MORNING CALL - July 16, 2021 - Zacks
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MORNING CALL - July 16, 2021
Events
Calendar of Upcoming Events
Focus Research
FINANCIAL INSTITUTIONS
Western Alliance Bancorporation (WAL)
Rating: OUTPERFORM, 12-Month Price Target: $130.00, Price: $96.22
Solid Qtr; On Pace to Achieve Lofty EPS Accretion Guidance on AmeriHome Deal
Western Alliance reported a strong quarter with impressive growth trends and an added benefit from its recent acquisition of
AmeriHome. Importantly, we believe the company is on pace to achieve its prior guidance calling for exiting 2021 with run-rate
EPS of $9.00. Loan growth beat our expectation on a period-end basis (up 18% annualized vs. our forecast of 14%), deposit
growth was exceptional (up 37% annualized vs. our forecast of 13%), and the net interest margin expanded 14 bp sequentially,
as the bank was able to shift excess liquidity effectively into higher-yielding loans. The combined impact generated net interest
income that was well above our forecast. Mortgage-related fees (net of negative loan servicing revenue) were also strong at
$111 million in the face of headwinds in the refi market, and overall, AmeriHome contributed $0.39 to EPS in the quarter.
We are also encouraged to see end-of-period loan balances $2.8 billion higher than the average balance, implying strong loan
growth momentum heading into the third quarter and should help support NIM as excess liquidity is deployed.
Estimate changes and recommendation. We're raising our 2021/2022 core EPS estimates to $8.62/$9.30 from $7.95/$9.00
owing to higher average earning assets and higher NIM assumptions. We reiterate our OUTPERFORM rating as WAL has
demonstrated that it is well-positioned to grow rapidly in good times and bad, and we expect the company to continue to
generate above-average growth in earnings, loans, and deposits, and accretes capital at a very high pace which results in strong
TBV growth. WAL trades at 10.5x our 2022 EPS estimate, which is a modest discount to peers trading at 10.7x despite the
company's above-average growth outlook. We expect a guidance update on Friday's conference call at 12pm ET; 833-236-2753,
code 367-6158.
U.S. Bancorp (USB)
Rating: NEUTRAL, 12-Month Price Target: $64.00, Price: $58.59
Positive Operating Leverage on Track to Resume in 2022
USB reported an all-around strong quarter. The highlight was core preprovision net revenue increased $324 million Q/Q
to $2.37 billion, above our forecast of $2.22 billion, driven by strong broad based fee income growth, led by its payment
businesses, while maintaining good expense control. Credit quality continued to improve, which led to a $350 million reserve
release (vs. our forecast of $393 million), while net charge-offs were only 25 bp.
3Q Outlook: net interest income to be relatively stable Q/Q, with modestly higher loan growth; somewhat muted by lower
rates. The payments business is expected to be relatively stable. Given a still challenging revenue environment, USB will
continue to manage expenses to fairly stable.
Average loan growth inflected as it increased $295 million Q/Q. Although end of period loans, were $2.6 billion above the 2Q
average, USB is projecting average loan growth to be modestly stronger in 3Q, led by consumer. Commercial loan growth is
still somewhat muted. USB is seeing solid consumer spending and middle market business owners are more optimistic, which
will eventually lead to stronger loan growth
Wedbush Securities does and seeks to do business with companies covered in its
research reports. Thus, investors should be aware that the firm may have a
conflict of interest that could affect the objectivity of this report. Investors should
consider this report as only a single factor in making their investment decision.
Please see pages 7–9 of this report for analyst certification and important
disclosure information.
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Page 1Plenty of capital flexibility. With a CET-1 ratio of 9.9% vs. an internal target of 8.5%, plenty of room for accelerated share
buybacks. We expect USB to complete its $3 billion authorization this year and announce a bigger one.
HEALTHCARE
BioMarin Pharmaceuticals (BMRN)
Rating: OUTPERFORM, 12-Month Price Target: $141.00, Price: $79.68
Valrox MAA Accepted, CHMP Opinion Expected in H1:22
BioMarin is a fully integrated biotechnology company that develops, manufactures and commercializes treatments for
rare diseases. On June 15, the Company announced the European Medicines Agency's (EMA) acceptance of its Marketing
Authorization Application (MAA) of valoctocogene roxaparvovec (Valrox) for adults with severe hemophilia A. The MAA
submission includes 1-year safety and efficacy data in 134 subjects enrolled in the Phase 3 GENEr8-1 study as well as four
and three years of follow-up from the 6E13 vg/kg and 4E13 vg/kg dose cohorts, respectively, in the ongoing Phase 1/2 dose
escalation study. This announcement comes a little more than two weeks after BioMarin's resubmission on June 28 and in our
view, suggests an increased likelihood of European approval next year. Having been granted accelerated assessment by the
EMA for Valrox in May 2021, BioMarin anticipates a CHMP opinion in H1:22. In the U.S., BioMarin is looking to resubmit the
BLA to the FDA in Q2:22 and anticipates a six-month review period. We currently estimate WW sales of $275 million in 2025
following EU and U.S. launches in September and December 2022, respectively.
Next: Three oral presentations and nine poster presentations for valoctocogene roxaparvovec (Valrox) for the treatment of
adults with severe hemophilia A at the International Society on Thrombosis and Haemostasis (ISTH; July 17-21, 2021; Virtual).
See our July 2 note for presentations details.
RETAIL AND CONSUMER
Restaurants
Q2 Preview - Weeks of 7/19 & 7/26: Favor WING, DPZ and the Casual Diners
● Believe WING poised for top- and bottom-line upside.
● Also favor DPZ and the casual diners within our coverage reporting through the week of 7/26: BJRI, CAKE, and TXRH.
● We are raising our price targets for DPZ (to $520 from $480) and MCD (to $265 from $260).
American Outdoor Brands, Inc. (AOUT)
Rating: OUTPERFORM, 12-Month Price Target: $38.00, Price: $33.90
Another Beat in 4Q; Guidance Characteristically Conservative
● The Wedbush View: AOUT continues to put up strong quarterly numbers and show proof of concept for the company’s
‘Dock and Unlock’ strategy. And while our estimates are up substantially, AOUT shares are trading sharply lower, in that
while the FY22 guidance was modestly ahead of consensus estimates, the Street was clearly looking for a more aggressive
outlook. This would have been out of character, in that even during AOUT’s short time as a public company, it is clear that
management aims to under-promise and over-deliver. To that end, we are comfortable with the guide, particularly in the
face of an uncertain post-pandemic environment, and as such our OUTPERFORM rating is unchanged and we are nudging
our price target higher, from $36 to $38 (11x our avg. FY21-FY23E EBITDA estimates).
● AOUT reported 4Q21 adjusted EBITDAS of $7M versus the $3.4M EBITDAS generated in the year-ago quarter and the $6M
in EBITDAS we were modeling for 4Q. The Street was not previously provided results from last year’s 4Q, and so both our
estimates as well as Street estimates remained somewhat fuzzy, but it is fair to say that this was nonetheless comfortably
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Page 2ahead of expectations. Similarly, adjusted EPS of $0.34 was ahead of our estimate of $0.28 and last year’s $0.13. On the
top-line, AOUT grew sales 50% to $65M versus the $43M in the year-ago quarter, in line with our estimate.
TMT
Hardware
2CQ21 Preview - INTC & AMD
Hardware Earnings Preview: 2CQ21
INTC - Reports 7/22 AMC - UNDERPERFORM - TP$53
● With PC shipments holding firm Q/Q, we believe Intel is poised to exceed our top-line estimates (and INTC's prior guidance).
However, in our view, the Street should already be anticipating a better CCG number than the downtick implied by Intel's
initial guide.
● The questions rather are: 1) will better utilization help Intel GMs, and 2) can/will management forecast a better top-line
number in CQ3?
● Given the moving parts involved with question #1 including: utilization, yields on new server products, ASP impact of AMD
competition, and depreciation tied to the 10nm transition, we don't have conviction on whether Intel can provide upside
to its prior margin guidance.
● With regards to #2, while we would expect Intel should anticipate at least flattish PC sales and a return to sequential revenue
growth for its data center group (as Ice Lake ramps and enterprise and hyperscale spending rebound), we also don't know
how conservative management might be (the CQ2 guide appeared very conservative).
● Net, we remain cautious on the name given our expectation of continued AMD share gains and higher Intel spending levels.
We base our target price on a blended multiple (net debt) of: ~11X FY2022 earnings and ~3-4x EV/S, or where the stock
has traded historically.
● Finally, if yesterday's news comes to fruition we would see a Global Foundries transaction as another potentially longer
term investment (supporting Intel's foundry business) that would almost certainly weigh on near to intermediate term
economics (starting with GM dilution).
AMD - Reports 7/27 - OUTPERFORM - TP$110
● We expect another beat and raise quarter from AMD and would reiterate that it remains one of our favorite names in tech
hardware.
● While we believe AMD will again report solid computing and graphics revenues, we also think upside will be constrained
by supply challenges. Unlike last quarter when the TSMC reported an unexpectedly strong contribution from HPC and 7nm
suggesting AMD received wafer upside, this time metrics were more mixed. Rather, we expect a beat will be fueled by
Enterprise, Embedded, and Semi-Custom growth driven by stronger than expected sales of AMD server products as demand
for EPYC has ramped considerably.
● We expect this setup will continue to benefit AMD through the remainder of the year and into 2022 (and likely into 2023).
Similarly, we see upside to our gaming estimates through the remainder of the year in-line with Sony's unit expectations
for this fiscal year. Together, we anticipate these results should push AMD to exceed its already impressive Y/Y guidance.
● We are reiterating our OUTPERFORM rating and target price of $110 based on a PE multiple of ~36X (plus net cash) applied
to our 2022E EPS estimate.
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Page 3Seagate Technology PLC (STX)
Rating: NEUTRAL, 12-Month Price Target: $85.00, Price: $89.62
4FQ21 Preview
EARNINGS PREVIEW - STX reports 7/21 BMO
We are lifting our sales and EPS forecasts to fit with both STX's guide and our view that 2H results will likely be more favorable
than we had previously estimated. And even post the favorable shift in our numbers, we believe if anything STX will exceed
our new estimates. Given this shift in estimates, our target price lifts to $85.
Despite this optimism around results, however, we are remaining on the sidelines given our view that other commodity
hardware names have more attractive valuations (in particularly WDC).
Likely Positives:
● ASP growth - With Chia demand having cleaned up a significant portion of HDD inventory, even as cloud requirements
were lifting and controller availability was constraining output, we believe HDD makers regained the upper hand in setting
pricing with gains in distribution and monthly contract benefitting FQ4 results and with better quarterly contract likely to
yield gains in FQ1. As such we are now estimating 3% ASP gains in June and 2% gains in September.
● Beneficial mix - Areas of demand strength (Chia and cloud storage) require higher capacity, higher ASP HDDs.
● GM strength - In turn, better pricing trends should predominantly flow to improved GMs with our estimates now assuming
STX GMs return to the low 30 percent range that have characterized past performance during cyclical peaks.
Potential Negatives:.
● COGs - We would note some potential for increased costs related both due to the tight component environment as well as
the surge of COVID cases in SE Asia, both of which could have yielded higher logistics costs (to ensure component availability,
targeted output, worker safety, etc..
Derivatives:
● With STX reporting ahead of WDC, we believe strength at the former will be interpreted as positive for the latter.
● MRVL, AVGO - Assuming 3rd party research is on point, better units (particularly near-line parts) could yield some upside
for controller vendors (to the extent they can get wafers).
Outlook & Valuation:
● We are reiterating our NEUTRAL rating though we are lifting our price target to $85 (from $70). We get to our target by
applying a multiple of ~12x (after netting out ~$17/share in net debt) to our FY'22E EPS. While this multiple is roughly in-line
with STX's historic range, we would note that it values STX at a premium to multiples we use to value peers with exposure
to similarly cyclical industries including WDC and MU.
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Page 4Hardware
Enterprise Hardware - One Step Forward; Two Steps Back for Servers
On Tuesday, we had the opportunity to host Dolly Wu the GM for Inpsur US to present her view of the US server market. Please
contact me or your Wedbush sales contact if you'd like to listen to the replay.
One Step Forward - Improving Server Demand - According to Dolly, server demand is strong; we see this as an inflection as
trends were weak as recently as this Spring.
● Better demand is coming from both the cloud and enterprise markets (though cloud customers are better able to navigate
supply constraints which is resulting in accelerated cloud adoption). Chinese hyperscale should pick up through Q3 and
into CQ4.
● AI is a particular point of strength (and has been for some time).
● Inspur is seeing initial demand for edge deployments including demand for AI implementations at the edge.
● Although costs are up, customers are generally willing to pay up given their need for incremental IT equipment to support
their businesses.
Two Steps Back - Supply/Logistics/Manufacturing Challenges Constrain Supply
● Shortages in a variety of ICs are weighing on manufacturers' ability to meet demand. In particular, AVGO parts (e.g., PCIe
switches with lead times of 52+ weeks) are holding up builds. But supply of AMD Epyc, NICs, HBAs, backplanes, NVDA GPUs,
PMICs and certain analog parts, are also falling short of demand.
● Transportation challenges (container pricing and availability, port stoppages, lack and cost of trucking) are combining to
increase costs while delaying fulfillment.
● It is difficult/costly to find workers to fill US factory jobs, while tariffs and increased transit costs weigh on China built COGs.
Other Topics of Interest
● DRAM - pricing is not yet finalized for CQ3, though Inspur is looking at low to mid single digit increases in CQ3. Pricing in
CQ4 could be flat or even down (we would be surprised if this is the case).
● SSDs - prices are lifting and fulfillment rates are only 40% - 50% (we have heard prices are up 10%+ and in same cases as
much as 30%).
● HDDs - ASPs are up a little bit due to supply limitations.
● AMD vs. INTC - AMD is gaining share as EPYC is a superior part, but share gains are less than they would have been due
to supply constraints (which Dolly believes will last through 2021). Intel (since the management change) has been more
responsive to customer requirements including cutting prices (lead-times on Intel parts are just 1-4 weeks). Net, she believes
that AMD needs to improve supply (to push its existing advantage) or a newly more responsive Intel with greater resources
will eventually close the competitive gap.
● NVDA - Remains the clear leader in AI with other solutions only gaining traction in selective niche applications. All SKUs of
datacenter GPUs are tight though large customer transitions to A100 should be complete by the end of 2021.
Entertainment Software
Golf and Ratchet Aren’t Enough for SW Growth as HW Surprises
After the market close on Thursday, July 15, NPD released the June 2021 (five-week period ending July 3) U.S. retail video
game hardware and software sales data.
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Page 5According to NPD, June U.S. console/handheld software sales were $220 million, down 5% year-over-year, and roughly in-line
with our estimate of $223 million. The decrease was driven by the launch of Sony’s record-breaking The Last of Us Part II a
year earlier. The game sold-through over 4 million units in its release weekend, making it the fastest-selling first-party PS4
exclusive of all time. A pair of high-profile new releases in June 2021 (Nintendo’s Mario Golf: Super Rush and Sony’s Ratchet &
Clank: Rift Apart), a solid recent release slate, Switch momentum, robust Internet spending, and the gradual re-opening of the
physical economy were unable to overcome the launch of the June 2020 headliner. Other key headwinds that contributed to a
modest year-over-year industry packaged software sales decline included ongoing digital mix shift, the increasing popularity
of subscription offerings, and spending on new hardware (as opposed to software). It is also worth noting that Mario Golf:
Super Rush and Ratchet & Clank: Rift Apart are both console exclusives, for the Switch and the PS5, respectively, which hurt
their contributions. Finally, the shelter-in-place tailwind experienced a year earlier was much more pronounced. The other top
sellers in June 2021 included Nintendo’s Animal Crossing: New Horizons (boosted by bundle demand), Mario Kart 8 Deluxe,
and Super Smash Bros. Ultimate. Industry packaged software sales increased on a month-over-month basis due to June 2021’s
new releases and an extra week in the June retail month (as is customary).
Mario Golf: Super Rush led industry unit sales with roughly 249,000 units, below our estimate of 300,000 units, likely due
in part to mediocre reviews.
Ratchet & Clank: Rift Apart led industry dollar sales, and sold roughly 211,000 units, below our estimate of 250,000 units
despite strong reviews. Animal Crossing: New Horizons sold roughly 214,000 units including strong bundle sales, above our
estimate of 200,000 units. Mario Kart 8 Deluxe sold above our expectations. Super Smash Bros. Ultimate sold above our
expectations as well. Please view the full report for our latest Investment Update.
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Page 6Analyst Certification
As to each company covered, the respective research analyst (or analysts) certifies that the views expressed in the research report
accurately reflect such research analyst’s personal views about the subject securities and companies, and that no part of his or her
compensation was, is, or will be directly or indirectly related to the specific recommendation or views contained in the research report.
Mentioned Companies
Company Rating Price Target
United Microelectronics OUTPERFORM TWD54.00 TWD67.00
Taiwan Semiconductor OUTPERFORM TWD613.00 TWD700.00
Nintendo NEUTRAL ¥63,280.00 ¥64,000.00
Apple OUTPERFORM $149.15 $185.00
Advanced Micro Devices Inc OUTPERFORM $89.05 $110.00
American Outdoor Brands, Inc. OUTPERFORM $33.90 $38.00
Activision Blizzard OUTPERFORM $92.32 $125.00
BJ's Restaurants OUTPERFORM $46.48 $68.00
BioMarin Pharmaceuticals OUTPERFORM $79.68 $141.00
The Cheesecake Factory OUTPERFORM $52.45 $70.00
Chipotle Mexican Grill OUTPERFORM $1,619.98 $1,800.00
Diebold Nixdorf Inc NEUTRAL $11.65 $14.00
Domino's Pizza, Inc. OUTPERFORM $485.32 $520.00
Electronic Arts OUTPERFORM $143.12 $175.00
East West Bancorp Inc OUTPERFORM $70.79 $91.00
General Motors OUTPERFORM $58.00 $85.00
International Business Machines NEUTRAL $139.82 $140.00
Intel Corp UNDERPERFORM $56.52 $53.00
McDonald's Corporation OUTPERFORM $237.13 $265.00
Microsoft OUTPERFORM $282.51 $325.00
Micron Technology Inc NEUTRAL $78.49 $105.00
NetApp Inc. NEUTRAL $79.84 $76.00
Nvidia OUTPERFORM $793.66 $700.00
Pure Storage Inc. NEUTRAL $18.19 $25.00
Starbucks OUTPERFORM $119.80 $132.00
Shake Shack OUTPERFORM $98.32 $118.00
Silicon Motion Technology Corp OUTPERFORM $63.00 $85.00
Seagate Technology PLC NEUTRAL $89.62 $85.00
Del Taco Restaurants OUTPERFORM $9.64 $15.00
Take-Two Interactive Software OUTPERFORM $171.88 $212.50
Texas Roadhouse Inc. OUTPERFORM $96.39 $122.00
Unity Software Inc. OUTPERFORM $99.62 $125.00
Ubisoft Entertainment OUTPERFORM €58.06 €85.00
U.S. Bancorp NEUTRAL $56.99 $64.00
Western Alliance Bancorporation OUTPERFORM $96.22 $130.00
Western Digital OUTPERFORM $70.01 $90.00
Wingstop Inc. OUTPERFORM $154.18 $180.00
Investment Rating System:
OUTPERFORM: Expect the total return of the stock to outperform relative to the median total return of the analyst's (or the analyst's
team) coverage universe over the next 6-12 months.
NEUTRAL: Expect the total return of the stock to perform in-line with the median total return of the analyst's (or the analyst's team)
coverage universe over the next 6-12 months.
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Page 7UNDERPERFORM: Expect the total return of the stock to underperform relative to the median total return of the analyst's (or the
analyst's team) coverage universe of the next 6-12 months.
The Investment Ratings are based on the expected performance of a stock (based on anticipated total return to price target) relative
to the other stocks in the analyst's coverage universe (or the analyst's team coverage).*
Rating distribution Investment Banking Relationships
(as of July 16, 2021) (as of July 16, 2021)
OUTPERFORM: 64.19% OUTPERFORM: 14.88%
NEUTRAL: 33.69% NEUTRAL: 4.72%
UNDERPERFORM: 2.12% UNDERPERFORM: 0.00%
The Distribution of Ratings is required by FINRA rules; however, WS' stock ratings of Outperform, Neutral, and Underperform most
closely conform to Buy, Hold, and Sell, respectively. Please note, however, the definitions are not the same as WS' stock ratings are
on a relative basis.
The analysts responsible for preparing research reports do not receive compensation based on specific investment banking activity.
The analysts receive compensation that is based upon various factors including WS' total revenues, a portion of which are generated
by WS' investment banking activities.
Company Specific Disclosures
1. WS makes a market in the securities of Western Alliance Bancorporation, U.S. Bancorp, The Cheesecake Factory, BJ's Restaurants,
Chipotle Mexican Grill, Del Taco Restaurants, Shake Shack, Starbucks, Wingstop Inc., McDonald's Corporation, Texas Roadhouse Inc.,
Domino's Pizza, Inc., Advanced Micro Devices Inc, Intel Corp, Seagate Technology PLC, BioMarin Pharmaceuticals, American Outdoor
Brands, Inc., United Microelectronics, Taiwan Semiconductor, Nintendo, Apple, Activision Blizzard, Broadcom Inc., Diebold Nixdorf Inc,
Dell Technologies Inc., Electronic Arts, East West Bancorp Inc, General Motors, Hewlett Packard Enterprise Co., International Business
Machines, Marvell Technology Group Ltd, Microsoft, Micron Technology Inc, NetApp Inc., Nvidia, Pandora Media, Pure Storage Inc.,
Silicon Motion Technology Corp, Take-Two Interactive Software, Unity Software Inc., Ubisoft Entertainment and Western Digital.
3. WS co-managed a public offering of securities for Western Alliance Bancorporation and Unity Software Inc. within the last 12 months.
4. WS has received compensation for investment banking services from Western Alliance Bancorporation within the last 12 months.
5. WS provided Western Alliance Bancorporation and Unity Software Inc. with investment banking services within the last 12 months.
7. WS expects to receive or intends to seek compensation for investment banking services from Western Alliance Bancorporation, Apple
and Hewlett Packard Enterprise Co. in the next three months.
12. Wedbush Securities Inc. has a banking relationship with East West Bancorp Inc.
Price Charts
Wedbush disclosure price charts are updated within the first fifteen days of each new calendar quarter per FINRA regulations. Price
charts for companies initiated upon in the current quarter, and rating and target price changes occurring in the current quarter, will not
be displayed until the following quarter. Additional information on recommended securities is available on request.
Disclosure information regarding historical ratings and price targets is available: Research Disclosures
*WS changed its rating system from (Strong Buy/ Buy/ Hold/ Sell) to (Outperform/ Neutral/ Underperform) on July 14, 2009.
Applicable disclosure information is also available upon request by contacting the Research Department at (212) 833-1375, by email to
leslie.lippai@wedbush.com. You may also submit a written request to the following: Wedbush Securities, Attn: Research Department,
142 W 57th Street, New York, NY 10019.
OTHER DISCLOSURES
The information herein is based on sources that we consider reliable, but its accuracy is not guaranteed. The information contained
herein is not a representation by this corporation, nor is any recommendation made herein based on any privileged information. This
information is not intended to be nor should it be relied upon as a complete record or analysis: neither is it an offer nor a solicitation
of an offer to sell or buy any security mentioned herein. This firm, Wedbush Securities, its officers, employees, and members of their
families, or any one or more of them, and its discretionary and advisory accounts, may have a position in any security discussed herein
or in related securities and may make, from time to time, purchases or sales thereof in the open market or otherwise. The information
and expressions of opinion contained herein are subject to change without further notice. The herein mentioned securities may be
sold to or bought from customers on a principal basis by this firm. Additional information with respect to the information contained
herein may be obtained upon request.
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Page 8Wedbush Securities does and seeks to do business with companies covered in its research reports. Thus, investors should be aware
that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as
only a single factor in making their investment decision. Please see pages 3–7 of this report for analyst certification and important
disclosure information.
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