HSBC Holdings Plc – ADS (HBC) – Bear of the Day
We retain our Underperform recommendation on HSBC Holdings plc (HBC) with an Underperform recommendation. Our primary concern is the harsh impact from the deepening Eurozone crisis. Moreover, the company is suffering from weak revenue growth in its mature markets due to ongoing low interest rates and regulatory restrictions.The company's cost containment measures will help it deal with economic pressures to a great extent. But we expect high inflation in some key Asian markets, slothful loan growth, insufficient core operating performance and high wage inflation to restrict the company's growth, at least in the near term.
Our six-month target price of $36.00 per ADS equates to about 8.5x our earnings estimate for fiscal 2011. This target price implies an expected negative total return of 9.0% over that period. This is consistent with our long-term Underperform recommendation on the ADSs.
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Citi Trends, Inc. (CTRN) – Bear of the Day
Citi Trends, Inc. (CTRN) falling comparable store sales, coupled with rising operating expenses battered the third-quarter 2011 results. The company incurred a quarterly loss of $0.38 per share that broadened from the prior-period loss of $0.03. The Zacks Consensus Estimate for the quarter was a loss of $0.37 per share.Further, due to uncertainty hovering around sales given the global economic unrest, the company rolled back its earnings guidance range of $1.25 to $1.35 per share for fiscal 2011. The company decided not to provide any guidelines unless it finds any near-term catalysts to drive sales.
Intense competition from other retailers, seasonal nature of business and risks associated with sourcing merchandise from developing countries may further undermine the company's future growth prospects. Currently, we are maintaining a long-term Underperform recommendation on the stock.
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BHP Billiton – ADR (BHP) – Bear of the Day
We downgrade our recommendation on BHP Billiton Ltd. - ADR (BHP) from Neutral to Underperform based on declining industrial demand on the back of sluggish economic growth in Europe and U.S. Other headwinds include competition from peers, upsurge in oil prices and rising inflation in the emerging markets.Turning toward expenses, the cost of improving ore grades, mining disruptions due to natural calamities, governmental delays as well as currency fluctuations further thwart the stock. A slower global growth rate, on the back of the European crisis and a dwindling U.S. economy may impact the demand for the company's products and dampen revenue growth going forward.
Volatility in currency prices may have a significant impact on the company s financial results going ahead. Moreover, an upsurge in oil prices and rising core inflation in the emerging markets may also prove detrimental to the company's growth.
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France Telecom – ADR (FTE) – Bear of the Day
We are downgrading our recommendation to Underperform on France Telecom (FTE). The company reported lackluster results in the first nine months due to weak mobile device sales in France, higher VAT rates and challenging economic conditions in Egypt and Cote d'Ivoire.Although Conquests 2015, exiting of minority holdings, expanding in emerging markets and cost-saving programs remain in place, we believe persistently weak economic conditions, labor concerns, lower mobile termination rates and unfavorable regulatory measures across its key European markets might restrict the upside potential of the stock.
France Telecom continues to invest in the deployment of mobile broadband and fiber optic network in France, 2G and 3G roaming facilities as well as expansion in emerging markets. We believe these investments might increase the company's cost of operation, resulting in lower profits.
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Meritor, Inc. (MTOR) – Bear of the Day
Meritor, Inc. (MTOR) is a globally recognized automotive parts supplier. However, the company has high customer concentration, which implies limited scope for margin expansion. Further, the recent turmoil in the global economy is expected to continue to mar its results.We are also disappointed about Meritor's deteriorating cash flow. Although the company's fiscal fourth quarter profit was ahead of the Zacks Consensus Estimate by $0.19 per share, we remain concerned about its long-term outlook.
Our long-term Underperform recommendation on the stock indicates that it will perform lower than the broader market. Our $5.50 target price, 3.8X our 2012 EPS estimate, reflects this view.
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Canadian Solar, Inc. – ADS (CSIQ) – Bear of the Day
Canadian Solar, Inc. - ADS (CSIQ) is a low cost, vertically-integrated solar module producer with predominantly China-based manufacturing assets. In the near-term, fortunes look to be impacted by the industry-wide oversupply glut, leading to sharply falling average selling prices, tepid module demand in Europe, and rising competition in the market.Furthermore, adjusted loss per ADS of $1.24 in its third quarter of 2011 was way below the Zacks Consensus Estimate of $0.51 loss. Given the industry wide high inventory level, we do not foresee any short-term improvement in margins of the company. So we advise investors to exit from the stock for now and look for a favorable entry point in the future.
Canadian Solar is also undergoing a review by the International Trade Commission due to a complaint by Westinghouse Solar Inc. In the complaint Westinghouse Solar accused Canadian Solar of patent rights infringement.
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China Life Insurance – ADR (LFC) – Bear of the Day
China Life Insurance's (LFC) third-quarter earnings witnessed a steep decline from the comparable period of last year. High surrenders, low premium income and increased impairment losses led to a decline in the net income, while increased unrealized losses in the investment portfolio led to reduced shareholders equity.Additionally, China Life inherently faces substantial interest rate, market and currency risk. Although the company has a strong brand name, it has to deal with considerable competition on the domestic front, which limits earnings growth.
Overall, we expect some downside in the near term due to lack of any significant growth catalyst. The quantitative Zacks Rank for China Life is currently #4, indicating slight downward pressure on the ADRs over the near term.
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Citi Trends, Inc. (CTRN) – Bear of the Day
Citi Trends, Inc. (CTRN) falling comparable store sales, coupled with rising operating expenses battered the third-quarter 2011 results. The company incurred a quarterly loss of $0.38 per share that broadened from the prior-period loss of $0.03. The Zacks Consensus Estimate for the quarter was a loss of $0.37 per share.Further, due to uncertainty hovering around sales given the global economic unrest, the company rolled back its earnings guidance range of $1.25 to $1.35 per share for fiscal 2011. The company decided not to provide any guidelines unless it finds any near-term catalysts to drive sales.
Intense competition from other retailers, seasonal nature of business and risks associated with sourcing merchandise from developing countries may further undermine the company's future growth prospects. Currently, we are maintaining a long-term Underperform recommendation on the stock.
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Linear Technology (LLTC) – Bear of the Day
Linear Technology (LLTC) is a leading OEM of analog and mixed signal semiconductors. September quarter results missed the Zacks Consensus, as weak demand, unfavorable mix and a higher tax rate impacted results. Extreme caution regarding customers also led to a weak guidance.Therefore, despite the strong business model, excellent products and ability to generate strong operating cash flows, we advise investors to avoid the shares, since we believe there is uncertainty in near-term demand. The high debt burden also increases risks.
We think the loss of the iPad business will continue to tell on sentiments. We are therefore reiterating our Underperform recommendation on the shares, as indicated by our $26 target price (14.9X P/E).
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Meritor, Inc. (MTOR) – Bear of the Day
Meritor, Inc. (MTOR) is a globally recognized automotive parts supplier. However, the company has high customer concentration, which implies limited scope for margin expansion. Further, the recent turmoil in the global economy is expected to continue to mar its results.We are also disappointed about Meritor's deteriorating cash flow. Although the company's fiscal fourth quarter profit was ahead of the Zacks Consensus Estimate by $0.19 per share, we remain concerned about its long-term outlook.
Our long-term Underperform recommendation on the stock indicates that it will perform lower than the broader market. Our $5.50 target price, 3.8X our 2012 EPS estimate, reflects this view.
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