Friday, July 30, 2010

Biogen-Idec (NASDAQ:BIIB): Porges downgrdes to Underweight, $51 target

Bernstein's Geoffrey Porges is making a significant call in Biogen-Idec (NASDAQ:BIIB) downgrading the name to Underperform from Market Perform with a $51 price target (prev. $57)

After all the news in biotech over the past week Bernstein regards one company as unfortunately marginalized: Biogen Idec. Based on their concerns about competition, pricing, pipeline, revenue and earnings growth, as well as lack of credible buyer interest, they are downgrading Biogen Idec to Underperform with a new $51 price target. There are a number of reasons for our view that Biogen is likely to underperform its peers and the broader market in coming months.

First, the disclosures about Sanofi's interest in Genzyme seem credible to Bernstein and amount to a rejection of a possible bid for Biogen. Speculation about other simultaneous bids for Biogen seem unlikely to materialize. Despite Biogen's sell off last Friday, they expect further downside for Biogen as takeout interest bleeds out of the stock. Firm regards Sanofi's likely interest in Genzyme as real and reflecting the value Sanofi, and possibly other acquirers, see in Genzyme. They see less unrealized value in Biogen and regarded Sanofi as one of the few potential acquirers with dry powder and likely interest in acquiring Biogen's assets. They believe the possibility of another bid for Biogen emerging now, after the company has been for sale for the better part of two years, is very low.

Second, branded competitive pressure on Biogen's MS franchise is set to increase significantly. In June an FDA advisory committee recommended approval of Novartis' fingolimod (formerly FTY 720, now Gilenia) and this amounted to a much stronger endorsement than Bernstein expected.

Third, last Friday's approval of generic enoxaparin raises the probability of approval for generic versions of Teva's Copaxone, which adds to the likely future threats to Biogen's Avonex.

Fourth, all these factors (increased branded competition, likely generic competition for Copaxone, possible biosimilar competition for Avonex) undermine the viability of Biogen's aggressive pricing strategy in the MS market.

Fifth, Bernstein believes the support for Biogen's stock from aggressive share buybacks is likely to wane within a month or so. Specifically, the company only has $1.5bn in available cash reserves at the end of Q2 after their buyback activity in and after the quarter. The company's current share repurchase authorization of $1.5bn has only $235mm remaining after their quarterly results announcement on July 20. While their annual operating cash flow of $1.5bn would support a recurring annual share buyback of $1.3bn, the pace of such a buyback is likely to be materially slower than the $2.5bn repurchase in the last 9 months. With reduced buyback activity, the firm expects the support for the stock in the market to soften.

Sixth, Biogen's flexibility to reduce R&D and SG&A spending and significantly improve margins seems to have limited additional scope. One of the key elements of bullish theses about Biogen is that their historically high R&D ratios (up to 31% in 2004) could be reduced dramatically with new management and a rejuvenated board.

Seventh, Berinstein believes the company's R&D portfolio has limited potential and no near term newsflow of significance. While the company's pipeline contains several items with long term potential, it mainly consists of only marginally innovative products with unclear probabilities of success and limited commercial potential (pegylated beta interferon, BG-12, daclizumab). Of their much touted "eight programs in late stage development", they regard only long acting factor IX as having both a solid technical foundation and significant commercial potential.

Finally, Biogen continues to suffer from a divided board, to which they add inexperienced management and significant turnover of key executives.

SCB Biogen revenue forecast reduced by 2-5%; EPS forecast reduced by 7-10% long term.

Notablecalls: This is another significant call from Porges, the Bernstein biotech analyst many consider the best in the business. For reference, check out what he did to Gilead (GILD) on July 16 when he downgraded the stock.

The one thing about Porges is that he doesn't flip around with ratings. He's been rating BIIB Market Perform for at least 3 yrs. When he changes his opinion, people take notice. I suspect large accounts will be selling BIIB today.

I'm not even going to comment on the details. I have no value to add there.

This one is going down today.

Goes towards $55 and possibly (likely) below.

Thursday, July 29, 2010

Netlogic Microsystems (NASDAQ:NETL): Weak quarter - Short radar

Netlogic Microsystems (NASDAQ:NETL) may be a short this morning following quarterly #'s and guidance out last night.

Here are some of the comments that have caught my eye:

- UBS is downgrading NETL to Neutral from Buy with a $33.50 price target (prev. $34.50) saying they see limited near-term catalysts that could provide an upside surprise to growth based on expectations for: 1) muted macro improvements, 2) the ramp of NetLogic content-laden LTE wireless infrastructure and IPv6 switch/routers as well as its XLP processor to more likely be 2011/12 events. Thus, as they believe NetLogic’s stock is reflecting a fair valuation, they downgrade to a Neutral rating.

- Cowen maintain Neutral rating on NETL:

Conclusion: NETL reported a solid Q2 with bottom-line upside driven by better-than-expected GMs. Guidance (fully covered by backlog) of +5% seq. is conservative, but many hoped for more. Inventories jumped to 145 days vs. 110 in Q1 on new pdts given tight supplies and NETL not wanting to get caught short. CSCO (27% of revs) was down 4% seq. in Q2 as they burned some inventory on certain legacy platforms. Huawei (~10%) also burning some inventory as they transition to a vendor managed program. Fundamentally, NETL is on track - we continue to expect strong forward growth as NETL continues to capitalize on the multi-core opportunity and increased KBP content in 3G/4G network-related buildouts. NETL has been a strong performer QTD (+21% vs. 8% for the SOX), getting a boost following the announcement of their next-gen XLP processor which significantly increases TAM. That said, we’d expect the stock to give back some esp. given inventory, CSCO, and a conservative guide. NETL trades at 23x CY10 EPS, 21x CY11 EPS. Remains one of the better growth stories around, but there’s little rush in the mkt.

- For objectivity's sake, not everyone is cautious on NETL this morning. Here's a more bullish view from JMP Securities:

We reiterate our Market Outperform rating and $37.50 price target on NetLogic Microsystems while raising estimates following a solid 2Q10 result that produced slightly lower-than-expected revenue of $95M (+10% q/q, +192% y/y, JMP $96M) and that allowed the company to post non- GAAP EPS of $0.38, or $0.05 above our $0.33 estimate (Street’s $0.31). Solid demand across all products and excellent product mix drove non-GAAP gross margins to 69%, or up 280bps over last quarter’s 66.2%, and led the company to raise full-year 2010 guidance from $377M to $383M, illustrating the increasing performance gap that the company’s solutions provide over the competition. For us the highlight of the quarter was the company’s ability to accrete both top line and margin, as well guide up on the outlook, despite Cisco-derived revenues falling sequentially from 37% of sales to 27% of sales on that company’s rebalancing of inventory at contract manufacturers. This speaks to the diversification strength of the NetLogic story, as well as its leverage to the 3G/4G wireless infrastructure story, in our opinion, and we are increasing our CY11 non-GAAP EPS estimate from $1.50 to $1.55. Our unchanged $37.50 price target represents ~24x our new FY11 non-GAAP EPS estimate of $1.55, and we view a 24x multiple as an appropriate premium to our coverage universe mean multiple of ~13x given the companies unique market position, leverage to wireless infrastructure trends, and disproportionately large addressable market.

Notablecalls: OK, this is what NETL's recent quarterly track-record looks like:

July 28 2010
Netlogic Microsystems, Inc. Guides Q3 $0.36 v $0.33e - conf call
- Guides FY10 $1.40 v $1.30e, R$383M v $379Me (previously guided FY10 EPS $1.28

April 29 2010 Netlogic Microsystems, Inc. Reports Q2 $0.38 v $0.32e, R $95M v $95Me
Netlogic Microsystems, Inc. Guides Q2 $0.32 v $0.29e, R$95M v $88Me - conf call
- revenue opportunities in the high end are growing rapidly.
- sees growth from each of its top 5 customers.

February 2 NetLogic beats by $0.17, beats on revs, reports better than expected gross margin
Reports Q4 (Dec) earnings of $0.59 per share, $0.17 better than the First Call consensus of $0.42; revenues rose 124.9% year/year to $69.5 mln vs the $61.9 mln consensus
NetLogic sees Q1 EPS of $0.56 vs $0.40 (43.33 +0.84)

Notice the difference in the magnitude of the beat? We didn't much of a beat & raise this qtr.

In addition to that, as Cowen points out, inventory is up both at Cisco & Huawei (both large customers). While is may be tied to new products it's still worrisome.

Note that NETL sold off 3-4 pts back in April on seemingly better results than what we got yesterday.

The stock is trading 20x EPS, which is tad on the high side.

Anyway, one to watch on the short side. Should be down 10% today.

Wednesday, July 28, 2010

Notable Calls Network (NCN): Rockwell Automation (NYSE:ROK)

Sorry for the lack of posts lately. It's hot outside & the analyst community is fixated on earnings releases that still keep pouring in. So very few actual calls based on new info (checks etc.) are made.

It's pretty slow intraday as well, although we do catch an occasional mover or two on Notable Calls Network (NCN) each day.

For example today, a marvelous opportunity presented itself just after open in Rockwell Automation (NYSE:ROK). The provider of industrial automation power, control, and information solutions reported its quarterly #'s around 7:00 AM ET and at first sight it looked like another nice beat & raise.

The stock did very little in pre market. Almost no volume.

- Right around open, a new but very capable NCN member (a girl!) pinged me saying J.P. Morgan was actually out cautious on the name.

I felt the traders were looking for stuff to short (sell), so it immediately caught my attention.

- 09:32 AM ET, after getting the details I quickly distributed J.P. Morgan's comments:

ROK - J.P. Morgan out cautious/neg following results - ALERT
Solid quarter, but not the upside we’ve been used to. Headline EPS missed our above-consensus estimate, and the magnitude of the beat is much less than seen in prior quarters.. given recent beats, an in-line quarter is a meaningful event, and given the standing premium, we think the stock should have a down day.

The stock had already gapped down 30-40c, indicating there was indeed selling pressure present despite the headline upside. As you can see from the chart below the stock dropped like a ROK providing gains in excess of 1 pt over the next 10 minutes as the comments circled the trading desks.

A nice start to the day.

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.

Monday, July 26, 2010

Ford (NYSE:F): EPS ~$2 in 2010-2012 looks possible, Street high target from Merrill

Ford (NYSE:F) is getting some fairly positive commentary from several tier-1 firms this morning:

Note the co reported Q2 results on Friday.

- Merrill Lynch/BAC is raising their target on Ford to $20 from $18 while reiterating their Buy rating:

As a result of Ford’s strong 2Q results, we are raising our EPS estimates in 2010e from $1.45 to $1.95, in 2011e from $1.90 to $2.25, and in 2012e from $2.20 to $2.40. This is further supported by a conservative P/E of ~9X our 2011e EPS. We are encouraged by Ford’s continued execution and believe the company is at a positive inflection point

Balance sheet improvement accelerating
Ford's cash generation of $2.6bn in 2Q:10 was better than expected, and the company paid down $7bn of debt in the quarter. 2Q gross cash stood at $21.9bn versus $27.3bn in debt. Our current estimates imply that the company will be net cash positive in 2011, FMCC may be overcapitalized, and as a result shareholders will reap much greater benefits than generally perceived.

Solid 2Q10 results; company outlook slightly improved
Ford reported 2Q EPS from operations of $0.68, better than our estimate of $0.35 and consensus of $0.40. The upside was driven by strength in all segments, particularly North America and Ford Motor Credit . Ford made minor changes to its 2010 outlook, but reiterated key targets of solid profits with positive Automotive cash flow and added the expectation of reaching net cash positive by YE 2011.

- J.P. Morgan is also out positive saying EPS of ~$2 in 2010-2012 looks quite possible:

We raise our 2010e EPS to $2.00 (vs. $1.60 earlier), 2011e EPS $2.00 (vs. $1.60 earlier) and 2012e EPS to $2.10 (vs. $1.85 earlier). Auto profit improvement in 2011 is offset by lower y/y FMCC profits on non-repeat of 2010's sizable lease residual gains. We leave our price target unchanged at $16 but now base it on 2011 and by using a 5x EV/EBITDA multiple (Ford hinted that removal of valuation allowance could happen soon – something which would likely shave ~$0.30 from our published 2011/2012 EPS). Operationally, Ford is clearly showing excellent progress on nearly all fronts, although the sustainability of NA margins from current levels is a concern. Retain Neutral with positive bias.

Notablecalls: Well it looks like people are slowly but surely starting to accept the idea of Ford having $2+ in EPS power.

Chart looks OK & we have Merrill/BAC out with a new Street high tgt of $20.

One to watch to the upside.

MEMC Electronic (NYSE:WFR): Upgraded to Overweight at Barclays; Short squeeze?

Barclays is upgrading MEMC Electronic (NYSE:WFR) to Overweight from Equal-Weight with a $16 price target (prev. $14).

Shares have not participated in the recent solar rally, primarily due to concerns over Q2 earnings miss and low upside risk to 2010 guide. Although we do not anticipate any upside to Q2 results, checks indicate 2H upside from solar/SunEd segments exists. Positive '11 earnings impact (~$0.55-$0.60) from in-house wafering is also not completely baked into street estimates in Barcap's view. Shares are trading at a discount to poly peers (OCI, GCL). With ~$3/share cash on hand, solid progress on SunEd/solar segments and robust outlook for semis segment, risk reward now appears attractive (pot'l upside to $16, downside to $10, representing risk-reward of 3:1), in firm's view.

1) Robust Fundamentals: Demand from both semis and solar segments remains very strong. Checks indicate that MEMC is completely sold out for the rest of the year and is currently trying to procure poly in the spot market to meet excess demand. One poly competitor told Barcap that "demand is limitless for MEMC" - obviously, most poly suppliers are focused on meeting excess demand from existing customers and as such they do not see significant upside to Q2 results (from extra poly purchases in the spot market). That said, they believe poly/wafer pricing is looking good and despite higher tolling costs, MEMC is likely able to maintain margins. Checks with several solar customers, for instance, indicate that wafer prices were up sequentially in Q2 and could likely remain flat or even increase sequentially in Q3/Q4. Fundamentals within semis segment also appear to be relatively robust and they expect pricing to be up mid-high single digit percentage points sequentially in Q3/Q4. None of the major semis competitors are adding capacity and as such they expect pricing outlook to remain relatively stable, even into 2011. Finally, fundamentals for SunEd business appear relatively strong in markets such as Italy and the US. Barcap's current model assumes $5.50/W system ASP for SunEd in 2H10. Greater mix of Italian systems business could lead to pricing/volume upside, in their view.

2) 2011 Positive Earnings Impact from In-house Wafering Not Completely Priced In: MEMC does not have an in-house wafering facility and as such has to use third party wafer suppliers to convert poly into wafer – these conversion (or tolling) costs are rising and as such, negatively impacting 1H10 solar business gross margins. Barcap forecasts MEMC’s solar business revenues to reach $740 million this year – assuming $0.85-$0.90/W wafer ASPs; this would translate into ~840MW of wafer shipments, but only $55 million net income. For comparison purposes, they expect Chinese wafer supplier Renesola (SOL) to ship 750MW worth of wafers, but generate $150 million net income. They forecast wafer tolling costs of ~$0.50/W in 2010 vs. in-house wafer processing cost of ~$0.28/W for Renesola. This difference in poly processing cost is equivalent to ~$40/kg poly cost difference. In other words, a pure-play wafer manufacturer (Renesola) buying poly at $60/kg in the spot market today would have the same wafer cost structure as a poly manufacturer that has a poly production cost of ~$20/kg. Firm expects this dynamic to change once MEMC brings wafering in-house from 2011. For 2011, they are currently forecasting ~750MW of solar wafer shipments – assuming MEMC brings wafer costs down to levels similar to Chinese wafer competitors (at least ~$0.20/W reduction), they expect positive pre-tax earnings impact of $150 million. Assuming 15% tax rate and 225 million shares outstanding, net positive earnings impact would equate to ~$0.55-$0.60/share, which is not currently fully priced into shares, in our view (our above-consensus estimates assume $0.28 positive earnings impact). Management expects processing costs to be even lower – between $0.20/W and $0.25/W. Higher wafer shipments or lower processing costs could result in additional positive earnings impact.

Low Sentiment – Relatively High Short Interest Levels: Short interest on MEMC shares is at record levels (5-year high). Investors expect Q2 results to disappoint and remain concerned about 2H10 guidance, given rising tolling costs. Barcap also notes that shares have not participated in the recent solar rally. They expect sentiment to improve, once investors become comfortable with execution and get a better understanding of 2011 earnings power. Execution on in-house wafering ramp should enable the company to mitigate a $40/kg poly price decline and still maintain earnings. Clearly, poly prices are not declining by $40/kg next year ($20/kg decline is likely to be the worst case). As such, they expect solar earnings to grow next year (as opposed to current assumption of flat earnings) and drive positive estimate revisions.

Notablecalls: I looks like WFR may be setting up for a bit of a short squeeze. Analysts are downplaying the potential impact of the Q2 miss while short interest stands at 5-year highs.

I also like Barcap's comments regarding 'In-house Wafering' which could add ~$0.50-0.60 EPS. Put a modest 10x multiple on that and you have $5-6 bucks of upside. Not bad for a $10-11 stock, eh.

One to watch. Could trade over $12.00 level today.

Thursday, July 22, 2010

Odyssey Healthcare (NASDAQ:ODSY): Downgrade to Negative at Susquehanna

Susquehanna is making an interesting call on Odyssey Healthcare (NASDAQ:ODSY) downgrading it to Negative from Neutral.

(Note that Gentiva Health (GTIV) agreed to acquire Odyssey Healthcare for $27/share in cash on May 24.)

Over the last few weeks, the prospects for the home health industry have taken a turn for the worse. While Gentiva’s purchase agreement for ODSY has no meaningful outs, SUSQ believes the shares are trading at a level that does not provide an attractive risk/reward. Thus, they encourage fundamental investors to take profits rather than wait for the final $0.50 arbitrage to completely play out.

Susquehanna is lowering their fundamental investment rating on the shares of Odyssey HealthCare, a leading hospice provider, to Negative from Neutral. ODSY is in the process of being acquired by Gentiva Health Services, a leading home health provider. Over the last few weeks, there have been a number of adverse developments regarding the home health industry, generally, and Gentiva Health Services, specifically. Despite this string of negative news, ODSY shares trade within 2% of the proposed take-out price of $27. Term loan commitments from Gentiva’s bank group are due later this week. If the loan syndication is delayed or runs into trouble, the firm believes it could put pressure on ODSY shares. If the syndication proceeds as previously expected, they believe ODSY shares would trade approximately $0.25 higher on the announcement (with roughly $0.25 left until final closing). Thus, we do not believe the risk/reward of staying in ODSY shares is compelling and would encourage fundamental investors to take profits now rather than wait for the arbitrage to completely play out. Negative Factor

The amount of debt being raised relative to Gentiva’s market capitalization is substantial, and debt to EBITDA for the combined GTIV/ODSY is expected to be 4.7x before giving effect to any deal synergies. The biggest component of the bank financing is still being syndicated with commitments on the Term Loan B being due late this week. Susquehanna believes that, if commitments are not forthcoming at the end of the week and there is a need to extend the commitment period, the arbitrage spread for ODSY could widen significantly. GTIV has a current equity market capitalization of $629 million, and an enterprise value of $727 million. To acquire Odyssey, GTIV is seeking to raise $1.2 billion in debt. Approximately $925 million of the funds being raised are slated to come from various bank lines – a $125 million revolver, a $200 million Term Loan A, and a $600 million Term Loan B. Beyond bank financing, Gentiva also hopes to raise $305 million through a high yield offering in early August. Neutral Factor.

The financial arbitrage community is placing considerable emphasis on the fact that the ODSY purchase agreement does not contain a financing contingency, which could be used as an out. In addition, the lead banks have made a commitment to fund the transaction even if it can not be syndicated and would have to declare a material adverse change in order to walk away from the deal. Because there is not financing contingency, GTIV would in theory have to come up with funding for the transaction in another way if the bank agreement were to have problems. However, given that neither home health nor hospice are asset intensive businesses, Susquehanna is not sure that alternative financing could be arranged quickly in light of the recent issues raised about home healthcare. They believe that, if the deal as proposed begins to slip, the situation could become very contentious and difficult, with the outcome of any litigation likely to take considerable time to play out. Neutral Factor.

Notablecalls: I would have pretty much dismissed the Susquehanna call if not for this:

Gentiva Loan Pushed Back Amid Soft Demand, SEC Probe

It looks like that A.J. Rice, the Susquehanna analyst wasn't aware of the loan being pushed back at the time of writing this call. Although, he does note specifically:

'The biggest component of the bank financing is still being syndicated with commitments on the Term Loan B being due late this week. Susquehanna believes that, if commitments are not forthcoming at the end of the week and there is a need to extend the commitment period, the arbitrage spread for ODSY could widen significantly. '

Don't get me wrong, I'm not expecting the deal to be a bomb. It looks like (despite the fairly modest break-up fee), GTIV has very few options to wiggle out of buying ODSY, even if they wanted to.

But the news does indicate the deal is about to get delayed. This means more risk, which in turn means the arb spread is going to widen. ODSY can only go lower from current levels.

Tough to put a target on this one but it seems sub-$26 looks likely.

Tuesday, July 20, 2010

Schnizer Steel (NASDAQ:SCHN): Upgraded to Buy at UBS, checks indicate pricing upside

UBS is making a fairly strong call on Schnizer Steel (NASDAQ:SCHN) upgrading the name to a Buy from Neutral with a $56 price target (unchanged).

They are upgrading shares of scrap processor Schnitzer Steel on the basis of scrap prices seen rising into August and after a sharp retreat in the share’s value. More than 85% of FY2010 profits are likely driven by its scrap (metals recycling) segment, of which at least 2/3 is generally exported. UBS likes the business model of procuring scrap in the U.S. and selling in stronger growth markets overseas but often struggle to find an attractive entry point in terms of valuation and the volatile scrap cycle. They find shares currently attractive at 5.1x FY2011E EV/EBITDA and 4.3x FY2012E EV/EBITDA, compared with a 5-year average 6.7x and a 10-year average 5.9x multiple.

UBS conducted channel checks on Monday, speaking with five scrap dealers and other sources who confirmed market conditions had begun to improve. Most cited higher offers of $10 to $20/t of late, while some said price levels could rise as much as $50/t in the next 30 days. Firm thinks August scrap prices rise $10- $20/t m/m. Shredded grades were cited back at $315/t and No 1 heavy melt was quoted at $280/t from levels as low as $230/t in the past month but still down from a peak $400/t in April. Scrap contacts said their supplies, or flows to their yards, were slim and overseas demand had improved, with several citing exports to India and Turkey in recent days.

UBS thinks the biggest concern weighing on SCHN shares aside from scrap prices has been demand in China. They spoke with the company recently, and they reiterated demand has been solid from Asia, despite falling scrap and iron ore prices of late. Their colleagues in Asia and in global Metals and Mining strategy have begun to talk of iron ore price stabilizing imminently as imported iron ore prices, down to $124/t as of July 16, now are very close to break-even mined costs in China of $110-$120/t. UBS industry contacts have been adamant that many of China’s iron ore miners will shut production rather than produce below cost. They think iron ore price stability can also support a floor to scrap prices.

Schnitzer shares often anticipate moves in scrap prices, and in recent months seems to have baked in a sharper drop in scrap prices than the reality of the scrap market. The latest No. 1 heavy melt price quoted in the chart was $347/t as of June but they have heard levels as low as $230 in the export market, although recently recovered to $280-$300/t. The chart above roughly indicates a scrap price value of $250/t reflected in SCHN shares compared with levels recently recovered to about $280-$300/t.

SCHN management is targeting eventual scrap EBIT profit per ton of $40, highlighting lower-cost procurement when the economy recovery and greater metal extraction capability from recent technology investments. It achieved $43/t of EBIT in a robust May qtr but UBS expects this falls to $18/t for its Aug qtr. For 2011 and 2012 they model scrap EBIT/t of $34/t.

UBS thinks valuation looks compelling on consensus estimates relative to historical multiples. They prefer to use EV/EBITDA as it gives more credit to the company’s strong balance sheet. Some use of cash for acquisitions or share buybacks can yield upside to their earnings estimates. Firm anticipates just 3% net debt to capital at the end of fiscal year 2011, and sees it being debt free in its fiscal 2012 absent other uses of cash.

Notablecalls: I think the pricing tid-bits UBS has uncovered in their checks will come as a moderate surprise to many. I'm sure very few were expecting any near-term upside to scrap pricing, especially in light of rather weak scrap performance exhibited by Steel Dynamics (STLD) last night.

It also appears UBS is being rather conservative with their EBIT estimates for this year and the next. Despite this they see 30%+ upside to the stock price.

SCHN is rather thin, so getting fills in the pre market will be tough. I'm more interested how it will perform after open.

Absent a market crash I would not be surprised to see SCHN trade $44+ today.

Monday, July 19, 2010

Veeco Instruments (NASDAQ:VECO): Big order for Veeco & Aixtron is likely near - UBS

UBS is making a big call on Veeco Instruments (NASDAQ:VECO):

Our discussions with industry contacts in China found that Elec-Tech plans to sign a large purchase order for 100 of Veeco’s MOCVD reactors in 3Q10 with 70 for its Wuhu, China factory and 30 for its Yangzhou, China factory. In addition, we found Elec-Tech plans to order 30 of Aixtron’s MOCVD reactors for its Wuhu factory.

Estimate potential 2011 EPS upside for Veeco & Aixtron at $0.94 & €0.13
Our checks find Elec-Tech is close to signing its 100 MOCVD order with Veeco for $255M, which is $2.6M per MOCVD reactor, while Aixtron’s 30 MOCVD order is for $83M, or $2.8M per MOCVD, reactor (likely the new G5 tool). If Veeco is able to close on this order, we estimate it could add $0.90 to our current 2011 EPS estimate of $4.20, while the Aixtron transaction could add €0.13 to its EPS in 2011E.

Expect these 130 MOCVD shipments to occur from Mar-11 to Dec-11
Our checks find that Elec-Tech expects Veeco’s 100 tools to be shipped in batches by the end of 2011, while Aixtron’s 30 tools should be shipped by Mar-11. We believe these 130 tools for Veeco and Aixtron would not all be recognized as a single order in 3Q10, but instead would likely be staggered as orders thru 2011.

China’s subsidies for MOCVD reactors remain a catalyst through 2H11
We expect Elec-Tech will apply for government subsidies in both Wuhu City and Yangzhou City for about $1.2-$1.5M per reactor after the equipment orders are placed and down payments are made. Given our view of more MOCVD reactor orders in China thru 2H11, we reiterate our Buy ratings on Veeco and Aixtron.

Notablecalls: Note that UBS highlighted 2 Chinese orders back in June & their sales is out with a call that with this 100 MOCVD order included, Veeco's 2011 EPS could reach around $6.00 (consensus is still around $4.00).

This means the stock could effectively DOUBLE from here.

I would not be surprised to see VECO trade up 2-3 pts on this today.

PS: VECO went up 8-9% intraday in June when UBS highlighted the Sanan & NeoNeon orders.

Definitely worth watching. Again, great job UBS Semi team. Chin, Jenkins & Mulholland hitting it out of the park.

Recent shorts are going to get some ol' fashioned belt-in-the-teeth action. 25% short interest in the name.

Friday, July 16, 2010

Precision Castparts (NYSE:PCP): Upgraded to Outperform at CSFB

Credit Suisse is upgrading Precision Castparts (NYSE:PCP) to Outperform from Neutral with a $150 (prev. $129)

At the beginning of the year, they began warming up to commercial OE. As Q1 progressed, rate increases instead of cuts became a reality for both Boeing and Airbus. They got more positive and upgraded Boeing and Spirit April/May, but held of on PCP given its pricier valuation and some concern over the longer term sustainability of its superior margin profile. However, CSFB thinks the bearish sentiment on the stock is overdone and the 20% decline in share price since early May is unwarranted. They believe Precision offers one of the best risk/reward profiles in commercial aerospace.

Credit Suisse sees even greater peak earnings power this cycle given its strong positions on new aircraft development programs, market share expansion in both aerospace and power, acquisition integration as well as its aggressive margin protection during the downturn. PCP is highly levered to the OE cycle where visibility has cleared and rates are increasing on both narrowbody and widebody production. PCP has much to gain from Boeing’s new 787 as it has a $5.6M+ position on each aircraft and is looking to earn company average margins from the start, unlike other risk-sharing partners where delays and re-design is pressuring margin on the first block of aircraft.

PCP has experienced heavy destocking during the downturn in both Aero and Power, resulting in orders that were more than 20% below build rates in some cases. However, they believe the visibility has improved and that the stars are aligning for a robust recovery in the second half of PCP’s FY’11 (December 2010 and March 2011 quarters). FQ2, or the September quarter looks to be the transition quarter but in the December quarter a number of key tailwinds will converge for PCP and they expect a steep revenue and earnings ramp. CSFB's FY’11 est. of $7.53 is 10-cents above the street and their FY’12 estimate of $8.69 is now 11-cents above the street. They introduce a FY’13 estimate of $10.25, which is 22-cents above the street.

Upgrading PCP for several key reasons:

1) Greater change in peak earnings power

Among OE names, PCP shld enjoy greatest relative upside in peak earnings power since prior upcycle (2007) due to aforementioned aero OE rev growth, energy industry upside, low defense ex osure & insulation from 787 margin pressure. Plus, PCP is more likely than other OE names (BA/SPR) to supplement org. earnings with accretive M&A given its track record. CSFB FY’12 est. rises $0.07 to $8.69 ($0.11 >street) and they introduce FY’13 at $10.25 ($0.22 >street). They est. peak EPS at $12+ further out.

2) OE pipeline kicking in – new programs, legacy program rate hikes

3) They think concerns on inventory accounting overdone, creating attractive entry point

Notablecalls: This one is a mover and I suspect it will get play today.

Arena Pharmaceuticals (NASDAQ:ARNA): Upgraded to Overweight at J.P. Morgan

Arena Pharmaceuticals (NASDAQ:ARNA) is getting surprisingly positive comments from several firms after the FDA’s Endocrinologic and Metabolic Drugs Advisory Committee (EMDAC) panel narrowly voted against approval of Vivus’s Qnexa for obesity (10-6).

- J.P. Morgan notes that investors had been focusing on VVUS for some time, but now they expect greater attention to quickly shift to the other two late-stage players, ARNA and OREX. On that note, JPM believes there are some broad yet valuable takeaways from Thursday’s deliberations. First, they believe the need and desire for obesity drugs was clearly acknowledged by the panel and the FDA. Second, the panelists were concerned about the size of the potential consumer base; this is a concern both ARNA and OREX must address. Third, this patient pool means safety is absolutely of paramount importance. Efficacy seems like a distant second. Finally, despite FDA guidelines calling for 1-yr clinical trials, the panel would clearly like to see longer data for these chronic therapies. Taking these factors and all of their work in this field into account, they have altered their outlook on the late-stage obesity assets and now believe lorcaserin has the best shot at approval:

ARNA: Patients may not lose a lot of weight, but clean safety and robust trial design give lorcaserin best shot at approval, in our view; upgrade to OW from N and increase PT to $6. ARNA’s lorcaserin is next in the regulatory queue, with a panel on Sep 16 (PDUFA is Oct 22).

While we are still not moved by the modest efficacy, we have long been comforted by lorcaserin’s seemingly benign safety and impressed by ARNA’s recent execution (partnership, publication). Importantly, in the context of today’s panel discussion, we believe the drug is relatively well positioned with two years of controlled safety data, no clear adverse safety signal, and a robust clinical trial design. Moreover, the preapproval partnership with Eisai and publication in the prestigious New England Journal of Medicine both provide a degree of validation (not to mention a boost to management credibility). To be clear, we still have some issues with ARNA, including the high warrant coverage. Nevertheless, we believe the kneejerk reaction to sell ARNA upon the Qnexa vote (off ~9% and much more from the day’s highs) was overdone. Indeed, based on
what we heard today, we believe lorcaserin has the best shot at regulatory success. Our new YE10 PT of $6 (was $5) is based on a 65% probability of approval.

(J.P. Morgan is downgrading VVUs to Neutral from Overweight, price target is lowered to $6 from $15).

- Cowen notes that today, investors will debate what this denial means for the other two obesity drugs currently being reviewed by the FDA, Arena Pharmaceuticals lorcaserin and Orexigen Therapeutics' Contrave. Investors will weigh the demise of a competitor against yet another datapoint suggesting the bar is high for the approval of obesity pharmaceuticals. One of firm's obesity physician consultants attended yesterday's panel, and has provided us with her initial impression:

She perceives no increased risk for Arena's lorcaserin, and believes that this is now the best positioned for approval. She has consistently said that lorcaserin has the most benign safety profile, and yesterday's panel only emphasized for her the paramount importance of a clean safety profile to getting an obesity drug approved. Furthermore, she perceived three of the panel's bigger objections to Qnexa's approval as its adverse cardiovascular effects, teratogenecity, and the small number of patients on Qnexa for two years. Not only does lorcaserin not have adverse cardiovascular findings, but it produced trends or statistically significant improvements in several cardiovascular risk factors compared to placebo including blood pressure, total cholesterol, LDL cholesterol, triglycerides, and heart rate. Lorcaserin's pivotal program also included a reasonably high proportion of patients with cardiovascular risk factors, including 21% with hypertension, 33.5% with dyslipidemia, although only 0.2% with diagnosed cardiovascular disease. Lorcaserin also has not been associated with teratogenicity. Because of the requirement that lorcaserin's effects on valvulopathy be assessed over two years, lorcaserin has the highest number of patients on therapy for two years of the three agents. In BLOOM, 573 patients stayed on therapy for a second year, and 426 completed a full 24 months of dosing. Therefore, as the firm believes that there is little increased risk to lorcaserin's application following yesterday's panel, but that its competitive positive will benefit from the demise of Qnexa, they perceive the panel as a positive for lorcaserin. Cowen remain at Outperform on ARNA.

- Piper Jaffray (the eternal bull on ARNA) saying they are buyers of ARNA shares today arguing that the clean safety profile and proven efficacy of Lorcaserin are approvable.

Lorcaserin Efficacy is Sufficient for Approval. The pooled analysis presented at ADA on >6,000 patients showed that 47.1% of patients lost at least 5% of their body weight on Lorcaserin vs. 22.6% on placebo. This clearly meets the FDA defined approval guidelines requiring at least 35% of patients lose at least 5% of their body weight and that this is approximately double the placebo rate. The efficacy of Lorcaserin was seen across multiple demographic subgroups including sex, age and ethnicity.

Qnexa Panel Proves that Safety is Key to Success. Piper reiterates their view that the clean safety profile of Lorcaserin is the key factor for FDA approval and ultimately physician uptake. Lorcaserin is the safest of the 3 new obesity agents in their view with the most common side-effects of upper respiratory infections, headache, dizziness, nasopharyngitis and nausea. The incidence of depression was only slightly higher with Lorcaserin and incidence of suicidal thoughts was 1.3% in both groups. The company has performed extensive cardiac echo analysis to rule out an increased risk of valvulopathy with Lorcaserin. In all, they expect a positive advisory panel vote for Lorcaserin on September 16th.

Reits Overweight and $10 target on ARNA.

Notablecalls: Well it looks like the traders that shorted ARNA on Vivus' negative panel announcement failed to account for the safety part of the decision.

Lorcaserin is not as effective as Qnexa, but is more safer to use. Considering the market size, the FDA decided to play it safe and not recommend Qnexa, which leads the analysts to believe they will approve ARNA's lorcaserin.

ARNA traded as high as $5.70 before the Panel announcement, only to crash to $3.60 2 hours later. The stock rebounded to $4.50 in after hours trading.

I suspect we may see $5+ levels again today on short covering and new longs initiated ahead of the Sept 16 Advisory panel.

PS:'s very own druglord Adam F. has the following comments on ARNA:

Arena Pharmaceuticals(ARNA) looks to be the default winner from Thursday's negative decision on Qnexa

Thursday, July 15, 2010 (NASDAQ:AMZN): Downgrading to Neutral on margin concerns - Merrill Lynch/BAC

Merrill Lynch/BAC is making a substantial call on (NASDAQ:AMZN) downgrading it to Neutral from Buy ahead of quarterly #'s. Their price target is lowered to $140 from $150.

While Amazon remains one of the faster growers in the Internet sector, and this is not a Kindle-unit-sales-related downgrade, the firm is downgrading the stock to Neutral based on the following changes vs. their September 2009 upgrade.

The details:

We believe street margin expectations are too high vs. too low. For 3Q we are at GAAP operating profit of $316mn (4.5% margin) vs. street at $380mn (5.3% margin). We view the street estimate of $380mn in GAAP operating profit as too high as we anticipate the following cost pressures: 1) Amazon hired 1,800 people in Q1 and we hiring to continue in 2Q due to digital investment, pressuring opex (our lower-than-street estimates assume a $26mn q/q increase in tech and content spend in 2Q, and $14mn in 3Q, which we believe are reasonable); 2) eBook reader market is getting more competitive for pricing, and we anticipate heavy marketing spending in 3Q; and 3) After limiting fulfillment cost pressure in 2009 due to the recession, we anticipate normal q/q expense pressure in 3Q as fulfillment hiring ramps up. We expect GAAP margins at 5.5% in 2011 vs. street at 5.9%.

We believe 3Q’10 could have the first y/y margin decline in several quarters and we highlight that Amazon historically guides 3Q operating income below 2Q reported operating income, but street estimates have Amazon operating income up significantly q/q.

We now anticipate decelerating growth vs. accelerating growth. Over the past four quarters, Amazon realized accelerating y/y revenue growth as sales benefited from an economic recovery (catch-up consumer spending), market share gains and new category traction. Beginning in Q3’10, after Amazon passes its easiest comps in 2Q, we anticipate material deceleration in growth, down to 28% by 4Q on a currency adjusted basis. Our channel checks with both Channel Advisors and Mercent suggest some deceleration in growth at Amazon (non-media) in 2Q with tougher comps ahead. We anticipate that decelerating revenue could impact Amazon’s multiple, resulting in a multiple in the lower half of the stock’s 5-year historic forward sales range of 0.8-2.1x. Our new price objective is based on a 1.6x multiple.

Increasing competitive pressure in digital. The launch of the iPad, availability of numerous eBook readers in the market, and competition in digital content (Netflix, Hulu, Pandora, etc.), and the upcoming Google books offering, have increased the competitive pressure on Amazon’s digital and Media business. As Amazon is not shy in its investments or pricing to gain share, we think the increasing competitive profile could impact forward margins through increased hiring, lower pricing on Kindle hardware or increased levels of Kindle

Increasing est. to street on rev., but still lower on margins The Euro/$ rate has recovered from $1.19 to $1.27 and we are increasing our 2010 revenue estimate accordingly to $32.87bn from $31.80bn, essentially in-line with the street at $32.84bn. However, we remain below street on margins, expecting $2.81 in 2010 GAAP EPS vs. street at $2.90. Given our views on potentially lower 3Q margins, we are lowering our PO to $140 from $150, based on 30x (down from 35x) 2011 non-GAAP EPS $4.58 or 1.6x 2011 sales.

Notablecalls: Merrill/BAC has been Buy-rated on AMZN for quite a while. With the firm downgrading the name to Neutral just a week ahead of results, saying expectations have grown too high, I expect to see some selling.

The law of large numbers may be catching up with AMZN, which is likely to weigh on the multiple at some point.

But that's the longer-term view.

The reason I think one should keep AMZN on radar today is because of trading dynamics. I suspect some people have been gearing up the buy-amzn-into-earnings trade. It has worked nicely over the past quarters, which is why the Merrill downgrade will catch them with their pants down.

Note that couple of tier-1 firms were out positive on the upcoming #'s over the past days. Merrill is saying these estimates could prove to be too high. In Amazon's case only thing worse than a revenue miss is a margin miss.

I suspect AMZN will trade below the $120 level today and closer to $119.

Wednesday, July 14, 2010

Align Technology (NASDAQ:ALGN): Denstply’s Clear Aligner Suffers a Setback - SunTrust

SunTrust's Jonathan Block is out with some very interesting comments on Align Technology (NASDAQ:ALGN) saying that late yesterday, they began hearing chatter that Dentsply’s pending clear aligner product (MTM) suffered a regulatory setback. Last night, their checks confirmed it. Dentsply's clear aligner has been delayed. They no longer expect the product to be approved in 2010. Firm's best guess now calls for mid-2011. Obviously, this is a positive for ALGN.

Note that Align is no stranger to Notable Calls (make sure you read the humorous comments!)

The details:

What We Know. Dentsply reps were scheduled to have a training session later this week. The training program was going to address the company’s No Trace product (lingual treatment) as well as the new MTM clear aligner. Due to the delayed regulatory approval for the MTM aligners, the training session has been cancelled.

Still Some Unknowns. From what we have gleaned, Dentsply believed it could essentially piggyback off the benchmark studies Invisalign used to obtain its second (most recent) 510k approval in December 2008. The FDA apparently will not accept this. Dentsply now likely has to submit additional clinical data. While details are murky, if true, this could set Dentsply’s product back by approximately one year, in our opinion.

Takeaway. Clearly, Dentsply’s setback would be a positive for ALGN. Some of the noise about Dentsply's MTM capturing significant share in 2H10 should now go away. For us, our diligence (Doc Survey: The Real Story on Competition) has shown that Dentsply's product would not be a significant competitor to Invisalign Full. That said, this does remove an overhang on ALGN shares and should mitigate fear about the near-term impact to Invisalign Express. In addition, it tells us that Danaher's (Ormco) next generation aligner, which we believe will largely be an upgrade to Simpli5, may have a longer approval process than some expect. Reiterate Buy on ALGN.

Notablecalls: Dentsply’s clear aligner product was expected to compete with Align's product, which promted the wonderful & gutsy downgrade from Northcoast Research back in April when the stock was trading around $20.

The stock traded as low as $13 couple of months later.

While ALGN has bounced a bit off its recent lows I would not be surprised to see the stock trade up nicely over the next few days.

Well done SunTrust! This is what I call research!

Lexmark International (NYSE:LXK): Move to Underweight on Stiffer Competition, Weaker Inventory Growth, FX Pain - Morgan Stanley

Morgan Stanley is out with a rather significant negative call on Lexmark International (NYSE:LXK) downgrading the printer manufacturer to Underweight from Equal-Weight (no price target).

Morgan Stanley's meetings with printer competitors and proprietary channel data tell them the Street underestimates these 2H10 risks for Lexmark: 1) increased competition in laser printers as HP’s component constraints ease; 2) reduced growth benefits from inventory restocking; and 3) earnings risk from the recent depreciation of the EUR against the USD. Firm lowers their CY10 EPS estimates to 19% below consensus to consider these risks and expect LXK shares to underperform any near-term rebound in technology hardware stocks.

Believe Lexmark was a large beneficiary of HP’s laser component shortages earlier in the year. According to IDC, Lexmark’s laser printer value share was 8% in C1Q10, growing 30% Y/Y from 6% a year ago. In the same quarter, HP held 32% share, down from 37% a year ago. Following their checks in Asia, MSCO expects HP’s laser printer constraints to ease by July, allowing HP to reclaim laser market share from pent up demand starting in C3Q10. As a result, they are lowering their 2010 revenue growth estimate for Lexmark from 5%, which is already below consensus of 6%, to 3% excluding the Perceptive Software acquisition, and lowering laser printer revenue growth from 15% to 12% (11% at constant currency).

Checks with Wal-Mart revealed that some stores have stopped selling Lexmark inkjets over the last one to two months, but the stores expect to continue to carry cartridges. The decreased shelf space at Wal-Mart is not a surprise, given Lexmark’s strategic shift to target higher volume inkjet users in SOHO and SMB through office superstores. However, an exit from Wal-Mart stores could accelerate the decline of Lexmark’s inkjet installed base and result in lower ink cartridge inventory in the U.S., putting further pressure on Lexmark to execute its laser growth strategy. Even though Lexmark de-emphasized low-end inkjet over the past three years, the inkjet segment still accounted for 32% of revenue and ~22% of operating income in 2009, by MSCO estimates.

Morgan Stanley's June channel survey also suggested that the shift in business from Lexmark to HP might be underway. The survey showed that resellers expect Lexmark to lose share and HP to gain share in C2Q. In addition, 40% of printer resellers expect sequential growth in their business with HP in C2Q, compared to 35% of resellers last quarter. In contrast, the number of resellers expecting to increase their business with Lexmark fell from 40% in C1Q to 26% in C2Q.

Firm lowers their 2010 EPS estimate to $3.41 (19% below consensus) from $4.01, to account for increasing competition in laser printers as HP’s component constraints ease and earnings risk from the recent depreciation of the EUR against the USD. Their 2010 revenue estimate only falls to $4,055 million from $4,063 million as they model $61 million of revenue from the Perceptive Software acquisition, completed on June 7. Notably, they already assumed no inventory restocking benefit in their original estimates, therefore requiring no further changes to their model.

For C2Q10, MSCO EPS estimate falls to $0.82 from $0.96 (consensus at $0.95), on the back of lower gross and operating margins. They model gross margins of 34.8% versus consensus of 37% and operating margin of 9.3% versus consensus of 10.6% mainly due to foreign currency headwinds. Lexmark does not hedge P&L impacts and has limited natural hedges in Europe.

Notablecalls: This is a fairly fundamental call on MSCO's part. I would not be surprised to see the stock trade down markedly in reaction as most other tier-1 firms have been extremely positive on the name.

What bothers me in respect to this call is the ranting about competition and lack of shelf space at WMT while most of the EPS estimate cut comes from currency adjustments.

Nonetheless MSCO has dug up new and interesting info which is why I expect this call to drive the stock down in the n-t.

$33.50 anyone?

Chemicals: Downgrade coverage view to Neutral; PX to Neutral; SHW to Sell - Goldman Sachs

Goldman Sachs is making a significant call on Chemicals this morning downgrading their sector view to Neutral from Attractive as recent global economic data point to a more muted economic outlook heading into 2H2010.

Ratings changes:

- Praxair (NYSE:PX) is downgraded to Neutral from Buy with a $91 target price (prev. $95)

- Sherwin-Williams (NYSE:SHW) is downgraded to Sell from Neutral with a $71 target price (prev. $77)

Recall that they had taken a more pro-cyclical stance on the Chemical space beginning on May 15, 2009 (their “Embrace the Cycle” call) to reflect a constructive outlook for the global economy and upside potential toward mid-cycle valuations. As expected, the global economy bottomed out and a strong cyclical rebound in underlying demand from the depths of the recession took hold with positive macro trends worldwide combined with robust customer inventory rebuilds in early cycle end markets. Those factors along with more favorable developments for raw material costs and product pricing plus extremely aggressive restructuring efforts fueled substantial upward earnings revisions, driving chemical sector outperformance - sector average up 47% versus the S&P500 up 22% since May 15, 2009.

While the 2Q2010 earnings season is likely to show strong results given nearly uniform commentaries by companies expressing little evidence of any slowing, (including positive preannouncements from PPG, EMN and Arkema), the firm sees increased uncertainty surrounding the demand outlook for 2H2010 - early 2011 as a series of data points in past weeks suggest deceleration worldwide: 1) disappointing ISM and employment data in the US; 2) continued weakness in the GS global PMI index; 3) downward revisions of GS China GDP forecasts; and 4) less inspiring trends in key chemical end markets such as auto, semis, and housing.

The market is discounting near-term earnings risk Despite the positive tone from the industry in recent months, the market appears to be discounting a more somber earnings outcome in the near term. Forward P/E multiples for the chemicals group rallied from trough levels of 10X-11X in March 2009 to mid-teens in early April 2010 (vs. the average mid-cycle multiple of 15X-16X). However, since late April-May, as investor confidence has eroded, the chemical sector’s average P/E multiple has dropped to around 13X based on Goldman's current 2011 EPS estimates.

Sherwin-Williams (NYSE:SHW): Source of opportunity
Goldman is adding the US paint producer Sherwin-Williams (SHW) to their Americas Sell list to reflect a cautious view on the domestic residential and commercial construction markets (50% of total sales) where recent macro data point to demand deterioration in coming quarters. SHW trades at 14X their 2011E EPS (vs. mid-cycle 13X-13.5X), at a substantial premium to the peer group (PPG, VAL, and RPM) average of 12X. Since early April, SHW shares have increased 8% versus peer group down 5%. However, considering that almost 90% of the company’s revenues are generated from the US and it has substantial exposure to the construction markets, they believe that SHW is unfavorably positioned compared to other paint names that have more diversified geographic and end market exposure.

To reflect a slowing demand trend in the coming years, the firm has lowered 2010/2011/2012 EPS forecasts to $4.65/$5.25/$6.00 from $4.70/$5.50/$6.15. Their new 12-month price target is $71 (-$6) based on 13.5X 2011E EPS, or about 3% downside from current level (relative to average 11% upside for the sector). Firm believes other names such as Valspar (VAL, Buy) in the paint space offer more attractive investment opportunities.

Notablecalls: SHW & PX should trade down today as Goldman is taking their Chemical chips off the table since turning bullish more than a year ago.

Note that Goldman is also downgrading Homebuilders today (to Neutral from Attractive) as the previously anticipated new home sales pickup following the May drop has not yet materialized;

Given how leveraged SHW is to domestic construction market, the call should add some fuel to the fire. Although, one must admit Goldman throwing in the towel looks more like a contrarian signal. They were quite bullish on Homies all the way down.

As I have already noted this morning the general tape feels over extended so I'd be looking at potential shorting opportunities rather than going long.

Pass the salt, please!

Advanced Micro Devices (NYSE:AMD): Cautious comments ahead of #'s - Morgan Stanley

Morgan Stanley is out with an interesting call on Advanced Micro Devices (NYSE:AMD) saying they believe the share price will fall relative to the industry over the next 15 days.

Research Tactical Idea:

After the market close, INTC reported revenues that beat the high end of guidance, which was driven by a 13% QoQ increase in Intel's Data Center (Server) revenues vs PC Client revenues that grew at 2% QoQ. We believe this confirms our view that data points around the consumer appear weaker than the enterprise market, and supports our UW rating on AMD, which has ~80% consumer exposure. Additionally, we believe that competitor Intel has stronger MPU server products, which may have translated to share loss for AMD during the JunQ. AMD is scheduled to report earnings this

Thursday, July 15, and we expect AMD results to compare unfavorably to INTC's. We estimate that there is about a 60% to 70% or "likely" probability for the scenario. Estimated probabilities are illustrative and assigned subjectively based on our assessment of the likelihood of the scenario.

Stock Rating: Underweight
Industry View: Cautious

Notablecalls: AMD is up this morning in reaction to Intel's better than expected numbers. Morgan Stanley is calling for weak quarter on AMD's part, which could indeed pressure the stock today.

The S&P has gone up ~7% over the past 7 days and feels a bit extended.

Worth keeping AMD on your radar early on. Bit of a contrarian call. I see it giving up at least some of the early gains and heading toward $7.75 level today. Let's see how it works out.

Monday, July 12, 2010

Weyerhaeuser (NYSE:WY): Don't Spend It Too Fast - Credit Suisse

Weyerhaeuser (NYSE:WY) is getting some interesting commentary from Credit Suisse after the co announced the process of paying out its accumulated "earnings and profits" (E&P) as required in a conversion to REIT status.

As it demonstrated at the May 27th analyst meeting, the expected E&P will be $5.6 billion, 90% of which is in stock (effectively as stock split) and 10% in cash. Shareholders owning the stock as of next Thursday, July 22nd, will receive the E&P (and be responsible for taxes on this effective dividend) on or about Sept. 1st.

Here comes the interesting part:

Don't Spend It Too Fast: At Friday's closing price taxable shareholders will incur up $5.70 per share in actual cash tax liabilities (depending on their state of residence), yet the cash portion of the E&P distribution will likely be just $2.65 per share. This means that owners in the upper tax brackets will not only end up paying 100% of the cash portion of the distribution in taxes, but that they will need to cough up another $3 or more for taxes for each share owned. In other words, taxable shareholders in "high tax" states could be required to "transfer” about 16% ($5.70) of their current proportionate economic interest in Weyerhaeuser the tax-exempt (pension/endowment) shareholders given that the E&P "dividend" is such a high proportion (74%) of the current market capitalization.

Sell and Buy It Back: This predicament may increase the stock's volatility over the next 6 trading days (through next Monday, the 19th) as the 20th is apparently the "ex" date. We could see taxable investors sell the stock to avoid this massive, $26.49 per share dividend reflected in their brokerage 1099’s next February, and then buy the shares back after the ex-date. If the stock weakens over this 6-day period, tax-exempt investors may want to take advantage.

Maintain Neutral Rating: We also maintain our $44 target price.

Notablecalls: WY is trading around $38.50-$39.00 this morning. Consider the following:

- The news was clearly expected

- CSFB is saying people are likely to SELL the stock due to tax issues.

This looks like a fading oppy to me.

Also note that UBS is out upgrading WY this morning (+ve on the whole group). The upgrade is unrelated to this news out this morning.

I would not be surprised for WY to give back at least half of this morning's gains over the course of the trading day, putting $37-37.50 levels in play.

Obviously, while I was writing it up the price has escaped us. Sigh.

Friday, July 09, 2010

UAL (NASDAQ:UAUA): RASM #'s could re-ignite the stock

Airlines and especially UAL (NASDAQ:UAUA) are on my radar screen this morning after the co reportes better then expected RASM #'s last night (traffic and unit revenues).

Southwest Airlines (NYSE:LUV) also presented nice RASM #'s.

Analysts are rather optimistic and are essentially calling for an upside in the sector today:

- Morgan Stanley:

UAUA’s result reaffirms that the airline industry revenue trend is still intact. Now, with favorable LCC, LUV, and UAUA June results reported, we believe it is fair to conclude that last week’s lighter-than-expected CAL PRASM data point was an isolated event (see CAL RASM: Miss May Be Isolated Look to LCC/UAUA for Confirmation 7/2/10). While one-time benefits created a difficult seq. comparison for CAL relative to peers, data points from others highlight that strong demand trends remain intact. In fact, LUV and UAUA’s June PRASM results showed a seq. improvement vs. May in excess of the simple change in YoY comparisons. We continue to believe that on-going demand strength will improve recent negative investor sentiment, in conjunction with:

1) Attractive valuation as a number of legacy airlines are trading around 4-5x 2010 EPS and 4-5x 2010 EBITDAR, and 2) Likely upcoming favorable mgmt commentary during earnings season consistent with the positive trends expressed at our recent meetings with a number of the airlines.

UAUA reported June PRASM growth of ~31%, which is at the high-end of our est. for 29%-31% and buy-side expectations, in our view. Based on the monthly PRASM growth results reported by UAUA this quarter, UAUA’s 2Q10 consolidated PRASM growth is tracking at ~26.9%, which compares favorably vs. mgmt’s recent guidance for 26%-27% YoY growth. The strong June result was driven primarily by a ~28% YoY increase in Yields.

- Citigroup:

Sector Rises 3.2% — US/Canadian airline stocks rose 3.2% (average) since July 1st. LCC’s release of above consensus June 2010 operating results July 6th breathed needed life into the sector following the selloff last week, partially on CAL’s June results, which investors seemed to perceive as soft and an indicator of potentially worse releases to come. UAUA’s solid June operating report this evening should further improve sector sentiment (we would note that UAUA stock has underperformed the group by 4.5% since July 1st). Looking forward, JBLU will report June numbers and 2Q earnings season begins the week of July 19th.

June 2010 PRASM Review — CAL initiated the release of June 2010 operating results after the close July 1st, reporting consolidated passenger revenue per available seat mile (PRASM) rose 21-22% YoY, below our 23% estimate, implied consensus of 22%, and some competitor estimates that approached 25%. Of the carriers that reported June 2010 PRASM, LCC +22% (consensus +19%), LUV +24% (consensus +25%), and UAUA +30.5-31.5% (consensus +30%). We expect JBLU to report June PRASM +14%, slightly ahead of the Street.

Notablecalls: UAUA should have an extra pair of jet engines today as:

- Ther PRASM results are showing clear acceleration (yoy)

- As Citigroup notes, UAUA has underperformed the group by 4.5% since July 1.

- Analyst estimates are bound to move higher for UAUA and the group in the coming days.

- I expect JPM and MLCO also come out +ve on the group either today or on Monday.

I expect UAUA to trade up by 5% today (to make up for the underperformance) & I would not be surprised to see more upside if the general market is favourable.

Let's see how it works out.

Thursday, July 08, 2010

Nanometrics (NASDAQ:NANO): INTC Giveth, and INTC Taketh Away—Downgrading to Perform - Oppenheimer

Oppenheimer's Semiconductor team is downgrading Nanometrics (NASDAQ:NANO) to Market Perform from Outperform while lowering their target to $10 (prev. $13).

The firm notes their downgrade of NANO is plain and simple: They upgraded the stock in August of 2009 (@ $3.55) on proprietary data points indicating the company had been awarded INTC's 22nm thin-film/optical critical dimension (OCD for short) metrology business. Based on the magnitude of this business, they saw clear visibility for $1-plus/share in earnings in 2010/2011. Until recently, this has been their consistent thesis on NANO.

Recently, however, Opco's checks suggest that upon encountering technical issues during initial trial/pilot runs at 22nm, INTC has turned back this decision, partially. With persistent issues related to tool-to-tool matching (i.e., measurements made on one tool not quite matching same measurements on another tool), INTC has relegated more critical thin-film/OCD applications in/around the lithography bay to KLAC. KLAC was the incumbent supplier, and has an installed base of thin-film/OCD tools already at INTC for 45/32nm.

Roughly, the firm estimates that the total thin-film/OCD tool opportunity at INTC for 22nm totals ~80 tools, with half allocated for litho applications, the other half for etch. Thus, they estimate NANO's loss to be 40 tools (give or take) in 2011. Given INTC is presently a 20%-plus customer (exceeded only by Samsung), the impact in terms of percentage and absolute value materially impacts their 2011 model. Taking out $30M in revenue, and assuming 1) percent gross margin on INTC sales is 40%, well below its corporate average of 50%-plus, and 2) no offset out of operating expenses as support of INTC sales offers no scaling to the downside, they estimate the earnings impact at ~$0.40/share.

Thus, consistent with a $30M revenue shortfall in 2011, translating to a ~$0.40/share earnings drop in their model for 2011, Opco is lowering their FY11 estimate to $0.90 from $1.32

Justifying their Perform rating (vs. Underperform) is the potential for partial offsets: 1) ramp in UniFire for INTC back-end, 2) OCD metrology win at Toshiba and 3) revival of overlay metrology. However, there are already questions on the semi cycle, and share loss makes a specific stock even more questionable.

Notablecalls: This is what I call quality research - new info coupled with a change in thesis.

Note that Piper Jaffray was out very positive on NANO on June 28 reiterating their Overweight rating and $22.50 price target saying that based on their conversations, they believed the Street was underestimating NANO's opportunity at Intel:

NANO's OCD opportunity at Intel is likely to be bigger than we thought. We initially estimated that the OCD opportunity at Intel as a $60-$90 million opportunity for Nanometrics in the 22nm node. We now believe that the opportunity is likely to be closer to $90-$120 million. While Intel has taken a few systems for development, we believe the volume is minimal today. We expect shipments for production tools for 22nm to commence in Q4:10. The increase in our estimates for Intel rev for OCD increases our confidence in our CY11E, and we believe that NANO numbers are likely to go up not down moving forward.

I guess Opco's comments will give Piper something to think about.

NANO isn't a big trader but I think the call will create some selling pressure. The stock hasn't done much over the past 6 months (vs. the market decline) or so which seems to indicate that investors were expecting good news out of NANO.

I think the stock is likely to trade towards $10 level today & I would not be surprised to see that level breached. Would not rule out $9.50.

Again, well done Opco Semi team!

Tuesday, July 06, 2010

Schonfeld Letter to Traders: It is getting tougher

Here is a letter from Steven Schonfeld the owner of Schonfeld Group Holdings LLC a trading group that until now how employed hundreds of prop traders.

Here's a brief overview of the firm and its founder via WSJ

'On December 5, 1988 we started Schonfeld Securities. Very soon after, we started hiring prop traders, and many years later formed "Opus Trading Fund".

Prop trading has always been and will always be an extremely important part of our business and certainly the one that is closest to our hearts. The best Schonfeld traders will always have a place to trade and the capital to maximize their earnings potential. We are committed to them and will always strive to provide an environment for them to succeed. Sadly, however, we are re-thinking the notion that less skilled and less successful traders can be here forever without producing sufficiently for themselves and the firm.

For over 21 years we have always done everything we could, with the traders¹ best interests in mind, to provide careers and opportunities for our traders.

We have always cared more than you could imagine for your careers, happiness, well being and future.

We truly admired many of your passions for trading and for the markets. Over the years we have stood by you and you have stood by us as well. There has been real loyalty on both ends and don't ever think we took your loyalty for granted for one second.

Bull and bear markets come and go. Good trading markets come and go. But unfortunately, our vision of the future of trading has changed. It is getting much tougher for traders to make a living or get by. The direct competition from black boxes, stat arb and high frequency trading which continues to grow at exponential rates is here to stay and has caused us to change our outlook for lesser skilled traders.

Based on the above competitive changes to the trading arena, we feel we are doing an injustice to both our lesser skilled traders and the firm by keeping them around. At best, they will barely get by and that's not why we are in his business or what they should be here for.

Unfortunately the career of trading is not a good option for lesser skilled traders going forward. We will be letting go many of these traders over the next 6-12 months. It is with deep regret and the hardest thing we have had to do since the inception of the firm in 1988. It truly saddens us to do this, but we are doing the traders who will not be making a living going forward a favor, so they can venture into different careers.

It is even more painful since many of you have been so loyal and really good guys.

To those of you that we ultimately let go, we deeply apologize but whether you understand it immediately or not, it truly is best for you.

After discussions with the managers and exhaustive quantitative research our objective will be to reduce the number of traders we have down to those that we believe will make a great or very good living trading for years and years to come with the necessary skills needed.

The traders who are newer to trading will be given some extra time to potentially have their skills stand out. The days of a trader making a living by generating $50k to $75k of adjusted gross annually are over. There is room for only highly motivated, skilled and developing traders that can add value to each other and the firm.

Once again, we wish it was different and are extremely sorry for those that don't make it.'

Notablecalls: Nothing to add really. We know it's happening. The business has gotten tougher yet again.

Thursday, July 01, 2010

Dendreon (NASDAQ:DNDN): Colour on CMS news; Bounce candidate

Dendreon (NASDAQ:DNDN) is getting defended accross the board after the stock got hit (-20%) in after hours trading following The Centers for Medicare & Medicaid Services (CMS) issued a standard statement that it is now starting its national coverage analysis of Provenge to determine whether or not Provenge is reasonable
and necessary.

- J.P. Morgan is reiterating their Overweight rating saying they view this as an attractive opportunity for patient, LT investors. This development has the potential to linger as an overhang considering it cranks up the decibels of an already noisy situation. Nevertheless they ultimately expect a favorable resolution given that Provenge is an FDA-approved treatment with a demonstrated survival advantage, was rapidly incorporated into NCCN treatment guidelines (indicating acceptance within the medical community), and is already covered by some private payors and local MACs:

What’s an NCA? Medicare coverage is limited to treatments that are deemed “reasonable and necessary.” In some cases, CMS will initiate a NCA to determine if it should implement a National Coverage Determination (NCD) – a national policy statement granting, limiting, or excluding Medicare coverage. This news was surprising given that NCAs are generally not initiated on freshly approved drugs though our understanding is this is not a cost-effectiveness-driven exercise.

What are the potential scenarios? We see the worst-case scenario (outright refusal of coverage) as highly unlikely given Provenge’s overall survival benefit (esp. in pts 65+ yrs) and NCCN guideline adoption. Indeed, we are not aware of any NCDs for “on-label” oncology drugs (only off-label in CRC with Avastin/Erbitux/oxali and for Abarelix where coverage was restricted to the labeled indication). The best-case scenario would arise from a review that does not even proceed to an NCD. In the event there is an NCD that clarifies the on-label population for Medicare, we would actually view this as a positive as it essentially guarantees national coverage (and we only assume on-label use). A risk to note is this process could prompt some local MAC directors to stall coverage decisions until the NCA plays out.

We’re disappointed but remain OW. Investors may need a strong stomach (or some quality noise-cancelling headphones), but we remain confident that coverage of Provenge will remain intact following CMS’s review. We anticipate greater clarity post the MEDCAC meeting later this year. That said, we acknowledge this news is an added overhang to DNDN, which was already in the midst of a firestorm of controversy, and this event is unlikely to improve sentiment near term.

- Cowen's Eric Schmidt, Ph.D reits Outperform on Dendreon and highlights 5 reasons why Provenge should be covered and reimbursed by CMS:

1. CMS covers all drugs that are medically necessary. There is essentially no debate that Provenge’s proven survival advantage and benign side effect profile are medically necessary for elderly men (the CMS population). The only other approved PRCA agents (taxotere and cabazitaxel) do not compare well to Provenge in terms of efficacy or safety.

2. CMS is forbidden by law to make coverage decisions based upon drug pricing. Provenge's high cost cannot be used against it. CMS cannot negotiate a lower price point for Provenge.

3. There is no precedent on CMS's part to even attempt to restrict coverage of cancer drugs in on label indication. All three prior NCDs convened to discuss oncology drugs (colorectal cancer therapies, Abarelix, Zevalin/Bexxar) were focused on off-label use.

4. A majority of states go as far as to require payors to reimburse for cancer drugs that are used off-label, but listed in the various Compendia.

5. President Obama doesn’t want to convene a Sarah Palin "death panel". Were CMS to even host MEDCAC panel that debates coverage for Provenge, the political fallout would be enormous.

We believe the national coverage decision (NCD) is being called to provide guidance to CMS's local Medicare Administrative Contractors (MACs) on Provenge. We believe the only politically acceptable outcome is coverage for on label use, though CMS might use the NCD to make it clear that it will restrict off-label use (not in street models). While Dendreon management was taken off guard by last night's decision to open an NCD, it doesn't expect the proceedings to have a material impact on Provenge's launch (CMS and other payors are likely to continue to reimburse the drug during the NCD process). In fact a CMS spokesperson has said it is "99.9 percent certain that we will pay for it (Provenge) if somebody files a claim"

We find it somewhat ironic that in an environment where wholly-owned oncology assets are highly coveted acquisition candidates (Osi Pharmaceuticals, Abraxis Bioscience) investors are fleeing shares of Dendreon.

Our thesis on DNDN is unchanged: we recommend shares based on Provenge’s $4B+ WW market potential and unique barriers to competition. We believe the shares can outperform the market by 100% over the next year.

- Baird & Co reiterates their Outperform rating and $64 price target (unch) on DNDN saying that while they understand the recent consistent drumbeat of Provenge launch concerns and rumors coupled with yesterday’s announced national coverage determination (NCD) on Provenge could give any investor pause, they believe the worst case scenario contemplated here – an official CMS ruling not to reimburse for Provenge – is simply not supported by the facts. With the stock indicated sharply lower in aftermarket trading, they remain aggressive buyers.

Three key points:
First, cost effectiveness is not an issue here. While some concerns have been voiced over Provenge’s cost ($93k/patient), we note that CMS guidance documents indicate that cost effectiveness is not considered in NCDs (see CMS guidance here).

Second, CMS cannot second-guess FDA. Provenge has been approved by FDA to treat asymptomatic or minimally symptomatic metastatic castrate-resistant prostate cancer patients, and the MEDCAC review will not re-analyze FDA’s decision.

Third, the data supports the use of Provenge as “reasonable and necessary” in this population, in our view. CMS will likely consider whether Provenge is appropriate for Medicare patients (>65 years), and may limit reimbursement to only on-label use.

Looking at Provenge’s label, we point out that in a survival analysis of the Provenge clinical trials, 78% of patients were >65. In addition, median survival in patients >65 years of age was 23.4 months, versus 17.3 months for control (6.1 month survival benefit). This compares to an overall median OS benefit of four months, so it appears older patients in fact did better. Moreover, the label clearly states that there were no apparent differences in the safety profile of Provenge in patients over 65 and younger patients.

All things considered, we do anticipate the MEDCAC review will endorse Provenge reimbursement. It is also important to note that the initiation of a National Coverage Analysis does not impact fiscal intermediaries (such as Palmetto, etc.), which are already reimbursing Provenge, nor does it restrict local CMS contractors from covering the drug. With DNDN shares trading substantially below pre-Provenge approval levels, we remain aggressive buyers on weakness.

Notablecalls: Buy it, it's going to bounce. It's very likely to see $30 again today. The stock traded $25-26 in after hours.


- Read this: Factors CMS Considers in Opening a National Coverage Determination

Who Can Request an NCD
- A. Requests by external parties
A request to make an NCD can be received from an individual or entity who identifies an item or service as a potential **benefit** (or to prevent potential harm) to Medicare beneficiaries.


So, basically pretty much anyone can attempt to initiate a NCD. A possible competitor. A patient. CMS itself. A short-seller...

I happen to know that at least one very large biotech player that was heavily long into Provenge approval sold (& potentially reversed) his position in the name. And believe me, these guys can think out-of-the-box when it comes to trading, if you get the drift.

This is the business we chose. I tip my hat.

I suspect the coming ownership filings have an interesting story to tell.

- Is CMS really going to send out a message: Stop developing active cellular immunotherapies. They work, but they cost too much, so we're not going to pay for these ?

Most of Provenge patients are 65+ (men over 70 have a VERY high likelyhood of developing prostate cancer). Is CMS really going to deny access to this new wonder-drug that has given new hope to so many?

I say, Hell NO!

They may want to send out a message regarding off-label use but Provenge is so disease-specific that I doubt there will be much off-label use out there.

- As Cowen notes, OSIP & ABII got bought. Big pharma is salivating for these kinds of assets right now. At this valuation Dendreon is clearly a takeover candidate. Although I doubt they would sell out even at a 100% premium from here.

- The delay in CMS decision is a non-event as Provenge production wasn't expected to be in full-force til 2012.

Note that private payers, the Aetnas of the world are already paying for Provenge.

All in all folks, this is a chance to buy a very scarce biotech asset at 30c on the dollar. Use it. I'm not long but I'm planning adding Dendreon to my L-T portfolio as soon as today.