bmo_research highlights apr 21
TRANSCRIPT
April 21, 2010
TODAY'S HIGHLIGHTS
U.S. Canadian / Int'l
Estimates/Targets Raised Apple Russel Metals
Seagate Technology Gildan Activewear
VMware
Juniper Networks
Edwards Lifesciences
Nuvasive
UnitedHealth Group
Estimates/Targets Lowered US Bancorp
TD Ameritrade Holding
Penson Worldwide
Weatherford International
SUPERVALU
Biogen Idec
FINANCIALS
Banks U.S. US Bancorp Nearing an Inflection Point on Credit Trends
Discount Brokers U.S. TD Ameritrade Holding Lowering Estimates on Rate / Cost Assumptions
Trading Services U.S. Penson Worldwide Plans for Debt Raise; 1Q Results to Be Soft
ENERGY & UTILITIES
Services & Equipment U.S. Weatherford International Realization Should Grow that Downside is Discounted
Pipelines Sector Comment Natural Gas IQ: LNG Lagniappe
CAPITAL GOODS & SERVICES
Diversified Industrials Canada Russel Metals Pricing and Volumes in Recovery
CONSUMER
Apparel & Specialty U.S. lululemon athletica Takeaways From Analyst Day in Vancouver
Food & Drug U.S. Ruddick 2Q10 Preview - Looking For EPS Growth
Food & Drug U.S. SUPERVALU Worsening 4Q Traffic Trends + Continued "ID"...
Food & Drug U.S. Safeway SUPERVALU Trends Should Benefit Safeway
Auto Parts Canada Magna International March North American Vehicle Production; Magna's...
Diversified Consumer Canada Gildan Activewear Q2 Earnings Preview: Increasing Estimates; Raising...
TECH/TELECOM/MEDIA
Enterprise Hardware U.S. Apple A $3 June
Enterprise Hardware U.S. Seagate Technology Drive Relief
Enterprise Hardware U.S. VMware March Sequential Growth
Comms Equip U.S. Juniper Networks Decent Quarter but Not Enough Upside
HEALTH CARE
MedTech U.S. Edwards Lifesciences Revenue Light, EPS Beat, Gross Margins Impressive
MedTech U.S. Nuvasive Delivering, as Promised
MedTech U.S. Stryker Beat on the Top, Beat on the Bottom
Managed Care U.S. UnitedHealth Group Past Performance is No Guarantee
Biotech U.S. Biogen Idec Tysabri Slowing, HC Reform Dampening Already Low...
Please r cluding the Analyst's Certification.
US Bancorp (USB-NYSE)
Stock Rating: Outperform Industry Rating: Market Perform
April 20, 2010
Banks
Peter J. Winter Lana ChanBMO Capital Markets Corp. BMO Capital Markets Corp.212-885-4108 [email protected] [email protected]
Jonathan Katz Virginia Chiarello 212-885-4066 [email protected] [email protected]
Nearing an Inflection Point on Credit Trends Securities Info Price (20-Apr) $28.21 Target Price $31 52-Wk High/Low $28/$15 Dividend $0.20Mkt Cap (mm) $54,050 Yield 0.7%Shs O/S (mm, BASIC) 1,916 Float O/S (mm) 1,914Options O/S (mm) 134.7 ADVol (30-day, 000s) 11,741
Price Performance
Event USB reported 1Q10 EPS of $0.34, in line with consensus and a penny above our estimate of $0.33. Aside from $34 million in securities losses($0.01/share), it was a clean quarter.
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US BANCORP DEL NEW (USB)Price: High,Low,Close(US$) Relative to S&P 500
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Impact USB reported another strong quarter in a difficult environment. Credit trendscontinued to be positive as the rates of increase in NCOs and NPAsmoderated for the fifth consecutive quarter. USB continued to add to reserves, but at a slower pace. Despite a sequential increase in net interestincome owing to earning asset growth and margin expansion, total revenuesdeclined sequentially owing to seasonally low fee income and the negative impact of impending legislation on deposit service charges. Capital ratios continue to increase through internal earnings generation.
efer to pages 12 to 14 for Important Disclosures, in
Forecasts We are lowering our 2010 EPS estimate to $1.54 (was $1.59), reflecting lower fee income and less loan growth partially offset by lower credit costs.We are lowering our 2011 and fully normalized EPS estimates to $2.25(from $2.45) and $3.10 (from $3.15), respectively.
Valuation In our view, USB trades at an unwarranted P/E discount based on 2012 EPS (9.0x versus 10.0x for the peer group). Our targeted P/E multiple for the bank group is 10.0x; however, we believe USB deserves a 2 multiple premium, given its top-tier profitability measures and ability to generate revenues. Our$31 price target is based on 12x our fully normalized EPS estimate of $3.10, discounted back by 10% for two years.
Recommendation We reiterate our OUTPERFORM rating and $31 price target.
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Last Data Point: April 19, 2010
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Valuation/Financial Data
(FY-Dec.) 2009A 2010E 2011E 2012E EPS Pro Forma $0.97 $1.54 $2.25 $3.10 P/E 18.3x 12.5x 9.1x First Call Cons. $1.61 $2.28 $2.74 EPS GAAP $0.97 $1.54 $2.25 $3.10
Bk Val/Share $12.79 $14.11 $15.86 na Price/Book 2.0x 1.8x na Tang. BV/Shr $7.58 $8.93 $10.67 na Price/TB 3.2x 2.6x na
Quarterly EPS 1Q 2Q 3Q 4Q 2009A $0.24 $0.12 $0.30 $0.30 2010E $0.34A $0.37 $0.41 $0.43
Balance Sheet Data (12/31/09) ROE 10.50% Exp./Revenues 49.10% ROA 0.96% Net Charge-Offs/Loans 2.68% NPAs/Loans+OREO 2.34% Tang. Common/Assets 5.62% Reserve/Loans 3.\08% Notes: All values in US$. Source: BMO Capital Markets estimates, Bloomberg, FactSet, Global Insight, Reuters, and Thomson Financial.
Changes Annual EPS Annual Bk Val/Share Quarterly EPS 2010E $1.59 to $1.54 2010E $14.08 to $14.11 Q2/10E $0.39 to $0.37 2011E $2.45 to $2.25 2011E $16.03 to $15.86 Q3/10E $0.42 to $0.41 2012E $3.15 to $3.10 Q4/10E $0.44 to $0.43
Please r cluding the Analyst's Certification.
TD Ameritrade Holding (AMTD-OTC) Stock Rating: OutperformI ndustry Rating: Outperform
April 20, 2010
Discount Brokerage
Michael Vinciquerra, CFABMO Capital Markets Corp.
Jillian Miller Richard Fellinger [email protected] [email protected] 404-926-1581 404-926-1582
Securities Info Pr ice (19-Apr) $20.06 Target Pr ice $2352-Wk High/Low $21/$15 Dividend --Mk t Cap (mm) $11,826 Yield --Shs O/S (mm, BASIC) 589.5 Float O/S (mm) 233.5Options O/S (mm) na ADVol (30-day, 000s) 6,369
Price Performance
Lowering Estimates on Rate / Cost Assumptions
Event TD Ameritrade reported adjusted March (FY1Q10) quarter EPS of $0.23, net
of $0.04 in tax benefits. Our estimate and consensus was $0.24.
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TD AMER ITRADE HLDG CORP (AMTD)Price: High,Lo w,Close( US$) Relative to S&P 500
efer to pages 7 to 11 for Important Disclosures, in
Impact Revenues were actually $6.8 million higher than our projection, butcompensation, execution and "other" expenses were all above ourassumptions. Trading was soft for a March quarter, but the companycontinues to have tremendous success in adding client assets. Net new assetswere a record $10 billion for fiscal 2Q. Overall, the quarter was mixed giventhe spike in expenses and the continuing positive trends in client flows.
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Forecasts As part of our quarter-end modeling update (for both AMTD and other brokerage companies), we are changing our underlying assumption regardingFed rate changes. Our model now incorporates a 25 bp Fed increase in each quarter from 4Q10 to 4Q11 versus the first increase being in 3Q10 before. In addition, we’re adding much more conservative assumptions on expenselevels, all of which is resulting in sharp cuts to our 2010 and 2011 estimates.Our new numbers are $1.02 and $1.45, respectively, down from $1.10 and$1.68 previously. Lower interest yields were the single largest driver.
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Valuation/Financial Data
(FY-Sep.) 2008A 2009A 2010E 2011E EPS Pro Forma $1.37 $1.11 $1.02 $1.45 P/E 19.7x 13.8x First Call Cons. $1.07 $1.45 EPS GAAP $1.33 $1.10 $1.02 $1.45
FCF $1.36 $1.21 $1.14 $1.54 FCF Yield 5.7% 7.7% Pretax Margin (%) 51.7% 44.1% 36.8% 36.8% Rev. ($mm) $2,499 $2,408 $2,569 $2,998
Quarter ly EPS 1Q 2Q 3Q 4Q 2009A $0.31 $0.23 $0.30 $0.28 2010E $0.23A $0.27A $0.25 $0.27
Balance Sheet Data (12/31/09) Net Debt ($mm) $571 ROE 25.2% Total Debt ($mm) $1,414 Debt/Cap. nm Notes: All values in US$. Source: BMO Capital Markets estimates, Bloomberg, FactSet, Global Insight, Reuters, and Thomson Financial.
Valuation Shares currently trade for around 14x our revised FY2011 estimate. Given the positive trends in account and asset additions and the earnings upside tohigher rates, we still find these shares attractive.
Recommendation Our rating remains OUTPERFORM.
Changes Annual EPS Annual FCF Quarterly EPS 2010E $1.10 to $1.02 2010E $1.22 to $1.14 Q3/10E $0.29 to $0.25 2011E $1.68 to $1.45 2011E $1.77 to $1.54 Q4/10E $0.34 to $0.27
Please r cluding the Analyst's Certification.
Penson Worldwide (PNSN-NASDAQ) Stock Rating: OutperformI ndustry Rating: Market Perform
April 20, 2010
Trading Services
Michael Vinciquerra, CFABMO Capital Markets Corp.
Jillian Miller Richard Fellinger [email protected] [email protected] 404-926-1581 404-926-1582
Securities Info Pr ice (20-Apr) $10.42 Target Pr ice $1252-Wk High/Low $12/$7 Dividend --Mk t Cap (mm) $267 Yield --Shs O/S (mm, BASIC) 25.6 Float O/S (mm) 19.4Options O/S (mm) na ADVol (30-day, 000s) 94
Price Performance
Plans for Debt Raise; 1Q Results to Be Soft
Event After Tuesday’s close, Penson announced its plan for a $200 million senior
second lien secured notes offering to support working capital requirements
for its Ridge contracts acquisition. In addition, it released preliminary data
for 1Q10 indicating quarterly EPS will be about $0.04, or $0.01 including
some one-time charges for the Broadridge deal and severance.
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PENSON WORLDWIDE INC (PNSN)Price: High,Lo w,Close( US$) Relative to S&P 500
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Impact EPS of $0.04 for 1Q10 places Penson below our estimate of $0.07 andconsensus of $0.05. Given the company’s disclosures, the delta versus our model will be in non-clearing, "other" transaction revenues, which weredown on a sequential basis. In regards to the debt, the company will use theproceeds to pay down ~$100 million in current bank debt and also providecapital to support its pending Broadridge deal.
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Valuation/Financial Data
(FY-Dec.) 2008A 2009A 2010E 2011E EPS Pro Forma $1.16 $0.57 $0.60 $0.99 P/E 17.4x 10.5x First Call Cons. $0.48 $0.93 EPS GAAP $0.41 $0.62 $0.60 $0.99
FCF $0.47 $0.53 $0.84 $1.14 FCF Yield 8.1% 10.9% Pretax Margin (%) 5.7% 8.4% 9.0% 13.8% Rev. ($mm) $293 $285 $292 $316
Quarter ly EPS 1Q 2Q 3Q 4Q 2009A $0.07 $0.24 $0.15 $0.12 2010E $0.04 $0.13 $0.19 $0.25
Balance Sheet Data (12/31/09) Net Debt ($mm) $197 ROE 8.6% Total Debt ($mm) $246 Debt/Cap. nm Notes: All values in US$. Source: BMO Capital Markets estimates, Bloomberg, FactSet, Global Insight, Reuters, and Thomson Financial.
Forecasts We are taking down our “other” revenue projection from $12.75 million in1Q to $10.75 million to bring our non-interest revenue assumption in linewith management’s guidance. As a result, our 2010 estimate is reduced to$0.60 from $0.64. Official 1Q results will likely be released the afternoon ofMay 5, with a conference call the following morning. Our estimates will likely change post quarter, as we’re adjusting the Fed funds rate assumptionsin all our brokerage-related models to assume hikes don’t start until 4Q10.
Valuation Shares now trade at 17x our 2010 estimate. Our target of $12 assumes a 20x multiple that same figure.
Recommendation We rate shares OUTPERFORM.
Changes Annual EPS Annual FCF Quarterly EPS 2010E $0.64 to $0.60 2010E $0.87 to $0.84 Q1/10E $0.07 to $0.04
efer to pages 3 to 5 for Important Disclosures, in
Please r cluding the Analyst's Certification.
Weatherford International(WFT-NYSE) Stock Rating: Market PerformI ndustry Rating: Outperform
April 20, 2010
Oil ServicesAlan Laws, CFA
BMO Capital Markets Corp.303-436-1125
Phillip Jungwirth, CFA303-436-1127
Realization Should Grow that Downside is Discounted
Event Weatherford (WFT) reported 1Q10 operating EPS of $0.06 including (all toofamiliar) one-time items that totaled $81mm. Our estimate was notmeaningfully different than consensus at $0.09, so it was a miss but one thatwas largely expected and not meaningful. Like HAL, margin expansion inNorth America (NA) was the story, up 690bp to 12.6% with the go forward a story of stability not growth. International profitability suffered from weatherissues, project delays, mobilization costs and project wind down in Mexico butis now on an upward trajectory. WFT sees 2Q EPS flat to 1Q followed by earnings growth well into 2011. On the balance sheet, net debt rose sequentially to 40% of capital, and there was scant discussion of free cash flowclaims and better capital efficiency for 2010 ex-M&A and/or legal settlements(the latter being of keen interest to investors). On the FCP investigation, the company pled the fifth given legal sensitivities. We still think a near-term settlement could be in the offing – a potential material catalyst for the stock.
Securities Info Price (19-Apr) $17.21 Target Price $24 52-Wk High/Low $24/$13 Dividend --Mkt Cap (mm) $12,699 Yield --Shs O/S (mm, BASIC) 737.9 Float O/S (mm) 737.9Options O/S (mm) na ADVol (30-day, 000s) 12,826
Price Performance
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WEATHERFORD INTERNATIONAL LT (WFT)Price: High,Low,Cl ose(US$) Relative to S&P 500
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efer to pages 6 to 10 for Important Disclosures, in
Impact We believe WFT represents reasonable risk-adjusted value at current levelseven with the FCP overhang and a tight financial position. There was nothing incrementally negative in its 1Q release, and we see considerable leverage tothe upcycle in its international operations. Yes, 2Q EPS is expected to be flat and below current consensus, but a solid ramp beyond that seems doable with rising int’l activity. Our concerns around its financial flexibility remainand we don’t expect material free cash generation given its level of earningsand anticipated working capital requirements. An equity cushion would helpalleviate concerns around funding opportunities/growth and potential financial penalties from FCP, in our view, but management has consistently denied pursuit of this option. The FCP investigation clearly remains the wildcard for the stock. Failing overtly punitive terms (i.e., >$200mm fine and aninternal monitor), we see the stock rallying hard on FCP closure.
Forecasts We are trimming our 2010 EPS to $0.61, but maintaining our $1.35 for 2011.
Valuation Our target remains $24 based on an 18x P/E multiple applied to 2011 EPS.
Recommendation Our opinion remains MARKET PERFORM with a bias to upgrade.
Changes Annual EPS Annual OperCF Quarterly EPS
2010E $0.70 to $0.61 2010E $2.18 to $2.09 Q3/10E $0.23 to $0.19 Q4/10E $0.30 to $0.27
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(FY-Dec.) 2008A 2009A 2010E 2011E EPS GAAP $2.00 $0.53 $0.61 $1.35 P/E 28.2x 12.7x First Call Cons. $0.69 $1.30
OperCF $2.98 $1.79 $2.09 $2.93 P/OperCF 8.2x 5.9x EBITDA ($mm) $2,737 $1,711 $2,046 $2,757 EV/EBITDA 9.4x 7.0x Rev. ($mm) $9,600 $8,827 $9,775 $11,409
Quarterly EPS 1Q 2Q 3Q 4Q
2009A $0.27 $0.10 $0.13 $0.02 2010E $0.06A $0.08 $0.19 $0.27
Balance Sheet Data (31-Mar) Net Debt ($mm) $6,629 TotalDebt/EBITDA 3.3x Total Debt ($mm) $6,836 EBITDA/IntExp 5.5x Net Debt/Cap. 39.9% Price/Book 1.3x
Notes: All values in US$ Source: BMO Capital Markets estimates, Bloomberg, FactSet, Global Insight, Reuters, and Thomson Financial.
Page 1 April 20, 2010
North American Pipelines
Industry Rating: Market Perform
April 20, 2010
Carl Kirst, CFABMO Capital Markets Corp.
Danilo Juvane, CFA713-546-9741
Gas Industry Snapshot* Natural Gas IQ: LNG Lagniappe
NYMEX Natural Gas 12-Mo. Strip ($/mmbtu): $4.68
Weekly Change -3.6%
YTD Change -20.3%
NYMEX Crude Oil 12-Mo. Strip ($/bbl): $86.26
Weekly Change -1.4%
YTD Change 5.0%
Natural Gas Liquids (40% ethane, $/gal): $1.06
Current $ Correlation to Spot Crude Oil 51.1%
Weekly Change 3.7%
YTD Change -10.7%
Processing Frac-Spread (Gulf Coast, $/gal): $0.72
Weekly Change 4.0%
YTD Change 3.6%
LNG U.S. Imports (weekly avg, Bcf/d): 1.45
Weekly Change -42.1%
Y-o-Y Change -29.8%
Natural Gas in Storage (Bcf): +87 to 1,756
Vs. this week last year 21 to 1,692
Vs. this week 5-yr avg 21 to 1,510
Natural Gas Directed Rig Count: +14 to 973
Weekly Change 1.5%
Y-o-Y Change 28.0%
Stock Performance: Weekly
US Gas Diversif ieds -1.4%
US Gas Utilities -0.6%
Canadian Pipelines -0.2%
Canadian Trusts 0.4%
UTY (Philadelphia Utility Index) -1.5%
XOP (S&P E&P SPDR) -2.3%
OSX (Oil Service Index) -0.8%
S&P 500 (SPX) 0.1%
10-Year US Treasury Yield -1.1%
Stock Performance: YTD
US Gas Diversif ieds 6.4%
US Gas Utilities 4.4%
Canadian Pipelines 3.0%
Canadian Trusts 7.4%
UTY (Philadelphia Utility Index) -4.1%
XOP (S&P E&P SPDR) 5.4%
OSX (Oil Service Index) 8.5%
S&P 500 (SPX) 7.4%
10-Year US Treasury Yield -1.0%
* A ll data priced as of close April 19, 2010 in US$
Source: B loomberg, EIA, Waterborne, Baker Hughes, P latts, Company data.
The Natural Gas IQ is our weekly report aimed at developments in the natural gas
infrastructure space, and importantly, the implications for our pipeline equities.
Is a gas-OPEC on the horizon? We don’t think so, despite recent commentary
out of Algeria, the host country of this year’s Gas Exporting Countries Forum
(GECF, whose members account for 2/3 of worldwide gas reserves) held
yesterday. In short, Algeria is spearheading a drive to reduce global LNG
production to raise spot global gas prices. “Sources” supposedly indicate that the
executive committee had reached consensus to act, but with no consensus on what
the actual mechanism should be. Given the two largest holders of gas reserves,
Russia and Qatar, basically sell their LNG linked to oil (that is until QatarGas 3/4
comes into service later this year—some volumes of which were originally meant
for the US spot market), and that Russia has already agreed to selling 15% of its
pipeline volumes at spot prices for the next 3 years, it’s hard for us to believe a
concerted effort to reduce liquefaction utilization today will take hold. In the final
analysis, it may not mean a whole lot for US gas prices either way, given the rise in
domestic shale supply and our own lackluster call/reliance on LNG imports. After
all, with minimum contracted volumes into the US likely in excess of 0.5 Bcfd (the
lowest monthly imports we see on recent record is 0.7 Bcfd), potentially removing
~400 MMcfd from the US market may help our oversupply, but only marginally.
LNG import forecast goes contra trend as May likely to be less than April.
After falling to near parity, the UK NBP futures market is now at a $1 premium
over Henry Hub (Exhibit 44), implying any swing production in the market will
continue to head for Europe even with the high refill state of European storage
(Exhibit 46). Production issues in Oman, Egypt and ongoing problems in Nigeria
and Algeria have basically offset new production volumes. The upshot, rather than
the typical trend of rising US LNG imports into the spring/summer (as unneeded
winter heating volumes look for a home), we see US LNG imports remaining
lackluster at best (close to 1 Bcfd), a dynamic unlikely to improve especially in the
context of our own bearish view of near term natural gas prices.
Refer to pages 23 to 24 for Important Disclosures, including Analyst's Certification.
This report was prepared by an analyst(s) employ d as a research analyst(s) under FINRA rules. For disclosure statements, including
Russel Metals (RUS-TSX) Stock Rating: Market PerformIndustry Rating: Outperform
April 20, 2010 Research Comment Toronto, Ontario
Randy Cousins, CFA BMO Nesbitt Burns Inc. (416) 359-6194 [email protected] Assoc: Stephen Yang
Price (19-Apr) $21.40 52-Week High $21.99 Target Price $22.00 52-Week Low $12.05 Pricing and Volumes in Recovery
ed by BMO Nesbitt Burns Inc., and who is (are) not registerethe Analyst's Certification, please refer to pages 5 to 7.
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Russel Metals (RUS)Price: High,Low,Close Earnings/Share
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Event We are increasing our 2010 estimates for Russel Metals based on higher steel
prices and demand recovery. The offset is FX.
Impact
Positive. Higher steel prices should result in higher earnings for Russel.
Forecasts We are increasing our Q1/10 earnings estimate to $0.30 from $0.20. Our 2010
estimate is increased to $1.38 from $1.05. Our 2011 estimate remains $1.65 and
reflects our estimate of normalized earnings for Russel.
Valuation
Our target price is $22 or a dividend yield of 4.5%.
Recommendation With higher steel prices the risk to the common dividend at Russel is reduced.
We have argued that Russel to a large extent trades on the basis of its dividend
yield. With the rally in the Bank stocks and some other higher yield situations
such as BCE, there has been a similar reduction in yield expectations for Russel.
From an earnings perspective, the price of steel is the critical variable. Our
estimate of sustainable or normalized EPS for Russel is $1.65 per share.
Excluding the peaks and the troughs, the stock has generally traded between 11
and 14 times earnings in the last few years. Normalized value plus our 2010
forecast EPS of $1.38 implies a target between $19 and $25 dollars. We rate
Russel Market Perform. Our target yield is 4.5% or 180 basis points higher than
the bank index yield.
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(FY-Dec.) 2008A 2009A 2010E 2011E EPS $3.65 -$1.13 $1.38 $1.65 P/E 15.5x 13.0x CFPS $4.12 -$0.74 $1.90 $2.20 P/CFPS 11.3x 9.7x Rev. ($mm) $3,366 $1,972 $2,281 $2,458 EV ($mm) $1,571 $931 $1,293 $1,258 EBITDA ($mm) $384 $84 $176 $198 E
V/EBITDA 4.1x 11.1x 7.3x 6.4x
Quarterly EPS Q1 Q2 Q3 Q4 2008A $0.50 $1.24 $1.44 $0.48 2009A -$0.92 -$0.41 $0.21 -$0.01 2010E $0.30 $0.37 $0.34 $0.36 Dividend $1.00 Yield 4.7% Book Value $13.29 Price/Book 1.6x Shares O/S (mm) 59.7 Mkt. Cap ($mm) $1,278 Float O/S (mm) 59.7 Float Cap ($mm) $1,278 Wkly Vol (000s) 1,206 Wkly $ Vol (mm) $19.8 Net Debt ($mm) -$17.5 Next Rep. Date May (E)
Notes: All values in C$; * Calculations on as reported basis Major Shareholders: First Call Mean Estimates: RUSSEL METALS (C$) 2010E: $1.19; 2011E: $1.49
Changes Annual EPS Annual CFPS Quarterly EPS Target 2010E $1.05 to $1.38 2010E $1.55 to $1.90 Q1/10E $0.20 to $0.30 $18.00 to $22.00 Q2/10E $0.25 to $0.37 Q3/10E $0.28 to $0.34 Q4/10E $0.32 to $0.36
Please r cluding the Analyst's Certification.
lululemon athletica (LULU-NASDAQ; LLL-TSX) Stock Rating: Market PerformI ndustry Rating: Market Perform
April 20, 2010
Apparel Retail
John D. MorrisBMO Capital Markets Corp.
Jennifer Redding Edward Plank 212-885-4072 212-885-4053 [email protected] [email protected]
Securities Info Price (20-Apr) $41.92 Target Price $4252-Wk High/Low $46/$11 Dividend --Mkt Cap (mm) $2,134 Yield --Shs O/S (mm, BASIC) 50.9 Float O/S (mm) 50.9Options O/S (mm) na ADVol (30-day, 000s) 1,098
Price Performance
Takeaways From Analyst Day in Vancouver
Event We attended the lululemon Analyst Day on Tuesday, April 20 in Vancouver.The company was upbeat and the event was well attended. CEO Christine Day and CFO John Currie appear to have a strong understanding of thebusiness and continue to make investments necessary to grow the company.Management provided store tours of lululemon, ivivva, and the distributioncenter, showcased fall product through a function show, and outlined keystrategies. We continue to see stable fundamentals, given consistent positivemomentum. That said, we believe earnings are likely to come in closer toconsensus estimates during the back half, given more challenging compares.
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LULULEMON ATHLETICA INC (LULU)Price: High,Low,Close(US$) Relati ve to S&P 500
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Impact Management outlined key opportunities to deliver long-term EPS growth in keeping with its 25% target through: opening up more showrooms to testpotential new markets for store expansion, building out lines such as runningand innovating new technical product, executing further on its still young e-com business, increasing its in-stock position in key categories and key sizes,and delivering on its new ivivva concept. Net-net, while the long-term outlook appears solid, we believe more challenging 2H10 comparisons, aswell as incremental SG&A spend in FY2010 to boost store labor, may keep alid on the degree of upside. That said, we continue to believe that lululemonis a solid concept that brings a unique and differentiated approach to market, although, in our view, the current momentum appears to be fully reflected inthe stock.
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Valuation/Financial Data
(FY-Feb.) 2008A 2009A 2010E 2011E
EPS Pro Forma $0.61 $0.82 $1.07 $1.35 P/E 39.2x 31.1x First Call Cons. $1.07 $1.37 EPS GAAP $0.61 $0.83 $1.07 $1.35
FCF $0.13 $1.44 $1.20 $1.50 P/FCF 34.9x 27.9x EBITDA ($mm) $76.8 $107.6 $145.7 $183.2 EV/EBITDA 13.6x 10.8x Rev. ($mm) $353 $453 $584 $722 EV/Rev 3.4x 2.7x
Quarterly EPS 1Q 2Q 3Q 4Q
Forecasts We are maintaining our 1Q and FY2010 EPS estimates of $0.20 and $1.07,respectively.
2009A $0.09 $0.13 $0.20 $0.40 2010E $0.20 $0.22 $0.23 $0.42
Balance Sheet Data (01/29/10) Net Debt ($mm) -$160 TotalDebt/EBITDA nm Total Debt ($mm) $0 EBITDA/IntExp na Net Debt/Cap. nm Price/Book 16.2x
Notes: All values in US$. Source: BMO Capital Markets estimates, Bloomberg, FactSet, Global Insight, Reuters, and Thomson Financial.
Valuation With the stock trading at roughly 31x our FY2011 EPS estimate, we believe expectations are high and find it difficult to justify a higher valuation.
Recommendation We maintain our MARKET PERFORM rating on the shares.
efer to pages 5 to 7 for Important Disclosures, in
Please r cluding the Analyst's Certification.
Ruddick (RDK-NYSE) Stock Rating: Market PerformI ndustry Rating: Outperform
April 20, 2010
Food Retail
Karen ShortBMO Capital Markets Corp.
Megan O'Hara212-885-4124
2Q10 Preview - Looking for EPS Growth Securities Info Pr ice (20-Apr) $33.60 Target Price $3252-Wk High/Low $33/$22 Dividend $0.48Mkt Cap (mm) $1,638 Yield 1.4%Shs O/S (mm, BASIC) 48.7 Float O/S (mm) 46.4Options O/S (mm) na ADVol (30-day, 000s) 380
Price Performance
Event For a period of time, we argued Ruddick should be valued somewhere in
between Whole Foods and the conventional supermarkets because of the
stronger (sustainable) top line (unit growth and same store sales), the non-
union nature of the work force and the strong market shares. A&E justified a
depressed multiple to WFMI – making the blended valuation somewhere in
between. For a while, this theory on valuation methodology rang true –
comps and margins were industry leading and unit growth prospects
remained robust so a valuation premium to the conventionals played out.
More recently, sales trends and margin pressures have more or less mirrored
trends seen at the conventionals, but Whole Foods has bucked the trend. As a
result, for now, we would argue RDK should trade more in line with
conventional peers. Once the top line recovers, however, we see upside to the
stock, so for longer time horizon investors we think the current levels
represent a good entry point. Ruddick will release FY2Q10 (12/28/09 to
3/28/10) results on 04/29/10 (with no conference call). We (and consensus)
are at EPS of $0.49 – reasonable given some buffer at A&E as well as
inclement weather – which helps the top line. Our EPS assumes same-store
sales decline 2.0% versus the down 2.4% in 1Q.
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RUDDICK CORP (RDK)Price: High,Low,Close(US$) Relative to S&P 500
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Volume ( mln )
L ast Data Point: April 19, 2 010 Valuation/Financial Data
(FY-Sep.) 2008A 2009A 2010E 2011E EPS Pro Forma $2.00 $1.87 $1.98 $2.11 P/E 17.0x 15.9x First Call Cons. $2.00 $2.17 EPS GAAP $2.00 $1.87 $1.98 $2.11
FCF -$1.22 -$0.57 $1.17 $1.40 P/FCF 28.7x 24.0x EBITDA ($mm) $288 $290 $313 $332 EV/EBITDA 6.4x 6.0x Rev. ($mm) $3,992 $4,078 $4,396 $4,576 EV/Rev 0.5x 0.4x
Quarter ly EPS 1Q 2Q 3Q 4Q
Impact Neutral/Positive. 2009A $0.47 $0.45 $0.46 $0.49
2010E $0.49A $0.49 $0.51 $0.50
Quarter ly EBITDA 1Q 2Q 3Q 4Q 2009A $72.1 $70.0 $72.4 $75.7 2010E $76.5 $77.5 $79.5 $79.6
Balance Sheet Data (12/31/09) Net Debt ($mm) $360 TotalDebt/EBITDA 1.3x Total Debt ($mm) $400 EBITDA/IntExp na Net Debt/Cap. 29.7% Price/Book 2.0x Notes: All values in US$. Source: BMO Capital Markets estimates, Bloomberg, FactSet, Global Insight, Reuters, and Thomson Financial.
Forecasts We reiterate our FY2Q10 EPS estimate of $0.49, which is in line withconsensus, our FY2010 estimate of $1.98 versus $2.00 consensus, and our FY2011 estimate of $2.11 versus $2.17 consensus.
Valuation RDK is trading at an EV/EBITDA and P/E of 5.6x and 15.7x our FY2011estimates, respectively.
Recommendation We continue to rates of RDK MARKET PERFORM.
efer to pages 5 to 8 for Important Disclosures, in
Please r including the Analyst's Certification.
SUPERVALU (SVU-NYSE) Stock Rating: Market PerformI ndustry Rating: Outperform
April 21, 2010
Food Retail
Karen ShortBMO Capital Markets Corp.
Megan O'Hara212-885-4124
[email protected] Securities Info
Price (20-Apr) $16.27 Target Price $20 52-Wk High/Low $18/$12 Dividend $0.35Mkt Cap (mm) $3,449 Yield 2.2%Shs O/S (mm, BASIC) 212.0 Float O/S (mm) 209.5Options O/S (mm) na ADVol (30-day, 000s) 3,870
Selected Bond Iss Ind Prc Rat’g Mdys/S&P YTW SpreadSVU 7 1/2 05/15/12 106 Ba3 / B+ 4.30% 329bpSVU 7 1/2 11/15/14 103 Ba3 / B+ 6.21% 461bpBond data from Bloomberg.
Price Performance
Worsening 4Q Traffic Trends + Continued “ID” Weakness in 1Q = Cloudy Future
Event SUPERVALU continues to make progress with key initiatives to drive
efficiencies and preserve profitability, but these efficiencies should only
serve to partially offset significant FY2011 headwinds. These headwinds
include 1) the persistence of extremely negative sales trends in 4Q10 and in
to 1Q11, 2) an estimated $0.05 LIFO headwind, 3) higher rates on the
revolver, 4) the loss of Ukrop’s, and 5) higher pension expense. More
troubling was the deterioration in traffic trends in 4Q (-3% vs. -2% in 3Q), as
well as comments that the “ID” remains in the -6% area in 1Q and will likely
remain at this level throughout the entire 1H11. If true, ID sales guidance
(for a FY ID in the -2% area) seems unachievable – and our below-guidance
EPS estimate of $1.71 (vs. guidance of $1.75-$1.95) reflects this skepticism.
More important, -6+% IDs indicate significant share losses in our view, and
we are concerned the SUPERVALU conventional banners may not, in fact,
resonate with the customer. The stock, however, looks cheap, and liquidity is
comfortable, so we remain at MARKET PERFORM, but remain sidelined.
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SUPERVALU INC (SVU)Price: High,Low,Close(US$) Relative to S&P 500
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efer to pages 7 to 10 for Important Disclosures,
Impact Negative/neutral.
Forecasts Our FY2011 EPS comes down to $1.71 from $1.88. Our 1Q11 EPS is at $0.50.
Valuation SVU is trading at a FY2011 EV/EBITDA of 4.5x and a P/E of 9.5x. A slight (and justified) discount to the peers.
Recommendation We maintain our MARKET PERFORM rating.
Changes Annual EPS 2011E $1.88 to $1.71
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Last Data Point: April 19, 2010
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Valuation/Financial Data
(FY-Feb.) 2009A 2010A 2011E 2012E EPS Pro Forma $2.86 $1.97 $1.71 na P/E 9.5x na First Call Cons. $1.96 $1.96 $2.22 EPS GAAP $2.86 $1.97 $1.71 $1.00
FCF $1.54 $2.42 $1.70 na P/FCF 9.6x na EBITDA ($mm) $2,662 $2,198 $2,137 na EV/EBITDA 4.5x na Rev. ($mm) $44,564 $40,597 $39,072 na EV/Rev 0.2x na
Quarterly EPS 1Q 2Q 3Q 4Q 2010A $0.55 $0.35 $0.46 $0.62 2011E $0.50 $0.23 $0.43 $0.56
Quarterly EBITDA 1Q 2Q 3Q 4Q 2010A $562.0 $648.7 $435.0 $562.0 2011E $648.7 $435.0 $503.8 $549.4
Balance Sheet Data (11/30/09) Net Debt ($mm) $6,237 TotalDebt/EBITDA 3.8x Total Debt ($mm) $8,180 EBITDA/IntExp na Net Debt/Cap. 58.0% Price/Book 1.2x Notes: All values in US$. Source: BMO Capital Markets estimates, Bloomberg, FactSet, Global Insight, Reuters, and Thomson Financial.
Please r cluding the Analyst's Certification.
Safeway (SWY-NYSE) Stock Rating: OutperformI ndustry Rating: Outperform
April 21, 2010
Food Retail
Karen ShortBMO Capital Markets Corp.
Megan O'Hara212-885-4124
SUPERVALU Trends Should Benefit Safeway Securities Info Pr ice (20-Apr) $26.49 Target Price $2852-Wk High/Low $27/$18 Dividend $0.40Mkt Cap (mm) $10,299 Yield 1.5%Shs O/S (mm, BASIC) 388.8 Float O/S (mm) 385.4Options O/S (mm) na ADVol (30-day, 000s) 5,449
Selected Bond Iss
Event We maintain our OUTPERFORM rating on SWY going into 1Q10 because
we believe SWY is undervalued, but caution 1) we are $0.02 below
consensus at $0.28, so we think there could be risk of a miss; and 2) the
recent strength in SWY could add some risk of weakness. We would take
advantage of any potential weakness after earnings. We reiterate our
Outperform. Details: SWY will report FY1Q (1/3/10-3/27/10) earnings on
04/29/10 with a call at 11a.m. EST. Our $0.28 estimate reflects 1) a 3-bp
decline in gross margins, ex fuel; 2) a 51-bp deterioration ex fuel, including
D&A; 3) a 2.7% decline in ID sales, a sequential improvement from the
4.1% decline seen in FY4Q09, but this improvement is largely predicated on
deflation of -1% vs. -2.4% seen in 4Q09; and 4) gas margins of 12¢. OPIS is
indicating gas margins were in the 16¢ area in 1Q. If accurate, the risk of an
EPS miss is less likely because the higher margins provide an estimated
$0.03 buffer. This gets us a to an 8% y/y EPS decline, but if we back out the
Super Bowl debacle in last year’s EPS, we are looking for a 21% y/y decline.
On the call, we will look for color on sales trends in 2Q, inflation
expectations, and the competitive environment.
efer to pages 5 to 11 for Important Disclosures, in
Impact Neutral.
Forecasts We forecast FY1Q10 EPS of $0.28 vs. $0.30 consensus. For FY2010 andFY2011, we remain at $1.82 and $2.01 vs. consensus of $1.80 and $2.04.
Valuation Our $28 price target values SWY at FY2010 EV/EBITDA of 5.5x and a P/Eof 15.4x. KR is trading at 5.9x EV/EBITDA and 13.6x P/E, a discount we continue to think is unwarranted given SWY’s higher EBITDA marginssupported by the Canadian division, Blackhawk, less overlap with WMT, and greater upside based on our DCF.
Recommendation We continue to rate shares of Safeway OUTPERFORM.
Ind Prc Rat’g Mdys/S&P YTW SpreadSWY 4.95 08/16/10 101 Baa2 / BBB 2.12% 199bpSWY 6 1/2 03/01/11 105 Baa2 / BBB 1.20% 80bpBond data from Bloomberg.
Price Performance
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SAFEWAY INC (SWY)Price: High,Low,Close(US$) Relative to S&P 500
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Volume ( mln )
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(FY-Dec.) 2008A 2009A 2010E 2011E EPS Pro Forma $2.16 $1.56 $1.82 $2.01 P/E 14.6x 13.2x First Call Cons. $1.80 $2.04 EPS GAAP $2.21 $1.56 $1.82 $2.01
FCF $9.74 $2.42 $2.46 $3.03 P/FCF 10.8x 8.7x EBITDA ($mm) $2,994 $2,517 $2,605 $2,654 EV/EBITDA 5.7x 5.6x Rev. ($mm) $44,104 $40,851 $42,335 $43,412 EV/Rev 0.3x 0.3x
Quarter ly EPS 1Q 2Q 3Q 4Q 2009A $0.30 $0.42 $0.31 $0.53 2010E $0.28 $0.42 $0.43 $0.69
Quarter ly EBITDA 1Q 2Q 3Q 4Q 2009A $545.9 $625.9 $548.5 $796.4 2010E $519.7 $605.8 $608.3 $870.7
Balance Sheet Data (12/31/09) Net Debt ($mm) $4,430 TotalDebt/EBITDA 1.9x Total Debt ($mm) $4,902 EBITDA/IntExp na Net Debt/Cap. 45.0% Price/Book 2.1x Notes: All values in US$. Source: BMO Capital Markets estimates, Bloomberg, FactSet, Global Insight, Reuters, and Thomson Financial.
This report was prepared by an analyst(s) employ d as a research analyst(s) under FINRA rules. For disclosure statements, including
Magna International (MGA-NYSE; MG.A-TSX) Stock Rating: OutperformIndustry Rating: Outperform
Member of: Top 15 Large Cap Stock Selections Top 15 Value Stock Selections
April 20, 2010 Research Comment Toronto, Ontario
Peter Sklar, CA BMO Nesbitt Burns Inc. (416) 359-5188 [email protected] Assoc: Andrew McKendry, CA, CFA
Price (19-Apr) $63.36 52-Week High $64.51 Target Price $70.00 52-Week Low $30.66 March North American Vehicle Production;
Magna’s Q1/10 Mix Slightly Favourable
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Magna International (MGA)Price: High,Low,Close(US$) Earnings/Share(US$)
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Event We have reviewed detailed North American industry production data for March
2010 to assess Magna’s exposure to specific platforms.
ed by BMO Nesbitt Burns Inc., and who is (are) not registerethe Analyst's Certification, please refer to pages 6 to 8.
Impact Slightly Positive. Based on production data for all of Q1/10, we calculate that
revenues on Magna’s top eighteen North American platforms increased 76%
year over year, slightly better than the Detroit Three.
Forecasts Although our analysis suggests the potential for slight earnings upside, we have
not revised our Q1/10 earnings estimate of $0.89 per share. Our Q1/10 earnings
forecast is above the consensus mean forecast of $0.77 per share. We expect
Magna will report its Q1/10 results on Thursday, May 6.
Valuation Our target price of US$70 is unchanged, and is based on a projected enterprise
value that is 3.8x our 2011 EBITDA forecast.
Recommendation We believe that Magna is well positioned to be a leading consolidator of the
North American supply base. As well, the stock offers considerable value
relative to the leading U.S. auto parts companies. We continue to rate Magna
Outperform.
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Last Data Point: April 19, 2010
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(FY-Dec.) 2008A 2009A 2010E 2011E EPS $3.37 -$2.67 $3.01 $5.16 P/E 21.0x 12.3x CFPS $11.67 $5.55 $9.95 $12.32 P/CFPS 6.4x 5.1x Rev. ($mm) $23,704 $17,367 $19,760 $22,523 EV ($mm) $4,360 $2,847 $5,852 $5,475 EBITDA ($mm) $1,422 $416 $1,225 $1,634 EV/EBITDA 3.1x 6.8x 4.8x 3.4x Quarterly EPS Q1 Q2 Q3 Q4 2008A $1.78 $2.04 $0.17 -$0.68 2009A -$1.79 -$1.29 $0.45 -$0.05 2010E $0.89 $0.84 $0.53 $0.75 Dividend $0.00 Yield 0.0% Book Value $65.33 Price/Book 1.0x Shares O/S (mm) 112.7 Mkt. Cap (US$mm) $7,141 Float O/S (mm) 85.5 Float Cap (US$mm) $5,417 Wkly Vol (000s) 5,301 Wkly $ Vol (USmm) $247.0 Net Debt ($mm) -$1,155.0 Next Rep. Date 06-May (E)
Notes: All values in US$; Statistics reflect spinoffs; Subordinate Voting Major Shareholders: Widely held. Votes controlled by Frank Stronach. First Call Mean Estimates: Not Available
This report was prepared by an analyst(s) employ d as a research analyst(s) under FINRA rules. For disclosure statements, including
Gildan Activewear (GIL-NYSE; GIL-TSX) Stock Rating: Outperform
April 20, 2010 Research Comment Montreal, Quebec
Claude Proulx, CFA BMO Nesbitt Burns Inc. (514) 286-3501 [email protected] Assoc: Dean Ciura
Price (20-Apr) $28.22 52-Week High $28.52 Target Price $34.50 52-Week Low $10.36 Q2 Earnings Preview: Increasing Estimates;
Raising Target Price to $34.50
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Gildan Activewear (GIL)Price: High,Low,Close(US$) Earnings/Share(US$)
Event
Gildan (GIL) will report its Q2/10 results before market open on May 13.
Impact Potentially Positive. Based on U.S. shipment data from distributors to end users
reported in Crest Top-Line reports published by Capstone Research, we believe
that Gildan’s sales growth might have exceeded 25% in Q2/10. As a result, we
now expect EPS to reach $0.40 (excluding any impact of the Haitian
earthquake), materially exceeding consensus of $0.34.
ed by BMO Nesbitt Burns Inc., and who is (are) not registerethe Analyst's Certification, please refer to pages 6 to 8.
Forecasts In light of stronger volumes and pricing, we are increasing our EPS estimates by
$0.10 and $0.07 to $1.60 and $1.92 for fiscal 2010 and 2011, respectively.
Valuation GIL still looks very inexpensive at roughly 15x our fiscal 2011 EPS forecast
given its strong organic growth rate as well as its retail and international growth
prospects.
Recommendation Gildan is rated Outperform due to its attractive valuation, very low cost base,
strong growth prospects and solid balance sheet. Our target price of US$34.50
(up from US$29.50) assumes that GIL shares will trade at about 18x our fiscal
2011 EPS estimate (~16x previously) of US$1.92, 12 months from now. We
believe that a higher multiple is justified given the steady recovery seen in U.S.
wholesale activewear volumes in recent months, which provides significant
confidence that Gildan can meet and potentially exceed our expectations both
this year and next year.
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Last Data Point: April 19, 2010
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(FY-Sep.) 2008A 2009A 2010E 2011E EPS $1.49 $0.77 $1.60 $1.92P/E 17.7x 14.7x CFPS $1.58 $1.31 $2.19 $2.52P/CFPS 12.9x 11.2x Rev. ($mm) $1,250 $1,038 $1,299 $1,604 EV ($mm) $3,298 $3,209 EBITDA ($mm) $256 $159 $275 $316 E
V/EBITDA 12.0x 10.1x
Quarterly EPS Q1 Q2 Q3 Q4 2008A $0.26 $0.35 $0.47 $0.41 2009A $0.04 $0.06 $0.32 $0.34 2010E $0.24a $0.40 $0.52 $0.44 Dividend $0.00 Yield 0.0% Book Value $7.74 Price/Book 3.6x Shares O/S (mm) 121.0 Mkt. Cap (US$mm) $3,414 Float O/S (mm) 121.0 Float Cap (US$mm) $3,415 Wkly Vol (000s) 6,299 Wkly $ Vol (USmm) $115.9 Net Debt ($mm) -$138.0 Next Rep. Date 13-May (E)
Notes: All amounts in US$; EPS excludes one-time items of -$0.29 for F08, $0.02 in F09 and -$0.01 in F10. Major Shareholders: Widely held First Call Mean Estimates: GILDAN ACTIVEWEAR INC (US$) 2010E: $1.46; 2011E: $1.73
Changes Annual EPS Annual CFPS Quarterly EPS Target 2010E $1.50 to $1.60 2010E $2.09 to $2.19 Q2/10E $0.37 to $0.40 $29.50 to $34.50 2011E $1.85 to $1.92 2011E $2.44 to $2.52 Q3/10E $0.49 to $0.52 Q4/10E $0.41 to $0.44
Please r cluding the Analyst's Certification.
Apple (AAPL-OTC) Stock Rating: OutperformI ndustry Rating: Market Perform
April 21, 2010
Enterprise Hardware & Imaging
Keith BachmanBMO Capital Markets Corp.
Jung Pak Corey Meehan213-228-2546 [email protected] [email protected]
Securities Info Price (20-Apr) $244.59 Target Price $290 52-Wk High/Low $251/$119 Dividend --Mkt Cap (mm) $221,793 Yield --Shs O/S (mm, BASIC) 906.8 Float O/S (mm) 900.0Options O/S (mm) na ADVol (30-day, 000s) 18,344
Price Performance
A $3 June
Event Despite the high expectations, Apple delivered a very strong quarter with
revenue and EPS upside of around $1.5 billion and $0.88, respectively.
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APPLE COMPUTER INC (AAPL)Price: High,Low,Cl ose(US$) Relative to S& P 500
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Impact Positive. We believe the strong momentum will continue in the June quarter,and we believe Apple can deliver ~$3.00 in EPS, much higher than guidanceof $2.28-$2.39. Our higher estimates vs. guidance are driven by 1) Apple’shistorically conservative guidance, 2) momentum in iPad sales, 3) continued strength in iPhones with the help of a new phone, and 4) better-than-expected gross margins – we project around 39% vs. guidance of 36%.
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efer to pages 8 to 10 for Important Disclosures, in
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Valuation/Financial Data
(FY-Sep.) 2008A 2009A 2010E 2011E
Forecasts We are materially raising our estimates for FY2010 and FY2011, driven byhigher iPhone and iPad units. For FY2010, we project $13.09 in EPS vs. ourprevious estimate of $11.57. For FY2011, we project $14.45 in EPS vs. our previous estimate of $13.35.
EPS GAAP $6.78 $9.08 $13.09 $14.45 P/E 18.7x 16.9x First Call Cons. $12.06 $13.97
FCF $9.43 $9.94 $14.26 $15.53 P/FCF 17.2x 15.7x EBITDA ($mm) $8,823 $12,474 $17,307 $19,515 EV/EBITDA 11.5x 10.2x Rev. ($mm) $37,491 $42,905 $58,117 $65,727 EV/Rev 3.4x 3.0x
Quarterly EPS 1Q 2Q 3Q 4Q
Valuation Given our estimate changes, we are raising our target price from $265 to$290, based on 18x-20x our FY2011 EPS estimate (no change). 2009A $2.50 $1.79 $2.01 $2.77
2010E $3.67A $3.33A $2.87 $3.22
Balance Sheet Data (27-Mar) Net Debt ($mm) -$23,155 TotalDebt/EBITDA nm Total Debt ($mm) $0 EBITDA/IntExp na Net Debt/Cap. nm Price/Book 6.2x
Notes: All values in US$. Source: BMO Capital Markets estimates, Bloomberg, FactSet, Global Insight, Reuters, and Thomson Financial.
Recommendation We remain OUTPERFORM on AAPL. We continue to like the stock basedon a robust product cycle that we believe will drive units and estimateshigher through year end. Apple shares perform well with higher unit revisions, and we believe upside to units and estimates remains based onstrong momentum in iPad sales and continued share gains in iPhones, helpedby the launch of new phone during the June quarter. Changes Annual EPS Annual FCF Quarterly EPS Target
2010E $11.57 to $13.09 2010E $12.62 to $14.26 Q3/10E $2.63 to $2.87 $265.00 to $290.00 2011E $13.35 to $14.45 2011E $14.34 to $15.53 Q4/10E $2.88 to $3.22
Please r cluding the Analyst's Certification.
Seagate Technology (STX-NASDAQ) Stock Rating: Market PerformI ndustry Rating: Market Perform
April 21, 2010
Enterprise Hardware & Imaging
Keith BachmanBMO Capital Markets Corp.
Jung Pak Corey Meehan213-228-2546 [email protected] [email protected]
Securities Info Price (20-Apr) $19.33 Target Price $25 52-Wk High/Low $22/$6 Dividend --Mkt Cap (mm) $9,648 Yield --Shs O/S (mm, BASIC) 499.1 Float O/S (mm) 486.8Options O/S (mm) na ADVol (30-day, 000s) 14,755
Price Performance
Drive Relief
Event STX reported a very strong quarter, particularly against concerns (including
our own) on weak pricing and higher inventory levels. Reported EPS were
$1.03 (net of charges), which included $0.04 of benefit from a lower share
count and tax rate vs. consensus of $0.94 and our $0.91. In our preview of
April 19, we thought EPS would be around $1.00, so STX results were in
line with our expectations.
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SEAGATE TECHNOLOGY (STX)Price: High,Low,Cl ose(US$) Relative to S& P 500
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Impact Positive – more important than March quarter results, STX is guiding EPS tobe in a range of $0.81-$0.85, or $0.83-$0.86 without charges vs. ouranticipated guide range of $0.70-$0.80. We believe the stock will enjoy a relief rally based on better-than-expected June quarter guidance.
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Valuation/Financial Data
(FY-Jun.) 2008A 2009A 2010E 2011E
efer to pages 6 to 9 for Important Disclosures, in
Forecasts We are raising our FY2011 forecast from $3.12 to $3.35.
EPS Pro Forma $2.59 -$0.35 $3.49 $3.35 P/E 5.5x 5.8x First Call Cons. $3.38 $3.46 EPS GAAP $2.36 -$1.61 $3.19 $3.23
FCF $2.99 $0.39 $2.76 $3.22 P/FCF 7.0x 6.0x EBITDA ($mm) $2,369 $917 $2,764 $2,818 EV/EBITDA 3.3x 3.3x Rev. ($mm) $12,708 $9,806 $11,684 $12,923 EV/Rev 0.8x 0.7x
Quarterly EPS 1Q 2Q 3Q 4Q
Valuation We are raising our target price from $23 to $25, or 7x-8x our FY2011 EPS estimate. We base our MARKET PERFORM rating and $25 target price onthe view that STX will trade sharply higher near term. 2009A $0.26 -$0.23 -$0.45 $0.06
2010E $0.58A $1.04A $1.03A $0.84
Balance Sheet Data (2-Apr) Net Debt ($mm) -$404 TotalDebt/EBITDA 0.7x Total Debt ($mm) $1,975 EBITDA/IntExp na Net Debt/Cap. nm Price/Book 4.1x
Notes: All values in US$. Source: BMO Capital Markets estimates, Bloomberg, FactSet, Global Insight, Reuters, and Thomson Financial.
Recommendation We maintain our MARKET PERFORM rating. We believe that negativepricing chatter will hold STX’s multiple in check over the summer months.As we look longer term, into CY2H10, we believe that tightness could return to drives, and thus we could return to a more bullish view on at least one ofthe drive stocks over the course of summer.
Changes Annual EPS Annual FCF Quarterly EPS Target 2010E $3.27 to $3.49 2010E $2.94 to $2.76 Q4/10E $0.72 to $0.84 $23.00 to $25.00 2011E $3.12 to $3.35 2011E $2.88 to $3.22
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VMware (VMW-NYSE) Stock Rating: Market PerformI ndustry Rating: Market Perform
April 21, 2010
Enterprise Hardware & Imaging
Keith BachmanBMO Capital Markets Corp.
Corey Meehan Jung Pak 212-885-4026 213-228-2546
[email protected] [email protected]
Securities Info Pr ice (20-Apr) $56.52 Target Price $55 52-Wk High/Low $58/$25 Dividend --Mk t Cap (mm) $6,059 Yield --Shs O/S (mm, BASIC) 107.2 Float O/S (mm) 70.3Options O/S (mm) na ADVol (30-day, 000s) 1,789
Price Performance
March Sequential Growth
Event VMware reported very impressive March-quarter results with revenue and
EPS estimates exceeding our, and the Street's, forecast. Total sales increased
4% sequentially to $634 million versus our forecast of $595 million and the
Street’s estimate of $593 million. Strong sales and operating expense
management resulted in EPS of $0.32 versus our and the Street’s estimate of
$0.28.
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Impact Positive - We believe strong March-quarter results illustrate that fundamentals in the server virtualization market, and VMW has a lock onvirtualization segment.
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(FY-Dec.) 2008A 2009A 2010E 2011E EPS Pro Forma $1.05 $1.00 $1.33 $1.60 P/E 42.5x 35.3x First Call Cons. $1.19 $1.39 EPS GAAP $0.73 $0.49 $0.72 $0.90
FCF $1.54 $2.20 $2.55 $2.95 P/FCF 22.2x 19.2x EBITDA ($mm) $627 $682 $899 $1,050 EV/EBITDA 6.3x 5.4x Rev. ($mm) $1,881 $2,024 $2,725 $3,200 EV/Rev 2.1x 1.8x
Quarter ly EPS 1Q 2Q 3Q 4Q
Forecasts For CY2010, we are increasing our sales forecast to $2.73 billion from $2.57 billion and EPS to $1.33 from our previous forecast of $1.24. For CY2011, we are increasing our sales estimate to $3.2 billion from $2.96 billion, with EPS of $1.60 from our previous estimate of $1.45.
Valuation We are increasing our target price to $55 from $50, which is based on 30x -35x (no change) our CY2011 EPS estimate of $1.60. 2009A $0.25 $0.20 $0.24 $0.31
2010E $0.32A $0.32 $0.31 $0.39
Balance Sheet Data (12/31/09) Net Debt ($mm) -$384 TotalDebt/EBITDA 0.5x Total Debt ($mm) $450 EBITDA/IntExp na Net Debt/Cap. nm Price/Book 8.3x Notes: All values in US$. Source: BMO Capital Markets estimates, Bloomberg, FactSet, Global Insight, Reuters, and Thomson Financial.
Recommendation We remain MARKET PERFORM rated. We believe improving fundamentalsare already priced into the stock and that VMware’s shares are fairly valuedat current levels.
Changes Annual EPS Annual FCF Quarterly EPS Target 2010E $1.24 to $1.33 2010E $2.56 to $2.55 Q2/10E $0.29 to $0.32 $50.00 to $55.00 2011E $1.45 to $1.60 2011E $2.94 to $2.95 Q4/10E $0.36 to $0.39
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Juniper Networks (JNPR-NYSE) Stock Rating: Market PerformI ndustry Rating: Market Perform
April 21, 2010
Communications Equipment
Tim LongBMO Capital Markets Corp.
Ari Klein Kevin Manning 212-885-4103 212-885-4102
[email protected] [email protected]
Securities InfoPrice (20-Apr) $31.56 Target Price $29 52-Wk High/Low $32/$18 Dividend --Mkt Cap (mm) $16,449 Yield --Shs O/S (mm, BASIC) 521.2 Float O/S (mm) 504.6Options O/S (mm) na ADVol (30-day, 000s) 5,668
Price Performance
Decent Quarter but Not Enough Upside
Event Juniper reported a solid quarter with decent guidance, but as we were
concerned about, it likely is not enough given the recent run-up in the stock.
Sales beat estimates by about 1%, well below the last two-quarter average of
5%. Gross and operating margins were better, but guidance calls for a flat
performance on higher revenues. We are impressed by Juniper’s growth in
some new product categories like LAN switching and wireless, and the
potential for higher operating margins. However, we believe these positives
are reflected in the stock at these levels.
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JUNIPER NETWORKS INC (JNPR)Price: High,Low,Close(US$) Relat ive to S&P 500
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Impact Neutral/Negative. While Juniper did manage to slightly top expectations, the beat was likely not enough given the recent run-up of the shares. We expectto see weakness in Juniper as well as the rest of the networking group todayin sympathy.
Forecasts We are slightly raising our CY2010 and CY2011 revenue and non-GAAP EPS estimates to $3.98B/$1.21 and $4.60B/$1.47 from $3.92B/$1.20 and$4.47B/$1.46.
Valuation We are maintaining our price target of $29 based on a P/E multiple of 20xour 2011 pro forma EPS estimate of $1.47.
Recommendation We rate JNPR shares MARKET PERFORM.
Changes Annual EPS Annual FCF Quarterly EPS 2010E $1.20 to $1.21 2010E $1.47 to $1.30 Q2/10E $0.28 to $0.29 2011E $1.46 to $1.47 2011E $1.73 to $1.76
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(FY-Dec.) 2008A 2009A 2010E 2011E EPS Pro Forma $1.18 $0.92 $1.21 $1.47 P/E 26.1x 21.5x First Call Cons. $1.18 $1.45 EPS GAAP $0.93 $0.42 $1.08 $1.28
FCF $1.29 $1.20 $1.30 $1.76 P/FCF 24.3x 17.9x EBITDA ($mm) $864 $668 $935 $1,136 EV/EBITDA 15.3x 12.6x Rev. ($mm) $3,572 $3,316 $3,983 $4,600 EV/Rev 3.6x 3.1x
Quarterly EPS 1Q 2Q 3Q 4Q 2009A $0.17 $0.19 $0.23 $0.32 2010E $0.27A $0.29 $0.31 $0.35
Balance Sheet Data (12/31/09) Net Debt ($mm) -$2,175 TotalDebt/EBITDA nm Total Debt ($mm) $0 EBITDA/IntExp na Net Debt/Cap. nm Price/Book 2.8x Notes: All values in US$.
Source: BMO Capital Markets estimates, Bloomberg, FactSet, Global Insight, Reuters, and Thomson Financial.
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Edwards Lifesciences (EW-NYSE) Stock Rating: OutperformI ndustry Rating: Outperform
April 21, 2010
Medical Technology
Joanne K. WuenschBMO Capital Markets Corp.
Revenue Light, EPS Beat, Gross Margins Impressive
Securities Info Price (20-Apr) $104.65 Target Price $118 52-Wk High/Low $106/$56 Dividend --Mkt Cap (mm) $5,919 Yield --Shs O/S (mm, BASIC) 56.6 Float O/S (mm) 56.0Options O/S (mm) na ADVol (30-day, 000s) 321
Price Performance
Event Edwards reported 1Q revenue of $340.5 million (up 8.6%, up 9.4%
underlying excluding positive foreign exchange and a $12.9 million
reduction from divested products), below the consensus’s $346.7 million.
EPS of $0.80 (up 14.3%) was a penny ahead of the consensus and in line
with our thinking. Management reiterated revenue guidance, looking for
revenue growth of 10%-13%, but given the shift in the euro is looking for
results to come in at the bottom of the original range of $1.43-$1.50 billion.
However, given the strength in the business, and guidance for gross profit
margin improvement to 72% from 69.5% in 2009, EPS is raised to a range of
$3.52-$3.60 ($1.76-$l.80 post-split) from $3.50-$3.60.
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EDWARDS LIFESCIENCES CORP (EW)Price: High,Low,Close(US$) Relative to S&P 500
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Impact While revenue was somewhat weak (management noted surgical heart valve sales that disappointed), stronger gross margins bucked higher spending andled to an EPS beat. In general, the company’s THV clinical program is onschedule, adoption of its next-generation SAPIEN XT in Europe is tracking, and gross margin expansion from product mix shift is impressive.
Forecasts We are decreasing our 2010 revenue estimate to $1,447.3 million (up 9.5%)from $1,467 million based on an increased fx headwind; no change to our2010 EPS estimate of $3.58 (up 17.6%).
Valuation Our new price target of $118 is based on 28x our 2011 EPS estimate of$4.20.
Recommendation We rate shares of EW OUTPERFORM; increasing PT to $118 from $110.
Changes Target $110 to $118
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(FY-Dec.) 2009A 2010E 2011E 2012E EPS Pro Forma $3.04 $3.58 $4.20 $5.20 P/E 29.2x 24.9x 20.1x First Call Cons. $3.55 $4.21 $5.35 EPS GAAP $3.93 $3.58 $4.20 $5.20
FCF $1.79 $3.28 $4.21 $5.31 P/FCF 31.9x 24.9x 19.7x EBITDA ($mm) $289 $333 $384 $456 EV/EBITDA 18.3x 15.9x 13.4x Rev. ($mm) $1,321 $1,447 $1,634 $1,958 EV/Rev 4.2x 3.7x 3.1x
Quarterly EPS 1Q 2Q 3Q 4Q 2009A $0.70 $0.79 $0.71 $0.84 2010E $0.80A $0.90 $0.88 $1.00
Balance Sheet Data (12/31/09) Net Debt ($mm) $192 TotalDebt/EBITDA 0.4x Total Debt ($mm) $129 EBITDA/IntExp na Net Debt/Cap. 15.4% Price/Book 5.1x Notes: Includes opt exp; excludes one-time extraordinary items. All values in US$. Source: BMO Capital Markets estimates, Bloomberg, FactSet, Global Insight, Reuters, and Thomson Financial.
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Nuvasive (NUVA-NASDAQ) Stock Rating: OutperformI ndustry Rating: Outperform
April 21, 2010
Medical Technology
Joanne K. WuenschBMO Capital Markets Corp.
Securities Info Price (20-Apr) $44.32 Target Price $50 52-Wk High/Low $47/$27 Dividend --Mkt Cap (mm) $1,733 Yield --Shs O/S (mm, BASIC) 39.1 Float O/S (mm) 38.7Options O/S (mm) na ADVol (30-day, 000s) 667
Price Performance
Delivering, as Promised
Event NuVasive delivered revenue of $109.1 million (up 36.3%), coming in ahead
of the First Call consensus estimates of $107.8 million. Operating EPS,
excluding amortization, stock base compensation, and litigation charges,
were $0.21, in line with consensus and ahead of our $0.18 estimate. GAAP
EPS were $0.03 (up from a $0.12 loss 1Q09).
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NUVASIVE INC (NUVA)Price: High,Low,Close(US$) Relative to S&P 500
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Impact NUVA traded up 3% on Tuesday heading into the quarter, and we suspect that it may give back some on Wednesday as management beat somewhatbut maintained financial guidance (revenue of $480-$500 million and Non-GAAP EPS of $1.13-$1.25). The company continues to execute toward 30%-35% revenue growth in the 2010 and, with reimbursement concerns fallingby the wayside (March sales were strong and sales morale is up), it appearson track to deliver.
efer to pages 6 to 8 for Important Disclosures, in
Forecasts We are increasing our revenue estimate in 2010 to $491.8 million (up 32.8%)from $480.5 million; our operating EPS estimate increases to $1.22 from$1.18. In 2011, our revenue estimate increases to $612.2 million (up 24.5%;management is guiding 25%-30% revenue growth in 2011); no change to ouroperating EPS of $1.69 (up 38.6%). In 2012, our revenue estimate increasesto $742.3 million (up 21.3%) from $725.2 million; no change to ouroperating EPS of $2.46 (up 45.7%).
Valuation Our price target is based on 3.5x 2011 EV/Revenue.
Recommendation We rate shares of NUVA OUTPERFORM. We are raising our price targetto $50 from $47. Changes Annual FCF Quarterly EPS Target
2010E $1.25 to $1.23 Q4/10E $0.26 to $0.25 $47.00 to $50.00
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(FY-Dec.) 2009A 2010E 2011E 2012E EPS Pro Forma $0.31 $0.68 $1.13 $1.79 P/E 65.2x 39.2x 24.8x First Call Cons. $1.19 $1.64 $2.23 EPS GAAP $0.14 $1.55 $1.13 $1.79
FCF $0.35 $1.23 $0.51 $1.16 P/FCF 36.0x 86.9x 38.2x EBITDA ($mm) $77 $104 $155 $215 EV/EBITDA 17.3x 11.6x 8.4x Rev. ($mm) $370 $492 $612 $742 EV/Rev 3.7x 2.9x 2.4x
Quarterly EPS 1Q 2Q 3Q 4Q 2009A -$0.02 $0.11 $0.11 $0.11 2010E $0.06A $0.16 $0.19 $0.25
Balance Sheet Data (12/31/09) Net Debt ($mm) $65 TotalDebt/EBITDA 2.2x Total Debt ($mm) $230 EBITDA/IntExp 23.6x Net Debt/Cap. 12.4% Price/Book 5.8x Notes: Includes opt exp; excludes one-time extraordinary items. All values in US$. Source: BMO Capital Markets estimates, Bloomberg, FactSet, Global Insight, Reuters, and Thomson Financial.
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Stryker (SYK-NYSE) Stock Rating: OutperformI ndustry Rating: Outperform
April 21, 2010
Medical Technology
Joanne K. WuenschBMO Capital Markets Corp.
Securities Info Price (20-Apr) $58.45 Target Price $67 52-Wk High/Low $58/$36 Dividend $0.60Mkt Cap (mm) $23,168 Yield 1.0%Shs O/S (mm, BASIC) 396.4 Float O/S (mm) 289.7Options O/S (mm) 18.6 ADVol (30-day, 000s) 1,510
Price Performance
Beat on the Top, Beat on the Bottom
Event SYK reported 1Q10 results that beat on the top and bottom line. Revenue of
$1,799 million increased 12.4% (up 8.7% ex-fx), surpassing the consensus’s
$1,750.5 million. Total revenue included a 10.7% (up 6.4% ex-fx) increase in
orthopaedic implant sales to $1,077 million and a 15% (up 12.2% ex-fx)
increase in MedSurg equipment sales to $722 million. EPS increased 12.7%
to $0.80, bypassing the consensus estimate by $0.02 and our estimate by a
penny. Management reiterated its financial outlook, guiding for constant
currency sales growth of 5% to 8% and EPS in the range of $3.20 to $3.30. 70
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STRYKER CORP (SYK)Price: High,Low,Close(US$) Relative to S&P 500
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Impact A recovering orthopaedic and MedSurge market combined withmanagement’s ability to leverage (operating margins increased to 24.8%from 23.7% y/y) bodes well for SYK.
efer to pages 7 to 12 for Important Disclosures, in
Forecasts No change to our full-year EPS estimate in 2010 of $3.36 (up 13.7%), abovemanagement’s guidance, but the gate throughout the year is somewhattempered to account for the shares repurchased in the quarter (2.1 millionshares at an average price of $51.74) and the penny beat to our estimate.Management expressed comfort in the 2Q consensus estimate of $0.80; weare lowering our 2Q EPS estimate to $0.81 (up 11.1%) from $0.82.Similarly, there is no change to our 2011 EPS estimate of $3.83 (up 13.9%)and 2012 estimate of $4.35 (up 13.5%).
Valuation SYK trades at 15x our 2011 EPS vs. ZMH’s 13x and SNN’s 14x, while itsPEG ratio is 1.1x vs. ZMH’s 1.3x and SNN’s 1.2.
Recommendation We rate shares of SYK OUTPERFORM.
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(FY-Dec.) 2009A 2010E 2011E 2012E EPS Pro Forma $2.95 $3.36 $3.83 $4.35 P/E 17.4x 15.3x 13.4x First Call Cons. $3.27 $3.67 $4.12 EPS GAAP $2.77 $3.36 $3.83 $4.35
FCF $3.33 $3.89 $4.23 $4.80 P/FCF 15.0x 13.8x 12.2x EBITDA ($mm) $2,004 $2,381 $2,419 $2,701 EV/EBITDA 8.5x 8.4x 7.5x Rev. ($mm) $6,723 $7,300 $7,878 $8,529 EV/Rev 2.8x 2.6x 2.4x
Quarterly EPS 1Q 2Q 3Q 4Q 2009A $0.71 $0.73 $0.69 $0.82 2010E $0.80A $0.81 $0.80 $0.94
Balance Sheet Data (12/31/09) Net Debt ($mm) -$2,941 TotalDebt/EBITDA 0.4x Total Debt ($mm) $996 EBITDA/IntExp 54.7x Net Debt/Cap. nm Price/Book 3.5x Notes: Includes opt exp; excludes one-time extraordinary items. All values in US$. Source: BMO Capital Markets estimates, Bloomberg, FactSet, Global Insight, Reuters, and Thomson Financial.
Changes Annual FCF Quarterly EPS 2010E $4.31 to $3.89 Q2/10E $0.82 to $0.81 2011E $4.15 to $4.23 Q3/10E $0.81 to $0.80 Q3/10E $0.95 to $0.94
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UnitedHealth Group (UNH-NYSE) Stock Rating: Market PerformI ndustry Rating: Market Perform
April 21, 2010
Managed Care
Dave ShoveBMO Capital Markets Corp.
Jennifer Lynch212-885-4059
Past Performance is No Guarantee… Securities Info Pr ice (20-Apr) $30.98 Target Price $34 52-Wk High/Low $36/$22 Dividend $0.03Mkt Cap (mm) $35,451 Yield 0.1%Shs O/S (mm, BASIC) 1,144 Float O/S (mm) 1,137Options O/S (mm) na ADVol (30-day, 000s) 11,699
Selected Bond Iss Ind Prc Rat’g Mdys/S&P YTW SpreadUNH 3.3% '08 na WR / NR naUNH 0% '09 na WR / NR naBond data from Bloomberg.
Price Performance
Event Yesterday, UnitedHealth reported solid 1Q10 results and raised FY2010 EPS
guidance to a range of $3.15-$3.35.
Impact Positive – UNH produced strong earnings growth in 1Q10, with metricsimproving across most lines of business. The consolidated medical loss ratioshowed meaningful improvement while administrative costs were wellmanaged. Enrollment has improved ahead of schedule, with commercialmembership results beating our expectations by more than 700,000 lives.Business fundamentals continue to improve; however, industry optimism is being tapered by reform implementation fears. Our trepidations relate toMedicare Advantage program changes, to which UNH remains heavilyexposed. The greater risk associated with this program keeps us on thesidelines here, and we therefore maintain our MARKET PERFORM rating.
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UNIT EDHEALTH GROUP INC (UNH)Price: High,Lo w,Close( US$) Relative to S&P 500
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Forecasts Excluding mergers and acquisitions, our current EPS estimates for UNH are$3.30 for 2010 and $3.35 for 2011. This represents 2% EPS growth in 2010and 2% in 2011.
Valuation UNH shares trade at 9.2x our 2011 EPS estimate of $3.35. We believe theshares merit a forward P/E of 10x, producing a price target of $34. The targetmultiple is at the low end of UNH’s historical range; however, we believe thenear-term earnings outlook is also in that range.
Recommendation We continue to rate shares MARKET PERFORM.
Changes Annual EPS Annual FCF Quarterly EPS Target 2010E $2.90 to $3.30 2010E $4.50 to $4.75 Q2/10E $0.70 to $0.74 $32.00 to $34.00 2011E $3.20 to $3.35 2011E na to $4.90 Q3/10E $0.75 to $0.76 Q4/10E $0.75 to $0.77
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(FY-Dec.) 2008A 2009A 2010E 2011E EPS Pro Forma $2.95 $3.24 $3.30 $3.35 P/E 9.4x 9.2x First Call Cons. $3.08 $3.36 EPS GAAP $2.40 $3.24 $3.30 $3.35
FCF $4.64 $4.50 $4.75 $4.90 P/FCF 6.5x 6.3x EBITDA ($mm) $6,556 $6,758 $6,800 $6,780 Rev. ($mm) $80,415 $86,546 $93,000 $96,106
Quarter ly EPS 1Q 2Q 3Q 4Q 2009A $0.81 $0.73 $0.89 $0.81 2010E $1.03A $0.74 $0.76 $0.77
Balance Sheet Data (12/31/09) Net Debt ($mm) $134 TotalDebt/EBITDA 0.0x Total Debt ($mm) $11,173 EBITDA/IntExp 1.6x Net Debt/Cap. 0.4% Price/Book 2.0x Notes: All values in US$. Source: BMO Capital Markets estimates, Bloomberg, FactSet, Global Insight, Reuters, and Thomson Financial.
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Biogen Idec (BIIB-OTC) Stock Rating: UnderperformI ndustry Rating: Market Perform
April 21, 2010
Biotechnology
Jason Zhang, Ph.D.BMO Capital Markets Corp.
Alex Arfaei212-885-4033
Tysabri Slowing, HC Reform Dampening Already Low Revenue Growth
Securities Info Price (20-Apr) $53.91 Target Price $4552-Wk High/Low $60/$42 Dividend --Mkt Cap (mm) $14,534 Yield --Shs O/S (mm, BASIC) 269.6 Float O/S (mm) 268.3Options O/S (mm) na ADVol (30-day, 000s) 2,383
Selected Bond Iss
Event Biogen reported 1Q10 revenues of $1,109 million, slightly below Street
expectations and ~$30 million below our forecast. Non-GAAP EPS of $1.08
missed our $1.17 estimate and the Street’s $1.13 consensus because of lower
revenues, and $27 million in impairment charges and R&D payments.
efer to pages 9 to 11 for Important Disclosures, in
Impact Tysabri patient numbers revealed that new commercial patients added per week continued to decline from ~189/week in 4Q09 to ~138/week in 1Q10. Although, Biogen stated that in late March the new patient adds rebounded to~190/week, we remain cautious about the prospects of Tysabri as morepatients reach the 18-24 month treatment window. The JCV antibody trials are at least two years away from addressing the PML issue, and it is difficult to tell how informing trial physicians about the JCV status of their patientswill impact Tysabri use. We tend to believe this will likely lead to lowerTysabri use given that according to Biogen ~54% of patients are JCV antibody positive. The company expects health care reform to lower 2010revenues by $70-$90 million or 2%; however, management did not adjust guidance.
Forecasts 2010 revenue growth of 2%, below the company’s "mid-single-digit growth"guidance, and non-GAAP EPS of $4.51 below guidance of at least $4.55.
Valuation Price target of $45: ~11x our 2011 EPS of $4.80 discounted back 15%.
Recommendation With low-single-digit revenue growth, increasing pressure on its MS franchise, and EPS growth driven in part with aggressive share buy backs, we maintain our UNDERPERFORM rating on BIIB shares. Changes Annual EPS Annual FCF Quarterly EPS 2010E $4.57 to $4.51 2010E $4.29 to $4.19 Q2/10E $1.16 to $1.10 2011E $4.66 to $4.80 2011E $4.70 to $4.84 Q3/10E $1.12 to $1.15 Q4/10E $1.13 to $1.17
Ind Prc Rat’g Mdys/S&P YTW SpreadBiogen Idec 0.0% '19 na na / na naBond data from Bloomberg.
Price Performance
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BIOGEN IDEC INC (BIIB)Price: High,Low,Close(US$) Relat ive to S& P 500
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EPS Pro Forma $3.66 $4.12 $4.51 $4.80 P/E 12.0x 11.2x First Call Cons. $4.61 $4.86 EPS GAAP $2.65 $3.35 $3.49 $4.04
FCF $4.37 $3.14 $4.19 $4.84 P/FCF 12.9x 11.1x EBITDA ($mm) $2,060 $2,054 $2,089 $2,183 EV/EBITDA 6.7x 6.4x Rev. ($mm) $4,097 $4,377 $4,469 $4,619 EV/Rev 3.1x 3.0x
Quarterly EPS 1Q 2Q 3Q 4Q
2009A $1.05 $0.75 $1.12 $1.20 2010E $1.08A $1.10 $1.15 $1.17
Balance Sheet Data (12/31/09) Net Debt ($mm) -$483 TotalDebt/EBITDA 0.5x Total Debt ($mm) $1,085 EBITDA/IntExp na Net Debt/Cap. nm Price/Book 2.4x
Notes: All values in US$. Source: BMO Capital Markets estimates, Bloomberg, FactSet, Global Insight, Reuters, and Thomson Financial.
Important Disclosures Analyst's Certification As to each company covered in this report, the analyst hereby certifies that the views expressed in this report accurately reflect my personal views about the subject securities or issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. Analysts who prepared this report are compensated based upon (among other factors) the overall profitability of BMO Capital Markets and their affiliates, which includes the overall profitability of investment banking services. Compensation for research is based on effectiveness in generating new ideas and in communication of ideas to clients, performance of recommendations, accuracy of earnings estimates, and service to clients. Analysts employed by BMO Nesbitt Burns Inc. and/or BMO Capital Markets Ltd. are not registered as research analysts with FINRA. These analysts may not be associated persons of BMO Capital Markets Corp. and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.
Company Specific Disclosures For Important Disclosures on the stocks discussed in this report, please go http://researchglobal.bmocapitalmarkets.com/Company_Disclosure_ Public.asp.
Distribution of Ratings (Dec. 31, 2009) Rating
Category
BMO Rating BMOCM US
Universe* BMOCM USIB Clients**
BMOCM USIB Clients***
BMOCM Universe****
BMOCM IB Clients*****
First Call Universe
Buy Outperform 32.2% 12.3% 38.3% 36.1% 47.9% 50% Hold Market Perform 62.6% 10.2% 61.7% 56.9% 48.9% 43% Sell Underperform 5.3% 0% 0% 6.9% 3.2% 7%
* Reflects rating distribution of all companies covered by BMO Capital Markets Corp. equity research analysts. ** Reflects rating distribution of all companies from which BMO Capital Markets Corp. has received compensation for Investment Banking services as
percentage within ratings category. *** Reflects rating distribution of all companies from which BMO Capital Markets Corp. has received compensation for Investment Banking
services as percentage of Investment Banking clients. **** Reflects rating distribution of all companies covered by BMO Capital Markets equity research analysts. ***** Reflects rating distribution of all companies from which BMO Capital Markets has received compensation for Investment Banking services as
percentage of Investment Banking clients.
Ratings and Sector Key We use the following ratings system definitions: OP = Outperform - Forecast to outperform the market; Mkt = Market Perform - Forecast to perform roughly in line with the market; Und = Underperform - Forecast to underperform the market; (S) = speculative investment; NR = No rating at this time; R = Restricted – Dissemination of research is currently restricted.
Market performance is measured by a benchmark index such as the S&P/TSX Composite Index, S&P 500, Nasdaq Composite, as appropriate for each company. BMO Capital Markets eight Top 15 lists guide investors to our best ideas according to different objectives (Canadian large, small, growth, value, income, quantitative; and US large, US small) have replaced the Top Pick rating.
Other Important Disclosures For Other Important Disclosures on the stocks discussed in this report, please go to http://researchglobal.bmocapitalmarkets.com/Company_Disclosure_ Public.asp or write to Editorial Department, BMO Capital Markets, 3 Times Square, New York, NY 10036 or Editorial Department, BMO Capital Markets, 1 First Canadian Place, Toronto, Ontario, M5X 1H3.
Prior BMO Capital Markets Ratings Systems http://researchglobal.bmocapitalmarkets.com/documents/2009/prior_rating_systems.pdf
Dissemination of Research Our research publications are available via our web site http://bmocapitalmarkets.com/research/. Institutional clients may also receive our research via FIRST CALL, FIRST CALL Research Direct, Reuters, Bloomberg, FactSet, Capital IQ, and TheMarkets.com. All of our research is made widely available at the same time to all BMO Capital Markets client groups entitled to our research. Additional dissemination may occur via email or regular mail. Please contact your investment advisor or institutional salesperson for more information.
Conflict Statement A general description of how BMO Financial Group identifies and manages conflicts of interest is contained in our public facing policy for managing conflicts of interest in connection with investment research which is available at http://researchglobal.bmocapitalmarkets.com/Conflict_Statement_ Public.asp.
General Disclaimer “BMO Capital Markets” is a trade name used by the BMO Investment Banking Group, which includes the wholesale arm of Bank of Montreal and its subsidiaries BMO Nesbitt Burns Inc. and BMO Nesbitt Burns Ltée./Ltd., BMO Capital Markets Ltd. in the U.K. and BMO Capital Markets Corp. in the U.S. BMO Nesbitt Burns Inc., BMO Capital Markets Ltd. and BMO Capital Markets Corp are affiliates. Bank of Montreal or its subsidiaries (“BMO
BMO Capital Markets
Financial Group”) has lending arrangements with, or provide other remunerated services to, many issuers covered by BMO Capital Markets. The opinions, estimates and projections contained in this report are those of BMO Capital Markets as of the date of this report and are subject to change without notice. BMO Capital Markets endeavours to ensure that the contents have been compiled or derived from sources that we believe are reliable and contain information and opinions that are accurate and complete. However, BMO Capital Markets makes no representation or warranty, express or implied, in respect thereof, takes no responsibility for any errors and omissions contained herein and accepts no liability whatsoever for any loss arising from any use of, or reliance on, this report or its contents. Information may be available to BMO Capital Markets or its affiliates that is not reflected in this report. The information in this report is not intended to be used as the primary basis of investment decisions, and because of individual client objectives, should not be construed as advice designed to meet the particular investment needs of any investor. This material is for information purposes only and is not an offer to sell or the solicitation of an offer to buy any security. BMO Capital Markets or its affiliates will buy from or sell to customers the securities of issuers mentioned in this report on a principal basis. BMO Capital Markets or its affiliates, officers, directors or employees have a long or short position in many of the securities discussed herein, related securities or in options, futures or other derivative instruments based thereon. The reader should assume that BMO Capital Markets or its affiliates may have a conflict of interest and should not rely solely on this report in evaluating whether or not to buy or sell securities of issuers discussed herein.
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