CELG is getting an additional boost after-market after the announcement that the company is added to S&P 500 index. CELG is replacing AmSouth and is trading higher by 5.3%. As I outlined in my previous message, CELG is on a hot growth trail. The company is soon to be multi-billion dollar company and today's S&P 500 addition acknowledges that growth aspect. Being listed in the S&P 500 causes CELG to be covered in many index and mutual funds that emphasizes this index. This tends to fuel buying interest which can propel the stock price higher in the near term. As CELG has been one of the best performers in the biotech index this year, I believe that many fund managers may become interested in covering CELG.
Aside from the being added to S&P 500, I believe CELG along with other biotech companies (AMGN, GENZ, and PDLI are also covered in the FilthyRick Hive) are poised to outperform the market in the near term. Biotechs are entering into the seasonally strongest time of the year. Towards the year end are packed with many medical conferences that outline drug development trial data. Biotech stocks tend to be news driven as the investors seek to assess future earning potential of the company with favorable indications from FDA drug trials. In particular, CELG will have a strong presence at ASH (American Society of Hematology) in December of this year. Heading into this conference, we may expect relatively stronger performance of the stock as investors anticipate many favorable trial data for the drugs in the pipeline.
Other than the catalysts stemming from the update on the drug pipeline during the medical conferences, biotech stocks also have very strong fundamentals. Unlike the bubble era we had seen in late 1990's and early 2000's, most mid to large cap biotech companies now have real earning with great growth potential; their research investments are finally bearing fruits. After seeing some buying interest in the sector in 2005, biotechs struggled in 2006 as the hedge and mutual fund managers overly emphasized the energy and commodity sector. As the energy and commodity hype dissipates (yes, global economies are slowing down as evidenced by many countries' economic indicators), the money is rapidly being rotated away from the energy and commodity sector and being put into somewhere else. I believe the biotech sector may be a beneficiary of this trend. Biotech stocks are not exposed to economic cyclicality and earning growth aspects are not in question. The companies in economically sensitive sectors such as retailers, industrials, housing, commodities, as well as transportation may face uncertain earning outlook. In fact, many biotech companies' earning growth is accelerating as their products are marketed for the large untapped area of oncology, hematology, immunology, etc. Biotechs' PE and PEG ratio are currently much lower compared to what they have been historically. These sound industry fundamentals are likely to serve as a safe haven for investors in this uncertain market condition. CELG may also benefit from this trend.
After the market close, Merck announced that it is paying 1.1 Billion to purchase small biotech company called Sirna Therapeutics (RNAI). RNAI is up near 100% as MRK is paying hefty premium. As large pharmas look to biotech companies for acquisition targets to fuel their growth and as biotech earning outlook continues to solidify, biotech companies should see exciting times ahead.
Monday, October 30, 2006
Sunday, October 29, 2006
CELG: sailing smoothly on the ship of Revlimid.
CELG is one of core biotech stocks covered in FilthyRich hive along with AMGN, GENZ, and PDLI. CELG had a huge run-up last week after reporting stellar earning results last Thursday pre-market. CELG has hit a new all time high on Friday. We had CELG covered in the thread since 6/28/05 @ $20.38 (split adjusted). At current price of $50.33, the stock is generating 147% return in 16 months.
CELG falls completely in the opposite spectrum of AMGN in terms of investment thesis. While I think AMGN's value makes the stock attractive for a long term idea, the growth is what CELG is all about. CELG is currently undergoing the fastest growth of the top-line number in the company history due to rapid uptake in its blood cancer drug Revlimid. This quarter's number was impressive. Top-line revenue number came in at 245 mil versus the consensus number of 231 mil. EPS number was 15 cents which was a penny ahead of the consensus number. SG&A number was much higher than expected at 67 mil versus mid-50 mil that some analysts were expecting. This is due to aggressive marketing efforts that the company is making in promoting Revlimid. Despite the higher expense, CELG was able to beat the expected EPS number. Revenue number was 89% higher than the same Q a year ago and net income grew by eye-popping 3000%.
On the trailing basis, the company is trading at PE greater than 90 based on consensus mean number of 868 mil revenue and 53 cents EPS. So am I crazy to recommend CELG shares at this lofty price? Although I am not sure what the stock will do near term, I believe that there is still a plenty of upside left for the stock. Revlimid is approved for 5q-MDS (myelodysplastic syndrome) in January of this year and multiple myeloma in June of this year. Revlimid is projected to bring in close to 700 mil in the US and Europe for MDS treatment in 2009 (as we near 07, people will pay attention to 09 estimate: biotech stocks typically look at earning two years out and pipeline story for stock price estimate). In addition, MM treatment in 2009 may exceed the sales of 1.2 billion for CELG. Revlimid will be a blockbuster drug for CELG. The drug commands supreme pricing with the cost exceeding $60,000 for 5q-MDS treatment and $27,000 for MDS treatment. As such, the company can achieve gross margin above low 90% with Revlimid and the company may be able to demonstrate op ex and net margin number greater than 50% and high 30% range respectively in the future. If we add the sales number of existing drug Thalomid, the company is poised to achieve revenue number greater than 2 billion by 2009. With assumed net profit margin in the high 30% range, EPS can exceed $2.2. If the company earning growth is expected to grow by 50% over next 5 years, it may not be unreasonable to assign PE somewhere between 30 and 40. Taking more conservative approach with PE of roughly 30, the company valuation could exceed $65 a share by late 2007. Remember this is only assuming Revlimid's penetration in 5q-MDS and MM market and with the approval in Europe for these treatments which looks increasingly likely in the first half of 07.
But the story for Revlimid is just beginning. Outside 5q-MDS and MM market, CELG is actively evaluating Revlimid for non 5q-MDS, NHL, CLL, sciatica, and CRPS. These markets represent multi-billion dollar revenue opportunity for CELG. In particular, revenue opportunity for CLL and NHL market can be as large as 500 mil and 2 billion dollars.
Outside Revlimid, CELG has plenty of potent line of future products in its pipeline. CC-4047 addresses the new areas such as myelofibrosis, small cell lung cancer, as well as sickle cell anemia and B-thalassemia. CELG also has follow-on IMid CC-11006 in Hematological malignancies and is working toward a clinical development plan for CC-10015. Finally, CELG is actively evaluating oral PDE-4/TNF alpha inhibitor, CC-10004 for psoriasis, psoriatic arthritis, and rheumatoid arthritis. In next month of Nov, there is a major hematology conference (ASH) where CELG will present many data for Revlimid and early trial data for the drugs in the pipeline. Promising data is likely to further propel share price higher as CELG's market opportunities rises exponentially.
In summary, no large cap biotech company is likely to show better growth potential as CELG. The share price may appear expensive but given the growth rate (likely to exceed 100% YOY over next 2 years and higher than 50% over next 5 years), the stock multiple premium is justified. Furthermore, analyst's estimation for initial penetration of Revlimid in 5q-MDS and MM is very conservative as the number lags that indicated by several medical surveys. This may imply significant near term earning surprise. Long term, CELG can tap into several additional markets with the products in the pipeline, significantly raising the overall top-line revenue opportunity.
The shares will be volatile but along some turbulent ocean waves, the ship of Revlimid will sail along smoothly, taking CELG franchise to nowhere it has gone before. I believe the stock will get to $60 sometime in the first half of 07 and we will revisit the company fundamental then.
Good luck to CELG longs.
CELG falls completely in the opposite spectrum of AMGN in terms of investment thesis. While I think AMGN's value makes the stock attractive for a long term idea, the growth is what CELG is all about. CELG is currently undergoing the fastest growth of the top-line number in the company history due to rapid uptake in its blood cancer drug Revlimid. This quarter's number was impressive. Top-line revenue number came in at 245 mil versus the consensus number of 231 mil. EPS number was 15 cents which was a penny ahead of the consensus number. SG&A number was much higher than expected at 67 mil versus mid-50 mil that some analysts were expecting. This is due to aggressive marketing efforts that the company is making in promoting Revlimid. Despite the higher expense, CELG was able to beat the expected EPS number. Revenue number was 89% higher than the same Q a year ago and net income grew by eye-popping 3000%.
On the trailing basis, the company is trading at PE greater than 90 based on consensus mean number of 868 mil revenue and 53 cents EPS. So am I crazy to recommend CELG shares at this lofty price? Although I am not sure what the stock will do near term, I believe that there is still a plenty of upside left for the stock. Revlimid is approved for 5q-MDS (myelodysplastic syndrome) in January of this year and multiple myeloma in June of this year. Revlimid is projected to bring in close to 700 mil in the US and Europe for MDS treatment in 2009 (as we near 07, people will pay attention to 09 estimate: biotech stocks typically look at earning two years out and pipeline story for stock price estimate). In addition, MM treatment in 2009 may exceed the sales of 1.2 billion for CELG. Revlimid will be a blockbuster drug for CELG. The drug commands supreme pricing with the cost exceeding $60,000 for 5q-MDS treatment and $27,000 for MDS treatment. As such, the company can achieve gross margin above low 90% with Revlimid and the company may be able to demonstrate op ex and net margin number greater than 50% and high 30% range respectively in the future. If we add the sales number of existing drug Thalomid, the company is poised to achieve revenue number greater than 2 billion by 2009. With assumed net profit margin in the high 30% range, EPS can exceed $2.2. If the company earning growth is expected to grow by 50% over next 5 years, it may not be unreasonable to assign PE somewhere between 30 and 40. Taking more conservative approach with PE of roughly 30, the company valuation could exceed $65 a share by late 2007. Remember this is only assuming Revlimid's penetration in 5q-MDS and MM market and with the approval in Europe for these treatments which looks increasingly likely in the first half of 07.
But the story for Revlimid is just beginning. Outside 5q-MDS and MM market, CELG is actively evaluating Revlimid for non 5q-MDS, NHL, CLL, sciatica, and CRPS. These markets represent multi-billion dollar revenue opportunity for CELG. In particular, revenue opportunity for CLL and NHL market can be as large as 500 mil and 2 billion dollars.
Outside Revlimid, CELG has plenty of potent line of future products in its pipeline. CC-4047 addresses the new areas such as myelofibrosis, small cell lung cancer, as well as sickle cell anemia and B-thalassemia. CELG also has follow-on IMid CC-11006 in Hematological malignancies and is working toward a clinical development plan for CC-10015. Finally, CELG is actively evaluating oral PDE-4/TNF alpha inhibitor, CC-10004 for psoriasis, psoriatic arthritis, and rheumatoid arthritis. In next month of Nov, there is a major hematology conference (ASH) where CELG will present many data for Revlimid and early trial data for the drugs in the pipeline. Promising data is likely to further propel share price higher as CELG's market opportunities rises exponentially.
In summary, no large cap biotech company is likely to show better growth potential as CELG. The share price may appear expensive but given the growth rate (likely to exceed 100% YOY over next 2 years and higher than 50% over next 5 years), the stock multiple premium is justified. Furthermore, analyst's estimation for initial penetration of Revlimid in 5q-MDS and MM is very conservative as the number lags that indicated by several medical surveys. This may imply significant near term earning surprise. Long term, CELG can tap into several additional markets with the products in the pipeline, significantly raising the overall top-line revenue opportunity.
The shares will be volatile but along some turbulent ocean waves, the ship of Revlimid will sail along smoothly, taking CELG franchise to nowhere it has gone before. I believe the stock will get to $60 sometime in the first half of 07 and we will revisit the company fundamental then.
Good luck to CELG longs.
Tuesday, October 24, 2006
AMGN: another outstanding quarter but still waiting for outstanding reception
AMGN reported the Oct earning results after the market close today. Total revenue came in around 3.6 billion roughly in line with the consensus estimate. On the bottom line results, the company reported $1.04 EPS, beating the consensus number by solid 7 cents. This Q, the EPO (treats anemia and boosts red blood cell counts) continues to generate healthy sales for the company. Aranesp sales exceeded 1 billion for the first time, coming in at 1.07B against the consensus number at 1.04 B. Epogen came in at 633 million against the 616 million consensus number. Combined sales of Nuelasta/Neupogen (boosts white blood cell counts, used in chemotherapy settings) roughly came in as expected at 1 billion. The sales of Enbrel which treats rheumatoid arthritis, psoriasis and other inflammatory conditions came short of the expectation at 703 mil versus 739 mil consensus estimate, reflecting more fierce competitive landscape in this market segment. The company also noted very strong ramp of new cancer drug vectibix to treat the mid to late stage colorectal cancer. Vectibix (formerly known as Pmab) will likely to be more meaningful revenue contributor as the potential market opportunity is thought to exceed 2 billion.
AMGN also notes low inventory levels for its EPO and Neulasta/Nuepogen products at its distributors, which pretty much ensures continued strong sales of these products in the next Q. As such, the company guides next Q sales to the upper range of previously guided range (14 to 14.3 billion). The company boosts EPS for 06 estimates for the next Q by 10 cents to $3.85 to $3.95 range from previously guided range of $3.75 to $3.85. AMGN is essentially doing $4 EPS and PE is only slightly higher than 18 on a trailing basis. In 07, I believe that the EPS will could exceed $4.60 to $4.70 level as the company continues to buy back shares and its oncology drug Vectibix ramps up. The company did half billion dollar worth of share buyback this Q at an average of $69 a share. This is an another indication that the company thinks that the shares are priced attractively. The company may allow additional share buyback programs in the future. In 08, we may be looking at EPS estimate above $5 range. At current price, the shares maybe trading with PE less than 16 on 07 estimate and less than 15 on 08 estimate. As we are nearing end of calendar year 06, EPS estimate for 08 will be the focus of the investors and as such, AMGN is clearly a bargain at the current price.
The reason that AMGN shares are depressed may be from the uncertainty related to the patent litigation against Roche. Roche is set to introduce drugs in the US that will challenge AMGN multi-billion dollar EPO franchise. FDA approval date for Roche is towards late Feb of 07. AMGN has filed lawsuit claim against Roche and the hearing is expected to start in Sept of 07. There is a strong chance that AMGN will file injunction against Roche before the FDA approval date so that the sales of the Roche's drug will not start prior to the actual resolution of the court trial. AMGN is attacking Roche on 6 claims. AMGN has to show Roche infringes on any of 6 claims on EPO products so some research firm such as SmithBarney continues to view AMGN's chance to prevail very favorably. In my opinion, AMGN share price will get a huge boost (10%) if AMGN wins against Roche in defending its EPO franchise.
With many of the oncology drugs in the pipeline and Vectibix ramping, AMGN never has been stronger in terms of new product position. AMGN has been beefing up on developing new drugs at a torrid pace. It is exploring extended markets for the existing drugs and plowing into various lucrative oncology products. This has caused AMGN's R&D expenditures to skyrocket; it is spending 30 ~ 40% more on the research and development from the prior year level. Yet its financial metrics are superb with operating margin in the mid 40% and net profit margin in the mid 30%. This is one of the premiere biotech company trading at a bargain. I continue to believe that as the concern of Roche litigation dissipates and the oncology product ramps, PE multiple will normalize to mid 20's and with estimated EPS of $4.6 ~ 4.7 in 07 and probably higher than $5 in 08, you can do your math to find the target price for the stock.
AMGN also notes low inventory levels for its EPO and Neulasta/Nuepogen products at its distributors, which pretty much ensures continued strong sales of these products in the next Q. As such, the company guides next Q sales to the upper range of previously guided range (14 to 14.3 billion). The company boosts EPS for 06 estimates for the next Q by 10 cents to $3.85 to $3.95 range from previously guided range of $3.75 to $3.85. AMGN is essentially doing $4 EPS and PE is only slightly higher than 18 on a trailing basis. In 07, I believe that the EPS will could exceed $4.60 to $4.70 level as the company continues to buy back shares and its oncology drug Vectibix ramps up. The company did half billion dollar worth of share buyback this Q at an average of $69 a share. This is an another indication that the company thinks that the shares are priced attractively. The company may allow additional share buyback programs in the future. In 08, we may be looking at EPS estimate above $5 range. At current price, the shares maybe trading with PE less than 16 on 07 estimate and less than 15 on 08 estimate. As we are nearing end of calendar year 06, EPS estimate for 08 will be the focus of the investors and as such, AMGN is clearly a bargain at the current price.
The reason that AMGN shares are depressed may be from the uncertainty related to the patent litigation against Roche. Roche is set to introduce drugs in the US that will challenge AMGN multi-billion dollar EPO franchise. FDA approval date for Roche is towards late Feb of 07. AMGN has filed lawsuit claim against Roche and the hearing is expected to start in Sept of 07. There is a strong chance that AMGN will file injunction against Roche before the FDA approval date so that the sales of the Roche's drug will not start prior to the actual resolution of the court trial. AMGN is attacking Roche on 6 claims. AMGN has to show Roche infringes on any of 6 claims on EPO products so some research firm such as SmithBarney continues to view AMGN's chance to prevail very favorably. In my opinion, AMGN share price will get a huge boost (10%) if AMGN wins against Roche in defending its EPO franchise.
With many of the oncology drugs in the pipeline and Vectibix ramping, AMGN never has been stronger in terms of new product position. AMGN has been beefing up on developing new drugs at a torrid pace. It is exploring extended markets for the existing drugs and plowing into various lucrative oncology products. This has caused AMGN's R&D expenditures to skyrocket; it is spending 30 ~ 40% more on the research and development from the prior year level. Yet its financial metrics are superb with operating margin in the mid 40% and net profit margin in the mid 30%. This is one of the premiere biotech company trading at a bargain. I continue to believe that as the concern of Roche litigation dissipates and the oncology product ramps, PE multiple will normalize to mid 20's and with estimated EPS of $4.6 ~ 4.7 in 07 and probably higher than $5 in 08, you can do your math to find the target price for the stock.
JPM: another solid quarter and more to come
JPM reported earning pre-market on Wednesday last week. Sorry I was not able to update on the earning results on a more timely basis (please understand that I have a day job too). The company beat both the revenue and EPS estimate. The company reported 3.3 billion in revenue with reported EPS of 92 cents. The headline bottom line result was 6 cents ahead of the consensus estimate. However, if you took out the merger cost related to Bank of New York swap deal, below normal private equity gains, and MSR valuation adjustment, it appears that core EPS exceeds the consensus number by 11 cents. This is a third consecutive quarter in which JPM has exceeds the consensus EPS estimate by 5 cents or higher. This is even more impressive considering banking industry is fighting against nasty headwind: squeezed net margin interest (NIM), slowing residential mortgage business, sagging auto loan business, as well as possible deterioration in the consumer credit quality. This quarter, the business was very strong in the investment banking and wealth management sector. This strength was offset by the weakness in the consumer banking and the mortgage business. But the real story behind JPM continues to be the operational efficiency improvement as Jamie Dimon works on turning around once "confused and lost" entity.
I continue to believe that the improvement in the operational metrics and net profit margin will propel EPS outlook for JPM even in this difficult banking environment. Net profit margin now stands above 21% but still far below 30% level attained by Bank of America and Citigroup. While BAC and C have tough time beating the top and bottom line estimate (because net profit margin has peaked and the prospect for topline growth is not so good these days), JPM still has a plenty room for improving EPS performance by continuing to streamline the business. Consequently, I believe JPM will excel its peers in terms of bottom results for months to come.
NIM for banks are very low due to situation called yield inversion. Banks typically borrow the money from the consumers, paying cheaper short term interest and loan to the larger businesses, charging higher rate on a longer term basis. In order for the banks to have highly profitable loan business, the spread between the long term and short term interest rate needs to be as large as possible (of course long term rates being on the higher side). However, amid talks of possible recession, the yield has become inverted, meaning the short term interest rate is higher than long term interest rate that the bank can charge to the business customers. This situation rises because people are not very clear on the direction of the economy. If the economy enters into recession, I believe Fed will cut the rate and the short term rate will drop and the yield curve will become normalized again. If the economy is seen to achieve another solid growth, then this confidence will tend to raise long term yield and this way, the yield inversion may be also avoided. Currently we don't know where the economy is headed and this uncertainty is depressing long term yield while the prospect of the further Fed's action to hike rate floats the short term rates higher. Thus, we got the yield inversion.
I expect the yield curve to normalize once the economy shows clearer trend (slow or grow). Unless the economy enters into severe recession, I believe JPM will ultimately see better consumer, mortgage, as well as credit card business. Then the bank will fire at all cylinders, significantly boosting outlook for the topline growth. I think if you are a patient investor, I continue to recommend JPM. JPM trades below its peers on a price to book ratio(BAC and C) (1.3~1.4X compared to 2X). If same ratio is applied, this is a $60 to $65 stock. In addition, if net profit margin improves to the level of BAC and C, the company can attain EPS greater $5.5 based on 07 earning estimate. If there is higher than expected topline growth due to improving banking business climate, EPS can well exceed that level. Apply a simple PE of 12, again you end up with mid $60 stock. I believe in the turnaround story of JPM and you won't see me selling my shares until the stock hits mid $60 level (well for options, it is a different story !).
I continue to believe that the improvement in the operational metrics and net profit margin will propel EPS outlook for JPM even in this difficult banking environment. Net profit margin now stands above 21% but still far below 30% level attained by Bank of America and Citigroup. While BAC and C have tough time beating the top and bottom line estimate (because net profit margin has peaked and the prospect for topline growth is not so good these days), JPM still has a plenty room for improving EPS performance by continuing to streamline the business. Consequently, I believe JPM will excel its peers in terms of bottom results for months to come.
NIM for banks are very low due to situation called yield inversion. Banks typically borrow the money from the consumers, paying cheaper short term interest and loan to the larger businesses, charging higher rate on a longer term basis. In order for the banks to have highly profitable loan business, the spread between the long term and short term interest rate needs to be as large as possible (of course long term rates being on the higher side). However, amid talks of possible recession, the yield has become inverted, meaning the short term interest rate is higher than long term interest rate that the bank can charge to the business customers. This situation rises because people are not very clear on the direction of the economy. If the economy enters into recession, I believe Fed will cut the rate and the short term rate will drop and the yield curve will become normalized again. If the economy is seen to achieve another solid growth, then this confidence will tend to raise long term yield and this way, the yield inversion may be also avoided. Currently we don't know where the economy is headed and this uncertainty is depressing long term yield while the prospect of the further Fed's action to hike rate floats the short term rates higher. Thus, we got the yield inversion.
I expect the yield curve to normalize once the economy shows clearer trend (slow or grow). Unless the economy enters into severe recession, I believe JPM will ultimately see better consumer, mortgage, as well as credit card business. Then the bank will fire at all cylinders, significantly boosting outlook for the topline growth. I think if you are a patient investor, I continue to recommend JPM. JPM trades below its peers on a price to book ratio(BAC and C) (1.3~1.4X compared to 2X). If same ratio is applied, this is a $60 to $65 stock. In addition, if net profit margin improves to the level of BAC and C, the company can attain EPS greater $5.5 based on 07 earning estimate. If there is higher than expected topline growth due to improving banking business climate, EPS can well exceed that level. Apply a simple PE of 12, again you end up with mid $60 stock. I believe in the turnaround story of JPM and you won't see me selling my shares until the stock hits mid $60 level (well for options, it is a different story !).
Tuesday, October 10, 2006
Dow reaches another record high
Today Dow managed to reach another all time high. However, the market may face near term correction as we head into the heart of the earning season. In my opinion, several economic indicators which include GDP number, housing starts, manufacturing index as well as employment number point to the economy that is transitioning to slower growth. Past 17 interest rate hikes are finally taking a toll on the pace of the economic growth.
The market so far has seen the glass as half full and continues to expect that the economy is achieving soft landing. We are now heading into the earning season. As the economy is slowing down, the likelihood of corporate earning not meeting the lofty expectation is higher than ever. Earning warning from any of the bell-weather companies in the industrial, retailer, tech and other economically sensitive sector could worry the investors that the economy is in the state of less than perfect landing. This can trigger short term corrective selling in my opinion. In addition, the market has anticipated the Fed easing rate as early as the end of this year. As I have noted, this may not be the case. Although Fed is done hiking the rate, I continue to believe that Fed will leave the rate unchanged until energy and commodity prices are under control. This will leave the economy slowing even further. As a result, I continue to see further erosion in the commodity and oil prices in the intermediate term. The market is now somewhat getting this message. Today the 10 year bond yield is rising as the market realized Fed may not ease the rates so soon. This has resulted in steepening of the yield curve somewhat.
The mortgage rates dropped in recent weeks. However, as the long term rate climb back up again, the mortgage rate may shoot up again. I see further slowing down in the home sales and prices of the home will continue to decline throughout the remaining of the year.
After the market today, Alcoa (AA), biggest Aluminum producer, missed the earning by whopping 11 cents. The metal commodity stocks have been all over the map and my short trade results have been mixed depending on individual names. However, I believe that the slowing economy will temporarily cut earning outlook for these names and I will remain short on these names for now. Genentech also reported earning after the market. The biotech company handily beat the consensus EPS number by 8 cents. However, the stock is selling off because it fell a little short on the revenue number of Herceptin and Rituxan. This may be the sign that the market may be getting a little tired of being a bull. Legg Mason, financial brokerage house, also warns after the market close today. Tomorrow, we may have some selling pressure due to these events. I am interested in seeing how the market manages this bad news. But I do expect we may run into some selling pressure next a few days.
I continue to believe in the financials and biotechs for current state of the market. With financials, everyone knows they are in a difficult environment (inverted yield, mortgage load default, personal bankruptcy law change, slowing home loans, ect). Earning expectation is relative low. So, bad earning result may not result in a sharp sell-off. On the other hand, slowing economy ultimately means rate cut down the road and this could support the financial sectors (JPM and GS are filthy Rich’s pick). I also like biotech. As DNA number shows, biotech may be one of a few sectors that show continued robust earning growth. Biotech sector is still in the midst of strong secular growth trend. Amid the concerns of slowing economy, this sector may provide some safe haven for investors for strong earning results. Biotech sectors are very difficult to analyze and has tons of risks with individual names. Filthy Rich’s approach has been focusing on large cap names with proven earning track record and robust pipeline (AMGN, CELG, and GENZ) and adding one or two small cap names to bring out some specie (PDLI).
The market so far has seen the glass as half full and continues to expect that the economy is achieving soft landing. We are now heading into the earning season. As the economy is slowing down, the likelihood of corporate earning not meeting the lofty expectation is higher than ever. Earning warning from any of the bell-weather companies in the industrial, retailer, tech and other economically sensitive sector could worry the investors that the economy is in the state of less than perfect landing. This can trigger short term corrective selling in my opinion. In addition, the market has anticipated the Fed easing rate as early as the end of this year. As I have noted, this may not be the case. Although Fed is done hiking the rate, I continue to believe that Fed will leave the rate unchanged until energy and commodity prices are under control. This will leave the economy slowing even further. As a result, I continue to see further erosion in the commodity and oil prices in the intermediate term. The market is now somewhat getting this message. Today the 10 year bond yield is rising as the market realized Fed may not ease the rates so soon. This has resulted in steepening of the yield curve somewhat.
The mortgage rates dropped in recent weeks. However, as the long term rate climb back up again, the mortgage rate may shoot up again. I see further slowing down in the home sales and prices of the home will continue to decline throughout the remaining of the year.
After the market today, Alcoa (AA), biggest Aluminum producer, missed the earning by whopping 11 cents. The metal commodity stocks have been all over the map and my short trade results have been mixed depending on individual names. However, I believe that the slowing economy will temporarily cut earning outlook for these names and I will remain short on these names for now. Genentech also reported earning after the market. The biotech company handily beat the consensus EPS number by 8 cents. However, the stock is selling off because it fell a little short on the revenue number of Herceptin and Rituxan. This may be the sign that the market may be getting a little tired of being a bull. Legg Mason, financial brokerage house, also warns after the market close today. Tomorrow, we may have some selling pressure due to these events. I am interested in seeing how the market manages this bad news. But I do expect we may run into some selling pressure next a few days.
I continue to believe in the financials and biotechs for current state of the market. With financials, everyone knows they are in a difficult environment (inverted yield, mortgage load default, personal bankruptcy law change, slowing home loans, ect). Earning expectation is relative low. So, bad earning result may not result in a sharp sell-off. On the other hand, slowing economy ultimately means rate cut down the road and this could support the financial sectors (JPM and GS are filthy Rich’s pick). I also like biotech. As DNA number shows, biotech may be one of a few sectors that show continued robust earning growth. Biotech sector is still in the midst of strong secular growth trend. Amid the concerns of slowing economy, this sector may provide some safe haven for investors for strong earning results. Biotech sectors are very difficult to analyze and has tons of risks with individual names. Filthy Rich’s approach has been focusing on large cap names with proven earning track record and robust pipeline (AMGN, CELG, and GENZ) and adding one or two small cap names to bring out some specie (PDLI).
Sunday, October 08, 2006
Tivo: Dish wins a small battle
On Tuesday after the market close, the appellate court announced that they are staying the injunction order issued by the previous Texan court during the entire appeal process by Dish. As a result, Dish is now able to continue their DVR service during the appeal process which is expected to last another 12 to 18 months. In reaction to this news, the stock tanked more than 10% on Wednesday. Speculators who had hoped for the quick overturn of the stay and quick settlement with Dish was disappointed and bailed out of the stock, creating selling pressure.
In reaction to this news, Bear Stern analyst downgraded the stock from market perform to market underperform, citing uncertainty associated with the appeal process (I could not find out his adjusted target price on the stock). S&P analyst also downgraded the stock from strong buy to buy due to prolonged litigation process. He cut the target price to $8 from $10. On the other hand, Smithbarney analyst reiterated buy rating on the stock, commenting staying the injunction is an extremely common process during the appeal process and should not come as a surprise. In addition, the firm maintains the target at $14.5. The analyst at Smithbarney noted $10 is the enterprise value of the company while $4.5 is the value associated with eventual positive outcome of the litigation against Dish. Hence, without the litigation, there still is a significant upside for Tivo.
I noted in my previous investment thesis that the stock will be highly volatile until the litigation process is resolved. I would also like to emphasize that staying the injunction in no way portends that Dish has the upper hand during the actual appeal process. It is rather common to temporarily halt the injunction order while the appeal court now decides whether previous Texan court decision that favors Tivo is valid and should be enforced against Dish. Although the speculation premium has dissipated last two days, you will get them all back and more, should eventual litigation outcome favors Tivo.
One thing that Dish did get out of the staying the injunction during appeal process is extra time to develop alternative DVR solution that can bypass Tivo patents. However, even they come up with their own solution, they need to then replace all existing 4 mil affected DVR and the cost could be prohibitively expensive. To me, it would simply make more sense for Dish to license Tivo technology and pay small license fee per month rather than spending several billions of dollars upgrading all the affected DVR.
While we had bad news on the litigation front, Tivo announced on a same day that they have crossed license the patents with IBM. Smithbarney speculates this announcement as a prelude to new product announcement related to either brand new form of portable media device or movie downloading device onto the Tivo platform. While this news was largely ignored over the litigation setback, I think Tivo continues to have very innovative products that help the company to gain firmer traction in the DVR market space. With possible revenue boost coming from Series 3 DVR just released last month and Comcast DVR deployment that is set to start soon, I continue to speculate with Tivo on a long side.
In reaction to this news, Bear Stern analyst downgraded the stock from market perform to market underperform, citing uncertainty associated with the appeal process (I could not find out his adjusted target price on the stock). S&P analyst also downgraded the stock from strong buy to buy due to prolonged litigation process. He cut the target price to $8 from $10. On the other hand, Smithbarney analyst reiterated buy rating on the stock, commenting staying the injunction is an extremely common process during the appeal process and should not come as a surprise. In addition, the firm maintains the target at $14.5. The analyst at Smithbarney noted $10 is the enterprise value of the company while $4.5 is the value associated with eventual positive outcome of the litigation against Dish. Hence, without the litigation, there still is a significant upside for Tivo.
I noted in my previous investment thesis that the stock will be highly volatile until the litigation process is resolved. I would also like to emphasize that staying the injunction in no way portends that Dish has the upper hand during the actual appeal process. It is rather common to temporarily halt the injunction order while the appeal court now decides whether previous Texan court decision that favors Tivo is valid and should be enforced against Dish. Although the speculation premium has dissipated last two days, you will get them all back and more, should eventual litigation outcome favors Tivo.
One thing that Dish did get out of the staying the injunction during appeal process is extra time to develop alternative DVR solution that can bypass Tivo patents. However, even they come up with their own solution, they need to then replace all existing 4 mil affected DVR and the cost could be prohibitively expensive. To me, it would simply make more sense for Dish to license Tivo technology and pay small license fee per month rather than spending several billions of dollars upgrading all the affected DVR.
While we had bad news on the litigation front, Tivo announced on a same day that they have crossed license the patents with IBM. Smithbarney speculates this announcement as a prelude to new product announcement related to either brand new form of portable media device or movie downloading device onto the Tivo platform. While this news was largely ignored over the litigation setback, I think Tivo continues to have very innovative products that help the company to gain firmer traction in the DVR market space. With possible revenue boost coming from Series 3 DVR just released last month and Comcast DVR deployment that is set to start soon, I continue to speculate with Tivo on a long side.
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