Friday, May 15, 2009

Today's analyst actions

from briefing: Pali Research upgrades WMG to Buy from Neutral and sets target price at $7.50.The firm notes that they have been quite negative on Warner Music and the broader music industry for the past few years, as they feared accelerating physical sales declines, a slower than expected ramp in digital revenues, weakening balance sheets with poor capital allocation and the fact that music labels were essentially becoming unnecessary. While the firm expects the music industry's declines/troubles to continue for at least the next couple of years with total domestic unit sales down an estimated 8% in 2009 and 6%-7% in 2010, compared to an 8.5% decline in 2008, they now believe WMG is in a position to generate over $400 mln of EBITDA and nearly $200 mln of free cash flow in each of the next several years.

AlphaNinja's take - Worth a look - with a Market Cap of $762m, that's a FCFY (FreeCashFlow Yield) of 26%. Interest payments on the company's $2.2billion pile of debt run $41m per quarter, and the company's "OIBDA" (op income before D&A) is only $80mil, or just 2x the interest payments. Cash balance of $658 million eases some debt concerns, and debt isn't due until 2014, but these covenants may come into play this year. From the recent 10q:

senior secured credit facility-The maximum total leverage ratio, which decreases over time, was 4:00:1 for the quarter ended March 31, 2009 and decreases from 4.00:1 to 3.75:1 for the two quarters ending June 30, 2009 and September 30, 2009 and then to 3.50:1 beginning with the quarter ending December 31, 2009. Our minimum interest coverage ratio, which increases over time, is 3.00:1 for the fiscal year ending September 30, 2009 and increases to 3.25:1 for fiscal 2010.
Senior Subordinated Notes and the Holdings Discount Notes, the Fixed Charge Coverage Ratio, as defined in such indentures, must exceed a 2.0 to 1.0 ratio. Fixed Charges are defined in such indentures as consolidated interest expense excluding certain non-cash interest expense.


Covidien(COV) added to top picks list at Citi.

AlphaNinja's take - Covidien was Tyco's crown jewel before being spun off. Well run with a long history, the company is inexpensive at 12x forward earnings. Net (subtracting cash from MCAP) FCFY at 9% is nice, but AlphaNinja would be interested if that were in the low/mid teens, by way of a sub-30 stock price.


AlphaNinja: Cal-Maine Foods(CALM) downgraded somewhere? Stock down 7%. We're familiar with the name, as well as the conservative, capable company management. This a total commodity stock - the trade over the past few years has been to get aggressive near 20 and take profits in the 30's. The ongoing debate about potential price collapses in shell eggs may be missing the more "structural shift" argument - that shell eggs have been an underpriced source of protein for too long. As inflated as shell egg pricing has been the last few years, feed (Cost of Selling) costs have been up huge as well, so we may find that CALM's costs recede faster than their selling prices. Free Cash Flow this year will be around $100million, or 20% of MCAP. Great yield, but a necessary one, given political risks from California chicken laws and wild price swings in shell egg pricing. Will be interested in this name if it falls to 20.


Nordstrom(JWN) upped to buy at PiperJaffray. Target of $25, stock +7% to 22.50 today.

AlphaNinja: This company will do $300m in FCF annually for the next few years, and the market values the company at $4.5billion. They could potentially get FCF to the $700m range. The stock is more than fairly priced - it might become more attractive if the market takes another massive leg down.

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