Odyssey Healthcare a Hold for Now
Our Hold recommendation on Odyssey Healthcare Inc. (ODSY) remains intact at current levels pending the release of second-quarter results. Our current revenue and EPS estimates are $162 million and $0.12 respectively versus consensus estimates of $164 million and $0.11.
Industry fundamentals remain strong. We believe growth momentum will persist over the medium to long term, given the aging population. In addition, a growing awareness of hospice care alternatives is broadening the mix of hospice admission diagnoses. We believe, Odyssey's strong track record of integrating acquisitions, a well developed and centralized operational model and strong cash flow from operations augur well for continued growth via acquisition and the establishment of greenfield programs.
The hospice industry is heavily regulated at both the state and federal level. As a result, the company is vulnerable to changes in reimbursement rates or changes in methods governing calculation of reimbursement levels. Low barriers to entry are encouraging new market entrants and increasing competition. Noting weaker patient admissions in the management's recent earnings pre-announcement and the historical importance of acquisitive growth to Odyssey, increasing competition may also increase vendor pricing, should new entrants pursue similar growth through acquisition strategies.
We have valued Odyssey HealthCare on a forward price/earnings (P/E) basis, as well as a comparison to similar firms in the healthcare facilities sector. Our $9.50 target price is derived using a multiple of 17.9 x FY08 EPS of $0.53.
KLA-Tencor a Near-Term Hold
KLA-Tencor Corporation (KLAC) is the market leader in the process diagnostics and control (PDC) equipment segment of the semiconductor manufacturing equipment industry with an estimated 41% market share. With a portfolio levered towards 300mm wafers and 45-90nm design tools, the company stands to benefit with the continued deployment of leading-edge gear in new semiconductor fabrication facilities.
With $1.3 billion of cash and investments and no debt, the company's finances are a source of strength. The company has a dominant position in photomask (reticle) inspection and it is the flagship product line with more than an estimated 70% market share. KLA is the dominant player in the wafer inspection/defect review tools market.
KLA-Tencor's long-term prospects are solid as well. Although the semiconductor equipment business is characterized by extreme volatility, the industry should continue to grow at a double-digit annual pace as electronic applications proliferate. The firm's diverse customer base is another source of strength.
However, orders for the September quarter were $482 million down 32% from the June quarter. September has historically been a difficult period for bookings of KLA-Tencor.
On a long-term basis, the firm offers everything one could ask for from a firm dependent on the semiconductor-spending cycle. It outgrows the industry by 10%, its balance sheet is a source of strength and it has leadership positions in 18 of the 20 markets it competes in. We would be on the sideline until the orders get worked out.
