The WSJ reports that E*Trade (ETFC) is getting a $2.55bn cash infusion from Citadel Investment Group, in a bid to restore confidence and liquidity in the discount brokerage. In a plan overseen by the federal Office of Thrift Supervision, Citadel will make a two-part investment in E*Trade. The first component is the purchase of E*Trade's entire $3bn portfolio of asset-backed securities for a value of around $800m. The 2nd component is the purchase of $1.75bn worth of 10yr notes, paying an annual interest rate of about 12.5%.
“Heard on the Street” column dicusses home builders, saying that with home sales slowing to a crawl and buyers unable to qualify for mortgages, some home builders are struggling to keep their operations going. The make-or-break matter for most builders is the ability to generate cash to service debt and to pay for the construction of new homes. Such liquidity risks could trap investors. "Liquidity is the No. 1 concern for builders, and rightly so," says Nishu Sood, of Deutsche Bank. "It's a matter of survival," he says of the many builders that borrowed heavily for the land they stockpiled during the housing boom. WCI Communities (WCI) is currently testing the banks' patience. The co recently violated an "interest coverage" test, which requires a minimum ratio of EBITDA to the interest it owes on its debt, says Andrew Brausa, of BofA. Another builder that worries investors is Standard Pacific (SPF). The builder has about $140m in debt service next year and is likely to generate enough cash in its 4Q of this year to cover these payments, says Vicki Bryan, an analyst at Gimme Credit. But there are other drains on its liquidity. For one, the co has to pay $150m of maturing long-term debt next year and an additional $150m in ‘09, UBS analyst David Goldberg says. Other builders with problems mentoned include BZH, DHI and TOL.
Barron’s Online discusses Idearc (IAR), saying that after falling 28% since it spun off from Verizon a year ago, Idearc represents a bargain worth considering. At a 52w low, the co's enterprise value as a multiple of operating earnings is 8x, less than some directories businesses have fetched in LBOs in recent years. Not that Idearc is about to be LBO'd anytime soon: With $9bn in debt, it's already heavily levered. But investors willing to stomach the risk are paying a historically cheap price to get the same thing that has attracted private equity to yellow pages outfits: High cash flow from a no-growth business that offers quarterly dividends totaling $1.36, for a rich 7% yield. Idearc has the cash flow to support, and perhaps even increase, that dividend, but it could use that cash to make more acquisitions or enter new US mkts, offering the prospect of higher-than-expected sales growth. "We thought Idearc was undervalued when we first bought into the shares, and at the current price, it's still undervalued," says Mike Shinnick, of 1st Source Monogram Long-Short Fund.
“Inside Scoop” section reports that CEO of Cardinal Health (CAH) has bought $1.1m worth of the co's stock. Clark, who joined Cardinal in Apr’06, purchased 20K shares Mon. The buy was Clark's first open-mkt purchase and the shares acquired represent his only transferable shares. The purchase follows a less bullish signal 2wks ago, when director Matthew Walter sold $5.4m worth of stock through a limited liability co. Jonathan Moreland, of Ladenburg Thalmann Asset Mgmt, notes that Clark's purchase is a significant amount of money but says he is concerned by Walter's even larger sale, especially since it came at a similar price to the Clark buy. "Frankly, it's about time an exec was indicating some value for these shares," Moreland says. He adds that adding in Walter's sale "makes for a pretty conflicted signal."
Thursday, November 29, 2007
Paperstand (ETFC, WCI, SPF, IAR, CAH)
Wednesday, November 28, 2007
Marvell (NASDAQ:MRVL): Bounce?
- Banc of America is the most pessimistic of the analyst community noting that in part to resolve this expense creep (+4.4% Q/Q) and in part to rationalize the headcount in the acquired Intel group, MRVL announced a 7% RIF (400 heads), to start in Q4. With annualized savings of $40m per year, they think both scope and the dollar impact of the RIF for next year were less than had been hoped.
Further, guidance for a return to only 50% GMs in the 2H08, while consistent with firm's thesis, is likely to disappoint, as they think some investors were looking for 50%+ GMs in the 2H based on cost savings from a transition to manufacturing of cellular products at TSM. Firm's new tgt is $15, based on a PE multiple of 22x F2009 pro forma EPS estimate of $0.67, net of cash. Maintains Neutral.
- Jefferies notes that although the cellular business is still negatively impacting profitability, they believe Marvell is well positioned to regain profitability and revenue growth in CY08 as it benefits from multiple product cycles and drives operational leverage within its acquired assets (PXA, Avago, QLogic). Firm believes the stock may be weak today as some may view the guidance as weak given the extra week; yet at the end of day, they believe MRVL is attractively valued at ~15x '09 EPS. Maintains Buy and $21 tgt.
- Goldman Sachs lowers their tgt to $19 from $21 but retains a Buy rating asthey are encouraged by MRVL's growth prospects and increased margin focus, but recognize investors have been shaken by recent missteps and could wait for a new permanent CFO.
- Citigroup thinks the quarter was solid and a 400-person lay-off plus an array of gross margin initiatives show a new sense of urgency regarding current investor concerns. While they expected revenue growth guidance conservatism, the Street found this and C2008's margin outlook unsatisfactory, pressuring the stock to $15.15 AMC. In firm's view, the Street cuts they feared are an opportunity to Buy, not sell the stock, and they would use weakness to leg into positions.
- Oppenheimer says MRVL reported strong Q308(Oct) revenues/EPS beating street consensus estimates handily. Guidance for Q4 also beat consensus on all fronts. Stock was down in after hours as the bears are pushing that the upside guidance is based on a 14week versus a normal 13week quarter. Nevertheless, the firm believes fundamentally MRVL is showing improvements on all fronts. Buyers on the pullback as they see business improving ahead of plan. Maintains Buy and $22 tgt.
Notablecalls: With MRVL stock trading around $15 in after hours (down 10%), I would look to buy some for a bounce.
Tuesday, November 27, 2007
Cisco Systems (NASDAQ:CSCO): Color on yesterday's move
Mother Morgan noted yesterday morning that in Cisco's F1Q08 quarterly filing, data for the emerging markets showed a significant deceleration in revenue growth. Specifically, emerging markets revenues grew 19% YoY in the October quarter, down from 35% YoY growth in the August quarter and 36% YoY growth in the same quarter a year ago. The firm said that while they remain confident in their Overweight-V rating and $38 price target, they would closely monitor this critical part of Cisco's growth story for signs of a rebound or further deterioration.
The comments from this morning are the following:
- Banc of America managed to host several Telepresence based meetings with Kelly Ahuja, Cisco's Vice President & General Manager of Core Routing yesterday. According to the firm, Mr. Ahuja indicated that trends in routing remain strong and that increasing broadband penetration and bandwidth consumption will likely drive robust demand for the foreseeable future. BAC believes the company's routing business can continue to deliver mid-teens rev growth for the foreseeable future.
Cisco was confident regarding its position within the emerging markets and stated that developing nations still require Cisco's ability to deliver an end to end network vs. the point solutions offered by competitors. However, due to a lack of existing infrastructure, network rollouts and revenue recognition may lag order growth.
Due to robust traffic growth, Cisco is still seeing good routing demand from larger carrier and enterprise customers, while healthy demand for managed services gives the company confidence that the SMB market remains healthy. Maintains Neutral and $33 tgt.
- Morgan Stanley notes that as a follow up to their Nov. 26 note, they reaffirm their view that underlying fundamentals of Cisco's emerging markets business are intact, and believe revenue growth and gross margins should rebound in FQ2.
A discussion with Emerging Markets head Paul Mountford and Corporate Controller Jonathan Chadwick indicated that EM fundamentals remain strong and that if not for the change in the way Cisco processes deferred revenue, the segment would have turned in growth similar to prior quarters. MSCO notes, however, that order growth did slow from 40% in prior quarters to a still strong 35% YoY in F1Q. This change in deferral accounting is noted in the 10-Q but not fully explained.
While the decline this quarter is a concern and one that bears watching, discussion with management leads the firm to expect a rebound in FQ2 (Jan) to recent levels (~63%) as specific events that impacted FQ1 seem unlikely to repeat in upcoming quarters.
Notablecalls: I think the deceleration in Emerging Markets is for real. I also think we're going to see further deceleration in the US and Europe soon. While today's comments coupled with overall positive tape may generate a bounce, I expect it to be short-lived.
Paperstand (TIVO, GOOG, ODP)
According to the WSJ, Google (GOOG), wants to offer consumers a new way to store their files on its hard drives, in a strategy that could accelerate a shift to Web-based computing and intensify the co's competition with Microsoft. Google is preparing a service that would let users store on its computers essentially all of the files they might keep on their PC HDD. The service could let users access their files via the Internet from different computers and mobile devices when they sign on with a password, and share them online with friends. It could be released as early as a few months from now.
Barron’s Online highlights fundmanager top holdings, including: HRB, AIG, C, GNW, PRU, MET, WFC, BAC, AOC and STI.
“Inside Scoop” section reprots that Ziff Assset Mgmt is building a significant stake in Office Depot (ODP). Ziff disclosed a 6.4% stake in Office Depot Mon. Ziff now owns 17.6m, making it the co's 2nd-largest holder. (Barclay's Global Investors owns 10.2% of Office Depot stock.) Ben Silverman, of InsiderScore.com, says he knows Ziff to be a long-term focused investment manager. "They're not activists."
DigiTimes reports that Taiwan Semi (TSM) and United Micro (UMC) are clearly slowing down expansion of their 12-inch capacities amid an industry downturn. Judging from the delivery schedules TSMC and UMC have set with equipment suppliers, the industry recovery will have to wait until after 2H08. Both foundries have announced that they will have significant cuts in their ‘08 capex although neither of them has provided concrete figures of the decreases.
Monday, November 26, 2007
Ceradyne (NASDAQ:CRDN): Expect Tomorrow's Scheduled Business Update to be Positive - Broadpoint
There has been some speculation that initial MRAP II test results may not have been positive. Their checks indicate no definitive results on this front so far. As the vehicles have already been returned to the company after the ballistic test, they expect the company to talk about the initial analysis on the test.
Firm continues to expect more body armor orders in the near term. While existing orders would take the company's current body armor shipment run-rate through the end of this year, there have been doubts about the company getting new orders to sustain this run-rate through the end of 1Q:CY08. They expect management to reiterate their confidence in upcoming body armor orders and future orders for the next-generation XSAPI body armors.
The stock currently trades at less than 8x firm's CY08 EPS estimate, which does not include any contribution from the MRAP II program. They believe this presents a strong buying opportunity. Reits Buy and $84 tgt.
Notablecalls: CRDN stock looks ready for a bounce, in my opinion.
Solar Module ASP likely to decline 15% in 2008E - Jefferies
The firm expects that the leading solar markets of Germany, Japan and (to a growing extent) the USA will have to absorb a significant portion of this new supply. These markets already have the lowest module ASPs and are the most price sensitive which will force further price reductions in order to stimulate demand.
Jeffco expects that the pain of this price erosion will be shared unequally throughout the solar value chain. Their base assumption is that a 15% module price decline will lead to a 10% decline in cell prices and a 5% decline in wafer prices while silicon price will be unaffected. Margins will be most affected in the module and cell production segments.
Notablecalls: The consensus estimate for solar module ASP decline for 2008 is around -5%, which certainly makes Jeffco's call an out-of-consensus one. I'm not sure if this call is an outright actionable one, but would not be surprised to see weakness is many of the high-flying solar names in the n-t.
Sunday, November 25, 2007
Barron's Summary (Barron's questions HPQ accounting; CCU, HET, BCE, HOG, DISH, IBM, CLUB, SGIC)
“The Trader” column questions Hewlett-Packard (HPQ) accounting, which is what Bernstein Research analyst A.M. Sacconaghi has been doing. HP was the big, bright spot of a bleary week, reporting a 28% jump in 4Q profits. But the co is a standout in another way. Among big tech stocks Sacconaghi covers, HP is the only one that excludes "intangibles amortization" expense from reported earnings. This means that HP's EPS will not factor in any amortization, the prorated write-offs over time, from acquisitions. This accounting treatment gives a 21c boost to HP's ‘07 EPS, Sacconaghi reckons. HP is by no means the only culprit, but investors ought to bear this in mind when mulling HP's profitability and valuation. "H-P has said in the past it excludes intangibles amortization b/c acquisitions are not an integral part of its operating model," Sacconaghi notes. But "history suggests otherwise." HP coughed up $7.3bn on 10 deals in the past year alone, "acquisition and intangibles" amortization expense hit $783m in ‘07.
Fresh concerns about the willingness of private-equity firms to complete LBOs have depressed the shares of announced takeover targets such as Clear Channel (CCU), Harrah’s (HET) and BCE (BCE). This creates potential opportunities for investors willing to bet the deals get completed. A bet on Harrah's could bring annualized returns of 18%. Clear Channel might pop more than 5 bucks a share, an annualized 85% gain. Other buyout tgts mentioned: ACS, BIIB, BEAS and VMED.
It could take a year or so for the US economy to firm. But when it does, Harley-Davidson’s (HOG) shares are likely to take off, rising to more than 60 from today's depressed 46.
Once again, “The Trader” column discusses potential EchoStar (DISH) acquisition by AT&T (T). In coming months, AT&T will need to show that its video offering, U-verse, is gaining traction and EchoStar will likely face rising customer turnover. So, while a deal may take longer than expected, we'd still expect necessity to drive a combination sometime in the future.
“Follow Up” section highlights IBM (IBM), which aims for $11 in EPS in 2010, driven partly by higher margins from software, which provides 20% of total sales and 40% of profit. Service revs are growing well, as are sales to emerging mkts and to small and medium-sized business. At last week's price, IBM trades around 15x current-year estd EPS of $6.98. Bob Djurdjevic of Annex Research figures the shares are worth $125. He thinks the financial-services woes will last 6-9mo’s. "Beyond that, sales will be on an upward spiral," he says.
“Follow Up” section also discusses Town Sports (CLUB), which has 9 new gyms opening in the current qrtr, just in time to help folks lose their holiday fat. That should kick-start Town Sports' shares, which are trading around 11x ‘08 earnings. Town Sports is "a one-off name that is underfollowed" by Wall Street, says Barbara Cappaert of KDP Investment Advisors. In part, that's b/c it has been public for a little more than a year. Even so, she says, it's "ridiculous" that the shares trade below 10.
“Technology Trader” column highlights Silicon Graphics (SGIC), saying that there are signs that SG is turning around: Orders in its F1Q were up 43% sequentially, and it now has pro forma rev of about $120m. But it's not making any money, and the growth picture is a little hard to decipher. But SGI contends that it truly is reviving. Silicon Graphics has a stock-mkt value a tad under $200m, and has $85m or so in long-term debt, so its total EV is about $285m. The co has a pro forma rev run rate of about $500m. My tipster sees rev of $600m in the F’08, and $650m or so in F’09. For investors, this is a speculative name with a couple of potential payoffs. First, the co's niche in high-performance computing could make it an interesting acquisition candidate. Second, SG has increased its focus on leveraging its intellectual- property portfolio of 700+ patents in high-end computing and visualization. And, finally, the Street eventually is going to figure out that the co is actually alive. SG isn't a place to bet the mortgage money, but it's a potentially nifty speculation.
Friday, November 23, 2007
Paperstand (WFMI, CRM)
The WSJ’s “Heard on the Street” column discusses Whole Foods (WFMI), saying that the co’s investment story is a lot like the goods on its shelves: Pricey, but so compelling that ppl keep going back. Committed Whole Foods investors are heartened by its resilient sales, the growth prospects of its recently acquired Wild Oats stores and its dividend, which the co boosted by 11% in the latest qrtr. Yet more competition, higher costs and murkiness surrounding Wild Oats' dilution on ‘08 earnings suggest that investors, unless they have strong stomachs, should consider shopping elsewhere. "It's a stock that today you just have to step aside on," says Rob Lutts, of Cabot Money Mgmt.
Barron’s Online highlighs Salesforce.com (CRM), saying that the co may well boost its cash earnings by 45% next year, but even with that healthy growth, its shares are pricey at a recent $56. As more and more Wall St analysts have begun focusing on results based on cash earnings, rather than on reported earnings, it's becoming more difficult to tell which co’s are really doing well. But no one can quite agree on what multiple of cash flow that a stock should fetch to be fairly valued. This creates a great deal of uncertainty about whether Salesforce is a bargain or a dog at its current price, which is about 40x next yr's expected free cash flow. There's no doubt what the bulls think. The stock has jumped 42% in the past 3mo’s. But there's no reason to believe that this run can last when other promising tech co’s are seeing their shares fall in an environment of heightened volatility and worries about the economy.
Wednesday, November 21, 2007
Over the past two hours a rumor about Ericsson's CEO getting fired has been circulating in Stockholm - Avian Securities
Obviously, Ericsson (NASDAQ:ERIC) is now heading towards value territory - but it's just as clear that the market no longer believes that the operating margin slide will halt at 13-15% level. Investors have started pricing in the global mobile CAPEX spending decline in early 2008 - the scenario Avian has been discussing throughout the summer and autumn.
Nevertheless, Ericsson has several things going for it. First - some of its market share gains may have come from lowballing orders in India and China, but they are likely to stick. Ericsson may well head into the next CAPEX upswing with 45%-plus global infra share. Second - Ericsson's margins may well dip into single digits, but it now has a new multimedia business line that might actually thrive in recession conditions. Operators may opt to begin outsource more of their billing and content design/operation if they decide to cut costs in a recession environment. Ericsson is far ahead of its smaller rivals in this category of offering advanced outsourcing services to mobile carriers. Third - the massive China 3G orders loom in the horizon, probably 2Q or 3Q 2009 in our conservative estimate. That's still 6-7 quarters out - but it's a concrete and sizeable new revenue cake from which Ericsson has a reasonable chance of carving a 30-40% slice even with the likely domestic vendor quotas.
The firm thinks Ericsson may become one of the first major telecom stocks to bottom out - though most likely much grief and panic lies ahead as the sector comes to grips with a true cyclical downturn. It is well worth considering as a prime candidate for a robust rebound if the stock tumbles again today on the back of global sell-off wave. They think the resignation of Svanberg might perk up considerable interest from investors - the CEO's credibility is more or less gone after the curious tonal shifts between the three major investor meetings of September, October and November.
Notablecalls: Interesting comments for sure. Please see further color from today.
Ericsson (NASDAQ:ERIC): Bounce candidate?
- Banc of America is among the few firms out with defensive comments saying that despite another disappointing data point, they believe ERIC is attractively valued at these levels. With a very strong Services business and a dominant share in wireless infrastructure, they see scope for improvement. Firm also expects better cash conversion over the next several quarters, which could restore management credibility.
Continued slowdown in US, Telefonica's acquisition of TIM, and possible network sharing agreements in the UK were all cited as reasons for revenues being light in Q4. While none are new items and the Q4 should be weak for the industry, the firm expects some normalization in 1H08.
Notablecalls: I think ERIC may be a bounce candidate around the $24 level as the weak guidance has already been baked in the valuation here. Note that RBC Capital was out on ERIC just couple of days ago taking their Q4 revenue ests to low end of management guidance range noting Ericsson is seeding the opportunities for future growth in new markets which may have some negative near term margin impact. According to RBC, it may take a few more quarters for Ericsson's financial model to reach steady state.
So no real surprise here. With the stock knocked down by GSCO downgrade this morning, I think there's a fair chance the stock may stage a bounce here.
Paperstand (SFD, DE, TEVA)
The WSJ’s “Ahead of the Tape” column discusses Smithfield Foods (SFD), a very acquisitive co. Smithfield has been on a binge of late. In the past yr or so, it acquired Sara Lee's European meat business and rival Premium Standard Farms. It also bought ConAgra Foods' Butterball brands turkey division through a joint venture. Smithfield is now the nation's largest player in turkeys, and it is stuffed with debt. Its interest costs have doubled in the past 4ys. Moody's has lowered its credit rating. CEO Larry Pope has said he wants to bring debt down. But this is a tough time to do it, b/c hog prices are falling. Analysts recently have been taking down their earnings ests. Smithfield reports next week. Its share price is already down 19% since a July high. Smithfield will likely be fine in the long run, but all the debt it's taken on doesn't help its flexibility in a tough economic environment.
“Ahead of the Tape” also discusses Deere (DE), whose investors have enjoyed nature's bounties. The co's shares are up 53% YTD. A surge in corn acreage amid strong ethanol demand caused Deere's tractors and combines to roll off the factory floor. But the stock has slipped 10% from its 52w high reached Nov. 6 on concerns that next year's corn crop won't stack up with this year's. High corn prices, combined with a steep drop in the price of ethanol, have forced a number of ethanol makers to close shop. Even established ethanol players are suffering. ADM (ADM), the nation's largest ethanol producer, said income from corn processing for biofuel plunged 48% from a year ago in its latest earnings report. The upshot: Ethanol-driven demand for corn next year may weaken. Deere reports quarterly earnings today. Look out for warnings about the outlook for farm-equipment sales next year.
Barron’s Online discusses Teva Pharma (TEVA), whose shares are up 43% YTD. "There are a lot of positive things happening over the next year or two," says Alan Lancz, of Alan B. Lancz & Associates. "If you have a long-term time frame, you can make good money here and not overpay for it." Earnings could climb next year twice as fast as those generated by the broader stock mkt, thanks to a strong pipeline, growing demand for generics here and abroad and rising branded-drug sales. Teva has lots of cash to fund acquisitions. In a shaky economy, and there's little doubt that we are in the midst of one, drug makers are attractive defensive plays. "They are accelerating earnings growth at a time when the rest of the mkt faces lots of challenges," says Peter Schofield, of Knott Capital Mgmt.
Tuesday, November 20, 2007
WellCare Health Plans (NYSE:WCG): Always Go to Other Peoples' Funerals, or They Won't Go to Yours
In CIBC's view, the warrant appears to be fairly specific in nature, and focused primarily on WellCare's Medicaid business in Florida, particularly its behavioral health operation. There is little mention of the company's Medicare business, or its PDP operation. It doesn't appear that the agents disturbed the office of Adam Miller, the Chief Operating Office of WellCare s Prescription Drug Plans. This would seem unusual if the government were mounting a large investigation into the Medicare PDP product.
It's possible that the Florida Medicaid investigation spreads into other areas, but the document seems to rule out widespread, systemic fraud, increasing the likelihood that WellCare settles, pays a fine, but remains in all its businesses, rather than being put out of business.
The investigation will be drawn out, there will be more negative headlines to come, and it will be many quarters before WellCare files financial reports with the SEC, but the more limited scope of the investigation suggests that WellCare's business is worth far more than $35 per share.
Notablecalls: I like this out-of-consensus call from CIBC. They were out with some supportive comments yesterday morning but were hesitant to become more positive. Now that they got the search warrant from Tampa, things have become somewhat more clear. That's an edge. Other firms didn't make the effort to get the docs.
While government investigations definitely can spread quickly into other areas, the feds usually tend to hit with all they have in this phase. If this is all they have, WCG is going back to $50-55 in a jiffy (next couple of months).
Looking at this call from CIBC's Carl McDonald, my gut tells me WCG will hit $40 soon. Maybe even this week.
Monday, November 19, 2007
Euroseas (NASDAQ:ESEA): Target upped to $21 from $17 at Oppenheimer
With the shares currently trading at 7.0x 2008 EPS estimate of $2.05, a 28.7% discount to dry- bulk universe (net ESEA), the firm believes ESEA presents compelling value in light of its growth potential.
Notablecalls: The dry-bulk space continues to be among traders' favs here. With the stock down over 1/3 over the past couple of weeks and OpCo coming out with such strong comments, it's due for a bounce. Also, note that technically, the stock rests right above its 200MA.
Cognizant Tech (NASDAQ:CTSH): No Matter What Happens Next Year, the Stock Should Be Bought - Jefferies
Also, given recent turmoil in the financial services sector (45% of CTSH revs), it is reasonable to assume that 2008 could experience some softness in demand, or at the very least that 2008 could get off to a slower start than we have witnessed in previous years. They have assumed a slowdown in overall growth next year from 50% to 34%, based on a combination of conservatism and current size of the business. This growth rate relative to current valuation is compelling, in Jeffco's view.
Additionally they believe that 2008 guidance when it is released should be a catalyst to the stock. Even if guidance comes in below consensus, the firm feels that current valuation would suggest a sigh of relief for the stock, providing an upside catalyst. Reits Buy and $50 tgt.
Notablecalls: CTSH got hit pretty badly couple of weeks ago after not offering investors the usual wide beat & raise quarter they have grown accustomed to over the past years. This was seen as the first sign of trouble about to hit the offshore IT services sector. Must say it's hard to argue with this with the whole sector leveraged to the US financial services space. Yet, even if we don't see the 40%+ growth rates in the financial side over the next year or two (or possibly never), the stock still looks interesting here.
The wording of the call is likely strong enough to create some reasonably good buy interest over the next couple of days. I would not be surprised to see CTSH up 1-2 bucks in the s-t.
Sunday, November 18, 2007
Barron's Symmary (LVS, WYNN, MGM, LLY, ADM, OZM, DISH, CL, BCS, GOOG, VMW)
Barron’s cover story discusses casino stocks, which are up 173%, 140% and 127% in 2ys, for Las Vegas Sands (LVS), Wynn (WYNN) and MGM (MGM), respectively. "Some investors seem to think high margins are perpetual and are disappointed when they find out otherwise, but you're starting to see margins pressured as supply gets saturated and competition increases," says Wahid Chammas, of Janus Capital. 2ys ago, Chammas advocated betting on Macau while the public wavered, but he is more circumspect today. "The story has been discovered." While Wynn and LVS have upped Macau's wow factor, nearly everyone is building and renovating. Cash-flow margins of around 30% will come under pressure with competition, possible discounting, and as all-important junkets, which bring tourists to Macau and hence control customers, lobby for a bigger slice of the take. Another correction of 25-30% would merely take LVS and Wynn to levels they were at in July, and they'd still be richer than their peers on most valuation measures. Today, even after the recent declines, LVS and Wynn sport enterprise values that are 34 and 22x their respective ‘08 Ebitda. To put that in perspective, Harra’s (HET), which has no Macau casinos, is being acquired by buyout firms at a comparable 9.9x multiple. "Betting on these stocks is like betting on the winning horse after the race," says David Trainer, of New Constructs. He thinks LVS and Wynn are overvalued. "Their current mkt valuations imply huge future cash-flow growth." Another co mentioned as “pure play on Macau” – Melco PBL (MPEL), whose shares fetch 164x ‘08 earnings.
Fund manager likes BBBB, SKIL, CPLA, ININ, PRXL, KNDL, WMGI, NUVA, BUCY and KDN.
Eli Lilly (LLY) shares look like dead money following a mixed test result for its experimental anticlotting drug. They could drop another 10% if the product doesn't generate sales.
Archer Daniels Midland (ADM) shares are too expensive, given the uncertainties about margins and earnings in the next few quarters. A 20%-30% decline would make them palatable again.
Barron’s: With earnings strong and dividend yields approaching those on Japanese government bonds, expect a rally in Japan's stock market, one of the developed world's cheapest (SNE, CAJ, TM, NMR, EWJ, JOF).
Compared with other money-management firms, Och-Ziff (OZM) looks quite overpriced. And that would hold true even if its stock were 5 to 10 points below its current price.
Sasol's (SSL) ADRs have soared about 400%, to just north of 50, since they were listed in 2003. The stock could be worth about 70 in a year if oil prices stay high.
“The Trader” section discusses EchoStar (DISH), saying that in the past, price reportedly prevented marriage with AT&T (T). AT&T supposedly has offered $65 a share, and DISH CEO Charles Ergen has demanded $75. There's no guarantee the two will reach an agreement this time, either. But compromise may come easier in the wake of EchoStar's disappointing 3Q earnings report. AT&T would like to get a deal done quickly for two reasons. First, it would like to have an agreement in place before the presidential election. Pushing a deal of this size through the regulatory system takes time, so it may have to be done in a month or so. AT&T has also said that it will decide by year end which satellite provider it will use to offer its telephone customers video services. AT&T has a joint venture with EchoStar. But BellSouth, which AT&T bough in ‘06, works with DirecTV (DTV), soon to be owned by Liberty Media. Thomas Eagan, of Oppenheimer, believes that AT&T will choose EchoStar as a partner and concurrently try to buy the co. AT&T is rolling out a new technology (U-verse) to offer TV service and compete with cable operators. However, ests of the operation's costs have risen, and AT&T has trimmed its projection of the number of homes for which the system will be available. Eagan postulates that Ma Bell will continue to roll out U-verse in metropolitan areas and buy a satellite co to provide TV service in more rural territories. A combination also would lower the co's programming costs.
“The Trader” also out saying that Colgate-Palmolive (CL) has a nice problem: Its business is doing so well and its stock has risen so strongly that its shares now appear expensive. At a recent 78.80, Colgate now trades at 20.7x ests for ‘08. The co's P/E is high compared to its 13% earnings growth and trumps those of other personal-care players. "The whole personal-care group is expensive relative to the S&P 500," says Bill Schmitz, od Deutsche Bank. The group trades at a 28% premium to the mkt, which matches the highest premium it has sported over the past 10ys and is well above the 15% mean. In any case, investors would be wise to take some profits and show their pearly whites all the way to the bank.
At roughly 7x forward earnings, Barclays (BCS) looks attractive. Shares of bank have fallen more than 30% since August. The bank is due to come out with its detailed trading statement later this year. As long as its capital-adequacy ratios remain intact, Barclays may be up for a re-rating.
According to the “Plugged In” column, Google (GOOG) is playing high-stake pokker with wireless carriers. Does the co, which has designs on the mobile-phone industry, really want to go to war with the likes of AT&T and Verizon? Probably not. Even though Google is one of the few co’s on the planet that could enter the wireless-service mkt and afford to build a network from scratch, I doubt that they will. It's too expensive, too time-consuming and too difficult to execute for a co with such little expertise. "What they are trying to do is pressure the carriers," posits Charter Equity Research analyst Ed Snyder. "I doubt that Google wants to own spectrum or build out a network. That would be a fool's errand," he adds. So why would Google go to such great lengths? B/c it needs the wireless carriers to play ball, and Google thinks it can force the carriers to cooperate where existing handset makers have failed. For Google to become the last entrant to mkt as a regulated wireless carrier in a mature industry wouldn't turn out well for current shareholders. They may be willing to pay for growth of the burgeoning Internet ad mkt, but they didn't intend on owning a regulated utility that needs to spend tens of billions of dollars with 5yr time horizons for return on that investment. Simply put, a move to become a wireless carrier would fundamentally destroy one of the greatest growth-stock stories of our time. The wireless carriers should call the bluff.
“Technology Trader” discusses VMware (VMW) valuation. There was a sobering piece last week from Bernstein Research analyst Toni Sacconaghi on VMware's extraordinary valuation. He noted that it is one of just two co’s (other is BIDU) in the tech and telecom sector that trade at multiples of more than 20x EV to trailing 12 mo' sales. Sacconaghi ran a screen for stocks that at any time in the ‘02-‘06 period traded at a trailing EV/sales ratio of 20 or more. He found 7 that hit that level at least once. And of those, only two, SunPower (SPWR) and XM Satellite Radio (XMSR), outperformed the mkt for a year after they topped the 20 figure. He notes that both SunPower and XM were growing at much faster rates than VMware when they reached that valuation, 200% at SunPower and 140-150% at XM, vs 65% or so for VMW. And he notes that SunPower's valuation on that measure has come down considerably, while XM shares have suffered a huge absolute fall. Other stocks that at least briefly hit the 20 level include AKAM, EBAY, RHT, RMBS and SIRI. Sacconaghi notes that most of them underperformed the mkt in both the qrtr and the yr following the point where they hit the 20 ratio, and that only two stocks, XM and Sirius, were able to maintain multiples above 20 for a yr or more. Both later traded sharply lower. Sacconaghi wasn't making a fundamental call on VMW. But he did offer a sobering warning: The valuation is at a level that other highfliers have been unable to sustain.
Friday, November 16, 2007
Paperstand (GOOG, CBI, CHE)
The WSJ reports that Google (GOOG) is gearing up to make a serious run at buying wireless spectrum in a FCC auction in Jan. Google is prepared to bid on its own without any partners. It is working out a plan to finance its bid, which could run $4.6bn or higher, that would rely on its own cash and possibly some borrowed money.
Barron’s Online discusses Chicago Bridge & Iron (CBI), saying that tougher comparisons after strong growth and concerns about the economy mean this stock could start to lose some gas. The co became a Wall St darling in recent years as one of the few ways to play demand for liquefied natural gas (LNG). That has resulted in an outsized valuation and stock price. Shares are up 95% this year alone and have increased more than ten-fold in the past 5ys. Big energy co’s have been funneling cash flow from rising commodity prices into projects that expand existing production facilities or building new ones to meet growing global demand for energy. And CB&I has been at the center of that movement. LNG accounted for 60% of the co's awards of $4.9bn for the first 9mo’s of ‘07, boosting CB&I's backlog of contracts for new projects to $6.4bn. While CB&I has been getting more positive attention from Wall St as of late, the good news is already baked into the stock. David Yuschak, of SMH Capital, says the reasons he was bullish on CB&I for the past 3 or 4 ys, the potential to win big contracts amid LNG growth expectations, "have played out." He recently downgraded the stock to Sell on concern over where the potential upside surprises would come from. And in the intermediate term, "we couldn't answer that question," says Yuschak.
“Inside Scoop” section reports that President and CEO of Chemed (CHE), Kevin McNamara, sold 15K Chemed shares for $836K Tue and Wed. Looking at the sale, Jim Barrett, of CL King, says: "Net-net, I never like to see insider selling. But if I were a shareholder, I would not be overly concerned about this particular sale." He notes that McNamara's sale represented less than 10% of his direct stake in the co. While Barrett rates Chemed at Neutral, he says, "Overall they've done very, very well" and calls them "mkt leaders in both segments."
Thursday, November 15, 2007
Novatel Wireless (NASDAQ:NVTL): Reducing ests and tgt due to Gobi threat - Piper
Notebooks featuring the multi-mode Gobi solution will have access to the high-speed mobile Internet services offered by network operators in virtually all parts of the world as the solution supports both CDMA2000 EV-DO and HSPA networks worldwide.
Based on comments at QUALCOMM Analyst Day indicating Gobi should ship in volume at a very competitive price by mid-2008, PJ believes this solution will facilitate increased competition for Novatel's embedded module segment. In fact, they believe the common software API and reference design for a software-defined configurable data module supporting both EV-DO Rev. A and HSPA with full backward compatibility, will enable price leaders to enter the market and lead to intense price competition.
Further, discussions with QUALCOMM management indicated strong early momentum for Gobi, with a design win at HP in-hand and strong interest from numerous other tier 1 notebook OEMs.
PJ is lowering their 2008 proforma EPS estimate from $1.45 to $1.38 and 2009 proforma EPS estimate
from $1.55 to $1.29. Price tgt is cut to $19 from $26.
Notablecalls: Gobi was introduced on Oct 23, causing a sharp sell-off both in NVTL and SWIR. So, in that sense PJ's call does not highlight any new negatives. But it does bring the competitive problems to the forefront. PJ's not the only one out with cautious comments this AM. Deutsche Bank notes that revisiting last month's announcement on their Gobi platform the company expects to ramp up shipments of its embedded laptop module. They see this as a drive to bring down the cost of embedding data connectivity and as a competitive to step to fend off WiMAX. This is a smart move, but one that is likely going to make things difficult for Novatel and Sierra Wireless, in DB's view.
All in all, I think there may be some more downside in NVTL following PJ's call. Just a short scalp, though.
Paperstand (AMTD weighs ETFC bid; EBAY; Q)
The WSJ reports that in recent days E*Trade (ETFC) has received calls from various parties suggesting a cash infusion into E*Trade similar to the $2bn investment that Bank of America (BAC) recently made in Countrywide (CFC), which gave BofA a stake in the lender. At the same time, E*Trad CEO Mitch Caplan has been weighing the pros and cons of selling E*Trade to a rival. Ppl familiar with the matter say that Ameritrade (AMTD) is keeping a close eye on E*Trade, and that its board in recent weeks has talked about a possible bid.
The WSJ’s “Heard on the Street” column discusses banks and coming subprime hits. Expectations are growing that UBS (UBS) may face 4Q write-downs of as much as $7.1bn. Investors and analysts believe that Citigroup (C) may face more pain after announcing last week that it expected to take write-downs of $8-11bn in the 4Q. Today, Barclays (BCS) is expected to announce its own write-downs. While the bank has been dogged by rumors of a $10bn hit, analysts say they expect a write-down of $2.9-$3.1bn. A write-down of that amount would lessen investor fears. Additionally, no major departures are expected at the bank's Barclays Capital unit. Some banks that have recently reported write-downs, such as Merrill Lynch (MER), have put significantly lower values on holdings of some of these securities than others have. To be sure, not all CDOs are the same. But analysts say the comparisons suggest that banks such as UBS and Citi, if they mark down as much as Merrill, may have to recognize more losses.
Barron’s Online discusses eBay (EBAY), saying that with eBay's 20x multiple of forward earnings, there may be little to lose in betting that the growth businesses at the co, namely the PayPal and Skype, will surprise ppl's expectations. "EBay is getting a different kind of investor than they've traditionally had, investors who are looking at the stock now for growth at a reasonable price," observes Michael Shinnick, of 1st Source Monogram Long-Short Fund. That could mean that the stock, which is trading at around $33, could easily move to $45, or even the low $50s a share over the next 12 mo’s.
“Inside Scoop” section reports that three insiders have purchased 48K shares in Qwest Comm. (Q). "It's not a perfect buy signal, but it qualifies as significant by my criteria b/c they've increased their holdings by a large percent, and their past purchases have done well," says Jonathan Moreland, of Ladenburg Thalmann Asset Mgmt. "I think there is legitimate concern about the industry that they are playing in and the ability to get earnings going in the right direction again," he says. "I'm not willing to follow [these insiders] right here and now, I'd love to see more progress with [Qwest's] business plan and finances."
Wednesday, November 14, 2007
Paperstand (PFE, WB)
Barron’s Online discusses Pfizer (PFE), saying that things can't get much worse for the stock. Blame falling revs, failed drugs and widespread doubts that it can replace drugs losing their patents. But with multiples hitting 10yr lows and US Big Pharma's highest dividend yield, 5.1%, investors have little to lose. In fact, the stock could return 30% or more in the next 2ys if mgmt can pull off the right acquisition to offset falling revs. "It's a value play for ppl who are willing to wait and get paid for it," says Gregory Greene, of Fox Asset Mgmt. "It will take time for them to show Wall St what they can do."
“Inside Scoop” ection reports that Wachovia’s (WB) lead independent director, Lanty Smith, spent $3.9m last week on Wachovia stock, the same day shares hit a more than 4yr low. Nonetheless, Ben Silverman, of InsiderScore.com, says Smith's purchase is an endorsement of Wachovia's long-term value by a 20yr director who has a strong handle on the financial-services sector. He also points to a smaller insider purchase by another director in early Nov as a positive sign for long-term investors.
Tuesday, November 13, 2007
Baidu.com (NASDAQ:BIDU): Steep Correction Creates Attractive Buying Opportunity - Citigroup
The sell-off appears to have been caused by a disappointing outlook from Cisco last week for its US enterprise business. Of course, the China Search market has little fundamental correlation with near-term outlook for US router demand.
Investors should remember that we are still pre-eCommerce in China, and as the overwhelming dominant player, Baidu is best positioned benefit from the market's growth. Reits Buy and $425 tgt.
Notablecalls: With the stock down 100+ bucks from its recent high, it sure looks like the ideal bounce candidate.
Monday, November 12, 2007
Cynosure (NASDAQ:CYNO): We would be agressive buyers at current levels - Jeffco
Firm notes CYNO shares have declined ~20% since the company reported impressive 3Q results on unwarranted fears associated with a deceleration in the aesthetic laser market. They recently met with CYNO management and came away very upbeat about the overall tone of business and the state of the laser aesthetics market.
Jeffco maintains their belief that Cynosure should outperform the laser industry's 20–25% growth rate, and, based on physician channel checks, they do not believe that CYNO has seen any deceleration in sales for any of their product offerings. In fact, based on other laser company's reported CY3Q results, they believe that CYNO is taking massive share in the core laser market and is outperforming its competitors in all segments.
They remind investors that CYNO is only generating Smartlipo sales in North America at present and the explosive growth to-date has not included the OUS market opportunity (which tey believe is as large as the North American opportunity).
Notablecalls: Note that Jeffco's tgt represents almost 100% upside from current levels. That's bound to generate interest. Also, the comments regarding CYNO taking share and seeing no ASP pressure should reassure investors that the co is not getting hit by the weakening economy.
CYNO looks and sounds like a really strong story here. Definitely worth a shot on the long side.
ETrade (NASDAQ:ETFC): Color on news
- Banc of America is lowering their tgt to $10.50 from $12 while keeping Neutral rating on the stock.
- Citigroup is lowering their rating on ETFC to Sell from Hold and cutting tgt to $7.50 from $13 saying the continued negative news flow about charges resulting from its mortgage & CDO exposure, an SEC inquiry, and continued deterioration in its financial condition, all increase the likelihood of significant client attrition.
Firm estimates that trying to liquidate E*Trade's loan & ABS portfolio would result in over $5b of losses (more than wiping out tangible equity). Based on accounting convention, E*Trade is not required to mark-to-market certain loans and securities. However, in the event that it has to sell these assets as a result of losing its funding sources (e.g. deposits & repo lines), losses could be realized. Citi's haircuts to arrive at the $5b loss estimate include 10% on 1st lien loans, 20% on HELOCs, and 25% on its ABS portfolio.
Theylowering 07/08/09 earnings est to $0.31, $0.90, $0.90. the tgt of $7.50, includes a 15% probability of bankruptcy.
Notablecalls: Citigroup's call is titled "Bankruptcy Risk Cannot Be Ruled Out". That's why we have the stock down 30% in pre-market and not 10% like it should be following Friday's news. And it would still be a bounce candidate!
This stuff sounds like '00-'02 when Guy Moszkowski was covering ETFC for Citi (then Salomon). Think he downgraded the stock to Sell around $4. Man, this is clueless stuff. Prashant, you should have seen this coming and should now be looking for reasons to UPGRADE this stock, not downgrade. Phew!
It's a buy around $6. Even if the mortgage positions end up worthless, ETFC is worth a lot more than what it is selling for right now.
Friday, November 09, 2007
Sprint Mobile WiMAX drama continues – Nortel and Alcatel Lucent are vulnerable to any trouble of the US Mobile WiMAX projects - Avian Securities
It’s a little strange how there is no word on early Mobile WiMAX handsets by November 2007 – Avian's discussions with certain hardware vendors at the recent CTIA conference has lead them firm to believe that development of Mobile WiMAX phones has been slower than anticipated. The early service may well have to depend on laptops with internal WiMAX connectivity or PC cards sold separately. This market is already being addressed by Verizon and several other mobile operators and it’s not clear that it’s large enough to offer much nourishment to Mobile WiMAX players.
Nortel (NYSE:NT) and Alcatel Lucent (NYSE:ALU) were badly beaten in the 3G mobile infrastructure competition; the revenue growth hopes of their mobile network units in 2008-2010 rest largely on strong early ramp-up of global Mobile WiMAX orders. America is the focus of the entire global WiMAX market – the Sprint launch of the service is the most important early roll-out in the world.
According to Avian, the blow-up of the Sprint-Clearwire deal is an ominous sign – there is a chance that the new Sprint CEO might scale down WiMAX plans radically or scrap the project entirely. Needless to say, the impact on Alcatel Lucent and particularly Nortel could be sizeable, particularly after the recent brief, but powerful short-covering rally of Nortel.
Notablecalls: Looks like more trouble in store for Nortel (NYSE:NT). Note that another WiMAX vendor, Alvarion (NASDAQ:ALVR) is already down in pre-market action.
Gmarket (NASDAQ:GMKT): Color on quarter - bounce oppy?
- RBC Capital notes Q3 was lackluster as GMKT reported revenue of $56.9mm vs. RBC $59.5mm and consensus $60.9mm. EBITDA was $7mm vs. RBC $9.2mm. Pro Forma EPS of $0.13 also lagged RBC $0.15 and consensus $0.16. This was as a result of the holidays as well as unseasonably warm weather, which led to lower traffic, lower take rates (due to warm weather's impact on the higher margin apparel category), and lower advertising revenue.
The key takeaway from Gmarket's 3Q07 report was the October GMV of 322b KRW. With each month in 4Q historically trending better than the previous, it is possible that Gmarket may report GMV of around 966b KRW vs. RBC's current 903b KRW. Things can change between now and the end of the quarter, but the firm isincrementally more comfortable with their estimates. They maintain Outperform rating and $32 target price, which is based on 30x EPS, 15x EBITDA, and a 3.5% FCF yield on 2009 estimates.
- Goldman Sachs notes gross and operating margins fell even further than wthey expected due to the product mix shift from clothing to PCs and electronics. Gmarket paid out a record 51% of transaction revenue in credit card and bank fees, implying that much of the financial returns from its platform accrue to the credit card industry. Management noted that October GMV was a monthly record of W322 bn, and that the rest of 4Q07 should be similar, implying 4Q07 GMV of around W966 bn, up 42% yoy versus 3Q07's up 35% yoy.
GSCO does not believe the Chusok holiday in 3Q07 or stronger GMV growth in 4Q07 fully excuse the 3Q07 earnings disappointment, since Gmarket's GMV growth in future periods should be closer to 35% yoy than 42% yoy, and since Gmarket ought to be growing earnings faster than GMV, not 28pp slower.
They reduce their 2007 EPS estimate by 2% to US$0.70, 2008 by 3% to US$1.03, and 2009 by 3% to US$1.40.
Notablecalls: I'd be a buyer of GMKT around $21 (and change) as I think Q4 will provide some positive surprises to investors. First of all, the results will likely be better than in Q3 as Q4 is seasonally strong quarter. About half of Koeran population is christian = Xmas shopping.
Also, it looks like the co has been hiring quite agressively in Q3. Why? I do have my theories but I'm not running a rumour mill here. But I do think the management may have a card or two up their sleeve here.
I continue to like GMKT here as a L-T story. Sooner or later either eBay or Yahoo! will move in with an offer to buy GMKT. The stock will likely be considerably higher by then.
But as I said, in ultra s-t it's a bounce play.
Paperstand (MRK, S, CLWR, WHR, NVR, XMSR, SIRI)
The WSJ reports that Merck (MRK) is expected to announce that it agreed to pay about $4.85bn to settle a significant portion of the claims over injuries allegedly linked to its Vioxx painkiller, after insisting for years that it would fight all 27K cases filed rather than compromise. An agreement is expected to be announced Fri morning in New Orleans, where a federal judge is overseeing the litigation. "We've been asked by the judge to talk to the plaintiffs," a Merck defense spokesman said.
According to the WSJ, Sprint Nextel (S) and Clearwire (CLWR) are scrapping their agreement to jointly build a nationwide high-speed wireless network based on WiMax technology. The 2 co’s signed a letter of intent in July to pursue the partnership, which they hoped to finalize within 60 days. But the complexities of the transaction and the departure last month of Gary Forsee as Sprint's CEO made it too difficult to reach a final pact. The unraveling of the preliminary agreement is a blow to Clearwire. The agreement called for the co’s to share costs on a network that would reach 100m ppl by the end of next year, with each side providing roaming rights to the other's customers. Sprint said it planned to spend about $5bn on the network through 2010.
Barron’s Online highlights Whirlpool (WHR), whose shares are down 37% since summer highs. The co is a global leader able to surmount the US housing contagion in a strong position. The stock should benefit from the recent acquisition of Maytag as well as a growing intl demand that drives 40% of sales. According to Longbow Research analyst David MacGregor, shares of the co have suffered from the misperception that Whirlpool is tied solely to US housing fortunes. But just 18% of Whirlpool's US shipments are linked to new residential construction. More than 2/3 of shipments are for replacement purposes. MacGregor believes a looming deadline for year-end portfolio reports is partially to blame for the Whirlpool selloff. "I think a lot of portfolio managers want to get rid of stocks that may be perceived as having a residential-construction flavor," he says. "And, as a result, the stock's on sale." The bargain-basement prices could offer buyers of Whirlpool stock over 70% upside in the next 12mo’s, based on the avg analyst tgt price.
“Inside Scoop” section reports that despite the continuing deterioration in the housing mkt, one insider has homed in on NVR (NVR), buying more than $50m in shares of the home builder. With shares of NVR hovering near lows, its founder and chmn made the largest dollar-value insider purchase on record for the co, 6 mo’s after selling more than $200m in stock. From Mon through Wed, Chmn Dwight Schar bought 118K shares for $52.4m. He now holds 403K shares or 7.9% of the NVR's shares outstanding. "It is very rare to see insider buying and selling to this extent, even in the course of one year," says Ben Silverman, of InsiderScore.com. "In one sense it could be a very expensive public-relations move, but it's a positive sign that he's putting a quarter of his profits back into the company."
TheDeal.com reports that DoJ is expected to clear XM-Sirius (XMSR, SIRI) deal. Approval looks likely despite antitrust staff leaning toward blocking the satellite radio deal.
Thursday, November 08, 2007
Cisco Systems (NASDAQ:CSCO): No Joy at Ciscoville
- Citigroup notes October was in-line at the top line but rounded $0.01 better (excluding favorable tax rate) in EPS. However, guidance calls for an in-line January, breaking the beat and raise trend. This alone would likely have the shares trading down on the news. When
coupled with a weak US Enterprise (down ~4% Y/Y) and incremental macro hedging commentary, the stock could retreat to the $25-$27 range.
Cisco's US Enterprise comments, and particularly those related to Financial Services, will
weigh on most of Citi's coverage group. In data networking, those more exposed include Riverbed and F5, while Juniper and Foundry are less exposed. In Data Storage, all are over-exposed relative to data networking including Network Appliance, EMC, Emulex,
QLogic, and Brocade.
- CIBC is somewhat more optimistic noting in line + soft U.S. = weakness in stock. However, LT fundamentals look solid and unchanged. They would buy on the weakness but don't expect upside near term.
General points of concern were: 1) weakness in switching (U.S. enterprise + product intro cycle); 2) lowest headcount additions since 2005; 3) implied slow growth in YoY order growth for international service provider; and 4) lack of growth in WLAN and Home Networking.
Stock likely to get hit but trading at 17x CIBC's '09E EPS (pre-hit) they continue to see upside. In the weak markets of 2001-2003, the stock traded above 20x. With a more diversified business today and strong growth outlook, they continue to favor the shares. Maintains SO rating and $35 target.
- Morgan Stanley thinks risk-reward favors owning shares of CSCO and they recommend using an expected sell-off as an opportunity to build a position. While not discounting macro concerns, particularly around US enterprise, Cisco is positioned to benefit from the breadth of long-tailed trends positively affecting carrier, consumer, and yes, even enterprise networks in both developed and emerging markets. Firm reiterates their OW-V rating and $38 price target while recognizing that the key risk is whether softness in US enterprise, one of the few areas of weakness this quarter, spills over into other businesses.
- Goldman Sachs is the most positive of the bunch saying CSCO shares are trading at 17x their CY08 EPS and at a 6.5% annualized cash flow yield based on the $3.1 billion in cash flow in the quarter. Firm believes Cisco can achieve at least the high end of its 13-16% top-line growth in FY08, even in the face of a weaker US enterprise (13% of sales) business outlook. Also, during the quarter, Cisco increased projections for European growth and indication that the weak US demand is currently limited to the US financials, retail, and auto verticals.
GSCO is maintaining their 12-month price target of $40.
Notablecalls: So looks like RBC was right with their comments a week back regarding the expected lumpiness in CSCO's performance. Despite all the supportive analyst ga-ga, it's difficult to be positive on CSCO here. Financials and autos represent a mere 14-15% of the co's revs, but weakness there may spread to other parts of the business.
While the stock is up roughly a buck from its pre-market lows, I suspect it may continue its slide over the next weeks. Around $29 is the level where I'd be looking for a bounce.
Paperstand (AKAM, LLNW, ADVS, USTR)
The WSJ’s “Heard on the Street” column out saying that the share prices of Akamai (AKAM) and Limelight (LLNW) could go even lower. Despite the growth in online content, the stocks of Akamai and Limelight have plunged. Since mid-July, Akamai's shares have dropped 26%, while the stock price of Limelight, which went public in June, has slid 53%. And Wall St. doesn't think the situation will improve soon. "There's plenty more room for [Akamai and Limelight] to fall," says Scott Kessler, of S&P. Mr. Kessler has a Sell rating on Akamai. Akamai and Limelight shares remain expensive even after their recent declines, analysts say. Limelight is trading at a P/E ratio of 94x estd earnings for the next 12mo’s, far above the tech industry's avg of about 21x earnings. Akamai is trading at a P/E ratio of about 24x future 12mo earnings. "In the past, there was some justification for Akamai's high stock b/c it operated in a near-monopoly, but it's different today," Mr. Kessler says. "It's too expensive even now."
Barron’s Online discusses Advent Software (ADVS), saying that the co has decent prospects for sales growth, and bulls appreciate the co's strong cash flow. But at a recent price of $54, the co trades at a jaw-dropping 114x next year's estd EPS. Even on a cash basis, Advent is pricey. Advent was a favored stock for a time in the late '90s, briefly hitting an all-time closing high of $75.50 in Sep 2000, right before banks and everyone else stopped buying software; subsequently, its shares cratered to $9. Many of the same glowing remarks made of Advent today were said back then, and they're unlikely to stop what may well be a shift of more and more money into comfortable large-cap stocks like Microsoft, Google and Apple. Their shares are performing like never before as the co’s find unexpected sources of growth.
“Inside Scoop” reports that heavy insider selling at United Stationers (USTR) may indicate that the tides may be changing. From Nov. 2 to 5, two senior execs grossed $14.9m by selling more than 251K shares acquired through options. Roughly 320K options were exercised for $8.5m. They were not set to expire for at least 5ys. Another 68K shares were sold for $4.1m to cover the taxes related to the transactions. These sales cast a shadow over what has been a tremendous run-up in the stock in recent years. "I would say that the sales coming now are a bit concerning," says Ben Silverman, of InsiderScore.com.
Wednesday, November 07, 2007
Research in Motion (NASDAQ:RIMM): Target upped to $180 at RBC Capital
Firm's broad-based global checks (US, Canada, Europe) and data from their RBC Early Tech Adopter Panel (3,600 responses) point to RIM's biggest ever Christmas quarter, with accelerating momentum on Curve, Worldphone, Pearl, 8800/8820 and pent up demand for CDMA/EDGE Pearl 2 (RIM may sell 5M+ Pearl 2's FTM). Competition (e.g. iPhone, Microsoft) is not in their view impacting RIM's momentum.
RBC's F08 estimates become $6.0B Revenue and $2.23 EPS ($5.9B and $2.16 prior) above street for $5.9B/$2.16. F09 outlook becomes $9.9B, $3.80 EPS ($9.1B, $3.36 EPS prior) vs. street at $8.6B/$3.18.
Notablecalls: What can I say. The momentum continues. Slowly but surely, analyst estimates and targets keep creeping higher. RBC's FY09 numbers represent the new Street high. Expect to see buy interest in RIMM. It now has $140-$150 written all over it.
Paperstand (GM, MS, AIG, )
“Heard on the Street” column reports that 2 analysts are projecting Morgan Stanley (MS) may take a 4Q write-down of $3-6bn. David Trone, of Fox-Pitt, projected the possible write-downs at $4-6bn, Mike Mayo, of Deutsche Bank, $3-4bn. While the firm may not have underwritten as many CDOs, Morgan Stanley may have been involved in transactions with other firms that left it with exposure to CDO risks. Such proprietary trading with the firm's own money already cost the firm $480m on money-losing quantitative stock trading in the 3Q, with $390m in losses occurring on a single day in Aug. Asked by a CNBC reporter Mon about possible 4Q write-downs, Morgan Stanley CEO John Mack indicated he expected numerous firms would report such hits b/c mkt prices have declined. But he wouldn't address specifics about Morgan Stanley.
“Ahead of the Tape” column discusses American International Group (AIG), saying that investors are worried about co’s exposure to the subprime mortgage mkt. They might want to redirect their attention. AIG acts as a mortgage investor and lender, and as a seller of mortgage insurance. But its subprime exposures look contained. The 3Q earnings the co reports after the mkt closes today could show its core insurance businesses face many other challenges. The report comes 5 days after former chief Maurice R. "Hank" Greenberg declared his interest in "strategic alternatives" for the firm. He controls a hoard of AIG shares and seems to want to shake things up. Competition is also intense abroad, which can cut into profits in places with greater growth potential than a mature insurance mkt like the US. In Japan, domestic and foreign insurers, AIG included, are scrambling to serve the life insurance and retirement needs of a wealthy, aging population. Then there's the threat posed by natural catastrophes. 2ys of benign hurricane seasons have helped boost insurer profits, but a massive event could be costly. For the 3Q05, when Hurricane Katrina hit, AIG reported a 36% drop in net income.
Also, “Ahead of the Tape” discusses Cisco (CSCO), saying that if history is any guide, Cisco will put up strong earnings numbers today. And its stock could still drop. Cisco has beat the Street's qrtrly forecasts 88% of the time in the past 6ys, not once posting results below expectations. Consistency leads to high hopes among investors, who are prone to diving out of the stock on even slight missteps. Over that 6yr period, the stock has finished the trading day following the report below water 46% of the time.
“Inside Track” section out saying that stock sales by the top brass of Burlington Northern Santa Fe (BNI) are a cause for concern, but investors who plan to be on board for the long haul should pay more attention to stock purchases by investing guru Warren Buffett of Berkshire Hathaway (BRKA). Burlington Northern Chmn and CEO Matthew Rose, CFO Thomas Hund and COO Carl Ice recently reported selling 122K shares for $10.5m. "I think these guys taking profits could mean the short-term outlook is looking fuzzy," said Ben Silverman, of InsiderScore.com. "If you look at mgmt comments recently...this makes sense."
Barron’s Online highlights Abbott Labs (ABT), saying that Wall St. seems to have started warming up again to the co. It has, however, been a gradual thaw. Up 13% over the last 12mo’s due to expectations surrounding Abbott's experimental Xience V heart stent, Abbott has been hit by recent concerns that the FDA could delay approving the device next year, curtailing profit growth. Yet Abbott's earnings could climb substantially in ‘08, even if Xience gets held up by regulators, thanks to rising sales of Abbott's blockbuster rheumatoid arthritis drug, Humira and new drug launches. "The story surrounding Abbott and its stock is not going to break apart if FDA approval of Xience gets pushed back 6mo’s or so," says David Heupel, of Thrivent Investment Mgmt.
“Inside Scoop” section reports that 3 insiders at Under Armour (UA) have sold $142m in stock. On Thu founder, President and CEO Kevin Plank and his family foundation and trusts sold 1.5m class A shares for $88.5m. He continues to own 12.5m class B shares of the co, or 25.7% of Under Armour's outstanding shares. Class B shares don't trade publicly but can be converted to publicly traded class A shares on a 1-to-1 basis. Plank converted class B shares to class A as part of the sale. On the same day, two senior vice presidents also sold stock. Considering their large holdings, "these insiders can't be accused of running for the exits," says Jonathan Moreland, of Ladenburg Thalmann Asset Mgmt. "Still, given that they are all selling at the same time, at a time when analysts are downgrading the co, it's enough to make investors a bit concerned."
Tuesday, November 06, 2007
Global Sources (NASDAQ:GSOL): Price target upped to $45 at Citigroup
The company is the smaller of two players in what is effectively a duopoly market, and it is differentiated by two primary characteristics: 1) A more comprehensive offering, including an Online marketplace; speciality print catalogs/publications; and leading China Sourcing Fairs trade shows; and 2) By having a greater emphasis on screening, filtering and verifying suppliers for quality/capabilities.
Global Sources has a very long history of doing this business: it has been engaged in international trade-related B2B commerce for 36+ years, and in B2B eCommerce (read: online) for nearly 12 years.
According to Citi, one of the difficulties in valuing Global Sources has been the absence of good comparable companies. With a direct competitor recently going public, however, they can now provide more meaningful inputs to their methodology. Based on their latest estimates for 2008-09, the firm arrives at a fair value of US$45.77. Their target price represents 27x 2009E non-GAAP EPS.
Citigroup lists 10 reasons why they believe the Street is currently undervaluing the assets of Global Sources. The reasons range from good visibility into revs and earnings to a large and loyal community of active buyers.
Most importantly, while Citi believes the current fair value of GSOL is $45 per share, they note it could go higher if comparable multiples climb higher as well.
Notablecalls: I must say it's fairly difficult to sum up this 30 page note in just couple of paragraphs. The main thing about this call is that it highlights this under-the-radar stock in a way that will likely generate significant buy interest. The direct competitor gone public is of course Alibaba.com.
While I'm not too familiar with GSOL, I've talked to some people that see the co as a real rule-breaker. This is pretty much what Citigroup is saying in their call. I strongly suggest you check it out, if you have access to their research.
For short-term traders, I would not be surprised to see a Baidu-like movement in the stock today and over the next couple of weeks. The stock's a huge mover and I suspect will challenge its all time highs in the very near term.
Paperstand (WCG, BKS, GME)
The WSJ’s “Heard on the Street” column discusses WellCare (WCG), saying that as details of the govt inquiry emerge, some say the hedge-fund selling may have created an opportunity for investors with an appetite for risk. On word that state and federal agents descended on WellCare's HQ Oct. 24, the co's stock price declined from $128 a share the day before to less than $21 in about a week. A number of hedge funds using computer-based, quantitative models appeared to be among the biggest losers. The rash of selling suggests that the same models that pushed the quant hedge funds to scoop up shares began urging them to sell when the stock fell, even though it isn't clear how the investigation will affect the co. By some analysts' ests, quantitative funds controlled 40% of the shares before the price drop. WellCare's hefty profit margins were among the reasons computer models lit up. Brian Wright, of Jefferies, says quantitative firms were so heavily invested in WellCare also b/c of the co's recent tendency to beat analysts' earnings tgts, then raising guidance. Those same attributes, however, worried investors who don't depend on computer models. In the spring, several Wall St analysts expressed concern. Carl McDonald, of CIBC, questioned the amount of money WellCare was getting from the state of Florida compared with competitors. He has an Outperform rating on the shares. "Ppl have always had some concerns about WellCare; they have higher margins than others in the sector," said Peter Costa, of FTN Midwest. Friday, Mr. Costa upgraded his rating on the stock to the equivalent of Hold from Sell.
According to the WSJ, Wall St investment banks plan to launch tomorrow an offering of up to $10bn in loans for Chrysler's automotive business. The offering amounts to a second try at a debt sale that was postponed in July amid gathering credit-market turmoil. The loans are connected to the recent acquisition of a majority stake in Chrysler by Cerberus Capital Mgmt. The banks' efforts to find investors for the Chrysler loans this month come amid a recovery in the mkt for risky corporate debt in recent weeks. It isn't clear how much of the $10bn in Chrysler auto-business loans the banks will try to sell this month and whether they will be able to find enough investors to take on the debt.
According to the Barron’s Online, fund manager likes GOOG, AAPL, CSCO, MSFT, EMC, VMW, INTC, NVDA, SYK and GILD.
“Inside Scoop” section reports that Leonard Riggio, Barnes & Noble (BKS) founder and chmn, bought shares on the bookseller but trimmed his position in GameStop (GME), a videogame retailer of which he is a director. From Oct. 24 through 29, Riggio sold 2m GameStop shares for $116.2m. Earlier that month Riggio bought 600K shares of Barnes & Noble for $22.8m. It's been a tale of two stocks so far this year: GameStop shares have soared 107% while Barnes & Noble has slipped 8.4%.
Monday, November 05, 2007
Nokia (NYSE:NOK): Nokia hit by second-tier insurgency - Avian Securities
According to Kuittinen, it’s not entirely surprising that the brand new lead models from Samsung and Sony Ericsson are outselling Nokia’s 6-month old flagship phones (N95 and Nokia 6300) in the last weeks of October. What is noteworthy in their view is the series of tepid debuts of Nokia’s new 6000 series phones. The 6080, the 6070, the 6500 Classic, the 6500 Slide, the 6288 – all of these models are having some trouble finding traction.
He thinks it’s clear that Nokia’s management is aware of the situation – this is why Nokia elected to not guide for global market share gains in 4Q 2007 and even took the unusual step of pointing out that Nokia did not gain share in Europe in 3Q 2007. It’s hard to get a full picture of 4Q market share situation, particularly because the LG990 is still in early stages of ramping up and Samsung’s biggest model and iPhone are yet to launch.
At this point Avian projects that the Top Five charts of UK and German contract phones at the end of November won’t include a single Nokia model. The N-95 and N-81 simply aren’t getting the operator support or media buzz to help deflect the surge of several second-tier brands. Nokia's share price continues floating serenely close to its multi-year highs. In firm's view, investor complacency is not warranted. Multimedia device operating margins may dip by 2% in 4Q and even the main phone unit margins may come down a point as Nokia's European market share is now in decline and the pricing pressure on the rise.
Notablecalls: First of all, I'd like to welcome Tero and Avian Securities among the growing base of research providers that have elected to send their stuff directly to Notable Calls. Talking to my buddies still working on the Street, I hear NC is getting lots of traction among the trading community. That is, of course, music to my ears.
Secondly, when was the last time you heard anything negative on Nokia? I've been reading Tero's musings on the Handset space for as long as I remember. This guy is definitely worth listening to!
Not saying short NOK here but based on Tero's comments, the next leg may not be up!
Accuray (NASDAQ: ARAY): Aetna National Coverage Decision Is a Significant - Jefco
Jefco's channel checks indicate that trends in FY1Q were strong and they expect results to exceed their revenue, EPS, and CyberKnife placement estimates of $45.6MM, $0.05, and 11 revenue generating units, respectively. FC consensus is at $45.8MM and $0.04.
Reits Buy and $29 tgt.
Notablecalls: Looks like the CyberKnife is gaining traction! That should help the shares to propel even higher. Today!
RF Micro Devices (NASDAQ:RFMD): Piper Jaffray reits Outperform and $9 tgt
Firm believes Samsung could also drive significant growth for RFMD during CY08, with design wins into multiple 3G handsets expected to launch. In fact, they believe Samsung could become a 10% customer for RFMD by mid-2008.
They expect RFMD to host an upbeat analyst day on Nov. 15th, with a focus on longer-run growth opportunities and efforts to improve its gross margins. Firm believes Polaris 3 yields could improve during the March quarter, helping this product approach its longer-run gross margins of ~30%. Further, they believe transition of pHEMT towards internal supply sources could further boost gross margins during the June quarter. Consequently, they continue modeling a return to 33-34% gross margins for RFMD by calendar Q208.
Strong ramp of Polaris 3, share gains within Samsung, and growing business with Tier 2 handset customers could lead PJ's FY09 estimates to prove conservative. Reits Outperform and $9 tgt.
Notablecalls: I was positive on RFMD starting from early September, highlighting several calls from CIBC and Citigroup as Actionable. The stock made a nice 25% upside move but after coming somewhat below expectations on guidance side (profitability) on Oct 23, the stock is back where it started.
The problem? The primary culprits were a sharp price increase in externally sourced pHEMT switches and poor initial yields on Polaris 3 (P3) due to a material problem (also sourced externally).
The management promised to take care of both problems and investors are likely going to hear at least some good news on these fronts on Nov 15.
The demand for components continues to be strong, so I view recent weakness as a buying opportunity. Note that PJ's tgt represents 50% upside from current levels.
Research in Motion (NASDAQ:RIMM): Citigroup's Top Handset stock to own for 2008
stock to own for 2008. Firm's recent meetings with top management re-emphasized RIM's high-quality team, long-term strategy, unique market position, and profitable growth. Continued carrier support into the enterprise, aggressive pro-sumer entry, and new consumer/SoHo offerings should help drive continued sales & EPS growth in 2008 and beyond. CY08 growth estimated +57% sales and +66% EPS.
While RIM stock is often viewed as a momentum play, they argue the real momentum is in RIM's fundamentals: increasing distribution through carrier partners, expanding geographic reach, and a swelling subscriber base that is just now hitting critical mass. Citi views RIM's strong stock price performance as reflective of the underlying fundamentals of the RIM business which are only starting to hit critical mass adoption growth.
Management repeatedly emphasizes its role as a trusted partner to carriers & benefits that accrue to RIM. While other handset vendors (NOK, MOT) attempt to disintermediate carriers into a dumb bitpipe, RIM reaps the rewards of carrier partnership & cooperation.
A key point in Viti's thesis on the handset space is that software and services will be critical this cycle. While investors focus on the ubiquitous Blackberry device with RIM, the they believe software is the real driver. Maintains Buy and $140 tgt.
Notablecalls: Will this call be enough to push RIMM stock to a new all time high? Sure, why not. RIMM's a momentum play, folks. The stock has $130+ written all over it. Grab it early and aggressively.
By the way, Oppenheimer is out with a new tgt on Google (NASDAQ:GOOG). Opco's $850 represents the new Street high. I suspect RIMM + GOOG will be enough to pull the market out of the early slump.
Sunday, November 04, 2007
Barron's Summary (DWA, CROX, NTRS, KCP, DPTR, MAT)
Fund manager likes CSCO, AKAM, RIMM, AMZN, MDR, MRK and GILD. Another fund holdings include LMT, MO, BAC, ALL, XOM, C, TOT, MET, JNJ and GS.
The shares of Mattel (MAT), at about 21, are near their 52-week low. But they could jump to 30 over the next 12 months as the crisis recedes. Caveat: If there's another big recall, all bets are off.
Delta Petroleum (DPTR) can ill afford to disappoint investors. If it does, its stock, already off this year but still at a premium to its peers, soon could slide another 20% or more.
Kenneth Cole (KCP) stock, recently at a four-year low of 18, could shoot to 50 on new sportswear. "The stock and the company have endured much pain, but the stars are aligning," says Shawn Kravetz, of Esplanade Capital.
With sales and earnings climbing briskly, the ascent of Northern Trust’s (NTRS) stock looks far from over. The shares easily could tack on 10% or more annually in the coming years.
“The Trader” section discusses Crocs (CROX), saying that that demand for the low-priced kicks still appears strong. But Crocs and their ilk have all the markings of a fad, and fads eventually end. The mad dash for the exits shows the fancy footwork required of the co to meet increasingly high expectations. Christopher Williams thinks its shares will hit the high 30s much faster than fans expect.
“The Trader” also highlights DreamWorks (DWA), whose Bee Movie opened Fri on nearly 4K screens. Analysts expect the film to rake in $30-40m over the weekend on its way to a domestic box-office haul topping $150m. The buzz isn't the only reason to like DreamWorks' stock. Another hit to add to a string that already includes the money-minting Shrek franchise will help the studio establish a reputation for consistency in a lumpy business. That could help it achieve a richer stock price. Just last week, the co reported a 5-fold increase in 3Q profits, boosted by Shrek the Third, whose home-DVD sales will drive earnings this qrtr while Bee earns back its upfront costs. BofA analyst Michael Savner expects Bee to gross $40m during the weekend, and $175m overall in the US. "If Bee Movie hits our forecast, DreamWorks should realize nearly $310m in net rev and $130m in gross profits over the film's life," he notes. Such tgts might even prove conservative. Also helping Bee is the early-Nov release -- just in time for kids who have settled back in school to start prowling for distractions. DWA trades for 14.4x ‘07 earnings, compared with 15.1x for the leisure-products group, even though its net profit margin of 27% far outstrips the group's 6%. While takeover talk has grown far less animated these days, the co's strong cash flow, healthy balance sheet and an 11% debt-to-capital ratio all add up to an appealing picture.
Friday, November 02, 2007
Paperstand (MER in trouble; CLWR, AYR, CSGP)
The WSJ reports that Merrill Lynch (MER), in a bid to slash its exposure to risky mortgage-backed securities, has engaged in deals with hedge funds that may have been designed to delay the day of reckoning on losses. The transactions are among the issues likely to be examined by the SEC. The SEC is looking into how the firm has been valuing, or "marking," its mortgage securities and how it has disclosed its positions to investors. Regulators are scrutinizing whether Merrill knew its mortgage-related problem was bigger than what it indicated to investors throughout the summer. In one deal, a hedge fund bought $1bn in commercial paper issued by a Merrill-related entity containing mortgages. In exchange, the hedge fund had the right to sell back the commercial paper to Merrill itself after one year for a guaranteed minimum return. While the Merrill-related entity's assets and liabilities weren't on Merrill's own balance sheet, Merrill might have been required to take a write-down if the entity was unable to sell the commercial paper to other investors and suffered losses. The deal delayed that risk for a year.
According to the WSJ, Sprint (S) is weighing changes to its plans to offer high-speed wireless Internet service using WiMax technology, including a potential merger of its wireless broadband unit with Clearwire (CLWR). The co is mulling its options as it continues its hunt for a new CEO to succeed Gary Forsee. The CEO search and wireless broadband initiative will be among the topics the co's board reviews at a retreat this weekend. Meanwhile, Sprint is closing in on an agreement with Google (GOOG) to offer mobile devices tailored to the Web giant's new cellphone operating platform.
Barron's Online highlights Aircastle (AYR), whose shares have gained 9% YTD. There is still a 25-35% upside for the shares over the next 12mo's on top of rising dividend payments. Further acquisitions of aircraft also will boost earnings. The co is scheduled to report 3Q earnings on Nov. 9. "The biggest catalyst out of [next week's] earnings report is that they don't report anything special, that it's just business as usual," says John E. Leslie III, of Miller/Howard Investments.
"Inside Scoop" section reports that the CEO of CoStar (CSGP) sold $8.6m in stock this week in the wake of a poor reception to his co's latest earnings report. In total he sold 151K shares. On the co's earnings call last Thu, Florance told investors, "I think we may be seeing the end of one of the great industry booms here."