Wednesday, December 31, 2008

Ceradyne (NASDAQ:CRDN): Downgraded to Hold at Morgan Joseph

Little known Morgan Joseph is out with a downgrade on Ceradyne (NASDAQ:CRDN). Firm is lowering their rating to Hold from Buy after their due diligence shows Ceradyne will not ship any of its new X-SAPI body armor in 4Q08 as a result of a contract protest by a competitor.

If the matter had been settled quickly, Ceradyne might have made shipments by year-end. Instead, the Army has decided to start from scratch and seek new bids from suppliers. Those bids are expected to be submitted in mid-January, with orders possible as soon as the end of the month.

Firm is significantly lowering their 2009 estimates due to lower body armor shipments, pricing pressure on ceramic solar cell crucibles, and new accounting treatment of the company's $120mm convertible debt. They estimate total sales of $599.0mm, gross profit of $204.7mm, EBITDA of $135.5mm, operating income of $97.1mm, and net income of $63.9mm or $2.30 per diluted share. They had expected 2009 sales of $641.2mm, gross profit of $240.9mm, EBITDA of $171.1mm, operating income of $130.1mm, and net income of $84.1mm or $3.17 per share.

Morgan Joseph is cancelling their $22 price tgt on CRDN and are currently providing no new tgt.

Notablecalls: CRDN bulls are definitely not going to like this. I also suspect this is the reason why CRDN issued that stealthy earnings warning 2 weeks ago. Note that consensus for 09 EPS stands at $2.61 vs Morgan Joseph's $2.31.

I really do not see CRDN getting crushed on this call but 1pt worth of downside may be in the cards.

Tuesday, December 30, 2008

Dow Chemical (NYSE:DOW): Cough up the cash or else...

I just wanted to do a quick follow-up to the Dow Chemical (NYSE:DOW)/ Rohm & Haas (NYSE:ROH) story:

Barclays' Risk Arbitrage Team is out with a call saying they believe there are significant restrictions on Dow’s ability and incentives to maneuver its way out of the deal or into a price cut. They find the current risk-reward attractive and expect the deal to be completed on its current terms.

Notablecalls: So this means DOW will have to buy ROH for $78 per share in cash? Sure looks like it.

Also, note that according the the initial agreement, if the merger is not completed by January 10, its price rises every day by a fixed amount to compensate Rohm investors for the delay.

So if DOW does not cough up the cash by Jan 10, the deal will get more expensive for them. A really cruelsome situation to be in.

As the old adage goes - In the best times the worst deals are made.

PS: Notable Calls Network (NCN) had a very similar Barclays call already yesterday saying there was very little DOW could do in terms of backing out of the deal. Rohm & Haas (ROH) stock was trading around $49 and change when the call was issued. It shot up $54.5 over the next couple of hours and I see fills around $55 this AM.

So a 4+ pt gain was to be had, depending on ones entry/exit. Any size.

This is how Notable Calls Network (NCN) works - sharing the flow. We catch them every day.

Not all calls are this good (we get many wrong as well) but NCN is for the pros. You decide which calls to take and which one's to leave.

Want to be part of NCN?

It's easy. Just shoot me a brief email that includes a short description of yourself and your AOL nickname.

Please do note that contacts via IM are limited to people with:

- 3+ years of trading experience

- Access to quality research/analyst commentary

- Ability to generate and share (intraday) trading calls

I will not accept contacts from purely technically oriented traders, penny stock fans or people who have less than 3 years of experience in the field.

Monday, December 29, 2008

Dow Chemical (NYSE:DOW): Comments on K-Dow news

Citigroup comments on Dow Chemical (NYSE:DOW) after Parliamentary opposition over the economics of K-Dow has led the Supreme Petroleum Council to cancel the $17.4B JV.

The move comes as a surprise following a re-valuation of the deal this month, and the firm views as a HUGE negative for Dow shareholders. Kuwait’s liberal Popular Action Bloc had been pressuring the Prime Minister to scrap the deal before January 1st to avoid a $2.5B termination penalty.

ROH Implications — The ROH acquisition ($18.5B EV) is expected to be completed in early ‘09, according to ROH’s press release. The deal looked fully-priced when announced in July ‘08 & now appears extremely overpriced given a deep recession and lack of cash from the Kuwait deal. With the credit crisis spreading, the borrowing costs have shot up for most companies globally.

Can ROH Deal Close? — DOW should be looking to protect its shareholders by cutting the ROH deal at a lower price or walking away from the deal by paying a break up fee. However, it may not be easy since there is no "buyer's remorse" clause in the merger deal, nor a MAC clause trigger. If DOW is forced to pay the original price of $78/share, then they will have to reevaluate their thesis on Dow. Recently, Apollo was able to opt out of its $10.6B deal with HUN for a payment of $1B. Firm now expects lengthy negotiations between DOW & ROH.

Notablecalls: I suspect both DOW and ROH will get hit in a major way today. For DOW the worst case scenario would be - ROH closes, but K-Dow does not. That's what we are seeing ATM.

The K-Dow deal was expected to increase Dow’s financial flexibility and increase the likelihood of the ROH merger concluding efficiently. So it's logical to see ROH get hit.

Where should/could ROH trade?

ROH was trading around $45 when the deal news hit back in July. Yet, if one takes a look at the peers - NCX was trading around $23-$24 in July and now trades around $4-$5.

I would not be surprised to see ROH hit $45 today. If the deal breaks down the stock will be headed toward $30 level.

How to play DOW?

I suspect we may see some downgrades in the n-t as most analysts were pretty high on the K-Dow deal. I see a 6-10% downside move in DOW. Let's see if I'm right about this one.

Tuesday, December 23, 2008

AMAG Pharma (NASDAQ:AMAG): Bounce?

We have several firms out defending AMAG Pharma (NASDAQ:AMAG) this morning follwing news the FDA issued a Complete Response Letter for Ferumoxytol:

- Leerink says they are encouraged that two of the three issues in the original Complete Response Letter from late October appear to have been resolved without the need for additional clinical trials, and they would be buyers on any weakness, as this removes the worst case scenario, in firm's view. Reits Outperform and $46 tgt.

- JP Morgan reits Overweight on AMAG saying they expect weakness in AMAG shares as investors question the management’s ability to effectively address regulatory questions, but they believe that ferumoxytol (trade name now Feraheme) will be approved without additional clinical trils. Remain Overweight on expectations of a brief delay (6- mo or less), which in their view would drive significant upside in AMAG shares.

A longer delay doesn’t seem likely. The ferumoxytol saga looks a lot to them like Vyvanse story, where Shire gained FDA approval after 2 CR letters, where both resubmissions were designated Class 1 (2-mo review). Unresolved label conflicts apparently was the basis of the 1st CR, while manufacturing questions underpinned the 2nd CR, and the entire approval delay was less than 6 months. Firm believes ferumoxytol could follow a similar path, with approval by mid-09. Note that a longer delay (2H09 or later) could start to impact valuation, since we believe IV iron sales growth could moderate in a bundled environment (likely phase-in begins by 2011e).

Notablecalls: AMAG will hold a conf call 8:30 AM ET to clarify the issues behind the 2nd CR Letter. I really like JPM's reasoning re: Vyvance

I suspect there will be several firms out in defense of AMAG today.

The stock will take a hit but it shouldn't be more than say 10% putting it above the $30 level in my book. This makes the $27-$28 levels a buy

Friday, December 19, 2008

Ceradyne (NASDAQ:CRDN): Downgraded after a stealthy warning

Stanford is out downgrading Ceradyne (NASDAQ:CRDN) to Hold from Buy after the co lowered its FY08 and FY09 guidance at an investor conference yesterday after the market close. The company reduced its FY09 sales guidance from $640-650 million to $600 million and EPS guidance from $3-3.25 to $2.30 due to pricing pressure in solar, XSAPI body armor delay, and weakening demand for its industrial business.

Firm lowers FY09 sales and EPS estimates to $596M and $2.29. They believe there is still downside risk to management’s new guidance due to uncertainty from the XSAPI rebid after BAE Systems (BAESY, Not Rated) withdrew its protest. According to sources, the Army is considering splitting the XSAPI business more evenly amongst the winners, which means Ceradyne could end up with less than the previously awarded 64% market share. In addition, management assumes it maintains the 75% market share on the new side plates (ESBI), but the scope and timing remains uncertain.

They downgrade Ceradyne to a HOLD and reduce price target from $23 to $18 based on new estimates.

Notablecalls: What's so great about this dg? Well, there is no PR out on this warning. Short at will. This baby will go down hard. I'm guessing $21-$22 range. And don't cover until the PR.

PS: Now hearing Stephens out saying CRDN will trade below $22 in their opinion.

Flour (NYSE:FLR): Downgraded to Sell at Citigroup

Citigroup downgrades Flour (NYSE:FLR) to Sell from Hold partially on the Obama Overbuilt thesis, but also on project-specific risk at Al-Zour. They find FLR shares are up ~60% since mid-November, and this cannot be accounted for by 1) the Obama impact and 2) the recent rally in energy-related shares. They also believe there is increasing risk Fluor’s piece of the $15 billion Al-Zour refinery may be canceled by the Kuwaiti Oil Ministry.

- Citi calculates an average EPS impact of the Obama plan less than 5% over the next two years. This impact has been more than factored into E&C shares over the last four weeks as the names are up 76% - far more than both the S&P Energy Index and the impact of a stimulus package. Risk of Obamamania hitting a reality check is high, particularly hen oil prices have slid over the same four weeks. Firm's math concludes two of the E&Cs, Foster and McDermott, should not benefit at all from a stimulus package.

- The $15 billion Al-Zour refinery may be canceled by the Kuwaiti Oil Ministry, and this project was already included in Fluor’s backlog (Fluor won the $2 billion utilities package for the facility.) News reports of the project’s demise are not new. But the project’s viability appears more at risk the further oil and gas prices fall, and they believe it is now prudent to exclude it from their estimates.

Citi target is down to $37 from $41 fro FLR.

Notablecalls: FLR has been hit by several downgrades over the past week. GSCO put it to their Conviction Sell list last week while Lazard slapped a Sell on it yesterday. Stock has been pretty resilient but Citi's call may be the one to break the camel's back.

The wording of the call is strong and I suspect we will see FLR in the $44-$45 range today.

Thursday, December 18, 2008

Intel (NASDAQ:INTC): Downgraded to Underperform, $11 tgt at Jeffco

Jefferies' Semicondutor team is out with some pretty nasty downgrades on almost all of the largest players in the space:

- Unlike prior downturns we entered with relatively lean inventories in most end markets.
- Q4 has gotten worse for everyone – significantly below prior guidance.
- Q1 visibility is AWFUL and likely not to improve before earnings calls given the holiday shutdowns

- Don't get fooled by this near-term rally.
- Start buying in mid-February – the first leg of the cyclical upturn will
rise all tides.
- 2nd Leg of the upturn – what to own and what not own;
- What to own - Broadcom, NetLogic, Qualcomm, Silicon Labs, and
- What not to own - AMD, Cypress, Intersil, National Semi, Silicon
Image, Texas Instruments, and Zoran.

For example they are downgrading Intel (NASDAQ:INTC) to Underperform from Buy while lowering their tgt to $11 from $26.

They recommend investors sell shares as Intel is likely to experience multiple compression as 1) the PC market slows due to desktop declines and slowing laptop growth, 2) a mix shift to the low-end in the PC market pressures MPU ASPs, and 3) other efforts in new end markets disappoint. Reducing CY09 EPS estimate to $0.76 (from $1.45).

$11.00 PT is based on 1.5x '09 EV/Rev or 15x CY09 EPS (inline with peers).

Notablecalls: Phew..are they on mushrooms or are they for real? Regardless of their choice in drugs I suspect INTC is going sub-$15 today. Nasty.

Wednesday, December 17, 2008

OM Group (NYSE:OMG): Downgraded to Underweight, $15 tgt - KeyBanc

Keybanc is out with a yet another major Specialty Chemicals call downgrading OM Group (NYSE:OMG) to Underweight from Hold with a $15 price tgt.

Firm notes that during 4Q08, cobalt prices moved from $29/lb in October to $16/lb in November to about $11/lb in December, making the 4Q08 average price $17/lb. They had previously based their 4Q08 EPS estimate of $0.28 on cobalt at $23/lb. Given the precipitous drop, they now estimate 4Q08 EPS for OM Group at a loss of $0.18, bringing revised 2008 EPS estimate to $4.60. Prior 2008 EPS estimate was $5.05

Using a cobalt price of $11/lb (vs. $21/lb previously) for 2009, Keybanc's EPS estimate is cut from $2.50 to $0.80. They again caution that cobalt prices are highly volatile with swings that can be large and swift; therefore, the new 2009 EPS estimate of $0.80 should be viewed with a high degree of skepticism and with the expectation that frequent EPS revisions are possible as cobalt prices change.

A wild card in their 4Q08 estimate is the amount – if any – OMG may write down its inventory as it applies the "lower of cost or market" criteria to its inventory valuation. Firm notes they have estimated a $7.0 million (equal to $0.15 per share) mark-to-market adjustment in the 4Q, but have no firm basis for making a specific estimate.

They see no catalyst to drive the shares higher in the near term. With losses expected in 4Q08 and 1Q09 and very low EPS expected in 2009, they see more downside risk than upside potential at this time.

Notablecalls: I'm starting to like Mr. Saul Ludwig, KeyBanc's Speciality Chemicals analyst.

Assuming he is right about 2009 EPS OMG shares are trading at a whopping 27-28x P/E.

Remember what happened to Arch Chemicals (NYSE:ARJ) few weeks back when Ludwig was out with a pretty much similar call? ARJ got whacked!

OMG is going to suffer the same fate, I suspect. I see the stock going sub $20, probably as soon as today. This is a monster call.

Apple (NASDAQ:AAPL): One Scare Too Many; Downgrading to Perform - Oppenheimer

Oppenheimer is out downgrading Apple (NASDAQ:AAPL) to Market Perform from Outperform saying they don't know why Steve Jobs has pulled out of his annual address at Macworld on January 6. Maybe he's not feeling well, or maybe he just has nothing new to say. Whatever the reason, the unexpected announcement has underscored the greatest risk to Apple's long-term success—its dependence on Jobs' health and its apparent lack of a succession plan.

Six months have passed since Jobs appeared at the Apple Developer Conference, looking drawn and unwell. It's past time for Apple to either disclose the state of his health or elaborate a viable plan for eventually transferring power. Until such time, they can no longer continue to recommend Apple as a long-term investment. Downgrading to Perform; and removing $145 PT.

Notablecalls: This call I think will generate some serious debate about Jobs' health. It sure takes a set of cojones to come out with a downgrade like this one.

I see more downside to AAPL stock in the n-t.

Tuesday, December 16, 2008

United Parcel Service (NYSE:UPS): Downgraded to Underperform at Merrill Lynch

I wanted to highlight you the Merrill Lynch downgrade on United Parcel Service (NYSE:UPS). It's a nasty one.

Merrill is reducing their opinion on UPS’ shares to Underperform from Neutral and lower price objective to $44 from $54. They are reducing 2009 and 2010 EPS estimates 12% and 10%, to $3.15 and $3.70, from $3.58 and $4.09, as they further reduce volume and margin targets.

While they believe UPS, which owns 50% of the market, will win its fair share of DHL’s business (represents ~5%-6% of the market), they believe volumes have fallen precipitously over recent weeks, causing a further pressure in targets. Firm targets domestic volumes to fall 1% in 2009 (from flat) and domestic operating margins will fall 110 bps to 11.5%, owing to the weak economy. The price target is based on a 14x target multiple of 2009 EPS estimate.

Notablecalls: I think UPS will get whacked on this call as:

1) MLCO has uncovered new information about UPS' business decelerating markedly over the past few weeks

2) MLCO's tgt price is way below current mkt price

3) MLCO has the largest customer base - their calls move the mkt.

I suspect $49's are in the cards today. (several points of downside over the next week or so)

Other calls of interest::

Merrill Lynch calling for a bottom in Ferts:

Temporary buyers strike largely priced in We believe fertilizer fundamentals are nearing a bottom, given nitrogen and phosphate prices have already plunged through breakeven margins for marginal producers, triggering significant shuttered global capacity. The significant deferral in fertilizer applications that occurred this fall can not repeat in the spring if crops are to be planted. We are raising our EV/EBITDA valuation multiples for each nutrient by one multiple point (nitrogen from 2 to 3, phosphate from 3 to 4, and potash from 4 to 5), which are still well below historical levels. Our ratings on POT, MOS, IPI, and TRA are raised to Buys, CF is raised to a Neutral, and AGU remains an Underperform, largely due to a potential large inventory devaluation in its retail business.

FBR initiates Bank of America (NYSE:BAC) with Underperform and $9 tgt:

We reinitiate coverage of Bank of America Corporation (BAC) at Underperform with a $9.00 price target, equal to 0.6x pro forma tangible book value of $15.50. Our chief concern is Bank of America's thin tangible common equity. We calculate a tangible common equity ratio of just 3.15% (including its October capital raise, the acquisition of Merrill Lynch, and TARP warrants), which is just too low. While Bank of America's capital will be rebuilt over time, we expect that it will have to raise a substantial amount of new common capital to jumpstart the process, which will dilute existing shareholders. We recommend that investors stay away from the stock until this initial raise is complete. Our 2009 operating EPS estimate of $2.00 is well below the consensus estimate of $2.61, which we attribute largely to continued, elevated provision expense.

Notablecalls: Ferts will react to MLCO upgrades. BAC..I see a 30-40c move to the downside at best today. (NASDAQ:BIDU): Added to Conviction Buy List at Goldman Sachs

Goldman Sachs upgrades (NASDAQ:BIDU) to Buy from Neutral and adds it to their Conviction Buy List:

Baidu trades at just under 20X 2009E non-GAAP earnings:

1) Paid search spending is 2bp of GDP in China, versus 9-12bp in developed search markets.

2) Goldman forecasts search spending climbing at around 30% per year for several years and believes Baidu can maintain query share (with government help and consumer loyalty) for around 30% per year revenue and EPS growth.

3) Baidu has $10 net cash per share, a 35% 2008 ROE, and they estimate it will convert over 80% of earnings to free cash flow. The GS Options team suggests buying 1X2 call spreads for low-cost leverage.


1) They expect concern that the China government has targeted Baidu for punishment will diminish; they doubt the government seeks to disadvantage Baidu to the extent it loses substantial query share to foreign rivals.

2) Firm believes paid search will outgrow China’s GDP given low penetration, rising query volumes on increasing broadband penetration, and secular demand from consumer-facing companies. (3) Baidu is trading at multiples comparable to slower-growing, more-cyclical businesses such as and Ctrip, and its 2009 P/E multiple is about one-third above Google’s, while its growth rate is about double Google’s.

Notablecalls: It kind of looks like Goldman will catch a lot of short sellers with their pants down. Statistics show GSCO Conv. Buy list additions run 3-10%, depending on the nature of the stock. We know BIDU is a mover so the expected move it probably closer to 10% than to 3%.

My bet is we will see BIDU around $125-$128 level today.

Goldman isn't saying anything new but the fact they are putting the stock to their Conviction Buy list ($145 tgt) speaks for itself.

Monday, December 15, 2008

JP Morgan (NYSE: JPM): Downgrade to Underperform at Merrill Lynch

Merrill Lynch downgrades JP Morgan (NYSE: JPM) to Undperform from Neutral while lowering tgt to $27 from $44.

Merrill expects 4Q loss of -$0.11 from +$0.25 on expectation of another significant round of credit reserve builds exacerbated by cap mkts activity, mark-to-mkt losses. Also rationalizing ‘09E to better reflect the deteriorating economic environment and better reflect the impact of WaMu loan portfolio. Key driver of new forecasts is expectation of loss rates moving up in-line with higher unemployment. Accordingly, they cut ‘09E to $1.98 (details within). They also stresstest forecasts for very real possibility of higher unemployment and find 09E could easily fall into the red.

Capital markets weak as marks continue
They are now forecasting another substantial ($2.8bn) mark-to-market loss in the Investment Bank as asset spreads have gapped meaningfully almost across the board. Investment banking activity has fallen dramatically and the firm expects the environment to remain weak in ‘09E as the economy remains in recession.

Underperform: Cutting PO to $27 from $44
Merrill does not believe the Street has rationalized the true impact of expected economic woes on Cons. Credit, and particularly what that means for JPM earnings. Their new ‘09E of $1.98 is 27% below consensus and represents a 5.3% ROE. Applying 0.7x expected BV of $39 to discount low ROE expectation offset by some valuation premium due to relative franchise strength, gives new PO of $27.

Notablecalls: How much is this downgrade worth? I think it's worth a lot. I see stock getting pounded towards the $29 level in the ultra s-t and prolly below MLCO's tgt price over the next weeks.

Market has shown some considerable resilience over the past weeks but I think it needs another shake-out. This dg may give the que.

Ah, and btw - Goldman downgraded Apple (NASDAQ:AAPL) this AM. Rating goes to Neutral from Buy with tgt lowered to $115.

Thursday, December 11, 2008

Costco (NASDAQ:COST): Morgan Stanley and JP Morgan expect COST to guide down

Two tier-1 firms are very negative on Costco (NASDAQ:COST) ahead of today's call:

- Morgan Stanley expects management to be extremely cautious on the outlook for the rest of the year and for the stock to come under pressure throughout the day.

What to Watch For on the Call: We expect management to lower both 2Q (MS $0.71 vs. street at $0.75) and full year guidance on the call (MS $2.97 vs. Street at $3.01). As current US core comps are running below our 3% estimate for the rest of the year, we believe there is risk the company can guide below our current estimates.

- JP Morgan: Looking To The Call For Revised Guidance. As previewed, we think that the market widely anticipated a 1Q beat (relative to consensus estimates) and we wouldn't be surprised to see the stock open modestly higher. However, we believe that the real news of the day will come on the company’s 11:00 AM EST conference call (dial in # 1.800.399.8203) when details of the beat (i.e., how much of the upside came from unusually rich gas margins vs. core merchandising strength) are revealed and the significance of the quarterly trend is framed vis-à-vis updated FY09 guidance (currently @ $3.00-$3.25, Street @ $3.01). With this in mind, we believe that the prior outlook may prove too optimistic with risk that the company will either trim its full-year EPS guidance – resulting in a potential mid-day shift in the stock toward the downside.

At 17.3x our CY09 EPS the stock looks priced for perfection, if not a bit over-valued given slowing core comp trends, which could lead to significant SG&A deleverage down the road. Stay Neutral.

Notablecalls: As JPM notes the stock is still priced to perfection and a guidance cut will cause the stock to trade down. Looks like COST isn't the safe heaven many believed it to be.

My bet is a 5-7% downside is in the cards today.

Wednesday, December 10, 2008

American Express (NYSE:AXP): Initiated SELL $13 tgt - BofA

Bank of America is initiating American Express (NYSE:AXP) with Sell and whopping $13 tgt

- Number of factors will have a disproportionately negative impact on AXP’s near-term prospects. These factors include 1) the significant consumer and corporate spending slowdown, 2) the accelerated loan book growth over the past few years, 3) geographic and demographic risks embedded in current receivables and 4) upcoming funding and liquidity obligations needing to be addressed in a stressed capital markets environment.

- AXP’s “spendcentric” model is being tested given consumer & corporate distress, leading us to model a sharp decrease in billed business. The surprising deterioration in super-prime customers due to the housing meltdown factors into our outlook for accelerating chargeoffs. We look for 2009 EPS to fall 35% y/y to $1.58. Our forecast is $0.65 below the Street. Our 2010 EPS estimate is $2.97, $0.58 below the Street.

Notablecalls: Oh my god!

Apple (NASDAQ:AAPL): Morgan Stanley negative on the stock

Morgan Stanley is out negative on Apple (NASDAQ:AAPL) saying they see near-term downside to AAPL shares in light of weaker demand, especially for the iPhone where expectations remain high. They highlight three surprising data points from their survey of 2,500 US consumers:

First and most important to the stock, despite significant price cuts, “extreme” interest in the iPhone is lower than February ‘07 survey (5% vs. 7%). They reduce CY09 unit forecast to 14mln (from 19mln) and note additional price cuts may be necessary to stimulate unit demand at lower margins. Firm assigns a 15x P/E multiple to iPhone, a blended average of RIMM and GOOG.

Second, Mac brand satisfaction and market share momentum remain intact but PC purchasing plans over the next year are half of 2005 levels. MSCO lowers Mac unit growth to flat and assign a 13x P/E to this segment (50% premium to P/Dell).

Third, iPod penetration peaked in the US and new purchases by the installed base this holiday season will fall well short of past years (6% vs. 40% typically). They lower CY09 unit growth (to -30%YoY) and assign a 3x P/E multiple which assumes revenues trend towards zero over the next three years

What’s next: MSCO lowersC4Q estimates but believes Apple can meet the wide guidance range provided in October given channel fill of new products. That said, consensus C1Q and CY09 estimates are at risk of lower unit demand, inventory adjustments and price cuts.

Notablecalls: AAPL stock is going to get whacked on this. I would not be surprised to see a 5pt downside move today. Note that MSCO's new price tgt for AAPL is $95.

Tuesday, December 09, 2008


JP Morgan is out with a MAJOR NEGATIVE call on General Electric (NYSE:GE):

- Cutting estimates. 2009 goes to $1.20 from $1.45 (now ~$0.37 below Street), with 2010 to $1.10 from $1.30 (now ~$0.55 below Street).

- Negative: 4Q a miss. The $0.50-0.52 excludes a $1.0-1.4 B after-tax charge, part of which is provisioning (~$600 mm). GE gets a pass on restructuring, but provisions are a part of doing business and inclusion in the number brings us to ~$0.44-0.46.

- Management reaffirmed the dividend, as expected; however, this appears to assume the business trends are steady state or that the company will find other significant sources of cash flow. As per our estimate, we see the potential for the business to decline over next year or two. This means that the company will need to fill a hole with working capital or "other" both sources of cash that we view as unsustainable, assuming that GECS remains as challenged as we think it will Current cash flow estimates indicate that 2009 should be safe (and even if a GECS infusion were to occur, it would still leave $10B cash from the recent equity offering), but we remain cautious on the company’s ability to sustain the dividend in 2010.

Initiates $13 price tgt for GE!

Notablecalls: GE will get whacked, I suspect.

T. Rowe Price (NASDAQ:TROW): Downgraded to Sell from Neutral at Goldman Sachs

Goldman is downgrading shares of T. Rowe Price (NASDAQ:TROW) to Sell from Neutral. Firm's 12-month DCF and P/E based price target is $28, unchanged, implying 24% downside. They believe TROW’s current 60% P/E premium to the group (versus a historical 20% premium) is unsustainable amid accelerating fundamental headwinds including expected net outflows, slipping relative investment performance, and deteriorating operating margins. Goldman views T. Rowe as a long-term beneficiary of market turmoil, but they see the shares under- performing on a relative basis over the coming quarters.

T. Rowe’s strong financial position (a solid $853 mm in net cash or $3 per share) has rendered the stock a relative safe haven, leading to meaningful outperformance versus peers (+24% relative YTD). That said, shares now trade at 25X 2009E EPS or a 60% premium to peer average – a level they view as unsustainable given rising fundamental headwinds. Specifically, they expect 4Q08 to mark TROW’s first quarter of net outflows since 2001 due to weak equity absolute performance and slowing target date flows, while rising unemployment pressures the firm’s retail-heavy business mix and 401(K) flows. Further, TROW’s recent relative investment performance has slipped with the asset weighted Morningstar rating in October at 3.6, down from 4.0 a year ago. In addition, Goldman sees the firm steering clear of expense reductions to gain share (in comparison to peers cutting costs), which they expect to drive operating margin 900bps below pre- downturn levels – a decline similar to the early 2000’s.

Notablecalls: A Sell rating from GSCO on a stock that's trading 25x 2009 EPS - a recipe to get whacked.

I see TROW down 5-7% today. Lets see if I'm right on this o

Monday, December 08, 2008

Chesapeake Energy (NYSE:CHK): Deutsche colour on news

Deutsche Bank is out positive on Chesapeake Energy (NYSE:CHK) after the co issued a press release containing a comprehensive new financial and operational strategy in response to turbulent financial markets and commodity price uncertainties. The key highlight is a cash neutral budget (i.e. reliant on neither asset sales nor equity issuance) that CHK expects to generate growth of 5-10% for 2009, and 10-15% in 2010 (down from 17% and 16%, at the midpoint of prior guidance).

Cuts 2009-10 capex by more than $6B (40%)
CHK is cutting its 2009 capital budget by $3.5 billion, or 43%, and its 2010 budget by $2.95B, or 35%. Meanwhile, asset sale plans remain unchanged ($450MM VPP#4 still anticipated by YE; $450MM VPP#5 and a midstream monetization slated for Q1-09), such that per guidance CHK expects to build up to $4B in additional cash resources over the next two years. Its cash flow profile seems reasonably visible given CHK's restructured hedging portfolio, under which about 76% of its 2009E production is hedged at a floor price of $8.20/Mcf, including only 12% of production subject to knockout hedges, which are largely concentrated in Q4-09.

Rethinks equity filings; conference call Monday AM
Finally, and likewise very importantly, CHK announced plans to terminate the recently announced Distribution Agreements, and will NOT in fact issue any shares under the S3; it is also reducing the shares to be registered under its acquisitions shelf (S4 filing) to 25MM shares from 50MM. Given recentlyacute concerns surrounding CHK's spending plans and liquidity profile, Deutsche believes the stock will react very favorably to these retrenchment moves; they will provide further thoughts and updated numbers following the company's conference call this morning at 9AM EDT (888-211-7383 / 1193464).

Notablecalls: I think $13.50-$14.50 levels are in play for CHK in the near-term.

Friday, December 05, 2008

Cubist Pharma (NASDAQ:CBST) : Downgraded to Underperform at Oppenheimer

Oppenheimer is out downgrading Cubist Pharma (NASDAQ:CBST) to Underperform from Mkt Perform, seeing downside to $18-$19 range.

According to Oppenheimer the downgrade is based on concerns that the near-term product in-licensing is likely to be outside core markets and may result in material dilution. CBST has identified licensing a late-stage or commercial product as a high priority. Based on firm's review of acquisition candidates in CBST's core anti-infective market, they see few compelling opportunities and believe CBST may be forced to expand outside its core market. On valuation, CBST trades at 22.0x '09 fully taxed pro forma EPS compared to 16.1x for a universe of profitable biotechs. View the absence of composition of matter patents for Cubicin as a chronic high-impact risk factor justifying a lower PEG than peer group.

Opco points to the acquisition of Ecallantide from Dyax Corp. (DYAX, NR, $2.48) on 4/24 as the first step in CBST's transition from anti-infective company to an acute care-focused commercial company.

Does lower commercial risk trump higher clinical development execution risk? In firm's view, investors offered a clear answer, sending shares of CBST down 13% in the two week period following the Ecallantide in-licensing on 4/24/08, versus the Amex Biotech Index performance of -0.25% during the same period.

ANDA Risk Fades But IP Questions Remain. While investor concern about a near-term aNDA filing for Cubicin is receding, Oppenheimer views the absence of composition of matter protection for Cubicin as a chronic overhang justifying a lower PEG ratio and creating a deterrence to potential acquirers.

If a paragraph IV challenge is filed, CBST would have 45 days to file an infringement suit against an ANDA applicant. An infringement suit would prevent FDA approval of the ANDA for at least 30months from the date of the notice, unless a court rules in favor of the ANDA applicant beforehand. While we have no specific knowledge of companies preparing Paragraph IV certifications, the firm believes there is always a chance such filings would occur, creating overhang on CBST shares.

Notablecalls: I like the reasoning behind this Opco's call. It kind of looks like the stock has gotten ahead of itself - Cubicin is a nice product but has its problems (ANDA's looming).

What to do with the stock?

I think the stock will get hit on this call. See sub-$27 levels.

The larger cap bios have underperformed lately and I think people are better off taking profits in CBST and moving into CELG's of the world.

Thursday, December 04, 2008

Arch Chemicals (NYSE:ARJ): Major downgrade from Keybanc

Keybanc is out with a pretty major downgrade on Arch Chemicals (NYSE:ARJ) cutting their rating to Underweight from Neutral with a $18 tgt.

In the face of many headwinds, they are reducing their FY09 estimate to $1.80 from $2.30 vs. 2008 EPS estimate of $2.25; firm's $2.25 estimate is the midpoint of Arch Chemicals, Inc.'s current full year guidance of $2.20-$2.30.

In their many discussions with companies over the past few weeks, they are seeing a lack of urgency in further reducing current cost structures and companies may not be doing enough to adjust to the current environment. Keybanc senses that ARJ may be in this camp; this is their opinion only. As volumes tumble with weakening demand we should see a sharp increase in unabsorbed overhead, which would lead to an overall reduction in profitability.

The headwinds that ARJ is facing in 2009 are a strengthening dollar, a weakening European and Asian economy, higher pension costs, higher interest expense, continued weakness in North American housing, and lower non-residential construction spending. The Advantis acquisition, lower shipping costs and benefits from the Company's HTH plant expansions and the personal care plant in China will partially offset some of these headwinds.

At this time they do not see a reason why investors would want to establish a new position at the current price near $26.

Notablecalls: I suspect this call has what it takes to destroy the stock today. By destorying I mean a 6-10% downside move. Note the $1.80 FY09 EPS estimate is the new Street low (consensus stands at $2.39).

Keybanc's downside price target is based on a P/E of 10x estimated 2009 EPS of $1.80. Sounds prudent in current environment.

Red Had (NYSE:RHT): Jeffco upgrade to Buy; Cisco relationship on tap?

Jefferies is out with an interesting upgrade on Red Had (NYSE:RHT) taking their rating to Buy from Hold with a $16 tgt.

OK November. Checks indicate steady demand for the core RHEL products (AP, RHN, etc.), while Jboss sales continue to outperform. It seems like Red Hat is picking up some share in middleware dueto BEA/Oracle (ORCL, $16.13, Buy) dislocation and because open source solutions become relatively more attractive as budgets tighten.

Cisco relationship on tap. Industry sources indicate that Cisco's (CSCO, $16.01, Buy) upcoming line of blade servers is likely to offer RHEL as an option, perhaps even as the default OS. The KVM (non-bare metal) virtualization features in RHEL would allow any type of virtualized container to run on the Cisco blades.

Upgrade to Buy. With 100% recurring revenue including 80% off the balance sheet in any given quarter, increasing Jboss sales, and low-cost leadership, Red Hat is well-positioned to buffer the '09 spending storm. Additional revenue from a deal with Cisco would provide upside to our current estimates. The company has $3.90 in net cash per share, and on a cash flow basis, the shares are yielding about 16%.

Notablecalls: 1) Beaten down stock 2) Very low valuation (16% FCF yield is low), 1/3 of mkt cap in cash 3) A catalyst in the horizon in form of Cisco news.

RHT should see some nice buying interest following this call.

Tuesday, December 02, 2008

Xenoport (NASDAQ:XNPT): Actionable Call Alert!

XNPT: MAJOR DEFENSE FROM MORGAN STANLEY - Seems like a big over-reaction. Rating Overweight

Results for 986 P2b in GERD are out this morning, overall the trial failed on efficacy and there were no problems with safety. Harr had nothing in his model for this indication, expectations should have been quite low for 986 in this indication. However, stock is getting hit extremely hard in pre-trading. Seems like a big over-reaction. Rating Overweight.

Notablecalls: Bounce!

Tessera (NASDAQ:TSRA): What is the true value of the stock? - FBR

Friedman Billings Ramsey comments on Tessera (NASDAQ:TSRA) after the Administrative Law Judge (ALJ) in the wireless ITC case determined that TSRA's asserted patents are valid but not infringed by the respondents (ATI, Freescale, Motorola, Qualcom, Spansion, ST Micro).

FBR notes this is the same judge who (in February 2008) granted the same respondents a stay of motion, which was actually overruled by the ITC Commission 29 days later upon appeal by TSRA. To that end, it appears "on the surface" that TSRA could, once again, appeal to the ITC Commission with the goal of an overruling, especially considering the ITC staff commentaries that have been in favor of TSRA.

With all the uncertainties associated with the legal front, and lower EPS estimates in CY09, the key question is "What is the true value of the stock?"

Firm calculates a sum of the parts of $18.00: $7.00/share for the core semi business, $5.00/share for the non-semi mix—combined with the current net cash/share of $6.00, this results in their $18.00/share valuation.

Stock net: despite disappointing news from the wireless ITC case, we believe that TSRA's intrinsic value of $18.00/share bakes in a worst-case scenario, with no settlement in any of the legal fronts and not much incremental revenues from the new non-semi segments realized. The stock, below $10.00 (where it traded after hours), is undervalued, in their opinion, and offers "event-driven" investors an attractive entry point.

Notablecalls: I suspect TSRA will trade over the $10 level today. ITC Commission has been very pro-Tessera and with current $9 levels representing pretty much the worst case scenario, risk/reward looks to be in place for a solid upside bet.

Monday, December 01, 2008

General Electric (NYSE:GE): Could lower guidance tomorrow - Citigroup

Citigroup is out cautious on General Electric (NYSE:GE) saying GE Capital webcast could be forum to lower 2009 outlook. Firm maintains Hold rating and $16 tgt on the stock.

On 11/25 GE announced it will be holding a webcast on 12/2 to review GE Capital. The goal of the webcast is to review strategy, funding, liquidity, risk management and details behind the recently announced $2 billion cost reduction program at GE Capital.

Opportunity for GE to Lower 2009 EPS Expectations? — Firm believes the webcast could also serve as a venue to lower 2009 EPS expectations. Normally the coming year guidance is communicated by CEO Jeff Immelt at the late December meeting which is scheduled for 12/16 this year.

Historical Precedent For Guide Down — In prior years, when street estimates were too high, GE has held late Nov/Early Dec meetings and used them as a forum to lower expectations so the CEO could focus more on strategy, etc at the late Dec meeting. The likelihood of this being the case this year appear reasonably high given the short notice on the webcast and the unprecedented macro and financial upheaval. Cit notes they cut their ‘09 GE estimates on 11/14 to $1.65 and while numbers have drifted down since, the street is still at $1.75. Further, the risk to their below consensus estimate appears biased to the downside.

Notablecalls: Interesting call from Citi - something I would call research (or a research call). The stock has recovered nicely from the $12-$13 level and could get hurt on this call.