The stock currently trades at a P/S multiple of 7.0x, but we believe the stock can approach a multiple of at least 9x revenue over the long-term as the leader in the space. We therefore maintain a Buy rating and a price target of $83 on the stock.
Dr. Reddy's Not Ready to Buy
Dr. Reddy's Laboratories, Ltd. (RDY) is a global pharmaceutical company located in Hyderabad, India. RDY produces active pharmaceutical ingredients (API), finished dosage forms, and branded and generic pharmaceutical products for the global market.
While fiscal 2007 was a very strong year for the company, the lack of significant generic product launches, intense pricing pressure in the generics market, and declining revenues from the Mexico CPS and betapharm businesses took a toll on the company's performance in fiscal 2008. Though we expect RDY to swing back to growth in fiscal 2009, we believe it will take some time for the company to resolve the situation in Germany and Mexico.
This, along with the lack of any significant near-term catalysts, is likely to keep the shares trading in a tight range over the next few months. We maintain our Hold rating with a price target of $16 (INR 700).
While the company swung back to positive earnings in the fourth quarter of fiscal 2008, net income for fiscal 2008 declined almost 50% y-o-y. The company reported earnings of $0.69 (INR 27.73) per ADS in fiscal 2008. Going forward, RDY is guiding towards top-line growth of 25% in fiscal 2009. Contributions from newly acquired businesses and new product launches should help the company achieve this target. Based on our earnings model, we see total revenues increasing 23% to $1.4 billion (INR 61.5 billion) in fiscal 2009.
Switching Biz Models at CallWave
CallWave (CALL) is continuing with the implementation of a revised business strategy and is redirecting resources to products focused on fixed-mobile convergence. In addition, the company has shifted to indirect selling (focus on phone companies) from sales and marketing addressing consumers directly.
Although these changes incorporate additional business risks and will result in net earnings losses, they are expected to provide top-line sales momentum over the next two years. We believe the challenging transition to a new business model (which is more dependent on wireless services and sales through local phone companies) and exposure to competitive offerings in the market will continue to limit stock appreciation.
However, we maintain our Hold recommendation as we see limited downside potential with $46.8 million of net cash and indications of product acceptance at tier-2 carriers. On the basis of price-to-sales (P/S), CallWave is trading at 2.5x sales primarily due to lower estimated revenues for 2008.
We believe the stock will trade at such metrics given the changing business fundamentals and the challenging competitive environment. To CallWave's advantage, the company has significant cash on its balance and, therefore, we set a target price of $2.30 near its cash position and based on limited growth over 2008.
GM & Ford Cuts Keep TEN a Hold
Tenneco (TEN) is witnessing revenue improvements and has been successful in its cost reduction efforts and restructuring activities. The company holds a leading position in nearly every product category it offers. Moreover, diversification has proved to be a major positive for the company.
The company projects that it will achieve an average compounded annual Original Equipment (OE) revenue growth rate of 11-13% between 2008 and 2012. However, elevated commodity costs, oil prices, and sizeable production cuts at General Motors (GM) and Ford (F) lead us to rate the stock a Hold.
Currently, shares of Tenneco Inc. are trading at 12.6x our 2008 EPS estimate of $2.06. We set a six-month target price of $28.00 and rate the shares a Hold. This is 13.6x our 2008 estimate.
