Rent-A-Center Shuttering Stores
Rent-A-Center, Inc. (RCII) fourth quarter results were ahead of our estimates, and management's guidance for fiscal year 2008 was also above its previous guidance. The upside to its 2008 EPS guidance will come from cost savings associated with the company closing 280 stores. We bumped up our 2008 EPS estimates to reflect the store closings and established 2009 estimates.
With the stock trading around 8x our 2008 EPS, the downside risk should be muted even if the company falls short of its earnings guidance. Even so, we maintain our Hold rating because the weak consumer spending environment is not likely to improve for several quarters.
Our target price of $18.25 is about 8.5x our 2008 EPS estimate, which is a slight discount to the company's long-term growth rate. RCII shares are trading at 8.3x our 2008 EPS estimate. This valuation looks cheap, but we think it reflects the problems associated with the company's core customer base. We maintain our Hold rating and expect RCII shares to track the overall market for the next six months.
Recommending SCRX Up to $28
Sciele Pharma, Inc. (SCRX) is a specialty pharmaceutical company engaged in the sale of prescription products for the treatment of cardiovascular, metabolic, obstetrical and gynecological, and pediatric and gastroenterological conditions and disorders. The company's broad focus and deep product pipeline offer substantial growth opportunities over the next several years.
Moreover, Sciele received a boost recently when the FDA approved the company's new Sular formulation. This removed a significant overhang from the stock. Sciele is set to launch the new Sular in March when users will be switched to the new formulation prior to the potential entry of generic Sular in June 2008.
The next step in Sciele's game plan is the successful conversion of users to the new Sular formulation prior to the potential entry of generics (Sular loses exclusivity in June 2008). While we acknowledge the fact that Sciele has a very short time-frame for achieving this objective, we have confidence in the company's ability to execute its plan successfully.
We believe the current share price represents an attractive entry point for long-term investors. We maintain our Buy rating on Sciele Pharma, and recommend purchase up to the $28 level. We believe the company has done a commendable job, so far, in executing its plans to protect the Sular franchise from generics.
Western Digital Corp.
This company finds hard drives are hot commodities as notebook PC sales surge.
Western Digital Corp. (WDC), is the second largest manufacturer of hard drives in world. The company's products include 3.5-inch, 2.5-inch, and 1.0-inch form factor drives, as well as enterprise hard drive products, which are offered under various brand names that include WD Caviar, WD Raptor, WD Scorpio, WD Passport, My Book, My DVR Expander, GreenPower, and WD Raid Edition.
The Lake Forest, California-based company, a Zacks #2 Rank (Buy), is benefiting from the strong demand for consumer gadgets, such as notebook computers, which require ever expanding amounts of storage capacity.
On Jan 23, the company announced earnings for the second quarter and surprised to the upside by 29.81 percent. WDC reported $1.35 a share, beating analyst estimates of $1.04 a share by 31 cents. Revenue was $2.2 billion for the quarter compared with $1.4 billion in the prior year. Earnings per share grew 137 percent over the prior year.
Hard drive revenue grew by 46 percent over second-quarter 2006, with shipments increasing 40 percent year-over-year in unit volume. Branded products accounted for 18 percent of hard drive revenue, continuing to emphasize the value of WD's global brand.
Fifty-four percent of the hard drive revenue in the quarter was derived from non-desktop PC segments, including hard drives for notebook PCs, consumer electronics and enterprise applications, and branded company retail sales. This compares with 42 percent in second-quarter 2006.
'We are very pleased with our December quarter results and continue to be excited about our prospects in addressing the surging global demand for high-capacity storage in multiple consumer and business markets,' said John Coyne, WD president and chief executive officer.
The company said on its conference call that it has not seen any effect of the softening U.S. economy on usage or orders.
Western Digital also raised forecasts for the third quarter. The company expects to earn 85 to 91 cents a share on revenue in the range of $1.925 billion to $2 billion.
Analysts scrambled to raise estimates, with 11 out of 17 covering analysts in the last 30 days raising by nine cents to 88 cents from 79 cents. Ninety days ago, the average consensus for the third quarter was only 56 cents.
The company has a forward P/E of only 7.46 and a PEG of 0.6, both under industry averages.
Medical Devices Bringing New Products
With so many different aspects of medical technology to consider, we wanted to get a better perspective on what investors might find interest in. Recently, we sat down with Zacks senior analyst
Tom Park to get his take on what we should expect.
What can you tell us about your outlook for the medical devices industry this year?
The medical products or devices industry is comprised of a diverse group of companies that should benefit from new product introductions and continued favorable demographic trends that should drive increasing demand for hospital supplies and equipment. In particular, an aging population demanding quality healthcare should continue to provide a favorable demand environment for the industry.
Are there any stand-out Buy recommendations in this space?
In mid-January, we upgraded Immucor (BLUD) from a Hold to a Buy, based on valuation. This was after the company reported second quarter 2008 earnings results. Immucor had EPS in-line with our estimate on in-line revenue. Our FY08 estimates still exceed guidance that was reiterated.
The strong earnings growth has been driven by double-digit sales growth, gross margin expansion, and operating cost control. Although under pressure from the Echo launch, gross margins are expected to regain momentum next fiscal year. Our price target is based on roughly 34x FY09 EPS estimate.
What other news is worth mentioning among companies in this space?
I-Flow (IFLO) announced that it entered into an agreement to acquire AcryMed. We previously lowered our FY07 revenue estimate. Management previously reiterated its FY07 revenue growth targets for Regional Anesthesia and total revenue.
The company finally sold InfuSystem in late October. The divestiture is to allow the company to focus and allocate resources on the bigger long-term growth opportunity in Regional Anesthesia.
Due to the positive clinical results that have been reported, I-Flow began to expand the sales force and marketing programs ahead of plan in the first quarter 2007 instead of waiting until after the close of the deal.
Is there anything else about this industry you think investors need to be aware of?
A negative in this industry is the pressure from both the government and private pay customers to contain costs. Health insurance premium increases are being passed on to employers and consumers. A decline in economic conditions can depress growth in elective procedures (such as vision correction), as these expenses are generally not reimbursable. This cost containment trend has hit doctors who have to deal with lower Medicare reimbursements.
Tom Park is a senior analyst covering the medical devices industry for Zacks Equity Research.
Buy Shares of Brazil's Gafisa
We are keeping our a Buy recommendation on Gafisa S.A. (GFA). Third quarter results were positive, the short-term outlook remains promising and the lower Brazilian interest rates have been helping the emergence of the construction sector.
We believe the less benign monetary policy in Brazil is a temporary problem. The potential for growth in the local mortgage business is fantastic, and the huge inventory of land already acquired, construction in progress and finished units all point to strong earnings and revenues in future quarters.
Our target price is $46.50, or 30x our 2008 earnings estimate. Currently, Gafisa is trading at 22.8x our 2008 estimated EPS. The valuation remains high because of the continued growth in the Brazilian real estate market and the very positive short-to-medium term outlook. We still believe Gafisa remains a good short-term alternative, since the company is becoming a true leader in a fast growing market and has a huge inventory of land and developments that will keep earnings up in the following quarters.
Biogen Idec Warrants Patience
Biogen Idec (BIIB) posted solid results in the fourth quarter of 2007, driven by solid sales of both Avonex and Tysabri. Tysabri looks set to have a great 2008 given the growing prescriber base and the recent approval in Crohn's Disease.
Biogen's growth will begin to slow dramatically starting in 2010 unless the pipeline can deliver. There are several pivotal programs underway and several more to begin this year. The stock price performance will be determined by just how many of these pipeline candidates move from potential to actual sales. In the meantime, we think investors can be patient.
We are not opposed to owning the name, but we only see $66 as fair value. The name would truly be an excellent take-out candidate for a large-cap pharma name such as Pfizer (PFE), Wyeth (WYE), AstraZeneca (AZN) or Sanofi (SNY). However, the price has to be right for a deal to get done. Biogen's stock is currently trading at 19.0x 2008 EPS, so any deal would be dilutive from a large-cap pharma standpoint. Still, that pipeline and manufacturing capacity looks very intriguing.
