Align Tech Tries to Even Out
We believe a difficult U.S. economy and higher marketing expenses will hamper Align Tech, Inc.'s (ALGN) topline growth and margins. Strong international growth and foreign exchange gains will help offset this. In the near-term, we think earnings quality could become an issue as the management finds it difficult to meet growth targets. Meaningful earnings growth will be pushed out to fiscal 2009 and 2010. We are reiterating the current Hold recommendation.
We have adjusted our models to reflect the current economic environment. We expect fiscal 2008 sales growth of 10%, in-line with the management's guidance of $309 million - $314 million. Heavier marketing spending may be necessary to drive GP channel penetration required to achieve management s growth targets. As a result, margin pressure can be expected, possibly leading to earnings quality issues.
Flat ortho and GP utilization rates sequentially suggest the company may have fully tapped the former OrthoClear customer base, as well as fully penetrating the most easily reached segment of the U.S. malocclusion cases supporting the theory of higher marketing spending. We believe the stock deserves to trade at 10% discount to the group average of 2.6x 2008 revenues. Our valuation remains at 2.3x our 2008 revenue estimate. The target price falls to $10.35, below our previous estimate.
DeVry Upgraded to a Buy
DeVry, Inc.'s (DV) management continues to execute well with the company reporting positive enrollment trends since its turnaround in fiscal 2006. In addition, the management is executing a five year strategic plan that focuses on four growth priorities in order to drive growth while maintaining the company's financial strength.
DeVry University is benefiting from strong enrollment growth and increased enrollments of online students. Total student enrollment growth for the 2008 summer term increased 12.6%. Finally, the ongoing real estate optimization strategy and incremental acquisitions are adding to the company's earnings potential. Therefore, the stock is upgraded to a Buy.
DeVry is currently trading at 31.4 times trailing 12 month EPS, reflecting the company s revenue and potential earnings growth profile since the turnaround. Over the last five years, the stock has traded in a wide P/E range of 13 to 60. However, excluding the low P/Es from the time of negative enrollment comparisons and excluding the high P/E on depressed earnings when the stock initially rallied on the announcement of the first positive enrollment comparison, the stock has traded in the P/E range of 30 to 52. The target price is $64.00, which is a 36 P/E multiple on 12 month trailing earnings.
Eni SpA Strength Priced In
We are maintaining our Hold recommendation on Eni SpA (E) ADRs after the company's third-quarter results. We continue to believe that the company's positive production-growth profile, capital discipline and attractive dividend are adequately reflected in its premium valuation relative to its European peers.
However, we are increasingly concerned with Eni's high valuation which is approaching that of the European super majors, TOTAL (TOT) and BP (BP), relative to its historical norms and as production growth slows, the stock could come under significant pressure.
The key positives in the Eni story include the company s strong production-growth prospects, driven by a long inventory of development projects, a growing gas business and an attractive dividend. The company's positive upstream growth prospects stem from its robust and diversified portfolio of assets.
Other negative issues include the company's relatively lower leverage to crude oil prices, given its growing focus on the downstream gas sector, lack of investments in the Russian market, and prospects for increased competition in the Libyan market from U.S. players for future contract awards.
We see limited upside from current levels despite the healthy growth profile. Earnings momentum may come under pressure during the next quarters as production growth slows to average. Given the already rich valuation by historical standards, we believe ENI may experience some de-rating going forward.
Finisar Beats Expectations
Finisar Corp. (FNSR) has gained a strong position in the short-distance, low-cost portion of the Ethernet market. FNSR's acquisition of Optium Corporation further compliments its product portfolio and should be accretive to its earnings in 2009.
Although some recent data points indicate that spending on network equipment may be slowing, FNSR has reported strong results and given good guidance. As such, we maintain our Hold rating with our $1.50 target price.
On September 8, Finisar announced financial results for fiscal 2009 first quarter. Revenue for the quarter was $128.7 million, exceeding the company's guidance of $120 million to $125 million. This represents a 21.7% increase in revenue from the $128.7 million reported in the year-ago quarter and a 6.4% increase over the $121.0 million reported in the previous quarter.
