 |
 |
| Sign Up For This Free Weekly Newsletter |
| IN THIS ISSUE – May 28, 2010 | www.bullmarket.com |
|
Feature Article By BullMarket.com: Fiscal Q2 Results from Synovis Top Expectations By NextInning.com: Member Q&A - CREE, LED Lighting, and Niche Players By BullMarket.com: Member Q&A: Microsoft By BullMarket.com: Cisco Roadshows Highlight Company's Strategy
|
|
Fiscal Q2 Results from Synovis Top Expectations The company announced a drop in profits from the prior-year period, but that was expected due to higher costs associated with the planned expansion of its surgical sales force and the costs of integrating a sizable acquisition last year. The reported results did, however, top Wall Street's expectations and the stock traded sharply higher on the news. The St. Paul, Minnesota-based maker of tissue-repair products reported a profit for the quarter ended April 30th of $1.2 million, or 11 cents per share, versus year-ago net income of $2.1 million, or 18 cents per share. Sales grew by 19% to $17.6 million. Wall Street analysts were looking for the company to report just 8 cents per share in profits on sales of $17.4 million. As was the case in the prior quarter, the company's expansion of its surgical sales force and increased integration and incremental expenses at its Orthopedic and Wound (O&W) Products segment helped to drive a $2.9 million increase in SG&A costs to $9.9 million for the quarter. The sales force expansion was responsible for $1.3 million of the increase and $1.5 million came from spending at the O&W segment. Research and development costs totaled $1.1 million, a 23% increase from last year due to new investments in O&W products and future indications for Veritas Gross margin, however, increased by 1 percentage point year over year and two points sequentially to 73% on increased sales of its higher-margin Veritas products and higher average selling prices. "We are pleased to announce strong second-quarter revenues -- a direct result of our investment in the expanded surgical sales force, high demand in the marketplace for our Veritas products, and our increasingly effective and maturing microsurgical sales team," said President and CEO Richard Kramp. "Our Surgical sales team is focused on the large opportunities in the hernia and breast reconstruction markets, while our Microsurgical sales professionals continue to demonstrate the benefits of our proven Coupler technology, along with our unique micro clips and instruments, to the microsurgery market." Veritas sales climbed to $4.1 million in Q2, a 93% increase over the same period last year. Veritas sales accounted for 23% of total Q2 revenue and represented an annualized sales rate of more than $16 million "Sales in Europe rose significantly from the first quarter, and we expect momentum to continue there and in the United States," Kramp said. Other target markets for the product are in orthopedics and wound healing. The company added four independent representative groups in the U.S. during the quarter, and sales into the O&W marker were roughly $450,000 in the quarter, a 181% increase from Q1. The O&W sales force now includes eight direct U.S. representatives and six domestic independent rep groups. The company plans to add more independent rep groups to complete its U.S. coverage this year. Internationally, it has three distributors covering Italy, Germany, and Spain. It also hired a sales director to direct the effort. Second-quarter microsurgical product sales totaled a record $2.7 million, a 27% increase over the same period last year. The unit's principal product is the Coupler, which facilitates connecting extremely small blood vessels in about one-fifth of the time required by hand suturing. Synovis also started to roll out the Flow Coupler, which received FDA approval early in the quarter. It began the full release of the product on May 1st. He added the Flow Coupler "more than doubles the revenue potential of the Coupler and offers significant improvement over current practices to verify blood flow by combining Doppler technology with our existing Coupler technology." Rounding out the sales report, sales of the Tissue-Guard line of products for vascular, thoracic, and neurosurgical applications totaled $4.3 million in the quarter, a 4% increase over the year-ago period. Peri-Strips Dry, or PSD, sales slid by -7% to $4.6 million, hurt, the company said, by the introduction of a competing buttress product from current Recommended List selection Covidien (COV, $41.45, -0.30). Also a bovine-tissue based product, PSD is most often used to prevent bleeding and leaking of gastric fluids during bariatric surgical procedures. Covidien is one of two major makers of surgical staplers, and sales of Peri-Strips that adhere to Covidien's staplers fell off, while sales for use with non-Covidien staplers continued to grow. Synovis blamed "aggressive pricing" by Covidien and trialing of the new product by hospitals. Kramp said the company has undertaken competitive studies and is trying to figure out the best way to counter Covidien's move. On the conference call, Kramp said "convenience" was one reason why surgeons opted to try the Covidien product. The buttress is pre-mounted with an adhesive rather than the surgeon having to add one via a gel. Synovis is researching a similar application. "You use a buttress to stop bleeding and to stop leakage, and of course, increase burst strength, and I would put burst strength third because rarely do you get a burst. But those are the only reasons to use it," he said on the call. "And by all of those measures, we are more effective. I mean that's hands-down. It's objective scientific data. So the ease-of-use, certainly, made (Covidien) more attractive. Maybe some other issues in terms of contracting and relationships helped them get the trialing. But I think in the long run, if it comes down to performance, if it comes down to clinical effectiveness, we're going to be the winner. " Addressing the integration of the assets from Pegasus into the O&C unit, Kramp said the company ran into some delays getting regulatory approval from California and it took longer to higher qualified sales people than it expected, but it isn't running into resistance from doctors because the Pegasus products had temporarily disappeared from the market. "Our enthusiasm about this acquisition is higher than at the time we acquired it," he said. "And the reason is the markets are large, the products are approved, and the products work very well. And we have not seen that kind of pushback that scares you where the doc says 'gee, no, I tried that stuff, don't like it.' We have not seen that. What we have seen is, yes, we were using it but got cut off. We don't really have a form -- we would have to get started again." Rounding out the financials, the company's balance sheet remains in good shape. The company ended the quarter with $59.3 million in cash and equivalents, up from $56.5 million at the end of Q1. Operating cash flow equaled $2.5 million. The company has no debt. BMR Take: Shares of Synovis have done little since we reported on the company's fiscal first quarter in February. The stock has been range-bound at roughly $13-$16 per share for much of this year. We continue to like Synovis for its growth prospects long term, but it still needs to work through the integration of Pegasus. The investment in a big sales team appears to be starting to pay off in a faster-growing top line but it won't show up on the bottom line until the company achieves a more favorable comparison on the SG&A cost front. That will happen in time. This was a quarter of solid progress for the company, and we think the stock is starting to look more attractive. With about $5 in net cash, the stock is trading for about 14x 2011 estimates ex-cash. This small-cap medical device company could be worth another go-around on the Recommended List if it runs into any weakness. We exited the stock in June 2009 at $19.50 for a 38.5% return prior to its dilutive acquisition of Pegasus, which pressured the stock and its earnings.
Member Q&A - CREE, LED Lighting, and Niche Players The stock has tripled in the last 30 days but the comapny is losing money and has $70M in debt. Do you think these guys have a chance? A) That's a tough question to answer, but I think I can help you sort it out to some degree. Let's start by looking at the LED industry. There are quite a few companies that make some sort of LED (Light Emitting Diode) at the wafer level. There are fewer companies that participate in the "high brightness" segment of the total LED market (these are lamps used for backlight, score boards, etc.). There are only a handful of companies that participate in the "high power" LED market (these are for ambient lighting applications). There are considerably more companies that buy LED wafers (maybe diced into LED die) from these fabricators and package the LED. There is decent differentiation available at this level, but the capital investment is generally smaller and therefore a lower capital barrier to entry. There are yet even more companies that take the packaged LEDs and place them in a "bulb" type package that can be used in either a common bulb socket (include the AC to DC conversion circuitry) or can be used in a lighting system that sends the appropriate DC voltage to the bulb. There are a vast number of companies that buy packaged LEDs and incorporate them into artful / useful stuff. There are probably more than a hundred of these sorts of companies in my metro area and, if you were to count "hobbyists," probably several thousand. As best as I can tell, Lighting Science (a reporting pink sheet company) fits into the latter two categories and may have some participation in the second. There is plenty of room for profit and differentiation in these categories, but I would most certainly avoid setting up a model that sits squarely on the tracks that are the primary focus of companies like Phillips (PHG), Sylvania and GE (GE) (GE uses CREE LEDs in its products). To at least a certain extent, LSCG is doing this with its focus on commercial luminary applications. In residential applications, the first focus for the LED lighting industry was the "R" (Reflector) series bulbs used in common down-light applications. R bulbs, while dispersing light in a wide pattern (a flood versus a spot), are not trying to provide the near 360 degree illumination of a classic Edison or "A" series bulb. Also notable is that standard R bulbs sell for dollars versus cents for an A bulb. I wrote a couple years ago about this and how it would be a year or so before we started seeing meaningful A bulb designs (I think the title of the article was "CREE is Lighting the Way" or something along those lines). More or less in line with that projection we started seeing A bulb designs. In my view, there is only one rational reason for a niche player to try to enter the A bulb market - to get attention and raise money. The reason for this opinion is that even if the company has some artful differentiation today, I think it is playing on the train tracks used by some monstrous companies that will eventually run it over. Of course, there is always a slim chance the company really has something unique, but I would personally put the odds of that somewhere between picking a winning lottery ticket and picking a single number on a roulette wheel (yeah, I know, a broad range of odds, but the point being slim to nearly zero). The bottom line here is there are many ways to play the LED lighting trend. While I may find one I like in packaging and/or fixtures, at this stage of the game I like the foundry side of the equation and intend to stick with CREE as my sole allocation for now. My thinking here is there is enough aggregate growth potential for the LED lighting industry to provide a high return for what I view as the 800 pound gorilla. I'm not thinking a several hundred percent gain like we enjoyed during the last 14 or so months, but still a gain potential that is far above the broad market indexes and very easily offsets the relatively moderate risk I judge is present at the current price / valuation. As you determine what is right for you, I think it is important to keep in mind allocation risks. If I were to buy into a packaging or fixture company I would be compelled to lower my allocation to CREE. While it is entirely possible for the stocks of the two companies to move in opposite directions, I would personally count both as a similar allocation. Disclosure: At the time of this publication, out of the companies discussed herein, Paul McWilliams had a long position in CREE. In addition to these, he also had short positions in CREE June $60.00 calls and CREE January 2011 $95.00 calls.
Member Q&A: Microsoft A) Recommended List selection Microsoft was under pressure yesterday after CEO Steve Ballmer told reporters at an event in Singapore that problems in Europe might not be isolated to the region given how interconnected the global economy is. "I think we all do understand that the world economy is very linked and everybody is nervous that any problems that we might see in Greece (and) Europe will not be isolated in Europe," he said, adding, "Before the Greek issue everyone has been saying they are more and more cautiously optimistic." Meanwhile, the stock was upgraded today by FBR. Analyst David Hilal took the stock to "outperform" from "market perform," while raising his price target by $1 to $32. Hilal noted that Microsoft's Windows 7 operating system and Office 2010 should benefit from a corporate upgrade sector over the next couple of years. He also pointed out that the stock is trading at the low end of its valuation range over the past five years, excluding during the Great Recession period in late 2008-early 2009. The analyst also said that the current European weakness looks built into the stock. BMR Take: All in all, we believe the market overreacted to Ballmer's comment, and think basically he was just stating the obvious. Slower European growth and currency headwinds will impact a lot of global companies to some extent. However, we're still big believers in the corporate PC upgrade cycle, given that many enterprise PCs are still running the aging Windows XP. The stock has also been weak during the sell-off likely because it’s a very big, liquid name, so if portfolio managers are looking to raise cash fast, a position in Microsoft is easy to dump quickly without crushing the stock price. We continue to rate the stock a "Buy."
Cisco Roadshows Highlight Company's Strategy Inder Singh, the company's VP of portfolio management, appeared on Wednesday at a growth stock conference sponsored by Robert W. Baird. Robert McIntyre, the chief technology officer for the company's Service Provider Video Technology Group, was at the JP Morgan Global Technology, Media and Telecom conference on Tuesday. Singh described Cisco for those not familiar with the company as one that "focuses on competing at a platform level (and) competing on an architectural level. It is a company that has had a history of not just selling products and boxes, but really selling end-to-end solutions to customers and selling them with an architectural differentiation. In many ways, what allows us to offer that to our customers is the fact that we have market leadership in virtually every segment of our business, when you look at it from a technology standpoint." Currently a $40 billion company, Cisco says about a third of its business is with large service providers like Verizon Communications (VZ, $27.49, -0.47) and AT&T (T, $24.43, -0.42); about 42% of year-to-date product orders have come from the enterprise and public sector, which is to say large companies and governments; while about one-fifth of its business comes from mid-sized companies around the world. The company also has some consumer-facing businesses as well. Geographically, about half of sales come from the U.S. and Canada. About one-fifth of sales so far this year have come from Europe, while Asia and emerging markets are around 11% each. Founded in 1984, Cisco has grown dramatically over the years in large measure because of numerous strategic acquisitions. "Some of you who have followed the company are probably familiar with the fact that we had obviously started as a switching and routing-based business and then in the early 2000 started adding these billion dollar bolt-on businesses, if you will. We call them advanced technologies," he said. "We started off with areas like storage and security, but really what we did was we invested to grow $1 billion businesses just around our core business. It was a strategy that worked well." The strategy, he said, has been to take that core networking business and take advantage of the many ways the market is evolving. "These transitions allow us to actually enter into some adjacent markets that maybe we weren’t in, in the past. The data center, for example," Singh said. "Although we do sell a lot of switching equipment, the market is going through a virtualization transition that allows us to expand into that market as well and offer some new solutions . . . The collaboration market is another one that’s going through a transition. And the video market; obviously video is growing itself, but (it's also) going through some transition. So, the way we look at our strategy today, the networking market that we were in allows us to now enter into some of these adjacent markets leveraging some of those macro level transitions." The company's acquisition of Tannberg is a case in point. The video conferencing company offers solutions that in some respects overlap products that Cisco also had in the market, but Tannberg was viewed as a leader. "We’re really focusing our attention on how you take two really good product lines that really do overlap a little bit, but more importantly complement one another, from the low end all the way to the high end, to do a really good job of setting up virtual meetings and doing collaborative-type video sessions," McIntyre said during his Q&A session with investors last week. Traffic over the Internet has grown exponentially in recent years and Cisco says that based on its analysis of customer traffic it is clear that video has been the big driver of traffic growth. The company estimates that video could be 85-90% of Internet traffic in a few years, driven in part by new devices like the iPad, smartphones, and other wireless connected products. One second of video traveling across a network uses 100 times as much capacity a second's worth of data or voice over the same network, the company says. It currently projects that video traffic will be measured in exabytes, which are trillions of gigabytes, by 2013. To address that growth Cisco coined a concept it refers to as "medianet." "It’s more than just being edge-aware, it’s more than just making video look better or better media content," McIntyre said. "It’s really looking at the networks from a five to seven year out perspective with our customers, anticipating where we need to be five to seven years out. And again, we have tools like traffic monitoring and measurements, but then making sure that as we have that five to seven year out view, every decision that’s made as you upgrade the network over the next five to seven years, is done with a view toward what five to seven years out would like." Singh addressed Cisco business strategy in the video sector by saying "we look at the video area as not just a set of point solutions or point products, but we look at it as the evolution of a portfolio" using such next generation technologies as its new CRS-3 router, announced earlier this year. Cisco, Singh said, spends about $5 billion annually on R&D, with much of it directed at taking existing products and trying to apply them to adjacent vertical markets. He talked at length about the company's efforts in the video, collaboration, and virtualization markets, but those are just three of 30 companywide priorities it is working on. "We call these market adjacencies, but they include things like Borderless Networks, Cloud Computing, Mobility, Safety and Security, Smart Grid. So, we have a CEO (John Chambers) who is a tremendously nonlinear thinker, very, very visionary, and he keeps challenging and saying that we’re going to go from 30 to 50 market adjacencies soon," Singh said. "One of my experiences in my two years at Cisco has been that he means it. He keeps upping the challenge for the management team, and I could see that happening pretty soon in terms of growth of the number of priorities that we have." Asked how he thought analysts and investors misjudge Cisco, Singh, a former sell-side analyst, replied by saying it's their thinking of Cisco as predominantly a switch and router company. But he also addressed how the company could focus on 30 priorities coherently. "What I have discovered in the company is there’s a very disciplined process. It’s called CPAD, the Cisco Priority Assessment Dashboard. I sit on the steering committee that manages that process, but it’s a very venture-capital model way of making sure that you have a metered investment going into virtual healthcare, a metered investment going into TelePresence, a metered investment going into smart connected communities," he said, adding: "It's really making sure that you manage each one of these 30 areas almost as a start-up. A start-up within a very large company by managing them in a way where you actually see results, and if something isn’t performing you course-correct." BMR Take: We always find these road show presentations to be a good way for investors to get a flavor of a company's culture. Cisco is still very entrepreneurial for a big company and it seems to pull it off. Chambers is the main face of the company who has been around long enough to have managed through prior recessions, which is a strength given the difficult period we've just emerged from. Investors can listen to replays of both presentations by going to the Events & News page on the company's website. We think Cisco, which we added on Thursday, is simply too cheap for a technology bellwether. It's still a solid grower that is at the heart of IT infrastructure, and should benefit from a multi-year IT architectural upgrade and new products. There are risks, as we noted in our thesis last Thursday, but we think the stock is worth at least $29.
|
Want Our Investment
|
|||||||||||||
To View Our Disclosure Policies: BullMarket.com, NextInning.com. Copyright © 2010 Indie Research LLC – All
Rights Reserved Readers are urged to consult with their own independent financial advisors
with respect to any investment. All information contained in this report
should be independently verified with the companies mentioned. Neither
Indie Research, LLC, nor its officers, directors, partners, contributors
or employees/consultants, accept any liability whatsoever for any direct
or consequential loss arising from any use of information on this website
or any use of information in its newsletters. |
||||||||||||||