VMWare Inc. (NYSE: VMW) saw a spectacular initial public offering back in the middle of 2007, but has since retreated to somewhat reasonable levels. The stock traded as high as $125 per share in late October before retreating to its current levels around $80 per share. It now appears that the company has attracted some analysts who believe the investment looks conservative today.

William Blair & Company initiated research coverage on VMWare with a Market Perform rating and an Aggressive Growth company profile. Analyst Laura Lederman estimated 2007 pro forma EPS at $0.80, $1.14 for 2008, and $1.60 for 2009. These numbers put the company’s current P/E ratio at around 100x on a trailing 12-month basis, 70x forward 2008, and 50x forward 2009. These ratios make the stock look almost conservative trading at these levels considering it is the market leader in a fast-growing industry.

The analyst noted, “We have covered the software space for more than 20 years and rarely have we found a solution with a cost-savings proposition as compelling as virtualization software. In fact, many software products do not deliver a positive quantifiable return on investment, but VMware’s virtualization software can greatly lower IT costs and increase hardware utilization (from 10%-15% to roughly 80%) by aggregating servers into shared pools of IT capacity. This tremendous savings in hardware and management resources explains why the server virtualization market and, in particular, VMware are growing so quickly.”

Lazard Capital also initiated coverage on the company with a Buy rating earlier this month. Currently, the average price target from analysts on Wall Street stands at around $105 per share. In the end, server virtualization is a quickly growing industry that is expected to grow to $10 billion by 2011. VMWare sits at the head of this new trend and stands to benefit as a market leader. Combined, these factors make VMW a stock worth watching!

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Radyne Corporation (NDAQ: RADN) shares moved up yesterday after an activist hedge fund called on the company to hire an investment banking firm to explore strategic alternatives. San Diego-based Monarch Activist Partners, which didn’t disclose its investment stake, sent a letter to the company calling on the board to consider strategic changes and perhaps an outright sale of the company. Shareholders are hoping that Radyne takes the advice and unlocks shareholder value.

“Monarch has given ample time to Radyne’s management and has refrained from applying public pressure to highlight the disappointing job performance,” said Sohail Malad, Managing Partner of Monarch. “If management is unable to lay out a strategic plan that allows investors to quantify what the current course will deliver, than it is our belief that the public market should determine the value of the Radyne businesses.”

Monarch believes that Radyne has potential but will never fully realize the potential as an independent public company on the current course. There is a growing gap between the value of the company as a standalone entity versus the value of the enterprise in a sale transaction. Moreover, the activist hedge fund reported that potential strategic acquirers have already expressed interest in that the company should take seriously. At a minimum, Monarch believes that the board should conduct a marketing test in a publicly disclosed environment so all would-be suitors can express interest in the company.

Radyne currently has a market capitalization of around $160 million trading at just 13.8 times earnings, suggesting that the company is undervalued. However, many are questioning the timing and motives behind this request. The M&A market isn’t exactly the strongest right now amid a difficult credit environment, while Monarch holds a very small stake in the company. Regardless, this is definitely a situation that is worth watching closely over the next few months!

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Yahoo! Inc. (NDAQ: YHOO) shareholders are beginning to show signs of frustration as the company’s shares continue to sink off their highs of $34 last year. The web portal’s management has communicated a reorganization strategy, but has yet to produce results showing that a tangible turnaround is under way. Shareholders are hoping that the web giant will report decent third quarter results and take more aggressive actions to turn the company around.

Cheap Yahoo shares have also reportedly caught the eye of private equity firms interested in purchasing the company. A market capitalization of just $29 billion trading at just 42 times earnings puts it substantially below its peers despite its market-leading position in search and e-mail. There are no formal discussions currently taking place, but private equity firms are reportedly aggressively reaching out since its stock began trading below $24 per share.

There are also some concerns inside Yahoo that a strategic buyer like AOL, AT&T, CBS, Microsoft, or even News Corp., who have all shown interest in the past, may want to make a move at these depressed levels. The interest exists because Yahoo has an execution problem, not a structural problem. There are a lot of smart investors and companies that think they better execute and take advantage of the company’s leading search and e-mail services.

There is word on the street the Yahoo is planning to implement more dramatic measures in order to speed up a turnaround. These measures reportedly include layoffs numbering in the hundreds of employees in order to refocus its efforts on a smaller number of key areas. Currently, Yahoo employs around 14,000 people and said it plans to invest in some areas, reduce emphasis in others, and eliminate some areas of the business that don’t support the company’s priorities.

In the end, as management continues to fail to implement a turnaround and the stock continues to decline, the likelihood of a serious offer for Yahoo increases. There is a lot of money sitting in the hands of private equity firms, who are confident that they could orchestrate a faster turnaround. Meanwhile, strategic suitors are always looking to expand their offerings and shares in Yahoo are clearly on sale. Combined, these factors make YHOO a stock worth watching!

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Nokia Corporation (NYSE: NOK) shares rose over eight percent today after the company announced spectacular earnings that beat Wall Street estimates. The mobile device maker reported fourth quarter revenues of 15.7 billion Euros versus a consensus of 14.9 billion on sales of 133.5 million mobile devices, up 27% year-over-year and 20% from last quarter. The company also said that it expects a normal seasonal decline in the first quarter, but plans to maintain market share and expand over the next year.

Many investors were shocked by these strong earnings following the poor results posted yesterday by Motorola, Inc. (NYSE: MOT). Nokia showed the opposite story with excellent growth driven by market share gains in Latin America, Europe and Asia Pacific. The company’s mobile phone margins were also at an all-time high at a time when many believe Motorola may cut their prices in order to compete. Earnings estimates for Nokia are expected to be lifted by 5 to 10 percent following this news.

This news is devastating to Motorola shareholders hit with poor earnings just days ago. It is now clear that Motorola’s decline was not the result of an industry slowdown but rather of another decline in market share that could hurt the company. More, the planned price-cutting measures would clearly hurt Motorola more than Nokia given the latter’s strong and improving margins on its mobile phones. Motorola also faces an uphill battle in foreign markets that it has relied on in the past to drive growth.

Nokia does have a little to worry about, however, with the threat of price-cutting. The cellular industry has relied solely on added features, more minutes and other benefits to attract customers rather than pure price-cutting. If Motorola decides that it is the only hope to recover, Nokia and other may have to follow suit. This could spark a price war that could kill margins and hurt all companies involved. Alternatively, if Nokia decides to stay out, they could lose substantial market share.

In the end, this is great news for Nokia and bad news for Motorola. It will be interesting to see how this story plays out over the next few months, but Motorola will need a substantial number of changes in order to turn themselves around in the face of such strong competition.

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Goldman Sachs (NYSE: GS) released an interesting research note on various bond insurers that have seen a spectacular run-up over the last few days. Bond insurance companies make money by providing lenders with insurance that borrowers will make timely payments in exchange for a fee from the borrower. Unfortunately, this great wave of defaults has cost these insurers billions as they are forced to pay out more claims at higher amounts. Recently, some of these companies have come out saying that Wall Street has blown their problems out of proportion. So, how much are they really worth?

Goldman Sachs valued the three largest bond insurance companies under three scenarios. The first scenario (“Run-Off”) is a situation where the insurers won’t raise enough capital to satisfy ratings agencies and may struggle to write new business. The second scenario (“Ongoing Concern”) assumes a capital raise in line with losses with no added book value and a derivative mark-down. And the third scenario (“Bailout”) is a best-case scenario where the firms are bailed out with capital injections sufficient to operate in their current condition.

So, where do these companies stand?

• Ambac Financial (NYSE: ABK)
  • Run-Off: $15
  • Ongoing Concern: $10
  • Bailout: $35
• MBIA Inc. (NYSE: MBI)
  • Run-Off: $6
  • Ongoing Concern: $14
  • Bailout: $48
• Security Capital Assurance (NYSE: SCA)
  • Run-Off: $0
  • Ongoing Concern: $1.50
  • Bailout: $13

Currently, it looks like ABK is trading at Run-Off valuation; MBI is trading at Ongoing Concern valuation; and, SCA is trading at Ongoing Concern valuation. Are these accurate numbers? What are the odds of these companies receiving a bailout? Well, the numbers are somewhat subjective, but a bailout should not be thrown out of the cards – just look at Countrywide. In the end, these companies still face substantial problems, it’s simply a matter of the methods they are able to use to get out of them that determine their valuation!

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Banking stocks have been beaten down to their lowest levels in years thanks to the combination of mortgage and credit problems. It seems like the write-downs on these losses continue to increase every quarter by billions of dollars, which has many would-be investors sitting on the sidelines until the picture gets a little clearer. However, a zealous Federal Reserve issuing emergency rate cuts and a 12% rally on Wall Street has many investors ready to buy now!

The Federal Reserve’s actions are often seen as a precursor to banking stock turnarounds. In the past, an aggressive Federal Reserve, such as the one we are seeing today, that dramatically steepens the yield curve by cutting rates. Unfortunately, we have seen aggressive rate cuts but the yield curve this time is inverted and only moderately steepening – much different than in the past. It appears that banks’ benefit from lower rates is a bit too modest to offset the massive credit problems we’re seeing today.

The real driver behind the growth in the banking sector today is the borrower. Consumer credit is extremely weak these days as they relied on housing prices to increase in order to pay off their debts with longer term debts from other sources – a dangerous cycle. Meanwhile, there is some risk that CRE and corporate borrowers may also soon face problems in the event of an economic slowdown. Many believe that the latter is not yet priced in to the market.

So, who was the big buyer if things still aren’t any better? Well, there is some speculation that hedge funds took the opportunity to close out some of their short positions. There appeared to be a correlation between the top performers and most heavily shorted stocks, although there were some long-term buyers who didn’t want to miss a bottom that likely got in towards the end of the rally. Unfortunately, the bottom is not likely here quite yet as mortgage defaults promise to continue amid a much weaker consumer.

Banking stocks may be cheap now, but prudent investors may want to hold off buying them until they can see the situation with some clarity. However, one of the best banking plays for those looking to take on some risk may be Bank of America (NYSE: BAC) as they have relatively little subprime exposure and recently acquired Countrywide Financial at bargain-basement prices!

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Syms Corp. (OTC: SYM), which delisted its stock in mid-January and plans to deregister tits shares in April, may find itself in court with two activist shareholders as a result. Barington Capital and Esopus Creek Advisors, who collectively own 9.8 percent of the company, sued Syms alleging that its directors broke their fiduciary duty to investors by enabling the company to delist. The activists are also seeking a copy of the company’s shareholder list, presumably to see if others are interested in joining the lawsuit.

“The group believes that such actions will destroy shareholder value,” said Barington and Esopus in a letter to the board. “Since the Company announced on December 21, 2007 that it was delisting and deregistering its shares, the price of Syms’ stock has fallen by over 42%, destroying over $104 million in market capitalization.”

Syms countered the argument by saying that investors will still be able to buy and sell shares on the pink sheets, while the company will save $750,000 per year in costs associated with being a listed company. The company also indicated that management will be better able to focus its attention and resources on continuing to improve operations and enhance shareholder value.

Many shareholders, however, are convinced that the real motive behind the delisting is to lower the stock price enough so that management can complete a management-led buyout at an inexpensive valuation, leaving shareholders in the dust with nothing to say for their investment. There is speculation that this has long been a consideration of store founder Sy Sims.

Barington and Esopus have begun registering their shares in their own name in order to prevent this process. If the company has more than 300 shareholders on record, then it cannot deregister itself without approval from the shareholders. As a result, the two activists are encouraging other investors to do the same before it is too late and the value of their investment is lost.

In the end, this is an interesting story that is worth following. If the activist investors are able to hold off any deregistration, the company may decide that it is best to relist and deal with the costs rather than remain traded on the OTC markets. This may cause a jump in the share price if the stars align. Combined, these factors make SYM a stock worth watching!

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Mortgage insurance stocks have been a rollercoaster ride in recent days amid speculation that some may be going out of business while others would be poised to take over entire markets. Good news from bond insurers led to broad increases yesterday, but bad news beat PMI stocks back down to reality today. The mortgage meltdown is far from over and the future of these companies remains uncertain.

MGIC Investment Corporation (NYSE: MTG) shares hit a 15-year low after dropping more than 30 percent today. The nation’s largest mortgage insurance company announced that paid losses could reach $2 billion this year as it struggles to accurately forecast its losses amid the mortgage meltdown. The company is struggling with not only a dramatic increase in delinquencies, but also an increase in the cost of each claim as fewer delinquent homeowners are resuming payment.

Home buyers typically purchase mortgage insurance from companies like MGIC when they put down less than 20 percent of their home’s value, which makes most of their customers those with exotic mortgages (the ones that don’t require huge down payments). MGIC said it had 107,120 delinquent loans by the end of 2007, which is a 16,000 loan increase from the end of the third quarter. Clearly, there is still trouble in the housing market that is only likely to continue.

The PMI Group, Inc. (NYSE: PMI), another major provider of private mortgage insurance, also saw its shares decline more than 15 percent today after the bad news from MGIC. Interestingly, the stock soared yesterday after bond insurers Ambac and MBIA announced that they don’t expect to pay as much as they expected in claims and that the value of their assets is far higher than the market initially believed. Unfortunately, this may not ring so true for mortgage insurers as compared to bond insurers.

In the end, the mortgage markets are still in freefall as foreclosures continue to rise and delinquencies continue to increase. Mortgage insurance companies made the mistake of insuring risky loans with exotic mortgages, and that decision is likely to cost them going forward. Nobody knows the extent of the damage yet, but it may be wise to stay away from these companies for now!

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Motorola, Inc. (NYSE:MOT) shares fell over 20 percent today after the company posted a disappointing operating loss in the current quarter due to continued weakness in its cell phone business. The mobile device maker warned of further market share losses this quarter and backed off its forecast for its mobile devices division to return to profitability during 2008. Shareholders are now questioning whether the company will be able to pull itself out of its current downward spiral and turnaround its cell phone business at all.

The news is likely to disappoint activist investor Carl Icahn, who has amassed a four percent stake in the company. The billionaire investor continues to insist that Motorola shares are undervalued with the cell phone business showing no value at all. As a result, he contends that the company should spin-off the cell phone business from the rest of the businesses in order to unlock value for shareholders. Unfortunately, now may not be the best time as a turnaround is expected to take much longer.

However, Motorola’s cell phone business may prove difficult to turnaround. They are losing market share, which makes them smaller, which makes them less competitive on costs, which makes their phones less compelling, which loses more market share. In other words, the company is likely to see its margins on cell phones shrink, which may force it to raise prices. This will only cause problems, particularly in our current economic condition where consumers are pinching pennies.

Right now, Motorola executives say they are focused on cutting costs and getting the mobile devices business back to profitability. Meanwhile, shareholders may be beginning to regret not putting Carl Icahn on the board of directors when they had the chance not long ago. For now, they will have to remain content and deal with a dropping share price.

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Sprint Nextel Corporation (NYSE: S) shares dropped over 25 percent last week after the company announced major layoffs of 4,000 workers and the closing of approximately 125 stores in order to cut costs by $700 to $800 million per year. The telecom giant deemed these measures necessary in order to offset the loss of approximately 885,000 subscribers. Now, there is speculation that the company might be on the verge of a price war designed to win back some of its customers from rivals.

Sprint has already taken several steps towards repositioning itself for profitability. New chief executive Dan Hesse has already begun selecting a new management team and put a freeze on the company’s cash-drain WiMax initiative. The telecom giant is also reportedly considering a speed-up of the network migration of Nextel’s iDen users to CDMA in order to pave the way for a potential sale of the iDen Network itself. And finally, Sprint is also reportedly considering an overhaul of its pricing plans in an effort to win back customers that it had lost so quickly to rivals.

The cellular phone industry is a unique one in that it has never experienced price cutting in the past. Traditionally, companies have resorted to increasing minutes and features while keeping the price point extremely fixed. Now that more than 2/3 of all US citizens own a cell phone, competition has become a bit more stiff and price-cutting may be the only way left to win back customers. There is even some speculation that the company could adopt a fixed-rate unlimited-usage program similar to that of Leap Wireless or MetroPCS – a move that would surely upset other large telco players.

Sprint’s botched merger with Nextel has led to a mass exodus of its users to both AT&T (NYSE: T) and Verizon Wireless (NYSE: VZ), which have both shown substantial increases in subscribers over the past year and are expected to show the same later this month. Any price cutting could be as damaging to the cellular industry as it was to the movie rental business – but it may be the only option remaining…

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