Opnext Initiated as a Hold
A major concern for Opnext, Inc. (OPXT) is customer concentration. Cisco (CSCO) and Alcatel-Lucent (ALU) accounted for 45.7% and 14.3% of the total sales, respectively, in the most recently reported quarter. Moreover, the market for optical modules and components is highly competitive and is characterized by rapid technological innovation.
The company announced an agreement to acquire privately held StrataLight Communications, Inc. for $172 million in cash and stock. This acquisition is expected to broaden the company's product portfolio. We are initiating coverage of OPXT with a Hold rating and a six-month target price of $5.75.
Going forward, management expects revenues in the range of $74 million $77 million for the first quarter of fiscal 2009, up from $72.7 million generated in the fourth quarter of 2008. For fiscal 2009, the company expects to expand in the 10G and 40G markets to address broader network applications. The stock is currently trading at 15.9x our FY2009 EPS estimate.
Sealed Air Seen as Average
Sealed Air Corp. (SEE) reported first quarter EPS of $0.35, below our estimate of $0.40 and down 10.3% y-o-y, due to lower gross and operating margin as a result of the large increase in resin prices and slowing economic conditions in North America. Volume growth remains anemic in the U.S. and higher raw material costs, particularly resins, are preventing margin expansion.
However, higher international volume, acquisitions and lower operating expenses should support profitability. The company is also implementing price hikes and improving operating efficiencies. SEE is focusing more on developing technologies and innovative new products for food and protective packaging applications. It has also announced plans to source more materials from and expand manufacturing operations in China.
In the long run, we anticipate the potential for a significantly lower-cost structure. We retain our Hold rating on the stock. Our target price of $19.25 is predicated on around 11.7x our 2008 EPS estimate of $1.65.
In Q108, the quarterly dividend was raised by 20% to $0.12 per share and SEE repurchased $27 million of its common stock. The company also invests in acquisitions.
SEE is actively engaged in implementing price increases and improving operating efficiencies. The management is also pursuing a multi-year global manufacturing strategy, under which, it expects to realize savings of approximately $45 million in 2009, increasing to $55 million in 2010. For 2008, the management expects operating expenses to be less than 16% of net sales. The company is also on track to complete conversion of its North American operations onto the SAP platform by mid-2008, which will enhance efficiencies.
During the first quarter, volume declined in all regions except Asia. The management anticipates continuous slow growth rates in its Protective Packaging businesses in North America and Europe in the coming quarters of 2008.
Crown Castle a Buy, Pre-Earnings
We maintain our Buy rating and the same valuation target for Crown Castle International Corporation (CCI), a leading operator of wireless communications towers in the USA and Australia, as the company will shortly release second quarter 2008 financial results. We believe recent weakness in the stock price is related to general global equity market weakness.
