Couple of heavyweights are issuing strong defenses on Lorillard (NYSE:LO) following yesterday's sell-off:
- Morgan Stanley is issuing Research Technical Idea, saying they expect the stock will rise in absolute terms over the next 30 days.
This is because the stock has traded off recently, making short term valuation much more compelling. Although LO's 3Q09 results trailed our forecast, we do not believe there has been any change in the Company's long-term prospects and/or value, and as a result, we believe that the 7% decline in Lorillard's share price is both an over-reaction and unwarranted. We expect strong absolute returns to be driven by: (i) Improved reported shipment volume, with a declining negative impact from trade inventory movements. We forecast LO's shipments to decline by 5.2% and 2.4% during 4Q09 and 2010, respectively. (ii) Stronger pricing (note PM USA's 3-4% hike on Friday). (iii) More favorable menthol competitive conditions (e.g., the Blend 54 launch impact will moderate). (iv) Increasing share repurchases. (v) An attractive valuation at ~8.0x 10e EV/EBITDA (=RAI), and a 5.4% dividend yield.
- UBS notes that every stock has its role in a given portfolio. Investors own companies because they are best-in-class, others look for cash return/income stories and another type of investor looks for event driven ideas. Lorillard has all 3 of these traits. We believe Monday’s 7% (unwarranted) pull back offers many types of investors an opportunity to buy a best in class company that is a legitimate M&A candidate.
How Much Do You Get Paid to Wait for the Take-Out? 15% Per Year
While we have limited visibility on when Lorillard will get taken out, we would be surprised to see the company as a stand alone entity beyond 2 years. We see Reynolds American or Imperial Tobacco as logical buyers. We estimate investors waiting for an eventual take out can expect 15%+ total shareholder return per year to wait (10% EPS growth, 5-6% dividend yield).
Pricing Environment Stable and That’s What Matters for Tobacco Stocks
We believe concerns over potential disruption in the healthy cigarette pricing environment should abate as more cigarette companies send out price increaseletters to the trade. Altria raised prices Friday night by 3-4% across its portfolio and Commonwealth Brands just raised prices Monday afternoon. We expect Lorillard and Reynolds American to follow shortly.
Valuation: Raising Target to $100 Based on Blended Methodology
We are raising our target to $100 from $80 based on adjustments to our blended valuation, which includes: 1) M&A ($108)—weighted 50%, 2) DCF Value ($90), 3) Dividend Yield ($93), and Relative PE vs. Food ($85)—the other 50%.
- Goldman Sachs reiterates their Buy rating on LO shares and views yesterdays’s selloff as an attractive opportunity for longer-minded investors to buy a premier US tobacco company with healthy fundamentals and significant balance sheet optionality at a compelling valuation. First, while reported shipments fell 6.3%, underlying shipments were only down 1%, relatively in-line with our expectations. Second, LO pricing remains healthy, as the lowernet pricing per pack relative to our estimate is a primarily a function of negative mix. Maverick grew almost 40% in 3Q09 versus Newport shipment down 10%. Third, Newport is still gaining market share and has seen relatively limited impact from new Menthol brands. Fourth, LO repurchased over $350 mn shares in 3Q09, which suggests the company could repurchase at least $1 bn of shares annually over the next few years. Lastly, valuation is increasingly attractive with shares at 11.6X 2010 P/E (80% relative), well below historical averages closer to 14X P/E (95% relative) despite a healthy 10% EPS growth in 2010.
- Credit Suisse believes that concerns about volume declines and perceived pricing weakness are overdone and consider the stock attractively valued at the current level.
Action: I usually do not like buying on defenses but this time there are a few catalysts that might make it work:
- Morgan Stanley's RTI will bring buying interest today
- Potential for cigarette price increase in the next few days
- LO is a very strong candidate for M&A and once the dust settles, I would expect the speculations to return.
Sum it up and I would expect the shares to be up around 3+% today.
Tuesday, October 27, 2009
Thursday, October 22, 2009
Citrix Systems (NASDAQ:CTXS): Not Good Enough?
Analyst comments following Citrix Systems (NASDAQ:CTXS) results last night leave an impression that the outlook might weight on the shares near-term:
- Credit Suisse says that although revenue results and guidance were relatively in line with expectations and management continued to control expenses to report upside to September quarter operating margin estimates, the company’s operating margin guidance of 75-100 basis points expansion for 2010 fell short of consensus expectations of approximately 200 basis points. The lowered margin guidance relative to expectations reinforces our belief that the company will return to “investment mode” as the economy recovers given management’s commitment to the desktop virtualization market.
- JP Morgan believes the revenue guidance of 8-9% growth implies material contribution from the Desktop Virtualization market, raising the risk of achieving these goals. However, if this growth is realized, it appears to us that the margin guidance is relatively conservative.
- Morgan Stanley believes cons. margins for CY10 are too high as a) VMW is outspending CTXS on VDI—which will drive a CY10 investment cycle, and b) our universe in general will see discretionary spending return in a recovery. Mgmt. prudently guided margins below cons. for Q4, and for 75-100 bps of expansion in CY10, vs. the 170 bps in consensus and our 80bps. While this will weigh on the stock near term, it removes the margin overhang.
- Merrill Lynch lists reasons to stay cautious:
1. CY10 not a ‘cyclical’ rebound. Investors view CTXS as a growth cyclical leveraged to an economic rebound. Hence the premium multiple. But CY10 outlook implies license and total rev of +5% and +9% y/y, not that faster vs. mature companies like MSFT, ORCL, and SY trading at a lower valuation.
2. Core XenApp business implies a tepid growth. For CY10, we expect Networking and Online to grow at 8% and 18%. Moreover, we model XenDesktop to grow 126% to $65mn albeit off a small base of $29mn. On the flip side, this implies core XenApp growth of only 2%. Moreover, starting 1Q10, Citrix will report XenApp and XenDesktop as a single segment, making it hard for investors to discern the underlying growth rate for core XenApp as well as XenDesktop (a key underpinning for the premium stock valuation).
3. Near term disruption from XenDesktop Trade-up. A Trade-up program starting 4Q would allow current XenApp customers to move to a super set XenDesktop for an upgrade fee. But XenDesktop charges on a per user or per device model vs. XenApp that allows concurrent users, which could imply higher costs for some customers, potentially causing NT disruption.
There were many positives as well and JMP Securities lists them:
1) While we still think it’s early in the ramp of desktop virtualization, the company reported 10 large desktop deals over 2,000 seats each, (compared to ten 1,000-seat deals last quarter), a positive indicator for this potentially large market, in our opinion. 2) Deferred revenue grew to $556 million (vs. our $541 million estimate), up from $481 million last year, resulting from the strength in the subscription business. 3) From a geographic perspective, the company noted ongoing improvements in the Americas and Asia with particular strength in Japan. 4) The company’s Online Services business(its SaaS offering) posted solid growth, up 21% for the year vs. our up 18% estimate driven by customers looking to reduce travel and increase productivity through tools like web conferencing. 5) The company recorded 12 deals over $1 million (five of which were XenApp, three were XenApp/XenDesktop combos, and four Netscaler) compared to seven deals last quarter, an encouraging trend, in our opinion.
Action: This is a deja vu for me with PLCM yesterday serving as an example. Both co's had decent quarters with in-line revenue and EPS helped by cost cuts.. however, they both seem to go into spending mode to fight off bigger, better-equipped competitors. This extra spending pushes operating margin leverage further away, which scares off some of the investors.
Basically it is yet another case of share vs margin.
The commentary is not as scary as it was with PLCM yesterday, so I don't expect the same kind of punishment for the stock. Still, I would expect the shares to fall more than the 4% decline in after hours trading.. say around 8-10%. That means anything above $39.5 is a short.
Tuesday, October 20, 2009
Overseas Shipholding Group (NYSE:OSG): Downgraded to Underweight at JP Morgan
JP Morgan is downgrading shares of Overseas Shipholding Group (NYSE:OSG) to Underweight from Neutral and lowering price target to $24 from $38:
We are downgrading OSG to Underweight (from Neutral) as the recent share-price strength has disconnected from the company’s deteriorating near-term earnings outlook resulting in an all-time high valuation for the shares. Specifically, based on our new tanker rate estimates for 2H09 and 2010 (detailed in our industry note published today), we now expect OSG to post losses for 3Q09, 4Q09, and full-year 2010, and the stock’s estimated 2010 EV/EBITDA multiple of 15.1 times represents an all-time high, the highest multiple in the peer group, and a 42% premium to the industry average. All told, after months of outperformance, we look for the shares to underperform the peer group through the earnings trough we forecast for 2010.
Lowering EPS estimates and now forecasting losses through 2010. We are lowering our tanker spot rate forecasts through 2010 and based on these new estimates, we now project that OSG will post a loss in 3Q09 and 4Q09 as well as in full-year 2010. OSG’s increasing spot-market exposure, particularly as time-charter and FFA hedges expire in 2010, exacerbates the magnitude of the EPS declines associated with our new rate forecasts, with OSG having close to the highest earnings leverage within the tanker peer group. We now estimate that OSG will post 3Q09, 4Q09, and 2010 per-share losses of $1.03 (versus our prior forecast of a $1.14 loss), $1.41 (versus a $0.01 profit), and $1.90 (versus a $0.43 profit), respectively.
Share-price strength far too early for a recovery trade. OSG shares have increased by 23% month-to-date (versus a 4% appreciation of the S&P 500), easily outperforming the tanker peer group and the next strongest stock (FRO). We believe much of the share-price strength can be attributed to a shift to commodity-focused stocks as the US$ weakens and oil prices increase. In addition, OSG’s heavy short interest likely exacerbates positive price moves. However, we think the optimism in the shares also likely reflecting a global economic recovery ignores the current oversupply situation in the tanker industry which is likely to materially lag a rebound in demand and the estimated pressure that this overcapacity is likely to have on earnings and cash flow through 2010.
Valuation unappealing; lowering price target. Based on our new 2010 forecasts, OSG is now trading at a 2010E EV/EBITDA of 15.3 times, which represents an industry-high multiple and a 42% premium to the peer group average. We are also lowering our December 2010 price target to $24 (from $38) to reflect our new 2010 rate and earnings forecasts.
Action: This is actually a sector call as JP Morgan is updating estimates on all of the Oil Tankers, but OSG stood out for me. There are some other rating changes as well:
- Tsakos Energy Navigation (NYSE:TNP) to Underweight form Neutral with tgt to $13 from $20
- Capital Product Partners (NASDAQ:CPLP) to Neutral from Overweight
- Knightsbridge Tankers (NASDAQ:VLCCF) to Overweight from Neutral with tgt up to $20 from $18
TNP is also quite strong call, but the other stocks are too thin for my taste.
There are some good reasons to like this call:
- EPS estimates cut way below the Street. In fact, for 4Q09 JP Morgan's EPS est goes from Street high to Street low
- Price target lowered way below current share price
- Overall bearishness of the call
- Stock price at the 52-week high
However, I don't know if this is enough. Charts like this do not break to the downside without a very good reason. This downgrade gives a good reason, but might not be enough..
So how to play this? In current market stocks like OSG and TNP fall only when there is strong selling pressure. When the volume fades, stocks tend to bounce quickly. So that's what I would be looking for - as long as the stocks are sold on good volume, I would like to be short. Once the volume dries up, I would cover. Not the best plan, but wouldn't want to get caught by a nasty squeeze.
We are downgrading OSG to Underweight (from Neutral) as the recent share-price strength has disconnected from the company’s deteriorating near-term earnings outlook resulting in an all-time high valuation for the shares. Specifically, based on our new tanker rate estimates for 2H09 and 2010 (detailed in our industry note published today), we now expect OSG to post losses for 3Q09, 4Q09, and full-year 2010, and the stock’s estimated 2010 EV/EBITDA multiple of 15.1 times represents an all-time high, the highest multiple in the peer group, and a 42% premium to the industry average. All told, after months of outperformance, we look for the shares to underperform the peer group through the earnings trough we forecast for 2010.
Lowering EPS estimates and now forecasting losses through 2010. We are lowering our tanker spot rate forecasts through 2010 and based on these new estimates, we now project that OSG will post a loss in 3Q09 and 4Q09 as well as in full-year 2010. OSG’s increasing spot-market exposure, particularly as time-charter and FFA hedges expire in 2010, exacerbates the magnitude of the EPS declines associated with our new rate forecasts, with OSG having close to the highest earnings leverage within the tanker peer group. We now estimate that OSG will post 3Q09, 4Q09, and 2010 per-share losses of $1.03 (versus our prior forecast of a $1.14 loss), $1.41 (versus a $0.01 profit), and $1.90 (versus a $0.43 profit), respectively.
Share-price strength far too early for a recovery trade. OSG shares have increased by 23% month-to-date (versus a 4% appreciation of the S&P 500), easily outperforming the tanker peer group and the next strongest stock (FRO). We believe much of the share-price strength can be attributed to a shift to commodity-focused stocks as the US$ weakens and oil prices increase. In addition, OSG’s heavy short interest likely exacerbates positive price moves. However, we think the optimism in the shares also likely reflecting a global economic recovery ignores the current oversupply situation in the tanker industry which is likely to materially lag a rebound in demand and the estimated pressure that this overcapacity is likely to have on earnings and cash flow through 2010.
Valuation unappealing; lowering price target. Based on our new 2010 forecasts, OSG is now trading at a 2010E EV/EBITDA of 15.3 times, which represents an industry-high multiple and a 42% premium to the peer group average. We are also lowering our December 2010 price target to $24 (from $38) to reflect our new 2010 rate and earnings forecasts.
Action: This is actually a sector call as JP Morgan is updating estimates on all of the Oil Tankers, but OSG stood out for me. There are some other rating changes as well:
- Tsakos Energy Navigation (NYSE:TNP) to Underweight form Neutral with tgt to $13 from $20
- Capital Product Partners (NASDAQ:CPLP) to Neutral from Overweight
- Knightsbridge Tankers (NASDAQ:VLCCF) to Overweight from Neutral with tgt up to $20 from $18
TNP is also quite strong call, but the other stocks are too thin for my taste.
There are some good reasons to like this call:
- EPS estimates cut way below the Street. In fact, for 4Q09 JP Morgan's EPS est goes from Street high to Street low
- Price target lowered way below current share price
- Overall bearishness of the call
- Stock price at the 52-week high
However, I don't know if this is enough. Charts like this do not break to the downside without a very good reason. This downgrade gives a good reason, but might not be enough..
So how to play this? In current market stocks like OSG and TNP fall only when there is strong selling pressure. When the volume fades, stocks tend to bounce quickly. So that's what I would be looking for - as long as the stocks are sold on good volume, I would like to be short. Once the volume dries up, I would cover. Not the best plan, but wouldn't want to get caught by a nasty squeeze.
Thursday, October 15, 2009
Donaldson (NYSE:DCI): The Forgotten Blue Chip - Credit Suisse
Credit Suisse is upgrading Donaldson (NYSE:DCI) to Outperform from Underperform and raising price target to $41 from $28:
We are upgrading shares of Donaldson to Outperform from Underperform. Our upgrade is based on 1) upside from the engine aftermarket business driven by a bottoming out of utilization rates which the market is not baking in, 2) long term opportunity to increase aftermarket penetration rate, and 3) consensus forecasts for 2010 and 2011 appear low. The Credit Suisse Investment Policy Committee (IPC) is adding Donaldson to the U.S. Focus List.
Top-quality blue-chip company levered to a cyclical recovery. Donaldson has grown earnings and consistently earned high teens return on capital for 19 years in a row before this downturn and the extent to which they can benefit from a cyclical recovery is underappreciated. Global IP which is bottoming out has had a 0.7+ correlation to overall company sales. We believe the track record of earnings growth returns in FY2011 with earnings power of close to $3.00 by FY 2013.
2010 and 2011 consensus too low. We believe over 40% of Donaldson’s portfolio is early cycle (a number not many know) where signs of a recovery could lead to faster growth combined with a low US dollar which likely helps earnings come in higher than expectations.
We are raising our target price to $41 from $28 based on our FY 2013 EPS estimate of $2.80 at a 18.5x P/E multiple discounted back. The 18.5x P/E multiple is consistent with what DCI shares have traded at for almost a decade. The stock has lagged more cyclical industrial names, although it should see double-digit top-line growth and close to 2x that in earnings in a recovery.
Action: So many reasons to like this upgrade:
- Double upgrade from Underperform to Outperform is usually enough to move stocks on its own
- Addition to the Focus List means Credit Suisse is out there buying the stock
- Stock has been weak lately due to lackluster FY10 guidance given on 1st of September.. Note that Credit Suisse estimates are near the high end of the guidance range and also close to the original consensus prior to the guidance. This suggests CS views this guidance as conservative and expects upside. As CS points out, DCI might be more early cycle than the market gives it credit for and mgmt team of DCI is rather conservative.
- Stocks of some of the biggest customers (Caterpillar, Deere) are right at the highs
DCI isn't a stock that would make a huge gap up.. and even if some enthusiastic pre-market trader drives it too high, it will probably offer decent entry levels after the open - around 2..2.5% above yesterday's close, maybe even lower if the market stays red. That's where I would be buying as I expect to see shares up at least 5% at some point today.
We are upgrading shares of Donaldson to Outperform from Underperform. Our upgrade is based on 1) upside from the engine aftermarket business driven by a bottoming out of utilization rates which the market is not baking in, 2) long term opportunity to increase aftermarket penetration rate, and 3) consensus forecasts for 2010 and 2011 appear low. The Credit Suisse Investment Policy Committee (IPC) is adding Donaldson to the U.S. Focus List.
Top-quality blue-chip company levered to a cyclical recovery. Donaldson has grown earnings and consistently earned high teens return on capital for 19 years in a row before this downturn and the extent to which they can benefit from a cyclical recovery is underappreciated. Global IP which is bottoming out has had a 0.7+ correlation to overall company sales. We believe the track record of earnings growth returns in FY2011 with earnings power of close to $3.00 by FY 2013.
2010 and 2011 consensus too low. We believe over 40% of Donaldson’s portfolio is early cycle (a number not many know) where signs of a recovery could lead to faster growth combined with a low US dollar which likely helps earnings come in higher than expectations.
We are raising our target price to $41 from $28 based on our FY 2013 EPS estimate of $2.80 at a 18.5x P/E multiple discounted back. The 18.5x P/E multiple is consistent with what DCI shares have traded at for almost a decade. The stock has lagged more cyclical industrial names, although it should see double-digit top-line growth and close to 2x that in earnings in a recovery.
Action: So many reasons to like this upgrade:
- Double upgrade from Underperform to Outperform is usually enough to move stocks on its own
- Addition to the Focus List means Credit Suisse is out there buying the stock
- Stock has been weak lately due to lackluster FY10 guidance given on 1st of September.. Note that Credit Suisse estimates are near the high end of the guidance range and also close to the original consensus prior to the guidance. This suggests CS views this guidance as conservative and expects upside. As CS points out, DCI might be more early cycle than the market gives it credit for and mgmt team of DCI is rather conservative.
- Stocks of some of the biggest customers (Caterpillar, Deere) are right at the highs
DCI isn't a stock that would make a huge gap up.. and even if some enthusiastic pre-market trader drives it too high, it will probably offer decent entry levels after the open - around 2..2.5% above yesterday's close, maybe even lower if the market stays red. That's where I would be buying as I expect to see shares up at least 5% at some point today.
Tuesday, October 13, 2009
Synaptics (NASDAQ:SYNA): Downgraded to Underperform at Jefferies
Jefferies is downgrading Synaptics (NASDAQ:SYNA) to Underperform from Hold and lowering price target to $16 from $26:
Downgrading to Underperform (from Hold) after a round of channel checks into the capacitive touch screen market. We believe CQ4 orders are tracking below guidance with stronger headwinds in 2010 due to share loss and a negative mix shift to modules likely driving another leg down in the stock.
- Capacitive touch screen market likely larger our previous expectations with a faster shift to chips from modules. Our checks suggest the capacitive touch screen market continues to expand and is likely larger than our previous expectations as (1) handset OEMs push touch capabilities into even low-end phones and (2) handset OEMs move more quickly to capacitive screens. We have increased our capacitive touch screen forecast to 84MM (from 50MM) in CY09 and 188MM (from 100MM) in CY10 (See Exhibit 1). Our checks suggest the market is moving faster to chip solutions (from modules) likely driving additional share loss and ASP compression for Synaptics.
- Downgrading to Underperform - Cracks in fundamentals only getting started. We are downgrading Synaptics to Underperform (from Hold) as our checks suggest its business has deteriorated further since our downgrade in late July. We believe orders for its December quarter are tracking in the $130-135MM (+10-15% Q/Q) range, below implied guidance of $140MM, likely driven by inventory issues at LG and a delay in the ramp of its two high profile wins at Nokia (X6) and RIM (Storm 2). Looking into 2010, our checks suggest stronger headwinds due to (1) a faster mix shift to lower ASP module solutions (chip ASP of $1-1.50 vs. module of $4-7), particularly at LG which had been the last module holdout and (2) increased competition and share loss at LG, HTC, and RIM (see Exhibit 2). Despite our expectations for significant unit growth in the capacitive touch market of over 100+% Y/Y in 2010, we believe these headwinds cause Synaptics' mobile business to be only flat Y/Y (units up 25-30% Y/Y with blended ASPs down 20%) and we have reduced our estimates.
- Expect inline CQ3 results with CQ4 guidance below. We believe CQ3 results will be roughly inline with our est and St. of $117MM/$0.41 yet believe CQ4 guidance will be below St. of $139MM/$0.60. We lowered our CQ4 est to $132MM/$0.53 and decreased our St. low CY10 est to $476MM/$1.63 vs. St. of $560MM/$2.30 to reflect our reduced mobile estimates.
Action: This is a strong call that should be read by all the shareholders of Synaptics. Pressure on ASPs and margin is neverever a good sign for a technology company and is almost always followed by share price decline. Even the increase in units doesn't help due to shift to module solutions that have way lower ASPs.
Basically the stock is in nobody's land. It isn't a growth story, it isn't a margin expansion story, it isn't a share gain story.. so basically there aren't many logical owners of the shares. One might be tempted to see some valuation support but the future earnings are very difficult to predict.
The shares already saw a huge decline after the problems first came evident with guidance for F1Q10 & FY10 but there should be more downside ahead. I would expect the shares to decline at least 5% today, possibly even 7+%. So if the market allows you to get fills for shorts at around 3% below yesterday's close, these should be worth taking.
Downgrading to Underperform (from Hold) after a round of channel checks into the capacitive touch screen market. We believe CQ4 orders are tracking below guidance with stronger headwinds in 2010 due to share loss and a negative mix shift to modules likely driving another leg down in the stock.
- Capacitive touch screen market likely larger our previous expectations with a faster shift to chips from modules. Our checks suggest the capacitive touch screen market continues to expand and is likely larger than our previous expectations as (1) handset OEMs push touch capabilities into even low-end phones and (2) handset OEMs move more quickly to capacitive screens. We have increased our capacitive touch screen forecast to 84MM (from 50MM) in CY09 and 188MM (from 100MM) in CY10 (See Exhibit 1). Our checks suggest the market is moving faster to chip solutions (from modules) likely driving additional share loss and ASP compression for Synaptics.
- Downgrading to Underperform - Cracks in fundamentals only getting started. We are downgrading Synaptics to Underperform (from Hold) as our checks suggest its business has deteriorated further since our downgrade in late July. We believe orders for its December quarter are tracking in the $130-135MM (+10-15% Q/Q) range, below implied guidance of $140MM, likely driven by inventory issues at LG and a delay in the ramp of its two high profile wins at Nokia (X6) and RIM (Storm 2). Looking into 2010, our checks suggest stronger headwinds due to (1) a faster mix shift to lower ASP module solutions (chip ASP of $1-1.50 vs. module of $4-7), particularly at LG which had been the last module holdout and (2) increased competition and share loss at LG, HTC, and RIM (see Exhibit 2). Despite our expectations for significant unit growth in the capacitive touch market of over 100+% Y/Y in 2010, we believe these headwinds cause Synaptics' mobile business to be only flat Y/Y (units up 25-30% Y/Y with blended ASPs down 20%) and we have reduced our estimates.
- Expect inline CQ3 results with CQ4 guidance below. We believe CQ3 results will be roughly inline with our est and St. of $117MM/$0.41 yet believe CQ4 guidance will be below St. of $139MM/$0.60. We lowered our CQ4 est to $132MM/$0.53 and decreased our St. low CY10 est to $476MM/$1.63 vs. St. of $560MM/$2.30 to reflect our reduced mobile estimates.
Action: This is a strong call that should be read by all the shareholders of Synaptics. Pressure on ASPs and margin is neverever a good sign for a technology company and is almost always followed by share price decline. Even the increase in units doesn't help due to shift to module solutions that have way lower ASPs.
Basically the stock is in nobody's land. It isn't a growth story, it isn't a margin expansion story, it isn't a share gain story.. so basically there aren't many logical owners of the shares. One might be tempted to see some valuation support but the future earnings are very difficult to predict.
The shares already saw a huge decline after the problems first came evident with guidance for F1Q10 & FY10 but there should be more downside ahead. I would expect the shares to decline at least 5% today, possibly even 7+%. So if the market allows you to get fills for shorts at around 3% below yesterday's close, these should be worth taking.
Friday, October 9, 2009
Ralcorp (NYSE:RAH): Downgraded at Credit Suisse
Credit Suisse is lowering their rating on Ralcorp (NYSE:RAH):
We are downgrading Ralcorp from Outperform to Neutral and lowering our FY 10 EPS forecast from $5.10 to $4.75. We have reduced our target price from $75/share to $64/share based on a P/E multiple of 12.5x against our FY 11 EPS forecast. Our view that the company was well-positioned to benefit from private label share gains and from earnings accretion from the acquired Post cereal business has not played out particularly well.
We believe the company will need to make a significant investment in promotional spending on Post to regain the market share it lost this year to aggressive competitors. Over the past 12 weeks, Post's market share is now at 11.2%, down 260 bps compared to a year ago. To make matters more challenging, we find that the growth rate of private label food in general is slowing as the economic shock that drove consumer trial has now faded.
We expect downward earnings revisions heading into the 4Q earnings release on November 10 as analysts recognize the high sensitivity of RAH’s EPS to Post’s operating margin. Every 100 basis points of margin erosion in represents $0.13/share to RAH. If FY 10 is truly going to be a reinvestment year for Post, then our Post operating margin estimate of 21% (down 100 bps) in FY 10 may be too high.
With the stock trading at such a big valuation discount, it certainly feels like we are getting off this stock too early. Indeed, if we put a hefty valuation on the private label business akin to TreeHouse’s (8.8x EBITDA), then the market is valuing the Post business at only 4.4x EBITDA. However, we can’t justify supporting an Outperform rating until we get more comfort that management has accurately diagnosed the problems that Post is facing and has developed a compelling strategy for solving them. So far, we have not heard or seen enough proof.
Firm is also removing stock the U.S. Focus List.
Action: Somewhat mixed feelings on this one. There are some good arguments supporting a rather hefty sell-off today and in the coming days:
- Credit Suisse FY10 EPS est is going from Street high to Street low. How often do you see this kind of change in view? Once a year? At the moment I cannot recall anything else like that.
- Comments regarding promotional activity and margins do not sound good at all. It is a typical case of margin vs market share and co hasn't performed that well in that area recently.
- Removal from Focus List should add shares that need to be sold.
However, the stock is not too expensive, which might limit the downside. Also, the stock has been rather weak since mid-September and stocks have had a tendency to shed off anything negative recently.
I would expect to see around 2 points of downside today, maybe even more. The stock will probably gap down a point or so, leaving another point for early shorts.
We are downgrading Ralcorp from Outperform to Neutral and lowering our FY 10 EPS forecast from $5.10 to $4.75. We have reduced our target price from $75/share to $64/share based on a P/E multiple of 12.5x against our FY 11 EPS forecast. Our view that the company was well-positioned to benefit from private label share gains and from earnings accretion from the acquired Post cereal business has not played out particularly well.
We believe the company will need to make a significant investment in promotional spending on Post to regain the market share it lost this year to aggressive competitors. Over the past 12 weeks, Post's market share is now at 11.2%, down 260 bps compared to a year ago. To make matters more challenging, we find that the growth rate of private label food in general is slowing as the economic shock that drove consumer trial has now faded.
We expect downward earnings revisions heading into the 4Q earnings release on November 10 as analysts recognize the high sensitivity of RAH’s EPS to Post’s operating margin. Every 100 basis points of margin erosion in represents $0.13/share to RAH. If FY 10 is truly going to be a reinvestment year for Post, then our Post operating margin estimate of 21% (down 100 bps) in FY 10 may be too high.
With the stock trading at such a big valuation discount, it certainly feels like we are getting off this stock too early. Indeed, if we put a hefty valuation on the private label business akin to TreeHouse’s (8.8x EBITDA), then the market is valuing the Post business at only 4.4x EBITDA. However, we can’t justify supporting an Outperform rating until we get more comfort that management has accurately diagnosed the problems that Post is facing and has developed a compelling strategy for solving them. So far, we have not heard or seen enough proof.
Firm is also removing stock the U.S. Focus List.
Action: Somewhat mixed feelings on this one. There are some good arguments supporting a rather hefty sell-off today and in the coming days:
- Credit Suisse FY10 EPS est is going from Street high to Street low. How often do you see this kind of change in view? Once a year? At the moment I cannot recall anything else like that.
- Comments regarding promotional activity and margins do not sound good at all. It is a typical case of margin vs market share and co hasn't performed that well in that area recently.
- Removal from Focus List should add shares that need to be sold.
However, the stock is not too expensive, which might limit the downside. Also, the stock has been rather weak since mid-September and stocks have had a tendency to shed off anything negative recently.
I would expect to see around 2 points of downside today, maybe even more. The stock will probably gap down a point or so, leaving another point for early shorts.
Savient Pharmaceuticals (NASDAQ:SVNT): Upgraded to Outperform at Oppenheimer
Oppenheimer is raising their rating on Savient Pharmaceuticals (NASDAQ:SVNT) to Outperform from Perform:
We are upgrading SVNT to Outperform from Perform based upon increasing confidence in Krystexxa's approval and commercial prospects, and a more attractive valuation following the recent stock pullback. Importantly, (1) The announcement of a proposed offering of up to 4.6M shares on 10/7 drove SVNT down ~12%, which we feel is unwarranted and believe presents an attractive entry point. (2) We continue to believe SVNT will adequately address outstanding manufacturing issues and will re-submit data in 1Q10. (3) We are confident in Krystexxa's approval ~3Q10 and believe any incremental short-term (1-2-month) delays are not likely to hinder the drug's long-term prospects. (4) We moderately increase our Krystexxa sales estimates and establish a $17 price target.
Stock Move Overdone; Takeout May Be Possible. We believe SVNT's recent financing strengthens the balance sheet and should fund SVNT through late 2011, a clear positive. We do not believe the raise in any way signals lack of partnership or acquisition interest. On the contrary, we believe an acquisition following FDA approval is certainly possible.
Krystexxa De-risked; Manufacturing Approach Likely To Succeed. We continue to believe SVNT will adequately resolve manufacturing concerns. We expect SVNT to re-submit data in 1Q10 addressing 1) CMC issues, 2) labeling, and 3) REMS data. Importantly, while Krystexxa's label may include a black box warning, we do not believe this will impact its commercial prospects.
3Q10 Approval Expected For Krystexxa. We believe 3Q10 approval is likely, even though 6-month stability data will be submitted close to the new PDUFA date. Given the severity of the refractory gout population, we do not believe FDA wishes to delay approval. Also, any additional delay would be immaterial to SVNT's valuation in our view.
Market Opportunity May Be Underestimated, Introducing PT of $17. We have modestly increased our U.S. and ex-U.S. Krystexxa sales estimates based upon our assumption that a higher percentage of patients with gout tophi are likely to receive Krystexxa. Our increase in worldwide Krystexxa sales estimates results in our PT of $17.
Action: First of all, note that SVNT 4.3M share secondary was priced at $13.29 last night, right at yesterday's close instead of usual discount. Yes, the stock had already tanked yesterday, but still, it is a strong sign that the secondary was very well received.
Also, take a look at how HGSI acted in back in July after secondary. There was so strong demand that the shares traded way above secondary pricing the next day. Might be the case here as well.
The only question is how much to pay up? The shares were down 12% yesterday and I expect this decline to be reversed today. Still, greedy as I am, I wouldn't like to pay above $13.8 or so. More agressive accounts might want to go higher to get more size.
Oh btw, I like the upgrade by Oppenheimer as well. It has all the ingredients of a good call and without the secondary it might be worth around 5% of upside by itself. Now it just adds fuel to the fire.
We are upgrading SVNT to Outperform from Perform based upon increasing confidence in Krystexxa's approval and commercial prospects, and a more attractive valuation following the recent stock pullback. Importantly, (1) The announcement of a proposed offering of up to 4.6M shares on 10/7 drove SVNT down ~12%, which we feel is unwarranted and believe presents an attractive entry point. (2) We continue to believe SVNT will adequately address outstanding manufacturing issues and will re-submit data in 1Q10. (3) We are confident in Krystexxa's approval ~3Q10 and believe any incremental short-term (1-2-month) delays are not likely to hinder the drug's long-term prospects. (4) We moderately increase our Krystexxa sales estimates and establish a $17 price target.
Stock Move Overdone; Takeout May Be Possible. We believe SVNT's recent financing strengthens the balance sheet and should fund SVNT through late 2011, a clear positive. We do not believe the raise in any way signals lack of partnership or acquisition interest. On the contrary, we believe an acquisition following FDA approval is certainly possible.
Krystexxa De-risked; Manufacturing Approach Likely To Succeed. We continue to believe SVNT will adequately resolve manufacturing concerns. We expect SVNT to re-submit data in 1Q10 addressing 1) CMC issues, 2) labeling, and 3) REMS data. Importantly, while Krystexxa's label may include a black box warning, we do not believe this will impact its commercial prospects.
3Q10 Approval Expected For Krystexxa. We believe 3Q10 approval is likely, even though 6-month stability data will be submitted close to the new PDUFA date. Given the severity of the refractory gout population, we do not believe FDA wishes to delay approval. Also, any additional delay would be immaterial to SVNT's valuation in our view.
Market Opportunity May Be Underestimated, Introducing PT of $17. We have modestly increased our U.S. and ex-U.S. Krystexxa sales estimates based upon our assumption that a higher percentage of patients with gout tophi are likely to receive Krystexxa. Our increase in worldwide Krystexxa sales estimates results in our PT of $17.
Action: First of all, note that SVNT 4.3M share secondary was priced at $13.29 last night, right at yesterday's close instead of usual discount. Yes, the stock had already tanked yesterday, but still, it is a strong sign that the secondary was very well received.
Also, take a look at how HGSI acted in back in July after secondary. There was so strong demand that the shares traded way above secondary pricing the next day. Might be the case here as well.
The only question is how much to pay up? The shares were down 12% yesterday and I expect this decline to be reversed today. Still, greedy as I am, I wouldn't like to pay above $13.8 or so. More agressive accounts might want to go higher to get more size.
Oh btw, I like the upgrade by Oppenheimer as well. It has all the ingredients of a good call and without the secondary it might be worth around 5% of upside by itself. Now it just adds fuel to the fire.
Monday, October 5, 2009
General Dynamics (NYSE:GD): Upgraded by Morgan Stanley
Morgan Stanley is upgrading General Dynamics (NYSE:GD) to Overweight from Equal-Weight and raising price tgt to $80 from $52:
It’s time to buy GD, drivers could take shares beyond our $80 PT. GD’s current valuation prices in an extended trough, whereas we project a Gulfstream recovery starting in 2011. Anecdotal evidence from industry contacts, a pickup in used jet sales (leading indicator of a turn) and some new orders indicate the upper end bizjet demand is thawing, warranting a higher aero multiple for Gulfstream. Although early, GD offers investors an option on the Chinese business jet market that could drive substantial incremental demand. Weeks ago the Chinese government announced changes to open up its airspace for business jets, effectively unlocking the Chinese market (only 100 or so business jets in operation in China today). Gulfstream would be a lead beneficiary of a sea change in Chinese bizjet demand, which could drive a re-rating for Gulfstream.
Where We Differ: GD’s valuation reflects enduring concerns about Gulfstream’s outlook, but improving demand internationally heightens confidence in deliveries, especially in 2011-12 and we’re raising our EPS estimates. GD trades in-line with defense peers at 9X 2011 EPS, implying an equivalent 9X P/E on the Gulfstream business. But if the business jet recovery plays out, Gulfstream could more rightfully enjoy a mid/high-teens multiple (adds $13 - $17 per share) excl. China upside, pointing to $80 or higher.
Revising Industry View to In-Line: Defense is down 1% YTD (15% underperformance rel. to S&P), and has sizably missed the S&P rally this year. But we believe that a bearish view on Defense is now consensus and has more or less fully played out.
Action: I really like this call. Not much is expected from biz-jets so Morgan Stanley's comments stand out. And China as a source for upside - sounds sexy, doesn't it?
This call will definitely generate some buying interest. I expect the shares to trade to at least $65 today, maybe even making a new 52-week high this week.
If GD goes too high too soon then TXT represents a good secondary play.
It’s time to buy GD, drivers could take shares beyond our $80 PT. GD’s current valuation prices in an extended trough, whereas we project a Gulfstream recovery starting in 2011. Anecdotal evidence from industry contacts, a pickup in used jet sales (leading indicator of a turn) and some new orders indicate the upper end bizjet demand is thawing, warranting a higher aero multiple for Gulfstream. Although early, GD offers investors an option on the Chinese business jet market that could drive substantial incremental demand. Weeks ago the Chinese government announced changes to open up its airspace for business jets, effectively unlocking the Chinese market (only 100 or so business jets in operation in China today). Gulfstream would be a lead beneficiary of a sea change in Chinese bizjet demand, which could drive a re-rating for Gulfstream.
Where We Differ: GD’s valuation reflects enduring concerns about Gulfstream’s outlook, but improving demand internationally heightens confidence in deliveries, especially in 2011-12 and we’re raising our EPS estimates. GD trades in-line with defense peers at 9X 2011 EPS, implying an equivalent 9X P/E on the Gulfstream business. But if the business jet recovery plays out, Gulfstream could more rightfully enjoy a mid/high-teens multiple (adds $13 - $17 per share) excl. China upside, pointing to $80 or higher.
Revising Industry View to In-Line: Defense is down 1% YTD (15% underperformance rel. to S&P), and has sizably missed the S&P rally this year. But we believe that a bearish view on Defense is now consensus and has more or less fully played out.
Action: I really like this call. Not much is expected from biz-jets so Morgan Stanley's comments stand out. And China as a source for upside - sounds sexy, doesn't it?
This call will definitely generate some buying interest. I expect the shares to trade to at least $65 today, maybe even making a new 52-week high this week.
If GD goes too high too soon then TXT represents a good secondary play.
Thursday, October 1, 2009
Leap Wireless (NASDAQ:LEAP) & MetroPCS (NYSE:PCS): Downgraded at JP Morgan
JP Morgan is downgrading shares of Leap Wireless (NASDAQ:LEAP) and MetroPCS (NYSE:PCS):
We are downgrading Leap Wireless and MetroPCS to Neutral from Overweight. We have become increasingly concerned with wireless fundamentals as the industry faces secular challenges, with high penetration and heavy competition causing downward movement on price and increased acquisition costs. We believe Leap and Metro have been forced to operate more and more defensively, and we expect to see additional ARPU erosion over time while long-term margin guidance could be challenging. ˇ
Competitive landscape poses challenges. Recent months have brought a slew of competitive announcements in the wireless industry, particularly at the low end from Tracfone and Sprint’s Boost Unlimited. Leap and MetroPCS, we believe in large part as a reaction to these new competitors, began offering additional features into existing price points in early August, effectively lowering pricing. Metro added to these features just yesterday, more than doubling roaming coverage. We are expecting additional competitors over time as well. For example, AT&T recently noted a prepaid trial it is running in a few markets; though at a large premium, we believe price reductions could come should AT&T see a market opportunity. We could also see T-Mobile, a victim of Leap, Metro, and Boost’s success over the past several quarters, become more aggressive.
Profitability at risk. Both Leap and Metro guide to long-term margins in the mid-40% range. However, we believe the carriers could run into challenges achieving that level of profitability amid recent ARPU compression and further potential pricing pressures. ARPU is now expected to dip below $40 in the near term and could fall further, following recent pricing changes. Both companies have demonstrated an ability to get margins to the 40% level in mature markets thus far; however, that was achieved with ARPU at higher levels. In addition to using price as a lever, Leap and Metro may need to increase acquisition costs to win market share. As a result, we are cautious on both companies' ability to continue scaling effectively over the long-run.
Changes to expectations. We expect seasonal pressures to impact 3Q09 results for Leap and Metro, though new price plans launched in early August could mitigate some of the impact. Nonetheless, we are reducing our net add estimates for both companies given our expectations for seasonality to outweigh new promotions. We believe ARPU will continue to trend downward, dipping below $40, and we expect it could fall further as customers transition to the new plans. Our estimate changes drive modest changes to EBITDA for 3Q09. However, we are making more significant changes to 2010 estimates, reducing our net add estimates as we expect competition to hinder growth.
Potential near-term upside likely to be short-lived. Both companies are entering a seasonally stronger period as 4Q and 1Q results typically benefit from the holiday selling season as well as tax refunds, and we could see shares outperform, although we believe that is a widely held view. Despite potential near-term outperformance, we are very cautious on long-term fundamentals. We are adjusting our price target for MetroPCS to $10 from $11.
Action: While this call contains nothing that's not already known by the market, it is strong enough to generate some selling pressure today. Both stocks are great trading instruments so I would expect traders to jump on board as well, trying to push the shares lower. LEAP & PCS both should be good shorts at the current pre-mkt levels ($19.30 and 9.08, respectively).
We are downgrading Leap Wireless and MetroPCS to Neutral from Overweight. We have become increasingly concerned with wireless fundamentals as the industry faces secular challenges, with high penetration and heavy competition causing downward movement on price and increased acquisition costs. We believe Leap and Metro have been forced to operate more and more defensively, and we expect to see additional ARPU erosion over time while long-term margin guidance could be challenging. ˇ
Competitive landscape poses challenges. Recent months have brought a slew of competitive announcements in the wireless industry, particularly at the low end from Tracfone and Sprint’s Boost Unlimited. Leap and MetroPCS, we believe in large part as a reaction to these new competitors, began offering additional features into existing price points in early August, effectively lowering pricing. Metro added to these features just yesterday, more than doubling roaming coverage. We are expecting additional competitors over time as well. For example, AT&T recently noted a prepaid trial it is running in a few markets; though at a large premium, we believe price reductions could come should AT&T see a market opportunity. We could also see T-Mobile, a victim of Leap, Metro, and Boost’s success over the past several quarters, become more aggressive.
Profitability at risk. Both Leap and Metro guide to long-term margins in the mid-40% range. However, we believe the carriers could run into challenges achieving that level of profitability amid recent ARPU compression and further potential pricing pressures. ARPU is now expected to dip below $40 in the near term and could fall further, following recent pricing changes. Both companies have demonstrated an ability to get margins to the 40% level in mature markets thus far; however, that was achieved with ARPU at higher levels. In addition to using price as a lever, Leap and Metro may need to increase acquisition costs to win market share. As a result, we are cautious on both companies' ability to continue scaling effectively over the long-run.
Changes to expectations. We expect seasonal pressures to impact 3Q09 results for Leap and Metro, though new price plans launched in early August could mitigate some of the impact. Nonetheless, we are reducing our net add estimates for both companies given our expectations for seasonality to outweigh new promotions. We believe ARPU will continue to trend downward, dipping below $40, and we expect it could fall further as customers transition to the new plans. Our estimate changes drive modest changes to EBITDA for 3Q09. However, we are making more significant changes to 2010 estimates, reducing our net add estimates as we expect competition to hinder growth.
Potential near-term upside likely to be short-lived. Both companies are entering a seasonally stronger period as 4Q and 1Q results typically benefit from the holiday selling season as well as tax refunds, and we could see shares outperform, although we believe that is a widely held view. Despite potential near-term outperformance, we are very cautious on long-term fundamentals. We are adjusting our price target for MetroPCS to $10 from $11.
Action: While this call contains nothing that's not already known by the market, it is strong enough to generate some selling pressure today. Both stocks are great trading instruments so I would expect traders to jump on board as well, trying to push the shares lower. LEAP & PCS both should be good shorts at the current pre-mkt levels ($19.30 and 9.08, respectively).
BMC Software (NYSE:BMC): Downgraded at JP Morgan
JP Morgan is downgrading BMC Software (NYSE:BMC) to Underweight from Neutral:
We are downgrading the shares of BMC to Underweight from Neutral and establishing an end-December 2010 price target of $30, representing 20% downside from current levels (our end-2009 price target was $30, too). The stock appears to imply material improvement in operations, which we view as unlikely. At this point, we believe the risk to the shares outweigh the potential reward.
Great Expectations. While the BladeLogic assets are probably leveraged to improved enterprise software spending, we do not expect much change to the demand for the remaining assets of BMC from historical rates.
Historical Weak Free Cash Flow Likely to Persist. We expect the surprisingly weak long-term free cash flow characteristics of BMC to persist, even with the much anticipated mainframe software renewal cycle that is expected this year.
F10 Guidance Risk. While this is not a call on the quarter, we do believe BMC’s F10 guidance could be at risk since this is predicated on an improving software spending environment. Though non-GAAP EPS will likely at least come in line due to accounting flexibility, cash flow could be at risk (though BMC also enjoys flexibility in reporting operating cash flow).
Not Likely to Be Acquired. We recognize the risk of BMC being acquired but view that as unlikely at these levels or even meaningfully below these levels.
Action: JP Morgan is trying to spoil the bulls' party and I'd say they they will succeed, at least near-term. Comments about weak cash flow and F10 guidance will definitely hurt the stock.
Should be good for at least 3% of downside today. Even more if the market stays red.
We are downgrading the shares of BMC to Underweight from Neutral and establishing an end-December 2010 price target of $30, representing 20% downside from current levels (our end-2009 price target was $30, too). The stock appears to imply material improvement in operations, which we view as unlikely. At this point, we believe the risk to the shares outweigh the potential reward.
Great Expectations. While the BladeLogic assets are probably leveraged to improved enterprise software spending, we do not expect much change to the demand for the remaining assets of BMC from historical rates.
Historical Weak Free Cash Flow Likely to Persist. We expect the surprisingly weak long-term free cash flow characteristics of BMC to persist, even with the much anticipated mainframe software renewal cycle that is expected this year.
F10 Guidance Risk. While this is not a call on the quarter, we do believe BMC’s F10 guidance could be at risk since this is predicated on an improving software spending environment. Though non-GAAP EPS will likely at least come in line due to accounting flexibility, cash flow could be at risk (though BMC also enjoys flexibility in reporting operating cash flow).
Not Likely to Be Acquired. We recognize the risk of BMC being acquired but view that as unlikely at these levels or even meaningfully below these levels.
Action: JP Morgan is trying to spoil the bulls' party and I'd say they they will succeed, at least near-term. Comments about weak cash flow and F10 guidance will definitely hurt the stock.
Should be good for at least 3% of downside today. Even more if the market stays red.
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