Genuity says its time to sell Evertz
With great gains this year ($14-$38), Genuity research analyst David Hodgson thought that it was time on Wednesday to take those profits off the table and sell Evertz Technologies (ET:TSX). He reduced his share price target from $35 to $28. And that’s about where the stock is at a couple of days later. With low volumes, few folks could have hit the exits, unfortunately:
Evertz reported another solid quarter with revenue of $74.4 million, right in line with our estimate, while EPS of $0.30 was in line with our and consensus estimates. The company’s operating expense control was once again excellent, with opex (SG&A + net R&D) up just 11% YoY, as compared to revenue growth of 59% YoY.
While the results of Q2/F08 were encouraging, the company’s disclosure of its November monthly sales and the 4-6 week purchase order backlog, which showed a sequential decline of 23% if one were to combine the two figures, was rather disconcerting. To meet the Q3/F08 consensus revenue estimate, Evertz would need to deliver sequential growth of close to 53% for its remaining book and ship business vis-à-vis the October quarter book and ship levels. Clearly, against the backdrop of the 23% sequential drop in November sales and the backlog as of November 30, this would seem to be unreasonable. Monthly sales volumes appear to have fallen from a peak of north of $25 million just a few months ago to approximately the low $20 million range over the past couple of months.
We believe that the competitive playing field is flattening to a certain extent for Evertz, given our perspective that the overall market dynamics remain fairly positive. The company’s win rate during the past two to three quarters likely was not sustainable, given the impact of competition. This being said, the company remains the market leader in many verticals.
Our revised assumptions for F2008 and F2009 revenue growth are 40% and 19%, with EPS growth of 34% and 11%, respectively. We believe that a reduction in the target multiple is reasonable, given the decrease in the EPS growth rate according to our F2009 estimates.
With a market capitalization of approximately $2.9 billion, on forecast sales of $280 million in F2008, the stock was not pricing in the sequential deceleration in revenue. We are reducing our target price to $28.00 (from $35.00) and our rating to SELL (from HOLD). Our EPS forecast for F2009 assumes revenue growth and operating margin of 19% and 41.5%, respectively. Our rating change is quite simply a valuation argument at current levels.