Monday, July 31, 2006

Calls of Note Part 1

- Goldman Sachs notes Oracle CEO Larry Ellison continues to signal his intention to compete against Red Hat (NASDAQ:RHAT), most recently in a Forbes interview noting that Oracle can offer support for Red Hat Linux and has rights to redistribute the product. Firm continues to believe Oracle will soon announce intentions to redistribute a Red Hat compatible product, possibly for free and also offer support services for this product at a fraction of the price of Red Hat.

Firm would avoid Red Hat's stock until Oracle announces its Linux strategy. Delivering a Red Hat compatible Linux distribution makes Oracle even more of a competitive threat than delivering comparable technology or a different ("non-standard") distribution as Novell has done. Red Hat Enterprise Linux has over 80% market share. They believe Oracle is motivated to preempt Red Hat's progression up the infrastructure stack as a database and middleware vendor by disrupting Red Hat's business model but not harming the Red Hat Linux distribution which Oracle needs to be successful to counter Microsoft.

Notes their negative view on Red Hat seems to be a minority view among sell side analysts. Feel confident the bulls will be proven to have been overly bullish and to have disregarded the risks Oracle presents in this market. Maintains Sell.

Notablecalls: Mixed feelings about this one. On one hand its not news. On the other hand
Goldman has a large customer base and RHAT trades 55x 06 EPS and 40x 07 EPS. I want to see some weakness in RHAT before taking action. If this one starts rolling over it will be ugly.

- Bear Stearns think recent strong Q2 reports by Standard & Poor's and Fitch bode well for Moody's Corp (NYSE:MCO). In Q2, S&P posted 19% revenue growth (organic) while Fitch rose 16%. Both companies exhibited robust top-line growth amid fears of a slowdown in debt issuance. Moody's reports Q2,06 results this Wednesday, August 2.

Firm expects Moody's to benefit from the same factors cited by its competitors---solid structured finance growth (with CDOs up big---offsetting a more-subdued RMBS performance) and sharp gains in the investment grade and HY categories. However, keep in mind that the top-line comparison for Moody's (Q2,05: +25%) is more difficult than those for S&P (+14%) or Fitch (+21%). They lifting their Q2 EPS estimate by $0.03 to $0.58, and 2006 estimate to $2.11. This more than reverses $0.02 estimate cut following MCO's Investor Day in early-June.

Notes they realize that their estimate tweaks are a bit late as MCO shares are up over 10% in the past week. They also think a fresh round of regulatory rumbling this week could take the wind out of MCO's and MHP's respective sails. Indications are that the Senate Banking Committee could act on a ratings agency bill this Wednesday. Maintains Peer Perform.

Notablecalls: See that 200 day moving average around $57 level? Thats where I expect the shares to stall. Vertical moves like that (almost) never hold.

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