Morgan Joseph Downgrades Novatel (NVTL) to Hold

August 20, 2008 9:47 AM EDT

Morgan Joseph downgrades Novatel Wireless (Nasdaq: NVTL) from Buy to Hold.

While Novatel topped Morgan Joseph's and the Street's sales and EPS estimates, the firm cites a soft Q3 outlook as a top reason for the downgrade. Morgan Joseph also points out that Novatel's gross margins were down from last quarter's 27.9% to 26% in Q2. As a result, the firm cut its estimates on Novatel: sales and EPS go to $350.3 million and $0.41 for FY08 and to $360 million and $0.45 for FY09. The Street estimates are currently calling for sales of $382.46 million and EPS of $0.60 for FY08 and $438.95 million and $0.79 for FY09.

Morgan Joseph said that it had previously expected Novatel to benefit from "new, operator-specific USB modems for each of Novatel's key accounts to supplement 3Q08 sales", but as management indicated last night, these new developments are not expected to be released until Q4. "Meanwhile, in winning back the promotional slot at Verizon, it appears that Novatel is suffering extreme price compression."

While the firm sees strong trends in 3G connectivity and continued adoption over the long-term, Morgan Joseph notes that Novatel will likely "contend with drastically compressing USB ASPs and continued pressure from lower price module manufacturers" in '09.

Novatel Wireless, Inc. provides wireless broadband access solutions for the mobile communications market worldwide.

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