Westamerica Slogging Through
Westamerica Bancorporation?s (WABC) 2Q08 diluted operating earnings of $0.77 per share were in-line with estimates. Results were supported by a 37 bps sequential increase in net interest margin and unchanged provision for loan losses. On the downside, credit quality worsened during the quarter and growth continued to be elusive.
After reviewing the results, we are slightly moderating our FY08 and FY09 estimates to $3.10 per share and $3.25 per share, respectively. Currently, WABC trades at 17.2 times the consensus forward estimate, a 21% premium to the peer group median. On a price-to-book basis, the shares now trade at 283% premium to the peer median, versus 355% premium as on May 28, 2008.
Relative pricing continues to look very expensive on a P/E-to-growth (PEG) basis, using the consensus forward estimate and the consensus long-term growth rate. WABC?s PEG ratio is now 2.69, a 119% premium to the 1.23 median for the peer. On a price-to-book basis as well, the 283% premium looks quite stretched, given a ROE only 32% above median.
However, we believe that WABC should continue to trade at a sizeable premium to its peers, given its strong capital levels and superior credit metrics. These positives mainly result from its minimal exposure to housing loans, though we anticipate some moderation in the credit quality in the coming quarters mainly due to the commercial real estate portfolio of the bank.
We also see payback problems spreading from mortgages to other types of loans. Further, we still think that the company could be a reasonable acquisition target, which should continue to lend support to the shares.
Our $56.00 price target equates to about 3.83 times our projected book value six months out or about 18.1 times our 2008 earnings estimate of $3.10 per share. Along with $1.40 per share annual dividend, the target price implies a return of about 6.5% over the six-month horizon. Thus, we reiterate our Hold rating on the shares of WABC.
Shaw Comm Markets Maturing
We assumed coverage of Shaw Communications (SJR) in February 2007. We think SJR can grow EPS at a CAGR of at least 15%-17% over the next five years, driven by the acquisition of cable systems, the rollout of digital telephony and the country?s fastest Internet service, coupled with continuing share buybacks.
Moreover, continued share buybacks, funded by free cash flow and coupled with the increased dividend, will boost total shareholder return. However, a mature market for high-speed Internet service and the uncertainty surrounding the sustainability of the positive trends in the Star Choice business, contribute to a high risk/reward ratio in the stock at its current high valuation multiples.
In the coming years, the company will strategically focus on its digital phone operations and its broadband business with 69% Internet penetration of basic cable (up from 65.2% at August 31, 2007), and will evaluate wireless possibilities. Further, the company is actively engaged in making strategic acquisitions.
The company is also actively managing its capital. In 3Q08, the company used free cash flow (up 10.4% to $309.3 million for the first nine months of 2008) to raise its dividend by 11%, and since August 31, 2007, the company has reduced its long-term debt by C$433.9 million. We maintain our Hold rating on the shares.
NVIDIA Estimates Lowered
As the only remaining major independent player in the market for GPUs used in PCs, NVIDIA Corporation (NVDA) is well-positioned to benefit from increased graphics requirements. The company is also gaining traction in its new product offering including its new CUDA initiative.
However, NVIDIA reported disappointing Q2 results and blamed much of it on the competitive pricing environment and weakening desktop PC market. Moreover, a slow ramp of its 55 nm processes will pressure gross margins over the next few quarters. We therefore lower our estimate for the full fiscal year 2009 and 2010 and maintain a Hold rating on NVIDIA shares
Since its struggle with difficult product cycles and lower margins in fiscal 2004 and fiscal 2005, NVIDIA turned the corner, increasing its net profit margin three-fold, and driving its Return on Equity into the 30% range for 2008. The company has significant stock option exposure, albeit not out of line for a rapidly growing technology company.
NVIDIA reported a ROE of 34.66% in fiscal 2008, which we expect to fall significantly in fiscal 2009, due to increased cost of revenue and R&D expenses, resulting in a lower net margin. The company has a strong balance sheet with minimal debt and a falling leverage ratio as shareholders equity increases.
Shares of NVIDIA are currently trading at 22.4x our reduced fiscal 2009 EPS estimate of $0.58. Our $14.00, price target represents a multiple of 24.1x fiscal 2009 estimates as we believe the stock can trade at a premium to the industry on depressed earnings.
Mylan Generics Gaining Growth
While we expect Mylan Inc.?s (MYL) acquisition of Merck Generics to contribute to long-term growth, near-term execution risks remain. Mylan announced certain strategic initiatives which should help drive long-term growth. We view these initiatives as steps in the right direction. But the management also stated that they expect 2008-2010 EPS to be negatively impacted by a slower-than-expected new product launch.
The company adjusted EPS guidance for 2008-2010 based on higher expenses, reduced opportunities from patent challenges and the potential sale of its specialty business. We believe that the new guidance should be achievable and we have updated our model based on the guidance.
