Anticipating Strength from Tessera
Tessera's (TSRA) advanced packaging technologies have industry-wide application. March quarter top-line results beat consensus estimates while the bottom-line missed slightly.
The licensing business has very attractive operating leverage characteristics. The firm has won five major lawsuits and now receives royalties from all of the big four in the DRAM market.
Tessera recently suffered its first legal set back as an International Trade Commission judge stayed the company's patent infringement motion against Motorola (MOT), Freescale (FSL) and Qualcomm (QCOM). This will not affect the top or bottom-line.
We continue to rate shares of TSRA a Buy. Looking ahead, second quarter total revenue is expected to be within the range of $54 million to $56 million, which includes projected royalty and license fees of between $47 million and $49 million. These ranges are one million dollars above management's previous guidance originally given on January 31, 2008, as they are anticipating strong performance in our core business.
WaMu Outlook Stays Bleak
Washington Mutual's (WM) 1Q08 earnings at a negative $1.40 per share were abysmal, significantly missing our and the Street's estimates. The loss was driven by the elevated level of provisioning ($3.5 billion) during the quarter.
Even though
Moody's (MCO) raised WM's rating to stable from negative (following the $7.0 billion capital raise), we remain negative on the shares of WM. The significant reduction of its dividend payment and the restructuring of certain major business operations we continue to rate the stock a Sell.
Further, considering expectations for a continued challenging environment and that the company has not given guidance with respect to the provision for loan losses for 2008 -- nor other credit quality metrics -- we have lowered our 2008 and 2009 earnings expectations to ($2.80) per share and $0.00 per share, respectively, from a loss of $0.22 per share and $1.35 per share previously. On a price-to-book basis, the shares trade at 0.58x its 1Q08 book value of $21.74 per share, a 3.57% premium to the peer group median of 0.56x (vs. 8.8% discount previously), which looks quiet stretched given that WM's ROE [return on equity] is negative and expectations remain high for its earnings to continue to put up losses over the next several quarters.
Risks with Ride Aid Turnaround
Management at the Rite Aid Corporation (RAD) is executing a turnaround strategy centered on increasing the profitability of the existing store base, which includes improving the product mix with generic and private label products. Nevertheless, management acquired the Brooks Eckerd chain prior to a convincing turnaround in profitability.
Also,
Wal-Mart's (WMT) initiative to enter the retail generic drug market should pressure the company's pharmacy margin. Importantly, the company has a large debt burden. Given management s EPS guidance for fiscal 2009, the stock is rated a Sell.
Wal-Mart's entry into the retail generic drug market may prove detrimental to Rite Aid's pharmacy sales. Given the company's structural competitive disadvantages and high debt position, the stock should be valued on a price-to-sales basis. Most recently, the stock declined to $1.95 or 0.058 times expected post-merger annualized sales.
Due to the company being in a turnaround phase with a high debt burden, the determination of Rite Aid's stock valuation is challenging.
