Trimble Navigation Points the Way

Trimble Navigation, Ltd. (TRMB) is an original equipment manufacturer (OEM) of GPS-based products and control systems. Both revenue and EPS exceeded the consensus in the March quarter. Revenue growth was the strongest in the TFS segment, driven by continued momentum in the ag market.

Operating margins expanded in all except the E&C segment. Forward guidance is for a 5-6% sequential increase in Q2 and a 15-17% growth for the year. International markets will be the key to growth in 2008, as the weak macro situation is likely to have a continued negative impact on E&C.

However, international growth is likely to remain strong. Also, the company operates in markets where there are some large players, including the government, while the consumer exposure is very limited. This should lend some stability to the top line.

Trimble has one of the largest market shares in the U.S., and has had recent success in Europe. Additionally, developing economies in Asia, Africa and Europe are likely to provide further impetus to growth. The strong end markets, success with several new products and improving margins indicate that 2008 will not be too bad a year for the company.

TRMB shares are currently trading at a 21.5x multiple of share price to our 2008 earnings estimate (P/E). We feel very positive about this stock, but consider the valuation fair, given the macro situation and TRMB's considerable exposure to the domestic market. Consequently, we are reiterating our Hold rating target price of $31.00 (20.1x P/E).

Adjusting Hold-Rated Cepheid

Cepheid, Inc. (CPHD) is a molecular diagnostics company that develops, manufactures, and markets fully-integrated systems for genetic analysis in the clinical molecular diagnostic, industrial and biothreat markets. The company announced its expansion in North America with licenses in Canada and registrations in Mexico, and the signing of another group purchasing contract with Novation.

The company is focused in driving growth primarily by penetrating further in the clinical market and launching new products. However, expansion efforts may prove more expensive than the company currently anticipates, and it may not succeed in increasing revenue to offset higher expenses. We maintain our Hold recommendation on the shares.

We previously increased our FY08 revenue and EPS estimates. Management previously increased its FY08 revenue guidance and provided detailed FY08 earnings guidance. For FY08, the company expects to be profitable excluding stock compensation and amortization of acquired intangibles.

At its current price of $29.56 per share, CPHD is trading at 8.7x our 2008 revenue estimate of $190 million, which is at a premium to the group multiple of rough 8.3x.