Analyst Actions: MGIC Investment, Dollar Tree Stores, Overstock.com, SanDisk, Fuel Tech
LEHMAN REINSTATES UNDERWEIGHT RATINGS ON MGIC INVESTMENT, RADIAN
Lehman Brothers reinstates underweight ratings on MGIC Investment (MTG) and Radian (RDN), and downgrades several mortgage stocks in connection with its downgrade of the mortgage finance group to negative from neutral and the specialty finance group to neutral from positive.
Analyst Bruce Harting says he believes "the hefty expected losses in the mortgage sector cannot happen in a vacuum," and that "it is just a matter of time before problems spill into other loan sectors in consumer finance."
He downgrades Countrywide Financial (CFC) and IndyMac Bancorp (IMB) to underweight from equal-weight. He also downgrades Washington Mutual (WM), American Express (AXP), Capital One Financial (COF), Discover Financial Services (DFS), and PMI Group (PMI) to equal-weight from overweight. Meanwhile, he maintains MasterCard (MA) at overweight.
JP MORGAN DOWNGRADES DOLLAR TREE STORES TO UNDERWEIGHT FROM NEUTRAL
JP Morgan analyst Charles Groom says most of Dollar Tree Stores (DLTR) bulls point to the company's multi-price point rollout as key catalyst to long-term story, but he says he has sensed less optimism by management on this front. He says Friday's news that CFO Kent Kleeberger was unexpectedly leaving the company for lower market-cap Chico's FAS (CHS) adds another layer to his mosaic that maybe the upside from this initiative is less robust than many suspect.
Groom says he is struggling to justify current multiples on the dollar store space in light of slowing consumer backdrop, particularly at the low end. He says the stock's valuation is a bit rich, and notes Dollar Tree shares are within 80% of 52-week high, up about 24% year-to-date.
PIPER JAFFRAY UPGRADES OVERSTOCK.COM
Piper Jaffray upgrades Overstock.com (OSTK) to market perform from underperform. On Friday, the company posted $0.20 third quarter loss per share, vs. $1.19 loss a year ago.
Analyst Aaron Kessler says he's incrementally more positive as Overstock.com is headed toward a path to profitability through improved cost controls, improved product mix, higher mix of third party sales, and vastly more efficient marketing. He notes that in the third quarter Overstock.com generated EBITDA of $4 million, vs. his breakeven estimate.
Kessler says while there are still risks to the long-term story given Overstock.com's history of not executing, he believes the cards are in place for continued profitability. He narrows $1.53 2007 loss estimate to $1.23 loss, raises breakeven 2008 to $0.31 EPS. He sets $31 price target.
JP MORGAN ADDS SANDISK TO FOCUS LIST
On Friday, SanDisk (SNDK) posted third quarter non-GAAP EPS of $0.54, vs. $0.61 a year ago, despite a 38% revenue rise.
JP Morgan analyst Paul Coster says SanDisk reported strong third quarter results and issued guidance consistent with his above-consensus fourth quarter forecast; gross margins are expanding rapidly again. He believes SanDisk will hit the upper end of its 15%-20% operating margin target range in 2008, yielding over 50% EPS growth.
Coster says SanDisk is the "pure-play" investment in the massive, explosive-growth NAND flash memory market. He notes NAND growth is fueled by its use in smartphones, MP3 players, cameras, and USB Flash drives.
He sees $3.00 2009 pro forma EPS on sales of $5.49 billion. He reiterates overweight recommendation, and set a $54 October 2008 price target.
MERRIMAN CURHAN DOWNGRADES FUEL TECH
Fuel Tech (FTEK) was downgraded to sell from neutral by Merriman Curhan. Analyst Jesse Herrick says channel checks indicate competitive landscape, for pricing and market share, much more challenging than commonly perceived for the company's Fuel Chem product line, which he believes accounts for vast majority of potential value at FTEK.
Herrick says General Electric (GE) is a strong player and is taking market share from Fuel Chem with comparable-product performance at cost some 30%-50% lower; sees potentially significant impact on the company's revenues and margins. He also sees very small market for the company's air pollution control product, given close look at EPA's projections.
He sees $0.27 2007 EPS, and cuts $0.62 2008 EPS estimate to $0.49. He thinks the shares are more fairly values in the $12-$15 range.