Qualcomm Deal Bodes Well for IDTI
Ethan Allen (NYSE: ETH) After pre-announcing results from its first quarter (ending September) on Oct. 18, Ethan Allen gave investors more information at its Analysts’ Day on October 26. Most of the excitement swirled around the Disney branded children’s furniture launch slated for Nov. 18 (Mickey Mouse’s birthday of course). Although management did not give formal guidance for the December quarter or year, it sounded to us that it was tempering expectations. We’re working through our assumptions to see if our estimates fit with the Street.
Integrated Device Technology (NSDQ: IDTI) Mobile phone chip developer Qualcomm recently bought NXP Semiconductors as a way to gain traction in automotive chips. I have long sung the praises of the benefits of IDTI’s purchase of ZMDI. ZMDI also supplies chips to the automotive market. The connected auto is a major growth area for chip and software companies. Qualcomm paid 16 times NXP’s 2016 estimated profits. Applying a similar multiple to IDTI would result in a stock price of $26, 24% higher than current levels.
Cynosure (NSDQ: CYNO) The decline in Cynosure after its earnings release has me scratching my head. Revenue beat by $5 million and earnings were 3 cents better. The company never gives guidance but was upbeat on future growth—management actually said the momentum was improving for its products. The only issue with the quarter was a drop in a balance sheet account called deferred revenue, which represents payments for pre-orders of products that haven’t been delivered yet. This number started climbing after the release of the SculpSure introduction in September 2015 when the company started taking orders. Now that the product is widely available, most orders are filled in the same quarter in which they are received which means they do not pile up in deferred revenue.
Healthcare stocks in general are getting squashed across the board. Several Pharmacy Benefit Manager companies and drug stocks have noted pricing pressure on drug pricing from insurance companies. Part of the reason we like Cynosure so much is its extremely limited exposure to insurance reimbursement. The stock trades at 24 times its 2017 estimate of $1.80, a very low valuation for a company growing earnings 40%.
U.S. Concrete (NSDQ: USCR) was highlighted in the Oct. 31 edition of Barron’s. Craig Hodges of Hodges Capital Management called it out as one of his favorite stocks. His justification should ring familiar to Growth Stock Strategist subs; the stock was hit unfairly due to weather related issues, infrastructure spending is on the rise and several company specific projects like La Guardia airport’s rebuild support purchase of the stock.
Stock Talk
Edward Getchell
Didn’t you recommend a stop loss on Cynosure at $43? I got stopped out 10/25.
Linda McDonough
Edward,
Yes I’ve been working to find more information on the decline but do recommend a stop loss at $43. I recommend selling half a position at a stop loss price and as the fundamentals still look good to me, I’m not removing the stock from the portfolio entirely.
Linda
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Paul Dash
Hi Linda,
I was interested in getting into Ambarella on the basis of your enthusiastic endorsement, but on researching it I found this analysis from the S&P Capital IQ with a sell rating. Can you give me your comments?
We estimate revenue will increase 16% in FY 18 (Jan.) following our projection for a 1.6% drop
in FY 17. Despite recent strength within the wearable sports camera market, we are growing
more cautious about the sustainability of demand in the first half of calendar year 2017
and see the potential for a pronounced inventory
correction.We remain optimistic about the
prospects for AMBA’s flying cameras as well
as growth for home monitoring applications.
We expect AMBA to benefit from greater traction
for its video processing solutions within the
automotive and security markets.We expect
selling prices to be pressured given competitive
pressures and short product cycles.
ä We see an annual gross margin between 63%
and 65% through the end of FY 18, which compares
to a 65% margin in FY 16. Over time, we
expect margins to be impacted by a less favorable
mix towards the lower margin Asia IP security
camera market and the consumer IP security
market.We believe that AMBA will keep
research and development costs elevated to invest
in next generation products.
ä We forecast operating EPS of $2.71 for FY 17
and $2.93 for FY 18.
Investment Rationale/Risk
ä Our Sell recommendation primarily reflects our
view that consensus estimates may prove to be
too elevated for FY 18. While AMBA appears to
be well-positioned to take advantages of secular
opportunities in areas like drones, we note
recent product delays in this category. New
product releases like GoPro’s Hero5 capture
devices are likely to support demand for AMBA
through the holiday selling season, but we
question the sustainability of orders thereafter
and see the potential for a sharper inventory
correction than consensus estimates currently
anticipate.We expect visibility for end-market
products using AMBA s chips to remain low in
the coming quarters.
ä Risks to our recommendation and target price
include lower than expected end-market demand
for capture devices, greater than anticipated
declines in selling prices and greater
than expected competitive threats.
ä Our 12-month target price of $53 is based on a
near peer P/E multiple of 18X to our FY 18 operating
EPS estimate of $2.93.We note that our
target price implies an Enterprise Valueto-
EBITDA multiple of 12X and price-to-sales of
4.9X, both near comparable peers.
Analyst’s Risk Assessment
LOW MEDIUM HIGH
Our risk assessment reflects our concerns
regarding AMBA&’s heavy dependence on a few
large customers, and the company’s short
product cycles.We also note a highly competitive
environment and rapidly changing industry
conditions within the video capture space. This is
partly offset by the company’s healthy free cash
flow generation and balance sheet.
Revenue/Earnings Data
Revenue (Million $)
1Q 2Q 3Q 4Q Year
2017 57.16 65.14 100.5 — —
2016 71.01 84.19 93.20 67.97 316.4
2015 40.92 46.97 65.69 64.70 218.3
2014 33.94 37.71 45.99 39.97 157.6
2013 25.92 27.96 35.67 31.52 121.1
2012 21.64 22.27 26.67 26.67 97.26
Earnings Per Share ($)
2017 0.05 0.25 0.84 E0.74 E2.71
2016 0.56 0.68 0.87 0.15 2.27
2015 0.17 0.29 0.57 0.53 1.57
2014 0.16 0.21 0.30 0.18 0.85
2013 0.07 0.19 0.25 0.13 0.60
2012 0.06 0.01 0.12 0.12 0.30
Fiscal year ended Jan. 31. Next earnings report expected: Early
March. EPS Estimates based on S&P Capital IQ Operating
Earnings; historical GAAP earnings are as reported in Company
reports.
Dividend Data
No Dividend Data Available
Stock Report | December 10, 2016 | NNM Symbol: AMBA
Ambarella Inc
Recommendation SELL H H H H H Price
$54.46 (as of Dec 09, 2016 4:00 PM ET)
12-Mo. Target Price
$53.00
Report Currency
USD
Redistributionl IQ. Can you give me your comments?
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