Notable Calls
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Thursday, May 31, 2007
Six Flags (NYSE:SIX): Update
According to Jim Cramer (who’s also bullish on the stock) 1Q signaled a strong upcoming summer. For additional color check out Cramer's interview with Six Flags CEO Mark Shapiro.
So, by buying the stock now you expect big guys to jump in, in a verge of a BIG summer. That can happen any time soon.
How long should one hang on to the stock? Not long, I will likely sell the stock before the quarterly report (buy on rumor, sell on news). Also, don’t forget to look out from the window. If it’s raining for sixth consecutive day, get out.
From a technical perspective, the stock is in a mild uptrend, and close to the trendline. This should provide some support for the stock.
Position: Long SIX
Sandisk (NASDAQ:SNDK): Samsung continues to have problems with NAND
OpCp is also hearing that the 2nd batch of Apple iPhone orders are starting to come in and could provide provide some more stability to the demand/pricing picture. NAND flash spot prices continue to be stable, compared to last year this time when NAND spot/contract prices were down 5-10%. While near term retail demand picture in May might be soft, they see retail demand picking up in late June and into 2H07. Maintains Buy and $53 tgt on SNDK.
Notablecalls: This may create some buy interest in SNDK today. Would have called it actionable yesterday but following the almost $2 bounce, I'm somewhat more cautious.
RightNow (NASDAQ:RNOW): Added to Sell List at Goldman
RightNow trades at a substantial premium to the rest of the software sector. The stock is trading at 82X 2007E EV/adjusted FCF multiple compared to the software group median of 19X. 2008E multiples are 57X for RightNow and 17X for the software median.
Notablecalls: More often than not, changes in sales force indicate problems to come. GSCO's on right tracks here. Expect to see some selling pressure.
Motorola (NYSE:MOT): Color on cost cuts
- Jefferies notes that while MOT appears to be cheap, they believe it could take a year tosubstantially improve the company's handset portfolio. Other concerns include: 1) continued market share losses, 2) decline in iDEN business, and 3) 2H07 weakness in cable business.
The estimated cost savings of $600 million annually is about $100-150 million higher than what the firm hadanticipated, thanks to continued discretionary-cost controls, G&A expense tightening and site rationalization. These cost controls will affect all business segments. Jeffco's above-consensus estimates already bake in additional cost reductions. As such, they make no changes to their EPS estimates. Firm estimates $0.40/share for 2007 and $1.00/share for 2008, which compares to consensus estimates of $0.35 and $0.86, respectively. Maintains Hold and $19 tgt.
- Raymond James estimates the $600 million in annualized cost savings could represent incremental earnings of approximately $0.16 per share. While their 2008 EPS estimate of $1.07 is among the most optimistic on the Street, their aggressive estimates look increasingly realizable. In light of yesterday's announcement, the firm believes that management's actions may even provide additional upside earnings potential. RayJay expects to provide updated earnings estimates following the announcement of June quarter results.
Firm notes they are encouraged by the progress in Motorola's cost-reduction initiatives. Following an initial slow start, they credit much of the recent momentum to new Chief Financial Officer Tom Meredith. They continue to believe that the March quarter represented the low-water mark for Motorola, and expect the business to progressively improve through 2007. Reits Strong Buy on MOT.
Notablecalls: Well, MOT just cut 11% of its opex (based on 2006 number). Most Street estimates are starting to look very conservative here. I must agree with the analyst community here - it's going to take at least a year to come up with new and exciting handset models. Lucky for us, the market is forward looking in nature.
Btw, did you see the utter cock up called Foleo from Palm (NASDAQ:PALM)? Jesus, I mean...what the heck?!
Paperstand (KO, DELL, LNG)
According to the “Ahead of the Tape” column, Dell’s (DELL) earnings report today is unlikely to alter Street's view that the former PC champ is getting clobbered by its rival, H-P (HPQ). World-wide PC shipments by Dell fell 7.8% in the 1Q, and its share of the global mkt dropped to 13.9% from 16.4%. H-P's PC shipments, meanwhile, surged 29% in the qrtr and its mkt share rose to 17.6% from 14.9%. Dell's F1Q earnings, the first full qrtr after Chmn Michael Dell reassumed the CEO spot in Jan, should reflect that drop. Analysts expect the co to post earnings excluding 1x items of 26c a share, a 21% decline. Profit margins could be a rare bright spot. The price of computer chips has plunged this year. In April, cheap chips used in iPods helped Apple post strong quarterly margins. A similar decline may also help Dell. But Dell is grappling with many more issues, including an SEC investigation into its accounting practices. In June, the co will start selling PCs at Wal-Mart (WMT), a shift from its low-cost direct-sales model that could sap margins. With so many clouds hanging over Dell, any sunshine could light up its shares. But its storm is far from over.
Barron’s Online suggests that tech investors might consider options contracts as a way to make money off the sluggish stock performance of communications-equipment (CE) vendors this summer. This group within the S&P's 500 is one out-of-favor area that could pick up with such a surge in prices between now and the end of Sep. Shares of Ciena (CIEN), Alcatel-Lucent (ALU) and other components of the S&P CE group have lagged the mkt, on avg, this year, rising only 6.3% compared to 7% for the S&P 500. But the trick is, it may not pay to be long-term holders of the stocks if a correction follows the meltup. These shares could easily show up for less money after the summer. For that reason, selling options could be a way to make some money off the short sellers' "capitulation" without having to take a long-term bet on co’s through outright stock purchases. 3 different strategies present themselves. Investors who already own CE stocks can make money by selling "covered" calls this summer. Investors who don't own shares can sell put options, making a little money while waiting for the possibility of the mkt meltup. Lastly, investors willing to forego income in return for less risk may sell shares of Nokia (NOK) or other stocks they already own while buying calls, which give the investor an opportunity to get back into the stock later on if shares do, indeed, experience a "meltup."
“Inside Scoop” section reports that an offshore mutual-fund manager is snapping up soaring shares of Cheniere Energy (LNG) well ahead of the opening of its first liquefied-natural-gas (LNG) facility along the Gulf Coast. Orbis Investment Mgmt crossed the 10% ownership threshold on May 10 and then purchased another 112K shares on the open mkt for $4.05m. Ben Silverman, of InsiderScore.com, says Orbis "came in strong here both in terms of what they bought in the last 5 months and with the stock rising."
Wednesday, May 30, 2007
Biogen-Idec (NASDAQ:BIIB): Buyback indicates no takeover
Under the terms of the modified "Dutch Auction", holders can tender shares for a price between $47 and $53; BIIB will determine the lowest price within that range that allows the firm to purchase up to 57M shares, or 16% of current outstanding stock.
However, much market speculation has circulated as to BIIB's take-out potential in recent days. Firm thinks this transaction may serve to detract from such a scenario. It appears to be fashionable now for large-cap biotechs to institute aggressive share repurchase programs (as they are largely viewed as indicative of management's confidence in the underlying business).
However, they think this circumstance may see a more muted investor response (given the background of significant take-out speculation preceding thisannouncement). Maintains Neutral and $56 tgt.
Notablecalls: Looking at the call volume in BIIB over the past week or so, it really makes me think something is going on. Yet, the huge buyback indicates just the opposite. Who do you believe? The call buyers or the management? My bet's on the management. Taking a quick short above the $50 level (prefer $50.50) may yield some profit today. Think about all the buyers that would just love to cash in. Would play it small, though. Tight leash, too.
Apple (NASDAQ:AAPL): Morgan Stanley out positive
MSCO believes Apple's operating margin will continue to improve from two factors:
1) Apple's operating expenses grow at 1/2 the rate of revenues. If this relationship holds going forward, every $1bn of incremental CY08 revenue drives 30 bps operating margin; and
2) Product sold through Apple's retail stores earns as much as 14 points incremental profit. All else equal, a 5 point increase in the mix of revenues through Apple stores adds 50 bps operating margin.
Firm's CY08 operating margin increases to 19.8% (from 16.7%) and CY08 EPS shifts to $5 (from $4.29). They continue to believe earnings and stock revisions are heavily weighted to the upside and think that even $7 in EPS may be doable in CY08. New tgt stands at $150. Maintains Overweight.
Notablecalls: New 52 wk high coming for AAPL today. Expect to see at least couple of points of immediate upside. Actionable call!
Cymer (NASDAQ:CYMI): Intel capex cuts pressure estimates
They expect CYMI's June quarter revenue to decline qt-qt and fall short of management guidance of flat qt-qt. They are also pulling down their revenue estimates for the back half of 2007. For the entire year the firm now forecasts revenues at $505 million versus prior estimate of $527 million.
The company is aggressively repurchasing stock so a lower share count will partially offset the EPS impact from a cut in revenues. Maintains Neutral but lowers tgt to $39 from $41.
Notablecalls: Capex cuts at Intel should not come as a surprise to market participants as these were hinted by company management already a month ago at Intel's Analyst meeting. The comments regarding falling short of guidance sound somewhat more omnious and may indeed pressure the stock over the next week or so. Yet, with the stock trading 15x BAC's lowered EPS number, the valuation is quite low. Based on that, I think the downside will be muted.
In case of the unlikely event of the stock getting hit today following BAC's call, I'd be looking for a bounce.
Paperstand (ICE, MSFT, CG, ITY, HPQ)
According to the WSJ, at a technology conference, Microsoft (MSFT) today will unveil the fruits of 6 years of research pushed by Chmn Bill Gates, a computer designed like a table with a touch-screen. The system, called Surface and aimed initially for use in hotels and casinos, includes features that allow users to buy tickets to events, wirelessly retrieve and display photos and play games. It goes on sale later this year. And Palm (PALM) co-founder Jeff Hawkins, plans to disclose what Palm calls a "new category" of mobile device. Though few details are known, one industry exec expects the gadget to be somewhat larger than Palm's existing products and to include wireless networking.
Barron’s Online discusses tobacco co’s, which have received private-equity offers recently. The signs indicate more deals are coming, benefiting investors in the right stocks. "When the music stops, there may be 5 or fewer major global players," says Charles Norton, of Vice Fund. Looking for new mkts to offset smoking restrictions and falling cigarette consumption in the US and elsewhere, cigarette makers are grabbing smaller rivals, taking advantage of a cheap credit mkt. Yet instead of chasing takeout rumors, the smart bet for investors is to focus on co’s with rising profits, cash flows and dividends, such as Carolina Group (CG), the tracking stock for cigarette maker Lorillard, a subsidiary of Loews, and Imperial Tobacco (ITY). The free cash and dividends that makes these co’s worthy takeover tgts also makes them attractive to common stock investors. "It's never a good idea to buy a stock just b/c you think it's a take-out," says Nik Modi, of UBS. "If you find a potential takeout tgt that first and foremost has good fundamentals and is undervalued, then it's potentially lucrative."
“Inside Scoop” section reports that H-P (HPQ) execs cheered to new highs of the co’s stock by enthusiastic selling, totalling $21.5m. 6 co execs sold stock from May 22 to May 25, including Chmn, CEO and President Mark Hurd and Executive VP and CFO Catherine Lesjak. The execs sold both existing stock and stock from options exercises.
Sharesleuth.com has new piece on Utek (UTK), read here.
Tuesday, May 29, 2007
Advanced Medical Optics (NYSE:EYE): Color on MoisturePlus recall
- Piper Jaffray estimates an annual run-rate of Complete MoisturePlus sales of $60 million worldwide, which they are pulling out of their model. This reduces 2007 revenue estimate by $35 million and 2008 by $60 million. Firm is reducing 2007 EPS by $0.12 and 2008 by $0.20 to $1.22 and $2.06, respectively. They are lowering EYE's price target from $41 to $37, based on the same 18x CY08 EPS estimate, which is now $2.06.
The collateral damage to AMO should be much more limited than in the case of Bausch's recall. AMO generates about 80% of its revenue from surgical products which are sold to ophthalmologists as opposed to the optometrists and consumers that purchase eye care products such as solutions, contact lenses, and pharmaceuticals over the counter. Nevertheless, AMO will have to devote substantially more resources to the division to the detriment of profit margins. Indirectly, the recall throws a wrench into the company's ability to make a bid for Bausch & Lomb by increasing AMO's financing costs.
- Citigroup notes that although the company has provided little detail on MoisturePlus sales, they estimate global sales were likely to have been on the order of $80m in 2007. With little cost flexibility, removing these sales trims Citi's 2007 forecast by $0.43 to $1.01 (which excludes any one-time costs associated with the recall). In 2008, they estimate a drop in sales of $66m resulting in a $0.37 EPS drop to $1.78 as they expect any share loss to persist in light of the difficulty Bausch & Lomb has had in regaining share after its recall of Renu with MoistureLoc. Maintains Sell and lowers tgt to $32 from $33.
Notablecalls: BOL took a 20% haircut after it announced the recall of Renu. I don't think the damage in EYE will be as bad because as Piper notes, most of EYE's revenue comes from surgical products. The financial impact of recalling MoisturePlus stands around $0.20-$0.40, suggesting 3-6 pts of downside. The stock traded around $37 in after hours action on Friday. Think I'd be bidding EYE opportunistically around the $34-$35 level but would be ready to pay more if it starts to look like the downside is going to be less than that. I think the bidding war surrounding BOL has put the entire sector in play and that may help the stock to bounce.
Also, I would not be surprised to see a downgrade or two.
Paperstand
The WSJ reports that the consortium of banks led by Royal Bank of Scotland said Tue it will go forward with a €71.1bn ($95.61bn) takeover bid for ABN Amro (ABN), topping a bid from Barclays and continuing a struggle with Bank of America for control of the Dutch bank's US arm. The consortium, which includes the Dutch bank Fortis and Spain's Santander Central Hispano, said the offer is 79% in cash and through the issue of new shares in RBS. The cash component was originally 70% in a proposed offer outlined last month. The trio of banks said the €38.40 is a 13.7% premium to the value of Barclays PLC's rival offer.
According to the WSJ, Tishman Speyer Properties and Lehman Brothers yesterday were near a deal to purchase Archstone-Smith trust (ASN) for more than $12bn. A deal could be announced as early as today. Exact terms of the transaction couldn't be learned, but Archstone-Smith's mkt cap is $12.3bn and an agreement would likely involve a premium. The buyers also would assume $6.3bn in debt. That would make the deal one of the largest privatizations of a public REIT.
The WSJ reports that the FTC will conduct the govt antitrust review of Google’s (GOOG) proposed $3.1bn purchase of DoubleClick. The FTC Fri made a so-called "second request" of Google, for additional information to assess any possible overlapping lines of business. The issuance of a 2nd request is a signal that the FTC is taking a hard look at the deal, as was expected.
The WSJ reports that Avaya (AV) is in talks with private-equity and strategic bidders about selling part or all of the co, the latest sign that there could be a new round of M&A in the telecom-equipment industry. Among parties that could be interested in all or parts of Avaya are private-equity firms, which are attracted to Avaya's cash flow and low debt, as well as network-equipment makers like Norton (NT). Avaya is in talks with private-equity firm Silver Lake Partners about a LBO plan.
According to the WSJ, private-equity firms are in serious discussions about a buyout of CDW (CDWC). Chicago's Madison Dearborn Partners was considered in the lead to purchase the co. But one person familiar with the discussions noted that they are at an especially sensitive stage and could fall apart. Madison Dearborn also might receive some late competition from other buyout firms.
The WSJ reports that URS (URS) agreed to buy rival engineering co Washington Group Intl. (WGII) for about $2.6bn in cash and stock, in a deal that highlights a construction boom driven by energy-efficiency and govt projects. The deal, valued at $80 for each Washington Group share, represents a 14% premium.
Monday, May 28, 2007
Thank you all for feedback!
Must say I'm overwhelmed by feedback. Not only did many of you post comments on the site, but also sent me numerous emails with wonderful comments. Here are some examples:
It's your site - do what you please. Your content is so good that very few will be turned off by an ad banner or adsense crap.
John W.
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Hi there I couldn't comment because I'm not a member. I'm the stonedinvestor I check your site once in a great while but I was turned off for JUST the reason you are highlighting too many no care posts. I even did a parody called NotableBongs for a short while! I think by cutting back you are making a great move, but be careful too much inaction makes a Blog look really dead. As for ads to each his own I wouldn't do it-- it will feel cleaner and I
think you can still be swallowed by a larger player at some later time.
Yours- Ben
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Dear NC,
I have been late in discovering your work, to my detriment.... ads on the site are fine, and why not? They are so omnipresent they become part of the background anyway.(at least as long as they don't blink).....
I have become devoted to your work in a short time, so beware of walking catfish and feral rabbits and such....and many thanks for AQNT !Hope your pause refreshes, gwc
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It surely looks like most of you enjoy the blog in its current state. Also, most readers don't seem to mind ads as long as they remain tasteful. And that they will.
See you all tomorrow morning.
NC
Barron's Summary (JSDA, OXPS, XFML, BRLC)
Barron’s highlights Affordable Residential Communities (ARC), saying that one analyst thinks the company is worth $15 a share, more than 50% above the amount that Farallon Capital Management is offering.
Lawson Software (LWSN) shares have already recovered some lost ground, but at least one analyst thinks they have the potential to rise more than 50% beyond their recent levels.
If Jones Soda (JSDA) were to trade for 20x earnings, just above the industry norm, its shares would be valued at 7, not today's 21.50. Jones' founder and CEO, Peter van Stolk, tells Barron's he's not interested in selling the co. But van Stolk and other insiders have taken advantage of the stock's run-up to sell shares in recent mo’s. So, too, has Thomas Barry of the Bjuman Barry Small Cap Growth Fund, which unloaded its entire 1-million-share stake earlier this year. "I'd be nervous buying the stock at these P/E levels with the earnings and rev they've had," says Barry.
“The Trader” column discusses steakhouses, saying that several things must happen before steakhouses rebound. Rising beef costs must moderate, and you'd catch the first whiff of that in cattle futures. Consumer spending should improve as the housing mkt stabilizes and as gas prices drop, but these will likely be signaled by an upturn in retailers' forecast. Shares of Rare Hospitality (RARE) are off 13% this year. Morton’s Restaurants (MRT) have slipped 19% since late-Feb while Ruth’s Chris Steak House (RUTH) has declined 16%. But what smells like a buying opportunity may remain a deceptive scent for some time yet. Until then, steakhouses can hike prices (and risk losing customers), or swallow the higher costs (and risk losing profits). Stockholders can hope for buyout offers.
“The Trader“ highlights OptionsXpress (OXPS), whose shares have skidded more than 20% since Nov. Lately, however, the murmur on OptionsXpress has grown dark and ominous. Success has invited competition from both upstarts and larger firms muscling in on its turf, making it tougher to snag new customers. The cost of attracting each new account had more than doubled over the past year. And as the US contemplates trading options in penny increments, exchanges and mkt makers squeezed by narrower spreads are threatening to cut back on payments to brokerages for steering customer orders their way. These payments make up 15% of co's rev. Sensing the end of the line, growth investors have disembarked, and OptionsXpress might have continued its slide if not for a whiff of takeover speculation last week.
“The Trader” also recommends a option strategy for investors. "Collars" allow conservative investors to participate in rallies up to a certain tgt but limit downside risk should the mkt slide. You accomplish this by selling OTM calls and using the proceeds to buy protective puts. Given the mkt's upward bias, call prices have become rich. And collars "are most attractive when potential gains under the collar substantially exceed potential losses," says Thomas Schwab of Summit Portfolio Advisors. Take Apple (AAPL), for example. With shares near 112.50, selling a 130-strike call that expires Jan’09 can generate enough to buy a 110 put of similar duration. That allows investors to participate in a rally up to 130 but protects against declines below 110. Schwab screened for other stocks with lopsided call-to-put prices. Those include AMGN, NEM, BEN, COP, LTD and SPY.
Barron’s discusses Xinhua Finance (XFML), saying that last year, the co put some businesses into its media subsidiary. First, however, it passed some of them through just-created entities that were owned by insiders and by Chinese corporations. Whatever other purpose this arrangement served, it had the effect of enriching insiders and "stepping up" the value of those assets when they finally reached Xinhua Finance Media's balance sheet. By passing a television business through a entity called Upper Step, the prospectus shows, Xinhua gave $19m to ex-CFO Shelly Singhal and a long-time business partner of Bush's named Dennis L. Pelino. The co says that Singhal became the "full-time" CFO of Xinhua Finance last Sep. But SEC filings show him continuing his SBI investment banking business for several small co’s right up through his resignation this month. The prospectus also mentions a deal under which Xinhua referred Chinese credit unions to Singhal's investment consulting firm Brightline Capital, in exchange for $2.8 million in commissions. While Singhal's major role in Xinhua Finance might trouble investors even after his departure, the company is still run by officers and directors with unsettling histories. Just last week, Xinhua Finance tapped as its financial chief David C. Wang, a fellow who's followed Singhal throughout his career. Three "independent" directors overseeing good governance at Xinhua Finance, or its US-listed sub, all came from Stonepath - a co now facing involuntary bankruptcy after 3 successive financial restatements. Suffice it to say that this Chinese firm is still surrounded by red flags, and in this case, they probably don't connote good luck.
“Technology Trader” takes on Syntax-Brillin (BRLC) that struggled to bring off a $125m follow-on offering of stock last Wed. The co has had negative cash flow from operations totaling $90m in the past 6 qrtrs, so it desperately needed last week's cash. CEO Vincent F. Sollitto Jr. says the co's cash needs reflect its fast growth, with sales up 350% in the MarQ. At $6.30 a share, the mkt values the co at half a billion bucks. What's wrong with this picture? Investors have wondered whether the TV maker shows gross profits only b/c its cost of goods sold has been reduced with rebates from Taiwan Kolin, the contract manufacturer for most of the co's TVs. Many institutions pitched for last week's offering were spooked by a recent report from the accounting analysts at the Center for Financial Research and Analysis, which said that without Kolin's $165m of credits since Dec’05, Syntax-Brillian would've had a negative gross profit of almost $64m. And that's before operating expenses. Why is Kolin so generously helping Syntax-Brillian plump its results? Kolin and its affiliates are Syntax-Brillian's largest shareholders, with an 11% stake before last week's deal. Kolin sold $5m worth of that stock in the offering, and it's registered to be able to sell half of its remaining stake after a 90-day lockup. It may make better profits on the stock than on the TVs.
“Technology Trader” also negative on Open Text (OTEX). Near 23 last week, investors are valuing the co at $1.4bn. That's 45x the annualized quarterly earnings of the co's best historical quarter. License sales have gotten worse, not better. Since acquiring Hummingbird last Oct, Open Text hasn't disclosed sales for Hummingbird products. But on conference calls, the co says Hummingbird sales are down 20% since the acquisition. Applying that guidance, calculations show that licenses for Open Text's other products have fallen, too. But Open Text's continuing business challenges, and its perpetually squirrelly accounting, leave wondering about that bubbly valuation.
“Plugged In” section reprots that Sybase (SY) could be waiting in the wings to snare Openwave (OPWV). That's the word on the street as Openwave shareholders anxiously await a buyout for the mismanaged mobile-communications-software concern. Sybase emerged as a leading suitor for the outfit last week. The news surfaced after Openwave's largest independent shareholder, Harbinger Capital Partners, offered to take a majority stake in Openwave, through an unsolicited cash bid of $8.30, with a potential dividend sweetener. Sybase isn't the only interested party. Oracle (ORCL) is also said to have performed due diligence, but hasn't made a formal offer. Other potential buyers that may have been kicking the tires include IBM (IBM), H-P (HPQ) and Siemens (SI).
Tuesday, May 22, 2007
Gone fishing..
While away, I'll be keeping my eye on the market just in case some unusually good opportunities happen to present themselves. If they do, I'll be sure to highlight them.
Monster Worldwide (NASDAQ:MNST): Former CEO and founder selling stock
While Mr. McKelvey is no longer an employee or director of Monster, and therefore is presumably not privy to internal company discussions, his decision to reduce his ownership stake would seem to suggest that he believes a sale of the company at a premium valuation is not imminent. Although his ownership stake is not sufficient to block a transaction, with over 30% of the voting power, his backing would be helpful if a change of control were in the works.
Notablecalls: MNST stock has soared since April 12 when CEO Bill Pastore was unexpectedly replaced by Sal Ianuzzi. Ianuzzi sold Symbol Tech to Motorola not long ago and people have been assuming he was brought to MNST to sell the co. The departure of former CEO and founder Mr. McKelvey in Oct 2006 pretty much marked the low point for the stock.
I'm not a big fan of MNST here considering the slowing job market and high valuation. On the other hand, I'm not entirely sure McKelvey's stock sales will be enough to stop this train just yet. But it surely represents the first step.
DRAM sector bleeding to death
Citi's analysis suggests that DRAM sector cash-on-hand (ex. Samsung) is only enough for 2.56 quarters or less of operation and original capex. That said, to preserve cash for further capex and avoid any financial crunch risk, they believe DRAM makers will soon be forced to halt their original expansion programs despite anticipated debt fundraising.
Samsung is the safest DRAM maker, able to survive 12 quarters of cash burn, followed by Micron at 3.6 quarters. Meanwhile, Promos can only endure cash burn for 1.3 quarters.
Contrary to the Street's belief, Hynix is less able to sustain this cash burn than Powerchip (2.3 quarters) and Nanya (2.1 quarters). This shows that even Hynix will probably be forced to trim its wafer-in capacity capex and to halt 200mm production.
Firm notes that in 2001, tier-1 players could support four months of cash burn and capex fell 27.3% YoY in 2001 and 37.3% YoY in 2002.
Notablecalls: It's sure starting to look like the SMH is running on fumes.
Paperstand (SVU, MDU)
Barron’s Online “Inside Scoop” section reports that a director at MDU Resources (MDU) has been on a selling binge of late, taking advantage of MDU's stock as it trades near an all-time high. Thomas Everist, an MDU board member since ‘95, has sold a total of 742K shares for a total of $22.6m since May 2.
Monday, May 21, 2007
Quick note on XFML
One person rarely makes a co, but these things tend to make investors cautious. I personally still think XFML may be a legit operation. They made Mr. Singhal resign and have appointed a internal committee to review the corporate governance issues. That's definitely good.
Anyway, despite all the negativity it looks like the stock managed to put together a nice bounce after the open. Hope some of you particpated in the move. Would consider taking at least partial profits a prudent move here.
NC
Raymond James: Current valuations in the PV space are highly attractive
Much of last Friday's sell-off in the solar space can be attributed to the Chinese central bank's decision to raise interest rates and reserve requirements, in yet another attempt by Beijing to cool down China's surging economy and lofty stock market valuations.
RayJay continues to be very bullish on PV. These short-term stock gyrations aside, they believe that the global PV market is fundamentally in excellent shape and see this pullback as an opportunity to buy on the dip.
Firm believes PV manufacturers naturally stand to benefit, including Outperform-rated
JA Solar Holdings (JASO; currently at only 16.1x their 2008 EPS estimate);
SunPower Corp. (SPWR; at 27.8x 2008E EPS);
Suntech Power Holdings (STP; at 21.4x 2008E EPS);
RayJay views the current valuations as highly attractive within the context of a market growing at 20%+ per year.
Notablecalls: I'm no expert on the PV space but I do consider Raymond James one of the best firms out there. I suspect these comments will create some real buy interest in the mentioned stocks today. My favourite of the three is JASO. Going to call this one actionable.
Xinhua Finance Media (NASDAQ:XFML): Much ado about nothing?
Over the weekend, the company announced that Mr. Shelly Singhal resigned from its board, after being moved from the CFO to Exec Dir, Corp. Dev., on May 15. Additionally, Barron's reported that two senior staffers at Glass Lewis, a subsidiary of XFML's parent company, had resigned.
The trading pattern of the stock last week suggests that concerns over these two matter were already in the marketplace, even though the news was reported over the weekend.
While these type of events call into question the character of the current and prior mgmt at XFML, CIBC believes these issues have no impact on current fundamentals, and that weakness provides a good buying opportunity ahead of seasonally strong 2Q results. Maintains $14 tgt and Sector Outperformer rating.
Notablecalls: First, let me tell you that XFML isn't a company I know too well. Yet, chewing through some of the initiation notes it certainly looks interesting. The chinese ad industry is in a secular growth phase and it looks like XFML is in a good position to benefit from it. I especially like the co's exposure to the financial media side as numbers coming from China show the chinese people are opening brokerage accounts at a healthy clip.
The news coming over the weekend look bad at first glance but I'm not so sure the impact is as bad as suggested by the decline in XFML's stock price. Also, it looks like a rather large short line was put out over the last week. Trading around 16x 08 EPS, the stock's not exactly expensive.
I would put XFML on my bounce play radar today.
Paperstand (AT, ED, GOOG, CRM, HVT, CONN, MSFT, AAPL)
According to the WSJ, Consolidated Edison (ED) provider of electricity to 9m ppl in NYC and Westchester County, is pursuing a sweeping plan to upgrade its aging electric system, including installation of state-of-the-art superconducting electrical cable in midtown Manhattan. The $39m installation, set to be unveiled today, will be largely funded by the Dept of Homeland Security. Agency officials say they are making the investment b/c the hardiness of electrical infrastructure in financial hubs like Manhattan is vital to the nation's economy. Superconducting cable, sold by several co’s, carries far more power than conventional cable but is expensive and poses certain technical challenges. The Con Edison project will use cable able to deflect power surges that was developed by American Superconductor (AMSC). American Superconductor hopes the marquee project will spur use of the cable by more utilities, which are notoriously cautious about new technology. "We hope this breaks the logjam," said CEO Grey Yurek.
The WSJ reports that Google (GOOG) and Salesforce (CRM) are discussing an alliance that could help them compete more effectively with Microsoft (MSFT). The co’s are still hashing out details of a potential partnership, expected to be announced in the next few weeks. But one outcome could be a Web-based offering that integrates some of Google's online services such as email and IM with those of Salesforce, whose "customer-relationship mgmt" tools help salespeople track their accounts.
“Heard on the Street” reports that national retailers of big-ticket items such as houses, boats and motorcycles aren't the only co’s facing the prospect of more late payments and losses on their consumer loans these days. So, too, are smaller regional retailers. But unlike mortgage lenders, which have been forced to tighten their underwriting standards amid the subprime meltdown, these smaller players are trying to encourage customers to keep buying by offering more zero-interest loans and extended payment plans. "At the end of the day, you do what it takes to get business," says Dennis Fink, CFO of Haverty Furniture (HVT). In the 1Q, 55% of loans that Haverty made to customers were no-interest for longer than 12mo’s, compared with 40% a year earlier. Another co mentioned is Conn’s (CONN).
“Ahead of the Tape” out saying that Microsoft (MSFT) Vista may not meet optimistic views. The tech co that really seems to be enjoying MSFT’s new OS is Apple (AAPL). The co has used Microsoft's Vista as an opportunity to make hay over the self-proclaimed superiority of the OS in its own Macs. Microsoft doesn't agree with that message, noting it has shipped 40m copies of Vista for consumers. Still, Apple has the hotter hand. Mac sales were up 35% in the 1Q. PC sales were up by 9%, a bit better than the prior 2 qrtrs, but below the avg rate of the past 3 years. "Somebody in Cupertino ought to send flowers to Redmond and a nice 'Thank You' note," hedge-fund manager Jeff Matthews noted.
Sunday, May 20, 2007
Barron's Summary
Barron’s out saying that without the burden of Chrysler, Daimler (DCX) stock could continue the rise that began last year. The shares, now around 86, could hit 100 or more in a year. Some savvy investors figure that the new Daimler is still a bargain. "Doing a sum-of-the-parts valuation, Mercedes is in Daimler for free," argues Adam Jonas, of Morgan Stanley, who values that car unit alone at between $30-40 a share.
Fund manager likes COP, AMGN and PFE.
Genworth's (GNW) shares, laggards over the past year, could climb more than 24% over the next 18 to 24 months as the company allocates more capital to higher-return businesses.
USG's (USG) earnings could rebound to $5 or $6 share in coming years. If the company trades again for 15 times earnings - its historic norm - the stock could climb to 90, from today's 40.
Bulls on Clorox (CLX) argue that the stock, now in the high 60s, could go as high as 85 in a year if the company improves its product lineup and starts selling more abroad.
According to the “The Trader” column Rob Haines, of CreditSights, is among those who expects more mergers in life-insurance sector, as co’s look to put money to work. Potential acquirers include American Intl. Group (AIG), which ended last quarter with $15-20bn in excess capital; Prudential (PRU), which has a good merger track record and more than $6bn in untapped debt capacity; and MetLife (MET), which until recently had been busy integrating its Travelers acquisition. Screening for likely targets among co’s with more than $10bn in assets, essentially those with attractive heft but which may lack the scale to compete in the long run, Haines came up with names including Conesco (CNO), Phoenix (PNX), Protective Life (PL) and Unum (UNM). These stocks trade at 0.7-1.5x BV and "could be fairly easy to digest by any one of the larger industry leaders," he notes.
“The Trader” section also highlights Chiquita Brands (CQB), which has found a way to improve one of nature's perfect foods. Working with Landec (LNDC), Chiquita is introducing "intelligent packaging" to extend the shelf life of ripe bananas by up to 12 days. This allows bananas to be sold more widely at convenience stores, fast-food restaurants and Starbucks. It is also rolling out new products like "Chiquita Fruit in a Bottle," which has snagged a 5% share in its first mkt, Belgium. The push to transform the co "from a commodity produce supplier to a more value-added, healthy consumer products co" bodes well for profit growth, says Oppenheimer analyst Barry Sine, who expects per-share earnings to double to $1.50 next year from 75c in ‘07. Given the steps that Chiquita is taking to reduce profit volatility, Oppenheimer's Sine reckons that the co's shares are worth 22. Separately, Landec shares have climbed steadily to about 13.25, up 512% since ‘03, as the co worked off its debt, improved profits and boosted its cash stash to more than $2.25 a share.
“Follow Up” section out saying that Micron (MU) looks cheap. With a tangible book value of about $8.60 a share (including the coming debt), the stock's downside risk is diminishing. It could be 6-9 mo’s before Micron sees profits again, but with spot prices of 512Mb DRAM chips, now around $1.75, approaching the marginal cost of production, price declines will slow. Such low prices, not only for DRAMs but the flash-memory chips that Micron also makes, could lift demand anew, and with it, Micron's shares.
“Sizing Up Small Caps” section discusses regional banks, which are flat in ’07. "The catalyst is not there, at least not yet," to reverse the banks' slide, says David Ellison, of FBR Small Cap Financial Fund. "But you don't know when the catalyst is going to show up," he says, so it's best to purchase reasonably-priced shares in anticipation of the improvement, even if that's a ways off. "As long as you are buying good deposit franchises, you're not going to wake up one day and find out they can't fund themselves," Ellison says. Two banking operations that fit Ellison's description are Cullen/Frost Bankers (CFR) and Seacoast Banking (SBCF). In both cases, the shares have dipped after prolonged gains that some investors believe will resume once the economy picks up and the extent of recent real-estate problems is better defined. Investors in these shares should also benefit from both institutions' attractiveness to bigger players interested in expanding their franchises.
“Technology Trader” section highlights Xinhua Finance Media (XFML), which has collected some influential US assets this year, including Glass Lewis that's staffed with veterans of the SEC and the WSJ...or at least it was until last week. That's when 2 of the most prestigious staffers at Glass Lewis resigned after apparently concluding that their new parent co, Xinhua Finance, would have flunked a Glass Lewis review of its corporate transparency. It turns out that Xinhua Finance's IPO prospectus failed to mention some awkward facts about the co's then-CFO, Shelly Singhal. Singhal was simultaneously the co's CFO and an investment banker and stock broker who runs the Bedrock Securities. And since Apr’06, Singhal's firm has been under a cease- and-desist order from the NASD, as the regulators seek to suspend Bedrock for violating several SEC rules.
“Plugged In” column out saying that it looks like Nokia (NOK) wants to cool off its serious relationship with Texas Instruments (TXN) and start dating other chip suppliers. This isn't a new phenomenon. First, Motorola (MOT) weaned itself from Freescale (FSL), by launching a relationship with Qualcomm (QCOM). Then, in Feb, Nokia announced that Infineon (IFX) would provide a single-chip platform for its entry-level handsets in emerging mkts. TI has been a near-exclusive supplier of power mgmt and baseband chips to Nokia. But it appears that the Infineon deal was only the first blow. Now there's speculation that Nokia is turning to the likes of Freescale and Broadcom (BRCM) to serve as alternative chip suppliers for higher-end handsets. The speculation is that Broadcom will win 2.5G phone business and perhaps some 3G business. "In ‘07, our goal is to win designs. In ‘08, you should start seeing products come out, and ‘09 has to be all about gain in mkt share," CEO of Broadcom, Scott McGregor, told analysts and investors. "You'll see some other products come out later in the year, [but] I can't say too much about them," he said.
Friday, May 18, 2007
AS&E (NYSE:ASEI): Results likely below consensus
Assuming decent sequential growth in non-ZBV revenue, firm's analysis suggests the company would need to ship all of its ZBVbacklog in order to possibly reach the consensus March revenueestimate of $47 million. Given we are now in the second half of the June quarter and the company has not announced any ZBV orders, they believe this scenario of shipping all ZBVs in the March quartermay set-up the company for a fairly weak June performance. A shiftaway from higher margin ZBV revenue would likely result in compressed margins and declining earnings.
At 22x firm's C08 EPS estimate they believe there may be some downside should the company miss consensus estimates and theoutlook for growth remains negative. If investor nervousness increases, they would look at 3x $12 cash per share as a good cushion. ASEI likely bottoms in the next few months as the story moves past declining high margin DoD orders for ZBVs. In the second half of 2007 the stability of the business should firm up due to multiple recent longer-term contract awards, enabling healthy sequential growth from June quarter results.
Maintains Underperform and lowers tgt to $40 from $48.
Notablecalls: Looks like some downside in store for ASEI today. But also note that there is fair chance of a nice bounce play after the co reports on Monday as expectations will be quite low.
Under Armour (NYSE:UA): Lots of growth ahead?
BAC also expects UA's gross margins (after dropping in 1H07) to rise in 2H07 and up-tick further in 2008.
Notablecalls: Interesting comments buy BAC's Rober Ohmes. Note that international accounted for just 4% of revenues in 1Q07. Plenty of growth ahead for UA. The main problem here is the valuation. Trading 35-40x FY08, the stock's expensive meaning there is very little room for error. I think UA's one of the stocks you buy when they stumble.
In the very s-t, I think BAC's comments may generate some buy interest. But do note that the stock has bounced considerably over the past couple of days and some important averages (namely the 200 EMA) are near.
Citigroup comments on couple of fast movers
- First, they believe the recent pull back in Akamai (NASDAQ:AKAM) represents a buying opportunity. AKAM's 1Q results missed expectations but fundamentals were robust. Some investors were anticipating 1Q to be AKAMs 6th consecutive beat & raise qtr; results at the hi-end of guidance resulted in a ~20%+ drop in the shares.
Firm estimates AKAM's 07 rev and EPS growth at ~45% with 08 rev growth of 34% and EPS of 38%. Based on their ests, AKAM trades at a P/E of 34x 07 and 25x 08. If AKAM were to maintain its current 07 multiple on 08 ests it would yield a $59 share price or 37% higher than the current level. Citi thinks AKAM shares can provide an attractive return without exceeding current ests and expects the shares to rebound from current oversold condition.
AKAM competitor Limelight's pending IPO (S-1 filed March 22nd) will keep competition concerns top-of-mind but the firm thinks market demand and AKAM's differentiated offering will trump such worries.
- Secondly, coming out of restriction, Citi is updating their view on Riverbed (NASDAQ:RVBD) taking their rating to Buy from Hold. Post an impressive March and with a new product cycle at its back, the company's tech advantage is lengthening and momentum continues to build. Future catalysts include Steelhead Mobile, channel expansion, and an increased storage presence.
Riverbed continues on its hyper-growth track while progressing toward it starget operating model. While an opex catch-up may result in a margin pause for June, the company is on track to exit 2007 at ~20%+ Op Mgn vs the 20-25% LT target. Citi's prior CQ2 estimates of $43M and $0.07 are now $49M and $0.12. Tgt is raised to $52 from $34.
Notablecalls: Of the two calls, AKAM's certainly my favourite. The stock has been beaten down despite the fact nothing has really changed when it comes to fundamentals. The growth is still robust and we're yet to see any pricing pressure.
Paperstand (GE, IMCL, REGN, DNA, ONXX, KOG, CHC)
The WSJ reports that General Electric (GE) is close to agreeing to sell its plastics division for almost $11bn to Saudi Arabia's largest industrial co, Saudi Basic Industries. If the deal is completed, the Saudi co known will have bested Basell of Hoofddorp, after a long auction process. Several private-equity firms were also interested at one time.
„Heard on the Street” reports that shares of ImClone (IMCL) have tumbled more than 9% since Tuesday on heavy volume after embargoed data from an important cancer trial was released to 24K physicians expected to attend the conference of one of the largest oncology groups, the ASCO. Shares of Regeneron (REGN) have fallen almost 15% since and Genentech (DNA) is down 3%, while Onyx Pharma (ONXX) is up almost 10%, as investors pass around abstracts, or summaries, of data to be released as part of the ASCO meeting. Even though regulators have clamped down recently on co’s relaying mkt-moving information to select investors, it isn't the first time that stocks have moved sharply ahead of the key event, amid the growing hunger of investors to get an information edge on volatile stocks such as biotech co’s. "Oncology stocks consistently have shown unexplained volatility around the time ASCO releases data on embargo to its members," says Steven Harr, of Morgan Stanley.
Barron’s Online out saying that Kodiak (KOG) shares should scale new heights as the co plumbs the depths of the Rockies in search of untapped energy. The rocky shale Kodiak is drilling through is thousands of feet thick in the Vermillion Basin of Wyoming and Northern Colorado, far thicker than gas explorers usually encounter. Though it is more expensive and challenging to drill here than in most places on the continent, high gas flows from Kodiak's first wells and from those of another nearby energy-and-exploration co, Questar (STR), indicate that this region could become one of N-America's best natural-gas finds. Kodiak has yet to turn a profit, but the co is expected to start generating earnings once it shifts into production mode. Led by a cost-conscious mgmt team, each member with decades of energy experience in the Rockies, Kodiak has enough cash on the books to cover ‘07 operating costs. Speculators have driven Kodiak's shares from around $3 last fall to a record high $6.40 on May 1 on the two wells dug by Kodiak and a string of positive results from the area's largest player and first mover, Questar. Randall Abramson, of Trapeze Asset Mgmt, says Kodiak "is a very compelling resource story with a potential for an awful lot of natural gas." He sees the stock as a play on the potential value of reserves locked in Kodiak's land.
“Inside Scoop” section reprots that 4 insiders at Centerline (CHC) have been busy lining their coffers with shares of the co since the stock fell to a yearly low. CEO, Chmn, Vice Chmn and a managing trustee have bought a total of $9.3m of the co's stock since May 11. The cluster of purchases represents the highest level of quarterly buying at the co over the past 5 years. Stephen Ross, the co's non-exec Chmn, spent the most, buying 402K shares for $7.2m. Ross is "a legend in the real-estate business, so his involvement in [Centerline] and his buying here certainly makes it attractive," says Ben Silverman, of InsiderScore.com.
Thursday, May 17, 2007
MEMC (NYSE:WFR): Comments on buyback
Firm notes this is a definite positive for the shares, as investors have been anxiously awaiting a productive use of the ever-growing cash balance. At an avg. price of $60/share, the program would reduce share count by 8.33M shares, which if completed in 2008 would increase EPS estimate by $0.15, to $4.28 from $4.13. Based on CIBC's 19x target multiple, this could raise the calculated fair value of the shares by nearly $3, to $81. In the past 4 quarters, WFR has generated $457M of FCF, providing nearly all of the required funds for the share repurchase.
Firm believes the $500M authorization is larger than expectations, signaling optimistic prospects.
Notablecalls: The stock traded to $60 in after hours in reaction to the news. Looking at the chart, I feel there may be some more upside to WFR today. Just a gut feel, nothing more.
salesforce.com (NYSE:CRM): Growth becoming more expensive
- Morgan Stanley notes solid top line Q with upside to revenues but cash flow from operations was a little lighter than they anticipated and a significant increase in capitalized costs masked margin declines from their calculations. While the firm has readily acknowledged the significant growth of salesforce.com revenues, they remain concerned that the company is generating the growth at an increasing cost. They need to see better operating leverage - something that has yet to improve, and in fact may be weakening. Hence, they remain Underweight CRM shares.
- Cowen says they would not be surprised to see the stock trade off in the coming weeks following a decent, but not great quarter, in the face of high expectations and the looming specter of a full frontal assault by Oracle and Microsoft in the coming quarters. While most financial metrics were good, none were outstanding, and the company continues to be only marginally profitable on a GAAP basis. Despite a high level of predictability in the subs model, the firm believes heavy infrastructure investments intended to stimulate growth could have a negative impact on profitability and FCF should the competitive environment heat up, a scenario they consider highly likely. CRM trades at 38x Cowen's revised FCF forecast of $146M (+67%). Maintains Neutral.
Notablecalls: Well, it looks like growth is becoming more expensive for CRM. ORCL, MSFT and SAP have participated half-heartedly in the SAAS space so far but as Cowen notes, this may be changing soon. I don't think CRM's a core short here but it may see some downside over the next couple of days.
Paperstand (CCU, AAI, MEH, STI, COMS, JPM)
According to the WSJ, AirTran (AAI) is expected to announce that holders of almost 57% of the shares of Midwest Air (MEH) have agreed to sell their stock under AirTran's $389m offer to acquire the airline. B/c the support represents a shift in favor of its longstanding effort to purchase Midwest despite opposition from the rival carrier's board and mgmt, AirTran is also expected to extend the deadline for Midwest shareholders to tender their stock. Although AirTran's latest bid for Midwest expired at midnight yesterday, a new deadline is expected to be set for Jun. 8.
“Ahead of the Tape” column out saying that a wave of cash is looking for a home in the stock mkt. With Bausch & Lomb’s announcement yesterday that it had agreed to be taken private, there are now 12 co’s in the S&P500 index set to go private this year. The total price tag for these co’s stands at $179bn, according to S&P analyst Howard Silverblatt. That's a lot of cash investors will have to redeploy. "This is a lot of money that will have to find a home," Mr. Silverblatt says. S&P500 index funds will pump the money right back into stocks in the index, as will many of the actively managed mutual funds that use the index as a benchmark. First and foremost, they'll need to buy the shares of the co’s replacing the outgoing members of the index. Of course all the cash "coming" into the stock mkt was really the stock mkt's to begin with. The reality is that, with so many co’s going private, there are fewer stocks to buy, and that's sending the ones that remain higher.
“Heard on the Street” column reports that SunTrust Bank (STI) has sold 9% of its $2.3bn stake in Coca-Cola, and has said it will decide what to do with the rest by year's end. The move is meant to appease exasperated investors who see the Coke shares as an asset that SunTrust has been squandering for decades. Still, it could be too little too late to save SunTrust from a takeover long thought to be impossible. The bank's sale of the beverage maker's shares could make SunTrust more vulnerable, b/c any buyer of SunTrust currently would have to include the mkt value of the Coke holding in the purchase price. Shedding the stock would make a takeover of SunTrust less expensive, and some analysts have long argued that the Coke stake amounted to a "poison pill" that kept SunTrust in control of its destiny. "The clients who are holding the stock are the ones that believe there's going to be a deal," says Nancy Bush, of NAB Research, who has followed SunTrust closely for two decades. "It's very sad to me. This was once upon a time a great franchise."
Barron’s Online highlights 3Com (COMS), saying that the challenges to 3Com may be more than Citadel knows how to fix. Citadel upped its stake in 3Com from 1% to 8% in April, and has sent a note to the 3Com board offering to provide "input" to turn the stock around. The co's share of networking products has shriveled over the years dramatically. For 3Com to achieve sustained sales growth and profitability will be tough in a mkt where even Cisco is finding growth elusive. Worse, after taking sole control of the China venture, 3Com will end up with far less cash, a fact that gives value investors pause. Without that pristine balance sheet, 3Com looks more like an expensive networking stock trading at 25x next year's earnings. "It's difficult to see what Citadel could possibly do better than 3Com mgmt, at a time when the co is in transition, and given that networking is always competitive even for Cisco," says Mark Mowrey, of Al Frank Asset Mgmt. Mowrey is holding on to the stock for some upside potential, but "if I weren't already in the stock, I wouldn't put new money into it at this point," says Mowrey.
“Inside Scoop” section reprots that JP Morgan (JPM) is trading around all-time-high territory, and co insiders are celebrating the co's success by selling stock at a greatly increased pace. Over the past 30 days, execs have sold $14.4m in stock, comprising the majority of the $22.4m in stock sold over the last 2 years. The biggest sellers were CIO Ina Drew, and Steven Black, the co-CEO of JPM's investment-banking unit.
Wednesday, May 16, 2007
Motorola (NYSE:MOT): Comments on new products, restructuring and ESL
- Raymond James maintains their Strong Buy rating saying that first and foremost, Motorola will become fixated on improving its cash conversion cycle, leaning down inventories, and better managing receivables and payables. The cFO indicated the company would announce additional downsizing and restructuring (likely to be announced May 30 or 31). While no details were provided on the magnitude of such a downsizing, he indicated the initial downsizing was not nearly significant enough.
In general, management seems to have regained confidence following the humbling experience of profit and market share losses in the March quarter, a sign the business may be stabilizing.
- CIBC notes they remain comfortable with their thesis and Sector Performer rating on the company. They are warming to the story, but are still looking for evidence of a clear turn and signs of market traction with the new 3G models (like the Z8, Q9, and RAZR2, which were highlighted at the event) before turning more positive. Firm believes the turn has come yet and comments by new CFO Thomas Meredith suggest 2Q07 trends remain very tough.
- Banc of America notes they believe the new products, with similar design but better features and functionality, are a step in the right direction. They are also encouraged by the new leadership, and expect Mr. Meredith to be a change agent. Firm believes MOT is moving up market at a time when the handset industry is transitioning to more fully featured products. They believe this tend is favorable for Nokia, Sony Ericsson, Research in Motion, Palm, and QUALCOMM.
Notablecalls: Nothing really unexpected emerged from the meeting. The RAZR2 is a cool phone but hardly a game changer. Heads have started to roll at MOT and according to whispers a merger of co's Networks and Connected Home business units will be announced soon. This will create some savings but as the CFO hinted, will likely be just the beginning. Which is positive, of course. Motorla has become too bloated and unfocused and now needs to correct itself.
On another matter, SEC filings published last night showed that Eddie Lampert, the billionaire hedge fund manager known for making large bets on a few companies, including Hoffman Estates-based Sears Holdings Corp, has acquired a 925,000 share stake in Motorola. Lampert received special permission from the SEC to postpone disclosing the details of some of his holdings. That "confidential treatment" expired last night. The filings also showed he poured close to $800 million into Citigroup stock and another $30 million into Clear Channel. Eddie didn't become rich by being stupid. It looks like his cost basis for MOT is pretty close to current market price. With Ichan and Lampert on board, I would not be surprised to see other big game hunters join soon.
Anyway, I continue to stand by my bullish thesis on Motorola.
Paperstand
“Inside Track” section out saying that not all stock purchases by CEOs are created equal, and a smaller purchase can sometimes be a better indicator than a larger one. John Riccitiello, the new CEO of Electronic Arts (ERTS), and W. Edward Scheetz, president and CEO of Morgans Hotel (MHGC), each bought shares of his co's stock last week, but the strength of the signal sent by the transactions differs significantly, said Jonathan Moreland, of InsiderInsights.com. Mr. Moreland said he finds Mr. Scheetz's purchase of $291K worth of Morgans Hotel stock a more positive sign than Mr. Riccitiello's purchase of almost $1m of EA stock, partly b/c of Mr. Scheetz's more timely trading history, and partly b/c of the recent runup in Morgans Hotel stock. "I was impressed that Mr. Scheetz was putting more money into a stock after it had risen so strongly in the past months," Mr. Moreland said. "I was also impressed with his track record, much more than with the gentleman at Electronic Arts."
Barron’s Online discusses Wyeth (WYE), whose shares closed at a 5-y high last week. It's no wonder. Despite the regulatory delays, Wyeth has one of the pharma industry's strongest pipelines. 2 or 3 potential blockbusters could hit the mkt by ‘08, and profits could beat expectations. Yet the stock trades at one of the lowest multiples in Big Pharma, and its performance YTD has lagged several of its peers. Thus, it wouldn't surprise us if the stock still has room to run. "The pipeline is strong and holds a lot of potential," says Herman Saftlas, of S&P. "Key drugs are doing well, and I forecast double-digit earnings growth, perhaps 10-11% annually over the next 2 years. Yet the stock trades at a discount to Big Pharma."
“Inside Scoop” section reprots that insiders at Blue Nile (NILE) have sold nearly $20m in stock since May 1, led by Chmn and CEO Mark Vadon and President, CFO and Director Diane Irvine. "When you look at the numbers," Ben Silverman, of InsiderScore.com, says, "these guys are taking some big profits now. It's well-deserved if you look at where stock has come from." As for investors, Silverman adds, "The signal is: Proceed with caution."
Tuesday, May 15, 2007
Amgen (NASDAQ:AMGN): Comments on Medicare NCD
- Goldman Sachs notes that assuming the limitations are implemented, except for MDS, Aranesp sales in 2008 might be reduced by 30% which is consistent with their 2007-09 forecast of $2.4bn (-13% yoy), $2.4bn (+ 0%), & $2.5bn (+1%), resp. Epogen sales would not be affected, but another proposed NCD is likely in 2007. They have assumed Epogen will decline by 4%, 14% & 10% in 2007-09, resp.
Despite the decline in Epogen & Aranesp sales, the firm expects 8-11% yoy EPS growth in 2007-09 due to expense control and share repurchase. Amgen shares are trading at 13X 2007 EPS (incl. ESO) & PEG of 1.5 based on 3-year EPS CAGR of 9%. The PE & PEG of drug stocks are 17X & 2.3, resp. GSCO's 12-month target of $72 is based on 16X Amgen's 2008 EPS of $4.50.
- Citigroup notes the proposal was published four months ahead of schedule after last week's FDA advisory panel meeting on the drugs. The scope and timing of the proposal will likely surprise investors and put downward pressure on Amgen.
In Citi's view, these reimbursement proposals could potentially restrict >50% of the CIA market depending on the final decision. The oncology segment represents ~17% of total Amgen?s sales. Thus, they see further downside to the stock relative to their $54 target price and expect Amgen to test the $50 support level.
They are very concerned that the FDA's Cardiorenal Advisory Committee in the fall will further vote to restrict usage of Epogen in the nephrology setting representing approximately 26% of Amgen's total sales. Thus, the firm continues to expect further weakness in the stock until CMS and FDA complete their review of the product labels and reimbursement in the nephrology setting.
Notablecalls: AMGN is down over 3 bucks in early action and I would not be surprised to see the stock hit $52 today. Would pick up some stock there for a bounce, as valuation is still cheap, despite the cuts.
Arris (NASDAQ:ARRS): How will it continue to grow?
Two of Arris's top four customers, Liberty Global and Time Warner (TWC), have reached what appears to be peak embedded multimedia terminal adaptor (E-MTA) volumes.
As it relates to Comcast (CMCSA), RJ estimates the operator will experience modest quarter / quarter growth the next three or four quarters and peak somewhere between 650,000 - 750,000 VoIP new net-adds per quarter (up from 571,000 in March). While impressive from an operator perspective, given an E-MTA average selling price of $70-$80 (and falling over time), the firm is hard pressed to understand how Arris will continue to grow its E-MTA revenue base meaningfully.
Notablecalls: ARRS' business is about 1/3 CMTS (cable modem termination systems) and 2/3 eMTA (embedded multimedia terminal adaptor). CMCSA accounts for roughly 40% of revs.
The CMTS side carries high margins but the margins have likely peaked already and are likely to decline from here. CSCO and MOT are likely to regain share over the next couple of yrs.
It also looks like the eMTA side is no longer high growth territory. Trading 18x 08 EPS, ARRS doesn't really look like a bargain here.
Monday, May 14, 2007
Motorola (NYSE:MOT): Mid-quarter checks suggest some stabilization
Firm notes they have seen evidence of two trends that illustrate the progress MOT is making internally to address its issues. Adoption of a firm global pricing policy (and adhering to it). A shake up in the global distribution system, reducing arbitrage activity and forcing regional sell-through disciplines.
MOT will host an event on May 15 in which it will show a mix of already introduced models and new models, including new derivatives of the MOTOFONE and a new slick RAZR-like clamshell. CIBC expects features to still be light, and would keep expectations low. Looks for late '07 for change.
The firm is tweaking their estimates to reflect more near-term sell-in challenges. For 2Q07, they are slightly reducing revenue estimate to $9.2 billion from $9.4 billion. Pro forma EPS estimate is unchanged at $0.04. They are looking for a clear turn and new 3G models before turning more positive.
Notablecalls: Nice comments by CIBC's Ittai Kidron. Zander and his team are trying to fix the problems ailing MOT's largest division - the mobile. While the pricing and distrubution system are important, I think what investors really want to hear is that the mobile poducts development labs are working feverishly to come up with new and cool products. There has been some ga-ga over the RIZR R8 lately but looking at the thing..it looks like all the other phones out there.
The stock is starting to look good. In fact, it looks like it cleared the 50 day EMA on Friday. The last time MOT closed above this average was in October 2006. I continue to stand by my bullish thesis on MOT.
Sandisk (NASDAQ:SNDK): May have some s-t upside in it
Tactically, they advise investors to build positions patiently thru the Q on market volatility (for now less urgency needed than in analog Co's ADI, ISIL, FCS and SMTC). NAND contract pricing was stable in 1H May and overall densities are tracking flat QTD with 4Gb+ up 10% (vs 1Q averages). While the firm expect a modest June swoon (seasonality), prospects are increasing better-than-modeled 2Q07 pricing (-5% embedded in their 3Q07 royalty calculation). Recalls Samsung/Hynix guided to +20% 2Q pricing).
Citi remains confident NAND fundamentals can move into under-supply by late-3Q. Upcoming milestones impacting sector psychology include: 1) MOT's 5/15 new product launch (embedded/removable NAND demand), 2) Bi-monthly contract pricing updates 3) Monthly US retail card/drive/MP3 sell-through date (released the last week of each Q (NPD/CIR)), and 4) Apples's late-June iPhone aunch (embedded/removable NAND demand).
Notablecalls: Well, SNDK's chart looks good. May have couple of bucks of upside in it if it gets moving. One to watch.
Paperstand
According to the WSJ, the Army is pushing to turn a crowded multibillion-dollar competition for the next generation of troop transports into something closer to a winner-take-all event. Now that the Pentagon is planning on buying many more of the vehicles, Army officials say they would like to see one primary design. That would make the vehicle much easier to maintain. "If you have four different vehicles, that means you have to have four different logistics systems to provide parts. You have to train soldiers how to fight from four different vehicles. It becomes very expensive and complex," the senior Army official said. US Central Command say that it now needs as many as 17,700 vehicles, enough to ensure that every soldier who leaves the base in Iraq is riding in one of them. The surge in demand has forced the smaller players, such as Force Protection (FRPT), to team up with major vehicle producers to increase production. Mike Aldrich, VP of business development and govt relations, said the Force Protection-General Dynamics (GD) joint venture could produce more than 10K MRAP vehicles by the end of ‘08. "What's holding us back is a substantial order," he said. Oshkosh Truck (OSK) has also entered the fray.
“Ahead of the Tape” out saying that if the housing-mkt shakeout has an epicenter, it probably lies in Florida. For co’s with business tied closely to the state, that is a problem. Home builders are getting hit hardest in Florida. Building permits for new-home construction were 51% below their year-ago level in the 1Q. Florida still boasts one of the lowest unemployment rates in the country. But it wouldn't be surprising to see its broader economy worsen in the mo’s ahead. Big public builders have established an outsized presence in Florida. Co’s that supply builders are feeling pinched. PGT (PGTI) generated 92% of its business in Florida last year. In the 1Q, PGT's sales were down 25%. Florida Rock (FRK) reported that 1Q sales were down 33%. Banks with exposure to Florida real estate have been getting hurt, even some far away from the state. In April, Webster Financial (WBS) warned that credit quality on its Florida residential-construction loan portfolios had deteriorated. Retailers with big exposure to the state could suffer, too. MarineMax (HZO) has been lowering its sales expectations. It generates more than 40% of its sales in Florida. Haverty Furniture (HVT) has said its sales in Florida are getting hurt by the combination of the housing downturn, rising insurance rates and rising property taxes charged to out-of-state residents. Florida has little in the way of exports, and so it is unlikely to get much help from strong global economic growth, says Goldman economist Jan Hatzius. He doesn't think the housing downturn is enough to push the whole US economy into recession, but it could be a "canary in the coal mine" of trouble in regional economies.
Sunday, May 13, 2007
Barron's Summary
Barron’s cover lines up Top500 co’s based on cash-flow returns on investment. This year top honors go to Goldman Sachs ( GS), Franklin Resources (BEN) ranks 2nd. The bronze went to Apple (AAPL), while Terex (TEX), took fourth place, and Paccar (PCAR) fifth.
Barron’s interviewed analyst likes NUE, RS, STLD and AKS. Another fund manager top10 holdings include PENN, AMT, MKL, KMX, POOL, NDN, PNK, BYI, ACF and GISX.
If the merger of Thomson (TOC) and Reuters (RTRSY) goes through as planned, resulting cash flows could make Thomson shares worth roughly 20% more than Friday's level.
The Dolans, controlling shareholders of Cablevision (CVC), have offered $36-and-change fore share that now tade above 35. Dissenting shareholders say the company is worth $50 to $60 a share. "We'd hang in until [the Dolans] force us out," says Christopher Marangi, of Gamco Investors.
With lower interest rates, Annaly Capital Mgmt (NLY) could earn more than $2 a share, which could propel its stock into the low-20s. Some savvy investors now think the worst is over. "The yield curve will start to steepen in the 2H07 and continue to do so in '08 as the economy begins to slow and the Fed cuts rates," says Arnie Schneider, CIO of Schneider Capital Mgmt.
The shares of Constellation Brands (STZ) are starting to recover after a sharp drop earlier this year. As the company tends to its challenges, the shares could jump more than 25% in a year. Tim Ramey, of DA Davidson, sees profits climbing 20% in F'09, to $1.75 a share. The shares, now trading at just 13.5x that est, could well hit 29 in 12-18 months, he says.
“The Trader” column discusses Virgin Media (VMED), whose shares trade at a big discount to their US counterparts. Virgin's shares have long attracted hedge funds with a keen nose for bargains. To Brad Ruderman, of Ruderman Capital Mgmt, Virgin's selloff last week illustrates the "very, very tight leash granted to mgmt" by Wall St, after predecessor NTL had loaded the co with debt to build its infrastructure. "But what was negative for the previous regime is now positive for the co," Ruderman says. "It has a state-of-the-art network already in place, and now it's up to mgmt to monetize the value of that network." He reckons shares are worth at least 35, with Virgin's cash flow and dominant network also enticing to buyout firms. Drawing parallels between UK and US cable businesses can seem as absurd as, well, comparing soccer and football. But at about 24, Virgin shares trade at just 6.4x ‘07 operating cash flow, compared with multiples of 8-9 for stateside counterparts, says Oppenheimer analyst Thomas Eagan. He calls the stock's pullback "overdone" and says "now is the time to buy."
“The Trader” also out saying that the selling in the shares of Dean Food (DF) may be overdone. The shares seem to have discounted a worst-case scenario, making valuation more compelling. Mgmt had guided ‘07 profits to $1.72 a share, the low end of its forecast range. Jim Lane, of TriPoint Asset Mgmt, also sees limited downside. If shares slide toward, say, 25, an earnings yield approaching 6.6% could make Dean a tgt for larger food co’s. If dairy margins firm up, the shares could trade up to 42.
“Technology Trader” section discusses Seagate (STX) and Western Digital (WDC), whose shares are down 16% and 11% respectively, YTD. Some analysts have even suggested that flash memory could completely replace drives in PCs, and put Western and Seagate out of business. But PC sales are doing just fine, and flash - in great part owing to its cost - is not going to replace disk drives globally for years to come. Once investors come to appreciate those facts, Western Digital shares could appreciate another 20% or more. Western is cheaper than Seagate by a wide margin, trading at a 2-y-low P/E multiple of about 9.4x the next four quarters' estd profit, below its 5-y median of 11.6x, while Seagate is near its median of 12.2x. "Western has an attractively valued stock for a co that is one of the premier players in a mkt that's set to grow at least 10% a year for several years," says Citigroup analyst Paul Mansky, referring to the expected ramp-up in disk-drive unit sales. Mansky thinks that Western Digital is "a technology laggard by design," and that some investors underestimate Western Digital's strategy of gaming the technology curve to turn in profits and steady cash flow.
Friday, May 11, 2007
Integrated Device Technology (NASDAQ:IDTI): Expect analyst day to provide a spark in the stock
IDT's base business is stable, with growth being led by AMB, search engines, and gaming clocks. The next leg of growth will include PC audio, comm clocks, PCI-express, and pre-processing switches. The company previewed its newest products for PC display, digital TV, and handset I/O.
There was no update to the outlook. However, IDT indicated that it believes it would see a return to growth in the second half of CY07, driven by PC
seasonality and a renewed growth in gaming, with wireless a wild card. Margins should improve with higher utilization.
Firm says IDT tweaked its long-term targets, lowering gross margin to 55%-58% but retaining operating margin targets at 25%-30%. Firm believes IDT will soon begin moving back towards those ranges, and maintain a very positive view of growth and market share gain opportunities. IDTI remains a favorite.
Notablecalls: There are several positive comments on IDTI today after the analyst day. Looks like the mgmt was convicing enough to make the analyst community believe that the growth is returning and margins are improving. Let's see if the buy-side is as positive on the name as well. I believe they do and we are going to see upside in the stock over the next few days. Unless the ugly tape of yesterday continues, of course.
Fluor (NYSE:FLR): Overly conservative guidance provides opportunity
Firm raises their forecasted 2007 and 2008 EPS estimate to $4.20 and $5.20 from $4.00 and $4.90 on higher backlog and margin assumptions to reflect strong first quarter results.
Firm continues to believe that management guidance seems conservative given the robust growth in backlog, and expect that this will lead to upside surprises, particularly in the second half of the year.
Notablecalls: FLR has rallied after initial disappointment in 2007 guidance as the mkt is starting to understand that the guidance was overly conservative. Note that the mgmt guidance from May 7th was $3.50-3.80 and now Citi is raising their estimate to $4.20! Smart money has had an oppty to collect the shares and I'm sure they are using today's call by Citigroup to push the shares higher. I see the stock hitting $105 today easily, potentially going even higher. Early buyers will be rewarded.
Thursday, May 10, 2007
Quick note on WFMI
Notablecalls: Didn't think it would happen but here it is. WFMI looks to be heading towards the $40 levels and that's where I expect it to bounce.
Nektar Therapeutics (NASDAQ:NKTR): Short squeeze alert!
Notablecalls: Wow! The stock is down considerably since my bearish April 5 call. Considering the positive comments from Cowen's Ian Sanderson (who of course has been a NKTR bull through is all), the 30% short interest and the upgrade from Morgan Stanley, I think NKTR will see a nice short squeeze here.
Intel (NASDAQ:INTC) is pushing out deliveries of tool orders
Based on checks with two major vendors, it appears at least $500MM (~10% of INTC's C2007 capex budget of ~$5.5B) has been pushed out. Based on a current quarterly wafer fab equipment order/revs run rate in the $9B range, this amounts to ~5% of total CQ3 tool revs/shipments. These pushouts increase the likelihood that INTC will cut its C2007 capex budget over the coming months - consistent w/its goals to recognize more capital efficiencies.
Who is most exposed? Exposure to INTC in firm's coverage universe is highest at AMAT, NVLS, AEIS, and to a lesser degree KLAC and BRKS.
Dwindling stock supply and private equity remain strong tailwinds, but given deteriorating fundamentals, the firm would look for stocks to pull back near-term focusing new money only on company-specific restructuring stories (like top idea KLAC) where estimates still have a lot of dry powder.
Notablecalls: Interesting comments from Citi's Timothy Arcuri. He's right of course, but looking at the SMH chart I'm not so sure today is the day one should step in front of this train. Look for some initial weakness.
Whole Foods (NASDAQ:WFMI): Bounce candidate
- Morgan Stanley notes comps, total sales, margins and EPS all came in below firm's forecast. As they believe the margin drag from the new store ramp-up could persist, they are reducing their 2007 and 2008 estimates by $0.15.
MSCO believes margin drag from the new store ramp-up was one of the primary factors behind the margin weakness in the quarter (store contribution margin down 90bps, operating margin down 121 bp). Store-level depreciation expense, which is included in direct store expenses, continues to increase as a record number of stores are added to the portfolio. Whole Foods added 6 stores this quarter vs. 3 stores a year-ago. New stores also carry higher direct store expenses versus existing stores, and accordingly, the re-acceleration of unit growth is playing a role in dragging down margins. In the past, the double digit comps may have helped mask some of the new store margin drag.
While the Whole Foods base has been showing disappointing results, they still see significant turnaround potential in the pending Wild Oats acquisition and believe this will help WFMI shares stage a recovery in the year ahead. With no news on the merger (FTC review drags on), falling earnings estimates will likely have WFMI shares down sharply in today's trading. Maintains Overweight but lowers tgt to $61 from $66.
Notablecalls: Well, I think this didn't come as a surprise to the regular readers. While the stock will open down considerably today, there are some positives:
- The comp for the 5 weeks ending with May 6th was 7.5%, suggesting a potential bounce in same store sales.
- Management indicated that it was aware that certain markets require different store sizing strategies, and stated that they were not looking to put the newer, larger footprint stores in all new markets.
WFMI's still expanding at a relatively fast pace and that's certainly one of the things hurting margin performance (the other being competition). That's something the management can control.
Also, it looks like the OATS acquisition is starting to be viewed as a catalyst for the stock. While I still view it as a forced move, one has to respect the trading dynamics.
All in all, I think WFMI's a bounce candidate below the $42 level. There was a fair amount of negativity going into the EPS release and most of the bears got proven right. Yet, the intial comp performance for the 5 weeks ending with May 6th points to a bounce of some sort. That will help the stock today.
Ideally, I'd like to see some analyst coming out with a swinging downgrade, but I don't think it will happen today. We're are more likely to get supporting comments as the stock has gotten hit badly enough already.
Paperstand (ABX, NEM, DAR, NSM)
The WSJ’s ”Ahead of the Tape” discusses gold stocks. After a year of poor performance by the sector, Barrick Gold (ABX) posted solid quarterly earnings last week. Newmont Mining (NEM) last month posted disappointing earnings after a jump in energy and other costs. Citigroup analyst John Hill thinks that while higher expenses have hurt gold miners, the real problem comes from a disconnect between forces driving the price of gold and gold-mining stocks. Rising demand for jewelry in India and China has increased demand for gold. That explains why prices for gold have risen during a global bull mkt in stocks the past few years. Gold miners, however, have languished b/c the classic investors in their shares, the bearish kind, have been on the sidelines as stocks churn higher, Mr. Hill says. Buyers of gold "have been on fire, but the natural buyers of gold stocks" haven't been, he said. Recent rumblings in the economy, soft 1Q expansion, slack hiring in April and tepid business spending, have raised concerns about a slowdown, but stocks haven't blinked. So far, the recent rise in gold-miner stocks is a blip in the bigger picture. But if concerns about the economy keep driving them higher, the rest of the stock mkt may be in for a rude awakening.
Barron’s Online highlights Darling Intl. (DAR), whose stinky business of processing slaughterhouse animal waste and restaurant grease is turning sweet. Anticipation that Darling may start offering animal fat as a component for biodiesel fuel has turned the stock with 19th century roots into a 21st century alternative-energy play. In what is known as "rendering," Darling collects leftover animal components and cooking oil from restaurants to produce various grades of protein, fat, and animal hide. These ingredients are sold to co’s that make pet food and livestock feed, soap, and leather goods, among other items. The co is emerging from a cyclical downturn marked by low product prices and high energy costs. Product prices have climbed higher in recent mo’s. Darling's grease-trap business is capturing new clients, and foreign demand for US cattle is recovering from the ‘03. Last year's acquisition of a leading competitor is generating cost synergies. Michael Cook, CEO and CIO of SouthernSun Asset Mgmt, says the biofuel debate "has made the stock more interesting in recent days, but our view is that this is a substantially longer-term play in both the co's (traditional businesses) and the biofuel space."
“Inside Scoop” section reports that Relational Investors, a private investment firm, has just sunk $107m into shares of National Semi (NSM). RI bought 3.95m shares between May 1 and May 8. The purchases pushed Relational's stake in National Semi to 38m shares, or 12.4%. The investment firm's latest purchase of NSM stock "suggests that [Relational thinks] there is additional value in this co that can be wrung out and that there are ways for the co to find that value," says Ben Silverman, of InsiderScore.com. He adds that the size of the buy is a very strong signal, particularly for long-term focused investors.
Wednesday, May 09, 2007
Sharper Image (NASDAQ:SHRP): Turnaround in sight?
Firm's conversations led them to believe that recent management changes, along with out-of-the-box thinking, are beginning to paint a rosier long-term picture for the company than the near-term suggests. However, persisting sales weakness and consequential pressures on the balance sheet lead the firm to remain cautious for the time being.
One of firm's key concerns with Sharper Image over the past 18 months has been the company's lack of exciting new product offerings, especially in the face of declining sales in both its Ionic Breeze line and massage chairs. While recent announcements aren't likely to be primary revenue drivers, in firm's view, they do believe that they possess the necessary cachet to reinvigorate the product buzz historically associated with Sharper Image's offerings.
The opinion from the employees the firm spoke with was unanimous. The company seems to have a better sense of hierarchy, reporting channels, and accountability since the management and Board changes have taken place, which they view as a positive.
They expect near term sales performance to remain weak despite the company appearing to edge closer to a potential inflection point in its turnaround process. They expect weak April comps on Thursday and reiterate Hold rating.
Notablecalls: The comp performance at SHRP has been just awful. Steven Lightman was appointed as chief executive and president on March 26, causing the stock to gain some ground. The rally was short-lived as SHRP reported -29% comp number for March and a delayed the release of its 10K.
I don't think the comp number to be reported tomorrow will be any better. L-T who knows, maybe Lightman can turn this ship around. Some of Soleil's comments look to point that way.
Marsh & McLennan (NYSE:MMC): LBO candidate?
The company owns the premier and largest franchises in its chosen segments, with Marsh and Guy Carpenter in insurance and reinsurance brokerage, Mercer Consulting in employee benefits, and Kroll in Risk Consulting. Each of these businesses are strong cash flow generators and do not require much capital to operate. In addition, they can be run separately - giving tremendous flexibility in terms of asset sales.
Senior management would do well in a takeout. The top five senior officers would receive a total of $74 million for involuntary termination or termination for good reason upon change in control, in cash and unvested stock awards.
If the private equity firm invested $8 billion in Marsh, the returns per year at 15% are $1.2 billion. Private equity investors usually target returns of 20% or above but for large multi-billion dollar transactions, they are willing to accept a lower hurdle rate ranging from 15% to 17%. That would imply a $40 stock price. Maintains a Buy rating on MMC.
Notablecalls: Interesting comments by DB's Alain Karaoglan. Yet, people close to the co have repeatedly said there is no deal in works. Also, the chart does not indicate the stock is ready to bolt upward from here. It looks more like the buyers from 3 weeks back are closing their positions as talk of the imminent LBO is fading.
I would not be surprised to see a fade in MMC stock today if it gaps up more than say $0.50 on open.
Paperstand (AT, GE, CMG)
The WSJ reprots that at least 3 groups of private-equity buyers have formed to pursue a potential purchase of Alltel (AT). The groups of suitors each have begun a series of meetings with Alltel's management, which has indicated to investors that it is pursuing strategic alternatives. The groupings include Blackstone Group and Providence Equity Partners; TPG Capital and the private-equity arm of Goldman Sachs; and Carlyle Group and Kohlberg Kravis Roberts.
“Heard on the Street” column out saying increasingly restive General Electric (GE) shareholders, frustrated with 6 years of meager returns, are pressuring Chmn Jeffrey Immelt to break up the co. But some shareholders and analysts argue that GE's sprawling businesses are better off together than apart. GE's big umbrella, these investors say, can balance differing product and economic cycles, while helping all its businesses financially. And that would boost the stock price over the longer term. Merrill Lynch analyst John Inch, who last year advocated spinning off or selling the consumer-finance and NBC Universal entertainment units, appears to have had second thoughts. In a note, Mr. Inch suggested that the technology-savvy Mr. Immelt could strengthen GE by bolstering its media-and-entertainment division with an Internet-focused acquisition. The "keep GE together" crowd appears to have a strong ally in Mr. Immelt, who has resisted past calls to sell NBC Universal. Mr. Immelt has repeatedly expressed his frustrations with GE's stock price, which is down 7% since he took over in Sep’01. "It's a no-brainer they should be thinking about it," says Jim Bitter, of Wilmington Trust Investment Mgmt. Mr. Bitter doesn't expect Mr. Immelt to take immediate action, but he says investors "will move away from the stock" if there are no changes at GE.
Barron’s Online “Inside Scoop” section reports that investopr interest in Chipotle Mexican Grill (CMG) turned hot last week following the co's 1Q earnings, but insider sentiment was decidedly more mild as 2 execs sold nearly $6.3m in shares. President, COO and Director Montgomery Moran sold 10K class A shares on Fri for a total value of almost $784K. Chmn and CEO Steve Ells also sold significant amounts of shares last week, including 56K class B shares for more than $3.9m. While the sales were part of an automated sales plan, or a 10b5-1 plan, last week's transaction marked a significant upswing from Ells' prior planned sales, which had come in lots smaller than 6K shares. Meanwhile, Ells exercised 20K options for class A shares and sold the stock for $1.6m. The insider selling and high valuation should cause shareholders some concern, says Jonathan Moreland, director of research at InsiderInsights.com.
DigiTimes reports that Taiwan Semi(TSM) is expected to ramp up its production of Intel's (INTC) 802.11n Wi-Fi chips at 0.13-micron in the 3Q. TSMC is already producing the Intel chips in small volume, as Intel's 802.11n Wi-Fi modules are expected to hit the mkt this month. The collaboration for the Wi-Fi marks a step towards closer collaboration between TSM and Intel. Meanwhile, TSM has seen increased orders at the 90nm process. Altera (ALTR) has announced that its low-cost Arria GX family of transceiver-based FPGAs will be manufactured at TSM's 90nm process. Texas Instruments (TI) reportedly is expected to increase its output of LoCosto handset single chips at the 90nm node from TSM in the 2Q. TI has also been said to be splitting its 45nm business between TSM, United Micro (UMC) and a yet-to-be-determined foundry. TSM's board of directors yesterday approved capital appropriation of $205m for expanding 45nm process capacity at the foundry's Fab 12.
Tuesday, May 08, 2007
Motorola (NYSE:MOT): No board seat for Carl Icahn
While the close vote suggests a large number of investor are unhappy with the current state of the company and pace of restructuring, it gives CEO Ed Zander room to work. But time will be short and Mr. Zander will now clearly be under the board's gun to show improvement.
The vote outcome is likely to negatively impact the shares in the near term as some investors expected Mr. Icahn to push for more aggressive near-term steps. The firm also looks for the company to be less aggressive on buyback activity in the near term, which could reduce support for the shares.
Firm's estimates and SP rating are unchanged. Regardless of the make up of Motorola's board, management has a significant amount of work to do. They would wait for more evidence of a turnaround that may not come until late in 2007 before revisiting our rating. Maintains neutral opinion.
Notablecalls: I'm hard pressed to see any real downside in MOT stock following the news. Icahn blamed his loss on three or four large mutual funds he did not identify that threw their support behind Ed Zander and the board. Zander better show some results in H207 or he will lose the backing of these large holders.
Reuters reports: Icahn, 71, has taken roughly a 3 percent stake in Motorola since he revealed plans in late January to seek a board seat. After Monday's meeting, during which he said his bid had likely failed, Icahn said he had no plans to sell his shares.
"It's a very, very good investment," he told reporters outside the Art Institute of Chicago. "It's just a question of do they have good enough management to carry it home.
"The next three, four months are going to tell the story and I really hope Ed (Zander) is correct in what he's saying and that things will go well," he added.
Icahn initially had said he wanted Motorola to conduct a large share buyback, but after a bleaker-than-expected 2007 outlook he changed his position, saying fixing the company's
operational problems took precedence.
Research in Motion (NASDAQ:RIMM): Comments following analyst day
- Goldman Sachs is telling investors to buy the stock saying they believe sales growth will unlock operating leverage in 2H FY2007. In the coming quarters we should see R&D and SG&A as a percent of sales drop, offsetting gross margin decline.
Firm also believes the new BlackBerry Curve, or the 8300, will be a very strong product and will ultimately prove stronger than the recent 8800 launch. This PALM killer should see success in both the enterprise and prosumer markets.
GSCO sees 33% upside to their $185 12 month price target, based on 30x oFY2009 (Feb-09) EPS x ESO of $6.10. They believe 30%+ earnings growth and strong cash flow justifies the multiple.
- Deutsche Bank notes the company announced several new software modifications and add-ons, but offered no real news.
While the firm thinks the co may have more product annoucements late this year, for the time being the company is heavily promoting the additional software features now available over its servers. While this includes some compelling applications (e.g. PBX over BlackBerry) they think this does little to alter the core RIM investment case
RIM disclosed some detail on the growth trends they are enjoying outside North America. While these sales are still low as a percent of total revenue, the trends are accelerating. The Pearl, in particular, has served as an important catalyst.
Reiterates their outlook that near-term product cycles can drive earnings, but these remain fuly reflected in the stock price. Maintains Hold and $125 tgt.
Notablecalls: I think GSCO's comments trump DB here. The chart looks good and I would not be surprised to see RIMM challenge 52-week highs soon.
Going for the consumer market sounds good but the hidden message here is the management may be worried about the future growth of the business side. On the other hand, RIMM has been fairly US centric and going beyond US will likely ensure growth will be strong for another couple of yrs. Not sure about the margins there, though. Also, based on checks done by JMP's Samuel Wilson, cell phone store sales staff have still not figured out how to pitch RIM's full QWERTY offerings, such as the 8800 and 8700 devices, to the consumer segment. Wilson points out that if a consumer suggests that email is not his or her primary application, sales people are quick to push users towards Windows Mobile-based devices such as the Samsung BlackJack and Windows-based Palm Treos.
Paperstand (AA, X, GGP, ARUN)
The WSJ’s ”Heard on the Street” column out saying that investors have been betting that the deal-making in commodities isn't through. The rapid consolidation of co’s in aluminum, steel, mining and other commodities also illustrates the need for heft as co’s increasingly compete globally, something that investors predict could spur still more deals. Among those that could at some point receive takeover offers: Lonmin, US Steel (X), First Quantum and even Alcoa (AA). Rather than a sign of the top for commodity prices, some investors say the deal-making could help put a lid on supply and put even more pressure on a host of commodity prices, helping the profits of a number of these co’s. "I think this is going to continue," says John Ing, CEO of Maison Placements. "This has really snowballed to where no co is immune."
Barron’s Online “Inside Scoop” section reprots CFO of General Growth Properties (GGP), Bernard Freibaum, purchased $27m in shares of the co. The transaction increases his total stake to 7.16m shares, or approximately 2.9% of the co's outstanding shares. RBC analyst Rich Moore says, "It shows that mgmt has confidence. Any time you spend $27m on something you think there's value there."
DigiTimes reports that Aruba Networks (ARUN) expects its share in the global enterprise mobility solution mkt to nearly double to 20% in ‘08 from the current 10-12%, co CEO Dominic Orr said in Taipei recently. A maturing mkt for wireless network solutions from the business sector, together with Aruba's focus on establishment of wireless networks for large-scale enterprises will help drive up Aruba's mkt share, Orr indicated. Although some co’s have already launched business-use 802.11n-compliant devices, the mkt is not expected to see significant demand for 802.11n products from the business sector until ‘09, Orr stated.
Monday, May 07, 2007
ID Systems (NASDAQ:IDSY) - steps in the right direction
Pete Fausel, ID Systems' new head of Sales / Marketing, plans to implement a 5 point growth strategy.
1. Expand the customer base.
2. Improve customer benefit attainment (Increase the speed in which a customer realizes the benefits of ID Systems' products and this will lead to more deployments in a shorter period of time). The company plans to build an entire group around this concept starting with Roger Tenney, the ex Ford engineer that spear headed the Wireless Asset Tracking System roll-out at Ford.
3. Leverage Channel Partnerships. Firm sees there will be a number of new partnerships and distributors announced this year. Expectations are that, eventually, 50% of the company's revenue will flow from this channel. To date, the company has been nearly 100% reliant on direct sales.
4. Identify and Attack Vertical Markets. The big three appear to be Automotive, Government, and Aviation. The company plans to have its sales force become more specialized, changing from geographic coverage to industrycoverage.
5. Expand in Europe. Europe offers larger opportunities for the company's products than the U.S. Currently, the company has one salesperson in Europe and no revenue to date. There will be growth in the sales and support network within Europe in 2007. In addition, there is a need to partner to both sell and install equipment in Europe.
Notablecalls: Given the chart looks like the mkt liked what IDSY was saying on the Investor Day. IDSY has been much like many other similar companies with little visibility into the earnings that tend to fluctuate quarterly. These steps seem to be in the right direction, allowing better visibility and diversified revenue base. We may see some follow-up interest in the shares today, but wouldn't count on it.
Zoltek (NASDAQ:ZOLT) - a play on wind energy
Firm believes pending announcements could drive estimates higher, increase FY09 earnings leverage visibility, and narrow the current multiple discount to growth from investor concerns over execution. Given improved Q207 execution and increased comfort with company's unique position as the largest, and lowest-cost, incumbent producer for industrial-grade carbon fiber, which they expect to be supply contrained through at least 2010, firm sees shares
as attractive. They see Zoltek's market opportunity as similiar to silicon providers to the solar industry two years ago.
Firm anticipates a substantial contract extension with Vestas at ~2x+ the current 3-yr $80-100M. They also believe company will reveal textile-plant conversion plans for precursor at a plant in Mexico. Lastly, they expect follow-on contract orders from other new and existing wind turbine customers in 2007 and oil services companies in 2008.
Notablecalls: Zoltek is definately a unique stock in two ways: 1) it is a dominant player in fast-growing sector, providing carbon fiber for the wind
energy sector. The company is in quite the same position as MEMC Electronic (NYSE:WFR) is to the solar sector. 2) Unlike MEMC Zoltek is the only US-quoted pure-play of the wind energy sector.
Given all the gaga over the solar energy, one might wonder why wind energy has gone relatively unnoticed. Lack of high-profile quoted wind energy companies has probably been the reason, but that is rather unjustified. After all, it has proven to be profitable source of alternative energy. Look for wind energy to continue growing and Zoltek to be one of the beneficiaries l-t. S-t, it's tough to make a call here following big gap up on Friday. Ideally I would like to see a pull-back to low $30s - that's probably where the analyst community would come out with aggressive recommendations. Not sure if we get that kind of opportunity, though.
Sunday, May 06, 2007
Barron's Summary
Fund manager picks include RGC, CNK, CKEC, JRC and MNI. Another fund manager top holdings include BRKA, CNQ, DISH, MHK, SHLD, LUK, IDT and BRKB.
McDermott (MDR) could rally at least into the mid-60s in the next 18 months, from 59. The stock trades for 15.5 times '08 estimated earnings, below the sector's average P/E of 20.
The shares of WellPoint (WLP) look cheap, selling at just 12.7 times estimated 2008 earnings. With business prospects strong, the shares could top $100, up 23% from now.
The shares of Delta Air Lines (DAL), which started trading Thursday at about $21, are apt to face turbulence in early weeks as creditors cash out. But they're headed for a cruising altitude closer to $27.
Barron’s has learned that over the past few weeks CEO of iMergent (IIG), Donald L. Danks, has told select individual and institutional investors that the co's F3Q earnings will be over 50% higher than the est of 39-41c a share set by the one analyst who follows the co. Some ppl apparently have gotten the good word already. On a tape recording of a conversation heard by Barron's, a voice that sounds like Danks' is heard telling an investor about the earnings, adding that "net dollar contracts written," which is the way the co reports its rev, will be around $50m. The recording was made by a person who says he took part in the conversation, who identifies the other speaker as Danks and who contends that others have told him they have had similar discussions with the iMergent CEO. Such conversations would appear to violate Regulation FD of the SEC, which mandates that a co can't disclose material information about its operations selectively, but instead must make "fair disclosure" to all potentially interested parties simultaneously. Asked about this Fri afternoon, Danks adamantly denied having spoken with any outsiders about the qrtrly earnings. "I would never give that information to anyone who would use it to trade the stock."
Barron’s discusses Intl. Fight League (IFLI.OB), saying that the co’s stock has plunged after an IPO last year. Given the co's lack of profits and big challenges, the stock is unlikely to rise anytime soon from its recent level of about $3.
“The Trader” section discusses favorably Interactive Brokers (IBKR), whose founder and CEO Thomas Peterffy tested public appetite for his co and was greeted with clamor. The deal valued the firm at $12bn, 3x that of the Nasdaq (NDAQ). About $1bn of the proceeds will go to Peterffy. And he swelled his bank balance without relinquishing his stranglehold on the firm he founded 25y ago, which he controls with 91.3% of voting rights post-IPO. Net rev grew 65% in ‘05 and 35% last year, and the co keeps costs low with savvy use of automation. No surprise, then, to see shares accorded a plump valuation. At 31, IBG shares trade at 4.4x tangible BV, or 26x ‘06 earnings of $1.21 per-share. That presupposes derivatives volume will keep growing at a galloping pace of more than 20% a year, and that Peterffy will continue to stay two nimble steps ahead of the crowd.
“International Trader” discusses BSkyB (BSY), whose stock is up 25% since the beginning of the year. The co is facing multiple legal and regulatory challenges to its latest strategic moves. BSkyB might yet have to sell its stake in cable's ITV at a loss and see the terrestrial broadcaster fall into the hands of rival Virgin Media. And the success of ITV and Setanta Sports in outbidding the BBC and BSkyB for rights to show the FA Cup is an ominous sign of growing competition. BSkyB says its gross direct-to-home customer additions were the highest in a F3Q in 6 years. At 340K, the total exceeded even bullish forecasts. Churn did worsen, but BSkyB points to the phasing-out of discounts that cost it some business, short-term, and left net new customer additions at a more modest 51K. But those new customers seem to be buying higher-priced products, with ARPU coming in above 400 pounds for the first time. All this promises extra earnings growth, perhaps not fully reflected in the admittedly robust 21x forward earnings multiple that BSkyB's stock has been trading at. That said, BSkyB now faces much higher expectations of its operating performance, suggesting that any slippage will be judged harshly by investors.
“Plugged In” column discusses upcoming Motorola (MOT) AGM, saying that Carl Icahn will be in the house. He's pushing for at least one seat on the board in return for his 3% stake in the co. The column also reports that there’s a rumor that Ericsson (ERIC) has made an unsolicited offer to acquire Motorola at 23 a share. Snyder says that at least two major shareholders say Icahn has been spreading that word.
Friday, May 04, 2007
Jones Sode (NASDAQ:JSDA): Bounce play
- James Maher, the analyst covering JSDA for Think is taking his rating up to Accumulate from Source of Funds noting the co announced 1Q07 results that disappointed on the top line, but suggested better things to come during FY07 as the canned soda rollout continues and high fructose corn syrup inventory is depleted. Gross margin rates improved less during the quarter than the firm had estimated as sales of concentrate ramped more slowly. They believe sales will be stronger in coming quarters and have revised their FY07 estimates accordingly.
Jones Pure Cane Soda in cans is now on track to be on the shelves by Memorial Day at the long list of retail locations the company announced last March. Wal-Mart and Target are among the retailers that already have begun stocking and selling Jones Pure Cane Soda. Firm believes sales growth will be much more robust in Q2 and Q3 as retailers using just-in-time inventory systems begin to re-order.
With new products and substantially larger retail distribution (with more to come), they believe Jones Soda has the opportunity to gain share of very large markets and earn rising returns on its investment. Maintains $26 tgt.
Notablecalls: Must say I was stunned to see the numbers when they hit. Yet, comments by the management on the call made sense. They didn't want to stock the shelves with the fructose products when they are about be pushing the pure-cane lines. It made the Q1 top-line look horrible but the management says they are running things from a 12-month basis rather than a 3-month basis.
The stock ended around $21 in after hours action. I think that if you can pick up some stock around these levels, you'll get a bounce. $0.75 leash.
Scientific Games (NASDAQ:SGMS): Short squeeze coming?
- Bear Stearns notes that in short, they think the quarter was good enough in investors eyes, with some reason for pause (printed product revenue deceleration & margin softness). They believe the high short interest (~15-17% of float including the Perelman shares) and the in line result may promote a short squeeze tomorrow. Ultimately, they think the shares will react more to management's commentary on today's call than the 1Q07 result, as they await updates regarding the various growth initiatives (China - Welfare Lottery, Global Draw, Germany, Mexico instant ticket).
- JP Morgan think the stock should react positively: Recently, negative sentiment has
dominated due to skepticism about China and NT EPS. 1Q results prove these concerns wrong. SGMS reminds them of WMS 12 months ago, when after disappointing investors for several qtrs even small positives caused out-performance in the shares. However, SGMS' recent entry into China and accretive acquisition of OGT are potentially very significant. Reiterates Overweight.
Notablecalls: It sure looks like the Italy JV made the qtr. Is the $12 mln run rate sustainable? I suspect that will be one of the main questions on the call. Also, the chart looks good.
Whole Foods (NASDAQ:WFMI): BAC comments on comps and margins
Channel checks, including a round of store visits, leaves the firm believing that 2Q comps could run in the mid 7% range. In fact, they believe there could be as much as 100 bps of upside to their 2Q07 comp estimate of 7.0%, which would place comps at the high end of company guidance of 6.0-8.0%.
Margin deterioration should continue in 2Q, and there is some risk that it may be worse than the firm is forecasting.
Channel checks continue to point to volume and shrink issues at some new stores, however. Last quarter, the drag from new square footage was particularly acute at over $60 per sq. ft. Maintains Neutral and $45 tgt.
Notablecalls: Mixed emotions about WFMI here. I still think the co's in trouble and margins will need to come down. Competition from Kroger, Publix, and Safeway that are building their natural/organic position is not going to go away. It becoming apparent that the OATS acquisiton was a defensive one. BAC notes senior management stressed to them the importance of not letting the Wild Oats brand get into a competitor's hands, such as those of a stronger supermarket looking for a natural/organic label to add to its portfolio. So, it looks like they were forced to buy OATS. I think that over time, WFMI will need to lower their prices and that will cut into margins.
S-t, however I'm somewhat encouraged by BAC's checks showing stonger than expected comp performance. Will it be enough to create some s-t buy interest? I'm not really sure as the comments on margins pretty much destory the positivity.
Paperstand (MSFT and YHOO in talks)
The WSJ’s ”Heard on the Street” column out saying that Brilliance China Automotive (CBA) is looking like a smart way to play China's love affair with cars. In a packed field of more than 32 Chinese auto makers, the co has increased its share of the Chinese car mkt to 2.4% at the end of 1Q07. Brilliance is out to grab additional mkt share by cutting prices, importing parts and employing the cachet of Italian design. Although it posted a net loss last year of 398m yuan ($51.65m), the shortfall was 39% narrower than the 650m yuan loss of the year before. Brilliance reaped $1.3bn in rev in ‘06, a 92% increase, on an increase in unit sales of its minibuses and, in particular, its Zhonghua sedans. Car sales in China are booming, as the growing consumer class takes to the road, creating the world's 2nd-largest vehicle market after the US. China's sedan mkt grew 30% to 5.18m units last year. For decades, the local mkt was completely dominated by the big-name foreign makers. Now, China's domestic car manufacturers are cutting costs and mounting a serious challenge. Brilliance has good prospects in that scrimmage. Citigroup rates its stock a Strong Buy, with a 12mo price tgt of $38 per ADS.
Barron’s Online highlights IndyMac (IMB), whose shares have lost about a third of their value this year as investors fret about lower-income America's problems with paying back home loans. But this is one lender that doesn't deserve the subprime stain. The worst of the IndyMac's credit problems stemming from the subprime bust already seem to be baked into shares of a co that has a limited exposure to these risky loans in the first place. Trading at 1.2x book value, vs mortgage lender peers which trade at 1.6x, there doesn't seem to be much room for the stock to fall as the co's hybrid thrift and mortgage banking model gives it flexibility to maneuver through tough environments. And the stock's 6.5% dividend yield offers some margin of safety. Insiders are certainly buying into this story. As the stock skidded to its lowest level in nearly 4 years in March, IndyMac execs and directors stepped up to make their largest purchases of shares in co history. This activity triggered initial Victory Capital Mgmt portfolio manager Arvind Sachdeva to purchase shares at around $30 for the firm's "contrarian-minded" value fund: "We were already analyzing [IndyMac] but that got our attention."
“Inside Scoop” section reports that Netflix (NFLX) founder and recently appointed Microsfot (MSFT) director Reed Hastings has wasted no time in building up his holdings of the software giant with a $3m stock purchase. Hastings, who is also the CEO, Chmn and President of Netflix, bought 100K Microsoft shares for $30 each on May 1, his first purchase of the stock. Jonathan Moreland, of InsiderInsights.com, says Hastings' purchase sends out a strong upbeat signal b/c it went so far above and beyond Microsoft's stock ownership requirement and b/c insider buys are rare at the co, while selling is overwhelmingly the norm.
Thursday, May 03, 2007
MEMC (NYSE:WFR): JP Morgan adding WFR to Focus List
Given the strong performance of WFR since mid-C06, they believe many investors on the sidelines have lamented missing out on one of the best performers in the SemiCap space. JPM thinks this is the last-best opportunity to get into the stock prior to the seasonal rush of momentum investors starting in C3Q07. They continue to believe that peak QoQ wafer demand growth will be in C3Q07 in preparation for the strong semi demand pull in front of the holiday season.
In C2Q07 they believe both Shin-Etsu and SUMCO signed contracts with the largest YoY polysilicon price increases since prices started rising.
Reiterates OW with a Target Price of $75, which is 23x C07 EPS estimate of $3.25 vs. 20.4x consumables group avg.
Notablecalls: WFR started its bounce already Tuesday morning, so JPM's a tad late with their call. Yet, the $75 tgt and Focus List addition will generate some strong buy interest today and over the next week. I would not be surprised to see WFR hit $60 today, if the overall tape remains firm. On the other hand, if it opens at around $60, I'd be looking for a fade.
Las Vegas Sands (NYSE:LVS): Missing the whisper number on Macau
- JP Morgan notes the Street is likely to react negatively to LVS' $5m EBITDA shortfall in Macau in 1Q, and the shares are probably range bound until early Sept when the market will get a sense of initial demand at Venetian Macao. Shares could break-out of the $83-$90 range btwn now and then due to monthly visitation and revenue growth in Macau deviating from the (+)30%-35% range. LVS' 1Q results in Macau do not alter the LT value that they recognize in the stock.
Bears will rightly point to LVS' 29.2% EBITDA margin, down from 32% in 4Q:06. LVS' reason behind $12m of temp. higher expenses will be greeted with some skepticism. While the $6m increase in employee costs will likely decline when Venetian opens, the labor mkt is tight and an increase in labor costs should be expected going forward.
The Venetian and Palazzo openings have been delayed but only by weeks in Macau and probably a few months in LV. Firm recalls the premature openings of both Venetian and WYNN in LV, both of which left negative tastes in investors' mouths.
JPM continues to recommend LVS, particularly during periods of rising investor skepticism, which may occur after last night's earnings. They expect LVS' EBITDAR will increase to $3.7B in 2010 from $824M last year. Reasonable multiple ranges on this cash flow produce a broad range of future values in 2010 from $150-$170 which supports firm's Overweight rating.
- Bear Stearns notes they expect the shares to trade down today (especially given shares + move yesterday) on the Sands Macao results and likely downward 2007 revisions to Street estimates. While Sands Macao results were softer than expected, they think the longer-term growth profile is, for the most part, unchanged. Firm continues to rate LVS Peer Perform and would likely be more opportunistic buyers at lower levels.
- Morgan Stanley says they are lowering their price target to $87 from $88 to reflect the delays to the Cotai openings. Firm believes the stock could trade off on the softer Macau number and the Cotai delays.
Notablecalls: The problem here is the Macau where EBITDA came in at $102 million vs. the 115 mln whisper number. This is also the first EBITDA decline Macau has seen since opening. It looks like Galaxy and WYNN have been more competitive luring in the mass market volumes. Competition usually means lower margins. And that's exactly what we got.
Trading at a high valuation (30x CY08), I think there is very little room for error here. The stock traded down to $83 but bounced back to $86 soon after, ending at around $85 in after hours action. I suspect there may be some additional downside in LVS over the next week or so. The stock may attempt to bounce early on.
Paperstand (GM, MORN, AMGN, LCC)
The WSJ’s ”Heard on the Street” column out on General Motors (GM), saying that investors looking to buy shares now should beware of looming challenges. The co last year raised a pile of cash to avoid a liquidity crisis and has improved its cost structure and put new models on the mkt. Although GM recently lost its No. 1 rank by global sales to Toyota, it is expanding overseas in hot mkts such as China. Still, GM's well-being depends on the ability to cut labor costs, mostly health benefits. If GM can get concessions from the UAW, its shares and bonds could post significant gains. If the two sides engage in a prolonged fight, it could slow the co's bid to stop burning cash, set back its turnaround plan and wipe out the recent advances in its stock and bonds. The upshot is that even the most bullish analysts think GM's shares and bonds could face pressure. "With GM, the scary thing is they're not even close to the finish line here. They're not generating cash," says Rod Lache, an analyst at Deutsche Bank who has a Buy rating on GM's stock in the hopes the auto maker will get significant health-care givebacks during the union negotiations. "It's too early to say the worst is over for GM," says Shelly Lombard, of Gimme Credit, who believes the co is about a 1/3 of the way through its turnaround. She says GM's bonds could see more upside if the co gets the union concessions it needs and its vehicles sell well, but adds the securities aren't exactly cheap. "In the best-case scenario the bonds could go to par by ‘09, but it's still a volatile situation now," she says.
“Ahead of the Tape” highlights Morningstar (MORN), whose shares have doubled since going public 2 years ago. This qtr, analysts expect a 24% increase in EPS and strong rev growth. The co is firing on all cylinders, with sales in its critical individual, adviser and institutional segments growing at strong double-digit rates last year. It's also been on an acquisitions binge, picking up the funds-data business of S&P's this year and Ibbotson Associates last year, among others. Independent research has also become a hot commodity since Wall St. firms were forced to clean up their own research after the tech bubble burst. But as its shares climb higher, Morningstar's own oft-repeated advice to investors might be applicable: Don't chase performance. The firm trades at 47x last year's earnings, more than highfliers like Google and Apple. Since listing, its share price has outperformed Google, and measured up to Apple. The air is pretty thin up there.
Barron’s Online out on Amgen (AMGN), saying that recent problems may have been overblown. And with multiples bouncing off 5y lows and profits still outgrowing the broader mkt, Amgen looks cheap, especially if promising new drugs hit the mkt in coming years. "The mkt has overreacted [to safety concerns] and created a pocket of inefficiency," says Cliff Hoover, of Dreman Value Mgmt. "If investors step back, they see a co of size with good existing drugs and a pipeline." Hoover says that the co "can grow earnings 10-15% annually over the next 3 years." At "13 or 14x potential earnings in ‘08, [Amgen] is not being rewarded for its future potential," says Robert Kang, of HighMark.
“Inside Scoop” reports that PAR Capital Mgmt, who played a significant role in bringing US Airways (LCC) out of bankruptcy nearly 2 years ago, yesterday decided it was time to let the airline fly on its own. PAR disclosed Wed morning that it had sold 6.75m shares of US Airways to UBS the previous day. The transaction slashed PAR's stake in the airline to 0.29% from 7.9%. InsiderScore.com's Ben Silverman calls the sale a negative for US Airways shareholders and says it could create an overhang for the stock.
Wednesday, May 02, 2007
Navteq (NYSE:NVT): Headwinds looming on the horizon?
- Deutsche Bank thinks the Street will be excited by the comfortable beat in this quarter and the positive momentum in the business given the strong results from 2H06. However they caution against such optimism especially since the core in-dash segment (60% of revenues) is delivering just single digit unit growth (8% in 1Q-07) and some of the foundations of the 1Q-07 results (e.g. capturing December PND royalty revenues and $2.7mn delayed internet revenues in 1Q-07, delaying op-ex spending into 2Q and the loss of TomTom), are suggesting more challenging quarters ahead. The performance in the seasonally weaker 2Q & 3Q periods might underperform already high expectations (est. 72% & 66% Y/Y growth in PND units in 2Q & 3Q).
DB think the sudden loss of the Tom Tom contract just a few months into the deal was the result of significant price competition from Tele Atlas. They estimate these units at ~1.0 - 1.5mn units in FY07 or ~$25mn in revenues for Navteq. Importantly it indicates that we are still in a very price competitive market despite its duopolistic nature and that firm's estimated ASP decline of ~9% Y/Y in 2007 (ex-FX) may be conservative.
Total 1Q-07 in-dash auto units increased by just 8% Y/Y, equal to its slowest rate of growth posted in 3Q-06 and far less than previous quarter's performance of high teens to 20%+ growth rates.
Reits Sell with a new $30 tgt that values Navteq at 24x firm's new FY07E EPS of $1.26 which represents a 50%+ premium to their expectations of 15-20% avg. earnings growth over the next 2-3 years. This is a slight premium to its close comparable Getty Images (GYI: trades at 19x 07E EPS), justified given Navteq's slightly faster growth rates.
Notablecalls: Well, it looks like some of the revenue upside was spill-over from Q4. Some investors and analysts will adjust their models to account for the stronger growth in Q1 and we may end up with a situation where Q2-Q3 estimates become too high for the co to meet or beat. Also, the growth in the core in-dash auto business is decelerating considerably. The loss of the Tom Tom business will not hurt much, but does indicate pricing pressures.
Even Bear Stearns' Peter Barry, the biggest NVT bull on the Street noted this morning that headwinds may loom on the horizon. He does however maintain his Outperform rating on the stock hoping that by 2008, the company will begin to have material revenue from cell phone service providers, and from dynamic content. That may of course, be already reflected in the valuation, with the stock trading 2x its growth rate.
I suspect there's a fair chance that the initial positive reaction in NVT stock may be fadeable today. The stock has had trouble overcoming the $38 level in the past and I think that's your leash. Note that the last prints in after hrs were around $37.50.
Hansen Natural (NASDAQ:HANS): Goldman offers another piece of the puzzle
With 1Q EPS likely to be merely in-line, they see a downward trading bias. The stock fell -26%, -14% and -6% after the past 3 quarterly reports, which were all in-line or a penny ahead.
However, they see many reasons to own the stock into 2H2007 and believe visibility into some upside drivers could emerge during the tele-conference: 1) Hansen might talk more proactively about increasing prices (following Red Bull), 2) Hansen has new product news for the first time in 18-24 months, 3) a European distribution deal could be reached.
GSCO views valuation as attractive at 19-20X 2008 EPS, but are mindful for a potentially lower entry-point around the quarterly results. Maintains Neutral and $46 tgt.
Notablecalls: Note that Stifel's Mark Astrachan was out a bit cautious on HANS just 2 days ago. According to Mark, trade sources indicate that unit selling and promotion expenses for Monster and other Hansen products is up in the 1Q. He downplayed the impact of these costs to the investment thesis saying it does not mean the cost of doing business is increasing for HANS.
GSCO offers another piece of the puzzle saying Red Bull's 12-ounce and better competition from Pepsi have made modest dents in share growth momentum. Is this why HANS is stepping up their promotional activity? If this is true, cost of doing business may very well be increasing for HANS.
The stock is down just over a buck from Stifel's call but given GSCO's comments, I think there may be some more downside in store for HANS.
Tuesday, May 01, 2007
Syntax Brillian (NASDAQ:BRLC): Will the shorts be feeling a load of pain soon?
large-sized DTV sales. Firm believes the shortfall is due to poor Tier-1 pricing & lack of value SKUs, which is precisely why CC's new TV chief has expanded its 2Q-4Q Olevia SKU orders from 2 (27,32) to 6 (larger sizes).
Firm's Circuit City checks indicate large-sized DTV inventories & SKU diversity were poorly managed, and were the reason for CC's recent TV management change. Tier-1 TV inventories have been lingering for 50+ days, while well-priced Olevias (27, 32) have been turning over in under a week.
CIBC believes Target & Kmart are ramping Olevia quite well, & are only limited by BRLC's ability to finance receivables (especially in China). With C1Q AR's currently converting into cash, and an Asian factoring deal on its way, they expect favorable CY07 guidance, when BRLC reports before mid May.
At 8x conservative CY07 EPS estimate of $0.90, they believe BRLC is a compelling value. With a 46%-of-float short position, 9.6 days to cover, rapidly-expanding Tier-1 retail penetration, and a watershed factoring deal on its way, they believe the shorts will soon be feeling a load of pain.
Notablecalls: Interesting comments by CIBC's Daniel M. Gelbtuch. BRCL may be one to watch over the next couple of days.
Circuit City (NYSE:CC): Comments on warning
- Bear Stearns CC experienced below plan sales in April primarily related to a fall off in unit demand for large flat panel and projection TVs. CC admitted that BBY is taking share, as the firm expected it would in 1H. However, CC would not attribute the slowdown to the replacement of 3,400 employees. But, the falloff is far too coincidental. While they expected top line volatility, they did not foresee such a steep decline; lowering 1Q comp to (8%) from (4%).
Nonetheless, the firm believes that there is a broader consumer trend at work (maybe 60% macro, 40% co-specific).Indeed, CC's announcement fits with similar sentiment from TGT, WMT, and ODP. They are in the process of looking at their BBY comp. Firm expects consumer stocks to face continued headwinds in the near term.
Bear believes that CC has more positive catalysts than negative, particularly at $16, where it was indicated after hours. These include: 1) the announcement of a new CFO; 2) the details of the next wave of restructuring; and 3) the potential sale of InterTAN. Finally, they believe that CC remains a viable target for private equity and believe that the board will feel increased pressure to explore its alternatives.
At $16, CC will be trading at 5.9x on an EV/EBITDA basis; it will have a 0.16x EV/sales ratio, a 7.5% FCF yield, and cash will represent an estimated 25% of its mkt cap. While the firm would not be surprised to see some downgrades, they find it difficult to do so after considering these factors. Maintains Outperform.
Notablecalls: CC looks to be caught between the rock and a hard place. On one hand there's the weakening macro situation, on other hand there's strong competition from BBY, liquidations of CompUSA and Tweeter and the apparent internal turmoil (labor changes). Let's review these:
- Macro probably accounts for 40-50% of the shortfall. That's something already echoed by TGT, ODP over the past couple of weeks.
- Competition from BBY is certainly not news. There had been some analyst chatter of CC losing significant share in the critical large screen TV category. In fact, weakness in large screen flat panels was cited as one of the main reasons for the shortfall by the management.
- CompUSA and Tweeter liquidations? Known already.
- The internal turmoil. CC is in the proccess of replacing 3000 of its highest paid associates. This is bound to have an impact on the general customer service levels, thus providing BBY to capture some additional market share.
So, most of the problems were already known. With the stock down 50% from its peak in 2006 and cash representing 25-30% of its market cap, one could argue most of the problems are already priced in. Note that the last time CC made drastic changes to store labor compensation in February 2003, the stock wasn't far from its bottom.
I suspect the stock will open around $15.50 today and will take another quick $0.50 haircut. That's when it becomes buyable for a bounce.
The situation in BBY is also an interesting one. The stock is likely to get hit today (as down $0.50 in after hours action) as fears of general CE retail slowdown spread. Note that it was only April 4 when CC guided for FY08. 26 days later they warn. This indicates that most of the problems are company/competition specific as trends in demand do not change that quickly. This may mean BBY actually took business from CC.
Note that BBY is expected to file its 10-K during the week of May 6. They are likely to update their guidance and if they reiterate the guidance given on April 4, there will likely be a nice short squeeze. Citigroup's Retailing team called BBY after CC's announcement and was informed by BBY that BBY had not seen material changes from their expectation, and they will not revise their guidance.
All in all, I expect BBY to get hit today but would be bidding it around $45 for a bounce.
Paperstand
According to the WSJ, a human-rights group released a critical report on Wal-Mart (WMT), alleging the retailer used security cameras to spy on union sympathizers and planted supervisors alongside pro-union workers to monitor activities, among other actions that violated federal labor laws. The 210-page report by Human Rights Watch is the most comprehensive analysis to date of the co's actions during union organizing drives. It examines dozens of drives at a US Wal-Mart store between 2000 and 2005 and cites 15 decisions by the National Labor Relations Board that found Wal-Mart violated labor laws during those drives.
The WSJ reports that activist investor Carl Icahn is intensifying his campaign to get a Motorola (MOT) board seat, calling the co "troubled" and likening reported comments by CEO Ed Zander to "something straight out of Alice in Wonderland." The criticism, which marks the first personal remarks toward Mr. Zander since Mr. Icahn began buying shares in the co, is part of a letter in which Mr. Icahn directly addresses Motorola shareholders. Shareholders will vote on the seat eyed by Mr. Icahn at the co's annual shareholders meeting Mon. Mr. Icahn's letter to shareholders also says that the co "has been shaken by leadership setbacks." In it, he adds that it has suffered "a critical failure in oversight and leadership that must be addressed." "Motorola has stumbled, and stumbled badly," Mr. Icahn writes. Mr. Icahn's letter to shareholders also includes a reference to a recent WSJ article in which Mr. Zander more than once stated "I love my job. I hate my customers."
“Heard on the Street” column discusses Delta Air Lines, which emerged from bankruptcy yesterday. But don't expect the airline's new shares to take off when Delta begins trading again Thu. While Delta recently dismissed concerns by rival carriers that consumer demand has begun flagging, investors remain skeptical of many airline stocks at a time when the forecast for the US economy is cloudy. Delta's new shares, meanwhile, already are trading on a "when-issued" basis at levels suggesting that the valuation placed on the carrier by its financial advisers may be higher than what would-be buyers of its stock are immediately willing to pay. When Delta filed its final reorganization plan with a NY bankruptcy court in Dec, advisers suggested the airline, upon exiting from Ch11, would be valued at between $9.4-12bn. That represents between $23.50-30 for each of the 400m shares to be issued. Even the lower end of that range would give Delta the 2nd-highest mkt value in the US airline industry, after Southwest, and a P/E ratio 2nd to none, based on the airline's net income forecast of $456m for ‘07. Last week, CFO Edward H. Bastian said that mgmt is comfortable with the prospects for Delta's share price and recognized that a mkt cap of $10bn or more "would be fully valued." An initial surge in the share price, Mr. Bastian added, would be an "unnatural build." Some creditors who would have been issued the co's new shares instead opted to sell before they ever received them. Last month, for instance, more than 90% of the airline's pilots completed the sale of about $1.16bn in claims against the airline to investors more willing to wait for long-term growth of the stock. And other creditors are expected to follow suit. "There's going to be some pretty big sell pressure on the stock b/c there will be lots of [creditors] looking for liquidity after being locked in for so long," said Bill Mann, of Motley Fool. "New investors are going to be cautious in the short term."
Barron’s Online “Inside Scoop” section reprots that Chmn and CEO Charles R. Schwab sold 800K shares of Charles Schwab (SCHW) for nearly $16m this past Fri. "Chuck Schwab has a long standing practice in place of periodically selling some of his shares as part of an overall estate mgmt and personal financial-mgmt plan," says co spokesman Glen Mathison. "He is still a significant owner of the co." In fact, Mr. Schwab continues to hold over 214m shares, about 17% of the firm's outstanding stock, even after sales of 16.76M shares (totaling $268m) over the last 18 mo’s.
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