The company expects to lose money in 2008 in this segment and has chalked out a brand licensing agreement. Philips has been facing stiff competition in the consumer electronics segment and we have witnessed its margins of key products have been under extreme pressure.
We expect Philips to continue to spend heavily on research and development (R&D), sales and promotional activities, which may also raise pressure on margins, although the company has progressed to stabilize its EBITA margin.
Owens-Illinois Making Progress
Owens-Illinois, Inc. (OI) reported first quarter EPS of $1.08, above our estimate of $0.80, on account of favorable currency translation, a higher-than-expected price recovery of manufacturing inflation and lower net interest expenses. The company saw double-digit glass container revenue growth across all geographic markets, except North America.
The company derived the bulk of its revenue gains from currency translation and price recovery rather than volume. We believe OI will continue to focus on profitability over market share. Our target price is $46.00, which is around 10.2x our FY08 EPS estimate of $4.51.
The 2007 and Q108 results show that OI is making progress on the cost front. Owens was able to offset its commodity-related costs with price hikes and product mix. OI will focus more on extensive product innovation to provide customers with unique packaging concepts. More importantly, most of the company's business is secured under contracts, which have some price increase clauses.
The company is doubling the capacity of its new glass container manufacturing plant in Lurin, Peru. We anticipate a 9.7% increase in OI's 2008 revenues. For 2008, the management expects free cash flow of approximately $500 million. The news on asbestos claims improved in FY07 and in Q108.
However, we expect volume growth in the North American glass container business to remain in the low single-digit range. The company still sees inflation in energy and labor as an important issue. Energy accounts for 15%-25% of total production costs and the recent surge in energy prices will increase OI's cost of sales.
We believe OI has excellent long-term growth prospects due to its strong industry leadership position and willingness to push consolidation. While we note an improved earnings outlook, we believe the bulk of the positive story has already been factored into OI shares.
Lawson Software Guidance Dips
We maintain our Hold rating on the shares of Lawson Software, Inc. (LWSN). The company reported revenue of $233 million and EPS of $0.10 vs. consensus of $229 million and $0.10 with slight upside on license, maintenance and consulting revenues. Q4 marked record software contract signings and operating margins hitting an all-time high with further improvements expected.
Deferred license revenue grew approximately 50% y/y. This indicates that last year's sales ramp and new sales management are executing well. LWSN plans to add another 10% in QBSR in FY09.
