Friday, June 09, 2006

Calls of Note Part 1

- Piper Jaffray has positive comments on UARM after co's footwear line hit stores on June 3. Firm's channel checks (at several Dick's and Sports Authority locations) over the weekend point to strong initial customer response to the product. In addition, a successful launch in the footwear space could result in an accelerated roll-out of related product over the next few years.

Women's and youth segments represent tremendous growth opportunities. Firm continues to believe these segments are under-penetrated in the marketplace as the women's product is currently in 3,500 N. American retail doors with the opportunity to be in approx. 7,000 (current door count for men's). The women's segment grew from 17% of the company's overall business in FQ105 to 24% in FQ106. Believes UARM has a similar opportunity with the youth segment, which achieved year-over-year growth of 120%.

Piper ups their FY06 and FY07 EPS estimates above consensus with tgt going to $36 from $33. Reits Outperform.

Notablecalls: Think is widely known that UARM's footwear line will be a success. But UARM is a mover.

- JP Morgan is defending EBAY noting the shares are down 27.8% since the beginning of the year compared to the SandP 500 which is up ~1%. Additionally, the stock is trading at an EV/EBITDA multiple of 12.4x F'07, vs. its peers which are trading at an average of 14.5x. Firm believes eBay's share price should be higher than its sum of the parts valuation because of the synergies different businesses bring to the combined company. Their analysis shows the share are trading at a 35% discount (at the midpoint) to its sum of the parts valuation. Reits Overweight.

Notablecalls: Not actionable but good to know category. EBAY's chart looks bad and it takes more than a valuation call to move it up.

- Prudential is upgrading their weighting from Unfavorable to Favorable as firm's analysis indicates that in the Mar-06Q, inventory days were at the lowest March quarter levels ever at PC OEMs, Communications Infrastructure OEMs, Handset OEMs and Taiwan notebook makers.

According to the firm, manufacturing utilization rates for the sector are at 90%, well below the peak levels of 95%-97% seen during the previous two cycle peaks (Mar-00 and Mar-04 qtrs), and above the trough levels of 82%-87%. At these levels, it is difficult for them to imagine the supply chain double ordering and building inventories in a broadbased and material manner.
Semi indices have sold off about 20% since early in the year, and the median stock in the universe is trading at a 12% P/E discount to '07 EPS - they think the risk/reward equation is attractive.

Top picks: AMD, TXN, MCHP, BRCM and MRVL. Remains Underweight INTC.

Notablecalls: While I'm normally not looking to highlight any upgrades/downgrades on this page (easy to find elsewhere), I do think market participants should pay attention to this Prudential call. The market may have made an important low yesterdayand is due for a bounce. The utilization story has been getting louder in Semis and we may see a squeeze.

- As I highlighted the Prudential Semi call, I feel it needs to be balanced with an opposing one from RBC Capital (firm I admire for their research). RBC is out with comments on Semis noting they downgraded the group in Jan-2006 as they saw PC growth moderating, Semi Supply and Inventories Indicators turning negative. In firm's view, the difference from their 2004 downgrade is that actual levels of Supply and Inventories are much lower (healthier) in 2006 than in 2004. However, 2006 differs from 2004 as inventory and supply-levels might be relatively healthier but end-demand might be moderating much faster this time.

Firm's checks continue to show PC demand weakening globally with little chance of a seasonal 2H06. Also, the lack of a major killer-app that could substantially drive semiconductor revenues above the typical 7% yoy growth is not helping things. PC-demand typically leads overall semi-demand, and the weakness in PCs is an ominous sign of things to come for other semiconductor groups.

When do you Buy? According to RBC, one should buy semi-stocks when supply and inventory indicators start to improve and PC-demand picks up. Between now and year-end, there might be short-term rallies, but the meaningful bottom will most likely occur in late 06 when the semi-equipment companies start to see significant weakness (an indicator of supply spigot being turned off). In the meantime, they recommend investors continue to use rallies to sell.

Notablecalls: While I respect Prudential's Semi upgrade, I feel RBC has a strong point about selling rallies. I feel the Semi Holdrs (SMH) can retrace as much as 50% of the recent sell-off.

- Bear Stearns is once again lowering their estimates for INTC. Firm recalls that they lowered their estimates two weeks ago, on 5/25, based on proprietary checks which pointed to incremental weakness in notebook builds. The further lowering of estimates is based on further weakness in 2Q PC builds, as well as a weaker pricing outlook for 2H.

Firm is maintaining Outperform rating on the stock however, as they remain confident that Intel's solid product line-up in 2H06 should lead to market share stabilization in late '06/early '07, and valuation is clearly attractive.

Notablecalls: No surprises here. Everyone already knows the PC mkt is a stinker.

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