Nine Actionable Calls

The following is excerpted from a recent note that Singular Research sent to clients:

Growth Play

Ebix, Inc. (EBIX) is an international provider of software and e-commerce solutions for the insurance industry. It focuses on the sale and support of its insurance carrier systems, broker/agency management systems and exchange family of products, which provide connectivity between consumers, agents, carriers, and third party providers. It also provides services for software development, delivery of software as an application service provider (ASP), software license, maintenance and business process outsourcing. EBIX trades 8x our 09 eps estimtate. We project 35%+ eps and revenue growth. The company beat estimates last quarter by 13%; eps estimates are revised higher for 09. All are extrememly rare events in this environment.

• Other items: Net sales grew by 71% quarter-over-quarter, and 13% sequentially; EPS grew by 85% quarter-over-quarter, and 17% sequentially.
• The Insurance Exchange segment revenues grew by 128% quarter-over-quarter.
• Reports success in new Health Benefits market with Acclamation acquisition.
• Acquires ConfirmNet, building market lead in insurance certificate tracking.
• Latest offer to acquire HealthAxis (HAXS) is rejected by the company’s board.
• Acquisition strategy may benefit from attractive stock market valuations.
• Value proposition to Insurance Industry is compelling despite weak economy.
• Revenue and EPS projections increased from Q2:08 coverage initiation.

Short Play

We believe that Bank of America's (BAC) balance sheet will ultimately have to be fortified by a Citi (C) like government bailout. As a result, its stock price continues to have substantial downside risk. We are initiating coverage with a SELL rating.

Investment Thesis

• While we expect earnings at BAC to erode throughout 2009, our short call is based on a rapidly deteriorating balance sheet that will force the company into drastic measures, such as a government bailout, much like Citigroup's recent agreement with the Federal government.
• While recent mergers with Countrywide Financial and Merrill Lynch (still pending) position BAC as a behemoth in the financial services industry, these transactions have also loaded the company with questionable assets that are likely to be written down substantially in the near future.
• On a pro-forma basis, level 3 assets, which are valued almost exclusively by internally generated models, represent $144 billion, or approximately 74% of the company’s equity. This represents a jump of 344% in level 3 assets since Q4:07.
• Off-Balance Sheet assets and derivative exposure have also jumped since the beginning of the year, and write-downs are likely. We believe that as this becomes apparent to investors, the stock price will decline towards tangible book value. As a result, we are initiating coverage of BAC with a SELL rating and a $7 price target.

Risks

• The Federal government has already initiated several bailout plans that are intended to improve the current credit crisis and unfreeze the credit markets. BAC will benefit to the extent that these plans are successful.

Singular Research Screens

Chart Choices

Long: AECOM Technology Corporation (ACM) provides professional technical and management support services to government and commercial clients worldwide. Its Professional Technical segment delivers planning, consulting, architectural and engineering design, and program and construction management services. This segment provides its services for a range of projects, including highways, airports, bridges, mass transit systems, government and commercial buildings, water and wastewater facilities, and power transmission and distribution. ACM beat estimates over last four quarters. Next quarter eps estimate is +30% and 2009 eps estimate is +19%; PE is reasonable at 17x FTM . ACM is well-positioned for continued infrastructure stimulus domestically and internationally.

Short: Blackbaud, Inc. (BLKB) provides software and related services for nonprofit organizations. It offers various software solutions, including The Raiser's Edge, an application software to manage a nonprofit organization's constituent relationship management activity; The Financial Edge, an accounting application to address the accounting needs of nonprofit organizations; and The Education Edge, a student information management system designed principally to organize an independent school's admissions and registrar processes, could be facing a prolonged period of non-generosity during deepest recession in 26 years. EPS estimates were cut 20% for q4 and slashed over 15% for 2009. 70% premium to S&P 500 on TTM, 20% premium on FTM.

Insider Buying: Bill Barrett Corporation (BBG) is an independent oil and gas company engaged in the exploration, development, and production of natural gas and crude oil in the rocky mountain region of the United States. The company’s areas of operation includes Uinta Basin in northeastern Utah; Piceance Basin in northwestern Colorado; Powder River Basin in northeastern Wyoming; Wind River Basin in central Wyoming; Paradox Basin in southwestern Colorado and southeastern Utah; Montana Overthrust in southwestern Montana; and Big Horn Basin in north central Wyoming. It transports natural gas and oil through the company’s and third party gathering systems and pipelines. Three insider buys over $32m at an average price of $23.91. BBG Trades 10x TTM and 3.4x ECV/EBITDA.

Insider Selling: Marvell Technology Group, Ltd. (MTVL) is a semiconductor company, engages in designing, developing, and marketing analog, mixed-signal, and digital signal processing, and embedded microprocessor integrated circuits. It offers storage products that include preamplifier, read channel, hard disk controller, system-on-a-chip solution, motor controller, and tape drive controllers; one insider sell at $56m at $6.54. Consumer Electronics markets have been slowed by recession. Q4 eps estimates – 45%, FTM estimates revised - 40%.

Positive EPS Surprise: Photronics, Inc. (PLAB) engages in the manufacture and sale of photomasks primarily for the semiconductor industry. Photomasks are high precision quartz plates containing microscopic images of electronic circuits. The company’s photomasks are used in the manufacture of semiconductors and flat panel displays, as well as used as masters to transfer circuit patterns onto semiconductor wafers and flat panel substrates during the fabrication of integrated circuits, and other types of electrical components. Last quarter eps beat + 114%. Trades 9x FTM eps and 2.1x EV/EBITDA.

Mid Cap Garp: Priceline.com Incorporated, (PCLN) operates as an online travel company in the United States and Europe. It provides various travel services, including airline tickets, hotel rooms, car rentals, vacation packages, cruises, and destination services under 'Name Your Own Price' brand name. 13.5x FTM eps estimates, 9.5x EV/ EBITDA. 0.57 PEG ratio on 5 year estimated eps growth rate of 22%.

Positive Accruals (high potential eps miss): Investment Technology Group, Inc. (ITG) operates as an agency brokerage and technology company, which provides solutions spanning the investment process in North America, Europe, Asia, and Australia. The company offers ITG Opt, a computer-based equity portfolio optimizer; Macgregor Enterprise Compliance, a daily and real-time pre-trade portfolio compliance monitoring system; and ITG Logic, a risk management and trading cost reduction tool. Reported net income to cash flow growth spread is over 195%. With near 40% contraction in the institutional and hedge fund business expected, 2009 eps is only expected to be down -7%.

Disclosure: Author holds a long position in EBIX

Comments

[kruser53:]

Nice picks. No disclosures?.

Jan 07 09:59 AM

[Urbane Gori...:]

Not too sure about BofA.. They have a following that seems to forgive them everything.. Kinda like AAPL or MSFT. And I do think the bailouts will keep coming.

It would seem to me that a better choice to short would be those companies that are 'hanging in the breeze' with no govenment safety net available. I'd be looking at REITS.. Preferably those with debt due later this year and that have a big diviidend that they'll have to cut sometime. Or maybe retailers now that XMas is over and they'll have to face the fact that the big sales season is over and there aren't any more buyers.... Maybe a homebuilder if they aren't already chock-a-block with shorts...

You can do a scan and then head over to 'shortsqueeze.com' to see who's shorted heavily and who isn't... I'd also take a look at the option activity for a few months out.... You really donp;t want to be holding a short on options expiration day..

Good article.. Thx jegan

Jan 08 08:45 PM