Daily Archives: April 8, 2007

Will AT&T Chicken Out?

AT&T (T) may not follow its fellow telecom giant Verizon (VZ) into the fiber to the home business, at least not to the tune of $23 billion. Verizon is counting on picking up cable customers by offering voice, TV, and broadband service in one package.

As an alternative, AT&T may try to buy Echostar (DISH) or DirecTV (DTV). The market cap of DISH is $20 billion and DTV is $29 billion. But, unlike Verizon’s investment, both of the satellite companies come with customers and billions of dollars in revenue. From that standpoint, the idea of an acquisition makes sense.

But, satellite TV is not interactive. It cannot produce true video-on-demand and comes into the home through a different "pipe" than broadband or voice. The products can be bundled from a billing standpoint, but they are not the kind of "all in one" service that cable and fiber to the home offer. Also, AT&T would have to continue to rely on DSL for most of its broadband service, and DSL connections are not usually as fast as what cable offers.

Whether consumers care that their services all come into the home though a common connection may be academic as long as the products work fine and the price is low.

If AT&T can buy a satellite TV operator, it takes almost all of the risk out of being in the TV business. The big phone company picks up enough revenue to justify the purchase on its own merits, and, fiber to the home may never garner enough customers to justify the cost.

Douglas A. McIntyre

Posted on: April 8, 2007 – 10:06 pm in Telecom

Broadcom Analyst Schizophrenia

Barron’s has rightly pointed out that there are two schools of thought on the near-terms future of chip company Broadcom (BRCM).

Those in the first camp think that the bad news on Broadcom is out now that its big customer Motorola (MOT) has said that the next quarter will be poor. Further, Broadcom is gaining traction in the wireless chip market which used to belong to Qualcomm (QCOM) and Texas Instruments (TXN).

On the other side of the fence, the view is that Motorola’s troubles may only be at their beginning. What hurts the big handset manufacturer will continue to hurt Broadcom. This analysis seems more compelling.

Among the large handset companies, most researchers believe that Sony Ericsson will continue to do well by focusing on the high end of the market. Nokia (NOK) continues to increase its lead as the industry’s largest company, doing well in fast growing markets including China and India. Motorola’s success with its RAZR model is over, and it cannot seem to find a suitable replacement. Unit sales could be hurting at MOT for some time to come.

Not good news for Broadcom. Not good news at all.

Douglas A. McIntyre can be reached at douglasamcintyre@247wallst.com. He does not own securities in companies that he writes about.

Posted on: April 8, 2007 – 9:46 pm in Analyst Calls

NTAP – Network Appliance Inc: Caching Growth over Earnings

04/07/2007

Revenue growth for the first three quarters of FY2007 (FY ending April) is very impressive, 38.6%, 35% and 35.7% respectively. We estimate that FY2007 will turn in a 35% gain in revenue; EPS to show a more modest increase to $0.72. We estimate revenue growth for FY2008 at 24% as over 50% of revenue is generated from the slowing U.S. economy.

Outstanding share count increased from 380.4M in 2005 to 388.4M in 2006. In Q3 FY2007, NTAP rectified the situation by repurchasing 6.2M shares. NTAP announced that it intends to continue its repurchase program in Q4 FY2007. Our understanding is that current share repurchases are financed by increasing long term debt. This kind of window dressing is not beneficial to long term fundamentals. With debt at 2% and a strong balance sheet there is no immediate consequence.

At least 25% of the YOY Q4 FY2007 EPS increment stems from the repurchase program. Even with the buy-back, EPS is likely to increase only 6% on a 35% gain in revenue. Margins are slipping. Until there is tangible evidence to the contrary we will have to respectfully disagree with our colleagues regarding lofty predictions for FY2008 earnings. Estimated FY2008 EPS is $0.87.

We anticipate that NTAP will continue to concentrate on revenue growth and market share for FY2008 and FY2009. We guesstimate that upon attaining $3.2 – $3.5B revenue, the focus will shift to earnings. Upon occurrence, revenue and earnings will flip meaning; revenue growth at 7% – 9% and earnings growth at 30% – 35%. Once a better economy-of-scale is obtained, it will be easier to increase margins. Until then a ttm P/E of 45 to 60 should remain the norm for this stock.

Disclosure: No conflicts, FY2008 estimates are non consensus.

http://www.crossprofit.com

Posted on: April 8, 2007 – 7:04 pm in Technology Companies

Google In The Tribune’s Crosshairs

Sam Zell has not made money by giving things away. As the new controlling investor in The Tribune Company (TRB) he sounds like he plans to milk his newspaper content for every dime. And, he wants Google to know that it may mean no posting of TRB content at Google sites. Zell is quoted as saying "If all of the newspapers in America did not allow Google (GOOG) to steal their content, how profitable would Google be?"

Agence France-Presse and Google have just settled the issue of whether the big search engine can post headlines, photos, and news summaries at places like Google News. The legal battle over the matter has gone on for over a year. That settlement may well include some payment to the French news agency. Google has also made a deal with The Associated Press to pay that news firm for us of its content.

Zell understands that the internet has driven much of the profit out of the newspaper industry by offering news online for free. Even newspaper companies with large websites are not getting enough internet ad revenue to replace what they lose in subscription circulation and lineage at their print properties.

Google may be facing a movement by large print organizations to exact some payment for their content. And, that is a fight that may get very nasty.

Douglas A. McIntyre can be reached at douglasamcintyre@247wallst.com. He does not own securities in companies that he writes about.

Posted on: April 8, 2007 – 7:03 pm in Media

A Low Ball Bid For Dow?

A group made of up investors from the Middle East and the US is rumored to be making a bid to buy Dow Chemical (DOW). If the deal goes forward, it could be the largest LBO ever, about $50 billion. The offer would be in the range of $52 to $58. The stock currently trades around. $44.

The price may be a good deal for the investors, perhaps too good. Dow Chemical’s stock is down over 10% over the last two years. The S&P is up over 20% for the same period. The company’s operating profit did dip in 2006 to $4.13 billion from $5,24 billion in 2005. But, with the exception of a flat spot is 2002, revenue has gone up each year since 1998. With that kind of consistent growth, the company might be viewed as undervalued. Operating income last year was double the 2003 figure.

The down side of Dow is that it supplies both the construction and car industries. And, its pricing metrics are based on a number of commodities.

That makes a the company an unpredictable bet.

Douglas A. McIntyre

Posted on: April 8, 2007 – 3:24 pm in Mergers and Buy Outs