Friday, August 31, 2007

Leap Wireless (NASDAQ:LEAP): BofA continues to be positive

- Banc of America is positive on Leap Wireless (NASDAQ:LEAP) saying they do not believe that the churn spike in expansion markets at Leap, exaggerated by a rolling series of large market launches which suddenly stopped, gives evidence of larger 'sub-prime' market exposure. The key lesson learned on the heels of 2Q Leap results was that the continuous market launching in 2006 depressed regular reported churn data leaving 2006 a poor baseline for 2007 estimates.

They have updated their Leap model taking into consideration 2Q results, 3Q07 2007, and 2008 guidance provided by the company, and follow-up conversations with management. New 2007 EBITDA estimate is $413 million vs. previous $448 million. This represents 51% Y/Y '07 EBITDA growth. Firm anticipates 40% growth in 2008, including new, AWS market launch costs.

They believe Leap Wireless remains an attractive investment opportunity, more so following its sharp correction on the back of 2Q results. Leap is a solid and proven business model (~30% EBITDA margins, over 40% in core markets) expanding covered pops in 2008 by 45% where financial growth expectations (39% '07-'10 EBITDA CAGR, including $100 million of launch costs in 2008) justify a premium valuation, in firm's view, relative to national postpaid wireless carriers and the telecom sector generally.

Maintains Buy and $100 tgt.

Notablecalls: Expect this call to generate some interest in LEAP.

Thursday, August 30, 2007

Coldwater Creek (NASDAQ:CWTR): Actionable call alert!

- CIBC has some very interesting comment on Coldwater Creek (NASDAQ:CWTR) after the women's apparel retailer last night reported a nearly 28 percent fall in quarterly profit, hurt by higher promotional activity, and forecast a "particularly challenging" third quarter. Coldwater shares fell more than 13 percent to $15.05 in late electronic trade after closing at $17.39 on the Nasdaq on Wednesday:

- CIBC notes 2Q EPS of $0.09 were below their and the Street’s $0.12, with the miss to firm's model stemming from lower than expected sales (a -6% comp and lighter than expected direct sales growth) and a 270 bp decline in merchandise margin from higher markdowns.

While the bar for earnings was lowered early in the year (and they were hoping it was sufficiently low enough at that time), management in all fairness could not have accounted for the current psychological and/or real impact that the housing market has on the consumer. CIBC continues to believe that CWTR’s issues are indeed macro related and that the product looks strong. Since 2Q, initiatives have been in place to improve the store layout, website and catalog. Importantly, the company is incentivizing store managers to meet daily conversion targets - this was done successfully in 1Q and was started again this past Monday.

According to CIBC while they were disappointed by the need to lower 2H guidance, CWTR isn’t exactly alone in the women’s space – there really hasn’t been any company focused on boomers that has thrived as of late. However, the difference between CWTR and its peers is that CWTR continues to be fundamentally strong; it isn’t facing serious product issues, it isn’t waiting for a new merchant or executive to formulate a new strategy, and it hasn’t hit a stumbling block in its growth. In their view, CWTR continues to be among the best stories in specialty retail given the attractive, underserved market it caters to, strength of the management team, significant store expansion still ahead, and the opportunity to more than double the operating margin via direct sourcing and sales leverage. CIBC believes that despite low visibility now is the time to step in.

CWTR remains CIBC's top pick into 2H. Firm maintains Sector Outperformer rating while cutting 12 month tgt to $25 from $29.

Notablecalls: I love this call from CIBC's Roxanne Meyer. I think lowering the bar for H2 was somewhat expected and I think there are investors who were waiting for it to happen in order to step in. Coldwater Creek continues to be one of the most compelling growth stories in the industry. The risk/reward is very favorable with the core earnings power both a supporter and driver of the stock price. Investors who wait on the sidelines for the news of an eventual earnings' rebound will likely miss a large percentage gain as the stock will likely slingshot when the improvement is realized.

Short interest in the stock stands at close to 20%. I think shorts have made decent money shorting CWTR and I feel that at least some of them will want to bank some profits into today's weakness.

CWTR could easily be a $25 to $30 stock if and when visibility returns. That makes it a shaky short and a very interesting long.

I wish some bow-wow firm downgraded CWTR this AM giving you guys decent fills tad below the $15 level. Absent any downgrades, $15 is the price I'd be willing to pay with a big smile on my face.

I feel CWTR is a bounce candidate here. Going to call the CIBC note Actionable here!

Rackable Systems (NASDAQ:RACK): Positive checks on Rackable?!

- RBC Capital is out with some surprising comments on Rackable Systems (NASDAQ:RACK) saying their checks suggest the flow of orders at Rackable is improving as Amazon laps tough year-over-year comparables and other key customer relationships remain stable. Consequently, firm's revenue estimate for the quarter may prove conservative.

Based on valuation and historical EV-to-revenue multiple analysis, they estimate potential EV-to-CY 08 revenue multiples of 1.0x on upside execution and customer risk mitigation and 0.2x on downside execution. Currently, Rackable is trading at ~0.4x RBC's CY08 revenue estimate ($420 million), suggesting negative execution sentiment relative to estimates. Accordingly, they expect some near-term recovery in the shares, though the sustainability of any positive move is difficult to gauge given the customer concentration.

On a 12-month basis, the firm maintains their $13 price target as they evaluate the potential for more consistent execution beyond the current quarter. Firm maintains Sector Perform rating and Speculative risk assessment for the same reason.

Notablecalls: Wow, when was the last time you heard ANYONE say ANYTHING positive on RACK? This call is going to create some buy interest in the stock today, for sure! Grab it early on but don't overpay.

RACK's Analyst day is on Sept 6 which makes the set-up even better in my view. I see more positive coming from there than negative.

Altria (NYSE:MO): Deutsche expects upside in MO

- Deutsche Bank is positive on Altria (NYSE:MO) today raising their tgt to $82 from $80 after the co said yesterday it will spin-off Philipp Morris Intl tobacco unit. DB thinks the spin will be an early 2008 event, just like Kraft this year. The relevant question now is where do we go from here? The balance sheet opportunity is vast. For example, $30 billion in leverage puts PM USA at 1.8 times debt/EBITDA, (a de-facto A-industrial level even if the agencies don't think so owing to legal risks) and PMI at 2 times. A 75% dividend pay-out on Philip Morris USA (PM USA) earnings would drive a yield of 5.4% if it traded at 14x P/E on 2008 forecasts. PMI would trade on a yield of 4.6%.

But there's another wrinkle to start thinking about now as well - cost savings via business restructure and/or acquisitions. The simple math today is every 1% in EBIT margin drives $150 million in profits at PM USA and $230 million at PMI. So as stand alone companies, maybe they belt tighten 3% points in margin each. That's $450 million at PM USA and $690 million in PMI. Using the sum of parts metrics multiples applied below, such an outcome drives another $5-6 in share value or valuation in the high $80's. Based on these factors, they are surprised that the share price reaction has not been stronger

Altria remains Deutsche's best large cap idea with revised target price implying 22% total return upside in the shares over the next 12 months. Maintains Buy.

Notablecalls: When was the last time you saw a 22% total return upside in MO? Deutsche's no foolish operator but their tgt is still way below say for example Morgan Stanley's $87 number (reited Overweight yesterday).

I strongly feel that based on yesterday's news, MO stock deserves to be at least 2-3 bucks higher than the current quote. I expect this to happen over the next week or so. I'm as surprised as Deutsche by the lack of share price reaction yesterday.

Paperstand (CHU, SKM)

According to the WSJ's "Heard on the Street" column, the recent drama over financing for the sale of Home Depot's (HD) supply unit was in some ways just a warm-up. An even bigger battle between banks and their clients at private-equity firms looms with the impending sale of First Data (FDC) to Kohlberg Kravis Roberts. Banks have committed to lending billions of dollars to buyout firms that are in the midst of buying numerous co's. As investors shun buying these loans from the banks, these Wall St. giants run the risk of being saddled with these loans on their books, hurting their profitability. So far, KKR has shown a willingness to give some ground, although not on issues that would fundamentally change the outlook for banks and their shares. But the banks are hoping KKR's willingness to compromise will grow over time.

Barron's Online out saying that there are telecom values to be found even among those stocks that have already done well within telecommunications, especially those tied to the unrelenting growth of wireless communications. They include wireless frontrunners such as China Unicom (CHU), the number-two operator in the race to unwire the mainland, and SK Telecom (SKM), the dominant wireless operator in S-Korea. The ADR's of both co's have outperformed the last 12 mo's, with Unicom ADRs more than doubling and SK ADRs up 26%. But there's still much value to be found in both. The growth in cellular makes sense, given that emerging mkts, and especially Asia, have substantially underdeveloped wireless mkts that could see blockbuster growth for years to come, much higher than the US cellular services mkt, where about 80% of the eligible population already has a wireless account. Indeed, in a note last Fri, Lehman analyst Paul Wuh wrote, "China Unicom will continue to benefit from strong subs growth given China's relatively low wireless penetration [of 38%] and the trend of fixed-to-wireless substitution."

"Inside Scoop" section reports that last week, Intuit (INTU) announced the departure of its president and CEO. This week, the co disclosed the outgoing exec had sold $4.2m worth of stock. Stephen Bennett sold 154K shares on Mon. The divested stake represented 74% of Bennett's direct holdings. Bennett's stock sale stands in contrast to his stated optimism for Intuit. "If he thinks everything is fine with the co, it is definitely an odd way to show it by selling so much of his holdings," says Jonathan Moreland, of

Wednesday, August 29, 2007

Knight Capital Group (NASDAQ:NITE): BAC calling for a bounce

- Banc of America is out on Knight Capital Group (NASDAQ:NITE) after yesterday's turmoil saying that while August has clearly been a rocky month for Deephaven, it was not as bad as some had suspected. Given the meaningful decline in the stock (which, in retrospect, appears a bit of an overreaction), they believe the stock could see a bounce today. That said, Deephaven performance is negative 3Q07 to date and could weigh on earnings unless performance turns around over rest of quarter.

Deephaven's Flagship Global Multi-Strategy Fund LLC and Global Multi-Strategy Fund Ltd. were down an estimated 2.24% and 2.23%, respectively. Deephaven's Event Fund LLC and Event Fund Ltd. were down an estimated 4.16% and 4.18%, respectively

But performance up to July 31, 2007, was positive: Global Multi-Strategy Fund LLC and Global Multi-Strategy Fund Ltd. were up 6.80% and 6.68%, respectively. Event Fund LLC and Event Fund Ltd. were up an estimated 3.58% and 2.99%, respectively.

So, year-to-date performance right now is not as bad as first thought, with Event funds only down 0.7% and 1.3%, respectively, and multi-strategy funds up 4.4% and 4.3% respectively. Given that the firm believes the multi-strategy fund is the larger of the two funds (which account for 85%-90% of total AUM), they believe year-to-date performance at Deephaven is still positive overall.

Still, 3Q07 is going to be challenging, as returns are going to be negative unless performance improves over last month of the quarter, and we could see Deephaven report a loss to reverse accrual accounting from 1H07.

Maintains Buy on NITE.

Notablecalls: I was positive on NITE yesterday, calling for a bounce around the $13 level. The stock never reached that level so unless some of you had more conviction early on no trade was triggered. Today, we have BAC out calling for a bounce saying things are likely less murky than most think. With the stock close to the $13 I think this call is certainly worth the shot.

Of note, Sandler O'Neill maintained their Buy rating and $20 tgt on NITE yesterday.

PDL Biopharma (NASDAQ:PDLI): Color on news

Couple of firms comment on PDL Biopharma (NASDAQ:PDLI) after the co said on Tuesday it will sell off all of its marketed medicines and warned its earnings would be significantly reduced in the near term. In addition to announcing a major strategic shift away from a focus on heart disease treatments, PDL said it terminated a phase 3 clinical trial of its experimental drug, Nuvion, for ulcerative colitis. PDL, which expressed surprise and disappointment over the Nuvion failure, said it decided to get out of the cardiovascular disease business and instead focus on discovery and development of medicines for cancer and immunological diseases:

- Deutsche Bank notes PDL shares reacted negatively to PDL's press release, the Board's weak response as to whether PDL is still potentially positioning for sale and if the Board truly believes reinvesting monies behind an early-stage pipeline given PDL's extremely poor track record is in
fact the best strategy for maximizing shareholder value. DB continues to believe PDL commands unique scarcity takeout value particularly on current valuation given its state-of-the-art antibody technology know-how and manufacturing expertise and remains a major takeout target among multiple ex-U.S. and U.S. pharma and biotech players.

It remains critical for PDL leadership to continue proactively guiding this process to completion in order to offset accelerating stock weakness fueled by a lack of positive catalysts, and a weak
repositioning strategy for PDL as an early-stage biotech re-start. While PDL plans an R&D meeting 11/07, a clear strategy has yet to be developed, in firm's view.

- CIBC is taking their rating to Sector Performer from Sector Outperformer saying key outstanding questions are when the assets will be divested, at what price, and how proceeds will be invested or returned to investors. Although execution of this plan is a risk, overall, they believe the reorganization increases the possibility that PDL is acquired.

PDLI shares slipped to ~$20 on the news, and based on the company's new fundamentals and a lack of near-term catalysts, they believe this is near fair value. Although a takeout would occur at a premium to this, they do not expect a deal before mid-2008.

- JP Morgan is downgrading the stock to Neutral from Overweight.

Notablecalls: Activist investor Third Point LLC had been urging the board for months to oust Chief Executive Mark McDade and a week ago they finally succeeded. But who would have known McDade was leaving behind all this.

If one assumes PDLI manages to sell off all of its marketed drugs + Ularitida (PII, CHF, $750 mln potential), I think it could bank about $600-$700 mln. That's about $5-$6 bucks per share.

I also think the royalty stream, coming from nine marketed mAbs is worth $1.8-$2 bln today (a 10x multiple to peak royalties of $450 mln in 2013 and discounting back 5 years at 20%), which equates to about $15-$16 per share.

So together, that's roughly $20 per share.

Now, there's the scientific platform and a handful of mid-to-early stage compounds in the pipeline. I must say I have no idea how to value the platform as PDLI has had a really lousy development yield, spending twice as much as most peers to come up with workable compounds. Still, it's certainly THE thing potential acquirers want. So, the platform could be worth upto say $10 per share.

I'm giving zero value to the current pipeline as PDLI will need to burn through a lot of cash before anything interesting surfaces from there.

So, for a potential acquirer, PDLI could be worth upto say $30 per share. So maybe, just maybe Third Point knew what they were doing after all. Though, I'm sure they are surprised by the Nuvion news.

The stock will get hit today and will trade below the $20 level. I think it could initially go below the $18 level and even $17 does not look far-fetched here. So, shorting it above $19 looks like a safe bet.

I suspect there could be a bounce but I would not touch this one before it comes close to the $16-17 level.

Paperstand (MHS for PLMD; WEN on the block)

According to the WSJ, Medco Health Solutions (MHS) plans to buy PolyMedica (PLMD) in a $1.29bn deal. The deal would allow Medco to capture a much bigger piece of a mkt driven by America's diabetes and obesity epidemic. With one million patients as members, PolyMedica is the country's biggest supplier of blood-glucose testing supplies. Under the terms of the all-cash deal, Medco said it would pay $53 a share for PolyMedica, a 17% premium. Including the assumption of $213m in PolyMedica debt, the deal is valued at about $1.5bn.

The WSJ reports that Triarc Cos. said it had reached a confidentiality agreement with Wendy's Intl. (WEN) to review financial data in order to prepare a possible bid. Chmn Nelson Peltz has indicated that Triarc is willing to offer as much as $41 a share.

After months of wrangling, it looks as if financier Carl Icahn and his allies have finally gained sway over WCI Communities (WCI). Shareholders are expected to vote tomorrow to install Mr. Icahn and two of his representatives on the WCI board, as part of an agreement last week between the activist investor and the co's current board. Two investment-firms that own sizable stakes of the co also are each expected to gain a seat, while 3 current board members will keep their seats. It will be a victory, of sorts, for Mr. Icahn, whose $920m bid for WCI was rejected by the board in April, stunning many on Wall St. who believed the offer was as good as it would get. No better bid emerged. "To the extent that one of his objectives was to gain control, he's gained that," says Paul Puryear, of RayJay. "Maybe it is a win for Carl Icahn. I don't know if it's a win for shareholders."

“Heard on the Street” column discusses Countrywide (CFC), whose stock price is down nearly 12% since the purchase of convertible preferred shares was announced by BofA. That's largely b/c investors still don't know how badly Countrywide has been wounded by the recent credit crunch. At a minimum, Countrywide faces a hit to near-term earnings; some analysts expect a loss in the current qrtr. At worst, the co could be forced to dump assets at fire-sale prices or seek another emergency infusion of capital, potentially slashing the value of its stock further. "2bn dollars from BofA is not a lot compared to what they may need," says Stuart Plesser, of Standard & Poor's. Though Countrywide bills the investment a "vote of confidence," Mr. Plesser thinks the sale of preferred stock signaled distress. The preferred stock carries a yield of 7.25% and is convertible into a stake of about 16% of Countrywide's common shares, at $18 apiece. The stock had been $36 only 5 weeks earlier, and Mr. Plesser doesn't think Countrywide would have sold such a large stake at such a low price unless it needed cash immediately.

Barron’s Online highlights Trinity Industris (TRN), saying that after a 30% pullback from last May's peak, the co’s shares should get back on track. Trinity's attractive valuation and solid prospects have encouraged its largest shareholder, Tontine Capital Partners, led by respected hedge-fund manager Jeffrey Gendell, to plunk down nearly $80m this year as the stock fell from around $43 to $35. That dip reflected concern that the railcar industry has peaked, owing in part to a buildup for ethanol-related cars. But strong backlogs in railcar orders, plus a robust demand for Trinity's inland barges and wind tower structures, make for solid earnings prospects. Meantime, the shares trade at an undemanding 10x forward earnings. Sam Halpert, of Van Eck Associates, sees Trinity as a cheap play in infrastructure, where other stocks have gotten rather rich. While he says he is watching railcar demand closely, he notes Trinity's "valuation is attractive" given that three of its main businesses "have good growth prospects as a low-cost provider." At minimum, he sees a 20% upside to Trinity shares, noting that that figure is probably "overly conservative." On avg, analysts polled by Thomson Financial see 38% upside to the stock.

“Inside Scoop” section reports that with the co’s shares relatively flat YTD, two directors at Pep Boys (PBY) signaled their confidence in the co's growth potential with about $1.5m in recent purchases. James Mitarotonda purchased over $1.2m in stock through his equity fund Barington Companies Equity Partners. William Leonard purchased 20K shares. Mitarotonda now owns more than 4.5m shares in Pep Boys, or 8.8% of the co's outstanding. Leonard's total of 126,699 shares is less than 1% of the co's shares.

Tuesday, August 28, 2007

Sandisk (NASDAQ:SNDK): OpCo out positive on SNDK

- Oppenheimer is out positive on Sandisk (NASDAQ:SNDK) saying their hannel checks as late as last night indicate that NAND flash supply continues to be tight from the majors Samsung and Hynix. Recent spot price declines have to do with Toshiba pressuring prices in a very low volume NAND spot market. SNDK slid last night on some misplaced concerns with IMFT/Apple. Firm believes some APPL orders might have been rerouted from Micron to the flash majors Samsung/Toshiba. Their checks indicate Apple orders intact and in fact very strong, with new iPod/iPhone refresh/launch on the way. SNDK should see upside to topline, market share gains and gross margins. NAND flash card OEMs as of last night indicating that they will end month of August in NAND flash shortage. Reiterating Buy and $70 PT on SNDK.

OpCo believes SNDK is fundamentally in a very sound position. They believe 1) company has firmly established a cost leadership over competition - Samsung and Hynix over the past several quarters. Micron still remains fairly small to be market mover. Also 2) SNDK's licensing outlook appears more stable and predictable than in the past 4 quarters. Also they believe an insatiable appetite from Apple and a continuing NAND supply shortage is sapping available NAND supply capping Taiwanese flash card OEMs and resulting in 3) market share gains for SNDK.

Notablecalls: Expect to see buy interest in SNDK early on.

Knight Capital Group (NASDAQ:NITE): Comments on 8-K filing

- Banc of America notes that yesterday, they sat down with Knight Capital Group's (NASDAQ:NITE) CEO Tom Joyce and CFO Steve Bisgay. Mgmt was up- front about pressures NITE feels in both core business and Deephaven currently, but continues to believe NITE is well-positioned for long term. Current valuation (10x '08E ex. $3 cash per share) appears to reflect challenges, but given time it may take for cyclical pressures to abate and/or positive elements of story (increased share buyback) to impact EPS, investors likely need patience here given lack of near-term catalysts. Still have long-term positive view on NITE given valuation, but cognizant of near-term challenges ahead.

In 8-k last night, NITE stated that due to mkt conditions/industry practice, that if a Deephaven fund incurs losses in 2H07, NITE would return a portion of 1H07 incentive fees ($68.4m). Based on BAC's meeting, issues seem related to event-driven fund, which along with mkt. neutral fund accounts for 85-90% of AUM. Although unclear what EPS impact will be in the end (depends on extent of losses, performance in 2H07 and compensation offset), they expect NITE to face significant pressure today (and wouldn't be surprised if mkt over-reacts to announcement).

Reducing estimates to take into account Deephaven issues and more cautious outlook on core Global Markets business. 07/08 estimates go to $0.96/$1.15 from $1.06/1.33. Maintains Buy due to valuation.

Notablecalls: I'm sure NITE stock will get hit today following the 8K filing released last night. Yet, it looks like most of the problems are related to Deehaven's event-driven fund that accounts for less than 35% of assets under management. I also think the root of the problem is the recent turmoil in the credit mkt (widening spreads), which makes the problems s-t in nature.

BAC notes that in discussions with management after the 8-K was released, the company stressed that Deephaven was not blowing up, but that the 8-K was to clarify the clawback provision given current market conditions. This seems to confirm my views. Also, due to the recent major market moves of late, NITE appears to be feeling pressure in the broker-dealer business.

BAC's new EPS estimates assume no contribution from Deephaven in H207, which may prove to be pretty conservative. The pressure in the broker-dealer and ALP side remains an unknown variable but I don't see any disasters there. The algorithms have likely underperformed but will rebound eventually as the market becomes more stable again (it has already, btw).

So, all in all I think the stock should become buyable for a bounce today. I'm guessing around recent lows, say $12.50-$13 level.

Monday, August 27, 2007

Ceradyne (NASDAQ:CRDN): MRAP II orders could represent huge upside

- First Albany notes several news articles last week cited U.S. military and Pentagon officials regarding the military's inability to meet its target shipment of mine resistant ambush protected
(MRAP) vehicles in Iraq and Afghanistan for CY07. They believe this situation presents an opportunity for additional players.

According to the firm Ceradyne (NASDAQ:CRDN) has already announced its partnership with Oshkosh Truck and Ideal Innovations (I-3) to develop the armored vehicle BULL. This vehicle has successfully passed limited testing by the U.S. Government and, they believe, is a serious contender for future MRAP II orders and could represent huge upside for CRDN.

While the firm sees significant opportunities with the Army in its MRAP II applications, these are not in their estimates yet. They would point out that just the incremental revenue growth opportunity from China and recent acquisitions could be meaningful in CY08. At current levels, the stock trades at less than 14x conservative CY08 estimates. Firm believes any traction on the BULL could present significant upside to the stock. Reiterates Buy rating.

Notablecalls: I suspect this call is going to generate some interest in CRDN.

Myriad Genetics (NASDAQ:MYGN): Expect pressure today

Piper Jaffray comments on Myriad Genetics (NASDAQ:MYGN) after its Canadian competitor Neurochem Inc (NASDAQ:NRMX) said on Sunday that a Phase III clinical trial had not demonstrated a statistically significant difference in favor of its tramiprosate treatment for Alzheimer's Disease:

- Piper believes shares of MYGN will likely be under pressure today in sympathy for the Phase III Flurizan program. They recommend purchasing Myriad on weakness to invest in the high-growth, profitable Predictive Medicine business ahead of the Flurizan data in mid-08.

Flurizan is in two pivotal Phase III trials for Alzheimer's disease. Firm believes the North American Phase III trial is sufficiently powered to meet the primary endpoint of a 25% decline in ADAS-Cog in mild AD patients.

The study randomized 1,684 mild AD patients to either placebo or 800mg BID of Flurizan on top of standard of care for 18-months. In fact, the company may be able to split the large North American study to count as two pivotal studies for a late 2008 NDA filing. As a reminder Myriad retains 100% ownership of Flurizan, which PJ believes has blockbuster potential with projected peak sales of $2.3 billion by 2015.

Piper reiterates Outperform rating and $54 price target. They value the Predictive Medicine business at $1.13 billion by applying a 6x multiple to FY08E revenues of $188 million and Flurizan at $1.2 billion by applying a 5x multiple to 2015 sales of $2.3 billion discounted back at 35% through mid-'08.

Notablecalls: MYGN is an analyst darling and I'm sure PJ's defense won't be the last. However, I'm somewhat more inclined to short MYGN here early on as I feel the stock's valuation is very strongly tied to Flurizan, the Alzheimer's drug currently in Phase III testing.

PJ values MYGN's Predictive Medicine business at $1.13 billion, meaning Flurizan accounts for the rest of the $700 million (MYGN's mkt cap stands at 1.84 bln) (yes, I'm excluding cash from my calcs). Paying $700 mln for an AD treatment Flurizan promises to be would be dirt cheap, if there were not for the cracks in Flurizan's story. Without going too much into deets here, there are some big cracks in Flurizan's story. Simply put, I don't think Flurizan will show statistically significant results in H1:2008.

There were several big cracks in Alzhemed (NRMX's drug) trials and it ended badly. I think investors will reevaluate the value of Flurizan following the news.

I suspect MYGN becomes buyable for a bounce 3 bucks below Friday's close.

Paperstand (HD, ABK, MBI, AGO)

According to the WSJ, the global credit crunch has begun to put a squeeze on the buyout boom, with banks and private-equity firms forcing Home Depot (HD) to sell its struggling wholesale supply unit for much less than what had been agreed to just 2 mo’s ago. Home Depot's board yesterday agreed to sell Home Depot Supply for $8.5bn to Bain Capital, Carlyle Group and Clayton, Dubilier & Rice, about 18% less than the price hammered out in June. In addition, Home Depot itself will hold about 12.5% of the unit's equity and guarantee some of the debt issued by the banks to finance the acquisition. That's significant because if the banks can't sell the debt in bond mkts, and it sits on their balance sheet, they have to mark down its value, which some can ill-afford to do.

“Heard on the Street” column out saying that as the bond-mkt mess grew this summer, investors dropped shares of the largest insurers. Ambac Financial Group (ABK) took the biggest hit, falling 38% from the beginning of the year. MBIA (MBI) fell 30%, and Assured Guaranty (AGO) slid 16%. "The selloffs from the stock are unprecedented in their speed," said Heather Hunt, of Citi. While the share prices have since rallied from their lows, they remain down for the year and their valuations are right near their historic lows. Investors may have been too hasty in dumping shares this time, some analysts say. These co’s had minimal exposure to subprime residential mortgages. And b/c they typically apply tougher underwriting standards and hold higher-grade portfolios than the rest of the mkt, they should fare better than the overall mkt in terms of losses. That isn't to say shares of these co’s will follow a smooth slope upward. Bond insurers will most likely have to shoulder losses for some mortgage securities, and things may look bad at different periods. But ultimately their payments, which will be spread out over a long period, will be manageable. "The business model of the [bond] insurance co’s is that they worry about the actual payments they're going to make going forward as opposed to mark-to-mkt hits," said Matt Sauer, of Ariel Capital Mgmt. "It's a potential that they're going to sustain some losses...but they're going to weather this."

Sunday, August 26, 2007

Barron's Summary (TMO, RTN, UA, QCOM)

“The Trader” column highlights Thermo Fisher Scientific (TMO), which is beloved by all 11 analysts who cover the stock. Yet Thermo Fisher shares trade more than 20% below the avg analyst tgt, one of the widest such chasms among large stocks. The co has seen profits grow strongly in the medical-research boom and as drug co’s race to find and develop new treatments. Greater emphasis on environmental protection and on safety standards also increases demand for the co's array of tools. This month, TMO also approved plans to buy back $700m more in stock, taking its buyback tally to $1bn. With annual sales topping $9bn, and a dizzying array of products and customers, the co's economic cycle risk is minimized. And with more than half its sales overseas, it's also shielded from any slack in the US economy. An already bullish sell-side chorus normally is a minus, but such a consensus can turn into a plus in times of mkt tumult.

“The Trader” also highlights Raytheon (RTN), whose strong cash stash and low debt inoculate it against credit-mkt ills. Nervousness over the US defense spending outlook and a possible withdrawal from Iraq further provide the opening to stockpile shares. Several catalysts could help Raytheon. Strong foreign demand should help spur continued intl. growth. The world's 5th-largest defense contractor ended a strong 2Q with $3bn in cash and a healthy cash-flow yield of about 7.6%. Cowen analyst Cai von Rumohr expects Raytheon to buy back shares actively, especially on dips, and for the co to expand its repurchase program at the fall board meeting. Defense spending priorities change with Oval Office occupants, but even Democrats are unlikely to do anything more drastic than prune the missile-defense budget. A greater risk to the stock lies in cage-rattling campaign rhetoric. But Raytheon's strong cash flow and buybacks should help support its shares, as does a dividend yield of nearly 2%. Valuation also is moderate; the stock pulled back as much as 12% in the mkt selloff before rebounding. At about 58, it trades at 15.5x forward earnings.

Fund manager picks include C, AXP, DIS, HOG, ODP and GPS.

With generous cash flows available to spend on high-return operations, Comcast (CMCSA) could see its shares climb as high as 40 in the next 12 months.

Banks and investment banks gave private-equity firms low rates on LBO deals that hadn't closed. Now they -- and their shareholders -- may be stuck with this poorly priced debt. Co’s mentioned: C, JPM, GS, MER and MS.

At a recent 17, the stock of Town Sports Intl. (CLUB) is well off its 52-week high of 24. That could be a good buying opportunity. With profits rising briskly, the stock could chin up to 25 within a year.

A recent pullback in the Chattem (CHTT) shares, to the high 50's, offers a buying opportunity. One bull sees the stock approaching 80 in 12 to 18 months.

“Follow Up” section negative on Under Armour (UA), saying that its high valuation heightens execution risk. After eating Nike's lunch in the sweat-busting gear mkt, UA faces far stronger competition as it enters categories such as cross-training shoes. It might also have to invest heavily to push European expansion, possibly pressuring margins. Daniel Scalzi, of Matrix, says that UA's return on capital is slipping, suggesting it's a maturing co, which could make it undeserving of such a high valuation. Goldman Sachs, an underwriter of UA's IPO, rates the stock Neutral, with a 55 price tgt. Says BB&T analyst Eric Tracy: "This is one stock that appears to be priced to perfection, maybe even beyond perfection. The continuation of near-perfect execution and substantial earnings upside will be needed to justify further share appreciation." And, as we know, even Michael Jordan missed a shot once in a while.

“Plugged In” column discusses Qualcomm (QCOM), saying that analysts and investors are extremely bullish on Qualcomm's prospects, particularly because the co is also sweetly positioned to benefit from the coming boom in Third Generation (3G) wireless telephony. Credit Suisse analyst Michael Ounjian is so bullish on "accelerating 3G adoption," he thinks Qualcomm shares should hit 60, despite any drag from patent disputes. What's more, his ests exclude patent-related rev from Nokia, which he deems too unpredictable. Patent settlements and awards are no small matter, they can reach into hundreds of millions of dollars.

Friday, August 24, 2007

Brocade (NASDAQ:BRCD): Bullish on the stock

What's up with Brocade (NASDAQ:BRCD) this morning? The results were in-line or slightly better than pre-announced, with revenue guidance for Q4 tad weaker than consensus. The stock got hit a lil in after hours action but I suspect it stands to appreciate today as the margin guidance was surprisingly good. BRCD management expects to hit tgt margins in Q4 with GM around 55-56% and OM around 19-20%. Yeah, the mid-point of Q4 revenue guidance was below consensus but it should not come as a surprise given the performance at NTAP and QLGC.

Heck, the thing is trading 10-11x EPS here. Also note that according to management, they are keeping Q4 guidance conservative and will step it up if overall macro picture shows signs of improvement.

We have JMP Securities out with an upgrade this AM taking their rating to Outperform from Mkt Perform. Also, Lehman thinks BRCD likely to appreciate as investors show relief that mgmt can deliver higher EPS despite modestly disappointing rev.

I think that if you can pick up this beaten down stock at around close early on, you'll make money on it today.

Gap (NYSE:GPS): Color on quarter

Several firms comment on Gap (NYSE:GPS) after the retailer announced its quarterly results last night and provided updated outlook for the year:

- Banc of America notes GPS maintained their back half estimates after flowing through Q2 EPS, and raised the full- year to $0.90-0.95. Firm expects SG&A to be a major area of opportunity in the
second half, with savings coming from significant headcount reductions (roughly $100M) as well as cutting back on incremental marketing that they ran last Fall. Together these could provide as much as $0.09-0.10 of cushion to the back half.

Inventories came in at down (6)% per square foot, ahead of the plan for down low single digit, and are now expected to be down mid-single digit at the end of Q3 and Q4. Merchandise margins also showed some signs of improvement and were up +170 bps in Q2, and improved at each of the divisions. They fully recognize that its too early to call a turn at this point, but more consistency on this line is certainly encouraging, with easier compares in the second half.

BAC continues to see significant EPS potential in a turnaround scenario and limited downside with numbers stabilizing and the stock trading at just 6.9x trailing EBITDA and just 13.9x '08E P/E ex. cash. As a result, they are sticking with their Buy rating at this time. Tgt is $25.

- Deutsche Bank maintains their Buy rating and $22 tgt saying raising guidance makes GPS a standout considering that most other apparel retailers have been lowering guidance. In addition to milestones that include the first Y-O-Y EPS increase in nearly 3 years, significant gross margin improvement, and SG&A leverage despite a negative comp, GPS’ multiple should get credit for the fact that the company is raising guidance while most of the peers are reducing. Raising: Q3 C07 to $0.20 from $0.18, Q4 C07 to $0.28 from $0.27, C07 to $0.93 from $0.89, C08 to $1.05 from $0.94.

Deutsche believes GPS has limited downside and substantial upside potential, making the risk-reward attractive, particularly compared to decelerating performance for much of the peer group.

- Citigroup says GPS posted solid 2Q07 and raised guidance, but they think EPS can go higher.

2Q07's inventory PSF at -6% was better than an expected -LSD, a bullish signal for 3Q07 merchandise margin, although we conservatively estimate flat 3Q GM. Further, the firm applauds the -MSD 2H07 inventory guidance.

Stabilizing margins on strong inventory control and cost reductions yield improving free cash flow (yield +4-5%) and share repo's (new $1.5bil authz'n). New leadership (CEO & brand Presidents) should positively impact customer focus, store experience and merchandise execution. A potential merchandising turnaround would yield further upside to firm's above consensus estimates.

Notablecalls: Solid results from GPS. No question about it. I was surprised by the gross margin performance and based on comments provided by Glenn Murphy (the new CEO) I think there will be upside to current EPS guidance. New CEO's rarely want to be overly optimistic with guidance.

I think GPS can move above the $18 level today.

Paperstand (HD, TEL, COV, DFS, FRPT, THC)

According to the WSJ, Home Depot (HD) last night was close to accepting about $1.2bn less for its wholesale distribution business in the sale to three private-equity firms. But there were still substantial doubts about whether the deal would close before a deadline yesterday night, as three major banks continued to balk over the financing. The situation was becoming increasingly ugly, people familiar with the matter said, with some of the most senior figures on Wall St. trying to manage their exposure to a deal beset by twin crises in both the housing and credit mkts.

“Heard on the Street” column discusses spinoffs. Savvy investors have been playing this game for years, snapping up spinoffs after their share prices fall. Today, with investors valuing safety above potential returns, the current crop of spinoffs has been beaten up even more than usual, and that has created some bargains. "Given the timing of these spinoffs during this mkt volatility, the selloff has been more severe," said Michael Winter, of Otter Creek Mgmt. Among them, Tyco Electronics (TEL), Covidien (COV) and Discovery Financial (DFS). "You often see these spinoffs overlooked or shunned by the mkt b/c they're underfollowed by Wall St., and often they've got great business models," Mr. Winter says. "As an investor who doesn't really care about whether a co is a large cap or a midcap, you can buy them cheap."

Barron’s Online discusses Force Protection (FRPT), saying that since delivering the first MRAP vehicles to Iraq in ‘03, Force Protection has sparked a burgeoning program that the DoD now calls its "highest acquisition priority." Despite the military's push for as many vehicles as it can get, Force Protection stock looks attractive thanks to investors who have nervously sold off shares as competitors sought a piece of its lucrative mkt. Force Protection has the only battle-tested vehicles in Iraq and Afghanistan, with new entrants just beginning to deliver MRAP trucks under the Pentagon's program. "Force Protection defined the mkt in the US," Thomas Weisel analyst David Gremmels says. If the military has its way, the US govt will spend over $10bn on MRAPs between this year and next. And industry observers say ‘08 spending alone could ultimately approach $8-12bn, as the armed services look to order as many as 23K vehicles. Lawrence Korb, of Center for American Progress and an assistant secretary of defense from ‘81-‘85, calls the program's rapid growth "unprecedented." "Usually it takes a decade for something like this to happen," he says. "There is no member of Congress who opposes increased funding for this program," says SunTrust analyst Chris Donaghey, "even if they're opposed to our presence in Iraq."

“Inside Scoop” section reports that trouble in Florida has cast a dark shadow over Tenet Healthcare (THC), but now significant insider buying may indicate that the hospital operator's rehabilitation is going well. Over the past two days, CEO and President Trevor Fetter and independent director J. McDonald Williams spent an aggregate $486K to buy 129K shares on the open mkt. Although the dollar amount looks small, the number of shares purchased make ‘07 the largest buying year since ’99. Ben Silverman, of, says, "I think these guys are trying to call a bottom" to their stocks, but he doesn't think anyone is really bullish about this space right now. It's more of a valuation question. It's worth taking a look at Tenet, Silverman says, because "even though we saw more aggressive buying elsewhere, [Tenet's] cash flow stands out against the pack."

Thursday, August 23, 2007

Cooper (NYSE:COO): Jeffco's cautious

- Jefferies is out with a strongly worded call on Cooper (NYSE:COO) initiating coverage with a Hold and $48 tgt saying that contrary to the Street, they do not consider COO a realistic near-term takeout candidate. They also believe the Street has adopted an overly optimistic stance on the U.S. Biofinity launch and COO's ability to spur a meaningful shift in the U.S. lens market toward daily disposables.

Firm thinks COO's operational challenges will prevent a takeout in the near term. Meanwhile, they believe COO is vulnerable to significant market share erosion, particularly in torics, because it lacks a widely available SiH lens. COO has struggled to ramp its manufacturing for the Biofinity SiH lens, resulting in a year-plus delay in the full-scale U.S. launch of the spheres. While COO says it is on track to meet its revised capacity goals for Biofinity spheres by H2:07 — a view the Street appears to accept wholeheartedly — the company has offered few metrics to support this claim, leaving room for a possible negative surprise.

In recent months, COO has stressed the growth opportunity associated with daily disposables, which presently account for less than 10% of the U.S. market. Although this opportunity seems attractive in theory, COO faces a tough marketing environment with JNJ and ACL, which have proven marketing expertise and a shared incentive to prevent a shift toward dailies. In addition, Jeffco believes the significant cost disadvantage to the patient associated with daily disposables will hinder adoption levels.

Firm considers the stock's risk/reward tradeoff to be unattractive at current levels and is waiting for a better entry point.

Notablecalls: COO is trading couple of bucks above Jeffco's $48 tgt and very near to the analyst median of $54. The logic behind the call looks sound and I suspect will generate some selling interest among current holders. Technically...the stock doesn't look too strong either.

Verigy (NASDAQ:VRGY): Primed for a pullback?

Couple of firms comment on Verigy (NASDAQ:VRGY) after the Automated Test Equipment player reported its FQ3 results last night:

- Banc of America notes Verigy's (NASDAQ:VRGY) October guidance was modestly better than their estimate due to SoC strength, while July Q bookings came in lighter as memory softness impacted orders. More importantly, the 'beat and raise' story of the last few quarters was absent.

While the stock could be under pressure near term due to lack of positive catalysts, the firm thinks this presents a LT buying opportunity. They think VRGY's product strength has enabled them to gain share in both the SoC and memory markets.

While the topic of a share buy-back has been brought about numerous times, management was non-committal on the amount or timing. BAC believes the right amount of cash to run the business is about $100-$140M. Firm thinks VRGY could announce a share buy-back after the end of their fiscal year and they expect it to be in the $100-$150M range. Company has roughly 340,000 share holders due to sale of Agilent's stake to Agilent shareholders last year and the buyback could help consolidate the shareholder base.

Slightly lowering their FY08 GAAP estimate from $2.14 to $2.07. Reiterates Buy while taking tgt to $32 from $34.

- Cowen notes VRGY reported FQ3 consistent with their "in -line" pre-announcement a week ago prompted by a free fall in the shares that caused many to ask if something was wrong fundamentally. Shares (pressured by forced fund redemptions) jumped after the announcement. FQ4 guidance was in line however mgmt. did indicate that memory test demand is weakening consistent with reports from others. Especially given lumpy order patterns by memory mfgs. visibility is very low.

VRGY continues to execute well in a choppy environment that may get even more challenging as it appears that demand for memory testers is beginning to weaken. FQ4 looks relatively stable on the memory side but mgmt acknowledges that visibility is very low especially given the speed with which customers often change their minds. While the firm is mindful of better flash pricing and new applications for NAND etc., they remain somewhat cautious on memory ATE demand in the ST.

Notablecalls: I was surprised to see VRGY down only $0.50 in after hours action given the lack of upside on guidance and bookings. Note that VRGY has been a serial beater in the past. I think the stock is primed for a fall.

Paperstand (WB, DGX, HUN)

The WSJ’s “Heard on the Street“ column discusses Wachovia (WB), which has been punished for bulking up on exotic adjustable-rate home loans at the height of the mkt. Still, investors should be smiling, because Wachovia could take advantage of the downturn to build its lending business. And at the current valuation, the bank's shares now trade at a 12-mo trailing P/E of 10, a 10-y low and a discount to its peers, means investors are expecting serious losses from its mortgages, which are unlikely to happen. "It's cheap," says banking analyst John McDonald of BofA, who calls Wachovia a Buy.

Barron’s Online discusses Quest Diagnostics (DGX), whose shares are down 14.6% from a record close last August. But thanks to new business, an acquisition, cost cutting and growing demand for sophisticated medical tests, Quest may be a good prescription for nervous investors. Quest still generates lots of cash. And after falling this year, rev and profits should start growing again in ‘08. Plus, if the overall mkt remains shaky, a defensive play such as Quest looks all the more appealing, despite a slight premium to the broader mkt. "It's a quality business that throws off a good amount of cash, and the numbers are getting better," says Robert Sellar, of Aberdeen Asset Mgmt.

“Inside Scoop” section highlights Huntsman (HUN), which is set to be acquired by Hexion Specialty Chemicals, but a wide disparity between the takeover price and the mkt is sparking insiders into a merger-arbitrage play. Jon Huntsman Sr. serves as Chmn of the co he formed in ‘94 but has roots dating back to the ‘70s. His 2nd oldest son, Peter, currently serves as CEO, President and Director. Together, they doled out $15.4m to purchase 637K shares on the open mkt within the past two weeks. Ben Silverman, of, says it looks like father and son "are playing the spread here on the arbitrage."

Wednesday, August 22, 2007

Analog Devices Inc (NYSE:ADI): Color on quarter

Couple of firms comment on Analog Devices Inc (NYSE:ADI) after the co whose chips translate real-world signals like pressure, temperature and sound into digital signals reported its Q3 results last night:

- Banc of America notes Oct. qtr sales are forecasted to grow 2% Q/Q to $695m at the mid-pt of guidance - in line with Street expectations. They believe the outlook reflects some conservatism, given strength in orders throughout the qtr. (+7% Q/Q), the higher backlog (+2%), a healthy book-to-bill (1.05), and lean channel inventory. Importantly, ADI's commentary is also suggestive of the persistence of a favorable backdrop for the chip group.

An unfavorable mix and a goal to further reduce inventory (via lower utilization) is preventing near-term GM expansion. This trend is however likely to reverse in Q1 as a richer mix of higher margin industrial relative to consumer, an improvement to GMs in the MEMS business (via outsourcing of production), and an increase in utilization (inventory rebuild) will prove accretive to GMs. In addition the firm believes that higher sales, coupled with tight op-ex control, a potential sale of the wireless DSP business, and aggressive stock buybacks will help drive earnings leverage (albeit at a slower than ideal pace). Maintains Buy and $44 tgt.

- Morgan Stanley thinks bears can pick on the lack of gross margin expansion in the FQ4 guidance and flat to up 4% Q/Q revenue guidance. However positives include 7% Q/Q bookings growth, 6% Q/Q growth in power management (an emerging business for ADI), very positive secular trends in MEMS, 1.8% dividend yield, 5.2% of shares repurchased with another $1B authorized, and firm's continued confidence management is continuing to hone its product focus that should drive improved earnings power (which should be demonstrated with the anticipated near term divestiture of their lower margin wireless handset business).

With expectation the sale of the wireless handset business is very near (high probability in next 3 months) we could see the stock move up into the $39-$41 range (depending on the sale price and what is included) in the near term. MSCO's above consensus F2008 estimates are unchanged and their 12-18 month stock price target remains $48 with a bull case target of $60. Maintains Overweight.

Notablecalls: ADI is among the best names in the space with healthy cash flow and a very diversified customer base. The stock was down $0.50 in after hours action due to lack of GM upside in guidance. The analysts are making a solid case about things getting gradually better in H2 and that should help the stock. Also note that MSCO sounds very confident regarding the sale of the wireless business. This may mean the analyst at MSCO knows something the rest of us don't. Deals like this one usually get announced some weeks after the quarterlies.

With the stock down in after hours and the market looking very positive this AM, I think buying ADI tad below the close makes sense for a quick trade.

Paperstand (TD Ameritrade and E*Trade in talks)

According to the WSJ, TD Ameritrade Holding (AMTD) and E*Trade Financial (ETFC) are holding merger discussions. A merger of the 2 online brokers would create a dominant player in what has been a highly fragmented industry, with dozens of smaller co’s battling for mkt share. As a result, it could reduce some of the fierce competition that has benefited consumers by driving down the cost of online trading but has squeezed the industry by chipping away at its profit margins. As of the end of June, E*Trade had 4.7m brokerage and banking accounts, TD Ameritrade had 6.3m such accounts. A spokeswoman for E*Trade said the firm's management team has consistently stated it believes there is "tremendous value in consolidation that aligns business strategy and operational synergies and will do what is in the best interest of its customers." A TD Ameritrade spokeswoman said, "We have talked and continue to talk to peers in the industry."

“Heard on the Street” column out saying that insurers’ stocks starting to look cheap. Insurance stocks have been hit hard by the mortgage-mkt tumult, and that has created opportunities for investors willing to overlook some dings and scratches in co’s that should generate healthy profits over the long term. Among the stocks trading at attractive prices are Genworth (GNW), Allstate (ALL), Hartford Financial (HIG), Chubb (CB) and ACE (ACE). True, some of these stocks could be hurt one way or another by subprime mortgages gone bad, but any losses could be minor compared with their overall profits. Genworth sells mortgage insurance, which puts the co on the hook to make good on home loans if borrowers default. Genworth and the other insurers hold mortgage securities in their investment portfolios, and some include subprime loans. "It's got the mortgage word in it, and that's a bad word these days," says Andrew Kligerman, ofUBS. Genworth has taken the biggest hit of the 5 co’s, and is now down about 20% from its high price for the year. Mr. Kligerman says the stock is now "dirt cheap," and earlier this month he upgraded it to a Buy rating.

The WSJ’s “Inside Track” section reports that despite the mkts' concern that tightening access to easy credit could derail LBOs, two Avaya (AV) insiders appear confident that their co's planned acquisition by private-equity firms will materialize. Francis M. Scricco, Avaya's sen. VP of manufacturing, logistics and procurement, and director Richard F. Wallman recently disclosed buying a total of $1.4m worth of the co's stock, even as Avaya's shares traded well below the $17.50-a-share price that a private-equity group has agreed to pay for the co.

Barron’s Online discusses South Jersey Industries (SJI), which is picking up new customers at a faster clip than the national avg. It's the co's innovative approach to providing on-site energy to Borgata Hotel Casino & Spa that has vaulted this local-utility operator onto the national scene. The co is in the midst of developing an even bigger facility to meet the heating and cooling demands for Echelon Place, a Las Vegas Strip resort scheduled to open in 2010. The stock's 3% dividend yield offers moderate stability, but its low payout, which falls below the co's minimum tgt of 50% of earnings, means there is considerable room for dividend growth. William H. Reaves, of WH Reaves, calls South Jersey "a fine little co" that is moving to a stage that will make it eligible as a holding for larger investment funds once it firmly stays above the $1bn mkt-cap level. Taking a long-term view, his firm has been an investor in South Jersey for several years and is the utility's 3rd-largest shareholder. Reaves says, "We think mgmt is exceptional and they just know how to grow value" with fiscal discipline and strong regulatory relationships.

“Inside Scoop” section reports that Jarden (JAH) insiders have bought more than $3.3m in the co's stock since July 31, even with the consumer-products co's shares falling along the way. Chmn and CEO Martin Franklin most recently bought shares on Fri, when he paid $465K for 15K shares. In total, he has spent nearly $2m on Jarden stock over the last month. Meanwhile, Jarden Vice Chmn and CFO Ian Ashken bought stock on two occasions in the last month, spending a total of $815K.

Tuesday, August 21, 2007

Raytheon (NYSE:RTN): Cowen's best idea

- Cowen is out with a call saying Raytheon (NYSE:RTN) is their best idea for the currently volatile equity market based on:

1) immunity to credit market turmoil (no commercial exposure, net cash position) and;

2) projected 15%+ EPS growth through 2009 from rising foreign sales, share buyback, and easing pension expense; and there's up to 35c of upside to Cowen's above-consensus 2009 EPS projection of $4.65 from more aggressive buyback, mix- related margin upside, and higher pension returns.

RTN also should offer more consistent "organic" sales growth than peers of @ 6% than peers (foreign growth; electronics hold up in weapons downturns) and less headline risk than platform builders from a critical Democratic Congress. Nevertheless, RTN commands a below-average 40% net buy ratio and sells for a peer-low 13.0x 2008 "economic" P/E, with a healthy 7.6% cash flow yield. This gives it potential to outperform the market by 15%+ in 6-12 months. Possible triggers include:

1) new business wins (mainly international)
2) strong Q3 results/share repurchase, and
3) expanded buyback authorization at RTN's fall board meeting.

Bolstered Stock Repurchase Potential. RTN exited Q2 with a peer-hi $3B in cash, $1.6B+ in H2 cash flow, & $611MM remaining repurchase authorization. Given it bought 6MM shares in June @ $55.21/sh., it's apt to be an active buyer in Q3, particularly on dips. RTN's working capital/tax initiatives could bolster cash flow to enable additional buyback.

Notablecalls: RTN may indeed represent a safe haven here and the almost 8% cash flow yield makes it very buyable. The chart looks like the stock may have 1-2 bucks of upside in it over the next couple of days.

Paperstand (CFC, USG, OWW)

The WSJ’s “Heard on the Street“ column out saying that these are happy days for Warren Buffett. "I can spend money faster than Imelda Marcos when things are right," he says. For the past 3 years, Mr. Buffett's traditional bargain-hunting investment strategy has been partly stymied as debt-fueled private-equity funds and hedge funds drove asset prices out of his value-investing orbit. The result: Today he's sitting on a war chest of nearly $50bn in cash. Some investors speculate Berkshire Hathaway (BRKA) could be a buyer for parts of mortgage lender Countrywide (CFC). Berkshire could also be taking advantage of cheaper stock prices in co’s he already owns. For example, Berkshire bought shares of USG (USG).

Barron’s Online interviewed fund manager top holdings include AMTY, BDSI, BZP, CNU, NTRZ, PME, PNCKE, SMTK, UGNE and VIDE.

“Inside Scoop” section reports that Orbitz Worldwide’s (OWW) insiders are buying shares. In total, 5 insiders bought $592K in stock. Orbitz President and CEO Steven Barnhart led the contingent of officers and directors with a purchase of 25K shares for $246K.

Sunday, August 19, 2007

Barron's Summary (TSCM, ANF, CFC, MI, CAB, EMC, NBR, WM, MTN, T, JSDA, MELI)

Barron’s cover discusses Jim Cramer, of (TSCM), and his stock picks that seem to underperform. Article is highly entertaining, so I decided to post it fully. Read here.

An interview with fund manager highlighted, only US listed stock he likes in ANF.

It's time to peruse the financial sector because inexpensive shares are plentiful. Battered stocks like Countrywide (CFC) and MGIC (MTG) could be bargains. Thrifts could be takeover targets. Other mentioned stocks include CIT, GNW, COF, ABK, MBI, BSC, JPM, TRV, WB, WM, MET, ETFC and LEH.

The shares of Marshall&Ilsley (MI) look like a steal at around 44, and could be worth as much as 55. In M&I shareholders get a bank with solid prospects and a slice of a potentially hot tech stock.

The Cabela’s (CAB) stock, which took a thumping during the recent credit-market squeeze, could climb 30% in the next year as store openings, big money makers, continue apace.

EMC (EMC) will benefit directly from VMware's (VMW) rising profits, and will also enjoy gains in the sale of storage-area networks, thanks to virtualization's growth. It could be a $22-23 stock.

Nabors' (NBR) shares look enticing. Bulls think that the stock, now below 30, ultimately could hit 50. A big wild card: the possibility that it eventually will be an acquisition target.

“The Trader” column discusses WaMu (WM), saying that the co will presumably pick up share in a chastened mortgage mkt with healthier lending standards when the dust settles. WaMu also has the liquidity to absorb newly originated loans onto its balance sheet, having pared its loan portfolio by some $28bn and increased core deposits by $5.2bn. A 28% slide this year had sent shares below 33 last week and lifted the co's yield toward 7%. "While I would not call the dividend yield well protected, I see no reason that it would be cut," notes Punk Ziegel analyst Richard Bove. If this holds true, investors might make more money on the WaMu yield than from the overall mkt's gain this year.

“The Trader” also highlights Vail Resorts (MTN), whose shares have skidded nearly 20% since July peak. But Vail has many things going for it. For a start, it is a standout among peers for generating free cash flow. Even in a bad winter, its resorts generate more than $100m in FCF. That figure could rise to $140m in ‘08. That's not the only reason that Rochdale Securities analyst Hayley Wolff likes the stock. Pricing power is strong, and earnings comparisons with prior warm winters have grown easier. The co's private clubs also are cash gems. Full memberships fetch $250K plus dues, with Vail pocketing the cash up front. It currently has $2.40 per share in cash deposits on its books, and that could rise to nearly $7 once two other clubs are completed. Its real-estate unit also is moving into "the sweet spot" of a development cycle, and could soon start returning cash to investors, Wolff notes. In addition, the mkt value of its land is understated on its books. Unlike most hotels or casinos, Vail's resorts straddle choice locations, and a limited supply of agreeable mountains pose daunting entry barriers for rivals. Despite '07's snow deficit, and a projected 1% decline in skier visits, Rochdale expects Vail Resorts' rev to expand 7% and its EBITDA to increase 16%. Friday's bounce took shares to 53, still near the low end of its historical range between 6-9x ‘08 EBITDA. Rochdale's Wolff reckoned the stock could be worth about 70.

The merger of AT&T (T) and BellSouth, now 6 mo’s old, has provided ample opportunity for the co to find cost savings and boost earnings. Still on the to-do list: increasing the top line to ensure long-term organic growth. The savings so far have kept shareholders happy. In the 2Q, AT&T reported 2% pro forma rev growth, but a 21% increase in adjusted EPS, thanks in part to $1.9bn of cost trims and a $3.9bn stock buyback. We'd counter that the current stock price already reflects the $3bn of merger savings AT&T will reap this year, followed by the $5bn planned for '08. "We don't see the upside in the stock," says Sushil Wagle, of J&W Seligman.

Jones Soda (JSDA) made a name for itself with funky drinks such as WhoopAss, but lately, its investors are getting whupped. And Jones could keep falling, as the soda-pop marketer tries to make more inroads into the premium canned-soda business. In June, Starbux (SBUX) dropped Jones sodas. Then, this month, Jones reported underwhelming 2Q results, its 3rd disappointment in 4 qrtrs, as concentrate case sales of Jones Pure Cane Soda came in well below expectations. Mgmt sliced its sales-growth forecast for ‘07 to 30-40% growth, from 50%. Jones still sells for an ultra-rich 125x '07 ests of 8c a share. This seems too high a price to pay for a niche co that is having problems executing on its rollout strategy.

“Technology Trader” discusses MercadoLibre (MELI), saying that there are red flags aplenty. Most of the IPO stock came from selling holders, including all the senior execs. A noncompete agreement with eBay has expired; eBay could set up shop in Latin America tomorrow. Meanwhile, the stock, which came at 18, is now at 31, giving MercadoLibre a mkt cap of more than $1.4bn. The co had ‘06 rev of $52m. Let's say it grows 50% this year and does $80m; that gives you a stock at 17x rev. In contrast, eBay trades for 6x rev. Boost the multiple to 8x for faster growth, and you still get a stock that could drop in half.

Thursday, August 16, 2007

Gone fishing

I'm off for a long weekend. Posting will resume on Monday.


Paperstand (KFT, CHRT, BZH, EMC, VMW, C, CFC)

According to the WSJ, Kraft (KFT) is in the early stages of finding a buyer for its Post cereals business, the No. 3 US cereal maker by sales after Kellogg and General Mills. A logical bidder would be PepsiCo (PEP). Post may fetch as much as $3bn. Kraft has sent financial information on the unit to potential bidders and if the unit is successfully auctioned, a deal could be signed later this year.

According to the WSJ, Charter Comm.'s (CHRT) controlling shareholder, Paul Allen, is considering a wide range of options for the co, including a privatization and sale. Mr. Allen, who controls a 51.7% stake in Charter and 91% of the voting power, said in a regulatory filing that he may pursue a privatization in which he would acquire all of the stock he doesn't own. At Charter's current stock price, that would amount to about $1bn. The filing also said he may look at a recapitalization or restructuring to reduce Charter's leverage. In addition, it said he may consider "other extraordinary corporate transactions, such as mergers or reorganization or sales of material assets."

"Heard on the Street" section discusses Beazer Homes (BZH), whose shares have been on a wild ride this summer as investors tussle over the outlook for the co. Those betting against Beazer now might have the upper hand. Its recent disclosure of accounting irregularities is expected to accelerate a months-long govt inquiry that began in May. Late last week, Beazer said its former chief accounting officer improperly recorded "reserves and other accrued liabilities." The disclosure is expected to bolster an investigation by the SEC related to whether Beazer violated securities laws. While home-builder stocks have been hurt by the turmoil in the housing and credit markets, Beazer's share price has been hurt more than most. In addition to the investigations, the co has been beset with rumors that it was going to file for bankruptcy-court protection. Beazer has called the rumors "scurrilous" and "unfounded." One possible focus of the SEC's inquiry is whether Beazer was properly disclosing its mortgage practices to investors. Accounting irregularities in the co's books, however, can be easier for investigators to pursue. "So far, everything suggests the mortgage issues were a local problem," says Robert Curran, of Fitch Ratings, "whereas the accounting issue appears to be a corporatewide problem." He said the disclosure raises the possibility Beazer may have to restate prior earnings or take a charge when an eroding housing mkt has already battered the builder's profits.

Barron's Online out saying that investors buying EMC (EMC) on the dip could get a cool 40% discount to VMware's (VMW) hot shares, effectively buying VMware's 84c per share in earnings next year at a P/E multiple of just 42x vs the 67x multiple the mkt is paying for VMware shares outright. EMC owns 86% of VMWare. Throw in the prospect of 17% earnings growth for the rest of EMC, excluding VMware, and there could be 20% or more upside to EMC stock over the next 12 mo's. "We bought more EMC yesterday; we couldn't believe it sold off," says Christopher Baggini, of Gartmore Funds.

"Inside Scoop" section reports that hedge fund manager Eddie Lampert boosted his stake in Citigroup (C) amid mounting credit woes that have taken the floor out from beneath the financial sector. By the end of the 2Q, Lampert's hedge fund, ESL Investments, raised its stake in Citigroup to 24.8m shares from the 15.2m held as of March 31. Lampert started buying Citigroup shares through an affiliated fund called RBS Partners in early '06 and has accumulated 10.9m shares by the end of the year. Ben Silverman, of, says Lampert apparently "sees value to be unlocked in that name over the long term."

NY Post reports that the mortgage industry meltdown may be about to claim its biggest victim yet. Countrywide Financial (CFC), the nation's No. 1 mortgage lender, appears headed for a financial crisis as speculation swirled on Wall St. yesterday that the co is having trouble finding buyers for the ultra-short-term corporate debt it uses to fund its daily lending operations. Adding to the mkt's jitters about Countrywide's liquidity, a Merrill Lynch analyst yesterday cut his rating on the co's shares from Buy to Sell, warning the co could be headed for bankruptcy if the cracks in the mortgage industry continue to deepen. "If enough financial pressure is placed on Countrywide or if the mkt loses confidence in its ability to function properly, then the model can break, leading to an effective insolvency," Kenneth Bruce, the Merrill analyst, wrote in the report urging investors to dump their shares. Only 3 days ago, Bruce told investors they should consider buying the shares. "We have quickly re-assessed our position . . . b/c the financial mkt situation appears to be getting worse at an accelerating pace," Bruce said yesterday.

Hedge-fund managers have no shame at all...

Wednesday, August 15, 2007

Autodesk (NASDAQ:ADSK): Cautious call from Morgan Stanley

- Morgan Stanley is out with a cautious call on Autodesk (NASDAQ:ADSK) saying they are picking up softness in the channel overall that may weigh on ADSK results expected this Thursday. With a few positive checks to help keep things from looking too stormy, feedback indicating sales quotas a stretch and a few resellers frustrated with shrinking incentives, the firm believes that the building front may catch up with the company - if not this quarter, perhaps the second half of the year for which a healthy ramp (+15% Y/Y) is expected. The stock currently trades in-line with its peers using multiples from a conservative model, but any softness either in actual results or guidance could weigh on the shares especially given ADSK's record of better growth and expectations for the same.

Other vendors in the segment experienced slowness this quarter (see PMTC and Dassault's SolidWorks segment) and MSCO believes ADSK may also be seeing pressure based on channel feedback hence our focus on sales inertia.

Last Q's results indicated momentum in certain areas but full-year guidance left us wondering if it was on the optimistic side against the backdrop of some potentially weakening core metrics. ADSK has been able to leverage subscriptions and 3D to drive overall revenue growth but declining new seat adds, slowing subscription penetration and sluggish deferred revenue growth may point to signs of a storm ahead.

Notablecalls: I think this call is actionable from a trading perspective. Recall that PMTC reported solid Q1 results and provided strong guidance only to disappoint investors couple of months later. While admittedly PMTC's negative pre-announcement was due to weak execution, one can't help to wonder if it was the only reason. Maybe the CAD market is indeed slowing? Like ADSK, PMTC's top line growth had been decelerating over the last year.

Also, recents checks done by other firms show that some large Autodesk resellers have indicated that the loss of volume discounts on AutoCAD has hurt their business. Some mentioned that they tried to put more sales effort behind 3D products, but that the market for 3D is simply going to develop and grow at its own pace. In other words, changing incentive compensation and changed sales force behavior could not alter the pace of 3D adoption beyond its own chosen speed.

I know there's a fair chance ADSK will prove the doubters wrong but given the nervous shoot-first-ask-questions-later type of market we are in I think ADSK stock will take a hit today.

Paperstand (DTV, GXP, GPS)

The WSJ reports that DirecTV (DTV) is expected to announce a wholesale agreement today with Current Group to provide high-speed Internet service over electric-power lines. Under the agreement, DirecTV will market a bundled package of Current's broadband and Voip services under the DirecTV brand.

According to the WSJ, Berkshire Hathaway (BRKA) bought a small stake in Dow Jones (DJ) in the 2Q, during Rupert Murdoch's bid to win ownership of the co. Berkshire's stake comes as a surprise because Berkshire's Chmn Warren Buffett has publicly voiced concerns in recent years about the newspaper-publishing industry and the challenges it faces from the Internet and other technology.

Federal authorities are preparing to file criminal charges against nearly a dozen individuals in connection to a years-long investigation into improper stock lending. Federal prosecutors in Brooklyn, NY, and the SEC are investigating whether current or former employees at Janney Montgomery, Morgan Stanley (MS) and other financial institutions committed fraud by taking kickbacks or engaging in self-dealing while arranging stock-lending agreements. The investigation has centered on conduct involving mostly lower-level employees across Wall Street. The cases involve "finders" or firms that act as intermediaries and assist borrowers and lenders in locating stock to borrow. The stock-lending mkt was once a backwater of Wall St., but has grown into a $10bn industry, fueled by the increased use of short-selling. For years, this mkt had been under the radar, which authorities believe created holes in compliance and an opportunity for fraud.

According to the WSJ, many investors have run for the exits in recent weeks, but insiders are taking the opposite route, displaying their most bullish behavior in several years. As stock mkts have tumbled, co execs and directors have reacted by increasing the level of their share purchases and decreasing the pace of their sales. Taken together, the pattern suggests co insiders believe that mkt conditions are set to improve, said Michael Painchaud, of Market Profile Theorems. "It's overwhelming, really, and I think it only bodes well for the mkt going forward," Mr. Painchaud said. Co’s mentioned include HMA, MYL, NT and YHOO.

Barron’s Online discusses Great Plains Energy (GXP), saying that the pullback in shares makes it among the cheapest stocks in its sector. The stock is expected to gain around 15% over the next year. New rate hikes in its regulated-utility mkts in Missouri and Kansas expected by the end of the year and the close of its acquisition next year of Aquila should offer greater earnings visibility and confidence in the stock. In the longer term, synergies from integrating Aquila, the 2010 opening of the Missouri coal plant, and the completion of environmental upgrades at existing plants will significantly boost cash flow as the projects are completed. "We are getting paid well for waiting for the earnings to come through, and also the relatively high dividend gives it [the stock] support in volatile mkts," says Barry Abramson, of Gamco Investors. "We like that they are significantly expanding their utility rate base with the construction of this new larger power plant" to expand their core business, he says.

According to the “Inside Scoop” section, Gap’s (GPS) new Chmn and CEO Glenn Murphy has made the retailer's largest insider purchase in at least 4 years. Murphy bought 150K shares for $2.3m Fri. Ben Silverman, of, says Murphy's purchase is a "confidence-inspiring move" but quickly adds, "I wouldn't classify it as very actionable."

Tuesday, August 14, 2007

eTelecare Global (NASDAQ ADS:ETEL): Bounce candidate

Couple of firms comment on eTelecare Global (NASDAQ ADS:ETEL) after the provider of outsourced customer care services surprised the investment community just two days after its earnings call with news that it has lost the Dell consumer technical support program, one of two programs that it provides for Dell.

- JMP Securities reits their Outperform rating saying blamed on Dell's volume cutbacks, the
program was to contribute approximately $32 million of revenue in 2007. Operations managers learned of the development on August 7th and failed to notify the company's CEO until late Friday.

A consumer technical support program for the XPS line was being cancelled due to Dell's reduction to its forecasted volumes. eTelecare commented that Dell said it was entirely volume and demand related and not attributable to any quality issues with eTelecare. The company's other program with Dell is for business client technical support and is in an entirely different corner of Dell. According to JMP the company's CEO was extremely forthcoming about the sequence of events, the consequences, and what actions have been taken to ensure it doesn't happen again.

Firm's price target is reduced from $19 to $16, which corresponds to about 9x Enterprise Value to 2008 EBITDA. The price target reduction not only reflects a 10% lower estimate next year but also multiple contraction more in line with peer group averages as the company's strong growth is likely to be discounted in the wake of an operational and controls mishap.

- Baird also maintains their Outperform rating saying that as majority of the work was US-based, margins for the tech support program were lower than the company's overall corporate margins. Importantly, they note that the reduced guidance does not include any redeployment of reps from this program. Firm is reducing their 2007E EPS to $0.67 from $0.79, and 2008E EPS to $0.75 from $0.96. They assume 2008E revenue of $266 million (+9%); management considers $300 million+ possible.

Barid is reducing their price target to $14 from $19, which reflects 16X prospective 2009 EPS and 8X prospective 2009 EBITDA. They consider the stock good value for higher-risk investors around $11-12 (about 15X 2008E EPS), given expectation of underlying revenue growth (ex-Dell loss) of 15%+ over the next few years.

Notablecalls: Oh man, what a mess. This must have been one of the more ebarrassing conf calls I've heard for quite a while. Yet, as JMP notes the company's CEO was extremely forthcoming in explaining the turn of events, which is good.

Looking at the thing I strongly feel ETEL may be a bounce candidate here. Here are the reasons:

- The offshore Business Process Outsourcing (BPO) industry is growing at an impressive rate and ETEL represents one of the best players out there. ETEL is a niche provider of complex voice-based services via an onshore/offshore delivery model. Most of their call-centers are located in the Philippines with the rest in the US. Business in the Philippines is growing at a healthy 30-40% clip and has better margins than in the US.

- The loss of the Dell program was not due to ETEL's lack of performance but due to Dell's reduction to its forecasted volumes.

- Assuming the stock will open around $11, it's trading around 15x 2008 EPS, which is not much considering the growth and potential. Just take a look at the ratesat which ETEL has been growing at over the past years. Losing the Dell program is a bump in the road, in my opinion.

- There will be new contract wins given its strong pipeline of new clients.

So, at around $11 I find ETEL actionable for a bounce.

Risks include: Upcoming IPO lock-up mid-Sept & expected margin pressure from the reps needed to be redeployed.

Avon Products (NYSE:AVP): Actionable call from GSCO

- Goldman Sachs is adding Avon Products (NYSE:AVP) to the Americas Conviction Buy List to take advantage of recent weakness. The firm is very confident in their $2.20 2008E (ex-charges) since cost savings should accelerate next year. 2Q (reported July 31) was weaker than street expectations primarily due to management's bias to spend now for earnings acceleration in 2008 and 2009. The risk/reward for AVP is very attractive at currently in their view, with 32% potential upside, and although investments in advertising and RVP are likely to remain high near term, margins should recover over the coming quarters. Plus, sales growth has already begun to benefit from the spending.

GSCO believes the earnings recovery that they forecast in 2008 and 2009 will be the catalyst for the shares to move higher. Once investors gain comfort that management does not plan further major increases in advertising and RVP, they should regain comfort with estimates, and the firm believes the stock will look very attractive. Also, management significantly stepped up share repurchases in 2Q, which they believe could continue over the coming quarters and support the shares. Tgt remains at $45.

Notablecalls: AVP stock is down over 10% since missing consensus expectations two weeks ago. Avon spent an additional $71 million in the quarter toward ads and an incentive program for its representatives, which was the main driver for the shortfall. Avon also said it would ramp up ad spending an additional 15% in 2007. The co is in the middle of a multiyear restructuring that includes cutting jobs, eliminating less profitable products and aggressive advertising. Investors are fearful that the high level of agressive advertising is here to stay (and may go up from here!) as competition is getting fiercer in the sector.

GSCO's call helps to soothe the fears regarding advertising expenditures, saying management is not planning any further hikes. Margins have a good chance of recovering as the funds put to work in advertising in past quarters will be starting to bear fruit. Generally, Avon is considered a smart advertiser, putting their dollars to work where very good rates of return are seen.

Currently, the market is pricing in further hikes and little in terms of margin recovery. That's the disconnect traders can take advantage of, according to Goldman.

I like this one and I'm going to call it Actionable here. Be prepared to pay up early on but don't overpay! I think there could be couple of days of upside in store following the call.

PS: I'm working on a trading call that I plan to publish after the open today. So be sure to check back.

Monday, August 13, 2007

Quick note: Recent mo-mo casualties ready for a pop?

Must say I feel that today may be the day when shorts in some of the recent momo-casualties will be taken on a ride. Stuff like CROX, ISRG, AAPL etc.

Note that CROX is trading up in the pre-market as Piper Jaffray is out with a positive call on the name.

I do like AAPL here.

Lemme know if any of you disagree.

CSK Auto (NYSE:CAO): Added to Buy List at GSCO

- Goldman Sachs is out with a positive call on CSK Auto (NYSE:CAO) adding the stock to their Americas Buy List, with a $17 12-month price target, implying 34% upside, and down from $18 previously. As new CEO Larry Mondry assumes control, they expect the first dispassionate, analytical look at the firm's assets and cost structure in years. Also, the firm retains enormous value as a strategic take-out candidate given its West Coast store base; CSK retains this value despite dislocation in the capital markets and the likely lack of a private equity bid. Credit market volatility and poor near-term visibility suggest a choppy road ahead, but the firm views this as an appealing entry point for the long run.

GSCO believes any restructuring moves, focused on assets and costs, would be received favorably. Also, simply filing financials will add clarity to the firm's financial position. They continue to view a strategic deal as the likely ultimate outcome, but this could take more than a year to transpire.

Notablecalls: I think CAO represents a painful situtation for many large players. Karsch Capital that owns close to 10% of shares outstanding has been calling the co to put itself up for sale, saying there was genuine interest from private equity firms in acquiring the co and from investment banks in financing a transaction. Yet, with the ongoing credit turmoil, hopes for a private equity deal have vanished, putting the stock back in the penalty box. Now the talk has shifted to management's ability to turn the co around plus the possibility of a strat. buyer stepping in.

CAO does not look overly cheap vs. other players in the industry but given the potential for margin recovery, it's certainly interesting here. The new CEO's compensation includes a healthy amount of options, meaning his incentives are aligned with shareholders.

I'm not going to call this one actionable but it's certainly one to watch. My gut tells me the stock could do $13.50-$14.00 following the call. Not the usual ultra s-t time frame but rather couple of days as GSCO may send some shorts covering.

Friday, August 10, 2007

AmerisourceBergen (NYSE:ABC): Actionable call alert!

- Baird is out with an interesting call on AmerisourceBergen (NYSE:ABC) saying they have placed the stock to their Focus List, List, believing it the single best near-term investment opportunity in their coverage universe. Their rating is Outperform with a tgt of $60.

According to Baird large cap healthcare distributors avoid many perils concerning the Market - these arenon-cyclical, defensive firms, avoiding direct consumer-, reimbursement- and much binary product risk, while being relatively unaffected by commodity prices, currency moves, monetary policy, or foreign political activity.

Market worries about fund rotation and position unwinding are temporary, technical events. Money flows may seek high-quality, defensive stocks with clean balance sheets, reduced capital needs, and attractive valuation.

ABC trades at 16.9x, 14.5x CY07, CY08 EPS from continuing operations. Firm expects a rally into the seasonally-strong March quarter, aided by reduction in (and traction from) near-term investments and another impending generics wave.

With 75% of analysts rating ABC Hold or Sell, but the lowest published price target 15% above current valuation, they suggest the Market isn't paying attention, expectations risk low, and at 14x CY08E, an upgrade wave may be looming, with the opportunity for substantial NTM equity returns.

Notablecalls: Oh my, goosebumps again! This call is a thing of beaty. ABC stock has gotten hit lately after posting somewhat weaker than expected results on July 26. Management did however raise the upper end of fiscal-year EPS guidance and told investors they would accelerate the current buyback, buying back about 5.4 million shares of its common stock from Bank of America Corp at an average price of around $46. The quarterly miss was due to lower than expected performance at PharMerica (PMC) pharmacy unit, which handles long-term care and workers compensation. Yet, now it has spinned off the PharMerica unit, combining it with a similar division of Kindred Healthcare (KND). The detractor is gone, allowing management to fully focus on the core business.

I love how Baird hilights the fact 75% of analysts rate ABC Hold or Sell. Shows you where the expectations are. Yes, there are some risks (less generic launches, lower dosing for anemia drugs) but at current levels these seem priced in.

I'm going to call this one Actionable! I suspect this call has the power to move ABC for several days or even a week. While I usually refrain from including a target on my calls, I think in ABC's case $46, the price at which management was willing to buy a large chunk of their stock back, makes sense here as a s-t tgt.

Thursday, August 09, 2007

Omrix Biopharma (NASDAQ:OMRI): Oppenheimer upgrades to Buy

I'm now hearing Oppenheimer is out with an upgrade on Omrix Biopharma (NASDAQ:OMRI), taking their rating to Buy from Hold saying they believe investors are overreacting to a revenue shortfall of roughly $8mm in IVIG sales to one customer, and would use any pullback in the share price as a buying opportunity.

Firm's tgt is $35.

Notablecalls: Nice move by OpCo! See below for further deets. I continue to see OMRI as actionable here.

Intuitive Surgical (NASDAQ:ISRG): Oppenheimer ups tgt to $255!

- Oppenheimer is upping their tgt on Intuitive Surgical (NASDAQ:ISRG) to $255 from 190 saying they believe over 50% of prostatectomies performed in the US are now being done with the da Vinci system. Additionally, they estimate the number of prostatectomies performed is growing as patients are choosing surgery over radiation therapy or watchful waiting. OpCo also feels that many other urology procedures such as nephrectomies and cystectomies are beginning to be completed with robotics.

The company believes the number of da Vinci hysterectomies will increase at least 175% this year. In firm's opinion, Intuitive is being conservative with this estimate.

And finally general surgery. The da Vinci system can be utilized in most surgical cases. Over time, more and more general surgeons have tried the system and are beginning to report success. Firm believes robotics are currently used in less than 1% of potential general surgery cases and hence feel there is a large potential market here for Intuitive Surgical. They believe general surgery adoption will steadily rise over the next five years.

International use of technically advanced medical devices usually lags several years behind the US. OpCo expect to see a steady ramp of da Vinci sales overseas.

Notablecalls: This looks like the new Street high price tgt for ISRG. That's bound to generate buy interest in this fast-mover today.

Omrix Biopharma (NASDAQ:OMRI): Actionable call alert!

Several firms are out in defense of Omrix Biopharma (NASDAQ:OMRI) after the biosurgical and passive immunotherapy products maker posted a 71 percent fall in quarterly profit partly hurt by certain unrecognized and deferred revenue and lowered its total product sales view for 2007, pushing shares down 20 percent. The uncertainty related to future shipment of Intravenous Immunoglobulin (IVIG) to an European Union country, as well as related unrecognized revenue resulted in the company cutting its full-year product sales view.

Omrix said it was not certain as to when it could record the revenue or if it could even continue to sell the product in that country in 2007:

- Cowen notes Omrix reported 2Q results below estimates but they believe fundamentals remain fully intact for above average growth beginning in 2008. Two unpredictable, one-time events impaired 2Q sales gains. Important positive catalysts in 2H07 should bolster confidence in the firm's ability to execute its long-term growth strategy. Firm reiterates their Outperform rating and advises investors to use near-term weakness in the shares to build positions.

They expect any share weakness to be short lived as important milestones occur in the next six months. The PDUFA date for Thrombin is Sept. 6, and the company plans to report results from a small Phase I trial of its fibrin patch at an analyst meeting planned for October. Label expansion for Evicel for general surgery should be issued by Jan-08, bolstering sales potential. Finally they expect IVIG marketing partner FFF Enterprises to win FDA approval for IVIG in mid-2008, providing upside to estimates.

- CIBC notes they did not expect 2Q to miss this badly, but their fundamental view on OMRI is actually unchanged, and they feel the stock would be very appealing in the mid- 20s where it may open. The worst may well be over, and a few sizeable catalysts this year can drive both EPS and the stock a lot higher. Maintains Sector Outperformer and $43 tgt.

Firm notes mgmt confirmed a new VIG bidding in one EU country, with a decision coming in 4Q. They believe the potential deal size will be similar to last year's U.K. order of $30M (OMRI got 2/3 of the U.K. contract). The 2006 U.K. order added $0.50-plus to EPS, and CIBC has no VIG in estimates.

- Citigroup notes yet another issue - this time in IVIG - created a Q2 shortfall, reduced guidance for 2007, and should lead to a sharp correction in the stock price. While they are disappointed by another execution snafu - the core thesis of a big ramp in the Biosurgery business - still looks intact and they would stick with this story.

What's Next - FDA approval for stand-alone thrombin is slated for September 2007, the IVIG issue could get resolved, and a government tender for a high-margin VIG contract could create an unexpected catalyst in Q4:07. Hence, Citi expects the current negative sentiment to turn positive very soon and for the stock to recover quickly.

Assuming the stock opens at $24, the shares will be trading at 15x new 2008 EPS estimate of $1.51 (+135%), which is too big a penalty for the recent execution missteps. They would take advantage ahead of what should be much stronger results in 2H:07 and a string of high-profile product catalysts. Citi's revised $42 target price reflects their lowered EPS outlook for 2008 to account for lower IVIG sales, which now appears to be a worst case scenario. Maintains Buy.

Notablecalls: Oh my, this one's surely a bounce play. I must say I don't know a whole lot about OMRI or the markets it operates in but reading the defenses gives me goosebumps. This is the type of stuff that bounce plays are made of - stock down 20%+ on problems that at least seem s-t in nature, plus sizable catalysts ahead. Plus you have valuation supporting the story. Paying 15x for 100%+ grower is a joke, A JOKE!

I wish some gung-ho analyst downgraded it this AM, giving you guys decent fills early on. Grab it at $24 and be prepared to pay up! Actionable call alert!