Office Depot (NYSE:ODP): Upgraded to Overweight at JP Morgan

JP Morgan is out with a major call on Office Depot (NYSE:ODP) upgrading the shares to Overweight from Neutral while raising their price tgt to a whopping $8 (prev. $5).

Firm notes they are upgrading ODP to Overweight for the following reasons: 1) a modest normalization of the economic environment over the next year combined with ODP’s high macro correlation and apparent liquidity over that timeframe; 2) the potential for upward cash flow/earnings revisions against negative Street sentiment; 3) significant multiple expansion to reach peak valuation on trough earnings; and 4) the dissipation of the liquidity governor on the stock.

All in, they see a 3-1 risk-reward scenario. Firm's Dec 2009 price target of $8 is based on 8x EV/EBITDA using 2010 forecasts, 0.4x price to sales, and discounted normalized earnings of $1 in 2012.

Not for the faint of heart. This is an out-of-consensus call: ODP had 1 buy, 12 holds, and 3 sells prior to JP Morgan's upgrade. They also want to emphasize that this is not for the faint of heart. ODP has demonstrated inconsistency since 2006, and management has lost some credibility. Also, 2Q could be the worst quarter of 2009 for ODP given seasonally low revenues.

Looking for the first leg. JP Morgan believes ODP has sufficient liquidity to carry it through the next year unless the macro environment takes another significant leg lower (i.e., sales continue to decline at a high teens rate over the next four quarters with no benefit from the -7% and -15% compares in 3Q08 and 4Q08, respectively). The call is based on their expectation that yoy U.S. GDP and payroll growth become modestly positive over the upcoming 12 months. Recall, ODP’s top-line growth rate is 70%+ correlated to these factors. This is about the first leg of the stock’s recovery: peak multiple on trough earnings. Looking back to 2001, ODP began moving higher three quarters prior to the bottom in yoy GDP and payroll growth.

Shoots of green. All three office superstores commented that domestic retail comp trends have stabilized excluding the Easter shift. Moreover, SPLS recently indicated that its smallest customers in NA Delivery are also showing early signs of stabilization. The consumer/small business customer led the U.S. into the recession and they are likely to be the first to begin the procession out.

Notablecalls: First off all, the $8 tgt is set for December 2009. So, JP Morgan is pretty much calling for 100% upside in the next 6-7 months.

Also, as they note this is a out-of-consensus call. When you have something like this coming out of a tier-1 firm you better pay attention. Usually a table turner.

All in all, I think this one can trade over $5 level today.

CarMax (NYSE:KMX): Upgraded to Buy at Deutsche Bank

Deutsche Banks is making a catch-up call in CarMax (NYSE:KMX) raising their rating to Buy from Hold and bumping price tgt to $15 (prev. $10).

Improvement in wholesale funding market has positive implications for CAF
The combination of vastly stronger demand and contracting spreads on Auto ABS deals has mitigated one of our key concerns: That captive (non-bank) finance co's such as Carmax Auto Finance might be structurally impaired. Improving liquidity and lower borrowing costs suggest that this business can once again become an important contributor to KMX earnings (as well as a support to sales).

April deal appears profitable, and the market is now even better
KMX completed its first ABS issuance since early July 2008 on April 9, 2009. The gross collateral spread was 7.3%, which was actually the highest on record. While this number does not account for increased loan loss provisions and credit enhancements, Deutsche Bank still believes that the terms of the securitization imply a $368 per unit profit on CAF originations, a dramatic improvement from early 1Q09 levels, when they estimate market conditions implied a -$106 per unit loss. At today’s spreads, they estimate per-unit profitability at $525 per unit.

And they believe that retail business fundamentals should improve
After historically outperforming the used car market, KMX appears to have underperformed the overall used industry over the past 3 quarters. Firm believes that this was partly attributable to segment mix (lower priced, older vehicles have already begun to recover, and “newer used” vehicles have lagged). While they anticipate near-term volatility, they believe that fundamentals could improve significantly over the next 6-12 months as automaker capacity consolidates, and the new vehicle market shifts from deflationary to inflationary pricing; particularly positive for the type of recent vintage used cars that represent KMX’s specialty.

Carmax has lagged the industry rally, which creates an opportunity
While shares of traditional auto retailers have rallied by 50%-100% since early March, Carmax’s shares remain roughly flat, partially due (in Deutsche Bank's opinion) to structural concerns regarding CAF which they believe are substantially mitigated by ABS market improvements. They estimate that KMX shares could have 40%-50% upside from current levels (to target price of $15) if they apply the average forward multiple for benchmark auto retailers (14x-15x) to 2011 EPS estimate, which the firm sees as conservative. Primary downside risks include deterioration of loan losses, widening of ABS spreads, and lower consumer spending driven by higher unemployment.

Notablecalls: A real ketchup call but it will likely work. After all Deutsche has spent past 3 yrs on Hold.

I suspect the stock can trade towards $11 level if the market continues to hold.

Big Lots (NYSE:BIG): Downgraded at JP Morgan - cautious ahead of numbers

JP Morgan is making an interesting call on Big Lots (NYSE:BIG) this morning downgrading the shares to Neutral from Overweight while lowering tgt to $27 (prev. $28)

Firm notes they have déjà vu concerns ahead of Big Lots 1Q EPS print tomorrow and accordingly are downgrading the stock to Neutral from Overweight. Importantly, while they think BIG will handily exceed their estimate/Street consensus for 1Q EPS, they also believe that this is likely discounted given the company’s excellent track record over the past 3 years (avg. $0.07 beat over the last 12 quarters). Moreover, any 1Q upside could be trumped by cautious commentary on 2Q09 sales – similar to August 2008 when BIG cautioned that sales QTD were soft (BIG dropped 7.1% vs. SPX +0.4% that day). Finally, BIG has outperformed the market more than four-fold year-to-date, with shares up ~75% (RLX +17%) and sentiment – both buy-side and sell-side – has noticeably improved since March. Net, the firm doesn’t find the risk/reward as compelling today and are moving to the sidelines ahead of the print.

Learning From retail peers – sell on the news, déjà vu concerns. The market isn’t rewarding companies for EPS upside, in JP Morgan's view, with retailers including BJ, KSS, JCP, HD, AAP, and PETM topping Street estimates on earnings day, but watched the stock close in the red. As such, they are concerned that BIG may not be immune to the “sell on the news” trade and believe shares may come under pressure on Thursday despite a solid print. Further, they believe that the selling pressure on the stock may be exacerbated if Big Lots takes a cautious tone on 2Q top-line trends – reminiscent of the 2Q08 EPS print where results topped the Street by $0.06, but a downbeat forward sales outlook sent shares down 7.1% on the day (SPX +0.4%

Too much sell side (and buy side) love. At the time of JP Morgan's upgrade in early March, sell side support was noticeably less evident with only a 40% “Buy” rating ratio and short interest stood at 22.0%. Today, that “Buy” ratio stands at 62% and short interest has been cut almost in half to 14.0%. This “sea change” in sentiment makes the firm nervous given the aforementioned run-up in the stock. Accordingly, they think the risk-reward equation may balance (for the time being) and they're moving to the sidelines on the stock.

Lowering 2Q09 and FY09 EPS outlook. JP Morgan is lowering their 2Q outlook from $0.31 to $0.29 (Street at $0.30) based on a tough cycle against two closeouts in 2Q08 and difficult stimulus comparisons in June.

Notablecalls: A very elegant call on JP Morgan's part. The analyst, Charles Grom and his team are not only taking their 2Q09 estimates down but are giving their clients (and investors in general) a roadmap on what to expect if indeed BIG does guide down. Excellent work.

Talking to one contact who thinks BIG will get a -5% hair cut on this call.

PS: Also note Pali is out cautious on BIG saying they remain on the sidelines, as 1) they see some risks, especially in Q2, that may bring in below consensus numbers and 2) they believe the stock is reasonably valued after its recent run.

First Solar (NASDAQ:FSLR) : Downgraded to Underpeform at FBR Capital

FBR Capital is out with a stingy call on First Solar (NASDAQ:FSLR) downgrading their rating to Underperform from Market Perfrom ($100 tgt).

Polysilicon prices taking a nose dive. Checks over the past week suggest (quality) spot poly prices have declined to $65/kg, down 35% year to date, driven by: 1) weak end-market demand for si-based modules, and 2) an aggressive attempt by industry leaders like Hemlock, MEMC, and Wacker (all enjoying average fully loaded cost of $40/kg) to further increase their lead over the new entrants (which are estimated to have $80-plus/kg cost structure).

- From inexpensive but “quality” poly to inexpensive but “quality” si-based modules. Checks also suggest six inch solar wafer prices (in the spot market) have declined to US$3.50/piece, implying that finished solar wafers are now < US$1/watt. Assuming US$0.80/watt for turning wafers into modules, we estimate $65/kg poly to yield modules at a cost of US$1.60-US$1.80/watt. And even a rather aggressive GM of 20% implies si-based manufacturers could sell modules at US$2.10 (or EUR€1.62, assuming 1.3 F/X) and compete head-to-head with FSLR.

- Recent checks indicate at least one of FSLR top customers has already switched from FSLR to a si-based module vendor for a project that is currently under construction.

- Takeaway from our KfW meeting in Germany: 1) Senior executives in charge of (PV) project origination and structuring told the firm that PV project financing has not improved as fast as they were expecting. Although KfW can finance less than 3MW to 5MW projects on its own, it is the larger projects, requiring a consortium of (3-5) banks that are slow to be approved. 2) Year-to-date project backlog (at KfW) is comprised of45% si-based and 55%-TF based. This is a dramatic change from CY08 mix of 80%-plus TF.

- Given the increased downside risk, as well as the current valuation premium given to FSLR, FBR Capital believes the stock will face a significant headwind over the next several months. With the U.S. market not taking off until sometime in CY10 in their opinion, with the PV demand in Europe (and Germany in particular) not improving as fast, and si-based module/system ASPs now offering attractive economic benefits, they believe FSLR will either end up owning more projects (as a means to better control its destiny, which should also complicate revenue recognition) or/and continue to accommodate the market by reducing ASPs well below what is dialed into the consensus.

Notablecalls: FBR's comments regarding customers (major ones) turning away from the co will hurt the stock as it means consensus estimates are now in jeopardy.

I think the stock can trade closer to $180 level in the n-t.

Apple (NASDAQ:AAPL): Upgraded to Overweight at Morgan Stanley

Morgan Stanley is out with a major call on Apple (NASDAQ:AAPL) raising their rating to Overweight from Equal Weight with target upped to $180 (prev. $105).

iPhone is feeding earnings growth that the market is missing: Firm believes Apple is emerging as the clear leader in the battle over the mobile Internet. They size this as an incremental 4 billion installed base opportunity for Apple, 4x the installed base of PCs and 10x the installed base of MP3 players. Our proprietary survey work points to iPhone-driven EPS upside over the next two years, muting any margin or growth concerns in Apple’s core iPod/Mac business. Consequently, they’re upgrading AAPL to Overweight, raising EPS forecast (CY10 20% above consensus), and increasing price target from $105 to $180.

C3Q09 marks key inflection point: Two key factors drive iPhone unit and EPS upside based on their survey: 1) They expect a price cut to the current generation iPhone to drive 50-100% incremental unit demand (base case assumes 50% on $50 price cut; bull case assumes 100% on $100 cut). 2) Their survey data suggests 15%+ of the iPhone installed base typically upgrade to a new phone (15% base case, 20% bull case). Morgan Stanley also factors in a inventory build post the launch of new products. Net-net, their CY09/CY10 iPhone unit estimates increase 42% and 61% to 24.8/36.2mn. CY10 GAAP EPS shift from $5.52 to $7.50; non-GAAP EPS, adj. only for actual sales of iPhone, increase to $9.00 from $5.67.

Notablecalls: These are some pretty hefty numbers. Don't think I have ever seen iPhone unit estimates increased by that much in a single call.

I think a lot of shorts piled in AAPL last week, hoping for the stock to roll over but Mother Morgan does provide them with a surprise this AM. The call will cause at least some of them to cover. A kind of Potash (POT) like situation from last week.

If this thing gets going, it can do 3-5 pts to the upside today.

Another scenario I see is that it gaps up 2-3pts, then sells off 1-2 pts in the first 45 mins and then resumes to the upside.

Carbo Ceramics (NYSE:CRR): Morgan Stanley making a major call

Morgan Stanley is out with a pretty major call on Carbo Ceramics (NYSE:CRR) upping their tgt to $70 from $60. Reits Overweight.

Near-term Haynesville proppant debate could be irrelevant, in Morgan Stanley's view. 2009 consensus EPS has come down to ~$2/shr, a number that they think Carbo could hit even without significant sales into the Haynesville this year. The real debate, in their view, is whether ceramic proppant will become a large part of the Haynesville completion “formula” when the shale play moves into development. Firm sees very good odds that ceramic will build considerable market share in the area once producers start to shift their focus from initial production (IP) to maximizing economics over the life of the well.

What’s new: They recently spent time with several E&P firms in “legacy” ceramic proppant areas in the US who all indicated they were not considering switching away from ceramic, but instead were exploring other less risky ways to reduce costs. They also spoke with service firms accounting for over 80% of CRR’s ceramic sales – all continue to believe in the technical superiority of ceramic and recommend it as the best economic option for high-pressure applications.

Where they differ: Morgan Stanley believes the market is concerned about uncertainty around ceramic’s role in the Haynesville after E&Ps posted decent IPs with cheaper substitutes. But they do not think this debate is key for Carbo’s 2009 numbers. While the cyclical downturn has been unprecedented in its speed and severity, they believe producers generally are acting no differently than in previous drilling downturns. As such, thhe firm expects historical trough-cycle proppant purchasing trends to hold in 2009, which supports EPS at ~$2/shr – without factoring in a material contribution from the Haynesville. Any strength in Haynesville ceramic sales could propel Carbo past our 2009 volume and EPS forecasts. They remain above consensus for 2010/11.

Notablecalls: Take a look what CRR did when Morgan Stanley initiated it with Overweight and $60 tgt on May 4 - the stock shot up 10 pts over the next 4 days.

Now Morgan Stanley is upping their tgt by another 10 bucks.

This baby will fly. High.

Potash (NYSE:POT): Upgraded to Buy at Citigroup

Citigroup is out with a Fertilizer call upgrading Potash (NYSE:POT), Mosaic (NYSE:MOS) to Buy from Hold and Agrium (NYSE:AGU) to Hold from Sell.

Looking Past the China Contract — In recent months investors have been sharply focused on the upcoming China potash contract and the risk potash prices could fall below last year’s $575/t level. However, the bigger risk in Citigroup's view is that the Ag complex will continue to rally on stronger grain fundamentals. There are three key reasons grain prices are moving higher, thus creating an environment for multiple expansion for fertilizer stocks:

- Grain Supplies Remain Historically Tight — Last week’s USDA report indicated lean grain inventories, including significantly tighter corn stocks-to-use (16% vs. 20-year avg. of 24%). In our view grain prices don’t have a “cushion” – another major weather event or poor crop for a major producer (US, Ukraine, Argentina) could move corn prices closer to the $5.00+ range we saw last summer.

- The US Planting Season Is Seriously Behind Schedule — Wet cold weather has significantly delayed much of the US corn crop. The latest crop progress report indicates corn plantings are 62% complete, behind the 85% average rate for 2004- 2008. Soy plantings are lagging as well, at 25% vs. the 44% average rate.

- Broader Market Stabilization & Easing of Deflation Concerns — Potash prices held up well during the worst of the credit crisis and market collapse. With the easing of credit conditions and stabilization of some industrial and consumer markets, downside risk is lessened.

- Upgrading POT, MOS to Buy, AGU to Hold — This is a part of a global call, with their European counterparts upgrading potash producers K+S and ICL.

Notablecalls: I suspect a lot of shorts piled into POT yesterday and may be scrabling for the exits early on.

The call makes sense but they are a bit late in my book. Nonetheless, POT & MOS will see buy interest at least early on.

Can POT do $115 today?

Of note, Citigroup is downgrading Monsanto (NYSE:MON) to Hold from Buy as:

a) they are concerned that a onslaught of Chinese glyphosate will pressure near-term earnings; b) the stock is close to their price target of $95. MON has outperformed the group this year (+27% YTD vs. the S&P Chemical Index +20%); they are switching their preferred way to play the Ag cycle from MON to fertilizer producers POT and MOS.

Subject: Cure for the Financial Crisis??

* *In a small town on the South Coast of France, the holiday season is
in full swing, but it is raining so there is not too much business
taking place.

Everyone is heavily in debt.

Luckily, a rich Russian tourist arrives in the foyer of the small local
hotel.

He asks for a room and puts a Euro100 note on the reception counter,
takes a key and goes to inspect the room located up the stairs on the
third floor.

The hotel owner takes the banknote in a hurry and rushes to his meat
supplier to whom he owes E100. The butcher takes the money and races to
his supplier to pay his debt.

The wholesaler rushes to the farmer to pay E100 for pigs he purchased
some time ago.

The farmer triumphantly gives the E100 note to a local prostitute who
gave him her services on credit.

The prostitute quickly goes to the hotel, as she was owing the hotel for
her hourly room used to entertain clients.

At that moment, the rich Russian comes down to reception and informs the
hotel owner that the room is unsatisfactory and takes his E100 back and
departs.

There was no profit or income.

But everyone no longer has any debt and the small town's people look
optimistically towards their future.

Could this be the solution to the global financial crisis?

Source: Unknown

Photonics (NASDAQ:PLAB) : Upgraded to Buy at Merrill Lynch

PS: I'M HEARING THERE IS SOME CONFUSION IF MERRILL LYNCH REALLY UPGRADED PLAB OR NOT - WILL FOLLOW UP (08:12 AM UPDATE)

PS: MERRILL LYNCH DID NOT UPGRADE PLAB TODAY. A MERE TARGET CHANGE. (08:50 AM UPDATE)

Merrill Lynch is out reiterating Buy on Photronics (NASDAQ:PLAB) while raising their target to $4 from $2. (The upgrade comes after the co reported its F2Q09 results two days ago)

Merrill notes that although interest expense is increasing in the near term, revenue growth is starting to pick up again and expense cuts already in place increase cash available to service debt. In addition, the total debt level in F3Q drops $30mn when the new lease on the Nanofab takes affect. As PLAB’s financial flexibility increases, valuation multiples should climb toward ongoing concern peer levels. Half the peer P/TBV average would be 0.7x. At that level, PLAB would trade for $4, firm's new PO up from $2.

Debt overhang abates with further restructuring
PLAB recently announced 2 steps to increase their financial flexibility: 1) renegotiated Nanofab lease agreement with Micron and 2) an extension of their credit facility. The Nanofab lease reduces lease payments by $1.8mn per quarter and eliminates $30mn in long-term debt. The modified credit facility includes $10mn of added borrowing capacity to each of the previous step-downs and pushes the maturity date out 6 months to 1/31/11, when the company should be profitable. Each of these steps should begin to help alleviate investor concerns over PLAB’s debt burden.

Cash improving to support increased interest expense
Gross margins were 220bps better than the firm expected due to more aggressive cost reductions and are likely to improve as growth returns. With capex requirements easing this year, PLAB should have ample cash available to handle the $1.3-1.5mn in incremental interest expense from floating rate and FX adjustments.

Notablecalls: Will PLAB join the ranks of Zale (NYSE:ZLC), Tenet (NYSE:THC) and Talbots (NYSE:TLB) today?

It could but there are some differences to this one:

- It's a Nasdaq listed stock. A techie.

- No real short interest there.

On the other hand it's been trading like it wants to break to new 52-week highs. Not sure there are too many shorts out there looking to chop down a $2-3 stock.

PS: I'M HEARING THERE IS SOME CONFUSION IF MERRILL LYNCH REALLY UPGRADED PLAB OR NOT - WILL FOLLOW UP (08:12 AM UPDATE)

PS: MERRILL LYNCH DID NOT UPGRADE PLAB TODAY. A MERE TARGET CHANGE. (08:50 AM UPDATE)

Talbots (NYSE:TLB): Upgraded to Outperform at FBR Capital

For you high high octane fans, FBR Capital is upgrading Talbots (NYSE:TLB) to Outperform from Market Perform while raising tgt to $4 from $2.

The upgrade comes since they believe:

1) the risk/reward from current levels is attractive, as they believe the stock already discounts the ongoing challenging business;

2) the looming threat of bankruptcy has been greatly reduced; and

3) merchandise improvements continue in the company’s spring product flows.

To be clear, FBR is recommending shares of TLB to more speculative investors with a high tolerance for risk. They fully appreciate the ongoing issues with the company’s balance sheet but note the company has made tremendous progress in stabilizing its liquidity situation. Firm also points out that the company is in the process of selling the J. Jill division, which could potentially be a positive catalyst to shares. They have noted three concerns looming over the company—liquidity risk, vendor risk, and operational risk—each of which, they believe, has been lessened. Finally, in their opinion, current consensus estimates might be low enough to give the company some “breathing room.” Firm stresses that the fundamental story is not yet fully apparent; nonetheless, they believe investors with a higher risk appetite may find TLB interesting.

We have seen investors “chasing beta” in such names as ANN, PSUN, and even TWB; investors have put money to work in stories that hold the promise of significant upside, and also have attempted to mitigate the biggest risk of all: bankruptcy.

Notablecalls: Will TLB join the ranks of Tenet (NYSE:THC) and Zale (NYSE:ZLC)?

This one has a whopping 27% short interest - most of them betting on what? Chap 11? FBR saying it ain't happening here. When FBR's otherwise so cynical retail analyst says so, I tend to listen.

Not making an outright call here but this one can do $3+ if the market holds.

EPIQ Systems (NASDAQ:EPIQ) : Upgraded to Buy at Keybanc

Keybanc is out with a pretty big call on EPIQ Systems (NASDAQ:EPIQ) upgrading the shares to Buy from Hold with a $17 tgt.

According to the firm the upgrade is based on recent data suggesting that momentum in EPIQ's bankruptcy segment could create meaningful revenue and EPS upside in the 2Q and 2009.

Last week, the firm noted that EPIQ won the Chrysler bankruptcy (Chapter 11) engagement, which was confirmed on the Company's web site. Moreover, data from U.S. courts indicates bankruptcy filings increased more than 60% year-over-year in the 4Q (December); they expect March quarter data to be available by the end of May. At an investor conference earlier today, CEO Tom Olofson commented that EPIQ has seen its Chapter 11 business "more than double" year-to-date, accelerating every month so far in 2009 up to 149% year-over-year growth in April. Firm believes strong bankruptcy momentum is sustainable for many quarters or years, as historical data suggests filings can continue to increase even after a recovery begins, and bankruptcy cases can take many years to complete.

Keybanc is raising their 2009/2010 EPS estimates while noting they think meaningful upside to their estimates is possible.

EPIQ's bankruptcy business appears to be growing faster than Keybanc previously forecast. Their checks and recent management commentary give them a more bullish outlook for EPIQ's bankruptcy business. EPIQ has been retained on 7 of the 10 largest Chapter 11 engagements of 2009, including the Chrysler and Thornburg Mortgage cases, which are the two largest restructurings of 2009.

Notablecalls: This call will likely generate some serious upside in EPIQ stock today and in the coming days. 'Meaningful upside to estimates is possible' is 6 words investors want to hear.

Thin name, though.

McDonald's (NYSE:MCD): Upgraded to Buy at Deutsche Bank

Deutsche Banks is out upgrading McDonald's (NYSE:MCD) to Buy from Hold with a price tgt of $65 (prev. $60).

According to the firm the upgrade is supported by: 1) compelling valuation, 2) positive upcoming catalysts and 3) attractive cash flow. The stock now trades at 13.6x forward 12- months EPS, the lowest multiple since early 2003 and below the 5-yr avg. of 16.0x and the restaurant industry avg. of 16.1x. Further, with the div. yield at an all-time high and the earnings outlook improving, they are moving to a Buy.

Upcoming catalysts
Deutsche analyst sees several upcoming catalysts for MCD that could provide upside to 2H
forecasts and/or improve the valuation multiple. Key catalysts include: 1) McCafe (now in +10k locations vs. 1k a year ago; national advertising launched on May 5th), 2) easing commodity pressures (guidance looks conservative here) and 3) currency overhang likely goes away in 4Q.

Compelling risk-reward

Downside: They see ~$4.00/sh in earnings power in 2010, even under a bearish demand scenario (2% comps), a 50bps decline in rest. margin and no SG&A leverage. Applying a trough multiple of 13x to this outlook puts downside risk in the stock at $52/sh.

Upside: If MCD makes Deutsche's $4.17 est. for next yr. and the multiple returns to historical avg. of 16x, they see upside to $67/sh. Downside = 4%. Upside = 24%. In addition, the firm expects MCD to return nearly 25% of the current market cap to shareholders (via share repurchases and divs.) over the next 3 yrs, providing further downside support.

Notablecalls: MCD is no big mover but I like the call. I feel that over the past months people have been selling the likes of MCD (steady performers) to play the bounces in the high-beta sectors.

Also, it looks like the Quant funds were caught with their pants down in Short high-beta/Long low-beta bets. Many of them have been selling the low beta Longs to fund redemptions, while keeping the high-beta Shorts in place.

The Deutsche call isn't earth shattering but it may create some nice buy interest in this high quality name. Business for MCD has never been better.


PS: One blog I have been reading recently is Zero Hedge (zerohedge.blogspot.com). I know very little about the author(s) but their commentary is certainly interesting. Check it out.

Seeing the amount of work that is put into Zero Hedge makes me almost feel bad about myself. I should write more.

Tenet Healthcare (NYSE:THC): Upgraded to Buy at Goldman Sachs

Goldman is making a gutsy bet on the hospital operator, taking their tgt from $1 to $5.

I'm just wondering if Tenet (NYSE:THC) will shape up like Zale (NYSE:ZLC) following the Merrill Lynch upgrade last week.

- Distressed (check)

- Sub $5 stock (check)

- Up already 100%+ from lows (check)

- Tier-1 upgrade (check)

Notablecalls: I'm not making an outright call here but THC could hit $3+ on this.

Aerospace/Defense upgrade/downgrade - Goldman Sachs

At the peak of one cycle and the trough of another

We are at the peak of a decade long boom in Defense spending, and at the trough of a two year Aerospace bear market. Goldman Sachs is upgrading Aerospace to Attractive and downgrading Defense to Cautious, and expect A&D investors to increasingly rotate out of the latter and into the former, particularly given that, at current trading levels, one pays the same price for trough Aerospace earnings as they do for peak Defense earnings.

Firm is upgrading Aerospace to Attractive given:

1) Traditional Buy signals are turning green. The second derivative in yoy air traffic and the level of aircraft orders are both close to a bottom, which typically indicates the start of an upturn in the group.

2) Expectations are low and sentiment is weak, as evidenced by the significant decline in consensus estimates as well as positive stock reactions to downward guidance revisions when companies report.

3) Attractive valuation + positive catalysts. In prior cycles, Aerospace stocks consistently decline 50% peak to trough, which is where the group is today. Multiples have bounced off lows, but still near trough, and have potential to double. Several near-term positive catalysts could drive multiple expansion (BA conference, Paris Air Show, 787 first-flight).

Goldman is upgrading Boeing to Neutral from Sell, Spirit to Buy from CL Sell, and Rockwell Collins to Buy from Neutral. Goodrich remains CL Buy rated. They also revise their estimates and price targets across the group.

Firm is downgrading Defense to Cautious given:

1) Defense spending has peaked, and history suggests an extended downturn is possible as Defense spending typically moves in decade long cycles. Defense stocks underperform when spending is declining.

2) Defense is lower priority than it used to be. It has become very clear in recent months that Defense is atthe lower end of the new Administration’s list of priorities, and could increasingly become a bill payer for other government spending.

3) The stocks are not as inexpensive as they appear, and our analysis shows that the group could see relative multiple compression, coupled with earnings declines beyond the end of the decade.

They are downgrading Northrop Grumman to Sell and adding it to the Conviction Sell List, and downgrading L-3 and Raytheon to Neutral from Buy. They also make modest downward revision to PT and estimates.

Notablecalls: Plenty to choose from:

- Aerospace: Spoke to one contact who thinks Boeing (NYSE:BA) will see some buying interest on the upgrade as Goldman has done a good job covering the stock. They stayed on Sell for a long time and have started gradually moving towards a more positive view over the past months, removing the Conviction Sell and now upgrading to Neutral.

They are also adding SPR to their Buy list from Conv. Sell and raising tgt to $17 from $12.

- Defense: I like the Northrop-Grumman (NYSE:NOC) downgrade to Conviction Sell with a $40 tgt. The squeeze is over.

Additionally we have JP Morgan out with some cautious comments on the Defense sector saying the recent rally is starting to look long in the tooth.

After underperforming the S&P 500 by 21% from the end of January through mid March, the four largest defense primes have now outperformed by 19% over the past two months. The budget release, solid earnings, low valuations, and short covering have all driven the recent rally. However, they have difficulty seeing continued material outperformance due to a weak fundamental outlook and an
absence of positive catalysts.

Valuations reached depressed levels by mid March, with the four primes trading at an average multiple of only 6.5x our 2010 earnings estimates. As they commented at the time, the stocks were ripe for a rally given where they were trading, the potential for the budget release to eliminate much of the uncertainty that was making investors flee from them, and the likelihood that Q1 earnings and guidance for 09 would be solid. Now that a rally has taken place, they see tougher outlook for relative performance.

Several incremental data points have been negative. Beyond the well telegraphed budget cuts announced last month by Secretary Gates, they have seen a number of other data points recently that reinforce their belief that the administration has many other priorities that come before defense, intelligence, and space contracting.

Medifast (NYSE:MED): Upgraded to Buy at Canaccord - potential for short squeeze?

Canaccord Adams is upgrading Medifast (NYSE:MED) to Buy from Hold and raising their price tgt to $12.50 from $8 and adding to Best Ideas list.

They believe Medifast’s multi-channel approach to marketing its weight management products and exposure to multi-level marketing (MLM) as a growing sales channel should continue to lead to significant outperformance relative to the broader weight management sector and improve upon a relatively low level of investor recognition. MLM is now approaching 60% of revenue and as a selling channel provides a meaningful counter-balance to a weak economy, facilitates a powerful testimonial-driven sales pitch with ongoing distributor support to drive revenue, and lends itself to an attractive financial model. Medifast’s momentum is very strong with revenue tracking its leading indicators closely, and the leading metrics are sti ll early in an acceleration phase with plenty of room to run. The upstart Medifast Weight Control Centers segment is also enjoying a significant growth phase driven by unit expansion, including franchising and company-operated units.


Valuation
Canaccord views MED shares as significantly undervalued given the growth rate and attractive financial characteristics. MED trades at just 11x 2009E earnings despite over 70% projected earnings growth and 5x EBITDA.

Next Catalyst
MED shares are likely to be driven by business momentum well beyond the broader weight management or direct selling sectors, and as such quarterly earnings should be the primary catalysts. We expect momentum in sales, EPS and leading indicators to drive the shares into and beyond Q2 results in early August.

Notablecalls: A controversial name with some shorts on board will probably create some nice upside. I'm guessing 10%+ if the market holds (just a guess - fyi).

TW Telecom (NASDAQ:TWTC): Downgraded at Merrill and FBR

TW Telecom (NASDAQ:TWTC) gets two downgrades this morning:

- Merrill Lynch/BAM downgrades TWTC to Underperform from Buy with a $10 tgt on the realization of their thesis, strong stock performance and valuation. TW Telecom shares are discounting a view that the company can maintain its current revenue trajectory and margin profile throughout the economic downturn. Firm's projections are more cautious, as they believe TW Telecom’s contractual business model creates a lagged effect regarding changes in economic activity. TW Telecom faces regional economic pressure.

- FBR Capital notes TWTC reported better-than-expected 1Q09 results but provided a cautious outlook for 2009, reflecting macro trends, weak enterprise demand, product substitution, and pricing pressure. Results for 1Q09 were largely ahead of consensus and FBR expectations, driven by solid execution amid a difficult environment and reflecting the relative resiliency of the telecom services subscription-based business model. The $10M acquisition of a metro fiber asset (plus ancillary assets) in early 1Q09 is augmenting customer growth. Adjusted EBITDA exceeded expectations due to the combination of higher revenue and higher gross margin but was partially driven by a $2M deferral in merit pay increases to 2Q09. Enterprise revenue momentum in 2Q09 is a key focus, and management conveyed a cautious tone, consistent with FBR's meeting on March 12. Although 1Q09 is typically a seasonally weak quarter, they have not extrapolated the revenue growth rate, as they do not believe there has been a pickup in business demand at this juncture. The company typically sees revenues from new contract signings after a 60-day to six-month buildout following a new contract, suggesting lower 1Q09 signings will be evidenced in 2Q09 and 3Q09. FBR believes shares are fairly valued in the $12 range, and moderating revenue trends may limit near-term upside potential. They are lowering their rating from Outperform to Market Perform but would expect the shares to respond positively to any evidence of revenue momentum as part of a recovery scenario, which they believe it is too early to call.

Notablecalls: Two downgrades, with one coming from a tier-1 firm with a large client base will likely hit the stock. I would not be surprised to see sub-$11 levels today.

Kenexa (NASDAQ:KNXA): Upgraded at Oppenheimer and Keybanc

Kenexa (NASDAQ:KNXA) may be on the move today after posting results last night and getting upgraded at Oppenheimer and Keybanc:

- Oppenheimer is taking their rating to Outperform and introducing a $12 PT as they are growing increasingly confident that the company's business is at or near a bottom. Overall, while 1Q results were largely in line with its forecast, they believe parts of its business are showing early signs of improvement. Though the RPO business will likely remain a ST drag, the LT upside potential is far too significant to ignore. At current levels, KNXA trades at just 1.0x CY09E recurring revs, below the SaaS group average of 2.5x. The firm arrives at their $12 PT by applying a 1.7x multiple to CY09E rec revs and add the ~$45M of net cash on its balance sheet.

- Keybanc is upgrading their rating on shares of KNXA from HOLD to BUY and establishing a 12-month target price of $11, about 40% above yesterday's closing price. KNXA reported 1Q results in line with consensus expectations. More significantly, deferred revenue was up sequentially by about $3 million in a very challenging economic environment. Firm believes this increase reflected strong sales of applicant tracking (ATS) solutions in multi-element deals including consulting and content, and we expect the Company to see benefits to its subscription line by the 3Q and beyond. They see room for a recovery in KNXA's EV/ revenue multiple, which appears cyclically depressed, as sequential revenue stability emerges later in 2009 and costs remain controlled. Although they are not modeling a robust recovery for KNXA's recruitment process outsourcing (RPO) business, they think non-RPO consulting and content sales could rebound as a recovery takes root, possibly providing top-line upside.

Notablecalls: Nice chart and two upgrades will offer some upside. Kind of under the radar play, though.

Chesapeake Energy (NYSE:CHK): Upgraded to Overweight at Morgan Stanley

Morgan Stanley is upgrading Chesapeake Energy (NYSE:CHK) to Overweight from Equal-weight with a $34 tgt.

CHK is levered to the 2010 recovery in natural gas prices; Morgan Stanley expects the shares to remain “gas beta” near term. Beyond their view of improving natural gas fundamentals, they see merit to CHK’s operating plan and expect the strategy to support outperformance. CHK is focusing on the lowest-cost US resource plays and has secured capital from partners to accelerate development. Firm sees improving capital efficiency and accelerating production and reserve growth in 2010/11 as a result. The market is concerned about follow through, and therein lies the opportunity. They see attractive relative valuation at a ~25% discount on 2010e unhedged EV/EBITDA and a ~18% discount to NAV at strip pricing.

Two Aspects to Morgan Stanley's Call:

I) Leverage to the recovery: CHK is “gas beta.” They like the risk/reward of a commodity that should enjoy better fundamentals in 2010, an outlook not fully in the stock. Firm expects the recent decline in rig count to result in production declines (visible in May/June),
tighter balances, and higher natgas prices.

II) The right moves, but market is unconvinced: CHK holds dominant positions in low-cost plays. It has sold working interests in three plays (another to come) in exchange for development capital. Using a partner’s capital to build scale in the most capital-intensive stage of the resource play development cycle is a sound strategy. The underlying asset quality is not in question, and Morganb Stanley expects accelerating reserve adds and production growth in 2010/11 vs. the industry.

Notablecalls: Not exactly the type of call that makes me want to buy any size in the 1/2 pt range. It's just that CHK is a traders' favourite and we have a tier-1 firm upgrading it.

I see it trading above the $23 level in the s-t and if the market is kind enough, maybe it can challenge recent highs.

PS: The 40% premium paid by ANR for FCL may help the commodity space today.

Williams-Sonoma (NYSE:WSM): Downgraded at Merrill/BAM and Sanford Bernstein

Williams-Sonoma (NYSE:WSM) is getting two downgrades today:

- Merrill Lynch/BAM is downgrading WSM to Neutral from Buy with a $13 tgt noting that while WSM’s LT viability and strong brand identity remain intact the shares up substantially since December as a result of the realization of numerous factors, which are reflected in today's share price, the current risk/reward ratio is not as compelling. The balance sheet has strengthened, cash flows have improved, the dividend is intact, bank agreements have been renegotiated, inventory levels significantly reduced, capex reduced to a minimum, comps sequentially improved from Oct 2008 lows.

- Sanford Bernstein is out with a U.S. Retail downgrade taking their rating down on WSM, HD and LOW (from OP to MP).

Early cycle retail call is rapidly running its course, leading them to shift their overweight sector
positioning to a more balanced market-weight. As evidence continues to accumulate that the cyclical downturn in the broader economy and the consumer sector is beginning to bottom, the rationale for overweighting the early cycle retail / consumer discretionary sector is waning. Broadly, the leading indicators have turned positive, and weekly jobless claims have now been in a downtrend for over a month, both of which in the past have preceded the official conclusion of prior recessions. Firm notes their are not explicitly calling an end to the recession, but they are very cognizant that 12-month relative returns for the retailers have turned negative around the conclusion of past recessions. As the probability increases of an end to this recession in 2009, the investment case for a Retail sector overweight deteriorates, which argues for a more selective approach to Retail.

Within the context of overall retail, the home-related retailers have tended to be the earliest of the early cycle names, given housing's typically leading characteristics. This cycle has been similar, with HD and LOW among the best performing stocks in firm's coverage in 2008 (outside of the more defensive auto parts retailers).

With this strong relative performance and significant multiple expansion, these two stocks
are now already discounting a majority of a recovery to fair value. Based on our view of normalized margins in the 9.5% range for both, blended fair value framework suggests only 20% to 30% upside to true fair value. While this still represents meaningful upside, they would argue that relative returns could pale in a true economic recovery and that still significant uncertainty in the timing and pace of recovery to normalized margins should keep the stocks at some reasonable discount to true fair value.

WSM is a somewhat different case as the stock performed relatively poorly in 2008 (- 31% relative) as liquidity concerns pressured the stock, but year to date, WSM is up ~80% versus the market. Bernstein sees normalized margins in the 7% range (in line with WSM's 15-year average), which implies a fair value of ~$15 or approximately 15% upside to FV from current levels. Given more significant and lingering structural questions around WSM's business model and competitive positioning, they would need to see more significant upside opportunity to continue to recommend the stock.

Notablecalls: Two downgrades will do their damage to WSM's stock price today. I see it going to about $12-ish (or slightly below) where it will find buyers and squeeze higher again.

Going short retail is going to be the next crowded trade, I suspect.

Early morning tidbits: CECO,SONC

Couple of ratings changes that stand out early on:

- UBS is upgrading Career Education (NASDAQ:CECO) to Buy from Neutral while raising their tgt to $30 from $26.

Firm notes the slight revenue miss vs consensus was likely due to lower revenue per student as Culinary programs were extended to 21 months from 15. This makes them less reliant on expensive private loans. Enrollment rose 10.5% for Q2, above 6.9% in Q1, beat firm's estimate of 6.4% on outperformance in all divisions, and consensus of 5.9%.

UBS is maintaining their 2009E EPS at $1.15, despite the Q1 miss, and raising 2010E and 2011E EPS to $1.65 and $2.00, above the consensus of $1.57 and $1.69.

Notablecalls: The stock got hit yesterday following results and UBS raising their rating/tgt/estimates is certainly a surprise here. This one will squeeze higher.

- Merrill Lynch/BAM is out downgrading Sonic (NASDAQ:SONC) to Underperform from Neutral while lowering their tgt to $7.50 from $9.50 after the nation's largest chain of drive-in restaurants told investors ystem-wide same-store sales in March and April deteriorated slightly versus levels experienced in the first two quarters of fiscal 2009, reflecting an ongoing weak consumer environment (link:)

According to Merrill, softer sales lead to significant changes in EPS estimates from $0.69 for FY 2009 to $0.58 and from $0.86 to $0.67 for FY 2010. They are assuming that negative same store sales trends continue into FY 2010. For the second consecutive year, Sonic is negatively pre-announcing on the eve of its investor meeting. Same store sales in the 3Q (May) are running slightly below the down 3.6% system wide same store sales recorded in the first half, including partner same store sales down modestly worse than the minus 6.3% rate for the first half. These are disappointing sales levels versus easier sales comparisons. Sonic is making significant progress on its refranchising plan.

Notablecalls: Morgan Stanley beat Merrill to the punch with their April 20 downgrade but I think SONC will still get hit on the news/call.

International Flavors & Fragrances (NYSE:IFF): Upgrade to Buy at Keybanc

For the third day in a row, I'm going to highlight a call from Keybanc Capital Markets.

Keybanc is upgrading International Flavors & Fragrances (NYSE:IFF) to Buy from Hold with a $39 tgt. According to the firm the changes is based on confidence that their 2009 EPS outlook remains intact, noticeable underperformance relative to the specialty chemical sector and its major consumer products customers, comfort that the Flavors segment can generate some growth this year, and the potential for Fine Fragrances to bottom soon.

KEY INVESTMENT POINTS
REASONS FOR A MORE POSITIVE VIEW

- 2009 Outlook Intact: They believe their 2009 EPS estimate of $2.50 remains intact although they now see lower interest expense and taxes offsetting weaker Fragrance results.

- Flavors – Remain in Positive Territory: Firm suspects Flavor segment growth is sustainable and they now are looking for 2% year-over-year growth in 2009 led by new product wins.

- Fine Fragrances Bottoming: They sense inventory destocking is starting to slow. While sales are expected to decline 20%+ in 2009 vs. 2008, IFF is doing a good job offsetting its highest profitability business with cost savings and new product wins in Functional Fragrances.

- 2010 - Good Recovery: Keybanc senses that cost savings and modest 2% sales growth in 2010 should get EPS back to $2.75 vs. an estimated $2.50 in 2009, which is good progress from its last trough earnings level at $1.40 in 2001.

- Valuation Has Lagged: Since March 9, IFF shares are up only 15% vs. a 34% rally in the S&P 500 and a 106% rally in specialty chemical coverage universe. IFF is trading below its average historical lows.

At current levels, IFF is trading at a 2009E EV/EBITDA multiple of 8.3x and a 2009E P/E of 12.0x. Over the last seven years, IFF has traded in an average low and high EV/EBITDA multiple range of 9.0x to 11.7x and average low and high P/E range of 14.0x to 19.4x.

Notablecalls: So what's so special about this call? Just another valuation + 'we think things may be turning' type of thing, isn't it?

Yes, youre right.

Yet, one thing about this market over the past couple of days is that people are looking for former laggards to bid up on anything positive. IFF hasn't been much of a performer and I suspect they will use this call to send it higher.

How high, you ask?

As usual, it's pretty much anyone's guess but waterpistol-to-head I'd say 5%+ upside may be in the cards in the very n-t.

Interpid Potash (NYSE:IPI): Short into numbers?

Coming from a seasoned hedge fund player: He is shorting Interpid Potash (NYSE:IPI) ahead of EPS report

I shorted some IPI today at 27.50.... not enough to hurt me... but just based on a hunch that this weakest player of the group comes up short tomorrow morning with earnings and poor guidance.

I hear that Farmers are planting this spring w/o applying potash and phosphate (i guess side applications will come later). Prolly too much capacity in the system already and this will not help.

AGU didn't have a barn burner of a quarter either a few days ago.... potash volumes down 83%. AGU's demand estimates were similar to POT's in April.... Potash 30-40% lower, Phosphate 25-35% lower, and 10% lower for nitrogen.

Perhaps this is already built into IPI's price.... but perhaps not with the price at a 6mo high

IPI might announce cap ex deferrals, shutdowns, etc.

Additionally... I hear IPI has a checkered past with some associations with "promoters"

Notablecalls: FYI

NewMarket (NYSE:NEU): Downgrade to Hold at Keybanc

Keybanc again, this time downgrading NewMarket (NYSE:NEU) to Hold from Buy

Firm notes that April 27, 2009 they increased their former price target to $70 as they believed
NewMarket Corporation (NEU-NYSE) shares would continue to outperform the overall market; since then NEU shares have risen another 14% vs. a 5% increase in the S&P 500 over the same period. NEU shares closed at $66.54, which is 5% from former price target and they now expect NEU shares to perform in line with the overall market going forward;

Management has done an exceptional job in capitalizing on the current environment and expanding margins despite volumes falling sharply. The price/cost benefits from lower raw materials and the lag in price adjustments in petroleum additives more than offset headwinds with lower volumes, unfavorable foreign exchange and higher pension costs. Although it should be noted that the Company had a $1.1 million ($0.05 per share) benefit from LIFO liquidation in 1Q09, Keybanc had previously believed that the Company was impacted by LIFO charges. They do not expect any LIFO charges (or benefits) in 2Q09 as inventories will likely begin to increase as demand rises.

In 2010 they anticipate a recovery in volumes (+7%) coupled with modestly higher raw material costs (+2.4%) and lower average selling prices (-1%) vs. 2009.

The Foundry Park financing issues need to be resolved by August 2010 by the construction loan due date; however, until a permanent resolution is put into place they anticipate that this could be an overhang on the stock.

Based on both 2009 and 2010 earnings estimates, NEU shares are fairly valued at this time and reflect the favorable environment in which they currently compete, in firm's opinion.

Notablecalls: The thing with this one is that while it's a mere valuation call, Keybanc is clearly the axe in the name. They have had a huge run with this one and now are telling clients to cash in.

The clients will cash in their chips and that will bring us opportunity on the short side.

I guessing 2+ pts downside, provided the market doesn't go bananas.

Public Storage (NYSE:PSA): Downgraded to Underweight at Keybanc

- Keybanc is out downgrading Extra Space Storage (NYSE:EXR) to Underweight from Neutral ($6.50 tgt) after the co reported 1Q09 results that were weaker than expected and pointed to a sharper deterioration across the self storage sector, as full year guidance was meaningfully reduced. In addition, the Company had little good news to announce on the capital raising front to act as a counterbalance to the weaker than anticipated core. This fundamental weakness has come on top of a recent runup in EXR's share price of 43% since the end of March vs. a 37% appreciation in the MSCI US REIT index over the same period. The downgrade reflects the downside surprise and likelihood of further deterioration, as well as the less attractive valuation.

- Citigroup maintains its Buy rating and $8 target (!?) on EXR asking a rhetorical question if the co is the canary in the coal mine?

Extra Space Storage (EXR) - the first storage REIT to report - materially changed its core same store operations guidance to reflect what would appear to be a rapidly declining operating environment. If not for the accretive capital structure changes, guidance would likely have dropped closer to ~10%.

BUT THIS IS THE MOST INTERESTING PART:

- Keybanc is downgrading EXR peer Public Storage (NYSE:PSA) to Underweight from Hold, while establishing a below the mkt price tgt of $56. According to the firm the stock remains the most expensive in the self storage sector and will likely see a similar erosion in core operating performance when it reports later this week.

EXR's Northern California and Southern California portfolios lost 430 bps and 210 bps of occupancy year-over-year, respectively, helping drive year-over-year declines in NOI of 12% and 10%, respectively. These markets comprise a total of ~30% of PSA's SSNOI (Northern California ~12%; Southern California ~18%).

PSA shares are down 12.7% YTD, outperforming the sector by 1,030 bps. The stock is expensive today; it trades at a 7.7% implied cap rate based on today's closing price of $68.75/share, which does not take into account any decline in net operating income. This is 230 bps below the sector's average implied cap rate of 10%, and 150 bps below the average implied cap rate for the REITs overall. The Company also trades at 15.1x our 2009 AFFO estimate of $4.55, a 62% premium to the sector's average AFFO multiple of 9.3x.

Notablecalls: PSA reports on May 7 (after mkt) - meaning there will be 2 days of possible downside action.

I guess it depends how bad EXR will get hit today but I think Keybanc's comments regarding a likely miss from PSA will keep the stock under pressure. After all, PSA looks to be trading at a premium to the sector.

Ralph Lauren (NYSE:RL): Downgraded to Underperform at Merrill/BAM

Merrill Lynch/BAM is out with cautious comments on Apparel players saying following easy sales and weather comparisons in March, underlying momentum may still be weak (adjusting for the Easter shift) as retailers continue to face traffic and ticket pressures.

Firm also notes relative outperformance of retail stocks (vs. SP500) usually ends in May as Retail stocks typically outperform the SP500 starting in Jan / Feb, peaking in Mar, and then underperform in May/Jun until Aug/Sep. Branded Apparel stocks typically start to underperform the SP500 in Jun and July.

They are downgrading Ralph Lauren (NYSE:RL) to Underperform from Neutral (with a $42 tgt) noting that after benefiting from the upward mobility in customer spending patterns (as key dep’t stores customers focused on up-scaling merchandise assortments through ‘06-’07), dep’t stores shift away from a higher AUR strategy and emphasis onsharper price points, coupled with continued customer traffic declines and tightening inventory plans, should be unfavorable to RL’s core US wholesale outlook through F10 (roughly 30% of RL’s global revenues concentrated in M, DDS, KSS, and JCP). RL will also face the difficult anniversary of the sell-in of American Living (initial shipments started in Dec 07 – F3Q08, launched Feb 08, with additional category launches throughout 2008).

Owned retail comps likely still weak
Owned retail comps (40% of F09E rev) at full-line and outlet stores are also deteriorating and could pressure results through F1H10, despite RL’s efforts to reduce inventory levels.

Europe should moderate; FX & Expenses pressure outlook
Declining trends, already impacting RL’s owned Retail in Europe, could pressure Europe wholesale (from the +DD% in constant currency for F3Q09), despite the Lauren launch Spring 09.

Notablecalls: I think the downgrade makes sense here - the stock is up a lot from March lows and there are only neg. catalysts on the horizon.

Can RL do 2 pts worth of downside today? Yes, unless the market goes bananas again.

Pennsylvania REIT (NYSE:PEI): Downgraded to Sell at Stifel

Stifel is out with a pretty snappy dowgrade on Pennsylvania REIT (NYSE:PEI) lowering their rating to Sell from Hold due to declining real estate fundamentals, an overleveraged balance sheet, and obscured visibility to improvement in either factor.

PEI lacks a clear path to reduce leverage. It has $670 million of 2010 unsecured credit line maturities and only $315 million of current market equity to support a renewal - it may find solutions, but the firm prefers safer business plans in a frozen debt environment.

PEI shares are up 196% since the $2.62 March 2 closing low, compared to a 45% decline in the RMZ index, a rally that they think is overdone.

PEI trades at an implied 9.9% cap rate excluding any new equity dilution that would reduce its 90% debt-to-gross-asset-value ratio (10% cap rate).

They estimate that PEI would have to sell about 100 million new shares to bring debt down to 60%, more than tripling the float.

Portfolio fundamentals are weaker than expected - highlighted by a 6.4% DECLINE in same-store NOI growth - the worst they have ever seen from a public retail REIT in one quarter. They think PEI will survive, but its line lenders could increase control through tough extension terms at the expense of common shareholders.

Notablecalls: This will no doubt hurt the stock.

Emerson (NYSE:EMR): Upgraded to Buy from Neutral at Merrill/BAC

Merrill Lynch/BAC is upgrading Emerson (NYSE:EMR) to Buy from Neutral while establishing a whopping $50 tgt on the name (vs. prev. $32 tgt)

Lagging share price creates opportunity
EMR has significantly lagged its industrial peers during this recent rally – Merrill thinks driven by concerns that trough earnings for Emerson occur much later than other perceived shorter cycle plays. However, they think earnings for most industrials are likely to trend lower in 2010, which they think puts EMR on more of a comparable footing to close the performance gap with other industrials.

Emerson business outlook appears to be turning higher
Firm thinks the outlook for Emerson’s business, on average, has also begun to turn up. For instance, Emerson has the largest direct exposure to China at ~9% of revenues. Roughly 75% of the company’s products are estimated to be tied to infrastructure spending which should benefit from global stimulus efforts. In addition, roughly one quarter of Emerson’s product mix sells into economically sensitive end markets – mostly in North America – that should benefit in a U.S. recovery.

Future order rate improvement could boost sentiment
Emerson’s orders also appear to be hitting trough levels at down over 20%. Consequently, once the rate of order decline begins to ease – possibly later this year – they think the stock could also respond favorably.

Notablecalls: That $50 tgt will surely catch traders attention and cause the stock to move above the $35 level.

PS: I know I should be making fun of the Research in Motion (NASDAQ:RIMM) upgrade out of UBS this morning. I won't, though - the fact they upgraded it here is retarded enough.

"I'll bet you wished you had fed the rest of me to the dogs."
Gary Oldman as Mason Verger

"No, no Mason I prefer you the way you are."
Sir Anthony Hopkins as Hannibal