Novatel Downgraded to Sell

Novatel Wireless, Inc. (NVTL - Analyst Report), a leading provider of wireless data access cards and embedded solutions, reported challenges associated with business execution, delays in next-generation product shipment due to technical issues, and reduced financial resources due to an audit committee’s ongoing accounting review.

We believe these factors will continue to impact the company throughout the remainder of this fiscal year. Novatel did not provide any specific time frame, or visibility, when improved opportunities from its new products can be derived. In addition, the market for wireless data access equipment has recently become more competitive as several large vendors launched innovative products with attractive pricing.

Novatel’s second quarter 2008 preliminary earnings results were significantly below our estimates. We downgrade our recommendation to a Sell as we assess appropriate signs for improved conditions. Novatel is trading at 38.9x our estimated 2008 earnings, which represents a significant premium to both the S&P 500 and the comparable peer group forward earnings averages. However, after adjusting $4/diluted share of net cash balance, the stock is trading at more reasonable 13.9x.

We believe this valuation level reflects the management’s challenges to adapt to changes in market demand which resulted in lower-than-expected second quarter performance. We set a six-month valuation target of $5.50 based on a net of cash multiple of 10x to our fiscal 2008 earnings estimate plus $4/diluted share of net cash balance.

Nalak Das contributed to the report.

Read the full analyst report on NVTL