notablecalls@gmail.com
Friday, June 29, 2007
Paperstand (MS, T, TMO, SONS)
The WSJ’s „Heard on the Street” column highlights Discover Financial Services, which is being spun off from Morgan Stanley (MS) next week. The co is dwarfed by rival card processors Visa and MasterCard. It holds $51bn in credit-card loans, less than half that of behemoth issuers like BofA, JP Morgan and Citigroup. It generates less spending on those cards than American Express and has little presence outside the US. "The mkt for plastic is still relatively underpenetrated in many ways, and there aren't a large number of networks in the mkt," says Moshe Katri, of Cowen who covers payment processors. The positive sentiment is being fueled by hopes Discover will be nimbler and more aggressive as an independent co. And if it still can't catch up to its rivals, there are expectations that the co will be a takeover tgt for a big bank or even retailer.
“Ahead of the Tape” highlights AT&T (T), which is the sole carrier of iPhone for the next 5 years. While Apple (AAPL) is up 42% this year, AT&T is up only 13%, and may be a better way for investors to play Apple's new product. Subs to the iPhone service should be less likely to switch to other services once they sign up, partly b/c of the hefty investment in the device. That should reduce the important "churn" rate of subs who switch to other services. iPhone's users also seem likely to pay for extra telephone services. Analysts at Credit Suisse est the avg net profit from an iPhone subs will be $1,724 to AT&T for phone services over the life of a customer, compared with $936 on avg for AT&T customers who use other phones. Ma Bell also could snatch subs from rivals. Of the 1m+ ppl who signed up for an AT&T service that will notify them when an iPhone is available, 40% don't have AT&T's service. AT&T ests about half of its iPhone subs will come from competitors. Now all Apple has to do is deliver the product everyone expects.
Barron’s Online discusses Thermo Fischer (TMO), saying that despite the stock run-up, investing in Thermo Fisher is no risky experiment. Remaining revenue and cost synergies from the already profitable merger, growth opportunities in emerging markets, and strong free cash flow mean investors can still extract plenty of upside from the stock in the next 12 mo’s. The stock's climb over the last year is due in large part to enthusiasm over the merger, and the kudos are well-deserved, says Caryn Zweig, of Abner, Herrman & Brock Asset Mgmt. The union of Thermo Electron and Fisher Scientific is "one of the few mergers where one plus one equals three," says Zweig. "They will be able to take full advantage of their opportunities."
“Inside Scoop” section reports that the stock of Sonus Networks (SONS) is near multiyear highs and the co is facing delisting, but one value investor sees potential. This week Legatum Capital bought 1.14m shares for $9.7m. In addition to Legatum, the overall institutional ownership in Sonus has steadily risen since ‘05, according to Joshua Hong, of OwnershipAnalyzer.com.
Thursday, June 28, 2007
Digital River (NASDAQ:DRIV): Color on warning
RBC Capital: Why the $7 million miss? The primary factor was a slowdown in the ramp of key clients including Symantec, Microsoft and an unnamed client, which the firm estimates to be approximately $4M, $2M and $1M respectively.
The roll-out of the renegotiated SYMC contract, which provides DRIV with global renewals, was said to be only a third complete, essentially unchanged from the end of Q1. Shifting resources on the part of both companies were to blame for the shortfall. MSFT business, which includes Office trial conversions and Vista, was said to be ramping slower than expected.
Is all the bad news out? Likely for 2007, but the company has a challenging road ahead as they attempt to reinvigorate growth among its historically strongest customer and grow Microsoft to the magnitude investors had originally hoped, all while balancing investments in infrastructure, which the firm feels is necessary for the company to increase operational efficiency and attract new customers.
RBC is lowering their price target from $58 to $50, and maintaining Sector Perform rating. Target reflects lowered outlook on the company's 2007 revenue and EPS growth expectations of 12% and 3% respectively (was previously projected to be 20% and 17% respectively).
- Piper Jaffray notes that while disappointed with the lower than expected guidance, they believe DRIV's issues are more short-term in nature and not a reflection of the overall long-term health of the business. As such, they expect to see accelerated revenue and earnings growth in 2008 as these issues are resolved and DRIV sees greater contribution from Microsoft and Symantec. With shares down 15% after hours to around $44, DRIV is trading at 12x/9x 2007/2008 EBITDA, which PJ believes is attractive given our expectation of 20% plus LT earnings growth. Additionally, DRIV announced an expanded share repurchase program for up to $200M in common stock. At current prices, they would expect the company to be active in a buyback. Firm maintains Outperform, lowers tgt to $61 from $72.
Notablecalls: The warning should not come as a big surprise to investors as checks done by firms covering DRIV were showing subdued activity by MSFT. Jeffco was stupid enough to upgrade the stock on June 20 in face of this. There had been some talk of Symantec (45% customer) getting back on track, so this was probably the psychological trigger for them. Usually, Jeffco's no stupid operator but they sure did get this one wrong. Happens.
What's next? Investors have been expecting MSFT to become the main growth drivers for DRIV. This has yet to happen, as it seems Mr. Softee is approaching the e-commerce outsourcing channel very conservatively (in face of its largest product launch ever) to ensure they do not disrupt the traditional OEM and Retail channel partners.
RBC's Robert Breza has noted in the past that it took Digital River approximately seven years to build the SYMC relationship. While he does not expect Microsoft to take as long, he does believe the first couple of years are a learning process for each side (Digital River and Microsoft). Investors have front-end loaded the ramp in Microsoft and are disappointed.
This means DRIV may have one more tough quarter ahead. Although on the conf call management noted their H2 estimates may prove to be conservative.
Given the 7 pt haircut the stock got last night I think DRIV may be a bounce candidate early on. But I would not overstay my welcome as I think there may be another 10% downside to this one over the next weeks as valuation continues to be quite high. But play the bounce first!
FormFactor (NASDAQ:FORM): Expect to see downside
While n.t. risk to FORM's fundamentals, downside appears limited to around $35 (20x downside C2008 EPS of $1.70) and they are still believers in longer-term story given strong fundamental demand for FORM's DRAM cards and some new evaluations (e.g., TXN) on logic side that could help in C2008.
Therefore, they are loathe to downgrade to Sell (maintains Hold), but these issues likely to at best keep lid on stock near-term and at worst cause break to mid $30's.
Maintains $45 12mo tgt; looks for break to $35-37 near term - Many investors looking to Buy FORM at these levels. Citi notes they would wait out what could be bad news near term. F07 GAAP EPS from $1.44 to $1.39, F08 unchanged.
Notablecalls: I failed to call Citi's negative note on FORM outright actionable on June 18 and the stock is down 7% since then. I'm quite sure today's note will cause FORM another 1 to 2 pts worth of damage.
Paperstand (RIMM, PALM, FLWS)
The WSJ reports that two bidders are expected to make competing offers for Altadis within days that could value the cigarette and cigar maker at $17.5bn or more and result in one of the biggest tobacco deals ever. Imperial Tobacco (ITY) and CVC Capital have been negotiating terms and conditions in recent days with Altadis in anticipation of making formal bids by next week.
According to the WSJ, Massachusetts regulators accused UBS (UBS) of improperly providing below-mkt office space, low-interest personal loans and other perks to Boston-based hedge-fund execs if they steered enough business to UBS. The administrative complaint, part of a previously disclosed investigation, was filed by the Massachusetts Securities Division against UBS's US brokerage arm.
Barron’s Online out saying that the reviews are in, and Apple’s (AAPL) iPhone is being hailed as a groundbreaking consumer product that is likely to be an enormous commercial success. For RIM (RIMM) and Palm (PALM) it means that both stocks will likely struggle in coming mo’s. iPhone has convinced some observers that cellphones will increasingly be used to consume information through Web browsing and playing music and video. It won't be easy for RIM and Palm to prove they can dominate that new landscape the way they have their existing mkts. Nonetheless, both stocks seem priced for continued success that may be elusive. RIM sports a FP/E of 33.8x and Palm, 24.2x, ahead of the 23x multiple, on avg, of MOT, NOK, ERIC and QCOM. "To justify even $140 a share for RIM, we need to see the co selling more than 1m units per qrtr outside of their traditional base of business customers," says Richard Windsor, of Nomura Securities. "We're just not seeing it."
“Inside Scoop” section reports that RLR Capital disclosed it had accumulated a 5.1% stake in 1-800 Flowers (FLWS) with more than 1.3m class A shares. In its activist 13D filing, RLR said that co's shares were "substantially undervalued" when they were purchased. RLR founder Robert Rosen also sent a letter Wed to James McCann, founder, Chmn and CEO of 1-800-Flowers, declaring support for mgmt's cost-cutting and growth initiatives. Ben Silverman, of InsiderScore.com, says that RLR's "buying into strength and their flattering letter shows that they have a lot of faith and confidence in mgmt."
Wednesday, June 27, 2007
Nektar Therapeutics (NASDAQ:NKTR): Pfizer continues to be serious about Exubera
Early prescription trends for Exubera have been disappointing, due to a deliberate launch by Pfizer and lowpatient awareness. However, the firm believes that patient dissatisfaction with current diabetes therapies has created pent-up demand for Exubera, and will drive accelerating use as Pfizer's primary care launch gains traction in H2:07 and direct-to-consumer advertising begins this summer. Recent clinical checks indicate high patient satisfaction with Exubera and, in many cases, an improvement in glucose control over injections.
Notablecalls: Last time I was positive on NKTR, the stock took out my stops in a heartbeat. Not only that, it took another 15% dive over the following weeks. The shorts sure like to chop this one down. Yet, Cowen's comments make too much sense not to be highlighted. Not calling it actionable here, though.
Jones Soda (NASDAQ:JSDA): Time to bottom fish?
Overall, the firm views this announcement as an incrementally positive. The highergross margin afforded energy drink sales should, in theory, provide Jones Soda with upside potential beyond this year. For example, they would expect theenhanced energy drink category to generate an approximate 60% gross margin, which compares to the core (i.e. bottle DSD and DTR sales) approximate 35% gross margin and the concentrate (i.e. cans, CSD) approximate 85% gross margin.
They expect the company to rollout the "Gaba" enhanced energy line of branded beverages through its distribution, or DSD, network to certain markets as early as the end of this year. Firm anticipates a National rollout, also through the DSD network, next year.
PJ's $31 price target is 68x their 2008 earnings estimate, a premium to the company's 50% growth rate but in line with the 36x-106x four-year trading range. Alternatively, the price target is 12x 2008 revenue estimate. Reiterates Outperform rating on JSDA shares.
Notablecalls: It's fairly quiet out there this AM. I couldn't help to notice PJ still has a $31 target on JSDA, implying hefty upside to current $13 stock price. The stock has been crushed lately, partly because of lower than expected results reported in May and also due to the disappointment at SBUX. The price has been more than halved since mid-April.
Note that ThinkEquity upgraded their rating on JSDA to Buy from Accumulate on June 18 saying they believe the news that Starbucks would stop offering Jones Soda at the end of June has created a buying opportunity as the shares have sold off substantially. Firm believes sales at Starbucks were a very small percentage of bottled soda sales and, more importantly, will have no impact on the rollout of Jones Pure Cane Soda in cans.
Jones Pure Cane Soda in cans is now on track to be on the shelves by the Fourth of July at the long list of retail locations the company announced last March. ThinkEquity believes sales growth will reaccelerate in Q2 an Q3 as retailers using just-in-time inventory systems begin to re-order.
Despite some setbacks, and with the potential for more growing pains, the firm believes new products and substantially larger retail distribution (with more to come) provide Jones Soda with the opportunity to gain share of very large markets and earn rising returns on its investment. Think's target on JSDA stands at $20.
Even here at $13 the stock's not cheap. Yet, considering the growth and opportunity for expansion, I think JSDA is starting to look increasingly interesting. The chart continues to look omnious but I suspect a n-t bottom is $1 away. I would not be surprised to see ThinkEquity come out and up their rating to Strong Buy as the shares are down another $3 points since their June 18 upgrade.
Paperstand (AAPL, EBAY, WEN)
The WSJ reports that Citigroup (C) is in advanced talks to buy Automated Trading Desk, an electronic trading firm, for about $700m. The purchase of the firm could be announced this week, though details of the deal could still change.
The WSJ's Walter Mossberg tested Apple’s (AAPL) iPhone. The verdict is that, despite some flaws and feature omissions, the iPhone is, on balance, a beautiful and breakthrough handheld computer. Its software, especially, sets a new bar for the smart-phone industry, and its clever finger-touch interface, which dispenses with a stylus and most buttons, works well, though it sometimes adds steps to common functions. The iPhone's most controversial feature, a virtual keyboard on the screen, turned out in tests to be a nonissue. But the iPhone has a major drawback: the cellphone network it uses. It only works with AT&T, won't come in models that use Verizon or Sprint and can't use the digital cards that would allow it to run on T-Mobile's network. So, the phone can be a poor choice unless you are in areas where AT&T's coverage is good. It does work overseas, but only via an AT&T roaming plan. In addition, even when you have great AT&T coverage, the iPhone can't run on AT&T's fastest cellular data network. Instead, it uses a pokey network called EDGE, which is far slower than the fastest networks from Verizon or Sprint that power many other smart phones. And the initial iPhone model cannot be upgraded to use the faster networks.
“Inside Track” section reports that Margaret C. Whitman, president and CEO of eBay (EBAY), made a deal of her own recently by selling more than $20m worth of her co's shares. Ms. Whitman, who hadn't sold any eBay stock in almost 4 years, did the transaction under a plan that provides for the sale of as many as 6.4m shares, valued at more than $200m at current prices, from this month to next Feb. "It's a routine part of prudent tax and estate planning as well as asset diversification," said eBay spokesman Hani Durzy.
Barron’s Online “Inside Scoop” section reports that during the 1Q, Tudor Investment had sold off its entire holdings of 2.42m Wendy’s (WEN) shares. Shortly after clearing its tray of shares, Tudor made a return visit, buying 5.33m shares, or a 6.1% stake, by June 13. The firm filed as a passive shareholder. Ben Silverman, of InsiderScore.com, says historical pricing suggests Tudor made 10-15% gains, give or take a few percentage points, from its previous investment in Wendy's.
Tuesday, June 26, 2007
Beware of excessive eagerness!
NC
Adobe Systems (NASDAQ:ADBE): Conflicting views
- Goldman Sahcs is removing ADBE from their Buy list saying that although they believe the strength in Adobe's CS3 release is likely to sustain its 17% top-line growth rate this year, they do not believe results are likely to end up significantly above this figure and may not meet expectations increasingly focused on upside surprises in future quarters. As a result, the firm is opting for the sidelines, as a trade until later this year when visibility into FY2008 and further acceleration beyond current estimates emerges.
GSCO's current estimates anticipate 32% yoy growth in the August quarter and 23% yoy growth in the November quarter, which is a testament, in their view, to the strongest product cycle in the company's history (with CS3) and ongoing strength in Acrobat/knowledge worker sales. However, shorter term, they do not anticipate a significant upside to these estimates and given the company's premium valuation compared to the overall sector (trading at 25X forward EPS estimate), they believe significant upside to the current stock price remains limited. Maintains $47 tgt.
- Cowen notes trading in software stocks has become more volatile in the last month and Adobe stock has pulled back noticeably since the May quarter report. Sentiment has always played a major part in the stock action and with the stock now more controversial, they believe investors should look to add to positions. While too early to gauge prospects for upside to Street $0.40 EPS estimate (they are $0.43) for the August quarter, they believe set-up looks good. Firm notes strong deferred revenue build during Q2 as well as many specific tailwinds this quarter have the potential to drive upside. Given consensus controversial view after pull-back off CS3 launch quarter report, they believe expectations are properly set to be exceeded. Maintains Outperform.
Notablecalls: Must say I was somewhat surprised to see ADBE pull back so agressively following Q1 results. I was ready to make a fade call after the co reported but held off as most firms were still very positive on the stock. Was looking for couple of bucks worth of downside at the most.
Now, ADBE is down little over 10% from highs. That's after reporting the second-largest increase in deferred revenue ever. There is very little doubt in my mind that ADBE can post some decent upside when it reports in September. This makes it a bounce candidate today following GSCO's call. I expect the stock to gap down and would be looking for a bounce just before it hits the $39 level. That's my ultra s-t view.
Paperstand (GM, TSN, AZO)
The WSJ reports that in the latest sign Congress is turning a skeptical eye toward Wall St., an influential House committee is set to hear testimony from all 5 commissioners of the SEC today, the first time that has happened in at least 10 years. With the Democrats in control of both houses of Congress, it is an opportunity for Democratic lawmakers to frame such issues as the rise of hedge funds, CEO pay and shareholder rights through their own prism and to sharpen the debate heading into the ‘08 election. "It's signaling power," said James Angel, of Georgetown University's McDonough School of Business in Washington, of the invitation to all 5 commissioners.
The WSJ reports that about 450K Chinese-made tires sold in the US, and possibly many more, may lack an important safety feature. The tire defect comes in the wake of several other high-profile safety problems involving Chinese products. "As imports grow, and China is the largest exporter to the US, it's essential" that all manufacturers comply with US safety regulations, said Daniel Zielinski, of Rubber Manufacturers Association. Last year's fatal accident occurred when four carpenters were traveling back to their homes in Philadelphia after a day of framing homes in the Pocono Mountains. According to a lawsuit filed in the Court of Common Pleas in Philadelphia County on behalf of the two men killed and one of the two who were injured, the tread separated on the left-rear wheel of the van, causing the vehicle to crash. Also named in the lawsuit is General Motors (GM), maker of the van. The suit accuses the car maker of building a defective vehicle that was prone to tip over in an accident. The tires involved in the case were replacement tires and not part of the van's original equipment.
“Heard on the Street” column out saying that more consumers are flocking to low-fat, all-natural and now drug-free chicken. And that could be good news for Tyson Foods (TSN) and its investors. The co announced last week that all of its branded retail chicken will be produced without antibiotics. The financial upside of Tyson's plan isn't chicken feed. Americans will consume 87 pounds of chicken per person in ‘07, even though the price of a boneless chicken breast has risen at least 20% in the last 12 mo’s, mainly b/c of the higher cost of corn-based food. Over the longer term, Tyson's new initiatives -- ranging from increased advertising to the introduction of higher-priced branded chicken -- could lead to stronger earnings and a higher valuation as investors stop viewing that co as a simple "protein" purveyor that supplies undifferentiated chicken, beef and pork to restaurants and retailers. "What they're trying to do is become a packaged-food co. It's really smart of them," says Neil Eigen, of Seligman Investments.
Barron’s Online “Inside Scoop” section reports that with AutoZone (AZO) shares racing to new highs, investment firm DE Shaw is continuing to add stock in the automotive-parts retailer to its portfolio. DE Shaw now owns 3.37m shares, or 5% of AutoZone’s outstanding stock. Ben Silverman, of InsiderScore.com, says DE Shaw's buy into stock strength at AutoZone is a positive signal for investors. However Silverman adds that DE Shaw's historically quantitative investment strategy makes its reasoning behind the purchase somewhat opaque. "With Shaw, b/c these guys are a quant firm who use methods like stats arbitrage, what's important to remember is they're not looking at some of the same factors that retail and other institutional investors look at." "That said, something popped up on their screens that they like here," Silverman says.
Monday, June 25, 2007
AMD (NYSE:AMD): ThinkEquity positive
ThinkEquity's Eric Ross thinks Advanced Micro Devices (NYSE:AMD) is seeing a better quarter thananalysts and investors expect, and he believes this will drive shares higher next month, when it is expected to report. Higher notebook mix (even at the lowend) drives higher ASPs and better margins than expected. The firm upgraded AMD on May 15 because theyheard it was gaining share back; they continue to hear of better margins and ASPs. Mr. Ross expects this momentum to continue through 2007. Reiterates $19 price target and believes it could be a near-term event.
Street consensus is for $1.26b and ($0.85), and ThinkEquity expects $1.35b and ($0.64).Importantly, we expect gross margins to improve from 29% to 34% Q/Q; which they believe investors should view very positively. The biggest drivers are share gains (Dell and Toshiba) and higher ASPs due to a better mix of notebooks.
Notablecalls: Well, Eric's the man! I think AMD goes higher from here. At least in the s-t as the chart shows signs of bottoming. Thursday's big gain followed by a breather on Friday sets stage for a nice upside move.
NavTeq (NYSE:NVT): Actionable call alert!
Portable navigation market really is taking off in the U.S. Two percent penetration of portable navigation devices and declining prices should keep elasticity at these high levels for at least another 2-3 years. So they are raising their estimates for 2007, 2008 and 2009 portable navigation end market unit growth to 200%, 120% and 50% y/y from 160%, 100% and 40% prior. Firm notes they could still be conservative as they are assuming elasticity to decline 2 points over the next 2 years and are discounting no growth coming from countries outside North America and Europe.
Notablecalls: Looks like BAC's FY08 estimate is the new Street high by far. The previous Street high stood at around $1.80. This type of conviction will no go unnoticed. The logic behind the call looks solid and one can even consider it somewhat conservative, making it even more believable.
I think the call ranks just a few points below the likes of Deutsche's Illumina (NASDAQ:ILMN) call from June 11. But it's surely actionable. Sitting at my old desk, I would load up on NVT on open and watch it climb over the next couple of weeks as other firms join BAC and up their ests.
$.50 leash.
NAVTEQ is one of two global suppliers of digital maps for navigation device manufacturers, like Garmin. The co's primary competitor is Teleatlas.
Office Depot (NYSE:ODP): Four firms cutting ests over the weekend
- Deutsche Bank says they believe the recent slowdown in the economy continues to impact
Office Depot's results. As such, they are reducing their quarterly and annual EPS estimates (Q2 goes to $0.41, below last year's $0.43, FY07 goes to $2.10 from $2.26 and FY08 to $2.42 from $2.64, up 15% y/y). The biggest changes to firm's forecasts come on the top line, which in turn will lead to SG&A deleverage. Despite these changes, they are maintaining Buy rating as they believe a strong balance sheet should support downside.
- Citigroup notes they are lowering second and third quarter estimates for Office Depot on belief that since the company provided guidance in April, sales in the North American Retail and Delivery segments have further deteriorated primarily due to a challenging macroeconomic environment.
While the Street had already anticipated an earnings miss, it will likely be slightly greater than expected. In addition to cutting 2Q estimate by $0.04 to $0.42, $0.06 below cons., they are also cutting 3Q by $0.04 to $0.56, as they believe the sales softness will likely persist through the summer. While the shares are attractively valued at these levels, trying to find a bottom in the shares could prove challenging. Citi thinks there could be some further downside from here and that a better buying opportunity may present itself over the next several months. Maintains Buy. Taget is cut to $51 from $52.
- Banc of America is adjusting downward their below consensus estimates for ODP on concerns the current environment is proving difficult to drive top line growth both in the NA Retail and Contract divisions. Firm's estimate for Q2 goes to $0.43 from $0.46, Q3 is lower by $0.02 to $0.55 and the year is now $2.15E from $2.20. 2008E is now $2.48 from $2.51. Channel checks and conversations with industry contacts lead them to believe business has decelerated. They fear that an increasingly competitive promotional environment could also inhibit margin expansion opportunities. Maintains Neutral, $37 tgt.
- Goldman Sahcs cuts their estimates as follows: FY2007 to $2.24 (down $0.07), FY2008 to $2.63 (down $0.07), and FY2009 to $3.14 (down $0.06). Cuts primarily reflect lower NA Retail and Delivery sales, and a delay to the firm's gross margin recovery. Neutral, $40 tgt.
Notablecalls: I'm somewhat surprised to see four large firms cut their estimates almost simultaneously. Probably a case of analysts not wanting to diverge from the herd. I suspect the stock will get hurt today as some investors will surely panic and sell. We have Citi out basically saying there could be further downside from here. Yet, they have the highest target on the Street for ODP.
I think ODP may lend itself to a scalp short early on but I'm not expecting any major downside here. The valuation's too low for that. More agressive trading accounts may even catch ODP for a quick bounce around the $32 level.
Sunday, June 24, 2007
Barron's Summary (BX, AOB, YHOO, CROX)
Fund manager picks include CFC, LUM and CNX.
If the subprime-mortgage market worsens, MBIA (MBI) could sustain claims losses exceeding a half-billion bucks. It might have to issue more stock, diluting shareholders.
The recent weakness in State Street (STT) stock offers a chance to buy cheap shares in a major beneficiary of expanded global securities markets. The upside is more than 20%.
At 46, Crocs (CROX) shares are priced for near-perfect execution. If the company trips, they could drop into the mid-30s, more in line with other footwear concerns. Take profits.
Salesforce.com (CRM) shares look pricey after rising threefold in three years. And now that the small company is competing with behemoth Oracle, taking profits is sensible.
“The Trader” section highlights DJO (DJO), whose shares took a beating in May after DJO reported its 2nd earnings miss in a row. The pullback was treated as a buying opportunity by some hedge funds, like Millbrook Capital Mgmt, which has accumulated a 9.4% stake. Millbrook is seeking regulatory clearance to buy more shares. The injury-care business is recession-proof, and DJO boasts gross margins near 60%. DJO's earnings flub also was caused by glitches, like $2m in cost overruns, as it struggled to absorb a recent acquisition of Aircast. Canaccord Adams analyst William Plovanic expects DJO to earn $2 a share in ’08. With mid-cap medical-technology co’s trading at an avg 23.7x ‘08 earnings, DJO's 20.7 multiple manages to look reasonable. He expects strong cash flow to help DJO pare debt and grow EPS "well in excess of revs for at least the next 3-4 years." Millbrook sees shares trading near 60 within 1-2 years.
“The Trader” also highlights Diebold (DBD) and NCR (NCR), whose shares are up 32% and 50% over the year, respectively. In N-America the financial self-service mkt is expected to grow by just 3-5% a year. Yet in less saturated mkts, like China, India and E-Europe, the growth rate exceeds 10% as banks jockey for the early-mover edge in the nascent self-service banking mkt. The shift toward higher-margin managed services also should generate more cash flow. Jefferies analyst Yvonne Varano expects "improving demand for ATMs, and cost savings to drive double-digit earnings growth in the coming years." NCR is trading at about 16.4x forward earnings, while Diebold sports a 17.6x. Both valuations are reasonable, and within their historical range - and may prove modest, if demand for automated transactions surpasses the Street's moderate ests.
“International Trader” highlights American Oriental Bioengineering (AOB), which is set to sell 13m shares in a secondary offering. CEO Shujun Liu will sell another 2m shares. For such a small co, there are a lot of big questions, along with a history of muddled disclosures and misleading claims. First, customers of the co aren't looking very closely at two key product lines, packaging for both carry misleading claims. The "UrinStopper Patch" package says it contains "radioactive photons" that "warm the acupoints." But Chemir Analytical Services says it detected no radioactive elements. Meanwhile, packaging for SoyPeptide powder says it has "patent technology from University of California, Berkeley." But an official at a UC Berkeley's Office of Technology Licensing says, "They are not one of our licensees." Secondly, the co’s history includes penny stock fraudsters and persons that are barred from the banking and brokerage industries.
“Follow Up” out positively on Yahoo (YHOO), saying that for all the uncertainties Yahoo faces, its stock is almost sure to rise. "Any way you look at it, the stock goes up from here," says Larry Haverty of Gabelli Global Multimedia. "It is very good value." Haverty sees Yahoo shares fetching in the upper 30s in a sale.
Friday, June 22, 2007
Taser (NASDAQ:TASR): Jeffco upping tgt to $20 from $13
Inflection Point? Jeffco believes "yes" and is increasing '08 EPS by a penny accordingly. Over 44 countries have started a Taser program, and there are countries like France that may aggressively roll out Tasers to their officers. The penetration rate of the U.S. law enforcement market is about 25%, and there are large cities like Chicago that are warming to the product.
The question to which they do not have an answer is whether the business acceleration looks like a hockey stick (steep acceleration), a slow building exponential graph (flatter acceleration), or more of an upward moving sine wave (lumpy). Bottom line is the business is improving, and many future catalysts exist.
Notablecalls: TASR has been on fire over the past couple of months and I suspect Jeffco's call will yield some nice upside today and over the next couple of weeks.
Banc of America: DRAM price pop due to inventory build, not supply and demand
June and July are the two weakest months in the year for memory demand. So why are prices increasing if demand is seasonally weak? In the past, DRAM suppliers use this time of year to build inventory and push prices higher. Demand picks up sharply in August. Suppliers want to start the seasonally strong period (August to October) with the best possible backdrop to pricing.
So price increases in June and July have little to do with supply/demand. They think the DRAM industry is in an oversupply situation. Whether or not second half seasonal demand can soak up the excess supply is the critical issue. Recent favorable monthly PC demand is a better argument to support a soft landing in the memory cap-ex cycle than DRAM prices.
Notablecalls: Both AMAT and LRCX blew through my stops yesterday. Yet, it looks like the bounce in DRAM pricing has nothing to do with end demand. Also note that Piper Jaffray is out downgrading NSM, ADI and LLTC (analog space) this morning saying recent industry checks indicate a broad weakening of the semiconductor recovery cycle. Not making any calls here, though.
salesforce.com (NYSE:CRM): Color on yesterday's sell-off
Citi thinks it's possible that this urgent meeting never occurred. In fact, CRM sales management has weekly forecasting calls. And some key sales execs reportedly were absent from this call leading Citi to believe that if the business was way off track, why wouldn't some of these keys execs show up. From firm's view, there is no issue in overall demand. But CRM has to demonstrate it can close this rich pipeline of potential deals. Post the GOOG partnership a couple weeks back, CRM saw a record surge of new customer leads.
The firm also believes hiring trends remain very healthy this Q. At 2,243 total employees at end of Q1, CRM has hired ~150-200 new employees per quarter over the past year. They believe CRM continues to hire aggressively in Q2. Even a small slowdown could be beneficial to the overall operating margins for the company.
While the departure of an AppExchange executive is disappointing after only four months on the job, the firm believes this exec chose another role at a smaller company and had little impact on the business during such a short duration at CRM.
Maintains Buy and $60 tgt.
Notablecalls: The decline started yesterday morning, about 90 mins into regular trading after First Albany put out a call to clients saying their sources indicate CRM held an urgent meeting to address sub-par close rates thus far this quarter in its North America SMB segment.
The firm also noted their contacts indicate that CRM's SVP and GM of AppExchange and Developer Marketing, Rene Bonvanie, recently resigned. In their opinion, Mr. Bonvanie was a relatively high-profile hire, and represented a symbolic move because he was hired from SAP, where he was VP of Global Marketing.
First Albany reduced their tgt on CRM to $53 from $58 saying it is still fairly early in CRM's July 2Q; it is possible that close rates will improve during the remainder of the quarter, or that CRM will make up the difference in other segments (e.g., Enterprise, International).
- I think Citi's right. Either this meeting never happened or it was just one of regular sales forecasting meetings CRM likes to hold. Adding 2,500 customers/quarter, sales management is always fine tuning the business. As for the departure of Mr. Bonvanie, it's likely a non-event.
I think CRM will be an early bouncer.
Paperstand (BP, ADM, POOL, PSS, JNY)
The WSJ reprots that Archer-Daniels-Midland (ADM) is preparing to enter the sugar-cane-ethanol business in Brazil. Such a move by the co would mark an endorsement of a gasoline substitute that competes directly with the corn-based approach used by US ethanol co’s. ADM is exploring a variety of strategies to enter Brazil's sugar-cane-ethanol mkt, ranging from building sugar-cane mills and ethanol plants from the ground up to acquiring sugar-cane co’s. ADM's senior VP of strategy, Steve Mills, said the co hasn't ruled out an outright purchase of Cosan, Brazil's largest ethanol producer, in which ADM owns a small stake.
Barron’s Online discusses Pool Corp. (POOL), saying that current challenges to future growth mean that shares of the co could start to sink. Even corporate insiders get the message, judging by the heavy selling that's been going on. The weakened housing mkt has hurt demand for new pools, while cooler weather has delayed new pool construction and the opening of existing pools that would require maintenance and supplies. Increased spending to open up new sale centers catering to local pool builders and the development of Pool's nascent irrigation and landscaping business to service pool owners and golf courses, for example, will be a drag on earnings in the near term. These initiatives are expected to help the co sustain a 20% earnings growth rate in the long run, but their benefits are not expected to start kicking in till ‘08. Pool shares look fully valued given tough conditions and the dearth of near-term catalysts to help the stock. Pool stock is trading 20.4x earnings ests, a 24% premium to the S&P's 500. Short sellers have commandeered 20% of the co's outstanding shares, which Michael Cox, of Piper Jaffray, says "is really predicated on a tie to the housing mkt."
“Inside Scoop” section reports that Diaco Investments disclosed ownership of an 8.8% stake, or 5.7m shares, in Payless Shoesource (PSS) on June 15, making it the co's 2nd-largest shareholder. Diaco is the investment vehicle of investor Simon Glick. Mr. Glick said that he started buying into Payless shares in Aug’06 and that he built up his stake b/c "I like the business and I have a high regard for its mgmt." Diaco's decision to step into Payless shares "is a good signal in terms of at least one institutional investor having confidence in the Stride Rite acquisition" and the co's decision to turn toward higher-end, branded footwear, says Ben Silverman, of InsiderScore.com. Silverman cautions, however, that the limited information available on Diaco's investing style means that it is hard to gauge how Simon Glick may be planning to manage his Payless shares, or how long he plans to hold the stock.
The NY Times reports that the Jones Apparel (JNY) was near a deal late last night to sell Barneys NY (BNNY.OB), the high-fashion chain, for about $825m to the investment arm of the Dubai govt. The sale would end Jones Apparel’s 3-year ownership of Barneys, whose Madison Avenue emporium is considered one of fashion’s trophies but which never fit within Jones Apparel’s mass-mkt stable of brands like Anne Klein, Jones New York and Nine West. The investment arm of Dubai, Istithmar, has been on a buying spree in the last 3 years, purchasing $1.6bn of high-profile businesses and real estate.
Thursday, June 21, 2007
AK Steel (NYSE:AKS): Bradford expects a positive earnings surprise from AKS
AK Steel is benefiting from a strong specialty steel market: grain oriented silicon steel, but also 409 stainless steel, which does not contain nickel. This latter product has gained market share compared to the more common 300 series, which contains both nickel and chrome, with nickel prices so strong as to have pushed customers to the much-lower-cost 400 series.
The company's "Big 3" automobile industry customers have clearly been hurting, but AK is especially strong with Toyota (TM), which has been gaining share. They have been winning Toyota quality awards for a number of years.
Consolidation in the steel industry has not reached AK Steel yet despite numerous stories in the press. The firm suspects that the sharp rise in these shares has made the stock too expensive for the taste of most of the likely aggressors, yet U.S. Steel could still obtain major synergies from such a combination, in their view.
Notablecalls: While I much rather would like to highlight some negative calls on the steel group here, this one's interesting enough to be highlighted as a positive. For what it's worth Bradford has a Sell rating on AKS. Wouldn't have guessed, eh?
Monster Worldwide (NASDAQ:MNST): Citigroup reits Buy
Citi notes that through 12 weeks of the quarter, MNST's QTD Y/Y job postings growth in the U.S. is tracking modestly ahead of last quarter's 14% Y/Y growth. They are tracking 15% Y/Y growth through June 17th. The key point here is that their revenue estimate assumes a material deceleration in North American recruitment advertising (55% of MNST's total revenue) from 15.0% Y/Y growth in the March quarter to 10.8% Y/Y growth in the June quarter to $180MM. But listings tracking doesn't indicate this level of deceleration. In terms of MNST's other segments, the firm believes estimates already assume reasonable deceleration.
And their Long-Term Thesis Remains Intact: 1) Secular migration of Help Wanted advertising online; 2) MNST remains #1 or #2 in almost every key geo market; 3) European leverage opportunity drives a strong EPS growth outlook; 4) Greater likelihood of share buybacks;
Reits Buy and $53 tgt, especially with the stock now trading at a U.S. radio or newspaper sector multiple of 10.8X EV/EBITDA, they believe valuation risk here is highly limited.
Notablecalls: MNST is down substantially since I highlighted it as a potential short on June 7. I think kudos goes to Baird for their excellent comments saying it is possible that estimates or full-year guidance can be revised by the new management. Looks like the market has been gradually pricing in that risk over the past couple of weeks.
While Citi's call makes some sense, looking at the chart I see very little reason to buy the stock here. I want to see some bottoming action first. An early sell-off, followed by a recovery towards the close is something that would get my attention.
I suspect that eventually MNST will be sold. I just don't think it's going to happen in the next 6 months.
Paperstand (MO, RCI, KKD)
According to the WSJ, the Altria Group (MO) Philip Morris unit is preparing for a tectonic change - regulation of tobacco by the FDA. With Democrats in charge of Congress, the long-debated step appears more likely than ever. A Senate bill is expected to clear a key committee next month, and companion legislation has been introduced in the House. Both bills would give the FDA broad sway over tobacco products, including the power to set product standards, which could include limiting certain ingredients in cigarettes. Tobacco makers would have to turn over to the agency extensive information about their products. The bills also dangle a potentially lucrative opportunity. They say that if a new kind of cigarette can be scientifically proven to "significantly reduce harm" to smokers, and its availability would also benefit the health of "the population as a whole," the cigarette's marketing claims may win approval from the FDA. Philip Morris, which is working on a slew of new products it hopes might qualify for FDA-approved health claims, acknowledges it must transform itself into a credible player in the expected scientific debates at the FDA. So the co is trying to emulate an industry already under the agency's purview, the drug co’s. The co has a number of highly engineered products in the works, all of which are designed to possibly reduce tobacco's dangers.
Barron’s Online discuses Rogers Comm. (RCI), whose stock is up 45% this year. Rogers is more expensive than Comcast now, but with good reason: It's two co’s in one. It's not just the biggest cable outfit, it's also the largest wireless operator. Rogers' 7m wireless customers are bringing the co rising ARPU in a mkt where only about 60% of likely cellphone customers have a phone. For Rogers, that means operating profit margins in wireless approaching 50%, higher than either wireless or cable operators down here. While there is 15% or so upside to the stock from a recent price of $44, there could be more upside as ests continue to rise for the co's growth in EBITDA. "Rogers is not cheap anymore, but the growth prospects are higher than they've been and margins are widening," says Stephen Gauthier, of Gauthier & Cie.
“Inside Scoop” section reports that Krispy Kreme Doughnuts’ (KKD) largest shareholder has taken another bite out of the doughnut maker, raising its stake by 20% or 1.25m shares. Mohamed Abdulmohsin Al Kharafi & Sons, a Kuwaiti-based firm led by the Al Kharafi family, now owns 7.37m shares, or 11.4% of Krispy Kreme. Jonathan Moreland, of InsiderInsights.com, says the latest transactions could be the beginning of a positive insider profile for KKD. "What's missing here are the insiders themselves," Moreland notes, referring to the co's officers and directors.
Wednesday, June 20, 2007
Jeffco defending Brush (NYSE:BW)
Notablecalls: I'm going to call this one actionable here @ $42.
Brush Engineered Materials (NYSE:BW): First Albany calling for a bounce
Brush now expects 2Q EPS to be below the low end of the previously announced range of $0.50 to $0.65 per share. Firm's 2Q:07 EPS estimate of $0.51 was quite conservative vs. the consensus estimate of $0.59, as their numbers already accounted for some near-term inventory of ruthenium at customers and at the same time, some inventory at the company's cellular phone customers. While management did not give specific guidance, they are now modeling EPS of $0.45 in 2Q.
Firm notes their channel checks at Seagate (STX) and Komag (KOMG) (two of the three key customers of Brush for ruthenium) continue to indicate that recent weakness in business has not at all changed their plans to transition the technology to perpendicular media. If anything at all, both customers now expect the adoption by year-end to be higher than what they had anticipated earlier.
For the full year, the company now guided for EPS to be in the range of $2.00 to $2.55, down from their previous guidance of $2.20 to$2.75. FA's CY07 and CY08 EPS estimates remain unchanged at $2.35 and $3.15, respectively.
Earlier, First Albany had recommended that clients should take any weakness in the stock until the reporting of 2Q results as a buying opportunity, as they were expecting the company to report below-consensus 2Q results. With this preannouncement, they believe the negative news is already out now. Firm expects the growing adoption of perpendicular media and typical seasonality in the company's consumer-driven products (roughly 20% or revenues) to drive a strong second half for Brush. They would be buyers of the stock today as it pulls back on this negative news. Maintains Buy rating and $63 price target on the stock.
Notablecalls: This stock is an ideal bounce candidate. First Albany has done good job covering this one and I think they are right about calling today's weakness a buying oppy.
Littlefuse (NASDAQ:LFUS): Color on warning
Littelfuse also lowered its full-year earnings view to $1.65 to $1.75 a share vs previous $2. The company said it is still confident of achieving 15 percent operating margin target by the end of 2009.
- Baird notes they remain Neutral on LFUS following the warning as management indicated thay experienced weakness in the telecom end market. Firm believes this was due to delays in sales to Huawei and Tyco for the 3G mobile phone deployment in China. They believe the summer Olympics in Beijing is no longer a catalyst for the rollout and consequently, the upgrade could take significantly longer than originally forecast.
Also, they believe the consumer electronics market remains somewhat weak. Littelfuse reported experiencing the continuing effects of an industry inventory correction; firm expects this is due to softness in the consumer electronics segment. While management had originally forecast the inventory correction to have been worked through by the end of the second quarter, the firm is concerned that slowing economic growth could prolong this correction.
Baird anticipates that under-utilization at production facilities, particularly at the Teccorplant, will put pressure on margins.
Firm's new $36 price target (down from $43) is based on 18x their 2008 EPS estimate. Historically, Littelfuse trades 20x.
Notablecalls: LFUS stock will be taken out to the woodshed today. I suspect the stock may be down today by as much as $5 to $6, meaning anything above the say $36 is probably shortable. However, the stock feels like a bouncer. The last time LFUS warned was in December 2004. Back then, LFUS gapped down but managed to put together a nice bounce. I would keep my eye on the $33 level for a long entry. Small size.
In 2006 the co set in motion a plan that management feels will lead to lessened earnings volatility (through a lowering of fixed costs), that has dogged the co for the past 10 or so years, and lead to its operating margin moving back to 15% of sales over the next few years (from 10-11% the past few years). According to management, this is achievable by 2009. The second leg of the plan is to ramp-up internal growth to the high- single-digit area (from mid-single-digits currently) by working more closely with its original design manufacturer customers and an increase in R&D.
Current problems feel more like a bump in the road.
DRAM equipment space: real-time pushouts of tool shipments
While all suppliers are impacted, it appears impact is greatest at AMAT, LRCX - both of which have big Taiwan DRAM exposure.
Citi notes they have been on the road the past few wks speaking with a broad base of investors. The general rhetoric remains cautious - yet incredulous that stocks have remained resilient in the face of "bad news". While there has been a lot of market speculation around capex cuts, there is frankly yet to be much in the public domain regarding pushouts, capex cuts, or the like. Firm thinks it all comes down to the numbers - and equipment stocks are simply not cheap enough to tell them that the buy side's EPS estimates are that much less than the sell side's estimates.
Indeed, major equipment stocks trade at roughly a market multiple off C2008 EPS - hardly discounting a big EPS cut for a cyclical group with a slowing growth profile.
Notablecalls: The DRAM space is a mess. During the past five months, the price of 512Mb has fallen to $1.80 from $5.80 (an almost-70% decline). The DRAM makers are bleeding from their eyeballs and slashing capex should not come as a surprise. Vista continues to be a disaster, so no help coming from there.
Citi's right pointing out the resilience of the semi equipment space in face of bad news. For example, AMAT's has climbed back to the levels where it was before reporting its terrible qtr in mid-May. I have to agree with Citi here - eventually, it all comes down to the numbers.
Sitting at my old desk I would put out a short line in both AMAT and LRCX here. Tight stops just above recent swing highs. Not looking for a home run here. Just some downside.
Paperstand (MGM, BBY, GYI, ADSK, GES)
The WSJ reports that Kirk Kerkorian's plans to take over two of the prized assets of MGM Mirage (MGM) were on the verge of being withdrawn last night. MGM was thrown into uncertainty after Mr. Kerkorian made a surprise announcement that he was interested in purchasing the Bellagio Hotel&Casino and the $7.4bn Project CityCenter out of the wider co. His intentions appeared to put the whole casino co in play, with the co's convening a special committee to advise it on how to proceed. MGM Mirage's stock soared and yesterday traded 37% higher than its preannouncement levels. But Mr. Kerkorian appears to have backed down from his original plan, in part b/c of the valuation implied by MGM's new JV plans with Kerzner Intl. (KZL). The co is expected to disband the special committee.
According to the WSJ, 2 big hedge funds at Bear Stearns (BSC) were close to being shut down last night as a rescue plan developed over several days fell apart in a drama that could have wide-ranging consequences for Wall St. and investors. Merrill Lynch (MER), one of the hedge funds' lenders, said it would move to seize collateral, much of it mortgage-backed debt, from the 2 funds and sell it. At the same time, the funds' managers worked with a handful of other key lenders, including Goldman Sachs (GS) and BofA (BAC), to pay off the funds' $9bn in loans. As of a few weeks ago, the 2 Bear Stearns hedge funds held more than $20bn of investments, mostly in complex securities made up of bonds backed by subprime mortgages. In recent weeks, however, the firm's High Grade Structured Credit Strategies Enhanced Leverage Fund and High Grade Structured Credit Strategies Fund have been besieged by investors and lenders trying to recover their money as the value of the funds' underlying bonds fell sharply.
Responding to complaints by Google (GOOG) to state and federal antitrust enforcers, Microsoft (MSFT) agreed to change its Vista in advance of a court hearing next week that will review its compliance with a ‘02 antitrust settlement. The DoJ and state attorneys general said that Microsoft has agreed to make changes later this year that will make it easier for competitors to run their desktop search programs with Vista.
“Heard on the Street” column discusses Best Buy (BBY), whose shares tumbled yesterday, following its earnings miss and reduced forecast. While bulls think the stock can hold its ground for the next qtr or two amid an industry shakeout, bears counter that Best Buy's strategy of rapidly gaining share in a cutthroat electronics-retailing industry might not be worth the cost. So far, Best Buy, widely regarded as the best consumer-electronics retailer, has resisted that pressure. Investors have cause to be spooked by the electronics-retailing industry. Circuit City has shuffled its mgmt ranks and laid off workers. Tweeter Home filed for Ch11 this month. CompUSA closed more than half of its stores this year. "Our concerns have been around the competitive dynamics of the consumer-electronics industry," said Loomis Sayles analyst Eric Meyers. "The greatest growth of the TV cycle is behind us. The attempt to differentiate yourself with services, which is partially what Best Buy is doing, is challenging. We have reservations about the ultimate earnings power of the co going forward."
The WSJ reports that Getty Images (GYI) plans to announce today that it is acquiring Pump Audio for $42m. For Getty, buying Pump represents the latest step to expand beyond its core business.
“Inside Track” section reports that after months of being prohibited from selling shares, 13 insiders at Autodesk (ADSK) sold $45m of the co's stock in a span of 14 days this month. Autodesk instructed insiders not to buy or sell shares while the co completed an internal review of stock-option accounting. The results of that review, which included charges of $34.8m, were released June 4, and the insider stock sales began the next day.
Barron’s Online out saying that though not cheap, shares of Merck (MRK), Amylin Pharma (AMLN) and perhaps industry laggard Nektar (NKTR) could gain 20% or more over the next year if physicians pen the right prescriptions. "It's an enormous mkt, and a safe and effective drug will reap big benefits," says David Kliff, of Diabetic Investor newsletter. "This is a dangerous time for investors to play whose pipeline has the next wonder drug. So the safest play over the next 12 mo’s is co’s with existing therapies gaining mkt share." Suffered by almost 21m Americans, diabetes could strike as many as 30m adults and children in the next qrtr century.
“Inside Scoop” section reports that selling must be in the genes, as the brotherly duo atop Guess (GES) sold nearly $60m worth of stock in the co last week. Since last Tue, Chmn Maurice Marciano has sold 716K shares for $35.3m; and Vice Chmn and CEO Paul Marciano sold 500K shares last week for $24.6m. When it comes to insider transactions Guess ranks low. Thomson Financial currently rates the co at 1 on its 1-10 Insider scale (with 1 being the most bearish). The avg insider rating for the apparel industry is 4.27 compared with 3.7 for the S&P's 500 at large.
Tuesday, June 19, 2007
Yahoo (NASDAQ:YHOO): Color on management change
- Banc of America says they applaud the news of co-founder Jerry Yang taking back the reigns of the company, given his vision and long history with the organization. They believe the move potentially pushes YHOO closer to its technology roots and provides a much needed boost to company morale and strategy. Firm is adjusting their tgtdown to $35 from $36 to reflect management guidance of Q2 revenue in the low-end to mid-point of previously announced guidance. They continue to expect double-digit search monetization growth rates in the back half of 2007 and expect to see the effects of its Right Media acquisition and newspaper partnerships in 2008. Maintains Buy.
- Deutsche Bank maintains their Hold rating on shares of Yahoo! amidst yet another cut to ests (perhaps not up to 1,000 but getting there) and the removal of Terry Semel (CEO). While they view Jerry Yang's CEO appointment as a long-term strategic positive (focus on re-investment and R&D), they think Yahoo! remains in pretty bad shape, in terms of over-emphasis on margins and cash flows (at the expense of rev growth), slowing user/rev growth, display ads under pressure, search ramp still challenging and access deals heading into re-negotiation. 2007 EBITDA could be at risk due to Yang's focus on re-building Yahoo! DB is lowering their revenue est. in '07 and '08 to $5.1bn and $5.9bn (from $5.2bn and $6.1bn) and EBITDA to $1.9bn in '07 and $2.4bn in '08 (from $2.1bn and $2.5bn). Price tgt is cut to $26 from $28.
- Morgan Stanley notes they are believers in culture and leadership (especially from engaged founders) and remain enthusiastic about Yahoo!'s asset base. Net, they think this leadership change should prove to be a long-term positive for Yahoo!.
The bad news is that visibility into Yahoo!'s traditional branded / display advertising and affiliate network revenue (together 65% of revenue in C2006), at the margin, has worsened in CQ2E. For CH2:07E, Yahoo!'s Y/Y implied revenue guidance range was +9-26% with a mid-point of +18%. For CH2:07E, 'middle to low-end' growth would imply +9-18% growth, vs. MSCO +17% estimate. Net, if results come in at the 'middle to low-end' of the guidance range for C2007E, this would imply 0% to -5% change to firm's revenue estimates.
Maintains Overweight-V - In their view, Yahoo! remains a 'turnaround growth story' with innovative leadership amidst a more nimble organization and promising revenue generating initiatives both in process and to come. They continue to expect accelerating revenue growth in CH2:07E / C2008E to benefit Yahoo! shares.
Notablecalls: If Terry Semel had not stepped in as the CEO/Chairman of YHOO 6 years ago, the co would have been a marginal player today. Semel saved Yahoo. Clearly, Yahoo lacks the IT talent GOOG has and while I suspect Mr. Yang can reset the priorities, I see no reason why they should fare any better than say MSFT. But I guess that's a topic for the intellectuals.
On the trading side, we have YHOO lowering their outlook. The stock managed to stay above the $29 level in after hours action but I suspect we may see sub-$29 levels today. Operationally, the co is a mess and the only way Yang and his team can make it better, is by upping the tech spending. That will eat into margins and hurt the valuation. And I'm not even sure it's going to work. The stock is not cheap here and the risk is skewed to the downside.
Paperstand (AAPL, MYL)
The WSJ out saying that co’s hang up on Apple’ (AAPL) iPhone. While millions of consumers are eagerly anticipating iPhone launch next week, Bill Caraher is bracing for the worst. Mr. Caraher, technology director of von Briesen & Roper, says he is being besieged by inquiries from employees wondering whether the office's email system can be used with the device. His answer, at least initially, has been no. The main problem is that the iPhone can't send and receive email through the co's corporate BlackBerry email servers. He says he is unwilling to look into workarounds, b/c they might compromise the co's security. "It's another hole in the system ppl can exploit," he says. This scene is being repeated in workplaces throughout the country as Apple moves closer to its much-ballyhooed rollout of the iPhone. While iPhones can be used for email, for now, many businesses don't plan to sync them with internal email systems that use technology from RIM (RIMM), MSFT and Good Technology, owned by Motorola (MOT). All this may change later this month when Apple plans to unveil the iPhone. According to a person close to Apple, the co is expected to fight for this mkt, currently dominated by players like RIM, Palm (PALM) and, increasingly, Nokia (NOK) and Motorola. If Apple comes up with an acceptable strategy for integrating with business software systems, many co’s might change their tunes.
Barron’s Online “Inside Scoop” section reports that Mylan Labs (MYL) Vice Chmn and CEO Robert J. Coury paid $926K for 50K shares from June 14 to June 15. Also last week, CFO Edward Borkowski bought 5K shares for $92K and director Rodney Piatt bought 4K shares for $74K. Michael Painchaud, of Market Profile Theorems, calls the recent insider purchases an "actionable buy" signal.
Monday, June 18, 2007
RadNet (NASDAQ:RDNT): Jeffco upping their target
They consider their current EBITDA estimates of $75 million in 2007 and $81 million in 2008 to be wildly conservative. These estimates do not include 1) contribution from recently announced acquisitions (Borg Imaging and Rockville Open MRI), 2) contribution from new, unannounced acquisitions, 3) Radiologix synergies (projected to be $11 million), or 4) better-than-expected organic growth.
Also, the firm believes RDNT may refinance its $405MM senior secured credit facility with GE Financial Services some time later this year, reducing annualized interest expense and improving cash flow by $5-$6 million.
Channel checks indicate that consolidation opportunities in the space are increasing as financial pressure resulting from the recent implementation of the DRA cuts on imaging services intensify.
Notablecalls: Looks like Jeffco's target represents 45% upside from current levels. The chart looks good and so does the story. I think this one may indeed see some serious upside over the next 6 months or so. Also, there is currently very little sell-side coverage on RDNT. Think that may be changing, too.
Symantec (NASDAQ_SYMC): Added to the Buy list at GSCO
GSCO notes their more positive view on the stock is driven by: 1) Impressive upcoming releases of its flagship products; 2) Their view that internally the company is healthier than it has been since the Veritas acquisition closed over two years ago; 3) Anticipation of upside to conservative guidance in June and FY08; 4) Aggressive buybacks, 5) Wanting to be early on a turnaround story given investor appetite for this.
Major product releases over the next few months - NetBackup 6.5, this summer and Endpoint Protection 11.0, anticipated in September - should stem shares losses and provide a boost to revenues. For the June qtr, the firm expects upside to Street estimates and have raised their EPS estimates to $0.22, from $0.20 (Street at $0.20, guidance $0.18-$0.20).
Notablecalls: Well, GSCO touted SYMC as one of their top picks just before the co warned in January. They removed SYMC from their Buy list following the warning and now that the stock has bounced 20% from the bottom and is trading about 1 buck from the pre-warning level, it's being added to the list again. Absurd enough to work? Yeah, why not! Count me in!
FormFactor (NASDAQ:FORM): cutting prices for DRAM cards?
The bad news is that margin pressure intensifying (especially in DRAM!), while NAND remains a dud. While revs still appear healthy, recent checks suggest FORM facing a considerably tougher pricing environment in its core DRAM market and is now cutting prices for DRAM cards owing to pressure from customers and a desire to keep MJC at bay.
On NAND, they still see very little progress due to ongoing technical issues at several custs, a situation further exacerbated by MJC's new mfg facility (now ramping, set to 3x capacity by 8/08) + new competitive offering from AMST in Korea. Expects FORM to increasingly shift focus to logic where new fine-pitch card could help in C2008.
While solid 2H revs should provide a backstop, NAND remains problematic and intensifying DRAM pricing pressure and ramping expenses should keep EPS in-check (best-case). With the stock +6% in two days, risk/reward appears only balanced and all things equal, the firm is still not buyers until $37-39. Maintains Hold, $45 tgt.
Notablecalls: It looks like MSCO's call from June 8 (see arhives) put a floor in for FORM. This, coupled with the overall positive tape helped the stock to gain some ground last week. MSCO's call was pretty simple - DRAM probe card revenues are highly correlated to bit shipments and not near-term capital spending or equipment order trends.
Yet, Citi's call includes some disturbing bits of information. Is FORM really forced to cut prices on DRAM cards after all? If Citi's right, I'm hard pressed to see any upside in the stock. Not sure FORM is an outright short based on these comments but the risk seems to be to the downside here.
Paperstand (GE for DJ; LCC, ITG)
The WSJ reprots that General Electric (GE) and Pearson are in talks about making a joint bid for Dow Jones (DJ) that would allow the Bancroft family to keep a minority interest. The two co’s have discussed a scenario in which GE's CNBC business channel, the FT and Dow Jones would be combined into a privately held joint venture. The venture would be owned equally by GE and Pearson, with the Bancrofts holding a minority stake.
According to the WSJ, in a major boost for its A350 jetliner program, Airbus is finalizing an order with US Airways (LCC) for as many as 30 jetliners. The order, which could be announced as early as today, would be valued at an estd $7bn at list prices, although such orders normally carry steep discounts.
“Heard on the Street” column discusses ITG (ITG), saying that there have been a number of dark days for investors in the co lately. Now, one of those shareholders is trying to push the firm into the light. ITG is under pressure from hedge fund DE Shaw to sell off all or parts of itself. As an alternative to a sale, DE Shaw also called for a significant stock-repurchase program in an effort to boost ITG's share price. Before DE Shaw's letter became public June 12, ITG's shares had fallen 18% during the previous 12 mo’s. DE Shaw said the shares were trading at a discount of 30-40% to the avg valuation of comparable co’s. That is b/c ITG's earnings haven't kept up with its peers. The shares are trading at about 19x estd ‘07 earnings. The co's closest public rivals are NYSE Euronext (NYX) and Nasdaq (NDAQ). They are trading at about 32x and almost 26x estd ‘07 earnings, respectively.
Sunday, June 17, 2007
Barron's Summary (BID, EVST, FWLT, UTSI)
Barron’s “The Trader” section discusses Sotheby’s (BID), whose shares have pulled back since late April. This week, the conspicuous consumers will flock to London for the Impressionists and contemporary art sales, and the recent track record suggests Sotheby's ests may again be conservative. Record NY sales in May already bode well for the 2Q earnings, and Robbert van Batenburg, of Louis Capital, expects EPS as high as $1.72 vs. consensus of $1.34. With Christie's snagging more mkt share in ‘06's fall auctions, and Sotheby's regaining some of that this year, Sotheby's is "carrying considerable momentum into the 2H07" and faces easier yoy comparisons, notes Wedbush analyst Rommel Dionisio. More important, record prices motivate "otherwise reluctant owners to bring their pieces to the mkt," Van Batenburg adds. "This emergence of more highly valued works of art not only generates higher revenue with higher margins, but also fuels the auction hype." Van Batenburg sees the stock pushing 66 by year end.
“The Trader” also discusses Everlast (EVST), which recently agreed to be acquired by Hidary Group. A 30-day "go shop" clause for Everlast to find a better bid looks insincere next to the $4.5m breakup fee. Also curious was the June 4 agreement by CEO Seth Horowitz to vote the 19.2% of shares he controls in support of the Hidary offer, even if a better offer emerges. It also did not escape investors' notice that Horowitz's employment contract was recently amended to remove limits on payments he might receive following a change of control. Aquamarine Capital says it will vote against the low-ball offer. Since price is the decisive arbiter of cash bids, "why didn't the board of directors run an auction or actively take other measures to get the best possible price?" asks Jeff Lick, of Galt Investments. Logical buyers including Nike (NKE), Adidas, Puma and Under Armour (UA) weren't contacted. The unasked question among these firms' carefully lawyered missives: Why would mgmt agree to an un-shopped lowball offer from an affiliate? Everlast's prospects indeed look bright, the co recently signed a deal with Michelin to launch a footwear line next year, and has inked licensing pacts to start selling in China in ‘08. And assuming rev grows at 20%, applying a multiple of 10x ‘08 EBITDA of about $20m would value shares at more than 40, Lick says.
Roundtable likes CVC, HLT, MDS, SQAA, USM, RIMM, WFC, VLO, LYO, AEO, IMOS, C, ENDP, ULUR, HPQ and PIR. Dislikes NETL and XLY.
Lehman's (LEH) lagging share price offers the chance to invest in a rising banking power with a keen eye for risk management.
If Alleghany (Y) hews to its course and doesn't encounter any unforeseen problems, its shares, which have been trading above $360, could rise 50% by 2010.
“International Trader” highlights HSBC (HBC), which has been battered by the US subprime-mortgage mess. But the bank looks better when judged over a longer span. Its shares have outpaced those of RB of Scotland, Citigroup (C) and BofA (BAC), especially since ‘04, when the Fed started raising interest rates. The longer view shows that HSBC shares fare better than their peers when systemic risks, macro fundamentals, go against the banking industry. Reason: The co's earnings streams come from various global regions and are less correlated with one another than are the sources of some other big banks' profits.
“Follow Up” section highlights Foster Wheeler (FWLT), whose stock is up almost 700% since Jan ’05. Earnings are expected to rise to $5.46 a share this year. Analysts forecast continued earnings growth in ‘08, to $5.95. The shares are changing hands at just 18x next year's ests, roughly even with the broad mkt and below the 22x by peers. If the preliminary work "proceeds to project, it suggests that this mkt is with us for at least 5 more years," says CEO Ray Milchovich. Investors often overlook another Foster Wheeler business: supplying boilers and other equipment to power providers like utilities. This business, accounting for about 23% of cash flow, looks to be picking up as the world's power needs expand. The could give the co, and its stock, an even bigger surge.
“Follow Up” saying that seemingly insatiable demand for base and precious metals has helped give a powerful lift to mining co shares. Like CVRD (RIO) and Rio Tinto (RTP). Like most co’s in the metals sector, CVRD and Rio Tinto are considered well run, which suggests there would be little room for a buyer to make operating improvements. It's hardly an opportune environment for takeovers, says Damien Hackett, of Canaccord Adams. In general, he thinks the shares are fully valued. Most stocks in the sector, he says, are trading at 9 or 10x estd earnings for the year ahead, about where they should be, given the record commodity prices. "It's hard to imagine commodity prices going up in the next 6-8 mo’s," Hackett adds. Hackett expects shares of the major players in the metals sector "to drift sideways for the next 3-6 mo’s...until the economic outlook changes." If the global economy slows, as he expects, the sector could take a hit.
“Plugged In” column out negative on UTStarcom (UTSI), whose shares have plunged 21% since co-founder Ying Wu quit on June 1. The reason for Wu's abrupt departure is unclear, but one thing is clear: He's now free to unload some of his 4.7m shares. Frankly, it's darn near impossible to know what's going on, b/c UTStarcom hasn't provided meaningful information in nearly a year. Even when making mandatory filings, UTStarcom is stealthy. On the Fri before last Christmas, it revealed that it had received an SEC Wells notice, several days before. Critics contend that the co's IPTV products are more hype than substance.
Friday, June 15, 2007
Mastercard (NYSE:MA): Estimates upped to new Street high at SunTrust
Their growing bullish conviction reflects a constructive view of the company's exposure to strong transaction growth, its considerable pricing power and meaningful operating leverage. It is their opinion that the Street continues anticipating a deceleration in transaction and revenue growth which is not in the offing.
The company benefits from secular shift from cash to electronic payments at the point of sale, exposure to strong cross-border travel trends, proliferation of new payment modalities and the emergence of burgeoning international economies with little historical electronic payments volume. SunTrust argues that MasterCard is moving into "harvest" mode in the US. The domestic market, which will comprise nearly 50% of the company's 2007 GDV, is relatively mature. As a result, they believe the company will re-direct its advertising spend toward rapidly-growing emerging markets, which should require lower absolute expenditures. This is one factor suggesting potentially greater-than-expected operating leverage and EPS upside.
Notablecalls: Looks like SunTrust EPS numbers are the new Street high. Given the strong chart, I expect to see buy interest in MA today.
Trident Micro (NASDAQ:TRID): Low valuation + strengthening demand
Based on recent checks, they believe rebounding panel pricing is being partly driven by robust 2H 32-inch+ Tier-1 TV demand (TRID's sweet spot). These leading indicators, & the rapid ramp of 1080P (Sharp, Samsung, & Sony own 85%+ of this segment) point to a strong CY2H07 for TRID.
Checks further indicate strengthening demand could generate CY07 TV unit sell of as much as 78M, well-above CIBC's current 72M estimate, with growing Tier- 1 mix. They also expect TRID should be able to file its delinquent 10K/Qs by mid- July, prior to their release of June Q results.
At ~11x $1.80 CY08 EPS estimate, TRID is trading at a significant ~40% discount to its peers. CIBC believes TRID presents investors with compelling value as the company is set to leverage its impressive product portfolio against surging demand in the seasonally strong CY2H.
Notablecalls: CIBC's right with their on TRID here. Firstly, channel checks done by other firms indicate low panel inventory and seasonal buildup starting in earnest. AUO has said panel inventory in channel is normal. Also, pricing has been OK. The >37" size LCD TV is seeing good demand in the U.S.
Also, channel checks indicate Mediatek has not been able to crack into Sony or Sharp and TRID still very well entrenched at major TV OEMs. The single-chip (MPEG decode + back-end) TV solution developed by Sony/NEC keeps lurking in the background, though.
With a low valuation and 14% short interest, TRID could see some upside here.
Also, keep Genesis Micro (NASDAQ:GNSS) on your radar. Note the co has $5 cash per share on its balance sheet and carries a hefty short interest. They are competing with TRID and RBC Capital noted yesterday thyy believe that the co is on track to win some designs from Tier 1 OEMs
in late CY07.
One more thing - note that Sony is coming out with an entry-level LCD TV line to compete with the likes of BRLC's Olevia.
Paperstand (BKD, KMR)
Barron’s Online highlights Brookdale Senior Living (BKD), saying that strong demand for senior-citizen housing is bolstering the fortunes of the co. But though Brookdale has become the leading manager of senior housing in the US, its stock has not followed suit. But the stock could gain roughly 20% over the next year with the help of additional gains from dividend growth as Brookdale continues to add more units for rent and to trim expenses. The co is quite simply a cash-flow story. It incrementally passes on part of those gains to shareholders through dividend increases. Brookdale is now stepping back from an aggressive acquisition phase in a highly fragmented industry to focus on increasing cash flow by expanding current facilities and adding on ancillary services. Brookdale's initiatives will help push its brand as a destination spanning seniors' needs for those with active lifestyles to those that need nursing care. As Brookdale grows, it is generating economies of scales that are reducing costs and improving operating profit margins. Gary Ran, CEO of Telemus Capital Partners, says Brookdale is a play on "the combination of being in the right industry and having strong, financially disciplined owners."
“Inside Scoop” section reports that Kinder Morgan Mgmt (KMR) shares recently hit an all-time high, but several insiders, including the co's CEO, see opportunity for the stock to kindle yet more value. On June 11 and 12, four execs from the co purchased 54K shares for $2.7m. The recent cluster of purchases is the first instance of insider activity at the co since Oct’05, when Richard Kinder last purchased shares, notes Ben Silverman, of InsiderScore.com.
Thursday, June 14, 2007
Select Comfort (NASDAQ:SCSS): Color on mid-quarter update
- Piper Jaffray notes that following yesterday's mid-quarter update, they are 2H07 sales from $478M to $434M. Same-store sales are tracking near -18%, below PJ estimate of -9%. The company expects same-store sales growth to return during the second half of CY07. Risks to management guidance are decidedly on the downside as PJ expects anemic growth trends to continue during the next six month period and advise shareholders to remain on the sidelines until tangible catalysts exist.
New marketing programs have not been rolled out broadly as expected during the second quarter and management plans a review of the current message to its consumers. Unfortunately, recent marketing initiatives are overly focused on the problem (lack of sleep) and not the solution (cure tired with a Sleep Number Bed). Piper thinks management may focus more on the Brand and benefits of the product, rather than trying to generate demand. They estimate a revision to the current marketing plan may take only 2-3 months to roll-out. The firm is reducing CY07 sales estimate from $891M to $830M (below guidance), and reducing EPS estimate from $1.01 to $0.88.
Maintains Market Perform and lowers tgt to $15 from $19 as fundamentals remain soft and unpredictable.
Notablecalls: This one was expected. Given what we had heard from BBBY and the fact chief marketing officer left in May, there was no doubt in my mind SCSS would come short of expectations. That's also the reason why the stock was down only little over 6% in after hours action. Frankly, I believe SCSS is one of the most economically sensitive stocks out there. With price tags of around $2000-$5000, the beds are expensive, yet SCSS clearly targets the middle class consumer. A bad combo in current economic environment. Hence, the high short interest. I know at leat one high profile short-seller that considers SCSS a core short.
Considering SCSS spends 45 cents on every dollar it makes on Sales & Marketing, blunders in this departement are not easily forgiven. Yet, I think investors will be somewhat relieved to see CEO Bill McLaughlin step in and take charge.
Don't get me wrong. I like this co. In fact, I think SCSS may initially put together a nice bounce now that the bad news is out of the way. The $264 mln repurchase program is huge, just huge compared to SCSS' $800 mln market cap. According to the management, the program takes a tiered approach, significantly accelerating share repurchases if the share price declines. They are even prepared to incur debt to repurchase shares. That's bound to lend significant support to the stock price.
I just think that after couple of points of upside, the shorts will show up again, chopping the stock down.