NVIDIA Poised for Slowdown
As the only remaining major independent player in the market for Graphic Processing Units (GPUs) used in PCs,
NVIDIA Corporation (NVDA) is well positioned to benefit from increased graphics requirements with strong momentum in its GeForce products. NVIDIA reported better than expected Q4 results and is forecasting sales in Q109 to be better than seasonal.
However, cost-related issues with the new GeForce 8800 GT have taken a toll on gross margins, which should continue for a few quarters. Then again, since its struggle with difficult product cycles and lower margins in fiscal 2004 and fiscal 2005, NVIDIA has turned the corner, increasing its net profit margin three-fold, and driving its return on equity (ROE) into the 20% range.
The company has significant stock option exposure, albeit not out of line for a rapidly growing technology company. NVIDIA reported an ROE of 34.5% in fiscal 2008, which we expect to fall in fiscal 2009 due to increased expenses related to the 8800GT, and fall farther as the company's asset base increases. We believe NVIDIA has a strong balance sheet with minimal debt and a falling leverage ratio as shareholders equity increases.
Shares of NVIDIA are trading at a multiple of 14.4x our fiscal 2009 EPS estimate of $1.52 and 2.5x our fiscal 2009 revenue estimate of $8.81 per share. With slowing spending growth on technology expected, we maintain a Hold rating on NVIDIA shares and lower our six-month price target to $23.
Our six-month price target represents a multiple of 15.1x our fiscal 2009 EPS estimate and 2.6x our fiscal 2009 revenue estimate, a discount to the industry mean. We believe the stock can reach the target given the valuation range of its peer group due to its industry leading position.
Upgrading Health Care Properties
Health Care Property Investors, Inc. (HCP) had a solid fourth quarter, with FFO per share increasing 22% (excluding charges) over the year earlier quarter. Operations are holding up in the company's core portfolio and the company will be selling assets to pay down debt in 2008. HCP was a heavy acquirer in 2007, making $4.7 billion of investment. High debt levels are the main negative of HCP.
We think health care will continue to outperform other sectors in 2008. Health care is a good, defensive sector in a weakening economy that could put pressure on other commercial real estate sectors. Based on 2008 FFO estimates, HCP trades at an approximate 8% discount to sector averages. While HCP has superior assets and growth potential compared to peers, the company's recent acquisitions were pricey.
We expect the CNL and Slough portfolio acquisitions to be dilutive to earnings in the near term, although integration has been going smoothly.
