Sierra Wireless Downgraded
Sierra Wireless Inc. (SWIR), a leading developer of OEM [original equipment manufacturer] wireless modem cards and access solutions, is being challenged with intensifying competition in the PC OEM market, coupled with unfavorable economic conditions.
The company provided disappointing third-quarter financial guidance. We believe these concerns may restrict Sierra's near-term growth prospects. This is in lieu of the company's recent second quarter fiscal 2008 financial results that were above our expectations due to precipitous demand and requirements for wireless data cards, USB modems, and PC embedded modules.
Long-run fundamentals for high-speed mobile broadband services remain firm. However, Sierra must receive new design wins or some cost-effective product transition with major customers in order to streamline its PC OEM business. We downgrade the stock to a Hold until we identify further growth catalysts for the company.
Sierra Wireless shares are trading at 12.3x our estimated 2008 earnings, which represent a discount to both the S&P 500's metric and the comparable peer group average forward earnings. With respect to other selected valuation metrics, the stock is also trading well below the peer group average. We believe this valuation discount reflects the company's lackluster financial outlook.
According to our view, the stock price may remain lumpy over the near-term given tightened economic expectations and increased competition. We set a reduced six-month valuation target of $18, based on P/E of 13.7x our 2008 estimated earnings, as valuation forecasts trend closer to the S&P 500 average.
Hartford Financial Holds Steady
Hartford Financial Services (HIG) reported its second quarter earnings results after market close on July 28, 2008. Core earnings of $2.22 per share were $0.12 per share above consensus. The net income for the quarter was down 13.0% year-over-year due to realized capital losses. Assets under management grew 3.0% year-over-year.
We expect HIG to continue to benefit from its leading position in several of its markets and its plans to expand the retirement income products range to take advantage of growing needs in U.S. as well as in Japan. However, higher losses in the investment portfolio and increased competition should limit the upside potential. We are maintaining our Hold recommendation on the shares.
After reviewing 2Q08 results and the guidance by management, we are lowering our FY08 and FY09 core earnings estimates to $9.30 per share and $10.10 per share, respectively, prior to the conference call. At the current price level, shares of HIG trade at 1.05x its June 30, 2008, reported book value of $55.51 per share and 0.90x its adjusted book value of $64.68 per share.
