Notable Calls
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Friday, March 30, 2007
Have a nice weekend!
Calls of Note Part 3
Prudential notes that trading in Avici Systems (NASDAQ:AVCI) shares has spiked this week, accompanied by a swift move in prices over the past 3 days. This week, nearly 40% of the outstanding shares have traded (nearly 5.5M shares), vs. the 20-day average daily volume of about 400K going into the week, though spikes as high as 60%-70% of total shares in a single day occurred twice in the past year at earnings releases. Firm does not believe this recent trading is driven by positive long-term fundamental developments for Avici.
AVCI is almost entirely dependent on a single customer, AT&T, which uses AVCI products as its primary core routing platform. Given AVCI's limited resources to support development, both monetary and in headcount, firm expects AVCI to be displaced as sole core provider to AT&T, something AVCI has also acknowledged in filings.
AVCI started seeking potential buyers more aggressively in 2/06, coinciding with a near 50% cut in headcount, but by the end of '06, none had emerged. Some potential buyers, including Huawei, Alacatel-Lucent, and Nortel, have exited previous reseller/OEM agreements with AVCI, hardly the action of interested buyers. At this point, firm believes it is unlikely AVCI will find a buyer in the telco vendor community. Nor do they believe AVCI is seeing traction yet in its SOAPSTONE project, which is still in early development.
Reiterates Underweight and $6 tgt.
Notablecalls: Expect the stock give back at least some of this week's gains.
AVCI is almost entirely dependent on a single customer, AT&T, which uses AVCI products as its primary core routing platform. Given AVCI's limited resources to support development, both monetary and in headcount, firm expects AVCI to be displaced as sole core provider to AT&T, something AVCI has also acknowledged in filings.
AVCI started seeking potential buyers more aggressively in 2/06, coinciding with a near 50% cut in headcount, but by the end of '06, none had emerged. Some potential buyers, including Huawei, Alacatel-Lucent, and Nortel, have exited previous reseller/OEM agreements with AVCI, hardly the action of interested buyers. At this point, firm believes it is unlikely AVCI will find a buyer in the telco vendor community. Nor do they believe AVCI is seeing traction yet in its SOAPSTONE project, which is still in early development.
Reiterates Underweight and $6 tgt.
Notablecalls: Expect the stock give back at least some of this week's gains.
Calls of Note Part 2
ThinkEquity believes that WebSideStory (NASDAQ:WSSI) is underappreciated for secular trends and strengthening positioning, which has depressed valuation multiples. Firm's recent checks suggest activity levels and sales focus have improved nicely q/q, which suggests that risk/reward levels are current levels. They're encouraged that CEO Jim McIntyre's leadership has focused and re-energized the company, and expect that increased confidence both in his leadership and in the broadening customer analytics opportunity drives multiple expansion.
Firm would not be surprised if management had relatively strong visibility into Q1 targets, given that the Q4 results were announced late in February (vs. instead of in late January) and given that firm's checks suggest that Q1 was off to a good start. They're aware of a large Visual Sciences deal with a new customer and also some other opportunities which were closed early in Q1, which drives their comfort levels with their targets (which are slightly ahead of street estimates).
Online ad spending continues to be healthy (especially with increased interest in online video advertising or mobile ads and ramping credibility of Yahoo search), although any mild slow down in online ad spending could potentially be positive news for web analytics vendors: In fact, firm wouldn't be surprised to see organizations shift some focus to improving online measurement and optimization in order to drive increased funding for online advertising programs in the intermediate term. Given that web analytics is a key enabler of online site measurement and optimization, they expect that overall interest in web analytics and related customer targeting (search, bid management) continues to grow nicely.
WebSideStory going after the broader customer analytics opportunity via the Visual Sciences platform, which opens the door to a larger IT spending pool: Firm believes that WebSideStory is differentiated vis- -vis other web analytics vendors on its ability to solve broader, more complex customer analytics opportunities. This broader customer analytics opportunity requires a next generation platform to span both online and offline worlds and cut across channels (email, IVR, kiosk, catalog, POS, reservation) in real time, and enable more flexible, deep dive, and real-time analysis of customer trends and opportunities. Firm believe that the budget for a broader customer analytics solution could come out of the IT budget instead of the online marketing budget, and thus opens the door to much larger pool of spending (could be 10x more spending on Business Intelligence to support marketing than on Web Analytics to support online marketing). They acknowledge the increased challenges in navigating the more technical conversations with IT and the business intelligence teams in sales cycles, and are comfortable that the reps are appropriately and quickly ramping up.
Firm has Buy rating and $22 tgt for the stock.
Notablecalls: There are some comments about the current quarter too, but overall it's rather for you investors out there.
Firm would not be surprised if management had relatively strong visibility into Q1 targets, given that the Q4 results were announced late in February (vs. instead of in late January) and given that firm's checks suggest that Q1 was off to a good start. They're aware of a large Visual Sciences deal with a new customer and also some other opportunities which were closed early in Q1, which drives their comfort levels with their targets (which are slightly ahead of street estimates).
Online ad spending continues to be healthy (especially with increased interest in online video advertising or mobile ads and ramping credibility of Yahoo search), although any mild slow down in online ad spending could potentially be positive news for web analytics vendors: In fact, firm wouldn't be surprised to see organizations shift some focus to improving online measurement and optimization in order to drive increased funding for online advertising programs in the intermediate term. Given that web analytics is a key enabler of online site measurement and optimization, they expect that overall interest in web analytics and related customer targeting (search, bid management) continues to grow nicely.
WebSideStory going after the broader customer analytics opportunity via the Visual Sciences platform, which opens the door to a larger IT spending pool: Firm believes that WebSideStory is differentiated vis- -vis other web analytics vendors on its ability to solve broader, more complex customer analytics opportunities. This broader customer analytics opportunity requires a next generation platform to span both online and offline worlds and cut across channels (email, IVR, kiosk, catalog, POS, reservation) in real time, and enable more flexible, deep dive, and real-time analysis of customer trends and opportunities. Firm believe that the budget for a broader customer analytics solution could come out of the IT budget instead of the online marketing budget, and thus opens the door to much larger pool of spending (could be 10x more spending on Business Intelligence to support marketing than on Web Analytics to support online marketing). They acknowledge the increased challenges in navigating the more technical conversations with IT and the business intelligence teams in sales cycles, and are comfortable that the reps are appropriately and quickly ramping up.
Firm has Buy rating and $22 tgt for the stock.
Notablecalls: There are some comments about the current quarter too, but overall it's rather for you investors out there.
Calls of Note Part 1
SunTrust says they remain bullish on Bankrate (NASDAQ:RATE) and contend that the shares? recent swoon reflects an over-reaction to perceived macro risk factors. It is their opinion that the company's proprietary content, overwhelmingly low-cost organic traffic and superior monetization will fuel sustainable long-term above-average organic revenue, EPS and free cash flow growth through the economic cycle.
Some RATE detractors argue that ongoing turmoil in the sub-prime mortgage market presages overall market deterioration, which will ultimately cause many of the company's advertisers to fail or will substantially erode the company's pricing power. Firm contends that these concerns are materially misplaced, however, in light of the company's increasingly diversified advertiser base and its superior value proposition.
While they acknowledge that a sharp mortgage market contraction or a protracted secondary market liquidity crisis could cause a dramatic mortgage volume decline - with a clearly deleterious financial impact on Bankrate - they believe these are relatively remote possibilities. Firm encourages investors to note that the overall mortgage market remains healthy, despite the sub-prime debacle, as measured by 1Q07?s robust MBA index performance. This is a reliable indicator of Bankrate's traffic, in their opinion, and reflects an apparent dichotomy between prime and sub-prime demand.
They are also constructive regarding Bankrate's pricing power. Some bears argue that a mortgage market contraction would adversely affect the company's pricing leverage. Again, while a deep, protracted downturn could cause the failure of sufficient mortgage advertisers to dent aggregate demand, firm contends that Bankrate's value proposition to advertisers, coupled with an increasingly diversified base, will allow the company to continue raising prices and monetizing traffic. Firm reminds investors that higher revenue per page view reflects both explicit pricing increases and improving yield. They anticipate ongoing yield optimization.
Notablecalls: RATE tried to bounce yesterday on positive mention from Jefferies, but tough tape dragged it back down. Expect to see another attempt today with better results.
Some RATE detractors argue that ongoing turmoil in the sub-prime mortgage market presages overall market deterioration, which will ultimately cause many of the company's advertisers to fail or will substantially erode the company's pricing power. Firm contends that these concerns are materially misplaced, however, in light of the company's increasingly diversified advertiser base and its superior value proposition.
While they acknowledge that a sharp mortgage market contraction or a protracted secondary market liquidity crisis could cause a dramatic mortgage volume decline - with a clearly deleterious financial impact on Bankrate - they believe these are relatively remote possibilities. Firm encourages investors to note that the overall mortgage market remains healthy, despite the sub-prime debacle, as measured by 1Q07?s robust MBA index performance. This is a reliable indicator of Bankrate's traffic, in their opinion, and reflects an apparent dichotomy between prime and sub-prime demand.
They are also constructive regarding Bankrate's pricing power. Some bears argue that a mortgage market contraction would adversely affect the company's pricing leverage. Again, while a deep, protracted downturn could cause the failure of sufficient mortgage advertisers to dent aggregate demand, firm contends that Bankrate's value proposition to advertisers, coupled with an increasingly diversified base, will allow the company to continue raising prices and monetizing traffic. Firm reminds investors that higher revenue per page view reflects both explicit pricing increases and improving yield. They anticipate ongoing yield optimization.
Notablecalls: RATE tried to bounce yesterday on positive mention from Jefferies, but tough tape dragged it back down. Expect to see another attempt today with better results.
Color on Quarter: Red Hat (NYSE:RHT)
Several comments on Red Hat (NYSE:RHT) after co's F4Q07 report and FY08 guidance.
- JP Morgan notes RHT reported modestly softer than expected Q407 revenue and Q108 revenue guidance, while the company's FY08 guidance encapsulates consensus-and EPS guidance of $0.67-0.72 compares well to consensus of $0.68. They are relieved to not see a downward revision to FY08 margins given recent commentary about JBoss investments. FY08 cash flow guidance of 15-20% growth will likely bring upward revisions to cashflow and provides comfort for billings growth in the 17-23% range for FY08 which compares firm's estimate of 21%. While Q4 could have been stronger, the FY08 outlook is encouraging and should provide support for the stock.
Firm says Cashflow and billings look solid going forward. They have raised their FY08 adjusted operating cash flow to $255M from $246M (guidance was $250-260M) which puts their FY08 billings target at 21%-a modest increase from 20.5% growth in billings heading into the print. Furthermore, the mix of long term billings decreased to 25% of billings from 29% in Q3, and should provide some relief to concerns on elongating cycles though, the number was up YoY from 21%. The increase in the FY08 billings target is the takeaway here and provides comfort over the quarter-to-quarter volatility in subscription and billings growth.
- Bank of America says execution continues and fundamentals remain solid. Although RHT didn't deliver another blowout, the biz continues to trend well, as better than expected subscription rev ($96 mm), solid billings/non-GAAP cash flow ($138 mm, $56 mm), and slightly more bullish '08 guidance overshadowed a $2.3 million training/services revenue shortfall.
What are we doing with the stock? While a tough tech tape could limit some of the upside in the near term, firm remains buyers here, as they were encouraged by another quarter of solid execution and believe Red Hat's risk/rewardprofile is attractive at current levels. In addition, Red Hat remains one of the few secular growth stories in the enterprise software space, which could bode well for the shares should market sentiment rebound in 2H07.
- Baird notes that the risks and noise swirling around this story have begun to fade; 1) Oracle and Microsoft/SUSE have not disrupted demand; 2) projections by some industry analysts that Linux server shipments had slowed proved untrue; 3) JBoss has not experienced personnel defections in the wake of Marc Fluery's departure; and 4) the advent virtualization is not likely to cannibalize RHEL license sales.
Firm's concern had been that the introduction of GPLv3 would create confusion and consternation in the market. The most recent draft introduced just two days ago was most encouraging. The language around the patent provision appeared much less threatening.
The JBoss product offering remains in the early stages of development, and holds considerable long-term prospects. Firm expects Red Hat to remain a disruptive change agent within the software industry, to the continued benefit of its shareholders.
- Goldman Sachs says Red Hat's 4Q FY2007 was a mixed bag, with guidance ultimately putting a positive spin on results that were more in-line with estimates and likely a touch below the more bullish expectations. That said, the most important metrics - namely cashflow and billings both beat their estimates coming in at $46m and $138m (up 35%) respectively compared to their $41m and $133m expectations. Guidance (particularly on cash flow) should result in rising Street estimates. Firm's revised FY'08, FY'09 EPS estimates are $0.70 and $0.83, compared to $0.66 and $0.78. They are initiating FY'10 EPS estimates of $0.94. (Including ESOs expenses their estimates are $0.55, $0.69 and $0.82).
Notablecalls: Strong billings and cash flow guidance sent the stock up ~5% in the afterhours. While I'm positive on the stock l-t as the mgmt continues to execute, it's tough to see any more upside today in the current mkt.
- JP Morgan notes RHT reported modestly softer than expected Q407 revenue and Q108 revenue guidance, while the company's FY08 guidance encapsulates consensus-and EPS guidance of $0.67-0.72 compares well to consensus of $0.68. They are relieved to not see a downward revision to FY08 margins given recent commentary about JBoss investments. FY08 cash flow guidance of 15-20% growth will likely bring upward revisions to cashflow and provides comfort for billings growth in the 17-23% range for FY08 which compares firm's estimate of 21%. While Q4 could have been stronger, the FY08 outlook is encouraging and should provide support for the stock.
Firm says Cashflow and billings look solid going forward. They have raised their FY08 adjusted operating cash flow to $255M from $246M (guidance was $250-260M) which puts their FY08 billings target at 21%-a modest increase from 20.5% growth in billings heading into the print. Furthermore, the mix of long term billings decreased to 25% of billings from 29% in Q3, and should provide some relief to concerns on elongating cycles though, the number was up YoY from 21%. The increase in the FY08 billings target is the takeaway here and provides comfort over the quarter-to-quarter volatility in subscription and billings growth.
- Bank of America says execution continues and fundamentals remain solid. Although RHT didn't deliver another blowout, the biz continues to trend well, as better than expected subscription rev ($96 mm), solid billings/non-GAAP cash flow ($138 mm, $56 mm), and slightly more bullish '08 guidance overshadowed a $2.3 million training/services revenue shortfall.
What are we doing with the stock? While a tough tech tape could limit some of the upside in the near term, firm remains buyers here, as they were encouraged by another quarter of solid execution and believe Red Hat's risk/rewardprofile is attractive at current levels. In addition, Red Hat remains one of the few secular growth stories in the enterprise software space, which could bode well for the shares should market sentiment rebound in 2H07.
- Baird notes that the risks and noise swirling around this story have begun to fade; 1) Oracle and Microsoft/SUSE have not disrupted demand; 2) projections by some industry analysts that Linux server shipments had slowed proved untrue; 3) JBoss has not experienced personnel defections in the wake of Marc Fluery's departure; and 4) the advent virtualization is not likely to cannibalize RHEL license sales.
Firm's concern had been that the introduction of GPLv3 would create confusion and consternation in the market. The most recent draft introduced just two days ago was most encouraging. The language around the patent provision appeared much less threatening.
The JBoss product offering remains in the early stages of development, and holds considerable long-term prospects. Firm expects Red Hat to remain a disruptive change agent within the software industry, to the continued benefit of its shareholders.
- Goldman Sachs says Red Hat's 4Q FY2007 was a mixed bag, with guidance ultimately putting a positive spin on results that were more in-line with estimates and likely a touch below the more bullish expectations. That said, the most important metrics - namely cashflow and billings both beat their estimates coming in at $46m and $138m (up 35%) respectively compared to their $41m and $133m expectations. Guidance (particularly on cash flow) should result in rising Street estimates. Firm's revised FY'08, FY'09 EPS estimates are $0.70 and $0.83, compared to $0.66 and $0.78. They are initiating FY'10 EPS estimates of $0.94. (Including ESOs expenses their estimates are $0.55, $0.69 and $0.82).
Notablecalls: Strong billings and cash flow guidance sent the stock up ~5% in the afterhours. While I'm positive on the stock l-t as the mgmt continues to execute, it's tough to see any more upside today in the current mkt.
Color on Announcement: Dell (NASDAQ:DELL)
Couple of firms comment Dell (NASDAQ:DELL) after co delayd its SEC filings due to ongoing investigation.
- JP Morgan notes last night Dell announced that its 10-K filing would be delayed owing to its ongoing accounting investigation. While this was not entirely unexpected, the company went on to note that the audit committee's investigation had uncovered evidence of "misconduct," a number of accounting errors, and deficiencies in the company's financial control environment.
Firm believes the accounting investigation had been largely overlooked by investors, who had become increasingly focused on what Dell's restructuring plans would be. Now that the company has revealed that misconduct has occurred, firm believes the risks are more pronounced for whatever the investigation uncovers. The company has not definitively noted that a restatement will be necessary, but the company has noted the investigation is focused on revenue recognition and accruals.
- Prudential says that while the delay and language contained within the press release will be a disappointment to some investors, they think there is little risk of a delisting and/or criminal charges being brought against Dell's current executives.
They continue to recommend owning shares of Dell on our belief that there is operating leverage in the model due to 1) reduced component and operational costs, 2) a balanced pricing strategy, 3) server and storage product cycles, and 4) services expansion.
- Cowen says the main concern they have with yesterday's announcement is not the timing of when Dell will file their 10K, but what will be in the filing. They would rank the order of our concerns to be first "evidence of misconduct" then "deficiencies in the financial control", and finally just "accounting errors". For the Dell near term bulls, these comments raise the concern that historical margins that the company has enjoyed, might not be accurate. If so, the premise that the company can get close to prior margin structure might not be as important. Dell has not stated if these items will require restatement. Firm believes the company is providing information as it becomes available, but has not yet concluded its efforts.
- Merrill Lynch says their initial read is that a worst case restatement scenario appears unlikely to be consistent with the language in Dell's accounting disclosure and the outcome may be more benign than words like "misconduct" and "deficiencies" first suggest. They find it unlikely that a significant restatement would be lurking undisclosed at a point when Dell's Audit chair simultaneously asserts: (1) "as we move toward the conclusion of our investigation"; and (2) "the Audit Committee is working . . . to determine whether the accounting errors necessitate any restatements of prior period financial statements, and to assess whether the control deficiencies constitute a material weakness in Dell's internal control over financial reporting."
If Dell is near the conclusion, wouldn't it identify now if it believed a material restatement was likely? That it's still determining if "any" restatement is required suggests it may be unlikely to find a significant and obvious case at this late stage.
In firm's opinion, the key question is whether Dell's accounting errors constitute (a) earnings smoothing from quarter to quarter yet essentially accurate reporting over longer periods; or (b) outright misrepresentation of earnings power over multiple annual periods such that investors' view of historical margins is slashed.
Notablecalls: It would be easy to call not filing 10K a non-event as Prudential does, but the possible content of the filing is what makes me cautious. Concerns about the accuracy of Dell's prior margins will probably prevent any meaningful bounce in the stock today vs current $22.90 level.
- JP Morgan notes last night Dell announced that its 10-K filing would be delayed owing to its ongoing accounting investigation. While this was not entirely unexpected, the company went on to note that the audit committee's investigation had uncovered evidence of "misconduct," a number of accounting errors, and deficiencies in the company's financial control environment.
Firm believes the accounting investigation had been largely overlooked by investors, who had become increasingly focused on what Dell's restructuring plans would be. Now that the company has revealed that misconduct has occurred, firm believes the risks are more pronounced for whatever the investigation uncovers. The company has not definitively noted that a restatement will be necessary, but the company has noted the investigation is focused on revenue recognition and accruals.
- Prudential says that while the delay and language contained within the press release will be a disappointment to some investors, they think there is little risk of a delisting and/or criminal charges being brought against Dell's current executives.
They continue to recommend owning shares of Dell on our belief that there is operating leverage in the model due to 1) reduced component and operational costs, 2) a balanced pricing strategy, 3) server and storage product cycles, and 4) services expansion.
- Cowen says the main concern they have with yesterday's announcement is not the timing of when Dell will file their 10K, but what will be in the filing. They would rank the order of our concerns to be first "evidence of misconduct" then "deficiencies in the financial control", and finally just "accounting errors". For the Dell near term bulls, these comments raise the concern that historical margins that the company has enjoyed, might not be accurate. If so, the premise that the company can get close to prior margin structure might not be as important. Dell has not stated if these items will require restatement. Firm believes the company is providing information as it becomes available, but has not yet concluded its efforts.
- Merrill Lynch says their initial read is that a worst case restatement scenario appears unlikely to be consistent with the language in Dell's accounting disclosure and the outcome may be more benign than words like "misconduct" and "deficiencies" first suggest. They find it unlikely that a significant restatement would be lurking undisclosed at a point when Dell's Audit chair simultaneously asserts: (1) "as we move toward the conclusion of our investigation"; and (2) "the Audit Committee is working . . . to determine whether the accounting errors necessitate any restatements of prior period financial statements, and to assess whether the control deficiencies constitute a material weakness in Dell's internal control over financial reporting."
If Dell is near the conclusion, wouldn't it identify now if it believed a material restatement was likely? That it's still determining if "any" restatement is required suggests it may be unlikely to find a significant and obvious case at this late stage.
In firm's opinion, the key question is whether Dell's accounting errors constitute (a) earnings smoothing from quarter to quarter yet essentially accurate reporting over longer periods; or (b) outright misrepresentation of earnings power over multiple annual periods such that investors' view of historical margins is slashed.
Notablecalls: It would be easy to call not filing 10K a non-event as Prudential does, but the possible content of the filing is what makes me cautious. Concerns about the accuracy of Dell's prior margins will probably prevent any meaningful bounce in the stock today vs current $22.90 level.
Thursday, March 29, 2007
Calls of Note Part 5
Couple of more comments on Apple (NASDAQ:AAPL):
- Prudential completed a tear-down analysis of the Apple iTV, which was released into the North American market last week.
The iTV looks like a scaled down PC. Intel's Crofton MPU (looks like a Dothan) and Calistoga chipset drive the device, along with NVidia's GE Force Go 7300 GPU. Broadcom's 802.11n WLAN chipset is in the version theypurchased, as is Realtek's Audio Codec and Fast Ethernet LAN controller.
On the memory side, Nanya and Samsung are the largest suppliers of DRAM, while Toshiba supplies a 40GB HDD. Other components are from Linear Tech (analog), Marvell (HDD SoC), International Rectifier (FETs), Cypress (Clock Chip and flash controller), Intersil (CPU voltage regulator), and Texas Instruments (analog and HDD motor controller).
While the Apple iTV is a high-visibility design win, they do not expect it to change the economic fortunes for most of its suppliers. PEG's Senior IT Hardware analyst, Jesse Tortora, who covers Apple, is forecasting only 800,000 and 1.8 million units to be shipped in 2007 and 2008, respectively.
- Morgan Stanley comments on PC's saying unit demand rebounded in February after a meaningful slowdown in January due to consumers waiting for Vista loaded PCs until late January. Total U.S. PC unit growth rebounded to a healthy 23% YoY in February, in-line with December 2006 growth. AAPL is the only vendor that appears unscathed by the Vista transition. Continued Mac momentum and strong double-digit iPod growth in the Q give them confidence that AAPL will beat expectations in the March Q.
Notablecalls: Not actionable but good to know category. Please scroll down for additional commentary on AAPL.
- Prudential completed a tear-down analysis of the Apple iTV, which was released into the North American market last week.
The iTV looks like a scaled down PC. Intel's Crofton MPU (looks like a Dothan) and Calistoga chipset drive the device, along with NVidia's GE Force Go 7300 GPU. Broadcom's 802.11n WLAN chipset is in the version theypurchased, as is Realtek's Audio Codec and Fast Ethernet LAN controller.
On the memory side, Nanya and Samsung are the largest suppliers of DRAM, while Toshiba supplies a 40GB HDD. Other components are from Linear Tech (analog), Marvell (HDD SoC), International Rectifier (FETs), Cypress (Clock Chip and flash controller), Intersil (CPU voltage regulator), and Texas Instruments (analog and HDD motor controller).
While the Apple iTV is a high-visibility design win, they do not expect it to change the economic fortunes for most of its suppliers. PEG's Senior IT Hardware analyst, Jesse Tortora, who covers Apple, is forecasting only 800,000 and 1.8 million units to be shipped in 2007 and 2008, respectively.
- Morgan Stanley comments on PC's saying unit demand rebounded in February after a meaningful slowdown in January due to consumers waiting for Vista loaded PCs until late January. Total U.S. PC unit growth rebounded to a healthy 23% YoY in February, in-line with December 2006 growth. AAPL is the only vendor that appears unscathed by the Vista transition. Continued Mac momentum and strong double-digit iPod growth in the Q give them confidence that AAPL will beat expectations in the March Q.
Notablecalls: Not actionable but good to know category. Please scroll down for additional commentary on AAPL.
Calls of Note Part 4
- Bank of America notes that at an Analyst event, Intel (NASDAQ:INTC) released details regarding its upcoming Penryn family of products, slated for introduction in 2H07. It also simultaneously disclosed key elements of its new microarchitecture, Nehalem, slated for introduction in 2008.
Penryn - driving higher performance at potentially lower costs. The improvement in performance (20-45% vs. existing processors, in certain applications) will likely blunt the improvement that AMD will witness from its upcoming platform (Barcelona) launch. Intel's cost leadership vs. AMD will, in firm's view, be further extended given Penryn's smaller footprint (die size) of 107mm2 vs. existing Core 2 products (143mm2). The cost and performance advantage, they think, has positive implications for Intel's ability to maintain margins while simultaneously building on share gains vs. AMD.
Nehalem - a game changer for Intel. With Nehalem in 2008, Intel essentially addresses bottlenecks associated with its prior architecture (particularly in high end servers), by utilizing an Integrated Memory Controller approach in conjunction with Configurable System Interconnect Architecture - similar to AMD's approach with Opteron. Nehalem also integrates a graphics core onto the processor silicon - an event that is occurring sooner than expected and should allow Intel to see modest expansion of its share of bill of materials in a PC. Nehalem nullifies AMD's remaining advantage in the multi-processor (high-end) server market.
Maintains Buy and $28 tgt on INTC.
Notablecalls: Not actionable but good to know category.
Penryn - driving higher performance at potentially lower costs. The improvement in performance (20-45% vs. existing processors, in certain applications) will likely blunt the improvement that AMD will witness from its upcoming platform (Barcelona) launch. Intel's cost leadership vs. AMD will, in firm's view, be further extended given Penryn's smaller footprint (die size) of 107mm2 vs. existing Core 2 products (143mm2). The cost and performance advantage, they think, has positive implications for Intel's ability to maintain margins while simultaneously building on share gains vs. AMD.
Nehalem - a game changer for Intel. With Nehalem in 2008, Intel essentially addresses bottlenecks associated with its prior architecture (particularly in high end servers), by utilizing an Integrated Memory Controller approach in conjunction with Configurable System Interconnect Architecture - similar to AMD's approach with Opteron. Nehalem also integrates a graphics core onto the processor silicon - an event that is occurring sooner than expected and should allow Intel to see modest expansion of its share of bill of materials in a PC. Nehalem nullifies AMD's remaining advantage in the multi-processor (high-end) server market.
Maintains Buy and $28 tgt on INTC.
Notablecalls: Not actionable but good to know category.
Calls of Note Part 3
- Prudential is reiterating their Overweight rating and maintaining $18 Price target on Great Wolf Resorts (NASDAQ:WOLF). Firm believes the stock is relatively inexpensive as they remain comfortable with their estimates and management guidance. As private equity interest remains high in the lodging/leisure space, they continue to view WOLF as a potential takeout candidate.
Concerns about a slowing consumer spending, sub-prime spillover, and rising gas prices have dragged on the stock. While the company has Midwest exposure, it continues to decline as a percentage of the business and by the end of 2008, it could be less than 20% of EBITDA, based on the current pipeline. Out of the gate, WOLF stumbled since their Winter 06/07 opening in Mason, OH given patron and employee health complaints potentially caused from the water's chlorine in the waterpark. Management's immediate response to this issue was a positive as management and health officials say conditions have improved at the lodge.
Prudential still thinks the company is close to announcing several new Great Wolf locations in the next few months. They believe Great Wolf makes sense in higher density markets, particularly when next to incremental traffic drivers (lifestyle centers/major outlet malls/theme parks, as well as other tourist attractions). They think that filling the pipeline adds to the story and turns WOLF into a growth vehicle and not just a turnaround story.
Notablecalls: One for investors. WOLF has created a nice concept and by expanding will likely generate some nice return for shareholders.
Concerns about a slowing consumer spending, sub-prime spillover, and rising gas prices have dragged on the stock. While the company has Midwest exposure, it continues to decline as a percentage of the business and by the end of 2008, it could be less than 20% of EBITDA, based on the current pipeline. Out of the gate, WOLF stumbled since their Winter 06/07 opening in Mason, OH given patron and employee health complaints potentially caused from the water's chlorine in the waterpark. Management's immediate response to this issue was a positive as management and health officials say conditions have improved at the lodge.
Prudential still thinks the company is close to announcing several new Great Wolf locations in the next few months. They believe Great Wolf makes sense in higher density markets, particularly when next to incremental traffic drivers (lifestyle centers/major outlet malls/theme parks, as well as other tourist attractions). They think that filling the pipeline adds to the story and turns WOLF into a growth vehicle and not just a turnaround story.
Notablecalls: One for investors. WOLF has created a nice concept and by expanding will likely generate some nice return for shareholders.
Calls of Note Part 2
- RBC Capital is out with a wonderful call on Zoltek (NASDAQ:ZOLT) saying they elieve carbon fiber (CF) as a raw material to the wind industry is tracking similar to silicon and the solar industry two years ago. Firm believes Zoltek is in a parallel commodity cycle position as the incumbent silicon producers (ie MEMC Electronic Materials) were in early 2005 as the solar industry started to develop. Today, with the wind industry, the rapid replacement of fiberglass with CF in the production of longer turbine blades (which generate more power per $ invested), is driving RBC's estimate of 45% CAGR of CF.
The dynamics in silicon in 2005 and CF today are the same: both industries produce a commodity product required for an explosive growth end market, both of which happen to involve alternative energy. The barriers to entry are not huge: making silicon or CF is not limited by some resource in the ground - new entrants, which the firm fully expects in both industries, is only a matter of capital, time to construct capacity, and the conviction that demand for higher volumes is sustainable.
Before the cycle expands with more players, the incumbents have the ability to lock in long-term contracts, and leverage pricing power that can generate significant margin upside. Zoltek is one of very few wind-derivative plays in the U.S. equity market, has cost and capacity ramp advantages vs. new entrants, and is best positioned to capitalize.
RBC's new $45 target (up from $32) represents a 27x P/E multiple on their calendar 2008 EPS
estimate of $1.67. Maintains Outperform.
Notablecalls: The call makes perfect sense but on the other hand one has to respect the trading dynamics. I expect to see some buy interest in ZOLT today possibly followed by a pull back in price over the next week or so. The stock has gone too high, too fast. At least for my taste.
The dynamics in silicon in 2005 and CF today are the same: both industries produce a commodity product required for an explosive growth end market, both of which happen to involve alternative energy. The barriers to entry are not huge: making silicon or CF is not limited by some resource in the ground - new entrants, which the firm fully expects in both industries, is only a matter of capital, time to construct capacity, and the conviction that demand for higher volumes is sustainable.
Before the cycle expands with more players, the incumbents have the ability to lock in long-term contracts, and leverage pricing power that can generate significant margin upside. Zoltek is one of very few wind-derivative plays in the U.S. equity market, has cost and capacity ramp advantages vs. new entrants, and is best positioned to capitalize.
RBC's new $45 target (up from $32) represents a 27x P/E multiple on their calendar 2008 EPS
estimate of $1.67. Maintains Outperform.
Notablecalls: The call makes perfect sense but on the other hand one has to respect the trading dynamics. I expect to see some buy interest in ZOLT today possibly followed by a pull back in price over the next week or so. The stock has gone too high, too fast. At least for my taste.
Calls of Note Part 1
- Piper Jaffray was out yesterday afternoon with comments on Apple (NASDAQ:AAPL) after NPD released its monthly sales tracking data:
The firm notes that analysis of iPod NPD unit data for the months of Jan & Feb leads them to expect an iPod range of 10m-11m for the Mar-07 quarter (PJ model calls for 10.3m iPods and they believe Street consensus is ~10.9m). After the first month of March quarter data (January), they had been pointing to a range of 11m-12m units. Data for the month of February, however, fell slightly from January, for both Apple and the market overall, which is inconsistent with what they have seen in previous years from January to February.
While iPod units fell slightly m/m in February, this downtick was in line with the overall MP3 player market. iPod market share was unchanged from January to February at ~70%.
Piper says they believe investors should supplement these data points with other information. It is also important to note that international iPods are not captured in this data, international had a material positive impact on iPod units in the December quarter. Maintains Outperform and $124 tgt.
Notablecalls: The call hit around noon and looking at yesterday's chart one can certainly spot the damage it did to the stock price. Must say this is something I have been suspecting for quite some time (Please see the archives for further color). The upcoming iPhone is hurting iPod sales. Not to mention the fact almost everyone already has an iPod. I think some pretty sizable short positions were put on following Piper's call yesterday and while there will be some bounces, AAPL's a short here.
The firm notes that analysis of iPod NPD unit data for the months of Jan & Feb leads them to expect an iPod range of 10m-11m for the Mar-07 quarter (PJ model calls for 10.3m iPods and they believe Street consensus is ~10.9m). After the first month of March quarter data (January), they had been pointing to a range of 11m-12m units. Data for the month of February, however, fell slightly from January, for both Apple and the market overall, which is inconsistent with what they have seen in previous years from January to February.
While iPod units fell slightly m/m in February, this downtick was in line with the overall MP3 player market. iPod market share was unchanged from January to February at ~70%.
Piper says they believe investors should supplement these data points with other information. It is also important to note that international iPods are not captured in this data, international had a material positive impact on iPod units in the December quarter. Maintains Outperform and $124 tgt.
Notablecalls: The call hit around noon and looking at yesterday's chart one can certainly spot the damage it did to the stock price. Must say this is something I have been suspecting for quite some time (Please see the archives for further color). The upcoming iPhone is hurting iPod sales. Not to mention the fact almost everyone already has an iPod. I think some pretty sizable short positions were put on following Piper's call yesterday and while there will be some bounces, AAPL's a short here.
Paperstand (DE, TTWO, ABT, CHK)
The WSJ’s ”Heard on the Street” column out saying that shares of Deere (DE) have been riding high on the fumes of the ethanol boom, but that intoxication could soon level off. Deere's shares are up 40% since the beginning of Sep, buoyed by ethanol-induced euphoria and near-record crop prices. But some analysts think the stock price may already have the positive outlook for farm equipment baked in. Robert McCarthy, of Robert W. Baird, thinks Deere's stock is starting to look expensive. Shares of Deere were trading at 16.7x Mr. McCarthy's estd EPS for the next 12 mo’s, he wrote in a note to investors last month. That is above the highest forward P/E ratio for Deere based on the consensus est the stock achieved the last time corn prices were this heady a decade ago. Baird has a Hold rating on Deere.
“Ahead of the Tape” column reports that the board of Take-Two (TTWO) is likely to get the heave-ho today from a group of dissident shareholders. The hope is that fresh faces will right Take-Two's ship after years of missteps. Those hopes may be baked in to shares, up nearly 20% YTD to about $21 - pretty pricey, relative to expected earnings; the stock's forward P/E ratio is 27. That's a lot to pay for a co that has been a one-hit wonder. Grand Theft Auto has been Take-Two's cash cow ever since GTA III's introduction in ‘01. Take-Two is releasing a new version, GTA IV, in Oct, but sales may not stack up to past hits. The introduction of expensive next-generation machines such as Xbox 360 and PlayStation 3 could limit sales, b/c fewer gamers use them and GTA IV will be compatible only with the latest consoles. Todd Greenwald, of Nollengberger, figures Take-Two will sell just 5m units of GTA IV in the 3 mo’s after its rollout, compared with 3-month sales of 12m for the previous version. To call the stock a grand theft would be a cheap shot. But investors should keep their hands on their wallets for now.
Barron’s Online highlights Abbott (ABT), whose shares are up 30% in the past year. Still, the stock may not reflect the earnings potential of its new stent, two cholesterol drugs that could hit the mkt next year and increasing sales of the blockbuster rheumatoid arthritis drug, Humira. Some analysts say Abbott's profits could increase as much as 15% annually over the next 3 years, a nice figure compared to relatively paltry earnings growth from the broader mkt. "I wouldn't call the stock cheap, but you're paying a reasonable multiple for shares of a co with earnings expectations it will probably beat," says Bryce Hill, of Oppenheimer. "If things go well with the new stent, Humira and the new drugs, it's reasonable that the stock could trade at 70 a share," Hill adds.
“Inside Scoop” section reports that Aubrey McClendon, Chmn and CEO of Chesapeake Energy (CHK), has been a persistent buyer of shares of the co. On March 22 and 23, he plunked down another $6.1m to purchase 200K shares on the open mkt. McClendon now beneficially owns about 26m shares. Meanwhile, Richard Davidson, appointed a director a year ago, bought 10K shares for nearly $300K, boosting his stake to 32,500 shares. Jonathan Moreland, of InsiderInsights.com, says McClendon's purchase is consistent with the robust insider-buying that is cropping up across the energy sector. "Chesapeake has been a quality co in the past, and I think it will do well in the future, as the industry trend is bullish," says Moreland. Ben Silverman, of InsiderScore.com, says that if the stock stays above $27.50, McClendon "picks up some easy income" through short puts he has sold on 85,600 shares.
“Ahead of the Tape” column reports that the board of Take-Two (TTWO) is likely to get the heave-ho today from a group of dissident shareholders. The hope is that fresh faces will right Take-Two's ship after years of missteps. Those hopes may be baked in to shares, up nearly 20% YTD to about $21 - pretty pricey, relative to expected earnings; the stock's forward P/E ratio is 27. That's a lot to pay for a co that has been a one-hit wonder. Grand Theft Auto has been Take-Two's cash cow ever since GTA III's introduction in ‘01. Take-Two is releasing a new version, GTA IV, in Oct, but sales may not stack up to past hits. The introduction of expensive next-generation machines such as Xbox 360 and PlayStation 3 could limit sales, b/c fewer gamers use them and GTA IV will be compatible only with the latest consoles. Todd Greenwald, of Nollengberger, figures Take-Two will sell just 5m units of GTA IV in the 3 mo’s after its rollout, compared with 3-month sales of 12m for the previous version. To call the stock a grand theft would be a cheap shot. But investors should keep their hands on their wallets for now.
Barron’s Online highlights Abbott (ABT), whose shares are up 30% in the past year. Still, the stock may not reflect the earnings potential of its new stent, two cholesterol drugs that could hit the mkt next year and increasing sales of the blockbuster rheumatoid arthritis drug, Humira. Some analysts say Abbott's profits could increase as much as 15% annually over the next 3 years, a nice figure compared to relatively paltry earnings growth from the broader mkt. "I wouldn't call the stock cheap, but you're paying a reasonable multiple for shares of a co with earnings expectations it will probably beat," says Bryce Hill, of Oppenheimer. "If things go well with the new stent, Humira and the new drugs, it's reasonable that the stock could trade at 70 a share," Hill adds.
“Inside Scoop” section reports that Aubrey McClendon, Chmn and CEO of Chesapeake Energy (CHK), has been a persistent buyer of shares of the co. On March 22 and 23, he plunked down another $6.1m to purchase 200K shares on the open mkt. McClendon now beneficially owns about 26m shares. Meanwhile, Richard Davidson, appointed a director a year ago, bought 10K shares for nearly $300K, boosting his stake to 32,500 shares. Jonathan Moreland, of InsiderInsights.com, says McClendon's purchase is consistent with the robust insider-buying that is cropping up across the energy sector. "Chesapeake has been a quality co in the past, and I think it will do well in the future, as the industry trend is bullish," says Moreland. Ben Silverman, of InsiderScore.com, says that if the stock stays above $27.50, McClendon "picks up some easy income" through short puts he has sold on 85,600 shares.
Wednesday, March 28, 2007
Calls of Note Part 5
Somewhat to my surprise, two firms are out with positive comments on American Commercial (NASDAQ:ACLI), with one calling the stock a table pounding buy:
- Merrill Lynch notes American Commercial Lines shares are down over 20% from their peak in late February on 1Q07 concerns due to soft spot market grain rates and weather delay days. ACLI's shares are currently trading at 15.8x firm's revised 2007 and 12.8x 2008 EPS estimates, below the 16x historical forward P/E for the barge sector, and a discount to the 20x forward multiple for the Jones Act sector. MLCO believes that the pullback represents a buying opportunity and reiterates Buy opinion and $41 price objective.
Harsh winter weather in February caused the Illinois River to freeze over for almost three weeks, resulting in a significant decline in volumes in the month. While the firm estimates that those volumes likely shifted to truck or rail, tonnage in the first three weeks of March rebound sharply, up 28% both year-over-year and above the three-year average.
Firm is lowering 1Q07 EPS estimate from $0.24 to $0.19, and 2007 EPS from $1.92 to $1.90, as an expected recovery in 2H07 did not offset the volume impact from weather in the first quarter.
- Stephens calls ACLI a table pounding buy. Why has the stock pulled back recently? Concerns regarding a difficult Q1 comp are well known at this point, but they believe it has created some confusion in the market. 1) Could the Company miss Q1 and lower '07 guidance? Firm is comfortable with their $0.20 estimate for the quarter (the same as consensus, which has come down recently), but believes the full year cannot be judged on Q1 results (the seasonally weakest quarter, approximately just 10% of annual EPS). In fact, they would point out that management's guidance for '07 ($1.75-$1.95) already factors in a seasonally weak Q1, but also assumes organic growth will be flat.
2) Spot pricing is down y/y. When looking at spot rates on a y/y basis, spot grain rates are down 5% (as a result of the post Hurricane Katrina comps last year). While grain is approximately 30% of the Company's business, the other commodities remain strong, particularly liquid. 3) An increasing short position (approximately 7.5MM shares are now short, representing 12% of shares outstanding, an increase from 6.8MM shares short in January). 4) The CEO recently sold approximately 400,000 shares of stock (diversifying his portfolio). Firm would point out that he still has over 300,000 shares remaining, and they find it highly unlikely that he would sell ahead of a bad quarter.
Maintains Overweight and $50 tgt.
Notablecalls: Not going to call this one outright actionable as there are no price levels of interest anywhere near. Ideally, I see the stock selling off some more after open and then squeezing higher. Let's see if the market can put together such a scenario.
- Merrill Lynch notes American Commercial Lines shares are down over 20% from their peak in late February on 1Q07 concerns due to soft spot market grain rates and weather delay days. ACLI's shares are currently trading at 15.8x firm's revised 2007 and 12.8x 2008 EPS estimates, below the 16x historical forward P/E for the barge sector, and a discount to the 20x forward multiple for the Jones Act sector. MLCO believes that the pullback represents a buying opportunity and reiterates Buy opinion and $41 price objective.
Harsh winter weather in February caused the Illinois River to freeze over for almost three weeks, resulting in a significant decline in volumes in the month. While the firm estimates that those volumes likely shifted to truck or rail, tonnage in the first three weeks of March rebound sharply, up 28% both year-over-year and above the three-year average.
Firm is lowering 1Q07 EPS estimate from $0.24 to $0.19, and 2007 EPS from $1.92 to $1.90, as an expected recovery in 2H07 did not offset the volume impact from weather in the first quarter.
- Stephens calls ACLI a table pounding buy. Why has the stock pulled back recently? Concerns regarding a difficult Q1 comp are well known at this point, but they believe it has created some confusion in the market. 1) Could the Company miss Q1 and lower '07 guidance? Firm is comfortable with their $0.20 estimate for the quarter (the same as consensus, which has come down recently), but believes the full year cannot be judged on Q1 results (the seasonally weakest quarter, approximately just 10% of annual EPS). In fact, they would point out that management's guidance for '07 ($1.75-$1.95) already factors in a seasonally weak Q1, but also assumes organic growth will be flat.
2) Spot pricing is down y/y. When looking at spot rates on a y/y basis, spot grain rates are down 5% (as a result of the post Hurricane Katrina comps last year). While grain is approximately 30% of the Company's business, the other commodities remain strong, particularly liquid. 3) An increasing short position (approximately 7.5MM shares are now short, representing 12% of shares outstanding, an increase from 6.8MM shares short in January). 4) The CEO recently sold approximately 400,000 shares of stock (diversifying his portfolio). Firm would point out that he still has over 300,000 shares remaining, and they find it highly unlikely that he would sell ahead of a bad quarter.
Maintains Overweight and $50 tgt.
Notablecalls: Not going to call this one outright actionable as there are no price levels of interest anywhere near. Ideally, I see the stock selling off some more after open and then squeezing higher. Let's see if the market can put together such a scenario.
Calls of Note Part 4
- Merrill Lynch comments on Vertex Pharma (NASDAQ:VRTX) saying the co is expected to provide updates on VX-950 (telaprevir) at the upcoming EASL meeting. The late breaker abstract by McHutchison et al., on Saturday, April 14 will receive significant scrutiny as it provides a 12 week post therapy update for PROVE 1. While the firm is not surprised by declines ahead of EASL, they consider the current sell-off to be overdone, especially if strong efficacy from 12 week triple therapy + 12 week dual therapy could be disclosed in H2/2007.
While they cannot rule out further declines, they believe current levels represent an opportunity for patient investors. MLCO believes that the stock could recover to the low-mid $30's in near term given a combination of strong PCR negative rate approaching 75% and no meaningful changes in the trends for safety/dropout rates, with the potential for further appreciation in the next 12 months pending strong data from the 12+12 arm.
Firm recommends buying April US$30.00 call options ahead of the follow-on PROVE 1 data as a way to enter into a stock position for the long term while hedging downside risk.
Notablecalls: I'm somewhat surprised to see such a sell-off in VRTX. Clearly, the co is a takeover candidate for big pharma. I like this call.
While they cannot rule out further declines, they believe current levels represent an opportunity for patient investors. MLCO believes that the stock could recover to the low-mid $30's in near term given a combination of strong PCR negative rate approaching 75% and no meaningful changes in the trends for safety/dropout rates, with the potential for further appreciation in the next 12 months pending strong data from the 12+12 arm.
Firm recommends buying April US$30.00 call options ahead of the follow-on PROVE 1 data as a way to enter into a stock position for the long term while hedging downside risk.
Notablecalls: I'm somewhat surprised to see such a sell-off in VRTX. Clearly, the co is a takeover candidate for big pharma. I like this call.
Calls of Note Part 3
- Morgan Stanley notes that with its core business still under pressure, another acquisition with issues, and managerial turnover, they remain Underweight on Check Point (NASDAQ:CHKP). And all this sounds very familiar; deals lost in the enterprise in major existing accounts and US Government concerns impacting yet another acquisition likely pressures the stock in their view - just like 2 years ago. All in, it seems like deja vu all over again. A likely disappointing top line in 2007 from at least $10 million in lost PointSec sales along with execution issues will lead CHKP shares to underperform the markets, in their view, as these factors expose the consensus opinion for better growth as less than accurate. Firm recommends investors sell CHKP shares else, lest history repeat itself for the second (perhaps third?) time this decade.
Larger vendors have steadily gained share in large enterprise deals, including several additional Fortune 20 accounts we recently learned of. Cisco and Juniper embedding functionality are steadily absorbing NG platform accounts and there's no one to navigate the ever-turbulent security waters - just a few officers with no crew.
As Checkpoint has suggested better growth from acquisitions and core stability, firm's checks have found this to be far from the reality. MSCO's2007 estimated revenues $13mm below the street reflect their estimate of the real momentum or lack thereof for the company, hence they reiterate the UW rating.
Notablecalls: Not actionable but good to know category.
Larger vendors have steadily gained share in large enterprise deals, including several additional Fortune 20 accounts we recently learned of. Cisco and Juniper embedding functionality are steadily absorbing NG platform accounts and there's no one to navigate the ever-turbulent security waters - just a few officers with no crew.
As Checkpoint has suggested better growth from acquisitions and core stability, firm's checks have found this to be far from the reality. MSCO's2007 estimated revenues $13mm below the street reflect their estimate of the real momentum or lack thereof for the company, hence they reiterate the UW rating.
Notablecalls: Not actionable but good to know category.
Calls of Note Part 2
- Citigroup says that based on checks, they do not believe comps at Whole Foods (NASDAQ:WFMI) have improved from the 7% reported in 1Q07 despite modestly easier prior yr comparisons in 2Q07 (comps were up 11.9% in 2Q06 vs. up 13% in 1Q06). Firm thinks this is due in part to competition by conventional supermarkets.
Given the lackluster trends, they are lowering their 2Q and 07 comp est to 6% from 7% previously. This is at the lower end of guidance of 6-8% comp growth in FY07. Firm is also lowering their FY07-09 EPS by 4c, 6c, and 10c, respectively.
Given lower EPS estimates and lower target multiple which reflects weak trends, they are lowering their target price by $8 to $49. Maintains Hold.
Notablecalls: Looks like more downside in store for WFMI. Not an outright trading call, though.
Given the lackluster trends, they are lowering their 2Q and 07 comp est to 6% from 7% previously. This is at the lower end of guidance of 6-8% comp growth in FY07. Firm is also lowering their FY07-09 EPS by 4c, 6c, and 10c, respectively.
Given lower EPS estimates and lower target multiple which reflects weak trends, they are lowering their target price by $8 to $49. Maintains Hold.
Notablecalls: Looks like more downside in store for WFMI. Not an outright trading call, though.
Calls of Note Part 1
- Goldman Sachs maintains their Neutral coverage view on the Homebuilder sector as they believe the stocks are unlikely to rally sharply from current levels despite many larger-cap stocks bumping up against an historical entry point of 1.0X price-to-book value (P/BV). Weak order activity from Lennar reported yesterday coupled with comments from management that the Spring selling season pick-up has not come through as hoped are likely to weigh on investor sentiment, off-setting the potentially enticing stock valuations.
Beazer Homes (NYSE:BZH) responded to news reports last night that it is the subject of a
widespread investigation involving lending practices as laid out in recent articles published by the Charlotte Observer. Although Beazer denied the allegations of wrong-doing as outlined by the Charlotte Observer stressing that it has acted as a mortgage originator, not an underwriter, the presence of such allegations coupled with comments attributed to an FBI agent on the investigation are likely to weigh on Beazer shares. With the stock trading at 0.75X P/BV prior to last night's reports, the firm maintains their Neutral rating on BZH shares.
Notablecalls: BZH was down over 5 pts in after hours action. That's a 17% haircut on some pretty vague investigation news. Given the almost 20% short interest, I'm inclined to believe the stock was pushed down. OK, for example's sake, let's say youre an institutional trader with a 300K short position in the name. 20 minutes after the close the CNBC reports of potential FBI investigation at BZH. You take a deep breath, switch on your ECN platform and use another 30-50K stock to push BZH down in after hours, hoping some of it will stick on open. As you hit the bids, the stock goes down as noone is willing to set up in front of a potential investigation. If youre lucky, the analyst community will reiterate their cautious stance in the morning and you can easily cover your 300K shares for an extra 5 pt profit. Heck, why not go long 50K after youre done covering! BZH's valuation's way below that of peers and once the panic sellers are done the stock will probably squeeze higher.
Anyway, I suspect the $26 level reached in after hours may provide a nice s-t bounce oppy for aggressive accounts.
Beazer Homes (NYSE:BZH) responded to news reports last night that it is the subject of a
widespread investigation involving lending practices as laid out in recent articles published by the Charlotte Observer. Although Beazer denied the allegations of wrong-doing as outlined by the Charlotte Observer stressing that it has acted as a mortgage originator, not an underwriter, the presence of such allegations coupled with comments attributed to an FBI agent on the investigation are likely to weigh on Beazer shares. With the stock trading at 0.75X P/BV prior to last night's reports, the firm maintains their Neutral rating on BZH shares.
Notablecalls: BZH was down over 5 pts in after hours action. That's a 17% haircut on some pretty vague investigation news. Given the almost 20% short interest, I'm inclined to believe the stock was pushed down. OK, for example's sake, let's say youre an institutional trader with a 300K short position in the name. 20 minutes after the close the CNBC reports of potential FBI investigation at BZH. You take a deep breath, switch on your ECN platform and use another 30-50K stock to push BZH down in after hours, hoping some of it will stick on open. As you hit the bids, the stock goes down as noone is willing to set up in front of a potential investigation. If youre lucky, the analyst community will reiterate their cautious stance in the morning and you can easily cover your 300K shares for an extra 5 pt profit. Heck, why not go long 50K after youre done covering! BZH's valuation's way below that of peers and once the panic sellers are done the stock will probably squeeze higher.
Anyway, I suspect the $26 level reached in after hours may provide a nice s-t bounce oppy for aggressive accounts.
Color on quarter: Xyratex (NASDAQ:XRTX)
Couple of firms comment on Xyratex (NASDAQ:XRTX) after the co released its Q1 results last night:
- Baird notes XRTX reported FQ107 revenue/EPS results of $236 million/$0.40, ahead of consensus of $230 million/$0.31, on stronger-than-anticipated revenue and gross margins. The firm is encouraged with the continued fast growth in the systems business (27% YOY), and healthy infrastructure margins.
Management provided FQ207 guidance of $203-$218 million/$0.09- $0.19, slightly below consensus estimates of $210 million/$0.16. Given the unchanged outlook for F07, the firm is leaving their estimates unchanged.
Baird believes both STX and Hitachi represent meaningful upside opportunities, although the timing is unclear. To the extent STX is not able to re-use existing MXO equipment, it will need to purchase new equipment from XRTX, which could result in upside in the next two quarters. Management reiterated expectations that Hitachi business will not meaningfully add to revenue/EPS until F08; however, the firm suspects Hitachi's recently announced plans to refresh 75% of its product line-up in C2007 could accelerate capital spending on XRTX equipment as Hitachi attempts to transition manufacturing operations to lower-cost geographies and optimize manufacturing procedures.
Maintains Outperform rating as XRTX is s attractive with a valuation of 11x C08E EPS, beatable forward estimates, growth opportunities with STX and Hitachi, and a stable, fast-growing systems business.
- RBC Capital notes Xyratex posted healthy February 2007 quarter results, beating Street consensus on the top line and the bottom line.
The lower-than-expected fiscal 2Q07 non-GAAP EPS forecast relates to slightly higher-than expected operating expenses and tax rate (due to lower mix of Storage Infrastructure revenue/ income which carries a 0% tax rate). For FY07, Xyratex continued to position its Storage Infrastructure business as volatile but positive. However, the exact timing of Seagate orders remains difficult to forecast, as it completes the Maxtor integration efforts. Notably, Xyratex's Networked Storage Solutions revenue guidance for fiscal 2Q07 includes NetApp growth of 4-5% (past two years, NetApp has posted ~15% sequential growth).
Firm maintains 12-month price target of $25 saying they assume a probable, though not certain, upside/downside scenario of $30/$14 on above/below consensus execution. On a 12-month basis, they continue to rate Xyratex shares Outperform.
Notablecalls: Tough to call this one. Looks like a non-event.
- Baird notes XRTX reported FQ107 revenue/EPS results of $236 million/$0.40, ahead of consensus of $230 million/$0.31, on stronger-than-anticipated revenue and gross margins. The firm is encouraged with the continued fast growth in the systems business (27% YOY), and healthy infrastructure margins.
Management provided FQ207 guidance of $203-$218 million/$0.09- $0.19, slightly below consensus estimates of $210 million/$0.16. Given the unchanged outlook for F07, the firm is leaving their estimates unchanged.
Baird believes both STX and Hitachi represent meaningful upside opportunities, although the timing is unclear. To the extent STX is not able to re-use existing MXO equipment, it will need to purchase new equipment from XRTX, which could result in upside in the next two quarters. Management reiterated expectations that Hitachi business will not meaningfully add to revenue/EPS until F08; however, the firm suspects Hitachi's recently announced plans to refresh 75% of its product line-up in C2007 could accelerate capital spending on XRTX equipment as Hitachi attempts to transition manufacturing operations to lower-cost geographies and optimize manufacturing procedures.
Maintains Outperform rating as XRTX is s attractive with a valuation of 11x C08E EPS, beatable forward estimates, growth opportunities with STX and Hitachi, and a stable, fast-growing systems business.
- RBC Capital notes Xyratex posted healthy February 2007 quarter results, beating Street consensus on the top line and the bottom line.
The lower-than-expected fiscal 2Q07 non-GAAP EPS forecast relates to slightly higher-than expected operating expenses and tax rate (due to lower mix of Storage Infrastructure revenue/ income which carries a 0% tax rate). For FY07, Xyratex continued to position its Storage Infrastructure business as volatile but positive. However, the exact timing of Seagate orders remains difficult to forecast, as it completes the Maxtor integration efforts. Notably, Xyratex's Networked Storage Solutions revenue guidance for fiscal 2Q07 includes NetApp growth of 4-5% (past two years, NetApp has posted ~15% sequential growth).
Firm maintains 12-month price target of $25 saying they assume a probable, though not certain, upside/downside scenario of $30/$14 on above/below consensus execution. On a 12-month basis, they continue to rate Xyratex shares Outperform.
Notablecalls: Tough to call this one. Looks like a non-event.
Paperstand
The WSJ reports that DoubleClick is exploring a sale, and is already in active talks with Microsoft (MSFT), among other potential suitors. The co is using investment bank Morgan Stanley to help sound out its options, including a possible stock-mkt listing. The co is majority-owned by Hellman & Friedman, which since purchasing DoubleClick in ‘05 for approximately $1.1bn, has sold off a number of divisions and reshaped the business. Hellman is seeking at least $2bn for DoubleClick, and it remains an open question whether the firm will choose to complete a deal.
“Heard on the Street” column out saying that reinsurers that sold hurricane coverage last year won the wager; they pocketed hefty premiums, paid few claims and watched their share prices rise. Now, some are moving to reduce their risk by buying or merging with rivals. The main argument for consolidation: increasing pressure on reinsurers to limit their exposure to any one type of disaster by selling a more diversified range of policies. With the US hurricane season kicking off in roughly 2 mo’s, the time for action might be now. According to the article, Scor (SCO) plans to launch a hostile tender offer for Converium (CHR) next month to gain more mkt power and broaden its risk portfolio. Analysts and industry veterans alike believe the incentives to consolidate will endure. "I think this will extend out for more than just a year or two," said Bill Yankus, of Fox-Pitt. Other dealmakers mentioned include ENH and MXRE.
Barron’s Online positively out on Broadcom (BRCM), whose stock is down 26% in the last 12 mo’s. With all awful developments now behind it (investigations, MOT warning), Broadcom can welcome incoming CFO Eric K. Brandt with a stunning balance sheet consisting of $2.8bn of cash and marketable securities, no debt and a cash flow statement that added $721m last year. The recent drama has left Broadcom shares at a reasonable P/E multiple of 21x ‘08's projected earnings, near its lows over the last 2 years, as CEO Scott A. McGregor leads the co's advance into the fastest-growing mkt for semiconductors, the cellphone. "They continue to be very strong in executing plans to enter new chip mkts, and they consistently out-engineer many other chip co’s," says J.P. Morgan chip analyst Shawn Webster, commenting on why he initiated coverage of Broadcom in late Feb with the equivalent of a Buy rating.
“Inside Scoop” section reports that one director at Johnson Controls (JCI) has made a $6m bet that there is still upside to the co’s stock price. Eugenio Clariond made his latest purchase on March 23, when he paid $3m to purchase 31K shares of Johnson Controls. The latest buy came just 5 weeks after another $3m purchase on Feb. 14. Ben Silverman, of InsiderScore.com, says that Clariond's $6m splurge is a "bullish bet on the co being able to boost its building efficiencies and power-solution businesses as the automotive business deals with industry problems."
According to the DigiTimes, citing Samsung Electronics' semiconductor business president Chang-Gyu Hwang, the overall memory mkt which includes DRAM and NAND flash should head towards more positive prospects in the 2H07 with DRAM demand expected to warm up while NAND flash shortages are about to arrive in the mentioned time frame.
“Heard on the Street” column out saying that reinsurers that sold hurricane coverage last year won the wager; they pocketed hefty premiums, paid few claims and watched their share prices rise. Now, some are moving to reduce their risk by buying or merging with rivals. The main argument for consolidation: increasing pressure on reinsurers to limit their exposure to any one type of disaster by selling a more diversified range of policies. With the US hurricane season kicking off in roughly 2 mo’s, the time for action might be now. According to the article, Scor (SCO) plans to launch a hostile tender offer for Converium (CHR) next month to gain more mkt power and broaden its risk portfolio. Analysts and industry veterans alike believe the incentives to consolidate will endure. "I think this will extend out for more than just a year or two," said Bill Yankus, of Fox-Pitt. Other dealmakers mentioned include ENH and MXRE.
Barron’s Online positively out on Broadcom (BRCM), whose stock is down 26% in the last 12 mo’s. With all awful developments now behind it (investigations, MOT warning), Broadcom can welcome incoming CFO Eric K. Brandt with a stunning balance sheet consisting of $2.8bn of cash and marketable securities, no debt and a cash flow statement that added $721m last year. The recent drama has left Broadcom shares at a reasonable P/E multiple of 21x ‘08's projected earnings, near its lows over the last 2 years, as CEO Scott A. McGregor leads the co's advance into the fastest-growing mkt for semiconductors, the cellphone. "They continue to be very strong in executing plans to enter new chip mkts, and they consistently out-engineer many other chip co’s," says J.P. Morgan chip analyst Shawn Webster, commenting on why he initiated coverage of Broadcom in late Feb with the equivalent of a Buy rating.
“Inside Scoop” section reports that one director at Johnson Controls (JCI) has made a $6m bet that there is still upside to the co’s stock price. Eugenio Clariond made his latest purchase on March 23, when he paid $3m to purchase 31K shares of Johnson Controls. The latest buy came just 5 weeks after another $3m purchase on Feb. 14. Ben Silverman, of InsiderScore.com, says that Clariond's $6m splurge is a "bullish bet on the co being able to boost its building efficiencies and power-solution businesses as the automotive business deals with industry problems."
According to the DigiTimes, citing Samsung Electronics' semiconductor business president Chang-Gyu Hwang, the overall memory mkt which includes DRAM and NAND flash should head towards more positive prospects in the 2H07 with DRAM demand expected to warm up while NAND flash shortages are about to arrive in the mentioned time frame.
Tuesday, March 27, 2007
Calls of Note Part 7
- Cowen notes they believe that Enterprise-focused telecom carriers increasingly must have managed hosting to compete, and Savvis (NASDAQ:SVVS) is the best target in the market. Acquisition is also likely the easiest exit for 50% holder Welsh Carson. Firm views Verizon as the most likely buyer, but sees Level 3 and others as possibilities. They expect 19% outperformance relative to the market over the next 12 months without an acquisition. A deal in the near term could be at a similar price.
To compete with AT&T, which is a top provider of hosting and co-location, the firm believes other enterprise-focused telecom carriers must strengthen their managed hosting offerings.
Cowen view VZ as the most likely buyer. Savvis's hosting would fill in the blank left by MCI's limited hosting offering, putting VZ more on par with AT&T. LVLT also has a strategic need for hosting such as Savvis, but has less capability to pay cash. Other backbone operators such as GLBC could also consider Savvis.
Most acquirers could transfer Savvis traffic to their own network and shut down the Savvis network, eliminating virtually all network costs.
Notablecalls: Expect to see buy interest in SVVS today and over the next week as it's not every day that you hear a firm saying a co is an acquisiton tgt will be gone by yearend.
To compete with AT&T, which is a top provider of hosting and co-location, the firm believes other enterprise-focused telecom carriers must strengthen their managed hosting offerings.
Cowen view VZ as the most likely buyer. Savvis's hosting would fill in the blank left by MCI's limited hosting offering, putting VZ more on par with AT&T. LVLT also has a strategic need for hosting such as Savvis, but has less capability to pay cash. Other backbone operators such as GLBC could also consider Savvis.
Most acquirers could transfer Savvis traffic to their own network and shut down the Savvis network, eliminating virtually all network costs.
Notablecalls: Expect to see buy interest in SVVS today and over the next week as it's not every day that you hear a firm saying a co is an acquisiton tgt will be gone by yearend.
Calls of Note Part 6
- Piper Jaffray is very positive on F5 Networks (NASDAQ:FFIV) saying that following discussions with numerous F5 resellers, they believe demand for the company's products have been exceptionally strong in the U.S. during the March quarter, and they anticipate another solid domestic quarter for the BIG IP product family. Firm also believes F5's federal business in this geography remained stable and do not anticipate any meaningful deterioration from this vertical.
While they have picked up a few data points suggesting some pockets of weakness in EMEA, only 17% of F5's revenues come from there and the firm believes this small relative exposure will be dwarfed by the strength they are picking up on in the U.S.
Firm's channel checks in December revealed a robust pipeline, and they believe numerous deals were purposely pushed into the March quarter. This, coupled with recent channel checks, gives them a high degree of confidence that F5 will likely beat estimates and guide above consensus for the June quarter. F5's new high-end products are gaining momentum and the firm believes this trend will continue throughout 2007 due to the explosive growth in data center traffic. The BIG IP 8400 was introduced in March 2006 and should regain momentum this quarter. Reits Outperform and $100 tgt.
Notablecalls: For some reason FFIV was very weak in yesterday's session. Think this is what prompted Piper's call. Ideally, I see FFIV gapping lower and then squeezing higher.
While they have picked up a few data points suggesting some pockets of weakness in EMEA, only 17% of F5's revenues come from there and the firm believes this small relative exposure will be dwarfed by the strength they are picking up on in the U.S.
Firm's channel checks in December revealed a robust pipeline, and they believe numerous deals were purposely pushed into the March quarter. This, coupled with recent channel checks, gives them a high degree of confidence that F5 will likely beat estimates and guide above consensus for the June quarter. F5's new high-end products are gaining momentum and the firm believes this trend will continue throughout 2007 due to the explosive growth in data center traffic. The BIG IP 8400 was introduced in March 2006 and should regain momentum this quarter. Reits Outperform and $100 tgt.
Notablecalls: For some reason FFIV was very weak in yesterday's session. Think this is what prompted Piper's call. Ideally, I see FFIV gapping lower and then squeezing higher.
Calls of Note Part 5
- Merrill Lynch notes they recently met with various executives of Motorola's (NYSE:MOT) Connected Home division (8% of revenues) and found the division fundamentals to be stronger than originally anticipated. Five takeaways:
1) Motorola's set-box business appears more secure than perceived by the Street. MLCO finds some 707-related inventory buildup in low-end STBs, but demand for HD and DVR boxes still exceeds supply.
2) Growth to continue over the next 18 months. Contrary to the common view, the firm believes the July 1 separation of security in the STB will result in strong revenue growth over the next 18 months as the new rule results in an increase in the price of a set top by $50 and carries the same margin.
3) Limited inventory correction in 2H. Firm believes demand for high end HD and DVR set-top boxes is high. They see some inventory buildup in low end boxes ahead of the July 1th deadline, yet the short correction period should be offset by strength in high end units.
4) They believe the division is almost finished with its M&A spree, outside of small acquisitions that may address certain niches.
5) Margins to remain at current levels. We expect operating margin to remain relatively stable, within the 12-14% range, following a substantial improvement from 6.5% in 4Q05 to 12% in 4Q06.
Firm estimates that sales of set top boxes accounts for ~70% of Connected Home division revenues, while video head-end equipment sales account for about 5-6%. They estimate that modems account for another 10-11% and other infrastructure products (CMTS/GPON/other), consumer products (cordless phones/security cameras/etc.), and services account for about 14-15% of revenue.
Notablecalls: Well, it's certainly been a while since I've seen any positive comments on MOT. I continue to be a s-t bull on the stock. Please see archives for further color.
1) Motorola's set-box business appears more secure than perceived by the Street. MLCO finds some 707-related inventory buildup in low-end STBs, but demand for HD and DVR boxes still exceeds supply.
2) Growth to continue over the next 18 months. Contrary to the common view, the firm believes the July 1 separation of security in the STB will result in strong revenue growth over the next 18 months as the new rule results in an increase in the price of a set top by $50 and carries the same margin.
3) Limited inventory correction in 2H. Firm believes demand for high end HD and DVR set-top boxes is high. They see some inventory buildup in low end boxes ahead of the July 1th deadline, yet the short correction period should be offset by strength in high end units.
4) They believe the division is almost finished with its M&A spree, outside of small acquisitions that may address certain niches.
5) Margins to remain at current levels. We expect operating margin to remain relatively stable, within the 12-14% range, following a substantial improvement from 6.5% in 4Q05 to 12% in 4Q06.
Firm estimates that sales of set top boxes accounts for ~70% of Connected Home division revenues, while video head-end equipment sales account for about 5-6%. They estimate that modems account for another 10-11% and other infrastructure products (CMTS/GPON/other), consumer products (cordless phones/security cameras/etc.), and services account for about 14-15% of revenue.
Notablecalls: Well, it's certainly been a while since I've seen any positive comments on MOT. I continue to be a s-t bull on the stock. Please see archives for further color.
Calls of Note Part 4
- Stanford comments on Brooks Automation (NASDAQ:BRKS) after co's software product line sale to Applied Materials clears last anti-trust hurdle. Firm notes the sale should net BRKS $1.50/sh in cash. In addition to its existing $2.50/sh, the company is now cash heavy with significantly more than it needs to effectively run the business. Firm believes this sale is the lynchpin in finalizing a major cash distribution/stock buyback strategy, which they believe will be announced when BRKS reports its 2Q07 financial results, tentatively scheduled for May 9th.
BRKS will close the Mar Q with about $200 mil in cash but will receive another $115 mil. when the sale of its software product group to Applied Materials closes, expected in early April. At its current run rate, BRKS is generating $25 mil. cash/Q. Thus, mgt. believes that BRKS will exit the September fiscal year with close to $400 mil. in net cash ($5.30/sh, about 33% of market cap). Management believes it needs $100 mil. to run the business and another $50-$100 mil. for opportunistic acquisitions, leaving $200+ mil. to possibly return to shareholders.
Firm believes the best alternative for investors, a major positive for the stock and the most likely scenario would be an accelerated buyback > $100 mil. announced at Mar. Q earnings release. Such a buyback would be accretive to earnings. The institution of a small (< $0.05/share/Q) dividend would also be a significant positive catalyst for the stock. No buyback and/or small ongoing dividend may connote to investors internal, undisclosed problems for which the company is hoarding cash, clearly a negative.
Notablecalls: Not actionable but good to know category.
BRKS will close the Mar Q with about $200 mil in cash but will receive another $115 mil. when the sale of its software product group to Applied Materials closes, expected in early April. At its current run rate, BRKS is generating $25 mil. cash/Q. Thus, mgt. believes that BRKS will exit the September fiscal year with close to $400 mil. in net cash ($5.30/sh, about 33% of market cap). Management believes it needs $100 mil. to run the business and another $50-$100 mil. for opportunistic acquisitions, leaving $200+ mil. to possibly return to shareholders.
Firm believes the best alternative for investors, a major positive for the stock and the most likely scenario would be an accelerated buyback > $100 mil. announced at Mar. Q earnings release. Such a buyback would be accretive to earnings. The institution of a small (< $0.05/share/Q) dividend would also be a significant positive catalyst for the stock. No buyback and/or small ongoing dividend may connote to investors internal, undisclosed problems for which the company is hoarding cash, clearly a negative.
Notablecalls: Not actionable but good to know category.
Calls of Note Part 3
- Merrill Lynch notes QLogic (NASDAQ:QLGC) has sold off since January due to concerns over slowing growth in the FC-Switch business and speculation surrounding a potential miss for the Mar-07Q. However, at 15x CY07e EPS (ex-cash), the stock appears to be pricing in a miss already. MLCO expects the switch business to regain momentum in 2H and see upside potential from InfiniBand. They think additional share buy backs are also likely and believe the risk/reward is favorable for investors with a 2+ qtr horizon.
They expect HBA revenues (85% of sales) to grow in the low to mid teens over the next few years. The Fibre Channel market appears healthy and the firm expects the 4G transition to continue for the next few quarters. Though virtualization is beginning to impact server unit growth negatively, it should have a positive impact on HBA growth as virtualization accelerates the transition to storage area networking.
Despite the recent disappointment in the FC-switch market (12% of sales), the firm continues to believe that QLogic will benefit from the BRCD/MCDT merger longer term. InfiniBand is a new opportunity for QLGC and they expect revenue ramps from this product line in the next 1 - 2 quarters. QLGC has multiple design wins and is well positioned to gain share in this $300M market. Firm thinks street expectations for this business are conservative and see upside potential in 2H07. Reits Buy.
Notablecalls: Would not be surprised to see some buy interest in QLGC over the next week or so. The stock has been lagging the general tech group and may have around $1 worth of upside in it. Not a high conviction call.
They expect HBA revenues (85% of sales) to grow in the low to mid teens over the next few years. The Fibre Channel market appears healthy and the firm expects the 4G transition to continue for the next few quarters. Though virtualization is beginning to impact server unit growth negatively, it should have a positive impact on HBA growth as virtualization accelerates the transition to storage area networking.
Despite the recent disappointment in the FC-switch market (12% of sales), the firm continues to believe that QLogic will benefit from the BRCD/MCDT merger longer term. InfiniBand is a new opportunity for QLGC and they expect revenue ramps from this product line in the next 1 - 2 quarters. QLGC has multiple design wins and is well positioned to gain share in this $300M market. Firm thinks street expectations for this business are conservative and see upside potential in 2H07. Reits Buy.
Notablecalls: Would not be surprised to see some buy interest in QLGC over the next week or so. The stock has been lagging the general tech group and may have around $1 worth of upside in it. Not a high conviction call.
Calls of Note Part 2
- TWP notes today's CPU environment is a difficult one, particularly with the aggressive ongoing price cuts between Intel (NASDAQ:INTC) and AMD. The firm is incrementally more positive on Intel, however, given their findings regarding its long-term server road map, and particularly the Thurley platform. They believe that the dramatic change in architecture (i.e., integrated memory controller and CSI) bodes well for the company as it transitions off of the Bensley platform in 2H08.
Intel will introduce its next-generation server platform named Thurley in 2H08 and will feature the Gainestown processor and Tylersburg chipset. Most of the time, a platform upgrade represents an evolutionary step forward-however, they view the introduction of Thurley as a revolutionary change and dramatic improvement in Intel's core system architecture.
Gainestown-Intel's masterpiece in the works: Similar to Barcelona, Gainestown will be a monolithic quad-core processor in the Nehalem family and will be manufactured at a mature 45nm node. The most dramatic architectural changes, however, lie in the use of Common System Interface (CSI) and an integrated DDR3 memory controller (iMC). CSI is a coherent, point-to-point interconnect (similar to AMD's coherent HyperTransport), and replaces the aging Front-Side Bus (FSB). Gainestown will also feature a shared 8MB cache, improved power efficiency and Hyper-Threading capabilities. Firm's checks on Gainestown have come back extremely favorably, with OEMs and systems builders particularly excited about the adoption of the DDR3 iMC and CSI.
The firm is incrementally more positive on shares of Intel given the shift in market momentum toward Core 2 products (i.e., Woodcrest, Clovertown, Conroe and Merom), and are further encouraged by Intel's longer-term road map, particularly on server. Given the current aggressive pricing environment, however, they believe that pricing will weigh on margins in the near term. Despite trading below the historical average P/E of 23x, they believe that shares are fairly valued, trading at 15x 2008 EPS estimates of $1.25. Maintains Market Weight rating on shares.
Notablecalls: Not actionable but good to know category. Goes to show how little head start AMD has with their Barcelona.
Intel will introduce its next-generation server platform named Thurley in 2H08 and will feature the Gainestown processor and Tylersburg chipset. Most of the time, a platform upgrade represents an evolutionary step forward-however, they view the introduction of Thurley as a revolutionary change and dramatic improvement in Intel's core system architecture.
Gainestown-Intel's masterpiece in the works: Similar to Barcelona, Gainestown will be a monolithic quad-core processor in the Nehalem family and will be manufactured at a mature 45nm node. The most dramatic architectural changes, however, lie in the use of Common System Interface (CSI) and an integrated DDR3 memory controller (iMC). CSI is a coherent, point-to-point interconnect (similar to AMD's coherent HyperTransport), and replaces the aging Front-Side Bus (FSB). Gainestown will also feature a shared 8MB cache, improved power efficiency and Hyper-Threading capabilities. Firm's checks on Gainestown have come back extremely favorably, with OEMs and systems builders particularly excited about the adoption of the DDR3 iMC and CSI.
The firm is incrementally more positive on shares of Intel given the shift in market momentum toward Core 2 products (i.e., Woodcrest, Clovertown, Conroe and Merom), and are further encouraged by Intel's longer-term road map, particularly on server. Given the current aggressive pricing environment, however, they believe that pricing will weigh on margins in the near term. Despite trading below the historical average P/E of 23x, they believe that shares are fairly valued, trading at 15x 2008 EPS estimates of $1.25. Maintains Market Weight rating on shares.
Notablecalls: Not actionable but good to know category. Goes to show how little head start AMD has with their Barcelona.
Calls of Note Part 1
- FBR notes they continue to recommend shares of Urban Outfitters (NASDAQ:URBN) as their top growth/momentum pick and are now adding to the FBR Top Picks list. Firm notes they have seen consistent progress at both divisions throughout March; they believe that comps quarter-to-date remain in the slightly negative range (but have been positive in recent weeks) at the Urban Outfitters division and in the positive low to mid single digit range at the Anthropologie division. They believe that margins are up dramatically over last year as tight inventory control limits downside margin risk.
They believe that if the company posts positive comps in 1Q07 and beats 1Q07 earnings, the stock will continue its upward momentum. Notes the announcement of a 4.5M share sale by Chairman Dick Hayne has put pressure on the stock. Firm believes this liquidation is an isolated event and is not indicative of massive insider selling; they do not feel that he would liquidate in the face of pending bad news in today's litigious environment.
Firm is raising their FY07 estimate from $0.85 to $0.90 and FY08 estimate from $1.02 to $1.17. They believe that shares of URBN should be valued in line with a three-year EPS growth rate of 30%. FBR's $35 12-month price target values URBN at 30.0x FY08 EPS forecast of $1.17.
Notablecalls: It's fairly quiet out there this AM, so I thought to highlight it. Not actionable but good to know category.
They believe that if the company posts positive comps in 1Q07 and beats 1Q07 earnings, the stock will continue its upward momentum. Notes the announcement of a 4.5M share sale by Chairman Dick Hayne has put pressure on the stock. Firm believes this liquidation is an isolated event and is not indicative of massive insider selling; they do not feel that he would liquidate in the face of pending bad news in today's litigious environment.
Firm is raising their FY07 estimate from $0.85 to $0.90 and FY08 estimate from $1.02 to $1.17. They believe that shares of URBN should be valued in line with a three-year EPS growth rate of 30%. FBR's $35 12-month price target values URBN at 30.0x FY08 EPS forecast of $1.17.
Notablecalls: It's fairly quiet out there this AM, so I thought to highlight it. Not actionable but good to know category.
Paperstand (SMG, URBN)
The WSJ’s ”Heard on the Street” column highlights Scotts Miracle-Gro (SMG), whose execs took a cold, hard look at their business and figured they could do with a lot more debt. "We felt like the moons were aligned, and so we went for it," says CFO Dave Evans. The co obtained $775m in additional debt and paid out $750m to its shareholders by distributing a special dividend and repurchasing a chunk of its shares. A number of public co’s are taking a leaf out of the playbook of private-equity firms and loading up on debt to improve returns for their shareholders. In doing so, they are taking on more risk and making big bets that they will stay profitable for years to come. The credit mkts have been hospitable to most fund-raising efforts, though there are signs that debt investors are becoming less accommodating and are starting to push corporate interest rates higher. During the past few months, Domino’s Pizza (DPZ), Health Mgmgt (HMA) and Dean Foods (DF) also unveiled plans to take on significantly more debt and distribute much of their cash to shareholders through dividends or buybacks. Proponents of such "do-it-yourself buyouts," also known as leveraged recapitalizations, say they make public co’s more efficient and may help increase their bottom lines in the long run.
Barron’s Online highlights Ivy Global Natural Resources Fund top holdins. Those include COP, VLO, RIO, DO, BTU, APD, GFI, NE, ACI and BHI.
“Inside Scoop” section reports that Urban Outfitters (URBN) Chmn and President Richard Hayne sold off close to 10% of his holdings in the co he co-founded, taking advantage of a pricey valuation to stitch up sizeable gains. From March 21 to 23, Hayne disposed of 4.5m shares for $114m on the open mkt. That trimmed Hayne's holdings to 39.3m shares, or a 23.9% stake. Mark LoPresti, of Thomson Financial, says, "This is the largest sale since 1993," when the co went public, in terms of dollar value for any year or for any individual. It is Hayne's 2nd-largest sale in terms of share count when taking into account four 2-for-1 stock splits since 1996. Ben Silverman, of InsiderScore.com, says there are a number of mitigating factors regarding Hayne's sales, such as, "he takes minimal amount of cash compensation and he isn't loaded up on options."
Barron’s Online highlights Ivy Global Natural Resources Fund top holdins. Those include COP, VLO, RIO, DO, BTU, APD, GFI, NE, ACI and BHI.
“Inside Scoop” section reports that Urban Outfitters (URBN) Chmn and President Richard Hayne sold off close to 10% of his holdings in the co he co-founded, taking advantage of a pricey valuation to stitch up sizeable gains. From March 21 to 23, Hayne disposed of 4.5m shares for $114m on the open mkt. That trimmed Hayne's holdings to 39.3m shares, or a 23.9% stake. Mark LoPresti, of Thomson Financial, says, "This is the largest sale since 1993," when the co went public, in terms of dollar value for any year or for any individual. It is Hayne's 2nd-largest sale in terms of share count when taking into account four 2-for-1 stock splits since 1996. Ben Silverman, of InsiderScore.com, says there are a number of mitigating factors regarding Hayne's sales, such as, "he takes minimal amount of cash compensation and he isn't loaded up on options."
Monday, March 26, 2007
Calls of Note Part 6
- CIBC's Amit Hazan has some interesting comments on Digene (NASDAQ:DIGE) following news that BEC plans to acquire BSTE for $85/share (a 55% premium). CIBC feels the uncanny similarities between the Biosite and Digene stories are important to learn from, and they see the long-term acquisition value inherent in DIGE at a time when the diagnostic space has become very acquisitive.
BSTE had a virtual monopoly on the BNP diagnostic space until competition entered during 2003-06 (Bayer, Roche, Abbott, Dade, JNJ, DP). While the stock succumbed to competitive noise on more one occasion, the weakness proved to be a buying opportunity time and time again.
DIGE is stronger than BSTE on almost every metric today, has a stronger market position than BSTE ever did (mainly due to IP), and won't have competition until '09-'10. If one extrapolates the BSTE acquisition multiple, the value in DIGE today becomes quite evident.
BSTE is being acquired for 4.8x TTM sales, 4.5x '07E sales, and 4.2x '08E sales. These multiples on DIGE imply a takeout of $49/share on '07E sales (+24%) and $56 on '08E sales (+40%). No analogy is perfect, but investors should know their med device history and be prepared for a repeat.
Maintains Sector Outperformer and $58 tgt on DIGE.
Notablecalls: While I usually refrain from posting comments during the trading day, I think
the work Amit Hazan has done on DIGE is just too important to ignore. Please see archives for further color on the stock.
BSTE had a virtual monopoly on the BNP diagnostic space until competition entered during 2003-06 (Bayer, Roche, Abbott, Dade, JNJ, DP). While the stock succumbed to competitive noise on more one occasion, the weakness proved to be a buying opportunity time and time again.
DIGE is stronger than BSTE on almost every metric today, has a stronger market position than BSTE ever did (mainly due to IP), and won't have competition until '09-'10. If one extrapolates the BSTE acquisition multiple, the value in DIGE today becomes quite evident.
BSTE is being acquired for 4.8x TTM sales, 4.5x '07E sales, and 4.2x '08E sales. These multiples on DIGE imply a takeout of $49/share on '07E sales (+24%) and $56 on '08E sales (+40%). No analogy is perfect, but investors should know their med device history and be prepared for a repeat.
Maintains Sector Outperformer and $58 tgt on DIGE.
Notablecalls: While I usually refrain from posting comments during the trading day, I think
the work Amit Hazan has done on DIGE is just too important to ignore. Please see archives for further color on the stock.
Calls of Note Part 5
- Deutsche Bank is downgrading CV Therapeutics (NASDAQ:CVTX) to Sell from Hold ahead of full Ranexa Merlin PIII data to be presented at the American College of Cardiology (ACC)
on Tues, 3/27.
Firm now believes Ranexa ACC data will fall short of generating sufficient positive data trends for supporting Ranexa's outlook even as an approved niche chronic angina agent. Failure to achieve Merlin's efficacy endpoint (orig disclosed 3/6) of composite CV-related death, 1st occurrence of MI or recurrent ischemia and potential lack of clear positive trends on secondary endpoints would be expected to have an adverse impact on current Ranexa sales trends. Ranexa's comparable safety profile v standard of care is not enough to make Ranexa's profile compelling on a reward/risk analysis in their view. DB is lowering 2007-10 Ranexa sales projections to $48M, $58M, and $68M, and $78M, respectively.
As a result of Ranexa's diminished outlook they believe it may be difficult for CVTX to raise additional capital in order to support high operational expenses supporting Ranexa sales and expect increasing pressure on CVTX's ability to remain solvent.
Firm's new $2 PT is based on 2x 08 Ranexa sales of $58M and 58M s.o. CVTX currently has ~$270M or $4-5 cash/shr assuming 1Q07 burn, to be reduced as a function of operating expenses and the firm notes the $399.5M in convertible debt.
Notablecalls: Think the tgt cut will generate some jitters today.
on Tues, 3/27.
Firm now believes Ranexa ACC data will fall short of generating sufficient positive data trends for supporting Ranexa's outlook even as an approved niche chronic angina agent. Failure to achieve Merlin's efficacy endpoint (orig disclosed 3/6) of composite CV-related death, 1st occurrence of MI or recurrent ischemia and potential lack of clear positive trends on secondary endpoints would be expected to have an adverse impact on current Ranexa sales trends. Ranexa's comparable safety profile v standard of care is not enough to make Ranexa's profile compelling on a reward/risk analysis in their view. DB is lowering 2007-10 Ranexa sales projections to $48M, $58M, and $68M, and $78M, respectively.
As a result of Ranexa's diminished outlook they believe it may be difficult for CVTX to raise additional capital in order to support high operational expenses supporting Ranexa sales and expect increasing pressure on CVTX's ability to remain solvent.
Firm's new $2 PT is based on 2x 08 Ranexa sales of $58M and 58M s.o. CVTX currently has ~$270M or $4-5 cash/shr assuming 1Q07 burn, to be reduced as a function of operating expenses and the firm notes the $399.5M in convertible debt.
Notablecalls: Think the tgt cut will generate some jitters today.
Calls of Note Part 4
Stifel thinks Argon ST's (NASDAQ:STST) small SSTD deal is potentially worth much more in 2008 and beyond.
Last week Argon ST was awarded a $5.3 million contract modification to continue development work and sea trial certification of the AN/SLQ-25A/C, Surface Ship Torpedo Defense (SSTD) for the U.S. Navy to be completed over the next 14 months. The $5.3 million development contract itself is not material; however, since Argon ST is the sole-source provider for this device, a shift to product work could have a significant impact on revenue beginning in 2008 and continuing for an extended period.
There are about 200 25A units on U.S. Navy surface ships and 220 more deployed by allied forces. Firm thinks upgrade work on the 420 units to the 25C class could potentially be worth over $1 million per unit. In addition, they think it is highly likely that new 25C units will be produced. Stifel is not changing their forecasts at this time but believe more news is likely to surface as the development work and testing nears completion.
Firm's 12-month target price of $28 represents an EV/F07E EBITDA multiple of 13x. STST shares are currently valued at a multiple of about 11.5x. They think this is a conservative level as it is similar to that of Argon's public peers but far below recent M&A activity in the SIGINT/electronic warfare space. Maintains Buy.
Notablecalls: Interesting comments by Stifel's Stephen Levenson. I'd keep an eye on this one as the revenue impact could be a major one if Levenson's right. The chart looks like it wants to break out.
Last week Argon ST was awarded a $5.3 million contract modification to continue development work and sea trial certification of the AN/SLQ-25A/C, Surface Ship Torpedo Defense (SSTD) for the U.S. Navy to be completed over the next 14 months. The $5.3 million development contract itself is not material; however, since Argon ST is the sole-source provider for this device, a shift to product work could have a significant impact on revenue beginning in 2008 and continuing for an extended period.
There are about 200 25A units on U.S. Navy surface ships and 220 more deployed by allied forces. Firm thinks upgrade work on the 420 units to the 25C class could potentially be worth over $1 million per unit. In addition, they think it is highly likely that new 25C units will be produced. Stifel is not changing their forecasts at this time but believe more news is likely to surface as the development work and testing nears completion.
Firm's 12-month target price of $28 represents an EV/F07E EBITDA multiple of 13x. STST shares are currently valued at a multiple of about 11.5x. They think this is a conservative level as it is similar to that of Argon's public peers but far below recent M&A activity in the SIGINT/electronic warfare space. Maintains Buy.
Notablecalls: Interesting comments by Stifel's Stephen Levenson. I'd keep an eye on this one as the revenue impact could be a major one if Levenson's right. The chart looks like it wants to break out.
Calls of Note Part 3
- Merrill Lynchs notes Third Point LLC recently bought a 9% stake in PDL Biopharma (NASDAQ:PDLI) and, based on SEC filings, voiced concern over PDL's corporate and R&D spending. Third Point is seeking to place 4 directors on PDL's board and to bring in consultants to analyze spending. This may be just the opening salvo, but in firm's view, PDLI stock is undervalued precisely because they expect the company to make significant efforts to improve R&D yield either internally or through deals. With pipeline expectations emerging from a low point, any positive news will likely boost the stock.
Despite robust revenues and significant R&D investment, PDL has never launched a product from its pipeline. However, MLCO believes that the new chief medical officer and management are taking a hard look at the pipeline and that everything is on the table in terms of asset allocation and potential deals.
In any event, with a robust and diverse revenue stream and a refocused R&D effort, the firm believes the stock is undervalued. We expect significant pipeline and collaborative activity that ideally will yield commercial products sooner rather than later to contribute to the company's Vision 2010 goal of $1bn in revenue. Maintains Buy.
Notablecalls: Expect to see some buy interest following the call.
Despite robust revenues and significant R&D investment, PDL has never launched a product from its pipeline. However, MLCO believes that the new chief medical officer and management are taking a hard look at the pipeline and that everything is on the table in terms of asset allocation and potential deals.
In any event, with a robust and diverse revenue stream and a refocused R&D effort, the firm believes the stock is undervalued. We expect significant pipeline and collaborative activity that ideally will yield commercial products sooner rather than later to contribute to the company's Vision 2010 goal of $1bn in revenue. Maintains Buy.
Notablecalls: Expect to see some buy interest following the call.
Calls of Note Part 2
Deutsche Bank is out with some fairly interesting comments on Motorola (NYSE:MOT):
How much would you pay for a Chinese maker of color televisions and toasters? Do you think there is a reason why General Electric has essentially exited the consumer electronics business entirely?
The firm thinks Dell and HP are as good a comp as Nokia, and that is not intended as a compliment. What are Dell and HP's operating margins? 6% - 7%. Still, the contrarians will argue that MOT has numerous unlocked gems, and its margin problems are nothing that a good restructuring cannot fix.
There is no easy way for Motorola to fundamentally alter its margins. DB thinks they will likely remain tied to economic and fashion cycles without some drastic action. Icahn Partners thinks the company will be forced to take this drastic action if they lever the company to the gills.
In all the sensitivity analysis the firm performed the key variable was margins for the handset business. They varied exit multiples, leverage levels and several others factors, but in the end Mobile Device margins were by far the biggest swing factor. Some of these cases offer truly appealing returns, and they understand how investors could find a case for buying the stock at these levels. In DB's view, more things have to go right than can go wrong to get to those returns. Put another way, the margin of safety on Motorola at $17.75 is slim.
The truly shocking thing to them about Motorola in 2007 is that there is so much missing. At 3GSM they had only one truly new phone "the flip-kick RIZR Z8", which is really not that exciting, and the fact that it is a Symbian device underscores how mixed up the company has become. Where is the SCPL? The market needs something new and the firm thinks its unlikely that Motorola will have anything in time for Christmas this year. They also think the personnel issues at Mobile Devices will prove challenging. We think it will be a few months before the middle management team there settles down. The group has a lot of very talented people, but its unclear who will stick around. With 66,000 employees Motorola has gotten to be an institution, and institutions do not design hot phones overnight.
Finally, one cannot rule out the possibility that Motorola is waging a brutal tactical campaign against Mr. Icahn's hostile offer. Things may not be quite as bad as they sound. Nonetheless, even if they are sandbagging him and the Street to give themselves room to make the necessary changes, its tough to deny that the company is not in as good of shape as it appeared three or four quarters ago.
Notablecalls: Call me a MOT bull here with a stop below recent lows. Despite the warning and the resulting pessimism (it was there before, with the warning acting as the confirmation), the stock managed to put together a bounce on Friday. That tells me there will likely be further upside to this one.
How much would you pay for a Chinese maker of color televisions and toasters? Do you think there is a reason why General Electric has essentially exited the consumer electronics business entirely?
The firm thinks Dell and HP are as good a comp as Nokia, and that is not intended as a compliment. What are Dell and HP's operating margins? 6% - 7%. Still, the contrarians will argue that MOT has numerous unlocked gems, and its margin problems are nothing that a good restructuring cannot fix.
There is no easy way for Motorola to fundamentally alter its margins. DB thinks they will likely remain tied to economic and fashion cycles without some drastic action. Icahn Partners thinks the company will be forced to take this drastic action if they lever the company to the gills.
In all the sensitivity analysis the firm performed the key variable was margins for the handset business. They varied exit multiples, leverage levels and several others factors, but in the end Mobile Device margins were by far the biggest swing factor. Some of these cases offer truly appealing returns, and they understand how investors could find a case for buying the stock at these levels. In DB's view, more things have to go right than can go wrong to get to those returns. Put another way, the margin of safety on Motorola at $17.75 is slim.
The truly shocking thing to them about Motorola in 2007 is that there is so much missing. At 3GSM they had only one truly new phone "the flip-kick RIZR Z8", which is really not that exciting, and the fact that it is a Symbian device underscores how mixed up the company has become. Where is the SCPL? The market needs something new and the firm thinks its unlikely that Motorola will have anything in time for Christmas this year. They also think the personnel issues at Mobile Devices will prove challenging. We think it will be a few months before the middle management team there settles down. The group has a lot of very talented people, but its unclear who will stick around. With 66,000 employees Motorola has gotten to be an institution, and institutions do not design hot phones overnight.
Finally, one cannot rule out the possibility that Motorola is waging a brutal tactical campaign against Mr. Icahn's hostile offer. Things may not be quite as bad as they sound. Nonetheless, even if they are sandbagging him and the Street to give themselves room to make the necessary changes, its tough to deny that the company is not in as good of shape as it appeared three or four quarters ago.
Notablecalls: Call me a MOT bull here with a stop below recent lows. Despite the warning and the resulting pessimism (it was there before, with the warning acting as the confirmation), the stock managed to put together a bounce on Friday. That tells me there will likely be further upside to this one.
Calls of Note Part 1
- JP Morgan notes that following their successful seasonal call from Aug. '06 to Jan. '07, they have maintained a C1H07 trading range call with expectations for limited downside on valuation support and buybacks. The firm has also recommended buying semiconductor equipment stocks to prepare for a likely late 2Q/early 3Q upward inflection. In line with their thesis, they placed three stocks on the JPMorgan U.S. Equity Focus List and also introduced Share Gain and Margin Expansion Thesis. However, because they feel the odds of acute memory-related equipment demand weakness is fading and primary research suggests logic and foundry chipmakers are jockeying for C2H07 manufacturing slots, they are making the inflection call now.
Key Catalysts. 1) April Earnings Season - JPM expects it to be good with comments that memory is solid and the foundry outlook is better at the margin. 2) Memory Price Stabilization - Appears to be happening in Flash and the fir expects the same to occur for DRAM in C2Q07. 3) Visibility for increased Logic/Foundry Orders - happening at the margin now.
Also, it is firm's distinct impression that a large percentage, a large majority actually, of growth-oriented investors/institutions that they have met with are underweight semiconductor equipment and related stocks or are out altogether.
Tier One Top Picks on competitive share gain include OW-rated ASML (NASDAQ:ASML), Mattson (NASDAQ:MTSN), Ultra Clean Holdings (NASDAQ:UCTT), and Varian Semi (NASDAQ:VSEA). Tier Two Top Picks on segment share gain include OW-rated Cymer (NASDAQ:CYMI) and KLA-Tencor (NASDAQ:KLAC).
Time to Step Up to OW-Rated Lam Research (NASDAQ:LRCX). According to JPM, Lam has the same catalysts as above plus the likelihood of increased C3Q and C4Q shipment guidance during the April and/or July earnings seasons on improving Foundry demand.
Notablecalls: While I don't agree with this call fundamentally, I do recognize the trading dynamics surrounding these stocks. Watch LRCX today for some upside.
Key Catalysts. 1) April Earnings Season - JPM expects it to be good with comments that memory is solid and the foundry outlook is better at the margin. 2) Memory Price Stabilization - Appears to be happening in Flash and the fir expects the same to occur for DRAM in C2Q07. 3) Visibility for increased Logic/Foundry Orders - happening at the margin now.
Also, it is firm's distinct impression that a large percentage, a large majority actually, of growth-oriented investors/institutions that they have met with are underweight semiconductor equipment and related stocks or are out altogether.
Tier One Top Picks on competitive share gain include OW-rated ASML (NASDAQ:ASML), Mattson (NASDAQ:MTSN), Ultra Clean Holdings (NASDAQ:UCTT), and Varian Semi (NASDAQ:VSEA). Tier Two Top Picks on segment share gain include OW-rated Cymer (NASDAQ:CYMI) and KLA-Tencor (NASDAQ:KLAC).
Time to Step Up to OW-Rated Lam Research (NASDAQ:LRCX). According to JPM, Lam has the same catalysts as above plus the likelihood of increased C3Q and C4Q shipment guidance during the April and/or July earnings seasons on improving Foundry demand.
Notablecalls: While I don't agree with this call fundamentally, I do recognize the trading dynamics surrounding these stocks. Watch LRCX today for some upside.
Paperstand (C, DELL)
The WSJ reports that Citigroup (C) execs are putting the finishing touches on a restructuring plan that is likely to involve around 15K job cuts and a charge against earnings of more than $1bn. The stakes are high for Citigroup CEO Charles Prince, who announced a cost-cutting review of operations late last year and has billed the outcome as critical to rejuvenating the co. Mr. Prince is facing mounting pressure from both inside and outside the co to reduce Citigroup's expenses, which are rising at a faster rate than rev, to deliver better financial results, and to drive up the co's stagnant stock price.
“Heard on the Street” column out on Dell (DELL), saying that Wall St wants the co to go on a crash diet to fatten up its stock price. Dell has enjoyed some of the PC industry's highest profit margins, but over the past few years, the co's operating expenses have rapidly increased, up more than 30% to $1.7bn in the past 2 years, while it has struggled to keep sales rising at the same rate. A major reason for Dell's bloated expenses: a soaring headcount. In the 2 years since Jan05, Dell's employee base has jumped by nearly 50%. In that same period, the co's rev rose 7%. Dell's operating margin dipped to 5.6% in FebQ, down from 8.2% yoy. Now Wall St. is saying that one of the PC industry's leanest co’s has gotten too flabby. Sunil Reddy, of Fifth Third Asset Mgmt, says Dell's expenses have to come down for its profits to go up. "I wouldn't be surprised if they announce some kind of work-force reduction plan," he says. Mr. Reddy says investors want to see Dell's operating margins rise to the 6% range. Chirag Vasavada, of T. Rowe Price Associates, says Dell needs to start "cutting heads or holding operating expenses steady and growing sales."
“Heard on the Street” column out on Dell (DELL), saying that Wall St wants the co to go on a crash diet to fatten up its stock price. Dell has enjoyed some of the PC industry's highest profit margins, but over the past few years, the co's operating expenses have rapidly increased, up more than 30% to $1.7bn in the past 2 years, while it has struggled to keep sales rising at the same rate. A major reason for Dell's bloated expenses: a soaring headcount. In the 2 years since Jan05, Dell's employee base has jumped by nearly 50%. In that same period, the co's rev rose 7%. Dell's operating margin dipped to 5.6% in FebQ, down from 8.2% yoy. Now Wall St. is saying that one of the PC industry's leanest co’s has gotten too flabby. Sunil Reddy, of Fifth Third Asset Mgmt, says Dell's expenses have to come down for its profits to go up. "I wouldn't be surprised if they announce some kind of work-force reduction plan," he says. Mr. Reddy says investors want to see Dell's operating margins rise to the 6% range. Chirag Vasavada, of T. Rowe Price Associates, says Dell needs to start "cutting heads or holding operating expenses steady and growing sales."
Sunday, March 25, 2007
Barron's Summary
Barron’s lines up most influential CEO’s. The ultimate CEO who matters is Steve Jobs, of Apple (AAPL). Jobs' departure probably would result in a greater loss of stock-mkt value than the loss of any other CEO in the world. Jobs might be worth 20 or so points to Apple shares, roughly $16bn.
Fund manager likes NLY, ANH, ORGN and OPX. Dislikes FMT, RATE, MCO and MHP.
Starbucks (SBUX) has skidded 20% since Nov, to the low 30s. But the stock could rally into the mid-40s as same-store sales and profit margins improve. "We are at the point where a long-term investor can make a strong case for buying the stock," says Marc Greenberg, of Deutsche Bank. "This is a great brand, with great pricing power, an excellent operating model and good prospects. And now the stock is much cheaper" than it used to be.
They've already jumped, but RadioShack (RSH) shares could rise 30% or more in the next 12-18 months if new chief Julian Day hammers costs further and gets the product mix right. "There is a tremendous amount of room to cut, and this is what ppl are missing," asserts Dennis Bryan, of First Pacific Advisors.
Barron’s discusses stocks with pending lawsuits. World Wrestling (WWE), American Express (AXP) and Qualcomm (QCOM) could be helped by court cases. MasterCard (MA) and Sherwin-Williams (SHW) could be hurt.
The Veterans Affairs is one of Uncle Sam's most efficient agencies but still must make improvements to provide adequate care. That effort should benefit patients…and the agency's contractors. Those include MCK, BDX, CPHD and RHHBY.
“The Trader” section discusses Apple (AAPL), saying that any day now Apple TV will debut in stores across the country. For $299, the digitally savvy can play music, movies and videos stored on a home computer through television. Given the unknown potential, many analysts have yet to count Apple TV in their ests, but a marginally successful rollout could snag a slice of the $26bn mkt for DVDs and CDs. Deutsche Bank analyst Chris Whitmore says it is conceivable that Apple TV will cannibalize 20-30% of the existing DVD mkt within several years. It "opens substantial new mkt opportunities to Apple," he notes, and builds on Apple's stronghold in digital-content distribution. That's not the only compelling catalyst. Barron's sees a boost in Mac sales when "Boot Camp" gets delivered free this spring with Apple's new Leopard OS. Apple shares aren't cheap at 24x expected earnings, but the stock's P/E multiple has been higher before. And a premium is warranted for profits projected to grow by 20% annually in the next 5 years, presuming Apple continues to capitalize on this still-budding digital product cycle.
“International Trader” section highlights Nidec (NJ), whose stock is down 12% in last 12 mo’s. Blame the plunge in NAND flash-memory chips. At ¥7,830 last week, Nidec trades at 28x earnings, and sports a mkt cap of ¥1.13trln ($9.7bn). Nidec’s long-term growth rate, by Bloomberg's reckoning, is 52%. It isn't a cheap stock, and CEO Shigenobu Nagamori has said that the right mkt cap on his tgt of a trillion yen in sales is at least ¥2.5trln. Indubitably true is that those who bet against Nagamori over the long haul have been wrong.
“Technology Trader” column highlights positively CMGI (CMGI). Article was ran by Barron’s Online on March 21. See archives.
“Plugged In” column highlights Telanetix (TNXI). The co boasts a mkt value of only $58.5m, but it has proven that it can compete with its bigger rivals in the high-end video-conferencing mkt: Cisco (CSCO), H-P (HPQ) and Polycom (PLCM). In Jan, Telanetix beat its larger rivals by winning a major contract from Mercedes-Benz USA. The Telanetix system delivers full-size, face-to-face images in high res on large flat-panel screens, along with real-time audio and data. It really gives the perception that users are in the same room, says Bob Jesenik, of Aequitas Capital. "If they can make it CEO-proof, which we think they can, it could achieve mass-mkt growth," he comments. Jesenik says that Telanetix has been breaking even and could turn a profit this year. Sales could take off, he adds, given its announcement last week that it will lease systems to corporations for as little as $1,000 a month. Analyst Joe Noel of Dutton Associates, pegs ‘07 rev at $8.5m. He predicts annual earnings of 18c a share and rates the stock a Strong Buy, with tgt of 5. But even without a takeover offer, Jesenik contends that this small-cap could get big in a hurry. He says that mgmt has a proven track record with technology start-ups. In addition, "the senior team doesn't take salary, which tells us that they are aligned with shareholders' interests."
Notablecalls: This one may fly but keep a tight leash as youre certainly not the first one on this train.
Fund manager likes NLY, ANH, ORGN and OPX. Dislikes FMT, RATE, MCO and MHP.
Starbucks (SBUX) has skidded 20% since Nov, to the low 30s. But the stock could rally into the mid-40s as same-store sales and profit margins improve. "We are at the point where a long-term investor can make a strong case for buying the stock," says Marc Greenberg, of Deutsche Bank. "This is a great brand, with great pricing power, an excellent operating model and good prospects. And now the stock is much cheaper" than it used to be.
They've already jumped, but RadioShack (RSH) shares could rise 30% or more in the next 12-18 months if new chief Julian Day hammers costs further and gets the product mix right. "There is a tremendous amount of room to cut, and this is what ppl are missing," asserts Dennis Bryan, of First Pacific Advisors.
Barron’s discusses stocks with pending lawsuits. World Wrestling (WWE), American Express (AXP) and Qualcomm (QCOM) could be helped by court cases. MasterCard (MA) and Sherwin-Williams (SHW) could be hurt.
The Veterans Affairs is one of Uncle Sam's most efficient agencies but still must make improvements to provide adequate care. That effort should benefit patients…and the agency's contractors. Those include MCK, BDX, CPHD and RHHBY.
“The Trader” section discusses Apple (AAPL), saying that any day now Apple TV will debut in stores across the country. For $299, the digitally savvy can play music, movies and videos stored on a home computer through television. Given the unknown potential, many analysts have yet to count Apple TV in their ests, but a marginally successful rollout could snag a slice of the $26bn mkt for DVDs and CDs. Deutsche Bank analyst Chris Whitmore says it is conceivable that Apple TV will cannibalize 20-30% of the existing DVD mkt within several years. It "opens substantial new mkt opportunities to Apple," he notes, and builds on Apple's stronghold in digital-content distribution. That's not the only compelling catalyst. Barron's sees a boost in Mac sales when "Boot Camp" gets delivered free this spring with Apple's new Leopard OS. Apple shares aren't cheap at 24x expected earnings, but the stock's P/E multiple has been higher before. And a premium is warranted for profits projected to grow by 20% annually in the next 5 years, presuming Apple continues to capitalize on this still-budding digital product cycle.
“International Trader” section highlights Nidec (NJ), whose stock is down 12% in last 12 mo’s. Blame the plunge in NAND flash-memory chips. At ¥7,830 last week, Nidec trades at 28x earnings, and sports a mkt cap of ¥1.13trln ($9.7bn). Nidec’s long-term growth rate, by Bloomberg's reckoning, is 52%. It isn't a cheap stock, and CEO Shigenobu Nagamori has said that the right mkt cap on his tgt of a trillion yen in sales is at least ¥2.5trln. Indubitably true is that those who bet against Nagamori over the long haul have been wrong.
“Technology Trader” column highlights positively CMGI (CMGI). Article was ran by Barron’s Online on March 21. See archives.
“Plugged In” column highlights Telanetix (TNXI). The co boasts a mkt value of only $58.5m, but it has proven that it can compete with its bigger rivals in the high-end video-conferencing mkt: Cisco (CSCO), H-P (HPQ) and Polycom (PLCM). In Jan, Telanetix beat its larger rivals by winning a major contract from Mercedes-Benz USA. The Telanetix system delivers full-size, face-to-face images in high res on large flat-panel screens, along with real-time audio and data. It really gives the perception that users are in the same room, says Bob Jesenik, of Aequitas Capital. "If they can make it CEO-proof, which we think they can, it could achieve mass-mkt growth," he comments. Jesenik says that Telanetix has been breaking even and could turn a profit this year. Sales could take off, he adds, given its announcement last week that it will lease systems to corporations for as little as $1,000 a month. Analyst Joe Noel of Dutton Associates, pegs ‘07 rev at $8.5m. He predicts annual earnings of 18c a share and rates the stock a Strong Buy, with tgt of 5. But even without a takeover offer, Jesenik contends that this small-cap could get big in a hurry. He says that mgmt has a proven track record with technology start-ups. In addition, "the senior team doesn't take salary, which tells us that they are aligned with shareholders' interests."
Notablecalls: This one may fly but keep a tight leash as youre certainly not the first one on this train.
Friday, March 23, 2007
Calls of Note Part 4
- Prudential notes that The Senate Banking Committee, chaired by Christopher Dodd, held a hearing on Thursday regarding the subprime mortgage industry. Federal and state regulators, mortgage lenders, consumer advocates, lawyers and distressed borrowers testified at the hearing.
Firm's primary takeaway is that the credit quality of subprime mortgage is likely to continue deteriorating near term. Mortgage lenders at the hearing testified that they estimate that 40% to 60% of subprime mortgage borrowers would have failed to qualify if their mortgages were underwritten at fully-indexed interest rates, suggesting a widespread vulnerability to material rate resets. At the same time, the industry is still in the midst of implementing more restrictive regulatory guidelines on non-traditional mortgage, suggesting to Prudential that the availability of subprime credit could get curtailed further.
Firm believes that this hearing, similar to this committee's recent hearing on the credit card industry, reflects Congressional Democrats' twin themes of more visible assertion of oversight power and consumer protection. However, they are not sure whether there is any practical legislative solution to the perceived threat of higher subprime mortgage foreclosures beyond controversial "rescue" mortgages and regulatory dissuasion.
Notablecalls: 40% to 60% of of the subprime mortgage borrowers would have failed to qualify? Ouch!
Firm's primary takeaway is that the credit quality of subprime mortgage is likely to continue deteriorating near term. Mortgage lenders at the hearing testified that they estimate that 40% to 60% of subprime mortgage borrowers would have failed to qualify if their mortgages were underwritten at fully-indexed interest rates, suggesting a widespread vulnerability to material rate resets. At the same time, the industry is still in the midst of implementing more restrictive regulatory guidelines on non-traditional mortgage, suggesting to Prudential that the availability of subprime credit could get curtailed further.
Firm believes that this hearing, similar to this committee's recent hearing on the credit card industry, reflects Congressional Democrats' twin themes of more visible assertion of oversight power and consumer protection. However, they are not sure whether there is any practical legislative solution to the perceived threat of higher subprime mortgage foreclosures beyond controversial "rescue" mortgages and regulatory dissuasion.
Notablecalls: 40% to 60% of of the subprime mortgage borrowers would have failed to qualify? Ouch!
Calls of Note Part 3
- FTN Midwest notes that on March 19 Barron's recently ran an article about Seagate (NYSE:STX) citing a note published by Prudential regarding STX's quarter end rebate program. Firm says they have differing opinions about how they interpreted the rebate program and their whole take on the current quarter implications for the HDD manufacturers.
Firm believes that the STX rebates are not a new development as they offered similar rebates in the last march quarter. Also, Toshiba and HGST are the most aggressive pricing wise in the channel at this point in time and STX will only be coming in line with the lower price points, not establishing them. Another thing to note is that according to firm's channel contacts, the majority of the drives covered under the rebate program are high capacity drives over 250 GB. This move from STX is more geared towards stimulating high capacity drive demand which has suffered tremendously due vista and other industry conditions rather than gaining market share.
Notablecalls: Not actionable but good to know category.
Firm believes that the STX rebates are not a new development as they offered similar rebates in the last march quarter. Also, Toshiba and HGST are the most aggressive pricing wise in the channel at this point in time and STX will only be coming in line with the lower price points, not establishing them. Another thing to note is that according to firm's channel contacts, the majority of the drives covered under the rebate program are high capacity drives over 250 GB. This move from STX is more geared towards stimulating high capacity drive demand which has suffered tremendously due vista and other industry conditions rather than gaining market share.
Notablecalls: Not actionable but good to know category.
Color on Quarter: Palm (NASDAQ:PALM)
The Palm (NASDAQ:PALM) takeover saga continues as the company declined to comment the rumors on its quarterly conference call. Lots of comments about the results and takeover situation today.
- RBC says soft Q4 Guidance reflects higher 680 mix. Q4 guidance for $400-410M missed $416M conc, implying 0% Q/Q growth (vs. 6% Q3) reflecting expected higher (lower ASP) Treo 680 mix and ongoing PDA weakness. GM guidance for 36-36.5% was slightly down from Q3 and less egregious than expected. EPS outlook for $0.13-0.16 (inline with RBC) reflects ongoing cost containment, and appears conservative.
Firm says Palm appeared defiant, focused on turnaround, not takeout, increasing our conviction that no takeout is imminent. Palm affirmed pending Smartphone announcements (expected May, ahead of iPhone), aimed at recovering lost momentum. Turnaround remains possible -- but daunting hurdles remain.
Firm raises price tgt to $18 from $15.
- ThinkEquity says that although Palm's share price has reflected rife speculation on the takeover front, they think it prudent that investors focus on fundamentals. On this note, fiscal 3Q saw a return to revenue growth, gross margin expansion, record Treo unit sell-in and sell-through, and the revenue outlook (although lower than our model on whithering handheld units) points to improving Treo channel inventories. While one quarter does not a trend make, it appears we are seeing early signs of improved execution. Firm is raising their price target to $20. Maintain Accumulate rating.
- Merrill Lynch continues with their cautious view, noting that while Palm's Treo shipments grew 37% YoY in the Feb Q, the growth pales in comparison to the 90% YoY growth of RIM's Blackberry, by their estimates. Palm lost share despite 11% declines in average Treo selling prices versus only 3% drop in Blackberry selling prices, in the same period.
Palm's below-consensus May Q sales outlook of ~$405mn (~ down QoQ, flat YoY) and continued EBIT declines reflects the intensely competitive environment. Firm believes Palm benefited during the past quarter from a benign competitive environment at main carriers Verizon/Sprint. However, competition is likely to intensify when RIM launches its new Pearl/88xx at those carriers. The expected launch of Apple's iPhone at Cingular, featuring touch-screen features (similar to Palm's Treo), could also steal mindshare away from Palm.
Palm stock has appreciated ~31% in the past 2 months on speculation of a takeout. However, on the call management gave no indication of any imminent deal, which firm believes is likely to disappoint short-term oriented investors. Even if the deal were to materialize they do not expect any significant premium as Palm currently trades at a rich ~28x PE on firm's and consensus CY08 estimates. They are lowering FY08 est. by 20c to 61c and FY09 est. by 25c to 72c, on lower Treo ASP expectations, high opex, and faster declines in high-margin handhelds.
- Citigroup says that while the guidance is falling below existing estimates, overall they do not see the existing performance or future outlook in a negative light. Coming into the call, they had meaningful concerns about their near-term outlook, especially since they put themselves up for sale. Within this context the numbers were not that bad.
Having said that, they were surprised by management's decision to guide to flat to down operating expenses in 4Q. They argue that the lower spending is simply a timing issue. Given the ramp of competitive products expected to arrive in the market place (Q-derivatives, i-phone), firm would think that higher investment levels would be necessary. As was illustrated last year with the Moto-Q, competitive launches can cause short-term volatility in Palm's order shipments.
The company has made very little progress thus far in re-designing the Palm OS source code received from Access. This means it will be a while before they will be able to ramp up a WCDMA Palm OS product portfolio. Firm estimates that they are probably at least 1 to 1.5 years away from launching Palm 3G devices. With carriers allocating more 'shelf space' to 3G and less to GSM devices, this increases the risk level around their market share position. While the company can design Windows-based products with 3G, these products traditionally have been much volatile for Palm and more vulnerable to competitive pressure.
Notablecalls: The rumors of MOT-for-PALM still continued to circulate yesterday with chatters of deal already today. Sorry to dissapoint you guys and gals, still do not see it coming. Coming back to the reality, while the quarter was not bad, the guidance is not that nice. Given that we are getting nearer to expected iPhone launch I would expect consumers to postpone their purchase, thus hurting Palm's May qtr. However, while tempting, it is tough to short the shares today as most analysts seem to be rather positive and potential for more takeover chatter.
- RBC says soft Q4 Guidance reflects higher 680 mix. Q4 guidance for $400-410M missed $416M conc, implying 0% Q/Q growth (vs. 6% Q3) reflecting expected higher (lower ASP) Treo 680 mix and ongoing PDA weakness. GM guidance for 36-36.5% was slightly down from Q3 and less egregious than expected. EPS outlook for $0.13-0.16 (inline with RBC) reflects ongoing cost containment, and appears conservative.
Firm says Palm appeared defiant, focused on turnaround, not takeout, increasing our conviction that no takeout is imminent. Palm affirmed pending Smartphone announcements (expected May, ahead of iPhone), aimed at recovering lost momentum. Turnaround remains possible -- but daunting hurdles remain.
Firm raises price tgt to $18 from $15.
- ThinkEquity says that although Palm's share price has reflected rife speculation on the takeover front, they think it prudent that investors focus on fundamentals. On this note, fiscal 3Q saw a return to revenue growth, gross margin expansion, record Treo unit sell-in and sell-through, and the revenue outlook (although lower than our model on whithering handheld units) points to improving Treo channel inventories. While one quarter does not a trend make, it appears we are seeing early signs of improved execution. Firm is raising their price target to $20. Maintain Accumulate rating.
- Merrill Lynch continues with their cautious view, noting that while Palm's Treo shipments grew 37% YoY in the Feb Q, the growth pales in comparison to the 90% YoY growth of RIM's Blackberry, by their estimates. Palm lost share despite 11% declines in average Treo selling prices versus only 3% drop in Blackberry selling prices, in the same period.
Palm's below-consensus May Q sales outlook of ~$405mn (~ down QoQ, flat YoY) and continued EBIT declines reflects the intensely competitive environment. Firm believes Palm benefited during the past quarter from a benign competitive environment at main carriers Verizon/Sprint. However, competition is likely to intensify when RIM launches its new Pearl/88xx at those carriers. The expected launch of Apple's iPhone at Cingular, featuring touch-screen features (similar to Palm's Treo), could also steal mindshare away from Palm.
Palm stock has appreciated ~31% in the past 2 months on speculation of a takeout. However, on the call management gave no indication of any imminent deal, which firm believes is likely to disappoint short-term oriented investors. Even if the deal were to materialize they do not expect any significant premium as Palm currently trades at a rich ~28x PE on firm's and consensus CY08 estimates. They are lowering FY08 est. by 20c to 61c and FY09 est. by 25c to 72c, on lower Treo ASP expectations, high opex, and faster declines in high-margin handhelds.
- Citigroup says that while the guidance is falling below existing estimates, overall they do not see the existing performance or future outlook in a negative light. Coming into the call, they had meaningful concerns about their near-term outlook, especially since they put themselves up for sale. Within this context the numbers were not that bad.
Having said that, they were surprised by management's decision to guide to flat to down operating expenses in 4Q. They argue that the lower spending is simply a timing issue. Given the ramp of competitive products expected to arrive in the market place (Q-derivatives, i-phone), firm would think that higher investment levels would be necessary. As was illustrated last year with the Moto-Q, competitive launches can cause short-term volatility in Palm's order shipments.
The company has made very little progress thus far in re-designing the Palm OS source code received from Access. This means it will be a while before they will be able to ramp up a WCDMA Palm OS product portfolio. Firm estimates that they are probably at least 1 to 1.5 years away from launching Palm 3G devices. With carriers allocating more 'shelf space' to 3G and less to GSM devices, this increases the risk level around their market share position. While the company can design Windows-based products with 3G, these products traditionally have been much volatile for Palm and more vulnerable to competitive pressure.
Notablecalls: The rumors of MOT-for-PALM still continued to circulate yesterday with chatters of deal already today. Sorry to dissapoint you guys and gals, still do not see it coming. Coming back to the reality, while the quarter was not bad, the guidance is not that nice. Given that we are getting nearer to expected iPhone launch I would expect consumers to postpone their purchase, thus hurting Palm's May qtr. However, while tempting, it is tough to short the shares today as most analysts seem to be rather positive and potential for more takeover chatter.
Color on Quarter: Jabil Circuiq (NYSE:JBL)
Several firms commenting Jabil Circuit (NYSE:JBL) after quarterly results.
- Citigroup notes that at first look Jabil's sales outlook appeared only a bit soft but additional analysis reveals that the outlook includes the company's recently acquired Taiwan Green Point which consensus did not include resulting in an organic outlook that indeed was lower than expected. While the company cites a host of issues (product, customer transitions, and exiting lower profitable business) investors will still interpret this as subdued demand and not the typical Jabil upside.
The biggest disappointment to investors is the company's head fake of a lack of operating profit turnaround. The company has been very vocal of operating margins to return to the 4-5% range in the next few quarters and this clearly is no longer in the case with an OPM outlook of 2.5-3.0% in May and 3.25-3.75% in August.
Firm sees no reason to buy Jabil as catalysts for operating turnaround are at least 3-6 months away, in their view, and with 50% of the Street with Buy ratings on the stock and EPS estimates significantly higher than ours, firm expects sentiment and estimates to shift lower.
As derivative Implications firm see additional risk to Solectron, Sanmina, and Celestica, which will implement the Cisco lean inventory management process during the next few quarters which has taken Jabil more effort to streamline.
- Jefferies says that although Jabil was unable to provide fiscal 2Q07 profit and margin data due to the ongoing option investigation, they believe profitability was well below their projections.
Just as Jabil resolves two (of the three) execution issues during the February quarter and the final issue is on the mend, Jabil's consumer business is now undergoing a reconfiguration due largely to pricing pressure, in their view. As such, Jabil expects a sequential decline in its consumer business in the May quarter (despite incremental revenue from a recent acquisition) and another decline in the August quarter.
- Cowen says they remain cautious on Jabil's shares near-term as the co is now transitioning two significant consumer customers (possibly Nokia & Philips) to different business models. This will hurt rev/margins for 3Q/4Q. Plus, Jabil said end market demand has been weak since December, but has now stabilized. With margins, May Q should be the trough, with improvement q/q for rest of CY07.
What's Wrong at Jabil? Good Q, tough to answer specifically. There has been options backdating, May 06 qrt with three operational issues (repair, ramping biz & component design), mostly now resolved. Nov 06 saw poor mix, an internally developed product write-off, and weak demand. Now Feb 07 qrt has big challenges hitting the consumer space. The Nokia cell phone biz will ramp down and new programs which incorporate vertical components (plastic/metal casings) will ramp up. Normal 'EMS' businesses with Philips will ramp down, as Jabil works to jointly develop and then build products (LCD TVs). All this hurting revs/margins near term. Firm's thoughts; 1. Jabil grew too fast in FY06, revs up 37% to $10.3B, and tried to do too many things with product design. 2. the consumer biz is very different than other areas of EMS. Very low margins, high turn inventory, all require a streamlined supply chain, with more vertical components in house, similar to the Hon Hai, Flex model. Jabil is working to adjust to this type of operation. Firm would look for visibility to emerge in August or Nov qrts.
- Bear Stearns taking their rating down to Peer Perform from Outperform as they no longer see compelling risk/reward. Firm says JBL is experiencing too many moving parts in its consumer business model which is driving near-term revenue deterioration as well as increased risk. Specifically, JBL is moving to a more product development-based relationship with PHG they believe, allowing it to perform more value-added R&D work and less commodity assembly. In addition, firm thinks JBL is moving the majority of its NOK business to a vertically integrated model which can also introduce new near-term risks. Firm believes JBL has the management team to execute on these challenges, however, they don't expect results for ~2 qtrs.
Notablecalls: Jabil has at least two more tough quarters ahead with both revenue and margins suffering. $23.5 level seems to act as a support for the shares N-T but I do not expect that level to hold given all the operational issues. Probably we are going to see lower share price no later than just after the opening bell rings today.
- Citigroup notes that at first look Jabil's sales outlook appeared only a bit soft but additional analysis reveals that the outlook includes the company's recently acquired Taiwan Green Point which consensus did not include resulting in an organic outlook that indeed was lower than expected. While the company cites a host of issues (product, customer transitions, and exiting lower profitable business) investors will still interpret this as subdued demand and not the typical Jabil upside.
The biggest disappointment to investors is the company's head fake of a lack of operating profit turnaround. The company has been very vocal of operating margins to return to the 4-5% range in the next few quarters and this clearly is no longer in the case with an OPM outlook of 2.5-3.0% in May and 3.25-3.75% in August.
Firm sees no reason to buy Jabil as catalysts for operating turnaround are at least 3-6 months away, in their view, and with 50% of the Street with Buy ratings on the stock and EPS estimates significantly higher than ours, firm expects sentiment and estimates to shift lower.
As derivative Implications firm see additional risk to Solectron, Sanmina, and Celestica, which will implement the Cisco lean inventory management process during the next few quarters which has taken Jabil more effort to streamline.
- Jefferies says that although Jabil was unable to provide fiscal 2Q07 profit and margin data due to the ongoing option investigation, they believe profitability was well below their projections.
Just as Jabil resolves two (of the three) execution issues during the February quarter and the final issue is on the mend, Jabil's consumer business is now undergoing a reconfiguration due largely to pricing pressure, in their view. As such, Jabil expects a sequential decline in its consumer business in the May quarter (despite incremental revenue from a recent acquisition) and another decline in the August quarter.
- Cowen says they remain cautious on Jabil's shares near-term as the co is now transitioning two significant consumer customers (possibly Nokia & Philips) to different business models. This will hurt rev/margins for 3Q/4Q. Plus, Jabil said end market demand has been weak since December, but has now stabilized. With margins, May Q should be the trough, with improvement q/q for rest of CY07.
What's Wrong at Jabil? Good Q, tough to answer specifically. There has been options backdating, May 06 qrt with three operational issues (repair, ramping biz & component design), mostly now resolved. Nov 06 saw poor mix, an internally developed product write-off, and weak demand. Now Feb 07 qrt has big challenges hitting the consumer space. The Nokia cell phone biz will ramp down and new programs which incorporate vertical components (plastic/metal casings) will ramp up. Normal 'EMS' businesses with Philips will ramp down, as Jabil works to jointly develop and then build products (LCD TVs). All this hurting revs/margins near term. Firm's thoughts; 1. Jabil grew too fast in FY06, revs up 37% to $10.3B, and tried to do too many things with product design. 2. the consumer biz is very different than other areas of EMS. Very low margins, high turn inventory, all require a streamlined supply chain, with more vertical components in house, similar to the Hon Hai, Flex model. Jabil is working to adjust to this type of operation. Firm would look for visibility to emerge in August or Nov qrts.
- Bear Stearns taking their rating down to Peer Perform from Outperform as they no longer see compelling risk/reward. Firm says JBL is experiencing too many moving parts in its consumer business model which is driving near-term revenue deterioration as well as increased risk. Specifically, JBL is moving to a more product development-based relationship with PHG they believe, allowing it to perform more value-added R&D work and less commodity assembly. In addition, firm thinks JBL is moving the majority of its NOK business to a vertically integrated model which can also introduce new near-term risks. Firm believes JBL has the management team to execute on these challenges, however, they don't expect results for ~2 qtrs.
Notablecalls: Jabil has at least two more tough quarters ahead with both revenue and margins suffering. $23.5 level seems to act as a support for the shares N-T but I do not expect that level to hold given all the operational issues. Probably we are going to see lower share price no later than just after the opening bell rings today.
Calls of Note Part 2
Merrill Lynch is raising price tgt on MEMC Electronic Materials (NYSE:WFR) from $60 to $73 as a result of their higher 2008 estimates reflecting stronger polysilicon pricing.
Semiconductor wafer prices are also rising while volumes should increase after 1Q07. Given the sustainability of these trends, firm's price target only requires that the current 19x 2007 P/E is maintained as valuation shifts to their new 2008 estimates. This is conservative vs. their 21x sum of the parts peer valuation calculation.
Several poly suppliers have recently signed long term contracts with semiconductor and solar companies, and others are taking prepayments signaling a tight market for several more years. In the biggest move, REC, announced a 7-year agreement to supply poly to SUMCO, the 2nd largest semi wafer maker, with rising pricing through 2010! This shows that the tight poly market is increasingly impacting the semiconductor market and not just solar.
Falling solar costs from technology driving market growth Solar cell makers are finding ways to lower the cost per watt of electricity through technological advances which is spurring market demand and volume growth that keep poly supply tight.
Firm raised their operating EPS estimate (w/stock comp, 17% cash tax) for 2008 from $3.55 to $3.85 on stronger revenues of $2.32 billion (up 6% from $2.185 billion previously). Firm's estimates are slightly above consensus and reflect a higher contribution from solar, as their semi assumptions remain largely intact.
Notablecalls: Expect to see initial pop in the shares but wouldn't stay on board for too long after such a run over the past few days. Also, Merrill is just highlighting the same reasons that have been behind the run.
Semiconductor wafer prices are also rising while volumes should increase after 1Q07. Given the sustainability of these trends, firm's price target only requires that the current 19x 2007 P/E is maintained as valuation shifts to their new 2008 estimates. This is conservative vs. their 21x sum of the parts peer valuation calculation.
Several poly suppliers have recently signed long term contracts with semiconductor and solar companies, and others are taking prepayments signaling a tight market for several more years. In the biggest move, REC, announced a 7-year agreement to supply poly to SUMCO, the 2nd largest semi wafer maker, with rising pricing through 2010! This shows that the tight poly market is increasingly impacting the semiconductor market and not just solar.
Falling solar costs from technology driving market growth Solar cell makers are finding ways to lower the cost per watt of electricity through technological advances which is spurring market demand and volume growth that keep poly supply tight.
Firm raised their operating EPS estimate (w/stock comp, 17% cash tax) for 2008 from $3.55 to $3.85 on stronger revenues of $2.32 billion (up 6% from $2.185 billion previously). Firm's estimates are slightly above consensus and reflect a higher contribution from solar, as their semi assumptions remain largely intact.
Notablecalls: Expect to see initial pop in the shares but wouldn't stay on board for too long after such a run over the past few days. Also, Merrill is just highlighting the same reasons that have been behind the run.
Calls of Note Part 1
Two tier-1 firms offering their views on Columbia Sportswear (NASDAQ:COLM) today.
- Merrill Lynch notes that as part of our Retailing Leaders Conference, they hosted an investor discussion with Columbia Sportswear's CFO Bryan Timm, VP of Sales Mick McCormick, and Director of Investor Relations David Kiser.
Firm notes the company has made significant changes in its footwear organization since the departure of former Vice President Brad Gebhard last October, overhauling the staff (including 100% of the senior merchandising team, the design leadership, as well as sales and distribution staff) and realigning production processes. Newly developed product will have a greater casual/lifestyle focus, with more year-round offerings (currently primarily cold weather products). The first line to incorporate these changes will be the spring '08 offering, which should post some good growth against slight declines in spring '07.
Firm sees moderate fall backlog growth, in the 6-8% range. They continue to see relatively moderate fall backlog growth, due to a warm winter in the US and Europe, and the likelihood that footwear orders will be down y/y. (While retail inventories in the US have now cleared given a much colder and wetter February, they got the sense that European outerwear inventories remain thick.) This represents a deceleration from last fall's 8.7% constant dollar organic backlog, which included low single digits growth in footwear orders (keep in mind that footwear SKUs will be down 33% for fall '07).
Management pointed out some key differentiators between the two brands. North Face is far more of a fashion brand than Columbia (which is more focused on authenticity and value) and has a very small sportswear business (39% of Columbia's sales, and up 18% this past fall). While North Face does provide markdown support to retailers (Columbia does not), management also pointed out that Columbia provides much higher initial mark-ups to retail customers.
Firm thinks investors will have one more big opportunity to buy COLM, after March results, assuming conservative backlog growth and guidance. They reiterate Buy and call COLM their best retail idea.
- Morgan Stanley says they're getting more cautious on COLM's order backlog. Recent sales data and discussions with retailers for COLM's outerwear business cast some doubt as to the quality of current order backlog levels -- a key stock driver. While market share in core Outerwear (50%+ of EBIT) is rising nicely yy, they're seeing 20%+ declines in avg price point suggesting that retailers are heavily discounting product to clear the shelf for spring merchandise. Not a shocker given the rough winter for the cold-weather apparel business, but never a good data point to see for an apparel brand.
Why This is Important: By firm's math, 65% of COLM's sales, and nearly 75% of annual cash flow comes from the fall selling season. Advance orders are being booked today, and reported by COLM next month w/1Q EPS. The North Face (owned by VFC) is not slowing down nor are smaller brands like Spyder and Marmot (owned by K2) that are gaining share. In addition, they're seeing new competitors like Merrill (owned by Wolverine Worldwide) get into the Outdoor space. Furthermore, there's an overinventoried US retail base that firm thinks is only holding margin steady due to vendor markdown support, and yet COLM is one of the few brands that does not offer such margin support. When all is said and done, they think that the outerwear space will be a share-grab for fall '07 (orders being placed now), and firm's concerned about COLM's relative positioning.
Notablecalls: Ouch! COLM shares are going to get hurt today. While Merrill seems to be positive at the first glance - best retail idea after all - they are also not expecting to see strong backlog that seems to be priced into the stock. And backlog is just about everything this stock is about. Actionable!!
- Merrill Lynch notes that as part of our Retailing Leaders Conference, they hosted an investor discussion with Columbia Sportswear's CFO Bryan Timm, VP of Sales Mick McCormick, and Director of Investor Relations David Kiser.
Firm notes the company has made significant changes in its footwear organization since the departure of former Vice President Brad Gebhard last October, overhauling the staff (including 100% of the senior merchandising team, the design leadership, as well as sales and distribution staff) and realigning production processes. Newly developed product will have a greater casual/lifestyle focus, with more year-round offerings (currently primarily cold weather products). The first line to incorporate these changes will be the spring '08 offering, which should post some good growth against slight declines in spring '07.
Firm sees moderate fall backlog growth, in the 6-8% range. They continue to see relatively moderate fall backlog growth, due to a warm winter in the US and Europe, and the likelihood that footwear orders will be down y/y. (While retail inventories in the US have now cleared given a much colder and wetter February, they got the sense that European outerwear inventories remain thick.) This represents a deceleration from last fall's 8.7% constant dollar organic backlog, which included low single digits growth in footwear orders (keep in mind that footwear SKUs will be down 33% for fall '07).
Management pointed out some key differentiators between the two brands. North Face is far more of a fashion brand than Columbia (which is more focused on authenticity and value) and has a very small sportswear business (39% of Columbia's sales, and up 18% this past fall). While North Face does provide markdown support to retailers (Columbia does not), management also pointed out that Columbia provides much higher initial mark-ups to retail customers.
Firm thinks investors will have one more big opportunity to buy COLM, after March results, assuming conservative backlog growth and guidance. They reiterate Buy and call COLM their best retail idea.
- Morgan Stanley says they're getting more cautious on COLM's order backlog. Recent sales data and discussions with retailers for COLM's outerwear business cast some doubt as to the quality of current order backlog levels -- a key stock driver. While market share in core Outerwear (50%+ of EBIT) is rising nicely yy, they're seeing 20%+ declines in avg price point suggesting that retailers are heavily discounting product to clear the shelf for spring merchandise. Not a shocker given the rough winter for the cold-weather apparel business, but never a good data point to see for an apparel brand.
Why This is Important: By firm's math, 65% of COLM's sales, and nearly 75% of annual cash flow comes from the fall selling season. Advance orders are being booked today, and reported by COLM next month w/1Q EPS. The North Face (owned by VFC) is not slowing down nor are smaller brands like Spyder and Marmot (owned by K2) that are gaining share. In addition, they're seeing new competitors like Merrill (owned by Wolverine Worldwide) get into the Outdoor space. Furthermore, there's an overinventoried US retail base that firm thinks is only holding margin steady due to vendor markdown support, and yet COLM is one of the few brands that does not offer such margin support. When all is said and done, they think that the outerwear space will be a share-grab for fall '07 (orders being placed now), and firm's concerned about COLM's relative positioning.
Notablecalls: Ouch! COLM shares are going to get hurt today. While Merrill seems to be positive at the first glance - best retail idea after all - they are also not expecting to see strong backlog that seems to be priced into the stock. And backlog is just about everything this stock is about. Actionable!!
Paperstand (C, HRB, VLO, BCS)
The WSJ’s ”Heard on the Street” column reprots that a faction within Citigroup (C) is pushing Chmn and CEO Charles Prince to bid for ABN Amro (ABN). The Dutch banking giant announced earlier this week that it is in exclusive talks about being taken over by Barclays. An offer by Citigroup could assuage some of the problems that have plagued the world's largest bank. But it would be difficult: Since ABN's negotiations with Barclays are exclusive, any move by Citigroup would have to be unsolicited, and might be considered hostile. Still, Citigroup has been studying how well ABN would fit as a possible acquisition tgt. The 2 banks have complementary businesses in the US and Latin America, and a deal would give Citigroup a stronger foothold in continental Europe. There also is the possibility that Citigroup could push for part of ABN's assets, such as LaSalle Bank or Banco ABN Amro Real. Hostile takeover bids in the banking industry are difficult to win, and hostile deals of all stripes are particularly tough in the Netherlands, where co’s enjoy many defenses that aren't allowed elsewhere. The Dutch central bank has already said it would frown on such a situation.
“Ahead of the Tape” highlights H&R Block (HRB), whose CEO Mark Ernst, has said repeatedly the co will announce whether it has reached a deal to sell Option One Mortgage by the end of March. But it may have to lower its $1.3bn asking price on the unit, which deals in risky subprime mortgages, if it wants to cut a deal by then. In regulatory filings, H&R Block said Option One's delinquency rate in its F3Q rose to 11.2% from 5.6% last year. B/c of a jump in defaults, the lender recorded loan-loss provisions of $111.1m, a nearly 750% increase from $13.1m a year ago. Of those delinquencies, 84% were on loans written during previous qrtrs, indicating that H&R Block had sharply underestimated the increase in defaults, and raising questions about whether loan-loss provisions will have to be raised again, diminishing the value of the co. "There are likely to be more provisions in the future, and you would think an astute buyer would know that," said Donn Vickrey, of Gradient Analytics. Pressure is building as the unit drags on H&R Block's stock, down 12% since the end of Jan. Last week, S&P's said it may downgrade its credit rating on H&R Block's ability to meet certain financial obligations due to the impact of Option One's mortgage operations. That puts greater pressure on H&R Block to unload Option One, as a downgrade could pinch other parts of the H&R empire, according to UBS. Tick tock, tick tock.
Barron’s Online out saying that shares of US oil refiners have pumped out high-octane returns in recent years. But the biggest among them, Valero (VLO), could still produce a refined performance in the coming year. In N-America, Valero is bigger than Exxon or BP in its capacity to turn crude oil into gasoline, diesel and other fuels. At 18 refineries, many on the Gulf of Mexico coast, it can produce 3.3m barrels of refined product daily. With cumulative stock returns of nearly 400% over 5 years, it's reasonable to ask if Valero's run is over. While triple-digit returns may not continue, the stock has fallen about 13% from its all-time high reached last April, and dividends are on the rise. Refining demand is strong going into the summer-driving season, capacity is tight, and interruptions - for repairs or to crude supplies - would boost the prices Valero can charge customers. That scenario should last for several more years, given the industry's limited ability to expand. "This is a perfect storm, when everything goes right for the refineries," says Fadel Gheit, of Oppenheimer.
“Inside Scoop” section reports that longtime Bear Sterns (BSC) director Paul Novelly is making a bullish call on the financial-services giant as the stock pulled back from its record high. In the two previous trading days, Novelly doled out $6.67m to purchase 45K shares on the open mkt. Novelly now directly holds 170K shares of the co plus another 2,900 restricted shares. Ben Silverman, of InsiderScore.com, says Novelly's purchase is notable considering that he "is someone who is self-made, who understands how to create wealth and manage it… through the good times and the bad."
“Ahead of the Tape” highlights H&R Block (HRB), whose CEO Mark Ernst, has said repeatedly the co will announce whether it has reached a deal to sell Option One Mortgage by the end of March. But it may have to lower its $1.3bn asking price on the unit, which deals in risky subprime mortgages, if it wants to cut a deal by then. In regulatory filings, H&R Block said Option One's delinquency rate in its F3Q rose to 11.2% from 5.6% last year. B/c of a jump in defaults, the lender recorded loan-loss provisions of $111.1m, a nearly 750% increase from $13.1m a year ago. Of those delinquencies, 84% were on loans written during previous qrtrs, indicating that H&R Block had sharply underestimated the increase in defaults, and raising questions about whether loan-loss provisions will have to be raised again, diminishing the value of the co. "There are likely to be more provisions in the future, and you would think an astute buyer would know that," said Donn Vickrey, of Gradient Analytics. Pressure is building as the unit drags on H&R Block's stock, down 12% since the end of Jan. Last week, S&P's said it may downgrade its credit rating on H&R Block's ability to meet certain financial obligations due to the impact of Option One's mortgage operations. That puts greater pressure on H&R Block to unload Option One, as a downgrade could pinch other parts of the H&R empire, according to UBS. Tick tock, tick tock.
Barron’s Online out saying that shares of US oil refiners have pumped out high-octane returns in recent years. But the biggest among them, Valero (VLO), could still produce a refined performance in the coming year. In N-America, Valero is bigger than Exxon or BP in its capacity to turn crude oil into gasoline, diesel and other fuels. At 18 refineries, many on the Gulf of Mexico coast, it can produce 3.3m barrels of refined product daily. With cumulative stock returns of nearly 400% over 5 years, it's reasonable to ask if Valero's run is over. While triple-digit returns may not continue, the stock has fallen about 13% from its all-time high reached last April, and dividends are on the rise. Refining demand is strong going into the summer-driving season, capacity is tight, and interruptions - for repairs or to crude supplies - would boost the prices Valero can charge customers. That scenario should last for several more years, given the industry's limited ability to expand. "This is a perfect storm, when everything goes right for the refineries," says Fadel Gheit, of Oppenheimer.
“Inside Scoop” section reports that longtime Bear Sterns (BSC) director Paul Novelly is making a bullish call on the financial-services giant as the stock pulled back from its record high. In the two previous trading days, Novelly doled out $6.67m to purchase 45K shares on the open mkt. Novelly now directly holds 170K shares of the co plus another 2,900 restricted shares. Ben Silverman, of InsiderScore.com, says Novelly's purchase is notable considering that he "is someone who is self-made, who understands how to create wealth and manage it… through the good times and the bad."
Thursday, March 22, 2007
Color on Warning: Motorola (NYSE:MOT)
Motorola (NYSE:MOT) getting plenty of comments after cutting its guidance last night.
- JP Morgan notes that MOT dramatically reduced Q1 guidance on handset shipments that fell well below even their very low expectation due to lack of high-end WCDMA models and a decision not to chase low-end market share with price. Although they are now forecasting a more drawn-out handset margin turnaround, firm continues to believe that a handset business of the scale and reach of MOT's should be able to sustain double-digit op margins and remain hopeful that the new leadership team, following the appointment of Greg Brown as Pres. and COO and Tom Meredith as acting CFO, can get there. With share price support provided by Carl Icahn, a larger buyback, and MOT's attractiveness as an LBO candidate, firm is maintaining their Overweight rating.
- RBC takes their rating down to Sector Perform from outperform and lowers price tgt to $19 from $22 as they believe Motorola shares may just drift sideways for the balance of the year.
Firm says Motorola is trying to move away from the price game for market share, but the product portfolio at the moment is lacking in the high-end and the low-end. Carriers and customers may also be balking at Motorola's decision to firm-up pricing and with a weakened derivative product portfolio, Motorola has limited ability to raise prices. Peering into Motorola's upcoming family of products reveals more of the same, which is why they believe Motorola is now a 2008 story.
- Goldman Sachs' bottom line message remains avoid shares. 1) They believe we are looking at a multi year recovery. Based on their recent analysis of the handset industries profit pools, firm believes that Motorola, despite the weakness, should and will continue to invest in emerging markets. This long-term strategy will require double digit margin targets in handsets to be years away. 2) Based on the same analysis as their analysis of the 4Q06 miss, firm believes the high-end of the product line is suffering large losses, as is the low-end, while mid-tier product profits are likely stable. Further, Nokia was a major driver of this quarter's weakness. 3) One of Motorola's steps towards improvement will be an aggressive ramp in 3G and Qualcomm should benefit. 4) Firm's reverse DCF shows that shares are currently pricing in a longer term operating margin in mobile devices of 8-9%. Before turning more positive on shares, they look for shares to reflect a longer term outlook around 5%, suggesting a price closer to $15-16.
- Merrill Lynch notes that management (implicitly) expects the handset margins to be around 8% in 2H. However, given the poor reception for Motorola's new handsets, firm believes it would be more prudent to conservatively model breakeven levels for 3Q and 3% for 4Q. Firm also notes that the history of consumer electronics companies' product cycles works against Motorola. While management looks for a quick second half recovery, the experience of Nokia and Apple shows that recovery could take a few years. The abrupt declines in profits suggest that the required changes could be fundamental and involve changes to the R&D and perhaps selling processes.
Notablecalls: Buyback and Icahn may make the investors to buy the stock but will sure not make the consumers buy the phones. Valuation may also look compelling, but there's no quick fix for the Motorola's problems. As long as there is no reason to buy Motorola phones, there is no reason to buy the stock either. The question is, when is it time to make a leap of faith in the mgmt/product portfolio? It will probably take some time.
- JP Morgan notes that MOT dramatically reduced Q1 guidance on handset shipments that fell well below even their very low expectation due to lack of high-end WCDMA models and a decision not to chase low-end market share with price. Although they are now forecasting a more drawn-out handset margin turnaround, firm continues to believe that a handset business of the scale and reach of MOT's should be able to sustain double-digit op margins and remain hopeful that the new leadership team, following the appointment of Greg Brown as Pres. and COO and Tom Meredith as acting CFO, can get there. With share price support provided by Carl Icahn, a larger buyback, and MOT's attractiveness as an LBO candidate, firm is maintaining their Overweight rating.
- RBC takes their rating down to Sector Perform from outperform and lowers price tgt to $19 from $22 as they believe Motorola shares may just drift sideways for the balance of the year.
Firm says Motorola is trying to move away from the price game for market share, but the product portfolio at the moment is lacking in the high-end and the low-end. Carriers and customers may also be balking at Motorola's decision to firm-up pricing and with a weakened derivative product portfolio, Motorola has limited ability to raise prices. Peering into Motorola's upcoming family of products reveals more of the same, which is why they believe Motorola is now a 2008 story.
- Goldman Sachs' bottom line message remains avoid shares. 1) They believe we are looking at a multi year recovery. Based on their recent analysis of the handset industries profit pools, firm believes that Motorola, despite the weakness, should and will continue to invest in emerging markets. This long-term strategy will require double digit margin targets in handsets to be years away. 2) Based on the same analysis as their analysis of the 4Q06 miss, firm believes the high-end of the product line is suffering large losses, as is the low-end, while mid-tier product profits are likely stable. Further, Nokia was a major driver of this quarter's weakness. 3) One of Motorola's steps towards improvement will be an aggressive ramp in 3G and Qualcomm should benefit. 4) Firm's reverse DCF shows that shares are currently pricing in a longer term operating margin in mobile devices of 8-9%. Before turning more positive on shares, they look for shares to reflect a longer term outlook around 5%, suggesting a price closer to $15-16.
- Merrill Lynch notes that management (implicitly) expects the handset margins to be around 8% in 2H. However, given the poor reception for Motorola's new handsets, firm believes it would be more prudent to conservatively model breakeven levels for 3Q and 3% for 4Q. Firm also notes that the history of consumer electronics companies' product cycles works against Motorola. While management looks for a quick second half recovery, the experience of Nokia and Apple shows that recovery could take a few years. The abrupt declines in profits suggest that the required changes could be fundamental and involve changes to the R&D and perhaps selling processes.
Notablecalls: Buyback and Icahn may make the investors to buy the stock but will sure not make the consumers buy the phones. Valuation may also look compelling, but there's no quick fix for the Motorola's problems. As long as there is no reason to buy Motorola phones, there is no reason to buy the stock either. The question is, when is it time to make a leap of faith in the mgmt/product portfolio? It will probably take some time.
Calls of Note Part 4
Friedman, Billings, Ramsey's checks indicate significant price cuts on Intel (NASDAQ:INTC) server processors scheduled for July, coincident with the AMD Barcelona launch. Essentially, these cuts bring quad-core processors to dual-core price points, which will likely be negative for INTC server margins, but would allow it to gain further share. On desktop and server, firm does not believe INTC has matched recent AMD price cuts, and they believe the end markets are performing in a seasonally normal manner. Net for INTC, firm thinks these cuts likely delay margin improvement until later in 2H, when 45nm processors begin to ship. But they do not see a risk to INTC estimates, and are willing to be patient with the stock at the current price. These price cuts are, however, more significant for AMD and are likely to create further pressure for the remainder of the year.
Notablecalls: Nothing to comment here, all too clear.
Notablecalls: Nothing to comment here, all too clear.
Calls of Note Part 3
JP Morgan out positive on Cymer (NASDAQ:CYMI) following their visir this week. They came away from in-depth discussions with management feeling comfortable about Cymer's margin expansion program and its prospects for sustained competitive advantage. Cymer is one of their OW-rated top picks within the second tier of our Share Gain and Margin Expansion Thesis.
Management believes it is on plan to deliver margin expansion throughout 2007 and into 2008. Key drivers include mix and supply chain management. Firm is comfortable with their GM forecast of 51% in 2007 and 53.5% in 2008, up from 48.3% in 2006. Management still believes a 55% GM is attainable.
As Nikon ramps its 610C immersion tool that uses Cymer's most advanced lasers, the mix shift should be solid, especially in C2H07 on an XLR-500 ramp. Cymer expects accelerated lithography market unit growth with compelling ASP expansion in 2008 on immersion penetration in volume production outside of Flash, which should be very good for mix/margins. Importantly, later in 2007 and into 2008, Cymer's ring technology should ramp sharply, once again stretching the technology advantage versus is competitor Gigaphoton.
Notablecalls: While not much new, this note should alleviate concerns about gross margins and competitive position that have weighted on the stock. As such, would expect to see buying interest in the stock today.
Management believes it is on plan to deliver margin expansion throughout 2007 and into 2008. Key drivers include mix and supply chain management. Firm is comfortable with their GM forecast of 51% in 2007 and 53.5% in 2008, up from 48.3% in 2006. Management still believes a 55% GM is attainable.
As Nikon ramps its 610C immersion tool that uses Cymer's most advanced lasers, the mix shift should be solid, especially in C2H07 on an XLR-500 ramp. Cymer expects accelerated lithography market unit growth with compelling ASP expansion in 2008 on immersion penetration in volume production outside of Flash, which should be very good for mix/margins. Importantly, later in 2007 and into 2008, Cymer's ring technology should ramp sharply, once again stretching the technology advantage versus is competitor Gigaphoton.
Notablecalls: While not much new, this note should alleviate concerns about gross margins and competitive position that have weighted on the stock. As such, would expect to see buying interest in the stock today.
Calls of Note Part 2
Piper Jaffray highlights raised concerns for Zoran (NASDAQ:ZRAN) after major Taiwanese fabless IC design company Mediatek Inc. announced that it will invest $37 million in private U.S.-based digital camera chip designer NuCORE Technology. Mediatek would own a 69% stake in the firm after the stock swap. The company indicated it would use the alliance to expand its product line and more importantly to accelerate penetration of this new market, as well as for potential technology synergies with its handset chip business. The San Jose, CA based NuCORE Technology Inc. was started in 1997 by founders with background from Hitachi medical imaging and Intel Japan, focusing on digital image processing chips for video and digital cameras.
Firm believes this represents an increased medium-term business risk to Zoran, where Digital Still Camera (DSC) segment accounted for 33% of 2006 sales (42% in 4Q06). According to NuCORE, its Japan R&D team enables close cooperation with camera OEMs and sensor manufacturers, while its Taiwan sales serve the contract manufacturers in the outsourced market. While firm believes that Zoran continues to have a strong position at Taiwanese contract manufacturers for DSC, Mediatek's entry represents a significant threat given the latter's track record of success entering markets such as DVD chip and chipsets for GSM/GPRS handset applications.
While it is too early to quantify the potential impact on Zoran's DSC business given the lack of details of Mediatek's plan at this stage, firm notes that the Taiwanese IC company's historical entry into the DVD market increased pricing and thus margin pressure significantly.
Notablecalls: Not actionable but good to know category.
Firm believes this represents an increased medium-term business risk to Zoran, where Digital Still Camera (DSC) segment accounted for 33% of 2006 sales (42% in 4Q06). According to NuCORE, its Japan R&D team enables close cooperation with camera OEMs and sensor manufacturers, while its Taiwan sales serve the contract manufacturers in the outsourced market. While firm believes that Zoran continues to have a strong position at Taiwanese contract manufacturers for DSC, Mediatek's entry represents a significant threat given the latter's track record of success entering markets such as DVD chip and chipsets for GSM/GPRS handset applications.
While it is too early to quantify the potential impact on Zoran's DSC business given the lack of details of Mediatek's plan at this stage, firm notes that the Taiwanese IC company's historical entry into the DVD market increased pricing and thus margin pressure significantly.
Notablecalls: Not actionable but good to know category.
Calls of Note Part 1
Two notes out today dismissing Palm's (NASDAQ:PALM) status as takeover candidate following Motorola's (NYSE:MOT) warning.
- Merrill Lynch says Motorola's 1Q07 warning and accelerated share-buyback makes it an unlikely bidder for Palm, in their opinion. While they have been consistently skeptical of a Palm takeout, Motorola could have been the most likely bidder given the pre-existing relationship/synergies between Palm's Treo smartphone and Motorola's Good Technology (push email system) acquisition. However, firm believes Motorola's organic challenges, and presence of an activist shareholder (Carl Icahn), make it less likely for the company to chase Palm at this stage.
In addition to Motorola, Nokia has been cited in media reports as another possible strategic bidder for Palm. However, firm thinks Palm will be a poor fit for Nokia and a potential Nokia-Palm combination could introduce several integration challenges for Nokia. Palm traditionally focuses on the US market with high exposure to CDMA carriers and dependence on Palm/Microsoft operating system, while Nokia focuses on the non-US GSM/WCDMA markets using the Symbian operating system.
Palm's large cash balance (~27% of current market cap) has also raised the possibility of a private equity bid/LBO. However, the uncertain cash flows related to the hit or miss nature of Palm's products make a private equity takeout questionable, in firm's opinion. While Palm does have a loyal user base, firm's store checks point to market share shifts in favor of Palm rivals, RIM (Blackberry) and Samsung (Blackjack), that have recently launched several thinner and cheaper smartphones, compared to the Palm Treo. The expected entry of the Apple's iPhone is another competitive risk.
- JP Morgan says speculation that MOT is about to acquire PALM may be misplaced. In their mind, this raises further doubts regarding the entire speculative bubble that developed in recent weeks regarding a potential sale of PALM to strategic or private equity investors.
Nokia still doesn't make sense to them. Nokia could step in as a potential acquirer, but lacking the Good Technology back-end (owned by Motorola) to a Treo-based solution, it would seem a highly risky approach to trying to win enterprise business. Intellisync doesn't come close to either Blackberry or GoodLink, in firm's view. They remain skeptical.
Notablecalls: PALM traded down a bit in the afterhours yesterday, but I believe there is further downside to the stock. Anything above $19 should be good for shorting. Given Nokia's track record of acquisitions so far (small acquisitions for technology), I really don't see them buying Palm.
- Merrill Lynch says Motorola's 1Q07 warning and accelerated share-buyback makes it an unlikely bidder for Palm, in their opinion. While they have been consistently skeptical of a Palm takeout, Motorola could have been the most likely bidder given the pre-existing relationship/synergies between Palm's Treo smartphone and Motorola's Good Technology (push email system) acquisition. However, firm believes Motorola's organic challenges, and presence of an activist shareholder (Carl Icahn), make it less likely for the company to chase Palm at this stage.
In addition to Motorola, Nokia has been cited in media reports as another possible strategic bidder for Palm. However, firm thinks Palm will be a poor fit for Nokia and a potential Nokia-Palm combination could introduce several integration challenges for Nokia. Palm traditionally focuses on the US market with high exposure to CDMA carriers and dependence on Palm/Microsoft operating system, while Nokia focuses on the non-US GSM/WCDMA markets using the Symbian operating system.
Palm's large cash balance (~27% of current market cap) has also raised the possibility of a private equity bid/LBO. However, the uncertain cash flows related to the hit or miss nature of Palm's products make a private equity takeout questionable, in firm's opinion. While Palm does have a loyal user base, firm's store checks point to market share shifts in favor of Palm rivals, RIM (Blackberry) and Samsung (Blackjack), that have recently launched several thinner and cheaper smartphones, compared to the Palm Treo. The expected entry of the Apple's iPhone is another competitive risk.
- JP Morgan says speculation that MOT is about to acquire PALM may be misplaced. In their mind, this raises further doubts regarding the entire speculative bubble that developed in recent weeks regarding a potential sale of PALM to strategic or private equity investors.
Nokia still doesn't make sense to them. Nokia could step in as a potential acquirer, but lacking the Good Technology back-end (owned by Motorola) to a Treo-based solution, it would seem a highly risky approach to trying to win enterprise business. Intellisync doesn't come close to either Blackberry or GoodLink, in firm's view. They remain skeptical.
Notablecalls: PALM traded down a bit in the afterhours yesterday, but I believe there is further downside to the stock. Anything above $19 should be good for shorting. Given Nokia's track record of acquisitions so far (small acquisitions for technology), I really don't see them buying Palm.
Paperstand (BKS, BGP, CNB, CPO, WBSN)
The WSJ’s ”Ahead of the Tape” column reports that deal rumors have swirled around Barnes & Noble (BKS) and Borders Group (BGP) ever since activist hedge fund Pershing Square Capital Mgmt took large stakes in the 2 booksellers late last year. A merger is one of the more daring notions afloat, and perhaps the most likely outcome. Both co’s report earnings today, and Borders is expected to announce restructuring plans that could ignite more deal chatter. Hurt by competition from discounters such as Wal-Mart (WMT) and online retailers like Amazon (AMZN), the co’s have struggled to increase profits in one of their biggest businesses: best-selling hardcover books. BKS slashed fiscal-year earnings tgts and said "Harry Potter and the Deathly Hallows," set for release in July, will produce little profit, b/c the co will have to offer it at a steep discount to compete with rivals. Goldman Sachs analysts are skeptical about a buyout of either co, due in part to their soft earnings growth. Goldman thinks a merger makes more sense.
“Heard on the Street” column out saying that as the outlook for home builders grows grimmer, regional banks that extended loans to construction co’s could start having some costly regrets. According to the article, Colonial BancGroup (CNB) is among the banks most heavily exposed to the once-hot Florida construction mkt. Colonial lent far more to construction borrowers as a percentage of its so-called core capital last year than recommended by Federal Deposit Insurance Corp. guidelines. Colonial's construction-lending ratio is 413% of core capital, compared with the FDIC's minimum threshold guideline of 100%. "If you have more than twice as many loans on your books as your liquidation value, then you're essentially just waiting for the vultures to swoop in," says Richard Suttmeier, of RightSide Advisors.
Barron’s Online highlights Corn Products Intl. (CPO), saying that with demand for its corn syrup and other sweeteners rising, the co could hit pay dirt. Sure, the stock has had a rocky ride. Before rebounding recently, the shares dropped 17% off Dec's record high, reflecting worries that fast-rising corn prices, its biggest cost, could hurt profits. Yet Corn Products remains poised to produce robust earnings. Farmers are gearing up to plant a bigger corn crop this year, which could put a lid on corn prices in ‘08. And if not, rising demand for high-fructose corn syrup, an essential ingredient in soft drinks, gives Corn Products leverage to boost US prices as rivals diversify into ethanol production. Sales in Mexico continue to rise, and the co's S-American business grows more profitable. "Fears about corn prices drove the stock low enough so that the risk-reward ratio looks compelling," says Christina McGlone, of Deutsche Bank, who recently upgraded Corn Products to Buy.
“Inside Scoop” section reports that Blum Capital Partners senses upside in Websense’s (WBSN) stock. Blum disclosed that it had picked up a 6.6% stake, or 2.95m Websense shares so far in the 1Q. Blum snapped up the stock 2 weeks after shares of Websense delivered a disappointing 4Q earnings report. Ben Silverman, of InsiderScore.com, says that what he finds interesting about Blum's buy is that the investment firm does not "seem scared off" by Websense's purchase of PortAuthority, even though the deal will be dilutive to Websense's ‘07 EPS by 10-15c. Blum is a "long-term value investor, and they like to take big stakes," says Silverman. While Blum typically looks for co’s generating strong cash flow, Websense's ‘06 cash flow actually decreased year over year, which Silverman says may mean that Blum intends to help Websense unlock value in its stock.
“Heard on the Street” column out saying that as the outlook for home builders grows grimmer, regional banks that extended loans to construction co’s could start having some costly regrets. According to the article, Colonial BancGroup (CNB) is among the banks most heavily exposed to the once-hot Florida construction mkt. Colonial lent far more to construction borrowers as a percentage of its so-called core capital last year than recommended by Federal Deposit Insurance Corp. guidelines. Colonial's construction-lending ratio is 413% of core capital, compared with the FDIC's minimum threshold guideline of 100%. "If you have more than twice as many loans on your books as your liquidation value, then you're essentially just waiting for the vultures to swoop in," says Richard Suttmeier, of RightSide Advisors.
Barron’s Online highlights Corn Products Intl. (CPO), saying that with demand for its corn syrup and other sweeteners rising, the co could hit pay dirt. Sure, the stock has had a rocky ride. Before rebounding recently, the shares dropped 17% off Dec's record high, reflecting worries that fast-rising corn prices, its biggest cost, could hurt profits. Yet Corn Products remains poised to produce robust earnings. Farmers are gearing up to plant a bigger corn crop this year, which could put a lid on corn prices in ‘08. And if not, rising demand for high-fructose corn syrup, an essential ingredient in soft drinks, gives Corn Products leverage to boost US prices as rivals diversify into ethanol production. Sales in Mexico continue to rise, and the co's S-American business grows more profitable. "Fears about corn prices drove the stock low enough so that the risk-reward ratio looks compelling," says Christina McGlone, of Deutsche Bank, who recently upgraded Corn Products to Buy.
“Inside Scoop” section reports that Blum Capital Partners senses upside in Websense’s (WBSN) stock. Blum disclosed that it had picked up a 6.6% stake, or 2.95m Websense shares so far in the 1Q. Blum snapped up the stock 2 weeks after shares of Websense delivered a disappointing 4Q earnings report. Ben Silverman, of InsiderScore.com, says that what he finds interesting about Blum's buy is that the investment firm does not "seem scared off" by Websense's purchase of PortAuthority, even though the deal will be dilutive to Websense's ‘07 EPS by 10-15c. Blum is a "long-term value investor, and they like to take big stakes," says Silverman. While Blum typically looks for co’s generating strong cash flow, Websense's ‘06 cash flow actually decreased year over year, which Silverman says may mean that Blum intends to help Websense unlock value in its stock.
Wednesday, March 21, 2007
Calls of Note Part 5
- FBR says that given the liquidity crunch facing many nonprime originators, the option to receive a secured loan could provide temporary relief for originators that are in need of increased liquidity. While the firm believes investors would view such actions as a positive for the subprime sector, as they signal that capital is available, they do not believe attractive financing terms would be available for NEW or NFI. While other originators are facing a liquidity crunch, they believe the companies most likely to receive secured loans are still originating loans, have access to warehouse lines, generally possess better collateral performance, and are running at generally low levels of leverage. As such, they would not expect NEW or NFI to garner attractive financing terms to enable such a transaction.
With regard to NFI, while operationally it is in better condition than NEW, the firm believes the shear leverage (31x) leaves NFI very little in the way of assets to pledge for a secured commitment. Furthermore, the potential liquidity liability associated with the FY07 income carryforward (approximately $150 million cash liability as a dividend, or an estimated $68 million cash liability as a tax and penalty payment in de-REIT scenario) would use much of any injection of liquidity without improving the operating condition of the company.
Notablecalls: Thought it was important to highlight the call as the subprimes are the trader's favourites these days.
Calls of Note Part 4
- JP Morgan is raising their C07/C08 ests on MEMC (NASDAQ:WFR) as the polysilicon/wafer pricing environment is turning out to be better than previously expected. The desire by solar cell makers to aggressively expand manufacturing capacity is the primary driver for continued polysilicon shortness, with no near-term relief in sight. Additionally, the two large Japanese semi wafer makers are beginning to experience material polysilicon cost increases as their buffers to polysilicon pricing volatility have largely run out. Going forward they expect both Shin-Etsu and SUMCO to pass along the increased cost of polysilicon to their customers, allowing MEMC to raise wafer prices in tandem.
Utilization rates and capacity expansion plans at many solar cell makers continue to be limited by the amount of polysilicon they can acquire. For example, Solar World, which acquired Shell Solar, disclosed in a recent quarterly report that the former Shell facilities operating in the U.S. were only at 50% utilization rates due to a lack of polysilicon.
Overall semi wafer demand has been relatively flat for the past three quarters as declining logic/analog wafer starts offset wafer start growth for memory applications. Firm believes indications of an increase in Back-End utilization rates signals that C1Q07 is the utilization rate trough for the semi industry.
Reiterates OW, and they would be buying now. JPM is raising C07 revenue and GAAP EPS estimates to $2.0bn/$3.25 from $1.9bn/$2.98 and C08 estimates to $2.4bn/$3.80 from $2.32bn/$3.35, primarily on higher gross margins for semi wafers.
Notablecalls: Think the wording is strong enough to create some further buy interest in WFR. Tight leash, as the stock made a nice upward move yesterday and is prone to some profit taking. See archives for further color on WFR.
Utilization rates and capacity expansion plans at many solar cell makers continue to be limited by the amount of polysilicon they can acquire. For example, Solar World, which acquired Shell Solar, disclosed in a recent quarterly report that the former Shell facilities operating in the U.S. were only at 50% utilization rates due to a lack of polysilicon.
Overall semi wafer demand has been relatively flat for the past three quarters as declining logic/analog wafer starts offset wafer start growth for memory applications. Firm believes indications of an increase in Back-End utilization rates signals that C1Q07 is the utilization rate trough for the semi industry.
Reiterates OW, and they would be buying now. JPM is raising C07 revenue and GAAP EPS estimates to $2.0bn/$3.25 from $1.9bn/$2.98 and C08 estimates to $2.4bn/$3.80 from $2.32bn/$3.35, primarily on higher gross margins for semi wafers.
Notablecalls: Think the wording is strong enough to create some further buy interest in WFR. Tight leash, as the stock made a nice upward move yesterday and is prone to some profit taking. See archives for further color on WFR.
Calls of Note Part 3
- TWP is reducing their estimates on AMD (NYSE:AMD) following a round of checks indicating upcoming price cuts and continued channel headwinds. Furthermore, with negative free cash flow expected through most of 2007, they expect management to turn to the capital markets to raise cash over the next several months. However, the firm maintain Market Weight rating and are waiting for more concrete performance benchmarks of Barcelona, although they are incrementally more negative on shares given pricing, channel and financial challenges.
AMD exited 2006 with $1.54bn in cash, $3.8bn in debt and is planning $2.5bn in capital expenditures in 2007. As a result, the firm now is modeling negative free cash flow throughout 2007, with a need to raise cash by 4Q, unless capital expenditure (capex) is reduced. Checks indicate that management may be planning for a $1bn convertible during 2Q. TWP believes ongoing concerns regarding potential financing is likely to continue to weigh on shares, although they believe that management may have other options (including the possibility of lowering its capex requirements).
Given the recent decline in stock price of approximately 39% over the last three months (versus a 0.88% decline in the S&P 500), the firm believes that much of widely known issues are already baked into the current valuation. Given management's recent commentary and checks that indicate additional upcoming headwinds, however, they are cautious on the name and will monitor 1) the timing and performance benchmarks of Barcelona, 2) the health of the channel and 3) the overall pricing environment for potential upside. As such, they believe shares are fairly valued, trading at 1.1x P/book versus historical average of 2.0x, 4.8x P/EBITDA versus historical average of 10.0x, and 1.0x P/sales versus historical average of 1.0x.
Notablecalls: Not actionable but good to know category.
AMD exited 2006 with $1.54bn in cash, $3.8bn in debt and is planning $2.5bn in capital expenditures in 2007. As a result, the firm now is modeling negative free cash flow throughout 2007, with a need to raise cash by 4Q, unless capital expenditure (capex) is reduced. Checks indicate that management may be planning for a $1bn convertible during 2Q. TWP believes ongoing concerns regarding potential financing is likely to continue to weigh on shares, although they believe that management may have other options (including the possibility of lowering its capex requirements).
Given the recent decline in stock price of approximately 39% over the last three months (versus a 0.88% decline in the S&P 500), the firm believes that much of widely known issues are already baked into the current valuation. Given management's recent commentary and checks that indicate additional upcoming headwinds, however, they are cautious on the name and will monitor 1) the timing and performance benchmarks of Barcelona, 2) the health of the channel and 3) the overall pricing environment for potential upside. As such, they believe shares are fairly valued, trading at 1.1x P/book versus historical average of 2.0x, 4.8x P/EBITDA versus historical average of 10.0x, and 1.0x P/sales versus historical average of 1.0x.
Notablecalls: Not actionable but good to know category.
Calls of Note Part 2
- Merrill Lynch met with Netlogic's (NASDAQ:NETL) management recently and came away positively about the company's growth prospects. NETL appears well positioned to benefit from emerging trends such as 10G, IPTV, and VoIP, and is expanding its addressable market through new products. Despite the recent run up, the firm sees further upside in the next 12-months and are raising tgt from $26 to $32.
MLCO expects NETL to report an inline to slightly better Mar-07Q, and believe that Jun-07Q revenue guidance will be more or less inline. Cisco should rebound this quarter as inventory adjustments at that customer appear to have ended. Going forward, sales to Cisco will likely remain flattish until NETL's new wins begin to ramp in early 2008. On the other hand, revenues from ALU, JNPR, Arris, and FDRY are expected to grow strongly throughout 2007. They believe NETL's new product ramps are on track and expect the company's tier 1 wins for its content processor (NETL7) to start to ramp in 2H.
As Triple Play gains traction, TCAM technology adoption is broadening which should help NETL to diversify away from Cisco. NETL appears particularly well-positioned at Edge Router and IPTV system vendors such as ALU, JNPR, RBAK, MOT, and BigBand. NETL's sales to these customers should grow strongly as routers with higher TCAM content begin to ship over the next few quarters.
Notablecalls: The tgt raise is substantial enough to generate some buy interest.
MLCO expects NETL to report an inline to slightly better Mar-07Q, and believe that Jun-07Q revenue guidance will be more or less inline. Cisco should rebound this quarter as inventory adjustments at that customer appear to have ended. Going forward, sales to Cisco will likely remain flattish until NETL's new wins begin to ramp in early 2008. On the other hand, revenues from ALU, JNPR, Arris, and FDRY are expected to grow strongly throughout 2007. They believe NETL's new product ramps are on track and expect the company's tier 1 wins for its content processor (NETL7) to start to ramp in 2H.
As Triple Play gains traction, TCAM technology adoption is broadening which should help NETL to diversify away from Cisco. NETL appears particularly well-positioned at Edge Router and IPTV system vendors such as ALU, JNPR, RBAK, MOT, and BigBand. NETL's sales to these customers should grow strongly as routers with higher TCAM content begin to ship over the next few quarters.
Notablecalls: The tgt raise is substantial enough to generate some buy interest.
Calls of Note Part 1
- JP Morgan says that Varian Semi (NASDAQ:VSEA) is one of their absolute Top Picks within their Share Gain and Margin Expansion Thesis and is on the JPMorgan Focus List. Based on an unchanged 17x target P/E multiple applied to firm's new C2008 GAAP EPS estimate of $4.10, up from $3.40 previously, they are raising their March 2008 stock price target to $70 from $58.
In line with firm's detailed memory-related research and their recent report on TSMC stepping up to the plate with new orders, the firm sees some modest upside to previous Varian forecast, especially for C2H07 on the TSMC business. As such, they are raising C2H07 revenue estimates by $5mn. per qtr. New C07 and C08 rev ests are $1.0bn and $1.2bn, respectively.
JPM raised VSEA to OW and substantially increased revenue forecast when Applied (AMAT) announced its departure from the Ion Implant business but left their margin forecast
unchanged. Firm is increasingly confident that Varian is likely to see better pricing with Applied out of the market. They also see an increase in high margin spares-related business.
VSEA trades at 12.0x new C2008 GAAP EPS estimate of $4.10 vs. group average of 13.4x. In their view, VSEA is one of the most potentially explosive equipment stocks on share gain and margin expansion, as well as solid execution.
Notablecalls: Looks like an actionable call! Expect to see strong buy interest in VSEA today.
In line with firm's detailed memory-related research and their recent report on TSMC stepping up to the plate with new orders, the firm sees some modest upside to previous Varian forecast, especially for C2H07 on the TSMC business. As such, they are raising C2H07 revenue estimates by $5mn. per qtr. New C07 and C08 rev ests are $1.0bn and $1.2bn, respectively.
JPM raised VSEA to OW and substantially increased revenue forecast when Applied (AMAT) announced its departure from the Ion Implant business but left their margin forecast
unchanged. Firm is increasingly confident that Varian is likely to see better pricing with Applied out of the market. They also see an increase in high margin spares-related business.
VSEA trades at 12.0x new C2008 GAAP EPS estimate of $4.10 vs. group average of 13.4x. In their view, VSEA is one of the most potentially explosive equipment stocks on share gain and margin expansion, as well as solid execution.
Notablecalls: Looks like an actionable call! Expect to see strong buy interest in VSEA today.
Color on quarter: Adobe Systems (NASDAQ:ADBE)
Most firms are positive on Adobe Systems (NASDAQ:ADBE) following Q1 results:
- Goldman Sachs notes Adobe reported solid 1Q results, though revenues of $649 mn were a bit lighter than their $662 mn estimate, EPS (ex-ESOs) of $0.30 was ahead of their-and Street-$0.29 estimate, and continuing to demonstrate the company's close focus on costs and their ability to steer to EPS as the quarter progresses. Creative Solutions, in particular, delivered revenues of $346 mn, ahead of firm's $320 mn estimate, indicating strong demand for the product suite which is only likely to amplify, in their view, as CS3 launches later in the quarter.
Results should prove to be a positive for the stock. With the product cycle trough (for Creative Suite products) now behind us, the firm is looking for a succession of catalysts starting with next week's announcement of CS3 followed next day by the company's analyst day.
The key risk is that investors will tend to sell on the news as CS3 launches. GSCO notes that in each prior cycle, Adobe shares ran up significantly ahead of the release and then tended to trade down in the aftermath. Increased competition from Microsoft is also a threat with the launch of Vista. Maintains Buy with a $47 tgt.
- Piper Jaffray says that for Q2, Adobe guided to $0.34-$0.36 on $700m-$740m vs. Street
estimates of $0.35 on $718.1m. The firm is confident in this guidance, given CS3's impact on the second half of the May quarter will be significant.
They believe there are two risks to ADBE shares. The first is multiple compression. There is always the potential that investors believe this is the Adobe of old, and the way to trade the stock is to sell the stock before CS3 ships. (Typically the stock trades off 15% in the three months following shipment.) Firm believes this risk is low, given the sell off already happened in the month of January, and now investors are focusing on earnings growth and the upcoming easy comps in August and November. The second risk is the majority of the sell side is positive on Adobe, and investor optimism can only go down (i.e. Microsoft and Vista). Overall, they believe the positives well outweigh the risk. Maintains Outperform and $51.
Notablecalls: Yes, ADBE stands on the eve of its biggest product launch ever. But don't forget the co has a close to $25 billion market cap and trades at 25 times its 2008 EPS estimate. Quite simply, I don't think the almost 2 pt gain reached in after hours will hold today. Sitting at my old trading desk I would have loved to put out a short line in the stock around $43. Not sure it will get there this AM, though.
- Goldman Sachs notes Adobe reported solid 1Q results, though revenues of $649 mn were a bit lighter than their $662 mn estimate, EPS (ex-ESOs) of $0.30 was ahead of their-and Street-$0.29 estimate, and continuing to demonstrate the company's close focus on costs and their ability to steer to EPS as the quarter progresses. Creative Solutions, in particular, delivered revenues of $346 mn, ahead of firm's $320 mn estimate, indicating strong demand for the product suite which is only likely to amplify, in their view, as CS3 launches later in the quarter.
Results should prove to be a positive for the stock. With the product cycle trough (for Creative Suite products) now behind us, the firm is looking for a succession of catalysts starting with next week's announcement of CS3 followed next day by the company's analyst day.
The key risk is that investors will tend to sell on the news as CS3 launches. GSCO notes that in each prior cycle, Adobe shares ran up significantly ahead of the release and then tended to trade down in the aftermath. Increased competition from Microsoft is also a threat with the launch of Vista. Maintains Buy with a $47 tgt.
- Piper Jaffray says that for Q2, Adobe guided to $0.34-$0.36 on $700m-$740m vs. Street
estimates of $0.35 on $718.1m. The firm is confident in this guidance, given CS3's impact on the second half of the May quarter will be significant.
They believe there are two risks to ADBE shares. The first is multiple compression. There is always the potential that investors believe this is the Adobe of old, and the way to trade the stock is to sell the stock before CS3 ships. (Typically the stock trades off 15% in the three months following shipment.) Firm believes this risk is low, given the sell off already happened in the month of January, and now investors are focusing on earnings growth and the upcoming easy comps in August and November. The second risk is the majority of the sell side is positive on Adobe, and investor optimism can only go down (i.e. Microsoft and Vista). Overall, they believe the positives well outweigh the risk. Maintains Outperform and $51.
Notablecalls: Yes, ADBE stands on the eve of its biggest product launch ever. But don't forget the co has a close to $25 billion market cap and trades at 25 times its 2008 EPS estimate. Quite simply, I don't think the almost 2 pt gain reached in after hours will hold today. Sitting at my old trading desk I would have loved to put out a short line in the stock around $43. Not sure it will get there this AM, though.
Paperstand (CMGI, SBUX, JAS)
According to the WSJ, Barclay’s (BCS) talks to buy ABN (ABN) are forcing banks world-wide to evaluate their next moves. Elite global banks such as Citigroup (C) or HSBC (HBC) could emerge as 11th-hour bidders for ABN. HSBC's recent missteps in the US mkt for risky subprime mortgages may sideline the big British bank, but several investment bankers believe that Citigroup Chmn and CEO Charles Prince could use ABN as a chance to show he has the troubled bank moving in the right direction. Several European banks could also bid. ING Groep (ING) says it is "following developments."
“Heard on the Street” column discusses Starbux (SBUX) saying that the shares of the co may have more perk in them than some investors realize. At Starbucks's annual meeting, scheduled for today, execs plan to reaffirm the co's growth plans and shed light on their vision for the future. That usually wouldn't mean much to the co's investors, who have been accustomed to rapid growth and rising shares. But this year is different. "Ppl want to be reassured that there is not a brand problem," says UBS analyst David Palmer. Part of what has always driven Starbucks's stock is the magic surrounding its brand, led by Chmn Howard Schultz’s cheerleading, and investors are sure to get a dose of that at today's meeting. Last year, Mr. Schultz and CEO Jim Donald mixed homespun anecdotes with financial charts showing the co's rapid growth before crooner Tony Bennett appeared on stage for a surprise performance. "To the degree that ppl need to see confidence from Howard," Mr. Palmer said, "we believe that they will see it."
Barron’s Online highlights CMGI (CMGI), saying that recently some of the savviest hedge funds, including Renaissance Technologies, have been buying CMGI stock as the co morphs again. Today CMGI gets paid a fee to streamline the delivery of electronics for firms such as Hewlett-Packard and Eastman Kodak. After a year of little or no attention on Wall St., WR Hambrecht analyst Robert Stimson initiated coverage of CMGI on March 9 with a Buy rating, saying the present value of CMGI's assets is $2.50, 35% above a recent price of $1.85. "Where there has been enormous opportunity in tech is with some of these fallen angels," says Stimson. But after a 40% jump this year in CMGI shares, is there any upside left? Barron’s thinks so. CMGI may be a cheap bet that there's value in the electronics supply chain. Trading below the co's $1bn in trailing 12-mo sales, and with $275m of cash and $2bn of net operating loss carry-forwards, the co may even be an attractive take-out tgt for freight giants such as FedEx or UPS. "As (CMGI) improves its gross profit and operating profit, this is a business whose sales can rise by 20% or more a year," adds Stimson.
“Inside Scoop” section reports that Tennenbaum Capital Partners and longtime insiders at Jo-Ann Stores (JAS) collectively grossed nearly $73m by selling 2.96m shares on the open mkt. Ben Silverman, of InsiderScore.com, said there may be some concern that Tennenbaum Capital dumped its stake "unceremoniously," but the mitigating factor is that the fund "really bought at the right time." Silverman notes that fellow value investor Olstein Capital Mgmt also reduced its stake drastically a few months ago. In Dec, Olstein sold 1.26m Jo-Ann shares for $30.5m, slipping its holdings below the 5% threshold. It held stakes of 9.1% at the end of ‘05 and 7.9% as of mid-Oct ‘06, notes Silverman. With Jo-Ann rallying, Silverman says "the expectations are high and it's a valuation question now."
“Heard on the Street” column discusses Starbux (SBUX) saying that the shares of the co may have more perk in them than some investors realize. At Starbucks's annual meeting, scheduled for today, execs plan to reaffirm the co's growth plans and shed light on their vision for the future. That usually wouldn't mean much to the co's investors, who have been accustomed to rapid growth and rising shares. But this year is different. "Ppl want to be reassured that there is not a brand problem," says UBS analyst David Palmer. Part of what has always driven Starbucks's stock is the magic surrounding its brand, led by Chmn Howard Schultz’s cheerleading, and investors are sure to get a dose of that at today's meeting. Last year, Mr. Schultz and CEO Jim Donald mixed homespun anecdotes with financial charts showing the co's rapid growth before crooner Tony Bennett appeared on stage for a surprise performance. "To the degree that ppl need to see confidence from Howard," Mr. Palmer said, "we believe that they will see it."
Barron’s Online highlights CMGI (CMGI), saying that recently some of the savviest hedge funds, including Renaissance Technologies, have been buying CMGI stock as the co morphs again. Today CMGI gets paid a fee to streamline the delivery of electronics for firms such as Hewlett-Packard and Eastman Kodak. After a year of little or no attention on Wall St., WR Hambrecht analyst Robert Stimson initiated coverage of CMGI on March 9 with a Buy rating, saying the present value of CMGI's assets is $2.50, 35% above a recent price of $1.85. "Where there has been enormous opportunity in tech is with some of these fallen angels," says Stimson. But after a 40% jump this year in CMGI shares, is there any upside left? Barron’s thinks so. CMGI may be a cheap bet that there's value in the electronics supply chain. Trading below the co's $1bn in trailing 12-mo sales, and with $275m of cash and $2bn of net operating loss carry-forwards, the co may even be an attractive take-out tgt for freight giants such as FedEx or UPS. "As (CMGI) improves its gross profit and operating profit, this is a business whose sales can rise by 20% or more a year," adds Stimson.
“Inside Scoop” section reports that Tennenbaum Capital Partners and longtime insiders at Jo-Ann Stores (JAS) collectively grossed nearly $73m by selling 2.96m shares on the open mkt. Ben Silverman, of InsiderScore.com, said there may be some concern that Tennenbaum Capital dumped its stake "unceremoniously," but the mitigating factor is that the fund "really bought at the right time." Silverman notes that fellow value investor Olstein Capital Mgmt also reduced its stake drastically a few months ago. In Dec, Olstein sold 1.26m Jo-Ann shares for $30.5m, slipping its holdings below the 5% threshold. It held stakes of 9.1% at the end of ‘05 and 7.9% as of mid-Oct ‘06, notes Silverman. With Jo-Ann rallying, Silverman says "the expectations are high and it's a valuation question now."
Tuesday, March 20, 2007
Calls of Note Part 5
- BB&T Capital Markets is out with an interesting call on Railroads noting that the "rail renaissance" has been very good to railroads and railroad investors in recent years. However, railroad management teams are seemingly running the businesses for their debt holders and credit rating agencies (i.e. focusing on repaying debt and maintaining investment grade credit ratings), and the firm believes many equity investors are simply fed up. Shareholders want their money, and they want it now. They want bigger dividends. They want bigger share repurchases. They simply want to get paid. So it's time to send a loud and clear message to the market, and in firm's view there is no better way than a material stock repurchase. But they don't mean over the next few years, per the current authorizations, they mean today. BB&T believes the rails can afford it, so it's time to pay up.
Dividends and share repurchase authorizations are increasing, to be sure, but why wait to buy the stock? Instead of buying stock over the course of years, why not go the market immediately with a tender offer for the entire repurchase authorization? The firm believes that if the Class I rails levered up to the 50% debt-to-cap level, they could use the cash to repurchase from 10%-31% of their shares outstanding, which could add 5%-17% to 2007 EPS. Bottom-line: if your stock is such a great value, buy it aggressively. And buy it now, not "opportunistically" over time. If that requires levering up a bit, then so be it. They believe the end result would be accretive to EPS, and likely applauded by the market.
Buy the stocks, and buy them now. That's BB&T's message to investors and railroad management teams. It's easy to tell investors that your stock is undervalued and your outlook is solid, but it's another thing altogether to step up and buy back 10%+ of your shares outstanding. That's how you send the right message to shareholders, and that's exactly what they think the Class I rails in their coverage universe should do. Firm remain bullish on their railroad coverage universe, and continues to recommend Buy rated names: BNI, CNI, CSX, GWR, NSC, and UNP.
Notablecalls: BB&T's John L. Barnes III sure comes across as a strongly opinionated fellow. The rails have been acting pretty OK lately so would not be surprised to see some further buy interest in select names.
Dividends and share repurchase authorizations are increasing, to be sure, but why wait to buy the stock? Instead of buying stock over the course of years, why not go the market immediately with a tender offer for the entire repurchase authorization? The firm believes that if the Class I rails levered up to the 50% debt-to-cap level, they could use the cash to repurchase from 10%-31% of their shares outstanding, which could add 5%-17% to 2007 EPS. Bottom-line: if your stock is such a great value, buy it aggressively. And buy it now, not "opportunistically" over time. If that requires levering up a bit, then so be it. They believe the end result would be accretive to EPS, and likely applauded by the market.
Buy the stocks, and buy them now. That's BB&T's message to investors and railroad management teams. It's easy to tell investors that your stock is undervalued and your outlook is solid, but it's another thing altogether to step up and buy back 10%+ of your shares outstanding. That's how you send the right message to shareholders, and that's exactly what they think the Class I rails in their coverage universe should do. Firm remain bullish on their railroad coverage universe, and continues to recommend Buy rated names: BNI, CNI, CSX, GWR, NSC, and UNP.
Notablecalls: BB&T's John L. Barnes III sure comes across as a strongly opinionated fellow. The rails have been acting pretty OK lately so would not be surprised to see some further buy interest in select names.
Calls of Note Part 4
- ThinkEquity's Eric Ross comments on Sandisk (NASDAQ:SNDK) saying NAND prices have fallen sharply, and they fear there may be difficult news in the near term. ASPs have plagued a larger portion of the quarter than many investors expect. In addition, any improvement in NAND pricing may shift capacity back to NAND, muting any recovery. The firm does not believe we have reached the bottom quite yet.
Prices have fallen 35%+ Q/Q in the March quarter alone. Every company has pre-announced and said that pricing is falling sharply: Hynix, MU, SanDisk, and Samsung all announced sharply falling prices. Prices continue to fall, albeit not at the same rate. Some sources phrased this as, "prices bottomed out." But, when the firm asked for a more-clear definition, they said they intended to say, "declines have bottomed." Firm believes some investors intended the former. Most supply chain sources expect prices to continue to fall for at least another month or two, and likely to some degree (albeit slowing) until the end of the year.
Investors are looking to demand to pull the industry out of the slump-NAND Flash drives for PCs and cell phone handset volumes. The firm agrees these will be drivers, but they fear there may be difficult news beforehand.
Many dual DRAM/NAND makers have moved back toward DRAM. Samsung and Hynix have allocated larger portions of capacity to DRAM as NAND prices plummeted and DRAM was more profitable. Now, neither is very good. They are likely to shift back if NAND pricing begins to improve, muting any real recovery for a quarter. Mr. Ross does not expect this to occur until the summer at the earliest. It is possible we will see some misses by NAND makers in the March quarter.
The firm is cutting their ests on SNDK: 1QCY07 from $840.0 million to $788.0 million; CY07 from $4.032 billion to $3.928 billion; 1QCY07 from $0.18 to $0.08; CY07 from $1.02 to $0.84; Reits Accumulate and $45 tgt.
Notablecalls: NAND's a tough business to be in. I continue to see no reason to own SNDK around current levels.
Prices have fallen 35%+ Q/Q in the March quarter alone. Every company has pre-announced and said that pricing is falling sharply: Hynix, MU, SanDisk, and Samsung all announced sharply falling prices. Prices continue to fall, albeit not at the same rate. Some sources phrased this as, "prices bottomed out." But, when the firm asked for a more-clear definition, they said they intended to say, "declines have bottomed." Firm believes some investors intended the former. Most supply chain sources expect prices to continue to fall for at least another month or two, and likely to some degree (albeit slowing) until the end of the year.
Investors are looking to demand to pull the industry out of the slump-NAND Flash drives for PCs and cell phone handset volumes. The firm agrees these will be drivers, but they fear there may be difficult news beforehand.
Many dual DRAM/NAND makers have moved back toward DRAM. Samsung and Hynix have allocated larger portions of capacity to DRAM as NAND prices plummeted and DRAM was more profitable. Now, neither is very good. They are likely to shift back if NAND pricing begins to improve, muting any real recovery for a quarter. Mr. Ross does not expect this to occur until the summer at the earliest. It is possible we will see some misses by NAND makers in the March quarter.
The firm is cutting their ests on SNDK: 1QCY07 from $840.0 million to $788.0 million; CY07 from $4.032 billion to $3.928 billion; 1QCY07 from $0.18 to $0.08; CY07 from $1.02 to $0.84; Reits Accumulate and $45 tgt.
Notablecalls: NAND's a tough business to be in. I continue to see no reason to own SNDK around current levels.
Calls of Note Part 3
- Goldman Sachs notes that based on their recent channel checks, they believe LG Electronics' handset business is tracking ahead of expectation, but handset upside could be offset by the weaker-than-expected display business. Appliance remains on track.
Firm expects LGE to ship 16.3 mn handsets in 1Q (vs. 15.5 mn guidance). 'Chocolate' shipments remain strong, and the recently launched 'Shine' phone seems to be off to a strong start. Overall, handset profitability could see a modest improvement in 1Q to around 3% OPM, helped by 1) higher volume, 2) favorable product mix, and 3) FX.
Display remains the weak link, and they expect losses to widen in 1Q. PDP is the main culprit, suffering from low utilization and ASP declines. In addition, LCD TV prices for new models were recently lowered, while LCD TV panel prices have fallen less than expected, further pressuring TV margins.
GSCO is encouraged by the signs of improving execution in LGE's handset business. 1Q could mark the third quarter of stable handset margins (albeit a low margin), and be a step closer to regaining investor confidence.
Notablecalls: There aren't many positive signals coming from the handset industry but looks like GSCO managed to spot one. The Chocolate is a chic phone and that pretty much tells me consumers are willing to buy new handsets, provided they are new & cool. That's what Motorola (NYSE:MOT) is currently lacking. However, given the low valuation and pessimistic sentiment, an opportunity for a leap of faith may be in the cards here. Not a high conviction call here but I thought to express my view on this one. See archives for more color on MOT.
Firm expects LGE to ship 16.3 mn handsets in 1Q (vs. 15.5 mn guidance). 'Chocolate' shipments remain strong, and the recently launched 'Shine' phone seems to be off to a strong start. Overall, handset profitability could see a modest improvement in 1Q to around 3% OPM, helped by 1) higher volume, 2) favorable product mix, and 3) FX.
Display remains the weak link, and they expect losses to widen in 1Q. PDP is the main culprit, suffering from low utilization and ASP declines. In addition, LCD TV prices for new models were recently lowered, while LCD TV panel prices have fallen less than expected, further pressuring TV margins.
GSCO is encouraged by the signs of improving execution in LGE's handset business. 1Q could mark the third quarter of stable handset margins (albeit a low margin), and be a step closer to regaining investor confidence.
Notablecalls: There aren't many positive signals coming from the handset industry but looks like GSCO managed to spot one. The Chocolate is a chic phone and that pretty much tells me consumers are willing to buy new handsets, provided they are new & cool. That's what Motorola (NYSE:MOT) is currently lacking. However, given the low valuation and pessimistic sentiment, an opportunity for a leap of faith may be in the cards here. Not a high conviction call here but I thought to express my view on this one. See archives for more color on MOT.
Calls of Note Part 2
- CIBC is out with a call on Digene (NASDAQ:DIGE) noting the stock has declined 25% since its earnings report last month, and is down 10% in the recent weeks since Roche filed its long-awaited (and delayed) PMA for Amlicor HPV. In their note, the firm details why they doubt Roche will be competitive, and argue that DIGE is a solid buy on the recent weakness.
Firm spoke with several investigators from Roche's clinical trial (who cumulatively performed over 4,000 samples) and they also spoke to their contacts at Roche. They found two key issues: 1) "clinical sensitivity" for Roche is inferior to Digene and 2) throughput on Amplicor will be an issue.
All investigators the firm spoke with said Roche's PCR-based diagnostic yielded too many false positives. They suspect Roche now increased the cutoff rate to improve results, but this would mean that new validation studies and LT follow-up are needed. CIBC feels this will delay Roche's approval.
The investigators were all very clear that "efficiency is king," and they noted that Amplicor is a much more manual process that requires hours of additional "hands-on" time. Firm's Roche contacts confirm this, and does not expect filing for their automated platform (TaqMan) for at least two years. Reits Sector Outperformer and $58 tgt.
Notablecalls: That's what I call research! CIBC's Amit Hazan has gone the extra mile for investors here and the results speak for themselves. To make things more interesting, note that TWP has downgraded DIGE to Market Weight from Overweight this morning as they are transferring the co from the Life Science industry while maintaining estimates. That may create some weakness but also a superb s-t buying opportunity as CIBC's comments should outweigh the downgrade. Think I'm going to call this one actionable.
Firm spoke with several investigators from Roche's clinical trial (who cumulatively performed over 4,000 samples) and they also spoke to their contacts at Roche. They found two key issues: 1) "clinical sensitivity" for Roche is inferior to Digene and 2) throughput on Amplicor will be an issue.
All investigators the firm spoke with said Roche's PCR-based diagnostic yielded too many false positives. They suspect Roche now increased the cutoff rate to improve results, but this would mean that new validation studies and LT follow-up are needed. CIBC feels this will delay Roche's approval.
The investigators were all very clear that "efficiency is king," and they noted that Amplicor is a much more manual process that requires hours of additional "hands-on" time. Firm's Roche contacts confirm this, and does not expect filing for their automated platform (TaqMan) for at least two years. Reits Sector Outperformer and $58 tgt.
Notablecalls: That's what I call research! CIBC's Amit Hazan has gone the extra mile for investors here and the results speak for themselves. To make things more interesting, note that TWP has downgraded DIGE to Market Weight from Overweight this morning as they are transferring the co from the Life Science industry while maintaining estimates. That may create some weakness but also a superb s-t buying opportunity as CIBC's comments should outweigh the downgrade. Think I'm going to call this one actionable.
Calls of Note Part 1
- Piper Jaffray comments on Apple (NASDAQ:AAPL) after speaking with 20 Apple specialist resellers over the past several days.
Firm believes that, on average, Street models assume around 1.45m Mac units for the Mar-07 quarter, which is down 10% q/q from Dec-06. In their checks with 20 Apple retail stores, 85% of resellers expect Mac sales in Mar-07 will decline slightly vs. Dec-06, while the other 15% expect Mac units will be flat q/q. In general, resellers defined "slightly decline" as a 5%-10% drop from Dec-06 to Mar-07. They believe, therefore, Street estimates are achievable and may be slightly conservative.
They believe Apple's new OS, Leopard, will likely be released in mid April. Slightly more than half of the resellers in checks said Leopard related purchase delays are having a slight negative impact on Macs, while slightly less than half said Leopard is not having any impact on Macs.
As was the case in the early days of the iPod, Apple resellers in firm's checks expect AppleTV will need to be more fully understood by consumers before it turns into a major contributor. Almost all (95%) resellers in the sample said they expect AppleTV will have a minor impact on business in the near term (next 1-2 qrtrs). Maintains Outperform and $124 tgt.
Notablecalls: So it looks like the Mac business is growing as expected. That's surely good news. Can the same be said for iPods? I'm not so sure. Overall, AAPL continues to represent the only growing part of the PC business. That's enough to sustain the valuation for now. I don't expect the call to have a major positive impact on the stock today. We may see SOME buy interest, though.
Firm believes that, on average, Street models assume around 1.45m Mac units for the Mar-07 quarter, which is down 10% q/q from Dec-06. In their checks with 20 Apple retail stores, 85% of resellers expect Mac sales in Mar-07 will decline slightly vs. Dec-06, while the other 15% expect Mac units will be flat q/q. In general, resellers defined "slightly decline" as a 5%-10% drop from Dec-06 to Mar-07. They believe, therefore, Street estimates are achievable and may be slightly conservative.
They believe Apple's new OS, Leopard, will likely be released in mid April. Slightly more than half of the resellers in checks said Leopard related purchase delays are having a slight negative impact on Macs, while slightly less than half said Leopard is not having any impact on Macs.
As was the case in the early days of the iPod, Apple resellers in firm's checks expect AppleTV will need to be more fully understood by consumers before it turns into a major contributor. Almost all (95%) resellers in the sample said they expect AppleTV will have a minor impact on business in the near term (next 1-2 qrtrs). Maintains Outperform and $124 tgt.
Notablecalls: So it looks like the Mac business is growing as expected. That's surely good news. Can the same be said for iPods? I'm not so sure. Overall, AAPL continues to represent the only growing part of the PC business. That's enough to sustain the valuation for now. I don't expect the call to have a major positive impact on the stock today. We may see SOME buy interest, though.
Paperstand (MATK, DRC)
The WSJ reports that ABN Amro (ABN) is nearing a deal to be acquired by Barclays (BCS) for more than $80bn. The two banks had discussed a deal as long as a year ago, but talks foundered. The chief execs resumed talks at a meeting in Geneva about 6 weeks ago, even as ABN Amro publicly asserted that it wanted to remain independent. Under the terms being discussed, Barclays would offer a mix of cash and stock for ABN Amro, valuing the bank's shares in the range of low €30s, slightly above their current trading price.
The WSJ discusses new Detroit woe – makers of parts won’t cut prices. Navistar has supplied diesel engines to Ford (F) for almost 30 years. Yet in late Feb Navistar, embroiled in a financial dispute with Ford, temporarily cut off all engine shipments to its single biggest customer. The move dramatized a broad shift in the balance of power in the struggling US auto industry. The dispute involved competing views of warranty claims and price contracts. But at its core was the engine supplier's refusal to play an old Detroit game, in which US car makers have deflected the pressure of global competition by repeatedly forcing suppliers to trim their own prices. For the old Big Three of Ford, GM (GM) and the Chrysler (DCX), the case was evidence of a new reality. It finds itself surrounded by parts suppliers from which it can no longer easily squeeze price concessions.
“Heard on the Street” column discusses Martek Biosciences (MATK), saying that one of its accounting methods has led to concerns that Martek is trying to make profits look more robust than they really are. The bone of contention: Martek's treatment of what it calls "idle" assets. Martek noted in its F1Q results that it has $94.3m of property, plant and equipment, "being held for future use." Martek doesn't depreciate assets designated this way. Such an approach is pretty rare; co’s typically depreciate assets that they are either using or could be using. Martek's approach lessens the bite that depreciation charges take out of net profit. In F07, the move could boost net profit by about $3.9m, or about 20%, according to Glass, Lewis & Co. A similar gain over the past year could have helped the co avoid 2 consecutive years of declining net profit. Plus, if Martek was fully depreciating its assets and taking a bigger hit to profit, the co's share price would be an expensive 37x expected F07 earnings, as opposed to its current multiple of 30x. Robert N. Freeman, an accounting professor at the University of Texas, said "You're in a gray area."
Barron’s Online “Inside Scoop” section reports that the Chmn of Dresser-Rand (DRC), William Macaulay, has just filled up his tank with shares of the co. Mr Macaulay spent $4m on 150K shares on March 15. The purchase came the week after private-equity firm First Reserve, where Macaulay holds the Chmn and CEO posts, launched a secondary offering of its remaining 11.6m Dresser-Rand shares. Ben Silverman, of InsiderScore.com, says Macaulay's buying is a positive signal, especially since the stock is currently trading near its 52w intraday high. "In a sense, he could be reinvesting in Dresser-Rand," says Silverman, "What I think is good is that he is planning to stick around as Chmn, and that he feels that the stock is going to appreciate in the long term."
The WSJ discusses new Detroit woe – makers of parts won’t cut prices. Navistar has supplied diesel engines to Ford (F) for almost 30 years. Yet in late Feb Navistar, embroiled in a financial dispute with Ford, temporarily cut off all engine shipments to its single biggest customer. The move dramatized a broad shift in the balance of power in the struggling US auto industry. The dispute involved competing views of warranty claims and price contracts. But at its core was the engine supplier's refusal to play an old Detroit game, in which US car makers have deflected the pressure of global competition by repeatedly forcing suppliers to trim their own prices. For the old Big Three of Ford, GM (GM) and the Chrysler (DCX), the case was evidence of a new reality. It finds itself surrounded by parts suppliers from which it can no longer easily squeeze price concessions.
“Heard on the Street” column discusses Martek Biosciences (MATK), saying that one of its accounting methods has led to concerns that Martek is trying to make profits look more robust than they really are. The bone of contention: Martek's treatment of what it calls "idle" assets. Martek noted in its F1Q results that it has $94.3m of property, plant and equipment, "being held for future use." Martek doesn't depreciate assets designated this way. Such an approach is pretty rare; co’s typically depreciate assets that they are either using or could be using. Martek's approach lessens the bite that depreciation charges take out of net profit. In F07, the move could boost net profit by about $3.9m, or about 20%, according to Glass, Lewis & Co. A similar gain over the past year could have helped the co avoid 2 consecutive years of declining net profit. Plus, if Martek was fully depreciating its assets and taking a bigger hit to profit, the co's share price would be an expensive 37x expected F07 earnings, as opposed to its current multiple of 30x. Robert N. Freeman, an accounting professor at the University of Texas, said "You're in a gray area."
Barron’s Online “Inside Scoop” section reports that the Chmn of Dresser-Rand (DRC), William Macaulay, has just filled up his tank with shares of the co. Mr Macaulay spent $4m on 150K shares on March 15. The purchase came the week after private-equity firm First Reserve, where Macaulay holds the Chmn and CEO posts, launched a secondary offering of its remaining 11.6m Dresser-Rand shares. Ben Silverman, of InsiderScore.com, says Macaulay's buying is a positive signal, especially since the stock is currently trading near its 52w intraday high. "In a sense, he could be reinvesting in Dresser-Rand," says Silverman, "What I think is good is that he is planning to stick around as Chmn, and that he feels that the stock is going to appreciate in the long term."
Monday, March 19, 2007
Quote of the Day
We believe Vista is a disaster. No one seems to want it-no corporation wants to be the first to use it, and no consumer (save a few early adoptors) wants to spend a dime to get anything other than future-proofing; no one in the supply chain believes it could provide anything of a driver for PCs. We believe Vista will be a non-driver, but Vista-premium features could be a real driver in 2H07. No one we spoke with believed. Ironically, most new $300 PCs are Vista compliant, although may run a bit slow in the graphics and are certainly unfit for power users.
Eric Ross, ThinkEquity Partners on CeBit 2007 PC And Processor Demand (March 19 2007)
Notablecalls: Must say I agree. Not actionable but surely entertaining.
Eric Ross, ThinkEquity Partners on CeBit 2007 PC And Processor Demand (March 19 2007)
Notablecalls: Must say I agree. Not actionable but surely entertaining.
Calls of Note Part 7
- JP Morgan is raising 2007 and 2008 EPS estimates ahead of Genentech's (NYSE:DNA) investment community meeting on March 23. Given strong Avastin and Lucentis trends exiting 4Q06 as well as impressive operating leverage, they would not be surprised to see 2007 earnings guidance raised at the meeting. However, even if guidance is unchanged, Genentech's P/E is near a 4-yr low on the back of concerns from the AVAiL data, making the risk/reward in DNA shares very compelling.
DNA shares began to weaken after the AVAiL data on Feb 21, with further pressure on YTD performance from a weak biotech tape. Consensus ests for 2007 began the year at ~$2.55, and they are now 12.5% higher, yet DNA shares are flat YTD (BTK index: -5.1%). In firm's view, concerns over Avastin growth due to AVAiL results as well as Herceptin competitive fears from the coming 30001 study from GSK's Tykerb (1H07e) have contributed to DNA weakness. JPM would argue that these concerns are largely priced into DNA shares; indeed their growth ests for both Avastin and Herceptin in 2007 and 2008 are beatable (Avastin: 29.4% and 22.5%; Herceptin: 15.3% and 11.7%).
Firm is raising their 2007 and 2008 estimates to $2.91 and $3.47 respectively from $2.83 and $3.43 previously largely on higher Lucentis estimates. Reits Overweight.
Notablecalls: Expect to see some buy interest in DNA today.
DNA shares began to weaken after the AVAiL data on Feb 21, with further pressure on YTD performance from a weak biotech tape. Consensus ests for 2007 began the year at ~$2.55, and they are now 12.5% higher, yet DNA shares are flat YTD (BTK index: -5.1%). In firm's view, concerns over Avastin growth due to AVAiL results as well as Herceptin competitive fears from the coming 30001 study from GSK's Tykerb (1H07e) have contributed to DNA weakness. JPM would argue that these concerns are largely priced into DNA shares; indeed their growth ests for both Avastin and Herceptin in 2007 and 2008 are beatable (Avastin: 29.4% and 22.5%; Herceptin: 15.3% and 11.7%).
Firm is raising their 2007 and 2008 estimates to $2.91 and $3.47 respectively from $2.83 and $3.43 previously largely on higher Lucentis estimates. Reits Overweight.
Notablecalls: Expect to see some buy interest in DNA today.
Calls of Note Part 6
- Bank of America notes their channel checks indicate that AMD (NYSE:AMD) is preparing for another round of price cuts on Apr 9th, in an effort to 1) bolster flagging demand for its products and 2) preempt Intel's price cuts scheduled for Apr 22nd. These price cuts, which the firm believes will be across of several AMD's desktop products (including Semprons, Athlon X2s), and will range between 26-42%.
BAC is reducing their below consensus FY07 GAAP EPS from a loss of $0.45 to a loss of $1.00 (consensus a loss of $0.39) saying AMD's elevated cost structure, attributable in part to a significant depreciation ramp through 2007, will make it even harder for AMD to avoid more pressure on GMs, despite the slight relief accruing from increased 65nm volumes.
They expect the aforementioned cuts to have little impact on Intel. Succinctly put, while the price cuts will put some pressure on Intel's low-end offerings, they expect blended pricing for Intel's desktop processors to trend flat with higher volumes in the premium Core 2 Duo segment offsetting price erosion in lower end processors; the stability in notebook and server pricing (no price cuts) should serve as anadditional mitigating factor.
Maintains Neutral on AMD but thinks it's premature to bottom-fish on the stock.
Notablecalls: Ouch!
BAC is reducing their below consensus FY07 GAAP EPS from a loss of $0.45 to a loss of $1.00 (consensus a loss of $0.39) saying AMD's elevated cost structure, attributable in part to a significant depreciation ramp through 2007, will make it even harder for AMD to avoid more pressure on GMs, despite the slight relief accruing from increased 65nm volumes.
They expect the aforementioned cuts to have little impact on Intel. Succinctly put, while the price cuts will put some pressure on Intel's low-end offerings, they expect blended pricing for Intel's desktop processors to trend flat with higher volumes in the premium Core 2 Duo segment offsetting price erosion in lower end processors; the stability in notebook and server pricing (no price cuts) should serve as anadditional mitigating factor.
Maintains Neutral on AMD but thinks it's premature to bottom-fish on the stock.
Notablecalls: Ouch!
Calls of Note Part 5
- Merrill Lynch comments on FTI Consulting (NYSE:FCN) noting the shares have risen 15% since the company reported its strong 4Q06 results and outlook on February 15th. Firm reiterates their Buy-rating on the stock, but is highlighting the potential for temporary downward pressure on the stock price as consensus estimates currently may not fully reflect the seasonal weakness in 1Q. MLCO's revised 1Q EPS forecast of $0.36 is now 8% below consensus of $0.39. However, for the full year, they see more upside potential than downside risk to their estimates, and view any short-term weakness as a buying opportunity.
Firm looks for revenue growth to remain solid in coming years and to prove resilient in the event of a US economic downturn, cushioned by the counter-cyclical nature of the Restructuring business (17% of sales), which would benefit from any pick-up in bankruptcy-related activity. Tgt remains $39.
Notablecalls: The stock sure looks like it wants to move somewhat lower.
Firm looks for revenue growth to remain solid in coming years and to prove resilient in the event of a US economic downturn, cushioned by the counter-cyclical nature of the Restructuring business (17% of sales), which would benefit from any pick-up in bankruptcy-related activity. Tgt remains $39.
Notablecalls: The stock sure looks like it wants to move somewhat lower.
Calls of Note Part 4
- Bank of America comments on CBOT Holdings (NYSE:BOT) saying they have lifted their '07/08 EPS estimates to $4.99 and $6.14 from $4.84 and $5.85 to reflect current volume trends and expectations that the higher volatility environment we are currently experiencing could last for some time.
They are also raising their price target to $195 from $170 to reflect current ICE bid and potential for counter- bid by CME. BAC believes that CME will likely have to raise its bid for BOT given higher price ICE is currently offering. According to their analysis, CME could pay from $205-215 for BOT and still make a deal work. That said, given the conservative nature of CME management, they can not yet be sure that they would get that aggressive, and are raising BOT price target to $195.
Notablecalls: Would not be surprised to see some buy interest in BOT following the call. Note that ICE has not ruled out going hostile on BOT.
They are also raising their price target to $195 from $170 to reflect current ICE bid and potential for counter- bid by CME. BAC believes that CME will likely have to raise its bid for BOT given higher price ICE is currently offering. According to their analysis, CME could pay from $205-215 for BOT and still make a deal work. That said, given the conservative nature of CME management, they can not yet be sure that they would get that aggressive, and are raising BOT price target to $195.
Notablecalls: Would not be surprised to see some buy interest in BOT following the call. Note that ICE has not ruled out going hostile on BOT.
Calls of Note Part 3
- JP Morgan notes that based on their listings and revenue per listing analysis, they feel comfortable that eBay's (NASDAQ:EBAY) 1Q is tracking ahead of street consensus estimates of $1.71B and $0.30.
QTD listings up 11% Y/Y. On a reported basis (incl. Taiwan and China), QTD listings are tracking up 8% Y/Y. Ex. Taiwan and China, listings are up 11%. As of 3/16, the firm has tracked 507.4M total new listing, with 369.4M in the US, UK, and DE. Based on analysis and checks, the firm believes that RPL in 1Q is tracking slightly above their estimate of $1.88 due to product mix and stable conversion trends, and as such, they are confident that 1Q is trending above consensus estimates.
Based on their checks, the firm believes that keyword pricing remains stable. According to SEM executives at the JPMorgan Internet Conference, Yahoo!'s Project Panama launch has resulted in lower click prices for brand advertisers. As companies with strong brands such as eBay tend to attract more clicks, they in turn are required to pay less for the same ad position. Net/Net, they believe eBay may realize lower search marketing expenses while maintaining or increasing its lead volume from search. Reits Overweight.
Notablecalls: Expect to see some buy interest in EBAY this morning. I don't see the comment as anything major, though.
QTD listings up 11% Y/Y. On a reported basis (incl. Taiwan and China), QTD listings are tracking up 8% Y/Y. Ex. Taiwan and China, listings are up 11%. As of 3/16, the firm has tracked 507.4M total new listing, with 369.4M in the US, UK, and DE. Based on analysis and checks, the firm believes that RPL in 1Q is tracking slightly above their estimate of $1.88 due to product mix and stable conversion trends, and as such, they are confident that 1Q is trending above consensus estimates.
Based on their checks, the firm believes that keyword pricing remains stable. According to SEM executives at the JPMorgan Internet Conference, Yahoo!'s Project Panama launch has resulted in lower click prices for brand advertisers. As companies with strong brands such as eBay tend to attract more clicks, they in turn are required to pay less for the same ad position. Net/Net, they believe eBay may realize lower search marketing expenses while maintaining or increasing its lead volume from search. Reits Overweight.
Notablecalls: Expect to see some buy interest in EBAY this morning. I don't see the comment as anything major, though.
Calls of Note Part 2
- FBR notes that recent checks suggest that despite a flattening in poly spot prices, MEMC (NYSE:WFR) has been able to sell higher than the previously expected amount of poly into the spot market, a trend that is expected to continue into 2Q07, therefore providing upside to their estimates. To that end, they increasing their revenue/EPS estimates and actually going above the consensus. 1Q07/CY07 pro forma EPS estimates have changed from $0.69/$3.01 to $0.70/$3.12, which compares to consensus estimates of $0.69/$3.04.
FBR's price target has also increased from $45 to $54, which is 5x CY08 EV/Sales and 10x CY08 EV/ EBITDA, which is driven by higher estimates, as well as some multiple expansion because of higher growth prospects. Unlike the previous years when a combination of insufficient transparency and restatements of quarterly results made us doubt long- term growth prospects, they have now increased confidence in MEMC's ability to capitalize on not only the shortage of poly, but also benefit from the secular growth of the solar industry.
However, their concerns are: 1) continued share loss in the semi wafer market, particularly in Japan and Korea, 2) ineffectiveness of long-term strategy at Chinese/Taiwanese solar cell/module manufacturers, which would adversely impact MEMC as two of its current solar wafer customers reside there.
Maintain Market Perform rating, but would become more aggressive if the shares pull back or more upside to estimates is determined.
Notablecalls: There was some chatter of a poly glut on Friday. Some names were hit pretty bad, including WFR which lost 2 points initially but managed to recover some of it after lunchtime. FBR has never been a fan of WFR and with the firm raising their ests above consensus, it warrants some attention. Not calling it outright actionable as the stock has been acting heavy over the past couple of weeks.
FBR's price target has also increased from $45 to $54, which is 5x CY08 EV/Sales and 10x CY08 EV/ EBITDA, which is driven by higher estimates, as well as some multiple expansion because of higher growth prospects. Unlike the previous years when a combination of insufficient transparency and restatements of quarterly results made us doubt long- term growth prospects, they have now increased confidence in MEMC's ability to capitalize on not only the shortage of poly, but also benefit from the secular growth of the solar industry.
However, their concerns are: 1) continued share loss in the semi wafer market, particularly in Japan and Korea, 2) ineffectiveness of long-term strategy at Chinese/Taiwanese solar cell/module manufacturers, which would adversely impact MEMC as two of its current solar wafer customers reside there.
Maintain Market Perform rating, but would become more aggressive if the shares pull back or more upside to estimates is determined.
Notablecalls: There was some chatter of a poly glut on Friday. Some names were hit pretty bad, including WFR which lost 2 points initially but managed to recover some of it after lunchtime. FBR has never been a fan of WFR and with the firm raising their ests above consensus, it warrants some attention. Not calling it outright actionable as the stock has been acting heavy over the past couple of weeks.
Calls of Note Part 1
- JP Morgan's Semiconductor team notes recent checks in the semiconductor space indicate Consensus estimates need to be lowered for 2Q07 and 2007. They believe this will cause a sell-off in semiconductor stocks, which the firm believes will be the last chance to buy stocks before the second half rally.
The firm compared their 2Q07 and 2007 estimates to Consensus for our large-cap and broad-based stocks, and it appears Consensus estimates are an average of 1% above their estimates for 2Q07 and only slightly below normal seasonality. They believe Consensus estimates are too optimistic and are based on a "quick recovery" scenario in 2Q07.
Consensus estimates should be reduced over the next four weeks as it becomes clear 2Q07 guidance will be below normal seasonality. JPM believes this should also mark the last major estimate cut for the semiconductor sector. Analysis indicates AMD, CY, INTC, and ONNN should experience the largest estimate cuts, while TXN, BRCM, ALTR, XLNX, and FCS should experience smaller reductions.
Firm believes the lowering of Consensus estimates should trigger a sell-off, and they strongly encourage investors to begin or add to long positions during the weakness. They believe this is last chance to buy before stocks rally in 2H07. Top Picks include: TXN, MCHP, BRCM and NVDA.
Notablecalls: Agree with JPM here. The consensus numbers have been raising on heels of positive comments from several industry names. The truth however is that the U.S. economy has entered a period of choppy growth (At best! More likely slowing growth and eventually deceleration) and Semis have rarely done well during times like this. The HOLDRS (SMH) have gone nowhere over the past 6 months and I suspect the next leg will be down.
The firm compared their 2Q07 and 2007 estimates to Consensus for our large-cap and broad-based stocks, and it appears Consensus estimates are an average of 1% above their estimates for 2Q07 and only slightly below normal seasonality. They believe Consensus estimates are too optimistic and are based on a "quick recovery" scenario in 2Q07.
Consensus estimates should be reduced over the next four weeks as it becomes clear 2Q07 guidance will be below normal seasonality. JPM believes this should also mark the last major estimate cut for the semiconductor sector. Analysis indicates AMD, CY, INTC, and ONNN should experience the largest estimate cuts, while TXN, BRCM, ALTR, XLNX, and FCS should experience smaller reductions.
Firm believes the lowering of Consensus estimates should trigger a sell-off, and they strongly encourage investors to begin or add to long positions during the weakness. They believe this is last chance to buy before stocks rally in 2H07. Top Picks include: TXN, MCHP, BRCM and NVDA.
Notablecalls: Agree with JPM here. The consensus numbers have been raising on heels of positive comments from several industry names. The truth however is that the U.S. economy has entered a period of choppy growth (At best! More likely slowing growth and eventually deceleration) and Semis have rarely done well during times like this. The HOLDRS (SMH) have gone nowhere over the past 6 months and I suspect the next leg will be down.
Paperstand (CYH, TRI, IFX, AUO)
The WSJ reports that Community Health Systems (CYH) was last night nearing a deal to Triad Hospitals (TRI), breaking up an existing $4.5bn buyout plan by a group of private-equity funds. Exact details of the offer weren't clear late yesterday, but one person familiar with the plan described it as being "several hundred million dollars" greater than the offer tabled in Feb by a duo of CCMP Capital Advisors and Goldman Sachs Capital Partners.
”Heard on the Street” column out saying that Infineon (IFX) could be singing an upbeat new tune by the end of the year, all b/c of a ringtone. And that could be music to the ears of Infineon's investors. The share price of Europe's largest maker of microprocessors has risen some 65% since the start of ’06, up 7% this year alone. But even at its current price, the co still trades at about half the going rate of its US-based peers. Investors are buzzing over industry speculation that Infineon will supply the main chip to drive the highly anticipated iPhone from Apple (AAPL). "We believe Infineon is the dominant supplier of the [electronic brains] for the iPhone," says Jagdish Rebello, of iSuppli. Proponents of Infineon take the long view: By the end of ‘07, the co will have cashed out big from its majority stake in its old memory-chip business and completed the turnaround of a money-losing cellphone technology division, which had been a drag on earnings. Now is a good time to buy, they say. Infineon has new contracts in the pipeline, including a deal with Nokia (NOK), and "it's trading at a deep discount" to its peers, says Robert Turner, of Turner Investment Partners.
The NY Times reports that more than 60m cans and pouches of dog and cat food sold under dozens of brand names were recalled on Saturday after being linked to the deaths of 10 animals. The food was manufactured by Menu Foods, which makes wet food sold as store brands for co’s like Wal-Mart (WMT), Kroger (KR) and Safeway (SWY).
DigiTimes reprots that Samsung Electronic and LG Electronics recently visited AU Optronics (AUO), Chi Mei Optoelectronics and Chunghwa Picture Tubes to secure TV panel supply, with the TV makers placing orders 2 months earlier than originally planned. Since Samsung and LGE will source 50% (5.5m units) and 35% (2.5m units), respectively, of their TV panels this year from Taiwan, a tight supply of TV panels is expected to occur, with TV panel prices to switch from dropping to rising by May at the earliest should Taiwan-based panel makers stick to their quotations.
”Heard on the Street” column out saying that Infineon (IFX) could be singing an upbeat new tune by the end of the year, all b/c of a ringtone. And that could be music to the ears of Infineon's investors. The share price of Europe's largest maker of microprocessors has risen some 65% since the start of ’06, up 7% this year alone. But even at its current price, the co still trades at about half the going rate of its US-based peers. Investors are buzzing over industry speculation that Infineon will supply the main chip to drive the highly anticipated iPhone from Apple (AAPL). "We believe Infineon is the dominant supplier of the [electronic brains] for the iPhone," says Jagdish Rebello, of iSuppli. Proponents of Infineon take the long view: By the end of ‘07, the co will have cashed out big from its majority stake in its old memory-chip business and completed the turnaround of a money-losing cellphone technology division, which had been a drag on earnings. Now is a good time to buy, they say. Infineon has new contracts in the pipeline, including a deal with Nokia (NOK), and "it's trading at a deep discount" to its peers, says Robert Turner, of Turner Investment Partners.
The NY Times reports that more than 60m cans and pouches of dog and cat food sold under dozens of brand names were recalled on Saturday after being linked to the deaths of 10 animals. The food was manufactured by Menu Foods, which makes wet food sold as store brands for co’s like Wal-Mart (WMT), Kroger (KR) and Safeway (SWY).
DigiTimes reprots that Samsung Electronic and LG Electronics recently visited AU Optronics (AUO), Chi Mei Optoelectronics and Chunghwa Picture Tubes to secure TV panel supply, with the TV makers placing orders 2 months earlier than originally planned. Since Samsung and LGE will source 50% (5.5m units) and 35% (2.5m units), respectively, of their TV panels this year from Taiwan, a tight supply of TV panels is expected to occur, with TV panel prices to switch from dropping to rising by May at the earliest should Taiwan-based panel makers stick to their quotations.
Sunday, March 18, 2007
Barron's Summary
According to the Barron’s, Textron (TXT) has doubled in the past 5 years, to around 90. If it can deliver efficiently on its backlog of orders for jets and helicopters, another doubling is likely in the next 5 years.
At around 19.40, Saks' (SKS) shares are now 37% higher than they were last August. They could keep climbing to the mid-20s as margins and earnings grow.
Ryder (R) trades around 49, or an inexpensive 10 times analysts' 2008 estimates. It could rally into the 60s if the company bests its conservative earnings guidance.
”The Trader” section out saying that shockwaves from the epicenter of the quaking mortgage world will shake homebuilders. Although subprime loans make up just a fraction of all mortgages, any tightening of lending standards could crimp home demand and prices, and delay the already-slow convalescence of the ailing housing mkt. At some point, slip-sliding homebuilders may be worth buying again. A number of these stocks are trading just 10-20% above their tangible book value, historically a turning point for slipping shares. Not all homebuilders will fare equally as lending constricts. Toll Brothers (TOL) and KB Homes (KBH) are highly correlated stocks that have traded in sync 86% of the time over the past year. But Michael Benhamou, of Louis Capital, sees a possible divergence ahead. For one thing, tightening credit will hit the lower end of the housing spectrum harder, and KB Homes serves a wider swath of first-time home owners. The avg price of homes sold by KB is $277K, compared with $690K for Toll. As lending tightens for new buyers, Benhamou reckons "Toll will outperform KB Homes by 15% over the next 3 months."
“Technology Trader” column wondering, why is ST Micro (STM) trading at such high multiples, compared those of rivals. At a recent $19, ST enjoys about twice the earnings multiple of the better-positioned Texas Instruments (TXN). ST has won Buy ratings from analysts like Mark Lipacis of Prudential. In his notes, Lipacis reports that ST has the industry's best cash-flow yields, given that its free cash flow should be better than 7% of his forecast for ‘07 revs. TI ranks 3rd, with about 5.2%. The Pru analyst says that such free cash-flow percentages were strong predictors of stock performance last year. But ST's cost controls will only go so far, if its sales don't keep growing. Although full-year sales rose 11% in ‘06, on a sequential basis sales flattened and then turned downward after the JunQ06. In Jan07, ST told investors to expect sales to slide 3-11% sequentially in the MarQ07. ST bulls are banking on a sharp rebound in sales in the 2H. The visibility's not great, therefore, on an ST sales revival. So why does it trade for 23x trailing earnings, while TI trades for 11x? Well, both ST and Infineon (IFX) have been flagged as potential buyout candidates that private equity buyers could load up with debt, like Freescale. So much private equity money is looking for work these days that you can't rule out any deal, but ST's challenges look kind of difficult to this yokel.
Fund manager picks include BBG, SWN, XOM, PBR, NOV, GRP, SLB, LNG, NRG and CBI. Another fund top holdings include: TEX, DHI, NVR, KBH, BRKB, GS, JOYG, AIG, CTX and UNH.
At around 19.40, Saks' (SKS) shares are now 37% higher than they were last August. They could keep climbing to the mid-20s as margins and earnings grow.
Ryder (R) trades around 49, or an inexpensive 10 times analysts' 2008 estimates. It could rally into the 60s if the company bests its conservative earnings guidance.
”The Trader” section out saying that shockwaves from the epicenter of the quaking mortgage world will shake homebuilders. Although subprime loans make up just a fraction of all mortgages, any tightening of lending standards could crimp home demand and prices, and delay the already-slow convalescence of the ailing housing mkt. At some point, slip-sliding homebuilders may be worth buying again. A number of these stocks are trading just 10-20% above their tangible book value, historically a turning point for slipping shares. Not all homebuilders will fare equally as lending constricts. Toll Brothers (TOL) and KB Homes (KBH) are highly correlated stocks that have traded in sync 86% of the time over the past year. But Michael Benhamou, of Louis Capital, sees a possible divergence ahead. For one thing, tightening credit will hit the lower end of the housing spectrum harder, and KB Homes serves a wider swath of first-time home owners. The avg price of homes sold by KB is $277K, compared with $690K for Toll. As lending tightens for new buyers, Benhamou reckons "Toll will outperform KB Homes by 15% over the next 3 months."
“Technology Trader” column wondering, why is ST Micro (STM) trading at such high multiples, compared those of rivals. At a recent $19, ST enjoys about twice the earnings multiple of the better-positioned Texas Instruments (TXN). ST has won Buy ratings from analysts like Mark Lipacis of Prudential. In his notes, Lipacis reports that ST has the industry's best cash-flow yields, given that its free cash flow should be better than 7% of his forecast for ‘07 revs. TI ranks 3rd, with about 5.2%. The Pru analyst says that such free cash-flow percentages were strong predictors of stock performance last year. But ST's cost controls will only go so far, if its sales don't keep growing. Although full-year sales rose 11% in ‘06, on a sequential basis sales flattened and then turned downward after the JunQ06. In Jan07, ST told investors to expect sales to slide 3-11% sequentially in the MarQ07. ST bulls are banking on a sharp rebound in sales in the 2H. The visibility's not great, therefore, on an ST sales revival. So why does it trade for 23x trailing earnings, while TI trades for 11x? Well, both ST and Infineon (IFX) have been flagged as potential buyout candidates that private equity buyers could load up with debt, like Freescale. So much private equity money is looking for work these days that you can't rule out any deal, but ST's challenges look kind of difficult to this yokel.
Fund manager picks include BBG, SWN, XOM, PBR, NOV, GRP, SLB, LNG, NRG and CBI. Another fund top holdings include: TEX, DHI, NVR, KBH, BRKB, GS, JOYG, AIG, CTX and UNH.
Friday, March 16, 2007
Calls of Note Part 6
Oppenheimer says they are seeing NAND flash pricing stabilizing and module manufacturers scrambling to build spurring demand - positives for SanDisk (NASDAQ:SNDK).
Firm's channel checks with leading Taiwanese flash module manufacturers - Transcend(#3), A-Data (#4) - indicate Flash prices moderating and module manufacturers scrambling to build inventory post Chinese New Year.
Outlook for the June quarter is for NAND ASPs pricing declines to be much more moderate, with June quarter capacity addition more muted. On the supply side: Samsung's output in Q406 was almost 70% at 63nm. Samsung continuing at 63nm, and has not added significant capacity in Q1 and not adding significant capacity in Q2, continuing output in Q1/Q2 on 63nm. Believe Samsung 51nm which could add to supply will be a mid to late Q3 event. Given that Samsung is still on 63nm in 1H07, firm believes it is being less aggressive on pricing since it does not have any cost levers. Nevertheless, Samsung is working aggressively on 51nm. Also, Samsung has not changed its NAND/DRAM allocation since moving 50% of capacity on its new fab to DRAM in Dec-06.
Also Samsung's move into retail card market appears to be much more exaggerated than actual reality. With a lack of brand, or retail distribution pipeline, firm estimates little to no risk to SNDK.
Toshiba appears to be the most aggressive in capacity additions in 1Q/2Q, pulling in 56nm - but has also been less aggressive in pushing prices. Flash card OEMs seeing SNDK/Toshiba gaining flash card market share in 1H07 over Samsung and Hynix.
Also NAND spot prices for the 2 weeks ending Mar 15th are down only 3% for 1Gb, 1% for 2Gb, 1.5% for 4Gb a substantial moderation. Firm reiterates Outperform rating on SNDK with a $50 PT.
Notablecalls: Not much new as Oppenheimer was upgrading the shares just a few days ago based on stabilizing prices.
Firm's channel checks with leading Taiwanese flash module manufacturers - Transcend(#3), A-Data (#4) - indicate Flash prices moderating and module manufacturers scrambling to build inventory post Chinese New Year.
Outlook for the June quarter is for NAND ASPs pricing declines to be much more moderate, with June quarter capacity addition more muted. On the supply side: Samsung's output in Q406 was almost 70% at 63nm. Samsung continuing at 63nm, and has not added significant capacity in Q1 and not adding significant capacity in Q2, continuing output in Q1/Q2 on 63nm. Believe Samsung 51nm which could add to supply will be a mid to late Q3 event. Given that Samsung is still on 63nm in 1H07, firm believes it is being less aggressive on pricing since it does not have any cost levers. Nevertheless, Samsung is working aggressively on 51nm. Also, Samsung has not changed its NAND/DRAM allocation since moving 50% of capacity on its new fab to DRAM in Dec-06.
Also Samsung's move into retail card market appears to be much more exaggerated than actual reality. With a lack of brand, or retail distribution pipeline, firm estimates little to no risk to SNDK.
Toshiba appears to be the most aggressive in capacity additions in 1Q/2Q, pulling in 56nm - but has also been less aggressive in pushing prices. Flash card OEMs seeing SNDK/Toshiba gaining flash card market share in 1H07 over Samsung and Hynix.
Also NAND spot prices for the 2 weeks ending Mar 15th are down only 3% for 1Gb, 1% for 2Gb, 1.5% for 4Gb a substantial moderation. Firm reiterates Outperform rating on SNDK with a $50 PT.
Notablecalls: Not much new as Oppenheimer was upgrading the shares just a few days ago based on stabilizing prices.
Calls of Note Part 5
RBC says their checks indicate that Zoltek (NASDAQ:ZOLT) has made significant progress in negotiating an extension to the Vestas contract at terms better than their prior expectations. The current 3-yr $80-100M contract expires at the end of 2007. Firm believes a new contract size could be 2 - 2.5x prior yearly levels. While the impact to RBC's estimates would depend on the contract details, a contract of this size could represent 10-20c side to their 2008 estimates, and further 2009 growth. Firm believes Zoltek is in a superior negotiating position vs. Vestas, who has limited alternative options. A new material contract would likely require a press-release intra-qtr (rare for this company) and be a major catalyst for the stock. Investors adding to positions before this catalyst will likely benefit from both forward earnings and multiple expansion.
While they are remaining conservative on their valuation and price target for the moment, firm believes another solid qtr of execution (esp on the revenue, gross margin and Abilene yield fronts) after the solid Q107 will go far in alleviating investor concerns. In addition, a new Vestas contract could cause them to reconsider the substantial multiple discount to growth their current target reflects. Firm's current PT is 19x calendar 2008 EPS of $1.67 (a 0.3 PEG ratio).
Notablecalls: Actionable call alert! Think the stock has at least a point of upside in it today.
While they are remaining conservative on their valuation and price target for the moment, firm believes another solid qtr of execution (esp on the revenue, gross margin and Abilene yield fronts) after the solid Q107 will go far in alleviating investor concerns. In addition, a new Vestas contract could cause them to reconsider the substantial multiple discount to growth their current target reflects. Firm's current PT is 19x calendar 2008 EPS of $1.67 (a 0.3 PEG ratio).
Notablecalls: Actionable call alert! Think the stock has at least a point of upside in it today.
Calls of Note Part 4
Baird says preliminary dealer survey results suggest U.S. demand for Harley-Davidson (NYSE:HOG) is trending slightly below their forecast. Firm trimmed their estimates to reflect softer retail trends and weaker profits from financial services.
Firm contacted 39 Harley dealers in the last week to assess market conditions. A few trends have emerged, but their checks will continue through late March, which is the most important period in the quarter.
Preliminary results suggest Q1 retail volume in the U.S. will be up 1-2% versus their prior +3% forecast. Parts sales are trending flat as some dealers report strike-related shortages. Relative to expectations, dealers report modest disappointment with many citing weather as a factor.
Dealers are comfortable with new bike inventory and report a shortage in used bikes. Some dealers report that competitors are selling MY07 bikes below MSRP, but pricing has improved since Q4. A few credit the improved pricing environment to reduced shipments during the strike.
Most dealers (74%) report no change in terms of the availability of credit, but a handful indicates that conditions have worsened. Firm estimates that Harley sells about 10-15% of bikes to subprime borrowers, suggesting that tighter credit standards could curb retail demand.
Baird adjusted their estimates to reflect a slightly more conservative posture with respect to retail demand and HDFS profitability. However, it is important to note that HDFS represents just 13% of operating profit, so even a 20% drop in income from financial services would reduce EPS by just 3%. The more significant concern, reflected in firm's nearly flat U.S. retail forecast for 2007, relates to the impact of tighter credit markets on the availability of retail credit.
Notablecalls: Not much new, more like a review of already known concerns. Also, the chart is rather showing signs of bottoming. Not actionable, but good to know category.
Firm contacted 39 Harley dealers in the last week to assess market conditions. A few trends have emerged, but their checks will continue through late March, which is the most important period in the quarter.
Preliminary results suggest Q1 retail volume in the U.S. will be up 1-2% versus their prior +3% forecast. Parts sales are trending flat as some dealers report strike-related shortages. Relative to expectations, dealers report modest disappointment with many citing weather as a factor.
Dealers are comfortable with new bike inventory and report a shortage in used bikes. Some dealers report that competitors are selling MY07 bikes below MSRP, but pricing has improved since Q4. A few credit the improved pricing environment to reduced shipments during the strike.
Most dealers (74%) report no change in terms of the availability of credit, but a handful indicates that conditions have worsened. Firm estimates that Harley sells about 10-15% of bikes to subprime borrowers, suggesting that tighter credit standards could curb retail demand.
Baird adjusted their estimates to reflect a slightly more conservative posture with respect to retail demand and HDFS profitability. However, it is important to note that HDFS represents just 13% of operating profit, so even a 20% drop in income from financial services would reduce EPS by just 3%. The more significant concern, reflected in firm's nearly flat U.S. retail forecast for 2007, relates to the impact of tighter credit markets on the availability of retail credit.
Notablecalls: Not much new, more like a review of already known concerns. Also, the chart is rather showing signs of bottoming. Not actionable, but good to know category.
Calls of Note Part 3
Baird out with an interesting note on Syntax-Brillian (NASDAQ:BRLC), saying that per their checks, Target stores will start rolling out Olevia TVs within the next two weeks. Some stores already have models on display, while others have them in stock, ready to display in the near future. Firm's checks indicate Target will sell 32-, 37-, and 42-inch models, with the majority of stores carrying 32- and/or 37-inch models. Firm expects the Target rollout to be mostly complete in 2Q. Firm views it as incrementally positive for Syntax-Brillian, as the company continues to execute on its strategy to expand retail distribution in the U.S., Asia, and Europe.
Notablecalls: Can't say I'm too familiar with the name, but Baird's comments caught my attention. Expect to see buying interest in the stock today.
Notablecalls: Can't say I'm too familiar with the name, but Baird's comments caught my attention. Expect to see buying interest in the stock today.
Calls of Note Part 2
Bank of America believes Intel's (NASDAQ:INTC) stock has come under pressure in recent weeks amidst concerns that Intel has responded to AMD's aggressive price moves with a new (unscheduled) round of price cuts. The increase in HP's B/S and channel inventories have only served to exacerbate these concerns.
Firm believes concerns over additional price cuts overblown. Our checks suggest that Intel has not initiated any broad-based price cuts this quarter post the pre-scheduled Jan 21st price reductions. In fact, contrary to what had been reported in Digitimes, where a 5-10% reduction for two Intel processors was reported (Pentium D series 915 and 820), they believe the only cut initiated (~10%) was on the 915 on Mar 4th. They note that this was a pre-scheduled cut, and that perhaps more importantly, our checks still support no change in ASPs for premium Core 2 Duo desktop processors.
Jan SIA data confirms a stable pricing environment for Intel. The channel data points are also consistent with firm's analysis of the Jan SIA data for microprocessors (MPUs), which showed that pricing (on a 3-mo moving avg. basis) rose 3.7% M/M - the biggest rise in 18 months. Given the ASP declines in AMD processor ASPs, the uptick in pricing reported by the SIA was by definition driven solely by improving ASPs for Intel.
Concerns over HP's inventories - much ado about nothing? The focus on an increase in channel inventory (+1 week Y/Y to 5 weeks) at HP, attributable to the increase to the build of Vista-ready systems at qtr end, seems overblown. Importantly, an analysis of Jan and Feb motherboard and notebook shipments points to a seasonal qtr for PCs (and by extension MPUs), with little evidence of inventory build. This backdrop combined with stability in Intel ASP, suggests that Q1 sales are tracking to at least the mid-point of Intel's outlook for slightly below seasonal growth (-7%).
Notablecalls: This note should generate mild interest in the shares today, but I like it more in longer perpective, say 1-2 months. Intel has been enjoying torturing AMD of late and now has it just about where it likes AMD to be - beaten down. Now Intel can concentrate on its own gross margins and as the margins go, so does the stock.
Firm believes concerns over additional price cuts overblown. Our checks suggest that Intel has not initiated any broad-based price cuts this quarter post the pre-scheduled Jan 21st price reductions. In fact, contrary to what had been reported in Digitimes, where a 5-10% reduction for two Intel processors was reported (Pentium D series 915 and 820), they believe the only cut initiated (~10%) was on the 915 on Mar 4th. They note that this was a pre-scheduled cut, and that perhaps more importantly, our checks still support no change in ASPs for premium Core 2 Duo desktop processors.
Jan SIA data confirms a stable pricing environment for Intel. The channel data points are also consistent with firm's analysis of the Jan SIA data for microprocessors (MPUs), which showed that pricing (on a 3-mo moving avg. basis) rose 3.7% M/M - the biggest rise in 18 months. Given the ASP declines in AMD processor ASPs, the uptick in pricing reported by the SIA was by definition driven solely by improving ASPs for Intel.
Concerns over HP's inventories - much ado about nothing? The focus on an increase in channel inventory (+1 week Y/Y to 5 weeks) at HP, attributable to the increase to the build of Vista-ready systems at qtr end, seems overblown. Importantly, an analysis of Jan and Feb motherboard and notebook shipments points to a seasonal qtr for PCs (and by extension MPUs), with little evidence of inventory build. This backdrop combined with stability in Intel ASP, suggests that Q1 sales are tracking to at least the mid-point of Intel's outlook for slightly below seasonal growth (-7%).
Notablecalls: This note should generate mild interest in the shares today, but I like it more in longer perpective, say 1-2 months. Intel has been enjoying torturing AMD of late and now has it just about where it likes AMD to be - beaten down. Now Intel can concentrate on its own gross margins and as the margins go, so does the stock.
Calls of Note Part 1
JP Morgan out with loud praise for ASML (NASDAQ:ASML), saying to buy ASML by June or risk missing a big move in their view. ASML is their top large cap pick and to paraphrase Chris Danely, it is in the front seat of their mini van. Firm sees sustained competitive advantage, share gain, and margin expansion, and they believe investors should be buying the stock aggressively now or risk missing it for a potentially long time. Firm believes the stock is at, or very close to solid valuation support, memory-related weakness is minimal, and consensus is about a year behind the curve relative to their EPS estimates.
Due to general market weakness, the likelihood of roughly 60 unit orders in C1Q07 and C2Q07 vs. 84 in C4Q06, and concern that Nikon is closer than previously expected in immersion created the recent dip in ASML shares, in firm's view. Recent comments suggest a better immersion unit split for Nikon vs. ASML at Toshiba. This has created fear that Nikon is closer to ASML in immersion than previously expected. Firm sees Toshiba as a huge win for ASML as it represents share gain in Japan that has been traditionally off limits (at a very tough customer). Nikon will remain a strong competitor, but they think ASML is poised to grow its market share throughout the immersion era based on solid positions at its core customers plus increased penetration in Japan and at Intel. As such, the company's overall market share should trend up to the 65%+ range over the next few years. ASML's unit orders should dip in 1Q, but TSMC is back with 90nm orders now and 65nm to follow while Intel is preparing for a sharp 2H07 unit ramp. Bottom line, most of the 1H order drop is low ASP i-Line tools and the value of orders should remain strong on an increase in leading edge dry ARF and 1900i orders.
Firm expects a new order cycle and traditional seasonality to drive substantial upside in equipment stocks in C2H07 as we have stated repeatedly since January. Also, they continue to recommend buying the low end of a likely first half 2007 trading range, which has been largely defined in our view.
Notablecalls: ASML seems to be trading relatively flat in the Europe. Buying the shares near the yesterday's close should provide oppty to unload them for 25-50c profits later today as JP Morgan's comments are strong enough to create buying interest.
Due to general market weakness, the likelihood of roughly 60 unit orders in C1Q07 and C2Q07 vs. 84 in C4Q06, and concern that Nikon is closer than previously expected in immersion created the recent dip in ASML shares, in firm's view. Recent comments suggest a better immersion unit split for Nikon vs. ASML at Toshiba. This has created fear that Nikon is closer to ASML in immersion than previously expected. Firm sees Toshiba as a huge win for ASML as it represents share gain in Japan that has been traditionally off limits (at a very tough customer). Nikon will remain a strong competitor, but they think ASML is poised to grow its market share throughout the immersion era based on solid positions at its core customers plus increased penetration in Japan and at Intel. As such, the company's overall market share should trend up to the 65%+ range over the next few years. ASML's unit orders should dip in 1Q, but TSMC is back with 90nm orders now and 65nm to follow while Intel is preparing for a sharp 2H07 unit ramp. Bottom line, most of the 1H order drop is low ASP i-Line tools and the value of orders should remain strong on an increase in leading edge dry ARF and 1900i orders.
Firm expects a new order cycle and traditional seasonality to drive substantial upside in equipment stocks in C2H07 as we have stated repeatedly since January. Also, they continue to recommend buying the low end of a likely first half 2007 trading range, which has been largely defined in our view.
Notablecalls: ASML seems to be trading relatively flat in the Europe. Buying the shares near the yesterday's close should provide oppty to unload them for 25-50c profits later today as JP Morgan's comments are strong enough to create buying interest.
Thursday, March 15, 2007
Calls of Note Part 7
- Merrill Lynch notes tt seems the long road to finality in the CVS/Caremark merger saga might be only a few days away. While anything is still possible and it would not be prudent to say the merger is a lock, the firm believes there is a good chance the deal becomes finalized. CVS shareholders will vote on March 15 and CMX holders on March 16.
In a scenario where CVS or CMX shareholders vote no to the CMX deal, the firm still sees limited downside to CVS stock. In fact, either way they believe the stock is undervalued. Assuming a minimum P/E multiple of 15.5x on their standalone 2007 EPS estimate of $1.90, MLCO estimates downside risk of approximately 9% to $29.50. However, if the CMX merger is not completed, they believe investors will refocus on fundamentals and see potential upside of 24% to $40. If the CMX deal is completed, the upside could be 39% to $45 assuming 20x on pro forma 2008 EPS of $2.25 (firm's current $2.15 standalone estimate plus $0.10
accretion).
They see positive catalysts for CVS regardless of the outcome. If ESRX wins out, CVS will receive a $675 million break-up fee and still generate strong sales and earnings growth over the coming years. Maintains Buy.
Notablecalls: It sure looks like CVS may have some upside over the next couple of days. Not a very high conviction call but it's in a defensive sector and 40% upside sounds pretty good.
In a scenario where CVS or CMX shareholders vote no to the CMX deal, the firm still sees limited downside to CVS stock. In fact, either way they believe the stock is undervalued. Assuming a minimum P/E multiple of 15.5x on their standalone 2007 EPS estimate of $1.90, MLCO estimates downside risk of approximately 9% to $29.50. However, if the CMX merger is not completed, they believe investors will refocus on fundamentals and see potential upside of 24% to $40. If the CMX deal is completed, the upside could be 39% to $45 assuming 20x on pro forma 2008 EPS of $2.25 (firm's current $2.15 standalone estimate plus $0.10
accretion).
They see positive catalysts for CVS regardless of the outcome. If ESRX wins out, CVS will receive a $675 million break-up fee and still generate strong sales and earnings growth over the coming years. Maintains Buy.
Notablecalls: It sure looks like CVS may have some upside over the next couple of days. Not a very high conviction call but it's in a defensive sector and 40% upside sounds pretty good.
Calls of Note Part 6
- Citigroup comments on TiVo (NASDAQ:TIVO) after Steve Sordello, CFO, presented at firm's Small/Mid-Cap conference today. The presentation was generally positive and well received.
The company outlined five growth drivers in 2007, namely: 1) premium content (eg. AMZN deal and broadband content), 2) Comcast rollout later this spring, 3) a new HD box that will be cheaper than the current box, 4) a mix shift in advertisements and subsidies, and 5) DVR advertising. TIVO expects to see lower cash intensity as it moves away from retail rebates. As such, mgmt does not foresee a need to solicit addt'l capital from the market.
TIVO envisions only requiring a "modest upcharge" for Comcast subs to get a TiVo box. This is a positive for TIVO as it presents less of an economic hurdle to overcome in penetrating cable MSO households.
While TIVO regards DTV's ownership change as a net positive, it remains focused on cable. Expects DISH trial to conclude by yr. end. Reit Buy & $11 tgt.
Notablecalls: Looks like TIVO investors have some catalysts to look forward to. I would not be surprised to see some buy interest over the next couple of days.
The company outlined five growth drivers in 2007, namely: 1) premium content (eg. AMZN deal and broadband content), 2) Comcast rollout later this spring, 3) a new HD box that will be cheaper than the current box, 4) a mix shift in advertisements and subsidies, and 5) DVR advertising. TIVO expects to see lower cash intensity as it moves away from retail rebates. As such, mgmt does not foresee a need to solicit addt'l capital from the market.
TIVO envisions only requiring a "modest upcharge" for Comcast subs to get a TiVo box. This is a positive for TIVO as it presents less of an economic hurdle to overcome in penetrating cable MSO households.
While TIVO regards DTV's ownership change as a net positive, it remains focused on cable. Expects DISH trial to conclude by yr. end. Reit Buy & $11 tgt.
Notablecalls: Looks like TIVO investors have some catalysts to look forward to. I would not be surprised to see some buy interest over the next couple of days.
Calls of Note Part 5
- Merrill Lynch comments on AudioCodes (NASDAQ:AUDC) after the co warned that 1Q07 sales would be $36-38mn, or 15% below firm's $43.7mn forecast. MCLO believes the shortfall was broad-based and attribute it to underperformance at recent acquisitions and to consolidation turmoil among AudioCodes' large customers like Nortel, Alcatel-Lucent, and Verint. Although recovery could take time and near-term visibility remains low, the firm maintains Buy rating as: 1) AudioCodes remains well exposed to secular growth in VoIP (20%+ CAGR till 2009, per Synergy); 2) the 22% decline in the stock already reflects most of the bad news; and 3) they believe management will cut costs aggressively to improve profitability, especially at their recent acquisitions. Firm also highlights the support from ~$3 in cash/share, which is ~39% of the current market cap.
While topline visibility remains limited, management could cut costs aggressively, especially in the underperforming acquisitions that have added $5-6mn in opex (+35%) without adding much by way of sales. Firm is lowering FY07 pro-forma EPS estimate to 33c from 47c, but believes a potential top-line recovery could eventually lead to EPS upside of as much as 40c. Lowers tgt to $10 from $14.
Notablecalls: Interesting comments by MLCO's Vivek Ary. While AUDC was an accident waiting to happen I would not be surprised to see some more downgrades today. Think the stock may be a buy if it gaps down this AM. That's the s-t call. Longer term, I suggest you read what Blodget has to say about VoIP. Mixed emotions.
While topline visibility remains limited, management could cut costs aggressively, especially in the underperforming acquisitions that have added $5-6mn in opex (+35%) without adding much by way of sales. Firm is lowering FY07 pro-forma EPS estimate to 33c from 47c, but believes a potential top-line recovery could eventually lead to EPS upside of as much as 40c. Lowers tgt to $10 from $14.
Notablecalls: Interesting comments by MLCO's Vivek Ary. While AUDC was an accident waiting to happen I would not be surprised to see some more downgrades today. Think the stock may be a buy if it gaps down this AM. That's the s-t call. Longer term, I suggest you read what Blodget has to say about VoIP. Mixed emotions.
Calls of Note Part 4
- Deutsche Bank notes that last week they met with Seagate's (NYSE:STX) CFO Charles Pope and came away very comfortable with the company's ability to return to its pre-Maxtor operating model. Firm continues to believe Street estimates are too low, and do not fully factor in the benefit of Seagate's technology lead in PMR and the cost savings resulting from the closure of the Maxtor facilities. They also believe recent concerns about Flash taking over the HDD market have been overdone.
The firm came away from our meeting very comfortable with STX's ability to return to its 24-26% GM target range in the March Q, and believes investors do not fully appreciate the significant leverage of STX's model from the ramp of PMR and the closure of Maxtor. The ramp of new low-cost drives (primarily due to PMR) gives STX a significant cost advantage versus competitors, particularly in notebook where pricing has been aggressive.
STX plans to ramp Woodlands #3 over a 3-year period (similar to its Woodlands #2 ramp), which the firm believes is slower than many investors expect. They view this slow and steady ramp as a positive for Komag (NASDAQ:KOMG), as model suggests STX will continue to rely on Komag for media. This contrasts with market sentiment that Komag's STX business to be significantly curtailed with the Woodlands #3 ramp.
STX's shares have been under pressure in recent weeks and are are now trading at 9x FY08 EPS estimate of $2.75, below STX's median FTM P/E of 12x. Reits Buy and $31 tgt.
Notablecalls: Nice comments by Deutsche. Think there will be some buy interest in both STX and KOMG. The sentiment in KOMG has been very negative lately, but the stock showed some signs of s-t bottoming yesterday.
The firm came away from our meeting very comfortable with STX's ability to return to its 24-26% GM target range in the March Q, and believes investors do not fully appreciate the significant leverage of STX's model from the ramp of PMR and the closure of Maxtor. The ramp of new low-cost drives (primarily due to PMR) gives STX a significant cost advantage versus competitors, particularly in notebook where pricing has been aggressive.
STX plans to ramp Woodlands #3 over a 3-year period (similar to its Woodlands #2 ramp), which the firm believes is slower than many investors expect. They view this slow and steady ramp as a positive for Komag (NASDAQ:KOMG), as model suggests STX will continue to rely on Komag for media. This contrasts with market sentiment that Komag's STX business to be significantly curtailed with the Woodlands #3 ramp.
STX's shares have been under pressure in recent weeks and are are now trading at 9x FY08 EPS estimate of $2.75, below STX's median FTM P/E of 12x. Reits Buy and $31 tgt.
Notablecalls: Nice comments by Deutsche. Think there will be some buy interest in both STX and KOMG. The sentiment in KOMG has been very negative lately, but the stock showed some signs of s-t bottoming yesterday.
Calls of Note Part 3
- CIBC notes that after a round of meetings in Asia with supply chain members, they believe Motorola (NYSE:MOT) is experiencing stronger than expected weakness in just about every area of its handset operation. Firm is lowering their 1Q07 handset shipment targets from 56M to 52M, reflecting a 20.9% QoQ decline.
They are growing increasingly skeptical of MOT's ability to deliver on its 2H07 double digit handset operating margin. Firm's checks suggest the SCLP could be delayed from late 1Q/early 2Q to late 2Q and they believe new 3G models are not expected to deliver in volume through 3Q07.
CIBC believes shipments could fall more than 20% sequentially with weakness across most areas. Checks show softness for the core RAZR and that newer products (KRZR and RIZR) are yet to gain traction. The low end is weak with MOTOFONE shipments possibly cut in half from 4Q06.
While they view Motorola s turnaround as a question of when and not if, they suggest investors don't wait for the fix as they believe it could take more than two to three quarters to materialize (at best). Firm is also unconvinced that Carl Icahn can make a material impact in the near term, which also limits the opportunity for near-term upside to the stock.
Adjusting 1Q07 estimates to revenue of $9.7B and earnings of $0.15 per share from $10.3B and $0.19. Maintains Sector Perfomer rating.
Notablecalls: Nothing really surprising here. Please see archives for further color on MOT.
They are growing increasingly skeptical of MOT's ability to deliver on its 2H07 double digit handset operating margin. Firm's checks suggest the SCLP could be delayed from late 1Q/early 2Q to late 2Q and they believe new 3G models are not expected to deliver in volume through 3Q07.
CIBC believes shipments could fall more than 20% sequentially with weakness across most areas. Checks show softness for the core RAZR and that newer products (KRZR and RIZR) are yet to gain traction. The low end is weak with MOTOFONE shipments possibly cut in half from 4Q06.
While they view Motorola s turnaround as a question of when and not if, they suggest investors don't wait for the fix as they believe it could take more than two to three quarters to materialize (at best). Firm is also unconvinced that Carl Icahn can make a material impact in the near term, which also limits the opportunity for near-term upside to the stock.
Adjusting 1Q07 estimates to revenue of $9.7B and earnings of $0.15 per share from $10.3B and $0.19. Maintains Sector Perfomer rating.
Notablecalls: Nothing really surprising here. Please see archives for further color on MOT.
Calls of Note Part 2
- Goldman Sachs' Asia team notes there has been market speculation (reported in the Associated Press on Mar 14) that Mediatek may bid for Trident Microsystems (NASDAQ:TRID), a Tier-1 US-listed TV chipset maker with a market cap of around US$1.2bn.
Although Mediatek has declined to comment on the potential M&A, the firm does not believe such a transaction would add much value to Mediatek as:
1) Trident is trading at 22X 2007E consensus EPS while Mediatek is at 18X (including employee bonus), thus the deal could be dilutive if Mediatek were not able to achieve a price at a discount to the current trading price;
2) Trident is a Tier-1 TV chipset vendor with high-profile customers such as Sony and Samsung, but it faces serious competition to its already-high market share from emerging players such as Mediatek. Customer synergies would be nice to have, but the products are not highly complementary, in firm's view.
They continue to believe Mediatek should utilize its rich cash position to acquire IPs that it lacks, such as networking, broadband, or RF technology, in order to strengthen its product offerings to challenge the territory currently dominated by Broadcom/Marvell.
Notablecalls: TRID went vertical two days after TWP's cautious call (see archives). As I noted, TRID is a difficult stock to short and the violent upward move in the past 3 days pretty much proves my point. Shorts were squeezed with the help of takeover chatter, but looks like GSCO's comments may cool some of this.
Although Mediatek has declined to comment on the potential M&A, the firm does not believe such a transaction would add much value to Mediatek as:
1) Trident is trading at 22X 2007E consensus EPS while Mediatek is at 18X (including employee bonus), thus the deal could be dilutive if Mediatek were not able to achieve a price at a discount to the current trading price;
2) Trident is a Tier-1 TV chipset vendor with high-profile customers such as Sony and Samsung, but it faces serious competition to its already-high market share from emerging players such as Mediatek. Customer synergies would be nice to have, but the products are not highly complementary, in firm's view.
They continue to believe Mediatek should utilize its rich cash position to acquire IPs that it lacks, such as networking, broadband, or RF technology, in order to strengthen its product offerings to challenge the territory currently dominated by Broadcom/Marvell.
Notablecalls: TRID went vertical two days after TWP's cautious call (see archives). As I noted, TRID is a difficult stock to short and the violent upward move in the past 3 days pretty much proves my point. Shorts were squeezed with the help of takeover chatter, but looks like GSCO's comments may cool some of this.
Calls of Note Part 1
- Piper Jaffray notes there is talk on the Street that Apple (NASDAQ:AAPL) is planning an event for April 15 at the NAB tradeshow. At last year's NAB, expectations were that Apple would announce a high end version of Final Cut, but this did not materialize. Firm believes that there is a >50% chance that if Apple holds a special event at NAB, it will be the venue for this announcement. While still only a rumored special event, investors will likely be somewhat concerned about what Apple has up its sleeve as we get closer to NAB. Piper maintains their Outperform rating on Avid Tech (NASDAQ:AVID), given shares are already trading at a discounted multiple (18x CY07E EPS vs. comps at 24x) and does not believe a higher end version of Apple's Final Cut would end up significantly impacting Avid's pro post production business (Avid pro post production is 15%-20% of revenue).
If Apple announces a higher end version of Final Cut, it is likely to have at least one advantage over Avid: price. Any high end Apple editing package is likely to be priced lower than an Avid system (such as Adrenaline). THey believe, however, that Avid's pro customers are less sensitive to price and more sensitive to brand and familiarity. The Avid story is clearly not squeaky clean, but the firm believes it is getting closer to becoming a stable growing business again.
Notablecalls: Interesting comments by Piper's Gene Munster. Not actionable but good to know category. Should AAPL unveil the Final Cut, there would likely be a knee-jerk reaction in AVID's stock. But that's about it.
If Apple announces a higher end version of Final Cut, it is likely to have at least one advantage over Avid: price. Any high end Apple editing package is likely to be priced lower than an Avid system (such as Adrenaline). THey believe, however, that Avid's pro customers are less sensitive to price and more sensitive to brand and familiarity. The Avid story is clearly not squeaky clean, but the firm believes it is getting closer to becoming a stable growing business again.
Notablecalls: Interesting comments by Piper's Gene Munster. Not actionable but good to know category. Should AAPL unveil the Final Cut, there would likely be a knee-jerk reaction in AVID's stock. But that's about it.
Wednesday, March 14, 2007
Calls of Note Part 3
- Citigroup has some interesting, yet concering comments on Baidu.com (NASDAQ:BIDU) after completing a paid search survey. The takeaways include:
Concerns on Baidu's growth rate reinforced. 1) Baidu likely seeing higher churn, with 15 advertisers planning to cut spend in next 6 months for every 20 planning to increase. 2) Google can't be counted out: advertisers give it higher satisfaction and spend more on Google on average than Baidu.
Advertiser breakdown suggests Baidu's lead over Google less than traffic lead. Of the respondents, 86.3% advertise on Baidu and 62.2% on Google (respondents advertise on more than one engine). This contrasts with the traffic share numbers from Sept, where Baidu had 61.9% share vs. 24.1% for Google.
Google looks set to gain from ad budgets in the next six months: more advertisers plan to increase their spend (~25%) plus fewer plan to decrease their spend (only ~5%) on Google, compared to Baidu, where ~20% plan to increase spend, but 15% plan to decrease spend.
Maintains Sell on BIDU.
Notablecalls: This may be the reason why BIDU was so weak yesterday. On the other hand, I've never really seen anything leak out of Citi before. Would not be surprised to see some initial weakness in BIDU following these comments.
Concerns on Baidu's growth rate reinforced. 1) Baidu likely seeing higher churn, with 15 advertisers planning to cut spend in next 6 months for every 20 planning to increase. 2) Google can't be counted out: advertisers give it higher satisfaction and spend more on Google on average than Baidu.
Advertiser breakdown suggests Baidu's lead over Google less than traffic lead. Of the respondents, 86.3% advertise on Baidu and 62.2% on Google (respondents advertise on more than one engine). This contrasts with the traffic share numbers from Sept, where Baidu had 61.9% share vs. 24.1% for Google.
Google looks set to gain from ad budgets in the next six months: more advertisers plan to increase their spend (~25%) plus fewer plan to decrease their spend (only ~5%) on Google, compared to Baidu, where ~20% plan to increase spend, but 15% plan to decrease spend.
Maintains Sell on BIDU.
Notablecalls: This may be the reason why BIDU was so weak yesterday. On the other hand, I've never really seen anything leak out of Citi before. Would not be surprised to see some initial weakness in BIDU following these comments.
Calls of Note Part 2
- Merrill Lynch is lowering their 1Q estimates on Motorola (NYSE:MOT) to reflect supply chain checks which are indicating in some cases as much as 20% sequential declines on orders of PCBs, casings, and connectors. The data also suggests sluggish demand for the KRZR and a slow start to the RIZR. They are lowering 1Q EPS to 18c from 19c and note that there could be further downside.
With growing evidence of a weak handset portfolio, the firm can no longer assume the best of both worlds, or growth in handset shipments coupled with ASP stabilization. In their view, management will elect to be margin-conscious and will therefore let MOT's market share decline rather than allow ASPs to drop. MLCO now models '07 units to be up 10.1% YoY vs. 20% before, with EPS estimate of $1.01, down from $1.12 (consensus is $1.17).
Firm notes Motorola's stock still looks cheap, trading at 13x new 2008E EPS of $1.38, down
from $1.54 (Street at $1.42). Furthermore, the stock could look even cheaper should management finance a stock buyback with debt. They therefore believe that the downside risk is limited. On a negative note however, shares will likely remain confined to the current trading range due to struggles in the handset business, risks to the profitable iDEN business and greater contribution from the less profitable Wimax segment.
Notablecalls: No surprises here. Must say I'm starting to turn somewhat more bullish on MOT as valuation is low and we have been getting some bullish indications from component suppliers. The $18 level may provide a short-term bounce here. Not a high conviction call, though.
With growing evidence of a weak handset portfolio, the firm can no longer assume the best of both worlds, or growth in handset shipments coupled with ASP stabilization. In their view, management will elect to be margin-conscious and will therefore let MOT's market share decline rather than allow ASPs to drop. MLCO now models '07 units to be up 10.1% YoY vs. 20% before, with EPS estimate of $1.01, down from $1.12 (consensus is $1.17).
Firm notes Motorola's stock still looks cheap, trading at 13x new 2008E EPS of $1.38, down
from $1.54 (Street at $1.42). Furthermore, the stock could look even cheaper should management finance a stock buyback with debt. They therefore believe that the downside risk is limited. On a negative note however, shares will likely remain confined to the current trading range due to struggles in the handset business, risks to the profitable iDEN business and greater contribution from the less profitable Wimax segment.
Notablecalls: No surprises here. Must say I'm starting to turn somewhat more bullish on MOT as valuation is low and we have been getting some bullish indications from component suppliers. The $18 level may provide a short-term bounce here. Not a high conviction call, though.
Calls of Note Part 1
- Bank of America notes that while consumer worries stalk stocks in firm's coverage, they wanted to ring in with some positive comments on Apple (NASDAQ:AAPL), which they believe support their Buy thesis. In the last 3 months, Apple is +4.2%, while the NASDAQ is down 2.7%. Given Apple's strong product portfolio, the firm thinks Apple's stock can continue to do well.
BAC believes that Apple will introduce a new notebook, with flash based storage in 2H07. Turn on time will be shorter (with flash), and they imagine the form factor will be thinner, than existing notebooks. They do not believe the capacity point has been concluded, but guess will end up around ~30GB.
Similarly, they believe that Apple will introduce a new iPod video with flash based storage in 2H07, that will add to the existing family of hard drive storage based iPod videos. Finally, they have 5 million handsets in their CY07 model, and believe that their estimates could prove conservative.
Apple's flash based products have implications for the hard drive industry. The 1.8 inch drives or smaller (that go into iPods) is about 5% of total industry drive shipments, and notebooks are about 25% of total drive shipments, with notebooks growing about 2x the market growth. However, the firm believes that the ultra portable notebook market (target for flash based notebooks) is only about ~2% of total drive units (or about 6%-7% of total notebooks). Moreover, they have a hard time believing that the notebook market will significantly shift to ~ 30GB flash capacity, since Vista requires ~15GB (Apple's Tiger requires 2GB - 4GB). Firm believes that flash based Vista notebooks would be best suited for business travels that use the network as primary storage.
BAC stays Neutral on both STX and WDC.
Notablecalls: Nothing really new here. A new ultra thin laptop from Apple would of course be another monster seller.
BAC believes that Apple will introduce a new notebook, with flash based storage in 2H07. Turn on time will be shorter (with flash), and they imagine the form factor will be thinner, than existing notebooks. They do not believe the capacity point has been concluded, but guess will end up around ~30GB.
Similarly, they believe that Apple will introduce a new iPod video with flash based storage in 2H07, that will add to the existing family of hard drive storage based iPod videos. Finally, they have 5 million handsets in their CY07 model, and believe that their estimates could prove conservative.
Apple's flash based products have implications for the hard drive industry. The 1.8 inch drives or smaller (that go into iPods) is about 5% of total industry drive shipments, and notebooks are about 25% of total drive shipments, with notebooks growing about 2x the market growth. However, the firm believes that the ultra portable notebook market (target for flash based notebooks) is only about ~2% of total drive units (or about 6%-7% of total notebooks). Moreover, they have a hard time believing that the notebook market will significantly shift to ~ 30GB flash capacity, since Vista requires ~15GB (Apple's Tiger requires 2GB - 4GB). Firm believes that flash based Vista notebooks would be best suited for business travels that use the network as primary storage.
BAC stays Neutral on both STX and WDC.
Notablecalls: Nothing really new here. A new ultra thin laptop from Apple would of course be another monster seller.
Color on news: Juniper Networks (NASDAQ:JNPR)
Several firms comment on Juniper Networks (NASDAQ:JNPR) after the co filed an 8-K stating that Bob Dykes, EVP and CFO, and Rob Sturgeon, EVP Service Layer Technology (SLT) Group (Security) and GM of the Enterprise both resigned:
- JP Morgan believes the resignations are the result of CEO Scott Kriens' decision to make a significant change in direction for Juniper's senior mgmt team, based on firm's "reading between the lines" of the 8-K filing and conference call.
JPM believes Juniper has always had a weak bench with little outside experience. To wit, management from Netscreen, Peribit, and Kagoor left shortly after the acqus were complete, and when Jim Dolce, former CEO of Unisphere Networks left in Jan '06, he was replaced internally.
The firm also believes this announcement, together with the completed restatements, signals Juniper can again begin repurchasing stock, providing some support for the stock, since prior to the announcement Juniper was in possession of material non public information. As a reminder, Juniper's Board has authorized a $2B repurchase, which at today's prices equates to 113M shares, or approximately 19% of shares outstanding. They wouldn't be surprised, however, to see Juniper wait until it brings on new management before actually repurchasing stock in volume in order to be able to offer a more attractive options package.
So while the changes may appear negative at first, assuming Juniper can attract the right level of new talent, they believe these resignations could potentially end up being a positive for the company, lending Juniper a fresh start and together with recent hires Stephen Elop and Channels Chief Frank Vitagliano (hired from IBM last year), a fresh senior management team to execute on the margin expansion story that continues to be firm's core thesis on the stock. Reiterates Overweight.
- Merrill Lynch says they are concerned with the lack of management stability at Juniper; yet believe that the changes could be a positive sign. Five of the six most senior executives, outside of the CEO, have resigned since Jan'06: The VP of World Operations, the head of Routing and the head of Application Products resigned last year. Last night, it was the CFO and the head of SLT (enterprise). Despite the risk of being accused of wearing rose-colored glasses, the firm states that these changes are positive moves for the company.
MLCO notes they are discouraged by Management's unwillingness to participate in a CFO
resignation call, and reiterate the financial targets. Yet, despite their concerns, they believe the stock is not expensive, trading at 18.4x 2008 PE. The merits behind the management changes seem rational and should Juniper be able to fix its management issues and execute on its product launches, next year's estimates could prove conservative. Firm sees limited downside to the stock and maintains Buy rating.
- RBC Capital notes there are still moving-parts at Juniper and the CFO and a division- head just resigned. With multiple-compression likely despite a possible share-repurchase program, they are reducing their price-target from $19 to $18 and maintaining neutral-stance. A discount to the historic trading-range of 15-34x means a price-point near $15 may make the shares more-compelling. Juniper is now the third company in firm's universe to lose a CFO, joining Nortel and NETGEAR.
Notablecalls: The stock was down 20 cents in after hours action. That's probably not enough to generate a meaningful bounce. In fact, considering my ever-cautious stance regarding JNPR, I wouldn't rule out some further weakness as management failed to reiterate Q1 guidance.
- JP Morgan believes the resignations are the result of CEO Scott Kriens' decision to make a significant change in direction for Juniper's senior mgmt team, based on firm's "reading between the lines" of the 8-K filing and conference call.
JPM believes Juniper has always had a weak bench with little outside experience. To wit, management from Netscreen, Peribit, and Kagoor left shortly after the acqus were complete, and when Jim Dolce, former CEO of Unisphere Networks left in Jan '06, he was replaced internally.
The firm also believes this announcement, together with the completed restatements, signals Juniper can again begin repurchasing stock, providing some support for the stock, since prior to the announcement Juniper was in possession of material non public information. As a reminder, Juniper's Board has authorized a $2B repurchase, which at today's prices equates to 113M shares, or approximately 19% of shares outstanding. They wouldn't be surprised, however, to see Juniper wait until it brings on new management before actually repurchasing stock in volume in order to be able to offer a more attractive options package.
So while the changes may appear negative at first, assuming Juniper can attract the right level of new talent, they believe these resignations could potentially end up being a positive for the company, lending Juniper a fresh start and together with recent hires Stephen Elop and Channels Chief Frank Vitagliano (hired from IBM last year), a fresh senior management team to execute on the margin expansion story that continues to be firm's core thesis on the stock. Reiterates Overweight.
- Merrill Lynch says they are concerned with the lack of management stability at Juniper; yet believe that the changes could be a positive sign. Five of the six most senior executives, outside of the CEO, have resigned since Jan'06: The VP of World Operations, the head of Routing and the head of Application Products resigned last year. Last night, it was the CFO and the head of SLT (enterprise). Despite the risk of being accused of wearing rose-colored glasses, the firm states that these changes are positive moves for the company.
MLCO notes they are discouraged by Management's unwillingness to participate in a CFO
resignation call, and reiterate the financial targets. Yet, despite their concerns, they believe the stock is not expensive, trading at 18.4x 2008 PE. The merits behind the management changes seem rational and should Juniper be able to fix its management issues and execute on its product launches, next year's estimates could prove conservative. Firm sees limited downside to the stock and maintains Buy rating.
- RBC Capital notes there are still moving-parts at Juniper and the CFO and a division- head just resigned. With multiple-compression likely despite a possible share-repurchase program, they are reducing their price-target from $19 to $18 and maintaining neutral-stance. A discount to the historic trading-range of 15-34x means a price-point near $15 may make the shares more-compelling. Juniper is now the third company in firm's universe to lose a CFO, joining Nortel and NETGEAR.
Notablecalls: The stock was down 20 cents in after hours action. That's probably not enough to generate a meaningful bounce. In fact, considering my ever-cautious stance regarding JNPR, I wouldn't rule out some further weakness as management failed to reiterate Q1 guidance.
Tuesday, March 13, 2007
Calls of Note Part 4
Susquehanna says they have recently learned that a large Midwestern insurance vendor may have signed a seven-figure deal with Interactive Intelligence (NASDAQ:ININ). This is significant news as the company had only 4 seven-figure deals last year, none of them in the first quarter; and only two in 2005, with neither of them in the first quarter. Firm spoke with a large, publicly traded insurance company that purchased Interactive Response in Q4, and may have followed with Interactive Distributor in Q1. At $40+/seat, the solution for 3,000+ seats represents a seven-figure deal. They are maintaining their estimates for Q1 and for the year, but believe that the above mentioned deal could be incremental.
Based on firm's proprietary analysis of capex for the customer care industry, spending continues to grow at a healthy rate in 2007, albeit at a lower than in 2006; 7% versus 12%. While this may be a cautionary note for market leaders in the space, firm believes that the opportunity for ININ remains robust due to small (<10%) market share and differentiated offerings (lower TCO, and IP-PBX).
Notablecalls: Nice find by Susquehanna! Expect to see some buying interest in the stock today.
Based on firm's proprietary analysis of capex for the customer care industry, spending continues to grow at a healthy rate in 2007, albeit at a lower than in 2006; 7% versus 12%. While this may be a cautionary note for market leaders in the space, firm believes that the opportunity for ININ remains robust due to small (<10%) market share and differentiated offerings (lower TCO, and IP-PBX).
Notablecalls: Nice find by Susquehanna! Expect to see some buying interest in the stock today.
Calls of Note Part 3
Roth out positive on Natus Medical (NASDAQ:BABY) after they visited co's Olympic Medical facility in Seattle to gauge the acquired business' manufacturing capabilities and assess its product offering. They came away content that Olympic Medical is a sound strategic fit, given its breadth of base neonatal care products. Firm continues to believe the integration of the bulk of Olympic's products into Natus' product portfolio, as well as the shift from a primarily direct mail model to a direct sales force, should drive volume growth and pricing strength across Natus' neonatal account base.
In addition, they spent time checking out the CFM and CoolCap devices. Firm believes both devices complement each other not only in the diagnosis and treatment of HIE, but also with respect to manufacturing, as both devices are housed and comprised of similar technology. They expect this latter point to provide significant profitability out of the CoolCap device.
At Roth's recent growth stock conference, Natus' management discussed its long-term corporate goals of achieving a revenue run rate toward the $250 million level by 4Q08 and to grow EPS by close to 50% annually. Firm believes management's track record over the past few years has demonstrated an ability to execute this type of combined organic and acquisition-based strategy, while driving toward enhanced profitability.
Firm reiterates Buy and raises price tgt to $22 from $20.
Notablecalls: This note might move this baby.
In addition, they spent time checking out the CFM and CoolCap devices. Firm believes both devices complement each other not only in the diagnosis and treatment of HIE, but also with respect to manufacturing, as both devices are housed and comprised of similar technology. They expect this latter point to provide significant profitability out of the CoolCap device.
At Roth's recent growth stock conference, Natus' management discussed its long-term corporate goals of achieving a revenue run rate toward the $250 million level by 4Q08 and to grow EPS by close to 50% annually. Firm believes management's track record over the past few years has demonstrated an ability to execute this type of combined organic and acquisition-based strategy, while driving toward enhanced profitability.
Firm reiterates Buy and raises price tgt to $22 from $20.
Notablecalls: This note might move this baby.
Color on Mid-Qtr Update: Texas Instruments (NYSE:TXN)
Despite some disappointment in lack of guidance upside in Texas Instruments' (NYSE:TXN) mid-quarter update, analyst community is mostly sticking with the bottoming theme.
- Citigroup notes that consistent with our fieldwork, bookings are improving, supporting an outlook for "growth" in 2Q07 (cons reflects +7.1% q/q). Recall that their checks suggest Mar/Apr are showing meaningful improvement.
While they are duly disappointed by a lack of guidance increase (they had raised their estimates last Monday), firm remains confident that fundamentals are improving. Firm makes no changes to their estimates.
- JP Morgan notes that as they expected, TI confirmed bookings were improving across the board, in all product categories. Firm believes the company's book-to-bill has increased above 1.0 in both its wireless (35% of 4Q06 revenue) and analog businesses (40% of 4Q06 revenue).
Firm believes TI's earnings power is $2.20 in 2008, driven by share gains in analog and DSPs along with margin expansion. They expect consensus estimates to rise throughout the year and they believe TXN stock has significant upside based on a potential 20X multiple to our assumed $2.20 earnings power for C08.
Concerned on TI's Inventory. Texas Instruments expects to keep utilization rates and inventory roughly flat QoQ during 1Q07, and firm expects 1Q07 inventory to peak at a record 84 days. Firm hopes TI elects to burn down inventory and create margin leverage for 2H07 because the inventory build could mute the margin recovery they expect.
- Merrill Lynch views the uneventful update as great opportunity and raises price objective to $38 from $35. Firm notes Texas Instruments offered very little new information during its mid-quarter update last night, which disappointed investors looking for numbers to be raised. Firm thinks this is a great opportunity to buy an attractively valued stock at the bottom of the business cycle.
Firm says a look at history reveals that TXN never sees "seasonally normal" activity at the top or bottom of industry cycles. The company is coming off a two-quarter hole in revenue that has taken shipments well below the rate of end market consumption. Firm estimates that wireless alone is $200 million to $300 million below real demand. They expect TXN to see significantly stronger than seasonal revenue growth in the second and third quarter of 2007 as revenue renormalizes to meet market demand.
- Goldman Sachs is more cautious, saying that they believe investors expected TI to narrow its guidance towards the high-end of the range and expect reiteration of original mid-points will be viewed as disappointing. Relative to TXN stock, firm believes the risk/reward is not appealing considering the limited upside to previous peak (~10%) and the likelihood of how far away we are from any kind of a real cyclical upturn as they believe that business will assume normal seasonal patterns now that they believe analog distributors have made their "catch-up" orders.
Notablecalls: I believe there is a buying opportunity in the stock today in the $31.50-$32 area. The key theme is still bottoming of the business, making this quarter's numbers secondary compared to order pickup. Just a trade, though, and remember to keep it on tight leash.
- Citigroup notes that consistent with our fieldwork, bookings are improving, supporting an outlook for "growth" in 2Q07 (cons reflects +7.1% q/q). Recall that their checks suggest Mar/Apr are showing meaningful improvement.
While they are duly disappointed by a lack of guidance increase (they had raised their estimates last Monday), firm remains confident that fundamentals are improving. Firm makes no changes to their estimates.
- JP Morgan notes that as they expected, TI confirmed bookings were improving across the board, in all product categories. Firm believes the company's book-to-bill has increased above 1.0 in both its wireless (35% of 4Q06 revenue) and analog businesses (40% of 4Q06 revenue).
Firm believes TI's earnings power is $2.20 in 2008, driven by share gains in analog and DSPs along with margin expansion. They expect consensus estimates to rise throughout the year and they believe TXN stock has significant upside based on a potential 20X multiple to our assumed $2.20 earnings power for C08.
Concerned on TI's Inventory. Texas Instruments expects to keep utilization rates and inventory roughly flat QoQ during 1Q07, and firm expects 1Q07 inventory to peak at a record 84 days. Firm hopes TI elects to burn down inventory and create margin leverage for 2H07 because the inventory build could mute the margin recovery they expect.
- Merrill Lynch views the uneventful update as great opportunity and raises price objective to $38 from $35. Firm notes Texas Instruments offered very little new information during its mid-quarter update last night, which disappointed investors looking for numbers to be raised. Firm thinks this is a great opportunity to buy an attractively valued stock at the bottom of the business cycle.
Firm says a look at history reveals that TXN never sees "seasonally normal" activity at the top or bottom of industry cycles. The company is coming off a two-quarter hole in revenue that has taken shipments well below the rate of end market consumption. Firm estimates that wireless alone is $200 million to $300 million below real demand. They expect TXN to see significantly stronger than seasonal revenue growth in the second and third quarter of 2007 as revenue renormalizes to meet market demand.
- Goldman Sachs is more cautious, saying that they believe investors expected TI to narrow its guidance towards the high-end of the range and expect reiteration of original mid-points will be viewed as disappointing. Relative to TXN stock, firm believes the risk/reward is not appealing considering the limited upside to previous peak (~10%) and the likelihood of how far away we are from any kind of a real cyclical upturn as they believe that business will assume normal seasonal patterns now that they believe analog distributors have made their "catch-up" orders.
Notablecalls: I believe there is a buying opportunity in the stock today in the $31.50-$32 area. The key theme is still bottoming of the business, making this quarter's numbers secondary compared to order pickup. Just a trade, though, and remember to keep it on tight leash.
Calls of Note Part 2
BofA says their quarterly partner survay for Red Hat (NYSE:RHT) remains upbeat. Partners they surveyed (90) maintained a positive CY07 outlook, in aggregate, for their RHT biz and expect +24% Y/Y growth, which is consistent with firm's billings forecast (+24%). In addition, the majority view Oracle's presence as a relative non-event in the N/T, as only 12% see 'significant' interest from customers in Oracle's offering.
RHT is slated to report 4Q results on Thurs, Mar 29th. Firm is currently forecasting total rev of $112 million and pro forma EPS of $0.10, although they believe seasonal momentum could lead to modest top line upside. In terms of the key metrics to watch, firm's model projects total billed bookings (rev + change in deferred rev) of $140 million (+37% Y/Y) and OCF of $49 million.
RHEL 5 introduction could help create some N/T buzz. Tomorrow, firm expects mgmt will introduce RHEL 5 in San Francisco at 12:00 pm ET. Firm believes the key takeaway will be getting some insight into pricing for RHEL 5, as they expect that RHT is likely to adjust per server pricing based on the new virtualization capabilities. In addition, they believe mgmt may provide color around the upcoming Red Hat Exchange platform launch (RHX).
Notablecalls: Red Hat has been getting some positive comments lately. If the Xen virtualization is even close to what it is promised to be, it sure will generate a lot of buzz. The biggest optimists are expecting Xen to make VMWare unnecessary in many cases. WMWare, remember, was valued at up to $9 bln in most optimistic valuations - compared to RHT's EV of $4 bln. Apples to oranges, but shows the potential value in virtualization.
RHT is slated to report 4Q results on Thurs, Mar 29th. Firm is currently forecasting total rev of $112 million and pro forma EPS of $0.10, although they believe seasonal momentum could lead to modest top line upside. In terms of the key metrics to watch, firm's model projects total billed bookings (rev + change in deferred rev) of $140 million (+37% Y/Y) and OCF of $49 million.
RHEL 5 introduction could help create some N/T buzz. Tomorrow, firm expects mgmt will introduce RHEL 5 in San Francisco at 12:00 pm ET. Firm believes the key takeaway will be getting some insight into pricing for RHEL 5, as they expect that RHT is likely to adjust per server pricing based on the new virtualization capabilities. In addition, they believe mgmt may provide color around the upcoming Red Hat Exchange platform launch (RHX).
Notablecalls: Red Hat has been getting some positive comments lately. If the Xen virtualization is even close to what it is promised to be, it sure will generate a lot of buzz. The biggest optimists are expecting Xen to make VMWare unnecessary in many cases. WMWare, remember, was valued at up to $9 bln in most optimistic valuations - compared to RHT's EV of $4 bln. Apples to oranges, but shows the potential value in virtualization.
Calls of Note Part 1
Merrill Lynch commenting Nortel (NYSE:NT), saying that while the stock currently reflects a best-case recovery scenario, they are increasingly concerned that investors may be overlooking Nortel's weak product portfolio. Firm's proprietary quadrant analysis indicates that only ~14% of Nortel's product sales in 2006 came from growth markets where Nortel grew share. However, the overwhelming majority, or 44% of sales, came from declining segments, with the remaining 43% of sales from growth segments where Nortel lost share.
With Nortel exiting UMTS (~$650mn in '06 sales), and with firm's expectations for flattish CDMA trends, Nortel's remaining business has to grow at a challenging 10-15% pace in 2007 to meet Street expectations. Firm recently reduced their 2007 revenue growth estimate to only 0.7% YoY growth (vs. street at 3.5% growth) and believe there could be further downside to our estimates. Also, with >85% of Nortel's sales in markets where it is relatively weak, they are concerned 2008 could also be a challenging year, requiring either additional R&D expenses, potentially dilutive acquisitions, or expansion into low-margin services activities. Nortel has scheduled its 4Q06 earnings call for 19-Mar, and firm believes the stock could trade down if management sounds conservative on 2007 prospects.
Notablecalls: Merrill has valid concerns here. The Street is looking for healthy growth from Nortel, but to co is rather in the cost-cutting mode. Expect to see pressure on the shares today.
With Nortel exiting UMTS (~$650mn in '06 sales), and with firm's expectations for flattish CDMA trends, Nortel's remaining business has to grow at a challenging 10-15% pace in 2007 to meet Street expectations. Firm recently reduced their 2007 revenue growth estimate to only 0.7% YoY growth (vs. street at 3.5% growth) and believe there could be further downside to our estimates. Also, with >85% of Nortel's sales in markets where it is relatively weak, they are concerned 2008 could also be a challenging year, requiring either additional R&D expenses, potentially dilutive acquisitions, or expansion into low-margin services activities. Nortel has scheduled its 4Q06 earnings call for 19-Mar, and firm believes the stock could trade down if management sounds conservative on 2007 prospects.
Notablecalls: Merrill has valid concerns here. The Street is looking for healthy growth from Nortel, but to co is rather in the cost-cutting mode. Expect to see pressure on the shares today.
Monday, March 12, 2007
Calls of Note Part 6
One of the best comments this AM comes from Goldman Sach's Asia team on Gmarket (NASDAQ:GMKT):
GSCO notes Gmarket's GMV guidance miss in 4Q06 disturbed them. However they view Gmarket's enterprise value of $0.6 bn as unduly small relative to the franchise value of being Korea's largest e-commerce business growing at 2X-3X the pace of the e-commerce industry with the 7th most visited website in Korea, 11 mn active users, turnover last year of $2.4 bn, revenue last year of $164 mn, revenue growth last quarter of 67% yoy, and earnings growth last quarter of 78% yoy. Firm believes that Gmarket can fundamentally earn its way back to a $20-plus stock price by reporting GMV consistent with its guidance, starting with 1Q07 GMV out either in April or upon full results on May 9.
GSCO sees 3 non-earnings developments which might assist the stock:
1) Yahoo! or eBay could buy stock in Gmarket: eBay acquired prior market leader Internet Auction, and Yahoo! paid $13.30 per share for 4.5 mn Gmarket shares in June 2006. With GMV around one third that of Yahoo Japan and 3X faster growing, and GMV slightly larger than Taobao, the firm views Gmarket as complementary to Yahoo's Asian marketplaces.
2) Gmarket could boost its e-commerce share and leverage its platform by acquiring smaller Korean marketplaces.
3) Gmarket could coordinate any overseas expansion with Yahoo!, which controls the largest marketplaces in Japan, China, and Taiwan.
Notablecalls: Must say I view GMKT as one of the more interesting e-commerce plays outside of the U.S. The stock got schmeissed on Friday after reporting weaker than expected results but managed to bounce nicely during the day. I'm not going to call this one outright actionable but the stock is worth keeping on the radar. Even for investors. Note that GSCO has a Buy and $21 tgt on the stock.
GSCO notes Gmarket's GMV guidance miss in 4Q06 disturbed them. However they view Gmarket's enterprise value of $0.6 bn as unduly small relative to the franchise value of being Korea's largest e-commerce business growing at 2X-3X the pace of the e-commerce industry with the 7th most visited website in Korea, 11 mn active users, turnover last year of $2.4 bn, revenue last year of $164 mn, revenue growth last quarter of 67% yoy, and earnings growth last quarter of 78% yoy. Firm believes that Gmarket can fundamentally earn its way back to a $20-plus stock price by reporting GMV consistent with its guidance, starting with 1Q07 GMV out either in April or upon full results on May 9.
GSCO sees 3 non-earnings developments which might assist the stock:
1) Yahoo! or eBay could buy stock in Gmarket: eBay acquired prior market leader Internet Auction, and Yahoo! paid $13.30 per share for 4.5 mn Gmarket shares in June 2006. With GMV around one third that of Yahoo Japan and 3X faster growing, and GMV slightly larger than Taobao, the firm views Gmarket as complementary to Yahoo's Asian marketplaces.
2) Gmarket could boost its e-commerce share and leverage its platform by acquiring smaller Korean marketplaces.
3) Gmarket could coordinate any overseas expansion with Yahoo!, which controls the largest marketplaces in Japan, China, and Taiwan.
Notablecalls: Must say I view GMKT as one of the more interesting e-commerce plays outside of the U.S. The stock got schmeissed on Friday after reporting weaker than expected results but managed to bounce nicely during the day. I'm not going to call this one outright actionable but the stock is worth keeping on the radar. Even for investors. Note that GSCO has a Buy and $21 tgt on the stock.
Calls of Note Part 5
Couple of cautious comments on Micron (NYSE:MU) and DRAM market in general:
- JP Morgan notes that memory pricing for DRAM components quarter-to-date has been weaker than our expectations due to excess capacity. In addition, firm's checks indicate component demand has been below their expectations at MU and QI due to excess inventory. As a result of the falling pricing and lower demand, they are lowering their estimates on MU and QI. While MU and QI stock have fallen in sync with the memory price declines in anticipation, the firm believes Consensus estimates will require additional "resetting" in the coming months and remain cautious on memory stocks.
- Bear Stearns says that based on channel checks with the DRAM supply chain, they expect DRAM pricing to remain under pressure for the remainder of C1Q07 and through almost all of
C2Q07. Firm's checks lead them to believe DDR2 spot and contract prices should decline further by about 15% from current levels before bottoming in the June timeframe. This follows declines of ~10% in 1H March and 20% in February for DDR2 contract prices. Inventory continues to rise in the channel which is expected to lead to a period of inventory digestion even after demand reacts to the recent price declines.
The price weakness is being driven by supply -- with Samsung, Elpida/Powerchip, Qimonda significant contributors to supply growth in C1Q07 -- and pressure from PC OEMs to lower prices following the stability in 2H06.
Bear is lowering their May-Q revenue estimate on MU from $1,457M (+0.8% QoQ) to $1,344M (-7.0% QoQ), based on a lowering of their DRAM ASP estimate from -11% QoQ to -21% QoQ. Firm is lowering their GM from 27.3% to 23.4% and GAAP EPS from $0.06 to $(0.05), significantly below consensus of $0.15. They would remain on the sidelines on Micron stock and see further downside pressure on the stock.
Notablecalls: Lousy call alert on MU. Hope you kept a tight stop.
- JP Morgan notes that memory pricing for DRAM components quarter-to-date has been weaker than our expectations due to excess capacity. In addition, firm's checks indicate component demand has been below their expectations at MU and QI due to excess inventory. As a result of the falling pricing and lower demand, they are lowering their estimates on MU and QI. While MU and QI stock have fallen in sync with the memory price declines in anticipation, the firm believes Consensus estimates will require additional "resetting" in the coming months and remain cautious on memory stocks.
- Bear Stearns says that based on channel checks with the DRAM supply chain, they expect DRAM pricing to remain under pressure for the remainder of C1Q07 and through almost all of
C2Q07. Firm's checks lead them to believe DDR2 spot and contract prices should decline further by about 15% from current levels before bottoming in the June timeframe. This follows declines of ~10% in 1H March and 20% in February for DDR2 contract prices. Inventory continues to rise in the channel which is expected to lead to a period of inventory digestion even after demand reacts to the recent price declines.
The price weakness is being driven by supply -- with Samsung, Elpida/Powerchip, Qimonda significant contributors to supply growth in C1Q07 -- and pressure from PC OEMs to lower prices following the stability in 2H06.
Bear is lowering their May-Q revenue estimate on MU from $1,457M (+0.8% QoQ) to $1,344M (-7.0% QoQ), based on a lowering of their DRAM ASP estimate from -11% QoQ to -21% QoQ. Firm is lowering their GM from 27.3% to 23.4% and GAAP EPS from $0.06 to $(0.05), significantly below consensus of $0.15. They would remain on the sidelines on Micron stock and see further downside pressure on the stock.
Notablecalls: Lousy call alert on MU. Hope you kept a tight stop.
Calls of Note Part 4
FBR calls Noble (NYSE:NE) their favorite stock and an FBR Top Pick. Firm believes that the stock has considerable upside potential, with very strong downside support. NE represents far and above the most attractive risk/return profile of any stock that they cover, with substantial upside potential and very strong downside protection trading just above firm's estimated liquidation value.
Based on Noble's March 8 fleet status report, they raised their 2008 EPS estimate to $13.90 from $13.65 on higher contract day rates and trimmed 2007 EPS estimate to $9.10 from $9.20 on downtime and contract slippage.
Noble continues to trade at an incredibly cheap valuation relative to firm's estimated liquidation value for the company. When they DCF its signed contracts and assume each rig is liquidated after each deal ends, they get an estimated liquidation value of $61.47 per share. By comparison, RIG is trading at 1.5x, DO at 1.8x, and GSF at 2.5x.
Maintains Outperform and $118 tgt.
Notablecalls: NE saw some buy interest on Fiday as there was some broker chatter saying the co had receieved a bid from SeaDrill.
Based on Noble's March 8 fleet status report, they raised their 2008 EPS estimate to $13.90 from $13.65 on higher contract day rates and trimmed 2007 EPS estimate to $9.10 from $9.20 on downtime and contract slippage.
Noble continues to trade at an incredibly cheap valuation relative to firm's estimated liquidation value for the company. When they DCF its signed contracts and assume each rig is liquidated after each deal ends, they get an estimated liquidation value of $61.47 per share. By comparison, RIG is trading at 1.5x, DO at 1.8x, and GSF at 2.5x.
Maintains Outperform and $118 tgt.
Notablecalls: NE saw some buy interest on Fiday as there was some broker chatter saying the co had receieved a bid from SeaDrill.
Calls of Note Part 3
While unconfirmed, I'm hearing chatter Amgen (NASDAQ:AMGN) has been downgraded to Reduce from Neutral at UBS.
Notablecalls: Please see today's comments below for further color.
Notablecalls: Please see today's comments below for further color.
Calls of Note Part 2
- Morgan Stanley says that after Macau's '06 gaming revenue restatement and firm's latest trip to the market last week, they believe there is more risk to the Macau stories, and have adjusted their gaming forecasts. As a result, the firm has reduced their price targets for LVS ($93 to $88) and WYNN ($112 to $104). They're still Macau believers, but the restatement, along with very high expectations and continued concerns about how the Street is tying its market forecasts to its company forecasts, causes them to believe that there is more risk to the numbers. This could play out with continued downside margin surprises when companies report their results, as was the case for 4Q06. When looking at company/market results and forecasts, investors should ask, "Where is the growth coming from?" The answer will determine the viability of margin and earnings forecasts.
Several weeks ago, the Macau government restated the '06 gaming numbers. While the total revenue is the same, the mass vs. VIP split shifted dramatically towards VIP. Avg mass market spend/visitor/day went from up 14% in '06 prior to the restatement to down 1%. With a higher percentage of VIP revenues, the implied market EBITDA is lower, as VIP revenues carry 15% avg margins, while mass market margins avg around 35%.
Notablecalls: Expect to see some early weakness in both of the mentioned names.
Several weeks ago, the Macau government restated the '06 gaming numbers. While the total revenue is the same, the mass vs. VIP split shifted dramatically towards VIP. Avg mass market spend/visitor/day went from up 14% in '06 prior to the restatement to down 1%. With a higher percentage of VIP revenues, the implied market EBITDA is lower, as VIP revenues carry 15% avg margins, while mass market margins avg around 35%.
Notablecalls: Expect to see some early weakness in both of the mentioned names.
Calls of Note Part 1
- ThinkEquity notes that with the Leopard launch (Mac OS X v 10.5) just around the corner, they have revisited their Apple (NASDAQ:AAPL) revenue and earnings power estimates in light of the ever- larger Mac OS X user base. Firm likes how Vista has established a "hardware upgrade mindset" among PC users, and they expect Apple CPU unit shipments to benefit from Vista tailwinds, the release of Leopard, and a CS3 pro catalyst. They believe software is core to further share gains and margin expansion for Apple, and encourage investors to remain focused with a "Look At The Core."
Think's new FY07 revenue estimate is $24.4 billion or 26.3% y/y growth (up from 22.3% y/y growth). New FY07 EPS estimate is $3.24 or 43% y/y growth (up from 35% y/y growth). Firm expects revenue growth to accelerate in FY08 thanks to the iPhone. Until they better understand the earnings power of this new offering, they are modeling a 170 basis point
decrease in gross margins, which could prove conservative. Maintains Buy and $120 tgt.
Notablecalls: Not actionable but good to know category. Think's ests for FY07 are now pretty much in-line with consensus.
Think's new FY07 revenue estimate is $24.4 billion or 26.3% y/y growth (up from 22.3% y/y growth). New FY07 EPS estimate is $3.24 or 43% y/y growth (up from 35% y/y growth). Firm expects revenue growth to accelerate in FY08 thanks to the iPhone. Until they better understand the earnings power of this new offering, they are modeling a 170 basis point
decrease in gross margins, which could prove conservative. Maintains Buy and $120 tgt.
Notablecalls: Not actionable but good to know category. Think's ests for FY07 are now pretty much in-line with consensus.
Color on news: Amgen (NASDAQ:AMGN)
Several firms comment on Amgen (NASDAQ:AMGN) after the FDA modified the label for erythropoiesis stimulating agents (ESA), incl. Aranesp and Epogen/Procrit, to include a black box warning, recommendation to start with the lowest dose and strong emphasis against exceeding hemoglobin (Hb) of 12g/dL. Medicare also allowed carriers to drop coverage of ESA for treatment of anemia of cancer (AOC) immediately:
- JP Morgan notes that although the revised safety warnings for erythropoietin stimulating agents (ESAs) reinforced the labeled usage as expected, the language regarding risks of use was more severe than they thought. The new language is harsher than the firm thought, where they are surprised that DAHANCA data, which has not been published in a peer-reviewed journal, would be specifically referred to in a black box.
Separately, CMS sent a letter to the national Part B carriers instructing them to discontinue coverage of ESA's for AoC. Thus reimbursement changes have come quicker than expected, though the impact to EPS appears manageable, in the range of $0.05-$0.08 on 2008 EPS for AoC alone.
Maintains Overweight rating. Despite the significant negative headlines regarding ESA safety in recent weeks, they still see weakness as a buying opportunity ahead of catalysts with upside potential: 145 trial data, the ODAC panel (May 10), and potential setbacks to the CERA PDUFA (May 20).
- Goldman Sachs expects use of ESA for AOC ($0.6bn or 15% of Aranesp sales) to decline
significantly. Physicians will likely be more cautious and target lower Hb for the approved indications as well.The firm has modified their model to reflect a pessimistic scenario, assuming 12%, 24% and 30% reduction in Epogen + Aranesp sales in 2007-09, leading to a cut in our EPS (including ESO) by $0.11, $0.35 and $0.55 to $4.17, $4.50 and $4.89, respectively. GS model assumes launch of Roche's CERA in the US and Europe in 2007 and generic EPO in Europe in 2008 and in the US in 2013 (when patent of Epogen expires). Not included in the model are sales from new products, such as denosumab ($2+bn potential) and AMG-531 ($0.2bn) for which Phase 3 data should be available in 2007.
Maintains Buy but lowers tgt to $72 from $82.
- Baird says that while they understand some investors may have expected this move, we do think our estimates may need to be lowered.
Indeed, firm's recent EMR analysis indicating minimal Aranesp use above 13 g/dL. This same analysis, however, showed 13-14% of doses are delivered to patients with Hb >12g/ dL. They think these dynamics, coupled with recent AoC (anemia of cancer) reimbursement restrictions and the new label are bound to impact Aranesp revenue deleteriously.
Firm now models Aranesp revenue of $4.2B, $3.7B, $4.1B and $4.4B down from $4.7B, $5.2B, $5.6B and $6.2B for 2007-2010, respectively. They stress, however, that they view these new
estimates as extreme. Maintains Outperform and remains buyers of the stock. Tgt goes to $80 from $90.
- Deutsche Bank maintains their Buy rating and $90 tgt on AMGN saying their rating is based on underappreciated fundamentals, discounted valuation and potential catalysts in 2H07. They continue to expect volatility related to EPO/Aranesp and CERA-related competitive landscape. Firm estimates Medicare-covered AOC sales to account for ~5-6% of WW Aranesp sales (50% of AOC sales is covered by Medicare), with any potential impact significantly reflected in their recently reduced estimates.
Notablecalls: Presently it sure looks like AMGN has nothing going for it. EPO problems on one hand with follow-on biologics on other. Yet, looking at things from a longer-term perspective, none of these problems is fatal. I have no view on AMGN stock in the s-t but I do believe the problems currently known have been discounted.
- JP Morgan notes that although the revised safety warnings for erythropoietin stimulating agents (ESAs) reinforced the labeled usage as expected, the language regarding risks of use was more severe than they thought. The new language is harsher than the firm thought, where they are surprised that DAHANCA data, which has not been published in a peer-reviewed journal, would be specifically referred to in a black box.
Separately, CMS sent a letter to the national Part B carriers instructing them to discontinue coverage of ESA's for AoC. Thus reimbursement changes have come quicker than expected, though the impact to EPS appears manageable, in the range of $0.05-$0.08 on 2008 EPS for AoC alone.
Maintains Overweight rating. Despite the significant negative headlines regarding ESA safety in recent weeks, they still see weakness as a buying opportunity ahead of catalysts with upside potential: 145 trial data, the ODAC panel (May 10), and potential setbacks to the CERA PDUFA (May 20).
- Goldman Sachs expects use of ESA for AOC ($0.6bn or 15% of Aranesp sales) to decline
significantly. Physicians will likely be more cautious and target lower Hb for the approved indications as well.The firm has modified their model to reflect a pessimistic scenario, assuming 12%, 24% and 30% reduction in Epogen + Aranesp sales in 2007-09, leading to a cut in our EPS (including ESO) by $0.11, $0.35 and $0.55 to $4.17, $4.50 and $4.89, respectively. GS model assumes launch of Roche's CERA in the US and Europe in 2007 and generic EPO in Europe in 2008 and in the US in 2013 (when patent of Epogen expires). Not included in the model are sales from new products, such as denosumab ($2+bn potential) and AMG-531 ($0.2bn) for which Phase 3 data should be available in 2007.
Maintains Buy but lowers tgt to $72 from $82.
- Baird says that while they understand some investors may have expected this move, we do think our estimates may need to be lowered.
Indeed, firm's recent EMR analysis indicating minimal Aranesp use above 13 g/dL. This same analysis, however, showed 13-14% of doses are delivered to patients with Hb >12g/ dL. They think these dynamics, coupled with recent AoC (anemia of cancer) reimbursement restrictions and the new label are bound to impact Aranesp revenue deleteriously.
Firm now models Aranesp revenue of $4.2B, $3.7B, $4.1B and $4.4B down from $4.7B, $5.2B, $5.6B and $6.2B for 2007-2010, respectively. They stress, however, that they view these new
estimates as extreme. Maintains Outperform and remains buyers of the stock. Tgt goes to $80 from $90.
- Deutsche Bank maintains their Buy rating and $90 tgt on AMGN saying their rating is based on underappreciated fundamentals, discounted valuation and potential catalysts in 2H07. They continue to expect volatility related to EPO/Aranesp and CERA-related competitive landscape. Firm estimates Medicare-covered AOC sales to account for ~5-6% of WW Aranesp sales (50% of AOC sales is covered by Medicare), with any potential impact significantly reflected in their recently reduced estimates.
Notablecalls: Presently it sure looks like AMGN has nothing going for it. EPO problems on one hand with follow-on biologics on other. Yet, looking at things from a longer-term perspective, none of these problems is fatal. I have no view on AMGN stock in the s-t but I do believe the problems currently known have been discounted.
Friday, March 09, 2007
Calls of Note Part 3
- JP Morgan has an interesting note out on McAfee (NYSE:MFE) after the co filed an 8K announcing the pay package for incoming CEO Dave Dewalt. After a quick read, and before any contact with the company, the firm is surprised about location of the CEO and treatment of options in change of control (acquisition) situations.
MFE has a big location in Plano, Texas and that is where CFO Eric Brown is located. Now it appears that company will continue the shift to Texas as the employment agreement has payments to cover transaction costs for Mr. Dewalt to purchase a residence in Dallas and sell his home in California.
There is no 100% vesting of options in change of control: Instead there is a clause calling for the greater of a twelve months accelerated vesting, or 50% of the then unvested shares accelerated vesting in the case of a change of control. Firm finds this surprising as agreements like the one RSA Security did with its in coming CFO prior to it being acquired called for 100% vesting of unvested stock/options in case of change in control.
The need to uproot to move to Texas and not getting 100% vesting on change of control is not a situation that they would want if they believed the company was about to be acquired. This supports firm's thesis that the Board of Directors of MFE appears to be running the company in a way that says they will be independent for quite some time.
Notablecalls: Not actionable but good to know category.
MFE has a big location in Plano, Texas and that is where CFO Eric Brown is located. Now it appears that company will continue the shift to Texas as the employment agreement has payments to cover transaction costs for Mr. Dewalt to purchase a residence in Dallas and sell his home in California.
There is no 100% vesting of options in change of control: Instead there is a clause calling for the greater of a twelve months accelerated vesting, or 50% of the then unvested shares accelerated vesting in the case of a change of control. Firm finds this surprising as agreements like the one RSA Security did with its in coming CFO prior to it being acquired called for 100% vesting of unvested stock/options in case of change in control.
The need to uproot to move to Texas and not getting 100% vesting on change of control is not a situation that they would want if they believed the company was about to be acquired. This supports firm's thesis that the Board of Directors of MFE appears to be running the company in a way that says they will be independent for quite some time.
Notablecalls: Not actionable but good to know category.
Calls of Note Part 2
- Merrill Lynch notes that the central issue for Intel (NASDAQ:INTC) is always gross margin, and the firm recently spent some time with management trying to understand the company's plans. They think that Intel is a lot more interested in reducing AMD to its former status than in showing much gross margin improvement this year. Investors looking for Intel to deliver GM upside are likely to be disappointed.
Intel has bigger plans for 2008, and management clearly hopes to be able to show more meaningful GM improvement. Here's the problem - Intel's plans aren't going to work out unless AMD backs off. AMD may be in a difficult situation now, but it still has a decent product portfolio for this year and enough money to fund its capital spending plans.
The firm does credit Intel with taking a much harder line on operating expenses, and that should allow the company to deliver on their $1.10 estimate this year even as the battle with AMD continues. Intel has historically had difficulty controlling opex during periods of revenue growth, but they think that's changing.
Making money on the stock is going to be tough in the absence of sustainable gross margin improvement, though. The microprocessor business is becoming a duopoly, albeit a lopsided one. Intel's stockholders will be better off when the company's management realizes that and acts accordingly. Maintains Neutral.
Notablecalls: Interesting comments by MLCO's Joe Osha. However given the recent slide in INTC's stock I don't think there will be much of an impact.
Intel has bigger plans for 2008, and management clearly hopes to be able to show more meaningful GM improvement. Here's the problem - Intel's plans aren't going to work out unless AMD backs off. AMD may be in a difficult situation now, but it still has a decent product portfolio for this year and enough money to fund its capital spending plans.
The firm does credit Intel with taking a much harder line on operating expenses, and that should allow the company to deliver on their $1.10 estimate this year even as the battle with AMD continues. Intel has historically had difficulty controlling opex during periods of revenue growth, but they think that's changing.
Making money on the stock is going to be tough in the absence of sustainable gross margin improvement, though. The microprocessor business is becoming a duopoly, albeit a lopsided one. Intel's stockholders will be better off when the company's management realizes that and acts accordingly. Maintains Neutral.
Notablecalls: Interesting comments by MLCO's Joe Osha. However given the recent slide in INTC's stock I don't think there will be much of an impact.
Calls of Note Part 1
- Cowen continues to be positive on Intuitive Surgical (NASDAQ:ISRG) noting that with recent broad market weakness driving shares of ISRG down 6% from the Feb. high, the shares are trading at 28x 2008 EPS est. of $3.90 while they anticipate EPS growth of 40-45% for the next three years.
Intuitive Surgical is unique among mid-cap medical device companies due to its exceptional growth and high margins. The da Vinci surgical system has captured less than 10% of its target hospital market to-date and the firm sees penetration rising to 25% in 2009. They estimate 40% sales growth for 2007 and expect Intuitive to post results that exceed consensus throughout the year.
Da Vinci prostatectomy (80% of tot. procedure sales) share appears likely to reach 80% in three years from 35% today, with nearly 50% procedure growth in 2007. Hysterectomy volume should rise by more than 2x. They see notable upside in gastric bypass for obesity as hospitals fight for patient traffic. With an est. installed base of 600 units, including 41 hospitals with two systems and 13 hospitals with three da Vinci units, the firm perceives an enduring market presence for Intuitive that is strengthening quarterly.
Maintains Outperform rating.
Notablecalls: Nothing really new there. May create some buy interest, though. After all, it's ISRG.
Intuitive Surgical is unique among mid-cap medical device companies due to its exceptional growth and high margins. The da Vinci surgical system has captured less than 10% of its target hospital market to-date and the firm sees penetration rising to 25% in 2009. They estimate 40% sales growth for 2007 and expect Intuitive to post results that exceed consensus throughout the year.
Da Vinci prostatectomy (80% of tot. procedure sales) share appears likely to reach 80% in three years from 35% today, with nearly 50% procedure growth in 2007. Hysterectomy volume should rise by more than 2x. They see notable upside in gastric bypass for obesity as hospitals fight for patient traffic. With an est. installed base of 600 units, including 41 hospitals with two systems and 13 hospitals with three da Vinci units, the firm perceives an enduring market presence for Intuitive that is strengthening quarterly.
Maintains Outperform rating.
Notablecalls: Nothing really new there. May create some buy interest, though. After all, it's ISRG.
Color on news: New Century Financial (NYSE:NEW)
Couple of firms comment on New Century Financial (NYSE:NEW) after the co last night said it had received $265 million in financing, but stopped accepting loan applications after some lenders blocked its credit lines:
- Merrill Lynch maintains Sell as they see little value in NEW shares. Further challenges appear to have engulfed NEW, as at least one lender seems to have terminated its credit facility, leaving the company with inadequate liquidity to operate normally. NEW has mortgaged its few remaining unencumbered assets, a move that essentially leaves equity holders holding the liabilities of closing the lending platform. Credit positioned marginally better but more losses seem likely in near-term.
NEW seems to have been provided a temporary life-line, however, the firm thinks a pending liquidity crisis is still likely to de-stabilize the company. Crisis of confidence now appears set to spread to primary business partners, as NEW's liquidity problems are limiting its ability to fund loans and it has stopped taking new applications. Revenue short-falls are certain and the value of broker network likely impaired on a major stoppage, suggesting the platform value of NEW is negative. They think the outcome is likely liquidation in bankruptcy.
- Keefe, Bruyette & Woods notes they believe that New Century will likely file for bankruptcy unless it finds a buyer. The company's operating expenses were running at almost $200 million a quarter and although this would go down moderately because of reduced loan acquisition expenses, the majority of those costs are fixed in the near term. Consequently, they would expect a bankruptcy filing in the relatively near future unless the company can find a buyer/partner.
It appears unlikely to the firm that New Century will be able to renew its credit lines because the extremely difficult market conditions will likely result in company generating material losses for the foreseeable future.
- JP Morgan notes that with the funding of new loans now halted due to lender restrictions, they believe NEW has relatively no unencumbered source of operating cash flow from which to satisfy any new margin calls or working capital requirements. Judging from NEW's statement on Feb. 7 that on Dec. 31, 2006 the company had $350M of cash and liquidity, it is easy to see how quickly the $195M remaining from the loan could be used up.
Firm believes NEW has most likely put up the vast majority of its remaining unencumbered assets to secure this $265M financing, and as a result, they believe there will be little if any assets left in the event of liquidation for common shareholders to lay claim to. They continue to view any purchase of NEW shares at this time as highly speculative, and would advise any investors that maintain a position in the common stock to sell those shares.
Notablecalls: I have no comments on this one. All too clear.
- Merrill Lynch maintains Sell as they see little value in NEW shares. Further challenges appear to have engulfed NEW, as at least one lender seems to have terminated its credit facility, leaving the company with inadequate liquidity to operate normally. NEW has mortgaged its few remaining unencumbered assets, a move that essentially leaves equity holders holding the liabilities of closing the lending platform. Credit positioned marginally better but more losses seem likely in near-term.
NEW seems to have been provided a temporary life-line, however, the firm thinks a pending liquidity crisis is still likely to de-stabilize the company. Crisis of confidence now appears set to spread to primary business partners, as NEW's liquidity problems are limiting its ability to fund loans and it has stopped taking new applications. Revenue short-falls are certain and the value of broker network likely impaired on a major stoppage, suggesting the platform value of NEW is negative. They think the outcome is likely liquidation in bankruptcy.
- Keefe, Bruyette & Woods notes they believe that New Century will likely file for bankruptcy unless it finds a buyer. The company's operating expenses were running at almost $200 million a quarter and although this would go down moderately because of reduced loan acquisition expenses, the majority of those costs are fixed in the near term. Consequently, they would expect a bankruptcy filing in the relatively near future unless the company can find a buyer/partner.
It appears unlikely to the firm that New Century will be able to renew its credit lines because the extremely difficult market conditions will likely result in company generating material losses for the foreseeable future.
- JP Morgan notes that with the funding of new loans now halted due to lender restrictions, they believe NEW has relatively no unencumbered source of operating cash flow from which to satisfy any new margin calls or working capital requirements. Judging from NEW's statement on Feb. 7 that on Dec. 31, 2006 the company had $350M of cash and liquidity, it is easy to see how quickly the $195M remaining from the loan could be used up.
Firm believes NEW has most likely put up the vast majority of its remaining unencumbered assets to secure this $265M financing, and as a result, they believe there will be little if any assets left in the event of liquidation for common shareholders to lay claim to. They continue to view any purchase of NEW shares at this time as highly speculative, and would advise any investors that maintain a position in the common stock to sell those shares.
Notablecalls: I have no comments on this one. All too clear.
Color on results: National Semi (NYSE:NSM)
Several firms comment on National Semi (NYSE:NSM) after the maker of power management and other chips last night said inventory concerns appeared to be behind it:
- Wachovia says National delivered a positive outlook, forecasting sequential growth of 4.5% in the company's May quarter, following 3 straight quarters of sequential decline in sales (Revenue is expected to decline 21% yr/yr). Management believes the worst of the inventory correction is behind the company, in line with firm's checks on the broader analog space. While it appears they have been too negative on the company's wireless handset business (25%-30% of sales), they still have concerns about increased competition and the potential deceleration in growth for National in this market. NSM is trading at a 21x PE on current year EPS, right in line with the average of the HPA group.
Bookings increased 3% q/q, reversing two straight quarters of decline. National stated that bookings increased in mid January and have remained steady, with orders from distribution, EMS and OEMs all showing improvement. The company noted strength in wireless handset bookings (+14% q/q), comm/networking (+25%), and displays (+5%), while industrial/medical/consumer was flat and PC bookings down 10% q/q. Book-to-bill was greater than 1:1 for the first time in three quarters.
WACH's new May quarter estimates are $448 million in revenue and $0.27 in EPS, up from $440 million and $0.25. FY07 (May year-end) goes to $1.92 billion and $1.34, up from $1.91 billion and $1.24. Maintains Market Perform.
- Merrill Lynch notes the question du jour following National's revenue outlook will likely be whether or not the analog market is bottoming. Indications of distributor inventory declines coupled with booking increases suggest it's a possibility. The notion is supported by a decline of National's internal inventory of 3%, although they note days are up to nearly 90 days. ML thinks we're close enough to the trough to turn the focus to which companies are best positioned to leverage an industry uptick.
Unlike many of its peers, National still has viable margin levers to pull when the sector returns to revenue growth. In an environment where many analog players are struggling to balance growth and margins in their long-term strategies, the firm finds National coming off a very weak revenue trajectory with a solid 59.8% gross margin on just mid-50% utilization. A look at mix yields further potential upside to margins, as the higher margin standard analog business still only represents 84% of total revenue.
- JP Morgan says National is the third semiconductor company in the past three weeks with a book-to-bill above 1.0 and they expect more companies to report book to bill ratios above 1.0 as 1Q07 progresses.
Inventory build concerning. Inventory increased 14 days QoQ from 77 days in F2Q07 to 91 days in F3Q07, above the company's target range of 75-80 days and the highest since 1997. JPM is concerned the inventory build will mute margin recovery during C07.
As a result, they are raising F07 revenue and EPS estimates from $1.9 billion and $1.03 to $1.9 billion and $1.08 but lowering F08 revenue and EPS estimates from $2.0 billion and $1.25 to $1.9 billion and $1.16 due to a muted recovery. Maintains Neutral.
Notablecalls: NSM sure sounded optimistic. That comes only a month after they warned. The co has large exposure to cellural handset markets and noted seeing some real order strength there. As several tier-1 houses have upgraded the shares over the past couple of weeks I suspect the upside from levels reached in after hours action is limited.
- Wachovia says National delivered a positive outlook, forecasting sequential growth of 4.5% in the company's May quarter, following 3 straight quarters of sequential decline in sales (Revenue is expected to decline 21% yr/yr). Management believes the worst of the inventory correction is behind the company, in line with firm's checks on the broader analog space. While it appears they have been too negative on the company's wireless handset business (25%-30% of sales), they still have concerns about increased competition and the potential deceleration in growth for National in this market. NSM is trading at a 21x PE on current year EPS, right in line with the average of the HPA group.
Bookings increased 3% q/q, reversing two straight quarters of decline. National stated that bookings increased in mid January and have remained steady, with orders from distribution, EMS and OEMs all showing improvement. The company noted strength in wireless handset bookings (+14% q/q), comm/networking (+25%), and displays (+5%), while industrial/medical/consumer was flat and PC bookings down 10% q/q. Book-to-bill was greater than 1:1 for the first time in three quarters.
WACH's new May quarter estimates are $448 million in revenue and $0.27 in EPS, up from $440 million and $0.25. FY07 (May year-end) goes to $1.92 billion and $1.34, up from $1.91 billion and $1.24. Maintains Market Perform.
- Merrill Lynch notes the question du jour following National's revenue outlook will likely be whether or not the analog market is bottoming. Indications of distributor inventory declines coupled with booking increases suggest it's a possibility. The notion is supported by a decline of National's internal inventory of 3%, although they note days are up to nearly 90 days. ML thinks we're close enough to the trough to turn the focus to which companies are best positioned to leverage an industry uptick.
Unlike many of its peers, National still has viable margin levers to pull when the sector returns to revenue growth. In an environment where many analog players are struggling to balance growth and margins in their long-term strategies, the firm finds National coming off a very weak revenue trajectory with a solid 59.8% gross margin on just mid-50% utilization. A look at mix yields further potential upside to margins, as the higher margin standard analog business still only represents 84% of total revenue.
- JP Morgan says National is the third semiconductor company in the past three weeks with a book-to-bill above 1.0 and they expect more companies to report book to bill ratios above 1.0 as 1Q07 progresses.
Inventory build concerning. Inventory increased 14 days QoQ from 77 days in F2Q07 to 91 days in F3Q07, above the company's target range of 75-80 days and the highest since 1997. JPM is concerned the inventory build will mute margin recovery during C07.
As a result, they are raising F07 revenue and EPS estimates from $1.9 billion and $1.03 to $1.9 billion and $1.08 but lowering F08 revenue and EPS estimates from $2.0 billion and $1.25 to $1.9 billion and $1.16 due to a muted recovery. Maintains Neutral.
Notablecalls: NSM sure sounded optimistic. That comes only a month after they warned. The co has large exposure to cellural handset markets and noted seeing some real order strength there. As several tier-1 houses have upgraded the shares over the past couple of weeks I suspect the upside from levels reached in after hours action is limited.
Thursday, March 08, 2007
Calls of Note Part 4
- Morgan Stanley is raising their view on Semiconductor Capital Equipment to Attractive from In-Line and upping most of their ratings and price targets. Unlike the consensus, the firm believe semi cap equipment stocks will soon reflect a bottoming of manufacturing utilizations in 1H07, an inflection in capital equipment orders in 2H07, and robust capital spending growth in 2008. Consequently, they see a combination of earnings growth and multiple expansion driving 20%+ appreciation in the average semi cap stock over the next 12-18 months.
MSCO sees bottom-up 10-15% capex growth in 2008, flat to down 5% capex in 2007 (vs. +2% previously). They assume non-strategic NAND suppliers will cut capacity expansion plans this year. However, bottom-up 2008 capex analysis indicates spending should pick up, driven primarily by the foundries/NAND flash suppliers and increasing capital intensity as the industry commences the move to 45nm. DRAM concerns in 2007 are overblown. DRAM capex $ per incremental unit shipment in 2007 remains below historical peaks, and DRAM capital intensity remains reasonable relative to historical trends.
Winners will have leverage to 45nm and company-specific product/profitability initiatives: They are upgrading ratings on Applied Materials (AMAT) and KLA-Tencor (KLAC) to Overweight, maintaining Overweight-V ratings on LAM (LRCX) and FormFactor (FORM), downgrading Cymer (CYMI) to Underweight and maintaining Novellus (NVLS) at Underweight.
Notablecalls: Not actionable but good to know category. Some of this stuff may be good for a short-term fade.
MSCO sees bottom-up 10-15% capex growth in 2008, flat to down 5% capex in 2007 (vs. +2% previously). They assume non-strategic NAND suppliers will cut capacity expansion plans this year. However, bottom-up 2008 capex analysis indicates spending should pick up, driven primarily by the foundries/NAND flash suppliers and increasing capital intensity as the industry commences the move to 45nm. DRAM concerns in 2007 are overblown. DRAM capex $ per incremental unit shipment in 2007 remains below historical peaks, and DRAM capital intensity remains reasonable relative to historical trends.
Winners will have leverage to 45nm and company-specific product/profitability initiatives: They are upgrading ratings on Applied Materials (AMAT) and KLA-Tencor (KLAC) to Overweight, maintaining Overweight-V ratings on LAM (LRCX) and FormFactor (FORM), downgrading Cymer (CYMI) to Underweight and maintaining Novellus (NVLS) at Underweight.
Notablecalls: Not actionable but good to know category. Some of this stuff may be good for a short-term fade.
Calls of Note Part 3
- Thomas Weisel Partners notes that while they are more positive on Trident Micro's (NASDAQ:TRID) 2007 growth prospects, they continue to believe significant upside to the stock will be dictated by the success of Trident's 2008 design-win activity and limited by ongoing competitive pricing and share risk, particularly at Sony and Samsung. Based on recent checks with multiple industry contacts, they see incremental share risk at Sony in 2008, which is likely to prove management's $450mn revenue target more challenging to achieve, in firm's view. They are maintaining their CY08 revenue and EPS estimates of $377mn and $1.40. TWP believes shares are relatively fairly valued, trading at 18x and 15x CY07 and CY08 EPS estimates, respectively.
Recent checks with multiple TV industry contacts indicate that Sony has recently developed a new single-chip (MPEG decode + back-end) TV solution in conjunction with NEC that is much more cost competitive relative to its prior multi-chip solution, which is currently being utilized in its high-end X-series LCD-TVs. Checks suggest Sony is working aggressively to leverage this technology across its high-end and mainstream 2008 product lines-Sony's mainstream TVs are currently predominantly supplied by Trident. While firm's checks indicate that 2008 designs will not be decided for several months, they believe there is potential significant incremental risk to Trident's share position at Sony (which was north of 80% in 2006 and is likely closer to 60-65% in 2007, by TWP estimates).
Notablecalls: Nice catch by TWP's Jason Pflaum! I think the comments regarding Sony will create a big overhang on TRID stock over the next couple of days or even weeks. I've always considered TRID a difficult stock to short but sitting at my old trading desk I would have put out a short line in it. One to watch!
Recent checks with multiple TV industry contacts indicate that Sony has recently developed a new single-chip (MPEG decode + back-end) TV solution in conjunction with NEC that is much more cost competitive relative to its prior multi-chip solution, which is currently being utilized in its high-end X-series LCD-TVs. Checks suggest Sony is working aggressively to leverage this technology across its high-end and mainstream 2008 product lines-Sony's mainstream TVs are currently predominantly supplied by Trident. While firm's checks indicate that 2008 designs will not be decided for several months, they believe there is potential significant incremental risk to Trident's share position at Sony (which was north of 80% in 2006 and is likely closer to 60-65% in 2007, by TWP estimates).
Notablecalls: Nice catch by TWP's Jason Pflaum! I think the comments regarding Sony will create a big overhang on TRID stock over the next couple of days or even weeks. I've always considered TRID a difficult stock to short but sitting at my old trading desk I would have put out a short line in it. One to watch!
Calls of Note Part 2
- Deutsche Bank notes that following the recent ~25% pullback, shares of Applied Biosystems (NYSE:ABI) look significantly undervalued vs. strong core fundamentals. Given the company's market leading position in its three core technology platforms, an increased focus on the applied markets and emerging geographies, and its robust new product pipeline, the firm thinks that ABI is poised for significant future growth and appreciation. They reiterate Buy rating and $42 price target and would look to add shares at these depressed price levels.
ABI remains the market leader in its 3 core platforms: mass spec, sequencing, and real-time PCR. Given the company's leverage to pharmacogenomics, proteomics, molecular diagnostics and DNA forensics, the firm anticipates that ABI's LT organic growth rate, margin structure and cash flow should be at the forefront of the Life Science Tools peer group. Additionally, the upcoming debut of its new next-gen sequencer (from Agencourt) is a prime example of the company's ability to innovate internally as well as via strategic acquisitions.
The crux of DB's upgrade of ABI shares in Sep. was the company's success in the applied markets, and that fundamental view remains unchanged.
On the valuation side, the company's forward EBITDA multiple is at 9x, well below its historical average and that of the comp group (11.4x). Additionally, the company has a forward operating cash flow yield of 7.6%, well above the previous 2 years and significantly above the comp group average of 2-3% (with a free cash flow yield of 6.3%). Given the strength in fundamental valuation vs. current trading levels, the firm thinks that now is an opportune time to add shares of ABI.
Notablecalls: Given the schmeissing this stock has experienced over the last week, I'd keep it on my radar for a possibe bounce over the next couple of days.
ABI remains the market leader in its 3 core platforms: mass spec, sequencing, and real-time PCR. Given the company's leverage to pharmacogenomics, proteomics, molecular diagnostics and DNA forensics, the firm anticipates that ABI's LT organic growth rate, margin structure and cash flow should be at the forefront of the Life Science Tools peer group. Additionally, the upcoming debut of its new next-gen sequencer (from Agencourt) is a prime example of the company's ability to innovate internally as well as via strategic acquisitions.
The crux of DB's upgrade of ABI shares in Sep. was the company's success in the applied markets, and that fundamental view remains unchanged.
On the valuation side, the company's forward EBITDA multiple is at 9x, well below its historical average and that of the comp group (11.4x). Additionally, the company has a forward operating cash flow yield of 7.6%, well above the previous 2 years and significantly above the comp group average of 2-3% (with a free cash flow yield of 6.3%). Given the strength in fundamental valuation vs. current trading levels, the firm thinks that now is an opportune time to add shares of ABI.
Notablecalls: Given the schmeissing this stock has experienced over the last week, I'd keep it on my radar for a possibe bounce over the next couple of days.
Calls of Note Part 1
- RBC notes that despite the choppy tape and the recent slide in the shares, their checks on Cisco (NASDAQ:CSCO) indicate strengthening trends across most of the company's business segments. And with the shares now trading at a discount to its growth rate, the firm is reiterating their Outperform rating.
Bookings in the carrier (25%) and commercial (25%) segments remain strong and they are also hearing of improving trends on the Enterprise side (45%). It's still early in the quarter to determine upside for the April Q but carrier activity and wireline spending trends give the firm comfort in their revenue estimate of $8.73B (+3% QoQ), broadly inline with the consensus of $8.76B.
Cisco hit a soft spot during the recent quarter with U.S. Enterprise customers and this segment only grew only in the mid-single-digits. From discussions at Voicecon, the firm believes some of this weakness is temporary and they believe the industry is still in the middle of a healthy upgrade cycle. Nevertheless, although the broader enterprise-spending trend remains healthy, they're not expecting a quick snap-back in demand right away.
Considering the telcos spend on video, the upgrade cycle by cable operators, and the healthy growth in user-generated video, the back- half of 2007 and CY08 may provide strengthening-demand for Cisco. On top of this improving backdrop, Cisco may enjoy magnified results due to its numerous product cycles. As large as the company is, Cisco may be entering a growth spurt. RBC's price target is $32, or 20x CY08 EPS.
Notablecalls: Not actionable but good to know category. Given the overnight strength in Asia, you may want to try to get some commons cheap onboard. Just a trade, though. Would sell the merchandise soon after as I suspect the overall market strength won't hold.
Bookings in the carrier (25%) and commercial (25%) segments remain strong and they are also hearing of improving trends on the Enterprise side (45%). It's still early in the quarter to determine upside for the April Q but carrier activity and wireline spending trends give the firm comfort in their revenue estimate of $8.73B (+3% QoQ), broadly inline with the consensus of $8.76B.
Cisco hit a soft spot during the recent quarter with U.S. Enterprise customers and this segment only grew only in the mid-single-digits. From discussions at Voicecon, the firm believes some of this weakness is temporary and they believe the industry is still in the middle of a healthy upgrade cycle. Nevertheless, although the broader enterprise-spending trend remains healthy, they're not expecting a quick snap-back in demand right away.
Considering the telcos spend on video, the upgrade cycle by cable operators, and the healthy growth in user-generated video, the back- half of 2007 and CY08 may provide strengthening-demand for Cisco. On top of this improving backdrop, Cisco may enjoy magnified results due to its numerous product cycles. As large as the company is, Cisco may be entering a growth spurt. RBC's price target is $32, or 20x CY08 EPS.
Notablecalls: Not actionable but good to know category. Given the overnight strength in Asia, you may want to try to get some commons cheap onboard. Just a trade, though. Would sell the merchandise soon after as I suspect the overall market strength won't hold.
Wednesday, March 07, 2007
Calls of Note Part 5
- Goldman Sachs is removing Directed Electronics (NASDAQ:DEIX) from the Americas Investment Sell List. Concerns of decelerating growth in satellite radio and the possibility of Directed losing the Sirius business are likely overblown. Although seasonality remains a headwind given Directed's exposure to consumer electronics, its valuation remains depressed even in the worst case scenario of Directed losing all of the Sirius business. With Directed's Q4 shortfall already priced into the stock and DEIX shares having declined by -24% since our downgrade vs. the S&P 500's -2.0%, our Sell has run its course. Over the past 52-weeks, DEIX shares are down -42% vs. the +9% for the S&P 500.
Although the risks associated with the Sirius satellite radio business will remain an overhang, the firm thinks Directed Electronics shares are getting punished beyond the value of the Sirius franchise. Analysis suggests that even in the worst case scenario, where Directed Electronics loses the entire Sirius business, DEIX shares would be at depressed relative to the earnings power of its underlying security and entertainment businesses.
While they are not recommending the shares now given Directed's seasonality and execution issues, they think the price is an attractive entry point for value-based investors with a long-term focus. Maintains $14.50 tgt.
Notablecalls: Would not be surprised to see some buy interest in DEIX over the next couple of days. GSCO was dead right on DEIX with their negative calls and while they are not turning positive here, it may be the first step.
Although the risks associated with the Sirius satellite radio business will remain an overhang, the firm thinks Directed Electronics shares are getting punished beyond the value of the Sirius franchise. Analysis suggests that even in the worst case scenario, where Directed Electronics loses the entire Sirius business, DEIX shares would be at depressed relative to the earnings power of its underlying security and entertainment businesses.
While they are not recommending the shares now given Directed's seasonality and execution issues, they think the price is an attractive entry point for value-based investors with a long-term focus. Maintains $14.50 tgt.
Notablecalls: Would not be surprised to see some buy interest in DEIX over the next couple of days. GSCO was dead right on DEIX with their negative calls and while they are not turning positive here, it may be the first step.
Calls of Note Part 4
- Piper Jaffray notes they recently visited Crocs' (NASDAQ:CROX) Japanese operations and were highly impressed with the executive team, consumer adoption of the brand, regional sales potential, and initiatives underway to elevate the contribution to earnings from the Asian marketplace. The firm has increased confidence with respect to FY07 estimates and specifically management's ability to successfully identify and expand brand distribution into untapped markets. They believe international market growth is outpacing internal forecasts and they remain confident in international sales trending toward 40%-45% of total sales in FY07.
Global distrib. underappreciated: At roughly 21K doors (mid-Feb), current mkt cap of ~$1.88B suggests value of <$90K/door for Crocs' present distribution infrastructure. Piper believes the market is undervaluing potential upside from distribution leverage as they assume sales/door less than 50% of peak potential ($27K/avg door in FY06).
Maintains Outperform and $70 tgt.
Notablecalls: Not actionable but good to know category.
Global distrib. underappreciated: At roughly 21K doors (mid-Feb), current mkt cap of ~$1.88B suggests value of <$90K/door for Crocs' present distribution infrastructure. Piper believes the market is undervaluing potential upside from distribution leverage as they assume sales/door less than 50% of peak potential ($27K/avg door in FY06).
Maintains Outperform and $70 tgt.
Notablecalls: Not actionable but good to know category.
Calls of Note Part 3
- Jefferies is positive on Energy Conv. Devices (NASDAQ:ENER) after Intel announced at an analyst's conference in California that it has sent samples of its 128MBit PCM to customers. This unit will be a drop-in replacement for NOR flash. While ENER has added several new licensees for Phase Change Memory (PCM) over the last year, the stock has trended downward as the market has discounted the licensees. Firm believes that, given Intel's announcement coupled with Samsung's announcement for commercial production, investors will likely react positively to the news. Importantly, ENER is not manufacturing PCM but only licensing the technology through its ownership in the Ovonyx JV. This should increase investors confidence as established players are validating the technology.
The firm notes tjeu have not included any revenues or licensing fees from PCM until they get better visibility, but they believe this segment could be worth $40/share. Firm derives this value by applying a 1% licensing fee to the Flash and DRAM market of $50B, which yields $500M in revenues to the Ovonyx JV. Since this is a licensing company, Ovonyx should generate north of 50% net margins, yielding over $250M in net income. ENER owns 40% of the JV, which would add over $100M in equity income or more than $2.50 upside to earnings.
Even if they assume that technology is only rolled out to its current licensees (~75% of the market), full roll-out does not occur until 2010, and discount this value back by 25%, it would imply a current value of $15.
ENER has pulled back 20%+ following the $0.01 miss in the quarter. The firm would look to aggressively add to positions. ENER is trading at a discount to the solar industry even though it has similar expected growth rates and the best balance sheet. They also believe that the company is likely to announce an additional two PCM licensees (possibly MU and Hitachi) over the coming months.
Reits Buy and $47 tgt.
Notablecalls: You better buy this one early on! Actionable call alert! See archives for additional color.
The firm notes tjeu have not included any revenues or licensing fees from PCM until they get better visibility, but they believe this segment could be worth $40/share. Firm derives this value by applying a 1% licensing fee to the Flash and DRAM market of $50B, which yields $500M in revenues to the Ovonyx JV. Since this is a licensing company, Ovonyx should generate north of 50% net margins, yielding over $250M in net income. ENER owns 40% of the JV, which would add over $100M in equity income or more than $2.50 upside to earnings.
Even if they assume that technology is only rolled out to its current licensees (~75% of the market), full roll-out does not occur until 2010, and discount this value back by 25%, it would imply a current value of $15.
ENER has pulled back 20%+ following the $0.01 miss in the quarter. The firm would look to aggressively add to positions. ENER is trading at a discount to the solar industry even though it has similar expected growth rates and the best balance sheet. They also believe that the company is likely to announce an additional two PCM licensees (possibly MU and Hitachi) over the coming months.
Reits Buy and $47 tgt.
Notablecalls: You better buy this one early on! Actionable call alert! See archives for additional color.
Calls of Note Part 2
- FBR notes that tomorrow, the generic biologic debate begins in earnest and Amgen's (NASDAQ:AMGN) revenue will come under fire from yet another angle. The Senate HELP committee hearing on follow-on biologics begins tomorrow at 10 a.m. Even if watered down, legislation sponsored by Representative Waxman is threatening to biologics-makers with looming patent expirations. Amgen's Epo patent expires in 2013, and the firm calculates that Epogen is worth roughly 25% less with generic biologic competition than without. With numerous headwinds, the stock's multiple does not appear to be poised for expansion from its current 14x. They are maintaining Market Perform rating and $65 price target.
Notablecalls: Let's see if AMGN can overcome these comments today. I suspect it can.
Notablecalls: Let's see if AMGN can overcome these comments today. I suspect it can.
Calls of Note Part 1
Couple of Tier-1 firms have positive comments on Yahoo (NASDAQ:YHOO) after the co presented at MS Tech conference yesterday:
- Morgan Stanley notes Terry Semel, Yahoo!'s Chairman & CEO, and Sue Decker, acting CFO & Head of Advertising Product Group, highlighted that Yahoo! should continue to benefit from favorable secular trends in online advertising. They addressed a number of new / current initiatives related to search / branded advertising + video + social media + mobile + off-network partnerships (Right Media + eBay + newspaper consortium). Post-Yahoo!'s successful release of Panama + reorganization of its structure and management in 12/06 to better focus on audiences, advertisers, and publishers, the firm feels more confident in the company's ability to capture future growth opportunities.
Yahoo! noted that the Panama launch and the new ranking algorithm (2/5/07), as expected, resulted in a noticeable lift in search volume, click-through rates, higher quality leads, and advertiser / user satisfaction. Given yesterday's remarks and firm's analysis of early signs of success for Panama, they continue to believe Yahoo!'s outlook is strong. In addition, experience with the new search offering and recent checks with advertisers / agencies / search engine marketers (SEMs) / developers / industry leaders to date confirm their hypothesis that Panama represents a major improvement over Yahoo!'s prior offering and a more competitive product. And, hey, as investors, they like the type of accelerating Y/Y revenue growth YHOO should support as 2007 quarters evolve. Reits Overweight.
- Merrill Lynch is upping their tgt on YHOO to $34 from $33 as management confirmed that the Panama algorithm launch has gone "quite well", with increasing click-through rates, higher quality leads for advertisers, and some cost-per-click pressure (as expected). These changes should generate higher ROI for advertisers, which should lead to more ad dollars for Yahoo! in the back half of the year. On a recent ML hosted call, comScore indicated that, indexed to Google, Yahoo!'s click-through rates were up 5-10% since the Panama launch. The firm is increasing their 1Q revenue estimate by $15mn to $1,206mn (ML now in-line with consensus) as believe low-end of the 1Q guidance range seems less likely. CY07 adjusted EPS increases to $0.75 from $0.74 on higher revs. and a lower share count. Maintains Buy.
Notablecalls: Nice comments but not likely actionable.
- Morgan Stanley notes Terry Semel, Yahoo!'s Chairman & CEO, and Sue Decker, acting CFO & Head of Advertising Product Group, highlighted that Yahoo! should continue to benefit from favorable secular trends in online advertising. They addressed a number of new / current initiatives related to search / branded advertising + video + social media + mobile + off-network partnerships (Right Media + eBay + newspaper consortium). Post-Yahoo!'s successful release of Panama + reorganization of its structure and management in 12/06 to better focus on audiences, advertisers, and publishers, the firm feels more confident in the company's ability to capture future growth opportunities.
Yahoo! noted that the Panama launch and the new ranking algorithm (2/5/07), as expected, resulted in a noticeable lift in search volume, click-through rates, higher quality leads, and advertiser / user satisfaction. Given yesterday's remarks and firm's analysis of early signs of success for Panama, they continue to believe Yahoo!'s outlook is strong. In addition, experience with the new search offering and recent checks with advertisers / agencies / search engine marketers (SEMs) / developers / industry leaders to date confirm their hypothesis that Panama represents a major improvement over Yahoo!'s prior offering and a more competitive product. And, hey, as investors, they like the type of accelerating Y/Y revenue growth YHOO should support as 2007 quarters evolve. Reits Overweight.
- Merrill Lynch is upping their tgt on YHOO to $34 from $33 as management confirmed that the Panama algorithm launch has gone "quite well", with increasing click-through rates, higher quality leads for advertisers, and some cost-per-click pressure (as expected). These changes should generate higher ROI for advertisers, which should lead to more ad dollars for Yahoo! in the back half of the year. On a recent ML hosted call, comScore indicated that, indexed to Google, Yahoo!'s click-through rates were up 5-10% since the Panama launch. The firm is increasing their 1Q revenue estimate by $15mn to $1,206mn (ML now in-line with consensus) as believe low-end of the 1Q guidance range seems less likely. CY07 adjusted EPS increases to $0.75 from $0.74 on higher revs. and a lower share count. Maintains Buy.
Notablecalls: Nice comments but not likely actionable.
Color on news: CV Therapeutics (NASDAQ:CVTX)
Several firms comment on CV Therapeutics (NASDAQ:CVTX) after the co announced MERLIN trial failed to reach the primary efficacy endpoint (composite of cardiovascular death, MI, and recurrent ischemia), but there was no adverse trend in death or arrhythmias in patients taking Ranexa. Full data will be presented on March 27th, 2007 at 8:50AM at the American College of Cardiology meeting in New Orleans:
- Morgan Stanley notes this outcome, neutral safety data and failed efficacy, is largely consistent with their expectations, and the company believes it could support a first line label for Ranexa. A wider label should allow Ranexa to expand beyond niche status and potentially drive the company towards breakeven. However, given the current greater than$200M burn rate and the current less than $10M per quarter run rate, the firm continues to doubt sales will become large enough to drive meaningful profitability.
The worst case scenario that this drug leads to inferior outcomes has been taken off the table. However, the firm expects the underperformance to continue. Maintains Underweight.
- Merrill Lynch says that as they expected, MERLIN failed to achieve the primary efficacy endpoint but "there was no adverse trend in death or arrhythmias. The company believes that "the data could support expansion of the existing Ranexa indication to include first line angina" per the special protocol agreement (SPA) with the FDA. However, FDA does not always abide by SPAs, so the firm would wait to see the final label, which the company suggested could be issued in 1H:08.
The bulls expect this safety data to accelerate script growth, but they firmconservatively models ongoing, consistent TRx growth and maintain peak US sales of $240M in 2012E. They think the company could expand sales and marketing efforts and/or look to partner Ranexa (which would help offset costs). Maintains Neutral.
- Piper Jaffray notes that with cardiovascular efficacy questions now addressed, their key
remaining question on MERLIN is whether Ranexa causes a significant reduction in glucose levels in diabetics. If the company shows at least a 0.7% A1c reduction relative to placebo, the firm would view this as a significant positive with the potential to reinvent Ranexa as a diabetes drug. As a reminder, there was a 0.7% A1c reduction seen in the CARISA study and an even greater A1c reduction for placebo diabetics rolled over into extension studies. They have historically viewed and continue to view the diabetes data as a possible game changer for Ranexa.
Piper has lowered 2010 sales in the angina setting from $336m to $200m, reflecting continued growth at current rates. This lowers target from $12 (35x 2010E EPS of $0.60, disc. 30% for 2 periods) to $10 (35x 2010E EPS of $0.47, disc. 30% for 2 periods). This could prove highly conservative if Ranexa works in diabetes. With the stock indicated post-market close at $9-10, the firm remains at a Market Perform rating, but they will re-evaluate their rating if A1c data from MERLIN are positive.
- Bear Stearns says that while the MERLIN results are in-line with their expectations, they believe there could be some short term strength in CVTX shares based on short covering (roughly 28% of the shares are short), the anticipated filing for Ranexa in front-line angina (anticipated in the next 1-2 quarters), and the NDA filing for Regadenoson in mid-07. However, they are maintaining their Peer Perform rating for longer-term investors.
Notablecalls: Trial results are always difficult to interpret, especially when they appear to be mixed. I must say I like the comments from Bear Stearns as the expecations regarding efficiency in the MERIL were pretty low. Most analysts were just looking for solid safety. That's pretty much what we got, too. The co may still get first-line angina indication for Ranexa from the FDA, based on safety. With a very high short interest and Piper ringing the bell on diabetes potential, I'd keep CVTX on my radar screens for a bounce. More agressive accounts may find the $9 level reached in after market action a good entry point. Tight leash.
- Morgan Stanley notes this outcome, neutral safety data and failed efficacy, is largely consistent with their expectations, and the company believes it could support a first line label for Ranexa. A wider label should allow Ranexa to expand beyond niche status and potentially drive the company towards breakeven. However, given the current greater than$200M burn rate and the current less than $10M per quarter run rate, the firm continues to doubt sales will become large enough to drive meaningful profitability.
The worst case scenario that this drug leads to inferior outcomes has been taken off the table. However, the firm expects the underperformance to continue. Maintains Underweight.
- Merrill Lynch says that as they expected, MERLIN failed to achieve the primary efficacy endpoint but "there was no adverse trend in death or arrhythmias. The company believes that "the data could support expansion of the existing Ranexa indication to include first line angina" per the special protocol agreement (SPA) with the FDA. However, FDA does not always abide by SPAs, so the firm would wait to see the final label, which the company suggested could be issued in 1H:08.
The bulls expect this safety data to accelerate script growth, but they firmconservatively models ongoing, consistent TRx growth and maintain peak US sales of $240M in 2012E. They think the company could expand sales and marketing efforts and/or look to partner Ranexa (which would help offset costs). Maintains Neutral.
- Piper Jaffray notes that with cardiovascular efficacy questions now addressed, their key
remaining question on MERLIN is whether Ranexa causes a significant reduction in glucose levels in diabetics. If the company shows at least a 0.7% A1c reduction relative to placebo, the firm would view this as a significant positive with the potential to reinvent Ranexa as a diabetes drug. As a reminder, there was a 0.7% A1c reduction seen in the CARISA study and an even greater A1c reduction for placebo diabetics rolled over into extension studies. They have historically viewed and continue to view the diabetes data as a possible game changer for Ranexa.
Piper has lowered 2010 sales in the angina setting from $336m to $200m, reflecting continued growth at current rates. This lowers target from $12 (35x 2010E EPS of $0.60, disc. 30% for 2 periods) to $10 (35x 2010E EPS of $0.47, disc. 30% for 2 periods). This could prove highly conservative if Ranexa works in diabetes. With the stock indicated post-market close at $9-10, the firm remains at a Market Perform rating, but they will re-evaluate their rating if A1c data from MERLIN are positive.
- Bear Stearns says that while the MERLIN results are in-line with their expectations, they believe there could be some short term strength in CVTX shares based on short covering (roughly 28% of the shares are short), the anticipated filing for Ranexa in front-line angina (anticipated in the next 1-2 quarters), and the NDA filing for Regadenoson in mid-07. However, they are maintaining their Peer Perform rating for longer-term investors.
Notablecalls: Trial results are always difficult to interpret, especially when they appear to be mixed. I must say I like the comments from Bear Stearns as the expecations regarding efficiency in the MERIL were pretty low. Most analysts were just looking for solid safety. That's pretty much what we got, too. The co may still get first-line angina indication for Ranexa from the FDA, based on safety. With a very high short interest and Piper ringing the bell on diabetes potential, I'd keep CVTX on my radar screens for a bounce. More agressive accounts may find the $9 level reached in after market action a good entry point. Tight leash.
Tuesday, March 06, 2007
Color on Announcement: AMD (NYSE:AMD)
Several firms commenting Advanced Micro Devices (NYSE:AMD) after co announced yesterday morning that it is unlikely to meet its revenue guidance.
- Morgan Stanley believes AMD's margins will be under severe pressure as it suffers from aggressive pricing competition in MPUs, as well as a product line that is currently inferior to its primary competitors. While AMD's product portfolio should be more competitive in the second half of this year, firm expects its financials to remain under pressure for at least several quarters. Meaningful losses are likely during the first half of this year, and they could continue into the second half of the year as well. In addition, firm believes that AMD will need to raise capital to fund its previously planned capex investments for 2007. Consequently, they maintain their Underweight-V rating on AMD.
Firm's 2007 and 2008 EPS estimates are now ($0.50) and $0.60 respectively versus $0.15 and $0.84 previously.
- Cowen notes that AMD announced that 1Q07 (March) results would likely fall below rev guidance of $1.6-1.7B, down 4-10% seq. Mgmt attributed the primary source of weakness to inability to provide certain commitments to their distributors which have resulted in share losses presumably to INTC. Mgmt admitted to having "taken their eye off" the ball with respect to its distribution partners as AMD ramped into new OEM customers. Mgmt continues to highlight pricing pressure in the server end market as a significant source of weakness. Firm believes it is too early to call a bottom in shares of AMD. In their opinion, the visibility limitations make a valuation call on these growth shares incredibly challenging. Firm expects the data flow regarding fundamentals to remain negative over the near-term. Without any significant positive catalysts on the horizon, they expect shares to remain under pressure.
Firm expect the pricing pressure coupled with the integration of ATI's lower margin consumer-related business units is likely to result in sustained GM pressure. They believe the feasibility of achieving the 50% GM target exiting 2007 appears increasingly unrealistic.
- JMP offering contrarian view, upgrading the share to Market Outperform from Market Perform, with price tgt of $15 based on 15x their Street-high 2008 EPS estimate of $1.15 (Street @ $0.78 with a wide range). The upgrade is based on:
Firm's proprietary industry and channel research indicates that AMD's next-generation "Barcelona" quad-core server chip and next-generation low-power mobile PC processor chip is exhibiting excellent power, performance, scalability, and price/performance characteristics at key OEM customers such as HPQ, Dell, IBM, Fujitsu-Siemens, Sun, and Lenovo. Firm believes that the next-generation quad-core Opteron server chip and the next-generation low-power mobile processor chip will level the playing field with Intel. The new products may allow AMD to regain the performance mantle in the high-margin server chip market with performance gains of 20-30% over equivalent Intel Xeon server chip while also allowing AMD to target the high-margin corporate and small-business notebook PC market with bundled low-power processor/integrated graphics solutions.
While the ATYT merger has been a rocky one with delays and market share losses in several discrete and integrated graphics segments, firm's research suggests that the new AMD Series 690 integrated graphics chipset for desktops and notebooks, with full support for Vista DX10 graphics, HD video, and Blu-Ray/HD DVD, will likely allow AMD to achieve renewed success in the consumer and corporate PC market. Also, despite a 30-45 day delay in the production availability of AMD's next-generation high-end R600 discrete graphics chip competing with NVDA's GeForce8800, firm's research indicates that AMD has successfully addressed the production and power bottlenecks with the R600, and the solution will likely be successfully bundled with AMD's high-end Athlon64 processors for OEM and channel customers.
Firm's research also suggest that AMD's manufacturing yields on 65nm technology on 12-inch wafer production are ramping well, about one quarter ahead of schedule, and will likely allow AMD processor margins with the better product mix to quickly rebound to the 50-52% level from current levels of 40% over the next 12 to 18 months. Given the increased production volumes, AMD will likely be able to satisfy its rapidly expanding OEM and channel customers with plentiful supplies of high-end dual-core processors beyond the current quarter.
Notablecalls: While most of the Street is negative (to say it mildly), I actually like JMP's opinion. Too bad they are probably 1-2 qtrs too early with the upgrade. However, if they are right about Barcelona, AMD shareholders do have better times ahead.
- Morgan Stanley believes AMD's margins will be under severe pressure as it suffers from aggressive pricing competition in MPUs, as well as a product line that is currently inferior to its primary competitors. While AMD's product portfolio should be more competitive in the second half of this year, firm expects its financials to remain under pressure for at least several quarters. Meaningful losses are likely during the first half of this year, and they could continue into the second half of the year as well. In addition, firm believes that AMD will need to raise capital to fund its previously planned capex investments for 2007. Consequently, they maintain their Underweight-V rating on AMD.
Firm's 2007 and 2008 EPS estimates are now ($0.50) and $0.60 respectively versus $0.15 and $0.84 previously.
- Cowen notes that AMD announced that 1Q07 (March) results would likely fall below rev guidance of $1.6-1.7B, down 4-10% seq. Mgmt attributed the primary source of weakness to inability to provide certain commitments to their distributors which have resulted in share losses presumably to INTC. Mgmt admitted to having "taken their eye off" the ball with respect to its distribution partners as AMD ramped into new OEM customers. Mgmt continues to highlight pricing pressure in the server end market as a significant source of weakness. Firm believes it is too early to call a bottom in shares of AMD. In their opinion, the visibility limitations make a valuation call on these growth shares incredibly challenging. Firm expects the data flow regarding fundamentals to remain negative over the near-term. Without any significant positive catalysts on the horizon, they expect shares to remain under pressure.
Firm expect the pricing pressure coupled with the integration of ATI's lower margin consumer-related business units is likely to result in sustained GM pressure. They believe the feasibility of achieving the 50% GM target exiting 2007 appears increasingly unrealistic.
- JMP offering contrarian view, upgrading the share to Market Outperform from Market Perform, with price tgt of $15 based on 15x their Street-high 2008 EPS estimate of $1.15 (Street @ $0.78 with a wide range). The upgrade is based on:
Firm's proprietary industry and channel research indicates that AMD's next-generation "Barcelona" quad-core server chip and next-generation low-power mobile PC processor chip is exhibiting excellent power, performance, scalability, and price/performance characteristics at key OEM customers such as HPQ, Dell, IBM, Fujitsu-Siemens, Sun, and Lenovo. Firm believes that the next-generation quad-core Opteron server chip and the next-generation low-power mobile processor chip will level the playing field with Intel. The new products may allow AMD to regain the performance mantle in the high-margin server chip market with performance gains of 20-30% over equivalent Intel Xeon server chip while also allowing AMD to target the high-margin corporate and small-business notebook PC market with bundled low-power processor/integrated graphics solutions.
While the ATYT merger has been a rocky one with delays and market share losses in several discrete and integrated graphics segments, firm's research suggests that the new AMD Series 690 integrated graphics chipset for desktops and notebooks, with full support for Vista DX10 graphics, HD video, and Blu-Ray/HD DVD, will likely allow AMD to achieve renewed success in the consumer and corporate PC market. Also, despite a 30-45 day delay in the production availability of AMD's next-generation high-end R600 discrete graphics chip competing with NVDA's GeForce8800, firm's research indicates that AMD has successfully addressed the production and power bottlenecks with the R600, and the solution will likely be successfully bundled with AMD's high-end Athlon64 processors for OEM and channel customers.
Firm's research also suggest that AMD's manufacturing yields on 65nm technology on 12-inch wafer production are ramping well, about one quarter ahead of schedule, and will likely allow AMD processor margins with the better product mix to quickly rebound to the 50-52% level from current levels of 40% over the next 12 to 18 months. Given the increased production volumes, AMD will likely be able to satisfy its rapidly expanding OEM and channel customers with plentiful supplies of high-end dual-core processors beyond the current quarter.
Notablecalls: While most of the Street is negative (to say it mildly), I actually like JMP's opinion. Too bad they are probably 1-2 qtrs too early with the upgrade. However, if they are right about Barcelona, AMD shareholders do have better times ahead.
Calls of Note Part 4
JP Morgan defending Starbucks (NASDAQ:SBUX) following recent decline. Firm believes the current price offers an excellent risk/reward opportunity and would own with a 3-12 month investment horizon.
Concerns regarding 1Q margin pressure linger, but firm does not see risk to near-term estimates. While they believe F2Q will be another challenging margin quarter (which is they believe is reflected in their model), they remain comfortable with $0.20 estimate which should be aided by solid comp and store growth. Firm's model reflects 23% revenue growth, driven by 19% U.S. operating week growth and 5% comps. They continue to expect operating margin improvement in 2H.
The Schultz memo is a call to action, not for slower growth. Chairman Howard Shultz's internal letter warning of "the commoditization of the Starbucks experience" was very well publicized. Firm believes the letter was focused on growing Starbucks' appeal relative to consumers, and that it was a call on the company's culture without financial implications of slower store growth, higher capital spending, or increased operating expenses.
Improved QSR coffee not a threat. While McDonald's increased its coffee sales by 15% in F06, firm sees the company's improved coffee roasts and packaging primarily as a better beverage option for MCD's breakfast patrons and in a defensive move from other QSR names either promoting (BKC) or planning to introduce breakfast (WEN). In summary, firm does not see improved offerings at QSR as a major threat to SBUX.
Notablecalls: Nothing new in this note, but seems to be the first defense after quite a big decline. Look for others to follow as SBUX continues to be analyst favorite. Not actionable, though.
Concerns regarding 1Q margin pressure linger, but firm does not see risk to near-term estimates. While they believe F2Q will be another challenging margin quarter (which is they believe is reflected in their model), they remain comfortable with $0.20 estimate which should be aided by solid comp and store growth. Firm's model reflects 23% revenue growth, driven by 19% U.S. operating week growth and 5% comps. They continue to expect operating margin improvement in 2H.
The Schultz memo is a call to action, not for slower growth. Chairman Howard Shultz's internal letter warning of "the commoditization of the Starbucks experience" was very well publicized. Firm believes the letter was focused on growing Starbucks' appeal relative to consumers, and that it was a call on the company's culture without financial implications of slower store growth, higher capital spending, or increased operating expenses.
Improved QSR coffee not a threat. While McDonald's increased its coffee sales by 15% in F06, firm sees the company's improved coffee roasts and packaging primarily as a better beverage option for MCD's breakfast patrons and in a defensive move from other QSR names either promoting (BKC) or planning to introduce breakfast (WEN). In summary, firm does not see improved offerings at QSR as a major threat to SBUX.
Notablecalls: Nothing new in this note, but seems to be the first defense after quite a big decline. Look for others to follow as SBUX continues to be analyst favorite. Not actionable, though.
Calls of Note Part 3
Stifel out with a note on American Science & Engineering (NASDAQ:ASEI), saying that details of the FY07 Supplemental Budget Appropriation bill include $24 million to upgrade 67 Z Backscatter Vans (ZBV) now in the field in Southwest Asia to ruggedized level, which means removing the proprietary equipment and installing it in a vehicle armored sufficiently to protect the crew and the equipment.
Firm views this potential order as a positive as it is the first indication that the ruggedized ZBV, for which development began just a few months ago, is ready for deployment, and also hints that future purchases of new ZBVs could be the ruggedized version, which most likely carries a higher price and delivers more operating profit dollars to American Science & Engineering's P&L.
Firm believes American Science & Engineering will likely partner with a reputable armored vehicle manufacturer and limit it's direct work to high margin proprietary items.
ASEI shares trade with a high level of volatility and firm thinks current valuation levels are inexpensive given the proven utility of the company's products and likelihood of deployment of several new products over the next 12 months. The lack of forward visibility is what they think is behind the discount to the peer group, but they are confident that additional business will likely develop. Firm would be buyers at current levels.
Reiterates Buy and $72 price tgt.
Notablecalls: Nice find by Stifel! Expect to see buying interest based on this note. ASEI is a mover with sizeable short interest, so could be worth a point or more. Actionable!
Firm views this potential order as a positive as it is the first indication that the ruggedized ZBV, for which development began just a few months ago, is ready for deployment, and also hints that future purchases of new ZBVs could be the ruggedized version, which most likely carries a higher price and delivers more operating profit dollars to American Science & Engineering's P&L.
Firm believes American Science & Engineering will likely partner with a reputable armored vehicle manufacturer and limit it's direct work to high margin proprietary items.
ASEI shares trade with a high level of volatility and firm thinks current valuation levels are inexpensive given the proven utility of the company's products and likelihood of deployment of several new products over the next 12 months. The lack of forward visibility is what they think is behind the discount to the peer group, but they are confident that additional business will likely develop. Firm would be buyers at current levels.
Reiterates Buy and $72 price tgt.
Notablecalls: Nice find by Stifel! Expect to see buying interest based on this note. ASEI is a mover with sizeable short interest, so could be worth a point or more. Actionable!
Calls of Note Part 2
Wachovia out with a nice overview of their key impressions from 2nd Annual Wachovia Homebuilding Conference, which was held March 1st and 2nd in Las Vegas.
Sales trends continue erratic. In general firm believes the Spring selling season has been at least a mild disappointment for most; traffic levels seem firm, but sales activity soft. The exception is CA, which several companies mentioned as rebounding nicely (SPF, TOL, CTX). FL was regularly described as the state with the most widespread weakness. Opinions were mixed but biased towards signs of stabilization in the DC metro and mixed but biased towards weakness in TX. DHI seemed more pessimistic about conditions; SPF more optimistic.
Downturn duration expectations extending. Likely as a result of a so-far sluggish Spring, firm felt some builders seemed to be tempering their outlooks for their business. Firm liked HOV CEO Ara Hovnanian's characterization of this recovery as potentially a boat hull, or a long period of flatness before a gradual rise. To paraphrase him, whether the hull is the size of a Boston Whaler or the Queen Mary has yet to be seen.
Sub-prime not a worry (yet). Most builders do not expect problems in the sub-prime market to spill into substantially-tightened lending standards for the prime market, and on average firm believes builders feel that sub-prime customers represent 10-12% of total business.
Builders making headway in labor cost savings. Several builders reported increasing concessions from trade subcontractors, on the order of 5-7% labor cost reductions in select markets, which should begin bolstering margins in 2H07.
Pay down debt in the short run, re-grow in the long-run. Of course firm continues to hope for a more permanent focus on free cash flow by builders even after the cycle rebounds, and more measured additions to lot supply coupled with bolstered share repurchase activity. In the short run, however, most appear to be focused on reducing debt or maintaining current debt-to-cap levels, while keeping an eye out for opportunities to re-invest in land.
Little commentary on M&A potential. While many builders believe the industry likely to consolidate in the long run, few expect substantial public-to-public merger activity in the near-term. Some commented that substantial liquidity is likely to move towards the distressed-land and distressed private-builder markets rather than into public builder private equity takeouts.
Notablecalls: Not actionable, but very good to know category.
Sales trends continue erratic. In general firm believes the Spring selling season has been at least a mild disappointment for most; traffic levels seem firm, but sales activity soft. The exception is CA, which several companies mentioned as rebounding nicely (SPF, TOL, CTX). FL was regularly described as the state with the most widespread weakness. Opinions were mixed but biased towards signs of stabilization in the DC metro and mixed but biased towards weakness in TX. DHI seemed more pessimistic about conditions; SPF more optimistic.
Downturn duration expectations extending. Likely as a result of a so-far sluggish Spring, firm felt some builders seemed to be tempering their outlooks for their business. Firm liked HOV CEO Ara Hovnanian's characterization of this recovery as potentially a boat hull, or a long period of flatness before a gradual rise. To paraphrase him, whether the hull is the size of a Boston Whaler or the Queen Mary has yet to be seen.
Sub-prime not a worry (yet). Most builders do not expect problems in the sub-prime market to spill into substantially-tightened lending standards for the prime market, and on average firm believes builders feel that sub-prime customers represent 10-12% of total business.
Builders making headway in labor cost savings. Several builders reported increasing concessions from trade subcontractors, on the order of 5-7% labor cost reductions in select markets, which should begin bolstering margins in 2H07.
Pay down debt in the short run, re-grow in the long-run. Of course firm continues to hope for a more permanent focus on free cash flow by builders even after the cycle rebounds, and more measured additions to lot supply coupled with bolstered share repurchase activity. In the short run, however, most appear to be focused on reducing debt or maintaining current debt-to-cap levels, while keeping an eye out for opportunities to re-invest in land.
Little commentary on M&A potential. While many builders believe the industry likely to consolidate in the long run, few expect substantial public-to-public merger activity in the near-term. Some commented that substantial liquidity is likely to move towards the distressed-land and distressed private-builder markets rather than into public builder private equity takeouts.
Notablecalls: Not actionable, but very good to know category.
Calls of Note Part 1
Bear Stearns out with an interesting note on Palm (NASDAQ:PALM), saying that in light of news reports that PALM mgmt has hired investment bankers to "explore options," they wanted to highlight an important valuation issue: net operating loss (NOLs) carryforwards, because the actual realizable amount -- around $1.00-$1.10/share -- is less than some investors may expect.
According to PALM's latest 10Q, the company has NOLs of ~$609mm on 104mm shares. However, this translates to ~$1/share since NOLs will be subject to IRS limitations if PALM is acquired.
Specifically, IRS limits the use of acquired company's NOLs to a long-term tax exempt rate (4.18% as of 3/07) of the equity value per year at the time of the acquisition for up to 20 years --e.g., at hypothetical acquisition price of $17/share for PALM, annual limit on NOLs is $74mm (i.e., equity value of $1.77bn * 4.18%).
In addition, NOLs from a prior acquisition (i.e., Handspring's $273mm), must adhere to the IRS limitation specified at the time of acquisition (10/03) --i.e., $9mm/year based on equity value of $188mm.
Notablecalls: Bear Stearns is late with this note as PALM already gave up all of the Friday's gains yesterday. However, this goes to the very good to know category should the takeover speculations resurface.
According to PALM's latest 10Q, the company has NOLs of ~$609mm on 104mm shares. However, this translates to ~$1/share since NOLs will be subject to IRS limitations if PALM is acquired.
Specifically, IRS limits the use of acquired company's NOLs to a long-term tax exempt rate (4.18% as of 3/07) of the equity value per year at the time of the acquisition for up to 20 years --e.g., at hypothetical acquisition price of $17/share for PALM, annual limit on NOLs is $74mm (i.e., equity value of $1.77bn * 4.18%).
In addition, NOLs from a prior acquisition (i.e., Handspring's $273mm), must adhere to the IRS limitation specified at the time of acquisition (10/03) --i.e., $9mm/year based on equity value of $188mm.
Notablecalls: Bear Stearns is late with this note as PALM already gave up all of the Friday's gains yesterday. However, this goes to the very good to know category should the takeover speculations resurface.
Monday, March 05, 2007
Calls of Note Part 4
- Stifel is out with a Subprime Mortgage Sector downgrade saying that following meetings with three mortgage lenders last week (CFC, NDE, and IMH) and several recent negative developments in the sector, they are taking a significantly more bearish stance on the industry.
Specifically, despite valuations that are well below book value, the firm sees increasing evidence that this industry is now in a downward spiral whereby each negative development fuels additional deterioration in key fundamentals including origination volume, pricing, credit " and most importantly " funding.
Firm believes recent developments have led to a "crisis in confidence" that has put unbelievable pressure on secondary market demand with bids for loan pools and ABS bonds nearly evaporating. With the NEW and FMT news late Friday, the firm believes this risk is only increasing further, and they now expect profitability will be severely strained until conditions stabilize. They expect this to make it difficult for even higher quality players like LEND to remain solvent and all remaining subprime lenders will need to obtain significant covenant waivers to remain operational.
As a result, despite stocks that have fallen an average of nearly 50% since their initial cutious call (Feb 7), they believe further downside is likely, as liquidity risk is still rising. Accordingly, they have cuttheir rating to Sell from Hold on NFI, LEND, and NEW.
For CFC, while they still believe the company will take advantage of the sector turmoil, their near-term bias is also negative as they expect the disconcerting trends in the subprime sector to increasingly spread into the Alt-A and, to a lesser extent, prime sectors.
Notablecalls: Several firms are out with some pretty nasty commentary on NEW and other names. I know that many were loading up on the likes of NFI in anticipation of a bounce but now it looks like that train is going straight to hell.
Specifically, despite valuations that are well below book value, the firm sees increasing evidence that this industry is now in a downward spiral whereby each negative development fuels additional deterioration in key fundamentals including origination volume, pricing, credit " and most importantly " funding.
Firm believes recent developments have led to a "crisis in confidence" that has put unbelievable pressure on secondary market demand with bids for loan pools and ABS bonds nearly evaporating. With the NEW and FMT news late Friday, the firm believes this risk is only increasing further, and they now expect profitability will be severely strained until conditions stabilize. They expect this to make it difficult for even higher quality players like LEND to remain solvent and all remaining subprime lenders will need to obtain significant covenant waivers to remain operational.
As a result, despite stocks that have fallen an average of nearly 50% since their initial cutious call (Feb 7), they believe further downside is likely, as liquidity risk is still rising. Accordingly, they have cuttheir rating to Sell from Hold on NFI, LEND, and NEW.
For CFC, while they still believe the company will take advantage of the sector turmoil, their near-term bias is also negative as they expect the disconcerting trends in the subprime sector to increasingly spread into the Alt-A and, to a lesser extent, prime sectors.
Notablecalls: Several firms are out with some pretty nasty commentary on NEW and other names. I know that many were loading up on the likes of NFI in anticipation of a bounce but now it looks like that train is going straight to hell.
Calls of Note Part 3
Two defensive notes out on Amgen (NASDAQ:AMGN).
- JP Morgan says that With AMGN shares now trading at 12.5X 08 consensus (vs Big Pharma at 15), they'd argue the selloff from anemia-related headlines is overdone. They find AMGN's risk/reward highly attractive ahead of the ODAC panel and CERA PDUFA, both in May. They are comfortable with the risk of trial 145 (Aranesp in small cell lung cancer or SCLC) as, like many recent negative anemia trials, target Hb levels are outside of commercial clinical practice.
The 145 study guides Hb levels to 13-14g/dl, higher than 97% of commercial oncology patients on Aranesp. Hence, even if Aranesp demonstrates harm in Trial 145, its relevance to contemporary practice is questionable, in firm's view. With 80% power to detect a 42% survival difference between the study cohorts, a smaller difference (e.g., 10%) is unlikely to reach statistical significance. So the most likely scenario, in their view is that Aranesp shows no difference (i.e. benefit or harm) between treatment arms.
Firm believes that a negative trial 145 is manageable for Aranesp where worst-case scenario, 10% of CIA sales may be at risk (~$285M). When also factoring in a potential hit to Aranesp in AoC, they estimate a total EPS impact of $0.13 or 3% of our 2008 ests of $4.83. Reiterates Overweight.
- Deutsche Bank thinks that Amgen's recent severe decline from $75.85 (1/22/07) to $61.75 (3/2/07) per share or $16B or 23% is unwarranted, and more than reflects impact from negative events sidelining investors. On valuation, AMGN shares are trading at 12x their 08 EPS est of $5.31 or 43% discount to its comp grp avg of 21x, making AMGN an increasingly attractive investment opportunity.
Sum of the parts analysis shows -ve events more than fully reflected in valuation. Firm set forth an abbreviated sum of the parts framework for forecasting financial impact from anticipated new KDOQI guidelines impact, and negative dialysis, pre-dialysis, AOC data and upcoming studies (including the 145 lung cancer CIA trial results in May). Net/net, firm est the sum impact to be $125M/$0.11 in 07, $265M/$0.23 in 08, and $283M/$0.20 in 09.
Notablecalls: The defenses keep coming, but this time Deutsche got to a new level - they are holding a conference call with investors to discuss the issues. Might want to grab a few commons ahead of the call at 10AM EST today. Tight leash though as the defenses have failed to work so far. Would love to see it gap down first along with the general market.
- JP Morgan says that With AMGN shares now trading at 12.5X 08 consensus (vs Big Pharma at 15), they'd argue the selloff from anemia-related headlines is overdone. They find AMGN's risk/reward highly attractive ahead of the ODAC panel and CERA PDUFA, both in May. They are comfortable with the risk of trial 145 (Aranesp in small cell lung cancer or SCLC) as, like many recent negative anemia trials, target Hb levels are outside of commercial clinical practice.
The 145 study guides Hb levels to 13-14g/dl, higher than 97% of commercial oncology patients on Aranesp. Hence, even if Aranesp demonstrates harm in Trial 145, its relevance to contemporary practice is questionable, in firm's view. With 80% power to detect a 42% survival difference between the study cohorts, a smaller difference (e.g., 10%) is unlikely to reach statistical significance. So the most likely scenario, in their view is that Aranesp shows no difference (i.e. benefit or harm) between treatment arms.
Firm believes that a negative trial 145 is manageable for Aranesp where worst-case scenario, 10% of CIA sales may be at risk (~$285M). When also factoring in a potential hit to Aranesp in AoC, they estimate a total EPS impact of $0.13 or 3% of our 2008 ests of $4.83. Reiterates Overweight.
- Deutsche Bank thinks that Amgen's recent severe decline from $75.85 (1/22/07) to $61.75 (3/2/07) per share or $16B or 23% is unwarranted, and more than reflects impact from negative events sidelining investors. On valuation, AMGN shares are trading at 12x their 08 EPS est of $5.31 or 43% discount to its comp grp avg of 21x, making AMGN an increasingly attractive investment opportunity.
Sum of the parts analysis shows -ve events more than fully reflected in valuation. Firm set forth an abbreviated sum of the parts framework for forecasting financial impact from anticipated new KDOQI guidelines impact, and negative dialysis, pre-dialysis, AOC data and upcoming studies (including the 145 lung cancer CIA trial results in May). Net/net, firm est the sum impact to be $125M/$0.11 in 07, $265M/$0.23 in 08, and $283M/$0.20 in 09.
Notablecalls: The defenses keep coming, but this time Deutsche got to a new level - they are holding a conference call with investors to discuss the issues. Might want to grab a few commons ahead of the call at 10AM EST today. Tight leash though as the defenses have failed to work so far. Would love to see it gap down first along with the general market.
Calls of Note Part 2
Jefferies says they attented the SPIE conference in San Jose last, where they met with both equipment vendors involved in lithography, and fab managers from IDMs and foundries, coming away with positive data points for ASML (NASDAQ:ASML). The net take from this was (1) chipmakers remain committed to existing CY07 spending plans with no signs of Capex push-out, (2) traction of Immersion tools may be slower than expected, as DRAM chipmakers look to utilise dry-lithography tools longer and (3) ASML's product roadmap in-tune with customer requirements.
On the first point, firm spoke with key representatives from both leading memory chipmakers (DRAM and NAND) and foundry players. Despite weakening NAND and DRAM spot prices, memory chipmakers alluded that their mgmt remain committed to the current CY07 capex budget. In particular, Samsung, Hynix and Toshiba appear focused on fighting for DRAM and NAND market share. Amongst the foundries, TSMC's capex spend remains on track, as well as spending plans from the MPU chipmakers.
On the second point, firm does not expect to see any Immersion booking surprise in 1H:07. From their conversations, firm believes that DRAM chipmakers are likely to purchase dry 193nm-lithography tools rather than Immersion tools. This is because DRAM makers are unwilling to take the higher yield impact and higher maintenance costs associated with Immersion tools. In contrast, NAND makers will purchase Immersion, preferring the higher productivity gained from geometry shrinkage.
Notablecalls: Not actionable. While Jeffy came away with positive data points from the conference, the most important point seems to be lower than expected traction of Immersion tools. That may be perceived negatively for Cymer (NASDAQ:CYMI). One to keep an eye on.
On the first point, firm spoke with key representatives from both leading memory chipmakers (DRAM and NAND) and foundry players. Despite weakening NAND and DRAM spot prices, memory chipmakers alluded that their mgmt remain committed to the current CY07 capex budget. In particular, Samsung, Hynix and Toshiba appear focused on fighting for DRAM and NAND market share. Amongst the foundries, TSMC's capex spend remains on track, as well as spending plans from the MPU chipmakers.
On the second point, firm does not expect to see any Immersion booking surprise in 1H:07. From their conversations, firm believes that DRAM chipmakers are likely to purchase dry 193nm-lithography tools rather than Immersion tools. This is because DRAM makers are unwilling to take the higher yield impact and higher maintenance costs associated with Immersion tools. In contrast, NAND makers will purchase Immersion, preferring the higher productivity gained from geometry shrinkage.
Notablecalls: Not actionable. While Jeffy came away with positive data points from the conference, the most important point seems to be lower than expected traction of Immersion tools. That may be perceived negatively for Cymer (NASDAQ:CYMI). One to keep an eye on.
Calls of Note Part 1
Wachovia out noting that Medtronic's (NYSE:MDT) interventional spine unit was not present at the 2007 Society of Interventional Radiology (SIR) meeting; MDT's booth only featured vascular products. When Arcuate was missing at this year's AAOS meeting, firm assumed it was because MDT was instead targeting interventional radiologists (IRs). Given that SIR is the key IR meeting, they now suspect MDT may have pulled back from its aggressive Arcuate launch. It is not clear why this "on again/off again" program seems to be off again; firm suspects either legal concerns surrounding the Kyphon (NASDAQ:KYPH) patent lit. or a change in strategy given the pending management changes at MDT. Either way, firm views Arcuate's disappearing act as a positive for KYPH.
Firm says meeting supports their Outperform rating on KYPH: They expect upside to their 2007 revenue (driven by X-Stop) and EPS estimates (driven by lower convertible debt interest); the 15-20% growth forecast for kyphoplasty (KP) among IRs is consistent with their 18% domestic KP forecast. Further, the threat posed by MDT's Arcuate continues to ease while KYPH's acquisition of Disc-O-Tech's Confidence VP system should allow for further IR penetration and share gains in 2008 and beyond.
Notablecalls: Might have called this one actionable on some other day, but with futures indicating another choppy day, don't think this note will catch enough attention.
Firm says meeting supports their Outperform rating on KYPH: They expect upside to their 2007 revenue (driven by X-Stop) and EPS estimates (driven by lower convertible debt interest); the 15-20% growth forecast for kyphoplasty (KP) among IRs is consistent with their 18% domestic KP forecast. Further, the threat posed by MDT's Arcuate continues to ease while KYPH's acquisition of Disc-O-Tech's Confidence VP system should allow for further IR penetration and share gains in 2008 and beyond.
Notablecalls: Might have called this one actionable on some other day, but with futures indicating another choppy day, don't think this note will catch enough attention.
Thursday, March 01, 2007
Attention!
NC will be on vacation on Friday and will resume posting Monday morning.
Oh and btw, I still love getting feedback (wink-wink!).
NC
Oh and btw, I still love getting feedback (wink-wink!).
NC
Calls of Note Part 2
- Prudential is lowering their Q1 EPS on Nokia (NYSE:NOK) below cons. to 0.23 (down by 0.03) and Q2 to 0.24 (down 0.02). Even with decent unit volumes and associated share gains, they expect near-term results to be impacted by lingering price discounting that has affected market players for the past few quarters, which will likely limit earnings power in 1H07. Firm does not believe the ASP pressure is due to geography mix alone, as price discounting is evident in developed markets too.
Firm expects new devices, like the new N-Series and E-Series, to start to ramp from mid-March onwards; however, this means Q1 will still be largely dependent on the existing product line. They expect near-term ASP weakness will lead to weak near-term earnings.
Over the course of the year, they are more optimistic about a rebound in the business as new handsets begin to ship in volume and as the NOK/SI integration work proceeds once that deal closes. NOK releases up to 4 dozen new handset models a year, which should help relieve near-term ASP pressure. Firm expects margins to improve in 2H07, and they are raising their 4Q EPS estimate by 0.01.
Net-net, this does not change their overall thinking on the company, and they continue to view Nokia as the best-positioned handset maker. Firm believes this near-term weakness will yield to eventual recovery, but until we move closer to such recovery, they remain Neutral Weight with a $22 price target.
Notablecalls: You buy any of this stronger H2 talk? SI integration will save the day? Huh?
Firm expects new devices, like the new N-Series and E-Series, to start to ramp from mid-March onwards; however, this means Q1 will still be largely dependent on the existing product line. They expect near-term ASP weakness will lead to weak near-term earnings.
Over the course of the year, they are more optimistic about a rebound in the business as new handsets begin to ship in volume and as the NOK/SI integration work proceeds once that deal closes. NOK releases up to 4 dozen new handset models a year, which should help relieve near-term ASP pressure. Firm expects margins to improve in 2H07, and they are raising their 4Q EPS estimate by 0.01.
Net-net, this does not change their overall thinking on the company, and they continue to view Nokia as the best-positioned handset maker. Firm believes this near-term weakness will yield to eventual recovery, but until we move closer to such recovery, they remain Neutral Weight with a $22 price target.
Notablecalls: You buy any of this stronger H2 talk? SI integration will save the day? Huh?
Color on news: Motorola (NYSE:MOT)
Couple of firms comment on Motorola (NYSE:MOT) after financier Carl Ichan and three of his entities filed to buy more than $2 billion, or 4.4 percent, of the company's common stock. The company also filed its 10K last night:
- Piper Jaffray notes the co indicated in its 10K that roughly 39% of Mobile Device sales were to China Mobile, Sprint, Verizon, Cingular, and T-Mobile. With firm's channel checks indicating weakening North American market share and a continued drop in Motorola ASPs, they have lowered their 1H07 estimates. Motorola indicated mobile device inventory was up year over year due to slower Q406 demand than Motorola anticipated for certain products, which the firm believes was primarily iDEN phones and KRZR handsets. Checks indicate additional price cuts of KRZR and RAZR during Q107 should help lower inventory, but such pricing actions will likely result in sequentially lower Q107 operating margins. The co indicated "going forward mobile devices will rebalance its market share and profitability objectives with a greater emphasis on profitability."
Based on more cautious 1H07 outlook, they are lowering 2007 proforma EPS estimate from $1.17 to $1.08 and 2008 estimate from $1.39 to $1.36. Maintains Market Perform but lowers tgt to $20 from $21.
- JP Morgan believes MOT's current lackluster handset line-up is leading to continued ASP and operating margin pressure in Q1 and Q2 which also raises the potential for a more modest turnaround in back half of '07. Coupled with the current leadership void following the departure of Ron Garriques, they are reducing their Mobile Devices operating margin estimates. However, the firm continues to believe MOT is capable of returning to double-digit handset margins longer term and with near term share price support provided by Carl Icahn, they are maintaining Overweight rating.
Reducing handset margins to 2.5% in Q1 and 4.5% in Q2, down 350 basis points each from previous estimates while Q3 and Q4 margins fall to 6.0% and 9.0% down 300 and 100 basis points respectively.
Icahn purchases limit downside as 4 of Carl Icahn's funds filed notice after the close of their intentions to purchase a minimum $1.2B worth of MOT stock. At Wednesday's $18.52 close, $1.2B implies approximately 65M new shares in addition to the 40M shares which Icahn's funds already control, giving him a minimum 4.3% stake of the roughly 2.5B shares outstanding.
Notablecalls: Looks like things in the handset space are going to get worse before getting better. In order for things to get better, we need something new - new kinds of services or killer products like the iPhone. I don't see anything that exciting coming from MOT nor NOK in the near term. Regarding Ichan, call me paranoid but I'm not buying this potential increase in positions. I suspect that a month later investors will find out Ichan has actually reduced its currently reported quantity. I've seen it happen at least once in the past. The stock was up around 5% last night in after market action. Don't think the levels will hold.
- Piper Jaffray notes the co indicated in its 10K that roughly 39% of Mobile Device sales were to China Mobile, Sprint, Verizon, Cingular, and T-Mobile. With firm's channel checks indicating weakening North American market share and a continued drop in Motorola ASPs, they have lowered their 1H07 estimates. Motorola indicated mobile device inventory was up year over year due to slower Q406 demand than Motorola anticipated for certain products, which the firm believes was primarily iDEN phones and KRZR handsets. Checks indicate additional price cuts of KRZR and RAZR during Q107 should help lower inventory, but such pricing actions will likely result in sequentially lower Q107 operating margins. The co indicated "going forward mobile devices will rebalance its market share and profitability objectives with a greater emphasis on profitability."
Based on more cautious 1H07 outlook, they are lowering 2007 proforma EPS estimate from $1.17 to $1.08 and 2008 estimate from $1.39 to $1.36. Maintains Market Perform but lowers tgt to $20 from $21.
- JP Morgan believes MOT's current lackluster handset line-up is leading to continued ASP and operating margin pressure in Q1 and Q2 which also raises the potential for a more modest turnaround in back half of '07. Coupled with the current leadership void following the departure of Ron Garriques, they are reducing their Mobile Devices operating margin estimates. However, the firm continues to believe MOT is capable of returning to double-digit handset margins longer term and with near term share price support provided by Carl Icahn, they are maintaining Overweight rating.
Reducing handset margins to 2.5% in Q1 and 4.5% in Q2, down 350 basis points each from previous estimates while Q3 and Q4 margins fall to 6.0% and 9.0% down 300 and 100 basis points respectively.
Icahn purchases limit downside as 4 of Carl Icahn's funds filed notice after the close of their intentions to purchase a minimum $1.2B worth of MOT stock. At Wednesday's $18.52 close, $1.2B implies approximately 65M new shares in addition to the 40M shares which Icahn's funds already control, giving him a minimum 4.3% stake of the roughly 2.5B shares outstanding.
Notablecalls: Looks like things in the handset space are going to get worse before getting better. In order for things to get better, we need something new - new kinds of services or killer products like the iPhone. I don't see anything that exciting coming from MOT nor NOK in the near term. Regarding Ichan, call me paranoid but I'm not buying this potential increase in positions. I suspect that a month later investors will find out Ichan has actually reduced its currently reported quantity. I've seen it happen at least once in the past. The stock was up around 5% last night in after market action. Don't think the levels will hold.
Calls of Note Part 1
- Bear Stearns notes investors should stay on the sidelines on AMD (NYSE:AMD) even at current levels. Trough valuations get them to a price of $11-$12, and given further deterioration in fundamentals and negative data points from their recent channel checks, the firm believes AMD has downside to these trough levels. They expect AMD to gain share in 2H07 and 2008, after share losses in 1H07, but these share gains will be achieved through aggressive pricing, not because of its technological edge.
AMD's 1Q unit shipments are tracking well below firm's conservative expectations (they have already factored in excess inventory exiting 4Q in their earlier estimates) due to weaker than expected demand for AMD in mature markets, the company's inability to penetrate existing accounts given its less competitive product roadmap, and belief that some of its desktop customers have increased their activities with Intel. Firm expects AMD's unit share to decline 140 bps QoQ to 23.7% in 1Q. Though 1Q price declines are well known, they believe AMD's 2Q processor pricing will deteriorate significantly beyond current market expectations. Bear is lowering 1Q revenues from $1.65B (-7% QoQ) to $1.53B (-14% QoQ), and 1Q EPS from ($0.11) to ($0.22). Maintains Peer Perform.
Notablecalls: So Bear thinks it's not the time to bottom fish in AMD. They are most likely right. Note that ThinkEquity's Eric Ross took his tgt on AMD to $12 almost a month ago citing similar reasons.
AMD's 1Q unit shipments are tracking well below firm's conservative expectations (they have already factored in excess inventory exiting 4Q in their earlier estimates) due to weaker than expected demand for AMD in mature markets, the company's inability to penetrate existing accounts given its less competitive product roadmap, and belief that some of its desktop customers have increased their activities with Intel. Firm expects AMD's unit share to decline 140 bps QoQ to 23.7% in 1Q. Though 1Q price declines are well known, they believe AMD's 2Q processor pricing will deteriorate significantly beyond current market expectations. Bear is lowering 1Q revenues from $1.65B (-7% QoQ) to $1.53B (-14% QoQ), and 1Q EPS from ($0.11) to ($0.22). Maintains Peer Perform.
Notablecalls: So Bear thinks it's not the time to bottom fish in AMD. They are most likely right. Note that ThinkEquity's Eric Ross took his tgt on AMD to $12 almost a month ago citing similar reasons.
Morgan Stanley positive on Apple (NASDAQ:AAPL)
- Morgan Stanley says they would be buyers of Apple (NASDAQ:AAPL) on incremental revenue and operating leverage. Firm believes the market is underestimating the likely success of iPhone. They're raising C2007 unit and revenue forecasts to better reflect iPhone interest levels, as described in our proprietary survey. EPS estimates for 2007 and 2008 increase to reflect higher unit estimates and a more favorable NAND pricing outlook. They also believe the market is underestimating potential operating leverage. While the firm sees positive leverage drivers across Apple's product segment, the iPhone alone increases scale (better pricing from suppliers), strengthens retail store leverage (increased velocity on fixed-cost base), and takes advantage of lower NAND pricing in the market. Rates AAPL Overweight with a $110 price target.
Expecting 8M units in 2007, up from 6M: MSCO is raising their iPhone unit estimates by 33% due to their survey. A survey of 2,500 US consumers found that more people are interested in buying an iPhone than the combined number of people who already own or are planning to buy a similar high-end device in the NTM (23% vs. 19%). Firm's new forecast could prove conservative if the above-mentioned catalysts play out. C2007 iPod estimate trends down (by 1.5M units) to consider a slightly higher cannibalization rate than previously forecast. C2007 Revenue and EPS increase $600M and $0.43, respectively.
Notablecalls: Considering MSCO's ests were already Street high, any positive revisions will be greeted by the market with a nice bump in share price. Actionable call alert!
Expecting 8M units in 2007, up from 6M: MSCO is raising their iPhone unit estimates by 33% due to their survey. A survey of 2,500 US consumers found that more people are interested in buying an iPhone than the combined number of people who already own or are planning to buy a similar high-end device in the NTM (23% vs. 19%). Firm's new forecast could prove conservative if the above-mentioned catalysts play out. C2007 iPod estimate trends down (by 1.5M units) to consider a slightly higher cannibalization rate than previously forecast. C2007 Revenue and EPS increase $600M and $0.43, respectively.
Notablecalls: Considering MSCO's ests were already Street high, any positive revisions will be greeted by the market with a nice bump in share price. Actionable call alert!
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