Plenty of calls today with my favourite one coming from Morgan Stanley:
We are upgrading Textron to Overweight from Underweight with an 18-month price target of $25. While there is an above-average risk in this “double upgrade,” we believe that the risk-reward outlook for TXT is compelling. This is principally because our assessment of the prospects/value of Textron Finance (TFC), based on a differentiated and detailed analysis, is more favorable than the market’s. If we are right, TXT could be a two year double.
Where we differ: Textron Finance undoubtedly faces significant issues. However, equity and convertible capital raise, coupled with stronger-than-expected cash flow in 2Q, has significantly reduced the risk of a liquidity-driven bear case at TFC and therefore TXT. Most importantly, we believe that TXT excluding TFC should trade at approximately 12-13X 2011e EPS, implying a current negative TFC value of ~$5–7/share. This level of negative value would imply total writedowns of ~35%–45%, and ~50%–65% of the non-aircraft portfolio. In contrast, our bottoms-up analysis indicates likely write-offs of 24% in our base case. Notably, excluding TFC losses, TXT currently trades at only 9X 2011 EPS.
We now see a “middle-ground”: Our prior underweight rating was based on the potential of an extremely stressed “bear” case outcome at TFC/TXT. We now believe that TFC will track towards a “middle ground” with substantial but manageable write-offs (aided by ongoing cash flows from much of the finance).
Cessna would be “icing on the cake”. Of secondary importance, we see growing evidence that the business jet market may be nearing a trough, and we anticipate a recovery after 2010.
Action: Plenty of reasons to like this call. Double upgrade (from Under to Over) that makes sense from Tier-1 firm, volatile stock, even the futures seem to be recovering. Would expect to see 7-10% upside today, meaning anything below $16 is a buy.
Tuesday, September 1, 2009
AIG (NYSE:AIG): Downgraded to Underperform at Bernstein
Bernstein Research is taking down their rating on AIG (NYSE:AIG):
We are downgrading AIG to Underperform from Market-Perform. Our target price of $10 and earnings estimates remain unchanged. There are no changes to our thinking since our Q2 earnings writeup on August 10. Therefore, the downgrade is strictly a reaction to the big run up in AIG's stock price.
Using our 3-part valuation model, we can examine why we think AIG's current stock price allows very little chance for uncertainty, and fails to corporate considerable downside risk potential.
− AIG's Q2 end book value per share to holders of common equity, after all Government stakes and support are eliminated, was $21.80. We are using an estimated year-end book value per share of $14.30 as our starting assumption for other calculations. This amount included an announced charge of $5bn for Q3 as AIG accelerates amortization of its remaining $13.8bn of prepaid commitment fee (essentially a non-cash equity injection from the Government as part of its support). ˇ
− However, if one were to completely eliminate the prepaid commitment fee now, plus goodwill of $6.4bn, AIG would already have negative tangible common book per share of ($7.10). There could be other sources of writedown as well (e.g. deferred tax assets that cannot be applied to future earnings).
− But given that AIG is being supported with other preferred equity, its current negative common equity ignores potential positive optionality from potential operating earnings, capital gains, and asset sales. Our "upside" scenario captures this, and current registers a midpoint value of about $36 per share. But this scenario is highly uncertain: even our midpoint estimate assumes that a lot has to go right in the future. The midpoint corresponds to an average price/book ratio on the insurance subsidiaries of about 1.05x "normal" book (i.e. assuming cleaned-up assets). This is comparable to where "cleaner" names like TRV and ACE are trading. On $21.80 per share, AIG is trading at nearly 2.1x book, almost comparable to PGR.
− Finally, AIG's current stock price gives virtually no weight to the possibility that the common equity is worth zero. Both the base and upside scenarios show the possibility of zero in any sensitivity analysis, and we are explicitly using a 50% probability of this event. While we would acknowledge that the prospects for AIG employees and insurance operating units appears considerably better than they did 9 months ago, the same cannot automatically be said for common shareholders. We still think the political risk is considerable, with a very real possibility that the Government reduces support once AIG is no longer deemed a systemic risk.
Action: It is just a quick heads-up for early birds. AIG is currently trading at $44 in the pre-mkt, which should be good for a short before the rest of the crowd wakes up. Would like to get out by 8 am to reduce the risk of getting caught by yet another squeeze.
We are downgrading AIG to Underperform from Market-Perform. Our target price of $10 and earnings estimates remain unchanged. There are no changes to our thinking since our Q2 earnings writeup on August 10. Therefore, the downgrade is strictly a reaction to the big run up in AIG's stock price.
Using our 3-part valuation model, we can examine why we think AIG's current stock price allows very little chance for uncertainty, and fails to corporate considerable downside risk potential.
− AIG's Q2 end book value per share to holders of common equity, after all Government stakes and support are eliminated, was $21.80. We are using an estimated year-end book value per share of $14.30 as our starting assumption for other calculations. This amount included an announced charge of $5bn for Q3 as AIG accelerates amortization of its remaining $13.8bn of prepaid commitment fee (essentially a non-cash equity injection from the Government as part of its support). ˇ
− However, if one were to completely eliminate the prepaid commitment fee now, plus goodwill of $6.4bn, AIG would already have negative tangible common book per share of ($7.10). There could be other sources of writedown as well (e.g. deferred tax assets that cannot be applied to future earnings).
− But given that AIG is being supported with other preferred equity, its current negative common equity ignores potential positive optionality from potential operating earnings, capital gains, and asset sales. Our "upside" scenario captures this, and current registers a midpoint value of about $36 per share. But this scenario is highly uncertain: even our midpoint estimate assumes that a lot has to go right in the future. The midpoint corresponds to an average price/book ratio on the insurance subsidiaries of about 1.05x "normal" book (i.e. assuming cleaned-up assets). This is comparable to where "cleaner" names like TRV and ACE are trading. On $21.80 per share, AIG is trading at nearly 2.1x book, almost comparable to PGR.
− Finally, AIG's current stock price gives virtually no weight to the possibility that the common equity is worth zero. Both the base and upside scenarios show the possibility of zero in any sensitivity analysis, and we are explicitly using a 50% probability of this event. While we would acknowledge that the prospects for AIG employees and insurance operating units appears considerably better than they did 9 months ago, the same cannot automatically be said for common shareholders. We still think the political risk is considerable, with a very real possibility that the Government reduces support once AIG is no longer deemed a systemic risk.
Action: It is just a quick heads-up for early birds. AIG is currently trading at $44 in the pre-mkt, which should be good for a short before the rest of the crowd wakes up. Would like to get out by 8 am to reduce the risk of getting caught by yet another squeeze.
Monday, August 31, 2009
Kinetic Concepts (NYSE:KCI): Buzz Growing on Strattice Performance in the Breast; Lowering Estimates
JP Morgan has a very interesting note on Kinetic Concepts (NYSE:KCI), discussing the issues with Strattice dermal matrix:
KCI has what we believe to be a growing issue with the performance of its Strattice dermal matrix in breast reconstruction. Over the last few weeks, we’ve consulted with a number of leading surgeons in the field of post mastectomy breast reconstruction. Many of these surgeons are advisers to KCI, all are customers, and several were early adopters of Strattice and are considered thought leaders in their field. On the back of these discussions, it seems that while Strattice works well in areas such as hernia repair, where there is sufficient microvascularization, it is not integrating as well in the breast, and there is a higher rate of complications.
On several fronts this presents a challenge for KCI. For starters, Strattice has become in relatively short order the company’s leading growth driver. Since its introduction in 1Q08, sales have climbed to more than $85M annualized and are likely to surpass $100M in the back half of the year. Strattice has in part cannibalized Alloderm, but it’s also expanded the market, as Alloderm has been and remains capacity constrained. The introduction of Strattice has allowed KCI to promote its products for new applications and, for the first time, expand internationally. What’s important as well is that Strattice has much higher margins, by our estimates 15-20% higher than Alloderm. Thus, the shift from Alloderm to Strattice not only enables the company to overcome the capacity constraints of manufacturing and marketing a cadaver-based product, but it substantially improves the company’s profitability.
..
Since its launch, KCI has aggressively promoted Strattice in both hernia repair and breast reconstruction. Hernia repair is today 70% of the company’s regenerative mix (Alloderm + Strattice), with reconstruction comprising the other 30%. Strattice’s uptake in breast has been significant. In fact, on the company’s 2Q call, management on multiple occasions highlighted the progress in breast reconstruction, indicating that demand was exceeding expectations. Part of what’s helping Strattice in both breast and hernia repair is not only wider availability, but (a) its availability in larger size grafts and (b) it’s less expensive than Alloderm for the hospital.
The problem is that in breast reconstruction adverse event rates with Strattice are in practice running higher than expectations. Surgeons we spoke with that have done large numbers of Strattice implants indicate that the porcine graft does not incorporate as well as Alloderm. Integration is taking longer, and the number of cases where Strattice fails to incorporate is leading to more revisions. Surgeons indicate a higher seroma1 rate with Strattice and a higher rate of post-implant infections.
Firm is lowering estimates on KCI as following:
Action: While the impact on total revenue & EPS estimates is rather small, it is never a good sign if the main growth engine runs into trouble. KCI shares have had a nice run after 2Q09 results, in part thanks to growth at Lifecell. Would expect the shares to see some weakness in the coming days as some of the most optimistic expectations need to be reset.
Fannie Mae (FNM) and Freddie Mac (FRE): No Underlying Value Remains
FBR Capital is reminding investors that they believe there is no fundamental value remaining in FNM & FRE:
Fundamental value does not support shares. The government has already invested almost $100 billion in the GSEs, with a $51.7 billion capital infusion for Fannie and $45.9 billion for Freddie. Ultimately, we believe there are no "free lunches," and this capital must be repaid if the GSEs are ever going to be stand-alone entities in the future. However, credit costs are digging Fannie and Freddie further in the whole, and we believe both companies are under-reserved to face future losses. As of 2Q09, Fannie's nonperforming loans totaled $170 billion against reserves of only $55 billion, implying a 32% coverage ratio. Likewise, Freddie's nonperforming assets totaled $77.5 billion with reserves of only $25.2 billion, or a 32.5% coverage ratio. With serious delinquencies continuing to rise at alarming rates, we would expect continued NPA pressures to drive reserves higher.
Future of the GSEs still undecided. The future of the GSEs remains a large question mark, and to our understanding, we will not get an answer anytime soon. The Administration is keeping discussion about the GSEs behind closed doors, and inklings of potential decisions have not really been leaked. They tested the waters in July with the "good bank/bad bank" scenario, and we heard that the response was very negative. As such, it sounds like the Administration is back to the drawing board. Congress iswaiting for the Administration to take the lead, but President Obama's team will not table the issue until after the FY 2011 budget is delivered on February 1, at the earliest.
Most likely scenarios. In the Treasury's white paper on financial reform, six scenarios are discussed as future outcomes for the GSEs. The key decision is whether Fannie and Freddie will be private companies, essentially arms of the government, or whether they will be "quasi-private" and retain their hybrid business model. In our view, the most likely scenario is that the GSE's operations will be split up, and Fannie and Freddie will be spun out of the government as mortgage insurers with small portfolios; the majority of the portfolio would likely remain in the government's hands.
Action: It is usually not a very good idea shorting into such a huge rally. Some might even call it suicidal. However, with AIG tanking on Friday and getting some beating again in the pre-mkt, the other crap financials should follow the lead. I'd expect see the shares of FNM & FRE at least 10% lower today.
Fundamental value does not support shares. The government has already invested almost $100 billion in the GSEs, with a $51.7 billion capital infusion for Fannie and $45.9 billion for Freddie. Ultimately, we believe there are no "free lunches," and this capital must be repaid if the GSEs are ever going to be stand-alone entities in the future. However, credit costs are digging Fannie and Freddie further in the whole, and we believe both companies are under-reserved to face future losses. As of 2Q09, Fannie's nonperforming loans totaled $170 billion against reserves of only $55 billion, implying a 32% coverage ratio. Likewise, Freddie's nonperforming assets totaled $77.5 billion with reserves of only $25.2 billion, or a 32.5% coverage ratio. With serious delinquencies continuing to rise at alarming rates, we would expect continued NPA pressures to drive reserves higher.
Future of the GSEs still undecided. The future of the GSEs remains a large question mark, and to our understanding, we will not get an answer anytime soon. The Administration is keeping discussion about the GSEs behind closed doors, and inklings of potential decisions have not really been leaked. They tested the waters in July with the "good bank/bad bank" scenario, and we heard that the response was very negative. As such, it sounds like the Administration is back to the drawing board. Congress iswaiting for the Administration to take the lead, but President Obama's team will not table the issue until after the FY 2011 budget is delivered on February 1, at the earliest.
Most likely scenarios. In the Treasury's white paper on financial reform, six scenarios are discussed as future outcomes for the GSEs. The key decision is whether Fannie and Freddie will be private companies, essentially arms of the government, or whether they will be "quasi-private" and retain their hybrid business model. In our view, the most likely scenario is that the GSE's operations will be split up, and Fannie and Freddie will be spun out of the government as mortgage insurers with small portfolios; the majority of the portfolio would likely remain in the government's hands.
Action: It is usually not a very good idea shorting into such a huge rally. Some might even call it suicidal. However, with AIG tanking on Friday and getting some beating again in the pre-mkt, the other crap financials should follow the lead. I'd expect see the shares of FNM & FRE at least 10% lower today.
Thursday, August 27, 2009
Energy Conversion Devices (NASDAQ:ENER): Bounce play?
Haven't seen any analyst comments yet, but got a feeling that Energy Conversion Devices (NASDAQ:ENER) is a bounce play at current $11.9 level of pre-mkt. Yes, the guidance for next quarter is fugly (F1Q10 in line with F4Q09 - 4Q was $51.4 mln vs $67.8 mln consensus), but more importantly, guidance for full FY10 looks quite decent. Seems to me that mgmt is seeing things getting better the in 2010 but keeps the expectations low for near-term not to dissapoint. With current issues widely known, one should look at what's to come when the dust settles.
I've started buying here at $11.90 and will add if the price drops.
I've started buying here at $11.90 and will add if the price drops.
Whirlpool (NYSE:WHR): Upgraded to Outperform at Cowen
Cowen is upgrading Whirlpool (NYSE:WHR) to Outpeform:
Conclusion: We are upgrading shares of WHR from Neutral to Outperform as we believe a stabilization in demand trends next year, combined with the ongoing improvements in the company's cost structure, should help EBIT margin revert closer to historical levels. Management has been proactive in reducing fixed costs as domestic appliance shipments have now shrunk 22% from peak levels set in 2005. WHR also stands to benefit from a weaker dollar, which we believe will add $246MM to the top line in FY10. At only 9x our new Street high FY10 EPS estimate and 7x our FY10 EV/EBITDA estimate, we see significant value in shares of WHR, as growth and ROIC should dramatically improve when the economy recovers.
Improvement in Demand Could Benefit FY10 Operating Margins By 150bps. We estimate that declines in unit shipments have lowered operating margins by 300bps during 1H:09 due to fixed cost deleveraging and lower capacity utilization. We project global unit shipments to decline only 1% in FY10, which should by itself drive 150bps of margin recovery.
We Believe Operating Margin of 6.7% Is Achievable By FY13, Equating To Over $10 in EPS. Our FY09 and FY10 operating margin estimates of 3.7% and 5% are substantially below what we believe to be normalized margin of 7.9% set in 2001. Demand stabilization, productivity improvements, efficiencies related to the 2006 Maytag acquisition, and high cost plant closures should support a gradual reversion to historical margins.
The Street Is Massively Underestimating FY10 Profitability. Our FY09 EPS estimate of $3.97 stands at the high end of management's guided range of $3.50 to $4.00. Our FY10 EPS estimate is raised 92% to a Street high of $7.07, 60% above current consensus of $4.46. Our FY10 estimate revisions are based a stabilization in sales, improved gross margin and lower SG&A spending due to massive restructuring efforts.
Action: Wow, the new FY10 EPS estimate really caught my eye. Current range is $3.50 to $5.25.. and now Cowen says $7.07. Unreal. Of course, these are sell-siders' numbers and real expectations are higher, but you don't see estimate raise of that magnitude too often. Continued talks of cash for appliances should also help.
I expect the shares to hit at least $64 today.
Conclusion: We are upgrading shares of WHR from Neutral to Outperform as we believe a stabilization in demand trends next year, combined with the ongoing improvements in the company's cost structure, should help EBIT margin revert closer to historical levels. Management has been proactive in reducing fixed costs as domestic appliance shipments have now shrunk 22% from peak levels set in 2005. WHR also stands to benefit from a weaker dollar, which we believe will add $246MM to the top line in FY10. At only 9x our new Street high FY10 EPS estimate and 7x our FY10 EV/EBITDA estimate, we see significant value in shares of WHR, as growth and ROIC should dramatically improve when the economy recovers.
Improvement in Demand Could Benefit FY10 Operating Margins By 150bps. We estimate that declines in unit shipments have lowered operating margins by 300bps during 1H:09 due to fixed cost deleveraging and lower capacity utilization. We project global unit shipments to decline only 1% in FY10, which should by itself drive 150bps of margin recovery.
We Believe Operating Margin of 6.7% Is Achievable By FY13, Equating To Over $10 in EPS. Our FY09 and FY10 operating margin estimates of 3.7% and 5% are substantially below what we believe to be normalized margin of 7.9% set in 2001. Demand stabilization, productivity improvements, efficiencies related to the 2006 Maytag acquisition, and high cost plant closures should support a gradual reversion to historical margins.
The Street Is Massively Underestimating FY10 Profitability. Our FY09 EPS estimate of $3.97 stands at the high end of management's guided range of $3.50 to $4.00. Our FY10 EPS estimate is raised 92% to a Street high of $7.07, 60% above current consensus of $4.46. Our FY10 estimate revisions are based a stabilization in sales, improved gross margin and lower SG&A spending due to massive restructuring efforts.
Action: Wow, the new FY10 EPS estimate really caught my eye. Current range is $3.50 to $5.25.. and now Cowen says $7.07. Unreal. Of course, these are sell-siders' numbers and real expectations are higher, but you don't see estimate raise of that magnitude too often. Continued talks of cash for appliances should also help.
I expect the shares to hit at least $64 today.
Wednesday, August 26, 2009
Cerus Corporation (NASDAQ:CERS): Upgraded at Avondale
Avondale is upgrading Cerus Corporation (NASDAQ:CERS):
We are upgrading our investment rating on Cerus Corporation to Market Outperform as there have been severalkey developments for the company in terms of product acceptance and regulatory advancements. These positives,along with the company's recent capital raise and an overall heightened awareness of infectious agents in the bloodsupply, provide more stability to Cerus' story as it continues its lengthy quest to bring pathogen inactivation to themainstream. We look for near term catalysts to include (1) the continued adoption of the company's INTERCEPTtechnology overseas, (2) the signing of a strategic partnership to advance clinical trials in the U.S., (3) thepresentation of data from its Phase I red cell trial, and (4) the continued focus on pathogen reduction as a majorpriority for blood safety.
Price target goes to $5 from $2.
Action: This will probably go nuts. $2.50 anybody?
We are upgrading our investment rating on Cerus Corporation to Market Outperform as there have been severalkey developments for the company in terms of product acceptance and regulatory advancements. These positives,along with the company's recent capital raise and an overall heightened awareness of infectious agents in the bloodsupply, provide more stability to Cerus' story as it continues its lengthy quest to bring pathogen inactivation to themainstream. We look for near term catalysts to include (1) the continued adoption of the company's INTERCEPTtechnology overseas, (2) the signing of a strategic partnership to advance clinical trials in the U.S., (3) thepresentation of data from its Phase I red cell trial, and (4) the continued focus on pathogen reduction as a majorpriority for blood safety.
Price target goes to $5 from $2.
Action: This will probably go nuts. $2.50 anybody?
Affymax (NASDAQ:AFFY): Cowen's Non-Consensus Idea
Cowen is highlighting Affymax (NASDAQ:AFFY) as one of their non-consensus ideas:
Consensus View: The typical investor ignores Affymax. Some do so simply because they view the company as too early in its lifecycle, while others are concerned that lead candidate Hematide's Phase III trials may not succeed. Nearly all think that Hematide's commercial prospects are uncertain as it will compete against the entrenched epoetin franchises of Amgen and Johnson & Johnson, and therefore will struggle to gain share.
Our View: We think Affymax is likely to be one of the best-performing small cap biotech stocks over the next 6-12 months. Biotech investors are keenly focused on events occurring within a couple of quarters, and all four of Hematide's Phase III trials will report results in Q1:10. As Hematide will challenge the Epogen/Aranesp/Procrit franchise, one of biopharma's most successful, in the $4B renal anemia market, all investors will need to form an opinion of its prospects. Therefore Affymax will become very topical, and we expect just the increase in visibility will drive outperformance. Moreover, we believe that as investors do real work on Hematide, they will be pleasantly surprised by what they find. We recently checked in with 6 anemia physician consultants who have been involved in Hematide's development. They are unanimous in their opinion that Hematide's 4 Phase III trials will succeed, and support FDA approval. They believe its once-monthly administration is a significant advantage in the $1B predialysis market and therefore expect it to capture share. While its competitive advantage in the $3B dialysis market is less clear, the nearly-certain introduction of bundled reimbursement in 2011 will create the opportunity for Hematide to take share by competing on price. Our DCF analysis suggests Affymax is pricing in 2016 (peak) U.S. sales of just $280MM - $360MM, representing approximately 7-9% of the market. Should investors come to believe that Hematide could take more substantial but still minority 20-30% share of the kidney disease ESA market, Affymax's stock would appreciate by 100-200%.
Action: Looking at the chart I wouldn't say AFFY is that ingored. After all, the stock is trading near the 52-week highs and is almost certain to make a new high today with the help from additional spotlight from Cowen. They make a good case for the stock and highlighting a stock as potential double or triple tends to attract some new money.
It is very thin name, too thin to be involved with meaningful size.. but if you're able to get some shares early on, you should be able to unload these at least 1 point higher when the rest of the crowd comes chasing the shares.
Or maybe I'm just too bored. It has been really slow this week and I don't see anything even mildly interesting today.
Consensus View: The typical investor ignores Affymax. Some do so simply because they view the company as too early in its lifecycle, while others are concerned that lead candidate Hematide's Phase III trials may not succeed. Nearly all think that Hematide's commercial prospects are uncertain as it will compete against the entrenched epoetin franchises of Amgen and Johnson & Johnson, and therefore will struggle to gain share.
Our View: We think Affymax is likely to be one of the best-performing small cap biotech stocks over the next 6-12 months. Biotech investors are keenly focused on events occurring within a couple of quarters, and all four of Hematide's Phase III trials will report results in Q1:10. As Hematide will challenge the Epogen/Aranesp/Procrit franchise, one of biopharma's most successful, in the $4B renal anemia market, all investors will need to form an opinion of its prospects. Therefore Affymax will become very topical, and we expect just the increase in visibility will drive outperformance. Moreover, we believe that as investors do real work on Hematide, they will be pleasantly surprised by what they find. We recently checked in with 6 anemia physician consultants who have been involved in Hematide's development. They are unanimous in their opinion that Hematide's 4 Phase III trials will succeed, and support FDA approval. They believe its once-monthly administration is a significant advantage in the $1B predialysis market and therefore expect it to capture share. While its competitive advantage in the $3B dialysis market is less clear, the nearly-certain introduction of bundled reimbursement in 2011 will create the opportunity for Hematide to take share by competing on price. Our DCF analysis suggests Affymax is pricing in 2016 (peak) U.S. sales of just $280MM - $360MM, representing approximately 7-9% of the market. Should investors come to believe that Hematide could take more substantial but still minority 20-30% share of the kidney disease ESA market, Affymax's stock would appreciate by 100-200%.
Action: Looking at the chart I wouldn't say AFFY is that ingored. After all, the stock is trading near the 52-week highs and is almost certain to make a new high today with the help from additional spotlight from Cowen. They make a good case for the stock and highlighting a stock as potential double or triple tends to attract some new money.
It is very thin name, too thin to be involved with meaningful size.. but if you're able to get some shares early on, you should be able to unload these at least 1 point higher when the rest of the crowd comes chasing the shares.
Or maybe I'm just too bored. It has been really slow this week and I don't see anything even mildly interesting today.
Tuesday, August 25, 2009
China Nepstar Chain Drugstore (NYSE:NPD): Cut to Sell with $4 target at Roth
Roth Capital Partners is downgrading shares of China Nepstar Chain Drugstore (NYSE:NPD) to Sell with $4 target following quarterly results and special dividend announcement yesterday:
Trimming revenue est following another quarterly miss. NPD 2Q09$78.2mm revenue missed estimated $86.2mm for the 2ndconsecutivequarterly miss, attributed to 1) Drug retail sales slowdown amid unfavorablemacroeconomic conditions which struck hardest in Guangdong and YangtzeRiver Delta, where most of Nepstar's stores are located, 2) Exclusion of salesfrom 355 Yunnan JZJ drug stores previously included in 2008 revenue. Welower our 2009 forecast to $327.5mm (-6% yoy) from previous $351.4mm(0% yoy). We forecast 15% 2010 sales growth, down from previous 20%, to$376.6mm revenue for lack of near-term drivers for drug retail business andthe meaningful-sized M&A and store openings (on average, ~400 storescontribute to $0.01/ADS annual earnings).
Gross margin compression expected as EDL impacts roll in. We forecastgross margin decrease due to the change in competitive landscape forNepstar from the price regulation in hospitals' pharmacies by the health carereform zero premium policy. While Nepstar caters to middle/upper middleclass consumers who are less dependent on pricing stipulation, we anticipate1-2 pts of gross margin compression in combination with a relatively rigidopex >40%. The diversification of the portfolio into high margin,nutraceuticals and non-pharmaceutical products may partially buffer thisimpact.
Special dividend. As we applaud mgt's decision in returning cash($1.50/ADS before year end) back to the investors, we believe it acquiescesthe challenges to generate favorable return on capital, at least near/mid term.
Downgrade to Sell rating, Maintain $4 PT. While we highly regard mgt'sefforts in making sound decisions in store closings, cost cutting, M&A anddividend paying, we see slow recovery in drug retail business in both macroand micro aspects. Our comparable analysis assigns 13x multiple to Nepstarthat values the business at $2.10/ADS based on 2010 earnings. Adding$1.90/ADS forward cash to reach our $4.00/ADS price target.
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Morgan Stanley is also commenting:
Cutting 09 sales further by 10% and EPS by 29%: NPD just reported 2Q09 results with revenue and EPS missing our estimates. Investors may respond positively to the special dividend of $1.5/share, but this is also a reflection of the difficulty in identifying good store acquisition targets. Given the 2Q09 miss and slow export recovery, we believe business is unlikely to rebound strongly in 2H09. We have reduced our sales forecast by 10% and EPS by 29%. However, we have raised our PT from US$5.3 to US$5.8 to reflect improved ROE. Although the new PT represents 20% downside from current levels, we are maintaining our EW rating on NPD shares due to the high volatility of the stock.
Action: After initial pop on special dividend and headline EPS number the stock gave back most of the gains yesterday. This downgrade makes sure that the rest of the gap is also erased. These comments make me wonder who the hell was buying it yesterday. Sure, special dividend is nice, but that's about all there is positive. Estimates are cut across the board and these aren't just some cosmetical corrections to make the DCF model look nice again.
Morgan Stanley has highlighted NPD as short-term short idea several times this year. Given their comments I would expect them to issue another short idea today or in the coming days. After all, their target is 20% below the current share price. Given the volatile nature of this stock staying at Equal-Weight makes sense, after all you cannot shuffle ratings back and forth all the time.. but short-term short recommendation would be suitable for those clients interested in trading idea. Of course, this is pure speculation on my part.
To sum it up: anything above $7 early today is short with covers starting at $6.8. Heck, it might do $6.6 today given the weakness in China today.
Trimming revenue est following another quarterly miss. NPD 2Q09$78.2mm revenue missed estimated $86.2mm for the 2ndconsecutivequarterly miss, attributed to 1) Drug retail sales slowdown amid unfavorablemacroeconomic conditions which struck hardest in Guangdong and YangtzeRiver Delta, where most of Nepstar's stores are located, 2) Exclusion of salesfrom 355 Yunnan JZJ drug stores previously included in 2008 revenue. Welower our 2009 forecast to $327.5mm (-6% yoy) from previous $351.4mm(0% yoy). We forecast 15% 2010 sales growth, down from previous 20%, to$376.6mm revenue for lack of near-term drivers for drug retail business andthe meaningful-sized M&A and store openings (on average, ~400 storescontribute to $0.01/ADS annual earnings).
Gross margin compression expected as EDL impacts roll in. We forecastgross margin decrease due to the change in competitive landscape forNepstar from the price regulation in hospitals' pharmacies by the health carereform zero premium policy. While Nepstar caters to middle/upper middleclass consumers who are less dependent on pricing stipulation, we anticipate1-2 pts of gross margin compression in combination with a relatively rigidopex >40%. The diversification of the portfolio into high margin,nutraceuticals and non-pharmaceutical products may partially buffer thisimpact.
Special dividend. As we applaud mgt's decision in returning cash($1.50/ADS before year end) back to the investors, we believe it acquiescesthe challenges to generate favorable return on capital, at least near/mid term.
Downgrade to Sell rating, Maintain $4 PT. While we highly regard mgt'sefforts in making sound decisions in store closings, cost cutting, M&A anddividend paying, we see slow recovery in drug retail business in both macroand micro aspects. Our comparable analysis assigns 13x multiple to Nepstarthat values the business at $2.10/ADS based on 2010 earnings. Adding$1.90/ADS forward cash to reach our $4.00/ADS price target.
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Morgan Stanley is also commenting:
Cutting 09 sales further by 10% and EPS by 29%: NPD just reported 2Q09 results with revenue and EPS missing our estimates. Investors may respond positively to the special dividend of $1.5/share, but this is also a reflection of the difficulty in identifying good store acquisition targets. Given the 2Q09 miss and slow export recovery, we believe business is unlikely to rebound strongly in 2H09. We have reduced our sales forecast by 10% and EPS by 29%. However, we have raised our PT from US$5.3 to US$5.8 to reflect improved ROE. Although the new PT represents 20% downside from current levels, we are maintaining our EW rating on NPD shares due to the high volatility of the stock.
Action: After initial pop on special dividend and headline EPS number the stock gave back most of the gains yesterday. This downgrade makes sure that the rest of the gap is also erased. These comments make me wonder who the hell was buying it yesterday. Sure, special dividend is nice, but that's about all there is positive. Estimates are cut across the board and these aren't just some cosmetical corrections to make the DCF model look nice again.
Morgan Stanley has highlighted NPD as short-term short idea several times this year. Given their comments I would expect them to issue another short idea today or in the coming days. After all, their target is 20% below the current share price. Given the volatile nature of this stock staying at Equal-Weight makes sense, after all you cannot shuffle ratings back and forth all the time.. but short-term short recommendation would be suitable for those clients interested in trading idea. Of course, this is pure speculation on my part.
To sum it up: anything above $7 early today is short with covers starting at $6.8. Heck, it might do $6.6 today given the weakness in China today.
Frontline Ltd. (NYSE:FRO): Beware of a Short Squeeze Ahead of Earnings - JP Morgan
JP Morgan is calling for a short squeeze in the shares of Frontline Ltd. (NYSE:FRO) ahead of earnings on this Friday:
Potentially stronger-than-expected 2Q09 rates could result in an EPS surprise . . . . SFL’s 2Q09 profit-sharing revenue came in $2.8 million above our forecast as we believe that FRO employed several of its vessels on short-term contracts throughout 2Q (likely for storage purposes) at rates that far exceeded the soft spot market levels. After backing into the implied rates earned on those vessels (and leaving all else unchanged in our model), we believe that FRO could easily exceed the recently raised average Street forecast of $0.03 and the losses estimated by many analysts (ourselves included).
. . . and lend support to FRO’s dividend-payout potential. There has been significant doubt among investors and analysts regarding the sustainability of FRO’s recent $0.25-per-share dividend distribution. Indeed, we believed that FRO might be forced to suspend its dividend in the 1Q09 release as the company had unfunded capital commitments that exceeded $1 billion. FRO has since canceled orders, removing more than half of these capital commitments, and if it has a greater-than-expected profit in 2Q and there are any potential further newbuild cancellations, we believe that FRO may be able to maintain its dividend again in 2Q, which may catch some investors by surprise.
Near-term catalyst risk outweighs reward to a short position, in our view. EPS upside to estimates across the shipping space in the 2Q09 earnings season has been greatly rewarded with large share-price gains, particularly for those stocks with material short interest. Given FRO’s 7% short interest (as a percentage of the float) and a potential EPS beat on Friday, we believe the near-term-catalyst risk outweighs the reward to a short position this week. We reiterate our longer-term Underweight rating on FRO shares given the company’s highly levered balance sheet as well as its high operational exposure to the extremely soft tanker spot market, which should result in severely challenged earnings results for the remainder of 2009.
Action: I like this call a lot, especially due to the Underweight rating JP Morgan has on the stock. Highlighting near-term catalysts contrary to their longer-term view adds credibility.
What to do with the stock? Must say tanker stocks are difficult to trade, they are bound to squeeze on downgrades & give back gains after upgrades. Frontline is also listed in Europe making the opening price dependent on European trading. So the best way to play it is probably buying right after the open unless overall market or sector collapses.
Potentially stronger-than-expected 2Q09 rates could result in an EPS surprise . . . . SFL’s 2Q09 profit-sharing revenue came in $2.8 million above our forecast as we believe that FRO employed several of its vessels on short-term contracts throughout 2Q (likely for storage purposes) at rates that far exceeded the soft spot market levels. After backing into the implied rates earned on those vessels (and leaving all else unchanged in our model), we believe that FRO could easily exceed the recently raised average Street forecast of $0.03 and the losses estimated by many analysts (ourselves included).
. . . and lend support to FRO’s dividend-payout potential. There has been significant doubt among investors and analysts regarding the sustainability of FRO’s recent $0.25-per-share dividend distribution. Indeed, we believed that FRO might be forced to suspend its dividend in the 1Q09 release as the company had unfunded capital commitments that exceeded $1 billion. FRO has since canceled orders, removing more than half of these capital commitments, and if it has a greater-than-expected profit in 2Q and there are any potential further newbuild cancellations, we believe that FRO may be able to maintain its dividend again in 2Q, which may catch some investors by surprise.
Near-term catalyst risk outweighs reward to a short position, in our view. EPS upside to estimates across the shipping space in the 2Q09 earnings season has been greatly rewarded with large share-price gains, particularly for those stocks with material short interest. Given FRO’s 7% short interest (as a percentage of the float) and a potential EPS beat on Friday, we believe the near-term-catalyst risk outweighs the reward to a short position this week. We reiterate our longer-term Underweight rating on FRO shares given the company’s highly levered balance sheet as well as its high operational exposure to the extremely soft tanker spot market, which should result in severely challenged earnings results for the remainder of 2009.
Action: I like this call a lot, especially due to the Underweight rating JP Morgan has on the stock. Highlighting near-term catalysts contrary to their longer-term view adds credibility.
What to do with the stock? Must say tanker stocks are difficult to trade, they are bound to squeeze on downgrades & give back gains after upgrades. Frontline is also listed in Europe making the opening price dependent on European trading. So the best way to play it is probably buying right after the open unless overall market or sector collapses.
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