Wednesday, March 31, 2010

Louisiana-Pacific (NYSE:LPX): Actionable Call Alert!

Credit Suisse is making a major call on Louisiana-Pacific (NYSE:LPX) upping their target to $14 (prev. $11), reiterating Outperform rating and most importantly raising their EPS estimates way above consensus.

Firm notes the price of benchmark (North Central 7/16") oriented strand board (OSB) has jumped 25% since December, rising almost twice its normal seasonal rate through the first quarter. OSB stood at $248 per thousand square feet (msf) at the end of last week, up 70% from $146/msf exactly one year ago. This $248 level is the highest OSB price seen since the second quarter of 2006 – when LPX earned $0.52 per share.

- CSFB estimates that the OSB industry lost EBITDA virtually continuously from the fourth quarter of 2006 until this quarter – or for more than three years! Over 30% of North American structural panels (plywood and OSB) capacity has been closed since -- but this misses the point. Much of the remaining capacity cannot "run full" as major elements of the supply chain – from "lumberjacks" cutting trees to trucks hauling finished products to wholesalers/distributors -- have been destroyed across North America. As seen in the 2003-05 OSB price recovery, it takes years for industry players to “believe” the upturn, as seasonal crosscurrents can prove confusing.

They believe the current rally, despite the still-weak housing start environment, is a result of the collateral damage to the supply chain during this "Great Recession." No doubt also that inventories across the remaining supply chain have been cut to the bone. In addition, the firm believes that repair and renovation activity has bounced back enough to create a bit better demand than last year at this time.

They highlight the weekly average OSB price going back 10 years, and compare these prices to annual housing starts. Firm notes that OSB prices have jumped more than average in the first quarter of 2010 despite the continued-weak housing starts.

Specific Product Price/EPS Estimate Changes
As a result of the surprising strength of the first quarter wood products rally, and CSFB's assumption that demand will gradually (and not just suddenly) improve over the next several years (as demographic realities kick in), they are increasing their wood products pricing forecast. In addition, the firm is increasing their EPS forecast for LPX at this time -- though they note that higher pricing forecasts for wood products will benefit a number of other companies.

The Street Sleeps: 2003 All Over Again?
CSFB notes that even before they raised their estimates on Louisiana-Pacific, they had by far the highest 2011 EPS estimates on the Street – so high that they are not included in the consensus calculations! Well, if they had a problem before, they’ll have an even bigger one now. However, for those of you who watched CSFB's coverage of the wood products industry from TriBeCa during the early days of the 2003-05 wood products pricing upcycle, you will know that they will not wait for the pack! Simply, all they are doing is assuming that current prices are sustainable, not just a one-shot rally in a never-ending depression. We will enter 2011 after the three lowest housing starts years in half a century and with net household formations at or near a record level. Please note that CSFB's new 2013 peak projection for LPX is “just” $2.25/share – about half the EPS produced at the last peak (which is consistent with LPX having a better balance sheet in 2013, offset by 30% more diluted shares and 40% lower peak operating margins in OSB). In other words, they are not looking at a “pie in the sky” scenario by any stretch!

Louisiana-Pacific has huge leverage to OSB pricing, with a $25/msf change having a $0.35/share EPS impact with "depressed" production levels (as seen since 2008) and a $0.45-$0.55/share impact under more "normal" production levels

Notablecalls: Actionable Call alert! Actionable Call alert! Actionable Call alert!

Just take a look at Credit Suisse's EPS estimates for 2010 & especially the outer years. And these guys have seen it all before.

If CSFB is right with their "just" 2.25/share EPS estimate for 2013, you're looking at a double-to-triple ($18 to $24 per share) share price by mid-2011. I suspect every U.S. based fund manager will be telling their analysts to start looking at the space after today.

I'm guessing LPX will trade up today to the tune of 6-9%+, putting $9.50+ level possibly in play. Note that there is a 12% short interest in the name.

I'm really-really hoping for a decent entry right after open so everyone can get size before price escapes to the upside.

Note that Barclays is also out positive on the space this morning boosting EPS for timber and wood product rich companies such as WY, LPX, RYN, and PCL. They believe the risk to their above consensus estimates remains to the upside.

Tuesday, March 30, 2010

eHealth (NASDAQ:EHTH): We would, if we could - Oppenheimer

Oppenheimer is pressing their negative bet on eHealth (NASDAQ:EHTH) the internet-based insurance agency services provider, this morning.

Firm notes they can't downgrade eHealth, because they already have an Underperform on it, but they would if they could. The market has totally misinterpreted the impact of health reform on eHealth's business, in their view, specifically, the 20% cap on administrative costs and profits in the individual business that takes effect on January 1, 2011. Today, broker commissions alone account for 10-15% of individual premiums, so starting next year, health plans will have to significantly reduce the commissions offered to brokers in order to remain in compliance with the new regulation.

- This is not just a theory on their part, Opco notes. They have spoken with several of the biggest individual insurers, including some of eHealth's largest customers, and there is unanimous agreement that the cap on administrative costs and profits will cause broker commissions to fall.

- Rarely do they have such conviction in an idea, particularly when the potential downside is so significant. Opco thinks commissions will fall 30% or more next year, and they're cutting their 2011 EPS projection by over 35% (a $0.25 reduction, to $0.45). Opco's PT falls to $12, almost 30% lower than current levels, from $14.

- Opco's sense is that while no insurer wants to be the first to cut commissions, once the first step is made, other plans will very quickly follow suit. The cuts will have to start fairly soon, since commission rates are generally established when the individual policy is first sold.

- In other words, an individual policy sold today at the current commission structure will have to continue paying that same high commission in the first quarter of next year, as well as a steeper renewal commission, which will make it more difficult for plans to abide by the 20% cap on administrative cost and profits.

- Therefore, the full hit to eHealth will take a few years to completely phase-in, since the company will continue to receive above average renewal commissions. But this means earnings at the company could be down in 2012, too.

Notablecalls: I guess Oppenheimer's Healthcare/Managed Care & Other Healthcare Services team deserves extra credit for their conviction.


Monday, March 29, 2010

Independents’ Day for natural gas: Street too bearish, upgrade E&Ps to Attractive - Goldman Sachs

Some of the E&P stocks will be on fire today as Goldman Sachs upgrades the whole sector to Attractive from Neutral, upgrades Southwestern Energy (NYSE:SWN) to a Conviciton Buy and RBC Capital upgrades EOG Resources (NYSE:EOG) to Outperform.

- Goldman Sachs upgrades the E&P sector to Attractive from Neutral as: 1) they believe natural gas prices are near bottom; 2) they remain positive on oil prices; and 3) E&P stocks reflect below $5.50/MMBtu long-term natural gas prices at $80/bbl WTI oil which they view as unsustainable. Firm sees 28% upside to their 6-month DCF- and multiples-based target prices, (some of which are revised), which reflect their 4Q 2010 $6/MMBtu Henry Hub natural gas view (below their mid-cycle) and lower 2010/11 price forecasts and earnings estimates.

While the Street tends to become very cautious on natural gas during the shoulder months, sharp pullbacks in E&P equities have historically been more prevalent during fall than spring. Goldman notes they have identified only two spring shoulder months during the last 13 years (2005 and 2006) versus six fall shoulder month corrections. Arguably, the current contraction counts as a third. While past performance is no indicator of future results, they believe if spring shoulder month fears such as LNG and a continued strong rig count subside there is room for E&P stocks to rise.

* Goldman upgrades Southwestern Energy (NYSE:SWN) to Buy from Neutral and add shares to the Americas Conviction Buy List with 42% return potential to a revised $54 6-month DCF and multiples based target price. They believe recent underperformance (-18% versus coverage over the last 3 months), largely on concerns regarding minimal 2010 hedging, negative free cash flow at lower gas prices and neutral commentary on Fayetteville Shale downspacing, provides a compelling entry point for the shares. They expect shares to outperform as gas prices and sentiment improve, likely reducing cash flow concerns and allowing investors to refocus on Southwestern’s high quality asset base, above average growth/returns and upcoming resource catalysts in the Fayetteville, Marcellus, and Haynesville/Bossier shales.

Maintain CL-Buy on XCO, Buys on UPL, DVN, NFX, EOG and STR
Among gassy growth E&Ps, EXCO Resources remains CL-Buy and Ultra Petroleum remains Buy. Among companies with underappreciated oil upside, they continue to rate Devon Energy, Newfield Exploration and EOG Resources Buy. Goldman rates Questar Buy for restructuring potential.

- RBC Capital's Leo Mariani upgrades EOG Resources (NYSE:EOG) to Outperform from Sector Perform and raises his target to $130 (prev. $112).

Firm notes EOG is a best-in-class operator, and they expect EOG to "open the kimono" on new oil resource plays in the DJ Basin (Niobrara) and the Eagle Ford Shale at its April 7th Analyst Day. They suspect EOG has several hundred thousand acres in each play, and these should add significant value to the Company. Firm also suspects that EOG is active with a European shale gas play and other North American horizontal plays, which
could further augment value.

EOG Is Transforming Into A More Oily Company & Growth Is Accelerating. RBC forecasts organic production growth of 12% in 2010 and 20% in 2011, which includes liquids growth of 48% in 2010 and 45% in 2011 and North American natural gas growth of 2% in 2010 and 10% in 2011. Their forecast implies that oil/liquids production will increase from 24% of production during 4Q09 to 32% by 4Q10 and 37% by 4Q11.

EOG Has A Solid Balance Sheet, Which RBC Believes Can Withstand Lower Natural Gas Prices. EOG has not released 2010 CapEx but they expect it may outspend cash flow by 15-20%. Firm forecasts 2010 discretionary cash flow of $3.8 billion vs 2010 CapEx of $4.5 billion. However, EOG has an undrawn $1.0 billion revolver and over $600 million in cash, and they expect it to maintain sufficient cushion on its revolver.

Upgrading To Outperform; Stock Is Cheap To Its Peers. RBC values EOG's proved and low-risk probable reserves at $153/share using $6.50 gas/$85 oil. Their $130 price target is based on a 15% discount to NAV. EOG is discounting roughly $5.00/Mcf natural and $85/Bbl oil, which is now about 5-8% cheap to its large-cap peers.

Notablecalls: First, SWN - with Goldman Sachs turning moderately positive on Natural gas & related equities, the Street will take notice. Not only will they take notice, they will buy into this call as Goldman is still considered as one of the most influential names in the commodity space. Shorts will likely feel the need to cover.

I suspect SWN will trade towards the $40 level today & I would definitely not rule out higher levels ($41's). I also suspect SWN will see even higher levels in the coming weeks.

Second, EOG - RBC highlights upcoming potentially major catalysts & raises target to $130. I'm guessing EOG will see $92.50 level today. The Goldman sector upgrade will surely help.

Hell, why not buy CHK & HK here or even UNG?

Friday, March 26, 2010

Apple (NASDAQ:AAPL): Credit Suisse raises target to $300, calls for a Monster quarter

Credit Suisse is making a major call on Apple (NASDAQ:AAPL) raising their target to $300 (prev. $275) and reiterates Outperform rating. The firm is calling for a Monster quarter...

As we approach the end of Apple’s March quarter, CSFB believes it is now clear the company is running well ahead of our previous expectations and consensus, and they are raising estimates as a result. While upside is often the norm for Apple, the firm notes they are still surprised by the current strength as they believe Apple is now running well ahead of expectations in all of its key business segments during what is typically a seasonally “sloppy” quarter. Overall, they are increasing their March quarter revenue and EPS estimates to $12.26 billion and $2.57 from $11.45 billion and $2.27, respectively. To put this in perspective, the March quarter typically represents Apple’s seasonal nadir, and their estimates would imply the March quarter of 2010 would be the second strongest quarter in company history (including seasonally strong December quarters). In addition, this upside flows into firm's full year forecast. They are now looking for fiscal 2010 revenues and EPS of $56.49 billion and $12.53 versus their previous $54.4 billion and $11.83, respectively. On a calendar basis, they expect respective revenues and EPS of $59.43 billion and $13.23 for 2010. For fiscal 2011, the firm is now looking for respective revenues and EPS of $65.34 billion and $14.55, versus $62.31 billion and $13.64 previously. For calendar 2011, they are now expecting revenues and EPS of $66.32 billion and $14.72, respectively. Firm notes the following key takeaways from their revisions:

iPad: The Good News Starts Streaming In
The iPad isn’t out yet, but CSFB feels comfortable removing some conservatism from the model. When the iPad was launched they introduced a fairly conservative unit forecast for the device, but they noted their high-40s gross margin estimate was higher than most of their peers were modeling. Their gross margin estimates remain essentially unchanged, but solid pre-order momentum is pushing them to increase their unit forecast. For the June quarter, the firm is now looking for 1.08 million units versus 650 thousand previously. For calendar 2010 they are now looking for 4.81 million units, versus their previous forecast for 3.93 million units. For calendar 2011, they are looking for 8.73 million units, versus 7.9 million previously.

iPhone: International Expansion Is the Key Driver
International momentum for the iPhone is likely to drive upside. While CSFB believes the iPhone continues to perform well in the United States, they believe much of the incremental share gains and upside will come from international markets in the March quarter and throughout 2010. They are raising their March quarter iPhone unit estimate to 7.41 million units, from 6.54 million previously. For calendar 2010, they are now looking for 40.65 million units, versus 39.11 million units previously. And for calendar 2011, the firm is now looking for 52.36 million units, up from 50.18 million units previously.

Macs: Hefty Share Gains to Continue
CSFB's Mac estimates were already optimistic, so they are making only modest revisions today. Recent data from NPD suggest that Mac units grew by 38.3% in the U.S. retail segment for the first two months of the year.

iPod: The “Forgotten Segment” Is Surprisingly Robust
CSFB notes very little investor focus on the iPod segment, as many have already assumed this business is facing irreversible secular decline. Indeed, this has been their line of thinking as well, particularly with the likely long-term cannibalization from the iPhone and iPad business segments. Nevertheless, the App Store continues to breathe new life into this category, and into the Touch product family in particular. Indeed, NPD data suggest that iPod units grew by an average rate of 4.9% in January and February, whereas they had been forecasting a 15.4% decline for the full quarter. As such, they are raising their March quarter iPod estimates to 11.0 million units, from 9.32 million units previously.

The firm notes they are now 8.9% ahead of consensus EPS for the quarter and 7.5% ahead of fiscal 2010 consensus. We suspect consensus expectations will trend upward in coming weeks, but Apple still has plenty of room for a sharp upside surprise when it reports results next month. In their view, this surprising momentum in fundamentals and the potential for a very successful iPad launch next week bode well for the stock’s near-term momentum. Apple is currently trading at 17.1 times CSFB calendar 2010 EPS estimate, and ex-cash (assuming a 3% interest rate) the multiple stands at 15.1 times. This compares favorably to the historical five year average of 24.7 times.

Notablecalls: So this is the first tier-1 firm to institute a $300 target for Apple (Pacific Crest, or whatever it's called these days put out a report with a similar target back in Jan but who cares about Pacs, right).

CSFB is calling for a monster quarter which should lead to strong buy interest in the name.

Note that J.P. Morgan is upgrading Research in Motion (NASDAQ:RIMM) this morning (to OW, 84tgt) with Merrill Lynch/BAM & RBC calling for a strong quarter. This should add fuel to the fire. Hell, even Nokia (NYSE:NOK) gets an upgrade from JPM this morning. The whole mobile internet space is red-hot.

I suspect AAPL will take out its $231 high today with $233-234 levels not out of question if the market plays ball.

It's quarter end, remember.

Thursday, March 25, 2010

Genzyme (NASDAQ:GENZ): Downgraded to Underweight at J.P. Morgan

Genzyme (NASDAQ:GENZ) is getting some really negative tier-1 commentary this morning following yesterday’s announcement of an impending consent decree for the Allston manufacturing facility:

- J.P. Morgan is downgrading GENZ to Underweight from Neutral and lowering their target to $45 (prev. $55) saying this is a a materially negative development, and we find it highly unlikely that a company with a multi-year history of manufacturing non-compliance (that has resulted in a consent decree) can quickly resolve the issues at hand. On the surface, the fact that the Allston plant remains open and Cerezyme/Fabrazyme supply is not expected to be disrupted is a positive. That said, supply disruption is very often associated with consent decrees, and unconditional resolution of the Allston manufacturing issues could require significant facility changes and limitations on supply. In addition, they think that management changes or actions by activist shareholders would be unlikely to quickly alter the course of the consent decree or add near-term value. As a result of the manufacturing uncertainty, JPM is lowering their revenue forecasts by 2-3%, raising their COGS and SG&A expenses significantly, and lowering 2010-2012 non GAAP EPS by $0.85, $0.45 and $0.30 to $2.00, $3.50 and $4.15 respectively.

Characterization of FDA dialogue has been overly optimistic. On its 4Q09 earnings call, Genzyme was “on track with its commitments to the 483 observations.” Yet, just over one month later, a consent decree is issued. Looking back to the fall of 2009, Genzyme noted that the new manufacturing processes and methods following the vesivirus contamination are “not expected to be a risk” but less than a month later, a 49-item Form 483 emerged with citations that included protocol development for vesivirus contamination. Hence, the firm is cautious that the there is “no expectation” of a supply disruption for Cerezyme and Fabrazyme especially when the 10K cites the following: “If a consent decree were imposed, we would incur substantial additional expenses and may not be able to produce some or all of our products.” Hence, when Genzyme paints a fairly optimistic picture for a very serious problem like a consent decree, JPM thinks skepticism is warranted.

- Morgan Stanley is reiterating their Underweight rating and $48 target price noting that the market is underestimating the financial impact from the impending consent decree.

Genzyme has a significant fixed cost base (~$2.4 bn in op ex plus >$650 mn+ in cap ex), and using Abbot’s previous agreement as a guide, they believe a reasonable base case is that FDA asks for 15-25% of gross profits from the Allston plant until the consent decree is resolved (could be higher). While some investors may cheer that the company’s hobbled balanced sheet and cash flows likely prevent additional product or company acquisitions, Street estimates need to come down significantly and MSCO now believes EPS will be <$2.00 in 2010; <$3.00 in 2011, and <$4.00 in 2012 (versus consensus of $3.08, $4.23, and $5.11,respectively). The stock is not yet out of the woods, and they see ongoing risk of underperformance. - Goldman Sachs maintains their Sell rating on the name as they believe the news could result in a substantial one-time fee, and create more uncertainty over profits for 2010-11.

1) One-time payment could exceed $300 mn. Assuming the FDA bases the profit disgorgement on US sales in 2009, we estimate $325 mn in profits could be at risk, with downside risk if FDA seeks profits on earlier years (unlikely, in GSCO's view).

2) Future profit disgorgement may reduce 2010/11 EPS by $0.70 (25%) and $0.81 (20%), resp. GSCO assumes that only profits on sales of Cerezyme and Fabrazyme in the US would be at risk, with downside risk if the FDA
seeks profits on worldwide sales (unlikely, in their view).

3) Downside risk on higher costs. Remediation steps could lower margins; for every 1% fall in operating margin, they estimate costs would increase by $50 mn and EPS would fall by $0.14.

4) Little impact on Lumizyme approval, continue to expect delays. As Lumizyme is not produced at Allston and Genzyme did not intend to produce product at the 2,000L scale in Allston, GSCO believes the consent decree may have little impact on the timing of Lumizyme approval. However, they continue to expect delayed approval to 2011 on more data requirements.

5) Cut 2010 EPS. GSCO says they have eliminated Thyrogen sales for 2Q2010 (but no profit disgorgement or other fees), resulting in a reduction in their 2010E EPS (ex-ESO) to $2.73 from $2.83. There is no change to their 2011-12E EPS (ex-ESO) of $4.07 and $4.67, respectively.

Notablecalls: It surely looks like GENZ is going to see another wave of selling today as J.P. Morgan throws in the towel & other tier-1 firms reiterate their negative stances on the name.

There is no short interest to speak of (sub 3%) which kind of means the general market has been neutral-to-positive on the name. This is probably due to the fact people don't want to bet against Carl Icahn, the activist shareholder in GENZ.

I think some investors have lost their faith & patience in the name and will look to dump the stock before it goes back to it's December lows.

I would not be surprised to see GENZ trade down to $53.50 level today and possibly even lower.

PS: Actor Shia LaBeouf appears to be taking his role as Gordon Gekko's protégé in the upcoming "Wall Street" movie a little too seriously. - NYT


Tuesday, March 23, 2010

Saks (NYSE:SKS): Gator Boots & Gucci Suits, Upgrade to Overweight - J.P. Morgan

J.P. Morgan is upgrading Saks (NYSE:SKS) to Overweight from Neutral boosting their 2010 price target to $11 from $7, implying ~26% upside from current levels.

Firm notes that following a recent meeting with CEO Steve Sadove, they’d be comfortable owning the stock today from both a sentiment and fundamental perspective. From a sentiment standpoint, SKS stands out as the least loved name in our coverage group with the highest short interest ratio (37.4% of the float) and percentage of sell-side Underweight ratings (33.3%). On fundamentals, the combination of 1) sales momentum (3 consecutive months of positive SSS), 2) the easiest top-line compares in JPM universe (-20.4% SSS average over next 6 months), 3) opportunities to reach a new peak GPM, 4) expense/ inventory/capital discipline, and 5) a solid FCF profile are all attractive attributes.

Turning to their model, JPM is significantly raising their FY10 EPS and FY11 EPS estimates – to ($0.06) and $0.20, respectively, from ($0.19) and ($0.09) previously. Importantly, their FY11 EPS forecast is 2x current Bloomberg consensus and would represent the company’s first fiscal year of profitability in four years. JPM's increased confidence reflects management’s re-focus on improving store productivity vs. peers and a return to its previous MSD operating margin level. In the near term, recent channel checks suggest luxury retailers continue to see augmented basket sizes and sharp improvements in traffic trends, and they are increasing their March SSS estimate 200 bps to 8.0% (ahead of consensus of 5.7%) accordingly. Last, on valuation JPM's $11 price target reflects a 9.5x EV/EBITDA multiple, an appropriate discount to its historical multiple of 17.3x, in firm's view.

Least loved stock in the group. Saks stands out as the least loved name within JPM coverage group, which they love to fade, particularly when a company’s topline is reaching a positive inflection point. Three supporting facts worth noting: 1) SKS has the highest percent of sell ratings within their entire Broadline & Food coverage group at 33.0% (vs. the 7.5% coverage group average); 2) SKS is the least recommended stock within the department store space at only 33.3% buy ratings (52.7% average); and 3) SKS also has the highest short interest ratio in JPM coverage group at 28.6% of total shares outstanding at the middle of February, which compares to a 7.5% average across their universe. As a percent of the float, short interest is even higher, standing at approximately 37.4%.

Near-term outlook remains bright... but longer term opportunities are most intriguing. While the company’s stock run to date has reflected its ability to weather the recession and avoid bankruptcy, they believe further appreciation is likely as investors gain further understanding that Saks has emerged as a stronger company, in firm's view, with i) a lowered cost structure, ii) stabilized balance sheet, and iii) significant long-term opportunities ahead.

To this end, JPM notes they walked away from their recent meeting with SKS management most impressed about the company's focus on returning to its previous (2007) mid-single-digit operating margin levels.

JPM believes the company has 5 specific catalysts ahead:

LT Catalyst #1: At the beginning of the runway toward sales per sq. ft. goals.

LT Catalyst #2: Internet and Off 5th are growth channels.

LT Catalyst #3: New peak in GPM by 2012.

LT Catalyst #4: $100 million of fixed cost taken out of structure is permanent.

LT Catalyst #5: FCF flexibility as capital spending will stay at moderated.

Notablecalls: Retail is red-hot and Saks is going to be its poster boy today. You can almost hear the shorts screaming every time the Retail Holdrs (RTH) moves up another 1/4 pt. The move doesn't seem to make any sense but yet it's there, it's happening.

Is it the inflation trade? If so, why isn't the commodity space making new highs right here, right now?

I can't understand it either.

And here you have SKS breaking to new 52 week highs.

SKS is going to trade up today to the tune of 6-8% (or even more) as shorts scramble to cover.

It kind of makes me wonder though if we are getting closer to a blow-off top in the market...

American Superconductor (NASDAQ:AMSC): Upgraded to Buy at Jefferies, Wunderlish highlights Sinovel orders

Jefferies is upgrading American Superconductor (NASDAQ:AMSC) to Buy from Hold with a $35 price target (unch) saying they view the current level of AMSC's stock price as a buying opportunity. The stock has been pressured since late CY'09 from a variety of issues including mgt maintaining FY'10 guidance against lofty expectations and concerns about a potential shake-out of the wind industry in China. They continue to like the story's operational momentum and leverage to Chinese wind growth. On a risk-return basis the firm believes the stock is trading lower than fair value.

Bear case unlikely, in Jefferies' view. Recent press reports have raised fears that gov't efforts to force a shake-out in turbine manufacturing will slow Chinese wind installations. Yet, China appears committed to rapid growth in wind having raised its target to 150 GW of installations by 2020 (from 25 GW today). In fact, efforts to restrict capital deployment in the sector appear targeted towards a glut of under-capitalized new entrants with limited technological expertise, not the industry leaders AMSC has signed development contracts and orders with. While AMSC does face a rev concentration risk (Sinovel makes up the majority of revs), it is also gaining traction with new customers, some from outside China, such as Hyundai
Heavy Industries, which plans to export turbines for the US mkt.

Guidance upside as a catalyst? The company gave first time FY'10 guidance in Nov. '09 ("more than $400M" and non-GAAP EPS exceeding $1.15). Since then the company has announced several new contracts and orders that could raise the outlook (see the text of this note for more details). While Street ests are currently ahead of these figures (revs/EPS of $420M and $1.18), with the stock down, the firm believes there is potential performance upside from a raise. Moreover, they note that recent announcements from AMSC on next gen turbine development suggest that subsequent years' growth may continue to be very strong.

- Also note that little known Wunderlich Securities is out also positive on AMSC saying the co shares announced yesterday that its largest customer had placed an initial order for electrical components for its 5-megawatt (MW) wind turbine. Separately, the company announced it had received one of many needed regulatory approvals for a electrical interconnection system that would use superconducting wire. Firm believes the
shares represent the best opportunity in a U.S.-based wind energy company. AMSC is experiencing more than two times the industry average growth rate, which, in the U.S., clocked in at a blistering 39% in 2009.

Largest customer, Sinovel, launches new product line with AMSC inside. AMSC is now selling electronic components for all three of Sinovel's wind turbine products. Although AMSC has made it clear for some time that it was developing Sinovel's 5MW wind turbine, this is the first formal announcement giving production time-frame and placing an order. Some investors were expecting Sinovel to move to Brand X electrical components and this announcement would seem to push that out to the distant future if ever.

5MW wind turbine order is the tip of the iceberg. This initial order is small but that is the way these orders start. Three years after introducing its first turbine, Sinovel ordered over a thousand electrical components. Wunderlich notes they would argue that the time between initial order and production is shrinking as both the market develops and as Sinovel's reputation grows. It is now the fifth-largest wind turbine maker in the world according to some sources. Reits Buy and $50 tgt for AMSC.

Notablecalls: When you have 'potential guidance raise' & 'Sinovel orders' in one note (ok, two notes), you're looking at AMSC up 6-8%, with $28+ level in play.

It's become a hated stock, mostly thanks to Citron Research touting the short thesis on the name, it looks good for a buy. A trade, if you will. There's a 26% short interest.

btw, I think the Street missed the Sinovel news yesterday.

Monday, March 22, 2010

Viropharma (NASDAQ:VPHM): Analysts positive after investor day; Target raised to $19 at Oppenheimer

Viropharma (NASDAQ:VPHM) is getting a lot of positive commentary this morning after the co held an investor event on Friday, March 19.

- Oppenheimer is raising their price target on VPHM to a new Street high of $19 (prev. $15) noting the investor meeting focused on Cinryze and the opportunity in hereditary angioedema (HAE), as well as future expansion opportunities. Importantly, 1) with only ~400 patients on Cinryze at YE09, out of a total of ~2,800 patients, the firm believes a robust US Cinryze launch should continue. 2) With ~12,500 HAE patients, they believe the EU represents a significant expansion opportunity. 3) Opco sees potential Cinryze expansion opportunities in renal transplantation, where a POC study will begin in late-2010/early-2011. 4) They raise their price target to $19 from $15 on higher peak US Cinryze sales ($400M) and addition of European sales. Reits Outperform.

- Jefferies ups their target to $18 (prev. $16) and reits Buy as Cinryze sales in Europe, as well as all other new geographies discussed at VPHM's analyst meeting, represent upside to firm's estimates. They continue to believe that the Street has underappreciated the Cinryze market opportunity.

For the first time, VPHM also outlined its plans for obtaining Cinryze approval in other countries outside of Europe. There are 28 countries targeted for Cinryze regulatory filing in 2010-2012 and another five countries where filings will occur in 2013-2014. The company believes that this could expand the target patient population by over 90,000 patients, assuming a consistent worldwide HAE prevalence of 1:40,000 (compared to 23,000-24,000 patients in the U.S. and Europe).

In addition, Jefferies calls VPHM one of the beneficiaries of the Health Care Reform. The new health care reform act is a major positive for companies with biologics, as it creates a 12-year exclusivity period prior to biosimilar competition. Orphan drug exclusivity in the U.S. for seven years is the primary protection for both VPHM"s Cinryze (exclusivity expires in Oct 2015) and AUXL's Xiaflex (February 2017). Both drugs would benefit from an additional five years of exclusivity under the new health care reform act. As they had modeled the impact of biosimilars differently in each case, the firm estimates that a 12-year exclusivity period would add $0-1 per share to their VPHM price target of $18 and $10 per share to their AUXL price target of $44.

- Thomas Weisel is raising their price target to $17 (prev. $14) to reflect the impact of an aggressive and comprehensive ex-U.S. commercialization strategy and believe the notion of potential label expansion into the transplant setting will support continued multiple expansion.

The role of complement inhibition is gaining traction in the transplant setting following the recent presentation of promising investigator-sponsored, proof-of-concept data with Alexion’s Soliris.
VPHM provided a compelling review of the biology behind C1 inhibition and believes Cinryze can be used to treat antibody mediated rejection (AMR) and delayed graft function (DGF) in kidney transplant patients and plans to initiate two proof-of-concept Phase II trials in each setting later this year.

TWP believes the HAE market opportunity remains underappreciated and believe the stock should continue to find decent support at these levels as Consensus numbers and excitement about the transplant opportunity increase after Friday’s event.

Notablecalls: Well, what's there not to like? VPHM used to be a crummy biopharma play with Vancocin, their best-selling drug going generic in a year or two. That's until Cinryze showed up. It's priced around $400,000/year putting VPHM in the same league with the other rare-disease plays like GENZ or BMRN.

Now it seems it's all about Cinryze and the analyst community has fallen in love with the drug and its potential.

The stock looks like it wants to break to new highs soon and I don't really see anything stopping it. I guess it's going to trade to $14+ today.

Thursday, March 18, 2010

athenahealth (NASDAQ:ATHN): Priced for Perfection, But Is Perfection Moving Out of Reach? Downgrade to Underperform - Oppenheimer

Oppenheimer is out with a fairly harsh downgrade on athenahealth (NASDAQ:ATHN) taking their rating to Underperform from Peer Perform while lowering their target to $31 (prev. $37).

Firm believes the risk/reward has turned more negative. Shares have rebounded over the last two days following the successful filing of its Form 10-K (after the initial delay), which signals to them a lack of serious accounting issues to be concerned with. What is of concern is the slowing growth in the company's core service (Collector), evidenced by lackluster physician adds in 4Q. Elongating selling cycle and need for significant increase in sales & marketing expense make it more challenging, in Opco's view, for ATHN to achieve its long-term goals of 30% top-line and 40% bottom-line growth, particularly given lower margin profile for its newer offerings.

- Physician (doc) adds of 884 in the quarter were much lower than expected, particularly given that Caritas Christi represented 500 physicians in 4Q. At the current pace, Opco expects to see q/q doc adds to decline once Cook Children's goes live in 1Q. Achieving a 30% increase in docs in 2010 seems a challenge.

- Indeed, management noted that in order to increase doc adds 30% in 2010, they are increasing the sales force 60%, which they feel will offset an elongating selling cycle. While that might be the case, the firm sees it having a sizable impact on margins and is responsible for a portion of their downward earnings revisions.

- Margins are also taking a hit from two other fronts. First, impact from restatement is hitting EBITDA margin by 400 bps. Second, focus on selling Clinicals and Communicator, which carry much lower margins than Collector, will also be a drag on margins.

Physician adds, particularly for Collector, is important in helping the company achieve its 30% top-line growth targets. Management commented on its 4Q call that Collector sales were less than expected, due in part to a longer sales cycle as potential clients consider Collector in conjunction with Clinicals. In order to offset the longer sales cycle, management noted that it intends to increase its sales force by 60% in 2010. While this may well help accelerate the rate of physician adds, it will have an impact on margins and is responsible for a portion of our downward earnings revisions.

- ATHN would need 300 bps higher revenue growth of mixed services (Collector/Clinicals/Communicator) to maintain similar earnings growth for Collector alone given margin differentials. Margin pressure isn't necessarily an issue if revenue growth is well north of 30%, but given mgmt comments that 30% top-line growth is the goal, Opco sees product mix as a headwind for earnings growth

- Opco lowers their CY10-11 EPS estimates to $0.62 and $0.86 from $0.81 and $1.13, respectively. Firm lowers their PT to $31 from $37 based on our 5-yr DCF analysis, which assumes a WACC of 9.7% and a terminal growth rate of 4%. Their revised price target implies a P/E multiple of 36x their CY11 EPS estimate of $0.86, which is in line with their near-term earnings growth rate and which the firm feels is still a very healthy multiple.

Notablecalls: With ATHN trading 36x CY11 EPS this one is going to hurt. I'm guessing 1.5-2 pts of downside.

Note there's a 25% short interest in the name, so it's not going to do down in a straight line.

Wednesday, March 17, 2010

BlackRock (NYSE:BLK): Upgraded to Outperform, added to Credit Suisse Focus List

Credit Suisse is upgrading BlackRock (NYSE:BLK) to Outperform from Neutral with a $280 price target (prev. $270) and adding the stock to their Focus List.

The BLK stock has underperformed asset manager peers by 11% YTD, which provides an entry point for longer-term investors to lever three of the strongest secular drivers of AuM growth – ETF strategies, payout market, and international distribution. More importantly, the firm expects strong EPS and flows to drive stock price outperformance over the intermediate term, and believe investors are already aware of the seasonal issues that impact 1Q flows in ETFs, Money Market Funds, and the risk to quantitative funds and money market flows in 2010. Accordingly, they are raising their 2011 EPS estimate to $13.50 from $13.30, which compares to $13.22 for consensus.

Competitive Advantages
BLK has several structural advantages that will keep the barriers to entry high in its core growth markets (ETF, fiduciary, LDI, advisory). Additionally, BLK has the strongest and widest distribution platform among global asset managers in CSFB's view with significant scale in both core retail channels (wirehouse, mutual fund, insurance, DC) and core institutional channels (DB, endowments, foundations, sovereign wealth funds, unions). BLK also benefits from the ownership of three of the larger product distributors in the world (Bank of America / Merrill Lynch, Barclays, and PNC Bank). With BLK's mostly high relative fund performance and wide product menu leveraging its distribution strength, it will be harder for weaker/smaller competitors to catch-up, and they look for continued industry consolidation to benefit BLK. After a weak start to 2010 due to seasonal net flow issues, the firm expects BLK's organic growth rate to increase from 0% in 1Q to 1.0% in 2Q, and then continue to improve into 2011. They estimate their 2011 net flow forecast of $174B (5% organic growth) is about $60B higher than consensus.

How Can a $3 Trillion Asset Manager Grow?
With CSFB estimate of 10-12% market share for BLK of the total global asset management market, the main question is how can BLK continue to grow organically? The firm views the three drivers as: 1) strong distribution, 2) deep product in secular growth markets, and 3) overall strong fund performance. For the most part, BLK meets these three objectives with the largest global institutional platform ($1.3T of AuM with DB plans, endowments, foundations, sovereign wealth funds), and with among the top retail distribution platforms in the US and Western Europe (broker/dealers, financial supermarkets, banks). Additionally, BLK already has large product in all of the key long-term growth markets – ETF / Passives, Liability Driven Investing, Defined Contribution, Balanced (Fiduciary, Target Date Funds), which most competitors lack. On the final point, relative fund performance, BLK is the second highest performing asset manager in the US with 63% of AuM rated 4 or 5 stars by Morningstar vs. 32.5% for peers.

Outperform Thesis
CSFB estimates stronger earnings/accretion from BGI will drive a $0.06 EPS beat in 1Q10, and help offset weaker flows q/q. However, they look for strong flows in 2Q to lift the BLK stock, and EPS above the consensus (‘10 EPS = 11.36 vs. 11.19). They also believe BLK is best-positioned to benefit from 3 of the 4 secular drivers of AuM growth, which are 1) ETF products, 2) payout market (retirees in US and Western Europe), 3) international distribution. One area that BLK can upgrade is its retail distribution in non-Japan Asia and LATAM (growing emerging market middle class is fourth secular driver). Risks to the BLK stock are 1) greater than expected money market fund and quantitative outflows in ‘10, 2) low performance fees in real estate, and 3) a decline in short-term solution assignments (like Bear Stearns, AIG mandates).

While the SimFund / AMG data releases provide new data points for BLK’s US fund flows (especially money market), the firm views the 1Q and 2Q earnings releases (in late April and late July) as the next key catalysts. Due to the seasonal impact on 1Q flows, they estimate 2Q represents the next all-around strong quarter for BLK.

Notablecalls: It's not every day one can call for up to 10 pts of intraday upside in a stock. That's the likely scenario on BLK today.

BLK has lagged the other asset managers over the past couple of months, mainly due to AUM concerns, regulation and probably due to the fact the acquired BGI is very quant-heavy in its nature. Quant funds have been having a tough time again, I suspect.

Yet, as CSFB points out BLK is the best of breed operator in the space with a lot of exposure to growth markets. Better buy the powerhouse when it's under performing.

I think BLK will trade up today and nicely so. $220+ is my guess today.

Monday, March 15, 2010

Beazer Homes (NYSE:BZH): Cracks in Foundation But Property By No Means Condemned. Initiating Coverage With a Buy Rating - Citigroup

Citigroup's Homebuilding team is picking up coverage on Beazer Homes (NYSE:BZH) with a Buy rating and $6.25 target price, implying 37% upside.

Firm notes that according to Bloomberg, across the Street there are 5 Holds, 2 Sells and no Buy ratings. As such, they believe their investment thesis is an out of consensus call.

Based on valuation (BZH trades at ~0.8x Citi's estimate of 2Q10 TBV versus the peer group average of ~1.5x) and that fact that the rest of Street has seen fit to assign no Buy ratings to the stock, they think the investment community may not be distinguishing between BZH the company and BZH the stock. To be sure, BZH the company faces both operational and financial obstacles. That being said, the firm thinks the stock is cheap and that a positive near-term catalyst is likely to emerge in the form of a debt refinancing.

Company Overview
BZH is a top ten homebuilder based on closings. Like many of its peers, the company has shifted its focus to the first-time homebuyer segment (~65% of LTM closings). Through the downturn, BZH has exited many markets and as a result its operations are now concentrated in three regions: the West, East and Southwest. As of '08, BZH no longer operated a financial services subsidiary. BZH now utilizes a marketing arrangement with a third party financial institution to originate mortgages. BZH is headquartered in Atlanta. The company was founded in ‘85 and went public in ‘94.

Going With the Flow: Asset-Lite Strategy
BZH is pursuing an asset-lite strategy in which it attempts to minimize its land position and land development activities and focus instead on the building and selling of homes. Although BZH is targeting three to four years of total land exposure split evenly between owned and optioned land, it currently has one of the longer land supplies in its peer group.

Although asset-lite has become the predominant strategy among the public homebuilders, BZH has been less vocal than some of its peers about the importance of having an asset-lite strategy. Citi thinks BZH is deliberately trying not to over promise with regards to its ability to achieve its targeted land supply. While most of its peers which are acquiring new lots intend to monetize those purchases in the next 6-12 months, BZH's land acquisition strategy has somewhat of a longer dated focus. On its most recent conference call, BZH stated its land acquisition strategy is focused on “controlling positions that can generate home closings in ’11 and ’12.

Cracks in Foundation… — BZH faces both operational and financial challenges. On the homebuilding side, they think BZH is a below average operator. BZH's gross margins and inventory turns have trailed the peer group average while its SG&A as a percentage of revenues has recently exceeded the peer group average. On the financial side, even after factoring in the recent equity issuance and the company's tax refund, Citi thinks BZH's balance sheet remains highly leveraged with a ~61% net debt-to-cap compared to the peer group average of ~29%.

…But Property Not Condemned — Citi thinks investors are well served by distinguishing between BZH the company and BZH the stock. Their normalized earnings analysis suggests that for investors who are confident that BZH will survive, there is considerable upside in the stock relative to its current valuation. When calculating normalized earnings for BZH, they address the excess leverage issue by first "rightsizing" the company's balance sheet. Even after their "rightsizing" adjustment, they conclude that BZH is cheap.

Debt Refinancing Could Be a Positive Near-Term Catalyst — While their analysis suggests that BZH's near-term liquidity profile is adequate, they think an upcoming debt refinancing could be a positive catalyst for the stock. Next month the firm expects BZH to issue intermediate or long-term debt and use the proceeds to call its outstanding '12 debt. By removing the '12 maturity and terming out its debt structure, they think BZH would effectively eliminate any existential concerns.

Notablecalls: I must say that at least from the trading perspective, I like the call. What's there not to like:

- Sub-$10 stock with a relatively large price target and the only Buy rating on the Street.

- A beaten down stock that has managed to trap a lot of shorts. Short interest stands close to 20%.

- Catalyst ahead in form of an upcoming debt refinancing.

The problem with BZH is that they bought too much land at the wrong price. That means their margins will lag the peer group for years as it takes time to work off the expensive land inventory. But I guess with the stock down from the $80's (in 2006) to current $4-5 level, much of that is already priced in.

All in all, I expect BZH stock to trade up today to the tune of 5-7%, putting $4.75-4.85+ levels in play. It could go somewhat higher if the market continues its recent ramp. But I prefer to stay conservative as always.

Friday, March 12, 2010

Digital River (NASDAQ:DRIV): Checks Indicate McAfee Is Running Tests With DRIV; Raising Price Target to $34 - JMP Securities

JMP Securities is out with an interesting call on Digital River (NASDAQ:DRIV) saying their checks indicate McAfee is running tests with DRIV. Firm is raising their target to $34 (prev. $31) while reiterating Outperform rating.

JMP notes they came across several fully functional McAfee sites in various geographies, languages and currencies, which were being powered by Digital River. They could not verify this with management, but they believe that these are preliminary tests for now and no formal contract has been reached. While there are many variables that could impact McAfee’s potential contribution if the deal were to happen, firm's back-of-the-envelope calculation suggests a conservative 15% increase to their 2011 adjusted EBITDA estimate, if the entire consumer business – new sales and renewals – in all geographies is moved to Digital River. JMP is maintaining 2011 their adjusted EBITDA estimate of $97.9 million (consensus at $93.7 million) awaiting a potential deal. However, they are raising their price target from $31 to $34, as they believe this information removes two major overhangs for the stock – it highlights the value proposition of the platform as an old customer potentially comes back and exhibits that the software category is not fully penetrated as once thought.

As of now, it appears as if Digital River is only running tests for McAfee, but JMP believes that the implementation of a test indicates that conversations and negotiations, regarding the transition of McAfee back onto the Digital River platform, are well underway. They could not reach management for a comment prior to publishing this report. However, Figure 1 shows what they believe to be a reference to a Digital River landing page. Interestingly, the site seems to be live for a number of countries, as can be seen from the screenshot below.

How could this impact estimates?
The firm does not think that there is a contract between Digital River and McAfee as of yet. While the timing ofan announcement is unclear, they would mention that from discussion to contract to launch could take several months. Sans any new large client signings, Digital River will be undergoing a restructuring of its workforce as soon as Symantec fully transitions off its platform, which is scheduled for June 30th. Once Digital River undergoes its restructuring, it will not have the resources to expedite the launch of such a large client. Hence, they believe that Digital River will use the pending transition of Symantec to expedite the closing of the deal.

From a back-of-the-envelope perspective, JMP notes that in calendar 2009, McAfee’s consumer business generated $714 million in revenue. In the same period, Symantec generated $1.8 billion in consumer revenue, of which approximately 80% was online. Applying this 80% ratio to McAfee’s consumer business would imply eCommerce revenue of approximately $570 million that Digital River could help transact.

Net net, assuming a take rate of 10%, they believe that McAfee could easily generate $57 million in revenue and at Digital River’s current margins, it would imply incremental EBITDA of $15 million, which would raise their 2011 estimate by 15%.

Notablecalls: See the huge gap on DRIV's chart in October 2009? That happened when Symantec announced they would take online sales in-house.

McAfee isn't as big as Symantec but would still account as bagging an elephant. It would re-validate DRIV's platform. Kaspersky took its solution in-house several years back and returned to the Digital River platform in 2009. Who knows, maybe Symantec will do the same?

I think DRIV has a fair chance of trading up a full 1pt on this.

Kudos goes to Sameet Sinha & his team at JMP Securities for excellent research! Keep up the good work, guys!

Thursday, March 11, 2010

Bucyrus International (NASDAQ:BUCY): Downgraded to Neutral from Buy at Broadpoint/Amtech

Broadpoint Amtech is downgrading Bucyrus International (NASDAQ:BUCY) to Neutral from Buy saying they believe the rising momentum driving Bucyrus shares has skewed the risk/reward following a string of positive catalysts. With shares within 10% of firm's target and mounting evidence that China will tighten loan standards (the China commodity story is a main driver of prices, profits and capex), they introduce some near-term concerns that drive their downgrade.

Terex' accretion still unknown, but universally expected to be positive. Broadpoint expects to see details soon, but they currently believe high Terex inventories and DSOs (where BUCY is already well above Joy Global) are a concern. Also, the firm believes the stock component of the deal and a slower integration than the DBT deal (e.g. cross-selling, after-market exploitation, manufacturing) could lead to a multiple de-rating in the short-run; in their opinion, the bar is set inappropriately high in the short-run relative to public information.

- $6 EPS discounted into stock price, leaving little room for near-term disappointment: While they believe earnings power in excess of $6 is very much within the Bucyrus/TEX long-term model, they also believe investors are discounting too much of that $6 into valuation at this time for the reasons mentioned above, and given the cyclical nature of those peak earnings.

- China policy action could slow second derivative loan growth/coal beta: Broadpoint believes investors have awarded a premium to out-year assumptions due to strong China commodity demand, and Bucyrus' stock is strongly correlated to China coal data. China is making it clear through its policy actions that it intends to cool off speculative lending and it is ending its stimulus programs. As a result, the multiple investors are willing to apply to the China demand story may be muted, absent (thus far) a US/Europe/Japan recovery.

- Firm notes they still see upside potential to their $75 target in 2010 and longer-term upside beyond their target, but near-term risks could create a better entry point as a number of positive data points are already in the stock.

Notablecalls: The Goldman pump (adding to Conviction Buy list) didn't work much yesterday and with Broadpoint downgrading the stock today on potential China headwinds could cause some weakness as the GSCO buyers bail.

The call is short and to the point. Pretty much the way I like it.

Could be worth 2pts+ to the downside if the market decides to cooperate.

Tuesday, March 09, 2010

Warnaco Group (NYSE:WRC): PVH could pay $75/share for Warnaco, upgrade to Outperform - CSFB

Credit Suisse is upgrading Warnaco Group (NYSE:WRC) to Outperform from Neutral while raising their price target to $56 (prev. $45).

Two factors give them confidence in WRC's outlook: 1) rebounding global growth for Calvin Klein, WRC's key business; and 2) the potential for a PVH-WRC deal to combine CK under one roof.

A global brand story. CK is one of the few American brands with global potential, and with 80%+ of company profits derived from CK, CSFB believes Warnaco is well positioned to benefit from CK's international expansion. Less than half the size of Hermes, Coach, and Bulgari in Asia and Gucci, Diesel, Hugo Boss, and Ralph Lauren in Europe, CK is highly underpenetrated internationally. Growing at a 13% CAGR the last 3 years, CSFB estimates that Calvin Klein’s global retail roll-out (from 1,100 to 1,700 own retail doors) coupled with 4-6% comps could drive a 12% int'l revenue CAGR over the next 5 years and 6-8% total growth. And strong results last week suggest CK is setting up nicely for 2010 as constant currency int'l growth accelerated (+11% in Europe and +8% in Asia).

Ticker CK...? Regardless of what happens with M&A in the branded apparel sector near-term, CSFB expect PVH and WRC to unify the Calvin Klein brand under one roof at some point in what they believe would be a highly synergistic transaction. Though it's not clear when such a transaction would occur (or how it would be structured), the case to combine the key licenses and brand ownership is compelling given that Ralph Lauren shareholders were rewarded with $6+ billion of market value creation as the company acquired and consolidated most of its major licenses over the last decade. In a deal scenario, they estimate that PVH could pay as much as $75 for Warnaco and still generate solid EPS accretion and strong returns for its own shareholders.

In an outright acquisition of WRC by PVH, CSFB's merger model concludes that PVH would generate a 30% IRR for its shareholders over 4-years and would drive $3+ billion of value creation for PVH shareholders (WRC shareholders would receive the 68% acquisition premium). They assume PVH acquires 100% of WRC at $75 per share, a 68% premium, with a total deal size of $3.4 billion, financed by 60% debt, 30% equity, and 10% cash. They also assume $75 million of synergies, a 7% forward sales CAGR, and a 17x P/E multiple on the combined company (in line with Ralph Lauren)

Valuation. Despite superb execution and above average sales growth, WRC trades at <14x CSFB 2010 EPS estimate (vs. the sector avg of 15x). However, as Warnaco is increasingly viewed as a great way to play global consumption growth, the stock could benefit from P/E expansion..

Notablecalls: I think this is a significant call from the ever-wonderful CSFB research team. They are pretty much calling for PVH to acquire WRC for $75/share, a hefty premium and it looks like they have the numbers to back it up:

CSFB is out with another call on Phillips-Van Heusen (NYSE:PVH) explaining the rationale behind the potential deal. According to them, PVH is way better served buying Warnaco than buying Tommy (JPM has a separate note discussing a possible PVH+Tommy deal, after WWD reported the outfit was up for sale by Apax).

WRC will see new highs today, putting $47 level in play. Could go higher, if market plays ball.

It's the kind of a call that has power to move the stock for days.

First Solar (NASDAQ:FSLR): Don't Try to Catch A Falling Knife; Downgrading Solar Stocks on C2H10 Oversupply Risk - JP Morgan

JP Morgan is making a big call on Alternative Energy space downgrading First Solar (NASDAQ:FSLR), Energy Conversion Devices (NASDAQ:ENER) to Underweight from Neutral and Evergreen Solar (NASDAQ:ESLR) to Neutral from Not Rated.

Firm believes this industry faces a number of supply and margin headwinds heading into C2H10. They believe these headwinds are likely to cause many solar stocks to underperform what they feel are more attractive alternative energy investments in the LED and Wind sectors which look to have better underlying fundamentals over the next 12 months.

Solar Demand Strength Is The Highlight In C1H10 as demand pull-forward in Germany is apt to drive an atypical seasonal pattern in C2010. JPM's updated global solar demand model calls for ~7.5GWs of installations in C2010 with our work suggesting ~4.5GWs of this coming in the first half of the year before Germany’s tariff reset in July drives a moderation in demand growth in C2H10. As solar stocks have historically traded in-line with volume demand, theyview this as a particularly negative indicator for the group.

- Oversupply Likely Becomes a Major Issue In C2H10 as checks continue to suggest that module makers are aggressively expanding capacity to chase market share even as many admit that supply could soon be running ahead of demand given how fast the industry is adding. To them, this feels eerily similar to what happened to the industry in C2H08-C1H09 when the market was oversupplied by as much as 30% for several quarters. In fact, the firm estimates that C2H10 oversupply could approach 3-4GWs on an annualized basis, even worse than what occurred in the prior inventory correction.

- JPM Thinks Module ASPs Will Contract 20% – If Not More – In C2H10. This should drive big margin compression and add significant risk to C10/C11 estimates as many module makers will largely be through the bulk of their poly cost reductions by mid-year and scaling of non-silicon costs will likely only provide a partial offset.

Recent checks suggest that solar module ASPs continue to trend in the same $1.80- $2.00/W range seen over the past few months. JPM expects this pricing range to persist through most of C1H10. That being said, their sources indicate that earnest discussions on C2H10 volumes, and more importantly pricing, will likely begin in mid-to-late April with early indications suggesting pricing concessions of at least 10% for most buyers of any scale. Also noteworthy is the fact that this is right around when most Chinese module vendors will have already seen the bulk of the benefits from lower polysilicon costs which, in JPM's view, should only further compound any margin pressures for the group in C2H10.

- Right Around The Corner Is Yet Another Subsidy Cut. On Jan 1, 2011 Germany is expected to make yet another subsidy cut, somewhere in the 10% range as part of the annual regression plan. This should add even further downside pressure on product demand and margins over the next 12 months. JPM says enough is enough, and recommend long-only investors look elsewhere, to LED and Wind themes, for investment ideas.

First Solar, Inc. - SPECIFIC COMMENTS:

JPM notes they are downgrading FSLR to Underweight on the back of our C2H10 supply concerns. While they realize sentiment is already negative on this name, their talks with investors suggests that the market has become extremely comfortable with the notion that FSLR’s “worst-case” 2010 EPS is around $6 and that the stock appears to be nearing a bottom. They tend to disagree and believe the stock could move meaningfully lower given pricing sensitivity work that suggests it would only take a 10% ASP decline in C2H10 to get FSLR down to $6 EPS. In the context of what they believe is big pending oversupply across the industry later this year, this would suggest there is very little margin for error in these expectations and see further downside risk to estimates.

- Downgrading FSLR from Neutral to Underweight, lowering their December 2010 price target to $85 vs. $140 previously, and reducing C10E revenue and PF EPS estimates to $2.7bn/$5.83 vs $2.8bn/$6.30 while reducing C11E revenue and PF EPS estimates to $3.0bn/$5.48 vs. $3.5bn/$5.58 previously. On valuation, JPM's $85 target is based on ~15x their C11E EPS, or in-line with our alternative energy group average.

- JPM notes they realize FSLR’s German exposure is well understood but pricing risk still appears to be underappreciated. At an estimated ~50% of sales in C2010, FSLR’s German exposure remains among the highest in the solar industry and they believe this alone creates sufficient risk heading into C2H10 given the ongoing uncertainty around demand and pricing in that key region beyond CQ2. That said, consensus estimates seem to imply no more than a 10% decline in module ASPs for FSLR in 2H10 with a similar level of decline for all of C2011. These expectations seem optimistic.

- Firm sees EPS downside of $5 for FSLR on their pricing outlook and believe this could start to drown out the $6 “worst-case” EPS scenario that the market appears to have fixated upon. On valuation, they think the market will not be willing to award more than a mid-teens multiple for stocks that are undergoing sustained pricing and margin compression the way FSLR is and as such, they believe the stock is fairly valued at ~$85, or ~15x their C11E EPS, with downside to potentially $75 as investors begin to gravitate more towards their view of sub-$6 EPS for both C10E and C11E.

Notablecalls: FSLR is going to take the heat here, not ENER or ESLR. The stock has become quite a battlegound and it looks like the bulls lost another major ally this morning.

The oversupply story isn't anything really new but the comments of another subsidy cut from Germany will surely surprise some people.

With JPM calling for $75-$85/share levels in FSLR, there will be sellers in the name today. I'm guessing the stock can trade down towards the $103 level today. I don't really see the name breaching par today just yet. But who knows.

PS: Also, do note the Solar names (especially FSLR) are crawling with shorts so the stocks are not going down in a straight line. I know several inst. players that are looking for reasons to own the names. It's just that they haven't found any...yet.

Thursday, March 04, 2010

Disney (NYSE:DIS): 2011 In Wonderland; upgrade to Buy - Merrill Lynch/BofA

Merrill Lynch/BofA is making a significant call on Disney (NYSE:DIS) upgrading to name to a Buy from Neutral while raising their price target to $42 (prev. $33), implying 33% upside.

The firm notes they believe accelerating DIS earnings will be driven by five major themes over the coming quarters, including: 1) a broad economic recovery that benefits advertising-driven Media Networks, 2) a falling unemployment rate that helps consumer recovery, benefiting Parks & Resorts and Consumer Products, 3) new expansion projects that bring incremental growth to Parks & Resorts, 4) a new creative cycle that benefits Studio Entertainment and Consumer Products and 5) ABC retrans deals and relaxed political spending rules that boost Media Networks cash flow. Considering the risks and opportunities, Merrill's new Bull Case scenario reflects 3.8x more upside than their Bear Case downside, making DIS one of the most compelling equities in Media and Entertainment in FY11—especially for those seeking consumer exposure.

- Advertising recovery: auto comeback hits home
Following a -13% compression in 2009, the firm believes total U.S. advertiser spend is poised to rebound to the mid single digit range in CY10E, as current economic indicators and non-economic events such as political elections and the Olympics point to higher ad spend. With almost 20% of its revenue derived from advertising, they believe DIS will benefit from the continued rising tide of advertiser spend.

- Consumer recovery: help wanted? gone to Disney World
With unemployment high, consumer confidence low and 30% of total revenue driven by Parks & Resorts (P&R), DIS remains meaningfully geared towards a consumer recovery. Our analysis suggests that declines in unemployment should translate into meaningful top-line improvement at Disney’s P&R businesses in FY11, with positive operating leverage enabling outsized bottom-line benefits. Merrill believes these factors will help drive P&R revenue and EBIT growth of +7% and +18%, respectively, in FY11E.

- New creative cycle: bouncing off the bottom?
Due to the hit nature of the movie business, it is difficult to pinpoint an exact turnaround of Disney’s recent lackluster film performance. However, Merrill believes the combination of several upcoming franchise-type films and recent restructuring activity could set the stage for Studio Entertainment and Consumer Product outperformance in FY11/12E. They currently forecast Studio Entertainment revenue and EBIT of $7.1bn and $765mn in FY11E, respectively, buoyed by the upcoming releases Alice in Wonderland, Toy Story 3, The Sorcerer’s Apprentice, Pirates of the Caribbean 4 and Cars 2. Firm believes Disney’s Studio Entertainment has potential to return to its past success levels in the years 2006-2008 ($730mn-$1.2bn of OI).

- Other considerations: sustainable cable network growth
While Cable Networks have historically represented the largest segment for Disney, their importance has grown in terms of revenue (now 30% of total FY10E) and operating income (just under 60% of FY10E and 66% including Equity in the Income of Investees) with sustained growth and the decline of other less stable segments. In FY09, Cable Networks was the only segment to post revenue and OI growth. Disney Channel and ABC Family continue to build on recent successes, while ESPN is still the largest driver of the segment (estimated at roughly 75% of total Cable Network OI).

With DIS shares currently trading at 13x FY11E EPS, the firm believes DIS’ historical 15% premium to S&P 500 reflecting unique brands, well regarded management, solid earnings performance and strong balance sheet is sustainable considering the number of positive factors potentially influencing the company over the next 12-24 months. On a forward year PEG basis, DIS is currently trading at a discount to the market (0.57 vs. 0.99), clearly not reflecting its higher growth potential (+23% EPS growth vs. the S&P 500’s +13% growth using BofAML Macro Research projections). Merrill believes numerous catalysts exist for upward estimate revisions, including upcoming theatrical releases, retrans consent/reverse comp deal announcements, new cruise ship launches and Park upgrades (in addition to underlying cyclical improvements).

They are increasing their FY10E and FY11E EPS from $1.93 to $2.00 and $2.19 to $2.45 to better reflect their revised outlook and firm's price objective is now $42 (+33% upside), which implies 17x FY11E P/E. Firm's new longer term Bull and Bear case valuations are $51 and $26, respectively, reflecting peak upside of +63% and worst case potential of -16% over the next 12-18 months.

Notablecalls: I like this call a great deal. Merrill's Entertainment team has been cautious-to-neutral on Disney for a while and rightly so. The stock has been a dog for years (well, at least since 05/06) and have gotten their act back together only recently. Disney has so many moving parts yet Merrill seems to have good things to say about most of them.

Networks are doing OK & if you add good studio performance to that, you've got yourself an outperforming stock.

With Merrill hinting longer-term upside to $51/share I think people will take notice. Overall sentiment regarding Disney is still quite cautious.

The stock is headed towards new 52-week highs today putting $32.50+ levels in play, I suspect.

It's cheap & it's got catalysts. What else do you need.

Wednesday, March 03, 2010

Netflix (NASDAQ:NFLX): Downgraded at Merrill Lynch/BofA & Kaufman

Netflix (NASDAQ:NFLX) is going to be in the penalty box today as two firms are out downgrading the name this morning:

- Merrill Lynch is downgrading NFLX to Underperform from Buy while keeping their $70 price target noting the 26% rise YTD to near $70 is pricing in a very optimistic scenario with their DCF requiring a near tripling of subscribers by 2015 and a low 10% discount rate to justify the current share price.

Further, this optimistic scenario ignores the increased competitive risk as consumers begin consuming more and more video content online, likely reducing the value of Netflix’s unique DVD distribution capabilities over the long term. Therefore they are downgrading the stock from Buy to Underperform and maintaining our $70 price objective which has high short interest (19% as of the end of January) and near-term momentum (1Q10 is likely in-line or better) supporting a premium valuation given the long-term cash generation capabilities of the business.

Low 4Q churn may not be sustainable
Netflix’s impressive 30bps y/y decline in churn in 4Q and the high subscriber growth guidance based on extrapolating this low churn forward was the primary driver of the stock’s upward move this year. If this churn can remain low, Netflix should benefit from both better subscriber growth (fewer new subscribers to find to replace smaller subscriber losses) and higher profitability (marketing goes down as a percentage of revenue because the company does not need to buy as many new customers to support growth). But it is reasonable to question whether this low churn rate can be continued longer term.

Competitive risks increasing
The most significant new threat is HBO GO which leverages HBO’s undisputed subscription content lead (roughly 65% of movies for 5 out of their first 6 years) and much larger subscriber base (~29mn headline subs). HBO GO is still developing its model and has not solved the “last ten feet problem” (i.e. getting onto the TV) but could be a real threat longer term. Wal-mart’s Vudu acquisition shows increased interest in the space, though is likely not directly competitive

Not a Q1 call – expect in-line or better
Q1 is seasonally Netflix’s most front-end loaded quarter as gift cards and holiday sales of Blu-ray/DVD players drive gross sub adds in Jan. Netflix’s guidance for the first quarter of 32% y/y growth in ending subscribers is high, but likely achievable given the visibility they had when they gave guidance on 1/27.

- Kaufman is downgrading NFLX to Hold from Buy while maintaining their $69 price target noting that while they maintain a positive bias on NFLX's fundamentals, they believe shares are fully valued at current levels with shares trading at 26x/21x our 2010/2011 PF EPS estimates vs. their 15%-20% LT growth estimate. Firm notes that NFLX is currently trading at the upper end of its forward GAAP P/E range over the last three years (28x forward GAAP EPS today vs. range of 16x-36x and a mean and median of 24x). They would look to get more constructive on shares in the low $60s.

Search Data Analysis Indicates Continued Strong Sub Growth in 1Q. Based on their analysis of searches for the term "Netflix" on Google, Kaufman expects solid sub growth to continue in 1Q. Historically, there has been a 95% correlation between search volume growth for "Netflix" and gross sub growth. For 1Q (through 2/27), "Netflix" searches have showed an increase of 38% Y/Y (vs. Kaufman 36% estimate), which represents an increase from the 34% growth in searches in 4Q (34% Y/Y reported growth).

Stock Catalysts. Kaufman believes potential positive catalysts for Netflix shares include 1) successful rollout of Netflix for Wii in the spring and continued traction with PS3 launch, 2) additional studio deals that expands Netflix's digital catalog, and 3) continued trend of lower churn. Potential negative catalysts include 1) increased competition (i.e., Wal-Mart acquisition of Vudu), 2) postage rate increases, and 3) more limited margin upside.

Notablecalls: With two bullish firms throwing in the towel, NFLX is likely to get sold today. The stock acted somewhat weaker relative to the market yesterday which should give the bears some more confidence.

The main risk I see here is the general market as I think we're headed to new highs over the next weeks. Netflix will likely follow, destroying anyone short the name.

But I guess this is not something one should be concerned about today.

The stock is going to trade down by at least 4-5%, putting the $66 level in play, with $65 not out of the question if the bears have enough conviction today.

PS: I'm now hearing Susquehanna has also downgraded NFLX this morning. That makes 3 downgrades.

Tuesday, March 02, 2010

Regal Entertainment (NYSE:RGC): It's ex-div, stupid!

In case you're wondering why the Regal Entertainment (NYSE:RGC) upgrade from BMO got sold so aggressively on open, here's the reason:

Six Stocks Going Ex-Dividend First Week of March

That's right. The BMO Capital analyst Jeffrey B. Logsdon chose to upgrade RGC on ex-dividend date. The guys & gals that bot RGC last night on hopes of a ex-div play got a bonus!


Regal Entertainment Group (NYSE:RGC): Upgrading to Outperform; Raising Target to $19 - BMO Capital

BMO Capital is upgrading the cinema names this morning:

- Regal Entertainment Group (NYSE:RGC) is upgraded to Outperform from Market Perform while raising their target to $19 (prev. $15).

- Cinemark Holding (NYSE:CNK) is upgraded to to Outperform from Market Perform with target raised to $20 (prev. $18).

Since Regal (RGC) is the larger of the two names and has underperformed its peer Cinemark (CNK) by a wide margin over the past year, I think there will be a better trading opportunity in the latter.

BMO notes they are growing increasingly optimistic about 2010 films, believe the DCIP financing will yield shortand long-term benefits, and believe the stock is likely to see multiple expansion from digital and 3-D. They expect 2010 to be a watershed year for exhibitors as an expanded digital screen/ 3-D count, coupled with heightened consumer awareness of 3-D and event programming, leverages the swelling amount of 3-D Hollywood films and event programming. RGC should benefit nicely from the shift owing to its large market position and its 2009 success with 3-D. BMO's current forecast for RGC contemplates incremental profits from higher attendance and ticket prices associated with feature film and programming possibilities with digital screen/3-D capabilities (3-D, events, corporate meetings, etc.) but they believe investors will soon pay a higher multiple, because the shift is likely to result in noticeably improved and sustainable returns on invested capital.

Basis for the Upgrade
1.) BMO anticipates multiple expansion as the implementation of 3-D enabled digital projectors penetrates the worldwide theatrical screen base over the next three years. 3-D is clearly revitalizing the exhibition industry as consumers are frequently being provided a better movie-going experience (recession or no recession). BMO expects this to translate into marginally higher attendance (even if from the curiosity factor), higher ticket prices (virtually no pricing resistance, especially given that films can still be enjoyed in 2-D at traditional pricing levels), and higher operating income per ticket (even if margins come
down slightly on royalty/licensing payments for 3-D technology).

2.) They believe investors will start looking forward and ascribing a premium to the earnings potential in the 2010-2012 timeframe where digital projection and 3-D will play a larger role in the movie-going experience and revenue generating capability of ticket sales for Regal and others. The growing supply of event films in the 3-D format, which should be an ongoing benefit for the next few years, will improve theater level economics for the next three years.

3.) Regal expects to ramp up 3-D capable screens from its current 427 screen base in 308 theaters to 527 screens by the end of 1Q10 and to the 1,100-1,200 level by the end of 2010 (which seems low by its statements that it can be at the 150- 200 per month install level once DCIP funding occurs). This could help push 2010 earnings estimates to higher levels on the up-charge ability of 3-D films, which are expected to number more than 20 in 2010.

Management indicated it expects DCIP to close within the next couple of weeks. The basic terms of the financing include a five-year, $445 million facility, junior capital of a $135 million, and a combined equity contribution of $80 million from the three exhibitors (AMC, Cinemark and Regal). Regal’s share of the initial equity contribution will include a combination of its existing digital equipment and cash. BMO thinks RGC’s share will be close to $35 million in equipment and cash, a meaningful portion of which has already been spent, including the costs of silver screens. In addition to the initial capital contribution, contributions of approximately $5-$8 million per year during the three-year rollout period to cover any costs in excess of the amount funded by DCIP are expected. Investors will welcome the closure of the financing adventure DCIP has experienced.

4.) Strong results from NWSA’s Avatar and the overall results from Holiday 2009 films lead to carry-over benefits in the first quarter of 2010. The 2009 calendar box office finished up 19.3% year over year in the quarter and 10% in 2009 to a record breaking $10.6 billion. The success of NWSA’s Avatar and its $706.6 million earned at the domestic (North America) box office to date is in part responsible for the gains along with other Holiday 2009 films that have had strong theatrical runs such as The Twilight Saga: New Moon ($295.7 million domestic to date), The Blind Side ($247.4 million domestic to date), Alvin and the Chipmunks: The Squeakquel ($216.6 million domestic to date), Sherlock Holmes ($205.7 million domestic to date), 2012 ($162.3 million domestic to date), and A Christmas Carol ($137.9 million domestic to date).

Estimate Revisions
BMO is raising their 2010 EPS estimate to $0.82 from $0.76 and their 2011 estimate to $0.94 from $0.89. Firm's new 2010 EBITDA estimate is $573 million (up from $558 million) and their new 2011 estimate is $582 million (up from $568 million). The primary reason for their upward estimate revisions is that they believe improving sentiment over 2010 films and better definition to the digital screen and 3-D rollout.

Notablecalls: As noted above, CNK has been on tear lately while RGC has lagged performance wise. Now may be the time to play ketchup. 3-D is coming in a big way and is about to revolutionize the industry.

Note that the much famed Doug Kass over at has grown very fond of the cinema operators of late and told his followers yesterday he sold some of his CNK to buy more of RGC.

It always pays to be in good company.

The stock isn't a huge mover but given the proximity of annual highs, that's where the price is headed. Could trade towards $15.50+ today.

PS: Note that Carmike Cinemas (NASDAQ:CKEC) posted strong results last night. Should add some fuel to the fire.