The WSJ’s ”Heard on the Street” column reprots that a faction within Citigroup (C) is pushing Chmn and CEO Charles Prince to bid for ABN Amro (ABN). The Dutch banking giant announced earlier this week that it is in exclusive talks about being taken over by Barclays. An offer by Citigroup could assuage some of the problems that have plagued the world's largest bank. But it would be difficult: Since ABN's negotiations with Barclays are exclusive, any move by Citigroup would have to be unsolicited, and might be considered hostile. Still, Citigroup has been studying how well ABN would fit as a possible acquisition tgt. The 2 banks have complementary businesses in the US and Latin America, and a deal would give Citigroup a stronger foothold in continental Europe. There also is the possibility that Citigroup could push for part of ABN's assets, such as LaSalle Bank or Banco ABN Amro Real. Hostile takeover bids in the banking industry are difficult to win, and hostile deals of all stripes are particularly tough in the Netherlands, where co’s enjoy many defenses that aren't allowed elsewhere. The Dutch central bank has already said it would frown on such a situation.
“Ahead of the Tape” highlights H&R Block (HRB), whose CEO Mark Ernst, has said repeatedly the co will announce whether it has reached a deal to sell Option One Mortgage by the end of March. But it may have to lower its $1.3bn asking price on the unit, which deals in risky subprime mortgages, if it wants to cut a deal by then. In regulatory filings, H&R Block said Option One's delinquency rate in its F3Q rose to 11.2% from 5.6% last year. B/c of a jump in defaults, the lender recorded loan-loss provisions of $111.1m, a nearly 750% increase from $13.1m a year ago. Of those delinquencies, 84% were on loans written during previous qrtrs, indicating that H&R Block had sharply underestimated the increase in defaults, and raising questions about whether loan-loss provisions will have to be raised again, diminishing the value of the co. "There are likely to be more provisions in the future, and you would think an astute buyer would know that," said Donn Vickrey, of Gradient Analytics. Pressure is building as the unit drags on H&R Block's stock, down 12% since the end of Jan. Last week, S&P's said it may downgrade its credit rating on H&R Block's ability to meet certain financial obligations due to the impact of Option One's mortgage operations. That puts greater pressure on H&R Block to unload Option One, as a downgrade could pinch other parts of the H&R empire, according to UBS. Tick tock, tick tock.
Barron’s Online out saying that shares of US oil refiners have pumped out high-octane returns in recent years. But the biggest among them, Valero (VLO), could still produce a refined performance in the coming year. In N-America, Valero is bigger than Exxon or BP in its capacity to turn crude oil into gasoline, diesel and other fuels. At 18 refineries, many on the Gulf of Mexico coast, it can produce 3.3m barrels of refined product daily. With cumulative stock returns of nearly 400% over 5 years, it's reasonable to ask if Valero's run is over. While triple-digit returns may not continue, the stock has fallen about 13% from its all-time high reached last April, and dividends are on the rise. Refining demand is strong going into the summer-driving season, capacity is tight, and interruptions - for repairs or to crude supplies - would boost the prices Valero can charge customers. That scenario should last for several more years, given the industry's limited ability to expand. "This is a perfect storm, when everything goes right for the refineries," says Fadel Gheit, of Oppenheimer.
“Inside Scoop” section reports that longtime Bear Sterns (BSC) director Paul Novelly is making a bullish call on the financial-services giant as the stock pulled back from its record high. In the two previous trading days, Novelly doled out $6.67m to purchase 45K shares on the open mkt. Novelly now directly holds 170K shares of the co plus another 2,900 restricted shares. Ben Silverman, of InsiderScore.com, says Novelly's purchase is notable considering that he "is someone who is self-made, who understands how to create wealth and manage it… through the good times and the bad."
Friday, March 23, 2007
Thursday, March 22, 2007
Color on Warning: Motorola (NYSE:MOT)
Motorola (NYSE:MOT) getting plenty of comments after cutting its guidance last night.
- JP Morgan notes that MOT dramatically reduced Q1 guidance on handset shipments that fell well below even their very low expectation due to lack of high-end WCDMA models and a decision not to chase low-end market share with price. Although they are now forecasting a more drawn-out handset margin turnaround, firm continues to believe that a handset business of the scale and reach of MOT's should be able to sustain double-digit op margins and remain hopeful that the new leadership team, following the appointment of Greg Brown as Pres. and COO and Tom Meredith as acting CFO, can get there. With share price support provided by Carl Icahn, a larger buyback, and MOT's attractiveness as an LBO candidate, firm is maintaining their Overweight rating.
- RBC takes their rating down to Sector Perform from outperform and lowers price tgt to $19 from $22 as they believe Motorola shares may just drift sideways for the balance of the year.
Firm says Motorola is trying to move away from the price game for market share, but the product portfolio at the moment is lacking in the high-end and the low-end. Carriers and customers may also be balking at Motorola's decision to firm-up pricing and with a weakened derivative product portfolio, Motorola has limited ability to raise prices. Peering into Motorola's upcoming family of products reveals more of the same, which is why they believe Motorola is now a 2008 story.
- Goldman Sachs' bottom line message remains avoid shares. 1) They believe we are looking at a multi year recovery. Based on their recent analysis of the handset industries profit pools, firm believes that Motorola, despite the weakness, should and will continue to invest in emerging markets. This long-term strategy will require double digit margin targets in handsets to be years away. 2) Based on the same analysis as their analysis of the 4Q06 miss, firm believes the high-end of the product line is suffering large losses, as is the low-end, while mid-tier product profits are likely stable. Further, Nokia was a major driver of this quarter's weakness. 3) One of Motorola's steps towards improvement will be an aggressive ramp in 3G and Qualcomm should benefit. 4) Firm's reverse DCF shows that shares are currently pricing in a longer term operating margin in mobile devices of 8-9%. Before turning more positive on shares, they look for shares to reflect a longer term outlook around 5%, suggesting a price closer to $15-16.
- Merrill Lynch notes that management (implicitly) expects the handset margins to be around 8% in 2H. However, given the poor reception for Motorola's new handsets, firm believes it would be more prudent to conservatively model breakeven levels for 3Q and 3% for 4Q. Firm also notes that the history of consumer electronics companies' product cycles works against Motorola. While management looks for a quick second half recovery, the experience of Nokia and Apple shows that recovery could take a few years. The abrupt declines in profits suggest that the required changes could be fundamental and involve changes to the R&D and perhaps selling processes.
Notablecalls: Buyback and Icahn may make the investors to buy the stock but will sure not make the consumers buy the phones. Valuation may also look compelling, but there's no quick fix for the Motorola's problems. As long as there is no reason to buy Motorola phones, there is no reason to buy the stock either. The question is, when is it time to make a leap of faith in the mgmt/product portfolio? It will probably take some time.
- JP Morgan notes that MOT dramatically reduced Q1 guidance on handset shipments that fell well below even their very low expectation due to lack of high-end WCDMA models and a decision not to chase low-end market share with price. Although they are now forecasting a more drawn-out handset margin turnaround, firm continues to believe that a handset business of the scale and reach of MOT's should be able to sustain double-digit op margins and remain hopeful that the new leadership team, following the appointment of Greg Brown as Pres. and COO and Tom Meredith as acting CFO, can get there. With share price support provided by Carl Icahn, a larger buyback, and MOT's attractiveness as an LBO candidate, firm is maintaining their Overweight rating.
- RBC takes their rating down to Sector Perform from outperform and lowers price tgt to $19 from $22 as they believe Motorola shares may just drift sideways for the balance of the year.
Firm says Motorola is trying to move away from the price game for market share, but the product portfolio at the moment is lacking in the high-end and the low-end. Carriers and customers may also be balking at Motorola's decision to firm-up pricing and with a weakened derivative product portfolio, Motorola has limited ability to raise prices. Peering into Motorola's upcoming family of products reveals more of the same, which is why they believe Motorola is now a 2008 story.
- Goldman Sachs' bottom line message remains avoid shares. 1) They believe we are looking at a multi year recovery. Based on their recent analysis of the handset industries profit pools, firm believes that Motorola, despite the weakness, should and will continue to invest in emerging markets. This long-term strategy will require double digit margin targets in handsets to be years away. 2) Based on the same analysis as their analysis of the 4Q06 miss, firm believes the high-end of the product line is suffering large losses, as is the low-end, while mid-tier product profits are likely stable. Further, Nokia was a major driver of this quarter's weakness. 3) One of Motorola's steps towards improvement will be an aggressive ramp in 3G and Qualcomm should benefit. 4) Firm's reverse DCF shows that shares are currently pricing in a longer term operating margin in mobile devices of 8-9%. Before turning more positive on shares, they look for shares to reflect a longer term outlook around 5%, suggesting a price closer to $15-16.
- Merrill Lynch notes that management (implicitly) expects the handset margins to be around 8% in 2H. However, given the poor reception for Motorola's new handsets, firm believes it would be more prudent to conservatively model breakeven levels for 3Q and 3% for 4Q. Firm also notes that the history of consumer electronics companies' product cycles works against Motorola. While management looks for a quick second half recovery, the experience of Nokia and Apple shows that recovery could take a few years. The abrupt declines in profits suggest that the required changes could be fundamental and involve changes to the R&D and perhaps selling processes.
Notablecalls: Buyback and Icahn may make the investors to buy the stock but will sure not make the consumers buy the phones. Valuation may also look compelling, but there's no quick fix for the Motorola's problems. As long as there is no reason to buy Motorola phones, there is no reason to buy the stock either. The question is, when is it time to make a leap of faith in the mgmt/product portfolio? It will probably take some time.
Calls of Note Part 4
Friedman, Billings, Ramsey's checks indicate significant price cuts on Intel (NASDAQ:INTC) server processors scheduled for July, coincident with the AMD Barcelona launch. Essentially, these cuts bring quad-core processors to dual-core price points, which will likely be negative for INTC server margins, but would allow it to gain further share. On desktop and server, firm does not believe INTC has matched recent AMD price cuts, and they believe the end markets are performing in a seasonally normal manner. Net for INTC, firm thinks these cuts likely delay margin improvement until later in 2H, when 45nm processors begin to ship. But they do not see a risk to INTC estimates, and are willing to be patient with the stock at the current price. These price cuts are, however, more significant for AMD and are likely to create further pressure for the remainder of the year.
Notablecalls: Nothing to comment here, all too clear.
Notablecalls: Nothing to comment here, all too clear.
Calls of Note Part 3
JP Morgan out positive on Cymer (NASDAQ:CYMI) following their visir this week. They came away from in-depth discussions with management feeling comfortable about Cymer's margin expansion program and its prospects for sustained competitive advantage. Cymer is one of their OW-rated top picks within the second tier of our Share Gain and Margin Expansion Thesis.
Management believes it is on plan to deliver margin expansion throughout 2007 and into 2008. Key drivers include mix and supply chain management. Firm is comfortable with their GM forecast of 51% in 2007 and 53.5% in 2008, up from 48.3% in 2006. Management still believes a 55% GM is attainable.
As Nikon ramps its 610C immersion tool that uses Cymer's most advanced lasers, the mix shift should be solid, especially in C2H07 on an XLR-500 ramp. Cymer expects accelerated lithography market unit growth with compelling ASP expansion in 2008 on immersion penetration in volume production outside of Flash, which should be very good for mix/margins. Importantly, later in 2007 and into 2008, Cymer's ring technology should ramp sharply, once again stretching the technology advantage versus is competitor Gigaphoton.
Notablecalls: While not much new, this note should alleviate concerns about gross margins and competitive position that have weighted on the stock. As such, would expect to see buying interest in the stock today.
Management believes it is on plan to deliver margin expansion throughout 2007 and into 2008. Key drivers include mix and supply chain management. Firm is comfortable with their GM forecast of 51% in 2007 and 53.5% in 2008, up from 48.3% in 2006. Management still believes a 55% GM is attainable.
As Nikon ramps its 610C immersion tool that uses Cymer's most advanced lasers, the mix shift should be solid, especially in C2H07 on an XLR-500 ramp. Cymer expects accelerated lithography market unit growth with compelling ASP expansion in 2008 on immersion penetration in volume production outside of Flash, which should be very good for mix/margins. Importantly, later in 2007 and into 2008, Cymer's ring technology should ramp sharply, once again stretching the technology advantage versus is competitor Gigaphoton.
Notablecalls: While not much new, this note should alleviate concerns about gross margins and competitive position that have weighted on the stock. As such, would expect to see buying interest in the stock today.
Calls of Note Part 2
Piper Jaffray highlights raised concerns for Zoran (NASDAQ:ZRAN) after major Taiwanese fabless IC design company Mediatek Inc. announced that it will invest $37 million in private U.S.-based digital camera chip designer NuCORE Technology. Mediatek would own a 69% stake in the firm after the stock swap. The company indicated it would use the alliance to expand its product line and more importantly to accelerate penetration of this new market, as well as for potential technology synergies with its handset chip business. The San Jose, CA based NuCORE Technology Inc. was started in 1997 by founders with background from Hitachi medical imaging and Intel Japan, focusing on digital image processing chips for video and digital cameras.
Firm believes this represents an increased medium-term business risk to Zoran, where Digital Still Camera (DSC) segment accounted for 33% of 2006 sales (42% in 4Q06). According to NuCORE, its Japan R&D team enables close cooperation with camera OEMs and sensor manufacturers, while its Taiwan sales serve the contract manufacturers in the outsourced market. While firm believes that Zoran continues to have a strong position at Taiwanese contract manufacturers for DSC, Mediatek's entry represents a significant threat given the latter's track record of success entering markets such as DVD chip and chipsets for GSM/GPRS handset applications.
While it is too early to quantify the potential impact on Zoran's DSC business given the lack of details of Mediatek's plan at this stage, firm notes that the Taiwanese IC company's historical entry into the DVD market increased pricing and thus margin pressure significantly.
Notablecalls: Not actionable but good to know category.
Firm believes this represents an increased medium-term business risk to Zoran, where Digital Still Camera (DSC) segment accounted for 33% of 2006 sales (42% in 4Q06). According to NuCORE, its Japan R&D team enables close cooperation with camera OEMs and sensor manufacturers, while its Taiwan sales serve the contract manufacturers in the outsourced market. While firm believes that Zoran continues to have a strong position at Taiwanese contract manufacturers for DSC, Mediatek's entry represents a significant threat given the latter's track record of success entering markets such as DVD chip and chipsets for GSM/GPRS handset applications.
While it is too early to quantify the potential impact on Zoran's DSC business given the lack of details of Mediatek's plan at this stage, firm notes that the Taiwanese IC company's historical entry into the DVD market increased pricing and thus margin pressure significantly.
Notablecalls: Not actionable but good to know category.
Calls of Note Part 1
Two notes out today dismissing Palm's (NASDAQ:PALM) status as takeover candidate following Motorola's (NYSE:MOT) warning.
- Merrill Lynch says Motorola's 1Q07 warning and accelerated share-buyback makes it an unlikely bidder for Palm, in their opinion. While they have been consistently skeptical of a Palm takeout, Motorola could have been the most likely bidder given the pre-existing relationship/synergies between Palm's Treo smartphone and Motorola's Good Technology (push email system) acquisition. However, firm believes Motorola's organic challenges, and presence of an activist shareholder (Carl Icahn), make it less likely for the company to chase Palm at this stage.
In addition to Motorola, Nokia has been cited in media reports as another possible strategic bidder for Palm. However, firm thinks Palm will be a poor fit for Nokia and a potential Nokia-Palm combination could introduce several integration challenges for Nokia. Palm traditionally focuses on the US market with high exposure to CDMA carriers and dependence on Palm/Microsoft operating system, while Nokia focuses on the non-US GSM/WCDMA markets using the Symbian operating system.
Palm's large cash balance (~27% of current market cap) has also raised the possibility of a private equity bid/LBO. However, the uncertain cash flows related to the hit or miss nature of Palm's products make a private equity takeout questionable, in firm's opinion. While Palm does have a loyal user base, firm's store checks point to market share shifts in favor of Palm rivals, RIM (Blackberry) and Samsung (Blackjack), that have recently launched several thinner and cheaper smartphones, compared to the Palm Treo. The expected entry of the Apple's iPhone is another competitive risk.
- JP Morgan says speculation that MOT is about to acquire PALM may be misplaced. In their mind, this raises further doubts regarding the entire speculative bubble that developed in recent weeks regarding a potential sale of PALM to strategic or private equity investors.
Nokia still doesn't make sense to them. Nokia could step in as a potential acquirer, but lacking the Good Technology back-end (owned by Motorola) to a Treo-based solution, it would seem a highly risky approach to trying to win enterprise business. Intellisync doesn't come close to either Blackberry or GoodLink, in firm's view. They remain skeptical.
Notablecalls: PALM traded down a bit in the afterhours yesterday, but I believe there is further downside to the stock. Anything above $19 should be good for shorting. Given Nokia's track record of acquisitions so far (small acquisitions for technology), I really don't see them buying Palm.
- Merrill Lynch says Motorola's 1Q07 warning and accelerated share-buyback makes it an unlikely bidder for Palm, in their opinion. While they have been consistently skeptical of a Palm takeout, Motorola could have been the most likely bidder given the pre-existing relationship/synergies between Palm's Treo smartphone and Motorola's Good Technology (push email system) acquisition. However, firm believes Motorola's organic challenges, and presence of an activist shareholder (Carl Icahn), make it less likely for the company to chase Palm at this stage.
In addition to Motorola, Nokia has been cited in media reports as another possible strategic bidder for Palm. However, firm thinks Palm will be a poor fit for Nokia and a potential Nokia-Palm combination could introduce several integration challenges for Nokia. Palm traditionally focuses on the US market with high exposure to CDMA carriers and dependence on Palm/Microsoft operating system, while Nokia focuses on the non-US GSM/WCDMA markets using the Symbian operating system.
Palm's large cash balance (~27% of current market cap) has also raised the possibility of a private equity bid/LBO. However, the uncertain cash flows related to the hit or miss nature of Palm's products make a private equity takeout questionable, in firm's opinion. While Palm does have a loyal user base, firm's store checks point to market share shifts in favor of Palm rivals, RIM (Blackberry) and Samsung (Blackjack), that have recently launched several thinner and cheaper smartphones, compared to the Palm Treo. The expected entry of the Apple's iPhone is another competitive risk.
- JP Morgan says speculation that MOT is about to acquire PALM may be misplaced. In their mind, this raises further doubts regarding the entire speculative bubble that developed in recent weeks regarding a potential sale of PALM to strategic or private equity investors.
Nokia still doesn't make sense to them. Nokia could step in as a potential acquirer, but lacking the Good Technology back-end (owned by Motorola) to a Treo-based solution, it would seem a highly risky approach to trying to win enterprise business. Intellisync doesn't come close to either Blackberry or GoodLink, in firm's view. They remain skeptical.
Notablecalls: PALM traded down a bit in the afterhours yesterday, but I believe there is further downside to the stock. Anything above $19 should be good for shorting. Given Nokia's track record of acquisitions so far (small acquisitions for technology), I really don't see them buying Palm.
Paperstand (BKS, BGP, CNB, CPO, WBSN)
The WSJ’s ”Ahead of the Tape” column reports that deal rumors have swirled around Barnes & Noble (BKS) and Borders Group (BGP) ever since activist hedge fund Pershing Square Capital Mgmt took large stakes in the 2 booksellers late last year. A merger is one of the more daring notions afloat, and perhaps the most likely outcome. Both co’s report earnings today, and Borders is expected to announce restructuring plans that could ignite more deal chatter. Hurt by competition from discounters such as Wal-Mart (WMT) and online retailers like Amazon (AMZN), the co’s have struggled to increase profits in one of their biggest businesses: best-selling hardcover books. BKS slashed fiscal-year earnings tgts and said "Harry Potter and the Deathly Hallows," set for release in July, will produce little profit, b/c the co will have to offer it at a steep discount to compete with rivals. Goldman Sachs analysts are skeptical about a buyout of either co, due in part to their soft earnings growth. Goldman thinks a merger makes more sense.
“Heard on the Street” column out saying that as the outlook for home builders grows grimmer, regional banks that extended loans to construction co’s could start having some costly regrets. According to the article, Colonial BancGroup (CNB) is among the banks most heavily exposed to the once-hot Florida construction mkt. Colonial lent far more to construction borrowers as a percentage of its so-called core capital last year than recommended by Federal Deposit Insurance Corp. guidelines. Colonial's construction-lending ratio is 413% of core capital, compared with the FDIC's minimum threshold guideline of 100%. "If you have more than twice as many loans on your books as your liquidation value, then you're essentially just waiting for the vultures to swoop in," says Richard Suttmeier, of RightSide Advisors.
Barron’s Online highlights Corn Products Intl. (CPO), saying that with demand for its corn syrup and other sweeteners rising, the co could hit pay dirt. Sure, the stock has had a rocky ride. Before rebounding recently, the shares dropped 17% off Dec's record high, reflecting worries that fast-rising corn prices, its biggest cost, could hurt profits. Yet Corn Products remains poised to produce robust earnings. Farmers are gearing up to plant a bigger corn crop this year, which could put a lid on corn prices in ‘08. And if not, rising demand for high-fructose corn syrup, an essential ingredient in soft drinks, gives Corn Products leverage to boost US prices as rivals diversify into ethanol production. Sales in Mexico continue to rise, and the co's S-American business grows more profitable. "Fears about corn prices drove the stock low enough so that the risk-reward ratio looks compelling," says Christina McGlone, of Deutsche Bank, who recently upgraded Corn Products to Buy.
“Inside Scoop” section reports that Blum Capital Partners senses upside in Websense’s (WBSN) stock. Blum disclosed that it had picked up a 6.6% stake, or 2.95m Websense shares so far in the 1Q. Blum snapped up the stock 2 weeks after shares of Websense delivered a disappointing 4Q earnings report. Ben Silverman, of InsiderScore.com, says that what he finds interesting about Blum's buy is that the investment firm does not "seem scared off" by Websense's purchase of PortAuthority, even though the deal will be dilutive to Websense's ‘07 EPS by 10-15c. Blum is a "long-term value investor, and they like to take big stakes," says Silverman. While Blum typically looks for co’s generating strong cash flow, Websense's ‘06 cash flow actually decreased year over year, which Silverman says may mean that Blum intends to help Websense unlock value in its stock.
“Heard on the Street” column out saying that as the outlook for home builders grows grimmer, regional banks that extended loans to construction co’s could start having some costly regrets. According to the article, Colonial BancGroup (CNB) is among the banks most heavily exposed to the once-hot Florida construction mkt. Colonial lent far more to construction borrowers as a percentage of its so-called core capital last year than recommended by Federal Deposit Insurance Corp. guidelines. Colonial's construction-lending ratio is 413% of core capital, compared with the FDIC's minimum threshold guideline of 100%. "If you have more than twice as many loans on your books as your liquidation value, then you're essentially just waiting for the vultures to swoop in," says Richard Suttmeier, of RightSide Advisors.
Barron’s Online highlights Corn Products Intl. (CPO), saying that with demand for its corn syrup and other sweeteners rising, the co could hit pay dirt. Sure, the stock has had a rocky ride. Before rebounding recently, the shares dropped 17% off Dec's record high, reflecting worries that fast-rising corn prices, its biggest cost, could hurt profits. Yet Corn Products remains poised to produce robust earnings. Farmers are gearing up to plant a bigger corn crop this year, which could put a lid on corn prices in ‘08. And if not, rising demand for high-fructose corn syrup, an essential ingredient in soft drinks, gives Corn Products leverage to boost US prices as rivals diversify into ethanol production. Sales in Mexico continue to rise, and the co's S-American business grows more profitable. "Fears about corn prices drove the stock low enough so that the risk-reward ratio looks compelling," says Christina McGlone, of Deutsche Bank, who recently upgraded Corn Products to Buy.
“Inside Scoop” section reports that Blum Capital Partners senses upside in Websense’s (WBSN) stock. Blum disclosed that it had picked up a 6.6% stake, or 2.95m Websense shares so far in the 1Q. Blum snapped up the stock 2 weeks after shares of Websense delivered a disappointing 4Q earnings report. Ben Silverman, of InsiderScore.com, says that what he finds interesting about Blum's buy is that the investment firm does not "seem scared off" by Websense's purchase of PortAuthority, even though the deal will be dilutive to Websense's ‘07 EPS by 10-15c. Blum is a "long-term value investor, and they like to take big stakes," says Silverman. While Blum typically looks for co’s generating strong cash flow, Websense's ‘06 cash flow actually decreased year over year, which Silverman says may mean that Blum intends to help Websense unlock value in its stock.
Wednesday, March 21, 2007
Calls of Note Part 5
- FBR says that given the liquidity crunch facing many nonprime originators, the option to receive a secured loan could provide temporary relief for originators that are in need of increased liquidity. While the firm believes investors would view such actions as a positive for the subprime sector, as they signal that capital is available, they do not believe attractive financing terms would be available for NEW or NFI. While other originators are facing a liquidity crunch, they believe the companies most likely to receive secured loans are still originating loans, have access to warehouse lines, generally possess better collateral performance, and are running at generally low levels of leverage. As such, they would not expect NEW or NFI to garner attractive financing terms to enable such a transaction.
With regard to NFI, while operationally it is in better condition than NEW, the firm believes the shear leverage (31x) leaves NFI very little in the way of assets to pledge for a secured commitment. Furthermore, the potential liquidity liability associated with the FY07 income carryforward (approximately $150 million cash liability as a dividend, or an estimated $68 million cash liability as a tax and penalty payment in de-REIT scenario) would use much of any injection of liquidity without improving the operating condition of the company.
Notablecalls: Thought it was important to highlight the call as the subprimes are the trader's favourites these days.
Calls of Note Part 4
- JP Morgan is raising their C07/C08 ests on MEMC (NASDAQ:WFR) as the polysilicon/wafer pricing environment is turning out to be better than previously expected. The desire by solar cell makers to aggressively expand manufacturing capacity is the primary driver for continued polysilicon shortness, with no near-term relief in sight. Additionally, the two large Japanese semi wafer makers are beginning to experience material polysilicon cost increases as their buffers to polysilicon pricing volatility have largely run out. Going forward they expect both Shin-Etsu and SUMCO to pass along the increased cost of polysilicon to their customers, allowing MEMC to raise wafer prices in tandem.
Utilization rates and capacity expansion plans at many solar cell makers continue to be limited by the amount of polysilicon they can acquire. For example, Solar World, which acquired Shell Solar, disclosed in a recent quarterly report that the former Shell facilities operating in the U.S. were only at 50% utilization rates due to a lack of polysilicon.
Overall semi wafer demand has been relatively flat for the past three quarters as declining logic/analog wafer starts offset wafer start growth for memory applications. Firm believes indications of an increase in Back-End utilization rates signals that C1Q07 is the utilization rate trough for the semi industry.
Reiterates OW, and they would be buying now. JPM is raising C07 revenue and GAAP EPS estimates to $2.0bn/$3.25 from $1.9bn/$2.98 and C08 estimates to $2.4bn/$3.80 from $2.32bn/$3.35, primarily on higher gross margins for semi wafers.
Notablecalls: Think the wording is strong enough to create some further buy interest in WFR. Tight leash, as the stock made a nice upward move yesterday and is prone to some profit taking. See archives for further color on WFR.
Utilization rates and capacity expansion plans at many solar cell makers continue to be limited by the amount of polysilicon they can acquire. For example, Solar World, which acquired Shell Solar, disclosed in a recent quarterly report that the former Shell facilities operating in the U.S. were only at 50% utilization rates due to a lack of polysilicon.
Overall semi wafer demand has been relatively flat for the past three quarters as declining logic/analog wafer starts offset wafer start growth for memory applications. Firm believes indications of an increase in Back-End utilization rates signals that C1Q07 is the utilization rate trough for the semi industry.
Reiterates OW, and they would be buying now. JPM is raising C07 revenue and GAAP EPS estimates to $2.0bn/$3.25 from $1.9bn/$2.98 and C08 estimates to $2.4bn/$3.80 from $2.32bn/$3.35, primarily on higher gross margins for semi wafers.
Notablecalls: Think the wording is strong enough to create some further buy interest in WFR. Tight leash, as the stock made a nice upward move yesterday and is prone to some profit taking. See archives for further color on WFR.
Calls of Note Part 3
- TWP is reducing their estimates on AMD (NYSE:AMD) following a round of checks indicating upcoming price cuts and continued channel headwinds. Furthermore, with negative free cash flow expected through most of 2007, they expect management to turn to the capital markets to raise cash over the next several months. However, the firm maintain Market Weight rating and are waiting for more concrete performance benchmarks of Barcelona, although they are incrementally more negative on shares given pricing, channel and financial challenges.
AMD exited 2006 with $1.54bn in cash, $3.8bn in debt and is planning $2.5bn in capital expenditures in 2007. As a result, the firm now is modeling negative free cash flow throughout 2007, with a need to raise cash by 4Q, unless capital expenditure (capex) is reduced. Checks indicate that management may be planning for a $1bn convertible during 2Q. TWP believes ongoing concerns regarding potential financing is likely to continue to weigh on shares, although they believe that management may have other options (including the possibility of lowering its capex requirements).
Given the recent decline in stock price of approximately 39% over the last three months (versus a 0.88% decline in the S&P 500), the firm believes that much of widely known issues are already baked into the current valuation. Given management's recent commentary and checks that indicate additional upcoming headwinds, however, they are cautious on the name and will monitor 1) the timing and performance benchmarks of Barcelona, 2) the health of the channel and 3) the overall pricing environment for potential upside. As such, they believe shares are fairly valued, trading at 1.1x P/book versus historical average of 2.0x, 4.8x P/EBITDA versus historical average of 10.0x, and 1.0x P/sales versus historical average of 1.0x.
Notablecalls: Not actionable but good to know category.
AMD exited 2006 with $1.54bn in cash, $3.8bn in debt and is planning $2.5bn in capital expenditures in 2007. As a result, the firm now is modeling negative free cash flow throughout 2007, with a need to raise cash by 4Q, unless capital expenditure (capex) is reduced. Checks indicate that management may be planning for a $1bn convertible during 2Q. TWP believes ongoing concerns regarding potential financing is likely to continue to weigh on shares, although they believe that management may have other options (including the possibility of lowering its capex requirements).
Given the recent decline in stock price of approximately 39% over the last three months (versus a 0.88% decline in the S&P 500), the firm believes that much of widely known issues are already baked into the current valuation. Given management's recent commentary and checks that indicate additional upcoming headwinds, however, they are cautious on the name and will monitor 1) the timing and performance benchmarks of Barcelona, 2) the health of the channel and 3) the overall pricing environment for potential upside. As such, they believe shares are fairly valued, trading at 1.1x P/book versus historical average of 2.0x, 4.8x P/EBITDA versus historical average of 10.0x, and 1.0x P/sales versus historical average of 1.0x.
Notablecalls: Not actionable but good to know category.
Calls of Note Part 2
- Merrill Lynch met with Netlogic's (NASDAQ:NETL) management recently and came away positively about the company's growth prospects. NETL appears well positioned to benefit from emerging trends such as 10G, IPTV, and VoIP, and is expanding its addressable market through new products. Despite the recent run up, the firm sees further upside in the next 12-months and are raising tgt from $26 to $32.
MLCO expects NETL to report an inline to slightly better Mar-07Q, and believe that Jun-07Q revenue guidance will be more or less inline. Cisco should rebound this quarter as inventory adjustments at that customer appear to have ended. Going forward, sales to Cisco will likely remain flattish until NETL's new wins begin to ramp in early 2008. On the other hand, revenues from ALU, JNPR, Arris, and FDRY are expected to grow strongly throughout 2007. They believe NETL's new product ramps are on track and expect the company's tier 1 wins for its content processor (NETL7) to start to ramp in 2H.
As Triple Play gains traction, TCAM technology adoption is broadening which should help NETL to diversify away from Cisco. NETL appears particularly well-positioned at Edge Router and IPTV system vendors such as ALU, JNPR, RBAK, MOT, and BigBand. NETL's sales to these customers should grow strongly as routers with higher TCAM content begin to ship over the next few quarters.
Notablecalls: The tgt raise is substantial enough to generate some buy interest.
MLCO expects NETL to report an inline to slightly better Mar-07Q, and believe that Jun-07Q revenue guidance will be more or less inline. Cisco should rebound this quarter as inventory adjustments at that customer appear to have ended. Going forward, sales to Cisco will likely remain flattish until NETL's new wins begin to ramp in early 2008. On the other hand, revenues from ALU, JNPR, Arris, and FDRY are expected to grow strongly throughout 2007. They believe NETL's new product ramps are on track and expect the company's tier 1 wins for its content processor (NETL7) to start to ramp in 2H.
As Triple Play gains traction, TCAM technology adoption is broadening which should help NETL to diversify away from Cisco. NETL appears particularly well-positioned at Edge Router and IPTV system vendors such as ALU, JNPR, RBAK, MOT, and BigBand. NETL's sales to these customers should grow strongly as routers with higher TCAM content begin to ship over the next few quarters.
Notablecalls: The tgt raise is substantial enough to generate some buy interest.
Calls of Note Part 1
- JP Morgan says that Varian Semi (NASDAQ:VSEA) is one of their absolute Top Picks within their Share Gain and Margin Expansion Thesis and is on the JPMorgan Focus List. Based on an unchanged 17x target P/E multiple applied to firm's new C2008 GAAP EPS estimate of $4.10, up from $3.40 previously, they are raising their March 2008 stock price target to $70 from $58.
In line with firm's detailed memory-related research and their recent report on TSMC stepping up to the plate with new orders, the firm sees some modest upside to previous Varian forecast, especially for C2H07 on the TSMC business. As such, they are raising C2H07 revenue estimates by $5mn. per qtr. New C07 and C08 rev ests are $1.0bn and $1.2bn, respectively.
JPM raised VSEA to OW and substantially increased revenue forecast when Applied (AMAT) announced its departure from the Ion Implant business but left their margin forecast
unchanged. Firm is increasingly confident that Varian is likely to see better pricing with Applied out of the market. They also see an increase in high margin spares-related business.
VSEA trades at 12.0x new C2008 GAAP EPS estimate of $4.10 vs. group average of 13.4x. In their view, VSEA is one of the most potentially explosive equipment stocks on share gain and margin expansion, as well as solid execution.
Notablecalls: Looks like an actionable call! Expect to see strong buy interest in VSEA today.
In line with firm's detailed memory-related research and their recent report on TSMC stepping up to the plate with new orders, the firm sees some modest upside to previous Varian forecast, especially for C2H07 on the TSMC business. As such, they are raising C2H07 revenue estimates by $5mn. per qtr. New C07 and C08 rev ests are $1.0bn and $1.2bn, respectively.
JPM raised VSEA to OW and substantially increased revenue forecast when Applied (AMAT) announced its departure from the Ion Implant business but left their margin forecast
unchanged. Firm is increasingly confident that Varian is likely to see better pricing with Applied out of the market. They also see an increase in high margin spares-related business.
VSEA trades at 12.0x new C2008 GAAP EPS estimate of $4.10 vs. group average of 13.4x. In their view, VSEA is one of the most potentially explosive equipment stocks on share gain and margin expansion, as well as solid execution.
Notablecalls: Looks like an actionable call! Expect to see strong buy interest in VSEA today.
Color on quarter: Adobe Systems (NASDAQ:ADBE)
Most firms are positive on Adobe Systems (NASDAQ:ADBE) following Q1 results:
- Goldman Sachs notes Adobe reported solid 1Q results, though revenues of $649 mn were a bit lighter than their $662 mn estimate, EPS (ex-ESOs) of $0.30 was ahead of their-and Street-$0.29 estimate, and continuing to demonstrate the company's close focus on costs and their ability to steer to EPS as the quarter progresses. Creative Solutions, in particular, delivered revenues of $346 mn, ahead of firm's $320 mn estimate, indicating strong demand for the product suite which is only likely to amplify, in their view, as CS3 launches later in the quarter.
Results should prove to be a positive for the stock. With the product cycle trough (for Creative Suite products) now behind us, the firm is looking for a succession of catalysts starting with next week's announcement of CS3 followed next day by the company's analyst day.
The key risk is that investors will tend to sell on the news as CS3 launches. GSCO notes that in each prior cycle, Adobe shares ran up significantly ahead of the release and then tended to trade down in the aftermath. Increased competition from Microsoft is also a threat with the launch of Vista. Maintains Buy with a $47 tgt.
- Piper Jaffray says that for Q2, Adobe guided to $0.34-$0.36 on $700m-$740m vs. Street
estimates of $0.35 on $718.1m. The firm is confident in this guidance, given CS3's impact on the second half of the May quarter will be significant.
They believe there are two risks to ADBE shares. The first is multiple compression. There is always the potential that investors believe this is the Adobe of old, and the way to trade the stock is to sell the stock before CS3 ships. (Typically the stock trades off 15% in the three months following shipment.) Firm believes this risk is low, given the sell off already happened in the month of January, and now investors are focusing on earnings growth and the upcoming easy comps in August and November. The second risk is the majority of the sell side is positive on Adobe, and investor optimism can only go down (i.e. Microsoft and Vista). Overall, they believe the positives well outweigh the risk. Maintains Outperform and $51.
Notablecalls: Yes, ADBE stands on the eve of its biggest product launch ever. But don't forget the co has a close to $25 billion market cap and trades at 25 times its 2008 EPS estimate. Quite simply, I don't think the almost 2 pt gain reached in after hours will hold today. Sitting at my old trading desk I would have loved to put out a short line in the stock around $43. Not sure it will get there this AM, though.
- Goldman Sachs notes Adobe reported solid 1Q results, though revenues of $649 mn were a bit lighter than their $662 mn estimate, EPS (ex-ESOs) of $0.30 was ahead of their-and Street-$0.29 estimate, and continuing to demonstrate the company's close focus on costs and their ability to steer to EPS as the quarter progresses. Creative Solutions, in particular, delivered revenues of $346 mn, ahead of firm's $320 mn estimate, indicating strong demand for the product suite which is only likely to amplify, in their view, as CS3 launches later in the quarter.
Results should prove to be a positive for the stock. With the product cycle trough (for Creative Suite products) now behind us, the firm is looking for a succession of catalysts starting with next week's announcement of CS3 followed next day by the company's analyst day.
The key risk is that investors will tend to sell on the news as CS3 launches. GSCO notes that in each prior cycle, Adobe shares ran up significantly ahead of the release and then tended to trade down in the aftermath. Increased competition from Microsoft is also a threat with the launch of Vista. Maintains Buy with a $47 tgt.
- Piper Jaffray says that for Q2, Adobe guided to $0.34-$0.36 on $700m-$740m vs. Street
estimates of $0.35 on $718.1m. The firm is confident in this guidance, given CS3's impact on the second half of the May quarter will be significant.
They believe there are two risks to ADBE shares. The first is multiple compression. There is always the potential that investors believe this is the Adobe of old, and the way to trade the stock is to sell the stock before CS3 ships. (Typically the stock trades off 15% in the three months following shipment.) Firm believes this risk is low, given the sell off already happened in the month of January, and now investors are focusing on earnings growth and the upcoming easy comps in August and November. The second risk is the majority of the sell side is positive on Adobe, and investor optimism can only go down (i.e. Microsoft and Vista). Overall, they believe the positives well outweigh the risk. Maintains Outperform and $51.
Notablecalls: Yes, ADBE stands on the eve of its biggest product launch ever. But don't forget the co has a close to $25 billion market cap and trades at 25 times its 2008 EPS estimate. Quite simply, I don't think the almost 2 pt gain reached in after hours will hold today. Sitting at my old trading desk I would have loved to put out a short line in the stock around $43. Not sure it will get there this AM, though.
Paperstand (CMGI, SBUX, JAS)
According to the WSJ, Barclay’s (BCS) talks to buy ABN (ABN) are forcing banks world-wide to evaluate their next moves. Elite global banks such as Citigroup (C) or HSBC (HBC) could emerge as 11th-hour bidders for ABN. HSBC's recent missteps in the US mkt for risky subprime mortgages may sideline the big British bank, but several investment bankers believe that Citigroup Chmn and CEO Charles Prince could use ABN as a chance to show he has the troubled bank moving in the right direction. Several European banks could also bid. ING Groep (ING) says it is "following developments."
“Heard on the Street” column discusses Starbux (SBUX) saying that the shares of the co may have more perk in them than some investors realize. At Starbucks's annual meeting, scheduled for today, execs plan to reaffirm the co's growth plans and shed light on their vision for the future. That usually wouldn't mean much to the co's investors, who have been accustomed to rapid growth and rising shares. But this year is different. "Ppl want to be reassured that there is not a brand problem," says UBS analyst David Palmer. Part of what has always driven Starbucks's stock is the magic surrounding its brand, led by Chmn Howard Schultz’s cheerleading, and investors are sure to get a dose of that at today's meeting. Last year, Mr. Schultz and CEO Jim Donald mixed homespun anecdotes with financial charts showing the co's rapid growth before crooner Tony Bennett appeared on stage for a surprise performance. "To the degree that ppl need to see confidence from Howard," Mr. Palmer said, "we believe that they will see it."
Barron’s Online highlights CMGI (CMGI), saying that recently some of the savviest hedge funds, including Renaissance Technologies, have been buying CMGI stock as the co morphs again. Today CMGI gets paid a fee to streamline the delivery of electronics for firms such as Hewlett-Packard and Eastman Kodak. After a year of little or no attention on Wall St., WR Hambrecht analyst Robert Stimson initiated coverage of CMGI on March 9 with a Buy rating, saying the present value of CMGI's assets is $2.50, 35% above a recent price of $1.85. "Where there has been enormous opportunity in tech is with some of these fallen angels," says Stimson. But after a 40% jump this year in CMGI shares, is there any upside left? Barron’s thinks so. CMGI may be a cheap bet that there's value in the electronics supply chain. Trading below the co's $1bn in trailing 12-mo sales, and with $275m of cash and $2bn of net operating loss carry-forwards, the co may even be an attractive take-out tgt for freight giants such as FedEx or UPS. "As (CMGI) improves its gross profit and operating profit, this is a business whose sales can rise by 20% or more a year," adds Stimson.
“Inside Scoop” section reports that Tennenbaum Capital Partners and longtime insiders at Jo-Ann Stores (JAS) collectively grossed nearly $73m by selling 2.96m shares on the open mkt. Ben Silverman, of InsiderScore.com, said there may be some concern that Tennenbaum Capital dumped its stake "unceremoniously," but the mitigating factor is that the fund "really bought at the right time." Silverman notes that fellow value investor Olstein Capital Mgmt also reduced its stake drastically a few months ago. In Dec, Olstein sold 1.26m Jo-Ann shares for $30.5m, slipping its holdings below the 5% threshold. It held stakes of 9.1% at the end of ‘05 and 7.9% as of mid-Oct ‘06, notes Silverman. With Jo-Ann rallying, Silverman says "the expectations are high and it's a valuation question now."
“Heard on the Street” column discusses Starbux (SBUX) saying that the shares of the co may have more perk in them than some investors realize. At Starbucks's annual meeting, scheduled for today, execs plan to reaffirm the co's growth plans and shed light on their vision for the future. That usually wouldn't mean much to the co's investors, who have been accustomed to rapid growth and rising shares. But this year is different. "Ppl want to be reassured that there is not a brand problem," says UBS analyst David Palmer. Part of what has always driven Starbucks's stock is the magic surrounding its brand, led by Chmn Howard Schultz’s cheerleading, and investors are sure to get a dose of that at today's meeting. Last year, Mr. Schultz and CEO Jim Donald mixed homespun anecdotes with financial charts showing the co's rapid growth before crooner Tony Bennett appeared on stage for a surprise performance. "To the degree that ppl need to see confidence from Howard," Mr. Palmer said, "we believe that they will see it."
Barron’s Online highlights CMGI (CMGI), saying that recently some of the savviest hedge funds, including Renaissance Technologies, have been buying CMGI stock as the co morphs again. Today CMGI gets paid a fee to streamline the delivery of electronics for firms such as Hewlett-Packard and Eastman Kodak. After a year of little or no attention on Wall St., WR Hambrecht analyst Robert Stimson initiated coverage of CMGI on March 9 with a Buy rating, saying the present value of CMGI's assets is $2.50, 35% above a recent price of $1.85. "Where there has been enormous opportunity in tech is with some of these fallen angels," says Stimson. But after a 40% jump this year in CMGI shares, is there any upside left? Barron’s thinks so. CMGI may be a cheap bet that there's value in the electronics supply chain. Trading below the co's $1bn in trailing 12-mo sales, and with $275m of cash and $2bn of net operating loss carry-forwards, the co may even be an attractive take-out tgt for freight giants such as FedEx or UPS. "As (CMGI) improves its gross profit and operating profit, this is a business whose sales can rise by 20% or more a year," adds Stimson.
“Inside Scoop” section reports that Tennenbaum Capital Partners and longtime insiders at Jo-Ann Stores (JAS) collectively grossed nearly $73m by selling 2.96m shares on the open mkt. Ben Silverman, of InsiderScore.com, said there may be some concern that Tennenbaum Capital dumped its stake "unceremoniously," but the mitigating factor is that the fund "really bought at the right time." Silverman notes that fellow value investor Olstein Capital Mgmt also reduced its stake drastically a few months ago. In Dec, Olstein sold 1.26m Jo-Ann shares for $30.5m, slipping its holdings below the 5% threshold. It held stakes of 9.1% at the end of ‘05 and 7.9% as of mid-Oct ‘06, notes Silverman. With Jo-Ann rallying, Silverman says "the expectations are high and it's a valuation question now."
Tuesday, March 20, 2007
Calls of Note Part 5
- BB&T Capital Markets is out with an interesting call on Railroads noting that the "rail renaissance" has been very good to railroads and railroad investors in recent years. However, railroad management teams are seemingly running the businesses for their debt holders and credit rating agencies (i.e. focusing on repaying debt and maintaining investment grade credit ratings), and the firm believes many equity investors are simply fed up. Shareholders want their money, and they want it now. They want bigger dividends. They want bigger share repurchases. They simply want to get paid. So it's time to send a loud and clear message to the market, and in firm's view there is no better way than a material stock repurchase. But they don't mean over the next few years, per the current authorizations, they mean today. BB&T believes the rails can afford it, so it's time to pay up.
Dividends and share repurchase authorizations are increasing, to be sure, but why wait to buy the stock? Instead of buying stock over the course of years, why not go the market immediately with a tender offer for the entire repurchase authorization? The firm believes that if the Class I rails levered up to the 50% debt-to-cap level, they could use the cash to repurchase from 10%-31% of their shares outstanding, which could add 5%-17% to 2007 EPS. Bottom-line: if your stock is such a great value, buy it aggressively. And buy it now, not "opportunistically" over time. If that requires levering up a bit, then so be it. They believe the end result would be accretive to EPS, and likely applauded by the market.
Buy the stocks, and buy them now. That's BB&T's message to investors and railroad management teams. It's easy to tell investors that your stock is undervalued and your outlook is solid, but it's another thing altogether to step up and buy back 10%+ of your shares outstanding. That's how you send the right message to shareholders, and that's exactly what they think the Class I rails in their coverage universe should do. Firm remain bullish on their railroad coverage universe, and continues to recommend Buy rated names: BNI, CNI, CSX, GWR, NSC, and UNP.
Notablecalls: BB&T's John L. Barnes III sure comes across as a strongly opinionated fellow. The rails have been acting pretty OK lately so would not be surprised to see some further buy interest in select names.
Dividends and share repurchase authorizations are increasing, to be sure, but why wait to buy the stock? Instead of buying stock over the course of years, why not go the market immediately with a tender offer for the entire repurchase authorization? The firm believes that if the Class I rails levered up to the 50% debt-to-cap level, they could use the cash to repurchase from 10%-31% of their shares outstanding, which could add 5%-17% to 2007 EPS. Bottom-line: if your stock is such a great value, buy it aggressively. And buy it now, not "opportunistically" over time. If that requires levering up a bit, then so be it. They believe the end result would be accretive to EPS, and likely applauded by the market.
Buy the stocks, and buy them now. That's BB&T's message to investors and railroad management teams. It's easy to tell investors that your stock is undervalued and your outlook is solid, but it's another thing altogether to step up and buy back 10%+ of your shares outstanding. That's how you send the right message to shareholders, and that's exactly what they think the Class I rails in their coverage universe should do. Firm remain bullish on their railroad coverage universe, and continues to recommend Buy rated names: BNI, CNI, CSX, GWR, NSC, and UNP.
Notablecalls: BB&T's John L. Barnes III sure comes across as a strongly opinionated fellow. The rails have been acting pretty OK lately so would not be surprised to see some further buy interest in select names.
Calls of Note Part 4
- ThinkEquity's Eric Ross comments on Sandisk (NASDAQ:SNDK) saying NAND prices have fallen sharply, and they fear there may be difficult news in the near term. ASPs have plagued a larger portion of the quarter than many investors expect. In addition, any improvement in NAND pricing may shift capacity back to NAND, muting any recovery. The firm does not believe we have reached the bottom quite yet.
Prices have fallen 35%+ Q/Q in the March quarter alone. Every company has pre-announced and said that pricing is falling sharply: Hynix, MU, SanDisk, and Samsung all announced sharply falling prices. Prices continue to fall, albeit not at the same rate. Some sources phrased this as, "prices bottomed out." But, when the firm asked for a more-clear definition, they said they intended to say, "declines have bottomed." Firm believes some investors intended the former. Most supply chain sources expect prices to continue to fall for at least another month or two, and likely to some degree (albeit slowing) until the end of the year.
Investors are looking to demand to pull the industry out of the slump-NAND Flash drives for PCs and cell phone handset volumes. The firm agrees these will be drivers, but they fear there may be difficult news beforehand.
Many dual DRAM/NAND makers have moved back toward DRAM. Samsung and Hynix have allocated larger portions of capacity to DRAM as NAND prices plummeted and DRAM was more profitable. Now, neither is very good. They are likely to shift back if NAND pricing begins to improve, muting any real recovery for a quarter. Mr. Ross does not expect this to occur until the summer at the earliest. It is possible we will see some misses by NAND makers in the March quarter.
The firm is cutting their ests on SNDK: 1QCY07 from $840.0 million to $788.0 million; CY07 from $4.032 billion to $3.928 billion; 1QCY07 from $0.18 to $0.08; CY07 from $1.02 to $0.84; Reits Accumulate and $45 tgt.
Notablecalls: NAND's a tough business to be in. I continue to see no reason to own SNDK around current levels.
Prices have fallen 35%+ Q/Q in the March quarter alone. Every company has pre-announced and said that pricing is falling sharply: Hynix, MU, SanDisk, and Samsung all announced sharply falling prices. Prices continue to fall, albeit not at the same rate. Some sources phrased this as, "prices bottomed out." But, when the firm asked for a more-clear definition, they said they intended to say, "declines have bottomed." Firm believes some investors intended the former. Most supply chain sources expect prices to continue to fall for at least another month or two, and likely to some degree (albeit slowing) until the end of the year.
Investors are looking to demand to pull the industry out of the slump-NAND Flash drives for PCs and cell phone handset volumes. The firm agrees these will be drivers, but they fear there may be difficult news beforehand.
Many dual DRAM/NAND makers have moved back toward DRAM. Samsung and Hynix have allocated larger portions of capacity to DRAM as NAND prices plummeted and DRAM was more profitable. Now, neither is very good. They are likely to shift back if NAND pricing begins to improve, muting any real recovery for a quarter. Mr. Ross does not expect this to occur until the summer at the earliest. It is possible we will see some misses by NAND makers in the March quarter.
The firm is cutting their ests on SNDK: 1QCY07 from $840.0 million to $788.0 million; CY07 from $4.032 billion to $3.928 billion; 1QCY07 from $0.18 to $0.08; CY07 from $1.02 to $0.84; Reits Accumulate and $45 tgt.
Notablecalls: NAND's a tough business to be in. I continue to see no reason to own SNDK around current levels.
Calls of Note Part 3
- Goldman Sachs notes that based on their recent channel checks, they believe LG Electronics' handset business is tracking ahead of expectation, but handset upside could be offset by the weaker-than-expected display business. Appliance remains on track.
Firm expects LGE to ship 16.3 mn handsets in 1Q (vs. 15.5 mn guidance). 'Chocolate' shipments remain strong, and the recently launched 'Shine' phone seems to be off to a strong start. Overall, handset profitability could see a modest improvement in 1Q to around 3% OPM, helped by 1) higher volume, 2) favorable product mix, and 3) FX.
Display remains the weak link, and they expect losses to widen in 1Q. PDP is the main culprit, suffering from low utilization and ASP declines. In addition, LCD TV prices for new models were recently lowered, while LCD TV panel prices have fallen less than expected, further pressuring TV margins.
GSCO is encouraged by the signs of improving execution in LGE's handset business. 1Q could mark the third quarter of stable handset margins (albeit a low margin), and be a step closer to regaining investor confidence.
Notablecalls: There aren't many positive signals coming from the handset industry but looks like GSCO managed to spot one. The Chocolate is a chic phone and that pretty much tells me consumers are willing to buy new handsets, provided they are new & cool. That's what Motorola (NYSE:MOT) is currently lacking. However, given the low valuation and pessimistic sentiment, an opportunity for a leap of faith may be in the cards here. Not a high conviction call here but I thought to express my view on this one. See archives for more color on MOT.
Firm expects LGE to ship 16.3 mn handsets in 1Q (vs. 15.5 mn guidance). 'Chocolate' shipments remain strong, and the recently launched 'Shine' phone seems to be off to a strong start. Overall, handset profitability could see a modest improvement in 1Q to around 3% OPM, helped by 1) higher volume, 2) favorable product mix, and 3) FX.
Display remains the weak link, and they expect losses to widen in 1Q. PDP is the main culprit, suffering from low utilization and ASP declines. In addition, LCD TV prices for new models were recently lowered, while LCD TV panel prices have fallen less than expected, further pressuring TV margins.
GSCO is encouraged by the signs of improving execution in LGE's handset business. 1Q could mark the third quarter of stable handset margins (albeit a low margin), and be a step closer to regaining investor confidence.
Notablecalls: There aren't many positive signals coming from the handset industry but looks like GSCO managed to spot one. The Chocolate is a chic phone and that pretty much tells me consumers are willing to buy new handsets, provided they are new & cool. That's what Motorola (NYSE:MOT) is currently lacking. However, given the low valuation and pessimistic sentiment, an opportunity for a leap of faith may be in the cards here. Not a high conviction call here but I thought to express my view on this one. See archives for more color on MOT.
Calls of Note Part 2
- CIBC is out with a call on Digene (NASDAQ:DIGE) noting the stock has declined 25% since its earnings report last month, and is down 10% in the recent weeks since Roche filed its long-awaited (and delayed) PMA for Amlicor HPV. In their note, the firm details why they doubt Roche will be competitive, and argue that DIGE is a solid buy on the recent weakness.
Firm spoke with several investigators from Roche's clinical trial (who cumulatively performed over 4,000 samples) and they also spoke to their contacts at Roche. They found two key issues: 1) "clinical sensitivity" for Roche is inferior to Digene and 2) throughput on Amplicor will be an issue.
All investigators the firm spoke with said Roche's PCR-based diagnostic yielded too many false positives. They suspect Roche now increased the cutoff rate to improve results, but this would mean that new validation studies and LT follow-up are needed. CIBC feels this will delay Roche's approval.
The investigators were all very clear that "efficiency is king," and they noted that Amplicor is a much more manual process that requires hours of additional "hands-on" time. Firm's Roche contacts confirm this, and does not expect filing for their automated platform (TaqMan) for at least two years. Reits Sector Outperformer and $58 tgt.
Notablecalls: That's what I call research! CIBC's Amit Hazan has gone the extra mile for investors here and the results speak for themselves. To make things more interesting, note that TWP has downgraded DIGE to Market Weight from Overweight this morning as they are transferring the co from the Life Science industry while maintaining estimates. That may create some weakness but also a superb s-t buying opportunity as CIBC's comments should outweigh the downgrade. Think I'm going to call this one actionable.
Firm spoke with several investigators from Roche's clinical trial (who cumulatively performed over 4,000 samples) and they also spoke to their contacts at Roche. They found two key issues: 1) "clinical sensitivity" for Roche is inferior to Digene and 2) throughput on Amplicor will be an issue.
All investigators the firm spoke with said Roche's PCR-based diagnostic yielded too many false positives. They suspect Roche now increased the cutoff rate to improve results, but this would mean that new validation studies and LT follow-up are needed. CIBC feels this will delay Roche's approval.
The investigators were all very clear that "efficiency is king," and they noted that Amplicor is a much more manual process that requires hours of additional "hands-on" time. Firm's Roche contacts confirm this, and does not expect filing for their automated platform (TaqMan) for at least two years. Reits Sector Outperformer and $58 tgt.
Notablecalls: That's what I call research! CIBC's Amit Hazan has gone the extra mile for investors here and the results speak for themselves. To make things more interesting, note that TWP has downgraded DIGE to Market Weight from Overweight this morning as they are transferring the co from the Life Science industry while maintaining estimates. That may create some weakness but also a superb s-t buying opportunity as CIBC's comments should outweigh the downgrade. Think I'm going to call this one actionable.
Calls of Note Part 1
- Piper Jaffray comments on Apple (NASDAQ:AAPL) after speaking with 20 Apple specialist resellers over the past several days.
Firm believes that, on average, Street models assume around 1.45m Mac units for the Mar-07 quarter, which is down 10% q/q from Dec-06. In their checks with 20 Apple retail stores, 85% of resellers expect Mac sales in Mar-07 will decline slightly vs. Dec-06, while the other 15% expect Mac units will be flat q/q. In general, resellers defined "slightly decline" as a 5%-10% drop from Dec-06 to Mar-07. They believe, therefore, Street estimates are achievable and may be slightly conservative.
They believe Apple's new OS, Leopard, will likely be released in mid April. Slightly more than half of the resellers in checks said Leopard related purchase delays are having a slight negative impact on Macs, while slightly less than half said Leopard is not having any impact on Macs.
As was the case in the early days of the iPod, Apple resellers in firm's checks expect AppleTV will need to be more fully understood by consumers before it turns into a major contributor. Almost all (95%) resellers in the sample said they expect AppleTV will have a minor impact on business in the near term (next 1-2 qrtrs). Maintains Outperform and $124 tgt.
Notablecalls: So it looks like the Mac business is growing as expected. That's surely good news. Can the same be said for iPods? I'm not so sure. Overall, AAPL continues to represent the only growing part of the PC business. That's enough to sustain the valuation for now. I don't expect the call to have a major positive impact on the stock today. We may see SOME buy interest, though.
Firm believes that, on average, Street models assume around 1.45m Mac units for the Mar-07 quarter, which is down 10% q/q from Dec-06. In their checks with 20 Apple retail stores, 85% of resellers expect Mac sales in Mar-07 will decline slightly vs. Dec-06, while the other 15% expect Mac units will be flat q/q. In general, resellers defined "slightly decline" as a 5%-10% drop from Dec-06 to Mar-07. They believe, therefore, Street estimates are achievable and may be slightly conservative.
They believe Apple's new OS, Leopard, will likely be released in mid April. Slightly more than half of the resellers in checks said Leopard related purchase delays are having a slight negative impact on Macs, while slightly less than half said Leopard is not having any impact on Macs.
As was the case in the early days of the iPod, Apple resellers in firm's checks expect AppleTV will need to be more fully understood by consumers before it turns into a major contributor. Almost all (95%) resellers in the sample said they expect AppleTV will have a minor impact on business in the near term (next 1-2 qrtrs). Maintains Outperform and $124 tgt.
Notablecalls: So it looks like the Mac business is growing as expected. That's surely good news. Can the same be said for iPods? I'm not so sure. Overall, AAPL continues to represent the only growing part of the PC business. That's enough to sustain the valuation for now. I don't expect the call to have a major positive impact on the stock today. We may see SOME buy interest, though.
Paperstand (MATK, DRC)
The WSJ reports that ABN Amro (ABN) is nearing a deal to be acquired by Barclays (BCS) for more than $80bn. The two banks had discussed a deal as long as a year ago, but talks foundered. The chief execs resumed talks at a meeting in Geneva about 6 weeks ago, even as ABN Amro publicly asserted that it wanted to remain independent. Under the terms being discussed, Barclays would offer a mix of cash and stock for ABN Amro, valuing the bank's shares in the range of low €30s, slightly above their current trading price.
The WSJ discusses new Detroit woe – makers of parts won’t cut prices. Navistar has supplied diesel engines to Ford (F) for almost 30 years. Yet in late Feb Navistar, embroiled in a financial dispute with Ford, temporarily cut off all engine shipments to its single biggest customer. The move dramatized a broad shift in the balance of power in the struggling US auto industry. The dispute involved competing views of warranty claims and price contracts. But at its core was the engine supplier's refusal to play an old Detroit game, in which US car makers have deflected the pressure of global competition by repeatedly forcing suppliers to trim their own prices. For the old Big Three of Ford, GM (GM) and the Chrysler (DCX), the case was evidence of a new reality. It finds itself surrounded by parts suppliers from which it can no longer easily squeeze price concessions.
“Heard on the Street” column discusses Martek Biosciences (MATK), saying that one of its accounting methods has led to concerns that Martek is trying to make profits look more robust than they really are. The bone of contention: Martek's treatment of what it calls "idle" assets. Martek noted in its F1Q results that it has $94.3m of property, plant and equipment, "being held for future use." Martek doesn't depreciate assets designated this way. Such an approach is pretty rare; co’s typically depreciate assets that they are either using or could be using. Martek's approach lessens the bite that depreciation charges take out of net profit. In F07, the move could boost net profit by about $3.9m, or about 20%, according to Glass, Lewis & Co. A similar gain over the past year could have helped the co avoid 2 consecutive years of declining net profit. Plus, if Martek was fully depreciating its assets and taking a bigger hit to profit, the co's share price would be an expensive 37x expected F07 earnings, as opposed to its current multiple of 30x. Robert N. Freeman, an accounting professor at the University of Texas, said "You're in a gray area."
Barron’s Online “Inside Scoop” section reports that the Chmn of Dresser-Rand (DRC), William Macaulay, has just filled up his tank with shares of the co. Mr Macaulay spent $4m on 150K shares on March 15. The purchase came the week after private-equity firm First Reserve, where Macaulay holds the Chmn and CEO posts, launched a secondary offering of its remaining 11.6m Dresser-Rand shares. Ben Silverman, of InsiderScore.com, says Macaulay's buying is a positive signal, especially since the stock is currently trading near its 52w intraday high. "In a sense, he could be reinvesting in Dresser-Rand," says Silverman, "What I think is good is that he is planning to stick around as Chmn, and that he feels that the stock is going to appreciate in the long term."
The WSJ discusses new Detroit woe – makers of parts won’t cut prices. Navistar has supplied diesel engines to Ford (F) for almost 30 years. Yet in late Feb Navistar, embroiled in a financial dispute with Ford, temporarily cut off all engine shipments to its single biggest customer. The move dramatized a broad shift in the balance of power in the struggling US auto industry. The dispute involved competing views of warranty claims and price contracts. But at its core was the engine supplier's refusal to play an old Detroit game, in which US car makers have deflected the pressure of global competition by repeatedly forcing suppliers to trim their own prices. For the old Big Three of Ford, GM (GM) and the Chrysler (DCX), the case was evidence of a new reality. It finds itself surrounded by parts suppliers from which it can no longer easily squeeze price concessions.
“Heard on the Street” column discusses Martek Biosciences (MATK), saying that one of its accounting methods has led to concerns that Martek is trying to make profits look more robust than they really are. The bone of contention: Martek's treatment of what it calls "idle" assets. Martek noted in its F1Q results that it has $94.3m of property, plant and equipment, "being held for future use." Martek doesn't depreciate assets designated this way. Such an approach is pretty rare; co’s typically depreciate assets that they are either using or could be using. Martek's approach lessens the bite that depreciation charges take out of net profit. In F07, the move could boost net profit by about $3.9m, or about 20%, according to Glass, Lewis & Co. A similar gain over the past year could have helped the co avoid 2 consecutive years of declining net profit. Plus, if Martek was fully depreciating its assets and taking a bigger hit to profit, the co's share price would be an expensive 37x expected F07 earnings, as opposed to its current multiple of 30x. Robert N. Freeman, an accounting professor at the University of Texas, said "You're in a gray area."
Barron’s Online “Inside Scoop” section reports that the Chmn of Dresser-Rand (DRC), William Macaulay, has just filled up his tank with shares of the co. Mr Macaulay spent $4m on 150K shares on March 15. The purchase came the week after private-equity firm First Reserve, where Macaulay holds the Chmn and CEO posts, launched a secondary offering of its remaining 11.6m Dresser-Rand shares. Ben Silverman, of InsiderScore.com, says Macaulay's buying is a positive signal, especially since the stock is currently trading near its 52w intraday high. "In a sense, he could be reinvesting in Dresser-Rand," says Silverman, "What I think is good is that he is planning to stick around as Chmn, and that he feels that the stock is going to appreciate in the long term."
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