Notable Calls

Old dogs usually don't learn new tricks but I guess this one did. I present to you:

Notable Calls on Twitter!

My aim is to publish & comment on trading opportunities developing in real-time. There won't be many (up to 3 per day) but those highlighted will likely warrant attention.

I'm new to this Twitter thing but let's see how it works out.

Morgan Stanley is out positive on Apple (NASDAQ:AAPL) saying the combination of attractive valuation (15.3x CY10 EPS), recent negative sentiment post the iPad announcement, and upcoming product catalysts set up for AAPL shares to outperform nearterm. Specifically, the firm thinks the March iPad launch and rising anticipation of the next generation iPhones will positively shift investor sentiment in coming months. Longer term, they continue to believe the earnings power of the iPhone ecosystem is underappreciated. Firm reiterates their Overweight rating and $250 price target.

Catalyst 1: iPad launch in March: Morgan Stanley expects Apple to ship its first iPad and announce additional content deals in late March to better than expected demand. They see the iPad targeting the sub-$800 consumer notebook market which equates to 30M annual units just in the US (120M globally). Firm expects iPad points of distribution to expand through CY10, both in the US and International markets, which could add 500K-1M units from channel fill alone. MSCO forecasts 6M iPad shipments in CY10,above the consensus view of 3-4M.

Catalyst 2: New iPhone product cycle in June: They expect Apple to launch new iPhones in June that offer both a lower total cost of ownership and new functionality, potentially including gesture-based technology. As they’ve highlighted in the past, the cost of device + service plan is currently the biggest barrier to incremental demand in both mature markets like the US and emerging markets like China.

Morgan Stanley's $325+ Bull case scenario foresees: 1) Broader global carrier distribution drives 10% global handset market share by F12. 12x F12 iPhone EPS of $32 + 10x core EPS of $5 = $435/shr valuation. 2) Lower-end device / service plan drive 15% global handset market share and $200 average subsidy – 12x F12 iPhone EPS of $25 +10x core EPS of $5 = $358/shr valuation. 3) iPhone sells unsubsidized, broadening Apple’s TAM and placing it in market share leadership position (33% unit share). 12x F12 iPhone EPS of $23 + 10x core EPS of $5 = $325/shr valuation

Where they could be wrong/early: The combination of seasonally weak C1Q demand and inventory draw down ahead of the new iPhone product launch have raised concerns about near-term iPhone shipments. It’s important to note that Int’l markets are a growing mix of iPhone sales (56% to 65% in LTM). With additional carrier launches in the UK and momentum/market share gains across Western Europe and Asia, they believe US iPhone units could drop below 2M (down 35%+ QoQ) without falling below the current 6.5-7M unit expectation.

Notablecalls: AAPL had a strong afternoon move yesterday, partly helped by speculation out of co's investor day they would announce a stock split. The stock kept moving up even after Apple spokesman refuted the speculation, which tells me there was natural buying going on. People just needed a reason to buy the stock ahead of the many n-t catalysts.

Reverend Jim Bob Cramer, as much as I hate to quote him made a good point regarding Apple couple of days ago:

'... So why is the stock going down? Why hasn't it rallied more? That's not the way Apple trades. It pretty much waits for an event, runs up huge before it -- hint hint, what it will do with the iPad -- and then gives up some of the gain and consolidates. That's what it is doing now. I don't think it even matters how much good ink Apple gets for anything, including the iPad, for what will be great social media applications. The stock is going to be buffeted by the market on bad days and just hold its own on good days until we are close enough to the iPad run-up stage. ...'

Link (sub. required).

That's exactly what Morgan Stanley is trying to game here - the upside move ahead of iPad launch. I have no idea whether they are right going in this early but do note the firm has issued a Positive Research Tactical Idea (RTI), which should create some additional buy interest in the name today.

Could be good for 2-4 pts of upside, could be nothing. No real conviction here.

Morgan Stanley is downgrading Palm (NASDAQ:PALM) to Equal-Weight from Overweight as their basic tenet of our original OW thesis - that Verizon would open up new distribution channels driving subscriber growth which would then drive ecosystem development – appears not to be playing out as Verizon has puzzlingly refrained from providing the marketing muscle behind the products that we had expected them to.

Morgan Stanley continues to believe webOS is a leading OS platform and a valuable asset and ultimately plays a key part in the development of the mobile web OS environment - especially as they expect Android’s fragmenting versions to limit the ultimate success of applications on that platform – they just find it increasingly unlikely that Palm can achieve success on its own by driving strong unit shipments, at least for now and through the Verizon channel.

They continue to believe Verizon is unlikely to launch iPhone this year, but as opposed to their original thesis wherein they expected Verizon to promote Palm’s products as a primary alternative to iPhone, it now appears evident that Verizon has decided to position Android phones in that position while segmenting Palm exclusively for the dubiously sized “Moms” category. While the firm would not be surprised to see Verizon yet pull an about face and begin to more actively promote the Palm products, potentially later in the year when They expect Palm to release new models and form factors, they have no reason to believe that increased marketing push happens in time to rescue unit shipments over the next 3-6 months.

With plan A of a strong Verizon marketing campaign driving material user adoption apparently failing significantly faster than Morgan Stanley had expected it could, and the potential for licensing and partnering adoptions still 9-12 months out, the stock has little valuation support at its current level and they believe could move closer to their original Bear case valuation of $4 as the odds of their Bear thesis playing out have been greatly enhanced.

While Morgan Stanley continues to believe Palm begins selling at AT&T in the calendar 2nd quarter, they suspect that without the momentum they had expected Verizon to create in driving an embedded base of Palm users, that AT&T may tread lighter in pushing Palm’s webOS products themselves.

In addition, their thesis that the potential for partnering or licensing providing a floor for the stock, while still intact, is less of a near-term possibility given Microsoft’s launch of its Windows Phone 7 OS and Nokia’s recent partnership with Intel to create the MeeGo OS while focusing on Symbian versions 3 and 4 for the remainder of 2010 leaving the playing field of licensing suitors relatively thin in the next 6-9 months. Therefore while the opportunity for Palm to seek value from either of these players remains a distinct possibility in 2011 and beyond, the more immediate opportunities are more muted than they were at the beginning of the year, creating less cushion in the meantime while the company navigates its way through re-establishing its own brand. With that as the new backdrop, the firm believes the most important issue is understanding what Palm management decides to do next to monetize its asset, i.e. plan B.

At this point, MSCO believes PALM has 3 options:

1) Spend like crazy on brand advertising to drive brand awareness and consumer adoption, resulting in quarterly cash burn of $100M for each of the next four quarters and a balance of $170 million by the Nov-Q. Depending on the size of the marketing campaign and its resulting success, this strategy may raise near-term balance sheet concerns and the firm calculates leaves the company with less than two quarters of cash at the same burn rate. The appeal of this scenario from Palm’s perspective is without full support from Verizon, time is no longer on Palm’s side and 2010 may end up being the company’s big opportunity to achieve smartphone relevance. The risks to this strategy could be onerous, however, if the strategy does not drive sufficient subscriber adoption and funding sources that were available to them previously dry up. While the bull case outcome of this strategy has the potential of driving the subscriber adoption Palm needs to attain smartphone relevance and thereby regain a $13-16 stock price, the odds of this go-it-alone strategy fully working are, they believe, at best 50/50, placing the option value of this alternative in the mid-to-high single digit range for the stock.

2) A moderation of option #1, matching Morgan's current model, where PALM ramps opex significantly but less aggressively than in the first scenario and relies on negotiations with Verizon and other carriers to result in a more aggressive marketing push from the carrier than it is currently getting. They believe this is the most likely path for Palm to take, although they believe it is unlikely to grow quarterly unit volume above 1M until very late 2010 as carriers generally take time to change course. This scenario drives PALM's cash position to $279 million in the Nov-Q.

3) Change course and license webOS out to other vendors, particularly on the smartbook/notebook side. This would include managing the business for breakeven, sell lower unit volumes themselves just to support customers, and work aggressively to license the OS to multiple OEM's that are either feeling the pinch from Android or struggling with their own internal OS. Morgan Stanley calculates that if PALM licensed its OS for $7 per device and garnered 5-7% of the smartphone market in F2013, this could likely yield ~$0.40-0.50 in EPS in F2013. However, as previously described, they believe most of the potential licensees are likely to remain preoccupied with either new or soon-to-be-upgraded operating systems.

Firm could actively look to revisit our stance on the stock if the company decided to pursue either of plans 2 or 3 outlined above and actually got traction - i.e. Verizon decided to suddenly broadly and aggressively promote Palm and/or the company successively began to pursue a webOS licensing strategy - although at this point, they believe it could be several quarters before either would have thepotential of panning out.

Notablecalls:

Mason Verger: I guess now you wish you would've fed the rest of me to the dogs.
Hannibal Lecter: No, Mason, I much prefer you the way you are.

Same goes to Merrill Lynch for downgrading PALM to Underperform from Buy yesterday morning after pumping the name all the way down from its $18 highs.

Last man standing seems to be RBC Capital analyst Mike Abramsky, who by the way, lowered his target on PALM to $18 (prev. $25) yesterday while reiterating Outperform.

I just suggest you wait til Mike throws in the towel (not sure when this will happen, though) & buy the stock. Zero expectations coupled with a 70% short interest.

Okey-dokey. Here we go.


PS: The early squeeze you are seeing right now is due to trading desk chatter Palm has cancelled out of GSCO conf. Sometimes (and I mean sometimes!) this means there is news on the way but today I think it's more weather related. Seeing other companies cancel out of meetings as well here, so I'm not reading too much into the Palm cxl.

So you know.

PPS: and it warns! Lol.

Oppenheimer is making a significant negative call on Corning (NYSE:GLW) downgrading the name to Perform from Outperform and removing their $21 price target. The firm is also downgrading Au Optronics (NYSE:AUO) to Underperform from Perform.

Oppenheimer notes their analysis suggests that the LCD panel industry is in the final stages of a prolonged rebuild cycle that has helped significantly boost LCD panel demand over the last 9 months. With the cycle likely to peter out in the next couple of months, they believe LCD panel shipments will need to reset during 2Q to a lower level that is more closely aligned with underlying sell-through trends, particularly for TVs. If their analysis is correct, 1Q panel shipments are likely to represent the peak (or the near-peak) for 2010.

The industry participants likely to be most hurt by such a turn of events are the panel makers (such as AUO), whose prices and profitability can swing quickly and violently. Consensus estimates forecast that 1Q will represent trough earnings for LCD panel makers; Opco's analysis suggests 1Q may be as good as it gets in 2010.

The situation will likely be far less dire for LCD glass substrate makers. Corning and its small cadre of competitors have proven much more capable of maintaining pricing discipline through periods of volatility, and will likely be able to do so again, especially in the near term, when any pullback in demand can be used to rebuild the glassmakers' depleted inventories. Firm ntoes they are therefore not particularly worried about the risk of outsized pricing pressure or margin erosion at Corning. They are concerned, however, that Street estimates seem to ignore the likely 2010 seasonality and that current 2010 EPS consensus likely represents a best-case scenario.

Oppenheimer notes they recognize that Corning remains attractive in terms of valuation, trading at only 11x their below-consensus $1.64 and only 12x their worst-case FY10E scenario of $1.53. Still, they'd rather move to the sidelines until such time as consensus estimates and sentiment provide Corning a better chance of delivering positive rather than negative surprises.

- Firm estimates LCD TV panel shipments will reach 50M units in 1Q10, an unsustainable rate, in their view. Opco's above-consensus sell-through estimate of 176M TV units in 2010 implies that total LCD TV panel shipments will likely reach only 190-195M annual units, including the 15-20 million units attributable to channel expansion. Upside to their estimates will not be easy to achieve.

- Two factors appear to be driving 1Q10 LCD shipments above the underlying trendline: backfill of channel inventories, which were depleted following a better than expected 4Q09, and the last stages of channel expansion in China, where LCDs are now making their way into lower tier cities and regions.

- Oppenheimer notes they recognize IT panel demand could surprise to the upside during 2010. But with IT now representing only ~30% of total panel area, upside is unlikely to have a material impact on overall market dynamics. Under a best-case scenario (10% monitor growth and 28% notebook growth), total glass demand would exceed their current glass estimates by only 2% (or 60M ft^2).

Opco's GLW estimates, which were already slightly below consensus, are unchanged. They are cutting their AUO FY10E EPS to NT$0.54 from NT$1.95. Firm believes AUO consensus estimates, which project 1Q10 as the annual trough, rather than the peak, are subject to significant revisions.

Notablecalls: Oppenheimer's Yair Reiner & his people have done a pretty good job covering Corning over the past year. So, I would definitely take into account what they are saying.

The sector got hit yesterday after several analysts said LCD sales in China were weaker than expected over the Chinese New Year. So the downgrade itself isn't too surprising. It looked like Opco was looking for a reason to downgrade the names already back in January.

Both stocks will trade down today but I suspect AUO will be the hardest hit of the two.

BB&T Capital Markets is making a significant call in Pacer International (NASDAQ:PACR) upgrading the name to Buy from Hold and establishing a $8 target (prev. NA).

Firm notes their upgrade is predicated upon an improving intermodal environment, in particular pricing. While intermodal volumes have picked up for the first six weeks of the year, it is the talk of pricing that has us most excited about the Intermodal Marketing Companies (IMCs) and in today’s case Pacer. To be sure, we are just as enthusiastic about Hub Group (HUBG-$24.77- Buy) and J.B. Hunt (JBHT-$32.95-Buy). On the demand front, intermodal traffic is up 2.6% YTD compared to the same time frame in 2009. Containers on flat car (COFC) are up 5.3% YTD. Demand is nice, but pricing is the real leverage for an IMC and BB&T believes the Class I rails are looking to push across price increases in early spring (ahead of the April bid season) and then again in late summer/early fall. As a result, they believe intermodal pricing is finally headed in the right direction.

Talking about pricing. When the rails start pushing across price increases it makes the discussion that IMCs’ need to have with their shippers a little easier. When multiple parties begin talking about rate increases, it becomes more of the norm rather than the exception. After a couple of years of softening rates, BB&T believes 2010 represents a potential inflection point for intermodal rates. In fact, they believe rate increases are incurring faster than many industry participants anticipated and that includes both IMCs and shippers. Additionally, if truckload pricing turns positive, this should help support intermodal pricing. The past couple of years, rate reductions were standard and there was no way around it, but this year, they believe the tide will turn in favor of the IMCs and they believe that transformation is already underway. Rate hikes are like a snowball rolling downhill, when it starts happening, it is hard to stop and carriers want a piece of the action (of course it happens on the downside as well, when rates start falling it is hard to stop–the LTL industry is a great example).

What could the earnings look like for the new Pacer (i.e., without the wholesale business)? To be sure, BB&T believe Pacer is not going to earn $1.79/share like the company did in ’06 with record operating margins of nearly 27% (as a percent of net revenue), but can the company earn a $1.00/share in 2011? Every 1% improvement in intermodal revenue adds approximately $0.04–$0.05/share on an annual basis. Looking at the company from an operating margin (as a percent of net revenue) perspective, every 100 bps improvement adds
approximately $0.07–$0.08/share on an annual basis. BB&T's $0.60 estimate for 2011 assumes an operating margin of just 11%, and with a margin of 16.6% (well below peak), earnings are $1.00. With some of the cost savings that the company has implemented and a firming market, they believe it is quite possible that Pacer could earn $1.00/share in 2011.

A favorable risk/reward. In BB&T's opinion, they believe Pacer offers a compelling risk reward investment. The stock is trading at just $4.04 and has a tangible book value of $2.80, and as a result they see limited downside and with a lot of potential for upside. Firm notes they have been impressed with the new management team at Pacer and their focus on reducing costs, optimizing the network, and becoming more efficient. With purchased transportation costs on the rise with the new UNP agreement, management has been focused on cost reductions in other parts of the business, mainly SG&A.

Attractive valuation. Pacer is currently trading at 6.7x BB&T's 2011 EPS estimate of $0.60. Firm's $8 price target is based upon 13.3x their ’11 estimate. Historically, Pacer had traded at an average of approximately 16x one-year forward estimates. They acknowledge that a historical multiple is no longer reasonable in light of the loss of the company’s wholesale business and the uncertainty surrounding future profitability and therefore they have discounted the historical multiple approximately 20%. They believe it is worth noting that the company’s current level of debt at $27.8M is the lowest in history.

Notablecalls: PACR is going to fly high today, no question about it.

There is a lot to like about the call:

- It's Out-of-consensus, with BB&T calling higher rates & around $1 in EPS power.

- PACR is a long-forgotten name that has the ability to move big.

- Amazingly, valuation is still very low, allowing for a $8 target.

I suspect the stock can trade up 10-15% today, putting $4.40-4.60 levels in play. Note that the sector will be in focus today as Raymond James is upgrading Hub Group (HUBG) to a Strong Buy today.

It's going to get bid up big in the pre-market with very little shares actually crossing the tape. So I would be looking at the open for possible fills.

One to watch for sure.

Firm notes that over the last few weeks they reached out to a number of industry sources to update their thoughts on the systems integration and IT outsourcing market and on Accenture shares in particular. The feedback from CIOs and other industry sources was consistent with, if not somewhat more bearish than, the feedback they received in early December that led them to downgrade Accenture shares to a HOLD rating. In summary, cost reduction is dominating the IT agenda of most large enterprises in 2010 and while discretionary IT spending is improving modestly, they're hearing that sales cycles remain protracted, that larger enterprises are not yet embarking on large-scale software and services initiatives, that the focus remains on smaller incremental projects and that pricing terms on systems integration projects remains tough. Without exception, Kaufman's sources argued that the Indian firms were seeing a much stronger demand recovery.

Kaufman concludes that demand for project-based systems integration work in particular could remain sluggish throughout 2010 and that Accenture is likely to lower its fiscal 2010 top-line guidance to a range of perhaps negative 2%-5% (from positive 1% to negative 3%) on its next earnings call in late March. They also believe that a flat margin outlook is a best-case scenario given continued pricing pressure. Firm maintain their assumptions for a 4% constant currency decline and below-consensus EPS of $2.68 in fiscal 2010 while for fiscal 2011 they are lowering their growth rate assumption to 4% from 7% and our EPS estimate to $2.90 from $3.00, below Street consensus of $3.05.

In firm's view, the read-through for Accenture shares from the results out of HP on Wednesday and from Cap Gemini yesterday was negative. HP's services business was down approximately 4% in constant currency and was the weakest of its major segments, while the applications services unit (which comes closest to Accenture's mix) was down 8%. HP did not call out any demand recovery, it guided to similar demand trends going forward and revenues from the EMEA region (47% of Accenture's mix) were soft. Likewise, Cap Gemini's outlook for a sequential revenue improvement of just 1% in both 1H10 and 2H10 (basically flat revenues at the 2H09 run-rate), a material margin decline to 5% in 1H10 and "huge" pricing pressure were
not inspiring.

Kaufman notes they are cognizant of the fact that Street expectations are more muted than they were last quarter and that Accenture has already tilted the Street toward the lower end of its guidance range. However, the prospect of a downward guidance revision from a defensive name presumably on the cusp of a revenue recovery gives the firm reason to re-evaluate their rating on the stock. Kaufman believes that Accenture's P/E multiple could drift from 15x today to perhaps 12x-13x our fiscal 2011 EPS estimate of $2.90, implying a share price of approximately $35-$38. In their judgment, this downside risk is large enough to warrant a downgrade to a SELL rating. They are also lowering their price target from to $37 from $43 per share, based on an assumed P/E multiple of 12x-13x their fiscal 2011 EPS estimate of $2.90.

Yet, Street sentiment remains generally positive. Accenture shares have traded flat since its disappointing November quarter earnings call and have outperformed each of IBM, EMC, Dell, Cisco, HP and SAP over the last three months; 14 of the 21 sell-side analysts following Accenture shares rate the stock a Strong Buy or Buy; and the consensus sell-side constant currency growth estimate of approximately negative 2%-3% is still within Accenture's guidance range and the consensus is for an acceleration to 7% growth in fiscal 2011. This suggests that the majority of investors still believe that a near-term demand recovery is likely and that it is simply lagging the recovery in enterprise hardware (especially servers, chips, storage and network equipment) spend by a few quarters.

Accenture's P/E Multiple of 15x Looks Full
Accenture shares now trade at a calendar 2010 GAAP EPS multiple of 15x, at the lower end of the range of 15x-20x that investors were willing to pay during the 2005-2007 period. While a P/E multiple of 15x is not expensive, Kaufman would argue that further multiple expansion is likely to be tough if the Street needs to digest a more muted recovery trajectory. Accenture's P/E multiple gap relative to IBM (which tends to widen in good times, narrow in bad times and has peaked at about 4 multiple points on several occasions over the last seven years) has now opened up and has returned to peak levels.As illustrated in Exhibit 4, Accenture's P/E multiple is firmly in the bottom half of the range for its peer group of large-cap technology vendors, although Accenture shares have usually traded in this range. Kaufman concludes that the stock is hardly expensive but that it may be fully priced at 15x GAAP EPS given the sluggish demand environment.

Notablecalls: Kaufman's Karl Keirstead & Shateel Alam do it again - they are way ahead of the pack with their check and downgrade (see archives for their previous downgrade in the name).

With the analysts calling for a guide-down later in March, the call is bound to get attention. The market seems to be in a shoot-first-ask-questions-later mode so there will be some downside in the stock price today.

I'm guessing 1-1.5pts towards the $40 level.

Macquarie Equities Research is out with a very interesting call on Goldman Sachs (NYSE:GS) saying their mid-quarter analysis of market conditions lead them to the conclusion that Goldman’s sequential improvement in 1Q10 will not be as robust as originally expected. Concerns over sovereign debt, potential antibusiness actions by the US government and China’s attempts to cool growth have conspired to slow the recovery in global capital markets activity.

Impact
- Lower Top-Line Expectations. As a result, the firm now expects Goldman’s revenue to increase just 1% sequentially vs our prior forecast of a 16% gain. They expect investment banking to fall 27% to US$1.2bn from robust 4Q09 levels (vs their prior -9% delta). They expect equity trading/commissions to rise just 8% to US$2.1bn (vs 34%). Macquarie now sees principal losses (US$602m) vs gains (US$350m).

- One Lone Bright Spot. One area where they are boosting expectations is FICC; they have long expected activity to rebound from weak 4Q09 levels, but the firm now sees FICC up 39% sequentially to US$5.5bn (vs 30%). Increased concern in the debt markets is helping volume, volatility and risk premiums.

- Comp Higher Too. Meanwhile, Macquarie now believes management will accrue comp at a 47% rate. They had originally expected a lower rate (45%) and true-up higher in 4Q10, once the political spotlight had faded.

- Firm's Estimates Even More Subject to Change than Normal. Obviously, midquarter updates can be dubious as so much can change between this point and quarter-end. However, they see a material difference between consensus (and their prior estimate) and where things are tracking at this point. Should concerns over Greece and US politicians subside, deal flow could re-emerge quickly-

Earnings and target price revision
- Cutting 1Q10 to Street-Low. The combination of lower revenue and higher comp vs Macquarie's prior forecasts means our 1Q10 estimate drops to Street-low US$3.10 from near-consensus US$4.17. They are cutting 2010E to US$16.87 from US$18.24, mostly reflecting their 1Q10 change, as their outlook for the balance of the year is largely unchanged. Similarly, 2011 estimate remains unchanged.

Price catalyst
- 12-month price target: US$185.00 based on 9.6x 2011E.

- Catalysts: Passage of the Volcker Rule would be a negative catalyst, as the firm estimates GS generates 13% of profits from prohibited activities. Narrowing bid-ask spreads would hurt FICC, its biggest contributor. On the positive side, if neither materializes, and the backdrop improves, they see the stock reaching their target.

Action and recommendation
- With 18% upside to firm's target, GS shares are getting interesting, although they would like to see 25%-plus upside given the external risks. If their new 1Q10 estimate proves accurate, the firm believes that the stock could weaken to an attractive entry point of US$148.

Notablecalls: This is probably the first time for me to highlight any research from Macquarie, so welcomes are due. Macquarie has started covering many of the U.S. names over the past year or so and while they don't get much attention yet, this may be changing.

The Goldman call may serve to be a kind of a wake-up call for many - Q1 is off to a slow start. I suspect most market participants have accustomed to receiving only good numbers from Goldman.

Today, Goldman is facing a lot of pressure. Wherever injustice was done, Goldman has been involved.

At some point Goldman is going to end up with egg in their face.

Would not be surprised to see the stock trade down on this Macquarie call, once it gets circulated.

Not a conviction call on my part.

In the CRL, the FDA stated that “a preclinical find of pancreatic acinar cell tumors in rats was of sufficient concern to preclude approval of Horizant at this time." XenoPort and partner GSK will be in contact with the FDA to determine possible next steps.

- Deutsche Bank is downgrading XNPT to Hold from Buy noting they had had previously ascribed a high probability of approval given that the active ingredient of Horizant is a prodrug of gabapentin (Pfizer's Neurontin), an efficacious molecule that has been widely used for over 16 years, in addition to positive Phase 3 data. Hence, the firm is surprised by the FDA decision. In the CRL, the agency acknowledged that they had approved gapabentin even though there were similar carcinogenic findings associated with this compound. However, at that time, the FDA believed that the seriousness and severity of Neurontin's indication (refractory epilepsy) at the time justified the potential risks.

Deutsche believes that the probability is high that the FDA will require additional trials for approval, likely delaying potential product launch by a year or more. Given the FDA's extremely intractable stance concerning product safety, they think the odds are low that the product could be approved in the nearterm. And, there is a reasonable chance that Horizant could never be approved. Hence, given this surprising development, they are downgrading XNPT share.

- RBC Capital is lowering their XNPT target to $12 (prev. $30) while curiously maintaining their Outperform rating on the stock.

Firm notes they are surprised given the FDA previously only requested a REMS which is discussed in the late stages of approval, and think this is an irrational decision by the FDA. We note that the label for gabapentin discusses higher preclinical risk of pancreatic adenocarcinoma in male (but not female) rats at doses 10x higher than human doses, but it did not affect survival, and did not metastasize. Also, more than 2085 years of exposure with gabapentin showed no human cases in their clinical studies (nor XNPT's clinical studies). Thus we think based on available data, the findings are inconclusive and should not block approval.

RBC thinks 6-12 month delay and slim chance of approval but it can't be completely ruled out. They acknowledge the highest likelihood is that any approval of Horizant is unlikely particularly because the FDA seems concerned about the risk/benefit in RLS (as opposed to acknowledging giving approval to Pfizer in epilepsy). Some possible options may include 1) agreement on running additional preclinical studies showing inconclusive link to cancer; 2) examining full databases of gabapentin to determine any higher rate vs. background rate in normal populations; and 3) running post-marketing surveillance to monitor risks (such as Novo's liraglutide for diabetes that got approval after the FDA's perceived risk of thyroid cancer). The main concern is that epilepsy and diabetes may be seen as more serious medical concerns than RLS by the FDA.

RBC estimates XNPT has $135M in cash at YE09 or $4/share ($2 at YE10). If chances of approval are 25-30% and upside is $20-22, then risk/reward seems most favorable in single digits around $6-8 where Horizant would have $3-5/share or $150M EV, appropriate given the current risks and overhang.

Notablecalls: This is going to hurt, I suspect. XNPT was an analyst battleground with sponsors like Morgan Stanley constantly reiterating their Overweight rating with $44 target and firms like Lazard saying valuation was full around the $20 level (HOLD, $19 fair value estimate).

I guess the first warning sign was when GSK announced that it may cease research in depression and pain couple of weeks ago.

Now we have RBC saying they would consider $6-8 level as attractive on valuation basis (XNPT has $6/share in cash), which means the stock is likely to trade in the $12-$14 level today and drift lower towards the $10 level after that. The stock could drift way lower from there over the coming months.

So, if you can gets shorts in the $13-14 level...you should be able to cover lower later on.

Morgan Stanley has had a change of heart on Sandisk (NASDAQ:SNDK) and is upgrading the name to Overweight from Equal-Weight and establishing $37 price target (prev. NA)

While the stock has tripled from trough levels last year, the firm believes consensus estimates do not fully reflect potential upside to NAND flash product margins – amid a backdrop of stable pricing and favorable supply-demand fundamentals – and will be revised higher through the year. In addition, they think many investors view memory stocks purely as short-term “cyclical plays” and could be overlooking the longer-term secular drivers for NAND flash memory usage in smartphones, tablet-style portable devices, and solid-state drives (SSDs).


Why upgrade to OW now?
Morgan Stanley is turning constructive on SNDK based on recent checks that suggest NAND flash pricing will track above their prior expectations for a seasonal decline of +20-30% in Q1. In addition, their updated proprietary capex model suggests memory capex is skewed more towards DRAM this year ~60-65%, which boosts their confidence in disciplined NAND supply. Morgan Stanley's bullish outlook on NAND flash demand is also consistent with MS Wireless Equipment team’s recent forecast of above consensus 37% Y/Y smartphone growth over the next 2-3 years.

As a pure play on NAND flash supply-demand, they think above positive market trends uniquely benefit SNDK over the next 12 to 18 months by supporting a) moderate price declines for SNDK’s retail card and OEM component products, b) 35% or better product gross margins on cost reduction from transition to 24nm technology, and c) modest investment in capex and JV’s to strengthen the company’s balance sheet. The firm also thinks SNDK’s actions from last year to reduce captive wafer supply and develop a broader OEM channel should continue to move the company towards a less capital intensive and sustainably profitable model over future cycles.

Morgan Stanley believes NAND will be in undersupply for the next 12-18 months. After three years of oversupply and +60% annual price declines, they believe SNDK and the flash industry overall are in a “sweet spot” of balanced supply and demand. SNDK and peers have been reluctant to add new capacity after returning to profitability and appear focused on repairing their balance sheets and pursuing sustainable growth.


The Morgan Stanley global memory team estimates a 3% undersupply for NAND flash memory in 2010 based on 70% bit supply growth and 80% bit demand growth. Firm thinks memory makers are proceeding cautiously with plans to add new wafer start capacity and instead direct capex investments to node shrink and multi-level cell (MLC) technology that effectively increase “bit” production without requiring construction of costly new fabs. They believe investors underestimate the degree to which supply for NAND is constrained in the near-term given 1) low level of NAND equipment shipments and 6 -12 month lead-time to ramp new capacity after orders are placed, and 2) reluctance by SNDK and peers to make significant capex investments given their desire to repair balance sheets on the back of the prior cycle.

Guidance Appears Conservative, Raising FY10 Estimates. Given their bullish outlook on NAND fundamentals this year, they think management guidance for 2010 appears conservative, and they adjust their estimates above full year revenue and margin guidance. This lifts MSCO's FY10 EPS estimate to $3.10 or 34% above consensus. Firm arrives at their new PT of $37 by applying a 12x multiple, the low end of SNDK’s historical trading range and the average for our global memory group.

Valuation looks attractive on revised estimates and recent pull back. SNDK stock has declined ~17% YTD on expectations reset of seasonal demand weakness. Risk-reward looks attractive at ~1:2 at current levels, with $48 as MSCO's bull case and $18 as bear case. SNDK trades at 9x their revised CY10 EPS estimates or significantly below its 5-year historical range of 12 - 25x.

Notablecalls: This is a significant change of heart on Morgan Stanley's part. Recall, their Semiconductor team stayed neutral-to-negative on Sandisk throughout the run from $15's to $30's, calling the stock an an outright short in the upper part of the move. They also got stopped out of their negative Research Tactical Idea (RTI) right around the top.

J.P. Morgan & UBS pretty much followed the same pattern, reiterating their Sell/Underweight ratings on the name throughout the run.

A bloody mess, if you ask me. They all got it wrong. I got it wrong as I agreed with their views. About the only firm that got it right was ThinkEquity.

Now coming back to today's upgrade I must say I do like it. MSCO is basically calling for 12-18 months of NAND undersupply which is a fairly bold prediction that will get people's attention.

The stock is down almost 20% from its recent highs, which suggests a 1-1.5 pt move is likley in the cards. I would not be surprised to see SNDK trade above the $29 level if the market plays ball.

RBC Capital is making a bold call on Research in Motion (NASDAQ:RIMM) upgrading the stock to Top Pick from Outperform with a $120 price target (prev. unch) implying 73% upside.

Past the "Bogeys". RIM's stock has now passed its "bogeys": Storm stumbles, AAPL/GOOG launches, ASP/GM downshifts. A VZ iPhone is only 50% likely CY10, reflected in valuation, and nominal impact on RBC's sensitivity analysis.

With valuation at 14x Street, near historical lows, below peers, reflecting largely downside scenarios, and with upside catalysts pending, the firm sees positive risk/reward and rare opportunity to enter RIM shares.

- Realization I: “Not Dead”. Catalysts include strong quarterly financial results at healthy margins, sustained channel leverage, Enterprise refresh, global momentum, sustained US market share

RIM’s strong momentum has not reflected a company that is on the ropes due to Apple, Google. RIM has maintained strong momentum and consumer share gains during the entire period since iPhone came out (since June 2007 when iPhone was launched, RIM’s annual shipments have expanded 93% CAGR, Smartphone share from 13.7% CY07 to 20.6%% CY09), and subsequently strong financial results despite concerns about RIM’s business model.

Checks: Q4 Tracking Above Plan. Fresh channel checks (75 retail stores) preliminarily show strong BlackBerry sales, including a strong resurgence at AT&T and blowout BlackBerry Bold 9700 sell-through (at AT&T and T-Mo). These checks preliminarily suggest RIM’s Q4 (end Feb) is tracking above plan (RBC at 4.6M vs. management guidance for 4.4-4.7M sub adds). Catalysts that may offset historical Q1 seasonality include: 1) full quarter of new products (Tour2, 3G Pearl); 2) buzz around new software (UI, browser, apps); and 3) sustained carrier promotions and continued international awareness, which may offer possible upside to RBC's current Q1 estimates for 11M subs, 4.4M ships, $4.3B rev and $1.25 EPS (Street at $4.3B and $1.21).

- Realization II: “Closes the Gap”. Catalysts include improved browsing experience, updated user interface, further developer/application momentum.

Investors’ uncertainty concerning RIM lagging Apple, Google, etc. has overhung valuation. RBC agrees that RIM did “drop the ball” regarding updating its “front end” software (browsing, UI, bundled and downloadable applications, SDK, etc.), lagging Apple and missing the emerging consumer demand for rich mobile browsing, a thriving consumer application ecosystem, and intuitive, elegant smartphone UI. RIM’s UI and PIM, while reliable and functional, remained essentially unchanged for 10 years. However, they disagree that RIM will not catch up with – even in some ways surpass – these trends, by evolving its UI, browsing, application and mobile media experiences (both on devices and on the PC), to pace competitors and meet evolving consumer expectations. Firm notes that RIM, while historically lagging competitors in rolling out software innovations (attachment viewing, OTA downloads, HTML email, the opening up of its platform to third-party developers, Application Store, etc.), subsequently recovered ground once launching its version.

- Realization III: “RIM Regains the Crown”. New “cool” consumer handsets, “Super Apps” (application partnerships leveraging RIM’s platform), competitor shakeout -- and further positive surprises.


New “Cool” Consumer Handsets. RIM is expected to launch 16 new devices CY10, up from 5 in CY09, all of which are expected to be compatible with RIM’s pending updated software (UI/browser), while late CY10 next-gen devices will showcase the revised BlackBerry user experience and incorporate possible new form factors. CY10 device launches may include: a) an updated Tour (codenamed “Essex”); b) 3G Pearl 9100 (codenamed “Striker”); c) emerging markets Bold (codenamed “Atlas”) targeting China; d) Touchscreen Bold 9900 (codenamed “Dakota/Magnum”); and e) Storm slider with slide-out keyboard and large touchscreen.

2010 Moving to RIM
Consistent with RBC's Smartphone industry report published on August 18, 2009, “The New World Order”, mobile data is different than PC or Internet; the market is not a zero sum game – and RBC believes fears of decimation of RIM’s franchise are overdone.

2010 Moving To RIM. Reversing concerns about recent trends (Apple, Google, etc,), RBC foresees 2010 trends favoring RIM, as Smartphone growth shifts beyond US-centric iPhone clones to: 1) browsing + mobile email, leveraging RIM’s “crackberry” advantages; 2) International, where RIM has unmatched distribution breadth; 3) entry-level and SMB users, where RIM has significant cost advantages (ASP $320 at 35% HW GMs vs. iPhone $600 and GOOG $530). RIM’s efficiency becomes a visible competitive advantage, vs. data-sucking Smartphones hogging carrier networks, sustaining ARPU.

Street Estimates Remain Beatable. FTM Street estimates are in RBC's view overly pessimistic and reflect a negative share/margin loss scenario. Firm's F12E EPS of $6.33, above $5.33 Street, assumes stable NA share (30-40% Y/Y growth), international momentum/share gains, 42-43% GMs, accelerating consumer uptake. Q4 checks show momentum above plan, with pending product launches (Tour2, 3G Pearl) to drive upgrades and consumer uptake.

Notablecalls: RBC's Mike Abramsky (and his team) have done a wonderful job dissecting the RIM ecosystem. It's a must read for any RIM follower.

RBC highlights several potential upcoming catalysts, which should create some interest in the name today despite yesterday's move. If you look at RIMM's price performance over the past couple of weeks you can clearly see the stock has been under accumulation.

The market is looking red this morning following weaker than expected Euro econ. data which should enable you to get decent fills in the name.

I would not be surprised to see the stock trade above the $70 level & closer to $71 if the market plays ball.

Oppenheimer is out rather positive on Abercrombie & Fitch (NYSE:ANF) upgrading the name to Outperform from Peer Perform with a $46 tgt (prev. unch).

While January's sales results benefited from several one-time items, they believe there are hints of stabilization in the domestic business and these brands are not dead. In their view, several catalysts exist for ANF, including 1) 4Q earnings call next week, 2) very easy sales and margin comparisons, 3) growing (and highly profitable) international business and 4) potential for store closings at both A&F and Hollister. Yes, it is a leap of faith to believe that the domestic business can show some signs of life. However, they believe ANF represents one of the most compelling risk/reward opportunities in specialty retail and, accordingly, they are upgrading the stock to Outperform from Perform with a $46 price target.

Easiest Compares in Retail and Potential/Hope that January was more than just a “Blip”
Though the firm acknowledges easy compares do not make good comps alone, they cannot help but point out just how easy ANF’s compares are for the rest of 2010. ANF has underperformed the specialty retail average for almost three years now, which may create an opportunity in 2010 and beyond. Although gift cards helped spur sales in January, the Winter Clearance event also played a good part. Oppenheimer does not think the brand is dead and should the company properly align its pricing strategy, their think a sequential improvement in comps is possible. Their model assumes down mid-single digit comps in 2010.

Store Closures Could Provide Substantial Comp and EBIT Lift
A potential upcoming positive catalyst is the announcment of store closures on the company’s 4Q09 conference call. Though there will be one-time costs involved, Oppenheimer thinks that the majority of these closings are locations that are losing money and there could be a substantial comp and EBIT lft. To gain a better perspective of what these store closings could mean to numbers, they take a look at Chico’s from a year ago.

ANF today feels like Chico's (CHS) in late 2008. From 2006 to 2008 sales/ per square foot at the Chico’s core brand decreased from $1,028 to $598. Similarly from 2007 to 2009E the same metric at ANF declined from $535 to $375. In 2008, CHS gross margins dropped anywhere from 330 basis points to 580 basis points compounded by comps in the negative 13.0% to 17.5% range. In their analysis, Oppenheimer assume ANF will make an imminent announcement about store closures and expense reductions.


In the charts below the firm has identified time period “0” as the period where CHS made a similar announcement to reduce expenses and shutter underperforming doors (1/29/2009). In the four quarters prior to this announcement, CHS comped down double digits and gross margins decreased between 200 and 600 bps per quarter. However, in the three quarters post-announcement, CHS’s comps and gross margin increased sequentially. The stock price has increased almost 250% (vs. S&P up ~27%, peer group up 76%) since the announcement and was down almost 58% in the year prior to the announcement (vs. S&P down 38%, peer group down 33%).

Oppenheimer views ANF's 4Q earnings on 2/16 as a potential positive catalyst for the stock as 1) it is likely that domestic store closures are announced, 2) the company will give additional details regarding international performance, and 3) discussion around the U.S. business will focus on lower prices.

Based on their sum-of-the-parts analysis, the U.S. business is currently trading at just 0.1x EV/sales, a 90% discount to the group at 0.9x even with trough margins. CHS traded from 0.2x sales to roughly 1.1x in just 9 months after showing sequential comp improvement and then +comps in 2H09.

Notablecalls: Interesting call on Opco's part. Retail has become so hated, it almost looks good for a buy.

But not yet, not yet...

ANF is going to trade up 1pt+ on this call, I suspect. I'm not going to chase it here though..maybe as a bounce play if/when it gets crushed along with the mkt.

Morgan Stanley is making a significant call on Caterpillar (NYSE:CAT) upgrading the stock to Overweight from Underweight with a $70 price target (prev. $51).

Firm notes they are upgrading Caterpillar’s shares to Overweight, the first time they’ve been positive on the shares in three years of coverage. Firm notes they are now more bullish than consensus on both the pace of cyclical acceleration and on CAT’s ability to deliver on its structural transformation and, potentially, $8-10 in earnings. Upside risk is material in 2-3 years if structural changes work, i.e. shares could double.


Morgan Stanley's contacts in the supply chain tell them structural changes are real and are starting to work. In contrast they think many investors are still highly skeptical, specifically on CAT’s $8-10 earnings goal in 2012. They’re not completely there yet either, but this feels like an area where too many are underestimating CAT. The company earned $5.66 in the last cycle despite being hampered by lack of capacity and an outdated production system. The company’s move to streamline parts and materials—verified in their supplier conversations—could save hundreds of millions to billions. Warranty, variable labor, and de-bottlenecking should also push that number much higher in this cycle.

Structural changes look increasingly positive to US, market still feels skeptical. In August 2009 CAT outlined a number of initiatives that it felt would structurally improve operations and earnings. MSCO mentiones some of those: better quality leading to lower warranty, higher labor productivity, better parts and purchasing. The company aims to save 15% on transportation cost, 10% on direct materials costs 10%, and indirect materials costs 20%. Goal in August of 2009 was to reduce direct materials 2-3% in 2010. All these goals are ambitious, and on a $21 bn purchasing base (back at peak) the savings would be $2 bn plus, or ~$3 per share.

Cyclical forces look to be getting better, faster than consensus expects: 1) MSCO notes they are strong believers in a robust oil/gas cycle, and think that recovery may be getting underway even as CAT’s engine margins shrink near term. 2) They continue to hear near universal positive data points on mining, where CAT’s positioning is exceptional. 3) They think CAT (and Deere) will emerge with a structurally stronger position in the US construction market, as weaker competitors’ dealer networks will struggle to remain viable.

The firm also notes they have been hearing from suppliers for 6 months to a year that there has been a sea change in how CAT thinks about supplier relationships, with a focus on production flow and system cost rather than on capturing more of the margin pool at suppliers’ expense. Thus far their conversations remain mixed: there are suppliers who tell them they are saving money for CAT while making good margins, and there are those who tell them CAT still beats them up on pricing.

Cultural change and imported expertise. The seeming shift to a more integrated and collaborative relationship with suppliers was the biggest change the firm noted, but Cat also says in the past 3 years it has brought in more outside talent than ever before in the company’s history. The culture at Cat is loyal and insular, they think, so the changes are interesting. Many of the new hires have been in production—from Toyota and GM—but there is a new openness, they believe. MSCO has heard from more than one mid level manager at CAT that the initial steps on CPS were not exceptionally impressive, but that more recently the program is more robust and gaining traction.

Morgan Stanley's bull case scenario includes a price target of $108 based 12x 2013e EPS of $9.00.

Notablecalls: As Morgan Stanley notes they have been neutral-to-negative on CAT for the past 3 yrs. Until today. This is something I like to see - a major change in opinion.

With Morgan Stanley calling for a potential double saying the next cycle may benefit the co more than the last one, I think the stock will see significant buy interest.

I think CAT will see the $53 level today (up 5%) and I would not be surprised to see $53.50 during the day if the market plays ball.

Morgan Stanley is upgrading Newell Rubbermaid (NYSE:NWL) to Overweight from Equal-Weight while raising their price target on the name to $18 (prev. $16).

Firm notes the upgrade is based on their belief the risk/reward is very attractive for the stock. NWL is currently trading close to trough valuation on trough earnings after significant underperformance versus peers and the discretionary consumer index (~1400 bps of underperformance versus the XLY since 8/18/09). The market is not giving NWL credit for key positives, including a) a potential macro-driven topline recovery in 2010, and b) potential market share gains on a recent increase in strategic SG&A spending (advertising and R&D) and strong 2010 innovation pipeline.

Why They Are Becoming More Bullish:

1) The market now expects a late-cycle macro recovery for Newell. Previously, Morgan Stanley believed Newell was more exposed to a late cycle economic rebound than consensus anticipated. However, given NWL commented on its Q4 EPS conference call that 2010 organic sales growth would be back half weighted, they think this risk point is now in the stock, particularly given underperformance after Q4 results.

2) Pricing/cost risk less of a concern. Previously, the firm was concerned that Newell would not be able to fully pass on higher 2010 commodity costs through pricing, but they are less concerned about pricing/cost risk after an in-line slightly positive 4Q09 pricing result. In addition, Newell’s management team indicated that the promotional environment has not worsened in Newell’s key product categories in Q4, in contrast to most other household products categories. Lastly, some of Newell’s competitors have already announced price increases in the Rubbermaid business segment, which we expect Newell to follow.

3) Attractive valuation after recent under-performance. Newell’s valuation is attractive at 8.4x 2011e EPS and 6.5x EV/EBITDA (after adjusting for convertible dilution) and a 12% 2011e free cash flow yield, at the low-end of MSCO coverage universe. Since August 19, Newell’s stock has underperformed the discretionary consumer index by over 1400 basis points, the S&P 500 by ~900 basis points, and MSCO's SMID-cap HPC coverage universe by ~600 basis points, making NWL’s valuation more compelling.

Attractive Risk/Reward
Morgan Stanley's base case scenario $18 price target offers compelling 35% upside in the stock and is based upon a conservative 11.0 times 2011 P/E multiple at a 17% discount to the S&P 500 (in-line with Newell’s three-year historical 17% NTM discount). They are also 2% ahead of consensus in 2011 given their forecast for a macro-driven topline rebound.

In addition, they think variance versus their base case skews to the upside. Morgan Stanley's bull case scenario offers even more significant 87% upside in the stock, and assumes an incremental 150-bp macro-driven topline recovery, 100-bp of topline upside from market share gains, and 1% incremental cost-cutting. In contrast, their bear case $12 scenario offers only 10% potential downside in the stock given limited valuation compression since NWL’s valuation is already at the low-end of peers.

Notablecalls: I think this one has a fair chance of seeing some buy interest today. It's the kind of a household name investors tend to flock to during times of greater than usual volatility (uncertainty) as it provides a kind of a safe haven.

Getting blessed by Morgan Stanley with a decent target & potential for even higher returns, this looks like a bet one should consider.

It's going to trade close to $14 level today, I suspect.

Late Monday the Wall Street Journal reported that Leap had hired bankers to explore a sale of the company. Though JPM believes the company is actively seeking an acquirer, they believe a sale would be very challenging given deteriorating fundamentals and valuation hurdles.

- Low likelihood of near-term deal with PCS; valuation problematic. The ratio of Leap’s share price to Metro’s share price is currently 2.5, 9% below the bid Metro made in 2007. Leap is currently trading at 5.9x 2010E EBITDA, a premium to Metro at 4.6x; a 2.75 share ratio would imply a 6.1x multiple for Leap. In addition, amidst industry-wide pricing pressure, and deteriorating fundamentals, JPM believes that Metro would be unwilling to pursue a bid for Leap, even at current levels. A ratio of 2.0 could even be difficult to justify, as that implies 5.5x EBITDA for Leap, relatively unattractive given wireless fundamentals and peer valuations.

- Strategic benefit diminished. MetroPCS remains the most logical buyer of Leap; however, the firm believes the strategic value of a deal is more limited today. Both companies are experiencing substantial degradation in ARPU. Even as a combined entity, they believe they would maintain discount pricing, as competition with Sprint Boost Unlimited, Tracfone, and T-Mobile is likely to remain fierce. Firm acknowledges a combination would enable some synergies; however, a combined company is unlikely to provide pricing or cost stability to the industry, calling into question the usefulness of a merger. Furthermore, synergies could merely provide additional cushion for taking a more aggressive stance towards competitors, resulting in greater industry pressures. We believe initial synergy expectations associated with a merger with MetroPCS would be extremely difficult to achieve given the current industry dynamic.

- Other interested parties? JPM notes they are highly skeptical of AT&T, Verizon, Sprint, T-Mobile, America Movil, or other foreign buyers participating in an acquisition. Given deteriorating fundamentals and the high-churn nature of the business, they believe subscriber valuation would be minimal, leaving the company’s spectrum holdings as the most attractive asset. Needless to say, from an equity owner’s perspective, relying on spectrum valuation is problematic, at best, in JPM's view.

Notablecalls: This short albeit hard-hitting call is likely going to crush Leap Wireless' stock price today.

I'm guessing that by 10:00AM ET it's going to be trading around the $13.60 level & if that doesn't hold $13.20 is not out of the question.

This one is going to hurt.

Credit Suisse is making an interesting call on MEMC Electronic (NYSE:WFR) upgrading the name to Outperform from Neutral with a whopping $19.50 price target (prev. $17).

Bottom line. CSFB is raising their CY10 EPS from 42c to 71c; firm's CY11 EPS now at $1.49. They think the semi business is worth ~$11, and with $4.5 of cash, the implied solar valuation is negative. Prior trough book multiple was 1.1x (implies ~$11 is downside). They think the solar business is worth at least $4/share – risk/reward attractive.

Semi business entering a sweet spot. Semi wafer supply and demand is tightening driving price increases Q1 and in Q2. Semi capex is ramping, and should help demand in 2H10 and 2011. MEMC has increased market share by 2x LTM. Semi revenues in CY10 are higher than most investors’ expectations. Expect semi business to earn ~$1.09 in CY11; CSFB values it at $11/share.

CSFB thinks the semi business is generally much larger than what most investors expected in 2010. They think MEMC’s semi wafer shipments (measured in Millions of Square Inches or MSI) will grow nearly 60% y/y in 2010, well above industry MSI shipment growth rates slightly under 40% as MEMC is gaining market share in semis.

MEMC lost a significant amount of market share from 2005-08 in the semi business. This was primarily because the company focused too much on its solar poly business, which resulted in poor customer service, missed deliveries and a lack of focus in the semi business. MEMC’s new management team in the last year has significantly turned around the semi business. Firm thinks this is absolutely the right thing to do in the long run – the semi business has a legacy that spans beyond 30 years, does not depend upon subsidies, has strong long term unit growth trends and is much more consolidated than the solar wafer business.

Solar business fears overblown. While CSFB thinks the Sun Edison acquisition was the right move given US is a high growth end market, investors are concerned on cash flows and balance sheet impact. MEMC will use its balance sheet to drive construction finance of these projects, however, the projects are fully financed through buy-down financing – MEMC guided for positive FCF in 2010. The project debt is non-recourse. Sun Edison business was acquired for 80c/share, they value solar wafer business at ~$3.3 – solar total is over $4/share.

CSFB notes that anecdotally, they hear US installers complain that they do not receive sufficient panels to meet demand at lower price points. They think there should be some demand elasticity in the US at <$1.60/watt but suppliers today can clear panels in Germany at >$1.80/watt. Suppliers intentionally are diverting panels to Germany as there is an added worry the German government will cut subsidies soon. They think the German market will be impacted by a decline in subsidies – which the firm thinks will likely cause panel prices to decline – which in turn they think will help volumes in the US business.

Valuation. MEMC stock sold off 15% yesterday following a well attended analyst day. Besides general unease about Sun Edison acquisition, Investors worried about company’s breakeven EPS guidance for Q1 which missed street consensus at 9c (although CSFB says they thought full-year guidance of 70-80c, which included 10c of non-recurring charges was better than feared). Concerns appear overblown at current valuations, see favorable risk/reward with $8 upside to their price target and $2 downside if stock retrenches to 1x book.

Notablecalls: One of the main reasons why this call warrants attention is that Credit Suisse's Solar Energy team have never been fans of WFR in the past. They have been Neutral-rated on the name since the time the stock was in the $60-$70's back in 2007. They kept their cool all this time.

Until today.

The stock got crushed (-15%) following not-so-bad guidance which kind of looks like a capitulation move. The general market weakness surely helped.

So, today CSFB upgrades the stock with a whopping price target of $19.50 saying, hey guys, it's not so bad. The Semi business is humming and Solar may be getting better. Note that HSBC is upgrading the Solars this morning saying after Germany announced plans to cut solar incentives, but reported blockbuster shipments during the third quarter, have excited many analysts as the U.S. solar market could show strong growth this year.

This is bound to surprise a lot of people.

If we get a some kind of a stealthy rally in the market today (and I suspect we may get one) this one's going higher.

I'm thinking of $12.50+ as a prudent target under this scenario.

Actionable Call Alert!

Roth Capital is initiating Cyclacel Pharma (NASDAQ:CYCC) with a Buy and $7 target saying 2010 is the "Pivotal" Time for Sapacitabine and Cyclacel

Investment Case
What’s the play here? Cyclacel is now on the verge of becoming a pivotal stage biotechnology company. Its lead product, sapacitabine is in clinical development for several oncology indications. However, its primary focus is on hematological oncology. At the end of 2009 at the ASH conference, the drug delivered positive Phase II data in elderly AML patients, specifically encouraging response data, a favorable safety profile and importantly, encouraging one year survival data. When these three important clinical endpoints are taken together, Roth believes the profile for sapacitabine in treating AML patients is such that this could be a drug that physicians could administer chronically. This is in contrast to agents currently used to treat AML, which can elicit a high rate of remission. However they are associated with high rates of relapse and importantly high rates of 30-day all cause mortality. Subsequent to ASH in December, Cyclacel met with the FDA to discuss the plans and potential design of the sapacitabine pivotal trial program. In 2010, Cyclacel is expected to file a Special Protocol Assessment (SPA) and begin the pivotal study in mid-2010 potentially followed by a pivotal study in MDS patients.

Key Investment Drivers

- Lead sapacitabine program to enter pivotal studies in 2010. Sapacitabine is being developed primarily for hematological cancers and has completed a Phase II study in AML and is in an ongoing Phase II for MDS patients. Cyclacel is expected file for an SPA shortly with the FDA for an AML pivotal study expected to start in 2010. Recent positive Phase II data in elderly AML patients showed encouraging 1 year survival up to 35%, overall response rates up to 45% and low rates of all-cause mortality, which is common in older patients.

- Unmet medical need in elderly AML for potentially differentiated product. AML is generally a disease of older individuals and there is still an unmet medical need for new therapies. Sapacitabine can offer up not only encouraging efficacy to elderly patients, but a favorable safety profile. Additionally, the profile of the drug is such that patients could receive the drug chronically, which is generally not possible with current therapies. The goal of current drugs is to quickly induce remissions. However, especially in older patients, many of these remissions do not last and the safety profiles are not especially favorable to the patient. Following relapse there are none to few therapeutic options. Sapacitabine could offer a new alternative in being able to not only treat first line patients, but also could have the ability to treat relapse patients as well as be a maintenance therapy over the longer term.

- Stock-driving catalysts in 2010. News flow across Cyclacel’s programs should help to drive the stock in 2010 (highlighted below). Roth believes the receipt of an SPA by the FDA for the AML pivotal program will be viewed positively by the Street. Cyclacel has taken the right steps, in firm's belief, to capitalize on the missteps of others (e.g. Genzyme) in working hand in hand with the FDA to design and institute a proper randomized study for AML patients in order to bring sapacitabine to commercialization.

- Partnering potential. Based on sapacitabine’s differentiated profile potential in treating several tumor types, they believe a partner could be interested in having sapacitabine as part of its portfolio. To this end, Roth believes Cyclacel is actively engaged in partnering discussions for the compound. While it is difficult to predict timing of such an event, they do believe that a partnering catalyst would provide a significant stock catalyst, possibly in 2010.

- Long term pipeline growth. Sapacitabine is currently the primary value driver for Cyclacel. Roth sees long term potential for this product, not only for the lead AML program, but also for MDS patients as well as the significant potential of moving further into solid tumor development. Following sapacitabine is seliciclib, which is in Phase II development for NSCLC and NPC and the company’s aurora kinase program, which over the longer term could provide upside potential based on clinical trial progress. Additionally, they look to further efforts by Cyclacel to move into programs beyond oncology based on its expertise in cell cycle inhibition.

Notablecalls: This is a fairly interesting call from Roth Capital's Joseph Pantginis, PhD as he is among the first to pick up coverage on this small-cap momo biotech. As with most of the stuff in this field (and I guess life in general), there's a reason behind it.

Back in January CYCC used the sudden spike in its share price to raise additional capital and guess what?

(What?)

Roth served as the sole placement agent for the offering.

I know this looks a bit suspicious suggesting Roth got the deal by promising to pick up coverage on the name (pref. with a Buy & a high target) but...

(What? What?)

I gotta hand it to Roth for not initiating CYCC ahead of the offering as many of the other firms do, but rather after the capital raise. It was the semi-ethical thing to do and they pulled it off.

After reading the full note (all 18 pages of it), I must say I'm somewhat impressed with the quality of work Pantginis has put into it. It's definitely not your typical small-cap bio hype one gets from small firms but a rather sensible overview of the company.

Make sure you read it if you can get your hands on the full note.

I think CYCC can trade towards the $2.50 level today, with higher levels not out of the question if the market holds. This one's a mover.

Citigroup is making a big call on Lexmark (NYSE:LXK) adding the stock to their Top Picks Live list with a whopping $52 price target (prev. $41).

Firm notes that LXK moves to CIRA's conviction Buy list for three reasons. First, they do not believe 2010 consensus EPS ests reflect 1) the margin leverage associated with a cyclical improvement in laser printer/supplies demand, 2) the margin benefit assoc with the ramp of the new inkjet architecture intro’d in 9/09, or 3) mgmt’s plans to reduce op ex by a further 3-5% this year. Second, the shares are extremely inexpensive on both P/E (<6X FY10 operating EPS excl $6 in net cash) and DCF. Third, the shares are not widely owned; indeed, the current short interest represents more than 4 days of avg daily volume.

Cyclical and Structural Margin Boosters — In addition to a cyclical rebound in laser margins during 2010, there are several structural margin boosters. First, the co’s new inkjet architecture, intro’d in Sept 2009, reduces lifetime manufacturing cost for LXK while giving the co access to higher-usage customers. Second, LXK continues to move R&D and back-office to lower cost locations.

These factors drive Citi's revised 2010 EPS of $4.01 (+23% yoy) and 2011 EPS of $4.62 (+15% yoy), both of which are well above consensus. Moreover, they consider their estimates conservative on a number of fronts. For example, they are modeling inkjet operating margins down yoy in both FY10 and FY11 despite the cost benefits associated with the move to an entirely new architecture (specifically, a 4-5X reduction in print head costs over the life of the printer). In addition, Citi is not modeling laser margins back to past-cycle-peak through 2012.

Per Figure 1 below, LXK’s first yoy hardware growth in 4Q09 since 1Q05 bodes well for further share price appreciation as hardware placements lead to highly profitable supplies’ revenue in the future. LXK’s share price and hardware yoy revenue growth are highly correlated (correlation 0.82).


Second, Citi considers valuation very compelling, even after Tuesday’s (Feb. 2) 12% rise.
- LXK shares currently trade at 7.5X Citigroup's FY10 EPS estimate, just two multiple points above last year’s all-time low and well below the peers and the market. Excluding net cash from the share price and interest income from EPS, the shares trade at less than 6X Citi's FY10 EPS estimate.

- Free cash flow yield was an impressive 9% in FY09 and their modeling suggests a yield of 15% in FY10. A DCF analysis assuming 0% perpetual growth in FY12 free cash flow suggests a $70-80 fair value one year from now.

Finally, LXK shares are not widely owned, but they are widely shorted.
- By Citi's count, ten of the largest U.S.-based mutual funds were not top twenty holders of LXK shares as of September 30, 2009. Value fund representation within the top twenty is also surprisingly low. They expect this to change in coming quarters as it becomes clear that there is not only cyclical, but also structural improvement in margins underway.

- Shorter-term, the current short interest in LXK shares represents a more than 4 days of average trading volume. As a result, upside to 1H10 EPS could drive a significant short squeeze.

Citi is raising their FY10 revenue and non-GAAP EPS estimates to $4.1B (+6% yoy) and $4.01 (+23% yoy) from $3.9B and $3.28.

They are raising their FY11 revenue and non-GAAP EPS estimates to $4.4B (+7% yoy) and $4.62 (+15% yoy) from $4.1B and $3.94.

Firm is also introducing their FY12 revenue estimate of $4.7B (+6% yoy) and non-GAAP EPS estimate of $5.07 (+10% yoy).

Notablecalls: Wow - Lexmark (LXK) has come back to life! Citigroup's $52 price target is the new Street high with their EPS estimates for 2010-2010 towering consensus.

Lexmark has gone through major restructuring over the past couple years, pushing down the cost base which is enabling them to post strong bottom line numbers.

It also looks like the product line is getting a boost in the n-t.

Note how Citigroup hints LXK may be worth $70-80 per share in couple of years. This is bound to attract buyers. Short interest stands at 10% which isn't too big but still meaningful.

I think LXK can really explode when it gets past the $31 level.

Citigroup is out downgrading Lubrizol (NYSE:LZ) to Sell from Hold whole lowering their target to $67 (prev. $78).

Citi notes there was a new data point in lubricants that came out on Friday from NewMarket, one of Lubrizol’s main competitors. NewMarket’s lubricant additives margins dropped sequentially from 23.3% in 3Q’09 to 16.4% in 4Q’09 as raw material base oil prices went up faster than lubricant additive prices. They think this is the first crack in the lubricant industry. Lubrizol’s Lube Additive margins had skyrocketed from a historical average of ~12% to ~28% in both 2Q and 3Q 2009. They are downgrading LZ despite the 7% drop in the stock on Friday for three key reasons:

- Firm notes they have seen similar examples of margin erosion in other chemical products such as Monsanto’s Roundup and the fertilizer potash. In both these products, margins skyrocketed after having been stable for several years. In the case of Roundup, the Chinese entered the market and crushed margins in 2009. Recently in potash, the oligopoly structure did not hold up well, dragging down profitability. The reasons may be different in each case, but the outcome was the same.

Lubrizol’s lubricant margins hovered between 11%-13% for most of the decade before moving higher in 2009. The reason for the margin expansion was that raw material base oil prices collapsed in 2009, while final lubricant prices did not fall as much. As a result, there was an unprecedented margin expansion, when margins reached 28% in 2Q’09 and 3Q’09. Lubrizol may post good results in 4Q’09 when it reports on Thursday (2/4), but NewMarket’s results have shown the vulnerability of these margins to higher raw material costs. Can lubricant prices go up from here even if they did not go down in the recession? Citi thinks there could be pushback from customers such as engine oil and other lubricant manufacturers, quick lube chains, retailers such as AutoZone and Wal-Mart, or OEM players in the automotive and construction industry.

Given that Valvoline is one step downstream from Lubrizol, the firm expect its margins to be a leading indicator for LZ. Valvoline’s margins peaked in 2Q’09 and have declined for the last two quarters. NewMarket’s margins peaked in 3Q’09 and declined from there, roughly one quarter behind Valvoline. Firm expects Lubrizol to broadly follow the same pattern in the long run. LZ may post a good 4Q due to its cost cutting initiatives, but Citi's call today is not about the fourth quarter; it is more about the next 12-24 months.

- Citi thinks high operating margins of 28% could attract new investments by existing producers or new players to the industry. Lubrizol has already announced a new $1B capital program over the next 10 years to upgrade existing operations and to build capacity in additives. The centerpiece of the initiative is a greenfield expansion which involves an investment of over $200 mm over the next three years in building a new plant in Southern China. Lubrizol plans to break ground in late 2010 and would likely export products throughout Asia. Citi notes they wouldn’t be surprised if Chinese oil companies or others enter this business given attractive margins and China’s growing passenger car market and industrial lubricant needs.

- Citi is lowering their Lube Additives margin assumption from 23.5% in 2009 to 18.5% in 2010 and 16% in 2011. Our long-term margin assumption of 16% is higher than Lubrizol’s historical margin range of 11%-13%. A 1% change in Lube Additives margin impacts EPS by roughly 40¢/share, so there is significant sensitivity to Lube Additives profitability. Firm estimates that the Lubricant Additives segment accounted for ~85% of total company profit in 2009, while historically the segment was 60%-70% of total profit.

Firm is lowering their earnings estimates for 2010 (by $0.23 to $6.74) and 2011 (by $1.27 to $6.07) to account for lower operating margins in the Lubricant Additives business.

Notablecalls: This is a substantial call from Citi's Specialty Chemicals team as it highlights a potentially significant future margin cliff.

The stock has been a kind of an analyst darling of late and with Citi turning a cold shoulder, there will be more sellers today.

I'm not saying shorting LZ today will be easy. It was down 7pts on Friday & will have #'s out this week that are expected to be 'OK'. Plus, the futures are firmly in the green this morning.

But all in all, I foresee up to 3pts of downside in the name. I don't see it piercing the $70 level but it will likely come close.

Raising Estimates — CSFB is increasing their fourth quarter 2009 EPS estimate by $0.20 to $1.00, bringing their full-year estimate to $0.78. More importantly, the firm is moving their 2010 EPS estimate to a Street-high $5.00 from $2.80. Their 2010 estimate still assumes some correction in pulp prices (from announced February levels), and that only about half of the current $40/ton uncoated free sheet price increase sticks. CSFB notes their estimates could prove conservative (again) without a pulp-price correction in 2010.

Focus on Free Cash — CSFB now sees 2010 free cash flow of about $16 per share, on top of an estimated $14 in 2009. About 35% of these two years' massive free cash generation is from the alternative fuels mixture ("black liquor") credits generated during 2009 (and collected over both years). Beyond 2010, aided by high DD&A, they see free cash flow exceeding earnings by $2-$6 per share, depending on capital spending levels.

Net Debt Evaporating — At the time of the 2007 Weyerhaeuser uncoated free sheet business deal three years ago, Domtar's net debt was $58 per share and the stock reached $138/share, making Domtar's enterprise value over $190/share. At the end of 2009, the firm estimates that net debt per share was down to $1.175 billion ($27/share), net of the estimated $300 million tax credit receivable. By the end of 2010, they estimate net debt will be down to a mere $800 million ($18.50/share), even with an assumed jump in capital spending to $240 million. At Friday's $48.57 per share closing price, Domtar's estimated year-end enterprise value would be a mere $67/share – 65% below the 2007 peak even though the company is in far better shape!

CSFB points out that the nearly $40/share in free cash generation they see over the three year 2009-2011 period equals 80% of the current stock price!

Raising target by $10, to $80 — Based on Domtar's strong free cash flows and lower-risk profile, CSFB is raising their one-year target price by $10, to $80.

Domtar has about 6 million tons of North American pulp capacity, about 80% of which is softwood. CSFB believes almost all of the company's pulp capacity is globally competitive since they see no other region in the world is in a position to impact North American softwood pulp producers' competitive position.

Currently, Domtar processes most of its pulp to be sold in the form of uncoated free sheet paper. However, as evidenced by the recently-announced project to convert the Plymouth, NC mill, the company seems to be gradually shifting this pulp production away from the uncoated free sheet business (which is facing secular decline in the US) and into fastgrowing pulps, such as fluff pulp used for absorbency in disposable diapers and feminine care products.

Credit Suisse believes some investors still believe that Domtar is tied forever to a "dying business," -- uncoated free sheet. They do not see uncoated free sheet (office copy paper, envelopes, etc.) as a dying business -- just one that will see modest (2%-3%) annual declines on a secular basis. Firm sees operating rates rising in 2010 and 2011 as cyclical demand forces should counterbalance secular demand these years. In addition, they see Domtar maintaining most of its asset footprint as it may continue, if necessary, to convert more of the "finished products" from its pulp mills into specialty pulps and away from uncoated free sheet paper.

Reiterates Outperform.

Notablecalls: This looks like a fairly significant call from Credit Suisse's Paper Products team. Note their 2010 EPS estimate is now the new Street high and stands (or should I say towers) 62% above consensus.

On the trading dynamics side the stock is down 10pts from its recent highs and is set to report earnings on Feb 4 before market. CSFB is calling for good #'s & is telling people to buy ahead of the release. This shows they have strong conviction in the name. Don't think it goes unnoticed.

The stock is a mover, as evidenced by the ~10% move back in November when J.P. Morgan bumped their rating and estimates.

I do have to note we are in a different kind of market vs. November but I expect the call to attract buyers nonetheless.

It's quite difficult to give a specific range but I suspect that if they get it moving UFS can do $51.50 with $52.50 certainly not out of the question.