Energizer (NYSE:ENR): Upgraded to Buy from Underperform

Merrill Lynch is out with a major call on Energizer (NYSE:ENR) upgrading the shares to a Buy from Underperform.

Firm notes they had downgraded ENR to U/P with valuation closer to ~10x NTM EPS ahead of a tough Dec qtr with risk of a weak holiday season and retail inventory de-stocking. But with Q1 in the past, easier comps ahead, and shares off 30% from Jan highs, they expect a near-term bounce. Further, they think this may prove a compelling LT entry point for a solid story that is being given no credit by the market.

Three reasons to buy the stock:

1) shares are at 7.4x Merrill's below cons CY09 EPS est, 2.5 std deviations below the historical mean, and they see more upside than downside to their numbers;

2) the org battery comp swings from +4.6% in Q1 to -8.7% in Q2, as ENR laps one of its worst ever de-stocking qtrs in the yago;

3) they continue to believe there is very little risk to debt covenants, fear of which drove ENR to a trough P/E (5x) in Nov. A trade near-term, but not losing sight of LT story With 60% of sales in batteries, ENR faces tougher macro headwinds than most in HPC, and if the macro setting does not improve, batteries will struggle. But at current levels, the shares adequately reflect this uncertainty and now discount far too much going concern risk. Firm thinks ENR can grow EPS 10% annually in the LT, and current levels offer an opportunity for both a trade or a LT position.

Maintaining EPS estimates, price target of $59
Merrill is not changing their EPS ests or $59 PO. While they are below consensus on EPS, they think the market is discounting even lower numbers. 12-mo target is based on their 2010 est, but near-term, shares could move closer to 9x consensus, or $50. Firm sees downside to $35 if the shares test prior lows, but they think these lows were driven more by covenant concerns, which have eased with better Q1 results. Risks are clearly addt’l retailer de-stocking and worsening macro setting.

Notablecalls: ENR stock is down 12 pts from the Merrill downgrade levels (see NC post from Jan 13), so I think it's long due for a bounce.

I see at least 2 pts worth of upside following this call.

HEICO (NYSE:HEI): Could get hit following earnings

Have a kinda of an under-the-radar play for you this morning from Stephens. HEICO (NYSE:HEI), which engages in the design, manufacture, and sale of aerospace, defense, and electronics related products reported its Q1 results last night. The results came in way below expectations.

This is what Stephens has to say about HEI today:

HEI missed our and consensus F1Q09 targets as we had feared for the past few months based on our Flight Support Group (FSG) segment organic growth correlation analysis. F1Q09 EPS from continuing operations of $0.38 (+1% yoy) was below Stephens and consensus estimates of $0.43 & $0.42, respectively. These results exclude a non-recurring $0.04 retroactive R&D tax credit benefit realized in the quarter. Sales of over $130.5 mil (-3% yoy) were below our and the consensus estimate of $143 mil. (+6% yoy). FSG sales of $99.6 mil. (-3% yoy growth and -7% organically) were well below our $110 mil. (+7.5% yoy growth) target. F09 guidance was revised downward versus consensus sales and EPS expectations. We have been concerned over the past several months about weakening commercial aerospace aftermarket trends and HEI's significant exposure as well as potential trading multiple implications for the stock. During periods of expected weakening aftermarket growth, the stock has historically traded down to 9x-12x forward EPS expectations - the stock is currently trading at ~17x current F09 estimates. We believe that the stock is currently priced for a F09 EPS target of around $1.90, near the bottom of the prior EPS guidance range.

Notablecalls: Spoke to a L-T HEICO (NYSE:HEI) watcher who said the stock could go to mid-$20s.

Note that Raymond James is out with a d/g to Mkt Perform after upgrading the stock to Outperform on Dec 18. I suggest you take a look at what the stock did following RayJay's upgrade as this will help you guys to gauge the possible downside move.

I see 10%+ downside from closing levels.

Intuitive Surgical (NASDAQ:ISRG): Morgan Stanley and Oppenheimer out negative (ACTIONABLE SHORT ALERT)

Oppenheimer is out with a pretty negative call on Intuitive Surgical (NASDAQ:ISRG) noting that as the situation continues to worsen, their ISRG sensitivity analysis indicates a realistic scenario where 2009 EPS approach $4.00, which in all likelihood would pressure shares. Yet a "theoretical" value of ISRG without any unit sales contribution would be just over $70/share, so they suspect they'd see a solid floor for the stock in the mid-$80's.

If there are still pockets of denial about the deteriorating economic situation in relation to stocks, one prime example in healthcare seems to be the hospital spending crisis. While the issue by now is greatly discussed, some key underlying dynamics (investment income, unemployment, access to capital) keep getting worse, and the potential severity and longevity of the issue seem still to be underestimated by the Street and still not well reflected in shares.

Oppenheimer points to last week: 1) CYH's reduction of '09 cap-ex by another 15%, 2) Partners Healthcare's system (Boston area) cap-ex reduction due to new investment income losses, 3) Kaiser's just announced $2.3B investment loss in 2008, and 4) the broader difficulties of raising capital since the ratings agencies downgraded the nonprofit hospital sector from stable to negative about two months ago. Firm's checks indicate the March quarter is so far a continuation of the significant drought felt since early December, and they would avoid shares of ISRG, VAR and MR heading into those results.

As for ISRG, sensitivity analysis looks at the impact of da Vinci systems declines on mgmt's 2009 EPS guidance of $5.30-$5.40 (which assumes flat y/y unit growth). As they've detailed in the past, their current thinking is that units may decline by at least 20-30% or more, which would drive EPS toward the $4.00 area. Firm's new estimate of $4.85 (down from $5.05) is below the Street's $5.16, and remains at risk.

Notablecalls: With ISRG's sitting right at the $100 level and Oppenheimer calling for $20 worth of downside from here we may get a knee-jerk reaction. Looking for a 3-5 pts downside move off open. Calling it Actionable Short

PS: Note that Morgan Stanley is also out cautious on ISRG this AM saying consensus numbers do not fully reflect the severity of the capital-spending environment. Diligence indicates that capital spending will fall materially in 2009, putting management guidance of flat boxes at risk. Firm models system placements down 17% in 2009, which leads them to their Street-low estimates of $895 million in revenue and $4.68 in EPS, compared to consensus of $964 million and $5.16. Downward revisions appear likely through 2009, putting an overhang on the stock and underpinning firm's belief that it is still too early to own ISRG. This said, competitive position, earnings power, FCF yield and balance sheet quality will help the stock find a floor but not until visibility improves.

Notable Calls Network (NCN): American Science & Engineering (NASDAQ:ASEI)

Since I haven't highlighted Notable Calls Network (NCN) for a while now, I thought to give it a go.

We caught a nice mover today:

American Science & Engineering (NASDAQ:ASEI) was down today following a press release announcing the receipt of partial termination for convenience on its U.S. Government ZBV Military Trailer Order.

- The news hit around 9:42 AM ET causing the stock to slide 8 pts in little more than an hour. One can't really blame the initial (short) sellers as the Military is among ASEI's largest customers (think most of their backlog is Mil).

I did pour over the press release myself but given the fact I couldn't understand why the Military had cancelled the contract in the first place, I passed.

- Around 10:55 AM ET an NCN member pinged me saying Stifel was out defending ASEI saying the stock was down on old news:

'...We would buy the stock on the today's drop as we think the ultimate resolution of the situation will be favorable for AS&E. No change to forecasts.

On February 12, 2009, we spoke to representatives of the Department of Defense in relation to the protest of the recent award to AS&E to build 68 Z Backscatter Military Trailers (ZBMT) by Rapiscan, a division of OSI Systems (NASDAQ: OSIS). This information was published on that date.

A settlement had been reached between the Marines and OSI under which AS&E will be permitted to immediately start work on 34 ZBMTs, which should take about three months to deliver.

Marine Systems Command reviewed the terms of the solicitation and specifications, and will re-compete the remaining 34 units. AS&E's ZBMT meets the existing specs and is expected to meet any revised specifications. OSI's product did not meet the prior specs.

According to the representatives, the Marines would like to have all the ZBMTs yesterday. A spiral development program is in process to add capabilities to the ZBMT and it is possible that additional units may be added to the solicitation for the currently remaining 34 units.

It appears to us that this is not a one-shot order and that the ZBMT will likely become standard equipment for Marine units in the field and, potentially, at domestic bases. From the tone of the conversation, we sensed a high level of frustration from the representatives we spoke with. The Marines funded the R&D to develop the ZBMT and we believe the ZBMT is the system that is desired.

We strongly reiterate our Buy rating and 12-month target price of $90...'


So, over the next minutes I quickly distributed the defense to all NCN members. The call made sense & I knew it would produce a nice bounce. And it did. Depending on one's entry/exit 2-2.5 pts in profits was to be had as the defense call from Stifel spread among trading desks.


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

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.

DryShips (NASDAQ:DRYS): Upgraded at Oppenheimer

Oppenheimer is out with an interesting upgrade on DryShips (NASDAQ:DRYS) upgrading their rating to Market Perform from Underperform following dramatic underperformance by DryShips during the last month.

The firm estimates that DryShips is at least halfway through its $500M at-the-market (ATM) equity offering, which implies that daily shareholder dilution could diminish in coming weeks. DRYS has continued risk of charter renegotiation and further equity dilution, but spot and futures rates are now above cash-breakeven costs, reducing the likelihood of default for dry bulk companies. They also observe that dry bulk stocks and DRYS have generally performed poorly over the last four days, despite improving day rates.

Past Halfway Point. Assuming the company has been selling 10% of daily volume like last time, the company has issued approximately 43M shares at an average price of $5.90/sh ($256M) since January 28 and is more than halfway through its $500M offering. In November, the stock bottomed halfway through the estimated ATM offering period.

Offering End Could Be Even Closer. If the offering has been 20% of daily volume, DRYS would have finished the offering Thursday, having sold ~84M shares at $5.98/sh. Oppenheimer assumes this amount of dilution for modeling purposes. After the end of the last 25M share ATM offering (estimated on Dec 5), the stock outperformed significantly.

Testing November Lows Despite Improved Environment. The $500 million in new equity brings DRYS closer to compliance with LTV covenants, and offsets a good portion of the share count dilution in their NAV. In addition, day rates have improved dramatically since November, Chinese iron ore imports, inventories and pricing have improved.

Notablecalls: There could be a nice trade here in DRYS:

- The market seems to be tilted to the upside, which means that mo-mo stocks like DRYS can make larger than usual moves.

- Opco's comments regarding the offering make sense and seem pretty encouraging. Especially the aspect of the stock bottoming around halfway through the offering period in November.

- The chart seems to be favoring a bounce as well.

Everything seems to be in place for a possible 10%+ move to the upside as soon as today.

PS: Yes, it's an upgrade to Perform, not Outperform. There are very few analysts out there willing to step in front of this train, so you gotta give it up to Opco's Scott Burk for taking a stand. Note that it was Opco's negative comments some weeks ago that caused DRYS to roll over.

CoStar Group (NASDAQ:CSGP): Downgrade to Sell at Deutsche Bank

Deutsche Bank is downgrading CoStar Group (NASDAQ:CSGP) to Sell from Hold on their revised estimates that call for a prolonged period of declining fundamentals. Although revs growth was weak even before CRE trends turned (reported Feb 19), CSGP was able to maintain its rich valuation on outsized EPS growth. But with the bulk of operating leverage having run its course, further margin expansion may not be possible w/o re-acceleration in revs or outright restructuring. It follows that CSGP’s multiple could begin to contract materially as mkt sees that recovery is a long way off, or that further downside risk to #s exists.

Recapping the quarter
CSGP recorded its first-ever sequential revs decline (-1.5% QoQ) as unfavorable FX (-2%) compounded the impact on a macro-led slowdown in the core business. 4Q08 revs missed guidance (+0 to 1% QoQ), our estimate (by $400K), and the Street ($600K). Deutsche also notes full year revs growth (+10%) came in well below the original +14-16% guidance and is already aligned with post-9/11 downturn levels. GAAP EPS of $0.38 were $0.02 above us due to sharply lower selling & marketing expenses (+$0.05), even as higher COGS (-$0.02) and lower interest income (- $0.01) precluded some of this upside.

Believe the stock is fairly valued at $20
At 15x fwd EPS (ex-cash), CSGP trades at a sizeable premium to other subscription-based businesses that in firm's view do not share the same addressable market concerns. Deutsche's new $20 price target values the core business (ex $11/share in cash) at 9x 2009E EPS of $1.00.

Notablecalls: CoStar acts as a clearinghouse for pertinent information in the commercial real estate market. This probably means things are not getting any better for CSGP in the near-term. Deutsche's Sell rating and $20 tgt should create some downside for the stock.

I'm guessing CSGP will go below the $27 level today, possibly testing the 52-wk low.

US Steel (NYSE:X): Likely Trips Covenant in Q4; Reiterate Sell - UBS

UBS is out very negative on US Steel (NYSE:X) lowering their tgt to $23 from $25 after their 2009 EPS estimate for X drops to a $0.55 loss from breakeven EPS, now incorporating weaker tubular results, plus company guidance for pension/OPEB and capex costs. Drilling permits and rig counts suggest sharply worse tubular prices and volume, retreating from record Q4. This compares with consensus ’09 EPS at $1.43. UBS foresees H1 losses, with a turnaround in Europe after destocking potentially supporting H2.

Volume recovery is key, but challenging in global recession
The company reiterated that better volume is key to earnings recovery, highlighting the importance of economies of scale. Firm anticipates below 60% utilization in ’09 from the U.S. sheet business, as mini-mills restart to 80%, for a US average ~70%. Distributor shipments down ~40% in Q1 suggest potential downside to volumes.

Debt costs likely rise,
UBS anticipates in Q409 U.S. Steel will trip the total debt-to-EBITDA covenant on its $750M revolver of 3.25x, registering 4.5x. UBS credit analyst Jeff Cramer also believes its credit ratings could be lowered. Currently Moody’s has X as investment grade, at Baa3, while S&P’s BB+ rating is junk. While debt maturities look manageable near term, they anticipate funding costs will rise.

Reits Sell.

Notablecalls: This call is going to hurt X stock for two reasons:

- UBS is calling for weaker Tubular results. Tubular has been the single bright spot supporting the whole co.

- Convenants tripping? Uhoh! Don't think the market is going to like this one.

Google (NASDAQ:GOOG): Downgraded to Source of Funds - ThinkEquity

ThinkEquity is downgrading Google (NASDAQ:GOOG) to Source of Fund from Accumulate noting the shares are up 27% in the past three weeks (versus S&P up 3%) and are currently reflecting a 2H09 recovery that they believe is unlikely to materialize.

Firm's research suggests that paid clicks and CPCs have continued to deteriorate in the first half of Q1. They are now expecting 3.8% Y/Y growth in net revenue (0.6% for gross) versus the Street consensus at 10.3%. Think's PF EPS estimate is now $19.85 versus consensus at $21.20. As investors come around to their point of view, the firm expects to see multiples contract and the stock to fall into the $300 range.

Notablecalls: Wanted to let you know this one was out there. Looks like sub-$350 is in the cards for the stock.

Research in Motion (NASDAQ:RIMM): Downgraded to Underperform at CSFB

CSFB downgrades Research in Motion (NASDAQ:RIMM) to Underperform from Neutral as they lower their FY10 EPS estimate for RIM by 20% to $2.94 and introduce a below consensus FY11 EPS of $3.46. Firm's target price falls to $37 (from $45) representing 20% downside potential.

Lower smartphone estimates, RIM share gains to moderate. CSFB lowers smartphone industry volume forecasts to 154mn/177mn in 2009/2010 (+9.4%/+14.7% respectively) amid signs of slowing smartphone growth and concerns over affordability (total cost of ownership remains around $800).They maintain their view that RIM’s share gains will slow given share loss in North America, offset by some traction internationally. Globally, they expect RIM’s smartphone market share to be 17.0%/17.4% in CY09/CY10 respectively, leading to unit volumes of 26mn/26.3mn in FY09E/FY10E.

Less leverage than expected. CSFB believes that hardware GM may languish at around 35% for FY10 leading to a group OM of 20.9% with risks to the downside given several structural factors. 1) teardown analysis for the Bold 9000 and the Storm 9530 shows that RIM’s bill-of-materials (BOM) on new products is structurally higher than that of older platforms (Curve) and competing products (the Bold’s BOM is 55% higher than that of the E71). 2) see signs of aggressive pricing from RIM for virtually all recent product introductions driving double digit ASP declines. 3) see a rising IPR burden for RIM in WCDMA. 4) believe that RIM may need to retool its chipset strategy at some point, thereby driving R&D spending higher.

Notablecalls: Note the call was out YESTERDAY around market close. It will probably cause some damage to RIMM's stock price. Given I think the market should be faded this morning, RIMM would be the best instrument to use.

I does not look like things will get better for RIMM anytime soon.

JP Morgan (NYSE:JPM): $26 An Attractive Entry Point - Morgan Stanley

Morgan Stanley is out this morning calling JP Morgan (NYSE:JPM) one of their highest conviction Overweights. Firm believes current valuation is an attractive entry point and highlight three reasons for buying the stock today:

1) JPM is one of the best positioned for a downturn due to a strong capital position (TCE/TA at 3.8% vs. 2.8% at BAC and 1.5% at Citi), high reserve coverage (1.8 years vs. 1.0 at BAC and 1.2 at Citi), and low NPLs (1.2% vs 1.7% at BAC and 3.2% at Citi).

2) One of the best positioned for an improvement in asset values. Fed activity should help drive
improving asset values, aiding the IB business. JPM is not looking to sell assets into the bad bank, but rather may be a buyer depending on price, structure and leverage.

3) Attractive Valuation. JPM is currently trading at 0.7x book value and 1.1x tangible book. It may not be as cheap as some peers, but it also doesn’t have the dilution risk, in firm's view. Additionally, while they are forecasting a 30% dividend cut, mgmt suggested they are unlikely to cut the dividend at this time.

What’s New: Yesterday’s meeting with JPM’s CFO Mike Cavanagh strengthens Morgan's conviction in their OW call on the stock. They came away believing JPM is one of the best positioned to weather the pressures of increased scrutiny and incremental tail risk in a deteriorating environment.

Investment Thesis: They are Overweight JPM. JPM has less exposure to the riskiest assets (subprime, resi construction, cdos) than peers, stronger capital position and stronger risk management. WM accretion puts them in relatively stronger position going forward.

Notablecalls: Whenever I need to make an upside bet in the financials I pick JPM to do the job. Not saying this call in outright actionable but underscores my thinking. JPM seems the safest.

Research in Motion (NASDAQ:RIMM): Colour on warning

JP Morgan is out with some comments on Research in Motion (NASDAQ:RIMM) after the co warned this morning:

First take: likely stock reaction - neutral/slightly negative

The net outcome for F4Q is that although subscriber count will exceed expectations significantly, revenue will be near the mid-point of guidance, margin and earnings at the lower end of the guidance range.

Though the commentary suggests that the upgrade cycle is lengthening out and inventory is lean and that could weigh on F1Q, this could also lead to a spring loaded recovery later in FY10, when channel inventory gets replenished and the upgrade cycle returns to a more normalized rate.

The overall takeaway is mixed. The press release suggests that F1Q could be seasonally slower. Though the firm is forecasting a flattish F1Q, they suspect there is a risk that this forecast is too optimistic. That said, RIMM clearly has very strong positive momentum relative to other handset OEMs and is gaining significant market share, consistent with expectations. Though the commentary suggests that the upgrade cycle is lengthening out and inventory is lean and that this could weigh on F1Q, this could also lead to a spring-loaded recovery later in FY10, when channel inventory gets replenished and the upgrade cycle returns to a more normalized rate. The stock may come under some pressure today, in anticipation of weaker than expected F1Q guidance but they remain buyers of this strong growth story on the pullback. Firm believes the P/E multiple still does not reflect RIMM’s strong growth and ultimate earnings power.

Notablecalls: RIMM's latest upside move was largely helped by analyst comments of Gross margins staying above the 40% level. Looks like this isn't happening.

The good news is the subs growth but I think that in current environment GM trumps subs.

Do not think RIMM will go sub-$50 on this, though but I'm in no hurry to play the bounce here.

Energizer (NYSE:ENR): Added to Citi Top Picks Live with a $85 tgt

Citigroup is out positive on Energizer (NYSE:ENR) adding the stock to their Top Picks Live list with a $85 tgt (offering 73% upside from current levels) as ENR's shares are trading at a very reasonable 7.5x their CY10 EPS estimate.

The Story — Despite a weak U.S. economic environment, which has led to slow battery category growth, we are encouraged by recent trends as category sales growth accelerated to 4.9% in the last 4 week period, versus the 1.5% decline seen in the last month of 2008 (and, Citi notes, comps get increasingly easy for category growth with every passing month). More importantly, ENR was the only branded player in the total batteries category to gain market share in both 2008 (+0.7 pts, to 37.6%) and in January 2009 (+100 bps YoY to 40.5%). To be fair, ENR spent a lot to drive this growth as their percentage of sales on promotion rose sharply, but the firm thinks their EPS estimates for the rest of FY09 adequately reflect higher spending levels. While this data only reflects the U.S. battery category in tracked channels (which we believe accounts for ~40% of ENR's U.S. battery sales), they find these trends relevant and noteworthy.

Risk/Reward — With ENR expected to begin benefiting from the pullback in certain raw material costs, as well as continued synergies from the PYX acquisition, they believe that despite the tough macro backdrop, ENR will be able to generate ample operating cash flow to keep its debt/EBITDA within its covenants, which factor they believe has weighed on the stock heavily in recent months (though note that for2 consecutive quarters, ENR's debt/EBITDA has been below the critical 3.5x level on a TTM basis). And with the stock having stabilized recently (as a result of ENR's most recent earnings release), they believe that downside in the name is limited.

Bottom Line — Citi believes that while fiscal 2009 will be a challenging year for ENR, this outlook is already reflected in both the consensus estimates and the stock’s valuation. While the stock may lack a catalyst in the short term (next data points being monthly Nielsen data and next quarter’s earnings release in April), they think the worst is behind us on this name.

Notablecalls: ENR is a mover and I suspect that if the market's good this one has ample upside in the n-t.

Medicis (NYSE:MRX): Downgraded to Sell..er..Hold at Natixis Bleichroeder

Natixis Bleichroeder is out with a pretty nasty downgrade on Medicis (NYSE:MRX) taking their rating to Hold from Buy noting the entire market seems to be against Medicis and it’s fairly easy to see why -- if they lose Solodyn to generics, they would likely start losing money.

And yesterday’s news that the FDA had approved Impax’s generic the day before sent the stock into a nosedive. There is almost a universal view that the next wave of generics will be right behind and it will render Impax’s inability to launch because of the settlement with Medicis moot. And with this headwind it is hard to see the stock outperforming from here. But a large unanswered question is why only Impax? They were the only generic not sued and therefore there is no ambiguity that there would be no 30-month stay on them. With the Impax approval, Medicis’ old Citizen's Petition (CP) on dose proportionality was denied. The question is will the others like Sandoz, Barr and Mylan get approval within days. Also, it appears that Medicis could lose the race to get its Solodyn “2.0” approved.

Despite their desire to always go against what the rest of the market believes, despite the fact that they loathe changing ratings on stocks after the news, and despite the fact that they still think (although probably the only ones) there is some chance greater than zero that the FDA will resolve the Warner Chilcott CP and Medicis’ own in their favor, the firm is downgrading the stock from a BUY to a HOLD (and lowering target to $12.00 from $16.00) since they feel this last point has a low probability – perhaps 25%.

Firm notes their previous $16.00 target assumed a Solodyn 2.0 switch, but if the axe drops first, they could imagine MRX trading as low as $7.00. Hence, the $12.00 target is a tossup between scenarios. They note that a Reloxin approval would still be a big catalyst, yet few on the Street believe it will see a final approval in April. Firm thinks that Ipsen may have already submitted its response to the letter it received in December, but this too is shrouded in the unknown.

Notablecalls: This one could see some serious downside from the $12 level despite the other firms staying with their ratings on hopes of a favourable outcome in the generics case.

There is still considerable revenue (50% of it) risk..not sure any meaningful buyers are willing to step into a situation like this one leaving the stock out in the open.

If you read the body language in the MRX note you can see how the analyst is alot more negative than the $12 target makes it seem. Corey Davis, the senior analyst covering the stock does note he would slap a SELL on the stock if there wasn't still for the chance of things going MRX's way.

So, one to watch. Could make a nice short.

Wynn Resorts (NASDAQ:WYNN): Downgraded to Underweight, $21 tgt at Keybanc

Keybanc is out with a downgrade on Wynn Resorts (NASDAQ:WYNN) downgrading the shares to Underweight from Hold after the co announced substantial labor cost cutting initiatives for its Las Vegas properties.

Firm notes this is the first time they can ever remember this management team taking such drastic measures. In addition, on a conference call Steve Wynn commented that spending (labor, marketing, promotions,etc.) on the Encore opening was of a magnitude consistent with a boom time economy. These two data points combined with a severe recessionary climate in both of WYNN's markets cause them to lower their 4Q08 earnings estimate and reevaluate their investment opinion on these shares.

Keybanc is lowering 4Q08 EPS estimate to $0.40 from $0.45 (consensus is at $0.52) and believes there are few companies in the gaming sector with near term prospects and catalysts. Longer term, Wynn Resorts has among the best growth pipelines in the industry. Between 150 well located acres in Las Vegas and a 52-acre site on the Cotai strip in Macau, WYNN should be set for the next five to 10 years growth. That being said, the skittish investment climate today does not augur well for any gaming company and they are afraid WYNN's shares will under perform over the near term. The combination of negative group psychology, today's revelations and our new lower than consensus estimates, necessitates us re-instituting an UNDERWEIGHT investment rating on WYNN, with a downside price target of $21.

Notablecalls: This stuff does not look good. I think the stock can go to $20 in a jiffy if current sentiment prevails in the n-t. Definitely not saying WYNN is similar to LVS or MGM but I'm just hard pressed to see any meaningful buyers step up around here.

Couple of pts of downside is what I think may be in store for WYNN today.

Oh and btw, Merrill/BAC is lowering their tgt on MGM Mirage (NYSE:MGM) to $5 from $11.

MGM (NYSE:MGM): Any borrow?

In case youre wondering why MGM (NYSE:MGM) is down only 8% on this Citi call I suggest you try finding some shares to short. There's no one I know, that was able to get short MGM today.

It also looks like shorting Wynn Resorts (NASDAQ:WYNN) was the best thing to do.

I did think about shorting WYNN but hesitated given the early strength the stock was showing in the pre market.

MGM Mirage (NYSE:MGM): Next Shoe to Drop – Defaults at CityCenter (Actionable Short Alert) - Citi

Citigroup is out with a killer call on MGM Mirage (NYSE:MGM) initiating the stock with a Sell rating and a $2.50 tgt.

20-30% default rate at CityCenter? — Completion of this mega-project could not come at a worse time for MGM. To date, 55% of condo units have been sold, with only 20% deposits being received. Considering estimated spot prices have fallen 33% since the pre-sales (peak), Citi's base case is a 20-30% default rate. Analysis shows if prices fell a further ~15-20% from current levels, the condo projects will be loss making (the Mandarin condos aside).

Las Vegas already on life support — With 60% of Las Vegas revenues now coming from non-gaming revenues, weaker discretionary spending has a greater impact on the Strip. As 80% of MGM’s revenues come from Las Vegas, the firm forecasts MGM’s LV Strip EBITDA to decline 32% to $1.1b in 2009E – with an EBITDA margin of 21.5%, 640bps below a 2008E margin of 27.9%.

Dependent on revolver — To avoid violating its 7.5x Debt to EBITDA covenant, they calculate the group needs to generate $1.84b in 2009 EBITDA, vs. estimate of $1.39b. On Citi's thesis of a 20% condo default rate, they estimate the group will be sitting on $13.8b in debt. At this stage, debt maturity in 2009 and 2010 can be met by MGM’s $7b revolver but they do not rule out assets sales, with Mandalay Bay and Bellagio as potential targets.

Target price at $2.50 — Firm ascribes a 7x EBITDA value for the group’s gaming assets (the mean valuation of US players). With $15.4bn in debt (including unconsolidated JVs), they struggle to find any equity value for the group. They are 24% below the Street on 09E EBITDA and 30% below on 10E EBITDA.

Notablecalls: So this is why the casino stocks have been so weak of late. I suspect anything above the $7.00 level is an Actionable Short in MGM.

I see the stock trading towards $6 level in the very near term as fear sets in. There is very little MGM can do to better their situation. I don't think they can pull off a deal similar to LVS to keep them afloat around current levels. Best case seems to be a way below mkt offering with huge dilution.

Hurt So Good Again: The Bad Bank Plus Private Capital - Stifel

Stifel is out with some comments regarding the "Bad Bank" this morning after headlines suggest the government bad bank idea may be put on hold because of difficulty figuring out how to determine asset purchase prices.

- While they recognize this as a major challenge they believe there may be a solution that utilizes the market (and private capital) while still leveraging the government's large and low-cost balance sheet.

- In their recent note titled "Hurt So Good: Why the Bad Bank Works" (January 29) the firm examined how the price investors might be willing to pay for troubled assets could vary based on their costs of capital.

- They showed that for a hypothetical series of expected cash flows a reasonable purchase price could range anywhere from 50 to 95 cents on the dollar depending on financing costs and the rate of return demanded.

- While the government's balance sheet may provide a financially efficient place to warehouse these assets as they mature the difficulty in valuing them creates risk that the government could overpay at taxpayers' expense.

- Stifel believes a possible solution would be to allow private investment managers to essentially rent space on the government balance sheet for purchasing and managing pools of these assets.

- As an example, an asset manager could raise say $10B of private capital to create an investment fund. It would then contract with the government to secure additional debt financing to leverage this supplied capital. Assuming a 9x debt/equity leverage ratio this $10B of private capital then has $100B of purchasing power. • The fund would pay interest on the government debt first and the investor capital would absorb first losses on the purchased assets.

- If a sufficient number of funds participated in such a system then assets could be put out for competitive bid by the banks, ensuring efficient price discovery.

- A competitive process that leverage the government's low cost of capital while private capital absorbs first losses could be an efficient way to clear many of these assets from the banking sector while controlling risk to taxpayers in their view.

Notablecalls: FYI - just wanted to let you know it's out there.