SMI Reflects Pullback in Semis
Semiconductor Manufacturing International (SMI) is a Chinese semiconductor foundry company with multiple integrated chip wafer fabrication plants. SMI is the largest foundry company in China (third largest worldwide) and operates multiple plants and fabrication (fab) lines. Strategic alliances with Chartered, Toshiba, Infineon (IFX), Fujitsu, Motorola (MOT), Elpida and IMEC have provided access to intellectual property (IP) associated with a variety of semiconductor process technologies.
We remain concerned regarding operational performance in the near-term given severe price declines in DRAM. The firm has announced they plan to exit the DRAM business. We believe shares are currently fairly valued and expect them to trade at current valuation metrics. We continue to rate shares of SMI a Hold.
Gushan Environmental Bullish
China's biggest bio-diesel player Gushan (GU) is ramping up its production capacity in a big way to cater to the strong energy demand fueled by China's fast growing economy. The company's proprietary technology allows it to use cheaper sources of raw material and have a lower cost structure than its peers.
Looking ahead, lower fuel subsidies by the government, higher production and entry into the high margin chemical market should collectively generate significant earnings growth. However, loss of production due to the Beijing Olympics will affect performance in the near-term. Also, strong governmental control over diesel prices, volatility in global oil prices, and rising Chinese inflation continue to weigh on the stock.
Accordingly, we upgrade coverage of GU to a BUY recommendation and a six-month target price of $6.00. This represents only 6.8x our current-year 2008 EPS estimate and 5.0x our forward 2009 EPS estimate.
Priceline Downgraded from Buy
Priceline.com (PCLN) offers customers the ability to make hotel reservations worldwide primarily under the Booking.com and Agoda brands internationally and the Priceline.com brand in the U.S.
Slowing economic growth domestically and around the globe is negatively affecting Priceline.com's results. Macro conditions have worsened in recent months, and problems in the credit markets are making economic conditions more difficult.
Due to slowing economic growth in Priceline's domestic and international markets, we are reducing our estimates for the second half of 2008 and full-year 2009. Our 2008 EPS estimate goes from $5.76 to $5.43 and our 2009 EPS estimate goes from $7.16 to $6.34.
As a result of our lower EPS estimates, we are downgrading PCLN shares from Buy to Hold. Our target price is $61 or about 11x our 2008 EPS estimate.
ArthroCare Downgraded to Hold
The near-term should be difficult for ArthroCare Corp. (ARTC) investors as the company navigates the delayed filing of financial statements, FBI probe, and class action suits. The Centers for Medicare and Medicaid Services' non-coverage determination combined with the DiscoCare litigation will likely damage the Spine segment. Our recommendation moves to Hold.
The company's clear strategy to leverage its patented Coblation technology and other innovative, clinically superior surgical devices for the surgical treatment of soft-tissue conditions should help pull them through this difficult time. New products in Sports Medicine are stimulating growth in a fairly mature segment. Oncology also represents another growth opportunity for the company.
Given the current headline risk, we are surprised that the company trades at an 8% premium to the average of comparables 1.2x 2008 P/E/G. We believe most health plans and governments will seek to cut costs.
