Monday, April 30, 2007

Goodrich Petroleum (NYSE:GDP): RayJay more bullish than ever on the story

- Raymond James is positive on Goodrich Petroleum (NYSE:GDP) saying that after spending several days with management last week, they came away more bullish than ever on the story. The company has never been as well-positioned or with as many potential catalysts as they see emerging over the next six to nine months.

Goodrich announced results last week on their most recent horizontal well in the Cotton Valley. The Champe Graham 3-H has now been on-line for roughly three weeks and is still producing at its initial production rate of 4 MMcfe/d, which indicates an EUR of ~4 Bcfe versus 1 Bcfe/well on traditional vertical wells. RJ estimates that horizontal drilling in only the Bethany-Longstreet field (14% of total acreage) shouldadd at least $5/share to total NAV . While the market seems to pigeonhole Goodrich as a one-trick pony that lives or dies with horizontal drilling results, it should be pointed out that it is only one of seven potential catalysts on the horizon in 2007.

The other catalysts/trends consist of the following: Angelina River, James Lime, Alabama Bend, 20-acre downspacing, new "surgical" fracs, and slim-hole horizontal re-entries. Firm estimates the aggregate of all these along with additional horizontal drilling results in Bethany-Longstreet, could potentially add ~$20 to their current $45 total NAV estimate .

Overall, they believe Goodrich will have a steady stream of positive news the remainder of the year with potential to drive the stock materially higher. Reiterates Strong Buy rating and $45 target price.

Notablecalls: This is the kind of note that makes me feel all warm and fuzzy inside. RayJay is one of the best firms out there and if they spend several days with co's management and come back with very positive comments, I expect there to be considerable upside in the stock over the next couple of weeks. The chart doesn't look bad either! Actionable call alert!

Vanda Pharma (NASDAQ:VNDA): Problem solver for larger pharma players?

- Morgan Stanley is out with a wonderful call on Vanda Pharmaceuticals (NASDAQ:VNDA) saying they think VNDA should be a core long-term holding for risk-tolerant investors. Given the recent share price decline, the firm thinks this is an opportune time to build positions. Vanda has two attractive Phase III assets that address large market opportunities: VEC-162 for insomnia ($3.3 billion market) and Iloperidone for schizophrenia and bipolar ($8.7 billion market). They see Vanda as a 'problem solver' for many of the larger pharma companies that are losing patent protection on their respective CNS (central nervous system) drugs in the early part of the next decade.

Vanda is uniquely positioned with two late-stage CNS assets that possess the characteristics larger pharma companies want: 1) differentiated profiles; 2) the ability to treat several illnesses; and, 3) solid patent protection (beyond 2015). In firm's base case scenario, their 12-18 month price target is $29, which assumes the company will sign a partnership for VEC-162. Their work shows that licensees have returned an average 45% six months after a deal was announced.

MSCO thinks the frustration among investors that a deal hasn't happened yet is misplaced. The stock now reflects if any sort of deal will get done, not when. Thus, they think the downside risk is favorable.

Notablecalls: Given its relatively strong wording, I think the call will generate some buy interest in VNDA today and over the next couple of weeks.

Hansen Natural (NASDAQ:HANS): Cost of doing business increasing?

- Stifel is out with some interesting comments on Hansen Natural (NASDAQ:HANS) today saying that contrary to the 10% short interest in the shares, they would be surprised to see the company miss their 2007 and 2008 EPS estimates of $1.53 and $2.11, respectively, or annual growth of 37% and 38%. This is because of firm's continued bullishness on the energy segment and Hansen's untapped share potential.

As for the near term, they are $0.02 below Street consensus for 1Q and believe actual results may fuel worries that the cost of doing business is increasing. For example, firm's trade sources indicate that unit selling and promotion expenses for Monster and other Hansen products is up in the 1Q, although the Anheuser-Busch system is funding an unknown portion of the increase. They believe that the majority of the increase relates to athlete and event sponsorships, which collectively account for a small percentage of the company's overall promotion and selling expenses. However, a material increase in this item and/or an unexpected or material step-up in more conventional selling expenses may be interpreted as an increase in the cost of doing business. Firm believes this is not the correct interpretation of this result. For a number of selling and promotional items, the company amortizes the expense over the course of the year. Therefore, the potential exists for promotional programs to increase 1Q expenses before the marketing program has had the opportunity to improve sales. The result is that volume growth lags the increase in spending.

Again, they like HANS shares and so become more aggressive if they experience weakness on 1Q results. Maintains Buy and $46 tgt.

Notablecalls: Interesting comments from Stifel's Mark Astrachan. Despite the somewhat cautious tone of the call, I don't think there will be any real damage to the stock price. This looks to be just another case of analyst trying to hedge his position. If indeed HANS comes in a penny or two shy bc of marketing costs, we will likely see a nice bounce after the initial sell-off. Note that Stifel's channel checks do not indicate that the category has become increasingly dependent on promotional activity to drive growth. All in all, expect to see some s-t weakness in HANS today. But nothing major.

Apple (NASDAQ:AAPL): Mac market share up in Q1'07

- Piper Jaffray comments on Apple (NASDAQ:AAPL) saying IDC data indicated Mac market share was 2.6% in calendar Q1'07. This is up q/q from 2.5% in Q4'06, and up y/y from 2.1% in Q1'06. Strong Mac sales of 1.52m in the quarter drove market share gains which would have been even stronger if not for Vista's Jan. 30 launch, which negatively impact Mac market share. They expect Y/Y Mac market share gains to continue through FY07.

Due to Vista's Jan. 30 release and the PC sales that resulted from pent-up demand after its lengthy delay, the firm expected a slight sequential downtick in Mac market share. But strong Mac sales in Apple's March quarter enabled the company to gain share despite stronger than normal PC sales. With Apple heading into 3 quarters of significant product releases (iPhone, Leopard, new iPod) and the education buying season, they expect Y/Y market share gains to continue.

In over two years, the only quarter in which Macs saw a y/y market share decline was calendar Q1'06, during the heart of the Intel transition. Apple announced the transition to Intel processors in June 2005, but did not ship the first Intel Macs until late January of 2005. And only the final quarter of the period between the announcement and the products shipping, calendar Q1'06, saw a y/y decline in Mac market share. Since coming out of the Intel transition Mac market share has seen y/y increases, and y/y unit sales growth of about 30%, which have been about 3x the industry average of about 10%.

Maintains Outperform and $140 tgt.

Notablecalls: Not actionable but good to know category. Wake me up when they cross the 3% level. Or better not.

Paperstand (YHOO, JNY)

According to the WSJ, the European bank consortium seeking to top ABN Amro’s (ABN) agreed sale to Barclays (BCS) has lined up much of the funding sources needed to pay for its approximately $98.66bn bid. In recent days, Royal Bank of Scotland and the other banks in its consortium, Banco Santander (STD) and Fortis, have made contact with several other large European banks, asking them to help underwrite the potential offer. They plan to issue more stock to shareholders and sell some assets. The final package could represent a record amount for fund raising. The timing of what would be the world's largest-ever bank acquisition hangs on a Dutch court ruling, expected Thu. The consortium will have to launch its official offer by Sun if the Dutch Enterprise Chamber rules that ABN's related $21bn sale of its LaSalle Bank to Bank of America (BAC) can proceed. If the court freezes the sale, delays its ruling or demands further information, the consortium would have more time. RBS is trying to coordinate an unsolicited takeover and breakup of a bank, something that has never been accomplished before. Financing such a deal is riddled with complications. RBS has said its bid would be 70% in cash and 30% RBS shares. The skirmish over ABN, of Amsterdam, has turned into a global brawl over the Dutch bank's units spread around the world. Other banks still could enter bids, as well.

The WSJ reports that Yahoo (YHOO) today plans to announce a $680m deal to purchase the remaining 80% of closely held Right Media that it doesn't already own.

According to the WSJ, the CEO of Jones Apparel (JNY), Peter Boneparth, has spent his 5-year tenure trying to boost the co's fortunes through acquisitions, cost-cutting and overhauling mature labels. But now, faced with a stagnant stock price, dept-store consolidation and a downturn in the moderate-apparel sector, Mr. Boneparth has an ace left to play: selling the $5bn co's top-performing asset, the Barneys New York chain of luxury dept stores that he engineered the purchase of in ‘04. Jones is expected to pursue a sale, though Barneys isn't officially on the mkt yet.

“Heard on the Street” out saying that the subprime meltdown has shown that few banks were able to resist the appeal of making unconventional home loans to riskier borrowers in exchange for charging higher fees. This earnings season, cracks began showing in the quality of many banks' loan portfolios, such as at Countrywide (CFC). Others such as SunTrust (STI) and M&T Bank (MTB) had trouble finding buyers for their riskier loans and were forced to sell them at a loss or mark down their value on their books. Still, some regional and community banks steered clear of the subprime sector. Hudson City (HCBK), Zions (ZION) and UCBH (UCBH) stayed away from making low-documentation or no-documentation home loans, even to the most credit-worthy borrowers. When they wrote home mortgages, they insisted borrowers put at least 20% down and prove that they could pay them off. They collected deposits and focused almost entirely on commercial lending. As a result, they have some of the cleanest loan books and balance sheets in the business. Still, that hasn't stopped investors from penalizing their shares, which are relatively cheap. "The traditional commercial lenders will continue to do their thing, and the traditional home lenders who lost share to those that got in trouble are getting it back," says David Ellison, of FBR Funds.

Sunday, April 29, 2007

Barron's Summary

Most professional money managers questioned by Barron’s are turning cautious, after the Dow reached 13K mark. Many one-time bulls appear to have moved into the neutral camp, which now encompasses 37% of managers, up sharply from last fall's 20%. The bears' ranks, on the other hand, have stayed constant at around 17%. Ironically, this is just the sort of pessimism that ├╝ber-bull Carl Marker likes to see: "There's always something out there to be fearful of - the US dollar, the deficit, an unpopular war," says Marker, of IMS Capital Mgmt. "In the face of all this negativity, interest rates are low and stock prices are lower. Fearfulness makes us comfortable. We don't like to see optimistic predictions by investors or investment advisers." He espies one such bargain in the shares of Service Corp. Intl. (SCI). IMS owns about 1.265m shares. Service Corp. trades at around 12, or 18x analysts' ‘08 earnings ests of 58c a share, although annual earnings are growing by 22%. Marker thinks the stock could rally to 20 in the coming years as the mkt "anticipates" an explosion in demand that will ultimately come when growing numbers of baby boomers start dying off.

Charles Hess, of Inferential Focus, saying that the DoD has begun to embark on building a whole new global-networking system similar to the Internet called the GIG, or Global Information Grid. About $34bn is committed to this secure- communications system. Some co’s that are benefiting are Globecomm Systems (GCOM), SAIC (SAI), Radvision (RVSN). Mr. Hess also likes CSCO, CRXS, PLCM, OPTC and ILC.

According to the Barron’s, technical indicators point to excesses in the current bull market, and in individual stocks such as Kohl's (KSS) and AMD (AMD). But other issues, including BHP Billiton (BHP) and Millipore (MIL), look to have more room to run.

Electric-utility stocks have climbed at three times the rate of the S&P the past year -- and gains should continue for three to five years for nuclear players in power-constrained markets. Co’s mentioned include: EXC, ETR, D, CEG, NRG, CCJ, FLR and CBI.

Barrons’ analysis suggests that the shares of American Real Estate partners (ACP), at $110, carry a nearly 70% premium to their underlying value. That's too high, even for a play on Carl Icahn's investment savvy.

“The Trader” highlights Valero (VLO), which last week reported a 30% rise in 1Q net income and tripled its share buyback plan to $6bn. While some of the anticipated good news has materialized, further upside remains possible. A nearly 40% rise in operating income was driven by improving refining margins that should stay robust through the summer. Gasoline demand, for instance, shows few signs of abating, despite rising pump prices. Meanwhile, stricter product specifications, more complicated refining processes and tighter labor all help limit supply, and "refining margins could stay higher for longer than most on Wall St. expect," says FBR analyst Eitan Bernstein. Valero also remains the cheapest of the large refiners, Bernstein notes. At about 71, it trade at 9.7x FBR's ‘08 earnings este, compared with 10.8x for Sunoco (SUN) and 12.1x for Tesoro (TSO).

According to the Barron’s, continued steady flow of new contracts and acquisitions promise to boost Tetra Tech’s (TTEK) profits above expectations and drive the stock into the mid-20s over the next year. Also, Tetra Tech is widening its pool of opportunities beyond it traditional govt work building dams and cleaning up sewer systems and polluted rivers. It's now buying co’s in the energy, automotive and mining spaces. The purchase of Delaney Group could prompt mgmt to lift the high-end of its guidance for the year, according to Debra Coy of Janney Montgomery. "Tetra Tech is building momentum, and the level of investor enthusiasm will likely build as the year progresses," predicts Coy, who adds Tetra could be viewed as a "sexy-growth stock in the latter half of this decade." If, as some bulls expect, Tetra lifts operating margins into high single- to low double-digits over the next couple of years from about 7% currently, the stock could ultimately set happy investors off into an aquatic ballet.

“Review” section discusses Raser (RZ), which in ‘05 claimed big auto co’s and the US Army liked its advanced electric motor. Now, the co is into geothermal energy. More specifically, Raser is into geothermal tax credits. The federal govt allows a 2c tax credit for each KW/h of electricity generated from alternative energy sources. CEO Brent M. Cook formerly sold tax credits for coal-based synthetic fuels and he now has Raser leasing up geothermal rights in Utah and Nevada. "We have probably one of the best resource portfolios for geothermal that exists in the country right now," says Cook. Raser has less than $20m, so it would share the tax credits with partners. Alas, the tax law requires that the plants be ready to generate electricity by the end of ‘08 and it'll be another month before Raser even starts drilling exploration holes, a tight schedule which others in the industry say is not feasible. So Raser's racing the clock, unless Congress, as Cook fully believes, extends the deadline. Even so, he thinks he can get 30MW of generating capacity into service before ‘08 ends. Yet at Raser's $350m mkt value, investors are assuming it will build the 30MW and much, much more. Based on 8,760 hours a year, no downtime and a 5% discount rate, the present value of the 10y of credits on 30,000KW/h of capacity is barely worth $43m.

“Sizing Up Small Caps” column out positively on Brightpoint (CELL). The article is similar to one issued on April 25th in Barron’s Online (see NC archives).

This weeks “Technology Trader” has highly entertaining article on Nano Chemical (NCSH.OB).
CLICK HERE to read whole article.

Friday, April 27, 2007

MEMC Electronic Materials (NYSE:WFR) - A bounce play over the next few days

Plenty of comments on MEMC Electronic Materials (NYSE:WFR) after in-line results and guidance disappointed the mkt.

- Citigroup says the story is not over yet, but margin for error is closing fast - Given WFR's leverage to the poly spot market, it's probably not over here until poly spot prices begin to moderate - unlikely near-term. That said, near-term risk heightened as guidance may not be as conservative as it looks b/c they think obligations to STP may prevent WFR from relying as heavily on a strong spot market in CQ2. Firm maintains Hold rating, tgt goes from $48 to $60 on shift to sum-of parts.

- Friedman, Billings, Ramsey notes that although reporting in line with guidance (1Q) and guiding to consensus (2Q) is not really a "miss," they still find the report/guidance disappointing since the company had "upsided" the guidance/consensus in the past four quarters.

Firm also wonders what it would take for the company to disclose more, when most other competitors do. To that extent, they note that, if MEMC's semi wafer customers are not ordering because they have sufficient inventory (for now), why is MEMC not able to sell the incremental poly (that otherwise would have been used to make the semi wafer) into the spot market?

- JP Morgan says MEMC is likely to reduce solar polysilicon sales in order to keep up with wafer demand. Firm expects this elasticity between polysilicon demand and wafer demand to exist throughout C07 leading to additional tightness in the polysilicon mkt and eventually to upside to pricing.

Notablecalls: Despite the initial disappointment in numbers the bull case seems to prevail here. Looks like the lack of upside is rather caused by internal capacity constrains intead of lacking demand. One could even make a theory of too high demand limiting n-t revenue & EPS upside as MEMC is too busy supplying wafer and long-term contract instead of creaming off the polysilicon spot market.

With the capacity constraints easing going into the 2H and solar contracts ramping, the issues seem to be temporary of nature. Less supply and resulting tighter poly spot market should further drive already improving margins. Alltogether, the company is still in great shape.

Given the temporary nature of the "problems", I believe the current pre-market prices around $60-61 prove to be good buy for a bounce over the next few days.

McAffee (NYSE:MFE): Not enough to break out

Out of several comments on McAfee (NYSE:MFE) two caught my eye:

- Morgan Stanley notes that some quick math to back into bookings implies bookings growth of approximately 5% y/y and a healthy draw from the balance sheet. And in addition to an option review process dragging on, they flag fewer metrics to measure the performance detail of the core business on a real-time basis as an issue.

- JP Morgan says they do not think the massive revenue upside is a sign of a big acceleration in the market rather than a mix issue causing different accounting treatment, that is supported by guidance only going up by 1Q07 beat.

Deferred revenue was flat qoq at $893.9M, worst qoq growth since Sept. 04. Firm believes the mix issue was the primary reason which is unfortunate because deferred revenue provides the visibility for future quarters. This is first time in over two years that visibility has not improved through higher deferred revenue.

Notablecalls: The headline numbers for the quarter were definately strong, with the company beating consensus on both top and bottom line. That beat however seems to be one-time of nature and possibly borrowed from the next quarters. With bookings growth of just 5% y/y and deferred revenues staying flat q/q, sure doesn't look like that kind of outperformance is about to continue.

The stock is trading ~19x this year's earnings, not particularly cheap, but not extraordinarily expensive either. However, with the questionable future cash flow trends and slow growth, I do not think this is the stock I would like to own. The stock has been stuck around $30 over the past six months and I do not think this report is strong enought to generate appetite for the stock above the recent range. As such, I would be opportunistic short around recent highs at the $31.50 level. Note, however, that the recent mkt has provided some wild moves (AMZN anyone?) and have your stops tight.

Thursday, April 26, 2007

Johnson Controls (NYSE:JCI): Added to America's Conviction Buy List at GSCO

- Goldman Sachs is adding Johnson Controls (NYSE:JCI) to their America's Conviction Buy List, spotlighting it as their best idea. Firm's 6-month DCF and multiples based price target for JCI shares is $115, implying about 12% upside. Firm expects strong revenue growth in the company's building efficiency segment to be the primary growth driver, followed by its best-in-class battery business. Margin expansion is expected to occur in all segments. Option value around the "green" theme lends support and offers potentially sizable longer-term upside, especially if building efficiency concerns become more widespread, as they expect they will.

Notablecalls: I highlighted JCI as a potential long already on Monday, after the stock broke to a new all-time high helped by stronger than expected Q1 results. JCI has a lot going for it (margin expansion, the green theme) and I expect GSCO's call to generate some further buy interest in the name today.

Wendy's (NYSE:WEN): Not much upside left

JP Morgan has some interesting comments on Wendy's (NYSE:WEN) after the co released its Q1 results and said it would explore strategic alternatives. Wendy's said it is considering "changes to its capital structure, a possible sale, merger, or other business combination".

JPM's John Ivankoe notes that the earnings release was an interesting juxtaposition to Triarc's April 20 press release which said "Arby's (owned by Triarc) will be able to significantly increase value through both organic growth and the acquisition of other restaurant companies." The firm finds this relevant as the Chairman and CEO of Triarc Nelson Peltz controls Trian Fund Management which owns 8.3% of WEN common stock.

Interestingly, the Wendy's tax-free spin off of Tim Hortons only allows another 4m out of the current 89m shares to be bought back between now and September 2008. Only Triarc stands out as a possible business combination, and therefore they believe a leveraged recap makes the most sense to analyze in a limited amount of time.

If WEN were to increase leverage to pay a special dividend (like QSR peer DPZ), the firm would estimate the stock to be worth between $31- $37 if a 17-25x multiple were assigned to proforma F08 earnings. At this multiple range, EV/EBITDA ranges from 8.6x-10x, near its QSR peers which trade from 9.4x-9.8x. Firm remains UW and recommends investors take advantage of likely significant stock strength to sell shares.

Notablecalls: Does the news mean the management is giving up on the turnaround? After all the restructuring they have done, did they realize it's not going to work after all? Given the high valuation (the stock traded as high as $37.50 in after hours action), there isn't much upside left even in case of private equity players stepping in.

I suspect that if you can get a fill around $37.50 early on, you'll make money shorting today. Tight stop, say $0.50 looks prudent here.

Apple Computer (NASDAQ:AAPL): Strong results

Lots of positive commentary on Apple (NASDAQ:AAPL) after co reported strong Q1 results last night:

- According to Piper Jaffray the key question is: are we at the peak of EPS upside or is thissustainable? They believe we are not at the peak of EPS upside, given the firm believesApple is entering what will be the 3 strongest quarters in the company's history withthe following catalysts: 1) iPhone, 2) new product in Jun/Sep (video iPod, tabletMac, or other new consumer product), and 3) continued Mac market share gains. The more important point is that Apple has the pole position as it capitalizes in ashift in computer buying behavior. It is obvious consumers want computing devices that are focused on entertainment and creativity. To date, they have not seen any credible competitive threats in Apple's core markets (Zune is a flop in the MP3space and Dell & HP have failed to deliver PCs that rival the Mac). PJ believes thatin the coming quarters Apple will hold its massive lead in portable audio and grow share in the personal computer market. Maintains Outperform and ups tgt to $140 from $123.

- Goldman Sachs notes that even eliminating the help that Apple received from favorable component costs, the company still produced over a $0.10 beat to consensus earnings estimates in what should have been its toughest quarter, setting the tone for the rest of the year. Apple is right in front of a major change to its business model which, if anything, will increase the quality of what is already a strengthening model, delivering more predictable revenue and margin leverage. Firm's new earnings estimates for calendar 2007 and 2008 are $3.52 and $4.09, up from previous $3.16 and $3.89, respectively. Moves tgt to $120 from $110.

- Morgan Stanley notes they are keeping their $110 target for now but feel incrementally more confident that the $160 bull case scenario will play out in the next 12 months. Remains Overweight.

Notablecalls: AAPL no doubt produced strong results. The stock hit $102 level in after hours action, up 7 points from the close. The iPod number was a bit shy of estimates but the Mac performance coupled with lower components cost more than compensated for the difference. Also, pricing was firm. I would not be surprised to see AAPL surpass the $102 level early on as estimates and price tgts are raised across the board. That's my ultra-st view.

Paperstand (ABN, WMT, HOG, MTB)

The WSJ reports that ABN Amro (ABN) received an unwelcome $98.58bn takeover approach from a consortium led by Royal Bank of Scotland. But to pull off a deal, the RBS group would need to break up two existing takeover agreements: ABN's pact to be sold to Barclays and ABN's unusual side deal to sell its LaSalle Bank unit to Bank of America (BAC). The RBS group said its proposed offer, which would be paid 70% in cash and 30% with RBS shares, was conditioned on ABN finding a way to keep LaSalle Bank, which has become a flashpoint in the takeover battle.

According to the WSJ, Wal-Mart (WMT), under pressure to boost productivity at its Sam's Club wholesale unit, is cutting a small number of store-mgmt jobs at the operation as part of a rare nationwide job cut. The retailer plans to consolidate about 3K salaried-manager positions at some 580 US Sam's Club stores. It isn't clear how many ppl will lose their jobs. The unit has more than 100K employees world-wide.

Barron’s Online discusses Harley-Davidson (HOG), saying that with demand for its iconic machines looking weak, Harley's stock price may run out of gas. Buyers once had to patiently endure waiting lists to be able to take home the bike of their dreams. But sales of Harley-Davidson motorcycles at US dealerships have slowed or fallen for 3 qrtrs. And a jittery economy, weak housing mkt and credit issues could keep buyers out of showrooms. If so, production of new motorcycles in ‘07 could decline for the first time since Harley-Davidson went public in ‘86. "It's a good co with a great brand, but I think the fundamentals have deteriorated and don't see much upside for the stock over the next year," says Greg Badishkanian, of Citigroup. Or as David Carr, of Oak Value Fund adds, "We aren't saying the co is in trouble, but there are better places to invest."

“Inside Scoop” section reports that Richard Garman, director at M&T Bank (MTB), plunked down $2.6m to purchase 23K shares of the co. This was the first purchase by any co exec or director in 3 years. It was also Garman's largest buy in terms of dollar value ever at the co and the largest in share count since ‘94. Ben Silverman, of InsiderScore.com, says, "Any time we see that long of an interim between purchases it's intriguing." What's particularly notable about this transaction is that not only is Garman a longtime board member (since ‘87), but at age 76, he "is somebody planning not just for his future but for his family's future," Silverman says. "That is a good long-term signal."

Wednesday, April 25, 2007

Amazon.com (NASDAQ:AMZN): Shorting opportunity

Lots of positive commentary on Amazon.com (NASDAQ:AMZN) today after the co released stronger than expected Q1 results and raised guidance for both Q2 and YE07. We have at least 2 upgrades with estimates and price tgts raised across the board. There seems to be only one major firm out there that is keeping its cool. It's JP Morgan:

- JPM's Imran Kahn notes that after three straight quarters of 100+ bps Y/Y declines, gross margins in 1Q07 fell only 17 bps. While sales mix and lowered prices still pressured margins, growing third-party sales internationally slowed the decline. Continued growth in 3P units internationally is a key lever for moderating gross margin erosion. Looking forward they think gross profit margins will decrease 40 basis points Y/Y in F07 due to the impact of seasonal mix shift toward EGM in 2Q and Harry Potter book sales in 3Q (expected to be sold at 46% discount).

Although the International segment benefited this quarter from an increased mix of third party units from traction in Merchants@ and an acceleration of units sold, the firm believes this dynamic may impact AMZN's ability to show continued strong organic revenue growth.

Amazon's 1Q'07 tax rate was 23%, significantly lower than its 2006 effective tax rate of 50% and its 42% tax rate for the fourth quarter. As JPM was modeling a 35% tax rate for the first quarter, AMZN delivered GAAP EPS $0.07 above their expectations on the basis of the tax change alone. Amazon's 4Q topline results of $3.02B include an $84M Y/Y positive impact from foreign exchange. AMZN had more than 66M active customers at the end of the quarter, up 15.8% Y/Y - slowing somewhat from previous quarters.

Is Amazon a Buy? They think valuation is too rich. While AMZN's 1Q was solid, they think the valuation may not offer much upside. The stock is trading 50x firm's F07 GAAP earnings estimates, compared to its peers which are trading at 41x F07 GAAP estimates. Maintain Underweight rating.

Notablecalls: Looks like AMZN managed to pull a pretty decent quarter. While the whisper numbers indicated some upside, it was viewed largely as priced in already. I happen to know some pretty savvy market participants that were short the name going into the release. Overall, I suspect that absent the fairly large short lines, the stock would have been up no more than say 2-3 bucks in after hours action. With the help of some panicky shorts, the stock ended up almost 6 bucks.

Looking at the numbers, couple of things stick out:

- Approximately half of EPS (GAAP) upside came from the lower tax rate. Also, favorable FX contributed most of the revenue upside. Absent these two, AMZN would have posted just a slight or normal beat.

- 3rd party business helped the margin performance. Based on what I've heard, margins are shrinking there as well (for the merchants). So, I'm not entirely sure the upside from 3P is sustainable.

Most of the analyst community is going ga-ga over the results, with Piper Jaffray upgrading their rating, just after downgrading the stock on Monday. You probably already know how I feel about stuff like this. Also, Citi is upping their rating to Hold from Sell. Most targets go to the $50-$55 range with one exception. A large tier one firm is upping their tgt to $60.

Yes, I do think AMZN's a short at around $50.30 (last prints in after hours). Even the most bullish analysts see only 10-20% upside from these levels, which is likely not enough to compensate for the risks. This, coupled with what I consider to be poor quality of upside in results pretty much caps any further upside in the stock.

Given there are still many shorts in the name, I would scale in to the short squeeze.

Paperstand (LLY, RSH, ASF, NLS, PKTR, KEI, CUTR, PWER)

The NY Times reports that the FDA is examining whether Eli Lilly (LLY) provided it with accurate data about the side effects of the antipsychotic drug Zyprexa. The FDA has questions about a Lilly document from Feb’00 in which the co found that patients taking Zyprexa in clinical trials were 3.5x as likely to develop high blood sugar as those who did not take the drug. That document was not submitted to the agency. But a few months later, Lilly provided data to the FDA that showed almost no difference in blood sugar between patients who took Zyprexa and those who did not. The agency said it had not yet decided whether to take any action against Lilly. “The FDA continues to explore the concerns raised recently regarding information provided to the FDA on Zyprexa’s safety,” Dr. Mitchell Mathis,of FDA, said.

Notablecalls: As Zyprexa is a major revenue driver for LLY, we may see some weakness in the stock today.

The WSJ’s ”Heard on the Street” column out saying that investors have been lining up at Radioshack (RSH), but they may leave disapointed. Shares of the co have soared nearly 70% this year on enthusiasm over new mgmt's moves to cut costs and boost profit margins. Investors should realize that the run-up has come despite the fact that the co hasn't been able to sustain any significant improvement in rev over the past decade and that its sales at stores open for at least a year fell almost 6% in ‘06. RadioShack also is facing some longer-term obstacles. While there likely is additional fat to cut that will help the bottom line, RadioShack's shares now are quite expensive, suggesting that anticipated improvements in operations already are factored into the stock price. RadioShack trades at about 24x its expected earnings this year, above the P/E ratio of competitors such as Best Buy, which has a multiple of 16. "I sure as heck wouldn't be buying at this level; the juice is pretty much squeezed out of this orange," says Steve Monticelli, of Mosaic Investments. "They don't have the growth drivers" to justify the current price.

According to the WSJ, Research In Motion (RIMM) and Verizon Wireless today plan to announce the launch of a BlackBerry "World Edition" smart phone that enables Verizon customers to roam on overseas networks thanks to a dual-mode chip that is compatible with both Verizon's technology and wireless technology prevalent overseas.

The WSJ reports that insiders at a half-dozen co’s sold stock last qrtr before the co’s reported they would fall short of financial guidance, a pattern that can attract the attention of regulators and litigious shareholders. "I'm very suspicious about co’s that end up having to revise their guidance," said Constance E. Bagley, a professor at Harvard Business School. "I also think that when you add to that insiders selling at a higher price, it looks terrible." Representatives of Administaff (ASF), Nautilus (NLS) and Packeteer (PKTR) said execs sold shares before the events that caused revisions to financial expectations. Keithley (KEI) CFO Mark J. Plush declined to discuss the matter. Stephen J. Crimmins, former lawyer at the SEC, said sales by execs before revised guidance is "something the SEC will look at, especially in a period of intensified insider-trading enforcement." At Cutera (CUTR) 5 insiders sold shares between the initial financial guidance and the failure to meet that guidance. At Power-One (PWER), Chmn Steven J. Goldman sold 35K shares between the co's initial 1Q guidance and its announcement that it wouldn't meet that guidance.

Barron’s Online highlights Brightpoint (CELL), whose shares shot up 7% on Mon on an analyst’s upgrade. The stock is down 50% in the past 12mo’s, in part b/c Motorola has had a much harder time selling fancy trinkets. Brightpoint bears the brunt of that shortfall. But Brightpoint's profit can improve dramatically this year as things gradually improve at Motorola, not to mention rising sales at Nokia and the presence of the cellphone distributor in more mkts around the world. None of that is guaranteed, but the good news for the stock is that the mkt hasn't been expecting much. Despite the jump on Mon, Brightpoint has a P/E multiple of 15.1x ‘08 earnings. That's the same as the S&P's 500 avg, and way below the 30x forward multiple Brightpoint sported a year ago. "There's a much better risk-reward profile than there was even 6mo’s ago, and that establishes a good floor for the stock right now," says John Krause, of Thrivent Investment Mgmt. "I think their [P/E] multiple can expand as they put the worst of this behind them."

“Inside Scoop” section reports that a slew of top execs at AMR (AMR) are cashing out newly vested performance shares as they hit a rough patch. Over the past week, 5 execs sold 641K shares of the co on the open mkt for $19.2m. No co director or exec has purchased AMR shares since Jul’05. Mark LoPresti, of Thomson Financial, says that with AMR shares falling along with peers this year, "you don't like to see selling into negative momentum…[it] makes the activity a little more bearish than normal."

Tuesday, April 24, 2007

ResMed (RMD): Take two

I'm hearing that a boutique firm is out on ResMed (NYSE:RMD) saying they expect that the stock will gap down sharply this morning, but that it will also recover fairly rapidly creating a trading opportunity.

NC

ResMed (NYSE:RMD): Buy for a bounce

- William Blair's Ben Andrew has some interesting comments on ResMed (NYSE:RMD) after the maker and distributor of devices that help people with respiratory disorders announced lower than expected results last night. The co also announced a fairly large product recall with a total cost of about $60 million:

Since ResMed reported before Respironics, the firm does not yet know what happened overall with the market, but they suspect ResMed gave up a bit of share to competitive product launches, trialing of two new nasal pillow masks by competitors in the quarter and giveaways reported both by firm's field sources and RMD on their conference call. EPS suffered with the revenue shortfall (though gross margin was on target at 62.3%, a very encouraging sign that this is not a ResMed issue), coming in at an adjusted $0.35 (flat) compared to WB's $0.41 target. The S-8 recall makes for a dramatic headline, but based on past examples in which no patient harm occurred and the company responded proactively, the firm does not expect any durable impact on the franchise.

Firm's field sources indicate that demand for ResMed's devices, as well as their pricing power, are holding up well in the face of more aggressive competitors given their superior design and performance.

Should the stock open at $42 (where it was indicated after-hours trading), it would be at roughly 20 times firm's new calendar 2008 EPS estimate of $2.08 (down from $2.14), and in line with what the firm still believes are its sustainable long-term revenue and earnings growth rates of 20%. While the stock may languish for a quarter or so until investors see evidence that the company's strong new product lineup is having the market impact that they expect-driving volume and defending price for ResMed- the firm reiterates their Outperform rating.

Notablecalls: It looks like most of RMD's revenue shortfall comes from competitors trialing new products by giving them away for free. Management indicated on the conference call that at first they didn't believe it was going on and did not respond. Now however, they will respond to pricing pressures but by doing so, will continue to sell on value. According to the management, the market's respondse has been very good. Overall, they consider the market as incredibly healthy and continue to look out at other areas as well. They also noted that after responding to pricing pressures by competitors, their sales team had one of the best months on record.

The stock experienced a close to 15% haircut in after hours action with the last prints crossing a tad below the $42 level. Based on the relatively upbeat comments by RMD's management, I think the stock is buyable for a bounce around the $41.50-$42 level. Competitors cannot continue giving away their masks for free for an extended period, meaning pricing pressure will ease soon. The overall market is growing at a healthy clip, providing opportunity for everyone. The recall looks like a one-time event. 7 cases out of 300,000 devices sold is not that huge and shows management is proactive.

Note that RESP, RMD's larger competitor is due to reports its results on Thursday.

Dendreon (NASDAQ:DNDN): Expect to see additional buy interest today

- Banc of America has some positive comments on Dendreon (NASDAQ:DNDN) saying they anticipate an approval decision on Provenge by May 15th, under the condition of completing the Ph III IMPACT trial, and expect potential stock price appreciation in the near term. This view is based on firm's recent interviews with an ex-FDA general counsel, a regulatory executive in a major pharmaceutical company and CBER panel members.

Despite questionable statistical data, the decision remains highly political and given the safety profile, CBER appears motivated to approve additional products to stimulate R&D activities in cancer immunotherapy. BAC notes that Jesse Goodman, Director of CBER, appears to have influenced Celia Witten to 'lower the bar' by changing the efficacy question during the initial advisory panel voting and believe it is a good indicator of CBER's intentions.

Firm understands that DNDN is well prepared for a potential launch and believe Provenge can be out on the market by late 2007. If approved, they see potential upside to their TP to $29 and if an approvable letter is received potential downside to $6. Maintains Neutral as they remain cautious about the outcome of the IMPACT trial.

Notablecalls: DNDN was in play yesterday and I suspect this note by BAC's William Ho will create some additional buy interest in the name. Mr. Ho assigns a 2:1 (66%) probability to the approval. I suspect DNDN can move past the $18 level today.

Texas Instruments (NYSE:TXN): Sell that gap?

Several firms are commenting on Texas Instruments (NYSE:TXN) after the co issued better than expected Q1 results and provided blow-out Q2 guidance. We have at least one firm upgrading the stock this AM. Despite all the positive chatter, some of the largest firms remain cautious on the name:

- Morgan Stanley notes that Wwhile TI's very strong gross margin performance will likely drive EPS estimates as well as the stock price higher in the short-term, they expect a lackluster consumption environment to put a damper on additional upside in the stock, and they maintain their Equal-weight rating on TXN.

While the passing of the supply side cyclical correction in the semiconductor industry is a positive, they believe the supply side recovery is occurring in the midst of a deceleration in global GDP leading to an overall lackluster demand environment. While semiconductor bookings improved 2.2% Q/Q bookings were also down 10% Y/Y, and near-term visibility is limited (as evidenced by a semiconductor book-to-bill ratio of 0.99). Inventory dollars declined Q/Q but inventory days reached new 17+ year highs.

Based off MSCO's 2007 and 2008 earnings estimate of $1.86 and $2.15, respectively, TXN currently trades at a price-to-earnings (P/E) ratio of 17.4x and 15.1x. With 5-year growth estimate for the company at 15%, they believe a PEG ration of one times is appropriate, and the stock is reasonably valued.

- Goldman Sachs is telling investors not to chase the stock this morning. TI's fundamentals are clearly better than expected and the firm is adjusting EPS to reflect improved outlook; 2007 to $1.68 from $1.45, 2008 to $1.90 from $1.80, and 2009 to $2.05 from $1.95. That said they recognize they have been wrong to be overly negative on the stock, however, valuation is rich already as the stock trades after market at 21x their revised 2007 EPS and 20x normalized.

Hence, for large cap investors looking for semi exposure, they continue to believe Intel is more interesting as there is significantly greater upside as Intel appears to be improving its long-term competitive position vs AMD while TI's long-term position in wireless is challenged by a host of high-quality baseband and application processor competitors. In addition, TI's margins are at their peak, while Intel has room to improve.

Notablecalls: Must say that I've never seen TXN make such a move. The stock ended up 10% in after hours action. I think most of the upside was driven by short covering as many market participants were expecting lackluster results and guidance on heels of disappointing news from the wireless sector. What they underestimated, was TXN's ability to manage gross margin, thanks to its fab-lite model. The co surely tipped their hand with the big dividend raise they announced last week. Now, the problem with the fab-lite business model is that while it helps to preserve margins during downturns, it caps margin upside during better times. So, one can assume TXN's margins are close to their peak.

I don't think end demand has turned a corner. In fact, I think it will get worse from here. TXN's boosting their inventory in anticipation of a new cycle that will likely not materialize. That's a bad combo.

As for the s-t, I love the fact we have an upgrade from Piper Jaffray. The call won't hold much weight among the buy side players but it may get the stock closer to the $36 level early on. It's there where I'd be looking to short TXN. Note that all time high stands at $36.40 but I'm somewhat doubtful it will get there. So, I think that if you can get a fill between $36 and $36.40, you'll likely make money shorting.

Paperstand

The WSJ reports that Apple’s (AAPL) former CFO Fred Anderson has settled with the SEC on his alleged participation in the backdating of stock options at the co and the agency is expected to pursue a civil lawsuit against the co's ex-general counsel Nancy Heinen on similar charges. Ms. Heinen, who will be accused of helping to manipulate one of her own option awards as well as a grant to CEO Steve Jobs, plans to contest the charges.

According to the WSJ, ABN Amro (ABN) may have agreed to sell itself to Barclays (BCS), but circling rival bidders and questions about its pact to sell its main US unit to Banc of America (BAC) mean the Dutch bank may still end up in other hands. A rival consortium of Fortis, Banco Santander (STD) and Bank of Scotland is planning ways to scotch the Barclays deal and, in particular, ABN's agreement to sell its US bank, LaSalle, to BofA. The consortium canceled a meeting with ABN mgmt yesterday in order to review its options. "In view of ABN Amro's decision to sell LaSalle Bank to BofA, the banks need to understand the circumstances under which this sale can be terminated," the consortium wrote.

Barron’s Online “Inside Scoop” section reports that Gap (GPS) founder Donald Fisher and his wife Doris shed some shares from their massive stake in the retail giant. The Fishers sold 1.82m shares for $34m. Both have served as directors since 1969 with Donald Fisher currently acting as Chmn emeritus. Their son Robert is Chmn and interim president and CEO. The proceeds from the sales were the largest earned by any co exec or director in the past 5 years. Donald and Doris Fisher continue to hold 61.7m shares of Gap. Jonathan Moreland, of InsiderInsights.com, says the sheer size of the family's exposure to Gap "mitigates the bearishness of their present selling."

Monday, April 23, 2007

Calls of Note Part 4

- Piper Jaffray previews Apple's (NASDAQ:AAPL) qtr noting the co announced the sale of the 100 millionth iPod on 4/9, which implies slight upside to the Street's expectation of 10.7m units. Subtracting total iPod units reported through Dec-06 (~89m units) from the 100m units, and accounting for the 9 days in April, implies Q2 iPod units of ~11m.

Firm recently spoke with 20 Apple resellers and found that 85% are expecting a slight q/q decline (5% to 10%) in Mac sales. The Street is expecting Mac units to fall 10% q/q, so we may see slight upside to Street expectations of 1.45m Macs. The other 15% of Mac resellers expect Mac units to be flat q/q.

Based on two rounds of checks with 50 retail stores selling Vista and Vista-enabled PCs, they expect IDC Mac market share will decline from 2.5% in December to 2.3% in March (see note dated 3/2). Recently released Gartner data for PC shipments in calendar Q1 confirm this thesis (Gartner US share declined from 5.1% in Dec to 5% in March). However, this will represent a y/y market share gain (up from 2.1% in Mar-06). PJ expects market share to bounce back quickly in the June quarter.

Apple typically guides conservatively and they believe the company will guide in line, at best, with Street consensus for the June quarter. Maintains Outperform and $123 tgt.

Notablecalls: Not actionable but good to know category. I suspect the stock may see some buy interest into the qtrly announcement.

Calls of Note Part 3

- JP Morgan is out with some very interesting comments on Hansen Natural (NASDAQ:HANS) reiterating their Overweight on the stock given a detailed review of HANS revenue drivers through 2009 points to upside potential versus consensus, which should also drive EPS upside given consensus conservatively assumes no incremental EPS growth beyond revenue growth. Revenue upside would likely drive substantial upside in the stock, given the market is pricing in risk versus consensus as Hansen is trading at only 19.2 times 2008E EPS, well below its high-growth consumer peers despite a 29% consensus EPS growth CAGR through 2009.

Number of HANS positives include: 1) continuing off-premise distribution expansion, particularly with a shift of half of Monster distribution to A-B wholesalers, 2) expansion into theon-premise channel, 3) international expansion through greater penetration of Mexico and Canada as well as an initial entry into Europe (which JPM expects in H2), 4) a strong 2007 new product pipeline, and 5) energy drink price increases expected in H2.

Above consensus results should drive upside in the stock as the market currently appears to be factoring in significant downside versus consensus, given Hansen's NTM P/E of 25.1 times is a large 20% below a peer group of high-growth consumer companies (including Chico's, Urban Outfitters, Coldwater Creek, Starbucks, Panera Bread, and Chipotle). This lower valuation is despite Hansen having much higher returns, a higher free cash flow yield, a higher consensus EPS growth rate forecast, and a stronger balance sheet, than almost all of these peers.

Notablecalls: HANS looks to be primed for some nice upside over the next couple of days.

Calls of Note Part 2

- RBC Capital comments on Palm (NASDAQ:PALM) saying that following recent market/product stumbles (37% Y/Y Smartphone growth vs. RIM at 81%) and eclipsing competition, Palm is expected to announce new devices utilizing new and thinner form factors, lower pricing, new software and other innovations. In order to reclaim market position and reinvigorate growth, Palm new products must 'hit the mark' with technology, styling, features, price and reliability.

Valuation, inexpensive at 0.7x EV/S and below peers at 2.1x (with $4.86/share cash), is expected to rise, possibly to $21-23 on anticipation of pending announcements (expected May), speculation of rumored devices/ features including novel Smartphones and other handhelds, perhaps with touch screens, Wi-Fi and other technologies. Palm also recently hinted at new, on-demand services.

ST appreciation may offer a trading opportunity on pending product speculation; however, the firm remains cautious long-term over competition and execution concerns and sees downside risk to $14-$15 if Palm's new offerings and strategy stumble. Maintains Sector Perform rating.

Notablecalls: Interesting comments by RBC's Mike Abramsky! He's actually saying new product announcements could drive the stock up by 5 bucks over the next month. I suspect Mr. Abramsky may have sparked a rally in PALM here.

Calls of Note Part 1

Couple of tier-1 firms have some interesting comments on Johnson Controls (NYSE:JCI) after the co released stronger than expected Q1 results on Friday:

- Banc of America is raising their FY2008 and FY 2009 EPS estimates to $7.55 and $9.25 from $7.20 and $8.55 and are now 6% and 18% ahead of the FY2008 and FY2009 First Call mean. The higher estimates reflect firm's belief that Building Efficiency margins expand to 8.5% (previously 7.5%) by the end of the decade. While corporate margins should move from an all-time low to an all-time high over the next 10 quarters, they believe their model is still conservative in many aspects. BAC's 12 month target goes to $135 from $120 and they reiterate the Buy.

- Goldman Sachs notes they increasingly see the Building Efficiency segment as JCI's primary growth engine, as it leverages cross sell opportunities through York, particularly in higher margin services, and as it reaps the benefits from efficiency gains in York's manufacturing footprint. A growing amount of "green" option value also exists, in firm's view, especially if regulation around building energy consumption levels gains traction. GSCO's tgt goes to $115 from $95 with Buy rating reiterated.

- Baird says earnings climbed 36%, exceeding consensus by 6%. While not a "great" quarter
(pretax income just below expectations), this reinforces the strong business model with controls, battery, and foreign automotive businesses all performing very well. They believe this is the start of several quarters of 20%-plus EPS growth. Firm is meaningfully raising estimates on higher revenue growth (euro and new business) and modestly higher margin assumptions noting their new price is $109 and could exceed $130 when valuation model rolls forward late this year. Maintains Outperform.

Notablecalls: Strong results powered JCI stock to a new all-time high on Friday. There was some initial selling but buyers soon took over, lifting the stock by as much as 4 bucks from day low. This kind of action usually indicates further upside to come. Also, the analyst community is out positive on the stock today, with BAC raising their tgt to $135 and Baird saying they expect their tgt to exceed $130 later this year. I would not be surprised to see JCI probe the $105 level, maybe as soon as today.

Paperstand (ABN, BCS, AZN, MEDI, RIMM, DCX, JBLU)

ABN Amro (ABN) and Barclays (BCS) announced Mon they have agreed to merge, in one of the largest cross-border combinations in European banking history. The deal involves Barclays offering $49.27 for each ABN share. As part of the deal, ABN announced it is selling its US unit LaSalle Bank to Bank of America Corp. for $21bn in cash. Arthur Martinez will be the Chmn of the new combination, while John Varley will be named CEO.

The WSJ reports, that AstraZeneca (AZN) last night was near the purchase of MedImmune (MEDI) for more than $13bn. Barring any last-minute snags, the transaction could be announced as early as this morning. That represents a premium of more than 15% to where the company's shares finished Fri. At least 4 large co’s were involved in the final auction process, said ppl familiar with the negotiations, including Eli Lilly (LLY), which has a deep history of avoiding large M&A transactions. But AstraZeneca prevailed in the end, willing to step up with its large price.

Notablecalls: Those bidders who were left empty handed, will certainly start seeking new M&A targets.

The WSJ reports that Research In Motion (RIMM) is set to launch new software that will allow features of its BlackBerry device - including email, a chat function and electronic maps - to be used on non-BlackBerry devices. Later this year RIM will begin selling the software, which initially will be available only for some devices equipped with Microsoft’s (MSFT) Windows Mobile. RIM is planning to sell the software through its online store and through wireless carriers, according to Jim Balsillie, RIM's co-CEO. Pricing of the software hasn't yet been set. RIM says it also plans to eventually release versions for other mobile OS.

According to the WSJ, representatives of Kirk Kerkorian's Tracinda, which has proposed a $4.5bn acquisition of DaimlerChrysler's (DCX) Chrysler Group, met yesterday with United Auto Workers members who have separately proposed an employee-stock-ownership plan for Chrysler. DCX and its bankers have focused on discussions with 3 potential buyers: Cerberus Capital Mgmt, the team of Blackstone Partners and Centerbridge Capital Partners, and auto supplier Magna Intl. (MGA). Tracinda, in its proposal to DCX, said it would consider giving the UAW a stake as part of a new capital structure. The proposal would give the union equity in return for giving up some future benefits. This idea, swapping the retirement health-care debts owed to UAW workers for equity in their employers, is getting increasing attention among Detroit leaders. Ppl familiar with the situation say Tracinda wants to leave the door open to further discussions with the UAW Local 12 group, the one proposing an employee-stock-ownership plan, and others that might join an effort to promote an employee-led deal. The group of UAW assembly workers is suggesting employees could buy 70% of Chrysler.

Barron’s Online “Inside Scoop” section reports that George Soros disclosed that he beneficially held 20.49m shares, or an 11.5% stake, in JetBlue (JBLU) at the end of ‘06. Ben Silverman, of InsiderScore.com, says Soros has "been decreasing his stake over the years" in JetBlue. Adjusting for stock splits, his stake has gone from 22.4% in ‘02 to 17.3% in ‘03 to 16% in ‘04 to 14.5% in ‘05 and to 11.5% at the end of ‘06.

Sunday, April 22, 2007

Barron's Summary

Barron’s profiles Waste Mgmt (WMI), saying that the co’s stock is off 5% this year, to 35, or an appealing 18x expected earnings. It could rally into the mid-40s as the co meets or exceeds earnings ests.

According to the Barron’s few stocks are as cheap as oil drillers', which sell for single-digit multiples. Strong fundamentals, takeover activity and more generous dividend policies could lift the shares sharply. Stocks mentioned include Transocean (RIG), Diamonf Offshore (DO), GlobalSantaFe (GSF), Noble (NE) and Ensco (ESV).

Joy Global's (JOYG) shares should rise as coal and electricity operators rumble back from a flat '06 and global commodity demand bounds ahead. The stock could recover by 30% or more.

“The Trader” section discusses potential merger between TD Ameritrade (AMTD) and E*Trade (ETFC). Both co’s were hammered after they trimmed their ‘07 forecasts. But trading activity could turn swiftly, and the prospect of consolidation helps put a floor beneath stock prices. By Sandler O'Neill analyst Richard Repetto’s reckoning, Ameritrade's and E-Trade's compatible strategies bode well for a union. Both have sought to reduce their reliance on online trading and grow their higher-margin asset-gathering businesses. But "the redundancy of the 2 firms' efforts to effectively 'touch' their clients is obvious," he says. Given their complementary operations, a conservative trim of 15% of combined expenses would nudge pre-tax profit margins to 59%, he ests. A merger would create a formidable foe for the far larger Schwab (SCHW). Mgmts of Ameritrade and E-Trade clearly are open to the notion; the 2 dallied on and off before Ameritrade merged with TD Waterhouse in ‘05. TD Bank (TD) which controls more than a 1/3 of Ameritrade's shares, must be willing to go along, but a few more qrtrs of flubbed profits might make saying yes a lot easier.

“The Trader” section also highlights Domino’s Pizza (DPZ), which last week served a plan to buy back $200m worth of stock, and a one-time $13.50 a share dividend. To help pay for the dividend and buyback, the co last week completed a $1.85bn recapitalization that loaded more debt onto its balance sheet. That may not be such a sure thing. For a start, Domino's does not enjoy strong pricing power. Margins will be further threatened by high corn and wheat prices that affect almost every ingredient in pizza. Corn and wheat inventories are already at their lowest levels since the early ‘70s, and prices are projected to climb further. Last year, Domino's SSS declined for the first time in more than a decade, and analysts' projections for a 3% sales rise this year might prove too rosy. Last week, Bear Stearns analyst Joseph Buckley downgraded the stock, which he says was trading "reasonably close to fair value." He was also "apprehensive" about 1Q earnings. Shares trading at 33 will drop to 19.50 once the stock goes ex-dividend, and that lower dollar value might tempt bargain hunters. But Domino's debt load will be 7x ‘07 EBITDA of about $261m, Buckley notes. And its EV is 10x higher than ‘08 EBITDA. Domino's buyback might support the stock in the short term, but any further upside will now take a lot longer to show up.

“Follow Up” section highlights Vertex (VRTX), which has the leading experimental hepatitis drug, Telapravir, which inhibits an enzyme essential to the hepatitis C virus. Telapravir's rapid effectiveness in early trials sent shares above $45 last year, valuing Vertex as if it would have a near monopoly on treatment of HCV infections. Vertex seems to have a good drug in Telapravir, and is running excellent clinical studies. But its hepatitis business prospects are more realistically valued, since its shares have pulled back. "We see this as being a very crowded marketplace," says Jason Kolbert, of Susquehanna.

“Technology Trader” highlights Neurochem (NRMX), which shook up its fans last week. The co announced that its statistical consultants had suggested the co adjust the statistical model originally chosen for analyzing its pivotal clinical trial of Alzhemed, a drug aimed at stemming the memory-eroding progress of Alzheimer's. "An obvious interpretation of this news is that Alzhemed did not demonstrate a large effect," CIBC analyst Brian Lian told clients, "leading to extensive subset analyses." Other analysts axed their tgts for the stock. The co's release seemed to warn investors that Alzhemed's test performance might be damped by "potential confounding factors such as the effect of concomitant medications, baseline characteristics of the study population or differences in clinical sites." But the full assessment of the study won't be completed until around June. Some investors have long doubted the prospects of Alzhemed, selling short the shares of Neurochem after early trials of the drug failed to show a clear effect. Yet Alzhemed is the furthest along of a new generation of potentially disease-altering treatments for Alzheimer's. Others testing treatments include MYGN, ELN and the drug giants LLY and WYE.

Friday, April 20, 2007

Calls of Note Part 2

- TWP is positive on Suntech Power (NYSE:STP) after meeting with Amy Zhang, CFO of STP. Firm views the highlights from the meeting: pricing trends are in line with expectations (5% to 7%); demand remains strong, which they believe could drive upside to their forecast in 2007; MSK, high-priced silicon and currency will weigh on margins in 1Q07; and the sales channel is shifting toward direct sales to installers/integrators.

Ms. Zhang indicated that pricing trends for solar modules are largely in line with previous guidance of down 5% to 7% in 2007 from the $3.84 average price seen in 2006, and these declines are occurring gradually q/q.

Zhang was confident that demand for solar modules is strong at the pricing levels discussed above. In fact, it appears that STP is contemplating purchasing cells from third parties to meet strong customer demand that exceeds is current in-house cell production capabilities. This factor coupled with STP's previous commentary that it has more than enough silicon to reach its 2007 production target of 280MW gives the firm a high level of confidence in their current estimates and suggest there could be upside in 2007. TWP believe sSTP's production could approach 300MW in 2007, which they estimate would add roughly $0.05 to $0.10 in EPS to current 2007 GAAP estimate of $1.04 ($1.17 non-GAAP).

Maintains Overweight: While the margin message is not new, the firm had previously underestimated the magnitude of the impact in the near term, and they believe they are not alone in this area. They are, however, encouraged by the positive data points on pricing they have heard of late that were supported by STP and the positive commentary on demand trends. The STP shares are currently trading at 20.8x 2008 non-GAAP EPS estimates, respectively below the wafer/cell/module supplier average of 23.4x.

Notablecalls: Nice comments by TWP. I only wish the chart would agree more with the bullish tone of the call.

Calls of Note Part 1

- JP Morgan says the market is too negative on Whole Foods (NASDAQ:WFMI), in their view. The stock over-compensates for risks, yet under-compensates for strengths. An "investment year" in 2007E is well-advertised, particularly with the Wild Oats acquisition. Some of WFMI's recent sales issues have been competitive; some have been other things (the market says 80%/20%; JPM says the opposite). Same store sales should accelerate with the reversion back to 17%+ EPS growth likely. Reiterates Overweight.

JPM thinks sales trends will prove better than the market anticipates for Q207E. They estimate 7.5% comps, lapping an 11.9% in Q2 of last year. The current quarter likely benefited from a slight Easter shift, which occurred during Q207 this year (was in Q306 last year); this should cosmetically add say 50 bps to current quarter comps (hurt Q2 of the prior year by 55 bps).

Last quarter, WFMI started the quarter off at 6.8% (first 5 weeks of last quarter's 16-week period and facing a 13.6% comparison); the company reported 7% for the quarter in total (against a 13% comparison). This implies that WFMI's comp got slightly better as the last quarter progressed. Of the 6 stores opened during the period, the firm has received feedback on four, and the new stores are in-line with expectations.

At 26.8x 2008E calendar P/E, WFMI trades below its mean premium to various peers. In fact, WFMI trades at 1.6x that of Safeway (SWY/UW) on 2008E, and its 5 year mean premium has been at nearly 3x that of SWY's P/E. Its trough to SWY has been 1.5x in last 5 years (its high has been 4.5-5x). They think WFMI is also inexpensive at a 7.2% OCF/EV yield, for a growth company. A 1.6% dividend yield and 1x LTM PF sales valuation are also supportive.

Notablecalls: Nothing really new here. Not actionable but good to know category.

Color on quarter: Intuitive Surgical (NASDAQ:ISRG)

Several firms are commenting on Intuitive Surgical (NASDAQ:ISRG) after the co issued Q1 results last night:

- Deutsche Bank notes that with recurring revenues expected to sustainably make up a majority of company sales going forward, 1Q results clearly demonstrate the earnings power of Intuitive's business model. While system sales will always be a large component, growth in procedures is a longer-term growth driver to a more sustainable and predictable business model. Firm reiterates Buy rating and are raising their tgt to $150.

Based on firm's math, annualized per system utilization in 1Q approximated 133 procedures versus 119 in 4Q06. Gynecology and Urology continue to be the primary drivers of procedure growth, although all robotic indications grew in 1Q.

Importantly, for the first time, the "razorblade" component of the company's razor/razorblade business model accounted for a majority of total sales for the company, which the firm believes represents an important inflection point. Recurring revenue (Instruments/Accessories + Service) represented 51% of total sales in the quarter, with continued growth in this figure allowing for greater visibility to financial results and less lumpiness inherent with system sales. During the quarter, the company sold 44 da Vinci systems (33 U.S. and 11 OUS) versus DB's estimate of 46 systems.

- Cowen notes Intuitive Surgical posted surprisingly strong 1Q results which beat estimates and provedutilization is rising. EPS growth of 63% on a 48% sales gain bolsters firm's confidence that Intuitive shares can outperform the market by 20% this year. Steady increases in procedure utilization are being driven by broad adoption in urology and early traction in gynecology and bariatric surgery. They are raising estimates to reflect 42% sales growth this year and reiterate Outperform.

While new da Vinci system placements of 44 rose by 26% YOY, disposable instrument sales rose by 73%. The installed base rose to 602 systems, up 41% YOY. Utilization in terms of instrument sales per system rose by 23% YOY, double firm's 11% estimate. Potential for utilization to rise 3-fold exists.

- Bear Stearns notes the company placed 44 consoles in 1Q07, below their 47 placement estimate. While below firm's estimate, the figure represented a smaller than usual q/q sequential decline on a percentage basis (-10% q/q) vs. a year ago (-13% q/q).

While the console placements were below their and the Street's expectations, Accessories sales grew 73% y/y (vs. the 58% growth they expected with $36.8M). The barometers of ISRG's growth may have become a two-horse race, where Instrument revenues may begin to outshine console revenues from time to time. And while some investors may fear increased utilization will erode console sales growth, they believe the two metrics are more likely to share similar positive implications about long-term sales and EPS growth.

While they don't anticipate Accessory revenues will become the majority of revenues for some years to come, an acceleration of that process while still maintaining 40%+ top- and bottom-line growth rates should help the stock move higher. Maintains Outperform.

- Wachovia remains positive on ISRG saying that after a period of hyper-growth in system sales during 2005 and 2006, system sales have slowed some. Fortunately, strong procedure growth means that instruments growth has picked up the slack. In fact, Q1 2007 marks the first time that recurring instruments and service revenue made up the majority of ISRG's sales (50.9% of total sales). They view the increased contribution from recurring revenue as a significant positive since it should reduce revenue volatility.

Notablecalls: Following the results out last night, the stock initially shot up to around $126 but then retreated to $118 after it came apparent they had missed the whisper number (44 vs. 46-48) on system placements. I really don't see this as a significant miss as ASP's were up and accessories more than made up the difference. Comments by management helped the stock gain some ground, with the last trades crossing around $123.50. While I think the stock may be dead money for a week or two, I continue to be positive on ISRG and expect it to challenge 52 week highs soon after.

Color on quarter: Google (NASDAQ:GOOG)

Several firms comment on Google (NASDAQ:GOOG) after the co released strong Q1 results last night:

- Stifel notes Google reported particularly strong results relative to that which was embedded in its share price. Even related to firm's estimates, the company beat revenue by 2% and EBITDA by 4%. Google was able to grow ex-TAC revenue by 14% sequentially and only grow its cash operating expenses by 7%, reversing the operating deleverage which began to occur in 4Q06. The company spent $600 million in capital expenditures justifying the theory that management continues to build the infrastructure to support the world's largest technology company.

Google may be a growth company but, when incoporating its public market valuation, they believe it is a value stock. The company reported ex-TAC revenue of 67% or 2.5x the industry and 6x the rate of #2 Yahoo!. Google controls distribution on the Internet at 65% of global search query share and its market share seems to grow each and every month. Google continues to have significant untapped opportunity in areas such as mobile, video, checkout, radio, and TV, among others. The business trades for 25x forward earnings despite being the recipient of the vast majority of the incremental growth on the Internet today. Firm continues to believe this is a must-own stock and they would be aggressive buyers of the shares against their $585 target, which amounts to 31x cash earnings or 85% of the rate of three-year growth expectations (2007-2009).

- JP Morgan notes they are pleased by Google's strong domestic performance. US revenues were up 48%, and $20M higher than firm's estimate, and the growth rate slowdown of 320 bps was much better than the 460 bps they were expecting. JPM believes market share gains and monetization gains contributed to the strong growth, and expect these trends to continue.

Google's 1Q EBITDA margin of 63.4% was ahead of JPM's 62.8% estimate and up 130 bps Q/Q. In light of continued heavy investments in capex, they are pleased with the margin expansion, which was driven by lower than expected RandD and better than expected gross margins.

Based on Google's 1Q07 performance, they are raising 2Q07 net revenue, EBITDA, and EPS estimates to $2.719B, $1.673B, and $3.55 from $2.651B, $1.643B, and $3.49, respectively. At the same time, they are raising F07 net revenue estimate to $11.41B from $11.27B, EBITDA estimate to $7.04B from $6.93B, and EPS estimate to $15.06 from $14.75

Maintains Overweight rating. Google trades at 31.3x F07 pro forma EPS estimate of $15.06, compared to its peers at 45.0x. Given that Google is growing significantly faster, they believe it deserves at least a valuation in line with peers, and thus maintain Overweight rating.

- Goldman Sachs says they expect Google's shares to move higher given 1Q2007 results that serve as a strong base for better-than-expected revenue and profit growth in 2007. They
believe that better margins and absolute EBITDA yoy growth of 61% versus consensus expectations of 55% growth should increase investor confidence in Google's ability to drive improving FCF growth and returns. First-quarter results reinforce firm's outlook and view on valuation and reflect Google's ability to outpace the search industry overall.They continue to see 20%-plus upside to their year-end price target of $620.

Notablecalls: Another surprise by GOOG! Well, not quite. Note that over the past year the co has on average managed to beat EPS by 11%. That exactly the number we saw last night. Of course, most of the market participants did not expect another beat of this magnitude, especially in light of YHOO's results. Hence, the sharp rally in after hours. While there are some signs of slight deceleration in growth rates, it's nothing compared to what we have seen at YHOO or EBAY. Plus, the stock trades at a discount to these two. So, in some sense, Stifel's right - GOOG's a value stock. I think there will be an upward bias in GOOG stock over the next week or so, helped by positive analyst chatter.

Paperstand (WMT, SIR)

According to the WSJ’s ”Heard on the Street” column retail execs and major investors say Wal-Mart (WMT) needs to take some significant steps to regain its status as a growth stock. Here is their road map for rekindling the shares. Try the Golden Arches recipe. McDonald’s reversed a prolonged stock decline earlier this decade by drastically slowing US store expansion, closing unprofitable outlets and improving customer service. Between ‘03 and ‘05, its shares doubled in price. The key was McDonald's accepting that its US business had matured, and that it would be better off focusing more on overseas growth mkts, such as Latin America, Russia and China. Peter Sorrentino, of Huntington Asset Advisors, says it is time for a pullback in the US for the retailer. Wal-Mart has been "too focused on growth in units and not enough on the core business," Mr. Sorrentino says. "They lost their way."

Barron’s Online “Inside Scoop” section rerports that Steadfast Capital Mgmt disclosed that it now owns 4m shares of Sirva (SIR), or a 5.4% stake, up from the 2.1m shares it owned as of Dec.’06. According to StreetSight.net, Steadfast "employs a value-oriented strategy and seeks to invest in co’s that are growing at 20-25% a year." The largest chunk of its portfolio, 16.4%, is invested in Berkshire Hathaway (BRKA).

Thursday, April 19, 2007

Calls of Note Part 2

Couple of more interesting comments on last night's earnings movers:

- ThinkEquity's Suresh Balaraman comments on Novellus Systems (NASDAQ:NVLS) saying that while foundries should emerge from depressed levels, he expects Novellus to be vulnerable to slowdown in the memory segment. The firm is lowering estimates for 2008 and trimming their price target to $34 from $36. They estimate that the near-term downside to NVLS shares is $26.

ThinkEquity believes orders could average $350M +/- $30M in Q2 and Q3. While they anticipate foundries and advanced logic will emerge from moribund levels, it may not be sufficient to offset weaker memory spending. While they expect Vista to eventually emerge as a driver for DRAM, they believe any meaningful capacity addition will not be forthcoming from the memory segment until early 2008. Firm believes there is sufficient memory capacity to support the demand through the rest of the year.

Firm's price target of $34 assumes that order rates should approach around $380M over the next several quarters after a dip to $320M. It also reflects 15% normalized net margin and a 15 multiple. In the near term, the bookings could potentially dip to as low as $320M, causing stock price downside to $26 (12.5% net margins, 15 multiple).

Notablecalls: Think there may be some more downside in NVLS, in addition to weakness seen in after hours action.

- Deutsche Bank comments on eBay (NASDAQ:EBAY) saying that while the stock will likely trade up slightly today, they think that the stock should come back in to the low-$30s, particularly as investors dig into the underlying metrics (suggesting far slower growth in GMV and transactions than expected).

Notablecalls: As I said, I don't see favourable risk/reward here.

Calls of Note Part 1

Couple of more interesting comments on Motorola (NYSE:MOT) after the co issued its Q1 results yesterday morning:

- Morgan Stanley thinks the worst appears to be behind Motorola at this point, but as its competitors have captured momentum and mind share in 3G as well as at the low-end in emerging markets, regaining its footing - and more importantly its profitability -- in these critical growth areas will likely be a long-tailed story. Firm would get more constructive on increasing product synergies across its handset, cable, and networks businesses or new model introductions that could increase pricing power and operating margins. Conversely, they would get more negative on shares if the handset cost actions, most of which they think should have been well underway by this point, will merely offset an increasingly competitive environment.

MSCO's EPS estimate for 2007 drops 8c to 34c on reduced sales partially offset by a higher GM. For 2008, their forecast improves by 7c to 93c on higher ASPs and a better GM.

Motorola is a reasonably valued restructuring story, where reset expectations, in particular a low bar for Q2, could drive shares toward $20, or around one times EV/sales using C2008 estimate. Firm's fair value estimate for shares is around $18.50, which assumes that Motorola gets back to double digit operating margins by late 2008. Maintains Equal Weight.

- Deutsche Bank says that although they have a Hold rating and their PT is 18.6% below MOT's current trading price, they believe the stock, in the short run, is expected to see some bounce due to the well-publicized ongoing proxy fight between Carl Icahn and Motorola.

From what they heard on the call, the new team has not yet formulated a real strategy for turning around the mobile unit. While management called out several initiatives none of these were new - rationalizing the supply chain, new silicon vendors, standardizing software, etc. All were things the company had discussed when Mobile Devices still had double digit (positive) operating margins

They do not think Motorola is a company broken beyond repair. They have problems, and they need to fix them. There are some signs of progress, but the toughest changes lay ahead and will still take some time. They think the market continues to underestimate the timing of a turnaround at Motorola.

Notablecalls: I think that over the next qtrs MOT stock will continue to climb the wall of worry. There will be setbacks but I think these will prove to be buying opportunities. Motorola will get its mojo back eventually. Meanwhile we have Mr. Icahn looking out for the shareholders and of course, the stock price.

Color on quarter: eBay (NASDAQ:EBAY)

Several firms comment on eBay (NASDAQ:EBAY) after the co released its Q1 results last night:

- Goldman Sachs says they recommend buying eBay with 20%+ upside to their new $43 price target (was $40) with 3% higher 2007/2008 EPS estimates of $1.34/$1.62. 27% yoy revenue growth (stable 21% yoy organic), 29% EBIT growth, and 39% EPS growth in 1Q2007 increasingly make firm's 16% 2008-2011E growth outlook appear conservative. Accelerating rev/listing and GMV/listing yoy growth to 20%/12% from 11%/8% in 4Q2006 demonstrate the steady improvement in the buyer experience by better converting demand into revenue resulting in higher conversion rates and ASPs.

- Stifel notes the company was able to beat revenue expectations by 4% and EPS by 10% but the drivers were not as clean as they were in 4Q06.

Organic revenue was 21% on a year-over-year basis as compared to 27% reported growth. Acquisitions made over the last 12 months contributed 1 point to top-line growth. Foreign exchange due to a weaker dollar contributed an additional 5 points of growth. EPS strength relative to guidance was driven primarily by strong revenue contributions from non-GMV businesses, expense leverage and productivity, a lower tax rate, and benefits from a weaker dollar. Free cash flow for the quarter was $479 million , or 27% of revenue in the quarter.

Stifel says they track several metrics on a YOY growth basis: active users 10% (4% decel), marketplace net transaction revenue 22% (2% decel), PayPal 28% (7% decel), core listings 4% (6% decel), GMV ex-currency 10% (6% decel), and non-Motors GMV of $1B categories 15% (5% decel). Firm anticipates that eBay's organic growth rate will moderate into the midteens in 2008 and low teens in 2009.

They believe the company is worth 25x 2008 EV/ulFCF justifying a Buy-rating and $37 target price. eBay is a maturing, high-quality company trading at a respectable valuation. As they have said in the past, they do not believe returns in eBay shares will ever be the same as they once were but they believe the shares offer a reasonable, risk-adjusted return. Would buy on pullbacks against the $37 target.

- Banc of America says they remain positive on EBAY on expectation of continued stabilization of the Marketplace which should continue to drive improvements in ASP's, conversion rates and generally higher revenue per listing (+21% Y/Y); increasing traction and scale of key asset PayPal; other opportunities including on-platform advertising from YHOO and GOOG; and margin expansion driven by continued expense leverage in S&M and G&A lines. Significant stock buyback activity could provide support through seasonally weaker quarters.

They are somewhat concerned about decelerating GMV growth in the US in Q1 (8% Y/Y) vs. Q4 (14%). In addition, GMV growth (ex-forex) also decelerated in Q1 (11% Y/Y) compared to Q4 (17% Y/Y).

- Piper Jaffray notes eBay reported a generally solid Q1 with strength in non-GMV revenues and increasing S&M leverage, FX benefits, and a lower tax rate driving upside. Approximately $0.01 of EPS upside was from improved operating leverage and revenue upside, $0.01 from FX benefits, and $0.01 from a lower tax rate.

While the continued slowdown in core eBay listings (2% y/y) and GMV (10% y/ y currency neutral) is somewhat concerning, eBay was able to offset the lower listings and GMV through improved conversion rates and ASPs. Also, eBay continues to experience strength in the non-GMV categories, including PayPal, Skype, Shopping.com, and 3rd Party Advertising & Other, which grew at 28%, 119% y/y, 29% y/y, and 65% y/y.

Piper if upping their tgt to $39 from $37 while maintaining Market Perform rating.

Notablecalls: While at first glance it looks like eBay was able to pull a beat & raise quarter, most of the upside came from favorable FX and lower tax rate. Also, growth in active users was flat q/q and up only 10% y/y. Another concern is the apparent deceleration in US GMV. International is the main driver here. Can't say I see good risk/reward here. I have no view on the s-t movements.

Color on quarter: Labor Ready (NYSE:LRW)

Couple of firms comment on Labor Ready (NYSE:LRW) after the co released better than expected Q1 results last night, driving the stock up over 25% in after hours action:

- Goldman Sachs notes LRW's released 1Q07 results last night, management revised 2007 guidance upwards; they had anticipated a negative revision. GSCO notes they were surprised by 1) better gross margin driven by lower workers comp expense, 2) completion of the existing and a new $100m buy back program, and 3) improving same store growth trends in February and March which management believes is a sign of end market stabilization. However the firm maintains their conviction that another leg down in residential construction employment is a matter of WHEN not if, contrary to the company's outlook for a slight 2H07 recovery.

GSCO's revised 2007 EPS estimate of $1.26 is up 15% but remains 10+% below guidance reflecting their belief that the stabilizing trends the company has seen over the last 6-8 weeks are not sustainable. While they recognize in the near-term shorts will likely not be rewarded, they maintain Sell rating with a $15 tgt (up from $13).


- Stifel notes they are raising their '07 EPS estimate to $1.36 from $1.25 and '08 EPS estimate to $1.48 from $1.40. While on the surface, their revised estimates appear bullish, they believe that it is still too early to call a positive turn at LRW. Firm's and the company's outlook for the top line is essentially unchanged and almost all of the upside to the EPS outlook that management provided was due to lower workers' compensation expenses, other cost controls, and significant share buybacks.

Same branch sales trends in 1Q06 were robust, up 11% y-o-y, and quickly deteriorated throughout both the quarter and the rest of 2006. In firm's view, the positive trends as 1Q07 progressed had more to do with easier comps than a significant improvement in the market. They believe that the uncertainty in the overall economy and the construction environment indicates that LRW's outlook beyond 2Q07, which has limited top line visibility, could be optimistic. Residential builders have not called a bottom, business investment spending has come under pressure and consumer spending could come down if discretionary income declines.

Stifel believes that the stock could get ahead of itself in the near term due to the revised EPS outlook. Although LRW's newly authorized $100 million stock buyback could provide support for the shares, any significant upward stock price movement could be unsustainable unless economic growth accelerates and the construction market rebounds.

Notablecalls: Goldman was out negative on LRW just ahead of results (please see the archives) but the chart at that time didn't indicate weakness. Based on that, I didn't call it actionable. After closing around $18, the stock traded as high as $23.50 in after hours action as shorts were squeezed to death. I suspect that if you can get a fill around $23-$23.50, you'll make money shorting LRW today. There will likely be another leg down in housing and LRW will get hurt.

Paperstand (HSY, GOOG, BSX, GDP)

The WSJ reports that Freddie Mac (FRE) and Fannie Mae (FNM) said they expect to buy tens of billions of dollars of newly created subprime mortgage loans over the next few years to help prop up the roughly $1.3trln subprime mkt as lenders tighten their credit standards or flee altogether. The move shows how the two govt-sponsored co’s are redeeming themselves on Capitol Hill by depicting themselves as part of the solution to surging defaults on subprime mortgages, those for borrowers with weak credit records or high debt in relation to income. The promises to help such borrowers are bolstering their support in Congress just as lawmakers debate legislation to tighten regulation of Fannie and Freddie, both emerging from accounting scandals. That makes it less likely that Congress will back longstanding calls from the Federal Reserve and others for tight constraints on the amounts of mortgages they can retain as investments, currently around $1.4trln, or 14% of US home loans outstanding.

Notablecalls: NY Post reports that FRE and FNM bailout sum is about $20bn and in addition WaMu helps with $2bn. A win-win situation for FRE and FNM. Expect a positive reaction in subprime stocks.

“Heard on the Street” column out saying that shares of Hershey (HSY) might turn bitter before becoming sweet again. With a potential tug of war for the confectionery brands of Cadbury Schweppes (CSG) in the offing, Hershey might not be able to resist the temptation to make a bid. Any attempt by Hershey to purchase Cadbury's chocolate and chewing-gum brands, with an estd value of about $19bn, would put a squeeze on Hershey's earnings. But it may be an opportunity Hershey can't afford to miss. Analysts have bandied about various scenarios for a Cadbury deal, including one in which Hershey could buy Cadbury's gum business, while Kraft Foods (KFT) or Wrigley (WWY) could bid for its cream eggs and milk-chocolate bars. If Hershey were to consume a sizable chunk of Cadbury's brands, it would position the co as a global confectionery powerhouse. Hershey valuation of about 21x ‘07 earnings is lofty. "In our view, a large part of the run-up in Hershey shares is due to the mkt's belief that Hershey could be involved in some form of transaction with Cadbury Schweppes confectionery," JP Morgan analyst Pablo Zuanic wrote in a note. Mr. Zuanic downgraded Hershey's stock Mon to Sell from Hold.

“Ahead of the Tape” column discusses Google’s (GOOG) upcoming earnings report, suggesting a miss. What might pop up after search titan reports earnings later today is a story about Google. Google's search growth has blown past analyst expectations for so long that Wall St. might now be setting the bar too high. 33 of the 38 Google analysts have a Buy rating or better on the stock. Google is expected to post earnings excluding one-time items of $3.30 a share, up 69%. But search growth at Google and among its rivals is slowing down, which is understandable after years of supercharged gains. In March, Google's search queries in the US were up 29% from last year, below the 36% growth rate in Feb and down from more than 50% last year. Google is still growing faster than the industry. Industrywide, online searches in March were up 15%, compared with gains of 33% in Oct. Not surprisingly, Yahoo posted disappointing results late Tue. Google's stock, sliding since mid-Jan, may already be reflecting the trend. The co has also been on a spending binge, which could hurt profit margins. Last Fri the co said it will pay $3.1bn for DoubleClick. Google hasn't undershot earnings tgts since the 4Q05, and it blew past its 4Q06. An earnings miss now would be a shock to many. But with expectations so high, perhaps it shouldn't be.

Barron’s Online highlights Boston Scientific (BSX), whose shares have jumped 11% over 3 weeks, fueled largely by takeout speculation and an end to regulatory sanctions. But the co says it is not for sale. And with the co still facing big problems, the stock could either fall or languish. The mkts for stents and implantable defibrillators remain weak. New rival stents could steal business. Regulatory issues still need fixing. Profits, meanwhile, could fall in ‘07 for the 2nd straight year. "They still face a number of fundamental issues," says Michael Barr, of Victory Capital Mgmt. "The needle has shifted to some degree. The news about the FDA helped, but it isn't enough to get me to buy the stock." Last month, BMO cut its rating to Mkt Perform. "6 mo’s ago I would have said this was a value name, but now I am not so sure," says BMO analyst Joanne Wuensch. "It feels like a value trap."

“Inside Scoop” section reports that Josiah Austin, a Goodrich Petroleum (GDP) director, spent $1.9m to buy 60K Goodrich shares on the open mkt. Mr. Austin is already co’s largest stockholder. He now controls a 20.1% stake in Goodrich with nearly 5.69m shares, valued at $182m. Ben Silverman, of InsiderScore.com, notes that Austin has spent only about $36m to build the stake since Jun’00. This week's transactions raised Austin's cost basis to $6.30 per share from $6.00. Silverman says Austin has proved to be a smart buyer and continues to show "an enormous amount of faith in the co." Unlike well-known names like billionaires Carl Icahn or Harold Simmons, Austin "keeps a low profile" and has made strategic, and lucrative, plays in recent years.