Notable Calls

- Firm says they would be buyers of the stock at levels closer to $150 (~1x 2012E Net Sales) or toward the end of the more challenging year ahead.


Effect:
Amazon.com will most likely experience decelerating sales (and unit volume) growth rates throughout 2012, which may become clearer to investors with the CQ2:12 sales guidance to come on its CQ1 conference call. Interestingly, Amazon.com has an easy comp in CQ1 due to a 500 bps international sales impact from the earthquake / tsunami in Japan last year. However, when Amazon.com guides to CQ2 it will be doing so against a strong CQ2:10 comp of +44% y/y sales growth, and the firm expects investors may be surprised at the organic deceleration occurring in the business that may manifest itself within the CQ2 guide.


Cause:
The drivers of Amazon.com’s deceleration are numerous, some real and some optical, but all significant to the sales / unit growth story.

1. Apple (AAPL, $498, rated OW by Katy Huberty) may be having a significant and direct impact on Amazon.com’s EGM segment.

2. Apple and others are driving an accelerating digital shift in the Media category, and an increasing pace of change puts Amazon.com’s non-book Media business at risk (Music, Video and Video Games).

3. The console-based video game business is in a cyclically weak (possibly secularly weak) period.

4. The transition to 3P / FBA is being driven partially by the transition of eBooks to net sales accounting and while positive long-term, we do not think physical goods 3P is growing as fast as some investors believe.

5. Slowing sales growth and an overall shift to more 3P and digital goods may change the dynamics of working capital, a significant component of consolidated FCF that most investors currently capitalize at the same multiple as Amazon.com’s operating FCF

Details:

The Apple Impact:
In CQ4:11, Apple reported $33.6B of sales from two products – iPhone and iPad, which was more than 3x the size of Amazon.com’s entire EGM category. Importantly, Amazon.com is not a licensed retailer of iPhone and iPad, which has left a noticeable gap in Amazon.com’s consumer electronics portfolio. The true impact manifests itself in the sales growth deceleration of Amazon.com’s North America (“NA”) EGM sales line, which decelerated in CQ4:11 to +27% y/y growth (excluding Kindle Fire) from +44% y/y in CQ3:11. While most investors focused on Amazon.com’s Media sales deceleration, the EGM deceleration is more significant since it is the segment that investors expect the most share gains from over time.

The Digital Impact:
The second derivative impact of Amazon.com’s Apple issue is that mobile device proliferation is accelerating the shift of books, music, video and video games to digital distribution. Amazon.com is currently the market share leader in books but otherwise faces an uphill battle. We estimate that ~40% of Amazon’s media sales or ~16% of total sales comes from non-book media sales, and we believe this revenue stream is increasingly at risk to companies such as Apple, Netflix, Pandora, Spotify, etc. We believe Amazon.com is particularly focused on two of the four media categories – books and video. The books category has already been a huge success and given the media war that Amazon.com is now fighting to sustain its media business through the digital transition, we think Amazon.com will spend as much as it needs to in video to win top-spot within the second media category. With that said, we are incrementally negative on Netflix as we believe Amazon.com has competitive strengths that could aid in its war for video market share, namely its video streaming delivery infrastructure and its large, engaged customer base. Furthermore, Amazon.com has the necessary capital to ‘pay to play’ in this area (Netflix spends $1.5B-$2B per year on content). As it relates to music and video games, we believe Amazon.com is currently in a more difficult position and may choose to buy vs. build in these areas over time. Net / net, Apple is a problem for Amazon.com and the first / second derivative impacts will drive Amazon.com to continue spending aggressively for an extended period in the areas of discounted hardware devices, acquiring content, etc to sustain its competitive position within the media category.

Our views -> Numbers -> Value:
Our highest conviction views are around slowing unit volume growth, lower gross profit per unit and lower unit sell-through in the Media category. Those factors lead us to lower our 5-yr sales CAGR from 25% to 23% and our 10-yr CAGR from 18% to 16%. After factoring in slightly better gross margins due to 3P mix shift, our fair value estimate decreases by $42. Lower net Opex and Capex spend make-up ~$12 of positive value per share. Net, our fair value estimate declines by $30 and we shift to Equal-weight.

Notablecalls: Morgan Stanley has been a long-term supporter of AMZN & this cut will leave a dent:

- Note MSCO is also making a s-t call on the qtr saying investors will be 'surprised at the organic
deceleration' in CQ2 guide.

- I'm thinking we will see a 4-5% drop in the stock towards $177-$175 range.


PS: Look at what they did to AAPL yesterday.

Jefferies & Co analyst Peter Misek is downgrading his rating on Research in Motion (NASDAQ:RIMM) to Underperform from Hold with a $15 target (prev. $17) this morning.

- Jeffco's checks indicate RIM will delay and possibly abandon its OS licensing plans and its email/BBM/social networking app in favor of direct competition with Apple/Android. With no near-term positive headlines now expected and with St still far too high for FY13 (Feb) at $3.17 vs. their $2.00 est, they cut their target to $15 and downgrade to Underperform as they await the BB10 launch (likely Sep).

Background: The firm upgraded RIMM on 12/21 due to two primary reasons: 1) they believed RIM's stock price of $12.52 discounted an expected 37% cut to FY13 St estimates; 2) while they did not think a buy-out was likely, they thought RIM was investigating partnerships and could announce something this spring.

No near-term positive headlines expected: Misek's and his team's checks indicate RIM is likely to move away from a proposal to the Board that RIM license BB10 to Samsung and launch a new BBM, email, and social networking app for iOS/Android for a monthly fee. They believe Heins will present his new plan to the Board within two weeks and that he is likely to postpone or cancel those plans. Firm thinks the centerpiece of this plan (hinted at during his recent conference call) will be to compete head-to-head with the Apple, Android, and Windows
ecosystems with their own integrated hardware/software/services ecosystem.

Misek likes the new CEO Thorsten Heins but not his near-term strategy: the firm recently met with Heins and found him engaging, articulate, and thoughtful. They see no evidence that he is under the influence of the former management in any way. But they respectfully disagree with him. Firm believes that an ~1 year delay in licensing BB10 (what we believe to be an excellent OS) is a mistake. They believe decelerating efforts to offer enterprises the ability to get their fast secure Blackberry email on an iPhone or an Android device is a mistake. Misek notes they want to believe in RIM, but see the near-term risks as too high.

While success may come later this year once BB10 devices launch, we have seen the same story from RIM twice before in the last two years. First in 2010 with a Webkit Browser that would fix everything. Then BB7 in 2011. And now with BB10 in 2012.

Instead of restructuring Jefferies expects RIM to expand BB10 investments: rather than hoped for opex cuts, they now believe that QNX in Ottawa has moved to a new building to accommodate more staff. Firm also expects additional spending for data centers and advertising. Their estimates are inline with consensus for the Feb Q, below for the May Q, and far below for the Aug Q.

If the next month is weak then RIMM could pre-announce before Mobile World Congress (MWC) starts on 2/27.

Notablecalls: Mixed feelings about this one.

- Misek has done a pretty good job covering RIM in the past. Notice how he caught the recent $12.50 bottom in the stock with his 12/21 upgrade for a 37% gain. He is downgrading it back to Underperform but remains hopeful the stock won't fall below the recent $12.50 lows.

He actually calls Heins 'engaging, articulate, and thoughtful'.

- On the other hand Misek's checks show Heins is not going to license BB10 to Samsung. This was pretty much the only catalyst on the horizon for the next 6+ months.

Not only that, Heins is going to ratchet up the spend which will pressure the bottom line. Which in turn means ests are probably going lower.

And we may be looking for another warning in 3 weeks. I mean, iPhone & Android are still taking market share per recent checks and RIM has very little to counter that.

All in all, the stock is likely to pull back following this material new info regarding BB10 licensing.

BMO Capital is upgrading Southwestern Energy (NYSE:SWN) to Outperform from Mkt Perform with a $40 price target calling for Peak in negativity.

- BMO says the change in rating reflects a potential larger value creation event beginning to unfold and which itself is not grounded in natural gas. Their recommendation also hints of the contrarian.

The former speaks to Southwestern’s exploration efforts targeting the Lower Smackover Brown Dense oil formation. Leasehold totals ~500k net acres today. Big footprint. Completion operations commenced on the first horizontal test, with flow rates expected at time of 4Q11/2011 earnings. Two other wells are expected to have been drilled by that time. Talking late February on news flow. Talking potential catalysts on the horizon. The latter speaks to natural gas for which Southwestern Energy is somewhat synonymous. No hiding it. By no means do they imply a change in their less-than-bullish stance on natural gas with this change in recommendation, they say. The firm is simply pointing out the torque SWN affords to any tightening of the supply/demand balance before winter’s end, however temporary the resulting higher commodity price. They do take some comfort that Southwestern has proven to be one of the lowest-cost, highest-margin producers among independents. (Firm puts it in the “survivor” camp among natural gas producers.) They expect to see the same approach to developing the Brown Dense oil resource play. BMO believes a favorable risk/reward now exists for investors to gain exposure to potential near-term catalysts for the shares that could come from successful exploration results, plus torque to any potential, albeit temporary, recovery in domestic natural gas prices. The shares are down ~30% since the start of the winter heating season(November 1) and the multiple has contracted to a 12-month low of ~5.5x.

BMO's estimates are unchanged from those last published January.

Notablecalls: Today is natty day. This comes after Chesapeake (CHK) vowed to curtail Marcellus drilling, sending natural gas prices way higher in minutes. One glimpse at US Natural Gas Fund (UNG) and you see it's a coiled spring.

So, BMO gives you a reason to buy SWN today - says there's a potentially big catalyst waiting in Feb. Calls it best-of-breed, leveraged to natty.

The whole space will be on fire in the n-t. I see SWN trading $31+ today.

Another trader's favorite is Range Resources (NYSE:RRC)

We caught a big winner in Notable Calls Network (NCN) this morning - Sears Holdings (NASDAQ:SHLD)

The retailer has been on our radar ever since that Imperial Capital "Sell" call on Dec 9, followed by a significant earnings warning on Dec 27. More recently on Jan 12 commercial financing outfit CIT Group announced halting loans to Sears suppliers, which caused another morning gap-down in the stock.

Plenty of 10% moves up & down.


- Around 09:32 AM ET a senior member of NCN pinged me with the following:


SHLD: +CIT Said to Be Approving Orders for Sears

http://www.wwd.com/retail-news/financial/cit-said-to-be-approving-orders-for-sears-5523527#

(stock sold off big on CIT news removing them before)


Needless to say, this was material new information. Getting it out there to other NCN members was of utmost importance.

The stock had been on bounce/squeeze mode for days and this would only add fuel to the fire.

As you can see from the chart below a 3pt gain was to be had in the next 10-15 minutes.

Piper Jaffray's Ahmar Zamar is making a positive call on Cree (NASDAQ:CREE) after their checks uncovered a surprising December uptick in China's LED street lighting demand.

- Piper's proprietary checks with downstream LED lighting companies in China suggest Cree's customers likely saw rush orders in December ahead of an earlier Chinese New Year holiday. They met with international and domestic lighting players including TC Interconnect, Neo Neon, Phillips, and Osram over the last few weeks. Firm's checks also revealed that Chinese LED street lighting demand has recovered, and is growing at 30% y/y. Furthermore, competition is limited to leading chip suppliers Cree, Lumileds, and Osram. They view these checks as positive for Cree given 40% revenue exposure to China.

Firm reiterates Overweight and $50 price target on CREE:

China’s LED street lighting market growth resumes. Our checks with downstream LED street lighting players TC Interconnect (9% of street lighting market in China in FY11E) and Neo Neon indicate that Chinese street lighting market demand continues to accelerate, driven mostly by government projects. Based on our checks, we estimate there were a total of 200-300 LED street lighting projects available in 2011. In May 2011, the Chinese government announced the 2nd batch of “10 cities, 10,000 lights” LED street lighting demo projects. This time, it has been extended to 16 additional cities including Beijing, which totals to 37 cities promoting LED street lighting projects in China.

Cree remains the default supplier for Chinese street lighting projects with ~70% market share. Competition for LED street lighting projects in China is limited to 19 downstream companies who have been qualified under NDRC standards in late 2010. Our checks with domestic Chinese street lighting companies (e.g. Unilumin, Kingsun) indicate these companies use Cree chips by default unless the project has other specific requests. Our recent checks with LED street lighting players still rank Cree as the highest quality chip supplier.

Rush orders likely drive upside in December quarter. A December uptick in demand due to rush orders in China could drive upside to our $310m revenue est (cons $310m), but we believe March qtr growth could be more modest at +8% q/q vs our prior estimate of +11% q/q given a likely demand pull-in ahead of Chinese New Year (2 weeks earlier this year).


Notablecalls: This one could work:

- China LED street lighting demand coming back is definitely a surprise.

- What's even more important is the fact Chinese manufacturers are using mainly CREE chips. No local competition, huh?

- PJCO is also making a +ve call on the qtr. Note CREE is set to report on Jan 17, that's a week from now.

- The stock has been beaten to pulp & could be playing ketchup with the rest of the tech sector.


This could translate into 5-7% upside here, putting the stock closer to $24 level in the n-t.


PS: Note how Piper highlights Lumileds (NASDAQ:LEDS) as a leading chip supplier in addition to CREE. Should the China LED story find legs, LEDS could work well. Just take a look at the 40%+ move on Nov 4, 2011 following the news China had started incandescent bulb phase out. CREE was up 10% on that day.

Anyway something to keep on the radar.

I'm posting this on open.

Credit Suisse's Telco Equipment team is making a rather bold call this morning by upgrading Nokia (NYSE:NOK) to Outperform from Underperform with a price target of $8 (prev. $5.5).

- Actually the upgrade is part of a broader call as the firm is raising their Global 2012 handset estimates while also painting a positive scenario for Microsoft's Windows Phone initiative. They believe WP will become the #3 smartphone OS.

Ok, back to Nokia (NYSE:NOK):

CSFB believes Nokia will start to realise the benefits of transition from Symbian to Windows Phone from 2H 2012 as it can capture 13% global smartphone share in 2013. This will drive a long term turnaround EPS of €€ 0.60 (which is 50% above consensus).

They believe that Nokia’s new Windows Phone-based smartphones are poised to gain traction based on three key factors: 1) strengthening developer/carrier support for the Windows Phone ecosystem, as confirmed by Credit Suisse’s proprietary survey of more than 25 carriers globally, as well as recent application developer surveys and data points, 2) aggressive pricing of Nokia’s Windows Phone devices in the range of €€ 180-300 from the outset, and 3) the quality of the Windows Phone OS platform combined with Nokia’s brand, distribution, scale, and IPR.

Based on these three drivers, the firm believes that the Windows Phone platform will eventually command a significant-enough market share to become the #3 OS in the smartphone market. In fact, the Credit Suisse Telecommunications Equipment Team believes that Nokia will command 13.2% of the total smartphone market by calendar year 2013.

In Credit Suisse’s proprietary survey of more than 25 carriers globally, Windows Phone received higher ratings than RIM in every category surveyed except for messaging. This data further reinforces CSFB's belief that the Windows Phone platform will eventually able to command a significant-enough market share to become the #3 OS in the smartphone market.

In particular, they note Windows Phone’s lead in terms of user interface in Credit Suisse’s proprietary survey of more than 25 carriers globally. Windows Phone’s Metro interface screen is primarily a portal into what Microsoft calls the bigger “panorama.” Whenever the user is within a particular hub, they are looking at a section of that segment. The user can swipe from side to side to pan through all of that hub’s options and capabilities. If this user interface is ported to a larger screen tablet device, conceivably the user will see the whole integrated experience rather than a section of it through a small portal.

....

....

The notes are long, so I can publish only a tiny fraction of it all.

Notablecalls: It's very difficult to find a Buy rated analyst in NOK these days, let alone a Tier-1 one. So this means the upgrade is likely to generate meaningful attention. A major change in view.

I'm thinking 5-7% move in store.