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Analyst Comments: Soapstone, Bayer , Advanced Micro Devices, Harmony Gold, Entercom, Pervasive, CarMax, Cost Plus, Smith & Nephew, Ferrellgas, Alpharma

 August 26, 2008 08:19 AM

Soapstone Keeps from Slipping

We maintain our Hold recommendation on the shares of Soapstone Networks, Inc. (SOAP). The company's shares continue to drift down with a lack of news regarding customers for its PNC (Provider Network Controller) product.

Soapstone is primarily focused on developing and marketing its Soapstone PNC framework. The company has made several announcements regarding new products, including successful interoperability testing of the IPsphere Forum Service Structuring Stratum. However, it currently appears that PBT, which was expected to be the key driver for PNC, is having a difficult time catching on with tier 1 carriers.

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Although we believe it is too early to judge how successful Soapstone products will ultimately be, the company has a strong balance sheet with $7.09 in net cash per share, which will provide some support to the share price. Our price target on SOAP is based on the company's cash balance.

We estimate that Soapstone will have approximately $6.67 per share in cash in six months, the horizon of our target price. Although the stock is likely to trade below its cash value until Soapstone shows traction from its PNC business, we believe its strong cash balance will provide some support given that it will not burn through all its cash for years. If new initiatives are unsuccessful, it is always possible that the company liquidates or chooses another strategic option to return the cash to its shareholders. On the other hand, the shares are unlikely to appreciate without any meaningful customer news. We therefore maintain a Hold rating on SOAP shares and cut our six-month price target to $4.25.

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Bayer Risk, Reward Balanced

Bayer AG (BAYRY) has been shifting its focus on the healthcare segment in the past few years in order to maintain solid growth in the long run. The acquisition of Schering AG should improve its product portfolio, and we expect higher-cost synergies from the acquisition. The company reported 2Q08 financial results which were in line with our expectations. We maintain our Hold rating.

Bayer's future growth should be mainly driven by its healthcare segment. However, we are concerned about the slowdown in this segment, especially in the fourth quarter of 2007 and in the first quarter of 2008. Sales in the healthcare segment only grew by 0.9% in 4Q07 and 3.4% in 1Q08.

The failure of Nexavar for lung cancer and the U.S. court ruling against Yasmin will have negative impact for the growth of the segment. Therefore, we are lowering our estimates for 2008 and beyond.

The CropScience and Material Science segments should stabilize in the coming quarters. Currently, Bayer stock is trading at 11.7x our 2009 EPS estimate of $6.71 per ADR. Based on the business outlook we mentioned above, we believe the risk/reward profile is balance for Bayer stocks. Using our fiscal year 2009 earnings estimate of $6.71 per share, and a forward multiple of 15x, discounted at 20% for one year, we arrive at our price target of $85. The P/E ratio of 15 is between big pharma industry P/E of 18.6 and chemical industry P/E of 13.6. We choose this hybrid P/E because Bay operates in these two industries and each segment accounts for about 50% of its total revenue.

Broadcom Buys AMD TV Biz

Large-cap chipmaker Broadcom (BRCM) has reached a deal to purchase the digital television chip business from Advanced Micro Devices (AMD) for a reported $192.8 million. AMD shares are up on the news, but Broadcom has sold off 3.5% or so as of mid-day, as this could gouge earnings in the near term, according to a Reuters report today.

Even before this buyout news had been made, Zacks senior equities analyst Abdul Saleh had this to say in his most recent research report on Broadcom: "(G)rowth in the traditional wireline business is expected to slow down in the second half of the year, (and) gross margin is estimated to decline as the company continues to ramp up sale of new products to new and existing customers." Shares of BRCM remain a Hold. Zacks senior analyst Ken Nagy, CFA, who covers AMD, is quoted thusly about the company in his latest report: "We remain bullish about this stock, but prefer to take a wait-and-see approach for the time being." We will check to see if this cash infusion will be enough for the analyst to upgrade his rating of AMD looking ahead.

Harmony Gold Cutting Costs

Harmony Gold Mining Co. Ltd. (HMY) is benefiting from higher gold prices. Going forward, Harmony is focused on reducing its overall operating costs through its continuous operations agreement or CONOPS and the shutdown of loss-making shafts. The company is also reducing its headcount to control costs. As a result, we rate the shares a Hold with a target of $9.50.

However, CONOPS was terminated at Elandsrand, Evander 2 and 5, Cooke 1, 2, and 3 shafts, Masimong and Tshepong mines during fiscal 2008. We expect these measures to assist in improving the company's profitability. Fiscal 2008 cash operating costs were up 10.8% year-over-year due to lower production and inflationary pressures on salaries, electricity and steel and fuel.

But the management stated that it is actively focused on increasing production and lowering its cost structure, more specifically in the areas of overheads and the services of consultants and contractors.

The company has a diverse portfolio of gold development projects spread across South Africa and Papua New Guinea (PNG). These are Elandsrand, Doornkop, Tshepong and Phakisa in South Africa and Hidden Valley in PNG, which when developed, would deliver up to 1.4 million oz of additional production by 2011. In addition, it has a number of development prospects that are being progressed including surface sand dumps, rock dumps, tailing dams, reviewing the potential of uranium deposits in South Africa, and developing the Wafi Golpu gold and copper-gold deposits in PNG.

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