I hope that everyone had a merry Christmas. I wanted to give you my post earning comment on RIMM which reported earning after the market close last Thursday. I was on my personal trip to Las Vegas so I could not provide you my take on the earning on a timely basis. So I apologize for that.
RIMM continues to defy my expectation and deliver earning results that is blowing away the street estimate. And hats off to the management team for their efforts !. Heading into the earning, I indicated to you that RIMM had a lofty expectation and had more downside than the upside. I claim that the company needs to report significantly better than sub add number for this Q (expectation around 850K). I also claim that the company will need to guide higher for next Q sub add decidedly above the street expectation around 925K. And it is also expected that the company will handily beat both the revenue and the EPS number to further gain the momentum in the share price appreciation.
(see http://www.investorhives.com...)
RIMM met and exceeded all the points that I thought would be challenging for the company except on one front: gross margin. However, this is a significant development that further reinforce my short view on the stock. After listening to the conference call, following up with several analysts reports as well as doing number crunching on my own, I am more convinced that RIMM story is nearing its end. It will have one more great Q but in my opinion, as upgrade cycle behind Pearl dissipates beyond Feb Q, RIMM may see increasing margin pressure that will decrease the earning leverage despite the possible upward trend in the revenue number. Consequently, beyond Feb Q, I see company gross margin compression will shrink the market multiple for RIMM. Slower EPS growth may ensue and RIMM share may face weakness. I continue to view RIMM as a good short candidate. Above $135 level, I continue to recommend adding to your short position.
Let us look at this Q number. RIMM delivered revenue number of 835 M, significantly above the consensus number of $812 M. The net sub add for this Q was 875K, also significantly above 850K expected. More importantly, for next Q the company guides for sub add of 950K to 975K, above around 925K expected. The revenue guidance was $900 ~ $940 M, which is also above what the street was expecting. On these exciting quarterly metrics, the RIMM shares traded as high as $140 after the market. But on the actual trading day on Friday, the shares closed with 2% loss. Why? Despite the blowout revenue number for this Q and head and shoulder above number for next Q, the actual reported EPS for this Q was 95 cents versus 94 cents expected. In addition, the company guides for EPS in the range of 92 to 99 cents for next Q. Given the significant upside in revenue and sub adds metric this Q and great guidance on these metrics for next Q, EPS number reported for this Q and guided for next Q are disappointing. This appears to be due to the deteriorating overall gross margin to 53% from high 55% range.
Going forward, RIMM may face even more pressure in maintaining the GM. First of all, rapid growth in the company revenue number is primarily driven by the hardware sales, not by robust uptick in the service side (data contracts). Many existing RIMM customers like the Pearl design and are switching their device to Pearl from older products. In fact, Smithbarney estimates that only 30 to 40% of the new customer chose data plan with the subscription service. This may not be surprising: many consumers do not like to pay a lot of money for email service (they want this cheap like the regular phone). Pearl is supposed to gain acceptance in the consumer market outside the enterprise market but net addition in this segment may be much more challenging. Thus, RIMM's business around Pearl has risk of being more hardware oriented and this may result in lower than expected gross margin.
In addition, Pearl has lower ASP (Average Selling Price) compared to older RIMM product. As Pearl sales cannibalize other older RIMM products, the company revenue may be skewed towards the product that may have more margin pressure. Pearl competes in the consumer market with more than six fierce competitions (Nokia, Motorola, LG, Samsung, Palm, as well as HP and the number is growing). In the future, RIMM may need to be more aggressive in the marketing and pricing to compete more effectively in the consumer market. This may result in increased op ex spending and reduced net profit margin.
Finally, there is also uncertainty down the road how carriers will treat RIMM. While MSFT server related products do not charge carriers for any fees, RIMM does. This even raises RIMM business model in the enterprise market. As smartphones made by Samsung and LG operates on window based platform, carriers may push non-RIMM related service to the corporate clients to increase their profitability.
Ultimately, RIMM may face more margin pressure in the enterprise business as well. For these reasons, I contend that RIMM will not be able to sustain earning growth at a rate greater than 25% on a long term basis and 10 to 15% may be the more appropriate number that investors should be using to value its share price. Consequently, the market multiple for RIMM shares must come down significantly. I am willing to give premium PE to RIMM compared to its competitors who are getting roughly anywhere between 15 to 17. For RIMM, I continue to contend PE should be in the range of mid 20's, not 40 to 50 that it is trading on a trailing basis and higher than 30 on a forward basis.
The shares of RIMM have been burining brightly as insatiable investor' appetite for the sexy tech stocks continue to push share price higher. However, I do believe that the flame burns the brightest before it goes out. And RIMM flame will be no exception.
Thursday, December 28, 2006
Thursday, December 21, 2006
RIMM: Investors expecting a premiere performance
Research in Motion, the company which provides a popular blackberry service, was initiated into the 2007 stock list for our group in late Nov. We are playing RIMM on the short side. At that time, I maintain that coupled with the favorable investment sentiment for the tech sector, the stock could continue to advance till early January. The stock is now trading at lofty $134 level and has more than doubled in last six months. The company is set to report the earning after the market close tomorrow.
RIMM has reported stellar earning results last Q. The results surpassed the investors' expectation and analyst community. Since then the stock has been on a tear. RIMM has recently introduced the new smart (email) phone called Pearl and the management team has pictured extremely rosy picture for the future business climate based on this product's success. Pearl is thought to be penetrating significant portion of the consumer smart phone market outside the traditional enterprise business for RIMM and will be the engine for next phase of the growth for the company.
No doubt that Pearl is selling extremely well. Lehman's research indicates that Pearl is generating 15K net sub adds in last 2.5 weeks of September. Lehman thinks T-mobile alone is able to generate 200K net sub-adds this Q. In addition, although not as strong as T-mobile, Cingular and Verizon will also contribute a fair number of sub adds for the company. However, it does appear that Sprint has been a bit slow for RIMM to generate robust sub adds to date. Because of the great sell-thru of Pearl, I believe RIMM will report very strong number, probably 4 to 5 cents ahead of the consensus estimate of 94 cents.
The question is how much of this great story for Pearl is built into the stock price. RIMM is currently trading at PE of 40 on a trailing basis and PE of near 30 based on a forward basis. This implies great premium for the company compared to its competitors such as Nokia, Motorola, and Samsung, which are typically trading with PE of somewhere between 15 to 17. By this type of valuation, the investors are assuming that RIMM is in the midst of the robust growth that will last for a foreseeable future. RIMM is valued to be in a secular growth mode, rather than in cyclical growth mode.
For RIMM to continue to get this type of PE multiple, the company is now pressured to show that this Q was outstanding and next Q will be as well. In my opinion, if the company delivers bottom-line number that is about 4 to 5 cents higher than the mean estimate, investors will be disappointed as they will be looking for blowout Q performance. In addition, net sub add will be extremely important key metrics to pay attention. Bears maintain that strong Pearl sale will not last more than Q or two if it is mainly driven by the upgrades of the hardware by the existing customers. As such, the company needs to show strong net sub add performance this Q, far above the consensus estimate number of roughly 820K. The company guides for around 800K for this Q number during the last earning call. In my opinion, investors may be disappointed for anything less than 850K. More significantly, RIMM needs to guide higher for next Q net sub add number. The expectation is heading higher above 925K and I believe this may turn out to be very challenging for the company.
Because Pearl story has a significant consumer market component, I believe that the company cannot sustain this type of premium multiple for too long. The consumer smart phone market is extremely crowded by several competitions mentioned above. The pricing pressure for the product is great and the consumers have very little royalty for the product. This often leads to great churn number for the subscriber base. I can give higher multiple of greater than 30 for the enterprise segment of RIMM business, assuming RIMM continues to generate healthy subscriber growth (but some bears are also doubtful of this point). However, the consumer segment multiple should be roughly in line with what the competitions are getting, which is 15 to 17 range. As a result, it would be difficult to assign multiple greater than 22 ~ 25 range for the company. If you take current aggressive estimate of 4.62 and apply higher range of PE of 25, the stock would be fairly valued around $115 in 07. Should there be any weakness in the sales forecast, this multiple may further shrink and the shares are vulnerable for substantial downside.
RIMM is a relatively new stock for FilthyRich group and I may need to study the company fundamentals further to gain deeper understanding of the company. However, my current opinion is the company is heading into high expectation with the fundamental that do not support for the current share price.
Short term, investors may continue to be dazzled by Pearl sales number and chase this stock higher. Should this happens, you should be increasing your short position on the stock. Ahead of earning, it may be worthwhile taking 30% of your short position. Should there be a further price appreciation, you can establish your remaining position
RIMM has reported stellar earning results last Q. The results surpassed the investors' expectation and analyst community. Since then the stock has been on a tear. RIMM has recently introduced the new smart (email) phone called Pearl and the management team has pictured extremely rosy picture for the future business climate based on this product's success. Pearl is thought to be penetrating significant portion of the consumer smart phone market outside the traditional enterprise business for RIMM and will be the engine for next phase of the growth for the company.
No doubt that Pearl is selling extremely well. Lehman's research indicates that Pearl is generating 15K net sub adds in last 2.5 weeks of September. Lehman thinks T-mobile alone is able to generate 200K net sub-adds this Q. In addition, although not as strong as T-mobile, Cingular and Verizon will also contribute a fair number of sub adds for the company. However, it does appear that Sprint has been a bit slow for RIMM to generate robust sub adds to date. Because of the great sell-thru of Pearl, I believe RIMM will report very strong number, probably 4 to 5 cents ahead of the consensus estimate of 94 cents.
The question is how much of this great story for Pearl is built into the stock price. RIMM is currently trading at PE of 40 on a trailing basis and PE of near 30 based on a forward basis. This implies great premium for the company compared to its competitors such as Nokia, Motorola, and Samsung, which are typically trading with PE of somewhere between 15 to 17. By this type of valuation, the investors are assuming that RIMM is in the midst of the robust growth that will last for a foreseeable future. RIMM is valued to be in a secular growth mode, rather than in cyclical growth mode.
For RIMM to continue to get this type of PE multiple, the company is now pressured to show that this Q was outstanding and next Q will be as well. In my opinion, if the company delivers bottom-line number that is about 4 to 5 cents higher than the mean estimate, investors will be disappointed as they will be looking for blowout Q performance. In addition, net sub add will be extremely important key metrics to pay attention. Bears maintain that strong Pearl sale will not last more than Q or two if it is mainly driven by the upgrades of the hardware by the existing customers. As such, the company needs to show strong net sub add performance this Q, far above the consensus estimate number of roughly 820K. The company guides for around 800K for this Q number during the last earning call. In my opinion, investors may be disappointed for anything less than 850K. More significantly, RIMM needs to guide higher for next Q net sub add number. The expectation is heading higher above 925K and I believe this may turn out to be very challenging for the company.
Because Pearl story has a significant consumer market component, I believe that the company cannot sustain this type of premium multiple for too long. The consumer smart phone market is extremely crowded by several competitions mentioned above. The pricing pressure for the product is great and the consumers have very little royalty for the product. This often leads to great churn number for the subscriber base. I can give higher multiple of greater than 30 for the enterprise segment of RIMM business, assuming RIMM continues to generate healthy subscriber growth (but some bears are also doubtful of this point). However, the consumer segment multiple should be roughly in line with what the competitions are getting, which is 15 to 17 range. As a result, it would be difficult to assign multiple greater than 22 ~ 25 range for the company. If you take current aggressive estimate of 4.62 and apply higher range of PE of 25, the stock would be fairly valued around $115 in 07. Should there be any weakness in the sales forecast, this multiple may further shrink and the shares are vulnerable for substantial downside.
RIMM is a relatively new stock for FilthyRich group and I may need to study the company fundamentals further to gain deeper understanding of the company. However, my current opinion is the company is heading into high expectation with the fundamental that do not support for the current share price.
Short term, investors may continue to be dazzled by Pearl sales number and chase this stock higher. Should this happens, you should be increasing your short position on the stock. Ahead of earning, it may be worthwhile taking 30% of your short position. Should there be a further price appreciation, you can establish your remaining position
Wednesday, December 20, 2006
JPM: Ambitious CEO to take the bank to another level.
About 13 months ago, I named JPM as a top pick for 2006. At that time, the stock was lagging the market with a share price of around $36. Today JPM is hovering around another 52 week high level, trading at $48.28. The stock is posting solid 34% gain to date. The investment thesis behind JPM was better risk to award scenario. I anticipated somewhat choppy 2006 in 2005 due to Fed prolonged rate hike throughout 2005. I thought that this would have some effect on the growth rate of the economy, causing earning deceleration in certain sectors. As financials have lagged the market, I went with financials as the area to focus due to improved risk to award ratio. Financials have been fighting tough business climates. Shrinking interest margin due to yield inversion, difficult mortgage business, and change in personal bankruptcy policy all weighed negatively on the bank stocks.
So what do I think about JPM now after one year? JPM business outlook is better than ever. I continue to believe that JPM is going to further improve its financial metrics, notably ROE and net profit margin. Although JPM continues to make solid progress on its ability to generate higher net profit margin, it is still lagging its primary competitors such as BAC and C. New CEO Jamie Dimon recently took the full control of JPM after being promoted to both Chairman and the CEO of the company. He vows that he can take the company ROE metrics to 20% level but many analysts are still skeptical of his view. At most optimistic case, the analysts believe that ROE for the company will be around 17% at best, about 4 to 5% below the well run large integrated bank such as C and BAC. However, even if the analysts are right, I believe that the company can still achieve 15% growth in EPS over next 5 years. Folks, JPM is a low risk, extremely sound investment that will show steady growth over next 5 years. I believe that the company will generate EPS exceeding $4.50 in 07, $5.15 in 08, and $5.9 in 09. Therefore, even if the conservative PE of 12 is applied, the stock will be trading around $62 in 07 on a forward PE basis. If Jamie Dimon is correct about generating 20% ROE for the company, the upside for the share price is even greater.
I also expect that Jamie Dimon will raise the company dividend sometime in 07. The company has not raised the dividend in last 3 years and I believe that this will bring more investor enthusiasm to the stock, especially for those who are seeking a balance between the aggressive growth strategy and value approach.
You have noted lately that Citibank's financial performance has been lagging BAC. There is much talk in the market that C will spin off several branches of the business or outright sell some of wealth management asset to the interested parties. Don't be surprised if JPM shows a lot of interest in what is coming out of Citi. While C may cut its investment on expanding business scale, Jamie Dimon who has been cleaning up its house and improving the operation may show aggressiveness in expanding business scale in 07. In my opinion, JPM has really consolidated its business operations well under common data management platform and may handle additional M&A activities with better than expected business synergies. Finally, I also expect the company may be a little bit more aggressive with its Investment banking; the company spent most its time to establish steadiness and consistency in 06 for Investment Banking area.
Turnaround for JPM is no where near complete. This implies plenty of earning leverage that you will see from the company. 2006 was the year for the company to demonstrate the ability to improve operational performance and build the organization for more consistent growth. 2007 will be the year for the company to leverage on the operational improvements that it has achieved to date and become more aggressive on expanding business scale. I expect as the company exits 07, the company will have largely finished the operational improvements and establish the business scale to compete effectively with C and BAC. This sets up the company to become lean, mean cash generating machine in 08 (of course with the economy not in recession).
As such, I see JPM as the core holding in my portfolio. Despite the solid gain we had to date, I will continue to hold onto the shares as I see far higher share price in the future. CTRP now has the best pick status for 07 for FilthyRich group. However, JPM has not disappointed us with 06 performance. While other tech, biotech and china stocks have been all over the map in 06 and gave stomach aches every now and then, JPM has been steady and consistent in 06 and I believe it will be the same in 07. So congrats to JPM shareholders in 06 and we look for even better things to come in 07.
So what do I think about JPM now after one year? JPM business outlook is better than ever. I continue to believe that JPM is going to further improve its financial metrics, notably ROE and net profit margin. Although JPM continues to make solid progress on its ability to generate higher net profit margin, it is still lagging its primary competitors such as BAC and C. New CEO Jamie Dimon recently took the full control of JPM after being promoted to both Chairman and the CEO of the company. He vows that he can take the company ROE metrics to 20% level but many analysts are still skeptical of his view. At most optimistic case, the analysts believe that ROE for the company will be around 17% at best, about 4 to 5% below the well run large integrated bank such as C and BAC. However, even if the analysts are right, I believe that the company can still achieve 15% growth in EPS over next 5 years. Folks, JPM is a low risk, extremely sound investment that will show steady growth over next 5 years. I believe that the company will generate EPS exceeding $4.50 in 07, $5.15 in 08, and $5.9 in 09. Therefore, even if the conservative PE of 12 is applied, the stock will be trading around $62 in 07 on a forward PE basis. If Jamie Dimon is correct about generating 20% ROE for the company, the upside for the share price is even greater.
I also expect that Jamie Dimon will raise the company dividend sometime in 07. The company has not raised the dividend in last 3 years and I believe that this will bring more investor enthusiasm to the stock, especially for those who are seeking a balance between the aggressive growth strategy and value approach.
You have noted lately that Citibank's financial performance has been lagging BAC. There is much talk in the market that C will spin off several branches of the business or outright sell some of wealth management asset to the interested parties. Don't be surprised if JPM shows a lot of interest in what is coming out of Citi. While C may cut its investment on expanding business scale, Jamie Dimon who has been cleaning up its house and improving the operation may show aggressiveness in expanding business scale in 07. In my opinion, JPM has really consolidated its business operations well under common data management platform and may handle additional M&A activities with better than expected business synergies. Finally, I also expect the company may be a little bit more aggressive with its Investment banking; the company spent most its time to establish steadiness and consistency in 06 for Investment Banking area.
Turnaround for JPM is no where near complete. This implies plenty of earning leverage that you will see from the company. 2006 was the year for the company to demonstrate the ability to improve operational performance and build the organization for more consistent growth. 2007 will be the year for the company to leverage on the operational improvements that it has achieved to date and become more aggressive on expanding business scale. I expect as the company exits 07, the company will have largely finished the operational improvements and establish the business scale to compete effectively with C and BAC. This sets up the company to become lean, mean cash generating machine in 08 (of course with the economy not in recession).
As such, I see JPM as the core holding in my portfolio. Despite the solid gain we had to date, I will continue to hold onto the shares as I see far higher share price in the future. CTRP now has the best pick status for 07 for FilthyRich group. However, JPM has not disappointed us with 06 performance. While other tech, biotech and china stocks have been all over the map in 06 and gave stomach aches every now and then, JPM has been steady and consistent in 06 and I believe it will be the same in 07. So congrats to JPM shareholders in 06 and we look for even better things to come in 07.
Sunday, December 17, 2006
GS: Don't miss the finale of the firework; PT raised.
I wanted to give you my take on the latest earning result for Goldman Sachs. The company reported Dec 06 result pre-market on Tuesday. Ahead of the earning, I suggested you take some money off the table should there be a pullback given the torrid earning upward revision (especially if you are playing with call options). I also claim that GS should be still able to beat the consensus estimate by a solid margin (by margin of 10 to 15 cents).
http://www.investorhives.com...
GS delivered the near best quarter performance in the company franchise history. Quarterly revenue came in at 9.4 billion. EPS was $6.59, significantly above the consensus estimate of $6.05. The company thus beat the bottom-line number by outstanding 54 cents, much higher than what I have expected despite the significant analysts' earning revision prior to the earning.
Despite the blowout earning, the stock dipped slightly from $205 level that the stock was trading heading into the earning call, settling slightly below $200 level. Friday was an option expiration day. So there was a battle among institutional traders who want their call option at $200 in the money and those who wanted to see their put option in the money as well. This caused the stock to remain volatile, fluctuating around $200 level throughout the week after the earning. Frankly, given the large price appreciation ahead of the earning, I thought I would see more downward pressure but the stock held firm and I believe it is in a position to make a solid advance in coming days. Consequently, I want you to use the profits gained by selling some portion of GS holding ahead of earning to buy back the shares at these level. I believe that the stock still has substantial upside. I am further raising the target price to $250 from $230.
Because GS earning performance has been so stellar this year, many analysts expect the earning has peaked for the company. At near $20 EPS, the stock is currently trading barely above PE of 10 on a trailing basis. In the future, many analysts see EPS performance dropping to $16 ~ $17 range next year and think that the stock is trading with forward PE of 11 ~ 12 range. Given the market uncertainty in the US rate environment and economic uncertainties, the traders may feel inclined to be extremely conservative with assigning appropriate PE multiple.
Traders were looking so hard for reasons to sell the stock after the quarter that their reason almost appeared to be trivial without much ground. Bears contend that this quarter's performance was entirely helped by the one-time $500 mil investment gain from its FICC (Fixed Income, Currency, and Commodity) operation with Accordia Golf in Japan. Also they were disappointed in the growth of the revenue in the Investment banking side which showed only 4% growth sequentially from the previous Q. In addition, the comp ratio was lowest at 26.6% so operating cost going forward is likely to increase, pressuring the earning performance.
The truth is that great environment in the investment banking area is just beginning. GS reported the extremely strong backlog in the investment banking side. The good news is still to come given the record amount of M&A activities and IPO deals in the US and abroad. In fact, GS has the strongest presence in China (see figures below) and I believe that the investment banking revenue from China alone will surprise many investors' expectation and take the GS shares to much higher level. In addition, in the winter, commodity market has firmed up from the previous Q and could again help GS to achieve higher than expected revenue in FICC side. Finally, as I expect good 2007 in terms of the market performance (although we could see some correction in early 2007), equity trading revenue could remain strong as well. In my opinion, analysts are too concerned about the fact that GS is doing too well.
However, GS's great performance should be interpreted as better performance to come rather than peaking earning for the company. 15 to 20 % EPS drop that many bears are seeing are the reason that GS shares may continue to advance. I see the earning leveling off from the current level but don't see the EPS dropping by the magnitude that some bears may content GS will face. I expect EPS performance of somewhere between $18 and $19, slightly lower from the current record $20 performance. Furthermore, towards the end of 2007, Fed could ease after making sure inflation is under control. This could support the PE multiple of the financial sectors to expand to 13 ~ 14 range from the depressed 10 ~ 11. As a result, the shares can trade decidedly above $250 if my contentions actually pan out in the market place.
In conclusion, GS had a great 2006. 2007 will be another solid year for GS and the shares could continue to rise as investors gain more confidence that GS business in no where near the state of collapse. I think investors should use any weakness in the stock price as a chance to add to their position.
http://www.investorhives.com...
GS delivered the near best quarter performance in the company franchise history. Quarterly revenue came in at 9.4 billion. EPS was $6.59, significantly above the consensus estimate of $6.05. The company thus beat the bottom-line number by outstanding 54 cents, much higher than what I have expected despite the significant analysts' earning revision prior to the earning.
Despite the blowout earning, the stock dipped slightly from $205 level that the stock was trading heading into the earning call, settling slightly below $200 level. Friday was an option expiration day. So there was a battle among institutional traders who want their call option at $200 in the money and those who wanted to see their put option in the money as well. This caused the stock to remain volatile, fluctuating around $200 level throughout the week after the earning. Frankly, given the large price appreciation ahead of the earning, I thought I would see more downward pressure but the stock held firm and I believe it is in a position to make a solid advance in coming days. Consequently, I want you to use the profits gained by selling some portion of GS holding ahead of earning to buy back the shares at these level. I believe that the stock still has substantial upside. I am further raising the target price to $250 from $230.
Because GS earning performance has been so stellar this year, many analysts expect the earning has peaked for the company. At near $20 EPS, the stock is currently trading barely above PE of 10 on a trailing basis. In the future, many analysts see EPS performance dropping to $16 ~ $17 range next year and think that the stock is trading with forward PE of 11 ~ 12 range. Given the market uncertainty in the US rate environment and economic uncertainties, the traders may feel inclined to be extremely conservative with assigning appropriate PE multiple.
Traders were looking so hard for reasons to sell the stock after the quarter that their reason almost appeared to be trivial without much ground. Bears contend that this quarter's performance was entirely helped by the one-time $500 mil investment gain from its FICC (Fixed Income, Currency, and Commodity) operation with Accordia Golf in Japan. Also they were disappointed in the growth of the revenue in the Investment banking side which showed only 4% growth sequentially from the previous Q. In addition, the comp ratio was lowest at 26.6% so operating cost going forward is likely to increase, pressuring the earning performance.
The truth is that great environment in the investment banking area is just beginning. GS reported the extremely strong backlog in the investment banking side. The good news is still to come given the record amount of M&A activities and IPO deals in the US and abroad. In fact, GS has the strongest presence in China (see figures below) and I believe that the investment banking revenue from China alone will surprise many investors' expectation and take the GS shares to much higher level. In addition, in the winter, commodity market has firmed up from the previous Q and could again help GS to achieve higher than expected revenue in FICC side. Finally, as I expect good 2007 in terms of the market performance (although we could see some correction in early 2007), equity trading revenue could remain strong as well. In my opinion, analysts are too concerned about the fact that GS is doing too well.
However, GS's great performance should be interpreted as better performance to come rather than peaking earning for the company. 15 to 20 % EPS drop that many bears are seeing are the reason that GS shares may continue to advance. I see the earning leveling off from the current level but don't see the EPS dropping by the magnitude that some bears may content GS will face. I expect EPS performance of somewhere between $18 and $19, slightly lower from the current record $20 performance. Furthermore, towards the end of 2007, Fed could ease after making sure inflation is under control. This could support the PE multiple of the financial sectors to expand to 13 ~ 14 range from the depressed 10 ~ 11. As a result, the shares can trade decidedly above $250 if my contentions actually pan out in the market place.
In conclusion, GS had a great 2006. 2007 will be another solid year for GS and the shares could continue to rise as investors gain more confidence that GS business in no where near the state of collapse. I think investors should use any weakness in the stock price as a chance to add to their position.
Sunday, December 10, 2006
GS: Expect fireworks but investors know it is 4th of July.
In my previous message dated 11/22/06, I indicated GS is on a path to have one of the best Q in terms of earning. I believed that the company will have a blowout Q, beating the consensus estimate by a wide margin. I bumped up my price target to $230 from $200.
http://www.investorhives.com/msgd.php?msg_...
At that time, I told you guys that the stock would decidedly break above $200 level as investors anticipate great earning from the company. Although the stock remained volatile over last two weeks, the stock is now at $205 and a change and some of you who have been playing with options or the stock may have racked up some nice gain. What do we do now heading into the earning on Tuesday morning?
Two weeks ago, the mean consensus EPS estimate for the upcoming Q was somewhere between $4.9 to $5. However, in the matter of two weeks, we have seen torrid upward earning estimate revision by many analysts. Now according to Yahoo mean estimate number, the consensus EPS stands at tall $6 a share. Ahead of the earning, Smithbarney raises to the target to $200 from $155 and bumps up the EPS estimate for the Q to be $6.65 while maintaining hold rating. S&P raises the target by $10 to $230 and adds the stock to top ten portfolio stock list. A small research firm Buckingham Research Group ups the target to $256, citing higher than expected income from M&A activities and IPO deals in Asia and Europe in coming months. Prudential also increased the target price to $215, citing gains from ICBC investment.
While I still continue to expect robust earning performance that will even beat the elevated estimate, investors are also expecting this and the higher EPS estimate largely reflects very robust business environment that GS had in M&A and IPO market in the US and in Asia. Due to substantial earning revision, chance for the blow-out for Q is less likely. However, it is still possible that GS will probably beat the estimate number by a solid margin (probably ~ 15 to 20 cents).
In my opinion, real surprise will come from the guidance and this is where investors should focus to determine the near term stock price movement. Currently, investors expect that GS cannot sustain this level of earning performance for next year and the company will see 10 to 15% earning depreciation from the current level. While this year's estimate is roughly anywhere between $19 to $20 EPS, for the next year, the estimate remains in the range of $17 to $18. However, even at this reduced expectation, the stock is trading just above PE of 11 on a forward basis. So this is not an expensive stock.
Furthermore, I believe that the estimate for next year's earning is too low. Next year is the third year before the presidential election and the stock typically performs the best during this year. In addition, prior to 2008 Olympics, I expect extremely strong Chinese equity market that will fuel very robust IPO deals. No investment firm is better positioned in China as GS is. Finally international exposure of GS may help the firm to rack up substantial currency gains. If Fed eases the interest rate by late next year, PE multiple will likely to expand to 13 to 14 level and with EPS that may exceed $18 next year, the stock may test $250. So we still have some solid upside from the current level.
Although GS is heading into the earning with increased expectation, I believe you should not sell all of your shares into strength. If you are an option player (I know some of you have racked up more than 100% gain), I suggest you sell half of your position and let your free money work for you. If you are a stock holder, I may take some off the table to add more shares in case of price drop after the earning: however, I would still hold onto the good portion of your GS holding. I expect favorable guidance from the management and this is where the surprise will be. Even in the case of stock price drop due to largely in-line Q, you will get a great chance to add additional shares. Seems like we cannot lose on GS..
http://www.investorhives.com/msgd.php?msg_...
At that time, I told you guys that the stock would decidedly break above $200 level as investors anticipate great earning from the company. Although the stock remained volatile over last two weeks, the stock is now at $205 and a change and some of you who have been playing with options or the stock may have racked up some nice gain. What do we do now heading into the earning on Tuesday morning?
Two weeks ago, the mean consensus EPS estimate for the upcoming Q was somewhere between $4.9 to $5. However, in the matter of two weeks, we have seen torrid upward earning estimate revision by many analysts. Now according to Yahoo mean estimate number, the consensus EPS stands at tall $6 a share. Ahead of the earning, Smithbarney raises to the target to $200 from $155 and bumps up the EPS estimate for the Q to be $6.65 while maintaining hold rating. S&P raises the target by $10 to $230 and adds the stock to top ten portfolio stock list. A small research firm Buckingham Research Group ups the target to $256, citing higher than expected income from M&A activities and IPO deals in Asia and Europe in coming months. Prudential also increased the target price to $215, citing gains from ICBC investment.
While I still continue to expect robust earning performance that will even beat the elevated estimate, investors are also expecting this and the higher EPS estimate largely reflects very robust business environment that GS had in M&A and IPO market in the US and in Asia. Due to substantial earning revision, chance for the blow-out for Q is less likely. However, it is still possible that GS will probably beat the estimate number by a solid margin (probably ~ 15 to 20 cents).
In my opinion, real surprise will come from the guidance and this is where investors should focus to determine the near term stock price movement. Currently, investors expect that GS cannot sustain this level of earning performance for next year and the company will see 10 to 15% earning depreciation from the current level. While this year's estimate is roughly anywhere between $19 to $20 EPS, for the next year, the estimate remains in the range of $17 to $18. However, even at this reduced expectation, the stock is trading just above PE of 11 on a forward basis. So this is not an expensive stock.
Furthermore, I believe that the estimate for next year's earning is too low. Next year is the third year before the presidential election and the stock typically performs the best during this year. In addition, prior to 2008 Olympics, I expect extremely strong Chinese equity market that will fuel very robust IPO deals. No investment firm is better positioned in China as GS is. Finally international exposure of GS may help the firm to rack up substantial currency gains. If Fed eases the interest rate by late next year, PE multiple will likely to expand to 13 to 14 level and with EPS that may exceed $18 next year, the stock may test $250. So we still have some solid upside from the current level.
Although GS is heading into the earning with increased expectation, I believe you should not sell all of your shares into strength. If you are an option player (I know some of you have racked up more than 100% gain), I suggest you sell half of your position and let your free money work for you. If you are a stock holder, I may take some off the table to add more shares in case of price drop after the earning: however, I would still hold onto the good portion of your GS holding. I expect favorable guidance from the management and this is where the surprise will be. Even in the case of stock price drop due to largely in-line Q, you will get a great chance to add additional shares. Seems like we cannot lose on GS..
Initiating two additional biotech names: ISIS and ALNY
When I was previewing ASH 2006 for our FilthyRich biotech names sometime ago, I noted that biotech industry will face great waves of M&A activities over next two years. This is because big pharma companies such as Merck, Pfizer, and Novartis will be on the hunt for small to mid cap biotech companies to accelerate their drug discovery process.
So far we have positioned our biotech names very conservatively in terms of valuation as I saw the market uncertainties amid slowing economy. My feeling was that biotech companies are less prone to economical cyclicality and provide investors with nice place to weather out the periodic volatile storms in the market as investors continue to debate the extent of the economic slowdown. Even in the biotech, I have been emphasizing the valuation. I have been recommending AMGN with low PE ratio and reasonable growth rate. I have replaced DNA with GENZ to also reflect the emphasis on the value. Genentech, FilthyRich's pick for 2005, has been a stellar performer in 05 (racked up more than 100% gain). However, as Avastin drug potential was properly being reflected in the share price, we removed the name and replaced with GENZ. GENZ is a specialty biotech company armed with wide array of drugs in the product line to treat very rare diseases. The company is a very consistent and steady grower with PE in the low twenty ranges. I will definitely outline this company in detail in the future as I see the current price as very attractive entry point. PDLI is a small to mid cap biotech name. Here I also emphasize the conservatism in picking this stock. PDLI has a great royalty revenue stream from a number of large biotech companies such as DNA and BIIB. While other small biotech companies must burn cash after cash in order to develop its pipeline and face the prospect of going bankrupt when their pipeline never materialize, PDLI is in a position to use its royalty revenue to develop its pipeline without seeing negative cash flow from its operation. PDLI is undervalued I believe. Once this company shows positive data for the emerging pipeline, the stock will be noticed. I believe that the company represents a good value here.
Having said that, I believe that biotech sector will see more investors who are willing to speculate on the industry M&A activities. Overall market conditions supports this trend. The bond market is topping in my opinion. There is plenty money that rotated out of the real estate market (all the money was in the real estate market from 02 to 05.) The energy and commodity speculation has also fizzled out. At this point, there is plenty of liquidity out there that is waiting to get into the stock market. Presently, money is favoring tech names; however, with the economy that is slowing some signs of slowing down, I believe that the risk in the tech market is increasing and am betting that the money could rotate out of tech sector as quickly as early next year. These available liquidities can find a way into biotech sector that makes biotech as one of the most exciting sectors to invest in 07 and beyond.
On top of these favorable market trends, these are compelling industry reasons why M&A activities may pick up in the biotech sector. Big pharmas' drugs are facing more generic competitions as many of their drugs face patent expiration by early 2010. But the pharma companies continue to struggle with developing legitimate pipeline for continued top line growth. Several days ago, Pfizer dropped bomb in the investor community by stating that its highly touted cholesterol drug (raises good HDL cholesterol) torcetrapid with 24 billion dollar revenue potential has major side effect problem and the company will cease the development of the drug. This now set the stage for major M&A efforts by Pfizer and other large pharma companies to acquire small to mid size biotech companies to beef up the pipeline.
Who could be the beneficiaries of this trend? I believe that the biotech companies with RNA technology will be the focus of M&A activities by the pharma companies. Merck has paid more than 50% premium in acquiring Sirna, a RNA biotech company. Merck's acquisition validates the RNA technology as viable source of new drug pipeline development. I would like to bring ISIS (Isis pharmaceuticals) and ALNY (Alnylam pharmaceuticals) to your attention. I am initiating these two names to bring up more species to our biotech list. ISIS is initiated at the price of $12.13 and ALNY is covered at the price of $23.81. I have been watching and studying these two names last three months and over this time, the stock had a tremendous run. As a result, rather than jumping in with a big bet, I would suggest using the pullback in the stock price to accumulate. In addition, let me emphasize that these two names contains high elements of speculation. ISIS has several drugs in the pipeline that is in the middle of trial stage 2. ALNY has their pipeline at even earlier stage than ISIS. So it may still take several additional years to bring the drugs in the pipeline into the market. So I suggest you limit your exposure to less than 5% of your overall portfolio for each stock.
RNA acts as a messenger in building the protein, which are the building blocks of the human life, from DNA strains. By carefully disrupting or manipulating the RNA process, these companies can target the protein productions of malignant tumors, formation of bad cholesterol, etc. Consequently, RNA technology offers very promising way of conquering the cancer, heart diseases, diabetics and many other diseases that is plaguing the human kind. I will highlight more about the RNA interference technology for ALNY and RNA antisepses technology for ISIS.
So far we have positioned our biotech names very conservatively in terms of valuation as I saw the market uncertainties amid slowing economy. My feeling was that biotech companies are less prone to economical cyclicality and provide investors with nice place to weather out the periodic volatile storms in the market as investors continue to debate the extent of the economic slowdown. Even in the biotech, I have been emphasizing the valuation. I have been recommending AMGN with low PE ratio and reasonable growth rate. I have replaced DNA with GENZ to also reflect the emphasis on the value. Genentech, FilthyRich's pick for 2005, has been a stellar performer in 05 (racked up more than 100% gain). However, as Avastin drug potential was properly being reflected in the share price, we removed the name and replaced with GENZ. GENZ is a specialty biotech company armed with wide array of drugs in the product line to treat very rare diseases. The company is a very consistent and steady grower with PE in the low twenty ranges. I will definitely outline this company in detail in the future as I see the current price as very attractive entry point. PDLI is a small to mid cap biotech name. Here I also emphasize the conservatism in picking this stock. PDLI has a great royalty revenue stream from a number of large biotech companies such as DNA and BIIB. While other small biotech companies must burn cash after cash in order to develop its pipeline and face the prospect of going bankrupt when their pipeline never materialize, PDLI is in a position to use its royalty revenue to develop its pipeline without seeing negative cash flow from its operation. PDLI is undervalued I believe. Once this company shows positive data for the emerging pipeline, the stock will be noticed. I believe that the company represents a good value here.
Having said that, I believe that biotech sector will see more investors who are willing to speculate on the industry M&A activities. Overall market conditions supports this trend. The bond market is topping in my opinion. There is plenty money that rotated out of the real estate market (all the money was in the real estate market from 02 to 05.) The energy and commodity speculation has also fizzled out. At this point, there is plenty of liquidity out there that is waiting to get into the stock market. Presently, money is favoring tech names; however, with the economy that is slowing some signs of slowing down, I believe that the risk in the tech market is increasing and am betting that the money could rotate out of tech sector as quickly as early next year. These available liquidities can find a way into biotech sector that makes biotech as one of the most exciting sectors to invest in 07 and beyond.
On top of these favorable market trends, these are compelling industry reasons why M&A activities may pick up in the biotech sector. Big pharmas' drugs are facing more generic competitions as many of their drugs face patent expiration by early 2010. But the pharma companies continue to struggle with developing legitimate pipeline for continued top line growth. Several days ago, Pfizer dropped bomb in the investor community by stating that its highly touted cholesterol drug (raises good HDL cholesterol) torcetrapid with 24 billion dollar revenue potential has major side effect problem and the company will cease the development of the drug. This now set the stage for major M&A efforts by Pfizer and other large pharma companies to acquire small to mid size biotech companies to beef up the pipeline.
Who could be the beneficiaries of this trend? I believe that the biotech companies with RNA technology will be the focus of M&A activities by the pharma companies. Merck has paid more than 50% premium in acquiring Sirna, a RNA biotech company. Merck's acquisition validates the RNA technology as viable source of new drug pipeline development. I would like to bring ISIS (Isis pharmaceuticals) and ALNY (Alnylam pharmaceuticals) to your attention. I am initiating these two names to bring up more species to our biotech list. ISIS is initiated at the price of $12.13 and ALNY is covered at the price of $23.81. I have been watching and studying these two names last three months and over this time, the stock had a tremendous run. As a result, rather than jumping in with a big bet, I would suggest using the pullback in the stock price to accumulate. In addition, let me emphasize that these two names contains high elements of speculation. ISIS has several drugs in the pipeline that is in the middle of trial stage 2. ALNY has their pipeline at even earlier stage than ISIS. So it may still take several additional years to bring the drugs in the pipeline into the market. So I suggest you limit your exposure to less than 5% of your overall portfolio for each stock.
RNA acts as a messenger in building the protein, which are the building blocks of the human life, from DNA strains. By carefully disrupting or manipulating the RNA process, these companies can target the protein productions of malignant tumors, formation of bad cholesterol, etc. Consequently, RNA technology offers very promising way of conquering the cancer, heart diseases, diabetics and many other diseases that is plaguing the human kind. I will highlight more about the RNA interference technology for ALNY and RNA antisepses technology for ISIS.
Wednesday, December 06, 2006
AMGN: Use the concerns over EPO hearing to add agressively
AMGN shares have been weak lately. FilthyRich group has initiated the stock at $61.79 on 6/28/05 along with CELG and PDLI. Although it is up by roughly 11% in a year and a half time frame, the shares continue to under-perform its peers. My original investment thesis and the related articles are:
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http://www.investorhives.com/msgd.php?msg_...
The stock seemed to trend higher over last two months and was at one point was poised to break above $80 level where the technical resistance may have occurred. But now it is once again trading below $70. At this level, I believe that the stock is a great buy (my target is $100). It is trading with such a low valuation that it is simply a shame to see the stock trading at this level. In my opinion, AMGN will make roughly $4.5 to 4.6 in 07 and probably over $5 in 08. As we enter 07, you are looking at this premiere biotech companies trading with PE of 15 based on 07 and PE of 13 based on 08 estimate. In 07, the stock would be trading with PE of bank stock and I believe this type of valuation will not last and the stock should be trading much higher from the current level. Momentum investors continue to ignore improving pipeline in the oncology area and the current diverse pipeline that is already generating multi-billion dollar revenue. Instead, it is keying on two major uncertainties that is all related to AMGN's EPO line of drug. First one (I already went over this in the previous article) is related to the Roche's competitive drug CERA entry into the US market. AMGN has sued Roche for patent infringement and AMGN has a good chance to prevail the lawsuit due to extensive patent portfolio in the EPO market. We will hear about the Judge's decision soon in the early next year.
Second uncertainty that is currently depressing the stock price is US Congress hearing on the EPO reimbursement policy. The Congress is conducting a hearing to review the medical reimbursement policy for EPO products and possibly look into way of offering bundled pricing system to lower EPO usage. This is a way of reducing the medical cost and as Democrats took over the Congress and they have affordable medical cost as one of their top initiatives, many investors are afraid that these efforts may lead to lower bottom-line performance for EPO line of products for AMGN. The hearing will take place tomorrow and I believe no near term action will take place on this front: even if there will be some kind of policy change, it is likely to take years to implement. Furthermore, CMS is very much likely to defend its position with current reimbursement policy and there could be no change what-so-ever to the existing policy.
In my opinion, the stock fell in anticipation of the bad news and the drop has fairly reflected the possible negative scenario. Consequently, the risk to award ratio looks good for the stock and current price looks really attractive for the long term oriented investors. Also from the trading point of view, I think AMGN shares now offer good entry point with a short to intermediate term outlook. As such, I recommend you step up and buy AMGN shares.
Now, I would like to preview what AMGN has in store at ASH. Although investors may continue to pay attention to what AMGN competitors are offering at ASH, I believe that most of these concerns are now reflected in the share price and AMGN shares may have bottomed. Following comes from Lehman report published on Nov 29th on 2006 preview of ASH meeting. Tomorrow I will go over GENZ and will also comment on PDLI in the near future.
Amgen's ASH will be quiet, in our opinion, with more focus likely on competitors, EPO being a perennial, Amgen has no denosumab data but we highlight Novartis's competitor, Aclasta (zoledronic acid) which will be featured in a number of posters including data on ONJ and how a new schedule can reduce its incidence.
AMG 531, Thrombocytopenia
Amgen will present 48 week data, on Monday at 1:45 PM, for 531 in ITP, there is also a poster evaluating platelet activation in healthy volunteers; platelet activation has been suggested as a potential safety issue with 531. Amgen has completed two phase 3 studies of 531 in ITP and we expect top line data shortly followed by a BLA in early 2007.
AMG-523, B-Cell Disease
Amgen presents data for its lymphostat/atacicept competitor. A poster on Monday includes clinical implications in the title and we have long thought that Amgen needs to differentiate 523 from the pack; we expect a phase 2 go/no go decision shortly.
AMG-386, Anti-angiogenesis
Amgen has no data for 386, its antibody targeting ang2/tie-2 interaction but we note two posters discussing the role of this pro angiogenic axis in AML (Sunday) and CLL (Monday) and could support a decision by Amgen to explore a role for 386 in hematology; to date there has been a dearth of data for anti-angiogenic agents in hematology, we note a couple of PTK787 posters at ASH; however, our European colleagues expect 787 to be discontinued by Novartis.
Erythropoietin Competitors
A poster describing CERA consumption could provide additional insights into its biology; we have long believed that CERA's perversion of the natural EPO-receptor recycling following ligand binding could raise some questions regarding safety. Other EPO competitors include Neose who will present data from a phase 1 study in healthy volunteers in a Saturday poster.
Thrombocytopenia Competition
Following presentation of impressive data for eltrombopag in hepatitis-associated thrombocytopenia at AASLD, GSK will present ITP data orally (Monday 1:30 PM). We expect strong data from this randomized double-blind trial and while Amgen will likely get to market first with 531, eltrombopag's oral formulation will likely be favored by patients especially for chronic use; although this is where long-term safety which is as yet largely unknown is critical. Newcomer AKaRx will present data from another small molecule oral thrombopoietin agonist, AKR-501, which is currently in phase 1 testing in healthy volunteers (Monday 2:00 PM). We also note that Genzyme will present phase 1 data for the anti-CD16/CD3, GMA-161 in ITP, in a Saturday poster; GMA-161 was developed by Macrogenix.
http://www.investorhives.com/msgd.php?msg_...
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http://www.investorhives.com/msgd.php?msg_...
The stock seemed to trend higher over last two months and was at one point was poised to break above $80 level where the technical resistance may have occurred. But now it is once again trading below $70. At this level, I believe that the stock is a great buy (my target is $100). It is trading with such a low valuation that it is simply a shame to see the stock trading at this level. In my opinion, AMGN will make roughly $4.5 to 4.6 in 07 and probably over $5 in 08. As we enter 07, you are looking at this premiere biotech companies trading with PE of 15 based on 07 and PE of 13 based on 08 estimate. In 07, the stock would be trading with PE of bank stock and I believe this type of valuation will not last and the stock should be trading much higher from the current level. Momentum investors continue to ignore improving pipeline in the oncology area and the current diverse pipeline that is already generating multi-billion dollar revenue. Instead, it is keying on two major uncertainties that is all related to AMGN's EPO line of drug. First one (I already went over this in the previous article) is related to the Roche's competitive drug CERA entry into the US market. AMGN has sued Roche for patent infringement and AMGN has a good chance to prevail the lawsuit due to extensive patent portfolio in the EPO market. We will hear about the Judge's decision soon in the early next year.
Second uncertainty that is currently depressing the stock price is US Congress hearing on the EPO reimbursement policy. The Congress is conducting a hearing to review the medical reimbursement policy for EPO products and possibly look into way of offering bundled pricing system to lower EPO usage. This is a way of reducing the medical cost and as Democrats took over the Congress and they have affordable medical cost as one of their top initiatives, many investors are afraid that these efforts may lead to lower bottom-line performance for EPO line of products for AMGN. The hearing will take place tomorrow and I believe no near term action will take place on this front: even if there will be some kind of policy change, it is likely to take years to implement. Furthermore, CMS is very much likely to defend its position with current reimbursement policy and there could be no change what-so-ever to the existing policy.
In my opinion, the stock fell in anticipation of the bad news and the drop has fairly reflected the possible negative scenario. Consequently, the risk to award ratio looks good for the stock and current price looks really attractive for the long term oriented investors. Also from the trading point of view, I think AMGN shares now offer good entry point with a short to intermediate term outlook. As such, I recommend you step up and buy AMGN shares.
Now, I would like to preview what AMGN has in store at ASH. Although investors may continue to pay attention to what AMGN competitors are offering at ASH, I believe that most of these concerns are now reflected in the share price and AMGN shares may have bottomed. Following comes from Lehman report published on Nov 29th on 2006 preview of ASH meeting. Tomorrow I will go over GENZ and will also comment on PDLI in the near future.
Amgen's ASH will be quiet, in our opinion, with more focus likely on competitors, EPO being a perennial, Amgen has no denosumab data but we highlight Novartis's competitor, Aclasta (zoledronic acid) which will be featured in a number of posters including data on ONJ and how a new schedule can reduce its incidence.
AMG 531, Thrombocytopenia
Amgen will present 48 week data, on Monday at 1:45 PM, for 531 in ITP, there is also a poster evaluating platelet activation in healthy volunteers; platelet activation has been suggested as a potential safety issue with 531. Amgen has completed two phase 3 studies of 531 in ITP and we expect top line data shortly followed by a BLA in early 2007.
AMG-523, B-Cell Disease
Amgen presents data for its lymphostat/atacicept competitor. A poster on Monday includes clinical implications in the title and we have long thought that Amgen needs to differentiate 523 from the pack; we expect a phase 2 go/no go decision shortly.
AMG-386, Anti-angiogenesis
Amgen has no data for 386, its antibody targeting ang2/tie-2 interaction but we note two posters discussing the role of this pro angiogenic axis in AML (Sunday) and CLL (Monday) and could support a decision by Amgen to explore a role for 386 in hematology; to date there has been a dearth of data for anti-angiogenic agents in hematology, we note a couple of PTK787 posters at ASH; however, our European colleagues expect 787 to be discontinued by Novartis.
Erythropoietin Competitors
A poster describing CERA consumption could provide additional insights into its biology; we have long believed that CERA's perversion of the natural EPO-receptor recycling following ligand binding could raise some questions regarding safety. Other EPO competitors include Neose who will present data from a phase 1 study in healthy volunteers in a Saturday poster.
Thrombocytopenia Competition
Following presentation of impressive data for eltrombopag in hepatitis-associated thrombocytopenia at AASLD, GSK will present ITP data orally (Monday 1:30 PM). We expect strong data from this randomized double-blind trial and while Amgen will likely get to market first with 531, eltrombopag's oral formulation will likely be favored by patients especially for chronic use; although this is where long-term safety which is as yet largely unknown is critical. Newcomer AKaRx will present data from another small molecule oral thrombopoietin agonist, AKR-501, which is currently in phase 1 testing in healthy volunteers (Monday 2:00 PM). We also note that Genzyme will present phase 1 data for the anti-CD16/CD3, GMA-161 in ITP, in a Saturday poster; GMA-161 was developed by Macrogenix.
Tuesday, December 05, 2006
CELG: Setting all time high ahead of ASH.
As I have promised, I will highlight what CELG is presenting during ASH. I will do the same for GENZ and AMGN tomorrow. Ahead of ASH, CELG is hitting all time high today: the stock is now racking up impressive 190% return in one year and a half since our coverage of the stock on 6/28/05 at slightly over $20. Ahead of ASH that starts on Friday, Smithbarney raised the target for CELG shares to $70 from $58. The firm maintains buy rating on the stock. The justification of the target raise was the faster than expected sales of Revlimid for MDS and MM treatment. In addition, the firm sees much slower rate of decrease in Thalomid sales. With this estimate, firm sees the revenue that will exceed 2 billion with EPS in the range of $1.70 for 08 (As we enter 07, 08 estimate will be used for forward PE). So target of $70 implies PE of slightly greater than 40 which is not unreasonable given the fact that the company revenue is ramping with the growth rate greater than 70% through 2008 ( puts PEG ratio well below 0.6).
Again this estimate is based on the Revlimid sales in the targeted MM and MDS market in the Europe and in the US. CELG is waiting for European approval of Revlimid in early next year. So in order to justify the current valuation, European approval must be granted, which I believe it will happen given the safety profile and efficacy of Revlimid. If Revlimid is only targeted for MM and MDS market, then the story for CELG may be nearing its end. But it may be far from the truth.
Revlimid is now being evaluated for CLL and NHL which represents 600 mil and 4 billion markets respectively. These two markets represent more than 2X the revenue opportunity for Revlimid for MDS and MM market. The initial trial data on CLL looks very promising. In fact, some firms are now taking off the label sale of Revlimid into the earning estimate for CLL. NHL data is still in very early stage. We will hear more about the Revlimid indication with respect to CLL/NHL during ASH. If CELG successfully makes in-road in CLL/NHL market, the revenue of the company may be in the range of 5 to 6 billion and at the operating metrics of 30% (standard for large biotech company), the company EPS can bump upto $5 a share. This simply means still large untapped potential for share price appreciation remains. CELG is next AMGN and DNA if Revlimid can continue to penetrate into new applications. This is why investors may remain excited as we head into ASH and wait for favorable trial data.
Another interesting point about CELG is its extensive patents on Stem Cell technology. As Democrats now control the Congress, I believe there will be more push towards investing and developing Stem Cell technology to cure many neurological degenerative diseases. The company such as Geron is now being viewed as a beneficiary of this possible trend in the future (increased government spending in the stem cell research). If this pans out, CELG will also be the beneficiary of this trend. So we have another source of investor enthusiasm that may help to push share price higher in the future.
Now following is the highlight of CELG presentation with each dates specified for different presentation of trial data. Again the source for the next paragraph come from Lehman report published on Nov 29th to preview the ASH meeting.
Revlimid continues to be one of the higher profile products at ASH with a number of Important oral presentations:
Monday 8:15 AM and 8:30 AM, long-term data from MDS phase 2 studies;
Monday 11:30 AM, final data from the phase 1 Revlimid/Velcade combination study in R/R MM; phase 2 studies in 1st line and R/R disease have been initiated based on these phase 1 data;
Monday 12:00 PM and 12:15 PM, single agent activity in R/R CLL, this is an update of data that has been discussed over a couple of years and while CR's are impressive the data to date has been difficult to put into context; CELG is planning a series of pivotal studies in CLL;
Monday 2:00 PM, single agent activity in NHL, like the CLL data these are intriguing and registration studies are being planned to quantify the benefit of Revlimid in NHL;
Tuesday 9:30 AM, initial data from the phase 3 ECOG study comparing high dose
and low dose dex combined with Revlimid in 1st line MM will provide important safety data;
Tuesday 9:45 AM, Phase 1/2 1st line data for Revlimid combined with Memphian
prednisone. Celgene is also expected to present data for Thalid in MM including data comparing Thal/dex to VAD as a pre-transplant induction regimen in the 1st line setting as well as an update from the pivotal 1st line Thal/dex vs dex study.
Again this estimate is based on the Revlimid sales in the targeted MM and MDS market in the Europe and in the US. CELG is waiting for European approval of Revlimid in early next year. So in order to justify the current valuation, European approval must be granted, which I believe it will happen given the safety profile and efficacy of Revlimid. If Revlimid is only targeted for MM and MDS market, then the story for CELG may be nearing its end. But it may be far from the truth.
Revlimid is now being evaluated for CLL and NHL which represents 600 mil and 4 billion markets respectively. These two markets represent more than 2X the revenue opportunity for Revlimid for MDS and MM market. The initial trial data on CLL looks very promising. In fact, some firms are now taking off the label sale of Revlimid into the earning estimate for CLL. NHL data is still in very early stage. We will hear more about the Revlimid indication with respect to CLL/NHL during ASH. If CELG successfully makes in-road in CLL/NHL market, the revenue of the company may be in the range of 5 to 6 billion and at the operating metrics of 30% (standard for large biotech company), the company EPS can bump upto $5 a share. This simply means still large untapped potential for share price appreciation remains. CELG is next AMGN and DNA if Revlimid can continue to penetrate into new applications. This is why investors may remain excited as we head into ASH and wait for favorable trial data.
Another interesting point about CELG is its extensive patents on Stem Cell technology. As Democrats now control the Congress, I believe there will be more push towards investing and developing Stem Cell technology to cure many neurological degenerative diseases. The company such as Geron is now being viewed as a beneficiary of this possible trend in the future (increased government spending in the stem cell research). If this pans out, CELG will also be the beneficiary of this trend. So we have another source of investor enthusiasm that may help to push share price higher in the future.
Now following is the highlight of CELG presentation with each dates specified for different presentation of trial data. Again the source for the next paragraph come from Lehman report published on Nov 29th to preview the ASH meeting.
Revlimid continues to be one of the higher profile products at ASH with a number of Important oral presentations:
Monday 8:15 AM and 8:30 AM, long-term data from MDS phase 2 studies;
Monday 11:30 AM, final data from the phase 1 Revlimid/Velcade combination study in R/R MM; phase 2 studies in 1st line and R/R disease have been initiated based on these phase 1 data;
Monday 12:00 PM and 12:15 PM, single agent activity in R/R CLL, this is an update of data that has been discussed over a couple of years and while CR's are impressive the data to date has been difficult to put into context; CELG is planning a series of pivotal studies in CLL;
Monday 2:00 PM, single agent activity in NHL, like the CLL data these are intriguing and registration studies are being planned to quantify the benefit of Revlimid in NHL;
Tuesday 9:30 AM, initial data from the phase 3 ECOG study comparing high dose
and low dose dex combined with Revlimid in 1st line MM will provide important safety data;
Tuesday 9:45 AM, Phase 1/2 1st line data for Revlimid combined with Memphian
prednisone. Celgene is also expected to present data for Thalid in MM including data comparing Thal/dex to VAD as a pre-transplant induction regimen in the 1st line setting as well as an update from the pivotal 1st line Thal/dex vs dex study.
Sunday, December 03, 2006
CELG, AMGN, GENZ, PDLI: FilthyRich biotech issues at ASH
The American Society of Hematology (ASH) meeting kicks off on Dec 9th (coming Friday) and will last through December 12th. This meeting is one of the very prominent medical conferences in the area of blood related disease and many biotech companies are expected to reveal trial data of their pipeline at various stages. Promising trial data may excite investors and can possibly trigger share price rally. Typically in the past, biotech companies with high visibility in the meeting saw their shares appreciate prior to the meeting. If the rally is significant, the shares usually pull back at the end of ASH meeting. However, if the trial data reveals significant new opportunity, the share price may continue to firm up.
All four biotech companies covered in FilthyRich group have presence at ASH to a certain extent. Out of four, I believe CELG will have the strongest presence followed by GENZ. I believe CELG and GENZ shares could see nice rally this week towards the beginning of the ASH conference. For CELG, Revlimid will be highlighted for R/R MM in combination with Velcade for both early and late line of defense. Also phase 2 data of Revlimid on CLL and NHL could be available. Promising data on CLL/NHL could be a huge boost to the share price. So pay close attention on this development. GENZ seems to have come up with very impressive pipeline in the hematology area. GENZ will feature early trial data on Clolar, Campath, GMA161 and Mobozil. GENZ is very good stock to own in my opinion due to very diversified product portfolio. PDLI introduces its new development product, an antibody targeting CS1 on MM cells. PDLI is a small-mid cap biotech company that I have not gone over yet with you. I will outline PDLI in the near future along with GENZ. AMGN will have some presence but the focus for AMGN will be more on what competitions will present during ASH. AMGN share have been weak lately due to concerns over on-going medical reimbursement review (for EPO product) at US Congress. I continue to believe that AMGN shares are severely undervalued and for a long term investors who are looking for steady growth without crazy risk factor that biotech companies may represent for some investors, this company is a compelling buy.
For AMGN, GENZ, and CELG, I will cite the summary of what each company are presenting during ASH in the following message in the next couple of days. The source of my research was Lehman report that previews upcoming ASH. The report is over 60 pages but if you want to view the full report, email me using investorhives.com mail and give me your email address. I will be happy to share the report.
Amid uncertainty over the slowing economy and possible earning slowdown among many economically sensitive US corporations, I believe that the US large cap biotech companies offer great place to weather the pockets of turbulent times that you may see ahead. Also these companies sell many drugs abroad especially AMGN. For CELG, EU approval on Revlimid will even increase the revenue growth rate and the dollar is tumbling against Euro. Large cap biotech companies are weak dollar plays; weak dollar can greatly boost earning for biotech companies. In addition, large pharma needs biotech companies more than ever to sustain their drug development efforts and to grow their earning. PFE screwed up big time by announcing termination of the drug development efforts with one of the most highly touted cholesterol drug. This may create some serious ripples among pharma sector tomorrow. In my opinion, large pharma will be on the hunt for several small to mid cap biotech companies. This will make the biotech sector one of the most exciting sectors to invest in coming times. The risk is certainly greater than other sectors with biotech issues. I continue to believe that we can reduce the risk by aligning our investment choice within this sector with large cap issues with significant products in the pipeline. And then choose one or two small issues to speculate for the major upside movement.
I continue to believe that every investor should have some exposure to biotech sector.
All four biotech companies covered in FilthyRich group have presence at ASH to a certain extent. Out of four, I believe CELG will have the strongest presence followed by GENZ. I believe CELG and GENZ shares could see nice rally this week towards the beginning of the ASH conference. For CELG, Revlimid will be highlighted for R/R MM in combination with Velcade for both early and late line of defense. Also phase 2 data of Revlimid on CLL and NHL could be available. Promising data on CLL/NHL could be a huge boost to the share price. So pay close attention on this development. GENZ seems to have come up with very impressive pipeline in the hematology area. GENZ will feature early trial data on Clolar, Campath, GMA161 and Mobozil. GENZ is very good stock to own in my opinion due to very diversified product portfolio. PDLI introduces its new development product, an antibody targeting CS1 on MM cells. PDLI is a small-mid cap biotech company that I have not gone over yet with you. I will outline PDLI in the near future along with GENZ. AMGN will have some presence but the focus for AMGN will be more on what competitions will present during ASH. AMGN share have been weak lately due to concerns over on-going medical reimbursement review (for EPO product) at US Congress. I continue to believe that AMGN shares are severely undervalued and for a long term investors who are looking for steady growth without crazy risk factor that biotech companies may represent for some investors, this company is a compelling buy.
For AMGN, GENZ, and CELG, I will cite the summary of what each company are presenting during ASH in the following message in the next couple of days. The source of my research was Lehman report that previews upcoming ASH. The report is over 60 pages but if you want to view the full report, email me using investorhives.com mail and give me your email address. I will be happy to share the report.
Amid uncertainty over the slowing economy and possible earning slowdown among many economically sensitive US corporations, I believe that the US large cap biotech companies offer great place to weather the pockets of turbulent times that you may see ahead. Also these companies sell many drugs abroad especially AMGN. For CELG, EU approval on Revlimid will even increase the revenue growth rate and the dollar is tumbling against Euro. Large cap biotech companies are weak dollar plays; weak dollar can greatly boost earning for biotech companies. In addition, large pharma needs biotech companies more than ever to sustain their drug development efforts and to grow their earning. PFE screwed up big time by announcing termination of the drug development efforts with one of the most highly touted cholesterol drug. This may create some serious ripples among pharma sector tomorrow. In my opinion, large pharma will be on the hunt for several small to mid cap biotech companies. This will make the biotech sector one of the most exciting sectors to invest in coming times. The risk is certainly greater than other sectors with biotech issues. I continue to believe that we can reduce the risk by aligning our investment choice within this sector with large cap issues with significant products in the pipeline. And then choose one or two small issues to speculate for the major upside movement.
I continue to believe that every investor should have some exposure to biotech sector.
Friday, December 01, 2006
Tivo: Respectable Q but unrespectable guidance.
Tivo reported the earning after the market close on Wednesday. Heading into the earning, I thought the company had manageable expectation that had a fair chance of being exceeded. Hence I thought the stock was a trading buy.
(see http://www.investorhives.com/msgd.php?msg_...)
From the today's stock action, this turned out to be a blown call. Let us fast-rewind the tape and review what has occurred. As expectedly, Tivo delivered respectable top-line and bottom-line performance. The revenue came in at $65.7 mil, slightly ahead of the consensus estimate. EPS loss was at 12 cents, 3 cents better than the consensus loss estimate. Operating margin was ahead of some analysts' expectation, coming in at -18.7% versus ~ -25% expected. Tivo also announced DVR software deployment deal for Cablevision Mexico with 500K subscribers in the middle of 07. These headlines alone would have caused the shares to trade slightly higher, which it did just after the earning was released.
Then the investors took the notice of the next Q guidance. Although heading into the earning with low expectation, the company still managed to disappoint the investors with the next Q sales guidance. As the Christmas holidays are the seasonally the strongest time of the year for Tivo sub adds, the investors wanted to hear that the company will be aggressively accumulating as many as subs as possible (even at the expense of significantly higher marketing cost). This was also my expectation but it was not the case. Tivo guided for subdued sub add outlook. Yet the company was still guiding for the significantly higher operating expenses. This aspect may have been very puzzling for investors. The investors wanted to hear more aggressive sub add efforts at higher marketing expense. Or they could have been also happy with more profitability with less marketing expense. Somehow, Tivo seemed to have done something that is not very intuitive: less sub add with more operating expense. This was the source of the investors' disappointment and the stock tanked by nearly 10% today.
What may have happened was management's attempt to kill the two birds with a stone, a strategy which backfired on the stock price performance today but is not completely unreasonable. Tivo is fighting with two major uncertainties: timing of the network-wide Comcast deployment and resolution of the litigation against Dish. Tivo needs to ensure that Comcast relationship can generate meaningful sub adds for the company to expand its sub-base large enough for more effective ad opportunity. However, the timing of this event is rather uncertain. First, Comcast will have go through testing phase of Tivo software till early 07. Even after Comcast start marketing Tivo software by the middle of 07, it may take some additional time for the subscribers to readily accept Tivo product and Tivo software to gain momentum within Comcast subs. Cox deployment may even take longer than Comcast. Till then Tivo will continue to burn the cash and as such the company may want to minimize as much cash burn as possible.
Yet at the same time, the company may want to add respectable number of standalone sub adds (since it has the highest profitability) during the seasonally the strongest time of the year. So it is still spending fair amount of money to entirely subsidize the single tuner Tivo box (predicting loss of 30 ~ 35 mil and the company has slightly greater than 106 mil in cash). In a way, it is preferentially clearing out the old inventory as people will clearly have more inclination for the single tuner version with no hardware cost. Notice Tivo is raising upfront cost for the dual tuner DVR to $69 with higher monthly fee. However, longer term commitment (3 years) will yield significantly lower monthly fee (slightly less than $9 and is actually cheaper than $10 that the most cable providers are charging). So if people still opt for dual tuner this holiday season, all the revenue will be the upside surprise: the company thinks most of the hardware sales will be the single tuner because of no hardware cost (entire amount given back in the form of rebate). This is company's attempt to still experiment with the pricing plan to understand the consumer preference for more effective marketing and at the same time to yield respectable standalone sub adds during the holiday season.
So the company is trying to limit cash burn while adding reasonable number of new subs and in the process ended up guiding more subdue sub add outlook with higher operating expenses. Am I really disappointed? Well with the stock price movement Yes�� But with respect to what the company is doing, I can care less. This is because in order for Tivo to become a viable and thriving entity, the company must see two events with favorable outcomes: patent litigation against Dish and Comcast deployment. Yesterday's earning outcome and subsequent stock movement will be a noise compared to that you will see as a result of the litigation and effectiveness of Comcast deployment. These are two events that investors must pay attention. If none of these events pan out favorably for Tivo, I am going to bail out of the stock. Until then I am going to continue to speculate on Tivo on the long side.
Due to tremendous technological leadership in the DVR space and synergy with the advertisement product, in the worst case, Tivo will be bought out and become a division of Comcast. Even in this case, I believe that there could be a fair amount premium from the current share price (given how well Comcast share price is doing these days). In the best case of successful litigation outcome and rapid sub add growth from the MSO deals, the shares could be trading significantly above the current level. I am hoping that it would be the latter case. But so far investors are betting that it will be the former.
(see http://www.investorhives.com/msgd.php?msg_...)
From the today's stock action, this turned out to be a blown call. Let us fast-rewind the tape and review what has occurred. As expectedly, Tivo delivered respectable top-line and bottom-line performance. The revenue came in at $65.7 mil, slightly ahead of the consensus estimate. EPS loss was at 12 cents, 3 cents better than the consensus loss estimate. Operating margin was ahead of some analysts' expectation, coming in at -18.7% versus ~ -25% expected. Tivo also announced DVR software deployment deal for Cablevision Mexico with 500K subscribers in the middle of 07. These headlines alone would have caused the shares to trade slightly higher, which it did just after the earning was released.
Then the investors took the notice of the next Q guidance. Although heading into the earning with low expectation, the company still managed to disappoint the investors with the next Q sales guidance. As the Christmas holidays are the seasonally the strongest time of the year for Tivo sub adds, the investors wanted to hear that the company will be aggressively accumulating as many as subs as possible (even at the expense of significantly higher marketing cost). This was also my expectation but it was not the case. Tivo guided for subdued sub add outlook. Yet the company was still guiding for the significantly higher operating expenses. This aspect may have been very puzzling for investors. The investors wanted to hear more aggressive sub add efforts at higher marketing expense. Or they could have been also happy with more profitability with less marketing expense. Somehow, Tivo seemed to have done something that is not very intuitive: less sub add with more operating expense. This was the source of the investors' disappointment and the stock tanked by nearly 10% today.
What may have happened was management's attempt to kill the two birds with a stone, a strategy which backfired on the stock price performance today but is not completely unreasonable. Tivo is fighting with two major uncertainties: timing of the network-wide Comcast deployment and resolution of the litigation against Dish. Tivo needs to ensure that Comcast relationship can generate meaningful sub adds for the company to expand its sub-base large enough for more effective ad opportunity. However, the timing of this event is rather uncertain. First, Comcast will have go through testing phase of Tivo software till early 07. Even after Comcast start marketing Tivo software by the middle of 07, it may take some additional time for the subscribers to readily accept Tivo product and Tivo software to gain momentum within Comcast subs. Cox deployment may even take longer than Comcast. Till then Tivo will continue to burn the cash and as such the company may want to minimize as much cash burn as possible.
Yet at the same time, the company may want to add respectable number of standalone sub adds (since it has the highest profitability) during the seasonally the strongest time of the year. So it is still spending fair amount of money to entirely subsidize the single tuner Tivo box (predicting loss of 30 ~ 35 mil and the company has slightly greater than 106 mil in cash). In a way, it is preferentially clearing out the old inventory as people will clearly have more inclination for the single tuner version with no hardware cost. Notice Tivo is raising upfront cost for the dual tuner DVR to $69 with higher monthly fee. However, longer term commitment (3 years) will yield significantly lower monthly fee (slightly less than $9 and is actually cheaper than $10 that the most cable providers are charging). So if people still opt for dual tuner this holiday season, all the revenue will be the upside surprise: the company thinks most of the hardware sales will be the single tuner because of no hardware cost (entire amount given back in the form of rebate). This is company's attempt to still experiment with the pricing plan to understand the consumer preference for more effective marketing and at the same time to yield respectable standalone sub adds during the holiday season.
So the company is trying to limit cash burn while adding reasonable number of new subs and in the process ended up guiding more subdue sub add outlook with higher operating expenses. Am I really disappointed? Well with the stock price movement Yes�� But with respect to what the company is doing, I can care less. This is because in order for Tivo to become a viable and thriving entity, the company must see two events with favorable outcomes: patent litigation against Dish and Comcast deployment. Yesterday's earning outcome and subsequent stock movement will be a noise compared to that you will see as a result of the litigation and effectiveness of Comcast deployment. These are two events that investors must pay attention. If none of these events pan out favorably for Tivo, I am going to bail out of the stock. Until then I am going to continue to speculate on Tivo on the long side.
Due to tremendous technological leadership in the DVR space and synergy with the advertisement product, in the worst case, Tivo will be bought out and become a division of Comcast. Even in this case, I believe that there could be a fair amount premium from the current share price (given how well Comcast share price is doing these days). In the best case of successful litigation outcome and rapid sub add growth from the MSO deals, the shares could be trading significantly above the current level. I am hoping that it would be the latter case. But so far investors are betting that it will be the former.
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