M&A Bull Case Priced In;
Take Profits on LO and RAI
In all but the most optimistic M&A scenarios, we see
RAI and LO trading lower. We value LO at $68 in an
M&A/bull-case context, and see meager returns for
BAT if it were to buy more RAI stock at current
levels. Risk reward for RAI & LO is unattractive and
we downgrade both stocks to Underweight.
Core industry fundamental outlook is still challenging.
US cigarette volumes are declining ~4%, operating profit
growth is very pedestrian, e-cigarettes are not a growth
panacea, Engle progeny cases remain a concern, FDA has
moved slowly but the menthol threat remains, and excise
tax and other concerns will inevitably resurface. This is our
view irrespective of M&A, likely will persist even with M&A,
and is of greater concern at current valuations.
Consolidation possible, but issues are considerable.
While we have no knowledge of any particular transaction,
press reports indicate that RAI is in ongoing discussions to
acquire LO, although neither party has commented. Market
enthusiasm notwithstanding, LO is already trading with an
M&A premium (all time high 12.5x 2014e EBITDA), the
antitrust issues are significant, and divestitures trigger
capital gains tax and reduce synergies. And even if a deal
occurs, it now appears largely priced in.
LO is an outstanding business, but Newport is a
one-market product with a narrow franchise, faces real and
idiosyncratic menthol risk, and LO trades close to our M&A
value of $68. Share buybacks are less accretive to EPS at
higher values and we see ~17% downside absent M&A.
RAI has virtually no underlying operating profit growth
in its core cigarette business (RJRT), and even in a bull
case we see little upside. RAI appears fully valued at
peak 12.5x 2014e EBITDA assuming that a LO purchase
would require material divestitures and at current valuation
would produce limited accretion (and fail to meet RAI’s cost
of capital). A potential BAT bid for the public’s stake in RAI
seee twitter @germantrader71
Morgan Stanley downgrades Merck $MRK to Underweight, pulls PT + cuts base case from $43 to $40, "D/G to UW ahead of key trial look in March"
MS on Merck $MRK: Less enthusiastic about MRK’s pipeline after the odanacatib delay
MS on Merck $MRK: More worried than consensus that IMPROVE-IT cld fail in March ‘13, hurting numbers and anacetrapib perception
MS on Merck $MRK: Mgmt did not inspire confidence when they addressed a question about IMPROVE-IT outcome during the Feb. 1 earnings call
MS on Merck $MRK: IMPROVE-IT March update with 40% odds that study fails early due to excess harm; MRK stock down mid-teens pct to $35 then
Check news on Twitter from @germantrader71 mentioning JP Morgan analysis
JP Morgan positive on Acacia Research $ACTG, keeps Overweight, Target $55 (Fr close $25.10)
JPM on $ACTG: Apple-Samsung trial verdict underscores the value of key smartphone patents
JPM on $ACTG: Verdict benefits $ACTG by increasing pot value of the Palm portfolio and by establishing a smartphone software royalty-rate
JPM on $ACTG: We sense that ACTG management seeks a settlement with Apple that will be in the hundreds of millions (market cap USD 1.3 bln)
JPM on $ACTG: Deal would be for prior period shipments alone, would be much larger than any prior termdeal
We are upgrading SanDisk to Buy as we see an attractive entry point for
the stock: (1) Post NAND industry oversupply and price pressure through
3Q12, we expect a return to supply/demand balance by 4Q12 as we believe
suppliers such as Samsung and Hynix are pushing out capacity expansion
and shifting some NAND capacity to logic; (2) We expect modest gross
margin expansion for SanDisk in 2H12 given tighter supply dynamics; (3)
Long term, we see outsized SSD exposure for SanDisk relative to peers; (4)
Valuation has become compelling with the stock trading at just 5X 2013E
product earnings (given $15 in net cash/share plus $12 in royalty value).
below trading in Germany fyi, last trade equals $55.75, already higher at $57 last traded in US premarket
12:00:18 44,00 100
11:22:46 41,00 150
11:08:38 39,00 600
11:05:42 39,00 300
10:59:27 39,00 300
10:36:52 39,00 200
09:37:44 39,101 50
08:05:59 39,02 94
08:05:44 39,00 80
08:03:30 36,80 0
My tweets today:
Deutsche Bank on $ONXX: We see several potential acquirers & M&A fair value at $68-$76
Deutsche Bank on $ONXX: Large biotech/pharma with global oncology sales force could extract launch synergies (ONXX Kyprolis launch costly)
$ONXX trading at €41 in Germany = $52 (+16,9%), Stock ~10% shorted
JP Morgan upgrades $ONXX Target to $66 from $48
Baird upgrades $ONXX to Outperform, Target $70, "Buyers into the $70 area"
Deutsche Bank initiates $ONXX with Buy today, target $58
$ONXX will explode today, after FDA panel favors Kyprolis risk/reward
playing the upgrade yesterday worked very well
shorts should shut up on this board
their level of anxiety is very telling
Many shorts in this name speculating on lock up-expiry pressure on the shares.
Comments above show how nervous they are after today MS upgrade.
We'll see what the market makes of all of this...
get your point...
but MSDW initiated Equal Weight at December 14, 2011
(despite them earning a ton of money from the IPO)
the stock was at $23.31 then.
Now they upgrade at $ 10.06
Makes sense to me. Market will decide.