Keep It Simple: Buy Vimpel
Vimpel-Communications (VIP) is the second largest cellular carrier in Russia. Robust subscriber growth and acquisitions continue to drive revenue and earnings momentum. Growth prospects in Eastern Europe for wireless services remain firm and support our forecast for strengthening financials.
We continue to be intrigued by VimpelCom's success with increasing sales on a recurring basis and maintaining strong operating margin. Its recent acquisition of Golden Telecom is also expected to facilitate telecom expansion outside its core consumer cellular offering and provide significant growth momentum for the remainder of 2008. We reiterate our Buy rating based on financial metric estimates which we believe are attainable.
VimpelCom is trading at 15.3x our 2008 EPADS estimates. This is at a premium to its major competitor, Mobile TeleSystems (MBT) and the S&P 500. We set a six-month price target of $36.50, which is based on 18x our 2008 EPADS estimate.
Auto Supplier Magna Not So Big
Magna Intl. (MGA) enjoys a strong competitive position in the automotive industry, as it is one of the few providers of a complete range of interior and exterior auto systems to global auto companies. The company is expected to benefit from the strong focus on emerging markets.
Magna's acquisitions of automotive electronic companies in Michigan and China will expand its electronic product portfolio. The new business contract awarded by Hyundai Motor Corporation will drive Magna's revenues. The company also has a strong balance sheet and a cash reserve. However, declining volumes and the current squeeze in margin force us to rate the shares a Hold with a six-month target price of $77.00.
Increasing content per vehicle (CPV) is the main driver of Magna's growth. CPVs in both North America and Europe have been increasing over time. Some of the prominent new product launches driving CPV growth include Chevy Equinox, Chevy Cobalt, SAAB 9-3 and BMW X3.
Although the production ramp-up of BMW's X3 model positively impacts the company's top-line, the assembly-only nature of the contract is likely to erode gross margin. Moreover, large original equipment makers (OEM) are demanding pricing concessions from their suppliers, putting pressure on Magna's margins. Moreover, in North America, sales are falling due to declining volumes.
Initiating NewAlliance a Hold
We are initiating coverage on the shares of NewAlliance Bancshares, Inc. (NAL) with a Hold rating. NAL operates as a bank holding company, which provides commercial banking, retail banking, consumer financing, trust, and investment services predominately in the states of Connecticut and Massachusetts.
The company reported impressive first-quarter results with improved net interest margin, increased average loan balances, and reduced deposit costs. However, margin pressure is a major concern for NAL. Though net interest margin (NIM) shows an improvement during the first-quarter, we anticipate that the expansion will remain moderate through 2008 due to competitive funding costs. The margins will experience significant pressure once the Fed starts raising rates.
The company has a sizeable exposure to residential loans.
