HPQ and EDS Deal

Toni Sacconaghi, an analyst at Bernstein Research, notes that since 2002, EDS has generated annual revenue growth of just 0.4% versus 8% for HP. And he notes that gross margins at EDS are around 15%, versus 24% for HP. “Given that we do not believe HP will be able to materially improve either revenue growth or gross margins,” he writes, “the acquisition is likely to result in some multiple compression over time even though the deal is accretive and HP has the opportunity to boost EDS’ operating margins from current levels.” Sacconaghi also notes that EDS is heavily weighted to the U.S., with only a third of the company’s workers outside the country. He says that appears inconsistent with HP’s stated goal of building global capacity in its services business. Sacconaghi suggests that for $13 billion, the company could have instead bought Satyam (SAY) or Cognizant (CTSH), which have higher growth and fatter margins. He keeps his Market Weight rating on the stock.

Louis Miscioscia, Cowen: “Now is a good time to buy given the recent hit due to the announced deal with EDS,” he writes. “We would not have recommended that HP acquire EDS, and are concerned about opportunity costs, but we do believe that HP can make it work, that is with a lot of heavy lifting. Financially the deal is about a push, strategically this should actually help HP’s positioning in services and finally operationally one has to decide if Mark Hurd can run EDS better than EDS running itself. We think he can.” He keeps his Outperform rating.
Richard Gardner, Citigroup: “We would be aggressive buyers of HPQ shares on today’s pullback,” he writes. Gardner says the sell-off is “a clear overreaction.” Gardner says that HP faces slower industry growth, more stable component pricing and a more stable dollar going forward, but that “these factors are more than fairly reflect in consensus estimates” and the stock price.

Doug Reid, Thomas Weisel Partners: Reid writes that he is “incrementally more negative on HPQ” for three reasons: EDS’s “comparatively weak” margins and revenue profile and “significant integration risk.” He maintains a Market Weight rating.
Richard Krugele, Needham: He contends that “investor sentiments appear to be overdone.”
Scott Craig, Bank of America: Likewise, he says that “the stock price decline over the past 2 days…is an overreaction and a good buying opportunity for the stock.” He says that the deal “makes strategic long-term sense, even if the price paid is a little aggressive.” He says the reasons investors are nervous about the deal include lack of detail on potential cost and revenue synergies and “EDS’s challenging history.”

LDK - Q2 FY08 Thoughts

After reviewing the financials I have a few thoughts:
What the analysts do not like:
1. Q2 looks to have a GM of 23-27%
2. Inventory over one year to be processed- 21 Mil (reduction of roughtly 20% from end of Q1)
3. Taxes increased to $8.5 million from 500K.

What analysts do like:
1. Prepayments increased 65% from $141 mil to $231 Mil.
2. Sales FY 08 increase from 960 mil to 1.08 to 1.18 BIL.
3. Cash on hand increase a tad over 10% from $83 mil to $93 mil.
4. Inventory on hand increase from $349 mil to $519 mil. meaning delivery shortages are not likely to happen.
5. Total current assets increase 40%
6. R&D dropped significantly from 1.6 mil to 370K
7. They are paying their taxes...
8. Foreign currency benfit of $5 mil
9. General admin expenses increase 20% from 9.5 mil to 11.1 mil.
10. Nice bump in Government subsidies up over 100%.
11. Most important: Plant is on track and will be producing 100 to 350 MT of Poly by end of the year increasing the GM.

All in all, LDK is positioned extremely well for the future and continues to exceed expectations. FY 2008 It apprears that 2.20 per share is attainable. At a PE of 25 to 30, I think 60 to 75 by year end is very realistic not taking into account the buy-back of shares.
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After reviewing the conference call and the numbers:

The current cost of PS is $200/Kg.
They roughly sold 105 MW in qtr 1 and produced $233.4 Million in revenue with an average sell amount of $2.22 per watt.
They need about 8 grams/watt of Polysilicon.
This equates to 840,000 Kg's of PS at a cost of $200/kg.
So the costs of PS = $168 million.
1 - $168M /$233 = about 28 % gross margin.

From the CC lets advance 3 years:
The future costs of PS will cost them $35/Kg to produce with the new plant.
Let's say that at the end of 2009/ beginning 2010 they ship at a rate of 1.8 GW/year.
How much PS will they need?
The amount of PS will drop to 6.5 grams per watt.
So they need about 12 Million KG of PS per year, which is a lot of material.
This equates to about 15,000 Tons the magical new PS production capacity.

Bottom line:
The 1.8 GW will give revenue about $3.6 Billion/year ($2/Watt).
But the PS will only cost LDK $35/Kg to produce = $420 million/year. The gives a gross margin value of: 88%.

If you crunch those numbers LDK could net of $1.5 - 2.2 Billion or an EPS of $13-20 per share/year.

Market Bouncing Again

After BSC's buyout at $2 a share, the market has bounced off again for a few days similar to the event a month ago when the feds had to pull an emergency cut. The outcome? Investors will sell this pop on the next bad news. Financial stocks FNM, FRE, LEH made huge bounces including GE.
As many already know, the sub-prime crisis is not over. The mortgage rates have not reset and they're still high despite the fed rate being slashed point after another. I see us testing the bottom once again before any foreseeable, sustainable uptrend.

Bank Stocks on the Roar

Ever since the emergency fed rate cut a few weeks ago, bank stocks have been roaring. I'm not going to bother listing all the banks and their performa but here's a prime example with WM - Washington Mutual.

Stock Date-Price Date-Price % Increase
WM 1/17/08-12.46 2/1/08-21.82 60%

What cause this Roar? People have been clamoring a number of reasons for this sudden surge.

1. Shorts Covering
As the doom and gloom begins to worsen, a less risk in the downfall of the price of stocks begins to unfold. The only scenario that would cause conditions to deteriorate would be the federal reserve not providing liquidity within the exchange of cash. Now we all know that the feds do not want to see major banks that are somewhat, a symbol of US's status in the world fall despite their mistakes in undertaking risk in the sub-prime.

2. Institutions Buying
As we all know, many institutions sold their positions prior year end for tax purposes. From this sell off lead to other funds and investors to close their positions and keep cash for the time being. This notion can be probably derived by the fact that bank earnings were set to release in January, and I do not think there was one investor in wall street that knew these numbers would look horrible. As such, institutions probably had their mind set on infusing investments after the earnings and what better opportunity when the global market was in panic followed by an emergency fed rate cut.

Despite this mini rally that we are currently experience, I do not believe it's the beginning of a bull market. Although I do agree that we are off the lows, I would not be surprised if we saw another bear run before seeing a bull market. If we see any rumors running about bond insurers filing bankruptcy, expect profit taking and major dip.