Compass Minerals (NYSE:CMP): Upgraded to Overweight at JP Morgan

Compass Minerals (NYSE:CMP) is upgraded to Overweight from Neutral at JP Morgan with price target raised to $66 (prev. $50).

JP Morgan notes they raised their 2010 EPS forecast for Compass from $5.05 to $5.50 to reflect 8% higher salt prices given that Compass has now completed 80% of its salt tenders for the winter season. 2010 EPS model should prove conservative because it assumes (5%) lower salt volume despite Compass expanding its capacity about 7% to displace high-priced imported salt tonnage. Firm's earnings model in effect reflects a warm winter. They also assume 2010 Sulfate of Potash (SOP) prices of $500 per ton, about a $65 premium to a conservative MOP price, which could understate 2010 EPS power by $0.50. (SOP tends to sell at a $100-$150 premium to MOP. Each $100 per ton price change in SOP prices is worth about $0.75 per share in EPS.) Compass currently trades at 9.2x year-ahead EPS and 5.9x EBITDA. The company’s average free cash flow yield in the 2009-2010 period should be about 8%. JP Morgan's 2010 price target is $66 or a 12x multiple of EPS representing 30% appreciation potential over the coming year.

The investor faces a natural reluctance when contemplating the purchase of Compass Minerals shares because Compass has two businesses with perennial uncertainties. Winters may be warm or snowy, which materially affects volumes and profits of its core salt business. Secondly, the price of potash is and has been volatile, which weighs on the profits of its Specialty Potash segment. Yet there are moments of valuation when these uncertainties matter less.

The Specialty Potash segment is sufficiently depressed from a volume standpoint and its earnings are unrepresentatively low such that we believe an investor is partly shielded from negative volatility in salt volumes from a valuation standpoint. Should the winter season be normal and potash premiums truer to history, the company is capable of earning in excess of firm's current estimates (above $6.00 versus JPM $5.50 estimate). They think that the company would earn in the vicinity of $4.00 per share should potash prices or volumes prove exceptionally poor and the company faces an unseasonably warm winter. Firm thinks that a 12x multiple of depressed EPS is where the valuation would settle out.

Compass Minerals has been a poor performer in 2010. Investors are in search of cyclicality and have become warier of agriculture. Compass shares have underperformed the market by about 23% year to date and underperformed such bellwethers as Potash Corp and Mosaic by 46% and 43%, respectively. JP Morgan thinks this level of underperformance provides a reasonable entry point into these good-quality shares.

Notablecalls: The call makes sense and coming from JP Morgan, I think will move the stock. The eternal question of course remains - how much? One thing to me is quite clear - one should not pay up too much pre market. I think (depending on GDP data to be released soon), one can get decent fills around the open.

JPM makes a good case for CMP and the buyers will line up accordingly.

First Solar (NASDAQ:FSLR): Downgraded at Credit Suisse

First Solar (NASDAQ:FSLR) is getting downgraded to Neutral from Outperform at Credit Suisse this morning following earnings out last night. The firm is lowering their target to $135 (prev. $200).

Earnings momentum peaking. While there has been a widespread concern on FSLR’s margins, FSLR’s stock in the meantime has benefited from its consistent track record of beat and raise quarters in the past. While CSFB expected upside to the quarter, FSLR's reported Q2 results were well above consensus. However, they think Q3 will be the last good quarter for a while for similar upside surprises; and they expect a period where estimate resets are asymmetrically skewed to the downside as we move into 2010. Firm expects the stock to look ahead of this peaking earnings momentum and pull back to lower levels.

Reasons for downgrade (short summary):

1) earnings momentum peaking. CSFB thinks Q3 will be the last good qtr for a while for similar upside surprises; and they expect a period where est resets are asymmetrically skewed to the downside as we move into 2010.

2) rebates could accelerate price competition and will sharpen focus for customers and investors around pricing. We also expect Asian c-Si suppliers to match or beat these rebates in return.

3) ASP declines are winning the battle over vol growth;

4) rate of cost reductions could moderate. Our call is a reflection of the new risk/reward on the stock; still believe FSLR has a compelling technology and capable mgmt team that can deliver on longer-term roadmaps.

Notablecalls: This is a powerful downgrade from CSFB Solar Energy team. I'm actually surprised they didn't downgrade the stock to Underperform (the language is that strong). The stock will have 8-10% downside in store today.

General Electric (NYSE:GE): Upgraded to Buy at Goldman Sachs

Goldman Sachs is upgrading General Electric (NYSE:GE) to Buy from Neutral with a $15 price target (prev. $13) as as comments reported after the close by US House Financial Services Chairman Barney Frank suggest broadening support for regulatory reform that would not mandate the separation of GE Capital. While numerous uncertainties remain, Goldman is reducing their probability assumption for a costly GECS separation to 25% from 50% and this drives their higher target. Greater potential for a manageable regulatory outcome should prompt investors to focus on longer-term benefits of economic and credit stabilization to GE shares.

Catalyst
After the close, Bloomberg reported that Barney Frank indicated that GE and “manufacturers with finance businesses should be allowed to keep the units under a revision to rules that govern banking.” This seems to strengthen the view that legislative support for reform requiring GECS separation as implied by the Treasury “White Paper” is declining. Goldman estimates separation could cost equity holders $40 bn (lower EPS on higher taxes, capital and other costs) and had assumed a 50% probability (now lowered to 25%) in their old $13 price target. While uncertainties remain and GE faces other challenges (e.g. later cycle industrial mix and rising credit losses), they believe that – along with economic and credit stabilization signs - risk/ reward is improved to justify upgrading their rating.

Valuation
The $15 12-month target assumes 1) $12 for Industrial on $0.85 mid-cycle EPS, 16x PE (vs. 14.5x prior on 25% lower probability of GECS separation), discounted 1.5 yrs at 10%, 2) $3 for GECS on $0.40 mid-cycle EPS, 10x PE, discounted back 2 years at 15%.

Notablecalls: What can I say. The stock will trade up on this by about 4-6% but the $15 tgt is really uninspiring. It's more about getting a blessing from GSCO than anything else.

MGM Mirage (NYSE:MGM): Downgraded to Neutral at Merrill Lynch

Merrill Lynch is out downgrading MGM Mirage (NYSE:MGM) to Neutral from Buy while lowering their target to $8 (prev. $11).

MGM has taken an increasingly aggressive strategy toward booking group business in late 2009, ’10 and ’11. While this helps to fill MGM’s huge 33.7K room inventory, it effectively locks in lower rates, meaning MGM’s earnings snap-back could be delayed. No signs of group volume recovery by the hotel companies, means pricing will remain challenged for at least the rest of ’09 and likely longer.

Supply picture may not be improving as quickly as thought
Merrill continues to believe supply risks from CityCenter cannibalization (6K rooms, +6% growth) are understood, but the Fontainebleau LV (4K rooms, +4% growth) bankruptcy in June and slow progress on Cosmopolitan (3 rooms, +3% growth) were incremental positives. Now, there are signs that Fontainebleau LV could be worked out and Cosmopolitan (appt’d a new CEO) could open late ‘10, meaning supply of an add’l 7K high end rooms (+7% growth) will continue into late ‘10/’11.

Credit separation from equity a bad signal
In the last run, MGM’s debt and equity moved in lock step, as reduced likelihood of bankruptcy was positive for both. This hasn’t been the case recently w/equity rallying 36% (vs. S&P 11%) but LT debt (Jan 17 7 5/8) narrowing slightly from 64.5 to 66.25. With $12B in debt and a quick profit snap-back in ’10/’11 less likely due to locked-in rates + supply, add’l dilution for equity holders is a continued risk.

Notablecalls: The call has some new info (negative) and will likely work. You can get some decent fills in the pre market and cover lower later in the day.

MGM does not have any Macau assets to monetize so it's pretty much dying a slow death.

Right now I'm interested if it can go sub-$7 or not. With a little help from the market I think it can.

Quidel (NASDAQ:QDEL): Downgraded at Stephens

One call that I like this morning (in light of pre market weakness) is Stephens' downgrade of Quidel (NASDAQ:QDEL) to Equal Weight from Overweight. Price target remains at $16.

Firm notes the downgrade is based on valuation. The stock has had a very nice run in light of a significant improvement in near-term fundamentals associated with swine flu. They believe the current valuation of 29x 2010 EPS estimate fully represents the current fundamental outlook. Additionally, they worry that a speculative bubble might be building surrounding investors buying this name solely based on near-term upside to estimates associated with swine flu. While they believe QDEL is likely sitting in front of a sustained period of stronger-than-average flu activity, they believe investors would be shroud to focus on long-term sustainable earnings power.

Firm's belief is that their 2010 EPS estimate of $0.54 estimate is a better indication of long-term earnings power. Finally, based on channel checks at AACC, Stephens would highlight that they have some concerns surrounding increased commoditization and pricing pressure in some of QDEL's core markets. They recommend investors move to the sidelines and look for a better entry point with this name.

Notablecalls: Note that Stephens is the main firm covering QDEL. They have done well with the stock and are now telling people to get out. The stock will get hit..it will bounce...and will get hit again. That's what I think will happen today.

This one can do 5-7% to the downside.

Woodward Governor (NASDAQ:WGOV): Downgraded to Neutral at Baird; Goverment suspends MPC

Baird is out quite negative on Woodward Governor (NASDAQ:WGOV) downgrading the shares to Neutral from Outperform, no change to $23 price target. Firm believes suspension of MPC from participating in federal grants/programs creates a material revenue risk for WGOV and exacerbates already uncertain revenue visibility in company's aerospace, power generation, and infrastructure-related end markets. They remain constructive on long-term growth potential, but would look to high-teens to become buyers.

- MPC suspended from federal programs. As disclosed in WGOV's third quarter 10-Q, MPC (included in WGOV's Airframe Systems segment) received a notice of suspension from the U.S. Department of Defense stating that MPC has been temporarily suspended from participating in new federal procurements and grants, effective July 8.

- Recall that MPC derives approximately one-half of its near-$200MM revenue base from defense markets.

- Suspension applies only to MPC and not other WGOV businesses. MPC Products may continue to perform existing work under prime contracts in existence as of the date of the suspension.

- Sub-contractor work also limited. Certain government contractors must provide written notice before awarding MPC subcontracts exceeding $30K in value.

- DOJ investigation remains open. As previously disclosed, MPC is subject to a Department of Justice investigation regarding pricing practices prior to June 2005. The company is in the process of finalizing a settlement for this matter with $25MM accrued for settlement.

- WGOV does not believe MPC's suspension is related to any concerns of misconduct other than the aforementioned pricing practices issue.

Notablecalls: It looks like the 10-Q came out late last Friday and noone really paid any attention to the MPC suspension notice. Now Baird is out with a downgrade citing the suspension as the main cause. I think WGOV will get it (it's a mover stock). Only problem is how to get decent fills.

Harley-Davidson (NYSE:HOG): Positive comments following Analyst meeting

Somewhat surprisingly we have several firms out positive on Harley-Davidson (NYSE:HOG) following Analyst meeting:

- Baird is raising their target to $28 (prev. $21) and reiterating Outperform rating after the firm talked with management/dealers in meetings in Denver. They believe the turnaround story is building momentum led by a credible CEO with impressive credentials. Beyond the standard Harley noise – they advise investors to focus on the strength of the brand, opportunities to lower structural cost, and ideas to finance HDFS in better ways. Details were limited, but Baird believes the turnaround story will attract investment.

Summary. The presentation lacked tangible goals or meaningful metrics, leaving investors to overweight intangible clues – which were bullish. Firm notes they like that management is addressing structural cost, cutting dealer inventory, boosting residual values, refining the dealer network, exploring options for HDFS, and offering investors a more credible outlook. As the turnaround unfolds, they expect investors to demand more tangible metrics – but initial impression is favorable.

Brand. Dealers tell the firm more bikes are selling below MSRP, which diminishes the value of the brand. Management acknowledged this problem and vowed to protect the brand at all costs, starting with plans to slash production announced in earlier this month. Baird expects days inventory to drop to 75-90 days from 90-110 days, potentially creating short waiting lists again. Naturally, residual values should improve – which has favorable implications for HDFS.

Cost. The Harley-Davidson brand is among the best on the planet, but its operations fall short of world-class. CEO Keith Wandell brings impressive operational credentials to Harley, understands its shortcomings, and has the mandate to make the tough decisions. They expect the York negotiations to set the tone.

HDFS. Management considers HDFS a strategic asset, but acknowledges the need to lower its cost of capital. We'd like to see HDFS partner with third-party underwriters to drive fee income without capital risk (CarMax model). The topic of HDFS remains an insurmountable hurdle for some investors that otherwise might buy the stock – but believe the issue is diminishing.

- Deutsche Bank is raising their target to $26 (prev. $21) noting that although management did not convey any optimism regarding the near term outlook for motorcycle demand, they came away more confident in HOG's ability to maintain recent market share gains and return the business to historic margin levels. Firm maintains their Buy recommendation based on valuation and HOG's additional cost savings potential.

Management conveyed a number of data points which suggest that the company's recent market share gains could be more durable than we perceived (HOG appears to have made significant progress in improving its brand's positioning with young adults). The firm was also pleased to hear management reiterate their commitment to supporting prices and residuals, by aggressively curtailing production. Maintains Buy rating.

Notablecalls: It's quite odd to see so many positive things being said about HOG. Yet, the short interest still stands close to 20% in the name. The chart looks like it wants new highs in the $24 range. Won't get there today but I suspect there is upside in the name today. Say..3-5% or a full 1 pt if you will.

Aetna (NYSE:AET) : Colour on quarter - Bounce?

I wanted to highlight you some comments on Aetna (NYSE:AET) following a surprisingly weak earnings report out this morning:

AET reported operating EPS of $0.68, 13% below the Street's $0.78 est. AET also lowered 2009 EPS guidance to $2.75-2.90 from $3.55- $3.70, a 22% reduction at mid-point.

- Deutsche Bank notes the EPS guidance reduction was primarily due to continued higher medical costs in Commercial segment. The Commercial MLR came in at 85.9% vs Deutsche's 83.4% est, and included $65 million of negative PPRD primarily related to 2008 medical claims; ex PPRD the Commercial MLR would have been 84.6%. For 2009, AET now expects a Commercial MLR of 84.0-84.5% up from prior 82.3-82.8% guidance. This implies a Commercial MLR of 83.5-84.5% for 2H09. Total revs came in at $8.657b, $82m above est. Total membership was 55k lives above 19.052m est, driven primarily by higher Commerical risk and Medicaid ASO, partially offset by lower Commerical ASO.

On a positive note, AET increased health care claims reserves sequentially by $83.1m; however, DCPs declined by 0.4 days from 41.6 to 41.2, likely reflecting the higher reported medical expenses in 2Q09. AET repurchased 10.9m shares for $271m in 2Q. AET reported net capital gains in the investment portfolio in 2Q09.

Separately, the WSJ has an article out today noting that AET has been shopping its PBM, which could provide some near-term support to the stock. While the bear case will highlight that AET's MLR pressures create continued EPS risk, the bull case will state that AET has now moved its guidance to a more conservative level and the firm sees a near-term catalyst forthe stock with the potential sale of the PBM. Maintain Buy rating.

- Citigroup is out saying they think current results could mark a bottom. Aetna's strong customer growth and positive channel checks leave them convinced they can stabilize margin with price increases and still gain share of the shrinking commercial market. Also, large reserve increases last year by competitors leave them with a cushion to absorb higher medical trend this year.

Where the stock closes today (they think $24-$25) will depend on how convincing management is in their earnings call at 8:30a.m. ET that the new EPS guidance can be met. Citi's read is the new guidance is conservative based on sequential 3% reserve growth vs. 0.5% premium growth. Also, the WSJ reported potential PBM sale this a.m., and they expect strong results from WLP Wednesday, provide support.

Notablecalls: I think AET has the ability to bounce. Where? I suspect the stock is a buy sub-$24 and sell around $25. Let's see how that goes.

I personally missed the low $23 buy point.

SonicWALL (NASDAQ:SNWL): Colour on quarter; Upgraded to Outperform at Baird

SonicWALL (NASDAQ:SNWL) is getting commentary this morning after posting stronger-than-expected Q2 results last night:

- Baird is upgrading SNWL to Outperform from Neutral and raising their price target to $10 (prev. $5). According to the analyst the upgrade comes on improving fundamentals and macro environment. SNWL's Q2 showed QoQ product revenue growth and significant improvement in operating margins. This is the inflection point the firm needed to see before theygot more positive about this story. Firm recommends purchase as valuation appears very inexpensive relative to its peers and set a new price target at $10.

Q2 results showed very good operating margins on $49 million of revenue and EPS of $0.10 (Street at $48 million / $0.07). Product revenue grew QoQ at its core UTM and its CDP segments. Geographically, EMEA showed the best growth sequentially (up 20%), while North America was flat as was APAC. Also, subscription deferred revenue grew 4% QoQ to $96 million, a record result.

Q3 guidance is based on a cautionary environment that management expects will continue: revenue of $46 - $49 million and operating EPS of $0.08 -- $0.09 versus consensus of $48 million and $0.08. While Q2 results were encouraging, SNWL is very guarded about the macro headwinds for Q3.

- JP Morgan gives SonicWALL credit for their ability to improve operating margins to 15.7% and good collections in the quarter. Similar to Amdocs earnings yesterday, the underlying tone on the macro environment however has not changed and remains tough. They believe a displacement promotion enacted in Q2 helped push the company over to exceed revenue and cash flow expectations, which they do not believe is sustainable.

SNWL is running a displacement promotion where if a customer displaces a competitive product and buys for the full cost a 3 year subscription service, the hardware is free and included in that price. JPM believes this promotion will continue for maybe another quarter, but do not see this as sustainable. Because cash is collected up front, this promotion they believe is what helped CFO reach $11.1M.

39K units shipped was a good sign. They do recognize that despite a tough market and promotions, they think SNWL has done a good job of capturing what they can in the SMB market evident by 39K units shipped as compared to our 36.2 unit estimate. Company also cited a government deal for 23 E Class UTM appliances which is their higher end product.

Raising Price Target to $7.50: new $7.50 price target, up from $6.00. Maintains Neutral.

Notablecalls: SNWL is mostly a subscription service play, which is something the market should appreciate in these volatile times. I think this Baird upgrade will invite some buyers.

The stock can do 10%+ in the n-t.

Affymetrix (NASDAQ:AFFX): Colour on quarter; Upgraded to Overweight at Piper Jaffray

Affymetrix (NASDAQ:AFFX) is getting lots of commentary followin better-than-expected Q2 results:

- Piper Jaffray is upgrading their rating to Overweight from Neutral and raising their target to $11 (prev. $5)

Firm notes the upgrade reflects a favorable valuation, improving operational metrics and favorable revenue mix. They note the management is successfully restructuring the company's manufacturing cost base (and now turning their attention to operating expenses), the valuation (currently trading at 1.0x 2010 EV/Rev estimate) and the changing mix of business away from markets where they are less competitive (i.e. GWAS) and shifting resources toward markets that benefit Affy's products (such as pharmacogenomics). At this point, Piper believes it is far too premature to suggest Pharma budgets will suddenly strengthen or Illumina's advantage in DNA will evaporate. Rather, they see a company who is in the early stages of turning around, with an attractive valuation (despite the significant move already this year) and ample room to the upside.

Guidance: For 3Q09, Affymetrix anticipates $78M-$81M in revenue, encompassing PJ's ($80.6M) and Street consensus ($78.9M) prior estimates. They see potential upside to 3Q09 expense guidance of ($52-$53M, 55-56% GM).

- Morgan Stanley notes another quarter of stabilizing revenue trends with upside to consensus combined with solid 3Q guidance is encouraging and consistent with their recent upgrade thesis. Moreover, margin upside at both the GM and operating expense levels was also ahead of firm's expectations, and they continue to expect further news on cost cutting later in 2009, which could be a near term positive. Longer term, the success of the new product cycle and the peg array (GeneTitan) migration are the sustainable value drivers for this stock, and they remain cautious given limited visibility (particularly in genotyping) and <5% of the installed base transitioned successfully (need clear evidence of success beyond reagent rental customers)

A top and bottom line beat for a second quarter in a row will likely see the stock meaningfully higher from current levels. Maintains Equal Weight.

- JP Morgan maintains their Underweight rating saying that while new products (GeneTitan, QuantiGene assays, new genotyping system in 2H) hold potential, they do not see fundamentals improving significantly before 2010, despite a pending tailwind from NIH stimulus, and accordingly, remain cautious on shares in the near- to intermediate-term.

Notablecalls: AFFX has been a notable laggard in the genome space for quite a while, letting Illumina (NASDAQ:ILMN) kick their arse. I suspect there were some short bets made against the stock ahead of the numbers in light of warning from ILMN some weeks back. Now the shorts are on the run with Piper sponsoring the running event.

I think the stock can trade towards the $7 level and possibly higher in the n-t

Apple (NASDAQ:AAPL): Colour on quarter - Deutsche raises target to $225

Apple (NASDAQ:AAPL) is getting lots of positive analyst commentary following results out last night.

Here are some of the highlight:

- Deutsche Bank is raising their target to $225 from $150 noting iPhone shipments of 5.2M beat their model (DB at 5.0M) with robust demand outstripping supply. The iPhone remains immensely profitable (est. 60% GM) as it added an incremental $0.79 in EPS in the Q on a pro-forma basis (adjusting for subscription accounting). Further, Apple will extend the geographic reach of the iPhone from 18 to 80 countries by the end of the Sept Q, greatly expanding its addressable market. Further, the firm believes Apple is on track to partner with China Unicom as early as this Fall. As a result, they raise their CY09 iPhone unit estimate from 23M units to 26M (Sept Q increased from 6M to 8.5M).

New product ramps on the horizon to drive incremental demand
Apple shipped 2.6M Macs which was in-line with our model and 10.2M iPods, modestly below Deutsche's estimate (vs. DB at 10.5M iPods). They believe Apple’s new product pipeline is full including a refreshed iPod line, the introduction of Snow Leopard in Sept. and new Mac form factors possibly ramping in 2H09.

Deutsche Bank adjusts their FY09 EPS to $5.87 (vs. prior $5.50) and FY10 EPS to $7.15 (vs. prior $6.25). Normalizing for iPhone accounting results in pro-forma EPS of ~$9.50 in FY09 (vs. prior ~$8.50) and $11 in FY10.

- Morgan Stanley is bumping their target to $195 saying two important risks to their Overweight thesis were taken off the table with C2Q09 results. First, Macs resumed share gains even without a sub-$700 notebook product. Second, long-term gross margin guidance of "about 30%" was de-emphasized with stronger high margin iPhone sales and prepayments of constrained components. With these risks muted, iPhone sales > supply, and Mac unit upside, they see a high likelihood of the stock approaching their new $195 price target by calendar year-end.

- JP Morgan recommends that investors continue building or adding to positions in Apple. The company reported big June quarter results, and the guidance should be enough to keep investors’ interest. Key drivers were the Mac surge that we highlighted previously, alongside strong iPhone sales and favorable margin trends. Firm believes there are plenty of catalysts to keep numbers and the stock pointing up. They reiterate their Overweight rating and are lifting their Dec 09 price target to $170.00 from $167.50 previously.

- Canaccord is upgrading AAPL to Buy with a $200 price target.

Notablecalls: AAPL is trading 6 pts higher in the pre mkt (right about where it finished in after hours yesterday). I'm somewhat hesitant to buy it here despite the new Street high target from Deutsche and overall positive comments from other firms.

I think it can do $158-$159 in the s-t today but the risk of a blow-off top is exceedingly high. Most of the upside is coming from the iPhone and as DB notes Macs were not that hot.

International Paper (NYSE:IP): Upgraded to Buy at Deutsche Bank

Packaging/Paper group is on fire today after Packaging Corp. of America (NYSE:PKG) blew estimates away last night.

International Paper (NYSE:IP) looks to be the best play on PKG's results (up 15-16% pre mkt):

- Deutsche Bank is upgrading IP to Buy from Hold and upping their price target to $24 saying that while significant risks remain, it is clearer & clearer that the containerboard industry has managed itself in a fundamentally different fashion over the past year.

Prices reported in the trade papers have dropped $70-80/ton off last autumn's cyclical peak. However, prices were reported stable in June and appear stable again in July. Moreover, most industry players remain reasonably profitable at current price levels, despite a sharp drop in volumes. Industry consolidation, a proactive approach in managing supply & avoiding inventory overhang, and a weak US$ have all played a role in this performance. Additionally, domestic & export volume trends are recovering. June box numbers represented a first real sign of domestic vol’s starting to improve. This suggests that the improvement seen in the ISM survey and the industrial production index are starting to filter through to the box market.

Note Deutsche Bank is also upgrading PKG to Buy with a $24 target.

- Buckingham Research believes that PKG’s stellar EPS performance relative to expectations is a prelude to sizable beats by other containerboard producers including International Paper. They are reiterating their view that IP is well positioned to beat 2Q estimates and are raising their price target to $20 (prev. $18)

Firm reiterates their conviction that IP can meet or exceed their 2Q EPS estimate of $0.10, which is well above the breakeven consensus. IP has been taking disproportionate amounts of downtime (70% operating rates in 1Q09), and while they don’t think the variance with competitors will be narrowed too much in 2Q, at some point, if/when business improves further, it will be and IP will generate more incremental earnings power than others.

They consider $20 to be a conservative price target and believe the stock could go meaningfully higher if investors see renewed evidence of economic recovery.

Notablecalls: IP is trading around $17.50 in pre mkt (closed $16.49) and I suspect this one may have some more upside in it today. Traders will likely be gunning for the $18 level.

One other play people will be looking at is Temple Island (NYSE:TIN) which is also trading up 5-6% in pre market.

Note that DB and Buckingham are considered to be the strongest players in the Paper/Packaging field.

Baidu.com (NASDAQ:BIDU): Downgraded to Underperform at Credit Suisse

Credit Suisse Asia team is downgrading Baidu.com (NASDAQ:BIDU) to Underperform from Neutral this mroning. Their price target is $250 (prev. $200).

According to firm's industry sources, performance of Phoneix Nest is not yet satisfactory. They believe the launch of Phoneix Nest has not replaced the Classic P4P system yet, and substantial amount of Baidu revenue is still generated by Classic P4P.

Phoneix Nest, Baidu’s new advertising system, was officially launched on 20 April. Market believed Phoneix Nest will be a short-term growth driver, and expected Phoenix Nest will totally replace Classic P4P system soon. However, according to industry sources, performance of Phoneix Nest is not yet satisfactory. Also, Baidu announced that, starting from 15 June, two types of keywords are restricted to be advertised on Phoneix Nest only: 1) Professional keywords and 2) keywords with limited business value. As such, the firm views that Baidu does not want to replace the Classic P4P system with Phoneix Nest too soon. Finally, based on theirsample keywords, the average number of ads on the LHS was between 3.5 to 6.0 ads per keyword (except 15 May) after Phoneix Nest launch, at a similar range as before. As such, CSFB believes the launch of Phoneix Nest has not replaced the Classic P4P system yet, and substantial amount of Baidu revenue is still generated by Classic P4P.

They raise 2009E EPS by 3% and 2010 by 2% due to better SPI. They increase their DCF target price to US$250 from US$200, implying 38x 2009E P/E and 1.47x PEG. Due to rising competition from Google and vertical search engines in China, the firm expects Baidu revenue market share to decline from 59% in 2008 to 46% in 2012, and should not trade at a premium. Trading at 49x P/E and 1.86x PEG, Baidu is not attractive. Due to expensive
valuation, they downgrade Baidu from Neutral to UNDERPERFORM

Notablecalls: This should hurt BIDU stock as the Phoenix Next has been their much hyped new advertising system.

I'm guessing this one will be down 5 pts in a jiffy.

Infinera (NASDAQ:INFN): Downgraded to Underperform at Jefferies; losing Level 3?

Jefferies is out with a major negative call on Infinera (NASDAQ:INFN) downgrading the shares to Underperform from Hold and lowering their target to $6.75 (prev. $8).

The analyst notes that in recent days, they have been doing checks on Infinera's business with Level 3.

HAS HUAWEI BROKEN INTO LEVEL 3? Firm's recent checks with industry contacts suggest that Level 3 has been running a long haul WDM RFP process. Moreover, their checks are indicating that Huawei has won the business. Obviously, this has negative implications for Infinera. The equipment vendor is the sole supplier of long haul WDM gear to Level 3. The carrier accounted for 24% of Infinera's revenue over the past year.

WORST CASE FOR INFINERA: THEY LOSE THE BUSINESS OUTRIGHT. In a worst case scenario, they expect Infinera – over time – to lose roughly $75 million in annual sales with Level 3. Of course, any transition would take time. Moreover, Level 3 would continue filling out the installed base of Infinera DTN chassis with new modules. Over time, this revenue stream would dwindle as well.

BEST HOUSE IN A BAD NEIGHBORHOOD? The Level 3 outcome is likely a major step backward in Infinera's revenue run rate. The ugly situation at Level 3 reinforces Jeffco's concerns about the longer term margin profile of the business. They are concerned about the company's ability to translate its technology advantage into interesting levels of profitability.

DOWNGRADING TO UNDERPERFORM... From firm's perspective, it's now difficult to justify a premium valuation while their views on revenue growth and profitability are worsening. With the loss of business at Level 3, it's quite likely that our numbers will come down. They expect to adjust their model after the company reports Q2 tomorrow.

Notablecalls: George Notter and his Comm. Equipment at Jeffco have done an excellent job with their checks. The call should have a very negative impact on INFN's share price today. I'm guessing 10-15% downside.

What I have learned from similar calls in the past is that there is usually money to be made shorting the open. They gap'em down but soon enough sellers return...and take the stock down by another 5-7%.

Canadian Solar (NASDAQ:CSIQ): Oppenheimer calling for a big Q3; target raised to $19

Oppenheimer is out very positive on Canadian Solar (NASDAQ:CSIQ) raising their tgt to $19 from $14 following checks at Intersolar. Firm notes they are growing more positive on CSIQ as they believe high cost inventory has been burned through, units and margins should rebound, and 3Q Street estimates could prove conservative. They remain cautious on the sector overall, but believe CSIQ shares still have room to run.

Intersolar checks. Opco met with companies across the solar supply chain and left feeling more comfortable with 3Q demand trends, but less comfortable with industry ASPs and 2H linearity (4Q should be down sequentially vs. Street expectations, which model-in linear growth). Still, they believe CSIQ's story is intact and feel comfortable with their 5/21 upgrade.

Costs approaching $1.50/watt. CSIQ has burned through its high cost inventory and can now produce modules near $1.50/watt (~$0.90/watt for wafers and ~$0.60/watt for cell/module processing). With this cost structure, CSIQ can price aggressively to gain share while easily maintaining a mid-teens or better gross margin.

Expect a big 3Q; Street conservative. Solar peers are currently running at >70% utilization, yet 3Q Street estimates for CSIQ model-in 45-50%. CSIQ should at least track the industry (or even gain share) due to its better cost/pricing structure; firm sees >30% upside to consensus revenue and expects GMs well above the Street's 11% estimate.

Raising estimates and PT. They raise their 2009 and 2010 revenue/EPS estimates to $476M/$0.28 and $655M/$1.04 vs. consensus at $454M/$0.05 and $634M/$0.80.

Notablecalls: This call should generate some further upside in the CSIQ stock.

PS: Wanted to add that I think there are a lot of shorts in this one and they are likely to feel some heat...thinking CSIQ can go to $13.50 or even $13.85 if it really gets out of their hands.

Note that Nomura is out upgrading CSIQ to Buy this morning.

Esterline Technologies (NYSE:ESL): Upgraded to Outperform at Credit Suisse; $43 tgt

Credit Suisse is upgrading Esterline Technologies (NYSE:ESL) to Outperform from Neutral while raising their tgt to $43 (prev. $32).

While ESL has strong breadth across the typically late-cycle aerodefense market, the firm thinks its 18% sales (higher % for EBIT) exposure to comm’l aftermarket will allow it to benefit from the nearer-term recovery in spares demand that they anticipate in 2010. Thus the firm sees a single down EPS year in ‘09 as ESL’s diverse markets and acquisitive strategy should drive growth thereafter.

A Volatile Chart: The Feb. sell-off to $20 traces to an abnormally soft FQ1 (Dec) of $0.38 which startled investors following 8 prior qtrs averaging $0.93 (albeit w/ volatility). The mkt rightfully questioned ESL’s $3.70-$3.90 FY09 guidance after it delivered only 10% in FQ1. However, since then, airline traffic seems to be near bottom, and markets are now considering longer-term earnings pwr. With a more typical FQ2 report of $0.85 in May and an adj. in guidance to a more reasonably achievable range of $3.00-$3.20, the shares rallied quickly to above $30 on 6/5. Credit Suisse sees the recent pull-back to $26 as a good opportunity to get more involved.


Diversified Supplier w/ Global Reach: Aero spares comprise ~35% of revs (w/ higher margins), & they expect comm’l spares to recover late this year or early next. In military, ESL has solid int’l exposure of 10-15% offering diversity away from a slowing US DoD budget. Regarding recent U.S. defense cuts, Sec. Gates clear support for JSF (>$1M content/unit) trumps any negative news elsewhere (e.g. A400M).

New $43 TP: Today, ESL is CSFB's least expensive aero name w/ a P/E of 8.4x (CY09) & 7.3x (CY10E) & EBITDA multiple of 5.6x & 5.3x, respectively, offering a discount to peers of 12-28% . As well, the B/S is solid w/ net debt at 28% & FCF yield of 11%. Firm thinks the days of trough multiples (10x) on trough earnings are over as the mkt gains visibility. Thus, they expand out target multiple to the more historically normalized 12x for ESL’s comm’l aero (40% of total) and industrial ops (20%). For the defense biz (40%), which has sufficient int’l retrofit exposure to outpace U.S DoD budget growth, teyapply a slight premium of 10% to the 11x avg the firm uses for Pentagon-dominated peers, yielding a new TP of $43.

Notablecalls: This is a pretty gutsy call from CSFB's Aerospace & Defense team. They are basically saying commercial air traffic will recover...which is kind of suspect.

I checked with my aero/def analyst contact this morning and all he had to say was that this sure is a gutsy call. He calls the valuation interesting but notes the '..earnings stream is incredibly lumpy and they will leave you hanging as they don’t give any guidance...'

So there you have it.

I think ESL will trade up considerably today based on this call but is it really investable? Guessing 5-6% upside.

Brigham Exploration (NASDAQ:BEXP): Upgraded to Strong Buy from Underperform at Raymond James

Brigham Exploration (NASDAQ:BEXP) is getting very positive comments this morning after the co last night issued an operations update and announced that the Strobeck 27-34 #1H well came online with an initial rate of 2,021 boe/d from the Three Forks/Sanish (TFS) zone:

- Jefferies notes the first of three wells scheduled for completion this summer achieved a new record for BEXP ... it is also the second highest Three Forks Sanish (TFS) test in N Dakota. The Strobeck 27-34 (63% NRI; Mountrail County) flowed 2,021 boepd during the first 24 hours from the TFS. BEXP's prior record was 1,433 boepd from the Bakken. The highest report TFS test is XTO's (XTO, $35.85, Buy) Boucher 41X-21 well in Williams County at 2,571 boepd.

Demonstrates that longer laterals, more frac stages is working ... the Strobeck is 3 miles away from BEXP's Adix well which tested 892 boepd from the TFS from 11 frac stages in a 5,500' lateral. The Strobeck was completed with 20 frac stages, but 18 are effectively stimulated, in a 9,000' lateral. In effect, BEXP achieved more than double the production with 50% more frac stages. Also, the Strobeck well will be accretive to '09 reserves and will benefit from PUD-recognition. Last year the company booked only 4 million barrels in the Bakken, representing 17% of total reserves. Firm estimates that Strobeck's reserves would approximate 600 - 700,000 barrels if first month production averaged 600 bopd. This is possible considering the high initial production rate. Add in the two offset locations, even with a haircut, and Bakken reserves could be up 30% from this test alone. A 600,000 barrel well would achieve 25% threshold returns at $50 WTI assuming a $7 basis differential and $6.6 million well cost.

Next two catalysts imminent ... Jefferies expects to hear results from the Figaro 29-32 #1H (75%) in the Rough Rider area and possibly a second well in Mountrail County, the Anderson 28-33 #1 (55%), by the earnings call in the first week of August. Both wells will have 9,000' laterals and will be stimulated with 20-24 frac stages. Stimulation is scheduled for the Figaro in late-July and the Anderson in early August. Both wells would be accretive to '09 reserves.

"Rough Rider" delineation underway ... the Figaro is particularly important because it is in the largely undeveloped area West of the Nesson Anticline, where BEXP has one-half of their ND Bakken acreage.

Reiterates Buy and $6.50 tgt on BEXP.

- KeyBanc notes that while they believe it is more important to see how this well will produce over time, they expect the wells' IP to grab investors attention, as it is one of the strongest TFS wells to date (although a 20 stage frac was put into the well). They expect this to be a positive read-through for other TFS players, including Whiting Petroleum (WLL-NYSE), Continental Resources (CLR-NYSE), Encore Acquisition (EAC-NYSE), Newfield Exploration (NFX-NYSE), Kodiak Oil & Gas (KOG-AMEX) and XTO Energy (XTO-NYSE) - to name a few.

Couple of other wells to watch for. In addition, later this month, the Company plans to complete the, Figaro 29-32 #1H well, located in McKenzie County, ND. This long lateral Bakken well is expected to be completed with 20 isolated fracture stimulations. BEXP has also commenced drilling of the Brad Olson 9-16 #1H well, located in Williams County, ND in BEXP's Rough Rider Area. This well will be drilled to a total depth of 20,000 feet and is planned to be completed with 24 frac stages. Firm notes that this well is estimated to cost $6.25 million to drill and complete. In the Rough Rider Area, the Company controls ~100,345 net acres.

- Last but not least...Raymond James is upgrading BEXP to Strong Buy from Underperform.

Notablecalls: I think BEXP will have 25-30% upside in it today (close to a full point)

Positive news + similar catalysts on the horizon for the next couple of weeks. Nice combo.

Goldman Sachs (NYSE:GS): Upgraded to Buy at Meredith Whitney Advisory Group

Meredith Whitney Advisory Group is upgrading Goldman Sachs (NYSE:GS) to Buy with a 12 month price target of $186.

Firm notes their more bullish outlook on GS shares is deeply rooted in their sustained bearish stance on the US economy and state of US financials at large. Specifically, they expect a tsunami of debt issuance from federal/sovereign, state, and local governments ramping up debt issuance to fund woefully underfunded budget gaps. In addition, they expect corporate debt issuance to be at least 60% as strong as peak cycle levels reflecting sizable debt maturity rolls. What’s more, given fewer market players, not only is GS benefiting from market share gains on these products but more widely in derivatives products.

To be clear, the firm notes reasons for liking GS stock today are drastically different than any they have had recommending the stock on and off over the past decade. In the past, GS shares were a great play on equity markets and expansive global GDP. While that may still hold true down the line, their thesis today is that they expect GS to be the key competitor in some of the most unpredictable markets: government, corporate, and municipal debt. With those markets, GS handily layers on its suite of derivative products. For that, they expect GS to earn roughly a 16% ROE through 2011. Using those modest return hurdles, the firm derives estimates that are roughly 30% higher than Street consensus and a 12 month forward book value per share in excess of $124. Firm's price target is based upon a combination of a 1.5x multiple to forward book value as well as a 9.5x multiple of 2010 estimated EPS.

Notablecalls: Meredith is well, Meredith...hate it or love it..the mvp of Wall Street. She comes out and upgrades GS just one day before earnings. You have to love her for it.

How high will the stock trade today? $146-148 range? Sure. Why not!

NY Times is doing their best to push GS as well

Dana (NYSE:DAN): Upgraded to Overweight at Barclays; $3.50 target

And now for the small-cap of the day:

Barclays is upgrading Dana (NYSE:DAN) to Overweight from Equal Weight while raising their price target to $3.50 (prev. $2)

Firm notes they are upgrading DAN to OW, reflecting growing confidence that DAN will be able to avoid breaching its debt covenants, enabling investors to focus back on the fundamentals and recovery earnings power. DAN has solid liquidity, but the stock's valuation has been impacted by a large perceived risk of breaching covenants, which would allow its lender group to push the company into Chap 11.

While the firm does not forecast any meaningful volume recovery in the near-term, they expect a material rebound in earnings starting in 2Q09, driven by DAN's deep cost actions taken earlier this year, as well as a pick-up in Ford's production levels. This improvement, combined with the recent buyback of 10% of its debt, should enable DAN to clear its covenants.

Unlike AXL, DAN has not filed an 8-K indicating negotiations with its lenders, which should be a sign that DAN was in compliance as of June 30. This implies a solid 2Q EBITDA, which reinforces that DAN can stay in compliance for the year.

Notablecalls: Suspect 20%+ upside today may be in cards. AXL kinda worked, didn't it?

MEMC Electronic (NYSE:WFR): Upgraded to Buy at Citigroup; Added to Top Picks Live

Citigroup is upgrading MEMC Electronic (NYSE:WFR) to Buy from Hold and adding the stock to Top Picks Live with a $24 price target (prev. $16).

According to Citigroup, checks suggest pricing in its highly leveraged semi business has reached a key inflection and it is starting to reap meaningful cost reductions in its poly operations. While solar poly prices should remain under pressure through 2H:09, this has become broad consensus, meaning stock will move well before poly price increases occur (likely in mid-2010). F2009 from $0.16 to $0.34, F2010 from ~$1 to $1.34 and tgt $15 to $24 on ~15x C2010e + cash. See ~$12-13 replacement value for WFR’s assets or just 20% downside.

- Pricing headwinds starting to ease — Checks suggest 300mm wafer price of ~$90 (down from ~$125 entering ’09) now near all-in cash cost of ~$80-85 finally driving some supply rationalization + price inflection. They estimate WFR’s solar biz is run-rating EPS ~$0.60-0.80/yr despite poly pricing pressure, so all we need is for semis to stop losing money and a better semi pricing environment + supply rationalization should key this move.

- Near-term solar remains tough, but results solid and WFR as well positioned structurally as FSLR — Citigroup sees FQ2:09 (Jun) results at least in-line and likely better while margins at module makers have yet to bottom. They remain cautious on solar, but they think the Street will increasingly see a story here where sustainable margins and returns for WFR are similar to FSLR at a fraction of the multiple. Additionally, while it is taking some time, WFR is working with solar contract customers to extract concessions that may enable an asset-lite move downstream that would drive lower project IRR and share gain.

Additionally, one might expect poly prices to come down further in reaction to recently plummeting module prices. Indeed, firm's work on poly and module prices shows that module prices have generally led poly price declines. While this is a risk, it is quite simply consensus and even if it were to occur, the firm estimates WFR would still make ~$0.10/Q in each of CQ3 and CQ4.



As Street numbers have continued to march lower, Citigroup has been building a case that they wanted to get more positive on the solar sector at some point in 2H:09. While they don’t think it warrants that broad call yet, they feel WFR certainly has the best leverage of any mainstream solar play and they can make a structural case that is in the same ballpark as FSLR in terms of its flexibility and ability to gain share over time with a combination of cost advantages and sustainable cash flow. To that end, WFR is in the unique position of being able to fund continued poly capacity expansion from current cash flow (estimate it is run-rating ~$0.60-0.80/yr in the solar business) and all we need is a better semi pricing environment to lift some of the drag on overall earnings of the company.

One can build a case that sustainable gross margins are similar to FSLR

Over the longer term, WFR’s superior balance sheet versus its poly peers provides significant financial flexibility as it starts to create value downstream and take market share. To see this, Citigroup uses the example of a downstream module provider buying wafers at markup and selling modules into a project as compared to WFR selling in at cost. It is hard for them to see a sustainable situation where poly would sell for <$50/kg since broad grid parity is achievable in most regions at the $2.25-2.50 installed cost level. Assuming balance of system of ~$1.00 this means modules can sell in the $1.25-1.50 range sustainably. World-class non-silicon costs are already in the ~$0.65-0.70 range which, assuming module providers – which are basically just like EMS companies – are willing to take 10-15% gross margins long term, this leaves ~$0.50-0.60 for the wafer. Assuming tolling costs come down to ~$0.25-0.30 which even seems high, this leaves ~$0.25-0.30/W for the wafer. At ~5-6g/W this implies a poly cost of ~$50-60/kg. So, if WFR can make poly for ~$30/kg and sell it for $50-60 this implies sustainable gross margin in the 40-50% range, or not dissimilar to FSLR.

Notablecalls: Certainly an interesting call from the Citigroup Semiconductor Equipment team. Note the call comes only two weeks after JP Morgan downgraded the stock to Underweight (see archives) saying more and more poly capacity is coming online.

The whole WFR situation kind of likens to what the DRAM industry experienced over the past couple of years as Asian players kept adding capacity pushing gross margins to negative (!) range. While I'm not sure we will see negative GM's in this space, Citi may be somewhat early with their bottoming call. These things tend to take time.

So while the upgrade looks groovy and will probably work in the short-term (I'm guessing 5-6% upside today), I'm not entirely sure WFR warrants an investment here.

Meow!

American Axle (NYSE:AXL): ACTIONABLE CALL ALERT

Buckingham is out with a major call on American Axle (NYSE:AXL) reiterating Strong Buy and a whopping $9 target on the name:

- Firm believes AXL’s recently extended credit agreement is the first step in a more permanent re-negotiated credit facility. they believe the company could be granted a revised credit facility that will result in higher borrowing costs, but could also extend the company’s current maturities.

- They believe it is highly likely that management drew down most (if not all) of its available revolver credit facility during 2Q09. AXL’s credit facility is expected to step-down to $370M (from $475M) in April 2010, and as a result the company will have a $105M debt maturity in 2Q10 under the current credit agreement.

- Based on firm's quarterly liquidity analysis, they believe AXL has adequate liquidity to survive beyond its 2Q10 debt maturity (assuming the revolver is fully drawn). At the end of 2Q09, AXL had $280M of liquidity.

- They believe GM could provide some financial assistance to allow AXL to avoid a formal bankruptcy filing. Given the troubles that GM had with Delphi since they filed for bankruptcy in 2005, they believe GM will be reluctant to see AXL follow down the same path, especially given GM’s expected emergence from bankruptcy and production ramp-up of its most profitable full-size trucks.

- Firm believes management elected to draw down the remaining portion of its credit facility, as it bolsters its chances of getting a revised credit agreement.

Additionally, the analyst notes they would argue that AXL is a much more important auto part supplier to GM, as it produces axles for GM’s most profitable vehicles, full-size trucks. Once GM emerges from bankruptcy, they believe GM’s success is still reliant on the production of GM’s full-size trucks, as the Automotive Task Force and GM’s executives are well aware of this fact.

They believe once the “New GM” emerges from bankruptcy, which could be as early as this Friday, AXL’s re-negotiated credit agreement could shortly follow. Firm believes AXL could likely rally with the announcement of its extended credit agreement maturities. At which point, they believe management could evaluate the possibility of improving its capital structure through the issuance of equity and/or convertible debt.

Notablecalls: I'm going to call this one ACTIONABLE LONG IDEA. This one could zoom higher by 20-30% as soon as today on this call.

No firm covers autos or auto parts better than Buckingham Research Group.

Varian Semiconductor (NASDAQ:VSEA): Upgraded to Overweight at Barclays Capital

Barclays' Semi Capital Equipment team is out positive on the space saying they expect the SemiconWest trade show next week will spark renewed interest in semi equipment stocks and they recommend investors increase exposure to the group. Firm looks for growing visibility to double-digit Q/Q order growth through 2009 and that this will lead to strong earnings revisions ahead. They expect growing confidence of increased spending from Samsung and Hynix and that this will be a major catalyst for shares.

- Varian Semiconductor (NASDAQ:VSEA) is upgraded to Overweight from Equal Weight with a $35 price target (prev. $26).

The key drivers for the upgrade include: 1) They expect a beat on the Sep Q guide; 2) VSEA has a strong core franchise aided by aggressive cost cuts; 3) Firm sees visibility to growth from adjacent opportunities by 2011; and 4) the company has strong leverage to memory makers, which they believe will be the key incremental order driver in 2H09.

Expect a Beat on the Sep Q Guide
While Barclays expects June Q results to come in in-line with expectations, their checks suggest that continued foundry spending coupled with a modest orders from memory makers should drive Sep Q guidance of $90-100M, above consensus of $86M and near the company’s new breakeven level of ~$100M (vs. consensus EPS of -$0.10). This is a significant accomplishment for a company perceived as a “capacity driven” name, with limited leverage to the current tech buys. And with momentum continuing into Dec Q as well driven by memory, they see high likelihood for consensus estimates to head higher following the earnings call.

- KLA-Tencor (NASDAQ:KLAC) is also upgraded to Overweight from Equal with with a $32 target (prev. $25)

Near-term, they expect a strong beat and raise when KT reports. For June Q, the firm now models revs/EPS of $310M/-$0.08 (cons $299M/-$0.16). And supported by orders at high end of guide or better ($330+M), they look for mgmt to guide to much better Sep Q - they model $340M/$0.04 (cons $317M/-$0.08). Importantly, the firm looks for KT to be first lg cap eqpmt maker to reach B/E results.

Medium to longer term, they envision 4 drivers behind outperformance relative to WFE - 1) memory move to copper, 2) self-aligned double patterning, 3) adoption of high-k/metal gate by foundry/memory, and (iv) ongoing NAND shrinks.

Layer in aggressive cost cutting, and the firm sees $2.00 in earnings power in 2011, their new normalized EPS estimate. This in turn drives new price target of $32, suggesting 25+% potential upside from current levels.

Notablecalls: VSEA is my favourite of the two, despite the fact we have also Soleil upgrading KLAC today (to Buy from Hold).

I think both of these will enjoy 3-5% upside today (depending if the market will hold up).

Research in Motion (NASDAQ:RIMM): BlackBerry sales declined in June at AT&T and Sprint - Piper

Piper Jaffray is out somewhat cautious on Research in Motion (NASDAQ:RIMM) saying their checks indicated BlackBerry sales declined in June at AT&T and Sprint due to increasing smartphone competition, as BlackBerry sales appeared to lose share to the Palm Pre at Sprint and the new 3GS iPhone and older $99 iPhone at AT&T. BlackBerry sales at T-Mobile remained solid, but Verizon sales were slightly weaker following the termination of the BOGO promotion.

Increasing Competition – Remain Neutral: Firm believes the Palm Pre and iPhone products will remain popular with consumers and we anticipate increasing smartphone competition with additional launches in 2H09 such as the G2 at T-Mobile in August, and several mid-range smartphones from LG, Nokia, Motorola and Samsung in the upcoming months. As such, they anticipate increasing smartphone competition in 2HCY09 could result in RIM struggling to maintain its current market share and margin levels.

Notablecalls: While it shouldn't come as a surprise that the Pre and 3GS iPhone launches dented BBerry sales, the chart of RIMM looks broken.

On the other hand some of this has been discounted by the recent slide from $85 to $66. This makes the scenario of down-bounce-and further down most likely in my book.

Not making a call here but thought you should know.

Dryships (NASDAQ:DRYS) : Upgraded to Outperform at CSFB; $8 target

Credit Suisse is upgrading Dryships (NASDAQ:DRYS) to Outperform (previously Underperform) and increasing their target price to $8 (previously $5). Firm believes DRYS rig assets are being ignored by investors. While they expect oil prices to remain volatile, the recent oil price surge should help DRYS secure contracts for its speculative drillships which should in-turn help DRYS secure financing on its two un-financed drillships. While the timing of any new rig contracts remains uncertain they expect DRYS to fix 1-2 rigs on long term contracts later this year.

- They caution DRYS is not for the faint of heart and concerns remain about future equity issuances. DRYS raised $1.1 billion over the last 6 months (more than quadrupling its share count) and while highly dilutive it put DRYS balance sheet on stable ground. It is possible DRYS may tap the equity markets later this year, but do not expect it barring an acquisition, as they expect its shipyard to partially defer this years’ rig installment payments.

- Two Potential Catalysts for DRYS – Good and Bad. The positive catalyst for DRYS would be a fixture(s) for its newbuilding drillships. The negative catalyst would be a dilutive transaction for existing shareholders – this could be an equity issuance or a cancellation of existing newbuildings that results in payments of cash or shares to the selling party.

- Dry Bulk Freight Rates Softening– But Expectations are Low. Shipping is a demand driven story and the recent surge in freight rates has been driven by China’s thirst for iron ore. While CSFB expects Chinese iron ore imports to tail off in the back half of the year a pick up in demand from Other Asia or Europe could help off-set a potential slowdown in China.

Baltic Dry Index Off YTD High, But…
With the Baltic Dry Index trading over 3,000 and closer to its year to date high (4,291) than low (773), the firm expects the BDI to move lower heading into summer as port congestion in China unwinds, newbuildings are delivered, and China pulls back on its iron ore imports. Over the last few years DRYS has exhibited a strong correlation to the BDI – however, more recently the relationship between DRYS and the BDI has broken down. Over the last 6 months DRYS has exhibited a negative correlation to the BDI. This is not overly surprising given the volatility in the equity markets combined with DRYS ATM equity issuances in which DRYS raised roughly $1 billion in equity in at the market transactions.


Increasing Target Price to $8 (previously $5)
The $8 target price represents 60% upside potential from yesterday’s close. The $8 target price is based on our 2010 EBITDA estimate of ~$585 million and a ~6.5x EV/EBITDA multiple. O6.5x 2010 EBITDA multiple is a blended average of dry bulk comps (6.0x- 7.0x) and offshore driller comps (5.0x-6.5x). Following the completion of the last ATM equity issuance we estimate net debt at $1.5 billion and a share count of 258 million. Additionally, CSFB's $8 target price represents a 30% premium to DRYS NAV. DRYS dry bulk comps are trading at premiums to NAV ranging from 10% to over 100%.

They are increasing their 2009 EPS to $1.15 (previously $1.08) and 2010 EPS estimate to $1.09 (previously $1.01). The 2009 EPS revision was driven by increases to day rate estimates for the Panamax spot fleet. They expect the Panamax spot fleet to average roughly $16,000/d for the full year 2009.

Notablecalls: I think this is a fairly major call on CSFB's part. It sure rhymes with what Alcoa (NYSE:AA) CEO had to say about China yesterday.

Believe a 6-10% move may be in cards today for the dryshipper.

Dryships (NASDAQ:DRYS): Upgraded to Outperform from Underperform at Credit Suisse

Think I'm first one to break this one...Briefing, Fly, Street Account nor even TTN have it.

Target raised to $8.

More to follow.

Should be a mover.

XL Capital (NYSE:XL): Upgraded to Outperform at Credit Suisse

Credit Suisse is upgrading XL Capital (NYSE:XL) to Outperform from Neutral while raising target to $18 (prev. $13).

Analyst notes they are upgrading XL for 2 reasons:

- 1. Improving fixed income markets should lead to a strengthening capital position. CSFB believes it is unlikely that the company will raise capital even if fixed income markets deteriorate significantly.

- 2. Firm believes that XL's Franchise is stabilizing with lower top line declines going forward and underwriters continuing to maintain pricing discipline. In their view, a stronger capital position and stabilization in the franchise could lead to the removal of the negative ratings outlook by rating agencies in 6-12 months which should lead to an improvement in valuation from distressed levels as investors focus more on book value growth rather than the company's survival. As fixed income markets improve over the longer term, XL Capital’s book value should grow 50% due to reversal of unrealized losses, significantly faster than other less leveraged property casualty insurance companies.

CSFB increased their price target to $18. This is mainly driven by a higher valuation as investors get more comfortable with XL’s capital position and franchise stability. They acknowledge that XL is a riskier stock than many P&C and life insurance peers and their price target implies the stock can trade at 60% of 1Q10 book value excluding AOCI, a significant discount to the median P&C and life insurance stocks which trade at 86% and 67% of BVPS ex AOCI respectively. With the capital position stabilizing and the risk of a capital raise more remote, they believe investors will value the stock based on the burned down value of book value including AOCI.


50% upside to book value from potential reversal of unrealized losses: The company has $4 Bn or $11.70 per share in net unrealized losses on the balance sheet, or 78% of GAAP book value. CSFB estimates that $1.4 Bn could turn into realized losses over the life of the investments, implying that book value could grow a further $7.50 per share or 50% from 1Q09 levels as unrealized losses reverse over time.

Excess liquidity: Firm estimates the company has $2.4 Bn of excess cash and short term investments on the balance sheet which they believe is used to support the $4.7 Bn in risk assets. This implies the company will not be forced to sell risk assets at distressed prices. Also, as the risk assets roll off or recover in market value, they believe the company can put the excess cash to work in higher yielding investments which should help EPS by $0.07 per share.

Notablecalls: The sentiment in XL is getting stronger by day. Yesterday we had FBR Capital Markets team raise their target on XL to $17 from $12. The stock gapped up but failed to see any follow-through. I think CSFB's call is more powerful and will help to retrace at least some of yesterday's losses, if not more.

I think a 6-7% move may be in cards for XL today.

Hess Corp. (NYSE:HES): Upgraded to Overweight with a $75 target - Barclays

Barclays is out with an interesting call on Hess Corp. (NYSE:HES) upgrading the shares to Overweight from Equal weight and maintaining their $75 price target.

According to the analyst the upgrade comes following recent sharp underperformance. As one of the most oil-levered producers within their research universe, they believe Hess is well positioned to benefit from a rising oil price environment while offering a significant exploration potential upside with no sizable upfront premium.

Firm notes that although they have long been intrigued by the company’s vast long-term resource potential in Brazil, Ghana, Libya, and Australia, they were uncomfortable about the shares’ valuation. They believed the market had prematurely awarded too much premium for its exploration potential and ignored the unavoidable underlying risks associated with such a concentrated high-interest/high-impact drilling program (dry hole is the norm, not the exception, in the E&P business. The success rate for the worldwide-ranked wildcat exploration only averages about 15%–20%). As a result, despite their bullish medium-term outlook of the crude oil market and Hess’s status as one of the most oil-levered names within firm's research coverage, they maintained they their Equal Weight rating on HES when they upgraded SU to Overweight in mid-February. In addition, they were concerned that the stock could be negatively affected over the near term because of its lack of visible near-term production growth, poor earnings visibility, and the absence of concrete positive
exploration news flow.

So Why Now?

Recent Underperformance Created Buying Opportunity

Unsurprisingly, the stock’s recent poor relative performance has largely eliminated its once hefty exploration premium. Firm now estimates the stock may have included less than a $5 per share premium for future exploration potential, compared with an estimated premium of $18–$19 per share in late May/early June before the BM-S-22 second well bad news surfaced, providing an attractive entry point for longer-term-oriented investors, in their opinion.

In addition, reflecting the current stronger-than-expected oil price environment, they raised their 2009 and 2010 oil price assumption to $57 and $75 per barrel from $50 and $70 per barrel, respectively. Accordingly, they raised their 2009 and 2010 EPS estimates to $0.50 and $3.45 from previous forecasts of a loss of $0.15 and a profit of $2.55, respectively.

Notwithstanding the recent disappointing drilling result at its BM-S-22 block, the firm thinks the Hess’s five key exploration prospects (BM-S-22, Brazil, Cape Three Points, Ghana, Area 54, Libya, Carnavon Basin WA 390P, Australia, and the West Mediterranean Block 1, Egypt) could likely fetch far more than $1.6 billion even under today’s relatively challenging financial market conditions. At less than a $5 per share premium, investors are now getting the BMS- 22 essentially for free, providing a very attractive risk/reward ratio.

Notablecalls: This looks like a very sensible call on Barclays' part. They had the right mind not to participate in the BM-S-22 frenzy and are upgrading now that everyone else seems to have tossed the towel.

There is one more interesting point to their call. The analyst Paul Cheng notes it has been confirmed by Petrobras that ExxonMobil has offered to sublease the West Polaris drillship to Petrobras for the next few months. This suggests that XOM does not plan to drill a third well this year, which unavoidably calls into question whether XOM may be calling a time out because of the block’s poor performance.

Although the shares could potentially experience additional near-term pressure as the company and its partners wrap up the side track well within the next several days (the rig is currently expected to be moved off the block within the next 10 days), they think the bulk of the bad news is now reflected in the stock and the shares’ relative downside risk from here should be limited. They expect strong support at $45–$48 per share and they would be buyers here.

Importantly, although they are disappointed by the BM-S-22 result, the block is substantial, roughly equal to half the size of Rhode Island, and it is too early to write off its potential.

So, Cheng pretty much highlights another possible trading opportunity in HES. If indeed we get press reports (or possibly a PR from XOM/HES) saying they are taking a time out on BM-S-22, the shares are very likely to bounce hard following any downside reaction.

All in all, I think HES will trade up 3-4% today on this call, surpassing the $50 level once again.

FormFactor (NASDAQ:FORM): Upgraded to Outperform at Oppenheimer; $30 target

Oppenheimer is out with a significant call on FormFactor (NASDAQ:FORM) upgrading the stock to Outperform from Sector Perform while raising their tgt to $30 (prev. $22).

According to the analyst the upgrade is due to checks confirming that FORM is now seeing the whites of the eyes of an order recovery, courtesy of 1) massive equity/debt financing by DRAM chipmakers and 2) a snapback in DRAM R&D spending to correct for under-investment the past 4 quarters. Specifically, their checks indicate that FORM recently gained visibility on a 3x sequential uptick in wafer probe card orders from its largest customer, Elpida, for Q3 (Sept). Also, FORM is strongly positioned to regain share at Samsung and Inotera/Nanya for DDR3 wafer probe cards in Q4. Raising FY09/10 ests ever so slightly, but the key to their call is strengthening visibility, likely leading to cash flow break-even or better in Q4.

- FORM has suffered the past 1-2 years from a knockout combo of 1) an oversupply cycle for memory (DRAM/NAND) chips, 2) market share loss, and 3) massive (~50% in some cases) ASP erosion. Oppenheimer's call in upgrading FORM to Outperform is that there is meaningful visibility for a recovery in all 3.

- Firm's checks indicate FORM has 1) received a ~25-unit wafer probe card order from Elpida in June, stabilizing its outlook for Q3 for rev +10%-20% Q/Q, and 2) gained visibility from Elpida for a ~90 unit follow-on order in July. With shipments starting in Sept, they see the biggest benefit to revenue in Q4.

- With big orders from Elpida, they forecast Q4 rev to hit $50M or more. With mix shift toward high-end DDR3 product, and ~10%-15% reduction in materials cost from suppliers in Q2, visibility on cash flow break-even or better financial results in Q4 has never been more certain.

- Given that rev recognition of Elpida orders primarily falls in Q4, they are lowering their Q3 est, but raising Q4--net/net, FY09-10 ests are only marginally moving up to ($1.70)/($0.80). Based on checks, Q4 rev likely will only continue to strengthen, with pending orders for DDR3 share wins at Samsung, and Inotera/Nanya.

Notablecalls: Certainly a major call from Oppenheimer. I like the fact the upgrade is based on channel checks and not valuation (which is low anyway. For a good reason of course as FORM's performance has been lumpy at best).

Visibility is something the market will appreciate in FORM's case and will likely reward with some nice upside.

Note that Elpida is FORM's largest customer (accounting for 71% of total rev in Q1:09).

I'm guessing 5-7% upside will be in store today for the stock (unless the market crashes again).

Illumina (NASDAQ:ILMN): Defended following a negative pre-announcement

We have several firms out defending Illumina (NASDAQ:ILMN) after the co pre-announced 2Q results after the close and expecting revenues to be ~$161 MM, below prior guidance range of $168-173 MM. The miss was largely attributed to weakness in the array business: 1) Slowdown in GWAS as researchers await new content; 2) Softness in Foundation funding; & 3) Order delays (sequencers) as researchers are uncertain about grant money.

- Deutsche Bank reiterates Buy noting ST volatility does not reflect any change in fundamentals, which remain strong. ILMN est. that $10-15 MM of rev was impacted by delays in 1H’09, with some volatility expected in 3Q as well; however, stimulus benefit should make for a strong 4Q’09 (sequencing). Also, data from 1000 Genomes \should reinvigorate array growth in mid FY10 as rare variant content will drive ‘rich’ GWAS studies. Price tgt is lowered to $40 from $47.

- JP Morgan notes that despite the uncertainty over quarterly results, however, they maintain their long-term favorable view given the size of the genetic analysis market and strong competitive position for ILMN, which will report F2Q results on 7/21 @ 5pm ET. Maintains Overweight rating.

Read-through for other life science companies . . . buy LIFE. JP Morgan does not see direct read-through for other companies in their life science tools universe, other than AFFX, which also has a GWAS business. While we expect a number of companies, incl. LIFE to be impacted by the preannouncement, they would use any pullback as a buying opportunity, in particular for LIFE, which doesn’t have a microarray business and has little near-term exposure to the GWAS slowdown. Recent commentary from management (see transcript of their call with CEO Greg Lucier last month) has also confirmed that the company has not seen a recent slowdown in academic demand.

- Morgan Stanley: 2010+ and Fundamental Story Intact, Maintaining Overweight … They do not believe the Illumina story is broken, with the 2010 stimulus thesis and core business fundamentals largely intact given: 1) a meaningful multi-year stimulus benefit with upside to current consensus expectations (stimulus contribution in 2010 likely conservative); 2) an intact sequencing product cycle with a longer tail than many believe; and 3) the array business is struggling through a demand gap rather than a permanent fundamental negative inflection. However, trends in genome wide association studies remain the primary risk to the stock.

Maintains Overweight, lowering tgt to $38 from $42.

Notablecalls: I think this one has a fair chance of bouncing today. $32-$33 range is my target for this one.

Werner Enterprises (NASDAQ:WERN): Upgraded to Overweight at JP Morgan; potential for upside surprise

JP Morgan is upgrading Werner Enterprises (NASDAQ:WERN) to Overweight from Neutral with a $24 price target (prev. $18).

According to the analyst, WERN is one of the names within their coverage space that reflects low expectations and potential for significant upside surprise. They believe that WERN’s 2Q results are likely to show significant traction on cost-cutting initiatives while it provides attractive leverage to a turn in the economy in the medium term. They also believe the combination of low expectations and traction on cost cutting supports an attractive reward to risk profile even if the TL cycle turn takes time.

Low expectations support attractive risk to reward. Short interest of 24% of the float for WERN versus 11% on average for the other TL and LTL names JP Morgan covers is one indication of market skepticism regarding WERN, while its low 4.2x EV/ EBITDA valuation on 2010 estimates (vs. 8.2x on average for KNX and HTLD) reflects caution. Sell-side skepticism is also apparent with only 1 Buy rating out of 15 total ratings.

Serious approach to cost cutting could provide upside surprise. The firm believes a combination of aggressive non-driver cost reduction and further fuel efficiency gains can provide better than expected margin and EPS performance for WERN in 2Q09, and WERN’s cost-cutting activity should provide support for EPS as a TL turn may take patience.

Early cycle name with leverage to a turn. Historically the TL group including WERN performs well coming out of a downturn with WERN up 21% and 38% on average in the six and twelve months following the last quarter of the two most recent recessions (vs. the S&P 500 returns of 12% and 15%). They also note WERN’s significant EPS sensitivity of $0.13/ share to a 100 bp improvement in its operating margin.

Raising EPS estimates. JP Morgan is raising their 2Q09 EPS estimate from $0.18 per share to $0.22 per share and full-year 09 EPS from $0.72 to $0.78. 2010 EPS also rises. Stronger cost side performance is a key driver of the increases to our EPS forecasts.

Notablecalls: I like this call from the trading perspective. If JP Morgan is right about the potential significant upside surprise in the coming quarters, this one is going to zoom higher. The 24% short interest in the name is going to make sure of that.

Usually, when a tier-1 firm like JP Morgan comes out with a positive piece (estimates getting bumped higher), smaller firms tend to follow. This is how short squeezes develop.

I suspect this call will put some fire under the shorts today pushing the stock markedly higher. I see 5-7% upside in the name (just gut feel).