Bank of Montreal

This BMO branch in Waterloo, Ontario retains the Molsons Bank name on the plinth. (Photo credit: Wikipedia)

BMO : TSX : C$62.50
BMO : NYSE
HOLD 
Target: C$69.00

COMPANY DESCRIPTION:
With more than $525 billion in assets, Bank of Montreal, together with its subsidiaries, provides a broad range of retail banking, wealth management and investment banking products and solutions in North America and internationally. BMO operates approximately 1,600 bank branches and employs approximately 46,000 full time employees globally.
All amounts in C$ unless otherwise noted.

WEAK QUARTER: MARGINS AND EXPENSES
BMO reported Q2/13 adjusted EPS of $1.46, below our estimate and consensus of $1.49. EPS was up 1% YoY. Excluding the $66 million after tax recovery on the impaired credit portfolio acquired from M&I, EPS would have been $1.36. Relative to our estimate, stronger capital markets revenues were offset by lower insurance results, higher expenses, and a higher tax rate.
The Basel III CET ratio increased to 9.7% from 9.4%, reflecting earnings in the quarter and model refinements which lowered RWA. The bank bought back 4 million shares in the quarter. We believe BMO’s strong Tier 1 ratio and weaker earnings growth supports building in more aggressive share repurchase activity for 2013 and 2014. Insofar as capital allocation is concerned, we believe BMO is leaning more toward buy backs than acquisitions.

U.S. P&C earnings were up 9% YoY reflecting lower PCLs and expenses offset by weak top line growth (loan growth offset by NIM pressure). The 3% YoY decline in expenses reflects M&I synergies. On a US$ basis, total loans were up 0.4% QoQ (the second consecutive quarter of growth) as commercial loans were up 1.9 % QoQ and personal loans were down 1.2%. We expect synergies and good commercial loan growth (offset by NIM pressure) to drive mid- to- high-single-digit earnings growth.
Domestic P&C earnings were down 0.7% YoY, reflecting -2.3% operating leverage and additional NIM pressure. Expense growth was elevated, but consistent with commentary regarding the desire to continue to invest in the franchise. BMO’s issue with operating leverage does not appear to be expense control but rather the very weak top line growth. We do not believe revenue growth will accelerate in the near term largely because we expect margins to remain under pressure.

We continue to believe that BMO’s more aggressive posture in mortgages, while leading to strong mortgage growth this quarter (discussed below) is hurting the bank’s margin. Our 12-month target price of C$69.00 (down from C$70.00) is based on the stock trading at 10.8x our 2013E EPS, a 6% discount to the group multiple of 11.5x. We continue to rate BMO a HOLD. Our outlook on the stock is constrained by an expectation of below group average EPS growth driven by: a) higher PCLs as recoveries decline, b) NIM pressure, and c) weak operating leverage in domestic retail. We also expect BMO’s dividend growth to lag its peers.

Related articles

• U.S. Fed warns Bank of Montreal on anti-money laundering controls (business.financialpost.com)
• Toronto-Dominion Bank (amp2012.com)
• End-of-the-party feel to BMO results (business.financialpost.com)

Avago Technologies Limited

AVGO : NASDAQ : US$34.43
BUY 
Target: US$42.00

COMPANY DESCRIPTION:
Avago Technologies Limited is a designer, developer and global supplier of analog semiconductor devices. Avago offers products in three primary target markets: wireless communications, wired infrastructure, and industrial and automotive electronics. Applications for Avago products include smartphones, connected tablets, consumer appliances, data networking and telecom equipment, and enterprise storage and servers.

UNEXPECTED INDUSTRIAL GROWTH DRIVES BEAT; ANTICIPATE H2 WIRELESS RECOVERY
Investment recommendation:

Avago reported solid Q2/F2013 results above low expectations due to a modest recovery in Industrial division sales and strong Wireless division sales to Samsung and other LTE smartphone OEMs that helped offset the iPhone transition at largest customer Foxconn (Apple). Further, Avago guided to strong sequential growth in all 3 divisions for the July quarter. We anticipate strong Wireless sales growth in 2H/F2013 due to strong FBAR filter demand for new LTE smartphone programs at leading smartphone customers such as Apple, Samsung and others.

Further, we believe Avago’s proprietary technologies, strong IP portfolio, and diverse customer base in several growth markets position the company for strong long-term growth and industry-leading margins. We reiterate our BUY rating and $42 target.
Investment highlights
 Q2/F2013 sales of $562M and pro forma EPS of $0.61 were above our $552M/$0.57 estimates due to strong sales of FBAR filters into ramping
LTE smartphone programs and surprising 4% Q/Q sales growth in the highest-margin Industrial division – versus guidance for low single digit
decline – driven by a broad increase in distributor sell-though. Solid Wireless sales despite the Apple product transition were consistent with our surveys indicating strong LTE smartphone sales, including the Galaxy S 4, as Samsung was a 10% Avago customer for the first time.
 Avago management guided to a 6%-9% Q/Q increase in revenue for the July quarter driven by solid Q/Q growth in all divisions, including highsingle- digit Q/Q growth in Wireless due to the initial sales ramp into new smartphone programs at Apple.
 Our bullish H2 Wireless outlook remains unchanged, though we slightly increase our F2013E pro forma EPS from $2.73 to $2.74 and our F2014
estimate from $3.19 to $3.21 due to a modestly increased outlook for Avago’s Industrial division.
Valuation:

Our $42 price target is based on shares trading at roughly 13x our F2014 pro forma EPS estimate.

Related articles

• Has Avago’s Growth Stalled Out? (dailyfinance.com)
• Avago Technologies Limited to Announce Second Quarter Fiscal Year 2013 Financial Results on Wednesday, May 29, 2013 (virtual-strategy.com)

Credit Suisse Downgrades Tag Oil

Risk (Photo credit: The Fayj)

T-TAO

$3.30 -0.09

 

 

Credit Suisse probably said it best 
“Deflated Production; Downgrade Rating…We Were Wrong”.
They write:
• We Were Wrong: In our last note dated April 4, 2013, and titled “Production Likely to Exceed 5,000 boe/d”, we believed that production could reach those heights as production at that time was already between 4,000- 4,500 boe/d with only 15 of 27 wells onstream. However, we were wrong, and to a meaningful degree. Current production has declined to roughly 2,700 boe/d (46% oil) with six more wells to bring on production,
primarily due to higher than expected declines on certain higher rate wells. Excluding contribution from new wells that continue to be drilled, the company expects to average roughly 3,000 boe/d for the balance of the year. These results highlight the risk of limited operating
history with TAG’s shallow wells.
• New Estimates: With lower production production, we reduce our production in F2014E and F2015E by 41% and 49%, respectively. We also lower our cash flow forecast in F2014E and F2015E by 58% and 63%, respectively.

Overall, we assume a more modest growth profile from TAG’s shallow well program.
• Higher Risk Profile:

We previously assumed higher growth that placed TAG among few operators offering  attractive growth rates at relatively low risk with substantial
upside optionality.

With a tempered mid-term growth outlook from the shallow well program and more meaningful step-change growth more dependent on higher risk deep well exploration, the risk versus reward profile has shifted negatively.
• Recommendation: We downgrade our rating to Neutral from Outperform and lower our TP to C$6.50 (was C$9.50).
TAG is still self-funded and step-change growth potential remains around the corner, but we prefer a greater margin
of safety than the current market price of C$4.92.”
Meanwhile, M Partners cuts their target more modestly/hopefully from $11.00 to $8.00 and I’m sure the long list of
disappointment analysts following the story, will have new numbers out shortly.

Aegerion Pharmaceuticals

Patient Recognition Month Poster (Photo credit: Army Medicine)

AEGR : NASDAQ : US$60.74
BUY 
Target: US$90.00

COMPANY DESCRIPTION:
Aegerion is a biopharmaceutical company focused on the development and commercialization of treatments for patients with severe lipid disorders. Its lead therapeutic is Juxtapid, an oral small-molecule inhibitor of MTP approved in the U.S. and currently pending regulatory review in the E.U. for the treatment of patients with homozygous familial hypercholesterolemia (HoFH). Aegerion was founded in 2005 and is headquartered in
Cambridge, MA

Cardiologists a key untapped source of patients; drug awareness is high:
Physicians estimate that 34% of HoFH patients are referred from cardiologists (43% from PCPs), with cardiologists possibly representing a larger source of patients (1/3 of respondents estimate that >75% of HoFH patients are in cardiologists’ offices; 1/3 estimate 25%-50%; 1/3 estimate <25%). Most clinics have completed REMS for Juxtapid and Kynamro (57% each) and met with sales reps from AEGR and SNY (71% and 86%, respectively). While no clinics use genotyping to diagnose HoFH, they do use untreated LDL levels (>220-400 mg/dL) family history, physical attributes (xanthomas) and LDL levels on max therapies (>180-250 mg/dL).
Physicians anticipate off-label use and see a differentiated profile for Juxtapid:

In the next 12 months, physicians anticipate prescribing Juxtapid to patients with HeFH (43%), statin intolerance (29%) or LPL deficiency (14%). The primary concern is injection site reactions with Kynamro (average score of 7/10), while it is GI toxicity for Juxtapid (6.2 vs. 2.7 for Kynamro).

Related articles

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Bank of Nova Scotia

Scotia Tower, as seen from Seymour Street. (Photo credit: Wikipedia)

BNS : TSX : C$59.61
BNS : NYSE
BUY 
Target: C$67.00

COMPANY DESCRIPTION:
Scotiabank is one of North America’s premier financial institutions, and Canada’s most international bank. With over 80,000 employees, Scotiabank Group and its affiliates serve over 19 million customers in more than 55 countries around the world. Scotiabank offers a diverse range of products and services including personal, commercial, corporate and investment banking.

Q2/13 core cash EPS was $1.24 (up 6% YoY) versus our estimate of $1.25 and consensus of $1.26. At 6% YoY, BNS’ earnings growth is likely to be in line with the group average. Relative to our estimate, revenue was higher than expected, with capital markets revenue coming in better than expected. Slightly weaker than expected results relates to higher PCLs and higher expenses.
International earnings were up 5% YoY, reflecting good revenue growth offset by higher than expected investment spending and a 34% YoY increase in PCLs. Noninterest expense growth was 11% (5% QoQ), with half of the increase relating to acquisitions and the other half to investment spending. Operating leverage in the quarter was nil.

Given the investment spending in 2012, we expected BNS to deliver 2-3% operating leverage in the segment in 2013. In this respect, the expense growth in the quarter was surprisingly high. Higher PCLs reflect the expected normalization of credit losses in Colombia. We expect International
earnings growth to return to the low double-digits as early as next quarter.
Domestic P&C earnings were up 18.7% YoY on 15.1% YoY revenue growth and operating leverage of 2.4%. YoY, we were looking for earnings growth of 16.8%, revenue growth of 13.1%, and operating leverage of 1.1%. Earnings growth, excluding ING Direct, would have been 7.6%. Only Royal Bank is expected to deliver better organic earnings growth this quarter. With ING contributing $45 million in earnings last quarter and $51 million in Q2/13, the bank is already at the $190 million run rate discussed at the time of the deal.
Over the last five years, the bank’s better earnings stability and momentum has earned Scotia an average premium of 5-7%. On our estimates, the stock currently trades at a 5% premium to the group. For the reasons outlined below, we set our target price on BNS based on the stock trading at a 6% premium (consistent with RY).

Our target P/E premium drives a target P/E of 12.2x applied against our 2014E EPS and a target price of C$67.00 (down from C$69.00).

Related articles

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Rackspace Hosting HOLD

Image via CrunchBase

RAX : NYSE : US$39.30
HOLD 
Target: US$37.00

COMPANY DESCRIPTION:
A provider of managed hosting and cloud computing services, Rackspace provides businesses with the infrastructure to house their data (web sites and applications), and with the customer support for their IT services need. Primarily focused on small businesses, Rackspace Hosting is known for its unique customer service experience known as “Fanatical Support”. The company is headquartered in San Antonio, Texas.

DARK CLOUDS REMAIN ON THE HORIZON; REDUCING PT TO $37
Investment recommendation
Despite recent estimate cuts, we believe additional downside risks remain given the increasing level of competition and the operating distraction we believe is resulting from the OpenStack transition. We believe aggressive competitive pricing pressures and continued momentum from competitors’ cloud eco-systems will likely make the OpenStack transition increasingly difficult. We are lowering our target multiple from 10x to 9x and our price target from $40 to $37accordingly.
Investment highlights
 Dedicated business likely further slows – We believe the increasing adoption of IT outsourcing to the public cloud will likely shift more
incremental demand away from traditional dedicated hosting services. Premium pricing, product cycle transition and continued sales force distraction due to OpenStack will likely make it difficult for Rackspace to regain momentum in its core dedicated business.
 Uphill battle for OpenStack – As Amazon AWS, Microsoft Azure, VMWare and Google further penetrate respective cloud ecosystems, we believe it will be increasingly challenging for OpenStack to gain traction in the increasingly competitive market. The aggressive pricing strategy by AWS and matched by others will likely continue to create significant headwinds for companies like Rackspace.
 Still too early for bottom fishing – Despite the over 50% drop in share price from its recent peak, we believe it is still too early for bottom fishing given the continued downside risk and with its shares still valued at 9.7x 2014E EBITDA.

Related articles

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St. Jude Medical SELL Target $35

English: An artificial pacemaker from St. Jude Medical, with electrode. Français : Un Pacemaker de la compagnie St. Jude Medical, avec son électrode. Nederlands: Een kunstmatige pacemaker van St. Jude Medical, met elektrode. (Photo credit: Wikipedia)

STJ : NYSE : US$45.15
SELL 
Target: US$35.00

COMPANY DESCRIPTION:
St. Jude Medical is a large medical device company targeting large cardiovascular and neuromodulation markets — namely cardiac rhythm management (pacemakers and implantable cardioverter defibrillators), atrial fibrillation (surgical/catheter ablation and advanced mapping/diagnostics), heart valves, vascular closure and spinal cord stimulation.

MULTIPLE HEADWINDS & DISCONCERTING TRENDS; DOWNGRADE TO SELL
Investment recommendation
We downgrade STJ to SELL from Hold, owing primarily to: 1) questionable earnings quality, 2) our bearish view of the product pipeline relative to
competitors in key growth markets (e.g., TAVI, renal denervation), 3) potential for continued share loss in its largest business (i.e., CRM), and 4)
overextended valuation based on the key metric in our mid/large-cap valuation methodology (i.e. P/E/Growth).
We maintain our $35 price target (1.4x PEG X 2014E “pro forma” EPS of $3.93), representing over 20% potential downside from current levels.
Investment highlights
 We highlight questionable earnings quality, noting divergence of GAAP to non-GAAP EPS since 2010. “Non-recurring” expenses have
accelerated over the past 4 years, raising a red flag about the recurring nature of what management categorizes “non-recurring” expenses.
This should also instigate real reflection on the part of investors as to which “earnings number” should be used as a basis for valuation.
 We do not believe STJ’s offerings in new med-tech markets – namely TAVI, renal denervation, LAA, PFO – will meaningfully contribute to
revenue or EPS growth over the foreseeable future.  We think the bull case regarding Durata – i.e., no smoking gun (yet) a la Riata – is largely baked into the stock. That said, Durata could potentially re-emerge as a headline risk at some point in the future.
 STJ trades at 1.6x PEG to our 2014 “pro forma” EPS estimate,  which is a premium to the historic 1.5x large-cap med-tech median multiple, notwithstanding GAAP/non-GAAP EPS divergence.

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Valeant Pharmaceuticals International Inc.

Valeant Pharmaceuticals (Photo credit: Wikipedia)

VRX : NYSE : US$84.47
VRX : TSX
BUY 
Target: US$112.00

COMPANY DESCRIPTION:
Valeant is a specialty pharmaceutical focused on dermatology, branded generics, and neurology indications in the US, Canada, Latin America, urope and South East Asia. The company continues to grow through strategic acquisitions highlighted by the $2.6 billion acquisition of Medicis. In 2010, Valeant Pharmaceuticals International and Biovail Corporation completed a merger to form a single Canadian-based specialty pharmaceutical company.
All amounts in US$ unless otherwise noted.

VALEANT REELS IN A BIG ONE

Investment recommendation
Valeant has announced the previously speculated acquisition of Bausch & Lomb (B+L) for $8.7 billion. Contrast to our expectations, this is not a
‘merger of equals,’ and instead Valeant will pay cash funded by debt and up to $2 billion in new equity. In our note published yesterday, we had
highlighted B+L’s strategic fit and strong growth profile. However, based on our revised analysis (assuming the updated deal structure), we now
see significant accretion of 43.5%, in line with company guidance.
Investment highlights
 Wringing out the cost synergies from B+L. Valeant sees potential cost savings of $800 million, excluding manufacturing and tax synergies. Based on our discussions with management, we now expect that greater synergies can likely be extracted from B+L’s commercial infrastructure.
 B+L to take leverage modestly higher. The company has guided to 4.6x net debt to EBITDA following the expected close of the transaction in Q3. However, management expects that leverage can be reduced to under 4.0x by the end of next year.
Valuation
We value the combination of Valeant and B+L based on expected 43.5% accretion to our 2014E cash EPS. By applying (pre-B+L speculation)
P/cash EPS (~11.5x) and EV/EBITDA (13.2x) multiples to our accretion analysis, we arrive at a 12-month target of US$112.00 (increased from
US$82.00), which implies a 32.6% return and supports our BUY rating .

Related articles

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Emerald Oil

List of North Dakota numbered highways (Photo credit: Wikipedia)

EOX : NYSE : US$6.21
BUY 
Target: US$11.00

COMPANY DESCRIPTION:
Emerald Oil Inc. is an independent exploration and production company primarily focused on acquiring acreage and developing wells in the Bakken and Three Forks shale oil formations of the Williston Basin in North Dakota and Montana. The company also has acreage in the Sandwash Basin in Colorado and Wyoming, and the Heath Shale oil formation in central Montana.

SIGNIFICANT WILLISTON BASIN EXPOSURE AT A COMPELLING VALUATION
Investment recommendation
EOX is successfully transitioning to an emphasis on operated drilling in the Williston Basin (WB) Bakken/Three Forks (TF) plays, with initial
drilling in McKenzie County, North Dakota. We believe this transition will result in significant production growth and a higher stock price.
Investment highlights
 The company has completed a successful common stock offering and is now ready to accelerate development of its 54K net acre WB position, with a second rig due to start drilling shortly.
 EOX’s first operated Bakken well had a solid first 30 day average rate of 1,025 Boe/d. We expect two more results in late June and two more when the company releases Q2/13 results in early August, helping to drive rapid production growth beginning in H2/13. Based on the early results, we believe the company’s production guidance of 1,800 Boe/d for 2013 is conservative.
 Well costs are coming in at ~$10M, down from the original expectation of $11M, and we believe there is room for further declines.
 Trading at an adjusted EV/acre of only ~$2,500, EOX is the cheapest among its WB peers on this metric, with a group average of ~$8,000

Related articles

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Diana Shipping Adds To Fleet – The Turn In shipping Stocks ?

Panamax container ship (Photo credit: Wikipedia)

The question for AMP followers and all other holders of DSX – what do they see that caused them to add nearly 10 % to their fleet.

The Baltic Dry Index remains very low – off 85 % from the pre-recession 2008 crash. China growth is less than roaring and Europe is a drag on a world wide recovery.

Still we are trying to keep ahead of the curve and we presume DSX sees more than your humble economist:

Diana Shipping Inc. Announces Signing of a Term Loan Facility for Up to US$30 Million With the Export-Import Bank of China

1 hour ago – ACQUIREMEDIA

ATHENS, Greece, May 28, 2013 (GLOBE NEWSWIRE) — Diana Shipping Inc. (NYSE:DSX), a global shipping company specializing in the ownership and operation of dry bulk vessels, today announced that it has signed, through two separate wholly-owned subsidiaries, a term loan facility for up to US$30 million with The Export-Import Bank of China having a majority interest and DNB Bank ASA as agent. The purpose of this facility is to partly finance, after delivery, the acquisition cost of the two new-building Ice Class Panamax dry bulk carriers of approximately 76,000 dwt each, as previously announced by the Company on March 29, 2012. Based on latest information received by the yard, the vessels are now expected to be delivered to the Company during the fourth quarter of 2013 and the first quarter of 2014.

Separately, the Company also announced that yesterday it signed, through a separate wholly-owned subsidiary (the “Buyer”), a Memorandum of Agreement to purchase from an unaffiliated third party the m/v “Shoyo”, a 2006 built Panamax dry bulk carrier of 76,942 dwt, for a purchase price of US$20,250,000. The vessel, to be renamed “Artemis”, is expected to be delivered to the Buyer during September 2013.

Excluding the 3 aforementioned vessels, as well as 1 Capesize vessel expected to be delivered to the Company by early June 2013, and 2 new-building Newcastlemax vessels expected to be delivered to the Company during the second quarter of 2016, Diana Shipping Inc.’s fleet currently consists of 32 dry bulk carriers (2 Newcastlemax, 8 Capesize, 3 Post-Panamax, 2 Kamsarmax and 17 Panamax). As of today, the combined carrying capacity of our current fleet, excluding the six vessels not yet delivered, is approximately 3.5 million dwt with a weighted average age of 6.2 years. A table describing the current Diana Shipping Inc. fleet can be found on the Company’s website,www.dianashippinginc.com. Information contained on the Company’s website does not constitute a part of this press release.

DSX10.31+0.25

DRYS1.94+0.03

FRO2.26-0.0285

 

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