Among the biggest winners in Friday's early trading are
SAIC Inc. (Nasdaq: SAIC)
Splunk (Nasdaq: SPLK)
Omnivision (Nasdaq: OVTI)
Breaking up is easy to do
For the past few decades a number of academic studies found that
building a far-flung empire of companies is a bad idea as far as
investors are concerned. The unwieldy nature of such massive
enterprises makes it hard to peg a value for the entire firm,
leading to a "conglomerate discount."
So whenever investors see a company take steps to break itself
into pieces -- or "deconglomerate" -- they cheer loudly. In just
the past 18 months firms such as
Marathon Oil (
Sara Lee (NYSE: SLE)
Tyco International (
have all racked up quick gains when they announced plans to break
into two parts.
The latest example: Information technology and defense
contractor SAIC Inc., which is rallying nearly 8% this morning
after announcing plans Thursday to spilt itself in two.
SAIC's decision is for an unusual reason: The company found that
certain divisions were being hampered from pursuing government bids
because of a conflict of interest. In effect, the government was
displeased that SAIC's technology consultants were recommending the
use of the firm's technical services division.
Yet caution is warranted, especially after today's gain. That's
because SAIC has been a huge beneficiary of the government's
decision to outsource many security and intelligence functions over
the past decade. Sales shot up from $5 billion in fiscal (January)
2004 to more than $10 billion by fiscal 2009. The fact that sales
rose to just $10.6 billion by fiscal 2012 highlights the limits of
government's outsourcing efforts. And there's a good chance that
outsourced contracts will be brought back in house to save money,
which means that companies like SAIC may actually see revenue
declines in the belt-tightening years ahead.
A solid sophomore report from Splunk
When a company goes public, the stage is often set for a solid
initialquarterly report . The company is well aware that many
investors are paying close attention, so all efforts are made to
pump up the quarter. Yet many of these companies often stumble in
the subsequent quarter as all the tricks to juice a quarter have
So it's quite impressive that analytics software firm Splunk
delivered an impressive sophomore quarterly report on Thursday
evening, giving the stock a double-digit gain in today's trading.
Fiscal second-quarter sales of $44.5 million were more than 10%
ahead of consensus expectations as more clients sign up for the
company's "Big Data" software. That phrase has created a lot of
buzz in tech circles this year as companies seek to more
effectively harness and analyze all of the reams of data their
servers are producing. Splunk was widely touted as one of the
leading Big Data players when it was private, and still has that
reputation now that it is public.
Trouble is, with buzz comes nosebleed valuations. Splunk is on
track to generate around $185 million in sales this year, yet its
$3.5 billion valuation should give you pause. That kind of
price/salesmultiple is hard to maintain as a company grows ever
larger.Shares now trade for twice as high as the April 2012offering
price, and if you missed this meteoric rise, you may as well wait
to see if Splunk stumbles in the next quarter or two, which would
allow you to own this intriguing company at perhaps a far lower
Another Apple play falls near the tree
Unless your name is Samsung, it can be so nice to get a phonecall
Apple (Nasdaq: AAPL)
. Once the company decides to use your company's technology, you
can count on solid demand for your products -- and
strongappreciation from investors. Omnivision, which provides the
chips used in Apple's phone-based cameras, is just such an example.
The company's sales have risen from $507 million in fiscal April
(2009) to around $900 million by fiscal 2012, thanks to big orders
Omnivision's just-announced fiscal first-quarter sales of $258
million were nicely ahead of the $243 million consensus forecast.
More impressively, projections of sales in excess of $350 million
in the current quarter are far above the consensus $270 million
forecast. That's an early glimpse that Apple expects to sell a lot
of new iPhones in coming weeks and months. Look for analysts
to sharply boost their forecasts as fresh reports roll in, and look
for shares to extend today's gains as investors take note of a
still-reasonable valuation in the context of surging sales and
Action to Take -->
Although Omnivision will never garner a high multiple, shares have
ample room to run further. As a point of reference, audio chip
Cirrus Logic (Nasdaq: CRUS)
is also a provider to Apple and trades at around 13.5 timesforward
earnings . If analysts adjust their fiscal 2013 earnings-per-share
forecasts for Omnivision up to around $1.50, then shares could move
up into the lower $20s.
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.
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