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Published: June 14, 2010
Stocks seem to have stabilized as the
trading week came to a close, but investors continue to wrestle
with the market’s next move. Shares are noticeably cheaper than
a few months ago, but the risks of an economic slowdown have
increased. For those who see the current market as “half-full,”
here are some of the most compelling stocks from
StreetAuthority's daily "Winners" and "Losers" articles.
Emulex (NYSE: ELX)
Earlier in the week, we suggested that investors may have judged
an acquisition by Emulex too harshly. And the more I look at the
$160 million deal to acquire ServerEngines, the more there is to
like. I already discussed the notion that the acquired
technology will broaden Emulex’s technology platform to better
enable it to compete with its rivals. I should have added that
ServerEngines, the acquired company, also has a very impressive
base of customers on its own. And many of those customers do
business with Emulex’s rivals such as Qlogic (Nasdaq: QLGC)
and Broadcom (Nasdaq: BRCM). When the deal is completed,
look for Emulex to go knocking on a lot of new doors.
Also of note, Emulex’s profit margins had been below those of
its rivals. QLogic, for example, has 25%
earnings before interest, tax, depreciation and amortization
(EBITDA) margins in 2009, twice the level of Emulex. This
deal should boost Emulex’s pricing latitude, and as higher
prices yield fatter margins, profit growth is likely to exceed
revenue growth.
Analysts have taken a wait-and-see approach to this deal, but it
looks like a classic 1+1=3. It may take several quarters, but
you should look for profit forecasts to start to rise as the
acquisition begins to bear fruit.
Action to Take --> Shares of
Emulex trade for around two times trailing sales while Broadcom
and QLogic trade for about 3.5 times trailing sales. As the
company’s margin profile moves up to the level of those peers,
so should the price/sales ratio, implying +60% or more upside.
Allscripts (Nasdaq: MDRX)
In keeping with the theme of “misunderstood deals,” investors
really should take a closer look at the Allscripts deal to merge
with Eclipsys (Nasdaq: ECLP). As
we noted on Wednesday, the deal was poorly received, in part
due to a complex unwinding of a relationship with Mysis that
could lead to an overhang on the shares ahead of a planned
equity offering.
Major investors
such as mutual funds
can perhaps buy into
this stock a bit
cheaper through a
discounted price of
any equity offering.
(To get a deal done,
bankers often need
to price a deal a
bit below the
current trading
price). But we
individual investors
have no such luxury.
But this is such a
compelling industry
opportunity. We know
that doctors,
insurers and
hospitals have no
choice but to
participate in a
fully-electronic
records-keeping
system. And we know
that Allscripts and
Eclipsys have built
massive,
complementary
customer bases that
support all those
groups. We don’t
know what profits
might look like in
the near-term, which
is the partial
reason for the share
sell-off. But over
time, software-based
business models can
throw off oodles of
cash.
Action to Take
--> This
is a great stock to
read up on. Shares
may tread water
until Mysis sells
off its stake.
Before that happens,
analysts will be
generally quiet
about the deal
(especially if their
firm is
participating in the
stock sale). After
that event has
passed, look for
analysts to really
get behind this
name.
Wendy's/Arby's
(NYSE: WEN)
As the Friday
trading session
wound down,
investors had given
back half of the
earlier gains in
Wendy’s/Arby’s.
That's partially the
result of concerns
that the
buyout rumors
were just that --
rumors.
Deal or no deal,
this is an
attractively priced
stock with limited
downside based on
the current
cash flow
generated by the two
restaurant chains.
That cash flow
should stay in
place, unless
already-weak
same-store sales
figures fall even
further. But that
seems unlikely.
Instead, the odds
are that as
management tinkers
with the menus at
both restaurants,
they’ll eventually
strike a chord with
consumers. For
example, Wendy’s new
boneless wings have
been a reasonable
success, and are
just now catching on
abroad.
Action to Take
--> It’s
unclear if a buyout
is imminent. But it
is clear that
majority shareholder
Nelson Peltz will do
whatever it takes to
unlock value. With a
floor in place and
possible +20% to
+30% upside, this
stock looks fairly
appealing.
-- David Sterman
Staff Writer
StreetAuthority |
