Philips N.V. Drifts Forward

Headquartered in Amsterdam, The Netherlands, Koninklijke Philips Electronics N.V. (PHG) is one of the world's largest electronics companies and the biggest in Europe, with sales of 27 billion in 2007 and 12.4 billion in 1H08.

The company has worked to improve its cost structure, as its EBITA margins remained flat along with modest revenue performance despite the weaker-than-expected dollar. Based on these results, we are maintaining our revenue estimates for 2008.

We continue to rate the shares of PHG a Hold with a price target of $28.50 per share over the next six months. This amounts to between 6.7x-6.9x our new 2008 EPS estimate of $4.19.

Cepheid Diagnosed as Fair Value

Cepheid, Inc. (CPHD) is a molecular diagnostics company that makes systems for genetic analysis. The Sunnyvale, California-based company announced FDA clearance for its Xpert MRSA/SA SSTI test and Xpert MRSA/SA BC test. Cepheid also announced California legislation that mandates MRSA surveillance and testing in hospitals.

At the end of the second quarter, the management lowered its 2008 revenue and earnings guidance. The company no longer expects to be profitable, excluding stock compensation and amortization of acquired intangibles. We lowered our fiscal 2008 and 2009 estimates. The company is focused in driving growth primarily by penetrating further in the clinical market and launching new products.

At its current price of $13.83 per share, Cepheid is trading at 3.8x our 2009 revenue estimate of $214 million, which is at a discount to the group multiple of roughly 6.6x. At this stage, we believe most of the second quarter revenue and earnings shortfall and revised guidance for 2008 have been factored in the stock price. We believe CPHD is appropriately valued at roughly 4.2x 2009 revenue estimate. Our price target moves to $15.50.

National Semi Keeps Up Stride

National Semiconductor (NSM) is an OEM (original equipment manufacturer) of analog and mixed signal integrated circuits. Forward revenue guidance is an increase of 1-3% in the next quarter. New higher-margin products continue to grow in the mix, and management has refocused R&D (research and development) into areas that should sustain margins.

Valuation remains attractive in our opinion. Consequently, we are reiterating our Buy rating on NSM shares. National Semiconductor has refocused its business on supplying higher margin analog ICs to some of the fastest growing markets, including wireless handsets, notebooks, networking, and flat panel displays. National is also a top provider of power management components and amplifiers.

Overall bookings were up both sequentially and year over year. We estimate that the book-to-bill ratio was around 0.97. The company is generating steady gross margins (in the 60%+ range) and operating margins (in the 30%+ range). A better product mix, higher utilization rate and manufacturing efficiencies combine with higher sales to raise margins in the fiscal second quarter (Q209, ending November).

Heritage-Crystal Clean Initiated

Heritage-Crystal Clean (HCCI) is a leading industrial and hazardous waste services provider to the vehicle maintenance and manufacturing industries. We think Heritage's programs are attractive to small and medium-sized businesses seeking hazardous waste management and a minimal regulatory burden.

Over the next few years, we expect double-digit earnings growth due to market share gains in automotive repair, growth in customer commitments to the nonhazardous solvent recycling system, and the continued branch rollout.

We are initiating coverage of HCCI shares with a Hold rating. Our target price is $14.00, or 25.5x our FY09 EPS estimate. Heritage-Crystal Clean shares are trading at 124x our FY08 EPS and 21x our FY09 EPS. The higher P/E multiple in 2008 reflects a lower earnings stream related to the costs incurred on going public.

Primus Guaranty Heavily Exposed

Headquartered in Bermuda, Primus Guaranty, Ltd. (PRS) sells credit swaps as protection against the risk of default on investment grade obligations. In exchange for a fixed quarterly premium, PRS guarantees its customers a payment of an agreed amount in case the debt issuer counterparty defaults.

S&P recently placed the company's rating on CreditWatch with negative implications.