Earnings! Alcoa’s report after the close on Tuesday marked the unofficial kickoff of third-quarter earnings season. In spite of Alcoa’s mild earnings disappointment after beating the revenue consensus, I still expect overall third-quarter earnings to be stronger than Wall Street’s forecast, with 6% to 8% year-over-year growth instead of the 3.3% consensus. That will be good for the broad market, but what will really make the difference is better guidance for the December fourth quarter than the Street now expects.
You see for the fourth quarter, the Street has been very bearish. With all the problems emanating from the sub-prime mortgage mess, high energy prices and the falling dollar, Wall Street has been assuming that the consumer will retrench for the holidays, business capital spending will flatten or fall, and corporate earnings will be poor in the December period. I’m sure consumers will open their wallets later than ever, as they have been doing for years. But spend they will. Business capital spending surveys show a moderation in growth, not a decline, and that was before the recent Fed rate cut.
And as far as high energy prices go, they are already elevated and will go higher in a cold winter, but just as the hurricane season was a bust, I suspect fears of a colder winter are overblown. In the near-40 years that I have lived in California, I have noticed that a very rainy winter here means a milder winter on the East Coast, and vice-versa. Last year was quite dry here and quite cold in the Northeast. This year, it looks like we are going to get slammed. That puts upward pressure on natural gas prices to heat the West, but downward pressure on fuel oil prices to heat the Northeast. My best guesstimate right now is that oil will trade between $70 and $80 until the spring, disappointing both the $100-oil bulls and the $40-oil bears.
As for the sub-prime mess, it won’t straighten out until Fannie Mae lifts their loan cap from $417,000 to something much higher. With both political parties jockeying to take credit for passage or place blame on the failure to get this done, there’s a good chance it won’t happen. But we will stumble through, just as we can muddle through a weakening trend in the dollar.
So this week, I wanted to lay out the earnings calendar for our stocks, what Wall Street expects for each report and guidance, what I expect, and what the other critical factors will be that move these stocks prices either higher or lower. On balance, though, I think you will be very pleased with the performance of our portfolio by the time earnings season winds down in mid-November.
Some reporting dates are firm and others are still projected based on past reporting patterns. Here’s the calendar:
| Earnings Dates for October | Earnings Dates for November | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
I’ve laid out my expectations for all the biotech stocks below, plus every company expected to report by the end of next week. In next week’s Radar Report, I’ll be updating you on the Intel results, have a quick take on Motorola, Packeteer and Zhone, and lay out my forecasts for the rest of our companies in this earnings reporting season.
Avian Flu MegaShift
BioCryst (BCRX) will report about $10.5 million in sales and a 30-cent per share loss in both the September and December periods, which is in line with the consensus. The important topics on the call will be how their 40-person intramuscular (IM) trial of using a longer needle to inject peramivir for seasonal flu is going, and what the plan is for the intravenous (IV) peramivir Phase II clinical trial for avian flu. BCRX is a buy up to $13 for my $30 target after successful Phase II intravenous results are announced.
Crucell (CRXL) will show a sharp acceleration in sales and earnings over the next two quarters as the vaccine season accelerates. The Street (one analyst) is looking for $109.4 million and a loss of 10 cents a share in the September quarter. I expect that they will do closer to $115 million and breakeven. For December, the lone estimate is for $97.4 million and a loss of 17 cents. I think the company will guide for $105 million and a loss of around five cents. CRXL can be bought up to $28 for my $50 target.
Biotech MegaShift
Affymetrix (AFFX) should beat the consensus estimate, coming in at $97 million and seven cents a share for the September quarter versus Wall Street’s $92.4 million and five cents. I’m also looking for upward-revised guidance to around $115 million and 20 cents a share in the December period. That consensus is at $107.2 million and 16 cents.
Patti wrote: “You have been banging the gavel on AFFX for a year. Your target was $40 at the end of ’07 at that point, when AFFX was about $22. At some point I believe you even compared AFFX to ILMN. At the same point in time ILMN was about $32 and today it bounced over $55. I have owned ILMN since 5/04 when it was $7.85 and I have never felt that AFFX could compete in this technology. What makes you feel AFFX has a chance of reaching $40 and when?”
Although Affymetrix’ new Single Nucleotide Polymorphism (SNP) product to compete with Illumina was delayed, it is now shipping and is one of the reasons that I am estimating that earnings will come in above consensus. The other thing to remember is that Illumina already lost their major patent litigation to Affymetrix, and I expect AFFX to get a double-digit royalty that will impair Illumina’s profitability and add to Affymetrix’ bottom line.
If AFFX has the good earnings call on October 24 that I am expecting, I still think the stock can hit $40 by yearend, and certainly by my expected market peak next April. Buy AFFX on dips under $27 for my $40 target.
Amgen (AMGN) is expected to report $3.58 billion in sales and $1.03 on the bottom line, and then show a sequential decline in the December quarter to $3.54 billion and 97 cents. I expect them to beat the September numbers and guide higher than the December consensus for two reasons. First, I doubt the fall-off in Aranesp usage will be so dramatic, and doctors are in an uproar about what they see as Medicare ordering crummy medicine that will deplete the nation’s blood banks. The private payers like Blue Cross are not going along. Second, Amgen’s quick response to cut costs will show up in operating expenses right away, as they will either show or verbally give the restructuring costs for the quarter as a line item, and analysts will adjust them out because they are non-recurring. So, the stock is set to move upward, which will be followed by analysts raising recommendations for 2008 on what is obviously the best buy in the major biotech/pharma universe. Continue to buy the Amgen January 2009 $70 LEAP call (VAMAN) all the way up to $12.50 for my $25 target price when AMGN stock hits $95, on or before the LEAPs expire in January 2009.
CombinatoRx (CRXX) is still a development–stage company, and they should report right around the consensus estimates for $3.3 million in sales and a 46-cent loss this quarter, followed by $3.4 million and a 49-cent loss in the December period. That doesn’t matter. What counts is the status of their numerous Phase II clinical trials, either underway or on the schedule. They will take good Phase II results and find partners to fund the Phase III trials. It’s a great business model if you have a steady stream of new drug candidates, which their technology gives them. Buy CRXX up to $7.50 for my $16 target.
Dendreon (DNDN) will report less than $100,000 in revenues and lose about 25 cents a share in the September and December quarters, which are also the consensus estimates. Again, the numbers don’t matter. They might be able to say something positive about the rate of patient accrual or when they think that they’ll be able to do the interim peek for Provenge. Otherwise, there isn’t much they can do to move the stock, short of announcing the European partner, and I don’t have any insight as to when they will do that. It could be any day. DNDN can be bought under $8 for my $40 target after Provenge is approved.
eResearch’s (ERES) numbers do matter. The consensus is cautious at $26.6 million in sales and eight cents a share. I think they will do at least that, and perhaps as much as $28 million and 10 cents. Orders will be an important number during the quarter, and I’d like to see them top $30 million, with less than $5 million in cancellations. December-quarter guidance should be a bit higher than the Street’s $28.1 million and nine cents a share, but this is a cautious management that likes to set the bar low. ERES is a Top Buy up to $16 for my $30 target.
Geron (GERN) is a development–stage company, so you know the story: Financials don’t count for much, other than how much cash they have versus the burn rate. The consensus is at $1.0 million and a 20-cent loss, followed in December by $1.1 million and a 21-cents loss. As always with Geron, the stock will follow clinical trial news, plus any new medical society presentations or publications. Buy GERN up to $9 for an $18 trading target, and much higher levels in following years.
Isolagen (ILE) is another development-stage company, and I expect them to report less than $300,000 in revenues and lose 18 cents a share in both the September and December quarters. That’s pretty much the consensus. The big issue here is now that the clinical trial of the Isolagen Process has restarted, how fast are they enrolling patients and when will we see the data. Buy ILE under $4.50 for my $9 target.
Millennium Pharmaceuticals (MLNM) is expected to report $118.4 million and a profit of one cent a share, with the December quarter targeted at $122.8 million and two cents a share. They do have to hit and guide for these numbers to support the stock, but like the development-stage companies, the real movers will come out of a discussion about their drug pipeline and many ongoing trials. They are feeling pretty well about the latest results, so it should be an upbeat call. Buy MLNM up to $12 for my $23 target, possibly in a takeover.
QLT Inc. (QLTI) announced the acquisition of ForSight Newco, bringing them new ocular drug delivery technology that can replace eye drops, especially for glaucoma. Patient compliance is a real issue with eye drops — many older patients can’t or won’t bend their heads back far enough to get the drops in their eye, sometimes for fear of falling. Half of all eye drops patients don’t refill their prescriptions after the first six months supply is used up (or not used). If glaucoma is treated, it can be controlled; if not, it often results in blindness. Replacing eye drops is a big deal.
QLTI will pay $42 million upfront and then $5 million on initiation of the first Phase III clinical trial, $20 million on first commercialization of the first two products, and $15 million on first commercialization of each subsequent product, plus unrevealed royalties. They’ll start Phase I/II trials in the first half of 2008.
The company should beat the September consensus earnings estimate of five cents a share, even if they only match the revenue estimate for $32.6 million. They’ve reduced expenses more than Wall Street thinks. I expect them to guide above the consensus, which is looking for a sequential decline to $31.9 million and three cents a share in the December quarter. They should be able to report a flat quarter, because macular degeneration does not take holidays. Buy QLTI up to $8 for my $16 target.
Rochester Medical (ROCM) has a chance to really shine this quarter, with a full quarter of sales through Premiere. The one analyst following the stock is very cautious, looking for $8.4 million in sales in the September fourth quarter and seven cents a share, followed by $8.7 million and another seven cents in the December period. That would have ROCM coming in at $32.6 million and 23 cents for the September 2007 fiscal year, and the lone analyst is looking for only $38.9 million and 34 cents for fiscal 2008. I think they can beat $40 million and do 40 cents. ROCM is a Top Buy up to $23 for my $40 target.
Sequenom (SQNM) should hit the consensus for $9.7 million in sales and a 13-cent per share loss in the September quarter, and then guide for $11.4 million and a smaller loss of 11 cents in December, as they march towards profitability. As long as they have expenses under control and keep growing revenues, Wall Street will cut them some slack. The company usually has some interesting announcements about new partners or new applications for their gene sequencing equipment, and that can move the stock more than the numbers. SQNM remains a hold for my $10 target, which I may raise a bit after this call.
SXC Health Solutions (SXCI) has a bad quarter baked into the current stock price, with a consensus estimate for $22.6 million and eight cents a share. They are expected to bounce back to 13 cents a share on slight sequential revenue growth to $23.2 million in the December quarter. The key to the stock is when or if they will sign the delayed deals, as just one good contract could make the December revenue number too low. The stock tumbled under my $13 buy limit and found support in the low $12s. I’m raising the buy limit to $14 to give you a chance to buy it before the early November conference call. The target price stays at $30.
ViroPharma (VPHM) is expected to report $52.6 million in sales and 28 cents a share in the September quarter, and that’s probably right. But the consensus for the December quarter is $51.9 million and 24 cents, and that’s too low. I think the company will guide for an up December quarter and will also say that the whole issue of generic Vancocin is now a non-issue, because at this point no one could get a product into the marketplace earlier than ViroPharma management has expected all along. They won’t tell us what everyone really wants to hear, which is how close they are to an acquisition or in-licensing deal. But they will remind everyone that it could happen any day, and the stock will go up on the news.
How do I know that? Because this management is very smart, they won’t overpay, and they will have strategic plans in place for anything that they buy that they can talk about right from the first conference call that announces the deal. Buy VPHM up to $12 for my $25 target.
China MegaShift
Only two weeks after my forecast that the Chinese stock bubble will pop, a major crack appeared at LDK Solar. LDK makes solar wafers — a hot stock in a hot industry. The crack started when the company’s financial controller left, complaining of poor financial controls and an inventory discrepancy. When an economy is growing as fast as China’s is, based on the government printing money at an 18% annual growth rate, bad accounting and inventory problems can be papered over for quite a while. Look at the Chinese banks — every one has been bankrupt for years under honest accounting for loan losses, but they hang in there year after year because no one calls them on their manipulations or shuts them down.
In LDK’s case, the chief financial officer said that the company had conducted an investigation of the alleged inventory problem and found no evidence of it. They added that they fired the financial controller for cause when he didn’t show up for work. That was on October 3.
Five days later, on October 8, Barron’s published a piece quoting an LDK whistle-blower saying the company has severe manufacturing problems, with silicon ingots so contaminated that the quality control folks couldn’t even analyze them. The company responded by saying that they would file a report with the SEC “soon” that will “reconcile” data from the management assessment of inventory levels and an independent audit by KPMG. My experience is that the way you reconcile data with your auditing firm is that you accept their data, period.
It isn’t surprising that the red-hot solar industry is where this crack appeared — isn’t that always the way? The number of billionaires in China leapt to 108 at the end of 2006, up from 15 in 2005. China has more billionaires than any other country than the U.S. Mousey Tongue must be turning over in his urn. (Mousey Tongue was the best-named Siamese cat that I ever met.)
Historically, emerging market stocks sell at a discount to developed-market stocks because of the risks of bad accounting, weak corporate governance, unpredictable government edicts, currency risk and so on. The price-to-book value ratio of emerging markets has averaged a 40% discount to the price-to-book value ratio of developed markets over the last 10 years. But the China excitement started narrowing that discount at the beginning of 2003, and by the beginning of 2005, it was down to a 20% discount. By the beginning of 2007, it was down to a 5% discount, and today emerging markets trade at a premium to developed markets for the first time in at least 10 years, since the Asian currency crisis and Russian market collapse. Investors are paying a premium to put their funds into riskier stocks. That’s a bubble, and it could keep inflating for another year, all the way to the Beijing Olympics. Or LDK Solar could be the first “tell” that the game is over. It will be interesting to watch this play out.
UTStarcom (UTSI) put a little of their accounting travails behind them yesterday, finally announcing September and December 2006 quarterly and annual results. September’s report showed $601 million in sales, and they lost 36 cents a share. Analysts had expected a loss of 32 cents on $587.6 million in sales. December results showed $704 million in sales and a 35-cent loss. Analysts were looking for only $606.9 million and a 34-cent loss. These are old news, even though we finally have real numbers that are better on the top line and a tad worse on the bottom than expectations. They also completed the China sales recognition investigation, which caused revenue to shift to more recent periods.
More importantly, they’ll lay off 11% of their workforce, 700 people, taking a $10 million charge in the December quarter. This should save them $21 million a year. Analysts were looking for $2.27 billion and a loss of $1.28 a share for fiscal 2007, and these results won’t change that much.
On the conference call, management said that they will report the first and second quarters of 2007 in the next few weeks, and the September quarter in early November, finally bringing them up to date. They were able to transfer $150 million in cash out of China, and they should show us a balance sheet for September with tight but positive liquidity. It’s hard to predict what the hard book value will be, but it could be substantial in relation to the current price of the stock. UTSI remains a hold for a $10 recovery target. However, if the Chinese bubble market pops, we will sell.
Content on Demand MegaShift
Intel (INTC) will report next week, and Wall Street is looking for $9.6 billion and 30 cents a share, followed by $10.4 billion and 37 cents in the fourth quarter. PC sales have been strong, up 12% in the September quarter, so I suspect inventory levels of microprocessors are a little low going into the holiday build season. Intel may guide a bit higher for the December quarter.
It’s interesting that Intel had a good quarter due to strong sales of personal computers, digital cameras (+20% in the September quarter), cellphones (+18%) and other consumer electronics. Yet flash memory suppliers like SanDisk (SNDK) and DRAM suppliers like Micron (MU) are having a tough time. How can that be? There is serious weakness in spot prices for memory chips, and it is now impacting contract prices. Most memory chipmakers have seen October contract prices for DRAM drop about 20%, while flash memory fell 15%. They were looking for flat prices, based on good demand for end products. Instead, the Tier 2 suppliers are running at losses and the Tier 1 suppliers are getting squeezed. Flash memory prices are down 40% from August, when they were expected to be strengthening about right now due to a projected shortage. Because Samsung and Toshiba are still profitable, I expect further price pressure.
The problem is overcapacity, as the existing suppliers convert to 65-nanometer and even 45-nanometer processes, while DRAM suppliers accelerate their flash memory production in the vain hope that those products will be more profitable than DRAM. It’s turning into a real mess for SanDisk, which has been quite weak during this most recent upturn, and I expect some very unpleasant guidance from them when they report on October 18. We will continue to avoid these stocks, which I refer to as “trading sardines” that are good only for play money.
Motorola (MOT) is getting a little more respect due to rumors of strong sales of the Razr2, so they are another company that has a chance to make a big difference with a decent September quarter. Wall Street’s expectations are modest: $8.8 billion in sales and only four cents a share on the bottom line. I think they will do $9.1 billion and five or six cents. Even better, the consensus for the usually-strong December quarter is also reasonable at $9.7 billion and 10 cents. I think the company will guide for over $10 billion and 12 cents to 14 cents a share.
Obviously, if those numbers come through at next Thursday’s call, the stock will move. You can still buy the Motorola January 2009 $17.50 LEAP calls (VMAAW) just under my $4 buy limit for a $10.50 target ($28 minus $17.50) in January 2009 — or sooner.
Zhone Technologies (ZHNE) is expected to continue their pattern of small losses, with a loss of one cent a share in each of the September and December quarters. Revenues are forecasted at $43.2 million in the September quarter and $45.7 million in December. I see no reason to think that they will do better. They could have a good conference call if growth in their new DSL products accelerates, even if legacy products decline more than expected. The mix of business is important to this stock, but it’s very unpredictable quarter to quarter. Hold ZHNE for higher prices, probably in an acquisition.
New Economy MegaShift
Cnet Networks (CNET) was “favored” by advice from Henry Blodgett, the poster boy for dot.com analysts who did not know what they were doing in the Internet bubble. Although barred for life from the securities business, Blodgett has a blog and gives free advice to selected targets, most recently Cnet. His advice is to take it private, rehire the CEO that left due to stock options backdating, primp it up, and then sell it for big bucks. Great advice, Henry, except that would mean public investors don’t get the gain. Why he thinks private equity guys deserve to make all this money and we don’t is beyond me, but the obvious problems that he cites can all be fixed with the company public.
I wrote about these problems when we bought the stock, as they were what dragged it down under $8 in the first place. Cnet needs to focus on their very popular web sites and do a better job of monetizing them with ads. They need to do something with Webshots, the very good photo-sharing site that is hard to monetize and not as much fun as Flickr, but has a huge amount of content — 400 million photos — and loyal users. Maybe they need to split in two. These are not decisions that need to be made in private.
When Cnet reports on October 25, the consensus is looking for $99.4 million in sales, up 6.5% from last year, and two cents a share. Those numbers are about right. Guidance should be for $130 million in sales and $1.32 on the bottom line, which would be about in line for revenues, but a couple of pennies light. That might push the stock back under my buy limit. I say “might” because we will also get more details on the turnaround plan, and that will support the stock. So, buy CNET on any dip under my $8 buy limit, especially right after the earnings report, for my $17 target. If it doesn’t dip after the report, I will raise the buy limit a bit for those who are not yet in.
New Energy Technology MegaShift
Rentech (RTK) drew a question from subscriber Fred, who wrote: “Just read an ad for International Energy (IENI), which is supposed to be able to create 5,000 to 7,000 gallons of petroleum from an acre of a crop. The process takes only a few days, due to algae discoveries. Is this legit and competition for Rentech?”
It is possible to get 5,000 gallons of petroleum from an acre of algae, but at a great expense. There is a lot of research going on around the world, with actual production in Israel. My former partner, Lissa Morgenthaler, is now CEO of LiveFuels, which is funding several algae development projects at Sandia Labs, a Department of Energy research organization. She would be the first to say that they need to find the most efficient kinds of algae and slash production costs to make this economically feasible. So the big difference is that the Rentech process is competitive at $45 a barrel oil, and today algae might be competitive at $200 a barrel oil. That will come down over time, but Rentech’s window is right now.
Rentech should hit the consensus estimates of $23.3 million in sales and a loss of six cents a share in the September quarter, followed by $30.3 million and a loss of five cents in December. But what really matters is how their various coal-to-liquid projects are progressing, and I think the news will be good, especially about the collaborations with coal companies. RTK is a Top Buy all the way up to $5 for my $11 target.
Security MegaShift
Packeteer (PKTR) has a lot to prove this quarter. The consensus outlook for $33.9 million in sales covers a range from $32.4 million to $35.1 million. I think that they can do a little better than the consensus, maybe $34.2 million, just because capital spending is holding up in their area. Earnings estimates range from a nine-cent loss to breakeven, with a loss of five cents a share in the center. I’d like to see a three-cent loss to indicate Dave Cote has the situation under control. A lot will depend on what he reports and then on what he says about it — whether there are deeper competitive or product problems, or we were just looking at transient market conditions.
The outlook for the December quarter is even wider, centered on $36.8 million and a two-cent loss. If Dave can’t guide for profitability in the quarter, I think the board will give in to Elliott Associates and put the company up for sale, and the stock will go up. If Dave can point the way to a penny or two of profit, the stock will go up, and then it will go up more in January if he delivers. I still like the technology, and recommend buying PKTR up to $9 for my $20 target, which may be in a takeover.
Market Outlook
This market has been very strong, first consolidating with little weakness and then breaking out to new highs. The S&P 500 handled the 1552 to1555 area that I spoke about very well, and it is now headed for 1605. It is remarkable that the VIX Fear & Greed Index is still well over 15, as the last time that we were near these levels it was down to 10. There are still too many bears, and if sentiment stays this cautious all the way up to 1605, we’ll consolidate there for a bit and then break on up to the next big target at 1690.
If sentiment does finally turn very bullish, we can expect a quick, scary drop back to 1552 to1555 to rebuild negative sentiment and set up the move to 1690. It would take a sustained drop under 1550 to make me think that the short-term outlook has changed. Either way, our stocks should do very well in the December quarter. Oil prices look likely to hang around under $80, consumer spending will be OK, and the slowdown (but not downturn) in capital spending will not affect any of our positions directly.
We also may be on the verge of another plunge in the dollar — I think that’s what the gold market is telling us. Gold has been through a long, high-level consolidation just above $728, and it looks to me like breaking $751 will start the next leg up — one that could stretch all the way to $800. With “official” inflation nowhere in sight, the only other factor that I can think of that is driving gold is the terminally ill dollar’s next leg down.
Print This Post
