OP: Market Strategy ( Part 1 of 3 ) 08:22am EDT 12-Apr-02 CIBC World Markets Corp. (Avtar Batth) CIBCOPP SUMMARY April 12, 2002 Market Strategy
Upside Earnings Inflection: The Next Frontier
Earnings inflection points have a way of inducing Wall Street to change its affections. When earnings and operating margins peaked in 2Q/2000, the market's romance with concept stocks, as exemplified by the dot-coms, gradually withered as it rediscovered a fondness for shares offering earnings visibility, such as value, healthcare and utilities. Mounting operating pressures produced consecutive quarters of weak earnings, forcing companies to cut costs and securities analysts to cut earnings estimates into 4Q/2001. The double whammy of falling earnings and rising accounting uncertainties fueled the market's renewed preference for companies with visible-and real- earnings.
We expect the S&P 500's P/E multiple to stabilize at around 20X-25X, reflecting two forces. First, the Fed has held inflation in check, as it has for the last two decades. Second, the weak bond market of the last 12 months appears close to peaking out at a long Treasury yield of 6%. (See our S&P 500 Earnings Monitor of March 26.) Earnings, after woefully underperforming Street expectations into 3Q/2001, were roughly in line with forecasts in 2H/2001. The U.S. consumer has held on, and economic recovery appears to be under way. U.S. companies have cut costs massively, and inventory positions are shifting toward accumulation, presumably in anticipation of better demand. Business indices in Canada, Europe and even Japan are also signaling recovery.
We believe an upside earnings inflection point represents the next frontier for the markets. Consensus holds that it could occur in 2Q/2002; we think it could appear in 1Q/2002 results. More important, the markets have likely incorporated only a mediocre 6% recovery in operating earnings for 2002 over 2001's poor results; this compares with Street expectations of a 15% recovery and our admittedly ambitious 30% forecast. With the trajectory and duration of earnings recovery now under debate, the stage is set for an upside earnings inflection point to surprise the markets, as generally occurs at the start of every new cycle.
We asked our analysts to highlight those stocks that they believe have the greatest potential to surprise on the upside based on upcoming earnings reports. Note that at an inflection point, the definition of surprise varies by company and sector and should not be confused with sustainable earnings. Note that at an inflection point, the definition of surprise varies by company and sector and should not be confused with sustainable earnings. For some, a surprise may simply be a sharp decline in losses, as in the highly pressured technology space. For others, such as retailers, surprise earnings would be well above already strong numbers that have been driven by a stable consumer with good disposable income.
Subodh Kumar
CIBC World Markets Portfolio Strategist
Industry Analyst Banking Chan/Winter
Three Midwest banks are poised to report earnings surprises in the coming Qs: Buy-rated Comerica (CMA, target $65), KeyCorp (KEY, target $29), and U.S. Bancorp (USB, target $24). With 50% of earnings coming from the manufacturing-dependent Midwest economy, the current growth in manufacturing activity (measured by the ISM Index) should positively impact these banks' bottom lines as a result of three operating leverage points. These include 1) higher loan growth, which has been non-existent in the past year, 2) reduced credit costs, which are at the highest levels in 10 years, and 3) higher growth in market sensitive businesses, which have gradually suffered since the equity markets peaked in early 2000. Therefore, we believe our conservative EPS estimates for CMA, KEY, and USB could be revised upward if the economy continues to improve at a steady pace.
Marke Rating 2001A 2002E 2003E Company t Price Ticke Prior/Re Prior/Rev Prior/Rev Prior/Rev Analyst Cap r v Barr 2.87B 66.64 BRL Strong 1.60 4.60 4.02 Wilbur Laboratories Buy
Following December Q results (2Q02), management increased bottom line guidance for 2H to a range of $1.55-$1.65 and indicated that 2H product sales should accelerate 50% relative to 1H levels of $169 M (excluding generic Prozac). With the launch of generic Adderall (attention deficit hyperactivity disorder) in the March Q and the launch of a generic formulation of Mircette ($150M branded oral contraceptive) early in 4Q02, we continue to have a high degree of confidence in top and bottom line guidance. Several other potential launches before year-end including generic versions of the oral contraceptives Triphasil and Loestrin, which generate sales in excess of $450 million, would likely cement an upside case to current guidance. Price target $100.
Market Rating 2000A 2001A 2002E Company Cap Price Ticker Prior/Rev Prior/Rev Prior/Rev Prior/Rev Analyst Cephalon 3.44B 62.56 CEPH Strong Buy (1.47) 0.19 1.06 Geller
Cephalon shows positive 1Q script data. We expect the company to beat our 1Q estimate of $43.5 million in Provigil sales. As a result of the positive script data, should prove conservative. Our E $0.15 vs. $(0.28). Price target $91.
Industry Analyst CLECs/RLECs Carr
We believe the potential for upside earnings surprises among rural local exchange carriers (RLECs) is limited since, at its core, local telecom is akin to an annuity and therefore highly predictable. Any upside surprises would likely come from non-traditional RLEC businesses, such as edge-out competitive local exchange carrier (CLEC) or data services. For these reasons, we believe Commonwealth Telephone (CTCO, Buy, target $45) probably has the best chance to surprise on the upside. Among pure CLECs, the question is moot since none have positive earnings at this point. However, we believe Time Warner Telecom (TWTC, Buy, target $21) could surprise on the top line, with consensus expectations currently rather low. We should point out that this is a risky proposition due to uncertainty regarding customer base, although we could see some share price appreciation if the company is able to work through continuing bankruptcies among emerging carrier customers, accompanied by a moderation in network grooming and increased demand for local broadband connectivity among established carrier customers.
Market Rating 2001A 2002E 2003E Company Cap Price Ticker Prior/Rev Prior/Rev Prior/Rev Prior/Rev Analyst Dorel 592M 21.03 DIIBF SBuy 1.65 1.90 2.25 Schwarz Industries
A vertically integrated consumer product manufacturer focusing on three key markets: juvenile products, ready-to-assemble furniture and general home furnishings. Went through a difficult period in 2001 adjusting to ever moving and declining inventory levels at mass merchant customer base exacerbated by several internal operating issues. With those factors clearly behind now, should be poised to return to a profile of earnings growth given numerous new product introductions in both North America and Europe, alignment with leading mass merchant retailers such as Wal-Mart and Target and internal restructuring efforts, which should result in slight margin improvement. We expect 1QE $0.50 vs. $0.50, above consensus E $0.47. Price target $25 (C$39.00). (DII.B-TSE C$32.28).
Marke Rating 2001A 2002A 2003E Company t Price Ticker Prior/Rev Prior/Rev Prior/Rev Prior/Rev Analyst Cap Forest 14B 78.34 FRX Buy 1.18 1.78 2.13 Gerber Laboratories
A candidate for another in a string of upside quarterly earnings surprises. Results continue to be driven by substantial market share gains for anti-depressant, Celexa, which as become one of the largest brands in its market segment. Heavy recent research spending may moderate a bit with the FDA filing for Lexapro (depression)and lercanidipine (high blood pressure) following completion of pivotal trials. Our 4QE $0.47 vs. $0.38; consensus is $0.48, and reported EPS could reach $0.50. Price target $90.
Market Rating 2001A 2002E 2003E Company Cap Price Ticker Prior/Rev Prior/Rev Prior/Rev Prior/Rev Analyst Gildan 494M 17.50 GIL Buy C$1.72 C$1.85 C$2.25 Schwarz Activewear
A rapidly growing manufacturer and marketer of premium quality branded activewear sold primarily into the wholesale imprinted activewear segment of the North American and European apparel market. After having had reported better than expected earnings for about 8 Qs, the overall economic slowdown and corporate spending draught finally hit GIL in mid-2001. Following a material restructuring, bounced back in 1Q02 having beat our and Street estimates. May well do the same in 2Q (which ended March) which would start to push us to the higher end of management guidance E $2.00. We expect E C$0.50 vs. C$0.65, essentially in line with street. Distributor inventories remain low and tight while higher cotton costs have worked their way through the system. We will review our current target of $19.25 (C$29.00) after reports 2Q 5/9. (GIL.A-TSE C$27.50)
Industry Analyst Industrial Materials Lewis
We believe we are at or beyond the inflection in terms of earnings momentum, given that 1Q was the first Q in seven that we did not have any negative preannouncements in our universe. Three firms have the best leverage positions to take advantage of this shift. Bearing producer Timken (TKR-Strong Buy) is benefiting currently from strong automotive demand (the catalyst to this quarter's upside surprise), which will act as a bridge to the stronger industrial environment we anticipate in 2H. In addition to the natural leverage inherent in a manufacturer, the firm is a producer of high-quality steel and alloy bars, which is an even more fixed-cost operating model. Coupled with benefits from its ongoing restructuring and tariff/demand-inspired price increases for steel, we think this name offers tremendous and imminent absorption-related EPS growth. Price target $27-$28. Regal-Beloit (RBC-Buy), a manufacturer of motors and drives, will similarly see absorption-related margin gains as the economy finds firmer footing as the year progresses. It has a strong track record in this regard: in 1990-91 the economic recovery resulted in a near-trebling of operating margins over 3-4 years. We think conditions are in place to roughly mimic this performance. Price target $29. In distribution, our choice is MSC Industrial (MSM-Buy). Though more of a variable-cost model, uniquely leveraged to the industrial/metalworking sector, a concentration that will generate the greatest 'snapback' in an economic recovery. Further, has raised gross margin in the recession (unique in our space), invested heavily in infrastructure, personnel and IT and has a more leverageable compensation structure. Price target $26-$27.
Market Rating 2001A 2002A 2003E Company Cap Price Ticker Prior/Rev Prior/Rev Prior/Rev Prior/Rev Analyst
(PLEASE SEE PART 2) Apr-12-2002 12:22 GMT ------------ ------------ OP: Market Strategy ( Part 2 of 3 ) 07:59am EDT 12-Apr-02 CIBC World Markets Corp. (Avtar Batth) CIBCOPP SUMMARY LabCorp 6.79B 95.82 LH Buy 2.67 3.90 4.85 Szabo
The best positioned clinical laboratory in the high-priced, high-margin esoteric testing market. Growth in esoteric testing has driven considerable gains in volume and pricing over the past two years. We believe the potential upside in 1Q earnings would be driven by volume and pricing ahead of expectations leading to better than expected revenue. Given fixed cost structure, top-line growth contributes disproportionately to operating earnings. 1QE $0.92 vs. $0.62 with 6.9% volume growth and 3.5% pricing growth. Price target $8.
Industry Analyst Life Insurance Mendonca
Our thesis on the North American sector is that earnings and earnings momentum are driven by asset growth through market performance and new business growth. In this context product focus and distribution process are critical. Certain new business trends became apparent in 4Q01, specifically survivorship life, variable life, 401(k) business, variable annuities and other savings products. In the context of new business growth through these product areas, we focus on Manulife Financial (MFC Buy, target $31/C$49) in Canada and Nationwide Financial (NFS - Strong Buy, target $50) in the U.S. Manulife, in our view, possesses the product focus, and Nationwide is the premier distribution-focused life insurance company in the U.S.
Market Rating 2001A 2002A 2003E Company Cap Price Ticker Prior/Rev Prior/Rev Prior/Rev Prior/Rev Analyst Newmont 5.56B 28.37 NEM Strong Buy 0.07 0.64 0.89 Cooper MIning
We see 2002 as the turnaround to steadily declining earnings since 1997, as both higher gold prices and merger with two consistent earnings generators takes place. While 1Q results are going to be filled with noise when they are released next month, the earnings power of the new Newmont should be evident. We are forecasting earnings growth of 800% ($0.64/sh) in 2002 using the current spot price for gold of $300/oz. Leverage to these earnings is enhanced by 45% with an increase of $25/oz in the gold price. In 2003, we see further earnings growth of 39% using our gold price assumption of $325/oz giving Newmont one of the highest earnings in the global gold sector. Price target $37 (C$58). NMC.T
Industry Analyst Oilfield Service Brooks
The industry is mired in an environment of weak activity in North America and stable to slowly growing international activity. As such, YOY earnings comparisons will most likely be negative. Most analysts, ourselves included, have been reducing near-term EPS estimates. That does not mean that one or more companies could not surprise against consensus due to company-specific conditions, e.g., more international businesses than North American; specific geographic market strength; the impact of new products with better pricing, etc. The most likely candidates are among the late cycle small cap companies such as GulfMark (GMRK, Buy, target $41, 1QE $0.66 vs. $0.37), Stolt Offshore (SOSA, Strong Buy, $15, 2QE $0.09 vs. loss $0.07), CHC Helicopter (FLYA.T, Strong Buy, $27, 1QE $0.61 vs. $0.28), and Willbros Group (WG, Buy, $20, 1QE $0.26 vs. $0.05). The primary reason these companies might have better earnings is their smaller size, which makes earnings potentially more volatile, both up and down, and estimates more difficult to make.
Market Rating 2001A 2002E 2003E Company Cap Price Ticker Prior/Rev Prior/Rev Prior/Rev Prior/Rev Analyst Palm, Inc. 1.91B 3.31 PALM Buy (0.05) (0.16) 0.03 Sepenzis
Given near term delays in the introduction of compelling applications and services on 2 1/2 G cellular networks, Palm has emerged with the best chance for upside in the near term. While its competitors have chosen to duke it out in the high-end smart phone market, Palm has been left nearly alone in the low-to-mid-end PDA market, with the M130 selling well through the channel. We expect that the company may achieve its target of breakeven results as early as the current Q, and believe that Palm is undervalued relative to peer group. Price target $8.
Industry Analyst Pharmaceuticals Goldstein
Large capitalization pharmaceutical stocks are experiencing a period of lackluster earnings growth, principally due to the confluence of several factors, including low new product flow, patent expirations and regulatory (FDA) delays. However, two companies stand out: Wyeth (WYE, formerly known as American Home Products, Buy, target $65) and Johnson & Johnson (JNJ, Buy, target $65). Both have good visibility on EPS, with the potential for acceleration over the next 12-18 months. Although both companies are trading at high relative valuations to peers, they represent solid EPS momentum plays in an otherwise lackluster universe.
Industry Analyst Photonics Irani
Our bullish expectations for earnings momentum in the semiconductor capital equipment group are based on technology retooling cycles, which are now reaccelerating dramatically in IC manufacturing worldwide. Beneficiaries are likely to be foremost the large OEMs with critical mass, superior next gen technologies targeting future applications, and multi-segment offerings which can provide one-stop shop. These all point to Strong Buy-rated Applied Materials (AMAT, target $80) which should outperform average S&P 500 earnings recovery significantly, and ASM International (ASMI, target $35). We are also very enthusiastic about earnings momentum at Strong Buy-rated ASM Lithography (ASML, target under revision) and KLA Tencor (KLAC, target $66): accelerating towards linewidth shrinks and 300mm requires first and foremost new lithography equipment, which have much higher ASPs than prior generations, driving unit and ASP leverage at ASML towards above average earnings momentum. As for KLAC, each successive technology retooling has proven more difficult, and therefore more process diagnostic-intensive, implying outperformance again in 2002 following a 2001 in which it remained significantly profitable in each Q, a notable differentiation relative to all its large OEM peers.
Marke Rating 2001A 2002E 2003E Company t Price Ticke Prior/R Prior/Re Prior/Re Prior/Rev Analys Cap r ev v v t Scientific-Atlant 3.3B $21.09 SFA B 1.74 1.00 1.20 Bezoza a(2)
Could be upside surprise when reports 3Q (E $0.24 vs. $0.46) on 4/18. We believe the strength could come from Subscriber and Transmission business units as cable operators continue to upgrade networks and deploy digital set-tops. While digital net adds have slowed, we feel our current E 815K for digital set-tops remain intact. Lower component pricing should help offset set-top pricing pressure and lower set-top pricing should help drive volumes. We are also encouraged by the high percentage of variable costs in its set-top manufacturing. Trading at ~20X CY02E vs. peer group at 28X, we believe the shares to be cheap at this level. Price target $30.
Market Rating 2001A 2002E 2003E Company Cap Price Ticker Prior/Rev Prior/Rev Prior/Rev Prior/Rev Analyst Shermag C$163M C$12.26 SMG.T Buy C$1.00 C$0.65 C$1.00 Schwarz
(All figures Canadian dollars) A vertically integrated leading designer and manufacturer of solid wood and veneer household furniture. Since the arrival of now President and CEO, Jeff Casselman, has undergone several operational improvements, fortified product lines, initiated an imported product program and strengthened the overall senior management team. These initiatives are starting to bear fruit as the company is expanding specialty furniture retailer customer base and is further penetrating current customer base through increased breadth and depth of product. 4Q(March) E $0.14. We believe there is a chance for upside, as we have seen some pent-up industry demand become unleashed in some competitors' results. Price target $13.50. (SMG.T C$12.35)
Market Rating 2001A 2002A 2003E Company Cap Price Ticker Prior/Rev Prior/Rev Prior/Rev Prior/Rev Analyst SICOR 2B 17.37 SCRI Strong Buy 0.64 0.77 0.96 Wilbur
Following the release of its 4Q01 results, management boosted top line growth guidance from 20% to a range of 20%-25%. With the recent approvals of liquid pamidronate ($550 million in brand sales) and IFEX/MESNEX ($100 million brand market) and up to ten additional ANDA approvals before year-end, we expect SICOR to remain one of the more robust top line growth stories among generic drug stocks over the course of 2002. One additional paragraph IV filing where the company believes it will enjoy exclusivity, on an undisclosed product with in excess of $100M in sales, remains in the near-term queue and could serve as a catalyst for upward revisions to consensus 2002 estimates. Price target $27.
Industry Analyst Specialty Retailing: Hardlines Benedict
While EPS trends for many hardline retailers have proved resilient during the recent economic slowdown, we believe select industry leaders have the potential to deliver positive earnings surprises in coming quarters due to strong operating costs controls and modest improvements in top line trends. Within Home Improvement sector, we believe Home Depot's (HD, Buy, target $60) recent focus on centralized buying and store operating efficiency under CEO Bob Nardelli has enhanced underlying leverage to improvements in sales trends in 2002. In Consumer Electronics, we believe Best Buy's (BBY, Buy, target $95) market leading position and highly efficient operating cost structure position the company to benefit from the ongoing new product cycle for digital technologies and video gaming, resulting in continued strong gains in EPS in 2002.
Marke Rating 2001A 2002A 2003E Company t Price Ticke Prior/Rev Prior/Rev Prior/Rev Prior/Rev Analyst Cap r Teva 7.18B 56.03 TEVA Buy 2.11 2.52 3.00 Wilbur Pharmaceutica l
Management has knocked the cover off the ball over the past two Qs and EPADR have topped consensus expectations for a remarkable fourteen consecutive quarters. For the March Q, we again expect Teva to deliver strong YOY profit growth likely in excess of current consensus expectations. Following the release of December Q results, management endorsed the then consensus EPADR of $2.42. Strong new generic product flow, further acquisition synergies and potential revenue upside from arsenal of 16 paragraph IV ANDAs targeting brand sales of $5.5B suggest this guidance is conservative in light of continued strong operating fundamentals. Price target $85.
Market Rating 2001A 2002A 2003E Company Cap Price Ticker Prior/Rev Prior/Rev Prior/Rev Prior/Rev Analyst Yahoo! 9.2B 15.48 YHOO Buy (0.13) 0.10 0.16 Corcoran
(PLEASE SEE PART 3) Apr-12-2002 11:59 GMT -------------- -------------- OP: Market Strategy ( Part 3 of 3 ) 07:58am EDT 12-Apr-02 CIBC World Markets Corp. (Avtar Batth) CIBCOPP SUMMARY After a dismal 2001, we believe that Yahoo! has reached an inflection point and fundamentals will improve throughout 2002. The revenue declines experienced in 2001 have ceased, and 1Q results to exhibited the first Q of Y/Y revenue growth (6.9%) since 4Q00 (including HotJobs). Revenue growth and margin improvement should accelerate throughout 2002. Importantly, we do not believe improving performance is dependent upon a recovery in Internet advertising, which we do not forecast until late 2002. Although will continue to derive a large percentage (64%) of its revenue from Internet advertising in 2002, has taken the necessary steps to achieve meaningful diversification of its revenue base. An earlier than expected recovery in Internet advertising could further accelerate the turnaround story. Price target $21.
Industry Analyst Wireless Equipment Pfau
Kopin (KOPN, Buy, target $18) continues to see improving fundamentals in the wireless substrate business and strength in the display business for camcorders. We also expect that management will provide positive forward guidance. Spectrian (SPCT, Buy, target $20) is benefitting from new products and strong near term demand for wireless deployments in Korea and upgrades by wireless operators in the US.
|
||