Sorry - just one post so far this week, but I have been busy migrating this blog to http://www.bapcha.com
I've been working on new insights into Wells Fargo - since I found them to have been naughty with their numbers - much before the Wall Street Journal picked up on it.....
Please look at my older article on Fannie, Freddie and Wells Fargo. I will resume posting over the weekend.
Sorry for the trouble.
Bapcha
Thursday, August 21, 2008
Tuesday, August 19, 2008
The next ISRG ?
Intuitive Surgicals needs no introduction. The company's daVinci surgical robot is allowing the company to grow at a heady rate, and added to this, ISRG makes a gamut of disposable tools [which serve as the "working end" of the robotic arm used in surgery] which need to be "renewed" for every surgery. The tools provide ISRG a stream of revenue in a manner that is similar to Gillette's blades. ISRG's revenues are almost at a billion dollars a year run-rate, and it sports a market cap of over $10 Billion. The largest company that exclusively focuses on medical devices is Medtronic [MDT]. MDT's market value was at $10 billion - back in 1995 - the same year that ISRG was founded.
While there is still a lot of money to be made - in ISRG, there always is room for newer disruptive technologies in the field of MIS [minimally invasive surgery]. The two companies of today - which are often compared with ISRG - albeit with ISRG from about a half a dozen years ago, are: HNSN - Hansen Medical and STXS - Stereotaxis. Hansen1 develops, manufactures and sells a new generation of medical robots designed for accurate positioning, manipulation and stable control of catheters and catheter-based technologies. Stereotaxis2 focuses on the cardiac surgery market, and enables physicians to complete more complex interventional procedures by providing image guided delivery of catheters and guidewires through the blood vessels and chambers of the heart to treatment sites.
STXS has an extensive array of patents covering their magnetically guided catheter systems. HNSN has an equally impressive array of patents protecting their Sensei system. After a review of both patent portfolios, I'm confident that STXS has an edge over HNSN. Plus, STXS's system has a huge operational advantage - their catheters are substantially slimmer than HNSN's comparable ones. This is due to the fact that STXS's catheters have a magnetic tip, and are guided by a magnetic field surrounding the patient - while HNSN's guidance wires are bundled with the catheters [and hence thicker]. STXS's system has one huge disadvantage - the room in which the system is located - needs to be custom built - with magnetic shielding. Also, operational procedures similar to those taken by MRI facilities [no ferrous/ferric/magnetic stuff anywhere close to the system or the room it is in] need to be taken into account. In short, once a STXS magnetic guidance system is in place, it is cost-prohibitive to even think of moving it.
HNSN's most recent quarterly numbers were hampered by "sales lumpiness", but the company fell short of their goal for quarterly system sales [system sales drive the sale of disposables]. STXS has the edge in system sales for now - despite the fact that their systems are a lot more difficult to deploy. But, STXS had their own missteps - where they had to go back and re-engineer their magnetic irrigated catheter [it needs to be re-approved by the FDA]. Optimistically, this will contribute to revenues in calendar Q1-2009.
From the table, once can see similarities in the numbers....... ISRG had a reverse 1 for 2 split in July 2003 - which means that there was 100% dilution from the point of time that I chose to pick in 2001 for ISRG. STXS has been smart with their money, and got a $18Million payment in royalty from Biosense Webster - their partner in the manufacture of ablation catheters. Looking at numbers from other 10Q's filed by ISRG, ISRG extracted much more in sales - for the amount of expenditure on R&D - even in the early stages of the company.
The bottom-line:
1. There is no clear winner here in the battle for becoming the next ISRG. In fact, the next ISRG is ISRG - as it has another half a decade of growth left in it.
2. Between STXS and HNSN, my pick is STXS - for their technology has been through 10,000 cardiac procedures - some so complex that they were not attempted before STXS's Niobe entered the fray.
3. HNSN can use the fact that they are more easily deployable - to get an edge over STXS, but at the end of the day, the thinner, more routable STXS catheters will be able to perform surgeries that HNSN's Sensei cannot touch.
4. Both companies are burning money now, and will probably continue to do so for another three years. So, there is no urgency to get into either stock.
Operating rooms are rarely re-located. Neither are MRI labs. So, STXS's biggest negative is probably not a big deal in most cases.
Notes:
0. I have no positions in either stock. May initiate in the near future.
1. From Hansen's latest 10Q.
2. From Stereotaxis' latest 10Q.
3. ISRG's 2001 10Q.
While there is still a lot of money to be made - in ISRG, there always is room for newer disruptive technologies in the field of MIS [minimally invasive surgery]. The two companies of today - which are often compared with ISRG - albeit with ISRG from about a half a dozen years ago, are: HNSN - Hansen Medical and STXS - Stereotaxis. Hansen1 develops, manufactures and sells a new generation of medical robots designed for accurate positioning, manipulation and stable control of catheters and catheter-based technologies. Stereotaxis2 focuses on the cardiac surgery market, and enables physicians to complete more complex interventional procedures by providing image guided delivery of catheters and guidewires through the blood vessels and chambers of the heart to treatment sites.
STXS has an extensive array of patents covering their magnetically guided catheter systems. HNSN has an equally impressive array of patents protecting their Sensei system. After a review of both patent portfolios, I'm confident that STXS has an edge over HNSN. Plus, STXS's system has a huge operational advantage - their catheters are substantially slimmer than HNSN's comparable ones. This is due to the fact that STXS's catheters have a magnetic tip, and are guided by a magnetic field surrounding the patient - while HNSN's guidance wires are bundled with the catheters [and hence thicker]. STXS's system has one huge disadvantage - the room in which the system is located - needs to be custom built - with magnetic shielding. Also, operational procedures similar to those taken by MRI facilities [no ferrous/ferric/magnetic stuff anywhere close to the system or the room it is in] need to be taken into account. In short, once a STXS magnetic guidance system is in place, it is cost-prohibitive to even think of moving it.
HNSN's most recent quarterly numbers were hampered by "sales lumpiness", but the company fell short of their goal for quarterly system sales [system sales drive the sale of disposables]. STXS has the edge in system sales for now - despite the fact that their systems are a lot more difficult to deploy. But, STXS had their own missteps - where they had to go back and re-engineer their magnetic irrigated catheter [it needs to be re-approved by the FDA]. Optimistically, this will contribute to revenues in calendar Q1-2009.
| STXS Q2, 2008 | STXS Q2, 2007 | HNSN Q2, 2008 | HNSN Q2, 2007 | ISRG Q2, 2001 | ISRG Q2, 2000 | |
|---|---|---|---|---|---|---|
| Revenues | 10.66M | 7.84M | 5.8M | 2.4M | 12.72M | 5.13M | R&D | 4.8M | 7.1M | 6.3M | 4.4M | 3.3M | 2.8M |
| Gross profits | 6.5M | 3.5M | 1.08M | 0.781M | 6.1M | 1.6M |
| EPS | (0.35) | (0.42) | (0.60) | (0.37) | (0.12) | (0.23) |
| Shares | 36.5M | 36.1M | 24.7M | 21.5M | 35.6M | 19.8M |
From the table, once can see similarities in the numbers....... ISRG had a reverse 1 for 2 split in July 2003 - which means that there was 100% dilution from the point of time that I chose to pick in 2001 for ISRG. STXS has been smart with their money, and got a $18Million payment in royalty from Biosense Webster - their partner in the manufacture of ablation catheters. Looking at numbers from other 10Q's filed by ISRG, ISRG extracted much more in sales - for the amount of expenditure on R&D - even in the early stages of the company.
The bottom-line:
1. There is no clear winner here in the battle for becoming the next ISRG. In fact, the next ISRG is ISRG - as it has another half a decade of growth left in it.
2. Between STXS and HNSN, my pick is STXS - for their technology has been through 10,000 cardiac procedures - some so complex that they were not attempted before STXS's Niobe entered the fray.
3. HNSN can use the fact that they are more easily deployable - to get an edge over STXS, but at the end of the day, the thinner, more routable STXS catheters will be able to perform surgeries that HNSN's Sensei cannot touch.
4. Both companies are burning money now, and will probably continue to do so for another three years. So, there is no urgency to get into either stock.
Operating rooms are rarely re-located. Neither are MRI labs. So, STXS's biggest negative is probably not a big deal in most cases.
Notes:
0. I have no positions in either stock. May initiate in the near future.
1. From Hansen's latest 10Q.
2. From Stereotaxis' latest 10Q.
3. ISRG's 2001 10Q.
Thursday, August 14, 2008
Intel Can Grow again. Really......
Back in the early 1980's Andy Grove famously got Intel out of the much larger [in revenues] memory business, and put all of Intel's eggs in one basket and propelled INTC to the #1 spot in the semiconductor industry. But lately, there have been chinks in INTC's armour. For starters, the perennial also-ran in the CPU market - AMD had a temporary lead in the high-end [Opteron, multi-core]. But Intel's response was swift and decisive. Before long, AMD was back in the cellar and for now, Intel need not worry too much - about microprocessors and mobility.
While INTC is very good when it applies to their core business, they have had a less than stellar record - when you look at their acquisitions and other ventures. Even under Andy Grove's watch, Intel started diworseifying [sic] into the memory market. At first it was NOR flash [now divested to Numonyx]. Then they tried getting into programmable logic [Altera eventually bought most of that unit], and in 1999, they bought Level 1 Communications in one of their largest ever acquisitions. INTC bought smaller companies like Shiva to add to this unit - which was eventually packaged and sold to Marvell in 2006.
By far, Intel's worst investment till date is probably in the Intel/Micron Flash unit - which till now has cost upwards of $2 Billion. I wonder what Intel thought they'd get out of the NAND flash market, but one need not wait much longer to be convinced that it no longer is a market that INTC needs to be in.
Much of this is obvious when one looks at the most current 10Q of INTC's where for the six months ending June 28, 2008, net income attributable to the Digital Enterprise Group [includes Microprocessors and Chipsets] was $3.473 Billion; Mobility's net income for the same period was $2.417 Billion, and "all other" had a negative net income of $1.573 Billion. For the quarter ending June 28, 2008, the net income numbers for each of these units was roughly half of the six month numbers - at $1.710 Billion for Digital Enterprise, $1.251 Billion for Mobility and negative $706 Million for "other".
So, for Intel to rock and roll again:
a. Go back to basics. Andy Grove was right - get rid of anything that has to do with memory. Every dollar invested here will end up as a dollar of "impaired assets" - sooner rather than later.
b. Focus on mobility and microprocessors.
c. Stay ahead of AMD.
d. Get "junk" like Numonyx off the balance sheet.
e. Good job buying back $15 Billion of stock. Get authorized to buy back more......
Bapcha
Disclosures: Long INTC.
While INTC is very good when it applies to their core business, they have had a less than stellar record - when you look at their acquisitions and other ventures. Even under Andy Grove's watch, Intel started diworseifying [sic] into the memory market. At first it was NOR flash [now divested to Numonyx]. Then they tried getting into programmable logic [Altera eventually bought most of that unit], and in 1999, they bought Level 1 Communications in one of their largest ever acquisitions. INTC bought smaller companies like Shiva to add to this unit - which was eventually packaged and sold to Marvell in 2006.
By far, Intel's worst investment till date is probably in the Intel/Micron Flash unit - which till now has cost upwards of $2 Billion. I wonder what Intel thought they'd get out of the NAND flash market, but one need not wait much longer to be convinced that it no longer is a market that INTC needs to be in.
Much of this is obvious when one looks at the most current 10Q of INTC's where for the six months ending June 28, 2008, net income attributable to the Digital Enterprise Group [includes Microprocessors and Chipsets] was $3.473 Billion; Mobility's net income for the same period was $2.417 Billion, and "all other" had a negative net income of $1.573 Billion. For the quarter ending June 28, 2008, the net income numbers for each of these units was roughly half of the six month numbers - at $1.710 Billion for Digital Enterprise, $1.251 Billion for Mobility and negative $706 Million for "other".
So, for Intel to rock and roll again:
a. Go back to basics. Andy Grove was right - get rid of anything that has to do with memory. Every dollar invested here will end up as a dollar of "impaired assets" - sooner rather than later.
b. Focus on mobility and microprocessors.
c. Stay ahead of AMD.
d. Get "junk" like Numonyx off the balance sheet.
e. Good job buying back $15 Billion of stock. Get authorized to buy back more......
Bapcha
Disclosures: Long INTC.
Tuesday, August 12, 2008
nVidia. I refuse to believe that the worst is over yet.
There have been a lot of road-kills in the graphics business [Chips & Technologies, S3, Cirrus Logic, Tseng Labs come to mind], which is always cyclical, and "owned" by a player or two. For now, nVidia is one of the big two, and will continue to be - till the next major breakthrough in graphics processing creates a new winner [or a new old winner].
I had an opportunity to listen to nVidia's mea culpa conference call - after the earnings announcement that fell short, but wasn't as bad as expected. While this is fine and dandy, it just seems too "perfect" to me, and I refuse to believe that the long-term effects of this admitted snafu will last only one quarter. Why am I being pessimistic ?
a. NVDA came in closer to the low-end of their own guidance of $875M to $950M in revenues [I'd have thought that they had an excellent idea by mid-July as to what they would probably announce].
b. I believe in the cockroach theory. If you see a roach, there are a hundred below the floor-boards that you do not see.
c. In the semiconductor industry, even the best systems cannot stop the "propagation" of a mistake into other areas.
d. nVidia's cycle-time - from when they start designing a chip, to getting it fully qualified at Microsoft [to work with the OS and the graphics API] - to the time the company recognizes revenue from the product is anywhere from twelve to eighteen months [though occasionally, I have heard the company venture smaller numbers (which is possible for re-designs and incremental improvements)].
e. The announcement of a stock buy-back means nothing. Implementation thereof is key [see Linear Tech in my previous article].
Let me be very clear that I believe in Jen-Hsun Huang and his resilience. In fact, NVDA has been through bankruptcy protection once and emerged triumphant [which very few semiconductor companies have done in the past].
Bapcha
I had an opportunity to listen to nVidia's mea culpa conference call - after the earnings announcement that fell short, but wasn't as bad as expected. While this is fine and dandy, it just seems too "perfect" to me, and I refuse to believe that the long-term effects of this admitted snafu will last only one quarter. Why am I being pessimistic ?
a. NVDA came in closer to the low-end of their own guidance of $875M to $950M in revenues [I'd have thought that they had an excellent idea by mid-July as to what they would probably announce].
b. I believe in the cockroach theory. If you see a roach, there are a hundred below the floor-boards that you do not see.
c. In the semiconductor industry, even the best systems cannot stop the "propagation" of a mistake into other areas.
d. nVidia's cycle-time - from when they start designing a chip, to getting it fully qualified at Microsoft [to work with the OS and the graphics API] - to the time the company recognizes revenue from the product is anywhere from twelve to eighteen months [though occasionally, I have heard the company venture smaller numbers (which is possible for re-designs and incremental improvements)].
e. The announcement of a stock buy-back means nothing. Implementation thereof is key [see Linear Tech in my previous article].
Let me be very clear that I believe in Jen-Hsun Huang and his resilience. In fact, NVDA has been through bankruptcy protection once and emerged triumphant [which very few semiconductor companies have done in the past].
Bapcha
Monday, August 11, 2008
The other lucrative niche in semiconductors.
Since I wrote the Altera vs. Xilinx article, I have had multiple requests asking me what the other niche in semiconductors is -that has generated gross margins in excess of 60%...... the answer - Analog/Mixed Signal chips. Devices that perform functions like analog to digital and digital to analog conversion, power supply regulation, DC to DC conversion, etc. There are four companies in this space, but I will focus on the two companies that are better managed, and have pristine financials.
They are Linear Technology Corp. (LLTC) and Maxim Integrated Products (MXIM.PK). Maxim is in the process of re-stating earnings - as they did some options-backdating-shenanigans, and hence, need to go back all the way to 2005, and redo the numbers that they reported. In the most recent conference call, MXIM's CFO said that they would re-file all of the 10Q's and 10K's [going back to 2005] - by the end of 2008. Hence, there is more risk in buying MXIM's stock [and hence a greater capital appreciation potential too].
Getting to the reason for this article, LLTC has historically sported gross margins in excess of 70% and Maxim, in the high 60's. This is only part of the reason for their exemplary numbers.
LLTC's and MXIM's chips are small. They have a few hundreds of devices on average, and some have less than twenty. In a business where Intel and nVidia cram 20 Million plus transistors into a CPU/GPU, this is refreshingly different. The average selling price per LLTC chip was $1.57 in Q3 2008 [ended March 31, 2008] vs $1.67 in Q3 2007 [ended April 1, 2007]. So, these are cheap, ubiquitous chips - found everywhere - primarily in consumer, industrial, automotive and military/space. Yet, they had gross margins of 77.5% in Q3 2008 vs 77.8% in Q3 2007. Moreover, both companies have a culture wherein engineers constantly ask themselves if they can perform the same function - or perform the same function with more precision - with fewer devices.
Since these chips are small, one does not need a $2 Billion fab and $10 Million dollar mask sets to make the chips that they design. In fact the process that they use to make their chips date back a decade [0.25u for the curious types - when Intel is pushing 0.025u (u=1/1,000,000 of a meter)]. So, they can make their chips using depreciated equipment; test their chips using legacy testers - making LLTC a free-cash-flow machine [I sound like a cheap internet "home business" advert].
In the last reported quarter, Maxim had record revenues. They could not say much else. So, let us focus on LLTC's numbers. LLTC had revenues of $298M of which $231M was gross profits for the quarter ended March 31, 2008 [the last 10Q I could pull from the SEC]. Revenue increase was 17% yoy, and costs increased 18% yoy - meaning gross profits increased 16% yoy from $198M in 2007. Net income was $99M in 2008 vs. $98M in 2007. While this looks bad, it really isn't - as LLTC issued some $1.7 Billion of Senior securities [I am not going to discuss the +'s and -'s of issuing debt, but LLTC did and at a very attractive coupon rate of 3% for $1Billion and 3.125% for $700M, and ALL of it was used to re-purchase their stock]. EPS increased from 32c/share to 44c/share fully diluted. The company paid a dividend of 21c/share in 2008 for the qtr. vs. 18c/share in 2007 for the corresponding quarter.
There were 26% fewer shares for Q3 2008 vs. Q3 2007. The company used the entire debt facility mentioned in the prior paragraph to purchase their shares. If you want to know the gory details, pull up this file from the SEC.
So, in conclusion:
1. LLTC and MXIM participate in the highest margin niche in the semiconductor sector.
2. LLTC sells for an attractive valuation, plus the company pays a dividend of 84c/share/year.
3. They make cheap chips that are used everywhere. But LLTC and MXIM produce them cheaper.
4. They use legacy technology and equipment to produce chips - keeping a lid on capital expenditures.
5. LLTC has been aggressively buying back their stock.
6. MXIM may look risky, and is risky, but will probably do well - as soon as the uncertainties around the stock evaporate by the end of the year.
7. I used the words pristine financials for MXIM too - as they have over a billion in cash and no debt, and a very high gross margin business that generated record sales.
Notes: I currently have no positions in either stock, but after writing this article, I might buy into either on Aug 13, 2008.
They are Linear Technology Corp. (LLTC) and Maxim Integrated Products (MXIM.PK). Maxim is in the process of re-stating earnings - as they did some options-backdating-shenanigans, and hence, need to go back all the way to 2005, and redo the numbers that they reported. In the most recent conference call, MXIM's CFO said that they would re-file all of the 10Q's and 10K's [going back to 2005] - by the end of 2008. Hence, there is more risk in buying MXIM's stock [and hence a greater capital appreciation potential too].
Getting to the reason for this article, LLTC has historically sported gross margins in excess of 70% and Maxim, in the high 60's. This is only part of the reason for their exemplary numbers.
LLTC's and MXIM's chips are small. They have a few hundreds of devices on average, and some have less than twenty. In a business where Intel and nVidia cram 20 Million plus transistors into a CPU/GPU, this is refreshingly different. The average selling price per LLTC chip was $1.57 in Q3 2008 [ended March 31, 2008] vs $1.67 in Q3 2007 [ended April 1, 2007]. So, these are cheap, ubiquitous chips - found everywhere - primarily in consumer, industrial, automotive and military/space. Yet, they had gross margins of 77.5% in Q3 2008 vs 77.8% in Q3 2007. Moreover, both companies have a culture wherein engineers constantly ask themselves if they can perform the same function - or perform the same function with more precision - with fewer devices.
Since these chips are small, one does not need a $2 Billion fab and $10 Million dollar mask sets to make the chips that they design. In fact the process that they use to make their chips date back a decade [0.25u for the curious types - when Intel is pushing 0.025u (u=1/1,000,000 of a meter)]. So, they can make their chips using depreciated equipment; test their chips using legacy testers - making LLTC a free-cash-flow machine [I sound like a cheap internet "home business" advert].
In the last reported quarter, Maxim had record revenues. They could not say much else. So, let us focus on LLTC's numbers. LLTC had revenues of $298M of which $231M was gross profits for the quarter ended March 31, 2008 [the last 10Q I could pull from the SEC]. Revenue increase was 17% yoy, and costs increased 18% yoy - meaning gross profits increased 16% yoy from $198M in 2007. Net income was $99M in 2008 vs. $98M in 2007. While this looks bad, it really isn't - as LLTC issued some $1.7 Billion of Senior securities [I am not going to discuss the +'s and -'s of issuing debt, but LLTC did and at a very attractive coupon rate of 3% for $1Billion and 3.125% for $700M, and ALL of it was used to re-purchase their stock]. EPS increased from 32c/share to 44c/share fully diluted. The company paid a dividend of 21c/share in 2008 for the qtr. vs. 18c/share in 2007 for the corresponding quarter.
There were 26% fewer shares for Q3 2008 vs. Q3 2007. The company used the entire debt facility mentioned in the prior paragraph to purchase their shares. If you want to know the gory details, pull up this file from the SEC.
So, in conclusion:
1. LLTC and MXIM participate in the highest margin niche in the semiconductor sector.
2. LLTC sells for an attractive valuation, plus the company pays a dividend of 84c/share/year.
3. They make cheap chips that are used everywhere. But LLTC and MXIM produce them cheaper.
4. They use legacy technology and equipment to produce chips - keeping a lid on capital expenditures.
5. LLTC has been aggressively buying back their stock.
6. MXIM may look risky, and is risky, but will probably do well - as soon as the uncertainties around the stock evaporate by the end of the year.
7. I used the words pristine financials for MXIM too - as they have over a billion in cash and no debt, and a very high gross margin business that generated record sales.
Notes: I currently have no positions in either stock, but after writing this article, I might buy into either on Aug 13, 2008.
Sunday, August 10, 2008
Altera vs. Xilinx. Who is better ?
In the semiconductor business, there are two niches that have had gross margins in excess of 60%. One of them is programmable logic. I worked for ten years in companies that wanted to emulate the success of Xilinx and Altera. It took me ten years [and a $35 million dollar judgement against my last Programmable Logic employer] to figure out that this duopoly will own the programmable logic [FPGA and PLD] till the end of time [with a small market-share conceded to Lattice, Actel, QuickLogic, Atmel and Cypress Semi].
ALTR and XLNX make chips that can be programmed to perform any function you would want a chip to perform. Meaning, they make "blank slate" chips that can be configured to implement any logic function that you can dream of. In fact, Intel uses huge boards made of tens of these chips to make sure that their logic works - before they get their CPU's fabricated into silicon. Smaller ASIC companies have become smarter over the last decade and make prototypes of their chips [using programmable logic] before they start mass-production.
The elegance of this solution is obvious - when you take into consideration - the amount of $$$ it takes to design a chip. By the time you design, commit to a mask-set, run a few wafers through TSMC, UMC/whoever, get the chips back and test them, you'd be out $10M. The only drawback to this approach is that the programmable chips run slower than a custom designed silicon solution, and one could not possibly mass-produce using the prototyping chips - as whatever gains you might have in time to market, are erased by the expense for these chips - that can cost up to $1000 a pop. If you use a PL chip, all you do is to erase its original configuration, load a new one, and repeat till you succeed [easy eh ??]. Yes, there are exceptions to every single statement that I made here [which is what makes analyzing semiconductors - interesting].
Companies that tried to compete with the two big boys include Intel, Motorola, AT&T, AMD. Needless to say, they either failed or divested their business. Actually, AMD deserves credit for creating the first PAL [through their MMI division - now part of LSCC]. The reason why all these brand-name companies tried to get into PL, is the gross margin number that I mentioned in the first sentence of this article. The reasons as to why they failed are many-fold, but this article is about which of the companies is the better investment - looking forward the next two to five years.
Both Xilinx and Altera recognize the fact that the business that they are in [however profitable it may be], is mature. Any attempt by either company to enlarge their SAM [served available market] always resulted in decreased gross margins - this is due to the fact that all programmable logic chips can be replaced by an ASIC. In fact, both ALTR and XLNX have a path that they offer - which will allow one to go from a "changeable" programmable logic chip to a "fixed" ASIC, but they both do it for a reason [Bapcha at Gmail if you want to know why]. They both generate prodigious amounts of cash, and pay a small dividend that they easily earn - as they recognize the fact that they are in a niche in semiconductors that is not expanding at the rate that it was in the last decade.
Looking at the prior quarter's numbers, Altera had revenues of $359M and gross margins of 67%. Xilinx's numbers were $488M and 64% respectively. Their revenue growth rates were 12.5% and 9.4%. ALTR bought back 15% of their shares vs. 7.26% for XLNX [yoy fully diluted]. EPS was 32c/share in 2008 and 22c/sh in 2007 for ALTR. XLNX's earnings were 30c/share in 2008 and 28c/sh in 2007 [last reported quarter]. Dividend was raised by ALTR from 4c/sh to 5c/sh yoy/qtr. XLNX went up from 12c/sh to 14c/sh.
Before looking at the numbers, I thought that my decision would be easy, but it sure wasn't. While Xilinx has always had an edge over Altera in terms of market share, profitability, and earnings predictability [historically], ALTR is growing faster, has slightly better gross margins, and most significantly, better employee morale. Xilinx might be a better stock for total returns as it pays a significantly higher dividend, has a CEO in place who is determined to contain costs, but a work-force with a lot lower employee morale.
I started writing this article, wanting to pick Xilinx over Altera, but I have to pick the real growth stock among the two - ALTR. The market seems to agree with me - rewarding ALTR with higher multiples than it does for Xilinx. When the semiconductor market heats up, both these stocks have traded at PS numbers in the double digits [but that was when they were real growth stories].
Bottom-line: ALTR for growth.
Bapcha
Notes: I have NO positions in all of the stocks mentioned. Statements about employee morale constitute my opinion. Both companies have employees that are happy and vice-versa. Both companies have significant software investments, but it is a means to an end [selling chips].
ALTR and XLNX make chips that can be programmed to perform any function you would want a chip to perform. Meaning, they make "blank slate" chips that can be configured to implement any logic function that you can dream of. In fact, Intel uses huge boards made of tens of these chips to make sure that their logic works - before they get their CPU's fabricated into silicon. Smaller ASIC companies have become smarter over the last decade and make prototypes of their chips [using programmable logic] before they start mass-production.
The elegance of this solution is obvious - when you take into consideration - the amount of $$$ it takes to design a chip. By the time you design, commit to a mask-set, run a few wafers through TSMC, UMC/whoever, get the chips back and test them, you'd be out $10M. The only drawback to this approach is that the programmable chips run slower than a custom designed silicon solution, and one could not possibly mass-produce using the prototyping chips - as whatever gains you might have in time to market, are erased by the expense for these chips - that can cost up to $1000 a pop. If you use a PL chip, all you do is to erase its original configuration, load a new one, and repeat till you succeed [easy eh ??]. Yes, there are exceptions to every single statement that I made here [which is what makes analyzing semiconductors - interesting].
Companies that tried to compete with the two big boys include Intel, Motorola, AT&T, AMD. Needless to say, they either failed or divested their business. Actually, AMD deserves credit for creating the first PAL [through their MMI division - now part of LSCC]. The reason why all these brand-name companies tried to get into PL, is the gross margin number that I mentioned in the first sentence of this article. The reasons as to why they failed are many-fold, but this article is about which of the companies is the better investment - looking forward the next two to five years.
Both Xilinx and Altera recognize the fact that the business that they are in [however profitable it may be], is mature. Any attempt by either company to enlarge their SAM [served available market] always resulted in decreased gross margins - this is due to the fact that all programmable logic chips can be replaced by an ASIC. In fact, both ALTR and XLNX have a path that they offer - which will allow one to go from a "changeable" programmable logic chip to a "fixed" ASIC, but they both do it for a reason [Bapcha at Gmail if you want to know why]. They both generate prodigious amounts of cash, and pay a small dividend that they easily earn - as they recognize the fact that they are in a niche in semiconductors that is not expanding at the rate that it was in the last decade.
Looking at the prior quarter's numbers, Altera had revenues of $359M and gross margins of 67%. Xilinx's numbers were $488M and 64% respectively. Their revenue growth rates were 12.5% and 9.4%. ALTR bought back 15% of their shares vs. 7.26% for XLNX [yoy fully diluted]. EPS was 32c/share in 2008 and 22c/sh in 2007 for ALTR. XLNX's earnings were 30c/share in 2008 and 28c/sh in 2007 [last reported quarter]. Dividend was raised by ALTR from 4c/sh to 5c/sh yoy/qtr. XLNX went up from 12c/sh to 14c/sh.
Before looking at the numbers, I thought that my decision would be easy, but it sure wasn't. While Xilinx has always had an edge over Altera in terms of market share, profitability, and earnings predictability [historically], ALTR is growing faster, has slightly better gross margins, and most significantly, better employee morale. Xilinx might be a better stock for total returns as it pays a significantly higher dividend, has a CEO in place who is determined to contain costs, but a work-force with a lot lower employee morale.
I started writing this article, wanting to pick Xilinx over Altera, but I have to pick the real growth stock among the two - ALTR. The market seems to agree with me - rewarding ALTR with higher multiples than it does for Xilinx. When the semiconductor market heats up, both these stocks have traded at PS numbers in the double digits [but that was when they were real growth stories].
Bottom-line: ALTR for growth.
Bapcha
Notes: I have NO positions in all of the stocks mentioned. Statements about employee morale constitute my opinion. Both companies have employees that are happy and vice-versa. Both companies have significant software investments, but it is a means to an end [selling chips].
Wednesday, August 06, 2008
Amgen needs to start paying a dividend.
Amgen thinks that it is a scrappy little biotech. They sure are a biotech company, maybe even a little scrappy, but definitely not little. In fact, their growth numbers look anemic [they need a shot of EPO :-)]. Amgen was a duopoly for fifteen years - during this period, they sold two drugs - Epoetin Alfa [aka EPO, Epogen, Procrit], and Neupogen [Filgrastim]. Keeping things simple, EPO helps the body build red blood cells and Neupo, white blood cells.
When Amgen had no drugs [in the early 1980's] they sold the rights for dialysis, diagnostics, non-human and overseas [except Japan, which went to Kirin], rights for EPO to Johnson & Johnson (JNJ), and attached an often disputed royalty clause based on EPO's sales. It was an agreement a tiny biotech had to sign - in order to get their development efforts funded [Genentech (DNA) made a similar agreement with Roche in the 1980's - Roche still owns 56% of DNA; and Chiron (now part of Novartis) made a similar deal with Ciba-Sandoz]. The reason for the disputes from my point of view, is that both companies grossly underestimated the amount of money EPO would bring in.
Amgen was smart - before the patent on EPO ran out, they added on a sialic acid group to EPO, and EPO+Sialic Acid (Darbopoetin) was christened NESP [Novel erythropoiesis stimulating protein]. Similarly, AMGN added a PEG group [polyethylene glycol, OK, it really is monomethoxypolyethylene glycol] to Neupo and called it Neulasta. Of course AMGN wanted more money for NESP and Neulasta - than for EPO and Neupo respectively. The first to balk was Britain's NHS. Canada followed, and even medicare started asking tough questions. Then JNJ claimed that NESP was a derivative of EPO and hence JNJ had rights to NESP too.
OK - so now, the reason I went through all of the above is to show that AMGN is now in the big-leagues. They now have nine drugs [the four compounds mentioned above plus Erbitux account for 90% plus of AMGN's sales]. While AMGN faces competition, there is no real generic threat.
Looking at AMGN's balance sheet, they are sitting on $9 Billion in cash - about a half of which is outside the USA - which if repatriated will cost the company dearly, so the company clearly states that if the $4.5 Billion were repatriated to the US, it would be taxes at AMGN's marginal tax rate [the highest], plus local taxes in the country from which the money is repatriated. The bottom-line is that the company cannot use this money directly to issue dividend checks [but there are ways around this].
AMGN repurchased 8.8M shares for $537M in the first three months of 2007 [they still have $6.8 Billion in repurchase authorizations]. Till now, this has been AMGN's preferred way of returning cash to stockholders.
Given that that stock chart for the past five years looks like:
AMGN needs to start paying a dividend. This will also boost investor confidence in the fact that they will be around for a lot longer.
Disclosures: Long JNJ. No positions in AMGN, DNA, AVE, NVS, WYE.
When Amgen had no drugs [in the early 1980's] they sold the rights for dialysis, diagnostics, non-human and overseas [except Japan, which went to Kirin], rights for EPO to Johnson & Johnson (JNJ), and attached an often disputed royalty clause based on EPO's sales. It was an agreement a tiny biotech had to sign - in order to get their development efforts funded [Genentech (DNA) made a similar agreement with Roche in the 1980's - Roche still owns 56% of DNA; and Chiron (now part of Novartis) made a similar deal with Ciba-Sandoz]. The reason for the disputes from my point of view, is that both companies grossly underestimated the amount of money EPO would bring in.
Amgen was smart - before the patent on EPO ran out, they added on a sialic acid group to EPO, and EPO+Sialic Acid (Darbopoetin) was christened NESP [Novel erythropoiesis stimulating protein]. Similarly, AMGN added a PEG group [polyethylene glycol, OK, it really is monomethoxypolyethylene glycol] to Neupo and called it Neulasta. Of course AMGN wanted more money for NESP and Neulasta - than for EPO and Neupo respectively. The first to balk was Britain's NHS. Canada followed, and even medicare started asking tough questions. Then JNJ claimed that NESP was a derivative of EPO and hence JNJ had rights to NESP too.
OK - so now, the reason I went through all of the above is to show that AMGN is now in the big-leagues. They now have nine drugs [the four compounds mentioned above plus Erbitux account for 90% plus of AMGN's sales]. While AMGN faces competition, there is no real generic threat.
Looking at AMGN's balance sheet, they are sitting on $9 Billion in cash - about a half of which is outside the USA - which if repatriated will cost the company dearly, so the company clearly states that if the $4.5 Billion were repatriated to the US, it would be taxes at AMGN's marginal tax rate [the highest], plus local taxes in the country from which the money is repatriated. The bottom-line is that the company cannot use this money directly to issue dividend checks [but there are ways around this].
AMGN repurchased 8.8M shares for $537M in the first three months of 2007 [they still have $6.8 Billion in repurchase authorizations]. Till now, this has been AMGN's preferred way of returning cash to stockholders.
Given that that stock chart for the past five years looks like:
AMGN needs to start paying a dividend. This will also boost investor confidence in the fact that they will be around for a lot longer.
Disclosures: Long JNJ. No positions in AMGN, DNA, AVE, NVS, WYE.
Tuesday, August 05, 2008
The most brilliant marketing pitch by a company - bar none.
Intuitive Surgicals [ISRG] is a company that I have a deep amount of respect for. Much like US Surgicals - that revolutionized minimally invasive surgery [MIS] in the 1990's, ISRG is definitely revolutionary. It is the first robotic surgical instrument with "wrists" and hence a surgeon can - after a years' training, perform surgeries which result in shorter hospital stays, less pain, less need for blood transfusions, less scarring, and a couple of other advantages that I will talk about in the next few paragraphs.
ISRG had stunning results. Looking at the 10Q [for the quarter ending June 30, 2008], ISRG's sales were $219M - up from $140M in the corresponding period in 2007. Basic EPS was $1.32 - up from $0.81 for Q2, 2007. The fully diluted numbers were $1.28 in 2008 vs $0.79 in 2007. Recurring revenue grew 56% to $103.0M from $66.1M. Instruments and accessories revenue grew 61% to $73.6M from $45.8M during the second quarter of 2007. ISRG sold 85 da Vinci Surgical Systems during the second quarter of 2008, an increase of 52% compared with 56 in Q2 2007.
The stock now has a market value of almost $12 BIllion - leaving no room for error from the management. ISRG is expected to best the top end of analyst's estimates for the next several years, but I am not making a bear or a bull case for the stock in this article. I think that - apart from the four robotic arms with redundant circuits that can produce superior outcomes, I think that their brilliance in marketing is contained in the following paragraph that I'm quoting verbatim from their marketing material.
For most patients, dVP offers substantially less pain and a much shorter recovery than traditional prostatectomy. Other advantages include reduced need for blood transfusions; less scarring and less risk of infection. Moreover, studies suggest that dVP may offer improved cancer control and a lower incidence of impotence and urinary incontinence. [I added the bold/italics].
Prostatectomies drove ISRG's first growth spurt [till now], there will be hysterectomies and mitral valve repairs, but I think that if you offer a guy these two alternatives:
a. dVP [da Vinci Prostatectomy]
or
b. Open surgery
and mention the magic words from the ISRG marketing document, his choice will be (a) with not a second thought given to (b). Brilliant, even Freudian.
Disclosures: I currently have no positions in ISRG.
Note: I am in no way making fun of cancer. In fact, I am a lucky survivor.
ISRG had stunning results. Looking at the 10Q [for the quarter ending June 30, 2008], ISRG's sales were $219M - up from $140M in the corresponding period in 2007. Basic EPS was $1.32 - up from $0.81 for Q2, 2007. The fully diluted numbers were $1.28 in 2008 vs $0.79 in 2007. Recurring revenue grew 56% to $103.0M from $66.1M. Instruments and accessories revenue grew 61% to $73.6M from $45.8M during the second quarter of 2007. ISRG sold 85 da Vinci Surgical Systems during the second quarter of 2008, an increase of 52% compared with 56 in Q2 2007.
The stock now has a market value of almost $12 BIllion - leaving no room for error from the management. ISRG is expected to best the top end of analyst's estimates for the next several years, but I am not making a bear or a bull case for the stock in this article. I think that - apart from the four robotic arms with redundant circuits that can produce superior outcomes, I think that their brilliance in marketing is contained in the following paragraph that I'm quoting verbatim from their marketing material.
For most patients, dVP offers substantially less pain and a much shorter recovery than traditional prostatectomy. Other advantages include reduced need for blood transfusions; less scarring and less risk of infection. Moreover, studies suggest that dVP may offer improved cancer control and a lower incidence of impotence and urinary incontinence. [I added the bold/italics].
Prostatectomies drove ISRG's first growth spurt [till now], there will be hysterectomies and mitral valve repairs, but I think that if you offer a guy these two alternatives:
a. dVP [da Vinci Prostatectomy]
or
b. Open surgery
and mention the magic words from the ISRG marketing document, his choice will be (a) with not a second thought given to (b). Brilliant, even Freudian.
Disclosures: I currently have no positions in ISRG.
Note: I am in no way making fun of cancer. In fact, I am a lucky survivor.
Monday, August 04, 2008
Nortel Networks - a history of failure.
Today's [Monday, August 4, 2008] LEX column in the Financial TImes recommended that investors get their feet wet w.r.t NT. I respect the Lex authors a great deal, and their analysis is always based on thorough and excellent research, and often have insights that baffle me, and has me nodding in agreement. But this time around, I disagree.
Back in the 90's NT was called Northern Telecom, and they were a dividend paying, boring company, that did well for a lot of Canadian retirees. In 1998, they acquired Bay Networks [Bay Networks was then the newly merged WellFleet/SynOptics] for $9Billion in NT stock, and re-christened themselves Nortel Networks. As the stock was bid through the roof, the dividend was no big deal, and represented a very minute % of the stock's quotation. Y2K was great for NT. Their sales topped $30 Billion, with healthy gross and net margins, and their market value hit a high of almost $400 Billion [CDN].
Then came a disappointing series of events. The average selling prices of NT's equipment dropped, the massive dark and lit fiber build-out ceased, and NT started losing money. NT tried to save money by killing the dividend in 2001. But things got from bad to worse, and CEO John Roth was asked to decide to spend more time with his family and the CFO Frank Dunn succeeded Roth. Things got from bad to worse and before long, Dunn was done too [sorry - bad pun]. Anyway, about $3 billion in revenues from 1998 to 2000 was moved to 2001, 2002 and 2003 and about a quarter billion vaporized. Apart from SEC lawsuits/investigations and restatement of numbers, Dunn & Co. were charged by the RCMP recently.
Anyway, from Roth through Dunn, NT's management did not deliver. They took a $19Billion write-down in assets [mostly goodwill from acquisitions] in 2001, and warned that they would restate earnings. The stock followed south from a high in the $800's [split adjusted] to about $20, when the company did a 1 for 10 reverse split [the $800 would be $80 and $20 would be $2 without the 1 for 10 reverse in Dec 2006].
In 2004, a new clean-up CEO Mike Zafirowski took the helm from Dunn. He sold non-core assets, and has done his best to keep the divisions in synch.
Looking at NT's current 10Q - for the quarter ending June 30, 2008, they have $2.8 Billion in deferred taxes as an asset. Looking back from 2007 to 2008, NT had $2.868 Billion in deferred taxes in 2007. On June 30, 2008, the deferred tax number is $2.809 Billion. Which means that they used $59 Million. At this rate, it will take NT 46 years to "use" this asset. So, I am going out on a limb and saying that this asset is worthless.
The bottom-line:
1. I [in a rare act of dissent] - disagree with Lex.
2. NT is not a good investment at any price - given their record of not being able to do what they promise to do.
3. Strange items on the 10Q like the deferred tax assets which will take 46 years to use [I am not an accountant, so I expect to be corrected regarding the "use" of this asset].
4. NT possesses no real competitive advantage in the Telecom Equipment space.
5. In my opinion, no stock is worth buying just because it is cheap. It needs to be cheap and have a viable business with good numbers [like good cash flow, FCF] for me to buy into the stock.
Disclosures: I have no position[s] in NT - nor do I plan to initiate any.
Back in the 90's NT was called Northern Telecom, and they were a dividend paying, boring company, that did well for a lot of Canadian retirees. In 1998, they acquired Bay Networks [Bay Networks was then the newly merged WellFleet/SynOptics] for $9Billion in NT stock, and re-christened themselves Nortel Networks. As the stock was bid through the roof, the dividend was no big deal, and represented a very minute % of the stock's quotation. Y2K was great for NT. Their sales topped $30 Billion, with healthy gross and net margins, and their market value hit a high of almost $400 Billion [CDN].
Then came a disappointing series of events. The average selling prices of NT's equipment dropped, the massive dark and lit fiber build-out ceased, and NT started losing money. NT tried to save money by killing the dividend in 2001. But things got from bad to worse, and CEO John Roth was asked to decide to spend more time with his family and the CFO Frank Dunn succeeded Roth. Things got from bad to worse and before long, Dunn was done too [sorry - bad pun]. Anyway, about $3 billion in revenues from 1998 to 2000 was moved to 2001, 2002 and 2003 and about a quarter billion vaporized. Apart from SEC lawsuits/investigations and restatement of numbers, Dunn & Co. were charged by the RCMP recently.
Anyway, from Roth through Dunn, NT's management did not deliver. They took a $19Billion write-down in assets [mostly goodwill from acquisitions] in 2001, and warned that they would restate earnings. The stock followed south from a high in the $800's [split adjusted] to about $20, when the company did a 1 for 10 reverse split [the $800 would be $80 and $20 would be $2 without the 1 for 10 reverse in Dec 2006].
In 2004, a new clean-up CEO Mike Zafirowski took the helm from Dunn. He sold non-core assets, and has done his best to keep the divisions in synch.
Looking at NT's current 10Q - for the quarter ending June 30, 2008, they have $2.8 Billion in deferred taxes as an asset. Looking back from 2007 to 2008, NT had $2.868 Billion in deferred taxes in 2007. On June 30, 2008, the deferred tax number is $2.809 Billion. Which means that they used $59 Million. At this rate, it will take NT 46 years to "use" this asset. So, I am going out on a limb and saying that this asset is worthless.
The bottom-line:
1. I [in a rare act of dissent] - disagree with Lex.
2. NT is not a good investment at any price - given their record of not being able to do what they promise to do.
3. Strange items on the 10Q like the deferred tax assets which will take 46 years to use [I am not an accountant, so I expect to be corrected regarding the "use" of this asset].
4. NT possesses no real competitive advantage in the Telecom Equipment space.
5. In my opinion, no stock is worth buying just because it is cheap. It needs to be cheap and have a viable business with good numbers [like good cash flow, FCF] for me to buy into the stock.
Disclosures: I have no position[s] in NT - nor do I plan to initiate any.
Sunday, August 03, 2008
MU needs to focus on gross margins.
Since I donated two years of my life to Micron Technology, I am always interested in what they are up to. I thought that the Micron/Intel Flash partnership was good for Micron [financially] and bad for Intel. Intel has a history of doing well in what they excel at [microprocessors] and rarely do well when they acquire companies or fund joint ventures.
I pulled Micron's 10Q from the SEC website to look at their numbers for the quarter ended May 29, 2008, and what I found was - I mean, there are no words to describe how absolutely terrible their numbers are. Sales for the thirteen weeks ended May 29th 2008 was 1.498 Billion. Cost of goods sold was a whopping 1.450 Billion. Gross profits were $48 Million. That isn't terrible. It is pathetic, woeful. So, it cost Micron a whopping 97 cents to manufacture a dollar's worth of product.
Steve Appleton reacted a year ago by laying off workers, but that has ZERO impact on gross margins. Even Simplot will not bail Micron out [if he were alive] - since he would probably advice Micron to plant potatoes instead of trying to compete in the semiconductor business.
Back to the numbers - SG&A for the quarter wend down from $134M the previous year, to $116M in the mentioned quarter. R&D went down from $195M to $170M - all fantastic if the company can improve gross margins. Another cause for concern is that for the quarter, there was NO impairment in goodwill - that would have made the numbers that Micron reported worse still.....
The bottom-line: I am at a loss for words here. While I am tempted to initiate a call for heads to roll at Boise, even that will do absolutely NOTHING to improve gross margins. Micron needs to take very bold steps at this point in time, or, I predict that the last DRAM maker in the USA will not survive in their current form for long.
Bapcha
I pulled Micron's 10Q from the SEC website to look at their numbers for the quarter ended May 29, 2008, and what I found was - I mean, there are no words to describe how absolutely terrible their numbers are. Sales for the thirteen weeks ended May 29th 2008 was 1.498 Billion. Cost of goods sold was a whopping 1.450 Billion. Gross profits were $48 Million. That isn't terrible. It is pathetic, woeful. So, it cost Micron a whopping 97 cents to manufacture a dollar's worth of product.
Steve Appleton reacted a year ago by laying off workers, but that has ZERO impact on gross margins. Even Simplot will not bail Micron out [if he were alive] - since he would probably advice Micron to plant potatoes instead of trying to compete in the semiconductor business.
Back to the numbers - SG&A for the quarter wend down from $134M the previous year, to $116M in the mentioned quarter. R&D went down from $195M to $170M - all fantastic if the company can improve gross margins. Another cause for concern is that for the quarter, there was NO impairment in goodwill - that would have made the numbers that Micron reported worse still.....
The bottom-line: I am at a loss for words here. While I am tempted to initiate a call for heads to roll at Boise, even that will do absolutely NOTHING to improve gross margins. Micron needs to take very bold steps at this point in time, or, I predict that the last DRAM maker in the USA will not survive in their current form for long.
Bapcha
Is it time to buy Elan ?
The stock that taught me the most about investing is for sure Elan, and last week, I reminded myself the reason why I do not have it in my portfolio anymore. Elan was a remarkable company that was a leader in drug-delivery. They reformulated ordinary drugs like calcium channel blockers and naproxen, and extended the patent lives of compounds like Diltiazem, Nifedipine; and were the first company to take the nicotine patch to the OTC market. It made Don and Danny Panoz very rich, and they got into car racing, wine-making and car manufacturing.
Then in [approximately] the year 2000, they bought Athena Neurosciences - which gave Elan the Alzheimer's program that they share with Wyeth, and Nataluzimab [Tysabri]. After a brush with bankruptcy in 2002, and by divesting a lot of their assets, Elan bet its future on Nataluzimab and their Alzheimer's program.
The path to the marketplace for Tysabri was not easy. On March 1, 2005, the FDA issued a warning letter for Tysabri - that it causes a rare, fatal, irreversible neurological disease called progressive multifocal leukoencephalopathy (PML). PML is caused by a virus called the polyomavirus - that attacks and inflames the brain and spinal cord. It is ugly and often fatal. So Elan and Biogen-Idec [Tysabri's marketing partner] withdrew the drug almost immediately. What happened to Elan's stock in the immediate aftermath is left as an exercise to the reader, but it looked a lot worse than what happened last week.
When ELN and BIIB re-introduced Tysabri to the market, all multiple sclerosis patients taking the drug were clearly informed about the possibility of contracting PML, plus the drug was "black-boxed" and each patient had to/has to sign a waiver acknowledging the same. In fact, ELN and BIIB declared in a sober fashion that there would be more cases of PML as long as Tysabri remains in the market.
Last week, a couple of cases of PML were reported, and there will be more in the future. But like all drugs, the benefits have to always be weighed as opposed to the side-effects. In conclusion:
1. Tysabri is the most effective drug for treating Multiple Sclerosis on the market today.
2. Its benefits outweigh its side effects [PML].
3. Elan and Biogen-Idec have already performed their due diligence before reintroducing Tysabri to the market today.
4. While Elan has been beaten down to under $10, I think that it can go down further.
5. Elan will rise from the ashes again - like it has - in 2002 and 2005/2006.
6. I will be a buyer in the mid-single digits [if/when it gets there].
Bapcha
Then in [approximately] the year 2000, they bought Athena Neurosciences - which gave Elan the Alzheimer's program that they share with Wyeth, and Nataluzimab [Tysabri]. After a brush with bankruptcy in 2002, and by divesting a lot of their assets, Elan bet its future on Nataluzimab and their Alzheimer's program.
The path to the marketplace for Tysabri was not easy. On March 1, 2005, the FDA issued a warning letter for Tysabri - that it causes a rare, fatal, irreversible neurological disease called progressive multifocal leukoencephalopathy (PML). PML is caused by a virus called the polyomavirus - that attacks and inflames the brain and spinal cord. It is ugly and often fatal. So Elan and Biogen-Idec [Tysabri's marketing partner] withdrew the drug almost immediately. What happened to Elan's stock in the immediate aftermath is left as an exercise to the reader, but it looked a lot worse than what happened last week.
When ELN and BIIB re-introduced Tysabri to the market, all multiple sclerosis patients taking the drug were clearly informed about the possibility of contracting PML, plus the drug was "black-boxed" and each patient had to/has to sign a waiver acknowledging the same. In fact, ELN and BIIB declared in a sober fashion that there would be more cases of PML as long as Tysabri remains in the market.
Last week, a couple of cases of PML were reported, and there will be more in the future. But like all drugs, the benefits have to always be weighed as opposed to the side-effects. In conclusion:
1. Tysabri is the most effective drug for treating Multiple Sclerosis on the market today.
2. Its benefits outweigh its side effects [PML].
3. Elan and Biogen-Idec have already performed their due diligence before reintroducing Tysabri to the market today.
4. While Elan has been beaten down to under $10, I think that it can go down further.
5. Elan will rise from the ashes again - like it has - in 2002 and 2005/2006.
6. I will be a buyer in the mid-single digits [if/when it gets there].
Bapcha
Saturday, August 02, 2008
SunPower is a Semiconductor Company, and deserves to be valued like one.
SunPower is on a roll. Revenues for Q2-2008 were $383 Million - up 120% yoy. Guidance for 2009 was excellent, I think that SPWR's management is excellent, and their products are the best in the industry. Until someone comes up with a cheap multi-junction solar cell, SPWR will be the top dog for cell efficiency - a measure of how much of the sun's energy can be converted to electricity. SPWR depends on polysilicon to make their solar cells - in other words, their technology is mainstream - the only differentiator are the dyes used in processing - while that is interesting for a guy who designed chips for a decade and was issued four patents, that is a discussion for another day.
Let me get to the point. SunPower is a semiconductor company. They use semiconductor technology, processing to manufacture their solar cells, and ultimately will be valued like semiconductor companies are. So, let us analyze SPWR like a semiconductor company. As a semiconductor company, they are very richly valued at 5 to 6x sales. Do their gross margins justify such a rich valuation ? Absolutely NOT. Let's look at some numbers. SPWR's gross margins are about 20%. INTC, BRCM and TXN are at around 54% gross margins - but BRCM is fabless. Note that traditional semiconductor companies are not affected by government subsidies, and coal, nat gas and oil prices to the extent that SPWR is but these are not a big deal for a cutting-edge semiconductor company with a defensible technology that is either patent protected or hard to duplicate.
But that is not the case with SPWR. The technology to produce poly based solar cells is [in my eyes] primitive. So primitive that there are one hundred and seventy chinese companies coming online in the next year and a half. SPWR charges a premium for their solar cells that are a few percent more efficient than the ones made by SunTech or Yingli Green [STP, YGE].... and the kicker - that brought SPWR down from the triple digits - Spain cannot afford their huge solar subsidies for much longer [which have been the driving force behind the adoption of PV in Europe].
In short,
1. SPWR is a semiconductor company that has fabs [not fabless].
2. Has lousy gross margins for a semiconductor company.
3. Are subject to more vagaries of the market than traditional semiconductor companies like....
a. Subsidies in Spain, Germany and the USA
b. Oil prices [and nat gas and coal]
4. Is not made using very sophisticated technology that prevents the competition from getting into the business.
5. A gazillion chinese companies will make this a commodity business in under two years.
The bottom-line: SPWR deserves to be valued like a semiconductor company with gross margins of 20%, and not much of a technological edge over its peers. That would put the stock at below $40/share. Of course more subsidies and triple digit oil will put a temporary floor on this stock's price, but it will not last for long - as I expect polysilicon prices to be much lower in the next eighteen months - which will encourage more competition at the bottom end of the PV market.
Bapcha
Let me get to the point. SunPower is a semiconductor company. They use semiconductor technology, processing to manufacture their solar cells, and ultimately will be valued like semiconductor companies are. So, let us analyze SPWR like a semiconductor company. As a semiconductor company, they are very richly valued at 5 to 6x sales. Do their gross margins justify such a rich valuation ? Absolutely NOT. Let's look at some numbers. SPWR's gross margins are about 20%. INTC, BRCM and TXN are at around 54% gross margins - but BRCM is fabless. Note that traditional semiconductor companies are not affected by government subsidies, and coal, nat gas and oil prices to the extent that SPWR is but these are not a big deal for a cutting-edge semiconductor company with a defensible technology that is either patent protected or hard to duplicate.
But that is not the case with SPWR. The technology to produce poly based solar cells is [in my eyes] primitive. So primitive that there are one hundred and seventy chinese companies coming online in the next year and a half. SPWR charges a premium for their solar cells that are a few percent more efficient than the ones made by SunTech or Yingli Green [STP, YGE].... and the kicker - that brought SPWR down from the triple digits - Spain cannot afford their huge solar subsidies for much longer [which have been the driving force behind the adoption of PV in Europe].
In short,
1. SPWR is a semiconductor company that has fabs [not fabless].
2. Has lousy gross margins for a semiconductor company.
3. Are subject to more vagaries of the market than traditional semiconductor companies like....
a. Subsidies in Spain, Germany and the USA
b. Oil prices [and nat gas and coal]
4. Is not made using very sophisticated technology that prevents the competition from getting into the business.
5. A gazillion chinese companies will make this a commodity business in under two years.
The bottom-line: SPWR deserves to be valued like a semiconductor company with gross margins of 20%, and not much of a technological edge over its peers. That would put the stock at below $40/share. Of course more subsidies and triple digit oil will put a temporary floor on this stock's price, but it will not last for long - as I expect polysilicon prices to be much lower in the next eighteen months - which will encourage more competition at the bottom end of the PV market.
Bapcha
Thursday, July 31, 2008
Evil Exxon-Mobil.
Some politician [I am supposed to know his name, but this is a stock blog and not politico.com] immediately pounced on Evil Exxon-Mobil's $11.68 Billion in profits, and deemed that they needed to be taxed to the fullest extent. So, I had to investigate.
This is what I found. Exxon-Mobil had a pre-tax income of $22.2 Billion. They paid $10.5 Billion in taxes on the pre-tax income - for after tax profits of 11.7 Billion. Yes, $11.7 Billion is a lot of money. So, I dug in further. What about sales based taxes ? They paid $9.5 Billion [in addition to the $10.5 Billion on income]. What about excise taxes - they paid $12.3 Billion in excise taxes. In total, the $11.68 Billion was 8.5% of their revenues of $138 Billion for the quarter. Nice numbers, but let's see - the tax man got $10.5+12.3+9.5 = $32.3 Billion.
Since I am not rich [enough] yet, I want to eat the rich too - yeah tax the SOB's. But in the case of Exxon-Mobil, that would be tantamount to killing the goose that laid the golden egg. Flog the goose dear politician - do not kill it please. Not yet. You might think you don't need them, but $32.3 Billion says you do.
Bapcha
This is what I found. Exxon-Mobil had a pre-tax income of $22.2 Billion. They paid $10.5 Billion in taxes on the pre-tax income - for after tax profits of 11.7 Billion. Yes, $11.7 Billion is a lot of money. So, I dug in further. What about sales based taxes ? They paid $9.5 Billion [in addition to the $10.5 Billion on income]. What about excise taxes - they paid $12.3 Billion in excise taxes. In total, the $11.68 Billion was 8.5% of their revenues of $138 Billion for the quarter. Nice numbers, but let's see - the tax man got $10.5+12.3+9.5 = $32.3 Billion.
Since I am not rich [enough] yet, I want to eat the rich too - yeah tax the SOB's. But in the case of Exxon-Mobil, that would be tantamount to killing the goose that laid the golden egg. Flog the goose dear politician - do not kill it please. Not yet. You might think you don't need them, but $32.3 Billion says you do.
Bapcha
Wednesday, July 30, 2008
TomTom vs. Garmin.
The highlight of today was the tanking of Garmin. GRMN lost some 21% in value. It now trades at $35 and change. A lot lower than $125 that it hit in Nov 2007, and financially, their numbers were better than ever! So, what is it that caused GRMN to be worth 21% less today than it was yesterday ? In a word, NuviPhone - their fancy gizmo phone with GPS built in. In my opinion, it is not a good idea - why? It is because most phones can do some form of GPS already - be it using a proper SIRF chip to receive GPS coordinates from satellites, or whether the phone just "triangulates" from the Cell towers it can "talk" to. The iPhone has GPS built-in [the software will get better in a hurry].
Let's compare GRMN and TMOAF [Q2 2008 only] vs Q2 2007.
a. Gross margins. Tom2 had gross margins of 46%. Garmin, 45%. Add TeleAtlas, and Tom2 actually had gross margins of 50%. As TeleAtlas' market penetration improves, Tom2's margins will improve. Garmin's gross margins were 50% in 2007 and Tom2's were 54% [pro-forma including TeleAtlas]. From now on, all numbers will include TeleAtlas.
b. Sales. GRMN had sales of 912M and Tom2's sales were 485M Euros = $776M. Garmin's PND sales were $751M [I included auto and personal/fitness and excluded marine/aviation].
Conclusions:
1. TomTom's profit margins on PND's [85% of sales] is far superior to Garmin's gross margins on PND's. Tom2's gross margins on PND's was 42%, and for GRMN, it is 23.3% [I calculated the 23.3% from GRMN's earnings report [175M/751M].
2. TomTom owns TeleAtlas which has 85% gross margins, a heady growth rate, and an agreement to sell maps to Google for at least 5 more years.
3. Garmin looks cheaper on a PE basis alone, but that is mostly due to the fact that Tom2 has to amortize their purchase of TeleAtlas.
Bottom-line: I prefer TomTom for the simple reason that they own TeleAtlas, and that gives them an economic moat that Garmin will never have.
Bapcha
References: TomTom, Garmin, Published earnings reports.
Let's compare GRMN and TMOAF [Q2 2008 only] vs Q2 2007.
a. Gross margins. Tom2 had gross margins of 46%. Garmin, 45%. Add TeleAtlas, and Tom2 actually had gross margins of 50%. As TeleAtlas' market penetration improves, Tom2's margins will improve. Garmin's gross margins were 50% in 2007 and Tom2's were 54% [pro-forma including TeleAtlas]. From now on, all numbers will include TeleAtlas.
b. Sales. GRMN had sales of 912M and Tom2's sales were 485M Euros = $776M. Garmin's PND sales were $751M [I included auto and personal/fitness and excluded marine/aviation].
Conclusions:
1. TomTom's profit margins on PND's [85% of sales] is far superior to Garmin's gross margins on PND's. Tom2's gross margins on PND's was 42%, and for GRMN, it is 23.3% [I calculated the 23.3% from GRMN's earnings report [175M/751M].
2. TomTom owns TeleAtlas which has 85% gross margins, a heady growth rate, and an agreement to sell maps to Google for at least 5 more years.
3. Garmin looks cheaper on a PE basis alone, but that is mostly due to the fact that Tom2 has to amortize their purchase of TeleAtlas.
Bottom-line: I prefer TomTom for the simple reason that they own TeleAtlas, and that gives them an economic moat that Garmin will never have.
Bapcha
References: TomTom, Garmin, Published earnings reports.
Tuesday, July 29, 2008
The next ISRG.
Everyone wants to find the next Cisco, the next Microsoft, the next ISRG. ISRG has carved out a niche in the prostate surgery market - with the key buzzwords being POTENCY and CONTINENCE - enough to scare any self-respecting man to cower at the thought of near-castration [yeah, that includes me]. Forget the robotic arms, the $1.3M price tag, the cost of disposables, blah, blah. I am convinced that without these magic words in the marketing material, ISRG will be languishing today, with surgeons and surgees [what do you call a person who is going under the knife - I want a better word than patient], not clamoring for time under the robotic knives.
Yeah, there will be hysterectomies, and mitral valve repairs - but it was the old Freudian scare that vaulted ISRG into the S&P 500. OK - so I am looking for the next ISRG. I think I have found it, but irrigated catheters pale in comparison to increased potency and decreased incontinence.
So the search continues........
Bapcha
Yeah, there will be hysterectomies, and mitral valve repairs - but it was the old Freudian scare that vaulted ISRG into the S&P 500. OK - so I am looking for the next ISRG. I think I have found it, but irrigated catheters pale in comparison to increased potency and decreased incontinence.
So the search continues........
Bapcha
Merrill Lynch - smart or stupid ?
Merrill Lynch unloaded some $30.6 Billion in distressed CDO's for 22c/$ to Lone Star, and issued $8.5 Billion in equity. The biggest buyer was Singapore's Sovereign wealth fund - to the tune of $3.4 Billion. I think that while John Thain wanted to get Merrill on track as quickly as possible, twenty two cents a dollar is a dismal number - in tune with what collection agencies sometimes pay for unsecured debt. There is no way that the real estate that backed these CDO's will tank by 78%. Even assuming loan to equity values as ridiculous as 125%, the numbers do not make sense. Citibank's 56c/$ makes more sense to me.
Anyway, Thain has fast tracked Merrill Lynch's recovery by biting not a bullet, but by swallowing a grenade and hoping that it does not explode. Merrill will recover - like they always have when they go through hard times, but I think that Thain needs to be second guessed this time around..... While he did work miracles at Goldman Sachs and Archipelago/NYSE, I am not a believer this time around [I am willing to eat crow a few years down the road - not if MER re-emerges from the ashes - but if the sale of the CDO's turn out to be a good decision].
Bapcha
Anyway, Thain has fast tracked Merrill Lynch's recovery by biting not a bullet, but by swallowing a grenade and hoping that it does not explode. Merrill will recover - like they always have when they go through hard times, but I think that Thain needs to be second guessed this time around..... While he did work miracles at Goldman Sachs and Archipelago/NYSE, I am not a believer this time around [I am willing to eat crow a few years down the road - not if MER re-emerges from the ashes - but if the sale of the CDO's turn out to be a good decision].
Bapcha
Apple's market share gains from the PC market will evaporate....
http://sanjose.bizjournals.com/sanjose/stories/2008/07/28/daily18.html?ana=yfcpc
The real reason that I bought an iMac and a Macbook is because they were PC Compatible and had a transparent UNIX based architecture. If AAPL goes back to their proprietary architecture, I guarantee that their market share gains from the PC market will erode. In the world of computers, perception translates into sales [and profit margins[, and hence, the bottom-line, and AAPL has been doing very well indeed.
My take: If AAPL's highly popular Macs move back to a proprietary architecture, their market share gains will be gone. In other words, AAPL's stock will languish like it did for two decades before it took off with the iPod. Note that AAPL will still use Intel's CPU. It is the chipset [the chips that allow the CPU to talk to the peripherals] that they are altering......
Bapcha
The real reason that I bought an iMac and a Macbook is because they were PC Compatible and had a transparent UNIX based architecture. If AAPL goes back to their proprietary architecture, I guarantee that their market share gains from the PC market will erode. In the world of computers, perception translates into sales [and profit margins[, and hence, the bottom-line, and AAPL has been doing very well indeed.
My take: If AAPL's highly popular Macs move back to a proprietary architecture, their market share gains will be gone. In other words, AAPL's stock will languish like it did for two decades before it took off with the iPod. Note that AAPL will still use Intel's CPU. It is the chipset [the chips that allow the CPU to talk to the peripherals] that they are altering......
Bapcha
Monday, July 28, 2008
The flash market.
Everybody is buying flash - but as usual, the manufacturers got too greedy and built too many NAND-capable Fabs. Even Intel got into the business with an inferior partner in order to get a piece of the action. The best thing that Andy Grove did for Intel was to get them out of the memory market. Barrett/Ottellini got them back into it. I wonder who will get Intel out of the memory market again..... probably NOT the big O.
Anyway, even SanDisk is not doing too well. They might actually LOSE money this quarter - or make very little. I fully expect Eli to have a fit and get rid of a significant number of people..... sooner rather than later. In fact, every time the stock drops $5, SNDK has a mini-layoff..... great for the bottom-line, but bad for employee morale.
The equipment makers (who lead the semiconductor cycle) are indicating that a significant downturn is imminent..... I concur.
Bapcha
Anyway, even SanDisk is not doing too well. They might actually LOSE money this quarter - or make very little. I fully expect Eli to have a fit and get rid of a significant number of people..... sooner rather than later. In fact, every time the stock drops $5, SNDK has a mini-layoff..... great for the bottom-line, but bad for employee morale.
The equipment makers (who lead the semiconductor cycle) are indicating that a significant downturn is imminent..... I concur.
Bapcha
Fannie and Freddie.
I researched Fannie Mae, Freddie Mac, and Wells Fargo today, and my take is that all of the "accounting changes" that FNM, FRE and WFC have instituted in the last three months, makes their numbers fuzzier than ever before - leading to more uncertainty in the market.
In the case of Freddie Mac, it was the March earnings report - which should have been a negative $2.150 Billion - which was reported as 150 Million [kewl, the 2 Billion was dropped]. In the case of Wells Fargo, they deemed that accounts were delinquent only after 180 days. Maybe I should draw down my HELOC down, and run away with my money, - except, WFC still wins - 'cause they get the bloody house. Why do the banks never give me free money, but they get my tax dollars to bail out people who were speculating on real estate ?
My take is that most of the Alt-A loans were taken out by speculators - sure there were legitimate hardworking poor who stretched themselves to get into some of these loans - but the banks bloody well have an idea of what % was speculative.
ANyway, after a significant amount of research, I determined that FNM and FRE are definitely in the DO NOT BUY NOW category. WFC is a lot fuzzier. I really would like to know what % of their HELOCs are behind by 90 days - especially in CA. If the magic number is below a billion, it is a screaming buy. Below 2 billion, it is a buy. Anything over 3 is a "stay away".....
Bapcha
In the case of Freddie Mac, it was the March earnings report - which should have been a negative $2.150 Billion - which was reported as 150 Million [kewl, the 2 Billion was dropped]. In the case of Wells Fargo, they deemed that accounts were delinquent only after 180 days. Maybe I should draw down my HELOC down, and run away with my money, - except, WFC still wins - 'cause they get the bloody house. Why do the banks never give me free money, but they get my tax dollars to bail out people who were speculating on real estate ?
My take is that most of the Alt-A loans were taken out by speculators - sure there were legitimate hardworking poor who stretched themselves to get into some of these loans - but the banks bloody well have an idea of what % was speculative.
ANyway, after a significant amount of research, I determined that FNM and FRE are definitely in the DO NOT BUY NOW category. WFC is a lot fuzzier. I really would like to know what % of their HELOCs are behind by 90 days - especially in CA. If the magic number is below a billion, it is a screaming buy. Below 2 billion, it is a buy. Anything over 3 is a "stay away".....
Bapcha
Thursday, July 24, 2008
My Graduate Student Advisor - a felon [really] !!!
Henry Samueli - who founded Broadcom [BRCM] was my Graduate Student advisor at UCLA back in the early 1990's. He was an honourable man [still is]. I can now use the tag-line that is the header for this post.
Bapcha
Bapcha
Stockblogs.com
I will be listed as a Fundamental Analyst on http://www.stockblogs.com in the near future.
Bapcha
Bapcha
ISRG - irrational exuberance ?
Here's a quiz question - anyone remembers the day when Greenspan said the magic words "Irrational Exuberance" ? Answer: The day was December 5th 1996. Yes it was almost a dozen years ago.....
Back to ISRG - a very well run company, and local [off Kifer in Sunnyvale]. Nice profit margins, explosive growth, etc. etc. What is to not like here ?
Valuation. When a stock like ISRG is valued at 15x sales and 75x TTM earnings, there is little room for mistakes. Plus, the usual suspects are working on similar operating robots [though daVinci has the edge of being first, and being excellent]. While I have thoughts of robots going berserk - when a person is anesthetized and being operated on, daVinci has redundant circuits that will allow it to work even if the primary circuits fail.
Back to valuation. Even Cisco stumbled during their historic run in the 1990's. I guarantee that ISRG will stumble. While in ISRG investors' eyes, it will be a minor miss of heck, say 10% below the 50% projected growth rate, it will be enough to kill the stock to a TTM PE of 25.... while I do not sport a beard and wear Italian Suits, I GUARANTEE IT.
Back to ISRG - a very well run company, and local [off Kifer in Sunnyvale]. Nice profit margins, explosive growth, etc. etc. What is to not like here ?
Valuation. When a stock like ISRG is valued at 15x sales and 75x TTM earnings, there is little room for mistakes. Plus, the usual suspects are working on similar operating robots [though daVinci has the edge of being first, and being excellent]. While I have thoughts of robots going berserk - when a person is anesthetized and being operated on, daVinci has redundant circuits that will allow it to work even if the primary circuits fail.
Back to valuation. Even Cisco stumbled during their historic run in the 1990's. I guarantee that ISRG will stumble. While in ISRG investors' eyes, it will be a minor miss of heck, say 10% below the 50% projected growth rate, it will be enough to kill the stock to a TTM PE of 25.... while I do not sport a beard and wear Italian Suits, I GUARANTEE IT.
Friday, July 18, 2008
Google and MSFT kill the market.....
Google failed to please the market with a mere 30% increase in earnings. All said, GOOG's revenues actually came in a dollar below analyst guesstimates, and the stock tanked 10% in the aftermath of the report.
This economic downturn will be GOOG's first test - for the so far untouchable Larry and Sergei, this will be a huge test to see how well GOOG can do in a marketplace that does not want to spend money on the net, and instead wants to pump their dollars down a gas tank.....
More, and real stock analysis soon.
This economic downturn will be GOOG's first test - for the so far untouchable Larry and Sergei, this will be a huge test to see how well GOOG can do in a marketplace that does not want to spend money on the net, and instead wants to pump their dollars down a gas tank.....
More, and real stock analysis soon.
Wednesday, July 16, 2008
Euphoric Day in the market today.
July 16th 2008 will go down in history as one of the best day ever for bank stocks. Wells Fargo did well - though there were some troubling details in the earnings report - like WFC will deem an account delinquent if it is more than 180 days past due [as opposed to 120 that they used to use as a standard]. This will mean that over $300M in accounts that are actually over 120 days delinquent - will not be deemed as being so - as they are in the sweet spot - between 120 and 180 days.
More soon.....
More soon.....
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