Zacks Bull and Bear of the Day Highlights: Thoratec, J. C. Penney, Flextronics International, Google and Apple
Zacks Equity Research
For Immediate Release
Chicago, IL – December 14, 2012 – Zacks Equity Research highlights Thoratec Corp. (THOR) as the Bull of the Day and J. C. Penney (JCP) as the Bear of the Day. In addition, Zacks Equity Research provides analysis on Flextronics International Ltd. (FLEX), Google (GOOG) and Apple Inc. (AAPL).
We maintain our recommendation for Thoratec Corp. (THOR) at Outperform. Its earnings per share of $0.44 in the third quarter beat the Zacks Consensus Estimate. The company achieved 27% unit growth for HeartMate II in the third quarter.
Thoratec's competitor HeartWare has gotten approval, in November 2012, from the FDA for its Ventricular Assist System as a bridge to transplantation. However, there is no imminent competitive threat from HeartWare in the DT segment, as its product is not expected to be launched till 2015. We believe that the DT condition will account for the major part of growth in the Ventricular Assist Device (:VAD) market.
Despite less visibility, Thoratec has expertise in product development. The company continues to do well in overseas markets despite economic turmoil in Europe. We maintain our recommendation on the stock with a price target of $44.00, based on a P/E of 27.5x our 2012 EPS estimate.
J. C. Penney (JCP) posted a third-quarter 2012 loss of $0.93 per share that fared worse than the earnings of $0.18 in the year-ago quarter and the Zacks Consensus Estimate of loss of $0.08. The company has missed the Zacks Consensus Estimate in the last four quarters by an average of 328.2%. Total revenue also fell 26.6%, whereas comp sales slid 26.1%.
We observe that despite a well-diversified supplier base, the company has been struggling against other retail chains. Its dismal results dashed those hopes at least for the near term. Moreover, erratic consumer behavior and a sluggish economic recovery still remain matters of concern.
Currently, we maintain our Underperform recommendation on the stock. Our target price of $26.00 is based on a price-to-cash-flow multiple of 4.8X.
Electronic product contract manufacturer, Flextronics International Ltd. (FLEX) recently announced an agreement with Motorola Mobility LLC to acquire the latter’s manufacturing facility and equipment in Tianjin, China and related equipment in Jaguariuna, Brazil for an undisclosed amount. The deal is expected to be completed by the end of first half of calendar year 2013.
In May 2012, Google (GOOG) acquired Motorola Mobility for approximately $12.5 billion. The current deal reflects Google’s strategy of downsizing Motorola’s existing operations in order to save cost. The deal will make Flextronics Motorola’s biggest outsourcing partner.
Currently, Flextronics serves both Google and Apple Inc. (AAPL). We believe that Flextronics is well positioned to benefit from the growing rivalry between these two companies over the long term.
Flextronics expects the deal to be accretive on both operating income and earnings per share basis for fiscal year 2014. Revenue potential is expected to be of several billions and operating margin remains within the target range for its High Velocity Business segment. The company expects to earn a return on invested capital (“ROIC”) of 20% going forward.
Flextronics announced that the two facilities, along with equipment and assets are worth approximately $75.0 million and the company is not paying any premium for these items. Moreover, Flextronics will acquire a highly trained and skilled ready-to-deploy employee group, which will save it a lot of time and training money, in our view.
We believe that the deal will be significantly beneficial for Flextronics as it will help in expanding the company’s manufacturing capacity in the low cost regions of China and Brazil. Notably, in August this year Nokia Siemens Network signed a contract with Flextronics to open an assembly line in Brazil.
Acquisitions have been an integral part of Flextronics’ growth story. Although most of the acquisitions were that of start-ups and small companies, they helped Flextronics to expand its presence in the communications, medical, infrastructure and automotive sectors. We believe that the Motorola facility acquisition will further drive its growth prospects over the long term.
However, Google’s intentions regarding the Motorola hardware operations are not very clear. The search giant has already announced its intentions of exiting the entry-level low-margin handset business and focusing on high-end smartphones, where Motorola used to have minimum presence.
We believe that this uncertainty related to Google’s motive over Motorola’s handset manufacturing business will be a significant headwind for Flextronics going forward. If Google suddenly decides to wind up the whole business, both the current facilities will become idle (currently they will only manufacture Motorola handsets), which will hurt Flextronics’ top-line growth going forward.
Moreover, macro-economic concerns and weak end-market demand are the other major concerns in the near term.
We have an Underperform recommendation on Flextronics over the long term. Currently, Flextronics has a Zacks #4 Rank (Sell).
Every day, the analysts at Zacks Equity Research select two stocks that are likely to outperform (Bull) or underperform (Bear) the markets over the next 3-6 months.
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