Notable Calls
RSS feedNotablecalls@gmail.com
Friday, June 29, 2007
Notablecalls is out for the weekend, posting resumes on Monday. Have a nice weekend.
Paperstand (MS, T, TMO, SONS)
The WSJ’s „Heard on the Street” column highlights Discover Financial Services, which is being spun off from Morgan Stanley (MS) next week. The co is dwarfed by rival card processors Visa and MasterCard. It holds $51bn in credit-card loans, less than half that of behemoth issuers like BofA, JP Morgan and Citigroup. It generates less spending on those cards than American Express and has little presence outside the US. "The mkt for plastic is still relatively underpenetrated in many ways, and there aren't a large number of networks in the mkt," says Moshe Katri, of Cowen who covers payment processors. The positive sentiment is being fueled by hopes Discover will be nimbler and more aggressive as an independent co. And if it still can't catch up to its rivals, there are expectations that the co will be a takeover tgt for a big bank or even retailer.
“Ahead of the Tape” highlights AT&T (T), which is the sole carrier of iPhone for the next 5 years. While Apple (AAPL) is up 42% this year, AT&T is up only 13%, and may be a better way for investors to play Apple's new product. Subs to the iPhone service should be less likely to switch to other services once they sign up, partly b/c of the hefty investment in the device. That should reduce the important "churn" rate of subs who switch to other services. iPhone's users also seem likely to pay for extra telephone services. Analysts at Credit Suisse est the avg net profit from an iPhone subs will be $1,724 to AT&T for phone services over the life of a customer, compared with $936 on avg for AT&T customers who use other phones. Ma Bell also could snatch subs from rivals. Of the 1m+ ppl who signed up for an AT&T service that will notify them when an iPhone is available, 40% don't have AT&T's service. AT&T ests about half of its iPhone subs will come from competitors. Now all Apple has to do is deliver the product everyone expects.
Barron’s Online discusses Thermo Fischer (TMO), saying that despite the stock run-up, investing in Thermo Fisher is no risky experiment. Remaining revenue and cost synergies from the already profitable merger, growth opportunities in emerging markets, and strong free cash flow mean investors can still extract plenty of upside from the stock in the next 12 mo’s. The stock's climb over the last year is due in large part to enthusiasm over the merger, and the kudos are well-deserved, says Caryn Zweig, of Abner, Herrman & Brock Asset Mgmt. The union of Thermo Electron and Fisher Scientific is "one of the few mergers where one plus one equals three," says Zweig. "They will be able to take full advantage of their opportunities."
“Inside Scoop” section reports that the stock of Sonus Networks (SONS) is near multiyear highs and the co is facing delisting, but one value investor sees potential. This week Legatum Capital bought 1.14m shares for $9.7m. In addition to Legatum, the overall institutional ownership in Sonus has steadily risen since ‘05, according to Joshua Hong, of OwnershipAnalyzer.com.
Thursday, June 28, 2007
Digital River (NASDAQ:DRIV): Color on warning
RBC Capital: Why the $7 million miss? The primary factor was a slowdown in the ramp of key clients including Symantec, Microsoft and an unnamed client, which the firm estimates to be approximately $4M, $2M and $1M respectively.
The roll-out of the renegotiated SYMC contract, which provides DRIV with global renewals, was said to be only a third complete, essentially unchanged from the end of Q1. Shifting resources on the part of both companies were to blame for the shortfall. MSFT business, which includes Office trial conversions and Vista, was said to be ramping slower than expected.
Is all the bad news out? Likely for 2007, but the company has a challenging road ahead as they attempt to reinvigorate growth among its historically strongest customer and grow Microsoft to the magnitude investors had originally hoped, all while balancing investments in infrastructure, which the firm feels is necessary for the company to increase operational efficiency and attract new customers.
RBC is lowering their price target from $58 to $50, and maintaining Sector Perform rating. Target reflects lowered outlook on the company's 2007 revenue and EPS growth expectations of 12% and 3% respectively (was previously projected to be 20% and 17% respectively).
- Piper Jaffray notes that while disappointed with the lower than expected guidance, they believe DRIV's issues are more short-term in nature and not a reflection of the overall long-term health of the business. As such, they expect to see accelerated revenue and earnings growth in 2008 as these issues are resolved and DRIV sees greater contribution from Microsoft and Symantec. With shares down 15% after hours to around $44, DRIV is trading at 12x/9x 2007/2008 EBITDA, which PJ believes is attractive given our expectation of 20% plus LT earnings growth. Additionally, DRIV announced an expanded share repurchase program for up to $200M in common stock. At current prices, they would expect the company to be active in a buyback. Firm maintains Outperform, lowers tgt to $61 from $72.
Notablecalls: The warning should not come as a big surprise to investors as checks done by firms covering DRIV were showing subdued activity by MSFT. Jeffco was stupid enough to upgrade the stock on June 20 in face of this. There had been some talk of Symantec (45% customer) getting back on track, so this was probably the psychological trigger for them. Usually, Jeffco's no stupid operator but they sure did get this one wrong. Happens.
What's next? Investors have been expecting MSFT to become the main growth drivers for DRIV. This has yet to happen, as it seems Mr. Softee is approaching the e-commerce outsourcing channel very conservatively (in face of its largest product launch ever) to ensure they do not disrupt the traditional OEM and Retail channel partners.
RBC's Robert Breza has noted in the past that it took Digital River approximately seven years to build the SYMC relationship. While he does not expect Microsoft to take as long, he does believe the first couple of years are a learning process for each side (Digital River and Microsoft). Investors have front-end loaded the ramp in Microsoft and are disappointed.
This means DRIV may have one more tough quarter ahead. Although on the conf call management noted their H2 estimates may prove to be conservative.
Given the 7 pt haircut the stock got last night I think DRIV may be a bounce candidate early on. But I would not overstay my welcome as I think there may be another 10% downside to this one over the next weeks as valuation continues to be quite high. But play the bounce first!
FormFactor (NASDAQ:FORM): Expect to see downside
While n.t. risk to FORM's fundamentals, downside appears limited to around $35 (20x downside C2008 EPS of $1.70) and they are still believers in longer-term story given strong fundamental demand for FORM's DRAM cards and some new evaluations (e.g., TXN) on logic side that could help in C2008.
Therefore, they are loathe to downgrade to Sell (maintains Hold), but these issues likely to at best keep lid on stock near-term and at worst cause break to mid $30's.
Maintains $45 12mo tgt; looks for break to $35-37 near term - Many investors looking to Buy FORM at these levels. Citi notes they would wait out what could be bad news near term. F07 GAAP EPS from $1.44 to $1.39, F08 unchanged.
Notablecalls: I failed to call Citi's negative note on FORM outright actionable on June 18 and the stock is down 7% since then. I'm quite sure today's note will cause FORM another 1 to 2 pts worth of damage.
Paperstand (RIMM, PALM, FLWS)
The WSJ reports that two bidders are expected to make competing offers for Altadis within days that could value the cigarette and cigar maker at $17.5bn or more and result in one of the biggest tobacco deals ever. Imperial Tobacco (ITY) and CVC Capital have been negotiating terms and conditions in recent days with Altadis in anticipation of making formal bids by next week.
According to the WSJ, Massachusetts regulators accused UBS (UBS) of improperly providing below-mkt office space, low-interest personal loans and other perks to Boston-based hedge-fund execs if they steered enough business to UBS. The administrative complaint, part of a previously disclosed investigation, was filed by the Massachusetts Securities Division against UBS's US brokerage arm.
Barron’s Online out saying that the reviews are in, and Apple’s (AAPL) iPhone is being hailed as a groundbreaking consumer product that is likely to be an enormous commercial success. For RIM (RIMM) and Palm (PALM) it means that both stocks will likely struggle in coming mo’s. iPhone has convinced some observers that cellphones will increasingly be used to consume information through Web browsing and playing music and video. It won't be easy for RIM and Palm to prove they can dominate that new landscape the way they have their existing mkts. Nonetheless, both stocks seem priced for continued success that may be elusive. RIM sports a FP/E of 33.8x and Palm, 24.2x, ahead of the 23x multiple, on avg, of MOT, NOK, ERIC and QCOM. "To justify even $140 a share for RIM, we need to see the co selling more than 1m units per qrtr outside of their traditional base of business customers," says Richard Windsor, of Nomura Securities. "We're just not seeing it."
“Inside Scoop” section reports that RLR Capital disclosed it had accumulated a 5.1% stake in 1-800 Flowers (FLWS) with more than 1.3m class A shares. In its activist 13D filing, RLR said that co's shares were "substantially undervalued" when they were purchased. RLR founder Robert Rosen also sent a letter Wed to James McCann, founder, Chmn and CEO of 1-800-Flowers, declaring support for mgmt's cost-cutting and growth initiatives. Ben Silverman, of InsiderScore.com, says that RLR's "buying into strength and their flattering letter shows that they have a lot of faith and confidence in mgmt."
Wednesday, June 27, 2007
Nektar Therapeutics (NASDAQ:NKTR): Pfizer continues to be serious about Exubera
Early prescription trends for Exubera have been disappointing, due to a deliberate launch by Pfizer and lowpatient awareness. However, the firm believes that patient dissatisfaction with current diabetes therapies has created pent-up demand for Exubera, and will drive accelerating use as Pfizer's primary care launch gains traction in H2:07 and direct-to-consumer advertising begins this summer. Recent clinical checks indicate high patient satisfaction with Exubera and, in many cases, an improvement in glucose control over injections.
Notablecalls: Last time I was positive on NKTR, the stock took out my stops in a heartbeat. Not only that, it took another 15% dive over the following weeks. The shorts sure like to chop this one down. Yet, Cowen's comments make too much sense not to be highlighted. Not calling it actionable here, though.
Jones Soda (NASDAQ:JSDA): Time to bottom fish?
Overall, the firm views this announcement as an incrementally positive. The highergross margin afforded energy drink sales should, in theory, provide Jones Soda with upside potential beyond this year. For example, they would expect theenhanced energy drink category to generate an approximate 60% gross margin, which compares to the core (i.e. bottle DSD and DTR sales) approximate 35% gross margin and the concentrate (i.e. cans, CSD) approximate 85% gross margin.
They expect the company to rollout the "Gaba" enhanced energy line of branded beverages through its distribution, or DSD, network to certain markets as early as the end of this year. Firm anticipates a National rollout, also through the DSD network, next year.
PJ's $31 price target is 68x their 2008 earnings estimate, a premium to the company's 50% growth rate but in line with the 36x-106x four-year trading range. Alternatively, the price target is 12x 2008 revenue estimate. Reiterates Outperform rating on JSDA shares.
Notablecalls: It's fairly quiet out there this AM. I couldn't help to notice PJ still has a $31 target on JSDA, implying hefty upside to current $13 stock price. The stock has been crushed lately, partly because of lower than expected results reported in May and also due to the disappointment at SBUX. The price has been more than halved since mid-April.
Note that ThinkEquity upgraded their rating on JSDA to Buy from Accumulate on June 18 saying they believe the news that Starbucks would stop offering Jones Soda at the end of June has created a buying opportunity as the shares have sold off substantially. Firm believes sales at Starbucks were a very small percentage of bottled soda sales and, more importantly, will have no impact on the rollout of Jones Pure Cane Soda in cans.
Jones Pure Cane Soda in cans is now on track to be on the shelves by the Fourth of July at the long list of retail locations the company announced last March. ThinkEquity believes sales growth will reaccelerate in Q2 an Q3 as retailers using just-in-time inventory systems begin to re-order.
Despite some setbacks, and with the potential for more growing pains, the firm believes new products and substantially larger retail distribution (with more to come) provide Jones Soda with the opportunity to gain share of very large markets and earn rising returns on its investment. Think's target on JSDA stands at $20.
Even here at $13 the stock's not cheap. Yet, considering the growth and opportunity for expansion, I think JSDA is starting to look increasingly interesting. The chart continues to look omnious but I suspect a n-t bottom is $1 away. I would not be surprised to see ThinkEquity come out and up their rating to Strong Buy as the shares are down another $3 points since their June 18 upgrade.
Paperstand (AAPL, EBAY, WEN)
The WSJ reports that Citigroup (C) is in advanced talks to buy Automated Trading Desk, an electronic trading firm, for about $700m. The purchase of the firm could be announced this week, though details of the deal could still change.
The WSJ's Walter Mossberg tested Apple’s (AAPL) iPhone. The verdict is that, despite some flaws and feature omissions, the iPhone is, on balance, a beautiful and breakthrough handheld computer. Its software, especially, sets a new bar for the smart-phone industry, and its clever finger-touch interface, which dispenses with a stylus and most buttons, works well, though it sometimes adds steps to common functions. The iPhone's most controversial feature, a virtual keyboard on the screen, turned out in tests to be a nonissue. But the iPhone has a major drawback: the cellphone network it uses. It only works with AT&T, won't come in models that use Verizon or Sprint and can't use the digital cards that would allow it to run on T-Mobile's network. So, the phone can be a poor choice unless you are in areas where AT&T's coverage is good. It does work overseas, but only via an AT&T roaming plan. In addition, even when you have great AT&T coverage, the iPhone can't run on AT&T's fastest cellular data network. Instead, it uses a pokey network called EDGE, which is far slower than the fastest networks from Verizon or Sprint that power many other smart phones. And the initial iPhone model cannot be upgraded to use the faster networks.
“Inside Track” section reports that Margaret C. Whitman, president and CEO of eBay (EBAY), made a deal of her own recently by selling more than $20m worth of her co's shares. Ms. Whitman, who hadn't sold any eBay stock in almost 4 years, did the transaction under a plan that provides for the sale of as many as 6.4m shares, valued at more than $200m at current prices, from this month to next Feb. "It's a routine part of prudent tax and estate planning as well as asset diversification," said eBay spokesman Hani Durzy.
Barron’s Online “Inside Scoop” section reports that during the 1Q, Tudor Investment had sold off its entire holdings of 2.42m Wendy’s (WEN) shares. Shortly after clearing its tray of shares, Tudor made a return visit, buying 5.33m shares, or a 6.1% stake, by June 13. The firm filed as a passive shareholder. Ben Silverman, of InsiderScore.com, says historical pricing suggests Tudor made 10-15% gains, give or take a few percentage points, from its previous investment in Wendy's.
Tuesday, June 26, 2007
Beware of excessive eagerness!
NC
Adobe Systems (NASDAQ:ADBE): Conflicting views
- Goldman Sahcs is removing ADBE from their Buy list saying that although they believe the strength in Adobe's CS3 release is likely to sustain its 17% top-line growth rate this year, they do not believe results are likely to end up significantly above this figure and may not meet expectations increasingly focused on upside surprises in future quarters. As a result, the firm is opting for the sidelines, as a trade until later this year when visibility into FY2008 and further acceleration beyond current estimates emerges.
GSCO's current estimates anticipate 32% yoy growth in the August quarter and 23% yoy growth in the November quarter, which is a testament, in their view, to the strongest product cycle in the company's history (with CS3) and ongoing strength in Acrobat/knowledge worker sales. However, shorter term, they do not anticipate a significant upside to these estimates and given the company's premium valuation compared to the overall sector (trading at 25X forward EPS estimate), they believe significant upside to the current stock price remains limited. Maintains $47 tgt.
- Cowen notes trading in software stocks has become more volatile in the last month and Adobe stock has pulled back noticeably since the May quarter report. Sentiment has always played a major part in the stock action and with the stock now more controversial, they believe investors should look to add to positions. While too early to gauge prospects for upside to Street $0.40 EPS estimate (they are $0.43) for the August quarter, they believe set-up looks good. Firm notes strong deferred revenue build during Q2 as well as many specific tailwinds this quarter have the potential to drive upside. Given consensus controversial view after pull-back off CS3 launch quarter report, they believe expectations are properly set to be exceeded. Maintains Outperform.
Notablecalls: Must say I was somewhat surprised to see ADBE pull back so agressively following Q1 results. I was ready to make a fade call after the co reported but held off as most firms were still very positive on the stock. Was looking for couple of bucks worth of downside at the most.
Now, ADBE is down little over 10% from highs. That's after reporting the second-largest increase in deferred revenue ever. There is very little doubt in my mind that ADBE can post some decent upside when it reports in September. This makes it a bounce candidate today following GSCO's call. I expect the stock to gap down and would be looking for a bounce just before it hits the $39 level. That's my ultra s-t view.
Paperstand (GM, TSN, AZO)
The WSJ reports that in the latest sign Congress is turning a skeptical eye toward Wall St., an influential House committee is set to hear testimony from all 5 commissioners of the SEC today, the first time that has happened in at least 10 years. With the Democrats in control of both houses of Congress, it is an opportunity for Democratic lawmakers to frame such issues as the rise of hedge funds, CEO pay and shareholder rights through their own prism and to sharpen the debate heading into the ‘08 election. "It's signaling power," said James Angel, of Georgetown University's McDonough School of Business in Washington, of the invitation to all 5 commissioners.
The WSJ reports that about 450K Chinese-made tires sold in the US, and possibly many more, may lack an important safety feature. The tire defect comes in the wake of several other high-profile safety problems involving Chinese products. "As imports grow, and China is the largest exporter to the US, it's essential" that all manufacturers comply with US safety regulations, said Daniel Zielinski, of Rubber Manufacturers Association. Last year's fatal accident occurred when four carpenters were traveling back to their homes in Philadelphia after a day of framing homes in the Pocono Mountains. According to a lawsuit filed in the Court of Common Pleas in Philadelphia County on behalf of the two men killed and one of the two who were injured, the tread separated on the left-rear wheel of the van, causing the vehicle to crash. Also named in the lawsuit is General Motors (GM), maker of the van. The suit accuses the car maker of building a defective vehicle that was prone to tip over in an accident. The tires involved in the case were replacement tires and not part of the van's original equipment.
“Heard on the Street” column out saying that more consumers are flocking to low-fat, all-natural and now drug-free chicken. And that could be good news for Tyson Foods (TSN) and its investors. The co announced last week that all of its branded retail chicken will be produced without antibiotics. The financial upside of Tyson's plan isn't chicken feed. Americans will consume 87 pounds of chicken per person in ‘07, even though the price of a boneless chicken breast has risen at least 20% in the last 12 mo’s, mainly b/c of the higher cost of corn-based food. Over the longer term, Tyson's new initiatives -- ranging from increased advertising to the introduction of higher-priced branded chicken -- could lead to stronger earnings and a higher valuation as investors stop viewing that co as a simple "protein" purveyor that supplies undifferentiated chicken, beef and pork to restaurants and retailers. "What they're trying to do is become a packaged-food co. It's really smart of them," says Neil Eigen, of Seligman Investments.
Barron’s Online “Inside Scoop” section reports that with AutoZone (AZO) shares racing to new highs, investment firm DE Shaw is continuing to add stock in the automotive-parts retailer to its portfolio. DE Shaw now owns 3.37m shares, or 5% of AutoZone’s outstanding stock. Ben Silverman, of InsiderScore.com, says DE Shaw's buy into stock strength at AutoZone is a positive signal for investors. However Silverman adds that DE Shaw's historically quantitative investment strategy makes its reasoning behind the purchase somewhat opaque. "With Shaw, b/c these guys are a quant firm who use methods like stats arbitrage, what's important to remember is they're not looking at some of the same factors that retail and other institutional investors look at." "That said, something popped up on their screens that they like here," Silverman says.
Monday, June 25, 2007
AMD (NYSE:AMD): ThinkEquity positive
ThinkEquity's Eric Ross thinks Advanced Micro Devices (NYSE:AMD) is seeing a better quarter thananalysts and investors expect, and he believes this will drive shares higher next month, when it is expected to report. Higher notebook mix (even at the lowend) drives higher ASPs and better margins than expected. The firm upgraded AMD on May 15 because theyheard it was gaining share back; they continue to hear of better margins and ASPs. Mr. Ross expects this momentum to continue through 2007. Reiterates $19 price target and believes it could be a near-term event.
Street consensus is for $1.26b and ($0.85), and ThinkEquity expects $1.35b and ($0.64).Importantly, we expect gross margins to improve from 29% to 34% Q/Q; which they believe investors should view very positively. The biggest drivers are share gains (Dell and Toshiba) and higher ASPs due to a better mix of notebooks.
Notablecalls: Well, Eric's the man! I think AMD goes higher from here. At least in the s-t as the chart shows signs of bottoming. Thursday's big gain followed by a breather on Friday sets stage for a nice upside move.
NavTeq (NYSE:NVT): Actionable call alert!
Portable navigation market really is taking off in the U.S. Two percent penetration of portable navigation devices and declining prices should keep elasticity at these high levels for at least another 2-3 years. So they are raising their estimates for 2007, 2008 and 2009 portable navigation end market unit growth to 200%, 120% and 50% y/y from 160%, 100% and 40% prior. Firm notes they could still be conservative as they are assuming elasticity to decline 2 points over the next 2 years and are discounting no growth coming from countries outside North America and Europe.
Notablecalls: Looks like BAC's FY08 estimate is the new Street high by far. The previous Street high stood at around $1.80. This type of conviction will no go unnoticed. The logic behind the call looks solid and one can even consider it somewhat conservative, making it even more believable.
I think the call ranks just a few points below the likes of Deutsche's Illumina (NASDAQ:ILMN) call from June 11. But it's surely actionable. Sitting at my old desk, I would load up on NVT on open and watch it climb over the next couple of weeks as other firms join BAC and up their ests.
$.50 leash.
NAVTEQ is one of two global suppliers of digital maps for navigation device manufacturers, like Garmin. The co's primary competitor is Teleatlas.
Office Depot (NYSE:ODP): Four firms cutting ests over the weekend
- Deutsche Bank says they believe the recent slowdown in the economy continues to impact
Office Depot's results. As such, they are reducing their quarterly and annual EPS estimates (Q2 goes to $0.41, below last year's $0.43, FY07 goes to $2.10 from $2.26 and FY08 to $2.42 from $2.64, up 15% y/y). The biggest changes to firm's forecasts come on the top line, which in turn will lead to SG&A deleverage. Despite these changes, they are maintaining Buy rating as they believe a strong balance sheet should support downside.
- Citigroup notes they are lowering second and third quarter estimates for Office Depot on belief that since the company provided guidance in April, sales in the North American Retail and Delivery segments have further deteriorated primarily due to a challenging macroeconomic environment.
While the Street had already anticipated an earnings miss, it will likely be slightly greater than expected. In addition to cutting 2Q estimate by $0.04 to $0.42, $0.06 below cons., they are also cutting 3Q by $0.04 to $0.56, as they believe the sales softness will likely persist through the summer. While the shares are attractively valued at these levels, trying to find a bottom in the shares could prove challenging. Citi thinks there could be some further downside from here and that a better buying opportunity may present itself over the next several months. Maintains Buy. Taget is cut to $51 from $52.
- Banc of America is adjusting downward their below consensus estimates for ODP on concerns the current environment is proving difficult to drive top line growth both in the NA Retail and Contract divisions. Firm's estimate for Q2 goes to $0.43 from $0.46, Q3 is lower by $0.02 to $0.55 and the year is now $2.15E from $2.20. 2008E is now $2.48 from $2.51. Channel checks and conversations with industry contacts lead them to believe business has decelerated. They fear that an increasingly competitive promotional environment could also inhibit margin expansion opportunities. Maintains Neutral, $37 tgt.
- Goldman Sahcs cuts their estimates as follows: FY2007 to $2.24 (down $0.07), FY2008 to $2.63 (down $0.07), and FY2009 to $3.14 (down $0.06). Cuts primarily reflect lower NA Retail and Delivery sales, and a delay to the firm's gross margin recovery. Neutral, $40 tgt.
Notablecalls: I'm somewhat surprised to see four large firms cut their estimates almost simultaneously. Probably a case of analysts not wanting to diverge from the herd. I suspect the stock will get hurt today as some investors will surely panic and sell. We have Citi out basically saying there could be further downside from here. Yet, they have the highest target on the Street for ODP.
I think ODP may lend itself to a scalp short early on but I'm not expecting any major downside here. The valuation's too low for that. More agressive trading accounts may even catch ODP for a quick bounce around the $32 level.
Sunday, June 24, 2007
Barron's Summary (BX, AOB, YHOO, CROX)
Fund manager picks include CFC, LUM and CNX.
If the subprime-mortgage market worsens, MBIA (MBI) could sustain claims losses exceeding a half-billion bucks. It might have to issue more stock, diluting shareholders.
The recent weakness in State Street (STT) stock offers a chance to buy cheap shares in a major beneficiary of expanded global securities markets. The upside is more than 20%.
At 46, Crocs (CROX) shares are priced for near-perfect execution. If the company trips, they could drop into the mid-30s, more in line with other footwear concerns. Take profits.
Salesforce.com (CRM) shares look pricey after rising threefold in three years. And now that the small company is competing with behemoth Oracle, taking profits is sensible.
“The Trader” section highlights DJO (DJO), whose shares took a beating in May after DJO reported its 2nd earnings miss in a row. The pullback was treated as a buying opportunity by some hedge funds, like Millbrook Capital Mgmt, which has accumulated a 9.4% stake. Millbrook is seeking regulatory clearance to buy more shares. The injury-care business is recession-proof, and DJO boasts gross margins near 60%. DJO's earnings flub also was caused by glitches, like $2m in cost overruns, as it struggled to absorb a recent acquisition of Aircast. Canaccord Adams analyst William Plovanic expects DJO to earn $2 a share in ’08. With mid-cap medical-technology co’s trading at an avg 23.7x ‘08 earnings, DJO's 20.7 multiple manages to look reasonable. He expects strong cash flow to help DJO pare debt and grow EPS "well in excess of revs for at least the next 3-4 years." Millbrook sees shares trading near 60 within 1-2 years.
“The Trader” also highlights Diebold (DBD) and NCR (NCR), whose shares are up 32% and 50% over the year, respectively. In N-America the financial self-service mkt is expected to grow by just 3-5% a year. Yet in less saturated mkts, like China, India and E-Europe, the growth rate exceeds 10% as banks jockey for the early-mover edge in the nascent self-service banking mkt. The shift toward higher-margin managed services also should generate more cash flow. Jefferies analyst Yvonne Varano expects "improving demand for ATMs, and cost savings to drive double-digit earnings growth in the coming years." NCR is trading at about 16.4x forward earnings, while Diebold sports a 17.6x. Both valuations are reasonable, and within their historical range - and may prove modest, if demand for automated transactions surpasses the Street's moderate ests.
“International Trader” highlights American Oriental Bioengineering (AOB), which is set to sell 13m shares in a secondary offering. CEO Shujun Liu will sell another 2m shares. For such a small co, there are a lot of big questions, along with a history of muddled disclosures and misleading claims. First, customers of the co aren't looking very closely at two key product lines, packaging for both carry misleading claims. The "UrinStopper Patch" package says it contains "radioactive photons" that "warm the acupoints." But Chemir Analytical Services says it detected no radioactive elements. Meanwhile, packaging for SoyPeptide powder says it has "patent technology from University of California, Berkeley." But an official at a UC Berkeley's Office of Technology Licensing says, "They are not one of our licensees." Secondly, the co’s history includes penny stock fraudsters and persons that are barred from the banking and brokerage industries.
“Follow Up” out positively on Yahoo (YHOO), saying that for all the uncertainties Yahoo faces, its stock is almost sure to rise. "Any way you look at it, the stock goes up from here," says Larry Haverty of Gabelli Global Multimedia. "It is very good value." Haverty sees Yahoo shares fetching in the upper 30s in a sale.
Friday, June 22, 2007
Taser (NASDAQ:TASR): Jeffco upping tgt to $20 from $13
Inflection Point? Jeffco believes "yes" and is increasing '08 EPS by a penny accordingly. Over 44 countries have started a Taser program, and there are countries like France that may aggressively roll out Tasers to their officers. The penetration rate of the U.S. law enforcement market is about 25%, and there are large cities like Chicago that are warming to the product.
The question to which they do not have an answer is whether the business acceleration looks like a hockey stick (steep acceleration), a slow building exponential graph (flatter acceleration), or more of an upward moving sine wave (lumpy). Bottom line is the business is improving, and many future catalysts exist.
Notablecalls: TASR has been on fire over the past couple of months and I suspect Jeffco's call will yield some nice upside today and over the next couple of weeks.
Banc of America: DRAM price pop due to inventory build, not supply and demand
June and July are the two weakest months in the year for memory demand. So why are prices increasing if demand is seasonally weak? In the past, DRAM suppliers use this time of year to build inventory and push prices higher. Demand picks up sharply in August. Suppliers want to start the seasonally strong period (August to October) with the best possible backdrop to pricing.
So price increases in June and July have little to do with supply/demand. They think the DRAM industry is in an oversupply situation. Whether or not second half seasonal demand can soak up the excess supply is the critical issue. Recent favorable monthly PC demand is a better argument to support a soft landing in the memory cap-ex cycle than DRAM prices.
Notablecalls: Both AMAT and LRCX blew through my stops yesterday. Yet, it looks like the bounce in DRAM pricing has nothing to do with end demand. Also note that Piper Jaffray is out downgrading NSM, ADI and LLTC (analog space) this morning saying recent industry checks indicate a broad weakening of the semiconductor recovery cycle. Not making any calls here, though.
salesforce.com (NYSE:CRM): Color on yesterday's sell-off
Citi thinks it's possible that this urgent meeting never occurred. In fact, CRM sales management has weekly forecasting calls. And some key sales execs reportedly were absent from this call leading Citi to believe that if the business was way off track, why wouldn't some of these keys execs show up. From firm's view, there is no issue in overall demand. But CRM has to demonstrate it can close this rich pipeline of potential deals. Post the GOOG partnership a couple weeks back, CRM saw a record surge of new customer leads.
The firm also believes hiring trends remain very healthy this Q. At 2,243 total employees at end of Q1, CRM has hired ~150-200 new employees per quarter over the past year. They believe CRM continues to hire aggressively in Q2. Even a small slowdown could be beneficial to the overall operating margins for the company.
While the departure of an AppExchange executive is disappointing after only four months on the job, the firm believes this exec chose another role at a smaller company and had little impact on the business during such a short duration at CRM.
Maintains Buy and $60 tgt.
Notablecalls: The decline started yesterday morning, about 90 mins into regular trading after First Albany put out a call to clients saying their sources indicate CRM held an urgent meeting to address sub-par close rates thus far this quarter in its North America SMB segment.
The firm also noted their contacts indicate that CRM's SVP and GM of AppExchange and Developer Marketing, Rene Bonvanie, recently resigned. In their opinion, Mr. Bonvanie was a relatively high-profile hire, and represented a symbolic move because he was hired from SAP, where he was VP of Global Marketing.
First Albany reduced their tgt on CRM to $53 from $58 saying it is still fairly early in CRM's July 2Q; it is possible that close rates will improve during the remainder of the quarter, or that CRM will make up the difference in other segments (e.g., Enterprise, International).
- I think Citi's right. Either this meeting never happened or it was just one of regular sales forecasting meetings CRM likes to hold. Adding 2,500 customers/quarter, sales management is always fine tuning the business. As for the departure of Mr. Bonvanie, it's likely a non-event.
I think CRM will be an early bouncer.
Paperstand (BP, ADM, POOL, PSS, JNY)
The WSJ reprots that Archer-Daniels-Midland (ADM) is preparing to enter the sugar-cane-ethanol business in Brazil. Such a move by the co would mark an endorsement of a gasoline substitute that competes directly with the corn-based approach used by US ethanol co’s. ADM is exploring a variety of strategies to enter Brazil's sugar-cane-ethanol mkt, ranging from building sugar-cane mills and ethanol plants from the ground up to acquiring sugar-cane co’s. ADM's senior VP of strategy, Steve Mills, said the co hasn't ruled out an outright purchase of Cosan, Brazil's largest ethanol producer, in which ADM owns a small stake.
Barron’s Online discusses Pool Corp. (POOL), saying that current challenges to future growth mean that shares of the co could start to sink. Even corporate insiders get the message, judging by the heavy selling that's been going on. The weakened housing mkt has hurt demand for new pools, while cooler weather has delayed new pool construction and the opening of existing pools that would require maintenance and supplies. Increased spending to open up new sale centers catering to local pool builders and the development of Pool's nascent irrigation and landscaping business to service pool owners and golf courses, for example, will be a drag on earnings in the near term. These initiatives are expected to help the co sustain a 20% earnings growth rate in the long run, but their benefits are not expected to start kicking in till ‘08. Pool shares look fully valued given tough conditions and the dearth of near-term catalysts to help the stock. Pool stock is trading 20.4x earnings ests, a 24% premium to the S&P's 500. Short sellers have commandeered 20% of the co's outstanding shares, which Michael Cox, of Piper Jaffray, says "is really predicated on a tie to the housing mkt."
“Inside Scoop” section reports that Diaco Investments disclosed ownership of an 8.8% stake, or 5.7m shares, in Payless Shoesource (PSS) on June 15, making it the co's 2nd-largest shareholder. Diaco is the investment vehicle of investor Simon Glick. Mr. Glick said that he started buying into Payless shares in Aug’06 and that he built up his stake b/c "I like the business and I have a high regard for its mgmt." Diaco's decision to step into Payless shares "is a good signal in terms of at least one institutional investor having confidence in the Stride Rite acquisition" and the co's decision to turn toward higher-end, branded footwear, says Ben Silverman, of InsiderScore.com. Silverman cautions, however, that the limited information available on Diaco's investing style means that it is hard to gauge how Simon Glick may be planning to manage his Payless shares, or how long he plans to hold the stock.
The NY Times reports that the Jones Apparel (JNY) was near a deal late last night to sell Barneys NY (BNNY.OB), the high-fashion chain, for about $825m to the investment arm of the Dubai govt. The sale would end Jones Apparel’s 3-year ownership of Barneys, whose Madison Avenue emporium is considered one of fashion’s trophies but which never fit within Jones Apparel’s mass-mkt stable of brands like Anne Klein, Jones New York and Nine West. The investment arm of Dubai, Istithmar, has been on a buying spree in the last 3 years, purchasing $1.6bn of high-profile businesses and real estate.
Thursday, June 21, 2007
AK Steel (NYSE:AKS): Bradford expects a positive earnings surprise from AKS
AK Steel is benefiting from a strong specialty steel market: grain oriented silicon steel, but also 409 stainless steel, which does not contain nickel. This latter product has gained market share compared to the more common 300 series, which contains both nickel and chrome, with nickel prices so strong as to have pushed customers to the much-lower-cost 400 series.
The company's "Big 3" automobile industry customers have clearly been hurting, but AK is especially strong with Toyota (TM), which has been gaining share. They have been winning Toyota quality awards for a number of years.
Consolidation in the steel industry has not reached AK Steel yet despite numerous stories in the press. The firm suspects that the sharp rise in these shares has made the stock too expensive for the taste of most of the likely aggressors, yet U.S. Steel could still obtain major synergies from such a combination, in their view.
Notablecalls: While I much rather would like to highlight some negative calls on the steel group here, this one's interesting enough to be highlighted as a positive. For what it's worth Bradford has a Sell rating on AKS. Wouldn't have guessed, eh?
Monster Worldwide (NASDAQ:MNST): Citigroup reits Buy
Citi notes that through 12 weeks of the quarter, MNST's QTD Y/Y job postings growth in the U.S. is tracking modestly ahead of last quarter's 14% Y/Y growth. They are tracking 15% Y/Y growth through June 17th. The key point here is that their revenue estimate assumes a material deceleration in North American recruitment advertising (55% of MNST's total revenue) from 15.0% Y/Y growth in the March quarter to 10.8% Y/Y growth in the June quarter to $180MM. But listings tracking doesn't indicate this level of deceleration. In terms of MNST's other segments, the firm believes estimates already assume reasonable deceleration.
And their Long-Term Thesis Remains Intact: 1) Secular migration of Help Wanted advertising online; 2) MNST remains #1 or #2 in almost every key geo market; 3) European leverage opportunity drives a strong EPS growth outlook; 4) Greater likelihood of share buybacks;
Reits Buy and $53 tgt, especially with the stock now trading at a U.S. radio or newspaper sector multiple of 10.8X EV/EBITDA, they believe valuation risk here is highly limited.
Notablecalls: MNST is down substantially since I highlighted it as a potential short on June 7. I think kudos goes to Baird for their excellent comments saying it is possible that estimates or full-year guidance can be revised by the new management. Looks like the market has been gradually pricing in that risk over the past couple of weeks.
While Citi's call makes some sense, looking at the chart I see very little reason to buy the stock here. I want to see some bottoming action first. An early sell-off, followed by a recovery towards the close is something that would get my attention.
I suspect that eventually MNST will be sold. I just don't think it's going to happen in the next 6 months.
Paperstand (MO, RCI, KKD)
According to the WSJ, the Altria Group (MO) Philip Morris unit is preparing for a tectonic change - regulation of tobacco by the FDA. With Democrats in charge of Congress, the long-debated step appears more likely than ever. A Senate bill is expected to clear a key committee next month, and companion legislation has been introduced in the House. Both bills would give the FDA broad sway over tobacco products, including the power to set product standards, which could include limiting certain ingredients in cigarettes. Tobacco makers would have to turn over to the agency extensive information about their products. The bills also dangle a potentially lucrative opportunity. They say that if a new kind of cigarette can be scientifically proven to "significantly reduce harm" to smokers, and its availability would also benefit the health of "the population as a whole," the cigarette's marketing claims may win approval from the FDA. Philip Morris, which is working on a slew of new products it hopes might qualify for FDA-approved health claims, acknowledges it must transform itself into a credible player in the expected scientific debates at the FDA. So the co is trying to emulate an industry already under the agency's purview, the drug co’s. The co has a number of highly engineered products in the works, all of which are designed to possibly reduce tobacco's dangers.
Barron’s Online discuses Rogers Comm. (RCI), whose stock is up 45% this year. Rogers is more expensive than Comcast now, but with good reason: It's two co’s in one. It's not just the biggest cable outfit, it's also the largest wireless operator. Rogers' 7m wireless customers are bringing the co rising ARPU in a mkt where only about 60% of likely cellphone customers have a phone. For Rogers, that means operating profit margins in wireless approaching 50%, higher than either wireless or cable operators down here. While there is 15% or so upside to the stock from a recent price of $44, there could be more upside as ests continue to rise for the co's growth in EBITDA. "Rogers is not cheap anymore, but the growth prospects are higher than they've been and margins are widening," says Stephen Gauthier, of Gauthier & Cie.
“Inside Scoop” section reports that Krispy Kreme Doughnuts’ (KKD) largest shareholder has taken another bite out of the doughnut maker, raising its stake by 20% or 1.25m shares. Mohamed Abdulmohsin Al Kharafi & Sons, a Kuwaiti-based firm led by the Al Kharafi family, now owns 7.37m shares, or 11.4% of Krispy Kreme. Jonathan Moreland, of InsiderInsights.com, says the latest transactions could be the beginning of a positive insider profile for KKD. "What's missing here are the insiders themselves," Moreland notes, referring to the co's officers and directors.
Wednesday, June 20, 2007
Jeffco defending Brush (NYSE:BW)
Notablecalls: I'm going to call this one actionable here @ $42.
Brush Engineered Materials (NYSE:BW): First Albany calling for a bounce
Brush now expects 2Q EPS to be below the low end of the previously announced range of $0.50 to $0.65 per share. Firm's 2Q:07 EPS estimate of $0.51 was quite conservative vs. the consensus estimate of $0.59, as their numbers already accounted for some near-term inventory of ruthenium at customers and at the same time, some inventory at the company's cellular phone customers. While management did not give specific guidance, they are now modeling EPS of $0.45 in 2Q.
Firm notes their channel checks at Seagate (STX) and Komag (KOMG) (two of the three key customers of Brush for ruthenium) continue to indicate that recent weakness in business has not at all changed their plans to transition the technology to perpendicular media. If anything at all, both customers now expect the adoption by year-end to be higher than what they had anticipated earlier.
For the full year, the company now guided for EPS to be in the range of $2.00 to $2.55, down from their previous guidance of $2.20 to$2.75. FA's CY07 and CY08 EPS estimates remain unchanged at $2.35 and $3.15, respectively.
Earlier, First Albany had recommended that clients should take any weakness in the stock until the reporting of 2Q results as a buying opportunity, as they were expecting the company to report below-consensus 2Q results. With this preannouncement, they believe the negative news is already out now. Firm expects the growing adoption of perpendicular media and typical seasonality in the company's consumer-driven products (roughly 20% or revenues) to drive a strong second half for Brush. They would be buyers of the stock today as it pulls back on this negative news. Maintains Buy rating and $63 price target on the stock.
Notablecalls: This stock is an ideal bounce candidate. First Albany has done good job covering this one and I think they are right about calling today's weakness a buying oppy.
Littlefuse (NASDAQ:LFUS): Color on warning
Littelfuse also lowered its full-year earnings view to $1.65 to $1.75 a share vs previous $2. The company said it is still confident of achieving 15 percent operating margin target by the end of 2009.
- Baird notes they remain Neutral on LFUS following the warning as management indicated thay experienced weakness in the telecom end market. Firm believes this was due to delays in sales to Huawei and Tyco for the 3G mobile phone deployment in China. They believe the summer Olympics in Beijing is no longer a catalyst for the rollout and consequently, the upgrade could take significantly longer than originally forecast.
Also, they believe the consumer electronics market remains somewhat weak. Littelfuse reported experiencing the continuing effects of an industry inventory correction; firm expects this is due to softness in the consumer electronics segment. While management had originally forecast the inventory correction to have been worked through by the end of the second quarter, the firm is concerned that slowing economic growth could prolong this correction.
Baird anticipates that under-utilization at production facilities, particularly at the Teccorplant, will put pressure on margins.
Firm's new $36 price target (down from $43) is based on 18x their 2008 EPS estimate. Historically, Littelfuse trades 20x.
Notablecalls: LFUS stock will be taken out to the woodshed today. I suspect the stock may be down today by as much as $5 to $6, meaning anything above the say $36 is probably shortable. However, the stock feels like a bouncer. The last time LFUS warned was in December 2004. Back then, LFUS gapped down but managed to put together a nice bounce. I would keep my eye on the $33 level for a long entry. Small size.
In 2006 the co set in motion a plan that management feels will lead to lessened earnings volatility (through a lowering of fixed costs), that has dogged the co for the past 10 or so years, and lead to its operating margin moving back to 15% of sales over the next few years (from 10-11% the past few years). According to management, this is achievable by 2009. The second leg of the plan is to ramp-up internal growth to the high- single-digit area (from mid-single-digits currently) by working more closely with its original design manufacturer customers and an increase in R&D.
Current problems feel more like a bump in the road.
DRAM equipment space: real-time pushouts of tool shipments
While all suppliers are impacted, it appears impact is greatest at AMAT, LRCX - both of which have big Taiwan DRAM exposure.
Citi notes they have been on the road the past few wks speaking with a broad base of investors. The general rhetoric remains cautious - yet incredulous that stocks have remained resilient in the face of "bad news". While there has been a lot of market speculation around capex cuts, there is frankly yet to be much in the public domain regarding pushouts, capex cuts, or the like. Firm thinks it all comes down to the numbers - and equipment stocks are simply not cheap enough to tell them that the buy side's EPS estimates are that much less than the sell side's estimates.
Indeed, major equipment stocks trade at roughly a market multiple off C2008 EPS - hardly discounting a big EPS cut for a cyclical group with a slowing growth profile.
Notablecalls: The DRAM space is a mess. During the past five months, the price of 512Mb has fallen to $1.80 from $5.80 (an almost-70% decline). The DRAM makers are bleeding from their eyeballs and slashing capex should not come as a surprise. Vista continues to be a disaster, so no help coming from there.
Citi's right pointing out the resilience of the semi equipment space in face of bad news. For example, AMAT's has climbed back to the levels where it was before reporting its terrible qtr in mid-May. I have to agree with Citi here - eventually, it all comes down to the numbers.
Sitting at my old desk I would put out a short line in both AMAT and LRCX here. Tight stops just above recent swing highs. Not looking for a home run here. Just some downside.
Paperstand (MGM, BBY, GYI, ADSK, GES)
The WSJ reports that Kirk Kerkorian's plans to take over two of the prized assets of MGM Mirage (MGM) were on the verge of being withdrawn last night. MGM was thrown into uncertainty after Mr. Kerkorian made a surprise announcement that he was interested in purchasing the Bellagio Hotel&Casino and the $7.4bn Project CityCenter out of the wider co. His intentions appeared to put the whole casino co in play, with the co's convening a special committee to advise it on how to proceed. MGM Mirage's stock soared and yesterday traded 37% higher than its preannouncement levels. But Mr. Kerkorian appears to have backed down from his original plan, in part b/c of the valuation implied by MGM's new JV plans with Kerzner Intl. (KZL). The co is expected to disband the special committee.
According to the WSJ, 2 big hedge funds at Bear Stearns (BSC) were close to being shut down last night as a rescue plan developed over several days fell apart in a drama that could have wide-ranging consequences for Wall St. and investors. Merrill Lynch (MER), one of the hedge funds' lenders, said it would move to seize collateral, much of it mortgage-backed debt, from the 2 funds and sell it. At the same time, the funds' managers worked with a handful of other key lenders, including Goldman Sachs (GS) and BofA (BAC), to pay off the funds' $9bn in loans. As of a few weeks ago, the 2 Bear Stearns hedge funds held more than $20bn of investments, mostly in complex securities made up of bonds backed by subprime mortgages. In recent weeks, however, the firm's High Grade Structured Credit Strategies Enhanced Leverage Fund and High Grade Structured Credit Strategies Fund have been besieged by investors and lenders trying to recover their money as the value of the funds' underlying bonds fell sharply.
Responding to complaints by Google (GOOG) to state and federal antitrust enforcers, Microsoft (MSFT) agreed to change its Vista in advance of a court hearing next week that will review its compliance with a ‘02 antitrust settlement. The DoJ and state attorneys general said that Microsoft has agreed to make changes later this year that will make it easier for competitors to run their desktop search programs with Vista.
“Heard on the Street” column discusses Best Buy (BBY), whose shares tumbled yesterday, following its earnings miss and reduced forecast. While bulls think the stock can hold its ground for the next qtr or two amid an industry shakeout, bears counter that Best Buy's strategy of rapidly gaining share in a cutthroat electronics-retailing industry might not be worth the cost. So far, Best Buy, widely regarded as the best consumer-electronics retailer, has resisted that pressure. Investors have cause to be spooked by the electronics-retailing industry. Circuit City has shuffled its mgmt ranks and laid off workers. Tweeter Home filed for Ch11 this month. CompUSA closed more than half of its stores this year. "Our concerns have been around the competitive dynamics of the consumer-electronics industry," said Loomis Sayles analyst Eric Meyers. "The greatest growth of the TV cycle is behind us. The attempt to differentiate yourself with services, which is partially what Best Buy is doing, is challenging. We have reservations about the ultimate earnings power of the co going forward."
The WSJ reports that Getty Images (GYI) plans to announce today that it is acquiring Pump Audio for $42m. For Getty, buying Pump represents the latest step to expand beyond its core business.
“Inside Track” section reports that after months of being prohibited from selling shares, 13 insiders at Autodesk (ADSK) sold $45m of the co's stock in a span of 14 days this month. Autodesk instructed insiders not to buy or sell shares while the co completed an internal review of stock-option accounting. The results of that review, which included charges of $34.8m, were released June 4, and the insider stock sales began the next day.
Barron’s Online out saying that though not cheap, shares of Merck (MRK), Amylin Pharma (AMLN) and perhaps industry laggard Nektar (NKTR) could gain 20% or more over the next year if physicians pen the right prescriptions. "It's an enormous mkt, and a safe and effective drug will reap big benefits," says David Kliff, of Diabetic Investor newsletter. "This is a dangerous time for investors to play whose pipeline has the next wonder drug. So the safest play over the next 12 mo’s is co’s with existing therapies gaining mkt share." Suffered by almost 21m Americans, diabetes could strike as many as 30m adults and children in the next qrtr century.
“Inside Scoop” section reports that selling must be in the genes, as the brotherly duo atop Guess (GES) sold nearly $60m worth of stock in the co last week. Since last Tue, Chmn Maurice Marciano has sold 716K shares for $35.3m; and Vice Chmn and CEO Paul Marciano sold 500K shares last week for $24.6m. When it comes to insider transactions Guess ranks low. Thomson Financial currently rates the co at 1 on its 1-10 Insider scale (with 1 being the most bearish). The avg insider rating for the apparel industry is 4.27 compared with 3.7 for the S&P's 500 at large.
Tuesday, June 19, 2007
Yahoo (NASDAQ:YHOO): Color on management change
- Banc of America says they applaud the news of co-founder Jerry Yang taking back the reigns of the company, given his vision and long history with the organization. They believe the move potentially pushes YHOO closer to its technology roots and provides a much needed boost to company morale and strategy. Firm is adjusting their tgtdown to $35 from $36 to reflect management guidance of Q2 revenue in the low-end to mid-point of previously announced guidance. They continue to expect double-digit search monetization growth rates in the back half of 2007 and expect to see the effects of its Right Media acquisition and newspaper partnerships in 2008. Maintains Buy.
- Deutsche Bank maintains their Hold rating on shares of Yahoo! amidst yet another cut to ests (perhaps not up to 1,000 but getting there) and the removal of Terry Semel (CEO). While they view Jerry Yang's CEO appointment as a long-term strategic positive (focus on re-investment and R&D), they think Yahoo! remains in pretty bad shape, in terms of over-emphasis on margins and cash flows (at the expense of rev growth), slowing user/rev growth, display ads under pressure, search ramp still challenging and access deals heading into re-negotiation. 2007 EBITDA could be at risk due to Yang's focus on re-building Yahoo! DB is lowering their revenue est. in '07 and '08 to $5.1bn and $5.9bn (from $5.2bn and $6.1bn) and EBITDA to $1.9bn in '07 and $2.4bn in '08 (from $2.1bn and $2.5bn). Price tgt is cut to $26 from $28.
- Morgan Stanley notes they are believers in culture and leadership (especially from engaged founders) and remain enthusiastic about Yahoo!'s asset base. Net, they think this leadership change should prove to be a long-term positive for Yahoo!.
The bad news is that visibility into Yahoo!'s traditional branded / display advertising and affiliate network revenue (together 65% of revenue in C2006), at the margin, has worsened in CQ2E. For CH2:07E, Yahoo!'s Y/Y implied revenue guidance range was +9-26% with a mid-point of +18%. For CH2:07E, 'middle to low-end' growth would imply +9-18% growth, vs. MSCO +17% estimate. Net, if results come in at the 'middle to low-end' of the guidance range for C2007E, this would imply 0% to -5% change to firm's revenue estimates.
Maintains Overweight-V - In their view, Yahoo! remains a 'turnaround growth story' with innovative leadership amidst a more nimble organization and promising revenue generating initiatives both in process and to come. They continue to expect accelerating revenue growth in CH2:07E / C2008E to benefit Yahoo! shares.
Notablecalls: If Terry Semel had not stepped in as the CEO/Chairman of YHOO 6 years ago, the co would have been a marginal player today. Semel saved Yahoo. Clearly, Yahoo lacks the IT talent GOOG has and while I suspect Mr. Yang can reset the priorities, I see no reason why they should fare any better than say MSFT. But I guess that's a topic for the intellectuals.
On the trading side, we have YHOO lowering their outlook. The stock managed to stay above the $29 level in after hours action but I suspect we may see sub-$29 levels today. Operationally, the co is a mess and the only way Yang and his team can make it better, is by upping the tech spending. That will eat into margins and hurt the valuation. And I'm not even sure it's going to work. The stock is not cheap here and the risk is skewed to the downside.
Paperstand (AAPL, MYL)
The WSJ out saying that co’s hang up on Apple’ (AAPL) iPhone. While millions of consumers are eagerly anticipating iPhone launch next week, Bill Caraher is bracing for the worst. Mr. Caraher, technology director of von Briesen & Roper, says he is being besieged by inquiries from employees wondering whether the office's email system can be used with the device. His answer, at least initially, has been no. The main problem is that the iPhone can't send and receive email through the co's corporate BlackBerry email servers. He says he is unwilling to look into workarounds, b/c they might compromise the co's security. "It's another hole in the system ppl can exploit," he says. This scene is being repeated in workplaces throughout the country as Apple moves closer to its much-ballyhooed rollout of the iPhone. While iPhones can be used for email, for now, many businesses don't plan to sync them with internal email systems that use technology from RIM (RIMM), MSFT and Good Technology, owned by Motorola (MOT). All this may change later this month when Apple plans to unveil the iPhone. According to a person close to Apple, the co is expected to fight for this mkt, currently dominated by players like RIM, Palm (PALM) and, increasingly, Nokia (NOK) and Motorola. If Apple comes up with an acceptable strategy for integrating with business software systems, many co’s might change their tunes.
Barron’s Online “Inside Scoop” section reports that Mylan Labs (MYL) Vice Chmn and CEO Robert J. Coury paid $926K for 50K shares from June 14 to June 15. Also last week, CFO Edward Borkowski bought 5K shares for $92K and director Rodney Piatt bought 4K shares for $74K. Michael Painchaud, of Market Profile Theorems, calls the recent insider purchases an "actionable buy" signal.
Monday, June 18, 2007
RadNet (NASDAQ:RDNT): Jeffco upping their target
They consider their current EBITDA estimates of $75 million in 2007 and $81 million in 2008 to be wildly conservative. These estimates do not include 1) contribution from recently announced acquisitions (Borg Imaging and Rockville Open MRI), 2) contribution from new, unannounced acquisitions, 3) Radiologix synergies (projected to be $11 million), or 4) better-than-expected organic growth.
Also, the firm believes RDNT may refinance its $405MM senior secured credit facility with GE Financial Services some time later this year, reducing annualized interest expense and improving cash flow by $5-$6 million.
Channel checks indicate that consolidation opportunities in the space are increasing as financial pressure resulting from the recent implementation of the DRA cuts on imaging services intensify.
Notablecalls: Looks like Jeffco's target represents 45% upside from current levels. The chart looks good and so does the story. I think this one may indeed see some serious upside over the next 6 months or so. Also, there is currently very little sell-side coverage on RDNT. Think that may be changing, too.
Symantec (NASDAQ_SYMC): Added to the Buy list at GSCO
GSCO notes their more positive view on the stock is driven by: 1) Impressive upcoming releases of its flagship products; 2) Their view that internally the company is healthier than it has been since the Veritas acquisition closed over two years ago; 3) Anticipation of upside to conservative guidance in June and FY08; 4) Aggressive buybacks, 5) Wanting to be early on a turnaround story given investor appetite for this.
Major product releases over the next few months - NetBackup 6.5, this summer and Endpoint Protection 11.0, anticipated in September - should stem shares losses and provide a boost to revenues. For the June qtr, the firm expects upside to Street estimates and have raised their EPS estimates to $0.22, from $0.20 (Street at $0.20, guidance $0.18-$0.20).
Notablecalls: Well, GSCO touted SYMC as one of their top picks just before the co warned in January. They removed SYMC from their Buy list following the warning and now that the stock has bounced 20% from the bottom and is trading about 1 buck from the pre-warning level, it's being added to the list again. Absurd enough to work? Yeah, why not! Count me in!
FormFactor (NASDAQ:FORM): cutting prices for DRAM cards?
The bad news is that margin pressure intensifying (especially in DRAM!), while NAND remains a dud. While revs still appear healthy, recent checks suggest FORM facing a considerably tougher pricing environment in its core DRAM market and is now cutting prices for DRAM cards owing to pressure from customers and a desire to keep MJC at bay.
On NAND, they still see very little progress due to ongoing technical issues at several custs, a situation further exacerbated by MJC's new mfg facility (now ramping, set to 3x capacity by 8/08) + new competitive offering from AMST in Korea. Expects FORM to increasingly shift focus to logic where new fine-pitch card could help in C2008.
While solid 2H revs should provide a backstop, NAND remains problematic and intensifying DRAM pricing pressure and ramping expenses should keep EPS in-check (best-case). With the stock +6% in two days, risk/reward appears only balanced and all things equal, the firm is still not buyers until $37-39. Maintains Hold, $45 tgt.
Notablecalls: It looks like MSCO's call from June 8 (see arhives) put a floor in for FORM. This, coupled with the overall positive tape helped the stock to gain some ground last week. MSCO's call was pretty simple - DRAM probe card revenues are highly correlated to bit shipments and not near-term capital spending or equipment order trends.
Yet, Citi's call includes some disturbing bits of information. Is FORM really forced to cut prices on DRAM cards after all? If Citi's right, I'm hard pressed to see any upside in the stock. Not sure FORM is an outright short based on these comments but the risk seems to be to the downside here.
Paperstand (GE for DJ; LCC, ITG)
The WSJ reprots that General Electric (GE) and Pearson are in talks about making a joint bid for Dow Jones (DJ) that would allow the Bancroft family to keep a minority interest. The two co’s have discussed a scenario in which GE's CNBC business channel, the FT and Dow Jones would be combined into a privately held joint venture. The venture would be owned equally by GE and Pearson, with the Bancrofts holding a minority stake.
According to the WSJ, in a major boost for its A350 jetliner program, Airbus is finalizing an order with US Airways (LCC) for as many as 30 jetliners. The order, which could be announced as early as today, would be valued at an estd $7bn at list prices, although such orders normally carry steep discounts.
“Heard on the Street” column discusses ITG (ITG), saying that there have been a number of dark days for investors in the co lately. Now, one of those shareholders is trying to push the firm into the light. ITG is under pressure from hedge fund DE Shaw to sell off all or parts of itself. As an alternative to a sale, DE Shaw also called for a significant stock-repurchase program in an effort to boost ITG's share price. Before DE Shaw's letter became public June 12, ITG's shares had fallen 18% during the previous 12 mo’s. DE Shaw said the shares were trading at a discount of 30-40% to the avg valuation of comparable co’s. That is b/c ITG's earnings haven't kept up with its peers. The shares are trading at about 19x estd ‘07 earnings. The co's closest public rivals are NYSE Euronext (NYX) and Nasdaq (NDAQ). They are trading at about 32x and almost 26x estd ‘07 earnings, respectively.
Sunday, June 17, 2007
Barron's Summary (BID, EVST, FWLT, UTSI)
Barron’s “The Trader” section discusses Sotheby’s (BID), whose shares have pulled back since late April. This week, the conspicuous consumers will flock to London for the Impressionists and contemporary art sales, and the recent track record suggests Sotheby's ests may again be conservative. Record NY sales in May already bode well for the 2Q earnings, and Robbert van Batenburg, of Louis Capital, expects EPS as high as $1.72 vs. consensus of $1.34. With Christie's snagging more mkt share in ‘06's fall auctions, and Sotheby's regaining some of that this year, Sotheby's is "carrying considerable momentum into the 2H07" and faces easier yoy comparisons, notes Wedbush analyst Rommel Dionisio. More important, record prices motivate "otherwise reluctant owners to bring their pieces to the mkt," Van Batenburg adds. "This emergence of more highly valued works of art not only generates higher revenue with higher margins, but also fuels the auction hype." Van Batenburg sees the stock pushing 66 by year end.
“The Trader” also discusses Everlast (EVST), which recently agreed to be acquired by Hidary Group. A 30-day "go shop" clause for Everlast to find a better bid looks insincere next to the $4.5m breakup fee. Also curious was the June 4 agreement by CEO Seth Horowitz to vote the 19.2% of shares he controls in support of the Hidary offer, even if a better offer emerges. It also did not escape investors' notice that Horowitz's employment contract was recently amended to remove limits on payments he might receive following a change of control. Aquamarine Capital says it will vote against the low-ball offer. Since price is the decisive arbiter of cash bids, "why didn't the board of directors run an auction or actively take other measures to get the best possible price?" asks Jeff Lick, of Galt Investments. Logical buyers including Nike (NKE), Adidas, Puma and Under Armour (UA) weren't contacted. The unasked question among these firms' carefully lawyered missives: Why would mgmt agree to an un-shopped lowball offer from an affiliate? Everlast's prospects indeed look bright, the co recently signed a deal with Michelin to launch a footwear line next year, and has inked licensing pacts to start selling in China in ‘08. And assuming rev grows at 20%, applying a multiple of 10x ‘08 EBITDA of about $20m would value shares at more than 40, Lick says.
Roundtable likes CVC, HLT, MDS, SQAA, USM, RIMM, WFC, VLO, LYO, AEO, IMOS, C, ENDP, ULUR, HPQ and PIR. Dislikes NETL and XLY.
Lehman's (LEH) lagging share price offers the chance to invest in a rising banking power with a keen eye for risk management.
If Alleghany (Y) hews to its course and doesn't encounter any unforeseen problems, its shares, which have been trading above $360, could rise 50% by 2010.
“International Trader” highlights HSBC (HBC), which has been battered by the US subprime-mortgage mess. But the bank looks better when judged over a longer span. Its shares have outpaced those of RB of Scotland, Citigroup (C) and BofA (BAC), especially since ‘04, when the Fed started raising interest rates. The longer view shows that HSBC shares fare better than their peers when systemic risks, macro fundamentals, go against the banking industry. Reason: The co's earnings streams come from various global regions and are less correlated with one another than are the sources of some other big banks' profits.
“Follow Up” section highlights Foster Wheeler (FWLT), whose stock is up almost 700% since Jan ’05. Earnings are expected to rise to $5.46 a share this year. Analysts forecast continued earnings growth in ‘08, to $5.95. The shares are changing hands at just 18x next year's ests, roughly even with the broad mkt and below the 22x by peers. If the preliminary work "proceeds to project, it suggests that this mkt is with us for at least 5 more years," says CEO Ray Milchovich. Investors often overlook another Foster Wheeler business: supplying boilers and other equipment to power providers like utilities. This business, accounting for about 23% of cash flow, looks to be picking up as the world's power needs expand. The could give the co, and its stock, an even bigger surge.
“Follow Up” saying that seemingly insatiable demand for base and precious metals has helped give a powerful lift to mining co shares. Like CVRD (RIO) and Rio Tinto (RTP). Like most co’s in the metals sector, CVRD and Rio Tinto are considered well run, which suggests there would be little room for a buyer to make operating improvements. It's hardly an opportune environment for takeovers, says Damien Hackett, of Canaccord Adams. In general, he thinks the shares are fully valued. Most stocks in the sector, he says, are trading at 9 or 10x estd earnings for the year ahead, about where they should be, given the record commodity prices. "It's hard to imagine commodity prices going up in the next 6-8 mo’s," Hackett adds. Hackett expects shares of the major players in the metals sector "to drift sideways for the next 3-6 mo’s...until the economic outlook changes." If the global economy slows, as he expects, the sector could take a hit.
“Plugged In” column out negative on UTStarcom (UTSI), whose shares have plunged 21% since co-founder Ying Wu quit on June 1. The reason for Wu's abrupt departure is unclear, but one thing is clear: He's now free to unload some of his 4.7m shares. Frankly, it's darn near impossible to know what's going on, b/c UTStarcom hasn't provided meaningful information in nearly a year. Even when making mandatory filings, UTStarcom is stealthy. On the Fri before last Christmas, it revealed that it had received an SEC Wells notice, several days before. Critics contend that the co's IPTV products are more hype than substance.
Friday, June 15, 2007
Mastercard (NYSE:MA): Estimates upped to new Street high at SunTrust
Their growing bullish conviction reflects a constructive view of the company's exposure to strong transaction growth, its considerable pricing power and meaningful operating leverage. It is their opinion that the Street continues anticipating a deceleration in transaction and revenue growth which is not in the offing.
The company benefits from secular shift from cash to electronic payments at the point of sale, exposure to strong cross-border travel trends, proliferation of new payment modalities and the emergence of burgeoning international economies with little historical electronic payments volume. SunTrust argues that MasterCard is moving into "harvest" mode in the US. The domestic market, which will comprise nearly 50% of the company's 2007 GDV, is relatively mature. As a result, they believe the company will re-direct its advertising spend toward rapidly-growing emerging markets, which should require lower absolute expenditures. This is one factor suggesting potentially greater-than-expected operating leverage and EPS upside.
Notablecalls: Looks like SunTrust EPS numbers are the new Street high. Given the strong chart, I expect to see buy interest in MA today.
Trident Micro (NASDAQ:TRID): Low valuation + strengthening demand
Based on recent checks, they believe rebounding panel pricing is being partly driven by robust 2H 32-inch+ Tier-1 TV demand (TRID's sweet spot). These leading indicators, & the rapid ramp of 1080P (Sharp, Samsung, & Sony own 85%+ of this segment) point to a strong CY2H07 for TRID.
Checks further indicate strengthening demand could generate CY07 TV unit sell of as much as 78M, well-above CIBC's current 72M estimate, with growing Tier- 1 mix. They also expect TRID should be able to file its delinquent 10K/Qs by mid- July, prior to their release of June Q results.
At ~11x $1.80 CY08 EPS estimate, TRID is trading at a significant ~40% discount to its peers. CIBC believes TRID presents investors with compelling value as the company is set to leverage its impressive product portfolio against surging demand in the seasonally strong CY2H.
Notablecalls: CIBC's right with their on TRID here. Firstly, channel checks done by other firms indicate low panel inventory and seasonal buildup starting in earnest. AUO has said panel inventory in channel is normal. Also, pricing has been OK. The >37" size LCD TV is seeing good demand in the U.S.
Also, channel checks indicate Mediatek has not been able to crack into Sony or Sharp and TRID still very well entrenched at major TV OEMs. The single-chip (MPEG decode + back-end) TV solution developed by Sony/NEC keeps lurking in the background, though.
With a low valuation and 14% short interest, TRID could see some upside here.
Also, keep Genesis Micro (NASDAQ:GNSS) on your radar. Note the co has $5 cash per share on its balance sheet and carries a hefty short interest. They are competing with TRID and RBC Capital noted yesterday thyy believe that the co is on track to win some designs from Tier 1 OEMs
in late CY07.
One more thing - note that Sony is coming out with an entry-level LCD TV line to compete with the likes of BRLC's Olevia.
Paperstand (BKD, KMR)
Barron’s Online highlights Brookdale Senior Living (BKD), saying that strong demand for senior-citizen housing is bolstering the fortunes of the co. But though Brookdale has become the leading manager of senior housing in the US, its stock has not followed suit. But the stock could gain roughly 20% over the next year with the help of additional gains from dividend growth as Brookdale continues to add more units for rent and to trim expenses. The co is quite simply a cash-flow story. It incrementally passes on part of those gains to shareholders through dividend increases. Brookdale is now stepping back from an aggressive acquisition phase in a highly fragmented industry to focus on increasing cash flow by expanding current facilities and adding on ancillary services. Brookdale's initiatives will help push its brand as a destination spanning seniors' needs for those with active lifestyles to those that need nursing care. As Brookdale grows, it is generating economies of scales that are reducing costs and improving operating profit margins. Gary Ran, CEO of Telemus Capital Partners, says Brookdale is a play on "the combination of being in the right industry and having strong, financially disciplined owners."
“Inside Scoop” section reports that Kinder Morgan Mgmt (KMR) shares recently hit an all-time high, but several insiders, including the co's CEO, see opportunity for the stock to kindle yet more value. On June 11 and 12, four execs from the co purchased 54K shares for $2.7m. The recent cluster of purchases is the first instance of insider activity at the co since Oct’05, when Richard Kinder last purchased shares, notes Ben Silverman, of InsiderScore.com.
Thursday, June 14, 2007
Select Comfort (NASDAQ:SCSS): Color on mid-quarter update
- Piper Jaffray notes that following yesterday's mid-quarter update, they are 2H07 sales from $478M to $434M. Same-store sales are tracking near -18%, below PJ estimate of -9%. The company expects same-store sales growth to return during the second half of CY07. Risks to management guidance are decidedly on the downside as PJ expects anemic growth trends to continue during the next six month period and advise shareholders to remain on the sidelines until tangible catalysts exist.
New marketing programs have not been rolled out broadly as expected during the second quarter and management plans a review of the current message to its consumers. Unfortunately, recent marketing initiatives are overly focused on the problem (lack of sleep) and not the solution (cure tired with a Sleep Number Bed). Piper thinks management may focus more on the Brand and benefits of the product, rather than trying to generate demand. They estimate a revision to the current marketing plan may take only 2-3 months to roll-out. The firm is reducing CY07 sales estimate from $891M to $830M (below guidance), and reducing EPS estimate from $1.01 to $0.88.
Maintains Market Perform and lowers tgt to $15 from $19 as fundamentals remain soft and unpredictable.
Notablecalls: This one was expected. Given what we had heard from BBBY and the fact chief marketing officer left in May, there was no doubt in my mind SCSS would come short of expectations. That's also the reason why the stock was down only little over 6% in after hours action. Frankly, I believe SCSS is one of the most economically sensitive stocks out there. With price tags of around $2000-$5000, the beds are expensive, yet SCSS clearly targets the middle class consumer. A bad combo in current economic environment. Hence, the high short interest. I know at leat one high profile short-seller that considers SCSS a core short.
Considering SCSS spends 45 cents on every dollar it makes on Sales & Marketing, blunders in this departement are not easily forgiven. Yet, I think investors will be somewhat relieved to see CEO Bill McLaughlin step in and take charge.
Don't get me wrong. I like this co. In fact, I think SCSS may initially put together a nice bounce now that the bad news is out of the way. The $264 mln repurchase program is huge, just huge compared to SCSS' $800 mln market cap. According to the management, the program takes a tiered approach, significantly accelerating share repurchases if the share price declines. They are even prepared to incur debt to repurchase shares. That's bound to lend significant support to the stock price.
I just think that after couple of points of upside, the shorts will show up again, chopping the stock down.
Paperstand (DISH, SNE, EQY)
According to the WSJ, a hedge fund managed by Bear Sterns (BSC) is scrambling to sell large amounts of mortgage securities, a setback for a Wall St. firm known for its savvy debt-mkt trading. The fund makes bets on bonds backed by mortgages, many of which are subprime. Faced with losses on its investments, the fund, called High-Grade Structured Credit Strategies Enhanced Leverage Fund, together with a sister fund, is trying to sell about $4bn in mortgage-backed bonds to raise cash. The sales represent a sliver of the $7trln residential-mortgage-backed bond mkt, but it is still a large amount to be sold at one time and a potentially troubling sign for the broader mortgage-backed bond market.
The WSJ reports that Liberty Media and EchoStar Comm. (DISH) are preparing a surprising joint offer for Intelsat, which is accepting final bids for its auction today. The pairing represents a bold cooperation between EchoStar and Liberty, which is slated to take control of competing DirecTV (DTV) in the coming mo’s. Intelsat is expected to draw bids of $4.5bn to more than $5.5bn.
According to the WSJ, MacDonald Dettwiler & Associates has put its surveillance and space businesses on the block. Yet, while the assets are attractive b/c they fit with the Pentagon's new directives for developing smaller, nimbler satellites, potential buyers are balking at the roughly $1bn asking price. Four large US defense contractors, including Lockheed Martin (LMT) and Raytheon (RTN), have expressed interest and engaged in preliminary acquisition discussions. At this point, they have opted against making a formal bid after concluding the asking price was too high. The other 2 co’s that kicked the tires are Northrop (NOC) and Alliant Techsystems (ATK).
Barron’s Online highlights Sony (SNE), saying that it may be time to take profits. Technical signs are indicating a top in Japan's equity mkt, which could hurt Sony's local shares listed on the Tokyo SE. Sony CEO Howard Stringer has admirably handled the task of fixing Sony's TV business. He now faces the more daunting challenge of making the co's gambles on new gadgets pay off. Stringer must catch up to Microsoft in videogame consoles and related software, a business that can bring Sony a very rich 12% operating profit margin in good years. And he must establish Sony's Blu-ray as the dominant HD DVD format to position the audio and video business for a profitable future. Those goals are achievable, but to succeed Stringer may have to push the co into deeper losses in its games business in the near term, not a pretty sight for investors addicted to rising profit ests at Sony. Last week, Stringer disclosed that he sold about 130K shares of Sony's ordinary shares, or about 9.3% of his holdings. "Sony remains a great hope story, as it always has been," says Pelham Smithers, of Pali Research.
“Inside Scoop” section reports that the founder and Chmn of Equity One (EQY) has gone on a buying spree for shares of the REIT. Chaim Katzman spent $1.3m buying 50K shares. Michael Painchaud, of Market Profile Theorems, says that his firm's rating on Equity One's insider sentiment has been picking up since last Dec.
Wednesday, June 13, 2007
Flowserve (NYSE:FLS): Almost actionable!
Given their increased confidence in the longevity of this infrastructure spending cycle, the firm is raising their 2008 earnings estimate by $0.24 to $4.66 per share (+29% YOY), which now assumes 9.5% organic revenue growth (versus original estimate of6%) and a 130 bps improvement in operating margin to 11.6% (versus original 11.4% estimate).
The upside to estimates stems primarily from higher assumed revenue growth across each of the segments as the firm expects double-digit orders growth to continue throughout 2007 and in turn drive near double-digit revenue growth in 2008.
Additionally, they believe the best is yet to come within both the Pump and Valve divisions. The Pump segment is on the verge of seeing a meaningful acceleration in higher-margin aftermarket work associated with the most recent round of large projects going into service.
Notablecalls: Looks like Baird's 2008 EPS est is now the new street high. The firm has been positive on this industrial flow equipment player for quite a while now and rightly so. FLS has been a stellar performer.
I would call this one actionable right here if the chart didn't tell me otherwise. A case where technicals trump the fundamental side. I'd love to buy this one couple of bucks lower (near the 50 day MA)! One to keep on the radar.
Healthspring Inc. (NYSE:HS): Color on warning
- Goldman Sachs notes the press release cites a continuation of adverse costs trends from 1Q07 that were expected to abate but have instead worsened. However, it appears that management's prior characterization of 1Q2007 cost trends as temporary and "flu season"-related was incomplete given the broad-based nature of trend pressures now cited.
With the smallest member block across firm's coverage universe, a greater degree of volatility in MCR and earnings is not surprising. However, the magnitude of adverse trend development is likely to severely test investor confidence in management's ability to forecast and manage trend going forward. Share repurchase signals that management expects a significant pullback in shares, as well as abandonment of its strategy to acquire small MA plans.
- Jefferies think HealthSpring's early 2Q negative pre-announcement will likely cause HS shares to see year lows. News also likely to put pressure on others with meaningful Medicare exposure today. Given the 350 to 450-bp increase y-o-y in Medicare Advantage MLR at Humana (HUM) in 1Q07, they would expectHUM shares to be weak on this news.
Both firms will will revisit their earnings estimates following the conference call (9 AM ET.)
- Citigroup lowers their tgt to $21 from $26 with their 07E-10E EPS by 31c to $1.34 in 07, & by 35c, 40c, 45c in 08E-10E to $1.55, $1.75, $1.90. Maintains Hold rating, as the current bid for HS shares is $17, and they expect the stock to open materially lower.
According to Citi this news adds to a troubling mosaic of data points, notably higher med loss ratios at AET & CI last year; then UNH & WLP in 4Q06-1Q07; and the Citigroup non-profit conference where hospital systems said admissions were better and pricing remained strong. Yet MCOs at firm's conference reiterated that med cost trends are not accelerating. Another clue suggesting this is HS-specific is HS's large drop in days claims payable in 1Q07 that the firm raised a red flag on.
Notablecalls: HS had one of the lowest valuations in the managed care group. Now we know why. I think the stock could be down as much as 4-4 1/2 bucks today, making anything above say the $20-19,50 level a shorting oppy. I would try bidding around the $17 level for a bounce but I doubt it will get there today.
I sure looks the problems are here to stay for a while (rate increases lagging the costs) and with chatter of additional cost cuts on their way, the picture is turning increasingly bleak. Note that HUM and WCG derive a large portion of their earnings from the Medicare Advantage program. I expect to see selling pressure in both today.
Note that Mike B from Raymond James downgraded HS to Market Perform on May 14 to reflect the potential for higher medical costs. The primary change in his model was an increase in Medicare medical loss ratio assumption by ~50 basis points to reflect the potential for higher costs going forward.
Paperstand (CEN, NILE, MA)
“Inside Track” section reprots that execs at financial mkts are profiting from the gains the co’s shares have made in recent years as they sell part of their stock. Investor interest in exchanges has been keen, driven in part by merger announcements and expectations of more consolidation. That's helped fatten the profits of exchange execs who have sold shares. "Valuations have certainly come a long way," says Richard Repetto, of Sandler O'Neill. "There's probably a certain amount of liquidity being sought as well as diversification." NYSE (NYX) has seen a stream of selling by insiders this year. Among the sellers is Vice Chmn Gerald Putnam. This year, a series of transactions has whittled his stake in the NYSE down to a recent 516K shares, from 838K shares late last year. Top execs at Nasdaq (NDAQ) also have sold stock. Through the end of last month, Exec VP Christopher Concannon, Bruce Aust and Adena Friedman had sold a combined 57K shares this year. Officials at CME (CME) and IntercontinentalExchange (ICE) also have sold shares through 10b5-1 plans.
Barron’s Online discusses Blue Nile (NILE), whose share price has more than doubled since hitting a 2-year low last summer. Fast-growing profits, higher guidance, a well-respected mgmt team and a growing mkt for online jewelry sales have fueled great expectations. But Blue Nile's success could attract competition from online rivals with deeper pockets. And since hitting a record high last month, the shares command a premium that leaves little room for disappointment. So it's no wonder that insider selling has raised a few eyebrows. "If you are going to be disciplined about investing, you can't say 'Let's keep [the stock] and watch it go up, up, up,'" says Brian Bolan, of Jackson Securities. "You have to be disciplined and lock in profits, and this is a time to lock in some profits."
“Inside Scoop” section reprots that mutual-fund giant Fidelity Mgmt&Rsrch disclosed it now owns nearly 8.2m shares of the Mastercard (MA), a 10.2% stake. Fidelity's 3.65M new shares were purchased during a 10-week period in which MasterCard stock jumped 34%. Fidelity is now MasterCard's 2nd-largest institutional holder, behind Marsico Capital Mgmt. Ben Silverman, of InsiderScore.com, says Fidelity's new stake is a positive message given MasterCard stock's strong run of late.
Tuesday, June 12, 2007
Dean Foods (NYSE:DF): Color on warning
DF expects EPS of 30 to 31 cents in the second quarter, and $1.52 to $1.58 per share for the full year. Analysts, on average, were looking for 37 cents and $1.69 for the second quarter and full year. The co expects the third quarter to be "particularly challenging" as they face steep month-over-month increases in conventional raw milk costs, with an improvement in trend in the fourth quarter.
Notablecalls: The stock is going to get hit today but looking at the thing a bit more closely, I do think DF represents a nice bounce candidate. The raw milk price situation is well known across the industry. Several retailers have recently talked about the raising cost of food.
Deutsche Bank's Eric Katzman noted on May 10 that so far 2007 has been an action-filled and somewhat unusual year for Dean. Management reported 4Q06 results in early February with an optimistic view on 2007. This was followed by a very bullish CAGNY presentation, even though well regarded CEO Engles was not present due to sudden illness. Shortly afterward the company stunned investors and most likely many peer food companies by announcing a dramatic recapitalization, special $15 per share dividend and slightly more optimistic view of long term operating profit (from 6% to 7%) and free cash flow growth potential. The shares reacted well to all of these items, reaching an all time high of $37.48.
Yet suddenly management indicated with the recent 1Q07 results that a number of challenges had emerged and the earnings outlook for the remainder of 2007 was less visible. Management pointed to concerns over organic profits and rising milk cost, prompting DB to lower their 2007-2009 EPS estimates and to assume an additional profit warning when Dean updates investors on 2Q07 progress at the DB Global Consumer Conf. on 6/12/07. (That's today!)
According to Katzman, despite the estimate cuts, analysis of DF's LT segment EPS potentialsuggests fair value of $36. Katzman reiterated his Buy rating on DF, despite the expected warning saying his firm remains a believer in the long term value creation potential.
Also note that Morgan Stanley was out with a downgrade on DF already on May 3, taking their rating to Equal-Weight from Overweight based on expectations for lower earnings in 07/08 as well as the increased uncertainty on 2 of the key risk factors (raw milk price and competition at Horizon) they flagged going into 07.
MSCO took another swing at DF's EPS ests on May 17 lowering their 07 EPS forecast to $1.64 from $1.72 and 08 EPS to $1.76 from $1.78 saying their Bear case places further downside risk for 07 EPS at $1.47 and 08 at $1.35, implying a mid $20s PT. Firm's tgt currently stands at $35.
NC: Anyway, I would not be surprised to see DF stock to put together a nice bounce around the $30 level (if it gets there). Note that's the level where the 200 day MA lies.
MEMC Electronic (NYSE:WFR): CIBC maintains WFR as their top pick
While several semiconductor customers have indicated that fundamentals are beginning to improve (quarterly comps improving from depressed levels), 2Q will likely only be a period of inventory digestion and will translate to higher unit shipments for WFR in the September quarter.
Mgmt appears more confident regarding the ramp of wafer shipments to key PV customers and believes that 1Q production and delivery delays have been alleviated. While solar wafers have lower rev. potential than semi wafers, CIBC believes GM is 60-65%, which is higher than the corporate avg. They believe that many investors do not appreciate the high level of profitability on solar wafers and instead assume that the margin profile is similar to the ~40% average gross margin on the semiconductor side of the business.
Firm maintains WFR as their top pick due to belief that polysilicon pricing will continue to rise for the next four to six quarters, causing revenue and profitability upside surprises. Sector Outperformer, $78 tgt.
Notablecalls: 5 bucks higher I would have called this note actionable. Yet, around current levels WFR actually looks reasonably priced. Not making a call here.
Paperstand (MFW, RSH)
The WSJ’s „Heard on the Street” column discusses M&F Worldwide (MFW) whose stock has soared from $17 to $65 in just 6 mo’s. Among the biggest fans of M&F are hedge funds, which own more than 30% of the co's shares. Some of these funds say they relish the opportunity to invest alongside Ronald Perelman and say they are willing to overlook the billionaire financier's missteps at Revlon. Others say the fact that few analysts cover M&F makes it an overlooked gem that could keep climbing as Wall St. catches on. "The stock is still cheap," argues Doug Teitelbaum, of Bay Harbour Mgmt. "Over time, [Mr. Perelman and his partners] have made some great acquisitions." He says it is "foolish" to hold Revlon against Mr. Perelman, given his past successes.
Barron’s Online “Inside Scoop” section reprots that Goldman Sachs Asset Mgmt has recently started shacking up shares of RadiosShack (RSH). The investment behemoth disclosed that it now owns a 12.6% stake, or 17m shares, up from the 1.7m shares it disclosed in a list of its holdings on Mar 31. Ben Silverman, of InsiderScore.com, says, "It seems like a contrarian call to be that aggressive buying into strength, but I think it suggests that the portfolio managers at Goldman Sachs have a lot of long-term faith in the stock." He adds, "Let's put it this way, if you are a bull [on RadioShack shares], it supports your take. If you are a bear, it's a bit of a head-scratcher."
Monday, June 11, 2007
Illumina (NASDAQ:ILMN): Actionable call alert!
Main takeaways:
- Next-gen sequencing opportunity could be significantly larger than current estimates. The upside potential with Solexa' next-gen sequencing tech has been a strong success so far but upside potential remains significant. Prior to this technology, the ability to sequence a genome was minimal due to the time and cost restraints it involved. But with the introduction of new technology, the potential applications for this technology are limitless
- Illumina continues to innovate in genotyping at a remarkable rate: During 2006, Illumina introduced 8 new products to the market. ILMN is close to launching its Human 1M chip, which will provide further genetic coverage than any other product it has ever offered. Checks show customers are anxiously awaiting this product.
- One major factor that has slowed some of Illumina's recent momentum has been the overhang related to the Affymetrix litigation. Yet, according to DB, the impact is completely and utterly misunderstood by the Street. Even in the event of a large royalty (15%), the impact to total ILMN revenues is not as large as it seems (40% to 50% of ILMN genotyping revenues would not be subject to a future royalty.)
Deutsche has increased their FY08 revenue estimate from $410.0mn to $450.0mn and EPS estimate from $0.90 to $1.35 (no longer includes impact of royalty to AFFX). For FY09 they have increased their revenue estimate from $512.5mn to $585.0mn, while increasing EPS estimate from $1.30 to $1.60. Maintains Buy and ups tgt to $48 from $39.
Notablecalls: This is the kind of call that makes the tiny hairs on the back of my neck tingle. The kind of call that makes me wish I had a trading account so I could pull the trigger on a ton ILMN on open and watch it climb over the next couple of weeks.
Calls like this don't come by often. I think JPM's call on VSEA from March 21 or maybe RayJay's on GDP from April 30 deserve to stand in the same category.
Illumina is a fascinating growth story. I remember ILMN started its climb just as AFFX started failing. People started to talk about how ILMN's products were so much better than AFFX's. While it looks like AFFX is getting its act together, ILMN has powered way ahead of them.
Actionable call alert!
Under Armour (NYSE:UA): Goldman throwing cold water on UA
GSCO believes the probability of upside to FY07 estimates has declined, and long term perspectives have not fully factored in emerging execution risks. They believe shares will face pressure heading into the back to school. Firm notes they see a fine line between brand enhancement and brand exploitation and have become more concerned that investors are not being compensated for these risks. Tgt is lowered to $45 from $50. Maintains Neutral.
Notablecalls: While I'm not entirely sure GSCO's right here about UA, the call will do damage to the stock. Would not be surprised to see UA in the low 40ies in a week or two. I continue to think UA's one the co's you buy after they stumble. Unlike say CROX, UA seems to have sustainability.
Paperstand (GOOG vs. MSFT intensifies; GE and MSFT for DJ; BCS; AAPL)
The WSJ reprots that General Electric (GE) and Microsoft were in discussions in recent weeks to combine Dow Jones (DJ) with some portions of GE's NBC Universal, parrying a bid by News Corp., but the two sides couldn't reach an agreement. Before the idea was abandoned, GE and Microsoft were discussing a competing $60-a-share offer. One consideration for GE appears to be concern that the unsolicited bid by Rupert Murdoch's co to buy Dow Jones for $60 a share, or about $5bn, could help News Corp.'s efforts to field a television financial-news channel that would compete with GE's CNBC.
The WSJ reports that New York hedge-fund firm Atticus Capital has acquired shares of Barclays (BCS) and met with the bank to discuss whether it should drop its effort to buy ABN Amro (ABN). According to ppl familiar with the situation, Atticus has told Barclays officials that Barclays stock is undervalued and that if the bank dropped its bid, Barclays stock would rise.
According to the WSJ, Apple (AAPL) is in talks with the Hollywood studios to make new movies available for rental for its iTunes service. The rental service is being pitched aggressively by Apple, with titles to rent for $2.99 for a set number of days before expiring. It is unclear which studios might participate. The service is far from a certainty with several details to iron out.
Sunday, June 10, 2007
Barron's Summary (AMZN, ASN)
Barrons’ “The Trader” column discusses Amazon (AMZN), whose shares have vaulted 74% in less than 2 mo’s. With its rally, shares have zoomed past the recently raised price tgts of even the more optimistic analysts. They trade today at 123x what Amazon earned over the past year, or 57x forward earnings. The latter far exceeds multiples of less than 20x for eBay (EBAY) and 27x for Google (GOOG), themselves no shrinking violets of the Internet. Amazon bulls argue that projected profits may still prove too low and will be lifted as skepticism dissipates. But the current valuation heaps pressure on Amazon to deliver steady margin expansion and outsize profit growth, and assumes ever-escalating demand for online goods and services. Amid such great expectations, the shrewd move might be to book some profits. The surge has even attracted the attention of speculators who bet that Amazon might use its inflated currency to plug the DVD-rental gap in its resumé. As the broad mkt sold off last week, Netflix (NFLX) shares jumped 9%. "Although we like the long-term prospects for Amazon, we believe the recent run-up in the stock has been overdone," says Dan Jones, of Blue Water Asset Mgmt.
Barron’s discusses Archstone-Smith (ASN), saying that the interest on the $17bn of debt on the co after it is taken private could exceed $1bn, while this year's net operating income isn't likely to surpass $800m. A sale of assets might not cover the shortfall.
Fund manager likes TWB, ESLR, WU and dislikes AMZN. Other fund top holdings include DELL, FFH, IR and CX.
Limited Brands (LTD) shares, now around 26, should move into the 30s in a year or so, once the retailer finishes its restructuring. Any sharp pullbacks would offer a good chance to buy the stock.
Shares of smaller producers, like Forest Oil (FST) and Pioneer Natural (PXD), could jump 15-40% if the co’s spin off some assets into master limited partnerships. "If investors get in during the early part of the US MLP-creation cycle, they have the opportunity to profit," says Robert Gillon, of John S. Herold. Among existing master limited partnerships with growth potential is Kinder Morgan (KMP).
Wyndham (WYN) came public in August at 32 and now trades around 35. The company could be worth almost 60 a share as investors, or a financial buyer, recognize its growth potential.
“The Trader” section discusses Ameritrade (AMTD) situation. Last week, the shares popped on news that SAC Capital and JANA Partners had amassed an 8.4% stake and were prodding Ameritrade toward the altar. But no trip to the altar can occur without the blessing of TD Bank (TD), which owns 40% of the outstanding shares. In fact, the hedge funds see TD as such an obstacle that their May 29 missive to the Ameritrade board lobbied first for TD's removal from the proceedings even before they made a case for a merger. The remaining choice is for TD to buy out the 60% piece of Ameritrade that it doesn't own. Ameritrade now trades at 16x forward earnings, and given its opportunity cost for enhancing value in a merger, Brad Smith, of Blackmont Capital, ests that TD may have to cough up at least $25 a share. "While that may be its ultimate longer-term objective, it's not something TD wants to do right now," Smith says.
“Preview” section reports that conventional wisdom says that military contractors' stocks do well in presidential election years. A recent study of the past 6 presidential election years by analyst Byron Callan ,of Prudential, shows that a basket of the 5 largest pure-play defense issues, bought at the start of each year and held till the end, beat the S&P 500 in 4 of those years. In ‘04, the collective share prices of GD, LLL, LMT, NOC and RTN bested the S&P by 23%. In the ‘92 election, the basket trounced the mkt by nearly 37%. But the ‘08 election could resemble those of ‘52 and ‘68, where a central issue was how to end a war and big defense issues underperformed the mkt. "Given the national debate about what to do in Iraq, you have a similar situation developing next year," Callan cautions. In addition, he says, other issues, including "the rising cost of health care, are also high on many voters' agendas. So results might not follow previous patterns." At the same time, the analyst notes, "None of the candidates is calling for cuts in defense spending, so that could be viewed positive for stocks."
“Technology Trader” section discusses recent M&A activity in online ad and mkting firms. Article suggests that it isn’t hard to come with a list of potential tgts, including CNET, WBMD, RATE, TSCM, KNOT, ANSW, LGBT and QPSA. But, the question is, why haven't any of these co’s been bought so far? Problem No. 1: None of the key buyers in the recent ad-firm consolidation appear all that interested in owning co’s that pay ppl to create content. Problem No. 2. What those co’s, and their counterparts in the mainstream media, actually are interested in is user-generated content. They're enamored of social networks, places where users will return over and over again to entertain and socialize with each other. Problem No. 3. The barriers to creating compelling content on the Web are falling rapidly. CNET, for instance, faces challenges from a host of all-purpose gadget blogs, like Engadget and Gizmodo, and more specialized sites. Content is spreading into the long tail; the niche mkts aren't that niche-y any more. A final point. Stock activity doesn't necessarily mean an actual takeover bid is coming.
Friday, June 08, 2007
Smith Micro (NASDAQ:SMSI): VZW pushed its Vista release
Notablecalls: Nice find by ThinkEquity's Anton Wahlman. Too bad the stock is down so much over the past couple of days. SMSI is a bouncer and I think that following initial weakness, there's a good chance for a bounce. I like this co.
Note: Apparently, this call was issued yesterday! (Still, my gut is telling me to keep SMSI on the bounce radar today)
Many thanks to Stockmaven for pointing it out.
FormFactor (NASDAQ:FORM): MSCO's top pick
MSCO believes competitor's concerns on Advantest's potential entry in the probe card market are not new or a source of major concern in the near term. They think Advantest's growth in the tester market has been slowing and the company has been looking into new areas of growth, including advanced probe card market for more than a year. Checks suggest Advantest is still in the early R&D stages on a MEMs-based probe card and that the company is focusing more on vertical probe cards (one generation behind advanced MEMs cards).
Risk-reward looks attractive and 35%+ upside on FORM makes it our top pick. Firm's price target of $55 is based on a P/E of 25 times 2008 EPS estimate of $2.16, or a price-to-earnings growth (PEG) ratio of 1 based on their view that the company can increase its earnings 25-30% over the next several years.
Notablecalls: Goldman was out cautious on FORM yesterday morning, saying Advantest's potential entry in the probe card market is a long-term threat. The firm did maintain their Buy rating, though saying current levels are pricing in s-t weakness in fundamentals. Yet, according to MSCO, there is no weakness as DRAM probe card revenues are highly correlated to bit shipments. The stock is down 20% from its recent peak, with other semi names down around 10%. Must say I was surprised, how little damage GSCO's note did to FORM stock yesterday. Are we getting close to the bottom in FORM? I'm not ready to make that call here, considering the overall weakness of the tape, but signs like this cannot be disregarded.
Paperstand (TAXI, CMCSA)
“Heard on the Street” column out saying that small-bank investors who hope to snare big profits from a wave of takeovers in the industry may want to put their money elsewhere. That is b/c sellers, stung by a difficult operating environment that is bedeviling the industry, appear more willing than ever to hand over the keys to the vault without holding out for a big price. Such was the case yesterday when Yardenville National Bancorp agreed to be acquired by PNC Financial for $403m. Yardville has $3bn in assets compared with PNC's $123bn. The deal valued Yardville at $35 a share, making it a rare "takeunder" in which the acquisition price represents a discount to the target's trading price. "The sellers had been demanding a lot higher prices than the buyers wanted to pay, but with the continuing tough rev outlook, it's almost inevitable that you will see takeunders," says Jefferson Harralson, of Keefe, Bruyette & Woods.
Barron’s Online highlights Medallion Financial (TAXI), saying that recently, the price of a NYC medallion, which is affixed on the hoods of cabs, hit a record $600K. Medallion Financial will continue to benefit from the appreciating value of these licenses. The co, which owns 300 medallions itself, is also expanding its lending operations in several US cities. The co is also building a commercial lending business in lucrative niche mkts such as boats and RVs. All this expansion bodes well for Medallion's stock, which has been under pressure in the past year due to higher interest rates and development-related expenses. But, the shares are poised to outperform the mkt as Medallion starts partnering with medallion owners to take advantage of price appreciation, and as higher leverage boosts its lending capabilities and ROE in other niche loans. In addition, Medallion's 6.6% dividend yield offers a downside buffer as the co ramps up for a strong ‘08.
“Inside Scoop” section reports that Stephen Burke, Comcast's (CMCSA) COO and the president of the co's cable operations, sold $6.4m in Comcast shares on Mon. Burke's transaction included the sale of 208K class A common shares and 27K class A special common shares. The sale represented 88% of his class A common stake. Burke's sales follow on the heels of selling by Comcast's Chmn, CEO and President Brian Roberts. The CEO sold $9.4m, or 350K shares, of class A special stock. Ben Silverman, of InsiderScore.com, says that both the size of Burke's and Roberts' sales and Comcast insider history make the transactions hard to ignore. Comcast insiders have not been frequent buyers or sellers of co stock, according to Silverman. But, he adds, "When the insiders at the co have done so, they've done it wisely."
Thursday, June 07, 2007
CVS/Caremark (NYSE:CVS): Color on FEP mail-order loss
- Raymond James recalls the FEP contract was Caremark's largest customer pre-merger (16% of standalone revenue or ~$5.8 billion annually; now ~6.5% of post-merger revenue). CVS/Caremark will retain the large retail benefits and clinical business, some $4 billion in annual revenue but, they believe, low profitability (RJ estimates 6% gross margin). Firm estimates the lost mail-order business generated ~$1.8 billion in revenue and slightly higher profitability (RJ estimate = 10%).
RJ had previously estimated that the loss of the mail-order contract would amount to a $0.07 hit to their 2008 EPS forecast of $2.23 (~3% pressure), assuming that 10% of the gross profit hit is offset by G&A rationalization. Typically, though, they believe that such contract losses are gradual, implying that their $0.07 forecast is likely conservative.
CVS shares have sold off recently on the concerns over the FEP contract renewal and same-store sales deceleration in May (though expectedly driven by tougher comps from Medicare Part D). While the stock may sell off further as investors fret about the rest of PBM selling season, the firm would view any sell-off as an attractive buying opportunity. Reits Strong Buy and $45 tgt.
- Goldman Sachs believes that any weakness will be modest and short-lived. There are four reasons for this. 1) The loss of FEP mail does not change GS 2008 EPS estimate of $2.30. 2) Valuation is compelling. At $37, the P/E multiple on 2008 EPS is only 16x versus 19x for MHS and ESRX. 3) The company can tap its $5bn share repurchase authorization to support shares. Finally, the firm believes some investors may have been waiting for this event to initiate or add to positions.
GSCO would be even more aggressive buyers of the shares on any weakness today.
- Morgan Stanley believes that while bears may portray the loss of the mail contract to be a repudiation of the CVS/CMX combination, they view the business to be merely returning to the lowest cost operator (where it had been for many years prior to 2005) amid a process that was underway well before the merger was completed. In fact, the firm believes the news should alleviate a key near term concern for potential new buyers attracted (as we are) by the stock's hefty discount to its peers despite equally robust growth prospects.
Notablecalls: Looks like CVS is a strong bounce candidate here. I just hope there will be a gap-down on open.
Monster Worldwide (NASDAQ:MNST): Color on management shake-up
- Citigroup notes that although the change was unexpected, their view is that it was largely driven by the new CEO wanting to have his own team in place. The announcement did mention that the change was intended to support the future growth of MNST's Internet Advertising & Fees business, and in our view that segment does need to improve.
Firm's channel checks on Careers North America indicate a stabilization of this part of MNST's business (56% of rev. in Q1:07) as opposed to the consistent deceleration we have seen over the past 3-4 quarters.
Reits Buy and views the 2-3% after-market correction as a buying oppty.
- Banc of America thinks investors are likely to be initially disappointed with the CFO change given Lanny Baker's exposure with the company over the last several years. However, the new CFO brings considerable experience to the company.
The changes are not unexpected in their view, given the CEO's goals and prior tenures. However, the changes came earlier than they would have expected. BAC views this development as a positive as senior management has been able to put its plan in place sooner than expected.
No changes to their estimate or thesis. While the stock is bidding down in the aftermarket, they would use any weakness as a buying opportunity.
- Baird notes CFO Lanny Baker, who was very well regarded by investors, is leaving the company. Heis being replaced by Tim Yates, who has an impressive background (CFO of Symbol Technologies, CFO and CAO of Banker's Trust, CFO Saguenay Capital management, Yale undergrad, HBS MBA). More importantly, Mr. Yates has a long, and successfultrack record of working with new CEO Sal Ianuzzi including his role as CFO of Symbol Technologies (which was turned around and sold under Mr. Ianuzzi's leadership) and previously at Banker's Trust.
Mr. Iannuzzi also indicated that he plans to invest to build long-term competitive advantage. To that end, the firm believes the company will wisely invest for the long run, withless emphasis on very short-term results. They are not changing their estimates at this time, but note that management will likely be less influenced by short-term profit targets established previously. Thus it is possible that estimates or full-year guidance can be revised.
Baird thinks the stock may reactnegatively in the short term due to the reduced perception that a sale may be imminent given the recent changes. The increased emphasis on long-term investing (and the potential for revisions) could also negatively impact shorter-term investors. In addition, they note that former CFO Baker was popular with many investors. Maintains Neutral and $46 tgt.
Notablecalls: It surely looks like Goldman's negative call from May 22 is playing out here (see arvhives). While most firms are calling the 2% decline in after hours buyable, I'm yet again going with Baird's rationale here. Short-term profit targets set by previous management may indeed be thrown out of the window. That will hurt the stock.
While I think MNST will be buyable for a bounce, it's not going to happen 2% lower. More like 5%. In fact, I'd be on the lookout for some short-selling oppys in MNST early on. Tight leash, though as MNST is a tough stock to short.
Paperstand (takeover tgts: RATE, ANSW, WBMD, KNOT)
Barron’s Online speculating, which co’s among the online publishers might be the next wave of merger tgts. Potential tgts include Bankrate (RATE), Answers.com (ANSW), WebMD (WBMD) and The Knot (KNOT), all of which have editorial content that could be more desirable as Google (GOOG) and Microsoft (MSFT) try to sell more ads all over the Web using the two ad networks they just bought, DoubleClick and aQuantive. What good Internet co’s have in common are businesses in which individuals engage in highly specific activity and they have some substantial scale in that business. Bankrate and The Knot are relatively cheap and have desirable audience demographics, say investors and analysts. In addition, both co’s would be easy for a large media or Web co to buy, with mkt caps of $776m and $600m, respectively. "You're seeing a lot of consolidation in the [Internet content mkt] driven by the competitive dynamic between Google and Microsoft and Yahoo (YHOO), as well as seeing Big Media co’s establishing a presence on the Internet," says Heath Terry, of Credit Suisse. "After the wave of acquisitions of ad network co’s, the inventory of smaller content co’s is likely to become more valuable." The hottest area of growth right now in Internet advertising are specialized Websites, says one NY-based portfolio manager. "More and more of the audiences these sites cater to are going to get their information online over time," he says.
“Inside Scoop” section reprots that Kaydon’s (KDN) new President, CEO and Chmn, James O’Leary, has bought $400K worth of shares in his co, as the bearings maker's stock is on a roll. O'Leary now owns 120K shares of Kaydon. Robert W. Baird's Peter Lisnic says, "I think we're still clearly favorably disposed toward Kaydon. And that is b/c it does have above-avg growth prospects relative to other industrial co’s, we think." He underscores Kaydon's opportunity in the wind-energy mkt. Michael Painchaud, of Market Profile Theorems, says the buy, "net-net, is probably going to be a positive," moving Kaydon into the neutral range on his insider model.
Wednesday, June 06, 2007
Cooper (NYSE:COO): Color on earnings
- Citigroup notes that despite a top-line that grew 7% year-over- year, expenses were considerably ahead of their thinking leading to the EPS shortfall. Cooper held share in the quarter growing 4% ahead of modest worldwide contact lens market growth of 3%. Cooper continues to benefit from the shift to daily disposable use with the market expanding to 11% in the quarter (vs. a 5% decline in spherical lenses ex-single use).
While management reiterated prior guidance of $2.55-$2.75 (incl. options expense), Citi notes that there are various near-term challenges to the company's ability to execute and meet guidance. They believe the company will likely need to continue its increased sales efforts to promote new products and drive the shift to daily disposables. Nonetheless, given the continued strength in the daily disposable market the firm is raising F2007 revenue by $5m to $926m; however the quarterly miss drives EPS down $0.17 to $2.34. FIrm ups their target price to $55 from the $48 prior as calendar year 2008 EPS estimate rises to $3.27 from $3.23 prior. Maintains Hold.
- Goldman Sachs maintains their Buy rating on COO saying that despite mixed results for the quarter, there were plenty of developments to suggest that Cooper remains on track to drive increased profitability in FY 2008. Although margins were compressed during the quarter due to upfront spending to support the Biofinity launch, with a solid outlook for revenue growth, the story is attractive, particularly with the prospect of significant operating leverage in 2008 and beyond. As such, they are inclined to overlook perceived concerns from F2Q results with a eye towards greater earnings growth going forward.GSCO ups their tgt to $59 from $55.
- Baird notes FQ2 played out much the same way as other recent quarters, with CVI adjusted grossmargin continuing to move lower and SG&A expenses as a percentage of sales (even after excluding non-recurring items) continuing to move higher.
While the firm believes this could represent the low point for COO as it relates to earnings performance (management stressed on last night's call that a number of product development and product launch costs had been front-end loaded), they also believe management's outlook for ~30% EPS growth over H2-07 vs. what has now been a 15% EPS decline in H1-07 could prove difficult to achieve. To that end, they are lowering FY'07 adjusted-EPS projection to $2.24, well below management's current $2.55-$2.70 range. Additionally, the firm is taking their FY'08 EPS projection down to $2.95 from $3.07 previously (management has not provided FY'08 guidance).
Baird says their $52 price target represents a multiple of justover 16x NTM +1 EPS projection of $3.17 (includes FQ3-08 through FQ2-09). Over the last five years, COO has traded in an NTM multiple range of 11-24, and they believe continued profitability pressures are likely to limit upside to numbers and hence the multiple upon which these shares trade over the next several quarters, although take-out potential likely limits downside risk to the upper $40s/low $50s as well.
Notablecalls: COO is going to get hit today for sure. Yet, given the fairly sizable short interest and upcoming catalysts, the stock looks like a bounce candidate. Note that the problems with EYE's MoisturePlus product (and also BOL's equivalent) are likely to drive daily disposable lens use in the near-term. That's certainly a positive for COO.
On the valuation side, I'm going to go with Baird's $2.95 number for FY08, suggesting downside risk to upper $40s. The stock ended around $51 and change in after hours action.
Paperstand (BBBY, HOTT, SWHC)
The WSJ’s ”Heard on the Street” column discusses Bed Bath & Beyond (BBBY), saying that shares of the co now are more reasonably priced and might even attract attention from LBO specialists after its first-ever profit warning. Some say investors should remain on the sidelines, amid a housing slump and worries about the health of the consumer. Just as important, Bed Bath's stores are aging and some longtime fans have been turned off by recent moves, suggesting that Bed Bath may have its work cut out for it trying to return to Street's good graces. "The valuation isn't compelling ... its growth has slowed, its margins contracted during the last 5 qrtrs, and now [sales increases at Bed Bath stores open at least a year] are slipping," says Colin McGranahan, of Sanford C. Bernstein. "As a much more mature co, they are more subject to cyclicality, and that isn't a great story unless the stock is cheaper than it is," he says. Bed Bath now trades at 16.1x estd earnings for the next 12 mo’s, a tad cheaper than the overall mkt. While that is well below the 25 P/E avg of the past 5 years, Bed Bath doesn't have the growth prospects it once had for its flagship stores, and investors have been frustrated with the slow progress in its other businesses, such as its specialty Christmas Tree Shops. Bulls point out that Bed Bath's balance sheet is impressive. It holds about $1bn more cash than debt.
Barron’s Online highlights Smith&Wesson (SWHC), whose stock is up 90% over the past year. Article suggests, it still could go higher. The co’s mgmt team has successfully turned around this once-troubled co by bring big-business skills into a fragmented industry dominated by small, family owned businesses. Now, S&W is introducing new products and entering potentially lucrative new mkts, including the rifle and shotgun mkt that combined is 80% larger than the handgun mkt, which has historically driven the co's fortunes. The co also is working to regain its leadership in the law-enforcement mkt, which it lost years ago by failing to anticipate that lightweight, high-capacity polymer pistols would replace its heavier 6-shot revolvers that had long been standard-issue for 17K US police depts around the country. "The bottom line is 100% profit growth for fiscal ‘08,'' says CEO Mike Golden. "We've added seven points to gross margin and opportunities remain for margin enhancement."
“Inside Scoop” section reports that SAC Capital has racked up shares of Hot Topic (HOTT). SAC disclosed a 5.1% Hot Topic stake, or 2.3m shares, up from the 245K shares it had disclosed at the end of the 1Q. SAC's investment style is difficult to pinpoint b/c it uses a variety of methods to manage its $9.9bn in equity assets, but the hedge fund might be interested in Hot Topic b/c it perceives the stock as undervalued after the price plunge, says Ben Silverman, of InsiderScore.com. Silverman notes that SAC holds several positions in teen-apparel retailers, and seems be shifting those assets around.
Tuesday, June 05, 2007
Bed Bath & Beyond (NASDAQ:BBBY): RayJay making a bounce call
They note that frankly, in a normal environment, investors could expect the shares to deflate significantly. The environment, however, is anything but normal, and this fact - and the fact that earnings will still advance over last year's $0.35 and comparable sales are positive at +1.6% - likely mollifies the damage that will afflict the opening share price. While they, as interested students of the company, bemoan the fact that management does not actively engage in a dialog with investors, Bed Bath & Beyond's status as the premier retailer of home furnishings product remains unquestioned. Accordingly, they expect that the shares will open down, reflecting the novelty of the miss, and may trade better afterward as investors reflect on the economic reality. Maintain Outperform.
Notablecalls: So, it looks like RayJay is making a bounce call here.
Bed Bath & Beyond (NASDAQ:BBBY): GSCO cuts rating
GSCO has lowered their F07 and F08 EPS estimates to $2.35 and $2.65 from $2.44 and $2.82; as a result, price target moves down to $40 from $45, which equates to 15X F08 EPS estimates.
Notablecalls: This is exactly the type of stuff that will (at least initially) push the stock toward the lower end of my suggested range.
Bed Bath & Beyond (NASDAQ:BBBY): Color on warning
- Deutsche Bank notes their estimate was $0.39, which matched previous plan. BBBY pre-announded comps will be +1.6%, below expectations of 3%-5%, but total sales will increase by ~11%, which is close to 11.4% consensus (helped by the buybuy BABY acquisition inter-quarter).
The firm suspects BBBY fell victim to the retail weakness in April, and home-related pressures. This appears to have led to lower comps and margins, as BBBY likely discounted and increased marketing spend to drive sales.
DB is tweaking their 1Q model by -$0.02 to $0.37, as well as 2Q-4Q by $0.01 each quarter, as comps will likely remain challenged for the home goods space for the foreseeable future, they believe. All in for FY07, they have adjusted EPS down by $0.05 to $2.31, with FY08 also down comparably. BBBY trades at 15.3x new 2008 forecast, versus the retail average P/E of 16.2x.
They expect the stock to fall as estimates are reduced. A below-peers valuation may act as somewhat of a buffer, but the surprise of the first ever warning will likely be the story. Maintains Hold.
- Piper Jaffray says that for FQ1, they are taking down EPS from $0.39 to $0.37 -- which compares to management's range of $0.36-$0.38. Owing to stepped-up competition, macroeconomic headwinds, weak traffic trends, and overly promotional merchandise, they believe top-line and bottom-line trends remain challenging for the home furnishing industry throughout most of this year. As such they are taking down FY08 estimate from $2.38 to $2.34.
Given belief that BBBY is lacking a significant catalyst for FY08, and in view of their revised earnings model, the firm is reiterating their Market Perform rating and $38 tgt. Piper expects BBBY stock to be weak this morning.
Notablecalls: BBBY has been the poster child of the home furnishing space for the past 15 years. Yet, competition has become so stiff that even the best players are starting to feel it. Must say I saw this one coming when I read the wonderful call by Morgan Keegan published last week:
BBBY May Have Been Out-Done by Discounting from Direct Competitor
- Our channel checks indicated a heavy level of discounting by Linens-N-Things over the Memorial Day weekend.
- Our SSS estimate of 5% on top of 5% for the May quarter may prove too aggressive.
- We view the company's annual guidance of 10% top-line and EPS growth yr./yr. in FY2007
as more likely to be achieved through share buyback and unit growth than stable margins
and SSS.
Also, weakish Q2 guidance from Williams Sonoma (NYSE:WSM) seemed to confirm my suspicions.
While I think the first ever profit warning is likely to dent BBBY's valuation, I think the stock may be buyable for a bounce. BBBY traded around $39 and change is after hours but I suspect we may see levels of around $37 or even $35-$36 today. I would be bidding around the very low end of that range. Agressive accounts may even try finding some short-selling opportunities very early on (say around $38).
Paperstand (AMZN, AV, VOD, VSE)
The WSJ reports that Amazon.com (AMZN) CEO Jeff Bezos said Tue the co will increase its investment in China, which he said is the co's fastest-growing mkt, but where Amazon has been lagging its chief local competitor. On his first trip to China since Amazon bought Chinese Internet co Joyo.com in ‘04, Mr. Bezos unveiled a new name for the Chinese site and several other new features execs said are aimed at attracting more customers, including free shipping. He said that Amazon intends to pour more capital into its China operations, b/c of the opportunity its offers for rapid growth, although he declined to specify any amounts for new investment. Joyo "is our fastest growing business anywhere in the world," Mr. Bezos told reporters, adding later "and not by a little bit." "This business is remarkable, and it's growing so rapidly that it deserves even increased levels of investment."
According to the WSJ, Silver Lake and TPG Capital last night agreed to purchase Avaya (AV) for about $8.2bn. The deal is expected to close in the fall. The buyers will pay $17.50 a share for the co.
“Heard on the Street” column reports that some observers are whispering about whether Vodafone (VOD) could be the next target. Vodafone may be worth more in parts than it is whole, making it a prime candidate for investors agitating for a breakup. The co has been harangued by shareholders recently and has several large holdings that look tempting to other buyers, making Vodafone attractive to activist-type investors. Among the most valuable pieces: its 45% stake in Verizon Wireless. The biggest obstacle to pushing for change at the company is its sheer size. Some analysts think Vodafone could have a higher valuation if sold or split up. Vodafone's shares currently trade at about 6x EBITDA for the FY ended Mar’07. But recent sales of some telecom co’s have fetched as much as 9x.
Barron’s Online “Insider Scoop” section reports that VeraSun (VSE) director Steven Kirby bought nearly $608K worth of stock on May 31. Kirby's purchase was the largest insider buy in nearly a year. Kirby was joined last week by 2 other execs, CFO Danny Herron and Senior VP for Logistics Barry Schaps. Herron bought 1,500 shares, while Schaps bought 2K shares. Kirby now owns 1.6m shares in VeraSun, or 2.1%. Not every VeraSun exec was in a buying mood last week, however. William Honnef, Senior VP for sales and marketing, sold 45K shares, Senior VP and General Counsel John Schweitzer exercised 5K options and then sold the shares. Additionally, Matthew Janes, VP for technology, exercised 16K options and then sold the shares. Despite the stock slide and Kirby's bullishness, Jonathan Moreland, of InsiderInsights.com, says overall insider sentiment remains negative. Moreland says Kirby's buy, coupled with other insider purchases last week are "insignificant compared to sales occurring at the same time." Any near-term positive movement in the stock might also be delayed, Moreland says. "Insiders tend to be early in these crash-and-buy situations."
Monday, June 04, 2007
Marchex (NASDAQ:MCHX): Discounts?
Notablecalls: Looks like there may be some downside in store for MCHX over the next couple of days.
Nektar Therapeutics (NASDAQ:NKTR): Exubera sales force is set to kick off
Contrary to Exubera detailing to date, which focused on A1C efficacy and pulmonary safety, PFE is rolling out new data indicating that patient perception of Exubera's benefit is higher than that of traditional insulin formulations, leading to a higher patient acceptance rate and stronger patient compliance. The messaging also incorporates a pitch to "try insulin earlier," in an effort to capitalize on recent safety concerns over oral agent Avandia.
Firm's contacts suggest that PFE remains committed, having beefed up print advertising June 1, and appears on track to launch a major television DTC campaign in the July/August timeframe, which they believe will be a major driver for prescriptions in 2H:07. They reiterate their Buy rating on Nektar Therapeutics (NASDAQ:NKTR), PFE's partner on Exubera.
Notablecalls: Well done Noelle! I was somewhat surprised the shorts managed to chop NKTR down on May 10 after the management didn't take down their Exubera numbers and Morgan Stanley came out with an upgrade. The move uncovered by Neponset shows Pfizer means business with Exubera and I fully expect a nice upward move in NKTR over the next couple of days. Risk is best defined by recent lows. Think I'm going to call this one actionable!
Sandisk (NASDAQ:SNDK): Color on ITC
ITC's initial determination found that patent "517" was invalid & that STM's NOR did not infringe "338" (note: STM's NAND was already found not to infringe '338' back in Dec 2005). As a result, the firm believes that "338", based on which Samsung is currently paying royalty, no longer has any teeth. Moreover, the invalidity of '517' brings to question the depth and strength of SNDK's remaining patent portfolio.
As a result, the firm is quite confident that Samsung's royalty payments post-2009 will drop materially (likely close to or even below Hynix' ~$40m / year). This ruling is quite detrimental to SNDK's primary investment thesis (i.e. IP portfolio). If STM, a fledgling player in NAND flash, was able to manufacture parts in 2006 that were able to bypass most defensible SNDK patents at the time, surely Samsung by 2009 ought to be able to bypass all of them as well.
SNDK bulls will say that Samsung and Hynix are already paying royalty, so SNDK doesn't lose much with this ruling. However, DB points out that SNDK is trading at a premium to other memory peers due in large part to the value assigned to its IP portfolio.
No matter how they cut it, the firm does not see any reason to put new money into SNDK unless we see a material discount to their SoTP valuation (while today low-30s appears to be a good entry point, firm's view is likely to change with time). DB's base case SoTP valuation now drops to $36 from $39 (worst case is now $22 and best case $47). Maintains Hold.
- Someone forgot to tell Piper Jaffray about the ITC determination, because PJ is out on SNDK reiterating their Outperform rating and $51 tgt saying checks show continued strength in data-oriented phones, as well as increasing consumer interest in video and location-based applications that should drive solid growth in NAND flash demand.
For example, the firm noted solid sales of the LG VX8700 and Samsung u740 at Verizon, the Motorola V3xx at AT&T, the Samsung M620 "UpStage" at Sprint, and the Nokia 5300 at T-Mobile. In fact, the LG VX8700, which was the best-selling phone at Verizon according to checks, was highlighted by salespeople as offering support for up to a 4GB memory card, vs. a maximum 2GB for other phones. Firm believes this suggests carrier salespeople are increasingly highlighting the importance of NAND memory on mobile handsets.
Notablecalls: The License & Royalty side makes up over half of SNDK's operating income, meaning that without L&S the co may be facing losses after the current agreements expire. I'm sure the stock will get whacked today but considering there won't be any immediate impact from the ITC news and the fact NAND pricing has been surprisingly good (pointing to OK results), we may see a bounce. Low-30s is probably the best level to start from.
Motorola (NYSE:MOT): An upgrade and some estimate cuts
- CIBC upgrades their rating on MOT to Sector Outperformer from Sector Performer and sets a $23 tgt. Firm notes they see several positive under-the-surface trends that make them optimistic on MOT's future potential. Near term, they expect a very weak 2Q07 and have cut their estimates but see a unit/margin improvement starting 2H07.
MOT's focus on margins and not share should lead to a higher LT margin model. Thus, the firm views NT (low-margin) share losses in a positive context. Asia checks suggest the RAZR2 is ramping modestly, yet with a lower unit base; the RAZR2 doesn't need to be a home run to make an impact.
CIBC believes investors should focus on product portfolio and margin progress, yet not look for a game-changing model. MOT needs to avoid the pitfalls of the RAZR. A broad portfolio with good number of decent selling models is the target. So, don't look for a game changer, it's a different game.
- Piper Jaffray notes their May channel checks indicate Motorola North American market sharedeclined, and they believe its global share also continues to struggle. The firm is lowering their 2007 handset market share estimates for Motorola from 17.7% to 17.2% and 2008 market share estimates from 18.3% to 17.1%, resulting in lower EPS estimates. 2007 EPS estimate goes from $0.47 to $0.36 and 2008 EPS estimate from $1.10 to $0.99.
While checks indicated solid share at T-Mobile due to the RIZR and a price cut in the KRZR, PJ believes Motorola products lost share vs. the competition at the three other major carriers.
Based on firm's belief it could take several quarters for Motorola's mobile phone operating margins to recover, they maintain Market Perform rating and $18 tgt.
- Goldman Sachs is also out on MOT saying their channel checks suggest risk to Motorola's 2Q2007 handset unit shipments (relative to Street Consensus). Consequently, they are lowering their 2Q unit shipments estimate to 41 mn from 44.5 mn, which the firm believes could still be at risk depending upon the amount of channel inventory that needs to be worked through. Additionally, they anticipate further restructuring related to the non-handset business segments, which they believe suggests risk beyond Mobile Devices. Maintains Neutral and $16 tgt.
Notablecalls: It's hardly a surprise that MOT is looking at couple of pretty tough quarters here. Especially with Apple coming with their iPhone in 4 weeks. Still, CIBC makes a valid point regarding mkt share vs. profitability. I continue to stand by my positive stance on MOT.
Paperstand (NWS, PALM, AV)
According to the WSJ, as representatives of both co’s prepare to meet Mon, News Corp (NWS) is willing to go further than it has gone before in acceding to tighter editorial-independence controls to win Dow Jones (DJ), ppl close to News Corp. said Sun. But Rupert Murdoch made clear in an interview Fri that he isn't willing to yield to what may be a key demand from the Bancroft family: that the family control any editorial-oversight board created to protect Dow Jones's editorial independence in the event of a deal. Such a board should comprise "ppl with absolutely no business connections to me nor the family," Mr. Murdoch said, adding that the family "can't sell [Dow Jones] and keep it" by joining a newly created board. "I can't put down $5bn of my shareholders' money and not be able to run the business," Mr. Murdoch said. He stressed that he has "no plans to change anything" on the editorial or news sides of the paper.
The WSJ reports that Palm (PALM), facing mounting competition in the smart-phone mkt, is selling a 25% stake to a private-equity partner that will bring former Apple (AAPL) execs to the co. Under the transaction, which is expected to be announced today, Elevation Partners will invest $325m for a 25% stake. The move is designed to give Palm a new long-term investor that will bring in new talent. Palm will pay $940m in cash, or about $9 a share, to existing shareholders whose ownership of the co will drop to 75% under the deal's terms. The co will fund the restructuring with the $325m from Elevation, $400m in new debt and more than $200m of cash on its balance sheet to complete the transaction.
The WSJ reports that private-equity firms TPG Capital and Silver Lake Partners were last night in the leading position to purchase Avaya (AV) for around $17 a share. As in any auction, the situation was fluid and the deal could either break down or veer into the hands of another suitor, such as Nortel (NT). It may be some time until the final details are struck.
Sunday, June 03, 2007
Barron's Summary (GE, ABT, BLC, MTRX, SCI, PALM)
Abbott (ABT) trades for around 56, or a lofty 18 times earnings. It could be worth closer to 50, especially in view of questions surrounding a key drug.
With the Dow having finally broken out of its 8-year long trading range and moved higher, some technicians advise using any pullbacks to add exposure to large-cap stocks. Large caps mentioned include SGP, Q, XRX and VZ.
If Belo (BLC) splits its TV and newspaper units, its stock, now around 22, could hit 30. Shareholders also might benefit from a higher dividend or bigger stock buybacks.
According to the Barron’s, demand for crude oil continues to increase with economic growth, while productive capacity grows more slowly. One possible stock play on creaky refining infrastructure is Matrix Service (MTRX). The decline in production from major fields will not be reversed quickly. Technology can enhance production but it also accelerates the depletion of existing fields. Those that are able to ratchet up production to meet demand. A domestic crude-oil producer that fits the bill is Arena Resources (ARD), which has increased production of oil and equivalents by 76% yoy and is well positioned for further gains. These sorts of declines have hastened the shift to unconventional sources, such as shale gas, tight sands and coalbed methane. Unconventional resources comprised 56% of domestic gas supply in ‘05. Extraction from these resources generally requires more support from services. Among the service beneficiaries: OMNI (OMNI); Pioneer Drilling (PDC); and Natural Gas Services (NGS). The global mkt for liquefied natural gas is expected to more than double in the next 5 years. A speculative play is InterOil (IOC).
According to the “The Trader” column, death-care providers have revived over the past year, none more so than Service Corp. Intl. (SCI). While death is inevitable, SCI's continued surge is not. A ‘06 acquisition of rival Alderwoods boosted yoy profits, but volume on a comparable basis has declined. SCI was able to offset that drop by ratcheting up rev per funeral last qrtr, and has shrewdly shifted its focus from selling commoditized merchandise to providing more value-added services. But gross margins pushing 23% could weaken over time if, for instance, the trend toward cremations continue. The rate of cremations is expected to grow from about 1/3 today to 1/2 by 2030, and while co’s pad value with memorial services, cremations cost less and offer thinner margins. At about 14, SCI shares trade at 27x projected '07 earnings, versus about 19x for lesser rivals like Carriage Services (CSV) and Stewart Enterprises (STEI). "Much of the anticipated success for the year is priced into the stock," says John Ransom, of Raymond James. "Moreover, investors may have to brace for deceleration in the 2H07."
“Technology Trader” out saying that Palm’s (PALM) the Foleo is a monumental dud: Too pricey to be a companion to a cellphone, but not full-featured enough to replace a full-powered laptop. It didn't help that Palm founder Jeff Hawkins performed one of the all-time bad demos at the D: All Things Digital conference; he talked about the device for 10 minutes before actually demonstrating it; half-way through, ppl were streaming to the exits. It looked like the 7th inning of a blowout at Chavez Ravine. For months now, there have been rumors on the Street that Palm might be up for sale; theoretical suitors include Motorola (MOT) and Nokia (NOK) and various private-equity firms, but the chatter has faded lately. Barron’s would not be surprised to see the rumors mill heat up again, though. The Foleo is looking like a loser, which could trigger increased conviction that the co's Treo could gain wider acceptance in the hands of a handset maker with deeper pockets.
Friday, June 01, 2007
ThinkEquity's Eric Ross on Dell
The firm notes they applaud its strong quarter. No concrete guidance was provided. Despite its success in beating the financial forecast, the near-term outlook remains challenging: cash flow generation (negative in the quarter) is likely to be permanently lower, margins will likely shrink, ASPs are unlikely to see such a sharp rise again, component prices are not likely to seecontinued declines, and U.S. Federal business is typically lumpy
U.S. Federal sales were the biggest driver of revenues. This appeared to have turned on suddenly after many weak quarters.
Higher ASPs drove better-than-expected revenues—a 14% Y/Y increase—this, frankly, was a real surprise for all the investors and supply chain reps with whom the firm spoke.
The loss of $200 million in cash flow was due to accounts payable, and even if the cash flow bounces back to generation, the company is still generating less cash than it had historically.
Maintains Sell and $20 tgt on DELL.
Notablecalls: Just so you know..
Dell Computer (NASDAQ:DELL): Color on quarter
- Cowen notes that saying that they are surprised by the company's 1Q08 performance is an understatement. Dell achieved almost record results, or at least what they'd characterize as a record q/q performance, even in comparison to the best of times. The last time Dell had 19.5% GMs, up 240bp q/q, was seven years ago in 11/00. Even when OMs were getting close to 9% in 2005, a peak, GMs were only 18.6%. EPS of $0.34 was $0.08 above FC. Dell attributed the strength to component price declines (50% of benefit), a richer mix of biz (25% of benefit and a 14% higher ASP y/y) and smarter pricing (25%). Servers, up 19% y/y, storage 13% and NBs 7% all aided ASPs. Pointing to another record, during the past eight qrts server growth was usually 3%-9%, and didn't even break DDs in FY07. Apple saw component pricing benefits, but Acer, Gateway and HP did not. But Dell pointed to unsustainably high GMs, as component price benefits will abate in the 2H. Dell made solid progress in its turnaround efforts this qtr, way ahead of expectations. However with the shares at 18x FY09 est, the firm retains Neutral rating.
- Baird maintain Neutral rating on shares of Dell following a relatively strong April quarter,driven by more disciplined pricing/sales practices and very favorable component pricingenvironment. Dell also announced a 10% headcount reduction, which they believe provides further operating margin support amid likely GM headwinds. The firm does not recommend investors chase the expected strength given what they believe is a fairly full valuation, slow growth outlook, and anticipated increases in business complexity (retail, R&D, acquisitions, services, etc.).
- Morgan Stanley is shifting to an Equal-weight rating (from OW) on Dell shares as they believe the stock now better reflects risk:reward of their turnaround thesis. At 15x FY09 EPS of $1.80, Dell now trades above other systems vendors (e.g. HPQ and IBM) that arguably have better execution track records. And while the April quarter was consistent with firm's turnaround thesis, some of the positive dynamics are unlikely to persist in the near-term. MSCO expects the stock to trade up off last night's positive earnings surprise and recommend investors be opportunistic in taking some money off the table at these levels.
Notablecalls: Pretty good performance by DELL. Yet, component pricing may not hold near current low levels. Not going to make a call here but considering DELL trades around equal valuation to HPQ, I don't see much upside here.
Baird comments on Motorola (NYSE:MOT)
Notablecalls: Just some color on MOT. Yet, did you notice the stronger than expected results released by OmniVision (OVTI) last night? Motorola is a major customer of OVTI.
Paperstand (STP, TSL, SOLF, UNFI)
The WSJ’s ”Ahead of the Tape” column out saying that investing in China solar isn’t always a bright idea. Investors get a chance today to roll the dice on two investment fads, China and clean energy, with a single stock. LDK Solar makes its debut on the NYSE, offering more than 17m ADRs. The $450m it hopes to raise brings to about $1.5bn the amount China solar plays have raised in the US since Dec’05, joining Suntech (STP), Trina Solar (TSL) and Solarfun (SOLF). Yingli Green Energy lists on the NYSE next week. As one would expect with fad stocks, these shares can be volatile. Last month, China Sunergy soared 51% in its first day of trading. It's since given back nearly 30%. Wed, shares of Solarfun plunged 23% after it posted disappointing earnings. Even green investors are wary. "It's difficult to distinguish one co from the next," says Jack Robinson, of Winslow Green Growth Fund. "And you've got a mkt in China that's very much in a bubble. All the danger signs are there."
Barron’s Online discusses United Natural Foods (UNFI), whose shares have fallen 18% over the past 12 mo’s as investors fretted about the potential impact of a merger between Whole Foods and Wild Oats Markets. But United Natural still looks poised to turn leafy greens into plenty of crisp dollar bills for patient investors. The operational hiccups that impacted United Natural's 3Q results are short term and limited to the co's Western region, while issues surrounding Whole Foods' acquisition of Wild Oats are still theoretical. Last week's selloff has also pushed United Natural shares to an attractive valuation. The stock's forward P/E ratio of 18.8 represents a 23% discount to its 5y avg and a 13% discount to the packaged foods sector. In comparison, Whole Foods is currently trading at a plump 27.7 forward P/E, or a 71% premium to the S&P's 500. Growth catalysts for United Natural include continuing strength in its sales, an improved distribution network, and growing demand for organic foods. "Ppl want to live a healthier lifestyle and are more concerned about food safety, purity, obesity - all these issues are creating incremental demand for natural products," says Michael Warshawsky, of Barrett Associates. As more conventional grocers carry organic products and as Whole Foods and Wild Oats expand, Warshawsky adds, "it is going to be United Natural that will probably be the only co to service them" b/c of its size and infrastructure advantages.
“Inside Scoop” section reports that a tech-industry veteran has marked his recent election to the board of Sun Micro (SUNW) with a $1m investment in the networking giant. Michael E. Marks, the Chmn of Flextronics (FLEX) and a director at SanDisk (SNDK), purchased 200K Sun shares Wed at a price of $5.05 each. Ben Silverman, of InsiderScore.com, says Marks' purchase is a positive signal for Sun, particularly when combined with the co's $3bn share buyback announced on May 16. "In general, he strikes me as a pretty savvy investor," Silverman says.
Archives
June 2006 July 2006 August 2006 September 2006 October 2006 November 2006 December 2006 January 2007 February 2007 March 2007 April 2007 May 2007 June 2007 July 2007 August 2007 September 2007 October 2007 November 2007 December 2007 January 2008 February 2008 March 2008 April 2008 May 2008 June 2008 July 2008 August 2008 September 2008 October 2008 November 2008 December 2008 January 2009 February 2009 March 2009 April 2009 May 2009 June 2009 July 2009
