Wednesday, May 02, 2007

Navteq (NYSE:NVT): Headwinds looming on the horizon?

While most firms are positive on Navteq (NYSE:NVT) after the co issued stronger than expected Q1 results, we have one large firm issuing negative comments:

- Deutsche Bank thinks the Street will be excited by the comfortable beat in this quarter and the positive momentum in the business given the strong results from 2H06. However they caution against such optimism especially since the core in-dash segment (60% of revenues) is delivering just single digit unit growth (8% in 1Q-07) and some of the foundations of the 1Q-07 results (e.g. capturing December PND royalty revenues and $2.7mn delayed internet revenues in 1Q-07, delaying op-ex spending into 2Q and the loss of TomTom), are suggesting more challenging quarters ahead. The performance in the seasonally weaker 2Q & 3Q periods might underperform already high expectations (est. 72% & 66% Y/Y growth in PND units in 2Q & 3Q).

DB think the sudden loss of the Tom Tom contract just a few months into the deal was the result of significant price competition from Tele Atlas. They estimate these units at ~1.0 - 1.5mn units in FY07 or ~$25mn in revenues for Navteq. Importantly it indicates that we are still in a very price competitive market despite its duopolistic nature and that firm's estimated ASP decline of ~9% Y/Y in 2007 (ex-FX) may be conservative.

Total 1Q-07 in-dash auto units increased by just 8% Y/Y, equal to its slowest rate of growth posted in 3Q-06 and far less than previous quarter's performance of high teens to 20%+ growth rates.

Reits Sell with a new $30 tgt that values Navteq at 24x firm's new FY07E EPS of $1.26 which represents a 50%+ premium to their expectations of 15-20% avg. earnings growth over the next 2-3 years. This is a slight premium to its close comparable Getty Images (GYI: trades at 19x 07E EPS), justified given Navteq's slightly faster growth rates.

Notablecalls: Well, it looks like some of the revenue upside was spill-over from Q4. Some investors and analysts will adjust their models to account for the stronger growth in Q1 and we may end up with a situation where Q2-Q3 estimates become too high for the co to meet or beat. Also, the growth in the core in-dash auto business is decelerating considerably. The loss of the Tom Tom business will not hurt much, but does indicate pricing pressures.

Even Bear Stearns' Peter Barry, the biggest NVT bull on the Street noted this morning that headwinds may loom on the horizon. He does however maintain his Outperform rating on the stock hoping that by 2008, the company will begin to have material revenue from cell phone service providers, and from dynamic content. That may of course, be already reflected in the valuation, with the stock trading 2x its growth rate.

I suspect there's a fair chance that the initial positive reaction in NVT stock may be fadeable today. The stock has had trouble overcoming the $38 level in the past and I think that's your leash. Note that the last prints in after hrs were around $37.50.

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