HANDSET SUPPLY CHAIN: RAISING HANDSET FORECAST POST ASIA TRIP; BUY SWKS, OVTI, AND NOKIA - AARON D HUSOCK
Conclusion: We are raising our 3Q07 global handset forecast by 7% to 300 million units driven by upside at Nokia and Samsung over the course of the quarter that
also appears to be driving strong order momentum into 4Q07.
What's New: We met with industry contacts at 52 companies in Asia over the past two weeks, spanning semiconductors, handset components, EMS, and component distribution.
Component Implications: We reiterate our Overweight ratings on Skyworks and OmniVision and are raising our above-consensus estimates for both companies as our
checks indicate fundamentals are accelerating faster than we expected. We are also incrementally more positive on RFMD (upgraded to Equal-weight on 8/24/2007) as Nokia demand appears to be driving near-term upside to estimates and the company appears to be preparing for a much larger Nokia transceiver ramp than we were modeling.
Handset Vendor Implications: Our colleagues are upgrading Nokia to Overweight from Underweight as they see 15% upside to 2H07 consensus EPS driven by higher than expected volumes led by a ramp at the mid-to-high-end, increased market share and new product introductions continuing to stabilize ASPs resulting in margin and revenue outperformance. Our colleagues who cover Motorola are reducing 3Q07 and 4Q07 unit estimates as they see a slower than expected recovery.
REFINING & MARKETING: LOWERING ESTIMATES, STRAW HATS IN WINTER AHEAD? - DOUGLAS T. TERRESON
Estimates Appear High for Q3 2007:
Our earnings forecast for Independent R&M companies’ declines by 10% with today’s revision. Our estimates were 15% but are now 20% below consensus for Q3 2007. We are maintaining financial projections for 2008-2009 and under normal conditions.
Straw Hats in Winter Seasonal Trade Ahead?
Margins in refining, financial projections in R&M and investor sentiment typically declines during the 2nd half of each year, setting up the seasonal trade. With performance of R&M stocks superior during December to May in 15 of 18 years, we prepare for “Straw Hats in Winter”.
Constructive Outlook Remains For 2008-2010:
Margins are likely to remain near record levels during 2008-2010. Global growth in supply of “light-products” will modestly outpace that of demand, but global utilization rates and margins will remain unusually high, in our view.
Maintain In-Line on R&M Sector:
While earnings estimates appear high for 2007, financial conditions in refining will remain positive thorough the end of the decade. Valuation appears attractive on
normalized conditions, with select equities representing attractive value over the longer-term.
Overweight Stocks: VLO, SUN, TSO, COP, MRO, and XOM: Our price objectives are VLO - $90/sh., TSO - $66, SUN - $95/sh. COP - $105/sh., MRO - $75/sh., and
XOM - $96/sh.,
UTILITIES: KEY TAKEAWAYS FROM OUR 5TH POWER & UTILITY SUMMIT - BOBBY CHADA
Positive power price trend to continue: CEZ, EDF, IPR and SSE all explained that investment needs and sustainable high costs for power plant technology, fuel and CO2 emission certificates should continue to support higher power prices. We forecast that prices in Europe will increase by around 10%, to around EUR 60/MWh, over the next few years. This should continue to benefit European generators, especially the nuclear and hydro based generators like EDF, British Energy and Fortum.
Growth strategies: Many companies mentioned organic growth opportunities in the construction of new power plants and regional expansion not only in Europe
but also in the US, South America, Asia and South Africa. IPR’s growth pipeline offers one of the most clear-cut growth opportunities in our view. Regulated
utilities like Severn Trent, Terna and Snam Rete Gas see scope for growth in the expansion of their asset base and cost savings. The reinvestment of cash and
value that this can create will be an increasing focus over the next year in our view.
Renewable energies gaining attention: Utilities like IPR, SSE, EDP and CEZ all stressed their renewable plans. Some are more advanced than others — and
after major acquisitions in the last year we believe that IPR and EDP will move to a more organic development focus from now on. The major challenges to the
execution of a renewables strategy are finding the appropriate project and location, securing the relevant government approvals and sourcing the equipment in a
tight market. Nevertheless, an increased focus on renewable energy is a clear trend.
Our Key Overweight ratings are AEM, EDF, Centrica, International Power and Veolia.
Our Key Underweight ratings are PPC, United Utilities and Union Fenosa.
OIL & GAS : WHO GROWS THERE? - NEIL W PERRY
Volumes matter. After four years of declining volumes for the integrated oils, we see a resumption of growth between 2007 and 2009. It will be very unevenly dispersed between companies, and should act as a catalyst for performance.
It’s the declines that matter most. New projects are important, but the key is in the underlying declines. We separate out growth from decline and analyse our numbers and company targets in the context of realistic decline scenarios.
StatoilHydro, BG and Total stand out. The Norwegians look set for an outstanding year in 2008; BG is slowing down, but only slips to number two in the sector. Total has the highest growth rate of the larger companies, albeit it more risky than StatoilHydro and BG, and should show the greatest contrast with the last three years.
BP set to beat expectations by the most. BP has humble targets of just 1%. Our forecasts suggest 2% CAGR to 2009. We believe that the company has built in
aggressive underlying decline, and see up to 3% CAGR as viable.
Resuming coverage of StatoilHydro at Overweight. StatoilHydro replaces BG as our top pick in the sector, with 9% volume growth in 2008, the benefits of the merger and leverage to crude prices from a reasonable valuation base.
Integrated oils are 20-30% undervalued. We believe that the integrated oil sector is fundamentally undervalued. We expect a combination of continued earnings upgrades to both 2008 and longer term numbers, as well as a resumption of growth, to act as a catalyst for performance.