Patience Key with Westell
We stick to our Hold recommendation for Westell Technologies ( WSTL), a provider of broadband access products and conferencing services, after the company declared its fourth-quarter financial results, in line with our estimates. Although WSTL's financial results for the fourth quarter was down, we consider the company as more attractive for a longer time-horizon.
WSTL is systematically transforming itself into a leading technology-solutions provider for home networking and controller systems, targeting the wireless and wireline carriers, cable and other multi-service operators (MSO). The company announced near completion of its restructuring and manufacturing outsourcing initiatives, which are likely to improve operating margins in future reporting periods.
WSTL's decision to explore strategic alternatives for its conference services unit may also lead to improved financial conditions, which the company believes will be in the range of $39 million to $41 million in the first quarter of 2009 fiscal year. On the other hand, we do not anticipate WSTL to make a profit before the fiscal year ends.
With respect to P/S and EV/S, the stock is trading significantly below its peers. Our assessment indicates that earnings volatility will remain at least over the near-term, but we forecast financials to improve from mid fiscal 2009 as the company harnesses revenue from major carriers. We maintain our Hold rating and the same six-month price target of $2, which equates to approximately 0.4x our fiscal 2009 Enterprise Value/Sales estimates.
Upgrading Altria to a Hold
We upgrade Altria Group, Inc. (MO) to Hold from Sell, since despite a number of outstanding lawsuits, recent court rulings have been largely favorable, including some adverse verdicts being overturned in the tobacco industry's favor. The management believes that Altria can enhance profitability and shareholder value with greater focus on the domestic tobacco market alone, where the company has a leading market share.
The U.S. tobacco industry is one of the largest and most profitable markets in the world. With a number of strong brands, an efficient distribution network, and a strong field-sales force, Altria has the ability to leverage the company's resources across an array of tobacco products. However, positive and negative legal headlines create volatility in the stock. Product liability risks exist in the industry and may never be eliminated completely. Losses in litigations and potential mega-awards against tobacco companies would not only have a material effect on earnings, but could even threaten the solvency of the company.
Altria has traded in a P/E multiple ranges of 6 to 18 over the last 10 years. It has maintained a low P/E due to tobacco-related litigation issues, and has been pressured down to a single-digit P/E during times of unfavorable court verdicts. We expect Altria to trade in a P/E multiple range of 12 to 16. The target price of $24 is 14.5 times our six-month forward earnings estimate.
Varco Keeps Things A-Pumpin'
We maintain our Buy recommendation on National-Oilwell Varco Inc. (NOV) since the drilling equipment manufacturer retains its strength thanks to its strong leverage in the oilfield cycle. Peak-cycle commodity prices and capital outlays for exploration and production activities should keep the company's demand in robust health for the next few years.
New orders worth $2 billion in the first quarter have brought the company's total backlog to a record $9.9 billion, which highlights the company's strong earnings visibility going forward. It also reported better-than-expected first-quarter results.
To add to that, deepwater lease awards, discoveries in Brazil and the growing search for oil into new frontiers have significantly increased the demand for technologically advanced rigs, which the company is in a position to supply.