The Guest Blog

Farrell: Getting Psyched for the Jobs Report

The Bureau of Labor Statistics doesn't release its official jobs report until Friday but there is lots of preamble.

The non-manufacturing Institute of Supply Management survey on Wednesday registered 50.1, which puts it into the expansionary part of the hemisphere. The details were mostly encouraging. Business activities rose to 53.7, new orders were at 52.1 (but that was down a bit from last month), and supplier deliveries were 50.5. Inventory changes rose above 50 for the first time since August of 2008. A confirmatory report of better inventory news came from a major brokerage firm that reiterated its buy on Cisco (CSCO: not rated at Soleil) in part due to supply chain constraints preventing CSCO from shipping even more than had been expected. Good news for CSCO that business looks robust and good news for the view that inventories are too lean. Exports actually fell from a reading of 55 to 46. On the face of it, this appears to be discouraging, but then the overall did so well without exports that you have to be heartened.

The one "trouble spot" in the non-manufacturing ISM was employment. It did rise from last month's 41.6, but the new reading of 44, while better, still indicates a shrinking work force, just at a slower rate. It should be noted that this sub index has often been too pessimistic in the past. But the ADP (Automatic Data Processing Co.) employment survey saw a decline of 84,000 jobs. While much better than last month, and the ninth month in a row of a better reading, it is still negative. The boys at Capital Economics that I refer to often are predicting a fall of 50,000 jobs this Friday, but I see a few estimates of a gain of 50,000. The weekly reading of initial unemployment claims will be released Thursday at 8:30am as it always is, and while one week is not indicative of anything, this week's number does take on added importance. Tune in Friday morning at 8:30 as well for the jobs number. The future of the Universe depends upon it (?).

New idea time at Soleil comes from Mike Genovese. He is recommending Tekelec (TKLC: Buy-rated: recent price $15.70; 52-range $20 to $11). TKLC dominates the business of signaling platforms for wireless networks. Signaling is the software that turns on a cell phone, tells the network where it is, and connects the call. This is for both voice and text. The voice or data is carried by the big pipes the router companies provide. The company has an 80% market share in North America and Europe and invests more in research and development than any of its competitors in this arena.

Global mobile subscriptions are expected to grow 12% a year for the next few years. Text messaging is still in its explosive phase and is up 80% for the year ended last June. Carriers' cap ex is expected to grow 4-5% for 2010, which greatly benefits TKLC. The current product is a Signaling System platform (SS7) called Eagle 5. This is probably connecting all your calls and texts right now. The next generation is a Session Initiation Protocol (SIP) cleverly named the Eagle XG. SIP will gradually replace SS7 over the years but carriers will need both systems for quite some time. Verizon, for example, will run SIP, the new platform, on its Long Term Evolution (LTE) system for data, but keep SS7 (Eagle 5, the original product) for at least several years. Over 10 customers have ordered the new stuff, but the company has yet to record any revenues, which makes the future outlook rosy.

The company has a market cap of a bit over $1 billion, over $5 per share in net cash, and gross margins above 60%. Mike figures earnings this year to be $1.13. His $22 price target would be 15 times calendar year 2010 operating earnings plus $5.36 in cash. It would imply a 2 times Enterprise Value to Sales, which he feels is reasonable for a company with high 60% gross margins and 20% plus operating margins.

Old-idea update comes from Manoj Garg, who recommended Forest Labs a few weeks ago (FRX; Buy-rated; recent price $31.81). To recap: FRX has $12 a share in cash and two principal products that both face patent expiration. Lexapro (depression) and Namenda (Alzheimer's) provide the bulk of sales, but Manoj feels they will cash flow a net $16 a share to Forest the next few years. The reason for the update is the company is having a rare analyst day Thursday. He is looking for updates on products in the pipeline. They include linaclotide (for irritable bowel syndrome-IBS), ceftaroline (a broad spectrum antibiotic), and aclidinium and Daxas (for chronic obstructive pulmonary disease—COPD—which makes it hard to breathe). Manoj's EPS estimate for this year is $3.52, so the stock sells at just 9 times vs. the group average of 10 times. His price target is $38, which would be $12 in cash, $16 in expected cash flow from the current two principal products, and $10 discounted value for the pipeline. This does not include any potential of the company putting the cash to work developing or licensing other products.

Vincent Farrell, Jr. is chief investment officer at Soleil Securities Group and a regular contributor to CNBC.