Notable Calls
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Monday, April 30, 2007
Goodrich Petroleum (NYSE:GDP): RayJay more bullish than ever on the story
- Raymond James is positive on Goodrich Petroleum (NYSE:GDP) saying that after spending several days with management last week, they came away more bullish than ever on the story. The company has never been as well-positioned or with as many potential catalysts as they see emerging over the next six to nine months.
Goodrich announced results last week on their most recent horizontal well in the Cotton Valley. The Champe Graham 3-H has now been on-line for roughly three weeks and is still producing at its initial production rate of 4 MMcfe/d, which indicates an EUR of ~4 Bcfe versus 1 Bcfe/well on traditional vertical wells. RJ estimates that horizontal drilling in only the Bethany-Longstreet field (14% of total acreage) shouldadd at least $5/share to total NAV . While the market seems to pigeonhole Goodrich as a one-trick pony that lives or dies with horizontal drilling results, it should be pointed out that it is only one of seven potential catalysts on the horizon in 2007.
The other catalysts/trends consist of the following: Angelina River, James Lime, Alabama Bend, 20-acre downspacing, new "surgical" fracs, and slim-hole horizontal re-entries. Firm estimates the aggregate of all these along with additional horizontal drilling results in Bethany-Longstreet, could potentially add ~$20 to their current $45 total NAV estimate .
Overall, they believe Goodrich will have a steady stream of positive news the remainder of the year with potential to drive the stock materially higher. Reiterates Strong Buy rating and $45 target price.
Notablecalls: This is the kind of note that makes me feel all warm and fuzzy inside. RayJay is one of the best firms out there and if they spend several days with co's management and come back with very positive comments, I expect there to be considerable upside in the stock over the next couple of weeks. The chart doesn't look bad either! Actionable call alert!
Goodrich announced results last week on their most recent horizontal well in the Cotton Valley. The Champe Graham 3-H has now been on-line for roughly three weeks and is still producing at its initial production rate of 4 MMcfe/d, which indicates an EUR of ~4 Bcfe versus 1 Bcfe/well on traditional vertical wells. RJ estimates that horizontal drilling in only the Bethany-Longstreet field (14% of total acreage) shouldadd at least $5/share to total NAV . While the market seems to pigeonhole Goodrich as a one-trick pony that lives or dies with horizontal drilling results, it should be pointed out that it is only one of seven potential catalysts on the horizon in 2007.
The other catalysts/trends consist of the following: Angelina River, James Lime, Alabama Bend, 20-acre downspacing, new "surgical" fracs, and slim-hole horizontal re-entries. Firm estimates the aggregate of all these along with additional horizontal drilling results in Bethany-Longstreet, could potentially add ~$20 to their current $45 total NAV estimate .
Overall, they believe Goodrich will have a steady stream of positive news the remainder of the year with potential to drive the stock materially higher. Reiterates Strong Buy rating and $45 target price.
Notablecalls: This is the kind of note that makes me feel all warm and fuzzy inside. RayJay is one of the best firms out there and if they spend several days with co's management and come back with very positive comments, I expect there to be considerable upside in the stock over the next couple of weeks. The chart doesn't look bad either! Actionable call alert!
Vanda Pharma (NASDAQ:VNDA): Problem solver for larger pharma players?
- Morgan Stanley is out with a wonderful call on Vanda Pharmaceuticals (NASDAQ:VNDA) saying they think VNDA should be a core long-term holding for risk-tolerant investors. Given the recent share price decline, the firm thinks this is an opportune time to build positions. Vanda has two attractive Phase III assets that address large market opportunities: VEC-162 for insomnia ($3.3 billion market) and Iloperidone for schizophrenia and bipolar ($8.7 billion market). They see Vanda as a 'problem solver' for many of the larger pharma companies that are losing patent protection on their respective CNS (central nervous system) drugs in the early part of the next decade.
Vanda is uniquely positioned with two late-stage CNS assets that possess the characteristics larger pharma companies want: 1) differentiated profiles; 2) the ability to treat several illnesses; and, 3) solid patent protection (beyond 2015). In firm's base case scenario, their 12-18 month price target is $29, which assumes the company will sign a partnership for VEC-162. Their work shows that licensees have returned an average 45% six months after a deal was announced.
MSCO thinks the frustration among investors that a deal hasn't happened yet is misplaced. The stock now reflects if any sort of deal will get done, not when. Thus, they think the downside risk is favorable.
Notablecalls: Given its relatively strong wording, I think the call will generate some buy interest in VNDA today and over the next couple of weeks.
Hansen Natural (NASDAQ:HANS): Cost of doing business increasing?
- Stifel is out with some interesting comments on Hansen Natural (NASDAQ:HANS) today saying that contrary to the 10% short interest in the shares, they would be surprised to see the company miss their 2007 and 2008 EPS estimates of $1.53 and $2.11, respectively, or annual growth of 37% and 38%. This is because of firm's continued bullishness on the energy segment and Hansen's untapped share potential.
As for the near term, they are $0.02 below Street consensus for 1Q and believe actual results may fuel worries that the cost of doing business is increasing. For example, firm's trade sources indicate that unit selling and promotion expenses for Monster and other Hansen products is up in the 1Q, although the Anheuser-Busch system is funding an unknown portion of the increase. They believe that the majority of the increase relates to athlete and event sponsorships, which collectively account for a small percentage of the company's overall promotion and selling expenses. However, a material increase in this item and/or an unexpected or material step-up in more conventional selling expenses may be interpreted as an increase in the cost of doing business. Firm believes this is not the correct interpretation of this result. For a number of selling and promotional items, the company amortizes the expense over the course of the year. Therefore, the potential exists for promotional programs to increase 1Q expenses before the marketing program has had the opportunity to improve sales. The result is that volume growth lags the increase in spending.
Again, they like HANS shares and so become more aggressive if they experience weakness on 1Q results. Maintains Buy and $46 tgt.
Notablecalls: Interesting comments from Stifel's Mark Astrachan. Despite the somewhat cautious tone of the call, I don't think there will be any real damage to the stock price. This looks to be just another case of analyst trying to hedge his position. If indeed HANS comes in a penny or two shy bc of marketing costs, we will likely see a nice bounce after the initial sell-off. Note that Stifel's channel checks do not indicate that the category has become increasingly dependent on promotional activity to drive growth. All in all, expect to see some s-t weakness in HANS today. But nothing major.
As for the near term, they are $0.02 below Street consensus for 1Q and believe actual results may fuel worries that the cost of doing business is increasing. For example, firm's trade sources indicate that unit selling and promotion expenses for Monster and other Hansen products is up in the 1Q, although the Anheuser-Busch system is funding an unknown portion of the increase. They believe that the majority of the increase relates to athlete and event sponsorships, which collectively account for a small percentage of the company's overall promotion and selling expenses. However, a material increase in this item and/or an unexpected or material step-up in more conventional selling expenses may be interpreted as an increase in the cost of doing business. Firm believes this is not the correct interpretation of this result. For a number of selling and promotional items, the company amortizes the expense over the course of the year. Therefore, the potential exists for promotional programs to increase 1Q expenses before the marketing program has had the opportunity to improve sales. The result is that volume growth lags the increase in spending.
Again, they like HANS shares and so become more aggressive if they experience weakness on 1Q results. Maintains Buy and $46 tgt.
Notablecalls: Interesting comments from Stifel's Mark Astrachan. Despite the somewhat cautious tone of the call, I don't think there will be any real damage to the stock price. This looks to be just another case of analyst trying to hedge his position. If indeed HANS comes in a penny or two shy bc of marketing costs, we will likely see a nice bounce after the initial sell-off. Note that Stifel's channel checks do not indicate that the category has become increasingly dependent on promotional activity to drive growth. All in all, expect to see some s-t weakness in HANS today. But nothing major.
Apple (NASDAQ:AAPL): Mac market share up in Q1'07
- Piper Jaffray comments on Apple (NASDAQ:AAPL) saying IDC data indicated Mac market share was 2.6% in calendar Q1'07. This is up q/q from 2.5% in Q4'06, and up y/y from 2.1% in Q1'06. Strong Mac sales of 1.52m in the quarter drove market share gains which would have been even stronger if not for Vista's Jan. 30 launch, which negatively impact Mac market share. They expect Y/Y Mac market share gains to continue through FY07.
Due to Vista's Jan. 30 release and the PC sales that resulted from pent-up demand after its lengthy delay, the firm expected a slight sequential downtick in Mac market share. But strong Mac sales in Apple's March quarter enabled the company to gain share despite stronger than normal PC sales. With Apple heading into 3 quarters of significant product releases (iPhone, Leopard, new iPod) and the education buying season, they expect Y/Y market share gains to continue.
In over two years, the only quarter in which Macs saw a y/y market share decline was calendar Q1'06, during the heart of the Intel transition. Apple announced the transition to Intel processors in June 2005, but did not ship the first Intel Macs until late January of 2005. And only the final quarter of the period between the announcement and the products shipping, calendar Q1'06, saw a y/y decline in Mac market share. Since coming out of the Intel transition Mac market share has seen y/y increases, and y/y unit sales growth of about 30%, which have been about 3x the industry average of about 10%.
Maintains Outperform and $140 tgt.
Notablecalls: Not actionable but good to know category. Wake me up when they cross the 3% level. Or better not.
Due to Vista's Jan. 30 release and the PC sales that resulted from pent-up demand after its lengthy delay, the firm expected a slight sequential downtick in Mac market share. But strong Mac sales in Apple's March quarter enabled the company to gain share despite stronger than normal PC sales. With Apple heading into 3 quarters of significant product releases (iPhone, Leopard, new iPod) and the education buying season, they expect Y/Y market share gains to continue.
In over two years, the only quarter in which Macs saw a y/y market share decline was calendar Q1'06, during the heart of the Intel transition. Apple announced the transition to Intel processors in June 2005, but did not ship the first Intel Macs until late January of 2005. And only the final quarter of the period between the announcement and the products shipping, calendar Q1'06, saw a y/y decline in Mac market share. Since coming out of the Intel transition Mac market share has seen y/y increases, and y/y unit sales growth of about 30%, which have been about 3x the industry average of about 10%.
Maintains Outperform and $140 tgt.
Notablecalls: Not actionable but good to know category. Wake me up when they cross the 3% level. Or better not.
Paperstand (YHOO, JNY)
According to the WSJ, the European bank consortium seeking to top ABN Amro’s (ABN) agreed sale to Barclays (BCS) has lined up much of the funding sources needed to pay for its approximately $98.66bn bid. In recent days, Royal Bank of Scotland and the other banks in its consortium, Banco Santander (STD) and Fortis, have made contact with several other large European banks, asking them to help underwrite the potential offer. They plan to issue more stock to shareholders and sell some assets. The final package could represent a record amount for fund raising. The timing of what would be the world's largest-ever bank acquisition hangs on a Dutch court ruling, expected Thu. The consortium will have to launch its official offer by Sun if the Dutch Enterprise Chamber rules that ABN's related $21bn sale of its LaSalle Bank to Bank of America (BAC) can proceed. If the court freezes the sale, delays its ruling or demands further information, the consortium would have more time. RBS is trying to coordinate an unsolicited takeover and breakup of a bank, something that has never been accomplished before. Financing such a deal is riddled with complications. RBS has said its bid would be 70% in cash and 30% RBS shares. The skirmish over ABN, of Amsterdam, has turned into a global brawl over the Dutch bank's units spread around the world. Other banks still could enter bids, as well.
The WSJ reports that Yahoo (YHOO) today plans to announce a $680m deal to purchase the remaining 80% of closely held Right Media that it doesn't already own.
According to the WSJ, the CEO of Jones Apparel (JNY), Peter Boneparth, has spent his 5-year tenure trying to boost the co's fortunes through acquisitions, cost-cutting and overhauling mature labels. But now, faced with a stagnant stock price, dept-store consolidation and a downturn in the moderate-apparel sector, Mr. Boneparth has an ace left to play: selling the $5bn co's top-performing asset, the Barneys New York chain of luxury dept stores that he engineered the purchase of in ‘04. Jones is expected to pursue a sale, though Barneys isn't officially on the mkt yet.
“Heard on the Street” out saying that the subprime meltdown has shown that few banks were able to resist the appeal of making unconventional home loans to riskier borrowers in exchange for charging higher fees. This earnings season, cracks began showing in the quality of many banks' loan portfolios, such as at Countrywide (CFC). Others such as SunTrust (STI) and M&T Bank (MTB) had trouble finding buyers for their riskier loans and were forced to sell them at a loss or mark down their value on their books. Still, some regional and community banks steered clear of the subprime sector. Hudson City (HCBK), Zions (ZION) and UCBH (UCBH) stayed away from making low-documentation or no-documentation home loans, even to the most credit-worthy borrowers. When they wrote home mortgages, they insisted borrowers put at least 20% down and prove that they could pay them off. They collected deposits and focused almost entirely on commercial lending. As a result, they have some of the cleanest loan books and balance sheets in the business. Still, that hasn't stopped investors from penalizing their shares, which are relatively cheap. "The traditional commercial lenders will continue to do their thing, and the traditional home lenders who lost share to those that got in trouble are getting it back," says David Ellison, of FBR Funds.
Sunday, April 29, 2007
Barron's Summary
Most professional money managers questioned by Barron’s are turning cautious, after the Dow reached 13K mark. Many one-time bulls appear to have moved into the neutral camp, which now encompasses 37% of managers, up sharply from last fall's 20%. The bears' ranks, on the other hand, have stayed constant at around 17%. Ironically, this is just the sort of pessimism that über-bull Carl Marker likes to see: "There's always something out there to be fearful of - the US dollar, the deficit, an unpopular war," says Marker, of IMS Capital Mgmt. "In the face of all this negativity, interest rates are low and stock prices are lower. Fearfulness makes us comfortable. We don't like to see optimistic predictions by investors or investment advisers." He espies one such bargain in the shares of Service Corp. Intl. (SCI). IMS owns about 1.265m shares. Service Corp. trades at around 12, or 18x analysts' ‘08 earnings ests of 58c a share, although annual earnings are growing by 22%. Marker thinks the stock could rally to 20 in the coming years as the mkt "anticipates" an explosion in demand that will ultimately come when growing numbers of baby boomers start dying off.
Charles Hess, of Inferential Focus, saying that the DoD has begun to embark on building a whole new global-networking system similar to the Internet called the GIG, or Global Information Grid. About $34bn is committed to this secure- communications system. Some co’s that are benefiting are Globecomm Systems (GCOM), SAIC (SAI), Radvision (RVSN). Mr. Hess also likes CSCO, CRXS, PLCM, OPTC and ILC.
According to the Barron’s, technical indicators point to excesses in the current bull market, and in individual stocks such as Kohl's (KSS) and AMD (AMD). But other issues, including BHP Billiton (BHP) and Millipore (MIL), look to have more room to run.
Electric-utility stocks have climbed at three times the rate of the S&P the past year -- and gains should continue for three to five years for nuclear players in power-constrained markets. Co’s mentioned include: EXC, ETR, D, CEG, NRG, CCJ, FLR and CBI.
Barrons’ analysis suggests that the shares of American Real Estate partners (ACP), at $110, carry a nearly 70% premium to their underlying value. That's too high, even for a play on Carl Icahn's investment savvy.
“The Trader” highlights Valero (VLO), which last week reported a 30% rise in 1Q net income and tripled its share buyback plan to $6bn. While some of the anticipated good news has materialized, further upside remains possible. A nearly 40% rise in operating income was driven by improving refining margins that should stay robust through the summer. Gasoline demand, for instance, shows few signs of abating, despite rising pump prices. Meanwhile, stricter product specifications, more complicated refining processes and tighter labor all help limit supply, and "refining margins could stay higher for longer than most on Wall St. expect," says FBR analyst Eitan Bernstein. Valero also remains the cheapest of the large refiners, Bernstein notes. At about 71, it trade at 9.7x FBR's ‘08 earnings este, compared with 10.8x for Sunoco (SUN) and 12.1x for Tesoro (TSO).
According to the Barron’s, continued steady flow of new contracts and acquisitions promise to boost Tetra Tech’s (TTEK) profits above expectations and drive the stock into the mid-20s over the next year. Also, Tetra Tech is widening its pool of opportunities beyond it traditional govt work building dams and cleaning up sewer systems and polluted rivers. It's now buying co’s in the energy, automotive and mining spaces. The purchase of Delaney Group could prompt mgmt to lift the high-end of its guidance for the year, according to Debra Coy of Janney Montgomery. "Tetra Tech is building momentum, and the level of investor enthusiasm will likely build as the year progresses," predicts Coy, who adds Tetra could be viewed as a "sexy-growth stock in the latter half of this decade." If, as some bulls expect, Tetra lifts operating margins into high single- to low double-digits over the next couple of years from about 7% currently, the stock could ultimately set happy investors off into an aquatic ballet.
“Review” section discusses Raser (RZ), which in ‘05 claimed big auto co’s and the US Army liked its advanced electric motor. Now, the co is into geothermal energy. More specifically, Raser is into geothermal tax credits. The federal govt allows a 2c tax credit for each KW/h of electricity generated from alternative energy sources. CEO Brent M. Cook formerly sold tax credits for coal-based synthetic fuels and he now has Raser leasing up geothermal rights in Utah and Nevada. "We have probably one of the best resource portfolios for geothermal that exists in the country right now," says Cook. Raser has less than $20m, so it would share the tax credits with partners. Alas, the tax law requires that the plants be ready to generate electricity by the end of ‘08 and it'll be another month before Raser even starts drilling exploration holes, a tight schedule which others in the industry say is not feasible. So Raser's racing the clock, unless Congress, as Cook fully believes, extends the deadline. Even so, he thinks he can get 30MW of generating capacity into service before ‘08 ends. Yet at Raser's $350m mkt value, investors are assuming it will build the 30MW and much, much more. Based on 8,760 hours a year, no downtime and a 5% discount rate, the present value of the 10y of credits on 30,000KW/h of capacity is barely worth $43m.
“Sizing Up Small Caps” column out positively on Brightpoint (CELL). The article is similar to one issued on April 25th in Barron’s Online (see NC archives).
This weeks “Technology Trader” has highly entertaining article on Nano Chemical (NCSH.OB). CLICK HERE to read whole article.
Charles Hess, of Inferential Focus, saying that the DoD has begun to embark on building a whole new global-networking system similar to the Internet called the GIG, or Global Information Grid. About $34bn is committed to this secure- communications system. Some co’s that are benefiting are Globecomm Systems (GCOM), SAIC (SAI), Radvision (RVSN). Mr. Hess also likes CSCO, CRXS, PLCM, OPTC and ILC.
According to the Barron’s, technical indicators point to excesses in the current bull market, and in individual stocks such as Kohl's (KSS) and AMD (AMD). But other issues, including BHP Billiton (BHP) and Millipore (MIL), look to have more room to run.
Electric-utility stocks have climbed at three times the rate of the S&P the past year -- and gains should continue for three to five years for nuclear players in power-constrained markets. Co’s mentioned include: EXC, ETR, D, CEG, NRG, CCJ, FLR and CBI.
Barrons’ analysis suggests that the shares of American Real Estate partners (ACP), at $110, carry a nearly 70% premium to their underlying value. That's too high, even for a play on Carl Icahn's investment savvy.
“The Trader” highlights Valero (VLO), which last week reported a 30% rise in 1Q net income and tripled its share buyback plan to $6bn. While some of the anticipated good news has materialized, further upside remains possible. A nearly 40% rise in operating income was driven by improving refining margins that should stay robust through the summer. Gasoline demand, for instance, shows few signs of abating, despite rising pump prices. Meanwhile, stricter product specifications, more complicated refining processes and tighter labor all help limit supply, and "refining margins could stay higher for longer than most on Wall St. expect," says FBR analyst Eitan Bernstein. Valero also remains the cheapest of the large refiners, Bernstein notes. At about 71, it trade at 9.7x FBR's ‘08 earnings este, compared with 10.8x for Sunoco (SUN) and 12.1x for Tesoro (TSO).
According to the Barron’s, continued steady flow of new contracts and acquisitions promise to boost Tetra Tech’s (TTEK) profits above expectations and drive the stock into the mid-20s over the next year. Also, Tetra Tech is widening its pool of opportunities beyond it traditional govt work building dams and cleaning up sewer systems and polluted rivers. It's now buying co’s in the energy, automotive and mining spaces. The purchase of Delaney Group could prompt mgmt to lift the high-end of its guidance for the year, according to Debra Coy of Janney Montgomery. "Tetra Tech is building momentum, and the level of investor enthusiasm will likely build as the year progresses," predicts Coy, who adds Tetra could be viewed as a "sexy-growth stock in the latter half of this decade." If, as some bulls expect, Tetra lifts operating margins into high single- to low double-digits over the next couple of years from about 7% currently, the stock could ultimately set happy investors off into an aquatic ballet.
“Review” section discusses Raser (RZ), which in ‘05 claimed big auto co’s and the US Army liked its advanced electric motor. Now, the co is into geothermal energy. More specifically, Raser is into geothermal tax credits. The federal govt allows a 2c tax credit for each KW/h of electricity generated from alternative energy sources. CEO Brent M. Cook formerly sold tax credits for coal-based synthetic fuels and he now has Raser leasing up geothermal rights in Utah and Nevada. "We have probably one of the best resource portfolios for geothermal that exists in the country right now," says Cook. Raser has less than $20m, so it would share the tax credits with partners. Alas, the tax law requires that the plants be ready to generate electricity by the end of ‘08 and it'll be another month before Raser even starts drilling exploration holes, a tight schedule which others in the industry say is not feasible. So Raser's racing the clock, unless Congress, as Cook fully believes, extends the deadline. Even so, he thinks he can get 30MW of generating capacity into service before ‘08 ends. Yet at Raser's $350m mkt value, investors are assuming it will build the 30MW and much, much more. Based on 8,760 hours a year, no downtime and a 5% discount rate, the present value of the 10y of credits on 30,000KW/h of capacity is barely worth $43m.
“Sizing Up Small Caps” column out positively on Brightpoint (CELL). The article is similar to one issued on April 25th in Barron’s Online (see NC archives).
This weeks “Technology Trader” has highly entertaining article on Nano Chemical (NCSH.OB). CLICK HERE to read whole article.
Friday, April 27, 2007
MEMC Electronic Materials (NYSE:WFR) - A bounce play over the next few days
Plenty of comments on MEMC Electronic Materials (NYSE:WFR) after in-line results and guidance disappointed the mkt.
- Citigroup says the story is not over yet, but margin for error is closing fast - Given WFR's leverage to the poly spot market, it's probably not over here until poly spot prices begin to moderate - unlikely near-term. That said, near-term risk heightened as guidance may not be as conservative as it looks b/c they think obligations to STP may prevent WFR from relying as heavily on a strong spot market in CQ2. Firm maintains Hold rating, tgt goes from $48 to $60 on shift to sum-of parts.
- Friedman, Billings, Ramsey notes that although reporting in line with guidance (1Q) and guiding to consensus (2Q) is not really a "miss," they still find the report/guidance disappointing since the company had "upsided" the guidance/consensus in the past four quarters.
Firm also wonders what it would take for the company to disclose more, when most other competitors do. To that extent, they note that, if MEMC's semi wafer customers are not ordering because they have sufficient inventory (for now), why is MEMC not able to sell the incremental poly (that otherwise would have been used to make the semi wafer) into the spot market?
- JP Morgan says MEMC is likely to reduce solar polysilicon sales in order to keep up with wafer demand. Firm expects this elasticity between polysilicon demand and wafer demand to exist throughout C07 leading to additional tightness in the polysilicon mkt and eventually to upside to pricing.
Notablecalls: Despite the initial disappointment in numbers the bull case seems to prevail here. Looks like the lack of upside is rather caused by internal capacity constrains intead of lacking demand. One could even make a theory of too high demand limiting n-t revenue & EPS upside as MEMC is too busy supplying wafer and long-term contract instead of creaming off the polysilicon spot market.
With the capacity constraints easing going into the 2H and solar contracts ramping, the issues seem to be temporary of nature. Less supply and resulting tighter poly spot market should further drive already improving margins. Alltogether, the company is still in great shape.
Given the temporary nature of the "problems", I believe the current pre-market prices around $60-61 prove to be good buy for a bounce over the next few days.
- Citigroup says the story is not over yet, but margin for error is closing fast - Given WFR's leverage to the poly spot market, it's probably not over here until poly spot prices begin to moderate - unlikely near-term. That said, near-term risk heightened as guidance may not be as conservative as it looks b/c they think obligations to STP may prevent WFR from relying as heavily on a strong spot market in CQ2. Firm maintains Hold rating, tgt goes from $48 to $60 on shift to sum-of parts.
- Friedman, Billings, Ramsey notes that although reporting in line with guidance (1Q) and guiding to consensus (2Q) is not really a "miss," they still find the report/guidance disappointing since the company had "upsided" the guidance/consensus in the past four quarters.
Firm also wonders what it would take for the company to disclose more, when most other competitors do. To that extent, they note that, if MEMC's semi wafer customers are not ordering because they have sufficient inventory (for now), why is MEMC not able to sell the incremental poly (that otherwise would have been used to make the semi wafer) into the spot market?
- JP Morgan says MEMC is likely to reduce solar polysilicon sales in order to keep up with wafer demand. Firm expects this elasticity between polysilicon demand and wafer demand to exist throughout C07 leading to additional tightness in the polysilicon mkt and eventually to upside to pricing.
Notablecalls: Despite the initial disappointment in numbers the bull case seems to prevail here. Looks like the lack of upside is rather caused by internal capacity constrains intead of lacking demand. One could even make a theory of too high demand limiting n-t revenue & EPS upside as MEMC is too busy supplying wafer and long-term contract instead of creaming off the polysilicon spot market.
With the capacity constraints easing going into the 2H and solar contracts ramping, the issues seem to be temporary of nature. Less supply and resulting tighter poly spot market should further drive already improving margins. Alltogether, the company is still in great shape.
Given the temporary nature of the "problems", I believe the current pre-market prices around $60-61 prove to be good buy for a bounce over the next few days.
McAffee (NYSE:MFE): Not enough to break out
Out of several comments on McAfee (NYSE:MFE) two caught my eye:
- Morgan Stanley notes that some quick math to back into bookings implies bookings growth of approximately 5% y/y and a healthy draw from the balance sheet. And in addition to an option review process dragging on, they flag fewer metrics to measure the performance detail of the core business on a real-time basis as an issue.
- JP Morgan says they do not think the massive revenue upside is a sign of a big acceleration in the market rather than a mix issue causing different accounting treatment, that is supported by guidance only going up by 1Q07 beat.
Deferred revenue was flat qoq at $893.9M, worst qoq growth since Sept. 04. Firm believes the mix issue was the primary reason which is unfortunate because deferred revenue provides the visibility for future quarters. This is first time in over two years that visibility has not improved through higher deferred revenue.
Notablecalls: The headline numbers for the quarter were definately strong, with the company beating consensus on both top and bottom line. That beat however seems to be one-time of nature and possibly borrowed from the next quarters. With bookings growth of just 5% y/y and deferred revenues staying flat q/q, sure doesn't look like that kind of outperformance is about to continue.
The stock is trading ~19x this year's earnings, not particularly cheap, but not extraordinarily expensive either. However, with the questionable future cash flow trends and slow growth, I do not think this is the stock I would like to own. The stock has been stuck around $30 over the past six months and I do not think this report is strong enought to generate appetite for the stock above the recent range. As such, I would be opportunistic short around recent highs at the $31.50 level. Note, however, that the recent mkt has provided some wild moves (AMZN anyone?) and have your stops tight.
- Morgan Stanley notes that some quick math to back into bookings implies bookings growth of approximately 5% y/y and a healthy draw from the balance sheet. And in addition to an option review process dragging on, they flag fewer metrics to measure the performance detail of the core business on a real-time basis as an issue.
- JP Morgan says they do not think the massive revenue upside is a sign of a big acceleration in the market rather than a mix issue causing different accounting treatment, that is supported by guidance only going up by 1Q07 beat.
Deferred revenue was flat qoq at $893.9M, worst qoq growth since Sept. 04. Firm believes the mix issue was the primary reason which is unfortunate because deferred revenue provides the visibility for future quarters. This is first time in over two years that visibility has not improved through higher deferred revenue.
Notablecalls: The headline numbers for the quarter were definately strong, with the company beating consensus on both top and bottom line. That beat however seems to be one-time of nature and possibly borrowed from the next quarters. With bookings growth of just 5% y/y and deferred revenues staying flat q/q, sure doesn't look like that kind of outperformance is about to continue.
The stock is trading ~19x this year's earnings, not particularly cheap, but not extraordinarily expensive either. However, with the questionable future cash flow trends and slow growth, I do not think this is the stock I would like to own. The stock has been stuck around $30 over the past six months and I do not think this report is strong enought to generate appetite for the stock above the recent range. As such, I would be opportunistic short around recent highs at the $31.50 level. Note, however, that the recent mkt has provided some wild moves (AMZN anyone?) and have your stops tight.
Thursday, April 26, 2007
Johnson Controls (NYSE:JCI): Added to America's Conviction Buy List at GSCO
- Goldman Sachs is adding Johnson Controls (NYSE:JCI) to their America's Conviction Buy List, spotlighting it as their best idea. Firm's 6-month DCF and multiples based price target for JCI shares is $115, implying about 12% upside. Firm expects strong revenue growth in the company's building efficiency segment to be the primary growth driver, followed by its best-in-class battery business. Margin expansion is expected to occur in all segments. Option value around the "green" theme lends support and offers potentially sizable longer-term upside, especially if building efficiency concerns become more widespread, as they expect they will.
Notablecalls: I highlighted JCI as a potential long already on Monday, after the stock broke to a new all-time high helped by stronger than expected Q1 results. JCI has a lot going for it (margin expansion, the green theme) and I expect GSCO's call to generate some further buy interest in the name today.
Wendy's (NYSE:WEN): Not much upside left
JP Morgan has some interesting comments on Wendy's (NYSE:WEN) after the co released its Q1 results and said it would explore strategic alternatives. Wendy's said it is considering "changes to its capital structure, a possible sale, merger, or other business combination".
JPM's John Ivankoe notes that the earnings release was an interesting juxtaposition to Triarc's April 20 press release which said "Arby's (owned by Triarc) will be able to significantly increase value through both organic growth and the acquisition of other restaurant companies." The firm finds this relevant as the Chairman and CEO of Triarc Nelson Peltz controls Trian Fund Management which owns 8.3% of WEN common stock.
Interestingly, the Wendy's tax-free spin off of Tim Hortons only allows another 4m out of the current 89m shares to be bought back between now and September 2008. Only Triarc stands out as a possible business combination, and therefore they believe a leveraged recap makes the most sense to analyze in a limited amount of time.
If WEN were to increase leverage to pay a special dividend (like QSR peer DPZ), the firm would estimate the stock to be worth between $31- $37 if a 17-25x multiple were assigned to proforma F08 earnings. At this multiple range, EV/EBITDA ranges from 8.6x-10x, near its QSR peers which trade from 9.4x-9.8x. Firm remains UW and recommends investors take advantage of likely significant stock strength to sell shares.
Notablecalls: Does the news mean the management is giving up on the turnaround? After all the restructuring they have done, did they realize it's not going to work after all? Given the high valuation (the stock traded as high as $37.50 in after hours action), there isn't much upside left even in case of private equity players stepping in.
I suspect that if you can get a fill around $37.50 early on, you'll make money shorting today. Tight stop, say $0.50 looks prudent here.
JPM's John Ivankoe notes that the earnings release was an interesting juxtaposition to Triarc's April 20 press release which said "Arby's (owned by Triarc) will be able to significantly increase value through both organic growth and the acquisition of other restaurant companies." The firm finds this relevant as the Chairman and CEO of Triarc Nelson Peltz controls Trian Fund Management which owns 8.3% of WEN common stock.
Interestingly, the Wendy's tax-free spin off of Tim Hortons only allows another 4m out of the current 89m shares to be bought back between now and September 2008. Only Triarc stands out as a possible business combination, and therefore they believe a leveraged recap makes the most sense to analyze in a limited amount of time.
If WEN were to increase leverage to pay a special dividend (like QSR peer DPZ), the firm would estimate the stock to be worth between $31- $37 if a 17-25x multiple were assigned to proforma F08 earnings. At this multiple range, EV/EBITDA ranges from 8.6x-10x, near its QSR peers which trade from 9.4x-9.8x. Firm remains UW and recommends investors take advantage of likely significant stock strength to sell shares.
Notablecalls: Does the news mean the management is giving up on the turnaround? After all the restructuring they have done, did they realize it's not going to work after all? Given the high valuation (the stock traded as high as $37.50 in after hours action), there isn't much upside left even in case of private equity players stepping in.
I suspect that if you can get a fill around $37.50 early on, you'll make money shorting today. Tight stop, say $0.50 looks prudent here.
Apple Computer (NASDAQ:AAPL): Strong results
Lots of positive commentary on Apple (NASDAQ:AAPL) after co reported strong Q1 results last night:
- According to Piper Jaffray the key question is: are we at the peak of EPS upside or is thissustainable? They believe we are not at the peak of EPS upside, given the firm believesApple is entering what will be the 3 strongest quarters in the company's history withthe following catalysts: 1) iPhone, 2) new product in Jun/Sep (video iPod, tabletMac, or other new consumer product), and 3) continued Mac market share gains. The more important point is that Apple has the pole position as it capitalizes in ashift in computer buying behavior. It is obvious consumers want computing devices that are focused on entertainment and creativity. To date, they have not seen any credible competitive threats in Apple's core markets (Zune is a flop in the MP3space and Dell & HP have failed to deliver PCs that rival the Mac). PJ believes thatin the coming quarters Apple will hold its massive lead in portable audio and grow share in the personal computer market. Maintains Outperform and ups tgt to $140 from $123.
- Goldman Sachs notes that even eliminating the help that Apple received from favorable component costs, the company still produced over a $0.10 beat to consensus earnings estimates in what should have been its toughest quarter, setting the tone for the rest of the year. Apple is right in front of a major change to its business model which, if anything, will increase the quality of what is already a strengthening model, delivering more predictable revenue and margin leverage. Firm's new earnings estimates for calendar 2007 and 2008 are $3.52 and $4.09, up from previous $3.16 and $3.89, respectively. Moves tgt to $120 from $110.
- Morgan Stanley notes they are keeping their $110 target for now but feel incrementally more confident that the $160 bull case scenario will play out in the next 12 months. Remains Overweight.
Notablecalls: AAPL no doubt produced strong results. The stock hit $102 level in after hours action, up 7 points from the close. The iPod number was a bit shy of estimates but the Mac performance coupled with lower components cost more than compensated for the difference. Also, pricing was firm. I would not be surprised to see AAPL surpass the $102 level early on as estimates and price tgts are raised across the board. That's my ultra-st view.
- According to Piper Jaffray the key question is: are we at the peak of EPS upside or is thissustainable? They believe we are not at the peak of EPS upside, given the firm believesApple is entering what will be the 3 strongest quarters in the company's history withthe following catalysts: 1) iPhone, 2) new product in Jun/Sep (video iPod, tabletMac, or other new consumer product), and 3) continued Mac market share gains. The more important point is that Apple has the pole position as it capitalizes in ashift in computer buying behavior. It is obvious consumers want computing devices that are focused on entertainment and creativity. To date, they have not seen any credible competitive threats in Apple's core markets (Zune is a flop in the MP3space and Dell & HP have failed to deliver PCs that rival the Mac). PJ believes thatin the coming quarters Apple will hold its massive lead in portable audio and grow share in the personal computer market. Maintains Outperform and ups tgt to $140 from $123.
- Goldman Sachs notes that even eliminating the help that Apple received from favorable component costs, the company still produced over a $0.10 beat to consensus earnings estimates in what should have been its toughest quarter, setting the tone for the rest of the year. Apple is right in front of a major change to its business model which, if anything, will increase the quality of what is already a strengthening model, delivering more predictable revenue and margin leverage. Firm's new earnings estimates for calendar 2007 and 2008 are $3.52 and $4.09, up from previous $3.16 and $3.89, respectively. Moves tgt to $120 from $110.
- Morgan Stanley notes they are keeping their $110 target for now but feel incrementally more confident that the $160 bull case scenario will play out in the next 12 months. Remains Overweight.
Notablecalls: AAPL no doubt produced strong results. The stock hit $102 level in after hours action, up 7 points from the close. The iPod number was a bit shy of estimates but the Mac performance coupled with lower components cost more than compensated for the difference. Also, pricing was firm. I would not be surprised to see AAPL surpass the $102 level early on as estimates and price tgts are raised across the board. That's my ultra-st view.
Paperstand (ABN, WMT, HOG, MTB)
The WSJ reports that ABN Amro (ABN) received an unwelcome $98.58bn takeover approach from a consortium led by Royal Bank of Scotland. But to pull off a deal, the RBS group would need to break up two existing takeover agreements: ABN's pact to be sold to Barclays and ABN's unusual side deal to sell its LaSalle Bank unit to Bank of America (BAC). The RBS group said its proposed offer, which would be paid 70% in cash and 30% with RBS shares, was conditioned on ABN finding a way to keep LaSalle Bank, which has become a flashpoint in the takeover battle.
According to the WSJ, Wal-Mart (WMT), under pressure to boost productivity at its Sam's Club wholesale unit, is cutting a small number of store-mgmt jobs at the operation as part of a rare nationwide job cut. The retailer plans to consolidate about 3K salaried-manager positions at some 580 US Sam's Club stores. It isn't clear how many ppl will lose their jobs. The unit has more than 100K employees world-wide.
Barron’s Online discusses Harley-Davidson (HOG), saying that with demand for its iconic machines looking weak, Harley's stock price may run out of gas. Buyers once had to patiently endure waiting lists to be able to take home the bike of their dreams. But sales of Harley-Davidson motorcycles at US dealerships have slowed or fallen for 3 qrtrs. And a jittery economy, weak housing mkt and credit issues could keep buyers out of showrooms. If so, production of new motorcycles in ‘07 could decline for the first time since Harley-Davidson went public in ‘86. "It's a good co with a great brand, but I think the fundamentals have deteriorated and don't see much upside for the stock over the next year," says Greg Badishkanian, of Citigroup. Or as David Carr, of Oak Value Fund adds, "We aren't saying the co is in trouble, but there are better places to invest."
“Inside Scoop” section reports that Richard Garman, director at M&T Bank (MTB), plunked down $2.6m to purchase 23K shares of the co. This was the first purchase by any co exec or director in 3 years. It was also Garman's largest buy in terms of dollar value ever at the co and the largest in share count since ‘94. Ben Silverman, of InsiderScore.com, says, "Any time we see that long of an interim between purchases it's intriguing." What's particularly notable about this transaction is that not only is Garman a longtime board member (since ‘87), but at age 76, he "is somebody planning not just for his future but for his family's future," Silverman says. "That is a good long-term signal."
Wednesday, April 25, 2007
Amazon.com (NASDAQ:AMZN): Shorting opportunity
Lots of positive commentary on Amazon.com (NASDAQ:AMZN) today after the co released stronger than expected Q1 results and raised guidance for both Q2 and YE07. We have at least 2 upgrades with estimates and price tgts raised across the board. There seems to be only one major firm out there that is keeping its cool. It's JP Morgan:
- JPM's Imran Kahn notes that after three straight quarters of 100+ bps Y/Y declines, gross margins in 1Q07 fell only 17 bps. While sales mix and lowered prices still pressured margins, growing third-party sales internationally slowed the decline. Continued growth in 3P units internationally is a key lever for moderating gross margin erosion. Looking forward they think gross profit margins will decrease 40 basis points Y/Y in F07 due to the impact of seasonal mix shift toward EGM in 2Q and Harry Potter book sales in 3Q (expected to be sold at 46% discount).
Although the International segment benefited this quarter from an increased mix of third party units from traction in Merchants@ and an acceleration of units sold, the firm believes this dynamic may impact AMZN's ability to show continued strong organic revenue growth.
Amazon's 1Q'07 tax rate was 23%, significantly lower than its 2006 effective tax rate of 50% and its 42% tax rate for the fourth quarter. As JPM was modeling a 35% tax rate for the first quarter, AMZN delivered GAAP EPS $0.07 above their expectations on the basis of the tax change alone. Amazon's 4Q topline results of $3.02B include an $84M Y/Y positive impact from foreign exchange. AMZN had more than 66M active customers at the end of the quarter, up 15.8% Y/Y - slowing somewhat from previous quarters.
Is Amazon a Buy? They think valuation is too rich. While AMZN's 1Q was solid, they think the valuation may not offer much upside. The stock is trading 50x firm's F07 GAAP earnings estimates, compared to its peers which are trading at 41x F07 GAAP estimates. Maintain Underweight rating.
Notablecalls: Looks like AMZN managed to pull a pretty decent quarter. While the whisper numbers indicated some upside, it was viewed largely as priced in already. I happen to know some pretty savvy market participants that were short the name going into the release. Overall, I suspect that absent the fairly large short lines, the stock would have been up no more than say 2-3 bucks in after hours action. With the help of some panicky shorts, the stock ended up almost 6 bucks.
Looking at the numbers, couple of things stick out:
- Approximately half of EPS (GAAP) upside came from the lower tax rate. Also, favorable FX contributed most of the revenue upside. Absent these two, AMZN would have posted just a slight or normal beat.
- 3rd party business helped the margin performance. Based on what I've heard, margins are shrinking there as well (for the merchants). So, I'm not entirely sure the upside from 3P is sustainable.
Most of the analyst community is going ga-ga over the results, with Piper Jaffray upgrading their rating, just after downgrading the stock on Monday. You probably already know how I feel about stuff like this. Also, Citi is upping their rating to Hold from Sell. Most targets go to the $50-$55 range with one exception. A large tier one firm is upping their tgt to $60.
Yes, I do think AMZN's a short at around $50.30 (last prints in after hours). Even the most bullish analysts see only 10-20% upside from these levels, which is likely not enough to compensate for the risks. This, coupled with what I consider to be poor quality of upside in results pretty much caps any further upside in the stock.
Given there are still many shorts in the name, I would scale in to the short squeeze.
- JPM's Imran Kahn notes that after three straight quarters of 100+ bps Y/Y declines, gross margins in 1Q07 fell only 17 bps. While sales mix and lowered prices still pressured margins, growing third-party sales internationally slowed the decline. Continued growth in 3P units internationally is a key lever for moderating gross margin erosion. Looking forward they think gross profit margins will decrease 40 basis points Y/Y in F07 due to the impact of seasonal mix shift toward EGM in 2Q and Harry Potter book sales in 3Q (expected to be sold at 46% discount).
Although the International segment benefited this quarter from an increased mix of third party units from traction in Merchants@ and an acceleration of units sold, the firm believes this dynamic may impact AMZN's ability to show continued strong organic revenue growth.
Amazon's 1Q'07 tax rate was 23%, significantly lower than its 2006 effective tax rate of 50% and its 42% tax rate for the fourth quarter. As JPM was modeling a 35% tax rate for the first quarter, AMZN delivered GAAP EPS $0.07 above their expectations on the basis of the tax change alone. Amazon's 4Q topline results of $3.02B include an $84M Y/Y positive impact from foreign exchange. AMZN had more than 66M active customers at the end of the quarter, up 15.8% Y/Y - slowing somewhat from previous quarters.
Is Amazon a Buy? They think valuation is too rich. While AMZN's 1Q was solid, they think the valuation may not offer much upside. The stock is trading 50x firm's F07 GAAP earnings estimates, compared to its peers which are trading at 41x F07 GAAP estimates. Maintain Underweight rating.
Notablecalls: Looks like AMZN managed to pull a pretty decent quarter. While the whisper numbers indicated some upside, it was viewed largely as priced in already. I happen to know some pretty savvy market participants that were short the name going into the release. Overall, I suspect that absent the fairly large short lines, the stock would have been up no more than say 2-3 bucks in after hours action. With the help of some panicky shorts, the stock ended up almost 6 bucks.
Looking at the numbers, couple of things stick out:
- Approximately half of EPS (GAAP) upside came from the lower tax rate. Also, favorable FX contributed most of the revenue upside. Absent these two, AMZN would have posted just a slight or normal beat.
- 3rd party business helped the margin performance. Based on what I've heard, margins are shrinking there as well (for the merchants). So, I'm not entirely sure the upside from 3P is sustainable.
Most of the analyst community is going ga-ga over the results, with Piper Jaffray upgrading their rating, just after downgrading the stock on Monday. You probably already know how I feel about stuff like this. Also, Citi is upping their rating to Hold from Sell. Most targets go to the $50-$55 range with one exception. A large tier one firm is upping their tgt to $60.
Yes, I do think AMZN's a short at around $50.30 (last prints in after hours). Even the most bullish analysts see only 10-20% upside from these levels, which is likely not enough to compensate for the risks. This, coupled with what I consider to be poor quality of upside in results pretty much caps any further upside in the stock.
Given there are still many shorts in the name, I would scale in to the short squeeze.
Paperstand (LLY, RSH, ASF, NLS, PKTR, KEI, CUTR, PWER)
The NY Times reports that the FDA is examining whether Eli Lilly (LLY) provided it with accurate data about the side effects of the antipsychotic drug Zyprexa. The FDA has questions about a Lilly document from Feb’00 in which the co found that patients taking Zyprexa in clinical trials were 3.5x as likely to develop high blood sugar as those who did not take the drug. That document was not submitted to the agency. But a few months later, Lilly provided data to the FDA that showed almost no difference in blood sugar between patients who took Zyprexa and those who did not. The agency said it had not yet decided whether to take any action against Lilly. “The FDA continues to explore the concerns raised recently regarding information provided to the FDA on Zyprexa’s safety,” Dr. Mitchell Mathis,of FDA, said.
Notablecalls: As Zyprexa is a major revenue driver for LLY, we may see some weakness in the stock today.
The WSJ’s ”Heard on the Street” column out saying that investors have been lining up at Radioshack (RSH), but they may leave disapointed. Shares of the co have soared nearly 70% this year on enthusiasm over new mgmt's moves to cut costs and boost profit margins. Investors should realize that the run-up has come despite the fact that the co hasn't been able to sustain any significant improvement in rev over the past decade and that its sales at stores open for at least a year fell almost 6% in ‘06. RadioShack also is facing some longer-term obstacles. While there likely is additional fat to cut that will help the bottom line, RadioShack's shares now are quite expensive, suggesting that anticipated improvements in operations already are factored into the stock price. RadioShack trades at about 24x its expected earnings this year, above the P/E ratio of competitors such as Best Buy, which has a multiple of 16. "I sure as heck wouldn't be buying at this level; the juice is pretty much squeezed out of this orange," says Steve Monticelli, of Mosaic Investments. "They don't have the growth drivers" to justify the current price.
According to the WSJ, Research In Motion (RIMM) and Verizon Wireless today plan to announce the launch of a BlackBerry "World Edition" smart phone that enables Verizon customers to roam on overseas networks thanks to a dual-mode chip that is compatible with both Verizon's technology and wireless technology prevalent overseas.
The WSJ reports that insiders at a half-dozen co’s sold stock last qrtr before the co’s reported they would fall short of financial guidance, a pattern that can attract the attention of regulators and litigious shareholders. "I'm very suspicious about co’s that end up having to revise their guidance," said Constance E. Bagley, a professor at Harvard Business School. "I also think that when you add to that insiders selling at a higher price, it looks terrible." Representatives of Administaff (ASF), Nautilus (NLS) and Packeteer (PKTR) said execs sold shares before the events that caused revisions to financial expectations. Keithley (KEI) CFO Mark J. Plush declined to discuss the matter. Stephen J. Crimmins, former lawyer at the SEC, said sales by execs before revised guidance is "something the SEC will look at, especially in a period of intensified insider-trading enforcement." At Cutera (CUTR) 5 insiders sold shares between the initial financial guidance and the failure to meet that guidance. At Power-One (PWER), Chmn Steven J. Goldman sold 35K shares between the co's initial 1Q guidance and its announcement that it wouldn't meet that guidance.
Barron’s Online highlights Brightpoint (CELL), whose shares shot up 7% on Mon on an analyst’s upgrade. The stock is down 50% in the past 12mo’s, in part b/c Motorola has had a much harder time selling fancy trinkets. Brightpoint bears the brunt of that shortfall. But Brightpoint's profit can improve dramatically this year as things gradually improve at Motorola, not to mention rising sales at Nokia and the presence of the cellphone distributor in more mkts around the world. None of that is guaranteed, but the good news for the stock is that the mkt hasn't been expecting much. Despite the jump on Mon, Brightpoint has a P/E multiple of 15.1x ‘08 earnings. That's the same as the S&P's 500 avg, and way below the 30x forward multiple Brightpoint sported a year ago. "There's a much better risk-reward profile than there was even 6mo’s ago, and that establishes a good floor for the stock right now," says John Krause, of Thrivent Investment Mgmt. "I think their [P/E] multiple can expand as they put the worst of this behind them."
“Inside Scoop” section reports that a slew of top execs at AMR (AMR) are cashing out newly vested performance shares as they hit a rough patch. Over the past week, 5 execs sold 641K shares of the co on the open mkt for $19.2m. No co director or exec has purchased AMR shares since Jul’05. Mark LoPresti, of Thomson Financial, says that with AMR shares falling along with peers this year, "you don't like to see selling into negative momentum…[it] makes the activity a little more bearish than normal."
Notablecalls: As Zyprexa is a major revenue driver for LLY, we may see some weakness in the stock today.
The WSJ’s ”Heard on the Street” column out saying that investors have been lining up at Radioshack (RSH), but they may leave disapointed. Shares of the co have soared nearly 70% this year on enthusiasm over new mgmt's moves to cut costs and boost profit margins. Investors should realize that the run-up has come despite the fact that the co hasn't been able to sustain any significant improvement in rev over the past decade and that its sales at stores open for at least a year fell almost 6% in ‘06. RadioShack also is facing some longer-term obstacles. While there likely is additional fat to cut that will help the bottom line, RadioShack's shares now are quite expensive, suggesting that anticipated improvements in operations already are factored into the stock price. RadioShack trades at about 24x its expected earnings this year, above the P/E ratio of competitors such as Best Buy, which has a multiple of 16. "I sure as heck wouldn't be buying at this level; the juice is pretty much squeezed out of this orange," says Steve Monticelli, of Mosaic Investments. "They don't have the growth drivers" to justify the current price.
According to the WSJ, Research In Motion (RIMM) and Verizon Wireless today plan to announce the launch of a BlackBerry "World Edition" smart phone that enables Verizon customers to roam on overseas networks thanks to a dual-mode chip that is compatible with both Verizon's technology and wireless technology prevalent overseas.
The WSJ reports that insiders at a half-dozen co’s sold stock last qrtr before the co’s reported they would fall short of financial guidance, a pattern that can attract the attention of regulators and litigious shareholders. "I'm very suspicious about co’s that end up having to revise their guidance," said Constance E. Bagley, a professor at Harvard Business School. "I also think that when you add to that insiders selling at a higher price, it looks terrible." Representatives of Administaff (ASF), Nautilus (NLS) and Packeteer (PKTR) said execs sold shares before the events that caused revisions to financial expectations. Keithley (KEI) CFO Mark J. Plush declined to discuss the matter. Stephen J. Crimmins, former lawyer at the SEC, said sales by execs before revised guidance is "something the SEC will look at, especially in a period of intensified insider-trading enforcement." At Cutera (CUTR) 5 insiders sold shares between the initial financial guidance and the failure to meet that guidance. At Power-One (PWER), Chmn Steven J. Goldman sold 35K shares between the co's initial 1Q guidance and its announcement that it wouldn't meet that guidance.
Barron’s Online highlights Brightpoint (CELL), whose shares shot up 7% on Mon on an analyst’s upgrade. The stock is down 50% in the past 12mo’s, in part b/c Motorola has had a much harder time selling fancy trinkets. Brightpoint bears the brunt of that shortfall. But Brightpoint's profit can improve dramatically this year as things gradually improve at Motorola, not to mention rising sales at Nokia and the presence of the cellphone distributor in more mkts around the world. None of that is guaranteed, but the good news for the stock is that the mkt hasn't been expecting much. Despite the jump on Mon, Brightpoint has a P/E multiple of 15.1x ‘08 earnings. That's the same as the S&P's 500 avg, and way below the 30x forward multiple Brightpoint sported a year ago. "There's a much better risk-reward profile than there was even 6mo’s ago, and that establishes a good floor for the stock right now," says John Krause, of Thrivent Investment Mgmt. "I think their [P/E] multiple can expand as they put the worst of this behind them."
“Inside Scoop” section reports that a slew of top execs at AMR (AMR) are cashing out newly vested performance shares as they hit a rough patch. Over the past week, 5 execs sold 641K shares of the co on the open mkt for $19.2m. No co director or exec has purchased AMR shares since Jul’05. Mark LoPresti, of Thomson Financial, says that with AMR shares falling along with peers this year, "you don't like to see selling into negative momentum…[it] makes the activity a little more bearish than normal."
Tuesday, April 24, 2007
ResMed (RMD): Take two
I'm hearing that a boutique firm is out on ResMed (NYSE:RMD) saying they expect that the stock will gap down sharply this morning, but that it will also recover fairly rapidly creating a trading opportunity.
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ResMed (NYSE:RMD): Buy for a bounce
- William Blair's Ben Andrew has some interesting comments on ResMed (NYSE:RMD) after the maker and distributor of devices that help people with respiratory disorders announced lower than expected results last night. The co also announced a fairly large product recall with a total cost of about $60 million:
Since ResMed reported before Respironics, the firm does not yet know what happened overall with the market, but they suspect ResMed gave up a bit of share to competitive product launches, trialing of two new nasal pillow masks by competitors in the quarter and giveaways reported both by firm's field sources and RMD on their conference call. EPS suffered with the revenue shortfall (though gross margin was on target at 62.3%, a very encouraging sign that this is not a ResMed issue), coming in at an adjusted $0.35 (flat) compared to WB's $0.41 target. The S-8 recall makes for a dramatic headline, but based on past examples in which no patient harm occurred and the company responded proactively, the firm does not expect any durable impact on the franchise.
Firm's field sources indicate that demand for ResMed's devices, as well as their pricing power, are holding up well in the face of more aggressive competitors given their superior design and performance.
Should the stock open at $42 (where it was indicated after-hours trading), it would be at roughly 20 times firm's new calendar 2008 EPS estimate of $2.08 (down from $2.14), and in line with what the firm still believes are its sustainable long-term revenue and earnings growth rates of 20%. While the stock may languish for a quarter or so until investors see evidence that the company's strong new product lineup is having the market impact that they expect-driving volume and defending price for ResMed- the firm reiterates their Outperform rating.
Notablecalls: It looks like most of RMD's revenue shortfall comes from competitors trialing new products by giving them away for free. Management indicated on the conference call that at first they didn't believe it was going on and did not respond. Now however, they will respond to pricing pressures but by doing so, will continue to sell on value. According to the management, the market's respondse has been very good. Overall, they consider the market as incredibly healthy and continue to look out at other areas as well. They also noted that after responding to pricing pressures by competitors, their sales team had one of the best months on record.
The stock experienced a close to 15% haircut in after hours action with the last prints crossing a tad below the $42 level. Based on the relatively upbeat comments by RMD's management, I think the stock is buyable for a bounce around the $41.50-$42 level. Competitors cannot continue giving away their masks for free for an extended period, meaning pricing pressure will ease soon. The overall market is growing at a healthy clip, providing opportunity for everyone. The recall looks like a one-time event. 7 cases out of 300,000 devices sold is not that huge and shows management is proactive.
Note that RESP, RMD's larger competitor is due to reports its results on Thursday.
Since ResMed reported before Respironics, the firm does not yet know what happened overall with the market, but they suspect ResMed gave up a bit of share to competitive product launches, trialing of two new nasal pillow masks by competitors in the quarter and giveaways reported both by firm's field sources and RMD on their conference call. EPS suffered with the revenue shortfall (though gross margin was on target at 62.3%, a very encouraging sign that this is not a ResMed issue), coming in at an adjusted $0.35 (flat) compared to WB's $0.41 target. The S-8 recall makes for a dramatic headline, but based on past examples in which no patient harm occurred and the company responded proactively, the firm does not expect any durable impact on the franchise.
Firm's field sources indicate that demand for ResMed's devices, as well as their pricing power, are holding up well in the face of more aggressive competitors given their superior design and performance.
Should the stock open at $42 (where it was indicated after-hours trading), it would be at roughly 20 times firm's new calendar 2008 EPS estimate of $2.08 (down from $2.14), and in line with what the firm still believes are its sustainable long-term revenue and earnings growth rates of 20%. While the stock may languish for a quarter or so until investors see evidence that the company's strong new product lineup is having the market impact that they expect-driving volume and defending price for ResMed- the firm reiterates their Outperform rating.
Notablecalls: It looks like most of RMD's revenue shortfall comes from competitors trialing new products by giving them away for free. Management indicated on the conference call that at first they didn't believe it was going on and did not respond. Now however, they will respond to pricing pressures but by doing so, will continue to sell on value. According to the management, the market's respondse has been very good. Overall, they consider the market as incredibly healthy and continue to look out at other areas as well. They also noted that after responding to pricing pressures by competitors, their sales team had one of the best months on record.
The stock experienced a close to 15% haircut in after hours action with the last prints crossing a tad below the $42 level. Based on the relatively upbeat comments by RMD's management, I think the stock is buyable for a bounce around the $41.50-$42 level. Competitors cannot continue giving away their masks for free for an extended period, meaning pricing pressure will ease soon. The overall market is growing at a healthy clip, providing opportunity for everyone. The recall looks like a one-time event. 7 cases out of 300,000 devices sold is not that huge and shows management is proactive.
Note that RESP, RMD's larger competitor is due to reports its results on Thursday.
Dendreon (NASDAQ:DNDN): Expect to see additional buy interest today
- Banc of America has some positive comments on Dendreon (NASDAQ:DNDN) saying they anticipate an approval decision on Provenge by May 15th, under the condition of completing the Ph III IMPACT trial, and expect potential stock price appreciation in the near term. This view is based on firm's recent interviews with an ex-FDA general counsel, a regulatory executive in a major pharmaceutical company and CBER panel members.
Despite questionable statistical data, the decision remains highly political and given the safety profile, CBER appears motivated to approve additional products to stimulate R&D activities in cancer immunotherapy. BAC notes that Jesse Goodman, Director of CBER, appears to have influenced Celia Witten to 'lower the bar' by changing the efficacy question during the initial advisory panel voting and believe it is a good indicator of CBER's intentions.
Firm understands that DNDN is well prepared for a potential launch and believe Provenge can be out on the market by late 2007. If approved, they see potential upside to their TP to $29 and if an approvable letter is received potential downside to $6. Maintains Neutral as they remain cautious about the outcome of the IMPACT trial.
Notablecalls: DNDN was in play yesterday and I suspect this note by BAC's William Ho will create some additional buy interest in the name. Mr. Ho assigns a 2:1 (66%) probability to the approval. I suspect DNDN can move past the $18 level today.
Despite questionable statistical data, the decision remains highly political and given the safety profile, CBER appears motivated to approve additional products to stimulate R&D activities in cancer immunotherapy. BAC notes that Jesse Goodman, Director of CBER, appears to have influenced Celia Witten to 'lower the bar' by changing the efficacy question during the initial advisory panel voting and believe it is a good indicator of CBER's intentions.
Firm understands that DNDN is well prepared for a potential launch and believe Provenge can be out on the market by late 2007. If approved, they see potential upside to their TP to $29 and if an approvable letter is received potential downside to $6. Maintains Neutral as they remain cautious about the outcome of the IMPACT trial.
Notablecalls: DNDN was in play yesterday and I suspect this note by BAC's William Ho will create some additional buy interest in the name. Mr. Ho assigns a 2:1 (66%) probability to the approval. I suspect DNDN can move past the $18 level today.
Texas Instruments (NYSE:TXN): Sell that gap?
Several firms are commenting on Texas Instruments (NYSE:TXN) after the co issued better than expected Q1 results and provided blow-out Q2 guidance. We have at least one firm upgrading the stock this AM. Despite all the positive chatter, some of the largest firms remain cautious on the name:
- Morgan Stanley notes that Wwhile TI's very strong gross margin performance will likely drive EPS estimates as well as the stock price higher in the short-term, they expect a lackluster consumption environment to put a damper on additional upside in the stock, and they maintain their Equal-weight rating on TXN.
While the passing of the supply side cyclical correction in the semiconductor industry is a positive, they believe the supply side recovery is occurring in the midst of a deceleration in global GDP leading to an overall lackluster demand environment. While semiconductor bookings improved 2.2% Q/Q bookings were also down 10% Y/Y, and near-term visibility is limited (as evidenced by a semiconductor book-to-bill ratio of 0.99). Inventory dollars declined Q/Q but inventory days reached new 17+ year highs.
Based off MSCO's 2007 and 2008 earnings estimate of $1.86 and $2.15, respectively, TXN currently trades at a price-to-earnings (P/E) ratio of 17.4x and 15.1x. With 5-year growth estimate for the company at 15%, they believe a PEG ration of one times is appropriate, and the stock is reasonably valued.
- Goldman Sachs is telling investors not to chase the stock this morning. TI's fundamentals are clearly better than expected and the firm is adjusting EPS to reflect improved outlook; 2007 to $1.68 from $1.45, 2008 to $1.90 from $1.80, and 2009 to $2.05 from $1.95. That said they recognize they have been wrong to be overly negative on the stock, however, valuation is rich already as the stock trades after market at 21x their revised 2007 EPS and 20x normalized.
Hence, for large cap investors looking for semi exposure, they continue to believe Intel is more interesting as there is significantly greater upside as Intel appears to be improving its long-term competitive position vs AMD while TI's long-term position in wireless is challenged by a host of high-quality baseband and application processor competitors. In addition, TI's margins are at their peak, while Intel has room to improve.
Notablecalls: Must say that I've never seen TXN make such a move. The stock ended up 10% in after hours action. I think most of the upside was driven by short covering as many market participants were expecting lackluster results and guidance on heels of disappointing news from the wireless sector. What they underestimated, was TXN's ability to manage gross margin, thanks to its fab-lite model. The co surely tipped their hand with the big dividend raise they announced last week. Now, the problem with the fab-lite business model is that while it helps to preserve margins during downturns, it caps margin upside during better times. So, one can assume TXN's margins are close to their peak.
I don't think end demand has turned a corner. In fact, I think it will get worse from here. TXN's boosting their inventory in anticipation of a new cycle that will likely not materialize. That's a bad combo.
As for the s-t, I love the fact we have an upgrade from Piper Jaffray. The call won't hold much weight among the buy side players but it may get the stock closer to the $36 level early on. It's there where I'd be looking to short TXN. Note that all time high stands at $36.40 but I'm somewhat doubtful it will get there. So, I think that if you can get a fill between $36 and $36.40, you'll likely make money shorting.
- Morgan Stanley notes that Wwhile TI's very strong gross margin performance will likely drive EPS estimates as well as the stock price higher in the short-term, they expect a lackluster consumption environment to put a damper on additional upside in the stock, and they maintain their Equal-weight rating on TXN.
While the passing of the supply side cyclical correction in the semiconductor industry is a positive, they believe the supply side recovery is occurring in the midst of a deceleration in global GDP leading to an overall lackluster demand environment. While semiconductor bookings improved 2.2% Q/Q bookings were also down 10% Y/Y, and near-term visibility is limited (as evidenced by a semiconductor book-to-bill ratio of 0.99). Inventory dollars declined Q/Q but inventory days reached new 17+ year highs.
Based off MSCO's 2007 and 2008 earnings estimate of $1.86 and $2.15, respectively, TXN currently trades at a price-to-earnings (P/E) ratio of 17.4x and 15.1x. With 5-year growth estimate for the company at 15%, they believe a PEG ration of one times is appropriate, and the stock is reasonably valued.
- Goldman Sachs is telling investors not to chase the stock this morning. TI's fundamentals are clearly better than expected and the firm is adjusting EPS to reflect improved outlook; 2007 to $1.68 from $1.45, 2008 to $1.90 from $1.80, and 2009 to $2.05 from $1.95. That said they recognize they have been wrong to be overly negative on the stock, however, valuation is rich already as the stock trades after market at 21x their revised 2007 EPS and 20x normalized.
Hence, for large cap investors looking for semi exposure, they continue to believe Intel is more interesting as there is significantly greater upside as Intel appears to be improving its long-term competitive position vs AMD while TI's long-term position in wireless is challenged by a host of high-quality baseband and application processor competitors. In addition, TI's margins are at their peak, while Intel has room to improve.
Notablecalls: Must say that I've never seen TXN make such a move. The stock ended up 10% in after hours action. I think most of the upside was driven by short covering as many market participants were expecting lackluster results and guidance on heels of disappointing news from the wireless sector. What they underestimated, was TXN's ability to manage gross margin, thanks to its fab-lite model. The co surely tipped their hand with the big dividend raise they announced last week. Now, the problem with the fab-lite business model is that while it helps to preserve margins during downturns, it caps margin upside during better times. So, one can assume TXN's margins are close to their peak.
I don't think end demand has turned a corner. In fact, I think it will get worse from here. TXN's boosting their inventory in anticipation of a new cycle that will likely not materialize. That's a bad combo.
As for the s-t, I love the fact we have an upgrade from Piper Jaffray. The call won't hold much weight among the buy side players but it may get the stock closer to the $36 level early on. It's there where I'd be looking to short TXN. Note that all time high stands at $36.40 but I'm somewhat doubtful it will get there. So, I think that if you can get a fill between $36 and $36.40, you'll likely make money shorting.
Paperstand
The WSJ reports that Apple’s (AAPL) former CFO Fred Anderson has settled with the SEC on his alleged participation in the backdating of stock options at the co and the agency is expected to pursue a civil lawsuit against the co's ex-general counsel Nancy Heinen on similar charges. Ms. Heinen, who will be accused of helping to manipulate one of her own option awards as well as a grant to CEO Steve Jobs, plans to contest the charges.
According to the WSJ, ABN Amro (ABN) may have agreed to sell itself to Barclays (BCS), but circling rival bidders and questions about its pact to sell its main US unit to Banc of America (BAC) mean the Dutch bank may still end up in other hands. A rival consortium of Fortis, Banco Santander (STD) and Bank of Scotland is planning ways to scotch the Barclays deal and, in particular, ABN's agreement to sell its US bank, LaSalle, to BofA. The consortium canceled a meeting with ABN mgmt yesterday in order to review its options. "In view of ABN Amro's decision to sell LaSalle Bank to BofA, the banks need to understand the circumstances under which this sale can be terminated," the consortium wrote.
Barron’s Online “Inside Scoop” section reports that Gap (GPS) founder Donald Fisher and his wife Doris shed some shares from their massive stake in the retail giant. The Fishers sold 1.82m shares for $34m. Both have served as directors since 1969 with Donald Fisher currently acting as Chmn emeritus. Their son Robert is Chmn and interim president and CEO. The proceeds from the sales were the largest earned by any co exec or director in the past 5 years. Donald and Doris Fisher continue to hold 61.7m shares of Gap. Jonathan Moreland, of InsiderInsights.com, says the sheer size of the family's exposure to Gap "mitigates the bearishness of their present selling."
Monday, April 23, 2007
Calls of Note Part 4
- Piper Jaffray previews Apple's (NASDAQ:AAPL) qtr noting the co announced the sale of the 100 millionth iPod on 4/9, which implies slight upside to the Street's expectation of 10.7m units. Subtracting total iPod units reported through Dec-06 (~89m units) from the 100m units, and accounting for the 9 days in April, implies Q2 iPod units of ~11m.
Firm recently spoke with 20 Apple resellers and found that 85% are expecting a slight q/q decline (5% to 10%) in Mac sales. The Street is expecting Mac units to fall 10% q/q, so we may see slight upside to Street expectations of 1.45m Macs. The other 15% of Mac resellers expect Mac units to be flat q/q.
Based on two rounds of checks with 50 retail stores selling Vista and Vista-enabled PCs, they expect IDC Mac market share will decline from 2.5% in December to 2.3% in March (see note dated 3/2). Recently released Gartner data for PC shipments in calendar Q1 confirm this thesis (Gartner US share declined from 5.1% in Dec to 5% in March). However, this will represent a y/y market share gain (up from 2.1% in Mar-06). PJ expects market share to bounce back quickly in the June quarter.
Apple typically guides conservatively and they believe the company will guide in line, at best, with Street consensus for the June quarter. Maintains Outperform and $123 tgt.
Notablecalls: Not actionable but good to know category. I suspect the stock may see some buy interest into the qtrly announcement.
Firm recently spoke with 20 Apple resellers and found that 85% are expecting a slight q/q decline (5% to 10%) in Mac sales. The Street is expecting Mac units to fall 10% q/q, so we may see slight upside to Street expectations of 1.45m Macs. The other 15% of Mac resellers expect Mac units to be flat q/q.
Based on two rounds of checks with 50 retail stores selling Vista and Vista-enabled PCs, they expect IDC Mac market share will decline from 2.5% in December to 2.3% in March (see note dated 3/2). Recently released Gartner data for PC shipments in calendar Q1 confirm this thesis (Gartner US share declined from 5.1% in Dec to 5% in March). However, this will represent a y/y market share gain (up from 2.1% in Mar-06). PJ expects market share to bounce back quickly in the June quarter.
Apple typically guides conservatively and they believe the company will guide in line, at best, with Street consensus for the June quarter. Maintains Outperform and $123 tgt.
Notablecalls: Not actionable but good to know category. I suspect the stock may see some buy interest into the qtrly announcement.
Calls of Note Part 3
- JP Morgan is out with some very interesting comments on Hansen Natural (NASDAQ:HANS) reiterating their Overweight on the stock given a detailed review of HANS revenue drivers through 2009 points to upside potential versus consensus, which should also drive EPS upside given consensus conservatively assumes no incremental EPS growth beyond revenue growth. Revenue upside would likely drive substantial upside in the stock, given the market is pricing in risk versus consensus as Hansen is trading at only 19.2 times 2008E EPS, well below its high-growth consumer peers despite a 29% consensus EPS growth CAGR through 2009.
Number of HANS positives include: 1) continuing off-premise distribution expansion, particularly with a shift of half of Monster distribution to A-B wholesalers, 2) expansion into theon-premise channel, 3) international expansion through greater penetration of Mexico and Canada as well as an initial entry into Europe (which JPM expects in H2), 4) a strong 2007 new product pipeline, and 5) energy drink price increases expected in H2.
Above consensus results should drive upside in the stock as the market currently appears to be factoring in significant downside versus consensus, given Hansen's NTM P/E of 25.1 times is a large 20% below a peer group of high-growth consumer companies (including Chico's, Urban Outfitters, Coldwater Creek, Starbucks, Panera Bread, and Chipotle). This lower valuation is despite Hansen having much higher returns, a higher free cash flow yield, a higher consensus EPS growth rate forecast, and a stronger balance sheet, than almost all of these peers.
Notablecalls: HANS looks to be primed for some nice upside over the next couple of days.
Number of HANS positives include: 1) continuing off-premise distribution expansion, particularly with a shift of half of Monster distribution to A-B wholesalers, 2) expansion into theon-premise channel, 3) international expansion through greater penetration of Mexico and Canada as well as an initial entry into Europe (which JPM expects in H2), 4) a strong 2007 new product pipeline, and 5) energy drink price increases expected in H2.
Above consensus results should drive upside in the stock as the market currently appears to be factoring in significant downside versus consensus, given Hansen's NTM P/E of 25.1 times is a large 20% below a peer group of high-growth consumer companies (including Chico's, Urban Outfitters, Coldwater Creek, Starbucks, Panera Bread, and Chipotle). This lower valuation is despite Hansen having much higher returns, a higher free cash flow yield, a higher consensus EPS growth rate forecast, and a stronger balance sheet, than almost all of these peers.
Notablecalls: HANS looks to be primed for some nice upside over the next couple of days.
Calls of Note Part 2
- RBC Capital comments on Palm (NASDAQ:PALM) saying that following recent market/product stumbles (37% Y/Y Smartphone growth vs. RIM at 81%) and eclipsing competition, Palm is expected to announce new devices utilizing new and thinner form factors, lower pricing, new software and other innovations. In order to reclaim market position and reinvigorate growth, Palm new products must 'hit the mark' with technology, styling, features, price and reliability.
Valuation, inexpensive at 0.7x EV/S and below peers at 2.1x (with $4.86/share cash), is expected to rise, possibly to $21-23 on anticipation of pending announcements (expected May), speculation of rumored devices/ features including novel Smartphones and other handhelds, perhaps with touch screens, Wi-Fi and other technologies. Palm also recently hinted at new, on-demand services.
ST appreciation may offer a trading opportunity on pending product speculation; however, the firm remains cautious long-term over competition and execution concerns and sees downside risk to $14-$15 if Palm's new offerings and strategy stumble. Maintains Sector Perform rating.
Notablecalls: Interesting comments by RBC's Mike Abramsky! He's actually saying new product announcements could drive the stock up by 5 bucks over the next month. I suspect Mr. Abramsky may have sparked a rally in PALM here.
Valuation, inexpensive at 0.7x EV/S and below peers at 2.1x (with $4.86/share cash), is expected to rise, possibly to $21-23 on anticipation of pending announcements (expected May), speculation of rumored devices/ features including novel Smartphones and other handhelds, perhaps with touch screens, Wi-Fi and other technologies. Palm also recently hinted at new, on-demand services.
ST appreciation may offer a trading opportunity on pending product speculation; however, the firm remains cautious long-term over competition and execution concerns and sees downside risk to $14-$15 if Palm's new offerings and strategy stumble. Maintains Sector Perform rating.
Notablecalls: Interesting comments by RBC's Mike Abramsky! He's actually saying new product announcements could drive the stock up by 5 bucks over the next month. I suspect Mr. Abramsky may have sparked a rally in PALM here.
Calls of Note Part 1
Couple of tier-1 firms have some interesting comments on Johnson Controls (NYSE:JCI) after the co released stronger than expected Q1 results on Friday:
- Banc of America is raising their FY2008 and FY 2009 EPS estimates to $7.55 and $9.25 from $7.20 and $8.55 and are now 6% and 18% ahead of the FY2008 and FY2009 First Call mean. The higher estimates reflect firm's belief that Building Efficiency margins expand to 8.5% (previously 7.5%) by the end of the decade. While corporate margins should move from an all-time low to an all-time high over the next 10 quarters, they believe their model is still conservative in many aspects. BAC's 12 month target goes to $135 from $120 and they reiterate the Buy.
- Goldman Sachs notes they increasingly see the Building Efficiency segment as JCI's primary growth engine, as it leverages cross sell opportunities through York, particularly in higher margin services, and as it reaps the benefits from efficiency gains in York's manufacturing footprint. A growing amount of "green" option value also exists, in firm's view, especially if regulation around building energy consumption levels gains traction. GSCO's tgt goes to $115 from $95 with Buy rating reiterated.
- Baird says earnings climbed 36%, exceeding consensus by 6%. While not a "great" quarter
(pretax income just below expectations), this reinforces the strong business model with controls, battery, and foreign automotive businesses all performing very well. They believe this is the start of several quarters of 20%-plus EPS growth. Firm is meaningfully raising estimates on higher revenue growth (euro and new business) and modestly higher margin assumptions noting their new price is $109 and could exceed $130 when valuation model rolls forward late this year. Maintains Outperform.
Notablecalls: Strong results powered JCI stock to a new all-time high on Friday. There was some initial selling but buyers soon took over, lifting the stock by as much as 4 bucks from day low. This kind of action usually indicates further upside to come. Also, the analyst community is out positive on the stock today, with BAC raising their tgt to $135 and Baird saying they expect their tgt to exceed $130 later this year. I would not be surprised to see JCI probe the $105 level, maybe as soon as today.
- Banc of America is raising their FY2008 and FY 2009 EPS estimates to $7.55 and $9.25 from $7.20 and $8.55 and are now 6% and 18% ahead of the FY2008 and FY2009 First Call mean. The higher estimates reflect firm's belief that Building Efficiency margins expand to 8.5% (previously 7.5%) by the end of the decade. While corporate margins should move from an all-time low to an all-time high over the next 10 quarters, they believe their model is still conservative in many aspects. BAC's 12 month target goes to $135 from $120 and they reiterate the Buy.
- Goldman Sachs notes they increasingly see the Building Efficiency segment as JCI's primary growth engine, as it leverages cross sell opportunities through York, particularly in higher margin services, and as it reaps the benefits from efficiency gains in York's manufacturing footprint. A growing amount of "green" option value also exists, in firm's view, especially if regulation around building energy consumption levels gains traction. GSCO's tgt goes to $115 from $95 with Buy rating reiterated.
- Baird says earnings climbed 36%, exceeding consensus by 6%. While not a "great" quarter
(pretax income just below expectations), this reinforces the strong business model with controls, battery, and foreign automotive businesses all performing very well. They believe this is the start of several quarters of 20%-plus EPS growth. Firm is meaningfully raising estimates on higher revenue growth (euro and new business) and modestly higher margin assumptions noting their new price is $109 and could exceed $130 when valuation model rolls forward late this year. Maintains Outperform.
Notablecalls: Strong results powered JCI stock to a new all-time high on Friday. There was some initial selling but buyers soon took over, lifting the stock by as much as 4 bucks from day low. This kind of action usually indicates further upside to come. Also, the analyst community is out positive on the stock today, with BAC raising their tgt to $135 and Baird saying they expect their tgt to exceed $130 later this year. I would not be surprised to see JCI probe the $105 level, maybe as soon as today.
Paperstand (ABN, BCS, AZN, MEDI, RIMM, DCX, JBLU)
ABN Amro (ABN) and Barclays (BCS) announced Mon they have agreed to merge, in one of the largest cross-border combinations in European banking history. The deal involves Barclays offering $49.27 for each ABN share. As part of the deal, ABN announced it is selling its US unit LaSalle Bank to Bank of America Corp. for $21bn in cash. Arthur Martinez will be the Chmn of the new combination, while John Varley will be named CEO.
The WSJ reports, that AstraZeneca (AZN) last night was near the purchase of MedImmune (MEDI) for more than $13bn. Barring any last-minute snags, the transaction could be announced as early as this morning. That represents a premium of more than 15% to where the company's shares finished Fri. At least 4 large co’s were involved in the final auction process, said ppl familiar with the negotiations, including Eli Lilly (LLY), which has a deep history of avoiding large M&A transactions. But AstraZeneca prevailed in the end, willing to step up with its large price.
Notablecalls: Those bidders who were left empty handed, will certainly start seeking new M&A targets.
The WSJ reports that Research In Motion (RIMM) is set to launch new software that will allow features of its BlackBerry device - including email, a chat function and electronic maps - to be used on non-BlackBerry devices. Later this year RIM will begin selling the software, which initially will be available only for some devices equipped with Microsoft’s (MSFT) Windows Mobile. RIM is planning to sell the software through its online store and through wireless carriers, according to Jim Balsillie, RIM's co-CEO. Pricing of the software hasn't yet been set. RIM says it also plans to eventually release versions for other mobile OS.
According to the WSJ, representatives of Kirk Kerkorian's Tracinda, which has proposed a $4.5bn acquisition of DaimlerChrysler's (DCX) Chrysler Group, met yesterday with United Auto Workers members who have separately proposed an employee-stock-ownership plan for Chrysler. DCX and its bankers have focused on discussions with 3 potential buyers: Cerberus Capital Mgmt, the team of Blackstone Partners and Centerbridge Capital Partners, and auto supplier Magna Intl. (MGA). Tracinda, in its proposal to DCX, said it would consider giving the UAW a stake as part of a new capital structure. The proposal would give the union equity in return for giving up some future benefits. This idea, swapping the retirement health-care debts owed to UAW workers for equity in their employers, is getting increasing attention among Detroit leaders. Ppl familiar with the situation say Tracinda wants to leave the door open to further discussions with the UAW Local 12 group, the one proposing an employee-stock-ownership plan, and others that might join an effort to promote an employee-led deal. The group of UAW assembly workers is suggesting employees could buy 70% of Chrysler.
Barron’s Online “Inside Scoop” section reports that George Soros disclosed that he beneficially held 20.49m shares, or an 11.5% stake, in JetBlue (JBLU) at the end of ‘06. Ben Silverman, of InsiderScore.com, says Soros has "been decreasing his stake over the years" in JetBlue. Adjusting for stock splits, his stake has gone from 22.4% in ‘02 to 17.3% in ‘03 to 16% in ‘04 to 14.5% in ‘05 and to 11.5% at the end of ‘06.
Sunday, April 22, 2007
Barron's Summary
Barron’s profiles Waste Mgmt (WMI), saying that the co’s stock is off 5% this year, to 35, or an appealing 18x expected earnings. It could rally into the mid-40s as the co meets or exceeds earnings ests.
According to the Barron’s few stocks are as cheap as oil drillers', which sell for single-digit multiples. Strong fundamentals, takeover activity and more generous dividend policies could lift the shares sharply. Stocks mentioned include Transocean (RIG), Diamonf Offshore (DO), GlobalSantaFe (GSF), Noble (NE) and Ensco (ESV).
Joy Global's (JOYG) shares should rise as coal and electricity operators rumble back from a flat '06 and global commodity demand bounds ahead. The stock could recover by 30% or more.
“The Trader” section discusses potential merger between TD Ameritrade (AMTD) and E*Trade (ETFC). Both co’s were hammered after they trimmed their ‘07 forecasts. But trading activity could turn swiftly, and the prospect of consolidation helps put a floor beneath stock prices. By Sandler O'Neill analyst Richard Repetto’s reckoning, Ameritrade's and E-Trade's compatible strategies bode well for a union. Both have sought to reduce their reliance on online trading and grow their higher-margin asset-gathering businesses. But "the redundancy of the 2 firms' efforts to effectively 'touch' their clients is obvious," he says. Given their complementary operations, a conservative trim of 15% of combined expenses would nudge pre-tax profit margins to 59%, he ests. A merger would create a formidable foe for the far larger Schwab (SCHW). Mgmts of Ameritrade and E-Trade clearly are open to the notion; the 2 dallied on and off before Ameritrade merged with TD Waterhouse in ‘05. TD Bank (TD) which controls more than a 1/3 of Ameritrade's shares, must be willing to go along, but a few more qrtrs of flubbed profits might make saying yes a lot easier.
“The Trader” section also highlights Domino’s Pizza (DPZ), which last week served a plan to buy back $200m worth of stock, and a one-time $13.50 a share dividend. To help pay for the dividend and buyback, the co last week completed a $1.85bn recapitalization that loaded more debt onto its balance sheet. That may not be such a sure thing. For a start, Domino's does not enjoy strong pricing power. Margins will be further threatened by high corn and wheat prices that affect almost every ingredient in pizza. Corn and wheat inventories are already at their lowest levels since the early ‘70s, and prices are projected to climb further. Last year, Domino's SSS declined for the first time in more than a decade, and analysts' projections for a 3% sales rise this year might prove too rosy. Last week, Bear Stearns analyst Joseph Buckley downgraded the stock, which he says was trading "reasonably close to fair value." He was also "apprehensive" about 1Q earnings. Shares trading at 33 will drop to 19.50 once the stock goes ex-dividend, and that lower dollar value might tempt bargain hunters. But Domino's debt load will be 7x ‘07 EBITDA of about $261m, Buckley notes. And its EV is 10x higher than ‘08 EBITDA. Domino's buyback might support the stock in the short term, but any further upside will now take a lot longer to show up.
“Follow Up” section highlights Vertex (VRTX), which has the leading experimental hepatitis drug, Telapravir, which inhibits an enzyme essential to the hepatitis C virus. Telapravir's rapid effectiveness in early trials sent shares above $45 last year, valuing Vertex as if it would have a near monopoly on treatment of HCV infections. Vertex seems to have a good drug in Telapravir, and is running excellent clinical studies. But its hepatitis business prospects are more realistically valued, since its shares have pulled back. "We see this as being a very crowded marketplace," says Jason Kolbert, of Susquehanna.
“Technology Trader” highlights Neurochem (NRMX), which shook up its fans last week. The co announced that its statistical consultants had suggested the co adjust the statistical model originally chosen for analyzing its pivotal clinical trial of Alzhemed, a drug aimed at stemming the memory-eroding progress of Alzheimer's. "An obvious interpretation of this news is that Alzhemed did not demonstrate a large effect," CIBC analyst Brian Lian told clients, "leading to extensive subset analyses." Other analysts axed their tgts for the stock. The co's release seemed to warn investors that Alzhemed's test performance might be damped by "potential confounding factors such as the effect of concomitant medications, baseline characteristics of the study population or differences in clinical sites." But the full assessment of the study won't be completed until around June. Some investors have long doubted the prospects of Alzhemed, selling short the shares of Neurochem after early trials of the drug failed to show a clear effect. Yet Alzhemed is the furthest along of a new generation of potentially disease-altering treatments for Alzheimer's. Others testing treatments include MYGN, ELN and the drug giants LLY and WYE.
Friday, April 20, 2007
Calls of Note Part 2
- TWP is positive on Suntech Power (NYSE:STP) after meeting with Amy Zhang, CFO of STP. Firm views the highlights from the meeting: pricing trends are in line with expectations (5% to 7%); demand remains strong, which they believe could drive upside to their forecast in 2007; MSK, high-priced silicon and currency will weigh on margins in 1Q07; and the sales channel is shifting toward direct sales to installers/integrators.
Ms. Zhang indicated that pricing trends for solar modules are largely in line with previous guidance of down 5% to 7% in 2007 from the $3.84 average price seen in 2006, and these declines are occurring gradually q/q.
Zhang was confident that demand for solar modules is strong at the pricing levels discussed above. In fact, it appears that STP is contemplating purchasing cells from third parties to meet strong customer demand that exceeds is current in-house cell production capabilities. This factor coupled with STP's previous commentary that it has more than enough silicon to reach its 2007 production target of 280MW gives the firm a high level of confidence in their current estimates and suggest there could be upside in 2007. TWP believe sSTP's production could approach 300MW in 2007, which they estimate would add roughly $0.05 to $0.10 in EPS to current 2007 GAAP estimate of $1.04 ($1.17 non-GAAP).
Maintains Overweight: While the margin message is not new, the firm had previously underestimated the magnitude of the impact in the near term, and they believe they are not alone in this area. They are, however, encouraged by the positive data points on pricing they have heard of late that were supported by STP and the positive commentary on demand trends. The STP shares are currently trading at 20.8x 2008 non-GAAP EPS estimates, respectively below the wafer/cell/module supplier average of 23.4x.
Notablecalls: Nice comments by TWP. I only wish the chart would agree more with the bullish tone of the call.
Ms. Zhang indicated that pricing trends for solar modules are largely in line with previous guidance of down 5% to 7% in 2007 from the $3.84 average price seen in 2006, and these declines are occurring gradually q/q.
Zhang was confident that demand for solar modules is strong at the pricing levels discussed above. In fact, it appears that STP is contemplating purchasing cells from third parties to meet strong customer demand that exceeds is current in-house cell production capabilities. This factor coupled with STP's previous commentary that it has more than enough silicon to reach its 2007 production target of 280MW gives the firm a high level of confidence in their current estimates and suggest there could be upside in 2007. TWP believe sSTP's production could approach 300MW in 2007, which they estimate would add roughly $0.05 to $0.10 in EPS to current 2007 GAAP estimate of $1.04 ($1.17 non-GAAP).
Maintains Overweight: While the margin message is not new, the firm had previously underestimated the magnitude of the impact in the near term, and they believe they are not alone in this area. They are, however, encouraged by the positive data points on pricing they have heard of late that were supported by STP and the positive commentary on demand trends. The STP shares are currently trading at 20.8x 2008 non-GAAP EPS estimates, respectively below the wafer/cell/module supplier average of 23.4x.
Notablecalls: Nice comments by TWP. I only wish the chart would agree more with the bullish tone of the call.
Calls of Note Part 1
- JP Morgan says the market is too negative on Whole Foods (NASDAQ:WFMI), in their view. The stock over-compensates for risks, yet under-compensates for strengths. An "investment year" in 2007E is well-advertised, particularly with the Wild Oats acquisition. Some of WFMI's recent sales issues have been competitive; some have been other things (the market says 80%/20%; JPM says the opposite). Same store sales should accelerate with the reversion back to 17%+ EPS growth likely. Reiterates Overweight.
JPM thinks sales trends will prove better than the market anticipates for Q207E. They estimate 7.5% comps, lapping an 11.9% in Q2 of last year. The current quarter likely benefited from a slight Easter shift, which occurred during Q207 this year (was in Q306 last year); this should cosmetically add say 50 bps to current quarter comps (hurt Q2 of the prior year by 55 bps).
Last quarter, WFMI started the quarter off at 6.8% (first 5 weeks of last quarter's 16-week period and facing a 13.6% comparison); the company reported 7% for the quarter in total (against a 13% comparison). This implies that WFMI's comp got slightly better as the last quarter progressed. Of the 6 stores opened during the period, the firm has received feedback on four, and the new stores are in-line with expectations.
At 26.8x 2008E calendar P/E, WFMI trades below its mean premium to various peers. In fact, WFMI trades at 1.6x that of Safeway (SWY/UW) on 2008E, and its 5 year mean premium has been at nearly 3x that of SWY's P/E. Its trough to SWY has been 1.5x in last 5 years (its high has been 4.5-5x). They think WFMI is also inexpensive at a 7.2% OCF/EV yield, for a growth company. A 1.6% dividend yield and 1x LTM PF sales valuation are also supportive.
Notablecalls: Nothing really new here. Not actionable but good to know category.
JPM thinks sales trends will prove better than the market anticipates for Q207E. They estimate 7.5% comps, lapping an 11.9% in Q2 of last year. The current quarter likely benefited from a slight Easter shift, which occurred during Q207 this year (was in Q306 last year); this should cosmetically add say 50 bps to current quarter comps (hurt Q2 of the prior year by 55 bps).
Last quarter, WFMI started the quarter off at 6.8% (first 5 weeks of last quarter's 16-week period and facing a 13.6% comparison); the company reported 7% for the quarter in total (against a 13% comparison). This implies that WFMI's comp got slightly better as the last quarter progressed. Of the 6 stores opened during the period, the firm has received feedback on four, and the new stores are in-line with expectations.
At 26.8x 2008E calendar P/E, WFMI trades below its mean premium to various peers. In fact, WFMI trades at 1.6x that of Safeway (SWY/UW) on 2008E, and its 5 year mean premium has been at nearly 3x that of SWY's P/E. Its trough to SWY has been 1.5x in last 5 years (its high has been 4.5-5x). They think WFMI is also inexpensive at a 7.2% OCF/EV yield, for a growth company. A 1.6% dividend yield and 1x LTM PF sales valuation are also supportive.
Notablecalls: Nothing really new here. Not actionable but good to know category.
Color on quarter: Intuitive Surgical (NASDAQ:ISRG)
Several firms are commenting on Intuitive Surgical (NASDAQ:ISRG) after the co issued Q1 results last night:
- Deutsche Bank notes that with recurring revenues expected to sustainably make up a majority of company sales going forward, 1Q results clearly demonstrate the earnings power of Intuitive's business model. While system sales will always be a large component, growth in procedures is a longer-term growth driver to a more sustainable and predictable business model. Firm reiterates Buy rating and are raising their tgt to $150.
Based on firm's math, annualized per system utilization in 1Q approximated 133 procedures versus 119 in 4Q06. Gynecology and Urology continue to be the primary drivers of procedure growth, although all robotic indications grew in 1Q.
Importantly, for the first time, the "razorblade" component of the company's razor/razorblade business model accounted for a majority of total sales for the company, which the firm believes represents an important inflection point. Recurring revenue (Instruments/Accessories + Service) represented 51% of total sales in the quarter, with continued growth in this figure allowing for greater visibility to financial results and less lumpiness inherent with system sales. During the quarter, the company sold 44 da Vinci systems (33 U.S. and 11 OUS) versus DB's estimate of 46 systems.
- Cowen notes Intuitive Surgical posted surprisingly strong 1Q results which beat estimates and provedutilization is rising. EPS growth of 63% on a 48% sales gain bolsters firm's confidence that Intuitive shares can outperform the market by 20% this year. Steady increases in procedure utilization are being driven by broad adoption in urology and early traction in gynecology and bariatric surgery. They are raising estimates to reflect 42% sales growth this year and reiterate Outperform.
While new da Vinci system placements of 44 rose by 26% YOY, disposable instrument sales rose by 73%. The installed base rose to 602 systems, up 41% YOY. Utilization in terms of instrument sales per system rose by 23% YOY, double firm's 11% estimate. Potential for utilization to rise 3-fold exists.
- Bear Stearns notes the company placed 44 consoles in 1Q07, below their 47 placement estimate. While below firm's estimate, the figure represented a smaller than usual q/q sequential decline on a percentage basis (-10% q/q) vs. a year ago (-13% q/q).
While the console placements were below their and the Street's expectations, Accessories sales grew 73% y/y (vs. the 58% growth they expected with $36.8M). The barometers of ISRG's growth may have become a two-horse race, where Instrument revenues may begin to outshine console revenues from time to time. And while some investors may fear increased utilization will erode console sales growth, they believe the two metrics are more likely to share similar positive implications about long-term sales and EPS growth.
While they don't anticipate Accessory revenues will become the majority of revenues for some years to come, an acceleration of that process while still maintaining 40%+ top- and bottom-line growth rates should help the stock move higher. Maintains Outperform.
- Wachovia remains positive on ISRG saying that after a period of hyper-growth in system sales during 2005 and 2006, system sales have slowed some. Fortunately, strong procedure growth means that instruments growth has picked up the slack. In fact, Q1 2007 marks the first time that recurring instruments and service revenue made up the majority of ISRG's sales (50.9% of total sales). They view the increased contribution from recurring revenue as a significant positive since it should reduce revenue volatility.
Notablecalls: Following the results out last night, the stock initially shot up to around $126 but then retreated to $118 after it came apparent they had missed the whisper number (44 vs. 46-48) on system placements. I really don't see this as a significant miss as ASP's were up and accessories more than made up the difference. Comments by management helped the stock gain some ground, with the last trades crossing around $123.50. While I think the stock may be dead money for a week or two, I continue to be positive on ISRG and expect it to challenge 52 week highs soon after.
- Deutsche Bank notes that with recurring revenues expected to sustainably make up a majority of company sales going forward, 1Q results clearly demonstrate the earnings power of Intuitive's business model. While system sales will always be a large component, growth in procedures is a longer-term growth driver to a more sustainable and predictable business model. Firm reiterates Buy rating and are raising their tgt to $150.
Based on firm's math, annualized per system utilization in 1Q approximated 133 procedures versus 119 in 4Q06. Gynecology and Urology continue to be the primary drivers of procedure growth, although all robotic indications grew in 1Q.
Importantly, for the first time, the "razorblade" component of the company's razor/razorblade business model accounted for a majority of total sales for the company, which the firm believes represents an important inflection point. Recurring revenue (Instruments/Accessories + Service) represented 51% of total sales in the quarter, with continued growth in this figure allowing for greater visibility to financial results and less lumpiness inherent with system sales. During the quarter, the company sold 44 da Vinci systems (33 U.S. and 11 OUS) versus DB's estimate of 46 systems.
- Cowen notes Intuitive Surgical posted surprisingly strong 1Q results which beat estimates and provedutilization is rising. EPS growth of 63% on a 48% sales gain bolsters firm's confidence that Intuitive shares can outperform the market by 20% this year. Steady increases in procedure utilization are being driven by broad adoption in urology and early traction in gynecology and bariatric surgery. They are raising estimates to reflect 42% sales growth this year and reiterate Outperform.
While new da Vinci system placements of 44 rose by 26% YOY, disposable instrument sales rose by 73%. The installed base rose to 602 systems, up 41% YOY. Utilization in terms of instrument sales per system rose by 23% YOY, double firm's 11% estimate. Potential for utilization to rise 3-fold exists.
- Bear Stearns notes the company placed 44 consoles in 1Q07, below their 47 placement estimate. While below firm's estimate, the figure represented a smaller than usual q/q sequential decline on a percentage basis (-10% q/q) vs. a year ago (-13% q/q).
While the console placements were below their and the Street's expectations, Accessories sales grew 73% y/y (vs. the 58% growth they expected with $36.8M). The barometers of ISRG's growth may have become a two-horse race, where Instrument revenues may begin to outshine console revenues from time to time. And while some investors may fear increased utilization will erode console sales growth, they believe the two metrics are more likely to share similar positive implications about long-term sales and EPS growth.
While they don't anticipate Accessory revenues will become the majority of revenues for some years to come, an acceleration of that process while still maintaining 40%+ top- and bottom-line growth rates should help the stock move higher. Maintains Outperform.
- Wachovia remains positive on ISRG saying that after a period of hyper-growth in system sales during 2005 and 2006, system sales have slowed some. Fortunately, strong procedure growth means that instruments growth has picked up the slack. In fact, Q1 2007 marks the first time that recurring instruments and service revenue made up the majority of ISRG's sales (50.9% of total sales). They view the increased contribution from recurring revenue as a significant positive since it should reduce revenue volatility.
Notablecalls: Following the results out last night, the stock initially shot up to around $126 but then retreated to $118 after it came apparent they had missed the whisper number (44 vs. 46-48) on system placements. I really don't see this as a significant miss as ASP's were up and accessories more than made up the difference. Comments by management helped the stock gain some ground, with the last trades crossing around $123.50. While I think the stock may be dead money for a week or two, I continue to be positive on ISRG and expect it to challenge 52 week highs soon after.
Color on quarter: Google (NASDAQ:GOOG)
Several firms comment on Google (NASDAQ:GOOG) after the co released strong Q1 results last night:
- Stifel notes Google reported particularly strong results relative to that which was embedded in its share price. Even related to firm's estimates, the company beat revenue by 2% and EBITDA by 4%. Google was able to grow ex-TAC revenue by 14% sequentially and only grow its cash operating expenses by 7%, reversing the operating deleverage which began to occur in 4Q06. The company spent $600 million in capital expenditures justifying the theory that management continues to build the infrastructure to support the world's largest technology company.
Google may be a growth company but, when incoporating its public market valuation, they believe it is a value stock. The company reported ex-TAC revenue of 67% or 2.5x the industry and 6x the rate of #2 Yahoo!. Google controls distribution on the Internet at 65% of global search query share and its market share seems to grow each and every month. Google continues to have significant untapped opportunity in areas such as mobile, video, checkout, radio, and TV, among others. The business trades for 25x forward earnings despite being the recipient of the vast majority of the incremental growth on the Internet today. Firm continues to believe this is a must-own stock and they would be aggressive buyers of the shares against their $585 target, which amounts to 31x cash earnings or 85% of the rate of three-year growth expectations (2007-2009).
- JP Morgan notes they are pleased by Google's strong domestic performance. US revenues were up 48%, and $20M higher than firm's estimate, and the growth rate slowdown of 320 bps was much better than the 460 bps they were expecting. JPM believes market share gains and monetization gains contributed to the strong growth, and expect these trends to continue.
Google's 1Q EBITDA margin of 63.4% was ahead of JPM's 62.8% estimate and up 130 bps Q/Q. In light of continued heavy investments in capex, they are pleased with the margin expansion, which was driven by lower than expected RandD and better than expected gross margins.
Based on Google's 1Q07 performance, they are raising 2Q07 net revenue, EBITDA, and EPS estimates to $2.719B, $1.673B, and $3.55 from $2.651B, $1.643B, and $3.49, respectively. At the same time, they are raising F07 net revenue estimate to $11.41B from $11.27B, EBITDA estimate to $7.04B from $6.93B, and EPS estimate to $15.06 from $14.75
Maintains Overweight rating. Google trades at 31.3x F07 pro forma EPS estimate of $15.06, compared to its peers at 45.0x. Given that Google is growing significantly faster, they believe it deserves at least a valuation in line with peers, and thus maintain Overweight rating.
- Goldman Sachs says they expect Google's shares to move higher given 1Q2007 results that serve as a strong base for better-than-expected revenue and profit growth in 2007. They
believe that better margins and absolute EBITDA yoy growth of 61% versus consensus expectations of 55% growth should increase investor confidence in Google's ability to drive improving FCF growth and returns. First-quarter results reinforce firm's outlook and view on valuation and reflect Google's ability to outpace the search industry overall.They continue to see 20%-plus upside to their year-end price target of $620.
Notablecalls: Another surprise by GOOG! Well, not quite. Note that over the past year the co has on average managed to beat EPS by 11%. That exactly the number we saw last night. Of course, most of the market participants did not expect another beat of this magnitude, especially in light of YHOO's results. Hence, the sharp rally in after hours. While there are some signs of slight deceleration in growth rates, it's nothing compared to what we have seen at YHOO or EBAY. Plus, the stock trades at a discount to these two. So, in some sense, Stifel's right - GOOG's a value stock. I think there will be an upward bias in GOOG stock over the next week or so, helped by positive analyst chatter.
- Stifel notes Google reported particularly strong results relative to that which was embedded in its share price. Even related to firm's estimates, the company beat revenue by 2% and EBITDA by 4%. Google was able to grow ex-TAC revenue by 14% sequentially and only grow its cash operating expenses by 7%, reversing the operating deleverage which began to occur in 4Q06. The company spent $600 million in capital expenditures justifying the theory that management continues to build the infrastructure to support the world's largest technology company.
Google may be a growth company but, when incoporating its public market valuation, they believe it is a value stock. The company reported ex-TAC revenue of 67% or 2.5x the industry and 6x the rate of #2 Yahoo!. Google controls distribution on the Internet at 65% of global search query share and its market share seems to grow each and every month. Google continues to have significant untapped opportunity in areas such as mobile, video, checkout, radio, and TV, among others. The business trades for 25x forward earnings despite being the recipient of the vast majority of the incremental growth on the Internet today. Firm continues to believe this is a must-own stock and they would be aggressive buyers of the shares against their $585 target, which amounts to 31x cash earnings or 85% of the rate of three-year growth expectations (2007-2009).
- JP Morgan notes they are pleased by Google's strong domestic performance. US revenues were up 48%, and $20M higher than firm's estimate, and the growth rate slowdown of 320 bps was much better than the 460 bps they were expecting. JPM believes market share gains and monetization gains contributed to the strong growth, and expect these trends to continue.
Google's 1Q EBITDA margin of 63.4% was ahead of JPM's 62.8% estimate and up 130 bps Q/Q. In light of continued heavy investments in capex, they are pleased with the margin expansion, which was driven by lower than expected RandD and better than expected gross margins.
Based on Google's 1Q07 performance, they are raising 2Q07 net revenue, EBITDA, and EPS estimates to $2.719B, $1.673B, and $3.55 from $2.651B, $1.643B, and $3.49, respectively. At the same time, they are raising F07 net revenue estimate to $11.41B from $11.27B, EBITDA estimate to $7.04B from $6.93B, and EPS estimate to $15.06 from $14.75
Maintains Overweight rating. Google trades at 31.3x F07 pro forma EPS estimate of $15.06, compared to its peers at 45.0x. Given that Google is growing significantly faster, they believe it deserves at least a valuation in line with peers, and thus maintain Overweight rating.
- Goldman Sachs says they expect Google's shares to move higher given 1Q2007 results that serve as a strong base for better-than-expected revenue and profit growth in 2007. They
believe that better margins and absolute EBITDA yoy growth of 61% versus consensus expectations of 55% growth should increase investor confidence in Google's ability to drive improving FCF growth and returns. First-quarter results reinforce firm's outlook and view on valuation and reflect Google's ability to outpace the search industry overall.They continue to see 20%-plus upside to their year-end price target of $620.
Notablecalls: Another surprise by GOOG! Well, not quite. Note that over the past year the co has on average managed to beat EPS by 11%. That exactly the number we saw last night. Of course, most of the market participants did not expect another beat of this magnitude, especially in light of YHOO's results. Hence, the sharp rally in after hours. While there are some signs of slight deceleration in growth rates, it's nothing compared to what we have seen at YHOO or EBAY. Plus, the stock trades at a discount to these two. So, in some sense, Stifel's right - GOOG's a value stock. I think there will be an upward bias in GOOG stock over the next week or so, helped by positive analyst chatter.
Paperstand (WMT, SIR)
According to the WSJ’s ”Heard on the Street” column retail execs and major investors say Wal-Mart (WMT) needs to take some significant steps to regain its status as a growth stock. Here is their road map for rekindling the shares. Try the Golden Arches recipe. McDonald’s reversed a prolonged stock decline earlier this decade by drastically slowing US store expansion, closing unprofitable outlets and improving customer service. Between ‘03 and ‘05, its shares doubled in price. The key was McDonald's accepting that its US business had matured, and that it would be better off focusing more on overseas growth mkts, such as Latin America, Russia and China. Peter Sorrentino, of Huntington Asset Advisors, says it is time for a pullback in the US for the retailer. Wal-Mart has been "too focused on growth in units and not enough on the core business," Mr. Sorrentino says. "They lost their way."
Barron’s Online “Inside Scoop” section rerports that Steadfast Capital Mgmt disclosed that it now owns 4m shares of Sirva (SIR), or a 5.4% stake, up from the 2.1m shares it owned as of Dec.’06. According to StreetSight.net, Steadfast "employs a value-oriented strategy and seeks to invest in co’s that are growing at 20-25% a year." The largest chunk of its portfolio, 16.4%, is invested in Berkshire Hathaway (BRKA).
Barron’s Online “Inside Scoop” section rerports that Steadfast Capital Mgmt disclosed that it now owns 4m shares of Sirva (SIR), or a 5.4% stake, up from the 2.1m shares it owned as of Dec.’06. According to StreetSight.net, Steadfast "employs a value-oriented strategy and seeks to invest in co’s that are growing at 20-25% a year." The largest chunk of its portfolio, 16.4%, is invested in Berkshire Hathaway (BRKA).
Thursday, April 19, 2007
Calls of Note Part 2
Couple of more interesting comments on last night's earnings movers:
- ThinkEquity's Suresh Balaraman comments on Novellus Systems (NASDAQ:NVLS) saying that while foundries should emerge from depressed levels, he expects Novellus to be vulnerable to slowdown in the memory segment. The firm is lowering estimates for 2008 and trimming their price target to $34 from $36. They estimate that the near-term downside to NVLS shares is $26.
ThinkEquity believes orders could average $350M +/- $30M in Q2 and Q3. While they anticipate foundries and advanced logic will emerge from moribund levels, it may not be sufficient to offset weaker memory spending. While they expect Vista to eventually emerge as a driver for DRAM, they believe any meaningful capacity addition will not be forthcoming from the memory segment until early 2008. Firm believes there is sufficient memory capacity to support the demand through the rest of the year.
Firm's price target of $34 assumes that order rates should approach around $380M over the next several quarters after a dip to $320M. It also reflects 15% normalized net margin and a 15 multiple. In the near term, the bookings could potentially dip to as low as $320M, causing stock price downside to $26 (12.5% net margins, 15 multiple).
Notablecalls: Think there may be some more downside in NVLS, in addition to weakness seen in after hours action.
- Deutsche Bank comments on eBay (NASDAQ:EBAY) saying that while the stock will likely trade up slightly today, they think that the stock should come back in to the low-$30s, particularly as investors dig into the underlying metrics (suggesting far slower growth in GMV and transactions than expected).
Notablecalls: As I said, I don't see favourable risk/reward here.
- ThinkEquity's Suresh Balaraman comments on Novellus Systems (NASDAQ:NVLS) saying that while foundries should emerge from depressed levels, he expects Novellus to be vulnerable to slowdown in the memory segment. The firm is lowering estimates for 2008 and trimming their price target to $34 from $36. They estimate that the near-term downside to NVLS shares is $26.
ThinkEquity believes orders could average $350M +/- $30M in Q2 and Q3. While they anticipate foundries and advanced logic will emerge from moribund levels, it may not be sufficient to offset weaker memory spending. While they expect Vista to eventually emerge as a driver for DRAM, they believe any meaningful capacity addition will not be forthcoming from the memory segment until early 2008. Firm believes there is sufficient memory capacity to support the demand through the rest of the year.
Firm's price target of $34 assumes that order rates should approach around $380M over the next several quarters after a dip to $320M. It also reflects 15% normalized net margin and a 15 multiple. In the near term, the bookings could potentially dip to as low as $320M, causing stock price downside to $26 (12.5% net margins, 15 multiple).
Notablecalls: Think there may be some more downside in NVLS, in addition to weakness seen in after hours action.
- Deutsche Bank comments on eBay (NASDAQ:EBAY) saying that while the stock will likely trade up slightly today, they think that the stock should come back in to the low-$30s, particularly as investors dig into the underlying metrics (suggesting far slower growth in GMV and transactions than expected).
Notablecalls: As I said, I don't see favourable risk/reward here.
Calls of Note Part 1
Couple of more interesting comments on Motorola (NYSE:MOT) after the co issued its Q1 results yesterday morning:
- Morgan Stanley thinks the worst appears to be behind Motorola at this point, but as its competitors have captured momentum and mind share in 3G as well as at the low-end in emerging markets, regaining its footing - and more importantly its profitability -- in these critical growth areas will likely be a long-tailed story. Firm would get more constructive on increasing product synergies across its handset, cable, and networks businesses or new model introductions that could increase pricing power and operating margins. Conversely, they would get more negative on shares if the handset cost actions, most of which they think should have been well underway by this point, will merely offset an increasingly competitive environment.
MSCO's EPS estimate for 2007 drops 8c to 34c on reduced sales partially offset by a higher GM. For 2008, their forecast improves by 7c to 93c on higher ASPs and a better GM.
Motorola is a reasonably valued restructuring story, where reset expectations, in particular a low bar for Q2, could drive shares toward $20, or around one times EV/sales using C2008 estimate. Firm's fair value estimate for shares is around $18.50, which assumes that Motorola gets back to double digit operating margins by late 2008. Maintains Equal Weight.
- Deutsche Bank says that although they have a Hold rating and their PT is 18.6% below MOT's current trading price, they believe the stock, in the short run, is expected to see some bounce due to the well-publicized ongoing proxy fight between Carl Icahn and Motorola.
From what they heard on the call, the new team has not yet formulated a real strategy for turning around the mobile unit. While management called out several initiatives none of these were new - rationalizing the supply chain, new silicon vendors, standardizing software, etc. All were things the company had discussed when Mobile Devices still had double digit (positive) operating margins
They do not think Motorola is a company broken beyond repair. They have problems, and they need to fix them. There are some signs of progress, but the toughest changes lay ahead and will still take some time. They think the market continues to underestimate the timing of a turnaround at Motorola.
Notablecalls: I think that over the next qtrs MOT stock will continue to climb the wall of worry. There will be setbacks but I think these will prove to be buying opportunities. Motorola will get its mojo back eventually. Meanwhile we have Mr. Icahn looking out for the shareholders and of course, the stock price.
- Morgan Stanley thinks the worst appears to be behind Motorola at this point, but as its competitors have captured momentum and mind share in 3G as well as at the low-end in emerging markets, regaining its footing - and more importantly its profitability -- in these critical growth areas will likely be a long-tailed story. Firm would get more constructive on increasing product synergies across its handset, cable, and networks businesses or new model introductions that could increase pricing power and operating margins. Conversely, they would get more negative on shares if the handset cost actions, most of which they think should have been well underway by this point, will merely offset an increasingly competitive environment.
MSCO's EPS estimate for 2007 drops 8c to 34c on reduced sales partially offset by a higher GM. For 2008, their forecast improves by 7c to 93c on higher ASPs and a better GM.
Motorola is a reasonably valued restructuring story, where reset expectations, in particular a low bar for Q2, could drive shares toward $20, or around one times EV/sales using C2008 estimate. Firm's fair value estimate for shares is around $18.50, which assumes that Motorola gets back to double digit operating margins by late 2008. Maintains Equal Weight.
- Deutsche Bank says that although they have a Hold rating and their PT is 18.6% below MOT's current trading price, they believe the stock, in the short run, is expected to see some bounce due to the well-publicized ongoing proxy fight between Carl Icahn and Motorola.
From what they heard on the call, the new team has not yet formulated a real strategy for turning around the mobile unit. While management called out several initiatives none of these were new - rationalizing the supply chain, new silicon vendors, standardizing software, etc. All were things the company had discussed when Mobile Devices still had double digit (positive) operating margins
They do not think Motorola is a company broken beyond repair. They have problems, and they need to fix them. There are some signs of progress, but the toughest changes lay ahead and will still take some time. They think the market continues to underestimate the timing of a turnaround at Motorola.
Notablecalls: I think that over the next qtrs MOT stock will continue to climb the wall of worry. There will be setbacks but I think these will prove to be buying opportunities. Motorola will get its mojo back eventually. Meanwhile we have Mr. Icahn looking out for the shareholders and of course, the stock price.
Color on quarter: eBay (NASDAQ:EBAY)
Several firms comment on eBay (NASDAQ:EBAY) after the co released its Q1 results last night:
- Goldman Sachs says they recommend buying eBay with 20%+ upside to their new $43 price target (was $40) with 3% higher 2007/2008 EPS estimates of $1.34/$1.62. 27% yoy revenue growth (stable 21% yoy organic), 29% EBIT growth, and 39% EPS growth in 1Q2007 increasingly make firm's 16% 2008-2011E growth outlook appear conservative. Accelerating rev/listing and GMV/listing yoy growth to 20%/12% from 11%/8% in 4Q2006 demonstrate the steady improvement in the buyer experience by better converting demand into revenue resulting in higher conversion rates and ASPs.
- Stifel notes the company was able to beat revenue expectations by 4% and EPS by 10% but the drivers were not as clean as they were in 4Q06.
Organic revenue was 21% on a year-over-year basis as compared to 27% reported growth. Acquisitions made over the last 12 months contributed 1 point to top-line growth. Foreign exchange due to a weaker dollar contributed an additional 5 points of growth. EPS strength relative to guidance was driven primarily by strong revenue contributions from non-GMV businesses, expense leverage and productivity, a lower tax rate, and benefits from a weaker dollar. Free cash flow for the quarter was $479 million , or 27% of revenue in the quarter.
Stifel says they track several metrics on a YOY growth basis: active users 10% (4% decel), marketplace net transaction revenue 22% (2% decel), PayPal 28% (7% decel), core listings 4% (6% decel), GMV ex-currency 10% (6% decel), and non-Motors GMV of $1B categories 15% (5% decel). Firm anticipates that eBay's organic growth rate will moderate into the midteens in 2008 and low teens in 2009.
They believe the company is worth 25x 2008 EV/ulFCF justifying a Buy-rating and $37 target price. eBay is a maturing, high-quality company trading at a respectable valuation. As they have said in the past, they do not believe returns in eBay shares will ever be the same as they once were but they believe the shares offer a reasonable, risk-adjusted return. Would buy on pullbacks against the $37 target.
- Banc of America says they remain positive on EBAY on expectation of continued stabilization of the Marketplace which should continue to drive improvements in ASP's, conversion rates and generally higher revenue per listing (+21% Y/Y); increasing traction and scale of key asset PayPal; other opportunities including on-platform advertising from YHOO and GOOG; and margin expansion driven by continued expense leverage in S&M and G&A lines. Significant stock buyback activity could provide support through seasonally weaker quarters.
They are somewhat concerned about decelerating GMV growth in the US in Q1 (8% Y/Y) vs. Q4 (14%). In addition, GMV growth (ex-forex) also decelerated in Q1 (11% Y/Y) compared to Q4 (17% Y/Y).
- Piper Jaffray notes eBay reported a generally solid Q1 with strength in non-GMV revenues and increasing S&M leverage, FX benefits, and a lower tax rate driving upside. Approximately $0.01 of EPS upside was from improved operating leverage and revenue upside, $0.01 from FX benefits, and $0.01 from a lower tax rate.
While the continued slowdown in core eBay listings (2% y/y) and GMV (10% y/ y currency neutral) is somewhat concerning, eBay was able to offset the lower listings and GMV through improved conversion rates and ASPs. Also, eBay continues to experience strength in the non-GMV categories, including PayPal, Skype, Shopping.com, and 3rd Party Advertising & Other, which grew at 28%, 119% y/y, 29% y/y, and 65% y/y.
Piper if upping their tgt to $39 from $37 while maintaining Market Perform rating.
Notablecalls: While at first glance it looks like eBay was able to pull a beat & raise quarter, most of the upside came from favorable FX and lower tax rate. Also, growth in active users was flat q/q and up only 10% y/y. Another concern is the apparent deceleration in US GMV. International is the main driver here. Can't say I see good risk/reward here. I have no view on the s-t movements.
Color on quarter: Labor Ready (NYSE:LRW)
Couple of firms comment on Labor Ready (NYSE:LRW) after the co released better than expected Q1 results last night, driving the stock up over 25% in after hours action:
- Goldman Sachs notes LRW's released 1Q07 results last night, management revised 2007 guidance upwards; they had anticipated a negative revision. GSCO notes they were surprised by 1) better gross margin driven by lower workers comp expense, 2) completion of the existing and a new $100m buy back program, and 3) improving same store growth trends in February and March which management believes is a sign of end market stabilization. However the firm maintains their conviction that another leg down in residential construction employment is a matter of WHEN not if, contrary to the company's outlook for a slight 2H07 recovery.
GSCO's revised 2007 EPS estimate of $1.26 is up 15% but remains 10+% below guidance reflecting their belief that the stabilizing trends the company has seen over the last 6-8 weeks are not sustainable. While they recognize in the near-term shorts will likely not be rewarded, they maintain Sell rating with a $15 tgt (up from $13).
- Stifel notes they are raising their '07 EPS estimate to $1.36 from $1.25 and '08 EPS estimate to $1.48 from $1.40. While on the surface, their revised estimates appear bullish, they believe that it is still too early to call a positive turn at LRW. Firm's and the company's outlook for the top line is essentially unchanged and almost all of the upside to the EPS outlook that management provided was due to lower workers' compensation expenses, other cost controls, and significant share buybacks.
Same branch sales trends in 1Q06 were robust, up 11% y-o-y, and quickly deteriorated throughout both the quarter and the rest of 2006. In firm's view, the positive trends as 1Q07 progressed had more to do with easier comps than a significant improvement in the market. They believe that the uncertainty in the overall economy and the construction environment indicates that LRW's outlook beyond 2Q07, which has limited top line visibility, could be optimistic. Residential builders have not called a bottom, business investment spending has come under pressure and consumer spending could come down if discretionary income declines.
Stifel believes that the stock could get ahead of itself in the near term due to the revised EPS outlook. Although LRW's newly authorized $100 million stock buyback could provide support for the shares, any significant upward stock price movement could be unsustainable unless economic growth accelerates and the construction market rebounds.
Notablecalls: Goldman was out negative on LRW just ahead of results (please see the archives) but the chart at that time didn't indicate weakness. Based on that, I didn't call it actionable. After closing around $18, the stock traded as high as $23.50 in after hours action as shorts were squeezed to death. I suspect that if you can get a fill around $23-$23.50, you'll make money shorting LRW today. There will likely be another leg down in housing and LRW will get hurt.
Paperstand (HSY, GOOG, BSX, GDP)
The WSJ reports that Freddie Mac (FRE) and Fannie Mae (FNM) said they expect to buy tens of billions of dollars of newly created subprime mortgage loans over the next few years to help prop up the roughly $1.3trln subprime mkt as lenders tighten their credit standards or flee altogether. The move shows how the two govt-sponsored co’s are redeeming themselves on Capitol Hill by depicting themselves as part of the solution to surging defaults on subprime mortgages, those for borrowers with weak credit records or high debt in relation to income. The promises to help such borrowers are bolstering their support in Congress just as lawmakers debate legislation to tighten regulation of Fannie and Freddie, both emerging from accounting scandals. That makes it less likely that Congress will back longstanding calls from the Federal Reserve and others for tight constraints on the amounts of mortgages they can retain as investments, currently around $1.4trln, or 14% of US home loans outstanding.
Notablecalls: NY Post reports that FRE and FNM bailout sum is about $20bn and in addition WaMu helps with $2bn. A win-win situation for FRE and FNM. Expect a positive reaction in subprime stocks.
“Heard on the Street” column out saying that shares of Hershey (HSY) might turn bitter before becoming sweet again. With a potential tug of war for the confectionery brands of Cadbury Schweppes (CSG) in the offing, Hershey might not be able to resist the temptation to make a bid. Any attempt by Hershey to purchase Cadbury's chocolate and chewing-gum brands, with an estd value of about $19bn, would put a squeeze on Hershey's earnings. But it may be an opportunity Hershey can't afford to miss. Analysts have bandied about various scenarios for a Cadbury deal, including one in which Hershey could buy Cadbury's gum business, while Kraft Foods (KFT) or Wrigley (WWY) could bid for its cream eggs and milk-chocolate bars. If Hershey were to consume a sizable chunk of Cadbury's brands, it would position the co as a global confectionery powerhouse. Hershey valuation of about 21x ‘07 earnings is lofty. "In our view, a large part of the run-up in Hershey shares is due to the mkt's belief that Hershey could be involved in some form of transaction with Cadbury Schweppes confectionery," JP Morgan analyst Pablo Zuanic wrote in a note. Mr. Zuanic downgraded Hershey's stock Mon to Sell from Hold.
“Ahead of the Tape” column discusses Google’s (GOOG) upcoming earnings report, suggesting a miss. What might pop up after search titan reports earnings later today is a story about Google. Google's search growth has blown past analyst expectations for so long that Wall St. might now be setting the bar too high. 33 of the 38 Google analysts have a Buy rating or better on the stock. Google is expected to post earnings excluding one-time items of $3.30 a share, up 69%. But search growth at Google and among its rivals is slowing down, which is understandable after years of supercharged gains. In March, Google's search queries in the US were up 29% from last year, below the 36% growth rate in Feb and down from more than 50% last year. Google is still growing faster than the industry. Industrywide, online searches in March were up 15%, compared with gains of 33% in Oct. Not surprisingly, Yahoo posted disappointing results late Tue. Google's stock, sliding since mid-Jan, may already be reflecting the trend. The co has also been on a spending binge, which could hurt profit margins. Last Fri the co said it will pay $3.1bn for DoubleClick. Google hasn't undershot earnings tgts since the 4Q05, and it blew past its 4Q06. An earnings miss now would be a shock to many. But with expectations so high, perhaps it shouldn't be.
Barron’s Online highlights Boston Scientific (BSX), whose shares have jumped 11% over 3 weeks, fueled largely by takeout speculation and an end to regulatory sanctions. But the co says it is not for sale. And with the co still facing big problems, the stock could either fall or languish. The mkts for stents and implantable defibrillators remain weak. New rival stents could steal business. Regulatory issues still need fixing. Profits, meanwhile, could fall in ‘07 for the 2nd straight year. "They still face a number of fundamental issues," says Michael Barr, of Victory Capital Mgmt. "The needle has shifted to some degree. The news about the FDA helped, but it isn't enough to get me to buy the stock." Last month, BMO cut its rating to Mkt Perform. "6 mo’s ago I would have said this was a value name, but now I am not so sure," says BMO analyst Joanne Wuensch. "It feels like a value trap."
“Inside Scoop” section reports that Josiah Austin, a Goodrich Petroleum (GDP) director, spent $1.9m to buy 60K Goodrich shares on the open mkt. Mr. Austin is already co’s largest stockholder. He now controls a 20.1% stake in Goodrich with nearly 5.69m shares, valued at $182m. Ben Silverman, of InsiderScore.com, notes that Austin has spent only about $36m to build the stake since Jun’00. This week's transactions raised Austin's cost basis to $6.30 per share from $6.00. Silverman says Austin has proved to be a smart buyer and continues to show "an enormous amount of faith in the co." Unlike well-known names like billionaires Carl Icahn or Harold Simmons, Austin "keeps a low profile" and has made strategic, and lucrative, plays in recent years.
Notablecalls: NY Post reports that FRE and FNM bailout sum is about $20bn and in addition WaMu helps with $2bn. A win-win situation for FRE and FNM. Expect a positive reaction in subprime stocks.
“Heard on the Street” column out saying that shares of Hershey (HSY) might turn bitter before becoming sweet again. With a potential tug of war for the confectionery brands of Cadbury Schweppes (CSG) in the offing, Hershey might not be able to resist the temptation to make a bid. Any attempt by Hershey to purchase Cadbury's chocolate and chewing-gum brands, with an estd value of about $19bn, would put a squeeze on Hershey's earnings. But it may be an opportunity Hershey can't afford to miss. Analysts have bandied about various scenarios for a Cadbury deal, including one in which Hershey could buy Cadbury's gum business, while Kraft Foods (KFT) or Wrigley (WWY) could bid for its cream eggs and milk-chocolate bars. If Hershey were to consume a sizable chunk of Cadbury's brands, it would position the co as a global confectionery powerhouse. Hershey valuation of about 21x ‘07 earnings is lofty. "In our view, a large part of the run-up in Hershey shares is due to the mkt's belief that Hershey could be involved in some form of transaction with Cadbury Schweppes confectionery," JP Morgan analyst Pablo Zuanic wrote in a note. Mr. Zuanic downgraded Hershey's stock Mon to Sell from Hold.
“Ahead of the Tape” column discusses Google’s (GOOG) upcoming earnings report, suggesting a miss. What might pop up after search titan reports earnings later today is a story about Google. Google's search growth has blown past analyst expectations for so long that Wall St. might now be setting the bar too high. 33 of the 38 Google analysts have a Buy rating or better on the stock. Google is expected to post earnings excluding one-time items of $3.30 a share, up 69%. But search growth at Google and among its rivals is slowing down, which is understandable after years of supercharged gains. In March, Google's search queries in the US were up 29% from last year, below the 36% growth rate in Feb and down from more than 50% last year. Google is still growing faster than the industry. Industrywide, online searches in March were up 15%, compared with gains of 33% in Oct. Not surprisingly, Yahoo posted disappointing results late Tue. Google's stock, sliding since mid-Jan, may already be reflecting the trend. The co has also been on a spending binge, which could hurt profit margins. Last Fri the co said it will pay $3.1bn for DoubleClick. Google hasn't undershot earnings tgts since the 4Q05, and it blew past its 4Q06. An earnings miss now would be a shock to many. But with expectations so high, perhaps it shouldn't be.
Barron’s Online highlights Boston Scientific (BSX), whose shares have jumped 11% over 3 weeks, fueled largely by takeout speculation and an end to regulatory sanctions. But the co says it is not for sale. And with the co still facing big problems, the stock could either fall or languish. The mkts for stents and implantable defibrillators remain weak. New rival stents could steal business. Regulatory issues still need fixing. Profits, meanwhile, could fall in ‘07 for the 2nd straight year. "They still face a number of fundamental issues," says Michael Barr, of Victory Capital Mgmt. "The needle has shifted to some degree. The news about the FDA helped, but it isn't enough to get me to buy the stock." Last month, BMO cut its rating to Mkt Perform. "6 mo’s ago I would have said this was a value name, but now I am not so sure," says BMO analyst Joanne Wuensch. "It feels like a value trap."
“Inside Scoop” section reports that Josiah Austin, a Goodrich Petroleum (GDP) director, spent $1.9m to buy 60K Goodrich shares on the open mkt. Mr. Austin is already co’s largest stockholder. He now controls a 20.1% stake in Goodrich with nearly 5.69m shares, valued at $182m. Ben Silverman, of InsiderScore.com, notes that Austin has spent only about $36m to build the stake since Jun’00. This week's transactions raised Austin's cost basis to $6.30 per share from $6.00. Silverman says Austin has proved to be a smart buyer and continues to show "an enormous amount of faith in the co." Unlike well-known names like billionaires Carl Icahn or Harold Simmons, Austin "keeps a low profile" and has made strategic, and lucrative, plays in recent years.
Wednesday, April 18, 2007
Calls of Note Part 3
- Baird notes that although Komag (NASDAQ:KOMG) already preannounced (positive revenue) Q1 on March 21, Seagate's downward revision to Q2 estimates implies Komag could see some softness in Q2 as well. Firm notes that unit demand is the key metric for KOMG and that most of Seagate's margin/estimate reductions are driven by more competition/aggressive pricing (which would not impact KOMG and could actually help drive unit demand).
Given Seagate results, they are lowering 2007 EPS estimate to $3.90 from $4.00, driven by a weaker 1H profit picture. 2008 estimate is 4.50. Firm is lowering their price target to $39 from $44, based on 10x new 2007 EPS estimate of 3.90.
Given already negative sentiment and meaningful estimate reductions over the past few quarters, they believe a sentiment and fundamental trough is near and encourage value investors to accumulate shares on the near-term weakness. With a strong industry position, multiple growth drivers and prospects for meaningfully stronger results in 2H (from increased unit demand) amid reasonable valuation (<8x 2007 EPS), the firm maintains their Outperform rating.
Notablecalls: KOMG's chart sure looks weak here. Most of co's top customers have the ability to manufacture disk platters internally. This is the main reason why KOMG's stock trades at such a low valuation.
Given Seagate results, they are lowering 2007 EPS estimate to $3.90 from $4.00, driven by a weaker 1H profit picture. 2008 estimate is 4.50. Firm is lowering their price target to $39 from $44, based on 10x new 2007 EPS estimate of 3.90.
Given already negative sentiment and meaningful estimate reductions over the past few quarters, they believe a sentiment and fundamental trough is near and encourage value investors to accumulate shares on the near-term weakness. With a strong industry position, multiple growth drivers and prospects for meaningfully stronger results in 2H (from increased unit demand) amid reasonable valuation (<8x 2007 EPS), the firm maintains their Outperform rating.
Notablecalls: KOMG's chart sure looks weak here. Most of co's top customers have the ability to manufacture disk platters internally. This is the main reason why KOMG's stock trades at such a low valuation.
Calls of Note Part 2
- Piper Jaffray comments on Google (NASDAQ:GOOG) in light on Yahoo's Q1 results saying that due to the opinions of SEMs and the positive results coming from Comscore, they believed that Yahoo's Panama search monetization engine would drive upside in Q1. They were wrong, and now are slightly more cautious coming into Google's quarter. Assuming Comscore is at least directionally and relatively accurate (a potentially dangerous assumption), the Yahoo results may indicate that Comscore was simply overestimating paid click growth q/q, a scenario which is troublesome given Google's relatively low q/q growth of 5% according to Comscore. Yahoo's performance, however, has not correlated with Google's in the past. Combined with Google's announced reduction in ad coverage, these results make them at least incrementally more cautious coming in to Q1 results.
Int'l monetization and usage is growing much faster than the more mature U.S. market, and the firm believes Google has continued to gain share internationally, particularly in Europe. Strong international results may be enough to counter any weakness in the U.S. due to reduced ad coverage to allow Google to show the 12% sequential revenue growth consensus is expecting.
Although they believe Panama did well with large advertisers, some of whom may have slightly reduced Google spend in February due to a sudden flood of clicks from Yahoo, they believe Yahoo's new search monetization system hurt many smaller advertisers. It seems reasonable to assume these smaller advertisers may have shifted budgets toward Google.
Notablecalls: Not actionable but good to know category.
Int'l monetization and usage is growing much faster than the more mature U.S. market, and the firm believes Google has continued to gain share internationally, particularly in Europe. Strong international results may be enough to counter any weakness in the U.S. due to reduced ad coverage to allow Google to show the 12% sequential revenue growth consensus is expecting.
Although they believe Panama did well with large advertisers, some of whom may have slightly reduced Google spend in February due to a sudden flood of clicks from Yahoo, they believe Yahoo's new search monetization system hurt many smaller advertisers. It seems reasonable to assume these smaller advertisers may have shifted budgets toward Google.
Notablecalls: Not actionable but good to know category.
Calls of Note Part 1
- RBC Capital notes that despite several announcements yesterday, including a new silicon
contract and Evergreen-only plant expansion (outside of the EverQ venture), they must remain cautious on the long-term outlook for Evergreen Solar (NASDAQ:ESLR).
Firm believes the fundamental advantage of ESLR's technology, the ability to use less silicon to make a solar cell (albeit a less efficient one than industry avg) is of severely depreciating value given the vast amount of new silicon supply (a commodity) coming to market in 2008+. RBC believes silicon prices will rapidly decline in 2009+ and therefore be a much smaller lever on costs going forward.
Earnings Leverage: In order to secure the 6-year silicon deal with new silicon entrant DC Chemical, ESLR granted DCC $130M worth of stock, diluting the company 21%. Share count will approach 100M shares by the end of this year. Management is guiding investors to look to 2009 or 2010 for profits.
Bottom Line: They believe all the news investors were anticipating is now in the stock, with few catalysts that will drive upside. Firm believes the YTD appreciation in shares is primarily a result of short covering, spill-over from overall solar enthusiasm, and speculation about the deals announced yesterday, but they believe the financial and technical outlook for the company bode poorly long-term. Maintains Underperform.
Notablecalls: Good points by RBC's Stuart Bush.
contract and Evergreen-only plant expansion (outside of the EverQ venture), they must remain cautious on the long-term outlook for Evergreen Solar (NASDAQ:ESLR).
Firm believes the fundamental advantage of ESLR's technology, the ability to use less silicon to make a solar cell (albeit a less efficient one than industry avg) is of severely depreciating value given the vast amount of new silicon supply (a commodity) coming to market in 2008+. RBC believes silicon prices will rapidly decline in 2009+ and therefore be a much smaller lever on costs going forward.
Earnings Leverage: In order to secure the 6-year silicon deal with new silicon entrant DC Chemical, ESLR granted DCC $130M worth of stock, diluting the company 21%. Share count will approach 100M shares by the end of this year. Management is guiding investors to look to 2009 or 2010 for profits.
Bottom Line: They believe all the news investors were anticipating is now in the stock, with few catalysts that will drive upside. Firm believes the YTD appreciation in shares is primarily a result of short covering, spill-over from overall solar enthusiasm, and speculation about the deals announced yesterday, but they believe the financial and technical outlook for the company bode poorly long-term. Maintains Underperform.
Notablecalls: Good points by RBC's Stuart Bush.
Color on quarter: Yahoo (NASDAQ:YHOO)
Yahoo (NASDAQ:YHOO) is getting little love from the analyst community after reporting its Q1 results last night:
- Deutsche Bank notes they remain on the sidelines on shares of Yahoo! after in-line 1Q results. With the stock down 9% in after hours trading, they think the stock at this point could still face more downside pressure. At $29.50, the stock is trading at 36x 2007 and 29x 2008 earnings estimates, in-line with the Internet Media group at 36x '07 and 27x '08 earnings, but with slower growth (15-20% vs. group at 20%-25%).
Despite positive commentary by management at an industry conference for Panama, search results did not deliver 1Q upside. The high expectations were muted by only a modest contribution from Panama, with flat PPC rates and slower decline on RPS. Meanwhile, the display ad segment grew only 20%Y/Y vs. DB's 25%Y/Y estimate and below its historical rates of 30-35%. Firm thinks there is an oversupply of inventory on the non-premium side and the proliferation of the social networking sites will continue to pressure pricing.
For 2Q, they now expect $1,260mn in revenues, $486mn in EBITDA and $0.12 in GAAP EPS and 2007 estimates are now $5,226mn in revenues (+15% Y/Y), $2,115mn in EBITDA and $0.54 in GAAP EPS, versus prior estimates of $5,249mn, $2,125mn and $0.55 respectively.
- Piper Jaffray notes Yahoo generated net revenue of $1,183M, below their estimate of $1,201M and Street consensus of $1,208M, and even further below recent positive sentiment and firm's conviction that the company would see upside due to better than expected Panama results. PJ notes their enthusiasm about Panama likely should have been tempered by a historical perspective that Yahoo nearly always dead-centers their guidance, as they did this quarter producing net revenue within $8M of the mid-point of their guidance and EBITDA within $35K.
Is Panama Working? The answer seems to be yes, but not nearly as well or as quickly as the firm had thought. Monetization growth was likely slowed by weakness from small customers overpowering the increased spend seen by large branded search advertisers.
They believe Yahoo will be in a "show me" box on Wall Street for some time to come. At $30 per share, Yahoo trades at approximately 22x EV to 2008 PF net income (the best metric due to Yahoo's structurally higher tax rate and large cash and investment positions), while
Google, a company with far faster growth, more market power, and better earnings history trades at 23x. Maintains Mkt Perform and $30 tgt.
- Stifel says YHOO has three core components to its business " search, branded or display
advertisements, and fees. In the quarter, the search business did not show any early signs of material marketplace improvements as was increasingly suggested (and priced in) throughout the quarter. Overall, YHOO saw a revenue per search decline in the quarter, which was weakest at the beginning of the quarter and strengthened to turn positive by the end. To be fair, the company stated on its last call to not expect improvements until 2Q. In the branded business, the company noted that its top-200 advertisers grew by 20% in the quarter compared to 25%-30% in 4Q06 and 33% in 3Q06. In the fees business, the company saw paying customer growth of 24% but reported fees revenue growth of only 9% (10%- 11% after one-time adjustment). All in, YHOO has two components of its business showing noticeable decelerating trends and one in the midst of a restructuring in which management is betting on a double-digit 2H improvement. At 27x fully- taxed 2008 FCF estimates, they believe investors can afford to be patient and possibly attain shares in the low-to-mid $20s within this calendar year. Maintains Hold.
- ThinkEquity is reiterating their Buy rating and 12-month price target of $36. While Yahoo! (YHOO) reported an in-line 1Q07, they believe growth should begin re- accelerating in 2Q07 and the company remains well positioned to outperform 2H07/FY08 as monetization improvements in both search and display build momentum. Firm also believes YHOO's leading positions in video, mobile, and social media should drive greater user growth, further increasing the company's long-term advertising opportunity. They expect YHOO's planned marketing push in 2Q07, the upcoming TV upfront, and the announcement of key hires, e.g. CFO and Head of Audience, to act as potential near-term catalysts.
YHOO indicated that revenue-per-search (RPS) Y/Y declines stabilized in 1Q07 and that the
company is seeing strong increases in click-through-rates (CTRs) and improved cost-per-clicks (CPCs) heading in 2Q07. YHOO also announced that Panama's Japan rollout in 2Q07 remains on track, and the company should roll out Panama to Korea and Europe in the near future. Firm's checks indicate strong adoption trends/approval ratings from advertisers, and they believe the long-term opportunity for improved search monetization remains +40-50%, as YHOO is forecasting double-digit growth in overall revenue per page view in 2H07. They also believe YHOO will begin to add display and video advertising products to the Panama advertising system in the coming months which could further accelerate advertising yield.
Notablecalls: I have mixed emotions regarding Yahoo. On the bearish side, display ad segment growth is deaccelerating as there seems to be growing competition that is driving pricing down. Also, search is not doing too great as revenue per search is going down. Fee revenue grew only 9% y/y while customers grew 24%. On top of that, the valuation is still quite high. On the positive side, Panama's just starting to gain traction. Remember, it was only launched in Feb, giving it half a quarter to prove itself. With the upcoming launches in Japan and Europe Panama's impact may become more visible over the next couple of quarters. Plus, if ThinkEquity's right about the addition of display and video advertising products to the Panama advertising system, there could be significant upside.
Overall, while there are many negatives to the story, I think last night's reaction was a bit too harsh. Sitting back at my old desk, I would put out some early bids around $29 to catch the panic sellers. Would risk around $0.50.
- Deutsche Bank notes they remain on the sidelines on shares of Yahoo! after in-line 1Q results. With the stock down 9% in after hours trading, they think the stock at this point could still face more downside pressure. At $29.50, the stock is trading at 36x 2007 and 29x 2008 earnings estimates, in-line with the Internet Media group at 36x '07 and 27x '08 earnings, but with slower growth (15-20% vs. group at 20%-25%).
Despite positive commentary by management at an industry conference for Panama, search results did not deliver 1Q upside. The high expectations were muted by only a modest contribution from Panama, with flat PPC rates and slower decline on RPS. Meanwhile, the display ad segment grew only 20%Y/Y vs. DB's 25%Y/Y estimate and below its historical rates of 30-35%. Firm thinks there is an oversupply of inventory on the non-premium side and the proliferation of the social networking sites will continue to pressure pricing.
For 2Q, they now expect $1,260mn in revenues, $486mn in EBITDA and $0.12 in GAAP EPS and 2007 estimates are now $5,226mn in revenues (+15% Y/Y), $2,115mn in EBITDA and $0.54 in GAAP EPS, versus prior estimates of $5,249mn, $2,125mn and $0.55 respectively.
- Piper Jaffray notes Yahoo generated net revenue of $1,183M, below their estimate of $1,201M and Street consensus of $1,208M, and even further below recent positive sentiment and firm's conviction that the company would see upside due to better than expected Panama results. PJ notes their enthusiasm about Panama likely should have been tempered by a historical perspective that Yahoo nearly always dead-centers their guidance, as they did this quarter producing net revenue within $8M of the mid-point of their guidance and EBITDA within $35K.
Is Panama Working? The answer seems to be yes, but not nearly as well or as quickly as the firm had thought. Monetization growth was likely slowed by weakness from small customers overpowering the increased spend seen by large branded search advertisers.
They believe Yahoo will be in a "show me" box on Wall Street for some time to come. At $30 per share, Yahoo trades at approximately 22x EV to 2008 PF net income (the best metric due to Yahoo's structurally higher tax rate and large cash and investment positions), while
Google, a company with far faster growth, more market power, and better earnings history trades at 23x. Maintains Mkt Perform and $30 tgt.
- Stifel says YHOO has three core components to its business " search, branded or display
advertisements, and fees. In the quarter, the search business did not show any early signs of material marketplace improvements as was increasingly suggested (and priced in) throughout the quarter. Overall, YHOO saw a revenue per search decline in the quarter, which was weakest at the beginning of the quarter and strengthened to turn positive by the end. To be fair, the company stated on its last call to not expect improvements until 2Q. In the branded business, the company noted that its top-200 advertisers grew by 20% in the quarter compared to 25%-30% in 4Q06 and 33% in 3Q06. In the fees business, the company saw paying customer growth of 24% but reported fees revenue growth of only 9% (10%- 11% after one-time adjustment). All in, YHOO has two components of its business showing noticeable decelerating trends and one in the midst of a restructuring in which management is betting on a double-digit 2H improvement. At 27x fully- taxed 2008 FCF estimates, they believe investors can afford to be patient and possibly attain shares in the low-to-mid $20s within this calendar year. Maintains Hold.
- ThinkEquity is reiterating their Buy rating and 12-month price target of $36. While Yahoo! (YHOO) reported an in-line 1Q07, they believe growth should begin re- accelerating in 2Q07 and the company remains well positioned to outperform 2H07/FY08 as monetization improvements in both search and display build momentum. Firm also believes YHOO's leading positions in video, mobile, and social media should drive greater user growth, further increasing the company's long-term advertising opportunity. They expect YHOO's planned marketing push in 2Q07, the upcoming TV upfront, and the announcement of key hires, e.g. CFO and Head of Audience, to act as potential near-term catalysts.
YHOO indicated that revenue-per-search (RPS) Y/Y declines stabilized in 1Q07 and that the
company is seeing strong increases in click-through-rates (CTRs) and improved cost-per-clicks (CPCs) heading in 2Q07. YHOO also announced that Panama's Japan rollout in 2Q07 remains on track, and the company should roll out Panama to Korea and Europe in the near future. Firm's checks indicate strong adoption trends/approval ratings from advertisers, and they believe the long-term opportunity for improved search monetization remains +40-50%, as YHOO is forecasting double-digit growth in overall revenue per page view in 2H07. They also believe YHOO will begin to add display and video advertising products to the Panama advertising system in the coming months which could further accelerate advertising yield.
Notablecalls: I have mixed emotions regarding Yahoo. On the bearish side, display ad segment growth is deaccelerating as there seems to be growing competition that is driving pricing down. Also, search is not doing too great as revenue per search is going down. Fee revenue grew only 9% y/y while customers grew 24%. On top of that, the valuation is still quite high. On the positive side, Panama's just starting to gain traction. Remember, it was only launched in Feb, giving it half a quarter to prove itself. With the upcoming launches in Japan and Europe Panama's impact may become more visible over the next couple of quarters. Plus, if ThinkEquity's right about the addition of display and video advertising products to the Panama advertising system, there could be significant upside.
Overall, while there are many negatives to the story, I think last night's reaction was a bit too harsh. Sitting back at my old desk, I would put out some early bids around $29 to catch the panic sellers. Would risk around $0.50.
Paperstand (LAUR, BRP, AMX, KEY)
The WSJ’s ”Heard on the Street” column out saying that even as the coffers of private-equity firms have bulged in recent years, Wall St. has always assumed that buyout specialists would be wary of certain industries, such as financial services. These co’s usually have heavy capital requirements and already are loaded with borrowed money. Adding more debt as part of a LBO, could cripple their credit ratings and make it too expensive to raise money to run their businesses. These kinds of co’s also are often heavily regulated, and buyout specialists usually are wary of any tussles with govt bodies. But the slated purchase of SLM (SLM) has investors searching for other financial stocks that might be tgts. In fact, investment bankers say other buyout shops are discussing acquisitions of undervalued financial co’s, even including some banks. Among those that could be takeover bait are Countrywide Financial (CFC), CIT Group (CIT) and iStar (SFI). The fact that Blackstone also vied for Sallie Mae suggests that other private-equity firms could be eager for these kinds of deals. Another tgt is KeyCorp (KEY). One investment banker said KeyCorp might see some improvement with a buyout partner. Private-equity firms are getting so big and diversified that regulators might be more comfortable with those firms owning a bank, he added. "It's more challenging to do a deal for a mortgage player or a credit-card or auto lender than with Sallie Mae," says Richard Hofmann, of CreditSights. "But they're increasingly likely to be LBO tgts now that Sallie Mae has received such a large premium."
Barron’s Onlin saying that the best way to catch the growth of exploding broadband may be in emerging mkt stocks such as Brasil Telecom (BRP), one of the three largest fixed-line phone operators in Brazil, and America Movil (AMX), which provides cellphone service in Colombia, Ecuador and other parts of Latin America and which has double-digit operating profit growth. Both stocks are up smartly this year, with America Movil rising 13% and Brasil Telecom up 23%. But both could also see upside of 20% from their current value, to share prices in the neighborhood of $60 each. Neither co is exposed to the kind of rapid erosion of traditional phone lines that threatens AT&T, and, more important, both are seeing rapid expansion of wireless calling and broadband Internet access, the kinds of high-growth mkts telecom investors are betting on. Finding outperformance in foreign mkts means getting in early before explosive growth in communications is generally apparent. "There is a tipping point that happens in mkts, beyond which growth just takes off beyond what anyone could have expected," says Bill Hughes, of In-Stat. "If you have investments in a lot of different countries, when that tipping point comes, it's going to be a great investment."
“Inside Scoop” section highlights Laureate (LAUR), which in Jan agreed to be acquired. Since then, however, 3 of the co's top shareholders, Select Equity, T. Rowe Price and BlackRock, have voiced their opposition to the buyout. Combined, the 3 firms own 21% of Laureate's outstanding. Now, Select has increased its stake in the co, disclosing that it has raised its stake to 9.8% up from the 8.7% stake it had in Feb. Select spent $33.1m for the additional shares. Joshua Hong, of OwnershipAnalyzer.com, points out that investors still do not know what Laureate's second largest shareholder, William Blair, which owns a 9.6% stake, thinks of the deal. But b/c only 15 institutional investors hold about half of Laureate's shares, "it would probably not be that hard to gather opposition to the deal," says Hong.
Barron’s Onlin saying that the best way to catch the growth of exploding broadband may be in emerging mkt stocks such as Brasil Telecom (BRP), one of the three largest fixed-line phone operators in Brazil, and America Movil (AMX), which provides cellphone service in Colombia, Ecuador and other parts of Latin America and which has double-digit operating profit growth. Both stocks are up smartly this year, with America Movil rising 13% and Brasil Telecom up 23%. But both could also see upside of 20% from their current value, to share prices in the neighborhood of $60 each. Neither co is exposed to the kind of rapid erosion of traditional phone lines that threatens AT&T, and, more important, both are seeing rapid expansion of wireless calling and broadband Internet access, the kinds of high-growth mkts telecom investors are betting on. Finding outperformance in foreign mkts means getting in early before explosive growth in communications is generally apparent. "There is a tipping point that happens in mkts, beyond which growth just takes off beyond what anyone could have expected," says Bill Hughes, of In-Stat. "If you have investments in a lot of different countries, when that tipping point comes, it's going to be a great investment."
“Inside Scoop” section highlights Laureate (LAUR), which in Jan agreed to be acquired. Since then, however, 3 of the co's top shareholders, Select Equity, T. Rowe Price and BlackRock, have voiced their opposition to the buyout. Combined, the 3 firms own 21% of Laureate's outstanding. Now, Select has increased its stake in the co, disclosing that it has raised its stake to 9.8% up from the 8.7% stake it had in Feb. Select spent $33.1m for the additional shares. Joshua Hong, of OwnershipAnalyzer.com, points out that investors still do not know what Laureate's second largest shareholder, William Blair, which owns a 9.6% stake, thinks of the deal. But b/c only 15 institutional investors hold about half of Laureate's shares, "it would probably not be that hard to gather opposition to the deal," says Hong.
Tuesday, April 17, 2007
Calls of Note Part 3
- Goldman Sachs continues to be negative on Labor Ready (NYSE:LRW) reiterating their Sell rating on share ahead of 1Q2007 earnings to be announced on Thursday, April 18 (AMC). In firm's opinion, 2007 guidance and consensus estimates are too high given incremental housing weakness witnessed since the beginning of 2007. This note addresses the three primary areas of pushback from investors when they downgraded shares of Labor Ready on April 4: 1) Is this call too late? No. 2) Firm's $13 target price implies a new 52-week low - why? The housing market is at 52 week lows. 3) How does GSCO's below consensus estimate differ from the street? - They expect no 2H2007 recovery.
Catalyst: Labor Reay reports earnings on April 18. GSCO thinks 2007 EPS guidance of $1.25-1.30 is too high. The company cannot avoid negative earnings pressure due to its direct and indirect exposure to US residential construction activity. Since the beginning of 2007 firm's expectations for the US housing market have eroded; however, we have not, in firm's opinion, seen sufficient downward revisions to LRW guidance or Street estimates.
Notablecalls: Love the call! Wish the chart would agree with it more.
Catalyst: Labor Reay reports earnings on April 18. GSCO thinks 2007 EPS guidance of $1.25-1.30 is too high. The company cannot avoid negative earnings pressure due to its direct and indirect exposure to US residential construction activity. Since the beginning of 2007 firm's expectations for the US housing market have eroded; however, we have not, in firm's opinion, seen sufficient downward revisions to LRW guidance or Street estimates.
Notablecalls: Love the call! Wish the chart would agree with it more.
Calls of Note Part 2
- CIBC notes they remain bullish on NutriSystem's (NASDAQ:NTRI) near-term outlook. Firm believes that 1Q07 results should be reported at least in line with their estimate of $0.90 per share, with new customer adds of about 300K. NTRI will report 1Q07 earnings on Wednesday, April 25th.
Firm's analysis of comScore data indicates that traffic to online diet sites continued to slow yoy in 1Q. But nutrisystem.com's traffic share of top diet sites was stable while yoy growth rates in total traffic, and particularly for male traffic, outperformed other top sites.
NTRI shares are trading at 15x FY08 EPS estimate or 17x next 12-months estimated EPS. The latter compares to historical average of 28.5x and a hi-lo range of 47.6x-13.7x. Given the momentum they see in NTRI's business, they'd be opportunistic buyers at this level.
Firm continues to see strength in NTRI's business. Its product and service offering as well as marketing are favorably positioned to target male dieters. Negatives include tough existing and new competition, slowing online traffic trends in the sector, and volatility in the stock.
Notablecalls: Expect to see some buy interest in NTRI following the call. Look for an opening range breakout before stepping in.
Firm's analysis of comScore data indicates that traffic to online diet sites continued to slow yoy in 1Q. But nutrisystem.com's traffic share of top diet sites was stable while yoy growth rates in total traffic, and particularly for male traffic, outperformed other top sites.
NTRI shares are trading at 15x FY08 EPS estimate or 17x next 12-months estimated EPS. The latter compares to historical average of 28.5x and a hi-lo range of 47.6x-13.7x. Given the momentum they see in NTRI's business, they'd be opportunistic buyers at this level.
Firm continues to see strength in NTRI's business. Its product and service offering as well as marketing are favorably positioned to target male dieters. Negatives include tough existing and new competition, slowing online traffic trends in the sector, and volatility in the stock.
Notablecalls: Expect to see some buy interest in NTRI following the call. Look for an opening range breakout before stepping in.
Calls of Note Part 1
- Piper Jaffray says that consistent with their cautious Motorola (NYSE:MOT) outlook and recent monthly handset channel checks , they are lowering their June quarter and 2007 estimates for Motorola ahead of its earnings report.
Based on belief Motorola will focus on reducing channel inventory during Q207 combined with limited new products ramping during the quarter, the firm islowering Q207 Motorola unit estimate from 54M to 50M units. Checks on the important mid-tier segment indicate the RAZR/KRZR continue to struggle in the market versus improving WCDMA products from Sony Ericsson, Samsung, and LG and Nokia's 6300 in the mid-tier China market. Further, Motorola appears focused on improving profitability and conceding share in the low-tier. PJ believes the transition from the C-series to the W-series should positively impact operating margins, they believe this transition will take months and have more of an impact during 2H07. Further, checks indicate MOTOFONE sales remain below expectations.
2007 proforma EPS estimate goes (excluding stock-based compensation) from $0.63 to $0.51 and 2008 estimate from $1.17 to $1.07. Maintains Market Perform and lowers tgt to $17 from $18.
Notablecalls: Nothing really surprising here. I continue to stand by my MOT rec. Carl Icahn provided a positive surprise last week, announcing an increase in his stake. He also sent a letter to MOT shareholders asking to elect him to the Board of Directors.
Based on belief Motorola will focus on reducing channel inventory during Q207 combined with limited new products ramping during the quarter, the firm islowering Q207 Motorola unit estimate from 54M to 50M units. Checks on the important mid-tier segment indicate the RAZR/KRZR continue to struggle in the market versus improving WCDMA products from Sony Ericsson, Samsung, and LG and Nokia's 6300 in the mid-tier China market. Further, Motorola appears focused on improving profitability and conceding share in the low-tier. PJ believes the transition from the C-series to the W-series should positively impact operating margins, they believe this transition will take months and have more of an impact during 2H07. Further, checks indicate MOTOFONE sales remain below expectations.
2007 proforma EPS estimate goes (excluding stock-based compensation) from $0.63 to $0.51 and 2008 estimate from $1.17 to $1.07. Maintains Market Perform and lowers tgt to $17 from $18.
Notablecalls: Nothing really surprising here. I continue to stand by my MOT rec. Carl Icahn provided a positive surprise last week, announcing an increase in his stake. He also sent a letter to MOT shareholders asking to elect him to the Board of Directors.
Color on warning: Fair Isaac (NYSE:FIC)
Several firms comment on Fair Isaac (NYSE:FIC) after the co last night issued a warning for FY07:
- Citigroup is downgrading the stock to Hold from Buy saying that while the news will help establish a conservative base of numbers for FIC to grow off of, they do not see any catalysts in the stock as the market will likely take a more cautious stance on FIC's restructuring and as the firm believes an LBO may be more difficult in the near term given the potential for investor backlash. Firm is trimming their target to $37 from $53 to reflect the lower expectations and lack of near-term catalysts.
- William Blair notes they believe the company has moved aggressively in setting the bar low for the upcoming year.
The company blamed the earnings miss on lower revenue than expected, coupled with negative leverage. Part of this is ongoing fallout from last year's reorganization of the salesforce into vertical industry teams, or ICNs, which is having more disruption than planned. Also contributing was execution failure at the 11th hour, as a number of deals slipped past the March 31 quarter-end, but have been subsequently signed. Finally, a delayed rollout of the newest version of the Falcon fraud product also hindered sales in the quarter. The company blamed softness on bookings in the mortgage, fraud, and insurance bill review verticals; however, it did not attribute softness in the subprime mortgage sector for any revenue weakness. It also reported that it has not seen any attrition in FICO scores from the Vantage Score.
The new CEO Mark Greene said on the follow-on conference call that the quarter's weakness was a surprise, but that the reasons for the weakness are not. In follow-up conversation, he describes himself as disappointed in the quarter but in no way discouraged in his vision, and ready to move past this quarter and begin moving forward.
The new CEO's evaluation, after meeting with customers and employees, is that the company still maintains a reputation for cutting-edge analytic products, but has developed a reputation to be arrogant and difficult to work with. This confirms what the firm has heard in industry contacts. Even so, Dr. Greene's estimation is that clients and prospects want to do more business with the company, but need the whole customer experience enhanced, from marketing to sales contact to simpler product bundles to after-sale support. One example of movement in this direction is that the company now has senior executives assisting in relationship building and selling at its top 25 clients.
William Blair thinks these moves are all positives and reflect needed changes, based on their conversations with people in and around the company. the challenge will be getting them to bear fruit, particularly as measured by improved organic growth, where the new CEO sees success as moving nearer to industrywide growth rates in the high-single-digit range, with EPS growth supplemented by operating leverage and share repurchases. But they think the worst is now behind the company and that the next year will bring slow improvement to financial results.
- JP Morgan notes that somewhat surprisingly, management indicated on the follow-up call
that 2Q's revenue shortfall was more execution driven than cyclical. The revenue impact was largely from the change in sales approach and the Falcon upgrade delay. Management, under the new direction of Mark Greene, could be setting the FY07 guidance bar low after numerous earnings misses in recent years.
Mark Greene named a new COO and Chief Technology Officer. JPM likes the reorganization of the sales force but the changes, including training and new support teams, could take
time to implement.
Reiterates Neutral, with FIC trading at 24.7x F2007E EPS. While they believe management could be setting the bar low, they expect the sales 'reorganization' to take time to effectively execute. In addition, there could be cyclical pressures on segments in the coming quarters. After substantially reducing 2007 guidance, FIC is trading at the high end of its historical 15-25X forward 12-month EPS.
- JMP Securities says that although the numbers are clearly disappointing, the firm was encouraged by the new CEO's direct approach in recognizing the customer issues that the company has developed over the past years and in his vision to address these issues. Further, they believe that his vision to refocus Fair Isaac around its core products and away from a professional services focus also plays to the company's historical strengths.
Although in JMP's view the company now has the right vision, they also believe the execution of this plan will take some time with management looking to 1Q08 (December 2007) before it will begin to see the benefits of this turnaround. For FY07, they are lowering EPS estimate from $2.11 to $1.62. For FY08, they are lowering EPS estimate from $2.40 to $1.79. Maintains Mkt Perform rating.
Notablecalls: Must say I've had FIC on my radar as a potential short for some time already with sales force reorganization being the first red flag. Often enough, these reorganizations act as the canary in the coal mine, signalling problems to come.
I think we can safely assume FIC can generate EPS of around $2 in FY08. The stock ended at around $36 in after hours action implying an EPS multiple of about 18x. Given the seemingly s-t nature of FIC's problems, that's not too much. I really liked the comments of CEO Mark Greene regarding getting the house in order. Citi's downgrade (and there may be others) will hopefully push the price toward the $35-$35.5 levels, providing a possible buying opportunity for aggressive accounts.
- Citigroup is downgrading the stock to Hold from Buy saying that while the news will help establish a conservative base of numbers for FIC to grow off of, they do not see any catalysts in the stock as the market will likely take a more cautious stance on FIC's restructuring and as the firm believes an LBO may be more difficult in the near term given the potential for investor backlash. Firm is trimming their target to $37 from $53 to reflect the lower expectations and lack of near-term catalysts.
- William Blair notes they believe the company has moved aggressively in setting the bar low for the upcoming year.
The company blamed the earnings miss on lower revenue than expected, coupled with negative leverage. Part of this is ongoing fallout from last year's reorganization of the salesforce into vertical industry teams, or ICNs, which is having more disruption than planned. Also contributing was execution failure at the 11th hour, as a number of deals slipped past the March 31 quarter-end, but have been subsequently signed. Finally, a delayed rollout of the newest version of the Falcon fraud product also hindered sales in the quarter. The company blamed softness on bookings in the mortgage, fraud, and insurance bill review verticals; however, it did not attribute softness in the subprime mortgage sector for any revenue weakness. It also reported that it has not seen any attrition in FICO scores from the Vantage Score.
The new CEO Mark Greene said on the follow-on conference call that the quarter's weakness was a surprise, but that the reasons for the weakness are not. In follow-up conversation, he describes himself as disappointed in the quarter but in no way discouraged in his vision, and ready to move past this quarter and begin moving forward.
The new CEO's evaluation, after meeting with customers and employees, is that the company still maintains a reputation for cutting-edge analytic products, but has developed a reputation to be arrogant and difficult to work with. This confirms what the firm has heard in industry contacts. Even so, Dr. Greene's estimation is that clients and prospects want to do more business with the company, but need the whole customer experience enhanced, from marketing to sales contact to simpler product bundles to after-sale support. One example of movement in this direction is that the company now has senior executives assisting in relationship building and selling at its top 25 clients.
William Blair thinks these moves are all positives and reflect needed changes, based on their conversations with people in and around the company. the challenge will be getting them to bear fruit, particularly as measured by improved organic growth, where the new CEO sees success as moving nearer to industrywide growth rates in the high-single-digit range, with EPS growth supplemented by operating leverage and share repurchases. But they think the worst is now behind the company and that the next year will bring slow improvement to financial results.
- JP Morgan notes that somewhat surprisingly, management indicated on the follow-up call
that 2Q's revenue shortfall was more execution driven than cyclical. The revenue impact was largely from the change in sales approach and the Falcon upgrade delay. Management, under the new direction of Mark Greene, could be setting the FY07 guidance bar low after numerous earnings misses in recent years.
Mark Greene named a new COO and Chief Technology Officer. JPM likes the reorganization of the sales force but the changes, including training and new support teams, could take
time to implement.
Reiterates Neutral, with FIC trading at 24.7x F2007E EPS. While they believe management could be setting the bar low, they expect the sales 'reorganization' to take time to effectively execute. In addition, there could be cyclical pressures on segments in the coming quarters. After substantially reducing 2007 guidance, FIC is trading at the high end of its historical 15-25X forward 12-month EPS.
- JMP Securities says that although the numbers are clearly disappointing, the firm was encouraged by the new CEO's direct approach in recognizing the customer issues that the company has developed over the past years and in his vision to address these issues. Further, they believe that his vision to refocus Fair Isaac around its core products and away from a professional services focus also plays to the company's historical strengths.
Although in JMP's view the company now has the right vision, they also believe the execution of this plan will take some time with management looking to 1Q08 (December 2007) before it will begin to see the benefits of this turnaround. For FY07, they are lowering EPS estimate from $2.11 to $1.62. For FY08, they are lowering EPS estimate from $2.40 to $1.79. Maintains Mkt Perform rating.
Notablecalls: Must say I've had FIC on my radar as a potential short for some time already with sales force reorganization being the first red flag. Often enough, these reorganizations act as the canary in the coal mine, signalling problems to come.
I think we can safely assume FIC can generate EPS of around $2 in FY08. The stock ended at around $36 in after hours action implying an EPS multiple of about 18x. Given the seemingly s-t nature of FIC's problems, that's not too much. I really liked the comments of CEO Mark Greene regarding getting the house in order. Citi's downgrade (and there may be others) will hopefully push the price toward the $35-$35.5 levels, providing a possible buying opportunity for aggressive accounts.
Paperstand (TWX, KO, NCT)
The WSJ reports that inside Time Warner (TWX), senior execs are considering what was once unthinkable: whether the co should substantially reduce its cable-TV holdings over time. Cable has been a core part of the co and its precursors for decades and is now the biggest contributor to profits. But the long-term future of cable, as the Internet emerges as a viable venue for watching TV, is murky. Some within Time Warner wonder whether the co wouldn't be better off if it were to get out of cable and double down on the Web, where it already owns AOL, by buying another major Internet co. Likely is that Time Warner will decide to gradually reduce its 84% stake in Time Warner Cable (TWCAV.PK), possibly through acquisitions, while still maintaining a significant interest.
“Heard on the Street” column discusses Coca-Cola (KO), saying that since its Jun’05 debut, Coke Zero has sold more than 100m unit cases. While that is a fraction of the sales of Diet Coke or Coca-Cola Classic, the new drink is the co's "most successful launch...of any brand in 20 years," according to Chmn and CEO E. Neville Isdell. Some outsiders see signs of a bigger turnaround that reflects improving product development by Coke scientists, snazzier marketing and patched-up relations with bottlers, all areas where Coke was hurt by massive layoffs a few years ago. If the current trend holds, Mr. Isdell could win over skeptics who complain that Coke's glory days are a thing of the past. "We think the co has gotten momentum," says David Kolpak, of Victory Capital Mgmt. Unfortunately for Coke, the success of Coke Zero hasn't produced a jolt for its stock price yet. Coke shares are up 22% in the past year. Analysts say much of the rise is a result of strong growth in emerging mkts where consumers aren't bored by sodas.
Barron’s Online “Inside Scoop” section reports that 3 Newcastle (NCT) execs have buttressed their holdings with a total of $24.1m in shares of the REIT. Chmn Wesley R. Edens and Secretary Randal A. Nardone each bought 432K shares for $12m. The two men made their purchases as part of a secondary offering of 4.6m. Edens now beneficially owns 2.5m shares, a 4.7% stake, while Nardone beneficially owns 2.3m shares, a 4.3% stake. CIO Phillip Evanski joined, spending $71K on 2.5K shares. Jonathan Moreland, of InsiderInsights.com, says that the purchases at Newcastle echo an uptick in insider sentiment at other financial firms after the subprime-mortgage crisis-induced selloff. "I have recommended that ppl nibble at some of the oversold shares in this sector, and Newcastle is just as good as any," says Moreland.
“Heard on the Street” column discusses Coca-Cola (KO), saying that since its Jun’05 debut, Coke Zero has sold more than 100m unit cases. While that is a fraction of the sales of Diet Coke or Coca-Cola Classic, the new drink is the co's "most successful launch...of any brand in 20 years," according to Chmn and CEO E. Neville Isdell. Some outsiders see signs of a bigger turnaround that reflects improving product development by Coke scientists, snazzier marketing and patched-up relations with bottlers, all areas where Coke was hurt by massive layoffs a few years ago. If the current trend holds, Mr. Isdell could win over skeptics who complain that Coke's glory days are a thing of the past. "We think the co has gotten momentum," says David Kolpak, of Victory Capital Mgmt. Unfortunately for Coke, the success of Coke Zero hasn't produced a jolt for its stock price yet. Coke shares are up 22% in the past year. Analysts say much of the rise is a result of strong growth in emerging mkts where consumers aren't bored by sodas.
Barron’s Online “Inside Scoop” section reports that 3 Newcastle (NCT) execs have buttressed their holdings with a total of $24.1m in shares of the REIT. Chmn Wesley R. Edens and Secretary Randal A. Nardone each bought 432K shares for $12m. The two men made their purchases as part of a secondary offering of 4.6m. Edens now beneficially owns 2.5m shares, a 4.7% stake, while Nardone beneficially owns 2.3m shares, a 4.3% stake. CIO Phillip Evanski joined, spending $71K on 2.5K shares. Jonathan Moreland, of InsiderInsights.com, says that the purchases at Newcastle echo an uptick in insider sentiment at other financial firms after the subprime-mortgage crisis-induced selloff. "I have recommended that ppl nibble at some of the oversold shares in this sector, and Newcastle is just as good as any," says Moreland.
Monday, April 16, 2007
Calls of Note Part 4
- Thomas Weisel Partners commented on First Marblehead (NYSE:FMD) over the weekend in light of Sallie Mae (NYSE:SLM) acquisition.
Acquisition discussion highlights First Marblehead density disk: As FMD's largest customer (JPM, 25% of total service revenue) is reportedly involved in proposals for SLM, the potential for volume losses appears significantly increased. Firm notes that FMD's three primary volume contributors (JP Morgan, Bank of America and Charter One) account for 52% of total service revenue.
Loss of JP Morgan may result in 26% reduction of loan volume and 27% of earnings (based on 2006 earnings): While the company has increased the number of other lending partners, they note that (since JP Morgan purchased CFSI and pulled out from its SLM partnership) FMD's dependence on JP Morgan has increased.
TWP believes that the potential SLM transaction highlights the rising concern that both JP Morgan (note November 2005 CFSI acquisition and potential near term loan securitization) and Bank of America (renegotiation of contract in Summer 2007) may begin to originate and retain private loan volumes in order to provide additional services (bank accounts, credit cards) that the highly educated and leveraged customer base. Thinks FMD shares are fairly valued at current levels.
Notablecalls: What TWP did not know over the weekend and what we know now, is that both JPM and BAC are included in the group that is offering to buy SLM. Expect to see downside in FMD.
Acquisition discussion highlights First Marblehead density disk: As FMD's largest customer (JPM, 25% of total service revenue) is reportedly involved in proposals for SLM, the potential for volume losses appears significantly increased. Firm notes that FMD's three primary volume contributors (JP Morgan, Bank of America and Charter One) account for 52% of total service revenue.
Loss of JP Morgan may result in 26% reduction of loan volume and 27% of earnings (based on 2006 earnings): While the company has increased the number of other lending partners, they note that (since JP Morgan purchased CFSI and pulled out from its SLM partnership) FMD's dependence on JP Morgan has increased.
TWP believes that the potential SLM transaction highlights the rising concern that both JP Morgan (note November 2005 CFSI acquisition and potential near term loan securitization) and Bank of America (renegotiation of contract in Summer 2007) may begin to originate and retain private loan volumes in order to provide additional services (bank accounts, credit cards) that the highly educated and leveraged customer base. Thinks FMD shares are fairly valued at current levels.
Notablecalls: What TWP did not know over the weekend and what we know now, is that both JPM and BAC are included in the group that is offering to buy SLM. Expect to see downside in FMD.
Calls of Note Part 3
- Baird is cautious on Pool Corporation (NASDAQ:POOL) lowering their tgt to $40 from $41 after reducing 1Q07 EPS estimate from $0.10 to $0.07 (consensus) with other minor fine-tuning. Temperature data, channel checks and comparable-company reports imply a lackluster 1Q07 and 2007 outlook for POOL. They remain cautious on the stock going into the quarterly release and key selling season.
Firm's channel checks imply that MRO sales (approximately 60% of POOL's gross profits) are about as expected, nationwide. Their concern has been the 40% of gross profits driven by new pool construction. Cyclically, annual change in median home value (ammunition for aftermarket pool construction) will likely fall for the first time in POOL's public history during 2007 -- perhaps more acutely in key sunbelt states.
Weather has not cooperated in 2007. Distributors across in middle and northern states responded that the selling season should have started three weeks ago, but hasn't. Other sellers of discretionary consumer productsare seeing weak conditions. Last week, Marine Max (HZO) announced a weaker 2007 outlook. Polaris (PII) confirmed last week that end demand for ATVs, motorcycles and snowmobiles remains weak. POOL is scheduled to report on April 19.
Baird rates POOL Neutral, Higher Risk based on 11.5x EV/ 2007E EBITDA, which is a slight discount to historical average of 12x. The target also represents 20x 2007E estimate of $2.03, which is approximately the average historical valuation since 1998.
Notablecalls: POOL has proved to be a smart shorting opporunity over the past year or so as it is closely tied to the housing industry. Given the high likelyhood of futher downside in housing, POOL's likely disappoint over the next year or so.
Firm's channel checks imply that MRO sales (approximately 60% of POOL's gross profits) are about as expected, nationwide. Their concern has been the 40% of gross profits driven by new pool construction. Cyclically, annual change in median home value (ammunition for aftermarket pool construction) will likely fall for the first time in POOL's public history during 2007 -- perhaps more acutely in key sunbelt states.
Weather has not cooperated in 2007. Distributors across in middle and northern states responded that the selling season should have started three weeks ago, but hasn't. Other sellers of discretionary consumer productsare seeing weak conditions. Last week, Marine Max (HZO) announced a weaker 2007 outlook. Polaris (PII) confirmed last week that end demand for ATVs, motorcycles and snowmobiles remains weak. POOL is scheduled to report on April 19.
Baird rates POOL Neutral, Higher Risk based on 11.5x EV/ 2007E EBITDA, which is a slight discount to historical average of 12x. The target also represents 20x 2007E estimate of $2.03, which is approximately the average historical valuation since 1998.
Notablecalls: POOL has proved to be a smart shorting opporunity over the past year or so as it is closely tied to the housing industry. Given the high likelyhood of futher downside in housing, POOL's likely disappoint over the next year or so.
Calls of Note Part 2
- ThinkEquity is upping their tgt on Sigma Designs (NASDAQ:SIGM) to $40 from $30 based on
what we believe to be ongoing strong design wins and deployment activity. Firm only sees one major threat to this story, and that is competition. Fortunately, they believe the design wins already won by SIGM should be able to drive the stock materially higher for another 12 months.
Firm is increasing their FY08 and FY09 revenue estimates from $139M and $180M to $159M and $205M. For the same time periods, they are increasing their untaxed EPS estimates from $1.18 and $1.56 to $1.52 and $1.97.
As for the estimates, the firm caution that they do not know what the gross margins or any other expense/income items below the revenue line have been in the last few quarters. As such, they fear that their historical estimates may be adjusted downwards once they obtain the full information. Firm estimates the current fully diluted market cap to be close to $728M based on 28M shares. With cash being nominal, they call that a $700M enterprise value. They believe the stock should trade at close to $1.1B plus the cash, or $40 per share, a year from now.
The driver for the stock over the last five quarters has been IPTV in the form of set-top boxes from companies such as Motorola. Firm believes this will continue to be the main driver for the next 12 months, but that it will also be augmented by strong design wins in other areas, including digital media adapters (DMAs), DVD players (Blu-Ray), portable media players (PMPs) and TV sets.
Notablecalls: Expect to see buy interest in SIGM today.
what we believe to be ongoing strong design wins and deployment activity. Firm only sees one major threat to this story, and that is competition. Fortunately, they believe the design wins already won by SIGM should be able to drive the stock materially higher for another 12 months.
Firm is increasing their FY08 and FY09 revenue estimates from $139M and $180M to $159M and $205M. For the same time periods, they are increasing their untaxed EPS estimates from $1.18 and $1.56 to $1.52 and $1.97.
As for the estimates, the firm caution that they do not know what the gross margins or any other expense/income items below the revenue line have been in the last few quarters. As such, they fear that their historical estimates may be adjusted downwards once they obtain the full information. Firm estimates the current fully diluted market cap to be close to $728M based on 28M shares. With cash being nominal, they call that a $700M enterprise value. They believe the stock should trade at close to $1.1B plus the cash, or $40 per share, a year from now.
The driver for the stock over the last five quarters has been IPTV in the form of set-top boxes from companies such as Motorola. Firm believes this will continue to be the main driver for the next 12 months, but that it will also be augmented by strong design wins in other areas, including digital media adapters (DMAs), DVD players (Blu-Ray), portable media players (PMPs) and TV sets.
Notablecalls: Expect to see buy interest in SIGM today.
Calls of Note Part 1
- Piper Jaffray notes they attended the NAB tradeshow yesterday. NAB is the largest show for broadcast & post production companies. The two key themes at the show this year were: 1) the move to HD -- which has been a theme for the last several years, and 2) growth in web based video -- which has been a topic in the past and is becoming a bigger theme. Firm believes the general health of the broadcast & post production industry remains strong, and they would focus on companies positioned to capture business from one of these two major industry trends.
Apple (NASDAQ:AAPL) introduced Final Cut Studio 2, which is an update to its existing video production suite (continues to be priced at $1,299). More importantly, Apple introduced Final Cut Server, an asset management and workflow automation tool. Apple has consistently been criticized for not having a way for pro editors to tackle high end projects, given the lack of tools allowing editors to work collaboratively and manage the workflow of big projects. PJ believes the release of Final Cut Server is a sign that Apple is trying to push Final Cut into higher end projects. A higher end version of Final Cut has been rumored for 2 years, but it failed to materialize again this year.
Apple's announcements at NAB yesterday are not big news compared to the company's other product announcements this year, and the firm does not expect that these announcements will impact numbers in the near term. Maintains Outperform and $123 tgt.
Notablecalls: A non event for AAPL but given the lack of higher end version of Fincal Cut, there may be some buy interest in AVID. Please see archives for further color on the topic.
Apple (NASDAQ:AAPL) introduced Final Cut Studio 2, which is an update to its existing video production suite (continues to be priced at $1,299). More importantly, Apple introduced Final Cut Server, an asset management and workflow automation tool. Apple has consistently been criticized for not having a way for pro editors to tackle high end projects, given the lack of tools allowing editors to work collaboratively and manage the workflow of big projects. PJ believes the release of Final Cut Server is a sign that Apple is trying to push Final Cut into higher end projects. A higher end version of Final Cut has been rumored for 2 years, but it failed to materialize again this year.
Apple's announcements at NAB yesterday are not big news compared to the company's other product announcements this year, and the firm does not expect that these announcements will impact numbers in the near term. Maintains Outperform and $123 tgt.
Notablecalls: A non event for AAPL but given the lack of higher end version of Fincal Cut, there may be some buy interest in AVID. Please see archives for further color on the topic.
Color on data: Vertex Pharma (NASDAQ:VRTX)
Several firms comment on Vertex (NASDAQ:VRTX) after the co presented additional efficacy and safety data from the ongoing ph.IIb PROVE 1 study of telaprevir in hepatitis C (HCV), including SVR20 data from a 12-week treatment arm of telaprevir plus standard of care (Peg-IFN/RBV).
- CIBC notes that among 17 "intent to treat" pts in the 12-wk telaprevir/Peg-IFN/RBV arm, 6
achieved SVR20 (35%). Firm believes these are solid but not spectacular results; they would caution against over-interpreting this data due to the potential for statistical variability from the very small sample size.
They believe the rate of rapid virologic response for pts on telaprevir was impressive (79% vs. 11% for placebo), suggesting an additional 12 wks of Peg- IFN/RBV may be sufficient to suppress rebound and improve SVR. Importantly, there were no unexpected safety issues vs. prior data.
CIBC would expect some downside in VRTX, given inflated expectations for the 12-wk treatment arm at EASL. However, they continue to believe the totality of the ph.IIb data will support telaprevir's strong clinical profile and $2B mkt potential. Firm would use any weakness as a buying opportunity. Maintains Sector Outperformer and $42 tgt.
- Morgan Stanley says the data continue to suggest VX-950 is a potent drug that, when added to current drugs, improves patient outcomes and - at least until a better tolerated, more potent, or more convenient drug comes along - has a place treating hepatitis C. However, these data do not live up to investors and managements' aggressive assumptions, and timelines and revenue numbers are likely slipping across the Street as a longer treatment duration (six months) shrinks growth in the addressable population and pushes time to market further away (a randomized, controlled trial for Phase III looks increasingly likely). Firm is delaying their expected launch of VX-950 until 2010, which is significant given the company's current burn, and lowering long-term revenue estimates.
Even after Friday's leak of the data and sell-off, they expect further weakness as investors digest longer timelines and a longer treatment duration. Bigger picture, the firm continues to view VX-950 as a meaningful advance in HCV care, and the protease inhibitor class will ultimately change the HCV treatment paradigm (but continues to fear VX-950 could be Crixivan).
- Prudential says complete analysis of the entire set of data and the confirmation that there is no major side effect related to telaprevir treatment led them to conclude that telaprevir is still on track to enter the market as the first HCV protease inhibitor. Firm believes, based on available data, that the 24 weeks (12 weeks of telaprevir plus standard of care followed by 12 weeks of standard of care) of treatment should result in efficacy better than standard of care. The improved efficacy and the shortened treatment duration still make this new combination a game changer, although slightly less robust than they previously thought.
Although the number of patients available for evaluation was small in Arm D, the SVR12 data was highly anticipated by the Street and they think the stock is likely to react to the consensus interpretation of the data. On the most bearish side, one can argue that the response was only 35%, significantly lower than the number of 75% some hoped for long before PROVE 1 was started. Firm thinks the Street's expectation going into EASL was lowered, probably to the 50% range. If that were true, then the number would still be below expectation and they think the stock would be under pressure in the near term.
However, they think the most informative calculation is that 46% of patients in Arm D achieved a SVR12 after only 12 weeks of treatment with telaprevir and the standard of care. If the patient that withdrew with consent was taken out of the calculation, the SVR12 rate would be 6/12, or 50%, in line with the Street's expectation before EASL. If the consensus view would take this number, then the stock should not move too much as EASL. They are particularly relieved that no serious side effects were seen in the complete safety analysis.
Prudential believes the stock has passed its most speculative phase and recommends investors to accumulate shares. Maintain Overweight and $45 tgt.
Notablecalls: Expect to see downside in VRTX today. If MSCO's right, timelines will be pushed back in a major way, plus there will be no new data coming until Nov. On the other hand, there is very little doubt regarding the efficiency. Once launched, telaprevir will surely be part of the standard treatment for HCV, with $1-$2 billion market potential. Aggessive trading accounts may see buying opportunity around the -10% level today.
- CIBC notes that among 17 "intent to treat" pts in the 12-wk telaprevir/Peg-IFN/RBV arm, 6
achieved SVR20 (35%). Firm believes these are solid but not spectacular results; they would caution against over-interpreting this data due to the potential for statistical variability from the very small sample size.
They believe the rate of rapid virologic response for pts on telaprevir was impressive (79% vs. 11% for placebo), suggesting an additional 12 wks of Peg- IFN/RBV may be sufficient to suppress rebound and improve SVR. Importantly, there were no unexpected safety issues vs. prior data.
CIBC would expect some downside in VRTX, given inflated expectations for the 12-wk treatment arm at EASL. However, they continue to believe the totality of the ph.IIb data will support telaprevir's strong clinical profile and $2B mkt potential. Firm would use any weakness as a buying opportunity. Maintains Sector Outperformer and $42 tgt.
- Morgan Stanley says the data continue to suggest VX-950 is a potent drug that, when added to current drugs, improves patient outcomes and - at least until a better tolerated, more potent, or more convenient drug comes along - has a place treating hepatitis C. However, these data do not live up to investors and managements' aggressive assumptions, and timelines and revenue numbers are likely slipping across the Street as a longer treatment duration (six months) shrinks growth in the addressable population and pushes time to market further away (a randomized, controlled trial for Phase III looks increasingly likely). Firm is delaying their expected launch of VX-950 until 2010, which is significant given the company's current burn, and lowering long-term revenue estimates.
Even after Friday's leak of the data and sell-off, they expect further weakness as investors digest longer timelines and a longer treatment duration. Bigger picture, the firm continues to view VX-950 as a meaningful advance in HCV care, and the protease inhibitor class will ultimately change the HCV treatment paradigm (but continues to fear VX-950 could be Crixivan).
- Prudential says complete analysis of the entire set of data and the confirmation that there is no major side effect related to telaprevir treatment led them to conclude that telaprevir is still on track to enter the market as the first HCV protease inhibitor. Firm believes, based on available data, that the 24 weeks (12 weeks of telaprevir plus standard of care followed by 12 weeks of standard of care) of treatment should result in efficacy better than standard of care. The improved efficacy and the shortened treatment duration still make this new combination a game changer, although slightly less robust than they previously thought.
Although the number of patients available for evaluation was small in Arm D, the SVR12 data was highly anticipated by the Street and they think the stock is likely to react to the consensus interpretation of the data. On the most bearish side, one can argue that the response was only 35%, significantly lower than the number of 75% some hoped for long before PROVE 1 was started. Firm thinks the Street's expectation going into EASL was lowered, probably to the 50% range. If that were true, then the number would still be below expectation and they think the stock would be under pressure in the near term.
However, they think the most informative calculation is that 46% of patients in Arm D achieved a SVR12 after only 12 weeks of treatment with telaprevir and the standard of care. If the patient that withdrew with consent was taken out of the calculation, the SVR12 rate would be 6/12, or 50%, in line with the Street's expectation before EASL. If the consensus view would take this number, then the stock should not move too much as EASL. They are particularly relieved that no serious side effects were seen in the complete safety analysis.
Prudential believes the stock has passed its most speculative phase and recommends investors to accumulate shares. Maintain Overweight and $45 tgt.
Notablecalls: Expect to see downside in VRTX today. If MSCO's right, timelines will be pushed back in a major way, plus there will be no new data coming until Nov. On the other hand, there is very little doubt regarding the efficiency. Once launched, telaprevir will surely be part of the standard treatment for HCV, with $1-$2 billion market potential. Aggessive trading accounts may see buying opportunity around the -10% level today.
Paperstand (SLM, GOOG, MRK, HNR)
The WSJ reports that Sallie Mae (SLM) agreed to be sold to two private-investment funds and banks JP Morgan and Bank of America for $25bn, putting the embattled co into private hands at a time of intense political scrutiny of the student-lending industry. JC Flowers and Friedman Fleischer & Lowe plan to take a 50.2% ownership in the newly private firm, with JP Morgan and BofA each taking 24.9% stakes in the co. The buyout group plans to pay $60 per share, nearly a 50% premium to where its shares traded on Thu, before word leaked out of a possible transaction.
According to the WSJ, Google (GOOG) plans to begin selling advertising on more than 675 radio stations owned by Clear Channel Comm. (CCU), in a move designed to add scale to the co's offline ad-brokering efforts and boost Clear Channel's rev.
The WSJ discusses Merck’s (MRK) new vaccine against cervical cancer, Gardasil. The co lobbied dozens of states to make the vaccine mandatory for 11 and 12 year-old girls. The campaign scored some big victories. The CDC declared all women age 11-26 should get the vaccine. But behind the scenes, Gardasil has been dogged by uncertainty about how effective it really is. The FDA didn't ask its panel of experts advising on Gardasil to rule on whether the vaccine specifically prevented the cancer itself. In clinical trials, 361 of 8,817 women who received at least one shot of Gardasil went on to develop precancerous lesions on their cervixes within 3 years of vaccination, just 14% fewer than in a placebo control group. Scott Emerson, a professor of biostatistics at the University of Washington who sat on the FDA advisory committee, says he's not persuaded the vaccine is worth the billions of dollars likely to be spent on it in coming years. "I do believe that Gardasil protects against HPV 16 and 18, but the effect it will have on cervical-cancer rates in this country is another question entirely," says Dr. Emerson. Safety is another issue. Merck tested the vaccine in only a few hundred 11 and 12 year-old girls. Some doctors consider that number too small to declare the vaccine safe. In its approval letter, the FDA ordered Merck to follow "a sufficient number of children 11-12 years of age" in a large postmarketing study to further establish the vaccine's safety. That study won't be completed until ‘09.
Barron’s Online “Inside Scoop” section reprots that value investor Mohnish Pabrai's gushing purchases of Harvest Natural Resources (HNR) indicate that the stalemate caused by Venezuela's move to partially nationalize E&P co’s may be near completion. Pabrai, of Pabrai Investment Funds, has spent more than $12.3m to purchase 1.3m shares of Harvest. Ben Silverman, of InsiderScore.com, says that Harvest's prospects are riding on the co gaining final approval from the Venezuelan govt. But considering that Harvest is Pabrai's sole energy play in a concentrated portfolio, Silverman says the value investor "sees the forest through the trees [and] his continued investment here suggests that he has a lot of faith in the name."
According to the WSJ, Google (GOOG) plans to begin selling advertising on more than 675 radio stations owned by Clear Channel Comm. (CCU), in a move designed to add scale to the co's offline ad-brokering efforts and boost Clear Channel's rev.
The WSJ discusses Merck’s (MRK) new vaccine against cervical cancer, Gardasil. The co lobbied dozens of states to make the vaccine mandatory for 11 and 12 year-old girls. The campaign scored some big victories. The CDC declared all women age 11-26 should get the vaccine. But behind the scenes, Gardasil has been dogged by uncertainty about how effective it really is. The FDA didn't ask its panel of experts advising on Gardasil to rule on whether the vaccine specifically prevented the cancer itself. In clinical trials, 361 of 8,817 women who received at least one shot of Gardasil went on to develop precancerous lesions on their cervixes within 3 years of vaccination, just 14% fewer than in a placebo control group. Scott Emerson, a professor of biostatistics at the University of Washington who sat on the FDA advisory committee, says he's not persuaded the vaccine is worth the billions of dollars likely to be spent on it in coming years. "I do believe that Gardasil protects against HPV 16 and 18, but the effect it will have on cervical-cancer rates in this country is another question entirely," says Dr. Emerson. Safety is another issue. Merck tested the vaccine in only a few hundred 11 and 12 year-old girls. Some doctors consider that number too small to declare the vaccine safe. In its approval letter, the FDA ordered Merck to follow "a sufficient number of children 11-12 years of age" in a large postmarketing study to further establish the vaccine's safety. That study won't be completed until ‘09.
Barron’s Online “Inside Scoop” section reprots that value investor Mohnish Pabrai's gushing purchases of Harvest Natural Resources (HNR) indicate that the stalemate caused by Venezuela's move to partially nationalize E&P co’s may be near completion. Pabrai, of Pabrai Investment Funds, has spent more than $12.3m to purchase 1.3m shares of Harvest. Ben Silverman, of InsiderScore.com, says that Harvest's prospects are riding on the co gaining final approval from the Venezuelan govt. But considering that Harvest is Pabrai's sole energy play in a concentrated portfolio, Silverman says the value investor "sees the forest through the trees [and] his continued investment here suggests that he has a lot of faith in the name."
Sunday, April 15, 2007
Barron's Summary
Barron’s cover highlights Adobe (ADBE), whose shares have climbed from a ‘01 low of 8.35 to recent 42. But there looks to be plenty of upside left, thanks in no small part to a promising series of product launches slated for the next 3 mo’s. They represent Adobe's first effort to fully integrate its own products with those it gained through the acquisition of Macromedia. The stock doesn't look cheap, at least at first glance. It's changing hands at 28.6x F'07 earnings of $1.48 a share. But looked at in terms of its whopping free cash flow, Adobe is far more attractive: FCF amounts to more than 30% of sales, making the co one of the mkt's most notable cash kings. What's more, the consensus earnings ests of roughly 20% growth may seriously underestimate the real 12-mo potential; it could be as high as 30%. "Adobe stands to benefit from a whole bunch of mega-trends, including the sheer growth of the Web and broadband penetration," argues Jeffrey Hammond of Forrester Research. Bulls figure the shares are headed to at least 50 within a year.
The shares of K-Swiss (KSWS), at a recent 27, are off more than 25% from their 52w high. But the co's turnaround plan could easily lift the price to 32. Some of Street's best bargain hunters already are lining up behind K-Swiss. In mid-Feb, Martin Whitman's storied Third Avenue Mgmt reported holding 2.3m shares, or 8.8% stake.
Office Depot (ODP) trades for 35, or 15x estd earnings, a discount to Staples' (SPLS) 18. The stock could rally into the mid-40s as earnings continue to climb. Office Depot represents "pretty good value," says Bill Collier, of SunTrust. He's been buying more shares recently, and has a 12-mo tgt in the mid-40s. Besides, "the private-equity factor keeps a floor" on many retail stocks, he notes, though he does not necessarily expect Office Depot to become a buyout candidate.
“The Trader” column out saying that last Thu, investors sent shares of the Brunswick (BC) down 4%. The catalyst: yet another warning from the boat retailer MarineMax (HZO), Brunswick's largest customer. Brunswick won't report earnings until April 26, but MarineMax's dire forecast could be a bad omen for those hoping that the worst is over for the slumping boat mkt. But as customers like MarineMax start cutting orders, Brunswick may not be able to reduce production in time to avoid excess inventory, notes Hayley Wolff, of Rochdale Securites. Price discounting and margin pressures further threaten to sink the spring and summer selling season. At 30.6, Brunswick shares trade at 17x estd ‘07 EPS of $1.80. Analysts think profits will bottom this year and rebound to $2.15 in ‘08, but such ests, and the timeline, may prove too optimistic.
“International Trader” column has serious doubts on Ryanair’s (RYAAY) plan to start budget trans-Atlantic routes. A trans-Atlantic operation would immediately face much higher cost pressures, particularly for personnel. Safety rules dictate that air crews rest about 12 hours after a long flight, so the long-haul carrier would have to pay for its crews' hotels and transportation. What's more, the larger airplanes required couldn't be turned around within 90 minutes and would need far more fuel than the short-haul Boeing 737s it now uses. To help offset these higher costs while still offering low economy-class fares, Ryanair USA would need a premium-class section on its planes. Premium-class sections are key profit generators for long-haul airlines and are typically filled by execs jetting between major financial centers. Few are likely to want to go to the secondary airports.
“Follow Up” section discusses another round of takeover speculations on Dow Chemical (DOW). Investors will be further heartened to know that the co's parts might be worth more than its whole. According to Deutsche Bank analyst David Begleiter, a sum-of-the-parts valuation pegs the co's worth at $55, nearly 20% above the stock's recent price. To enhance shareholder value, Bear Stearns analyst Victor Miller has written, Clear Channel (CCU) could spin off its domestic billboard unit and sell its intl billboard operations. Clear Channel already is selling hundreds of its small-mkt radio stations and its TV business, which could raise $2.5bn. Miller has argued that Clear Channel is worth about $44 a share, without leveraging itself to repurchase stock. Despite a 2% boost in sales provided by Panera's (PNRA) new Crispani flatbread pizza, the additional labor and promotional expenses connected with it are pressuring operating margins. This is making some investors doubt that the co can meet its tgt of 25%+ earnings growth over the next 3 years. Panera says it is sticking with the tgt. But in the bitterly competitive, price-sensitive and increasingly saturated casual-food business, it might be biting off more than it can chew.
“Technology Trader” discusses Cepheid (CPHD), whose shares shot recently up in sympathy to Biosite takeover. But, according to the article, one simple difference is that Biosite earns robust profits, as Cepheid repeatedly has claimed to have found a profitable application for its tests. But Cepheid's achievements have fallen short of its forecasts. The co predicted it would make a profit in ‘06, for example. Instead, Cepheid's losses nearly doubled. Now CEO John Bishop eagerly directs investors' attention to the next big opportunity for Cepheid: infection-control testing at hospitals like those run by the Dept of Veterans Affairs. Cepheid glowingly predicts a $1.25bn annual mkt and Bishop believes that infectious-disease testing will bring Cepheid operating profits by the 4Q07. One of the few analysts to attempt a reasoned est of the veterans opportunity for Cepheid is Daniel Owczarski of Soleil. Owczarski concludes that the VHA program would add just over $1m in test sales to the co's annual rev. That wouldn't do a lot to reduce Cepheid's annual losses.
Notablecalls: Expect to see some profit taking following the Barron's call and a sharp increase in stock price.
“Plugged In” column out saying that Apple (AAPL) delay is no big deal. Late Thu, the co announced that the iPhone had "passed several of its required certification tests" and is on schedule to ship on time. The co added that finishing the iPhone on time "has not come without a price. We had to borrow some key software engineering and quality-assurance resources from our Mac OS," which means that the Leopard won't be ready to ship in time for Apple's developers' conference in June. " Leopard's delay isn't very important, says Charles Wolf, of Wolf Insights. "The long-term impact will be absolutely zero," Wolf says. "But it might postpone the upgrade cycle by a quarter or so."
Columbia Mid Cap Value Fund top 10 holdings include: PCG, ETR, APD, EIX, PPL, GGP, CMA, HES, ZION and CIT. Group's current favorites include MTD, HSC, NOV, EL and ATVI.
Friday, April 13, 2007
Color on Quarter: Lam Research (NASDAQ:LRCX)
Lam Research (NASDAQ:LRCX) getting plenty of comments following quarterly report.
- Citigroup says that Lam not only blew through consensus (EPS of $1.15 vs. $1.06), but it also raised its C07 EPS guidance significantly to $4.50-4.70, from $4.10-4.30. They were at $4.52 going into the call while consensus was at $4.05. Firm expects consensus to again rise to meet their estimates. C2H07 shipment guidance was also increased due to a smoothing of memory shipments, higher confidence by management in the sustainability of memory spending, and a pickup in Foundry activity.
While Lam is forecasting C2H07 shipments to be down 7% from C1H07, this is substantially better than the down 18% it was forecasting previously. Firm anticipates additional Foundry activity and unexpected turns business for Flash (which occurred in the prior 2 yrs) will drive upside shipments in C2H07. As they have forecasted all along and contrary to consensus, C07 is shaping up to be a strong year and the implosion in memory that the market was fearing appears unlikely to materialize.
- Morgan Stanley says LRCX had solid March Q with revs/EPS/shipments all better than their/consensus expectations. Half of the EPS upside ~$0.05 driven by better operating performance and the other half by a better tax/stock buyback strategy. June Q revs/EPS guidance of $665MM/$1.15 much better than their/consensus expectations but shipments guided slightly lower by ~$15MM (excludes March upside) versus their model. Management attributed lower shipments to a smoothing in memory related projects (we believe Nanya and Samsung-Austin). Checks suggest the smoothing to be normal 1-2 month fab timing related issue for the industry.
- ThinkEquity believes investors could be underestimating the magnitude of decline in memory spending. While the logic and foundry segment should recover from very depressed levels, the production capacity expansion is likely to be at 130nm and 90nm, the nodes where Lam's share is not as high. While virtually all DRAM and flash devices are at 65nm, the median logic and foundry segment is still at 180nm, moving toward 130nm. As the foundry and
advanced logic segment recovers, firm anticipates capacity (as opposed to R&D and tapeouts) spending primarily at 90nm and 130nm nodes, where Lam's share is much lower.
- Bank of America notes that memory customers are slipping shipment dates at LRCX. Prior forecast for June shipments was greater than 25% Q-o-Q growth; it is now 10-15%. Firm suspects Samsung contributed the most to that change in outlook. Memory remains at very high levels as a percent of the mix, 78% in the March quarter.
The shipment push outs in conjunction with a sharp decline in first quarter memory prices and the surge in memory investment over the last 5 years suggest to us that they are in a topping out process for the memory cap-ex cycle. Firm would use the recent run in the stock above $50 to lower exposure.
Notablecalls: Current year's memory capex is still very much first half loaded and shipment pushouts only magnify this theme, lessening the willingness for second half orders. Samsung, largest memory capex spender by far also echoed this, noting that close to 40% of memory capex was already spent in the first quarter. Also, Samsung is pushing 200mm to c2009 and pushing out NAND shipments, probably in conjunction with the oversupply. DRAM is still having oversupply. LRCX mgmt's comments and guidance seem to be somewhat in disconnection with the big picture. Alltogether, I would expect the stock to trade down today. Not a very high conviction call, though.
- Citigroup says that Lam not only blew through consensus (EPS of $1.15 vs. $1.06), but it also raised its C07 EPS guidance significantly to $4.50-4.70, from $4.10-4.30. They were at $4.52 going into the call while consensus was at $4.05. Firm expects consensus to again rise to meet their estimates. C2H07 shipment guidance was also increased due to a smoothing of memory shipments, higher confidence by management in the sustainability of memory spending, and a pickup in Foundry activity.
While Lam is forecasting C2H07 shipments to be down 7% from C1H07, this is substantially better than the down 18% it was forecasting previously. Firm anticipates additional Foundry activity and unexpected turns business for Flash (which occurred in the prior 2 yrs) will drive upside shipments in C2H07. As they have forecasted all along and contrary to consensus, C07 is shaping up to be a strong year and the implosion in memory that the market was fearing appears unlikely to materialize.
- Morgan Stanley says LRCX had solid March Q with revs/EPS/shipments all better than their/consensus expectations. Half of the EPS upside ~$0.05 driven by better operating performance and the other half by a better tax/stock buyback strategy. June Q revs/EPS guidance of $665MM/$1.15 much better than their/consensus expectations but shipments guided slightly lower by ~$15MM (excludes March upside) versus their model. Management attributed lower shipments to a smoothing in memory related projects (we believe Nanya and Samsung-Austin). Checks suggest the smoothing to be normal 1-2 month fab timing related issue for the industry.
- ThinkEquity believes investors could be underestimating the magnitude of decline in memory spending. While the logic and foundry segment should recover from very depressed levels, the production capacity expansion is likely to be at 130nm and 90nm, the nodes where Lam's share is not as high. While virtually all DRAM and flash devices are at 65nm, the median logic and foundry segment is still at 180nm, moving toward 130nm. As the foundry and
advanced logic segment recovers, firm anticipates capacity (as opposed to R&D and tapeouts) spending primarily at 90nm and 130nm nodes, where Lam's share is much lower.
- Bank of America notes that memory customers are slipping shipment dates at LRCX. Prior forecast for June shipments was greater than 25% Q-o-Q growth; it is now 10-15%. Firm suspects Samsung contributed the most to that change in outlook. Memory remains at very high levels as a percent of the mix, 78% in the March quarter.
The shipment push outs in conjunction with a sharp decline in first quarter memory prices and the surge in memory investment over the last 5 years suggest to us that they are in a topping out process for the memory cap-ex cycle. Firm would use the recent run in the stock above $50 to lower exposure.
Notablecalls: Current year's memory capex is still very much first half loaded and shipment pushouts only magnify this theme, lessening the willingness for second half orders. Samsung, largest memory capex spender by far also echoed this, noting that close to 40% of memory capex was already spent in the first quarter. Also, Samsung is pushing 200mm to c2009 and pushing out NAND shipments, probably in conjunction with the oversupply. DRAM is still having oversupply. LRCX mgmt's comments and guidance seem to be somewhat in disconnection with the big picture. Alltogether, I would expect the stock to trade down today. Not a very high conviction call, though.
Calls of Note Part 3
JMP Securities says that Clayton Holdings' (NASDAQ:CLAY) recent comments suggested that their 1Q revenue estimate is low and that their EPS estimate is achievable despite a perfect storm of cataclysmic events in the quarter for the subprime MBS market. By providing outsourcing services that span the entire lifecycle of a non-conforming mortgage from origination to post-securitization surveillance, Clayton has a unique and dominant franchise within a growing marketplace. Firm continue to believe that the company is poised to emerge from 2007 in a stronger position than it started in terms of Wall Street dealers' market share of securitizations, demand for greater due diligence rates on purchased portfolios, possible special servicing mandates, successful new product roll-outs, and new clients entering the customer mix.
Firm notes that management commented that revenue for the quarter should be a "couple of percentage points" below the first quarter of 2006, which would imply about $53-54 million, versus firm's $48 million estimate. On the gross margin front, they communicated expectations of mid-30%s, not far from firm's 38% forecast. They have two general observations. First, the ability to generate over $50 million of revenue during a quarter when the subprime
securitization market practically shut down attests to the breadth of services and some of the "counter-cyclical" or mitigating trends they see, such as rising due diligence rates. Second, the ability to deliver mid-30% gross margins seems to be a validation of the variable cost labor model that it employs. Specifically, the overwhelming bulk of its employees consist of contractors that are hired on an "as needed" basis to handle deal flow, not full-time employees that burden Clayton with fixed costs.
Notablecalls: See that big fall between March 8th and 13th? That's when the worries about the quarter were spreading. Now it looks as the quarter is just fine. Expect to see a strong interest in the shares today.
Firm notes that management commented that revenue for the quarter should be a "couple of percentage points" below the first quarter of 2006, which would imply about $53-54 million, versus firm's $48 million estimate. On the gross margin front, they communicated expectations of mid-30%s, not far from firm's 38% forecast. They have two general observations. First, the ability to generate over $50 million of revenue during a quarter when the subprime
securitization market practically shut down attests to the breadth of services and some of the "counter-cyclical" or mitigating trends they see, such as rising due diligence rates. Second, the ability to deliver mid-30% gross margins seems to be a validation of the variable cost labor model that it employs. Specifically, the overwhelming bulk of its employees consist of contractors that are hired on an "as needed" basis to handle deal flow, not full-time employees that burden Clayton with fixed costs.
Notablecalls: See that big fall between March 8th and 13th? That's when the worries about the quarter were spreading. Now it looks as the quarter is just fine. Expect to see a strong interest in the shares today.
Calls of Note Part 2
JP Morgan is removing Itron (NASDAQ:ITRI) from the JP Morgan Focus List as the stock price has exceeded their December 31st 2007 price target of $69.
Firm says some near-term caution is justified. They believe ITRI remains undervalued and there is potential for upward revisions to their EPS estimates for FY08 and beyond. However they don't expect significant growth of backlog in the next six months. In firm's view, large-scale AMI contracts will not be awarded until utilities have been able to assess the benefits of early AMI deployments in California and Ontario. They expect large awards to be made in late 2007/early 2008.
Firm also believe there's near-term risk associated with the pending Actaris acquisition. At minimum, ITRI will be hit with significant non-cash GAAP charges, but there might also be some near-term integration challenges. They expect the accretive benefit of the transaction to become evident in 2H07 - which might also justify revisions to EPS.
Notablecalls: ITRI is a mover and today the move is to south. After such a run hearing to be cautious will push at least some weaker hands to lock profits.
Firm says some near-term caution is justified. They believe ITRI remains undervalued and there is potential for upward revisions to their EPS estimates for FY08 and beyond. However they don't expect significant growth of backlog in the next six months. In firm's view, large-scale AMI contracts will not be awarded until utilities have been able to assess the benefits of early AMI deployments in California and Ontario. They expect large awards to be made in late 2007/early 2008.
Firm also believe there's near-term risk associated with the pending Actaris acquisition. At minimum, ITRI will be hit with significant non-cash GAAP charges, but there might also be some near-term integration challenges. They expect the accretive benefit of the transaction to become evident in 2H07 - which might also justify revisions to EPS.
Notablecalls: ITRI is a mover and today the move is to south. After such a run hearing to be cautious will push at least some weaker hands to lock profits.
Color on Announcement: Apple (NASDAQ:AAPL)
Couple of comments following Apple's (NASDAQ:AAPL) news yesterday.
- Goldman Sachs notes that yesterday after the close, Apple announced that iPhone is on schedule for a late June launch, though meeting this date necessitated diverting resources away from its Mac OS team. As a result, Apple announced it will delay the release of Leopard, its next generation OS, until October from it original mid-June timeframe.
With Leopard now shipping in October, firm believes Apple has pushed $25-50 million in revenue out of the June quarter, and roughly $100 million out of the September quarter. While Apple should be able to fully recover the software revenue in the December and March quarters, the delay could also push out some Mac sales as well. This will undoubtedly make Apple even more conservative in setting June-quarter targets on its April 25 earnings call,
probably pushing Street estimates closer to their $5.2B in revenue and EPS of $0.65 from current consensus of $5.5B and $0.68.
Although the push out of Leopard is not ideal, firm views iPhone as the driver of the next leg to the Apple growth story and this announcement should abate recent concerns about any potential delay in the launch, which they believe is more important to the stock. Today's announcement and the potential for even more conservative targets for the June quarter could cause some near-term weakness in AAPL shares. Firm would use this as an opportunity to add to positions.
- Merrill Lynch recommends investors use the current stock weakness related to Apple's delay of the Leopard operating system as a buying opportunity as it represents a temporary setback and they believe their long-term thesis is intact. Leopard will now ship in October instead of June, which Apple attributes to engineering & QA resources pulled from the OS X team to help finish iPhone (which the company says is "on schedule" to ship by late June). It underscores the fact that the iPhone is at least as much a mobile computer as a phone or music player. Leopard will still be available in beta version for developers in June at WDC.
- Piper Jaffray says that iPhone's on-time arrival outweighs Leopard delay. Despite the PR black-eye Apple will get from delaying Leopard (given Apple routinely chastises Microsoft for product delays), the announcement included that Apple will release the iPhone on time in June. While it's never a sure thing, this means firm's confidence in the iPhone coming in June goes from 70% to 90%. Apples track record at getting hardware out on time is hit or miss, as evidence by the recent one month slip of Apple TV. Apple's statement specified late June as the launch date of the iPhone, but Apple may deliver it earlier at the Worldwide Developers Conference, which begins on June 11. While they are not convinced the delay of Leopard is entirely related to getting the iPhone out on time, firm views the shipment of the iPhone as critical, and the timing of Leopard as a non-event.
Notablecalls: We have three tier-1 firms out saying to buy the weakness. Who am I to argue them? Buy the stock near $90 for a nice bounce, perhaps back to the levels of yesterday.
- Goldman Sachs notes that yesterday after the close, Apple announced that iPhone is on schedule for a late June launch, though meeting this date necessitated diverting resources away from its Mac OS team. As a result, Apple announced it will delay the release of Leopard, its next generation OS, until October from it original mid-June timeframe.
With Leopard now shipping in October, firm believes Apple has pushed $25-50 million in revenue out of the June quarter, and roughly $100 million out of the September quarter. While Apple should be able to fully recover the software revenue in the December and March quarters, the delay could also push out some Mac sales as well. This will undoubtedly make Apple even more conservative in setting June-quarter targets on its April 25 earnings call,
probably pushing Street estimates closer to their $5.2B in revenue and EPS of $0.65 from current consensus of $5.5B and $0.68.
Although the push out of Leopard is not ideal, firm views iPhone as the driver of the next leg to the Apple growth story and this announcement should abate recent concerns about any potential delay in the launch, which they believe is more important to the stock. Today's announcement and the potential for even more conservative targets for the June quarter could cause some near-term weakness in AAPL shares. Firm would use this as an opportunity to add to positions.
- Merrill Lynch recommends investors use the current stock weakness related to Apple's delay of the Leopard operating system as a buying opportunity as it represents a temporary setback and they believe their long-term thesis is intact. Leopard will now ship in October instead of June, which Apple attributes to engineering & QA resources pulled from the OS X team to help finish iPhone (which the company says is "on schedule" to ship by late June). It underscores the fact that the iPhone is at least as much a mobile computer as a phone or music player. Leopard will still be available in beta version for developers in June at WDC.
- Piper Jaffray says that iPhone's on-time arrival outweighs Leopard delay. Despite the PR black-eye Apple will get from delaying Leopard (given Apple routinely chastises Microsoft for product delays), the announcement included that Apple will release the iPhone on time in June. While it's never a sure thing, this means firm's confidence in the iPhone coming in June goes from 70% to 90%. Apples track record at getting hardware out on time is hit or miss, as evidence by the recent one month slip of Apple TV. Apple's statement specified late June as the launch date of the iPhone, but Apple may deliver it earlier at the Worldwide Developers Conference, which begins on June 11. While they are not convinced the delay of Leopard is entirely related to getting the iPhone out on time, firm views the shipment of the iPhone as critical, and the timing of Leopard as a non-event.
Notablecalls: We have three tier-1 firms out saying to buy the weakness. Who am I to argue them? Buy the stock near $90 for a nice bounce, perhaps back to the levels of yesterday.
Calls of Note Part 1
Oppenheimer notes that as they had expected, Samsung was having issues moving to the next 51/52nm node constraining supply. While street estimates for Samsung's bit growth ranged from 20-40% versus their 22%, Samsung guided Q207 to low single digit 2-6% q/q bit growth. Firm believes with SanDisk (NASDAQ:SNDK) having successfully pulled in its 56nm into Feb-07 has positive implications for SNDK's Q2 bit growth and market share gains in the NAND Flash card market.
Firm believes the supply constraints from Samsung plays favorably for SNDK. Sandisk has successfully pulled in its 56nm production from Q307 into Feb-07. This provides SNDK a cost side leverage which should start flowing through the P&L 1-2 quarters ahead of Samsung. Also, Sandisk will be scrambling to gain market share in the retail market and also supplying to the handset OEMs trying to capitalize on Samsung's constraints.
Oppenheimer also notes that Samsung is almost 40% of the NAND Flash market but even a higher 70% of the supply to the Taiwanese NAND Flash card OEMs who account for 30-40% of Silicon Motion Technology's (NASDAQ:SIMO) revenues. Samsung just guided Q207 to 2-6% bit growth well below most street estimates of 20-40% bit growth. This is what they had been concerned about for SIMO, as it constrains the merchant market that it depends on. Also, given that these are product transition could easily rollover into Q3.
Firm says that While their competition has argued that 1) there was no supply issue, that definitely does not seem to be the case and 2) also that other suppliers could step in, firm believes SNDK has been very aggressive but is not supplied by SIMO's controllers. Also given that Samsung is 40% of the market, small constraints cause large ripples in the markets. Also Samsung has cut back on its own SD card production which as catalyst for one of the positive preannouncements for SIMO.
Notablecalls: I really like both of the calls. Nice work by Oppenheimer's Vijay Rakesh! I'm positive that the market will also agree. We are going to see interest in SNDK and weakness in SIMO today.
Firm believes the supply constraints from Samsung plays favorably for SNDK. Sandisk has successfully pulled in its 56nm production from Q307 into Feb-07. This provides SNDK a cost side leverage which should start flowing through the P&L 1-2 quarters ahead of Samsung. Also, Sandisk will be scrambling to gain market share in the retail market and also supplying to the handset OEMs trying to capitalize on Samsung's constraints.
Oppenheimer also notes that Samsung is almost 40% of the NAND Flash market but even a higher 70% of the supply to the Taiwanese NAND Flash card OEMs who account for 30-40% of Silicon Motion Technology's (NASDAQ:SIMO) revenues. Samsung just guided Q207 to 2-6% bit growth well below most street estimates of 20-40% bit growth. This is what they had been concerned about for SIMO, as it constrains the merchant market that it depends on. Also, given that these are product transition could easily rollover into Q3.
Firm says that While their competition has argued that 1) there was no supply issue, that definitely does not seem to be the case and 2) also that other suppliers could step in, firm believes SNDK has been very aggressive but is not supplied by SIMO's controllers. Also given that Samsung is 40% of the market, small constraints cause large ripples in the markets. Also Samsung has cut back on its own SD card production which as catalyst for one of the positive preannouncements for SIMO.
Notablecalls: I really like both of the calls. Nice work by Oppenheimer's Vijay Rakesh! I'm positive that the market will also agree. We are going to see interest in SNDK and weakness in SIMO today.
Thursday, April 12, 2007
Calls of Note Part 4
JP Morgan commenting Apple (NASDAQ:AAPL), raising March quarter estimates ahead of Apple's earnings release, and also revising their longer-term assumptions for the iPhone.
Firm raises March quarter EPS estimate to $0.66 on revenues of $5.23 billion. They are raising iPod unit estimate to 10.34 million from 9.76 million, as well as their margin estimates to reflect the impact of flash price declines on iPod gross margins. Firm is also lowering their estimate for Mac shipments to 1.48 million versus 1.51 million previously.
Macs could show some improvement with CS3. For the June quarter, firm believes that Mac shipments should benefit from the launch of Creative Suite 3 from Adobe, but this is already factored into their numbers.
Firm is refining their overly optimistic iPhone pricing assumptions. They had assumed that the previously announced retail prices for the iPhone included a subsidy from Cingular, which they now believe is incorrect. In addition, they are now assuming more aggressive ASP declines in 2008.
Notablecalls: I was hoping to see gap up on the headline of raised estimates to call it a fading oppty. Didn't happen as stock is trading 30-40c below yesterdays close. I believe there is additional downside for the stock today given Mac shipments estimate reduction and more cautious view on iPhone by JP Morgan.
Firm raises March quarter EPS estimate to $0.66 on revenues of $5.23 billion. They are raising iPod unit estimate to 10.34 million from 9.76 million, as well as their margin estimates to reflect the impact of flash price declines on iPod gross margins. Firm is also lowering their estimate for Mac shipments to 1.48 million versus 1.51 million previously.
Macs could show some improvement with CS3. For the June quarter, firm believes that Mac shipments should benefit from the launch of Creative Suite 3 from Adobe, but this is already factored into their numbers.
Firm is refining their overly optimistic iPhone pricing assumptions. They had assumed that the previously announced retail prices for the iPhone included a subsidy from Cingular, which they now believe is incorrect. In addition, they are now assuming more aggressive ASP declines in 2008.
Notablecalls: I was hoping to see gap up on the headline of raised estimates to call it a fading oppty. Didn't happen as stock is trading 30-40c below yesterdays close. I believe there is additional downside for the stock today given Mac shipments estimate reduction and more cautious view on iPhone by JP Morgan.
Color on Quarter: Research In Motion (NASDAQ:RIMM)
Research In Motion (NASDAQ:RIMM) getting plenty of comments following quarterly report.
- Merrill Lynch notes that Feb Q sales were up 66% YoY to $930.4mn, shy of their $942mn forecast, as ~100K handset shipments were delayed. EPS of $1.01 was inline with strong gross margin of 53.5%, offset by increased spending on stock options investigation. Firm estimates these temporary effects cost RIM about $33mn in lost sales (100K handsets at $336 ASP) or 4-7c in EPS. While inline results could disappoint short-term investors, firm believes long-term trends remain solid.
May Q outlook on sales ($1.05bn), subscribers (1.14mn), handsets (>2.25mn) and EPS ($1.05) was largely inline with their recently raised estimates. However, pent-up demand for RIM's new product launches (Verizon Worldphone, T-Mobile WiFi Blackberry) could drive meaningful EPS upside (+4c to10c) during the May quarter. New applications/partner launches during RIM's analyst day (May 7 - coincides with WES Conference) could also create positive headlines, in firm's view.
- CIBC says that while RIMM came in a bit below their aggressive expectations, they see growth opportunities and a strong foundation for the company. But with the stock priced for perfection, the in line quarter and outlook are likely to weigh on investor enthusiasm and question the possibility of near-term upside.
Firm expects a modest pullback in the share price and remain comfortable with their SP rating. This reflects the strong outlook, but is balanced by the opex increase and changing mix and risk profile. Depending on the magnitude of the pullback, a buying opportunity could arise.
- With respect to stock options review, ThinkEquity notes that they previously interpreted the company's no "intentional misconduct" language in conjunction with the lack of high-level employee departures as a sign that the future impact from ongoing regulatory investigations would likely be benign. The SEC's escalation to a formal investigation suggests that things on the stock option pricing front will likely get worse before they get better.
Firm says that senior management's handling of the pricing investigation expenses, while well-meaning, is one of the strangest things they have seen on the management/governance front. It appears to us more an admission of guilt than a good faith gesture and it has an aftertaste of "too little too late."
- Cowen notes that guidance for the May ending quarter is somewhat uninspired, capturing standing GAAP EPS consensus of $1.04 (new range os $0.99-$1.07). Lower GMs, higher legal & administrative costs associated with the ongoing OSC/SEC inquiries and a higher tax rate keep a lid on earnings forecasts for a second straight quarter. Higher revenue is driven by sub guidance (1.125-1.15MM) , hardware units.
Firm's EPS estimates are essentially unchanged despite a much higher top-line. At ~34X their standing C08 EPS estimates - and little upward movement to numbers - firm sees RIMM's multiple coming in a bit.
Notablecalls: RIMM's in-line results and guidance were disappointment for the buy-side. Looks like there's more of the same to come as higher opex and options overhang push out the margin expansion. Add higher risk associated with the options investigation and you can see why the stock is trading at the lower multiples today than it was yesterday. See no reason to hold the shares at the current pre-market levels of around $136.
- Merrill Lynch notes that Feb Q sales were up 66% YoY to $930.4mn, shy of their $942mn forecast, as ~100K handset shipments were delayed. EPS of $1.01 was inline with strong gross margin of 53.5%, offset by increased spending on stock options investigation. Firm estimates these temporary effects cost RIM about $33mn in lost sales (100K handsets at $336 ASP) or 4-7c in EPS. While inline results could disappoint short-term investors, firm believes long-term trends remain solid.
May Q outlook on sales ($1.05bn), subscribers (1.14mn), handsets (>2.25mn) and EPS ($1.05) was largely inline with their recently raised estimates. However, pent-up demand for RIM's new product launches (Verizon Worldphone, T-Mobile WiFi Blackberry) could drive meaningful EPS upside (+4c to10c) during the May quarter. New applications/partner launches during RIM's analyst day (May 7 - coincides with WES Conference) could also create positive headlines, in firm's view.
- CIBC says that while RIMM came in a bit below their aggressive expectations, they see growth opportunities and a strong foundation for the company. But with the stock priced for perfection, the in line quarter and outlook are likely to weigh on investor enthusiasm and question the possibility of near-term upside.
Firm expects a modest pullback in the share price and remain comfortable with their SP rating. This reflects the strong outlook, but is balanced by the opex increase and changing mix and risk profile. Depending on the magnitude of the pullback, a buying opportunity could arise.
- With respect to stock options review, ThinkEquity notes that they previously interpreted the company's no "intentional misconduct" language in conjunction with the lack of high-level employee departures as a sign that the future impact from ongoing regulatory investigations would likely be benign. The SEC's escalation to a formal investigation suggests that things on the stock option pricing front will likely get worse before they get better.
Firm says that senior management's handling of the pricing investigation expenses, while well-meaning, is one of the strangest things they have seen on the management/governance front. It appears to us more an admission of guilt than a good faith gesture and it has an aftertaste of "too little too late."
- Cowen notes that guidance for the May ending quarter is somewhat uninspired, capturing standing GAAP EPS consensus of $1.04 (new range os $0.99-$1.07). Lower GMs, higher legal & administrative costs associated with the ongoing OSC/SEC inquiries and a higher tax rate keep a lid on earnings forecasts for a second straight quarter. Higher revenue is driven by sub guidance (1.125-1.15MM) , hardware units.
Firm's EPS estimates are essentially unchanged despite a much higher top-line. At ~34X their standing C08 EPS estimates - and little upward movement to numbers - firm sees RIMM's multiple coming in a bit.
Notablecalls: RIMM's in-line results and guidance were disappointment for the buy-side. Looks like there's more of the same to come as higher opex and options overhang push out the margin expansion. Add higher risk associated with the options investigation and you can see why the stock is trading at the lower multiples today than it was yesterday. See no reason to hold the shares at the current pre-market levels of around $136.
Calls of Note Part 3
Jefferies' teardown of the Garmin nuvi 200 revealed that Garmin is using SiRF's (NASDAQ:SIRF) SirfStarIII LP. Based upon their prior checks at the time leading up to CeBIT, firm believed that Garmin was going to use its internal solution, although their checks suggested that the models to be shown at CeBIT were likely only prototypes as the final BOM was not set. After CeBIT, firm's sources continued to indicate that the internal solution would be
used in the nuvi 200, with SiRF likely securing the designs for the nuvi 250 and 270.
This comes as a surprise to the firm and investors as the recent chatter has been increasingly negative with respect to other suppliers (specifically MediaTek) taking share from SiRF at Garmin. Firm views this positively for SiRF as it will likely quell concerns regarding its technology leadership and PND market share.
Notablecalls: Expect to see some buying interest in SIRF.
used in the nuvi 200, with SiRF likely securing the designs for the nuvi 250 and 270.
This comes as a surprise to the firm and investors as the recent chatter has been increasingly negative with respect to other suppliers (specifically MediaTek) taking share from SiRF at Garmin. Firm views this positively for SiRF as it will likely quell concerns regarding its technology leadership and PND market share.
Notablecalls: Expect to see some buying interest in SIRF.
Calls of Note Part 2
Thomas Weisel says their checks point to subdued 1Q subscriber growth for LoopNet (NASDAQ:LOOP). Their analysis of for-sale listings and site traffic suggests that count should be up from last year, but at a decelerating pace with net adds likely to be below the prior year's level for the third straight quarter.
Concern over subscriber growth could weigh on the stock in the short term, but firm still sees a big opportunity for LOOP to shift the pricing model over time and maintain an Overweight rating as a result with an upbeat view of long-term growth potential.
Firm has two new data points: (1) for-sale listings rose by 6,000 in 1Q to 199,000 (4Q rose by 12,000) and (2) average monthly site visits rose 11% sequentially to 1.0mn in 1Q. Firm has no direct read on subscriber growth, but can look at the past correlation of both metrics to subscriber count to get a sense of direction.
LOOP has run at 2.45-2.50 listings per subscriber and a similar ratio in 1Q would point to 1,600-5,000 net adds. Visits converted at a 0.16% rate in the 2Q-4Q period (0.1% 4Q). Using 1Q traffic and a 0.10-0.15% conversion rate, net adds would be 3,100-4,600. Thomas Weisel's estimate for net adds is 4500.
Notablecalls: With the stock sitting near the highs, comments about subscriber growth below expectations are not going to help the stock. Expect to see pressure on the shares over the next few days.
Concern over subscriber growth could weigh on the stock in the short term, but firm still sees a big opportunity for LOOP to shift the pricing model over time and maintain an Overweight rating as a result with an upbeat view of long-term growth potential.
Firm has two new data points: (1) for-sale listings rose by 6,000 in 1Q to 199,000 (4Q rose by 12,000) and (2) average monthly site visits rose 11% sequentially to 1.0mn in 1Q. Firm has no direct read on subscriber growth, but can look at the past correlation of both metrics to subscriber count to get a sense of direction.
LOOP has run at 2.45-2.50 listings per subscriber and a similar ratio in 1Q would point to 1,600-5,000 net adds. Visits converted at a 0.16% rate in the 2Q-4Q period (0.1% 4Q). Using 1Q traffic and a 0.10-0.15% conversion rate, net adds would be 3,100-4,600. Thomas Weisel's estimate for net adds is 4500.
Notablecalls: With the stock sitting near the highs, comments about subscriber growth below expectations are not going to help the stock. Expect to see pressure on the shares over the next few days.
Calls of Note Part 1
JMP Securities notes that Sotheby's (NYSE:BID) May Impressionist Art auction looks strong. The catalog was released for the company's May Impressionist & Modern Art Evening Sale. The line-up looks strong especially considering last year's auction included the $85 million Picasso. This year's estimated hammer range is $218.7-295.8 million and estimated aggregate sales range is $247.4-333.7 million versus last year's actual aggregate sales results of $207.6 million, an increase ranging from 19-61% (low to high ranges). Firm expects the May Contemporary Art auction to be even more impressive given that it will include a $40 million Mark Rothko and a $30 million Francis Bacon painting. They continue to recommend BID shares despite the recent run-up in share price. With more catalysts on the horizon, they believe further upside exists to their estimates and share price. Firm's prior $50 price target is under review.
Notablecalls: Given the run in the BID shares, looks like someone had an advance copy of the catalog. We'll probably see another pop in the share price today, but wouldn't count on that.
Notablecalls: Given the run in the BID shares, looks like someone had an advance copy of the catalog. We'll probably see another pop in the share price today, but wouldn't count on that.
Paperstand (NDAQ, GOOG, CBS, HUM, WCI)
Reuters reports that Nasdaq (NDAQ) has made an 23bn Swedish crown ($3.33bn) bid for its Nordic peer OMX. Nasdaq offered 192 crowns per share for the Nordic and Baltic exchange owner and technology firm, representing about 20% premium over yesterday’s close. OMX said on Thu it was in cooperation talks with several exchanges, but added it had not received any bid.
The WSJ reports that Google (GOOG) appears headed for a battle with Microsoft (MSFT) and others over voice-based search technology, which can take the place of conventional directory assistance and offer new benefits for mobile-phone users. Google released a free experimental service last week called Google Voice Local Search. It allows users to dial a number, 1-800-GOOG-411, and search for businesses in specific cities, using technology that recognizes what callers say. Google's test comes less than a month after Microsoft announced plans to buy Tellme Networks, that specializes in services that combine voice-recognition technology with the Web, and already provides automated directory-assistance services for AT&T and Verizon Wireless.
According to the WSJ, in a deepening of its online reach, CBS (CBS) is close to announcing a flurry of deals to distribute network TV shows and other video programming to various Web portals, including MSN and AOL. CBS could announce as early as today agreements which will make available to these portals previously aired full episodes of shows such as "NCIS," "CSI: Crime Scene Investigation," the "Evening News with Katie Couric" and certain sports programming. Aside from MSN and AOL, the media co is also expected to announce an agreement with Joost, an online-video service founded by the creators of the Skype. CBS will become the first broadcast network to sign with Joost.
Barron’s Online discusses Humana (HUM), saying that investors hoping to cash in on the co’s big gamble on Medicare may have missed their chance, at least for now. Rebounding from a selloff last fall, the stock has gained 21% since late Nov and is now flirting with the all-time high price reached in Oct, before Democrats took control of Congress. For investors, the election outcome ignited fears that congressional Democrats would cut payments to health plans sold by private insurers to provide seniors with Medicare benefits and prescription drugs. Luckily for Humana, those fears have not been realized. Payments to private Medicare health plans will rise in ‘08. But with Democrats gearing up for a fight over future funding, it could be a treacherous year for Humana's stock. "It's a good co and it runs well, but it's risky being tied so closely to the govt," says David Heupel, of Thrivent Large Cap Growth Fund. "It's a high threshold for us to get over. If this is an area where the Democrats decide to cut costs, it won't make Humana's life easy."
“Inside Scoop” section reportas that Hotchkis & Wiley Capital Mgmt reported it reduced its WCI Communities (WCI) holdings to 2.77m shares, or a 6.6% stake, down from 6.73m shares, or a 16.1% stake. Ben Silverman, of InsiderScore.com, says, "I think certainly the selling suggests the stock is as good as it gets right now, that these guys don't feel that there will be a higher offer than $22 per share, and that there is no near-term catalyst in the stock."
The WSJ reports that Google (GOOG) appears headed for a battle with Microsoft (MSFT) and others over voice-based search technology, which can take the place of conventional directory assistance and offer new benefits for mobile-phone users. Google released a free experimental service last week called Google Voice Local Search. It allows users to dial a number, 1-800-GOOG-411, and search for businesses in specific cities, using technology that recognizes what callers say. Google's test comes less than a month after Microsoft announced plans to buy Tellme Networks, that specializes in services that combine voice-recognition technology with the Web, and already provides automated directory-assistance services for AT&T and Verizon Wireless.
According to the WSJ, in a deepening of its online reach, CBS (CBS) is close to announcing a flurry of deals to distribute network TV shows and other video programming to various Web portals, including MSN and AOL. CBS could announce as early as today agreements which will make available to these portals previously aired full episodes of shows such as "NCIS," "CSI: Crime Scene Investigation," the "Evening News with Katie Couric" and certain sports programming. Aside from MSN and AOL, the media co is also expected to announce an agreement with Joost, an online-video service founded by the creators of the Skype. CBS will become the first broadcast network to sign with Joost.
Barron’s Online discusses Humana (HUM), saying that investors hoping to cash in on the co’s big gamble on Medicare may have missed their chance, at least for now. Rebounding from a selloff last fall, the stock has gained 21% since late Nov and is now flirting with the all-time high price reached in Oct, before Democrats took control of Congress. For investors, the election outcome ignited fears that congressional Democrats would cut payments to health plans sold by private insurers to provide seniors with Medicare benefits and prescription drugs. Luckily for Humana, those fears have not been realized. Payments to private Medicare health plans will rise in ‘08. But with Democrats gearing up for a fight over future funding, it could be a treacherous year for Humana's stock. "It's a good co and it runs well, but it's risky being tied so closely to the govt," says David Heupel, of Thrivent Large Cap Growth Fund. "It's a high threshold for us to get over. If this is an area where the Democrats decide to cut costs, it won't make Humana's life easy."
“Inside Scoop” section reportas that Hotchkis & Wiley Capital Mgmt reported it reduced its WCI Communities (WCI) holdings to 2.77m shares, or a 6.6% stake, down from 6.73m shares, or a 16.1% stake. Ben Silverman, of InsiderScore.com, says, "I think certainly the selling suggests the stock is as good as it gets right now, that these guys don't feel that there will be a higher offer than $22 per share, and that there is no near-term catalyst in the stock."
Wednesday, April 11, 2007
Calls of Note Part 5
Bank of America highly positive on First Solar (NASDAQ:FSLR), raising price tgt to $75 from $72 and saying it has the best fundamental model in PV.
Firm expects First Solar to deliver substantial growth. They have confidence FSLR will deliver on announced capacity due to a lack of reliance on polysilicon. They project FSLR's capacity to increase to 275 MW in FY08 from 75 MW in FY06. FSLR should produce well above rated capacity as the result of high utilization rates (127% in Q4).
Due to cost reductions, First Solar is in position to offer grid-parity pricing by FY10-FY12, while maintaining solid operating metrics. FSLR has forecast that it will be in the position to offer grid-parity prices of $1.00-1.25/watt by the FY10-FY12 timeframe while delivering gross margins of 35-40% and operating margins of 25%. To achieve these results, FSLR's production costs are expected to decline from $1.25/watt in 4Q06 to $0.60-0.80/watt in FY10-FY12 due to higher module and line efficiencies and lower labor costs.
Importantly, firm expects First Solar to exceed its target operating metrics due to above-grid pricing in FY10-FY12. FSLR has contracted 2/3 of its production at 6.5%/year price reductions, implying prices/watt of $1.84 in FY10 and $1.61 in FY12. As a result, firm believes upside exists to their FY10 operating margin estimate of 28%.
Notablecalls: The stock is already at its all time high, but a call like this will most probably create even higher levels. Suspect the stock has at least $2 of upside in it today.
Firm expects First Solar to deliver substantial growth. They have confidence FSLR will deliver on announced capacity due to a lack of reliance on polysilicon. They project FSLR's capacity to increase to 275 MW in FY08 from 75 MW in FY06. FSLR should produce well above rated capacity as the result of high utilization rates (127% in Q4).
Due to cost reductions, First Solar is in position to offer grid-parity pricing by FY10-FY12, while maintaining solid operating metrics. FSLR has forecast that it will be in the position to offer grid-parity prices of $1.00-1.25/watt by the FY10-FY12 timeframe while delivering gross margins of 35-40% and operating margins of 25%. To achieve these results, FSLR's production costs are expected to decline from $1.25/watt in 4Q06 to $0.60-0.80/watt in FY10-FY12 due to higher module and line efficiencies and lower labor costs.
Importantly, firm expects First Solar to exceed its target operating metrics due to above-grid pricing in FY10-FY12. FSLR has contracted 2/3 of its production at 6.5%/year price reductions, implying prices/watt of $1.84 in FY10 and $1.61 in FY12. As a result, firm believes upside exists to their FY10 operating margin estimate of 28%.
Notablecalls: The stock is already at its all time high, but a call like this will most probably create even higher levels. Suspect the stock has at least $2 of upside in it today.
Calls of Note Part 4
Goldman Sachs is reducing their price target for UnitedHealth (NYSE:UNH) to $51 from $54 to reflect the company's recent outlook for a higher commercial medical cost ratio (MCR). Firm sees likely stock downside on first quarter 2007 results with a confluence of company-specific and industry pressures on multiple areas of the company's commercial and Medicare business. They tweak down their 1Q2007 and 2007 EPS estimates by a penny each to $0.71 and $3.42, respectively. While they do not expect the company to miss earnings, firm believes that the combination of factors weighing against the company this quarter (MCR and enrollment, commercial and Medicare) are likely to impact investor confidence in the growth outlook for the company for 2007 and beyond, resulting in stock downside.
Notablecalls: UNH is a short near the close if you're able to get a fill.
Notablecalls: UNH is a short near the close if you're able to get a fill.
Calls of Note Part 3
JMP Securities notes that FDA documents recommend new CNS side-effect warning on Ditropan for overactive bladder (OAB). OAB is a $1.4B market with Detrol and Ditropan as market leaders. Indevus' (NASDAQ:IDEV) Sanctura currently has 2-3% market share which firm anticipates will grow with the launch of once daily Sanctura XR. The FDA detailed concern on CNS side effects of J&J's Ditropan in pediatric and elderly populations in advance of tomorrow's advisory committee meeting reviewing pediatric post-marketing data for multiple drugs including Ditropan. The FDA recommends a warning of potential CNS events specific to pediatric and geriatric populations and discontinuation if adverse events (AEs) are seen. The current label doesn't include age-specific AEs or recommend discontinuation.
Sanctura's active ingredient does not enter the CNS unlike other OAB drugs. Ditropan crosses the blood-brain barrier (BBB) leading to CNS AEs. Pfizer's Detrol also crosses the BBB and was the subject of a 1994 recommendation to add a pediatric CNS stimulation label warning. Sanctura does not cross the BBB and has shown the lowest rates of CNS side effects of the entire drug class, often lower than placebo rates.
CNS AE scrutiny will further differentiate Sanctura XR further before approval. Sanctura also has the lowest overall side effect rate of OAB therapies. IDEV has a commercialization partnership with Esprit Pharma for Sanctura. Sanctura XR is currently under FDA review with an August
PDUFA date. Firm believes IDEV and Esprit are looking for a primary care co-promotion partnership. This competitor speed bump may make the commercial opportunity more compelling for possible partners and improve economics for IDEV.
Notablecalls: Indevus is relatively uknown as only few analysts follow the company. As such, this call may go unnoticed despite being quite interesting.
Sanctura's active ingredient does not enter the CNS unlike other OAB drugs. Ditropan crosses the blood-brain barrier (BBB) leading to CNS AEs. Pfizer's Detrol also crosses the BBB and was the subject of a 1994 recommendation to add a pediatric CNS stimulation label warning. Sanctura does not cross the BBB and has shown the lowest rates of CNS side effects of the entire drug class, often lower than placebo rates.
CNS AE scrutiny will further differentiate Sanctura XR further before approval. Sanctura also has the lowest overall side effect rate of OAB therapies. IDEV has a commercialization partnership with Esprit Pharma for Sanctura. Sanctura XR is currently under FDA review with an August
PDUFA date. Firm believes IDEV and Esprit are looking for a primary care co-promotion partnership. This competitor speed bump may make the commercial opportunity more compelling for possible partners and improve economics for IDEV.
Notablecalls: Indevus is relatively uknown as only few analysts follow the company. As such, this call may go unnoticed despite being quite interesting.
Calls of Note Part 2
Deutsche Bank says that despite tight lips from Finisar (NASDAQ:FNSR) mgt, their checks indicate that Finisar has received approval for 10 Gig transceiver (X2 SR) shipments to Cisco on major platforms including Catalyst 3000, Cat 4000 and flagship Cat 6000. Certification on Cisco's major product lines for the X2 form factor is a key milestone and is core to firm's thesis on Finisar shares.
While late on certification, firm still expects Finisar to be the major supplier of X2 (10 GigE) transceivers into Cisco: 1. Cisco has mandated two laser sources of which Finisar is one 2. Finisar has the "home court advantage" as global transceiver leader 3. Firm's contacts maintain this to be the case.
Firm expects Finisar to report Q4 2007 (Apr) in early June. Although early, they expect results slightly above the midpoint of management's $104M to $110M guidance, or inline with their $108M estimate (street $108M). Their July quarter estimates move from $114M and $0.04 to $117M and $0.05 largely on better visibility into the 10 Gig ramp at Cisco. They had probability weighted certification at Cisco at 50% in the July quarter and now believe that this hurdle is behind the company.
Firm has Buy rating with $5 tgt for the stock.
Notablecalls: While the stock has made a move already, Cisco win should sound appealing enough to create additional buying interest.
While late on certification, firm still expects Finisar to be the major supplier of X2 (10 GigE) transceivers into Cisco: 1. Cisco has mandated two laser sources of which Finisar is one 2. Finisar has the "home court advantage" as global transceiver leader 3. Firm's contacts maintain this to be the case.
Firm expects Finisar to report Q4 2007 (Apr) in early June. Although early, they expect results slightly above the midpoint of management's $104M to $110M guidance, or inline with their $108M estimate (street $108M). Their July quarter estimates move from $114M and $0.04 to $117M and $0.05 largely on better visibility into the 10 Gig ramp at Cisco. They had probability weighted certification at Cisco at 50% in the July quarter and now believe that this hurdle is behind the company.
Firm has Buy rating with $5 tgt for the stock.
Notablecalls: While the stock has made a move already, Cisco win should sound appealing enough to create additional buying interest.
Calls of Note Part 1
Piper Jaffray raising estimates and price tgt for Crocs (NASDAQ:CROX) to $73 from $70 given their upbeat view of LT growth prospects.After hosting investor meetings with CEO, Ron Snyder, in New York, firm has increased confidence in near- and long-term growth prospects for the Crocs brand on a global basis. The company is actively diversifying its product mix while adding new points of distribution and managing a demand driven operating model. Firm expects the company to report solid FQ1 results and they believe bookings for the summer and fall periods are measuring up to aggressive growth expectations.
Stock-outs at many retailers suggest demand for new spring styles remains high and validates Crocs' strategy to segment the channel by price and product. Classic styles (Beach/Cayman) continue to sell-through on a positive comp basis, evidenced by Y/Y sales trends at mature stores and company owned kiosks. On balance, firm estimates the Beach/Cayman styles will represent near 30% of sales exiting FY07, down from 61% at year-end FY06. Jibbitz tie rates have exceeded initial expectations and licensed properties add regular freshness to the line.
Strong sales trends in European markets are being led by the U.K., Germany, and France. The company is currently operating at roughly 4M units/month in capacity and expects to near 4.5M units by mid-summer. Firm thinks the company's ability to manage demand driven and replenishment order flow while at a similar rate introducing new styles into the marketplace speaks to the flexibility and speed inherent in the global procurement process. Based on this, they think international sales on a run-rate dollar volume basis could exceed domestic sales by year end FY07.
Warm March weather and a strong response to initial shipments of new products likely resulted in a strong finish to FQ1. Firm is raising their FQ2-FQ4 estimates based on increased unit sales assumptions and solid sales momentum. They expect increased investment during the year in store level fixturing, placement, and marketing in an effort to secure year-round floorspace, purported by solid booking trends for 2H style launches. Upside to estimates remains based on the potential for continued strong demand trends, performance of late-FY06 acquisitions, and strong response to new styles and licensed products. Firm is raising PT from $70 to $73, continuing to utilize 30x their revised FY07E EPS of $2.44.
Notablecalls: Expect to see some buying interest in the name.
Stock-outs at many retailers suggest demand for new spring styles remains high and validates Crocs' strategy to segment the channel by price and product. Classic styles (Beach/Cayman) continue to sell-through on a positive comp basis, evidenced by Y/Y sales trends at mature stores and company owned kiosks. On balance, firm estimates the Beach/Cayman styles will represent near 30% of sales exiting FY07, down from 61% at year-end FY06. Jibbitz tie rates have exceeded initial expectations and licensed properties add regular freshness to the line.
Strong sales trends in European markets are being led by the U.K., Germany, and France. The company is currently operating at roughly 4M units/month in capacity and expects to near 4.5M units by mid-summer. Firm thinks the company's ability to manage demand driven and replenishment order flow while at a similar rate introducing new styles into the marketplace speaks to the flexibility and speed inherent in the global procurement process. Based on this, they think international sales on a run-rate dollar volume basis could exceed domestic sales by year end FY07.
Warm March weather and a strong response to initial shipments of new products likely resulted in a strong finish to FQ1. Firm is raising their FQ2-FQ4 estimates based on increased unit sales assumptions and solid sales momentum. They expect increased investment during the year in store level fixturing, placement, and marketing in an effort to secure year-round floorspace, purported by solid booking trends for 2H style launches. Upside to estimates remains based on the potential for continued strong demand trends, performance of late-FY06 acquisitions, and strong response to new styles and licensed products. Firm is raising PT from $70 to $73, continuing to utilize 30x their revised FY07E EPS of $2.44.
Notablecalls: Expect to see some buying interest in the name.
Paperstand (WFC, DCX, NDAQ, FCX, VIAB, TRMP)
The WSJ’s “Heard on the Street” column out saying that Wells Fargo (WFC) has hit some ruts, b/c of its exposure to risky subprime loans. Shares of Wells Fargo are taking an unusually harsh beating as many investors worry that the end of the subprime sector's woes is nowhere in sight. Wells Fargo originated $83bn in subprime loans last year. This has caused some concern since Wall St. seems increasingly leery of any subprime exposure. Grumbling aside, there is plenty of evidence to suggest Wells Fargo isn't a disaster about to happen. In recent weeks, execs have been telling analysts that the bank is shielded from any problems on about 65% of the subprime loans. The reason: Wells Fargo says most of its subprime loans are made under what it calls "co-issue arrangements," in which it acts only as the servicer of the loans. In such cases financial risk is borne by investment banks and other firms that securitize the subprime mortgages. The deals eliminate the possibility that the bank will be forced to repurchase loans if borrowers miss payments. Wells Fargo is "very smart with credit," concludes Sam Lippe, of Tamarack Value Fund. It holds about 230K shares of the co. "We don't see the co blowing up at all," Mr. Lippe says.
The WSJ reports that ConocoPhillips (COP) became the first major US-based oil co to add its voice to the call for a federal global-warming-emission cap. ConocoPhillips said it was joining the US Climate Action Partnership, a group of corporations that have called for a US emissions cap and have outlined broad principles that they want any cap to include. "We believe that the science is quite compelling and that climate change is certainly attributed to human activity and to the substantial use of fossil fuels," said Jim Mulva, Chmn and CEO of ConocoPhillips.
According to the WSJ, a top DaimlerChrysler (DCX) exec is scheduled to meet in NY this week with bidders for the Chrysler unit, but it appears that Kirk Kerkorian's Tracinda isn't among those invited. Tracinda was working up to the last minute in hopes of being included in the scheduled round of meetings with DaimlerChrysler exec Rüdiger Grube. Among the issues: DaimlerChrysler and its bankers are questioning whether Tracinda's bid, which came with several significant conditions, is competitive given proposals from 3 rival groups. Mr. Grube is scheduled today to kick off meetings with representatives from the tandem of Blackstone Group and Centerbridge Capital; Cerberus Capital; and a partnership between Magna Intl. (MGA) and Ripplewood.
The WSJ reports that Nasdaq (NDAQ) is in talks to buy the Philadelphia Stock Exchange. A move would give the Nasdaq a sizable foothold in the options business. The two exchanges have been talking for months, but a deal isn't expected anytime soon, and may take several weeks to put together. The discussions between the two mkts have intensified in recent weeks as Nasdaq looks for its next step after a failed bid to buy London SE. Some followers of the Philadelphia exchange say that with increased exchange valuations in recent years, the co could be valued at $250-300m.
The WSJ reprots that Federal regulators said they will seek a temporary restraining order and preliminary injunction to halt Western Refining's (WNR) $1.13bn acquisition of Giant Industries (GI). The FTC said the proposed buyout would lead to reduced competition for the bulk supply of light petroleum products, including motor gasoline, to northern New Mexico.
“Inside Track” section reports that 5 board members of Freeport (FCX) reported buying more than $16m worth of co shares last month before and after Freeport completed its acquisition of Phelps Dodge. InsiderScore.com research director Ben Silverman said the directors' purchases are a bet on strong demand and high prices for copper. "I think that this buying is really a bullish bet on copper pricing more than anything else," Mr. Silverman said.
Barron’s Online out saying that there’s plenty of value in Viacom's (VIAB) ultra-cheap stock, value that could reward patient investors as Redstone and other top execs fix what's broken with Viacom's old-media operations while bringing in rising rev from new media. With shares trading at 10x this year's projected EBITDA, compared to 15x for News Corp., Viacom shares could see 20% or better returns this year as its film business turns out more hits and its Websites start to contribute meaningfully to the top line. "Destination content will become more valuable b/c there will be more and more ways to make money off of it," says Bill Nygren, of Oakmark Fund. Henry Berghoef, Oakmark's director of research, says Viacom is perhaps the most undervalued Big Media co around, based on what are very reliable cash flows at the cable networks.
“Inside Scoop” section reports that Carl Icahn’s investment groups reported that in the last 2 weeks they have raised their holdings in Motorola (MOT) to 69.1m shares, or a 2.9% stake. That's up from 64.9m shares, or a 2.7% stake. Icahn said he intends to send his own letter out to investors on April 13 asking for support at the co's May 7 AGM.
The NY Times discusses Trump Entertainment Resorts (TRMP), saying that 2 of the 3 TRMP casinos in Atlantic City rank dead last in terms of gambling revs among the 11 casinos in town. And in an industry that sometimes seems like a legal means of printing money, the co lost $19m last year, in no small part b/c it is freighted with a staggering $1.4bn in debt. “Most casino co’s tend to be awash in cash, but we are not,” said COO Mark Juliano. “As a result, reinvestment was not done until fairly recently, causing the hotels to become somewhat less competitive from a facilities point of view. “You’ve got casinos here spending like mad to remake themselves and go up-mkt,” said the general manager at one rival property. “And you’ve got casinos with their heads in the sand who aren’t doing much of anything.” And then there’s the Trump Plaza, Trump Marina and Trump Taj Mahal, which he said occupy a third category by themselves. “You almost have to feel sorry for them,” this exec said. “They’re trying, but you have to wonder if they can pull it off.” “These properties are not earning what they could or should be earning,” said Adam Steinberg, of Morgan Joseph.
The WSJ reports that ConocoPhillips (COP) became the first major US-based oil co to add its voice to the call for a federal global-warming-emission cap. ConocoPhillips said it was joining the US Climate Action Partnership, a group of corporations that have called for a US emissions cap and have outlined broad principles that they want any cap to include. "We believe that the science is quite compelling and that climate change is certainly attributed to human activity and to the substantial use of fossil fuels," said Jim Mulva, Chmn and CEO of ConocoPhillips.
According to the WSJ, a top DaimlerChrysler (DCX) exec is scheduled to meet in NY this week with bidders for the Chrysler unit, but it appears that Kirk Kerkorian's Tracinda isn't among those invited. Tracinda was working up to the last minute in hopes of being included in the scheduled round of meetings with DaimlerChrysler exec Rüdiger Grube. Among the issues: DaimlerChrysler and its bankers are questioning whether Tracinda's bid, which came with several significant conditions, is competitive given proposals from 3 rival groups. Mr. Grube is scheduled today to kick off meetings with representatives from the tandem of Blackstone Group and Centerbridge Capital; Cerberus Capital; and a partnership between Magna Intl. (MGA) and Ripplewood.
The WSJ reports that Nasdaq (NDAQ) is in talks to buy the Philadelphia Stock Exchange. A move would give the Nasdaq a sizable foothold in the options business. The two exchanges have been talking for months, but a deal isn't expected anytime soon, and may take several weeks to put together. The discussions between the two mkts have intensified in recent weeks as Nasdaq looks for its next step after a failed bid to buy London SE. Some followers of the Philadelphia exchange say that with increased exchange valuations in recent years, the co could be valued at $250-300m.
The WSJ reprots that Federal regulators said they will seek a temporary restraining order and preliminary injunction to halt Western Refining's (WNR) $1.13bn acquisition of Giant Industries (GI). The FTC said the proposed buyout would lead to reduced competition for the bulk supply of light petroleum products, including motor gasoline, to northern New Mexico.
“Inside Track” section reports that 5 board members of Freeport (FCX) reported buying more than $16m worth of co shares last month before and after Freeport completed its acquisition of Phelps Dodge. InsiderScore.com research director Ben Silverman said the directors' purchases are a bet on strong demand and high prices for copper. "I think that this buying is really a bullish bet on copper pricing more than anything else," Mr. Silverman said.
Barron’s Online out saying that there’s plenty of value in Viacom's (VIAB) ultra-cheap stock, value that could reward patient investors as Redstone and other top execs fix what's broken with Viacom's old-media operations while bringing in rising rev from new media. With shares trading at 10x this year's projected EBITDA, compared to 15x for News Corp., Viacom shares could see 20% or better returns this year as its film business turns out more hits and its Websites start to contribute meaningfully to the top line. "Destination content will become more valuable b/c there will be more and more ways to make money off of it," says Bill Nygren, of Oakmark Fund. Henry Berghoef, Oakmark's director of research, says Viacom is perhaps the most undervalued Big Media co around, based on what are very reliable cash flows at the cable networks.
“Inside Scoop” section reports that Carl Icahn’s investment groups reported that in the last 2 weeks they have raised their holdings in Motorola (MOT) to 69.1m shares, or a 2.9% stake. That's up from 64.9m shares, or a 2.7% stake. Icahn said he intends to send his own letter out to investors on April 13 asking for support at the co's May 7 AGM.
The NY Times discusses Trump Entertainment Resorts (TRMP), saying that 2 of the 3 TRMP casinos in Atlantic City rank dead last in terms of gambling revs among the 11 casinos in town. And in an industry that sometimes seems like a legal means of printing money, the co lost $19m last year, in no small part b/c it is freighted with a staggering $1.4bn in debt. “Most casino co’s tend to be awash in cash, but we are not,” said COO Mark Juliano. “As a result, reinvestment was not done until fairly recently, causing the hotels to become somewhat less competitive from a facilities point of view. “You’ve got casinos here spending like mad to remake themselves and go up-mkt,” said the general manager at one rival property. “And you’ve got casinos with their heads in the sand who aren’t doing much of anything.” And then there’s the Trump Plaza, Trump Marina and Trump Taj Mahal, which he said occupy a third category by themselves. “You almost have to feel sorry for them,” this exec said. “They’re trying, but you have to wonder if they can pull it off.” “These properties are not earning what they could or should be earning,” said Adam Steinberg, of Morgan Joseph.
Tuesday, April 10, 2007
Calls of Note Part 6
Raymond James recently completed their iRobot (NASDAQ:IRBT) channel checks at various retailers across the country and found that Scooba stocking is down significantly, Roomba's movement through the channel has been slow, and overall competition in the specialty floor care category seems intense. The latter two findings seem to make sense and were well intimated by management. However, the lack of stocked Scooba in a broad sense at various retailers was a surprise and has us questioning their view on the market size of that product, the appropriate price point of that product, and really the true breadth of the co's floor care product line.
There were four key Scooba findings from the survey:
* Inconsistent Scooba Stocking: Five of the six retailers contacted were not consistently carrying Scooba product. Most said the product was not selling well.
* Discounts: The one retailer consistently carrying the product was using a heavy dose of incentives to move product. This makes us wonder if the $299 price point works for the channel. It is ironic though that the more expensive $399 price point seems more popular in direct sales mode.
* Intense Competition: Firm noticed a few significant new floor care products being stocked potentially at the expense of Scooba. While none of these compete directly with Scooba it appears that there is a "floor care" saturation point at retailers. Dyson, Dirt Devil, and Electrolux all seemed to grab incremental shelf space. There are also rumors that Dyson is once again eyeing the robot segment of the market.
* Uncertain Future: Firm received a divergent set of responses from store representatives regarding the product's future. It seemed fairly well split between those believing that the product was "permanently discontinued" and those believing that they "would probably have it in the future". Time will tell what the future holds.
Firm believes the focus on Scooba is essential during 1H07 given that it is one of the largest drivers of average selling price (ASP) performance for home robots. It is likely that this variable will be the single most watched item for investors to gauge what combination of volume increase and ASP erosion can combine to make 20% home robot growth achievable for the year.
Notablecalls: Expect to see pressure on the shares today.
There were four key Scooba findings from the survey:
* Inconsistent Scooba Stocking: Five of the six retailers contacted were not consistently carrying Scooba product. Most said the product was not selling well.
* Discounts: The one retailer consistently carrying the product was using a heavy dose of incentives to move product. This makes us wonder if the $299 price point works for the channel. It is ironic though that the more expensive $399 price point seems more popular in direct sales mode.
* Intense Competition: Firm noticed a few significant new floor care products being stocked potentially at the expense of Scooba. While none of these compete directly with Scooba it appears that there is a "floor care" saturation point at retailers. Dyson, Dirt Devil, and Electrolux all seemed to grab incremental shelf space. There are also rumors that Dyson is once again eyeing the robot segment of the market.
* Uncertain Future: Firm received a divergent set of responses from store representatives regarding the product's future. It seemed fairly well split between those believing that the product was "permanently discontinued" and those believing that they "would probably have it in the future". Time will tell what the future holds.
Firm believes the focus on Scooba is essential during 1H07 given that it is one of the largest drivers of average selling price (ASP) performance for home robots. It is likely that this variable will be the single most watched item for investors to gauge what combination of volume increase and ASP erosion can combine to make 20% home robot growth achievable for the year.
Notablecalls: Expect to see pressure on the shares today.
Calls of Note Part 5
Thomas Weisel reduces their industry rating on the semiconductor capital equipment industry from Favorable to Neutral following recent industry analysis that suggests the outlook for equipment orders in 2Q07 and 2H07 will track well below levels implied by Street estimates. With their industry downgrade, they are lowering their ratings on both VSEA and ASML from Overweight to Market Weight. They are also reducing estimates on AMAT, ASML, LRCX, VSEA, FORM, NVLS, KLAC and CYMI. While they believe that a modest downturn in DRAM orders (45-50% of 4Q06 total) now expected for 2Q07 and 3Q07 is already reflected in current semi cap valuations, firm's analysis indicates that separate, compensating positive catalysts anticipated by many investors are unlikely to materialize. In the current environment, they favor technology-driven (rather than capacity-driven) stories with expanding addressable markets that are trading at attractive valuations, including VRGY, LRCX and AMAT.
Firm is reducing their 2007 capex growth estimate from an above-Street 10% y/y to a below-Street 0% y/y. Firm expects recent negative capex commentary to characterize 1Q07 earnings calls.
Bad news is bad news, for a change: In contrast to the stock behavior around prior semi cap equipment order cycles, firm does not expect cautious capex commentary or evidence of equipment delivery push outs to serve as positive catalysts for stocks in the group. Their discussions with investors suggest to us that at current valuations negative demand datapoints will dominate over the positive psychology historically associated with oversupply corrections.
Semi cap group fairly valued given lack of near-term catalysts: Semi cap equipment stocks trade at an average 2007E and 2008E P/E of 19x and 14x, respectively, versus the lower-risk reference points of the SPX, which are currently at a respective 16x and 15x for 2007E and 2008E.
Notablecalls: There are lots of calls on semiconductor capital equipment today (notably BofA raising AMAT rating, JP Morgan once again praising ASML, LRCX getting positive comments from CIBC), so it will be interesting to see how the stocks react. Fundamentally I would rather agree with Thomas Weisel, but I'm not sure if the mkt agrees today.
Firm is reducing their 2007 capex growth estimate from an above-Street 10% y/y to a below-Street 0% y/y. Firm expects recent negative capex commentary to characterize 1Q07 earnings calls.
Bad news is bad news, for a change: In contrast to the stock behavior around prior semi cap equipment order cycles, firm does not expect cautious capex commentary or evidence of equipment delivery push outs to serve as positive catalysts for stocks in the group. Their discussions with investors suggest to us that at current valuations negative demand datapoints will dominate over the positive psychology historically associated with oversupply corrections.
Semi cap group fairly valued given lack of near-term catalysts: Semi cap equipment stocks trade at an average 2007E and 2008E P/E of 19x and 14x, respectively, versus the lower-risk reference points of the SPX, which are currently at a respective 16x and 15x for 2007E and 2008E.
Notablecalls: There are lots of calls on semiconductor capital equipment today (notably BofA raising AMAT rating, JP Morgan once again praising ASML, LRCX getting positive comments from CIBC), so it will be interesting to see how the stocks react. Fundamentally I would rather agree with Thomas Weisel, but I'm not sure if the mkt agrees today.
Calls of Note Part 4
Susquehanna introduces their proprietary Baidu Query Tracking for Baidu.com (NASDAQ:BIDU), which monitors the search volumes of approximately 2,000 key words on Baidu.com. These key words are selected in such a manner that they cover a wide variety of industry sectors, as well as users' daily consumption needs. A modeling technique is then deployed to estimate M/M and Q/Q query growth. The most recent data show that relevant queries grew by 17.4% Q/Q in 1Q07, continuing to demonstrate robust usage growth on Baidu platforms, despite the weak seasonality due to a late Chinese Lunar New Year. Thus, flat Q/Q revenue guidance already provides a cushion for potential dips in click-through rate and bid price. Firm thinks the company meeting the Street's expectation of 2Q sequential sales growth at mid to high 20s is not impossible, as they believe there will be continuous volume and pricing growth. Firm reiterates their Positive rating on BIDU.
Firm expects search query growth in 2Q07 to be around 20% Q/Q. They arrive at the conclusion by assuming average queries in April through June to equal March. Since the Chinese Internet market is driven by both user growth (~20% CAGR 2007-2010) and usage growth, they believe their assumption of no M/M growth in Q2 is conservative. If combined growth of click-through rate and average bid price could increase 8% Q/Q, the consensus expectation of 28% Q/Q revenue growth would not be impossible for Baidu, in their view.
Notablecalls: Baidu Query Tracking has yet to prove its accuracy, but the call should generate mild interest in BIDU shares. There have been concerns about BIDU's 2Q and despite not being extremely convincing, Susquehanna somewhat alleviates these concerns.
Firm expects search query growth in 2Q07 to be around 20% Q/Q. They arrive at the conclusion by assuming average queries in April through June to equal March. Since the Chinese Internet market is driven by both user growth (~20% CAGR 2007-2010) and usage growth, they believe their assumption of no M/M growth in Q2 is conservative. If combined growth of click-through rate and average bid price could increase 8% Q/Q, the consensus expectation of 28% Q/Q revenue growth would not be impossible for Baidu, in their view.
Notablecalls: Baidu Query Tracking has yet to prove its accuracy, but the call should generate mild interest in BIDU shares. There have been concerns about BIDU's 2Q and despite not being extremely convincing, Susquehanna somewhat alleviates these concerns.
Calls of Note Part 3
Piper Jaffray raises SanDisk (NASDAQ:SNDK) estimates after their monthly handset channel checks indicate continued strong demand for music-enabled and data-oriented phones.
Firm was particularly encouraged by strong demand for the Nokia 5300 offering a bundled 1GB microSD card, significantly more memory than most handsets currently available. As consumers store greater quantities of digital music, video, maps and other content on their devices, firm expects densities of bundled NAND memory cards and embedded NAND to significantly grow in coming years.
They were also encouraged by solid interest in mobile TV phones at Verizon stores in locations offering mobile TV service. Although these handsets do not yet offer storage capabilities, recent conversations at 3GSM suggest several vendors are considering enabling storage capabilities for mobile TV content. While Piper does not expect mobile TV to significantly drive demand for NAND flash until 2008, they believe this application could require densities significantly beyond SanDisk's average retail capacity of 1.2GB exiting 2006.
Also, firm's Verizon checks indicated growing consumer interest in VZ Navigator, Verizon's location-based service portfolio. They believe growing demand for this feature should drive increased demand for NAND memory required to store location maps. Further, Verizon's growing traction could spur other carriers to offer similar services. Consequently, they expect location-based services to further stimulate NAND memory adoption beginning in 2H07.
While NAND flash pricing has improved 20-30% in recent weeks, firm continues to model 60% year-over-year price declines in 2007 given volatility around recent price fluctuations. However, given indicators of future demand emerging from their checks, firm is raising their 2007 estimates from $1.02/$3.7B to $1.04/$3.8B, and raising their 2008 estimates from $2.46/$5.1B to $2.53/$5.2B.
Notablecalls: Nothing really new and estimate raises are also too small to generate interest.
Firm was particularly encouraged by strong demand for the Nokia 5300 offering a bundled 1GB microSD card, significantly more memory than most handsets currently available. As consumers store greater quantities of digital music, video, maps and other content on their devices, firm expects densities of bundled NAND memory cards and embedded NAND to significantly grow in coming years.
They were also encouraged by solid interest in mobile TV phones at Verizon stores in locations offering mobile TV service. Although these handsets do not yet offer storage capabilities, recent conversations at 3GSM suggest several vendors are considering enabling storage capabilities for mobile TV content. While Piper does not expect mobile TV to significantly drive demand for NAND flash until 2008, they believe this application could require densities significantly beyond SanDisk's average retail capacity of 1.2GB exiting 2006.
Also, firm's Verizon checks indicated growing consumer interest in VZ Navigator, Verizon's location-based service portfolio. They believe growing demand for this feature should drive increased demand for NAND memory required to store location maps. Further, Verizon's growing traction could spur other carriers to offer similar services. Consequently, they expect location-based services to further stimulate NAND memory adoption beginning in 2H07.
While NAND flash pricing has improved 20-30% in recent weeks, firm continues to model 60% year-over-year price declines in 2007 given volatility around recent price fluctuations. However, given indicators of future demand emerging from their checks, firm is raising their 2007 estimates from $1.02/$3.7B to $1.04/$3.8B, and raising their 2008 estimates from $2.46/$5.1B to $2.53/$5.2B.
Notablecalls: Nothing really new and estimate raises are also too small to generate interest.
Calls of Note Part 2
Cowen says that Critical Therapeutics' (NASDAQ:CRTX) recent co-promotion agreement with Dey Labs improves visibility on the Zileuton CR sales ramp, given the established presence of Dey's 200-rep respiratory specialist sales force. The FDA's 10-month review deadline for Zileuton CR is May 31st: we project an approvable letter followed by final approval and launch later this year. Firm projects Zileuton franchise sales of $125MM in 2011, based on 2-3% share of the U.S. moderate/severe asthma market. Critical Therapeutics also gains co-promotion rights to a Dey COPD product which is currently pending approval. And they believe the HMGB1 antibody program (with MedImmune) has intriguing potential as a broad inflammatory mediator. With approximately $1.20 in net cash per share, firm believes CRTX shares are attractively valued.
Notablecalls: Fundamentally there's really nothing in this call to make me buy the stock. However, recent days have been kind for small biotech stocks, so such call may catch attention of speculative traders.
Notablecalls: Fundamentally there's really nothing in this call to make me buy the stock. However, recent days have been kind for small biotech stocks, so such call may catch attention of speculative traders.
Calls of Note Part 1
Piper Jaffray out with an interesting call on Trimeris (NASDAQ:TRMS), saying that they have learned that French investigators will be initiating a trial this month to study switching of Fuzeon patients to MRK's new integrase inhibitor, Isentress (previously MK-0518). The trial will enroll approximately 170 patients with undetectable HIV levels treated with Fuzeon who will be randomized to either maintain their Fuzeon regimen or switch to Isentress. The primary endpoint will be powered to demonstrate non- inferiority between the two arms on the proportion of virologic failures at week 24. Firm believes that the study may have preliminary data in 2008.
In addition to the risk of declining new patient starts on Fuzeon, this study underscores the potential for direct switching of existing Fuzeon patients to new oral drugs. Firm believes that the side effects and inconvenience of Fuzeon therapy could open the door for switching to create further pressure on future Fuzeon sales. These new oral options could enter the market in 2H07 (PFE's maraviroc and MRK's Isentress).
Firm discusses BMY's Zerit and PFE's Viracept as case studies, both lost significant market share. If Fuzeon suffered a similar rate of market share decline (and they believe it could be worse), the company's current profitability may be unsustainable by 2009-2010. As a result, they are lowering their price target from $7 (16x 2010, disc 30% for two periods) to $5 (12x 2010, disc 40% for two periods) to reflect the low end of the current range of biotech multiples and heightened risk to our profitability assumptions.
Notablecalls: I believe there is additional downside to the stock over the next few days.
In addition to the risk of declining new patient starts on Fuzeon, this study underscores the potential for direct switching of existing Fuzeon patients to new oral drugs. Firm believes that the side effects and inconvenience of Fuzeon therapy could open the door for switching to create further pressure on future Fuzeon sales. These new oral options could enter the market in 2H07 (PFE's maraviroc and MRK's Isentress).
Firm discusses BMY's Zerit and PFE's Viracept as case studies, both lost significant market share. If Fuzeon suffered a similar rate of market share decline (and they believe it could be worse), the company's current profitability may be unsustainable by 2009-2010. As a result, they are lowering their price target from $7 (16x 2010, disc 30% for two periods) to $5 (12x 2010, disc 40% for two periods) to reflect the low end of the current range of biotech multiples and heightened risk to our profitability assumptions.
Notablecalls: I believe there is additional downside to the stock over the next few days.
Paperstand
The WSJ’s ”Heard on the Street” column discusses Warren Buffett’s railroad ride. Railroad operators have benefited in recent years from a boom in overseas demand for commodities, US hunger for foreign goods and restrained competition from their big rival, trucking. And thanks to earlier waves of consolidation that left only a handful of public US railroad co’s, their earnings and their stocks have attracted investor attention. So, the billionaire investor's bet on Burlington Northern (BNI) is the latest sign that the resurgence in railway stocks has some strength over the long haul. Mr. Buffett's Berkshire Hathaway (BRKA) has accumulated a total of 39m shares. Ken Hoexter, of Merrill Lynch, says that despite the near-term earnings risks, he remains bullish on the group. "Long term, the secular story of pricing and improved returns will drive improved share performance," says Mr. Hoexter, who has a Buy rating on Burlington' stock.
The NY Times reports that one of Canada’s largest pension funds is in early talks with other investors to form a consortium to mount a $45bn takeover bid for the parent co of Bell Canada in what would be the largest buyout in history. The Ontario Teachers’ Pension Plan, which is the largest shareholder of BCE Inc. (BCE), the telephone co’s parent, has reached out in recent weeks to Caisse de Dépôt et Placement du Québec and the Canada Pension Plan Investment Board about pursuing a takeover.
DigiTimes reports that monitor vendors are feeling the pressure from rising panel prices, with mkt watchers predicting that monitor prices may go up as early as May. Monitor vendors have admitted that rising panel prices, which have gone up $2-5 since the beginning of April, are heaping pressure on them. Mkt observers pointed out that although margins for monitors are low, its prices are so sensitive an issue that vendors are conservative about raising them. But the observers predict that if panel prices continue rising, monitor prices will go up in early May. Monitor panel prices have been going up due to decreased supply for the 17-inch segment, and strong demand for 19-inch and 19-inch widescreen segments.
The NY Times reports that one of Canada’s largest pension funds is in early talks with other investors to form a consortium to mount a $45bn takeover bid for the parent co of Bell Canada in what would be the largest buyout in history. The Ontario Teachers’ Pension Plan, which is the largest shareholder of BCE Inc. (BCE), the telephone co’s parent, has reached out in recent weeks to Caisse de Dépôt et Placement du Québec and the Canada Pension Plan Investment Board about pursuing a takeover.
DigiTimes reports that monitor vendors are feeling the pressure from rising panel prices, with mkt watchers predicting that monitor prices may go up as early as May. Monitor vendors have admitted that rising panel prices, which have gone up $2-5 since the beginning of April, are heaping pressure on them. Mkt observers pointed out that although margins for monitors are low, its prices are so sensitive an issue that vendors are conservative about raising them. But the observers predict that if panel prices continue rising, monitor prices will go up in early May. Monitor panel prices have been going up due to decreased supply for the 17-inch segment, and strong demand for 19-inch and 19-inch widescreen segments.
Monday, April 09, 2007
Calls of Note Part 4
- Goldman Sachs notes Sun Micro (NASDAQ:SUNW) shares are down 9% since their recent peak on March 20 versus the S&P 500 which is up 0.6%. The fear is that Sun missed the quarter and will therefore head into its fiscal year-end quarter on weakness. Firm disagrees. While March quarters in the US were unusually backend-loaded for their enterprise hardware names, they think Sun's came together both on the direct and indirect sides of the business, putting Sun in a position to achieve well-above the company's 4% operating margin target exiting the fiscal year.
Investor sentiment has been noticeably skittish on Sun. Investors are nervous about the quarter, projecting that further into questions about Sun's ability to sustain margin improvements. GSCO's checks suggest that Sun had a strong finish to the March quarter, strong enough to at least hit the low end of the company's target range. Checks also point to strong and building business activity for fiscal 4Q, including improvements in high-end box sales which should help margins. After making it through the difficult March quarter mostly unscathed and heading into its fiscal year end, Sun shares should recapture their recent slide and begin to move toward firm's $7.50 12-month tgt.
Notablecalls: The stock is about about 5-6 cents in pre mkt trading but I would not be surpised to see some more buy interest over the week or so.
Investor sentiment has been noticeably skittish on Sun. Investors are nervous about the quarter, projecting that further into questions about Sun's ability to sustain margin improvements. GSCO's checks suggest that Sun had a strong finish to the March quarter, strong enough to at least hit the low end of the company's target range. Checks also point to strong and building business activity for fiscal 4Q, including improvements in high-end box sales which should help margins. After making it through the difficult March quarter mostly unscathed and heading into its fiscal year end, Sun shares should recapture their recent slide and begin to move toward firm's $7.50 12-month tgt.
Notablecalls: The stock is about about 5-6 cents in pre mkt trading but I would not be surpised to see some more buy interest over the week or so.
Calls of Note Part 3
- Bear Stearns is raising their Wynn (NASDAQ:WYNN) LV EBITDA projection to $92.1m from prior $84.5m, based on their checks of strong high-end volumes throughout the 1Q. Firm is also raising their Wynn Macau EBITDA projections, which they base on a continued ramp up of that property (due to growing market share, strong table and slot volumes, overall market wide gaming revenue growth in the 1Q07). Firm is raising their all-in 1Q07 EBITDA projection +$10mm to $144m. 1Q07 EPS goes to $0.61 from $0.52, which is $0.08 above Consensus.
They continue to believe WYNN is a solid play on two 1H07 themes in the gaming sector: 1) strong high-end trends on the Las Vegas Strip and 2) growing market shares gains (Wynn specifc) and increasing EBITDA/cash flows in the growing Macau gaming market. On a risk-adjusted basis, they prefer WYNN over LVS in the near-term.
Reaffirm Outperform rating and YE07 PT of $124
Notablecalls: WYNN's a mover and as ests are raised above consensus we may see the stock move over the $100 level today.
Calls of Note Part 2
- Stifel notes that since January, Amgen (NASDAQ:AMGN) has been bombarded with news of safety hazards, regulatory concerns, reimbursement problems, and aborted trials, dropping shares to a highly attractive price from a valuation standpoint. While the firm would be buyers of shares at this price they would remain cautious as investors, since, in their opinion, Amgen still faces a number of events that will insure the price of shares will remain volatile through the rest of 2007.
The firm adjusted their model to reflect trends in IMS script data through 3/23/ 07 and have downwardly adjusted 1Q07 revenue estimates for most drugs and most significantly for the epoetin franchise. While the decline in January and February was similar in 2006 and 2007, in March 2007 the decline in prescriptions continued unlike in 2006. This fall off coincides with the FDA black box warning for ESAs such as Aranesp and Epogen, and follows the USP DI delisting of Aranesp for AOC. While Amgen reiterated guidance for 2007 on March 1, Stifel believes that they will be forced to downwardly adjust guidance during the first quarter conference call to reflect the fall off of epoetin prescriptions and potential reimbursement issues.
They would use Amgen as a trading engine, buying on weakness or overreaction and selling on strength, but would not be long term holders until safety, regulatory, and reimbursement uncertainties have been resolved. Tgt is lowered to $65 from $91. Maintains Buy.
Notablecalls: Let's see how the stock takes the news today. There will be some sellers following the guidedown comments, so I'm interested to see when & where the buyers are willing to step in. They better step in 1 pt lower or we may see AMGN going lower...much lower. Stiffy's right about AMGN being a trading engine. If indeed we get warning from AMGN, you can surely buy the gap down for a decent bounce.
Calls of Note Part 1
- Goldman Sachs think the recent rebound in Cox Radio (NYSE:CXR) shares is unsubstantiated and see 16% downside to firm's $12.50 price target based on their belief the premium in the stock owing to a potential buy-in remains overstated. CXR's relative premium is still ~1X multiple point, with no change in Cox's acquisition strategy, no visibly sustainable improvement in radio growth in 2007, sub-par relative fundamentals, slowed buybacks and no credible signs the parent Cox Enterprises is set to buy in the 34% float.
Low-single digit revenue trends apparent in 1Q07 are unlikely to offset faster expense growth and, the firm, along with Cox Radio management, remains cautious on whether that level of revenue growth is sustainable through 2007. Given a muted revenue outlook, a targeted mid-single digit rise in expenses and limited further share repurchases set against the relative premium valuation and their view that a privatization remains unlikely in the near-term, they maintain Sell rating.
Notablecalls: GSCO added CXR to their America's Conviction Sell List on November 2006 and the stock has been kind to the shorts ever since. Thursday's spike was due to an upgrade by CSFB that quickly morphed into a short squeeze. There may be some buy or cover interest in CXR left, but I suspect that not before long the stock will start heading south again. See archives for more color.
Low-single digit revenue trends apparent in 1Q07 are unlikely to offset faster expense growth and, the firm, along with Cox Radio management, remains cautious on whether that level of revenue growth is sustainable through 2007. Given a muted revenue outlook, a targeted mid-single digit rise in expenses and limited further share repurchases set against the relative premium valuation and their view that a privatization remains unlikely in the near-term, they maintain Sell rating.
Notablecalls: GSCO added CXR to their America's Conviction Sell List on November 2006 and the stock has been kind to the shorts ever since. Thursday's spike was due to an upgrade by CSFB that quickly morphed into a short squeeze. There may be some buy or cover interest in CXR left, but I suspect that not before long the stock will start heading south again. See archives for more color.
Paperstand
The WSJ reports that a probe by the DoJ into past money transfers at ABN Amro (ABN) looms as a hurdle to signing a deal to sell the Dutch bank to Barclays (BCS). ABN is working toward trying to reach a settlement with the DoJ but is facing time pressure: Barclays wants greater reassurance that the matter can be resolved before signing a deal to buy ABN for an estd $80bn within the next 2 weeks. Barclays doesn't want to inherit the risk of a criminal probe.
According to the WSJ, Yahoo (YHOO), Sandisk (SNDK) and Zing Systems have teamed up to launch an MP3 player that can download music wirelessly, in the latest attempt to take on Apple's iPod. A new wireless MP3 player called the Sansa Connect hit store shelves on Fri. The $250 device, crafted to work closely with Yahoo's Internet music and other online services, has a novel twist: It's designed to download music from the Internet wirelessly when the user isn't necessarily near a PC and wants to get fresh batches of songs.
“Heard on the Street” column out saying that investors who want to parlay Citigroup’s (C) long-awaited restructuring into profits might be better off on the sidelines this week when the co announces thousands of job cuts and other spending crackdowns. That is b/c the plan, likely to be announced Wed by Chmn and CEO Charles Prince, won't shed much light on the bank's fortunes as it grapples with a slew of tough issues weighing on financial institutions around the country. In a report issued Thu, Lehman Brothers analyst Jason Goldberg pegged Citigroup's rev per employee at $270K compared with $362K at its banking peers. To match its peers on that metric, Citigroup would have to cut 80K jobs, estd Mr. Goldberg. "While we don't expect it to go that far, we do believe cuts could run deeper than expectations," he wrote.
According to the WSJ, Yahoo (YHOO), Sandisk (SNDK) and Zing Systems have teamed up to launch an MP3 player that can download music wirelessly, in the latest attempt to take on Apple's iPod. A new wireless MP3 player called the Sansa Connect hit store shelves on Fri. The $250 device, crafted to work closely with Yahoo's Internet music and other online services, has a novel twist: It's designed to download music from the Internet wirelessly when the user isn't necessarily near a PC and wants to get fresh batches of songs.
“Heard on the Street” column out saying that investors who want to parlay Citigroup’s (C) long-awaited restructuring into profits might be better off on the sidelines this week when the co announces thousands of job cuts and other spending crackdowns. That is b/c the plan, likely to be announced Wed by Chmn and CEO Charles Prince, won't shed much light on the bank's fortunes as it grapples with a slew of tough issues weighing on financial institutions around the country. In a report issued Thu, Lehman Brothers analyst Jason Goldberg pegged Citigroup's rev per employee at $270K compared with $362K at its banking peers. To match its peers on that metric, Citigroup would have to cut 80K jobs, estd Mr. Goldberg. "While we don't expect it to go that far, we do believe cuts could run deeper than expectations," he wrote.
Saturday, April 07, 2007
Barron's Summary (SCUR, ALLT)
According to the Barron’s , Allianz's ADS (AZ) and its German shares have surged in the past two years but could still gain at least 20% more if the company continues to deliver improved financial performance.
At 56, Gannett (GCI) sells for a depressed 12x estd '07 earnings. The shares could rise to 65 if the co deploys its cash wisely, perhaps by lifting its $1.24 payout to $3.50. Credit Suisse analyst Debra Schwartz, who upgraded Gannett to Outperform from Neutral, eith $65 tgt, wrote in a note that a "significant potential catalyst" for the co's stock price would be the use of its "free cash." Although the co doesn't have an activist shareholder base, she said mgmt is "under pressure to improve returns."
Thanks to a growing share of a strong market, Interface (IFSIA) could enjoy sustainable 25% sales gains. The stock could jump by as much as 35%.
“Sizing Uo Small Caps” column out on Secure Computing (SCUR), saying that the co is the biggest pure play in the rapidly growing enterprise network-security segment. There are scads of tiny rivals that lack scale and there are larger, better known names, but they've traditionally served the consumer security mkts. And more recently there are major networking and storage outfits that have begun to step up their efforts. But as they gear up, SCUR remains the No. 1 player in the enterprise fire-wall mkt and offers a suite of other well-regarded products. Wall St. has taken note. Following stellar 4Q earnings, SCUR shares surged by more than 2pts, giving them a robust P/E multiple of 21 based on ‘08 ests. Around current $8 level, some investors and analysts see a buying opportunity. Lazard software analyst Joel Fishbein, for instance, recently reiterated his Buy on the stock near 8 and maintains a price tgt of 10. He ests SCUR could earn 53c a share next year, well above the 44c consensus est.
“Technology Trader” column discusses Deep Packet Inspection, or DPI, technology. Such gear lets carriers look inside the data packets that cross their network, to determine if the traffic is e-mail, video or voice. The largest DPI vendor is Cisco. But another DPI leader is selling at a bargain price, after warning investors last week that its MarQ sales will fall short of expectations. Allot Comm. (ALLT) fell from above 9 to around 7, for a mkt value of about $145m. Allot expected sales of almost $10m in the MarQ, but admitted last Mon that they will probably fall below $8.3m. Yet Allot says that it's doing fine in its direct sales to telecom carriers. IR head Jay Kalish told that the co is a contender in many of the ongoing requisition plans, with a box Allot is developing that will run at 10 Gigabits a second. The product will be available in the 3Q. Meanwhile, Allot had more than $80m in cash on Dec 31., so the disappointed stock mkt is really valuing the co at about $70m. That's around 1.5x this year's sales for Allot. Cisco may get its big share of DPI installations, but there's plenty of non-Cisco infrastructure out there. Allot will surely get share, too.
According to the “Follow Up”, it isn't check-out time yet, as Pet-Smart (PETM) plans lots of hotel openings to cash in on the pet-services boom. "There's another 20%" upside, says Ken Stuzin, of Brown Investment Advisory. He adds that the stock, which ran into some volatility on recent news of tainted pet food, could reach 40 in 12 mo’s. Stuzin agrees with the consensus est that PetSmart will earn $1.66 a share in its year ended Jan’08, but he sees $1.97 in the following year, a dime above the consensus. Even if the economy slows, Stuzin says, more Americans, regardless of income, will treat their pets as ppl and "look at other places to cut" expenses.
Vadim Zlotnikov, of Sanford C. Bernstein, calls the LBO bets part of a "bubble of stability", widespread trades, principally by hedge funds, based on assumptions that mkts will remain calm and generous. He's scanned the smaller-cap universe for stocks with concentrated hedge-fund ownership, low trading liquidity and a premium valuation, which could mean outsized risk should the "stability trade" expire. Some names to be wary of: CXW, BSG, EFD, POS, GVA, GMST, IT and DLM. These stocks remain hazardous to short. But those hoping to hit the private-equity lottery with any of them should recognize that faster money has gotten there first.
Thursday, April 05, 2007
Calls of Note Part 4
- Merrill Lynch is lowering their EPS projections on Pfizer (NYSE:PFE) to reflect dramatically lower Exubera projections and early entry of generic Norvasc (six months earlier than expected). The Exubera reductions hit 2008E EPS and beyond. The Norvasc reductions only hit 2007E since the firm had already forecast a >90% hit after the expected generic entry date in September 2007. MLCO revised '07E EPS from $2.23 to $2.15 and '08E from $2.38 to $2.35.
Firm has lowered 2012E US Exubera sales from $635M to $250M and ex-U.S. from $165M to
$60M. Despite a full launch to endocrinologists last fall and to primary care in January 2007 (Pfizer is switching to cardiovascular sales force this month), IMS data indicates that less than 1,500 TRxs (total prescriptions) are currently being written on a weekly basis. To compare, Januvia TRxs exceeded 20,000 on a weekly basis three months into launch.
The Associated Press reported March 22, 2007 that John Buse, President-elect of the American Diabetes Association (ADA) and participant in Exubera's trials, said that he sees it as his job to tell people to avoid Exubera: "I think Pfizer will wish they had never gotten into this. I doubt they'll regain their investment. There is no advantage to Exubera and there may be a safety risk. I see it as my job to talk people out of (using) it."
Notablecalls: No real impact on PFE from this call. However, note that Exubera is partnered with Nektar Therapeutics (NASDAQ:NKTR). MLCO slashed their 2012 Exubera sales est to $400 mln from $800 mln (NKTR revenues from $406mn to $316mn) and is in fact lowering their tgt on NKTR to $17 from $20 this AM. The stock has been on tear lately as investors have been betting that the resolution of manufacturing issues, wider availability of Exubera, launch to primary care physicians and a new sales team (PFE's top cardio team) would ignite Exubera sales. Maybe it will, but the sales potential isn't what it was previously thought. Would not be surprised to see a sharp pullback in NKTR over the next couple of days.
Firm has lowered 2012E US Exubera sales from $635M to $250M and ex-U.S. from $165M to
$60M. Despite a full launch to endocrinologists last fall and to primary care in January 2007 (Pfizer is switching to cardiovascular sales force this month), IMS data indicates that less than 1,500 TRxs (total prescriptions) are currently being written on a weekly basis. To compare, Januvia TRxs exceeded 20,000 on a weekly basis three months into launch.
The Associated Press reported March 22, 2007 that John Buse, President-elect of the American Diabetes Association (ADA) and participant in Exubera's trials, said that he sees it as his job to tell people to avoid Exubera: "I think Pfizer will wish they had never gotten into this. I doubt they'll regain their investment. There is no advantage to Exubera and there may be a safety risk. I see it as my job to talk people out of (using) it."
Notablecalls: No real impact on PFE from this call. However, note that Exubera is partnered with Nektar Therapeutics (NASDAQ:NKTR). MLCO slashed their 2012 Exubera sales est to $400 mln from $800 mln (NKTR revenues from $406mn to $316mn) and is in fact lowering their tgt on NKTR to $17 from $20 this AM. The stock has been on tear lately as investors have been betting that the resolution of manufacturing issues, wider availability of Exubera, launch to primary care physicians and a new sales team (PFE's top cardio team) would ignite Exubera sales. Maybe it will, but the sales potential isn't what it was previously thought. Would not be surprised to see a sharp pullback in NKTR over the next couple of days.
Calls of Note Part 3
- Goldman Sachs is increasing their 2007 revenue and EBITDA estimates on Yahoo! (NASDAQ:YHOO) by 2% and 3% respectively as they now forecast 23% yoy growth in branded ads and 16% yoy growth in search versus prior 19% and 13% forecasts. Firm is also raising their price target to $35 from $31.50 but maintaining Neutral rating given 10% upside versus the 20%-plus average upside of firm's Buy-rated stocks. New estimates still reflect a benefit from Panama but now the impact begins in 1Q2007 as they think Yahoo! has benefited from better-than-expected query growth and greater click-through rates that have more than offset declining prices.
Notably, even with their higher 1Q2007E revenue, the 13.8% yoy growth is still sub-par to other large-cap Internet names at 25%-55% and requires acceleration to 24% growth by 4Q2007 to achieve 18% full year growth and 16% growth from 2008-2011E.
Firm's new 12-month $35 price target assumes a 16X 2007E EBITDA multiple (1.0X forward 3-year growth) plus ~$9/share for Yahoo!'s cash, NOL, and investments in Alibaba, Yahoo! Japan, and Gmarket.
Notablecalls: Not actionable but good to know category. Note that Piper is out raising their ests on eBay (NASDAQ:EBAY) this AM. But that's hardly a surprise here.
Notably, even with their higher 1Q2007E revenue, the 13.8% yoy growth is still sub-par to other large-cap Internet names at 25%-55% and requires acceleration to 24% growth by 4Q2007 to achieve 18% full year growth and 16% growth from 2008-2011E.
Firm's new 12-month $35 price target assumes a 16X 2007E EBITDA multiple (1.0X forward 3-year growth) plus ~$9/share for Yahoo!'s cash, NOL, and investments in Alibaba, Yahoo! Japan, and Gmarket.
Notablecalls: Not actionable but good to know category. Note that Piper is out raising their ests on eBay (NASDAQ:EBAY) this AM. But that's hardly a surprise here.
Calls of Note Part 2
- Piper Jaffray is increasing their tgt on Jones Soda (NASDAQ:JSDA) to $31 from $18 saying margin expansion is driving the model as the company potentially achieves 30% ACV in FY07 and 50% in FY08 of its premium private label brand. Firm believes that the initial pipeline fill is shipping and being shelved (targeted goal of Memorial Day) as expected.
The potential 2H07 "risk" remains as a sell-through period versus the 1H07 channel fill, which may be offset by marketing initiatives. The company continues to invest in human capital, most recently hiring Mr. Peter Burns as SVP of Sales/Marketing.
Piper expects Jones Soda to also invest in its brand through product line launches or extensions, over time.
They are maintaining their FY07 EPS estimate of $0.21. They are also increasing their FY08 EPS estimate by $0.10 to $0.45 based on total revenue growth of 40.8% to $69.4 million versus $63.0 million prior (and conservatively flat gross margin). Reiterates Outperform.
Notablecalls: Oh boy, this is going to be interesting. The valuation is sky high but note there is around a 5 million share short position in the name (20% short interest). The shorts have been squeezed hard over the past couple of weeks and I suspect they will fight hard to counter the positive comments from Piper. If I were among the shorts in this name, I would surely do my best to chop this one down today, possibly toward negative territory.
The potential 2H07 "risk" remains as a sell-through period versus the 1H07 channel fill, which may be offset by marketing initiatives. The company continues to invest in human capital, most recently hiring Mr. Peter Burns as SVP of Sales/Marketing.
Piper expects Jones Soda to also invest in its brand through product line launches or extensions, over time.
They are maintaining their FY07 EPS estimate of $0.21. They are also increasing their FY08 EPS estimate by $0.10 to $0.45 based on total revenue growth of 40.8% to $69.4 million versus $63.0 million prior (and conservatively flat gross margin). Reiterates Outperform.
Notablecalls: Oh boy, this is going to be interesting. The valuation is sky high but note there is around a 5 million share short position in the name (20% short interest). The shorts have been squeezed hard over the past couple of weeks and I suspect they will fight hard to counter the positive comments from Piper. If I were among the shorts in this name, I would surely do my best to chop this one down today, possibly toward negative territory.
Calls of Note Part 1
- Piper Jaffray comments on Apple (NASDAQ:AAPL) after Best Buy announced that it will be expanding the Mac pilot program to ~200 stores by fall 2007, up from 57 stores today.
Firm believes Apple's store within a store at Best Buy will be much differen compared to the current pilot store rollout, which was a table with Apple products on it. The difference is they expect some (smaller number) of these 200 stores will have walled-off Apple stores, while others will have improved layouts. What is clear, you won't wander around Best Buy to shop for Apple. A good way to think about Apple & Best Buy is the Coach or Chanel store within a store concept at Nordstrom.
While Best Buy accounts for only a 2% increase Mac distribution, they estimate the volume of visitors through Best Buy equates to about a 10% increase in Mac distribution points.
Maintains Outperform and $124 tgt on AAPL.
Notablecalls: Not actionable but good to know category.
Firm believes Apple's store within a store at Best Buy will be much differen compared to the current pilot store rollout, which was a table with Apple products on it. The difference is they expect some (smaller number) of these 200 stores will have walled-off Apple stores, while others will have improved layouts. What is clear, you won't wander around Best Buy to shop for Apple. A good way to think about Apple & Best Buy is the Coach or Chanel store within a store concept at Nordstrom.
While Best Buy accounts for only a 2% increase Mac distribution, they estimate the volume of visitors through Best Buy equates to about a 10% increase in Mac distribution points.
Maintains Outperform and $124 tgt on AAPL.
Notablecalls: Not actionable but good to know category.
Color on quarter: Rackable Systems (NASDAQ:RACK)
Couple of firms comment on Rackable Systems (NASDAQ:RACK) after the co reaffirmed its Q1 revenue guidance but said gross margin will be way below previous outlook:
- RBC Capital notes Rackable cited intense competition within its large customer accounts as the key reason for the gross margin shortfall. Firm believes Dell is the primary culprit. 1Q07 book-to-bill ratio was well above 1.0x; ending 1Q07 backlog was at its highest level in the past four quarters; RapidScale has seen increased customer traction; and cash balance increased to $170 million at the end of 1Q07 (was $160.5 million at end of 4Q06).
Firm's forward estimates and investment rating are under review pending the comments to be provided by Rackable's management team on its preliminary earnings call on the morning of April 5, 2007 at 8 A.M. EST.
- Piper Jaffray notes that given the rapid deterioration in Rackable's gross margins, they are downwardly revising their EPS estimates for 2007 and 2008. Firm is now modeling 2007 and 2008 gross margins of 15.5% and 18.5% (down from 20.5% and 21.5%, respectively). 2007 and 2008 EPS estimates are now $0.43 and $0.85, which is a substantial cut from previous estimates of $0.90 and $1.17, respectively.
Firm believes pricing pressure will continue and reiterate Market Perform rating on RACK shares, but lower price target to $16 from $21.
- Cowen says they remain cautious on Rack's shares as it's tough going in the land of giants. Rack cut prices, which hurt gross margins by over 400 basis points. All this similar to the December quarter miss, but worse this time.
Rack has ~60-70% revenue concentration, with three customers, Amazon, Yahoo, and Microsoft. The lack of diversity makes it more difficult for Rack to fend off competition as there are less places to hide, and each of these customers is a marquee name. Firm does not see diversity increasing in the near future.
Cowen notes that even on their prior 2008 EPS of $1.00, half of this was stock options add back. If they include stock comp, even on the old ests the PE is over 30x 2008 ests, and that's before this preannouncement. Thus even with a drop in price below $16, the shares still appear expensive.
Notablecalls: It's surely tough going in the land of giants. Especially when youre a midget. RACK needs scale and in order to have that they need to win market share. The only way to win market share is to sacrifice margins. And that's what they are doing. The problem is they are competing with the likes of Dell, Sun and IBM that can buy hardware at cheaper prices due to very large quantities, not to mention have existing customer relationships. Is RACK's tech superior? Not likely at this stage.
The stock was down a point in after hours action. Aggressive accounts may find the levels reached in after hours a shorting opportunity.
- RBC Capital notes Rackable cited intense competition within its large customer accounts as the key reason for the gross margin shortfall. Firm believes Dell is the primary culprit. 1Q07 book-to-bill ratio was well above 1.0x; ending 1Q07 backlog was at its highest level in the past four quarters; RapidScale has seen increased customer traction; and cash balance increased to $170 million at the end of 1Q07 (was $160.5 million at end of 4Q06).
Firm's forward estimates and investment rating are under review pending the comments to be provided by Rackable's management team on its preliminary earnings call on the morning of April 5, 2007 at 8 A.M. EST.
- Piper Jaffray notes that given the rapid deterioration in Rackable's gross margins, they are downwardly revising their EPS estimates for 2007 and 2008. Firm is now modeling 2007 and 2008 gross margins of 15.5% and 18.5% (down from 20.5% and 21.5%, respectively). 2007 and 2008 EPS estimates are now $0.43 and $0.85, which is a substantial cut from previous estimates of $0.90 and $1.17, respectively.
Firm believes pricing pressure will continue and reiterate Market Perform rating on RACK shares, but lower price target to $16 from $21.
- Cowen says they remain cautious on Rack's shares as it's tough going in the land of giants. Rack cut prices, which hurt gross margins by over 400 basis points. All this similar to the December quarter miss, but worse this time.
Rack has ~60-70% revenue concentration, with three customers, Amazon, Yahoo, and Microsoft. The lack of diversity makes it more difficult for Rack to fend off competition as there are less places to hide, and each of these customers is a marquee name. Firm does not see diversity increasing in the near future.
Cowen notes that even on their prior 2008 EPS of $1.00, half of this was stock options add back. If they include stock comp, even on the old ests the PE is over 30x 2008 ests, and that's before this preannouncement. Thus even with a drop in price below $16, the shares still appear expensive.
Notablecalls: It's surely tough going in the land of giants. Especially when youre a midget. RACK needs scale and in order to have that they need to win market share. The only way to win market share is to sacrifice margins. And that's what they are doing. The problem is they are competing with the likes of Dell, Sun and IBM that can buy hardware at cheaper prices due to very large quantities, not to mention have existing customer relationships. Is RACK's tech superior? Not likely at this stage.
The stock was down a point in after hours action. Aggressive accounts may find the levels reached in after hours a shorting opportunity.
Paperstand (GOOG, SVVS, CBEY, BSG)
The WSJ reports that Apollo Mgmt, possibly joining the rush by buyout firms to cash in on their successful investment records, is exploring the private sale of a 10% stake in the firm for $1.5bn. The firm has retained investment bankers to study such a deal, which would allow founder Leon Black and his partners to sidestep the hassles and heightened scrutiny involved in a public stock offering. Should Apollo pursue a deal that values 10% of the firm at $1.5bn, Mr. Black could net as much as $750m.
According to the WSJ, Google (GOOG) is releasing a new feature called My Maps that lets users annotate online maps by marking locations with notes, video and photos and then share them with friends or the public. The move builds on Google's popular Maps service, which tech-savvy users have harnessed to build a wide range of customized maps displaying information such as Chicago crime statistics and listings of homes for rent or sale.
Barron’s Online highlights Savvis (SVVS), saying that it doesn’t take a savant to see that the telecom business is in a period of wild excess. Savvis, a so-called alternative telecom co deep in the red, will quintuple its spending this year over the previous year to host Websites for a fee for marquee clients such as Reuters. Excess sometimes can be mistaken for success. And sell-side analysts speculate that Verizon (VZ) and other large telcos might acquire such fast-growing outfits for a hefty premium. That kind of speculation has helped Savvis shares more than double in the past 12 mo’s.
But if you're not one to bet on buyouts, it may make more sense to look for alternative high-growth telecom firms that are also profitable. One such firm may be Cbeyond (CBEY). Cbeyond's shares have also appreciated smartly, up 72% in the last 12 mo’s, but the stock is still cheaper than Savvis', based EBITDA, despite what should be heady sales growth of 30% this year. A valuation closer to Savvis' would suggest 20% upside to Cbeyond's stock. Like Savvis, Cbeyond has a business that fits with what large telecom co’s do and that's growing fast. Cbeyond's enterprise value, including cash of $44m, is a multiple of 16x the co's expected ’07 EBITDA, compared to about 19x for Savvis' EV. Thomas Weisel Partners' James Breen thinks that 16x multiple makes the stock undervalued; he rates the shares a Buy.
Barron’s Online “Inside Scoop” section reports that some investors are losing confidence in Bisys’ (BSG) search for a buyer, but the founder of hedge fund Okumus Capital believes he can help the co, and he's put his money where his mouth is. Okumus Capital purchased a total of 504K shares for $6m in two separate transactions over the past month. The purchases boosted Okumus Capital's stake to 10.6%. Ben Silverman, of InsiderScore.com, notes that the stock did not climb significantly on news of Ahmet Okumus' large buy. The purchase was "positive, but it's mitigated just by the lack of visibility in terms of what will happen from an operational standpoint and from a strategic standpoint."
According to the WSJ, Google (GOOG) is releasing a new feature called My Maps that lets users annotate online maps by marking locations with notes, video and photos and then share them with friends or the public. The move builds on Google's popular Maps service, which tech-savvy users have harnessed to build a wide range of customized maps displaying information such as Chicago crime statistics and listings of homes for rent or sale.
Barron’s Online highlights Savvis (SVVS), saying that it doesn’t take a savant to see that the telecom business is in a period of wild excess. Savvis, a so-called alternative telecom co deep in the red, will quintuple its spending this year over the previous year to host Websites for a fee for marquee clients such as Reuters. Excess sometimes can be mistaken for success. And sell-side analysts speculate that Verizon (VZ) and other large telcos might acquire such fast-growing outfits for a hefty premium. That kind of speculation has helped Savvis shares more than double in the past 12 mo’s.
But if you're not one to bet on buyouts, it may make more sense to look for alternative high-growth telecom firms that are also profitable. One such firm may be Cbeyond (CBEY). Cbeyond's shares have also appreciated smartly, up 72% in the last 12 mo’s, but the stock is still cheaper than Savvis', based EBITDA, despite what should be heady sales growth of 30% this year. A valuation closer to Savvis' would suggest 20% upside to Cbeyond's stock. Like Savvis, Cbeyond has a business that fits with what large telecom co’s do and that's growing fast. Cbeyond's enterprise value, including cash of $44m, is a multiple of 16x the co's expected ’07 EBITDA, compared to about 19x for Savvis' EV. Thomas Weisel Partners' James Breen thinks that 16x multiple makes the stock undervalued; he rates the shares a Buy.
Barron’s Online “Inside Scoop” section reports that some investors are losing confidence in Bisys’ (BSG) search for a buyer, but the founder of hedge fund Okumus Capital believes he can help the co, and he's put his money where his mouth is. Okumus Capital purchased a total of 504K shares for $6m in two separate transactions over the past month. The purchases boosted Okumus Capital's stake to 10.6%. Ben Silverman, of InsiderScore.com, notes that the stock did not climb significantly on news of Ahmet Okumus' large buy. The purchase was "positive, but it's mitigated just by the lack of visibility in terms of what will happen from an operational standpoint and from a strategic standpoint."
Wednesday, April 04, 2007
Calls of Note Part 4
- Goldman Sachs sheds some more light on the Jackson Hewitt (NYSE:JTX) situation saying they believe that the stock's reaction to this negative news was overdone:
1) the DOJ did not sue Jackson Hewitt, only the franchisee;
2) firm reviewed the Jackson Hewitt franchisee contract, which establishes that franchisees are independent contractors, that the alleged fraudulent conduct would be in violation of this contract, that franchisees are responsible for hiring, training, and supervising their employees, and - most importantly - that the contract provides indemnification of Jackson Hewitt for conduct of the franchisee;
3) no one franchisee accounts for more than 2% of total revenues for Jackson Hewitt, and these 125 stores account for less than 2% of total stores; and (
4) the 2007 tax season is nearing its end, with the bulk of FY2007 revenues already accounted for.
GSCO believes that related business risk is low (less than 2% of revenues). It is their understanding that legal liability exists only if company employees were involved in the alleged conduct, knew about it, or benefited from it in some way. Firm's discussions with management suggest that this was not the case. Believe yesterday's weakness presents an immediate buying opportunity.
Notablecalls: I was too conservative on JTX few hrs ago, saying $27 was the level to buy. Was expecting at least some analysts to panic and downgrade the stock, providing a decent fill. No luck with that. First prints were around $28. Hope some of you had more conviction. Think the stock can hit $29.50 or even $30 early on, providing a quick scalp on the short side. After that, who knows.
1) the DOJ did not sue Jackson Hewitt, only the franchisee;
2) firm reviewed the Jackson Hewitt franchisee contract, which establishes that franchisees are independent contractors, that the alleged fraudulent conduct would be in violation of this contract, that franchisees are responsible for hiring, training, and supervising their employees, and - most importantly - that the contract provides indemnification of Jackson Hewitt for conduct of the franchisee;
3) no one franchisee accounts for more than 2% of total revenues for Jackson Hewitt, and these 125 stores account for less than 2% of total stores; and (
4) the 2007 tax season is nearing its end, with the bulk of FY2007 revenues already accounted for.
GSCO believes that related business risk is low (less than 2% of revenues). It is their understanding that legal liability exists only if company employees were involved in the alleged conduct, knew about it, or benefited from it in some way. Firm's discussions with management suggest that this was not the case. Believe yesterday's weakness presents an immediate buying opportunity.
Notablecalls: I was too conservative on JTX few hrs ago, saying $27 was the level to buy. Was expecting at least some analysts to panic and downgrade the stock, providing a decent fill. No luck with that. First prints were around $28. Hope some of you had more conviction. Think the stock can hit $29.50 or even $30 early on, providing a quick scalp on the short side. After that, who knows.
Color on news: Jackson Hewitt (NYSE:JTX)
Couple firms comment on Jackson Hewitt (NYSE:JTX) after the Justice Department and the Internal Revenue Service announced civil injunction suits against five companies that operate Jackson Hewitt franchises.
- William Blair notes it is critically important to note that the suits are aimed at this one particular Jackson Hewitt franchisee, not Jackson Hewitt corporate. It is also important to note that Jackson Hewitt's franchise agreements explicitly state that franchises are independently owned and operated and that any liability arising from faulty or fraudulent tax preparation belongs exclusively to the franchisee/preparer. Mr. Sohail's 126 Jackson Hewitt offices represent approximately 1.9% of Jackson Hewitt Tax Service's more than 6,500 locations, and, according to a news source, prepared 105,000 or 2.9% of the company's total network tax returns prepared last year. All of this suggests that the risk to the corporation-legally, operationally, and financially-is fairly well contained.
The government suit and investigation could pose additional risks to the company, however, including headline and reputation risk as well as the risk of spurring class-action lawsuits directed at Jackson Hewitt Tax Service Inc. on behalf of tax clients who may now owe the government money from fraudulent refunds. The news may provide ammo for legislators looking to increase oversight of the tax preparation industry by mandating preparer training standards, etc.
Firm cautiously maintains Outperform rating and estimates. Shares of JTX declined more than 18% on Tuesday after the story broke around 1:30 CDT. While the fear and uncertainty inherent to this situation is understandable, they believe the share price decline may prove to be an overreaction to an event that appears to center around one bad apple, not the entire barrel. At Tuesday's closing price of $26.53, JTX trades at 13.7 times fiscal 2007 EPS estimate of $1.94 and 11.7 times fiscal 2008 EPS estimate of $2.27. Shares are also trading at what the firm estimates is a nearly 10% free cash flow yield based on 2008 estimated free cash flow. This strong free cash flow generation informs the company's substantial share repurchase program. The co has buying power at the current stock price to repurchase more than 19% of the diluted shares outstanding.
- Morgan Stanley is upgrading the stock to Equal Weight from Underweight saying no franchisee at Jackson Hewitt accounts for more than 2-3% of revenues, and this particular franchisee is less than 2% of revenues, accounting for about $0.03 in EPS, based on firm's estimates, for a loss of value of about 1.5%, much less than the 18% decline in valuation that occurred following the announcement. Attractive free cash flow yields of 8-9% should support the stock between $25-$30.
Firm notes they are not upgrading to an Overweight based on their longer-term cautious view on the industry and the company, which has not changed. They believe that the increased competitive intensity will slow future growth for the company.
Notablecalls: Buy the stock here. Pay $27 if you have to. For a trade. Tight leash, though.
- William Blair notes it is critically important to note that the suits are aimed at this one particular Jackson Hewitt franchisee, not Jackson Hewitt corporate. It is also important to note that Jackson Hewitt's franchise agreements explicitly state that franchises are independently owned and operated and that any liability arising from faulty or fraudulent tax preparation belongs exclusively to the franchisee/preparer. Mr. Sohail's 126 Jackson Hewitt offices represent approximately 1.9% of Jackson Hewitt Tax Service's more than 6,500 locations, and, according to a news source, prepared 105,000 or 2.9% of the company's total network tax returns prepared last year. All of this suggests that the risk to the corporation-legally, operationally, and financially-is fairly well contained.
The government suit and investigation could pose additional risks to the company, however, including headline and reputation risk as well as the risk of spurring class-action lawsuits directed at Jackson Hewitt Tax Service Inc. on behalf of tax clients who may now owe the government money from fraudulent refunds. The news may provide ammo for legislators looking to increase oversight of the tax preparation industry by mandating preparer training standards, etc.
Firm cautiously maintains Outperform rating and estimates. Shares of JTX declined more than 18% on Tuesday after the story broke around 1:30 CDT. While the fear and uncertainty inherent to this situation is understandable, they believe the share price decline may prove to be an overreaction to an event that appears to center around one bad apple, not the entire barrel. At Tuesday's closing price of $26.53, JTX trades at 13.7 times fiscal 2007 EPS estimate of $1.94 and 11.7 times fiscal 2008 EPS estimate of $2.27. Shares are also trading at what the firm estimates is a nearly 10% free cash flow yield based on 2008 estimated free cash flow. This strong free cash flow generation informs the company's substantial share repurchase program. The co has buying power at the current stock price to repurchase more than 19% of the diluted shares outstanding.
- Morgan Stanley is upgrading the stock to Equal Weight from Underweight saying no franchisee at Jackson Hewitt accounts for more than 2-3% of revenues, and this particular franchisee is less than 2% of revenues, accounting for about $0.03 in EPS, based on firm's estimates, for a loss of value of about 1.5%, much less than the 18% decline in valuation that occurred following the announcement. Attractive free cash flow yields of 8-9% should support the stock between $25-$30.
Firm notes they are not upgrading to an Overweight based on their longer-term cautious view on the industry and the company, which has not changed. They believe that the increased competitive intensity will slow future growth for the company.
Notablecalls: Buy the stock here. Pay $27 if you have to. For a trade. Tight leash, though.
Calls of Note Part 3
- Wachovia comments on Intuitive Surgical (NASDAQ:ISRG) saying the co seems to have become increasingly focused on international markets. Firm believes this is reflected in a change in its guidance format.
After some interim analysis the firm has sized the international market opportunities for prostatectomy and hysterectomy (for cancerous conditions only) at 140,000 and 400,000 annual procedures, respectively. ISRG has increased its investment in sales and marketing infrastructure abroad and WACH believes that recent growth trends demonstrate a significant impact here. Given this, the firm now assumes a greater contribution from international sales; their model now has ISRG's international sales increasing from 16% of total revenue at the end of 2006 to 18% by the end of 2008 (previously, they assumed that international sales remained at a constant 16% of revenue).
Firm concludes that a nominal shift of 1% of patients diagnosed with prostate cancer from watchful waiting or other treatment regimens to da Vinci prostatectomy (dVP) could potentially result in $0.02 upside to previous 2008 estimates.
Maintains Outperform rating due to strong fundamentals, low domestic and international penetrations into target markets, and potential for upside to both their and street estimates. WACH has increased their 2008 EPS estimate by $0.13 to $3.58.
Notablecalls: Anyone think ISRG will soon challenge the 52-week highs?
After some interim analysis the firm has sized the international market opportunities for prostatectomy and hysterectomy (for cancerous conditions only) at 140,000 and 400,000 annual procedures, respectively. ISRG has increased its investment in sales and marketing infrastructure abroad and WACH believes that recent growth trends demonstrate a significant impact here. Given this, the firm now assumes a greater contribution from international sales; their model now has ISRG's international sales increasing from 16% of total revenue at the end of 2006 to 18% by the end of 2008 (previously, they assumed that international sales remained at a constant 16% of revenue).
Firm concludes that a nominal shift of 1% of patients diagnosed with prostate cancer from watchful waiting or other treatment regimens to da Vinci prostatectomy (dVP) could potentially result in $0.02 upside to previous 2008 estimates.
Maintains Outperform rating due to strong fundamentals, low domestic and international penetrations into target markets, and potential for upside to both their and street estimates. WACH has increased their 2008 EPS estimate by $0.13 to $3.58.
Notablecalls: Anyone think ISRG will soon challenge the 52-week highs?
Calls of Note Part 2
- Merrill Lynch comments on AMD (NYSE:AMD) after they a chance to sit down with co's top management recently to see just how deep the hole is. The market may still not appreciate just how much money AMD is likely to lose in Q1 and Q2 as it struggles to work off 90nm product inventory. They are revising their earnings estimate for 2007 down again, to a GAAP loss of $1.29, and they expect AMD to burn through about $900 million in cash by the end of June. The firm is Neutral - AMD's near-term problems are too great to support a more positive stance even at the stock's current level.
The good news is that the firm thinks the market may be underestimating the competitive impact that AMD could have this year with 65nm. The quad-core server debate is beside the point. What AMD really needs is a competitive product in the performance desktop segment. MLCO thinks that Athlon 64x2 on the new process technology should meet the need, and they also think that AMD could be able to turn free cash flow positive by Q4 of this year. They are more skeptical on AMD's prospects in mobile processors this year.
The bad news is that detailed analysis of AMD's cash situation indicates that the company likely can't get to the end of the September quarter without an equity financing in the $1 billion range. Investors need to remember that AMD's ability to offer additional debt may be constrained by the need to pay back the company's existing bridge loan.
As a stock, AMD is working through a bottoming process, and although the firm thinks it's too early to buy yet they think that AMD has more competitive potential than the street realizes. Joe Osha, the analyst covering AMD for MLCO notes they were struck by one observation that Ruiz made regarding margins. He thinks that both processor companies could end up with normalized gross margins in the 50% range. They agree, and think the trick is going to be figuring out how to make money on that level of margin as opposed to trying to return the market to its pre-2005, much higher margin structure. At least AMD understands what's happening and is making the right adjustments. If the company can get new products into the market successfully this year the stock could work later on. For now investors need to remain cautious in light of the very bad outlook we're likely to see for Q2, and the liquidity crisis that AMD has to confront after that.
Notablecalls: AMD @ $10? Sure feels like it. And you just gotta buy all the Semi Equipment makers as demand from Semi side is surely getting better as we speak, right? Overall, a very nice piece of analysis by MLCO's Joe Osha. Hits the nail on the head.
The good news is that the firm thinks the market may be underestimating the competitive impact that AMD could have this year with 65nm. The quad-core server debate is beside the point. What AMD really needs is a competitive product in the performance desktop segment. MLCO thinks that Athlon 64x2 on the new process technology should meet the need, and they also think that AMD could be able to turn free cash flow positive by Q4 of this year. They are more skeptical on AMD's prospects in mobile processors this year.
The bad news is that detailed analysis of AMD's cash situation indicates that the company likely can't get to the end of the September quarter without an equity financing in the $1 billion range. Investors need to remember that AMD's ability to offer additional debt may be constrained by the need to pay back the company's existing bridge loan.
As a stock, AMD is working through a bottoming process, and although the firm thinks it's too early to buy yet they think that AMD has more competitive potential than the street realizes. Joe Osha, the analyst covering AMD for MLCO notes they were struck by one observation that Ruiz made regarding margins. He thinks that both processor companies could end up with normalized gross margins in the 50% range. They agree, and think the trick is going to be figuring out how to make money on that level of margin as opposed to trying to return the market to its pre-2005, much higher margin structure. At least AMD understands what's happening and is making the right adjustments. If the company can get new products into the market successfully this year the stock could work later on. For now investors need to remain cautious in light of the very bad outlook we're likely to see for Q2, and the liquidity crisis that AMD has to confront after that.
Notablecalls: AMD @ $10? Sure feels like it. And you just gotta buy all the Semi Equipment makers as demand from Semi side is surely getting better as we speak, right? Overall, a very nice piece of analysis by MLCO's Joe Osha. Hits the nail on the head.
Calls of Note Part 1
- Bear Stearns comments on Sandisk (NASDAQ:SNDK) noting the recent tightening in the NAND market and resulting rebound in pricing has been partly driven by inventory replenishment and yield issues at manufacturers, which raises the concern that pricing could be flattish or under downward pressure once the inventory replenishment is completed and/or yields improve. Despite this "head-fake " risk, the firm expects any such risk to be temporary, as NAND industry fundamentals are indeed improving in 2Q07 from a supply versus demand standpoint, and they continue to believe that NAND supply-demand will be balanced in 2H07. At these levels the upside potential on the stock exceeds downside risk. Firm believes downside to the stock is $40 and upside is $55.
Though there are fears that capacity is on the verge of being converted back from DRAM to NAND, they expect capacity conversions from NAND to DRAM to continue in 2Q07. Based on their analysis, the firm does not expect conversions back to NAND to occur through 3Q07, and to occur in 4Q07 at the earliest. Global supply bit growth in 2Q is clearly going to be limited and less then demand growth. In particular, Samsung and Hynix continue to be cautious about their NAND capacity expansion and the firm expects their bit growth to be flat to slightly up in 2Q.
Although they are lowering their 1Q EPS from $0.12 to $0.08, the firm believes that 1Q is "water under the bridge". Investors should focus on SanDisk's earnings bottoming in 2Q and outlook for 2H07. 2Q EPS estimate is $0.01 (down from $0.04 previously), and they expect an improvement to $0.15 (down from $0.17 previously) and $0.44 in 3Q and 4Q, and to $2.58 in 2008.
Bear Stearns is reiterating their Outperform rating and price target of $55. While the stock could react negatively to flattish or downward movement in NAND flash pricing, which may occur in May/June given that inventory replenishment is likely to slow down at some point, they would use any pullbacks to accumulate the shares and get positioned for 2H07.
Notablecalls: Samsung and Hynix in aggregate represent 50-60% of global NAND supply. There are reasons for them to be cautious about adding capacity. After all, Samsung supplies NAND to Apple, while SNDK doesn't. As most of you know, the iPhone is seen as the main driver behind s-t NAND demand. Plus, there has been talk of supply constraints at Samsung that have added fuel to the fire. I'm not a SNDK fan and still see very little reason to own the stock here. I expect SNDK to see some s-t buy interest following the call from Bear Stearns (think there will see some similar calls over the next week or so) but eventually it's fadeable.
Though there are fears that capacity is on the verge of being converted back from DRAM to NAND, they expect capacity conversions from NAND to DRAM to continue in 2Q07. Based on their analysis, the firm does not expect conversions back to NAND to occur through 3Q07, and to occur in 4Q07 at the earliest. Global supply bit growth in 2Q is clearly going to be limited and less then demand growth. In particular, Samsung and Hynix continue to be cautious about their NAND capacity expansion and the firm expects their bit growth to be flat to slightly up in 2Q.
Although they are lowering their 1Q EPS from $0.12 to $0.08, the firm believes that 1Q is "water under the bridge". Investors should focus on SanDisk's earnings bottoming in 2Q and outlook for 2H07. 2Q EPS estimate is $0.01 (down from $0.04 previously), and they expect an improvement to $0.15 (down from $0.17 previously) and $0.44 in 3Q and 4Q, and to $2.58 in 2008.
Bear Stearns is reiterating their Outperform rating and price target of $55. While the stock could react negatively to flattish or downward movement in NAND flash pricing, which may occur in May/June given that inventory replenishment is likely to slow down at some point, they would use any pullbacks to accumulate the shares and get positioned for 2H07.
Notablecalls: Samsung and Hynix in aggregate represent 50-60% of global NAND supply. There are reasons for them to be cautious about adding capacity. After all, Samsung supplies NAND to Apple, while SNDK doesn't. As most of you know, the iPhone is seen as the main driver behind s-t NAND demand. Plus, there has been talk of supply constraints at Samsung that have added fuel to the fire. I'm not a SNDK fan and still see very little reason to own the stock here. I expect SNDK to see some s-t buy interest following the call from Bear Stearns (think there will see some similar calls over the next week or so) but eventually it's fadeable.
Paperstand (AVZ, PSUN)
Barron’s Online highlights Amvescap (AVZ), saying that the co’s already-sagging stock looks especially cheap. Co shares fell 8% last week, a week that included not only the departures of portfolio managers and other employees, the subject of a court battle, but the announcement that Robert H. Graham, the vice Chmn and co-founder of AIM, will retire. Amvescap stock is now trading at roughly 15x estd earnings for ‘07, and about 13x ‘08 ests, multiples that are well below the avg for other asset managers. "It is a buying opportunity," says Niamh Alexander, of CIBC. "I do believe they have the right asset mix for sustainable growth."
“Inside Scoop” section reports that since the start of the year, Adage Capital Partners increased its holdings in Pacific Sunwear (PSUN) to 4.2m shares, or a 6% stake, up from about 1.7m shares. Ben Silverman, of InsiderScore.com, says Atchinson and Gross (Adage was founded by Robert Atchinson and Phil Gross in ‘01.) continue to "run a lot of money" for Harvard University and other endowments. They are "very smart ppl, playing with other smart ppl's money."
“Inside Scoop” section reports that since the start of the year, Adage Capital Partners increased its holdings in Pacific Sunwear (PSUN) to 4.2m shares, or a 6% stake, up from about 1.7m shares. Ben Silverman, of InsiderScore.com, says Atchinson and Gross (Adage was founded by Robert Atchinson and Phil Gross in ‘01.) continue to "run a lot of money" for Harvard University and other endowments. They are "very smart ppl, playing with other smart ppl's money."
Tuesday, April 03, 2007
Calls of Note Part 6
- ThinkEquity's David Edwards notes that over the course of the last week, the firm visited several public and private solar companies in China. As is common in the industry, many conversations focused on silicon prices, module ASPs, and margins. Most module players in China will tell you that the silicon shortage is waning and that availability is increasing. Several producers have reported greater than 10% declines in feedstock prices - both at the wafer and silicon level - in the past six months. Additionally many Chinese producers have optimistic outlooks on the silicon supply moving forward with the bottleneck relaxing significantly by late 2007 vs. previously anticipated 2008.
Firm is cautious toward this outlook as many of these views are coming from producers that have relied solely on spot market purchases (and prices) if any supply was available at all. So, $250/kg for silicon may seem like a good price to a wafer manufacturer that was paying $300/kg last year - but that is a still a far cry from the best long-term contract prices that are well below $100/kg. In other words, they think any softening of the situation is perceived more favorably in China than it actually is for the market more broadly.
Notablecalls: Not actionable but good to know category. Not really sure what to make of this. Don't think WFR will get hit follwing these comments.
Firm is cautious toward this outlook as many of these views are coming from producers that have relied solely on spot market purchases (and prices) if any supply was available at all. So, $250/kg for silicon may seem like a good price to a wafer manufacturer that was paying $300/kg last year - but that is a still a far cry from the best long-term contract prices that are well below $100/kg. In other words, they think any softening of the situation is perceived more favorably in China than it actually is for the market more broadly.
Notablecalls: Not actionable but good to know category. Not really sure what to make of this. Don't think WFR will get hit follwing these comments.
Calls of Note Part 5
- ThinkEquity is positive on On2 Tech (AMEX:ONT) saying their channel checks over the last six weeks instill greater confidence that On2 could outperform firm's 1Q revenue estimate, which they have revised up from $2.36M to $2.45M. Specifically, takeaways are that On2's existing customer base is seeing better than expected growth in their respective businesses which should translate into higher levels of royalty-based revenue. Firm also believes average deal sizes continued to improve in 1Q. Increased confidence in 1Q trends leads them to believe On2 can achieve non-GAAP profitability this quarter, and as such, causes them to raise price target from $1.70 to $2.10.
Firm reiterates ONT as their top pick. ONT shares currently trade at 26.7x 2008 Non-GAAP diluted EPS estimate of $0.06, relative to its peer group at 24x-35x, and projected 3-year EPS growth of 35%. With a relatively fixed cost structure and growing level of highly profitable, recurring revenue, and most recent checks that indicate On2 should outperform firm's estimates and achieve profitability in 1Q, they have adjusted their forward P/E multiple on ONT from 28x to 35x.
Notablecalls: Expect to see some buy interest in ONT.
Firm reiterates ONT as their top pick. ONT shares currently trade at 26.7x 2008 Non-GAAP diluted EPS estimate of $0.06, relative to its peer group at 24x-35x, and projected 3-year EPS growth of 35%. With a relatively fixed cost structure and growing level of highly profitable, recurring revenue, and most recent checks that indicate On2 should outperform firm's estimates and achieve profitability in 1Q, they have adjusted their forward P/E multiple on ONT from 28x to 35x.
Notablecalls: Expect to see some buy interest in ONT.
Calls of Note Part 4
- Merrill Lynch notes First Horizon National (NYSE:FHN) is the most exposed to deteriorating consumer credit among the mid- and small-cap banks. It has material exposure to the highest risk loan categories. Also, low capital, low reserves and high dividend payout ratio give it little flexibility.
MLCO sees meaningful downside to FHN's shares as their three-pronged valuation methodology (sum-of-the-parts, target P/E and DCF) suggests a theoretical fair value of $31, suggesting 23% downside. Their '07 and '08 estimates are 5% and 11% below consensus respectively, and they view risks skewed to the downside.
The firm is most concerned that on balance sheet credits originated through the retail bank will deteriorate. FHN's residential real estate book is already showing signs of strain. Firm expects further deterioration, given elevated growth and exposure. They also expect deterioration in industry-wide residential construction loans, and FHN is very exposed.
There is also material EPS risk embedded in the mortgage origination unit. The recourse provision for early payment defaults (EPDs) related to sub-prime and/or Alt-A exposure is likely to increase. Moreover, recent issues in these two loan categories could drive a material slowdown in top-line growth. Maintains Sell.
Notablecalls: The stock took a pretty bad hit yesterday, following a warning from MTB. MLCO's comments do nothing to please the bulls, so more downside in store for FHN. Should the stock open down more than a pt, I would not be surprised to see a quick bounce.
MLCO sees meaningful downside to FHN's shares as their three-pronged valuation methodology (sum-of-the-parts, target P/E and DCF) suggests a theoretical fair value of $31, suggesting 23% downside. Their '07 and '08 estimates are 5% and 11% below consensus respectively, and they view risks skewed to the downside.
The firm is most concerned that on balance sheet credits originated through the retail bank will deteriorate. FHN's residential real estate book is already showing signs of strain. Firm expects further deterioration, given elevated growth and exposure. They also expect deterioration in industry-wide residential construction loans, and FHN is very exposed.
There is also material EPS risk embedded in the mortgage origination unit. The recourse provision for early payment defaults (EPDs) related to sub-prime and/or Alt-A exposure is likely to increase. Moreover, recent issues in these two loan categories could drive a material slowdown in top-line growth. Maintains Sell.
Notablecalls: The stock took a pretty bad hit yesterday, following a warning from MTB. MLCO's comments do nothing to please the bulls, so more downside in store for FHN. Should the stock open down more than a pt, I would not be surprised to see a quick bounce.
Calls of Note Part 3
- CIBC reiterates their Sector Outperformer rating & $25 target on Trident Micro (NASDAQ:TRID), in response to recent share pressure, driven by backtracking, yet still defiant shorts. The TRID rant-du- jour is HiDTV 2H08 ASPs will decline into the low teens. The irony is TRID's CY08 guidance & firm's estimates are precisely predicated on this occurrence. As such, the firm cannot understand the big fuss around ASPs.
HiDTV design activity for CY08 has commenced, & they have independently confirmed Samsung, Sharp, & Philips will be anchor high-volume adopters. Firm's Sony contact indicated they will integrate HiDTV into US sockets, yet may stick with NEC decoders in Japan & Europe, for political reasons.
At ~11x CIBC's CY08 EPS of $1.80, TRID is trading at a significant 33% discount to its peers. With restatements on their way (likely in May, following abbreviated March Q results in late April), followed by additional top-tier HiDTV design-win validations,they view TRID as a compelling value.
Notablecalls: While the situation at Sony (See archives) remains as an overhang, CIBC's comments may create a bounce n-t. My gut is telling me TRID may be a falling knife here, so look for some bottoming action before gobbling up any shares.
HiDTV design activity for CY08 has commenced, & they have independently confirmed Samsung, Sharp, & Philips will be anchor high-volume adopters. Firm's Sony contact indicated they will integrate HiDTV into US sockets, yet may stick with NEC decoders in Japan & Europe, for political reasons.
At ~11x CIBC's CY08 EPS of $1.80, TRID is trading at a significant 33% discount to its peers. With restatements on their way (likely in May, following abbreviated March Q results in late April), followed by additional top-tier HiDTV design-win validations,they view TRID as a compelling value.
Notablecalls: While the situation at Sony (See archives) remains as an overhang, CIBC's comments may create a bounce n-t. My gut is telling me TRID may be a falling knife here, so look for some bottoming action before gobbling up any shares.
Calls of Note Part 2
- Goldman Sachs advises investors to buy Google (NASDAQ:GOOG) with 30%-plus upside to their $620 price target. Firm has increased confidence in their view given new analytical framework developed from the paid lead growth details included in the 10K that supports their above-consensus 2007 yoy revenue growth of 55%. 55% top-line growth and 45% operating income growth, faster than 32% growth in invested capital, results in ~400 bps of ROIC expansion. GSCO views ROIC as the best measure of Google achieving a return on investment given it's the sum total of the effect of spending on the overall business. 1Q should begin the acceleration in FCF growth and ROIC expansion.
Firm estimates Google's ROIC will expand ~400 bps to 42.2% (versus the large-cap average of 15.1%) and free cash flow (FCF) growth will accelerate to 76% yoy in 2007 after a significant increase in investment caused ROIC to decline to 38% in 2006 from 81% in 2005 and FCF, while robust at $2.3bn, to experience a significant deceleration in growth to 3% 1Q2007E FCF growth acceleration to 74% yoy and 270 bps of ROIC expansion to 47.8% should start to alleviate investor concerns on costs, potential over-investment without a return, or share losses due to Panama, while reinforcing firm's view of that Google is creating value with its spend. Maintains Buy.
Notablecalls: I suspect there will be some nice buy interest in GOOG today.
Firm estimates Google's ROIC will expand ~400 bps to 42.2% (versus the large-cap average of 15.1%) and free cash flow (FCF) growth will accelerate to 76% yoy in 2007 after a significant increase in investment caused ROIC to decline to 38% in 2006 from 81% in 2005 and FCF, while robust at $2.3bn, to experience a significant deceleration in growth to 3% 1Q2007E FCF growth acceleration to 74% yoy and 270 bps of ROIC expansion to 47.8% should start to alleviate investor concerns on costs, potential over-investment without a return, or share losses due to Panama, while reinforcing firm's view of that Google is creating value with its spend. Maintains Buy.
Notablecalls: I suspect there will be some nice buy interest in GOOG today.
Calls of Note Part 1
- Thomas Weisel Partners comments on Apple (NASDAQ:AAPL) after completing a round of 30 channel checks with Apple specialist resellers and Apple retail stores across the United States. Firm's checks suggest s seasonally soft quarter for Mac and iPod, which is not surprising given normal seasonal demand trends. They note, however, that another 30%-plus q/q decline in Flash pricing should help margins; thus, they expect Apple to report EPS ahead of consensus.
TWP believes that, on a sequential basis, Mac units will likely decline in mid-single-digit area, but possibly be ahead of the Street assumptions on a revenue basis (they are at $5.39bn in total revenue versus Street at $5.17bn).
iPod nano still a dominant MP3 player, but checks suggest seasonal drop-off in demand compared with very strong December quarter: Again, not surprising and consistent with expectations of a 48% q/q decline in units. 4GB iPod nano remains the best-selling iPod, and Apple continues to outsell competition by 8:1 ratio.
Checks indicate limited interest in iTV thus far. Firm does not view this product as a large opportunity, as they believe there are less than 6mn PVR-type devices sold in the marketplace annually at present.
With 15-40% q/q declines on various Flash capacities, the firm believes Apple saw another sequential benefit in gross margin, and that average iPod margins are likely now above 40%, two times the levels seen in 2005. They bump their gross margin assumption to 30% (likely conservative) from 29.5%, and arrive at a $0.69 EPS estimate (excluding $0.03 option) versus prior assumption of $0.67 (Street at $0.66). TWP is also bumping up their June quarter revenue estimates due to higher Mac revenue, but remains below consensus on revenue (in-line EPS).
Firm believes the growth opportunities continue to be strong for Apple, but that those opportunities appear to be well understood by the investment community and, thus, reflected in the current stock price. Maintains Mkt Weight rating.
Notablecalls: Not actionable but good to know category. I continue to be cautious on AAPL and still think it's a short around current levels. Oh and btw, a boutique firm was out on AAPL last Friday saying that based on their intel the 4GB iPhone will be available on June 11 but the 8GB model will not arrive til mid-August.
TWP believes that, on a sequential basis, Mac units will likely decline in mid-single-digit area, but possibly be ahead of the Street assumptions on a revenue basis (they are at $5.39bn in total revenue versus Street at $5.17bn).
iPod nano still a dominant MP3 player, but checks suggest seasonal drop-off in demand compared with very strong December quarter: Again, not surprising and consistent with expectations of a 48% q/q decline in units. 4GB iPod nano remains the best-selling iPod, and Apple continues to outsell competition by 8:1 ratio.
Checks indicate limited interest in iTV thus far. Firm does not view this product as a large opportunity, as they believe there are less than 6mn PVR-type devices sold in the marketplace annually at present.
With 15-40% q/q declines on various Flash capacities, the firm believes Apple saw another sequential benefit in gross margin, and that average iPod margins are likely now above 40%, two times the levels seen in 2005. They bump their gross margin assumption to 30% (likely conservative) from 29.5%, and arrive at a $0.69 EPS estimate (excluding $0.03 option) versus prior assumption of $0.67 (Street at $0.66). TWP is also bumping up their June quarter revenue estimates due to higher Mac revenue, but remains below consensus on revenue (in-line EPS).
Firm believes the growth opportunities continue to be strong for Apple, but that those opportunities appear to be well understood by the investment community and, thus, reflected in the current stock price. Maintains Mkt Weight rating.
Notablecalls: Not actionable but good to know category. I continue to be cautious on AAPL and still think it's a short around current levels. Oh and btw, a boutique firm was out on AAPL last Friday saying that based on their intel the 4GB iPhone will be available on June 11 but the 8GB model will not arrive til mid-August.
Paperstand (GOOG, BID, UNM)
According to the WSJ, Google (GOOG) is furthering its ambitions to move beyond online advertising with a multiyear contract to sell television commercials that will appear through satellite-TV provider EchoStar (DISH). Under an arrangement to be announced today, Google will sell TV ad spots through an online auction system, with advertisers bidding the amount they are willing to pay per thousand households that view each commercial. Google will send the commercials of the winning bidders to EchoStar, which will then insert them in an unspecified number of daily blocks in the TV programming it delivers to the roughly 13m households that subscribe to its Dish service.
“Heard on the Street” column out positively on Sotheby’s (BID), saying that art-loving investors who might not be raising a bid paddle at the co’s coming spring sale are betting on the auctioneer's stock instead. "When ppl make money, they want to put it in things that will appreciate in value, and that's art," says Richard Rosen, of J&W Seligman. "This is an irreplaceable, one-of-a-kind franchise with huge barriers to entry," he adds. Sotheby's makes most of its money from fees it charges buyers and sellers, a lucrative but cyclical mkt it enjoys in a veritable duopoly with closely held rival Christie's. Sotheby's costs, such as salaries and travel budgets for its globe-trotting art specialists, are mostly fixed, so a little rev growth translates into a big boost in earnings. For example, rev in ‘06 grew 29% to $665m, while earnings jumped 70% to $107m. "In the up-part of the art-mkt cycle, those incremental dollars fall almost straight to the bottom line," says Rommel Dionisio, of Wedbush. He has a Buy rating on the stock. The co's sizable net-cash position, high growth rate, pricing power and new global strategy to boost sales provide strong fundamentals for the stock.
Barron’s Online “Inside Scoop” section reports that Relational Investors has just upped its stake in Unum Group (UNM), less than a month after Relational said it would keep an eye on the insurance brokerage's turnaround efforts. Relational reported boosting its stake in the insurance provider to 25.7m shares, or a 7.5% stake, up from the 21.3m shares, or 6.2% stake. In its initial filing, Relational said Unum's stock is undervalued b/c of the co's history of "repeated, significant, one-time reserve and settlement charges against reported earnings, poor operating results and poor forecasting." Ken Squire, of 13D Monitor, says Relational "has a reputation for being long-term value investors who actually go in and enhance shareholder value."
“Heard on the Street” column out positively on Sotheby’s (BID), saying that art-loving investors who might not be raising a bid paddle at the co’s coming spring sale are betting on the auctioneer's stock instead. "When ppl make money, they want to put it in things that will appreciate in value, and that's art," says Richard Rosen, of J&W Seligman. "This is an irreplaceable, one-of-a-kind franchise with huge barriers to entry," he adds. Sotheby's makes most of its money from fees it charges buyers and sellers, a lucrative but cyclical mkt it enjoys in a veritable duopoly with closely held rival Christie's. Sotheby's costs, such as salaries and travel budgets for its globe-trotting art specialists, are mostly fixed, so a little rev growth translates into a big boost in earnings. For example, rev in ‘06 grew 29% to $665m, while earnings jumped 70% to $107m. "In the up-part of the art-mkt cycle, those incremental dollars fall almost straight to the bottom line," says Rommel Dionisio, of Wedbush. He has a Buy rating on the stock. The co's sizable net-cash position, high growth rate, pricing power and new global strategy to boost sales provide strong fundamentals for the stock.
Barron’s Online “Inside Scoop” section reports that Relational Investors has just upped its stake in Unum Group (UNM), less than a month after Relational said it would keep an eye on the insurance brokerage's turnaround efforts. Relational reported boosting its stake in the insurance provider to 25.7m shares, or a 7.5% stake, up from the 21.3m shares, or 6.2% stake. In its initial filing, Relational said Unum's stock is undervalued b/c of the co's history of "repeated, significant, one-time reserve and settlement charges against reported earnings, poor operating results and poor forecasting." Ken Squire, of 13D Monitor, says Relational "has a reputation for being long-term value investors who actually go in and enhance shareholder value."
Monday, April 02, 2007
Calls of Note Part 6
- Goldman Sachs is adding Merrill Lynch (NYSE:MER) to the Americas Conviction Buy and Buy List. Shares are off more than 17% since hitting an all time high of $98.68 on January 18 as investor concerns about sub-prime mortgage exposure and potential contagion to adjacent credit markets have taken their toll. Over the same period, peers have lost 7% while the S&P 500 is off 1%. GSCO believes the sell off is overdone, and recommends investors build a position in Merrill Lynch to take advantage of the very strong investment banking and capital markets environments. Firm's $107 price target implies 31% upside. They raise 1Q07/2007 EPS estimates to $2.00/$8.20 from $1.84/$8.00.
Catalyst: MER reports 1Q2007 earnings in mid-April, and GSCO anticipates the firm will deliver upside to consensus estimates. Investors have over-estimated the headwinds sub-prime mortgage will have on the firm, in their view, and they believe they are not giving management enough credit for the positive momentum it has built over the last few years to improve its ROE. Both LEH and BSC have indicated sub-prime mortgage is a small contributor to their fixed income business, so MER's contribution should be equally as small. While the timing of the First Franklin deal was less than optimal, any revenues will be accretive in 2007 as the deal closed on 12/30/06.
MER trades at 2.0x book value, generally in line with its 5-year historical multiple of 1.9x and well below its recent multiple of 2.4x.
Notablecalls: Expect to see buy intrest in MER!
Catalyst: MER reports 1Q2007 earnings in mid-April, and GSCO anticipates the firm will deliver upside to consensus estimates. Investors have over-estimated the headwinds sub-prime mortgage will have on the firm, in their view, and they believe they are not giving management enough credit for the positive momentum it has built over the last few years to improve its ROE. Both LEH and BSC have indicated sub-prime mortgage is a small contributor to their fixed income business, so MER's contribution should be equally as small. While the timing of the First Franklin deal was less than optimal, any revenues will be accretive in 2007 as the deal closed on 12/30/06.
MER trades at 2.0x book value, generally in line with its 5-year historical multiple of 1.9x and well below its recent multiple of 2.4x.
Notablecalls: Expect to see buy intrest in MER!
Calls of Note Part 5
- JP Morgan says that in conjunction with MedPanel, wtheyconducted a proprietary survey of 50 high volume oncologists to gauge future trends for Amgen's (NASDAQ:AMGN) Aranesp. They view the survey as robust as it represents almost 200,000 pts. On the positive side, the data indicate that hemoglobin (Hb) targets in chemotherapy induced anemia (CIA) pts are not expected to markedly decline going forward. This has been a widespread concern on the Street. On the negative side, new patient starts and overall utilization of Aranesp in CIA may be pressured going forward.
Use of erythropoietin stimulating agents (ESAs) may decline in 12 mo with 58% of respondents expecting decreases b/t 0 and 20%+. In addition to lower ESA growth, Aranesp may lose as much as 5% of CIA share in 12 mo driven by oncologists opting out of ESA therapy.
JPM has lowered their 2007-2010 Aranesp forecasts by 10-12% and EPS by 2-4%, which in their view reflects realistic assumptions based on the survey results. 2007-2008 Aranesp estimates are now $4.12B (0% growth) and $4.49B (9% growth) respectively, from $4.60B and $5.1B prev. 2007-2008 EPS ests are now $4.25 and $4.61 respectively, down from $4.33 and $4.81 prev.
Reiterates OW. They're comfortable recommending AMGN shares at current levels as they believe that their anemia assumptions are reasonable and grounded by data (not sentiment). Firm sees more upside than downside to revised forecasts, and finds AMGN's risk/reward attractive at 13X their 2007 ests (versus 16.8X for US Big Pharma).
Notablecalls: AMGN sure looks like it wants to bounce here. I'm going to call the JPM's call as actionable. The analyst Geoffrey Meacham has gone the extra mile for investors here and his estimates are likely rock solid in terms of quantifying the ESA risk.
Use of erythropoietin stimulating agents (ESAs) may decline in 12 mo with 58% of respondents expecting decreases b/t 0 and 20%+. In addition to lower ESA growth, Aranesp may lose as much as 5% of CIA share in 12 mo driven by oncologists opting out of ESA therapy.
JPM has lowered their 2007-2010 Aranesp forecasts by 10-12% and EPS by 2-4%, which in their view reflects realistic assumptions based on the survey results. 2007-2008 Aranesp estimates are now $4.12B (0% growth) and $4.49B (9% growth) respectively, from $4.60B and $5.1B prev. 2007-2008 EPS ests are now $4.25 and $4.61 respectively, down from $4.33 and $4.81 prev.
Reiterates OW. They're comfortable recommending AMGN shares at current levels as they believe that their anemia assumptions are reasonable and grounded by data (not sentiment). Firm sees more upside than downside to revised forecasts, and finds AMGN's risk/reward attractive at 13X their 2007 ests (versus 16.8X for US Big Pharma).
Notablecalls: AMGN sure looks like it wants to bounce here. I'm going to call the JPM's call as actionable. The analyst Geoffrey Meacham has gone the extra mile for investors here and his estimates are likely rock solid in terms of quantifying the ESA risk.
Calls of Note Part 4
- FBR notes Urban Outfitters (NASDAQ:URBN) filed their 2006 10- K last Friday afternoon indicating that "Thus far during fiscal 2008 (calendar 2007), total company comparable store sales are positive."
Firm expects positive reaction to this data point as investors realize that 1Q07 could be the first consolidated positive comp quarter since 4Q05 for the company. They further point out that the company has yet to benefit materially from the spring break selling that is to occur over the next two weekends. Firm maintains belief that positive momentum will continue and that the turnaround at both divisions will strengthen throughout the year. They are raising their 1Q07 comp from flat to +1%, but it does not impact EPS estimates. FBR currently has a $35 12 month price target. They believe that shares of URBN should be valued in line with a three-year EPS growth rate of 30%. O
Firm notes that Chairman and CEO Dick Hayne sold 4.5M shares recently (approximately 9% of his position). Mr. Hayne owns over 43M shares following the liquidation and still owns over 25% of the company. They do not feel that he would liquidate in the face of pending bad news in today's litigious environment. They also noted a 120,000 share registration to sell by CFO John Kyees. Firm continues to feel that the improving fundamentals of URBN's turnaround outweigh any the negative implications of these insider transactions.
Notablecalls: FBR was out positive on URBN last week (See archives) and looks like they were right. Do check out the intraday chart on URBN from Friday, as it seems there was some buy interest in the name after the 10K was filed.
Firm expects positive reaction to this data point as investors realize that 1Q07 could be the first consolidated positive comp quarter since 4Q05 for the company. They further point out that the company has yet to benefit materially from the spring break selling that is to occur over the next two weekends. Firm maintains belief that positive momentum will continue and that the turnaround at both divisions will strengthen throughout the year. They are raising their 1Q07 comp from flat to +1%, but it does not impact EPS estimates. FBR currently has a $35 12 month price target. They believe that shares of URBN should be valued in line with a three-year EPS growth rate of 30%. O
Firm notes that Chairman and CEO Dick Hayne sold 4.5M shares recently (approximately 9% of his position). Mr. Hayne owns over 43M shares following the liquidation and still owns over 25% of the company. They do not feel that he would liquidate in the face of pending bad news in today's litigious environment. They also noted a 120,000 share registration to sell by CFO John Kyees. Firm continues to feel that the improving fundamentals of URBN's turnaround outweigh any the negative implications of these insider transactions.
Notablecalls: FBR was out positive on URBN last week (See archives) and looks like they were right. Do check out the intraday chart on URBN from Friday, as it seems there was some buy interest in the name after the 10K was filed.
Calls of Note Part 3
- Merrill Lynch notes that based on industry checks at the recent CTIA conference, they believe Research in Motion (NASDAQ:RIMM) is uniquely positioned to benefit from a multi-year acceleration in smartphone sales. RIM's new products featuring multimedia, GPS and mobile commerce capabilities that leverage RIM's secure network infrastructure will drive its next leg of growth, in firm's opinion. MLCO is raising CY07 pro-forma EPS estimate by 6% to $4.48 and CY08 EPS by 15% to $6.08. Reiterates Buy, $165 PO (~21% potential upside.)
Smartphones comprise six of top ten bestselling mobile phones on Amazon.com, including four Blackberry models. IDC projects smartphone shipments in RIM's core markets (US, Canada, W. Europe) to accelerate from 39% growth last yr to 50%+ CAGR for the next two years. If RIM can expand its core market share from 23% (current model) to 29% in CY08, they estimate earnings power of about $7, which puts theoretical upside for RIM stock at $175-210 on 25x-30x CY08 PE. RIM's compelling new portfolio, and consistent underperformance by rivals Palm, Motorola, and Nokia gives the firm confidence that RIM can gain meaningful share.
Firm looks for two positive catalysts near term: 1) RIM's FQ earnings call on 11-April; and 2) Potential launch of Verizon/Sprint Pearl and T-Mobile 83xx WiFi Blackberry on 7-May, coinciding with RIM's Capital Markets Day. MLCO recommends buying May US$140.00 call options ahead of the upcoming catalysts.
Notablecalls: Despite the fact MLCO's call contains nothing new, I expect to see some buy interest in RIMM today. Vivek, why not up your tgt on RIMM? That would give the call a lot more credibility.
Smartphones comprise six of top ten bestselling mobile phones on Amazon.com, including four Blackberry models. IDC projects smartphone shipments in RIM's core markets (US, Canada, W. Europe) to accelerate from 39% growth last yr to 50%+ CAGR for the next two years. If RIM can expand its core market share from 23% (current model) to 29% in CY08, they estimate earnings power of about $7, which puts theoretical upside for RIM stock at $175-210 on 25x-30x CY08 PE. RIM's compelling new portfolio, and consistent underperformance by rivals Palm, Motorola, and Nokia gives the firm confidence that RIM can gain meaningful share.
Firm looks for two positive catalysts near term: 1) RIM's FQ earnings call on 11-April; and 2) Potential launch of Verizon/Sprint Pearl and T-Mobile 83xx WiFi Blackberry on 7-May, coinciding with RIM's Capital Markets Day. MLCO recommends buying May US$140.00 call options ahead of the upcoming catalysts.
Notablecalls: Despite the fact MLCO's call contains nothing new, I expect to see some buy interest in RIMM today. Vivek, why not up your tgt on RIMM? That would give the call a lot more credibility.
Calls of Note Part 2
- JP Morgan notes that last week they made a bottom call on Lam Research's (NASDAQ:LRCX) shares suggesting that an upside revision to C2H07 shipment guidance would likely be a major upside catalyst for LRCX shares, most likely in the July earnings season, but it could begin to materialize in the April earnings season. Firm now thinks that a sharp and potentially sustainable recovery in Flash pricing, as a prelude to improved Flash fundamentals thus future capex growth, is likely to be a positive catalyst as well.
Lam is more leveraged to memory in general and Flash in particular given its success penetrating and holding share at the major memory vendors. Flash price weakness contributed to the recent underperformance of LRCX shares and is likely to drive stock leadership as Flash fundamentals improve.
There is no doubt in their minds that Flash will be the biggest driver of wafer fab equipment demand growth over the next five+ years and they like Lam's exposure. The firm also thinks the company's share gain and margin expansion are sustainable, but the stock seems to be discounting an implosion in both, which they see as highly unlikely.
This week, Samsung Semiconductor President Chang-Gyu Hwang stated at a Mobile Solutions forum in Taiwan that he expects a "severe shortage" of Flash devices in C2H07 as portable
applications such the iPhone, high density 3G players, and handsets with built-in memory drive demand.
Reiterates Overweight. LRCX trades at 10.5x JPM's unchanged C2007 GAAP EPS est. of $4.52 vs. universe average of 16.7x.
Notablecalls: Looks like JPM's intial call didn't generate the buy interest they expected (See Archives), so they are trying again. Think the points made (coupled with the strong wording) may generate some further buy interest in LRCX. Mr. Hwang's comments regarding a severe shortage of Flash devices will likely be circling the desks today.
Lam is more leveraged to memory in general and Flash in particular given its success penetrating and holding share at the major memory vendors. Flash price weakness contributed to the recent underperformance of LRCX shares and is likely to drive stock leadership as Flash fundamentals improve.
There is no doubt in their minds that Flash will be the biggest driver of wafer fab equipment demand growth over the next five+ years and they like Lam's exposure. The firm also thinks the company's share gain and margin expansion are sustainable, but the stock seems to be discounting an implosion in both, which they see as highly unlikely.
This week, Samsung Semiconductor President Chang-Gyu Hwang stated at a Mobile Solutions forum in Taiwan that he expects a "severe shortage" of Flash devices in C2H07 as portable
applications such the iPhone, high density 3G players, and handsets with built-in memory drive demand.
Reiterates Overweight. LRCX trades at 10.5x JPM's unchanged C2007 GAAP EPS est. of $4.52 vs. universe average of 16.7x.
Notablecalls: Looks like JPM's intial call didn't generate the buy interest they expected (See Archives), so they are trying again. Think the points made (coupled with the strong wording) may generate some further buy interest in LRCX. Mr. Hwang's comments regarding a severe shortage of Flash devices will likely be circling the desks today.
Calls of Note Part 1
Several firms comment on Semiconductor Industry Association (SIA) February data released over the weekend.
- Bear Stearns notes that from a YoY perspective the 3MMA revenue growth rate decelerated to 4.2% from 9.3% in January. Semiconductor units also decelerated with February's 3MMA YoY unit growth rate coming in at 2.9%, down from 3.8% in January. 3MMA ASPs increased 1.3% YoY, but decreased 4.3% MoM coming in at $0.483.
February revenue decreased 7.3% MoM to $17.9B, below the historical average growth rate of 5.1% MoM. Both units and ASPs were slightly weaker than expected.
February MPU revenues decreased 7% MoM, and came in well below the historical average revenue growth rate of 32%. MPU units only increased 3% MoM. Historically, units have increased an average of 20% MoM. DRAM revenue decreased 16% MoM versus its historical average decline of 1% as pricing continues to deteriorate. Units were down 2% MoM, slightly below the historical average increase of 1%.
Flash revenue increased 7% MoM versus its historical average growth of 12%, as ASPs continue to decline. Units increased 11% MoM, coming in better than the historical average increase of 10%. Analog revenues were down 5% MoM in what has historically been a flat environment. Units were down 1.6% versus the historical average increase of 7%.
The firm is tweaking lower their full year 2007 revenue growth rate from 6% to 5% YoY, based on a unit growth rate assumption of 10% YoY and an ASP decline of 5% YoY.
- JP Morgan notes revenue in all major categories decreased sequentially, with lower than seasonal declines in all categories except sensors. The microprocessor, memory, and logic categories were significantly below normal seasonality while the analog and discrete categories were slightly below normal seasonality.
Due to the lower than expected sales in February, they are lowering their 2007 forecast from 8% to 6% YoY growth.
JPM believes the excess inventory in the semiconductor industry is being worked down, as February YoY unit growth (ex discretes) was 2.9%, well below the normal YoY unit growth of 10%. As they expected, unit growth has started to decline, and they expect YoY unit growth to become negative in 1Q07, similar to previous troughs.
The firm recently upgraded their stance on the semiconductor sector to bullish due to belief the inventory correction is ending and the fall-off in unit growth gives them confidence.
- Goldman Sachs says they believe that the weakness in the February data supports their view that the 1QCY07 fundamentals have remained challenging despite recent commentary by the analog companies, with the upcoming earnings season likely to be disappointing relative to now elevated expectations.
Firm believes that Street estimates heading into Micron's (NYSE:MU) CY1Q'07 earningsreport are too high ($0.01 in EPS for CY1Q'07 versus GS LPS estimate of -$0.08), with downside likely to be driven primarily by lower than expected DRAM ASPs, which continued to deteriorate significantly since Micron's analyst meeting in early February. Although Micron's valuation is not as stretched as SPE valuations, the recent rally creates risk around the earnings report as they expect the magnitude of losses over the next several quarters to be much greater than Street expectations.
Notablecalls: I continue to reiterate my cautious stance on Semiconductors. Note that Baird is upgrading MU this AM to Outperform from Neutral. While MU's not a trading stock, we may see it being chopped down following market open.
- Bear Stearns notes that from a YoY perspective the 3MMA revenue growth rate decelerated to 4.2% from 9.3% in January. Semiconductor units also decelerated with February's 3MMA YoY unit growth rate coming in at 2.9%, down from 3.8% in January. 3MMA ASPs increased 1.3% YoY, but decreased 4.3% MoM coming in at $0.483.
February revenue decreased 7.3% MoM to $17.9B, below the historical average growth rate of 5.1% MoM. Both units and ASPs were slightly weaker than expected.
February MPU revenues decreased 7% MoM, and came in well below the historical average revenue growth rate of 32%. MPU units only increased 3% MoM. Historically, units have increased an average of 20% MoM. DRAM revenue decreased 16% MoM versus its historical average decline of 1% as pricing continues to deteriorate. Units were down 2% MoM, slightly below the historical average increase of 1%.
Flash revenue increased 7% MoM versus its historical average growth of 12%, as ASPs continue to decline. Units increased 11% MoM, coming in better than the historical average increase of 10%. Analog revenues were down 5% MoM in what has historically been a flat environment. Units were down 1.6% versus the historical average increase of 7%.
The firm is tweaking lower their full year 2007 revenue growth rate from 6% to 5% YoY, based on a unit growth rate assumption of 10% YoY and an ASP decline of 5% YoY.
- JP Morgan notes revenue in all major categories decreased sequentially, with lower than seasonal declines in all categories except sensors. The microprocessor, memory, and logic categories were significantly below normal seasonality while the analog and discrete categories were slightly below normal seasonality.
Due to the lower than expected sales in February, they are lowering their 2007 forecast from 8% to 6% YoY growth.
JPM believes the excess inventory in the semiconductor industry is being worked down, as February YoY unit growth (ex discretes) was 2.9%, well below the normal YoY unit growth of 10%. As they expected, unit growth has started to decline, and they expect YoY unit growth to become negative in 1Q07, similar to previous troughs.
The firm recently upgraded their stance on the semiconductor sector to bullish due to belief the inventory correction is ending and the fall-off in unit growth gives them confidence.
- Goldman Sachs says they believe that the weakness in the February data supports their view that the 1QCY07 fundamentals have remained challenging despite recent commentary by the analog companies, with the upcoming earnings season likely to be disappointing relative to now elevated expectations.
Firm believes that Street estimates heading into Micron's (NYSE:MU) CY1Q'07 earningsreport are too high ($0.01 in EPS for CY1Q'07 versus GS LPS estimate of -$0.08), with downside likely to be driven primarily by lower than expected DRAM ASPs, which continued to deteriorate significantly since Micron's analyst meeting in early February. Although Micron's valuation is not as stretched as SPE valuations, the recent rally creates risk around the earnings report as they expect the magnitude of losses over the next several quarters to be much greater than Street expectations.
Notablecalls: I continue to reiterate my cautious stance on Semiconductors. Note that Baird is upgrading MU this AM to Outperform from Neutral. While MU's not a trading stock, we may see it being chopped down following market open.
Paperstand (FDC LBO; GOOG vs MSFT; T for TI; AAPL)
The WSJ reports that Kohlberg Kravis Roberts is in late-stage negotiations to purchase First Data (FDC) for more than $24bn. KKR was hoping to make an official announcement over the next few days. The exact purchase price couldn't be learned yesterday, though two people described the price as a premium of at least 20% to First Data's mkt cap of about $20bn.
According to the WSJ, Google (GOOG) has emerged along with Microsoft (MSFT) as a contender to buy DoubleClick, presenting competition that stands to increase the final sale price of the online-advertising co. Microsoft has appeared less likely to win the bidding as the potential price for the co surpassed $2bn. But it is possible that Microsoft will counter.
The WSJ reports that AT&T (T) and affiliate seek Telecom Italia (TI) stake. Offers by AT&T and Mexican affiliate America Movile to take a combined 66.6% stake in the holding co that controls TI stand to accelerate consolidation among the world's largest telecom providers. The bids, which total about €2.6bn ($3.47bn), will first have to get past nationalist resistance from the Italian govt. The board of Italian tires-to-telecom group Pirelli yesterday said it had entered into exclusive talks with AT&T and America Movil to sell each co a 33.3% stake in the unlisted holding co Olimpia, which in turn owns 18% of Telecom Italia.
After months of drama in its boardroom and declining performance at its newspapers, Tribune (TRB) late yesterday appeared to be firming up a deal to sell itself to Sam Zell. Over the weekend, Tribune's special committee of the board reviewed competing offers from Mr. Zell and a joint bid from Eli Broad and Ron Burkle. Both offers propose taking the co private using an employee stock ownership plan.
AirTran (AAI) is expected to announce Monday that it is sweetening its takeover offer for Midwest Air (MEH) by about 13%, valuing the carrier at $389m. The higher cash-and-stock proposal, valued at $15 a share, is the latest attempt by AirTran to persuade Midwest to negotiate a deal that would unite two low-cost carriers.
In a major break with the music industry's longstanding antipiracy strategy, EMI Group is set to announce today that it plans to sell significant amounts of its catalog without anticopying software. The co is to make its announcement at a London news conference featuring Apple (AAPL) CEO Steve Jobs. EMI is to sell songs without the software, known as digital rights mgmt, through Apple's iTunes Store and possibly through other online outlets.
According to the WSJ, Google (GOOG) has emerged along with Microsoft (MSFT) as a contender to buy DoubleClick, presenting competition that stands to increase the final sale price of the online-advertising co. Microsoft has appeared less likely to win the bidding as the potential price for the co surpassed $2bn. But it is possible that Microsoft will counter.
The WSJ reports that AT&T (T) and affiliate seek Telecom Italia (TI) stake. Offers by AT&T and Mexican affiliate America Movile to take a combined 66.6% stake in the holding co that controls TI stand to accelerate consolidation among the world's largest telecom providers. The bids, which total about €2.6bn ($3.47bn), will first have to get past nationalist resistance from the Italian govt. The board of Italian tires-to-telecom group Pirelli yesterday said it had entered into exclusive talks with AT&T and America Movil to sell each co a 33.3% stake in the unlisted holding co Olimpia, which in turn owns 18% of Telecom Italia.
After months of drama in its boardroom and declining performance at its newspapers, Tribune (TRB) late yesterday appeared to be firming up a deal to sell itself to Sam Zell. Over the weekend, Tribune's special committee of the board reviewed competing offers from Mr. Zell and a joint bid from Eli Broad and Ron Burkle. Both offers propose taking the co private using an employee stock ownership plan.
AirTran (AAI) is expected to announce Monday that it is sweetening its takeover offer for Midwest Air (MEH) by about 13%, valuing the carrier at $389m. The higher cash-and-stock proposal, valued at $15 a share, is the latest attempt by AirTran to persuade Midwest to negotiate a deal that would unite two low-cost carriers.
In a major break with the music industry's longstanding antipiracy strategy, EMI Group is set to announce today that it plans to sell significant amounts of its catalog without anticopying software. The co is to make its announcement at a London news conference featuring Apple (AAPL) CEO Steve Jobs. EMI is to sell songs without the software, known as digital rights mgmt, through Apple's iTunes Store and possibly through other online outlets.
Sunday, April 01, 2007
Barron's Summary
Barron’s cover sroty discusses Alzheimer disease plays. Those at a bargain price include BMY, LLY, GSK, MRK, PFE, SGP and WYE. Smaller co’s mentioned with Phase 3 drug candidates include NRMX and MYGN.
Barron’s highlights negatively First Marblehead (FMD), saying that after a big run last year, the stock has begun tailing off. The worst may still be ahead, as the default rate on student loans backing some securities approaches a dangerous 9%.
Barron’s suggests that as newsprint-industry fundamentals improve, Bowater (BOW) could rally into the mid-30s from a current 23 a share, and Abitibi (ABY) could rise to 5 from 2.80. As a reminder, those two co’s announced merger on Jan 29. In a "merger of equals," Bowater shareholders will get 52% of the combined company, to be called AbitibiBowater, and Abitbi holders will receive 48%.
Walter Industries (WLT) is pushing to unlock value by selling its home-building and mortgage units. The company's assets could be worth as much as 38 a share, 52% above its current stock price.
According to “The Trader” section, Bruce Bartlett, of Lord, Abbett & Co., has been focusing on co’s that can deliver conspicuous profit growth driven by good old-fashioned sales increases, and not just nimble financial engineering and buybacks. Among tech co’s, Bartlett believes "gatekeepers," those with a product or service others need to expand, will enjoy keen demand and strong pricing power. One such example is Akamai (AKAM). Rev climbed 51% last year and is expected to rise more than 40% this year, with few competitors boasting its scope and quality of service. Analysts have roundly raised their ests to catch up to Akamai's, and Cowen & Co., for one, flags it as an "excellent large-cap play on the growth of multimedia Internet content."
MEMC Electronic Materials (WFR), which straddles a similarly choice spot in the semiconductor world. A current polysilicon shortage should at least support, if not drive up, prices of silicon wafers, and the relentless drive for increased memory capacity bodes well for wafer demand. The growing mkt for solar chips is another reason MEMC margins continue to strengthen.
Meanwhile, some consumer stocks also might better withstand any belt-tightening, since Americans holding off big-ticket splurges may still pay for smaller addictions. The video-game maker GameStop (GME) targets not just kids, of course, and a new generation of consoles has game geeks agog, and is fueling another boom. No question, all 3 stocks are trading near 52w highs, and none are cheap by conventional P/E measures. GameStop was among last week's top gainers, while MEMC was among the first quarter's. "But as we transition to a slower economy, and as profit growth starts to become scarce, stocks that can deliver above-avg growth should begin to command a greater premium," Bartlett says.
“The Trader” also highlights Omnivision (OVTI), whose shares are down 61% since last May. Profit margin has begun its slide, and while rev has held near $135m over the past 3 qrtrs, net income has tumbled from $22m to $11m. Analysts are calling for a 44% drop in EPS this year. Zealous bearish bets, about 40% of tradable shares are sold short, mean that short covering can send OmniVision shares momentarily higher. The co also has nearly $6 a share in cash. But RW Baird analyst Tristan Gerra expects the cash holding to "continue to erode as mgmt spends in an attempt to reverse course with, however, no expected effect on rapidly deteriorating fundamentals." Gerra has a price target of 8 on the stock, or 15x ‘08 earnings.
“Follow Up” section discusses favorably General Dynamics (GD), saying that the co’s CEO has given guidance of just $1.9bn in profits for '07, explaining that budgetary politics complicate rev stream forecasts. Those with a short-term orientation have every right to be nervous, but long-term investors should look beyond the Capitol Hill tug-of-war to see a solid co in an indispensable industry.
“Follow Up” also highlights Beazer (BZH), whose shares took nosedive last week. "Anyone holding the stock now is in a very speculative situation," says AG Edwards analyst Gregory E. Gieber. "Even without the probes, Beazer faces the same problem of declining sales and profits that everyone else in the industry currently faces," he adds.
Morgan Stanley strategist Henry McVey favors VLO, X, MCK and UIS. Expensive stocks include UST, DHR and PAYX.
“Technology Trader” section out positive on Broadcom (BRCM). The article is similar to March 28. Barron’s Online article. (See archives).
Barron’s highlights negatively First Marblehead (FMD), saying that after a big run last year, the stock has begun tailing off. The worst may still be ahead, as the default rate on student loans backing some securities approaches a dangerous 9%.
Barron’s suggests that as newsprint-industry fundamentals improve, Bowater (BOW) could rally into the mid-30s from a current 23 a share, and Abitibi (ABY) could rise to 5 from 2.80. As a reminder, those two co’s announced merger on Jan 29. In a "merger of equals," Bowater shareholders will get 52% of the combined company, to be called AbitibiBowater, and Abitbi holders will receive 48%.
Walter Industries (WLT) is pushing to unlock value by selling its home-building and mortgage units. The company's assets could be worth as much as 38 a share, 52% above its current stock price.
According to “The Trader” section, Bruce Bartlett, of Lord, Abbett & Co., has been focusing on co’s that can deliver conspicuous profit growth driven by good old-fashioned sales increases, and not just nimble financial engineering and buybacks. Among tech co’s, Bartlett believes "gatekeepers," those with a product or service others need to expand, will enjoy keen demand and strong pricing power. One such example is Akamai (AKAM). Rev climbed 51% last year and is expected to rise more than 40% this year, with few competitors boasting its scope and quality of service. Analysts have roundly raised their ests to catch up to Akamai's, and Cowen & Co., for one, flags it as an "excellent large-cap play on the growth of multimedia Internet content."
MEMC Electronic Materials (WFR), which straddles a similarly choice spot in the semiconductor world. A current polysilicon shortage should at least support, if not drive up, prices of silicon wafers, and the relentless drive for increased memory capacity bodes well for wafer demand. The growing mkt for solar chips is another reason MEMC margins continue to strengthen.
Meanwhile, some consumer stocks also might better withstand any belt-tightening, since Americans holding off big-ticket splurges may still pay for smaller addictions. The video-game maker GameStop (GME) targets not just kids, of course, and a new generation of consoles has game geeks agog, and is fueling another boom. No question, all 3 stocks are trading near 52w highs, and none are cheap by conventional P/E measures. GameStop was among last week's top gainers, while MEMC was among the first quarter's. "But as we transition to a slower economy, and as profit growth starts to become scarce, stocks that can deliver above-avg growth should begin to command a greater premium," Bartlett says.
“The Trader” also highlights Omnivision (OVTI), whose shares are down 61% since last May. Profit margin has begun its slide, and while rev has held near $135m over the past 3 qrtrs, net income has tumbled from $22m to $11m. Analysts are calling for a 44% drop in EPS this year. Zealous bearish bets, about 40% of tradable shares are sold short, mean that short covering can send OmniVision shares momentarily higher. The co also has nearly $6 a share in cash. But RW Baird analyst Tristan Gerra expects the cash holding to "continue to erode as mgmt spends in an attempt to reverse course with, however, no expected effect on rapidly deteriorating fundamentals." Gerra has a price target of 8 on the stock, or 15x ‘08 earnings.
“Follow Up” section discusses favorably General Dynamics (GD), saying that the co’s CEO has given guidance of just $1.9bn in profits for '07, explaining that budgetary politics complicate rev stream forecasts. Those with a short-term orientation have every right to be nervous, but long-term investors should look beyond the Capitol Hill tug-of-war to see a solid co in an indispensable industry.
“Follow Up” also highlights Beazer (BZH), whose shares took nosedive last week. "Anyone holding the stock now is in a very speculative situation," says AG Edwards analyst Gregory E. Gieber. "Even without the probes, Beazer faces the same problem of declining sales and profits that everyone else in the industry currently faces," he adds.
Morgan Stanley strategist Henry McVey favors VLO, X, MCK and UIS. Expensive stocks include UST, DHR and PAYX.
“Technology Trader” section out positive on Broadcom (BRCM). The article is similar to March 28. Barron’s Online article. (See archives).
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