Notable Calls
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Wednesday, January 31, 2007
Calls of Note Part 2
- ThinkEquity is positive on GigaMedia (NASDAQ:GIGM) saying recent marketing meetings with management in London left them even more enthusiastic about the fundamentals of GigaMedia's core businesses and growth potential. Its investments in marketing for CESL in Europe, numerous strategic initiatives in Asia (intended majority ownership of T2CN, investment in Southeast Asia-focused Infocomm, high-profile game license HellGate London), and future growth initiatives (casual online sports games in China, real-money Mahjong, expansion in Japan) position GigaMedia well for 40% annual growth over the next three years, in firm's view. They are increasing their FY07 and initiating FY08 estimates as well as raising price target to $15 from $13.
GigaMedia is expected to report Q4:06 earnings within the first two weeks of March. The firm is comfortable with their estimates of $28.5 million (+142% y/y, +18% q/q) in revenues and $0.13 (+225% y/y, +18% q/q) in EPS.
FY07 estimates increase to $141.2 in revenues (+54% y/y) and $0.52 in EPS (+58% y/y). For FY08, they are initiating estimates of $183.2 in revenues (+30 % y/y) and $0.70 in EPS (+33% y/y).
Notablecalls: Chart looks strong and Think's been right on GIGM so far.
GigaMedia is expected to report Q4:06 earnings within the first two weeks of March. The firm is comfortable with their estimates of $28.5 million (+142% y/y, +18% q/q) in revenues and $0.13 (+225% y/y, +18% q/q) in EPS.
FY07 estimates increase to $141.2 in revenues (+54% y/y) and $0.52 in EPS (+58% y/y). For FY08, they are initiating estimates of $183.2 in revenues (+30 % y/y) and $0.70 in EPS (+33% y/y).
Notablecalls: Chart looks strong and Think's been right on GIGM so far.
Calls of Note Part 1
- Morgan Stanley is out on Under Armour (NYSE:UA) noting that in their first three months of coverage, they've grown incrementally more constructive on UA. They still firmly think that gross margins will begin to come under pressure over the next 12 months.
But where they're more positive is how far ahead UA is as it relates to SG&A investment and infrastructure-build compared to other early cycle hyper growth stories. Firm now thinks it will have more cost levers to pull to maintain margins in the event of GM pressure than they previously assumed. That said, firm's sense is that a 55x p/e multiple is perhaps plausible when earnings are driven by sales + GM upside, but this multiple gets to be a stretch when the story turns into sales + SG&A leverage. Their $33 target (based on dcf model with UA following the path of an early stage Nike) is arguably low in light of potential for better SG&A leverage, which they will revisit after Thursday's earnings
The last 2 quarters UA beat EPS by nearly a third and the stock went down on both days. Four quarters ago UA beat by only 3% and the stock lost 23% in a day (off of a much lower valuation
base). Clearly, the company needs to beat meaningfully to avoid going down. Firm's sense is that UARM needs to beat a $0.30 number versus the Street at $0.25 -- which they think is entirely possible this quarter.
Maintains Underweight.
Notablecalls: Not actionable but good to know category. Shows you where the expectations stand.
But where they're more positive is how far ahead UA is as it relates to SG&A investment and infrastructure-build compared to other early cycle hyper growth stories. Firm now thinks it will have more cost levers to pull to maintain margins in the event of GM pressure than they previously assumed. That said, firm's sense is that a 55x p/e multiple is perhaps plausible when earnings are driven by sales + GM upside, but this multiple gets to be a stretch when the story turns into sales + SG&A leverage. Their $33 target (based on dcf model with UA following the path of an early stage Nike) is arguably low in light of potential for better SG&A leverage, which they will revisit after Thursday's earnings
The last 2 quarters UA beat EPS by nearly a third and the stock went down on both days. Four quarters ago UA beat by only 3% and the stock lost 23% in a day (off of a much lower valuation
base). Clearly, the company needs to beat meaningfully to avoid going down. Firm's sense is that UARM needs to beat a $0.30 number versus the Street at $0.25 -- which they think is entirely possible this quarter.
Maintains Underweight.
Notablecalls: Not actionable but good to know category. Shows you where the expectations stand.
NutriSystem (NASDAQ:NTRI) - bounce candidate
Citigroup comments on NutriSystem (NASDAQ:NTRI) following guidance provided last night. The firm notes Q406 EPS guidance is 50-53c, above consensus of 47c. 4Q rev. is expected to be $131-133mm w/ 159k custs vs. FC of $128mm and guidance of over 155k.
NTRI gave 1Q07 rev. guidance of $200-210mm vs. FC of $214mm and firm's est of $203mm. NTRI guided for 1Q07 new direct customer growth up 23%-32% vs. firm's est of up 15%, which they view favorably. However, mgmt provided 1Q07 EPS guid. of 82c-86c vs FC est. of 94c. As discussed in yesterday's call note (scroll down), they expected mgmt to provide conservative guidance that it could meet or beat.
Citi notes they are very confident in the company's longer-term prospects and believe its business model remains intact. Raising '06 eps by 6c and lowering '07-'08 eps by 10c and 12c, respectively to reflect guidance. Lowering target price by $3 to $92.
According to the firm the best indicator of the full year business for a diet company is January sales -- that month typically sets the tone for the remainder of the year. The firm had been anticipating y/y sales growth of 38% in 1Q07 to $203 million, versus consensus revenue growth of 46%. Based on company guidance issued after the close on 1/30/06, they are now expecting revenue growth of 43% in 1Q07. The critical metric will be new customer acquisitions. The company provided 1Q07 guidance for 290-310k new customers, or at least 23% YOY growth, which compares with Citi's previous estimate for 270k new customers, or 15% YOY growth. The company's guidance assumes healthy growth potential for the company.
While NTRI earnings are expected to grow 30% longer-term, the stock (using aftermarket price of $46) only trades at 16x '07 EPS estimates. This compares with Weight Watchers, a mature company with a 12% long-term EPS growth rate according to First Call, which trades at 22x consensus '07 estimates. Additionally, NTRI has a 30% short interest, which they think assumes new customer growth deteriorates in the near-term (2007 1Q diet season).
Maintains Buy.
Notablecalls: I suspect NTRI makes a good bounce play here. Would be an opportunistic buyer around the $46 level. The stock declined 6 pts following Citi's pre-market comments yesterday and then another 6 pts in after hrs action following the guidance release. The guidance for Q1 looks conservative, making the valuation quite tempting. Notice how Citi's tgt still stands at $92, implying 100% return. The stock's cheap even if the co can grow it's bottom line 20-25%.
NTRI gave 1Q07 rev. guidance of $200-210mm vs. FC of $214mm and firm's est of $203mm. NTRI guided for 1Q07 new direct customer growth up 23%-32% vs. firm's est of up 15%, which they view favorably. However, mgmt provided 1Q07 EPS guid. of 82c-86c vs FC est. of 94c. As discussed in yesterday's call note (scroll down), they expected mgmt to provide conservative guidance that it could meet or beat.
Citi notes they are very confident in the company's longer-term prospects and believe its business model remains intact. Raising '06 eps by 6c and lowering '07-'08 eps by 10c and 12c, respectively to reflect guidance. Lowering target price by $3 to $92.
According to the firm the best indicator of the full year business for a diet company is January sales -- that month typically sets the tone for the remainder of the year. The firm had been anticipating y/y sales growth of 38% in 1Q07 to $203 million, versus consensus revenue growth of 46%. Based on company guidance issued after the close on 1/30/06, they are now expecting revenue growth of 43% in 1Q07. The critical metric will be new customer acquisitions. The company provided 1Q07 guidance for 290-310k new customers, or at least 23% YOY growth, which compares with Citi's previous estimate for 270k new customers, or 15% YOY growth. The company's guidance assumes healthy growth potential for the company.
While NTRI earnings are expected to grow 30% longer-term, the stock (using aftermarket price of $46) only trades at 16x '07 EPS estimates. This compares with Weight Watchers, a mature company with a 12% long-term EPS growth rate according to First Call, which trades at 22x consensus '07 estimates. Additionally, NTRI has a 30% short interest, which they think assumes new customer growth deteriorates in the near-term (2007 1Q diet season).
Maintains Buy.
Notablecalls: I suspect NTRI makes a good bounce play here. Would be an opportunistic buyer around the $46 level. The stock declined 6 pts following Citi's pre-market comments yesterday and then another 6 pts in after hrs action following the guidance release. The guidance for Q1 looks conservative, making the valuation quite tempting. Notice how Citi's tgt still stands at $92, implying 100% return. The stock's cheap even if the co can grow it's bottom line 20-25%.
Color on quarter: SiRF Tech (NASDAQ:SIRF)
Several firms are commenting on SiRF Tech (NASDAQ:SRIF) after the co reported stronger than expected results and guidance:
- Morgan Stanley notes that excluding a lower tax rate, Q4 adjusted EPS were $0.01 above their $0.26 estimate and $0.02 above consensus. Revenue of $74MM easily topped firm's$70MM estimate and the company gave seasonal guidance (down 8%-12% Q/Q) for Q1. MSCO has revised their estimates higher (from $0.80 to $0.95 for 2007) as the advertising and price elasticity in the PND market was even greater than they noted in their November 28th upgrade report.
The strong Q4 results and SiRF's news flow at the upcoming 3GSM conference (February 12-15) is likely to keep a bid in the stock in the near term. However, the fact that competitive news flow is likely to continue to increase, Q1 should be seasonally slow, and the overall semiconductor industry business environment is challenged, as well as uncertainty about the timing associated with the share loss at TomTom will likely keep SiRF bound in a volatile $24-$30 range, in their view.
Maintains Equal Weight.
- RBC Capital is increasing their estimates and price target and maintaining Outperform rating on SIRF. The stock traded up about $4 in after-hours after the company beat 4Q07 estimates and guided better 1Q07 and 2007 revenue. The whisper expectations were lower than estimates due to share loss at TomTom.
The company guided impressive growth in spite of the strongest headwind of market share loss at its largest customer. This demonstrates that the company has broad based customer exposure and can continue to grow at a significant rate in spite of loss of a few sockets here and there.
Gross margins are still expected to be within its target model of 52% to 56%. There have been several claims and speculations about GPS chipsets prices falling from current $7 level to $2 suggesting significant decline in gross margins for SIRF. Q1 guidance and management's comment give the firm confidence that the company can maintain high gross margins though broad product portfolio offering. They continue to model at the high end of the target range.
Theyare increasing 2007 estimate from $1.06 to $1.18 (consensus was $1.00). Price target increases from $34 to $38 based on 32X 2007 earnings estimates.
Notablecalls: The problem with SIRF is that most firms already have Buy ratings on the stock. Following a 16% move in after hrs, I suspect tgt and est raises are not enough to keep the stock moving. There will be additional competition in the space in 2007 and SIRF does have huge customer concentration issues. I would be looking for cracks in buy interest after the open.
Take my calls with a pinch of salt. I've gotten some calls terribly wrong over the past couple of days. ATHR and GYI are probably the best examples of that. Somewhat tired, that's all. Hope no one got hurt.
- Morgan Stanley notes that excluding a lower tax rate, Q4 adjusted EPS were $0.01 above their $0.26 estimate and $0.02 above consensus. Revenue of $74MM easily topped firm's$70MM estimate and the company gave seasonal guidance (down 8%-12% Q/Q) for Q1. MSCO has revised their estimates higher (from $0.80 to $0.95 for 2007) as the advertising and price elasticity in the PND market was even greater than they noted in their November 28th upgrade report.
The strong Q4 results and SiRF's news flow at the upcoming 3GSM conference (February 12-15) is likely to keep a bid in the stock in the near term. However, the fact that competitive news flow is likely to continue to increase, Q1 should be seasonally slow, and the overall semiconductor industry business environment is challenged, as well as uncertainty about the timing associated with the share loss at TomTom will likely keep SiRF bound in a volatile $24-$30 range, in their view.
Maintains Equal Weight.
- RBC Capital is increasing their estimates and price target and maintaining Outperform rating on SIRF. The stock traded up about $4 in after-hours after the company beat 4Q07 estimates and guided better 1Q07 and 2007 revenue. The whisper expectations were lower than estimates due to share loss at TomTom.
The company guided impressive growth in spite of the strongest headwind of market share loss at its largest customer. This demonstrates that the company has broad based customer exposure and can continue to grow at a significant rate in spite of loss of a few sockets here and there.
Gross margins are still expected to be within its target model of 52% to 56%. There have been several claims and speculations about GPS chipsets prices falling from current $7 level to $2 suggesting significant decline in gross margins for SIRF. Q1 guidance and management's comment give the firm confidence that the company can maintain high gross margins though broad product portfolio offering. They continue to model at the high end of the target range.
Theyare increasing 2007 estimate from $1.06 to $1.18 (consensus was $1.00). Price target increases from $34 to $38 based on 32X 2007 earnings estimates.
Notablecalls: The problem with SIRF is that most firms already have Buy ratings on the stock. Following a 16% move in after hrs, I suspect tgt and est raises are not enough to keep the stock moving. There will be additional competition in the space in 2007 and SIRF does have huge customer concentration issues. I would be looking for cracks in buy interest after the open.
Take my calls with a pinch of salt. I've gotten some calls terribly wrong over the past couple of days. ATHR and GYI are probably the best examples of that. Somewhat tired, that's all. Hope no one got hurt.
Color on quarter: Sandisk (NASDAQ:SNDK)
Several comments on Sandisk (NASDAQ:SNDK) after the co issued strong Q4 results but dismal guidance:
- Merrill Lynch notes SanDisk delivered a solid quarter, but management's outlook was as shaky as the firm can remember. Industry oversupply in the first half of the year has limited any visibility into pricing for the year. ML has lowered their 2007E adjusted EPS estimate from $2.50 to $1.80, and our GAAP estimate from $2.10 to $0.88. Given that NAND prices still have room to fall, they see no need to upgrade SanDisk yet. As is so often the case, the stock will probably over react to intermediate-term problems despite the merits of owning it longer term. On the much lower numbers, valuation is not that compelling either. Firm's rating stands at neutral.
The pricing implosion at SanDisk has negative implications for the intermediate term, but enormously positive implications for the longer term. The firm notes they wrote late last year that they expected NAND flash to be at $1 per gigabit by the end of 2007, at which point solid-state drives (SSD) for mobile computers might start to become a reality. They are below $1 a gigabit already, and they think price could be down to $0.50 a gigabit by the end of the 2007. At that point, the prospect of $200 50GB storage devices ($0.50 x 8 x 50) becomes quite interesting.
- Citigroup says that against the backdrop of weak semiconductor company 4Q06 results, SanDisk's top and bottom line strength, albeit with blemishes, surprised favorably. However, and more importantly for the shares, a slew of unexpected outlook negatives, with few offsetting positives: 1) produced dramatically lower 1Q07 revenue and EPS, 2) decreased conviction in a mid-2007 product gross margin rebound, 3) added fresh concerns about the merits of the mSystems acquisition (just closed in late-November) and 4) cast doubt on the marketing muscle behind SanDisk's own MP3 and USB retail product execution ahead of new product launches in 2Q07. Further, SNDK's own aggressive production ramp through 2007 (F3 Dec, 2006 WPM of 70k exceeded Citi's 50k estimate; capacity now targeted at 136k WPM vs. 110 previously), adds to concern about excess industry production. Overall, their new 2007 and 2008 revenues each decline by 12% while EPS estimates decline 45% and 26% respectively. Similar declines to Street estimates are likely with little compelling evidence to assert confidently that a firm bottom has been set in firm's forward estimates.
They remain cautious on SNDK shares, seeing little reason to get more aggressive near-term in what is typically a (still distant) second-half play (albeit with powerful though well-known secular catalysts). A trough EPS multiple of ~16x on our 2008E estimates implies a valuation range of $35. Next week's MU analyst day seems likely to contribute to near-term share volatility, as sector supply growth concerns rekindle and as Lexar retail market share recapture concerns begin to brew. Thus, SanDisk's own February 26th analyst day may be the next potential catalyst in refurbishing now-tarnished investor confidence. Time, or the shares falling to below $35, could potentially cause the firm to reconsider their Holdrating and potentially increase interest in the shares. Target goes to $46 from $52.
- Deutsche Bank maintains their cautious stance on SNDK as they believe it will continue
to prove a prudent position. Highlighting the currently treacherous NAND flash environment, SNDK declined to give any guidance on full-year ASPs, GMs, or License & Royalty stream. Given this lack of visibility it is hard to see significant buyers stepping up to the plate (unless enticed by hopes of a technical rebound). Firm lowers theirtarget price to new SoTP value of $38 and remains on the sideline until they see a material discount to this fair value (given high beta).
SNDK moving away from giving bit growth and ASP guidance: They view this as negative as it significantly reduces Investors'/Analysts' ability to wrap their arms around the story. This is after all a memory company - bit growth and ASPs are key factors in modeling the business.
$300m stock buy-back approved: Given the high level of dilution through stock option grants, they believe this is a step in the right direction by the company's board. However, the buy-back is not large enough to signal that the board believes stock to be significantly under-valued.
- Goldman Sachs says they had hoped that the company would commit to scaling back its capacity additions, which would have allowed for NAND supply/demand dynamics to improve in 2H2007/2008. However, management appears committed to adding capacity, despite a continued very weak pricing environment. While they expect the stock to find a near-term trading floor in the upper $30/$40-range, they do not see any catalysts to drive the shares higher in the near-term in light of the company's unwillingness to scale back on capacity additions. The firm therefore recommends that only the most aggressive investors buy the stock today. That said, they continue to recommend a long SanDisk/short SPE pair trade, as they believe SanDisk is pricing in weak NAND fundamentals while the SPE stocks are not.
Notablecalls: I think SNDK is headed lower in the intermediate (1-3 month) term. How much would you pay for $1.80-$2.00 EPS power in 2007? 20x? Probably less, something more closer to 16x. Luckily for the holders of common, SNDK's price to book still stands strong. I have no view on what the stock will do in the very s-t. Suspect there will be a bounce. But that's a low conviction call.
- Merrill Lynch notes SanDisk delivered a solid quarter, but management's outlook was as shaky as the firm can remember. Industry oversupply in the first half of the year has limited any visibility into pricing for the year. ML has lowered their 2007E adjusted EPS estimate from $2.50 to $1.80, and our GAAP estimate from $2.10 to $0.88. Given that NAND prices still have room to fall, they see no need to upgrade SanDisk yet. As is so often the case, the stock will probably over react to intermediate-term problems despite the merits of owning it longer term. On the much lower numbers, valuation is not that compelling either. Firm's rating stands at neutral.
The pricing implosion at SanDisk has negative implications for the intermediate term, but enormously positive implications for the longer term. The firm notes they wrote late last year that they expected NAND flash to be at $1 per gigabit by the end of 2007, at which point solid-state drives (SSD) for mobile computers might start to become a reality. They are below $1 a gigabit already, and they think price could be down to $0.50 a gigabit by the end of the 2007. At that point, the prospect of $200 50GB storage devices ($0.50 x 8 x 50) becomes quite interesting.
- Citigroup says that against the backdrop of weak semiconductor company 4Q06 results, SanDisk's top and bottom line strength, albeit with blemishes, surprised favorably. However, and more importantly for the shares, a slew of unexpected outlook negatives, with few offsetting positives: 1) produced dramatically lower 1Q07 revenue and EPS, 2) decreased conviction in a mid-2007 product gross margin rebound, 3) added fresh concerns about the merits of the mSystems acquisition (just closed in late-November) and 4) cast doubt on the marketing muscle behind SanDisk's own MP3 and USB retail product execution ahead of new product launches in 2Q07. Further, SNDK's own aggressive production ramp through 2007 (F3 Dec, 2006 WPM of 70k exceeded Citi's 50k estimate; capacity now targeted at 136k WPM vs. 110 previously), adds to concern about excess industry production. Overall, their new 2007 and 2008 revenues each decline by 12% while EPS estimates decline 45% and 26% respectively. Similar declines to Street estimates are likely with little compelling evidence to assert confidently that a firm bottom has been set in firm's forward estimates.
They remain cautious on SNDK shares, seeing little reason to get more aggressive near-term in what is typically a (still distant) second-half play (albeit with powerful though well-known secular catalysts). A trough EPS multiple of ~16x on our 2008E estimates implies a valuation range of $35. Next week's MU analyst day seems likely to contribute to near-term share volatility, as sector supply growth concerns rekindle and as Lexar retail market share recapture concerns begin to brew. Thus, SanDisk's own February 26th analyst day may be the next potential catalyst in refurbishing now-tarnished investor confidence. Time, or the shares falling to below $35, could potentially cause the firm to reconsider their Holdrating and potentially increase interest in the shares. Target goes to $46 from $52.
- Deutsche Bank maintains their cautious stance on SNDK as they believe it will continue
to prove a prudent position. Highlighting the currently treacherous NAND flash environment, SNDK declined to give any guidance on full-year ASPs, GMs, or License & Royalty stream. Given this lack of visibility it is hard to see significant buyers stepping up to the plate (unless enticed by hopes of a technical rebound). Firm lowers theirtarget price to new SoTP value of $38 and remains on the sideline until they see a material discount to this fair value (given high beta).
SNDK moving away from giving bit growth and ASP guidance: They view this as negative as it significantly reduces Investors'/Analysts' ability to wrap their arms around the story. This is after all a memory company - bit growth and ASPs are key factors in modeling the business.
$300m stock buy-back approved: Given the high level of dilution through stock option grants, they believe this is a step in the right direction by the company's board. However, the buy-back is not large enough to signal that the board believes stock to be significantly under-valued.
- Goldman Sachs says they had hoped that the company would commit to scaling back its capacity additions, which would have allowed for NAND supply/demand dynamics to improve in 2H2007/2008. However, management appears committed to adding capacity, despite a continued very weak pricing environment. While they expect the stock to find a near-term trading floor in the upper $30/$40-range, they do not see any catalysts to drive the shares higher in the near-term in light of the company's unwillingness to scale back on capacity additions. The firm therefore recommends that only the most aggressive investors buy the stock today. That said, they continue to recommend a long SanDisk/short SPE pair trade, as they believe SanDisk is pricing in weak NAND fundamentals while the SPE stocks are not.
Notablecalls: I think SNDK is headed lower in the intermediate (1-3 month) term. How much would you pay for $1.80-$2.00 EPS power in 2007? 20x? Probably less, something more closer to 16x. Luckily for the holders of common, SNDK's price to book still stands strong. I have no view on what the stock will do in the very s-t. Suspect there will be a bounce. But that's a low conviction call.
Paperstand (BFAM, CNX, PPP)
The WSJ's "Heard on the Street" column discusses Bright Horizons Family Solutions (BFAM), sayin that for investors, the co's share price has been a test of faith. It recently posted lower sales, which weighed on its once-highflying stock price. "It's almost analogous to a water-skier coming around a corner," says Tony Sutton, of Putnam Small-Cap Growth Fund. "The line goes slack for awhile and then you take off again." The stock is trading at 20x consensus EPS est for the next 4 qrtrs. Like other service co's, BFAM's stock could suffer if the economy slows and businesses cut back on spending. Also, the fragmented nature of the child-care industry means competition has room to grow. Yet some investors expect Bright Horizons to keep gaining at a brisk pace. Its leadership position, they say, is bolstered by its name recognition among the more than 40K, mostly private child-care co's in the US. Its biggest rival, Knowledge Learning operates 120 centers, compared with Bright Horizons' 630. "Over the next 5 years, they're going to have the wind at their backs," says Kent Gasaway, of Kornitzer Capital Mgmt. "Co's really need them with the tight labor mkt," he adds. Kornitzer, with about $4bn in assets, owned a 2.5% stake in Bright Horizons as of Sept. 30, and it remains a "core holding," Mr. Gasaway says.
Barron's Online highlights Consol Energy (CNX), saying that investors might want to think about fueling their portfolios with shares of the co. Consol is unusual among large US coal co's for its natural-gas production business. And its already-strong operating margins should get a boost as utilities continue to add emissions equipment that encourages consumption of Consol's sulfur-laden but more energy-efficient coal. After unseasonable weather in '06, prices for coal and natural gas fell. With projections for production cuts this year, sentiment for the sector has waned. But the shares, 30% below their 52w high, reflect bad news. And with Consol locking in strong prices for '09, the shares look like one of the more attractive plays in the coal sector this year. "Consol right now is the only coal co synched with what utilities are looking for: long-term contracts for coal with lower transportation costs and more heat per ton," says Ian Synnott, of Natexis Bleichroeder. "That it is trading at a discount to peers is irrational." Despite a US focus on fossil-fuel alternatives, and the likely addition of nuclear plants down the road, coal remains America's greatest homegrown energy source. About half of US electricity generation is powered with coal. "If we are ever going to get serious about energy independence, coal to liquids to replace diesel fuel is huge," says David Williams, of Excelsior Value & Restructuring Fund. "We have 200 years of coal reserves in the US and...we will be using more coal."
"Inside Scoop" section reports that Third Avenue Mgmt disclosed a 6.2% ownership stake in Pogo Producing (PPP), or 3.6M shares, up from the 5.4% stake, or 3.16M shares, it had disclosed at the end of the 3Q. Third Avenue's glove-slap comes less than two months after another hedge fund, Third Point, rattled the cage at Pogo. In a filing, Third Point's CEO, well-known activist investor Daniel Loeb demanded that Pogo initiate action to sell itself in whole or part, and stated that he intends to wage a proxy battle at Pogo's '07 shareholder meeting to elect a new majority slate of directors. Ben Silverman, of InsiderScore.com, says that "Third Avenue's filing certainly helps Third Point's cause," b/c, combined, the 2 firms own a 13.4% stake in Pogo. "Moving forward, it will be important to see if they can get other firms on board to try to force some change here."
Barron's Online highlights Consol Energy (CNX), saying that investors might want to think about fueling their portfolios with shares of the co. Consol is unusual among large US coal co's for its natural-gas production business. And its already-strong operating margins should get a boost as utilities continue to add emissions equipment that encourages consumption of Consol's sulfur-laden but more energy-efficient coal. After unseasonable weather in '06, prices for coal and natural gas fell. With projections for production cuts this year, sentiment for the sector has waned. But the shares, 30% below their 52w high, reflect bad news. And with Consol locking in strong prices for '09, the shares look like one of the more attractive plays in the coal sector this year. "Consol right now is the only coal co synched with what utilities are looking for: long-term contracts for coal with lower transportation costs and more heat per ton," says Ian Synnott, of Natexis Bleichroeder. "That it is trading at a discount to peers is irrational." Despite a US focus on fossil-fuel alternatives, and the likely addition of nuclear plants down the road, coal remains America's greatest homegrown energy source. About half of US electricity generation is powered with coal. "If we are ever going to get serious about energy independence, coal to liquids to replace diesel fuel is huge," says David Williams, of Excelsior Value & Restructuring Fund. "We have 200 years of coal reserves in the US and...we will be using more coal."
"Inside Scoop" section reports that Third Avenue Mgmt disclosed a 6.2% ownership stake in Pogo Producing (PPP), or 3.6M shares, up from the 5.4% stake, or 3.16M shares, it had disclosed at the end of the 3Q. Third Avenue's glove-slap comes less than two months after another hedge fund, Third Point, rattled the cage at Pogo. In a filing, Third Point's CEO, well-known activist investor Daniel Loeb demanded that Pogo initiate action to sell itself in whole or part, and stated that he intends to wage a proxy battle at Pogo's '07 shareholder meeting to elect a new majority slate of directors. Ben Silverman, of InsiderScore.com, says that "Third Avenue's filing certainly helps Third Point's cause," b/c, combined, the 2 firms own a 13.4% stake in Pogo. "Moving forward, it will be important to see if they can get other firms on board to try to force some change here."
Tuesday, January 30, 2007
Calls of Note Part 2
- Citigroup notes that despite modestly negative data points, they still like NutriSystem's (NASDAQ:NTRI) stock over the next year. These negative data points could lead to near-term volatility: 1) website traffic showed moderating (albeit decent) growth; 2) firm believes the retail test w/ GNC is performing under plan; and 3) there is increased competition and copycat programs (particularly regarding the men's plan). While they see near-term volatility, checks indicate that men's program is doing well and though it is still in the early stages, NTRI's senior program is gaining some momentum. In 1Q07 as well as the full year '07, Citi expects 10-20% new customer growth. They would also expect a 15-25% increase in CAC, as they think marketing rose at a greater rate due to increased marketing spent on men and seniors in addition to the core women's business. Firm thinks sell-side analyst estimates may be at the upper end of what the company can achieve (at 36% revenue growth for '07), but investors are not expecting much (19x '07 consensus EPS and 30% short interest) despite 30% long-term EPS growth.
Maintains Buy but lowers tgt to $95 from $105.
Notablecalls: Not actionable but good to know category.
Maintains Buy but lowers tgt to $95 from $105.
Notablecalls: Not actionable but good to know category.
Calls of Note Part 1
- Piper Jaffray notes Apple's iPhone (4GB for $499 and 8GB for $599) should be available in June 2007. Because this device represents a new market segment for Apple, its release raises several important questions ranging from the economics of the Cingular/Apple partnership to the iPhone's addressable market. Here's a selection of some of the questions answered by PJ:
1. What Are The Economics Between Apple And Cingular? While this information is mostly unavailable, the firm believes Cingular is not subsidizing the iPhone but may be reducing service plans to iPhone customers. Cingular has confirmed that there is no revenue sharing plan in place from added iTunes Store users because of the iPhone.
2. Will The iPhone Be Available Through Other Carriers? Eventually yes, however, there is a multi-year exclusive deal between Apple and Cingular iPhone. It is unclear whether this deal applies to this iPhone model only, or several future iPhone models.
3. How Quickly Will The Price Of The iPhone Decrease? Industry trends show that handset prices decrease quickly. At launch the Motorola RAZR retailed for about $500 and one year later the price had decreased 50% to $250 (note: prices listed do not include rebates or subsidies). And while wthe firm feels the price will decrease with time and with future models (as Apple has indicated), they don't feel the price decline curve of the RAZR is an accurate measurement. It is more likely thatthe iPhone will approach the $399 mark and future models will address more price-sensitive markets.
4. What Are The Gross Margins Of The iPhone? PJ believes that Apple timed its entrance into the handset market with precision. While iPod margins are decreasing, firm's analysis of Palm's Treo devices indicates about a 30% margin, which they also believe is an accurate estimation for the first iPhone models longer term, but likely the initial iPhone model has a greater than 30% gross margin.
5. What Is The Addressable Market For The iPhone? Near term: Cingular has 58m subscribers, of which the firm estimates about 30% (14m) own iPods and about 10% own phones >$300 (5.8m). Long term: according to IDC estimates, there were 201.4m wireless subscribers in the U.S. and 1.8b worldwide by the end of 2006.
Maintains Outperform and $124 tgt on AAPL.
Notablecalls: Not actionable but good to know category.
1. What Are The Economics Between Apple And Cingular? While this information is mostly unavailable, the firm believes Cingular is not subsidizing the iPhone but may be reducing service plans to iPhone customers. Cingular has confirmed that there is no revenue sharing plan in place from added iTunes Store users because of the iPhone.
2. Will The iPhone Be Available Through Other Carriers? Eventually yes, however, there is a multi-year exclusive deal between Apple and Cingular iPhone. It is unclear whether this deal applies to this iPhone model only, or several future iPhone models.
3. How Quickly Will The Price Of The iPhone Decrease? Industry trends show that handset prices decrease quickly. At launch the Motorola RAZR retailed for about $500 and one year later the price had decreased 50% to $250 (note: prices listed do not include rebates or subsidies). And while wthe firm feels the price will decrease with time and with future models (as Apple has indicated), they don't feel the price decline curve of the RAZR is an accurate measurement. It is more likely thatthe iPhone will approach the $399 mark and future models will address more price-sensitive markets.
4. What Are The Gross Margins Of The iPhone? PJ believes that Apple timed its entrance into the handset market with precision. While iPod margins are decreasing, firm's analysis of Palm's Treo devices indicates about a 30% margin, which they also believe is an accurate estimation for the first iPhone models longer term, but likely the initial iPhone model has a greater than 30% gross margin.
5. What Is The Addressable Market For The iPhone? Near term: Cingular has 58m subscribers, of which the firm estimates about 30% (14m) own iPods and about 10% own phones >$300 (5.8m). Long term: according to IDC estimates, there were 201.4m wireless subscribers in the U.S. and 1.8b worldwide by the end of 2006.
Maintains Outperform and $124 tgt on AAPL.
Notablecalls: Not actionable but good to know category.
Color on quarter: Getty Images (NYSE:GYI)
Couple of comments on Getty Images (NYSE:GYI) following results:
- Piper Jaffray is upping their tgt to $50 from $45 after Getty reported a better-than-expected Q4 performance with improved growth in single image Royalty Free volumes as well as strength in Editorial, Film, and Micropayment. The one area for concern in the quarter is Rights Managed imagery (40% of revs), which increased just 1% y/y and the firm believes continues to be impacted by a softening offline ad environment. While they are incrementally more positive given the stabilization in RF, Q4 growth remained modest at 6.5% y/y (currency neutral) and GYI maintained its guidance for mid-single digit revenue growth in 2007. Also, while there could be some benefit from new initiatives in 2007, they would like to see signs of traction against these initiatives before getting more constructive. As such, the firm is maintaining Market Perform rating.
- JP Morgan notes that given the low expectations going into the quarter, they expect the shares to rally, continuing yesterday's rise following the news of Blum Capital's 5% stake. Firm maintains Neutral with a positive bias given GYI's undemanding valuation.
- Deutsche Bank thinks the stock at $46 (after hours trading) the stock could give up some of its gains, from profit taking. The stock already moved up 5% yesterday, thanks to the Blum investment, which drove speculation of a large corporate transaction and/or management shake up. They view the Blum investment as a positive building a base of long-term shareholders. Having said that, there are a few potential catalytic events to look out for, such as a potential settlement with convertible holders, positive Corbis update (mid Feb) and Jupitermedia earnings. In addition, there could be potential accretive transactions such as acquisitions and significant stock repurchases in the coming quarters. As the firm has said in the past, they think the company is underleveraged (less than 1x net debt/EBITDA) and could take on additional debt in the coming quarters. Near term, the company still needs to deal with the potential convertible default and the stock option overhang.
Maintains Hold and ups tgt to $45 from $43.
Notablecalls: I suspect the stock will have trouble hanging on to the $46.50 level it reached in after hrs. It needs a tier-1 upgrade to stay there and it looks like there won't be one.
- Piper Jaffray is upping their tgt to $50 from $45 after Getty reported a better-than-expected Q4 performance with improved growth in single image Royalty Free volumes as well as strength in Editorial, Film, and Micropayment. The one area for concern in the quarter is Rights Managed imagery (40% of revs), which increased just 1% y/y and the firm believes continues to be impacted by a softening offline ad environment. While they are incrementally more positive given the stabilization in RF, Q4 growth remained modest at 6.5% y/y (currency neutral) and GYI maintained its guidance for mid-single digit revenue growth in 2007. Also, while there could be some benefit from new initiatives in 2007, they would like to see signs of traction against these initiatives before getting more constructive. As such, the firm is maintaining Market Perform rating.
- JP Morgan notes that given the low expectations going into the quarter, they expect the shares to rally, continuing yesterday's rise following the news of Blum Capital's 5% stake. Firm maintains Neutral with a positive bias given GYI's undemanding valuation.
- Deutsche Bank thinks the stock at $46 (after hours trading) the stock could give up some of its gains, from profit taking. The stock already moved up 5% yesterday, thanks to the Blum investment, which drove speculation of a large corporate transaction and/or management shake up. They view the Blum investment as a positive building a base of long-term shareholders. Having said that, there are a few potential catalytic events to look out for, such as a potential settlement with convertible holders, positive Corbis update (mid Feb) and Jupitermedia earnings. In addition, there could be potential accretive transactions such as acquisitions and significant stock repurchases in the coming quarters. As the firm has said in the past, they think the company is underleveraged (less than 1x net debt/EBITDA) and could take on additional debt in the coming quarters. Near term, the company still needs to deal with the potential convertible default and the stock option overhang.
Maintains Hold and ups tgt to $45 from $43.
Notablecalls: I suspect the stock will have trouble hanging on to the $46.50 level it reached in after hrs. It needs a tier-1 upgrade to stay there and it looks like there won't be one.
Color on quarter: Atheros Comm (NASDAQ:ATHR)
Couple of comments on Atheros Comm (NASDAQ:ATHR) following results:
- Piper Jaffray notes they were encouraged by strong sales of 802.11n products, which accounted for nearly 23% of Atheros' WLAN revenue during Q406. In fact, Atheros indicated 802.11n sales were above its original expectations. Further, Atheros indicated it expects 802.11n shipments to represent its primary growth driver during 2007, despite expectations for a modest seasonal decline during Q107. Given Atheros' early lead in this market, they believe the company is well positioned to benefit from the transition to 802.11n products over the next few years.
The firm was also encouraged the company expects to grow sequentially across all lines of business in Q107, given the March quarter is normally seasonally weaker. Based on stronger-than-expected revenue growth as well as the recent closure of the Attansic acquisition, they are adjusting their 2007 estimates from $0.91/ $371.8M to $0.91/$403.4M, and raising 2008 estimates from $1.10/$446.4M to $1.14/$479.9M.
Maintains Outperform and ups tgt to $28 from $26.
- Morgan Stanley is also very positive on ATHR saying that from a product perspective, the revenue performance was driven by strong sales of the company's 802.11g and 802.11n products, which increased sequentially by 24% and 117%, respectively, and more than offset a sequential decline in sales of the company's 802.11a/g products (which are being cannibalized by the market's transition to 802.11n).
Firm notes they believe that Atheros will likely continue to upside revenue and EPS estimates going forward, and given the weak environment currently affecting the overall semiconductor industry, this outlook is the polar opposite of what has been happening with virtually every other company in their universe. Since last summer, they have reduced 2007 revenue estimates about 3 times on average for approximately 80% of the semiconductor stocks in their universe, and the average decline has been 14%. In contrast, Atheros is one of the only companies where they have been consistently increasing estimates. Furthermore, the firm expects Atheros to continue to grow significantly faster than the average semiconductor company over the next several years, with organic revenue growth (excluding the impact from the Attansic acquisition) of at least 30% in 2007.
While the firm is increasing their current estimates for Atheros, they believe solid upside potential to new estimates still exists. 2007 revenue and earnings estimates have increased to $420 million and $1.00 per share from $375 million and $0.95 per share, previously. Despite its strong performance last year and in the month of January, ATHR remains one of MSCO's favorite stocks, and they expect investors to react favorably to the company's fourth-quarter results and first-quarter guidance.
Maintains Overweight and $33 tgt.
Notablecalls: I'm somewhat surprised by the muted reaction in after hrs. The results are surely worth more than $0.20. I think the stock is headed higher today.
- Piper Jaffray notes they were encouraged by strong sales of 802.11n products, which accounted for nearly 23% of Atheros' WLAN revenue during Q406. In fact, Atheros indicated 802.11n sales were above its original expectations. Further, Atheros indicated it expects 802.11n shipments to represent its primary growth driver during 2007, despite expectations for a modest seasonal decline during Q107. Given Atheros' early lead in this market, they believe the company is well positioned to benefit from the transition to 802.11n products over the next few years.
The firm was also encouraged the company expects to grow sequentially across all lines of business in Q107, given the March quarter is normally seasonally weaker. Based on stronger-than-expected revenue growth as well as the recent closure of the Attansic acquisition, they are adjusting their 2007 estimates from $0.91/ $371.8M to $0.91/$403.4M, and raising 2008 estimates from $1.10/$446.4M to $1.14/$479.9M.
Maintains Outperform and ups tgt to $28 from $26.
- Morgan Stanley is also very positive on ATHR saying that from a product perspective, the revenue performance was driven by strong sales of the company's 802.11g and 802.11n products, which increased sequentially by 24% and 117%, respectively, and more than offset a sequential decline in sales of the company's 802.11a/g products (which are being cannibalized by the market's transition to 802.11n).
Firm notes they believe that Atheros will likely continue to upside revenue and EPS estimates going forward, and given the weak environment currently affecting the overall semiconductor industry, this outlook is the polar opposite of what has been happening with virtually every other company in their universe. Since last summer, they have reduced 2007 revenue estimates about 3 times on average for approximately 80% of the semiconductor stocks in their universe, and the average decline has been 14%. In contrast, Atheros is one of the only companies where they have been consistently increasing estimates. Furthermore, the firm expects Atheros to continue to grow significantly faster than the average semiconductor company over the next several years, with organic revenue growth (excluding the impact from the Attansic acquisition) of at least 30% in 2007.
While the firm is increasing their current estimates for Atheros, they believe solid upside potential to new estimates still exists. 2007 revenue and earnings estimates have increased to $420 million and $1.00 per share from $375 million and $0.95 per share, previously. Despite its strong performance last year and in the month of January, ATHR remains one of MSCO's favorite stocks, and they expect investors to react favorably to the company's fourth-quarter results and first-quarter guidance.
Maintains Overweight and $33 tgt.
Notablecalls: I'm somewhat surprised by the muted reaction in after hrs. The results are surely worth more than $0.20. I think the stock is headed higher today.
Paperstand (C, GYI)
The WSJ’s „Heard on the Street” column discusses Citigroup (C), saying that in the last 3 months of ‘06, the level of loans outstanding on the Sears cards dropped 13% to $23bn. That reflects a fall of about 20% from the nearly $29bn of loans on those cards when Citigroup bought the business in late ‘03. The Sears portfolio is just one factor that is weighing on Citigroup. After rallying last month, the co's stock price has lost ground amid investor concerns about rising expenses and the performance of other businesses. Last week, the co ousted Todd Thomson, a rising star at the bank who most recently ran its wealth-mgmt business. The bank needs to find a CFO after announcing plans to move Sallie Krawcheck from that position into the spot held by Mr. Thomson. The performance of the Sears card portfolio is tied to the fortunes of the retailer, which was struggling with sales even before Citigroup bought the card business. Sales at Sears stores open at least a year have been falling for years, and the decline has persisted under the ownership of hedge-fund billionaire Edward S. Lampert. "The issue is not profitability. The issue is growth," says Joe Dickerson, of Atlantic Equities. Based on typical industry growth rates, he ests that the Sears card portfolio should have $32bn in loans. Mr. Dickerson has the equivalent of a Hold rating on Citigroup's stock and a 12-month price tgt of $50.
Barron’s Online “Inside Scoop” section reports that Blum Capital Partners, a private-equity firm, spent $23.6M to buy 547K shares of Getty Image (GYI) on the open mkt through Jan. 18, ’07. The investment firm built up an initial stake of about 1.9M shares in the 3Q06 when the stock lost about a quarter of its value. Blum has since boosted its holdings to more than 3M shares, or 5% of Getty's nearly 60M outstanding. Blum's investment in Getty is valued at nearly $133.7M based on today's mkt price. Getty is Blum's fourth largest holding. Ben Silverman, of InsiderScore.com, notes that as the mkt leader, Getty's pricing model is considered expensive and inflexible compared with smaller players. Getty's beaten-down shares "certainly fits Blum's pattern of using some weakness for position building," Silverman says. He notes that Blum is currently in its third quarter of holding Getty shares and that the firm typically holds positions "for eight quarters-plus." Silverman says that delay "works as a nice hedge" b/c if Getty's result disappoint "they can claim to be an activist after all.
Barron’s Online “Inside Scoop” section reports that Blum Capital Partners, a private-equity firm, spent $23.6M to buy 547K shares of Getty Image (GYI) on the open mkt through Jan. 18, ’07. The investment firm built up an initial stake of about 1.9M shares in the 3Q06 when the stock lost about a quarter of its value. Blum has since boosted its holdings to more than 3M shares, or 5% of Getty's nearly 60M outstanding. Blum's investment in Getty is valued at nearly $133.7M based on today's mkt price. Getty is Blum's fourth largest holding. Ben Silverman, of InsiderScore.com, notes that as the mkt leader, Getty's pricing model is considered expensive and inflexible compared with smaller players. Getty's beaten-down shares "certainly fits Blum's pattern of using some weakness for position building," Silverman says. He notes that Blum is currently in its third quarter of holding Getty shares and that the firm typically holds positions "for eight quarters-plus." Silverman says that delay "works as a nice hedge" b/c if Getty's result disappoint "they can claim to be an activist after all.
Monday, January 29, 2007
OmniVision Tech (NASDAQ:OVTI) - bounce play
Morgan Stanley is out with a gutsy call saying the 14% sell-off in Omnivision (NASDAQ:OVTI) shares since early December appears overdone as they do not believe conditions in the image sensor market have gotten incrementally worse over the past two months. Firm spoke with three of the top five image sensor vendors last week and they believe Omnivision's prior guidance largely incorporates the current weakness in the market.
Omnivision's October quarter results and January quarter guidance already reflected the negative impact of a mix shift to low end handsets in the broader market that caused problems in C4Q06 for many wireless semiconductor vendors, notably Texas Instruments and STMicro. Mix is the key value driver for Omnivision and the firm continues to believe that Omnivision's mix of low-end and high-end image sensors stabilized in the January quarter, should improve modestly in the April quarter, and could become a meaningful tailwind as the company moves through 2007 and its customers ramp models with higher resolution cameras.
They do not expect Omnivision to suffer meaningfully from the reduction of pockets of excess inventory in the handset supply chain as they believe inventory at Omnivision's customers is relatively manageable, particularly as the company has little Motorola exposure.
Morgan Stanley believes there is minimal downside left in Omnivision shares as expectations are low, the stock is down nearly 70% from its highs, valuation is at an all-time low, and more than 40% of outstanding shares have been sold short. Their target is $18.
Reits Overweight.
Notablecalls: Actionable call alert. While I have been negative on OVTI for some time I think MSCO-s defense here makes sense at least in s-t. I expect the stock to move aggressively upward. Suspect it will hit at least $12.50 today.
Omnivision's October quarter results and January quarter guidance already reflected the negative impact of a mix shift to low end handsets in the broader market that caused problems in C4Q06 for many wireless semiconductor vendors, notably Texas Instruments and STMicro. Mix is the key value driver for Omnivision and the firm continues to believe that Omnivision's mix of low-end and high-end image sensors stabilized in the January quarter, should improve modestly in the April quarter, and could become a meaningful tailwind as the company moves through 2007 and its customers ramp models with higher resolution cameras.
They do not expect Omnivision to suffer meaningfully from the reduction of pockets of excess inventory in the handset supply chain as they believe inventory at Omnivision's customers is relatively manageable, particularly as the company has little Motorola exposure.
Morgan Stanley believes there is minimal downside left in Omnivision shares as expectations are low, the stock is down nearly 70% from its highs, valuation is at an all-time low, and more than 40% of outstanding shares have been sold short. Their target is $18.
Reits Overweight.
Notablecalls: Actionable call alert. While I have been negative on OVTI for some time I think MSCO-s defense here makes sense at least in s-t. I expect the stock to move aggressively upward. Suspect it will hit at least $12.50 today.
Calls of Note Part 5
Bear Stearns is upping their year-end 2007 price target on Wynn Resorts (NASDAQ:WYNN) to $124 from $108, after reviewing their previous sum of the parts analysis that provided the basis for price target. They are not changing their estimates (as they are above consensus for 4Q06 and 2007).
This morning, the firm initiated on LVS with a Peer Perform and lowered rating on MGM to Peer Perform, so why are they viewing WYNN differently? Simply put, they think by applying the same LV Strip- and Macau- target multiples to WYNN derives a much higher share price. Firm views this as a consistent valuation approach within our coverage universe. In addition, they would not recommend having zero portfolio exposure/new money going into the LV Strip and Macau -centric stocks and think WYNN has more upside than the others.
Using target EBITDA multiples of 10x to 12.5x for Las Vegas Strip cash flows & 11.5x to 14x for its cash flows (these are consistent for target multiples that they use for MGM & LVS , the firm believes fair value for to be in the $106 to $142 range, or an average of $124, which implies upside of 15% from current levels.
Additionally, they see several catalysts for WYNN that should move shares higher over the coming months: 1) a likely strong Chinese New Year's Eve (1Q07), 2) a good 4Q06 out of Macau and 3) the February 2007 opening of Spamalot, which should lift entertainment and casino revenues at its
LV property.
Notablecalls: Reminds me of Mastercard (NYSE:MA) from last week. Actionable call alert!
This morning, the firm initiated on LVS with a Peer Perform and lowered rating on MGM to Peer Perform, so why are they viewing WYNN differently? Simply put, they think by applying the same LV Strip- and Macau- target multiples to WYNN derives a much higher share price. Firm views this as a consistent valuation approach within our coverage universe. In addition, they would not recommend having zero portfolio exposure/new money going into the LV Strip and Macau -centric stocks and think WYNN has more upside than the others.
Using target EBITDA multiples of 10x to 12.5x for Las Vegas Strip cash flows & 11.5x to 14x for its cash flows (these are consistent for target multiples that they use for MGM & LVS , the firm believes fair value for to be in the $106 to $142 range, or an average of $124, which implies upside of 15% from current levels.
Additionally, they see several catalysts for WYNN that should move shares higher over the coming months: 1) a likely strong Chinese New Year's Eve (1Q07), 2) a good 4Q06 out of Macau and 3) the February 2007 opening of Spamalot, which should lift entertainment and casino revenues at its
LV property.
Notablecalls: Reminds me of Mastercard (NYSE:MA) from last week. Actionable call alert!
Calls of Note Part 4
- Piper Jaffray reiterates aQuantive (NASDAQ:AQNT) as their top small/mid cap Internet pick for 207. Firm believes catalysts for shares include: 1) strong 4Q results; 2) increasing traction internationally, especially for its agency services; and 3) increased visibility into 2007 estimates and the roll-out of Street 2008 estimates. They believe shares are attractive at 14x 2007 EBITDA vs. 20% LT EBITDA growth and relative to DTAS' acquisition multiple of 16x '07. Firm would be buyers of AQNT shares ahead of what they believe will be a very solid 4Q performance.
Based on recent channel checks, they have increased confidence that aQuantive will report very strong 4Q results, likely exceeding the high end of revenue and earnings guidance. While the firm expects strength across the board in the seasonally strong 4Q, they will likely see the most upside from the Digital Marketing Services segment as checks indicate robust demand for agency services. Checks also indicate that full year 2007 demand is very robust, which increases firm's confidence in their estimates and they believe we will see upside to firm's 17% organic growth estimate for DMS.
Maintains Outperform and $34 tgt.
Notablecalls: May see some buy interest.
Based on recent channel checks, they have increased confidence that aQuantive will report very strong 4Q results, likely exceeding the high end of revenue and earnings guidance. While the firm expects strength across the board in the seasonally strong 4Q, they will likely see the most upside from the Digital Marketing Services segment as checks indicate robust demand for agency services. Checks also indicate that full year 2007 demand is very robust, which increases firm's confidence in their estimates and they believe we will see upside to firm's 17% organic growth estimate for DMS.
Maintains Outperform and $34 tgt.
Notablecalls: May see some buy interest.
Calls of Note Part 3
Couple of interesting comments on MBIA (NYSE:MBI) from tier-1 firms:
- Morgan Stanley notes that in the last minutes of the trading day on Friday, Bloomberg published a story suggesting MBIA will announce a settlement with regulators today, January 29. The article indicates MBIA will pay only the previously reserved for $75 million in fines and penalties to settle all AHERF-related issues, but would leave an independent consultant at the company to further
investigate potential wrongdoing at Capital Asset. MBIA has not commented on the proposed settlement.
A regulatory settlement, as proposed, would be a clear positive for the stock as it would remove significant uncertainty. It would also enable the company to begin repurchasing shares (up to $1 billion). Investors will finally be able to focus on the merits of the underlying fundamentals of the business. However, given tight credit spreads, only single-digit book value growth, and downward pressure on new business written, the firm does not believe the fundamentals are all that strong at present.
If this proves accurate, they would expect the stock to get a sharp short-term lift on the back of heavy short covering. There are more than 20 million shares short, representing 15% of the total.
If the MBI shares rally materially on the announcement, the firm would recommend reducing one's position in the stock.
- Deutsche Bank thinks that should MBIA settle with the Securities and Exchange Commission (SEC) and other regulators today, the stock could get a lift. Some investors that are short the stock may decide to cover, given that the investigations did not lead to MBIA losing its triple A ratings. MBIA is one of the most heavily shorted stocks in the S&P 500. Also, the company is likely to resume repurchasing shares in earnest. They estimate MBIA's excess capital has increased to $1.8 billion. According to news reports on Friday, January 26, MBIA could settle with the SEC as early as today for $75 million, which is the amount the company reserved in November 2005. Firm believes the settlement is likely, given that the company suddenly postponed its earnings release the day before the planned release date and could not provide an explanation for the change.
DB based their $79 target price on 1.45 times projected 4Q'07 book, which is at a discount to the average of 1.5 since the management changes in 1999.
Notablecalls: Having found myself in similar situations, I feel for the shorts. Not a nice way to spend a weekend. Expect a sharp move.
- Morgan Stanley notes that in the last minutes of the trading day on Friday, Bloomberg published a story suggesting MBIA will announce a settlement with regulators today, January 29. The article indicates MBIA will pay only the previously reserved for $75 million in fines and penalties to settle all AHERF-related issues, but would leave an independent consultant at the company to further
investigate potential wrongdoing at Capital Asset. MBIA has not commented on the proposed settlement.
A regulatory settlement, as proposed, would be a clear positive for the stock as it would remove significant uncertainty. It would also enable the company to begin repurchasing shares (up to $1 billion). Investors will finally be able to focus on the merits of the underlying fundamentals of the business. However, given tight credit spreads, only single-digit book value growth, and downward pressure on new business written, the firm does not believe the fundamentals are all that strong at present.
If this proves accurate, they would expect the stock to get a sharp short-term lift on the back of heavy short covering. There are more than 20 million shares short, representing 15% of the total.
If the MBI shares rally materially on the announcement, the firm would recommend reducing one's position in the stock.
- Deutsche Bank thinks that should MBIA settle with the Securities and Exchange Commission (SEC) and other regulators today, the stock could get a lift. Some investors that are short the stock may decide to cover, given that the investigations did not lead to MBIA losing its triple A ratings. MBIA is one of the most heavily shorted stocks in the S&P 500. Also, the company is likely to resume repurchasing shares in earnest. They estimate MBIA's excess capital has increased to $1.8 billion. According to news reports on Friday, January 26, MBIA could settle with the SEC as early as today for $75 million, which is the amount the company reserved in November 2005. Firm believes the settlement is likely, given that the company suddenly postponed its earnings release the day before the planned release date and could not provide an explanation for the change.
DB based their $79 target price on 1.45 times projected 4Q'07 book, which is at a discount to the average of 1.5 since the management changes in 1999.
Notablecalls: Having found myself in similar situations, I feel for the shorts. Not a nice way to spend a weekend. Expect a sharp move.
Calls of Note Part 2
JP Morgan is raising their Q1 estimates on ADC Telecommunications (NASDAQ:ADCT) to reflect a more normal 12% q/q decline in revs vs. prior estimate for a 15% decline as they believe Verizon and Deutsche Telekom may have returned to spending on their respective FTTx networks faster than the firm previously anticipated after pausing in 2H'06. They reiterate Neutral rating as they continue to believe order patterns remain inconsistent making visibility a challenge, while ADC's desire to increase exposure to Asian markets through acquisition could increase execution risk.
Verizon may have worked through its FTTx inventory faster than the firm expected fueled by strong sub growth as Tellabs reported ONT revenue grew q/q in its Q4 ending Dec. 31, despite reducing ONT prices by 25% (or more) starting at the beginning of Nov. VZ reports today at 8:30am.
Deutsche Telekom reaffirmed its commitment to its 50-city VDSL rollout in a press release on Sunday and the firm believes spending on the FTTN VDSL rollout may have returned in late December as evidenced by Corning reporting on its Q4 conference call that orders from European customers were stronger than expected at the end of its quarter.
JPM continues to believe ADC needs add'l strong customers beyond DT and VZ and view Bharti and Chunghwa's FTTx plans as modestly positive although its is too early to tell if ADC can secure some of their business.
Notablecalls: Expect to see some buy interest in ADCT following the call.
Verizon may have worked through its FTTx inventory faster than the firm expected fueled by strong sub growth as Tellabs reported ONT revenue grew q/q in its Q4 ending Dec. 31, despite reducing ONT prices by 25% (or more) starting at the beginning of Nov. VZ reports today at 8:30am.
Deutsche Telekom reaffirmed its commitment to its 50-city VDSL rollout in a press release on Sunday and the firm believes spending on the FTTN VDSL rollout may have returned in late December as evidenced by Corning reporting on its Q4 conference call that orders from European customers were stronger than expected at the end of its quarter.
JPM continues to believe ADC needs add'l strong customers beyond DT and VZ and view Bharti and Chunghwa's FTTx plans as modestly positive although its is too early to tell if ADC can secure some of their business.
Notablecalls: Expect to see some buy interest in ADCT following the call.
Calls of Note Part 1
Couple of comments on Western Union (NYSE:WU) ahead of results:
- William Blair notes Western Union's fourth-quarter results will not only be the company's first results to show the full impact of the spin-off from First Data Corp., but also will be very closely watched as indicative of the overall health of the money transfer market. This remains a controversial topic, as other money transfer business operators have in their most recent results conceded impacts from price competition, macroeconomic weakness, and immigration-related effects. Firm expects, however, that Western Union will be able to report a stabilizing-albeit weak-environment and that this can be a first step in restoring confidence among investors. The stock's recent performance likely reflects this near-term outlook, but does not yet, in their opinion, reflect the exceptional long-term opportunity that they believe faces the company, especially internationally. Firm believes long-term investors will be rewarded and reiterates Outperform rating.
- Merrill Lynch notes they expect Western Union to report pro forma EPS of $0.26 on revenues of $1,179mn. Their pro forma EPS matches the First Call consensus estimate. ML thinks investors continue to undervalue the global WU franchise and its long-term growth potential. Guidance should not be a concern as the company has already called for 10-12% organic revenue growth and 12-14% EPS growth in 2007.
While flagging growth in the Mexico corridor and in the domestic business has caused revenue and margin pressure recently, the firm thinks the market is overlooking WU's long-term growth potential as revenue growth outside of these areas remains robust. Last week, WU's competitor MoneyGram reported strong transaction and revenue growth in money transfer and they believe this strong performance can be attributed to MGI's global network. They hear more and more about pricing pressure, but believe this is largely captured in their estimates.
WU announced a few weeks ago that an Arizona court ruled in its favor and is prohibiting the Arizona Attorney General's Office from seizing money transfers "not sent from or intended for payment in the state." ML believes the worst is over and expect domestic and U.S.-to-Mexico transaction levels to build from here.
Sees weakness ahead of the qtr a buying oppy.
Notablecalls: Western Union is set to report its fourth quarter results after the market close on Weds, Jan 31st. Not actionable but good to know category.
- William Blair notes Western Union's fourth-quarter results will not only be the company's first results to show the full impact of the spin-off from First Data Corp., but also will be very closely watched as indicative of the overall health of the money transfer market. This remains a controversial topic, as other money transfer business operators have in their most recent results conceded impacts from price competition, macroeconomic weakness, and immigration-related effects. Firm expects, however, that Western Union will be able to report a stabilizing-albeit weak-environment and that this can be a first step in restoring confidence among investors. The stock's recent performance likely reflects this near-term outlook, but does not yet, in their opinion, reflect the exceptional long-term opportunity that they believe faces the company, especially internationally. Firm believes long-term investors will be rewarded and reiterates Outperform rating.
- Merrill Lynch notes they expect Western Union to report pro forma EPS of $0.26 on revenues of $1,179mn. Their pro forma EPS matches the First Call consensus estimate. ML thinks investors continue to undervalue the global WU franchise and its long-term growth potential. Guidance should not be a concern as the company has already called for 10-12% organic revenue growth and 12-14% EPS growth in 2007.
While flagging growth in the Mexico corridor and in the domestic business has caused revenue and margin pressure recently, the firm thinks the market is overlooking WU's long-term growth potential as revenue growth outside of these areas remains robust. Last week, WU's competitor MoneyGram reported strong transaction and revenue growth in money transfer and they believe this strong performance can be attributed to MGI's global network. They hear more and more about pricing pressure, but believe this is largely captured in their estimates.
WU announced a few weeks ago that an Arizona court ruled in its favor and is prohibiting the Arizona Attorney General's Office from seizing money transfers "not sent from or intended for payment in the state." ML believes the worst is over and expect domestic and U.S.-to-Mexico transaction levels to build from here.
Sees weakness ahead of the qtr a buying oppy.
Notablecalls: Western Union is set to report its fourth quarter results after the market close on Weds, Jan 31st. Not actionable but good to know category.
Color on news: Intel (NASDAQ:INTC)
Several firms are commenting on Intel (NASDAQ:INTC) after the co announced a major breakthrough in transistor technology that has important ramifications for both the co itself and its competitors:
- Banc of America notes that in recent yrs, Intel's ability to increase the raw performance of its processors (via increasing the clock frequency) at a breakneck rate was significantly hindered by heat dissipation issues, as processors became increasingly 'hot' at higher frequencies. Consequently, Intel was forced to forgo clock speed (measured in GHz) as a way to increase performance; it instead had to drive performance via the use of multiple cores - with each core serving as a relatively independent processor - that collectively consumed less power.
The breakthrough announced last Friday allows Intel, via the use of new dielectric materials (the only one disclosed was Hafnium) and a metal gate in its 45nm manufacturing process, to demonstrate a 20% improvement in transistor performance, while simultaneously driving a 10x reduction in gate oxide leakage power (previously the dominant source of excess power issipation).The importance of this advancement, in firm's view, cannot be underestimated Intel will have the ability to introduce processors with much higher performance that consume significantly less power. This not only helps Intel move its PC processor roadmap along in an aggressive fashion, but also potentially allows the company to leverage its ultra low power processors in markets yet unexplored.
They note that while Intel has traditionally led AMD from a manufacturing technology perspective by 1-1.5 yrs (witness AMD's 65nm ramp- a full 5 qtrs behind Intel's), the announcement from Intel on Friday likely puts even more distance between AMD & Intel.
- First Albany believes Intel is using ASM International's (NASDAQ:ASMI) Atomic Layer Deposition (ALD) product for the high-K gate deposition step. While there are other ALD suppliers, they believe that ASMI was the only vendor working on the gate application, while most other ALD systems were targeted for DRAM capacitor applications or Barrier/Seed layers for inter-metal dielectric application. There are literally hundreds of metal and high-K material choices. Firm thinks it will be take a competitor years to find the right combination. In fact, Intel announced a working high-K/metal gate in late 2003 and, at the time, we thought it would be implemented in the 65nm process, but it took an additional 3 years to perfect the technology.
The only other company that looks to be close to Intel is IBM (IBM). IBM expects to use a high-k/metal gate at the 45nm node as well, but this will be introduced in the "2008 time frame."
Intel also announced that it has working microprocessors (Penryn) on its new 45nm process. In addition, the company has been able to boot several operating systems on its silicon. The company expects to ramp two 45nm in the second half of 2007 and a third in 2008.
Notablecalls: The news is probably not enough to move INTC stock but I suspect there will be some buy interest in ASMI following speculation by First Albany.
- Banc of America notes that in recent yrs, Intel's ability to increase the raw performance of its processors (via increasing the clock frequency) at a breakneck rate was significantly hindered by heat dissipation issues, as processors became increasingly 'hot' at higher frequencies. Consequently, Intel was forced to forgo clock speed (measured in GHz) as a way to increase performance; it instead had to drive performance via the use of multiple cores - with each core serving as a relatively independent processor - that collectively consumed less power.
The breakthrough announced last Friday allows Intel, via the use of new dielectric materials (the only one disclosed was Hafnium) and a metal gate in its 45nm manufacturing process, to demonstrate a 20% improvement in transistor performance, while simultaneously driving a 10x reduction in gate oxide leakage power (previously the dominant source of excess power issipation).The importance of this advancement, in firm's view, cannot be underestimated Intel will have the ability to introduce processors with much higher performance that consume significantly less power. This not only helps Intel move its PC processor roadmap along in an aggressive fashion, but also potentially allows the company to leverage its ultra low power processors in markets yet unexplored.
They note that while Intel has traditionally led AMD from a manufacturing technology perspective by 1-1.5 yrs (witness AMD's 65nm ramp- a full 5 qtrs behind Intel's), the announcement from Intel on Friday likely puts even more distance between AMD & Intel.
- First Albany believes Intel is using ASM International's (NASDAQ:ASMI) Atomic Layer Deposition (ALD) product for the high-K gate deposition step. While there are other ALD suppliers, they believe that ASMI was the only vendor working on the gate application, while most other ALD systems were targeted for DRAM capacitor applications or Barrier/Seed layers for inter-metal dielectric application. There are literally hundreds of metal and high-K material choices. Firm thinks it will be take a competitor years to find the right combination. In fact, Intel announced a working high-K/metal gate in late 2003 and, at the time, we thought it would be implemented in the 65nm process, but it took an additional 3 years to perfect the technology.
The only other company that looks to be close to Intel is IBM (IBM). IBM expects to use a high-k/metal gate at the 45nm node as well, but this will be introduced in the "2008 time frame."
Intel also announced that it has working microprocessors (Penryn) on its new 45nm process. In addition, the company has been able to boot several operating systems on its silicon. The company expects to ramp two 45nm in the second half of 2007 and a third in 2008.
Notablecalls: The news is probably not enough to move INTC stock but I suspect there will be some buy interest in ASMI following speculation by First Albany.
Paperstand (LCC, TSO, SUN, VLO, COP)
The WSJ reports that US Airways (LCC) is willing to increase its hostile takeover offer for Delta Air by $1bn under certain conditions as part of a last-ditch effort to win support from Delta creditors. The carrier said over the weekend that it would sweeten its $9.8bn cash-and-stock bid to about $10.8bn if the official committee of creditors approaches Delta with a demand that the Atlanta airline open itself to due diligence by US Airways. To get the additional $1bn, all in cash, the committee also would have to ask a bankruptcy judge to postpone a hearing next week on Delta's restructuring plan. The group also would have to agree to support the start of a formal antitrust review.
“Heard on the Street” out saying that with President Bush calling for significantly slowing the growth in gasoline consumption in the next decade, stocks of some refiners slipped temporarily last week, a sign that some investors are reassessing growth prospects for the refiners. That long-term concern may have overshadowed a near-term opportunity. There are good reasons to conclude refiners of crude are poised for a nice seasonal stock pop as the high-demand summer driving season approaches. Margins will "stabilize and start going back up in the spring," said John Parry, of John S. Herold. The energy-research co is bullish on refiners Tesoro (TSO) and Sunoco (SUN) and Valero (VLO). Although Herold doesn't rate those stocks, it has what Mr. Parry calls an "inferred buy" on them, b/c the stocks are trading below what Herold regards as their value based on their avg margins over the past 3 years. Herold has recommended investors buy ConocoPhillips (COP).
Sunday, January 28, 2007
Barron's Summary
Barron’s Roundtable members like NAV, KALU, TXI, MYY, FLML, SHPGY, CAR, SBH, TESOF, RIMM, AAPL, LRCX, HLYS, SLV, GLD, CVC, DA, GIS, BFA, IFF, WMI, GMT, SQAA, LCAPA. Another fund manager holds HPQ, ASH, TAP, PBG and VZ. Shorts include IPG, ADI, MRK, MEDI and UST.
If Altria (MO) spins off Kraft (KFT) and then divvies up its big tobacco businesses, its shares have the potential to return 20% over the next 18 months. "I'm very optimistic about the stock, particularly on a risk-reward basis," says David Adelman, tobacco analyst at Morgan Stanley.
Earnings gains and momentum trading have pushed the shares of BMC Software (BMC) to a recent 34. But based on the company's cash-flow trends, the stock should probably be in the high 20s. In addition, article suggests that BMC was a better takeover candidate at $17 a share than it is at $34.
The Euro Dogs Investment theory isn't foolproof, but it's produced nice results in most of the past 15 years. It's worth a look by anyone interested in adding large European stocks to a portfolio. FTE, E, ABN, BT, HBC, VOD, BCS, ING and RDSA.
According to the Barron’s, the Avis Budget (CAR) auto-rental unit has garnered scant attention. Therein lay an opportunity, a neglected turnaround story with freshly motivated mgmt. The co's brands have held stable mkt share, yet fleet-cost and pricing mismatches have knocked margins toward historical trough levels. But rental-car pricing is firming as newly independent Hertz (HTZ) and Avis Budget no longer serve corporate masters with other priorities. And fleet-car cost increases should moderate this year. Getting margins up to their 5-year avg would mean a doubling of earnings to more than $2 a share in ‘08, from 99c last year. That would make the Avis stock a bargain at today's 24, also the price at which mgmt's long-term equity incentives are struck.
“The Trader” section discusses Abitibi (ABY), saying that the Street is solidly bearish, with 50% of the analysts who follow it rating it a Sell and 35% a Neutral. The firm hasn't produced black ink since ‘03, and annual rev has been stuck at about C$5.3bn for a few years. There's also a decent-sized short position. One of the few Abitibi bulls around is John Schneider, of Touchstone Large Cap Value Fund. Schneider ests that in a few years, with a currency tailwind and stabilized newspaper and housing mkts, Abitibi could earn about US50c per share. Apply a 10 or 11x P/E multiple, and the stock could be worth roughly double today's price. The shares appear washed out, and probably have limited downside. That doesn't mean they're about to rise, but given how unloved the stock is, it likely wouldn't take much in the way of good news to push it up significantly.
“International Trader” section discusses Alcatel-Lucent (ALU), whose shares fell about 12% last week, following warning of slack sales and crumbling profitability. Still, the article suggests that investors should be reassured to some degree that the co plans to cut 200M euros in extra costs in ‘07. That's in addition to the 400M euros it planned to achieve in merger-related savings that it forecasts will be worth 1.4bn euros by ‘09. And Alcatel-Lucent's sales should pick up through ‘07 as US operators start spending again. The co's stronger positioning across fixed-line, wireless and Internet segments should start to have an impact. Last week's disappointing trading isn't an indication that won't happen. It's just a reminder of how difficult it will be.
“Technology Trader” section out saying that CommVault (CVLT) and Acme Packet (APKT) are both pricey, but could be worth a bet by growth investors. CommVault trades at 44x the expected earnings for its current fiscal year, and Acme trades at 55x current fiscal-year earnings. The big difference between these 2 co’s and many dot-com-era darlings: They're profitable, and they may reward investors handsomely over 3-5 years, says Christopher McHugh, of Turner Investment. "Acme's device routes Internet phone calls between different networks, and Cisco doesn't have a product for that, Juniper doesn't have a product for that," says McHugh. "They're addressing a real need the marketplace has." And CommVault has "some interesting new backup software that really seems to be taking mkt share," making the co a takeout tgt for EMC or IBM or another storage vendor, says Rich Parower, of J&W Seligman. The risks are high with these co’s, but as long as stock-fund managers are trimming their cash piles and looking to get in on the building of Internet 2.0, there should be ample demand for young stocks.
“Plugged In” column out with a piece discussing Motorola (MOT) vs. Nokia (NOK). Read here.
If Altria (MO) spins off Kraft (KFT) and then divvies up its big tobacco businesses, its shares have the potential to return 20% over the next 18 months. "I'm very optimistic about the stock, particularly on a risk-reward basis," says David Adelman, tobacco analyst at Morgan Stanley.
Earnings gains and momentum trading have pushed the shares of BMC Software (BMC) to a recent 34. But based on the company's cash-flow trends, the stock should probably be in the high 20s. In addition, article suggests that BMC was a better takeover candidate at $17 a share than it is at $34.
The Euro Dogs Investment theory isn't foolproof, but it's produced nice results in most of the past 15 years. It's worth a look by anyone interested in adding large European stocks to a portfolio. FTE, E, ABN, BT, HBC, VOD, BCS, ING and RDSA.
According to the Barron’s, the Avis Budget (CAR) auto-rental unit has garnered scant attention. Therein lay an opportunity, a neglected turnaround story with freshly motivated mgmt. The co's brands have held stable mkt share, yet fleet-cost and pricing mismatches have knocked margins toward historical trough levels. But rental-car pricing is firming as newly independent Hertz (HTZ) and Avis Budget no longer serve corporate masters with other priorities. And fleet-car cost increases should moderate this year. Getting margins up to their 5-year avg would mean a doubling of earnings to more than $2 a share in ‘08, from 99c last year. That would make the Avis stock a bargain at today's 24, also the price at which mgmt's long-term equity incentives are struck.
“The Trader” section discusses Abitibi (ABY), saying that the Street is solidly bearish, with 50% of the analysts who follow it rating it a Sell and 35% a Neutral. The firm hasn't produced black ink since ‘03, and annual rev has been stuck at about C$5.3bn for a few years. There's also a decent-sized short position. One of the few Abitibi bulls around is John Schneider, of Touchstone Large Cap Value Fund. Schneider ests that in a few years, with a currency tailwind and stabilized newspaper and housing mkts, Abitibi could earn about US50c per share. Apply a 10 or 11x P/E multiple, and the stock could be worth roughly double today's price. The shares appear washed out, and probably have limited downside. That doesn't mean they're about to rise, but given how unloved the stock is, it likely wouldn't take much in the way of good news to push it up significantly.
“International Trader” section discusses Alcatel-Lucent (ALU), whose shares fell about 12% last week, following warning of slack sales and crumbling profitability. Still, the article suggests that investors should be reassured to some degree that the co plans to cut 200M euros in extra costs in ‘07. That's in addition to the 400M euros it planned to achieve in merger-related savings that it forecasts will be worth 1.4bn euros by ‘09. And Alcatel-Lucent's sales should pick up through ‘07 as US operators start spending again. The co's stronger positioning across fixed-line, wireless and Internet segments should start to have an impact. Last week's disappointing trading isn't an indication that won't happen. It's just a reminder of how difficult it will be.
“Technology Trader” section out saying that CommVault (CVLT) and Acme Packet (APKT) are both pricey, but could be worth a bet by growth investors. CommVault trades at 44x the expected earnings for its current fiscal year, and Acme trades at 55x current fiscal-year earnings. The big difference between these 2 co’s and many dot-com-era darlings: They're profitable, and they may reward investors handsomely over 3-5 years, says Christopher McHugh, of Turner Investment. "Acme's device routes Internet phone calls between different networks, and Cisco doesn't have a product for that, Juniper doesn't have a product for that," says McHugh. "They're addressing a real need the marketplace has." And CommVault has "some interesting new backup software that really seems to be taking mkt share," making the co a takeout tgt for EMC or IBM or another storage vendor, says Rich Parower, of J&W Seligman. The risks are high with these co’s, but as long as stock-fund managers are trimming their cash piles and looking to get in on the building of Internet 2.0, there should be ample demand for young stocks.
“Plugged In” column out with a piece discussing Motorola (MOT) vs. Nokia (NOK). Read here.
Friday, January 26, 2007
Calls of Note Part 2
Jefferies notes that Investor confusion over Cogent's (NASDAQ:COGT) ability to handle various types of biometric information (company can handle fingerprint, palm and facial) coupled with spurious conclusions over pricing and competition trends have knocked COGT flat on its back. They believe 2007 could provide positive catalysts. Conversations with the government and the company suggest that Cogent is well positioned to win its fair share of upcoming awards, including the FBI next-generation identification system when it is awarded in the fourth quarter, in firm's view.
Firm's recent checks with DoJ suggest Cogent's technology is well suited for FBI's next-generation identification, in their view. Key requirements include speed and accuracy, multimodal biometric fusion (finger, palm, and facial), flexibility to adapt to changing requirements, ability to scale significantly, and interoperability with other government systems such as IDENT (a Cogent system). The current IAFIS system processes between 50,000 and 80,000 fingerprint submissions per day, a transaction volume that likely increase significantly as the civil portion of the system ramps-up. Furthermore, the government expects the size of the database to increase dramatically due to future retentions of civil submissions, a positive for Cogent. The government will at least consider foreign ownership, control, or influence, also a positive for Cogent. The FBI timeline is to have an RFP out in March, proposals submitted during the summer, and an award in September or October. Interestingly, firm believes the government plans only limited evaluations with some testing. Similar to US-VISIT, the award is likely made to a large systems integrator although the government reserves the right to specify an AFIS vendor.
Firm has Buy rating and $15 target for the stock.
Notablecalls: The stock has always been valued based on promise rather than performance. While all that Jefferies does is adding more promise, it just might do the trick with the stock beaten down and having sizeable short interest.
Firm's recent checks with DoJ suggest Cogent's technology is well suited for FBI's next-generation identification, in their view. Key requirements include speed and accuracy, multimodal biometric fusion (finger, palm, and facial), flexibility to adapt to changing requirements, ability to scale significantly, and interoperability with other government systems such as IDENT (a Cogent system). The current IAFIS system processes between 50,000 and 80,000 fingerprint submissions per day, a transaction volume that likely increase significantly as the civil portion of the system ramps-up. Furthermore, the government expects the size of the database to increase dramatically due to future retentions of civil submissions, a positive for Cogent. The government will at least consider foreign ownership, control, or influence, also a positive for Cogent. The FBI timeline is to have an RFP out in March, proposals submitted during the summer, and an award in September or October. Interestingly, firm believes the government plans only limited evaluations with some testing. Similar to US-VISIT, the award is likely made to a large systems integrator although the government reserves the right to specify an AFIS vendor.
Firm has Buy rating and $15 target for the stock.
Notablecalls: The stock has always been valued based on promise rather than performance. While all that Jefferies does is adding more promise, it just might do the trick with the stock beaten down and having sizeable short interest.
Calls of Note Part 1
Merrill Lynch lowers their '07 Genentech's (NYSE:DNA) Lucentis sales est. to reflect Dec. NDC data, which suggests reduced dosing frequency is negatively impacting sales. But, they'd see weakness as a BUYing opportunity despite lower Lucentis sales, concern about Tykerb approval in Feb. & issues related to Roche's low dose Avastin study in lung cancer. Avastin sales have re-accelerated & should continue to grow based on breast cancer approval in '08 and potentially positive data in adjuvant colorectal cancer by YE07.
NDC data for Lucentis sales in Dec. of $65 MM showed a sequential monthly decline from November sales of $75 MM. Firm believes the NDC sales decline reflected less frequent dosing of patients that began therapy several months ago. New patients are typically dosed once per month but after ~3 months, patients are dosed based on need, which they estimate at every three months. A large bolus of patients began therapy during
the drug's first 5 months on the market. But, these patients are beginning to be treated less frequently and new patient starts are not enough to offset the lost revenues.
Firm now expects 1Q07 sales to decline to $187 MM from $217 MM in 4Q06. They reduced their '07 Lucentis sales est. to $710 MM from $906 MM & EPS fell to $2.78 from $2.83.
Notablecalls: Interesting datapoint, Lucentis is too good for its own sake. It is working so well that only rare doses are needed, reducing the revenues. Remember, Lucentis was the source of upside the last qtr, but that may be limited from now on. DNA never gets hit big, but think the call will create some downside.
NDC data for Lucentis sales in Dec. of $65 MM showed a sequential monthly decline from November sales of $75 MM. Firm believes the NDC sales decline reflected less frequent dosing of patients that began therapy several months ago. New patients are typically dosed once per month but after ~3 months, patients are dosed based on need, which they estimate at every three months. A large bolus of patients began therapy during
the drug's first 5 months on the market. But, these patients are beginning to be treated less frequently and new patient starts are not enough to offset the lost revenues.
Firm now expects 1Q07 sales to decline to $187 MM from $217 MM in 4Q06. They reduced their '07 Lucentis sales est. to $710 MM from $906 MM & EPS fell to $2.78 from $2.83.
Notablecalls: Interesting datapoint, Lucentis is too good for its own sake. It is working so well that only rare doses are needed, reducing the revenues. Remember, Lucentis was the source of upside the last qtr, but that may be limited from now on. DNA never gets hit big, but think the call will create some downside.
Color On Quarter: Synaptics (NASDAQ:SYNA)
Gross margins the main issue of discussion following Synaptics (NASDAQ:SYNA) 2Q report.
- Cowen notes that Q2 revenue was strong in both PC and music players, with 3c EPS upside from operations plus a 7c boost from lower taxes. Strong backlog for the March quarter prompts them to raise estimates. While GM guidance below 40% for the first time has psychological impact, firm believes a broader product set should drive faster growth and bottom-line benefits. Finally, firm sees further upside potential from the handset segment.
GM is expected to be about 39% in Q3, below the historical target range of 40-45%, due to the mix of consumer notebooks, and third party content and price competition in multimedia controls. However, with projected revenue up 47% Y/Y, EPS are 10% better than their prior model. Firm believes SYNA is strategically focused on driving incremental sales and operating profit, with actions such as moving more engineering to Asia, and the launch of OneTouch, configurable solutions, which allow customers to rapidly design their own interfaces.
- Bear Stearns notes SYNA reported 2Q07 upside and provided in line EPS outlook on higher revs. While declining gross margin is a concern, it attributed the decline to mix shift and noted that it is actively taking steps to improve margins. Firm is raising their ests and 2007 price target from $33 to $37. They would take advantage of any weakness in the stock given the increasing adoption of touch interface solution across increasing number of segments (consumer electronics, cellphones, etc.).
From a larger perspective, as a leading provider of user interface solutions, SYNA is well positioned to continue to benefit from the accelerating adoption of mobile devices (notebooks, cellphones, MP3 players, etc.). As seen in AAPL iPhone and LG Prada (uses SYNA), touch interface solutions like SYNA's are becoming critical as device sizes continue to shrink with increasing features and complexity of functionalities.
- First Albany says that consistent with what they believe were whisper expectations, the raised 3Q revenue guidance appears to reflect the continuation of Synaptics' dual source status in the iPod click-wheel business. However, the gross margin is expected to be only 39% in 3Q, 172 bps lower than their prior estimate.
According to the firm, the deterioration of the gross margin during 2Q reflects the ongoing mix shift toward low end notebooks and lower margin multimedia applications. While management hopes to reverse some of the gross margin degradation with cost improvement programs and the ramping of higher margin OneTouch offering, firm is prudently modeling in a sub-40% gross margin for the next few quarters.
Notablecalls: My best guess is that GM decline is rather a trend than a flip. Look at what the co is doing - clickwheels and touchpads, neither of them is what one would call something really unique or extraordinary. iPod clickwheels are dual-sourced so SYNA is not the only one with the knowhow, touchpads are really impossible to use and have plenty of makers. Only iPhone's touchscreen seems to be interesting, but hey, that's not SYNA's. With the stock trading at 25x 2007 EPS and GM set to decline, see no reason to own the stock.
- Cowen notes that Q2 revenue was strong in both PC and music players, with 3c EPS upside from operations plus a 7c boost from lower taxes. Strong backlog for the March quarter prompts them to raise estimates. While GM guidance below 40% for the first time has psychological impact, firm believes a broader product set should drive faster growth and bottom-line benefits. Finally, firm sees further upside potential from the handset segment.
GM is expected to be about 39% in Q3, below the historical target range of 40-45%, due to the mix of consumer notebooks, and third party content and price competition in multimedia controls. However, with projected revenue up 47% Y/Y, EPS are 10% better than their prior model. Firm believes SYNA is strategically focused on driving incremental sales and operating profit, with actions such as moving more engineering to Asia, and the launch of OneTouch, configurable solutions, which allow customers to rapidly design their own interfaces.
- Bear Stearns notes SYNA reported 2Q07 upside and provided in line EPS outlook on higher revs. While declining gross margin is a concern, it attributed the decline to mix shift and noted that it is actively taking steps to improve margins. Firm is raising their ests and 2007 price target from $33 to $37. They would take advantage of any weakness in the stock given the increasing adoption of touch interface solution across increasing number of segments (consumer electronics, cellphones, etc.).
From a larger perspective, as a leading provider of user interface solutions, SYNA is well positioned to continue to benefit from the accelerating adoption of mobile devices (notebooks, cellphones, MP3 players, etc.). As seen in AAPL iPhone and LG Prada (uses SYNA), touch interface solutions like SYNA's are becoming critical as device sizes continue to shrink with increasing features and complexity of functionalities.
- First Albany says that consistent with what they believe were whisper expectations, the raised 3Q revenue guidance appears to reflect the continuation of Synaptics' dual source status in the iPod click-wheel business. However, the gross margin is expected to be only 39% in 3Q, 172 bps lower than their prior estimate.
According to the firm, the deterioration of the gross margin during 2Q reflects the ongoing mix shift toward low end notebooks and lower margin multimedia applications. While management hopes to reverse some of the gross margin degradation with cost improvement programs and the ramping of higher margin OneTouch offering, firm is prudently modeling in a sub-40% gross margin for the next few quarters.
Notablecalls: My best guess is that GM decline is rather a trend than a flip. Look at what the co is doing - clickwheels and touchpads, neither of them is what one would call something really unique or extraordinary. iPod clickwheels are dual-sourced so SYNA is not the only one with the knowhow, touchpads are really impossible to use and have plenty of makers. Only iPhone's touchscreen seems to be interesting, but hey, that's not SYNA's. With the stock trading at 25x 2007 EPS and GM set to decline, see no reason to own the stock.
Color On Quarter: Microsoft (NASDAQ:MSFT)
Plenty of firms commenting Microsoft (NASDAQ:MSFT) after the software giant reported its result last night.
- Merril Lynch says bears likely to focus on weaknesses in Xbox and Online. Xbox 360 met Q2 expectations of 4.4mn consoles, but lowered H2 guidance to 1.6mn consoles versus 2.6-4.6mn. In firm's view, this was likely done to balance retail supply with demand. Lower shipments could boost EPS in the short-term. Online was impacted by the transition to AdCentre, and will take time to work out.
Firm says Vista - core to FY07 investment thesis - is working. Client growth in Q2 of 9% y/y (adjusted for coupon program) was in-line with PC growth of 8-10%, indicating that Microsoft's SKU strategy is benefiting ASP's. Microsoft raised guidance for full-year Client revenue from 9-10% to 11-12% due to an expected full-year premium mix of 60%. In firm's view, a higher mix and good uptake of Vista could result in $800mn-$1bn revenue upside on an annual basis.
According to the firm, overhang for FY08 will be margin leverage. Management likely to talk about this on 2/15/07 meeting with investors in NY and on 3Q07 earnings call. Firm's view is that Microsoft is unlikely to make significant investments that would dilute margins. In a worst case scenario, MSFT could double or even triple Online opex of $400mn and keep margins flat because one-time launch expenses for Vista and Office will go away by the end of FY07. They think there could be upside of $0.10-0.15 to FY08 consensus EPS of $1.67, both from incremental Vista and Office 2007 revenue and lower opex.
- First Albany outlining positives and negatives:
Positives: 1) MSFT exceeded both revenue and EPS consensus estimates; 2) management indicated that December sales demonstrated encouraging signs of early adopter demand for Windows Vista, Office 2007, and Exchange Server 2007; 3) bookings grew 21% Y/Y, matching a multiyear high ; 4) Xbox 360 attach rates remain at record levels, while "Gears of War" sold >2.7M units within its first 8 weeks of release; 5) MSFT raised its premium mix expectations for 2H:07 to 60% from its previous estimate of 52%-54%; 6) SQL Server database grew >30% despite a tough comparison.
Negatives: 1) despite strong Entertainment (Xbox) results, MSFT reduced Entertainment guidance, probably reflecting a drive toward lower inventory levels; 2) despite a return to growth in Online Services (MSN), MSFT reduced guidance for Online Services, citing a slower expected growth rate in search queries and page views.
- JP Morgan notes that unearned came in at $11.9B in line with our target and ahead of cons. at $11.5B--and is a key positive data point on early Office traction as well as the burgeoning Client enterprise upgrade cycle. Along this line, Client unearned increased 35%+ YoY net undelivered elements and tech guarantee impact.
Q3 guidance of $13.7-14B/$0.45-0.46 is modestly below firm's $14B/ $0.45 est. and reflects higher deferrals, but they expected MSFT would be conservative. Q3 includes launch costs for Vista which will be largely one time in nature--and firm believes the co. is being cautious around early Vista and Office activity. They also believe that the EandD target of (15%)-(25%) YoY could prove to be too low.
MSFT has taken some of the upside off the table by raising guidance for Vista premium mix to 60%, raising Client rev. growth targets to 11-12% from 9-10% and reflecting some of the Office bookings strength by raising MBD targets to 10-11% growth from 8-9%. However, firm still believes 1) there is further upside in SandT on the SQL cycle, 2) MBD guidance reflects little ASP improvement which we should see, and 3) the Vista enterprise upgrade cycle could surprise.
Notablecalls: In otherwise strong results/guidance, Xbox guidance cut was the only negative surprise. However, I don't think this will be enough to spoil the party.
- Merril Lynch says bears likely to focus on weaknesses in Xbox and Online. Xbox 360 met Q2 expectations of 4.4mn consoles, but lowered H2 guidance to 1.6mn consoles versus 2.6-4.6mn. In firm's view, this was likely done to balance retail supply with demand. Lower shipments could boost EPS in the short-term. Online was impacted by the transition to AdCentre, and will take time to work out.
Firm says Vista - core to FY07 investment thesis - is working. Client growth in Q2 of 9% y/y (adjusted for coupon program) was in-line with PC growth of 8-10%, indicating that Microsoft's SKU strategy is benefiting ASP's. Microsoft raised guidance for full-year Client revenue from 9-10% to 11-12% due to an expected full-year premium mix of 60%. In firm's view, a higher mix and good uptake of Vista could result in $800mn-$1bn revenue upside on an annual basis.
According to the firm, overhang for FY08 will be margin leverage. Management likely to talk about this on 2/15/07 meeting with investors in NY and on 3Q07 earnings call. Firm's view is that Microsoft is unlikely to make significant investments that would dilute margins. In a worst case scenario, MSFT could double or even triple Online opex of $400mn and keep margins flat because one-time launch expenses for Vista and Office will go away by the end of FY07. They think there could be upside of $0.10-0.15 to FY08 consensus EPS of $1.67, both from incremental Vista and Office 2007 revenue and lower opex.
- First Albany outlining positives and negatives:
Positives: 1) MSFT exceeded both revenue and EPS consensus estimates; 2) management indicated that December sales demonstrated encouraging signs of early adopter demand for Windows Vista, Office 2007, and Exchange Server 2007; 3) bookings grew 21% Y/Y, matching a multiyear high ; 4) Xbox 360 attach rates remain at record levels, while "Gears of War" sold >2.7M units within its first 8 weeks of release; 5) MSFT raised its premium mix expectations for 2H:07 to 60% from its previous estimate of 52%-54%; 6) SQL Server database grew >30% despite a tough comparison.
Negatives: 1) despite strong Entertainment (Xbox) results, MSFT reduced Entertainment guidance, probably reflecting a drive toward lower inventory levels; 2) despite a return to growth in Online Services (MSN), MSFT reduced guidance for Online Services, citing a slower expected growth rate in search queries and page views.
- JP Morgan notes that unearned came in at $11.9B in line with our target and ahead of cons. at $11.5B--and is a key positive data point on early Office traction as well as the burgeoning Client enterprise upgrade cycle. Along this line, Client unearned increased 35%+ YoY net undelivered elements and tech guarantee impact.
Q3 guidance of $13.7-14B/$0.45-0.46 is modestly below firm's $14B/ $0.45 est. and reflects higher deferrals, but they expected MSFT would be conservative. Q3 includes launch costs for Vista which will be largely one time in nature--and firm believes the co. is being cautious around early Vista and Office activity. They also believe that the EandD target of (15%)-(25%) YoY could prove to be too low.
MSFT has taken some of the upside off the table by raising guidance for Vista premium mix to 60%, raising Client rev. growth targets to 11-12% from 9-10% and reflecting some of the Office bookings strength by raising MBD targets to 10-11% growth from 8-9%. However, firm still believes 1) there is further upside in SandT on the SQL cycle, 2) MBD guidance reflects little ASP improvement which we should see, and 3) the Vista enterprise upgrade cycle could surprise.
Notablecalls: In otherwise strong results/guidance, Xbox guidance cut was the only negative surprise. However, I don't think this will be enough to spoil the party.
Color On Quarter: MEMC Electronic Materials (NYSE:WFR)
MEMC Electronic Materials (NYSE:WFR) getting mainly positive comments after the co reported another beat & raise qtr. Price targets and estimates are getting bumped at most firms.
- JP Morgan notes MEMC continued to show its pricing leverage. Even in a relatively flat semi wafer start environment, it modestly beat its GM guidance for C4Q06, and guided GMs up 200bps to 50.8% for C1Q07. Importantly, MEMC provided C07 revenue and PF EPS guidance of greater than $1.9bn/$3.00, with C07 EPS guidance significantly above pre-call consensus.
Inventories for MEMC continued their downward trend to 34 days, setting a new historical low. Management commented that inventory levels were near the absolute bottom and would probably not decline any further. Firm believes the continued decline in MEMCs inventory underlines the continued tightness of polysilicon which is unlikely to be resolved until 2008 at the earliest, in their view.
MEMC indicated that the demand for solar related polysilicon remains strong and unsatisfied. Additionally, firm believes C1Q07 is the low point this year for QoQ semi wafer start growth, and throughout the remainder of the year, as wafer start growth reaccelerates, MEMC is likely to reduce solar polysilicon sales in order to keep up with wafer demand. Firm expects this elasticity between the two markets to exist throughout 2007.
- CIBC raising price tgt to $59 from $50 on strong results and an extremely bullish 2007 and long-term outlook. Firm notes that margins continued to rise and are further guided to rise, debunking the bear case.
Firm says MEMC continues to prove the wrong the bears, who claim that solar demand is not as strong as expectations and that corporate margins have peaked. The tight polysilicon situations (which is caused by PV demand), has led to a continuation of high silicon pricing, providing the revenue growth during the quarter. Management indicated that semiconductor silicon consumption was down slightly in 4Q, but was offset by slight pricing increases. This is in line with management's prior commentary and firm's checks across the foundry and semiconductor supply chain. As a result of the subdued semiconductor performance, revenue growth for MEMC was likely driven by increased spot polysilicon sales to solar customers, as more capacity has come online in preparation for the Suntech and Gintech solar wafer supply contracts that begin in 2007.
- Citigroup outlining positives and negatives:
Positives: Estimates going up yet again; solar allowing WFR to barely blink during semi downturn; guidance suggests solar margins 70%+ and likely to stay there for a while; labor savings still coming.
Negatives: When the music stops on poly shortages WFR's weakening 300mm position will become problematic; long-term model sets an extremely high bar and suggests mgmt is frustrated w/stock price.
Price tgt goes to $48 from $39, but "We've missed this train and we're not chasing it" as the note's headline says.
Notablecalls: Needless to say that I agree with the Citigroup here. It's been fun while it has lasted, but would not chase the stock at the the $46.5 levels of afterhours. I think they make a great point of mgmt being frustrated w/ stock price and don't think it's a good sign. Mgmt is probably understanding that the mkt is not expecting the music to play forever and therefore are laying out long-term model. Not sure if the mkt buys into that - after all, it's based on the same tidbits that have driven the stock so far. The stock has been acting too heavy of late for all the positive chatter. Any cracks in the buying interest may provide nice shorting oppty today.
- JP Morgan notes MEMC continued to show its pricing leverage. Even in a relatively flat semi wafer start environment, it modestly beat its GM guidance for C4Q06, and guided GMs up 200bps to 50.8% for C1Q07. Importantly, MEMC provided C07 revenue and PF EPS guidance of greater than $1.9bn/$3.00, with C07 EPS guidance significantly above pre-call consensus.
Inventories for MEMC continued their downward trend to 34 days, setting a new historical low. Management commented that inventory levels were near the absolute bottom and would probably not decline any further. Firm believes the continued decline in MEMCs inventory underlines the continued tightness of polysilicon which is unlikely to be resolved until 2008 at the earliest, in their view.
MEMC indicated that the demand for solar related polysilicon remains strong and unsatisfied. Additionally, firm believes C1Q07 is the low point this year for QoQ semi wafer start growth, and throughout the remainder of the year, as wafer start growth reaccelerates, MEMC is likely to reduce solar polysilicon sales in order to keep up with wafer demand. Firm expects this elasticity between the two markets to exist throughout 2007.
- CIBC raising price tgt to $59 from $50 on strong results and an extremely bullish 2007 and long-term outlook. Firm notes that margins continued to rise and are further guided to rise, debunking the bear case.
Firm says MEMC continues to prove the wrong the bears, who claim that solar demand is not as strong as expectations and that corporate margins have peaked. The tight polysilicon situations (which is caused by PV demand), has led to a continuation of high silicon pricing, providing the revenue growth during the quarter. Management indicated that semiconductor silicon consumption was down slightly in 4Q, but was offset by slight pricing increases. This is in line with management's prior commentary and firm's checks across the foundry and semiconductor supply chain. As a result of the subdued semiconductor performance, revenue growth for MEMC was likely driven by increased spot polysilicon sales to solar customers, as more capacity has come online in preparation for the Suntech and Gintech solar wafer supply contracts that begin in 2007.
- Citigroup outlining positives and negatives:
Positives: Estimates going up yet again; solar allowing WFR to barely blink during semi downturn; guidance suggests solar margins 70%+ and likely to stay there for a while; labor savings still coming.
Negatives: When the music stops on poly shortages WFR's weakening 300mm position will become problematic; long-term model sets an extremely high bar and suggests mgmt is frustrated w/stock price.
Price tgt goes to $48 from $39, but "We've missed this train and we're not chasing it" as the note's headline says.
Notablecalls: Needless to say that I agree with the Citigroup here. It's been fun while it has lasted, but would not chase the stock at the the $46.5 levels of afterhours. I think they make a great point of mgmt being frustrated w/ stock price and don't think it's a good sign. Mgmt is probably understanding that the mkt is not expecting the music to play forever and therefore are laying out long-term model. Not sure if the mkt buys into that - after all, it's based on the same tidbits that have driven the stock so far. The stock has been acting too heavy of late for all the positive chatter. Any cracks in the buying interest may provide nice shorting oppty today.
Thursday, January 25, 2007
Calls of Note Part 2
- Stifel notes they believe large-cap Internet stocks are in the midst of a positive revaluation toward fair value. The sector has materially underperformed the broad market rally over the past several months. Investors need exposure to underperforming, high quality assets that quickly have become "need to own" names given the reversal in relative performance.
Firm believes Amazon.com (NASDAQ:AMZN) business is mispriced and they anticipate that the company is entering at least a period of 12-18 months of accelerating operating leverage. In the text of this note, they show the 23 different areas of investment that AMZN was involved in over the past year. These initiatives have accelerated AMZN's revenue growth to 26% on an organic basis, or the highest level of the large-cap Internets, excluding Google. During the past year, free cash flow has significantly delevered and has also been impacted by one-time events such as a patent payment, Toys R' Us litigation fees, and the removal of the excess tax benefit from stock options from its FCF calculation. This delevering begins to reverse in 2007 and accelerates into 2008. Overall, the firm anticipates 29% FCF growth in 2007 over 2005 (they exclude the 2006 trough year) and an additional 29% FCF growth in 2008.
Reits Buy and $44 tgt.
Notablecalls: One for investment types. It also gives a glimpse of the sentiment surrounding the large-cap Internet names.
Firm believes Amazon.com (NASDAQ:AMZN) business is mispriced and they anticipate that the company is entering at least a period of 12-18 months of accelerating operating leverage. In the text of this note, they show the 23 different areas of investment that AMZN was involved in over the past year. These initiatives have accelerated AMZN's revenue growth to 26% on an organic basis, or the highest level of the large-cap Internets, excluding Google. During the past year, free cash flow has significantly delevered and has also been impacted by one-time events such as a patent payment, Toys R' Us litigation fees, and the removal of the excess tax benefit from stock options from its FCF calculation. This delevering begins to reverse in 2007 and accelerates into 2008. Overall, the firm anticipates 29% FCF growth in 2007 over 2005 (they exclude the 2006 trough year) and an additional 29% FCF growth in 2008.
Reits Buy and $44 tgt.
Notablecalls: One for investment types. It also gives a glimpse of the sentiment surrounding the large-cap Internet names.
Calls of Note Part 1
BofA comments on video game industry saying softer -than-expected demand for PS3 hardware could be an ominous sign given the historical success of third-party software sales on Sony's game consoles. Firm's recent checks indicate sluggish PS3 sales, despite much improved availability. They believe disappointing PS3 hardware sales are an incremental negative for all the game publishers. Firm reiterates their view that early 2007 could be a challenging time for publishing stocks and point to the soft demand for PS3's as evidence.
Based upon channel checks, 78% of the 50 retailers the firm spoke to reported PS3 hardware in-stock, while 70% stated inventory was lasting at least a week of sales. The PS3's price point and lack of compelling software titles were cited as the most common reason units were remaining on retail shelves. These findings run contrary to their (and consensus) thoughts about PS3 demand six months ago, when it was widely believed that the first few months of PS3 sales would easily be satisfied from pent-up demand. In contrast, Nintendo's Wii hardware is experiencing strong demand, but lower- than-expected supply.
Bottom line, the key risk is that FY08 software sales are at risk unless PS3 demand picks up (logically the result of a pricecut) or the publishers make meaningful inroads on the Wii platform. Firm estimates that PS3 sales will account for approximately 21% of their publisher's total FY08 sales. On the margin, they view Electronic Arts (NASDAQ:ERTS) as the most exposed to soft PS3 sales.
Notablecalls: Think the PS3 concerns are somewhat overblown. After all, it's 4 weeks after Christmas. You really think there won't be pricecuts? Nevertheless, the wording of the call is strong enough to generate some weakness in ERTS.
Based upon channel checks, 78% of the 50 retailers the firm spoke to reported PS3 hardware in-stock, while 70% stated inventory was lasting at least a week of sales. The PS3's price point and lack of compelling software titles were cited as the most common reason units were remaining on retail shelves. These findings run contrary to their (and consensus) thoughts about PS3 demand six months ago, when it was widely believed that the first few months of PS3 sales would easily be satisfied from pent-up demand. In contrast, Nintendo's Wii hardware is experiencing strong demand, but lower- than-expected supply.
Bottom line, the key risk is that FY08 software sales are at risk unless PS3 demand picks up (logically the result of a pricecut) or the publishers make meaningful inroads on the Wii platform. Firm estimates that PS3 sales will account for approximately 21% of their publisher's total FY08 sales. On the margin, they view Electronic Arts (NASDAQ:ERTS) as the most exposed to soft PS3 sales.
Notablecalls: Think the PS3 concerns are somewhat overblown. After all, it's 4 weeks after Christmas. You really think there won't be pricecuts? Nevertheless, the wording of the call is strong enough to generate some weakness in ERTS.
Color on quarter: Novellus (NASDAQ:NVLS)
Couple of interesting comments on Novellus Systems (NASDAQ:NVLS) following earnings:
- RBC Capital is maintaining their neutral stance on NVLS following its earnings call. The stock was trading up in after hours in spite of disappointing 1Q07 revenue and EPS guidance on short covering, in our view. Firm expects the stock to drift lower over next few days. Notes they will be more constructive on the NVLS and the semi-cap sector when they start to see meaningful orders from foundries.
EPS was higher by 8 cents primarily due to higher non-operating income and lower taxes. Higher gross margin contributed a penny to EPS upside. Orders and revenues were in-line; shipments of $390M were significantly lower than the guidance of $410- 420M. Order guidance of down 5% to 10% was slightly better than firm's expectations. As they expected, the Company guided for sequential increase in shipment. Firm is still disappointed as the increase is primarily coming as result of push-outs from 4Q06.
Management commented that second half would be better than first half, in sharp contrast to Lam Research's commentary. Although it is possible for NVLS to a have better 2nd half due to lower exposure to memory, the firm is not ready to step in and buy the stock.
- Cowen notes NVLS's Q4 was at the high-end of guidance on most metrics excepts for shipments which were 5%light given some industry push-outs/reschedulings. Bookings (-6%) were in line despite some order push-outs in logic. While commentary acknowledged a modest ST slowing, NVLS suggests a pick-upin H2 and suggested that push-outs had more to do with in sourcing/outsourcing decisions than the industrybeginning to roll-over. Given an increasing number of IDMs (TXN...) shifting more to foundries and shifting partner strategies (Freescale and others) this makes sense. NVLS suggests a foundry pick-up in H2. Still optimistic on the overall memory cycle - both DRAM and flash though there's a lot riding on Vista and new flash applications. Reduced shipments and a one Q impact from NVLS global biz structure (reduces taxes) drive Q1 below expectations. Still, given the recent sell-off, NVLS will probably be up a bit. Though NVLS has done a nice job tightening operations, increasing leverage etc., the firm will remain on the sidelines given industry cross currents and a stock lifted by merger talk which seems unlikely.
Notablecalls: Think NVLS may squeeze a bit higher before fading. No more than $32 range, though.
- RBC Capital is maintaining their neutral stance on NVLS following its earnings call. The stock was trading up in after hours in spite of disappointing 1Q07 revenue and EPS guidance on short covering, in our view. Firm expects the stock to drift lower over next few days. Notes they will be more constructive on the NVLS and the semi-cap sector when they start to see meaningful orders from foundries.
EPS was higher by 8 cents primarily due to higher non-operating income and lower taxes. Higher gross margin contributed a penny to EPS upside. Orders and revenues were in-line; shipments of $390M were significantly lower than the guidance of $410- 420M. Order guidance of down 5% to 10% was slightly better than firm's expectations. As they expected, the Company guided for sequential increase in shipment. Firm is still disappointed as the increase is primarily coming as result of push-outs from 4Q06.
Management commented that second half would be better than first half, in sharp contrast to Lam Research's commentary. Although it is possible for NVLS to a have better 2nd half due to lower exposure to memory, the firm is not ready to step in and buy the stock.
- Cowen notes NVLS's Q4 was at the high-end of guidance on most metrics excepts for shipments which were 5%light given some industry push-outs/reschedulings. Bookings (-6%) were in line despite some order push-outs in logic. While commentary acknowledged a modest ST slowing, NVLS suggests a pick-upin H2 and suggested that push-outs had more to do with in sourcing/outsourcing decisions than the industrybeginning to roll-over. Given an increasing number of IDMs (TXN...) shifting more to foundries and shifting partner strategies (Freescale and others) this makes sense. NVLS suggests a foundry pick-up in H2. Still optimistic on the overall memory cycle - both DRAM and flash though there's a lot riding on Vista and new flash applications. Reduced shipments and a one Q impact from NVLS global biz structure (reduces taxes) drive Q1 below expectations. Still, given the recent sell-off, NVLS will probably be up a bit. Though NVLS has done a nice job tightening operations, increasing leverage etc., the firm will remain on the sidelines given industry cross currents and a stock lifted by merger talk which seems unlikely.
Notablecalls: Think NVLS may squeeze a bit higher before fading. No more than $32 range, though.
Color on quarter: eBay (NASDAQ:EBAY)
Several firms are commenting on eBay (NASDAQ:EBAY) after the co issued surprisingly strong results and guidance last night:
- Piper Jaffray says that while eBay produced a strong quarter with upside to their estimates, the majority of the upside came from foreign exchange.
Listing growth has slowed considerably (12% y/ y); while monetization improved to $1.75 (ex forex) in Q4 from $1.65 in Q3, it failed to reach firm's target of $1.80. Unclear how much of the monetization improvement was Q4 seasonality.
Revenue per active users improved to $13.05 (ex forex) from $12.01 which is a positive sign and slightly above the bar the firm set in their last note as an indication of a reversal. Investors should continue to watch this to see how much seasonality and one-time high demand products affected this metric in Q4.
Usage growth continues to decelerate as active users increased only 14% y/ y in Q4, down from 17% in Q3, and at 82M was 2M below the 84M necessary to stabilize this metric. GMV growth (ex forex) flattened to 16% y/y growth, and likely benefited from higher ASPs in the quarter.
Despite the stock's strong positive reaction in the after-hours market, they believe eBay failed to produce a quarter that would indicate sustainable acceleration of growth. Firm believes an assumption of a declining growth rate for core is still the more realistic scenario. However, despite deteriorating fundamentals, the company is likely to continue to produce acceptable earnings results, helped by non-core factors, in the near term and as such, the stock is likely near its floor. They are therefore increasing their rating to Market Perform to reflect this reality and increasing price target to $30 from $25. They do believe that the near term cash generation of eBay will eventually catch up with its deteriorating fundamentals and slow down, but until then, investors are likely to give EBAY a more generous multiple.
- Deutsche Bank reiterates HOLD investment rating on shares of eBay despite the solid 4Q results that came in soundly ahead of expectations. While they are encouraged by the solid performance (and modest improvement in the underlying metrics), it remains a little difficult to fully extrapolate exactly where eBay's upside came from, especially with listings/transactions up 10%/11% Y/Y and GMV up 16% (FX adjusted).
Despite the respectable performance in 4Q (that should be well received by investors today), theythink that eBay faces longer term structural challenges in its business (that may be on hold in the near term). Specifically, the company still has to aggressively invest in demand (via marketing) to generate transaction volumes and GMV, a concept that may be fine tuned but difficult to defend against as off-line retailers (i.e. BestBuy, Wal-Mart, Circuit City, etc.) spend online to take advantage of lower-priced online media buys. As a result, seller feedback still remains negative from the notion that sellers are seeking for growth in sales and profits (for which growth
is proving increasingly elusive these days). While the stock will be up on short covering as a result of the 4Q strength, they think investors should wait on the sidelines to see if the 4Q uptick was a seasonal event or a sustainable trend.
Deutsche is raising their 2007 EPS estimate from $1.19 to $1.27, with revs now at $7.201bn from $7.007bn. $100mn in revs came from the StubHub acquisition. Tgt goes to $32 from $29.
- RBC Capital notes listings growth decelerated, but EBAY rebalanced the US marketplace, increased conversions, and stabilized ASPs. PayPal shrugged off the competitive threat from Google Checkout. Currency and acquisitions also added to growth. Finally, eBay will benefit from the repurchase of another $1b of stock, and the authorization of an incremental $2bn over the next 2 years.
Management raised guidance due to StubHub, which accounted for an incremental $105mm-$120mm, carryover of strong trends in 4Q06 accounting for about $60mm, offset by the exit from China of about $10mm-$15mm.
Using full 2008 estimates on EBAY (vs. blended 2007/2008),the firm now arrives at a price target of $38. They believe shares will have some follow through beyond the one-day earnings related move today, giving the company the benefit of the doubt in the near term. RBC is unsure whether this is a situation driven by easy compares and currency upside, or whether to believe the trends will remain strong throughout 2007.
Maintains Sector Perform rating.
Notablecalls: Looks like short covering will be the name of the game today. Yet, decelerating listings and usage growth will continue to weigh on the stock after the shorts are out of the way. The stock traded as high as $34 in after hrs. It may have some more upside in it, but I suspect it won't be more than say half a point.
- Piper Jaffray says that while eBay produced a strong quarter with upside to their estimates, the majority of the upside came from foreign exchange.
Listing growth has slowed considerably (12% y/ y); while monetization improved to $1.75 (ex forex) in Q4 from $1.65 in Q3, it failed to reach firm's target of $1.80. Unclear how much of the monetization improvement was Q4 seasonality.
Revenue per active users improved to $13.05 (ex forex) from $12.01 which is a positive sign and slightly above the bar the firm set in their last note as an indication of a reversal. Investors should continue to watch this to see how much seasonality and one-time high demand products affected this metric in Q4.
Usage growth continues to decelerate as active users increased only 14% y/ y in Q4, down from 17% in Q3, and at 82M was 2M below the 84M necessary to stabilize this metric. GMV growth (ex forex) flattened to 16% y/y growth, and likely benefited from higher ASPs in the quarter.
Despite the stock's strong positive reaction in the after-hours market, they believe eBay failed to produce a quarter that would indicate sustainable acceleration of growth. Firm believes an assumption of a declining growth rate for core is still the more realistic scenario. However, despite deteriorating fundamentals, the company is likely to continue to produce acceptable earnings results, helped by non-core factors, in the near term and as such, the stock is likely near its floor. They are therefore increasing their rating to Market Perform to reflect this reality and increasing price target to $30 from $25. They do believe that the near term cash generation of eBay will eventually catch up with its deteriorating fundamentals and slow down, but until then, investors are likely to give EBAY a more generous multiple.
- Deutsche Bank reiterates HOLD investment rating on shares of eBay despite the solid 4Q results that came in soundly ahead of expectations. While they are encouraged by the solid performance (and modest improvement in the underlying metrics), it remains a little difficult to fully extrapolate exactly where eBay's upside came from, especially with listings/transactions up 10%/11% Y/Y and GMV up 16% (FX adjusted).
Despite the respectable performance in 4Q (that should be well received by investors today), theythink that eBay faces longer term structural challenges in its business (that may be on hold in the near term). Specifically, the company still has to aggressively invest in demand (via marketing) to generate transaction volumes and GMV, a concept that may be fine tuned but difficult to defend against as off-line retailers (i.e. BestBuy, Wal-Mart, Circuit City, etc.) spend online to take advantage of lower-priced online media buys. As a result, seller feedback still remains negative from the notion that sellers are seeking for growth in sales and profits (for which growth
is proving increasingly elusive these days). While the stock will be up on short covering as a result of the 4Q strength, they think investors should wait on the sidelines to see if the 4Q uptick was a seasonal event or a sustainable trend.
Deutsche is raising their 2007 EPS estimate from $1.19 to $1.27, with revs now at $7.201bn from $7.007bn. $100mn in revs came from the StubHub acquisition. Tgt goes to $32 from $29.
- RBC Capital notes listings growth decelerated, but EBAY rebalanced the US marketplace, increased conversions, and stabilized ASPs. PayPal shrugged off the competitive threat from Google Checkout. Currency and acquisitions also added to growth. Finally, eBay will benefit from the repurchase of another $1b of stock, and the authorization of an incremental $2bn over the next 2 years.
Management raised guidance due to StubHub, which accounted for an incremental $105mm-$120mm, carryover of strong trends in 4Q06 accounting for about $60mm, offset by the exit from China of about $10mm-$15mm.
Using full 2008 estimates on EBAY (vs. blended 2007/2008),the firm now arrives at a price target of $38. They believe shares will have some follow through beyond the one-day earnings related move today, giving the company the benefit of the doubt in the near term. RBC is unsure whether this is a situation driven by easy compares and currency upside, or whether to believe the trends will remain strong throughout 2007.
Maintains Sector Perform rating.
Notablecalls: Looks like short covering will be the name of the game today. Yet, decelerating listings and usage growth will continue to weigh on the stock after the shorts are out of the way. The stock traded as high as $34 in after hrs. It may have some more upside in it, but I suspect it won't be more than say half a point.
Paperstand (RIMM, LCC, FCX)
According to the WSJ's "Heard on the Street" column, since the day Apple (AAPL) showed off its new iPhone, shares of RIM (RIMM) have been taking a beating. The logic: iPhone, capable of sending and receiving email, could eat into the mkt for RIM's BlackBerry. But it is too early to count out RIM. Indeed, many investors say that RIM may still have some growing to do. Its corporate wireless email device and service are poised to expand in mkts outside N-America, and has become practically indispensable at many large corporations. And the co has opened a 2nd-front: the consumer mkt. Its first foray into that territory, a stylish wireless email phone with a built-in camera named the Pearl, is selling well and a new line-up of devices geared toward both business users and consumers is coming soon. Expected to be priced far below the iPhone's $499 starting price, the new and already available RIM devices serve a different mkt segment, investors say. The iPhone is expected to appeal to high-end consumers seeking to upgrade their iPods. Others may be put off by some of the iPhone features such as its touch-screen keyboard, limited battery life and camera, a feature often banned by corporations. What's more is that RIM has a cozy relationship with some 225 network operators globally, who make large profits selling BlackBerry service. By contrast, Apple has decided to work with a single operator in the US, AT&T's (T) wireless unit. Investors believe RIM's easy-to-use technology and solid brand awareness make it uniquely positioned to increase its mkt share on multiple fronts. "I am willing to give them the benefit of the doubt that they will continue to come up with competitive offerings on the consumer side and I think they have more room to grow even on the enterprise side," says Martin Hubbes, of AGF Funds.
The WSJ reports that a group of Delta Air Lines bondholders Wed urged negotiations to begin on US Airways' (LCC) $9.8bn hostile takeover of the airline. The ad hoc committee of unsecured creditors, an informal group formed in Nov largely in support of the merger, said Delta has inflated the risks in order to kill the deal and exit bankruptcy-court protection as an independent co later this year. The bondholders believe opening discussions with the carrier could yield a more lucrative offer and thus fatten the payout to all Delta creditors. US Airways has set a Feb. 1 deadline for its offer to expire unless it wins approval from the official Delta creditors committee to examine Delta's finances in order to fine-tune the offer. The official committee, comprised of the 9 largest holders of Delta claims, has the authority ultimately to approve the merger or the standalone reorganization plan submitted by Delta. "It is our view that the concerns voiced by Delta mgmt about antitrust, labor and consumer issues related to an US Airways deal are exaggerated, and we believe a transaction is possible," said a spokeswoman for the ad hoc group. "We urged the Official Creditors' Committee today to engage in discussions with US Airways."
Barron's Online "Inside Scoop" section reprots that a director of Freeport-McMoRan (FCX) has loaded up his biggy bank with $26.7M in the shares of the co, ahead of approval for the co to buy Phelps Dodge. Robert Day purchased 377K Freeport shares on the open mkt on Jan. 22 , and another 123K shares on Jan. 23. Day has been on Freeport's board of directors since '95. This week's shopping spree is Day's first reported purchase of Freeport stock on the open mkt in the 12 years he has sat on the board.
Wednesday, January 24, 2007
Calls of Note Part 1
- Thomas Weisel comments on Wynn Resorts (NYSE:WYNN) saying Macau gaming win rose a healthy 44% in 4Q06, which bodes well for Wynn Macau and could be a source of upside for WYNN. Based on market win and recent market share figures, the property could be tracking ahead of firm's top-line estimates by 5% or more.
Stock call: A strong quarter with the potential for upward revisions could prove to be a short-term catalyst for the stock, but they continue to harbor concern over valuation and would remain on the sidelines at recent prices.
Based on estimates, they get to an $80-85 CFV (sum of the parts), and the stock is well above that. We argue that investors are paying a fair price for existing resorts, announced projects and giving credit for at least one other project. Firm sees upside potential as limited and would remain on the sidelines until they get clarity on further projects in Macau and plans for the Cotai Strip in particular.
Notablecalls: Not actionable but good to know category.
Color on results: Citrix Systems (NASDAQ:CTXS)
Mostly positive comments on Citrix Systems (NASDAQ:CTXS) following Q4 results:
- JP Morgan notes there is some hair here--but this is a much better outcome than most expected and CTXS should trade well.
At first blush, the results and guidance look strong across the board with the exception of operating margins, where CTXS has been historically inconsistent. Q4 earnings of $0.39 exceeded consensus of $0.38 with about $0.01 from repurchase activity and operating margins of 26.7% were below 27.6% estimate. Deferred revenue of $356M was ahead of $349M estimate while CFO of $97M exceeded firm's $82M target.
The stronger license is likely a result of the direct business-where firm's checks were stronger and should provide comfort that there is some stabilization in the core App. Virtualization business, which should enable mgmt. to maintain growth targets for the App Virtualization-key for CTXS to
emerge from its transition post Q107. They also believe ANG was solid vs. $28M target.
Guidance encapsulates Q1-which most viewed as a key risk heading into the quarter--and should enable consensus estimates to modestly move higher, and leave room for further upwards earnings revisions through the year.
Shares traded at 20.7x JPM's CY07 $1.55 in the after market, still below group average of 22-24x.
- Merrill Lynch notes Citrix delivered modest 4Q06 EPS upside, while across-the-board YoY license strength should temper lingering pessimism over Presentation Server. The robust product pipeline supports firm's conviction in Citrix' portfolio strategy, while added distribution breadth could underpin potential for appreciation in the shares.
Citrix' 4Q results suggest at least part of the weakness in Presentation Server in 3Q may have been execution related - which is easier to remedy than a secular decline. ML thinks management understands the need to maintain focus while expanding the product portfolio both organically and through acquisitions. Looking forward they expect a steady calendar of new product launches and new introductions to the channel beginning with the Partner Summit later this month. They continue to like the story and the stock and would be aggressive buyers at current levels.
Reits Buy and $39 tgt.
- Goldman Sachs notes Citrix Systems reported strong 4Q results, with core Application Virtualization business growing 11% in the quarter with license revenue growth of 2% year-over-year. The bear case had largely revolved around potential yoy declines, and thus the report should help bolster the belief that new use cases such as outsourcing, disaster recovery, and potentially even Vista upgrades for enterprises could drive low-mid-single-digit growth here.
Results should prove to be a positive for the stock, which has already rebounded significantly from its December lows when fears of Application Virtualization weakness were strongest. That said, they see plenty of new product releases and upgrades to carry performance higher from here. Firm's EPS estimates for FY07 and FY08 are $1.55 and $1.77 (ex-ESOs), compared to $1.55 and $1.76 previously.
- Stifel think there are not a lot of negatives but they believe that some could be disappointed in the lack of upside to EPS estimates for 2007 in the face of a higher 2007 revenue outlook along with the overall lack of margin expansion flavor in the story. Voluntary stock option investigation a minor negative but their sense is that the market cares less and less about stock option issues with each passing day.
Maintains Hold rating. The firm notes they clearly missed a short-term buying opportunity with early January concern about how 4Q would play out. At this point, they don't see any major near-term catalysts that would yield a meaningful acceleration in Citrix's growth and yield upside to estimates though a number of initiatives could prove interesting in terms of the 2008 outlook. They also don't believe that the shares will likely experience any significant multiple expansion in the near term.
Notablecalls: Waterpistol to the head, I think we will see an initial surge of short covering after the open, followed by a sizable pullback. But that's a low conviction call. The results were surprisingly good.
- JP Morgan notes there is some hair here--but this is a much better outcome than most expected and CTXS should trade well.
At first blush, the results and guidance look strong across the board with the exception of operating margins, where CTXS has been historically inconsistent. Q4 earnings of $0.39 exceeded consensus of $0.38 with about $0.01 from repurchase activity and operating margins of 26.7% were below 27.6% estimate. Deferred revenue of $356M was ahead of $349M estimate while CFO of $97M exceeded firm's $82M target.
The stronger license is likely a result of the direct business-where firm's checks were stronger and should provide comfort that there is some stabilization in the core App. Virtualization business, which should enable mgmt. to maintain growth targets for the App Virtualization-key for CTXS to
emerge from its transition post Q107. They also believe ANG was solid vs. $28M target.
Guidance encapsulates Q1-which most viewed as a key risk heading into the quarter--and should enable consensus estimates to modestly move higher, and leave room for further upwards earnings revisions through the year.
Shares traded at 20.7x JPM's CY07 $1.55 in the after market, still below group average of 22-24x.
- Merrill Lynch notes Citrix delivered modest 4Q06 EPS upside, while across-the-board YoY license strength should temper lingering pessimism over Presentation Server. The robust product pipeline supports firm's conviction in Citrix' portfolio strategy, while added distribution breadth could underpin potential for appreciation in the shares.
Citrix' 4Q results suggest at least part of the weakness in Presentation Server in 3Q may have been execution related - which is easier to remedy than a secular decline. ML thinks management understands the need to maintain focus while expanding the product portfolio both organically and through acquisitions. Looking forward they expect a steady calendar of new product launches and new introductions to the channel beginning with the Partner Summit later this month. They continue to like the story and the stock and would be aggressive buyers at current levels.
Reits Buy and $39 tgt.
- Goldman Sachs notes Citrix Systems reported strong 4Q results, with core Application Virtualization business growing 11% in the quarter with license revenue growth of 2% year-over-year. The bear case had largely revolved around potential yoy declines, and thus the report should help bolster the belief that new use cases such as outsourcing, disaster recovery, and potentially even Vista upgrades for enterprises could drive low-mid-single-digit growth here.
Results should prove to be a positive for the stock, which has already rebounded significantly from its December lows when fears of Application Virtualization weakness were strongest. That said, they see plenty of new product releases and upgrades to carry performance higher from here. Firm's EPS estimates for FY07 and FY08 are $1.55 and $1.77 (ex-ESOs), compared to $1.55 and $1.76 previously.
- Stifel think there are not a lot of negatives but they believe that some could be disappointed in the lack of upside to EPS estimates for 2007 in the face of a higher 2007 revenue outlook along with the overall lack of margin expansion flavor in the story. Voluntary stock option investigation a minor negative but their sense is that the market cares less and less about stock option issues with each passing day.
Maintains Hold rating. The firm notes they clearly missed a short-term buying opportunity with early January concern about how 4Q would play out. At this point, they don't see any major near-term catalysts that would yield a meaningful acceleration in Citrix's growth and yield upside to estimates though a number of initiatives could prove interesting in terms of the 2008 outlook. They also don't believe that the shares will likely experience any significant multiple expansion in the near term.
Notablecalls: Waterpistol to the head, I think we will see an initial surge of short covering after the open, followed by a sizable pullback. But that's a low conviction call. The results were surprisingly good.
Color on results: Yahoo! (NASDAQ:YHOO)
Several firms are commenting on Yahoo (NASDAQ:YHOO) after the co released its Q4 results and 2007 guidance.
- UBS thinks management hit all the right notes in their prepared remarks and during Q&A. The fourth quarter itself was solid, with branded the obvious highlight. Of course, the announcement that the new Panama ranking switch would be turned on February 5 was something that the firm, along with most investors, had been waiting on for some time.
Guidance is the one area where some investors may be a bit concerned as the revenue midpoint implies 14% y/y growth (the low-end of guidance implies just 8.6% y/y), however, the firm believes this guidance will prove to be relatively conservative. They assume that branded can continue to perform at least in line with the overall online ad market at about 25% in '07, and if one takes the company at face value in that Panama can provide double digit increases in search by the back half of the year, then it amounts to top-line growth of at least 16%-18% year over year.
The bottom line is that they think investors want to believe in Panama and that this management team can execute. We think that sentiment will improve on the heels of the Panama launch. While there are sure to be bumps in the road as the new technology is released, the firm continues to believe that investors will be rewarded as Yahoo moves forward in 2007 and Panama begins to show tangible results. Finally, they point out that Panama may continue to surprise investors as its scale and scope become better understood as a platform designed for much more than just text-based ads.
The read through for Google is difficult given the differences in Yahoo and Google's growth trajectories and monetization efforts. Having said that, UBS thinks Yahoo's q/q search growth was about 3-4%. That implies to us that it may be difficult for Google to see the 20% q/q growth they think it needs to move the stock up significantly. They think that Google had about 10-12% q/q volume gains in the quarter. So while Yahoo likely had zero monetization gains, they are not sure that Google's monetization improvements were significant enough to push it over 20% q/q. The profile internationally could be different, and may make firm's projections look conservative. However, given the uncertainty in the quarter,they recommend investors refrain from the short-term trade on Google's quarterly results. Rates Google Neutral.
- Stifel notes Yahoo! experienced a quarter that was at the high-end of its lowered guidance
and issued guidance below published expectations. In firm's view, investors are placing a bet that Panama will improve the growth of the business, not for just twelve months, but on a long-term basis.
On the positive side, Panama is here and management noted that the new ranking module will be active in the U.S. on February 5. This means relevancy will be a component of paid search results, like Google. The company is also planning the beginning the rollout in international markets in 2Q. Management further noted that the new search platform will begin to show revenue impact in 2Q and accelerate throughout 2007 and beyond. The company has issued back-end loaded guidance that incorporates a Panama lift beginning in 2Q06 and improving throughout the remainder of 2007. For Yahoo!, the firm projects 2007 revenue growth with Panama of 16% to $5.3 billion, a growth rate lower than both Amazon (21%) and eBay (19%).
Firm's view is that we are at a point of maturity on the Internet that opportunities are no longer greenfield in nature. In other words, at this juncture, when one company wins another loses. They strongly believe that Google and Yahoo! are direct competitors and that the growth trends favor Google.
They believe the risk to Panama is to the downside as expectations for its launch and a 2H benefit now seemed priced in at 30x 2008 FCF. Also, within the search business, they believe Google's better monetization has created an environment in which Google can always outbid competitors for affiliate deals unless competitors choose to give away all the economics of a deal. Expects Yahoo! to continue to experience affiliate departures throughout 2007 due to the network effect apparent in Google's affiliate business.
- Deutsche Bank is maintaining their HOLD investment rating on shares of Yahoo!, and
believe that the slowing core growth at Yahoo! (particularly pronounced in search) and optionality from the Panama platform have already been priced into the shares. While they contend that not much has changed from yesterday to today, the shares have been bid up on a February 5th Panama launch (all the while the 2007 guidance came in lower than Street expectations). In firm's view, the stock is likely to give back the modest gains overnight as investors dig deeper into the financial and valuation.
While the stock has moved higher on the monetization platform being on time, the quantification of the impact remains a debate. Guidance was lower than expected with a wide range of 8%-20% top line growth. As for the stock, they would be buyers of the stock at $25 and sellers at $30, given the slow 1H growth and uptick in 2H (already in the stock).
Notablecalls: While I love the rationale behind UBS' comments, Deutsche's call is likely to be right in the s-t. YHOO's a short above the $28 level.
- UBS thinks management hit all the right notes in their prepared remarks and during Q&A. The fourth quarter itself was solid, with branded the obvious highlight. Of course, the announcement that the new Panama ranking switch would be turned on February 5 was something that the firm, along with most investors, had been waiting on for some time.
Guidance is the one area where some investors may be a bit concerned as the revenue midpoint implies 14% y/y growth (the low-end of guidance implies just 8.6% y/y), however, the firm believes this guidance will prove to be relatively conservative. They assume that branded can continue to perform at least in line with the overall online ad market at about 25% in '07, and if one takes the company at face value in that Panama can provide double digit increases in search by the back half of the year, then it amounts to top-line growth of at least 16%-18% year over year.
The bottom line is that they think investors want to believe in Panama and that this management team can execute. We think that sentiment will improve on the heels of the Panama launch. While there are sure to be bumps in the road as the new technology is released, the firm continues to believe that investors will be rewarded as Yahoo moves forward in 2007 and Panama begins to show tangible results. Finally, they point out that Panama may continue to surprise investors as its scale and scope become better understood as a platform designed for much more than just text-based ads.
The read through for Google is difficult given the differences in Yahoo and Google's growth trajectories and monetization efforts. Having said that, UBS thinks Yahoo's q/q search growth was about 3-4%. That implies to us that it may be difficult for Google to see the 20% q/q growth they think it needs to move the stock up significantly. They think that Google had about 10-12% q/q volume gains in the quarter. So while Yahoo likely had zero monetization gains, they are not sure that Google's monetization improvements were significant enough to push it over 20% q/q. The profile internationally could be different, and may make firm's projections look conservative. However, given the uncertainty in the quarter,they recommend investors refrain from the short-term trade on Google's quarterly results. Rates Google Neutral.
- Stifel notes Yahoo! experienced a quarter that was at the high-end of its lowered guidance
and issued guidance below published expectations. In firm's view, investors are placing a bet that Panama will improve the growth of the business, not for just twelve months, but on a long-term basis.
On the positive side, Panama is here and management noted that the new ranking module will be active in the U.S. on February 5. This means relevancy will be a component of paid search results, like Google. The company is also planning the beginning the rollout in international markets in 2Q. Management further noted that the new search platform will begin to show revenue impact in 2Q and accelerate throughout 2007 and beyond. The company has issued back-end loaded guidance that incorporates a Panama lift beginning in 2Q06 and improving throughout the remainder of 2007. For Yahoo!, the firm projects 2007 revenue growth with Panama of 16% to $5.3 billion, a growth rate lower than both Amazon (21%) and eBay (19%).
Firm's view is that we are at a point of maturity on the Internet that opportunities are no longer greenfield in nature. In other words, at this juncture, when one company wins another loses. They strongly believe that Google and Yahoo! are direct competitors and that the growth trends favor Google.
They believe the risk to Panama is to the downside as expectations for its launch and a 2H benefit now seemed priced in at 30x 2008 FCF. Also, within the search business, they believe Google's better monetization has created an environment in which Google can always outbid competitors for affiliate deals unless competitors choose to give away all the economics of a deal. Expects Yahoo! to continue to experience affiliate departures throughout 2007 due to the network effect apparent in Google's affiliate business.
- Deutsche Bank is maintaining their HOLD investment rating on shares of Yahoo!, and
believe that the slowing core growth at Yahoo! (particularly pronounced in search) and optionality from the Panama platform have already been priced into the shares. While they contend that not much has changed from yesterday to today, the shares have been bid up on a February 5th Panama launch (all the while the 2007 guidance came in lower than Street expectations). In firm's view, the stock is likely to give back the modest gains overnight as investors dig deeper into the financial and valuation.
While the stock has moved higher on the monetization platform being on time, the quantification of the impact remains a debate. Guidance was lower than expected with a wide range of 8%-20% top line growth. As for the stock, they would be buyers of the stock at $25 and sellers at $30, given the slow 1H growth and uptick in 2H (already in the stock).
Notablecalls: While I love the rationale behind UBS' comments, Deutsche's call is likely to be right in the s-t. YHOO's a short above the $28 level.
Paperstand (MEAD, LEG, TIN)
According to the WSJ’s „Inside Track” section, stock purchases by 2 major shareholders of Meade Instruments (MEAD) loom even larger now that the funds have representatives on its board. Hummingbird Mgmt, Meade's largest shareholder, and Monarch Activist Partners reported increasing their stakes in the co over the past 2 weeks. The stock purchases are the first by the shareholders since June, when Meade agreed to let Hummingbird's Paul Sonkin and Monarch's James Chadwick join the co's board. After the most recent purchase, Hummingbird owns about 15.6% of Meade's stock outstanding, while Monarch has amassed a 3.7% stake. "Certainly it's positive that not only they're now on the board and they have more say in the direction of the co, but they're continuing to increase their respective stakes in the co," said Ben Silverman, of InsiderScore.com.
Barron’s Online highlights Leggett & Platt (LEG), whose shares have languished along with the home and automotive sectors. But a recently completed restructuring program and new acquisitions may give the co and its stock new legs to stand on in ‘07. Despite setbacks in several of its core mkts, Leggett's stock, which trades at 14x forward earnings, has the potential to climb at least 15% over the next 12 mo, as the benefits of a comprehensive restructuring program, which was completed last qrtr, drive into full gear. "In a mkt where there are a lot of uncertainties related to housing, this is a stock we think will hold up better b/c of its track record, mgmt team and dividend yield," says Trip Rodgers, of Carlson Capital.
“Inside Scoop” section reports that late Monday, Carl Icahn and his investment partners reported they have spent about $301.2M to purchase 7.2M shares (or a 6.73% stake) of Temple-Inland (TIN) on the open mkt starting in the 4Q05. Icahn's group also has exposure to another 3.38M shares, or 3.16% of Temple-Inland's nearly 107M outstanding shares, through a number of derivative agreements (total return swaps) with counterparties. Jonathan Moreland, of InsiderInsights.com, says that with Temple-Inland, it seems that Icahn "wants the big money like the '80s -- buy it and break it up." Although Icahn "is rarely bad to bet with," Moreland says that investors should have a stomach for volatility because sometimes his suggestions don't work out.
Barron’s Online highlights Leggett & Platt (LEG), whose shares have languished along with the home and automotive sectors. But a recently completed restructuring program and new acquisitions may give the co and its stock new legs to stand on in ‘07. Despite setbacks in several of its core mkts, Leggett's stock, which trades at 14x forward earnings, has the potential to climb at least 15% over the next 12 mo, as the benefits of a comprehensive restructuring program, which was completed last qrtr, drive into full gear. "In a mkt where there are a lot of uncertainties related to housing, this is a stock we think will hold up better b/c of its track record, mgmt team and dividend yield," says Trip Rodgers, of Carlson Capital.
“Inside Scoop” section reports that late Monday, Carl Icahn and his investment partners reported they have spent about $301.2M to purchase 7.2M shares (or a 6.73% stake) of Temple-Inland (TIN) on the open mkt starting in the 4Q05. Icahn's group also has exposure to another 3.38M shares, or 3.16% of Temple-Inland's nearly 107M outstanding shares, through a number of derivative agreements (total return swaps) with counterparties. Jonathan Moreland, of InsiderInsights.com, says that with Temple-Inland, it seems that Icahn "wants the big money like the '80s -- buy it and break it up." Although Icahn "is rarely bad to bet with," Moreland says that investors should have a stomach for volatility because sometimes his suggestions don't work out.
Tuesday, January 23, 2007
Calls of Note Part 4
- CIBC is reiterating their Sector Outperformer rating on Trident Micro (NASDAQ:TRID), while raising CY07 ests. & introducing CY08 forecast. Following a seasonal CY1Q, they expect TRID's image processing lead, peerless mid/high-range decode economics, & superior growth prospects, will be quite evident, to value & growth investors alike.
TRID has been under undue and incessant pressure for the past 3Qs, due to confusion over competition (BRCM, Mediatek, ZRAN, & ATI--non of which really compete with TRID), TRID's reticence (due to options-related 10K/Q delinquencies), and naturally declining, yet still sublime, gross margins.
In the report, the form elucidates why they believe investors & the cacophony of boorish bears are totally wrong about TRID, and why it will be a steal beyond C1Q:
- Firm believes that thus far, not a single Broadcom win has come at TRID's expense
- TV markets are bifurcating and TRID has laid claim to the mid to high end as others such as Taiwan Inc. battle at the low end.
- In spite of inevitable erosion, Trident s Gross and Operating Margins are still well-above the average (within the Digital Media Semiconductor peer group) and, as such, TRID should trade at a premium valuation rather than at a 30%+ discount. While gross margins are definitely coming down, and will likely see a high-4- handle in CY08, the firm believes that Trident should be an exception to the rule.
- TRID is on track to put its options review and management succession issues behind it in short order.
Along these lines, the firm increased their CY07 est. to $1.32 on $325M from $1.30/$320M, and established CY08 ests. of $1.80 on $450M. At ~13 new CY07E EPS of $1.32, TRID trades ~33% below peers' 20x. On the contrary, they believe TRID deserves a premium valuation, given its expanding domination of Tier-1 image processing (adding Philips in C2Q), and its growing- likelihood of similar success in HD decode during CY08.
Reits Sector Outperformer and $25 tgt.
Notablecalls: Would not be surprised to see some buy interest following the call. But also but sure to check out comments from TXN.
TRID has been under undue and incessant pressure for the past 3Qs, due to confusion over competition (BRCM, Mediatek, ZRAN, & ATI--non of which really compete with TRID), TRID's reticence (due to options-related 10K/Q delinquencies), and naturally declining, yet still sublime, gross margins.
In the report, the form elucidates why they believe investors & the cacophony of boorish bears are totally wrong about TRID, and why it will be a steal beyond C1Q:
- Firm believes that thus far, not a single Broadcom win has come at TRID's expense
- TV markets are bifurcating and TRID has laid claim to the mid to high end as others such as Taiwan Inc. battle at the low end.
- In spite of inevitable erosion, Trident s Gross and Operating Margins are still well-above the average (within the Digital Media Semiconductor peer group) and, as such, TRID should trade at a premium valuation rather than at a 30%+ discount. While gross margins are definitely coming down, and will likely see a high-4- handle in CY08, the firm believes that Trident should be an exception to the rule.
- TRID is on track to put its options review and management succession issues behind it in short order.
Along these lines, the firm increased their CY07 est. to $1.32 on $325M from $1.30/$320M, and established CY08 ests. of $1.80 on $450M. At ~13 new CY07E EPS of $1.32, TRID trades ~33% below peers' 20x. On the contrary, they believe TRID deserves a premium valuation, given its expanding domination of Tier-1 image processing (adding Philips in C2Q), and its growing- likelihood of similar success in HD decode during CY08.
Reits Sector Outperformer and $25 tgt.
Notablecalls: Would not be surprised to see some buy interest following the call. But also but sure to check out comments from TXN.
Calls of Note Part 3
- FBR notes negative headlines surrounding Amgen (NASDAQ:AMGN) may come sooner than expected. Firm contacts tell them that cuts to Medicare Part B may be proposed by the Democrats in a proposal to expand the State Children's Health Insurance Program (SCHIP). The expansion may need $50B in offsets over 10 years. Firm expects to hear that two AMGN- relevant areas may be discussed as places for Medicare savings: follow- on biologics and ASP+6%. They are maintaining Market Perform rating and $77 price target.
FBR's Washington contacts tell them that the Democrats - in response to the State of the Union address - may propose an expansion of the State Children's Health Insurance Program (SCHIP) totaling $50B over ten years. To offset the cost of this expansion, Democrats are expected to propose cuts to other CMS programs. With respect to biotech drug reimbursement, they hear that Medicare Part B may be a target of cuts.
A proposal to accelerate follow-on biologics may be part of the proposal, and ASP+6% reimbursement seems to also be a target. Both of these proposals may weigh on Amgen, since its blockbusters Epogen and Aranesp could get hit both on follow-on biologics (following Epo's patent expiration in 2013), and on a reduction in ASP+6% in the nearer term (since these are somewhat discretionary drugs for doctors, who may end up losing money on these drugs if ASP+6% is reduced too much).
Notablecalls: I don't think these comments will hurt AMGN today. Just wanted to let you know the call is out there.
FBR's Washington contacts tell them that the Democrats - in response to the State of the Union address - may propose an expansion of the State Children's Health Insurance Program (SCHIP) totaling $50B over ten years. To offset the cost of this expansion, Democrats are expected to propose cuts to other CMS programs. With respect to biotech drug reimbursement, they hear that Medicare Part B may be a target of cuts.
A proposal to accelerate follow-on biologics may be part of the proposal, and ASP+6% reimbursement seems to also be a target. Both of these proposals may weigh on Amgen, since its blockbusters Epogen and Aranesp could get hit both on follow-on biologics (following Epo's patent expiration in 2013), and on a reduction in ASP+6% in the nearer term (since these are somewhat discretionary drugs for doctors, who may end up losing money on these drugs if ASP+6% is reduced too much).
Notablecalls: I don't think these comments will hurt AMGN today. Just wanted to let you know the call is out there.
Calls of Note Part 2
Bear Stearns is positive on Sandisk (NASDAQ:SNDK) saying that although they expect demand/pricing for flash-based devices to be weak in the early part of 2007, at current levels they believe SanDisk stock is already pricing in the near-term pessimistic outlook. Specifically, the firm believes the stock is pricing in an ASP decline in the 30% range for 1Q07, and they believe guidance would have to be lower than this level for the stock to react unfavorably in the near-term. They believe the stock's current valuation, at 18x their 2007 non-GAAP EPS (including dilution from the M-Systems acquisition) presents a great opportunity for investors to accumulate the shares.
Firm remains comfortable with their 4Q06 EPS estimate of $0.80 (this excludes impact from M-Systems). They are estimating bit growth of 73% QoQ for the quarter, above guidance of 50-60% QoQ, and ASP decline of 23% QoQ, slightly below the low end of the guidance range of 15-20% QoQ. Firm believes SanDisk benefited from a strong increase in densities driven by the price cuts in 3Q and 4Q, as well as strong microSD demand in the quarter.
Maintains Outperform but lowers tgt to $65 from $72.
Notablecalls: Not holding my breath for a bounce.
Firm remains comfortable with their 4Q06 EPS estimate of $0.80 (this excludes impact from M-Systems). They are estimating bit growth of 73% QoQ for the quarter, above guidance of 50-60% QoQ, and ASP decline of 23% QoQ, slightly below the low end of the guidance range of 15-20% QoQ. Firm believes SanDisk benefited from a strong increase in densities driven by the price cuts in 3Q and 4Q, as well as strong microSD demand in the quarter.
Maintains Outperform but lowers tgt to $65 from $72.
Notablecalls: Not holding my breath for a bounce.
MasterCard (NYSE:MA) - Tgt upped to $130 + strong chart
Prudential is upping their tgt on MasterCard (NYSE:MA) to $130 from $100 saying the revised target equates to approximately 26 times 2008 pro forma EPS estimate, up from prior target multiple of 20.
Higher long-term earnings growth fed into firm's 10-year DCF-based equity valuation model is the primary driver. They now project 16.4% CAGR of net income, up from prior estimate of 14.0%.
Firm projects that gross dollar volume (GDV) at MasterCard will grow 14% in 2007 and 13% in 2008. Our forecasts of processed transaction growth are 17% in 2007 and 15% in 2008. They believe that the competitive landscape would be relatively stable near-term, as two major card networks (Visa and Discover) prepare to become publicly- traded companies over the next several quarters.
4Q06 pro forma EPS estimate remains $0.40. Firm forecasts yr/yr net revenue growth of 18.5% in 4Q06 with GDV growth of 15.0% and transaction volume growth of 19.5%. They continue to expect a smaller than usual sequential increase in marketing expenses, as they believe that the company has allocated proportionately larger share of annual marketing expenses to 2Q06 due to the World Cup promotion.
Maintains Overweight.
Notablecalls: Love the chart. The tgt raise is big enough to create some buy interest. Going to call this one actionable here as MA is a mover.
Higher long-term earnings growth fed into firm's 10-year DCF-based equity valuation model is the primary driver. They now project 16.4% CAGR of net income, up from prior estimate of 14.0%.
Firm projects that gross dollar volume (GDV) at MasterCard will grow 14% in 2007 and 13% in 2008. Our forecasts of processed transaction growth are 17% in 2007 and 15% in 2008. They believe that the competitive landscape would be relatively stable near-term, as two major card networks (Visa and Discover) prepare to become publicly- traded companies over the next several quarters.
4Q06 pro forma EPS estimate remains $0.40. Firm forecasts yr/yr net revenue growth of 18.5% in 4Q06 with GDV growth of 15.0% and transaction volume growth of 19.5%. They continue to expect a smaller than usual sequential increase in marketing expenses, as they believe that the company has allocated proportionately larger share of annual marketing expenses to 2Q06 due to the World Cup promotion.
Maintains Overweight.
Notablecalls: Love the chart. The tgt raise is big enough to create some buy interest. Going to call this one actionable here as MA is a mover.
Calls of Note Part 1
Couple of interesting comments on MEMC (NYSE:WFR):
- UBS notes they estimate that MEMC will likely meet its 4Q06 revenue guidance of $410-$415M (they estimate $415M, +2% q/q). Firm's channel checks found overall 200mm and 300mm prime semiconductor wafer prices increased, on average, 5% q/q as DRAM customer strength offset foundry customer weakness.
Firm's discussions with industry contacts found that MEMC just began selling "semiconductor grade" (higher quality) polysilicon for the first time last quarter as semiconductor wafer sales visibility remains limited in 1Q07. Channel checks found solar customers are paying $325-$350/kg for semiconductor poly (higher than the $200-$250/kg being paid for solar grade poly).
UBS' channel checks suggest 1Q07 semiconductor wafer volumes are-2%q/q and prices are +3%q/q. While MEMC likely benefits from solar wafer sales (mostly to Suntech) for the first time in 1Q07, firm's industry research found MEMC could benefit from increased market share at Intel as their discussions with industry contacts suggest one of Intel's 300mm wafer suppliers is sold out in 1Q07.
Maintains Buy and $60 tgt.
- FBR is saying they expect WFR to exceed firm's revenue/pro forma/GAAP EPS estimates of $414M/$0.58/$0.40, compared to the revenue guidance range of $410M-$415M and the consensus of $416M. Due to higher sale of poly in the spot market, they also expect the company to exceed their gross margin estimate (and guidance) of 48%.
Firm expects the solar wafer contracts with Suntech and Gintech to start contributing meaningful revenues in 2H07, although they note that these revenues will have a lower gross profit than the sale of poly in the spot market. These, combined with an acceleration of semi wafer capacity, as well as the initial capacity installation for in-house solar wafers manufacturing, are expected to lead to limited upside margin.
Investor expectations are for consensus CY07 pro forma EPS to increase to "at least" $2.80 (or so), versus FBR estimate/ consensus of $2.24/$2.55, but they this unrealistic. They applaud the company's flexibility in shifting capacity from semi to poly and vise versa, driven by the directional changes in the demand environment, but with increased industry supply and in-house overhead expenses, especially in 2H07 and beyond, they believe the magnitude of upside to consensus is limited.
Maintains Mkt Perform.
Notablecalls: I think UBS trumps FBR here. The chart looks like it wants to move higher. Check archives for further commentary.
- UBS notes they estimate that MEMC will likely meet its 4Q06 revenue guidance of $410-$415M (they estimate $415M, +2% q/q). Firm's channel checks found overall 200mm and 300mm prime semiconductor wafer prices increased, on average, 5% q/q as DRAM customer strength offset foundry customer weakness.
Firm's discussions with industry contacts found that MEMC just began selling "semiconductor grade" (higher quality) polysilicon for the first time last quarter as semiconductor wafer sales visibility remains limited in 1Q07. Channel checks found solar customers are paying $325-$350/kg for semiconductor poly (higher than the $200-$250/kg being paid for solar grade poly).
UBS' channel checks suggest 1Q07 semiconductor wafer volumes are-2%q/q and prices are +3%q/q. While MEMC likely benefits from solar wafer sales (mostly to Suntech) for the first time in 1Q07, firm's industry research found MEMC could benefit from increased market share at Intel as their discussions with industry contacts suggest one of Intel's 300mm wafer suppliers is sold out in 1Q07.
Maintains Buy and $60 tgt.
- FBR is saying they expect WFR to exceed firm's revenue/pro forma/GAAP EPS estimates of $414M/$0.58/$0.40, compared to the revenue guidance range of $410M-$415M and the consensus of $416M. Due to higher sale of poly in the spot market, they also expect the company to exceed their gross margin estimate (and guidance) of 48%.
Firm expects the solar wafer contracts with Suntech and Gintech to start contributing meaningful revenues in 2H07, although they note that these revenues will have a lower gross profit than the sale of poly in the spot market. These, combined with an acceleration of semi wafer capacity, as well as the initial capacity installation for in-house solar wafers manufacturing, are expected to lead to limited upside margin.
Investor expectations are for consensus CY07 pro forma EPS to increase to "at least" $2.80 (or so), versus FBR estimate/ consensus of $2.24/$2.55, but they this unrealistic. They applaud the company's flexibility in shifting capacity from semi to poly and vise versa, driven by the directional changes in the demand environment, but with increased industry supply and in-house overhead expenses, especially in 2H07 and beyond, they believe the magnitude of upside to consensus is limited.
Maintains Mkt Perform.
Notablecalls: I think UBS trumps FBR here. The chart looks like it wants to move higher. Check archives for further commentary.
Color on news: Gap (NYSE:GPS)
Several firms are commenting on Gap (NYSE:GPS) after the co announced that its President and CEO, Mr. Paul Pressler, was stepping down immediately:
- Goldman Sachs notes Pressler's departure has been speculated about for over a year and is not a surprise given recent results. However, there is no easy fix for GPS. A new CEO will need great vision and the ability to attract talent in order to rebuild the leadership ranks. Assuming the right CEO is hired and a turnaround is even possible, it will take time to reconnect with consumers while facing skilled competition.
This as a necessary change for Gap, but firm's reservations remain numerous. The issues confronting Gap are structural and will challenge any CEO and/or new management team, at the same time that the shares are fully valued with little upside even if a turnaround takes hold, while downside risk is high in light of on-going market share losses. Moreover, today's announcement reaffirms their view that that poor results are likely to continue given the turmoil in leadership.
Gap shares could trade-up marginally on the news and then continue to trade around current levels as investors wait to see who succeeds Pressler and what new strategies will ensue. The prospect of new leadership provides hope, but does not eliminate the secular issues Gap faces.
- Morgan Stanley sees Pressler's departure as a big step in the right direction. They expect further changes to be announced in the next month or so, including a possible sale of one of GPS' divisions (most likely Banana Republic) or an LBO of the entire company. In terms of who could replace Pressler, they think Mickey Drexler is unlikely. However, they find it interesting that Vanessa Castagna, executive chairwoman of Mervyn's and former CEO of JC Penney's stores and direct business, announced her resignation from Mervyn's and Cerberus Capital Management this morning. MSCO thinks she would be a great fit for GPS and possess the "deep retailing and merchandising experience" the retailer so desperately needs.
They expect the stock to reactive positively to the news of Pressler's departure as well as the Board's willingness to make material changes. MSCO continues to believe the stock will hit the $23-$25 range over the near term. Additional upside catalysts include a sale of one of GPS'
divisions or a sale of the entire company to a private equity player.
Maintains Overweight.
- Citigroup says that although they believe the market has been looking forward to Paul Pressler's departure, they are less constructive on the departure given that no permanent replacement was named. Furthermore, given that a search is likely to take at least 3-6 months in firm's view, they do not believe that a new CEO will be in a position to meaningfully impact the business until at least the fall or holiday of 2008. Additionally, they believe the stock's current valuation has been supported on speculation of a LBO or management change; however, with Mr. Pressler's resignation, the risk they see to the stock is that it begins to trade on fundamentals which could put downward price pressure on the shares.
Notablecalls: Looks like the Fisher family run out of patience. I suspect that firing Pressler will ignite a series of events that will prove to be beneficial for the shareholders. At least in the s-t.
- Goldman Sachs notes Pressler's departure has been speculated about for over a year and is not a surprise given recent results. However, there is no easy fix for GPS. A new CEO will need great vision and the ability to attract talent in order to rebuild the leadership ranks. Assuming the right CEO is hired and a turnaround is even possible, it will take time to reconnect with consumers while facing skilled competition.
This as a necessary change for Gap, but firm's reservations remain numerous. The issues confronting Gap are structural and will challenge any CEO and/or new management team, at the same time that the shares are fully valued with little upside even if a turnaround takes hold, while downside risk is high in light of on-going market share losses. Moreover, today's announcement reaffirms their view that that poor results are likely to continue given the turmoil in leadership.
Gap shares could trade-up marginally on the news and then continue to trade around current levels as investors wait to see who succeeds Pressler and what new strategies will ensue. The prospect of new leadership provides hope, but does not eliminate the secular issues Gap faces.
- Morgan Stanley sees Pressler's departure as a big step in the right direction. They expect further changes to be announced in the next month or so, including a possible sale of one of GPS' divisions (most likely Banana Republic) or an LBO of the entire company. In terms of who could replace Pressler, they think Mickey Drexler is unlikely. However, they find it interesting that Vanessa Castagna, executive chairwoman of Mervyn's and former CEO of JC Penney's stores and direct business, announced her resignation from Mervyn's and Cerberus Capital Management this morning. MSCO thinks she would be a great fit for GPS and possess the "deep retailing and merchandising experience" the retailer so desperately needs.
They expect the stock to reactive positively to the news of Pressler's departure as well as the Board's willingness to make material changes. MSCO continues to believe the stock will hit the $23-$25 range over the near term. Additional upside catalysts include a sale of one of GPS'
divisions or a sale of the entire company to a private equity player.
Maintains Overweight.
- Citigroup says that although they believe the market has been looking forward to Paul Pressler's departure, they are less constructive on the departure given that no permanent replacement was named. Furthermore, given that a search is likely to take at least 3-6 months in firm's view, they do not believe that a new CEO will be in a position to meaningfully impact the business until at least the fall or holiday of 2008. Additionally, they believe the stock's current valuation has been supported on speculation of a LBO or management change; however, with Mr. Pressler's resignation, the risk they see to the stock is that it begins to trade on fundamentals which could put downward price pressure on the shares.
Notablecalls: Looks like the Fisher family run out of patience. I suspect that firing Pressler will ignite a series of events that will prove to be beneficial for the shareholders. At least in the s-t.
Color on quarter: Texas Instruments (NYSE:TXN)
Several firms are commenting on Texas Instruments (NYSE:TXN) after the co issued its Q4 results and guidance:
- JP Morgan notes that as they hoped, there were several signs of a bottom on the call. TI's semiconductor book-to-bill decreased from 0.92 in 3Q06 to 0.89 in 4Q06, the lowest in over five years and roughly in line with firm's 0.90 estimate. In addition, the company's capital expenditures and depreciation for 2007 are both below 2006 levels.
Although revenue appears close to a bottom, TI is not lowering its inventory as the firm had hoped. TI stated it should actually increase utilization rates keeping inventory roughly flat during 1Q07, which should raise its inventory to a record 84 days. Although the company believes this is prudent, the firm finds it difficult to accept record inventory in the middle of a downturn. As a result, they believe the stock is range-bound until TI "blows up" due to its aggressive guidance and record inventory, which should occur sometime later this quarter and result in TI lowering utilization rates and inventory and bottoming its margins. JPM is maintaining their Overweight as TXN is trading near trough valuations and believes the inventory issue should be cleared up within a couple of months.
Firm is lowering their C07 revenue and EPS estimates from $13.7 billion and $1.52 to $13.3 billion and $1.45 and introducing C08 revenue and EPS estimates of $14.5 billion and $1.85. TXN stock is trading at 3.3X its C07E sales, the low end of its range of 3X-5X sales. JPM believes gross margins are bottoming soon and as a result is reiterating their Overweight rating.
- Stifel notes that with a report that created a somewhat surprising positive share reaction, Texas Instruments delivered a modest upside to recently reduced December expectations and gave cautious guidance that fell well below consensus. Although TXN doesn't appear to be largely suffering from company specific issues, they do believe the macro environment causing the March quarter reset is more concerning than the positive after hours trading might reflect.
Unfortunately, TXN's March quarter outlook suffers from the same industry issues that led to its negative mid-quarter update. In addition to revenue and EPS guidance, TXN made statements regarding inventories and factory loading which may ultimately have a larger impact on the company's shares than any near-term estimate revisions. Gross margin in the December quarter was 50.5%, a decrease of approximately 90bps sequentially, which was a lesser contraction than the firm had anticipated as the firm appears to have maintained a relatively high utilization rate. As a result of softer sales and relatively high production rates, the company's internal inventory decreased by only about $50 million sequentially.
For the March quarter TXN was indefinite as to what to expect regarding internal inventory balances as production would lessen during the first half of the quarter and then increase in the second half.
In firm's view, TXN is betting that the industry begins to return to normal by the second quarter and is relying on the flexibility of its hybrid manufacturing strategy to minimize the impact if orders remain sluggish. In the end, the risk of not having enough product may be greater than having too much inventory. However, at least until visibility shows some signs of improvement we stress
the potential repercussions to gross margin and profitability for much of 2007 should slower sales drive a need to again attempt to reduce internal inventories later in the year. Accordingly, they maintain their Hold rating.
- UBS notes TXN experienced broad-based weakness during Q4 in most of its end-markets including Wireless, DSP and Analog products. TXN's management commented that orders received in October and November were well below expectations, as it indicated during the mid-Q update, while orders stabilized in December, though at a low level. Book-to-bill came in at 0.89, down from 0.93 in Q3. Based on future expectations, TI indicated it has decided to start increasing wafer starts again during Q1, indicating to us that we have passed the trough. According to the company, weak demand in the high-end wireless segment could not be compensated by the solid low-end demand. Management reiterated that the company's LoCosto single-chip solution for the low-end handset market is ramping on track with expectations and is going well based on manufacturing yield performance. Firm expects LoCosto to start contributing to margins in 2H07 at the end of which LoCosto is expected to represent over 50% of all low-end handset shipments at TXN.
Firm continues to see valuation support for the TI shares and believes the market has largely priced in current weak fundamentals and is underestimating the potential for a solid rebound in 2H07, partly supported by LoCosto. At 14x 2008E EPS they view the shares as inexpensive and reiterate Buy rating as they believe the trough is near. Maintains PT of $38.
- Bear Stearns says they expect the mix shift towards low end cell phones to continue in 1Q07 as 3G cell phone demand remains weak. Though TI has been combating this mix shift with LoCosto, its wireless revenues continue to be pressured by the lower dollar content in these low end cell phones. It is difficult for the firm to call a bottom here on wireless as mix remains unfavorable for the foreseeable future and competition is intensifying in OMAP.
Outside of wireless, they see continued weakness in analog for 1Q07 as distributors are looking to further reduce their inventory on hand though checks indicate limited inventory builds across the supply chain. With decent sell through, they expect the current analog inventory correction to end exiting 1Q07.
This round of earnings reduction, in firm's opinion, was already priced into the stock. They reiterate the view that investors with an intermediate term time horizon should accumulate TI's shares at $29 and below given the improving risk/reward profile. However, for the near term, they expect TXN to trade sideways given the lack of immediate catalysts.
Notablecalls: It could have been worse. Management is now betting on a H107 rebound by not reducing inventory. If the rebound fails to materialize, it's going to be ugly. Currently, I see very little reason for a rebound to happen. I fully expect the stock to react positively in the s-t but the move will be faded later on.
- JP Morgan notes that as they hoped, there were several signs of a bottom on the call. TI's semiconductor book-to-bill decreased from 0.92 in 3Q06 to 0.89 in 4Q06, the lowest in over five years and roughly in line with firm's 0.90 estimate. In addition, the company's capital expenditures and depreciation for 2007 are both below 2006 levels.
Although revenue appears close to a bottom, TI is not lowering its inventory as the firm had hoped. TI stated it should actually increase utilization rates keeping inventory roughly flat during 1Q07, which should raise its inventory to a record 84 days. Although the company believes this is prudent, the firm finds it difficult to accept record inventory in the middle of a downturn. As a result, they believe the stock is range-bound until TI "blows up" due to its aggressive guidance and record inventory, which should occur sometime later this quarter and result in TI lowering utilization rates and inventory and bottoming its margins. JPM is maintaining their Overweight as TXN is trading near trough valuations and believes the inventory issue should be cleared up within a couple of months.
Firm is lowering their C07 revenue and EPS estimates from $13.7 billion and $1.52 to $13.3 billion and $1.45 and introducing C08 revenue and EPS estimates of $14.5 billion and $1.85. TXN stock is trading at 3.3X its C07E sales, the low end of its range of 3X-5X sales. JPM believes gross margins are bottoming soon and as a result is reiterating their Overweight rating.
- Stifel notes that with a report that created a somewhat surprising positive share reaction, Texas Instruments delivered a modest upside to recently reduced December expectations and gave cautious guidance that fell well below consensus. Although TXN doesn't appear to be largely suffering from company specific issues, they do believe the macro environment causing the March quarter reset is more concerning than the positive after hours trading might reflect.
Unfortunately, TXN's March quarter outlook suffers from the same industry issues that led to its negative mid-quarter update. In addition to revenue and EPS guidance, TXN made statements regarding inventories and factory loading which may ultimately have a larger impact on the company's shares than any near-term estimate revisions. Gross margin in the December quarter was 50.5%, a decrease of approximately 90bps sequentially, which was a lesser contraction than the firm had anticipated as the firm appears to have maintained a relatively high utilization rate. As a result of softer sales and relatively high production rates, the company's internal inventory decreased by only about $50 million sequentially.
For the March quarter TXN was indefinite as to what to expect regarding internal inventory balances as production would lessen during the first half of the quarter and then increase in the second half.
In firm's view, TXN is betting that the industry begins to return to normal by the second quarter and is relying on the flexibility of its hybrid manufacturing strategy to minimize the impact if orders remain sluggish. In the end, the risk of not having enough product may be greater than having too much inventory. However, at least until visibility shows some signs of improvement we stress
the potential repercussions to gross margin and profitability for much of 2007 should slower sales drive a need to again attempt to reduce internal inventories later in the year. Accordingly, they maintain their Hold rating.
- UBS notes TXN experienced broad-based weakness during Q4 in most of its end-markets including Wireless, DSP and Analog products. TXN's management commented that orders received in October and November were well below expectations, as it indicated during the mid-Q update, while orders stabilized in December, though at a low level. Book-to-bill came in at 0.89, down from 0.93 in Q3. Based on future expectations, TI indicated it has decided to start increasing wafer starts again during Q1, indicating to us that we have passed the trough. According to the company, weak demand in the high-end wireless segment could not be compensated by the solid low-end demand. Management reiterated that the company's LoCosto single-chip solution for the low-end handset market is ramping on track with expectations and is going well based on manufacturing yield performance. Firm expects LoCosto to start contributing to margins in 2H07 at the end of which LoCosto is expected to represent over 50% of all low-end handset shipments at TXN.
Firm continues to see valuation support for the TI shares and believes the market has largely priced in current weak fundamentals and is underestimating the potential for a solid rebound in 2H07, partly supported by LoCosto. At 14x 2008E EPS they view the shares as inexpensive and reiterate Buy rating as they believe the trough is near. Maintains PT of $38.
- Bear Stearns says they expect the mix shift towards low end cell phones to continue in 1Q07 as 3G cell phone demand remains weak. Though TI has been combating this mix shift with LoCosto, its wireless revenues continue to be pressured by the lower dollar content in these low end cell phones. It is difficult for the firm to call a bottom here on wireless as mix remains unfavorable for the foreseeable future and competition is intensifying in OMAP.
Outside of wireless, they see continued weakness in analog for 1Q07 as distributors are looking to further reduce their inventory on hand though checks indicate limited inventory builds across the supply chain. With decent sell through, they expect the current analog inventory correction to end exiting 1Q07.
This round of earnings reduction, in firm's opinion, was already priced into the stock. They reiterate the view that investors with an intermediate term time horizon should accumulate TI's shares at $29 and below given the improving risk/reward profile. However, for the near term, they expect TXN to trade sideways given the lack of immediate catalysts.
Notablecalls: It could have been worse. Management is now betting on a H107 rebound by not reducing inventory. If the rebound fails to materialize, it's going to be ugly. Currently, I see very little reason for a rebound to happen. I fully expect the stock to react positively in the s-t but the move will be faded later on.
Paperstand (SAP, TLEO)
According to the WSJ’s „Heard on the Street” column, when the CEO of SAP (SAP), Henning Kagermann, lays out the co's strategy before investors and analysts tomorrow, he will have to explain an unsettling paradox: Why big players like SAP are missing their earnings tgts when spending on business software is increasing. The scenario is frustrating for the big players b/c they haven't been able to cut themselves a larger slice of the business-software pie. Co’s are expected to spend $334bn on software this year, up 8% from last year, according to Forrester Research. Some argue SAP's slump highlights a broader shift under way in business software in which start-up co’s wield an advantage over established titans. "Increasingly, it's going to be hard for the big vendors to really outpace the industry, b/c the real growth is going to come from the more-disruptive players within software," said Brendan Barnicle, of Pacific Crest. He has a Sector Perform rating on SAP.
Barron’s Online „Inside Scoop” section reports that Dutch media tycoon John de Mol is keeping a close eye on Taleo (TLEO) as the software co emerges from its financial woes. De Mol's investment vehicle Talpa Beheer disclosed it spent nearly $11.5M to accumulate 1.12M shares of Taleo, or a 5.15% stake. Considering Talpa only recently crossed the 5% threshold requiring SEC disclosure, Ben Silverman, of InsiderScore.com, says it appears that De Mol "already bought the stock at weaker levels than now and even with his cost basis, he's up almost 30% based on the stock price today." "De Mol is certainly an interesting guy to keep an eye out," given his track record as a media entrepreneur, says Silverman. [De Mol sold Endemol, the TV production firm he founded, for roughly €5bn in ‘00.] Also, Silverman notes that international investors tend to be "somewhat selective" in building major stakes in US stocks.
Barron’s Online „Inside Scoop” section reports that Dutch media tycoon John de Mol is keeping a close eye on Taleo (TLEO) as the software co emerges from its financial woes. De Mol's investment vehicle Talpa Beheer disclosed it spent nearly $11.5M to accumulate 1.12M shares of Taleo, or a 5.15% stake. Considering Talpa only recently crossed the 5% threshold requiring SEC disclosure, Ben Silverman, of InsiderScore.com, says it appears that De Mol "already bought the stock at weaker levels than now and even with his cost basis, he's up almost 30% based on the stock price today." "De Mol is certainly an interesting guy to keep an eye out," given his track record as a media entrepreneur, says Silverman. [De Mol sold Endemol, the TV production firm he founded, for roughly €5bn in ‘00.] Also, Silverman notes that international investors tend to be "somewhat selective" in building major stakes in US stocks.
Monday, January 22, 2007
Calls of Note Part 7 (Nasdaq:UNCL)
Sanders Morris Harris (SMH) out positively on MRU Holdings (UNCL). The firm is hearing from sources that student loan volume at UNCL during Dec and Jan to date has been robust, running ahead of the co's expectations. Daily loan disbursements have frequently topped $1M in recent weeks and have started earlier than anticipated. The business mix includes a solid percentage of new customers, plus returning borrowers.
SMH says that UNCL also continues to make progress on the securitization and is currently working with the rating agencies. As a result of the recent loan volume and the Feb timing, firm has boosted their est for the amount of loans to be securitized by $30M, to $150M, which subsequently raises F3Q07 EPS ests. For the current quarter and full-year, SMH now projects earnings of $0.46 and $0.40, respectively, up from previous ests of $0.29 and $0.28. Firms full-year est still assumes a second securitization in FQ4 as well.
According to SMH, UNCL is a very attractive early-stage investment opportunity given its strengthening position as the low-cost provider in the rapidly growing student loan mkt.
Analyst reiterates Buy with price tgt of $9.
Notablecalls: MRU Holdings (UNCL) is one of NC's l-t picks (See archives). Most important event for the co is surely securitization, which, as we see now, is ahead of expectations. While UNCL currently remains under-the-radar stock, I would not be surprised to see a positive reaction following the call.
Calls of Note Part 6
- Cowen is cautious on DreamWorks (NYSE:DWA) saying they expect DWA to announce a $115MM write-down to Q4:06 earnings for Flushed Away when the company reports earnings on February 27th. The film has generated roughly $163MM in worldwide box office to-date, and wthey expect minimal additional box office for the remainder of the film's run. Firm now expects a final worldwide box office of $168MM versus pre-release estimate of $269MM.
As a result, they are lowering their estimate of Flushed Away's lifetime gross revenue from $424MM to $265MM, and estimate of the film's lifetime profit from $48MM to a loss of $97MM. At the time of DWA's secondary offering in November, management announced that a write-down would be necessary. However, Cowen believes that their estimate of the size of the write-down is larger than current Street expectations. DWA will have taken write-downs on two of its last three films.
Firm notes that the Street consensus EPS estimate for FY06 is $0.58. They believe FY06 estimates are too high given the performance of Flushed Away, and expects estimates to come down significantly over the next several weeks as analysts factor in the likely impact of the production cost write-down.
While the firm believes DWA shares could trade down in the near term due to FY06 estimate reductions, the build-up to the May 18th release of "Shrek the Third" could drive the shares higher over the next few months. However, recent film performance could ultimately cause investors to reassess DWA's long-term earnings power, leading to pressure on DWA shares.
Notablecalls: I think Cowen is right with their call on DWA. The stock has run too far and now looks toppish. Given the possible magnitude of Flushed Away's write-down, I think the stock's a short here. Cowen's comments are actionable. DWA needs to rethink their marketing strategy.
As a result, they are lowering their estimate of Flushed Away's lifetime gross revenue from $424MM to $265MM, and estimate of the film's lifetime profit from $48MM to a loss of $97MM. At the time of DWA's secondary offering in November, management announced that a write-down would be necessary. However, Cowen believes that their estimate of the size of the write-down is larger than current Street expectations. DWA will have taken write-downs on two of its last three films.
Firm notes that the Street consensus EPS estimate for FY06 is $0.58. They believe FY06 estimates are too high given the performance of Flushed Away, and expects estimates to come down significantly over the next several weeks as analysts factor in the likely impact of the production cost write-down.
While the firm believes DWA shares could trade down in the near term due to FY06 estimate reductions, the build-up to the May 18th release of "Shrek the Third" could drive the shares higher over the next few months. However, recent film performance could ultimately cause investors to reassess DWA's long-term earnings power, leading to pressure on DWA shares.
Notablecalls: I think Cowen is right with their call on DWA. The stock has run too far and now looks toppish. Given the possible magnitude of Flushed Away's write-down, I think the stock's a short here. Cowen's comments are actionable. DWA needs to rethink their marketing strategy.
Calls of Note Part 5
- Goldman Sachs is out with a call on Cisco Systems (NASDAQ:CSCO) saying they think the co is in the early stages of a multi-year product cycle that they believe will sustain double digit growth for the next 3 to 5 years. Firm's above consensus view reflects acceleration in high margin carriers sales, stable high single digit switching growth based on their proprietary model, and continued share gains in advanced technologies. Analysis points to unprecedented price stability in major product lines suggesting margins stability and operating leverage. In the report the firm detail their proprietary Cisco switching model, and a new enterprise routing model - both suggest continued positive margins.
GSCO is raising their FY2007, FY2008, and FY2009 estimates to $34.2 bn/ $1.31, $38.8 bn/$1.53, and $43.9 bn/$1.75 (excluding ESO).
Key catalysts include: 1) Early 2007 introduction of consumer electronics that speed the adoption of "video over the internet" services from Apple and Microsoft, and others will be positive for carrier spending on Cisco's products. 2) New product launches in Cisco's edge routing platform in 1H2007 should help Cisco gain further share. 3) Aggressive share repurchase should continue. 4) Firm's contacts confirmed strong demand for both corporate and carrier products in Europe in the quarter and emerging markets.
Maintains Buy and $35 tgt.
Notablecalls: Only GSCO has the power to move this mega-cap stock. I suspect we will see buying interest in CSCO today.
GSCO is raising their FY2007, FY2008, and FY2009 estimates to $34.2 bn/ $1.31, $38.8 bn/$1.53, and $43.9 bn/$1.75 (excluding ESO).
Key catalysts include: 1) Early 2007 introduction of consumer electronics that speed the adoption of "video over the internet" services from Apple and Microsoft, and others will be positive for carrier spending on Cisco's products. 2) New product launches in Cisco's edge routing platform in 1H2007 should help Cisco gain further share. 3) Aggressive share repurchase should continue. 4) Firm's contacts confirmed strong demand for both corporate and carrier products in Europe in the quarter and emerging markets.
Maintains Buy and $35 tgt.
Notablecalls: Only GSCO has the power to move this mega-cap stock. I suspect we will see buying interest in CSCO today.
Amgen (NASDAQ:AMGN) - expect to see a major move in the stock today
- Bear Stearns is out with a major call on Amgen (NASDAQ:AMGN) saying that after years of mystery and intrigue, they think the answer is upon us: CERA, indeed, appears to be just PEG-EPO, according to new court documents filed late Friday. Firm thinks this means AMGN's probability of winning its patent infringement case has increased dramatically. If the market fully digests this development, they believe AMGN shares could trade up sharply today. As a reminder, when the firm upgraded the stock ~2 weeks ago, they suggested fair value could exceed $90 if CERA does not launch.
In the documents, CERA is decribed as having the same "amino acid sequence and composition" as epoetin beta. In Bear's opinion, if CERA does have the exact sequence as EPO, it is more likely to infringe Amgen's manufacturing patents & composition patents. The documents also notes that CERA has an "identical amino acid sequence and composition of the carbohydrage moiety". In firm's opinion, it will be difficult for Roche to argue that CERA's backbone falls outside the scope of Amgen's patents on Epo and believe Amgen will be able to argue CERA infringe's its patents.
Reits Outperform on AMGN.
Notablecalls: Actionable call alert. CERA has been considered a major threat for AMGN's EPO line meaning that if Bear is right the stock will go vertical today. I expect to see a sizable move in AMGN today. I would not be surprised to see the stock challenge recent highs.
In the documents, CERA is decribed as having the same "amino acid sequence and composition" as epoetin beta. In Bear's opinion, if CERA does have the exact sequence as EPO, it is more likely to infringe Amgen's manufacturing patents & composition patents. The documents also notes that CERA has an "identical amino acid sequence and composition of the carbohydrage moiety". In firm's opinion, it will be difficult for Roche to argue that CERA's backbone falls outside the scope of Amgen's patents on Epo and believe Amgen will be able to argue CERA infringe's its patents.
Reits Outperform on AMGN.
Notablecalls: Actionable call alert. CERA has been considered a major threat for AMGN's EPO line meaning that if Bear is right the stock will go vertical today. I expect to see a sizable move in AMGN today. I would not be surprised to see the stock challenge recent highs.
Calls of Note Part 4
- Oppenheimer notes that in recent channel checks they have been unable to locate any high-end appliance dealers who are selling TurboChef (NASDAQ:OVEN) residential ovens, and very few who even know who TurboChef is. As a result, they conclude that the residential rollout will unfold a bit more slowly than they had previously forecast. Firm is pushing their residential unit shipment estimates out by a quarter, and the result is slightly lower earnings. They reduce 2007 EPS estimate from -$0.15 to - $0.25. Management was careful to comply with reg FD when they contacted them last week and so did not go much beyond what was said in the last conference call. Firm continues to expect that the residential launch will occur eventually, and would note that TurboChef does not need to sell that many units to move the needle on earnings. So they would not be sellers but do continue to rate the shares Neutral.
Opco cutting their 2007 unit shipment forecast for residential ovens from 3,700 units previously to 2,200 units now by pushing each of quarterly unit estimates out one quarter further. This results in a reduction in their residential segment revenue forecast from $14.8 million to $8.8 million in 2007. On a consolidated basis, revenue estimate falls from $97 million to $91 million.
Notablecalls: OVEN has had a nice run over the past 4-5 months and I suspect these comments will cause a pullback in the stock.
Opco cutting their 2007 unit shipment forecast for residential ovens from 3,700 units previously to 2,200 units now by pushing each of quarterly unit estimates out one quarter further. This results in a reduction in their residential segment revenue forecast from $14.8 million to $8.8 million in 2007. On a consolidated basis, revenue estimate falls from $97 million to $91 million.
Notablecalls: OVEN has had a nice run over the past 4-5 months and I suspect these comments will cause a pullback in the stock.
Calls of Note Part 3
Couple of firms are commenting on Qualcomm (NASDAQ:QCOM) this AM:
- CIBC notes QCOM shares have been under pressure for some time given the ongoing dispute around its licensing program. While they believe it will still take time until these issues are resolved, they see several fundamental drivers improving through 2007 and believe valuation is now better supported.
While parts of 2007 saw sluggish 3G trends, the believe recent results and comments from handset OEMs suggest increasing competition in the area in 2007 as they try to improve ASPs and margins. CIBC believes the WCDMA market can surpass QCOM's 175M unit target (firm's forecast is 178M).
Firm expects QCOM's WCDMA chipset share to rise in 2H07 as MOT slots QCOM this summer and turns more aggressive in 3G. They are raising their estimates slightly (weighted to 2H07/2008). 07/'08 EPS estimates are raised to $1.82 and $2.09 from $1.80 and $1.97. NOK is still included.
Currently, QCOM's shares are trading at 18.6x revised $2.09 FY08 EPS estimate. If Nokia is taken out,they estimate FY08E EPS would be around $1.80, reflecting a current 21.5x multiple. Either way the firm sees value at these multiples and with fundamentals improving in 2H07, they see upside.
Maintains Sector Outperformer and $45 tgt.
- UBS notes that at MOT's analyst day last Friday, MOT mgmt referred to QCOM's previously announced 3G chipset win as "significant". Checks indicate cost structure is more attractive than MOT's current Freescale soln, which could result in more meaningful mkt share in MOT's future 3G handsets than we originally anticipated. By firm's calcs, every 5m chipset upside results in ~$0.01 in EPS in FY07/08, all else equal.
MOT indicated it expects 3G (WCDMA/HSDPA) to drive replacements in 07, though likely more in 2H07. MOT also indicated 3G handset price reductions by handset vendors in 4Q06, which the firm believes is key element to adoption due to elasticity to lower pricing. While the ramp coincides w/ MOT's ramp in 3G handsets, nonetheless they view MOT's 3G industry commentary positively.
Maintains Buy and $50 tgt.
Notablecalls: Not actionable but good to know category. The comments are positive but I'm not sure it's enough to put some real fire under the stock. Overall, it's good to see sentiment finally starting to turn in favour of QCOM.
- CIBC notes QCOM shares have been under pressure for some time given the ongoing dispute around its licensing program. While they believe it will still take time until these issues are resolved, they see several fundamental drivers improving through 2007 and believe valuation is now better supported.
While parts of 2007 saw sluggish 3G trends, the believe recent results and comments from handset OEMs suggest increasing competition in the area in 2007 as they try to improve ASPs and margins. CIBC believes the WCDMA market can surpass QCOM's 175M unit target (firm's forecast is 178M).
Firm expects QCOM's WCDMA chipset share to rise in 2H07 as MOT slots QCOM this summer and turns more aggressive in 3G. They are raising their estimates slightly (weighted to 2H07/2008). 07/'08 EPS estimates are raised to $1.82 and $2.09 from $1.80 and $1.97. NOK is still included.
Currently, QCOM's shares are trading at 18.6x revised $2.09 FY08 EPS estimate. If Nokia is taken out,they estimate FY08E EPS would be around $1.80, reflecting a current 21.5x multiple. Either way the firm sees value at these multiples and with fundamentals improving in 2H07, they see upside.
Maintains Sector Outperformer and $45 tgt.
- UBS notes that at MOT's analyst day last Friday, MOT mgmt referred to QCOM's previously announced 3G chipset win as "significant". Checks indicate cost structure is more attractive than MOT's current Freescale soln, which could result in more meaningful mkt share in MOT's future 3G handsets than we originally anticipated. By firm's calcs, every 5m chipset upside results in ~$0.01 in EPS in FY07/08, all else equal.
MOT indicated it expects 3G (WCDMA/HSDPA) to drive replacements in 07, though likely more in 2H07. MOT also indicated 3G handset price reductions by handset vendors in 4Q06, which the firm believes is key element to adoption due to elasticity to lower pricing. While the ramp coincides w/ MOT's ramp in 3G handsets, nonetheless they view MOT's 3G industry commentary positively.
Maintains Buy and $50 tgt.
Notablecalls: Not actionable but good to know category. The comments are positive but I'm not sure it's enough to put some real fire under the stock. Overall, it's good to see sentiment finally starting to turn in favour of QCOM.
Calls of Note Part 2
- UBS comments on Dell Computer (NASDAQ:DELL) saying checks indicate large PC share losses for Dell in the US and Europe and they believe 4Q07 revenues will be even weaker than they had originally expected. 4Q07 is also anniversary of a 14 week quarter for Dell. The silver lining for Dell is that its ASPs seems to be relatively benign.
Firm believes corporate desktops and consumer segments are particularly weak in the US and they believe Dell is losing share in Europe. Also, the ramp up of sales of AMD-based systems may be slower than expected.
While the firm has been cautious about Dell's revenues for a long time, they were still surprised at the recent level of y/y PC shipment declines (both worldwide and in the US) that were recent reported from IDC and Gartner. According to IDC, in calendar 4Q06 Dell's worldwide PC units experienced a 8% y/y decline, compared to market growth of 9% and staggering growth from HP of +24%.
Factoring in views that share losses should continue, they are cutting estimates. For 4Q07 they estimate EPS of $0.28 (was $0.30) with a revenue decline of 3% to $14.7B (was $15.4B). FY08 estimate is now $1.30 (was $1.35) reflecting revenue growth of 5% to $60B (was $62B) & new FY09 estimate is $1.45 reflecting revenue growth of 6% to $63.5B.
Maintains Neutral but lowers tgt to $26 from $27.
Notablecalls: It's quite obvious UBS is late with their call. The stock has made its move. I would not be surprised to see a bounce in the s-t. However, looking at the stock l-t, it's surely going lower. Dell needs to reinvent itself and given its size that's a challenge.
Firm believes corporate desktops and consumer segments are particularly weak in the US and they believe Dell is losing share in Europe. Also, the ramp up of sales of AMD-based systems may be slower than expected.
While the firm has been cautious about Dell's revenues for a long time, they were still surprised at the recent level of y/y PC shipment declines (both worldwide and in the US) that were recent reported from IDC and Gartner. According to IDC, in calendar 4Q06 Dell's worldwide PC units experienced a 8% y/y decline, compared to market growth of 9% and staggering growth from HP of +24%.
Factoring in views that share losses should continue, they are cutting estimates. For 4Q07 they estimate EPS of $0.28 (was $0.30) with a revenue decline of 3% to $14.7B (was $15.4B). FY08 estimate is now $1.30 (was $1.35) reflecting revenue growth of 5% to $60B (was $62B) & new FY09 estimate is $1.45 reflecting revenue growth of 6% to $63.5B.
Maintains Neutral but lowers tgt to $26 from $27.
Notablecalls: It's quite obvious UBS is late with their call. The stock has made its move. I would not be surprised to see a bounce in the s-t. However, looking at the stock l-t, it's surely going lower. Dell needs to reinvent itself and given its size that's a challenge.
Calls of Note Part 1
- JP Morgan comments on Texas Instruments (NYSE:TXN) ahead its Q406 results scheduled for today. They expect the company to post results near the midpoint of its lowered 4Q06 revenue and EPS guidance of $3.353.50 billion (down 7%-11% QoQ) and $0.37-0.40 due to weakness in its semiconductor business (95% of 3Q06 sales), in line with firm's and Consensus estimates.
Conference call should be ugly. JPM's checks indicate TI's book-to-bill remained below 1.0 during 4Q06 due to an inventory correction in its analog business (38% of 3Q06 sales) and weak demand for its DSP products (36% of 3Q06 sales). They also expect 4Q06 gross margins to decline to 50.0%, 140 basis points below 3Q06.
Expect sub-seasonal 1Q07. Due to the low book-to-bill, they expect TI to guide 1Q07 revenue to decline 7% QoQ, in line with their estimates but below Consensus (down 4% QoQ) and typical seasonality (down 3% QoQ). Firm also expects the company to guide 1Q07 gross margins to decline again to 48% due to lower utilization rates. They note some of TI's analog peers such as National Semiconductor and Linear Technology have already guided for sequential revenue declines in the mid to high single digits for the March quarter as a result of the inventory correction, well below normal seasonal patterns of sequential growth.
Margins bottoming - time to buy. Despite a rocky 1Q07, they believe TI's margins are bottoming as inventory peaked in 4Q06 and TI is lowering its utilization rates to ensure its own inventory returns to a "normal" level. Fownside risk appears minimal. TXN stock is trading at 3.2X C07E sales, the low end of its historic range of 3X-5X sales.
Reits Overweight.
Notablecalls: Looks like JPM is hedging their bets on TXN by telling investors to expect a gruesome call. A call that should mark the bottom. That will keep the stock from plummeting if indeed the call is ugly and may even generate a bounce if it's not. One for traders. Investors...beware. I suspect things will continue to deteriorate for TXN in 2007. At best, the stock is dead money.
Conference call should be ugly. JPM's checks indicate TI's book-to-bill remained below 1.0 during 4Q06 due to an inventory correction in its analog business (38% of 3Q06 sales) and weak demand for its DSP products (36% of 3Q06 sales). They also expect 4Q06 gross margins to decline to 50.0%, 140 basis points below 3Q06.
Expect sub-seasonal 1Q07. Due to the low book-to-bill, they expect TI to guide 1Q07 revenue to decline 7% QoQ, in line with their estimates but below Consensus (down 4% QoQ) and typical seasonality (down 3% QoQ). Firm also expects the company to guide 1Q07 gross margins to decline again to 48% due to lower utilization rates. They note some of TI's analog peers such as National Semiconductor and Linear Technology have already guided for sequential revenue declines in the mid to high single digits for the March quarter as a result of the inventory correction, well below normal seasonal patterns of sequential growth.
Margins bottoming - time to buy. Despite a rocky 1Q07, they believe TI's margins are bottoming as inventory peaked in 4Q06 and TI is lowering its utilization rates to ensure its own inventory returns to a "normal" level. Fownside risk appears minimal. TXN stock is trading at 3.2X C07E sales, the low end of its historic range of 3X-5X sales.
Reits Overweight.
Notablecalls: Looks like JPM is hedging their bets on TXN by telling investors to expect a gruesome call. A call that should mark the bottom. That will keep the stock from plummeting if indeed the call is ugly and may even generate a bounce if it's not. One for traders. Investors...beware. I suspect things will continue to deteriorate for TXN in 2007. At best, the stock is dead money.
Paperstand (SUNW, INTC, AMD, VZ, SNY, BMY)
According to the WSJ, Sun Micro (SUNW) and Intel (INTC) have been negotiating an agreement under which Sun would buy Intel chips for use in server systems. A deal, which could be announced as soon as today, may include an endorsement by Intel of Sun's Solaris OS. Sun's use of Intel chips, would be a blow to AMD (AMD), which is now Sun's exclusive source for chips based on the x86 design used in most PCs and servers.
The WSJ reports that in a move that may hint at growing economic problems in Venezuela, the country's president, Hugo Chávez ordered his telecom minister to seize control of a Verizon Comm. (VZ)-controlled telecom co before paying compensation to its US owners. Mr. Chávez's announcement threw further doubts on whether Verizon would receive fair compensation for its stake in Compañia Anónima Nacional Teléfonos de Venezuela - CANTV.
According to the “Heard on the Street” column, the Sanofi-Avnetis’ (SNY) stock price has lagged behind its peers partly b/c the co doesn't tell the mkt much about the experimental drugs it is developing. This has created a cloud of uncertainty over the co, b/c understanding the pharma pipeline is key for investors. Now, its new CEO, Gérard Le Fur, says Sanofi is ready to start talking. "I accept the criticism that we weren't good enough in this area, so we have to improve our communication," Dr. Le Fur says. Sanofi promises the first signs of its new transparency will come at its ‘06 earnings conference Feb. 13, which will include an update on R&D. According to the article, former CEO, Jean-François Dehecq, will remain Chmn until 2010. Many analysts and investors believe that Mr. Dehecq is staying on to attempt one final acquisition, possibly of Bristol-Myers (BMY).
The WSJ reports that in a move that may hint at growing economic problems in Venezuela, the country's president, Hugo Chávez ordered his telecom minister to seize control of a Verizon Comm. (VZ)-controlled telecom co before paying compensation to its US owners. Mr. Chávez's announcement threw further doubts on whether Verizon would receive fair compensation for its stake in Compañia Anónima Nacional Teléfonos de Venezuela - CANTV.
According to the “Heard on the Street” column, the Sanofi-Avnetis’ (SNY) stock price has lagged behind its peers partly b/c the co doesn't tell the mkt much about the experimental drugs it is developing. This has created a cloud of uncertainty over the co, b/c understanding the pharma pipeline is key for investors. Now, its new CEO, Gérard Le Fur, says Sanofi is ready to start talking. "I accept the criticism that we weren't good enough in this area, so we have to improve our communication," Dr. Le Fur says. Sanofi promises the first signs of its new transparency will come at its ‘06 earnings conference Feb. 13, which will include an update on R&D. According to the article, former CEO, Jean-François Dehecq, will remain Chmn until 2010. Many analysts and investors believe that Mr. Dehecq is staying on to attempt one final acquisition, possibly of Bristol-Myers (BMY).
Sunday, January 21, 2007
Barron's Summary
Barron’s cover highlights stocks of co’s that benefit from rapid wealth growth. Those include: AXP - Plastic of choice for the well-heeled; COH - Madly popular high-end accessories; GD - Gulfstream jet demand soaring; FO - Golf clubs and good bourbon; IHG - Hosts to the globetrotting class; LVS - China's new rich jamming Macao; LTM - Play palaces for the suburban affluent; MER - Prime role in handling wealth transfer; MGM - Those who earn a lot often bet a lot; SKS - Stellar brand, company in turnaround; BID - Brokering culture to the hyper-rich; TIF - Those blue boxes are coveted globally; JWN - The apex of national department stores; TXT - Cessna prospering in private-jet boom; and WFMI - Selling virtue and organic kale, for plenty. Article also highlights co’s that serve a cash-strapped lower-income clientele. Those include BIG - Midwest close-out chain is on a roll; DG - Dollar stores gain share selling staples; FDO - Decent top-line growth, strong stock; EZPW - Pawn shops, sadly, are thriving; and FCFS - "Payday loans" profitable, under scrutiny.
Barron’s Roundtable members like EFA, RCS, FRA, LYO, HIG, ACGL, COF, GLW, PXD, EWS, PBR, NBR, YRCW, C, GE, RCL, FD, MEDI, BRL, BHI and SYMC.
The stock of Under Armour (UA), lately 51, is probably worth no more than the low 50s, and could fall much further if the young company stumbles. Competitors are storming Under Armour's market.
A buyout group that won the Clear Channel (CCU) auction stands to make a quick 50% return. But institutional opposition could kill the deal or force the group to boost its bid. Barron's has learned that at least two big institutional holders, including Fidelity Investments, have told mgmt that they will cast negative votes. "The LBO price is wholly inadequate," says Jeff Jacobowitz, of Robotti & Co.
The shares of Manor Care (HCR), off 6% from a high last summer, don't reflect all the improvements at the company. Jim Lane, of Tripoint Asset Mgmt sees the stock climbing 30%, to $65, over the next 18 months.
“The Trader” section highlights Tesoro (TSO), which is sitting on a treasure of cash, probably more than it needs to run the business efficiently. At the end of ‘06, the co will likely end up with about $800M in cash. FBR analyst Jacques Rousseau argues that the best use of the cash is a big buyback of its own shares, say $1bn worth, to take out some 20% of the 67M outstanding. Tesoro hasn't reduced the share count much in recent years, he says, so such a buyback would make a "material" impact on EPS, increasing estd profits about 18% this year by lowering shares outstanding. A similar move by refiner Ultramar Diamond Shamrock in ‘01 led to a 26% rise in the stock price over the next 12 weeks, he points out. With oil and refined-product prices falling, refiners will likely see share volatility in ‘07, and there will be chances to buy back the stock at prices lower than it is now.
The stocks listed here show strong fundamental business trends and above-avg short-term relative strength, which could lead to outperformance in the next few months, according to the Barron’s. SPW, IPG, AQNT, OII, LEH, ASN, MHS, KCI, GD, ADSK and CMCSA.
“Technology Trader” section discusses Cisco (CSCO), which fell 8% last week, after analysts at 3 brokerage firms downgraded the stock from Buy to Neutral. Barron’s argues that analysts jumped off the Cisco wave too early. After all, YouTube hasn't yet started stocking high-definition videos. Video traffic could grow to levels that force widespread upgrades of Internet gear. The article suggests that Cisco still has a few good quarters ahead of it.
Friday, January 19, 2007
Color on quarter: Capital One (NYSE:COF)
Several firms are commenting on Capital One Financial (NYSE:COF) after the co released its Q4 results last night. While most comments are positive in nature (COF is a former analyst darling), I suspect the calls from CIBC and Merrill Lynch make the most sense:
- CIBC notes they believe there is still a love affair going on between analysts and investors and Capital One. After all, the stock made people a lot of money in the 1990s and people remember a good thing. But COF is no longer a growth stock, in firm's view, and has even guided to flat earnings for 2007.
While at 10X their 2007 EPS estimate, the stock looks attractive to some, on value, they believe that until COF pays a competitive dividend with other banks it will trade at a 10X multiple. Currently, COF's div is just 0.14% vs. a 3.5% avg. for banks. COF cannot increase its dividend until at least 2008.
COF reported fourth-quarter EPS of $1.14 vs. $0.97, and well short of consensus of $1.24. What's worse, the company provided 2007 guidance that is effectively flat with 2006 prior guidance and actual performance. Competitive pressures, a flat yield curve, and prolonged integration expenses threw cold water on previous aspirations for higher earnings potential for this year. COF's credit outlook was pretty good: normalization but not a spike in credit delinquencies and losses.
CIBC is lowering their 2007 EPS estimate to $7.20 from $8.20 to reflect COF s transition toward lower margin and less risky businesses. They expect expense growth to decelerate through 2007 and credit losses to normalize. Firm is establishing 2008 EPS estimate of $8.50. Maintains Sector Performer.
- Merrill Lynch says COF Q4'06 results had something for everyone, as the reported EPS was below consensus and the NFB deal close added enough noise to confuse interpretation of the results. 2007 EPS guidance of $7.40-$7.80 likely disappoints, as the Street is at $8.11, though there is room for an upside surprise if credit remains good. Also, there was some speculation that guidance could be lower with investors looking for protection in the options market before the release, so COF shares could react positively to the release on relief that the guidance wasn't worse.
They think the stock could see some weakness today, though they think there is support for the shares at 9.6x 2007e EPS. COF reported adjusted Q4'06 EPS of $1.08, net of a 1x items that increased EPS by $0.06, which was well-below consensus of $1.24 and ML estimate of $1.21. The source of the miss was Bank segment under-performance followed by a modest GFS shortfall on higher expenses.
Maintains Buy.
Notablecalls: So that's why there was some buying COF in after hours! After pouring over COF's results last night I just don't see how anyone can believe management's guidance for 2007. The US Cards segement will surely deteriorate in 2007. Considering this segment makes up for most of COF's bottom line the stock continues to be radioactive here. It's a sell.
- CIBC notes they believe there is still a love affair going on between analysts and investors and Capital One. After all, the stock made people a lot of money in the 1990s and people remember a good thing. But COF is no longer a growth stock, in firm's view, and has even guided to flat earnings for 2007.
While at 10X their 2007 EPS estimate, the stock looks attractive to some, on value, they believe that until COF pays a competitive dividend with other banks it will trade at a 10X multiple. Currently, COF's div is just 0.14% vs. a 3.5% avg. for banks. COF cannot increase its dividend until at least 2008.
COF reported fourth-quarter EPS of $1.14 vs. $0.97, and well short of consensus of $1.24. What's worse, the company provided 2007 guidance that is effectively flat with 2006 prior guidance and actual performance. Competitive pressures, a flat yield curve, and prolonged integration expenses threw cold water on previous aspirations for higher earnings potential for this year. COF's credit outlook was pretty good: normalization but not a spike in credit delinquencies and losses.
CIBC is lowering their 2007 EPS estimate to $7.20 from $8.20 to reflect COF s transition toward lower margin and less risky businesses. They expect expense growth to decelerate through 2007 and credit losses to normalize. Firm is establishing 2008 EPS estimate of $8.50. Maintains Sector Performer.
- Merrill Lynch says COF Q4'06 results had something for everyone, as the reported EPS was below consensus and the NFB deal close added enough noise to confuse interpretation of the results. 2007 EPS guidance of $7.40-$7.80 likely disappoints, as the Street is at $8.11, though there is room for an upside surprise if credit remains good. Also, there was some speculation that guidance could be lower with investors looking for protection in the options market before the release, so COF shares could react positively to the release on relief that the guidance wasn't worse.
They think the stock could see some weakness today, though they think there is support for the shares at 9.6x 2007e EPS. COF reported adjusted Q4'06 EPS of $1.08, net of a 1x items that increased EPS by $0.06, which was well-below consensus of $1.24 and ML estimate of $1.21. The source of the miss was Bank segment under-performance followed by a modest GFS shortfall on higher expenses.
Maintains Buy.
Notablecalls: So that's why there was some buying COF in after hours! After pouring over COF's results last night I just don't see how anyone can believe management's guidance for 2007. The US Cards segement will surely deteriorate in 2007. Considering this segment makes up for most of COF's bottom line the stock continues to be radioactive here. It's a sell.
Coldwater Creek (NASDAQ:CWTR) - bounce candidate
Couple of firms are out commenting on Coldwater Creek (NASDAQ:CWTR) after the co issued sharply lower Q4 results last night:
- Banc of America notes CWTR cut its Q4 EPS guidance by nearly 40% to $0.16-0.17 (from $0.26-0.27) with the majority of the shortfall due to margins (particularly at retail). They think the timing of the announcement (given the company was at an investor conference last week) could raise concerns about management credibility.
Inventory concern against tough spring comparisons. CWTR pointed to a tough retail environment, not product issues, and plans to clear through inventory by the end of Q4. However, the firm does not believe CWTR has made adjustments to spring flows and there could be some markdown risk in Q1 if trends do not improve. They also note CWTR faces tough comparisons (+HSD-LT comps) over the next 3
quarters.
This takes 2006E to $0.59 from $0.69, 2007E to $0.72 from $0.92, and 2008E to $0.92 from $1.13. BAC expects conservative 2007 EPS guidance on 2/8, but believes the story has gone from a company that typically beats conservative guidance to one where there could be risk to numbers if weak trends persist. Thinks CWTR is a strong early stage story with a model highly leveraged to a retail rollout. Maintains Neutral but lowers tgt to $19 from $28.
- CIBC notes the EPS miss caught them off-guard given that: 1. they thought merchandise was highly appealing; 2. CWTR's promotional cadence was in line w/ LY, appearing as if inventory was moving as planned; and 3. they saw multiple margin drivers that they believed could offset modest markdowns.
While there may not be much downside from here, the firm thinks there could be an overhang on the stock near term given that investors were likely blind-sighted as well, will have to wait until 2/7 to get the 07 outlook (which is likely to trail the Street's) and 3/7 to get the critical details on 4Q.
However, LT they believe CWTR is among the best sales and margin growth stories, with still 40% three-year EPS growth. CIBC thinks the traffic issue is likely short-lived, inventories expected to be clean by end of 4Q, and the company remains on track to achieve LT operating margin goals.
Maintains Sector Outperformer. Lowers tgt to $29 from $35.
- JP Morgan says traffic was the primary reason for the company's lowered guidance ($0.16-$0.17 from $0.26-$0.27) and we see no reason to expect improvement in the near term. Despite this, however, they still believe that CWTR, with its leading sq. ft. growth and margin opportunity, remains an attractive investment-esp. given the 20%+ dip in CWTR shares aftermarket last night (SandP -0.3%).
Citing what are similar trends across the women's apparel space, the co. continues to experience declines in traffic. However, conversion metrics, units per transaction and average transaction size appear to remain positive. The worst categories include fashion-knit tops and jewelry/accessories-key categories for gifting/occasional dressing.
With strong 30% sq. ft. growth and easy margin opportunities still very much a part of the company's story, JPM believes that shares of CWTR should be able to sustain a premium valuation (similar to URBN and CHS) despite this blip. Should trends normalize, they estimate earnings power of closer to $1.50 over the next couple of years.
Reits Overweight.
- UBS says Coldwater Creek's 4Q profit warning announcement last night is a speed bump in what they believe is a unique long term growth story. A more promotional retail environment during Holiday resulted in soft traffic and margin pressure for Coldwater Creek. They do not believe the story is broken, however. They have lowered their EPS estimates and price target for CWTR. Firm's rating remains Buy.
Many of Coldwater Creek's competitors (Chico's, Talbots, and J. Jill) have already warned about 4Q falling short of expectations, due to company specific merchandising issues and subsequentaggressive promotions. Coldwater did not accelerate promotional activity pre holiday and accordingly, suffered soft traffic. Management plans to clear all remaining inventory in time for new deliveries in early February.
UBS thinks the CWTR story still represents one of the most compelling stories in the space, given 1) margin expansion, 2) 25%+ square footage growth, and 3) differentiated triple channel strategy. They would see any weakness today as a particularly attractive buying opportunity.
Target is cut to $28 from $30.
Notablecalls: I suspect CWTR is a prime bounce candidate. Firstly, the warning does not come as a surprise as several competitors have already issued negative news. Secondly, short interest continued to climb ahead of the announcement meaning there will be some short covering. Last but surely not least, the analyst community continues to be positive on CWTR, calling the news a speed bump. The 20%+ decline in after hrs seems to be excessive. Think the stock's a buy around $18.50 level.
- Banc of America notes CWTR cut its Q4 EPS guidance by nearly 40% to $0.16-0.17 (from $0.26-0.27) with the majority of the shortfall due to margins (particularly at retail). They think the timing of the announcement (given the company was at an investor conference last week) could raise concerns about management credibility.
Inventory concern against tough spring comparisons. CWTR pointed to a tough retail environment, not product issues, and plans to clear through inventory by the end of Q4. However, the firm does not believe CWTR has made adjustments to spring flows and there could be some markdown risk in Q1 if trends do not improve. They also note CWTR faces tough comparisons (+HSD-LT comps) over the next 3
quarters.
This takes 2006E to $0.59 from $0.69, 2007E to $0.72 from $0.92, and 2008E to $0.92 from $1.13. BAC expects conservative 2007 EPS guidance on 2/8, but believes the story has gone from a company that typically beats conservative guidance to one where there could be risk to numbers if weak trends persist. Thinks CWTR is a strong early stage story with a model highly leveraged to a retail rollout. Maintains Neutral but lowers tgt to $19 from $28.
- CIBC notes the EPS miss caught them off-guard given that: 1. they thought merchandise was highly appealing; 2. CWTR's promotional cadence was in line w/ LY, appearing as if inventory was moving as planned; and 3. they saw multiple margin drivers that they believed could offset modest markdowns.
While there may not be much downside from here, the firm thinks there could be an overhang on the stock near term given that investors were likely blind-sighted as well, will have to wait until 2/7 to get the 07 outlook (which is likely to trail the Street's) and 3/7 to get the critical details on 4Q.
However, LT they believe CWTR is among the best sales and margin growth stories, with still 40% three-year EPS growth. CIBC thinks the traffic issue is likely short-lived, inventories expected to be clean by end of 4Q, and the company remains on track to achieve LT operating margin goals.
Maintains Sector Outperformer. Lowers tgt to $29 from $35.
- JP Morgan says traffic was the primary reason for the company's lowered guidance ($0.16-$0.17 from $0.26-$0.27) and we see no reason to expect improvement in the near term. Despite this, however, they still believe that CWTR, with its leading sq. ft. growth and margin opportunity, remains an attractive investment-esp. given the 20%+ dip in CWTR shares aftermarket last night (SandP -0.3%).
Citing what are similar trends across the women's apparel space, the co. continues to experience declines in traffic. However, conversion metrics, units per transaction and average transaction size appear to remain positive. The worst categories include fashion-knit tops and jewelry/accessories-key categories for gifting/occasional dressing.
With strong 30% sq. ft. growth and easy margin opportunities still very much a part of the company's story, JPM believes that shares of CWTR should be able to sustain a premium valuation (similar to URBN and CHS) despite this blip. Should trends normalize, they estimate earnings power of closer to $1.50 over the next couple of years.
Reits Overweight.
- UBS says Coldwater Creek's 4Q profit warning announcement last night is a speed bump in what they believe is a unique long term growth story. A more promotional retail environment during Holiday resulted in soft traffic and margin pressure for Coldwater Creek. They do not believe the story is broken, however. They have lowered their EPS estimates and price target for CWTR. Firm's rating remains Buy.
Many of Coldwater Creek's competitors (Chico's, Talbots, and J. Jill) have already warned about 4Q falling short of expectations, due to company specific merchandising issues and subsequentaggressive promotions. Coldwater did not accelerate promotional activity pre holiday and accordingly, suffered soft traffic. Management plans to clear all remaining inventory in time for new deliveries in early February.
UBS thinks the CWTR story still represents one of the most compelling stories in the space, given 1) margin expansion, 2) 25%+ square footage growth, and 3) differentiated triple channel strategy. They would see any weakness today as a particularly attractive buying opportunity.
Target is cut to $28 from $30.
Notablecalls: I suspect CWTR is a prime bounce candidate. Firstly, the warning does not come as a surprise as several competitors have already issued negative news. Secondly, short interest continued to climb ahead of the announcement meaning there will be some short covering. Last but surely not least, the analyst community continues to be positive on CWTR, calling the news a speed bump. The 20%+ decline in after hrs seems to be excessive. Think the stock's a buy around $18.50 level.
Calls of Note Part 1
Couple of interesting comments on Whole Foods (NASDAQ:WFMI) this AM:
- Banc of America is reducing their 1Q EPS $0.02 to $0.41, FY07 $0.02 to $1.42, and FY08 $0.01 to $1.71. They now believe that WFMI's gross margin will deteriorate 25 bp in the 1Q compared to 15 bp previously. The reduction in gm estimate is due to WFMI's aggressive push to lower prices, particularly on dry grocery. Every 10 bp decrease in gm equates to approximately $0.01 in EPS.
Firm's CT pricing survey shows WFMI prices are down 3.9% from May. While observing prices in one store is certainly not conclusive, the survey seems to support company comments that it would aggressively lower prices to counter its 'Whole Paycheck' image. The survey could suggest more pressure on the gm (up to 40 bp); however, some of the lower pricing is likely being offset by the new UNFI contract and growth in higher margin prepared food items.
Theyhave also lowered comp est. to 6.5% from 7.5% as industry sources have indicated that comp stores sales remained 'challenging' in 1Q. Maintains Neutral and $45 tgt.
- JP Morgan is out defending the stock saying there is a wall-of-worry with WFMI, which, they think, is healthy and frankly makes the stock enticing at 3 1/2 year trough valuations and 52-week low.
Recent issues that have weighed on the stock reflect acceptable growing-pains, manageable competition, as well as, in firm's view, cyclical retail factors with sales. The sheer math of tough comparisons exacerbates this. The equity market over-compensates for these issues, in their opinion, while market sentiment is too negative (33% Buy ratings per Bloomberg). Reiterates Overweight. Long-term investors should start building positions.
They expect that same store sales will accelerate in the second half; the bottom will be this upcoming quarter, Q107E (6 to7% estimate).
Firm likens this investment to that of their former recommendation of food distributor, Sysco (SYY/N), which also took time to unveil during 2006 (firm's EPS estimates had been below consensus there, too). In the case of Whole Foods, free cash flow trends, as well as the addressable market, are larger, so their conviction level is higher here.
Notablecalls: While JPM's comments make perfect sense, BAC's estimate will most likely prevail in the s-t. Not saying WFMI is an outright short here but I would not want to be long the common here either.
- Banc of America is reducing their 1Q EPS $0.02 to $0.41, FY07 $0.02 to $1.42, and FY08 $0.01 to $1.71. They now believe that WFMI's gross margin will deteriorate 25 bp in the 1Q compared to 15 bp previously. The reduction in gm estimate is due to WFMI's aggressive push to lower prices, particularly on dry grocery. Every 10 bp decrease in gm equates to approximately $0.01 in EPS.
Firm's CT pricing survey shows WFMI prices are down 3.9% from May. While observing prices in one store is certainly not conclusive, the survey seems to support company comments that it would aggressively lower prices to counter its 'Whole Paycheck' image. The survey could suggest more pressure on the gm (up to 40 bp); however, some of the lower pricing is likely being offset by the new UNFI contract and growth in higher margin prepared food items.
Theyhave also lowered comp est. to 6.5% from 7.5% as industry sources have indicated that comp stores sales remained 'challenging' in 1Q. Maintains Neutral and $45 tgt.
- JP Morgan is out defending the stock saying there is a wall-of-worry with WFMI, which, they think, is healthy and frankly makes the stock enticing at 3 1/2 year trough valuations and 52-week low.
Recent issues that have weighed on the stock reflect acceptable growing-pains, manageable competition, as well as, in firm's view, cyclical retail factors with sales. The sheer math of tough comparisons exacerbates this. The equity market over-compensates for these issues, in their opinion, while market sentiment is too negative (33% Buy ratings per Bloomberg). Reiterates Overweight. Long-term investors should start building positions.
They expect that same store sales will accelerate in the second half; the bottom will be this upcoming quarter, Q107E (6 to7% estimate).
Firm likens this investment to that of their former recommendation of food distributor, Sysco (SYY/N), which also took time to unveil during 2006 (firm's EPS estimates had been below consensus there, too). In the case of Whole Foods, free cash flow trends, as well as the addressable market, are larger, so their conviction level is higher here.
Notablecalls: While JPM's comments make perfect sense, BAC's estimate will most likely prevail in the s-t. Not saying WFMI is an outright short here but I would not want to be long the common here either.
Color on quarter: IBM (NYSE:IBM)
Several firms are commenting on IBM (NYSE:IBM) after the co reported its Q4 results last night:
- Citigroup reiterates their Buy rating for IBM shares with a revised 12-month target of $115 (from $105). While they acknowledge that there is no near-term catalyst for IBM shares, they are encouraged by multiple signs in the 4Q06 financial results of improvement in the struggling services business and strong momentum in software. Valuation is also among the most attractive relative to growth within the Hardware sector.
4CQ revenue of $26.3B was well above firm's estimate and consensus due to significant upside in both software and services. EPS of $2.20 (excluding tax benefit) was one penny above consensus but two pennies below estimate. $17.8B in services bookings (+55% yoy) was the highest since 4Q02. IBM enjoyed significant acceleration in both short- and long-term bookings growth.
Impressive 11% organic middleware software growth suggests that IBM is gaining share thanks
to recent investments in sales and marketing.
- Morgan Stanley notes that continued momentum in Software, growing traction in Services, and easy YoY Hardware compares in C1Q07 suggest more room for relative stock performance near term. Firm is Overweight IBM and thinks the stock can provide investors with good leverage going into the seasonally weak first half of the year and would accumulate shares on yesterday's after-market dip.
IBM indicated steady demand and a healthy services deal pipeline going into 2007. It also kept its long term target of low-mid single digit revenue growth and 10-12% EPS growth (in-line with consensus), which the firm believes will be achievable given its on-going investments and productivity initiatives.
They tweaked revenues to reflect lower hardware growth and higher software growth in 2007 and FY07 revenues inch down to $94B from $94.4B. Firm increased EPS by 6 pennies in anticipation of more leverage in 2H07 from continued investments.
Maintains Overweight.
- Prudential notes the Hardware segment was the biggest disappointment to 4Q06 results as c/c revenues grew 0% vs. 7% in 3Q06, and gross margins fell 100 bps vs. a positive 60 bps increase in 3Q06. System Z mainframes fell to 1% growth (vs. 22% in 3Q06) and the Microelectronics division dropped sharply to -6% (vs. 29% in 3Q06). Additionally, IBM is not seeing a pick-up in the growth areas of System i and x (blade growth not carrying the revenue). Firm does not see any near-term relief in the Hardware segment over the next few quarters. Software had another strong quarter (up 5% organic) led by key branded middleware growing 21% YOY (10% organic). Software gross margins continued to expand to 86.5%, up 20 bps YOY (vs. 40 bps in 3Q06).
Although 4Q06 results were solid, investors expecting more immediate upside will be disappointed. They are raising 2007 EPS estimates to $6.77 from $6.67, which is entirely due to a lower expected effective tax rate of 28.5%. Reiterates Neutral Weight rating and $100 price target, awaiting more progress in Services and a pick-up in Hardware.
- Goldman Sachs says the IBM earnings stew somehow managed to mix together an even more varied combination of strengths, disappointments, and confusion than usual. While the quarter, and its implications for future growth, was strong and better-balanced than we've seen in over a year, unexpected investments in sales and incremental acquisition expense yielded gross margins that were lower than last year's December quarter in all three of IBM key segments (software, services, hardware). Although IBM's earnings growth continues to point to 10%-12% off of an increasing base, IBM confused the issue for 2007 by throwing a lower tax rate into the mix and implying that earnings could be more backend-loaded than current Street estimates. GSCO is raising their 2007 forecast to $6.74 from prior $6.60 and, although all of this comes from a lower tax rate, they think there could still be additional fundamental upside of $0.05-$0.10.
The stock's reaction after-hours pretty much tells the story and should provide a valuation base, taking IBM's multiple down by over a point and its relative multiple back to the low end (a rounded-up 0.9x the S&P 500) of its traditional range. Although IBM managed to summarily take the wind out of its sails, GSCO is staying with their Buy rating for now based on IBM's current implied multiple. To stay with the stock much beyond the seasonally weakest period for tech, we will need to see early upside.
Notablecalls: The stock traded down to $94 level in after hrs action. Lack of EPS upside coupled with disappointing hardware results will surely take wind out of its sails. I don't think we will see a meaningful bounce today.
- Citigroup reiterates their Buy rating for IBM shares with a revised 12-month target of $115 (from $105). While they acknowledge that there is no near-term catalyst for IBM shares, they are encouraged by multiple signs in the 4Q06 financial results of improvement in the struggling services business and strong momentum in software. Valuation is also among the most attractive relative to growth within the Hardware sector.
4CQ revenue of $26.3B was well above firm's estimate and consensus due to significant upside in both software and services. EPS of $2.20 (excluding tax benefit) was one penny above consensus but two pennies below estimate. $17.8B in services bookings (+55% yoy) was the highest since 4Q02. IBM enjoyed significant acceleration in both short- and long-term bookings growth.
Impressive 11% organic middleware software growth suggests that IBM is gaining share thanks
to recent investments in sales and marketing.
- Morgan Stanley notes that continued momentum in Software, growing traction in Services, and easy YoY Hardware compares in C1Q07 suggest more room for relative stock performance near term. Firm is Overweight IBM and thinks the stock can provide investors with good leverage going into the seasonally weak first half of the year and would accumulate shares on yesterday's after-market dip.
IBM indicated steady demand and a healthy services deal pipeline going into 2007. It also kept its long term target of low-mid single digit revenue growth and 10-12% EPS growth (in-line with consensus), which the firm believes will be achievable given its on-going investments and productivity initiatives.
They tweaked revenues to reflect lower hardware growth and higher software growth in 2007 and FY07 revenues inch down to $94B from $94.4B. Firm increased EPS by 6 pennies in anticipation of more leverage in 2H07 from continued investments.
Maintains Overweight.
- Prudential notes the Hardware segment was the biggest disappointment to 4Q06 results as c/c revenues grew 0% vs. 7% in 3Q06, and gross margins fell 100 bps vs. a positive 60 bps increase in 3Q06. System Z mainframes fell to 1% growth (vs. 22% in 3Q06) and the Microelectronics division dropped sharply to -6% (vs. 29% in 3Q06). Additionally, IBM is not seeing a pick-up in the growth areas of System i and x (blade growth not carrying the revenue). Firm does not see any near-term relief in the Hardware segment over the next few quarters. Software had another strong quarter (up 5% organic) led by key branded middleware growing 21% YOY (10% organic). Software gross margins continued to expand to 86.5%, up 20 bps YOY (vs. 40 bps in 3Q06).
Although 4Q06 results were solid, investors expecting more immediate upside will be disappointed. They are raising 2007 EPS estimates to $6.77 from $6.67, which is entirely due to a lower expected effective tax rate of 28.5%. Reiterates Neutral Weight rating and $100 price target, awaiting more progress in Services and a pick-up in Hardware.
- Goldman Sachs says the IBM earnings stew somehow managed to mix together an even more varied combination of strengths, disappointments, and confusion than usual. While the quarter, and its implications for future growth, was strong and better-balanced than we've seen in over a year, unexpected investments in sales and incremental acquisition expense yielded gross margins that were lower than last year's December quarter in all three of IBM key segments (software, services, hardware). Although IBM's earnings growth continues to point to 10%-12% off of an increasing base, IBM confused the issue for 2007 by throwing a lower tax rate into the mix and implying that earnings could be more backend-loaded than current Street estimates. GSCO is raising their 2007 forecast to $6.74 from prior $6.60 and, although all of this comes from a lower tax rate, they think there could still be additional fundamental upside of $0.05-$0.10.
The stock's reaction after-hours pretty much tells the story and should provide a valuation base, taking IBM's multiple down by over a point and its relative multiple back to the low end (a rounded-up 0.9x the S&P 500) of its traditional range. Although IBM managed to summarily take the wind out of its sails, GSCO is staying with their Buy rating for now based on IBM's current implied multiple. To stay with the stock much beyond the seasonally weakest period for tech, we will need to see early upside.
Notablecalls: The stock traded down to $94 level in after hrs action. Lack of EPS upside coupled with disappointing hardware results will surely take wind out of its sails. I don't think we will see a meaningful bounce today.
Paperstand (HES, IESC)
WSJ's "Heard on the Street" column out saying that as oil prices are sliding and energy shares are skidding, investors are trying to figure out which co's will be hurt most if oil stays down amid a relatively warm winter and ample global supply. "Some oil shares have held up better than expected," says Jack Ablin, of Harris Private Bank. "But profit expectations are getting slashed." He says Hess (HES) is vulnerable b/c it historically has been sensitive to crude-oil prices but lately its shares have held up surprisingly well. Among larger oil co's, ConocoPhillips (COP) could be hurt if oil prices keep tumbling. Others say that oil-service co's, like Tidewater (TDW), could be risky. In previous oil downturns, drilling co stocks have taken it on the chin b/c they operate with a high degree of operating leverage, or their earnings are most sensitive to moves in oil prices. Larger drilling co's include Grey Wolf (GW), Rowan (RDC) and Nabors (NBR). As oil's price falls, alternative-energy sources become less attractive b/c they usually are more expensive to produce than traditional sources. Ethanol producers could be hurt as rising corn prices send their cost of production higher, and as crude and gasoline prices fall. Publicly traded ethanol co's include Aventine Renewable Energy (AVR), Pacific Ethanol (PEIX) and VeraSun (VSE). Archer-Daniels-Midland (ADM) is the largest ethanol producer based on gallons produced. Large grain producers in the Farm Belt, like ADM, have made investments in part based on high oil prices. According to Credit Suisse research, ethanol makers were able to pull off a profit of 86c a gallon in the middle of the summer when oil was around $70 a barrel and corn was just $2.50 a bushel. Today, with oil near $50 and corn above $4, they incur a loss of 21c for every gallon they produce.
Barron's Online "Inside Scoop" section reports that 2 hedge funds have charged up their buying of shares of Integrated Electrical Services (IESC). In the last 2 weeks, hedge funds Tontine Capital Mgmt and Southpoint Capital Advisors have spent a total of $4.4M on shares of Integrated Electrical. The co's CEO Michael Caliel and Robert Callahan, a SVP, also jumped in with buys totaling $54K during that time period. Both Tontine and Southpoint have representatives on Integrated Electrical's board of directors, which Ben Silverman, director of research at InsiderScore.com, says boosts the bullish signal from their purchases. "They are not just casual investors here," Silverman says.
Barron's Online "Inside Scoop" section reports that 2 hedge funds have charged up their buying of shares of Integrated Electrical Services (IESC). In the last 2 weeks, hedge funds Tontine Capital Mgmt and Southpoint Capital Advisors have spent a total of $4.4M on shares of Integrated Electrical. The co's CEO Michael Caliel and Robert Callahan, a SVP, also jumped in with buys totaling $54K during that time period. Both Tontine and Southpoint have representatives on Integrated Electrical's board of directors, which Ben Silverman, director of research at InsiderScore.com, says boosts the bullish signal from their purchases. "They are not just casual investors here," Silverman says.
Thursday, January 18, 2007
Calls of Note Part 6
Prudential notes that preliminary CQ406 data from IDC suggests a slowing PC market and continued share loss for Dell (NASDAQ:DELL). Similar to last quarter, they expect a negative reaction for Dell shares on this news.
In anticipation of this data, they completed a round of checks with contacts across the PC supply chain. Checks indicate that through the month of December Dell continued to execute to a strategy of trading unit growth for profitability across all of its business segments.
While the unit growth is lower than they anticipated according to IDC, firm's checks suggest that Dell is on track for solid margin expansion in the quarter, offsetting any adverse affect from the lower unit sales. They do not expect this share loss to continue as they are starting to see the company become more aggressive in driving PC growth in the corporate space. Additionally, they see strength in servers, storage, and services, as well as component costs initiatives contributing positively to the bottom line.
Firm is maintaining their Street high FY'08 EPS estimate of $1.61 as they believe the company will post upside to consensus estimates in coming quarters. They recommend that investors use any weakness to buy shares of Dell. Remains Overweight with a $31 price target.
Notablecalls: Expect to see weakness in DELL followed by a trading bounce after the open. Nothing major, though.
In anticipation of this data, they completed a round of checks with contacts across the PC supply chain. Checks indicate that through the month of December Dell continued to execute to a strategy of trading unit growth for profitability across all of its business segments.
While the unit growth is lower than they anticipated according to IDC, firm's checks suggest that Dell is on track for solid margin expansion in the quarter, offsetting any adverse affect from the lower unit sales. They do not expect this share loss to continue as they are starting to see the company become more aggressive in driving PC growth in the corporate space. Additionally, they see strength in servers, storage, and services, as well as component costs initiatives contributing positively to the bottom line.
Firm is maintaining their Street high FY'08 EPS estimate of $1.61 as they believe the company will post upside to consensus estimates in coming quarters. They recommend that investors use any weakness to buy shares of Dell. Remains Overweight with a $31 price target.
Notablecalls: Expect to see weakness in DELL followed by a trading bounce after the open. Nothing major, though.
Calls of Note Part 5
CIBC notes that recent news flow indicates that Baidu.com (NASDAQ:BIDU) is taking steps to grab share from online branded ad; notably, Baidu inking a deal with EMI to launch online ad- supported music streaming services. Baidu also reportedly obtained an Internet news service license and is prepared to launch a news portal.
Firm believes the EMI deal would enable BIDU to monetize its large MP3 traffic, while mitigating legal risks related to music piracy. Firm expects to see more cooperation with entertainment content providers as online ad supported free music may work better than paid downloads in China.
They believe a news portal would allow BIDU to directly monetize its news search through branded ads on its portal. That said, they expect only minimal revenue upside in the near term as both initiatives are still in early stages. In the long run, the firm believes Baidu is on the right track to address the issue of decelerating top-line growth, considering China's online branded ad market is ~3x of paid search market.
Notablecalls: Would not be surprised to see some buy interest in BIDU following the call. I like the chart and the fact they are trying to monetize their large MP3 traffic.
Firm believes the EMI deal would enable BIDU to monetize its large MP3 traffic, while mitigating legal risks related to music piracy. Firm expects to see more cooperation with entertainment content providers as online ad supported free music may work better than paid downloads in China.
They believe a news portal would allow BIDU to directly monetize its news search through branded ads on its portal. That said, they expect only minimal revenue upside in the near term as both initiatives are still in early stages. In the long run, the firm believes Baidu is on the right track to address the issue of decelerating top-line growth, considering China's online branded ad market is ~3x of paid search market.
Notablecalls: Would not be surprised to see some buy interest in BIDU following the call. I like the chart and the fact they are trying to monetize their large MP3 traffic.
Calls of Note Part 4
JP Morgan is out with high conviction on Sprint-Nextel (NYSE:S) saying the stock has fallen in the past week since the 2007 outlook was provided. The outlook was the latest in a string of disappointments and hesitant investors have asked what levels defined previous troughs.
S's 41% discount to group mirrors ATandT Wireless 2002 trough. JPM believes the stock has reached its valuation trough. At 5.1x EV/'07E EBITDA, S at a 43% discount to the wireless group. Similarly, ATandT Wireless troughed in 10/2002 at a 41% discount on EV/EBITDA to the group. ATandT Wireless previously was the largest trough discount. The firm looked at a total of 6 prior instances of troughs since 2002.
Historical analysis of 6 prior troughs shows wireless stocks have typically risen 111% 6 months after troughing. How do they know this is the trough? The current 43% EV/EBITDA discount on S is the largest ever seen since 2002.
Takeaway? Bad news is more than baked in. In their view, Sprint's current share price reflects the bad news. As investors may recall, ATandT Wireless continued to stumble after 2002 but the stock still managed to more than double by the end of 2003.
Bottom line, they are buying the stock here. They do not think the stock can fall further, even on additional disappointments.
Notablecalls: I think JPM's right! You gotta buy Sprint here. The valuation discount is way too big to be ignored. Think there is just one big seller out there and once she is done S will bounce hard.
S's 41% discount to group mirrors ATandT Wireless 2002 trough. JPM believes the stock has reached its valuation trough. At 5.1x EV/'07E EBITDA, S at a 43% discount to the wireless group. Similarly, ATandT Wireless troughed in 10/2002 at a 41% discount on EV/EBITDA to the group. ATandT Wireless previously was the largest trough discount. The firm looked at a total of 6 prior instances of troughs since 2002.
Historical analysis of 6 prior troughs shows wireless stocks have typically risen 111% 6 months after troughing. How do they know this is the trough? The current 43% EV/EBITDA discount on S is the largest ever seen since 2002.
Takeaway? Bad news is more than baked in. In their view, Sprint's current share price reflects the bad news. As investors may recall, ATandT Wireless continued to stumble after 2002 but the stock still managed to more than double by the end of 2003.
Bottom line, they are buying the stock here. They do not think the stock can fall further, even on additional disappointments.
Notablecalls: I think JPM's right! You gotta buy Sprint here. The valuation discount is way too big to be ignored. Think there is just one big seller out there and once she is done S will bounce hard.
Motorola (NYSE:MOT) - buying opportunity ahead of management meeting
Plenty of firms previewing Motorola (NYSE:MOT) ahead of quarterly conference call/mini-analyst day taking place tomorrow. Severals firms are taking a look from the sum-of-the-parts/LBO perspective.
- Bear Stearns notes that Motorola's market value is down 23% since it released 3Q earnings on 10/17/06. This implies a massive decrease in the value for the handset business since they've seen no material change in either MOT's Networks and Enterprise or Connected Home businesses. By using relative comps for MOT's N&E business at 1.2x EV/Sales, and CH business at 2.2x, firm arrives at an implicit value for MOT's handset biz of $18bn today or 0.58x 2007 sales vs. 1.01x in October. Using the same analysis, NOK's handset business has decreased from 1.24x to 1.04x, only 0.20x a turn lower, in the same time frame.
- JP Morgan estimates Mobile Devices is trading at a surprisingly low 0.4x 2007 revs using discounted transaction comps for the Networks and Connected Home businesses, MOT's $3.9B purchase price for Symbol Technologies, and a trading multiple for the Enterprise business.
Assuming even no revenue growth ever again and a return to just 10% oper margins, firm believes Mobile Devices could produce a 17% FCF yield implying that a hypothetical private equity owner could get paid back 100% of the purchase price in under 6 years.
- Deutsche Bank's LBO model shows that a financial buyer could justify a purchase and expects reasonable returns for private equity levels. These returns, however, would be premised on paying little premium and enjoying some multiple expansion or greatly improved operating margins. Both of these are possible, but firm thinks such a transaction carriers with it significant risk, which may outweigh the returns.
Notablecalls: Motorola mgmt has got some explaining to do, so taking the time to sit down with the investors is the right thing to do. Co has to make a decision between margins and market share and I think the mkt expects a reasonable strategy on how to reachieve margins without the expense of mkt share. We already saw stock ticking up yesterday and I'd expect it to continue today as any rebound in margins would make the valuation quite attractive
- Bear Stearns notes that Motorola's market value is down 23% since it released 3Q earnings on 10/17/06. This implies a massive decrease in the value for the handset business since they've seen no material change in either MOT's Networks and Enterprise or Connected Home businesses. By using relative comps for MOT's N&E business at 1.2x EV/Sales, and CH business at 2.2x, firm arrives at an implicit value for MOT's handset biz of $18bn today or 0.58x 2007 sales vs. 1.01x in October. Using the same analysis, NOK's handset business has decreased from 1.24x to 1.04x, only 0.20x a turn lower, in the same time frame.
- JP Morgan estimates Mobile Devices is trading at a surprisingly low 0.4x 2007 revs using discounted transaction comps for the Networks and Connected Home businesses, MOT's $3.9B purchase price for Symbol Technologies, and a trading multiple for the Enterprise business.
Assuming even no revenue growth ever again and a return to just 10% oper margins, firm believes Mobile Devices could produce a 17% FCF yield implying that a hypothetical private equity owner could get paid back 100% of the purchase price in under 6 years.
- Deutsche Bank's LBO model shows that a financial buyer could justify a purchase and expects reasonable returns for private equity levels. These returns, however, would be premised on paying little premium and enjoying some multiple expansion or greatly improved operating margins. Both of these are possible, but firm thinks such a transaction carriers with it significant risk, which may outweigh the returns.
Notablecalls: Motorola mgmt has got some explaining to do, so taking the time to sit down with the investors is the right thing to do. Co has to make a decision between margins and market share and I think the mkt expects a reasonable strategy on how to reachieve margins without the expense of mkt share. We already saw stock ticking up yesterday and I'd expect it to continue today as any rebound in margins would make the valuation quite attractive
Calls of Note Part 3
Raymond James is positive on InterContinental Exchange (NYSE:ICE) raising their price target for the InterContinental Exchange by ~6% to $144 from $136. Earnings momentum has been very strong recently at the futures exchanges, and they believe that volume growth forecasts for the company could have meaningful upside.
The ICE's daily futures volume statistics for January to date have been extremely strong, indicating that firm's volume estimates for 2007 may well be conservative.
The ICE's January futures volumes have thus far significantly exceeded firm's expectations. Overall they see little reason to expect slower growth at the ICE in the near term, although beginning of the year volumes typically show some strength. While they continue to view the CME+BOT as the premier exchange in the futures space, ICE boasts a faster growth rate, as well as a higher return on capital, cash flow yield, and operating margin.
Firm continues to rate the ICE Outperform. With a faster growth rate than peers, synergies from the NYBOT deal (not included in their 2008 estimate), and ICE's position as a takeover candidate, the firm believes that the stock should trade at the high end of its peer range.
Notablecalls: Sure looks like GSCO's call trumped WACH's dg yesterday. The chart looks like it may make one more push higher. It's not as high conviction call as the one posted yesterday so adjust your risk accordingly.
The ICE's daily futures volume statistics for January to date have been extremely strong, indicating that firm's volume estimates for 2007 may well be conservative.
The ICE's January futures volumes have thus far significantly exceeded firm's expectations. Overall they see little reason to expect slower growth at the ICE in the near term, although beginning of the year volumes typically show some strength. While they continue to view the CME+BOT as the premier exchange in the futures space, ICE boasts a faster growth rate, as well as a higher return on capital, cash flow yield, and operating margin.
Firm continues to rate the ICE Outperform. With a faster growth rate than peers, synergies from the NYBOT deal (not included in their 2008 estimate), and ICE's position as a takeover candidate, the firm believes that the stock should trade at the high end of its peer range.
Notablecalls: Sure looks like GSCO's call trumped WACH's dg yesterday. The chart looks like it may make one more push higher. It's not as high conviction call as the one posted yesterday so adjust your risk accordingly.
Calls of Note Part 2
Merrill Lynch is positive on MEMC (NASDAQ:WFR) ahead of results saying the co has the potential to again post upside record results in 4Q and provide a stable 1Q outlook driven by rising pricing, flat to slightly down volume and cost reduction programs enabling solid margins. MEMC has an increasing mix of 300mm and high memory exposure, lower exposure to foundry, improving high end mix of wafers, sales to solar customers, including the start up of MEMC's 10 year contract with Suntech in 1Q07. Firm believes favorable IC and solar volume growth forecasts for 2007 should drive above industry growth and margins for MEMC as the pure play wafer and polysilicon supplier to both markets.
While firm's estimates have been based on conservative 2-3% wafer volume declines for 4Q06/1Q07, these have been partially offset by the improving pricing and margin mix of MEMC's business and growing sales to the solar market. Thus, they believe the stock should be bought ahead of a solid 4Q result and 1Q outlook.
Reits Buy and $50 tgt.
Notablecalls: Not a major call. I would not have highlighted it if there had not been some market participants trying to push the stock down by spreading the word that WFR would have to lower guidance due to weakness in its non-solar ops. That happened couple of days ago. The stock managed to shake it off and move higher. That tells me there are some serious buyers out there. Would not be surprised to see the stock move higher in the s-t.
While firm's estimates have been based on conservative 2-3% wafer volume declines for 4Q06/1Q07, these have been partially offset by the improving pricing and margin mix of MEMC's business and growing sales to the solar market. Thus, they believe the stock should be bought ahead of a solid 4Q result and 1Q outlook.
Reits Buy and $50 tgt.
Notablecalls: Not a major call. I would not have highlighted it if there had not been some market participants trying to push the stock down by spreading the word that WFR would have to lower guidance due to weakness in its non-solar ops. That happened couple of days ago. The stock managed to shake it off and move higher. That tells me there are some serious buyers out there. Would not be surprised to see the stock move higher in the s-t.
Calls of Note Part 1
Prudential comments on Amazon.com (NASDAQ:AMZN) ahead of 4Q earnings (Feb. 1st). Although the company didn't disclose holiday sales results, the firm believes that certain data points from other retailers suggest that AMZN's holiday season could have been less than spectacular.
First, book retailers BKS and BGP reported tepid holiday comp-store sales of -0.1% of -1.9%, respectively, despite significant promotional activity.
Second, music retailers continue to struggle: BGP noted a steep decline in the category, BBY reported a decline, and CC's music comps were down double digit.
Third, electronics was the hottest product category over the holidays, but was driven by flat-panel TVs, where AMZN does not appear to be a significant player. In addition, the CE business was reported to be highly promotional, which could pressure AMZN's profit margins.
Finally, U.S. traffic on Amazon was up only 5.7% in 4Q (according to comScore), and trended down in each month of the quarter.
On a positive note, DVD comps were positive for most retailers, and video gaming sales were a standout. In addition, AMZN will record full toy revenue for the first time in five years, and could get as much as a $150 million revenue boost from currency exchange.
Reiterates Underweight rating and $25 price target on AMZN.
Notablecalls: I would not be surprised to see weakness in AMZN ahead of the results. Pru's call does not have any new datapoints in it but it does highlight the obvious.
First, book retailers BKS and BGP reported tepid holiday comp-store sales of -0.1% of -1.9%, respectively, despite significant promotional activity.
Second, music retailers continue to struggle: BGP noted a steep decline in the category, BBY reported a decline, and CC's music comps were down double digit.
Third, electronics was the hottest product category over the holidays, but was driven by flat-panel TVs, where AMZN does not appear to be a significant player. In addition, the CE business was reported to be highly promotional, which could pressure AMZN's profit margins.
Finally, U.S. traffic on Amazon was up only 5.7% in 4Q (according to comScore), and trended down in each month of the quarter.
On a positive note, DVD comps were positive for most retailers, and video gaming sales were a standout. In addition, AMZN will record full toy revenue for the first time in five years, and could get as much as a $150 million revenue boost from currency exchange.
Reiterates Underweight rating and $25 price target on AMZN.
Notablecalls: I would not be surprised to see weakness in AMZN ahead of the results. Pru's call does not have any new datapoints in it but it does highlight the obvious.
Color on quarter: Lam Research (NASDAQ:LRCX)
Several firms are commenting on Lam Research (NASDAQ:LRCX) after the co reported Q4 results last night:
- Stifel notes that although the company once again posted strong results ahead of Street expectations, management's discussion of its shipments outlook (it no longer provides orders forecasts) raised some concerns over the health of the industry in the near term.
Management noted that more chipmakers were pushing out delivery dates, and that there would be some volatility over the next two quarters of when some tools would be delivered. Behind this lumpiness, there suggests some ominous signs. In firm's opinion, this trend typically signals a more cautious outlook (in simpler terms, if demand was strong and utilization rates high, chipmakers would actually prefer accelerating delivery dates versus extending them). The discussion about increasing tool push outs and a declining rate of capacity expansion near term are further indications of a potential order slowdown across the industry.
Despite these near-term concerns, they want to emphasize that Lam Research continues to outperform the industry in almost every metric, whether it be order rates, margin profile, operating profitability and cash flow. Maintains Hold.
- JP Morgan notes Lam delivered a weaker equipment demand outlook than 90 days ago, especially as it applies to shipment push outs in C1Q07. Based on the cockroach theory, investors will fear further push outs, which is reasonable in firm's view. As a result, LRCX and other equipment stocks are likely to stagnate until there is improved visibility on chip inventory depletion and a re-acceleration in equipment demand. Firm remains bullish on the year and continues to expect solid full year stock gains, mainly in the second half as they have stated previously, once the chip inventory is depleted, utilization rates begin to rise, and visibility for the next multi-quarter order cycle improves. However, they are incrementally cautious on near-term equipment stock
potential.
For large cap long only investors, they believe a likely negative stock price overreaction presents a compelling buying opportunity and recommend stepping up to LRCX shares into near-term weakness. Lam is a top tier semiconductor equipment franchise with extremely impressive cash flow yield (9% in 2007) and secular earnings power that they believe is deeply undervalued.
Reiterate OW and top large cap pick. At $50.25 (post close), LRCX trades at 11.2x JPM's new C2007 PF EPS est. of $4.50 (from $4.90) vs. univ. avg. of 14.6x.
Notablecalls: I think LRCX will go lower in the s-t. It's among the first semiconductor processing equpiment players to report and comments regarding pushouts will not bode well for the sentiment. After all, DRAM has been considered to be a bright spot.
- Stifel notes that although the company once again posted strong results ahead of Street expectations, management's discussion of its shipments outlook (it no longer provides orders forecasts) raised some concerns over the health of the industry in the near term.
Management noted that more chipmakers were pushing out delivery dates, and that there would be some volatility over the next two quarters of when some tools would be delivered. Behind this lumpiness, there suggests some ominous signs. In firm's opinion, this trend typically signals a more cautious outlook (in simpler terms, if demand was strong and utilization rates high, chipmakers would actually prefer accelerating delivery dates versus extending them). The discussion about increasing tool push outs and a declining rate of capacity expansion near term are further indications of a potential order slowdown across the industry.
Despite these near-term concerns, they want to emphasize that Lam Research continues to outperform the industry in almost every metric, whether it be order rates, margin profile, operating profitability and cash flow. Maintains Hold.
- JP Morgan notes Lam delivered a weaker equipment demand outlook than 90 days ago, especially as it applies to shipment push outs in C1Q07. Based on the cockroach theory, investors will fear further push outs, which is reasonable in firm's view. As a result, LRCX and other equipment stocks are likely to stagnate until there is improved visibility on chip inventory depletion and a re-acceleration in equipment demand. Firm remains bullish on the year and continues to expect solid full year stock gains, mainly in the second half as they have stated previously, once the chip inventory is depleted, utilization rates begin to rise, and visibility for the next multi-quarter order cycle improves. However, they are incrementally cautious on near-term equipment stock
potential.
For large cap long only investors, they believe a likely negative stock price overreaction presents a compelling buying opportunity and recommend stepping up to LRCX shares into near-term weakness. Lam is a top tier semiconductor equipment franchise with extremely impressive cash flow yield (9% in 2007) and secular earnings power that they believe is deeply undervalued.
Reiterate OW and top large cap pick. At $50.25 (post close), LRCX trades at 11.2x JPM's new C2007 PF EPS est. of $4.50 (from $4.90) vs. univ. avg. of 14.6x.
Notablecalls: I think LRCX will go lower in the s-t. It's among the first semiconductor processing equpiment players to report and comments regarding pushouts will not bode well for the sentiment. After all, DRAM has been considered to be a bright spot.
Color on quarter: Apple (NASDAQ:AAPL)
Several firms are commenting on Apple (NASDAQ:AAPL) after the co released its Q4 results last night:
- Morgan Stanley notes that margin leverage from Apple's fixed cost store base is becoming more central to the story, in our minds. They continue to want to own Apple shares ahead of several catalysts later this year and would look to add to positions on any dips near-term.
Revenue, margins and EPS topped firm's model and consensus estimates - though the revenue components came in differently than they expected. Apple shipped 21M iPods (vs. 14.4M est.) and 1.6M Macs (vs. 1.7M) with new products (Shuffle) driving much of the unit upside. Despite an iPod business that the Street generally believes to be lower margin revenue, both gross and operating margins hit Apple's highest levels ever. Positive margin factors include: 1) favorable component pricing across products; 2) incremental revenue leverage; and 3) product mix (e.g. MacBook Pro).
Maintains Overweight and $110 tgt.
- Merrill Lynch says Mac units were a little light at 1.6mn vs ML and consensus at 1.75mn. Bears will attempt to make a case the halo effect is waning; we disagree. Although they concede the Mac result was below their expectation, they still view 28% growth as very solid against a market growing 8% and expect the pace to remain healthy as new Macs are introduced and as pent up demand in the creative professional segment is released this Spring with Adobe creative suite native on Intel/Mac.
They don't think investors should be spooked by the March Q outlook (below Street) given the track record of subsequent upside. Firm's slightly lower March estimates are within the typical excess of actual results over management guidance. For F2007 they're raising estimates from $23.4bn / $2.76 to $23.7bn / $3.07 by rolling through the Q's upside and other tweaks. F2008 EPS nudges up from $4.05 to $4.10. They continue to recommend the stock with a price objective of $113.
- Piper Jaffray believes the Street (they were modeling for 1.6m Macs) got ahead of itself for the December quarter. While the Street will view the Mac number as a negative (reported 1.6m units vs. the Street at 1.75m), they view the Dec-06 Mac unit number (1.61m) as a positive datapoint. Over the last five years Mac units declined by an average of 1% from the September quarter to the December quarter. Therefore, the sequential decline this December (- 0.2%) was essentially in line with the average seasonal downturn when compared to the previous five years.
Firm notes that the quarter-over-quarter data from 2004 is not meaningful due to limited quantities of the G5 chip in the Sep-04 quarter pushing G5 Mac sales into the Dec-04 quarter, and as such they have excluded it from the comparative analysis. In general, the Dec-06 numbers show continued Mac momentum. The Dec-06 quarter marks the eighth quarter out of the last nine that the Mac has outgrown the computer market internationally and in the United States. Moreover, the Dec-05 quarter was a 14 week quarter, so the flat Mac unit results actually represent an uptick quarter over quarter on a normalized basis. According to IDC, Mac worldwide market share in Q4 was 2.4%, down from 2.8% in Q3. Maintains Outperform and ups tgt to $124 from $99.
- JP Morgan is downgrading AAPL to Neutral from Overweight noting that they have had an Overweight rating on Apple since October 2004, and the stock has appreciated strongly. But at current levels, they believe it is time to lighten up on positions.
Upside was significant for the December quarter. EPS exceeded JPM's above-consensus estimate by 39% and revenues topped our views by 8%. The upside was driven by iPod shipments of 21 million units, which substantially exceeded their optimistic 16 million unit estimate.
Unfortunately, JPM's thesis was based on stronger Mac shipments. After a significant run in the stock, their bullish thesis was based primarily on expectations for significant upside in Mac units. In this respect, the company fell short of estimates. With Mac shipments of 1.6 million units,
the company missed firm's above-consensus forecast for 1.9 million units.
As we enter the seasonally weaker period of the year, iPod shipments may disappoint investors' heightened expectations. Firm believes this risk is particularly pronounced given their concerns that some consumers may delay iPod purchases ahead of the iPhone launch.
As a result, they believe it may be difficult for the shares to outperform the peer group average.
Notablecalls: No wonder the stock got sold in after hrs trading. I can't believe how wrong Piper is with their defense on AAPL here. The market will not care about the Mac seasonality for the past 5 yrs! AAPL needs to show they can sell Mac's on top of the huge amount of iPod's they have already sold. AAPL needed to beat that Mac number! The IDC data isn't helping either. AAPL lost mkt share in Q4!? How can that be? JPM is right downgrading the stock here. The stock's a sell here around $94 level.
- Morgan Stanley notes that margin leverage from Apple's fixed cost store base is becoming more central to the story, in our minds. They continue to want to own Apple shares ahead of several catalysts later this year and would look to add to positions on any dips near-term.
Revenue, margins and EPS topped firm's model and consensus estimates - though the revenue components came in differently than they expected. Apple shipped 21M iPods (vs. 14.4M est.) and 1.6M Macs (vs. 1.7M) with new products (Shuffle) driving much of the unit upside. Despite an iPod business that the Street generally believes to be lower margin revenue, both gross and operating margins hit Apple's highest levels ever. Positive margin factors include: 1) favorable component pricing across products; 2) incremental revenue leverage; and 3) product mix (e.g. MacBook Pro).
Maintains Overweight and $110 tgt.
- Merrill Lynch says Mac units were a little light at 1.6mn vs ML and consensus at 1.75mn. Bears will attempt to make a case the halo effect is waning; we disagree. Although they concede the Mac result was below their expectation, they still view 28% growth as very solid against a market growing 8% and expect the pace to remain healthy as new Macs are introduced and as pent up demand in the creative professional segment is released this Spring with Adobe creative suite native on Intel/Mac.
They don't think investors should be spooked by the March Q outlook (below Street) given the track record of subsequent upside. Firm's slightly lower March estimates are within the typical excess of actual results over management guidance. For F2007 they're raising estimates from $23.4bn / $2.76 to $23.7bn / $3.07 by rolling through the Q's upside and other tweaks. F2008 EPS nudges up from $4.05 to $4.10. They continue to recommend the stock with a price objective of $113.
- Piper Jaffray believes the Street (they were modeling for 1.6m Macs) got ahead of itself for the December quarter. While the Street will view the Mac number as a negative (reported 1.6m units vs. the Street at 1.75m), they view the Dec-06 Mac unit number (1.61m) as a positive datapoint. Over the last five years Mac units declined by an average of 1% from the September quarter to the December quarter. Therefore, the sequential decline this December (- 0.2%) was essentially in line with the average seasonal downturn when compared to the previous five years.
Firm notes that the quarter-over-quarter data from 2004 is not meaningful due to limited quantities of the G5 chip in the Sep-04 quarter pushing G5 Mac sales into the Dec-04 quarter, and as such they have excluded it from the comparative analysis. In general, the Dec-06 numbers show continued Mac momentum. The Dec-06 quarter marks the eighth quarter out of the last nine that the Mac has outgrown the computer market internationally and in the United States. Moreover, the Dec-05 quarter was a 14 week quarter, so the flat Mac unit results actually represent an uptick quarter over quarter on a normalized basis. According to IDC, Mac worldwide market share in Q4 was 2.4%, down from 2.8% in Q3. Maintains Outperform and ups tgt to $124 from $99.
- JP Morgan is downgrading AAPL to Neutral from Overweight noting that they have had an Overweight rating on Apple since October 2004, and the stock has appreciated strongly. But at current levels, they believe it is time to lighten up on positions.
Upside was significant for the December quarter. EPS exceeded JPM's above-consensus estimate by 39% and revenues topped our views by 8%. The upside was driven by iPod shipments of 21 million units, which substantially exceeded their optimistic 16 million unit estimate.
Unfortunately, JPM's thesis was based on stronger Mac shipments. After a significant run in the stock, their bullish thesis was based primarily on expectations for significant upside in Mac units. In this respect, the company fell short of estimates. With Mac shipments of 1.6 million units,
the company missed firm's above-consensus forecast for 1.9 million units.
As we enter the seasonally weaker period of the year, iPod shipments may disappoint investors' heightened expectations. Firm believes this risk is particularly pronounced given their concerns that some consumers may delay iPod purchases ahead of the iPhone launch.
As a result, they believe it may be difficult for the shares to outperform the peer group average.
Notablecalls: No wonder the stock got sold in after hrs trading. I can't believe how wrong Piper is with their defense on AAPL here. The market will not care about the Mac seasonality for the past 5 yrs! AAPL needs to show they can sell Mac's on top of the huge amount of iPod's they have already sold. AAPL needed to beat that Mac number! The IDC data isn't helping either. AAPL lost mkt share in Q4!? How can that be? JPM is right downgrading the stock here. The stock's a sell here around $94 level.
Paperstand (TRB, EOP, HPQ, DELL, CCU, TELK)
The WSJ reports that at least 3 groups, including the Chandler family and a pairing of LA billionaires Ron Burkle and Eli Broad, submitted sharply varying proposals for Tribune (TRB) by last night's bid deadline, giving the co's board the difficult task of deciding how to proceed. None of the bidders is offering to pay a premium for all of Tribune. Even so, the board will likely come under pressure from shareholders to pursue some dramatic action.
According to the WSJ, a consortium of real-estate investors launched a competing $21.5bn offer for Equity Office Properties (EOP), hoping to knock off an existing $20.1bn deal with Blackstone Group. In this atmosphere, a topping bid that bests Blackstone's by some measures might have shocked real-estate experts a year ago. Today, it gets merely a shrug. "Honestly, I don't think anything can be too surprising anymore," said Michael Knott, of Green Street Advisors. "It just seems there's no limit to the prices being paid."
According to the WSJ General Electric (GE) last night was nearing a deal to purchase the diagnostics division of Abbott (ABT). Details of GE's plans couldn't be learned last night, and it is possible GE may be purchasing a large part but not all of the Abbott unit. Through last year's first 9 months, the division posted rev of about $2.9bn and an operating profit of approximately $300M.
The WSJ reports, citing 2 prominent research firms, that H-P (HPQ) increased its lead over Dell (DELL) in world-wide PC shipments in the 4Q. Gartner said H-P managed to increase its PC shipments by 24% in the 4Q. As a result, H-P's worldwide mkt share swelled to 17.4% from 15%. Gartner said Dell's global PC shipments in the 4Q slipped 8.7%, causing its mkt share to shrink to 13.9% from 16.4%. IDC said H-P's share increased to 18.1% in the 4Q from 15.9%. Dell's share slipped to 14.7% from 17.5%, IDC estd.
Barron’s Online reporting that the $26bn LBO of Clear Channel (CCU) appears to be running into resistance from some institutional shareholders, which could dim chances for shareholder approval of the huge media deal. The deal faces a high hurdle b/c 2/3 of the co's shareholders need to back the buyout for it to be approved. This means that holders who don't vote are effectively casting ballots against the deal. If 10% or 15% of holders don't vote, Clear Channel will need an enormous majority of the votes cast to get approval. As of Sept. 30, Fidelity Investments was Clear Channel's largest institutional shareholder, with an 11% stake, followed by Morgan Stanley at 7% and Capital Research at 5%. Other sizable shareholders include NWQ and Highfields Capital Mgmt. The Mays family, which runs Clear Channel, holds about 7% of the stock. Clear Channel shares moved up on Fri, after Bear Stearns' radio analyst, Victor Miller, put out a research note arguing that the buyout offer undervalued Clear Channel's radio business. In the note, Miller said that, instead of selling itself, Clear Channel should give shareholders the opportunity to swap their stock for shares in Clear Channel Outdoor (CCO). He also said that Clear Channel ought to sell about $2.5bn in assets and then do a large debt-financed share repurchase.
“Inside Scoop” section reports that Telik (TELK) shares imploded the day after Christmas on disappointing clinical trials results from its first drug, Telcyta, intended to treat cancer. The 70% loss prompted billionaire and activist shareholder Carl Icahn to nearly quadruple his stake in the co. Since Dec. 26, his investment vehicle Icahn Associates and affiliates have purchased 3.82M shares of Telik on the open mkt for nearly $18M. The group increased its stake to 5.2M shares, or 9.9%, of Telik's 52.4M outstanding shares.
Wednesday, January 17, 2007
Calls of Note Part 2
ThinkEquity is positive on On2 Technologies (AMEX:ONT) saying the shares have retreated roughly 20% after a solid run up into the Consumer Electronics Show (CES). However, they believe 2007 is shaping up to be different than previous years, when ONT stock has fallen and remained out of favor (post-CES) in accordance with static financial results. Based on conversations with several industry contacts at CES, the firm believes that On2's sales pipeline is building better than their previously expected, giving them confidence to raise both their estimates and price target, as well as move up their breakeven estimate to 1Q'07. Firm reiterates On2 as their top pick for 2007.
According to checks, they believe that On2's pipeline is shaping up to outperform expectations. More promising, in firm's view, is that the company is also seeing an uptick relative to its average licensing deal, which they believe ranges from $60,000 to $100,000. This, coupled with a shift to a growing number of royalty or residual-based transaction structures, gives them increased confidence in the company's ability to outperform estimates.
Price tgt is raised to $1.70 from $1.40.
Notablecalls: Interesting little note that may move the stock. ONT is a recent trader favourite.
According to checks, they believe that On2's pipeline is shaping up to outperform expectations. More promising, in firm's view, is that the company is also seeing an uptick relative to its average licensing deal, which they believe ranges from $60,000 to $100,000. This, coupled with a shift to a growing number of royalty or residual-based transaction structures, gives them increased confidence in the company's ability to outperform estimates.
Price tgt is raised to $1.70 from $1.40.
Notablecalls: Interesting little note that may move the stock. ONT is a recent trader favourite.
Calls of Note Part 1
Couple of conflicting notes on :Intercontinental Exchange (NYSE:ICE)
- Wachovia is downgrading shares of ICE stock to Market Perform from Outperform rated. Firm believes that the stock is now adequately priced versus being undervalued when they first launched coverage of the company on November 26th.
While they are not calling for a reversal of the positive fundamental trends, they believe that the stock is priced with high expectations which could disappoint and lead the stock down in the near term. Wachovia believes that investors have priced the stock for immediate high volume enhancement of NYBOT and continued hyper growth in the OTC business. Thus it is difficult for them to recommend investors invest fresh capital into the story at these levels.
Firm is raising their 2007 and 2008 estimates to $3.37 and $4.50 per share to account for full accretion of the NYBOT deal and also more robust oil futures trading. They believe the shares should trade between $135-140, or 29-30x 2008 earnings estimate.
- Goldman Sachs believes the market continues to underestimate the growth potential in ICE's volumes and see 28% of upside in the shares to firm's new DCF-derived 12-month price target of $165 (30x '08E EPS). They expect the electronification of the NYMEX, ICE OTC, and NYBOT markets to continue to drive upside to volume estimates and propel strong year-over-year growth. GS' new 2008 EPS of $5.50 is 43% above consensus and 10% above the next highest estimate. They believe the risk reward trade-off remains favorable on ICE with a 2:1 ratio of upside to downside based on bull case 2008 EPS of $7.00 and bear case EPS of $3.85.
The Street remains overly conservative on volume growth, in firm's view, and they expect significant earnings revisions in the coming months. Though they believe many investors already focus on the more constructive Street estimates (between $4.50 and $5.00), the firm expects that an elevated consensus number will reduce the risk of downside in investor's minds and provide further impetus to capture the skewed upside optionality of such high volume growth rates. They expect their price target to be achieved within the next 12 months.
Notablecalls: While WACH's downgrade will likely knock the stock down, I think GSCO's comments may help it to rebound. I'd go as far as to say that GSCO's comments trump WACH's dg.
- Wachovia is downgrading shares of ICE stock to Market Perform from Outperform rated. Firm believes that the stock is now adequately priced versus being undervalued when they first launched coverage of the company on November 26th.
While they are not calling for a reversal of the positive fundamental trends, they believe that the stock is priced with high expectations which could disappoint and lead the stock down in the near term. Wachovia believes that investors have priced the stock for immediate high volume enhancement of NYBOT and continued hyper growth in the OTC business. Thus it is difficult for them to recommend investors invest fresh capital into the story at these levels.
Firm is raising their 2007 and 2008 estimates to $3.37 and $4.50 per share to account for full accretion of the NYBOT deal and also more robust oil futures trading. They believe the shares should trade between $135-140, or 29-30x 2008 earnings estimate.
- Goldman Sachs believes the market continues to underestimate the growth potential in ICE's volumes and see 28% of upside in the shares to firm's new DCF-derived 12-month price target of $165 (30x '08E EPS). They expect the electronification of the NYMEX, ICE OTC, and NYBOT markets to continue to drive upside to volume estimates and propel strong year-over-year growth. GS' new 2008 EPS of $5.50 is 43% above consensus and 10% above the next highest estimate. They believe the risk reward trade-off remains favorable on ICE with a 2:1 ratio of upside to downside based on bull case 2008 EPS of $7.00 and bear case EPS of $3.85.
The Street remains overly conservative on volume growth, in firm's view, and they expect significant earnings revisions in the coming months. Though they believe many investors already focus on the more constructive Street estimates (between $4.50 and $5.00), the firm expects that an elevated consensus number will reduce the risk of downside in investor's minds and provide further impetus to capture the skewed upside optionality of such high volume growth rates. They expect their price target to be achieved within the next 12 months.
Notablecalls: While WACH's downgrade will likely knock the stock down, I think GSCO's comments may help it to rebound. I'd go as far as to say that GSCO's comments trump WACH's dg.
Color on warning: Rackable Systems (NASDAQ:RACK)
Couple of firms are out on Rackable Systems (NASDAQ:RACK) after the co issued a negative pre-annoncement last night:
- First Albany notes management attributed the EPS shortfall to unfavorable DDR memory pricing, intense competitive conditions, and lower-than-expected sales of the RapidScale products. Given firm's observations of favorable CPU and improving DDR2 pricing, they believe the margin shortfall was driven primarily, if not almost exclusively, by the intensifying competition within the x86 space.
The company will update its FY07 guidance during its earnings call on February 1, but they remain concerned about Rackable's competitive position. Dell (DELL), the firm believes, will almost certainly expand its AMD-based (AMD-$18.13-Not Rated) offerings. Supermicro, Rackable's tier-two peer, has recently announced server offerings that appear to match Rackable's value proposition in density and power efficiency. Despite the growth opportunities in the clustered storage space, they remain cautious of Rackable's competitive position, given its inexperience relative to the pure-play storage players.
Given the negative preannouncement, they are reducing estimates. FY07 EPS estimate goes $0.89 on $481M in revenue from $1.33 on $503M, respectively. Reiterates Underperform rating.
- RBC Capital notes they suspect the memory pricing issue is temporary given our view that DDR memory pricing will soften in 2007 as memory manufacturers ramp more production in anticipation of Microsoft's Vista launch. Consequently the comments on competitive dynamics and the timing of RapidScale appear more relevant to the forward outlook.
Firm has lowered their 12-month price target to $30 (was $40). They assume a probable, though not certain, FTM price downside/ upside scenario of $15/$40 (was $20/$60) on exection below/above their new estimates. Firm continues to rate the shares Outperform with a Speculative risk assessment on a 12-month basis, but their rating is subject to change near term pending greater clarity on competitive dynamics at top customers.
- Piper Jaffray says they believe large OEM competitors such as Dell and Sun Microsystems were aggressively discounting during the quarter and this is creating a pricing war in the high density server market. They believe Rackable had no option but to lower prices to retain current customers and this is resulting in significantly lower gross margins.
Rackable also experienced increases in prices of certain components, especially DDR memory, which had a negative impact on the gross margins during the December quarter. They believe the component pricing problem was magnified due to higher use of the DDR2 memory in newer systems based on Intel Woodcrest platform and AMD's Socket F platform. Maintains Mkt Perform. Tgt goes to $26 from $31.
Notablecalls: RACK continues to be a controverial name. Just check out the archives for NC comments. The cold hard fact here seems to be that DELL and SUNW are able to buy CPU's and memory at much lower prices than RACK can. An uphill battle. RACK needs to differentiate itself from the competition. I have no idea how they could do it. I suspect RACK's management doesn't either. At least not at this point. I have very little feel for the stock in the s-t. Given its sizable short interest and the 10 point haircut it receieved in after hrs trading I would not be surprised to see some short covering around these levels.
- First Albany notes management attributed the EPS shortfall to unfavorable DDR memory pricing, intense competitive conditions, and lower-than-expected sales of the RapidScale products. Given firm's observations of favorable CPU and improving DDR2 pricing, they believe the margin shortfall was driven primarily, if not almost exclusively, by the intensifying competition within the x86 space.
The company will update its FY07 guidance during its earnings call on February 1, but they remain concerned about Rackable's competitive position. Dell (DELL), the firm believes, will almost certainly expand its AMD-based (AMD-$18.13-Not Rated) offerings. Supermicro, Rackable's tier-two peer, has recently announced server offerings that appear to match Rackable's value proposition in density and power efficiency. Despite the growth opportunities in the clustered storage space, they remain cautious of Rackable's competitive position, given its inexperience relative to the pure-play storage players.
Given the negative preannouncement, they are reducing estimates. FY07 EPS estimate goes $0.89 on $481M in revenue from $1.33 on $503M, respectively. Reiterates Underperform rating.
- RBC Capital notes they suspect the memory pricing issue is temporary given our view that DDR memory pricing will soften in 2007 as memory manufacturers ramp more production in anticipation of Microsoft's Vista launch. Consequently the comments on competitive dynamics and the timing of RapidScale appear more relevant to the forward outlook.
Firm has lowered their 12-month price target to $30 (was $40). They assume a probable, though not certain, FTM price downside/ upside scenario of $15/$40 (was $20/$60) on exection below/above their new estimates. Firm continues to rate the shares Outperform with a Speculative risk assessment on a 12-month basis, but their rating is subject to change near term pending greater clarity on competitive dynamics at top customers.
- Piper Jaffray says they believe large OEM competitors such as Dell and Sun Microsystems were aggressively discounting during the quarter and this is creating a pricing war in the high density server market. They believe Rackable had no option but to lower prices to retain current customers and this is resulting in significantly lower gross margins.
Rackable also experienced increases in prices of certain components, especially DDR memory, which had a negative impact on the gross margins during the December quarter. They believe the component pricing problem was magnified due to higher use of the DDR2 memory in newer systems based on Intel Woodcrest platform and AMD's Socket F platform. Maintains Mkt Perform. Tgt goes to $26 from $31.
Notablecalls: RACK continues to be a controverial name. Just check out the archives for NC comments. The cold hard fact here seems to be that DELL and SUNW are able to buy CPU's and memory at much lower prices than RACK can. An uphill battle. RACK needs to differentiate itself from the competition. I have no idea how they could do it. I suspect RACK's management doesn't either. At least not at this point. I have very little feel for the stock in the s-t. Given its sizable short interest and the 10 point haircut it receieved in after hrs trading I would not be surprised to see some short covering around these levels.
Color on results: Intel (NASDAQ:INTC)
Several firms are commenting on Intel (NASDAQ:INTC) after the co reported Q4 results last night:
- JP Morgan says Intel expects a seasonal revenue decline of 4%-10% QoQ in 1Q07 ($8.7-$9.3 billion), above their prior $8.7 billion estimate (down 7% QoQ) due to higher 4Q06 revenue. The company also expects 1Q07 gross margins of 49.0%, above firm's prior 48.0% estimate. However, Intel gave C07 gross margin guidance of 50.0%, below JPM's prior estimate of 51.0%, which they believe was below Consensus.
While they are positive on the restructuring and better products, the firm remains Neutral on INTC due to belief in gross margin downside from excess capacity, higher start up costs, and price competition. They believe Intel could miss its 1Q07 guidance as checks in the PC food chain indicate inventory has increased and business conditions are worsening.
They are maintaining C07 EPS estimate of $1.05 (below Consensus of $1.13) but raising C07 revenue estimate from $37.0 billion to $38.2 billion. Firm is also introducing C08 revenue and EPS estimates of $41.8 billion (up 9% YoY) and $1.35.
INTC is trading at 3.4X C07 sales, below the mid-point of a historic range of 3.0X-5.0X sales. While the stock appears cheap, the firm remains Neutral due to belief of additional estimate cuts driven by lower gross margins. As soon as they believe gross margins are close to bottoming, their outlook on INTC could become more optimistic.
- Morgan Stanley notes Intel's fourth-quarter results make it clear that the company has overbuilt capacity, and despite having a stronger product line, they believe it will be difficult to prevent margin pressure. Given expectations for aggressive price competition, seasonally weak demand, higher-than-normal inventories, excess capacity, and near-term PC-oriented product cycle risk, the frim believes that Intel's near-term earnings risk will remain high.
They look for Intel to undertake aggressive pricing actions As the fourth-quarter data show, Intel has hit AMD where it hurts by snatching server market share and causing its server ASPs to decline sharply. Now that AMD has been wounded and its business model exposed, they expect Intel to continue to be aggressive during the next couple of quarters. Until AMD ramps its Rev G processor into volume in the second half of this year, the firm believes that Intel's overall product portfolio will be strong enough to make AMD vulnerable.
Despite the revenue upside, it appears increasingly clear that aggressive pricing actions and excess capacity will pressure Intel's margins and earnings power this year. While firm's 2007 revenue and gross margin assumptions remain unchanged, they have fine-tuned their well below consensus pro forma EPS estimate lower, from $1.10 to $1.05, as expense reductions are forecast to be less than expected. With gross margin pressure and risk to consensus estimates, they do not think INTC is about to outperform firm's universe.
While long-term valuations are reasonable, margin pressure, earnings risk and slow growth suggest that an Equal-weight rating is appropriate. MSCO expects INTC to find near-term support in the high teens to $20, and would expect to see sellers in the low to mid 20s.
- ThinkEquity's Eric Ross notes that while their initial reaction was to turn more bullish after witnessing Intel's strong Q406 revenue performance, depressed gross margins quickly disappointed them and soured their view. Mr. Ross thinks Q1 and 2007 gross margin guidance is unimpressive, and he believes the possibility of downside to these forecasts exists. However, it is his view that Intel has closed the technology gap with Advanced Micro Devices (NYSE:AMD) remains, and with the only difference now pricing, he expects Intel to regain some lost market share in 2007, albeit, at the expense of margins. Reiterates Accumulate rating and $23 price target.
They believe that Intel gained share back from AMD during the quarter in servers and notebooks, accounting for much of the increase in ASPs at Intel. They also believe ASP from servers drove the gain. Also, a higher portion of sales from the channel resulted in slightly higher ASPs for desktops and servers. Units were a record as they are typically during Q4.
Inventories still at record levels. While Intel reduced inventories during the quarter, they are still near record levels, and the firm believes Intel will need to sell off much of this at some point with a resulting charge.
ThinkEquity does not expect the price competition between Intel and AMD to end anytime soon. They expect a painful, prolonged, aggressive pricing environment throughout at least the first half of 2007. In addition, where they had previously modeled for a return of Intel's gross margins to the mid-50% range, they now expect gross margins to hover around 50% throughout 2007 and perhaps longer.
- Citi notes their primary concern about a weak 1H07 GM outlook was realized predicated on 1) under-utilization charges and 2) 45nm start-up costs. While this forces firm's 2007 EPS estimate lower as they had feared, guidance suggests a strong 2H07 inflection in margins (2Q07E is the bottom), based on the roll-off of 45nm start up charges. They continue to model 2008 well above the Street and anticipate upward revisions to consensus 2008E.
Meanwhile, '07 operating expenses, one of firm's key focal points, are expected to be down 15% y/y supporting an 88% increase in op margin 4Q07E/4Q06. The timing of Intel's improving operating margins has been pushed out, given weaker GMs, but the march toward 30% operating margins continues forward. Particularly given the margin restraints are temporary start-up costs, they remain positive on the shares, despite this setback. Maintains Buy and $26 tgt.
Notablecalls: Think the weakness on gross margin side is going to keep the pressure on INTC stock in the s-t.
- JP Morgan says Intel expects a seasonal revenue decline of 4%-10% QoQ in 1Q07 ($8.7-$9.3 billion), above their prior $8.7 billion estimate (down 7% QoQ) due to higher 4Q06 revenue. The company also expects 1Q07 gross margins of 49.0%, above firm's prior 48.0% estimate. However, Intel gave C07 gross margin guidance of 50.0%, below JPM's prior estimate of 51.0%, which they believe was below Consensus.
While they are positive on the restructuring and better products, the firm remains Neutral on INTC due to belief in gross margin downside from excess capacity, higher start up costs, and price competition. They believe Intel could miss its 1Q07 guidance as checks in the PC food chain indicate inventory has increased and business conditions are worsening.
They are maintaining C07 EPS estimate of $1.05 (below Consensus of $1.13) but raising C07 revenue estimate from $37.0 billion to $38.2 billion. Firm is also introducing C08 revenue and EPS estimates of $41.8 billion (up 9% YoY) and $1.35.
INTC is trading at 3.4X C07 sales, below the mid-point of a historic range of 3.0X-5.0X sales. While the stock appears cheap, the firm remains Neutral due to belief of additional estimate cuts driven by lower gross margins. As soon as they believe gross margins are close to bottoming, their outlook on INTC could become more optimistic.
- Morgan Stanley notes Intel's fourth-quarter results make it clear that the company has overbuilt capacity, and despite having a stronger product line, they believe it will be difficult to prevent margin pressure. Given expectations for aggressive price competition, seasonally weak demand, higher-than-normal inventories, excess capacity, and near-term PC-oriented product cycle risk, the frim believes that Intel's near-term earnings risk will remain high.
They look for Intel to undertake aggressive pricing actions As the fourth-quarter data show, Intel has hit AMD where it hurts by snatching server market share and causing its server ASPs to decline sharply. Now that AMD has been wounded and its business model exposed, they expect Intel to continue to be aggressive during the next couple of quarters. Until AMD ramps its Rev G processor into volume in the second half of this year, the firm believes that Intel's overall product portfolio will be strong enough to make AMD vulnerable.
Despite the revenue upside, it appears increasingly clear that aggressive pricing actions and excess capacity will pressure Intel's margins and earnings power this year. While firm's 2007 revenue and gross margin assumptions remain unchanged, they have fine-tuned their well below consensus pro forma EPS estimate lower, from $1.10 to $1.05, as expense reductions are forecast to be less than expected. With gross margin pressure and risk to consensus estimates, they do not think INTC is about to outperform firm's universe.
While long-term valuations are reasonable, margin pressure, earnings risk and slow growth suggest that an Equal-weight rating is appropriate. MSCO expects INTC to find near-term support in the high teens to $20, and would expect to see sellers in the low to mid 20s.
- ThinkEquity's Eric Ross notes that while their initial reaction was to turn more bullish after witnessing Intel's strong Q406 revenue performance, depressed gross margins quickly disappointed them and soured their view. Mr. Ross thinks Q1 and 2007 gross margin guidance is unimpressive, and he believes the possibility of downside to these forecasts exists. However, it is his view that Intel has closed the technology gap with Advanced Micro Devices (NYSE:AMD) remains, and with the only difference now pricing, he expects Intel to regain some lost market share in 2007, albeit, at the expense of margins. Reiterates Accumulate rating and $23 price target.
They believe that Intel gained share back from AMD during the quarter in servers and notebooks, accounting for much of the increase in ASPs at Intel. They also believe ASP from servers drove the gain. Also, a higher portion of sales from the channel resulted in slightly higher ASPs for desktops and servers. Units were a record as they are typically during Q4.
Inventories still at record levels. While Intel reduced inventories during the quarter, they are still near record levels, and the firm believes Intel will need to sell off much of this at some point with a resulting charge.
ThinkEquity does not expect the price competition between Intel and AMD to end anytime soon. They expect a painful, prolonged, aggressive pricing environment throughout at least the first half of 2007. In addition, where they had previously modeled for a return of Intel's gross margins to the mid-50% range, they now expect gross margins to hover around 50% throughout 2007 and perhaps longer.
- Citi notes their primary concern about a weak 1H07 GM outlook was realized predicated on 1) under-utilization charges and 2) 45nm start-up costs. While this forces firm's 2007 EPS estimate lower as they had feared, guidance suggests a strong 2H07 inflection in margins (2Q07E is the bottom), based on the roll-off of 45nm start up charges. They continue to model 2008 well above the Street and anticipate upward revisions to consensus 2008E.
Meanwhile, '07 operating expenses, one of firm's key focal points, are expected to be down 15% y/y supporting an 88% increase in op margin 4Q07E/4Q06. The timing of Intel's improving operating margins has been pushed out, given weaker GMs, but the march toward 30% operating margins continues forward. Particularly given the margin restraints are temporary start-up costs, they remain positive on the shares, despite this setback. Maintains Buy and $26 tgt.
Notablecalls: Think the weakness on gross margin side is going to keep the pressure on INTC stock in the s-t.
Paperstand (CVC, HANS, WSO)
The WSJ reports that a special committee of Cablevision's (CVC) board last night rejected the Dolans' $30-a-share offer as "inadequate" given the value of its cable system, which serves 3M customers mostly living in affluent environs of the NYC region. The rejection marked the 2nd time in less than 2 years that the Dolans failed to take Cablevision private despite their controlling interest, 70.4% of the voting shares.
According to the Barron’s Online, investors in Hansen (HANS) turned fickle toward the No. 2 energy-drink co in last year's 2H. But new growth initiatives could put some fizz back into the shares in ‘07. Although the stock has bounced back somewhat, there is still upside potential of at least 20%, as Hansen starts to reap the benefits of a deal under which brewer Anheuser_Busch (BUD) will distribute its Monster Energy Drink, potentially providing deeper mkt penetration. Hansen also should benefit from new-product introductions, following a pause in its pipeline last year. In addition, the co is likely to emulate energy-drink leader Red Bull's recent decision to boost prices. Les Engebretson, of Engebretson Capital Mgmt, started buying Hansen stock in early ‘04 and says the popularity of the beverage maker's energy drinks isn't a fad. "They have been able to take mkt share away from the others pretty consistently," he says, adding that the Anheuser arrangement represents "a major shift" in marketing. He expects earnings to grow another 35-40% in ‘07. Some speculate that the Anheuser relationship could ultimately lead to bid for the Hansen.
“Inside Scoop” section reports that a hedge fund, Basswood Capital Mgmt, has warmed up to shares of Watsco (WSO), claiming a 5.5% stake in the co. Basswood disclosed ownership of 1.3M Watsco shares on Jan. 11.
According to the Barron’s Online, investors in Hansen (HANS) turned fickle toward the No. 2 energy-drink co in last year's 2H. But new growth initiatives could put some fizz back into the shares in ‘07. Although the stock has bounced back somewhat, there is still upside potential of at least 20%, as Hansen starts to reap the benefits of a deal under which brewer Anheuser_Busch (BUD) will distribute its Monster Energy Drink, potentially providing deeper mkt penetration. Hansen also should benefit from new-product introductions, following a pause in its pipeline last year. In addition, the co is likely to emulate energy-drink leader Red Bull's recent decision to boost prices. Les Engebretson, of Engebretson Capital Mgmt, started buying Hansen stock in early ‘04 and says the popularity of the beverage maker's energy drinks isn't a fad. "They have been able to take mkt share away from the others pretty consistently," he says, adding that the Anheuser arrangement represents "a major shift" in marketing. He expects earnings to grow another 35-40% in ‘07. Some speculate that the Anheuser relationship could ultimately lead to bid for the Hansen.
“Inside Scoop” section reports that a hedge fund, Basswood Capital Mgmt, has warmed up to shares of Watsco (WSO), claiming a 5.5% stake in the co. Basswood disclosed ownership of 1.3M Watsco shares on Jan. 11.
Tuesday, January 16, 2007
Calls of Note Part 5
- Morgan Stanley is positive on Yahoo (NASDAQ:YHOO) saying it continues to be one of the more controversial stocks under their coverage. Controversy can often lead to opportunity. The controversy stems from four main investor concerns around 1) execution; 2) the transition to a new management structure; 3) the launch / success of Yahoo!'s new search ad platform ("Project Panama"); and 4) limited visibility in the company's branded advertising segment.
Although these concerns aren't without merit, firm's thesis remains that although they believe there remains a period of transition for Yahoo! over the coming months, they can't help but see YHOO shares at current levels as a good entry point for investors with 1) a 6-12 month perspective and 2) tolerance for volatility in the short term (1-6 months).
Firm's optimism is driven by several beliefs. First, based on experience with the front-end of Yahoo!'s new search product and conversations with advertisers / agencies / Search Engine Marketers (SEMs) / developers / industry leaders to date, once Yahoo! completes transitioning its advertisers to the new platform, they expect Panama to be a vast improvement over Yahoo!'s prior offering and a more competitive product.
Second, they think the announcement in December related to Yahoo's management restructuring, although reflecting a company in transition, if executed effectively, could be a good thing for Yahoo! long term.
In short ,they think the new management structure, coupled with the launch of Panama, could create a more competitive / galvanized company that begins to execute more effectively in CH2:07E and beyond.And when there are signs that a company may begin to execute on fundamentals amidst overly negative investor sentiment, this usually means an opportunity (e.g. EBAY shares in August 2006), albeit not without risk.
Reiterates Overweight - Firm's Base Case DCF analysis values YHOO shares at $35.
Notablecalls: Not actionable but good to know category.
Although these concerns aren't without merit, firm's thesis remains that although they believe there remains a period of transition for Yahoo! over the coming months, they can't help but see YHOO shares at current levels as a good entry point for investors with 1) a 6-12 month perspective and 2) tolerance for volatility in the short term (1-6 months).
Firm's optimism is driven by several beliefs. First, based on experience with the front-end of Yahoo!'s new search product and conversations with advertisers / agencies / Search Engine Marketers (SEMs) / developers / industry leaders to date, once Yahoo! completes transitioning its advertisers to the new platform, they expect Panama to be a vast improvement over Yahoo!'s prior offering and a more competitive product.
Second, they think the announcement in December related to Yahoo's management restructuring, although reflecting a company in transition, if executed effectively, could be a good thing for Yahoo! long term.
In short ,they think the new management structure, coupled with the launch of Panama, could create a more competitive / galvanized company that begins to execute more effectively in CH2:07E and beyond.And when there are signs that a company may begin to execute on fundamentals amidst overly negative investor sentiment, this usually means an opportunity (e.g. EBAY shares in August 2006), albeit not without risk.
Reiterates Overweight - Firm's Base Case DCF analysis values YHOO shares at $35.
Notablecalls: Not actionable but good to know category.
Calls of Note Part 4
- CIBC notes see further support for their theory that Verint (NASDAQ:VRNT) won a major contract with WMT that could propel FY07 ests. A week after VRNT announced a $12M order from an unnamed big boxer, March, formerly WMT's sole video source, said its WMT orders had slowed to a trickle. MN shares fell 43%.
The precipitous fall-off in March's previous ~$14M/qtr business from WMT suggests that the big-boxer has picked a new primary source for video surveillance software. If that new source is Verint, it could see ~$200M in incremental orders over the next 2-4 years, by ofirm's estimates.
A major relationship with WMT would also amount to a major endorsement, potentially further catalyzing VRNT's already enviable position in retail video surveillance solutions. CIBC believes WMT's video business has decent gross margin of ~50%-55%, compared with VRNT's 58% corporate average.
Firm does not believe that the WMT opportunity was fully baked in to 4Q06 guidance, making current Street estimates ($99.7M in revenues vs. firm's $104.8M) appear very conservative. They also see 5%-10% of potential upside to their and consensus FY07 revenue estimates.
Notablecalls: Expect to see a move in VRNT today. The chart looks like it wants to go higher.
The precipitous fall-off in March's previous ~$14M/qtr business from WMT suggests that the big-boxer has picked a new primary source for video surveillance software. If that new source is Verint, it could see ~$200M in incremental orders over the next 2-4 years, by ofirm's estimates.
A major relationship with WMT would also amount to a major endorsement, potentially further catalyzing VRNT's already enviable position in retail video surveillance solutions. CIBC believes WMT's video business has decent gross margin of ~50%-55%, compared with VRNT's 58% corporate average.
Firm does not believe that the WMT opportunity was fully baked in to 4Q06 guidance, making current Street estimates ($99.7M in revenues vs. firm's $104.8M) appear very conservative. They also see 5%-10% of potential upside to their and consensus FY07 revenue estimates.
Notablecalls: Expect to see a move in VRNT today. The chart looks like it wants to go higher.
Calls of Note Part 3
One of the last sell-side OmniVision (NASDAQ:OVTI) bulls is capitulating this morning as JP Morgan is taking their rating down to Neutral from Buy. After a two-year round-trip, firm says they are getting off the OVTI roller-coaster at what appears to be an inopportune time for the company. OVTI is locked in price-based competition in the low-margin VGA segment of the CMOS sensor space, and absent differentiation from WFC, margins will likely be under pressure for at least two quarters.
Firm doesn't like the way OVTI's F2H07 is shaping up. OVTI is locked into the VGA segment of the CMOS sensor space and is unable to differentiate, absent the introduction of WFC or a lower-cost nextgen chipset. Meanwhile, Tier 1 handset OEMs are seeing tremendous threats at the high-end of the market (RIM and Apple) and need to move to MPx quickly. With OVTI capacity-constrained and competitors emerging (e.g., Samsung) there is risk of share loss in a segment that really matters.
Firm are troubled too by insider sales, higher levels of capital expenditure, and higher inventory in F2Q07. With $6.29 cash p/share, firm sees no immediate risks, but they believe investors could easily see $1.00 cash p/share whittled away before FY08, if inventory levels don't decline.
Notablecalls: Frequent readers should know I've been negative on OVTI for some time now. Maybe, just maybe I'm starting to warm up to the name as I'm having tough time imagining what else negative could be there to come. Won't be trying to catch the falling knife, though, so sitting back and waiting for some positive datapoints before taking a more positive stance.
Firm doesn't like the way OVTI's F2H07 is shaping up. OVTI is locked into the VGA segment of the CMOS sensor space and is unable to differentiate, absent the introduction of WFC or a lower-cost nextgen chipset. Meanwhile, Tier 1 handset OEMs are seeing tremendous threats at the high-end of the market (RIM and Apple) and need to move to MPx quickly. With OVTI capacity-constrained and competitors emerging (e.g., Samsung) there is risk of share loss in a segment that really matters.
Firm are troubled too by insider sales, higher levels of capital expenditure, and higher inventory in F2Q07. With $6.29 cash p/share, firm sees no immediate risks, but they believe investors could easily see $1.00 cash p/share whittled away before FY08, if inventory levels don't decline.
Notablecalls: Frequent readers should know I've been negative on OVTI for some time now. Maybe, just maybe I'm starting to warm up to the name as I'm having tough time imagining what else negative could be there to come. Won't be trying to catch the falling knife, though, so sitting back and waiting for some positive datapoints before taking a more positive stance.
Calls of Note Part 2
Several firms are commenting on Sandisk (NASDAQ:SNDK) this AM:
- UBS expects SanDisk to meet or slightly exceed their December quarter revenue expectations for roughly $980 million (+30.4% q/q, + 30.5% y/y) and guide down hard seasonally in the range of 25% q/q. Although a string of pre-announcements and negative reports from IC vendors exposed to the wireless handset end market has us modestly concerned, the firm believes that the adoption of NAND into handsets is following its own strong secular adoption curve and that this area should drive ongoing performance despite a still weak pricing environment. The company should also benefit in 1H07 from higher royalty payments for Samsung as its MLC production increased to 70% of output in 4Q06 from 40% in 3Q06. Unfortunately for the company, industry oversupply relative to demand appears unavoidable to them into the seasonally weaker 1H07 timeframe, and they would expect ongoing weakness in NAND ASPs to weigh on sentiment when reporting season concludes.
- Citigroup notes that looking back, they think SNDK had a solid 4Q06. However, looking ahead they are cautious on the shares for four reasons: 1) NAND's 1H07 fundamentals appear challenging, confirmed by Samsungs -30% 1Q07 price guidance, 2) Street 07 royalty rev ests (most NOT calculated bottoms-up) appear a stretch, 3) SNDK's new pdcts at CES impressed but appear gross margin dilutive, risking a negative target reset at the 2/26 analyst day, 4) Price elasticity of demand for traditional cards and USB drives, decelerated in 06, compounding 07 rev growth and margin risks.
SanDisk is a classic second-half trade given its extensive consumer exposure, enjoying secular tailwinds in applications such as handset cards and its new "View" video display product.
- JP Morgan notes they were encouraged by SanDisk's CES product line-up, which should fuel growth in '07. Subsequent to CES, Samsung's 4Q results and guidance underscore Sandisk's challenges, but they believe 2H07 could see a grinding recovery in margins. 2007 consensus EPS is still steep and short-term risks abound, but post 4Q earnings (01/30) SNDK stock could get interesting.
Notablecalls: Nothing positive here on SNDK. Would not be surprised to see weakness in the stock heading into earnings.
- UBS expects SanDisk to meet or slightly exceed their December quarter revenue expectations for roughly $980 million (+30.4% q/q, + 30.5% y/y) and guide down hard seasonally in the range of 25% q/q. Although a string of pre-announcements and negative reports from IC vendors exposed to the wireless handset end market has us modestly concerned, the firm believes that the adoption of NAND into handsets is following its own strong secular adoption curve and that this area should drive ongoing performance despite a still weak pricing environment. The company should also benefit in 1H07 from higher royalty payments for Samsung as its MLC production increased to 70% of output in 4Q06 from 40% in 3Q06. Unfortunately for the company, industry oversupply relative to demand appears unavoidable to them into the seasonally weaker 1H07 timeframe, and they would expect ongoing weakness in NAND ASPs to weigh on sentiment when reporting season concludes.
- Citigroup notes that looking back, they think SNDK had a solid 4Q06. However, looking ahead they are cautious on the shares for four reasons: 1) NAND's 1H07 fundamentals appear challenging, confirmed by Samsungs -30% 1Q07 price guidance, 2) Street 07 royalty rev ests (most NOT calculated bottoms-up) appear a stretch, 3) SNDK's new pdcts at CES impressed but appear gross margin dilutive, risking a negative target reset at the 2/26 analyst day, 4) Price elasticity of demand for traditional cards and USB drives, decelerated in 06, compounding 07 rev growth and margin risks.
SanDisk is a classic second-half trade given its extensive consumer exposure, enjoying secular tailwinds in applications such as handset cards and its new "View" video display product.
- JP Morgan notes they were encouraged by SanDisk's CES product line-up, which should fuel growth in '07. Subsequent to CES, Samsung's 4Q results and guidance underscore Sandisk's challenges, but they believe 2H07 could see a grinding recovery in margins. 2007 consensus EPS is still steep and short-term risks abound, but post 4Q earnings (01/30) SNDK stock could get interesting.
Notablecalls: Nothing positive here on SNDK. Would not be surprised to see weakness in the stock heading into earnings.
Calls of Note Part 1
- Banc of America notes adoption rate of Vista will be, in their view, the most significant of their '7 Forces in 07.' Based on firm's channel checks in 2Hof December with retail store sales reps, combined with assessment of customer reactions to Vista at CES (anecdotal in nature), they continue to believe that CES will have a positive impact with G7 consumers in 2007. Firm sees this process/trend as a gradual build during 07, rather than a sudden surge.
In contrast to firm's take of a modest PC market improvement due to Vista in 07, the latest Taiwanese ODM data, gathered during the week of Jan 8th, is a little softer than they projected, as overall ships appear to be up just 6% q/q, vs. estimate of 8-12% q/q, and 18% q/q last year. Firm believes that the slowing of the economy and some very modest slowdown in front of Vista launch played a role, with the force of the economy having a far greater impact.
Downward pressure came solely from desktop motherboards, down 10% y/y and down 4% q/q. Notebooks continue to drive growth, with very strong ships 35% y/y and 25% q/q. Notebook y/y growth accelerated for the first time in five quarters. This leaves them feeling confident in their 2007 20% y/y unit growth forecast.
Preferred PC names are HPQ and XRTX. They also think STX is well positioned with tech lead, and look for better entry point.
Notablecalls: Not actionable but good to know category.
In contrast to firm's take of a modest PC market improvement due to Vista in 07, the latest Taiwanese ODM data, gathered during the week of Jan 8th, is a little softer than they projected, as overall ships appear to be up just 6% q/q, vs. estimate of 8-12% q/q, and 18% q/q last year. Firm believes that the slowing of the economy and some very modest slowdown in front of Vista launch played a role, with the force of the economy having a far greater impact.
Downward pressure came solely from desktop motherboards, down 10% y/y and down 4% q/q. Notebooks continue to drive growth, with very strong ships 35% y/y and 25% q/q. Notebook y/y growth accelerated for the first time in five quarters. This leaves them feeling confident in their 2007 20% y/y unit growth forecast.
Preferred PC names are HPQ and XRTX. They also think STX is well positioned with tech lead, and look for better entry point.
Notablecalls: Not actionable but good to know category.
Color on Nokia (NYSE:NOK)
Couple of firms are commenting on Nokia (NYSE:NOK) ahead of results:
- Goldman Sachs sees 13% potential upside to their 3-month price target of EUR17 and adds
Nokia to their Buy and Conviction Buy Lists (was Neutral). In firm's view, a perfect storm of negative newsflow (Motorola's profits warning, Apple's iPhone launch, broker downgrades) has coincided with the bottom of Nokia's product cycle, driving 17% underperformance vs. the FTSE Europe since July and over 25% vs. Alcatel-Lucent and Ericsson. GS notes they have high confidence that Nokia will post solid 4Q EPS of EUR0.27, allowing 2007 EPS estimates to bottom, while new products should drive a recovery in sentiment as well as ASPs and gross margins during 1H2007.
They expect Nokia to deliver solid (and possibly better than expected) 4Q results on January 25. Firm's checks indicate that Nokia has enjoyed strong European demand relative to its disastrous 3Q, which mitigates the impact on ASPs from extra low-end units in emerging markets. They model a 4Q ASP of EUR90, slightly below consensus but well above the bear-case. Additionally, they believe that given sell-out low-end demand, Nokia has not experienced price pressure, underpinning gross margins. Further, at 3GSM in February, new product launches could re-ignite hopes for a turnaround.
- Jefferies notes Nokia has suffered over recent weeks 'by implication'. The Motorola Q4 pre announcement, which featured sharply lower ASP's and margins, was taken as a negative signal for the Finnish company. However, experience shows that it is dangerous to draw conclusions by extrapolation from others; be they subcontractors or competitors. In this case the waining of the RAZR, and relative lack of traction of the successor KRZR could have positive implications with regard to Nokia regaining ground in the mid range.
Samsung's subsequent announcement on Q4 06 was much more upbeat, but attracted less attention. Handset volumes of 32m were in line with market consensus, but the $1 sequential (and annual) increase in ASP to $176 was well ahead of expectation, and contrasted sharply with the 15%+ (sequential) decline at Motorola. Moreover this was despite a substantial shift in mix to the Asia Pac markets (+60% YoY) vs Europe (+19%). The company noted positive trends in smart phone demand and WCDMA, where Nokia has above average share (40%+)
Firm's numbers put Nokia on 13.5x 2007. Take out restructuring and adjust for cash and its 12x; Cheap for a leading global brand. Meanwhile they expect solid Q4 numbers and confident a outlook based on improved products. Maintains Buy.
Notablecalls: Check out my comments on Nokia from Jan 10. It sure looks like we won't see a warning from the co and the stock has started to creep up. Expect that to continue. Would not overstay my welcome, though.
- Goldman Sachs sees 13% potential upside to their 3-month price target of EUR17 and adds
Nokia to their Buy and Conviction Buy Lists (was Neutral). In firm's view, a perfect storm of negative newsflow (Motorola's profits warning, Apple's iPhone launch, broker downgrades) has coincided with the bottom of Nokia's product cycle, driving 17% underperformance vs. the FTSE Europe since July and over 25% vs. Alcatel-Lucent and Ericsson. GS notes they have high confidence that Nokia will post solid 4Q EPS of EUR0.27, allowing 2007 EPS estimates to bottom, while new products should drive a recovery in sentiment as well as ASPs and gross margins during 1H2007.
They expect Nokia to deliver solid (and possibly better than expected) 4Q results on January 25. Firm's checks indicate that Nokia has enjoyed strong European demand relative to its disastrous 3Q, which mitigates the impact on ASPs from extra low-end units in emerging markets. They model a 4Q ASP of EUR90, slightly below consensus but well above the bear-case. Additionally, they believe that given sell-out low-end demand, Nokia has not experienced price pressure, underpinning gross margins. Further, at 3GSM in February, new product launches could re-ignite hopes for a turnaround.
- Jefferies notes Nokia has suffered over recent weeks 'by implication'. The Motorola Q4 pre announcement, which featured sharply lower ASP's and margins, was taken as a negative signal for the Finnish company. However, experience shows that it is dangerous to draw conclusions by extrapolation from others; be they subcontractors or competitors. In this case the waining of the RAZR, and relative lack of traction of the successor KRZR could have positive implications with regard to Nokia regaining ground in the mid range.
Samsung's subsequent announcement on Q4 06 was much more upbeat, but attracted less attention. Handset volumes of 32m were in line with market consensus, but the $1 sequential (and annual) increase in ASP to $176 was well ahead of expectation, and contrasted sharply with the 15%+ (sequential) decline at Motorola. Moreover this was despite a substantial shift in mix to the Asia Pac markets (+60% YoY) vs Europe (+19%). The company noted positive trends in smart phone demand and WCDMA, where Nokia has above average share (40%+)
Firm's numbers put Nokia on 13.5x 2007. Take out restructuring and adjust for cash and its 12x; Cheap for a leading global brand. Meanwhile they expect solid Q4 numbers and confident a outlook based on improved products. Maintains Buy.
Notablecalls: Check out my comments on Nokia from Jan 10. It sure looks like we won't see a warning from the co and the stock has started to creep up. Expect that to continue. Would not overstay my welcome, though.
Color on datapoint: Symantec (NASDAQ:SYMC)
We have couple of firms issuing some very interesting comments on Symantec (NASDAQ:SYMC) after NPD data on Thursday showed meaningful weakness in box security products:
- Piper Jaffray notes distributor NPD data released on 1/11 shows a 21% yoy decrease in Symantec sales for the Dec-06 quarter. Street revenue consensus for Dec-06 is up 20% yoy. Separately, NPD data suggests an 11% sequential decrease in Dec-06, and the Street consensus is looking for up 1% sequentially.
The firm is defending SYMC saying they have compared the historical NPD sales data and the company reported data since Jun-05. The result is, NPD data has historically underestimated Symantec consumer yoy revenue growth by an average of 17%, and the magnitude of the understatement is increasing. According to PJ this is due to the fact NPD data tracks retail box products, and does not track sales made online. Separately, Symantec's 30% subscription price increase from last August would not be captured by NPD.
Also, in December of 2005, Symantec shifted the consumer business to a fully ratable revenue recognition model. Although it is difficult to quantify it, they expect the consumer numbers in the December 2006 quarter will benefit from this shift. Maintains Outperform and $27 tgt.
- UBS on the other hand notes that last year SYMC did not release its date until 1/10. The firm is modeling F3Q07 rev & EPS of $1.34b and $0.29. SYMC mgt has yet to return calls which coupled with no EPS release date raises the possibility that a negative pre-announcement could be forthcoming.
According to the firm 2 factors that could be impacting SYMC's EPS date 1) the "go live" of its
consolid. ORCL ERP system post-close of Veritas acq. (at times launch of these systems has impacted many co's ability to recognize rev) and 2) Vista launch at end of this month which has impacted retail PC shipments (as evidenced in NPD data). If rev were pushed out for either reason, it would likely be realized in the Mar Q.
While consumer security represents 29% of our F3Q07 sales fcst for SYMC, MFE.com consumer sales are 37% which includes their direct sales as well as more recurring ISP rev stream. Retail for MFE, (which NPD corresponds to) is only 5% for MFE. Although the NPD and Vista hardware deferment are negative for both co's, they see the data as more negative for SYMC given MFE's more stable ISP rev stream. Maintains Buy and $24 tgt.
Notablecalls: Firstly, I'm still kicking myself for not writing up the NPD call on SYMC/MFE for NC on Friday! Secondly, PJ's defense of SYMC is likely to catch them with their pants down. You just don't go against a major datapoint like this one. I went over every datapoint on SYMC over the weekend and I must say I was surprised by what I saw. I think SYMC has been losing ground. None of the major firms has paid attention. Kudos goes to UBS for their excellent point regarding the timing of earnings release. I bet Heather Bellini, the analyst covering SYMC for UBS was out with the call already on Friday! Anyway, I think SYMC is a short here despite the oversized downside move the stock made on Friday. Actionable call alert!
- Piper Jaffray notes distributor NPD data released on 1/11 shows a 21% yoy decrease in Symantec sales for the Dec-06 quarter. Street revenue consensus for Dec-06 is up 20% yoy. Separately, NPD data suggests an 11% sequential decrease in Dec-06, and the Street consensus is looking for up 1% sequentially.
The firm is defending SYMC saying they have compared the historical NPD sales data and the company reported data since Jun-05. The result is, NPD data has historically underestimated Symantec consumer yoy revenue growth by an average of 17%, and the magnitude of the understatement is increasing. According to PJ this is due to the fact NPD data tracks retail box products, and does not track sales made online. Separately, Symantec's 30% subscription price increase from last August would not be captured by NPD.
Also, in December of 2005, Symantec shifted the consumer business to a fully ratable revenue recognition model. Although it is difficult to quantify it, they expect the consumer numbers in the December 2006 quarter will benefit from this shift. Maintains Outperform and $27 tgt.
- UBS on the other hand notes that last year SYMC did not release its date until 1/10. The firm is modeling F3Q07 rev & EPS of $1.34b and $0.29. SYMC mgt has yet to return calls which coupled with no EPS release date raises the possibility that a negative pre-announcement could be forthcoming.
According to the firm 2 factors that could be impacting SYMC's EPS date 1) the "go live" of its
consolid. ORCL ERP system post-close of Veritas acq. (at times launch of these systems has impacted many co's ability to recognize rev) and 2) Vista launch at end of this month which has impacted retail PC shipments (as evidenced in NPD data). If rev were pushed out for either reason, it would likely be realized in the Mar Q.
While consumer security represents 29% of our F3Q07 sales fcst for SYMC, MFE.com consumer sales are 37% which includes their direct sales as well as more recurring ISP rev stream. Retail for MFE, (which NPD corresponds to) is only 5% for MFE. Although the NPD and Vista hardware deferment are negative for both co's, they see the data as more negative for SYMC given MFE's more stable ISP rev stream. Maintains Buy and $24 tgt.
Notablecalls: Firstly, I'm still kicking myself for not writing up the NPD call on SYMC/MFE for NC on Friday! Secondly, PJ's defense of SYMC is likely to catch them with their pants down. You just don't go against a major datapoint like this one. I went over every datapoint on SYMC over the weekend and I must say I was surprised by what I saw. I think SYMC has been losing ground. None of the major firms has paid attention. Kudos goes to UBS for their excellent point regarding the timing of earnings release. I bet Heather Bellini, the analyst covering SYMC for UBS was out with the call already on Friday! Anyway, I think SYMC is a short here despite the oversized downside move the stock made on Friday. Actionable call alert!
Sunday, January 14, 2007
Barron's Summary
“Technology Trader” out with a real nasty piece on InnerWorkings (INWK). The article is highly entertaining, so I decided to post it fully. Read here.
Notablecalls: Expect to see big downside.
Barrons’ Roundtable members picks include MON, RIO, APOL, CECO, COCO, BIDU, APA, BRNC, HSOA, AIMC, ARW and SVBI. Another fund manager top holdings include MTW, CELG, AES, FDS, CTL, COH, IM, AKS, ETFC and CHRW.
The TV group looks undervalued. The New York Times (NYT) got a rich price for its TV stations, and that could lift the stocks. A retransmission victory would boost cash flow. There could be more upside this year in the low-profile TV group, which includes Hearst-Argyle (HTV), Sinclair (SBGI), Lin TV (TVL), Gray TV (GTN) and Nexstar (NXST), if Sinclair is successful in its current battle with Mediacom (MCCC) to be paid for providing local stations to Mediacom cable systems.
M&A deals will be bigger, pricier and riskier this year, an indication that the bull mkt in M&A and LBOs in Europe is growing long in the tooth. US listed tgts include BCS, DT, DB, ABN, VLKAY, KPN, SCM and OTE.
The depressed shares of YRC Worldwide (YRCW) could climb above 60. Cash flow is rolling along, and earnings for '07 could come in well above the Street's expectations.
“The Trader” section discusses Kimberly-Clark (KMB), which generally flies under the radar screen, even if 1.3bn ppl use its products every day. But a big upswell in Kimberly call options activity last month caught the attention of B. Craig Hutson, of Gimme Credit. At one point, the trading was almost 20x the normal volume. And the co's bonds have performed poorly, Hutson adds, on unconfirmed whispers of a possible LBO. Since mid-Sept the spread between Kimberly's bond yield and the benchmark 10y Treasury bond yield have widened sharply, by 30bp to some 90bp. That suggests bondholders are getting antsy about the LBO rumors. Despite Kimberly's recent share gains, its EV to EBITDA multiple of about 10.5x ‘06 ests is still significantly below its peers. P&G (PG) currently trades at about 13.5x, Clorox (CLX) at 12x. Hutson figures a 20% premium to the current price.
Escala Group (ESCL.PK) was delisted by the Nasdaq last week after it failed to meet deadlines for filing earnings. The co’s shares plummeted 42%. Traders say the stock will continue to decline as institutional holders are forced to liquidate their positions b/c of internal mandates that prohibit them from holding pink sheet stocks. "It could fall below BV," says one analyst. The analyst ests that after write-downs, Escala's shares have a per-share BV of around $2.30-2.60. "And if you take into account other yet-to-be calculated charges related to fighting shareholder lawsuits, the cost of the recent internal audit, the ongoing SEC investigation, what Spain might do with its shares of Escala, you can very easily get to a number around $1 a share in net asset value," he adds.
At year-end ‘05, Marsh Douthat, of Ockham Research, said General Motors (GM) was the Dow's most attractive. GM’s 58% moon shot in ‘06 came as a shock to just about everyone. Douthat didn't just get GM right. His top 5 Dow picks from last year had an avg total return of 26%, easily besting the benchmark. This year, Douthat gives his No. 1 slot to Wal-Mart (WMT). His other picks, in descending order: HD, MSFT, GE, PFE, JNJ, KO, AIG, INTC and CAT. "Everybody recognizes these stocks are relatively cheap, but they don't have a good handle on why they would get less cheap," he says. He doesn't pretend to know the catalyst, only that "there will eventually be one."
“Preview” section highlights Staples (SPLS), which is poised to roll out 100 “that-was-easy” type products each year. It's also innovating beyond its superstores, opening new copying stores to compete with Kinko's. "It's all about building a national brand and creating a service feel about our co," CEO Ron Sargent told. And the co, which has been boosting margins by increasing direct purchasing from factories, is moving into new mkts like Denver, and expanding its office-products brand in grocery stores around the nation. Sargent also expects the co to improve inventory mgmt at its N-American delivery unit in the next few years. That can only help earnings, which are forecast to grow about 15% in ‘07 and ‘08. Yet at $26, the stock remains at a below-trend 17.7x next year's earnings. By getting back to historic multiples, the shares could move up 14%, easy.
“Follow Up” section reviews Xerox (XRX) story, they ran 8 months ago. The shares are up 21.2%, the co's debt has been upgraded to investment grade, cash-flow growth is strong and the co's been buying back stock and keeping costs down. At 17 a share, there's still room for price appreciation.
Notablecalls: Expect to see big downside.
Barrons’ Roundtable members picks include MON, RIO, APOL, CECO, COCO, BIDU, APA, BRNC, HSOA, AIMC, ARW and SVBI. Another fund manager top holdings include MTW, CELG, AES, FDS, CTL, COH, IM, AKS, ETFC and CHRW.
The TV group looks undervalued. The New York Times (NYT) got a rich price for its TV stations, and that could lift the stocks. A retransmission victory would boost cash flow. There could be more upside this year in the low-profile TV group, which includes Hearst-Argyle (HTV), Sinclair (SBGI), Lin TV (TVL), Gray TV (GTN) and Nexstar (NXST), if Sinclair is successful in its current battle with Mediacom (MCCC) to be paid for providing local stations to Mediacom cable systems.
M&A deals will be bigger, pricier and riskier this year, an indication that the bull mkt in M&A and LBOs in Europe is growing long in the tooth. US listed tgts include BCS, DT, DB, ABN, VLKAY, KPN, SCM and OTE.
The depressed shares of YRC Worldwide (YRCW) could climb above 60. Cash flow is rolling along, and earnings for '07 could come in well above the Street's expectations.
“The Trader” section discusses Kimberly-Clark (KMB), which generally flies under the radar screen, even if 1.3bn ppl use its products every day. But a big upswell in Kimberly call options activity last month caught the attention of B. Craig Hutson, of Gimme Credit. At one point, the trading was almost 20x the normal volume. And the co's bonds have performed poorly, Hutson adds, on unconfirmed whispers of a possible LBO. Since mid-Sept the spread between Kimberly's bond yield and the benchmark 10y Treasury bond yield have widened sharply, by 30bp to some 90bp. That suggests bondholders are getting antsy about the LBO rumors. Despite Kimberly's recent share gains, its EV to EBITDA multiple of about 10.5x ‘06 ests is still significantly below its peers. P&G (PG) currently trades at about 13.5x, Clorox (CLX) at 12x. Hutson figures a 20% premium to the current price.
Escala Group (ESCL.PK) was delisted by the Nasdaq last week after it failed to meet deadlines for filing earnings. The co’s shares plummeted 42%. Traders say the stock will continue to decline as institutional holders are forced to liquidate their positions b/c of internal mandates that prohibit them from holding pink sheet stocks. "It could fall below BV," says one analyst. The analyst ests that after write-downs, Escala's shares have a per-share BV of around $2.30-2.60. "And if you take into account other yet-to-be calculated charges related to fighting shareholder lawsuits, the cost of the recent internal audit, the ongoing SEC investigation, what Spain might do with its shares of Escala, you can very easily get to a number around $1 a share in net asset value," he adds.
At year-end ‘05, Marsh Douthat, of Ockham Research, said General Motors (GM) was the Dow's most attractive. GM’s 58% moon shot in ‘06 came as a shock to just about everyone. Douthat didn't just get GM right. His top 5 Dow picks from last year had an avg total return of 26%, easily besting the benchmark. This year, Douthat gives his No. 1 slot to Wal-Mart (WMT). His other picks, in descending order: HD, MSFT, GE, PFE, JNJ, KO, AIG, INTC and CAT. "Everybody recognizes these stocks are relatively cheap, but they don't have a good handle on why they would get less cheap," he says. He doesn't pretend to know the catalyst, only that "there will eventually be one."
“Preview” section highlights Staples (SPLS), which is poised to roll out 100 “that-was-easy” type products each year. It's also innovating beyond its superstores, opening new copying stores to compete with Kinko's. "It's all about building a national brand and creating a service feel about our co," CEO Ron Sargent told. And the co, which has been boosting margins by increasing direct purchasing from factories, is moving into new mkts like Denver, and expanding its office-products brand in grocery stores around the nation. Sargent also expects the co to improve inventory mgmt at its N-American delivery unit in the next few years. That can only help earnings, which are forecast to grow about 15% in ‘07 and ‘08. Yet at $26, the stock remains at a below-trend 17.7x next year's earnings. By getting back to historic multiples, the shares could move up 14%, easy.
“Follow Up” section reviews Xerox (XRX) story, they ran 8 months ago. The shares are up 21.2%, the co's debt has been upgraded to investment grade, cash-flow growth is strong and the co's been buying back stock and keeping costs down. At 17 a share, there's still room for price appreciation.
Friday, January 12, 2007
Calls of Note Part 5
- Cowen notes shares of Intuitive Surgical (NASDAQ:ISRG) have declined significantly, falling by 18% in the past month. A combination of real and imagined events seems to have engendered fears of slower growth or lower earnings power. Firm believes that the price decline is not justified as business fundamentals are strong and likely to remain vigorous, contrary to trepidation about 2007 guidance. The threat from a recent patent suit is negligible. They maintain their positive stance on Intuitive and reiterate Outperform rating with expectations for the shares to outperform the market by 40% - 45% in the next 12 months.
Recent news accounts imply healthy sales trends for Intuitive Surgical, with unabating demand for prostatectomies, hysterectomies and new da Vinci surgical system placements in hospitals. Rising use for gastric bypass procedures to treat morbid obesity is also occurring, representing another source of growth as nearly 200,000 obesity surgeries are performed annually in the U.S. Hospitals view the system as a means for boosting competitive advantage and are publicizing new da Vinci system purchases in order to attract (or retain) patients.
Firm believes that system sales for the seasonally strong 4Q will again prove to be significantly higher than 3Q and note that in 2004 and 2005, 4Q systems sales rose by 7 and 9 units, respectively. Sales and earnings guidance for 2007 should be issued on February 1 when Intuitive reports 4Q results. Cowen believes that fears of guidance being below Street expectations are unwarranted based upon their observations of the market evolution and clinical progress for the da Vinci system.
The current forward P/E of 33x for shares of Intuitive is their lowest valuation in 3 years.
Notablecalls: Love the call but I suspect the bounce I was looking for 3 days ago (see archives) already happened yesterday. On the other hand, ISRG is a huge mover and Cowen's call is brilliant enough to turn heads. I'm going to call this one actionable after all.
Recent news accounts imply healthy sales trends for Intuitive Surgical, with unabating demand for prostatectomies, hysterectomies and new da Vinci surgical system placements in hospitals. Rising use for gastric bypass procedures to treat morbid obesity is also occurring, representing another source of growth as nearly 200,000 obesity surgeries are performed annually in the U.S. Hospitals view the system as a means for boosting competitive advantage and are publicizing new da Vinci system purchases in order to attract (or retain) patients.
Firm believes that system sales for the seasonally strong 4Q will again prove to be significantly higher than 3Q and note that in 2004 and 2005, 4Q systems sales rose by 7 and 9 units, respectively. Sales and earnings guidance for 2007 should be issued on February 1 when Intuitive reports 4Q results. Cowen believes that fears of guidance being below Street expectations are unwarranted based upon their observations of the market evolution and clinical progress for the da Vinci system.
The current forward P/E of 33x for shares of Intuitive is their lowest valuation in 3 years.
Notablecalls: Love the call but I suspect the bounce I was looking for 3 days ago (see archives) already happened yesterday. On the other hand, ISRG is a huge mover and Cowen's call is brilliant enough to turn heads. I'm going to call this one actionable after all.
Calls of Note Part 4
- Piper Jaffray notes their review of Crocs (NASDAQ:CROX) spring 2007 line underscores the dramatic expansion of the brand portfolio, extending beyond the classic clog into a lifestyle brand including footwear, apparel, and accessories. The classic Beach/Cayman style represents less than 5% of the mix and is trending quickly toward 25% of domestic sales. Last year, among the 8 styles, the core clog represented near 85% of sales. Firm believes Crocs is leveraging its global distribution network & proprietary Croslite resin to extend the brand into select technical apparel and sporting goods categories (currently less than 3% of sales) - longer term opportunities (late-FY07 & FY08).
They believe spring 2007 marks the first period when Crocs will aggressively bifurcate its
assortment by key retail accounts.
Sales/door continues to increase, seasonality is being offset with key license agreements, and the addition of Jibbitz into the floorset improves footwear sales by an average 35%. With near 140
(NCAA, NHL, NFL) team licenses, PJ thinks the brand will contend for year- round shelf placement and expand brand mindshare with the young male demo.
Firm is raising their FY07 sales & EPS estimates for new licensed product (NHL, NFL), expanded distribution, and elevated expectations surrounding sales & profitability. Tgt goes to $53 from $54.
Maintains Outperform.
Notablecalls: Nothing new in PJ's note. Won't have any immediate impact on the stock. Usually, when companies with strong core product lines start expanding agressively it's a sure sign that things will be slowing down.
They believe spring 2007 marks the first period when Crocs will aggressively bifurcate its
assortment by key retail accounts.
Sales/door continues to increase, seasonality is being offset with key license agreements, and the addition of Jibbitz into the floorset improves footwear sales by an average 35%. With near 140
(NCAA, NHL, NFL) team licenses, PJ thinks the brand will contend for year- round shelf placement and expand brand mindshare with the young male demo.
Firm is raising their FY07 sales & EPS estimates for new licensed product (NHL, NFL), expanded distribution, and elevated expectations surrounding sales & profitability. Tgt goes to $53 from $54.
Maintains Outperform.
Notablecalls: Nothing new in PJ's note. Won't have any immediate impact on the stock. Usually, when companies with strong core product lines start expanding agressively it's a sure sign that things will be slowing down.
Calls of Note Part 3
- RBC Capital is expecting decent results from Juniper (NASDAQ:JNPR) near term but the variability in core market share and moving parts at customer Verizon lead them to maintain Sector Perform rating and price target of $19 until they gain better visibility towards '07 estimates.
Competitor Cisco continues to enjoy accelerating bookings for its CRS-1 core router, which grew 25% sequentially in the recent quarter. Cisco is making headway with both the cable operators and the telcos for its CRS-1 and may be gaining share at key international telco accounts such as DT and NTT.
The on again, off again Verizon RFP for edge routing seems to back on again and not just for Juniper according to firm's sources. Contacts are indicating that Ericsson is working diligently to displace Juniper at this carrier now that it will soon have Redback integrated in its portfolio. So while some investors considered this RFP a done deal for Juniper, it may now be back up for grabs.
Throughout 2006 Juniper consistently lost market share sequentially in several router categories. However, in firm's view Juniper has now stabilized its market share loss in edge routers and the market for routers overall may be growing at a faster rate. Juniper's overall service provider market share now stands at about 17% with high end enterprise market share of about 26%.
Notablecalls: Not actionable but good to know category. The comments regarding the VZ deal sound interesting and may be an indication of some upcoming problems. ERIC is getting aggressive in the US. Would not want to be long the common into earnings.
Competitor Cisco continues to enjoy accelerating bookings for its CRS-1 core router, which grew 25% sequentially in the recent quarter. Cisco is making headway with both the cable operators and the telcos for its CRS-1 and may be gaining share at key international telco accounts such as DT and NTT.
The on again, off again Verizon RFP for edge routing seems to back on again and not just for Juniper according to firm's sources. Contacts are indicating that Ericsson is working diligently to displace Juniper at this carrier now that it will soon have Redback integrated in its portfolio. So while some investors considered this RFP a done deal for Juniper, it may now be back up for grabs.
Throughout 2006 Juniper consistently lost market share sequentially in several router categories. However, in firm's view Juniper has now stabilized its market share loss in edge routers and the market for routers overall may be growing at a faster rate. Juniper's overall service provider market share now stands at about 17% with high end enterprise market share of about 26%.
Notablecalls: Not actionable but good to know category. The comments regarding the VZ deal sound interesting and may be an indication of some upcoming problems. ERIC is getting aggressive in the US. Would not want to be long the common into earnings.
Calls of Note Part 2
- Citigroup is cautious on Sandisk (NASDAQ:SNDK) shares entering 2007. Fieldwork suggests known near- term pricing risks could prove greater than Street expectations, compounded near term by seasonality, waning price elasticity of demand, and any upside to NAND supply. On company-specifics, while they expect solid 4Q06 EPS given handset card strength, a cautious 1Q07 outlook should be expected and they see more downside than upside risk to 2007 Street EPS revisions. Psychologically, ongoing spot and contract price declines, compounded by MU's February 9th analyst day which seems likely to emphasize 2007 supply growth and a Lexar market share gains are headwinds. Further out, SanDisk's 2/26 strategic and financial outlook focused analyst day could put a floor under the shares in what is otherwise a seasonally-unfriendly period until May. In summary, while the shares are not expensive at 18.6x 2007E EPS, volatility could be significant near term. Catalysts could emerge closer to the February 26th Analyst day, and the firm might reconsider their Hold rating at share prices below $40.
Increases 4Q06 EPS to $0.71 from $0.69 on handset cards+unchgd pricing. However, for the 2nd time since early-Dec, the firm cuts their 07e EPS, to $2.55 from $2.71, this time on prd pricing (prop checks) + royalty. Tgt goes to $52 from $54.
Notablecalls: SNDK got hit yesterday on NAND concerns. That may continue in the s-t.
Increases 4Q06 EPS to $0.71 from $0.69 on handset cards+unchgd pricing. However, for the 2nd time since early-Dec, the firm cuts their 07e EPS, to $2.55 from $2.71, this time on prd pricing (prop checks) + royalty. Tgt goes to $52 from $54.
Notablecalls: SNDK got hit yesterday on NAND concerns. That may continue in the s-t.
Calls of Note Part 1
- JP Morgan is adding Sprint Nextel (NYSE:S) to their US Analyst Focus List with a January '08 Price Target of $25 as S should be a turnaround story with 2Q07 marking the turn to positive subscriber growth. Firm derives a $25 Price Target based on their expectations for an expansion of 2008E EV/EBITDA to 6.3X from its current level of 4.2X
JPM now believes the wireless industry's cumulative performance since 2003 makes the group's valuation less compelling and their focus in 2007 will be on relative values rather than a call on the group to rise. They expect upside to the stocks will be driven by turnarounds, upside to estimates, or asset plays.
In their view investors have become overly pessimistic on the outlook for Sprint Nextel. Though the merger has been extremely disappointing to date, the firm believes S will make substantial progress this year. Specifically: 1) return to positive net adds in 2Q07, and possibly in 1Q07; 2) the Street is no longer overly bullish on the stock, suggesting there could be upside on incrementally positive data; and 3) consensus estimates are calibrated down to a point where S is now likely to beat them - supported by the fact that there are only few Buy ratings now.
Maintains Overweight rating.
Notablecalls: JPM is probably on right tracks with their call. I have no feel for what the stock will do in the s-t, though.
JPM now believes the wireless industry's cumulative performance since 2003 makes the group's valuation less compelling and their focus in 2007 will be on relative values rather than a call on the group to rise. They expect upside to the stocks will be driven by turnarounds, upside to estimates, or asset plays.
In their view investors have become overly pessimistic on the outlook for Sprint Nextel. Though the merger has been extremely disappointing to date, the firm believes S will make substantial progress this year. Specifically: 1) return to positive net adds in 2Q07, and possibly in 1Q07; 2) the Street is no longer overly bullish on the stock, suggesting there could be upside on incrementally positive data; and 3) consensus estimates are calibrated down to a point where S is now likely to beat them - supported by the fact that there are only few Buy ratings now.
Maintains Overweight rating.
Notablecalls: JPM is probably on right tracks with their call. I have no feel for what the stock will do in the s-t, though.
Color on warning: AMD (NYSE:AMD)
Several firms are commenting on Advanced Micro (NYSE:AMD) after the co issued a negative pre-release last night:
- Goldman Sachs notes that while no explicit CY4Q06 sales guidance was given, management had indicated on its CY3Q06 earnings call that sales should increase in-line with normal seasonality of about +10% qoq. Operating income (excluding ATI and related charges) is now expected to be positive but down significantly qoq. Per firm's expectation, margins were negatively impacted by significantly lower CPU ASPs. They are lowering their EPS estimates on lower sales and margins: CY4Q06 EPS goes to $0.06 from $0.22; CY07 EPS goes to $0.90 from $1.05, and CY08 EPS goes to $1.30 from $1.80.
CY4Q06 marks the 3rd consecutive quarter AMD has missed expectations. GS downgraded the stock on 1/3/2007 given their view that the Street would cut estimates as it acknowledged that it is too big of a leap to get to the 2007 guidance AMD provided at its analyst meeting given the current state of its business. They view AMD as their best short idea in semis and continue to expect estimate cuts as the Street capitulates that AMD's 2007 outlook is too optimistic. Firm believes Intel stands to benefit from AMD's missteps given its current product superiority. While they do not see absolute upside in Intel's stock given that it is trading at 22X normalized EPS, they continue to expect a long Intel/short AMD pair trade to be very profitable in 2007.
Tgt goes to $16 from $19.
- JP Morgan says theybelieve the downside was driven by Intel's aggressive pricing and superior products and they expect further downside to Consensus estimates until AMD and Intel begin cutting capital expenditures. They downgraded AMD to Underweight in October due to expectation for downside to Consensus estimates and they note their previous C07 EPS estimate of $0.56 was roughly $0.55 below Consensus.
As a result, they are lowering their C06 revenue and EPS estimates from $5.7 billion and $1.12 to $5.6 billion and $0.93 and C07 revenue and EPS estimates from $7.4 billion and $0.56 to $6.7 billion and $0.18. Reits Underweight.
- UBS notes this warning reignites their doubts about AMD's flat to slightly up ASP assumption for 2007 given at the last analyst day. Furthermore, they believe AMD is also facing challenges in the ATI integration as they believe the R600 graphics product could be facing delays, leading to further share loss to NVDA.
Firm notes they have warned in the past about AMD's vulnerability in server which they estimate account for 35-40% of AMD standalone gross profit/cashflow and <10% of units. Intel's success with both Woodcrest/Clovertown seems to more than erase any progress AMD makes in notebooks.
Given Intel's 9 month lead on quad-core they expect a sharp Intel price cut ahead of AMD's quad-core (Barcelona) launch in late 2Q07 - a situation Intel can hedge with 45nm ramp & restructuring benefits. AMD's guidance of -$500m negative free cash flow in '07 looks challenging & could be worse, they had earlier warned. Maintains Neutral and $23 tgt.
- Citigroup is downgrading the shares of AMD to Hold from Buy reflecting concerns that gross margin may face more persistent pressure than anticipated. While they lowered estimates on AMD earlier this week to below-consensus levels, pricing pressure in servers leads them to reduce estimates again.
Tgt goes to $21 from $26.
Notablecalls: While many firms were negative on AMD ahead of the pre-release (GSCO with Sell, JPM with Underweight) I think ThinkEquity's Eric Ross nailed it for traders with his Jan 3 comments saying inventories at AMD has suddenly built in the channel, and prices were plummeting. Be sure to check out his intraday call on INTC from yesterday. AMD's loss may not be INTC's gain after all.
- Goldman Sachs notes that while no explicit CY4Q06 sales guidance was given, management had indicated on its CY3Q06 earnings call that sales should increase in-line with normal seasonality of about +10% qoq. Operating income (excluding ATI and related charges) is now expected to be positive but down significantly qoq. Per firm's expectation, margins were negatively impacted by significantly lower CPU ASPs. They are lowering their EPS estimates on lower sales and margins: CY4Q06 EPS goes to $0.06 from $0.22; CY07 EPS goes to $0.90 from $1.05, and CY08 EPS goes to $1.30 from $1.80.
CY4Q06 marks the 3rd consecutive quarter AMD has missed expectations. GS downgraded the stock on 1/3/2007 given their view that the Street would cut estimates as it acknowledged that it is too big of a leap to get to the 2007 guidance AMD provided at its analyst meeting given the current state of its business. They view AMD as their best short idea in semis and continue to expect estimate cuts as the Street capitulates that AMD's 2007 outlook is too optimistic. Firm believes Intel stands to benefit from AMD's missteps given its current product superiority. While they do not see absolute upside in Intel's stock given that it is trading at 22X normalized EPS, they continue to expect a long Intel/short AMD pair trade to be very profitable in 2007.
Tgt goes to $16 from $19.
- JP Morgan says theybelieve the downside was driven by Intel's aggressive pricing and superior products and they expect further downside to Consensus estimates until AMD and Intel begin cutting capital expenditures. They downgraded AMD to Underweight in October due to expectation for downside to Consensus estimates and they note their previous C07 EPS estimate of $0.56 was roughly $0.55 below Consensus.
As a result, they are lowering their C06 revenue and EPS estimates from $5.7 billion and $1.12 to $5.6 billion and $0.93 and C07 revenue and EPS estimates from $7.4 billion and $0.56 to $6.7 billion and $0.18. Reits Underweight.
- UBS notes this warning reignites their doubts about AMD's flat to slightly up ASP assumption for 2007 given at the last analyst day. Furthermore, they believe AMD is also facing challenges in the ATI integration as they believe the R600 graphics product could be facing delays, leading to further share loss to NVDA.
Firm notes they have warned in the past about AMD's vulnerability in server which they estimate account for 35-40% of AMD standalone gross profit/cashflow and <10% of units. Intel's success with both Woodcrest/Clovertown seems to more than erase any progress AMD makes in notebooks.
Given Intel's 9 month lead on quad-core they expect a sharp Intel price cut ahead of AMD's quad-core (Barcelona) launch in late 2Q07 - a situation Intel can hedge with 45nm ramp & restructuring benefits. AMD's guidance of -$500m negative free cash flow in '07 looks challenging & could be worse, they had earlier warned. Maintains Neutral and $23 tgt.
- Citigroup is downgrading the shares of AMD to Hold from Buy reflecting concerns that gross margin may face more persistent pressure than anticipated. While they lowered estimates on AMD earlier this week to below-consensus levels, pricing pressure in servers leads them to reduce estimates again.
Tgt goes to $21 from $26.
Notablecalls: While many firms were negative on AMD ahead of the pre-release (GSCO with Sell, JPM with Underweight) I think ThinkEquity's Eric Ross nailed it for traders with his Jan 3 comments saying inventories at AMD has suddenly built in the channel, and prices were plummeting. Be sure to check out his intraday call on INTC from yesterday. AMD's loss may not be INTC's gain after all.
Paperstand
The WSJ reports that federal authorities are actively investigating a backdated stock-option grant awarded to Steve Jobs, Apple’s (AAPL) CEO, that carried a false Oct’01 date, ppl familiar with the matter say. Apple recently disclosed that records were "improperly" created to claim that the grant was approved at a special board meeting that month. But no board meeting took place then. Investigators are now focusing on the grant to Mr. Jobs for 7.5m options that were finalized in Dec’01, when Apple's share price was higher. The false dating increased the value of the grant to Mr. Jobs, and resulted in a retroactive $20m charge to Apple's earnings when it was discovered by a special internal investigation. The false documentation was created by an Apple attorney named Wendy Howell, whom the co quietly dismissed last month. Ms. Howell contends that Apple's general counsel at the time, Nancy Heinen, instructed her to create the false documentation. Thomas Carlucci, Ms. Howell's attorney, said that while at Apple "Ms. Howell acted as instructed by Apple mgmt and with the co's best interest being paramount."
Barron’s Online discusses big pharmas, saying that despite setbacks last year at Pfizer (PFE) and other drug makers, Big Pharma has some big breakthroughs in store this year. Experts interviewed by Barron's Online, including doctors and industry analysts, helped identify 5 drugs that could advance treatment for certain serious conditions and pay off for drugs makers. The list includes Novartis’ (NVS) diabetes drug, Galvus, and its high-blood-pressure drug, Tekturna. GlaxoSmithKline (GSK) has a new breast-cancer drug, Tykerb, while Wyeth (WYE) has the antidepressant, Pristiq. Meanwhile, Sanofi-Aventis’ (SNY) long overdue diet drug, Acomplia, still awaits the FDA's approval, but should finally get launched this year.
“Inside Scoop” section reports that Iridian Asset Mgmt recently disclosed a 10% stake in HealthSouth (HLS) stock, or 8.2m shares, up from the 6.5% stake, or 5.2m shares, that it held at the end of the 3Q.
Thursday, January 11, 2007
Calls of Note Part 5
- ThinkEquity's Eric Ross is out with a major intraday call saying they heard from sources at the Consumer Electronics Show (CES) and elsewhere that Intel (NASDAQ:INTC) could see December-quarter revenues nearer to the low end of its range ($9.1b) rather than the midpoint of $9.4b or Consensus of $9.45b. Even with stronger gross margins, they still do not see EPS reaching above $0.23 vs. $0.25 for Consensus, without some financial engineering. While they would not short Intel into the quarter due to this (or change rating), it is possible for the shares to fall a bit.
Firm now believes December-quarter revenues are likely to be $9.25b (firm's new number) or lower. Consensus is $9.45b and $0.25 for the December quarter. These are sources both inside the company and in the electronics supply chain. They actually heard numbers as low as $9.10b for Intel's December quarter from their sources.
For high-end products, the quarter was very back-end loaded. They heard that high-end product such as Conroe (Core 2 Duo) for desktop saw weak October and November sales. Demand picked up sharply in December. Firm believes this is consistent with the build for Vista they have heard elsewhere, but are not certain this reflected real demand.
For low-end products, demand fell in December. Low-end demand for Intel appeared to have dried up in December after a strong October and November. This is consistent with what they have heard from other suppliers in the channel.
Mr. Ross believes Intel is winning back some higher-profile PC models from Advanced Micro Devices (NYSE:AMD), but due to its aggressive sales and pricing. He expects with these share losses by AMD (coming), we could see another aggressive pricing competition year.
Notablecalls: Considering most firms expect INTC to come in at least in-line I think Eric's comments will get some attention. Would not be surprised to see weakness in INTC following the call.
Firm now believes December-quarter revenues are likely to be $9.25b (firm's new number) or lower. Consensus is $9.45b and $0.25 for the December quarter. These are sources both inside the company and in the electronics supply chain. They actually heard numbers as low as $9.10b for Intel's December quarter from their sources.
For high-end products, the quarter was very back-end loaded. They heard that high-end product such as Conroe (Core 2 Duo) for desktop saw weak October and November sales. Demand picked up sharply in December. Firm believes this is consistent with the build for Vista they have heard elsewhere, but are not certain this reflected real demand.
For low-end products, demand fell in December. Low-end demand for Intel appeared to have dried up in December after a strong October and November. This is consistent with what they have heard from other suppliers in the channel.
Mr. Ross believes Intel is winning back some higher-profile PC models from Advanced Micro Devices (NYSE:AMD), but due to its aggressive sales and pricing. He expects with these share losses by AMD (coming), we could see another aggressive pricing competition year.
Notablecalls: Considering most firms expect INTC to come in at least in-line I think Eric's comments will get some attention. Would not be surprised to see weakness in INTC following the call.
Calls of Note Part 4
- JP Morgan notes DiVX (NASDAQ:DIVX) demonstrated its HD product at CES, which they believe will resonate with CE OEMs focused on price-sensitive end-markets. However, the key to the DIVX story remains consumer awareness and viral demand, which appears to be forcing CE OEMs to adopt the Codec. DivX Connected technology is maturing, pointing to DIVX's potential as the enabler of the "connected home' but success hangs in the balance.
DivX HD was demonstrated using 1080p playback from both a PC and a DIVX-certified I-O Data DVD. Expect Tier OEMs to target emerging markets with this product, currently certified by just three OEMs. DIVX demonstrated Ultra and Connected applications, though no licensees were announced.
At CES DIVX announced that its Codec is certified for use on an HP MediaSmart TV, expanding reach to a new product category. JPM learned that Toshiba is committing to certify all US DVD players in 2007, and Samsung released plans for a DIVX-certified mobile phone. DIVX management stated they are in dialog with OEMs spanning handsets, Game consoles, STBs and DVRs. Firm continues to believe that 1Q07 royalties are trending ahead of expectations owing to faster than expected U.S. adoption of DIVX on DVDs.
Reiterates Overweight Rating.
Notablecalls: Not actionable but good to know category. As I noted yesterday, JPM covers stuff with passion.
DivX HD was demonstrated using 1080p playback from both a PC and a DIVX-certified I-O Data DVD. Expect Tier OEMs to target emerging markets with this product, currently certified by just three OEMs. DIVX demonstrated Ultra and Connected applications, though no licensees were announced.
At CES DIVX announced that its Codec is certified for use on an HP MediaSmart TV, expanding reach to a new product category. JPM learned that Toshiba is committing to certify all US DVD players in 2007, and Samsung released plans for a DIVX-certified mobile phone. DIVX management stated they are in dialog with OEMs spanning handsets, Game consoles, STBs and DVRs. Firm continues to believe that 1Q07 royalties are trending ahead of expectations owing to faster than expected U.S. adoption of DIVX on DVDs.
Reiterates Overweight Rating.
Notablecalls: Not actionable but good to know category. As I noted yesterday, JPM covers stuff with passion.
Calls of Note Part 3
- Merrill Lynch notes that in the course of doing vendor checks at the consumer electronics show and elsewhere, it appears that Texas Instrument's (NYSE:TXN) much-discussed Locosto is having some early difficulties. The firm has no doubt that Locosto will be successful for TXN over the long run, and the part is shipping in volume, but they do think that expectations for Locosto-driven share gain in 2007 may be too high. Recall that Locosto integrates the radio transceiver and the baseband onto a single die, manufactured on a CMOS process. Working with an integrated CMOS radio is new for handset OEMs and carriers, and firm's checks indicate that transmit noise in the receive band has been an early challenge. Working around that requires the use of additional off-chip filters and matching circuits, which adds additional components and cost to the handset. Motorola's new entry-level MotoFone is the most visible Locosto win, and appears to have been hit by the component count issues they've turned up.
It would be foolish to argue that TI will not overcome some of Locosto's early problems, and they'd expect to see subsequent OEM implementations of the part look better. On the other hand, though, early expectations that Locosto was going to be a game-changer for TI at the low end of the market may not be met.
Notablecalls: Locosto has been expected to be in 50% of low-end handset by H2:2007. The comments from ML are not actionable but do warrant some attention.
It would be foolish to argue that TI will not overcome some of Locosto's early problems, and they'd expect to see subsequent OEM implementations of the part look better. On the other hand, though, early expectations that Locosto was going to be a game-changer for TI at the low end of the market may not be met.
Notablecalls: Locosto has been expected to be in 50% of low-end handset by H2:2007. The comments from ML are not actionable but do warrant some attention.
Calls of Note Part 2
- Goldman Sachs is raising their 4Q2006 revenue, EBITDA and EPS forecasts on Google (NASDAQ:GOOG) to $2,187mn (+17% qoq), $1,345mn (61.5% margin), and $2.90 based on channel checks that indicate spending growth of 15%-20% qoq. Firm advises investors to buy Google with 20%-plus upside to their $595 year-end price target. 4Q2006 results should reinforce growth outlook and valuation, while 2007 should be a year that illuminates new growth opportunities in branded advertising, video, non-web advertising, and software services (Google apps at your domain). These new areas would be incremental to their $17.47 2008E EPS and could render firm's $595 price target conservative.
Several factors could unfold over the coming months to unlock the value they see in Google shares: 1) strong 4Q2006 results due to a solid holiday season that likely benefited from continued advertiser demand, seasonal strength in traffic, and recent product launches (including Checkout); 2) benefits from monetizing new partnerships to be launched in 2007, including eBay, MySpace, and Intuit; 3) growth from new ad formats such as display, video (via YouTube, MySpace, and proprietary sites), pay per call, and pay per acquisition; 4) new non-web based advertising deals in radio, print, and television; and 5) the introduction of premium Google apps at your domain.
Reits Buy.
Notablecalls: Note that the ests are upped merely to in-line with consensus. The chart looks strong so I suspect there will be at least a slight push upward in the pre mkt. After all, it's GSCO.
Several factors could unfold over the coming months to unlock the value they see in Google shares: 1) strong 4Q2006 results due to a solid holiday season that likely benefited from continued advertiser demand, seasonal strength in traffic, and recent product launches (including Checkout); 2) benefits from monetizing new partnerships to be launched in 2007, including eBay, MySpace, and Intuit; 3) growth from new ad formats such as display, video (via YouTube, MySpace, and proprietary sites), pay per call, and pay per acquisition; 4) new non-web based advertising deals in radio, print, and television; and 5) the introduction of premium Google apps at your domain.
Reits Buy.
Notablecalls: Note that the ests are upped merely to in-line with consensus. The chart looks strong so I suspect there will be at least a slight push upward in the pre mkt. After all, it's GSCO.
Calls of Note Part 1
- JP Morgan expects MEMC (NYSE:WFR) to sequentially raise gross margins throughout the year in conjunction with its non-vertically integrated semi wafer competitors, Shin-Etsu and SUMCO, which are likely to pass on their increased polysilicon costs to their customers.
Firm expects polysilicon costs may increase by as much as 20% YoY due to the continuing supply/demand imbalance, which is unlikely to be resolved until 2008. They also believe that semi wafer start growth will outpace semi device unit growth in 2007 due to an incremental increase in average device die sizes, which are increasing as large die NAND Flash and multi-core microprocessors grow as a percentage of overall semi devices.
MEMC is also expected to start supplying wafers to the solar industry in 2007 in addition to the polysilicon it currently sells on the spot market to solar wafer makers.
JPM is raising their C2007 PF revenue/EPS estimates to $1.89bn/$2.90 from $1.88bn/$2.74 to reflect improved 2007 outlook on wafer pricing.
Reiterates OW Rating, and Top Consumables Pick Status. WFR shares are trading at 15.1x PF C2007 EPS estimate of $2.90 versus overall group average of 15.8x.
Notablecalls: Love the comments from JPM! While UBS nailed the latest upward move (see archives), JPM may add some fuel to the fire.
Firm expects polysilicon costs may increase by as much as 20% YoY due to the continuing supply/demand imbalance, which is unlikely to be resolved until 2008. They also believe that semi wafer start growth will outpace semi device unit growth in 2007 due to an incremental increase in average device die sizes, which are increasing as large die NAND Flash and multi-core microprocessors grow as a percentage of overall semi devices.
MEMC is also expected to start supplying wafers to the solar industry in 2007 in addition to the polysilicon it currently sells on the spot market to solar wafer makers.
JPM is raising their C2007 PF revenue/EPS estimates to $1.89bn/$2.90 from $1.88bn/$2.74 to reflect improved 2007 outlook on wafer pricing.
Reiterates OW Rating, and Top Consumables Pick Status. WFR shares are trading at 15.1x PF C2007 EPS estimate of $2.90 versus overall group average of 15.8x.
Notablecalls: Love the comments from JPM! While UBS nailed the latest upward move (see archives), JPM may add some fuel to the fire.
Color on news: Genentech (NYSE:DNA)
Several firms are commenting on Genentech (NASDAQ:DNA) after the co reported strong Q4 results and issued optimistic 2007 guidance. Lucentis and Avastin were the starts of the day:
- Morgan Stanley notes top and bottom line performance exceeded both their and Street expectations as Avastin is reaccelerating with the lung cancer approval and Lucentis again came in above expectations (which they expect to moderate through 2008 with longer dose intervals). Firm expects Street numbers will need to increase for the next several years for Lucentis, Avastin, margins and EPS (MS is raising all of these but Avastin, which they raised earlier this week).
A strong top-line quarter should help this stock continue "to climb the wall of worry"; the next major concern will likely be the upcoming AVAIL trial exploring lower doses of Avastin in lung cancer (they continue to expect high dose to win, and the impact if low wins is likely limited since
the patient cap effectively already took breast cancer economics there). Avastin remains the major source of investor dispersion, and they expect lung cancer will drive Avastin growth in 2007 with breast cancer driving 2008 (and adjuvant colorectal cancer potentially driving 2009 and beyond). Firm continues to like this stock as it offers the potential for top and bottom line upside. Reits Overweight. Tgt $96.
- Piper Jaffray notes DNA reported solid 4Q earnings with a recovery in all major cancer franchises and continued growth in Lucentis for its second quarter on the market. Specifically, after a sequential downturn in Rituxan sales in 3Q, Rituxan sales rebounded to $560m vs. PJ estimate of $540m. The company estimates that $125-150m of 2006 sales came from the rheumatoid arthritis indication. Avastin sales were also ahead of firm's expectations at $490m compared with our estimate of $483m. End-user sales were even higher at $499m after adjusting for a $9m reserve taken for the price cap program. Growth was driven by the recent launch of Avastin in lung cancer, and they expect that penetration could continue to increase in this setting in 1H07. As expected, Lucentis sales were $217m, well above PJ estimate of $160m but in line with IMS data. Herceptin sales of $322m showed a rebound in growth after a sequential down quarter in 3Q but were less than estimate of $339m.
Based on 4Q results and 2007 guidance, they are revising their non-GAAP EPS estimates from $2.65 to $2.87 in 2007 and from $3.02 to $3.37 in 2008. Firm's new estimates also include a more aggressive outlook on Lucentis sales and royalties. They are raising their price target from $113 (40x 2008 EPS, discounted at 15% for one-half period) to $118 (35x 2008 EPS). Maintains Outperform.
- FBR is probably the most pessimistic of the bunch saying guidance for 2007 of 25-30% EPS growth is incrementally better than where the Street was already, but the upside seems to be coming mostly from increased sales to Roche to re-fill its Herceptin/Avastin inventory. Though the firm raised their price target slightly to $90 (from $86), and Street numbers will likely rise, the stock seems destined to tread water in a 1H07 that lacks major catalysts. Avastin adjuvant data could be a driver later in 2007.
FBR notes they had thought Genentech would be reporting data from an Avastin adjuvant trial in breast (ECOG2104) in 1Q07, but this has been pushed to December (the San Antonio meeting); they had thought that interim data from an Avastin adjuvant trial in colon cancer could come in 1H, but according to the call, that's a 2H event also. Firm sees little else pipeline-wise that could surprise to the upside.
Notablecalls: Needless to say, I like FBR's comments by far the most. But on the other hand Morgan Stanley also makes sense with their "wall of worry" comments. The stock has done nothing for 9 months and now they guided 2007 up in a pretty convincing way. Not sure I'd want to step in front of this one.
- Morgan Stanley notes top and bottom line performance exceeded both their and Street expectations as Avastin is reaccelerating with the lung cancer approval and Lucentis again came in above expectations (which they expect to moderate through 2008 with longer dose intervals). Firm expects Street numbers will need to increase for the next several years for Lucentis, Avastin, margins and EPS (MS is raising all of these but Avastin, which they raised earlier this week).
A strong top-line quarter should help this stock continue "to climb the wall of worry"; the next major concern will likely be the upcoming AVAIL trial exploring lower doses of Avastin in lung cancer (they continue to expect high dose to win, and the impact if low wins is likely limited since
the patient cap effectively already took breast cancer economics there). Avastin remains the major source of investor dispersion, and they expect lung cancer will drive Avastin growth in 2007 with breast cancer driving 2008 (and adjuvant colorectal cancer potentially driving 2009 and beyond). Firm continues to like this stock as it offers the potential for top and bottom line upside. Reits Overweight. Tgt $96.
- Piper Jaffray notes DNA reported solid 4Q earnings with a recovery in all major cancer franchises and continued growth in Lucentis for its second quarter on the market. Specifically, after a sequential downturn in Rituxan sales in 3Q, Rituxan sales rebounded to $560m vs. PJ estimate of $540m. The company estimates that $125-150m of 2006 sales came from the rheumatoid arthritis indication. Avastin sales were also ahead of firm's expectations at $490m compared with our estimate of $483m. End-user sales were even higher at $499m after adjusting for a $9m reserve taken for the price cap program. Growth was driven by the recent launch of Avastin in lung cancer, and they expect that penetration could continue to increase in this setting in 1H07. As expected, Lucentis sales were $217m, well above PJ estimate of $160m but in line with IMS data. Herceptin sales of $322m showed a rebound in growth after a sequential down quarter in 3Q but were less than estimate of $339m.
Based on 4Q results and 2007 guidance, they are revising their non-GAAP EPS estimates from $2.65 to $2.87 in 2007 and from $3.02 to $3.37 in 2008. Firm's new estimates also include a more aggressive outlook on Lucentis sales and royalties. They are raising their price target from $113 (40x 2008 EPS, discounted at 15% for one-half period) to $118 (35x 2008 EPS). Maintains Outperform.
- FBR is probably the most pessimistic of the bunch saying guidance for 2007 of 25-30% EPS growth is incrementally better than where the Street was already, but the upside seems to be coming mostly from increased sales to Roche to re-fill its Herceptin/Avastin inventory. Though the firm raised their price target slightly to $90 (from $86), and Street numbers will likely rise, the stock seems destined to tread water in a 1H07 that lacks major catalysts. Avastin adjuvant data could be a driver later in 2007.
FBR notes they had thought Genentech would be reporting data from an Avastin adjuvant trial in breast (ECOG2104) in 1Q07, but this has been pushed to December (the San Antonio meeting); they had thought that interim data from an Avastin adjuvant trial in colon cancer could come in 1H, but according to the call, that's a 2H event also. Firm sees little else pipeline-wise that could surprise to the upside.
Notablecalls: Needless to say, I like FBR's comments by far the most. But on the other hand Morgan Stanley also makes sense with their "wall of worry" comments. The stock has done nothing for 9 months and now they guided 2007 up in a pretty convincing way. Not sure I'd want to step in front of this one.
Paperstand
According to the Barron’s Online, despite a slide in oil prices to levels not seen in nearly 2 years, the demand and govt incentives for sun- and ethanol-fueled power remain strong. Two stocks that could benefit are solar giant SunPower (SPWR) and ethanol producer VeraSun (VSE). With oil prices down, SunPower shares have fallen 8.5% from their 52w high, while VeraSun shares are down roughly 42% since going public last June. But each firm boasts bright long-term earnings growth prospects and solid mgmt in an era of increased state and federal support for energy alternatives. "For the first time in ‘06 you saw a number of solar and wind turbine co’s pushing into profitability," says Philip Deutch, who runs a private-equity fund whose investments include renewable energy technology. "Some ethanol co’s were profitable, too."
“Inside Scoop” section reports that Columbia Wanger Asset Mgmt, a wholly owned subsidiary of Bank of America, took advantage of the Abercrombie & Fitch (ANF) stock pullback to emerge as the teen retailer's top shareholder. Columbia reported it increased its holdings in Abercrombie to 5.94m shares (a 6.73% stake) from about 5.23m shares (a 5.3% stake) at the end of the 3Q.
Wednesday, January 10, 2007
Calls of Note Part 7
Morgan Keegan is out with another negative datapoint about OmniVision (NASDAQ:OVTI), saying the co has a pair of private upcoming competitors for its Wavefront coding technology.
Firm has learned of two private companies that have software-based auto focus product offerings similar to OmniVision's wavefront coding technology. Wavefront coding uses software to focus digital images instead of mechanical components to adjust the camera lens. This is a very attractive application for camera phones, which do not do well with moving parts. OmniVision was originally going to introduce a product including the technology this month, but the company has not been satisfied with its performance and no new timetable has been given.
The two private companies firm has identified who have similar technologies are DxO Labs and Dblur Technologies. DxO Labs is a French company that was spun off from Vision IQ in late 2002 and has roughly 60 employees. It has embedded imaging products similar to wavefront coding, as well as two lines of PC-based software for image enhancement and image quality measurement. Management has confirmed that its embedded imaging products are generating revenues. DxO Labs is backed by a variety of European and Japanese venture capitalist firms.
The other private company is Dblur Technologies, which is based in Israel and was established in 2000. It has a Software Lens product that provides the same auto focus functionality as wavefront coding and the company offers a variety of related services. Backers include Sequoia Capital, TemproPark Fund and Landa Ventures.
Notablecalls: OmniVision hasn't been too successful with its Wavefront technology so far. Upcoming competition isn't very surprising, but will not help the sentiment, either.
Firm has learned of two private companies that have software-based auto focus product offerings similar to OmniVision's wavefront coding technology. Wavefront coding uses software to focus digital images instead of mechanical components to adjust the camera lens. This is a very attractive application for camera phones, which do not do well with moving parts. OmniVision was originally going to introduce a product including the technology this month, but the company has not been satisfied with its performance and no new timetable has been given.
The two private companies firm has identified who have similar technologies are DxO Labs and Dblur Technologies. DxO Labs is a French company that was spun off from Vision IQ in late 2002 and has roughly 60 employees. It has embedded imaging products similar to wavefront coding, as well as two lines of PC-based software for image enhancement and image quality measurement. Management has confirmed that its embedded imaging products are generating revenues. DxO Labs is backed by a variety of European and Japanese venture capitalist firms.
The other private company is Dblur Technologies, which is based in Israel and was established in 2000. It has a Software Lens product that provides the same auto focus functionality as wavefront coding and the company offers a variety of related services. Backers include Sequoia Capital, TemproPark Fund and Landa Ventures.
Notablecalls: OmniVision hasn't been too successful with its Wavefront technology so far. Upcoming competition isn't very surprising, but will not help the sentiment, either.
Calls of Note Part 6
- Goldman Sachs has some interesting comments on Synchronoss Technologies (NASDAQ:SNCR) after the co announced it will provide order management support for Cingular/Apple's launch of the iPhone in June 2007, further expanding its long-standing relationship with Cingular (~65% of 2006 revenue). Importantly, the new relationship provides for support beyond just the e-commerce channel and into retail locations.
The company also updated its 4Q outlook, coming in about $1mn below its previous revenue range, but $0.01 above its original EPS range (now $0.11-$0.12 ex-ESOs vs. our $0.11 ex-ESOs). The 2007 outlook was reaffirmed, and the firm remains in-line with the top-end of the range at $100mn in revenue and $0.45 in EPS ($0.48 ex-ESOs). The revision to 4Q2006 guidance highlights the sensitivity in both revenue and margins to new transaction volumes coming onto the platform, but the ability to beat EPS expectations despite modest revenue slippage demonstrates very strong execution and automation rates.
Following a 9% rally yesterday in the shares off of the initial announcement of the Apple/Cingular partnership, the firm believes the stock has already captured much of the upside from this announcement.
Notablecalls: SNCR looks to have a highly promotional management. That's never a good sign. Considering VoIP accounts for large part of their revs/growth I'm somewhat cautious. Especially as it looks like they get paid per transaction. I'm skeptical regarding VoIP growth in general. Not even going to mention the miss on the revenue side and the fact the stock was up almost 10% yesterday. Expect to see a fade.
The company also updated its 4Q outlook, coming in about $1mn below its previous revenue range, but $0.01 above its original EPS range (now $0.11-$0.12 ex-ESOs vs. our $0.11 ex-ESOs). The 2007 outlook was reaffirmed, and the firm remains in-line with the top-end of the range at $100mn in revenue and $0.45 in EPS ($0.48 ex-ESOs). The revision to 4Q2006 guidance highlights the sensitivity in both revenue and margins to new transaction volumes coming onto the platform, but the ability to beat EPS expectations despite modest revenue slippage demonstrates very strong execution and automation rates.
Following a 9% rally yesterday in the shares off of the initial announcement of the Apple/Cingular partnership, the firm believes the stock has already captured much of the upside from this announcement.
Notablecalls: SNCR looks to have a highly promotional management. That's never a good sign. Considering VoIP accounts for large part of their revs/growth I'm somewhat cautious. Especially as it looks like they get paid per transaction. I'm skeptical regarding VoIP growth in general. Not even going to mention the miss on the revenue side and the fact the stock was up almost 10% yesterday. Expect to see a fade.
Calls of Note Part 5
- UBS comments on the impact of Apple's iPone on the global handset industry saying that in terms of overall design, the device looks great and is better than they expected. The iPhone is very innovative, particularly with respect to the man-machine interface, including the unique touchscreen technology.
In firm's view the biggest mystery surrounding the device is the lack of advanced mobile connectivity; ie no integrated 3G technology (WCDMA or HSDPA). It appears that Apple favours WiFi connectivity, which calls into question the "over-the-air" download capability of the device on traditional mobile networks. This could limit acceptance by mobile opertors in Europe.
UBS is forecasting 850k and 7.4m iPhone units for FY06-07E and FY-7-08E, respectively. This represents less than 1% of global units in each period. Given the high price of the iPhone (US$499 for 4GB and US$599 for 8GB), the impact in value terms is likely to be higher; they estimate iPhones will represent at c2-3% of industry revenue in 2008.
UBS expects no financial impact to Nokia in 2007. While potentially greater impact in 2008E, they believe there is nominal financial risk, as Nokia's sweetspot in terms of profit is in the mid-tier segment of the market. Potentially greater risk to Sony Ericsson which is focused on higher tier segment of the market.
Notablecalls: Not actionable but good to know cateogry. I would not be surprised to see NOK stock creep up as we get closer to Jan 25 (earnings). They either warn now or they won't warn at all.
In firm's view the biggest mystery surrounding the device is the lack of advanced mobile connectivity; ie no integrated 3G technology (WCDMA or HSDPA). It appears that Apple favours WiFi connectivity, which calls into question the "over-the-air" download capability of the device on traditional mobile networks. This could limit acceptance by mobile opertors in Europe.
UBS is forecasting 850k and 7.4m iPhone units for FY06-07E and FY-7-08E, respectively. This represents less than 1% of global units in each period. Given the high price of the iPhone (US$499 for 4GB and US$599 for 8GB), the impact in value terms is likely to be higher; they estimate iPhones will represent at c2-3% of industry revenue in 2008.
UBS expects no financial impact to Nokia in 2007. While potentially greater impact in 2008E, they believe there is nominal financial risk, as Nokia's sweetspot in terms of profit is in the mid-tier segment of the market. Potentially greater risk to Sony Ericsson which is focused on higher tier segment of the market.
Notablecalls: Not actionable but good to know cateogry. I would not be surprised to see NOK stock creep up as we get closer to Jan 25 (earnings). They either warn now or they won't warn at all.
Calls of Note Part 4
- First Albany notes MicroStrategy (NASDAQ:MSTR) CEO Michael Saylor held slightly over 3 million class A and class B shares as of March 31, 2006, the date of the company's most recent proxy statement. However, during 4Q:06, they estimate Mr. Saylor sold nearly 360,000 of his shares, representing 11.9% of his total MSTR holdings. Comparatively, he sold approximately 61,000 shares in all of 2005 and just over 20,000 shares in all of 2004.
The insider selling probably represents prudent diversification of assets, as MSTR shares have appreciated 2,260% in the past 4.5 years. However, it is difficult to entirely dismiss the insider sales (given the escalation in size), particularly if the company has switched from a state of accretive corporate buybacks, to substantial insider selling.
Regarding Q4, feedback indicates good traction, particularly in the retail vertical, and a willingness to let some deals slip to avoid pricing concessions at year-end. Firm is somewhat more cautious on 2007 citing valuation, margin compression and "below-industry" license revenue growth.
Reits Buy and $135 tgt for now.
Notablecalls: Mixed emotions regarding MSTR here. The level of insider selling isn't THAT bad and business looks to be humming nicely. I don't think MSTR is a short off of these comments. The chart looks to be agreeing with bulls as well.
The insider selling probably represents prudent diversification of assets, as MSTR shares have appreciated 2,260% in the past 4.5 years. However, it is difficult to entirely dismiss the insider sales (given the escalation in size), particularly if the company has switched from a state of accretive corporate buybacks, to substantial insider selling.
Regarding Q4, feedback indicates good traction, particularly in the retail vertical, and a willingness to let some deals slip to avoid pricing concessions at year-end. Firm is somewhat more cautious on 2007 citing valuation, margin compression and "below-industry" license revenue growth.
Reits Buy and $135 tgt for now.
Notablecalls: Mixed emotions regarding MSTR here. The level of insider selling isn't THAT bad and business looks to be humming nicely. I don't think MSTR is a short off of these comments. The chart looks to be agreeing with bulls as well.
Calls of Note Part 3
- Merrill Lynch is cutting their 2007 and 2008 EPS ests for Chipotle Mexican Grill (NYSE:CMG). Estimates go down by $0.10 (5.9%) and $0.14 (6.6%) to $1.59 and $1.95 respectively. Firm's revision reflects a lower outlook for margin expansion, given CMG's regional exposure to state minimum wage increases, and a 1% point downward revision of SSS growth forecast.
Given 99% company ownership and 54% of the units located in states with double digit minimum wage increases, they expect the margins to be vulnerable to labor cost pressures. Firm estimates EPS impact for labor inflation to be $0.06 - $0.08 (3-5%).
CMG is up against tough compares of 19.7% and 14.5% SSS growth in 1Q06 and 2Q06. ML expects SSS growth to decelerate from 15% YTD 2006 SSS growth to mid-single digits for 2007.
Sees limited upside to CMG's current multiple of 14.3x 2007E EBITDA given decelerating SSS growth and forecast for reduced margin expansion. Maintains Neutral.
Notablecalls: Not actionable but good to know category.
Given 99% company ownership and 54% of the units located in states with double digit minimum wage increases, they expect the margins to be vulnerable to labor cost pressures. Firm estimates EPS impact for labor inflation to be $0.06 - $0.08 (3-5%).
CMG is up against tough compares of 19.7% and 14.5% SSS growth in 1Q06 and 2Q06. ML expects SSS growth to decelerate from 15% YTD 2006 SSS growth to mid-single digits for 2007.
Sees limited upside to CMG's current multiple of 14.3x 2007E EBITDA given decelerating SSS growth and forecast for reduced margin expansion. Maintains Neutral.
Notablecalls: Not actionable but good to know category.
Calls of Note Part 2
- JP Morgan is adding OW-rated Mattson (NASDAQ:MTSN) to the JPMorgan U.S. Equity Focus List today with a Feb. '08 stock price target of $14, 14x their C2008 GAAP EPS estimate of $1.00.
In October 2006, Mattson pushed its upside gross margin target of "mid 40%" to C2Q07 from C4Q06. In general, the inability to deliver gross margin expansion has hindered MTSN shares over the past year while the rest of the fundamental story, including strong products, share gain, and operating expense discipline was solid.
Firm expects Mattson to deliver C4Q06 orders at the low end of guidance, but to also deliver sequential order growth in C1Q07 and C2Q07. Importantly, they believe C4Q06 orders carried higher gross margins than revenues as the company is successfully converting existing customers to its new higher margin products and is receiving orders from new customers at higher margins.
Solid penetrations of memory customers such as Samsung and Toshiba in 2006 should proliferate further in 2007, and strong exposure to Taiwanese memory makers should also drive order strength in C1H07. In C2H07, Mattson should benefit from its traditionally strong exposure to Foundry customers to keep the order strength continuing. Bottom line, this is a "show me" gross margin story and they expect it to unfold.
Notablecalls: Expect to see buy intetrest in MTSN today. The thing with JPM's Focus List is that they keep pressing their bets until they work.
In October 2006, Mattson pushed its upside gross margin target of "mid 40%" to C2Q07 from C4Q06. In general, the inability to deliver gross margin expansion has hindered MTSN shares over the past year while the rest of the fundamental story, including strong products, share gain, and operating expense discipline was solid.
Firm expects Mattson to deliver C4Q06 orders at the low end of guidance, but to also deliver sequential order growth in C1Q07 and C2Q07. Importantly, they believe C4Q06 orders carried higher gross margins than revenues as the company is successfully converting existing customers to its new higher margin products and is receiving orders from new customers at higher margins.
Solid penetrations of memory customers such as Samsung and Toshiba in 2006 should proliferate further in 2007, and strong exposure to Taiwanese memory makers should also drive order strength in C1H07. In C2H07, Mattson should benefit from its traditionally strong exposure to Foundry customers to keep the order strength continuing. Bottom line, this is a "show me" gross margin story and they expect it to unfold.
Notablecalls: Expect to see buy intetrest in MTSN today. The thing with JPM's Focus List is that they keep pressing their bets until they work.
Calls of Note Part 1
- Merrill Lynch is defending Research in Motion (NASDAQ:RIMM) after Apple launched its iPhone which combines cellphone and multimedia features in a touch screen only device causing RIMM's stock to go down hard in yesterday's trading.
In firm's view there are two distinct segments in the smartphone market: multimedia and messaging. The iPhone has a strong multimedia suite that will appeal to consumers, but they believe RIM's Blackberry smartphones with hardware keyboards have superior messaging (secure email) features targeted at prosumers and enterprises. They are also uncertain of the iPhone's ability to synch with Window-based contacts/outlook that could limit its enterprise adoption.
iPhone's pricing of $499-599 is much higher than smartphones from RIM, Palm, Nokia, Motorola and Samsung that are available for $0-300 (after rebates). First-time smartphone buyers may be attracted to iPhone's "wow" factor, but up-front price could divert them to cheaper alternatives which come with built-in an expandable memory slot (2Gb for ~$70), a full keyboard, and higher-speed (3G) networks. Regardless, the iPhone expands the general interests in smartphones, and could help support healthy pricing in the smartphone market (i.e. the Starbucks effect.)
The sell off in RIM stock is overdone, in firm's view, and mostly reflects high expectations with the Pearl platform. However they think Pearl's momentum can continue and will further accelerate with the imminent launch of Indigo and Crimson (full keyboard siblings of the Pearl). Firm believes iPhone's multimedia feature set and consumer focus could have a bigger overlap with Palm (PALM).
Reits Buy and $165 tgt on RIMM.
Notablecalls: ML's comments sound reasonable. I'd love to buy RIMM around 3-4 points lower, though. iPhone's no RIMM-killer.
In firm's view there are two distinct segments in the smartphone market: multimedia and messaging. The iPhone has a strong multimedia suite that will appeal to consumers, but they believe RIM's Blackberry smartphones with hardware keyboards have superior messaging (secure email) features targeted at prosumers and enterprises. They are also uncertain of the iPhone's ability to synch with Window-based contacts/outlook that could limit its enterprise adoption.
iPhone's pricing of $499-599 is much higher than smartphones from RIM, Palm, Nokia, Motorola and Samsung that are available for $0-300 (after rebates). First-time smartphone buyers may be attracted to iPhone's "wow" factor, but up-front price could divert them to cheaper alternatives which come with built-in an expandable memory slot (2Gb for ~$70), a full keyboard, and higher-speed (3G) networks. Regardless, the iPhone expands the general interests in smartphones, and could help support healthy pricing in the smartphone market (i.e. the Starbucks effect.)
The sell off in RIM stock is overdone, in firm's view, and mostly reflects high expectations with the Pearl platform. However they think Pearl's momentum can continue and will further accelerate with the imminent launch of Indigo and Crimson (full keyboard siblings of the Pearl). Firm believes iPhone's multimedia feature set and consumer focus could have a bigger overlap with Palm (PALM).
Reits Buy and $165 tgt on RIMM.
Notablecalls: ML's comments sound reasonable. I'd love to buy RIMM around 3-4 points lower, though. iPhone's no RIMM-killer.
Color on news: Apple (NASDAQ:AAPL)
While most firms are going gaga over Apple (NASDAQ:AAPL) I'm on the lookout for notes that are more down to earth. Citigroup has one:
- Citi reiterates their Hold rating for AAPL shares with a new $98 target (up from $85) after Apple's introduction of the highly anticipated iPhone at Macworld on Tuesday. While the design and ease-of-use of the product are revolutionary, the $499-599 initial price point and a single US carrier are likely to limit the available market to a subset of the already-modest smartphone portion of the handset market.
While investors may be tempted to believe that iPhone will ship earlier than June, the firm notes that the process of obtaining FCC approval for a new wireless device can take more than six months in some cases. In addition, firm's checks have consistently suggested a 2CQ volume-production ramp, consistent with a June launch. A six-month delay to availability is problematic because some iPod nano buyers---and even some hard drive-based iPod buyers---are likely to defer iPod purchases during 1HCY07, limiting earnings upside for the next six months.
Also, iPhone will initially sell for $499-599 with a two year service contract from Cingular (including a likely $150-200 subsidy). This leaves the low-end iPhone $200-350 more expensive than any other smartphone in the U.S., with the exception of Palm's Treo 700 Series where the differential is a more modest $0-100.
With its high price, the iPhone only represents compelling value to customers who plan to use all of its features, especially its 4-8GB of embedded flash for music, photo, and video storage. However, they suspect that a significant portion of music listeners will continue to prefer a discrete iPod for music because the smaller form factor is more convenient for running or the gym. These users are not likely to pay for 4-8GB of embedded flash memory that they do not intend to use. The use of removable flash storage would have allowed Apple to hit lower price points while still providing higher storage capacities for those customers that want them.
Citi's most likely-case scenario calls for iPhone shipments of 3-4M in CY07 and 8-9M in CY08. This scenario assumes that 10-15% of Cingular customers whose contracts expire in 2H07 buy iPhones and that the phone's compelling feature set attracts another 1.5M subscriptions to Cingular from other carriers in 2H07. For 2008, this scenario assumes that Apple takes 8-9% share of the U.S., European and Asia Pacific ex-Japan smartphone markets, or that Apple achieves 60-70% of estimated BlackBerry shipments in 2008.
They are adjusting estimates based on a scenario analysis of the likely impact of iPhone on future earnings. However, analysis suggests that the current share price is discounting a significant portion of the likely contribution. They therefore remain on the sidelines and would await a pullback into the low $80s before reconsidering the Hold rating.
Notablecalls: I don't think these comments are actionable in any way but I do believe that following yesterday's huge move upside will be somewhat capped. Note that Morgan Stanley is out on AAPL saying iPhone is clearly a game changer in the phone market and could drive even more earnings power than we currently model. Assuming 5% market share (vs. firm's current 1% estimate) and 10% operating margins, the iPhone could add $0.90+ of incremental annual EPS versus their current forecast. An expanding product portfolio, growing distribution engine and market share opportunities all keep them Overweight AAPL with a price target of $110. As far as I know, MSCO's ests are Street high following their brilliant Dec 28 iPhone call.
- Citi reiterates their Hold rating for AAPL shares with a new $98 target (up from $85) after Apple's introduction of the highly anticipated iPhone at Macworld on Tuesday. While the design and ease-of-use of the product are revolutionary, the $499-599 initial price point and a single US carrier are likely to limit the available market to a subset of the already-modest smartphone portion of the handset market.
While investors may be tempted to believe that iPhone will ship earlier than June, the firm notes that the process of obtaining FCC approval for a new wireless device can take more than six months in some cases. In addition, firm's checks have consistently suggested a 2CQ volume-production ramp, consistent with a June launch. A six-month delay to availability is problematic because some iPod nano buyers---and even some hard drive-based iPod buyers---are likely to defer iPod purchases during 1HCY07, limiting earnings upside for the next six months.
Also, iPhone will initially sell for $499-599 with a two year service contract from Cingular (including a likely $150-200 subsidy). This leaves the low-end iPhone $200-350 more expensive than any other smartphone in the U.S., with the exception of Palm's Treo 700 Series where the differential is a more modest $0-100.
With its high price, the iPhone only represents compelling value to customers who plan to use all of its features, especially its 4-8GB of embedded flash for music, photo, and video storage. However, they suspect that a significant portion of music listeners will continue to prefer a discrete iPod for music because the smaller form factor is more convenient for running or the gym. These users are not likely to pay for 4-8GB of embedded flash memory that they do not intend to use. The use of removable flash storage would have allowed Apple to hit lower price points while still providing higher storage capacities for those customers that want them.
Citi's most likely-case scenario calls for iPhone shipments of 3-4M in CY07 and 8-9M in CY08. This scenario assumes that 10-15% of Cingular customers whose contracts expire in 2H07 buy iPhones and that the phone's compelling feature set attracts another 1.5M subscriptions to Cingular from other carriers in 2H07. For 2008, this scenario assumes that Apple takes 8-9% share of the U.S., European and Asia Pacific ex-Japan smartphone markets, or that Apple achieves 60-70% of estimated BlackBerry shipments in 2008.
They are adjusting estimates based on a scenario analysis of the likely impact of iPhone on future earnings. However, analysis suggests that the current share price is discounting a significant portion of the likely contribution. They therefore remain on the sidelines and would await a pullback into the low $80s before reconsidering the Hold rating.
Notablecalls: I don't think these comments are actionable in any way but I do believe that following yesterday's huge move upside will be somewhat capped. Note that Morgan Stanley is out on AAPL saying iPhone is clearly a game changer in the phone market and could drive even more earnings power than we currently model. Assuming 5% market share (vs. firm's current 1% estimate) and 10% operating margins, the iPhone could add $0.90+ of incremental annual EPS versus their current forecast. An expanding product portfolio, growing distribution engine and market share opportunities all keep them Overweight AAPL with a price target of $110. As far as I know, MSCO's ests are Street high following their brilliant Dec 28 iPhone call.
Paperstand
The WSJ’s „Heard on the Street” column thinks that Wall St. may have been too hard on ConAgra Foods (CAG). In March, CEO Gary Rodkin presented a turnaround plan to investors, vowing to trim his co's disparate portfolio and focus marketing dollars on promising brands such as Healthy Choice frozen meals and soups, and Hebrew National hot dogs. Wall St. was unimpressed. The co's stock price hit a 52w low and most analysts said the moves didn't go far enough. But since then, ConAgra has posted a string of better-than-expected earnings. And its stock has been on a tear, rebounding to more than $27, a nearly 50% gain. Still, 8 of the 12 analysts following ConAgra's stock have maintained ratings of Hold or Sell, unwilling to shake their long-held view of ConAgra as a portfolio of poorly managed businesses and brands that have historically failed to dominate supermarket categories. "The co has a weak portfolio of brands, compared to the rest of the group," says Pablo Zuanic of JP Morgan. Mr. Zuanic says that despite the co's recent progress, "they need to make key investments in marketing and innovation to generate some growth with the type of brands they have. It will be a very slow build for ConAgra." Fans of the stock, however, see potential in the co's long-neglected brands. Investors clearly like what they see, driving the co's P/E ratio to about 30, well above peers.
“Inside Track” section reports that Penn Treaty (PTA) hasn't filed its financial statements for more than a year b/c of accounting issues, but recent stock purchases by 10 insiders indicate that the provider of long-term-care insurance is on the mend, an analyst says. Ben Silverman, of InsiderScore.com, said the cluster of insider stock purchases shows the co expects to put the accounting problems behind them. "I think it's a sign of confidence from insiders that they think they'll clear up the accounting issues, and that the business will be healthy going forward," Mr. Silverman said.
Barron’s Online discusses Time Warner Cable (TWACAV.PK), whose problems could turn out to be virtues. In the past, such co’s have traditionally lacked investor enthusiasm. But the cable operator has an opportunity to dramatically increase subs in Adelphia's former mkts, as well as to expand the use of higher-margin products. Given that opportunity, it's odd that the stock trades at a discount to Comcast on a per-subs basis, when both co’s have the same 50% penetration rate of their mkt. But oddly enough, Time Warner Cable has a mkt cap equal to just $3,900 per subs. Comcast trades well above that, between $4,200 and $4,500 per subs. Shares of Time Warner Cable will probably move from the OTC mkt to the NYSE next Mon, says Jessica Reif Cohen of Merrill Lynch. When they do, it will be a cable giant whose stock is in short supply. Time Warner Cable may be worth as much as $51 a share, wrote Katherine Styponias, of Prudential, in a recent report.
“Inside Scoop” section reports that hedge fund Coghill Capital Mgmt still sees a world of value in EarthLink (ELNK), even though shares of the co have fallen 40% over the past year. Coghill disclosed that it now holds a 5.1% stake, or 6.25m shares of EarthLink, up from the 469K shares, or less than 1% stake, it owned at the end of the 3Q.
“Inside Track” section reports that Penn Treaty (PTA) hasn't filed its financial statements for more than a year b/c of accounting issues, but recent stock purchases by 10 insiders indicate that the provider of long-term-care insurance is on the mend, an analyst says. Ben Silverman, of InsiderScore.com, said the cluster of insider stock purchases shows the co expects to put the accounting problems behind them. "I think it's a sign of confidence from insiders that they think they'll clear up the accounting issues, and that the business will be healthy going forward," Mr. Silverman said.
Barron’s Online discusses Time Warner Cable (TWACAV.PK), whose problems could turn out to be virtues. In the past, such co’s have traditionally lacked investor enthusiasm. But the cable operator has an opportunity to dramatically increase subs in Adelphia's former mkts, as well as to expand the use of higher-margin products. Given that opportunity, it's odd that the stock trades at a discount to Comcast on a per-subs basis, when both co’s have the same 50% penetration rate of their mkt. But oddly enough, Time Warner Cable has a mkt cap equal to just $3,900 per subs. Comcast trades well above that, between $4,200 and $4,500 per subs. Shares of Time Warner Cable will probably move from the OTC mkt to the NYSE next Mon, says Jessica Reif Cohen of Merrill Lynch. When they do, it will be a cable giant whose stock is in short supply. Time Warner Cable may be worth as much as $51 a share, wrote Katherine Styponias, of Prudential, in a recent report.
“Inside Scoop” section reports that hedge fund Coghill Capital Mgmt still sees a world of value in EarthLink (ELNK), even though shares of the co have fallen 40% over the past year. Coghill disclosed that it now holds a 5.1% stake, or 6.25m shares of EarthLink, up from the 469K shares, or less than 1% stake, it owned at the end of the 3Q.
Tuesday, January 09, 2007
Calls of Note Part 6
- Goldman Sachs is very cautious on mortgage insurers saying they believe slowing home prices, continued seasoning of the books, and subprime challenges add risks to the downside. Firm expects to see further challenges in the fourth quarter related to the aforementioned factors but believes the impact will be more noticeable as they move into 2007. Home prices are still in the early stages of a slowdown and blocks in peak loss years still have built-up appreciation. Firm believes the risk reward is particularly unfavorable for MGIC Investment Corp. (NYSE:MTG) and The PMI Group (NYSE:PMI), which are up 7.9% and 7.0%, respectively, over the past month on the heels of Congress passing mortgage insurance tax deductibility into law. They believe MGIC will experience similar challenges to the third quarter, which could lead MGIC to pull back. PMI has not experienced noticeable loss challenges as of yet, but early signs of difficulties could cause the stock to be weak, with the stock now trading at a premium to the group.
Notablecalls: MTG may be a short here as the co is scheduled to report on Jan 11. A smart trading contact pinged me couple of days ago on MTG pointing out negative comments from Lennar (LEN) regarding Florida and California markets. These two markets account for around 20% of MTG's income.
Notablecalls: MTG may be a short here as the co is scheduled to report on Jan 11. A smart trading contact pinged me couple of days ago on MTG pointing out negative comments from Lennar (LEN) regarding Florida and California markets. These two markets account for around 20% of MTG's income.
Calls of Note Part 5
- Goldman Sachs is a bit cautious on Ctrip.com International (NASDAQ:CTRP) saying they believe initiatives by the government to adopt e-ticketing across all platforms by the end of 2007 have prompted optimism that large travel consolidators with capability to install e-ticketing system will aggressively take market share from fragmented local travel agents. Firm estimates Ctrip's and eLong's 2006 air-ticketing combined air-ticketing market share at 10%. Firm share the view that secular trend favors large travel consolidators, but believes substantial e-ticketing market share gain by Ctrip is unlikely in 2007.
Firm believes Ctrip's share price may come under pressure given: 1) Ctrip is trading at 38X 2007 non-GAAP diluted EPADS (vs 18X for US peers) and 30X 2008 with 2007-10 tax earnings CAGR of 32% and 2007E ROE of 36%. 2) They believe 2007 revenue guidance may disappoint when the company guides upon 4Q2006 results announcement in February. GS expects Ctrip to guide 2007 revenue growth of 30%-35% versus their 2007/2006 forecast of 47% and 2006 guidance of 40%. They lower their 2007 earnings by 5% assuming margin pressure from higher revenue contribution from lower margin air-ticketing, but increase 2008 earnings by 3% assuming more aggressive air-ticketing market share growth.
Maintains Neutral. Tgt $47 (up from $44).
Notablecalls: I would not be surprised to see some weakness in CTRP following the call. The stock is trading at a hefty multiple. I would definitely not want to overstay my welcome as CTRP is a notorious bouncer.
Firm believes Ctrip's share price may come under pressure given: 1) Ctrip is trading at 38X 2007 non-GAAP diluted EPADS (vs 18X for US peers) and 30X 2008 with 2007-10 tax earnings CAGR of 32% and 2007E ROE of 36%. 2) They believe 2007 revenue guidance may disappoint when the company guides upon 4Q2006 results announcement in February. GS expects Ctrip to guide 2007 revenue growth of 30%-35% versus their 2007/2006 forecast of 47% and 2006 guidance of 40%. They lower their 2007 earnings by 5% assuming margin pressure from higher revenue contribution from lower margin air-ticketing, but increase 2008 earnings by 3% assuming more aggressive air-ticketing market share growth.
Maintains Neutral. Tgt $47 (up from $44).
Notablecalls: I would not be surprised to see some weakness in CTRP following the call. The stock is trading at a hefty multiple. I would definitely not want to overstay my welcome as CTRP is a notorious bouncer.
Calls of Note Part 4
- Wachovia is defending Intuitive Surgical (NASDAQ:ISRG) noting the shares are down year-to-date in 2007 after falling 18% during 2006 despite estimated 2006 EPS growth of 24%. The stock is presently trading at 39.5x firm's NTM EPS estimate. On a stock-based comp adjusted basis, this is an all time low NTM P/E and well below ISRG's two year average NTM P/E of 57x.
Firm believe that investors may be concerned about ISRG's 2007 guidance; initial 2006 guidance came in well below consensus estimates and the stock declined sharply as a result. However, heading into 2006 both ISRG's share price (at close to $140 vs. $91 currently) and consensus revenue estimates (at 37% vs. 33% currently) were considerably higher.
While the Cal Tech patent case does represent an overhang, the firm believes that any additional legal fees should have only a modest impact on annual EPS of $0.01-0.07 based on precedent patent litigation expenses at ISRG's peers (~$1-5MM/year). Since the suit has been brought by Cal Tech rather than a competitor the firm believes the worst case scenario for ISRG would involve royalty payments with little risk of an injunction. Resolution of the patent suit might take up to several years.
Valuation Range: $124 to $136. Maintains Outperform.
Notablecalls: Must say the chart looks tempting. Would not chase but rather be on the lookout for an intraday bounce. Could be worth several points.
Firm believe that investors may be concerned about ISRG's 2007 guidance; initial 2006 guidance came in well below consensus estimates and the stock declined sharply as a result. However, heading into 2006 both ISRG's share price (at close to $140 vs. $91 currently) and consensus revenue estimates (at 37% vs. 33% currently) were considerably higher.
While the Cal Tech patent case does represent an overhang, the firm believes that any additional legal fees should have only a modest impact on annual EPS of $0.01-0.07 based on precedent patent litigation expenses at ISRG's peers (~$1-5MM/year). Since the suit has been brought by Cal Tech rather than a competitor the firm believes the worst case scenario for ISRG would involve royalty payments with little risk of an injunction. Resolution of the patent suit might take up to several years.
Valuation Range: $124 to $136. Maintains Outperform.
Notablecalls: Must say the chart looks tempting. Would not chase but rather be on the lookout for an intraday bounce. Could be worth several points.
Calls of Note Part 3
UBS is positive on MEMC (NYSE:WFR) saying their discussions with industry contacts found that MEMC has decided to sell more of its polysilicon to solar customers on the spot market in 1Q07 instead of using its polysilicon to make ingots for the manufacture of 300mm semiconductor wafers in its factory in Taiwan. Firm's channel checks continue to find solid demand for polysilicon with spot prices still well above $200/kg.
According to an article in the Boston Herald, Schott's (#7 solar module company) solar module factory in Massachusetts has been unable to procure granular polysilicon and Schott is trying to sell this factory. They believe MEMC was Schott's granular polysilicon supplier and MEMC is instead likely selling its polysilicon to higher paying customers in the spot market.
Firm's recent channel checks in Taiwan have also found strong 300mm semiconductor wafer demand from Powerchip, Promos, and Inotera where they estimate MEMC's share is around 20%. In addition, industry research has found that TSMC and UMC are likely to slowly order more wafers again in late
1Q07.
Maintains Buy and $60 tgt.
Notablecalls: Nothing huge but I do like the comments regarding WFR selling its polysilicon to higher paying customers in the spot market. Comments from Taiwan are also encouraging. Like the chart. This one may be moving higher in the n-t.
According to an article in the Boston Herald, Schott's (#7 solar module company) solar module factory in Massachusetts has been unable to procure granular polysilicon and Schott is trying to sell this factory. They believe MEMC was Schott's granular polysilicon supplier and MEMC is instead likely selling its polysilicon to higher paying customers in the spot market.
Firm's recent channel checks in Taiwan have also found strong 300mm semiconductor wafer demand from Powerchip, Promos, and Inotera where they estimate MEMC's share is around 20%. In addition, industry research has found that TSMC and UMC are likely to slowly order more wafers again in late
1Q07.
Maintains Buy and $60 tgt.
Notablecalls: Nothing huge but I do like the comments regarding WFR selling its polysilicon to higher paying customers in the spot market. Comments from Taiwan are also encouraging. Like the chart. This one may be moving higher in the n-t.
Calls of Note Part 2
- ThinkEquity's Eric Ross comments on NVIDIA (NASDAQ:NVDA) saying they have heard that NVDA has slowed wafer starts at its foundry suppliers. This could just be a re-adjustment of inventories, but the firm has found that this is typically a reduction of overall product inventories. Graphics card makers are worried business is slow. They have seen a seasonal drop-off in demand, but privately they worry demand could be weaker.
Firm still expects NVDA to take share from ATI through March 2007. NVDA has been migrating customers up from its 6200 and 6300 processors to its 7200 and 7300 processors. ATI is unlikely to have a competitive product until it starts ramping its R600 in March (delayed from February). After that, NVDA's G84 and G88 should arrive at Computex (in June) and may take share back.
It does not seem likely to the firm that AMD/ATI will gain significant share back from NVDA in laptops, despite two new Inspirons AMD/ATI is likely to launch in summer 2007 according to sources at the Consumer Electronics Show (CES). They also believe Vista will be a minor driver until 2H07.
They still believe Playstation3 will lag versus the run-away success of Wii. This could constrain NVDA's gaming revenues. The biggest risk? If Intel's newest GPU (expected in September) is a decent GPU, both NVDA and ATI could lose share. It is planned to support DirectX10, and could offer real gaming capabilities.
Reits Sell and $28 tgt.
Notablecalls: ThinkEquity has yet again demonstrated their superior intelligence gathering skills. I don't think the note will do any damage to the stock in the s-t, though. Eric's comments regarding INTC's GPU warrant a closer look.
Firm still expects NVDA to take share from ATI through March 2007. NVDA has been migrating customers up from its 6200 and 6300 processors to its 7200 and 7300 processors. ATI is unlikely to have a competitive product until it starts ramping its R600 in March (delayed from February). After that, NVDA's G84 and G88 should arrive at Computex (in June) and may take share back.
It does not seem likely to the firm that AMD/ATI will gain significant share back from NVDA in laptops, despite two new Inspirons AMD/ATI is likely to launch in summer 2007 according to sources at the Consumer Electronics Show (CES). They also believe Vista will be a minor driver until 2H07.
They still believe Playstation3 will lag versus the run-away success of Wii. This could constrain NVDA's gaming revenues. The biggest risk? If Intel's newest GPU (expected in September) is a decent GPU, both NVDA and ATI could lose share. It is planned to support DirectX10, and could offer real gaming capabilities.
Reits Sell and $28 tgt.
Notablecalls: ThinkEquity has yet again demonstrated their superior intelligence gathering skills. I don't think the note will do any damage to the stock in the s-t, though. Eric's comments regarding INTC's GPU warrant a closer look.
Calls of f Note Part 1
- Piper Jaffray comments on Apple (NASDAQ:AAPL) saying that as has been the case for the last several years of CES, they did not see any devices that we believe could prove to be significantly competitive with the iPod. Firm continues to believe Microsoft's Zune is the best iPod alternative and they continue to be surprised at the lack of a compelling offering from consumer electronics giants like Sony.
There were no announcements related to Zune at CES, but Microsoft (Bach) did say that Microsoft's and Apple's paths will cross more in the future in this category. Regarding new/updated Zune players, the company (Bach) indicated that an annual release cycle makes sense, with annual pre-holiday releases. Also, Bach stated that the company wants to get a music player right before looking into multi-function devices (i.e., cell phone/MP3 player combo).
Sony did not release any compelling MP3 players at CES. Creative did not release any new devices at CES (at least through the first day of the show). Employees of Creative that the firmspoke to at the booth were themselves surprised that the company has not had a faster product release schedule, citing that Creative's last release in the HDD MP3 player space was over a year ago (Zen Vision M)
SanDisk released three MP3 players at CES, but none that the firm feels will significantly steal iPod market share.
Notablecalls: Not actionable but good to know category. WSJ has a piece saying AAPL may announce the iPhone as early as today as the co will kick off its annual Macworld event today and CEO Steve Jobs is scheduled to deliver a keynote speech at 9 a.m. PT (12 p.m. ET). Note that ThinkEquity is out with their comments on AAPL saying they do not expect apple to announce a phone at Macworld. If they are wrong, and we do see a phone, they expect to see it delivered in the form of a Mobile Virtual Network Operator (MVNO). After all, with its world-class brand, strong distribution capability and industry-leading content aggregation platform (iTunes), Apple tops firm's list of yet-to-be-announced MVNOs.
There were no announcements related to Zune at CES, but Microsoft (Bach) did say that Microsoft's and Apple's paths will cross more in the future in this category. Regarding new/updated Zune players, the company (Bach) indicated that an annual release cycle makes sense, with annual pre-holiday releases. Also, Bach stated that the company wants to get a music player right before looking into multi-function devices (i.e., cell phone/MP3 player combo).
Sony did not release any compelling MP3 players at CES. Creative did not release any new devices at CES (at least through the first day of the show). Employees of Creative that the firmspoke to at the booth were themselves surprised that the company has not had a faster product release schedule, citing that Creative's last release in the HDD MP3 player space was over a year ago (Zen Vision M)
SanDisk released three MP3 players at CES, but none that the firm feels will significantly steal iPod market share.
Notablecalls: Not actionable but good to know category. WSJ has a piece saying AAPL may announce the iPhone as early as today as the co will kick off its annual Macworld event today and CEO Steve Jobs is scheduled to deliver a keynote speech at 9 a.m. PT (12 p.m. ET). Note that ThinkEquity is out with their comments on AAPL saying they do not expect apple to announce a phone at Macworld. If they are wrong, and we do see a phone, they expect to see it delivered in the form of a Mobile Virtual Network Operator (MVNO). After all, with its world-class brand, strong distribution capability and industry-leading content aggregation platform (iTunes), Apple tops firm's list of yet-to-be-announced MVNOs.
Color on warning: Sprint Nextel (NYSE:S)
Several firms are commenting on Sprint Nextel (NYSE:S) after the co pre-released weak Q4 numbers and also guided down for 2007:
- Merrill Lynch notes that the mid-point of Sprint's EBITDA outlook for 2007 is about 12% below their previous estimate and 15% below consensus. Therefore, we now have the second major estimates downgrade since last August. Firm's estimates for 2007 had already been below consensus. They are lowering their consolidated EBITDA estimates for Sprint from $12.8bn to $11.8bn for 2007 and from $13.2bn to $12.5bn for 2008. EPS estimates fall from $1.25 to $1.00 in 2007 and from $1.32 to $1.17 in 2008.
Sprint shares traded in the after market at approximately $18 per share. On ML's revised estimates, Sprint trades at an EBITDA multiple of approximately 6.1x for 2007E and 5.3x for 2008E, which is in line with AT&T and Verizon trading at 5.6x and 4.9x EBITDA for 2008E, respectively. A positive for the stock is that after the second major estimates downgrade, Sprint presumably believes that it can exceed its updated outlook for 2007. However, valuation at levels in the after market is still only in line with the telecom comparisons even for 2008.
Firm's estimate revisions better reflect their view that Sprint does not have a quick fix for its problems, and that it must reinvest in the business, particularly on the Nextel side. Maintains Neutral
- Stifel notes the company reported losing 306,000 post-pay subscribers in 4Q06, versus their estimate of a loss of 200,000 post-pay subs, but did show some strength in wholesale subscriber adds, adding 876,000 in the quarter. Management continued to indicate much of the weakness stemming from the iDEN (legacy- Nextel) subscriber base, with churn increasing dramatically in the former- Nextel Partners properties.
The company clearly continues to struggle with integrating the legacy-iDEN networks, with the lower-margin revenue mix generated by the struggling iDEN business continuing to hamper consolidated results. Given the weak 4Q06 results and soft 2007 guidance, this may legitimately be the last surprisingly bad news from the company for a while, the firm still does not view the stock as compellingly inexpensive at current levels.
They believe the company has given itself a fairly low bar to cross in 2007 from a financial standpoint, although they would certainly like to see some stability from the company's post-pay retail operations before they become more confident in our financial estimates. From a momentum perspective, they wouldn't be surprised to see a near-term bottom occur sometime this week as
the market digests the new guidance and investors begin to perceive this as the last spate of bad news in the near term. Maintains Hold.
- Deutsche Bank is downgrading their rating to Sell from Hold saying that with the significant cut in estimated 2007 EBITDA, and with higher expected capital expenditures, it would seem that Sprint's operating performance will continue to deteriorate throughout 2007 before we are to witness signs of improvement. They now look for negative net subscriber additions in all four quarters for 2007.
With the pre-announcement, the company reported that it would significantly increase its 2007 forecasted capital expenditures to $8.5 billion, well above DB's estimate of $7.7 billion for 2007. The increase in capital expenditure forecast combined with the reduction in EBITDA estimates reduces firm's 2007 estimated free cash flow by more than 60% to $1.429 billion.
Following two quarterly disappointments in the past three that resulted in a meaningful reduction in forward estimates, with the continued deterioration of the company's basic post paid subscriber base, and with dwindling free cash flow to support the company's $6.0 billion share repurchase program (of which the company has repurchase $1.6 billion to date), they believe the long speculated concept of a leveraged buy-out will quickly fade from reality.
Although they believe that Sprint Nextel suffers from severe operational issues and is exposed to a fair degree of technology risk related not only to its network integration but also its iDEN re-banding effort, they also believe that it is a company capable of stabilizing core operations, as it has before. If this is the act of a management and board intent upon providing investors with a worst case perspective of a 2007 outlook, there is potential upside to firm's $11.3 billion EBITDA estimate.
DB finds it difficult to see why investors would pay much more than 5.0x for a company that has yet to produce even the slightest signs of stabilizing operations at a time when so many were assuming operational improvements to be a foregone conclusion. Accordingly, in taking the mid-point of the new guidance range and the mid point of the 5.0x - 5.5x EV/EBITDA multiple range in which the stock traded at before and after the significant share repurchase program was announced, the firm arrives at their revised $14 target price.
- JP Morgan thinks the patient will walk again as the company stated on the call that net adds should reverse to positive by 2Q07, a bold statement considering that suggests a turnaround within the next 90 days. Second, 2007 guidance was "the shoe drop" investors waited for, and we could see long-only buying today. Third, comments made today support firm's view that 3Q06 marked the operational bottom (variance of management targets vs results).
To achieve positive net adds in 2Q, gross adds need to be +/- 4% from the 4Q06 run-rate of 2.6mm and churn needs to improve 14-31bp (to 2.03%-2.11%) from 4Q. The improvements in churn seem achievable given positive seasonals as well as the waning iDEN churn impact (which is the source of negative growth).
Reducing 07 estimates, but S still trades at a 29% discount to Alltel. JPM would be buyers, especially on weakness.
Notablecalls: Must say I have very little feel for this one. Comments from both sides of the fence make sense. On one hand we've seen these potential LBO candidates bounce back hard following negative pre-releases but on the other hand comments from DB make me want to put out a small short above the $18 level. Sitting at my old trading desk I would most likely put out some light bids around $17.50 to catch the other side of some panicky downgrades. Nothing big, though. Would risk half a point or so.
- Merrill Lynch notes that the mid-point of Sprint's EBITDA outlook for 2007 is about 12% below their previous estimate and 15% below consensus. Therefore, we now have the second major estimates downgrade since last August. Firm's estimates for 2007 had already been below consensus. They are lowering their consolidated EBITDA estimates for Sprint from $12.8bn to $11.8bn for 2007 and from $13.2bn to $12.5bn for 2008. EPS estimates fall from $1.25 to $1.00 in 2007 and from $1.32 to $1.17 in 2008.
Sprint shares traded in the after market at approximately $18 per share. On ML's revised estimates, Sprint trades at an EBITDA multiple of approximately 6.1x for 2007E and 5.3x for 2008E, which is in line with AT&T and Verizon trading at 5.6x and 4.9x EBITDA for 2008E, respectively. A positive for the stock is that after the second major estimates downgrade, Sprint presumably believes that it can exceed its updated outlook for 2007. However, valuation at levels in the after market is still only in line with the telecom comparisons even for 2008.
Firm's estimate revisions better reflect their view that Sprint does not have a quick fix for its problems, and that it must reinvest in the business, particularly on the Nextel side. Maintains Neutral
- Stifel notes the company reported losing 306,000 post-pay subscribers in 4Q06, versus their estimate of a loss of 200,000 post-pay subs, but did show some strength in wholesale subscriber adds, adding 876,000 in the quarter. Management continued to indicate much of the weakness stemming from the iDEN (legacy- Nextel) subscriber base, with churn increasing dramatically in the former- Nextel Partners properties.
The company clearly continues to struggle with integrating the legacy-iDEN networks, with the lower-margin revenue mix generated by the struggling iDEN business continuing to hamper consolidated results. Given the weak 4Q06 results and soft 2007 guidance, this may legitimately be the last surprisingly bad news from the company for a while, the firm still does not view the stock as compellingly inexpensive at current levels.
They believe the company has given itself a fairly low bar to cross in 2007 from a financial standpoint, although they would certainly like to see some stability from the company's post-pay retail operations before they become more confident in our financial estimates. From a momentum perspective, they wouldn't be surprised to see a near-term bottom occur sometime this week as
the market digests the new guidance and investors begin to perceive this as the last spate of bad news in the near term. Maintains Hold.
- Deutsche Bank is downgrading their rating to Sell from Hold saying that with the significant cut in estimated 2007 EBITDA, and with higher expected capital expenditures, it would seem that Sprint's operating performance will continue to deteriorate throughout 2007 before we are to witness signs of improvement. They now look for negative net subscriber additions in all four quarters for 2007.
With the pre-announcement, the company reported that it would significantly increase its 2007 forecasted capital expenditures to $8.5 billion, well above DB's estimate of $7.7 billion for 2007. The increase in capital expenditure forecast combined with the reduction in EBITDA estimates reduces firm's 2007 estimated free cash flow by more than 60% to $1.429 billion.
Following two quarterly disappointments in the past three that resulted in a meaningful reduction in forward estimates, with the continued deterioration of the company's basic post paid subscriber base, and with dwindling free cash flow to support the company's $6.0 billion share repurchase program (of which the company has repurchase $1.6 billion to date), they believe the long speculated concept of a leveraged buy-out will quickly fade from reality.
Although they believe that Sprint Nextel suffers from severe operational issues and is exposed to a fair degree of technology risk related not only to its network integration but also its iDEN re-banding effort, they also believe that it is a company capable of stabilizing core operations, as it has before. If this is the act of a management and board intent upon providing investors with a worst case perspective of a 2007 outlook, there is potential upside to firm's $11.3 billion EBITDA estimate.
DB finds it difficult to see why investors would pay much more than 5.0x for a company that has yet to produce even the slightest signs of stabilizing operations at a time when so many were assuming operational improvements to be a foregone conclusion. Accordingly, in taking the mid-point of the new guidance range and the mid point of the 5.0x - 5.5x EV/EBITDA multiple range in which the stock traded at before and after the significant share repurchase program was announced, the firm arrives at their revised $14 target price.
- JP Morgan thinks the patient will walk again as the company stated on the call that net adds should reverse to positive by 2Q07, a bold statement considering that suggests a turnaround within the next 90 days. Second, 2007 guidance was "the shoe drop" investors waited for, and we could see long-only buying today. Third, comments made today support firm's view that 3Q06 marked the operational bottom (variance of management targets vs results).
To achieve positive net adds in 2Q, gross adds need to be +/- 4% from the 4Q06 run-rate of 2.6mm and churn needs to improve 14-31bp (to 2.03%-2.11%) from 4Q. The improvements in churn seem achievable given positive seasonals as well as the waning iDEN churn impact (which is the source of negative growth).
Reducing 07 estimates, but S still trades at a 29% discount to Alltel. JPM would be buyers, especially on weakness.
Notablecalls: Must say I have very little feel for this one. Comments from both sides of the fence make sense. On one hand we've seen these potential LBO candidates bounce back hard following negative pre-releases but on the other hand comments from DB make me want to put out a small short above the $18 level. Sitting at my old trading desk I would most likely put out some light bids around $17.50 to catch the other side of some panicky downgrades. Nothing big, though. Would risk half a point or so.
Paperstand
According to the WSJ, General Electric (GE) has asked for bids on its plastics business, valued at as much as $10bn, in an auction that appears to reflect new concerns from the DoJ about the lack of competition among possible private-equity buyers. GE has told a handful of private-equity firms contacted about the possible plastics-unit sale that they face restrictions on their ability to team up with other private-equity bidders. Although the exact nature of the restrictions isn't known, sources indicated that the contacted firms aren't allowed to call other buyout funds about teaming up.
The WSJ reports that Apple (AAPL) may announce as early as Tuesday a device that combines the iPod with a cellphone. Cingular Wireless will provide cellphone service to go with the phone. Such a product would give Apple access to the huge wireless business, with nearly a billion handsets shipped every year. That dwarfs the nearly 70m iPods Apple has sold over the past 5 years. Apple could also further outline its plans to enter the interactive television business with a product code-named iTV.
"Heard on the Street" column out saying that skies may darken for insurers. The risk business is getting a little riskier for insurance co shareholders. In coming weeks, property-casualty insurers are expected to report record profits for '06, but their ample cash and the rising competition it fosters are pushing down premiums. That often is a sign profits for the most aggressive players could take a hit down the road and is a red flag for investors who are exposed to this risk if they own some property-casualty specialists. "When you've gone through a bad period, you do behave in a more conservative fashion," says William Berkley, CEO of W.R. Berkley (BER). Smaller players or bigger co's could seek to build mkt share by cutting prices. For a broad view of pricing trends, investors might pay close attention to commentary from big insurers and reinsurers like AIG (AIG), Allianz (AZ) and Swiss Re.
Barron's Online "Inside Scoop" section, during the 4Q, 3 execs and directors at Vornado (VNO) sold 1.56m shares for $184.2m. According a report by Lehman Brothers analyst David Harris, sales at Vornado raised insider sales across the REIT industry to $327m during the 4Q, the highest level since the firm started following these transactions 4 years ago.
The WSJ reports that Apple (AAPL) may announce as early as Tuesday a device that combines the iPod with a cellphone. Cingular Wireless will provide cellphone service to go with the phone. Such a product would give Apple access to the huge wireless business, with nearly a billion handsets shipped every year. That dwarfs the nearly 70m iPods Apple has sold over the past 5 years. Apple could also further outline its plans to enter the interactive television business with a product code-named iTV.
"Heard on the Street" column out saying that skies may darken for insurers. The risk business is getting a little riskier for insurance co shareholders. In coming weeks, property-casualty insurers are expected to report record profits for '06, but their ample cash and the rising competition it fosters are pushing down premiums. That often is a sign profits for the most aggressive players could take a hit down the road and is a red flag for investors who are exposed to this risk if they own some property-casualty specialists. "When you've gone through a bad period, you do behave in a more conservative fashion," says William Berkley, CEO of W.R. Berkley (BER). Smaller players or bigger co's could seek to build mkt share by cutting prices. For a broad view of pricing trends, investors might pay close attention to commentary from big insurers and reinsurers like AIG (AIG), Allianz (AZ) and Swiss Re.
Barron's Online "Inside Scoop" section, during the 4Q, 3 execs and directors at Vornado (VNO) sold 1.56m shares for $184.2m. According a report by Lehman Brothers analyst David Harris, sales at Vornado raised insider sales across the REIT industry to $327m during the 4Q, the highest level since the firm started following these transactions 4 years ago.
Monday, January 08, 2007
Calls of Note Part 7
Thomas Weisel out on Crocs (NASDAQ:CROX), saying that channel checks point to a December-weighted quarter behind a surge of holiday sales.
Firm's checks at key retailers, in international markets and with Crocs direct channels suggest Crocs (both classics and new styles) were an extremely popular gift item this holiday season. All channels reported very strong sales in December and sparse inventory positions at key retail channel partners suggest demand exceeded supply. As expected, firm believes December strength offset both natural and buyer-imposed seasonality in October and early November.
During 4Q, firm found new distribution of Crocs in Macy's (former Marshall Fields doors), Tilly's and Belk department stores. Also incremental to business in 4Q was distribution of Collegiate and Disney licensed products. Firm believes this net new revenue was offset by retailers whose merchandising strategy de-emphasized Crocs during the 4Q period. Their checks found a seasonally smaller representation of Crocs in certain sporting goods retailers and in many European stores.
Despite a big December, firm saw evidence of unmet consumer demand: In mid-December, their checks found Crocs online business to be out of stock on certain items and some indications that it was swamped by order volume. In late December, they noticed inventories at many retailers were very lean, particularly in the week following Christmas. As such, firm believes upside in the quarter may have been capped by: 1) a surge in online orders that exceeded fulfillment capacity; 2) retailers that failed to order enough product to meet holiday demand; and 3) late-December blizzards in Colorado that caused missed shipping days, limiting Crocs' ability to chase business.
Firm remains comfortable with their above consensus ests for both Q107 and 2007.
Notablecalls: Not actionable but good to know category. Although I must say the stock looks like it wants to move higher. TWP usually covers stuff in greater detail than other firms.
Firm's checks at key retailers, in international markets and with Crocs direct channels suggest Crocs (both classics and new styles) were an extremely popular gift item this holiday season. All channels reported very strong sales in December and sparse inventory positions at key retail channel partners suggest demand exceeded supply. As expected, firm believes December strength offset both natural and buyer-imposed seasonality in October and early November.
During 4Q, firm found new distribution of Crocs in Macy's (former Marshall Fields doors), Tilly's and Belk department stores. Also incremental to business in 4Q was distribution of Collegiate and Disney licensed products. Firm believes this net new revenue was offset by retailers whose merchandising strategy de-emphasized Crocs during the 4Q period. Their checks found a seasonally smaller representation of Crocs in certain sporting goods retailers and in many European stores.
Despite a big December, firm saw evidence of unmet consumer demand: In mid-December, their checks found Crocs online business to be out of stock on certain items and some indications that it was swamped by order volume. In late December, they noticed inventories at many retailers were very lean, particularly in the week following Christmas. As such, firm believes upside in the quarter may have been capped by: 1) a surge in online orders that exceeded fulfillment capacity; 2) retailers that failed to order enough product to meet holiday demand; and 3) late-December blizzards in Colorado that caused missed shipping days, limiting Crocs' ability to chase business.
Firm remains comfortable with their above consensus ests for both Q107 and 2007.
Notablecalls: Not actionable but good to know category. Although I must say the stock looks like it wants to move higher. TWP usually covers stuff in greater detail than other firms.
Calls of Note Part 6
- Piper Jaffray is surprisingly negative on eBay (NASDAQ:EBAY) saying their proprietary count of worldwide eBay listings suggests total Q4 listings of between 578M-590M. These results are between 8%-11% below their 639M listing estimate for the quarter and could potentially be sequentially down in the seasonally strongest quarter (listings were up sequentially 19% in 4Q05 and 17% in 4Q04). While listings were expected to be weaker than in previous years due to the changes to Store listings, a second sequential quarterly decline, and listings below expectations, estimates are likely to come down.
Assuming firm's range of a listing miss of 8%-11% is accurate, eBay would need a corresponding increase in revenue per listing of 8%-11% in order to match their $1,052M estimate for Q4 auction-based revenue. Firm notes that their estimate for total revenue is near the mid-point of company guidance and $21M below the Street consensus. Without any improvement in revenue per listings, the shortfall could be near $100M.
Current Street consensus estimates for 2008 assume growth accelerating from 21% in 2007 to 22% in 2008, despite the marked slowdown in growth eBay is seeing across its core properties. Considering that slower listings growth indicate that 4Q06 overall growth will likely only be between 21%-23% (down from 42% in 4Q05), PJ believes that expectations of over 20% growth for '07 or '08 are unrealistic. Firm's newly released 2008 revenue estimate of $8,142M is $568M below current Street expectations and assumes 16% growth in 2008.
Maintains UP and $25 tgt.
Notablecalls: Wow! If this is true and the listings have indeed declined THAT much, EBAY shareholders are in for some turbulence. The stock has been standing on shaky ground and I think will continue to trade down in the n-t. I would not be surprised to see a warning from EBAY. Nice piece of research from Piper Jaffray! Actionable call alert!
Assuming firm's range of a listing miss of 8%-11% is accurate, eBay would need a corresponding increase in revenue per listing of 8%-11% in order to match their $1,052M estimate for Q4 auction-based revenue. Firm notes that their estimate for total revenue is near the mid-point of company guidance and $21M below the Street consensus. Without any improvement in revenue per listings, the shortfall could be near $100M.
Current Street consensus estimates for 2008 assume growth accelerating from 21% in 2007 to 22% in 2008, despite the marked slowdown in growth eBay is seeing across its core properties. Considering that slower listings growth indicate that 4Q06 overall growth will likely only be between 21%-23% (down from 42% in 4Q05), PJ believes that expectations of over 20% growth for '07 or '08 are unrealistic. Firm's newly released 2008 revenue estimate of $8,142M is $568M below current Street expectations and assumes 16% growth in 2008.
Maintains UP and $25 tgt.
Notablecalls: Wow! If this is true and the listings have indeed declined THAT much, EBAY shareholders are in for some turbulence. The stock has been standing on shaky ground and I think will continue to trade down in the n-t. I would not be surprised to see a warning from EBAY. Nice piece of research from Piper Jaffray! Actionable call alert!
Calls of Note Part 5
Goldman Sachs is adding Royal Caribbean (NYSE:RCL) shares to their Conviction Buy List and estimates 22% upside potential over the next 12 months. Firm thinks the overhang of higher energy expenses seems to be abating while on the margin they feel more confident that pricing trends may be slightly more robust than the current pessimistic expectations. GSCO thinks last year's underperformance (-8% vs gaming/lodging +36%) sets Royal up to outperform in 2007 as expectations are low and P/E multiple (13.6X) is towards the bottom of the historic range (10X-20X).
Catalyst Two positive near-term catalysts. 1) Firm thinks RCL will report solid 4Q06 in
February and a positive 2007 outlook. 2), We are entering wave season (next 8-10 weeks) when 28%-30% of RCL's cruises are booked, investors visit the companies, and cruise stocks are more likely to outperform.
Notablecalls: I would have called this one actionable 2 pts lower. Now it goes to the good to know category. There's a fair chance it will get faded. These stocks have seen some short covering over the past couple of weeks.
Catalyst Two positive near-term catalysts. 1) Firm thinks RCL will report solid 4Q06 in
February and a positive 2007 outlook. 2), We are entering wave season (next 8-10 weeks) when 28%-30% of RCL's cruises are booked, investors visit the companies, and cruise stocks are more likely to outperform.
Notablecalls: I would have called this one actionable 2 pts lower. Now it goes to the good to know category. There's a fair chance it will get faded. These stocks have seen some short covering over the past couple of weeks.
Calls of Note Part 4
UBS has upgraded Tech from E/W to O/W. Firm considers upper teens EPS growth within reach for Tech in 2007, over twice the likely EPS growth for the S&P. Accelerating and superior EPS growth at Tech during a broad profit growth deceleration should help Tech regain some of its historic PE premium.
According to the firm, it's much more than Vista. It's been 7 years since the last major corporate IT capex up-cycle and the increasing need to support more traffic at faster speeds and to store such data have reached a crucial point. Like software, they expect significant enterprise spending growth on communications and storage. The opportunity presented to Tech by the global economy is likely underestimated.
Tech's premium is 30%+, but more like 25-30% adjusted for cash held and more like 10-15% ex. Energy & Financials. If secular 10%+ EPS growth is credible a lows 20s PE is reasonable.
Computers & Peripherals, Comm. Equip. and IT Services join Software at O/W from E/W. Raise Semiconductors to E/W from U/W. They downgrade Healthcare to U/W from E/W owing to waxing political risks and waning cyclical risks. Pharma to U/W from E/W and HC Equip & Services to E/W from O/W. UBS adds EMC to their SSS list and removes GR.
Notablecalls: Not actionable but good to know category. I think the call is major enough to be highlighted as UBS has a pretty good track record over the past yr or so. They went UW Tech early 2006 and upgraded to EW in Sept 06. Needless to say I disagree with their OW rating on Tech here.
According to the firm, it's much more than Vista. It's been 7 years since the last major corporate IT capex up-cycle and the increasing need to support more traffic at faster speeds and to store such data have reached a crucial point. Like software, they expect significant enterprise spending growth on communications and storage. The opportunity presented to Tech by the global economy is likely underestimated.
Tech's premium is 30%+, but more like 25-30% adjusted for cash held and more like 10-15% ex. Energy & Financials. If secular 10%+ EPS growth is credible a lows 20s PE is reasonable.
Computers & Peripherals, Comm. Equip. and IT Services join Software at O/W from E/W. Raise Semiconductors to E/W from U/W. They downgrade Healthcare to U/W from E/W owing to waxing political risks and waning cyclical risks. Pharma to U/W from E/W and HC Equip & Services to E/W from O/W. UBS adds EMC to their SSS list and removes GR.
Notablecalls: Not actionable but good to know category. I think the call is major enough to be highlighted as UBS has a pretty good track record over the past yr or so. They went UW Tech early 2006 and upgraded to EW in Sept 06. Needless to say I disagree with their OW rating on Tech here.
Calls of Note Part 3
Citigroup notes their field checks reveal that AMD (NYSE:AMD) sold socket 939 parts into US distribution in December at a deep discount. Production of 939 parts should fall from ~20% in 4Q06 to almost nothing in 1Q07, putting this transitional issue in the past.
December was weak for PC components as the supply chain worked through previously built Pre-Vista systems. The Taiwanese PC supply chain had steep M/M declines in December for chip sets, communications and motherboards.
1Q07 motherboard shipments are expected to be better than normal, declining only 3% vs. a normal decline of 7%. Solid motherboard builds could provide a catalyst for PCs with upside to CIR's forecast dependent on the uptake of Vista.
Citi is lowering their 4Q06E revenue and EPS to $1,781M/$0.23 from $1,820M/ $0.27 and 2007E to $8,382M/$1.16 from $8,464M/$1.24, but keeps Buy rating as risk/reward for shares of AMD shows $17 downside (based on 13.6x trough) and upside to revised price target of $26 (down from $27).
Notablecalls: Citi's late again. Check out the comments from ThinkEquity's Eric Ross from last week.
December was weak for PC components as the supply chain worked through previously built Pre-Vista systems. The Taiwanese PC supply chain had steep M/M declines in December for chip sets, communications and motherboards.
1Q07 motherboard shipments are expected to be better than normal, declining only 3% vs. a normal decline of 7%. Solid motherboard builds could provide a catalyst for PCs with upside to CIR's forecast dependent on the uptake of Vista.
Citi is lowering their 4Q06E revenue and EPS to $1,781M/$0.23 from $1,820M/ $0.27 and 2007E to $8,382M/$1.16 from $8,464M/$1.24, but keeps Buy rating as risk/reward for shares of AMD shows $17 downside (based on 13.6x trough) and upside to revised price target of $26 (down from $27).
Notablecalls: Citi's late again. Check out the comments from ThinkEquity's Eric Ross from last week.
Calls of Note Part 2
- Merrill Lynch comments on Motorola (NYSE:MOT) after speaking to the co about the issues leading up to pre-announcement. Firm is encouraged to see that management is planning to devote the time and effort to explain its "get well" plans, as explained below. However, none of the issues impacting Motorola seem temporary, and in their view, the recovery to historical margins may be gradual.
Comparing trends at MOT with its top 4 comps over the past 2 yrs, they note that shipments rose by 103% vs. 58% for competitors. MOT also showed better margin trends, led by a better product portfolio, featuring the RAZR, rising from 5% to 12% (ex 4Q) vs. a decline from ~15% to ~12% by its comps. As such, they were surprised that over the same timeframe MOT's ASP declines were steeper than its comps pointing to a somewhat irrational and aggressive pricing strategy. That strategy may have to be reconsidered.
However, without a good replacement for the RAZR, there is a risk that continued aggressive pricing could put greater pressure on margins, similar to long-term trends at Nokia. ML would therefore hope to see Motorola shift its primary focus to profitability rather than market share targets.
Following the release of 4Q financials on January 19, the company plans to host the normal post-earnings conf call at 7:30AM EST, followed by a two hour session at 10:00AM with the entire senior management team to discuss two main issues: 1) MOT's "get well" plans and the road to margin recovery and 2) MOT's 2007 outlook and the company's strategic focus. Firm expects mgmt to be more open with its acquisition and diversification strategies away from the commoditizing handset biz.
Maintains Neutral.
Notablecalls: Love the comments from ML. I also salute MOT management for hosting the two hour session to discuss their plans. That may even help the stock in the n-t.
Comparing trends at MOT with its top 4 comps over the past 2 yrs, they note that shipments rose by 103% vs. 58% for competitors. MOT also showed better margin trends, led by a better product portfolio, featuring the RAZR, rising from 5% to 12% (ex 4Q) vs. a decline from ~15% to ~12% by its comps. As such, they were surprised that over the same timeframe MOT's ASP declines were steeper than its comps pointing to a somewhat irrational and aggressive pricing strategy. That strategy may have to be reconsidered.
However, without a good replacement for the RAZR, there is a risk that continued aggressive pricing could put greater pressure on margins, similar to long-term trends at Nokia. ML would therefore hope to see Motorola shift its primary focus to profitability rather than market share targets.
Following the release of 4Q financials on January 19, the company plans to host the normal post-earnings conf call at 7:30AM EST, followed by a two hour session at 10:00AM with the entire senior management team to discuss two main issues: 1) MOT's "get well" plans and the road to margin recovery and 2) MOT's 2007 outlook and the company's strategic focus. Firm expects mgmt to be more open with its acquisition and diversification strategies away from the commoditizing handset biz.
Maintains Neutral.
Notablecalls: Love the comments from ML. I also salute MOT management for hosting the two hour session to discuss their plans. That may even help the stock in the n-t.
Calls of Note Part 1
Bear Stearns is upping their 4Q projections for Wynn Resorts (NASDAQ:WYNN). Specifically, they are raising their Macau EBITDA projection to $54.7mm from prior $49.8mm (due to growing market share, strong table and slot volumes). Firm's 4Q EPS goes to $0.46, which is $0.02 above Consensus.
Firm continues to believe WYNN is a solid play on two 1H07 themes in the gaming sector: 1) strong high-end trends on the Las Vegas Strip and 2) growing market shares gains (Wynn specifc) and increasing EBITDA/cash flows in the growing Macau gaming market.
Reits Outperform rating and $108 tgt.
Notablecalls: Two reasons I decided to highlight this one: 1) The chart looks good 2) It's been squeezing the hell out of shorts over the past couple of weeks. Some bears were pretty convinced WYNN was done around end of Dec. Expect them to put up a fight at around $99-100 level.
Firm continues to believe WYNN is a solid play on two 1H07 themes in the gaming sector: 1) strong high-end trends on the Las Vegas Strip and 2) growing market shares gains (Wynn specifc) and increasing EBITDA/cash flows in the growing Macau gaming market.
Reits Outperform rating and $108 tgt.
Notablecalls: Two reasons I decided to highlight this one: 1) The chart looks good 2) It's been squeezing the hell out of shorts over the past couple of weeks. Some bears were pretty convinced WYNN was done around end of Dec. Expect them to put up a fight at around $99-100 level.
Color on warning: Tellabs (NASDAQ:TLAB)
Several firms are commenting on Tellabs (NASDAQ:TLAB) after the co issued a warning for Q4. The opinions are somewhat mixed:
- Morgan Keegan is downgrading the stock to Mkt Perform from Outperform saying they think many investors anticipated weak results for Tellabs for Q4:06, and they had reduced their estimates below consensus (December 11), but they didn't imagine results could miss by so much.
Firm acknowledges management's assertion that elements of the weakness are temporary and likely tied to the recently closed merger of AT&T and BellSouth; however, they suspect sales and earnings will not recover quickly for 3 reasons.
1) Weak sales stem from carriers' drive to control spending and not just the mergers, and this won't change soon.
2) Wireless capex likely declines materially in 2007, and this market had been a positive driver for the past 2 years.
3) Two out of the three growth areas for Tellabs have poor margin, Fiber to the Premises and optical transport.
Considering the degree of the shortfall, the firm doubts Tellabs management will sit back waiting for sales to recover. We anticipate management could adjust its cost structure to keep operating expenses below 30% of sales and bring operating margin back to the mid-teens. Furthermore, they imagine Tellabs could make an acquisition to improve its geographic mix, which could be a risk depending on the details. Finally, they think investors have downside protection considering the possibility that Tellabs becomes an acquisition target considering its enviable relationships and incumbent position with U.S. carriers.
- Morgan Stanley notes the magnitude of Tellabs revenue miss for 4Q06 (14% below MS estimate), along with similar announcements from ADCT, ADTN, and RBAK, is indicative of the weak wireline spending environment. While the revenue shortfall is partly related to a spending pause ahead of the recently approved BLS/T merger, they expect the challenging wireline capex environment to extend into the first half of 2007, or until technological and business-model issues surrounding telco video deployments show signs of improvement. Accordingly, the firm thinks it's too early to get constructive on TLAB shares despite the reasonable valuation. Maintains Equal Weight.
- Goldman Sachs is the most optimistic of the bunch noting it is important to keep in mind that the weakness is likely temporary in nature and that the outlook for 2007 remains healthy as Tellabs is a play on carrier bandwidth growth. Firm believes this miss will clear the decks and set a new lower bar for the stock, which may set up a positive long term scenario. Goldman continues to believe that the Street's topline estimates for 2007 remain too low. The 4Q miss is primarily due to the negative impact from long awaited merger of AT&T and BellSouth. They believe that the 2007 revenue outlook is likely dependent on new product traction (7100, 8600, and 8800), unlike 2006 where revenue growth was largely driven by strength in transport products. GS is adjusting their 4Q06, FY07, and FY08 estimates to $461mn/$0.11, $2,231mn/$0.64, and $2,412/$0.71 (excluding ESO) to account for the 4Q miss in revenues.
The firm is maintaining their 12-month price target of $11, and expect shares to be range bound in the near-term until confidence builds around the revenue and gross margin outlook. Maintains Neutral.
Notablecalls: While the news is not unexpected the magnitude of the miss will surely put pressure on the common. While both Morgan Keegan and MSCO make solid points regarding wireline capex in H107 and C07 in general, GSCO's comments regarding carrier bandwidth growth strike the core. Bandwidth will continue to grow no matter what. More of a question of when not if. Think the stock becomes buyable for a bounce around 1.2-1.5 pts lower. Would not touch this one if it opens down any less than 1 pt. The valuation continues to be reasonable with potential buyout lurking in the background.
- Morgan Keegan is downgrading the stock to Mkt Perform from Outperform saying they think many investors anticipated weak results for Tellabs for Q4:06, and they had reduced their estimates below consensus (December 11), but they didn't imagine results could miss by so much.
Firm acknowledges management's assertion that elements of the weakness are temporary and likely tied to the recently closed merger of AT&T and BellSouth; however, they suspect sales and earnings will not recover quickly for 3 reasons.
1) Weak sales stem from carriers' drive to control spending and not just the mergers, and this won't change soon.
2) Wireless capex likely declines materially in 2007, and this market had been a positive driver for the past 2 years.
3) Two out of the three growth areas for Tellabs have poor margin, Fiber to the Premises and optical transport.
Considering the degree of the shortfall, the firm doubts Tellabs management will sit back waiting for sales to recover. We anticipate management could adjust its cost structure to keep operating expenses below 30% of sales and bring operating margin back to the mid-teens. Furthermore, they imagine Tellabs could make an acquisition to improve its geographic mix, which could be a risk depending on the details. Finally, they think investors have downside protection considering the possibility that Tellabs becomes an acquisition target considering its enviable relationships and incumbent position with U.S. carriers.
- Morgan Stanley notes the magnitude of Tellabs revenue miss for 4Q06 (14% below MS estimate), along with similar announcements from ADCT, ADTN, and RBAK, is indicative of the weak wireline spending environment. While the revenue shortfall is partly related to a spending pause ahead of the recently approved BLS/T merger, they expect the challenging wireline capex environment to extend into the first half of 2007, or until technological and business-model issues surrounding telco video deployments show signs of improvement. Accordingly, the firm thinks it's too early to get constructive on TLAB shares despite the reasonable valuation. Maintains Equal Weight.
- Goldman Sachs is the most optimistic of the bunch noting it is important to keep in mind that the weakness is likely temporary in nature and that the outlook for 2007 remains healthy as Tellabs is a play on carrier bandwidth growth. Firm believes this miss will clear the decks and set a new lower bar for the stock, which may set up a positive long term scenario. Goldman continues to believe that the Street's topline estimates for 2007 remain too low. The 4Q miss is primarily due to the negative impact from long awaited merger of AT&T and BellSouth. They believe that the 2007 revenue outlook is likely dependent on new product traction (7100, 8600, and 8800), unlike 2006 where revenue growth was largely driven by strength in transport products. GS is adjusting their 4Q06, FY07, and FY08 estimates to $461mn/$0.11, $2,231mn/$0.64, and $2,412/$0.71 (excluding ESO) to account for the 4Q miss in revenues.
The firm is maintaining their 12-month price target of $11, and expect shares to be range bound in the near-term until confidence builds around the revenue and gross margin outlook. Maintains Neutral.
Notablecalls: While the news is not unexpected the magnitude of the miss will surely put pressure on the common. While both Morgan Keegan and MSCO make solid points regarding wireline capex in H107 and C07 in general, GSCO's comments regarding carrier bandwidth growth strike the core. Bandwidth will continue to grow no matter what. More of a question of when not if. Think the stock becomes buyable for a bounce around 1.2-1.5 pts lower. Would not touch this one if it opens down any less than 1 pt. The valuation continues to be reasonable with potential buyout lurking in the background.
Paperstand
The WSJ reports that in a move that could complicate one of the US Air Force's most important and politically sensitive weapons programs, Northrop Grumman (NOC) is threatening to shun a competition against Boeing (BA) for aerial-refueling planes b/c of concerns over the bidding rules. Northrop officials have hinted for months about quitting the race for the decades-long program, valued at $100bn or more, if they don't think the co has a fair shot of winning. Late last week, Northrop officially warned the Air Force in writing that it may not bid. Northrop officials believe draft bidding guidelines effectively favor Boeing's less-expensive refueling plane b/c they don't lay out detailed criteria for how the Air Force will evaluate extra capabilities, such as cargo and passenger capacity, that Northrop's proposed airplane offers.
“Heard on the Street” column out saying that for many investors in Escala Group (ESCL), the only thing that stands between the co and its life as a forgotten penny stock: its listing on the Nasdaq. The continued listings of firms that chronically miss securities-filing deadlines and lose scores of execs amid fraud and accounting investigations confound some investors and analysts who say the exchanges go light on certain co’s for business's sake. "The exchanges are definitely easy on co’s and don't boot them off when they really should," says Mark Grothe, of Glass Lewis & Co. "The listings are a source of income for them, and they don't want to miss out on those listing fees." As a result, investors are left to trade on potentially specious financial information, and analysts can't value the stocks b/c of the lack of reliable earnings data. That leads to irregular trading volumes and erratic price swings that can whipsaw investors. In recent weeks, eyebrows have been rising over Escala. Its shares had languished in the $5 range since plummeting more than 85% in May amid allegations of a massive stamp fraud at its Spanish majority owner, Afinsa. Afinsa, which until recently controlled 67% of Escala, was taken over by the Spanish govt in May, amid allegations of fraud, money laundering and other legal infractions. Spanish authorities have said Afinsa will be liquidated. Spain's govt said in a court filing that an inquiry by the SEC focused on whether Escala inflated the price of stamps sold to Afinsa. Escala has acknowledged that it is under investigation by the SEC but hasn't disclosed the focus of the SEC's examination. Investors want to know if the internal inquiry puts Escala in the clear with Nasdaq, or whether the co will still be delisted.
“Heard on the Street” column out saying that for many investors in Escala Group (ESCL), the only thing that stands between the co and its life as a forgotten penny stock: its listing on the Nasdaq. The continued listings of firms that chronically miss securities-filing deadlines and lose scores of execs amid fraud and accounting investigations confound some investors and analysts who say the exchanges go light on certain co’s for business's sake. "The exchanges are definitely easy on co’s and don't boot them off when they really should," says Mark Grothe, of Glass Lewis & Co. "The listings are a source of income for them, and they don't want to miss out on those listing fees." As a result, investors are left to trade on potentially specious financial information, and analysts can't value the stocks b/c of the lack of reliable earnings data. That leads to irregular trading volumes and erratic price swings that can whipsaw investors. In recent weeks, eyebrows have been rising over Escala. Its shares had languished in the $5 range since plummeting more than 85% in May amid allegations of a massive stamp fraud at its Spanish majority owner, Afinsa. Afinsa, which until recently controlled 67% of Escala, was taken over by the Spanish govt in May, amid allegations of fraud, money laundering and other legal infractions. Spanish authorities have said Afinsa will be liquidated. Spain's govt said in a court filing that an inquiry by the SEC focused on whether Escala inflated the price of stamps sold to Afinsa. Escala has acknowledged that it is under investigation by the SEC but hasn't disclosed the focus of the SEC's examination. Investors want to know if the internal inquiry puts Escala in the clear with Nasdaq, or whether the co will still be delisted.
Sunday, January 07, 2007
Barron's Summary
Medifast (MED) shares now look vulnerable to investors worried about the rejection of a positive dietary study and the authorship of some supportive Internet messages (article speculates that co’s CEO pushes the stock at Yahoo! Message Boards).
Notablecalls: The co’s CEO Bradley T. MacDonald quit on Friday. While the stock already got hit somewhat on Friday, I believe it will be down more... much more on Monday.
Example of Mr. MacDonald in action can be seen here.
It wasn’t easy for a telecom co to have a lousy 2006, but SprintNextel (S) managed it, shares down 11% with the sector up 30%, missing earnings forecasts 3 straight qrtrs, a messy merger integration in a year when the AT&T-BellSouth deal was acclaimed as a masterstroke. All this was more than enough to lose friends on Wall St., where only a 1/3 of the analysts now recommend Sprint stock, as opposed to 70% of them pushing AT&T. But turnaround seekers should take heart in the sour sentiment, as well as the stock's cheapness v. the industry, based on cash flow. Sprint, with a $56bn mkt value and less debt than its peers, is buying back $6bn in stock while investing $3bn in local WiMax. If it pays off, great. If not, and the core business keeps struggling, the stock's not expensive, and Sprint as an acquisition tgt is already being bandied. All of which shifts the risk/reward bargain in investors' favor.
Fund manager likes BEN, AB and JNC, dislikes JNS, TROW, FII, CNS and LM.
Bed Bath & Beyond (BBBY) trades for 39, or a relatively inexpensive 16x F08 ests. The stock could rise into the high 40s if the co can top its '08 earnings guidance.
One Origin Agritech (SEED) fan, Maxim Group, believes it is worth $21 a share. And the co says it is still focused on acquisitions. But litigation could well drag the stock price still lower.
Tyco International (TYC) shareholders may hit the trifecta: Shares could be worth 50% more than Tyco's current stock, thanks to higher price-earnings ratios.
Friday, January 05, 2007
Calls of Note Part 3
Baird has plenty of negative to say about OmniVision (NASDAQ:OVTI) following their checks that suggest 2007 could prove to be a very difficult year for the company.
Omnivision's gross margin is set to fall significantly over the next few quarters, in firm's view. Their checks indicate TSMC's gross margin on sales to Omnivision are approximately 40%, and estimate there should a 20% differential between Omnivision's gross margin and that of a fabbed competitor such as Micron. At 20% gross margin, Omnivision would lose money.
Per firm's checks, pricing is dismal: as low as $0.70 for VGA sensors, $2.50 for VGA modules. Omnivision no longer benefits from the tight supply environment of 2006, and excess capacity should bring pricing further down in 2007.
Samsung is now the second-largest supplier of CMOS image sensors. For 2007, Samsung is targeting the lower end of the mobile phone market - Omnivision's last stronghold. Micron's recent acquisition of Avago Technologies represents further bad news for Omnivision, as it will enable Micron to target sub-1mp CMOS image sensor markets which the company so far had ignored - targeting two-third of Omnivision's current revenues.
Omnivision missed two product cycles (1.3mp and 2mp) and is not gaining meaningful traction at 2 and 3mp resolutions, per firm's checks. WaveFront Coding Technology does not work and is currently experiencing "serious technology issues," per firm's checks.
Notablecalls: Oh well, if I were an OVTI shareholder, these comments would make me physically sick. Lower margins, increasing competition, sector not being in very good shape as witnessed by Motorola today - altogether it doesn't make up for a very cosy being. Expecting the shares to go lower.
Omnivision's gross margin is set to fall significantly over the next few quarters, in firm's view. Their checks indicate TSMC's gross margin on sales to Omnivision are approximately 40%, and estimate there should a 20% differential between Omnivision's gross margin and that of a fabbed competitor such as Micron. At 20% gross margin, Omnivision would lose money.
Per firm's checks, pricing is dismal: as low as $0.70 for VGA sensors, $2.50 for VGA modules. Omnivision no longer benefits from the tight supply environment of 2006, and excess capacity should bring pricing further down in 2007.
Samsung is now the second-largest supplier of CMOS image sensors. For 2007, Samsung is targeting the lower end of the mobile phone market - Omnivision's last stronghold. Micron's recent acquisition of Avago Technologies represents further bad news for Omnivision, as it will enable Micron to target sub-1mp CMOS image sensor markets which the company so far had ignored - targeting two-third of Omnivision's current revenues.
Omnivision missed two product cycles (1.3mp and 2mp) and is not gaining meaningful traction at 2 and 3mp resolutions, per firm's checks. WaveFront Coding Technology does not work and is currently experiencing "serious technology issues," per firm's checks.
Notablecalls: Oh well, if I were an OVTI shareholder, these comments would make me physically sick. Lower margins, increasing competition, sector not being in very good shape as witnessed by Motorola today - altogether it doesn't make up for a very cosy being. Expecting the shares to go lower.
Calls of Note Part 2
JP Morgan is adding DivX (NASDAQ:DIVX) to the JPMorgan Focus List with a January 2008 price target of $30, based on a multiple of 32 times FY08E PF EPS of $0.92, aligned with the peak multiple of near-peers DTSI and DLB.
With DIVX down 26% from a high of $31.36 on 11/28 (vs. up 2% for the SPX), they believe the risk-reward trade-off is heavily weighted toward owning DIVX , especially in advance of next week's CES and potential product and partnership announcements that might catalyze interest. Channel checks reveal that DIVX' penetration of the US DVD market stood at about 50% approaching the holidays, significantly higher than the company's own 19% assessment. JPM believes this could yield potential CE licensing upside in the seasonally strong March quarter.
The risks associated with a secondary issue of shares on the lock-up expiry on 3/20/07 is overstated, in their view: a) they think a dilutive primary issue is unlikely, b) JPM thinks institutional interest will be high, and c) at end of March investor attention will turn to the likelihood of seasonally strong CE licensing results, trumping other concerns.
Reits Overweight.
Notablecalls: Expect to see buy interest in DIVX following the calls. Good for a trade as DIVX is a mover. And when you get a chance, do check the archives for further color.
With DIVX down 26% from a high of $31.36 on 11/28 (vs. up 2% for the SPX), they believe the risk-reward trade-off is heavily weighted toward owning DIVX , especially in advance of next week's CES and potential product and partnership announcements that might catalyze interest. Channel checks reveal that DIVX' penetration of the US DVD market stood at about 50% approaching the holidays, significantly higher than the company's own 19% assessment. JPM believes this could yield potential CE licensing upside in the seasonally strong March quarter.
The risks associated with a secondary issue of shares on the lock-up expiry on 3/20/07 is overstated, in their view: a) they think a dilutive primary issue is unlikely, b) JPM thinks institutional interest will be high, and c) at end of March investor attention will turn to the likelihood of seasonally strong CE licensing results, trumping other concerns.
Reits Overweight.
Notablecalls: Expect to see buy interest in DIVX following the calls. Good for a trade as DIVX is a mover. And when you get a chance, do check the archives for further color.
Calls of Note Part 1
Cowen comments on Netflix (NASDAQ:NFLX) saying they expect a number of video downloading related announcements to occur at CES next week. Firm believes the announcements will focus on: 1) "download-to-own" video content and 2) revenue sharing deals between websites such as YouTube and content owners. While neither of these business models compete or overlap with Netflix, similar announcements at CES in 2005 put pressure on the shares. They continue to believe that mass market subscription-based video downloading is at least five years away. Firm would view a drop in Netflix shares due to downloading announcements from CES as a buying opportunity.
On Thursday, Sonic Solutions launched Qflix, a licensing and certification program approved by the studios, which will allow online retailers to sell movie downloads that can be burned onto DVDs. CinemaNow currently sells a limited number of download-to-burn movies (using a different technology) and iTunes sells movies for viewing on iPods and PCs/laptops -- both services price new release content at $15. Cowen expects downloadable movies to put a dent in traditional DVD retail sales over time.
Notablecalls: Chart looks like it may go down some more. My gut on the other hand tells me the worries are already priced in. When this happens, the stock usually gets hit early on but comes back with a vengeance. Especially one with NFLX's short interest.
On Thursday, Sonic Solutions launched Qflix, a licensing and certification program approved by the studios, which will allow online retailers to sell movie downloads that can be burned onto DVDs. CinemaNow currently sells a limited number of download-to-burn movies (using a different technology) and iTunes sells movies for viewing on iPods and PCs/laptops -- both services price new release content at $15. Cowen expects downloadable movies to put a dent in traditional DVD retail sales over time.
Notablecalls: Chart looks like it may go down some more. My gut on the other hand tells me the worries are already priced in. When this happens, the stock usually gets hit early on but comes back with a vengeance. Especially one with NFLX's short interest.
Color on warning: Openwave (NASDAQ:OPWV)
Several firms are commenting on Openwave (NASDAQ:OPWV) after the co yet again lowered guidance and provided a reply to Harbinger's filings:
- JP Morgan is the most optimistic of the bunch saying product and operational transitions are progressing, and a good bookings quarter in December shows promise for future improvement. But revenue/EPS will likely be light based on preliminary results as the company's move to a more ratable model should show up first in bookings then in income statement.
Bookings are expected to be ~$120M for the quarter and revenue/EPS between $83-84M/($0.08)-($0.09) compared to JPM estimate of $90.9M/$0.00. Big part of bookings came from Sprint, the largest customer, but there are some signs of broader improvement. Timing of one large systems deal did not contribute to revenue holding back the top line, while the combination of lower revenue and higher commission expenses on the good bookings contributed to the earnings miss.
Management is looking for ways to improve shareholder value with the announcement of a $100M repurchase program that the firm expects to begin in late January and be completed quickly over 30-60 days.
JPM believes there is value in the stock trading at 1.7X revenue, a 48% discount to its peers. Remains Overweight.
- CIBC notes that with its proxy fight less than two weeks away, OPWV downplayed weak F2Q07 results and trumpeted its 1.43 book-to-bill as validation of its strategic plan. But the firm has their doubts, given management's indication that visibility is unimproved and that '07 numbers need a fresh sheering.
Though generally encouraged by bookings, several factors curb firm's enthusiasm. Almost half the bookings were with Sprint; exclude it and book-to- bill is only ~0.9. Also, the disconnect between bookings (improved), visibility (unchanged), and rev. outlook (reduced) is puzzling.
Typically, they would expect bookings and backlog growth to be a harbinger of either improved visibility or of revenue momentum. The firm is therefore perplexed by management's indication that, despite the multi-year high backlog level a) visibility on a quarterly basis remains stuck at 60%-70% and b) revenue growth for the remainder of the year will be only moderate (and below earlier
indications).
Nevertheless, they view OPWV s $100 million share buyback announcement as a constructive move towards further shareholder value creation and a solid way to utilize its strong cash postion. Maintains SO.
- Jefferies is downgrading their rating to Hold from Buy saying another negative preannouncement indicates no near-term stability in the core business, and offers no evidence of new product traction. No sign of a major restructuring in sight either. However, $3.60 in net cash/share, a $100MM stock buyback program and >$1Bn in NOLs should all help support OPWV stock.
Firm's downgrade today reflects a slower-than- expected recovery process, and increasing financial risk related to cash burn and very high DSOs. While downside is probably limited, it is difficult to find a catalyst right now for OPWV shares. Recent shareholder activism has been scorned by management, but detailed guidance, a significant buyback, and a renewed focus on costs show that the shareholder discontent is already producing results. Jeffco remains concerned that Openwave's high dependency on new products that may not be enough to offset a declining legacy business.
Tgt goes to $9 from $11.
Notablecalls: In case you consider investing in OPWV I strongly suggest you go back and read Harbinger's filings. I especially enjoyed description of the events of late August, when dismissal of the chief marketing officer, chief administrative officer, chief operating officer, chief of business development and 60-odd other employees was allegedly misrepresented to investors as a reorganization. According to Harbinger, the action had more to do with silencing dissent than cutting costs or improving operations a Silicon Valley version of the night of the long knives.
Secondly, take a close look at what the co is doing. WAP gateways, ringback tones and mobile browsers (not for smartphones, though!). Hope LBS and music will save the day. Really. Pass.
- JP Morgan is the most optimistic of the bunch saying product and operational transitions are progressing, and a good bookings quarter in December shows promise for future improvement. But revenue/EPS will likely be light based on preliminary results as the company's move to a more ratable model should show up first in bookings then in income statement.
Bookings are expected to be ~$120M for the quarter and revenue/EPS between $83-84M/($0.08)-($0.09) compared to JPM estimate of $90.9M/$0.00. Big part of bookings came from Sprint, the largest customer, but there are some signs of broader improvement. Timing of one large systems deal did not contribute to revenue holding back the top line, while the combination of lower revenue and higher commission expenses on the good bookings contributed to the earnings miss.
Management is looking for ways to improve shareholder value with the announcement of a $100M repurchase program that the firm expects to begin in late January and be completed quickly over 30-60 days.
JPM believes there is value in the stock trading at 1.7X revenue, a 48% discount to its peers. Remains Overweight.
- CIBC notes that with its proxy fight less than two weeks away, OPWV downplayed weak F2Q07 results and trumpeted its 1.43 book-to-bill as validation of its strategic plan. But the firm has their doubts, given management's indication that visibility is unimproved and that '07 numbers need a fresh sheering.
Though generally encouraged by bookings, several factors curb firm's enthusiasm. Almost half the bookings were with Sprint; exclude it and book-to- bill is only ~0.9. Also, the disconnect between bookings (improved), visibility (unchanged), and rev. outlook (reduced) is puzzling.
Typically, they would expect bookings and backlog growth to be a harbinger of either improved visibility or of revenue momentum. The firm is therefore perplexed by management's indication that, despite the multi-year high backlog level a) visibility on a quarterly basis remains stuck at 60%-70% and b) revenue growth for the remainder of the year will be only moderate (and below earlier
indications).
Nevertheless, they view OPWV s $100 million share buyback announcement as a constructive move towards further shareholder value creation and a solid way to utilize its strong cash postion. Maintains SO.
- Jefferies is downgrading their rating to Hold from Buy saying another negative preannouncement indicates no near-term stability in the core business, and offers no evidence of new product traction. No sign of a major restructuring in sight either. However, $3.60 in net cash/share, a $100MM stock buyback program and >$1Bn in NOLs should all help support OPWV stock.
Firm's downgrade today reflects a slower-than- expected recovery process, and increasing financial risk related to cash burn and very high DSOs. While downside is probably limited, it is difficult to find a catalyst right now for OPWV shares. Recent shareholder activism has been scorned by management, but detailed guidance, a significant buyback, and a renewed focus on costs show that the shareholder discontent is already producing results. Jeffco remains concerned that Openwave's high dependency on new products that may not be enough to offset a declining legacy business.
Tgt goes to $9 from $11.
Notablecalls: In case you consider investing in OPWV I strongly suggest you go back and read Harbinger's filings. I especially enjoyed description of the events of late August, when dismissal of the chief marketing officer, chief administrative officer, chief operating officer, chief of business development and 60-odd other employees was allegedly misrepresented to investors as a reorganization. According to Harbinger, the action had more to do with silencing dissent than cutting costs or improving operations a Silicon Valley version of the night of the long knives.
Secondly, take a close look at what the co is doing. WAP gateways, ringback tones and mobile browsers (not for smartphones, though!). Hope LBS and music will save the day. Really. Pass.
Color on warning: Motorola (NYSE:MOT)
Several tier-1 firms are commenting on Motorola (NYSE:MOT) after the co warned late last night:
- I believe yesterday's call of the day goes to Deutsche Bank for downgrading the stock to to Hold from Buy just 2 hrs ahead of the news. The firm notes they are concerned that slowing growth in mobiles, a shift in volumes to low-priced models and reinvigorated competition will force Motorola to choose between market share and pricing in coming quarters. The firm lowered their price target from $30 to $22 on lower estimates.
The firm believes global handset volumes remain strong, but they expect some slowdown in growth rates in 2007. Further, much of the volume gains in the latest and coming quarters have come from low-end devices. Thinks Motorola is finding it harder to balance market share and margins, and we are headed into a lower margin environment in 2007.
In the past, the company has bee able to use its leading product portfolio to boot both growth and profitability. This is also becoming harder as many Asian vendors now offer truly thin phones. DB would also not rule out a better line-up from Nokia at 3GSM. Finally, they think Apple is highly likely to launch its own mobile phone possibly next week. This may not be a volume threat to Motorola, but could capture RAZR's 'iconic' status, denting Motorola's marketing efforts.
- Morgan Stanley notes the significant cut in profitability this quarter is a blow to a
key tenet of our thesis that margin improvement (along with market share gains) would drive stock outperformance. As this news will be quickly priced in to shares tomorrow, they're going to resist the temptation to change their Overweight rating at this point until they learn more about the reasons for the margin collapse and assess whether they are fixable over the next few quarters.
Motorola's negative pre-announcement is striking in at least two regards. First, and most important, mobile device operating margins appear to have been cut in half this quarter to around 5-6%. Second, although of far less importance right now, is that Motorola appears to have gained around 150 bps of share in the handset market this quarter. Regarding profitability, based on the limited data Motorola released last night, the firm believes gross margins at the corporate level are a little over 27% this quarter, down from 31.9% in 3Q06 and below MS estimate of 31.5%.
Clearly there was bad news priced into shares given the recent underperformance, but they don't think news this bad was priced in. The firm would not be surprised to see shares trade off 5% or more in tomorrow's session. They estimate ASPs were around $121 this quarter, below their estimate of $135. Tgt goes to $25 from $26.
- Piper Jaffray is downgrading their rating to MP from OP based on belief it could take several quarters for Motorola's handset operating margins to recover.
While handset unit shipments of 66M exceeded firm's 62M estimate, handset ASPs and operating margins were well below estimates. In fact, they estimate handset ASPs were approximately $120 versustheir $135 estimate. Further, they estimate mobile phone division operating margins were roughly 4-5% during the quarter versus 11% estimate.
Given the disappointing operating margins for Motorola and lack of strong mid-to-high end products to replace the now lower ASP RAZR, PJ believs Motorola's mobile phone margins could remain below 10% throughout 2007. Due to the disappointing Q406 results and channel checks indicating increasing competition, they are lowering their 2006 proforma EPS estimate from $1.34 to $1.19, 2007 from $1.56 to $1.07, and introducing a 2008 est of $1.33.
Tgt goes to $20 from $27.
Notablecalls: Can't say the news is a total surprise. Check the archives over the past couple of months for further commentary. The magnitude of the miss is, though. I happened to sit at my desk when the news hit and the first question to cross my mind was, "If this is how bad MOT is doing, what the heck will Nokia's (NOK) results look like when the co reports on Jan 25?"
Motorola's RAZR/KRZR (thin line) is still the hottest selling handset on the mkt and despite that the co can't put together a decent qtr. Nokia has been lagging in terms of innovative handsets meaning a time bomb ticking away there as well.
Back to MOT, I suspect we may see an initial bounce just below the $19 level. The co is still profitable and the stock is down over 25% from it's recent top (not that expensive either). In medium-term however, I'm not that optimistic. The handset market has run out of steam. It has been nearly commoditized. Must say I have no idea how MOT could come about fixing this problem. S-t the only winner in the handset space will most likely be Apple with their iPhone. That won't make things easier for MOT/NOK.
- I believe yesterday's call of the day goes to Deutsche Bank for downgrading the stock to to Hold from Buy just 2 hrs ahead of the news. The firm notes they are concerned that slowing growth in mobiles, a shift in volumes to low-priced models and reinvigorated competition will force Motorola to choose between market share and pricing in coming quarters. The firm lowered their price target from $30 to $22 on lower estimates.
The firm believes global handset volumes remain strong, but they expect some slowdown in growth rates in 2007. Further, much of the volume gains in the latest and coming quarters have come from low-end devices. Thinks Motorola is finding it harder to balance market share and margins, and we are headed into a lower margin environment in 2007.
In the past, the company has bee able to use its leading product portfolio to boot both growth and profitability. This is also becoming harder as many Asian vendors now offer truly thin phones. DB would also not rule out a better line-up from Nokia at 3GSM. Finally, they think Apple is highly likely to launch its own mobile phone possibly next week. This may not be a volume threat to Motorola, but could capture RAZR's 'iconic' status, denting Motorola's marketing efforts.
- Morgan Stanley notes the significant cut in profitability this quarter is a blow to a
key tenet of our thesis that margin improvement (along with market share gains) would drive stock outperformance. As this news will be quickly priced in to shares tomorrow, they're going to resist the temptation to change their Overweight rating at this point until they learn more about the reasons for the margin collapse and assess whether they are fixable over the next few quarters.
Motorola's negative pre-announcement is striking in at least two regards. First, and most important, mobile device operating margins appear to have been cut in half this quarter to around 5-6%. Second, although of far less importance right now, is that Motorola appears to have gained around 150 bps of share in the handset market this quarter. Regarding profitability, based on the limited data Motorola released last night, the firm believes gross margins at the corporate level are a little over 27% this quarter, down from 31.9% in 3Q06 and below MS estimate of 31.5%.
Clearly there was bad news priced into shares given the recent underperformance, but they don't think news this bad was priced in. The firm would not be surprised to see shares trade off 5% or more in tomorrow's session. They estimate ASPs were around $121 this quarter, below their estimate of $135. Tgt goes to $25 from $26.
- Piper Jaffray is downgrading their rating to MP from OP based on belief it could take several quarters for Motorola's handset operating margins to recover.
While handset unit shipments of 66M exceeded firm's 62M estimate, handset ASPs and operating margins were well below estimates. In fact, they estimate handset ASPs were approximately $120 versustheir $135 estimate. Further, they estimate mobile phone division operating margins were roughly 4-5% during the quarter versus 11% estimate.
Given the disappointing operating margins for Motorola and lack of strong mid-to-high end products to replace the now lower ASP RAZR, PJ believs Motorola's mobile phone margins could remain below 10% throughout 2007. Due to the disappointing Q406 results and channel checks indicating increasing competition, they are lowering their 2006 proforma EPS estimate from $1.34 to $1.19, 2007 from $1.56 to $1.07, and introducing a 2008 est of $1.33.
Tgt goes to $20 from $27.
Notablecalls: Can't say the news is a total surprise. Check the archives over the past couple of months for further commentary. The magnitude of the miss is, though. I happened to sit at my desk when the news hit and the first question to cross my mind was, "If this is how bad MOT is doing, what the heck will Nokia's (NOK) results look like when the co reports on Jan 25?"
Motorola's RAZR/KRZR (thin line) is still the hottest selling handset on the mkt and despite that the co can't put together a decent qtr. Nokia has been lagging in terms of innovative handsets meaning a time bomb ticking away there as well.
Back to MOT, I suspect we may see an initial bounce just below the $19 level. The co is still profitable and the stock is down over 25% from it's recent top (not that expensive either). In medium-term however, I'm not that optimistic. The handset market has run out of steam. It has been nearly commoditized. Must say I have no idea how MOT could come about fixing this problem. S-t the only winner in the handset space will most likely be Apple with their iPhone. That won't make things easier for MOT/NOK.
Paperstand
The WSJ’s „Heard on the Street” column discusses Home Depot (HD), saying that investors may soon discover that Bob Nardelli wasn't the only wrench in the works. Plenty of problems remain for the retailer, from a decline in home prices to vigorous competition from Lowe’s. Those twin issues are daunting enough, but Home Depot has a host of internal flaws that are hampering its ability to meet those challenges. The co in recent months has lost several execs, and the top ranks are generally lacking in much-needed retail experience. Home Depot's customer service is lackluster and its stores are still run by antiquated systems that too often leave shelves short of popular items. Getting on top of all these issues will take time. The departure of Mr. Nardelli was a quick fix, perhaps clearing the way for some needed changes. But restoring the retailer's stock price will be more of a long-term project for successor Frank Blake. And views differ over whether Mr. Blake is the right man for the job, considering his lack of retail experience. Many on Wall St. think the stock will fall back more, or, at best, remain at the current price for a while before it starts rising again. "The question is, 'How does the business perform from here?' " said Colin McGranahan, of Sanford C. Bernstein. "Say what you will about Bob Nardelli, but he was a hard worker and knew how to fix problems. That means there is no easy fix. There's no white rabbit." Mr. McGranahan is particularly pessimistic about any near-term rebound for Home Depot.
Barron’s Online “Inside Scoop” section reports that the Chmn of Rite Aid (RAD) headed to the checkout line as shares of the drugstore chain hit a 52w high. Robert Miller sold 300K shares for $1.7m. Miller now owns 12K Rite Aid common shares and options to purchase 9.55m shares. "I think Miller's sale now fits his own profile of garnering some compensation through the sale of stock," Ben Silverman, of InsiderScore.com, says.
Thursday, January 04, 2007
Calls of Note Part 5
- Jefferies has an interesting note on Novell (NASDAQ:NOVL) saying that as the co attempts to breathe life into its software business, they believe a re-positioning of the company as a Windows complement is probable. Recent SLES coupon activations are a beginning, and m&a could play a significant role.
Firm's checks indicate a tightening relationship between Novell and Microsoft, both technologically and strategically.
Firm expects Novell to receive the final part of a $300mm payment from Microsoft this week, boosting the company's net cash/share to ~$3.30. >16,000 activated subscriptions through late December puts Microsoft SLES coupon distributions at a pace that is well-ahead of the 70,000 annual average, and they think there is little chance in FY07 that Novell will record much 'dead' coupon revenue.
They believe investors could see an acquisition and some of the cost- cutting that was anticipated but did not happen late last year. Given that Novell is breakeven on an operating basis right now, they expect that almost any acquisition that delivers more than a 4% T-bill like return will be accretive.
Reits Buy with tgt going to $8 from $7.
Notablecalls: Expect to see some buy interest in NOVL today.
Firm's checks indicate a tightening relationship between Novell and Microsoft, both technologically and strategically.
Firm expects Novell to receive the final part of a $300mm payment from Microsoft this week, boosting the company's net cash/share to ~$3.30. >16,000 activated subscriptions through late December puts Microsoft SLES coupon distributions at a pace that is well-ahead of the 70,000 annual average, and they think there is little chance in FY07 that Novell will record much 'dead' coupon revenue.
They believe investors could see an acquisition and some of the cost- cutting that was anticipated but did not happen late last year. Given that Novell is breakeven on an operating basis right now, they expect that almost any acquisition that delivers more than a 4% T-bill like return will be accretive.
Reits Buy with tgt going to $8 from $7.
Notablecalls: Expect to see some buy interest in NOVL today.
Calls of Note Part 4
Merrill Lynch is raising their 12-month price objective for Celgene (NASDAQ:CELG) stock to $73 from $59, as they begin working off their 2008 EPS estimate, which they raised modestly to $1.57 from $1.54. Firm expects profits to more than double and margins to expand for Celgene in 2007 as it continues to ramp sales of Revlimid.
Firm expects Celgene to continue ramping Revlimid sales in 2007 for its labeled indications of relapsed/refractory multiple myeloma and MDS 5Q- and they look for approval in the EU in 1H07. Revlimid was a center of attention at ASH (Amer. Soc. Hematology) in December with continuing positive clinical developments in the treatment of CLL (chronic lymphocytic leukemia) and NHL (non-Hodgkins lymphoma) and the firm expects the company to initiate pivotal trial programs in both during the year. Thalomid sales are also holding up very well.
Assuming some off-label use of Revlimid in relapsed/refractory CLL and ultimately label expansion, they have added modest probability-adjusted sales estimates in that indication beginning in 2008, which raises EPS estimates to $1.57 from $1.54 in 2008, to $2.06 from $1.99 in 2009 and to $2.47 from $2.31 in 2010.
Reits Buy.
Notablecalls: ML isn't the first one to up their tgt to around $70. But I suspect the note will generate some interest despite that.
Firm expects Celgene to continue ramping Revlimid sales in 2007 for its labeled indications of relapsed/refractory multiple myeloma and MDS 5Q- and they look for approval in the EU in 1H07. Revlimid was a center of attention at ASH (Amer. Soc. Hematology) in December with continuing positive clinical developments in the treatment of CLL (chronic lymphocytic leukemia) and NHL (non-Hodgkins lymphoma) and the firm expects the company to initiate pivotal trial programs in both during the year. Thalomid sales are also holding up very well.
Assuming some off-label use of Revlimid in relapsed/refractory CLL and ultimately label expansion, they have added modest probability-adjusted sales estimates in that indication beginning in 2008, which raises EPS estimates to $1.57 from $1.54 in 2008, to $2.06 from $1.99 in 2009 and to $2.47 from $2.31 in 2010.
Reits Buy.
Notablecalls: ML isn't the first one to up their tgt to around $70. But I suspect the note will generate some interest despite that.
Calls of Note Part 3
- UBS comments on LAM Research (NASDAQ:LRCX) saying that while Intel has not updated its NOR flash plans, their industry research suggests if Intel upgrades its NOR flash fabs from 200mm to 300mm, Lam will likely win Intel's silicon etcher business. While Lam is unlikely to disclose customer information, channel checks found Lam's silicon etcher has better process scalability compared to Hitachi's (Intel's incumbent 200mm supplier).
They believe a 300mm NOR flash upgrade win at Intel would require 15-20 new silicon etchers at each of Intel's two existing volume production NOR flash fabs in Ireland and Israel. We estimate this could amount to $150M and $0.30 in incremental revenue and EPS for Lam.
Firm's 12-month price target is based on applying a 16x multiple to their CY08 EPS estimate of $3.95. While Lam's 1H07 shipment visibility to foundry and DRAM customers remains limited, tey view the possibility of a first ever etch win at Intel as a key 2H07 catalyst. Maintains Buy.
Notablecalls: I have never seen comments like this one move stocks. But I do like the way UBS covers the Semi and Semi Eq. space.
They believe a 300mm NOR flash upgrade win at Intel would require 15-20 new silicon etchers at each of Intel's two existing volume production NOR flash fabs in Ireland and Israel. We estimate this could amount to $150M and $0.30 in incremental revenue and EPS for Lam.
Firm's 12-month price target is based on applying a 16x multiple to their CY08 EPS estimate of $3.95. While Lam's 1H07 shipment visibility to foundry and DRAM customers remains limited, tey view the possibility of a first ever etch win at Intel as a key 2H07 catalyst. Maintains Buy.
Notablecalls: I have never seen comments like this one move stocks. But I do like the way UBS covers the Semi and Semi Eq. space.
Calls of Note Part 2
- Banc of America notes their industry/channel checks suggest that Intel's (NASDAQ:INTC) Dec qtr revs finished at $9.6b (+10% Q/Q) - or near the high end of guidance ($9.1-9.7b).
Specifically, checks suggest that Intel benefited from a stronger uptake of Core 2 Duo mobile
processors (Merom), as well as stronger momentum in servers (driven in part by share gains versus AMD). Given the strength in notebooks & servers they expect Q4 gross margin to benefit from improved mix. Consequently, they expect Q4 GAAP gross margin to clock in at ~52% vs. the mid-pt of guidance of 50%. Finally, from a geographic standpoint, most of the strength was witnessed outside North America, with Europe & APAC exhibiting relative outperformance.
The firm is raising their above-consensus 4Q rev. est. to $9.6b, and tweaking GAAP EPS est. higher to $0.27 (Street: $0.25). Firm's new CY07 GAAP EPS est. of $1.27, up from $1.25, remains comfortably above consensus ($1.11). They note that this marks their 2nd upward rev. to Intel's est. in less than a month.
Maintains Buy and Top Pick status. Tgt $28.
Notablecalls: Most certainly good to know category. I would not be surprised to see some buy interest in INTC early on as it looks like INTC is regaining some ground vs AMD.
Specifically, checks suggest that Intel benefited from a stronger uptake of Core 2 Duo mobile
processors (Merom), as well as stronger momentum in servers (driven in part by share gains versus AMD). Given the strength in notebooks & servers they expect Q4 gross margin to benefit from improved mix. Consequently, they expect Q4 GAAP gross margin to clock in at ~52% vs. the mid-pt of guidance of 50%. Finally, from a geographic standpoint, most of the strength was witnessed outside North America, with Europe & APAC exhibiting relative outperformance.
The firm is raising their above-consensus 4Q rev. est. to $9.6b, and tweaking GAAP EPS est. higher to $0.27 (Street: $0.25). Firm's new CY07 GAAP EPS est. of $1.27, up from $1.25, remains comfortably above consensus ($1.11). They note that this marks their 2nd upward rev. to Intel's est. in less than a month.
Maintains Buy and Top Pick status. Tgt $28.
Notablecalls: Most certainly good to know category. I would not be surprised to see some buy interest in INTC early on as it looks like INTC is regaining some ground vs AMD.
Calls of Note Part 1
Piper Jaffray comments on Apple Computer (NASDAQ:AAPL) sayings the Macworld keynote will be held on Tuesday, January 9 at 9:00am PST. They expect new product announcements at Macworld could include: iTV, a new iPod, and the iPhone.
Despite all of the talk regarding new product announcements, or lack thereof, at Macworld, the firm continues to believe that the announcement of an iPhone would be positive for AAPL shares and no sign of this product would be a negative.
Firm's take on most likely announcements:
iPhone entering production phase of 12m units (Certainty rank: 9 out of 10). In Nov-06 two separate reports came from Asian news sources indicating that Taiwanese manufacturer Hon Hai's subsidiary Foxconn had received a 12m unit contract for the iPhone. According to Commercial Time the manufacturer signed the contract with Apple to produce 12m units for a scheduled release in 1H07. Additionally, China Times reported that the manufacturer will produce between 500,000-600,000 units per month starting in early CY07.
iTV ($299) release at Macworld with some improvements from September debut (10 out of 10). At a Sep-06 event, Apple introduced the iTV, a wireless media streaming device to view iTunes content on a TV. At the show, the device was simply streaming media (but did not store it locally); Piper believes Apple could release an improved model with an internal hard disk drive. Downloadable movies average about 1.5GB each on iTunes and one way that Apple can ease capacity restrictions is to add hard drive space to the iTV. They believe Apple will eventually improve on the iTV shown in September, but the improvements may not come until after the initial release.
Maintains Outperform and $99 tgt.
Notablecalls: Not actionable but good to know category. Expect to see some serious volatility over the next week or so. Note that usually the stock gets sold hard on the day of the announcement.
Despite all of the talk regarding new product announcements, or lack thereof, at Macworld, the firm continues to believe that the announcement of an iPhone would be positive for AAPL shares and no sign of this product would be a negative.
Firm's take on most likely announcements:
iPhone entering production phase of 12m units (Certainty rank: 9 out of 10). In Nov-06 two separate reports came from Asian news sources indicating that Taiwanese manufacturer Hon Hai's subsidiary Foxconn had received a 12m unit contract for the iPhone. According to Commercial Time the manufacturer signed the contract with Apple to produce 12m units for a scheduled release in 1H07. Additionally, China Times reported that the manufacturer will produce between 500,000-600,000 units per month starting in early CY07.
iTV ($299) release at Macworld with some improvements from September debut (10 out of 10). At a Sep-06 event, Apple introduced the iTV, a wireless media streaming device to view iTunes content on a TV. At the show, the device was simply streaming media (but did not store it locally); Piper believes Apple could release an improved model with an internal hard disk drive. Downloadable movies average about 1.5GB each on iTunes and one way that Apple can ease capacity restrictions is to add hard drive space to the iTV. They believe Apple will eventually improve on the iTV shown in September, but the improvements may not come until after the initial release.
Maintains Outperform and $99 tgt.
Notablecalls: Not actionable but good to know category. Expect to see some serious volatility over the next week or so. Note that usually the stock gets sold hard on the day of the announcement.
Paperstand
Barron’s Online „Inside Scoop” section reports that SAC Capital still sees value for Pacific Sunwear (PSUN), although the co's stock has jumped 55% since hitting a multiyear low this summer. SAC disclosed ownership of 3.89m shares, or a 5.6% stake. "When we see aggressive buying from a fund, especially a fund the size of SAC with their history of returns, that's a positive event for the stock," says Ben Silverman, of InsiderScore.com.
The WSJ reports that Cisco (CSCO) agreed to buy IronPort Systems, a network-security start-up, for $830m in cash and stock. The deal extends a string of acquisitions in the security field by Cisco that has been expanding beyond its original stronghold in networking hardware.
The WSJ reports that Cisco (CSCO) agreed to buy IronPort Systems, a network-security start-up, for $830m in cash and stock. The deal extends a string of acquisitions in the security field by Cisco that has been expanding beyond its original stronghold in networking hardware.
Wednesday, January 03, 2007
Calls of Note Part 2
- Jefferies notes that electrifying performance from Taser (NASDAQ:TASR) during 2007 is their prediction because they believe more U.S. law enforcement agencies have included Tasers in their 2007 budgets, international opportunities appear to keep growing, and new products broaden the scope of the business.
Financial performance likely provides positive surprises in 2007. jefco's revenue estimate of $105 million assumes market penetration expands by 10% during the year, from ~25% to ~35%, due to more police agencies including Tasers in their budgets. A 10% increase translates into approximately $80 million of revenue since there are around 800,000 U.S. law enforcement officials and the average initial purchase is $1,000 for the X26 and cartridges They estimate ROIC improves to over 80% in 2007, driven by a 32% operating margin and capital turnover of almost 5x.
With 30 lawsuits either dismissed or decided in the company's favor, and none decided against the company, the perceived legal risks should decline. Fourth quarter weakness likely in stock, but may hold back stock performance until reported.
Reits Buy and $13 tgt.
Notablecalls: Something for both traders and investor types.
Financial performance likely provides positive surprises in 2007. jefco's revenue estimate of $105 million assumes market penetration expands by 10% during the year, from ~25% to ~35%, due to more police agencies including Tasers in their budgets. A 10% increase translates into approximately $80 million of revenue since there are around 800,000 U.S. law enforcement officials and the average initial purchase is $1,000 for the X26 and cartridges They estimate ROIC improves to over 80% in 2007, driven by a 32% operating margin and capital turnover of almost 5x.
With 30 lawsuits either dismissed or decided in the company's favor, and none decided against the company, the perceived legal risks should decline. Fourth quarter weakness likely in stock, but may hold back stock performance until reported.
Reits Buy and $13 tgt.
Notablecalls: Something for both traders and investor types.
Calls of Note Part 1
Advanced Micro Devices (NYSE:AMD) is getting whacked this AM by several negative comments:
- Goldman Sachs is downgrading AMD to Sell from Neutral, as they expect a weak P&L throughout the year given the significant ramp in fixed costs, a weak CPU pricing environment in 2007, and increasing competition from Intel in CY1H2007.
- ThinkEquity's Eric Ross notes that inventories at AMD have suddenly built in the channel, and
prices are plummeting. The firm believes the channel is angry, and PC OEMs are expressing concern about AMD's roadmap (particularly mobile). They fear this will translate into share loss to Intel. With the price war between AMD and Intel re-igniting, they believe AMD has little opportunity of meeting the high expectations for GM and OM it set on its recent analyst day. With capacity building in the channel and the risks of missteps in executing its merger with ATI, ThinkEquity lowers rating to Sell and price target to $15.
Since Mr. Ross and his team returned from Asia at the beginning of December, AMD inventories have built in the channel from essentially zero to roughly one month. They note inventories wereextremely low due to all of AMD's production capacity being allocated directly to PC OEMs. This implies that programs for major OEMs are not going well, or are being cancelled.
The firm has heard from several channel sources that distributors now saddled with AMD parts are rapidly cutting prices to unload these parts. Many distributors are worried they will lose money on these parts (and are not happy about it).
Intel's early release of its new quad core chip at extremely competitive prices will further pressure AMD to lower prices and further impact gross margins. With no real end in sight to the now-beginning price war between AMD and Intel, the firm believes AMD's gross margins could fall into the mid 40% range with little chance of meeting the targets (50% +/- 2%) it laid out for 2007 at its analyst day on December 15.
Rating goes to Sell from Buy with tgt cut to $15 from $30.
Notablecalls: Ouch! AMD most likely going sub $20 today. The GSCO downgrade is a non-event but the comments from Eric are just plain ugly. Additional pressure for DELL?
- Goldman Sachs is downgrading AMD to Sell from Neutral, as they expect a weak P&L throughout the year given the significant ramp in fixed costs, a weak CPU pricing environment in 2007, and increasing competition from Intel in CY1H2007.
- ThinkEquity's Eric Ross notes that inventories at AMD have suddenly built in the channel, and
prices are plummeting. The firm believes the channel is angry, and PC OEMs are expressing concern about AMD's roadmap (particularly mobile). They fear this will translate into share loss to Intel. With the price war between AMD and Intel re-igniting, they believe AMD has little opportunity of meeting the high expectations for GM and OM it set on its recent analyst day. With capacity building in the channel and the risks of missteps in executing its merger with ATI, ThinkEquity lowers rating to Sell and price target to $15.
Since Mr. Ross and his team returned from Asia at the beginning of December, AMD inventories have built in the channel from essentially zero to roughly one month. They note inventories wereextremely low due to all of AMD's production capacity being allocated directly to PC OEMs. This implies that programs for major OEMs are not going well, or are being cancelled.
The firm has heard from several channel sources that distributors now saddled with AMD parts are rapidly cutting prices to unload these parts. Many distributors are worried they will lose money on these parts (and are not happy about it).
Intel's early release of its new quad core chip at extremely competitive prices will further pressure AMD to lower prices and further impact gross margins. With no real end in sight to the now-beginning price war between AMD and Intel, the firm believes AMD's gross margins could fall into the mid 40% range with little chance of meeting the targets (50% +/- 2%) it laid out for 2007 at its analyst day on December 15.
Rating goes to Sell from Buy with tgt cut to $15 from $30.
Notablecalls: Ouch! AMD most likely going sub $20 today. The GSCO downgrade is a non-event but the comments from Eric are just plain ugly. Additional pressure for DELL?
Color on news: Sirius Satellite (NASDAQ:SIRI)
Several firms are commenting on Sirius Satellite (NASDAQ:SIRI) after the co said on Tuesday it ended 2006 with 6.024 million subscribers and achieved its first quarter of positive free
cash flow in the fourth quarter in line with its expectations:
- Bear Stearns notes the subs number was slightly ahead of their recently revised estimate of 5.9m and in the range of their recently reduced guidance (5.9-6.1m). The ending subs would imply net adds of 905K for the quarter, which declined 21% YOY as 4Q 05 was skewed by Howard Stern.
Assuming OEM net adds are consistent with their expectation, the marginal outperformance is driven by retail, and that Sirius had a 58% market share at retail (consistent with publicly released NPD data), Sirius's ending subs imply that XM likely may have ended the quarter with 7.85M subscribers, about 50K higher than firm's current estimates.
Over the last month based on retail travails, Sirius has fallen 15% and the 10% EV premium has been erased and actually turned to an 4% EV gap to XM. The firm thinks this is more reasonable given that the focus in 2007 is shifting to OEM where XM's partners have ~60% market share. Should Sirius execute during 2007 and the EV gap widen further, they could be inclined to revisit their Underperform rating, as they are bullish on the industry and the long term prospects of the companies.
- Deutsche Bank thinks that given that Sirius stock opens 2007 at $3.54, just above its 52-week
low of $3.50, and the stock was down 7.5% in 4Q06, reflecting the lower sub guidance on December 4 and investor fears about a decelerating satellite radio retail category generally, they believe the 6.0m subs will be viewed as good news and maintain Buy rating.
- Cowen notes that six quarters ago, in August 2005, SIRI set guidance for positive FCF in Q4:06. Firm views the accomplishment of this goal as a strong indication of the co's FCF pot'l. This success bodes well for SIRI'slonger-term guidance of $3B in revs and $1B in FCF by 2010. This LT guidance reflects significant upside to their estimates.
Expects several catalysts to drive appreciation in 2007 including: 1) OEM growth, 2) Settlement in royalty arbitration, 3) Cont'd FCF performance. M&A could provide add'l upside, however they do not view it as highly likely.
Notablecalls: Think SIRI shareholders will enjoy a nice day today.
cash flow in the fourth quarter in line with its expectations:
- Bear Stearns notes the subs number was slightly ahead of their recently revised estimate of 5.9m and in the range of their recently reduced guidance (5.9-6.1m). The ending subs would imply net adds of 905K for the quarter, which declined 21% YOY as 4Q 05 was skewed by Howard Stern.
Assuming OEM net adds are consistent with their expectation, the marginal outperformance is driven by retail, and that Sirius had a 58% market share at retail (consistent with publicly released NPD data), Sirius's ending subs imply that XM likely may have ended the quarter with 7.85M subscribers, about 50K higher than firm's current estimates.
Over the last month based on retail travails, Sirius has fallen 15% and the 10% EV premium has been erased and actually turned to an 4% EV gap to XM. The firm thinks this is more reasonable given that the focus in 2007 is shifting to OEM where XM's partners have ~60% market share. Should Sirius execute during 2007 and the EV gap widen further, they could be inclined to revisit their Underperform rating, as they are bullish on the industry and the long term prospects of the companies.
- Deutsche Bank thinks that given that Sirius stock opens 2007 at $3.54, just above its 52-week
low of $3.50, and the stock was down 7.5% in 4Q06, reflecting the lower sub guidance on December 4 and investor fears about a decelerating satellite radio retail category generally, they believe the 6.0m subs will be viewed as good news and maintain Buy rating.
- Cowen notes that six quarters ago, in August 2005, SIRI set guidance for positive FCF in Q4:06. Firm views the accomplishment of this goal as a strong indication of the co's FCF pot'l. This success bodes well for SIRI'slonger-term guidance of $3B in revs and $1B in FCF by 2010. This LT guidance reflects significant upside to their estimates.
Expects several catalysts to drive appreciation in 2007 including: 1) OEM growth, 2) Settlement in royalty arbitration, 3) Cont'd FCF performance. M&A could provide add'l upside, however they do not view it as highly likely.
Notablecalls: Think SIRI shareholders will enjoy a nice day today.
Color on news: Lennar (NYSE:LEN)
Several firms are commenting on Lennar (NYSE:LEN) after the country's 3rd largest homebuilder warned for Q4:
- Deutsche Bank notes Lennar's preliminary 4Q06 results reveal an impact from worsening housing market conditions similar to other builders, but they also continue to show the different strategy that Lennar is pursuing. As the firm has written previously, Lennar's strategy of aggressively matching pricing with current market conditions should allow its earnings to
rebound sooner than other builders.
4Q06 orders are down only -6% (vs. -35-40% for other builders in 3Q), illustrating Lennar's strategy of adjusting pricing to maintain a steady sales and delivery pace. Closings of 14,006 reflect an impressive turnover rate of roughly 90%, up from 68% in 4Q05. Write-downs of $400-$500mm in 4Q06 will bring the total for the year to roughly $525-$625mm, or 6-7% of equity after-tax. Firm notes that as they have written previously, builders' year-end write-downs should continue to be higher than investors' expect. In contrast to Toll and Hovnanian, Lennar sees no signs of imminent housing market bottoming. DB reduces their estimates--4Q06 to $0.74 (excluding write-downs) and FY07 to $2.10.
- UBS on the other hand notes that while many builders were caught off guard by the severity & speed of the correction, they believe Lennar's strategy of building 'even flow' to match the delivery pace, vs building to order, is disappointing. In their opinion, aggressive discounting, necessitated by elevated cancellation rates & spec building, leads to a vicious circle of further price reductions and falling margins. The returns generated on the Newhall project underscore the co's land expertise, which unfortunately was overshadowed in 06 by poor execution in the HB business.
UBS is not all that pessimistic regarding the co saying that as capital for private builders becomes increasingly constrained, they expect opportunities for well-financed public builders to unfold. Historically, Lennar has had success in expanding through acquisitions during downturns, as demonstrated by the acquisition of U.S. Homes in 2000 and Pacific Greystone in 1997. The financial flexibility created by Lennar's conservative balance sheet, combined with its land expertise, should limit downside potential during this slowdown. Through its F3Q (Aug), Lennar's net debt to capital was 37%, well below the 48% group average, reflecting management's efforts to limit balance sheet leverage to govern growth and reduce risk.
The firm is reducing their F06E EPS to $5.55 (-32% YOY) from $5.85, vs mgmt's revised guidance of ~$5.60. Further, F07E goes to $2.20 (-60% YOY) from $2.40. TgtT remains $52 and rating at Neutral.
- JP Morgan comments that while LEN noted that market conditions continued to weaken, they note that 4Q orders (w/JVs) of down 6% nearly matched 3Q's -5%, against a similar comp of 25% vs. 4Q's 24%. Moreover, the firm note that while pricing has likely weakened, aside from this possibly being exacerbated by LEN's evenflow/spec model, they believe weaker pricing is necessary to reduce today's excess inventory. Lastly, contrary to LEN's comments, new and existing home sales, the MBA Purchase index, and other builders' comments on some regions all point to signs of stabilization.
While LEN's 4Q charges of $400-$500 mil. are on top of YTD charges of $98 mil., JPM notes
these are only slightly more than KBH's $395-$445 mil., HOV's $326 mil., PHM's expected $300 mil., and DHI's $260 mil (all YTD). Moreover, at 4.8% of equity (after-tax), they continue to believe book value remains reliable.
Overall, they believe this newsflow in total is a neutral event, and continue to believe stable to improving trends in inventory, orders, and can rates will be positive catalysts for the sector, and reiterate their positive stance.
At 1.41x book value, LEN's is trading roughly in-line with its large-cap peers' 1.39x, which the firm believes appropriately reflects the outlook for a roughly in-line FY07 EPS decline. Hence, the firm maintains Neutral rating.
Notablecalls: As I have noted before, housing downturns have historically lasted between 26 and 52 months with new home unit sales averaging around a 50% decline. New home sales topped at close to 1.4 mln units in 2005 and have declined to around 1 mln units currently. Add a highly leveraged consumer to the mix and you'll likely see a prolonged downturn. While several firms expect this downturn to last no more than next couple of qtrs I suspect they will be disappointed.
While I have very little or no feel for the homies I suspect LEN will not get hit in any substantial way following the news. Buying it down 5-6% may provide a nice st bounce entry.
- Deutsche Bank notes Lennar's preliminary 4Q06 results reveal an impact from worsening housing market conditions similar to other builders, but they also continue to show the different strategy that Lennar is pursuing. As the firm has written previously, Lennar's strategy of aggressively matching pricing with current market conditions should allow its earnings to
rebound sooner than other builders.
4Q06 orders are down only -6% (vs. -35-40% for other builders in 3Q), illustrating Lennar's strategy of adjusting pricing to maintain a steady sales and delivery pace. Closings of 14,006 reflect an impressive turnover rate of roughly 90%, up from 68% in 4Q05. Write-downs of $400-$500mm in 4Q06 will bring the total for the year to roughly $525-$625mm, or 6-7% of equity after-tax. Firm notes that as they have written previously, builders' year-end write-downs should continue to be higher than investors' expect. In contrast to Toll and Hovnanian, Lennar sees no signs of imminent housing market bottoming. DB reduces their estimates--4Q06 to $0.74 (excluding write-downs) and FY07 to $2.10.
- UBS on the other hand notes that while many builders were caught off guard by the severity & speed of the correction, they believe Lennar's strategy of building 'even flow' to match the delivery pace, vs building to order, is disappointing. In their opinion, aggressive discounting, necessitated by elevated cancellation rates & spec building, leads to a vicious circle of further price reductions and falling margins. The returns generated on the Newhall project underscore the co's land expertise, which unfortunately was overshadowed in 06 by poor execution in the HB business.
UBS is not all that pessimistic regarding the co saying that as capital for private builders becomes increasingly constrained, they expect opportunities for well-financed public builders to unfold. Historically, Lennar has had success in expanding through acquisitions during downturns, as demonstrated by the acquisition of U.S. Homes in 2000 and Pacific Greystone in 1997. The financial flexibility created by Lennar's conservative balance sheet, combined with its land expertise, should limit downside potential during this slowdown. Through its F3Q (Aug), Lennar's net debt to capital was 37%, well below the 48% group average, reflecting management's efforts to limit balance sheet leverage to govern growth and reduce risk.
The firm is reducing their F06E EPS to $5.55 (-32% YOY) from $5.85, vs mgmt's revised guidance of ~$5.60. Further, F07E goes to $2.20 (-60% YOY) from $2.40. TgtT remains $52 and rating at Neutral.
- JP Morgan comments that while LEN noted that market conditions continued to weaken, they note that 4Q orders (w/JVs) of down 6% nearly matched 3Q's -5%, against a similar comp of 25% vs. 4Q's 24%. Moreover, the firm note that while pricing has likely weakened, aside from this possibly being exacerbated by LEN's evenflow/spec model, they believe weaker pricing is necessary to reduce today's excess inventory. Lastly, contrary to LEN's comments, new and existing home sales, the MBA Purchase index, and other builders' comments on some regions all point to signs of stabilization.
While LEN's 4Q charges of $400-$500 mil. are on top of YTD charges of $98 mil., JPM notes
these are only slightly more than KBH's $395-$445 mil., HOV's $326 mil., PHM's expected $300 mil., and DHI's $260 mil (all YTD). Moreover, at 4.8% of equity (after-tax), they continue to believe book value remains reliable.
Overall, they believe this newsflow in total is a neutral event, and continue to believe stable to improving trends in inventory, orders, and can rates will be positive catalysts for the sector, and reiterate their positive stance.
At 1.41x book value, LEN's is trading roughly in-line with its large-cap peers' 1.39x, which the firm believes appropriately reflects the outlook for a roughly in-line FY07 EPS decline. Hence, the firm maintains Neutral rating.
Notablecalls: As I have noted before, housing downturns have historically lasted between 26 and 52 months with new home unit sales averaging around a 50% decline. New home sales topped at close to 1.4 mln units in 2005 and have declined to around 1 mln units currently. Add a highly leveraged consumer to the mix and you'll likely see a prolonged downturn. While several firms expect this downturn to last no more than next couple of qtrs I suspect they will be disappointed.
While I have very little or no feel for the homies I suspect LEN will not get hit in any substantial way following the news. Buying it down 5-6% may provide a nice st bounce entry.
Paperstand
The WSJ’s „Inside Track” section reports that recent stock purchases by co insiders and a hedge fund are broadcasting a pretty clear signal about Gray Television (GTN). Chmn and CEO J. Mack Robinson and his wife, regular buyers of the stock over the years, have stepped up their purchasing pace by buying, since the beginning of Nov, almost $1m of stock in the co. Highland Capital Mgmt spent $1.29m on the shares in Dec, raising its stake to 10.5%. The positive signal sent by these purchases is reinforced by the fact they took place during a period when the co's common and Class A shares each rose more than 25%, said Jonathan Moreland, of InsiderInsights.com. "Buying into strength is a positive," he said.
Barron’s Online “Inside Scoop” section reports that on Dec. 28 Tudor Investment disclosed a 5.9% stake in Priceline (PCLN), or 2.15m shares. Tudor had not owned the stock since selling out of a previous holding at the end of ‘05. Priceline's largest shareholder, Fidelity Mgmt Research, also purchased shares in the 4Q, moving up from the 6.6% stake, or 2.4m shares, to a 12.3% stake, or 4.5m shares, on Dec. 11. Ben Silverman, of InsiderScore.com, says that the buys by Tudor and Fidelity outweighed the impact of a sale by Hutchison Whampoa, which sold its entire 10% stake, or 3.9m shares. "The fact that the [Hutchison] sale went on, and then the stock went higher shows that there is certainly a mkt for the stock," says Silverman, adding that "it looks like some of the institutions used that sale as an opportunity to beef up their own holdings" of Priceline stock.
NY Times reports that the S-Korean antitrust agency has formed a task force to investigate the licensing and business practices of the Qualcomm (QCOM). In Japan, Europe and the US, Qualcomm faces accusations by rivals that it has abused its mkt dominance in wireless technology to demand excessive royalties and block fair competition.
Barron’s Online “Inside Scoop” section reports that on Dec. 28 Tudor Investment disclosed a 5.9% stake in Priceline (PCLN), or 2.15m shares. Tudor had not owned the stock since selling out of a previous holding at the end of ‘05. Priceline's largest shareholder, Fidelity Mgmt Research, also purchased shares in the 4Q, moving up from the 6.6% stake, or 2.4m shares, to a 12.3% stake, or 4.5m shares, on Dec. 11. Ben Silverman, of InsiderScore.com, says that the buys by Tudor and Fidelity outweighed the impact of a sale by Hutchison Whampoa, which sold its entire 10% stake, or 3.9m shares. "The fact that the [Hutchison] sale went on, and then the stock went higher shows that there is certainly a mkt for the stock," says Silverman, adding that "it looks like some of the institutions used that sale as an opportunity to beef up their own holdings" of Priceline stock.
NY Times reports that the S-Korean antitrust agency has formed a task force to investigate the licensing and business practices of the Qualcomm (QCOM). In Japan, Europe and the US, Qualcomm faces accusations by rivals that it has abused its mkt dominance in wireless technology to demand excessive royalties and block fair competition.
Monday, January 01, 2007
Barron's Summary
Barron’s cover discusses the new AT&T/BellSouth (T), sayint that in the next few years, AT&T's earnings growth will depend largely on savings from cost-cutting after several big mergers. Cable competitors are in hot pursuit of the co's retail phone customers, however, and also have their sights on small and midsize businesses. Any or all of these issues could trip up AT&T in ‘07 or ‘08, resulting in lower-than-expected rev, higher expenses and a declining stock price. The co's shares have climbed 46.5% in the past year, to a recent 35, amid investor enthusiasm for the BellSouth deal, and currently trade for 13.6x next year's earnings. If P/E multiple merely retreats to 11, the bottom of its normal range, the stock could fall nearly 15%, to 30. But if the co misses Street's earnings tgts, the downside could be greater.
Fund manager picks include TSM and CHL. Another fund manager remains vary on India, but likes TTM and VSL.
The shares of Safeway (SWY) have surged 48% in the past year, to a recent 35, but investors may be getting carried away. Considering the challenges ahead, the stock is probably worth closer to 30.
Now that Great Plains Energy (GXP) has turned itself around, the shares could return 15% over the next year, thanks in part to a hefty dividend. The stock price is up 17% just since last summer.
“Up and Down Wall Street” section reports that usually, cancellations run only about 15% of orders for publicly owned home builders. However, cancellations have soared this year. According to Doug Kass 3Q rates for each of the leading home builders are: Centex (CTX), 37%; DR Horton (DHI), 40%; KB Homes (KBH), 53%; Lennar (LEN), 31%; Pulte Homes (PHM), 36%; Beazer (BZH), 57%; Hovanian (HOV), 35%; MDC Holdings (MDC), 49%; and Standard Pacific (SPF), 50%.
“Technology Trader” out saying that when Microsoft (MSFT) starts selling consumers the Vista at the end of the month, the co can look forward to a good cycle of upgrade sales. That's why the co’s shares rose 14% last year. Last year, memory-chip press agents told that Vista would spark a surge in demand for DRAM. The flacks told the truth. But the Vista memory boost has already happened, ahead of release of Vista. Since last summer, PC makers have urged PC buyers to get Vista-ready amounts of DRAM when purchasing, increasing avg DRAM per PC to 1Gb. That anticipation spurred a hot summer run in DRAM sales, as well as stock prices, for makers like Micron (MU), Qimonda (QI) and others. That was nice while it lasted. Some memory makers talk vaguely of a Vista demand boost in the 2H07, but that makes no sense when PCs are already selling with enough DRAM for Vista. What is more likely to appear this year is a glut of DRAM supply. Manufacturers are adding a lot of new production capacity this year. And the industry is starting to make chips that have smaller transistors, which would increase the bit-yield per wafer by about 50%. The shares of Micron already have fallen a 1/3 from their summer peak. Investors got the willies as demand softened for NAND flash and as Micron inventories steadily climbed. There's also lots of NAND manufacturing capacity on the way. Given the potential for a ‘07 glut in DRAM and NAND, Micron doesn't look like a fresh-money buy for ’07.
Fund manager picks include TSM and CHL. Another fund manager remains vary on India, but likes TTM and VSL.
The shares of Safeway (SWY) have surged 48% in the past year, to a recent 35, but investors may be getting carried away. Considering the challenges ahead, the stock is probably worth closer to 30.
Now that Great Plains Energy (GXP) has turned itself around, the shares could return 15% over the next year, thanks in part to a hefty dividend. The stock price is up 17% just since last summer.
“Up and Down Wall Street” section reports that usually, cancellations run only about 15% of orders for publicly owned home builders. However, cancellations have soared this year. According to Doug Kass 3Q rates for each of the leading home builders are: Centex (CTX), 37%; DR Horton (DHI), 40%; KB Homes (KBH), 53%; Lennar (LEN), 31%; Pulte Homes (PHM), 36%; Beazer (BZH), 57%; Hovanian (HOV), 35%; MDC Holdings (MDC), 49%; and Standard Pacific (SPF), 50%.
“Technology Trader” out saying that when Microsoft (MSFT) starts selling consumers the Vista at the end of the month, the co can look forward to a good cycle of upgrade sales. That's why the co’s shares rose 14% last year. Last year, memory-chip press agents told that Vista would spark a surge in demand for DRAM. The flacks told the truth. But the Vista memory boost has already happened, ahead of release of Vista. Since last summer, PC makers have urged PC buyers to get Vista-ready amounts of DRAM when purchasing, increasing avg DRAM per PC to 1Gb. That anticipation spurred a hot summer run in DRAM sales, as well as stock prices, for makers like Micron (MU), Qimonda (QI) and others. That was nice while it lasted. Some memory makers talk vaguely of a Vista demand boost in the 2H07, but that makes no sense when PCs are already selling with enough DRAM for Vista. What is more likely to appear this year is a glut of DRAM supply. Manufacturers are adding a lot of new production capacity this year. And the industry is starting to make chips that have smaller transistors, which would increase the bit-yield per wafer by about 50%. The shares of Micron already have fallen a 1/3 from their summer peak. Investors got the willies as demand softened for NAND flash and as Micron inventories steadily climbed. There's also lots of NAND manufacturing capacity on the way. Given the potential for a ‘07 glut in DRAM and NAND, Micron doesn't look like a fresh-money buy for ’07.
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