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Friday, December 29, 2006
Calls of Note Part 2
- Piper Jaffray is out with a comment on Apple (NASDAQ:AAPL) after the co filed its 10-K earlier this morning outlining the findings of the internal review and independent investigation into past option practices:
Key Issue No. 1: The company indicated that CEO Steve Jobs was aware of some favorable options grant dates but did not benefit from them personally and was not aware of the accounting implications.
Key Issue No. 2: Apple indicated there was a falsified special board meeting to approve 7.5m options for Jobs, but no member of the current management team was aware of this irregularity.
The financial impact of Apple's restatement is immaterial (~2% impact) to net income over the last nine years.
Apple reiterated that its investigation and the investigation of the special committee did not find any wrongdoing by current management; firm views this as a positive given investor's concerns that this issue could lead to the removal of Steve Jobs. While this is a significant positive, they have not heard any formal comments from the SEC on this matter; given the scope of
Apple's exhuastive internal investigation (reviewed >1 million documents, spent over 26,500 person-hours, and interviewed more than 40 current and former employees), the firm believes that any SEC findings would be consistent with Apple's findings.
Notablecalls: You already know where I stand regarding AAPL this AM. But do check the commentary under previous post as there are some legit points made by readers.
Key Issue No. 1: The company indicated that CEO Steve Jobs was aware of some favorable options grant dates but did not benefit from them personally and was not aware of the accounting implications.
Key Issue No. 2: Apple indicated there was a falsified special board meeting to approve 7.5m options for Jobs, but no member of the current management team was aware of this irregularity.
The financial impact of Apple's restatement is immaterial (~2% impact) to net income over the last nine years.
Apple reiterated that its investigation and the investigation of the special committee did not find any wrongdoing by current management; firm views this as a positive given investor's concerns that this issue could lead to the removal of Steve Jobs. While this is a significant positive, they have not heard any formal comments from the SEC on this matter; given the scope of
Apple's exhuastive internal investigation (reviewed >1 million documents, spent over 26,500 person-hours, and interviewed more than 40 current and former employees), the firm believes that any SEC findings would be consistent with Apple's findings.
Notablecalls: You already know where I stand regarding AAPL this AM. But do check the commentary under previous post as there are some legit points made by readers.
Color on news: Apple Computer (NASDAQ:AAPL)
Apple Computer (NASDAQ:AAPL) filed their 10-K/10-Q reports around 1 hr ago. Key takeaways:
- The investigation resulted in restatements as incorrect measurement dates were used to financial accounting purposes for certain option grants
- Steve Jobs was aware or recommended selection of some favorable grant dates
- He did not benefit from these grants
Notablecalls: I'm somewhat surprised to see AAPL stock trading up on the news. I think the investors that bought the stock over the past couple of days assumed Steve Jobs was NOT aware of any suspicious grants and most certainly did not recommend any. I suspect the move this morning is an attempt by some market participants to mark up the price on the last trading day of the yr, possibly to improve their performance.
- The investigation resulted in restatements as incorrect measurement dates were used to financial accounting purposes for certain option grants
- Steve Jobs was aware or recommended selection of some favorable grant dates
- He did not benefit from these grants
Notablecalls: I'm somewhat surprised to see AAPL stock trading up on the news. I think the investors that bought the stock over the past couple of days assumed Steve Jobs was NOT aware of any suspicious grants and most certainly did not recommend any. I suspect the move this morning is an attempt by some market participants to mark up the price on the last trading day of the yr, possibly to improve their performance.
Calls of Note Part 1
- UBS is positive on Huron Consulting (NASDAQ:HURN) raising their 12-month target to $54 from $46. Firm's target is DCF based and uses a slightly higher 10-year rev CAGR of 15% versus 14% previously; this change resulted from rolling out higher 08 estimates than those used previously in DCF analysis.
UBS is maintaining their $1.90 07 EPS estimate and rolling out a $2.35 08 estimate. Firm's new target implies that in 12-months, investors will value HURN shares at 23x $2.35 08 EPS estimate (versus the current forward 12-month PE multiple of 25x and historical average of 23x).
Industry research suggests that demand for Huron's services remains robust and that Q4 hiring may have exceeded firm's expectations. UBS believes these factors bode well for Huron's Q4 results and near-term stock price performance.
Maintains Buy.
Notablecalls: Yes, it's THAT quiet out there this AM.
UBS is maintaining their $1.90 07 EPS estimate and rolling out a $2.35 08 estimate. Firm's new target implies that in 12-months, investors will value HURN shares at 23x $2.35 08 EPS estimate (versus the current forward 12-month PE multiple of 25x and historical average of 23x).
Industry research suggests that demand for Huron's services remains robust and that Q4 hiring may have exceeded firm's expectations. UBS believes these factors bode well for Huron's Q4 results and near-term stock price performance.
Maintains Buy.
Notablecalls: Yes, it's THAT quiet out there this AM.
Paperstand
The WSJ reports that private-equity firms are beginning to circle Alltel (AT) making the nation's 5th-largest wireless operator another potential tgt amid a string of huge LBOs this year. Wall St. is buzzing about a possible deal and private-equity shops are already exploring the idea. The co has a mkt value of $21.7bn and a debt load of just under $3bn.
According to the WSJ, citing ppl familiar with the matter, SprintNextel (S) is close to choosing Nokia (NOK), as its third primary network-equipment provider for its next-generation wireless network throughout the US. The co plans to spend about $3bn on the network using WiMax technology in the next 2 years. Nokia can expect to get a portion of that as well as additional handset orders from Sprint, which is planning to deploy a network that reaches as many as 100m ppl by ‘08.
“Heard on the Street” column reports that Marsh & McLennan (MMC) is expected to get a fresh boost now that the co has agreed in principle to sell its Putnam Investments money-mgmt unit for $3.9bn. The price to be paid by Power Corp is at the higher end of most ests and could be good news for Marsh's battered shareholders.
Barron’s Online “Inside Scoop” section reports that a hedge fund has lightened its load of Take-Two (TTWO). Glenview Capital Mgmt disclosed a 6.7% stake, or 4.8m shares, in Take-Two stock, down from the 11% stake, or 7.8m shares.
Thursday, December 28, 2006
Calls of Note Part 3
- ThinkEquity's Eric Ross is out on Dell Computer (NASDAQ:DELL) saying speculation has been extremely high over the past several weeks that Dell will bolster its position in China with the acquisition of the PC business unit of China-based Beijing Founder Electronics. Firm's sources close to the deal indicate it will not occur, killed by pressure from the Chinese government.
This would force Dell to look for another strategy in China. Reiterates SELL rating and $17 price target.
Firm's sources believe the negotiations between the two parties have effectively ended as indirect pressure from the Chinese government has put the deal to rest. Management of Founder has publicly denied the rumor of the sale. Additional rumors have circulated that China's state-run Haier Group would buy the PC division. The firm reminds investors that two years ago, the U.S. government approved the sale of IBM's PC division of IBM to China's Lenovo Group.
Founder would have given Dell a solid No. 2 position in China. They believe the combination of Beijing Founder's PC business would significantly improve Dell's desktop PC market share position, as it would also strengthen Dell's sales channel in the China, putting pressure on Hewlett-Packard, and Lenovo.
Mr. Ross notes Dell is looking abroad to grow its PC business. Dell's lackluster growth in the U.S. market is offset by growth in the international arena, in particular, the Asia Pacific region. During the third quarter, revenue growth in the Americas region was weak, as it was down 3% on a year-over- year basis. Dell saw strength in Europe and Asia Pacific/Japan regions which
saw Y/Y growth of 5% and 8%, respectively. Think believes competition and eroding market share underscore the fact that Dell needs to look abroad to grow its PC business.
Notablecalls: Protectionism in the PC area? That can't be good news for DELL. Suspect the stock will get hit today. DELL needs to move outside of U.S. in search of growth and now it looks like there will be major obstacles in one of the largest markets - China. Another excellent piece of research from ThinkEquity's Eric Ross and his team.
This would force Dell to look for another strategy in China. Reiterates SELL rating and $17 price target.
Firm's sources believe the negotiations between the two parties have effectively ended as indirect pressure from the Chinese government has put the deal to rest. Management of Founder has publicly denied the rumor of the sale. Additional rumors have circulated that China's state-run Haier Group would buy the PC division. The firm reminds investors that two years ago, the U.S. government approved the sale of IBM's PC division of IBM to China's Lenovo Group.
Founder would have given Dell a solid No. 2 position in China. They believe the combination of Beijing Founder's PC business would significantly improve Dell's desktop PC market share position, as it would also strengthen Dell's sales channel in the China, putting pressure on Hewlett-Packard, and Lenovo.
Mr. Ross notes Dell is looking abroad to grow its PC business. Dell's lackluster growth in the U.S. market is offset by growth in the international arena, in particular, the Asia Pacific region. During the third quarter, revenue growth in the Americas region was weak, as it was down 3% on a year-over- year basis. Dell saw strength in Europe and Asia Pacific/Japan regions which
saw Y/Y growth of 5% and 8%, respectively. Think believes competition and eroding market share underscore the fact that Dell needs to look abroad to grow its PC business.
Notablecalls: Protectionism in the PC area? That can't be good news for DELL. Suspect the stock will get hit today. DELL needs to move outside of U.S. in search of growth and now it looks like there will be major obstacles in one of the largest markets - China. Another excellent piece of research from ThinkEquity's Eric Ross and his team.
Calls of Note Part 2
- Thomas Weisel Partners comments on Apple Computer (NASDAQ:AAPL) this morning after completing a round of about 20 channel checks with Apple specialist resellers and Apple retail stores across the United States and checks suggest strong "holiday season" demand for Intel-based Macs and iPods.
Checks suggest that 50% of Mac buyers are switchers and that there is strong demand for the MacBook ($1099 to $1499), especially the entry level white notebook as well as the slightly more expensive black models. They continue to believe that the real key to the Apple story over the next 12 months will be the actual Mac units sold.
Checks also indicated strong demand for 4GB nano ($199), which is available in five different colors and is the best selling iPod for the holiday season. The second best selling iPod is the 2GB nano ($149). More than 80% of checks indicated that the demand for iPods has increased compared to last quarter and last year.
Firm's Mac checks indicate strong demand and supply for Intel based Mac notebooks. However, they are already estimating 41.5%y/y growth for Mac units and they remain comfortable with current estimates.
Notablecalls: Not actionable but good to know category. The stock is down over 5% in pre mkt trading after the FT reported that the co gave Chief Executive Steve Jobs 7.5 million stock options in 2001 without the required authorization of the company's board. Records purporting to show that a full board meeting had taken place to approve the remuneration, as required by Apple's procedures, were later falsified, the Financial Times reported, citing people familiar with the matter.
While I continue to believe Steve Jobs did not act deliberately, I suspect trading dynamics of yesterday will dictate today's action. Too many dip buyers showed up yesterday.
Checks suggest that 50% of Mac buyers are switchers and that there is strong demand for the MacBook ($1099 to $1499), especially the entry level white notebook as well as the slightly more expensive black models. They continue to believe that the real key to the Apple story over the next 12 months will be the actual Mac units sold.
Checks also indicated strong demand for 4GB nano ($199), which is available in five different colors and is the best selling iPod for the holiday season. The second best selling iPod is the 2GB nano ($149). More than 80% of checks indicated that the demand for iPods has increased compared to last quarter and last year.
Firm's Mac checks indicate strong demand and supply for Intel based Mac notebooks. However, they are already estimating 41.5%y/y growth for Mac units and they remain comfortable with current estimates.
Notablecalls: Not actionable but good to know category. The stock is down over 5% in pre mkt trading after the FT reported that the co gave Chief Executive Steve Jobs 7.5 million stock options in 2001 without the required authorization of the company's board. Records purporting to show that a full board meeting had taken place to approve the remuneration, as required by Apple's procedures, were later falsified, the Financial Times reported, citing people familiar with the matter.
While I continue to believe Steve Jobs did not act deliberately, I suspect trading dynamics of yesterday will dictate today's action. Too many dip buyers showed up yesterday.
Calls of Note Part 1
- Banc of America comments on FormFactor (NASDAQ:FORM) saying they are cutting near term 4Q06 and 1Q07 EPS to reflect a delay in the penetration of the new NAND. The cut brings them back in line with street estimates and guidance for the December quarter. Firm views this as only a timing issue for the one-touch-down NAND product. FY07 EPS goes to $1.71 from $1.85.
Even so, they remain very optimistic about the 2007 growth prospects for the company. They think FORM is in the final stages of qualifying their new one- touch-down product with several NAND flash customers. Thinks that Micron (IM Flash Technology) could release a $50 million order in the March-07 quarter (1Q07) and drive a sharp increase in June revenues.
After SEMICON Japan it was apparent that the pace of technology change in the probe cell (prober, probe card, tester) is accelerating. The rising cost of test is driving the industry to search for new solutions that are increasingly dependent on probe card technology. BAC thinks the value add in the probe cell will migrate to the probe card. Micronics Japan (MJC) has introduced an integrated prober-probe card product targeting the memory market. FormFactor is investigating adding tester functions to its advanced probe cards.
Maintains Buy but cuts tgt to $43 from $45.
Notablecalls: Not actionable but good to know category. BAC is taking down their Street high estimates but talks of the possible large order from MU. In sum, neutral.
Even so, they remain very optimistic about the 2007 growth prospects for the company. They think FORM is in the final stages of qualifying their new one- touch-down product with several NAND flash customers. Thinks that Micron (IM Flash Technology) could release a $50 million order in the March-07 quarter (1Q07) and drive a sharp increase in June revenues.
After SEMICON Japan it was apparent that the pace of technology change in the probe cell (prober, probe card, tester) is accelerating. The rising cost of test is driving the industry to search for new solutions that are increasingly dependent on probe card technology. BAC thinks the value add in the probe cell will migrate to the probe card. Micronics Japan (MJC) has introduced an integrated prober-probe card product targeting the memory market. FormFactor is investigating adding tester functions to its advanced probe cards.
Maintains Buy but cuts tgt to $43 from $45.
Notablecalls: Not actionable but good to know category. BAC is taking down their Street high estimates but talks of the possible large order from MU. In sum, neutral.
Color on news: VCA Antech (NASDAQ:WOOF)
Couple of firms comment on VCA Antech (NASDAQ:WOOF) after the co issued guidance for 2007:
- Piper Jaffray expects WOOF shares to be weak today after conservative FY07 earnings guidance was provided yesterday afternoon and would recommend using this weakness as a buying opportunity in this core mid-cap growth holding. VCA Antech has a track record of guiding conservatively and they believe last night's announcement is in line with this practice. Firm believes the company continues to experience strong momentum across each of its business segments, which could result in upside to the preliminary guidance provided yesterday afternoon. Initial FY05 guidance (provided in October of 2004) was ultimately exceeded by 8% or $0.07 per share and similarly preliminary FY06 guidance of $1.03-$1.06 will likely be outdone by $0.09 (PJ is forecasting $1.15 for FY06). They believe the underlying trends in the veterinary care market remain intact and expect this sector to record strong growth once again in 2007. Firm maintains Outperform rating on WOOF shares but lowers tgt to $39 from $40.
- Banc of America notes WOOF issued detailed 2007E financial guidance essentially in line with their revenue and EPS forecasts. It did bump its internal laboratory revenue growth goal to 8%-10% in 2007 versus 7%-9% historically, consistent with competitor IDEXX Laboratories' move in July, but medical technologies' revenue growth expectations are sluggish.
The firm wouldn't expect the stock to move much on the news, although expectations for WOOF have historically been high, with surprises poorly received. 2007E EPS guidance implies growth of 12%-15% over firm's 2006E forecast, lower than the 17% to 20% growth implied by its initial 2006E forecast, although the acquisition of Pet's Choice in mid-2005 clearly drove a robust 2006 experience. WOOF's 2007E expectations don't contemplate an incremental chain hospital deal, and material weakness would present an opportunity to own one of the better growth stories in firm's research universe. Maintains Neutral and $33 tgt.
- Citigroup notes the guidance implies revenue growth of approximately 9% and EPS growth of 12%. The company's average EPS growth rate for the past three years ('04-'06E) has been roughly 24%. Despite the decelerating growth, WOOF continues to trade at a premium valuation at 24.2x FY07E P/E (vs. its historical average of 22x since 2002). Reits Sell.
Notablecalls: I don't think WOOF will decline more than 1 pt following the news.
- Piper Jaffray expects WOOF shares to be weak today after conservative FY07 earnings guidance was provided yesterday afternoon and would recommend using this weakness as a buying opportunity in this core mid-cap growth holding. VCA Antech has a track record of guiding conservatively and they believe last night's announcement is in line with this practice. Firm believes the company continues to experience strong momentum across each of its business segments, which could result in upside to the preliminary guidance provided yesterday afternoon. Initial FY05 guidance (provided in October of 2004) was ultimately exceeded by 8% or $0.07 per share and similarly preliminary FY06 guidance of $1.03-$1.06 will likely be outdone by $0.09 (PJ is forecasting $1.15 for FY06). They believe the underlying trends in the veterinary care market remain intact and expect this sector to record strong growth once again in 2007. Firm maintains Outperform rating on WOOF shares but lowers tgt to $39 from $40.
- Banc of America notes WOOF issued detailed 2007E financial guidance essentially in line with their revenue and EPS forecasts. It did bump its internal laboratory revenue growth goal to 8%-10% in 2007 versus 7%-9% historically, consistent with competitor IDEXX Laboratories' move in July, but medical technologies' revenue growth expectations are sluggish.
The firm wouldn't expect the stock to move much on the news, although expectations for WOOF have historically been high, with surprises poorly received. 2007E EPS guidance implies growth of 12%-15% over firm's 2006E forecast, lower than the 17% to 20% growth implied by its initial 2006E forecast, although the acquisition of Pet's Choice in mid-2005 clearly drove a robust 2006 experience. WOOF's 2007E expectations don't contemplate an incremental chain hospital deal, and material weakness would present an opportunity to own one of the better growth stories in firm's research universe. Maintains Neutral and $33 tgt.
- Citigroup notes the guidance implies revenue growth of approximately 9% and EPS growth of 12%. The company's average EPS growth rate for the past three years ('04-'06E) has been roughly 24%. Despite the decelerating growth, WOOF continues to trade at a premium valuation at 24.2x FY07E P/E (vs. its historical average of 22x since 2002). Reits Sell.
Notablecalls: I don't think WOOF will decline more than 1 pt following the news.
Paperstand
The WSJ’s „Heard on the Street” column discusses Wal-Mart (WMT), which cites a clutch of short-term problems behind its slowing pace of sales late this year, but bearish observers say looming challenges could hinder the retailer through ‘07 and beyond. Wal-Mart execs fingered disruptions from store remodeling, an overly aggressive bet on a new line of women's apparel and a slip from sales temporarily boosted by ‘05 hurricane-recovery efforts to explain lackluster results at its established stores. Several analysts don't foresee Wal-Mart's SSS rebounding until well into ‘07, or even later. Richard Hastings, of Bernard Sands, predicts that SSS for Wal-Mart's main US division "will now trend flat to slightly negative for the foreseeable future." Even some Wal-Mart bulls are cautious. Bear Stearns analyst Christine Augustine, who rates Wal-Mart's shares Outperform, with price tgt of $54-55, says it will be several months before Wal-Mart's sales benefit significantly from its efforts to remodel stores and tailor merchandise to customers. "It's our belief that SSS may remain under pressure for the 1H07," Ms. Augustine says.
Wednesday, December 27, 2006
Color on news: Apple Computer (NASDAQ:AAPL)
- JP Morgan comments on Apple Computer (NASDAQ:AAPL) saying the stock is under pressure today, as it appears investors are concerned about an article published by The Recorder regarding the company's options backdating investigation.
In regards to the potential for forged documents, at the conclusion of Apple's independent probe in October, the company noted the investigation "raised serious concerns reagarding the actions of two former officers...." Whether these actions included forged documents or not, there is no new news in The Recorder's article tying Steve Jobs to any wrongdoing.
The firm cannot confirm or refute the speculation that Steve Jobs may have hired an outside attorney. They would, however, have been surprised if Mr. Jobs did not have personal representation. This does not suggest any change to the conclusions of the independent probe in October either, in their view.
Overall, the firm continues to believe Apple will file its restated financials this week, and they would expect the filings to answer any remaining questions regarding the options investigation. As for the article in The Recorder, they can find little newsworthy revelations regarding Steve Jobs' tenure at Apple.
JPM believes the recent sell off in Apple's shares has provided investors with a unique opportunity to purchase the shares at depressed prices ahead of Macworld and the December quarter earnings release next month. They are reiterating Overweight rating.
Notablecalls: Looks like the market agrees with JPM here. At least for now.
In regards to the potential for forged documents, at the conclusion of Apple's independent probe in October, the company noted the investigation "raised serious concerns reagarding the actions of two former officers...." Whether these actions included forged documents or not, there is no new news in The Recorder's article tying Steve Jobs to any wrongdoing.
The firm cannot confirm or refute the speculation that Steve Jobs may have hired an outside attorney. They would, however, have been surprised if Mr. Jobs did not have personal representation. This does not suggest any change to the conclusions of the independent probe in October either, in their view.
Overall, the firm continues to believe Apple will file its restated financials this week, and they would expect the filings to answer any remaining questions regarding the options investigation. As for the article in The Recorder, they can find little newsworthy revelations regarding Steve Jobs' tenure at Apple.
JPM believes the recent sell off in Apple's shares has provided investors with a unique opportunity to purchase the shares at depressed prices ahead of Macworld and the December quarter earnings release next month. They are reiterating Overweight rating.
Notablecalls: Looks like the market agrees with JPM here. At least for now.
Calls of Note Part 6
Buying Apple (NASDAQ:AAPL) may make sense here since Steve Jobs hiring a lawyer can't be worth over 4 points of downside. Tight leash.
Calls of Note Part 5
- ThinkEquity's Eric Ross notes that increased performance and profitability in IBM's (NYSE:IBM) Global Service segment, together with strong software sales, causes them to reconsider their SELL rating and now recommend it as a BUY for this quarter. Firm now expects increased revenues together with higher margins in Q406 and stretching into 2007. They are upgrading IBM from Sell to Buy, and raising price target from $70 to $110.
Mr. Ross explains that the primary reason for his sell rating was the weak outlook for IBM's global service business, driven by weak IT services overall. He now believes this segment
(approximately 50% of total revenues) has turned the corner toward strong performance this quarter. The salespeople they have spoken with are extremely confident and say productivity is increasing, driving margins higher. While revenue concerns may linger, they expect IBM to boost the profitability of this segment into 2007.
Everyone the firm was able to get on the phone was highly confident that their area was performing very strongly (except in storage). This is a marked difference from the response they received from these same contacts in spring 2006.
Ests: Revs Q406 from $25.0b to $26.5b; CY06 from $90.166b to $91.666b; CY07 from $91.500b to $96.990b. EPS Q406 from $1.95 to $2.25; CY06 from $5.76 to $6.05; CY07 from $6.25 to $6.74.
Notablecalls: I like the conviction behind this call. I wish all upgrades were like this one. People would pay more attention to them. Note that THNK's ests are now close to Street high.
Mr. Ross explains that the primary reason for his sell rating was the weak outlook for IBM's global service business, driven by weak IT services overall. He now believes this segment
(approximately 50% of total revenues) has turned the corner toward strong performance this quarter. The salespeople they have spoken with are extremely confident and say productivity is increasing, driving margins higher. While revenue concerns may linger, they expect IBM to boost the profitability of this segment into 2007.
Everyone the firm was able to get on the phone was highly confident that their area was performing very strongly (except in storage). This is a marked difference from the response they received from these same contacts in spring 2006.
Ests: Revs Q406 from $25.0b to $26.5b; CY06 from $90.166b to $91.666b; CY07 from $91.500b to $96.990b. EPS Q406 from $1.95 to $2.25; CY06 from $5.76 to $6.05; CY07 from $6.25 to $6.74.
Notablecalls: I like the conviction behind this call. I wish all upgrades were like this one. People would pay more attention to them. Note that THNK's ests are now close to Street high.
Calls of Note Part 4
- Wachovia questions the rationale for the latest bounce in The Cooper Companies (NYSE:COO) shares, as both their recent checks and disclosures in the company's newest SEC filing raise concerns that appear likely to prevent a sustainable share-price recovery in the foreseeable future.
Firm's checks show that COO is offering select high-volume practitioners a 10% discount on inventory orders placed between December 22 and December 31 for immediate shipment. The promotion suggests COO is fighting a sales slowdown in its quarter ending January 31. Firm's concerns over the magnitude of any potential sales shortfall are heightened by comments from an industry source, who indicated that, to the best of his knowledge, the company has never before made such an offer of this kind.
COO's 2006 10-K, filed Tuesday, also raises a few cautionary flags. There are several 10-K disclosures (some new) that could negatively affect COO's tax rate, which the Street currently assumes can be maintained in the low-to-mid-teens range. Tax-related issues include FIN 48, a FASB interpretation implemented in July that clarifies the conditions for realizing a tax benefit. COO indicates that it still has not determined the impact FIN 48 will have on its financial
statements.
Firm's checks and the incremental 10-K findings suggest that COO is not yet on the road to recovery. They continue to advise remaining on the sidelines in this name. Valuation range $44 to $46.
Notablecalls: While I'm not questioning the contents of the call, the timing may be somewhat off as it's very early in the qtr. The co may just be pushing hard to get the product rolling. On the other hand demand may be so weak the co has discount hard already early in the qtr. COO is not an expensive stock and is considered to be a turnaround story. Tough to call this one. In case you feel inclined to short this one the $46 level should act as the leash.
Firm's checks show that COO is offering select high-volume practitioners a 10% discount on inventory orders placed between December 22 and December 31 for immediate shipment. The promotion suggests COO is fighting a sales slowdown in its quarter ending January 31. Firm's concerns over the magnitude of any potential sales shortfall are heightened by comments from an industry source, who indicated that, to the best of his knowledge, the company has never before made such an offer of this kind.
COO's 2006 10-K, filed Tuesday, also raises a few cautionary flags. There are several 10-K disclosures (some new) that could negatively affect COO's tax rate, which the Street currently assumes can be maintained in the low-to-mid-teens range. Tax-related issues include FIN 48, a FASB interpretation implemented in July that clarifies the conditions for realizing a tax benefit. COO indicates that it still has not determined the impact FIN 48 will have on its financial
statements.
Firm's checks and the incremental 10-K findings suggest that COO is not yet on the road to recovery. They continue to advise remaining on the sidelines in this name. Valuation range $44 to $46.
Notablecalls: While I'm not questioning the contents of the call, the timing may be somewhat off as it's very early in the qtr. The co may just be pushing hard to get the product rolling. On the other hand demand may be so weak the co has discount hard already early in the qtr. COO is not an expensive stock and is considered to be a turnaround story. Tough to call this one. In case you feel inclined to short this one the $46 level should act as the leash.
Calls of Note Part 3
- Piper Jaffray is cautious on Gap (NYSE:GPS) saying holiday sales appear weak at core Gap brand; traffic may not be only culprit: Core Gap stores have experienced flat or negative traffic trends in each of the last 25 months, owing to inconsistent merchandise and promotional patterns and deteriorating brand equity with the traditional casual wear customer
The firm has noted accelerated promotional activity relative to the prior year with markdowns being taken on a weekly basis and the company introducing its 50% storewide banner one week earlier than last year. Additionally, the company's Project Red, premium priced assortment, is being aggressively discounted in order to clear goods. Piper is trimming their FQ4 sales and EPS estimates.
On a positive note, they think Banana Republic remains the star performer in the GPS trio and a 40% off event week 4 (week prior to holiday) was well received by customers. Inventory of key items, especially sweaters, wool bottoms, and outerwear appeared well managed into the final holiday weekend.
Shares are fairly valued for fundamentals; upward moves in shares are based on speculation: At 16x FY08E EPS of $1.25, they believe the risk-reward profile of GPS shares is fairly balanced. Maintains $19 tgt. Maintains MP.
Notablecalls: Not the type of call you want to put out a short line on. Not actionable but good to know category. I'd rather wait for GPS to stumble and then pick up some stock for the inevitable bounce.
The firm has noted accelerated promotional activity relative to the prior year with markdowns being taken on a weekly basis and the company introducing its 50% storewide banner one week earlier than last year. Additionally, the company's Project Red, premium priced assortment, is being aggressively discounted in order to clear goods. Piper is trimming their FQ4 sales and EPS estimates.
On a positive note, they think Banana Republic remains the star performer in the GPS trio and a 40% off event week 4 (week prior to holiday) was well received by customers. Inventory of key items, especially sweaters, wool bottoms, and outerwear appeared well managed into the final holiday weekend.
Shares are fairly valued for fundamentals; upward moves in shares are based on speculation: At 16x FY08E EPS of $1.25, they believe the risk-reward profile of GPS shares is fairly balanced. Maintains $19 tgt. Maintains MP.
Notablecalls: Not the type of call you want to put out a short line on. Not actionable but good to know category. I'd rather wait for GPS to stumble and then pick up some stock for the inevitable bounce.
Calls of Note Part 2
- ThinkEquity notes that Germany is completing the auctioning of approximately four 3.5 GHz licenses at what appears to be extremely low prices. Firm believes this should cause a giant
spending boom for WiMax in Germany starting some time in 2007. Of course, Alvarion (NASDAQ:ALVR) will be one of the leading contenders for these four new accounts, with the usual list of competitive suspects.
Many years have passed since Margaret Thatcher and Ronald Reagan delivered excitement in terms of attempting to roll back the long claws of government ownership. Of course, the U.S. sold 1900 MHz spectrum in the mid-1990s and only a few months ago held some further auctions for 1700 and 2100 MHz. But, generally, these moments of privatization have been few and far between. At least outside of the former Eastern Bloc and South-East Asia, capitalism and private property have generally not been on the march for the last 15+ years.
So it is with great joy that they celebrate this year's Christmas gift from Germany: Privatizing 3.5 GHz spectrum for WiMax. Firm believes the bulk of the capital spending will start to kick in around the middle of 2007 at best. Competition for these contracts should be fierce.
At this point, they have no reliable view of how Alvarion's 4Q is tracking. Firm maintains 2006, 2007 and 2008 revenue estimates of $207m, $259m and $371m. For the same time periods, their untaxed EPS estimates remain ($0.01), $0.19 and $0.82. They maintain their 12-month price target of $10. This implies a target market cap of $630m, of which $109m is in cash
Notablecalls: I suspect this one is for the investor types rather than traders. Somewhat actionable?
spending boom for WiMax in Germany starting some time in 2007. Of course, Alvarion (NASDAQ:ALVR) will be one of the leading contenders for these four new accounts, with the usual list of competitive suspects.
Many years have passed since Margaret Thatcher and Ronald Reagan delivered excitement in terms of attempting to roll back the long claws of government ownership. Of course, the U.S. sold 1900 MHz spectrum in the mid-1990s and only a few months ago held some further auctions for 1700 and 2100 MHz. But, generally, these moments of privatization have been few and far between. At least outside of the former Eastern Bloc and South-East Asia, capitalism and private property have generally not been on the march for the last 15+ years.
So it is with great joy that they celebrate this year's Christmas gift from Germany: Privatizing 3.5 GHz spectrum for WiMax. Firm believes the bulk of the capital spending will start to kick in around the middle of 2007 at best. Competition for these contracts should be fierce.
At this point, they have no reliable view of how Alvarion's 4Q is tracking. Firm maintains 2006, 2007 and 2008 revenue estimates of $207m, $259m and $371m. For the same time periods, their untaxed EPS estimates remain ($0.01), $0.19 and $0.82. They maintain their 12-month price target of $10. This implies a target market cap of $630m, of which $109m is in cash
Notablecalls: I suspect this one is for the investor types rather than traders. Somewhat actionable?
Calls of Note Part 1
- UBS continues to be positive on Rockwell Collins (NYSE:COL) saying their Buy rating continues to reflect firm's view that underappreciated growth opportunities and margin leverage can drive significant EPS upside beyond current consensus estimates. UBS believes Collins' margins can benefit from an improved revenue mix, as it swaps lower margin In-Flight Entertainment revenues for high margin Information Management revenues.
They believe COL can continue to generate revenue growth that outpaces its peer group as they think much of its recent market share gains are still to come through. This includes 787, business jets as well as increased Buyer Furnished Equipment (BFE).
Firm's FY 2007 and FY 2008 EPS estimates are $3.25 and $3.80, respectively. Their initial FY08 EPS estimate compares to $3.54 consensus and reflects high single-digit organic revenue growth combined with further margin expansion at Commercial driven by 30%+ incremental margins on higher volumes, decreased low margin IFE revenues and lower R&D as 787 spending trails off.
Tgt moves to $73 from $67.
Notablecalls: I like this note. David Strauss and his team seem to have high conviction regarding the story. Expect to see a positive reaction over the next couple of days. Looking at COL's ops it's is like Honeywell (NYSE:HON) and Garmin (NASDAQ:GRMN) rolled into one.
They believe COL can continue to generate revenue growth that outpaces its peer group as they think much of its recent market share gains are still to come through. This includes 787, business jets as well as increased Buyer Furnished Equipment (BFE).
Firm's FY 2007 and FY 2008 EPS estimates are $3.25 and $3.80, respectively. Their initial FY08 EPS estimate compares to $3.54 consensus and reflects high single-digit organic revenue growth combined with further margin expansion at Commercial driven by 30%+ incremental margins on higher volumes, decreased low margin IFE revenues and lower R&D as 787 spending trails off.
Tgt moves to $73 from $67.
Notablecalls: I like this note. David Strauss and his team seem to have high conviction regarding the story. Expect to see a positive reaction over the next couple of days. Looking at COL's ops it's is like Honeywell (NYSE:HON) and Garmin (NASDAQ:GRMN) rolled into one.
Paperstand
The WSJ’s „Heard on the Street” column highlights Anadarko Petroleum (APC), which has something harder to find than oil - the floating rigs that explorers need for drilling. A boom in drilling deep-water oil and natural-gas wells in the Gulf of Mexico and off the coasts of Brazil and West Africa has driven demand for the specialized rigs needed to work in depths. Deep-water rigs are in short supply, and co’s are scrambling to get their hands on them, which could pay off for Anadarko. It pegged the looming scarcity early and moved quickly to secure board approval last year to spend $1bn locking down rig leases. Anadarko now has a larger inventory of Gulf-based rigs under contract than any other major oil co, giving it an extraordinary competitive advantage. Fields ripe for exploration can't be drilled without the rigs. Anadarko's leases give it a powerful bargaining chip to barter for stakes in more deep-water oil and gas prospects. Its moves have gone largely unappreciated on Wall St., overshadowed by investor concerns about the co's balance sheet.
Tuesday, December 26, 2006
Calls of Note Part 4
- Goldman Sachs has added Lockheed Martin (NYSE:LMT) to the Americas Conviction Buy List as they see 11% upside potential to the stock relative to their $102 six-month price target, which was derived using a blended average of adjusted earnings multiples and a DCF. Firm's conviction on LMT is based on: 1) belief that LMT will benefit in 2007 from share gained in 2006, 2) a 14.8% ROIC that's among the highest in the peer group, but trading multiples that are in-line with the defense peer group, and 3) belief that LMT's share price suffers from some investor skepticism over potential program cuts in the FY2008 budget they think are less likely to occur.
Catalyst: In 2006, LMT was a share gain story benefiting from wins on technical service contracts, key intelligence programs, and programs in adjacent markets. In 2007, the firm thinks LMT will see the benefit from: share gained in 2006, lower risk on key production programs, and the deployment of its $7+/share free cash flow. The FY2008 budget release in early Feb is the next catalyst, which the firm thinks will be favorable to LMT programs. Looking further ahead, LMT's opportunity pipeline includes: IWN ($10bn, mid-07), GPS-3 satellite ($5bn, mid-07 decision), and various ID/IQ contracts.
Notablecalls: Not actionable but good to know category. Really.
Catalyst: In 2006, LMT was a share gain story benefiting from wins on technical service contracts, key intelligence programs, and programs in adjacent markets. In 2007, the firm thinks LMT will see the benefit from: share gained in 2006, lower risk on key production programs, and the deployment of its $7+/share free cash flow. The FY2008 budget release in early Feb is the next catalyst, which the firm thinks will be favorable to LMT programs. Looking further ahead, LMT's opportunity pipeline includes: IWN ($10bn, mid-07), GPS-3 satellite ($5bn, mid-07 decision), and various ID/IQ contracts.
Notablecalls: Not actionable but good to know category. Really.
Calls of Note Part 3
- Jefferies comments on UT Starcom (NASDAQ:UTSI) saying their believe risks outweigh potential returns. N-T risks include mgmt departures, slowing PAS mkt, ongoing restructuring, and continuing losses. UTStarcom is seeking strategic alternatives, which could result in asset disposals rather than a sale of the entire company. The firm has shifted to a sum-of-the-parts valuation, with a $10 price target.
Firm notes they see divestiture of businesses as the most likely alternative. In their view, UT Starcom acquired its way into too many disparate businesses as it tried to diversify away from a declining PAS market. Firm says they have a tough time identifying a potential buyer for the entire company. On the other hand, a divestiture of individual businesses won't be an easy task either. Individual businesses could be difficult to unwind and separate from the core R&D and manufacturing assets of the company.
They have segmented UTStarcom's business into five components (slightly different from reported segments). This totals a value of roughly $1.2 billion, or 0.6x 2006 rev est. The calculation includes $360M for its PAS businesses, $400M for CDMA handsets, $320M for Broadband Infrastructure, $120M for Wireless Infrastructure.
Maintains Hold.
Notablecalls: It must be a pain covering a co like this one. There looks to be very little hope for the holders of the common here. Lucky for them, short interest stands close to 20%. Not actionable but good to know category.
Firm notes they see divestiture of businesses as the most likely alternative. In their view, UT Starcom acquired its way into too many disparate businesses as it tried to diversify away from a declining PAS market. Firm says they have a tough time identifying a potential buyer for the entire company. On the other hand, a divestiture of individual businesses won't be an easy task either. Individual businesses could be difficult to unwind and separate from the core R&D and manufacturing assets of the company.
They have segmented UTStarcom's business into five components (slightly different from reported segments). This totals a value of roughly $1.2 billion, or 0.6x 2006 rev est. The calculation includes $360M for its PAS businesses, $400M for CDMA handsets, $320M for Broadband Infrastructure, $120M for Wireless Infrastructure.
Maintains Hold.
Notablecalls: It must be a pain covering a co like this one. There looks to be very little hope for the holders of the common here. Lucky for them, short interest stands close to 20%. Not actionable but good to know category.
Calls of Note Part 2
- Merrill Lynch comments on ImClone Systems (NASDAQ:IMCL) saying that based on NDC data, Erbitux sales declined 10% month-over-month as Amgen's Vectibix continued to capture share of the Erbitux market faster than expected.
ML believes that unless there is significant market expansion, Vectibix could hurt Erbitux worse than the Street assumes because short durations of treatment make it easy for physicians to switch to Vectibix rather than Erbitux regimens for new patients.
They expect continued loss of market share to Vectibix will lead ImClone to reduce the price of Erbitux, which will hurt revenues. Firm does not expect a decision on price cuts to be made until the CRYSTAL phase 3 data in 1st line colorectal cancer is available in 1H07. They believe CRYSTAL will meaningfully benefit sales because the primary endpoint is progression-free survival, not survival, which is not enough to cause broader adoption & the regimen used in the study is not
standard of care.
With Erbitux sales now clearly declining as Vectibix captures share of its market, the firm believes it is less likely that ImClone can be acquired for a price near or above its current value. If market share continues to decline and ImClone/Bristol Myers have to lower price to compete, peak revenues are likely to fall significantly below Street estimates, reducing the company's break-up value. They currently estimate a break-up value of $25-$29, but if sales decline and Erbitux's price is cut, the break-up value could be in the low $20s or lower.
Reits Sell.
Notablecalls: Oh boy, IMCL's in trouble. Their main revenue generator is facing huge competition, there is nothing exciting in the pipeline and now the talk of the imminent takeover (it's been imminent for the past 3 yrs) is fading. Looking at the chart I suspect most market participants already know it. While I suspect the call will hurt the stock early on, it may produce a bounce later. That's how it usually works. Also, Carl Icahn may still have something up his sleeve.
ML believes that unless there is significant market expansion, Vectibix could hurt Erbitux worse than the Street assumes because short durations of treatment make it easy for physicians to switch to Vectibix rather than Erbitux regimens for new patients.
They expect continued loss of market share to Vectibix will lead ImClone to reduce the price of Erbitux, which will hurt revenues. Firm does not expect a decision on price cuts to be made until the CRYSTAL phase 3 data in 1st line colorectal cancer is available in 1H07. They believe CRYSTAL will meaningfully benefit sales because the primary endpoint is progression-free survival, not survival, which is not enough to cause broader adoption & the regimen used in the study is not
standard of care.
With Erbitux sales now clearly declining as Vectibix captures share of its market, the firm believes it is less likely that ImClone can be acquired for a price near or above its current value. If market share continues to decline and ImClone/Bristol Myers have to lower price to compete, peak revenues are likely to fall significantly below Street estimates, reducing the company's break-up value. They currently estimate a break-up value of $25-$29, but if sales decline and Erbitux's price is cut, the break-up value could be in the low $20s or lower.
Reits Sell.
Notablecalls: Oh boy, IMCL's in trouble. Their main revenue generator is facing huge competition, there is nothing exciting in the pipeline and now the talk of the imminent takeover (it's been imminent for the past 3 yrs) is fading. Looking at the chart I suspect most market participants already know it. While I suspect the call will hurt the stock early on, it may produce a bounce later. That's how it usually works. Also, Carl Icahn may still have something up his sleeve.
Calls of Note Part 1
- Wachovia highlights Costco (NASDAQ:COST) as their top pick for 2007. While not deviod of near-term risk, firm's outlook for membership fee income (MFI) growth - and the associated value it conveys to equity investors - provides the foundation for what they believe is a very favorable underlying risk/reward profile on the shares over the next 6-12 months.
Accounting for more than 70% of COST's annual operating income and growing at impressive double digit rates, membership fee income represents a powerful (and visible) source of value creation for COST shareholders over time. Following ~11% growth in FY06, MFI grew 14% in 1Q07 and is poised to accelerate further in coming quarters (WACH sees ~16% growth for FY07 in total).
Beyond this rising MFI profile, factors which support our bullish stance on COST include significant free cash flow generation (they estimate as much as $600MM this year), aggressive share buyback activity (they assume $1.6 billion), and the potential for the implementation of a more restictive return policy on TVs at some point in the year.
Sees valuation range of around $60 to $62.
Notablecalls: I don't think the call will have much impact on the stock. In case you do feel inclined to trade this one the 200 MA (exp) should act the the tight leash.
Accounting for more than 70% of COST's annual operating income and growing at impressive double digit rates, membership fee income represents a powerful (and visible) source of value creation for COST shareholders over time. Following ~11% growth in FY06, MFI grew 14% in 1Q07 and is poised to accelerate further in coming quarters (WACH sees ~16% growth for FY07 in total).
Beyond this rising MFI profile, factors which support our bullish stance on COST include significant free cash flow generation (they estimate as much as $600MM this year), aggressive share buyback activity (they assume $1.6 billion), and the potential for the implementation of a more restictive return policy on TVs at some point in the year.
Sees valuation range of around $60 to $62.
Notablecalls: I don't think the call will have much impact on the stock. In case you do feel inclined to trade this one the 200 MA (exp) should act the the tight leash.
Paperstand
The WSJ's "Heard on the Street" column discusses Leap Wireless (LEAP), whose shares have risen sharply this year and some investors are betting that they are in position to jump higher. To gain traction as a tiny carrier in the crowded cellphone industry, Leap took an unconventional approach. Under the brand name "Cricket," it targets niche mkts overlooked by larger carriers: young, low-income and ethnic customers. Leap doesn't require credit checks or contracts, and it offers flat-rate service rather than charging for minutes. That formula has paid off. The co has attracted 2m subs at a time when more than 3/4 of Americans already have cellphones. Shareholders have been rewarded: The stock is up 58% this year. The question now: Is the startling run over or will Leap sustain its fast-paced growth as it enters new mkts, fueling more gains? The answer could be continued growth, if investors are patient.
NY Times reports that the final burst of buying is expected to fall short of retailers’ expectations. Visa USA said that it would lower its closely watched forecast for holiday spending. Based on purchases by credit and debit card holders, Visa said sales rose 6.5% in Nov and Dec, compared with the same period last year, down from its initial forecast of a 7.5% gain. The co’s unexpected downward revision, and the millions of dollars in lost sales it represents, could have broad implications for the nation’s merchants, who count on purchases during the holiday season for nearly half of their business.
NY Times reports that the final burst of buying is expected to fall short of retailers’ expectations. Visa USA said that it would lower its closely watched forecast for holiday spending. Based on purchases by credit and debit card holders, Visa said sales rose 6.5% in Nov and Dec, compared with the same period last year, down from its initial forecast of a 7.5% gain. The co’s unexpected downward revision, and the millions of dollars in lost sales it represents, could have broad implications for the nation’s merchants, who count on purchases during the holiday season for nearly half of their business.
Sunday, December 24, 2006
Barron's Summary
Barron’s cover discusses US economy and stock mkt, saying that a cloud hangs over them. Bears worry that a serious recession lies ahead, spurred by overleveraged consumers cutting their spending in response to a collapse in home prices. Longer term, gloomsters bemoan the US' huge current-account deficit, a reflection, they insist, of America's lust for consuming more than it produces and spending more than it saves. Only the kindness of strangers (mostly Chinese and other Asian central bankers buying US debt securities) lets Uncle Sam continue his profligate ways. But such opinions aren't shared by everyone. Nor is Wall St. poised on a precipice. Stocks actually are cheap by many measures, says research boutique GaveKal. And shares of a certain type of nimble and tech-minded U.S. multinational could rise the most in coming years. Co’s mentioned include: AAPL, MOT, HPQ, DELL, BDK, IBM, DHR and ADI.
Fund managers like TXT, CSX, HES, TIN, D, IHG, CS and AZ.
Peabody Energy (BTU) trades for around 41 a share, far below its May peak of 76.29. As the co converts coal into earnings, its stock could rally toward 60.
After outpacing many media stocks in recent months, the shares of E.W. Scripps (SSP) could easily rise another 20%. New-media rev is surging, and the newspapers are holding up relatively well.
ITT (ITT) could trade up to 72 in 2 years, commanding a sector average of 18x earnings, as investors grow to appreciate its earnings visibility.
Hedge fund manager likes CVS, VRSN, YHOO and HB.
Friday, December 22, 2006
Merry Christmas!
Wanted to take a moment to thank NC readers and especially the folks that have sent us wonferful feedback. It's certainly been an interesting 7 months working on this blog.
Merry Christmas everyone. NC will be back on Tuesday.
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I wanted to let you know, how much a few of us appreciate the work you put into the blog. Thank you...keep up the great work.
Bob M.
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I don’t know who you are or where you get your info from, but I enjoy reading your blog several times during the day. I constantly check for updates during the day and get disappointed when there aren’t any. I find your posts insightful and meaningful. They give me a heads up on the market and since I day trade, they are tremendously useful. Makes me feel like I have an inside track. Thank you for providing this wonderful service. I hope to see a lot more from you. Feel free to write. Best to you.
Steve C.
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Hi there,
I happened to come across your blog a few days ago, and I gotta tella ya....I am impressed. I have been trading for 7 years now, and do so mostly around the ug/dg of the day tht I find to b most worthy of a trade, and find your blog to be very informative.
Keep it up,
Sincerely,
Larry B
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I find your site to be a very valuable tool each day. I am partner in a trading firm.
Jerry P.
Merry Christmas everyone. NC will be back on Tuesday.
--------
I wanted to let you know, how much a few of us appreciate the work you put into the blog. Thank you...keep up the great work.
Bob M.
--------
I don’t know who you are or where you get your info from, but I enjoy reading your blog several times during the day. I constantly check for updates during the day and get disappointed when there aren’t any. I find your posts insightful and meaningful. They give me a heads up on the market and since I day trade, they are tremendously useful. Makes me feel like I have an inside track. Thank you for providing this wonderful service. I hope to see a lot more from you. Feel free to write. Best to you.
Steve C.
---------
Hi there,
I happened to come across your blog a few days ago, and I gotta tella ya....I am impressed. I have been trading for 7 years now, and do so mostly around the ug/dg of the day tht I find to b most worthy of a trade, and find your blog to be very informative.
Keep it up,
Sincerely,
Larry B
---------
I find your site to be a very valuable tool each day. I am partner in a trading firm.
Jerry P.
Color on news: Qualcomm (NASDAQ:QCOM)
Several firms are commenting on QUALCOMM (NASDAQ:QCOM) after the co lowered their EPS guidance overnight:
- Morgan Stanley notes the EPS shortfall is being driven by higher legal expenses and bad debt reserves related to the Pantech Group in South Korea. Firm notes Pantech Group (Pantech, Curitel, and SK Teletech) shipped 4.1MM handsets in the 1H C2006, split between the CDMA and GSM/GPRS market.
With firm's revenue estimate already inline with the new guidance but with their chipset unit estimate slightly below, it suggests a mix shift to lower end phones (which will impact royalties in subsequent quarters) and/or lower sales of chipsets for basestations. CDMA+WCDMA handset shipments in the September quarter (royalties are recognized in arrears) are now expected to be 75-76MM units with a blended ASP of $210 versus firm's estimate of 75MM units and a blended ASP of $209 per unit.
Firm expects to update their estimates when they obtain further visibility into the March quarter. However they estimate there is $0.01 risk to adjusted EPS estimate of $0.43. Firm's F2007 EPS estimate of $1.77 also remains unchanged. They expect QCOM will face a modest amount of selling pressure on the news, as many investors remain hopeful for a favorable outcome of the ongoing licensing dispute with Nokia.
- Jeffco notes QCOM remains one of their best pure play picks into the 3G migration trend. As strong proxy for the broader wireless handset market, QCOM themetics for CY07 remains strong despite the on-going Nokia battle, and supports firm's positive stance on QCOM's position. There has been much pessimism about weaker handset demand, this is a positive datapoint for the sector. Firm believes that visibility should start improving in 2007 with potential resolution or settlement of many of the legal issues.
Maintains Buy and $54 PT.
- Goldman Sachs notes demand fundamentals appear positive which bodes well for the long term outlook for the shares. However, legal issues are likely to continue to dominate in the near-term, negatively impacting sentiment and limiting any near-term earnings upside. Nevertheless, the firm continues to believe that Investors with a long time horizon of 12 months or more will be paid to wait out the near-term impact of legal concerns. Fundamental demand remains healthy as demand for 3G continues to improve and 2G markets still have growth left in them, as QUALCOMM's chip segment continues to integrate in additional features and drive down prices with new chip designs. They see 2 potential upside catalysts: 1) the recent 3G chip win at Motorola could drive upside to 2008 estimates. 2) Qualcomm will be a key beneficiary of China's eventual move to 3G.
Firm is lowering their 12 month price target to $55 from $58.20. Maintains Buy.
Notablecalls: JPM is downgrading their rating to Underweight from Neutral saying that not only do these legal costs appear here to stay for some time, they suspect they could increase even further in the coming months. I expect QCOM to trade down following the downgrade as JPM may indeed be right. On the other hand, I see the stock as a bounce candidate, possibly below the $37 level.
- Morgan Stanley notes the EPS shortfall is being driven by higher legal expenses and bad debt reserves related to the Pantech Group in South Korea. Firm notes Pantech Group (Pantech, Curitel, and SK Teletech) shipped 4.1MM handsets in the 1H C2006, split between the CDMA and GSM/GPRS market.
With firm's revenue estimate already inline with the new guidance but with their chipset unit estimate slightly below, it suggests a mix shift to lower end phones (which will impact royalties in subsequent quarters) and/or lower sales of chipsets for basestations. CDMA+WCDMA handset shipments in the September quarter (royalties are recognized in arrears) are now expected to be 75-76MM units with a blended ASP of $210 versus firm's estimate of 75MM units and a blended ASP of $209 per unit.
Firm expects to update their estimates when they obtain further visibility into the March quarter. However they estimate there is $0.01 risk to adjusted EPS estimate of $0.43. Firm's F2007 EPS estimate of $1.77 also remains unchanged. They expect QCOM will face a modest amount of selling pressure on the news, as many investors remain hopeful for a favorable outcome of the ongoing licensing dispute with Nokia.
- Jeffco notes QCOM remains one of their best pure play picks into the 3G migration trend. As strong proxy for the broader wireless handset market, QCOM themetics for CY07 remains strong despite the on-going Nokia battle, and supports firm's positive stance on QCOM's position. There has been much pessimism about weaker handset demand, this is a positive datapoint for the sector. Firm believes that visibility should start improving in 2007 with potential resolution or settlement of many of the legal issues.
Maintains Buy and $54 PT.
- Goldman Sachs notes demand fundamentals appear positive which bodes well for the long term outlook for the shares. However, legal issues are likely to continue to dominate in the near-term, negatively impacting sentiment and limiting any near-term earnings upside. Nevertheless, the firm continues to believe that Investors with a long time horizon of 12 months or more will be paid to wait out the near-term impact of legal concerns. Fundamental demand remains healthy as demand for 3G continues to improve and 2G markets still have growth left in them, as QUALCOMM's chip segment continues to integrate in additional features and drive down prices with new chip designs. They see 2 potential upside catalysts: 1) the recent 3G chip win at Motorola could drive upside to 2008 estimates. 2) Qualcomm will be a key beneficiary of China's eventual move to 3G.
Firm is lowering their 12 month price target to $55 from $58.20. Maintains Buy.
Notablecalls: JPM is downgrading their rating to Underweight from Neutral saying that not only do these legal costs appear here to stay for some time, they suspect they could increase even further in the coming months. I expect QCOM to trade down following the downgrade as JPM may indeed be right. On the other hand, I see the stock as a bounce candidate, possibly below the $37 level.
Color on Quarter: Micron (NYSE:MU)
Several firms commenting Micron (NYSE:MU) after co reported Nov qtr last night.
- NC's favorite Eric Ross from ThinkEquity says the company saw strength across all of its business segments during the quarter, benefited by PC manufacturers buying up DRAM due to Vista and mobile phones moving to higher-resolution image sensors. Eric gives a nice overview segment-by-segment:
* Revenues for the computing DRAM were approximately $758 million, up 23% Q/Q, roughly 48% of revenues. Management said that demand is mostly driven by Vista, as the new OS is driving increasing memory per PC.
* Non-computing DRAM was approximately $348 million, up 1% Q/Q, roughly 22% of revenues. MU is worried that handset inventories will cause this segment to lag.
* NAND Flash was approximately $269 million, down 2% Q/Q, roughly 17% of revenues. Pricing was weak, but costs were lower than expected.
* Image Sensors was about $205 million, up 50% Q/Q, roughly 13% of revenues. Firm continues to believe that the main driver for this segment will likely be increasing Mpixels rather than attach rate.
- JP Morgan out cautiosly as expected given their recent downgrade. Firm notes gross margin upside due to higher than expected DRAM pricing (roughly 67% of F1Q07 revenue). However, the improved margins were offset by higher than expected operating expenses as the company ramps its new factories.
Inventories approaching record levels, which is a concern. While firm is positive on Micron's DRAM leverage, they remain concerned on the company's growing inventories. Days of inventory at Micron were up 9 days QoQ to 93 days, significantly above a normal level of 60-70 which adds risk to gross margins. Memory and sensor inventories grew sequentially.
- First Albany upgrading Micron to Buy from Neutral, saying that while they continue to believe that 1H:CY07 will be challenging for the memory makers, they also believe that this expectation is priced into MU shares. Firm also believes that 2H:CY07 and CY08 will be strong for the memory makers, particularly if other vendors hesitate to build capacity in 1H:CY07. FIrm believes that MU's valuation is compelling at current levels.
- Merrill Lynch sees Micron as short term trading opportunity of 20-25% upside. Firm doesn't think Micron is well-positioned enough or attractively valued enough to merit a buy recommendation. However, they note that DRAM pricing is expected to stay strong through the first part of next year, and Micron's stock has lagged the semiconductor sector and the broader market. They continue to see a short-term trading opportunity in the stock with a 20-25% range.
Rising capacity adds in the DRAM business raise the specter of overcapacity, and firm does think the risk of a sharp decline in pricing exists for the second half of 2007. For the next several quarters, though, the DRAM industry is clearly chasing demand.
Notablecalls: Maintaining my view from last night - MU is going higher today (and in the coming weeks) than the afterhours prices of yesterday. Out of the today's comments I'd point out Merrill's as this is the closest to my view. Think DRAM pricing will continue to surprise as PC manufacturers are getting ready for Vista launch. Looks like the process will help Micron through seasonally weaker Feb quarter and higher inventories.
- NC's favorite Eric Ross from ThinkEquity says the company saw strength across all of its business segments during the quarter, benefited by PC manufacturers buying up DRAM due to Vista and mobile phones moving to higher-resolution image sensors. Eric gives a nice overview segment-by-segment:
* Revenues for the computing DRAM were approximately $758 million, up 23% Q/Q, roughly 48% of revenues. Management said that demand is mostly driven by Vista, as the new OS is driving increasing memory per PC.
* Non-computing DRAM was approximately $348 million, up 1% Q/Q, roughly 22% of revenues. MU is worried that handset inventories will cause this segment to lag.
* NAND Flash was approximately $269 million, down 2% Q/Q, roughly 17% of revenues. Pricing was weak, but costs were lower than expected.
* Image Sensors was about $205 million, up 50% Q/Q, roughly 13% of revenues. Firm continues to believe that the main driver for this segment will likely be increasing Mpixels rather than attach rate.
- JP Morgan out cautiosly as expected given their recent downgrade. Firm notes gross margin upside due to higher than expected DRAM pricing (roughly 67% of F1Q07 revenue). However, the improved margins were offset by higher than expected operating expenses as the company ramps its new factories.
Inventories approaching record levels, which is a concern. While firm is positive on Micron's DRAM leverage, they remain concerned on the company's growing inventories. Days of inventory at Micron were up 9 days QoQ to 93 days, significantly above a normal level of 60-70 which adds risk to gross margins. Memory and sensor inventories grew sequentially.
- First Albany upgrading Micron to Buy from Neutral, saying that while they continue to believe that 1H:CY07 will be challenging for the memory makers, they also believe that this expectation is priced into MU shares. Firm also believes that 2H:CY07 and CY08 will be strong for the memory makers, particularly if other vendors hesitate to build capacity in 1H:CY07. FIrm believes that MU's valuation is compelling at current levels.
- Merrill Lynch sees Micron as short term trading opportunity of 20-25% upside. Firm doesn't think Micron is well-positioned enough or attractively valued enough to merit a buy recommendation. However, they note that DRAM pricing is expected to stay strong through the first part of next year, and Micron's stock has lagged the semiconductor sector and the broader market. They continue to see a short-term trading opportunity in the stock with a 20-25% range.
Rising capacity adds in the DRAM business raise the specter of overcapacity, and firm does think the risk of a sharp decline in pricing exists for the second half of 2007. For the next several quarters, though, the DRAM industry is clearly chasing demand.
Notablecalls: Maintaining my view from last night - MU is going higher today (and in the coming weeks) than the afterhours prices of yesterday. Out of the today's comments I'd point out Merrill's as this is the closest to my view. Think DRAM pricing will continue to surprise as PC manufacturers are getting ready for Vista launch. Looks like the process will help Micron through seasonally weaker Feb quarter and higher inventories.
Calls of Note Part 1
- Merrill Lynch is lowering their 2007 estimates on Yahoo (NASDAQ:YHOO) to reflect near-term Panama search monetization and management reorganization uncertainty. Firm thinks lower 2007 guidance versus published estimates is anticipated by the street, however Yahoo! stock may face pressure into the Jan. earnings call owing to guidance related uncertainty. Firm is lowering their 2007 revenue and EBITDA assumptions, which remain below consensus, to 15% growth from 18% (consensus is at 20%). They expect stock support above $23 (9x 2008E EV/EBITDA), and note that advertisers transitioning to Panama are generally positive on campaign management software tools, but remain divided on short-term impact of upcoming marketplace design (algorithm) changes, which warrants some near-term caution.
Pressures on 1H'07 revenue growth will include Panama transition, MSN loss, Daum affiliate loss, higher TAC rates and, potentially, the recent management reorganization. Firm notes their are optimistic that new partnerships and branded ad network opportunities in 2007 will help offset some of the affiliate losses to Google. Internet advertising industry growth remains robust, external data indicates that Yahoo! is holding US query share, and Panama opportunity is large, which is the basis for their positive long-term view on the stock given current valuation.
Firm's base case scenario for Panama assumes 8.5% core 4-year EBITDA growth (excluding search monetization) and a 70% improvement in search query monetization from Panama over 4 years. In this scenario, they value the stock at $32 based on 13x 2008E EBITDA.
2007 estimate changes:
Lowering revenue to $5.23bn (15% growth) from $5.34 bn
Lowering adjusted EBITDA to $2.15bn (15% growth) from $2.21bn
Lowering adjusted EPS to $0.75 (13% growth) from $0.78.
Notablecalls: I don't see this on as actionable. Good to know category.
Pressures on 1H'07 revenue growth will include Panama transition, MSN loss, Daum affiliate loss, higher TAC rates and, potentially, the recent management reorganization. Firm notes their are optimistic that new partnerships and branded ad network opportunities in 2007 will help offset some of the affiliate losses to Google. Internet advertising industry growth remains robust, external data indicates that Yahoo! is holding US query share, and Panama opportunity is large, which is the basis for their positive long-term view on the stock given current valuation.
Firm's base case scenario for Panama assumes 8.5% core 4-year EBITDA growth (excluding search monetization) and a 70% improvement in search query monetization from Panama over 4 years. In this scenario, they value the stock at $32 based on 13x 2008E EBITDA.
2007 estimate changes:
Lowering revenue to $5.23bn (15% growth) from $5.34 bn
Lowering adjusted EBITDA to $2.15bn (15% growth) from $2.21bn
Lowering adjusted EPS to $0.75 (13% growth) from $0.78.
Notablecalls: I don't see this on as actionable. Good to know category.
Color on news: Red Hat (NYSE:RHT)
Several firms are commenting on Red Hat (NYSE:RHT) after the co reported stronger than expected results last night:
- Merrill Lynch notes 1) Billings of $133.4mn (up 3% q/q, 50% y/y, highest y/y growth in 5 quarters) vs. est of 131.9mn and expectations ($110-115mn). 2) Cash flows ($59.6mn) handily beat ML est ($51.0mn) and expectations ($43-44mn). 3) Deferred revenue up 10% q/q and above expectations of 4%. Contrary to fears that Red Hat offered special discounts on long-term subscriptions, long-term deferred revenue was 27% of total deferred revenue, basically unchanged from two quarters back.
Impact from ORCL/NOVL seems limited. Although Red Hat had five weeks of competition in the quarter, it lost only a few customers. Oracle's Linux push is validating the market and expanding the pie which is driving more business for Red Hat, attested by 12K new customers in 3Q07 (up 20% q/q).
ML is raising their 4Q07 raising pro forma 4Q07 EPS by a penny (from $0.14 to $0.15) due to potential operating margin expansion (from 20.8% to 21.8%) but trimming revenue est to $113mn (from $114.6mn) and cash flows est (from $54.6mn to $44.6mn). Firm's 4Q07 cash flow est of $44.7mn is conservative and leaves potential room for upside. The firm is raising their FY08 pro forma EPS (from $0.65 to $0.69), mainly due to interest income and also trimming FY08 cash flow est (from $250.6mn to $240.5mn).
Tgt goes to $30. Rating maintained at Buy.
- Deutsche Bank notes Red Hat's execution in F3Q was solid as the company delivered upside
across almost every metric, especially considering the potential for distraction given the Oracle and Microsoft/Novell announcements. However, these competitive risks remain longer-term and the firm believes this will limit the multiple expansion potential for the stock.
The introduction of RHEL 5.0 at the start of next year should be a positive driver for the company given the current momentum in server virtualization and RHEL 5.0's integration of Xen virtualization support. The larger issue in firm's opinion though, is what impact Oracle
and Microsoft/Novell will have on Red Hat's pricing negotiations with customers. While it does not appear to be having a large impact yet, they believe it is still early and the potential impact could be significant.
Maintains Hold.
- UBS has the best note on RHT saying the focus, as usual, was on billings and cash flow, with each metric handily exceeding the pessimism of the street. Billings for the quarter came
in at $133m or +19% sequentially which compares to firm's conversations with investors that suggest that any level of growth this quarter would have been considered a positive surprise. Regarding cash flow, $60m was above consensus of $47m, with firm's view that the market was looking for a number more in the $42-$45m range. While many expected cash flow guidance for the current fiscal year to come down, given the level just posted, the company only needs to generate about $42m in its fiscal 4th quarter in order to hit the midpoint of its prior range.
In all, while there was more upside than they expected, last night's results confirm our recent field checks, where conversations with 15+ resellers highlighted that Red Hat's business was not as impacted in the quarter from the Oracle and Novell/Microsoft announcements as many had anticipated. While the firm had thought a good deal of short covering had occurred going into last night's print, the limited activity in the aftermarket (given the stock is now traded on the NYSE) would suggest otherwise. UBS notes that the November data (as of November 15th) indicated that 20m shares (11% of shares outstanding) of Red Hat were sold short, which represents the highest level since July 2005. With liquidity likely to be below average today given we are entering a holiday weekend, they believe the volatility of the stock will likely be exacerbated.
Although firm's checks suggest the near-term impact on Red Hat will be muted at best, and with 75% of resellers suggesting pipelines for Linux server demand in 2007 appear to be tracking above 2006 levels, they believe the key question will be whether or not Red Hat will face pricing pressure 6-9 months down the road. On this point, just over 50% of firm's reseller contacts suggest that Red Hat pricing will need to decline in the 15-20% range over the next 6-18 months.
With the stock looking as if it will gap up to $20 or so at the open today, suggesting a 23x multiple on CY07 CFO, the firm believes the question on pricing needs to be evaluated in more detail before making a commitment to the stock either way.
Firm ups their tgt to $19 from $17.50 but maintains Neutral rating.
Notablecalls: RHT trades around 40x CY07 EPS and has ORCL coming to challenge them on their own turf. I suspect the short interest is the main thing keeping the stock afloat here. Watch for some of the short positions being unwind. That may provide an interesting shorting oppy. Call me paranoid but I think that moving to NYSE was management's way of making short-selling in the stock more difficult.
- Merrill Lynch notes 1) Billings of $133.4mn (up 3% q/q, 50% y/y, highest y/y growth in 5 quarters) vs. est of 131.9mn and expectations ($110-115mn). 2) Cash flows ($59.6mn) handily beat ML est ($51.0mn) and expectations ($43-44mn). 3) Deferred revenue up 10% q/q and above expectations of 4%. Contrary to fears that Red Hat offered special discounts on long-term subscriptions, long-term deferred revenue was 27% of total deferred revenue, basically unchanged from two quarters back.
Impact from ORCL/NOVL seems limited. Although Red Hat had five weeks of competition in the quarter, it lost only a few customers. Oracle's Linux push is validating the market and expanding the pie which is driving more business for Red Hat, attested by 12K new customers in 3Q07 (up 20% q/q).
ML is raising their 4Q07 raising pro forma 4Q07 EPS by a penny (from $0.14 to $0.15) due to potential operating margin expansion (from 20.8% to 21.8%) but trimming revenue est to $113mn (from $114.6mn) and cash flows est (from $54.6mn to $44.6mn). Firm's 4Q07 cash flow est of $44.7mn is conservative and leaves potential room for upside. The firm is raising their FY08 pro forma EPS (from $0.65 to $0.69), mainly due to interest income and also trimming FY08 cash flow est (from $250.6mn to $240.5mn).
Tgt goes to $30. Rating maintained at Buy.
- Deutsche Bank notes Red Hat's execution in F3Q was solid as the company delivered upside
across almost every metric, especially considering the potential for distraction given the Oracle and Microsoft/Novell announcements. However, these competitive risks remain longer-term and the firm believes this will limit the multiple expansion potential for the stock.
The introduction of RHEL 5.0 at the start of next year should be a positive driver for the company given the current momentum in server virtualization and RHEL 5.0's integration of Xen virtualization support. The larger issue in firm's opinion though, is what impact Oracle
and Microsoft/Novell will have on Red Hat's pricing negotiations with customers. While it does not appear to be having a large impact yet, they believe it is still early and the potential impact could be significant.
Maintains Hold.
- UBS has the best note on RHT saying the focus, as usual, was on billings and cash flow, with each metric handily exceeding the pessimism of the street. Billings for the quarter came
in at $133m or +19% sequentially which compares to firm's conversations with investors that suggest that any level of growth this quarter would have been considered a positive surprise. Regarding cash flow, $60m was above consensus of $47m, with firm's view that the market was looking for a number more in the $42-$45m range. While many expected cash flow guidance for the current fiscal year to come down, given the level just posted, the company only needs to generate about $42m in its fiscal 4th quarter in order to hit the midpoint of its prior range.
In all, while there was more upside than they expected, last night's results confirm our recent field checks, where conversations with 15+ resellers highlighted that Red Hat's business was not as impacted in the quarter from the Oracle and Novell/Microsoft announcements as many had anticipated. While the firm had thought a good deal of short covering had occurred going into last night's print, the limited activity in the aftermarket (given the stock is now traded on the NYSE) would suggest otherwise. UBS notes that the November data (as of November 15th) indicated that 20m shares (11% of shares outstanding) of Red Hat were sold short, which represents the highest level since July 2005. With liquidity likely to be below average today given we are entering a holiday weekend, they believe the volatility of the stock will likely be exacerbated.
Although firm's checks suggest the near-term impact on Red Hat will be muted at best, and with 75% of resellers suggesting pipelines for Linux server demand in 2007 appear to be tracking above 2006 levels, they believe the key question will be whether or not Red Hat will face pricing pressure 6-9 months down the road. On this point, just over 50% of firm's reseller contacts suggest that Red Hat pricing will need to decline in the 15-20% range over the next 6-18 months.
With the stock looking as if it will gap up to $20 or so at the open today, suggesting a 23x multiple on CY07 CFO, the firm believes the question on pricing needs to be evaluated in more detail before making a commitment to the stock either way.
Firm ups their tgt to $19 from $17.50 but maintains Neutral rating.
Notablecalls: RHT trades around 40x CY07 EPS and has ORCL coming to challenge them on their own turf. I suspect the short interest is the main thing keeping the stock afloat here. Watch for some of the short positions being unwind. That may provide an interesting shorting oppy. Call me paranoid but I think that moving to NYSE was management's way of making short-selling in the stock more difficult.
Thursday, December 21, 2006
Quick Comment on Micron (NYSE:MU)
Micron (NYSE:MU) is out with the numbers. Quick look at the numbers shows mixed bag of positives and negatives, but at least for me, positives are outweighting the negatives.
Positives:
1) EPS way above expectations on strong gross margins - don't think that anybody expected margins as high as 31%.
2) NAND doing well, 15% revs coming from NAND according to the co - up from <10% in the previous quarters. Lexar sure helped, but the worst fears didn't come true for sure. And co is even telling that NAND margins improved!!
3) CMOS margins maintained - that is sure good thing in light of what OVTI was telling us.
Negatives:
1) Revenue. Looks like the co was concentrating on margins on the expense of revenue.
2) Inventories increased another ~$150m. That is a cause for concern.
As said, more positives than negatives. Expecting the stock to go higher tomorrow than the current $14.15 in the afterhours.
Positives:
1) EPS way above expectations on strong gross margins - don't think that anybody expected margins as high as 31%.
2) NAND doing well, 15% revs coming from NAND according to the co - up from <10% in the previous quarters. Lexar sure helped, but the worst fears didn't come true for sure. And co is even telling that NAND margins improved!!
3) CMOS margins maintained - that is sure good thing in light of what OVTI was telling us.
Negatives:
1) Revenue. Looks like the co was concentrating on margins on the expense of revenue.
2) Inventories increased another ~$150m. That is a cause for concern.
As said, more positives than negatives. Expecting the stock to go higher tomorrow than the current $14.15 in the afterhours.
Calls of Note Part 4
- ThinkEquity's ever-wonderful Eric Ross is previewing Micron's (NYSE:MU) qtr saying he believes MU will make the consensus estimates, which would beat the "whisper" that the company will miss. He expects this to be a meaningful positive, as he think a miss is already priced into the stock. Mr. Ross think shortages in DDR2 and stable contract pricing are the most likely drivers, with some support from sensors. He believes that strength will be partially offset by weak NAND, and that specialty DRAM (for cell phones) is a concern due to burgeoning cell phone inventories. Reiterates ACCUMULATE rating.
Every Taiwan PC participant told the firm of DDR2 shortages. Demand appears to be good, and ODMs are "screaming" for inventory. Contract prices are stable. Demand appears to have cooled somewhat in December, although this is typical in December, and demand appears stronger than typical seasonality.
Sensors are likely positive as well. The transition to higher density sensors is keeping ASPs solid. OVTI is likely playing at the low end relative to MU, which likely isn't seeing the pricing pressure that OVTI (OVTI) is seeing.
NAND is weak, but likely a small portion of revenues. MU is fortunate to have such little exposure to NAND (under 10%). Mr. Ross notes he is a bit worried about specialty DRAM. The majority of this segment is pseudo SRAM for cell phone handsets, and he is concerned about growing inventories in handsets. Even if this segment reports well this quarter, he believes it may be tougher in the following quarter.
MU shares are trading at 11.4x firm's estimated CY07 EPS of $0.86 (net of cash and debt), at a discount to Universe at 17.9x.
Notablecalls: Well, you know where NC stands regarding Micron. Anyone think MU can run into tonight's release?
Long MU.
Every Taiwan PC participant told the firm of DDR2 shortages. Demand appears to be good, and ODMs are "screaming" for inventory. Contract prices are stable. Demand appears to have cooled somewhat in December, although this is typical in December, and demand appears stronger than typical seasonality.
Sensors are likely positive as well. The transition to higher density sensors is keeping ASPs solid. OVTI is likely playing at the low end relative to MU, which likely isn't seeing the pricing pressure that OVTI (OVTI) is seeing.
NAND is weak, but likely a small portion of revenues. MU is fortunate to have such little exposure to NAND (under 10%). Mr. Ross notes he is a bit worried about specialty DRAM. The majority of this segment is pseudo SRAM for cell phone handsets, and he is concerned about growing inventories in handsets. Even if this segment reports well this quarter, he believes it may be tougher in the following quarter.
MU shares are trading at 11.4x firm's estimated CY07 EPS of $0.86 (net of cash and debt), at a discount to Universe at 17.9x.
Notablecalls: Well, you know where NC stands regarding Micron. Anyone think MU can run into tonight's release?
Long MU.
Calls of Note Part 3
Several firms are commenting on PMC-Sierra (NASDAQ:PMCS) after the co pre-announced lower than expected revs last night:
- Goldman Sachs notes weak trends related to communications infrastructure had also been cited in recent soft business updates from Altera, Exar, Lattice, and Xilinx, and they had noted potential risk for others with high comms exposure, such as PMC-Sierra, Applied Micro Circuits, Broadcom, and Marvell. Hence, the firm would not expect the incremental softness in PMC-Sierra's business to be viewed as much of a surprise, though magnitude of 4Q's qoq decline is still disappointing. They expect bookings and visibility are limited throughout the industry, which could also restrain 1Q outlooks. Tgt is adjusted to $7.50 from $8. Maintains Neutral.
- Merrill Lynch's Srini Pajjuri thinks that while the inventory correction in telecom appears to be nearing an end, demand appears to have weakened a bit due to pending mergers in the industry. Orders from China also appear somewhat weak, which he thinks was due to capex cuts in anticipation of 3G. Storage and enterprise, which accounts for 50% of sales, appears healthy and Mr. Pajjuri expect these businesses to grow in Q4.
Given the recent negative telecom semi news flow out of Xilinx, Altera, and Exar this quarter, the firm is not entirely surprised at the negative outlook revision. However, they believe that we're nearing the bottom, and expect the stock to outperform over the next twelve months driven by a healthy storage market, a rebound in FTTx and telecom revenue growth, and potential 3G deployments in China. Valuation appears attractive at 24x CY07 EPS for a company with 15 percent growth potential and 65 percent plus gross margins.
Maintains Buy.
- Prudential notes they expected DecQ revenues to come in at the low end of original DecQ guidance of $105 million due to concerns about the consolidation at the OEM's and service providers as well as elevated inventory levels and therefore they are not changing their estimates.
Worth noting is Jabil, one of the largest EMS players, which also announced results for its NovQ and inventory days were flat QoQ , near four year highs at 45 days. This preliminary data point supports firm's thesis that supply chain inventories will take until Q2'07 before inventories return to normal levels.
They are maintaining theirprice target of $6 and remain Neutral Weight the stock.
Notablecalls: The stock traded as low as $6.50 in after hrs. Think levels around $6.30-40 make it buyable again. For a trade, ofc. Longer term, I suspect the stock is headed towards lower levels. High fives go to Alex Gauna and Steven Chin from UBS for their cautious call made on PMCS Dec 11 (see archives). UBS is taking their tgt to $8.50 from $9 this AM but maintains Buy rating.
- Goldman Sachs notes weak trends related to communications infrastructure had also been cited in recent soft business updates from Altera, Exar, Lattice, and Xilinx, and they had noted potential risk for others with high comms exposure, such as PMC-Sierra, Applied Micro Circuits, Broadcom, and Marvell. Hence, the firm would not expect the incremental softness in PMC-Sierra's business to be viewed as much of a surprise, though magnitude of 4Q's qoq decline is still disappointing. They expect bookings and visibility are limited throughout the industry, which could also restrain 1Q outlooks. Tgt is adjusted to $7.50 from $8. Maintains Neutral.
- Merrill Lynch's Srini Pajjuri thinks that while the inventory correction in telecom appears to be nearing an end, demand appears to have weakened a bit due to pending mergers in the industry. Orders from China also appear somewhat weak, which he thinks was due to capex cuts in anticipation of 3G. Storage and enterprise, which accounts for 50% of sales, appears healthy and Mr. Pajjuri expect these businesses to grow in Q4.
Given the recent negative telecom semi news flow out of Xilinx, Altera, and Exar this quarter, the firm is not entirely surprised at the negative outlook revision. However, they believe that we're nearing the bottom, and expect the stock to outperform over the next twelve months driven by a healthy storage market, a rebound in FTTx and telecom revenue growth, and potential 3G deployments in China. Valuation appears attractive at 24x CY07 EPS for a company with 15 percent growth potential and 65 percent plus gross margins.
Maintains Buy.
- Prudential notes they expected DecQ revenues to come in at the low end of original DecQ guidance of $105 million due to concerns about the consolidation at the OEM's and service providers as well as elevated inventory levels and therefore they are not changing their estimates.
Worth noting is Jabil, one of the largest EMS players, which also announced results for its NovQ and inventory days were flat QoQ , near four year highs at 45 days. This preliminary data point supports firm's thesis that supply chain inventories will take until Q2'07 before inventories return to normal levels.
They are maintaining theirprice target of $6 and remain Neutral Weight the stock.
Notablecalls: The stock traded as low as $6.50 in after hrs. Think levels around $6.30-40 make it buyable again. For a trade, ofc. Longer term, I suspect the stock is headed towards lower levels. High fives go to Alex Gauna and Steven Chin from UBS for their cautious call made on PMCS Dec 11 (see archives). UBS is taking their tgt to $8.50 from $9 this AM but maintains Buy rating.
Calls of Note Part 2
Several firms are commenting on Jabil Circuit (NYSE:JBL) after the co released its FQ1 results and FQ2 guidance:
- Merrill Lynch notes that last night, for the second quarter in a row, Jabil provided partial FQ1 (Nov) results as it continues with a stock option investigation, which now includes an investigation into revenue recognition for Q4 of F1999 and Q3 of F2001. According to JBL, end demand was more subdued than expected as FQ1 progressed due largely to consumer (36% of sales). This does not come as a surprise given ofirm's recent research (e.g., China trip, inventory study, etc.), which has raised a number of yellow flags in the supply chain.
Given JBL's consistent track record, tey were surprised by several new issues that popped up in FQ1. First and foremost, the company is discontinuing a consumer product it designed due to delays and rising price pressures. Also, a more material intensive product mix hurt gross margins by ~50 basis points, which given the lack of SG&A details, likely implies operating profits were under more pressure than the Street would have thought.
Based on deteriorating cash cycle days (23 days vs. 14 days in FQ4), it looks as if cash flow from operations was negative for the first time in more than five years. Cash declined from $774MM to $658MM.
- Bear Stearns thinks JBL's Nov qtr conference call and "subdued" outlook will likely spoil its holiday spirits. Uncharacteristic for Jabil, its call focused more on what went wrong (more "subdued " demand, less consumer upside in Nov, yet more downside in Feb, growing inventories, negative mix change hit margins by 50bps and ensured they won't hit 4%+ until at least May 2007, $12M write-off due to failed LCD TV investment, $4M in additional legal costs, new revenue recognition issues related to 1999 and 2001, still no clue when it can file its financials, behind plan in fixing May qtr operational issues, whew??? getting tired) than what went right (hmm..networking demand was positive, (read: CSCO).
Why not downgrade? Three reasons: 1) They believe the problems listed above are temporal as opposed to secular. 2) They still like the risk/reward. 3) JBL is still a solid company earning above avg ROIC with a mgmt team that can steer it back onto its path.
Lowers FY07 EPS to $1.39 from $1.68. Tgt goes to $32 from $35. Maintains Outperform.
- RBC Capital notes they expect JBL shares to trend lower given disappointing and limited financial information as old (repair, tooling, mfg issues) and new (ODM charge, product mix) issues impeded margins in Q107. While the bulls will point to revenue growth, they remain concerned with multiple issues JBL has to contend with. Maintains Sector Perform rating as JBL has a 15% premium to the group; firm would get aggressive when the premium dissipates.
Notablecalls: Think we will see JBL going below $26 level today. Shorting around the high end of $25 level will also likely lead to profits.
- Merrill Lynch notes that last night, for the second quarter in a row, Jabil provided partial FQ1 (Nov) results as it continues with a stock option investigation, which now includes an investigation into revenue recognition for Q4 of F1999 and Q3 of F2001. According to JBL, end demand was more subdued than expected as FQ1 progressed due largely to consumer (36% of sales). This does not come as a surprise given ofirm's recent research (e.g., China trip, inventory study, etc.), which has raised a number of yellow flags in the supply chain.
Given JBL's consistent track record, tey were surprised by several new issues that popped up in FQ1. First and foremost, the company is discontinuing a consumer product it designed due to delays and rising price pressures. Also, a more material intensive product mix hurt gross margins by ~50 basis points, which given the lack of SG&A details, likely implies operating profits were under more pressure than the Street would have thought.
Based on deteriorating cash cycle days (23 days vs. 14 days in FQ4), it looks as if cash flow from operations was negative for the first time in more than five years. Cash declined from $774MM to $658MM.
- Bear Stearns thinks JBL's Nov qtr conference call and "subdued" outlook will likely spoil its holiday spirits. Uncharacteristic for Jabil, its call focused more on what went wrong (more "subdued " demand, less consumer upside in Nov, yet more downside in Feb, growing inventories, negative mix change hit margins by 50bps and ensured they won't hit 4%+ until at least May 2007, $12M write-off due to failed LCD TV investment, $4M in additional legal costs, new revenue recognition issues related to 1999 and 2001, still no clue when it can file its financials, behind plan in fixing May qtr operational issues, whew??? getting tired) than what went right (hmm..networking demand was positive, (read: CSCO).
Why not downgrade? Three reasons: 1) They believe the problems listed above are temporal as opposed to secular. 2) They still like the risk/reward. 3) JBL is still a solid company earning above avg ROIC with a mgmt team that can steer it back onto its path.
Lowers FY07 EPS to $1.39 from $1.68. Tgt goes to $32 from $35. Maintains Outperform.
- RBC Capital notes they expect JBL shares to trend lower given disappointing and limited financial information as old (repair, tooling, mfg issues) and new (ODM charge, product mix) issues impeded margins in Q107. While the bulls will point to revenue growth, they remain concerned with multiple issues JBL has to contend with. Maintains Sector Perform rating as JBL has a 15% premium to the group; firm would get aggressive when the premium dissipates.
Notablecalls: Think we will see JBL going below $26 level today. Shorting around the high end of $25 level will also likely lead to profits.
Calls of Note Part 1
UBS comments on First Data (NYSE:FDC) ahead the announced analyst and investor conference call announced last night:
- Firm thinks FDC's 3 segments are performing very well & they believe shares will benefit over the next 12 months from several catalysts (i.e. M&A, contract wins & a potential new CEO in 1H07). Since the threat of contract losses is fairly small, they reiterate their positive FDC thesis (strong growth/cash flow/leverage, favorable valuation, expansion opportunities).
They have changed their model to be in-line w/reported F06 numbers & F07 guidance (vs. prior pro-forma ests that included less debt expense). They have also removed M&A/new contract assumptions & tweaked some 1x/"below the line" items which were not related to FDC's core business. As a result, F07E EPS changed to $1.32 (from $1.47), but "core" net income growth remains an impressive 15%+.
UBS notes they are not changing their investment thesis at all. Firm continues to believe that
FDC's three main segments are performing very well and will meet and/or beat their respective F07 segment guidance (as FDC had indicated on the company's 3Q conference call). They would be extremely surprised if the company retreated on its prior commentary given it was only a few weeks ago and their businesses don't change that fast.
Firm thinks management has become increasingly frustrated by where the Street's estimates are for 2007 and while part of the blame lies with them and others, they also believe FDC did not provide enough specific information on "1x below the line" items until recently. Thinks FDC wants to set the record straight on where its expectations lie for next year. If there is anything more to the 8:30am EST conference call today, that would be a surprise to the firm.
Reits Buy and $30 tgt.
Notablecalls: I guess the timing of the management conference call came as a surprise for some and I would not be surprised to see some mkt participants get panicky. That may create a nice buying opporunity in the pre mkt ahead of the call. UBS' comments make perfect sense.
- Firm thinks FDC's 3 segments are performing very well & they believe shares will benefit over the next 12 months from several catalysts (i.e. M&A, contract wins & a potential new CEO in 1H07). Since the threat of contract losses is fairly small, they reiterate their positive FDC thesis (strong growth/cash flow/leverage, favorable valuation, expansion opportunities).
They have changed their model to be in-line w/reported F06 numbers & F07 guidance (vs. prior pro-forma ests that included less debt expense). They have also removed M&A/new contract assumptions & tweaked some 1x/"below the line" items which were not related to FDC's core business. As a result, F07E EPS changed to $1.32 (from $1.47), but "core" net income growth remains an impressive 15%+.
UBS notes they are not changing their investment thesis at all. Firm continues to believe that
FDC's three main segments are performing very well and will meet and/or beat their respective F07 segment guidance (as FDC had indicated on the company's 3Q conference call). They would be extremely surprised if the company retreated on its prior commentary given it was only a few weeks ago and their businesses don't change that fast.
Firm thinks management has become increasingly frustrated by where the Street's estimates are for 2007 and while part of the blame lies with them and others, they also believe FDC did not provide enough specific information on "1x below the line" items until recently. Thinks FDC wants to set the record straight on where its expectations lie for next year. If there is anything more to the 8:30am EST conference call today, that would be a surprise to the firm.
Reits Buy and $30 tgt.
Notablecalls: I guess the timing of the management conference call came as a surprise for some and I would not be surprised to see some mkt participants get panicky. That may create a nice buying opporunity in the pre mkt ahead of the call. UBS' comments make perfect sense.
Paperstand
The WSJ reports that hedge fund Highland Capital, that is the 2nd-largest shareholder in Delphi, plans to send a letter today to Delphi's board outlining a $4.7bn capitalization plan for Delphi, which is under Ch11. That would counter a proposal from a group of investors led by Appaloosa Mgmt and Cerberus Capital Mgmt that would infuse up to $3.4bn in preferred and common equity into the co.
According to the WSJ, Raytheon (RTN) last night was in the final stages of completing a deal to sell its aircraft-manufacturing unit to Canadian buyout firm Onex and Goldman Sachs Capital Partners for $3.3bn.
“Heard on the Street” column discusses Level 3 (LVLT), whose stock is up almost double in the past year and bond prices have risen about 20%. Behind the gains: Explosive growth in video viewing over the Internet, which requires high-speed networks of the sort Level 3 offers. At the same time, a hearty appetite by investors for risky debt has enabled the co to put itself on firmer footing by refinancing its debt at lower rates. There also are good reasons to believe that Level 3 might be an acquisition candidate. But there are reasons to be wary: The co remains saddled with debt, it is in a business that still has excess capacity, and it has reported a quarterly profit just once in its more than 20y history. With the stock and bonds at lofty levels, it could be that any future possible good news already is priced in. Even bullish analysts acknowledge that to keep the stock climbing, demand for video and voice over the Internet will have to be strong enough to allow Level 3 to increase what it charges for access to its fiber network. Level 3 also will have to demonstrate that it can skillfully integrate a series of recent acquisitions. The co will also have to show that it is getting closer to pulling more cash out of its business than it is putting in.
Barron’s Online “Inside Scoop” section reports that between Oct. 2 and Dec. 7, 8 insiders at Thermo Fisher (TMO) reaped over $103m in proceeds by selling 2.3m shares. Two million of those shares were bought with the exercise of options.
Wednesday, December 20, 2006
Calls of Note Part 3
- Citigroup is out positive on Human Genonme Sci (NASDAQ:HGSI) after VaxGen announced today that the Department of Health and Human Services (HHS) has terminated the company's contract to provide 75 million doses of a modern anthrax vaccine for civilian biodefense.
Today's setback for VaxGen could lead to additional contracts being awarded to Human Genome Sciences, in firm's view. Firm recalls that HGS is already producing 20,000 doses of ABThrax to deliver to the U.S. government for the national strategic stockpile by late 2008.
They believe that HHS might opt to enter into additional contract in the 2007/08 timeframe with HGS. Given the attractive margins of such a contract, this could be an important new cash flow source to HGS and could reduce further the likelihood for additional financing in the future
for the company.
Reits Buy and $19 tgt.
Notablecalls: Expect to see buy interest in HGSI today as Citi's call make sense.
Today's setback for VaxGen could lead to additional contracts being awarded to Human Genome Sciences, in firm's view. Firm recalls that HGS is already producing 20,000 doses of ABThrax to deliver to the U.S. government for the national strategic stockpile by late 2008.
They believe that HHS might opt to enter into additional contract in the 2007/08 timeframe with HGS. Given the attractive margins of such a contract, this could be an important new cash flow source to HGS and could reduce further the likelihood for additional financing in the future
for the company.
Reits Buy and $19 tgt.
Notablecalls: Expect to see buy interest in HGSI today as Citi's call make sense.
Calls of Note Part 2
- Piper Jaffray is positive on Tempur-Pedic (NYSE:TPX) saying that based on their recent
retail channel checks, they believe that business trends in the mattress/ bedding sector have improved following the mid-term election. Firm believes the hotly contested mid-term elections impacted the mattress/bedding sector in two ways: consumer confidence and the availability of advertising space. As we have passed the elections and advertising space has become more
available, they believe that traffic trends and sell-through has recovered, albeit in a seasonally slow period for the industry. The firm is raising their 4Q domestic sales estimate from $162 million to $167 million, which is predicated on 23% domestic mattress unit volume growth and 3% average unit selling price growth. They believe the improving sales environment, coupled with strong acceptance of the company's RhapsodyBed and continued distribution expansion with high-volume retail accounts is positively impacting sales trends.
Piper is forecasting FY06 sales of $946 million, which is slightly above the low end of the company's guidance. They remain confident in their 4Q operating EPS estimate of $0.39 and FY06 estimate of $1.31 which is at the high end of management guidance.
Tgt goes to $20 from $19 with MP rating maintained.
Notablecalls: Must say I'm surprised to see ests raised on a furniture maker. This comes after TPX's main peer Select Comfort (NASDAQ:SCSS) took a bad stumble on Nov 30. I have no intention to call this one actionable. Good to know category.
retail channel checks, they believe that business trends in the mattress/ bedding sector have improved following the mid-term election. Firm believes the hotly contested mid-term elections impacted the mattress/bedding sector in two ways: consumer confidence and the availability of advertising space. As we have passed the elections and advertising space has become more
available, they believe that traffic trends and sell-through has recovered, albeit in a seasonally slow period for the industry. The firm is raising their 4Q domestic sales estimate from $162 million to $167 million, which is predicated on 23% domestic mattress unit volume growth and 3% average unit selling price growth. They believe the improving sales environment, coupled with strong acceptance of the company's RhapsodyBed and continued distribution expansion with high-volume retail accounts is positively impacting sales trends.
Piper is forecasting FY06 sales of $946 million, which is slightly above the low end of the company's guidance. They remain confident in their 4Q operating EPS estimate of $0.39 and FY06 estimate of $1.31 which is at the high end of management guidance.
Tgt goes to $20 from $19 with MP rating maintained.
Notablecalls: Must say I'm surprised to see ests raised on a furniture maker. This comes after TPX's main peer Select Comfort (NASDAQ:SCSS) took a bad stumble on Nov 30. I have no intention to call this one actionable. Good to know category.
Calls of Note Part 1
- Goldman Sachs is adding MedImmune (NASDAQ:MEDI) to the Americas Conviction Buy List with no change to our 12 month target price of $37, suggesting 14% potential upside. On 12/7/06, the firm raised their 2007 and 2008 EPS mainly due to higher royalties and government contract revenues. Firm expects more visibility on new product launches in the next 18 months. MedImmune shares might reach $50 in 2008 if investors are convinced that management's 2009 EPS target of $2.00 is achievable.
Catalyst: GSCO expects 1) Synagis sales, which declined in the 2005/06 winter season, to
stabilize in 2006/07. 2) FDA advisory committee review of Flumist for 1-5 year olds in March 2007 3) FDA approval and relaunch of liquid Flumist with an expanded label in mid 2007 4) An international partner for liquid Flumist 5) Launch of Numax, an improved Synagis with an incremental sales potential of $0.5bn, in 2008 6) Progress on an early but high potential pipeline in the next 18 months.
Notablecalls: Must say 14% worth of upside does not get me too excited. But on the other hand the $50 tgt for 2008 looks good. The only problem I have with this call is that there may still be too much hope tied to Flumist. Flumist for 1-5 yr olds? Are you kidding? Or am I just having a bad morning? Overall, expect to see some buy interest following the call.
Catalyst: GSCO expects 1) Synagis sales, which declined in the 2005/06 winter season, to
stabilize in 2006/07. 2) FDA advisory committee review of Flumist for 1-5 year olds in March 2007 3) FDA approval and relaunch of liquid Flumist with an expanded label in mid 2007 4) An international partner for liquid Flumist 5) Launch of Numax, an improved Synagis with an incremental sales potential of $0.5bn, in 2008 6) Progress on an early but high potential pipeline in the next 18 months.
Notablecalls: Must say 14% worth of upside does not get me too excited. But on the other hand the $50 tgt for 2008 looks good. The only problem I have with this call is that there may still be too much hope tied to Flumist. Flumist for 1-5 yr olds? Are you kidding? Or am I just having a bad morning? Overall, expect to see some buy interest following the call.
Color on news: Redbak (NASDAQ:RBAK) and Ericsson
Couple of firms are out commenting on news of Ericsson AB's (NASDAQ:ERIC) $2.1 billion acquisition of data network equipment vendor Redback Networks (NASDAQ:RBAK):
- UBS notes the proposed acquisition of RBAK is consistent with firm's view that ERIC is seeking to enhance its IP & IPTV offering with edge routing capability. Notes that RBAK has already secured 12 of the top 20 wireline carriers in the world for its IP edge routers.
RBAK has had little focus on wireless carries & this deal will likely enhance its position globally given ERIC's #1 share in wireless infrastructure. Firm alsos believe RBAK's competitive positioning against CSCO & JNPR in top tier wireline operators is further aided. RBAK's recent loss at VZ, which we believe was due to aggressive efforts by JNPR, likely accelerated RBAK's plans to seek a merger.
UBS ests ERIC is about 6%-8% of JNPR sales. They believe the edge router portion of these sales, which are mostly focused in China, will be at risk post the proposed merger as ERIC will likely seek to sell the RBAK product (primarily SmartEdge) over the JNPR product line in edge opportunities.
- CIBC is downgrading JNPR to SP from SO. While JNPR remains a formidable competitor in both edge and core routing, the firm now believes upside to the stock is limited given the more formidable edge competition of an RBAK/ERIC combination and waning possibility of an acquisition premium.
JNPR needs to decide - sell now or buy bigger and faster. The two possible matches include Motorola and Nokia Siemens. Yet, the first is busy with other acquisitions and (so far) indicated no desire for large acquisitions while the second is bogged down with delayed deal closing and integration.
Though they believe Juniper s relationship with Ericsson (reseller) will remain in place for some time given the breadth of Juniper s product portfolio relative to Redback, they think a decline in the volume generated through this channel is now inevitable. Reseller alliances with Motorola , Nortel or Avaya for example could build some lost traction; but they see less
synergy with those partners across strategies and product lines.
Alternatively, JNPR could turn more aggressive in consolidation. However, options are less compelling (access or enterprise) and are likely to have a negative impact of financial performance (remember NetScreen?). In sum, the firm feels a premium is no longer justified and strategic risks are mounting. With its stock trading in the $19 range, JNPR is within a small margin of reaching CIBC's $20 price target. Given the above considerations they believe the stock is now fairly valued and are inclined to move to the sidelines.
Notablecalls: Looks like JNPR has the most to lose following the deal. I also have two high fives in store. First high five goes to ERIC's management for paying 7x annual revs for RBAK. That's pretty...high...guys. Second high five goes to financial advisors involved in the deal for ziplocked mouths as looking at the price action in RBAK stock couple of weeks ahead of yesterday's announcement it's pretty obvious there was a leak.
Arguably, the third high fives should go to RBAK management for selling their co for such a high price but it does just not fit the category. Well done guys! Really!
- UBS notes the proposed acquisition of RBAK is consistent with firm's view that ERIC is seeking to enhance its IP & IPTV offering with edge routing capability. Notes that RBAK has already secured 12 of the top 20 wireline carriers in the world for its IP edge routers.
RBAK has had little focus on wireless carries & this deal will likely enhance its position globally given ERIC's #1 share in wireless infrastructure. Firm alsos believe RBAK's competitive positioning against CSCO & JNPR in top tier wireline operators is further aided. RBAK's recent loss at VZ, which we believe was due to aggressive efforts by JNPR, likely accelerated RBAK's plans to seek a merger.
UBS ests ERIC is about 6%-8% of JNPR sales. They believe the edge router portion of these sales, which are mostly focused in China, will be at risk post the proposed merger as ERIC will likely seek to sell the RBAK product (primarily SmartEdge) over the JNPR product line in edge opportunities.
- CIBC is downgrading JNPR to SP from SO. While JNPR remains a formidable competitor in both edge and core routing, the firm now believes upside to the stock is limited given the more formidable edge competition of an RBAK/ERIC combination and waning possibility of an acquisition premium.
JNPR needs to decide - sell now or buy bigger and faster. The two possible matches include Motorola and Nokia Siemens. Yet, the first is busy with other acquisitions and (so far) indicated no desire for large acquisitions while the second is bogged down with delayed deal closing and integration.
Though they believe Juniper s relationship with Ericsson (reseller) will remain in place for some time given the breadth of Juniper s product portfolio relative to Redback, they think a decline in the volume generated through this channel is now inevitable. Reseller alliances with Motorola , Nortel or Avaya for example could build some lost traction; but they see less
synergy with those partners across strategies and product lines.
Alternatively, JNPR could turn more aggressive in consolidation. However, options are less compelling (access or enterprise) and are likely to have a negative impact of financial performance (remember NetScreen?). In sum, the firm feels a premium is no longer justified and strategic risks are mounting. With its stock trading in the $19 range, JNPR is within a small margin of reaching CIBC's $20 price target. Given the above considerations they believe the stock is now fairly valued and are inclined to move to the sidelines.
Notablecalls: Looks like JNPR has the most to lose following the deal. I also have two high fives in store. First high five goes to ERIC's management for paying 7x annual revs for RBAK. That's pretty...high...guys. Second high five goes to financial advisors involved in the deal for ziplocked mouths as looking at the price action in RBAK stock couple of weeks ahead of yesterday's announcement it's pretty obvious there was a leak.
Arguably, the third high fives should go to RBAK management for selling their co for such a high price but it does just not fit the category. Well done guys! Really!
Color on results: Palm (NASDAQ:PALM)
Several firms are commenting on Palm (NASDAQ:PALM) this AM after the co released its FQ3 results last night:
- UBS notes they continue to believe the Palm story is one of execution in terms of product
shipments, further cost efficiencies, and new product introductions. Although management delivered a license agreement with Access (for its operating system) that will improve gross margins by ~100bps, improvements will be offset by higher operating expenses to drive the Palm brand and awareness to consumers as well as accelerated R&D for new product development. While the firm views the strategy as the right investment to make given heightened competition, they do not believe the benefits and leverage in the model from these investments will materialize for the next several quarters.
UBS believes management clearly feels a sense of urgency to "right the ship" and execute. They believe success will hinge on the company's ability to raise consumer awareness of the value in its Treo products as well as bring more compelling product to market - both key elements in the increase in operating expenses over the next two quarters.
Firm's forecasts assume new product introductions in time for the 2008 holiday selling season to help accelerate unit shipments, ASP declines with fairly stable gross margins, and a leveling
off of operating expenses. They view new carrier wins as a key element to driving units, as sell-in on a per carrier basis has been decelerating due, in part, to the company's customers carrying less inventory. Lowering our pro forma FY07 EPS estimate (ex options) to $0.62 from $0.74 and pro forma FY08 EPS (ex options) to $0.76 from $0.81 reflecting higher than anticipated operating expenses.Tgt goes to $15 from $15.50. Maintains Neutral.
- Banc of America is more bullish calling the results good and guid okay incl Treo 750 delay. Palm posted in-line rev but better-than-expected F2Q product mix, margins, and EPS vs lowered guid. Mgmt acknowledged that Treo 750 certif. is running behind plan, in-line with ABC's checks, but F3Q rev guid was okay and is prob conservative. Palm's new mktg campaign leads to lower OMs and EPS, but firm's unit acceleration thesis holds.
Despite concerns about competition and pricing, Nov qtr smartphone unit sell-through was a record at 617K (+8% Q/Q, +42% Y/Y). Also, Palm's GM of 35.6% beat by 200bps and smartphone rev, units, and ASP of $283M, 603K, and $469 all beat BAC's ests. Handheld seg rev/units missed.
Palm's new deal with ACCESS for Palm OS is expected to boost F3Q's GM by 100bps and further improve mrgns over time. However, non-GAAP EPS guid of $0.11-0.13 missed firm's $0.17 est (cons $0.16) as Palm is ramping its $25M mktg campaign.
Firm is increasing FY07/08E rev from $1.23B/$1.49B to $1.27B/$1.58B, but non-GAAP EPS moves lower from $0.79/$1.00 to $0.68/$0.78 on higher opex. PT remains unchanged at $18.00, although they're moving from 20x CY07 EPS est to 20x CY08E EPS of $0.90 (non-GAAP) since they see CY07 EPS as temporarily depressed.
BAC thinks strong sell-through, GMs, and ASPs (all favorite bear topics) trump lower near-term OM/EPS and think increased mktg should lead to better future results, esp as units ramp.
Reits Buy.
Notablecalls: I suspect PALM didn't come in as bad as market participants generally feared. That's also the reason why we initially saw a positive reaction in after hrs trade. The GM side was impressive and in my book shows management can still execute. The $25 mln advertising campaign will eat into the bottom line s-t but coupled with new products expected over the next 6 months it may prove to be a step in the right direction. I also think that considering all the missteps made by management over the past 9 months Feb qtr guidance was kept low enough to avoid any futher stumbles. While I have no view on what the stock will do in the s-t things are starting to look somewhat better for PALM.
- UBS notes they continue to believe the Palm story is one of execution in terms of product
shipments, further cost efficiencies, and new product introductions. Although management delivered a license agreement with Access (for its operating system) that will improve gross margins by ~100bps, improvements will be offset by higher operating expenses to drive the Palm brand and awareness to consumers as well as accelerated R&D for new product development. While the firm views the strategy as the right investment to make given heightened competition, they do not believe the benefits and leverage in the model from these investments will materialize for the next several quarters.
UBS believes management clearly feels a sense of urgency to "right the ship" and execute. They believe success will hinge on the company's ability to raise consumer awareness of the value in its Treo products as well as bring more compelling product to market - both key elements in the increase in operating expenses over the next two quarters.
Firm's forecasts assume new product introductions in time for the 2008 holiday selling season to help accelerate unit shipments, ASP declines with fairly stable gross margins, and a leveling
off of operating expenses. They view new carrier wins as a key element to driving units, as sell-in on a per carrier basis has been decelerating due, in part, to the company's customers carrying less inventory. Lowering our pro forma FY07 EPS estimate (ex options) to $0.62 from $0.74 and pro forma FY08 EPS (ex options) to $0.76 from $0.81 reflecting higher than anticipated operating expenses.Tgt goes to $15 from $15.50. Maintains Neutral.
- Banc of America is more bullish calling the results good and guid okay incl Treo 750 delay. Palm posted in-line rev but better-than-expected F2Q product mix, margins, and EPS vs lowered guid. Mgmt acknowledged that Treo 750 certif. is running behind plan, in-line with ABC's checks, but F3Q rev guid was okay and is prob conservative. Palm's new mktg campaign leads to lower OMs and EPS, but firm's unit acceleration thesis holds.
Despite concerns about competition and pricing, Nov qtr smartphone unit sell-through was a record at 617K (+8% Q/Q, +42% Y/Y). Also, Palm's GM of 35.6% beat by 200bps and smartphone rev, units, and ASP of $283M, 603K, and $469 all beat BAC's ests. Handheld seg rev/units missed.
Palm's new deal with ACCESS for Palm OS is expected to boost F3Q's GM by 100bps and further improve mrgns over time. However, non-GAAP EPS guid of $0.11-0.13 missed firm's $0.17 est (cons $0.16) as Palm is ramping its $25M mktg campaign.
Firm is increasing FY07/08E rev from $1.23B/$1.49B to $1.27B/$1.58B, but non-GAAP EPS moves lower from $0.79/$1.00 to $0.68/$0.78 on higher opex. PT remains unchanged at $18.00, although they're moving from 20x CY07 EPS est to 20x CY08E EPS of $0.90 (non-GAAP) since they see CY07 EPS as temporarily depressed.
BAC thinks strong sell-through, GMs, and ASPs (all favorite bear topics) trump lower near-term OM/EPS and think increased mktg should lead to better future results, esp as units ramp.
Reits Buy.
Notablecalls: I suspect PALM didn't come in as bad as market participants generally feared. That's also the reason why we initially saw a positive reaction in after hrs trade. The GM side was impressive and in my book shows management can still execute. The $25 mln advertising campaign will eat into the bottom line s-t but coupled with new products expected over the next 6 months it may prove to be a step in the right direction. I also think that considering all the missteps made by management over the past 9 months Feb qtr guidance was kept low enough to avoid any futher stumbles. While I have no view on what the stock will do in the s-t things are starting to look somewhat better for PALM.
Paperstand
According to the WSJ’s „Heard on the Street” column, the oil industry is readying for a new wave of consolidation. "I think the environment is ripe for co’s to be considering consolidation," says Dan Pickering, of Pickering Energy Partners. "One thing these co’s know how to do is consolidate and cut costs." Targets include: HES, DVN, ECA, XTO and NXY.
Barron’s Online “Inside Scoop” section reports that over the past 90 days, 15 MGM Mirage (MGM) execs and directors grossed $50.96m by selling 1.09m shares on the open mkt, of which 93% were acquired through options.
Barron’s Online “Inside Scoop” section reports that over the past 90 days, 15 MGM Mirage (MGM) execs and directors grossed $50.96m by selling 1.09m shares on the open mkt, of which 93% were acquired through options.
Tuesday, December 19, 2006
Calls of Note Part 4
- Morgan Stanley is positive on FormFactor (NASDAQ:FORM) saying their checks suggest new NAND product (Harmony) continues to gain momentum and recent checks affirm FORM is set to win a large NAND order from the Intel-Micron JV in Q4/Q1 and evaluations with Hynix are progressing at a smooth pace. Firm believes up-time performance, a proprietary and novel self-planarization technology (this is new), and product reliability are key differentiators.
On the DRAM front, MS believes the company is on-track to take test parrellization to a new level and introduce a one or two-touch DRAM solution in the 1H07.
On the DRAM competitive front, they agree with the bears that FORM will face more competition in 2007 and beyond as customers push for dual-source, but they disagree that it will have a meaningful impact next year. Moreover, the firm believes the bears are overlooking the significant learning curve and higher levels of complexity associated with DRAM testing (versus NAND) that competitors will have to overcome once they pass the evaluation stage.
Notes they would be buyers of FORM at current levels. With less than 5% down-side from current levels and upside of more than 30%+ to our stock price target, they continue to believe that investors who are waiting for a better entry point could be disappointed. Consequently, the firm maintains Overweight-V on form and it remains one of the top picks in the coverage universe.
Notablecalls: Can't say I'm too excited about FORM here. Not actionable but good to know category.
On the DRAM front, MS believes the company is on-track to take test parrellization to a new level and introduce a one or two-touch DRAM solution in the 1H07.
On the DRAM competitive front, they agree with the bears that FORM will face more competition in 2007 and beyond as customers push for dual-source, but they disagree that it will have a meaningful impact next year. Moreover, the firm believes the bears are overlooking the significant learning curve and higher levels of complexity associated with DRAM testing (versus NAND) that competitors will have to overcome once they pass the evaluation stage.
Notes they would be buyers of FORM at current levels. With less than 5% down-side from current levels and upside of more than 30%+ to our stock price target, they continue to believe that investors who are waiting for a better entry point could be disappointed. Consequently, the firm maintains Overweight-V on form and it remains one of the top picks in the coverage universe.
Notablecalls: Can't say I'm too excited about FORM here. Not actionable but good to know category.
Calls of Note Part 3
- Goldman Sachs is positive on Baidu.com (NASDAQ:BIDU) raising their 12-month price target to $128 from $93 due to higher expectations for margins despite slightly lower revenue. Specifically, the firm is raising their 2007/2008 EPS by ~15% and increasing their long-term growth rate to 30% from 25% as they believe that the competitive landscape and investments will pressure margins less than they had modeled. Firm still estimates some margin contraction in 2007 (150 bps) while margins could be flat to up excluding the impact of the Japan investments.
While Baidu will continue to face near-term execution challenges in the transition to a direct sales force, firm's increased growth rate over the long-term reflects their view that investments and the competitive environment (primarily from Google and Yahoo!) are not expected to increase to the degree that they had forecasted in our margins, and Baidu is likely to maintain/gain share. Firm believes that 15%-plus upside to consensus 2007 and 2008 EPS driven by margins will continue to support the shares despite the expected topline weakness in the near-term. They do not expect the recently announced MSN deal to have a material effect in the near term due to MSN's minimal share of the Chinese search market.
Notablecalls: Well, Stevie will be happy! As BIDU is a mover and GSCO sure has the power to move it ..expect to see a move in the pre mkt.
While Baidu will continue to face near-term execution challenges in the transition to a direct sales force, firm's increased growth rate over the long-term reflects their view that investments and the competitive environment (primarily from Google and Yahoo!) are not expected to increase to the degree that they had forecasted in our margins, and Baidu is likely to maintain/gain share. Firm believes that 15%-plus upside to consensus 2007 and 2008 EPS driven by margins will continue to support the shares despite the expected topline weakness in the near-term. They do not expect the recently announced MSN deal to have a material effect in the near term due to MSN's minimal share of the Chinese search market.
Notablecalls: Well, Stevie will be happy! As BIDU is a mover and GSCO sure has the power to move it ..expect to see a move in the pre mkt.
Calls of Note Part 2
- Banc of America is increasing their target on Dreamworks (NYSE:DWA) to $37 from $31. 2006 has been a transformative year for DWA as it dissolved HoldCo, forged its relationship with Paramount, and its partnership with Aardman likely is over. Firm thinks the following are not yet reflected in DWA shares:
1) DWA's valuation has potential for upside. Firm forecasts normalized EPS of $1.80 - $2.00. The new target reflects the rolling fwd of estimates and higher movie assumptions in 2008+. It implies DWA could trade at 19.5x earnings, in line with other media co's and still a steep discount to the 50x price that DIS paid for PIXR.
2) BAC still believes a share buyback is likely. Despite a strong rally in DWA shares, they believe a repurchase in the low $30-range is attractive relative to where the stock could be in 12-24 months.
3) The visibility into DWA's film slate is far better today than it was at its IPO in late 2004. Over the next few years, feature films include two Shrek releases, Seinfeld's Bee Movie, a sequel to Madagascar, and Kung Fu Panda starring Jack Black.
4) They believe there is still untapped value in the Shrek franchise. In addition to at least two more Shrek films, we expect a Broadway musical of Shrek and a feature film based on supporting characters.
5) The company has yet to exploit its relationship with Paramount. Firm's model does not reflect the value of potential television projects with Nickelodeon or other potential synergies with Paramount.
Notablecalls: One for the investor types. Right now the stock looks like it wants to go lower.
1) DWA's valuation has potential for upside. Firm forecasts normalized EPS of $1.80 - $2.00. The new target reflects the rolling fwd of estimates and higher movie assumptions in 2008+. It implies DWA could trade at 19.5x earnings, in line with other media co's and still a steep discount to the 50x price that DIS paid for PIXR.
2) BAC still believes a share buyback is likely. Despite a strong rally in DWA shares, they believe a repurchase in the low $30-range is attractive relative to where the stock could be in 12-24 months.
3) The visibility into DWA's film slate is far better today than it was at its IPO in late 2004. Over the next few years, feature films include two Shrek releases, Seinfeld's Bee Movie, a sequel to Madagascar, and Kung Fu Panda starring Jack Black.
4) They believe there is still untapped value in the Shrek franchise. In addition to at least two more Shrek films, we expect a Broadway musical of Shrek and a feature film based on supporting characters.
5) The company has yet to exploit its relationship with Paramount. Firm's model does not reflect the value of potential television projects with Nickelodeon or other potential synergies with Paramount.
Notablecalls: One for the investor types. Right now the stock looks like it wants to go lower.
Calls of Note Part 1
- UBS is reducing their 4Q06 revenue estimate on Tellabs (NASDAQ:TLAB) to $530M from $543.5M, toward the low end of company guidance of $525-550M. They expect weakness in the quarter mostly due to delays in the closure of the T/BLS merger. Firm's 4Q06 EPS estimate reduces to $0.14 from $0.15 and they expect CY06 EPS of $0.56 vs.$0.57 prev.
UBS makes no changes to their 2007/2008 estimates. Tellabs should see a strong ramp of the ROADM 7100 at Verizon in 2007 but given this is a new account, initial revenue recognition is challenging to forecast. Firm continues to expect growth in 5500 sales in 2007 though at a much slower rate of 5% Y/Y, and believe 5500 growth will be more challenging in 2008/2009.
They currently estimate 6% growth only in FTTP revenues from Verizon next year for TLAB as they expect revenues from increased customer connects to be offset by ASP declines and share loss (most likely to Alcatel) as Verizon rolls out GPON. Higher FioS penetration, higher churn, or higher market share in GPON for TLAB would present upside potential to FTTP ests.
Maintains $12 tgt on Neutral rating.
Notablecalls: Nothing drastic here. The reason why I wanted to highlight the call is that since early Friday there have been rumors of Ericsson (NASDAQ:ERIC) making a sizeable acquisition in the U.S. TLAB looks like a suitable candidate. I'm aware of the earlier rumor of ERIC + Entrisphere (competitor to TLAB) but given it's small size it would not fit the bill. Also, RBAK would make sense as a target.
UBS makes no changes to their 2007/2008 estimates. Tellabs should see a strong ramp of the ROADM 7100 at Verizon in 2007 but given this is a new account, initial revenue recognition is challenging to forecast. Firm continues to expect growth in 5500 sales in 2007 though at a much slower rate of 5% Y/Y, and believe 5500 growth will be more challenging in 2008/2009.
They currently estimate 6% growth only in FTTP revenues from Verizon next year for TLAB as they expect revenues from increased customer connects to be offset by ASP declines and share loss (most likely to Alcatel) as Verizon rolls out GPON. Higher FioS penetration, higher churn, or higher market share in GPON for TLAB would present upside potential to FTTP ests.
Maintains $12 tgt on Neutral rating.
Notablecalls: Nothing drastic here. The reason why I wanted to highlight the call is that since early Friday there have been rumors of Ericsson (NASDAQ:ERIC) making a sizeable acquisition in the U.S. TLAB looks like a suitable candidate. I'm aware of the earlier rumor of ERIC + Entrisphere (competitor to TLAB) but given it's small size it would not fit the bill. Also, RBAK would make sense as a target.
Color on news: eBay (NASDAQ:EBAY)
Several firms are commenting on eBay (NASDAQ:EBAY) after reports the co is taking a 49% stake in a partnership with Chinese online portal and wireless operator Tom Online Inc. (Tom would hold a 51% stake):
- Prudential notes that in their view this news is like chop suey: good news mixed with bad. The
good news is that eBay would significantly reduce its operating losses in China. In addition, the combined company would be a stronger competitor. But the bad news is that eBay effectively would admit defeat in a market that was, at one time, billed as its next great growth opportunity.
The new Tom/eBay Chinese Web site will reportedly launch sometime in 2007. EBay is expected to maintain its own "cross-border" trading site for Chinese users that are selling to buyers outside of China, but it will shutter its main auction site in China.
Accdg to reports, the companies have not decided which brand name to use for the site. Tom CEO Wang Lei Lei will be CEO of the joint venture, and Jeff Liao, CEO of eBay's China subsidiary, will hold an unspecified management role at the joint venture and will also continue to run eBay's cross-border trading site. EBay is expected to contribute $40mm to the venture initially, and Tom will contribute $20mm.
Maintains Overweight rating and $40 price target on EBAY.
- Bear Stearns notes that while not stated in the article, they believe that eBay could simultaneously enter into a transaction involving PayPal and a local payments provider. Firm believes that a second transaction of this nature would be prudent and could likely add strength to the new platform, if true.
If this transaction were to happen, the firm would view it as a positive for the following reasons: 1) eBay will continue to participate in the upside growth of China, a market exhibiting one of the fastest Internet growth rates; 2) eBay will have access to a strong local company; 3) it will
cut of a funding source for eBay and likely lead to improved margins; and 4) potential synergies between Skype and PayPal.
Maintains Outperform.
Notablecalls: Not actionable but good to know category. Note that there are several firms out on EBAY this AM previewing the qtr (Jan 17) with GSCO telling investors to buy ahead of the release.
- Prudential notes that in their view this news is like chop suey: good news mixed with bad. The
good news is that eBay would significantly reduce its operating losses in China. In addition, the combined company would be a stronger competitor. But the bad news is that eBay effectively would admit defeat in a market that was, at one time, billed as its next great growth opportunity.
The new Tom/eBay Chinese Web site will reportedly launch sometime in 2007. EBay is expected to maintain its own "cross-border" trading site for Chinese users that are selling to buyers outside of China, but it will shutter its main auction site in China.
Accdg to reports, the companies have not decided which brand name to use for the site. Tom CEO Wang Lei Lei will be CEO of the joint venture, and Jeff Liao, CEO of eBay's China subsidiary, will hold an unspecified management role at the joint venture and will also continue to run eBay's cross-border trading site. EBay is expected to contribute $40mm to the venture initially, and Tom will contribute $20mm.
Maintains Overweight rating and $40 price target on EBAY.
- Bear Stearns notes that while not stated in the article, they believe that eBay could simultaneously enter into a transaction involving PayPal and a local payments provider. Firm believes that a second transaction of this nature would be prudent and could likely add strength to the new platform, if true.
If this transaction were to happen, the firm would view it as a positive for the following reasons: 1) eBay will continue to participate in the upside growth of China, a market exhibiting one of the fastest Internet growth rates; 2) eBay will have access to a strong local company; 3) it will
cut of a funding source for eBay and likely lead to improved margins; and 4) potential synergies between Skype and PayPal.
Maintains Outperform.
Notablecalls: Not actionable but good to know category. Note that there are several firms out on EBAY this AM previewing the qtr (Jan 17) with GSCO telling investors to buy ahead of the release.
Color on news: Biogen-Idec (NASDAQ:BIIB)
Couple of firms are commenting on Biogen-Idec (NASDAQ:BIIB) and Genentech (NYSE:DNA) after the FDA issued an advisory that two patients taking Rituxan for systemic lupus erythematosus (SLE) developed and died from progressive multifocal leukoencephalopathy (PML):
- Merrill Lynch notes there have been 23 cases of confirmed PML in patients taking Rituxan for lymphoma and the risk of PML is listed on the drug's label. The firm does not expect these cases to result in any change in sales of Rituxan in its primary indication of Non-Hodgkin's Lymphoma (NHL), which they project will represent about 87% of the drug's sales in 2007. However, there could be a modest slowing of uptake for Rituxan in non-fatal indications such as rheumatoid arthritis or other not yet approved indications of SLE or multiple sclerosis.
The PML was reported as late as 12 months after discontinuing Rituxan treatment in two patients who were being treated off-label for SLE. Also, PML cases have been reported in patients with SLE who have never received Rituxan, likely because patients are receiving one or multiple immunosuppressive drugs and have compromised immune systems. As a result, it is possible that these cases may not be related to Rituxan.
Even if none of the high-risk patients were given Rituxan, ML estimates that the maximum EPS impact for DNA could be $0.03 in 2007, $0.04 in 2008 and $0.06 in 2009. For BIIB, they estimate that maximum EPS impact would be $0.04 in 2007, $0.06 in 2008 and $0.08 in 2009. For now though, the firm maintains their estimates.
- Baird comments on BIIB saying the two SLE patients had longstanding SLE with multiple courses of immunosuppressant therapy prior to receiving Rituxan.
In an 8k, BIIB points out that PML is a known risk in patients who have immune suppression and has previously been reported in SLE patients who were not receiving Rituxan.Firm recalls that Rituxan is not approved for the treatment of SLE. Additionally, they model no revenue in this indication, so they see little material commercial impact here. Reiterates Neutral rating, $55 price target.
Notablecalls: Looks like much ado about nothing. BIIB ended down 2.5 points in aft mkt trading. That looks somewhat excessive. Buying BIIB around the $47.50 level likely presents a good risk/reward oppy. Don't think we will see any downgrades.
- Merrill Lynch notes there have been 23 cases of confirmed PML in patients taking Rituxan for lymphoma and the risk of PML is listed on the drug's label. The firm does not expect these cases to result in any change in sales of Rituxan in its primary indication of Non-Hodgkin's Lymphoma (NHL), which they project will represent about 87% of the drug's sales in 2007. However, there could be a modest slowing of uptake for Rituxan in non-fatal indications such as rheumatoid arthritis or other not yet approved indications of SLE or multiple sclerosis.
The PML was reported as late as 12 months after discontinuing Rituxan treatment in two patients who were being treated off-label for SLE. Also, PML cases have been reported in patients with SLE who have never received Rituxan, likely because patients are receiving one or multiple immunosuppressive drugs and have compromised immune systems. As a result, it is possible that these cases may not be related to Rituxan.
Even if none of the high-risk patients were given Rituxan, ML estimates that the maximum EPS impact for DNA could be $0.03 in 2007, $0.04 in 2008 and $0.06 in 2009. For BIIB, they estimate that maximum EPS impact would be $0.04 in 2007, $0.06 in 2008 and $0.08 in 2009. For now though, the firm maintains their estimates.
- Baird comments on BIIB saying the two SLE patients had longstanding SLE with multiple courses of immunosuppressant therapy prior to receiving Rituxan.
In an 8k, BIIB points out that PML is a known risk in patients who have immune suppression and has previously been reported in SLE patients who were not receiving Rituxan.Firm recalls that Rituxan is not approved for the treatment of SLE. Additionally, they model no revenue in this indication, so they see little material commercial impact here. Reiterates Neutral rating, $55 price target.
Notablecalls: Looks like much ado about nothing. BIIB ended down 2.5 points in aft mkt trading. That looks somewhat excessive. Buying BIIB around the $47.50 level likely presents a good risk/reward oppy. Don't think we will see any downgrades.
Paperstand
The WSJ reports that eBay (EBAY) in its second big pullback from Asia, is shutting down its main Web site in China and replacing it with a site that would be largely run by Tom Online (TOMO). The co plans to announce as early as today that it is taking a 49% stake in the new site in partnership with Tom Online. Tom Online would hold the other 51%.
Barron’s Online “Inside Scoop” section reports that value investor Blum Capital has begun harvesting profits from its stake in UAP Holding (UAPH) as the agricultural-products maker continues to trade near its 52w high. Blum disclosed that it sold about $11m in UAP stock, cutting its stake to 6.1%, or 3.13m shares, down from 7.1% stake, or 3.6m shares.
Barron’s Online “Inside Scoop” section reports that value investor Blum Capital has begun harvesting profits from its stake in UAP Holding (UAPH) as the agricultural-products maker continues to trade near its 52w high. Blum disclosed that it sold about $11m in UAP stock, cutting its stake to 6.1%, or 3.13m shares, down from 7.1% stake, or 3.6m shares.
Monday, December 18, 2006
Calls of Note Part 6
- JP Morgan is raising their 4Q'06 revenue estimate on Google (NASDAQ:GOOG) by $40M based on belief that the co is experiencing strong query volume growth and a noticeable pickup in keyword coverage. Firm's revised 4Q revenue, EBITDA, and EPS estimates are $2.23B, $1.39B, and $2.91. (Prev EPS was 2.86, cosensus $2.88)
According to firm's estimates, Google is on track to grow its global query volumes by 14% in 4Q, vs. the market which the firm believes is tracking up 10%. JPM is consequently increasing their Q/Q volume growth assumption to 14% from 13%, contributing ~$20M of incremental revenue.
Google continued to grow its advertising coverage at a steady pace in 4Q, dispelling some investors' concerns that Google's monetization upside may be tapped out. In 4Q, firm's 50K
keyword survey identified a 4.4% Q/Q increase in coverage to 77.9%.
Although the firm estimates 14% volume growth for Google.com, most competitors are showing muted 4Q growth. They estimate Yahoo!, MSN, and AOL are on pace to grow 4.5%, 3.0%, and 0.0%, respectively in 4Q. As such, they believe Google continues to gain global market share.
Google Remains firm's Top Pick. Google trades at 33.1x F'07 pro forma EPS estimate of $14.50 compared to its peers at 35.7x. Given that Google is growing significantly faster; JPM believes it deserves a premium, and thus maintains Overweight.
Notablecalls: Note that WSJ is out with a negative piece on GOOG this AM saying co's earning growth may hit a speed bump soon as their $10 billion cash hoard in interest-bearing investments like government securities -- isn't likely to grow at the same rate as last year. Will the JPM note outweigh the WSJ piece?
According to firm's estimates, Google is on track to grow its global query volumes by 14% in 4Q, vs. the market which the firm believes is tracking up 10%. JPM is consequently increasing their Q/Q volume growth assumption to 14% from 13%, contributing ~$20M of incremental revenue.
Google continued to grow its advertising coverage at a steady pace in 4Q, dispelling some investors' concerns that Google's monetization upside may be tapped out. In 4Q, firm's 50K
keyword survey identified a 4.4% Q/Q increase in coverage to 77.9%.
Although the firm estimates 14% volume growth for Google.com, most competitors are showing muted 4Q growth. They estimate Yahoo!, MSN, and AOL are on pace to grow 4.5%, 3.0%, and 0.0%, respectively in 4Q. As such, they believe Google continues to gain global market share.
Google Remains firm's Top Pick. Google trades at 33.1x F'07 pro forma EPS estimate of $14.50 compared to its peers at 35.7x. Given that Google is growing significantly faster; JPM believes it deserves a premium, and thus maintains Overweight.
Notablecalls: Note that WSJ is out with a negative piece on GOOG this AM saying co's earning growth may hit a speed bump soon as their $10 billion cash hoard in interest-bearing investments like government securities -- isn't likely to grow at the same rate as last year. Will the JPM note outweigh the WSJ piece?
Calls of Note Part 5
- UBS notes that while they remain cautious on its fundamental outlook, they increasingly believe Alltel (NYSE:AT) could be an acquisition candidate in early 2007. Speaking at firm's Media/Comm conference, CFO Sharilyn Gassaway suggested that mgmt is talking with interested parties and prefers an auction process to drive value rather than a one-off transaction with private equity.
UBS notes they have recently seen increased activity in fixed income and derivatives markets, with higher interest for short-term calls and 5-year CDS spread widening 32% in the last week. Meanwhile, Alltel shares are up 8% since lows after reporting a weak 3Q.
Management recently suggested that a continued shift to family plans and prepaid products will put pressure on voice ARPU trends. In 3Q, Alltel's retail voice ARPU had declined by 6% annually (stripping out the effects of data and ETC revenues), up from a 2% decline in 2Q. They also expect increased retention efforts to drive CPGA higher.
Despite fundamental issues facing the company, the firm is raising their 12-month price to $61 from $57 based on the reduction in our public market discount to 10% from 20% given increased expectations for a deal in 1H07.
Notablecalls: Just in case you care.
UBS notes they have recently seen increased activity in fixed income and derivatives markets, with higher interest for short-term calls and 5-year CDS spread widening 32% in the last week. Meanwhile, Alltel shares are up 8% since lows after reporting a weak 3Q.
Management recently suggested that a continued shift to family plans and prepaid products will put pressure on voice ARPU trends. In 3Q, Alltel's retail voice ARPU had declined by 6% annually (stripping out the effects of data and ETC revenues), up from a 2% decline in 2Q. They also expect increased retention efforts to drive CPGA higher.
Despite fundamental issues facing the company, the firm is raising their 12-month price to $61 from $57 based on the reduction in our public market discount to 10% from 20% given increased expectations for a deal in 1H07.
Notablecalls: Just in case you care.
Calls of Note Part 4
- Bear Stearns comments in TiVo (NASDAQ:TIVO) saying they can foresee several scenarios where the company is able to capitalize on its technological superiority, partnership agreements,
and the recent rapprochement with the advertising community. However, a number of significant challenges remain, which are unlikely to be resolved in the near-term, in firm's view, and they would prefer to wait for better visibility.
While the company may be displaying the Comcast solution at the upcoming CES in January 2007, the real value of the agreement is in 1) helping TiVo garner more distribution partnerships as other MSOs, they think, are likely to wait to evaluate Comcast's success before they make a commitment, and 2) the advertising potential that the significantly larger distribution presence offers, which will be impacted by long sales cycle and lead-times, as well as technological issues before a much broader cable advertising solution can be deployed.
Also, channel checks indicate that sales of TiVo DVRs have picked up in the last four weeks, which may be a function of the improved value proposition to the consumer, or better marketing, or just seasonality of the strong 4Q.
Maintains Underperform rating.
Notablecalls: The comments sure sound more positive than negative. Note that there has been some blog-level talk of a possible partnership with GOOG. Not actionable (although I would not be surprised to see TIVO close higher today).
and the recent rapprochement with the advertising community. However, a number of significant challenges remain, which are unlikely to be resolved in the near-term, in firm's view, and they would prefer to wait for better visibility.
While the company may be displaying the Comcast solution at the upcoming CES in January 2007, the real value of the agreement is in 1) helping TiVo garner more distribution partnerships as other MSOs, they think, are likely to wait to evaluate Comcast's success before they make a commitment, and 2) the advertising potential that the significantly larger distribution presence offers, which will be impacted by long sales cycle and lead-times, as well as technological issues before a much broader cable advertising solution can be deployed.
Also, channel checks indicate that sales of TiVo DVRs have picked up in the last four weeks, which may be a function of the improved value proposition to the consumer, or better marketing, or just seasonality of the strong 4Q.
Maintains Underperform rating.
Notablecalls: The comments sure sound more positive than negative. Note that there has been some blog-level talk of a possible partnership with GOOG. Not actionable (although I would not be surprised to see TIVO close higher today).
Calls of Note Part 3
- ThinkEquity's Eric Ross notes the firm returned from a week in Taiwan where they had the opportunity to meet with over 30 companies in the electronic supply chain. As in September, they went to Taiwan to determine if theyshould upgrade our Universe; after much investigation and thought, the firm believes there is little reason to own PC names, as they believe there is little upside to expectations in 2007 (and the potential for an inventory bubble).
PC unit demand is ok (still below seasonality), but all low end. Box demand is ok, but certainly not great. Believes 4Q06 Q/Q unit growth will roughly be 7% vs. 14% for normal seasonality.
Low-end pricing is the ONLY driver. Consumer customers do not seem to be buying anything except for low price. Box makers appear to be hesitating to offer new features such as Blu-Ray in this environment, as they believe they are unlikely to be repaid. Average pricing for desktops is
hovering below $700, and laptops are averaging below $900. Since returning to the U.S., the firm has seen laptops as low as $399, and desktops for $349 (although this is the same price as they saw before, one now can get a color printer included for free). Everyone the firm spoke with believes desktops are weak, and notebooks are strong. Consensus is that notebooks will have grown units 25% in 2006. Desktops may decline slightly Y/Y in units in 2006.
No one they met with believes Vista will be a big driver in 1H07. Even though investors and IR reps alike have inflated Vista as the saviour of the semiconductor industry, everyone the firm spoke with in the Asian supply chain believes it will be a dud. Also, no one even mentioned the Chinese New Year.
Every check they have done suggests that Advanced Micro Devices (NYSE: AMD) is shipping at capacity for the next several quarters (firm believes this could be 18+ million CPUs per quarter).
Notablecalls: This pretty much confirms my pessimistic views regarding the Vista-induced PC demand.
PC unit demand is ok (still below seasonality), but all low end. Box demand is ok, but certainly not great. Believes 4Q06 Q/Q unit growth will roughly be 7% vs. 14% for normal seasonality.
Low-end pricing is the ONLY driver. Consumer customers do not seem to be buying anything except for low price. Box makers appear to be hesitating to offer new features such as Blu-Ray in this environment, as they believe they are unlikely to be repaid. Average pricing for desktops is
hovering below $700, and laptops are averaging below $900. Since returning to the U.S., the firm has seen laptops as low as $399, and desktops for $349 (although this is the same price as they saw before, one now can get a color printer included for free). Everyone the firm spoke with believes desktops are weak, and notebooks are strong. Consensus is that notebooks will have grown units 25% in 2006. Desktops may decline slightly Y/Y in units in 2006.
No one they met with believes Vista will be a big driver in 1H07. Even though investors and IR reps alike have inflated Vista as the saviour of the semiconductor industry, everyone the firm spoke with in the Asian supply chain believes it will be a dud. Also, no one even mentioned the Chinese New Year.
Every check they have done suggests that Advanced Micro Devices (NYSE: AMD) is shipping at capacity for the next several quarters (firm believes this could be 18+ million CPUs per quarter).
Notablecalls: This pretty much confirms my pessimistic views regarding the Vista-induced PC demand.
Calls of Note Part 2
- JP Morgan continues to be positive on Whole Foods (NASDAQ:WFMI) saying the market over-compensates for a recent comp slowdown (currently 6-8%) and under-appreciates the likelihood of 20-30% secular top line growth and 15-20%+ EPS growth beyond 2007E.
Acceleration in 2H07E/2008E is likely while EPS estimates already materially reflect an "investment" year in 2007E. The market also over-compensates for trends that are related to the rest of retail. Management was frank with its comments about competition and cannibalization, yet too conservative with respect to the sheer math of tough comparisons and trends they've seen out of other retailers. This is reminiscent of 2003, which turned out to be a good buying opportunity for the stock. An extreme case of the recent comp slowdown - such as to 2-3% is not on the horizon. In fact, JPM estimates that 6% will be the bottom. WFMI reported a 6.8% comp for the 5 weeks in October on top of 13.6% last year.
Over the long-run, the market under-estimates the likelihood of 20%+ square footage growth - particularly in 2008E and thereafter. The new stores entering the comp base should be at least 5-6% of the comp base in 07E, 7-8% in 08E and 11-12% in 09E providing support for total company comps going forward. High single-digit sustainable comps (say 8%) with 20%+ square footage growth exceeds the top-line organic growth rates of all of firm's stocks, and supports an otherwise high valuation (27.3x CY2008E ). At 1.22x current sales and 27.3x 2008E EPS, WFMI is attractive. JPM reiterates Overweight rating.
Notablecalls: Nothing really new here. Investors either take the leap of faith or they don't. Expect to see moderate buy interest following the note. Think that soon enough WFMI will be a $50 stock again.
Acceleration in 2H07E/2008E is likely while EPS estimates already materially reflect an "investment" year in 2007E. The market also over-compensates for trends that are related to the rest of retail. Management was frank with its comments about competition and cannibalization, yet too conservative with respect to the sheer math of tough comparisons and trends they've seen out of other retailers. This is reminiscent of 2003, which turned out to be a good buying opportunity for the stock. An extreme case of the recent comp slowdown - such as to 2-3% is not on the horizon. In fact, JPM estimates that 6% will be the bottom. WFMI reported a 6.8% comp for the 5 weeks in October on top of 13.6% last year.
Over the long-run, the market under-estimates the likelihood of 20%+ square footage growth - particularly in 2008E and thereafter. The new stores entering the comp base should be at least 5-6% of the comp base in 07E, 7-8% in 08E and 11-12% in 09E providing support for total company comps going forward. High single-digit sustainable comps (say 8%) with 20%+ square footage growth exceeds the top-line organic growth rates of all of firm's stocks, and supports an otherwise high valuation (27.3x CY2008E ). At 1.22x current sales and 27.3x 2008E EPS, WFMI is attractive. JPM reiterates Overweight rating.
Notablecalls: Nothing really new here. Investors either take the leap of faith or they don't. Expect to see moderate buy interest following the note. Think that soon enough WFMI will be a $50 stock again.
Calls of Note Part 1
- First Albany is cautious on FoxHollow Tech (NASDAQ:FOXH) following meeting with management saying the co sees slower PAD market growth than its competitors, which according to the firm confirms that the SilverHawk business is facing growth hurdles over the near term. FOXH estimated PAD market growth at 8%-10% versus 20%+ estimated by the management teams of two other PAD players visited on firm's bus tour.
Firm lowers U.S. SilverHawk revenue estimate for 4Q and 2007 by $2.2M and $22M, respectively, and 2007 GAAP EPS estimate to $0.81 from $1.02 (consensus $0.75, range $0.41-$1.20).
Also, FOXH may be contemplating a transformational acquisition. Heretofore, the firm has perceived FOXH management to be "anti" balloons/ stents. However, the meeting leads them to believe FOXH may be gearing up to transform into a broad "vascular treatment company" vis-a-vis potential acquiring into one or both of these areas. While occurrence - let alone timing - is clearly an unknown, such a move would undoubtedly be a "sea change" in FOXH's approach to the PAD market and its customer base. Assuming for a moment that FOXH makes such a move, they would be slightly concerned about how investors would react.
They think FOXH may languish until there is better 2007 visibility, guidance for which may come in January. However, while sentiment regarding such a potential acquisition may be negative at first, the firm thinks a broad-product vascular treatment company makes sense and may ultimately be good for shareholders. Maintains Neutral.
Notablecalls: Chart sure looks ominous. The stock will surely get hit following the comments. However, I would be somewhat reluctant to short into a large gap down as I suspect there will some some short covering. For long's sake I hope this train stops before the $21 level.
Firm lowers U.S. SilverHawk revenue estimate for 4Q and 2007 by $2.2M and $22M, respectively, and 2007 GAAP EPS estimate to $0.81 from $1.02 (consensus $0.75, range $0.41-$1.20).
Also, FOXH may be contemplating a transformational acquisition. Heretofore, the firm has perceived FOXH management to be "anti" balloons/ stents. However, the meeting leads them to believe FOXH may be gearing up to transform into a broad "vascular treatment company" vis-a-vis potential acquiring into one or both of these areas. While occurrence - let alone timing - is clearly an unknown, such a move would undoubtedly be a "sea change" in FOXH's approach to the PAD market and its customer base. Assuming for a moment that FOXH makes such a move, they would be slightly concerned about how investors would react.
They think FOXH may languish until there is better 2007 visibility, guidance for which may come in January. However, while sentiment regarding such a potential acquisition may be negative at first, the firm thinks a broad-product vascular treatment company makes sense and may ultimately be good for shareholders. Maintains Neutral.
Notablecalls: Chart sure looks ominous. The stock will surely get hit following the comments. However, I would be somewhat reluctant to short into a large gap down as I suspect there will some some short covering. For long's sake I hope this train stops before the $21 level.
Paperstand
The WSJ reports that Express Scripts (ESRX) was last night preparing a $26bn cash and stock offer for Caremark Rx (CMX), in an effort to break up the co's existing takeover deal with drug chain CVS (CVS). An offer could be launched as early as today. It could set off a back-and-forth struggle for Caremark at a time when the co's deal with CVS was gaining credibility in the mkt. That transaction, which awarded no premium to Caremark's shareholders, initially failed to convince investors, who pushed shares in both co’s downward.
According to the WSJ, private-equity firms were in recent days moving into prime position to buy Biomet (BMET). An auction for the co was in its final days and could come to a head before year end. A contender remains Smith & Nephew (SNN), but the buyout shops were seen as leading candidates at the final hour.
The WSJ reports that Delta Air Lines, working to beat back an $8.4bn hostile merger bid from US Airways (LCC), is expected as soon as tomorrow to file a sweeping bankruptcy reorganization plan that values the co at $10-12bn. The range, representing the Atlanta airline's estd mkt value after emerging from bankruptcy, is down from the $12-14bn range the airline was calculating a few weeks ago. Still, Delta hopes creditors would prefer a plan that values the airline at more than US Airways' offer, and that would lead to an airline with an estd $10bn in debt versus $22bn under the merger scenario envisioned in the US Airways bid.
The WSJ reports that Loral Space & Comm. (LORL) in partnership with a Canadian pension fund, is expected today to announce a deal to acquire the Telesat satellite unit of Canada's BCE for more than $2.59bn. As part of the transaction, Loral will contribute cash as well as all of its own satellite assets to form a new co, based in Canada, that will own and operate the combined satellite fleet.
Sunday, December 17, 2006
HET to be acquired
The WSJ reprots that Apollo Mgmt and Texas Pacific Group are poised to win the auction for casino giant Harrah's Entertainment (HET), with an offer of at least $90 per share. The private-equity groups still are hammering out details of the deal, which would go down as one of the largest private-equity buyouts in history. While a last minute hiccup could always derail or scuttle a transaction, the two sides are expecting to announce it on Monday.
Barron's Summary
Barron’s cover story highlights the world’s cheapest big stock – ConocoPhillips (COP). Right now, ConocoPhillips could be one of the biggest bargains in the energy sector and, indeed, among all of the world's largest publicly traded corporations, even though some analysts haven't yet awoken to the fact. The stock has the lowest P/E ratio among the Dow Jones Global Titans, the 50 largest co’s worldwide ranked by stock-mkt value. "ConocoPhillips is too cheap to ignore on an absolute basis and relative to its peer group," says Robert Marcin, the managing partner of Defiance Asset Management, a Conshohocken, Pa., investment firm that holds the shares. "The stock is unsustainably undervalued if commodity prices stay around current levels." Marcin values the stock at 90. "A valuation at nine times earnings wouldn't be unreasonable when ExxonMobil trades for 12 times earnings," he declares.
Fund manager likes NWS and MBT, dislikes BHP.
Though up sharply since the summer, the shares of Turbochef (OVEN) could climb another 40% over the next year. But the stock is clearly speculative; lots of folks are betting against it.
Trading at around 48, Newfield Exploration (NFX) is a cheap stock. The co expects its production to grow by more than 20% next year, and some investors predict a like-sized gusher for the shares.
For speculators, the shares of NY Community Bancorp (NYB) might be worth a bet, on the chance of a takeover. For income investors, the chance of a payout cut means trouble.
At 33, or 35x estd earnings, Heelys (HLYS) is vulnerable to tripping. If it rallies on Christmas sales, take profits.
“The Trader” section discusses Brink’s (BCO), which has become latest activist hedge fund target, who will join the swelling ranks of investors who want Brinks to consider selling part or all of the co. Late last week, Stanley Works snapped up HSM Electronic, a security-alarm monitoring co, for $545m, a cue for some to re-evaluate Brink's, which has a mkt cap of nearly $3bn. Lehman Brothers analyst Jeffrey Kessler, for one, promptly raised his price tgt to 70 from 65, and said the sum of Brink's parts may warrant a price tag as high as 80.
“The Trader” column also suggests that MasterCard (MA) is pricey. Even in the light of this frenetic shopping week. Its shares have surged 108% since their late-May debut, compared with a 14% climb for American Express (AXP) over the same period. KBW analyst Sanjay Sakhrani assigns a value to MasterCard of about 22x his ‘08 EPS est of $4.44, and 4.5x his forward BV of $20.50. He then subtracts a rather conservative $7 a share for litigation damages to reach a price tgt of 88.
Internet stock fund largest holdings are NAPS and INSP. Jacob Internet fund likes InfoSpace's more than $400m of cash, and says Napster's stellar brand and valuable customer base could be prove attractive to a larger online co or media concern. "There are a couple of co’s that could take fliers on Napster," Ryan Jacob says.
Friday, December 15, 2006
Calls of Note Part 5
Baird commenting Garmin (NASDAQ:GRMN) following survay of 23 North American electronic retailers in the last week regarding customer trends for GPS-based devices.
Given their conversations, firm believes Garmin continues to maintain positive sales momentum and is likely holding share in North American PND. They also believe that many customers are gravitating towards more feature-rich units, particularly as pricing declines further. Despite these positives, firm maintain their Neutral rating based on the following factors:
First, they believe holiday price pressure is increasing. All surveyed stores suggested prices on Street Pilot and Nuvi units declined by roughly 10%-20%. TomTom units also declined by similar price amounts.
Second, they are concerned that component prices, which had been falling and aiding Garmin's cost structure, are now beginning to stabilize. Given the price pressure, firm is concerned that margins may face added pressure.
Third, they believe Europe is likely to become increasingly difficult given that Garmin needs to work through near-term distribution conflicts involving sell-through pricing - some dealers are not offering the lower pricing structure desired by Garmin.
Given these factors, firm is reducing their 2006 EPS estimate to $2.06 from $2.07, and 2007 EPS estimate to 2.36 from $2.43.
Price tgt goes to $47 from $49.
Notablecalls: GRMN has had a nice run in the past few days and this note will end this. Another reminder that high margins are not sustainable in this sector. Expect the stock to react accordingly.
Given their conversations, firm believes Garmin continues to maintain positive sales momentum and is likely holding share in North American PND. They also believe that many customers are gravitating towards more feature-rich units, particularly as pricing declines further. Despite these positives, firm maintain their Neutral rating based on the following factors:
First, they believe holiday price pressure is increasing. All surveyed stores suggested prices on Street Pilot and Nuvi units declined by roughly 10%-20%. TomTom units also declined by similar price amounts.
Second, they are concerned that component prices, which had been falling and aiding Garmin's cost structure, are now beginning to stabilize. Given the price pressure, firm is concerned that margins may face added pressure.
Third, they believe Europe is likely to become increasingly difficult given that Garmin needs to work through near-term distribution conflicts involving sell-through pricing - some dealers are not offering the lower pricing structure desired by Garmin.
Given these factors, firm is reducing their 2006 EPS estimate to $2.06 from $2.07, and 2007 EPS estimate to 2.36 from $2.43.
Price tgt goes to $47 from $49.
Notablecalls: GRMN has had a nice run in the past few days and this note will end this. Another reminder that high margins are not sustainable in this sector. Expect the stock to react accordingly.
Calls of Note Part 4
UBS says their checks suggest Samsung is currently undergoing MLC (multi-level cell) licensing renewal negotiations with SanDisk (NASDAQ:SNDK). Although they do not believe current contractual agreements do not expire until 2H09, Samsung is likely approaching the process earlier in order to procure more favorable terms as current MLC royalty rates. SanDisk's "first generation" patents that include MLC expire in the 2009-2014 timeframe while "2nd generation" patents, or modified/updated versions of MLC and other patents, expire in 2020 or later. Firm believes Samsung has a number of next-generation process technology development efforts underway, including charge trapping and PRAM, that may afford it some leverage in this process. Firm views the potential for lower royalty rates for future MLC payment streams from Samsung as a negative for SanDisk.
Notablecalls: Looks like a big blow for SNDK to me. All the negative talk so far has been about product line. However, note that licencing revenue is at least equally important as products, with some firms valueing licencing at $25 per share. With key licensees such as Samsung trying to renegotiate, look for this figure to come down sharply with the stock following the road.
Notablecalls: Looks like a big blow for SNDK to me. All the negative talk so far has been about product line. However, note that licencing revenue is at least equally important as products, with some firms valueing licencing at $25 per share. With key licensees such as Samsung trying to renegotiate, look for this figure to come down sharply with the stock following the road.
Calls of Note Part 3
Baird commenting Genzyme (NASDAQ:GENZ), saying that they understand from GENZ that CMS has reversed its prior negative decision (announced in October) to cut Synvisc reimbursement by grouping all viscosupplementation products into one J-code in 2007.
A quick look at the CMS website confirms this positive development. Synvisc reimbursement will be $198/dose (three doses required per course), comparable to the 2006 level.
Orthovisc - Synvisc's closest comp in the category - is reimbursed at $200.54/dose, making the economics fairly comparable across the board.
As things stand today, Synvisc will no longer be unprofitable for physicians to administer, eliminating the need for a dramatic price decrease.
Based on this development, firm is raising their Synvisc revenue estimates to $266M from $229M, resulting in a new 2007 EPS estimate of $3.17.
Notablecalls: The negative reimpursement decision came out 30/10, initially sending the stock down 2 points. Simple logic makes me to expect the same upside today.
A quick look at the CMS website confirms this positive development. Synvisc reimbursement will be $198/dose (three doses required per course), comparable to the 2006 level.
Orthovisc - Synvisc's closest comp in the category - is reimbursed at $200.54/dose, making the economics fairly comparable across the board.
As things stand today, Synvisc will no longer be unprofitable for physicians to administer, eliminating the need for a dramatic price decrease.
Based on this development, firm is raising their Synvisc revenue estimates to $266M from $229M, resulting in a new 2007 EPS estimate of $3.17.
Notablecalls: The negative reimpursement decision came out 30/10, initially sending the stock down 2 points. Simple logic makes me to expect the same upside today.
Calls of Note Part 2
Stifel's Cody G. Acree and Patrick Newton out saying that based on their checks Skyworks' (NASDAQ:SWKS) business appears to be progressing in line with the co's guidance and more convinced of Skyworks' opportunities in 2007 with strong potential to deliver second-half revenue and earnings upside.
Most significantly, firm's channel work has also led them to conclude that Skyworks has been selected to supply the Front-End Module to Apple's new iPhone, which should begin contributing to revenue during the first half.
Firm is highly encouraged by what they believe is an Apple win for many reasons. First, at about $2 per FEM this new customer could contribute to meaningful upside.
Second, they believe Apple's decision to use Skyworks over competing module suppliers is a material technology endorsement that should be acknowledged by investors.
Notablecalls: That's what I call research! Nice work guys! It probably won't work as a trade today as SWKS is too heavily traded, but should provide upside to the stock in the near-term as the news is getting digested by the street. If every iPhone has SWKS FEM, it should provide nice upside to 2007 ests even with low mkt share assumptions.
Most significantly, firm's channel work has also led them to conclude that Skyworks has been selected to supply the Front-End Module to Apple's new iPhone, which should begin contributing to revenue during the first half.
Firm is highly encouraged by what they believe is an Apple win for many reasons. First, at about $2 per FEM this new customer could contribute to meaningful upside.
Second, they believe Apple's decision to use Skyworks over competing module suppliers is a material technology endorsement that should be acknowledged by investors.
Notablecalls: That's what I call research! Nice work guys! It probably won't work as a trade today as SWKS is too heavily traded, but should provide upside to the stock in the near-term as the news is getting digested by the street. If every iPhone has SWKS FEM, it should provide nice upside to 2007 ests even with low mkt share assumptions.
Calls of Note Part 1
Bank of America is previewing Palm (NASDAQ:PALM) and Research in Motion (NASDAQ:RIMM), both due to report the next week.
Firm notes that on 11/27, Palm lowered F2Q rev and EPS guid because of new product delays. Unfort, while Palm stated that it expected the 3G Treo '750' US launch to occur in early F3Q - implying Dec. Firm's checks indicate that the launch could now be in late Jan or Feb. Further, the new mid-range Treo '680' is selling well, but colors are out of stock for ~1-2 wks, which is disappointing given the peak holiday season and new Treo mktg campaign.
Based on firm's checks, they see some risk to F3Q guid that may not be in the stock yet. While they think downside risk to shares is limited from current levels, if ests come down again, we may get a better entry point after this one last piece of bad news gets digested. However, firm remains confident that Palm's smartphone Treo unit shipments will begin accelerating Y/Y in F3Q/F4Q. As a result, they believe there is more of an opportunity for PALM shares post report because they think the stock will react favorably before units move higher.
For RIMM, firm has mostly heard positive feedback from both consumer and enterprise users, including first-time users. The positive response makes them believe BlackBerry units could surprise in coming quarters, although they believe their model adequately reflects the best case enterprise BlackBerry upgrade cycle, which implies that further increases will need to come from better traction in the more competitive consumer market.
Some cannibalization and phone only sales. Firm thinks early Pearl trends are pos, although they think a good portion of purchases may be upgrade units and persons buying merely as a phone without activating email. In this case, the Pearl may not drive big net add upside, which they think remains the key variable for the stock.
Notablecalls: Want to be long in PALM going into the earnings? Me neither. The mgmt is misexecuting perhaps worse then ever. Dont want to be short either as the downside looks limited. As for RIMM, Pearl users not activating email is alarming given the model's dependence on monthly service revenue. However, not sure how much credibility the note has - it looks to be based on something heard in the elevator of Manhatten skyscraper rather than actual research.
Firm notes that on 11/27, Palm lowered F2Q rev and EPS guid because of new product delays. Unfort, while Palm stated that it expected the 3G Treo '750' US launch to occur in early F3Q - implying Dec. Firm's checks indicate that the launch could now be in late Jan or Feb. Further, the new mid-range Treo '680' is selling well, but colors are out of stock for ~1-2 wks, which is disappointing given the peak holiday season and new Treo mktg campaign.
Based on firm's checks, they see some risk to F3Q guid that may not be in the stock yet. While they think downside risk to shares is limited from current levels, if ests come down again, we may get a better entry point after this one last piece of bad news gets digested. However, firm remains confident that Palm's smartphone Treo unit shipments will begin accelerating Y/Y in F3Q/F4Q. As a result, they believe there is more of an opportunity for PALM shares post report because they think the stock will react favorably before units move higher.
For RIMM, firm has mostly heard positive feedback from both consumer and enterprise users, including first-time users. The positive response makes them believe BlackBerry units could surprise in coming quarters, although they believe their model adequately reflects the best case enterprise BlackBerry upgrade cycle, which implies that further increases will need to come from better traction in the more competitive consumer market.
Some cannibalization and phone only sales. Firm thinks early Pearl trends are pos, although they think a good portion of purchases may be upgrade units and persons buying merely as a phone without activating email. In this case, the Pearl may not drive big net add upside, which they think remains the key variable for the stock.
Notablecalls: Want to be long in PALM going into the earnings? Me neither. The mgmt is misexecuting perhaps worse then ever. Dont want to be short either as the downside looks limited. As for RIMM, Pearl users not activating email is alarming given the model's dependence on monthly service revenue. However, not sure how much credibility the note has - it looks to be based on something heard in the elevator of Manhatten skyscraper rather than actual research.
Thursday, December 14, 2006
Calls of Note Part 5
- BMO Capital Markets notes their checks suggest that Broadcom (NASDAQ:BRCM) has obtained a noteworthy design win in the upcoming stealth phone, about to be offered by a major consumer device company.
No, it is not the application processor, neither the baseband, nor the wifi/Bluetooth. Firm's checks suggest that it is a system on a chip (SoC) that enables an onscreen touchpad feature that is likely going to enable a new type of user interface for the phone. They believe the SoC is a mixed signal, analog/digital device that has an ASP of somewhere in the $2-$3 range. It appears that there is a strong likelihood that this part shows up in the next generation media players as well.
No change to firm's model as the part adds a minimal $15 million in revenue to the top line in 2007. A slightly bigger impact could come in 2008, if the SoC is introduced in a slew of other products including the next generation media players. Separately, the firm is introducing 2008 estimates of non-GAAP $1.50, and GAAP estimates of $1.00.
Maintains Outperform but ups tgt to $38 from $33.
Notablecalls: Nice piece of research guys. Too bad it's not actionable. I wonder if it's the iPhone?
No, it is not the application processor, neither the baseband, nor the wifi/Bluetooth. Firm's checks suggest that it is a system on a chip (SoC) that enables an onscreen touchpad feature that is likely going to enable a new type of user interface for the phone. They believe the SoC is a mixed signal, analog/digital device that has an ASP of somewhere in the $2-$3 range. It appears that there is a strong likelihood that this part shows up in the next generation media players as well.
No change to firm's model as the part adds a minimal $15 million in revenue to the top line in 2007. A slightly bigger impact could come in 2008, if the SoC is introduced in a slew of other products including the next generation media players. Separately, the firm is introducing 2008 estimates of non-GAAP $1.50, and GAAP estimates of $1.00.
Maintains Outperform but ups tgt to $38 from $33.
Notablecalls: Nice piece of research guys. Too bad it's not actionable. I wonder if it's the iPhone?
Calls of Note Part 4
- Merrill Lynch notes they continue to see efforts by Radware (NASDAQ:RDWR) to revamp its sales force and refocus its R&D resources on product development. They also believe that Radware may be in the final phases of signing a small OEM agreement with a large European vendor, which could lead to additional opportunities in the future.
As discussed on its 3Q conference call, the US sales force is being pruned, leaving only the most productive people on board. Firm expects minimal near-term disruption since senior executives mainly manage the large accounts. Given that transition takes time, they do not expect to see material sales improvement in the US in 4Q, but this should be compensated by stronger trends in Europe and Asia.
Radware has the potential to secure new carrier opportunities in Q4 and 2007. After being engaged in several carrier-related RFPs for nearly 12-months, ML expects there should be at least one deal that will contribute to revenue over the next few quarters. Besides the well documented IBM partnership announced in October, additional strategic relationships and alliances should create opportunities in the enterprise and wireless verticals. However, these positive developments mentioned above are largely reflected in the recent share performance (up 8% since reporting 3Q results).
Maintains Neutral.
Notablecalls: Not actionable but good to know category.
As discussed on its 3Q conference call, the US sales force is being pruned, leaving only the most productive people on board. Firm expects minimal near-term disruption since senior executives mainly manage the large accounts. Given that transition takes time, they do not expect to see material sales improvement in the US in 4Q, but this should be compensated by stronger trends in Europe and Asia.
Radware has the potential to secure new carrier opportunities in Q4 and 2007. After being engaged in several carrier-related RFPs for nearly 12-months, ML expects there should be at least one deal that will contribute to revenue over the next few quarters. Besides the well documented IBM partnership announced in October, additional strategic relationships and alliances should create opportunities in the enterprise and wireless verticals. However, these positive developments mentioned above are largely reflected in the recent share performance (up 8% since reporting 3Q results).
Maintains Neutral.
Notablecalls: Not actionable but good to know category.
Calls of Note Part 3
- Citigroup notes they employ monthly US retail sell-through data (source: NPD) to pulse SanDisk's (NASDAQ:SNDK) memory card, USB drive and MP3 businesses which together comprise ~60% of the company's total product revenue. On the surface, November's overall data depicts a solid month for industry and an even better month for SanDisk on unit, bit growth, and revenue parameters. Firm finds this a welcome sign. That said, on further analysis MP3 sales are actually somewhat troubling given the unsustainable downshift toward SanDisk's 1GB offering while the micro-SD card category clearly shows increasing competition.
Looking ahead, December pricing typically increases while average densities decrease on lower-ticket purchases. However, recent contract price weakness casts some doubt that the typical seasonal increase will be observed this month. Net net, November's data leaves the firm comfortable with their bit growth estimate which is 500 bps above SNDK guidance, though they continue to believe pricing will be moderately worse than current Street expectations and company guidance (-22% vs. -17% Street estimates). In addition, they remain concerned that Street 1Q07 royalty revenue estimates remain lofty.
In summary, for SanDisk's stock price November's performance should add ballast to fundamental downside support near the $40 level (15x P/F12M EPS ests), though an unfavorable NAND industry backdrop is likely to limit meaningful share appreciation near-term, in particular given a lack of sustainable catalysts for the next six months.
Maintains Hold.
Notablecalls: Not actionable but good to know category. Looks like the $40 level will be the line in the sand for SNDK.
Looking ahead, December pricing typically increases while average densities decrease on lower-ticket purchases. However, recent contract price weakness casts some doubt that the typical seasonal increase will be observed this month. Net net, November's data leaves the firm comfortable with their bit growth estimate which is 500 bps above SNDK guidance, though they continue to believe pricing will be moderately worse than current Street expectations and company guidance (-22% vs. -17% Street estimates). In addition, they remain concerned that Street 1Q07 royalty revenue estimates remain lofty.
In summary, for SanDisk's stock price November's performance should add ballast to fundamental downside support near the $40 level (15x P/F12M EPS ests), though an unfavorable NAND industry backdrop is likely to limit meaningful share appreciation near-term, in particular given a lack of sustainable catalysts for the next six months.
Maintains Hold.
Notablecalls: Not actionable but good to know category. Looks like the $40 level will be the line in the sand for SNDK.
Calls of Note Part 2
- Jefferies comments on SiRF Tech (NASDAQ:SIRF) saying their checks suggest TomTom has selected privately held Global Locate as a second source GPS chipset supplier, beginning with its next generation TomTom ONE. Firm expects this new PND to be introduced at the Consumer Electronics Show in January. This risk has been contemplated and discussed by investors for nearly a year, and SiRF's stock traded off 3% as recently as yesterday due to this potential concern. Although the firminitially dismissed this as a recirculation of a prior rumor/risk, they checked back in with some of their industry contacts and now believe that there is a high likelihood that the decision has been made to use Global Locate (displacing SiRF) in the next generation ONE platform. Although they believe this decision to second source makes sound business sense for TomTom to facilitate better pricing, the firm wase surprised by TomTom's decision to use its highest volume platform (65-75% of Q4 volume) as its test case.
The firm has reduced their revenue and EPS estimates for 2007: CY07 revenue estimate to $304MM (from $321MM) to reflect a $23MM reduction in their PND revenue estimate, partially offset by an increase in wireless revenue estimate by roughly $5MM. Reduced CY07 estimate to $1.00 (from $1.13) due to the lower revenue.
Jeffco does not believe SIRF's technology advantage is over and is sticking to their Buy rating. Notes that it should come as a surprise as SRIF's 90% PND mkt share is not sustainable over the long term. Tgt goes to $34 from $36.
Notablecalls: Several firms were out in defense of SIRF yesterday saying TomTom was not looking for a second supplier. Looks like they were wrong. I expect SIRF stock to come under pressure today as Jeffco's CY07 EPS cut looks pretty bad considering the valuation. Also, yesterday's dip buyers will likely be looking for a way out.
The firm has reduced their revenue and EPS estimates for 2007: CY07 revenue estimate to $304MM (from $321MM) to reflect a $23MM reduction in their PND revenue estimate, partially offset by an increase in wireless revenue estimate by roughly $5MM. Reduced CY07 estimate to $1.00 (from $1.13) due to the lower revenue.
Jeffco does not believe SIRF's technology advantage is over and is sticking to their Buy rating. Notes that it should come as a surprise as SRIF's 90% PND mkt share is not sustainable over the long term. Tgt goes to $34 from $36.
Notablecalls: Several firms were out in defense of SIRF yesterday saying TomTom was not looking for a second supplier. Looks like they were wrong. I expect SIRF stock to come under pressure today as Jeffco's CY07 EPS cut looks pretty bad considering the valuation. Also, yesterday's dip buyers will likely be looking for a way out.
Calls of Note Part 1
- JP Morgan notes their checks indicate Intel's (NASDAQ:INTC) 4Q06 is on track to meet their $9.4 billion (up 8% QoQ) revenue estimate, in line with company guidance of up 4%-11%, and roughly in line with Consensus of $9.5 billion (up 8% QoQ). Firm believes Intel is also on track to meet gross margin guidance of 50%, in line with JPM estimate, due to high utilization rates.
They believe Intel is experiencing strength in the notebook processor segment due to a strong seasonal build as JPM's Asia research team now expects 4Q06 notebook growth of 23%, slightly
above an average of 20%. Checks indicate Intel's desktop processor business (roughly 28% of 3Q06 revenue) is below plan due to poor demand.
Checks also indicate Intel is on track to build inventory in the December quarter and they view the high inventory levels (92 days in 3Q06, near a record high) as a risk to margins in the coming quarters. Firm's checks also indicate Intel's inventory is rising in the channel in hopes of stronger than seasonal PC demand in 1Q07 driven by Vista, which the firm does not believe will happen. Processor inventory in the channel normally decreases during the fourth quarter.
While the firm is positive on recent restructuring efforts they remain Neutral on INTC due to belief gross margins should decline to the high-40% range during 1H07 due to record inventory, higher start up costs, and higher depreciation. INTC is trading at 3.5X C06 sales, below the mid-point of a historic range of 3.0X-5.0X sales.
Notablecalls: Not actionable but good to know category. Mixed emotions about the Vista upgrade as research has shown that the last time MSFT's Windows created a meaningul upgrade cycle was when 95 was released. Must say I agree more with JPM here regarding the miniscule impact of Vista on the overall PC demand. However, I continue to see Micron (NYSE:MU) (and also QI) as the main beneficiary of Vista as most PC's running the system will need their RAM upgraded.
They believe Intel is experiencing strength in the notebook processor segment due to a strong seasonal build as JPM's Asia research team now expects 4Q06 notebook growth of 23%, slightly
above an average of 20%. Checks indicate Intel's desktop processor business (roughly 28% of 3Q06 revenue) is below plan due to poor demand.
Checks also indicate Intel is on track to build inventory in the December quarter and they view the high inventory levels (92 days in 3Q06, near a record high) as a risk to margins in the coming quarters. Firm's checks also indicate Intel's inventory is rising in the channel in hopes of stronger than seasonal PC demand in 1Q07 driven by Vista, which the firm does not believe will happen. Processor inventory in the channel normally decreases during the fourth quarter.
While the firm is positive on recent restructuring efforts they remain Neutral on INTC due to belief gross margins should decline to the high-40% range during 1H07 due to record inventory, higher start up costs, and higher depreciation. INTC is trading at 3.5X C06 sales, below the mid-point of a historic range of 3.0X-5.0X sales.
Notablecalls: Not actionable but good to know category. Mixed emotions about the Vista upgrade as research has shown that the last time MSFT's Windows created a meaningul upgrade cycle was when 95 was released. Must say I agree more with JPM here regarding the miniscule impact of Vista on the overall PC demand. However, I continue to see Micron (NYSE:MU) (and also QI) as the main beneficiary of Vista as most PC's running the system will need their RAM upgraded.
Wednesday, December 13, 2006
Taking a positive stance on Micron (NYSE: MU)
Looking to enter on the long side of Micron Technology (NYSE:MU) again in the next few days. The stock has been getting hit on concerns about pricing and inventories across the product portfolio. However, the concerns seem to be exaggerated given the following:
1) Inventory concerns are not new as these were in part the reason why the stock got hit so much in October when the co last reported inventories of $799.7 mln, up $163.1 mln vs previous qtr. However, $75 mln of the increase was due to Lexar acquisition, making it one-time increase in NAND Flash inventories.
2) Talking about NAND Flash, while the pricing pressure is most likely to be a problem, remind that it still represents less than 10% of revs. As such, it should be fairly easy for the company to write down excess inventories (i.e legacy Lexar inventories) and come out leaner and cleaner.
3) CMOS, representing ~15% of revs is another cause for concern given the OmniVision (NASDAQ:OVTI) results & guidance. However, note that OVTI's weak margins were at least in part company-specific due to product mix and fabless operating model. Micron's CMOS operating margins have been ~5% better than OVTI's for this year, giving it more flexibility.
4) That brings us to DRAM - hey, Micron is still a DRAM company, remember? As usual, there is much talk about pricing pressure for DRAM, but that doesn't look anything out of ordinary for me. And we still have Vista upgrade cycle ahead of us. Vista, remember, is a masterpiece that would prefer to have Micron's one month's output of DRAM in the computer. Or at least 2 GB.
1) Inventory concerns are not new as these were in part the reason why the stock got hit so much in October when the co last reported inventories of $799.7 mln, up $163.1 mln vs previous qtr. However, $75 mln of the increase was due to Lexar acquisition, making it one-time increase in NAND Flash inventories.
2) Talking about NAND Flash, while the pricing pressure is most likely to be a problem, remind that it still represents less than 10% of revs. As such, it should be fairly easy for the company to write down excess inventories (i.e legacy Lexar inventories) and come out leaner and cleaner.
3) CMOS, representing ~15% of revs is another cause for concern given the OmniVision (NASDAQ:OVTI) results & guidance. However, note that OVTI's weak margins were at least in part company-specific due to product mix and fabless operating model. Micron's CMOS operating margins have been ~5% better than OVTI's for this year, giving it more flexibility.
4) That brings us to DRAM - hey, Micron is still a DRAM company, remember? As usual, there is much talk about pricing pressure for DRAM, but that doesn't look anything out of ordinary for me. And we still have Vista upgrade cycle ahead of us. Vista, remember, is a masterpiece that would prefer to have Micron's one month's output of DRAM in the computer. Or at least 2 GB.
Calls of Note Part 2
- Merrill Lynch is raising their 2007 and 2008 estimates for Allegheny Tech (NYSE:ATI) from $6.55/sh and $7.50/sh to $7.05/sh and $8.00/sh, respectively. In addition, they are raising their Price Objective on ATI to $112/sh, which is based on earnings of $8.00/sh in 2008 and a 14.0x P/E multiple. This is in-line with its historic average, which indicates that ATI's P/E has varied from about 8x to 35x, with an average closer to about 15x. Firm is now more confident that margins will be stable due to a more robust commercial up cycle than their previous forecast.
ATI currently has 30% of its revenues generated from the aerospace market, which they believe will increase over the next several years. The ML Aerospace & Defense team recently raised their delivery forecasts for Boeing on continued robust demand for aircraft. ML expects the replacement cycle for the North American legacy airlines to begin mid-to-late 2007.
In addition, they firmly believe that the use of composites as the primary structure on Boeing's new twin-aisle, the 787, marks a dramatic and fundamental shift in the aerospace industry, as significant as the transition from wood to aluminum for airframe structures. Composites are lighter, stronger and more durable than aluminum alloys. From the perspective of an investor in ATI, composite aircraft require much higher levels of titanium than traditional aluminum aircraft, as is the case for the 787 that requires 10X that of traditional aircraft of its size.
Notablecalls: Note makes sense. Expect to see buy interest in ATI today. Would not overstay my welcome.
ATI currently has 30% of its revenues generated from the aerospace market, which they believe will increase over the next several years. The ML Aerospace & Defense team recently raised their delivery forecasts for Boeing on continued robust demand for aircraft. ML expects the replacement cycle for the North American legacy airlines to begin mid-to-late 2007.
In addition, they firmly believe that the use of composites as the primary structure on Boeing's new twin-aisle, the 787, marks a dramatic and fundamental shift in the aerospace industry, as significant as the transition from wood to aluminum for airframe structures. Composites are lighter, stronger and more durable than aluminum alloys. From the perspective of an investor in ATI, composite aircraft require much higher levels of titanium than traditional aluminum aircraft, as is the case for the 787 that requires 10X that of traditional aircraft of its size.
Notablecalls: Note makes sense. Expect to see buy interest in ATI today. Would not overstay my welcome.
Calls of Note Part 1
- Banc of America comments on AMD (NYSE:AMD) reducing near-term estimates on weaker pricing trends and evidence of share loss in servers. In the meantime, they are taking this opportunity to reduce near-term estimates on AMD and formally introduce AMD-ATI combined model. Checks suggest that 4Q06 AMD estimates are tracking below firm's. Specifically, while their prior forecast for overall unit growth remains relatively unchanged, they are reducing their ASP assumptions to assume further ASP declines in 4Q06 vs. 3Q06 stemming principally from preemptive pricing actions by AMD against Intel's more robust offerings.
Firm is reducing their Q406 and FY07 EPS estimates to reflect 1) greater than anticipated declines in desktop and server processor ASPs and 2) share loss to Intel within the server segment. Firm's new 4Q06 GAAP EPS est. is now for $0.30 (pf $0.34) down from prior est. of $0.42 (pf $0.46) and below the consensus GAAP est. of $0.31 (pf $0.36). Their new FY07 est. calls for GAAP EPS of $1.04 (pf $1.20) down from prior GAAP est. of $1.20 (pf $1.36) and below consensus GAAP EPS of $1.28 (pf $1.40). They are also introducing FY07 revenue of $7.97b and GAAP EPS of $1.00 (pro-forma of $1.22) for the combined AMD-ATI entity, which suggests relative neutrality.
Specifically, the firm believes the lack of a competitive offering alternative to Intel's Conroe product in the high end desktop segment, has forced AMD to be more aggressive within the low-end/mainstream segments (vs. Intel's Pentium D/Pentium 4 offerings). And while the ramp up at Dell, coupled with strong momentum for AMD's notebook products (Turion 64 X2) are driving solid unit growth for AMD in the December quarter, they believe that a more competitive desktop pricing environment is putting a 'ceiling' on AMD's desktop revenue. This situation, they believe is also extending into the server market, where renewed strength from Intel is forcing AMD to take preemptive pricing actions to protect its market share. This coupled with the well publicized issues for AMD in meeting channel demand - which has also helped Intel gain incremental share in the channel - supports BAC's view of some pressure on AMD's earnings.
Also impacting AMD, they believe, is somewhat more muted momentum in the server business driven by Intel's renewed competitiveness in the server market, particularly in the 2P or DP (dual processor) segment (~80%+ of overall x86 server unit shipments).
Tgt goes to $20 from $23.
Notablecalls: This call comes ahead of analyst meeting scheduled for tomorrow. Note that GSCO was out on AMD earlier this week saying they expect the management to use this meeting to lower ests. The stock has been inching down and I think BAC's note will deal another blow for the bulls. Believe we will see AMD going below $20 level.
Firm is reducing their Q406 and FY07 EPS estimates to reflect 1) greater than anticipated declines in desktop and server processor ASPs and 2) share loss to Intel within the server segment. Firm's new 4Q06 GAAP EPS est. is now for $0.30 (pf $0.34) down from prior est. of $0.42 (pf $0.46) and below the consensus GAAP est. of $0.31 (pf $0.36). Their new FY07 est. calls for GAAP EPS of $1.04 (pf $1.20) down from prior GAAP est. of $1.20 (pf $1.36) and below consensus GAAP EPS of $1.28 (pf $1.40). They are also introducing FY07 revenue of $7.97b and GAAP EPS of $1.00 (pro-forma of $1.22) for the combined AMD-ATI entity, which suggests relative neutrality.
Specifically, the firm believes the lack of a competitive offering alternative to Intel's Conroe product in the high end desktop segment, has forced AMD to be more aggressive within the low-end/mainstream segments (vs. Intel's Pentium D/Pentium 4 offerings). And while the ramp up at Dell, coupled with strong momentum for AMD's notebook products (Turion 64 X2) are driving solid unit growth for AMD in the December quarter, they believe that a more competitive desktop pricing environment is putting a 'ceiling' on AMD's desktop revenue. This situation, they believe is also extending into the server market, where renewed strength from Intel is forcing AMD to take preemptive pricing actions to protect its market share. This coupled with the well publicized issues for AMD in meeting channel demand - which has also helped Intel gain incremental share in the channel - supports BAC's view of some pressure on AMD's earnings.
Also impacting AMD, they believe, is somewhat more muted momentum in the server business driven by Intel's renewed competitiveness in the server market, particularly in the 2P or DP (dual processor) segment (~80%+ of overall x86 server unit shipments).
Tgt goes to $20 from $23.
Notablecalls: This call comes ahead of analyst meeting scheduled for tomorrow. Note that GSCO was out on AMD earlier this week saying they expect the management to use this meeting to lower ests. The stock has been inching down and I think BAC's note will deal another blow for the bulls. Believe we will see AMD going below $20 level.
Comments on Apple
Several firms are commenting on Apple Computer (NASDAQ:AAPL) this AM. The two topics include the upcoming iPhone and also iTunes sales data. The latter is said to have caused yesterday's fall-out in AAPL stock as Forrester Research noted iTunes has experienced a collapse in sales revs this year:
- UBS notes they continue to believe that Apple will launch its cell phone initiative in the March/April timeframe with initial phone shipments possible as early as the end of next quarter.
Firm's research points toward Apple becoming its own carrier-or MVNO, likely using Cingular's GSM network. While there a number of challenges associated with an MVNO (many failed attempts by others), Apple may be the best positioned of any player yet to make it work given its distribution, brand, installed base of iPods & software/iTunes integration. An MVNO model would allow Apple to have total control over the user experience, which is something the firm cannot imagine Steve Jobs relinquishing by allowing just about anyone to sell his phone.
They would not be surprised if the company offered 2 or more phones for customers by year-end 2007, with the first version shipping as early as March. UBS believes one phone will likely be a GSM/GPRS phone, with a second phone potentially being a 3G/WCDMA product.
Based on checks in the supply chain, the firm believes the initial iPhone will initially be equipped with 4-8 gigabytes of NAND flash and could have a 2 megapixel digital camera. They expect the phone to work seamlessly with iTunes (Mac or PC versions) and photos will be easy to load on
and off the devices as well. Another key function could be chat, which Apple could make easier through what some have called an "iChat Mobile" application.
Assuming Apple is able sell about 5 million units in calendar 2007 (about 1.4% share of the estimated 2007 music player handset market), the firm estimates potential incremental annual revenue contribution of about $1.5 billion (assuming a $300 ASP to Apple) and annual EPS contribution of about $0.09. UBS' assumptions include operating margins of about 8% (well below Apple's current 12.6% margin) due to the incremental costs associated with entering the cell phone market (note that Motorola, one of the most established cell phone providers, currently has operating margins of 11.9%). They believe estimates may prove conservative if Apple is able to navigate through the challenges of entering such a competitive market.
Maintains Buy and $108 tgt.
- Morgan Stanley notes they believe Apple shares will trade higher once again by year-end 2007. Near-term, the introduction of new products and less exposure to any disruption from Microsoft's Vista OS launch could help reduce seasonal risk for AAPL shares. In the intermediate term, an expanding product portfolio, growing distribution engine and market share opportunities all keep the firm Overweight AAPL with an increased priced target of $110 (from $90).
Proprietary supply-chain checks give the firm high conviction in a 1H07 iPhone launch. They expect Steve Jobs to announce the iPhone at MacWorld or early next year. To-date, they've found two models that began initial production this month - a 4-gig and 8-gig version with capacity plans to build up to 12 million total units in C2007 (MS' new model only includes a conservative 6M units).
Raising their C2007 revenue and EPS from $22.7B and $2.58 to $28B and $3.13, respectively. Firm's new forecast assumes revenue growth accelerates to 41% YoY in C2007 - to $28 billion, well above consensus forecast of $24.3 billion. As new product leverage kicks-in, firm's F2008 EPS surpasses the current consensus forecast by $0.34 ($3.58 vs. consensus $3.24).
- Piper Jaffray notes that contrary to recent reports suggesting sales on iTunes are declining rapidly, their analysis of Apple company data regarding iTunes sales shows strong growth y/y.
In light of recent media reports of slowing iTunes sales, they analyzed music sales data and saw strong y/y growth in 2005 and 2006. Specifically, the firm compared total sales between Jan. and Sept. of '05 and '06 and saw 78% growth during that period. From Jan. to Sept. in 2005 Apple sold 10.4m songs/week and in 2006 that number was up 78% to 18.5m songs/week.
While Apple does not release the financial details of the iTunes Store, the company has indicated that they run the store "above break-even." The iTunes Store, therefore, is a supplement to
the iPod as Apple's vehicle to monetize the free iTunes software. The integration of iPod with the iTunes software along with some profitability from the iTunes Store represent the three ingredients of Apple's digital music ecosystem.
Firm also comments on Mac mkt share saying it should continue to grow in CY07 due to: 1) completion of Intel transition, 2) improved availability of Macs, 3) expanding footprint of Apple customers (iPod halo effect), and 4) ability to run Windows on a Mac.
Mac market share in Q3 was 2.8% and will likely be ~3.0% in Q4, which is up from 2.1% in Q1. Street estimates currently call for Mac market share in CY07 of 2.7%. If Mac market share grows at the same rate seen in CY06 (approx. 1.0%), we could see 4.0% by the end of CY07, with an average of 3.5% for the year. If Apple achieves an average of 3.5% Mac market share for CY07, they estimate Street EPS estimates are $0.34, or 11.6% too low.
Maintains Outperform and $99 tgt.
Notablecalls: I wonder what triggered yesterday's sell-off in AAPl stock. It sure wasn't the iTunes data from Forrester. I suspect some mkt participants took a closer look at iPhone margins and discovered to their surprise these to be lower than current ones. And so they sold. That of course is a faulty conclusion on their part. Just take a look at the new ests from Morgan Stanley. I suspect that for traders, yesterday's sell-off provides an opportunity not seen since Piper upped their tgt to $100 (pre-split). Sitting at my old trading desk I would be all over the stock this morning.
- UBS notes they continue to believe that Apple will launch its cell phone initiative in the March/April timeframe with initial phone shipments possible as early as the end of next quarter.
Firm's research points toward Apple becoming its own carrier-or MVNO, likely using Cingular's GSM network. While there a number of challenges associated with an MVNO (many failed attempts by others), Apple may be the best positioned of any player yet to make it work given its distribution, brand, installed base of iPods & software/iTunes integration. An MVNO model would allow Apple to have total control over the user experience, which is something the firm cannot imagine Steve Jobs relinquishing by allowing just about anyone to sell his phone.
They would not be surprised if the company offered 2 or more phones for customers by year-end 2007, with the first version shipping as early as March. UBS believes one phone will likely be a GSM/GPRS phone, with a second phone potentially being a 3G/WCDMA product.
Based on checks in the supply chain, the firm believes the initial iPhone will initially be equipped with 4-8 gigabytes of NAND flash and could have a 2 megapixel digital camera. They expect the phone to work seamlessly with iTunes (Mac or PC versions) and photos will be easy to load on
and off the devices as well. Another key function could be chat, which Apple could make easier through what some have called an "iChat Mobile" application.
Assuming Apple is able sell about 5 million units in calendar 2007 (about 1.4% share of the estimated 2007 music player handset market), the firm estimates potential incremental annual revenue contribution of about $1.5 billion (assuming a $300 ASP to Apple) and annual EPS contribution of about $0.09. UBS' assumptions include operating margins of about 8% (well below Apple's current 12.6% margin) due to the incremental costs associated with entering the cell phone market (note that Motorola, one of the most established cell phone providers, currently has operating margins of 11.9%). They believe estimates may prove conservative if Apple is able to navigate through the challenges of entering such a competitive market.
Maintains Buy and $108 tgt.
- Morgan Stanley notes they believe Apple shares will trade higher once again by year-end 2007. Near-term, the introduction of new products and less exposure to any disruption from Microsoft's Vista OS launch could help reduce seasonal risk for AAPL shares. In the intermediate term, an expanding product portfolio, growing distribution engine and market share opportunities all keep the firm Overweight AAPL with an increased priced target of $110 (from $90).
Proprietary supply-chain checks give the firm high conviction in a 1H07 iPhone launch. They expect Steve Jobs to announce the iPhone at MacWorld or early next year. To-date, they've found two models that began initial production this month - a 4-gig and 8-gig version with capacity plans to build up to 12 million total units in C2007 (MS' new model only includes a conservative 6M units).
Raising their C2007 revenue and EPS from $22.7B and $2.58 to $28B and $3.13, respectively. Firm's new forecast assumes revenue growth accelerates to 41% YoY in C2007 - to $28 billion, well above consensus forecast of $24.3 billion. As new product leverage kicks-in, firm's F2008 EPS surpasses the current consensus forecast by $0.34 ($3.58 vs. consensus $3.24).
- Piper Jaffray notes that contrary to recent reports suggesting sales on iTunes are declining rapidly, their analysis of Apple company data regarding iTunes sales shows strong growth y/y.
In light of recent media reports of slowing iTunes sales, they analyzed music sales data and saw strong y/y growth in 2005 and 2006. Specifically, the firm compared total sales between Jan. and Sept. of '05 and '06 and saw 78% growth during that period. From Jan. to Sept. in 2005 Apple sold 10.4m songs/week and in 2006 that number was up 78% to 18.5m songs/week.
While Apple does not release the financial details of the iTunes Store, the company has indicated that they run the store "above break-even." The iTunes Store, therefore, is a supplement to
the iPod as Apple's vehicle to monetize the free iTunes software. The integration of iPod with the iTunes software along with some profitability from the iTunes Store represent the three ingredients of Apple's digital music ecosystem.
Firm also comments on Mac mkt share saying it should continue to grow in CY07 due to: 1) completion of Intel transition, 2) improved availability of Macs, 3) expanding footprint of Apple customers (iPod halo effect), and 4) ability to run Windows on a Mac.
Mac market share in Q3 was 2.8% and will likely be ~3.0% in Q4, which is up from 2.1% in Q1. Street estimates currently call for Mac market share in CY07 of 2.7%. If Mac market share grows at the same rate seen in CY06 (approx. 1.0%), we could see 4.0% by the end of CY07, with an average of 3.5% for the year. If Apple achieves an average of 3.5% Mac market share for CY07, they estimate Street EPS estimates are $0.34, or 11.6% too low.
Maintains Outperform and $99 tgt.
Notablecalls: I wonder what triggered yesterday's sell-off in AAPl stock. It sure wasn't the iTunes data from Forrester. I suspect some mkt participants took a closer look at iPhone margins and discovered to their surprise these to be lower than current ones. And so they sold. That of course is a faulty conclusion on their part. Just take a look at the new ests from Morgan Stanley. I suspect that for traders, yesterday's sell-off provides an opportunity not seen since Piper upped their tgt to $100 (pre-split). Sitting at my old trading desk I would be all over the stock this morning.
Paperstand
The WSJ reports that the long-awaited consolidation of the airline industry is heating up, with UAL (UAUA) and Continental Airlines (CAL) holding talks on a possible merger and another carrier emerging as the tgt of an unsolicited takeover offer. UAL, parent of United Airlines, and Continental have been engaged in exploratory talks on a business combination for several months, but the discussions have taken on new urgency since US Airways (LLC) made a hostile bid for Delta Air Lines four weeks ago. Among the industry's smaller players, AirTran (AAI) is poised to launch an offer for Midwest Air (MEH), signaling that consolidation pressure has extended beyond the industry's behemoths. Airlines outside the US also are attracting more takeover interest. Australia's Qantas last night rejected a takeover bid of roughly $8.6bn from a group of investors that includes private-equity firm Texas Pacific Group and Macquarie Bank of Australia.
"Tracking the Numbers"column reports that investors looking for information about Qiao Xing Universal Telephone (XING), would learn that stock analysts expect earnings to rise and rate the shares a Buy. What they may not learn, however, is that the co paid the analysts' research firms tens of thousands of dollars in cash or stock to write those reports. As paid-for research firms, also known as sponsored-research or issuer-paid research firms, they receive fees from various sources, including co's seeking analyst coverage of their stock. One of the 2 research firms that rate Qiao Xing has been paid $33K for 4 reports since May'05, while the other owns about $20K of stock in the co.
Barron's Online out saying that some investors see a new kind of memory chip windfall in shares of Qimonda (QI), up 28% since the co spun out of Infineon (IFX) in mid-Aug. Qimonda could well displace Micron this year as the 3rd-largest maker of DRAM chips, say analysts. If that occurs, the co would trail only S-Korean giants Samsung and Hynix in the mkt for DRAM chips. After beating analysts' profit and sales ests in its 1Q as a public outfit on Nov. 14, Qimonda has convinced investors it has the right products and technology for a memory mkt primed to repeat itself. Vista software is coming out next year and DRAM supply is tight, and that could mean strong prices and rising profits. "Back in the early '90s, Micron [stock] went up a lot in price b/c ppl underestd the demand [for PCs and for DRAM]," says Robert Turner, of Turner Investment Partners. "That could be where we're headed with Qimonda."
"Tracking the Numbers"column reports that investors looking for information about Qiao Xing Universal Telephone (XING), would learn that stock analysts expect earnings to rise and rate the shares a Buy. What they may not learn, however, is that the co paid the analysts' research firms tens of thousands of dollars in cash or stock to write those reports. As paid-for research firms, also known as sponsored-research or issuer-paid research firms, they receive fees from various sources, including co's seeking analyst coverage of their stock. One of the 2 research firms that rate Qiao Xing has been paid $33K for 4 reports since May'05, while the other owns about $20K of stock in the co.
Barron's Online out saying that some investors see a new kind of memory chip windfall in shares of Qimonda (QI), up 28% since the co spun out of Infineon (IFX) in mid-Aug. Qimonda could well displace Micron this year as the 3rd-largest maker of DRAM chips, say analysts. If that occurs, the co would trail only S-Korean giants Samsung and Hynix in the mkt for DRAM chips. After beating analysts' profit and sales ests in its 1Q as a public outfit on Nov. 14, Qimonda has convinced investors it has the right products and technology for a memory mkt primed to repeat itself. Vista software is coming out next year and DRAM supply is tight, and that could mean strong prices and rising profits. "Back in the early '90s, Micron [stock] went up a lot in price b/c ppl underestd the demand [for PCs and for DRAM]," says Robert Turner, of Turner Investment Partners. "That could be where we're headed with Qimonda."
Tuesday, December 12, 2006
Calls of Note Part 5
- Merrill Lynch continues to be positive on Garmin (NASDAQ:GRMN) saying concerns on Mitac share gains are overdone.
ML continues to expect a strong holiday season for both Garmin and TomTom. While Mitac gained heavy share volume on Black Friday (est. 30,000 units vs. 20,000 units for Garmin and TomTom), theyview this share gain as a one time phenomenon. Given unsustainable price discounting, they believe market share has reverted to Garmin and TomTom.
Firm gathers the impression that retailers may have underestimated demand for PNDs and have requested additional shipments from Garmin and TomTom. PNDs remains a later holiday season product and we expect strong sales through end of December. Firm's checks have shown the n-vi sold out at some retailers. N-vi accounts for 40% of Garmin's PND units and c-series accounts for 30%.
Reiterates Buy thesis for Garmin. Garmin is the leading player in a robust growth market for PNDs. Firm notes they agree with the rest of the Street and investors that margins will decline; however, they differ on the pace of margin deterioration. In avionics, Garmin is the low-cost disruptor and will be a significant player (threat) to incumbent players. On a discounted cash flow basis, they estimate a fair value per share of $60 which implies 21X 2008E EPS of $2.85.
Notablecalls: Note that Soleil was out on GMRN yesterday upgrading their rating to Buy after spending couple of days with the management. They came away convinced business in humming nicely. Looks like they are right.
ML continues to expect a strong holiday season for both Garmin and TomTom. While Mitac gained heavy share volume on Black Friday (est. 30,000 units vs. 20,000 units for Garmin and TomTom), theyview this share gain as a one time phenomenon. Given unsustainable price discounting, they believe market share has reverted to Garmin and TomTom.
Firm gathers the impression that retailers may have underestimated demand for PNDs and have requested additional shipments from Garmin and TomTom. PNDs remains a later holiday season product and we expect strong sales through end of December. Firm's checks have shown the n-vi sold out at some retailers. N-vi accounts for 40% of Garmin's PND units and c-series accounts for 30%.
Reiterates Buy thesis for Garmin. Garmin is the leading player in a robust growth market for PNDs. Firm notes they agree with the rest of the Street and investors that margins will decline; however, they differ on the pace of margin deterioration. In avionics, Garmin is the low-cost disruptor and will be a significant player (threat) to incumbent players. On a discounted cash flow basis, they estimate a fair value per share of $60 which implies 21X 2008E EPS of $2.85.
Notablecalls: Note that Soleil was out on GMRN yesterday upgrading their rating to Buy after spending couple of days with the management. They came away convinced business in humming nicely. Looks like they are right.
Calls of Note Part 4
- Jefferies comments on Terayon (NASDAQ:TERN) after several industry news sources last night reported that a number of companies are potentially bidding on Terayon. The list of suspected bidders included Cisco, Motorola, Arris, and Harmonic " with news reports suggesting that Cisco and Motorola are the most aggressive bidders. Moreover, the news items suggest that a potential deal price would be in the $225 - $275 million range.
Firm notes investors might remember that Terayon was rumored to have been in play back in Q2/Q3 2005. The shares " at the time " ran to nearly $4.00/share amid rumors that Arris and Harmonic were likely suitors for Terayon. While the firm does not have direct insight into the current situation at Terayon, they believe the current news reports about management selling the business are probably accurate for a number of reasons.
Stated mildly, management's investor relations strategy has been a joke since the organization stopped filing financials after Q2'05. The organization hasn't cared to return investor and/or research analyst calls for some time. While the management team has claimed that its lawyers have prevented them from speaking about the business, the firm knows many others companies that have maintained a dialogue with the Street despite a delinquency in reporting numbers. The shareholder unfriendly stance reinforces the notion that Terayon management's strategy " for some time -- has been to sell the business.
Terayon -- if the speculation is accurate -- would most likely be getting an in-line or modest premium relative to the rest of the industry group. The firm is maintaining their Buy rating and $3.35 price target on the shares.
Notablecalls: Expect to see action in TERN today. Current mkt cap is around $130 mln. Think the stock can trade as high as $2.5 today.
Firm notes investors might remember that Terayon was rumored to have been in play back in Q2/Q3 2005. The shares " at the time " ran to nearly $4.00/share amid rumors that Arris and Harmonic were likely suitors for Terayon. While the firm does not have direct insight into the current situation at Terayon, they believe the current news reports about management selling the business are probably accurate for a number of reasons.
Stated mildly, management's investor relations strategy has been a joke since the organization stopped filing financials after Q2'05. The organization hasn't cared to return investor and/or research analyst calls for some time. While the management team has claimed that its lawyers have prevented them from speaking about the business, the firm knows many others companies that have maintained a dialogue with the Street despite a delinquency in reporting numbers. The shareholder unfriendly stance reinforces the notion that Terayon management's strategy " for some time -- has been to sell the business.
Terayon -- if the speculation is accurate -- would most likely be getting an in-line or modest premium relative to the rest of the industry group. The firm is maintaining their Buy rating and $3.35 price target on the shares.
Notablecalls: Expect to see action in TERN today. Current mkt cap is around $130 mln. Think the stock can trade as high as $2.5 today.
Calls of Note Part 3
- RBC Capital is upping Cameco (AMEX:CCJ) to Top Pick status as the shares offer significant upside potential. The negative effects of the flooding at Cigar Lake mine should be more than offset by rising uranium prices.
Uranium prices look set to continue their ascent. Firm believes that the uranium market will be in deficit in 2006 through 2008 and in a relatively balanced state from 2009 to 2010 based on a 2-year delay in the start-up of Cigar Lake. Their bullish outlook for uranium is unchanged from their November 17, 2006 upgrade. They continue to forecast an average price of $100/lb in 2007.
RBC expects the contribution from Bruce Power to increase over the next three years, and longer-term, as there is the potential for a significant expansion at Bruce. Also, Centerra is one of firm's Top Picks in the gold sector. Cameco has signalled that it will sell its interest in Centerra to fund further investments or acquisitions.
RBC values Cameco based on forecast 2007 uranium and power earnings with target P/E's of 25x and 15x respectively, in-line with historical trading ranges, and then add to that the company's 53% interest in Centerra Gold at market. Firm target price is $67.00.
Notablecalls: I guess the Top Pick status combined with $67 tgt will create some buy interest in CCJ.
Uranium prices look set to continue their ascent. Firm believes that the uranium market will be in deficit in 2006 through 2008 and in a relatively balanced state from 2009 to 2010 based on a 2-year delay in the start-up of Cigar Lake. Their bullish outlook for uranium is unchanged from their November 17, 2006 upgrade. They continue to forecast an average price of $100/lb in 2007.
RBC expects the contribution from Bruce Power to increase over the next three years, and longer-term, as there is the potential for a significant expansion at Bruce. Also, Centerra is one of firm's Top Picks in the gold sector. Cameco has signalled that it will sell its interest in Centerra to fund further investments or acquisitions.
RBC values Cameco based on forecast 2007 uranium and power earnings with target P/E's of 25x and 15x respectively, in-line with historical trading ranges, and then add to that the company's 53% interest in Centerra Gold at market. Firm target price is $67.00.
Notablecalls: I guess the Top Pick status combined with $67 tgt will create some buy interest in CCJ.
Calls of Note Part 2
- JP Morgan notes that despite the positive environment for DRAM memory (roughly 69% of MU F4Q06 revenue) they are concerned with Micron's (NYSE:MU) growing inventory levels and prospects for a weaker than expected flash environment in 1HC07. As a result, they see limited catalysts for outperformance of MU stock, and are downgrading MU from Overweight to Neutral.
Firm believes Micron's inventory levels grew again in its November quarter (F1Q07, not reported yet) due to higher than expected production of NAND flash memory chips (9% of F4Q06 sales) and weaker flash shipments. They believe MU realized lower than expected flash sales due to lower pricing and weak demand from the retail channel.
Pricing for NAND has been below firm's expectations during 2HC06 due to excess capacity. Due to additional capacity growth and a seasonal slowdown in demand, they expect NAND pricing to
collapse in 1HC07. Firm views Micron's higher production and growing inventory as a liability, given the expected NAND weakness.
JPM is still positive on DRAM environment which could limit downside for MU, but they prefer QI to take advantage of DRAM. Firm's checks indicate DRAM pricing should remain stable well into C1Q07, which should drive upside to Qimonda estimates as over 90% of its sales are from DRAM and the company has not reached peak gross margins of roughly 35%.
MU is trading at 1.5X C06E EV/sales the low end of a normal range of 1.3X-3.0X.
Notablecalls: Looks like I didn't pay enough attention to the flash side of business. The co had been adding production capacity there and now it looks like it's coming back to bite'em in the arse. I no longer expect MU stock to move up in the n-t.
Firm believes Micron's inventory levels grew again in its November quarter (F1Q07, not reported yet) due to higher than expected production of NAND flash memory chips (9% of F4Q06 sales) and weaker flash shipments. They believe MU realized lower than expected flash sales due to lower pricing and weak demand from the retail channel.
Pricing for NAND has been below firm's expectations during 2HC06 due to excess capacity. Due to additional capacity growth and a seasonal slowdown in demand, they expect NAND pricing to
collapse in 1HC07. Firm views Micron's higher production and growing inventory as a liability, given the expected NAND weakness.
JPM is still positive on DRAM environment which could limit downside for MU, but they prefer QI to take advantage of DRAM. Firm's checks indicate DRAM pricing should remain stable well into C1Q07, which should drive upside to Qimonda estimates as over 90% of its sales are from DRAM and the company has not reached peak gross margins of roughly 35%.
MU is trading at 1.5X C06E EV/sales the low end of a normal range of 1.3X-3.0X.
Notablecalls: Looks like I didn't pay enough attention to the flash side of business. The co had been adding production capacity there and now it looks like it's coming back to bite'em in the arse. I no longer expect MU stock to move up in the n-t.
Calls of Note Part 1
- Bear Stearns is raising their managed basis 2007 EPS estimate for CompuCredit (NASDAQ:CCRT) from $4.00 per share to $4.20 per share to reflect updated assumptions regarding interest rates and credit trends. This brings firm's estimate in line with the consensus and the earnings guidance issued by management along with Q3 results.
They are also establishing a year end 2007 price target of $48 per share or 11.5x 2007 estimate. Firm's year end 2006 price target was $38 per share.
CompuCredit remains uniquely positioned to take advantage of opportunities in sub-prime non-mortgage consumer lending. While the company's credit card business and purchased credit card portfolios still account for the vast majority of revenues and earnings, the company's investments in other businesses (micro lending, auto lending, and collections) to serve underserved/sub-prime consumers should help to increase diversification over time.
Firm notes their estimates and price target haven't assumed any significant benefit from the company's substantial excess capital position or the purchase of additional underperforming credit card portfolios. Some repurchase of shares is also possible, though unlikely.
Bear is maintaining their Outperform rating and believes the 2007 price target could prove too conservative if the company is able to deploy some or all of its excess capital in 2007.
Notablecalls: CCRT's one of Tom Brown's picks. Also check out the positive coverage the stock got in Barron's. I fully expect Bear's comments to create some buy interest today and in the coming days.
They are also establishing a year end 2007 price target of $48 per share or 11.5x 2007 estimate. Firm's year end 2006 price target was $38 per share.
CompuCredit remains uniquely positioned to take advantage of opportunities in sub-prime non-mortgage consumer lending. While the company's credit card business and purchased credit card portfolios still account for the vast majority of revenues and earnings, the company's investments in other businesses (micro lending, auto lending, and collections) to serve underserved/sub-prime consumers should help to increase diversification over time.
Firm notes their estimates and price target haven't assumed any significant benefit from the company's substantial excess capital position or the purchase of additional underperforming credit card portfolios. Some repurchase of shares is also possible, though unlikely.
Bear is maintaining their Outperform rating and believes the 2007 price target could prove too conservative if the company is able to deploy some or all of its excess capital in 2007.
Notablecalls: CCRT's one of Tom Brown's picks. Also check out the positive coverage the stock got in Barron's. I fully expect Bear's comments to create some buy interest today and in the coming days.
Color on news: Texas Instruments (NYSE:TXN)
Several firms are commenting on Texas Instruments (NYSE:TXN) after the co provided an expectedly weak mid-quarter update. The company lowered its 4Q06 revenue guidance from a range of $3.46 billion to $3.75 billion (flat to down 8% QoQ) to a range of $3.35 billion to $3.50 billion (down 7%-11% QoQ) and lowered EPS guidance from $0.40-$0.46 to $0.37-$0.40:
- JP Morgan is upgrading their rating to Overweight from Neutral saying this is the blow-up they have been waiting for. TI stated it is experiencing an inventory correction in analog semiconductors (38% of TI's 3Q06 sales) and poor demand for its DSPs (36% of TI's 3Q06 sales). The company's book to bill should remain below 1.0 for the second consecutive quarter.
Firm believes TI's gross margins are bottoming in 1Q07. They expect TI's gross margins to decline 340 basis points from the peak of 51.4% in 3Q06 to 48.0% in 1Q07, roughly in line with the previous downturn in 2004 when TI's gross margins declined 380 basis points.
JPM notes their stance on TI and many other semiconductor companies is to upgrade when they believe margins are close to bottoming and downgrade when they believe margins are close to peaking. Since they downgraded TI, they have been expecting an inventory correction to result in a "blow-up" and they stated they would upgrade the stock when they believed margins were close to bottoming. Firm believes last night was the "blow-up" they were looking for and margins should bottom during 1Q07. Valuation is also within 10% of the trough at 3.3X JPM's newly-lowered 2007 sales estimate.
- Merrill Lynch thinks TXN stock will likely to trade flat as inventory flushes through. TXN put the brakes on production as early as late Q3, and while the firm expects utilization to decline in the Dec-06Q, they do not believe internal inventory will come down until the Mar-07Q. Distributor inventory, however, will likely come down some in the Dec-06Q, but they think it will take another one to two quarters of under-shipping end demand before the supply channel is at an appropriate level.
Management indicated that the downward revision was also a result of a broad-based weakness across the product spectrum. This is consistent with their recent downward revision of estimates for TXN's analog business. ML's model now captures a 7% QoQ decline in the analog business in the Dec-06Q, followed by another 5% to 6% decline in the Mar-07Q.
At 17.9x´firmäs revised 2007 earnings estimate, they think the stock is reasonably valued. TXN was flat in after-hour trading despite the weak outlook, which suggests conservative expectations are already baked into the valuation. They expect the stock to trade sideways for the intermediate term, and rating stands at neutral.
- Morgan Stanley notes that given the magnitude of the company's downward revision, they are fine-tuning their forward estimates. Moreover, they believe a meaningful reduction to consensus estimates will have to occur, especially since they believe that most analysts have underestimated the ongoing weakness that should be seen in TI's first-quarter revenue, margin, and earnings
results.
Firm's 2007 revenue and EPS estimates have been fine-tuned lower to $14.115 billion and $1.75, respectively, from $14.58 billion and $1.80. Their model assumes that TI will grow its revenues by about 6% in 2006, followed by relatively flat revenues in 2007. This outlook suggests that near-term risk to fourth quarter and first-quarter revenue and EPS estimates should remain widespread throughout the overall semiconductor industry. As TI's revenue growth slows and management reduces its own inventories, they expect the company's margins and earnings to succumb to pressure, which should last at least through the first quarter of 2007. As an eventual positive, TI's distributor inventories are expected to decline in the fourth quarter to an historically low level of 7-8 weeks.
Maintains Equal Weight anbd $34 tgt saying the stock looks to be fairly valued.
Notablecalls: Love this call by JPM. It looks so elegant. One the other hand they have been Neutral on the stock since Mar-05, missing the 10 pt upside the stock experienced meanwhile. Think JPM's call can be considered as a solid trading call. Ultimately, the fundamentals will prove'em wrong.
- JP Morgan is upgrading their rating to Overweight from Neutral saying this is the blow-up they have been waiting for. TI stated it is experiencing an inventory correction in analog semiconductors (38% of TI's 3Q06 sales) and poor demand for its DSPs (36% of TI's 3Q06 sales). The company's book to bill should remain below 1.0 for the second consecutive quarter.
Firm believes TI's gross margins are bottoming in 1Q07. They expect TI's gross margins to decline 340 basis points from the peak of 51.4% in 3Q06 to 48.0% in 1Q07, roughly in line with the previous downturn in 2004 when TI's gross margins declined 380 basis points.
JPM notes their stance on TI and many other semiconductor companies is to upgrade when they believe margins are close to bottoming and downgrade when they believe margins are close to peaking. Since they downgraded TI, they have been expecting an inventory correction to result in a "blow-up" and they stated they would upgrade the stock when they believed margins were close to bottoming. Firm believes last night was the "blow-up" they were looking for and margins should bottom during 1Q07. Valuation is also within 10% of the trough at 3.3X JPM's newly-lowered 2007 sales estimate.
- Merrill Lynch thinks TXN stock will likely to trade flat as inventory flushes through. TXN put the brakes on production as early as late Q3, and while the firm expects utilization to decline in the Dec-06Q, they do not believe internal inventory will come down until the Mar-07Q. Distributor inventory, however, will likely come down some in the Dec-06Q, but they think it will take another one to two quarters of under-shipping end demand before the supply channel is at an appropriate level.
Management indicated that the downward revision was also a result of a broad-based weakness across the product spectrum. This is consistent with their recent downward revision of estimates for TXN's analog business. ML's model now captures a 7% QoQ decline in the analog business in the Dec-06Q, followed by another 5% to 6% decline in the Mar-07Q.
At 17.9x´firmäs revised 2007 earnings estimate, they think the stock is reasonably valued. TXN was flat in after-hour trading despite the weak outlook, which suggests conservative expectations are already baked into the valuation. They expect the stock to trade sideways for the intermediate term, and rating stands at neutral.
- Morgan Stanley notes that given the magnitude of the company's downward revision, they are fine-tuning their forward estimates. Moreover, they believe a meaningful reduction to consensus estimates will have to occur, especially since they believe that most analysts have underestimated the ongoing weakness that should be seen in TI's first-quarter revenue, margin, and earnings
results.
Firm's 2007 revenue and EPS estimates have been fine-tuned lower to $14.115 billion and $1.75, respectively, from $14.58 billion and $1.80. Their model assumes that TI will grow its revenues by about 6% in 2006, followed by relatively flat revenues in 2007. This outlook suggests that near-term risk to fourth quarter and first-quarter revenue and EPS estimates should remain widespread throughout the overall semiconductor industry. As TI's revenue growth slows and management reduces its own inventories, they expect the company's margins and earnings to succumb to pressure, which should last at least through the first quarter of 2007. As an eventual positive, TI's distributor inventories are expected to decline in the fourth quarter to an historically low level of 7-8 weeks.
Maintains Equal Weight anbd $34 tgt saying the stock looks to be fairly valued.
Notablecalls: Love this call by JPM. It looks so elegant. One the other hand they have been Neutral on the stock since Mar-05, missing the 10 pt upside the stock experienced meanwhile. Think JPM's call can be considered as a solid trading call. Ultimately, the fundamentals will prove'em wrong.
Paperstand
The WSJ’s „Heard on the Street” out saying that as more homeowners skip out or fall behind on their mortgage payments, some lenders have started tightening their underwriting standards. That may not be enough to save them from losses. Mortgage lenders, such as Countrywide Financial (CFC), Downey Financial (DSL) and FirstFed Financial (FED), try to avoid risky "subprime" borrowers, have become more cautious about who they lend to in general, and are setting aside more reserves for potential defaults. But the increasing popularity of 2nd mortgages could end up undermining their efforts. "Mortgages that have a 2nd mortgage behind them run a far higher risk of default," says Zach Gast, of Center for Financial Research & Analysis.
Barron’s Online “Inside Scoop” section reports that veteran bond trader John Devaney is charging into CompuCredit (CCRT) as the sub-prime lender rebuilds credibility with investors. Devaney purchased roughly 276K shares of CompuCredit for $10.5m.
Sharesleuth.com reports that Xethanol’s (XNL) partner in developing ethanol projects in New England has terminated their joint venture, citing concerns about the co and its technology. Global Energy notified Xethanol of the decision late last week. Lee R. Tyrol, a principal of Global Energy, also resigned as manager of the partnership, called NewEnglandXethanol. Tyrol confirmed the termination to Sharesleuth.com on Friday.
Monday, December 11, 2006
Calls of Note Part 8
- Citigroup notes they increasingly believe Philip Morris USA (NYSE:MO) will announce a price increase/off invoice reduction very soon. Based on conversations with a few of their trade contacts, the firm anticipate the company will increase prices by around $0.10 per pack and the other cigarette
Contacts have also indicated that both Philip Morris and Lorillard have been cutting their wholesaler orders recently, or reduced the amount of inventory wholesalers can purchase (this is typical right ahead of a price increase).
The firm notes they have been predicting for some time now that Philip Morris is likely to lead a
price increase of around $0.10 per pack by the end of the year. Their confidence that this action occurs has increased based on conversations they've had with their industry trade contacts. Citi believes the industry still has some pricing power and it makes sense for the manufacturers to take pricing since all of the tobacco companies are facing higher Master Settlement Agreement (MSA) payments during 2007 of around $0.06 per pack. Furthermore, the firm believe sthe manufacturers are more comfortable taking pricing soon given that state excise taxes did not increase substantially in 2006.
Notablecalls: Not actionable but good to know category. Just happen to like the chart.
Contacts have also indicated that both Philip Morris and Lorillard have been cutting their wholesaler orders recently, or reduced the amount of inventory wholesalers can purchase (this is typical right ahead of a price increase).
The firm notes they have been predicting for some time now that Philip Morris is likely to lead a
price increase of around $0.10 per pack by the end of the year. Their confidence that this action occurs has increased based on conversations they've had with their industry trade contacts. Citi believes the industry still has some pricing power and it makes sense for the manufacturers to take pricing since all of the tobacco companies are facing higher Master Settlement Agreement (MSA) payments during 2007 of around $0.06 per pack. Furthermore, the firm believe sthe manufacturers are more comfortable taking pricing soon given that state excise taxes did not increase substantially in 2006.
Notablecalls: Not actionable but good to know category. Just happen to like the chart.
Calls of Note Part 7
- Citigroup notes that on Fri, SanDisk (NASDAQ:SNDK) 8K revealed Nelson Chan's departure (EVP, 14-yr SNDK vet, Chan oversaw all pdcts ex handset cards, led the digicam OEM to retail transition, a build out to ~200K retail storefronts, and the MP3 product ramp. Was well-known and liked by retailers, OEM's and the Street.
SNDK attributed to personal reasons, though a gradual internal re-alignment to end mkt silos (the structure of recently-acq'd mSystems) may also be at play.
Firm views as a moderate fundamental and stock negative since Chan's partner+ customer relationships as well as deep retail markets understanding will be hard to replace. Bears will argue timing detracts from 4Q06 results conviction.
Friday's, brutal 16% Dec NAND contract price cut reveals sector vulnerability exiting 4Q, but validates their negative royalty revenue est revisions last week. Street royalty estimate cuts lie ahead as a headwind for the shares.
Shares have lagged QTD but are uncompelling as nt risks balance lt reward.
Reits Hold and $54 tgt.
Notablecalls: SNDK already got hit on Friday. While I think this Citi note will generate some selling interest in the pre mkt I would not be surprised to see buyers step in around recent lows.
SNDK attributed to personal reasons, though a gradual internal re-alignment to end mkt silos (the structure of recently-acq'd mSystems) may also be at play.
Firm views as a moderate fundamental and stock negative since Chan's partner+ customer relationships as well as deep retail markets understanding will be hard to replace. Bears will argue timing detracts from 4Q06 results conviction.
Friday's, brutal 16% Dec NAND contract price cut reveals sector vulnerability exiting 4Q, but validates their negative royalty revenue est revisions last week. Street royalty estimate cuts lie ahead as a headwind for the shares.
Shares have lagged QTD but are uncompelling as nt risks balance lt reward.
Reits Hold and $54 tgt.
Notablecalls: SNDK already got hit on Friday. While I think this Citi note will generate some selling interest in the pre mkt I would not be surprised to see buyers step in around recent lows.
Calls of Note Part 6
- CIBC comments on Cognos (NASDAQ:COGN) saying candlesticks are signaling a pause in trend...
The candlestick config. of the past few wks. suggests the rising trend of the past few mos. is about to stall. There are 2 bearish candle patterns that support firm's bias: 1) bearish engulfing candle on 11/27; and 2) hanging-man candle on 12/7, together suggest the structure is becoming vulnerable.
It also merits highlighting that the 12/26-9d MACD along with the 9d and 14d RSI indicators have started to descend, portending loss of bullish momentum. Firm also sees confirming loss of bullish momentum in the U.S. software sub-index chart patterns, which should weigh heavy on Cognos.
Notablecalls: LOL! Bad stuff really comes from Canada! Can't believe firms still publish stuff like that. To make matters worse I think they got the direction right. The BI space has been bid up on expectations of acquisitions by larger players (MSFT, IBM etc) to the extent that already reflect the takeover premiums.
The candlestick config. of the past few wks. suggests the rising trend of the past few mos. is about to stall. There are 2 bearish candle patterns that support firm's bias: 1) bearish engulfing candle on 11/27; and 2) hanging-man candle on 12/7, together suggest the structure is becoming vulnerable.
It also merits highlighting that the 12/26-9d MACD along with the 9d and 14d RSI indicators have started to descend, portending loss of bullish momentum. Firm also sees confirming loss of bullish momentum in the U.S. software sub-index chart patterns, which should weigh heavy on Cognos.
Notablecalls: LOL! Bad stuff really comes from Canada! Can't believe firms still publish stuff like that. To make matters worse I think they got the direction right. The BI space has been bid up on expectations of acquisitions by larger players (MSFT, IBM etc) to the extent that already reflect the takeover premiums.
Calls of Note Part 5
- UBS comments on Energy Conversion Devices (NASDAQ:ENER) saying articles posted to various websites on 12/10 (WSJ, EETimes, NY Times), suggest that IBM, Macronix and Qimonda will announce a phase-change memory prototype at the International Electron Devices meeting on 12/11. According to EETimes, the IBM PRAM boasts switching speeds at more than 500 times faster than traditional flash-memory technologies.
At first read, IBM's technology appears to be a new competitor to ENER's OUM. In November, Ovonyx discussed Samsung's OUM prototype as being 30x faster than traditional flash. The firm believes there are many parameters over which these technologies could be compared (speed, life, size, cost, scalability, intended applications, time to market), and they do not yet have enough data to compare the two.
Believes an additional competitor such as IBM could be perceived as a challenge for OUM.
Maintains Buy and $46 tgt on ENER.
Notablecalls: Sitting at my old trading desk I would watch sellers come in after the open and would then step in front of the action expecting Jeffco to come out in defense. Squeezefest. Let's see if this works out this way today.
At first read, IBM's technology appears to be a new competitor to ENER's OUM. In November, Ovonyx discussed Samsung's OUM prototype as being 30x faster than traditional flash. The firm believes there are many parameters over which these technologies could be compared (speed, life, size, cost, scalability, intended applications, time to market), and they do not yet have enough data to compare the two.
Believes an additional competitor such as IBM could be perceived as a challenge for OUM.
Maintains Buy and $46 tgt on ENER.
Notablecalls: Sitting at my old trading desk I would watch sellers come in after the open and would then step in front of the action expecting Jeffco to come out in defense. Squeezefest. Let's see if this works out this way today.
Calls of Note Part 4
- Merrill Lynch notes that Alpharma's (NSYE:ALO) recent SEC filings suggest that ALO may be seeking to purchase the class B shares that are currently held by A.L. Industrier ASA (ALI), an entity controlled by former Chairman Einar Sissener. ALI owns 11.9mn shares (22% of outstanding shares), which have supervoting rights and allow ALI to elect a majority of Board members. If ALO can purchase the B stock at reasonable terms, investors could view the event favorably because it 1) would likely be accretive to EPS, and 2) could make it easier for ALO to explore strategic options for its businesses, if it chooses to do so.
Firm analyzed scenarios in which ALO would purchase the B shares at current market price, a 5% premium, and a 10% premium. In these cases, assuming an estimated 4.6% interest rate on cash, the EPS accretion in 2007 could be 15%, 14%, and 13%. Some sort of premium could be justified by the fact that the Class B shares allow the holder to elect two-thirds of Board members and have supervoting rights (4 votes per share) in any non-class shareholder vote.
As the firm indicated in their recent note, the Analyst Meeting on 12/13 could be relevant for the stock if management announces actions that could enhance shareholder value. It is possible that management will discuss, among other strategic priorities, this share class issue.
Notablecalls: Merrill made a nice call on ALO on Dec 4 (see archives) and I would not be surprised to see further buy interest ahead of the analyst meeting.
Firm analyzed scenarios in which ALO would purchase the B shares at current market price, a 5% premium, and a 10% premium. In these cases, assuming an estimated 4.6% interest rate on cash, the EPS accretion in 2007 could be 15%, 14%, and 13%. Some sort of premium could be justified by the fact that the Class B shares allow the holder to elect two-thirds of Board members and have supervoting rights (4 votes per share) in any non-class shareholder vote.
As the firm indicated in their recent note, the Analyst Meeting on 12/13 could be relevant for the stock if management announces actions that could enhance shareholder value. It is possible that management will discuss, among other strategic priorities, this share class issue.
Notablecalls: Merrill made a nice call on ALO on Dec 4 (see archives) and I would not be surprised to see further buy interest ahead of the analyst meeting.
Calls of Note Part 3
- UBS notes they reduced PMC-Sierra (NASDAQ:PMCS) estimates on recent negative checks at the ITU Telecom World show suggesting further delays in China's 3G build out, negative mid-Q updates from ALTR and XLNX, wireline capex delays in Japan, and near term PON sales volatility. Firm estimates 50% of PMCS' sales come from telecom/comms end markets.
Firm left 4Q06 ests unchanged but lowered C2007E rev to $455M (vs $475M) and pro forma EPS to $0.27 (option burdened/OB: $0.15) vs. $0.40 (OB: $0.30) previously. They also introduce C2008 ests of $500M and $0.35 (OB: $0.20).
While they still think PMCS has solid positioning in wireless/wireline comms, PON, and enterprise storage equipment, and valuation remains fair, the firm believes upside to PMCS shares is limited until M&A integration activities subside, opex synergies offer margin leverage, and demand trends improve.
Tgt goes to $9 from $11. Reits Buy.
Notablecalls: Expect to see some weakness in PMCS over the next week or so. While there is nothing new in the note the tgt change may bring some sellers.
Firm left 4Q06 ests unchanged but lowered C2007E rev to $455M (vs $475M) and pro forma EPS to $0.27 (option burdened/OB: $0.15) vs. $0.40 (OB: $0.30) previously. They also introduce C2008 ests of $500M and $0.35 (OB: $0.20).
While they still think PMCS has solid positioning in wireless/wireline comms, PON, and enterprise storage equipment, and valuation remains fair, the firm believes upside to PMCS shares is limited until M&A integration activities subside, opex synergies offer margin leverage, and demand trends improve.
Tgt goes to $9 from $11. Reits Buy.
Notablecalls: Expect to see some weakness in PMCS over the next week or so. While there is nothing new in the note the tgt change may bring some sellers.
Calls of Note Part 2
- Goldman Sahcs' Semi team notes that AMD (NYSE:AMD) is hosting an analyst meeting on Thursday, which they expect to focus on the company's financial model, market positioning and manufacturing strategy. Firm believes the event may serve as a negative catalyst for the stock, as they think AMD is likely to lower Street 4QCY06 revenue and gross margin expectations in light of weak pricing, particularly in the high margin server segment, as well as the integration of the ATI acquisition. They continue to see about 10% downside to their $19 twelve-month price target, which is based on a 16X multiple applied to normalized EPS of $1.20. Believed the greatest risk to price target is significant share gains.
Firm also notes that December NAND contract prices, released last Friday, showed significant price declines of 10-25%, depending on the configuration. Relative to SPE stocks, while the Street is arguing that DRAM spending will prevent a severe SPE downturn, they argue that significant NAND excess capacity (as evidenced by these NAND price declines) will back up into DRAM thus driving DRAM prices down and driving a second leg of SPE order weakness in 2H07 with 1H07 SPE order weakness coming entirely from NAND.
Notablecalls: Negative comments from AMD would definitely hurt the stock. So I would not be surprised to see some weakness ahead of the meeting. GSCO's comments on DRAM are also noteworthy but I just don't see how weakness in NAND (gadgets) can back into DRAM (PC). I continue to maintain my positive stance on MU around current levels.
Firm also notes that December NAND contract prices, released last Friday, showed significant price declines of 10-25%, depending on the configuration. Relative to SPE stocks, while the Street is arguing that DRAM spending will prevent a severe SPE downturn, they argue that significant NAND excess capacity (as evidenced by these NAND price declines) will back up into DRAM thus driving DRAM prices down and driving a second leg of SPE order weakness in 2H07 with 1H07 SPE order weakness coming entirely from NAND.
Notablecalls: Negative comments from AMD would definitely hurt the stock. So I would not be surprised to see some weakness ahead of the meeting. GSCO's comments on DRAM are also noteworthy but I just don't see how weakness in NAND (gadgets) can back into DRAM (PC). I continue to maintain my positive stance on MU around current levels.
Calls of Note Part 1
- Piper Jaffray comments on Apple (NASDAQ:AAPL) after speaking to 20 Apple specialist over the last several days:
With 3 weeks left in the quarter, 60% of the resellers in firm's checks are anticipating Dec-06 Mac units will be up from Sep-06. Piper is modeling for Mac units to fall 1% q/q in Dec-06. . If Mac sales grew 5% q/q in Dec-06 vs. firm's currently modeled down 1%, we estimate it would add $0.03-$0.04 to $0.73 EPS estimate.
Apple's VARs indicated that iPod supply has been somewhat patchy in the Dec-06 quarter, while Mac supply has been very solid. Specifically, 75% of specialist stores said that they have had good supply of iPods, while 95% said they have had good supply of Macs in the quarter. Those that were missing iPods were typically missing the shuffle or the nano. iPod shuffles were scarce over the last several weeks, but 85% of Apple specialist stores in our sample said they now have it in
stock.
On average, the 20 Apple VARs said that ~25% of customers buying Macs are new-to-Mac and they expect this number will keep rising due to the iPod halo effect and Boot Camp. Apple stated on its last quarterly call that over 50% of customers that bought Macs in Apple retail stores in the Sep-06 quarter were new-to-Mac. Apple specialist stores have a lower new-to-Mac average given they typically serve more of the professional users and existing Mac faithful customer base. The firm sees, therefore, the 25% new-to-Mac number at these stores as a fairly high number.
Maintains Outperform and $99 tgt.
Notablecalls: Not actionable but good to know category. Looks like Dec qtr will be an OK one. Still, considering how leveraged AAPL is to iPod story I continue to cautious on the stock.
With 3 weeks left in the quarter, 60% of the resellers in firm's checks are anticipating Dec-06 Mac units will be up from Sep-06. Piper is modeling for Mac units to fall 1% q/q in Dec-06. . If Mac sales grew 5% q/q in Dec-06 vs. firm's currently modeled down 1%, we estimate it would add $0.03-$0.04 to $0.73 EPS estimate.
Apple's VARs indicated that iPod supply has been somewhat patchy in the Dec-06 quarter, while Mac supply has been very solid. Specifically, 75% of specialist stores said that they have had good supply of iPods, while 95% said they have had good supply of Macs in the quarter. Those that were missing iPods were typically missing the shuffle or the nano. iPod shuffles were scarce over the last several weeks, but 85% of Apple specialist stores in our sample said they now have it in
stock.
On average, the 20 Apple VARs said that ~25% of customers buying Macs are new-to-Mac and they expect this number will keep rising due to the iPod halo effect and Boot Camp. Apple stated on its last quarterly call that over 50% of customers that bought Macs in Apple retail stores in the Sep-06 quarter were new-to-Mac. Apple specialist stores have a lower new-to-Mac average given they typically serve more of the professional users and existing Mac faithful customer base. The firm sees, therefore, the 25% new-to-Mac number at these stores as a fairly high number.
Maintains Outperform and $99 tgt.
Notablecalls: Not actionable but good to know category. Looks like Dec qtr will be an OK one. Still, considering how leveraged AAPL is to iPod story I continue to cautious on the stock.
Sunday, December 10, 2006
Barron's Summary
Barron’s cover discusses mkt forecast for 2007. Strategists are forecasting a fifth straight year of positive stock returns, albeit more muted gains than those achieved in 2006. Only few stock mentioned in the article, including GD, MER, DF and WFT.
Medtronic (MDT) rallied 10% in recent weeks, to 53, on renewed growth, Some fans think the shares could climb into the 60s as new products spur sales.
The shares of Nortel (NT), little changed in 3 years, could jump by more than a third in the year ahead as long as restructuring finally starts to show results. And bigger gains may follow.
News-publisher GateHouse's (GHS) big dividend has attracted investors, but shares of rivals like Gannett (GCI) and Lee Enterprises (LEE) may offer more value right now.
Investors should put Alcon's (ACL) recent problems into perspective. Within 2 years, the co's shares, recently around 113, could be changing hands near 140.
„The Trader” column discusses Southwest Airlines (LUV), saying that if things go right for the industry, a Southwest stock price of 18 is justifiable one year out, and 20 two years out. With about $3 a share in cash and little debt, Southwest could even be a LBO candidate.
„The Trader” column highlights several LBO candidates, including BC, CVH, CNQ, IR, SUN and TKR. Article notes that top LBO candidates are still LEN, MDC, and RYL. LBO rumors also circling HD.
„International Trader” section highlights Vodafone (VOD), saying that thanks to its enlarged portfolio of assets in emerging mkts, it's still growing. In fact, it won't be long before such operations deliver more value to the co’s shareholders than do the co's established, mature mkts. Vodafone expects 60% of its growth in the next 5 years to come from emerging mkts. That's equivalent to an annualized growth rate of more than 12%, compared with 4% in the co's mature mkts. For now, Vodafone's shares are trading at a lowly forward P/E multiple of 10.85, having underperformed many of its peers over the past year. But it's about time that investors recognize some of Vodafone's emerging-mkt potential rather than treating the stock as dead money b/c of slack or nonexistent growth in its developed mkts.
“Follow Up” section highlights Intuit (INTU), suggesting that Digital Insight acquisition is actually a good news. The planned melding of Intuit's financial software into the online services offered by DGIN's stable of 1,700 regional and smaller banks could prove irresistible to both individuals and small businesses. Instead of just paying bills online, small co’s will also be able to track inventory, invoice customers, do payrolls and accept credit-card payments. "At the old-Intuit we were looking for not-very-exciting, high single-digit annual sales gains," says Dave Joseph, of Morgan Stanley. "This acquisition changes that, opening a whole new channel for growth....I think the co is much more of a growth story than it was before." Morgan Stanley's Joseph sees the shares rising over the next year, to about 38. And later gains could be even bigger.
“Technology Trader” discusses favourably EDS (EDS), saying that even after an 18% run, EDS stock is cheaper than it was a year ago, at about 18.9x ‘07 expected earnings of $1.43 per share, vs a forward P/E multiple of 23x a year ago. The stock trades at a 36% discount to the past 12 months' sales, compared to Infosys, which fetches 7.5x sales. Both, Barron’s Online and WSJ highlighted EDS positively last week.
“Plugged In” section discusses potential Apple (AAPL) and Disney (DIS) cooperation or even merger. The Pixar deal has clearly put Steve Jobs in a position to leave a mark on the House of Mouse. And Disney is ready to play a leadership role in the convergence of content and technology.
Fund top holdings include GME, PCL, RAD, TRMP and Q.
Friday, December 08, 2006
Calls of Note Part 3
- Morgan Stanley is positive on Momenta Pharma (NASDAQ:MNTA) saying that after attending the ongoing '618 patent litigation, they believe there is a high likelihood that the original ruling on inequitable conduct will be upheld, which will be a positive for Momenta. They found Dr. Uzan's testimony to be flawed and inconsistent, which they believe could impair his credibility and convince the Judge on intent to deceive. Firm expects a decision on this case sometime in the next 1-2 months.
The ongoing litigation increases firm's confidence in the favorable risk reward ratio for playing the Lovenox trial. Their analyses indicates a positive outcome from the trial could result in up to 50% upside (as the first major hurdle for generic Lovenox will be removed) whereas downside is relatively modest (10%-20%).
Reits Overweight on MNTA with a $30 tgt.
Notablecalls: Expect to see a positive reaction following the call. MNTA is a mover.
The ongoing litigation increases firm's confidence in the favorable risk reward ratio for playing the Lovenox trial. Their analyses indicates a positive outcome from the trial could result in up to 50% upside (as the first major hurdle for generic Lovenox will be removed) whereas downside is relatively modest (10%-20%).
Reits Overweight on MNTA with a $30 tgt.
Notablecalls: Expect to see a positive reaction following the call. MNTA is a mover.
Calls of Note Part 2
- ThinkEquity is reiterating Buy rating and $36 12-month price target on aQuantive (NASDAQ:AQNT). Based on recent meetings with management and industry checks, they believe AQNT's 4Q06 is tracking well and that the company should outperform the industry in FY07. Key drivers include international expansion, a rapidly scaling Drive PM, and share gains in technology (Atlas) and the agency business as marketers gravitate toward best-of-breed digital approaches vs. the integrated offerings of the large marketing services holding companies. Firm believes the pullback in AQNT's shares due to the marginal 3Q06 creates an excellent buying opportunity for a core sector holding.
They believe that increased sales collaboration between Atlas and DrivePM under Kirk McDonald is in the early stages of driving deeper penetration of marketer budgets for both products. Furthermore, the firm believes Atlas should make outsized share gains in Europe under the leadership of Scott Howe, who has demonstrated a strong track record of growing businesses at Avenue A and DrivePM and now heads both DrivePM and Atlas International. Believes that competitor DoubleClick has under-invested in the European market and is currently facing challenges in moving Falk eSolutions customers onto the DoubleClick platform (DoubleClick acquired Falk in March 2006).
Firm believes that AQNT's Digital Marketing Services (DMS) agencies face a strong pipeline of demand (perhaps best indicated by a 38% Y/Y DMS headcount increase in 3Q06), as projects delayed during Q3 are coming through in the fourth quarter.
Notablecalls: Anything new in this note? Nope! So it goes to the not actionable but good to know category.
They believe that increased sales collaboration between Atlas and DrivePM under Kirk McDonald is in the early stages of driving deeper penetration of marketer budgets for both products. Furthermore, the firm believes Atlas should make outsized share gains in Europe under the leadership of Scott Howe, who has demonstrated a strong track record of growing businesses at Avenue A and DrivePM and now heads both DrivePM and Atlas International. Believes that competitor DoubleClick has under-invested in the European market and is currently facing challenges in moving Falk eSolutions customers onto the DoubleClick platform (DoubleClick acquired Falk in March 2006).
Firm believes that AQNT's Digital Marketing Services (DMS) agencies face a strong pipeline of demand (perhaps best indicated by a 38% Y/Y DMS headcount increase in 3Q06), as projects delayed during Q3 are coming through in the fourth quarter.
Notablecalls: Anything new in this note? Nope! So it goes to the not actionable but good to know category.
Calls of Note Part 1
- Citigroup is cautious on Red Hat (NASDAQ:RHAT) ahead of results saying they est FQ3 revs and EPS at low end of guidance - $103M in rev ($103-105M guide), $0.11 ($0.12-0.13 guide). Ests billings of $120M (includes JBoss).
Firm notes they remain bullish on overall Linux adoption rates, but question the shifting economics for the industry. RHAT is in a very challenging period as its continues to integrate the JBoss acq and is in a more competitive Linux mkt. RHAT traditionally has very good visibility in the current quarter revenue due to its subscription pricing but they have modeled the lower end of the range due to the potential distractions the ORCL Unbreakable Linux and the MSFT/NOVL agreement potentially had on deal closings. Citi's billings estimate of $120M represents a 7% increase from an easy compare in 2Q (2Q billings were down 3% sequentially) and includes an estimated $12.75M in billings from JBoss.
RHAT has confirmed that current GM of the JBoss division of RHAT Marc Fleury is expected to be on paternity leave for three months.
Although they do not expect significant immediate mkt. share losses for RHAT, they think customers will seek to negotiate more favorable pricing terms and dedicated ORCL environments will seriously consider using ORCL for support.
Reits Sell and $13.50 tgt.
Notablecalls: RHAT's chart looks weak. Òver 10k $17.50 puts traded yesterday with the $15 strike not far behind. JMP Securities noted on Dec 6 that Fleury's leave may be a precursor to RHAT further lowering expectations related to Jboss as experience suggests that when senior managers of Fleury's stature take leave at such a critical juncture, there is generally risk of no return. Must say I would be somewhat reluctant to initiate a short position if the stock gaps down too aggressively.
Firm notes they remain bullish on overall Linux adoption rates, but question the shifting economics for the industry. RHAT is in a very challenging period as its continues to integrate the JBoss acq and is in a more competitive Linux mkt. RHAT traditionally has very good visibility in the current quarter revenue due to its subscription pricing but they have modeled the lower end of the range due to the potential distractions the ORCL Unbreakable Linux and the MSFT/NOVL agreement potentially had on deal closings. Citi's billings estimate of $120M represents a 7% increase from an easy compare in 2Q (2Q billings were down 3% sequentially) and includes an estimated $12.75M in billings from JBoss.
RHAT has confirmed that current GM of the JBoss division of RHAT Marc Fleury is expected to be on paternity leave for three months.
Although they do not expect significant immediate mkt. share losses for RHAT, they think customers will seek to negotiate more favorable pricing terms and dedicated ORCL environments will seriously consider using ORCL for support.
Reits Sell and $13.50 tgt.
Notablecalls: RHAT's chart looks weak. Òver 10k $17.50 puts traded yesterday with the $15 strike not far behind. JMP Securities noted on Dec 6 that Fleury's leave may be a precursor to RHAT further lowering expectations related to Jboss as experience suggests that when senior managers of Fleury's stature take leave at such a critical juncture, there is generally risk of no return. Must say I would be somewhat reluctant to initiate a short position if the stock gaps down too aggressively.
Color on news: National Semi (NYSE:NSM)
While several firms are commenting on National Semi (NYSE:NSM) following disappointing results announced last night, Wachovia puts it best:
Firm notes that investors who are bullish will likely point to the magnitude of National's lower guidance as so bad that it probably represents the trough. While this may be so, the firm believes that the pace of the recovery will likely prove much slower than what is priced into semiconductor stocks following the recent run up. In their view, one of the main differences between the 2004 and 2006 down cycles is the greater risk of economic slowdown today. They expect to see better entry points for NSM and the semi group in the coming months. Wachovia's FY08 EPS estimate for National has been revised down by 32% since 8/22/06.
With investors mostly focused on the ongoing inventory correction, the firm believes slowing end demand may be overlooked. In their view, National's 16% sequential decline in orders (notably at the OEM and contract manufacturer level) goes beyond just an inventory correction. They believe sluggish turns business (orders booked and shipped in the same quarter) foreshadows a slowing end demand environment. In terms of end markets, National expects a slowdown in wireless handsets, flat panels, and computing in the February quarter, led by continued inventory burn and slow build rates post the holiday season.
Wachovia's new February quarter estimates are $454 million in revenue and $0.27 in EPS, down from $494 million and $0.32. FY07 (May year-end) goes to $1.96 billion and $1.30, down from $2.05 billion and $1.40. FY08 goes to $1.98 billion and $1.26, down from $2.16 billion and $1.47.
Valuation range: $22-$24. Maintains Mkt Perform.
Notablecalls: The stock ended pretty much where it closed. Amazing resilience. Agree with Wach here - don't think it will last.
Firm notes that investors who are bullish will likely point to the magnitude of National's lower guidance as so bad that it probably represents the trough. While this may be so, the firm believes that the pace of the recovery will likely prove much slower than what is priced into semiconductor stocks following the recent run up. In their view, one of the main differences between the 2004 and 2006 down cycles is the greater risk of economic slowdown today. They expect to see better entry points for NSM and the semi group in the coming months. Wachovia's FY08 EPS estimate for National has been revised down by 32% since 8/22/06.
With investors mostly focused on the ongoing inventory correction, the firm believes slowing end demand may be overlooked. In their view, National's 16% sequential decline in orders (notably at the OEM and contract manufacturer level) goes beyond just an inventory correction. They believe sluggish turns business (orders booked and shipped in the same quarter) foreshadows a slowing end demand environment. In terms of end markets, National expects a slowdown in wireless handsets, flat panels, and computing in the February quarter, led by continued inventory burn and slow build rates post the holiday season.
Wachovia's new February quarter estimates are $454 million in revenue and $0.27 in EPS, down from $494 million and $0.32. FY07 (May year-end) goes to $1.96 billion and $1.30, down from $2.05 billion and $1.40. FY08 goes to $1.98 billion and $1.26, down from $2.16 billion and $1.47.
Valuation range: $22-$24. Maintains Mkt Perform.
Notablecalls: The stock ended pretty much where it closed. Amazing resilience. Agree with Wach here - don't think it will last.
Thursday, December 07, 2006
Calls of Note Part 3
- JP Morgan continues to be positive on DivX (NASDAQ:DIVX) following management meeting saying US retail channel checks suggest CE licensing momentum is tracking expectations. DIVX pegs penetration of the US DVD market at 19%, up 5 points from August, however this seems conservative. Channel checks indicate ~50% share of DVD/DVD-R models, 20% share of HTiB devices.
Many digital media distribution partnerships and initiatives have been announced recently by the likes of Walmart, Amazon, BitTorrent, Tivo, TimeWarner, CinemaNow, MovieLink. DIVX's perspective is that many of these arrangements will ultimately lead to implementations that require Codec for distribution, storage and interoperability of 'lean-back' content. However, aside from expressing an interest in partnerships with Google, Microsoft, Ebay, Amazon and Yahoo, the firm does not believe DIVX is close to forging a formal distribution arrangement with tier 1 content providers at this time.
Separately, the CFO stated that DIVX is actively considering a secondary share offering. The CFO sees a desire on the part of at least one early-stage investor (VCs, not employees) to diversify, counter-balanced by institutional investor demand. The CFO dismissed the idea of issuing primary shares, unless associated with an acquisition.
JPM's impression is that the company is executing to plan, though the CEO acknowledged that Stage 6 feature-sets are slower to come to market (not true of the underlying infrastructure) than desired. The CE testing lab appeared to be operating at 100% of physical capacity (DIVX will be leasing new space in the new year).
Reits Overweight as the firm believes DIVX should trade at a premium to its nearest peers, Dolby and DTSI (mean multiple of 32.7x FY07E PF EPS), owing to superior growth prospects, and potential upside from strategic initiatives.
Notablecalls: Let me see if I got this one right. DIVX is trading at a hefty 31x 08 EPS, the CFO is hinting they are considering a secondary share offering, the co is not even close to forging a formal distribution arrangement with tier 1 content providers and it looks like they need to add capacity soon. Also, the CEO acknowledged that Stage 6 feature-sets are slower to come to market. On top of that JPM is reiterating their Overweight rating. Still wanna buy the stock? Hey! Wait! I have this bridge here....
Many digital media distribution partnerships and initiatives have been announced recently by the likes of Walmart, Amazon, BitTorrent, Tivo, TimeWarner, CinemaNow, MovieLink. DIVX's perspective is that many of these arrangements will ultimately lead to implementations that require Codec for distribution, storage and interoperability of 'lean-back' content. However, aside from expressing an interest in partnerships with Google, Microsoft, Ebay, Amazon and Yahoo, the firm does not believe DIVX is close to forging a formal distribution arrangement with tier 1 content providers at this time.
Separately, the CFO stated that DIVX is actively considering a secondary share offering. The CFO sees a desire on the part of at least one early-stage investor (VCs, not employees) to diversify, counter-balanced by institutional investor demand. The CFO dismissed the idea of issuing primary shares, unless associated with an acquisition.
JPM's impression is that the company is executing to plan, though the CEO acknowledged that Stage 6 feature-sets are slower to come to market (not true of the underlying infrastructure) than desired. The CE testing lab appeared to be operating at 100% of physical capacity (DIVX will be leasing new space in the new year).
Reits Overweight as the firm believes DIVX should trade at a premium to its nearest peers, Dolby and DTSI (mean multiple of 32.7x FY07E PF EPS), owing to superior growth prospects, and potential upside from strategic initiatives.
Notablecalls: Let me see if I got this one right. DIVX is trading at a hefty 31x 08 EPS, the CFO is hinting they are considering a secondary share offering, the co is not even close to forging a formal distribution arrangement with tier 1 content providers and it looks like they need to add capacity soon. Also, the CEO acknowledged that Stage 6 feature-sets are slower to come to market. On top of that JPM is reiterating their Overweight rating. Still wanna buy the stock? Hey! Wait! I have this bridge here....
Color on News: Amgen (NASDAQ:AMGN)
We have some firms issuing positive comments on Amgen (NASDAQ:AMGN) after The House Ways and Means Committee met yesterday to discuss the possibility of a composite rate for Epogen, i.e., bundling it with other dialysis payments:
- FBR notes they think the likelihood of any near-term cuts or reimbursement changes is unlikely. The GAO and the Committee were inclined to issue a mandate now but, ultimately, decided to allow CMS to finish its data collection and present a report to the committee next summer. This removes this near- term overhang for Amgen. After yesterday, though, it does appear more likely that bundled payments could ultimately occur.
CMS's Leslie Norwalk suggested that CMS is in favor of including Epogen in the composite payment for dialysis. On the other hand, CMS is sensitive to the "case-mix" issue, i.e., it wants to avoid the possibility, for example, that small dialysis centers could be disincentivized from giving full EPO doses. CMS presents bundling data to Congress next summer. New NKF (National Kidney Foundation) guidelines may be incorporated into CMS's report. Spending on anemia drugs--being a big line item in Part B--will remain a "hot button" issue; policies that incrementally reduce EPO use would not surprise the firm. However, the push-out of the issue until 2007 is a reprieve from this sentiment overhang for investors.
- Goldman Sachs notes they continue to believe that CMS will probably not implement a bundling system unless there are sufficient data to develop a sound case-mix adjuster and quality safeguards. Assuming these elements are in place in 2007, Congress needs to review the CMS proposal and possibly pass legislation for the change. CMS estimates that it would take at least 18 months to fully implement the system once legislation is enacted. Therefore, bundling of payments is unlikely before 2010.
- Citigroup notes they attended today's House Ways and Means Committee hearing addressing issues on CMS' Medicare reimbursement policy for Amgen's Epogen. As they expected, CMS defended its current EPO Medicare reimbursement policy and therefore the firm is not anticipating any near-term changes to reimbursement for Epogen that would negatively impact sales. CMS highlighted that its policy does not conflict with FDA recommended treatment guidelines and that recent payment revisions have actually led to reductions in average hematocrit/hemoglobin levels and Epogen dose levels among Medicare dialysis patients in contrast to data presented by other hearing witnesses.
Reiterates Buy rating and $100 tgt on Amgen as they continue to believe investor concerns
related to potential changes in Epogen reimbursement are overstated. In firm's opinion, Amgen's stock is highly attractive trading at only 16x FY07 EPS estimate of $4.35.
Notablecalls: I would not be surprised to see further buy interest in AMGN today and in the coming days as I'm hearing that large short positions were put out ahead of the meeting in anticipation of bad news. These need to be unwind now creating buy interest. Also, AMGN looks cheap and has a healthy pipeline. (See archives for further color on the EPO bundling).
- FBR notes they think the likelihood of any near-term cuts or reimbursement changes is unlikely. The GAO and the Committee were inclined to issue a mandate now but, ultimately, decided to allow CMS to finish its data collection and present a report to the committee next summer. This removes this near- term overhang for Amgen. After yesterday, though, it does appear more likely that bundled payments could ultimately occur.
CMS's Leslie Norwalk suggested that CMS is in favor of including Epogen in the composite payment for dialysis. On the other hand, CMS is sensitive to the "case-mix" issue, i.e., it wants to avoid the possibility, for example, that small dialysis centers could be disincentivized from giving full EPO doses. CMS presents bundling data to Congress next summer. New NKF (National Kidney Foundation) guidelines may be incorporated into CMS's report. Spending on anemia drugs--being a big line item in Part B--will remain a "hot button" issue; policies that incrementally reduce EPO use would not surprise the firm. However, the push-out of the issue until 2007 is a reprieve from this sentiment overhang for investors.
- Goldman Sachs notes they continue to believe that CMS will probably not implement a bundling system unless there are sufficient data to develop a sound case-mix adjuster and quality safeguards. Assuming these elements are in place in 2007, Congress needs to review the CMS proposal and possibly pass legislation for the change. CMS estimates that it would take at least 18 months to fully implement the system once legislation is enacted. Therefore, bundling of payments is unlikely before 2010.
- Citigroup notes they attended today's House Ways and Means Committee hearing addressing issues on CMS' Medicare reimbursement policy for Amgen's Epogen. As they expected, CMS defended its current EPO Medicare reimbursement policy and therefore the firm is not anticipating any near-term changes to reimbursement for Epogen that would negatively impact sales. CMS highlighted that its policy does not conflict with FDA recommended treatment guidelines and that recent payment revisions have actually led to reductions in average hematocrit/hemoglobin levels and Epogen dose levels among Medicare dialysis patients in contrast to data presented by other hearing witnesses.
Reiterates Buy rating and $100 tgt on Amgen as they continue to believe investor concerns
related to potential changes in Epogen reimbursement are overstated. In firm's opinion, Amgen's stock is highly attractive trading at only 16x FY07 EPS estimate of $4.35.
Notablecalls: I would not be surprised to see further buy interest in AMGN today and in the coming days as I'm hearing that large short positions were put out ahead of the meeting in anticipation of bad news. These need to be unwind now creating buy interest. Also, AMGN looks cheap and has a healthy pipeline. (See archives for further color on the EPO bundling).
Calls of Note Part 2
- Morgan Stanley continues to be cautious on Garmin (NASDAQ:GRMN) noting that while it is not necessarily an accurate reflection of the PND competitive environment for all of 4Q06, they believe the strong sales performance during the key Black Friday selling period by low-priced competitors, Mitac and Magellan, underscores firm's view that: 1) market pricing may fall further than the market expects during the holiday season, 2) GRMN's products are priced well above competitor products, and 3) price will likely be the key driver of share in 4Q06.
GRMN has historically avoided being a price leader and does not appear to have deviated from this strategy for Black Friday. MS notes, however, that GRMN has never previously participated in such a high-growth, price-competitive consumer product segment. The 670% YoY growth in US market PND unit sales for the week ending 11/25/06, coupled with deep discounting on the Mitac Mio and Magellan Roadmate products, likely demonstrates the high elasticity of demand for the PND product category.
With a ~37% market share, Mitac dominated Black Friday PND sales due to its Mio c310x model, which had an average street price of ~$180 for the week ending November 25th. Magellan's 16% market share also benefited from robust sales of its Roadmate 2000, which had an average price of ~$290 for the same period. Both prices were apparently the result of heavy discounting for the Black Friday selling period, with average street prices for the products at ~$380 and ~$385 respectively for the previous week ending November 18th.
Garmin's share of PND market unit sales for the week ending November 25th was approximately 34%, a meaningful reduction from the approximately 60% level seen in 3Q06. Key PND competitor TomTom saw its market share drop from approximately 22% for 3Q06 to 3.3% for the week ending November 25th.
Notablecalls: These comments may hurt GMRN today. Considering the profile of NC readers I don't even have to explain why. Also note that Dr Min H. Kao, the company's co-founder, Chairman and CEO last night established pre-arranged trading plans to sell a portion of his shares in the company over a designated period.
GRMN has historically avoided being a price leader and does not appear to have deviated from this strategy for Black Friday. MS notes, however, that GRMN has never previously participated in such a high-growth, price-competitive consumer product segment. The 670% YoY growth in US market PND unit sales for the week ending 11/25/06, coupled with deep discounting on the Mitac Mio and Magellan Roadmate products, likely demonstrates the high elasticity of demand for the PND product category.
With a ~37% market share, Mitac dominated Black Friday PND sales due to its Mio c310x model, which had an average street price of ~$180 for the week ending November 25th. Magellan's 16% market share also benefited from robust sales of its Roadmate 2000, which had an average price of ~$290 for the same period. Both prices were apparently the result of heavy discounting for the Black Friday selling period, with average street prices for the products at ~$380 and ~$385 respectively for the previous week ending November 18th.
Garmin's share of PND market unit sales for the week ending November 25th was approximately 34%, a meaningful reduction from the approximately 60% level seen in 3Q06. Key PND competitor TomTom saw its market share drop from approximately 22% for 3Q06 to 3.3% for the week ending November 25th.
Notablecalls: These comments may hurt GMRN today. Considering the profile of NC readers I don't even have to explain why. Also note that Dr Min H. Kao, the company's co-founder, Chairman and CEO last night established pre-arranged trading plans to sell a portion of his shares in the company over a designated period.
Calls of Note Part 1
- UBS comments on Oracle (NASDAQ:ORCL) ahead of results and following yesterday's decline in stock price saying they are modeling rev & EPS of $4.16b & $0.22 and $1.24b in new software sales (all in line). Firm's lic est represents 18% y/y growth (guidance 15-20%). They believe lic growth could fall in 16-17% range, but expect the tone of the call to be positive, as checks suggest that some large deals were delayed due to ORCL holding firm on pricing where there is little risk of losing deals to a competitor.
Firm is modeling F2Q07 db lic rev of $879m & believe dbase lic growth in the 9-10% range is very reasonable & would likely be viewed as a decent showing. They are modeling total app lic rev of $364m. Strength from unlimited support could offset some of the spending delays on the db side, despite that a few of the large deals they were tracking that were subsequently delayed also had an app component.
Despite what is likely to be choppy trading over the next week, and potentially post the quarter (depending on where sentiment shakes out) they continue to see potential upside to CY07 EPS estimate of $1.05. While the firm does not believe the sky is falling, they do expect the shares to be volatile through the print.
Maintains Buy and $21 tgt.
Notablecalls: Not actionable but good to know category
Firm is modeling F2Q07 db lic rev of $879m & believe dbase lic growth in the 9-10% range is very reasonable & would likely be viewed as a decent showing. They are modeling total app lic rev of $364m. Strength from unlimited support could offset some of the spending delays on the db side, despite that a few of the large deals they were tracking that were subsequently delayed also had an app component.
Despite what is likely to be choppy trading over the next week, and potentially post the quarter (depending on where sentiment shakes out) they continue to see potential upside to CY07 EPS estimate of $1.05. While the firm does not believe the sky is falling, they do expect the shares to be volatile through the print.
Maintains Buy and $21 tgt.
Notablecalls: Not actionable but good to know category
Color on news: Hershey (NYSE:HSY)
Several firms are commenting on Hershey (NYSE:HSY) after the co warned the Street that Q4 and 2007 would be below expectations:
- UBS notes that they anticipated, HSY revised its '06 and '07 sales and EPS outlook to reflect slower current momentum and greater investment to reinvigorate growth. A slower and more expensive turnaround is what the firm had feared when they downgraded their estimates and rating on 12/5.
Mgmt's new growth targets were largely in-line with firm's recent est. UBS discussed HSY's flawed promotion strategy in '06, and they believe '07 promotions would cost more (and be higher up-front). Furthermore, HSY will not get an instant innovation lift, and it has to pay greater attention to the core (a slower build). Other headwinds include likely delisting of some limited editions and of Kissables.
Firm's new EPS '06 is $2.44 (+7% y/y vs. mid SD guidance, down from $2.47). New EPS est for '07 and '08 are $2.62 (down from $2.66) and $2.89 (from $2.94), respectively (+7% and +10.5% y/y). Tgt is cut by $1 to $55 with Neutral rating maintained.
- Bear Stearns notes the news not a major surprise, as they expected Canadian product recalls to hurt sales in the fourth (December) quarter. What was surprising, however, was that the company also said that 2007 would be disappointing, with EPS ranging from 7-9% rather than the previously stated 9-11%.
When the firm upgraded the HSY shares in October, they noted certain near-term risks to the story, including a potential earnings miss in 4Q and the possibly inauspicious signal sent when higher marketing is announced. Alas, these fears have come to pass in recent weeks, with more speed and impact than they anticipated.
On the positive side, the upgrade was based on a belief that dark chocolate, Hershey's latest initiative, would drive mix and margin growth. Nothing the firm has seen dissuades them from maintaining this belief. In fact, in the middle of yesterday's otherwise discouraging press release, management cited "success in dark chocolate " as a bright spot.
Bear is lowering their estimates but notes that after the dip, they see a positive trend for the HSY shares -- mostly because of dark chocolate -- and therefore maintain Outperform rating for 2007. As evidenced by Wrigley and McCormick in 2006, fallen stars in the food group can bounce back on even the slightest of positive news.
- JP Morgan has by far the best comments on HSY so far noting that while they admit to having been fans in the past of CEO Rick Lenny, in hindsight tey would criticize him on three fronts: a) cost cuts have led to a bare bones advertisings budget (2% of sales vs. 11% for WWY), b) excessive reliance on line extensions (leveraging the so-called "core brands", Hershey, Kisses, and Reese's), without creating new single-serve chocolate platforms (Mars is still stronger in this regard); the exceptions being Take5 and Kissables where support has been lacking; c) a trial and error approach to snacks that has yielded few "singles" (let alone, "home runs"); nuts, granola bars, and nutritional bars have not worked.
The competitive landscape changed. According to AC Nielsen, HSY's chocolate share in the FDM+WMT channel increased from 43.1% in 12/01 (Mars 30.1%) to 45.3% by 11/05; but it was down to 44.5% in 11/06 (Mars 32.1%). HSY continues to lose share and under perform Mars; sales for the latter at FDM+WMT have grown at a 6-7% pace for the past 4 reported periods taking 12-week moving averages, compared with -1% to +1% for HSY.
Firm sees few catalysts to lift the PE from the current trough levels. The only catalysts they see that can help push up the PE multiple would be of the top line/earnings kind. But in this regard they see downside both to the 3-4% top line growth target for FY07, and the 7-9% EPS growth target. Why? Based on market momentum, the firm does not see dark chocolate boosting category growth and would expect HSY to continue to show yoy market share losses thru mid 2007.
They believe confidence will take a hit and the stock may reach its trough PE level (18x). Firm notes they would only step in if HSY reached the trough PE on the new low end of guidance EPS of $2.56.
Notablecalls: While some of the miss was anticipated I tend to believe this is just the beginning of a major battle for HSY. The co has been underspending on marketing and will need to increase that in 07 and beyond. That will eat into margins. Must agree with JPM here - dark chocolate will not save the day. JPM notes they would only step in if HSY reached the trough PE on the new low end of guidance EPS of $2.56. That implies levels around $46. Suspect HSY can go even lower in the coming weeks.
PS: I'm hearing Goldman Sachs has taken their rating to Neutral on HSY this AM.
- UBS notes that they anticipated, HSY revised its '06 and '07 sales and EPS outlook to reflect slower current momentum and greater investment to reinvigorate growth. A slower and more expensive turnaround is what the firm had feared when they downgraded their estimates and rating on 12/5.
Mgmt's new growth targets were largely in-line with firm's recent est. UBS discussed HSY's flawed promotion strategy in '06, and they believe '07 promotions would cost more (and be higher up-front). Furthermore, HSY will not get an instant innovation lift, and it has to pay greater attention to the core (a slower build). Other headwinds include likely delisting of some limited editions and of Kissables.
Firm's new EPS '06 is $2.44 (+7% y/y vs. mid SD guidance, down from $2.47). New EPS est for '07 and '08 are $2.62 (down from $2.66) and $2.89 (from $2.94), respectively (+7% and +10.5% y/y). Tgt is cut by $1 to $55 with Neutral rating maintained.
- Bear Stearns notes the news not a major surprise, as they expected Canadian product recalls to hurt sales in the fourth (December) quarter. What was surprising, however, was that the company also said that 2007 would be disappointing, with EPS ranging from 7-9% rather than the previously stated 9-11%.
When the firm upgraded the HSY shares in October, they noted certain near-term risks to the story, including a potential earnings miss in 4Q and the possibly inauspicious signal sent when higher marketing is announced. Alas, these fears have come to pass in recent weeks, with more speed and impact than they anticipated.
On the positive side, the upgrade was based on a belief that dark chocolate, Hershey's latest initiative, would drive mix and margin growth. Nothing the firm has seen dissuades them from maintaining this belief. In fact, in the middle of yesterday's otherwise discouraging press release, management cited "success in dark chocolate " as a bright spot.
Bear is lowering their estimates but notes that after the dip, they see a positive trend for the HSY shares -- mostly because of dark chocolate -- and therefore maintain Outperform rating for 2007. As evidenced by Wrigley and McCormick in 2006, fallen stars in the food group can bounce back on even the slightest of positive news.
- JP Morgan has by far the best comments on HSY so far noting that while they admit to having been fans in the past of CEO Rick Lenny, in hindsight tey would criticize him on three fronts: a) cost cuts have led to a bare bones advertisings budget (2% of sales vs. 11% for WWY), b) excessive reliance on line extensions (leveraging the so-called "core brands", Hershey, Kisses, and Reese's), without creating new single-serve chocolate platforms (Mars is still stronger in this regard); the exceptions being Take5 and Kissables where support has been lacking; c) a trial and error approach to snacks that has yielded few "singles" (let alone, "home runs"); nuts, granola bars, and nutritional bars have not worked.
The competitive landscape changed. According to AC Nielsen, HSY's chocolate share in the FDM+WMT channel increased from 43.1% in 12/01 (Mars 30.1%) to 45.3% by 11/05; but it was down to 44.5% in 11/06 (Mars 32.1%). HSY continues to lose share and under perform Mars; sales for the latter at FDM+WMT have grown at a 6-7% pace for the past 4 reported periods taking 12-week moving averages, compared with -1% to +1% for HSY.
Firm sees few catalysts to lift the PE from the current trough levels. The only catalysts they see that can help push up the PE multiple would be of the top line/earnings kind. But in this regard they see downside both to the 3-4% top line growth target for FY07, and the 7-9% EPS growth target. Why? Based on market momentum, the firm does not see dark chocolate boosting category growth and would expect HSY to continue to show yoy market share losses thru mid 2007.
They believe confidence will take a hit and the stock may reach its trough PE level (18x). Firm notes they would only step in if HSY reached the trough PE on the new low end of guidance EPS of $2.56.
Notablecalls: While some of the miss was anticipated I tend to believe this is just the beginning of a major battle for HSY. The co has been underspending on marketing and will need to increase that in 07 and beyond. That will eat into margins. Must agree with JPM here - dark chocolate will not save the day. JPM notes they would only step in if HSY reached the trough PE on the new low end of guidance EPS of $2.56. That implies levels around $46. Suspect HSY can go even lower in the coming weeks.
PS: I'm hearing Goldman Sachs has taken their rating to Neutral on HSY this AM.
Paperstand
The WSJ reprots that a two-year standoff between News Corp. (NWS) and its second-biggest shareholder, Liberty Media (L), is nearing an end in a deal that will return Liberty to a powerful position in the media sector and solidify News Corp. Chmn Rupert Murdoch's control of his co. Under an agreement, which could be finalized in the next few weeks, News Corp. will buy Liberty's $11bn stake in the media giant in exchange for News Corp's 38.6% stake in satellite-TV firm DirecTV (DTV), some cash and some smaller News Corp. assets.
“Heard on the Street” column highlights Motorola (MOT), that is sitting on more than $14bn in cash and some $3bn generated each year. The co is primarily valued for its popular wireless handsets led by the trend-setting RAZR phone. Motorola derives 2/3 of its sales and profits from its handset division and any cracks in the division's performance add to worries that the global boom in handsets must be slowing. David Eiswert, of T. Rowe, compares Motorola to Cisco. "What jumps out at you is that ppl are giving Cisco the benefit of the doubt, that they have important technology in a field where there are barriers to entry, that they will reinvest and get similar returns in the future," he says. Motorola is trading at about 13.5x consensus ests of ‘07 earnings, compared with more than 20x next year's estd earnings for Cisco.
Barron’s Online discusses Pfizer (PFE), saying that investors have a chance to turn Pfizer's flop into a hit for their portfolios. Investors with a little patience may embrace Pfizer as a value play, assuming the co accelerates cost cuts, hikes its dividend and cuts more deals with other drug makers to fill the gap in its pipeline created by torcetrapib's demise. "Pfizer faces a huge cliff in 2011, but they have time to come up with the answer," says Derek Taner, portfolio manager for the AIM Global Health Care Fund. "Pfizer has a lot of resources." Some investors might consider investing in co’s with rival cholesterol drugs. Torcetrapib's demise has relieved Schering-Plough (SGP) and Avvott (ABT). "There is still a great patient need for effective medicines to treat lipid disorders," says Melissa Brontz, a spokeswoman for Abbott.
“Inside Scoop” section reports that during the first 5 days of the Dec, Baker Brothers plunked down $14.06m to purchase 682K Genomic Health (GHDX) shares in the open mkt on behalf of various funds. Rusty Szurek, general manager of InsiderScore.com, says that it is notable in itself that Baker Brothers is increasing its Genomic position "on really significant strength." But Julian and Felix Baker also have a strong track record investing in biotech co’s. "They are what in the business we call smart insiders," says Szurek.
“Heard on the Street” column highlights Motorola (MOT), that is sitting on more than $14bn in cash and some $3bn generated each year. The co is primarily valued for its popular wireless handsets led by the trend-setting RAZR phone. Motorola derives 2/3 of its sales and profits from its handset division and any cracks in the division's performance add to worries that the global boom in handsets must be slowing. David Eiswert, of T. Rowe, compares Motorola to Cisco. "What jumps out at you is that ppl are giving Cisco the benefit of the doubt, that they have important technology in a field where there are barriers to entry, that they will reinvest and get similar returns in the future," he says. Motorola is trading at about 13.5x consensus ests of ‘07 earnings, compared with more than 20x next year's estd earnings for Cisco.
Barron’s Online discusses Pfizer (PFE), saying that investors have a chance to turn Pfizer's flop into a hit for their portfolios. Investors with a little patience may embrace Pfizer as a value play, assuming the co accelerates cost cuts, hikes its dividend and cuts more deals with other drug makers to fill the gap in its pipeline created by torcetrapib's demise. "Pfizer faces a huge cliff in 2011, but they have time to come up with the answer," says Derek Taner, portfolio manager for the AIM Global Health Care Fund. "Pfizer has a lot of resources." Some investors might consider investing in co’s with rival cholesterol drugs. Torcetrapib's demise has relieved Schering-Plough (SGP) and Avvott (ABT). "There is still a great patient need for effective medicines to treat lipid disorders," says Melissa Brontz, a spokeswoman for Abbott.
“Inside Scoop” section reports that during the first 5 days of the Dec, Baker Brothers plunked down $14.06m to purchase 682K Genomic Health (GHDX) shares in the open mkt on behalf of various funds. Rusty Szurek, general manager of InsiderScore.com, says that it is notable in itself that Baker Brothers is increasing its Genomic position "on really significant strength." But Julian and Felix Baker also have a strong track record investing in biotech co’s. "They are what in the business we call smart insiders," says Szurek.
Wednesday, December 06, 2006
Calls of Note Part 7
- RBC Capital is positive on Zoltek (NASDAQ:ZOLT) after Norway-based oil-services company yesterday entered into a tentative $610M 3-year contract for its semi-submersible H-6e, the world's largest, most advanced drilling unit, to start operation in Nov. 2008 on the Norwegian shelf.
The H-6E is specifically designed for ultra-deep water operations. It will likely require advanced tech umbilical tethering cables to secure the rig to the sea floor. Offshore wells drilling in 2,000m or deeper are prime candidates for the carbon-fiber cables.
Aker Kaverner has been working with Zoltek to develop a new cable product that uses carbon fiber rods instead of steel (less weight and stronger for longer-length cables). Yesterday's large $610M oil-services rig contract increases likelihood of large demand for Zoltek's carbon fiber from a new end market.
Maintains Outperform on ZOLT.
Notablecalls: I would not be surprised to see some buy interest in ZOLT.
The H-6E is specifically designed for ultra-deep water operations. It will likely require advanced tech umbilical tethering cables to secure the rig to the sea floor. Offshore wells drilling in 2,000m or deeper are prime candidates for the carbon-fiber cables.
Aker Kaverner has been working with Zoltek to develop a new cable product that uses carbon fiber rods instead of steel (less weight and stronger for longer-length cables). Yesterday's large $610M oil-services rig contract increases likelihood of large demand for Zoltek's carbon fiber from a new end market.
Maintains Outperform on ZOLT.
Notablecalls: I would not be surprised to see some buy interest in ZOLT.
Calls of Note Part 6
- Bear Stearns believes SanDisk's (NASDAQ:SNDK) current stock price presents a great opportunity for investors to accumulate the shares.
From a near-term perspective, though investors are apprehensive about pricing in 4Q, firm's early read on 4Q is that pricing is tracking within guidance of down 15-20% QoQ, based on their retail checks and analysis. While it is early to reach a firm conclusion on demand for 4Q given that December is the biggest month of the year, based on channel checks they believe bit shipments so far are likely tracking towards the higher end of guidance of 50-60% QoQ. Checks point to very strong microSD sales, which should benefit bit shipments (given its dominant share in the segment) as well as ASP (given microSD is a higher ASP/margin product relative to other card formats and is growing as a percentage of sales).
There has been concern that the NAND market will be considerably oversupplied in 2007. Bears expects the market to be only slightly oversupplied next year, as supply growth for 2007 is on the path of getting more rational.
They believe that the acquisition of M-Systems has increased the possibility of an agreement being reached between SanDisk and Hynix on royalties for NAND flash. An agreement would lead to material upside to royalty estimates.
In firm's opinion the stock is clearly undervalued. They reiterating price target of $72.
Notablecalls: I think this one's actionable. There is way too much negativity on SNDK and comments like this one will get attention. Expect to see a sizeable move.
From a near-term perspective, though investors are apprehensive about pricing in 4Q, firm's early read on 4Q is that pricing is tracking within guidance of down 15-20% QoQ, based on their retail checks and analysis. While it is early to reach a firm conclusion on demand for 4Q given that December is the biggest month of the year, based on channel checks they believe bit shipments so far are likely tracking towards the higher end of guidance of 50-60% QoQ. Checks point to very strong microSD sales, which should benefit bit shipments (given its dominant share in the segment) as well as ASP (given microSD is a higher ASP/margin product relative to other card formats and is growing as a percentage of sales).
There has been concern that the NAND market will be considerably oversupplied in 2007. Bears expects the market to be only slightly oversupplied next year, as supply growth for 2007 is on the path of getting more rational.
They believe that the acquisition of M-Systems has increased the possibility of an agreement being reached between SanDisk and Hynix on royalties for NAND flash. An agreement would lead to material upside to royalty estimates.
In firm's opinion the stock is clearly undervalued. They reiterating price target of $72.
Notablecalls: I think this one's actionable. There is way too much negativity on SNDK and comments like this one will get attention. Expect to see a sizeable move.
Calls of Note Part 5
- Piper Jaffray is positive on Crocs (NASDAQ:CROX) saying they remain confident in their FQ4 sales and EPS estimates as the core Crocs business remains robust and checks suggest strong retail sales trends. The "classic" beach/Cayman continue to decline as a percentage of sales, resulting from strong consumer adoption of new styles. A recent survey of retailers and company-owned kiosks leads the firm to believe Crocs are favored as a holiday gift-giving item. They are raising their FY07 sales & EPS estimates in view of the timing of the Jibbitz acquisition (closed 12/5) and the planned introduction of roughly 10 new spring styles. Firm expects product detail and product flow visibility to improve near-term as the company formally introduces its new spring collection at the Fashion Footwear Association of New York show in New York this week.
Believes sales of classic Crocs and Disney styles in both Europe and Asia are comfortably above initial forecasts. Firm is conservatively modeling an additional $0.05 for Jibbitz in FY07 based on the current estimated door count. They expect to monitor door count expansion as the year progresses and believe Jibbitz could add up to $0.10-$0.15 to FY07 EPS.
Tgt goes to $53 from $51. Maintains Outperform.
Notablecalls: Think Piper is trying to pull an UARM here. Lets see if it works.
Believes sales of classic Crocs and Disney styles in both Europe and Asia are comfortably above initial forecasts. Firm is conservatively modeling an additional $0.05 for Jibbitz in FY07 based on the current estimated door count. They expect to monitor door count expansion as the year progresses and believe Jibbitz could add up to $0.10-$0.15 to FY07 EPS.
Tgt goes to $53 from $51. Maintains Outperform.
Notablecalls: Think Piper is trying to pull an UARM here. Lets see if it works.
Calls of Note Part 4
- Goldman Sachs is adding General Electric (NYSE:GE) to their Conviction Buy List with 19% upside to $42 12-month price target. At this point in the cycle, in a moderating growth operating environment and greater uncertainty in the industrial sector, they believe investors will gravitate to GE's late-cycle exposure, high-margin services mix, emerging markets strength, and attractive earnings visibility/consistency. The upcoming Dec 12 Outlook meeting has the potential to be a positive catalyst. Firm is looking for P/E multiple expansion and 10%-12% earnings growth in 2007 for GE, one of the Multi-Industry Primes that has lagged the market YTD.
Catalyst: GS believes GE's upcoming Dec 12 Outlook meeting with Jeff Immelt has the potential to be a positive catalyst, where the shares have rallied into this meeting in four of the past five years. They expect GE's 2007 outlook to compare favorably to other Multi-Industry companies on a risk-adjusted basis, with a solid case for 2x-3x World GDP core revenue growth and 10%-12% EPS growth driven by late-cycle and services mix contributing to meaningful margin expansion. Seasonal 4Q strength and a post Fed-tightening scenario could also be positive factors for GE shares to outperform over the near term.
Notablecalls: UBS commented on GE yesterday (see archives) saying 10-12% EPS growth may not be enough to keep investors happy. Now we have Goldman saying they expect multiple expansion on top of this growth. Go figure. My gut is telling me GE stock won't do much ahead of the meeting.
Catalyst: GS believes GE's upcoming Dec 12 Outlook meeting with Jeff Immelt has the potential to be a positive catalyst, where the shares have rallied into this meeting in four of the past five years. They expect GE's 2007 outlook to compare favorably to other Multi-Industry companies on a risk-adjusted basis, with a solid case for 2x-3x World GDP core revenue growth and 10%-12% EPS growth driven by late-cycle and services mix contributing to meaningful margin expansion. Seasonal 4Q strength and a post Fed-tightening scenario could also be positive factors for GE shares to outperform over the near term.
Notablecalls: UBS commented on GE yesterday (see archives) saying 10-12% EPS growth may not be enough to keep investors happy. Now we have Goldman saying they expect multiple expansion on top of this growth. Go figure. My gut is telling me GE stock won't do much ahead of the meeting.
Calls of Note Part 3
- TWP reiterates Overweight rating on Phase Forward (NASDAQ:PFWD). Firm continues to believe that Phase Forward will benefit from the increasing utilization of electronic data capture and other technologies by pharmaceutical manufacturers and biotech companies. In their view, PFWD's 3Q06 results demonstrated continued top-line momentum and margin improvement as more trials are conducted with the company's InForm product.
Last month, the company reported 3Q06 results above both our expectations and consensus. Revenues were above expectations in the quarter but the real leverage in the model came to light as the company reported operating margins that were 340bp above 3Q05 levels. The company's move toward a high-recurring, subscription-based model has enabled PFWD to leverage its existing infrastructure. The company has begun recognizing revenue from its Merck contract signed in early 2006 and should benefit from a recent large agreement with Novo Nordisk in 2007. The company has virtually no exposure to Pfizer.
TWP maintains their thesis that PFWD will be a significant beneficiary as manufacturers increase utilization of EDC technologies over the long run. The company has certainly outdistanced itself from most smaller competitors and, in their view, has a superior EDC application to Oracle's integrated application (database and EDC). At current levels, PFWD shares trade below firm's current fair value range of $16 to $18.
Notablecalls: Not a trading call but I suspect this one may be a keeper for the L-T investor. The co offers just what big pharmas currently need.
Last month, the company reported 3Q06 results above both our expectations and consensus. Revenues were above expectations in the quarter but the real leverage in the model came to light as the company reported operating margins that were 340bp above 3Q05 levels. The company's move toward a high-recurring, subscription-based model has enabled PFWD to leverage its existing infrastructure. The company has begun recognizing revenue from its Merck contract signed in early 2006 and should benefit from a recent large agreement with Novo Nordisk in 2007. The company has virtually no exposure to Pfizer.
TWP maintains their thesis that PFWD will be a significant beneficiary as manufacturers increase utilization of EDC technologies over the long run. The company has certainly outdistanced itself from most smaller competitors and, in their view, has a superior EDC application to Oracle's integrated application (database and EDC). At current levels, PFWD shares trade below firm's current fair value range of $16 to $18.
Notablecalls: Not a trading call but I suspect this one may be a keeper for the L-T investor. The co offers just what big pharmas currently need.
Calls of Note Part 2
- Bear Stearns notes Google (NASDAQ:GOOG) continued its strength in the international market by posting a 40bps gain to reach a 72.9% market share in October 2006. This is the highest market share level since the firm started tracking the data in early 2004. Google grew search queries by 60% YoY in October, meaningfully ahead of the industry growth at 52%, also marking an acceleration from 58% in September. They note that Google is the only major search site that consistently outperformed the industry since early 2005. Firm finds Google's strong growth particularly impressive given that it is growing from a much larger base.
Facing Google's aggressive market share expansion, Yahoo (NASDAQ:YHOO) lost 20bps in October and came in at 15.4%, marking the third consecutive month of international market share loss. However, the firm points out that as comScore data is predicated on sampling from a limited amount of countries and Asian countries where Yahoo has strong presence are under-represented in the comScore data. Yahoo is the second fastest growing search site YoY among the top five at 56.5% YoY growth in October, down slightly from the 56.8% level in September but ahead of the industry growth at 52%.
Maintains Outperform on GOOG.
Notablecalls: Not actionable but good to know category.
Facing Google's aggressive market share expansion, Yahoo (NASDAQ:YHOO) lost 20bps in October and came in at 15.4%, marking the third consecutive month of international market share loss. However, the firm points out that as comScore data is predicated on sampling from a limited amount of countries and Asian countries where Yahoo has strong presence are under-represented in the comScore data. Yahoo is the second fastest growing search site YoY among the top five at 56.5% YoY growth in October, down slightly from the 56.8% level in September but ahead of the industry growth at 52%.
Maintains Outperform on GOOG.
Notablecalls: Not actionable but good to know category.
Calls of Note Part 1
- CIBC notes that over the past few days, their meetings in Asia with chipmakers and equipment suppliers alike have netted one clear, key takeaway: The Vista-driven PC product cycle is here. Accelerating demand pull from PC OEMs' forecast in 1Q07 has chipmakers scrambling and pulling-in tool orders.
The ultimate barometer of this is foundries: Firm's checks suggest TSMC is well ahead of internal rev forecasts for PCs in 4Q (from down ~5-10% Q/Q, now closer to flat), despite ATI's cut to wafer starts to correct inventory. TSMC is pulling-in tool orders for Fab14 into 4Q making it a ~5% customer.
Other points in the PC supply chain are seeing much better than seasonal demand pull in 1Q07, e.g., according to rolling forecasts from PC OEMs incl. Dell and Lenovo, DRAM makers gearing for solidly positive Q/Q growth in 1Q, catalyzing acceleration of schedules for Inotera, & Elpida/Powerchip JV.
NAND Flash not down and out--Toshiba ordering for new Fab4 shell in 1Q. Total memory orders, in fact, tracking higher in 1Q. Stay long favs LRCX, AMAT. MTSN leverage is looking particularly big in 1Q. NVLS no longer a short, Dec orders whipsawing back up to flat to -5% Q/Q vs. -5%-10% Q/Q.
Notablecalls: Not actionable but good to know category. I guess it's good news for Micron (NYSE:MU)as well.
The ultimate barometer of this is foundries: Firm's checks suggest TSMC is well ahead of internal rev forecasts for PCs in 4Q (from down ~5-10% Q/Q, now closer to flat), despite ATI's cut to wafer starts to correct inventory. TSMC is pulling-in tool orders for Fab14 into 4Q making it a ~5% customer.
Other points in the PC supply chain are seeing much better than seasonal demand pull in 1Q07, e.g., according to rolling forecasts from PC OEMs incl. Dell and Lenovo, DRAM makers gearing for solidly positive Q/Q growth in 1Q, catalyzing acceleration of schedules for Inotera, & Elpida/Powerchip JV.
NAND Flash not down and out--Toshiba ordering for new Fab4 shell in 1Q. Total memory orders, in fact, tracking higher in 1Q. Stay long favs LRCX, AMAT. MTSN leverage is looking particularly big in 1Q. NVLS no longer a short, Dec orders whipsawing back up to flat to -5% Q/Q vs. -5%-10% Q/Q.
Notablecalls: Not actionable but good to know category. I guess it's good news for Micron (NYSE:MU)as well.
Color on news: InterDigital (NASDAQ:IDCC)
Couple of firms commenting on InterDigital (NASDAQ:IDCC) after the co issued negative guidance for Q4:
- Piper Jaffray notes that InterDigital cited weaker-than-expected revenue from Japanese licensees, primarily due to delays in 3G handset purchases as Japan transitions to local number portability. InterDigital indicated recurring royalties from sales related to Japan are expected to improve during Q107, although the firm is cautious such improvement may take time given our belief several Japanese OEMs and carriers had built extra handset inventory heading into the transition period for local number portability.
Given the declining likelihood any settlement payment from Samsung will occur during 2006, they are adjusting their estimate regarding the timing of final settlement from Samsung. Firm is now modeling a settlement payment from Samsung during Q307, although the timing and magnitude of any final settlement payment remains uncertain. Due to the revised timing of the Samsung settlement payment, offset by indications of slower-than-expected royalty growth, they are raising 2007 estimates from $0.49/$183M to $2.62/$362M, but are lowering recurring 2007 estimates from $0.49/$183M to $0.43/$182M.
Maintains Underperform and $26 tgt.
- First Albany is more bullish noting the shortfall versus tgeur estimate was in recurring patent licensing royalty revenues. According to the company, fourth-quarter revenues were negatively
impacted by delays in 3G handset purchases during the third quarter of 2006 in Japan. The company anticipates 1Q:07 recurring royalty revenues from licensees in Japan should be higher than those for 4Q:06. For 4Q:06, they have lowered their revenue estimate to $63.0 million from $67.4 million.
First Albany notes IDCC shares sold off more than they would have thought on the guidance, in part because of the consensus estimate being skewed by one estimate that includes the revenues from the settlement of the company's litigation with Samsung. The consensus revenue estimate was $105 million due to one estimate at $248 million. Firm reiterates Strong Buy rating and $40 tgt.
Notablecalls: I would be an opportunistic buyer around the $29 level as the news can be characterized more of a pushout than anything else. Co's like this one currently represent the better way of playing the handset space. Would use half of a normal position size as one should be ready to cut their losses quickly.
- Piper Jaffray notes that InterDigital cited weaker-than-expected revenue from Japanese licensees, primarily due to delays in 3G handset purchases as Japan transitions to local number portability. InterDigital indicated recurring royalties from sales related to Japan are expected to improve during Q107, although the firm is cautious such improvement may take time given our belief several Japanese OEMs and carriers had built extra handset inventory heading into the transition period for local number portability.
Given the declining likelihood any settlement payment from Samsung will occur during 2006, they are adjusting their estimate regarding the timing of final settlement from Samsung. Firm is now modeling a settlement payment from Samsung during Q307, although the timing and magnitude of any final settlement payment remains uncertain. Due to the revised timing of the Samsung settlement payment, offset by indications of slower-than-expected royalty growth, they are raising 2007 estimates from $0.49/$183M to $2.62/$362M, but are lowering recurring 2007 estimates from $0.49/$183M to $0.43/$182M.
Maintains Underperform and $26 tgt.
- First Albany is more bullish noting the shortfall versus tgeur estimate was in recurring patent licensing royalty revenues. According to the company, fourth-quarter revenues were negatively
impacted by delays in 3G handset purchases during the third quarter of 2006 in Japan. The company anticipates 1Q:07 recurring royalty revenues from licensees in Japan should be higher than those for 4Q:06. For 4Q:06, they have lowered their revenue estimate to $63.0 million from $67.4 million.
First Albany notes IDCC shares sold off more than they would have thought on the guidance, in part because of the consensus estimate being skewed by one estimate that includes the revenues from the settlement of the company's litigation with Samsung. The consensus revenue estimate was $105 million due to one estimate at $248 million. Firm reiterates Strong Buy rating and $40 tgt.
Notablecalls: I would be an opportunistic buyer around the $29 level as the news can be characterized more of a pushout than anything else. Co's like this one currently represent the better way of playing the handset space. Would use half of a normal position size as one should be ready to cut their losses quickly.
Paperstand
The WSJ’s „Heard on the Street” column discusses favorably Electronic Data Systems (EDS), which is completing the first stage of a turnaround under CEO Michael Jordan. EDS officials say sales are on track to total $21.1-21.3bn this year, while adjusted profits are likely to double. Debt that stood at $5bn in ‘03 has been cut to $3.1bn. To help revive the firm, Mr. Jordan restructured contracts EDS was having trouble handling such as by seeking more-favorable terms. He also cut costs by centralizing some business functions, diversified into additional support services and targeted new accounts. Six Wall Street analysts recently upgraded recommendations to the equivalent of Buy from Hold.
Also Barron’s Online pushing EDS (EDS), saying that the last few years it's been a climbing out of a pile of debt and cutting costs. But in June, EDS spent $380m for a majority stake in Mphasis, a competitor to Infosys. That acquisition gives EDS a 20K-strong workforce scattered across India, China, South America and Europe. The investment is a bet by CEO Michael Jordan that the co can move from being a turnaround story to one of growth by doing less of the old work of installing computers and more of the new, flashy high-margin IT services such as running the finance or human resources operations for a co. That makes EDS one of the most interesting ways to speculate on offshoring over the next year. "They're playing catch up with Infosys and the Indian firms, but there's no competitive advantage that Infosys has that EDS can't match," says Thomas Hunt III, of Eagle Global Advisors' domestic large cap growth fund. "Infosys' dominance is mkt share for them to lose and for EDS to gain," says Hunt.
“Inside Scoop” section reports that Fine Capital Partners increased its holdings in RedEnvelope (REDE) to 908K shares, a 9.46% stake. "We think the new CEO is very talented and has lots of experience in turning around Internet-based franchises," says Fine. "We think RedEnvelope has a lot of brand value and we think it is extremely cheap on a price-to-sales ratio."
Tuesday, December 05, 2006
Calls of Note Part 6
- Raymond James notes that while Natus Medical (NASDAQ:BABY) has had a nice run over the past five months, they continue to be buyers at current levels. They feel fundamentals are strong, remain comfortable with their estimates, and feel the potential for Cool-Cap approval should drive the stock in the near-term.
While the timing of FDA approval is always difficult to predict, the firm is hopeful that Natus could receive FDA approval for its Cool-Cap product in the near-term and view this announcement as a catalyst for the stock. Natus acquired Olympic Medical on October 16 and intimated in its conference call that it expected approval within a few months. While they do not anticipate changing estimates on the approval, the firm feels the announcement would create investor interest and give additional comfort in near-term estimates. They feel this product
could offer upside to 2007 revenue forecast.
The product helps prevent brain injury in newborns with birth asphyxia (oxygen deprivation) by cooling the body temperature, which slows the infant's metabolism and prevents a cycle of further apoptosis (cell death). This programmed cell death often causes brain damage. RayJay believe the U.S. market for the Cool-Cap is $65+ million. They assume a similar size market outside the U.S.
Maintains Outperform.
Notablecalls: Soleil-Belmont Harbor Capital's Daniel Owczarski called it nicely in June (see archives) saying the stock should be trading at a minimum in the $15 to $18 range. Think this baby has room to move higher.
While the timing of FDA approval is always difficult to predict, the firm is hopeful that Natus could receive FDA approval for its Cool-Cap product in the near-term and view this announcement as a catalyst for the stock. Natus acquired Olympic Medical on October 16 and intimated in its conference call that it expected approval within a few months. While they do not anticipate changing estimates on the approval, the firm feels the announcement would create investor interest and give additional comfort in near-term estimates. They feel this product
could offer upside to 2007 revenue forecast.
The product helps prevent brain injury in newborns with birth asphyxia (oxygen deprivation) by cooling the body temperature, which slows the infant's metabolism and prevents a cycle of further apoptosis (cell death). This programmed cell death often causes brain damage. RayJay believe the U.S. market for the Cool-Cap is $65+ million. They assume a similar size market outside the U.S.
Maintains Outperform.
Notablecalls: Soleil-Belmont Harbor Capital's Daniel Owczarski called it nicely in June (see archives) saying the stock should be trading at a minimum in the $15 to $18 range. Think this baby has room to move higher.
Calls of Note Part 5
- UBS notes that on September 14, they downgraded their rating on GE (NYSE:GE) to Neutral, from Buy, to reflect belief that earnings growth may be challenged by the shape of the yield curve, a bottoming out of reserves at GE Capital, higher tax rates, continued earnings softness at NBC and the eventual deceleration of aerospace aftermarket activity. They now believe developments over the last few months continue to suggest risks to GE's earnings growth rate in 2007, including a somewhat disappointing showing for NBCU's new primetime lineup, industrial companies' guidance of higher tax rates in 2007, the continued lag in GECC loss provisions behind receivables write-offs (through Q3) and increased evidence of aerospace aftermarket activity deceleration.
On December 12th, at its scheduled investor meeting in NYC, they expect GE to provide its formal earnings guidance for 2007. Given potential headwinds, the firm expects GE to guide to earnings growth in the 10%-12% range, somewhat below the roughly 13% currently built into the consensus earnings forecasts.
They maintain their 2006 EPS estimate of $1.97 and 2007 EPS estimate of $2.20. The below consensus estimate for 2007 assumes roughly 12% earnings growth, driven by earnings growth of roughly 7% in GE's finance businesses, 15% at Healthcare, 10% in Industrial, 12% in Infrastructure and 7% at NBCU.
Maintains Neutral and $38 tgt.
Notablecalls: I have no feel for GE here but I thought to highlight the call just in case.
On December 12th, at its scheduled investor meeting in NYC, they expect GE to provide its formal earnings guidance for 2007. Given potential headwinds, the firm expects GE to guide to earnings growth in the 10%-12% range, somewhat below the roughly 13% currently built into the consensus earnings forecasts.
They maintain their 2006 EPS estimate of $1.97 and 2007 EPS estimate of $2.20. The below consensus estimate for 2007 assumes roughly 12% earnings growth, driven by earnings growth of roughly 7% in GE's finance businesses, 15% at Healthcare, 10% in Industrial, 12% in Infrastructure and 7% at NBCU.
Maintains Neutral and $38 tgt.
Notablecalls: I have no feel for GE here but I thought to highlight the call just in case.
Calls of Note Part 4
- Cowen notes that Cambridge Display Tech (NASDAQ:OLED) has developed a new, patent-pending driver technology, TMA (total matrix addressing), which they believe could greatly accelerate the adoption of OLED devices for video-capable handset main displays, by improving yields, power consumption and device life. Moreover, TMA is applicable to any OLED material, allowing CDT to license chipsets for both polymer and competing small molecule types. While TMA is not yet in firm's model, they estimate the addressable market could be about 140MM units in 2008 and reiterate Outperform rating.
Cowen understands that CDT is seeking display OEM and chipset partners to develop TMA. Contacts in Asia confirmed strong interest in the project, suggesting that TMA should be cost-competitive with 2.8" AMLCDs and able to command a 10-15% price premium. The backplanes and row/column driver chips should be relatively straightforward, with the longest-lead item being the TMA image processor ASIC.
Notablecalls: While the chart looks weak I suspect the note will generate some interest in OLED over the next couple of days.
Cowen understands that CDT is seeking display OEM and chipset partners to develop TMA. Contacts in Asia confirmed strong interest in the project, suggesting that TMA should be cost-competitive with 2.8" AMLCDs and able to command a 10-15% price premium. The backplanes and row/column driver chips should be relatively straightforward, with the longest-lead item being the TMA image processor ASIC.
Notablecalls: While the chart looks weak I suspect the note will generate some interest in OLED over the next couple of days.
Calls of Note Part 3
- Merrill Lynch comments on Pfizer's (NYSE:PFE) Lipitor script trends. Firm notes that 1) 1H07 could face a tough YOY comparison because the Lipitor TRxs (total prescriptions) were strong in 1H06, and 2) although Lipitor NRxs (new prescriptions) have not declined sequentially since October, they think the stabilization is temporary because managed care plans to make a bigger push for patients to start on generic Zocor in January. And the total scripts (TRxs) have still declined recently, and there is no sign of TRx stabilization.
Firm continues to model Lipitor U.S. sales down 5% in 2007 vs. management's projection for growth. Major swing factors include statin market growth and Lipitor net pricing.
Maintains Neutral.
Notablecalls: Looks like Merrill's David Risinger is going after PFE with vengeance after downgrading the stock to Neutral yesterday. Considering that Lipitor accounts for 40-45% of PFE's bottom line, any negative comments will likely further hurt the stock. Must say I was fairly surprised to see the stock go below $24 level in the pre market yesterday but the trade worked out after all. Now lets see if ML can move PFE lower.
Firm continues to model Lipitor U.S. sales down 5% in 2007 vs. management's projection for growth. Major swing factors include statin market growth and Lipitor net pricing.
Maintains Neutral.
Notablecalls: Looks like Merrill's David Risinger is going after PFE with vengeance after downgrading the stock to Neutral yesterday. Considering that Lipitor accounts for 40-45% of PFE's bottom line, any negative comments will likely further hurt the stock. Must say I was fairly surprised to see the stock go below $24 level in the pre market yesterday but the trade worked out after all. Now lets see if ML can move PFE lower.
Calls of Note Part 2
- JP Morgan notes that after meeting with MCD management (CEO Jim Skinner, COO Ralph Alvarez, and UK President Steve Easterbrook) today, McDonalds (NYSE:MCD) remains their top large cap pick. Firm is encouraged by a combination of mid single digit operating income growth in addition to a sustainable 5%+ FCF yield on F07 estimates, and opportunity for EPS upside from solid comps and margins, favorable FX exposure, and the developmental licensee (DL) program.
The European business (35% of operating income) has improved with solid results in France
and Germany, partially offset by a still volatile, though generally improving UK market. JPM is encouraged by longer-term initiatives such as a new bridge operating platform (to be rolled out late F08), and a simplified global POS system. Cashless payment (by mid F07), continued refranchising (38% in F05 going to 46% in F06) and a focus on premium products should help sales, margins, and returns in the UK market. In addition, favorable currency (they now model the Euro at $1.30) allows the firm to raise their F07 estimate by $0.02 to $2.59 (consensus $2.56).
The company plans to sell 2,300 stores to Int'l licensees with a current asset value of $2.2
billion (about 4% of total equity value). As the timing of the DL remains uncertain on a quarterly basis, both the accretion to operating income and reduction in share count represents potential upside to current expectations.
They rate MCD Overweight. JPM believes the stock will at least maintain its current valuation at 16.4x F07E EPS and will be supported by 6-7% long-term operating income growth, a solid 5.3% cash flow yield, and strong performance in both the U.S. and Europe.
Notablecalls: MCD staged a nice breakout yesterday and I suspect this one may have some legs.
The European business (35% of operating income) has improved with solid results in France
and Germany, partially offset by a still volatile, though generally improving UK market. JPM is encouraged by longer-term initiatives such as a new bridge operating platform (to be rolled out late F08), and a simplified global POS system. Cashless payment (by mid F07), continued refranchising (38% in F05 going to 46% in F06) and a focus on premium products should help sales, margins, and returns in the UK market. In addition, favorable currency (they now model the Euro at $1.30) allows the firm to raise their F07 estimate by $0.02 to $2.59 (consensus $2.56).
The company plans to sell 2,300 stores to Int'l licensees with a current asset value of $2.2
billion (about 4% of total equity value). As the timing of the DL remains uncertain on a quarterly basis, both the accretion to operating income and reduction in share count represents potential upside to current expectations.
They rate MCD Overweight. JPM believes the stock will at least maintain its current valuation at 16.4x F07E EPS and will be supported by 6-7% long-term operating income growth, a solid 5.3% cash flow yield, and strong performance in both the U.S. and Europe.
Notablecalls: MCD staged a nice breakout yesterday and I suspect this one may have some legs.
Calls of Note Part 1
- UBS comments on Apple (NASDAQ:AAPL) saying that according to checks & NPD weekly data, iPod sales seem to be picking up into year-end backing their recently raised estimates. This weekend the firm again visited packed Apple stores & continues to notice that iPod products remain dominant best sellers at Amazon.com & other retailers.
Weekly data that includes Black Friday, already shows sales of Microsoft's new Zune falling off 9% week/week, in line with latest checks (Microsoft fell from 2nd to 5th place in MP3 share w/w). Data (which doesn't include Apple stores) shows iPods up 29% QTD vs. 18% in UBS' model for 1Q07. Data also shows a surge by SanDisk in MP3 share, which will likely be short-lived given a major promotion. Checks also point toward continued momentum in Macs and prospects for higher accessories & software longer-term.
Reits Buy and $108 tgt.
Notablecalls: Not actionable but good to know category.
Weekly data that includes Black Friday, already shows sales of Microsoft's new Zune falling off 9% week/week, in line with latest checks (Microsoft fell from 2nd to 5th place in MP3 share w/w). Data (which doesn't include Apple stores) shows iPods up 29% QTD vs. 18% in UBS' model for 1Q07. Data also shows a surge by SanDisk in MP3 share, which will likely be short-lived given a major promotion. Checks also point toward continued momentum in Macs and prospects for higher accessories & software longer-term.
Reits Buy and $108 tgt.
Notablecalls: Not actionable but good to know category.
Paperstand
„Heard on the Street” column discusses Pfizer (PFE), that lost over $20bn in mkt value yesterday. Article highlights several funds that held, as of Sept 30, over 100m PFE shares. Spokesmen for Dodge & Cox, Fidelity, Alliance and State Farm all declined to comment. In an interview this weekend, David Shedlarz, Pfizer's Vice Chmn, said the torcetrapib failure will put a premium on "focused business development," or smarter, faster deals to bring new drugs into the co's fold. Still, he emphasized these deals wouldn't be done for "short-term financial gain" but instead would only fit with Pfizer if the acquisitions or alliances had "strong strategic merit." Some investors argue, however, that the co may have to pay a large sum for any acquisition that will affect earnings.
Barrons’ “Inside Scoop” section reports that contrarian hedge fund Tontine Mgmt nearly doubled its stake in Dycom (DY) as investors turned leery toward the co. Dycom shares fell as wide as 15% on Nov. 21 after the co's F1Q earnings and guidance missed analysts' ests. Tontine currently holds 3.1m Dycom shares or 7,64% of the co. Tontine's portfolio manager Jeffrey Gendell is "a very successful contrarian and value investor," says Rusty Szurek, of InsiderScore.com. "I think with someone like this stepping up a stake in the co appears to be showing confidence in light of what was perceived as negative results and guidance.
Click here for this morning entertainment.
Monday, December 04, 2006
Calls of Note Part 5
- UBS notes NAND spot pricing has strengthened over the course of the last week and is now once again growing week on week. They believe this could be a near-term positive for shares of SanDisk (NASDAQ:SNDK).
Given suppressed valuation levels and the now rising spot market, the firm beieves the shares could see some momentum, which could be further fueled by market speculation regarding new products going into CES and a potential Apple iPhone going into MacWorld, both events in early January. Firm's Price Target on shares of SNDK is $55.
Although NAND spot is showing encouraging signs of strengthening, they note that their tracking of retail pricing trends is showing precipitous weakening. While this weakening is most likely a reflection of typical holiday promotions, it underscores the competitive pricing pressures being faced by the industry, pricing pressures that they expect to endure into 2006.
Notablecalls: SNDK is a trading stock. Merrill was negative on SNDK on Nov 29 and the stock went down. It then got squeezed higher and now we have some positive comments from UBS. With all the negativity surrounding it I suspect positive comments may work even better.
Given suppressed valuation levels and the now rising spot market, the firm beieves the shares could see some momentum, which could be further fueled by market speculation regarding new products going into CES and a potential Apple iPhone going into MacWorld, both events in early January. Firm's Price Target on shares of SNDK is $55.
Although NAND spot is showing encouraging signs of strengthening, they note that their tracking of retail pricing trends is showing precipitous weakening. While this weakening is most likely a reflection of typical holiday promotions, it underscores the competitive pricing pressures being faced by the industry, pricing pressures that they expect to endure into 2006.
Notablecalls: SNDK is a trading stock. Merrill was negative on SNDK on Nov 29 and the stock went down. It then got squeezed higher and now we have some positive comments from UBS. With all the negativity surrounding it I suspect positive comments may work even better.
Calls of Note Part 4
- Bear Stearns notes they believe that investors with an intermediate term time horizon should
begin to accumulate Texas Instruments (NYSE:TXN) at $29 and below. TXN is trading at 17x 2007 earnings (based on their reduced EPS), close to its past 5 year trough of 16x and at a
discount to its peer group. The lack of near-term catalysts deters the firm from upgrading their rating.
The wireless space in general is plagued by a shift to lower ASP phones, while the analog inventory correction continues. TI is combating the mix shift in wireless with LoCosto, while in analog, they are gaining share in high performance analog as well as exercising great inventory control. Bear thinks that TI is navigating well through some pretty adverse industry circumstances.
The firm is lowering their 4Q06 EPS from $0.43 to $0.41 and 2007 EPS from $1.80 to $1.71. While consensus numbers in print are $0.42 and $1.84 for 4Q06 and 2007, they believe that market expectations are lower. At current levels, they believe that the likelihood of TI lowering the mid-point of its 4Q guidance range on its mid quarter update on 12/11, as well as the risk of 2007 consensus estimates being lowered, are priced in. The downside to TI's wireless business (because of shift to lower end phones) and to its analog business for 4Q06 as well as 1Q07 are well understood by investors.
Maintains Peer Perform.
Notablecalls: As regular readers know I continue to be bearish on TXN. I don't think Bear's call makes much sense as things are likely to continue to worsen in the medium-term. There may be a trade there after the mid-qtr update, though.
begin to accumulate Texas Instruments (NYSE:TXN) at $29 and below. TXN is trading at 17x 2007 earnings (based on their reduced EPS), close to its past 5 year trough of 16x and at a
discount to its peer group. The lack of near-term catalysts deters the firm from upgrading their rating.
The wireless space in general is plagued by a shift to lower ASP phones, while the analog inventory correction continues. TI is combating the mix shift in wireless with LoCosto, while in analog, they are gaining share in high performance analog as well as exercising great inventory control. Bear thinks that TI is navigating well through some pretty adverse industry circumstances.
The firm is lowering their 4Q06 EPS from $0.43 to $0.41 and 2007 EPS from $1.80 to $1.71. While consensus numbers in print are $0.42 and $1.84 for 4Q06 and 2007, they believe that market expectations are lower. At current levels, they believe that the likelihood of TI lowering the mid-point of its 4Q guidance range on its mid quarter update on 12/11, as well as the risk of 2007 consensus estimates being lowered, are priced in. The downside to TI's wireless business (because of shift to lower end phones) and to its analog business for 4Q06 as well as 1Q07 are well understood by investors.
Maintains Peer Perform.
Notablecalls: As regular readers know I continue to be bearish on TXN. I don't think Bear's call makes much sense as things are likely to continue to worsen in the medium-term. There may be a trade there after the mid-qtr update, though.
Calls of Note Part 3
- UBS comments on IBM (NYSE:IBM) saying their checks thus far in 4Q06 point to sequential and y/y improvement in long-term services bookings, above initial expectations. Firm is raising their bookings estimate for 4Q06 to $13-$14B (from $12-$13B) given benefits from push-outs & some large deals.
While still early, checks also indicate hardware may benefit from pent-up demand for Series p servers as well as strength in storage & microelectronics, while software again is likely benefiting acquisitions. In services, they are still concerned about short-term trends and estimate about 3% overall bookings growth long-term.
UBS is maintaining their 4Q06 EPS estimate of $2.20 based on revenue growth 7%. 06 estimate remains $6.02 reflecting flat revenues of $91.4B. For '07 their estimate is $6.62 based on 4% revenue growth y/y. 08 EPS estimate remains $7.25 based on revenue growth of 3%.
Given some improvement in signings & progress in other segments they are raising their target modestly for IBM to $100 from $94. Notes that the shares could see some potential momentum into the January earnings report. Rating: Neutral.
Notablecalls: Not actionable but good to know category.
While still early, checks also indicate hardware may benefit from pent-up demand for Series p servers as well as strength in storage & microelectronics, while software again is likely benefiting acquisitions. In services, they are still concerned about short-term trends and estimate about 3% overall bookings growth long-term.
UBS is maintaining their 4Q06 EPS estimate of $2.20 based on revenue growth 7%. 06 estimate remains $6.02 reflecting flat revenues of $91.4B. For '07 their estimate is $6.62 based on 4% revenue growth y/y. 08 EPS estimate remains $7.25 based on revenue growth of 3%.
Given some improvement in signings & progress in other segments they are raising their target modestly for IBM to $100 from $94. Notes that the shares could see some potential momentum into the January earnings report. Rating: Neutral.
Notablecalls: Not actionable but good to know category.
Calls of Note Part 2
- Goldman Sachs is adding iStar Financial (NYSE:SFI) to the Americas Conviction Buy List as the believe the co offers best-in-class earnings reliability, but the market has yet to grant it the premium multiple that it deserves, even after recent strong performance.
Additionally, the firm anticipates corporate credit spreads widening, and iStar is unique among Commercial Finance companies in demonstrating a positive and reliable relationship between relative share price performance and spreads; they attribute this important relationship to iStar's almost pristine credit record. GS's DDM-derived 3-month price target ($62) assumes only 3% constant growth yet implies over 30% upside, incremental to the current 6.6% dividend yield.
Catalyst Near-term: they expect iStar's inaugural investor day (this Wednesday, December 6th, 2006) to be a positive catalyst, providing management a platform from which to clearly articulate strategic direction and, potentially, any new opportunities for diversification and growth. Longer-term, they anticipate widening corporate credit spreads to catalyze relative share price appreciation.
Notablecalls: Expect to see a move but keep it on a very tight leash. Action looks toppish to me.
Additionally, the firm anticipates corporate credit spreads widening, and iStar is unique among Commercial Finance companies in demonstrating a positive and reliable relationship between relative share price performance and spreads; they attribute this important relationship to iStar's almost pristine credit record. GS's DDM-derived 3-month price target ($62) assumes only 3% constant growth yet implies over 30% upside, incremental to the current 6.6% dividend yield.
Catalyst Near-term: they expect iStar's inaugural investor day (this Wednesday, December 6th, 2006) to be a positive catalyst, providing management a platform from which to clearly articulate strategic direction and, potentially, any new opportunities for diversification and growth. Longer-term, they anticipate widening corporate credit spreads to catalyze relative share price appreciation.
Notablecalls: Expect to see a move but keep it on a very tight leash. Action looks toppish to me.
Calls of Note Part 1
- Merrill Lynch notes that Alpharma (NYSE:ALO) will host an analyst meeting on December 13th in NYC, during which new CEO Dean Mitchell (started 7/1) will present for the first time the results of the company's recent strategic review and release '07 guidance. Given the stock's discount relative to the group ('07E EV/EBITDA of 6x vs. 11x), they believe the shares could bounce 10-15% if management announces actions that could enhance shareholder value.
Firm remains concerned that the growth of Kadian, ALO's only branded product (for pain), has moderated, and that a patent challenge is possible at any time. While ALO could launch the next-generation Kadian NT before a generic hit, the pain space will become increasingly competitive in the coming years. However, they note that concerns surrounding Kadian are well understood by investors. Looking ahead, management appears to be very focused on acquiring a product to better leverage the existing sales force (in pain or related area).
ALO's two other businesses, Animal Health (53% of '06E sales, primarily medicated feed additives) and Active Pharmaceutical Ingredients (26% of sales), are difficult to model and tend to be viewed by investors as commodity-like, lower growth businesses subject to margin swings. As a result, management may decide to provide more tangible targets and drivers for these businesses, which could potentially lead to improved investor perception. It is also possible that management could sell or spin one or both of these businesses, or seek other alternatives.
Notablecalls: Expect to see buy interest in ALO following the call. Somewhat similar to ML's call on PRX on Oct 12 (see archives).
Firm remains concerned that the growth of Kadian, ALO's only branded product (for pain), has moderated, and that a patent challenge is possible at any time. While ALO could launch the next-generation Kadian NT before a generic hit, the pain space will become increasingly competitive in the coming years. However, they note that concerns surrounding Kadian are well understood by investors. Looking ahead, management appears to be very focused on acquiring a product to better leverage the existing sales force (in pain or related area).
ALO's two other businesses, Animal Health (53% of '06E sales, primarily medicated feed additives) and Active Pharmaceutical Ingredients (26% of sales), are difficult to model and tend to be viewed by investors as commodity-like, lower growth businesses subject to margin swings. As a result, management may decide to provide more tangible targets and drivers for these businesses, which could potentially lead to improved investor perception. It is also possible that management could sell or spin one or both of these businesses, or seek other alternatives.
Notablecalls: Expect to see buy interest in ALO following the call. Somewhat similar to ML's call on PRX on Oct 12 (see archives).
Color on news: Pfizer (NYSE:PFE)
Several firms are commenting on Pfizer (NYSE:PFE) after the company announced discontinued development of torcetrapib, its most important pipeline product. This comes after the DSMB found a higher number of deaths (82 vs 51) in the torcetrapib arm of its phase III program.
- Bear Stearns notes that torcetrapib (T) was positioned to extend PFE's Lipitor (L) franchise exclusivity beyond 2011. PFE's lead CETP back-up, CP-800,569 has shown robust HDL elevation/LDL lowering without increased blood pressure in Phase I; but is not expected to enter Ph-3 until 2009. (L) accounts for ~30%/~45% of '07 sales/EPS & ~17% ($4.70) of PFE's DCF value.
The firm removed global (L+T) '11/'12 sales of $3B & $4B from their model. 5-yr ('06-'11) sales &
EPS CAGR's went to 1.6% & 4.8% from 2.3% & 5.6%. In the past 12 months, their 5-yr incremental pharma sales declined to $3.4B from $9.1B. The loss of (L+T) places added pressure on incremental revenues, increasing PFE's need to consider a larger, strategically driven acquisition.
They expect PFE to increase its dividend in the near term. If one assumes a +22% dividend increase (relative to a +17% average over last 10yrs & +26% announced 12/12/05) corresponds to a $1.17 annual dividend (55% payout ratio), & 4.2% yield on Friday's close (current yield 3.4%).
Reits Outperform and $32 tgt due to valuation.
- JP Morgan is downgrading PFE shares from Overweight to Neutral. The shocking revelation that torcetrapib development has been terminated owing to "an imbalance of mortality and cardiovascular events" engenders a litany of challenging questions and uncertainties that they expect to tether share performance for the near to intermediate term.
Firm's DCF analysis reveals an implied value for torcetrapib ranging from $3.49-$5.49 per share, while we see a more tempered share response, perhaps with initial downside in the range of 8-10%. Though indirect proxies, a review of other recent major negative events on drug stock performance suggests roughly a three-month period before recovery of shares to pre-event levels:
Merck and the Vioxx withdrawal (September 30, 2004); Pfizer and the release of data suggesting (admitting that) the COX-2 Celebrex was also associated with some evidence of increased cardiovascular risk (December 17, 2004); and Biogen-Idec and the removal of Tysabri from the market (February 28, 2005). In the weeks following these events, share prices continued to decline. However, following approximately 30 trading days (one and a half months), shares began to recover; and by just over 60 trading days (3 months), shares had returned to levels seen the day after the event.
Reassuring points worth bearing in mind: 1) there is time, with no near-term negative impact to earnings expected through 2009; 2) PFE is very well-equipped (with a sizable cash hoard) to address filling the anticipated post-Lipitor patent expiry hole.
- Banc of America notes that despite the setback, they are maintaining their Buy rating as the firm believes the remainder of Pfizer's pipeline and the company's cost-cutting abilities are underappreciated by the market. However, the firm is lowering their price target by $3 to $28 and expects shares to be under pressure today.
Firm estimates torcetrapib's value at $2-3/shr for Pfizer assuming sales and margins in the range of Lipitor. They have removed '10 sales ($1.3 billion) from their model, reducing 2010E EPS by $0.09 to $2.28.
BAC believes that Pfizer will seek to manage its earnings gap through quickened cost-cutting initiatives, which could account for upside to their cost-cutting forecasts that wthey have kept unchanged, for now. The firm also believes that Pfizer could intensify its M&A strategy to further build out its new product portfolio. With $15 billion in annual free cash flow, Pfizer has the financial flexibility to both raise its dividend and pursue an expanded M&A strategy.
If shares drop more than $3-4, or below $23-24, the firm believes that Pfizer shares would offer an attractive entry point that essentially would provide investors with an inexpensive call option on Pfizer's emerging pipeline and reflect considerable investor uncertainty on Pfizer's future sources of growth. If Pfizer shares were to drop to $23-24, its dividend yield would be in the 4% range, compared to the 5.5% floor levels for Bristol upon generic Plavix 'at risk' entry and Merck after the Vioxx withdrawal. They also believe Pfizer could boost its dividend another 15% next week, translating into nearly a 5% yield.
Notablecalls: I would be looking to buy PFE around the $24 level in the pre mkt as even the downgrades include supportive arguments. But it's going to be just a trade. I tend to believe PFE will be dead money for an extended period.
- Bear Stearns notes that torcetrapib (T) was positioned to extend PFE's Lipitor (L) franchise exclusivity beyond 2011. PFE's lead CETP back-up, CP-800,569 has shown robust HDL elevation/LDL lowering without increased blood pressure in Phase I; but is not expected to enter Ph-3 until 2009. (L) accounts for ~30%/~45% of '07 sales/EPS & ~17% ($4.70) of PFE's DCF value.
The firm removed global (L+T) '11/'12 sales of $3B & $4B from their model. 5-yr ('06-'11) sales &
EPS CAGR's went to 1.6% & 4.8% from 2.3% & 5.6%. In the past 12 months, their 5-yr incremental pharma sales declined to $3.4B from $9.1B. The loss of (L+T) places added pressure on incremental revenues, increasing PFE's need to consider a larger, strategically driven acquisition.
They expect PFE to increase its dividend in the near term. If one assumes a +22% dividend increase (relative to a +17% average over last 10yrs & +26% announced 12/12/05) corresponds to a $1.17 annual dividend (55% payout ratio), & 4.2% yield on Friday's close (current yield 3.4%).
Reits Outperform and $32 tgt due to valuation.
- JP Morgan is downgrading PFE shares from Overweight to Neutral. The shocking revelation that torcetrapib development has been terminated owing to "an imbalance of mortality and cardiovascular events" engenders a litany of challenging questions and uncertainties that they expect to tether share performance for the near to intermediate term.
Firm's DCF analysis reveals an implied value for torcetrapib ranging from $3.49-$5.49 per share, while we see a more tempered share response, perhaps with initial downside in the range of 8-10%. Though indirect proxies, a review of other recent major negative events on drug stock performance suggests roughly a three-month period before recovery of shares to pre-event levels:
Merck and the Vioxx withdrawal (September 30, 2004); Pfizer and the release of data suggesting (admitting that) the COX-2 Celebrex was also associated with some evidence of increased cardiovascular risk (December 17, 2004); and Biogen-Idec and the removal of Tysabri from the market (February 28, 2005). In the weeks following these events, share prices continued to decline. However, following approximately 30 trading days (one and a half months), shares began to recover; and by just over 60 trading days (3 months), shares had returned to levels seen the day after the event.
Reassuring points worth bearing in mind: 1) there is time, with no near-term negative impact to earnings expected through 2009; 2) PFE is very well-equipped (with a sizable cash hoard) to address filling the anticipated post-Lipitor patent expiry hole.
- Banc of America notes that despite the setback, they are maintaining their Buy rating as the firm believes the remainder of Pfizer's pipeline and the company's cost-cutting abilities are underappreciated by the market. However, the firm is lowering their price target by $3 to $28 and expects shares to be under pressure today.
Firm estimates torcetrapib's value at $2-3/shr for Pfizer assuming sales and margins in the range of Lipitor. They have removed '10 sales ($1.3 billion) from their model, reducing 2010E EPS by $0.09 to $2.28.
BAC believes that Pfizer will seek to manage its earnings gap through quickened cost-cutting initiatives, which could account for upside to their cost-cutting forecasts that wthey have kept unchanged, for now. The firm also believes that Pfizer could intensify its M&A strategy to further build out its new product portfolio. With $15 billion in annual free cash flow, Pfizer has the financial flexibility to both raise its dividend and pursue an expanded M&A strategy.
If shares drop more than $3-4, or below $23-24, the firm believes that Pfizer shares would offer an attractive entry point that essentially would provide investors with an inexpensive call option on Pfizer's emerging pipeline and reflect considerable investor uncertainty on Pfizer's future sources of growth. If Pfizer shares were to drop to $23-24, its dividend yield would be in the 4% range, compared to the 5.5% floor levels for Bristol upon generic Plavix 'at risk' entry and Merck after the Vioxx withdrawal. They also believe Pfizer could boost its dividend another 15% next week, translating into nearly a 5% yield.
Notablecalls: I would be looking to buy PFE around the $24 level in the pre mkt as even the downgrades include supportive arguments. But it's going to be just a trade. I tend to believe PFE will be dead money for an extended period.
Paperstand
The WSJ reprots that the partnership formed by Carl Icahn in his effort to acquire Reckson Associates (RA) unraveled over the weekend. But the REIT said Mr. Icahn insists he is prepared to move forward alone with his bid. Harry Macklowe, a New York real-estate developer, pulled out of the partnership with Mr. Icahn yesterday. That followed the withdrawal of Mack-Cali Realty (CLI) from the partnership on Saturday.
According to the WSJ, Qualcomm (QCOM) is buying two chip businesses that could take the co into new wireless mkts and strengthen its position against Intel and other rivals. The co is buying closely held Airgo Networks, a start-up that specializes in WiFi. Qualcomm is also buying some operations of RF Micro Devices (RFMD), which makes Bluetooth.
The WSJ reports that forecasts being released this week suggest that the tough ad mkt experienced this year is likely to worsen in ‘07. Not only will marketers continue to shift dollars from traditional media to emerging venues such as the Internet, possibly at a slightly reduced rate, but audience fragmentation will make it harder for media outlets to win price increases. At least that is the view of Merrill Lynch and media buyers ZenithOptimedia and GroupM. Each predicts growth in total ad spending will slow next year in the US and world-wide. Publicis Groupe’s Zenith and WPP Group’s GroupM are issuing their forecasts at investor conferences that start today.
“Heard on the Street” column discusses AXA (AXA), suggesting that investors could profit handsomely with the stock. Co’s CEO Henri de Castries last year told investors that by 2012 the co would double ‘04 rev and triple that year's underlying earnings. Those are big numbers considering the co reported more than $139bn in total rev last year. That was tops among insurers and among the highest pocketed by public co’s world-wide. To reach those goals, the co has said it has to raise its earnings at about a 15% annual clip. In an 87-page presentation in Oct, Mr. de Castries listed the specific growth and mkt returns that would be needed, without factoring in acquisitions. The co's assumptions, such as 3-5% annual growth in property-casualty rev and 5-10% annual growth in sales of life insurance and savings products, aren't heroic. "I'd say they probably will achieve their 2012 targets," says Nicholas Byrne, of JP Morgan. Mr. Byrne rates the stock a Buy and the co is his firm's top pick for this year in insurance.
Sunday, December 03, 2006
Barron's Summary
Barron’s cover discusses IBM (IBM), which is reinventing itself again under CEO Samuel Palmisano. It's shed its disk-drive and PC businesses to focus on less volatile operations with fatter margins, and has boosted productivity by slashing costs and spreading facilities around the globe. But, the roster of bulls on the stock has shrunk since the horrible 1Q05, when the co badly missed earnings forecasts. Today, even after a hearty rebound from its summer low of 72.73, IBM trades at 15x earnings. Compare that with 25x for EMC (EMC), 23 for DELL (DELL), and 20 for MSFT, the only software co larger than IBM. One bull sees the stock going up to $105, another sees the stock outperforming mkt at least 10-15% in coming years.
Fund manager likes FMD, AMG, PRAA, CCRT, COF, RNR and TNCC.
By skimming the top holdings of the most acclaimed stockpickers, an investor can assemble a best-ideas portfolio without paying hedge-fund mgmt fees. Barron’s has identified 5 well-regarded hedge funds whose investment moves are closely scrutinized. These leaders are Appaloosa Mgmt, Greenlight Capital, Lone Pine Capital, ESL Investment Mgmt and Icahn Partners. These funds largest holdings include: ORCL, MU, AMAT, SHLD, AZO, AN, AMP, MSFT, HSP, TWX, IMCL, ARII. Recent additions include: AMR, FDC, HLT, SLB. Recent sale include: MIR, LYV, SYMC, RIMM.
After the spinoff, Duke Energy (DUK) could trade for $23 and change; Spectra, for $16.45, one analyst says. Together, the 2 co’s will maintain the current payout, $1.28 a share.
Follow Up section discusses DirecTV (DTV). At about 18x estd '07 earnings, DirecTV "is undervalued," says Templeton Investments analyst Matthew Nagle. Longer-term, he says, the stock is worth at least 10% more than its current price.
Fund manager likes FMD, AMG, PRAA, CCRT, COF, RNR and TNCC.
By skimming the top holdings of the most acclaimed stockpickers, an investor can assemble a best-ideas portfolio without paying hedge-fund mgmt fees. Barron’s has identified 5 well-regarded hedge funds whose investment moves are closely scrutinized. These leaders are Appaloosa Mgmt, Greenlight Capital, Lone Pine Capital, ESL Investment Mgmt and Icahn Partners. These funds largest holdings include: ORCL, MU, AMAT, SHLD, AZO, AN, AMP, MSFT, HSP, TWX, IMCL, ARII. Recent additions include: AMR, FDC, HLT, SLB. Recent sale include: MIR, LYV, SYMC, RIMM.
After the spinoff, Duke Energy (DUK) could trade for $23 and change; Spectra, for $16.45, one analyst says. Together, the 2 co’s will maintain the current payout, $1.28 a share.
Follow Up section discusses DirecTV (DTV). At about 18x estd '07 earnings, DirecTV "is undervalued," says Templeton Investments analyst Matthew Nagle. Longer-term, he says, the stock is worth at least 10% more than its current price.
Friday, December 01, 2006
Calls of Note Part 4
Thomas Weisel notes says their checks with 40 retailers indicate that Garmin (NASDAQ:GRMN) has dropped retail prices across the automotive line by $50-100, with rebates given for existing unsold inventory at wholesalers. The early discounting highlights just how competitive the category is becoming. For example, the Nuvi 350, which had been selling for $799 at Best Buy in June, is now available for $699.99, with another $100 coming off the price with the current round of discounting.
Firm's sources indicate that in response to Garmin's move, TomTom is going to double its $50 rebate to $100 and extend the rebate period to January 7, 2007, from December 3, 2006. Customer support at TomTom has confirmed that the discount is being increased, but did not specify the new rebate amount. The discount is apparently for all TomTom products and brings the price of TomTom One down to $399.99 from $499.99. Firm expects the new rebate to be available in stores over the next seven days.
Firm views the discounting by Garmin primarily as an aggressive stance to protect market share, and not a sign of overall weak demand. Their post-Thanksgiving checks of 45 U.S. retailers indicated that demand for personal navigation devices (PNDs) was robust, with promotional Thanksgiving items selling out quickly, and Garmin products, particularly the c340 and Nuvi 660 the top sellers. Our checks also indicate that the low-cost TomTom One appears to be gaining traction at retailers, as the attractive price point and $50 rebates appear to have hit the mark. Checks also indicate a higher return rate for the TomTom One, however, due to a software glitch that leads to non-responsive systems.
Notablecalls: Good to hear about the demand, not so good to hear about the rebates. Overall, see it as net neutral, so labeling it not actionable but good to know.
Firm's sources indicate that in response to Garmin's move, TomTom is going to double its $50 rebate to $100 and extend the rebate period to January 7, 2007, from December 3, 2006. Customer support at TomTom has confirmed that the discount is being increased, but did not specify the new rebate amount. The discount is apparently for all TomTom products and brings the price of TomTom One down to $399.99 from $499.99. Firm expects the new rebate to be available in stores over the next seven days.
Firm views the discounting by Garmin primarily as an aggressive stance to protect market share, and not a sign of overall weak demand. Their post-Thanksgiving checks of 45 U.S. retailers indicated that demand for personal navigation devices (PNDs) was robust, with promotional Thanksgiving items selling out quickly, and Garmin products, particularly the c340 and Nuvi 660 the top sellers. Our checks also indicate that the low-cost TomTom One appears to be gaining traction at retailers, as the attractive price point and $50 rebates appear to have hit the mark. Checks also indicate a higher return rate for the TomTom One, however, due to a software glitch that leads to non-responsive systems.
Notablecalls: Good to hear about the demand, not so good to hear about the rebates. Overall, see it as net neutral, so labeling it not actionable but good to know.
Color on Quarter: OmniVision (NASDAQ:OVTI)
Several firms commenting Omnivision (NASDAQ:OVTI) following disappointing qtr and guidance.
- ThinkEquity notes that while units grew 12% sequentially in the October quarter, ASPs saw a roughly 10% decline. ASPs and gross margins were impacted by a combination of mix shift to low-end VGA and pricing pressure. VGA represented nearly two-thirds of camera phone units for OVTI in the October quarter, up from less than half in the prior quarter.
Firm says there was some notice of shortfall, but commentary on pricing pressure was somewhat worse than expected. GM slide to continue as pricing pressure accelerates near term. ASPs are likely to continue to fall faster than what OVTI deems as "normal" (20%-25% per year). Even with a shift to a higher mix of MP in the January quarter, firm believes pricing pressure in the MP segment is strong enough to drive ASP and gross margins lower.
- Baird downgrading OVTI to Underperform and cutting price target to $10 on the basis of very poor gross margin guidance, which firm believes could continue to deteriorate in outer quarters. Competition from Samsung and MediaTek in mainland China is driving very aggressive ASP declines, leading them to question OmniVision's long-term business model given the company's cost disadvantage (fabless) and lack of product breadth (no PSRAM/NAND flash).
Firm notes inventories up 51% amid weak guidance, creating inventory write-down risk. ASPs down 10% sequentially represent the third consecutive double-digit decline. Fabless model is creating a 20% gross margin disadvantage for OmniVision, per firm's checks. Also, per their checks, Wavefront Coding technology is facing significant image quality issues.
- Piper notes that despite a 12.1% Q/Q increase in unit shipment (from 58MM to 65MM units), 2QF07 results were light due to falling CIS prices and unfavorable product mix. Product mix in F2Q was dominated by VGA sensors for low-end mobile handsets, which grew to represent two-thirds of total shipment, up from 50%+ in prior quarters. Sales of mobile phones also grew to represent ~85% of the quarter's total revenue. Sales of digital camera products declined to represent just ~5% of revenue, down from ~10% in the prior quarter.
Notablecalls: Let's do some math: non-VGA units actually DECREASED to 65MM * 1/3 = ~22MM units from 58MM * 1/2 = 29MM units. Digital camera products also declined. So it's basically VGA that kept up the revenue, which makes me wonder if even this guidance is too aggressive given the pricing pressure. Longer-term, don't see anything too compelling either. Doing business in a sector that's turning into to commodity with disadvantageous fabless model doesn't look very promising. Expecting the stock see lower levels than the $15.10-$15.15 close in the A-H.
- ThinkEquity notes that while units grew 12% sequentially in the October quarter, ASPs saw a roughly 10% decline. ASPs and gross margins were impacted by a combination of mix shift to low-end VGA and pricing pressure. VGA represented nearly two-thirds of camera phone units for OVTI in the October quarter, up from less than half in the prior quarter.
Firm says there was some notice of shortfall, but commentary on pricing pressure was somewhat worse than expected. GM slide to continue as pricing pressure accelerates near term. ASPs are likely to continue to fall faster than what OVTI deems as "normal" (20%-25% per year). Even with a shift to a higher mix of MP in the January quarter, firm believes pricing pressure in the MP segment is strong enough to drive ASP and gross margins lower.
- Baird downgrading OVTI to Underperform and cutting price target to $10 on the basis of very poor gross margin guidance, which firm believes could continue to deteriorate in outer quarters. Competition from Samsung and MediaTek in mainland China is driving very aggressive ASP declines, leading them to question OmniVision's long-term business model given the company's cost disadvantage (fabless) and lack of product breadth (no PSRAM/NAND flash).
Firm notes inventories up 51% amid weak guidance, creating inventory write-down risk. ASPs down 10% sequentially represent the third consecutive double-digit decline. Fabless model is creating a 20% gross margin disadvantage for OmniVision, per firm's checks. Also, per their checks, Wavefront Coding technology is facing significant image quality issues.
- Piper notes that despite a 12.1% Q/Q increase in unit shipment (from 58MM to 65MM units), 2QF07 results were light due to falling CIS prices and unfavorable product mix. Product mix in F2Q was dominated by VGA sensors for low-end mobile handsets, which grew to represent two-thirds of total shipment, up from 50%+ in prior quarters. Sales of mobile phones also grew to represent ~85% of the quarter's total revenue. Sales of digital camera products declined to represent just ~5% of revenue, down from ~10% in the prior quarter.
Notablecalls: Let's do some math: non-VGA units actually DECREASED to 65MM * 1/3 = ~22MM units from 58MM * 1/2 = 29MM units. Digital camera products also declined. So it's basically VGA that kept up the revenue, which makes me wonder if even this guidance is too aggressive given the pricing pressure. Longer-term, don't see anything too compelling either. Doing business in a sector that's turning into to commodity with disadvantageous fabless model doesn't look very promising. Expecting the stock see lower levels than the $15.10-$15.15 close in the A-H.
Calls of Note Part 3
Merrill Lynch commenting Advanced Micro Devices' (NYSE:AMD) mobile plans, saying that success in the mobile processor business is critical to AMD's future. AMD still appears on track to launch a 65nm version of its existing Turion mobile part in Q2 of next year, followed by a complete redesign to be launched late in 2007. The highly integrated Fusion product looks interesting, but will need 45nm process technology and as such won't be shipping until mid-2008 at the earliest.
Firm think that AMD can take some additional market share in mobile next year, perhaps moving to 20% as compared to 17% for the most recent quarter. However, they think getting further than that will be tough, at least until 2008. AMD does not have the clear product advantages in mobile that it enjoyed in desktop and server during 2005 and early 2006. On the right track, but fully valued even given additional share gain in desktop and server next year.
AMD certainly deserves credit as a market share gainer, but firm still struggle to see how we make money on the stock for the intermediate term. Their work suggests that combined AMD/ATI earnings will be in the $0.72 range for 2007, which doesn't make the stock look compelling at $21.
Notablecalls: Not actionable but good to know category.
Firm think that AMD can take some additional market share in mobile next year, perhaps moving to 20% as compared to 17% for the most recent quarter. However, they think getting further than that will be tough, at least until 2008. AMD does not have the clear product advantages in mobile that it enjoyed in desktop and server during 2005 and early 2006. On the right track, but fully valued even given additional share gain in desktop and server next year.
AMD certainly deserves credit as a market share gainer, but firm still struggle to see how we make money on the stock for the intermediate term. Their work suggests that combined AMD/ATI earnings will be in the $0.72 range for 2007, which doesn't make the stock look compelling at $21.
Notablecalls: Not actionable but good to know category.
Calls of Note Part 2
Prudential out on aluminum market, noting that four separate accidents killed 85 Chinese coal mine workers November 25-27, and 3,726 died in 2,300 separate reported coal mine incidents in the first ten months of this year. Government officials vowed publicly to enforce safety regulations and punish lax or corrupt local officials.
Firm estimates that almost 90% of the coal output generates electricity and the remainder supplies steelmaking. Electricity shortages or reallocation may occur if coal output slows, and Chinese economic growth could slow. Chinese power rates and world coal prices would rise if China uses more imported coal after shutting some of its own mines.
Strict coal mine safety enforcement could cause recent 20% Chinese aluminum output growth rate to slow or even reverse. In 2006 China's 1.5 mmt output gain supplied most of the world's 2.25-2.50 mmt global aluminum consumption gain.
A plausible scenario would be for world metals consumption to fall 1%-2% short of expectations in 2007, spot coal prices to rise an extra $5-$10 per ton, and aluminum supply to fall 2.5% short causing an extra $0.25 per pound rise in aluminum prices.
Notablecalls: While Pru goes on to discuss the impact of aluminium price hike on Alcoa (NYSE:AA), I'd rather keep an eye on Century Aluminium (NASDAQ:CENX). In addition to being more volatile stock, the co is more leveraged to aluminium prices. Note that Merrill is out with an initiation of CENX with Neutral rating, saying that for every one cent change in the price of aluminium, CENX' EPS changes $0.15/sh. $0.25 price change would then account for $3.75/sh addition to EPS. Might consider it as a swing trade.
Firm estimates that almost 90% of the coal output generates electricity and the remainder supplies steelmaking. Electricity shortages or reallocation may occur if coal output slows, and Chinese economic growth could slow. Chinese power rates and world coal prices would rise if China uses more imported coal after shutting some of its own mines.
Strict coal mine safety enforcement could cause recent 20% Chinese aluminum output growth rate to slow or even reverse. In 2006 China's 1.5 mmt output gain supplied most of the world's 2.25-2.50 mmt global aluminum consumption gain.
A plausible scenario would be for world metals consumption to fall 1%-2% short of expectations in 2007, spot coal prices to rise an extra $5-$10 per ton, and aluminum supply to fall 2.5% short causing an extra $0.25 per pound rise in aluminum prices.
Notablecalls: While Pru goes on to discuss the impact of aluminium price hike on Alcoa (NYSE:AA), I'd rather keep an eye on Century Aluminium (NASDAQ:CENX). In addition to being more volatile stock, the co is more leveraged to aluminium prices. Note that Merrill is out with an initiation of CENX with Neutral rating, saying that for every one cent change in the price of aluminium, CENX' EPS changes $0.15/sh. $0.25 price change would then account for $3.75/sh addition to EPS. Might consider it as a swing trade.
Calls of Note Part 1
Friedman, Billings, Ramsey out with a very interesting piece on Dell (NASDAQ:DELL), saying that their analysis of Dell's warranty accruals points to at least three troubling conclusions.
First, it appears that Dell regularly uses warranty accruals to materially manage margins and earnings, rendering the reported results less useful for gauging actual margin trends.
Second, as of the last quarter for which a 10Q is available, the cost of actual claims as a percentage of product sales was rising steadily - up 30% YOY in FY06, reducing cash gross margin by 60bps - and costs may be heading higher.
Third, Dell's warranty disclosure is unusual, possibly unique, making it difficult to identify Dell's warranty accruals using only Dell's SEC filings. For this reason, firm believes this information is not in the consensus, and that restatements of earnings may be coming if this turns out to be one of the issues currently under SEC investigation.
Firm estimates that under-accrual for warranties has caused EPS overstatement of 2-8 cents in five of the last 12 quarters for which data is available. As of F1Q07, warranty cash costs were running at 46% of the warranty reserve, compared to 27% for HP and 13% for EMC. The evident trend is overstatement of gross margins since CY3Q03.
Notablecalls: Very interesting! If the warranties were the case in the last qtr (Oct) as well, don't think the stock should trade as high as it does. So much about the margin improvement.. Thunk DELL is heading lower near-term as the issue gets traction on the Street.
First, it appears that Dell regularly uses warranty accruals to materially manage margins and earnings, rendering the reported results less useful for gauging actual margin trends.
Second, as of the last quarter for which a 10Q is available, the cost of actual claims as a percentage of product sales was rising steadily - up 30% YOY in FY06, reducing cash gross margin by 60bps - and costs may be heading higher.
Third, Dell's warranty disclosure is unusual, possibly unique, making it difficult to identify Dell's warranty accruals using only Dell's SEC filings. For this reason, firm believes this information is not in the consensus, and that restatements of earnings may be coming if this turns out to be one of the issues currently under SEC investigation.
Firm estimates that under-accrual for warranties has caused EPS overstatement of 2-8 cents in five of the last 12 quarters for which data is available. As of F1Q07, warranty cash costs were running at 46% of the warranty reserve, compared to 27% for HP and 13% for EMC. The evident trend is overstatement of gross margins since CY3Q03.
Notablecalls: Very interesting! If the warranties were the case in the last qtr (Oct) as well, don't think the stock should trade as high as it does. So much about the margin improvement.. Thunk DELL is heading lower near-term as the issue gets traction on the Street.
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