Notable Calls

Citigroup is upgrading Vistaprint (NASDAQ:VPRT) to a Buy from Hold with a $62 price target (prev. $55).

Firm notes they are taking advantage of the recent 13% pullback in VPRT shares to upgrade what they have consistently viewed as a Core Internet Holding and one of the handful of ‘Net companies with a sustainable 20%+ 3-year EPS growth outlook. Their $62 PT is based on 22X our C2011 EPS estimate of $2.80. Three Upgrade Reasons:

1) Recent Market Reaction Overlooks Key Company Trends — On 11/16, a key Senate Committee published a highly negative report on Online Membership Programs, which listed VistaPrint as a beneficiary of these programs. This was the negative catalyst. Yet, Citi believes that the market reaction misses a) the Core Margin leverage in VPRT’s business model – they estimate organic Gross Margin (excl. the high-margin Membership Fees) has increased from 59% to 63% over the past year; and b) the increasing immateriality of these Fees to
VPRT – from 16% of profits in 2009 to an estimated 5% in 2010 to 0% in 2011.

Specifically, they estimate VPRT’s organic Gross Margin (excluding the high-margin Membership Fees) has increased from 59% to 63% over the past year.

What has caused VPRT’s Core Margins to expand? Citi believes the key factors have been scale, learning curve efficiencies, and the rollout of higher-margin Digital Subscription services, such as Website Design and eMail Marketing.

2) Citi Believes VPRT's New Product Rollouts & Investments Are Creating Long Growth Runways — Through the last three Recession quarters, VPRT maintained 32%-35% Y/Y Core organic revenue growth, highlighting the company’s secular growth opportunity – the online migration of Small Business marketing solutions. And they believe the recent rollout of high-margin products such as Website Design, eMail Marketing, and Online Search Placement – as well as new production facilities in Asia-Pac – are creating greater crosscategory/
cross-geography revenue opportunities.

3) Firm's Recent Factory Tour Gives Them Increased Confidence in VPRT's Growth & Efficiency Outlook — Per their 11/17 tour of the company’s key Windsor, Ontario, VPRT will be doubling the size of its production facility by mid/late 2010. Further, Citi's qualitative tour takeaway highlight the company’s efficiency steps/opportunities across Labor, Materials, Shipping & Overhead.

View Risk-Reward As Interesting Near- and Long-Term — Near-term, they view VPRT as one of the key Internet Market Share beneficiaries of the Recession. Long-term, VPRT continues to screen well against Citi's 4M Framework, including Management Team, Competitive Moats, Market Opportunity, and Business Model.

Notablecalls: I suspect this upgrade comes a bit of a surprise to many, especially the shorts. With the short interest close to 45% of float, the shorts had been feeling a lot of pain lately. They got a few breaks after Goldman Sachs downgraded the stock back in October and even talked Barron's to publishing a negative story on the co two weeks ago. That helped to knock the stock down from $55 to about $50. It looked like more downside was ahead.

Until this morning. With Citigroup upgrading the stock to a Buy, I think there will be more pain in store for the shorts. They may be right in thinking, but new 52 week highs are likely on the way regardless.

Taser (TASR) also went where it belonged EVENTUALLY but few folks who shorted that stock were alive to celebrate. Same probably goeth for VPRT.

The stock will trade to $52 today for sure with $52.50+ not out of the question if the market continues to play ball.

Let's see how it works out.

According to the firm, AMLN shares have been under pressure for several years, which they attribute to concerns regarding flattening Byetta trends, increasing competitive visibility, perceived regulatory risk for exenatide LAR, excess cash burn and limited pipeline visibility. Since reaching a peak share price of $51 on October 5, 2007 AMLN shares are off -76% as compared to the BTK that is up +3.2% over the same period of time. At current levels, with an enterprise value (EV) of $1.95B, AMLN shares are trading at 2x current year revenues and 4x AMLN share of revenues and appear to reflect limited sustainable growth for Byetta, low likelihood of exenatide LAR approval, heavily discounted earnings prospects and no value for its obesity assets.

Recently, however, AMLN has made significant progress towards addressing concerns with stabilization of Byetta trends, Byetta label expansion, operating expense reduction and global partnership for obesity assets. With focus on exenatide LAR as a primary value driver, however, uncertainty has persisted regarding approvability in the context of FDA concerns expressed regarding the long acting GLP-1 class. With FDA action on Novo Nordisks liraglutide as a potential nearer term proxy for FDA approach to the long acting GLP-1 class there has been an assumption that as goes liraglutide as will go AMLN.

- Barclays thinks exenatide LAR prospects may be better than expected irrespective of liraglutide action. In reviewing implications of Byetta label expansion, better than expected labeling for pancreatitis risk, differences in preclinical carcinogenicity profile, post-marketing experience with Byetta and efficacy data for Exenatide LAR the firm believes that a more constructive view regarding LAR approvability is appropriate.

- With over 1 million patients exposed to the exenatide molecule and with no major safety issues emerging Barclays believes that the Byetta safety database provides significant support for exenatide LAR approval in the event that FDA maintains a line extension designation for the product. With approval of the Byetta frontline monotherapy claim they believe that office of drug safety has had an opportunity to fully review the safety profile of the exenatide molecule and with better than expected Byetta labeling believe that a line extension designation would serve exenatide LAR well. In addition, with significant focus on cardiovascular risk for diabetes drugs they believe that the trend in favor of Byetta with hazard ratio (HR) of 0.70 could also serve to benefit exenatide LAR under a line extension designation.

- In assessing longer term value of AMLN obesity assets it may be tempting to consider market capitalizations for later stage obesity companies like Orexigen, Arena Pharmaceuticals and Vivus which range from $350-750M. They would note, however, that both Orexigen and Arena were valued in excess of $1B on phase II data and have lost considerable value on concerns regarding inferior weight loss to Vivus’s QNexa, potential for CNS adverse events, uncertainty on longer term intellectual property protection and in particular on the inability to secure a partnership. With 2 separate biologic products, efficacy on par with Vivus’s QNexa, a peripheral mechanism of action and a $1B collaboration with Takeda Barclays believes that AMLN obesity assets should command incremental value beyond current Vivus valuation and in excess of prior phase II value for other obesity targeting companies.

Firm is introducing long term estimates for AMLN from 2011-2020 which assume exenatide LAR approval and launch in the US by 3Q10 and by 3Q11 in Europe. In the US they estimate 2011-2020 exenatide molecule sales of $750M, $1.1B, $1.25B, $1.4B, $1.55B, $1.7B, $1.9B, $2.1B, $2.25B, $2.375B and $2.5B. EPS estimates for 2011-2020 are ($0.43), $0.91, $1.71, $2.24, $2.76, $3.34, $3.84, $4.20, $4.45 and $4.71, respectively.

Barclays arrives at their new $22 price target by applying a 25x multiple vs 16x multiple previously to 2014 EPS estimate of $2.24 as compared to prior 2012 EPS estimate of $1.70 and discounting at the same 25% discount rate. They believe that 2014 earnings are more representative of aggregate business opportunity for Byetta and exenatide LAR in the US and Europe and that the higher multiple is appropriate given the 35% EPS CAGR estimated for the period of 2012-2017.

Notablecalls: This is a fairly significant call for AMLN as Barclays is one of the first firms to come off their Neutral/Negative stance on the stock. Pull up a 2 year chart and you can see there has been very little reason to be positive on the stock. Yet now the stock is up 50% from its $8 low and that's usually the level where big players start to get interested again. The downtrend may be broken and catalyst lurk in the horizon. Also, if you look at Barclays' rec. history, they have down a pretty good job in AMLN, downgrading it to Underweigh in the mid-$40's and gradually turning more positive as the stock fell out of bed.

I was positively surprised to see the Byetta label expansion in light of the pancreatitis risk, which seems to indicate LAR is approvable. PDUFA date is set for March 2010.

When it comes to iraglutide, Novo continues to expect a formal update from the FDA before the end of 2009. This may create volatility in AMLN but the situation may end up as a win-win for AMLN as neg. iraglutide news means competition is pushed back and positive news will make a lot of people believe LAR is outright approvable.

So any way you slice it, it looks pretty positive.

Short interest still stands around 22%, which is significant enough to create a short squeeze on any positive developments.

Oh, and Barclays' $22 target is the new Street high.

All in all, I think AMLN will have legs today. The $13 level will break for sure with $13.50+ not out of the question.

Morgan Stanley is upgrading Deere (NYSE:DE) to Overweight from Equal-Weight with a $64 price target (prev. $48)

According to the firm demand for US farm equipment is growing as customers add acreage, a secular phenomenon that is widely underestimated. Cyclical factors are also more favorable than most believe, with corn likely higher into 2010 and the potential for recovery in Brazil. They see this as a rare opportunity where consensus is too conservative on both cyclical and secular factors, making DE risk reward highly favorable vs other machinery stocks.

Morgan Stanley's take on three core debates: 1) US farm equip sales rate is close to mid cycle, not above trend. Their proprietary analysis strongly suggests that the entire market for new equipment is a small group (~25,000) of very large farmers. These farmers doubled acreage over 10 years, taking 30mn acres from smaller farmers who don’t buy new equip. Those acres equate to 6,000 add’l annual tractors needed, vs 10 yr avg of 23,000 units.

2) Corn prices should strengthen into 2010. Demand should swing to up 4% from flat, on feed and ethanol. Lower demand from lower US livestock has already happened to a large extent.

MS commodity strategist Hussein Allidina argues for $4.50 corn in the ’09-’10 marketing year, on rising demand for US corn. Feed demand in the US will be soft again in 2010, but much of that downturn has already happened. EM demand for feed is still up.

3) Brazil has potential to offset a US drop if it occurs. A retracement of half the recent high hp market plunge in Brazil, plus 5 points of share, would offset a 10% US tractor fall. Deere gained 9 share pts. in ’09.

Brazilian offset could be bigger than realized. Brazil high horsepower volumes are down 50% in 2009, Deere has taken 900 bps of share on low volumes in Brazil. A rebound in Brazil that half retraced the fall, along with 5 pts of share, would offset a 10% US tractor drop.

Underpriced option in construction for ‘11/’12: Four years of volume declines, and two years of near zero volumes (’09 and ‘10e) will strain competitors’ dealers. Add in Tier 4 emissions turmoil and Deere (CAT too) should gain share as smaller competitors struggle.

Notablecalls: The Deere call reads pretty strong (and out-of-consensus). The stock is ready to break out and I think it will trade above the current 52-week high today. I'm guessing $53 level may break today with $53.50 not out of the question.

The Fertilizer stocks have been red-hot of late and Deere can be considered a sympathy play of a sort.

Something is going on in the Ag. space as big buyers have been lurking around for weeks now.

Deutsche Bank is upgrading Dillard's (NYSE:DDS) to Buy from Hold with a $28 price target (prev. $13.50).

Based on Dillard’s merchandising and cost control initiatives, improved inventory management and recent operating trends, the firm believes the company is better positioned than nearly all investors would have anticipated to grow EPS significantly in both the near and long term. Management began implementing several initiatives in 2007 and 2008, which up until recently have been masked by the deteriorating economy. Deutsche believes that Q3:09 results area testament to inventory and cost containment initiatives that have been undertaken and are a glimpse into what is to come. Given the improved operating efficiencies they are significantly increasing their EPS estimates, their price target and upgrading DDS to a BUY rating, from HOLD.

Historically considered a laggard, now proving the skeptics wrong
While Dillard’s management was working behind the scenes on new merchandising initiatives and ways to right-size the business in 2007, the company got the reputation of a laggard versus some of their competitors as they experienced deterioration across many metrics including comps, operating margins, and return on invested capital, etc. Additionally, the company’s minimal communication with investors and the Dillard family’s significant economic ownership and control was perceived in a negative light. In late 2007 and early 2008, as the economy was beginning its vicious Great Recession downward spiral, the company began receiving letters from activist investors demanding initiatives be undertaken to improve the operations of the business.

These activists recommended initiatives including:

1) Reduce the company’s cost base – through sourcing, rationalizing SG&A expenses
and reducing capex

2) Improve inventory management – institute initiatives to moderate inventory levels as
the stores appeared over-inventoried

3) Refine merchandise assortment – aggressively re-merchandise with a new vendor
selection, exclusive brands, updated private label and in-house collections

4) Enhance brand marketing – add more image and lifestyle campaigns to
communicate a revitalized message

While Dillard’s did not to respond publicly to these suggestions, it is clear to Deutsche now that many of these suggestions were being implemented at the company.

Normalized EPS
Deutsche continues to believe that the cyclical recovery has not yet been priced into many of retailers’ shares. They expect the improving economy over 2010-2011 to drive strong sales, EBIT margins and EPS growth across most of their Broadline names, including Dillard’s. They expect Dillard’s to see significant EBIT margin expansion over the 2009 – 2011 period (+234bp), given the strong cost discipline, efficiency gains, and streamlined inventory levels. The analysis assumes Dillard’s can eventually return to their historic peak EBIT margin of 8.5%, which may seem like a lofty goal as it would likely take several years for the company to return to these levels. However, applying a normalized multiple (15x) to the implied EPS, implies a share price of $56, or nearly 300% upside.

How good can it get?
Next, the firm updated their “How Good Can it Get Analysis,” which increases their FY10 comp estimate (-2%) by 100bp to 500bp increments and our FY10 gross margin estimates (+91bp) by 10bp to 50bp, but maintains their SG&A dollar estimates. If Dillard’s saw an improvement in comp sales in FY10 to +1% and a GM increase of 120bp, they would report a year-over-year increase in FY10 EPS of about 180%, compared to Deutsche estimate of a +57% increase. If discretionary spending drove the FY10 comp to +3% and gross margins to +140bp, that would result in a year-over-year increase in EPS of about +270%. The company will clearly see significant upside if sales and margins see some improvement from current levels, further supporting their Buy thesis.

Revising Q4:09, FY09, FY10 and FY11 EPS Estimates
Based on Q3 results and the company’s line-item guidance provided, the firm has updated their Dillard’s model. For Q4:09, they now expect EPS to be $1.10 (vs. -$0.31 LY), up from their previous estimate of $0.17. For FY09, they are projecting EPS of $0.80 (vs. -$1.56 LY), up from their previous estimate of -$0.61. Deutsche is also revising their FY10 EPS estimate upward to $1.25 (+57% y/y), from $0.43 previously, and their FY11 EPS estimate is now $2.01 (+60.2% y/y), up from $1.30 previously.

Notablecalls: Certainly an interesting call from Deutsche's Retail team. While the new target of $28 is the new Street high target by a wide mile, Deutsche is saying that based on normalized earnings the stock could be worth $56, implying 300% upside.

This is bound to generate strong interest in the name today.

Dillard's has been paying down debt at a fairly fast rate and has significant real estate holdings that may actually be worth double the current share price (Deutsche est. $41 NAV). The Dillard family and other insiders own 25-30% of the co and control 2/3 of the board votes due to dual Class A/Class B share structure.

There's a 12% short interest in the name and the chart looks good for a breakout.

I think DDS can trade above the $15 level today with $15.50+ certainly not out of the question.

The main risk here seems to be the general market. Futures are in the red early going and I'm not quite sure we will see any meaningful bounces until the markets give back some more of the recent gains.

Merrill Lynch/BAM is out with a rather significant Semicondutor sector downgrade, downgrading 4 large players to Neutral and 4 to Underperform:

Firm notes they are downgrading their view on the sector given unfavorable indications from our cyclical framework suggesting a modest inventory correction, even in the face of improving electronic demand and a more constructive outlook for the global economies. They are also downgrading shares of INTC, TXN, MRVL, and LSI to Neutral, and MXIM, NSM, POWI and MCHP to Underperform. Merrill now rates a modest 5 stocks (BRCM, XLNX, ALTR, ADI and LLTC) as Buys within their coverage group (19 stocks in total).

In particular, Merrill's industry model suggests that following a normalization of semiconductor IC shipments to “true” consumption levels, inventories in the supply chain are approaching a level suggesting a modest overshoot vs. equilibrium levels, even after accounting for above consensus global GDP growth, and a smart recovery in global electronic systems sales into 2010. Thus, barring a sharp upturn in the global economy, their indicators point to the potential for an inventory correction, thus rendering the risk-reward associated with ownership of chip stocks unattractive.

In some ways, the firm thinks the current backdrop reflects a striking contrast to the conditions that prevailed at the time of Merrill's upgrade. Specifically, at the time, supply chain inventories were at abnormally depressed levels, economic forecasts were poised to improve but as yet depressed, and indications of an inflection in electronic demand had just started to manifest themselves. Fast forward two quarters, and the picture looks completely different. To wit economic growth forecasts have trended higher, as have expectations of electronic demand growth, and supply chain inventories are perking above what they’d consider to be a normal equilibrium level. Last but not the least, sentiment around growth prospects for the group has also seen a marked improvement. Simply put, the ideal mixture of investor skepticism coupled with the potential for sharp upward revisions – which served as potent fuel for the semiconductor rally – no longer prevails. This then begs the question: What is the incentive to own chip stocks, esp. on the heels of a spectacular move up (SOX +83%) over the last 12 months?

For those looking for real world confirmation of the potential inventory adjustment being forecasted by Merrill's industry model, the firm would point to indications from the Asia PC supply chain suggesting a material downward bias to desktop forecasts in the near-term. In particular they note that their Taiwan Hardware analyst Tony Tseng is now projecting ~flat Q/Q growth in PCs (desktop motherboards and notebooks included) into Q4. Merrill notes that it represents a sharp downward revision (esp. on the motherboard front) vs. just a month ago, in turn suggestive of slowing momentum in the PC space – the lynchpin for semiconductor industry growth. Serving as further corroboration of waning momentum are resale trends out of Asia distribution suggesting recent monthly sales trends that have been solidly below seasonal. Importantly, they’d note that above seasonal trends in the distribution data in late 2008/early 2009 had served as a harbinger of the cyclical upturn, thus, in Merrill's view, underscoring the importance of the data.

Last but not the least, for those looking for a smoking gun, Merrill has one: namely, foundry utilization. Using TSMC utilization as a loose proxy for trends in overall foundry utilization rates, they’d note that a sale of the SOX every time TSMC’s utilization rates hit 100% would have put you on the right side of the trade in short order. As counterintuitive as this might sound (after all isn’t tighter capacity great for chip ASPs etc.?), the fact is that there is such a thing as too much of a good thing. When it comes to foundry utilizations, 100% seems to be the magic number, simply because “sold out capacity” – esp. in the face of an improving perception around the economy and by extension end demand – is often a catalyst for double/excess ordering in the supply chain. After all who wants to be caught short on semiconductor parts, which average a paltry $1.00-1.50 in ASPs, when demand is improving?


Will it be different this time, and will the backdrop allow for an extended period of rationality in the supply chain despite tight supply? Perhaps. Then again recent history suggests that this has ultimately never been a bet that worked out in favor of the chip investor.

Notablecalls: So, Merril Lynch/BAM is joining the Anti-Semi group today (call was out last night) after Morgan Stanley downgraded the Semi Equipment sector last week.

The call makes perfect sense and is backed by FBR Capital this morning. According to FBR, recent checks into 4Q PC builds with the top five notebook ODMs and top four desktop motherboard makers are worse than their month-ago checks. Overall, the firm forecasts 4Q PC builds to decline –1.5% QOQ, worse than their month-ago forecast of +5% growth QOQ.

It's kind of surprising to see this kind of action ahead of Q4 numbers but I guess this can be explained by recent rumours of double and triple ordering that has been occuring over the past months. The Intel's and Dell's of the world have enough components to work with and are paring back their future orders.

Good thing no real production capacity was added, which makes the upcoming decline somewhat easier to handle.
How to play it?

I'm not a big fan of shorting INTC here down 3-4% in the pre mkt. Too much of a battle, given how WDC/STX performed following the Merrill downgrade yesterday.

The Merrill call is good for context but not for actual trading, I think.

- Citigroup is upgrading SII to a Buy from Hold while raising their price target to $35 (prev. $29).

Smith shares plunged nearly 13% as the company tried to place a 28 million common share offering that no one expected and that seemed to be poorly timed. Citi notes they have lowered their EPS estimates slightly to reflect the dilution from the share offering. Their EPS estimate for 2010 is revised to $1.05 from $1.10 and their EPS estimate for 2011 is revised to $1.60 from $1.65. They believe that Smith is a company with high quality products and services and a premier brand name in oilfield services. That Smith is the one of the poorest performers among the major oil service stocks in 2009 makes this stock worth of a second look (especially following the stock’s brutal sell-off).


Smith Pays a Price to Remain Investment Grade While Pursuing Growth
Smith surprised analysts and investors by announcing a 28 million share stock offering, with proceeds to be used for debt repayment and to fund potential acquisitions and new growth initiatives. The company (which is determined to preserve its investment grade credit rating) realized that issuing new debt for acquisitions or growth would have resulted in a ratings downgrade.

Citi Believes SII Shares Are Oversold and Could Bounce in 2010
They have raised their rating on Smith to Buy from Hold. While Smith has been one of the worst performing oil service stocks in 2009, its poor operating results and its need for new equity capital are reflected in its current share price. Citigroup believes the stock has upside to around $35 in 2010.

They Believe Smith is a High Value M&A Target
Two M&A deals in oilfield services in 2009 have apparently kicked off another round of industry consolidation. While Smith’s stock offering clearly signals its desire to move forward on its own in the next phase of the business cycle, we see Smith as an ideal M&A target based on its longstanding global leadership in drilling fluids and bits.

Citi believes that Smith is a logical fit for several companies that have clearly signaled to the market that they want to make acquisitions. The most likely buyer of Smith, in firm's view, would be National Oilwell Varco (NOV.N; US$46.13; 1H). Clearly the operations and technological strengths of the two companies are well aligned. Other candidates to acquire Smith could be Schlumberger (SLB.N; US$67.09; 1M) and Weatherford (WFT.N; US$18.56; 1H)(in that order of probability).

If Smith Stumbles Next Year, Pressures to Merge Could Build Quickly
In 2010 Smith will face continuing challenges in the form of start-up costs in new international markets and pricing pressures in domestic markets. Smith’s PathFinder suite of drilling services is trailing expectations with respect to its pace of international expansion. If the company were to stumble amid these challenges, pressures to merge with a larger competitor could intensify quickly.


- RBC Capital is out with a call titled "Buy the Deal". Firm is reiterating their Outperform rating and $35 price target (unch).

They would buy the deal. Here's why:

1. Deal will help accelerate the expansion of SII's Directional Drilling product line and the growth of its international footprint.

2. SII remains the most consumable (razor blade) intensive company.

3. SII is the only pure play service specific company for mid cap ($2-10bn)
investors.

Highlights from chat with company last night:
1. Company has ~30 deals in various stage of discussions, and they typically close 10%. The M&A pipeline has heated up recently, as such, we would expect some deal flow within the next 3-6 months.

2. The sizes range between $6mn-$200mn. This indicates to us that most, if not all, potential deals will be private.

3. Company noted that any acquisition won't be pressure pumping and this equity deal is not related to SLB's put option on the M-I joint venture with SII.

Clients are still questioning execution.
RBC notes they would be concerned about execution if it coincided with status quo. This is not however the case. John Yearwood has been CEO since Jan 1, 2009. He has recently hired a new CFO and established an IR effort, SII's first ever. The CFO is an upgrade, in RBC's opinion, and the IR role shows a commitment to improving its communication effort with both investors and the sell-side.

From an operational standpoint, they have expanded the Pathfinder product line into 6 new countries in 2H09 and are targeting 1-2 new Eastern Hemisphere countries per qtr through 2010.

In RBC's view, the investment decision on SII is simple:
You either buy into John Yearwood, a successful geographic expansion, roll-out of the Pathfinder product line into new countries, successful execution on M&A and an improvement in investor communication or you don't.

Notablecalls: So, there you have it. Two firms are telling you buy SII down 4pts from the $31 level. The thing priced $26.50 last night.

Could trade towards $28 level if the market plays ball.

J.P. Morgan is out with another major call on Assured Guaranty (NYSE:AGO) raising their price target to $42 from $28 following earnings announcement out last night.

AGO reported op EPS in line with the pre-announced $0.45 per share. Included in its Q was a premium amortization schedule that was well above what JPM had previously modeled. In short, they were not properly accounting for the way FSA's premium revenue is recognized going forward as AGO purchased the company at a large discount to book. As such they are raising their estimates substantially and pushing their price target up to $42, using the same 7x multiple to their new 2011 estimate. With shares trading at half firm's target, they would be aggressive buyers.

Premium discount amortization significantly higher than modeled.
When AGO acquired FSA it booked ~ $1.6B of premium discount. A majority of the discount was applied to RMBS exposures that have a shorter duration than the overall portfolio. As a result, the discount amortization built into future premium earnings will run at a significantly higher rate than we had expected. AGO disclosed in its Q that deferred premium revenue earned will be ~ $1.1B over the next four quarters and gradually decrease ~15-20% annually over the next 3 years. This increased revenue does not change the economics of AGO’s business but will bolster regulatory capital dramatically.

RMBS loss mitigation efforts pay off.
AGO has been negotiating with mortgage originators to recover losses from improperly underwritten mortgages based on existing warranty covenants. In its 3Q earnings release AGO announced that they have reached an agreement to have $146M of mortgage loans repurchased by the originator and expect to put back an additional $804M of RMBS loans for a $527M total net benefit.

Additional capital to be raised by year-end.
As previously announced, AGO has initiated a capital plan in order to have its Aa3 rating affirmed by Moody’s. The plan includes external reinsurance, inter-company capital support, and $300M of new capital. The external reinsurance has already been negotiated, and the $300M of capital is expected to be raised by year-end. This capital may be a mix of common and preferred or convert/hybrid equity.

Significant earnings power increase.
JPM is raising their 2010 and 2011 earnings estimate to $5.00 and $6.00 per share from $3.00 and $4.00, respectively, to reflect significantly higher earned premiums and loss mitigation efforts.

Trading at just 3.5x JPM's normalized earnings estimate of $6, compared to the doubledigit multiple on normal earnings we had seen in the past, the stock is cheap in firm's opinion. Moreover, even if they penalize the stock for its ratings uncertainty, the lion’s share of the future earnings will come from amortization of back book of business; therefore, they believe there is little downside to the stock and reiterate their Overweight rating. JPM's new Dec 2010 price target of $42 is based on a historically low 7x multiple to their new 2011 estimate.

Notablecalls: So, today is 'Make Wilbur Ross Happy' day. The legendary distressed business investor owns around 16 million shares of AGO with an average price of ~$15-20 per share. He started buying AGO in February 2008 and has steadily increased his take since then.

I suspect AGO will fly high today following the results and the HUGE call from J.P. Morgan:

- I'm sure many of you saw how AGO reacted to the less ominous Moody's cut and J.P. Morgan comments last Friday. The stock shot up 4 pts from open and didn't give back much during the day. There was some serious buying going on.

- J.P Morgan has been and continues to be the Axe in the name. Their $28 price target was the Street high and the $42 target just mops the floor with other analyst covering the name.

- The reasoning behind the $42 target isn't based on some quirky DCF-based analysis. The people at JPM realized they were being too conservative and are upping their 2011/2012 EPS estimates by a friggin mile.

This stuff is bound to get attention. How many stocks are there with 100% price targets and a blessing from the Axe?

So how high will AGO trade today?

I suspect we may see another 10%+ move in the name today. If you look at the chart the stock has broken out to a new 52wk high and there is really nothing stopping it (except maybe some of momo buyers from Friday taking profits).

This will put the $23 level in play with $23.50-$24.00 levels definitely not out of the question.

Let's see how it goes.

UPDATE: Based on pre-market action, I now think this one can trade $25+.