Market Headwinds for Stoneridge
Stoneridge, Inc. (SRI) is aggressively cutting costs and benefiting from the growth of the commercial vehicle market. Increased use of electronics in vehicles is also benefiting the company. However, a squeeze between raw materials and prices, along with weak vehicle demand, force us to rate the shares a Hold with a target price of $15.50, which is 19.6x our 2008 estimate.
Stoneridge reported first quarter results. In the quarter, earnings were $0.28 per share, compared to $0.21 per share in the same period last year. The increase in net income was helped by strong electronics sales in North America and increased joint venture earnings. Net sales were $203 million, up from $185 million in the year-ago period.
Net sales increased primarily due to strong electronics sales in North America and Europe as well as the impact of foreign currency exchange rates. These improvements were accomplished despite a first-quarter production decline of approximately 26% in the medium- and heavy-duty truck markets in North America.
For full-year 2008, the company expects net income per diluted share to be in the range of $0.75 to $0.85, an increase from the previous yearâ?s earnings of $0.71 per share. This anticipated increase includes approximately $9 million to $13 million in restructuring related expenses after the expected benefit from a facility sale.
Stoneridge expects its new product sales and ongoing cost-reduction initiatives to more than offset these restructuring expenses as well as the expected volume declines in certain markets. Currently, shares of Stoneridge are trading at 17.8x our 2008 EPS estimate of $0.79.
Array Pharma Too Early Stage
Array BioPharma, Inc. (ARRY) focuses on developing orally active drugs by utilizing the latest advances in chemistry, biology and informatics. The company utilizes its proprietary discovery platform to enhance small molecule candidates for in-house or collaborative research and development programs.
On May 5, 2008, Array announced that it has received an $80 million funding commitment from Deerfield Management, a leading healthcare investment organization and one of Array's largest shareholders. The $80 million commitment is a six-year, interest-bearing loan under a Facility Agreement that provides for two draws by Array of $40 million each in June 2008 and December 2008.
Interest accrues on the total $80 million commitment as of the date of the Facility Agreement, and continues to accrue on the outstanding principal balance. Although we are encouraged by the recent progress in a number of collaborations, we are disappointed with recent negative phase II clinical trial results from its key lead candidate AZD6624.
We would like to see more data on the early-stage pipeline before we recommend investors purchase shares of Array. We are encouraged by the strong discovery platform and growing service collaboration business, but we are disappointed with recent negative phase II trial results from its lead candidate AZD6244.
The company is currently seeking to enter into new drug discovery collaborations which will provide the company with research funds. Albeit very early-stage, the company possesses an intriguing pipeline of small molecule candidates for cancer and inflammatory diseases.
We maintain our Hold rating on shares of Array BioPharma with a $7.5 price target. Our target corresponds to an 11.2x P/S ratio to our 2008 total revenue of $31 million. The 11.2x P/S ratio is at the middle of average biotech P/S between 10x and 15x.
Demand Up for Hold-Rated Finisar
As a leading provider of fiber optical products as well as network test and monitoring systems, Finisar Corporation (FNSR) has gained a strong position in short-distance, low-cost portion of the Ethernet market. With growing demand for bandwidth, particularly for video and IPTV, demand for high-speed bandwidth solutions such as 10 Gigabit Ethernet has increased rapidly. Given its leadership position in LAN/SAN and Metro Ethernet products, and its strong position in the growing 10/40 Gb/s optical transceiver market, we expect the company to experience strong top-line growth in fiscal 2009.
