Tuesday, June 30, 2009

Electronic Arts (NASDAQ:ERTS): Upgraded to Buy at Merril Lynch/BAM

Merrill Lynch/BAM is upgrading Electronic Arts (NASDAQ:ERTS) to Buy from Neutral following a modest post-E3 sell-off.

According to the analyst the upgrades is based on 1) expected upside to consensus estimates in 1Q and 2Q with company likely tracking at/above their early FY10 internal plan, 2) strength of Sims 3, Active and Need for Speed franchises likely driving improved investor sentiment on EA’s
execution, 3) catalysts and seasonality with the summer period historically giving the best return on EA’s stock and the firm sees several upcoming catalysts. Merrill is $100mn above consensus in F1Q (June) and F2Q and their bias is that Street estimates move higher for FY10/FY11 over next 90 days, as key Active and Sims titles should have catalog and sequel strength.

Multiple catalysts
In addition to 1Q/2Q upside, they see the following catalysts helping drive improved investor sentiment: 1) Strength of key Sims 3 franchise and progress on cost reduction initiatives outlined on 1Q conference call, 2) NPD retail sales data for EA improving with increases in market share reflecting a strong June/Sept Q title slate, 3) Need for Speed release in September, units for this key franchise could be up after several years of declines given easy comps and 4) possible PS3 price cut in August or September helptin drive improved sentiment on HW trends.

Valuation attractive if ests. going up, raising PO to $26
EA valued at 12x ex-cash FY11 (CY10) EPS estimate which is well below its historical average of over 20x. In conjunction with the upgrade to BUY, the firm is raising their PO to $26 from $25, rolling forward basis to FY11 using 17x excash EPS estimate of $1.14, plus $7 in cash (a discount to 20x target for ATVI).

Analyst notes they see upside to their PO at $26 based on 2x P/S if execution improves and EA can sustain 10-15% margins. Reaching 10-15% op. margins could warrant a 2.0x P/S multiple ($34 stock price) as EA traded at 4.5x sales last cycle on peak margins of 27%.

Notablecalls: I like this call as it highlights clear near-term catalysts and notes the $26 price tgt may end up being conservative.

I think ERTS will trade in the $21.50-22.00 range today. I don´t think one will get any fills below the lower end of that range.

Monday, June 29, 2009

Biogen-Idec (NASDAQ:BIIB): Cautious comments and a downgrade following another PML case

Justify FullBiogen-Idec (NASDAQ:BIIB) is getting some cautious commentary after the co reported another case of PML in Ex-U.S.,confirmed June 23, 2009. This is the 10th confirmed PML case since Tysabri was relaunched in July 2006. This patient had received 30 doses of Tysabri therapy.

- Deutsche Bank is downgrading BIIB shares from Buy to Hold, as they believe the shares are now fairly valued. Firm notes that when they upgraded, they argued that at about $42/ share BIIB shares were pricing in an overly pessimistic Tysabri scenario (i.e. that it would decline dramatically or even be pulled from the market). Tysabri, however, continued to grow. In their opinion, the stock is now pricing in reasonable Tysabri expectations and no longer warrants being one of firm`s "top picks" in 2009.

Longer term (1-2 years), BIIB remains one of Deutche`s favorite names. They still believe the Street has dramatically underestimated the company's EPS leverage (industry high R&D spending should come down ~7% as a % of revenue over the next 5 years). In addition, BIIB has 7 drugs in ph 3, for which the stock reflects little -- if any -- value. Shorter term, they think upside could be driven by wise use of cash. They continue to hope BIIB will use at least some of its cash to buy stock back (similar to 2007's "Dutch Tender") and/or complete a smart acquisition in the neuro or cancer fields.

- Jefferies notes that with emerging PML cases with Tysabri use (particularly in ex-U.S., where incidence is >4x higher vs. U.S.), they view increased adoption of drug holiday as strong possibility. BIIB trades below peers (~15-20% discount); however, they believe significant upside potential to current levels may be limited, except for take-out speculation. Maintains Hold and $53 tgt.

- Morgan Stanley says the new PML case supports thesis of increasing risk.

Impact on firm views: In support of the thesis that PML risk (rare brain infection associated with Tysabri use) is increasing with longer treatment duration, Biogen Idec announced on Friday its 10th case of PML following re-launch of Tysabri (June 2006; 13 including clinical trial set) and importantly, the 6th case in patients treated with drug for longer than 24 months. With this new case, the WW PML risk is ~1/1000 in patients treated for >24 months, and by firm`s estimations at least 1/500 ex-US in this patient population. They continue to believe the risk of PML is evolving and expect the rate to increase past the three year anniversary of Tysabri’s re-launch (although company has indicated plans to stop weekly reporting of cases in July) posing risk to the bull thesis of Tysabri re-acceleration and almost all forward Street estimates.

Maintains Underweight and $44 tgt.

Notablecalls: PML is nothing new but it kind of looks like the shares have found a glass ceiling. Looks like down is the path of least resistance for the time being.

No posititive catalysts around (barring a takeover)

I would not be surprised to see the stock down 1-1.5 pts following these comments.

Thursday, June 25, 2009

SLM Corp (NYSE:SLM): Upgraded to Overweight at JP Morgan

JP Morgan is upgrading SLM Corp (NYSE:SLM) on a long-term view that its transition to primarily a loan servicer, as opposed to a lender, will lower interest rate and funding risks, thus improving earnings visibility. Firm emphasizes they are taking a longer view on this call, but with the successful inception of Straight-A funding greatly improving the liquidity profile and the recent award of the ED servicing contract, they think SLM is currently trading at about 50% of their conservative DCF estimate of $15. As such, they are upgrading the stock to OW (a 6 to 12-month rating), and setting a YE09 price target of $12, a 20% discount to our estimated DCF value.

FFEL portfolio run-off alone worth $7.60/share. SLM's $140B+ FFEL book is already in run-off, as SLM is expected to sell its ECASLA loans to ED this year and next, and FDLP should become the sole provider of federal student loans beginning in the '10/'11 academic year. Discounting cash flows at 6% with est. 100bps net margin, JP Morgan values this portfolio to be worth $7.60 per share.

Estimate servicing business worth at least another $7.50/share. Firm assumes SLM will capture 30% of total loan volume, which they believe is conservative given the company is the largest of the four servicers selected. Based on their estimate of 25bps of servicing fee with 12bps of servicing expense, they model this business will produce a 50% gross margin.

Expect CP/Libor spread, private loan losses to drag on earnings near term. Firm models CP/Libor tightens to -15bps in 3Q09 from -23bps today, but still wider than the -10bps that was standard historically. In addition, although traditional private loan losses have held up well so far in this credit cycle, they believe fewer employment opportunities for recent grads will lead to credit pressure. JP Morgan has thus lowered their FY09 EPS est. to $0.68 and FY10 to $1.00.

With many key questions answered, stock looks cheap. JP Morgan notes their initial concern with SLM was liquidity and normalized interest expense; the commencement of Straight- A funding and renewal of the ABCP facility has improved visibility on that topic. Firm had also expected the recent ED servicing contract to encompass just ECASLA's two years of loans, but were positively surprised to see it also applies to FDLP loans going forward. With the future of SLM’s business model now more certain, they find shares are cheap, trading at 55% of sum-of-the-parts valuation.

Notablecalls: I´m sure Reverend Jim Bob Cramer will use this upgrade as an opportunity to pump SLM on TV.

Seriously speaking, I think the call will create some buying interest in the name. The stock is likely to trade in the $8.50-$9.00 range today or in the coming days.

Wednesday, June 24, 2009

MEMC Electronic (NYSE:WFR): Downgraded to Underweight at JP Morgan, Citi highlights an overnight acquisition in the space

MEMC Electronic (NYSE:WFR) is getting some interesting comments from two tier-1 firms this morning:

- JP Morgan is downgrading the stock to Underweight from Overweight with a price target of $12.

According the the firm the downgrade is due to faster than expected ASP declines in all of the company’s product lines. They also believe the overall supply of polysilicon will far exceed that of demand for the remainder of C09 and well into C10 driving down spot poly as well as semi and solar wafer pricing. We had previously est. spot poly would reach the $60/kg level at the end of the year, a level that now looks to be reached sometime this summer. JP Morgan now believes poly could reach the $35/kg level by the end of 2009, a price point lower than the manf cost of many new poly makers & at relative cost parity of the large incumbent poly makers.

An oversupply of polysilicon seems inevitable given the sheer volume of polysilicon that is expected to come on-line this year. A number of long lead time polysilicon factories will start production this year, but unfortunately actual solar PV demand today is a lot lower than last years expectations which initially drove the aggressive capacity expansion. This is resulting in a massive oversupply of polysilicon which could last for years if current announced capacity expansion plans are not scaled back.

Firm thinks MEMC may need to revise its solar wafer contracts, again given the continued decline of spot poly pricing. We believe a spot market price of under $50/kg would make MEMC’s current supply contracts unpalatable to its current solar wafer customers and could put them at a competitive disadvantage given that poly is usually more than 50% of the cost of a solar wafer. They now think spot prices for poly are likely to fall well below the $50/kg range in C2H09 forcing MEMC to once again lower its spot solar wafer prices in order to remain competitive.

Semi Wafer pricing is also being negatively impacted as MEMC competes with non-vertically integrated semi wafer makers. Both Shin-Etsu and SUMCO buy poly on the open market and the continued decline in spot pricing of the material allows both of these companies to pass along cost savings to their semi device customers. This allows these two companies to buffer ASP decline while vertically integrated companies such as MEMC and Wacker are forced to accept declining margins.

Reducing C09/C10 estimates on lower product ASPs & margins. New C09 rev/EPS ests are now $979mn/$0.19 vs. $1.014bn/$0.24 prior. New C10 rev/EPS ests are now $1.36bn/$1.06 vs. $1.41bn/$1.15 previously. WFR trades at 2.0x its P/TBV.

- Citigroup notes that overnight, GCL Silicon – #1 Chinese polysilicon manufacturer – announced that it was being acquired by its parent in a deal worth ~$3.4B.
The deal would provide some liquidity to fund GCL’s future expansion following its failed IPO last year. While some may argue this is a questionable indication of market value, at a valuation of ~$160/kg (based on estimated capacity (not production)) or ~3x sales (assuming ~$50-60/kg poly) the firm thinks this highlights the value that in-the-ground polysilicon assets continue to command even in this tough demand environment.

WFR valuation analysis — In conjunction with their earlier work, if they comp WFR's polysilicon business to GCL’s takeout multiple, they estimate WFR’s solar biz is worth ~$2.5B or about 3x the pure replacement value to replicate the assets based on capex. Adding back replacement value of its semis biz (~$0.75B based on ~$1MM per 1k wafers/month of 300mm capacity and ~$300k per 1k of 200mm) and ~$1.3B of net cash on the balance sheet, they come to a total valuation of roughly ~$20 per share for WFR, or slightly higher than the stock trades today.

Stock summary — Firm notes they are compelled to get more constructive on this longer term given much more favorable risk/reward balance driven by what they estimate is ~$2.00-2.25 cross-cycle EPS, replacement/takeout value including cash in ~$20 range, and some signs of poly price stabilization. That being said, they are still awaiting more confirmation of wafer inventory work-down and a beat/raise for estimates moving forward. Model unchanged, Maintains Hold, $15 target.

Notablecalls: This is surely a puzzling situation. The acquisition of WFR peer kind of lessens the power of the downgrade from JP Morgan.

Despite of his otherwise fairly lousy track record of covering WFR, the JP Morgan analyst Chris Blansett makes some interesting points regarding the supply/demand dynamic. Looks like there is very little hope of things getting better over the next year or so. So the downgrade looks warranted.

On the other hand the large deal that took place in China overnight highlights a similar possibility in case of WFR. It wasn`t too long ago we had rumours of BASF AG sniffing around.

All in all, I think the downgrade will work today but the stock remains prone to squeeze. This thing isn`t going down without a decent fight.

Tuesday, June 23, 2009

Early Morning Tidbits: FDX, PKI

- JP Morgan is upgrading Fedex (NYSE:FDX) to Overweight from Neutral and raising their target to $66 (prev. $60).

Firm says they are upgrading FDX to Overweight from Neutral because its strong operating leverage should drive performance for the stock when there is improvement in the economy, and they believe that the bad news regarding current pressures is now reflected in the stock. In JPM`s view, EPS estimates have finally come down sufficiently that current Consensus expectations are realistic, and they expect F2010 to clearly mark a bottom. They expect gradual improvement in transport demand data points to drive upside for the stock while the potential bankruptcy of a large LTL competitor provides another possible catalyst.

Notablecalls: Essentially a nice call from JPM. They downgraded the name back in January saving their clients from a lot of heartache. The stock didn´t go down a whole lot on the pretty dismal guidance issued last week so it`s ready to move up? Maybe.

I see the stock trading around $51.50-52 range today.

- Barclays is putting it rather blunt with PerkinElmer (NYSE:PKI):

They are downgrading PerkinElmer (PKI) from Equal Weight to Underweight on unfavorable risk-reward compared to peers. Despite the stock's significant year-to-date rally (up 24% vs. S&P500 +1%), there remains significant uncertainty around the company's end markets. Relative to peers, the firm believes the company has more industrial exposure, lacks differentiated technologies, and has significantly lower operating margins, meaning its growth prospects are less than peers and fewer dollars will likely flow to the bottom line once growth does resume.

Furthermore, downside risk to numbers remains. In the analyst`s view, the stock has gotten ahead of itself, now more than what they would consider to be fundamental fair value. Firm would advise investors to look elsewhere for more attractive risk-reward profiles in companies with differentiated technologies and higher margins.

Notablecalls: This one will likely get hit following the call. Sub-$17 anyone?

Palm (NASDAQ:PALM): CSFB raises tgt to $18, bumps EPS to above consensus

CSFB is out with a rather major call on Palm (NASDAQ:PALM) raising their tgt to $18 (prev. $11).

Firm notes their new PF revenue/EPS for FY11 goes to $2.9bn/$1.06 from $2.2bn/$0.64. Analyst points out that the FY11 EPS is 68% above comparable consensus and their more constructive outlook is driven by 1) heightened carrier interest, 2) updated margin analysis, and 3) increased confidence that with webOS, Palm has developed a scalable platform to introduce new products in rapid succession.

Healthy growth, margin expansion ahead. The successful launch of the Pre at Sprint has raised carrier interest given Palm now offers a credible alternative to Apple. CSFB believes this will drive top-line growth of 144% in CY10 and their estimate is predicated on 7.7mn units in CY10. This implies 4.1%/11.0%/2.3% Global/NA/WE smartphone market share. In the core NA market, their estimate is based on 30%/10%/10% smartphone share at Sprint/Verizon/AT&T. This revenue growth together with GM expansion will drive OMs to 10.9% in CY10 from -13.4% in CY09. CSFB´s proprietary GM analysis based on actual Pre teardown data shows structural GM for the platform is 40.6%. Their model assumes Pre GM’s start at 25% and peak at 37%, and as such, they think risks to CY10 margins are actually to the upside.

FQ4 results on June 25th. Owing mainly to an on-time launch of the Pre and a lower marketing spend, we believe results while not good, are likely to be modestly ahead of expectations, implying lower than expected cash burn (of $104mn). CSFB estimates that cash likely troughed at $213mn in May.

Valuation. Palm shares trade on a P/E and EV/S of 10.6x (CY10E cash EPS) and 0.9x versus the peer group average of 13.6x and 1.3x. They believe meaningful upward revisions to consensus estimates will drive multiples higher, and the $18 target price is based on a 15x multiple applied to CY10E cash EPS of $1.21.

Notablecalls: This certainly is a gutsy call from CSFB. The new $18 target is the new Street high not to mention the FY11 EPS, which is way higher vs. consensus.

RIMM's conservative, cautious outlook should temper ones expectations for PALM. That may be a good thing if one looks at CSFB`s comments re: the upcoming qtr.

Unless we get another huge down day like yesterday, I think PALM can trade up towards $13.50-14 range.

Monday, June 22, 2009

Sangamo Biosciences (NASDAQ:SGMO): Merriman believes SGMO shares should trade to a range of $10-11

Merriman Curhan Ford is out with a rather positive call on Sangamo Biosciences (NASDAQ:SGMO) reiterating their Buy rating and raising their target range from $5.50-6.50 to $10-11.

Firm believes Sangamo has the potential to be the leader in zinc finger applications both in the therapeutic arena and applications outside of the clinic. While the company’s diabetic neuropathy program is currently in question, they still believe in the therapeutic potential for the zinc finger platform. Additionally, partnerships with Dow Agro- Sciences and Sigma-Aldrich have the potential to provide Sangamo with future royalty streams and milestone payments. Merriman believes SGMO shares should trade to a range of $10-11.

Broad growth opportunity. Sangamo is now entering an interesting chapter in the company’s growth. They continue to believe that the zinc finger technology platform has a broad set of applications in both the therapeutic and non-therapeutic arenas. Firm believes investors are especially not assigning a fair value to the non-therapeutic potential of the zinc finger platform.

Clinical programs. The lead diabetic neuropathy SB-509 program has yielded quite a large dataset of clinically relevant data for a therapeutic indication with no other real treatment options at this point. Merriman sees the downside risk being minimal at this point for this program. Upside potential could come from a potential partner and more visibility on the path forward for a registration pathway. They believe investor excitement continues to grow around the SB-728 HIV program and could represent a transforming program for the company.

Dow AgroSciences (DAS) and Sigma-Aldrich (SA) continuing to gain key visibility in 2009. As part of the growing interest in the non-therapeutic applications of the zinc-finger platform, we expect increased visibility and value creation from the ongoing collaborations with DAS and SA in 2009 and going forward. Merriman believes these programs represent key potential revenue generators for Sangamo

Valuation. Firm reiterates their Buy rating and are raising target range from $5.50- 6.50 to $10-11. This change is based on what they believe to be the current status of the opportunities at Sangamo and currently see the therapeutic and non-therapeutic opportunities split ~50/50 with regard to contribution toward valuation.

Notablecalls: I'm sure that if you have been in this business long enough you have heard the jokes about John Merriman hiring only former quarterbacks as analysts.

Regardless of this, I think SGMO will see buying interesting following this call. It's a small biotech but unlike many of its peers, it's not that binary in nature.

I suspect the stock can trade up to $4.50-$4.80 following the call.

Friday, June 19, 2009

Hartford Financial (NYSE:HIG): Stock has more than 100% upside - Deutsche Bank

Deutsche Bank is out very positive on Hartford Financial (NYSE:HIG) saying the new TARP and equity capital insulates the company from significant credit and equity market deterioration. The stock at 25% of book (x-AOCI) is suggesting almost zero value for the life insurance operations. Based on Deutsche's updated valuation analysis, they maintain their 1-year target price of $19 but they believe The Hartford stock offers potentially more than 100% upside over a three-year period. Despite the capital and ratings volatility the company’s franchise remains intact, and we should have clarity on management succession within six months.

New capital provides meaningful cushion
Deutsche Bank estimates The Hartford can withstand significant credit deterioration (losses of 11% of risk-weighted assets over a three-year period) and a further equity market decline (down 25% to S&P at 700) following the new capital of $3.4 billion of TARP and $750 million of common equity. Should the S&P 500 index remain at the 900 level, they estimate The Hartford would have $3.4 billion of capital above what is needed for a 325% risk-based capital ratio, even after factoring in investment losses.

Key points from CEO meeting
Firm met with Mr. Ramani Ayer, Chairman and CEO of The Hartford. Three key points: 1) TARP should have little effect on running the business; there is no limit on compensation, only a limit on the composition of compensation; also, there are no constraints on agency commissions; 2) Ratings volatility has affected just a handful of businesses; and 3) The Hartford’s strategy is set to being a US-focused insurance company; in firm's view, that will lead to lower growth and returns, but also less volatility.

According to Deutsche analyst, updated valuation analysis takes a 3-year view, and it suggests the Hartford’s stock price could be $23 to $26 per share in three years, translating into potentially more than 100% upside.

Notablecalls: I like this call, especially after Lincoln (LNC) was on the move yesterday on positive comments from CSFB and Mother Merrill.

I already see some conviction buyers in the name early on so I suspect it will get play today. The stock surely has ability to move a cool 5-6% on this call.

Thursday, June 18, 2009

Lincoln National (NYSE:LNC): Upgraded to Outperform at CSFB

Lincoln National (NYSE:LNC) is getting positive vibes from several tier-1 firms this morning:

- CSFB is upgrading their rating to Outperform from Neutral and moving their price tgt to $24 (prev. $21).

The upgrade comes following LNC’s capital raise and the announced plans to issue preferred stock to the US Treasury. While the planned $950 million of CPP leaves a clear overhang on the shares, given the likelihood of a future equity raise to repay the CPP, the firm thinks the stock is trading at too large of a discount relative to the risk of future dilution and other potential franchise risks associated with having the government as a key stakeholder.

CSFB's main points of distinction vs. the other expected CPP recipient, HIG, are that: 1. LNC’s balance sheet problems are more modest in size for both credit and equity sensitivity, 2. their sense is that there is greater operational and management turmoil at HIG, and 3. they see a clearer path for LNC repaying the CPP within a year or two mainly because we questioned whether they really needed it in the first place. Although CSFB's first preference would have been LNC completing its entire capital raise privately, they believe that LNC’s $2.4 billion capital raise gives them more than enough capital and access to liquidity to weather a sustained economic downturn.

The anlyst notes that initially, they were admittedly hesitant to recommend LNC’s shares given their expectation that Lincoln’s tie-up with the Government will likely run longer than the 8-9 months that stronger banks such as JPM and GS will have been under quasi-government supervision once they pay back their preferreds this month. However based on nearly every qualitative and quantitative measure, LNC’s shares look unjustifiably discounted.

- Merrill Lynch is out saying they see almost 50% upside post capital raise. Lincoln is on target to raise $2 billion of capital which, in combination with other actions, suggests that the risk-based capital ratio would be at least 250% under an extreme bad case scenario for credit losses and the equity market. Bad case scenario looks less likely and mgmt more sanguine. Maintains Buy and $22 tgt.

Notablecalls: Takes guts to play this one to the upside in this environment but if this one gets going it can deliver a full point.

Note that Morgan Stanley was out positive on the name yesterday, calling for s-t upside in the name.

Also, Doug Kass of Seabreeze Partners named LNC his favourite Long yesterday. He has been pretty good with his calls lately so there may be something there after all. At least one would be in good company.

Wednesday, June 17, 2009

Netflix (NASDAQ:NFLX): Positive comments from several firms this morning

I think Netflix (NASDAQ:NFLX) will find buyers today. Here's why:

- Wedbush is upgrading NFLX to Buy from Hold this morning.

- Lazard is out with positive comments saying May website traffic suggest possible 2Q09 subscriber upside. If monthly churn in 2Q09 is 4.4%, consistent with their model and Netflix guidance for a normal seasonal rise, then Netflix, based on the stronger comScore correlation, would exit 2Q09 with 10.7 mln subscribers, vs guidance for 10.4-10.6 mln, and consensus near the midpoint of guidance.

- Citigroup is out reiterating their Buy and $52 tgt on the name after meeting the co's management. WThey view the 4 broad factors from their 4/26 upgrade as well intact: 1. NFLX has one of the sector’s strongest fundamental outlooks; 2. NFLX is one of the sector’s most economically defensive stocks; 3. NFLX has deeper than realized competitive moats; and 4. NFLX’s valuation relative to growth is very reasonable.

Despite a tough comp, Q2 QTD unique visitor growth (with both April and May data now in) remains strong at 28% Y/Y. At the margin, this gives the firm greater conviction in their Q2 Gross Sub Adds estimate of 1.73MM.

Notablecalls: Short interest still stands at a whopping 28% and the stock is down over 10 pts from its $50 highs. These calls are likely to get it moving up again. I'm not a buyer here at $39+ but will be keeping an eye out.

Texas Instruments (NYSE:TXN): Upgraded to Buy at Merrill Lynch/BAM - Margin expansion on Steroids

Merrill Lynch/BAM is out with a major call on Texas Instruments (NYSE:TXN) upgrading their rating to Buy from Underperform and adding the stock to their U.S 1 Focust list with a $27 tgt (prev. $18).

Firm notes their more favorable view is based on an expectation of margin expansion well above that currently being forecasted by the Street, suggesting a CY10E EPS power of $1.40+ (Street : $1.15) even against the backdrop of a modest cyclical recovery. Their new PO of $27 reflects 16x CY10 FCF/share est. of ~$1.70.

Margin expansion on steroids
Specifically, Merrill's analysis suggests: 1) an ~850bp benefit to GMs, from current levels, due to improved factory loadings, 2) an ~150bp benefit from restructuring, 3) an ~150bp benefit from lower depreciation and 4) an ~50-100bp benefit from improved mix, suggesting a GM run rate of ~52% by 4Q10 even with a modest recovery in sales next year (Street: +4% Y/Y). When combined with the benefit to annual op-ex by 4Q09 (and est. $550m) in the wake of restructuring actions, they conservatively estimate a quarterly EPS run rate of $0.43 by Q410 vs. the Street est. of $0.31. Additionally, they est. potential peak EPS at $2.30-$2.40, suggesting significant upside to the stock from current levels.

Basebands: Is the bark worse than the bite?
While there remains a significant focus on the impact to revenue from a declining baseband business over the next 3 yrs, the firm thinks the perception is worse than the reality. Their view is based on the belief that 1) much of the decline has already run its course (basebands down to ~12% of sales in 2009, from ~25% at the peak) suggesting a diminishing incremental drag; 2) the Nokia 3G business (>50% of baseband sales) is likely to recover from depressed levels with even a modest recovery in handset sales, and is unlikely to be at risk until alternate suppliers (QCOM, BRCM) begin to ramp in late 2010; and 3) the headwind from a decline in basebands is implicitly modeled into Street estimates (sales up only 4% in 2010, and 1% in 2011), as opposed to simply being factored into Street expectations.

Notablecalls: This is a fairly strong (out-of-consensus) call from a tier-1 firm.

Texas ain't exactly a momo favourite but I think it can trade into $21.50-$22 range today.

Tuesday, June 16, 2009

Notable Calls Network (NCN): A-Power Energy Generation Systems (NASDAQ:APWR)

Notable Calls Network (NCN) caught an interesting call today in A-Power Energy Generation Systems (NASDAQ:APWR):

- Around 11:55 AM a senior NCN member pinged me with the following call from Roth Capital:

'...Roth Capital right now with an unusual break-in on APWR, stock down .73 off earnings miss this morning. May fuel fresh shorts: Suspending Coverage

We are suspending coverage of A-Power Energy Generation Systems, Ltd. We believe the company's lack of transparency has created inherent limitations to our ability to gain adequate insight into the underlying fundamentals to confidently model and value the business. We believe this transparency has deteriorated further, impacting our ability to publish an investment recommendation. We will consider resuming coverage when transparency improves and underlying metrics become more visible.Prior to suspending coverage, we had a HOLD rating and a $5 price target. Effective with suspending coverage, prior estimates, rating, and price target should not be relied upon...'

- I immediately knew the call would have a negative impact on the share price of APWR. After all, the Roth Capital analyst was throwing in the towel because he could not work with information (or lack of it) APWR had been providing investors. That's rarely a good sign because investors (especially the big money types) like to know what exactly they are getting for their money. Uncertainty usually bring sellers.

Alternative energy sector is a fairly new one and cannot afford unambiguity.

So, over the next couple of minutes I distributed Roth's comments to other Notable Calls Network (NCN) memebers.

As you can see from the chart, the reaction was a rather aggressive one. Depending on one's entry and exit profits of up to 2 pts were to be had (pretty much any size).

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

Want to be part of NCN?

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

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

- 3+ years of trading experience

- Access to quality research/analyst commentary

- Ability to generate and share (intraday) trading calls

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

Sun Healthcare (NASDAQ:SUNH): Upgraded to Outperform at Leerink Swann

Leerink Swann is upgrading Sun Healthcare (NASDAQ:SUNH) to Outperform from Market Perform with a valuation range of $13-$14.

Firm believes the stock has been oversold on reimbursement concerns and the recent restatement at peer SKH. They believe that SUNH has significant organic margin expansion opportunities over the next couple of years and can continue to grow EPS even if Medicare rates are cut modestly.

Reimbursement and Reform Concerns. The recent weakness in SUNH shares mainly reflects fear about potential Medicare rate cuts andbundling under healthcare reform. In early May, CMS proposed a FY10 Medicare payment cut of 1.2% for SNFs. Further, most of the healthcare reform proposals call for bundling some post acute-care payments with hospital payments, which reduces longer-term pricing visibility.

Visibility Should Slowly Improve. Final FY10 SNF (skilled nursing facility) Medicare rule is to be released by early August, and although Leerink is not expecting significant improvement, a few proposals could be clarified or softened. In the past, CMS has used proposed rules to float controversial changes that are often removed from the final rule. Also, while the impact of bundling is unknown, implementation is not likely for many years, giving the industry time to reduce some of the uncertainty.

SUNH Can Grow EPS Even with Rate Cut. Leerink believes SUNH will be able to grow EPS in 2010, even if Medicare rates are cut slightly, through continued rollout of more Rehab Recovery Suites and improvements in patient mix. SUNH facilities with rehab suites have margins 150 bps higher than those without rehab suites. SUNH ended 1Q09 with 48 suites, and the company plans on having 70 open by YE09.

Recent Results Solid. 1Q09 skilled mix and pricing growth were strong, and SUNH generated good cash flow, and reduced debt. Skilled mix was 20.8% and Medicare Part A per diems increased 9% -- both the highest SUNH has reported to date and reflective of its ability to increasingly service higher acuity patients.

Notablecalls: SUNH is one volatile stock and I suspect Leerink's call will cause it to trade up significantly.

I'm guessing 7-10% upside move maybe in store.

What caught my eye was Leerink's comments on how SUNH would be able to grow EPS even with the Medicare rate cuts. Mind you, SUNH is trading around 6x fwd EPS.

Monday, June 15, 2009

ConAgra (NYSE:CAG): Downgrade to Hold at Citigroup, removed from Top Picks List

Citigroup is downgrading ConAgra (NYSE:CAG) to Hold from Buy and removing it from their Top Picks Live list.

What's Happened? — On Tuesday (6/9) ConAgra’s Slim Jim manufacturing plant in Garner, NC exploded killing three people. On Saturday (6/13), the local news paper indicated that the ATF has ruled the explosion an accident caused by a natural gas leak. ConAgra has not commented on the situation.

- Extensive Damage Done — The plant was extensively damaged and will likely be off-line for quite a long time and is the only plant that makes Slim Jim. Citigroup est. revenues of Slim Jim at $200 mm/yr and EPS contribution at $0.06/sh.

- Insurance Coverage is Unknown — ConAgra has not yet made any comments regarding its insurance coverage on the plant; nor its coverage with regards to business interruption insurance. Given that the ATF has said that it was a gas leak, Citigroup worries that the company’s insurance may not cover the cost of the damage to the facility, which will likely amount to tens of millions.

- Worst Case — The worst case is that CAG loses op. profits from Slim Jim for a year, amounting to -$0.06 to EPS. Additionally, there will likely be lawsuits related to the deaths and others who were injured. Lastly, the cost to repair the facility may not be covered by the insurance.

- Conclusion — Citigroup is downgrading CAG to Hold, as they don't see any positives coming out of this situation. They believe that 4Q09, ended May '09, will show strong momentum, but believe that the loss of Slim Jim will create unanticipated difficulties for F2010 that has reduced theirvisibility on F10 & F11 EPS. Firm's price target goes to $21 (-$4) and F11 EPS is reduced to 1.72.

Notablecalls: I think this call will cause some downside in the stock:

- Citi's Packaged Foods team is pretty highly regarded among the investor community.

- The stock is removed from Citi's Top Picks Live list which means there will be some selling pressure from the longs.

- The one time nature of the event that caused the downgrade may lure some traders to play the bounce. Some things that look too obvious tend to end up quite the opposite. CAG may end up being a perfect example.

I'm guessing 1-1.5pts of downside may be in store.

Friday, June 12, 2009

Goldman Sachs (NYSE:GS): Cutting ests on TARP payback acct’g charge, FDIC fee - Merrill Lynch/BAM

TARP repayment will drive hit to earnings for common
Merrill Lynch /BAM notes that when TARP pfds were issued in Oct, related warrants caused a portion of the investment to be allocated to paid-in-capital (“PIC”) with this balance set to slowly accrete to preferred stock over 20 quarters. Repayment of TARP by GS, JPM and MS will force a reversal of remaining warrant value (through pfd dividend line).

Warrant repay will drive Equity hit, but likely 3Q event
They also expect each Co. will pay the government to extinguish attached warrants, but uncertainty remains as to valuation (e.g. what volatility will be used in valuing?). Whatever the value, they expect it to be a hit to common equity (without going through the P&L) sometime in 3Q. The numbers are significant (anywhere from $700mn to $1bn+, by our calculation), but given the strong capital cushion at these firms, T-1 common ratio hit should be no more than 50bps. Also, it is not clear that the full amount will be charged (logically, they’d expect the charge to be just the amount over the aforementioned 2Q hit).

GS: 2QE cut to $2.92 from $3.59 on TARP hit offset by
stronger FICC, but ‘10E up on repayment GS credited $490mn of its TARP payment to PIC upon accepting its $10bn of government capital; firm est. a cost of about $430mn from repayment (after 2.75 qtrs. of accretion). They are also adding a FDIC assessment of $70mn. This cuts 2QE to $2.69 from $3.59. However, it is increasingly clear that GS FICC business continue to operate solidly, offsetting cut with better Trading brings 2Q to $2.92. Adjusting forward ests for repayment of TARP as they did last week for JPM and MS (remove dividend, offset by lower Trading from $10bn lower allocated capital), which raises 2H09 forecast by $0.10 and ‘10E to $17.63 from $17.45.

JPM: 2QE cut to $0.01 from $0.30 on TARP mark
JPM credited $1.3bn of its TARP funds to Retained Earnings upon accepting its $25bn of capital, so we estimate a loss of about $1.1bn from repayment. This cuts Merrill 2QE forecast by $0.29 to $0.01. Notes that they have already accounted for a $750mn FDIC assessment fee.

MS: 2QE to -$0.23 from $0.70: TARP hit, more DVA
MS credited $1bn+ of TARP funds to PIC upon accepting $10bn of capital; Merrill estimates a loss of about $900mn from repayment. Also adding FDIC assessment of $30mn. This cuts 2QE to $0.10 from $0.70. MS spreads have continued to tighten; they now believe MS could post DVA loss of at least 1Q’s $1.5bn, which cuts 2Q to a loss of -$0.14. An est. $70mn charge from the Mitsubishi pfd. to Common exchange cuts another $0.04. Finally, the move to Basic From Diluted shares (because of loss) cuts 2QE another -$0.05 to -$0.23.

Notablecalls: While kind of cosmetic, I think the cuts don't spell well for overall i-bank sentiment. Especially in case of Goldman Sachs (NYSE:GS) where most other firms are scrambling to raise their estimates.

It now feels somewhat silly to pay that kind of multiple for GS. I know I was kind of positive on the name a week ago (got a pop) but I guess I have changed my mind.

I would not be surprised to see GS trade down in the n-t.

Saks (NYSE:SKS): Upgrade to Buy, $7 target, EPS to Street high - Deutsche Bank

Deutsche Bank is upgrading their rating on Saks (NYSE:SKS) shares to BUY, from HOLD (with $7 tgt), as they now have conviction that SKS has solid initiatives & strategies currently in place that will drive FY12 EBIT margins toward FY07 levels (+4.39%). There appears to be more drivers to achieve this goal than previously anticipated, though it is clear that sales acceleration, which is highly correlated with the stock market, will be the key driver in achieving sustained long-term improvement. Mgmt’s initiatives to rationalize the business will create a substantial margin benefit to the upside.

Market Stabilization to Drive Sales; Substantial Expense Leverage to Follow
Saks’ comps are highly correlated to the stock market (0.83 since the start of the recession). Therefore the firm believes it is highly likely that sales will improve substantially as the Dow recovers to levels that assure luxury consumers. Saks has done an impressive job of managing expenses in this environment, and they believe coming out of this slowdown, they will be able to leverage a flat comp. Gross margin will also benefit from better aligned inventory levels, and other op. initiatives. There also remains substantial value in the company’s real estate (NAV $6.76) and SKS recently accessed the capital markets, proving liquidity & solvency.

Increasing EPS Estimates
The nature of Saks has changed – management is no longer spending like a luxury customer. The SG&A cuts that Saks has achieved are permanent, and Deutsche would not expect these expenses to return. Even though sales may never accelerate to the level of 2002 – 2006, sales should recover with the stock market. They are adjusting their EPS estimates further above Consensus and to new highs on the Street. Deutsche's new FY09 EPS estimate goes to -$0.71 (-1.2% y/y) from -$0.73 previously, FY10 EPS becomes -$0.37 (+47.5% y/y), from -$0.64 previously, and FY11 EPS estimate becomes $0.02, up from -$0.18 previously.

Notablecalls: Certainly an interesting call from Deutsche:

- As the firm notes their estimates are the new Street high.

- The $7 target offers close to 100% upside. Not something you see every day in the space.

- There's a 20%+ short interest in the name. Looks like a squeeze in the making.

All in all, I think there's a 10-15% move in store for SKS today.

Thursday, June 11, 2009

UnitedHealth Group (NYSE:UNH): Downgraded to Underperform at Oppenheimer

Oppenheimer is downgrading UnitedHealth Group (NYSE:UNH) to Underperform from Perform, and reducing their price target from $32 to $24.

Firm notes it's come to their attention that United is relying on a very aggressive Medicare bidding strategy in 2010 that will likely result in significant Medicare margin compression. United's bid assumes that physician costs will fall 21% next year, and that if a Medicare doctor payment fix occurs this year (likely), that plan reimbursement will be adjusted accordingly (very unlikely). Most other big Medicare plans in the industry are resigned to Medicare rates falling about 5% in 2010, versus an expected cost trend increase of 5%, and have reduced benefits accordingly. 2010 EPS projection is down $0.30, to $3.00.

If this goes against United, in a worst-case scenario, it will negatively impact operating earnings by almost $800 million, or $0.45 per share. Enrollment growth will offset a portion of this hit, but it will be difficult for United to show any meaningful EPS growth in 2010, even with a lot of share repurchase.

The issue here is timing. Congress isn't planning on passing health reform legislation until early September, which is probably aggressive. Either way, it will be far too late for CMS to adjust reimbursement, since the 2010 Medicare marketing season begins on October 1.

Therefore, 2010 will be United's third consecutive year of declining operating earnings, which will make it difficult for the company to sustain its industry-leading multiple, particularly since the market currently believes next year is when all of United's pieces will fall back into place. It doesn't appear that will be the case.

While the firm doesn't believe there is an enormous amount of downside to United's stock, as it already trades at less than 9x, they believe there are far more attractive opportunities in the group, like WellPoint, which will benefit from rising EPS projections over the next six months and trades at a lower multiple than UNH.

The implications for the other large Medicare plans in the industry are not positive. Because of this strategy, United will likely be offering far better benefits than most other plans, which will make it more difficult for competitors to grow and retain membership.

Notablecalls: UNH will likely get hit on this. why?

- First of all, it's a downgrade to Underperform. That always creates selling pressure. The stock is way up from its $16-$17 lows just 4 months ago.

- Cramerica has been all negative on the HMO's telling people to sell/short the whole group on heels of Obamas' healthcare reform. The downgrade validates his thesis.

- The chart kind of looks like the stock is headed lower here.

How low will it go?

This comes down to some math and gut feel. $0.30 in EPS x 9x estimate gives you $2.70 in potential valuation adjusted downside. Knowing UNH does not move that big I'm guessing $1.50-$2.00 is how much the stock will be down today.

Let's see how right or wrong I am with this one.

Tuesday, June 09, 2009

Omniture (NASDAQ:OMTR): Upgraded to Overweight at Morgan Stanley

Morgan Stanley is out with a major call on Omniture (NASDAQ:OMTR) upgrading their rating to Overweight from Equal Weight and initiating a price tgt of $18.

Current valuations underestimate the core cash flow growth potential: The dominant vendor enabling better returns on a customer’s online marketing spend, OMTR is well-positioned to be one of the strongest growers in the group. Conversations with customers indicate a pent up demand for new spending with OMTR, which should drive upside to consensus looking for just 2% billings growth in CY09, the firm estimates +6%. Expectations have come down materially over the past 10 months, and may now actually overestimate the impact of free offerings. More aggressive expense management — compounding the impact of stronger billings — drives 25%+ cash flow growth in Morgan Stanley model. Yet at 12.5x, OMTR trades at a 20%+ discount to the software group avg. of 15.8x on a CY10 EV/FCF basis. At their $18 price target OMTR would trade inline with the group on an EV/Sales basis at 2.7x.

Web 2.0 driving increasing spend with OMTR: Feedback from 25+ customers indicate $-weighted growth expectations for CY09 of +11% YoY. Near-term budgets remain tight, but customers plan to add products as budgets open up — avg. products per customer is expected to expand by 25% over the next year. At the same time, the ability to track social media sites like Twitter and Facebook, video embedded within sites, and activities on mobile sites should all increase overall transaction growth for OMTR.

The upcoming June quarter will likely show a continued difficult environment for new customer additions and attrition, however this is already in firm's estimates which look for net new customer adds to be down 61% YoY in CY09. But after a poor first quarter performance, management is taking more aggressive steps to control expenses, which should drive better EBITDA and EPS in the quarter. Stronger expense management along with a re-acceleration in billings growth in the back half of CY09 drives 25%+ cash flow growth in firm's model.

Notablecalls: This call will likely generate significant buying interest in the shares. OMTR has been a laggard but Morgan Stanley is now calling for a re-acceleration in fundamentals.

I suspect we will see OMTR trading above $13.00 level today (and possibly touching $13.50 if the market plays ball)

PS: I'm tempted to call this one Actionable.

Friday, June 05, 2009

Goldman Sachs (NYSE:GS): Barclays ups Q2 EPS to new Street high

Barclays is out with an interesting call on Goldman Sachs (NYSE:GS) moving to a Street-high view on 2Qearnings ($5.20 vs. $2.82 consensus).

Firm believes enthusiasm around GS's ability to continue to drive outsized trading revenues two quarters in a row is bringing renewed confidence to the broker-dealer business model. While they are certainly impressed with GS's 14% annualized ROE in the 1Q and prospects for a 22% annualized ROE in the 2Q, we do believe returns will become more challenging because of the recent capital raise and strong earnings this year leaving the firm with a 30% higher equity base by 4Q09 vs. just 1Q09.

As such, they believe multiple expansion could be capped post 2Q earnings, and stock price appreciation will have to come from book value growth. Barclays' new $165 price target (prev. $105) equates to some 10% upside assuming the current 1.4x P/B multiple (on expected 2Q BVPS) applied to year-end BVPS estimate.

That said, the analyst notes they would not be surprised to see the shares trade through their target temporarily heading into earnings as the market comes to grips with the impressive earnings power that is expected to be on display this quarter.

Notablecalls: Interesting call as Q2 EPS estimates move to Street high.

I suspect the comments will serve to push the stock somewhat higher in the n-t.

Wednesday, June 03, 2009

AirTran (NYSE:AAI): Upgraded to Buy at Merrill Lynch/BAM with a $9 tgt

Merrill Lynch/BAM is upgrading AirTran (NYSE:AAI) to Buy from Underperform while raising their price tgt to $9 from $4.

According to the firm, the upgrade is due to an improved earnings outlook based on better-than-expected sales trends, especially in the ancillary area, that they believe will build as the year progresses and into 2010. In that regard, the firm is raising their 2009 diluted EPS estimate from $0.40 to $0.80 (vs. consensus of $1.06) and 2010 diluted EPS estimate from $0.50 to $0.95 (vs. consensus of $1.00). Furthermore, the 30% pullback in AAI’s share price since peaking a month ago represent what they think is an attractiveentry-point for investors to purchase this high quality, profitable, low cost carrier.

Well-run, well-capitalized, low cost airlines, such as AirTran, typically outperform the sector in challenging economic environments such as the present. Furthermore, because AirTran is predominantly a domestic carrier, it is likely to incur less revenue pressures than carriers exposed to international markets where year-over-year comparisons are expected to be difficult.

Company off to a good start; anticipating profitable 2009
AirTran started 2009 off to a good start with a surprisingly good March quarter (i.e. profitable) despite the fact that the U.S. economy contracted 5.7% and the absence of Easter this year versus last. Looking forward, Merrill Lynch is projecting profits in every quarter for the remainder of 2009. Disciplined capacity plans (down 3.8% for year), ample cash ($384 million unrestricted), modest CAPEX schedule, and manageable debt maturities give us comfort with respect to the balance sheet.

Notablecalls: Nice call by Merill. Will send the shares considerably higher. I'm guessing $6.40-$6.50 if the market holds today.

Tuesday, June 02, 2009

Research in Motion (NASDAQ:RIMM): Some cautious calls out there

Couple of cautious calls out there on Research in Motion (NASDAQ:RIMM):

- Citigroup saying they expect RIMM shares to face trickier waters over the next few weeks. The much-anticipated Palm Pre launches with Sprint are on Saturday June 6 while Apple's Worldwide Developer's Conference (Monday June 8) is widely expected to include a new iteration of the iPhone. Both of these events may be akin to shooting the rapids for RIMM shareholders. But rapids are inevitably followed by clear water & they expect RIMM to successfully clear the Pre & Apple WWDC events & follow up with what they believe will be better than expected May quarter results & solid August quarter guidance.

Maintains Buy and $100 tgt on the stock.

- Kaufman notes that recently, Verizon Wireless commented at an industry conference that it will likely carry new smart phones from Palm and the Android platform in upcoming quarters. In addition, Sprint commented having exclusivity of the Palm Pre until the end of 2009.

View As Modest Negative for Research in Motion But Definitely Something To Monitor.
Overall, the firm views this as a modest negative for RIM and potentially could become a bigger issue as alternative platforms gain more traction in the marketplace. They had anticipated Verizon to bring in new smart phone vendors over time but the timing is ahead of what they and they believe consensus had thought.

BlackBerries Are Top Sellers at Verizon with Limited Competition.
From their industry and supply chain checks, the top-selling smart phones at Verizon are by far from RIM, namely the BlackBerry Storm and BlackBerry Curve meaning RIM has had Verizon pretty much to itself with limited competition. In addition, the firm believes other vendors who are at Verizon or are aspiring including Nokia, Motorola, Samsung, LG, HTC, etc. could see some pressure as well. Ultimately, they believe RIM's biggest risk is the day Apple's iPhones join Verizon's line-up of smart phones.

Maintains Hold.

Notablecalls: So we have two firms out hinting for some s-t downside in the stock. Will it work? It could but we need the market to play ball. Will it?

Not making a call here but I thought you ought to know.

Dover (NYSE:DOV): Upgraded to Buy at Merrill Lynch/BAM - ACTIONABLE CALL ALERT

Merrill Lynch/BAM is upgrading Dover (NYSE:DOV) to Buy from Neutral while raising their price tgt to $45 (prev. $34.50)

Merrill is also increasing their 2010 EPS forecast by 20 cents to $2.50 and raising 2011 estimate by 15 cents to $3.00. Firm notes their estimate changes are driven by increased confidence in Dover’s earnings tailwinds that include restructuring benefits, purchasing savings and contribution from acquisitions – most recently Tyler Refrigeration. They see possible share price risk to ~$30, or much less than perceived earlier cycle industrials that have run up faster.

New management is driving upside
Dover’s new management has been aggressively pursuing cost savings and internal operational changes including establishing a new business development structure. Merrill Lynch believes the positive results of this new M&A approach already appear to be paying off given the recent favorable acquisition of Tyler. They calculate gross EPS tailwinds could add to $1.00 in EPS heading into next year.

DOV offers a significant recovery play
In firm's opinion, DOV represents an opportunity to play future industrial recovery – particularly with over 60% of sales derived in North America where recovery should occur ahead of other regions such as Europe. Dover’s tech businesses have likely bottomed last quarter while the company’s Energy segment could provide a future tailwind following initial cycle expansion – particularly given rising energy prices and a domestic rig count that appears toward bottom.

Price target could be conservative
They achieve their price target by applying a mid-cycle valuation to normalized EPS target of $4.50 and discounting back, or by applying a 15x (forward) P/E target to 2011 EPS forecast of $3.00. In the short run, the firm thinks the market could assign a much higher valuation to DOV as the company’s strong earnings growth prospects become more apparent coupled with the stock’s favorable valuation vs. other cyclical industrials.

Notablecalls: I'm going to call this one Actionable - I expect the shares to see meaningful buying interest today and in the coming days.

There is a lot to like about this call:

- Dover has been a laggard and this call will help it to catch up.

- As MLCO points out, 2/3 of DOV's business is derived from the U.S. where things seem to have picked up. Europe will follow (contrary to press reports, checks are showing things are picking up there as well).

- The call is coming from Merrill Lynch, a firm with a large client base. The brokers will be calling every PM they know ushering them to get long the stock.

- The analyst, John G. Inch believes his $45 tgt could be too low.

I suspect anything below $35 level is Actionable. I see the stock surpassing this level today or in the coming days.