Williams-Sonoma Margin Pressure

The Williams-Sonoma flagship store in Union Sq...

The Williams-Sonoma flagship store in Union Square, San Francisco. (Photo credit: Wikipedia)

WSM : NYSE : US$56.40
HOLD 
Target: US$59.00

COMPANY DESCRIPTION:
Williams-Sonoma is a home furnishings retailer that  markets and sells products through around 590 brick and-mortar retail locations, the segment’s largest e-commerce business, and catalog distribution. WSM’s core concepts include Williams-Sonoma, Pottery Barn, Pottery Barn Kids, PBteen, and West Elm.

 

Investment recommendation
WSM faces notable gross margin headwinds in H2 as we believe more aggressive promotions will continue to drive sales,
particularly in the retail segment. We estimate the gross margin will decline 53bps yr./yr. to 38.9%, which would be the
company’s weakest margin since FY09. WSM is also contending with investments above its initial expectation as its ramps up its global infrastructure to support new company-operated stores and e-commerce sites in Australia and the U.K. We think this translates to a 20bps EBIT margin contraction in FY13.

We are downgrading shares from Buy to HOLD. The near-term pressure is fairly reflected at the stock’s current multiples of 18x our FY14 EPS estimate and 8x FY14E EV/EBITDA, in our view.
Investment highlights
 The Williams-Sonoma concept continues to struggle to sustain sales momentum. The namesake brand has suffered
comparable brand revenue declines in five of the last seven quarters.
 Our FY13 EPS estimate of $2.77 is $0.04 below consensus. For FY14, we estimate EPS of $3.17, versus consensus of
$3.19.
 Shares have run full steam. WSM has appreciated 37% over the TTM period, versus the S&P 500 index +17% and the RLX

index +25%.

Mitel Networks

Image representing Mitel Networks Corporation ...

Image via CrunchBase

MITL

 NASDAQ : US$4.52 BUY 
Target: US$6.00

COMPANY DESCRIPTION:
Mitel is a premier provider of IP telephony infrastructure, principally to small and mid-size organizations characterized by 1,000 or fewer lines. Products include IP-PBX systems, desktop hardware, UCC applications and managed services. Based in Ottawa, Canada, Mitel employs ~2,400 individuals and has 1,600 channel partners across 90 countries.
All amounts in US$ unless otherwise noted.

Semiconductor Devices and Related Technologies
UPSIDE LIKELY ON EXPANDING SOFTWARE SALES
We reiterate our BUY rating and increase our price target to $6 from $5 following largely in line Jul Q results and healthy gross margin guidance.
While the outlook for Oct Q revenue is a little light versus our previous model, gross margin expansion is proceeding at a strong clip, and we expect MITL to further capitalize on traction for its MiCloud UC-as-aservice offering and recently-acquired prairieFyre’s contact center  solution. We continue to view MITL as well positioned in leading virtualized UC applications and see upside potential to our estimates on continued gross margin expansion driven by expanding software sales.
Investment highlights
 MITL reported Q2/C13 (Jul) results. Revenue was $141.6 million compared to our estimate of $142.5 million and consensus of $143.5 million. EPS was $0.17, compared to our inline estimate of $0.15.
 Management guided Q3/C13 (Oct) to revenue of $142-148M, and implied EPS at the mid-point of $0.19. This compared to consensus estimates of $149M/$0.21 and our estimate of $148M/$0.21.
Management highlighted that the guidance includes caution based  on the softness seen by Avaya and Cisco.
 Mitel completed the acquisition of prairieFyre, a contact center  software provider, for $20 million in cash in the quarter.
prairieFyre provides Mitel’s existing contact center solutions and  management highlighted the acquisition was accretive in the  quarter.
Valuation
MITL’s price target of $6 (was $5) is 6x our C2014 EPS estimate of $.95

Urban Outfitters

Urban Outfitters in Pasadena, California

Urban Outfitters in Pasadena, California (Photo credit: Wikipedia)

URBN :

NASDAQ :

US$39.92 HOLD 
Target: US$48.00

COMPANY DESCRIPTION:
Urban Outfitters is a specialty retail offering fashion apparel, accessories, and home goods through around 490 stores, online,
and catalogs. The company operates under the Urban Outfitters, Anthropologie, Free People (which includes a wholesale
segment), Terrain, and BHLDN brands.
All amounts in US$ unless otherwise noted

Investment recommendation


URBN’s Q2 EPS of $0.51 beat  our $0.47 estimate and consensus of $0.48. Despite comparable retail sales growth 160bps ahead of our forecast at +9% on top of +4%, total sales growth of 12% was below our +13% estimate. URBN opened fewer new Free People stores than we had anticipated, and Terrain’s landscape business declined. The EPS upside was driven by a better gross margin as fewer markdowns at Anthropologie drove a 168bps expansion versus our +86bps estimate.

The S.G. & A. expense rate increased 14bps, better than our forecast of 60bps of deleverage. Shares are trading at 19x our 2014 EPS estimate and 9x 2014E EV/EBITDA based on the after-hours quote of $42. We view these as fair multiples for a retailer we project will grow its top and bottom lines at average rates of 9% and 13%, respectively, over the next five years.
Investment highlights
 We are raising our Q3 EPS estimate by $0.01 to $0.46, a penny below prior consensus. Our model calls for a 105bps gross margin increase, up from our prior forecast of a 55bps improvement. For 2013, a 40bps increase in our gross margin projection lifts our EPS estimate by $0.06 to $1.90, $0.01 below consensus.
 Incorporating our updated estimates into our DCF model and rolling it out to 2014 raises our price target from $41 to $48

Magna International Inc. A Growth Story

Mila (concept car division of Magna-Steyr) Alp...

Mila (concept car division of Magna-Steyr) Alpin, 2008, seen at MOTOR SHOW ESSEN 2010 (Photo credit: Wikipedia)

MGA : NYSE : US$81.16
MG : TSX : C$83.90
BUY
Target: US$89.00

COMPANY DESCRIPTION:
Magna is a one of the world’s largest and most diversified Tier 1 automotive components suppliers, active in 25 countries. The company also provides complete vehicle assembly services through its subsidiary, Magna Steyr.
All amounts in US$ unless otherwise noted.

BUY for strong growth story
We continue to recommend BUYing MGA to benefit from good EPS growth from modest sales growth, margin expansion and share buy backs. Margins should especially benefit from European and eventually emerging market (Rest of World or ROW) operating improvements and lower new facility costs.
Net, we expect these factors to drive low double-digit EPS growth/year. 
Management meetings reconfirm growth potential

Highlights include:
 European margin improvement could happen faster than expected,  There is upside potential to MGA’s European margin improvement target,
 MGA’s product mix seems likely to evolve, but we do not expect it to change substantially, as MGA is already a leader in most of its product areas, and
 We expect free cash flows to be spent on acquisitions and/or share buy backs, which should drive EPS growth. We expect acquisition discipline and acquisition opportunities to be lower.
High valuation, but supported by positive growth dynamics MGA’s valuation remains on the high side (see valuation section), but we think it can remain there given positive industry and company dynamics. Such dynamics support good EPS growth and the potential for upside surprises and positive forecast revisions, as per this quarter.
We have maintained our valuation multiple at 6.0x EV/NTM EBITDA, a roughly 1x multiple premium to MGA’s normal range given the positive growth dynamic thesis. The resulting target is moderately above our $83.27 DCF analysis.

Skyworks Solutions

The old Skyworks Logo

The old Skyworks Logo (Photo credit: Wikipedia)

SWKS : NASDAQ : US$23.64
BUY 
Target: US$30.00

COMPANY DESCRIPTION:
Skyworks is a leading supplier of power amplifiers, front end modules and other RF components for mobile devices (handsets, smartphones, and tablets) and communications infrastructure.

Investment recommendation:

While investors remain concerned regarding potentially slower high-end smartphone market growth in mature markets, we believe Skyworks growing content share and growing sales initiatives in new markets should result in 12-15% annual sales growth with expanding margins over the next couple years. Given Skyworks’ broad RFIC portfolio and customer base, we believe Skyworks growing portfolio of RF and analog solutions positions Skyworks to grow content share within its handset customer base and expand Skyworks’ content share in other markets such as wireless infrastructure, 802.11ac WiFi, and the M2M market. We reiterate our BUY rating and increase our price target $30.
Investment highlights
 We believe Skyworks is well positioned to hold strong dollar content share with leading LTE smartphone platforms and gain incremental share with its SkyOne integrated front-end solution in smartphones during F2014. Further, we believe new smartphone socket wins including power management ICs and WiFi PAs, recovered sales in wireless infrastructure, and strong growth from a diverse set of increasingly connected consumer and M2M market verticals should drive higher-margin HPA sales growth.
 In fact, we anticipate an increased mix of higher margin new products within both the Handset and HPA businesses over the next several quarters. Therefore, we are modeling steady gross margin improvement from 43.4% in F2013 to 44.5% in F2014. Our F2014 pro forma EPS estimates of $2.65 remains above consensus estimate of $2.55.
Valuation:

Our $30 price target is based on shares trading at roughly 11x-12x our F2014 pro forma EPS estimate.

Hologic

Hologic

Hologic (Photo credit: Wikipedia)

HOLX

NASDAQ : US$22.47
BUY 
Target: US$26.00

COMPANY DESCRIPTION:
Hologic is a women’s health company that offers medical imaging, diagnostic and therapeutic products to hospitals, imaging clinics, private practices, and labs through a 625-rep direct sales force as well as select independent distributors. The company develops and markets products that address a range of women’s health concerns, including breast cancer, cervical cancer, menorrhagia, osteoporosis and preterm birth and others.

Investment recommendation
As pre-announced, HOLX reported roughly in-line F3/13 results; however, it notably lowered FQ4/13 guidance. Despite an uninspiring quarter and guide for FQ4, we stick with the stock owing primarily to valuation, coupled with the potential revenue and margin benefits portended by 3D tomo and Panther, additional synergies with respect to the GenProbe integration, and deleveraging of the balance sheet.
Investment highlights
 FQ3 results beat on the bottom; in line on the top. As pre-announced, revs of $626.1M (+33% Y/Y) were in line and adj. EPS of $0.38 beat our estimate by $0.02 and consensus by $0.01.
 New CEO. Under new CEO Jack Cumming, HOLX will conduct a strategic review of the entire business and review the company’s capital allocation strategy. We expect HOLX will bring in fresh blood and seek opportunities for revenue/cost synergies.
 Guidance/model. HOLX lowered FQ4/13E revs by ~$30M and now expects FY13 adj. EPS of $1.46-1.47 (from $1.54-1.56). We lower FY13 revenue estimate to $2,510M from $2,541M and FY13E EPS to $1.47 from $1.54. We lowered FY14E revs to $2,620M (+4.4%) from $2,662M and FY14E adj. EPS to $1.64 (+11%) from $1.65.
 Growth drivers still in place. 3D tomo generated record sales and the GenProbe Dx business grew 6% pro-forma, pacing growth. Panther picked up new wins in the quarter, took market share, and remains on track to place 1,000 instruments by end of FY2015.

RF Micro Devices

English: IBM Simon smartphone in charging station.

English: IBM Simon smartphone in charging station. (Photo credit: Wikipedia)

RFMD : NASDAQ : US$5.44
BUY 
Target: US$7.50

COMPANY DESCRIPTION:
RF Micro Devices is a leading supplier of power amplifiers, front end modules and other RF components for mobile devices (handsets, smartphones, tablets) and communications infrastructure.

STEADY GM IMPROVEMENT IN Q1/F2014; ANTICIPATE 300-400BP INCREASE BY Q3/14
Investment recommendation:

We believe RFMD’s broad RFIC portfolio is driving clear market share gains with leading smartphone platforms and versus its RFIC competition, and we believe RFMD should grow much faster than the RFIC market in F2014/15. We also believe the saleof the UK fab, improved capacity utilization and additional assembly capacity in Beijing, ramping volume of new ultra low-cost CMOS PAs, and an overall improving mix of new products ramping with leading smartphone platforms should drive strong margin leverage. We reiterate our BUY rating and $7.50 price target.
Investment highlights
 Q1/F2014 sales of $293M and pro forma EPS of $0.09 exceeded our $288M/$0.07 estimates. We were impressed with the 5.3% sequential

CPG sales growth following strong Q4/F2013 levels. We believe RFMD has strong design momentum with leading smartphone platforms and anticipate ramping sales exiting C2013.

 Guidance for Q2/F2014 sales of $305M-$310M and pro forma EPS of $0.10-$0.11 was consistent with our $311.7M/$0.11 estimates and consensus of $307M/$0.10. We believe this guidance is prudent given timing of leading smartphone launches and maintain our above-consensus December quarter estimates.
 RFMD reported June quarter pro forma gross margin of 35.1% versus our 35.5% estimate. While RFMD is making progress toward expanding gross margin, we believe margins will materially improve in H2/F2014 from current levels for the reasons outlined above, especially post the sale of the UK fab and ramp of new products.
 We increase our F2014 pro forma EPS estimate from $0.43 to $0.44 and maintain our above-consensus F2015 estimate of $0.68.
Valuation: Our $7.50 price target is based on shares trading at roughly 11x our F2015 pro forma EPS estimate.

Google BUY Target Price $ 940

Google 貼牌冰箱(Google Refrigerator)

Google 貼牌冰箱(Google Refrigerator) (Photo credit: Aray Chen)

GOOG

 NASDAQ : US$910.68
BUY 
Target: US$940.00

COMPANY DESCRIPTION:
Google owns the world’s largest search engine, some of the most visited websites on the web, including YouTube.com, as well as the telecommunications equipment corporation Motorola Mobility. Google generates the vast majority of its revenue through advertising on the web and mobile devices.

Summary


Google’s Q2 results saw both revenue and EPS below consensus. Q2 and Q3 seem like quarters of transition, first to a new Enhanced Campaign
paradigm for AdWords, and to a better user experience (and slower growth) for Google Network. We remain attracted to secular positives,
while recognizing that Google’s admirable quest to stay young and innovative may continue to push out realization of an “optimal” model.
The next chapter may be a big hardware cycle, which could draw questions about structural margins. However, we continue to like Google’s dominant competitive position in a large and growing market.
Key points
Bullish – Enhanced Campaigns now represent 75% of all AdWords campaigns, showing fast adoption; Android continues its massive climb with ~900 million activated devices; Web sites TAC slowed its pace of expansion at only 8.0%, up from 7.9% in Q1, the smallest expansion in years.
Bearish Revenue and profitability miss; 6% CPC decline despite adoption of Enhanced Campaigns; self-inflicted slowdown in Google
Network growth should persist for two more quarters, along with an associated pick up in Google Network TAC to over 72% of revenue
compared to long-time run-rate of ~70%.
 Estimate changes – We lower our 2013/2014/2015 combined gross revenue to $59.4B/$68.6B/$78.6B from $61.7B/$71.5B/81.6B, and
non-GAAP EPS to $43.99/$52.54/$62.99 from $46.72/$56.48/$64.82.
Valuation
We raise our price target to $940 from $890 as we roll over to 2014E EPS. Our new target is based on 18x our slightly lower 2014 EPS estimate of $52.54.

 

eBay

Image representing eBay as depicted in CrunchBase

Image via CrunchBase

EBAY :

NASDAQ : US$57.38
BUY 
Target: US$64.00

COMPANY DESCRIPTION:
Founded originally as an online auction site in 1995, eBay has evolved over the years and aspires to now be recognized as an eCommerce enabler. The company is headquartered in San Jose, California, and operates three main business segments: Marketplaces, Payments, and GSI.

 

Summary
eBay’s Q2/13 results were solid, with revenue and EPS at the high end of guidance although slightly below consensus. Guidance was mixed, with Q3 guidance below our and consensus estimates, while management now expects full year results to come in at the low end of the previously-stated range. We believe eBay’s business remains healthy, despite this slight pause in growth driven by weakness in international economies. The big Q4 acceleration implied in full year guidance may keep some investors on the sidelines, but the bright spots in the quarter lead us to believe this is a buying opportunity.
Key Points
 Bullish: fixed price GMV growth of 17% was strong; U.S. revenue growth was strong at 16.1%, accelerating from 13.2% in Q1; account growth accelerated at both eBay and PayPal; Bill Me Later stayed strong; rollout of offline initiatives remains encouraging.
Bearish: International weakness hits the model on unit growth, FX translation, and a higher tax rate; margins in both Payments and Marketplaces reflected increased spend across several areas (except Marketing, which served as a safety valve for the second straight
quarter); Q4 will have to be strong for eBay to hit its FY guidance.
 Estimate Changes: We are lowering our FY13/FY14/FY15 revenue estimates to $16.2B/$18.9B/$22.0B from $16.6B/$19.4B/$22.4B, and EPS estimates to $2.71/$3.20/$3.72 from $2.78/$3.34/$3.90.
Valuation
We lower our price target from $67 to $64, based on 20x our lower 2014 EPS estimate of $3.20.

Canadian Pacific Railway Limited

A Canadian Pacific Railway freight eastbound o...

A Canadian Pacific Railway freight eastbound over the Stoney Creek Bridge, British Columbia. (Photo credit: Wikipedia)

CP : TSX : C$127.21
CP : NYSE: US$120.43
HOLD
Target: C$134.00

COMPANY DESCRIPTION:
Canadian Pacific Railway, recognized internationally for its scheduled railway operations, is a transcontinental carrier operating in Canada and the US. Its 14,000-mile rail network serves the principal centers of Canada, from Montreal to Vancouver, and the US Northwest and Midwest regions. CPR feeds directly into America’s heartland from both coasts, and alliances with other carriers extend its market reach throughout the US and into Mexico.
All amounts in C$ unless otherwise noted.

30% increase in normalized EPS projected
We expect the strong operating ratio (OR) improvement train to continue to roll along in Q2/13, propelled by cost cutting benefits. We project roughly 30% normalized EPS growth (i.e., excluding the $0.25-0.30 EPS strike hit in Q2/12), driven by a 71.8% OR (much better than the 77.8% in Q2/10, the last normal Q2). OR gains should continue to come from headcount reductions, yard closures and other cost improvement efforts.
Forecast tweaked lower on volume performance, but still very strong
We cut our forecast volume modestly due to weak volumes in Q2/13. We continue to expect good volume growth, but widespread Q2/13 volume weakness in many categories plus potentially slower emerging market commodity demand makes us a bit more cautious on CP volumes.
We continue to model very strong short- and long-term EPS growth for CP, powered by the company’s drive to improve its OR to the mid-60% range. We continue to model a 65% OR in 2015, consistent with recent comments by CEO, Hunter Harrison.
We cut our target C$3.00 to C$134.00 due to our lower forecast. Our valuation multiple is unchanged.
Maintaining HOLD as we think much of the growth is in the stock
We like the CP EPS growth story and reflect the very strong growth potential through our continued use of a premium valuation multiple of 10.0x EV/NTM EBITDAR (10.0x Q1/14E EV to Q2/14E – Q1/15E EBITDAR).
Our one-year valuation multiple is 1.0x above our normal valuation multiple to reflect the strong share price appreciation potential over the next 2-3 years. Our multiple is referenced against our estimate of a normal period target (our 3-year target) discounted back at our estimate of CP’s weighted average cost of capital (9.3%).
However, we continue to rate CP a HOLD because we don’t see compelling share price appreciation potential in the next year from current levels.

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