
ML believes RIM has been more aggressive in promoting low-price mobile data plans for consumers vs. its hardware-only rivals. T-Mobile's Pearl data plan at $19.99/mo is among lowest in the industry; they expect similar aggressive mobile data plans at other carriers.
CY08 pro-forma (ex-ESO) EPS estimate goes to $5.22 (vs. $4.86 previously). Maintains Buy.
Notablecalls: UBS beat ML by a couple of days, raising their tgt to $160 on Nov 16. The stock has doubled since August and I think that if today's tgt raise gaps the stock up more than a point one should be looking for a fading oppy.
Firm expects an imminent launch of the Pearl at Cingular, with some stores indicating shipments as early as this week. Cingular is largest US wireless carrier, and Pearl launch could support F4Q (Feb) outlook.
Pearl's thin form factor is a major shift from RIM's previous bulkier models, and they believe it is creating a strong buzz in Europe. IDC projects Western Europe smartphone sales to grow at 38% CAGR till 2010, ~1.4x faster than the 28% CAGR for overall market. Over 14 European carriers have launched the Pearl incl. Vodafone, O2 and T-Mobile.
ML believes RIM has been more aggressive in promoting low-price mobile data plans for consumers vs. its hardware-only rivals. T-Mobile's Pearl data plan at $19.99/mo is among lowest in the industry; they expect similar aggressive mobile data plans at other carriers.
CY08 pro-forma (ex-ESO) EPS estimate goes to $5.22 (vs. $4.86 previously). Maintains Buy.
Notablecalls: UBS beat ML by a couple of days, raising their tgt to $160 on Nov 16. The stock has doubled since August and I think that if today's tgt raise gaps the stock up more than a point one should be looking for a fading oppy.
Color on news: Monster Worldwide (NASDAQ:MNST)
Couple of firms commenting on Monster Worldwide (NASDAQ:MNST) after The Wall Street Journal reported over the weekend that Yahoo (which owns HotJobs) is close to an alliance that with enable 6 newspaper companies (that own >100 papers) to sell Yahoo/HotJobs job postings to help wanted customers.
- UBS believes alliance could hurt Monster by adding competition. Cynics may say it's too soon to say alliance will impact market share mix, but success of Careerbuilder (owned by Tribune, McClatchy, Gannett) makes us more concerned. Since newspapers bought CareerBuilder in '00, its rev share of online recruiting space has risen from what wthey think was <10% to rival MNST's; they think MNST & CareerBuilder now have about 20% share, versus <10% for HotJobs.
They worry alliance could hurt Monster's effort to add more local/small business customers. Firm estimates that small business customers contribute only about 40% of Monster's revenue now; but, they think this customer base will make or break Monster's growth story given that the Enterprise segment of the market is maturing.
UBS is leaving their estimates unchanged. However, this announcement does add another element of caution to Monster thesis; they were already cautious based on concerns about labor market slowdown. Maintains Neutral and $49 tgt.
- Wachovia notes the news also further validates their belief that a YHOO purchase of MNST is unlikely. They view this as a modest negative for MNST as it has hoped to partner up with mid-market newspapers.
Given MNST's desire to expand its local presence, the firm views the potential YHOO agreement as a negative in the sense that 4.6M of daily circ. & potentially 1.2M help wanted related unique online visitors will be moving to a competitor with a 5-yr deal. Firm assumes YHOO gave the newspaper co's better economics given its position as the #3 player. It also suggests newspaper co's are willing to partner with Internet co's which may have been viewed as "the enemy".
Maintains Mkt Perform and $38-$40 valuation range.
Notablecalls: Expect to see moderate selling pressure in MNST today. I was negative on MNST on Sept 29, calling for extended weakness. Obviously, I was wrong. Grain of salt anyone?
- UBS believes alliance could hurt Monster by adding competition. Cynics may say it's too soon to say alliance will impact market share mix, but success of Careerbuilder (owned by Tribune, McClatchy, Gannett) makes us more concerned. Since newspapers bought CareerBuilder in '00, its rev share of online recruiting space has risen from what wthey think was <10% to rival MNST's; they think MNST & CareerBuilder now have about 20% share, versus <10% for HotJobs.
They worry alliance could hurt Monster's effort to add more local/small business customers. Firm estimates that small business customers contribute only about 40% of Monster's revenue now; but, they think this customer base will make or break Monster's growth story given that the Enterprise segment of the market is maturing.
UBS is leaving their estimates unchanged. However, this announcement does add another element of caution to Monster thesis; they were already cautious based on concerns about labor market slowdown. Maintains Neutral and $49 tgt.
- Wachovia notes the news also further validates their belief that a YHOO purchase of MNST is unlikely. They view this as a modest negative for MNST as it has hoped to partner up with mid-market newspapers.
Given MNST's desire to expand its local presence, the firm views the potential YHOO agreement as a negative in the sense that 4.6M of daily circ. & potentially 1.2M help wanted related unique online visitors will be moving to a competitor with a 5-yr deal. Firm assumes YHOO gave the newspaper co's better economics given its position as the #3 player. It also suggests newspaper co's are willing to partner with Internet co's which may have been viewed as "the enemy".
Maintains Mkt Perform and $38-$40 valuation range.
Notablecalls: Expect to see moderate selling pressure in MNST today. I was negative on MNST on Sept 29, calling for extended weakness. Obviously, I was wrong. Grain of salt anyone?
Calls of Note Part 4
- Merrill's Joe Osha notes they had a chance to spend some time with Analog Devices' (NYSE:ADI) CEO Jerry Fishman following the publication of results last week. Firm was interested in drilling down on the potential for margin improvement at ADI, and they also questioned Fishman about how the competitive environment is changing.
In some ways, ADI looks like a tempting investment. There's plenty of cash flow and an obvious set of potential improvements. Management has been suggesting for two years that something positive is in the works on the money-losing DSP business. Simply waiting for things to get better is an easy route to take.
It is not, however, a strategy that's likely to work in ML's opinion. As they work through the numbers, it's hard to find any margin improvements that aren't in their estimates, and they see little evidence that change is coming. Firm also notes that ADI is no longer outgrowing the industry in either the data converter or amplifier markets.
At 13.6 EV/2007 EBITDA, the stock looks too expensive for a buyout, and it's also expensive relative to its peers. Even crediting ADI with sustained 10% growth and 26% GAAP operating margins, ML's fair value model suggests a normalized fair value of $34. They don't see investors making money from here. Maintains Neutral.
Notablecalls: I'd be tempted to put out a small short position on ADI following the call. Just because I feel there are too many longs already in it and ML's call will leave them somewhat uncomfortable.
In some ways, ADI looks like a tempting investment. There's plenty of cash flow and an obvious set of potential improvements. Management has been suggesting for two years that something positive is in the works on the money-losing DSP business. Simply waiting for things to get better is an easy route to take.
It is not, however, a strategy that's likely to work in ML's opinion. As they work through the numbers, it's hard to find any margin improvements that aren't in their estimates, and they see little evidence that change is coming. Firm also notes that ADI is no longer outgrowing the industry in either the data converter or amplifier markets.
At 13.6 EV/2007 EBITDA, the stock looks too expensive for a buyout, and it's also expensive relative to its peers. Even crediting ADI with sustained 10% growth and 26% GAAP operating margins, ML's fair value model suggests a normalized fair value of $34. They don't see investors making money from here. Maintains Neutral.
Notablecalls: I'd be tempted to put out a small short position on ADI following the call. Just because I feel there are too many longs already in it and ML's call will leave them somewhat uncomfortable.
Calls of Note Part 3
- Merrill Lynch notes theyrecently met with several service providers and equipment vendors in Asia and came away positively about PMC-Sierra's (NASDAQ:PMCS) growth prospects in 2007. China appears set to rollout 3G, and trends in FTTx in Japan and Korea are encouraging. Firm continues to believe that the recent decline in PMC's telecom business is related to a temporary inventory correction rather than any structural issues and expect street estimates to begin to move higher in the next 1 - 2 quarters.
Most service providers and equipment vendors in China expect 3G licenses to be granted in 1H07. PMC has about 15% exposure to the China wireline and wireless infrastructure markets, and supplies to leading Chinese OEMs Huawei and ZTE. While it's unclear how the technology landscape (WCDMA vs. TD-SCDMA) will emerge, PMC's components are mostly technology agnostic.
Firm met with NTT, SoftBank and KDDI in Japan and came away positively about the prospects of FTTH in Japan. They think the recent weakness at Passav is primarily related to excess inventory at NTT and expect Passav to rebound in Q1. Korea Telecom is also evaluating FTTH and is likely to begin its rollouts sometime in 2007, which could drive upside to our current estimates. Also, recent esults from NTAP and HP suggest that the storage market remains healthy.
Reits Buy and $10 tgt saying they expect the stock to move higher over the next few quarters from a combination of estimate revisions and multiple expansion.
Notablecalls: Think ML's Srini Pajjuri is making a good trading call here. Would buy the stock here with a $0.15 stop. Could be a half a pointer in the making.
Most service providers and equipment vendors in China expect 3G licenses to be granted in 1H07. PMC has about 15% exposure to the China wireline and wireless infrastructure markets, and supplies to leading Chinese OEMs Huawei and ZTE. While it's unclear how the technology landscape (WCDMA vs. TD-SCDMA) will emerge, PMC's components are mostly technology agnostic.
Firm met with NTT, SoftBank and KDDI in Japan and came away positively about the prospects of FTTH in Japan. They think the recent weakness at Passav is primarily related to excess inventory at NTT and expect Passav to rebound in Q1. Korea Telecom is also evaluating FTTH and is likely to begin its rollouts sometime in 2007, which could drive upside to our current estimates. Also, recent esults from NTAP and HP suggest that the storage market remains healthy.
Reits Buy and $10 tgt saying they expect the stock to move higher over the next few quarters from a combination of estimate revisions and multiple expansion.
Notablecalls: Think ML's Srini Pajjuri is making a good trading call here. Would buy the stock here with a $0.15 stop. Could be a half a pointer in the making.
Calls of Note Part 2
- Stifel notes they would use any weakness in MGIC Investment Corp (NYSE:MTG) shares stemming from a negative article in Barron's as a buying opportunity, as they see limited downside (an estimated 13%), even if the bearish case laid out in the article comes to fruition.
In short, the firm sees little new in the Barron's article and would summarize the bearish case presented as less one on MGIC specifically as on U.S. housing, as the key seems to be that the author expects that "the current downturn in the U.S. housing market promises to be no ordinary correction," though this seems to be taken as a given rather than the forecast that it is.
Firm's investment thesis is based on the following factors: 1) recapturing of market share vis- -vis piggybacks, 2) rising persistency, 3) a continued return of excess capital to shareholders, and 4) that MGIC's insured portfolio is less risky than the overall mortgage market and appears decently positioned to weather the current U.S. housing market downturn. As mentioned in the article, current results, especially for 3Q06 support their thesis, especially in regards to top-line growth.
Firm's EPS estimates, which assume deterioration in housing credit though not to the extent implied in the article, remain unchanged at $6.75 and $7.20, respectively. Target price is $80 or 1.4x y/e 2007 book value estimate of $58.38, toward the low end of the historical P/BV range.
Maintains Buy.
Notablecalls: MTG is a recent favourite of the shrinking short community and I guess they talked Barron's into publishing a negative piece on it. Depending on how low the stock opens this AM, I'd be tempted to play it for a bounce. Short interest stands at around 8%.
In short, the firm sees little new in the Barron's article and would summarize the bearish case presented as less one on MGIC specifically as on U.S. housing, as the key seems to be that the author expects that "the current downturn in the U.S. housing market promises to be no ordinary correction," though this seems to be taken as a given rather than the forecast that it is.
Firm's investment thesis is based on the following factors: 1) recapturing of market share vis- -vis piggybacks, 2) rising persistency, 3) a continued return of excess capital to shareholders, and 4) that MGIC's insured portfolio is less risky than the overall mortgage market and appears decently positioned to weather the current U.S. housing market downturn. As mentioned in the article, current results, especially for 3Q06 support their thesis, especially in regards to top-line growth.
Firm's EPS estimates, which assume deterioration in housing credit though not to the extent implied in the article, remain unchanged at $6.75 and $7.20, respectively. Target price is $80 or 1.4x y/e 2007 book value estimate of $58.38, toward the low end of the historical P/BV range.
Maintains Buy.
Notablecalls: MTG is a recent favourite of the shrinking short community and I guess they talked Barron's into publishing a negative piece on it. Depending on how low the stock opens this AM, I'd be tempted to play it for a bounce. Short interest stands at around 8%.
Calls of Note Part 1
- Citigroup notes the closure of the SanDisk (NASDAQ:SNDK) and mSystems transaction does not change their view of near and long-term share price prospects for the new SanDisk entity. Yet, 4Q06 end demand has been largely uninspiring with October's US retail sell through data for cards, drives and MP3 players sub-seasonal and with SanDisk observing bifurcated card and MP3 market share trends. On the other hand, SNDK has reiterated its OEM-centric handset card business is constrained by tightness in the assembly and test part of its extended supply chain.
While evidencing solid demand pull, this could also be an indication that competition is heating up in this secularly advantaged end market given increased handset card controller output recently at Silicon In Motion. As spot prices have drifted steadily lower in the past month SNDK's shares have steadily lagged the market, now down 12% QTD versus a 6% gain by the SOX. Looming 1H07 seasonality is likely to discourage a sustained rally, though a"catch-up" trading rally into the low-50's is possible into SanDisk's CES presentation, especially as valuation now appears low. Further out, 1H07 pricing seasonality sustains risk to the $40 level, though 12- month reward potential appears to the mid-60s. Reiterates Hold rating on SNDK shares.
Notablecalls: CES will take place early Jan resulting in several new product announcement in the portable EC space. That may indeed drive the stock higher. Not a high conviction call.
While evidencing solid demand pull, this could also be an indication that competition is heating up in this secularly advantaged end market given increased handset card controller output recently at Silicon In Motion. As spot prices have drifted steadily lower in the past month SNDK's shares have steadily lagged the market, now down 12% QTD versus a 6% gain by the SOX. Looming 1H07 seasonality is likely to discourage a sustained rally, though a"catch-up" trading rally into the low-50's is possible into SanDisk's CES presentation, especially as valuation now appears low. Further out, 1H07 pricing seasonality sustains risk to the $40 level, though 12- month reward potential appears to the mid-60s. Reiterates Hold rating on SNDK shares.
Notablecalls: CES will take place early Jan resulting in several new product announcement in the portable EC space. That may indeed drive the stock higher. Not a high conviction call.
Paperstand
The WSJ reports that several buyout deals to be announced this morning. Blackstone Group last night was near a $20bn takeover of Equity Office Properties (EOP) as Wall Street wrapped up one of its biggest days of deal making ever. If completed, the proposed effort to take Equity Office Properties private would be the largest such transaction in history, and possibly the largest real-estate deal ever, after factoring in the company's $16bn in debt. Even so, it was just one of a parade of multibillion-dollar deals expected to be announced by this morning. They include a $25.9bn takeover of mining concern Phelps Dodge (PD) by Freeport-McMoRan (FCX); a $3.3bn takeover of U.S. Trust, the private-banking arm of Charles Schwab (SCH) by Bank of America (BAC); and a $2.5bn agreement by Russian steelmaker Evraz to acquire Oregon Steel Mills (OS). Last night, Wall Street bankers were discussing the possibility of still more major deal announcements today.
„Heard on the Street” column discusses Syngenta (SYT), which bets that if it builds the right genetically modified seeds, profits will come, and some investors like its chances. It offers a cheaper way into the booming $56bn agricultural-chemical industry than its biggest US rival, Monsanto. "There are some stocks in which you look out for performance over two and three years, and this is one of them," says Madelynn Matlock, who manages $270m for the Huntington International Equity Fund.
Sunday, November 19, 2006
Barron's Summary
Barron’s cover discusses NYSE (NYX), whose investors love its electronic initiative and planned Euronext merger. Trading at more than 40x expected ‘07 earnings, NYX stock already is discounting massive efficiencies from the electronic transition and Euronext merger. It's trading based on hoped-for ‘08 earnings of maybe $3-4 a share, and more farther out. Investors thus are giving the exchange credit for winning battles it hasn't yet fought. They think CEO John Thain is playing a multiyear chess match and is thinking several moves ahead, the Euronext deal, the rollout of US derivatives listings, trading bonds and their derivatives, building a "dark pool" internally, an Asian linkup, maybe even having the Archipelago platform handle most NYSE-listed volume some day. They're convinced he's underpromising and ready to overdeliver. With the stock where it is, a lot needs to break right. And it only will if a better Big Board rises as its trading floor's grip on the mkts fades.
A deal could bring Coca-Cola Enterprises (CCE) $27 a share, a price about a third above its recent stock quote, while helping Coca-Cola to carry out a cohesive growth strategy.
It's generally gotten easier for investors to find, evaluate and trade bonds. Cautious investors should consider munis, and the paper of mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE).
MGIC Investments (MTG) stock, at 61.50, has been climbing as current trends favor mortgage insurers. But some skeptics see a rise in claims that could cut earnings in half, prompting a steep selloff in the shares.
The shares of DuPont (DD), which went nowhere for most of this decade, have begun moving up this year. Recently at 47.48, they could climb 15-20% in the year ahead.
As the dollar fell earlier this decade, some feared a meltdown. Instead, the buck has bottomed, and looks ready to rise in the year ahead by at least 5% against other currencies.
“The Trader” column suggest that the yellow pages business Verizon Comm. (VZ) is spinning off may merit a second glance. Shares of the spinoff, called Idearc (IAR), were distributed as a dividend after the mkt closed Fri, with stockholders receiving one Idearc share for every 20 Verizon shares owned. Idearc stock will begin trading Monday. Idearc shares were trading late last week for about 26.60 on a "when issued" basis. Shawn Collins, of Citigroup, reckons they could be worth about 33 based on various metrics. Idearc shares could fetch between 30-35 in a leveraged buyout, he reckons, or between 28-39 based on a multiple of 8-9x ‘06 EBITDA of about $1.637bn.
“Technology Trader” section discusses Medtronic (MDT), St. Jude (STJ) and Boston Scientific (BSX), whose shares are down 15%, 29% and 33%, respectively, since Dec05. Now, with the stocks trading at historically low multiples of about 20x next year's profits, a fair number of professional health-care investors are looking at quarterly reports for any sign of a demand uptick. Sanford Bernstein analyst Bruce Nudell suspects that if Medtronic's sales of defibrillators (ICD) show any strength, a thrill would run through its shares and those of its rivals. "Ppl are not concerned with the long term," says Nudell of his conversations with the buy side. "So, if it's a positive quarter, these stocks should go up." The valuations of these device stocks reflect low-growth expectations. Any hint of faster sales gains -- in the low teens, say -- should spark investors to pay a little more for them. Others stocksa mentioned include: CAMH, JNJ and CONR.
Manager top holdings highlighted: BRKA, AXP, ENR, JNJ, FDX, BUD, GE, AFL, SU and FAF.
Friday, November 17, 2006
Calls of Note Part 4
Wachovia taking a closer look at the hysterectomy opportunity of Intuitive Surgical (NASDAQ:ISRG).
There are over 600,000 hysterectomies performed in the U.S. annually and firm believes that 250,000 of these are potential da Vinci procedures. These 250,000 procedures include 200,000 complex-benign cases and 50,000 cancer cases. ISRG expects to be > 2% penetration (roughly 5,000 procedures) by the end of 2006.
Firm's current estimates are based on the assumption that da Vinci hysterectomy penetration reaches 4% in 2007, 6% in 2008, and 8% in 2009. Their sensitivity analysis shows that if hysterectomy follows the same adoption curve as prostatectomy (reaching 8% in 2007, 20% in 2008, and 35% in 2009), EPS would be $0.10 higher in 2007, $0.30 higher in 2008, and $0.59 higher in 2009 (this assumes system sales stay fixed at their current estimates).
ISRG now estimates that the U.S. market could handle 4,000 systems (1,000 hospitals with 3 systems and 1,000 hospitals with 1 system) and the international market could handle 2,000 systems (500 hospitals with 3 systems and 500 hospitals with one system). This results in a system market of $1.6B and an instrument market of $3.2B. Currently, the U.S. is at just 10% penetration (395 systems) and international is at just 6% penetration (120 systems).
Reiterates Outperform with $124-$136 valuation range.
Notablecalls: Nothing fundamentally new here, just serves as a reminder of how much upside there might be in the best case scenario. However, the stock is a mover and is sitting near the 52-week lows, so such comments may drive the stock once it starts going.
There are over 600,000 hysterectomies performed in the U.S. annually and firm believes that 250,000 of these are potential da Vinci procedures. These 250,000 procedures include 200,000 complex-benign cases and 50,000 cancer cases. ISRG expects to be > 2% penetration (roughly 5,000 procedures) by the end of 2006.
Firm's current estimates are based on the assumption that da Vinci hysterectomy penetration reaches 4% in 2007, 6% in 2008, and 8% in 2009. Their sensitivity analysis shows that if hysterectomy follows the same adoption curve as prostatectomy (reaching 8% in 2007, 20% in 2008, and 35% in 2009), EPS would be $0.10 higher in 2007, $0.30 higher in 2008, and $0.59 higher in 2009 (this assumes system sales stay fixed at their current estimates).
ISRG now estimates that the U.S. market could handle 4,000 systems (1,000 hospitals with 3 systems and 1,000 hospitals with 1 system) and the international market could handle 2,000 systems (500 hospitals with 3 systems and 500 hospitals with one system). This results in a system market of $1.6B and an instrument market of $3.2B. Currently, the U.S. is at just 10% penetration (395 systems) and international is at just 6% penetration (120 systems).
Reiterates Outperform with $124-$136 valuation range.
Notablecalls: Nothing fundamentally new here, just serves as a reminder of how much upside there might be in the best case scenario. However, the stock is a mover and is sitting near the 52-week lows, so such comments may drive the stock once it starts going.
Calls of Note Part 3
Morgan Stanley believes Amgen's (NASDAQ:AMGN) yesterday's publication of the full data sets from CHOIR and CREATE are creating a surprising (at least to them, as they have long thought less is more in this market and these data were released in preliminary form last spring) amount of discussion amongst physicians and now legislators about the appropriate use of erythropoietin stimulating agents like Aranesp and Epogen. Given the potential for a changing commercial, political, and regulatory landscape, the Epogen franchise could be at risk for either perceived or real erosion as the discrepancy between CMS's (higher) and product label (lower) erythropoietin dose guidelines draw increased scrutiny.
The publication of two studies (CHOIR and CREATE) suggesting that higher doses of erythropoietins in predialysis chronic kidney disease patients leads to higher mortality engendered significant debate at the American Society Nephrology (ASN) meeting, and firm highlights growing evidence that higher erythropoietin doses are harmful. In addition, the House Ways and Mean Committee sent a letter to CMS asking for an explanation of the discrepancy between erythropoietin labeled dose recommendations and CMS policies, which encourage higher and now likely unsafe dosing.
Firm's previous bias has been that this stock had an upside bias into year-end, with potential problems in 2007, but they now believe this news accelerates negative sentiment and potentially fundamentals. Firm sees more risk to the downside than up over both the short and medium term (every $100M in Aranesp or Epogen sales is $0.06 in EPS). Additionally, the high target hemoglobin levels in Amgen's TREAT study may need lowering, damaging
enrollment, physician perception of the drug, and interpretation of the trial.
Notablecalls: The news were out yesterday, so we have already seen the initial reaction. However, now we have Morgan Stanley turning negative on the stock and usually they move stocks. Expecting to see more downside today.
The publication of two studies (CHOIR and CREATE) suggesting that higher doses of erythropoietins in predialysis chronic kidney disease patients leads to higher mortality engendered significant debate at the American Society Nephrology (ASN) meeting, and firm highlights growing evidence that higher erythropoietin doses are harmful. In addition, the House Ways and Mean Committee sent a letter to CMS asking for an explanation of the discrepancy between erythropoietin labeled dose recommendations and CMS policies, which encourage higher and now likely unsafe dosing.
Firm's previous bias has been that this stock had an upside bias into year-end, with potential problems in 2007, but they now believe this news accelerates negative sentiment and potentially fundamentals. Firm sees more risk to the downside than up over both the short and medium term (every $100M in Aranesp or Epogen sales is $0.06 in EPS). Additionally, the high target hemoglobin levels in Amgen's TREAT study may need lowering, damaging
enrollment, physician perception of the drug, and interpretation of the trial.
Notablecalls: The news were out yesterday, so we have already seen the initial reaction. However, now we have Morgan Stanley turning negative on the stock and usually they move stocks. Expecting to see more downside today.
Calls of Note Part 2
- Friedman, Billings, Ramsey comments on MEMC Electronic Materials (NYSE:WFR) following checks with distributors, competitors and customers that suggest strong near term biz trends, primarily driven by: 1) selling excess poly into the spot market with spot prices at >$250/kg (vs. contract prices ~$85/kg); 2)200mm wafer prices up 1%-3% QOQ; 3) strong demand by memory customers.
However, checks also support our more cautious stance on WFR's LT growth prospects, driven by: 1) larger than expected industry wide poly capacity in CY07; 2) semi wafer customers currently receiving better longer-term contracts from Japanese competitors; 3) consistent with firm's thesis, Japanese competitors acquiring a number of Epi reactors in 4Q06 as they accelerate semi wafer capacity ramps (this factor alone helping them to secure longer term semi wafer contracts); 4) Epi wafer demand expected to grow faster in CY07 due to migration to sub 90nm (b/c Epi wafers have higher yields); 5) Japanese competitors estimated to have > 65% Epi market share.
Net/net, data points so far in 4Q06 suggest that WFR is on track to meet/exceed firm's estimates. However, industry contacts/data points also suggest that WFR's market share in semi wafer is increasingly at risk given competitors' capacity increases and its current willingness to offer customers attractive LT contracts.
- Cowen believes Suntech (NYSE:STP) traded down yesterday on concerns about Q3 results, specifically lower gross margins (due to higher wafer costs) and less-than-expected revenue contribution from the MSK acquisition (as it is just being integrated). Each of these is plausible, but, in firm's view, the downside risk to Q3 St. EPS is limited, and they expect sequential improvement from Q4 onward. Firm recommends investors use the pullback as an entry point.
Firm believes wafer volumes were already committed earlier, but higher prices set in Q3 may cause gross margin for the base growth business to be below expectations (firm has modeled 28.0%). And, with the mix of MSK revenue (at 10%E GM) blended margin could be lower than firm's estimate of about 25%. However, as in Q2, higher volume may be an offset. And, wafer prices should begin to ease in Q4.
Two recently announced, 5-year wafer supply contracts ($180MM with REC and $475-580MM with a Chinese supplier), plus the 10-year deal with MEMC, should reduce wafer costs from Q1:07 (up to 10%). This should offset ASP declines. Therefore, expected improvements in conversion efficiency from the new semiconductor groove process could boost margins.
Notablecalls: Two firm's telling essentially the same story from two perspectives. Not actionable but good to know category.
However, checks also support our more cautious stance on WFR's LT growth prospects, driven by: 1) larger than expected industry wide poly capacity in CY07; 2) semi wafer customers currently receiving better longer-term contracts from Japanese competitors; 3) consistent with firm's thesis, Japanese competitors acquiring a number of Epi reactors in 4Q06 as they accelerate semi wafer capacity ramps (this factor alone helping them to secure longer term semi wafer contracts); 4) Epi wafer demand expected to grow faster in CY07 due to migration to sub 90nm (b/c Epi wafers have higher yields); 5) Japanese competitors estimated to have > 65% Epi market share.
Net/net, data points so far in 4Q06 suggest that WFR is on track to meet/exceed firm's estimates. However, industry contacts/data points also suggest that WFR's market share in semi wafer is increasingly at risk given competitors' capacity increases and its current willingness to offer customers attractive LT contracts.
- Cowen believes Suntech (NYSE:STP) traded down yesterday on concerns about Q3 results, specifically lower gross margins (due to higher wafer costs) and less-than-expected revenue contribution from the MSK acquisition (as it is just being integrated). Each of these is plausible, but, in firm's view, the downside risk to Q3 St. EPS is limited, and they expect sequential improvement from Q4 onward. Firm recommends investors use the pullback as an entry point.
Firm believes wafer volumes were already committed earlier, but higher prices set in Q3 may cause gross margin for the base growth business to be below expectations (firm has modeled 28.0%). And, with the mix of MSK revenue (at 10%E GM) blended margin could be lower than firm's estimate of about 25%. However, as in Q2, higher volume may be an offset. And, wafer prices should begin to ease in Q4.
Two recently announced, 5-year wafer supply contracts ($180MM with REC and $475-580MM with a Chinese supplier), plus the 10-year deal with MEMC, should reduce wafer costs from Q1:07 (up to 10%). This should offset ASP declines. Therefore, expected improvements in conversion efficiency from the new semiconductor groove process could boost margins.
Notablecalls: Two firm's telling essentially the same story from two perspectives. Not actionable but good to know category.
Calls of Note Part 1
BofA out defending Eagle Test System (NASDAQ:EGLT) after the co guided Dec qtr way below consensus. Firm is cutting their FY07 estimates sharply to $0.78 from $1.15, but still believes the stock screens as a very good value.
Firm believes the earnings power of the stock is clearly evident by the performance of the last two quarters, mid $0.40's EPS per quarter. It delivered $1.56 in earnings for FY'06. In the next up cycle, earnings power should improve, assuming the company is further along in the penetration of new accounts and applications. It is not a stretch to estimate annual EPS power north of $2.00.
EGLT is one of a handful companies in firm's universe that should deliver materially higher earnings in the next cycle. The higher earnings peak and a top-tier financial model reflected in operating margins suggest to them a premium valuation for the stock is warranted.
Even with a 32-40% drop qt-qt in December revenues, gross margins will likely remain in the 60% range. There is no other stock in firm's coverage list whose financial model has this type of resilience.
Notablecalls: The stock closed down 11% at the afterhours. As the stock now becomes valued based rather on potential than current earnings, it reminds me UCTT a while ago when the co used to disappoint investors virtually every qtr, but the stock never got hit seriously. My take is that EGLT will do the same, so we have a potential bounce play here.
Firm believes the earnings power of the stock is clearly evident by the performance of the last two quarters, mid $0.40's EPS per quarter. It delivered $1.56 in earnings for FY'06. In the next up cycle, earnings power should improve, assuming the company is further along in the penetration of new accounts and applications. It is not a stretch to estimate annual EPS power north of $2.00.
EGLT is one of a handful companies in firm's universe that should deliver materially higher earnings in the next cycle. The higher earnings peak and a top-tier financial model reflected in operating margins suggest to them a premium valuation for the stock is warranted.
Even with a 32-40% drop qt-qt in December revenues, gross margins will likely remain in the 60% range. There is no other stock in firm's coverage list whose financial model has this type of resilience.
Notablecalls: The stock closed down 11% at the afterhours. As the stock now becomes valued based rather on potential than current earnings, it reminds me UCTT a while ago when the co used to disappoint investors virtually every qtr, but the stock never got hit seriously. My take is that EGLT will do the same, so we have a potential bounce play here.
Thursday, November 16, 2006
Calls of Note Part 7
- ThinkEquity's Eric Ross notes that the PC supply chain is weakening worse than seasonality. Recent conversations with Asian semiconductor supply chain companies indicate lower motherboard shipments than the market had previously expected. November sales are trending flat to down versus October. This is weakness beyond what is typically expected from seasonality. As an example, one large Taiwanese motherboard manufacturer that the firm frequently speaks with has lowered its Q4 forecast for motherboard shipments from 8-10% Q/Q growth to flat. This is a continuation of what they heard when in Asia in September.
The most common explanation for weakness we hear is component shortages. Demand for AMD (NYSE:AMD) components is off the charts-feeding their new customer DELL (NASDAQ:DELL) and the other major PC OEMs at the expense of distributors. One source believes Intel (NASDAQ: INTC) is seeing shortages as well, although this has not checked out anywhere else.
Firm believes component shortages are an excuse for poor PC unit demand. As they check further down the chain there do not appear to be shortages of components or chipsets.
While PC unit demand is ok (certainly not great), the mix is decidedly lower end. This is negatively impacting margins throughout the supply chain. Most expect demand will be little changed from Vista.
Notablecalls: Not actionable but very good to know category. Eric Ross continues to produce quality research at Think.
The most common explanation for weakness we hear is component shortages. Demand for AMD (NYSE:AMD) components is off the charts-feeding their new customer DELL (NASDAQ:DELL) and the other major PC OEMs at the expense of distributors. One source believes Intel (NASDAQ: INTC) is seeing shortages as well, although this has not checked out anywhere else.
Firm believes component shortages are an excuse for poor PC unit demand. As they check further down the chain there do not appear to be shortages of components or chipsets.
While PC unit demand is ok (certainly not great), the mix is decidedly lower end. This is negatively impacting margins throughout the supply chain. Most expect demand will be little changed from Vista.
Notablecalls: Not actionable but very good to know category. Eric Ross continues to produce quality research at Think.
Calls of Note Part 6
- UBS comments on Research in Motion (NASDAQ:RIMM) saying that while they recognize the inherent flaws in a limited sample channel check, they believe the change in tone from Pearl launch (hardware upgrades) & recent checks (increasing new sub attach rates) is interesting. Demand & reorders appears to see no early signs of abatement. Regarding TMO USA adds, RIM reported on Sept 28 so it would be aware of add rates when providing guidance.
Sales trends at Marvell for its xScale processor appear strong with the ompany shipping as many as it can manufacture, based on firm's checks. While Marvell supplies a number of vendors, they believe Pearl/BlackBerry strength is contributing to the strength. Marvell supplies its xScale processor for the Pearl as well as the 8700 and 7130.
UBS previously pointed to the possibility that their estimates were likely conservative as the upgrade replacement rate implied in prior FY08 estimates indicated a deceleration (historically, the 2nd year of a replacement cycle has seen acceleration). They are raising PF FY08 EPS estimate (ex-options) to $4.86 from $4.45 to more accurately reflect views.
Tgt goes to $160 from $125.
Notablecalls: Expect to see buy interest in RIMM.
Sales trends at Marvell for its xScale processor appear strong with the ompany shipping as many as it can manufacture, based on firm's checks. While Marvell supplies a number of vendors, they believe Pearl/BlackBerry strength is contributing to the strength. Marvell supplies its xScale processor for the Pearl as well as the 8700 and 7130.
UBS previously pointed to the possibility that their estimates were likely conservative as the upgrade replacement rate implied in prior FY08 estimates indicated a deceleration (historically, the 2nd year of a replacement cycle has seen acceleration). They are raising PF FY08 EPS estimate (ex-options) to $4.86 from $4.45 to more accurately reflect views.
Tgt goes to $160 from $125.
Notablecalls: Expect to see buy interest in RIMM.
Calls of Note Part 5
- JP Morgan comments on Dell Computer (NASDAQ:DELL) after the co announced that it would delay announcing its preliminary fiscal third quarter 2007 results. The results, originally expected tomorrow, will now be furnished by the end of the month. According to the company, the delay is a result of complexity associated with ongoing SEC and Dell Audit Committee investigations. The company also announced that the SEC has now entered into a formal order of investigation.
According to the firm last night's announcements continue to add uncertainty over events at Dell. The formalization of the SEC investigation does not bring hope that the issue will be resolved without impact to Dell's financials. The US Attorney's investigation into the matter is also ongoing.
With little evidence of any fundamental improvements in Dell's current financial condition, they believe it is best to avoid the shares at current levels. Firm continues to believe that that major structural and strategic actions are necessary to begin a bottoming process for the stock. These changes should include, but not be limited to the following: substantial changes in business leadership structure; significant refinements to the direct model in the consumer space; restructuring initiatives to lower discretionary spending and product cost structure; and aggressive attempts to exploit the microprocessor industry's profit pool (i.e., a more substantial move to AMD).
Notablecalls: I would not be surprised to see DELL go below the $25 level today. While several high profile investors have been positive on DELL over the past couple of months, I continue to be pessimistic regarding the co's future. Profit margins will never be the same. But that's a LT issue.
According to the firm last night's announcements continue to add uncertainty over events at Dell. The formalization of the SEC investigation does not bring hope that the issue will be resolved without impact to Dell's financials. The US Attorney's investigation into the matter is also ongoing.
With little evidence of any fundamental improvements in Dell's current financial condition, they believe it is best to avoid the shares at current levels. Firm continues to believe that that major structural and strategic actions are necessary to begin a bottoming process for the stock. These changes should include, but not be limited to the following: substantial changes in business leadership structure; significant refinements to the direct model in the consumer space; restructuring initiatives to lower discretionary spending and product cost structure; and aggressive attempts to exploit the microprocessor industry's profit pool (i.e., a more substantial move to AMD).
Notablecalls: I would not be surprised to see DELL go below the $25 level today. While several high profile investors have been positive on DELL over the past couple of months, I continue to be pessimistic regarding the co's future. Profit margins will never be the same. But that's a LT issue.
Calls of Note Part 4
- JP Morgan notes that on Thursday, Nov. 16, the Pediatric Advisory Committee will discuss the safety review of 16 drugs, including Celexa. Forest Labs (NYSE:FRX) shares could be weak on headline news that a Safety Evaluator from the Division of Drug Risk Evaluation has recommended that additional QT studies be performed on Celexa after 3 new adverse event cases of QT prolongation were found associated with the drug, but in firm's view, not clearly linked. Also, in May the FDA requested the inclusion of additional language in the label regarding QT prolongation.
The 16 drugs to be discussed will be Amaryl, Avandia, Celexa, Ditropan, Gemzar, Invan, Lipitor, Mobic, Norvir, Novolog, Rapamune, Tamiflu, Trileptal, Zocor, Zofran, and Zyvox. According to the agenda, Celexa will be discussed at 9:30 am.
Notablecalls: I've seen comments like this one before. Never worked. If indeed Reuters spits out some headlines on Celexa, you have a nice bounce play there. Would not short ahead of the release.
The 16 drugs to be discussed will be Amaryl, Avandia, Celexa, Ditropan, Gemzar, Invan, Lipitor, Mobic, Norvir, Novolog, Rapamune, Tamiflu, Trileptal, Zocor, Zofran, and Zyvox. According to the agenda, Celexa will be discussed at 9:30 am.
Notablecalls: I've seen comments like this one before. Never worked. If indeed Reuters spits out some headlines on Celexa, you have a nice bounce play there. Would not short ahead of the release.
Calls of Note Part 3
- Merrill Lynch notes that Monsanto's (NYSE:MON) biotech pipeline has a good balance of near- and long-term opportunities that are highlighted by the company's top-ten list. Based on progress made during 2006 field trials, which Monsanto briefly commented on at a recent investor conference in London, the firm estimates that many of these top-ten products will advance to the next phase of commercial development when Monsanto provides its R&D update during the F1Q conference call in early-January. Firm expects pipeline advances to drive an increase in Monsanto's gross margins to 54% by 2010 versus 49% in F2006 and the company's 51-53% target.
They also expect Monsanto to confirm in January that several new biotech products advanced to phase I evaluations in 2006, similar to the five new entries announced last January. ML's DCF-derived price objective for Monsanto has more than doubled from $22.50 (proforma stock split) to $55 in the last two years, driven by the expansion in seeds and biotech traits. They could see an upward revision to their DCF analysis, post the R&D update in January, similar to the $5/sh increase after the last revision, owing to increased breadth and advancement of the biotech pipeline.
Notablecalls: Tight leash on this one. While I think it has potential for a 1 pt move, I aknowledge it may also start quickly rolling in the opposite direction as it has done many times before.
They also expect Monsanto to confirm in January that several new biotech products advanced to phase I evaluations in 2006, similar to the five new entries announced last January. ML's DCF-derived price objective for Monsanto has more than doubled from $22.50 (proforma stock split) to $55 in the last two years, driven by the expansion in seeds and biotech traits. They could see an upward revision to their DCF analysis, post the R&D update in January, similar to the $5/sh increase after the last revision, owing to increased breadth and advancement of the biotech pipeline.
Notablecalls: Tight leash on this one. While I think it has potential for a 1 pt move, I aknowledge it may also start quickly rolling in the opposite direction as it has done many times before.
Calls of Note Part 2
- Baird notes their checks indicate STMicroelectronics' (NYSE:STM) Nomadik multimedia processor is currently ramping into several phones at a leading Asia-based mobile phone OEM and designed into a U.S.-based high-volume phone at the same OEM, all at the expense of TI's (NYSE:TXN) OMAP. Nomadik's scheduled ramp in Nokia smartphones apparently pushed out but also at the expense of OMAP.
Baird believes TI's OMAP is now on the defensive to regain market share, which could lead to pricing pressures. They believe OMAP could lose significant share in the second half of 2007.
Firm remains on the sidelines on TXN shares given these dynamics combined with a mix shift towards lower-end phones.
Notablecalls: Two points - 1) Nokia did it bc they need to get better prices. TXN has been charging them monopoly pricing. 2) NTT DoCoMo has also been cutting their dependence on TI's OMAP app chip. Keep away from TXN as the co is way too much leveraged to the handset business. And reg readers already know how I feel about the handset business.
Baird believes TI's OMAP is now on the defensive to regain market share, which could lead to pricing pressures. They believe OMAP could lose significant share in the second half of 2007.
Firm remains on the sidelines on TXN shares given these dynamics combined with a mix shift towards lower-end phones.
Notablecalls: Two points - 1) Nokia did it bc they need to get better prices. TXN has been charging them monopoly pricing. 2) NTT DoCoMo has also been cutting their dependence on TI's OMAP app chip. Keep away from TXN as the co is way too much leveraged to the handset business. And reg readers already know how I feel about the handset business.
Calls of Note Part 1
- Piper Jaffray is positive on Vertex Pharma (NASDAQ:VRTX) taking their tgt to $58 from $42. Firm notes they have taken a closer look at the HCV market, as they believe investors will begin shifting to a commercial focus in the next several quarters, after data from ongoing trials satisfy outstanding clinical uncertainties. After a closer look, the firm believes their prior telaprevir estimates were overly conservative, particularly on the numbers of new patients seeking treatment. Firm's new U.S. and worldwide telaprevir sales estimates are $2.3b and $4.0b (from 1.5b; $2.5b) in 2012.
Preliminary end of treatment data from the ongoing Phase 2 PROVE-1 trial expected in the next few weeks represents a near-term positive catalyst.
Notablecalls: Expect VRTX stock to be flying today. I can easily see 2 pts worth of upside from last close. VRTX is one of biotech's darlings and will most likely be acquired at some point.
Preliminary end of treatment data from the ongoing Phase 2 PROVE-1 trial expected in the next few weeks represents a near-term positive catalyst.
Notablecalls: Expect VRTX stock to be flying today. I can easily see 2 pts worth of upside from last close. VRTX is one of biotech's darlings and will most likely be acquired at some point.
Color on quarter: Applied Materials (NASDAQ:AMAT)
Several firms are commenting on Applied Materials (NASDAQ:AMAT) after the co issued in-line results but weakish guidance last night:
- UBS notes that AMAT's Jan-07 order guidance was in line with its industry peers as DRAM customer orders likely offset weak foundry orders again. AMAT now expects 2007 industry spending on wafer fab equipment to increase by 6% with momentum improving in 2H07
AMAT guided its Jan-07 sales to $2.3-$2.4B (-5% to -10% q/q), and EPS to $0.26-$0.27 which compares to the pre-call consensus estimate of $2.5B and $0.29. The firm has lowered their FY07 estimate from $1.07 to $1.03 as AMAT's tax rate increases from 32% to 34.5%.
Firm's 12-month price target of $19 is based on applying an 18x multiple to CY08 EPS estimate of $1.03. They continue to remain on the sidelines as they look for increased equipment orders from foundry customers, which they estimate AMAT is most leveraged to, before warming up to the stock. Maintains Neutral.
- Bear Stearns notes that mgmt guided orders to decline 5-10%, inline with firm's preview and understanding of consensus. However, top line calls for down 5-10% as well; this is slightly worse than their expectation into the call for down 5% guidance and also below consensus view.
The fim is adjusting their estimates down for fiscal 2007, but cuts are focused on the near term as their previous model was too optimistic on a return in foundry and flat panel activity. However, at this point, they do not currently believe Applied's overall order book will deteriorate substantially over what they expect will roughly represent a 2 quarter order pause. Despite weaker near-term expectations, the firm is modeling for mid to high-single digit top line growth after the Apr-Q. This is based on the assumption that while memory spending may curtail some, other semi end markets and served segments should begin to kick in.
Maintains Outperform but cut tgt to $22 from $25.
- Banc of America notes that AMAT's 2007 outlook is for semi-equipment industry to be up 6% largely driven by memory spending. DRAM cap-ex overtakes NAND in the memory mix. AMAT expects to outperform due to share gains in semi-equipment and high growth of the adjacent technologies. Flat panel is expected decline in 2007 due to the oversupply.
The firm is more cautious on their 2007 outlook: semi cap-ex down 10%. They think the risk of a sharp correction in memory is high. Firm points out that a year ago the industry was very bullish on flat panel and NAND only to see sharper than expected corrections in both markets. The current pause in semi-equipment suggests customers, at a minimum, want to see seasonal sell-through data.
The risk is that a more serious oversupply problem emerges in memory. The market acceptance of Vista and a continued oversupply in the NAND are the big swing factors. Either of these scenarios would likely lead to much weaker results at AMAT. Maintains Neutral and $18 tgt.
Notablecalls: Any of this stuff actionable? Not really. Good to know category.
- UBS notes that AMAT's Jan-07 order guidance was in line with its industry peers as DRAM customer orders likely offset weak foundry orders again. AMAT now expects 2007 industry spending on wafer fab equipment to increase by 6% with momentum improving in 2H07
AMAT guided its Jan-07 sales to $2.3-$2.4B (-5% to -10% q/q), and EPS to $0.26-$0.27 which compares to the pre-call consensus estimate of $2.5B and $0.29. The firm has lowered their FY07 estimate from $1.07 to $1.03 as AMAT's tax rate increases from 32% to 34.5%.
Firm's 12-month price target of $19 is based on applying an 18x multiple to CY08 EPS estimate of $1.03. They continue to remain on the sidelines as they look for increased equipment orders from foundry customers, which they estimate AMAT is most leveraged to, before warming up to the stock. Maintains Neutral.
- Bear Stearns notes that mgmt guided orders to decline 5-10%, inline with firm's preview and understanding of consensus. However, top line calls for down 5-10% as well; this is slightly worse than their expectation into the call for down 5% guidance and also below consensus view.
The fim is adjusting their estimates down for fiscal 2007, but cuts are focused on the near term as their previous model was too optimistic on a return in foundry and flat panel activity. However, at this point, they do not currently believe Applied's overall order book will deteriorate substantially over what they expect will roughly represent a 2 quarter order pause. Despite weaker near-term expectations, the firm is modeling for mid to high-single digit top line growth after the Apr-Q. This is based on the assumption that while memory spending may curtail some, other semi end markets and served segments should begin to kick in.
Maintains Outperform but cut tgt to $22 from $25.
- Banc of America notes that AMAT's 2007 outlook is for semi-equipment industry to be up 6% largely driven by memory spending. DRAM cap-ex overtakes NAND in the memory mix. AMAT expects to outperform due to share gains in semi-equipment and high growth of the adjacent technologies. Flat panel is expected decline in 2007 due to the oversupply.
The firm is more cautious on their 2007 outlook: semi cap-ex down 10%. They think the risk of a sharp correction in memory is high. Firm points out that a year ago the industry was very bullish on flat panel and NAND only to see sharper than expected corrections in both markets. The current pause in semi-equipment suggests customers, at a minimum, want to see seasonal sell-through data.
The risk is that a more serious oversupply problem emerges in memory. The market acceptance of Vista and a continued oversupply in the NAND are the big swing factors. Either of these scenarios would likely lead to much weaker results at AMAT. Maintains Neutral and $18 tgt.
Notablecalls: Any of this stuff actionable? Not really. Good to know category.
Paperstand
The WSJ reports that Carl Icahn and Macklowe Properties were last night preparing a $4.6bn bid for Reckson Associates Realty (RA), potentially spoiling Reckson's existing but embattled takeover deal with SL Green Realty. A personal investment vehicle of Mr. Icahn and Macklowe are set to offer $49 in cash for each share of Reckson. The offer would top a previous deal between Reckson and SL Green, in which SL Green offered about $44.89, valued at $4.13bn in total. The Icahn/Macklowe offer represents about a 9% premium to the SL Green deal.
According to the “Heard on the Street” column, two co’s whose casinos are better-known to Las Vegas locals than to the tourists have spent well over $1bn turning nondescript gambling halls into glitzy resorts. So far, their bets haven't worked out as they hoped. Station Casinos (STN) and Boyd Gaming (BYD) have long catered to pple who live in town. Boyd posted an unexpected loss for the 3Q, largely b/c of the sale of a poorly performing new casino. Station reduced its 4Q and ‘07 full-year guidance, after 18 straight qrtrs of meeting or exceeding ests. There are signs that the costly new showplaces aren't bringing in new business. Not only are the co’s undermining each others' newest offerings, they are also hurting established ones. Excluding Station's newest casinos, Red Rock and Green Valley Ranch, EBITDA for its 14 other Vegas-area casinos were down 11% yoy. What's more, their casino arms race has been eclipsed by grander projects from gambling titans Steve Wynn and Sheldon Adelson, whose Wynn Las Vegas and Venetian casinos cater mostly to tourists. "While we had forecast the earnings miss, the magnitude was greater than we had expected," said Dennis Forst, of KeyBanc, who saw the Station miss as a sign that supply has outstripped demand, at least for now. "This gives further credence to our thesis that the Las Vegas locals mkt has slowed dramatically."
According to the Barron’s Online, all signs are indicating that there is more biotech M&A deals coming. "A takeout should be pure upside, but it's not a good enough reason to buy a stock," says John Chambers, of Rodman & Renshaw. "Investors should buy shares of co’s that are good bets whether they get taken out or stand alone." Keen to plump up weak pipelines or enter new mkts, large drug co’s are once again gobbling up smaller drug makers, taking advantage of the selloff in biotech stocks earlier this year. Small biotechs mentioned include: KERX, DNDN, NUVO and CTRX.
“Inside Scoop” section reports that Sultan Center for Trading and General Contracting, disclosed it holds a 5.05% stake in Wild Oats (OATS) with 1.488m shares. Ben Silverman, of InsiderScore.com, says that Sultan's stake is notable b/c of the potential strategic implications. "I don't think Wild Oats is looking to the Middle East as an expansion opportunity logistically," but he says Sultan may bring the US chain's organic style "to their own country and utilize their ownership there to foster some relationship in importing goods."
Wednesday, November 15, 2006
MRU Holdings (NASDAQ: UNCL)
A new member on my watchlist is MRU Holdings (NASDAQ:UNCL) that recently moved to the Nasdaq from OTC mkt. The co provides private student loans to college students under its brand called "MyRichUncle."
According to public research, private student loan industry is one of the fastest growing mkts of consumer finance. Over the past 10 years, the use of private loans has risen 25% annually and approximately 40% per year for the past 3 years. Over the next 10 years, demand is expected to grow by 25% annually. Main reasons for the growth are demographic trends and the widening education funding gap. In the past, students received financial aid primarily in the form of federal grants and loans. Most grants are given only to families with annual incomes below $20K and typical grant covers less than 1/3 of tuition and expenses. Lenders typically turn away 70% of private loan applicants.
The backbone of MRU's strategy is its proprietary underwriting model for profiling loan applicants. Most credit providers assess consumer credit and the bankruptcy risk on student's or parent's FICO score. MRU thought this methodology did not provide enough coverage for younger individuals who have only brief credit history. The MRU model blends FICO with applicant's school, GPA, academic concentration and prior work experience. The thesis behind the model is that a studenst with high GPA at a top-tier school statistically yield good employment opportunities. The result is that MRU may approve loans to students who would otherwise be disqualified under traditional methods. B/c of the additional risk and lack of competing offers, MRU can price these loans at higher rate. For the students, those rates are still considerably more attractive than a credit card.
MRU expects to generate majority of its revs and income from interest income and residuals from the securitization of the loans. First, the co books interest income on the loans it originates while they are warehoused in the credit facility. Second, securitizations refer to the technique of pooling loans and selling them to a special purpose entity, typically a trust, which pays for the loans by issuing debt securities to investors.
Once loan originations ramp there is considerable operating leverage b/c a majority of costs are upfront and to some degree fixed, such as personnel, technology, and other infrastructure. Profit margins start to accelerate once the co crosses the breakeven threshold, which according to the Sanders Morris Harris, for MRU is approximately a $85m securitization. ThinkEquity puts breakeven point at a loan volume of approximately $100-$150m.
On Sept.29, the co reported that as of early Sept‘06, during its seasonally strong SepQ, it had originated $46m in loans, for a total of $85m in loans and well on its way to securitizing its first $100m in loans in the Dec ‘06 qtr. ThinkEquity sees the co securitizating another $100m in the Jun‘07 qtr, bringing total F07 loan volume to $200m. The co's goal is to do $100-150m in securitizations in C06, $300m or more in C07, and $750m in C08. Sanders Morris Harris sees the co doing $1.2bn by F2010. By Jun’08, with 2 securitizations per year, and approx. $700-800m of securitizations, MRU could be profitable in all four quarters.
ThinkEquity estimates that the co will break even in F07 (Jun.30), with EPS of $0.31. SMH sees F07 EPS at $0.36. With the stock trading around $6.5, the co trades at 18-21 times F07 profits. That is definitely cheap for a co growing that fast.
For abovementioned reasons, I would recommend buying the stock for a LT hold. Please do note that this one can be considered a highly speculative investment, and one should allocate only a small fraction of his or her portfolio into this one. Would look to exit the position when the stock doubles or at the end of F07 as expectations start materializing.
According to public research, private student loan industry is one of the fastest growing mkts of consumer finance. Over the past 10 years, the use of private loans has risen 25% annually and approximately 40% per year for the past 3 years. Over the next 10 years, demand is expected to grow by 25% annually. Main reasons for the growth are demographic trends and the widening education funding gap. In the past, students received financial aid primarily in the form of federal grants and loans. Most grants are given only to families with annual incomes below $20K and typical grant covers less than 1/3 of tuition and expenses. Lenders typically turn away 70% of private loan applicants.
The backbone of MRU's strategy is its proprietary underwriting model for profiling loan applicants. Most credit providers assess consumer credit and the bankruptcy risk on student's or parent's FICO score. MRU thought this methodology did not provide enough coverage for younger individuals who have only brief credit history. The MRU model blends FICO with applicant's school, GPA, academic concentration and prior work experience. The thesis behind the model is that a studenst with high GPA at a top-tier school statistically yield good employment opportunities. The result is that MRU may approve loans to students who would otherwise be disqualified under traditional methods. B/c of the additional risk and lack of competing offers, MRU can price these loans at higher rate. For the students, those rates are still considerably more attractive than a credit card.
MRU expects to generate majority of its revs and income from interest income and residuals from the securitization of the loans. First, the co books interest income on the loans it originates while they are warehoused in the credit facility. Second, securitizations refer to the technique of pooling loans and selling them to a special purpose entity, typically a trust, which pays for the loans by issuing debt securities to investors.
Once loan originations ramp there is considerable operating leverage b/c a majority of costs are upfront and to some degree fixed, such as personnel, technology, and other infrastructure. Profit margins start to accelerate once the co crosses the breakeven threshold, which according to the Sanders Morris Harris, for MRU is approximately a $85m securitization. ThinkEquity puts breakeven point at a loan volume of approximately $100-$150m.
On Sept.29, the co reported that as of early Sept‘06, during its seasonally strong SepQ, it had originated $46m in loans, for a total of $85m in loans and well on its way to securitizing its first $100m in loans in the Dec ‘06 qtr. ThinkEquity sees the co securitizating another $100m in the Jun‘07 qtr, bringing total F07 loan volume to $200m. The co's goal is to do $100-150m in securitizations in C06, $300m or more in C07, and $750m in C08. Sanders Morris Harris sees the co doing $1.2bn by F2010. By Jun’08, with 2 securitizations per year, and approx. $700-800m of securitizations, MRU could be profitable in all four quarters.
ThinkEquity estimates that the co will break even in F07 (Jun.30), with EPS of $0.31. SMH sees F07 EPS at $0.36. With the stock trading around $6.5, the co trades at 18-21 times F07 profits. That is definitely cheap for a co growing that fast.
For abovementioned reasons, I would recommend buying the stock for a LT hold. Please do note that this one can be considered a highly speculative investment, and one should allocate only a small fraction of his or her portfolio into this one. Would look to exit the position when the stock doubles or at the end of F07 as expectations start materializing.
Calls of Note Part 4
- Morgan Stanley comments on Trimeris (NASDAQ:TRMS) following restructuring news issued last night saying investors will likely applaud the near-term cost reductions, but given the company's already thin operating expenses and impending threats to Fuzeon (e.g. 2007 compassionate use programs for Merck's integrase inhibitor and Pfizer's CCR5 inhibitor), they do not see how the company can have its cake (invest for sustainable growth) and eat it too (near-term profits). The company gave little visibility on how it plans to achieve its goal of $1.00 per share in EPS, and given the need to invest in the next generation fusion inhibitor (entering human testing in 2007), they do not see how this level of profits is sustainable over the next few years without giving up significant long-term economics on the pipeline (unless R&D investment increases dramatically, the firm expects the company will have to take smaller profit if next-generation drug reaches the market).
They expect the stock will react positively to tonight's announcement in the short-term, but once long-term implications sink in, more sobering thoughts may prevail.
Maintains Underweight.
Notablecalls: I suspect TRMS may be a short around $12 level.
They expect the stock will react positively to tonight's announcement in the short-term, but once long-term implications sink in, more sobering thoughts may prevail.
Maintains Underweight.
Notablecalls: I suspect TRMS may be a short around $12 level.
Calls of Note Part 3
- Goldman Sachs has added Vornado Realty (NYSE:VNO), a large-cap diversified REIT (office, retail and other) and an S&P 500 constituent, to the US Conviction List as they believe the company is best positioned amongst the 38 stocks in firm's coverage universe to generate solid outperformance. Firm's $125 target price combined with the stock's current 2.9% yield indicates a 10+% total return potential. In line with GS "blue-chip" REIT call, Vornado combines high quality assets (NYC and Washington D.C.), a premier management team, and superior operating performance. These factors, the stock's reasonable valuation (NAV focus), and solid '07 growth all support firm's call.
Notablecalls: The chart is telling me it wants to move further up. My gut is telling me this REIT provides a fading oppy.
Notablecalls: The chart is telling me it wants to move further up. My gut is telling me this REIT provides a fading oppy.
Calls of Note Part 2
- The Merrill Lynch Focus 1 Committee is adding Stryker (NYSE:SYK) to its list, which is
consistent with their view that SYK offers above average revenue and earnings growth over the near and long term. Firm remains upbeat regarding key trends in the reconstructive (hip and knee implants) market, including demographics and pricing, which are likely to have a significant impact on SYK's valuation.
They look for 11-12% sales gains in 2007-2009, well above the 7-8% growth forecast for the overall med tech sector. Stryker's long held target of 20%+ earnings growth appears achievable over the next couple of years (slowing to an estimated 17% in 2009) with leverage fueled by a favorable mix shift that should lift gross margin, SG&A leverage, increasing cash balances and a lower tax rate.
They rate both Zimmer and Stryker a Buy with 12-month price objectives of $80 and $60, respectively. ZMH has been the biggest out-performer of late, offering EPS upside to consensus estimates. But SYK should benefit from more robust earnings growth over the next couple of years (20% vs 15% for ZMH) and greater upside to firm's PO, hence the decision to add it to Merrill Lynch's Focus 1 list.
Notablecalls: Expect to see buy interest in SYK but note that it's difficult for me to see more than 1 pt worth of upside from current levels.
consistent with their view that SYK offers above average revenue and earnings growth over the near and long term. Firm remains upbeat regarding key trends in the reconstructive (hip and knee implants) market, including demographics and pricing, which are likely to have a significant impact on SYK's valuation.
They look for 11-12% sales gains in 2007-2009, well above the 7-8% growth forecast for the overall med tech sector. Stryker's long held target of 20%+ earnings growth appears achievable over the next couple of years (slowing to an estimated 17% in 2009) with leverage fueled by a favorable mix shift that should lift gross margin, SG&A leverage, increasing cash balances and a lower tax rate.
They rate both Zimmer and Stryker a Buy with 12-month price objectives of $80 and $60, respectively. ZMH has been the biggest out-performer of late, offering EPS upside to consensus estimates. But SYK should benefit from more robust earnings growth over the next couple of years (20% vs 15% for ZMH) and greater upside to firm's PO, hence the decision to add it to Merrill Lynch's Focus 1 list.
Notablecalls: Expect to see buy interest in SYK but note that it's difficult for me to see more than 1 pt worth of upside from current levels.
Calls of Note Part 1
- Merrill Lynch comments on Conexant (NASDAQ:CNXT) saying they think it's time to close the door on WLAN.
CNXT's WLAN business has been losing money for the past few years, and they think a meaningful turnaround for the company in this market is unlikely. In firm's view, CNXT doesn't have the available resources to support its endeavors in this market, and believe that the company is better off investing its limited cash flow in other businesses where it has leadership positions, such as DSL and set top box silicon, as well as into de-levering its balance sheet. By their estimates, if Conexant exits WLAN, the net result would be a 160bps benefit to operating margin and a $0.03 increase in EPS on CY07 estimates. In fact, they view their estimates as conservative because they assume that Conexant spends about a quarter of the amount that Atheros (more or less a WLAN pure play) invests in its business.
With WLAN sales down 80% from its peak, estimated market share down to 5% in 2006 from 13% in 2004, and the company playing catch-up in 802.11n development, the firm doesn't see how Conexant can regain meaningful share in this market or if it can be profitable in this business. Atheros, Broadcom, and Marvell are far too efficient competitors in WLAN in their view, and they think the company is better off partnering than competing in 802.11n.
Maintains Buy on CNXT.
Notablecalls: Not actionable but good to know category.
CNXT's WLAN business has been losing money for the past few years, and they think a meaningful turnaround for the company in this market is unlikely. In firm's view, CNXT doesn't have the available resources to support its endeavors in this market, and believe that the company is better off investing its limited cash flow in other businesses where it has leadership positions, such as DSL and set top box silicon, as well as into de-levering its balance sheet. By their estimates, if Conexant exits WLAN, the net result would be a 160bps benefit to operating margin and a $0.03 increase in EPS on CY07 estimates. In fact, they view their estimates as conservative because they assume that Conexant spends about a quarter of the amount that Atheros (more or less a WLAN pure play) invests in its business.
With WLAN sales down 80% from its peak, estimated market share down to 5% in 2006 from 13% in 2004, and the company playing catch-up in 802.11n development, the firm doesn't see how Conexant can regain meaningful share in this market or if it can be profitable in this business. Atheros, Broadcom, and Marvell are far too efficient competitors in WLAN in their view, and they think the company is better off partnering than competing in 802.11n.
Maintains Buy on CNXT.
Notablecalls: Not actionable but good to know category.
Color on news: Comverse Tech (NASDAQ:CMVT)
Couple of firms are commenting on Comverse Tech (NASDAQ:CMVT) following a curious press release issued last night saying it has identified "errors in the recognition of revenue related to certain contracts, errors in the recording of certain deferred tax accounts and the misclassification of certain expenses in earlier periods" and that additional areas under review include "the possible misuse of accounting reserves and the understatement of backlog in fiscal 2002 and prior periods".
- Deutsche Bank notes they believe that the potential additional restatement will not impact previously reported cash and cash flow. Although the company had substantially completed its investigation and had preliminary restated financial statements ready, they believe the expansion of the investigation's scope will likely extend the review beyond the end of FY06, and the NASDAQ Panel may not grant additional time and may even remove the current delisting stay.
Firm's last checks continued to indicate the business remains robust. They also note that the company is already 15 days past the end of its third quarter and it has never negatively preannounced results so late. Additionally the firm is also encouraged by the fact that a positive Zev Bregman has been quoted in the press release, especially after the commentary appeared today in the Israeli online magazine The Marker Online (www.themarker.com), reporting rumors about a possible revenue warning and Mr. Bregman being let go.
DB would encourage investors to buy aggressively given the opportunity from share weakness off of these events, although they also note an increased risk of delisting.. Maintains Buy and $37 tgt.
- FBR is calls the press release confusing saying the company left much to be debated, as the magnitude of the revenue recognition errors and time period in question was not mentioned.
Very simply, last night's news could be the 'straw that broke the camel's back' for many of CMVT's shareholders. While investors can stomach volatility and understand the risks with the company's ongoing stock option investigation, this latest accounting revelation adds further uncertainty to the name and its potential delisting status. FBR maintains their Market Perform rating, while lowering price target from $24 to $20 to factor in a much higher risk profile.
Notablecalls: I'm going go with FBR here. Think CMVT deserves to be lower here than the $19.40 reached in after hrs trading.
- Deutsche Bank notes they believe that the potential additional restatement will not impact previously reported cash and cash flow. Although the company had substantially completed its investigation and had preliminary restated financial statements ready, they believe the expansion of the investigation's scope will likely extend the review beyond the end of FY06, and the NASDAQ Panel may not grant additional time and may even remove the current delisting stay.
Firm's last checks continued to indicate the business remains robust. They also note that the company is already 15 days past the end of its third quarter and it has never negatively preannounced results so late. Additionally the firm is also encouraged by the fact that a positive Zev Bregman has been quoted in the press release, especially after the commentary appeared today in the Israeli online magazine The Marker Online (www.themarker.com), reporting rumors about a possible revenue warning and Mr. Bregman being let go.
DB would encourage investors to buy aggressively given the opportunity from share weakness off of these events, although they also note an increased risk of delisting.. Maintains Buy and $37 tgt.
- FBR is calls the press release confusing saying the company left much to be debated, as the magnitude of the revenue recognition errors and time period in question was not mentioned.
Very simply, last night's news could be the 'straw that broke the camel's back' for many of CMVT's shareholders. While investors can stomach volatility and understand the risks with the company's ongoing stock option investigation, this latest accounting revelation adds further uncertainty to the name and its potential delisting status. FBR maintains their Market Perform rating, while lowering price target from $24 to $20 to factor in a much higher risk profile.
Notablecalls: I'm going go with FBR here. Think CMVT deserves to be lower here than the $19.40 reached in after hrs trading.
Paperstan
The WSJ’s „Heard on the Street” column reports that private-equity firms are circling ServiceMaster (SVM). Although ServiceMaster doesn't have a process for fielding buyout inquiries, some on Wall St. are openly talking about ServiceMaster as being "in play." Buyout firms' interest, coupled with some behind-the-scenes shareholder unrest, could push the co to make some major changes in the months ahead. At least some pple following ServiceMaster suggest that a mgmt-led buyout of the co is another possibility. Any buyout offers, or other corporate changes, could push up the stock price, which has been languishing lately.
According to the Barron’s Online, Tejon Ranc (TRC) shares look like a good bet, despite doubling in price over the past 5 years. Backers of the co believe that an emerging industrial center and residential projects on the site should attract burgeoning populations from LA and surrounding areas. After years of planning and discussions with various interest groups, Tejon is slowly monetizing its real-estate assets by forming partnerships to set up a foreign trade zone to attract clients to its 1,500-acre industrial park and with various home builders to develop residential communities called Centennial and Tejon Mountain Village. However, the most attractive part of Tejon is that the book value of the ranch is a mere $7.9m, or $29 per acre, notes Harris Hall, director of research at Singular Research. That is, the land is cheap and its value will multiply once it is sold off or leased through the development projects. Tejon's three development projects make up less than 10% of the land, but "each individually represents billions and billions of dollars worth of real estate for the foreseeable future," says Robert Stine, Tejon's CEO for the past decade.
“Inside Scoop” section reports that Fidelity Investments has sold off nearly 16m Yahoo (YHOO) shares since Sept. 30, when the co owned 38.9m shares. "You've got basically what is the most aggressive selling [of Yahoo stock] Fidelity has ever done in one period of time," Ben Silverman, director of research at InsiderScore.com, says.
Tuesday, November 14, 2006
Calls of Note Part 4
- Banc of America notes checks indicate Network Appliance (NASDAQ:NTAP) turned in a solid Q (though not quite as strong as last Q), so they are raising their already above Street revenue and EPS estimates to $650M and $0.27 (from $640M and $0.26). Street is $646M and $0.25. TP remains $35, within current valuation framework.
It sounds to like NTAP's existing offerings have all been strong (newer FAS3000 mid-range filers, the Decru security appliance, and expanding services offerings).
The firm doesn't believe the recently released FAS6000 (higher-end systems) have gained
as much momentum as the FAS3000, so could remain a future catalyst. The IBM OEM relationship appears to be progressing, and they believe helped during the Q.
Key drivers for longer-term growth are 1) expansion of IBM relationship in terms of both geographies and products (now includes FAS6000), 2) Decru security product, 3) VTL, which is a new tape product category for NTAP, 4) furthering the SAP relationship, 4) new sales of the high end 6000 product, which mgt cautioned has a long sales cycle, and 5) expansion into small and medium business with products that are appropriate for this market segment.
They also believe NTAP's product strength remains a positive for Buy rated Xyratex, and raised XRTX storage systems revs estimates to reflect this last week.
Notablecalls: Not actionable but good to know category.
It sounds to like NTAP's existing offerings have all been strong (newer FAS3000 mid-range filers, the Decru security appliance, and expanding services offerings).
The firm doesn't believe the recently released FAS6000 (higher-end systems) have gained
as much momentum as the FAS3000, so could remain a future catalyst. The IBM OEM relationship appears to be progressing, and they believe helped during the Q.
Key drivers for longer-term growth are 1) expansion of IBM relationship in terms of both geographies and products (now includes FAS6000), 2) Decru security product, 3) VTL, which is a new tape product category for NTAP, 4) furthering the SAP relationship, 4) new sales of the high end 6000 product, which mgt cautioned has a long sales cycle, and 5) expansion into small and medium business with products that are appropriate for this market segment.
They also believe NTAP's product strength remains a positive for Buy rated Xyratex, and raised XRTX storage systems revs estimates to reflect this last week.
Notablecalls: Not actionable but good to know category.
Calls of Note Part 3
- UBS continues to be positive on MEMC Electronic Materials (NYSE:WFR) saying MEMC's operating and EBITDA margins were 37% and 42% respectively for the past 6 months, outperforming its semiconductor wafer competitors. Firm's channel checks have found that early 1Q07 semiconductor wafer contract prices are tracking up 3-5% higher q/q compared to a historical decline of -5%.
While MEMC has not formally elaborated on which companies will make its solar wafers in 1H07, firm's discussions with industry contacts has found that MEMC will actually use at least 3 manufacturing partners instead of just one. Industry research suggests 2 are based in China (Yingli Solar and LDK Solar) and 1 is in Taiwan (Green Energy Technology).
UBS believes Samsung has accelerated efforts to make its own 300mm semiconductor wafers as channel checks found it recently ordered 12+ wafer polishing tools from a large equipment vendor. Industry research also found MEMC installed 300mm wafer slicing equipment in Korea for the first time and they believe MEMC is looking to grow its market share at Samsung which the firm estimates is less than 10%.
UBS values MEMC's semiconductor wafer business at $40/share or 18x CY08E EPS of $2.20 and its solar business at $20/share or 25x CY07E EPS of $0.80.
Notablecalls: UBS' research team has done some nice and productive channel checks. Would not be surprised to see some buy interest in WFR. Note that their tgt is $60 vs current mkt price of around $35. But also note that charts like this one sometimes tend to constrain moves. So, I'm not expecting any explosive moves.
While MEMC has not formally elaborated on which companies will make its solar wafers in 1H07, firm's discussions with industry contacts has found that MEMC will actually use at least 3 manufacturing partners instead of just one. Industry research suggests 2 are based in China (Yingli Solar and LDK Solar) and 1 is in Taiwan (Green Energy Technology).
UBS believes Samsung has accelerated efforts to make its own 300mm semiconductor wafers as channel checks found it recently ordered 12+ wafer polishing tools from a large equipment vendor. Industry research also found MEMC installed 300mm wafer slicing equipment in Korea for the first time and they believe MEMC is looking to grow its market share at Samsung which the firm estimates is less than 10%.
UBS values MEMC's semiconductor wafer business at $40/share or 18x CY08E EPS of $2.20 and its solar business at $20/share or 25x CY07E EPS of $0.80.
Notablecalls: UBS' research team has done some nice and productive channel checks. Would not be surprised to see some buy interest in WFR. Note that their tgt is $60 vs current mkt price of around $35. But also note that charts like this one sometimes tend to constrain moves. So, I'm not expecting any explosive moves.
Calls of Note Part 2
-Bear Stearns notes they believe expectations for Micron (NYSE:MU) have turned overly negative recently particularly with regards to its earnings capability over the next two quarters, and they believe a resetting of these expectations should be a near-term catalyst for the stock. Therefore, the firm sees a short-term buying opportunity for Micron shares.
Although they remain guarded on their full-year 2007 expectation for DRAM supply-demand dynamics, DDR2 original brand chips remain in tight supply with inventory virtually non-existent in the supply chain. DRAM pricing continues to be firm near-term and the firm thinks price declines should be less than seasonal in the early part of C1Q07 fuelled by upgrades due to Vista, though some minimal price declines would be expected from late November.
The street was disappointed with Micron's minimal gross margin increase in the Aug-Q, as the company clearly did not see the full benefit of the improved pricing environment and did not have any meaningful cost reduction last quarter. The DRAM pricing environment has clearly improved further in the Nov-Q. Bear is raising their Nov-Q and Feb-Q estimates for Micron, based primarily on better pricing and greater cost reduction respectively. For the Nov-Q, they are increasing revenue estimate from $1,672M (+22% QoQ) to $1,714M (+25% QoQ), above consensus of $1,646M (+20% QoQ), GM from 27.2% to 28.3%, and EPS from $0.18 to $0.22, above consensus of $0.20. Feb-Q EPS goes from $0.16 to $0.19.
Notablecalls: I have been negative on MU since the stock was above $18 in September. Goldman called it last time and I think Bear Stearns may be on right tracks this time. I'm not expecting an instant rally but rather a steady move upward in the coming weeks. I was impressed by the comments on DDR2 inventory being virtually non-existent ahead of important qtr. Nice job, Bear!
Although they remain guarded on their full-year 2007 expectation for DRAM supply-demand dynamics, DDR2 original brand chips remain in tight supply with inventory virtually non-existent in the supply chain. DRAM pricing continues to be firm near-term and the firm thinks price declines should be less than seasonal in the early part of C1Q07 fuelled by upgrades due to Vista, though some minimal price declines would be expected from late November.
The street was disappointed with Micron's minimal gross margin increase in the Aug-Q, as the company clearly did not see the full benefit of the improved pricing environment and did not have any meaningful cost reduction last quarter. The DRAM pricing environment has clearly improved further in the Nov-Q. Bear is raising their Nov-Q and Feb-Q estimates for Micron, based primarily on better pricing and greater cost reduction respectively. For the Nov-Q, they are increasing revenue estimate from $1,672M (+22% QoQ) to $1,714M (+25% QoQ), above consensus of $1,646M (+20% QoQ), GM from 27.2% to 28.3%, and EPS from $0.18 to $0.22, above consensus of $0.20. Feb-Q EPS goes from $0.16 to $0.19.
Notablecalls: I have been negative on MU since the stock was above $18 in September. Goldman called it last time and I think Bear Stearns may be on right tracks this time. I'm not expecting an instant rally but rather a steady move upward in the coming weeks. I was impressed by the comments on DDR2 inventory being virtually non-existent ahead of important qtr. Nice job, Bear!
Calls of Note Part 1
- Goldman Sachs is adding Cox Radio (NYSE:CXR) shares to the America's Conviction Sell list and see 27% potential downside to their price target as they believe the premium in the stock owing to a potential buy-in is overstated. CXR's historical relative premium owing to the chance that Cox Enterprises will buy-in the 34% public float has now widened to ~2X multiple points, with no change in Cox's acquisition-driven growth strategy, no visibly sustainable improvement in radio growth, and a slowed buyback program. Firm assignes only a 10% chance of a buy-in, which would imply a ~4X multiple point premium to peer valuations.
Catalyst: Select radio operators, including Cox Radio (albeit cautiously), cited signs of stronger trends in 4Q which has helped fuel a mini-rally in radio stocks. GS thinks "situational growth," that is, growth aided either by political dollars or political crowd-out, easier comps, better station ratings or other 1X items is masking the weak underlying trends and that as we approach 1Q2007, a truer picture of the still soft core ad trends will become clearer.
Notablecalls: The note is bound to get some attention among investors. Considering the rally the stock has staged, some will probably elect to get off the bandwagon in the n-t.
Catalyst: Select radio operators, including Cox Radio (albeit cautiously), cited signs of stronger trends in 4Q which has helped fuel a mini-rally in radio stocks. GS thinks "situational growth," that is, growth aided either by political dollars or political crowd-out, easier comps, better station ratings or other 1X items is masking the weak underlying trends and that as we approach 1Q2007, a truer picture of the still soft core ad trends will become clearer.
Notablecalls: The note is bound to get some attention among investors. Considering the rally the stock has staged, some will probably elect to get off the bandwagon in the n-t.
Paperstand
Barron’s Online „Inside Scoop” section reprots that Shamrock Activist Value Fund disclosed that it now owns about 1.73m Modine Manufacturing (MOD) shares, or a 5.27% stake of the co. While Shamrock said in the 13D that it has "no current plans or proposals with respect to" Modine or its securities, Lon Juricic, the founder of StreetInsider.com, says that Shamrock may become more actively involved with Modine if its stock performance does not improve.
Monday, November 13, 2006
Looking to load up on Six Flags (NYSE:SIX)
For a some time I’ve followed amusement park operator Six Flags (NYSE:SIX). The co has been in serious trouble, but recent mgmt changes may bring new life.
Several years ago, when grass was greener and snow was whiter Six Flags decided to start expanding like a m*****f*****. The co borrowed billions to open new amusement parks. Then all the sudden (as always), things didn’t go as they were supposed to go. And the co found itself heavily debted, and with declining attendance.
After few years of struggle, famed investor Danile Snyder decided to jump in and turn the ship around. The mgmt initially opposed Snyder suggestions, even issuing a poison pill, but at the end of last year he was named co’s Chmn and his buddy Mark Shapiro as CEO.
Currently the co has 26 parks in US, 1 in Canada and 1 in Mexico plus Darien Lake campground and soon to be opened Great Escape Lodge. It has 2.33bn in debt and virtually all its cash flow goes into paying interest on that debt. Now, the new mgmt has decided to sell some parks in order reduce debt. Currently the co is in talks to sell six theme parks. Bloomberg reported last week that there are two bidders for those six parks, with current bids at about $650m. While this is under what analysts expected ($800m or so), it still shows, how much the co is worth on a sum-of-parts basis. With 6 parks at $650m, it implies a value per park at around 110 million. That suggests 30 parks may be worth at least $3.3bn. Of course, value of the parks vary big, but it gives us at least some indication. Also, it is possible that the co has been looking to sell their weakest performing parks, meaning the remaining parks are worth even more. Six Flags' mkt cap stands at $573m, plus debt of $2.33bn, totalling $2.9bn in enterprise value. However, selling all parks is unlikely and makes no sense, as the parks in total generate nice profits.
The co reported its Q3 results on Nov 2, with revs at $540.7m (above analyst consensus) and EPS of $1.06 (below consensus). However, Friedman Billings Ramsay noted in their review that this was not a big surprise as they had clear indications that it was going to be a challenging quarter. Also, the stock's performance (YTD low) indicated low expectations.
Recently, the co has made steps to improve the performance of their parks and plans a big advertising campaign in 2007 (note the co’s business is highly seasonal with second and third quarter generating most of the revenue and profits). There are some indications that visitors (especially families) have started to spend more money at SIX's parks.
Conclusion: If the co manages to sell some of its parks (six at least), it can reduce its debt load rather drastically. In doing so the co’s shares will get a much needed boost.
Target price: This years high of $12 sounds a bit too optimistic, so I would sell the stock at around $8 or after next season (3Q07).
Disclaimer: Looking to load up on Six Flags, around $6.
Several years ago, when grass was greener and snow was whiter Six Flags decided to start expanding like a m*****f*****. The co borrowed billions to open new amusement parks. Then all the sudden (as always), things didn’t go as they were supposed to go. And the co found itself heavily debted, and with declining attendance.
After few years of struggle, famed investor Danile Snyder decided to jump in and turn the ship around. The mgmt initially opposed Snyder suggestions, even issuing a poison pill, but at the end of last year he was named co’s Chmn and his buddy Mark Shapiro as CEO.
Currently the co has 26 parks in US, 1 in Canada and 1 in Mexico plus Darien Lake campground and soon to be opened Great Escape Lodge. It has 2.33bn in debt and virtually all its cash flow goes into paying interest on that debt. Now, the new mgmt has decided to sell some parks in order reduce debt. Currently the co is in talks to sell six theme parks. Bloomberg reported last week that there are two bidders for those six parks, with current bids at about $650m. While this is under what analysts expected ($800m or so), it still shows, how much the co is worth on a sum-of-parts basis. With 6 parks at $650m, it implies a value per park at around 110 million. That suggests 30 parks may be worth at least $3.3bn. Of course, value of the parks vary big, but it gives us at least some indication. Also, it is possible that the co has been looking to sell their weakest performing parks, meaning the remaining parks are worth even more. Six Flags' mkt cap stands at $573m, plus debt of $2.33bn, totalling $2.9bn in enterprise value. However, selling all parks is unlikely and makes no sense, as the parks in total generate nice profits.
The co reported its Q3 results on Nov 2, with revs at $540.7m (above analyst consensus) and EPS of $1.06 (below consensus). However, Friedman Billings Ramsay noted in their review that this was not a big surprise as they had clear indications that it was going to be a challenging quarter. Also, the stock's performance (YTD low) indicated low expectations.
Recently, the co has made steps to improve the performance of their parks and plans a big advertising campaign in 2007 (note the co’s business is highly seasonal with second and third quarter generating most of the revenue and profits). There are some indications that visitors (especially families) have started to spend more money at SIX's parks.
Conclusion: If the co manages to sell some of its parks (six at least), it can reduce its debt load rather drastically. In doing so the co’s shares will get a much needed boost.
Target price: This years high of $12 sounds a bit too optimistic, so I would sell the stock at around $8 or after next season (3Q07).
Disclaimer: Looking to load up on Six Flags, around $6.
Calls of Note Part 7
- Goldman Sachs has added Humana (NYSE:HUM) to the Americas Conviction Buy List as they believe the recent sell-off in Humana stock has led to a particularly attractive buying opportunity with shares now trading at under 13X 2007 EPS. Firm expects near-term rationalization of market concerns over the potential for Democrats to enact unfavorable changes to the Medicare Advantage (which they think is unlikely). GS sees 27% upside to their 6-month price target of $66.
Catalyst: As the Democrats legislative priorities become clearer to the market over the next several weeks, the firm expects market concerns on impact to Medicare Advantage will diminish. Humana shares have now fallen nearly 30% from their month-ago level providing an opportunity for investors to buy the stock at less than 13X 2007 EPS (vs. the high-teens multiple that's prevailed for much of this year). While changes to the Medicare standalone drug program are a possibility (though still not likely, in firm's view), they think the odds of substantial change to the MA health plan program (which is what really matters to Humana) are remote.
Notablecalls: Expect to see a bounce! Actionable call alert!
Catalyst: As the Democrats legislative priorities become clearer to the market over the next several weeks, the firm expects market concerns on impact to Medicare Advantage will diminish. Humana shares have now fallen nearly 30% from their month-ago level providing an opportunity for investors to buy the stock at less than 13X 2007 EPS (vs. the high-teens multiple that's prevailed for much of this year). While changes to the Medicare standalone drug program are a possibility (though still not likely, in firm's view), they think the odds of substantial change to the MA health plan program (which is what really matters to Humana) are remote.
Notablecalls: Expect to see a bounce! Actionable call alert!
Calls of Note Part 6
- Deutsche Bank has been on the road with Atheros Comm (NASDAQ:ATHR) and conducting industry checks. They believe near-term trends are positive and the company's long-term growth strategy is compelling. In between this quarter and the long-term, the road may not be entirely smooth, but the firm remains positive on the overall outlook.
Firm's checks indicate that the quarter is tracking well. The company is levered to PC OEMs, and there are signs that they are broadening their availability of higher-margin 802.11n products. They think ATHR will gain share in Q4 in 802.11n. Firm also believes that concerns over PAS subscriber growth in China overlook seasonal buying patterns and upgrade cycle of over 93 million subscribers.
ATHR is looking for ways to expand beyond its core in WLAN. By this time next year they will be generating revenue from five product categories including core WLAN, mobile WLAN (ROCm), PAS, Ethernet switching and a new area - to be announced in January. Ultimately they hope to grow into a diversified supplier of semiconductors for digital communications. While this fate is far from certain, even Broadcom and Marvell were once small companies.
They are raising their price target from $23 to $25 on raised 2007 estimates and a better view into 2008.
Notablecalls: Nothing really new in this note but I think we may see some buy interest in ATHR.
Firm's checks indicate that the quarter is tracking well. The company is levered to PC OEMs, and there are signs that they are broadening their availability of higher-margin 802.11n products. They think ATHR will gain share in Q4 in 802.11n. Firm also believes that concerns over PAS subscriber growth in China overlook seasonal buying patterns and upgrade cycle of over 93 million subscribers.
ATHR is looking for ways to expand beyond its core in WLAN. By this time next year they will be generating revenue from five product categories including core WLAN, mobile WLAN (ROCm), PAS, Ethernet switching and a new area - to be announced in January. Ultimately they hope to grow into a diversified supplier of semiconductors for digital communications. While this fate is far from certain, even Broadcom and Marvell were once small companies.
They are raising their price target from $23 to $25 on raised 2007 estimates and a better view into 2008.
Notablecalls: Nothing really new in this note but I think we may see some buy interest in ATHR.
Calls of Note Part 5
- UBS notes that earlier last week they attended the Red Hat (NASDAQ:RHAT) Government Users Conference in Washington, D.C. The firm talked with a number of Red Hat customers and partners to gauge sentiment on the Linux market. From a reseller perspective, conversations suggested that the jury is still out regarding the impact that ORCL's announcement could have on pricing.
Much to their surprise, the majority of customers (as opposed to resellers) the firm spoke with were not aware of Oracle's recent announcement to provide its own support for RHEL. While that in and of itself is better than what they expected going into this event, the firm notes that it might be difficult to draw conclusions from this one vertical on how sales cycles this quarter might be impacted.
Customers are eagerly anticipating RHEL 5 because on the integration of Xen virtualization. They are confident in the disaster recovery and fault error containment offered by Xen, and they are motivated to implement virtualization to reduce costs on hardware and utilities, and to free up server room space.
Maintains Neutral and $16 tgt.
Notablecalls: As expected, RHAT bounced following the ORCL announcement. Following the bounce I think UBS' comments are not actionable anymore. Good to know category for the RHAT fans.
Much to their surprise, the majority of customers (as opposed to resellers) the firm spoke with were not aware of Oracle's recent announcement to provide its own support for RHEL. While that in and of itself is better than what they expected going into this event, the firm notes that it might be difficult to draw conclusions from this one vertical on how sales cycles this quarter might be impacted.
Customers are eagerly anticipating RHEL 5 because on the integration of Xen virtualization. They are confident in the disaster recovery and fault error containment offered by Xen, and they are motivated to implement virtualization to reduce costs on hardware and utilities, and to free up server room space.
Maintains Neutral and $16 tgt.
Notablecalls: As expected, RHAT bounced following the ORCL announcement. Following the bounce I think UBS' comments are not actionable anymore. Good to know category for the RHAT fans.
Calls of Note Part 4
- First Albany notes their industry contacts report strong global demand conditions for
salesforce.com (NYSE:CRM). Feedback applies to all major geographies, both small/ medium and enterprise segments, and across most product lines. They expect strong 3Q results, with bookings growth of 55%-70% and upside to the revenue consensus of $128.8M. Firm expects CRM to raise its revenue forecast for FY07.
Contacts report that CRM is now hiring account executives specifically for AppExchange, its on-demand platform for creating and sharing applications. This demonstrates that AppExchange is a primary growth focus, not an after-thought. Contacts suggest CRM is
currently hiring to fill 140+ sales positions worldwide -- a blistering pace likely to extend CRM's footprint relative to competitors.
Contacts also suggest CRM may be able to claim its first 10,000-seat customer, Cisco and added another large enterprise account. The firm expects CRM to introduce a new, higher-priced product version early next year.
Reits Buy.
Notablecalls: Hope the blisterig hiring pace won't affect margins in the n-t. On the other hand CRM ended with 1,300 employees in 2005 (vs 767 in 2004) meaning the pace of hiring may actually be slowing. Also, the news of CSCO sign-up is good. Considering the stock is up almost two fold and trading on a very high multiple I would look to sell it around $44.
salesforce.com (NYSE:CRM). Feedback applies to all major geographies, both small/ medium and enterprise segments, and across most product lines. They expect strong 3Q results, with bookings growth of 55%-70% and upside to the revenue consensus of $128.8M. Firm expects CRM to raise its revenue forecast for FY07.
Contacts report that CRM is now hiring account executives specifically for AppExchange, its on-demand platform for creating and sharing applications. This demonstrates that AppExchange is a primary growth focus, not an after-thought. Contacts suggest CRM is
currently hiring to fill 140+ sales positions worldwide -- a blistering pace likely to extend CRM's footprint relative to competitors.
Contacts also suggest CRM may be able to claim its first 10,000-seat customer, Cisco and added another large enterprise account. The firm expects CRM to introduce a new, higher-priced product version early next year.
Reits Buy.
Notablecalls: Hope the blisterig hiring pace won't affect margins in the n-t. On the other hand CRM ended with 1,300 employees in 2005 (vs 767 in 2004) meaning the pace of hiring may actually be slowing. Also, the news of CSCO sign-up is good. Considering the stock is up almost two fold and trading on a very high multiple I would look to sell it around $44.
Calls of Note Part 3
Two tier-1 firms are commenting on Hewlett-Packard (NYSE:HPQ) this morning:
- Deutsche Banks notes they have adjusted their price target up to $40, from prior $34,
reflecting increased visibility of near-term results and expectation of a possible $0.02-$0.03 of EPS upside this quarter. Firm's revenue and EPS estimates remain unchanged.$40 price target assumes HPQ trades at 16x CY07 EPS estimate which is within HP's historical range (10x-18x since the acquisition of Compaq). The valuation is also underpinned by a 10-year DCF (WACC 9.2%, growth of 3%). At current levels they view shares of HPQ as fairly valued. Firm believes the market is discounting future EPS of ~$3.00 in CY08 and ~10% operating margins. As such they believe there is limited upside and rate HPQ's shares a Hold.
- Merrill Lynch notes that for quite some time their research has argued HP's long run earnings power should exceed $3.00. Today they increase this estimate to $3.50+. To get there, the firm analyzes $2.5bn of net realizable margin enhancement plus the effects of incremental revenue growth and buybacks.
Specifically, beyond their F2006 estimate of $2.20, the firm anticipates an incremental
$0.20 from anniversary effects of the original restructuring, $0.35 from IT consolidation; $0.20 from real estate consolidation, $0.28 from upsell and attach in PCs and industry standard servers; $0.22 from indirect procurement optimization; $0.14 from direct procurement. They then subtract $0.21 from overlap in the above categories and subtract $0.47 for margin lost to price and re-investment. From there they add $0.11 annually in earnings from incremental revenue growth ($0.34 over 3 years); and $0.14 annually in share repurchases ($0.41 over 3 years). The sum of these supports ML's $3.50+ long run earnings power estimate. Tgt goes to $46 from $42 with the analyst noting that in 18-24 months they think the stock will discount long run (~F2009) number of $3.50+ and trade around $54, a 16% compound return over the next two years.
Notablecalls: The stock is back right where UBS made their positive comments regarding their $3.00 EPS power on Oct 23. The comments from DB and ML come ahead of results scheduled for Nov 16. I wish some knucklehead analyst came out and upgraded the stock, providing traders with an almost perfect short-selling oppy. I suspect today's comments won't gap the stock high enough. But lets face it, no analyst wants to upgrade HPQ ahead of results given the streched valuation and looming corporate spending deceleration.
- Deutsche Banks notes they have adjusted their price target up to $40, from prior $34,
reflecting increased visibility of near-term results and expectation of a possible $0.02-$0.03 of EPS upside this quarter. Firm's revenue and EPS estimates remain unchanged.$40 price target assumes HPQ trades at 16x CY07 EPS estimate which is within HP's historical range (10x-18x since the acquisition of Compaq). The valuation is also underpinned by a 10-year DCF (WACC 9.2%, growth of 3%). At current levels they view shares of HPQ as fairly valued. Firm believes the market is discounting future EPS of ~$3.00 in CY08 and ~10% operating margins. As such they believe there is limited upside and rate HPQ's shares a Hold.
- Merrill Lynch notes that for quite some time their research has argued HP's long run earnings power should exceed $3.00. Today they increase this estimate to $3.50+. To get there, the firm analyzes $2.5bn of net realizable margin enhancement plus the effects of incremental revenue growth and buybacks.
Specifically, beyond their F2006 estimate of $2.20, the firm anticipates an incremental
$0.20 from anniversary effects of the original restructuring, $0.35 from IT consolidation; $0.20 from real estate consolidation, $0.28 from upsell and attach in PCs and industry standard servers; $0.22 from indirect procurement optimization; $0.14 from direct procurement. They then subtract $0.21 from overlap in the above categories and subtract $0.47 for margin lost to price and re-investment. From there they add $0.11 annually in earnings from incremental revenue growth ($0.34 over 3 years); and $0.14 annually in share repurchases ($0.41 over 3 years). The sum of these supports ML's $3.50+ long run earnings power estimate. Tgt goes to $46 from $42 with the analyst noting that in 18-24 months they think the stock will discount long run (~F2009) number of $3.50+ and trade around $54, a 16% compound return over the next two years.
Notablecalls: The stock is back right where UBS made their positive comments regarding their $3.00 EPS power on Oct 23. The comments from DB and ML come ahead of results scheduled for Nov 16. I wish some knucklehead analyst came out and upgraded the stock, providing traders with an almost perfect short-selling oppy. I suspect today's comments won't gap the stock high enough. But lets face it, no analyst wants to upgrade HPQ ahead of results given the streched valuation and looming corporate spending deceleration.
Calls of Note Part 2
- This morning, Citigroup Investment Research (CIR) Chief U.S. Equity Strategist Tobias Levkovich is raising his rating on US semiconductors to overweight from neutral. As fundamental semiconductor analysts, they reiterate their positive view on the sector. The SOXX has risen about 15% in the past quarter, but the firm expects further appreciation, to our target of 500. While they recognize the potential for some pullback given the recent rally in the group and some noticeable deceleration in end-markets (handsets and PC's), given their already positive bias, the firm generally concurs with their US strategist. Top picks are Intel, IDTI, Intersil and Marvell, all of which they rate Buy.
While there is significant concern surrounding the high level of semiconductor inventories, firm's positive stance has been partially predicated on an inventory peak. As the chart below shows, when inventories have peaked (as illustrated by the highest point of semiconductor unit output above trend line) semiconductor stocks (the SOXX) have tended to be at or around their bottom. Thus, while bears still use inventories as an excuse to remain negative, they take the exact opposite stance, assuming by doing so, that the negative repercussions of high inventories are well understood by investors. Firm anticipates bears may turn more positive as inventories bottom in 1H07.
IDTI is firm's top small-cap idea, warming up to ALTR. Comm. IC stocks have seen the deepest cuts to estimates, reflecting the unexpected weakness in wireless and wireline infrastructure. No surprise, Comm. IC stocks have underperformed broader semiconductor stocks, down 20% YTD. Citi believes this creates opportunities in Comm. IC names, particularly given CIR's view that infrastructure spending will improve in 1H07. IDTI is top small cap idea, although, upon evidence of an improving communications end-market, they would look more favorably on Altera (ALTR). They reiterate their call for near-term trading weakness in TXN.
Notablecalls: While I think Citi will ultimately be proven wrong, one has got to respect the dynamics of the trading world. Sitting at my old trading desk I would load up on SMH (or alternatively ALTR) in the pre mkt and look to exit after the open. The problem with the call is that it does not take into account the likely upcoming weakness in the U.S economy. Also, note that CIR continues to be negative on Semi Capital Equipment space.
While there is significant concern surrounding the high level of semiconductor inventories, firm's positive stance has been partially predicated on an inventory peak. As the chart below shows, when inventories have peaked (as illustrated by the highest point of semiconductor unit output above trend line) semiconductor stocks (the SOXX) have tended to be at or around their bottom. Thus, while bears still use inventories as an excuse to remain negative, they take the exact opposite stance, assuming by doing so, that the negative repercussions of high inventories are well understood by investors. Firm anticipates bears may turn more positive as inventories bottom in 1H07.
IDTI is firm's top small-cap idea, warming up to ALTR. Comm. IC stocks have seen the deepest cuts to estimates, reflecting the unexpected weakness in wireless and wireline infrastructure. No surprise, Comm. IC stocks have underperformed broader semiconductor stocks, down 20% YTD. Citi believes this creates opportunities in Comm. IC names, particularly given CIR's view that infrastructure spending will improve in 1H07. IDTI is top small cap idea, although, upon evidence of an improving communications end-market, they would look more favorably on Altera (ALTR). They reiterate their call for near-term trading weakness in TXN.
Notablecalls: While I think Citi will ultimately be proven wrong, one has got to respect the dynamics of the trading world. Sitting at my old trading desk I would load up on SMH (or alternatively ALTR) in the pre mkt and look to exit after the open. The problem with the call is that it does not take into account the likely upcoming weakness in the U.S economy. Also, note that CIR continues to be negative on Semi Capital Equipment space.
Calls of Note Part 1
While several firms are likely going to commment (or have already done so) on news of Motorola (NYSE:MOT) buying Good Technology, I think JP Morgan deserves to be highlighted as the co was visiting Research in Motion's (NASDAQ:RIMM) HQ at the time when the news hit.
JP Morgan's Paul Coster notes that RIMM's Jim Balsillie seemed unsurprised by the news and expressed the view that though Good positions Motorola to make the enterprise pitch, the acquired company has insufficient subscriber base and functionality to displace RIM at the carrier or in the enterprise. He estimated Good's subscriber base at under 200,000. He likened the acquisition to Nokia's acquisition of Intellisync. The firm views Good's push solution as superior to Intellisync's but they otherwise agree with his view.
Commenting on general business trends the management noted that production started in Waterloo but is now scaling in Mexico too. Vodafone units are in production at the plant.
RIM expects about 200K units to be added to channel inventory this quarter. Mr Balsillie stated that Pearl "results are obviously positive", with consumers "aspiring up to the product". The Pearl data-plan attach rate is above 50% and below 80%, and management is designing marketing programs (a 'tiered' offering) to try and capture a higher percentage of data subscribers in the future. Discussions with management suggest that new versions of the Pearl will come to market in quick succession in coming months, including a Cingular version. Firm notes they received no direct confirmation of the Blackberry 8800 (aka as "Indigo") though a RIM employee conceded that there is room in the company's display cabinets for this new product (see www.blackberrycool.com for details of Indigo). Mr Kavelman stated the company's intention to publish re-stated audited results before the next quarterly results. Mr Lazaradis stated that RIM expects to introduce hybrid (cellular plus WiFi) RIM devices soon, though he would not commit to a timeframe. He believes RIM's 3G stack is well positioned to support session hand-off from cellular to WiFi.
Reits Overweight.
Notablecalls: Not actionable but good to know category. Given the bounce RIMM staged on Friday I would not be looking to go long this one here.
JP Morgan's Paul Coster notes that RIMM's Jim Balsillie seemed unsurprised by the news and expressed the view that though Good positions Motorola to make the enterprise pitch, the acquired company has insufficient subscriber base and functionality to displace RIM at the carrier or in the enterprise. He estimated Good's subscriber base at under 200,000. He likened the acquisition to Nokia's acquisition of Intellisync. The firm views Good's push solution as superior to Intellisync's but they otherwise agree with his view.
Commenting on general business trends the management noted that production started in Waterloo but is now scaling in Mexico too. Vodafone units are in production at the plant.
RIM expects about 200K units to be added to channel inventory this quarter. Mr Balsillie stated that Pearl "results are obviously positive", with consumers "aspiring up to the product". The Pearl data-plan attach rate is above 50% and below 80%, and management is designing marketing programs (a 'tiered' offering) to try and capture a higher percentage of data subscribers in the future. Discussions with management suggest that new versions of the Pearl will come to market in quick succession in coming months, including a Cingular version. Firm notes they received no direct confirmation of the Blackberry 8800 (aka as "Indigo") though a RIM employee conceded that there is room in the company's display cabinets for this new product (see www.blackberrycool.com for details of Indigo). Mr Kavelman stated the company's intention to publish re-stated audited results before the next quarterly results. Mr Lazaradis stated that RIM expects to introduce hybrid (cellular plus WiFi) RIM devices soon, though he would not commit to a timeframe. He believes RIM's 3G stack is well positioned to support session hand-off from cellular to WiFi.
Reits Overweight.
Notablecalls: Not actionable but good to know category. Given the bounce RIMM staged on Friday I would not be looking to go long this one here.
Paperstand
According to the WSJ’s „Heard on the Street” column, now that energy prices have tumbled from their summer highs, some of the hot money is shifting from bets on commodities to speculative energy stocks. In just a few months, hedge funds and other big investors have scored huge gains on these shares, and the profits could continue if energy prices rebound strongly. But some analysts are raising yellow flags about these co’s b/c there is no assurance they will succeed in their production and profit goals. Their share prices are so high that they may not go much higher and could tumble, especially if there is another retreat in oil and natural-gas prices. "It seems ppl's risk tolerance has gone up in the last month and a half," says George Shiau, of Copia Capital. "The hottest plays lately are co specific [investments] as opposed to the direction of oil and gas." Stocks mentioned include: DPTR, GDP, PLLL, CCJ and ECA.
The Deal.com reports that private equity firms weigh Sprint (S) buyout. The sheer size of a deal for the $70bn telecom could be prohibitive, however.
The Deal.com reports that private equity firms weigh Sprint (S) buyout. The sheer size of a deal for the $70bn telecom could be prohibitive, however.
Sunday, November 12, 2006
Barron's Summary
Fund manager picks highlighted, including STA, DFG, VZ, WIN, SVU, JBLU, SOW and CEF.
At 24 a share, the New York Times (NYT) trades where it did in 1987. But its assets could be worth 35. A mgmt-led buyout, though unlikely, would unlock value.
One forecast sees Wynn's (WYNN) gaming revenue hitting $1.4bn this year and $2.3bn in '07. The stock could shoot well past $100 a share.
According to „The Trader” column, REITs represent the largest short position in the portfolio of Douglas Kass, president of Seabreeze Partners. Apartment REITs "are priced for perfection. They'll be down more than 20% in the next 6 months or so," he says. Wall Street's earnings and cash-flow ests imply a 6-7% increase in rents in ‘07 and ‘08. But Kass sees rents rising by only 2-3%, thanks to a slowing economy and the weakness in the condo mkt. They're also trading 10-20% above their net asset values.
“Follow Up” section praises Whole Foods Market (WFMI). If mgmt can meet modest expectations, the shares could work back to 60 in 12-18 months. "The story is not over at Whole Foods, as the co is just about to go through a material acceleration," says Canaccord/Adams analyst Scott Van Winkle.
“Plugged In” column discusses DirecTV (DTV), which is 38.6% owned by Fox Entertainment. DTV's shares have been on a tear, pushed largely by expectations on bets that it might get acquired or merge with a competitor such as EchoStar (DISH). But article suggests that the co can't continue to acquire customers, much less retain them, unless they are raging sports fans. DirecTV won't be able to retain its monopoly forever. On top of that, digital cable is catching up in nearly every way and is much less hassle to install, maintain and operate. Plus, its signal doesn't get knocked out during rainstorms.
Friday, November 10, 2006
Calls of Note Part 5
- Kaufman Bros says they believe that NutriSystem (NASDAQ:NTRI) is currently conducting a test with GNC, the largest specialty retailer of health, wellness and diet products. From the information we have it seems that this is a co-marketing test (for now, at least). For more information, visit www.nutrisystem.com/gnc.
GNC has stores in more than 45 countries. GNC has 5,800 locations worldwide, with 4,812 U.S. locations, of which 2,529 are company-owned and the rest franchised or with Rite Aid (store-in-store format). The company also has 137 locations in Canada and 873 locations in 45 other countries.
Marketing has already started. Firm believes that GNC has sent emails to its customers marketing this program. They do not know if this deal will include in-store promotions, but that seems highly likely.
Maintains Buy and $102 tgt on NTRI.
Notablecalls: Expect to see buy interest in NTRI.
GNC has stores in more than 45 countries. GNC has 5,800 locations worldwide, with 4,812 U.S. locations, of which 2,529 are company-owned and the rest franchised or with Rite Aid (store-in-store format). The company also has 137 locations in Canada and 873 locations in 45 other countries.
Marketing has already started. Firm believes that GNC has sent emails to its customers marketing this program. They do not know if this deal will include in-store promotions, but that seems highly likely.
Maintains Buy and $102 tgt on NTRI.
Notablecalls: Expect to see buy interest in NTRI.
Calls of Note Part 4
- While most firms are positive on Kohl's (NYSE:KSS) following results released last night, Deutsche Bank's William Dreher Jr. provides some different sort of comments.
Q3 EPS of $0.68 was $0.04 above Street's $0.65 estimate, $0.09 above the high-end of the $0.56-$0.59 plan, but $0.01 below DB $0.69 estimate. The $0.68 EPS result represents a strong +52.2% increase over $0.45 LY, but investors may have been seeking more, with whisper numbers looking for a 7-handle EPS. Reiteration of Q4 guidance versus JCP's $0.10 increase, the lack of share repurchases and likely fewer than the 115 planned FY07 store openings could pressure the shares, despite the very strong y/y EPS growth. Though they believe that KSS operations are hitting on all cylinders and sales comparisons are modest through the spring, they believe that this is already priced into the shares. Maintains HOLD rating.
The rate of share repurchases during the quarter slowed dramatically, with only about 1MM shares repurchased (at an average price of $66.54/share) versus 18.4MM share repurchases (at an average price of $55.74/share) in Q2:06. This implies that management may feel that the shares are a bit rich at today's levels, but also reflects a strong discipline in managing its cash. DB believes that this discipline should enable KSS to help support the stock should the shares trade down somewhat or if EPS results begin to show impacts from a continued slowdown in the economy.
Notablecalls: Would not be surprised to see weakness in KSS today. The stock ended down $1 in after hrs trading but I suspect some of the positive comments from other firms will provide some initial support around the open.
Q3 EPS of $0.68 was $0.04 above Street's $0.65 estimate, $0.09 above the high-end of the $0.56-$0.59 plan, but $0.01 below DB $0.69 estimate. The $0.68 EPS result represents a strong +52.2% increase over $0.45 LY, but investors may have been seeking more, with whisper numbers looking for a 7-handle EPS. Reiteration of Q4 guidance versus JCP's $0.10 increase, the lack of share repurchases and likely fewer than the 115 planned FY07 store openings could pressure the shares, despite the very strong y/y EPS growth. Though they believe that KSS operations are hitting on all cylinders and sales comparisons are modest through the spring, they believe that this is already priced into the shares. Maintains HOLD rating.
The rate of share repurchases during the quarter slowed dramatically, with only about 1MM shares repurchased (at an average price of $66.54/share) versus 18.4MM share repurchases (at an average price of $55.74/share) in Q2:06. This implies that management may feel that the shares are a bit rich at today's levels, but also reflects a strong discipline in managing its cash. DB believes that this discipline should enable KSS to help support the stock should the shares trade down somewhat or if EPS results begin to show impacts from a continued slowdown in the economy.
Notablecalls: Would not be surprised to see weakness in KSS today. The stock ended down $1 in after hrs trading but I suspect some of the positive comments from other firms will provide some initial support around the open.
Calls of Note Part 3
- Citigroup comments on Adobe Systems (NASDAQ:ADBE) saying they do not believe Randy Furr's resignation as CFO was based on any negative issues, financial or operational, at Adobe.
Firm believes he voluntarily resigned for personal reasons and not at Adobe's request.
Although unconfirmed, they believe his decision may be related to the ongoing options investigations issues at his former employer Sanmina-SCI Corporation. While the extent of his involvement is unclear, Mr. Furr may have decided it is best not to risk casting any shadows on Adobe. Mr. Furr was CFO of Sanmina from 1992 until 1996, and was then promoted to President and COO. He resigned from Sanmina on 10-24-05. Adobe announced his appointment as CFO on 5-18-06, with a start date of 5-30-06.
Considering the caliber of Adobe's market standing, the firm does not believe it will be difficult to find a high quality replacement. Maintains Buy and $47 tgt.
Notablecalls: The only question on my mind is how much down does the stock have to gap in order for it to become buyable. $1.50 is my bet.
Firm believes he voluntarily resigned for personal reasons and not at Adobe's request.
Although unconfirmed, they believe his decision may be related to the ongoing options investigations issues at his former employer Sanmina-SCI Corporation. While the extent of his involvement is unclear, Mr. Furr may have decided it is best not to risk casting any shadows on Adobe. Mr. Furr was CFO of Sanmina from 1992 until 1996, and was then promoted to President and COO. He resigned from Sanmina on 10-24-05. Adobe announced his appointment as CFO on 5-18-06, with a start date of 5-30-06.
Considering the caliber of Adobe's market standing, the firm does not believe it will be difficult to find a high quality replacement. Maintains Buy and $47 tgt.
Notablecalls: The only question on my mind is how much down does the stock have to gap in order for it to become buyable. $1.50 is my bet.
Calls of Note Part 2
- Goldman Sachs is somewhat cautious on Lexmark (NYSE:LXK) after an as-expected analysts' meeting.
Although Lexmark is still very much a work-in-process, LXK shares have risen aggressively, up 47% year-to-date, versus 24% for the hardware group and the S&P's 10%. Despite this, the firm hesitates to take a more negative view on the stock due to support from its low share count (at only 98 million shares), many of which are tightly held by investors, and high short interest position (at nearly 10% of shares outstanding). On the other hand, they believe that in order for the stock to maintain its upwards momentum, Lexmark must continue to deliver outsized upside to its conservative guidance which will be harder to achieve before consumables reaccelerate on the hardware rebuild, possibly by year-end 2007. Firm's price target and estimates are unchanged.
At nearly $66, LXK shares are trading at 14.9x calendar 2007 EPS estimate of $4.40. At this level, LXK is trading slightly below HPQ, its closest printer comp, which supports Neutral rating.
Notablecalls: Bet GSCO has an investement banking relationship with LXK. So they can't put out anything really negative on the co. Not actionable.
Although Lexmark is still very much a work-in-process, LXK shares have risen aggressively, up 47% year-to-date, versus 24% for the hardware group and the S&P's 10%. Despite this, the firm hesitates to take a more negative view on the stock due to support from its low share count (at only 98 million shares), many of which are tightly held by investors, and high short interest position (at nearly 10% of shares outstanding). On the other hand, they believe that in order for the stock to maintain its upwards momentum, Lexmark must continue to deliver outsized upside to its conservative guidance which will be harder to achieve before consumables reaccelerate on the hardware rebuild, possibly by year-end 2007. Firm's price target and estimates are unchanged.
At nearly $66, LXK shares are trading at 14.9x calendar 2007 EPS estimate of $4.40. At this level, LXK is trading slightly below HPQ, its closest printer comp, which supports Neutral rating.
Notablecalls: Bet GSCO has an investement banking relationship with LXK. So they can't put out anything really negative on the co. Not actionable.
Calls of Note Part 1
- JP Morgan comments on Marvel Entertainment (NYSE:MVL) after Thursday post-close vice chairman Peter Cuneo filed a Form 4 disclosing the sale of 916K shares for $24.2m, and the gifting of 60K shares, leaving him holding only 640K in options. While the sale could weigh on Marvel stock near-term, the firm would expect a recovery, tied to an attractive earnings ramp and valuation.
Some could see Cuneo's sale as a sign to take profits after recent strength. That sentiment may be bolstered by Marvel's disclosure of no share repurchases in 3Q06, leaving it with $50m left on its current authorization. However, 62-year old Cuneo retains substantial Marvel stock. To that end, the description of his sale as diversification and profit taking, rather than a statement of concern for Marvel's future, has some merit.
Over time they believe investors will focus on Marvel's fundamentals. Firm believes that Marvel's 2007+ earnings ramp will be strong, driven by a solid third party movie slate next year featuring Spiderman 3, Fantastic Four 2 and Ghost Rider, and its own proprietary slate that debuts in 2008 featuring Iron Man and Hulk. Despite potential near-term weakness, maintain OW rating.
Notablecalls: Looking at the chart I must say I see very little chance of a short-selling oppy presenting itself in the n-t. Think the stock will gap down and then get bought.
Some could see Cuneo's sale as a sign to take profits after recent strength. That sentiment may be bolstered by Marvel's disclosure of no share repurchases in 3Q06, leaving it with $50m left on its current authorization. However, 62-year old Cuneo retains substantial Marvel stock. To that end, the description of his sale as diversification and profit taking, rather than a statement of concern for Marvel's future, has some merit.
Over time they believe investors will focus on Marvel's fundamentals. Firm believes that Marvel's 2007+ earnings ramp will be strong, driven by a solid third party movie slate next year featuring Spiderman 3, Fantastic Four 2 and Ghost Rider, and its own proprietary slate that debuts in 2008 featuring Iron Man and Hulk. Despite potential near-term weakness, maintain OW rating.
Notablecalls: Looking at the chart I must say I see very little chance of a short-selling oppy presenting itself in the n-t. Think the stock will gap down and then get bought.
Paperstand
The WSJ’s „Heard on the Street” column discusses Dell (DELL), saying that it now appears that Dell has chosen to give up its focus on mkt share in favor of profits. Citigroup analyst Richard Gardner, who has a Buy rating on the stock, noted that Dell's PCs are selling at higher-than-expected avg sale prices over the past qrtr and raised his tgt price for the stock to $27. "The first thing you have to fix is the level of profitability. Unprofitable growth for the sake of growth is really not a good strategy," says Marty Shagrin, of Victory Capital Mgmt. Victory, with $61bn under mgmt, held about 10m Dell shares as of the end of Sep. Toni Sacconaghi of Sanford C. Bernstein adds, "A lot of investors were flabbergasted at how weak Dell's margins were last quarter, so if margins do improve, it will provide some investors with comfort that was the bottom." Mr. Sacconaghi rates the co as Outperform.
According to the Barron’s Online, some recent bad news about investing in one of Canada's sweetest energy plays, royalty trusts, should make the other E&P co’s in the Great White North look more attractive. Among the attractive large, Canadian E&Ps are Suncor Energy (SU) and EnCana (ECA). Even if oil prices rise, offsetting the higher taxes on trusts, "investors would still be better off at the margin in a conventional E&P that would be able to enjoy the higher cash flows," writes Merrill Lynch analyst Andrew Fairbanks. And oil and gas trust stocks are likely to continue their decline, Fairbanks says.
“Inside Scoop” section reports that Blum Capital sold 3m shares of ITT Educational Services (ESI). The transaction cut Blum's total stake in the co to 3.88m shares, or a 9.3% stake, from the 6.83m shares, or 16.8% stake.
According to the Barron’s Online, some recent bad news about investing in one of Canada's sweetest energy plays, royalty trusts, should make the other E&P co’s in the Great White North look more attractive. Among the attractive large, Canadian E&Ps are Suncor Energy (SU) and EnCana (ECA). Even if oil prices rise, offsetting the higher taxes on trusts, "investors would still be better off at the margin in a conventional E&P that would be able to enjoy the higher cash flows," writes Merrill Lynch analyst Andrew Fairbanks. And oil and gas trust stocks are likely to continue their decline, Fairbanks says.
“Inside Scoop” section reports that Blum Capital sold 3m shares of ITT Educational Services (ESI). The transaction cut Blum's total stake in the co to 3.88m shares, or a 9.3% stake, from the 6.83m shares, or 16.8% stake.
Thursday, November 09, 2006
Calls of Note Part 4
- Susquehanna Financial Group's Semi analyst Dan Berenbaum notes that with C3Q earnings season just about wrapped up, they continue to see more bad news than good coming down the pike - importantly, they do not believe that equipment stocks are fully discounting the severity of the near-term risk. Firm's checks suggest that orders at large equipment companies are already on a slippery downward slope, and the news is steadily getting worse. Firm sees slowing order and shipment patterns as simply a reflection of deteriorating semiconductor industry fundamentals, where a classic combination of excess capacity build and normalizing demand will drive IC unit production back down to (or below) long-term trend-line. They expect the effects will be evident when AMAT reports F4Q06 (October) results in the form of below-expectation sales and bookings numbers. Firm also foresees a disappointing NVLS mid-Q update at the beginning of December, and would not be surprised to hear about chipmaker plans to potentially idle production lines during the holiday season.
Applied Materials (NASDAQ:AMAT) prepares to pay the piper. Very recent checks indicate that industry bellwether AMAT will struggle to hit F4Q06 (October) revenue guidance and will likely miss order guidance.
Novellus (NASDAQ:NVLS) is firm's favorite short - expect the mid-Q update to be a negative catalyst. While NVLS reported a generally solid September quarter, upside came primarily from internal operational improvements, which the firm sees as running out of steam. Lacking a strong product cycle in the midst of a declining order environment, they see downside risk to both December quarter order guidance of flat to down 10% and 1H07 consensus revenue and earnings expectations.
Notablecalls: Not actionable but very good to know category.
Applied Materials (NASDAQ:AMAT) prepares to pay the piper. Very recent checks indicate that industry bellwether AMAT will struggle to hit F4Q06 (October) revenue guidance and will likely miss order guidance.
Novellus (NASDAQ:NVLS) is firm's favorite short - expect the mid-Q update to be a negative catalyst. While NVLS reported a generally solid September quarter, upside came primarily from internal operational improvements, which the firm sees as running out of steam. Lacking a strong product cycle in the midst of a declining order environment, they see downside risk to both December quarter order guidance of flat to down 10% and 1H07 consensus revenue and earnings expectations.
Notablecalls: Not actionable but very good to know category.
Calls of Note Part 3
- Stifel is very positive on Abiomed (NASDAQ:ABMD) announced it will pursue a 510-K approval pathway for the Impella 2.5 instead of the longer (and expected) PMA approach.
If successful, this could allow this key product to be approved and commercially available in the U.S. market by the end of calendar 2007, 3 to 6 months earlier than firm's most recent estimate and as much as a year earlier than other estimates.
They continue to believe that the Impella 2.5 is a "home run" product for Abiomed in and of itself, but also the linchpin to making the company's entire "heart recovery" strategy provides a bridge between cardiologists and the rest of Abiomed's product line.
Last night's announcement should help remove one of the primary uncertainties in the ABMD story, namely the timing of Impella approval and availability in the U.S. market. As a result, the more favorable timeline should make the device more tangible and less theoretical to investors.
Stifel is upping their tgt on ABMD to $22 from $17 saying it remains one of the most exciting emerging medical device companies in their recent memory.
Notablecalls: Expect to see solid buy interest in ABMD today and in the coming days.
If successful, this could allow this key product to be approved and commercially available in the U.S. market by the end of calendar 2007, 3 to 6 months earlier than firm's most recent estimate and as much as a year earlier than other estimates.
They continue to believe that the Impella 2.5 is a "home run" product for Abiomed in and of itself, but also the linchpin to making the company's entire "heart recovery" strategy provides a bridge between cardiologists and the rest of Abiomed's product line.
Last night's announcement should help remove one of the primary uncertainties in the ABMD story, namely the timing of Impella approval and availability in the U.S. market. As a result, the more favorable timeline should make the device more tangible and less theoretical to investors.
Stifel is upping their tgt on ABMD to $22 from $17 saying it remains one of the most exciting emerging medical device companies in their recent memory.
Notablecalls: Expect to see solid buy interest in ABMD today and in the coming days.
Calls of Note Part 2
- UBS is cautious on AMD (NYSE:AMD) saying AMD's slowing momentum on servers in 3Q06 has negative implications for gross margins, leading them to reduce their 2007 EPS estimate to $1.23 from $1.36, as they reduc estimates of Opteron server processor sales to $1.54B from $1.67B in 2007. Furthermore, AMD's focus on Dell is leading to shortages in the channel, which happen to be more profitable than its OEM business.
UBS estimates AMD derives c.35% of its gross profit from Opteron. Due to its 3Q share loss in servers, they reduce their '07 GM estimate to 52.7% from 54.1% - firm sees negative margin impact from loss of share in Severs as more than offsetting AMD's gains in Notebooks.
AMD's 2006-07 capex plan of $4.4bn exceeds firm's estimate of '06-07 Operating cash flow by $1.7bn (ex-ATI). Even if it liquidates its 38% stake in Spansion (c.$0.7bn) and draws down its Fab 36 term loan ($0.9bn), a shortfall remains after the cash paid for ATI - a situation that could worsen if even a modest price war ensues.
Reits Neutral but cuts tgt to $23 from $26.
Notablecalls: I like this note. Notice how AMD failed to see any buy interest yesterday following a bullish call from Morgan Stanley. Sign of weakness. Is the UBS note actionable? It could very well be. But I would not press this bet as my gut is telling me there may be a short squeeze brewing.
UBS estimates AMD derives c.35% of its gross profit from Opteron. Due to its 3Q share loss in servers, they reduce their '07 GM estimate to 52.7% from 54.1% - firm sees negative margin impact from loss of share in Severs as more than offsetting AMD's gains in Notebooks.
AMD's 2006-07 capex plan of $4.4bn exceeds firm's estimate of '06-07 Operating cash flow by $1.7bn (ex-ATI). Even if it liquidates its 38% stake in Spansion (c.$0.7bn) and draws down its Fab 36 term loan ($0.9bn), a shortfall remains after the cash paid for ATI - a situation that could worsen if even a modest price war ensues.
Reits Neutral but cuts tgt to $23 from $26.
Notablecalls: I like this note. Notice how AMD failed to see any buy interest yesterday following a bullish call from Morgan Stanley. Sign of weakness. Is the UBS note actionable? It could very well be. But I would not press this bet as my gut is telling me there may be a short squeeze brewing.
Calls of Note Part 1
- UBS notes CSCO reported F1Q sales of $8.2B (+2.5% q/q, +24.9% y/y) that handily exceeded the their estimate of $7.88B. Guidance for 24-25% y/y growth in F2Q07, and upbeat comments on Q3 and Q4 prospects set the stage for a material rebound in sales for CSCO suppliers such as NETL, PMCS, BRCM and MRVL.
It now appears evident that recent deceleration at CSCO suppliers reflects lean manufacturing inventory work down rather than portending end mkt slowing. Given lean channel and CSCO inventory at present, and upward bias to sales momentum, the firm believes component sales into CSCO will need to see a strong upward bias in 1/2Q07.
The firm views CSCO switching strength (+15% y/y) as positive for NETL, BRCM and MRVL, CSCO DWDM and routing strength (+ mid-20s y/y, +13% y/y) as positive for PMCS, and advanced technology growth (+23%) as positive for BRCM. NETL is historically some 60-70% exposed to CSCO, PMCS 15-20%, BRCM 10-15% and MRVL 5-10%.
Netlogic Micro (NASDAQ:NETL) stands potentially the strongest potential for a solid mid-2007 recovery out of the CSCO channel and exposure to CSCO's enterprise switching that grew some 15% y/y. Checks consistently indicated there has been no material threat to its leadership position in Gen 3 knowledge-based processors, and that its downdraft into CSCO was exacerbated by concerns CSCO had mid 2006 regarding the scarcity of high-performance substrates NETL uses in the manufacture of its complex devices. They note rival IDTI has experienced a similar slowdown in its network search engines and would be consistent with firm's sense of no material share shifts exiting 2006.
Although adverse data points out of NSM and CSR suggest that wireless trends may continue to warrant some caution from BRCM mgmt, in firm's opinion the strength out of CSCO holds greater weight and puts BRCM in a better position to be upbeat on the outlook at its analyst day.
Notablecalls: Think NETL will see some buy interest. But do keep CSCO on the radar as I feel we may see a sell-the-news reaction there. That may keep NETL from moving up as well.
It now appears evident that recent deceleration at CSCO suppliers reflects lean manufacturing inventory work down rather than portending end mkt slowing. Given lean channel and CSCO inventory at present, and upward bias to sales momentum, the firm believes component sales into CSCO will need to see a strong upward bias in 1/2Q07.
The firm views CSCO switching strength (+15% y/y) as positive for NETL, BRCM and MRVL, CSCO DWDM and routing strength (+ mid-20s y/y, +13% y/y) as positive for PMCS, and advanced technology growth (+23%) as positive for BRCM. NETL is historically some 60-70% exposed to CSCO, PMCS 15-20%, BRCM 10-15% and MRVL 5-10%.
Netlogic Micro (NASDAQ:NETL) stands potentially the strongest potential for a solid mid-2007 recovery out of the CSCO channel and exposure to CSCO's enterprise switching that grew some 15% y/y. Checks consistently indicated there has been no material threat to its leadership position in Gen 3 knowledge-based processors, and that its downdraft into CSCO was exacerbated by concerns CSCO had mid 2006 regarding the scarcity of high-performance substrates NETL uses in the manufacture of its complex devices. They note rival IDTI has experienced a similar slowdown in its network search engines and would be consistent with firm's sense of no material share shifts exiting 2006.
Although adverse data points out of NSM and CSR suggest that wireless trends may continue to warrant some caution from BRCM mgmt, in firm's opinion the strength out of CSCO holds greater weight and puts BRCM in a better position to be upbeat on the outlook at its analyst day.
Notablecalls: Think NETL will see some buy interest. But do keep CSCO on the radar as I feel we may see a sell-the-news reaction there. That may keep NETL from moving up as well.
Color on quarter: Cisco Systems (NASDAQ:CSCO)
Several firms are commenting on Cisco Systems (NASDAQ:CSCO) after the co issued very strong results and good guidance last night:
- JP Morgan has one of the best summaries Cisco reported another extremely strong quarter, as revenue upside came from BOTH the core business AND SFA. Guidance again was extremely strong - esp for SFA - backing firm's thesis that SFA is opening-up new product cycles and
reinvigorating top-line growth, while providing cover for Cisco to become more aggressive in its core business. They cont to expect multiples to expand as Cisco remains on the offense. Reits OW.
One of the most impressive parts of the quarter was truly the broad-based revenue strength. Chambers said that eight of Cisco's top ten revenue products grew more than 20% y/y, and revenue growth was also strong across geographies, product lines, and customer sets. As a result, Core CSCO revenue grew 16% y/y to $7,600M, $237M ahead of both firm's estimate and guidance of 11-13% y/y growth, marking the highest y/y growth rate for core Cisco revenues in a quarter since the October, 2003 quarter, a full 3 years ago!
While gross margin of 64.8% fell 50 basis points q/q - most of which, they believe, happened within core Cisco since the richer mix of the higher margin Networks revenues within Scientific Atlanta this quarter would imply that SA's gross margin was flat to up - the firm believes that Cisco may be testing the elasticity of demand on a number of product lines, providing discounts, which in turn helped generate the 16% y/y growth this quarter in Cisco's core business. They therefore believe at least part of the core Cisco tailwind might be being driven by a more aggressive pricing stance at Cisco, a trend the firm expects to continue.
On the other hand, at the high end of Cisco's core guidance - i.e. 15% y/y growth in the core - SFA could grow a more normal 15% itself, but then total company revenue growth would never get anywhere near the top end of the total company guidance range of 24-25%. What this means is that the only way for the total company to hit the top end of the 24-25% guidance range - i.e. 25% - is either for core to grow 15% and SFA grow a blistering 25%, or for the core to grow faster than 15%, i.e. above guidance.
Bottom-line, Cisco continues to perform extremely well on all fronts, boosted both by strength at SFA and synergies with the core Cisco business, and also by a tailwind in its core enterprise and service provider businesses as the company continues to expand into emerging markets, commercial domestic customers and other new segments.
- Raymond James notes Cisco experienced broad based order growth across most geographies. Of note, they highlight US and Emerging Market, which experienced year-over-year order
growth of 17-19% and 43%, respectively. Firm would note that Europe continues to rebound with order growth increasing to double digits from high single digits in July. From a segment perspective Cisco is seeing strong order growth from all latforms. Of note, the firm highlights strength in service provider and commercial platforms with order growth of 22-24% and 20%, respectively. They are increasing their price target to $31 from $25. Reit Strong Buy as they believe Cisco continues to run on all cylinders.
- Merrill Lynch ups their tgt to $30 from $27. Maintains Buy.
Notablecalls: Looks like Goldman was right after all with their aggressive call ahead of the release. I continue to be pessimistic about 2007. With the stock almost vertical over the past couple of months (hit almost $27 in after hrs trading) I'd be watching for cracks in buy interest today and tomorrow. Everything's just too good to be true.
- JP Morgan has one of the best summaries Cisco reported another extremely strong quarter, as revenue upside came from BOTH the core business AND SFA. Guidance again was extremely strong - esp for SFA - backing firm's thesis that SFA is opening-up new product cycles and
reinvigorating top-line growth, while providing cover for Cisco to become more aggressive in its core business. They cont to expect multiples to expand as Cisco remains on the offense. Reits OW.
One of the most impressive parts of the quarter was truly the broad-based revenue strength. Chambers said that eight of Cisco's top ten revenue products grew more than 20% y/y, and revenue growth was also strong across geographies, product lines, and customer sets. As a result, Core CSCO revenue grew 16% y/y to $7,600M, $237M ahead of both firm's estimate and guidance of 11-13% y/y growth, marking the highest y/y growth rate for core Cisco revenues in a quarter since the October, 2003 quarter, a full 3 years ago!
While gross margin of 64.8% fell 50 basis points q/q - most of which, they believe, happened within core Cisco since the richer mix of the higher margin Networks revenues within Scientific Atlanta this quarter would imply that SA's gross margin was flat to up - the firm believes that Cisco may be testing the elasticity of demand on a number of product lines, providing discounts, which in turn helped generate the 16% y/y growth this quarter in Cisco's core business. They therefore believe at least part of the core Cisco tailwind might be being driven by a more aggressive pricing stance at Cisco, a trend the firm expects to continue.
On the other hand, at the high end of Cisco's core guidance - i.e. 15% y/y growth in the core - SFA could grow a more normal 15% itself, but then total company revenue growth would never get anywhere near the top end of the total company guidance range of 24-25%. What this means is that the only way for the total company to hit the top end of the 24-25% guidance range - i.e. 25% - is either for core to grow 15% and SFA grow a blistering 25%, or for the core to grow faster than 15%, i.e. above guidance.
Bottom-line, Cisco continues to perform extremely well on all fronts, boosted both by strength at SFA and synergies with the core Cisco business, and also by a tailwind in its core enterprise and service provider businesses as the company continues to expand into emerging markets, commercial domestic customers and other new segments.
- Raymond James notes Cisco experienced broad based order growth across most geographies. Of note, they highlight US and Emerging Market, which experienced year-over-year order
growth of 17-19% and 43%, respectively. Firm would note that Europe continues to rebound with order growth increasing to double digits from high single digits in July. From a segment perspective Cisco is seeing strong order growth from all latforms. Of note, the firm highlights strength in service provider and commercial platforms with order growth of 22-24% and 20%, respectively. They are increasing their price target to $31 from $25. Reit Strong Buy as they believe Cisco continues to run on all cylinders.
- Merrill Lynch ups their tgt to $30 from $27. Maintains Buy.
Notablecalls: Looks like Goldman was right after all with their aggressive call ahead of the release. I continue to be pessimistic about 2007. With the stock almost vertical over the past couple of months (hit almost $27 in after hrs trading) I'd be watching for cracks in buy interest today and tomorrow. Everything's just too good to be true.
Paperstand
According to the WSJ’s „Tracking the Numbers” column, leveraged buyouts of tech co’s are picking up steam and there may be more deals on the horizon. The list of attractive candidates isn't long, according to a study to be released today by Fitch Ratings. Fitch says possible buyout candidates include CA (CA) and Convergys (CVG).
Barron’s Online “Inside Scoop” section reports that Lone Pine Capital is prospecting for gains in Southwestern Energy (SWN). The hedge fund reported it purchased nearly 8.58m shares of Southwestern, or a 5.1% stake. Lone Pine did not disclose the prices or when the transactions were conducted. However, the firm held no Southwestern shares in the 2Q ended June 30. The fund is Southwestern's 2nd-largest shareholder. Ben Silverman, of InsiderScore.com, says what is particularly interesting about Lone Pine is the firm has been an "aggressive buyer" that sold off its energy positions in the 2Q.
Barron’s Online “Inside Scoop” section reports that Lone Pine Capital is prospecting for gains in Southwestern Energy (SWN). The hedge fund reported it purchased nearly 8.58m shares of Southwestern, or a 5.1% stake. Lone Pine did not disclose the prices or when the transactions were conducted. However, the firm held no Southwestern shares in the 2Q ended June 30. The fund is Southwestern's 2nd-largest shareholder. Ben Silverman, of InsiderScore.com, says what is particularly interesting about Lone Pine is the firm has been an "aggressive buyer" that sold off its energy positions in the 2Q.
Wednesday, November 08, 2006
Calls of Note Part 4
- JP Morgan is upgrading Whole Foods (NASDAQ:WFMI) from Neutral to Overweight. The firm would begin buying the stock, particularly for long-term oriented accounts.
Recent issues that have knocked the stock back (currently 41% off its high) reflect acceptable growing pains and more normalized comp store sales. This is eerily reminiscent of FY2003, which was a buying opportunity.
The reversion to the mean of comps in the shorter-term reflects a trend line that frankly is still good. Some of this is due to the sheer math of yoy comparisons, as well as WFMI's correlation with the rest of retail, in firm's view. The company is also reaccelerating new store openings. Square footage growth that eventually accelerates north of the 16% targeted level in FY07E is likely. With "normalized" comps of high single digits (say 8-9%) in FY08E, they forecast a secular sales (and earnings) growth rate that accelerates beyond 2007E's 13-17% target. Also, they speculate that macro is a factor (given other recent US retail trends, which have been relatively softer: a la Wal-Mart at 0.5%, Kohl's at 4.2%, Home Depot at -0.2%, Lowe's below the 0-2% range and Best Buy at 3% in the US for its latest quarter, Q206). Firm notes they have seen this before in FY2003 when Whole Foods slowed to 7% trends on 10% comparisons (now they're 6-7% on 13% comparisons). WFMI comps were directionally correlated with the rest of retail back then, and it proved to be a buying opportunity for the stock.
The stock is attractive at 26.3x 2008E EPS and 1.2x LTM sales.
Notablecalls: As regulars readers know, I don't like highlighting rating changes on this page but you just gotta love this one. The call is surely worth couple of points of upside in stock price.
Recent issues that have knocked the stock back (currently 41% off its high) reflect acceptable growing pains and more normalized comp store sales. This is eerily reminiscent of FY2003, which was a buying opportunity.
The reversion to the mean of comps in the shorter-term reflects a trend line that frankly is still good. Some of this is due to the sheer math of yoy comparisons, as well as WFMI's correlation with the rest of retail, in firm's view. The company is also reaccelerating new store openings. Square footage growth that eventually accelerates north of the 16% targeted level in FY07E is likely. With "normalized" comps of high single digits (say 8-9%) in FY08E, they forecast a secular sales (and earnings) growth rate that accelerates beyond 2007E's 13-17% target. Also, they speculate that macro is a factor (given other recent US retail trends, which have been relatively softer: a la Wal-Mart at 0.5%, Kohl's at 4.2%, Home Depot at -0.2%, Lowe's below the 0-2% range and Best Buy at 3% in the US for its latest quarter, Q206). Firm notes they have seen this before in FY2003 when Whole Foods slowed to 7% trends on 10% comparisons (now they're 6-7% on 13% comparisons). WFMI comps were directionally correlated with the rest of retail back then, and it proved to be a buying opportunity for the stock.
The stock is attractive at 26.3x 2008E EPS and 1.2x LTM sales.
Notablecalls: As regulars readers know, I don't like highlighting rating changes on this page but you just gotta love this one. The call is surely worth couple of points of upside in stock price.
Calls of Note Part 3
- Morgan Stanley notes that as they have suggested for months, Dell introduced AMD-based
OptiPlex desktop PCs for the corporate market on November 7, and these mainstream corporate PCs are configured with AMD Athlon 64 or Athlon 64 X2 dual core MPUs. Dell has continued steadily to introduce new PCs using AMD's MPUs, and the firm expects a large percentage of its needs to be supplied by AMD in the future. Since Dell is a 20% customer for Intel, the steady transition toward AMD as a second source could cause Intel to continue to lose market share and encounter overhead absorption problems. Their view of how Dell will affect MPU market share over the next one to two years is a primary factor behind their above-consensus estimate for AMD and below-consensus estimate for Intel in 2007. In addition to benefiting AMD, the OptiPlex 740 uses NVIDIA's integrated chipset solution (nForce 430 MCP).
The firm views Dell's announcement as further confirmation that the company intends to reduce its dependency on Intel, which they regard as a positive for AMD and NVDA, and a negative for INTC. In the past, AMD has had virtually no exposure to the corporate PC market, and they strongly believe that its growing relationship with Dell will help AMD gain traction in this lucrative segment of the PC market.
Notablecalls: Expect to see some buy interest but nothing drastic. The news should not come as a surprise for AMD watchers.
OptiPlex desktop PCs for the corporate market on November 7, and these mainstream corporate PCs are configured with AMD Athlon 64 or Athlon 64 X2 dual core MPUs. Dell has continued steadily to introduce new PCs using AMD's MPUs, and the firm expects a large percentage of its needs to be supplied by AMD in the future. Since Dell is a 20% customer for Intel, the steady transition toward AMD as a second source could cause Intel to continue to lose market share and encounter overhead absorption problems. Their view of how Dell will affect MPU market share over the next one to two years is a primary factor behind their above-consensus estimate for AMD and below-consensus estimate for Intel in 2007. In addition to benefiting AMD, the OptiPlex 740 uses NVIDIA's integrated chipset solution (nForce 430 MCP).
The firm views Dell's announcement as further confirmation that the company intends to reduce its dependency on Intel, which they regard as a positive for AMD and NVDA, and a negative for INTC. In the past, AMD has had virtually no exposure to the corporate PC market, and they strongly believe that its growing relationship with Dell will help AMD gain traction in this lucrative segment of the PC market.
Notablecalls: Expect to see some buy interest but nothing drastic. The news should not come as a surprise for AMD watchers.
Calls of Note Part 2
- JP Morgan is positive on Apple (NASDAQ:AAPL) after they yesterday visited Apple's headquarters in Cupertino, California.
The completion of the Intel transition, hefty store traffic, and successful Mac advertising could continue to spur momentum in the Mac business. In addition, the firm continues to believe that the post-holiday launch of Vista will make it even more likely that consumers will consider the Mac platform this quarter.
Management mentioned unnamed new products as a key driver of growth several times during
the meetings. This echoes similarly vague commentary from Steve Jobs regarding the company's product pipeline and supports their view that 2007 could mark an important rebound in product innovation from the company.
The widescreen video iPod and the Apple-branded phone represent two of the most likely new
products and of course, there should be some other unexpected products as well. JP Morgan also believes it is important to stress that none of these products are currently factored into their above consensus estimates for fiscal 2007.
Apple is trading at 25x calendar 2007 EPS ex-options estimate. They expect the iPod's momentum to improve and Mac share gains to accelerate. The firm is reiterating their Overweight rating.
Notablecalls: AAPL did see some buy interest off the positive comments from Piper yesterday. Think the rumors of JP Morgan meeting with the management helped as well. Apple's Mac business grows 8-9x the speed of overall PC business (units), making it one of tech's best stories.
The completion of the Intel transition, hefty store traffic, and successful Mac advertising could continue to spur momentum in the Mac business. In addition, the firm continues to believe that the post-holiday launch of Vista will make it even more likely that consumers will consider the Mac platform this quarter.
Management mentioned unnamed new products as a key driver of growth several times during
the meetings. This echoes similarly vague commentary from Steve Jobs regarding the company's product pipeline and supports their view that 2007 could mark an important rebound in product innovation from the company.
The widescreen video iPod and the Apple-branded phone represent two of the most likely new
products and of course, there should be some other unexpected products as well. JP Morgan also believes it is important to stress that none of these products are currently factored into their above consensus estimates for fiscal 2007.
Apple is trading at 25x calendar 2007 EPS ex-options estimate. They expect the iPod's momentum to improve and Mac share gains to accelerate. The firm is reiterating their Overweight rating.
Notablecalls: AAPL did see some buy interest off the positive comments from Piper yesterday. Think the rumors of JP Morgan meeting with the management helped as well. Apple's Mac business grows 8-9x the speed of overall PC business (units), making it one of tech's best stories.
Calls of Note Part 1
Several firms are commenting on National Semi (NYSE:NSM) after the co warned for Q4 last night:
- JP Morgan notes NSM is among a long list of HPA companies to cite handsets weakness due to an inventory correction. They expect similar 4Q softness from other companies in their coverage space with significant handsets exposure, namely, SMTC (21%), Maxim (15%), ADI (12%), BRCM (10%), ISIL (8%) and LLTC (7%).
Cutting estimates from $522M/$0.30 to $500M/$0.27. F07E estimates have also changed from $2.143B/$1.33 to $2.067B/$1.23. Firm expects growth to resume in the May-07 quarter once the handsets inventory is worked off and distributors reach desired inventory levels, and the foundry business winds down.
National is currently trading at 17.6x C07E EPS estimate, in-line to the peer group at 17.7x. Maintains Neutral rating on NSM as it underperforms during downturns due to high vertical market exposure.
- Citigroup notes that after witnessing 4Q06 revenue outlooks averaging -4% from LLTC, ISIL, and MXIM, they are not totally surprised with NSM's update. NSM attributed the miss to its handset business, suggesting a $22M shortfall in what is typically 30% of NSM
revenues, or a 14% miss on prior expectations for this business. The firm confirmed
with NSM that weakness was observed across its breadth of tier-1 customers as well as across direct and distribution channels.
On fundamentals, the magnitude of the miss casts new doubt on the strength of handset component demand pull from the supply chain in 4Q06, though does not offer any new news on handset finished goods end demand strength. For NSM's share price, while the revenue outlook is disappointing, the updated guidance suggests that NSM continues to execute well on its margin improvement objectives supporting the central tenet of firm's Buy thesis. Valuation remains inexpensive in absolute terms and relative to other analog names on a P/E basis, making the shares interesting for investors looking for a higher-quality story.
Tgt goes to $28.50 from $29.
Notablecalls: NSM was down around 1% in after hours trading following the news. The mobile phone business is saturated and I must say I see very little growth in the coming yr or so. 3G phones continue to be expensive and difficult to use. Think the thin phones from Motorola have been an important driver of overall demand. That looks to be slowing dramatically. Suspect we will see additional pricing pressure on the component side meaning estimates are likely still too high on many of the semi names. NSM's gross margin is still around 60% which is a lot and will most likely decline over time. I expect NSM stock to be lower over the next months.
- JP Morgan notes NSM is among a long list of HPA companies to cite handsets weakness due to an inventory correction. They expect similar 4Q softness from other companies in their coverage space with significant handsets exposure, namely, SMTC (21%), Maxim (15%), ADI (12%), BRCM (10%), ISIL (8%) and LLTC (7%).
Cutting estimates from $522M/$0.30 to $500M/$0.27. F07E estimates have also changed from $2.143B/$1.33 to $2.067B/$1.23. Firm expects growth to resume in the May-07 quarter once the handsets inventory is worked off and distributors reach desired inventory levels, and the foundry business winds down.
National is currently trading at 17.6x C07E EPS estimate, in-line to the peer group at 17.7x. Maintains Neutral rating on NSM as it underperforms during downturns due to high vertical market exposure.
- Citigroup notes that after witnessing 4Q06 revenue outlooks averaging -4% from LLTC, ISIL, and MXIM, they are not totally surprised with NSM's update. NSM attributed the miss to its handset business, suggesting a $22M shortfall in what is typically 30% of NSM
revenues, or a 14% miss on prior expectations for this business. The firm confirmed
with NSM that weakness was observed across its breadth of tier-1 customers as well as across direct and distribution channels.
On fundamentals, the magnitude of the miss casts new doubt on the strength of handset component demand pull from the supply chain in 4Q06, though does not offer any new news on handset finished goods end demand strength. For NSM's share price, while the revenue outlook is disappointing, the updated guidance suggests that NSM continues to execute well on its margin improvement objectives supporting the central tenet of firm's Buy thesis. Valuation remains inexpensive in absolute terms and relative to other analog names on a P/E basis, making the shares interesting for investors looking for a higher-quality story.
Tgt goes to $28.50 from $29.
Notablecalls: NSM was down around 1% in after hours trading following the news. The mobile phone business is saturated and I must say I see very little growth in the coming yr or so. 3G phones continue to be expensive and difficult to use. Think the thin phones from Motorola have been an important driver of overall demand. That looks to be slowing dramatically. Suspect we will see additional pricing pressure on the component side meaning estimates are likely still too high on many of the semi names. NSM's gross margin is still around 60% which is a lot and will most likely decline over time. I expect NSM stock to be lower over the next months.
Paperstand
According to the WSJ’s „Heard on the Street” column, building-materials co’s that sought bankruptcy-court protection under the weight of massive asbestos claims are emerging in trimmer, fighting form. Their timing could scarcely be worse. Makers of wallboard and insulation are putting the issue behind them, only to be greeted by one of the sharpest downturns in the US housing mkt in decades. Shares of USG (USG) are off nearly 60% from their highs in April. Armstrong World Industries (AWI) is down 11.5% since it started trading. And last week, shares of Owens Corning (OC) resumed trading after the co spent 6 years in bankruptcy protection, and promptly sank. Yet some investors, including Warren Buffett and the hedge fund D.E. Shaw Group, are betting that a few of the co’s in the building-materials business have attractive growth potential at current prices. One thing they like: these co’s battle-tested mgmt teams, which whipped the co’s into fighting form while dealing with scores of asbestos lawyers. All 3 co’s have set up their own trusts into which they each put billions of dollars to settle past, present and future asbestos claims. "USG's shares are undervalued, whether one is considering its potential earnings power as it emerges from the industry downturn now in progress, or whether one values the co on a sum-of-the-parts basis," says Jim Barrett of CL King. He has a Strong Buy rating on USG and a 12-month price tgt of $67.
“Inside Track” section reports that even as Texas Industries (TXI) maintains its silence regarding buyout talks instigated by a major shareholder, insiders are selling co shares, suggesting a deal isn't on the horizon. Egyptian investor Nassef Sawiris disclosed last month that he had accumulated a 2.3% stake in the co and controlled options that, if exercised, would boost the stake to 9.1%. Mr. Sawiris said he may push for the co to be sold and may attempt to seek control of the co himself "through a negotiated transaction or otherwise." But recent stock sales by Chmn Robert D. Rogers and 2 co VPs suggest the insiders don't expect the co to be sold for a premium price any time soon, said Ben Silverman, of InsiderScore.com.
According to the Barron’s Online, Activision (ATVI) is a game that investors may want to play. Game makers' stocks are cyclical, and the expected arrival this month of new game machines from Sony (SNE) and Nintendo is giving investors confidence a new round of game sales will boost profits for years to come. Activision stock is cheaper than that of rival Electronic Arts (ERTS), and the co offers higher growth based on the next installments of proven game franchises, such as "SpiderMan 3" and "Shrek 3," due next year. But if CEO Bobby Kotick, who investors describe as synonymous with the co's success, departs, the shares could fall 15% or more, say investors. If he stays, Activision could surge as investors breath a sigh of relief. One way to handle that uncertainty is to buy May 15 calls of Activision. "They've got some huge blockbuster movie [tie-ins] coming out, and they haven't been getting a lot of credit for blowing away ests," says Jason Schrotberger, of Turner Investment Partners. "If Kotick is cleared, then the stock will rally pretty hard," says Schrotberger. "I like the slate of games they've got, but I'd like to see them get the options stuff behind them," before buying Activision stock, adds Kenneth Turek, of Neuberger Berman.
“Inside Track” section reports that even as Texas Industries (TXI) maintains its silence regarding buyout talks instigated by a major shareholder, insiders are selling co shares, suggesting a deal isn't on the horizon. Egyptian investor Nassef Sawiris disclosed last month that he had accumulated a 2.3% stake in the co and controlled options that, if exercised, would boost the stake to 9.1%. Mr. Sawiris said he may push for the co to be sold and may attempt to seek control of the co himself "through a negotiated transaction or otherwise." But recent stock sales by Chmn Robert D. Rogers and 2 co VPs suggest the insiders don't expect the co to be sold for a premium price any time soon, said Ben Silverman, of InsiderScore.com.
According to the Barron’s Online, Activision (ATVI) is a game that investors may want to play. Game makers' stocks are cyclical, and the expected arrival this month of new game machines from Sony (SNE) and Nintendo is giving investors confidence a new round of game sales will boost profits for years to come. Activision stock is cheaper than that of rival Electronic Arts (ERTS), and the co offers higher growth based on the next installments of proven game franchises, such as "SpiderMan 3" and "Shrek 3," due next year. But if CEO Bobby Kotick, who investors describe as synonymous with the co's success, departs, the shares could fall 15% or more, say investors. If he stays, Activision could surge as investors breath a sigh of relief. One way to handle that uncertainty is to buy May 15 calls of Activision. "They've got some huge blockbuster movie [tie-ins] coming out, and they haven't been getting a lot of credit for blowing away ests," says Jason Schrotberger, of Turner Investment Partners. "If Kotick is cleared, then the stock will rally pretty hard," says Schrotberger. "I like the slate of games they've got, but I'd like to see them get the options stuff behind them," before buying Activision stock, adds Kenneth Turek, of Neuberger Berman.
Tuesday, November 07, 2006
Calls of Note Part 6
- FBR reiterates Outperform rating and $17 price target on shares of Arris (NASDAQ:ARRS), and views the stock's weakness Monday as a compelling buying opportunity for equity investors. First, they see few major risks related to the key fundamental question over the use of proceeds in any likely M&A scenario, and expect much of the overhang from the convert to lift as Arris' strategy takes shape. Second, they believe the offering signals management's confidence in the company's outlook, reinforcing their own checks that reveal improving demand and solid execution by the company. After perhaps a bit more downside in the very near term as convert buyers hedge positions, firm sees a compelling risk/reward for the shares, with as much as 50% upside over the next few quarters.
Firm views the mixture of share price pressure, increased volume, and a temporary "buyers' strike" due to the convert offering as a chance for investors with risk appetite to accumulate Arris shares at a significant discount to fundamental value. While it is difficult to call a bottom on this volatile name, they think the risk/reward at this point strongly favors long positions--and would be aggressive buyers while this window remains open.
Cash- adjusted ($2/share and a $0.06 EPS impact), the shares trade at 14x 2007E EPS. FBR thinks they should trade at a premium to the peer mean of 19x; $17 price target is based on 20x 2007E EPS plus $3/ share in cash by YE07.
Notablecalls: Would be looking for a bounce. The ideal trade would me to catch ARRS around $11 but I'm not sure it will get there.
Firm views the mixture of share price pressure, increased volume, and a temporary "buyers' strike" due to the convert offering as a chance for investors with risk appetite to accumulate Arris shares at a significant discount to fundamental value. While it is difficult to call a bottom on this volatile name, they think the risk/reward at this point strongly favors long positions--and would be aggressive buyers while this window remains open.
Cash- adjusted ($2/share and a $0.06 EPS impact), the shares trade at 14x 2007E EPS. FBR thinks they should trade at a premium to the peer mean of 19x; $17 price target is based on 20x 2007E EPS plus $3/ share in cash by YE07.
Notablecalls: Would be looking for a bounce. The ideal trade would me to catch ARRS around $11 but I'm not sure it will get there.
Calls of Note Part 5
- Oppenheimer comments on on Wal-Mart (NYSE:WMT) saying that as the holiday season approaches, the outlook for profit growth is clouded by weak sales, an improper women's apparel assortment, and the need for heavy apparel clearances. Risks of a pull back for WMT shares have increased, but they still believe strongly that Wal-Mart's changes will produce greater profits and multi-year appreciations for WMT shares.
October's 0.5% same-store sales gain for the Wal-Mart stores was the weakest since November 04's deeply disappointing results. November 06 is shaping up as another disappointing sales month, the third in a row.
Remodeling and special projects were supposed to be completed by the end of October, but will carry through mid-November. Shoppers rejected much of the women's apparel assortments for fall, especially skinny jeans, which are too far ahead on the fashion curve for most WMT shoppers: They want basic styles. Metro 7 expanded into 1,500 stores but sells well in only 600.
Large quantities of apparel are marked down for clearance. OpCo expects heavy clearances to continue for several months. With hot prices for holiday goods, toys and electronics particularly, WMT hopes to get through the season successfully, but the basis for that conviction seems tenuous. The firm has abandoned their expectation that for 4Q/06 WMT might surprise on the upside.
A reduction in capex would increase cash flow, EPS, shares repurchases, dividends, and ROI--assuming profits (R) remain unchanged or improve.
The major factor, by far, in firm's opinion, that contributed to Wal-Mart's unimpressive ROI was that it fell behind the times in appearance, service, and product quality, while it invested heavily to build stores and infrastructure. It is now correcting its operating deficiencies. They have a strengthening conviction that as the field organization gains experience and buying changes are made, Wal-Mart's new look and attitude will generate
same-store sales and profit growth within the next 12-18 months.
The designer for US Wal-Mart's new look is the same person who reworked Mexico's Suburbia stores, which are a big success story for Wal-Mart de Mexico (WMMVY).
To overcome a decade of neglect, Wal-Mart is engaged in a huge corrective effort. OpCo foresees strong benefits for Wal-Mart, and a tsunami spreading across much of retailing. Maintains Buy.
Notablecalls: Outstanding Investor Digest highlighted Bill Miller of Legg Mason, Arnold Van Den Berg of Century Management, and Bill Nygren of Oakmark Funds all being high on large caps. WMT was a among the favourites with PFE, MSFT, DELL and GE. Not telling to buy WMT here but I think that the pessimism surrounding the name lately has become a bit excessive.
October's 0.5% same-store sales gain for the Wal-Mart stores was the weakest since November 04's deeply disappointing results. November 06 is shaping up as another disappointing sales month, the third in a row.
Remodeling and special projects were supposed to be completed by the end of October, but will carry through mid-November. Shoppers rejected much of the women's apparel assortments for fall, especially skinny jeans, which are too far ahead on the fashion curve for most WMT shoppers: They want basic styles. Metro 7 expanded into 1,500 stores but sells well in only 600.
Large quantities of apparel are marked down for clearance. OpCo expects heavy clearances to continue for several months. With hot prices for holiday goods, toys and electronics particularly, WMT hopes to get through the season successfully, but the basis for that conviction seems tenuous. The firm has abandoned their expectation that for 4Q/06 WMT might surprise on the upside.
A reduction in capex would increase cash flow, EPS, shares repurchases, dividends, and ROI--assuming profits (R) remain unchanged or improve.
The major factor, by far, in firm's opinion, that contributed to Wal-Mart's unimpressive ROI was that it fell behind the times in appearance, service, and product quality, while it invested heavily to build stores and infrastructure. It is now correcting its operating deficiencies. They have a strengthening conviction that as the field organization gains experience and buying changes are made, Wal-Mart's new look and attitude will generate
same-store sales and profit growth within the next 12-18 months.
The designer for US Wal-Mart's new look is the same person who reworked Mexico's Suburbia stores, which are a big success story for Wal-Mart de Mexico (WMMVY).
To overcome a decade of neglect, Wal-Mart is engaged in a huge corrective effort. OpCo foresees strong benefits for Wal-Mart, and a tsunami spreading across much of retailing. Maintains Buy.
Notablecalls: Outstanding Investor Digest highlighted Bill Miller of Legg Mason, Arnold Van Den Berg of Century Management, and Bill Nygren of Oakmark Funds all being high on large caps. WMT was a among the favourites with PFE, MSFT, DELL and GE. Not telling to buy WMT here but I think that the pessimism surrounding the name lately has become a bit excessive.
Calls of Note Part 4
- Citigroup comment on Palm (NASDAQ:PALM) after news that NTP were suing the co for patent infringement. NTP was the company that successfully sued and settled with RIMM recently. While litigation is clearly never desired, the timing is bad for Palm given the ramping competitive pressure as vendors target the pro-sumer smartphone space.
At the same time, the company needs its cash balances in order to fund product development in order to address the new competition. At best, the litigation would be a mgmt distraction. At worst, it could influence carrier decisions around how aggressively to stock and market Palm's products.
Some had held out hope that Palm would be acquired. Citigroup thinks that it is unlikely that this would occur while the litigation is ongoing. The arrival of a deep-pocketed suitor would only increase the demands from NTP.
Even with the decline in the stock, they do not see a favorable risk-reward. Maintains Hold and $15 tgt.
Notablecalls: While I have been expecting the stock to go down, I can take no credit for what happened yesterday. Things continue to worsen for PALM.
At the same time, the company needs its cash balances in order to fund product development in order to address the new competition. At best, the litigation would be a mgmt distraction. At worst, it could influence carrier decisions around how aggressively to stock and market Palm's products.
Some had held out hope that Palm would be acquired. Citigroup thinks that it is unlikely that this would occur while the litigation is ongoing. The arrival of a deep-pocketed suitor would only increase the demands from NTP.
Even with the decline in the stock, they do not see a favorable risk-reward. Maintains Hold and $15 tgt.
Notablecalls: While I have been expecting the stock to go down, I can take no credit for what happened yesterday. Things continue to worsen for PALM.
Calls of Note Part 3
- Morgan Stanley says they are surprised by the strength of Staples (NASDAQ:SPLS) brand following a survey the firm conducted. Customer base is more loyal than its peers and less willing to shop other outlets. Demand for SPLS stores remains strong even in areas of higher concentration. These factors should continue to support square footage and overall top line growth in future years.
Office super stores likely to continue gaining share from local shops. All of the office super stores had stronger customer perceptions than the local office supply store. This suggests that super stores are likely to continue gaining share from this group.
SPLS customer is less likely to shop alternatives. Firm's survey data suggests that SPLS less willing to shop competitors than their peers. 46% of the customer base surveyed is likely to shop other super stores vs close to 60% for OMX and over 50% for ODP. Further, a greater portion of SPLS customers are expected to shop SPLS more frequently compared to OMX customers shopping OMX and ODP customers shopping ODP.
The firm now has increased confidence in their Overweight rating of SPLS given the strong brand loyalty and demand for new locations. They believe these factors should support future growth. Continue to see fair value for the stock in the $28-30 range based on a variety of valuation metrics.
Notablecalls: Is this an actionable trading call? Ofc not! But I guess it's something for the investing types.
Office super stores likely to continue gaining share from local shops. All of the office super stores had stronger customer perceptions than the local office supply store. This suggests that super stores are likely to continue gaining share from this group.
SPLS customer is less likely to shop alternatives. Firm's survey data suggests that SPLS less willing to shop competitors than their peers. 46% of the customer base surveyed is likely to shop other super stores vs close to 60% for OMX and over 50% for ODP. Further, a greater portion of SPLS customers are expected to shop SPLS more frequently compared to OMX customers shopping OMX and ODP customers shopping ODP.
The firm now has increased confidence in their Overweight rating of SPLS given the strong brand loyalty and demand for new locations. They believe these factors should support future growth. Continue to see fair value for the stock in the $28-30 range based on a variety of valuation metrics.
Notablecalls: Is this an actionable trading call? Ofc not! But I guess it's something for the investing types.
Calls of Note Part 2
- Baird believes Sigma Designs (NASDAQ:SIGM) is very well positioned to enjoy new multi-year product cycles including a first- to-market position in Ultrawideband, the basis for three standards and representing a large market potential. Microsoft IP STBs just starting to ramp. Cable STBs to start migrating to H.264/VC1 late next year. HDTV another large opportunity as Sigma offers the only integrated H.264/VC1/video processor with security layers on the market. Raising price target to $26 from $21.
Ultrawideband, a new multi-year product cycle for Sigma. First to market with a CMOS-based UWB solution, Sigma is potentially targeting high-volume opportunities in PCs and mobile applications.
Cable set-top boxes to start migrating to H.264 in 2007/2008. Motorola and other key set-top box vendors currently using Sigma Designs' decoders engaged in discussions with cable operators to integrate H.264- VC-1 in next-generation set-top boxes.
In IP set-top boxes, Sigma's momentum in previous quarter was all non-Microsoft. Revenues from Microsoft-based wins ramping starting in October quarter - all tier-one telcos. UTSTarcomm momentum also picking up.
In HDTV, no one but Sigma offers a video processor integrating H.264/VC-1 and the security layers compatible with Microsoft's DRMs. With the migration to lower geometry nodes, Sigma could be a major play in the HDTV market starting in 2007.
Blu-Ray DVD players: six wins for Sigma, three ramping starting this year.
Notablecalls: Were the stock trading around $15-$16 I'd recommend buying aggressively. Following the recent 3-month run I'm not so sure. In case you do buy, keep it on a tight leash as I think we may be pretty close to a medium-term top.
Ultrawideband, a new multi-year product cycle for Sigma. First to market with a CMOS-based UWB solution, Sigma is potentially targeting high-volume opportunities in PCs and mobile applications.
Cable set-top boxes to start migrating to H.264 in 2007/2008. Motorola and other key set-top box vendors currently using Sigma Designs' decoders engaged in discussions with cable operators to integrate H.264- VC-1 in next-generation set-top boxes.
In IP set-top boxes, Sigma's momentum in previous quarter was all non-Microsoft. Revenues from Microsoft-based wins ramping starting in October quarter - all tier-one telcos. UTSTarcomm momentum also picking up.
In HDTV, no one but Sigma offers a video processor integrating H.264/VC-1 and the security layers compatible with Microsoft's DRMs. With the migration to lower geometry nodes, Sigma could be a major play in the HDTV market starting in 2007.
Blu-Ray DVD players: six wins for Sigma, three ramping starting this year.
Notablecalls: Were the stock trading around $15-$16 I'd recommend buying aggressively. Following the recent 3-month run I'm not so sure. In case you do buy, keep it on a tight leash as I think we may be pretty close to a medium-term top.
Calls of Note Part 1
- Piper Jaffray comments on Apple Computer (NASDAQ:AAPL) saying that based on their
conversations with Adobe creative professionals, they believe the upcoming release of CS3, which will be the first version of Adobe's Creative Suite that is optimized for Intel-based Macs, will be a catalyst for new Mac sales. Specifically, the firm recently spoke with 50 Adobe customers and found that 24% expect to buy a new Mac within 2 quarters of the release of Adobe's CS3. CS3 is expected to be released in April 2007. Current versions of Adobe's creative products, such as Creative Suite, Photoshop, etc., do not run at full efficiency on Intel-based Macs. The bottom line is that there is significant pent-up demand for Intel-based Macs among the Adobe creative pro community. Adobe creative pro customers cannot run their Adobe apps at full efficiency on an Intel-based Mac until CS3 is released, so many are waiting until that time to upgrade their machines.
If these customers upgrade to a new Mac within the first 2 quarters following CS3 release (Jun-07 & Sep-07 quarters), one can expect 288k Macs sold to Adobe creative pros in each of those 2 quarters. That would be 138k more Macs per quarter than the firm had been anticipating, as they had been using an estimate of 150k Macs per quarter to Adobe creative pros. 138k more Macs sold to Adobe customers per quarter would add 7% ($0.04) to their EPS estimate in both the Jun-07 and Sep-07 quarters.
Reits Outpeform and $99 tgt.
Notablecalls: So, PJ is calling for an $0.08 upside in their EPS. The stock is trading around 25x FY07 consensus EPS implying $2 upside in price. At least that's how it should work theoretically. IN reality, I do like AAPL's chart here and I think there may be some buy interest today. Would keep it on a tight leash and would definitely not chase any gaps up.
conversations with Adobe creative professionals, they believe the upcoming release of CS3, which will be the first version of Adobe's Creative Suite that is optimized for Intel-based Macs, will be a catalyst for new Mac sales. Specifically, the firm recently spoke with 50 Adobe customers and found that 24% expect to buy a new Mac within 2 quarters of the release of Adobe's CS3. CS3 is expected to be released in April 2007. Current versions of Adobe's creative products, such as Creative Suite, Photoshop, etc., do not run at full efficiency on Intel-based Macs. The bottom line is that there is significant pent-up demand for Intel-based Macs among the Adobe creative pro community. Adobe creative pro customers cannot run their Adobe apps at full efficiency on an Intel-based Mac until CS3 is released, so many are waiting until that time to upgrade their machines.
If these customers upgrade to a new Mac within the first 2 quarters following CS3 release (Jun-07 & Sep-07 quarters), one can expect 288k Macs sold to Adobe creative pros in each of those 2 quarters. That would be 138k more Macs per quarter than the firm had been anticipating, as they had been using an estimate of 150k Macs per quarter to Adobe creative pros. 138k more Macs sold to Adobe customers per quarter would add 7% ($0.04) to their EPS estimate in both the Jun-07 and Sep-07 quarters.
Reits Outpeform and $99 tgt.
Notablecalls: So, PJ is calling for an $0.08 upside in their EPS. The stock is trading around 25x FY07 consensus EPS implying $2 upside in price. At least that's how it should work theoretically. IN reality, I do like AAPL's chart here and I think there may be some buy interest today. Would keep it on a tight leash and would definitely not chase any gaps up.
Paperstand
The WSJ’s „Heard on the Street” colim discusses AstraZeneca (AZN), whose CEO took the co over almost a year ago. Some investors worry the co's problems are mounting faster than CEO David Brennan can fix them, raising concerns about AstraZeneca's long-term future. After disclosing late last month that another of its experimental drugs had failed in human testing, the co now has just one product, a cardiovascular drug, in its pipeline with the potential to contribute to sales before 2010, analysts say. Even though Mr. Brennan and his predecessor have managed to deliver strong earnings in recent quarters by slashing costs and marketing existing products well, most of AstraZeneca's fat has been cut. Some investors fear sales of AstraZeneca's biggest drug, the heartburn medication Nexium, will suffer as managed-care co’s in the US force their patients to use lower-cost generic versions. Anne Marieke Ezendam, of Threadneedle Global Healthcare Fund, said she sold all of her AstraZeneca stock in the past 6 weeks. The trigger, she says, was UnitedHealth's announcement in Sep that it would stop paying for Nexium. She fears other big health plans will follow suit. "I think they will have a real struggle next year" getting Nexium onto the lists of approved drugs that health plans revise periodically, she said.
The Barron’s Online reports that ValueAct Capital has expanded its holdings of Hanover Compressor (HC). ValueAct shelled out a total of $20.2m for 1,140,900 Hanover shares. With its "very aggressive" spate of buying over the last 2 months, ValueAct is now Hanover's largest shareholder, notes Ben Silverman, of InsiderScore.com. ValueAct now holds 11.6m shares, or 11.2%.
Monday, November 06, 2006
Calls of Note Part 5
- Goldman Sachs comments on AU Optronics (NYSE:AU) noting that typically the TFT-LCD panel price trend does not go flat for a sustainable period. Prices tend to fall if they fail to go up. Panel makers have been attempting to raise 32" TV panel prices since 1H-Aug owing to continuing operating losses for TV panel sales at most panel makers. However, negotiations have remained tight with the result that prices stagnated at US$365 for the past 6 settlements.
As seasonal demand is now peaking out, negotiation power has started to shift to panel buyers, with the result that 1H-Nov. marked a decline of 1.4% for the mainstream 32" to US$360. 17" and 19" monitor panels stayed flat sequentially at US$130 and US$150 respectively. Firm sees the risk of a price cut as early as Dec. The 15.4" notebook panel price rose 1.9% to US$106 on still better notebook rather than desktop PC demand. They also see limited upside for notebook panel prices.
Goldman thinks panel makers are, and will still be in 2007, in a period of "growing pains" related to strong LCD TV demand growth. Another strong 50% yoy 2007 TV unit demand growth is likely to again be supported by around a 20% yoy TV price cut. This will lead to still below 10% operating margins and ROE even at tier one panel makers. Maintains Neutral on AUO.
Notablecalls: While there is nothing new to be found in this note, it reinforces my negative views on the LCD panel sector. This is also not good for GNSS; TRID etc.
As seasonal demand is now peaking out, negotiation power has started to shift to panel buyers, with the result that 1H-Nov. marked a decline of 1.4% for the mainstream 32" to US$360. 17" and 19" monitor panels stayed flat sequentially at US$130 and US$150 respectively. Firm sees the risk of a price cut as early as Dec. The 15.4" notebook panel price rose 1.9% to US$106 on still better notebook rather than desktop PC demand. They also see limited upside for notebook panel prices.
Goldman thinks panel makers are, and will still be in 2007, in a period of "growing pains" related to strong LCD TV demand growth. Another strong 50% yoy 2007 TV unit demand growth is likely to again be supported by around a 20% yoy TV price cut. This will lead to still below 10% operating margins and ROE even at tier one panel makers. Maintains Neutral on AUO.
Notablecalls: While there is nothing new to be found in this note, it reinforces my negative views on the LCD panel sector. This is also not good for GNSS; TRID etc.
Calls of Note Part 4
- RBC Capital notes that for investors willing to stomach some uncertainly for beta, 3Com's (NASDAQ:COMS) shares may represent an opportunity. On November 15, 3Com can opt to
increase its stake in the H3C-JV from 51% to 100%. The JV so far has been successful in its targeted markets and has displayed top-line growth of 77% YoY ($170M in the recent quarter). Huawei meanwhile is very keen to sell its 49% stake, making for a tidy and simple transaction. However, price may be the sticking point, which is why PE-firms have been thrown in the mix, adding volatility to 3Com's shares.
While uncertainty may decrease and help the shares if 3Com gains full control of the JV, it may be offset by the decrease in cash value that may lower the cushion on the base-value of the stock. 3Com can instead sell its stake, netting a hefty profit, but then what? As 3Com would have lost the most valuable part of its business. They believe the bulk of the proceeds will be tax-free.
Considering a multiple of its projected-sales for CY07 (assume $850M), the firm estimates the value of the JV may be $1.5-$1.8B. With that said, 3Com may need to offer a price between $750M-$900M for the full remaining stake. 3Com currently has $1B in net-cash or $2.58/per share. RBC estimates 3Com may want to keep a cushion of at least $200M. Another scenario may end with 3Com obtaining 80% of the JV and leaving the balance as a good-faith gesture.
Thinks 3Com's shares may be attractive near the $3.50-$4.00 range. Book value is currently $3.05. 3Com trades at 0.6x CY07 revenue estimate excluding its net cash position. The peer group currently trades at 2.0x CY07 revenue estimates net cash per share. RBC's price target remains $5.
Notablecalls: Is RBC calling for a fall in COMS stock price? Think they are as there is very little chance the management can execute the deal so that everyone will be happy.
increase its stake in the H3C-JV from 51% to 100%. The JV so far has been successful in its targeted markets and has displayed top-line growth of 77% YoY ($170M in the recent quarter). Huawei meanwhile is very keen to sell its 49% stake, making for a tidy and simple transaction. However, price may be the sticking point, which is why PE-firms have been thrown in the mix, adding volatility to 3Com's shares.
While uncertainty may decrease and help the shares if 3Com gains full control of the JV, it may be offset by the decrease in cash value that may lower the cushion on the base-value of the stock. 3Com can instead sell its stake, netting a hefty profit, but then what? As 3Com would have lost the most valuable part of its business. They believe the bulk of the proceeds will be tax-free.
Considering a multiple of its projected-sales for CY07 (assume $850M), the firm estimates the value of the JV may be $1.5-$1.8B. With that said, 3Com may need to offer a price between $750M-$900M for the full remaining stake. 3Com currently has $1B in net-cash or $2.58/per share. RBC estimates 3Com may want to keep a cushion of at least $200M. Another scenario may end with 3Com obtaining 80% of the JV and leaving the balance as a good-faith gesture.
Thinks 3Com's shares may be attractive near the $3.50-$4.00 range. Book value is currently $3.05. 3Com trades at 0.6x CY07 revenue estimate excluding its net cash position. The peer group currently trades at 2.0x CY07 revenue estimates net cash per share. RBC's price target remains $5.
Notablecalls: Is RBC calling for a fall in COMS stock price? Think they are as there is very little chance the management can execute the deal so that everyone will be happy.
Calls of Note Part 3
- JP Morgan notes they believe the adoption of Advanced Metering Infrastucture (AMI) will drive re-acceleration of growth for Itron (NASDAQ:ITRI) in 2007, however the size and complexity of AMI contracts may lengthen the sales cycle and push ITRI's top-line re-acceleration into late2007/early 2008.
The firm is therefore trimming their 2007 estimates to align more closely with the November 1st guidance; 10-22% PF EPS growth on 5-11% sales growth. Firm's revised forecast of $2.72 PF EPS on sales of $689mm, puts us at the mid-point with PF EPS growth of 14% on sales growth of 7%. The revision should also re-set consensus at a more conservative level that will allow for more constructive interpretation of results.
They leaving their Focus List Price Target unchanged at $69, but are revising target date to December 31st, 2007. The target date reflects firm's view of the appropriate time-horizon in which the AMI investment thesis plays out. The price target is based on an assigned P/E multiple of 22 times 08 PF EPS of $3.12. JP Morgan originally added ITRI to the focus list on July 10th at $53.15, with the expectation of a 30% return in one-year, which now turns into a 17-month time-horizon.
Notablecalls: JP Morgan has been one of the more outspoken bulls on ITRI. Now their 2007 EPS est is a tad below consensus. I'm not sure this will have an immediate impact on the stock price but I would not be surprised to see ITRI lower from current levels at some point between now and Dec 31 2007.
The firm is therefore trimming their 2007 estimates to align more closely with the November 1st guidance; 10-22% PF EPS growth on 5-11% sales growth. Firm's revised forecast of $2.72 PF EPS on sales of $689mm, puts us at the mid-point with PF EPS growth of 14% on sales growth of 7%. The revision should also re-set consensus at a more conservative level that will allow for more constructive interpretation of results.
They leaving their Focus List Price Target unchanged at $69, but are revising target date to December 31st, 2007. The target date reflects firm's view of the appropriate time-horizon in which the AMI investment thesis plays out. The price target is based on an assigned P/E multiple of 22 times 08 PF EPS of $3.12. JP Morgan originally added ITRI to the focus list on July 10th at $53.15, with the expectation of a 30% return in one-year, which now turns into a 17-month time-horizon.
Notablecalls: JP Morgan has been one of the more outspoken bulls on ITRI. Now their 2007 EPS est is a tad below consensus. I'm not sure this will have an immediate impact on the stock price but I would not be surprised to see ITRI lower from current levels at some point between now and Dec 31 2007.
Calls of Note Part 2
- Piper Jaffray has some interesting comments on Palm (NASDAQ:PALM) saying based on monthly handset channel checks, they believe Palm Treo sales were solid at Sprint during October, but Treo sales were weak at Verizon and Cingular.
Despite an increased $100 mail-in rebate reducing Treo prices to $299, checks indicated weak demand for the Treo 700p and 700w at Verizon stores due to price cuts in the competing Motorola Q phone. With a $100 mail-in rebate added for the Motorola Q, the price to consumers fell to $99, which resulted in re-accelerating Q sales and lower Treo sales, according to firm's checks. Further, the BlackBerry 8703e introduction also appeared to negatively impact Treo sales.
At Cingular, checks indicated Treo 650 sales remained weak due to stronger demand for the Nokia E62, HTC 8125 and BlackBerry 8700. However, Cingular store managers indicated several new smartphones will launch by year-end, and they believe this includes the 'blackjack" by Samsung, "pearl" by Blackberry, 8525, and the Treo 680 and 750v. While the firm believes the two Treo launches at Cingular will improve trends for Palm at this channel, they are somewhat surprised by the total number of smartphones Cingular could potentially offer.
Overall, they believe Palm sales trends are tracking in line with PJ November quarter pro forma EPS of $0.22. Maintains $16 tgt and Mkt Perform rating.
Notablecalls: Looks like the competition is still a major drag for PALM. As I'm not aware of any new-new products coming from the co, Christmas sales will likely fall short of analyst expectations. With the shares trading 17-18x consensus EPS that's probably too high, I think the stock will be lower over the next couple of weeks.
Despite an increased $100 mail-in rebate reducing Treo prices to $299, checks indicated weak demand for the Treo 700p and 700w at Verizon stores due to price cuts in the competing Motorola Q phone. With a $100 mail-in rebate added for the Motorola Q, the price to consumers fell to $99, which resulted in re-accelerating Q sales and lower Treo sales, according to firm's checks. Further, the BlackBerry 8703e introduction also appeared to negatively impact Treo sales.
At Cingular, checks indicated Treo 650 sales remained weak due to stronger demand for the Nokia E62, HTC 8125 and BlackBerry 8700. However, Cingular store managers indicated several new smartphones will launch by year-end, and they believe this includes the 'blackjack" by Samsung, "pearl" by Blackberry, 8525, and the Treo 680 and 750v. While the firm believes the two Treo launches at Cingular will improve trends for Palm at this channel, they are somewhat surprised by the total number of smartphones Cingular could potentially offer.
Overall, they believe Palm sales trends are tracking in line with PJ November quarter pro forma EPS of $0.22. Maintains $16 tgt and Mkt Perform rating.
Notablecalls: Looks like the competition is still a major drag for PALM. As I'm not aware of any new-new products coming from the co, Christmas sales will likely fall short of analyst expectations. With the shares trading 17-18x consensus EPS that's probably too high, I think the stock will be lower over the next couple of weeks.
Calls of Note Part 1
- Piper Jaffray comments on Motorola (NYSE:MOT) saying checks indicate strong North American trends, and they believe Motorola remains well-positioned to grow its dominant share during Q406.
Firm believes RAZR sales at Verizon Wireless improved during October, primarily due to the lowered price point of $50 from $100 in September. Also, they noted strong initial KRZR phone sales at Verizon. In addition, they believe Q sales improved m/m, mainly due to the lower price point of $100 from $200 in September.
According to checks, Motorola's RAZR continued to enjoy strong GSM phone sales at T-Mobile, mainly due to a price drop to $50 from $70 in September. Further, store managers indicated the $150 RAZR V3T music enabled phone and $70 tattoo RAZRs were also selling very well. While Samsung's Ultrathin platform products continued selling well, the firm believes the refreshed RAZR products led to increased sell through trends for Motorola.
In addition, RAZR continued to post strong sales at most Cingular stores. However, PEBL and SLVR sales at most T-Mobile and Cingular stores appeared flat to slightly down, mainly due to lack of attractive promotional activities for these phones.
Maintains Outpeform and $27 tgt.
Notablecalls: So the phones aren't selling unless the price is cut in half? Makes me say hmmm! Maybe this won't impact MOT this qtr, maybe it will. The stock is sitting pretty right at its 200MA. That tells me that at least SOME of this is already priced in. Think we will see some selling pressure in the very n-t and then a short covering rally. Still, I would not want to be long MOT into earnings. Would adjust my position accordingly.
Firm believes RAZR sales at Verizon Wireless improved during October, primarily due to the lowered price point of $50 from $100 in September. Also, they noted strong initial KRZR phone sales at Verizon. In addition, they believe Q sales improved m/m, mainly due to the lower price point of $100 from $200 in September.
According to checks, Motorola's RAZR continued to enjoy strong GSM phone sales at T-Mobile, mainly due to a price drop to $50 from $70 in September. Further, store managers indicated the $150 RAZR V3T music enabled phone and $70 tattoo RAZRs were also selling very well. While Samsung's Ultrathin platform products continued selling well, the firm believes the refreshed RAZR products led to increased sell through trends for Motorola.
In addition, RAZR continued to post strong sales at most Cingular stores. However, PEBL and SLVR sales at most T-Mobile and Cingular stores appeared flat to slightly down, mainly due to lack of attractive promotional activities for these phones.
Maintains Outpeform and $27 tgt.
Notablecalls: So the phones aren't selling unless the price is cut in half? Makes me say hmmm! Maybe this won't impact MOT this qtr, maybe it will. The stock is sitting pretty right at its 200MA. That tells me that at least SOME of this is already priced in. Think we will see some selling pressure in the very n-t and then a short covering rally. Still, I would not want to be long MOT into earnings. Would adjust my position accordingly.
Paperstand
The WSJ’s „Heard on the Street” column discusses Repsol (REP), whose stock has rallied 16% in past 2 months. Everyone thinks it is up for sale. Repsol has been assailed by talk of a possible takeover bid by a big oil multinational or a European rival flush with cash after years of high crude prices. The thinking is that Repsol, despite its small size, is appealing b/c of its still-impressive refining operations. In the past few months, co’s such as BP (BP), Royal Dutch Shell (RDSA) and ENI all have had to issue public denials that they were looking at Repsol, after a surge of mkt speculation. Despite the rampant speculation, investors might want to be wary. Repsol faces a triple-witching hour that threatens to push its shares back to earth. Its shares trade at about 10.3x estd ‘07 earnings, making its stock more expensive than its peer group at a 10.1 avg ratio. Many analysts, at Citigroup and Merrill Lynch, for instance, have become bearish on the stock. Citigroup rates the stock a Hold and has a tgt price of €21. Merrill Lynch has a Neutral rating.
Sunday, November 05, 2006
Barron's Summary
Barron’s cover story discusses US markets generally. One hedge fund manager has built his cash position to 30% of assets under mgmt. He thinks the Dow will fall to 11,300 by year end, and slide to 10,900 by mid-‘07. Several fund managers highlighted favour McCormick (MKC), Kellogg (K), P&G (PG), Dell (DELL), Genentech (DNA), J&J (JNJ), Coca-Cola (KO), White Mountains Insurance (WTM) and Talisman Energy (TLM). Managers say most overvalued issue is Google (GOOG), other pans include General Motors (GM), Ford (F) and CME (CME).
Notablecalls: In the name of truth, we must add that: „The Big Money Poll's report card shows that the stocks money managers deemed most overvalued in the fall '05 and spring '06 surveys in fact delivered greater returns in the ensuing months than the stocks the pros liked most. Blame the BlackBerry: Shares of Research in Motion (RIMM) boosted returns for the pans by rising 44% over 6 months, and 79% over 12.”
So, should we buy Google?
Fund manager picks highlighted. US listed co’s include CVS and BAB.
Evercore (EVR) shares, which have surged from 21 after an August IPO to a recent 35, could easily fall into the 20s if the merger boom subsides or the firm loses mkt share.
Now about 133, the shares of Potash (POT) could bounce around over short stretches. But they're likely to top bullish price targets of 145 and keep climbing for the rest of the decade.
As recently as April, ASV (ASVI) shares were near 35. Now they're at 14.50 and some investors say 10 would be a better reflection of the bulldozer maker's prospects.
„The Trader” section discusses Chico’s FAS (CHS), whose stock dropped about 13% last week on weak comps. James Hardesty, CIO at Hardesty Capital Mgmt began buying shares back in Aug and Sep, and he bought some more last week. The co is partly suffering from the national retail slowdown, he says, but Chico's is focusing its expansion investments on White House/Black Mkt, which has many fewer outlets than the Chico's stores, and a nice demographic, the avg customer is 42 and has annual income of $75K. The co should get itself back on track by next year, at a much lower-than-historical growth rate, but still good, of 20%, he adds. And since the stock now trades at about 16x earnings ests of $1.28 a share for the fiscal Jan’08, it's an opportunity, he contends. There are other interesting long-term bullish signs, too, like increased buying of shares by insiders.
“The Trader” section also suggests that CIT (CIT) shares could get a lift if the co opts to spin off its valuable aircraft-leasing business. On the co's earnings conference call last month, CEO Jeff Peek said CIT is "clearly examining ways in which we could monetize some of the value in our portfolio" of aircraft leases. Peek, a former Merrill Lynch exec, said CIT expects to make a decision by year-end.
Friday, November 03, 2006
Several firms commenting Whole Foods Market (NASDAQ:WFMI) following disappointing results issued last night.
- Morgan Stanley notes Whole Foods reported in-line EPS for 4Q; however, comps have decelerated, and store pre-opening expenses will be up far more than Street expectations. These two negatives prompt them to sharply reduce 2007 estimates. Given WFMI's premium valuation, they expect reactionary selling in early trading.
Firm believes WFMI shares will likely give up the valuation recovery posted since August. Looking at historical valuation bottoms, they expect shares to bottom out at 27-30x calendar 2007 P/E ($42-$47). As the bar has now been reset for this "transition year", and comp expectations have
now dropped to 6-8% (from double digits last few years) firm believes near-term EPS estimate risk has been flushed out. As they are attracted to Whole Food's long-term 20% earnings growth story, if shares get to 30x or below, firm recommends investors use the lower valuations to add to positions.
Price tgt goes to $63 from $70; F2007 EPS to $1.50 from $1.65.
- Goldman Sachs saying Whole Foods' transition to more square footage-driven top-line growth is proving much more painful than they (or the Street) had expected. Preopening costs could well double in 2007 even as comp growth moderates to a more normalized 7%-8%. As a result, EPS growth will likely remain below trend for the next two years. Firm is reducing their 2007 EPS estimate $0.12 to $1.53 and their 2008 forecast $0.16 to $1.77--they look for $2.15 in 2009. Firm believes the shares could trade below $50 tomorrow. Firm is lowering price target $7 or 11% to $59.86; would be inclined to take a hard look at the shares at or below $45.
- Bear Stearns the most negative out there, saying that multiple compression likely to follow downward earning revisions. Firm has had trouble recommending WFMI at multiples well above it 15 to 20% normalized growth. While growth retailers can trade at multiples more than double its growth rate during periods of earnings acceleration, inevitably those multiples revert back to the mean as the growth rate slows. WFMI appears to be entering that deceleration period, which likely will result in a re-assessment of the valuation premium. While WFMI may be able to re-accelerate its growth sometime during 2008, firm is not sure growth investors will be willing to wait that long, or at least not at the same premium. Applying a more conservative multiple of 20x to 25x PE to our new F2007 EPS of $1.48 implies a price range of $30 to $37, indicating significant downside still exists.
Notablecalls: Have to agree with Bear Stearns here. I dont feel like paying 30x EPS for mid-teens (and slowing) growth. The stock was trading at $50-$52 after expecting 15-20% growth for F2007 in August. With 13-17% growth expectation now, don't think the stock should trade higher than it was back then. Expecting lower price today than in the afterhours yesterday, most probably going sub-$50.
- Morgan Stanley notes Whole Foods reported in-line EPS for 4Q; however, comps have decelerated, and store pre-opening expenses will be up far more than Street expectations. These two negatives prompt them to sharply reduce 2007 estimates. Given WFMI's premium valuation, they expect reactionary selling in early trading.
Firm believes WFMI shares will likely give up the valuation recovery posted since August. Looking at historical valuation bottoms, they expect shares to bottom out at 27-30x calendar 2007 P/E ($42-$47). As the bar has now been reset for this "transition year", and comp expectations have
now dropped to 6-8% (from double digits last few years) firm believes near-term EPS estimate risk has been flushed out. As they are attracted to Whole Food's long-term 20% earnings growth story, if shares get to 30x or below, firm recommends investors use the lower valuations to add to positions.
Price tgt goes to $63 from $70; F2007 EPS to $1.50 from $1.65.
- Goldman Sachs saying Whole Foods' transition to more square footage-driven top-line growth is proving much more painful than they (or the Street) had expected. Preopening costs could well double in 2007 even as comp growth moderates to a more normalized 7%-8%. As a result, EPS growth will likely remain below trend for the next two years. Firm is reducing their 2007 EPS estimate $0.12 to $1.53 and their 2008 forecast $0.16 to $1.77--they look for $2.15 in 2009. Firm believes the shares could trade below $50 tomorrow. Firm is lowering price target $7 or 11% to $59.86; would be inclined to take a hard look at the shares at or below $45.
- Bear Stearns the most negative out there, saying that multiple compression likely to follow downward earning revisions. Firm has had trouble recommending WFMI at multiples well above it 15 to 20% normalized growth. While growth retailers can trade at multiples more than double its growth rate during periods of earnings acceleration, inevitably those multiples revert back to the mean as the growth rate slows. WFMI appears to be entering that deceleration period, which likely will result in a re-assessment of the valuation premium. While WFMI may be able to re-accelerate its growth sometime during 2008, firm is not sure growth investors will be willing to wait that long, or at least not at the same premium. Applying a more conservative multiple of 20x to 25x PE to our new F2007 EPS of $1.48 implies a price range of $30 to $37, indicating significant downside still exists.
Notablecalls: Have to agree with Bear Stearns here. I dont feel like paying 30x EPS for mid-teens (and slowing) growth. The stock was trading at $50-$52 after expecting 15-20% growth for F2007 in August. With 13-17% growth expectation now, don't think the stock should trade higher than it was back then. Expecting lower price today than in the afterhours yesterday, most probably going sub-$50.
Calls of Note Part 2
Deutsche Bank commenting what they call "silly season" for retailers as the retail stocks tend to be very volatile around the holiday season. As the holiday season approaches, investors (and analysts) can become very nervous given the importance of 4Q sales on full-year financial results. This leads to abnormal swings in stock prices, or what they call the "silly season". However, firm believes nimble investors can make money around this volatility, with our analysis highlighting three trading strategies to consider, including a look at some ndividual names.
Strategy 1: Play the retail index volatility, particularly for Jan/Feb gift card trade
The retail index tends to be volatile from November 15th through the end of February, by which point most retailers have reported holiday results. Firm believes over the past five years, this volatility has been somewhat predictable, with the index underperforming the market from
mid-November to mid-December, bouncing a bit later in December, falling off in January, and then rebounding sharply in February. Firm calls the Jan./Feb. movement the "gift card" trade and it has worked in three of the past four years.
Strategy 2: In December, own sub-sectors with less holiday sales exposure
For hardlines specifically, firm has found that the stocks with the most earnings leverage to the holiday season tend to perform the worst in December. They believe this occurs due to the heightened risks associated with companies that make a higher percentage of their profits over the holidays. For instance, the consumer electronics, home goods, and sporting goods sectors have typically underperformed the hardline group over the past five years, as these sectors tend to have more holiday earnings exposure. On the other hand, the auto parts, office products, and value retailers have outperformed other retailers and the market in general in December.
Strategy 3: Look at specific names with identifiable patterns - BBY, DKS, and SPLS come to mind
After strength in November, Best Buy (NSYE:BBY) tends to dip in December before reporting sales in January. Dick's Sporting Goods (NYSE:DKS) is similarly weak in December and January, but then strong in February. So, firm would buy those names on weakness. Staples (NASDAQ:SPLS) has outperformed the market in four of the past five years from November 15th through yearend, with the 3Q earnings report in mid-November likely the catalyst.
Notablecalls: Nothing outright actionable in this note. However, serves as a remainder that the retailers are extended and due for a pullback. As Wal Mart showed, there might be something rotten in the state of Denmark. BTW, don't get Deutsche's logic - if BBY and DKS are expected to be weak in December, why not suggesting shorting? Both charts suggest potential weakness.
Strategy 1: Play the retail index volatility, particularly for Jan/Feb gift card trade
The retail index tends to be volatile from November 15th through the end of February, by which point most retailers have reported holiday results. Firm believes over the past five years, this volatility has been somewhat predictable, with the index underperforming the market from
mid-November to mid-December, bouncing a bit later in December, falling off in January, and then rebounding sharply in February. Firm calls the Jan./Feb. movement the "gift card" trade and it has worked in three of the past four years.
Strategy 2: In December, own sub-sectors with less holiday sales exposure
For hardlines specifically, firm has found that the stocks with the most earnings leverage to the holiday season tend to perform the worst in December. They believe this occurs due to the heightened risks associated with companies that make a higher percentage of their profits over the holidays. For instance, the consumer electronics, home goods, and sporting goods sectors have typically underperformed the hardline group over the past five years, as these sectors tend to have more holiday earnings exposure. On the other hand, the auto parts, office products, and value retailers have outperformed other retailers and the market in general in December.
Strategy 3: Look at specific names with identifiable patterns - BBY, DKS, and SPLS come to mind
After strength in November, Best Buy (NSYE:BBY) tends to dip in December before reporting sales in January. Dick's Sporting Goods (NYSE:DKS) is similarly weak in December and January, but then strong in February. So, firm would buy those names on weakness. Staples (NASDAQ:SPLS) has outperformed the market in four of the past five years from November 15th through yearend, with the 3Q earnings report in mid-November likely the catalyst.
Notablecalls: Nothing outright actionable in this note. However, serves as a remainder that the retailers are extended and due for a pullback. As Wal Mart showed, there might be something rotten in the state of Denmark. BTW, don't get Deutsche's logic - if BBY and DKS are expected to be weak in December, why not suggesting shorting? Both charts suggest potential weakness.
Calls of Note Part 1
UBS believes Apple (NASDAQ:AAPL) is set to launch several new products in '07 - many not in their model - including phones, iTV, & even some sort of ultra-portable device. Firm continues to believe Mac sales are strong, driving margin expansion. They also remain confident in AAPL's ability to generate solid growth from iPods, music accessories & future innovations.
Firm believes that existing product lines can help drive revenue acceleration in calendar 2007 for Apple. They think phones, iTV & other innovations could add up to $0.50 in annualized earnings power long-term, according to their analysis (assuming at least 5mm phones sold annually).
Given Mac momentum, firm believes their 1Q07 estimate of $0.78 with revenue of $6.3B could prove conservative (includes Mac unit growth of 44% to 1.81mm). For FY07, their estimate of $2.75 with revenue of $23.2B (+20% y/y) does not include several potential products. For FY08 firm's estimate of $3.15 includes revenue of $26.7B (+15% y/y).
Firm reiterates Buy rating with $95 target ahead of Steve Jobs' Macworld keynote on January 8.
Notablecalls: Not actionable but good to know category.
Firm believes that existing product lines can help drive revenue acceleration in calendar 2007 for Apple. They think phones, iTV & other innovations could add up to $0.50 in annualized earnings power long-term, according to their analysis (assuming at least 5mm phones sold annually).
Given Mac momentum, firm believes their 1Q07 estimate of $0.78 with revenue of $6.3B could prove conservative (includes Mac unit growth of 44% to 1.81mm). For FY07, their estimate of $2.75 with revenue of $23.2B (+20% y/y) does not include several potential products. For FY08 firm's estimate of $3.15 includes revenue of $26.7B (+15% y/y).
Firm reiterates Buy rating with $95 target ahead of Steve Jobs' Macworld keynote on January 8.
Notablecalls: Not actionable but good to know category.
Thursday, November 02, 2006
Color on quarter: Maxim Integrated (NASDAQ:MXIM)
Several firms are commenting on Maxim Integrated (NASDAQ:MXIM) following results issued last night:
- Goldman Sachs notes Maxim's sales decline was attributed to a mismatch of demand with internal inventory, rather than an inventory reduction in the channel, as the company built channel inventory. However, they continue to believe that a channel inventory correction is underway, and expect that to be the other shoe to drop for Maxim over the next 2 quarters. In the 2004 inventory correction, Maxim saw a sales decline 2 quarters later than competitors such as Analog Devices, National and Intersil. Firm believes this is due to Maxim operating with a higher backlog and lead times. Thus, they would expect the company to get impacted by the current correction over the next 1-2 quarters. Firm islowering their below-consensus EPS estimates to reflect the lower sales, lower gross margin, and higher tax rate. Tgt is cut to $30 from $31.
- Citigroup notes that on one hand they admire MXIM for pushing aggressively toward a more application specific model from 18% of revenues currently to 35% in FY08. However, MXIM shares are the second worst performers in firm's coverage this year (-20% YTD) as its strategic shift is proving as significant as fundamentally changing DNA, a transformation that is less than a quarter complete, as measured by application specific mix shift. They expect Bulls to contend that that the stock is inexpensive, that the free cash flow yield is compelling, and that now is a good time to buy bad news. Firm's more cautious view is that the downward margin reset risk remains significant and with it significant downside risk in the stock.
In summary, MXIM shares bounced around after market, up $0.10 to $0.65 after losing $0.94 on the day as investors clung to backlog data (3-month flat qq) and overlooked the plethora of bad news, indicative in firm's view of hopefulness that MXIM can turn its ship around. eaten down analog stocks like MXIM are abundant, though high quality, clean, and catalyst rich stories which have strong free cash flow yields are not. There will likely be a time to get more bullish on MXIM shares, though now is not the time and presently they prefer names such as MCHP, NSM, ONNN, FCS and ISIL. Maintains Hold and $33 tgt on MXIM.
Notablecalls: Joe Osha from Merrill made a nice call ahead of results yesterday. While the stock bounced in after hrs trading I don't think the bounce will have much legs over the next couple of days. Would be looking for cracks in buy interest.
- Goldman Sachs notes Maxim's sales decline was attributed to a mismatch of demand with internal inventory, rather than an inventory reduction in the channel, as the company built channel inventory. However, they continue to believe that a channel inventory correction is underway, and expect that to be the other shoe to drop for Maxim over the next 2 quarters. In the 2004 inventory correction, Maxim saw a sales decline 2 quarters later than competitors such as Analog Devices, National and Intersil. Firm believes this is due to Maxim operating with a higher backlog and lead times. Thus, they would expect the company to get impacted by the current correction over the next 1-2 quarters. Firm islowering their below-consensus EPS estimates to reflect the lower sales, lower gross margin, and higher tax rate. Tgt is cut to $30 from $31.
- Citigroup notes that on one hand they admire MXIM for pushing aggressively toward a more application specific model from 18% of revenues currently to 35% in FY08. However, MXIM shares are the second worst performers in firm's coverage this year (-20% YTD) as its strategic shift is proving as significant as fundamentally changing DNA, a transformation that is less than a quarter complete, as measured by application specific mix shift. They expect Bulls to contend that that the stock is inexpensive, that the free cash flow yield is compelling, and that now is a good time to buy bad news. Firm's more cautious view is that the downward margin reset risk remains significant and with it significant downside risk in the stock.
In summary, MXIM shares bounced around after market, up $0.10 to $0.65 after losing $0.94 on the day as investors clung to backlog data (3-month flat qq) and overlooked the plethora of bad news, indicative in firm's view of hopefulness that MXIM can turn its ship around. eaten down analog stocks like MXIM are abundant, though high quality, clean, and catalyst rich stories which have strong free cash flow yields are not. There will likely be a time to get more bullish on MXIM shares, though now is not the time and presently they prefer names such as MCHP, NSM, ONNN, FCS and ISIL. Maintains Hold and $33 tgt on MXIM.
Notablecalls: Joe Osha from Merrill made a nice call ahead of results yesterday. While the stock bounced in after hrs trading I don't think the bounce will have much legs over the next couple of days. Would be looking for cracks in buy interest.
Calls of Note Part 3
- Morgan Stanley is positive on NVIDIA (NASDAQ:NVDA) ahead of Q3 results (Nov 9) saying they e expect the company to report another solid positive earnings surprise. In addition, they believe it is highly likely that the company will be able to report a full income statement now that the review and expected resolution of its option grant issues have been identified and addressed by the company's internal audit committee.
Based on their belief that NVIDIA has enjoyed strong demand for core logic chipsets, as well as notebook and desktop GPUs, they have increased their third-quarter estimate from 9% to 13% sequential revenue growth, and EPS estimate has increased to $0.36 from $0.35.
NVDA remains one of firm's favorite stocks: Year-to-date, NVDA has been the single-best performing stock in their universe, with a 76% gain versus a 3% gain in overall universe and a 6% decline in the SOX index. While NVDA may need to consolidate these gains in the near term, it is difficult to find a company in their universe with stronger near-term fundamentals and intermediate-term opportunities. Consequently, the firm reiterates Overweight-V rating, and have increased 12-month stock-price target to $40 from $35.
Notablecalls: Looking at NVDA chart, I must say I think it looks toppish. While MS is not the only firm positive on NVDA this AM I don't think it will bounce much here.
Based on their belief that NVIDIA has enjoyed strong demand for core logic chipsets, as well as notebook and desktop GPUs, they have increased their third-quarter estimate from 9% to 13% sequential revenue growth, and EPS estimate has increased to $0.36 from $0.35.
NVDA remains one of firm's favorite stocks: Year-to-date, NVDA has been the single-best performing stock in their universe, with a 76% gain versus a 3% gain in overall universe and a 6% decline in the SOX index. While NVDA may need to consolidate these gains in the near term, it is difficult to find a company in their universe with stronger near-term fundamentals and intermediate-term opportunities. Consequently, the firm reiterates Overweight-V rating, and have increased 12-month stock-price target to $40 from $35.
Notablecalls: Looking at NVDA chart, I must say I think it looks toppish. While MS is not the only firm positive on NVDA this AM I don't think it will bounce much here.
Calls of Note Part 2
Banc of America notes that their recent checks with several Taiwan motherboard players highlight a seasonal peak in the month of September, with month of October performances ranging from flat or slightly down (Asustek, MSI) to moderately down (Gigabyte). The firm would point out that a number of the motherboard manufacturers saw very solid growth for the months of August and September, and that the current environment suggesting a seasonal slowdown is indicative of a rational response by the PC supply chain to normal seasonal trends.
More importantly, they think recent investor concerns over a weaker than expected Q4 for motherboards is overdone. Specifically, they note the following:
While there has been much focus on recent weakness at Gigabyte, the firm notes that the company is primarily focused on the whitebox/channel market and may not be representative of what the firm believes to be a relatively healthy OEM market.
Importantly, the tone of checks with Asustek - the largest of the motherboard vendors - is not indicative of falling demand or a poorer outlook with regards to Q4. Specifically, they note that Asustek's Oct shipments are on track to mirror Sep levels (5.2M), and that Nov volumes are actually expected to trend higher to 5.5M.
Further, checks with MSI indicate that OEM demand remains strong with OEM demand outstripping supply in some instances (benefiting from Vista-capable mkting efforts). MSI is seeing esp. strong results from Europe, with our sources indicating that the region had already hit 70-80% of shipment forecasts for Q4.
Additionally, the firm would cite healthy Q4 forecasts at recent PC and notebook ODM earnings events at Acer (+20% Q/Q), Quanta (+30% Q/Q), and Compal (+18% Q/Q), respectively.
Notablecalls: Not actionable but good to know. Btw, BofA is positive on INTC, telling investors to add to positions.
More importantly, they think recent investor concerns over a weaker than expected Q4 for motherboards is overdone. Specifically, they note the following:
While there has been much focus on recent weakness at Gigabyte, the firm notes that the company is primarily focused on the whitebox/channel market and may not be representative of what the firm believes to be a relatively healthy OEM market.
Importantly, the tone of checks with Asustek - the largest of the motherboard vendors - is not indicative of falling demand or a poorer outlook with regards to Q4. Specifically, they note that Asustek's Oct shipments are on track to mirror Sep levels (5.2M), and that Nov volumes are actually expected to trend higher to 5.5M.
Further, checks with MSI indicate that OEM demand remains strong with OEM demand outstripping supply in some instances (benefiting from Vista-capable mkting efforts). MSI is seeing esp. strong results from Europe, with our sources indicating that the region had already hit 70-80% of shipment forecasts for Q4.
Additionally, the firm would cite healthy Q4 forecasts at recent PC and notebook ODM earnings events at Acer (+20% Q/Q), Quanta (+30% Q/Q), and Compal (+18% Q/Q), respectively.
Notablecalls: Not actionable but good to know. Btw, BofA is positive on INTC, telling investors to add to positions.
Calls of Note Part 1
Piper Jaffray has compiled answers to 16 questions regarding Apple Computer (NASDAQ:AAPL) ranging from their take on the iTV launch to Apple's thoughts on the holiday shopping season. Here are some:
1) How Do New Product Initiatives Like iTV Play Into Apple's Future? Apple's new wireless media hub, codenamed iTV, will be released in the Mar-06 quarter. While this product does not fit neatly into either the Mac or the iPod+iTunes sales segment, the firm believes this third category, the digital living room, bridges Apple's two main growth engines. The iTV lets users access iTunes content stored on a computer and view it on a television.
Whereas the iPod gives portable access to the same content, the iTV brings the content into the digital living room. Therefore, the iTV provides further integration between the Mac and iPod sales segments, by adding a 3rd significant growth driver to the mix. With the addition of an iPhone in the next 6 months, Apple will add a 4th driver, as the company continues to add to the ways in which media content stored on a computer is accessible anywhere at any time.
2) What Is Apple's Strategy For The Holiday Shopping Season? PJ believes that Apple sells more of its lower ASP iPods during the holidays relative to the rest of the year. With the significant updates to both the Shuffle and the nano in September, it seems Apple is focusing on the flash-based iPods for the Dec-06 quarter. The simple fact is that shopping data suggests that gift-givers buy lower-ASP products for others than they do when buying products for themselves. Firm believes Apple recognizes this trend and is situating the iPod line accordingly for the holiday shopping season.
3) What Is The Status Of The Options Backdating Investigation? On October 4, 2006 Apple released the findings of the internal option grants investigation and found no misconduct by any current board members, including Steve Jobs. Firm believes Jobs will remain Apple's CEO, given he was aware of these favorable grant dates but was not aware of the accounting treatment and did not benefit from them. Apple has indicated that the investigation was conducted by 3 board members using independent counsel. On Oct. 27 Apple announced that the Nasdaq had granted its request for continued listing on the exchange, pending the timely submission of its delayed Jun-06 report.
Maintains Outperform and $16 tgt.
Notablecalls: Not actionable but good to know.
1) How Do New Product Initiatives Like iTV Play Into Apple's Future? Apple's new wireless media hub, codenamed iTV, will be released in the Mar-06 quarter. While this product does not fit neatly into either the Mac or the iPod+iTunes sales segment, the firm believes this third category, the digital living room, bridges Apple's two main growth engines. The iTV lets users access iTunes content stored on a computer and view it on a television.
Whereas the iPod gives portable access to the same content, the iTV brings the content into the digital living room. Therefore, the iTV provides further integration between the Mac and iPod sales segments, by adding a 3rd significant growth driver to the mix. With the addition of an iPhone in the next 6 months, Apple will add a 4th driver, as the company continues to add to the ways in which media content stored on a computer is accessible anywhere at any time.
2) What Is Apple's Strategy For The Holiday Shopping Season? PJ believes that Apple sells more of its lower ASP iPods during the holidays relative to the rest of the year. With the significant updates to both the Shuffle and the nano in September, it seems Apple is focusing on the flash-based iPods for the Dec-06 quarter. The simple fact is that shopping data suggests that gift-givers buy lower-ASP products for others than they do when buying products for themselves. Firm believes Apple recognizes this trend and is situating the iPod line accordingly for the holiday shopping season.
3) What Is The Status Of The Options Backdating Investigation? On October 4, 2006 Apple released the findings of the internal option grants investigation and found no misconduct by any current board members, including Steve Jobs. Firm believes Jobs will remain Apple's CEO, given he was aware of these favorable grant dates but was not aware of the accounting treatment and did not benefit from them. Apple has indicated that the investigation was conducted by 3 board members using independent counsel. On Oct. 27 Apple announced that the Nasdaq had granted its request for continued listing on the exchange, pending the timely submission of its delayed Jun-06 report.
Maintains Outperform and $16 tgt.
Notablecalls: Not actionable but good to know.
Paperstand
Barron’s Online discusses Campbell Soup (CPB), whose stock has gained 25% ytd. But that might be as good as it gets for Campbell's share price for a while. "I don't see a lot of upside for this stock," says David Tuzzolino, of Mellon Financial's private wealth mgmt group. "Campbell is a good co, and the stock has had a very good year so far, but I think there is a lot of enthusiasm already baked into the stock price." Certainly, food makers remain a defensive sector if the economy lands hard next year. Investors still need to eat, even in a slowing or recessionary economy. But like many consumer staple stocks, Campbell appears expensive, especially compared to the co's staid earnings growth rate. The stock already reflects plenty of excitement over new, higher-priced products targeting health conscious Americans. And with anxieties over a slowing economy fading and other soup makers nipping at their heels, Campbell's stock could languish. Or as Steven Ralston, of Zacks Investment Research says, "The risks facing this stock could mitigate the potential rewards."
“Inside Scoop” section reports that American Realty (AFR) CEO Harold Pote shelled out $584K for 50K American Financial shares on Oct. 31. Pote was named the co's CEO on Aug. 17, replacing former CEO Nicholas S. Schorsch, who resigned "by mutual agreement" with American Financial's board. Pote joined the co's board in Mar‘06. Ben Silverman, of InsiderScore.com, says that Pote's purchase is a bullish signal, especially since he already holds a large amount of restricted common shares, including 500K awarded when he became CEO.
Wednesday, November 01, 2006
Closing investment idea
DreamWorks (NYSE:DWA) has reached our target price. Would be looking to close the position. Have sold mine for a 30% gain. Read initial recommendation here.
Paperstand
The WSJ’s „Heard on the Street” column discusses Sun-Times Media (SVN), whose battle–weary minority shareholders, who 3 years ago ousted Conrad Black from the co's top jobs amid allegations of corporate looting, have launched a new offensive. They want the co sold. Some of their frustrations are shared with a strange bedfellow: Mr. Black himself. The co "has been in free fall for over 2 years," Mr. Black said in an interview. The new mgmt at the co has delivered a string of disappointing results since selling the crown jewel, Telegraph Group. 2 weeks ago, the co said it expects 3Q operating results for its flagship Chicago Sun-Times and its suburban papers to be weaker than a year earlier. This is spurring major shareholders to meet with board members and urge them to cut costs and quickly resolve some sticky tax and legal issues to prepare for a sale. The shareholders are also vetting candidates to succeed CEO Gordon Paris. "The board has not acted with sufficient urgency," says Jennifer Wallace of Summit Street Capital. "Let's just sell it," says Christopher Browne, of Tweedy Browne.
According to the Barron’s Online, there's still value to be found among cable operators. While rising 15% so far this year, shares of NTL (NTLI) still look attractive compared to Comcast and growth opportunities abound. Having acquired the Virgin Mobile cellular phone service it could offer cellphone service along with traditional phone calls, cable TV and fast Internet, the fabled "quadruple play." Bulls brush away the threat of competition, arguing that with the Virgin brand giving the co momentum and with new products such as high-definition television, NTL should reap a cash windfall on the way to that communications bundle. "We think the stock is worth in the mid-$30s, and we're willing to be patient and allow the mgmt to execute on a quadruple play to produce those results," says Leon Cooperman, of Omega Advisors.
“Inside Scoop” section reports that Berkshire Hathaway disclosed an initial stake in Target (TGT) of 5.5m shares, valued at nearly $269m. The investment firm also boosted its stake in J&J (JNJ) to nearly 24.6m shares, valued at $1.47bn. In both cases, Berkshire's holdings amount to less than 1% of the co's outstanding shares.
Color on quarter: Baidu.com (NASDAQ:BIDU)
Goldman Sachs comments on Baidu.com (NASDAQ:BIDU) following results saying the revenue shortfall was more pronounced than they thought from the 2 lost Beijing distributors.
Customer additions were well below expectations at approximately 12k versus GS 24k estimate and 16k in 2Q2006, which they believe is likely due to the distributor transition. While they expected limited upside to the high end of the range due to the lost distributors, they did not expect an outright miss and such low 4Q2006 guidance.
That said, firm's 2007 and 2008 estimates were previously too conservative and they have moved to revenue growth that maps closer to what Google saw. Firm is moving to a Neutral rating from Sell given ~10% upside to 12-month price target of $93 versus old year-end 2006 price target. Since initiating on 9/13/2005, the stock is up 7.3% versus the S&P up 12.3%.
Firm notes they would not buy Baidu stock as the execution challenges should last a few quarters. Prior to this quarter, their only issue with buying Baidu stock was its valuation. While higher 2007 and 2008 estimates make valuation more reasonable, we are seeing execution risk for the first time, resulting in a continued unfavorable risk/reward due to the combination of just 10% upside in the stock and uncertainty of the transition. Firm expects these two challenges to last a few quarters and could give competitors an opportunity to attract advertisers, which could lead to more issues.
Notablecalls: I must say I would not be surprised to see BIDU stock move lower from the levels reached in after hrs trading. Not a high conviction call as some of BIDU rev guidance shortfall was due to the fact the co has began to raise prices.
Calls of Note Part 3
- UBS is somewhat cautious on Ralph Lauren (NYSE:RL) ahead of co's Nov 8 earnings release wondering if upside surprises are becoming more difficult for the co.
Firm wonders if 2Q was negatively impacted by an unusually warm Sept in Europe (represents 15% sales). On the flip side, 2Q should have benefited from unseasonably cooler climate in the US and incremental sales from the Polo Jeans and Chaps divisions. Further, Japan has posted strong 2Q sls for luxury retailers which bodes well for RL.
With an expanding base, upside surprises become more difficult. They est lower operating margin driven by increased expenses related to retail expansion and systems initiatives coupled with incremental stock option expense, partially offset by gross margin expansion and a slightly lower tax rate.
1Q upside resulted in a raised FY guidance, with remaining quarters' estimates unchanged. Since 1Q represents the smallest quarter, it was difficult to extrapolate if the 1Q momentum was sustainable. UBS looks for an updated FY guidance, as mgmt typically provides one during its 2Q conf call.
RL is currently trading near the top end of its recent historic range. Firm believes it's difficult to justify further multiple expansion at this time. Their $69 PT is derived on the basis of 19x on CY07E EPS of $3.63. Maintains Neutral.
Notablecalls: UBS may have a point there. While the shorts have been taken on a pretty wild ride over the past 3-4 months, I would be on a lookout for some weakness in the coming days.
Calls of Note Part 2
- Merrill Lynch notes that now that they've had a chance to see the numbers from most of Maxim's (NASDAQ:MXIM) competitors, they figured we'd offer a quick recut of their Maxim estimates prior to the release later today. It's clear that consensus estimates are too high, and although that's reflected in the stock to some extent they think there could be a slight negative reaction when the company reports.
Specifically, the firm thinks that revenue is likely to show a 3% sequential decline in the December quarter, and then a 1% decline in the March 2007 quarter, prior to beginning to recover later in 2007. That's consistent with the inventory clearance pattern that they're seeing elsewhere in the semiconductor business. The result is that FY07 earnings estimate drops from $1.43 to $1.33, while FY08 number declines from $1.67 to $1.57 (Consensus: $1.44/ $1.73).
Maxim now trades on 21x calendar 2007 earnings estimate (note that the company's fiscal year ends in June), which isn't cheap. Like so many of the analog companies the firm covers the P/E doesn't account for the company's cash hoard, and on an EV/2007 EBITDA multiple of 11.3x the stock looks a lot better. They're buyers of the stock with a $49 target. Maintains Buy.
Notablecalls: Not entirely sure MXIM will go down following the note. In case you do short this one, keep it on a tight leash.
Calls of Note Part 1
- JP Morgan is initiating DivX (NASDAQ:DIVX) with an Overweight rating.
According to the firm this profitable early-stage company offers very strong growth and profit prospects, as the leading independent supplier of video compression technology to the consumer electronics industry and to over 250M internet users, as they move to Web 2.0 and rich-media viewing.
Even operating lights out, momentum in CE licensing should fuel the company's growth through 2008 owing to the first-time adoption of the DIVX Codec on DVD players. As penetration goes from about 25% today, globally, to 40%, the firm believes DIVX CE licensing will grow over 50% in 2007 and over 30% in 2008.
DIVX's web strategy could yield upside, owing to aggressive monetization of DIVX's user touch-points (250 million player downloads, 90 million activations per month), and Stage6 sets a high standard for quality video playback that could position DIVX as a distributor of premium content and expand the Google relationship.
DIVX business model yields over 93% gross margins and tremendous operating leverage as the business grows. They expect 29% EPS CAGR through 2010 on at least 26% revenue growth, with much higher growth rates in the next two years.
JP believes DIVX should trade at a premium to its nearest peers, Dolby and DTSI (mean multiple of 26.3x FY07E PF EPS), and to the mean of firm's coverage universe (22.2x FY07E EPS), owing to superior margin structure and growth prospects, and potential upside from strategic initiatives. DIVX trades at 24.8 times PF 08E EPS of $0.92 and a PEG of 0.86, which they consider an attractive price level.
Notablecalls: This is the first high profile init. DIVX has had. JP Morgan is wildly positive and it's bound to get attention. Expect to see some more positive inits. in the coming days with the stock reacting well.
According to the firm this profitable early-stage company offers very strong growth and profit prospects, as the leading independent supplier of video compression technology to the consumer electronics industry and to over 250M internet users, as they move to Web 2.0 and rich-media viewing.
Even operating lights out, momentum in CE licensing should fuel the company's growth through 2008 owing to the first-time adoption of the DIVX Codec on DVD players. As penetration goes from about 25% today, globally, to 40%, the firm believes DIVX CE licensing will grow over 50% in 2007 and over 30% in 2008.
DIVX's web strategy could yield upside, owing to aggressive monetization of DIVX's user touch-points (250 million player downloads, 90 million activations per month), and Stage6 sets a high standard for quality video playback that could position DIVX as a distributor of premium content and expand the Google relationship.
DIVX business model yields over 93% gross margins and tremendous operating leverage as the business grows. They expect 29% EPS CAGR through 2010 on at least 26% revenue growth, with much higher growth rates in the next two years.
JP believes DIVX should trade at a premium to its nearest peers, Dolby and DTSI (mean multiple of 26.3x FY07E PF EPS), and to the mean of firm's coverage universe (22.2x FY07E EPS), owing to superior margin structure and growth prospects, and potential upside from strategic initiatives. DIVX trades at 24.8 times PF 08E EPS of $0.92 and a PEG of 0.86, which they consider an attractive price level.
Notablecalls: This is the first high profile init. DIVX has had. JP Morgan is wildly positive and it's bound to get attention. Expect to see some more positive inits. in the coming days with the stock reacting well.
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