Thursday, April 29, 2010

Aflac (NYSE:AFL): Upgraded to Buy at Citigroup, target raised to $60.

Citigroup is upgrading Aflac (NYSE:AFL) to Buy from Hold with a $60 target (prev. $55). The stock got hit rather hard after disclosing they have ~$950 mln exposure to 3 Greek banks in its investment portfolio.

According to the firm, Aflac remains a core holding within the U.S. life sector due to its ability to deliver a 20%-plus ROE along with operating EPS and BV CAGRs twice the peer group average. But, as evidenced by repeated sales shortfalls and with growth in annualized premiums in-force having shrunk to the 3%-4% range, is strongest years may now be behind it. Capital pressures from the investment portfolio as well as weak sales continue to be risks and may temper valuation expansion in 2010.

There are no changes to Citi's 2010E-12E of $5.50, $6.00 and $6.75 respectively, which were earlier increased following their preliminary review of 1Q10 results. They continue to view Aflac as a core holding for long-term investors within the life sector given its 20%-plus ROE and ability to deliver BV growth at a pace 2x the peer average. While they continue to question the unnecessary level of concentration risk taken within the investment portfolio, they still very much believe that Aflac possesses more than sufficient strength, as it demonstrated in 2009, to weather the current storm as it were and avoid an external capital raise. As such, the pull-back in the shares following the 1Q01 earnings release has created an attractive entry point to acquire the shares of a proven above average long-term performer. Citi's revised target equates to just 10x their 2011E, a valuation well below the Aflac’s historic average of over 13x and at the low end or what they estimate is still an attractive 10%-12% long-term growth rate. At a current price of 8.3x 2011E they view Aflac’s shares as too compelling a bargain to pass up

Citi views the nearly 6% drop in the share price following the release of what were relatively good 1Q10 results to have been an over-reaction by the market to concerns about European sovereign risk within the $72.3 billion investment portfolio. The size of Aflac’s exposure to Greece and Greek banks of $1.3 billion clearly caught the market by surprise. But, even a complete write-off of the entire stake would amount to only about 5 months of annual statutory earnings of around $2 billion and they estimate would still leave the company with a statutory RBC of over 450%. In fact, they estimate Aflac could withstand as much as $1 billion of after-tax investment losses in 2010 before management might be forced to raise capital to protect the company’s credit ratings. More importantly from our perspective are the indications they have seen over the past year that Aflac may have finally turned the corner with its Japanese operations which account for about 75% of its earnings and generate an estimated 30% after-tax operating ROE.

Notablecalls: I like this one, think AFL can trade towards $51.50/sh today. May go higher if the general market plays ball.

Note that Greek equities are in rally mode this morning. Should help the sentiment.

Vanda Pharma (NASDAQ:VNDA): "I Can't Fight This Feeling Anymore" ― Downgrading to Reduce, Lowering Price Target from $19 to $7 - Madison Williams

Madison Williams (formerly Sanders Morris Harris) is making an interesting call in Vanda Pharma (NASDAQ:VNDA) downgrading the name to a Reduce from Buy while lowering their target to $7 (prev. $19).

With a lower-than-expected base of prescriptions, underwhelming Rx growth, an overstuffed distribution channel, competition from another new product, early evidence of side effect issues, and a curiously silent marketing partner, Fanapt appears to be falling way short of their initial forecast. As a result, the firm is lowering their revenue estimates for Fanapt in 2010 from $60 million to $38 million, which includes $8 million of residual channel inventory at year-end (calculating 2010 demand sales at $30 million). They are lowering their rating on VNDA from Buy to Reduce and cutting their 12-month price target, which they derive using a blend of theirDCF model, sum-of-the-parts analysis, and discounted EPS model, from $19 to $7. Firm's valuation factors in VNDA benefitting from $27.5 million in NOLs against the Novartis $200 million payment for U.S. Fanapt rights. Firm's conversations and survey responses from psychiatrists suggest that: 1) Novartis is doing an abysmal job on Fanapt’s U.S. launch thus far; 2) side effects may be limiting the use of Fanapt; and 3) competition from newly-launched Saphris (Merck’s antipsychotic) is soaking up demand for new alternative treatments.

What is Novartis Doing? After paying $200 million to license the U.S. rights to Fanapt/Fanapt Depot, it is surprising that Novartis seems to have placed low-impact reps on the launch, and those reps have not yet visited certain key physicians. Even stranger, Novartis’s recent earnings call and slides did not even mention Fanapt as an important new product. Thus far, Novartis’s actions suggest to to the firm that it is not committed to Fanapt’s success, a key component of their downgrade of the stock.

Lack of Detailing, Side Effect Issues, and Competition is the Early Chatter with Physicians. Physicians the firm has spoken with and polled via their survey confirm that Fanapt is having a tough time commercially, indicating that the weak prescription trends are unlikely to change soon. Reasons include: more weight gain than expected, significant orthostatic hypotension side effects, a poorly designed titration pack, reimbursement issues, and the topper ― little or no sales support from Novartis. Additionally, they have heard that Merck’s Saphris is doing quite well as the new alternative treatment for schizophrenic patients who have failed first-line therapies.

Full Value is $8, Assuming VNDA Stops Spending Today. MW's sum-of-the-parts model values Fanapt royalties at $3.00/share (DCF through 2024 includes assumption for ex-U.S. sales) and cash at $5.20/share (assumes $27.5 million in NOLs are able to be used against the Novartis payment). Unfortunately, if the company continues to burn cash on operations, this lowers their present value calculation by $2.30, suggesting a $5.90 valuation. Firm notes that VNDA prescriptions could begin to perform better, and the operational spend could result in a new value driver longer term; however, they believe their $7 price target is the appropriate level for the shares until there is more information on the ramp of Fanapt and the company’s investment in its operations.

Notablecalls:
These are certainly very negative comments from Madison Williams. I'm especially surprised to see comments regarding the lack of marketing support from Novartis. The feedback from physicians is almost equally concerning.

Vanda (VNDA) and its Fanapt product were all the range back in 2009, making the stock one of the top performers for the year. Remember the day when VNDA stock went from $1 to $10?

They had it all - a reasonably good product in a huge market and the backing from Novartis. A great story anyone could fall in love with.

This is also the reason why the stock has almost cult-like following, equal maybe only to Dendreon. Just take a look at what goes on at Yahoo! boards and you'll see what I'm talking about.

So, if I were David Moskowitz, the Madison Williams analyst that downgraded the stock today, I'd get my spam filters ready. There will be a whirlpool of negative comments heading your way.

I think the stock will get hit on this, possibly significantly. VNDA is scheduled to report on May 4 (next week) & I suspect people were looking for some improvement in Fanapt sales #'s. Doesn't look like it's going to happen, folks.

Tuesday, April 27, 2010

Notable Calls Network (NCN): Research in Motion (NASDAQ:RIMM)

Some Notable Calls Network (NCN) members caught a fairly nice move in Research in Motion (NASDAQ:RIMM) yesterday.


- Around 10:50 AM ET a NCN member pinged me with a following Deutsche Bank sales desk call:

' RIMM- presenting at Capital Markets Day---some competitors last week had bullish calls about big new products coming at event-- we see nothing, think stock weakens - DBAB '

Calls like this one circle the trading desks frequently and sometimes offer trading opportunities. Notable Calls Network (NCN) usually picks them up pretty fast intraday.

The stock was already down 1pt+ since open & didn't really respond to the cautious/negative call from Deutsche. It even squeezed marginally higher over the next 5 mins or so. It seemed as though the lack of new product announcements was already priced in...or some smart market participants were actually starting to position themselves +vely ahead of an announcement.

- Around 10:55 AM ET a smart hedgie (new addition to NCN) that I follows the space closely pinged me back with the following:

RIMM feedback - 'tricky game, i am looking for a big announcement after 1pm on a new OS and/or browser. Don't think they update financials but prob good enuf for a rally back the moving avg '

Knowing he might be on to something interesting there, I quickly distributed the comments to other NCN members.


- The stock treaded water for the next 2hrs+, trading down & bouncing in 70c a range. Soon after 2:00 PM ET it suddenly took off with huge volume.

Why?

Two headlines crossed.

*RIM SAYS NEW BROWSER IS COMING OUT `NEXT CALENDAR QUARTER' - REUTERS

*RIM SAYS BROWSER DESIGNED FOR TOUCHSCREEN, TRACKPAD DEVICES - REUTERS


It was exactly the 'big announcement' the hedgie contact had been talking about. The OS 6.0 was showed briefly in video - it looked significantly better than current UI and Browser and will launch with new touchscreen in August/Sept.

The stock went up 4pts+ and then some the next morning.

I'm not saying it was an outright call to buy the stock ahead of the announcement but it did explain why the stock didn't react to the Deutsche call & highlighted a possible +ve catalyst too look out for. And that's a big thing, at least in my opinion.

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

Want to be part of NCN?

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

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

- 3+ years of trading experience

- Access to quality research/analyst commentary

- Ability to generate and share (intraday) trading calls

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

American International Group (NYSE:AIG): Downgrade to Underperform, $6 target

Keefe Bruyette & Woods is downgrading American International Group (NYSE:AIG) to Underperfrom from Market perform with a $6 target.

Rate the Shares Underperform. From a fundamental perspective, KBW views that AIG continues to own some very valuable businesses, however, in its totality, under the current operating and financial structure, they view that the publicly traded shares are grossly overvalued. They would caution investors that due to the highly volatile nature in which the shares trade, a short-term position in the shares, long or short, is highly speculative.

No Real EPS. KBW expects no net real EPS near term. After liquidity needs are met, they expect that earnings generated by the underlying operations are obligated to be used to make Series E dividend payments. While the company may report positive EPS, the firm believes these earnings cannot be valued in the normal sense because these earnings do not accrue to the common shareholder but to the preferred shareholder.

The False Premise of Tangible Book Value
In normal equity analysis, tangible book value is a natural starting point. Tangible book value is viewed to be a measure of the store of value created by a company over time, or an approximation of a run-off value. However, AIG’s capital structure is so unusual that we believe it does not fall under this definition. Would AIG be in business today without government aid? Or consider the CEO's public admission that selling all of the pieces of AIG would not be enough to fully repay AIG's debts. Doesn't this imply negative real worth, despite a positive book value calculation?


They illustrate the difference in capital structure between AIG and a typical insurer above. The typical insurer, P&C or life, carries debt loads at 20-30% debt-to-total capital. While AIG’s business model and capital structure were always different from the typical insurer, today, AIG’s debt levels are enormous. If one were to include the Series E preferred stock as debt (formerly, this was simply TARP debt), then the total AIG debt level is $188 billion versus diluted common equity of just $23 billion. Debt is more than 8 times greater than equity! In comparison, most insurers have the inverse relationship at a four-to-one level and even the “old AIG”, at its most highly leveraged, was less than 2-to-1 of debt-to-equity.

Can AIG Stand Alone? It's Unrealistic in KBW's View.
While one of the few routes available, and therefore most likely, KBW views that the Series E & F conversion scenario is difficult to execute. The process would normalize the ownership structure but even with all forms of government debt gone, they believe AIG’s capital structure would remain highly unusual with operating debt 3-4x larger than tangible equity. Upon government exit, how would rating agencies view such a structure? How would customers? Would the company avoid bankruptcy but still essentially have to go into run-off, unable to write new business? The past destruction of real equity value may yet still prove to be too much to overcome, in firm's view.

Total Earnings. Using KBW estimates, AIG's earnings power is in the range of $2.8 billion after tax. Firm note that this “normalized” earnings power is before interest costs associated with government debt. On a fully diluted basis, this implies EPS of approximately $3.97.

However, one should keep in mind that AIG has not been paying its 10% dividend on its $41 billion of noncumulative Series E preferred stock. So even if AIG does report earnings, the income will not be accruing to the common shareholder. After liquidity needs are met, AIG has a legal obligation to the preferred owner to pay this dividend, effectively eliminating any real EPS.

Price Target
In attempting to assess the value of the common shares, KBW views that they must attempt to value the company post a government exit and as a result, they use the scenario of converting Series E & F. Firm will suspend their skepticism regarding the feasibility of executing a Series E & F conversion and allowing AIG to stand alone without government support. In addition, they will favor the P/B and P/E methodologies below simply because they yield the more positive results.

Price to Book. Allowing for a 25% discount on the common stock from today’s market price, KBW estimates a pro forma tangible book value (assuming the successful AIA/ALICO sales) of approximately $14.02 per share. In this scenario, AIG would be left in an extremely levered financial position which would require either extensive public capital raising to remedy or else current business would face the risk of going into forced run-off. In addition, the balance sheet risk would remain. Furthermore, publicly traded insurers already trade below book value, on average. As a result, KBW would expect a trading valuation at a sharp discount to book value near 0.4x, yielding a price of approximately $6 per share.

Price to Earnings. On an earnings basis, using their earlier after-tax estimate of $2.8 billion, the impact of Series E & F conversion would result in EPS of $1.23 per share. Again, with peers like CB trading at just 9x and HIG at 7x 2011 EPS and considering the issues facing a stand-alone AIG, a heavy discount to peers must be applied. A 5x price-to-earnings multiple derives a $6 target.

Quick Sum of the Parts Yields Negative Worth. In a quick sum-of-the-parts analysis, the value of the operating units appears to be less than the total debt outstanding. A 10x PE multiple applied to the P&C and Domestic Life operations, using KBW's earlier earnings estimates, would indicate $46 billion of value. If they assume the accuracy of the carrying value of the Financial Services units, their value is $10.8 billion. Finally, one would need to add the coming gain-on-sale for the ALICO & AIA transactions of $22.2 billion (assuming zero taxes). The grand total is $79 billion, substantially below the total debt outstanding at 12/31/09 of $141 billion.

Notablecalls: As Keefe points out much of AIG's fate hinges on what the Government thinks about the situation and also how well the asset sales will go.

Note that this morning Times Online is reporting that Prudential’s biggest shareholder has been moving behind the scenes to orchestrate a potential break-up of the insurer as a radical alternative to its $35.5 billion Asian AIA acquisition.

http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article7108969.ece

This should create additional uncertainty regarding the whole AIG situation and rhymes rather well with the current KBW downgrade.

I think AIG will trade down today, maybe to the tune of 6-7%, putting at least $42 level in play.

Could go lower, though.

Monday, April 26, 2010

Johnson Control (NYSE:JCI): Upgrading to Outperform – Well Positioned for Cyclical Recovery - Baird

Baird is upgrading Johnson Control (NYSE:JCI) to Outperform from Neutral while raising their price target to $42 (prev. $33). Firm says JCI could be a $60 stock in 3-4 yrs time.

Firm notes that while they have been chasing the stock higher in recent months, it has outperformed the market by only 3% since its last earnings report and has been lagging the industrials sector of the S&P 500. This is one of the best business models in the automotive space with a well-diversified revenue steam across end markets and geographic regions. With automotive now less than one-half of revenue and one-fourth of profits, investors have increasingly viewed and valued the stock as an industrial.

The catalysts behind their upgrade are:

Rapid Profit Recovery: The company’s second fiscal quarter (March) was a record for any second quarter. Contributing to this was strong recovery in revenue, up 32%, driven by Interior Experience and Power Solutions along with parts of Building Efficiency (residential and Global Workplace Solutions). Additionally, margin recovery was significant driven by cost-cutting, volume and equity income from China in Interior Experience along with volume and productivity in Power Solutions and Building Efficiency.

Strong Growth in China: Strong economic activity in China is driving strong results across all business units; most of these investments are in minority-owned joint ventures with the profit growth most visible in the equity income line. Interior Experience is benefiting from the strong automotive demand and dominant market share. Power Solutions has a leading share of the OEM battery market and emerging end market demand bringing more advanced battery technology to this market. The Building Efficiency business is also well positioned.

Building Controls Business Is Turning the Corner: The company’s backlog for new systems in its Building Efficiency business is nearing an inflection point. Sequentially, the backlog starting to grow with year-over-year gains expected in the June quarter. The key drivers are increased award activity from stimulus money in the US and continued strong demand for energy efficient products and services.

Cyclical Recovery is Underway: The company’s automotive and building construction end markets appear to be at a trough in demand with multi-year cyclical recovery in revenue and profits likely.


Relative Stock Performance Lagging: The stock has had a great move off of the bottom. Baird notes they have been cautious about getting more aggressive on the stock in recent quarters. The combination of emerging signs of cyclical recovery, strong earnings performance and weak relative stock performance in recent months support the timing of their upgrade. The charts below show the stock as marginally outperformed the market since the last earnings report while underperforming the industrial sector of the S&P 500.

The company’s balance sheet and cash flow remain a key attraction to the stock. Net debt is now 22% of capital, well below the company’s target of 25-30%. This means there is about $1 billion in "dry powder” for acquisitions. Furthermore, Baird estimates the company could generate $3-4 billion in free cash flow (CFO less capital spending and dividends) over the next several years. The company has a very successful track record making acquisitions with a targeted 15 return on investment within the first couple of years. Putting this $4-5 billion in available funds into acquisitions could add $1.00 per share to firm's mid-cycle EPS estimate of $3.00-3.25 and $15-20 to their target price. Key areas for potential acquisitions are electronics in automotive, manufacturing capacity in batteries and product line/geographic extensions in building controls.

Notablecalls: Nice call, my only question is - will Baird have the power to move the stock? JCI traded 11 million shares on Friday.

Otherwise the chart looks good, close to breaking to new highs.

$35.50 is the line in the sand. It will get there but will it be surpassed?

Thursday, April 22, 2010

Boeing (NYSE:BA): Going with Boeing; Upgrading to Outperform, $98 target - Credit Suisse

Credit Suisse is making a important call on Boeing (NYSE:BA) upgrading the name to Outperform from Neutral with a $98 target price (prev. $72).

Greater Visibility Drives Higher Conviction: In just a quarter, the upturn in the economy has BA discussing rate hikes instead of cuts. History shows that such talk is typically reliable in a cyclical upturn. While overcapacity fears will persist while airlines struggle to turn a profit on low yields, history shows that they’ll simultaneously order and take delivery of new aircraft anyway, especially with fuel prices rising and ECA’s supporting continued credit availability. CSFB acknowledges the stock has run, but from overly depressed levels and see meaningful upside given Boeing’s position as a bellwether in the early stages of a long-cycle recovery.

With an improving economy, an increasingly stable financing environment supported by ECAs and a diminishing trend of deferral requests, their confidence in the 737 backlog has increased and they see improved likelihood of a rate hike by June. Boeing stated on yesterday’s call that it has seen notably higher requests for accelerated deliveries and that the backlog of deferral requests continues to decrease. CSFB believes that the overbooking in 2011 and 2012 is the driver behind upward rate pressure and they expect that Boeing will announce a decision to take rates not only up, but also higher than most are thinking.

CSFB Key Model Adjustments Are More 737s and Better Downstream Gross Profit on 787: 737s are among the highest margin products for Boeing, with an estimated gross margin in the high 20s. Given upward pressure on demand, they see rates rising to 36/month (from 31.5 today) in 2012 with an associated improvement in margins. Assuming 787-8 continues to retire risk over the remainder of the certification program, the firm sees opportunity for a step-up in its gross margin from an estimated 4-5% at first to 7% in late 2012 and 9% in 2013 on declining learning curve and anticipated pool extensions.

Defense: Finally, when the firm took a fresh look at Boeing’s defense business, they determined that things were not as bad as they thought. Several opportunities have emerged and they believe that BDS will see some offset from the F-18 multi-year, international opportunities for F-18, F-15, C-17, P-8 and rotorcraft, a tanker win as well as opportunities in cyber and adjacent markets.

Upcoming Catalysts Are Mostly Positive
CSFB sees numerous catalysts over the next few months that could continue to move shares higher during 2010. In addition to several Wall Street conference appearances, Boeing is hosting investors at the end of May at its annual investor day. They expect BA to deliver more positive news on 787 testing progress, commercial aircraft demand and an improved aircraft financing landscape.

Big Forecast Boost, Upgrading to O/P: Embedding increased BCA rates (737 to 36/mth in mid-‘11) and margins (737, 787), plus slightly improved BDS revs (F-18, tanker) and margins, CSFB 2011 est. rises $0.76 to $5.27 (Street $4.66). 2012 rises $1.23 to $6.15 (Street $5.35) on 787 margin boost, a full year of 737 at new rate, share repurchases and diminishing pension headwind. Regarding TP, improving macro visibility is driving multiple expansion, prompting to the firm to adopt historical 15.9x P/E multiple on FY2 ests. to achieve a 12-month TP of $98, which yields 32% upside and an upgrade to O/P.

Notablecalls: While Credit Suisse is admittedly somewhat late with their call, they are upping their EPS, pricing & delivery estimates way above consensus. They also see some n-t catalysts that should support the stock.

Technically the stock is about to break out to new 52-week highs & may see further buy interest once the magical $75 level is broken.

I'm thinking the stock will trade above the $75.50 level and I would not be surprised to see it trade towards $76 today. That's my ultra s-t view.

For those with more patience, 4-5 pts of upside over the next month or so sounds realistic.

Wednesday, April 21, 2010

Picture of the day: Transocean (NYSE:RIG) rig on fire

An explosion on a deepwater drilling rig working for BP in the Gulf of Mexico last night has left at least seven crewmembers critically injured and 11 still missing as of Wednesday morning. The Deepwater Horizon rig is reported to have had 126 workers on board at the time of the explosion late Tuesday night. The Coast Guard is searching for the missing; at least two workers were airlifted to hospitals with severe burns; the rest of the crew will arrive back to shore by boat today.

The rig, owned by leading deepwater drilling company Transocean, is said to be listing in the water, 50 miles south of the Louisiana coast, and is still on fire. The rig was drilling a well at the time of the explosion. It's unclear at this time what caused the disaster, but the speculation is that the rig likely suffered a blow out while cutting through rock some 18,000 feet down at BP's Macondo prospect in an area known as Mississippi Canyon Block 252.

Just in case you care to see what the rig looks/looked like last night here's a pic (click to enlarge):


Tuesday, April 20, 2010

Monster Worldwide (NYSE:MWW): Monster Beginning to Stir; Upgrading to Outperform - Credit Suisse

Credit Suisse is making an important call on Monster Worldwide (NYSE:MWW) upgrading the name to Outperform from Neutral and raising their target price to $22 (prev. $15).

MWW is a late cycle macro play and CSFB believes the labor markets are beginning to improve and MWW’s fundamentals are starting to turnaround. Though they will do not expect to see material turnaround in operating performance until 2011, the firm would look to take the opportunity to build and/or increase positions now, ahead of 2011 improvement. They believe there are several signs that the business is beginning to pick up and coming off of trough levels.

CSFB has increased ’11 rev to $1.05B (vs. $1.01B prior) vs. $1.02B (consensus) and EBITDA to $171M (vs. $142M prior) vs. $163M (consensus). They have increased ’12 rev to $1.23B (vs. $1.18B prior) vs. $1.19B (consensus) and EBITDA to $245M (vs. $211M prior) vs. $246M (consensus).

Reasons for the Upgrade
1) Improving Macro and Labor Market Conditions: CSFB believes that macro conditions are improving, albeit slowly, and the labor market should follow over the next few years. Credit Suisse economists expect the unemployment rate to improve to 9.2% by the end of 2010, to 8.6% by the end of 2011 and continue to trend down over time. THey would also note that total hires and job openings are up off of mid-2009 lows and that layoffs are trending down over the past year, based on the Job Openings and Labor Turnover Survey (JOLTS). Importantly, the total Quits, which is a proxy for workers willingness and/or ability to change jobs is up solidly off of mid 2009 lows. A rising Quits number bodes well for MWW, which benefits from increasing velocity of labor turnover. Additionally, the Monster Employment Index was up 6% year over year in March and at its highest level since November 2008.

2) Improving Operating Metrics and Sales: MWW’s deferred revenue increased about 15% sequentially in 4Q09 and CSFB would expect continued improvement in this metric in 2010, based on MWW’s guidance of 15-20% sales growth.

3) HotJobs Deal Should Add to 2011 Earnings: While CSFB does not have the HotJobs deal in their current estimates (the deal is expected to close in 3Q10), they believe it will add roughly $0.08 to 2011 EPS estimates when the deal closes.

4) Secular Concerns a Bit Overdone: While emerging competitors like Linkedin and Craigslist are players in the online job landscape, they do not believe they will materially impact MWW’s earnings acceleration over the next several years.

MWW Shares Underperforming the S&P 500 over the Past Year and YTD
MWW shares have underperformed the S&P 500 over the past year by about 9%, despite operating performance reaching trough levels. MWW has also underperformed the S&P 500 year to date by about 17%. MWW shares were driven lower when it reported 4Q09 earnings in early February (ended down 12%) and has recovered somewhat since hitting its lows after earnings, but is still trailing the S&P 500. CSFB believes at the time investors were disappointed by higher than expected operating expenses in 2010, as MWW guided to a 3-6% increase in 2010. They would note part of the operating expense growth is being driven by higher sales commissions due to improving business conditions, which bodes well for top-line growth going forward.

MWW Entering Accelerating Earnings Period in 2011, with Earnings Expected to Begin Peaking in 2013 and Beyond
CSFB believes 2010 should be the trough in MWW earnings and expect several years of “accelerating earnings” before we reach peak earnings. They view 2011 and 2012 as accelerating earnings periods, before MWW’s earnings begin peaking in 2013 and beyond.


Notablecalls: With the markets exhibiting 'back to business' mentality, it may really be the opportune time to start looking at some of the later-cycle plays like MWW. The more early cycle plays have run quite a bit and Monster has been the laggard.

The overall sentiment is markedly negative on the name, with Goldman Sachs issuing a Conviction Sell rating just some weeks ago and Deutsche downgrading the name to a Sell with a $11 target back in Feb.

Short interest stands around 20% of float.

With CSFB, who I count among the most influential (if not THE most) research providers on the Street upgrading the stock to an Outperform with a close to Street high price target, some of the shorts may want to take time and rethink their positions. Starting today.

Note that this isn't a valuation call as CSFB is raising their estimates above consensus on improving trends.

Definitely one to watch, with $16.50 the first target level and $16.75 no out of the question, if market plays ball.

Monday, April 19, 2010

Sandisk (NASDAQ:SNDK): Into the Strait of Messina; Downgrading to Underperform - Pacific Crest

Pacific Crest is downgrading Sandisk (NASDAQ:SNDK) to Underperform from Sector Perform saying they see fair valuation in the mid-to-high $20's.

Model and market changing; risks increasing. Firm says they think the NAND market has moved from a growth business to a cyclical business, perpetually in search of an application or market. SanDisk apparently believes this to be true, because instead of investing in extending their brand, the company has chosen to sell wafers and finished product to the Asian module houses that are largely considered its competitors.

It appears that the market views the opportunity in SNDK as if the days of heady growth are back, or as if the company’s admirable job of restructuring is operations will drive long-term and structurally higher profitability. Pacs sees it differently. They see a company in transition, and one in search of a next act. Unfortunately, a next act does not appear to be on the horizon any time soon. In short, they have become more cautious for the following reasons:

- A notable increase in “Alternative Channel” activity
- The negative implications of selling into alternative channels: negative ROI of increasing market share in traditional card market and the burden of captive manufacturing
- This strategy’s impact on SNDK’s multiple
- Realization that the appropriate multiple on even the most optimistic EPS assumption yields full value (peak) at current prices.

This alone would be sufficient to drive a rerating of most stocks, yet there are many things we can add to the above list. These include:

- The prospect of additional wafer capacity coming on line in 2H2010
- Marginal free cash flow generation even under optimistic scenarios for profitability
- A royalty stream running at 50% of prior year levels from its major licensee, Samsung
- The need to take on the major NAND players Samsung, Toshiba, Hynix and Micron, all of which have superior scale, in the embedded market. Three of those companies have a product portfolio that allows them to bundle/integrate other products
- No new volume “killer app” for NAND in the near term; the adoption of notebook SSD looks to be several years away

Notable Alternative Channel Activity Increase in a Supposedly Healthy Market
This is the issue that has recently gotten the firm's attention. After discussions with numerous supply chain contacts in Asia, it appears that SanDisk has notably increased its efforts in this area. SanDisk began this effort in Q3 of last year; the company revealed that it would sell wafers, unmarked cards/drives, and downgrade products into the memory module industry. Last year, this strategy was interpreted as an effort to work off excess inventory that SanDisk had been carrying because of the down-cycle. Conventional wisdom holds that the current NAND environment is healthy—strong pricing, no incremental capacity, iPad launch, and so on. Yet what Pacs found was a meaningful increase in availability of SanDisk wafers and unbranded cards in the Asian module market during 1Q2010. Several module houses said they can get meaningful quantities of unbranded cards and 3-bit per cell wafers from SanDisk, and they heard from one contact that even traditional 2 bit/cell MLC wafers were for sale. Pacs believes the pricing is often aggressive, and they think that Samsung now views SNDK as its primary competition for business with the Asian module houses.

Hard to Spin This Positively, Except Perhaps in the Short Term
There are a number of ways to view this development. First, it could imply that overall NAND industry demand is less healthy than it appears, as it begs the question: why would SanDisk be willing to enable its competitors in a market that is thought of as marginally undersupplied? Second, it could reveal that the market for X3 (3-bit/cell) devices is not as robust as hoped, as this is the primary product that seems to be available to Asia module houses. The commentary about aggressive pricing also seems to be at odds with how SNDK characterized X3 pricing at its analyst day in February.

“Pricing competitive to X2: Expands Gross Margin and Improves Return on Invested Capital”

- SanDisk Investor Day Presentation, p. 51

Third, it could imply that SanDisk does not think that further share gains of its own brand yield a positive ROI.

Implies Different, and Lower, Multiples for SNDK
Pacs argues, that the morphing of the business model should lead to a lower multiple more in line with those associated with either the NAND semi manufacturers SanDisk is beginning to resemble, the competition to which it is selling, or a combination of both. It suggests a P/E ratio closer to 8x to 9x or a P/S ratio closer 1.2x to 1.3x.

In recent conversations regarding SanDisk, the firm notes they have heard the case made that the company could earn as much as $4.00 in 2010, if it can post revenue upside and expand margins through the year. While they think numbers in this range are highly unlikely, they assume for the purposes of this exercise that the company reaches those numbers. Given what they think are the appropriate multiples for the changing business, its current price implies full valuation (paying the median multiple for peak earnings is typically a stretch). If EPS comes closer to Pacs' number, or consensus, the stock should have downside from here (based on their multiple). From otheirperspective, the valuation has more chance of deflating from here.

At $2.50 in earnings, downside goes to $25. The risk/reward tilts heavily toward risk—it’s time to exit the shares.


Notablecalls: I think this is a fairly significant call from Pacific Crest's Semiconductor team, headed by Kevin Vassily. The comments of meaningful quantities of unbranded cards in the alternative channel spell trouble. Not to mention the more L-T oriented comments regarding the morphing of Sandisk's business model.

SNDK will report in two days, which makes the call even more important. Note that most other firms (have two tier-1's out this morning) are calling for a strong quarter. But do note that while J.P. Morgan is calling for strong numbers, even they are mindful of current valuation and are reiterating their Neutral rating.

I think these comments from Pacs will hit SNDK stock today. I'm guessing the stock will be down 1pt+ today, putting $36.50 level in play.

Friday, April 16, 2010

NVIDIA Corp. (NASDAQ:NVDA): Downgraded at Needham, Fermi not ramping

Needham is making a significant call on NVIDIA Corp. (NASDAQ:NVDA) downgrading the name to a Hold from Strong Buy and removing their previous $22 price target.

Firm notes the move comes after a series of channel checks indicating that Fermi is not ramping well and there could be further product delays. Based on their findings, NVIDIA has very limited supply of Fermi desktop/notebook parts and yields remain poor at around 20-30%. Moreover, Needham's checks indicate AMD Radeon 5800 is gaining design wins given its favorable price/performance, smaller die size and full product portfolio of DX11 40nm parts. Firm believes NVDA could lose market share starting in C2H10, face a more challenging pricing environment and/or experience potentially lower gross margins. Accordingly, the firm has reduced their FY11/FY12 revenues and EPS estimates. Given their concerns around the Fermi ramp, potential GM risk and lower forecasted ramp of Tegra, they believe the shares do not warrant a Strong Buy. They would recommend investors sell into any near term strength as they believe delays in Fermi could cause risks to consensus estimates in the outer quarters.

Fermi is not ramping well. After a series of channel checks, Needham believes there is limited supply of Fermi parts (single digit thousands) compared to their previous expectations (hundreds of thousands). Heat (over 200W), poor yields (20-30%) and large die size (550mm2) are reducing availability of Fermi chips and causing further product delays (1-2 months). While AMD is also facing GPU shortages, the firm thinks they are better positioned to take share given their complete product line, higher yields due the smaller die size and favorable price/performance. Because of the limited supply of Fermi parts, Needham believes NVDA will be forced to cut ASPs on its older GPUs in order to protect unit share and match AMD's price/performance, which would result in lower revenue.

Near term GM risk. Given the high cost structure due to the large die size and potentially lower ASPs, they are reducing their GM estimates for FY11 by ~100 bps to 44.3% (vs. prior estimates of 45.4%).

Intel integrated graphics threat. Throwing more fuel to the fire, checks indicate Intel's integrated graphics (Arrandale/Clarksdale) are gaining design wins at the expense of NVDA, particularly in the low-to-mid range discrete GPU market.

Lowering ests. For FY11, Needham ests fall to $3.9BN/$0.80 (vs. $4.05BN/$0.94). For FY12, their ests fall to $4.1BN/$1.00 (vs. $4.25BN/$1.12). While their April ests remain unchanged, they are lowering their July, Oct and Jan ests to reflect a slower ramp of Fermi and potential gross margin risk.

Notablecalls: Needham's Semi team is pretty good & I think their comments of poor Fermi performance at Nvidia will pressure the stock. Fermi has been considered an important (if not the most important) part of Nvidia's future success. If Needham's checks prove to be correct, the co will lose considerable market share to ATI and Intel.

I would not be surprised to see considerable selling pressure in Nvidia stock today and possibly in the coming days.

Stock should be down 50-80c+ or 3-5%+ on this.

Good job Needham!

Palm (NASDAQ:PALM): See takeout value around $10-14/sh - RBC Capital

RBC Capital is out with an interesting call on Palm (NASDAQ:PALM) saying that if acquired, they believe webOS may command a greater 'strategic premium' than generally appreciated. They see takeout value at a whopping $10-14/sh range.

'Perfect Storm'. If acquired, webOS may command a healthy strategic premium, given a 'perfect storm' of factors: 1) the frenetic 'land grab' in the huge, nascent Smartphone market; 2) rising Smartphone competitive intensity, with too many Apple/Google contenders; 3) the realization owning great software is key to leadership; and 4) carrier, OEM fear over Apple/Google's growing power and threat of repricing down their businesses (Google Voice, iTunes, Nexus, etc.).

Strategic Premium. Palm's challenges have been scale/awareness – not webOS, which is still labeled elegant and revolutionary. Potential acquirers may look beyond Palm's struggling hardware business and capital structure (debt, converts), and see a rare opportunity to acquire a modern Smartphone OS, unique R&D team and budding developer ecosystem. $2-3B may seem cheap, when factoring in growing threats to an acquirer's legacy business (e.g., multi-billion dollar handset/PC sales). Acquirers may also value carrier support for WebOS, which carriers hope will stand up to Android/iPhone when married to a partner with scale/resources. webOS is also scalable (e.g., to netbooks, tablets) and leverages the cloud and Web Standards, expanding its addressability to other hot markets.

$10–14/sh Possible. Palm trades at 1.0x EV/S; precedent transactions (MSFT/ Danger, NOK/ Symbian, etc.) range from 2.3-9x EV/S. Using sum-of-parts, RBC estimates takeout could be $10-14/sh (1.4-1.9x EV/S). The firm has ranked potential acquirers by strategic need and fit:

Strategic Fit: Acquirer urgency/priority to lead in Smartphones and compete with Apple, Google, etc.; fit with existing businesses, customer bases, platforms, geographies, technologies (e.g., OS/platforms), distribution (carrier) fit, market positioning fit.

Execution Fit: integration risk, cultural fit, synergies, organizational integration, potential to preserve Palm autonomy (key employee retention), other integration risks, ability to manage channel conflict, etc

Hewlett-Packard - RBC's best case acquirer:
$14B cash on hand
- Attracted to Smartphone market both offensive and defensive (protect PC business).
- Opportunity to embed webOS into a variety of computing products.
- Allows differentiated smartphone strategy vs prior Smartphone offerings (Windows Mobile).
- Could preserve Palm autonomy (Palm becomes Smartphone division).
- Lower integration risk (both located in California, former Palm CEO runs HP's Personal Systems Group).

Acquirer Anxiety. Palm is facing rising pressure to capitalize on webOS's potential, before its challenges overwhelm it. However, with 2 years of cash, RBC doesn't foresee imminent bankruptcy. And they believe possible acquirers also feel intensifying pressure to capture a leading OS before the market gets 'sewn up' by Apple/Google - or risk losing webOS to a competitor.

Positive Risk/Reward. RBC's scenario analysis suggests positive risk/reward: 1) acquisition (60% probability) = $10-14/sh; 2) turnaround (30%) = our $11/sh target; and 3) no buyer materializes (15%) and Palm either stabilizes or deteriorates (shares could return to ~$4/sh at distressed 0.6x EV/S multiple, possibly lower).

Notablecalls: RBC's Mike Abramsky is making another bold call on Palm here. The rest of the analyst community seem to be thinking $6-7/sh is the best the co can fetch under a takeover scenario. While Abramsky has been utterly wrong about Palm in the past, I think the call will generate some buy interest in the name in the n-t.

I found it very interesting to see that Harbinger Capital, a hedge fund specializing in event/distressed strategies, had taken a sizable 9.48% stake in Palm. Falcone is known for his bold bets.

Some Palm watchers have suggested to me Elevation Partners, that controls around 30% has a cost basis of about $5.41 (facoring in the convertible preferred shares). So that is likely the starting point of price negotiations, I would think.

Wednesday, April 14, 2010

Abercrombie & Fitch (NYSE:ANF): ANF story now represents the best of both worlds - Credit Suisse

Credit Suisse is out positive on Abercrombie & Fitch (NYSE:ANF) raising their price target to $63 (prev. $49) and reiterating their Outperform rating.

Firm notes they are increasing their F10E from $1.82 to $2.10 and their F11E from $2.69 to $3.00 to reflect stronger than previously forecast total sales and comps. ANF posted its third consecutive positive comp in March, increasing CSFB's confidence that the turnaround of the U.S. business is gaining traction, which they expect will continue through the rest of F10, especially given the easy comparisons (which get easier as the year goes on). The ANF story now represents the best of both worlds – a domestic turnaround story and a hyper-growth international story.

Catalysts: The next catalyst for the stock will be ANF’s April sales results, to be released on May 6, 2010.

In the near-term, they believe the street is missing the total revenue story for 1Q, and that consensus numbers are too low. Firm notes they already know the actual sales dollars for February and March, so they can solve for what the consensus revenue estimate is for April. Using 1Q consensus revenue of $659.6MM and subtracting the actual sales results from February and March, they calculate April sales consensus at $186.1MM, down 6% vs. April 2009 sales of $199MM, excluding Ruehl. Using the March spread between comps and total sales of 1,400bps, this would imply comps down 20% in April. Truthfully, the firm says, they don’t think anyone is looking for a down 20% comp in April, but rather that many are missing the fact that total sales have grown 11-14% above comp growth over the past two months, which speaks to the strength of ANF’s new fleet of international stores and growing e-commerce business.


CSFB believes no matter what comp ANF reports for April (they estimate down 4-6%), total sales will be an upside surprise vs. consensus numbers. Based on their comp estimate for April, they estimate 1Q10 sales of $687MM vs. consensus of $660MM.

Best of Both Worlds
CSFB believes at this stage of the game ANF offers the best of both worlds in terms of what retail investors should own right now – a domestic turnaround story gaining traction and a hyper-growth international story.

ANF has now posted three consecutive months of positive comps (+8% in January, +5% in February, +5% in March) and they believe that the U.S. business will only continue to gain traction.

They expect ANF’s international business to grow ~86% this year, and represent ~20% of total sales (from 12% in 2009), and continue to grow over the next 5 years, to reach 34% of sales in 2014.

Not to pick on LULU, but most investors consider LULU the best growth story in CSFB universe. However, when one looks at the size and growth of ANF’s international business compared to LULU’s entire business, they would call ANF international the best growth story in CSFB universe (it just happens to be hidden by the mature U.S. store base).

With LULU’s EV at $2.9BN, it trades at a 5x multiple of F10 sales. If ANF international were given the same multiple, the EV of international alone would be $3.4BN (compared to ANF’s actual current EV of $3.7BN). CSFB believes this highlights how the market remains behind the curve in terms of appreciating the ANF international story.

Need to Consider EPS Upside to Understand Valuation
With ANF stock up 35% since March 1st and trading at 19x F11 consensus EPS of $2.52, many are starting to call the stock expensive. That would be true if you believe there is no upside to consensus estimates.

CSFB believes there is upside to both F10 consensus of $1.83 and F11 consensus of $2.52. They estimate much of the upside will come from top-line, as the company achieves not only better (positive) comps but also a larger spread than many are expecting, again driven by international and e-commerce growth. Keep in mind that every comp point (or total sales point) adds ~$0.12 to EPS.

Notablecalls: Another lovely call from Credit Suisse's research team. As many of you noticed, ANF didn't recieve much love on Monday after Jefferies slapped a Street high target of $75 on it.

Now CSFB is playing ketchup and has numbers to back it up.

I'm not saying ANF is an outright buy on this but it's certainly one to watch. If it gets jiggy, buy it. There is momentum in this one.

Potash Corp (NYSE:POT): Downgraded to Neutral from Conviction Buy at Goldman Sachs

Goldman Sachs is making an important Fertilizer call downgrading Potash Corp (NYSE:POT) to Neutral and Conviction Buy and Mosaic (NYSE:MOS) to Neutral from a Buy.

Firm notes they maintain their view that potash prices have bottomed both domestically and internationally, though it seems pricing momentum has recently stalled. They are making no changes to their estimates, and continue to see robust fertilizer demand for the sector. However, with price increases losing steam, they see fewer catalysts to propel the stocks higher near term.

In the offshore markets, the industry has secured considerable volumes with India at $370 per ton and may have to wait for Brazilian order activity this summer to establish another leg up in pricing. While they maintain that potash prices have bottomed in the international market—with the low for the current cycle set by China at $350/mt CFR—they now believe that the near-term upside to pricing may be more limited. The scale of volume in the various Indian contracts suggests less likelihood that India will be an incremental buyer of additional tons later this year. Brazil, which buys on a spot basis, could set the sentiment tone later this summer—the ag giant usually buys the bulk of its volume in 2Q and 3Q. As global producer inventories continue depleting on sales to India and other markets, the extent to which Brazil returns to more normalized application rates and restocks its channels will be a critical variable in the global market over the next several months

Goldman is also becoming concerned about pricing momentum in the domestic markets. Firm notes they have written at length on the significant rebound they expected in the North American potash market following a difficult 2009, and all indicators suggest this is playing out in early 2010. However, the expected $30 per ton spring price hike appears to be losing some industry support. Their channel checks indicate some Russian product has been pressuring the river markets and the industry may be unable to fully support the price hike. While seemingly at odds with declining producer inventories and positive expected demand, Goldman fears the visibility of stalling prices could affect recently improved buyer psychology. Furthermore, weather and planting intentions could pose a less favorable near-term risk/reward setup now that an expectation for significant volumes has become more accepted as a base case. If the spring season is too wet, or farmers tilt more towards soybeans rather than corn, potash demand could be tempered. They previously believed such risks were less significant when the market was discounting more subdued demand expectations.

Goldman is lowering their 12-month price targets for POT to $123.69 from $131 and MOS to $64 from $68 based on reduced target PE multiples of 16X from 17X to be more inline with the historical mean.

Notablecalls: There have been some rumblings over the past couple of days of Russian product being sold at lower prices, so the Goldman downgrade isn't a complete surprise.

They are backing off of their ill-timed Conviction Buy, which should pressure POT.

I see $108-107 as the prudent n-t level.

Tuesday, April 13, 2010

Verso Paper (NYSE:VRS): Upgraded to Outperform at Credit Suisse, $6 target established

Credit Suisse is making an interesting call on Verso Paper (NYSE:VRS) upgrading the little name to Outperform from Neutral and establishing a $6 price target (prev. $3.50).

Firm says they believe that many of the recent headwinds Verso has faced are beginning to subside and see multiple upcoming catalysts to the stock. In addition, they believe that the market is ignoring the upside leverage tied to recently announced price increases.

Storm Clouds Parting: Over the last month, Domtar Corp. (UFS, $73.03, OUTPERFORM [V], TP $84.00) has announced the closure of its Columbus, MS coated paper mill, which will help tighten up supply. Also, coated groundwood inventory levels are now at low levels and retail sales (which are a pre-cursor to advertising expenditures) have jumped in recent months.

In March, average same store sales jumped by 8.7% according to Retail Metric Inc., better than consensus estimates. This jump may prelude advertisement expenditures, which are a major driver of coated paper demand. Should retail sales continue to remain strong through the spring and summer periods, the firm believes that advertiser will “wake up” and realize they must advertise this Christmas as the consumer goes back to the mall.

Finally… Coated Prices May Increase: After watching coated paper prices fall steadily since late 2008, manufacturers have announced a $30/ton price increase effective April 1st. Given the low inventory levels for coated groundwood, recent price increases in Europe, improving retail sales and Domtar’s mill closure, CSFB has increased confidence that most or all of this price increase will stick, and that further increases may be on the horizon.

Don’t Forget Pulp: With pulp prices continuing to increase, Verso is poised to benefit in multiple ways. First, and most directly, Verso sells pulp on the open market, directly benefiting from higher prices. Second, marginal producers of coated paper (mainly located in China and Europe) buy pulp on the market. Therefore, as their costs rise, non-integrated producers must either have to realize higher pricing in the near-future, shutter capacity or both, which would help Verso continue to achieve better price realizations.

Raising Estimates
Credit Suisse is raising their EPS estimates for 2010 through 2013 and their belief that the coated market is beginning to tighten up and coated paper demand may be better than they were previously modeling:

Cheep on Risk Adjusted Valuation: Assuming just 6.1x CSFB Peak (2013) EPS estimate of $1.65 (expected in late 2012) and discounting back 1 ½ years at a 41% rate, CSFB reaches their $6.00 one-year (2Q 2011) target.

Notablecalls: Interesting little paper/pulp play which I'm sure will go nuts on this upgrade.

Credit Suisse's Paper Products team produced a 20% move in Lousiana-Pacific (LPX) and I would expect similar action in Verso. The logic is pretty much similar. CSFB expects the co to earn $1.65 in EPS by late-2012, which means it will be a $16 to $20 dollar stock in 2011. Provided everything goes the way CSFB expects. That will generate interest.

I suspect this one will be up 10-15% today, putting $4.40 level in play.

Expedia (NASDAQ:EXPE): Upgraded to Conviction Buy at Goldman Sachs

Goldman Sachs is upgrading Expedia (NASDAQ:EXPE) to a Conviction Buy from Neutral, raising their target to $31 (prev. $25). They are suggesting switching into EXPE from Priceline.com (NASDAQ:PCLN), which is getting downgraded to a Neutral from Buy.

Firm notes they raise EXPE, as: 1) They expect its hotel business to benefit from improving travel trends, given ADR leverage; 2) EXPE (at 15X 2010E EPS) has sharply underperformed PCLN (23X) and hotel stocks (30X) year to date; 3) While they forecast faster growth in online travel bookings in Europe than in the US, and thus faster growth at PCLN than EXPE, they believe this is now reflected in valuations: PCLN’s market cap was smaller than EXPE’s until early 2008, then similar to EXPE’s through mid-2009, and is now more than $5 bn (EV gap is around $4.5 bn adjusting for net cash), or 60%, larger than EXPE’s, suggesting that investors already discount a bigger, as well as faster-growing market in Europe. PCLN shares are up 305% vs. the S&P 500 down 21% since adding PCLN to the Buy list on June 28, 2007.


Catalyst
EXPE shares have underperformed the S&P 500 and PCLN by around 8% and 20% YTD on fears over net revenue rates, tougher comps, and potentially higher marketing spend. Goldman believes that EXPE shares substantially discount these concerns and can appreciate 23% driven by 1) multiple expansion, as investors gain confidence in EXPE’s longer-term volume growth potential; 2) positive estimate revisions, as occupancy rates improve, driving better ADRs; and 3) dividends and buybacks, given low leverage and more than $650 mn in FCF.

EXPE’s domestic operations generate more than 60% of gross bookings and revenue
Goldman focuses on the US for EXPE as roughly 60% of EXPE’s gross bookings and revenue come from the US, though the US proportion has been declining over time. Outside the US, they do not believe that investors are giving EXPE enough credit for potential growth and market share gains in Europe (where EXPE is still ramping up recently acquired Venere) and Asia (where EXPE controls second-place China OTA eLong).

PCLN’s 70% greater enterprise value already reflects the faster growth opportunity for European online travel bookings vs. US online travel bookings
Goldman estimates the total travel market size (offline and online) in Europe at $299 bn, roughly 27% bigger than the total travel market size in the US, due to a moderately larger GDP in Europe than in the US. Given higher online penetration of travel bookings at close to 60% in the US versus 34% in Europe, they believe that the US online travel market is currently one third larger than the Europe online travel market. Over the next several years, the firm expects the online penetration ratios and thus online travel market sizes of the US and Europe to converge, driving faster bookings growth for PCLN than EXPE. EXPE and PCLN possess similar penetration rates of online hotel bookings in their respective chief markets. However, because PCLN’s enterprise value is already 70% greater than EXPE’s, they believe that the faster European online travel growth opportunity is already discounted in valuations.

Notablecalls: Piper Jaffray upgraded EXPE yesterday morning but the stock didn't produce much of a move. With Goldman now giving their blessing on the name, I think we will see a nice 5%+ move.

I expect to see some sell interest in PCLN as well, as people switch from the outperformer to the relative underperformer.

Monday, April 12, 2010

Ciena (NASDAQ:CIEN): Upgraded to Buy at Merrill/BAM, see upside to $40

Merrill Lynch/BAM is upgrading Ciena (NASDAQ:CIEN) to Buy from Underperform with a $22 price target (prev. NA)

Firm notes Ciena has embarked on a transformative acquisition of Nortel’s optical and Metro Ethernet Networking (MEN) assets. MLCO sees the combined entity well-positioned to take advantage of the multi-year capex upcycle in optical networking. With several new product cycles from Ciena (nextgen Core Director, WWP wireless backhaul switches) and Nortel MEN (40G/100G WDM), they think Ciena-Nortel MEN can become a powerhouse in global optical networking with a chance to substantially improve from their current 9% market share in a $16bn global market.

They expect the upcoming April 20 Analyst Day to be a positive catalyst for the stock, with Ciena possibly rolling out a combined financial model for the Ciena and Nortel-MEN assets.

35% upside potential based on $22 PO
MLCO's $22 PO is based on 1.5x 2011E EV to pro-forma sales potential for the combined assets. The choice of 1.5x is within the comparables range of 1x – 3x but at a slight discount to Ciena’s 2.2x, 3-yr median EV/S, which the firm believes captures the Nortel-MEN integration risks and lower future growth rates. But they see substantial additional upside to the stock, should the merger with Nortel be well executed.

MLCO notes that under the assumption of 20x P/E target (inline with historical levels), and $2.06 in earnings power, they think the stock could approach $40 once the growth and profitability targets are achieved.

Positive carrier capex trends in 2010
Since the beginning of this year, almost every US carrier (Ciena’s core market) including AT&T, Verizon, Sprint, Qwest and Level(3) has maintained or raised capex expectations. In some cases, the incremental capex will go towards wireless rather than wireline, but within the wireline segment, MLCO sees substantial focus on optical networking and Ethernet.

The main challenge for carriers now, in their view, is to reduce the cost of operations when traffic growth grows exponentially and revenues decline. The focus is therefore to offload traffic from the expensive IP MPLS infrastructure to the cheaper optical and Ethernet layers.

In MLCO's view Ciena is well positioned in wireless backhaul with its new Ethernet (WWP) portfolio; they also see strength in optical switching and metro optical where capacity demand continue to increase. irm thinks we could also see incremental benefits (in late 2010 onwards) from domestic broadband stimulus programs.

Stock has run but not done
Over the past year Ciena stock has appreciated about 80%. Yet this doesn’t stop MLCO from upgrading the stock. In their view, a successful integration with Nortel, coupled with growth in the underlying market could translate into a substantial earnings upside. The consensus view is still mostly skeptical or even negative, and good financial performance could therefore bring new investors to the stock.

Over the years, Ciena’s stock followed its earnings cycles with investors typically over-shooting or under-shooting at the peak and the bottom of the cycles. It happened in late 2007, when AT&T and Verizon were both buying the high margin Core Directors at the same time, and it may happened again now, given that multitude of pending projects they see in the market.

Notablecalls: With a firm the size and power of Merrill upgrading CIEN, people will take note.

Merrill is also suggesting that if everything goes as planned, CIEN will be a $40 stock, implying well over 100% return.

The stock has responded very well to similar comments (namely, the CSFB upgrade from Jan) and I suspect we may see a similar reaction in the very n-t.

Technically speaking the stock is very close to breaking to fresh 52-week highs, which should contribute to buy interest.

I think CIEN will trade over the $17 level and potentially closer to $17.50 today (the market needs to play ball for CIEN to achieve the higher end of the range, though).

Note there's a 25% short intrest in the name. Explosive combo!

Abercrombie & Fitch (NYSE:ANF): Fear & Loathing in..London; target to $75 (!) - Jefferies

Jefferies is making an interesting out-of-consensus call on Abercrombie & Fitch (NYSE:ANF) raising their price target on the name to a new Street high of $75 (prev. $50) and reiterating their Buy rating.

Firm notes they hosted ANF mgmt for meetings in London on April 8-9. Meetings suggest U.S. biz is on a solid path of improvement while the int'l piece is a very sizable and "now" catalyst. They think Street '10/'11 EPS ests. are way too low, sentiment still too negative, and stock risk/reward still exceptional (upside >50% / downside <10%).

Key Points

- Convinced The U.S. Turn Is Here. Comps have turned positive, product is improved, and prices are more affordable giving consumers a reason to come back to the brands. The Adult/Kid businesses should see the strongest momentum near-term while Hollister trends should improve by mid-year.

- See Int'l Near 25% of Sales / 50% of Profits in '11. International is a home run and should continue to be the sales growth driver as well as the primary earnings engine while the U.S. business slowly exits the trough. The international growth and profit potential is one of the most attractive in retail, in their view.

- Now Even More Bullish On Earnings Power. Management's set goal of returning to "at least 15%" operating margins by 2012 looks like it can happen in 2011. Jeffco holds this more bullish view given improving U.S. comp trends, accelerating international growth, gross margins which look like they are about to turn back up in 2H'10, and sizable cost savings opportunities from closing stores in the U.S. As such we are raising our 2011 EPS by $1 to $3.75.

- Expect Bears to Continue Capitulating. The ratings distribution remains overly neutral on ANF with general sentiment still very skeptical. Firm continues to believe that the domestic business is in the beginning of a cyclical recovery and that the international opportunity is more powerful than many estimate. Near-term, they see improving monthly comps as a catalyst to drive shares higher.

- Call Jeffco For Trip Highlights. Firm says they learned why management is confident around its 15% operating margin goal for 2012, the process and thinking around store closures, and even discussed potential uses of excess cash.

Jeffco's new $75 PT is based on 22x 2011 P/E and 7x EV/EBITDA (recovery multiples), a slight premium to historic averages. They also factor in their work that suggests the international biz could be worth near $30. Risks to PT include a re-acceleration in sales declines.

Notablecalls: This must have been one hell of a trip Randy Konik & his team had in London. I mean, clients have to call in (!) to get the highlights. This stuff is probably not for the eyes and ears of women & children.

I can't wait to hear the details!

Now, for the call..

The stock has been a bit of a short crusher of late. Co posted the worst comp. numbers in the teen sector last week, the stock gapped down 2pts in reaction and then rallied 4pts+. Short interest stands around 15%, and the analyst community is skeptical as ever.

Even Barron's is out cautious on the name today:
http://www.reuters.com/article/idUSN1111384520100411

Jeffco's track record with ANF is actually rather admirable - they managed to upgrade the name back in May '09 with a 50% price target (which sounded somewhat bizarre to everyone) & have been upping it ever since then. The point being, they were right.

As many of you know, I'm bit of a junkie for these out-of-consensus calls, so I think this one's a keeper here.

There could be several points worth of upside there, if the market holds. I'm guessing $52's.

Look at what they did to Columbia (COLM) on Friday, after Barclays slapped a 50% target on the name.

Friday, April 09, 2010

Alcoa (NYSE:AA): Downgrading to Neutral & Removing from JPM Focus List

J.P. Morgan downgrades Alcoa (NYSE:AA) to Neutral from Overweight and is removing the stock from their Focus List. Firm's new target is $16.50 (prev. $21.50).

Firm notes their downgrade reflects their new 2011E EPS of $0.48 (which is based on their metal strategist's aluminum price forecast of $0.92/lb) and lower December 2010 price target of $16.50. Although Alcoa has taken significant costs out of its business by closing high cost operations and through additional procurement and productivity savings, they think it will still struggle to generate attractive returns at JPM's strategist’s
2011 aluminum price forecast of $0.92/lb. While LME aluminum currently sits at $1.04/lb today and the average price for the forward curve in 2011 is roughly $1.11/lb, the firm believes likely weak 1Q results and relatively poor fundamentals for the aluminum market as compared to other metals will encourage investors to gravitate towards companies that have more earnings leverage to their respective metal prices.

Lowering 2010E EPS as headwinds offset rising aluminum prices. JPM is lowering their 1Q10E EPS to $0.04 from $0.18 and 2010E EPS to $0.74 from $1.10. 1Q results should benefit from rising aluminum prices (about $0.12 assuming a 15- day lag), Fx (about $0.02), and additional annual procurement & overhead savings (about $0.05 in the quarter though the number should grow to a run rate of $0.09/qtr as savings are achieved). These gains, however, should be largely offset by the reversal of the $0.06 LIFO benefit from 4Q09 (and perhaps a modest charge) and lower can sheet volumes due to a pricing dispute with a key customer. They are also lowering their estimates for the balance of the year, as can sheet volumes and margins will likely not spring back to pre-dispute levels by Q2 and to account for some further cost inflation.

Lowering target price to $16.50 from $21.50. JPM is lowering their Dec 2010 price target to $16.50 from $21.50 to reflect their lower 2010E EPS and lower EV/EBITDA multiple of 7.5x. Their previous price target was based on AA’s average forward multiple of 7.8x since 2002, but they believe a discount is now appropriate given our 2011 aluminum price forecast. However, if JPM were to hold the current aluminum price of $1.04/lb constant for 2011, their 2011E EPS, holding all other factors constant, would move to $1.36 and 2011E EBITDA to $4.8bn, which would equate to a 2011E EV/EBITDA multiple of 5.2x on the current stock price. Additionally,
applying AA's average forward EV/EBITDA multiple of 7.8x to the $4.8bn of EBITDA would equate to a stock price of $27. AA currently trades at 2010E and 2011E EV/EBITDA multiples of 7.1x and 8.2x respectively.

Notablecalls: With J.P. Morgan's Metals team lowering Alcoa estimates just ahead of their earnings release, I think the call warrants attention. Also, their FY11 EPS estimate of $0.48 is now the Street low.

I thought Deutsche's FY011 EPS ests (lowered last week) were as low as they would go here but looks like JPM had other plans.

JPM upgraded Alcoa back in March 2009, so their clients are sitting on sizable gains.

I think AA will get hit on this downgrade. It's a slow mover & the general tape is strong, so you should be able to get decent fills starting from early on.

$14.50? and if that breaks, another 10-20c lower?

Wednesday, April 07, 2010

Cedar Fair Entertainment (NYSE:FUN): Raising to Outperform, $18-20 fair value - Wells Fargo

Wells Fargo Securities is upgrading Cedar Fair Entertainment (NYSE:FUN) to Outperform from Market Perform raising valuation range to $18-20 (prev. $11-13)

According to the firm their Outperform rating on Cedar Fair units and $18-$20 valuation range reflects their view that the termination of the acquisition agreement with Apollo provides management an opportunity to immediately pursue renegotiating/refinancing the company’s maturing debt against a backdrop of 1) favorable credit markets, and 2) an improved outlook for the ’10 operating season due to a gradually improving economy and easy weather comparisons.

While management could pursue deleveraging/restructuring debt maturities/recapitalization through multiple combinations of equity/debt offerings, WF believes the most likely (and most shareholder friendly) will be a restructuring of debt maturities with existing creditors. Given the favorable conditions in the credit markets and current ~ 8.4% average weighted cost of debt, they are optimistic that the company could ladder out its current 2012 and 2014 maturities at a weighted average cost of debt between 7-9%. Removal of this refinancing uncertainty along with an improved 2010 operating environment from a gradually improving economy and easy weather comparisons (FUN’s management team is widely respected as one of the best operators in the industry) should serve as an upward revaluation catalyst for the units toward at least the lower end of an ~8-10x forward historical EV/EBITDA range.

Finally, WF would note that otheir ‘10/’11 EBITDA estimates are $11.6MM/$14.3MM below those outlined by management in the recent proxy filings related to the now terminated Apollo acquisition. Upcoming debt maturities: 8.30.11 $310MM revolver maturity, ~ $640MM of maturing ’12 term debt, and $900MM of maturing ’14 debt. Firm expects there will be a distribution provision in any new financing agreement requiring certain criteria be met before a distribution could be re-instated. They believe management will focus primarily on debt reduction and strengthening the balance sheet in the near-term, rather than resuming a distribution. WF's $18-$20 valuation range implies an EV/EBITDA range of 7.6-8.0x relative to the historical range of 7.9- 9.9x and a free cash flow yield of 10.5-9.4% to our 2011 EBITDA/unit and free cash flow/share estimates of $5.87 and $1.89, respectively. They also view these multiples as reasonable at worst to conservative versus a likely “trough” earnings year in 2009, considering:

- The regional price/value “getaway” proposition offered to consumers by Cedar Fair parks/hotels in a slowing U.S. economic environment,

- Geographic diversity and opportunity for in-park revenue enhancement via the June 2006 acquisition of five Paramount amusement parks,

- Suspension of distribution with free cash flow used to deleverage balance sheet of elevated but serviceable debt levels, and

- Development (revenue opportunities) adjacent to existing parks.

While Cedar Fair was in violation of its Q409 distribution provision, the company was in compliance with its Q409 debt covenants (required 5.25x consolidated leverage ratio). The company’s consolidated leverage ratio debt covenant tightens in Q410 to 5.0x and WF current estimates project that management will remain in compliance with a Q410E 4.53x consolidated leverage ratio. WF current estimates include repayment of $46.0 million in term debt during 2010 following $161.3 million of term debt repayment in 2009. This debt repayment should provide increasing cushion versus debt covenants by reducing the numerator of the consolidated leverage ratio calculation. Long-term, they believe the company’s goal is to reduce debt to achieve a 3.5-4.0x consolidated leverage ratio.

Notablecalls: Wells Fargo's Timothy Conder & him team are making a pretty big call here.

Apollo dropped their $11.50 takeover bid yesterday morning, after months of power struggle with current Cedar management.

The stock went briefly below the former offer price but rebounded rather violently throughout the day. That kind of shows buyers are looking to scoop up the shares around current levels.

Q Investments, a hedge fund that owns an 18% equity stake in the co is rumored to be looking to increase their stake. So that may explain the move.

Wells Fargo's valuation range of $18-20 should create further buy interest in the name.

Tuesday, April 06, 2010

Align Technology (NASDAQ:ALGN): Downgraded to Sell from Buy at Northcoast; target lowered to $13 (!)

Northcoast Research is out with a very negative call on Align Technology (NASDAQ:ALGN) downgrading the name to a Sell from Buy and lowering their price target to $13 (prev. $21)

Firm notes they believe ALGN’s proficiency program will transition from a revenue growth tailwind to a headwind beginning July 1, 2010. During the past several quarters, firm's research indicates ALGN’s revenue has benefited from doctors actively working to achieve proficiency status. In total, they believe this
one-time benefit has added 5-10 percentage points to ALGN’s North American case start growth rate.

In 2H10-1H11 (second-half FY10-first-half FY11), ALGN will compare against these inflated results and they believe growth will slow as a result. Later this year, doctors will simply not have the same incentive to aggressively grow their Invisalign cases (in some cases by 2x-4x) to maintain active status. Separately, many doctors are upset by ALGN’s proficiency requirements and will simply discontinue using Invisalign.

Even more concerning, Northcoast's research indicates that the GAC division of Dentsply (XRAY) will soon enter the market with a new clear aligner product. While there is no public data available on the new GAC product at this point, they believe it will be a multi-aligner system (10+) that will initially be able to treat about 50% of Invisalign cases at a retail price of $700, or a 55% discount to ALGN’s Invisalign Full.

Firm notes they already have a solid case study to suggest what could happen in the clear aligner market when a formidable competitor enters the market with a considerably less expensive product. Privately-held OrthoClear’s market share increased from 2.5% in 2Q05 to approximately 23% in 3Q06. If XRAY’s new clear aligner product can achieve the same level of market penetration as OrthoClear did in its first six quarters on the market, they estimate it would reduce ALGN’s 2H10 EPS by $0.01 and 2011 EPS by $0.09 due to unit share erosion alone. Firm estimates additional margin compression and lower Invisalign ASP’s could increase ALGN’s EPS risk to $0.18 in FY11.

Finally, they believe recent changes to the Invisalign Teen promotion will expose the adult cases that were causing strong teen procedure growth. Later in the year, the firm believes Invisalign Teen growth rates will slow significantly as doctors that were using the teen product on adult cases transition back to the traditional Invisalign.

Notablecalls: This is one fine piece of research from Northcoast Research's team. They are highlighting several possible (and real) headwinds, some of that are likely to materialize in the next 6 months.

The dental space, as many of you know has gotten hit particularly hard during the recession, yet ALGN stock is up quite nicely over the past couple of years.

There is no short interest to speak of which shows the negative side of the story is yet to be known.

I suspect ALGN will get hit as the call circulates around trading desks today and in the coming days.

Note that Northcoast has put real work into this, as the call is 24 pages long.


PS: This may be the first time I have highlighted Northcoast Research here, so welcome aboard!

Huron Consulting Group (NASDAQ:HURN): Upgrading to Outperform on Better-Than-Expected Retention Post Bonus Payments - Baird

Baird is making an interesting call on Huron Consulting Group (NASDAQ:HURN) upgrading the name to an Outperform from Neutral and raising their price target to $30 (prev. $27).

Firm notes they are upgrading HURN to Outperform on improved visibility on management’s retention efforts succeeding in keeping the vast majority of core H&E Directors and MDs. Additionally, their 1Q10 consulting survey showed continued stabilization in the more cyclical segments, with consultants pointing to the recently passed Healthcare bill potentially causing various entities to adjust business processes, thus creating an additional source of engagements.

Baird notes that when HURN first announced the financial restatements, the company had roughly 170 MDs and 230 Directors. Since that time, they believe 37 MDs and 32 Directors have departed or have been let go, with only 4 MDs in H&E and 4 MDs in Legal Consulting having departed. On the Director side, out of the 32 departures, the firm believes 10 were part of Legal or H&E practices.

For perspective, the vast majority of HURN billable employees (78%) are part of the Legal and H&E practices. The majority of the departures have occurred in the Financial and the Corporate consulting segments, which we expect to contribute less than 20% of HURN’s 2010 revenues and EBITDA. If management made the decision to entirely exit the Financial Consulting business, it would only add approximately 0.7x 2010E EV/EBITDA to the current multiple.

- Retention remains the key. Previously, Baird notes they stated that HURN’s largest hurdle was retention of MDs in core segments (Health and Education and Legal) after bonus payments were made following the 4Q09 earnings release. While some post-bonus turnover has occurred, the number of departures appears to be quite a bit below their initial estimates.

- Post bonus departures lower than feared. Baird believes HURN had 148 MDs and 206 Directors prior to bonus payouts. Over the 5-6 weeks which have elapsed since, HURN has seen 5 MDs leave (2 in H&E and 1 in Legal) as well as 10 Directors (4 in Legal and 3 in H&E). Of note, one of the H&E MDs was hired only a month before
the restatement.

- Valuation gap likely to close. HURN is trading at a 5.2x 2010 EV/EBITDA, a 2 point discount to its peers. They believe this gap could potentially close over the next couple of quarters as it becomes clear that management’s retention efforts focused on the core segments have succeeded. If investors gain confidence in the retention efforts, they believe the stock could enjoy significant upside

Baird says their $30 price target represents 7x 2010E EV/EBITDA. This represents a significant discount to the historical 10.4x average, but in line with the peer group which currently trades at 7-7.5x 2010E EV/EBITDA, as they believe that the peer valuation discount owed to employee retention risks will likely close.

Notablecalls: Well hello old friend. Last time we met you were in a bit of a blunder. Looks like you have got your house in order again, haven't you? That's nice.

The thing is, HURN's a mover and Baird blesses it with a very nice upside price target.

I think HURN can trade up 2pts+ (around 10%) on this, putting $23 level in play.

I may be a bit overly optimistic here as HURN is a thin name and won't attract the real big money players but it's interesting enough to warrant attention.

Let's see how it works out.