Thursday, December 30, 2010

Insider Exclusive: How the Game has Changed

Considering it's the end of the year with very little going on in the trenches, I thought to provide my 2 cents on a subject that has really been in the spotlight for the past couple of months:

Insider trading & the related arrests

I suspect the day the Galleon founder was walked out of his Manhattan office in handcuffs will be looked back at as a day the trading game changed.

The investigations following the arrest have shed light to a complex web of (hedge fund) traders, consultants and company insiders buying & selling price-sensitive information about public companies. I'd say that never before has the game been that exposed for public viewing.

Stevie & Raj (1) didn't become billionaires by making random bets on the market. They have consistently been making money for the past 15-20 years. Only now the public is starting to learn how exactly they did it, while most of the mutual funds failed to beat inflation.

But this is not something I plan to whine about. These guys were smart & ruthless enough to take money away from lesser players and that's just how the game works. This is how the really big money is made. Or at least, that's how it was made.

What I'm more interested in is how all this is changing the game.

As many of you may have noticed, I pay a lot of attention to analyst calls. In fact, I'd say most of my trading throughout the day is based on all sorts of (sell-side) analyst commentary. The analysts are paid to guide us traders through the information jungle, pointing out relevant pieces of information & explaining why certain names should move up or down. Their collective opinions are called the consensus. Our job as traders is to constantly compare the current available information against the consensus. If there is a disconnect between the available info & and the consensus an act of arbitrage (a trade!) can be performed.

The (sell-side) analysts have a host of analytical tools at their disposal. None of these tools however, include access company-specific non-public information. RegFD made sure companies can't tell the analysts anything they haven't disclosed publicly beforehand.

So, when using sell-side research as one's guide in trading, eventually Stevie & Raj are going eat your lunch because through consultants, they have access to real-time info.

For example's sake, Stevie & Raj know that despite the fact the UBS analyst thinks Sandisk (NASDAQ:SNDK) is a Sell at 20 bucks in October 2009, NAND demand is actually going to go through the roof as Apple & other are going to unveil a host of products that can't use enough of it.

So, you're left selling your Sandisk (SNDK) shares to Stevie & Raj who are more than happy to buy them. You're left wondering about how the stock recovers the gap-down by noon & ends positive for the day.

By the time the UBS analyst realizes he was wrong & upgrades the stock back to a Buy, it's trading at 32 bucks. You're definitely not going to listen to the chump again as he got it so wrong the last time around. You just sit and watch the stock go up another 10 bucks.

At 45 bucks it's pretty clear NAND pricing is moving up as Apple & others are ordering like mad. Heck, even Digitimes has a story about it. You buy SNDK at 47 bucks. The chart looks great, couple of tier-2 firms are out with positive earnings revisions.

Stevie & Raj are more than happy to sell you your shares back.


Over the next 2 months tech gets hit as rumblings of an Asian component inventory glut make the rounds. Sandisk (SNDK) shares slide to $40 and then to $35.

You sell the first decent bounce at 38 bucks as most analysts are telling you NAND pricing will not recover til 2nd half of 2011.

Stevie buys half your shares but Raj doesn't chip in. He now has other problems...

OK, back to reality.

Most of sell-side research out there is really that bad as exhibited in the Sandisk (SNDK) example. Many of the seasoned sell-siders have moved to the where they can really contribute & make money. This has left us with the 'GSCO kids', barely out of business school to guide us trough our trading days.

But with the recent crack down of the consultant-network-hedge-fund symbiosis, this may be changing. With the consultants pretty much out of the game, hedge fund traders are left to rely on good old sell-side research.

Traders typically pay the sell-side through commish, which means more money will again flow that way. Firms can again hire better/more seasoned people to do research. The quality of research goes up and people will take notice.

Maybe even one day people will look at a Goldman Sachs rating change and say 'Wow, this is good stuff. I wanna buy some at open'.

That I would call C H A N G E.

One can at least hope right?

PS: I spoke to several financial journalists about this subject but I suspect they didn't really understand how big the implications of the recent government crack down could be on the industry. This is really changing the way market participants are dealing with information. And trading as you know is the ultimate information business.

Throughout my career I have noticed (in hindsight mostly) how people have failed to understand or perceive the events that have led to truly big changes. This certainly feels like one of these occasions.


(1) Stevie & Raj are obviously fictional characters portraying large hedge fund players.
(2) Sandisk (SNDK) was picked as an example by entirely random means.

Tuesday, December 21, 2010

Amedisys (NASDAQ:AMED): Upgrade to Buy: risk/reward is good - Deutsche Bank

Deutsche Bank's Specialty Health Care Services team is upgrading Amedisys (NASDAQ:AMED) to Buy from Hold this morning with a $39 price target (prev. $31).

After sitting on the sidelines for the past 24+ months on AMED (DBAB moved to Hold on November 20, 2008), the firm is upgrading their opinion on the shares to Buy based on belief that the risk/reward is compelling on the upside. While they believe consensus estimates still remain too high for 2011, they see limited downside risk to AMED shares, which are trading at 4.7x their (Street-low) 2011E EBITDA and 9.7x their (Street-low) 2011E EPS. On the upside, DBAB believes AMED's fundamentals should stabilize due to recent restructuring efforts, and they believe its shares are poised to recover after having lagged DBAB coverage universe by 4,900 bps (49%) YTD. Firm sees 33% upside potential to AMED shares over the next 12 months based on their target price of $39, which they’ve increased from $31. Within DBAB coverage universe, AMED sports the absolute lowest valuation on an EV/EBITDA basis.

Street 2011 EPS remains too high, but buy-side likely discounting consensus. DBAB's sense is that the buy-side has disregarded much of the sell-side forecasts as being too optimistic. And so they are comfortable putting a Buy recommendation on AMED – even despite the fact that their 2011 EPS of $3.01 sits 15% below consensus. For 2012, DBAB is establishing EPS of $3.50 or +16% Y/Y. Their 2012 model as assumes -2% pricing (+2.5% MB offset by PPACA cut and case mix creep adjustment), +5% volume growth and 100 home-based branch acquisitions. Firm figures M&A will accelerate in 2012, following a more modest pace in 2011 once its operations sufficiently stabilize.

Risk profile remains high due to investigations, but risk/reward compelling. DBAB acknowledges that AMED’s ongoing investigations could limit the “appetite” for the equity by some investors over the near/medium-term; however, they are drawn to AMED shares at current valuation levels because of the risk/reward. Firm's price target of $39 equates to 5x 2012 EV/EBITDA, while a DCF-based valuation approach supports a share price even higher. Even if AMED’s investigations were to lead to some financial culpability, though, they believe it’s relatively modest net leverage (0.25x) and strong FCF (~$90M in 2011E) provide for good financial flexibility. If AMED’s fundamentals begin to stabilize over the coming quarters, they believe upside (to their price target) will approach 33% over the next 12 months.

Risk profile remains high due to investigations, but risk/reward compelling. Firm acknowledges that AMED’s ongoing investigations could limit the “appetite” for the equity by some investors over the near/medium-term. The most important of these investigations, in their view, is the ongoing Civil Investigative Demand process that was initiated by the U.S. Department of Justice pursuant to the False Claims Act. AMED’s other investigation matters include an ongoing Securities and Exchange Commission (SEC) investigation and a Senate Finance Investigation that was launched earlier in 2010. Despite these investigations and the potential for real financial culpability if any wrongdoing is determined, they are drawn to AMED shares at current valuation levels because of the absolute risk/reward. Their price target of $39 equates to just 5x 2012 EV/EBITDA, while a DCF-based valuation approach supports a share price even higher. DBAB's DCF-based valuation model yields a range of valuations in the $55-$60 level assuming a WACC of 8%, growth of 5% from 2013-2020 at a 10% EBITDA margin and a terminal growth rate of 2%.

Notablecalls: This may prove to be a significant call. Here's why:

- The sentiment in Amedisys (AMED) is undoubtedly negative. The name saw a wave of downgrades back in July when the SEC/CMS investigation issues surfaced. The stock has been cut in half this year and has actually failed to move down from the downgrade levels.

- There is only one other (real) firm out there with a Buy on AMED. It's Oppenheimer and they have a $44 price target. No tier-1 firms until Deutsche's upgrade today. Hell, this thing hasn't seen an upgrade since 2009.

- Deutsche has Street cred. as they have been on the sidelines for almost 2 yrs.

- Short interest stands at over 20%. That's a lot.

- If you look at AMED peers AFAM & LHCG both are up 30-40% from July lows. It may be time for AMED to play some ketchup.

- If you read the note, notice how conservative DBAB actually is with their below-consensus estimates & a price target they claim may be way too low. They are saying there may be upside to the current $39 price target in the next 12 mts.

- Chart looks good for a bounce & AMED sure is a mover.

I think we may have a winner here. I think AMED sees $31+ today. May see $32+ in the coming days. If you look at the chart you'll see that when they get it going the stock is prone to move several (3-4 pts) at a time.

One to watch for sure.

Friday, December 17, 2010

Veeco Intruments (NASDAQ:VECO): Bounce?

Veeco Intruments (NASDAQ:VECO) is being defended at two major firms this morning:

- UBS (Steven Chin) saying they believe Veeco’s stock has traded lower on concerns that China’s LED subsidy program may end early according to a story in the China Business News. Firm notes Jiangmen City and Yangzhou City (2 biggest programs in China) have always made it clear their 2-year LED subsidy programs which began in 3Q09 would have 3Q11 end dates. They did not change their Veeco EPS estimates just because Yangzhou City may end its program 1 month early per the China Business News.

Expect continued speculation over a new Chinese LED subsidy near term
Our discussions with 4 of the major customers in Yangzhou City found none are rushing to place orders by a 7/1/11 deadline or installing. However, customers believe details on China’s 5-year plan in 1H11 could see the LED subsidy change from equipment to applications which UBS still believes is a long term positive for Veeco. While Veeco’s q/q order growth was due to China orders in 2H10, they believe Korean orders resuming in 1H11 is a key reason to keep a Buy rating.

Korean customer equipment orders from Veeco likely resume in 1H11
Their checks found LG Innotek (Veeco’s #1 Korean customer) will spend KRW 194B (about $170M) in capex in 1H11 which we estimate is at least 30 MOCVD reactors ($75M in sales for Veeco). Firm views this as a positive inflection point as Veeco’s Korean customer orders were $0 in 3Q10 and 4Q10. They also expect Korean orders for Veeco’s new MOCVD tool could also be a catalyst in 1H11.

Valuation: Maintain Buy rating and 12-month price target of $54
UBS PT is based on 10x their cross-cycle EPS estimate of $4 plus $14/sh in net cash

- J.P Morgan is out with a note titled ' Risk/Reward Just Got A Lot More Attractive; Buy on Recent Weakness'

They rate VECO Overweight with a $75 per share price target.

Firm notes that following a round of checks across the LED supply chain, they reiterate their bullish stance on Veeco shares which are down roughly 20% on the week following poor TV sales data from Best Buy and a competitor downgrade in recent days. JPM believes both of these headwinds will prove to be temporary and sees the recent weakness in the stock as an opportunity for investors to add to their positions.

MOCVD demand from China all systems go. Their checks indicate MOCVD order momentum is likely to persist well into C1H11, driven in large part by upside at Chinese LED makers. Moreover, firm believes Veeco continues to see market share traction, in Taiwan & Korea, despite the intro of AIXG’s new G5 tool earlier this Q.

MOCVD subsidy risk overblown in near-term. While uncertainty around the status of MOCVD subsidies in China beyond their scheduled expiration in 2011 remains high, most investors have factored this into their MOCVD outlook in JPM's view. In the near-term, JPM checks suggest that there have been no official changes to any MOCVD-specific subsidy programs, with indications that, at worst, policy will simply be fine-tuned to manage more tightly the allocation of subsidies.

Subsidy mechanism to be fine-tuned (again). Rather than cut MOCVD subsidies, they believe policymakers will be emphasizing criteria such as 1) IP, 2) financial strength, 3) & long-term business model, among others to ensure companies with the potential to compete in the global LED industry are the ones being invested in. Assuming this revision occurs in the next few months, they remind investors that this would not be the first time that the subsidy program has been fine-tuned as it was only earlier this year that payouts were structured to phase in over 3 installments to ensure tools were actually being installed and run for volume production.

Best Buy data is backwards looking. The TV food chain, including LED makers, had cited some inventory-related softness as far back as 2-3 months ago, so they don't find it surprising that Best Buy's results reflected this to some degree. That being said, their checks suggest the worst of the inventory situation is now behind us with most LED suppliers expecting volumes to start growing again in C1Q11.

LED sentiment improving. JPM's recent talks with investors suggest a renewed appetite to own LED stocks heading into 2011 as concerns around TV-related inventory are quickly moving to the rear-view and general lighting demand comes more into focus. To that end, JPM notes that LED bellwethers Cree and Veeco (prepullback) are both +20% in the past month, or well ahead of S&P 500’s 5% uptick.

Notablecalls: Veeco (NASDAQ:VECO) is down 10 pts since the Citigroup downgrade on Monday (see archives) & yesterday's additional negative comments from the same analyst.

- Today, both UBS and JPM are refuting Citi's negative comments regarding Chinese subsidies. It seems each Chinese city has its own MOVCD subsidy program and the ending of one of these does not mean all of them will end.

Not saying MOCVD demand from China is all systems go but it may be not as bad as Citi thinks.

All in all, I think sentiment got all too negative all too fast. Shorts felt really comfortable yesterday driving the stock down over 4 pts intraday, which means they will be taken for a ride today.

I'm guessing VECO could see $42's again today.

Wednesday, December 15, 2010

Hertz Global (NYSE:HTZ): Upgrading On Enhanced Growth Profile - Barclays

Barclays U.S. Autos & Auto Parts team is upgrading Hertz Global (NYSE:HTZ) to Overweight from Equal-Weight with a $20 price target (prev. $15) implying 47% of upside.

- Their 2011 and 2012 estimates are above consensus.

Last week’s bullish Investor Day reinforced Barclays' view that the market underestimates HTZ’s earnings growth potential, which should benefit from management's strategy to grow off-airport and deep-value sales and margins and from HTZ’s exposure to the equipment rental market, which the firm believes is in very early stages of recovery.

Hertz’s impressive 3-year financial targets are likely still conservative. The company initiated bold goals suggesting about 50% annual growth in pretax income through 2013. They still view these targets as conservative, especially Hertz’s assumption of 7-8% annual revenue growth, in light of its 14-16% CAGR goal for equipment rental, and as they estimate its growth initiatives should allow car rental to grow in the double digits.

Hertz’s strong push into the off-airport and value markets alone should boost its car rental (RAC) annual revenue growth by 5% above the industry. This should enable HTZ to materially outpace its car rental peers over the next few years.

The equipment rental (HERC) business is becoming a major engine for earnings growth. 3Q10 was an inflection point for HERC, as revenues saw their first y-o-y increase since the downturn, following a 40% decline since peak sales. Management guided to 2011-13 sales growth in the mid-teens, which should enable EBITDA to grow by 20-30% a year, based on the 75% incremental margins the business can generate.

Barclays' new $20 price target is 7.4x their above-consensus 2012 EBITDA of $1.65bn. While HTZ has had a strong performance recently, firm's price target suggests there is large additional potential as investors turn their focus to HTZ’s 2012 earnings, encouraged by the mid-term outlook. Over time, they see even more upside as HTZ continues to reduce its net corporate debt through large expected cash generation

Notablecalls: Barcap has the ability to move these stocks. Check out their Avis-Budget (CAR) upgrade on March 18, the stock was up almost 10% that day and went up another 50% over the next month or so. Same analyst, Brian Johnson. (He is 4th rated, btw).

HTZ has a nice chart and I think people will greet this upgrade with some additional buy interest.

$14.25-14.50 is the range I'm looking at presently.

Tuesday, December 14, 2010

MOCVD Space: VECO & AIXG downgraded

The MOCVD space is getting two downgrades this morning:

- Citigroup is downgrading Veeco Instruments (NASDAQ:VECO) to Hold from Buy with a $50 price target (prev. $52) as they now see heightened risk of 1H:11 policy change in China regarding MOCVD subsidies. In part due to fear around a change, checks indicate big China follow-on orders pulling in – helping CQ4 and maybe CQ1 orders – but creating what is likely a big falloff in orders moving through 2011. They are cutting C2011 EPS from $5.72 to $3.88 (Street ~$4.93), but this pushes into 2012 so EPS there remains ~$5.00. Cut target from $52 to $50 (still on SOP valuation), no longer justifying a Buy.

Reading the tea leaves — While their discussions w/key sources in China reveal no “official” change, they think concern is mounting around three factors: 1) the program is well on its way to a key goal of establishing 3-4 emerging Chinese LED companies (e.g. Sanan, Elec-tech, Epilight, Silan); 2) program mis-use and overheating (for example, checks indicate a unit of GCL Group is bidding a very large order (~500 tools) mostly w/AIXG, including many older generation tools); and 3) all of the money is going to foreign MOCVD suppliers (VECO/AIXG) and is becoming counterproductive to the ancillary goal of establishing some domestic MOCVD suppliers. As evidence, Citi thinks one city – Yangzhou – has already stopped any future subsidies. With change potentially coming in CQ1, customers like Sanan and Elec-tech are both trying to pull-in big follow-ons to beat a change.

2011 worse, but 2012 should be strong — Excluding China, improving LED fab utilization has provided a better backdrop of newsflow but they are also concerned about an extended “pause” in 2011 MOCVD demand from Taiwan/Korea until high costs (esp. larger diameter sapphire wafers) and low yields are resolved.

Where can the stock go? — Zeroing all Tier 2 China demand + adjusting for some Taiwan share gains, they see shipment downside to ~40-50 tools/Q w/EPS ~$0.40-0.50/Q. At 10x this annualized EPS plus ~$12/share net cash, we could see downside to ~$32 (~35%) at which point the firm is again Buyer, all things equal.

- Kaufman Bro's is downgrading another major MOCVD player Aixtron AG (NASDAQ:AIXG) to Hold from Buy with a $37 price target (prev. $34).

Aixtron's stock price has increased from roughly $24 per ADR to its current level of more than $37 per share. This represents over 55% appreciation over the last three months and above their original price target of $34 and our revised price target of $37. Additionally, consensus forecasts have moved higher, toward their estimates, reducing the potential for upside surprise. Finally, they believe that a potential shortage of sapphire wafers could delay some demand for new MOCVD tools in 2011. With all of these factors in mind, we believe the stock is now fairly valued for its near-term prospects.

Revising Forecasts: Going forward, KBRO has changed their assumptions to reflect a more conservative view on deliveries in 2011. They have made no changes to 4Q10 forecasts. They have lowered their MOCVD tool assumptions from 460 units in 2011 to 410 units. Firm's expectation is that the sapphire shortage is likely to become more acute in mid to late 2011 and that this shortage could slow order rates for Aixtron (AIXG). They believe the company will likely ship 419 tools in 2010, thus they are mostly flat for 2011. KBRO has maintained their ASP assumptions with a blended rate of $2.54 million per tool in 2011, up from $2.22 million per tool in 2010. They are forecasting gross margins for the first half of 2011 to remain at 55% given a flat order assumption going forward. This equates to 2011 EPS of €2.06 versus firm's prior estimate of €2.30. They are still 4% above consensus, but not enough to warrant a BUY rating.

There is potential upside to their forecasts if the Japanese or Korean customers return to their historical order patterns. However, they believe these customers will likely delay their orders until the G5 and Crius II products have been fully vetted. Importantly, China is the fastest growing market for MOCVD tools and AIXG was a little slower penetrating this market versus its nearest competitor, Veeco Instruments ($49.97, VECO, BUY).

Notablecalls: Both stocks should get hit on this. AIXG is up 8 pts in 10 days and VECO is up 15 pts from its September lows.

Short interest is high (VECO 32%; AIXG N/A, but probably in the 20%s) so these are not easy shorts. Shorting the sharp bounces is probably the best way to go.

This is all too similar to the Solar space. Incentives are running out & LED manufacturers have been scrambling to take advantage of the last remaining bits. Once the music stops.. it stops.

I'm somewhat surprised to see KBRO's comments regarding the sapphire wafer shortage. This could benefit Rubicon (NASDAQ:RBCN). Be sure to check out the short interest in this one.

You're probably best served not shorting VECO in the hole in the pre market but rather waiting for the open.

Monday, December 13, 2010

OmniVision Tech (NASDAQ:OVTI): Taking Profits: Downgrading to Neutral - J.P. Morgan

J.P. Morgan is downgrading OmniVision Tech (NASDAQ:OVTI) to Neutral from Overweight with a $35 target (unch).

Firm believes OVTI’s prospects remain very encouraging through 2011, so they believe the stock still has potential upside, however, they also believe investors should now wait for a better entry-point or for better visibility into the gross margin outcome of the transition to second-generation back side illumination product in mid/late 2011. OVTI has appreciated by 125% YTD, versus 11% appreciation in the S&P 500, and they think there are better returns to be had elsewhere in JPM coverage universe at this time. Firm's December 20110 Price Target remains $35.00.

JPM is not introducing any changes to estimates. If anything, reports from Reuters that the second generation iPad will feature forward- and rear-facing cameras, is a potential source of upside to their F4Q11 forecast. They remain below consensus for FY11 and FY12, which reflects their view that gross margins will probably decline in the first half of FY12, and that there will be a seasonal slow-down in sales in F4Q notwithstanding ramping shipments at Apple.

They remain constructive regarding OVTI’s multi-year prospects. JPM believes OVTI’s 3-year growth of about 20% CAGR will be buoyed by ramping demand for higher quality image sensors in multiple endmarkets, including smart phones, laptops, autos, games, medical devices, surveillance equipment and digital cameras. They believe OVTI has established a strong leadership position and a 6 - 12 month advantage in cost of production, relative to Samsung, Sony and Aptina. Execution is first-rate. They expect the board to use excess cash to drive shareholder value through buy-backs.

JPM notes they have two near-term concerns: 1) that gross margins will dip in the next 6 - 9 months as the company ramps production of BSI generation-2 product at low initial-yield rates, and 2) that the firm will encounter a seasonal inventory re-adjustment post Chinese New Year.

OVTI is trading at 17 times revised CY11 PF EPS of $1.92, which is approximately aligned with the mean of our coverage, and a slight premium to the firm’s 5-year mean P/E trading multiple. The multiple does not take into consideration ~$6.88 per share of cash; so on an ex-cash basis, OVTI looks more attractive and there could still be upside for the stock. That said, with OVTI up 125% YTD they believe the stock is trading closer to fair value now, and on a risk-reward basis, they think there are better 6 - 12 month returns elsewhere in their coverage universe. JPM expects OVTI to trade in line with the mean of their coverage over the next 6 - 12 months.

Notablecalls: Paul Coster & his team are the Axe in OVTI.

- He upgraded the sensor maker back in April-09 when the stock was trading around $9/share. It was a gutsy call and he has stuck by it ever since, gradually raising his estimates and target.

- The call is an intelligent one - not overly dogmatic. Now that the rest of the Street is warming up to the story (iPad cams etc), Coster is telling his clients to start taking profits.

This may be a valuation call but it's a damn good one. I suspect vanilla sellers will show up after open. Stock should be under pressure in the n-t.

I think some fast money guys jumped on board following the bullish Opco call on Friday.

The market is looking up this morning (surprise, eh), so I suggest you don't sell it in the hole pre mkt but rather wait after open.

Thursday, December 09, 2010

Ford (NYSE:F): Merrill raises target to $24 - new Street high

Merrill Lynch/BofA is out with a positive Automotive Industry call. Among the highlights:

- Ford (NYSE:F) target is raised to a new Street high of $24 (prev. $20)

- Goodyear Tire (NYSE:GT) is upgraded to Buy from Neutral

- Cooper Tire (NYSE:CTB) is upgraded to Buy from Neutral

Sales are recovering, now with two consecutive months of a SAAR of 12.3mm, a run-rate 1mm units above the Jan-Sep ’10 SAAR of 11.3mm. Merrill believes this recent acceleration in the sales pace is supportive of their above-consensus 2011 US sales forecast of 15mm units as light vehicle demand continues to recover. Meanwhile, inventory remains lean, and there appears to be price discipline among the OEMs, as industry average incentives are about $175 less per vehicle than peak 2009 levels. While the industry has been slowly recovering in volume and pricing, auto companies have been posting near record margins with volume levels that are still only just up from the trough. Therefore the firm is confident that further operating leverage can be achieved during the recovery in the cycle and that most stocks in the auto value chain remain undervalued by the market.

As Ford (NYSE:F) has been the recent poster boy of the Auto industry, here are the details:

Merrill is raising their Ford EPS estimates in 4Q10e from $0.45 to $0.48, in 2011 from $2.25 to $2.40, and in 2012 from $2.40 to $2.55. They are also increasing their price objective from $20 to $24, which is based on a P/E of 10X our 2011e. In their view, Ford’s stock should continue to outperform for a number of reasons, including, strong management, solid operating results, a consistently improving balance sheet, industry-leading product, and recovery in the U.S. sales cycle.

Solid results should continue
Ford’s financial performance over the past year has been impressive, with LTM EPS of $2.05 and automotive cash flow generation of ~$6.5bn. Merrill expects the company to continue generating solid pre-tax profits in North America and in Ford Motor Credit, and stable/improving international performances to bolster results.

Balance sheet getting stronger each quarter
Ford has made meaningful progress in shoring up its balance sheet, and they expect further improvement ahead. Merrill's current estimates imply that Ford will be comfortably net cash positive in 2011 and FMCC remains significantly over capitalized, which should drive higher value for shareholders.

Product sweet spot and common platform leverage ahead
Merrill believes Ford is entering the sweet spot of its product cadence in MY11-MY14 (please see Car Wars 2011-2014 for further detail). They are forecasting an annual U.S. replacement rate of ~30% for Ford during this timeframe, and expect greater use of common platforms/parts to drive significantly lower engineering costs.

Solid leadership at the top
It is difficult to measure the short-term success of a management team in the automotive industry, as so much is dependant upon the economic cycle. However, we believe Alan Mulally has led Ford through what is likely the worst of the downturn, and has positioned the company for success as volumes recover.

Notablecalls: So, the Ford story may be getting another leg up. The stock hit the $17 level some weeks back and has been consolidating in a 1pt range ever since. GM may be to blame as people freed up money to play the IPO.

Now we have another tier-1 firm out with very positive comments (remember, it was MSCO who first set the ball rolling back in Oct).

This may be exactly whats needed to get the stock over the $17 level. May happen today.

GT & CTB also worth watching.

Tuesday, December 07, 2010

Research in Motion (NASDAQ:RIMM): ?

Research in Motion (NASDAQ:RIMM) is getting 2 downgrades this morning:

- CLSA is cutting RIMM to Underperform from Buy saying the recent 44% rally since 1 September leaves limited upside despite the likelihood that next week's FQ3 (Nov) results (after the close on 16 December) are towards the high end of the outlook for sales, units and EPS. Firm bumps up our FQ3 forecasts to account for solid demand for Torch and emerging markets momentum. They incorporate some initial projections for RIM's Playbook tablet (scheduled to launch in CQ1), which helped ignite the recent rally along with an expected seamless transition to the recently acquired QNX operating system, thereby leaving little room for disappointment

Tablets: Apple is the incumbent, not RIM
CLSA expects Playbook to have limited EPS impact (~$0.05-0.10 in F2012) especially given the likelihood that the product is gross margin dilutive (a key metric for the stock). Unlike smartphones, where iPhone had a high hurdle to overcome in penetrating enterprises (dominated by incumbent RIM), the iPad is now the early incumbent in the enterprise that RIM would need to one-up in its features (or one-down in price). This could prove an uphill battle particularly as iPad enterprise users access corporate intranets via browsers, which was not the case with accessing corporate push-email. By the time RIM sells its first Playbook, CLSA estimates Apple will have already sold ~17m iPads.

Firm maintains their $68 price target.

- Gleatcher (the former First Albany, Amtech etc) is downgrading RIMM to Neutral from Buy saying they believe the recent move captures near-term strength and cannot justify material multiple expansion from here given their projection of slowing earnings growth over the next 2 years. Firm sees increased competition in 2011 as smart phones move to the mid-range, alternative solutions penetrate the enterprise, and RIMM's bandwidth efficiency has not yet translated to the consumer.

Near-term strong. Firm has raised November to $1.69 on $5.5bil, at the upper-end of RIMM's guidance and above consensus of $1.63 on $5.4bil. Their forecast assumes 14.2mil units, 5.1mil subscriber additions, $310 ASP and 42.3% gross margins. They have also raised their February forecasts.

Loyal Blackberry fans ripe for upgrade. RIMM’s Torch will expand from 1 carrier (AT&T launched 8/12/2010), to 75 in November and 200+ in February. Firm sees 2-3 solid quarters of sell-through as a percentage of its approximate 55mil subscriber base upgrades to the Torch and future Blackberry 6.0 platforms.

Competition to accelerate in CY11. Gleacher believes the near-term strength will prove temporary as the upgrade cycle completes and competition accelerates. RIMM has enjoyed a "price umbrella" as the iPhone has stayed in the $600 range and Android's have fallen from the $450 range to $350 over the past year. They think competition will accelerate in CY11 as Samsung/MOT/HTC broaden product offerings and #3 contenders Win7 and NOK catch up and expand into Europe, Asia and Latin America

Conclusion. Firm''s $70 target (up from $60) is based on 11.1x their FY13 (Feb ending, so essentially CY12) estimate, not including current net cash of $3.71. They do expect a strong quarter and outlook, but $70 is not enough for new money given competitive threats and potential execution risk on product launches following the 50% move since September. Next catalyst: Nov. report on Thursday, 12/16.

Notablecalls: I think this market is due for a pull-back and RIMM is my poison of choice. Not for the faint hearted obviously. Adjust your risk accordingly.

Analog -- according to FBN Securities: Yesterday the market was working on a very rare "all up"" day with equities, USD, gold, bonds, and crude all in the green... apparently this has happened 12 times since 2008 and the mkt was down the next day 10 of them.

(Amusing. nothing to do with my feel towards the mkt, obv)

Monday, December 06, 2010

Compellent (NYSE:CML): Actionable Call Alert!

Pacific Crest is upgrading Compellent (NYSE:CML) to Outperform from Peer Perform with a $40 price target as stand alone and $65 as a takeover target. Firm names Compellent their Top 2011 Small-Cap pick. Raising 2011 and 2012 Estimates.

Compellent to benefit from rising virtualization and SAN budgets. The Pacific Crest 2011 CIO Survey (n=82) shows 66% planning to increase 2011 budgets, with the highest dollar increases expected in virtualization and SAN budgets. As a leading next-generation SAN supplier, Compellent should be a direct beneficiary of rising 2011 IT budgets. It is also well positioned with its Fluid Data Architecture and differentiated software functionality optimized for virtual environments.

Upgrading CML to Outperform on accelerating revenue and profit growth. While 2010 was an investing year, evident by CML shares that have risen just 15% year to date, Compellent will enter 2011 with multiple product upside drivers and unlevered sales capacity that should accelerate growth. They are upgrading their rating to Outperform and expect operating profits to double on 28% revenue growth.

Fully Taxed Profits Could More Than Triple in Three Years
Pacs estimates that the investments in both the next-generation hardware and software platforms that are now shipping, combined with the required sales support investments in the last years, should better position Compellent for share gains through 2014. Considering that the company has only 0.5% share of the $40 billion storage industry, our forecast of 28% to 30% annual growth could prove to be conservative. Looking at profit trends, they expect net profits to triple over the coming three years to $1.00 per share, even with the assumption that the tax rate will increase from 6% in 2010 to 35% going forward. The acquisitions of four next-generation storage suppliers— EqualLogic, 3PAR, Data Domain, Isilon Systems—further validate the increasing requirements for modern storage systems and novel approaches that can support new virtual, video and cloud workloads over the next decade.

See Upside to $40 on Standalone Basis and $65 on Takeout
Establishing a fair value on Compellent—given that the company is still in the relatively early stages of development, with only 0.5% share of the $40 billion storage market and a current focus on building an internal sales structure that can support a $500 million revenue base or more—will likely mask the profit potential of the business until it reaches scale. Pacs isestablishing a $40 price target based on an EV/sales multiple of 4.5x, which is a valuation methodology that is more aggressive than what they use for most of our enterprise IT hardware companies that have more mature models and are valued on earnings, not revenue levels. That said, there are four next-generation storage companies that serve as a good proxy for the value of a next-generation storage supplier, in our view. On a stand-alone basis, they estimate that a 40% discount to the average EV/sales takeout multiple of 7.7x for 3PAR, Data Domain, EqualLogic and Isilon Systems would be a reasonable starting point to value a next-generation storage supplier like Compellent. Applying a 75% discount to the takeout multiples as a downside scenario, wthey see potential downside risk in CML share price to $20, or roughly 2.0x EV/sales.

Notablecalls: So, PACS is out with a call saying SAN and virtualization budgets will increase the most in 2011. That's not exactly news but they do highlight Compellent (CML) as one of the fastest growing Enterprise IT stocks in their universe.

- They slap a Street high $40 share target (45% upside) on CML saying the co will triple EPS in 3 years.

- They say almost ALL of listed peers have been bought at valuations that would translate into $65/share for CML. That's over 100% upside.

- You have Radware (RDWR) up 18% on Israeli takeover speculation. Another Enterprise IT play.

All this is going to translate into hefty upside in CML today. I'm guessing 6-7% upside putting $29-30 levels in play.

Actionable Call Alert!

Netflix (NASDAQ:NFLX): Morgan Stanley raises Bull Case to $265/share

Morgan Stanley is out positive on Netflix (NASDAQ:NFLX) raising their estimates and target price scenarios.

Their Base Case fair value is now $225 (up from $185).

Bull Case fair value is raised to $265.

Seizing the Opportunity: Netflix continues to capitalize on the current window of limited direct competition in its effort to build the leading, scale-based digital video platform. Morgan Stanley believes Netflix has a sustainable competitive advantage, owing to: 1) a significant lead in over-the-top device distribution; 2) an unrivaled portfolio of subscription-based digital content rights; 3) best-inclass technology architecture; and 4) an iconic brand in streaming video. While Netflix’s success will likely invite more intense competition in the coming months, they believe its scale, value proposition and consistent execution position it as a long-term beneficiary of the global secular growth in digital video.

Pricing Change Increases Scale, Drives Increased Content Investment: In Morgan Stanley's view, Netflix’s announcement of a streaming-only plan, along with a ~7-18% price increase across its hybrid (DVD + streaming) plans in the USA, highlights the company’s commitment to streaming and the competitive advantages / pricing power the company perceives in its DVD-by-mail business. While the price increase may drive churn / plan substitution higher in the USA, they believe the increased revenue from the price increase (firm is raising their C2011E revenue estimate by ~6%) will allow Netflix to continue to increase streaming content investment by 200%+ / 50%+ in C2011E / C2012E while still maintaining a 13%+ operating margin (vs. 12.5% in C2010E).

Increasing Estimates, Reiterate OW: Morgan Stanley is increasing their C2011E revenue / EPS estimates to $3.23B / $4.37 from $3.04B / $4.07, while their ending sub number remains relatively unchanged at 27.3MM, as the CQ1 price change causes ARPU to increase Y/Y after six years of declines. They reiterate their Overweight rating on Netflix as the price increase drives top-line upside and funds additional content investment, thereby improving the value proposition while maintaining operating margin levels.

Notablecalls: OK, the Bears had their fun on Friday. Now it's the Bull's turn.

As with Chipotle (CMG), Morgan Stanley is not just playing the fundies here but also the sentiment. The shorts piled on & will likely be taken for a bit of a ride. Notice the stock is down 20 pts from the recent top.

Possibly a trade here on the long side.

Sunday, December 05, 2010

Notable Calls Network (NCN): Netflix (NASDAQ:NFLX)

I haven't done this for quite a while, so I thought to share nice a trade we had on the Notable Calls Network (NCN) last Friday.

The network nowadays is 100+ strong with professional members of the buy & sell side represented. We share the daily trading flow: analyst calls, news, insight & analysis etc. NCN is about having 100+ extra pairs of eyes & ears out there.

Fridays in December are usually fairly quiet but this was not the case last week. The day was packed with some pretty good action. Here's an example:

- Around 11:30 AM ET a seasoned NCN member pinged me with the following:

HEARING - StreetInsider has confirmed that another noted short seller, Manuel Asensio, will be talking about Netflix, Inc. (Nasdaq: NFLX) on CNBC's on Strategy Session this afternoon.,

Normally, I would have filed this under the 'not-actionable-but-good-to-know' category & moved on. But not this time. This time I knew it would be acionable. Here's why:

1) The CANDIES, a group of high momentum names had started to underperform over the past several days. Netflix (NFLX) among them. I had highlighted a rather interesting Chipotle (CMG) downgrade from Morgan Stanley the same morning and that trade was working well. There was clearly selling pressure on the recent momentum group.

2) Manuel Asensio is one of the best known members of the (shrinking) short-only cabal. Smart and agressive, he is usually not the type of guy people want to bet against. It was pretty clear his comments would send Netflix (NFLX) stock into a free-fall.

I quickly distributed the call to other NCN members.

As you can see from the chart below once the call started making rounds the stock didn't look back. By the time Asensio came on around 12:25 PM ET the stock was already down 5 pts. Needless to say, liquidity wasn't an issue. You could have easily hit the stock with a 20K order and get filled.

Asensio didn't hold any punches, calling the stock 4-5 times overvalued with unreasonable expectations. He did what he was expected to do.

The stock actually bounced 1.5 pts right after Asensio came on - a classic sell-the-rumour-buy-the-news reaction if you will. The stock did end up a cpl of pts lower by end of day but that was hardly tradable.

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.

Friday, December 03, 2010

Chipotle Mexican Grill (NYSE:CMG): Downgrade on Spicy valuation - Morgan Stanley

Morgan Stanley is downgrading Chipotle Mexican Grill (NYSE:CMG) to Equal-Weight from Overweight and are removing their price target on the name (prev. $195)

Bottom line: After a spectacular 12-month run of 200%, Morgan Stanley is downgrading shares of CMG to Equal-Weight from Over Weight as the stock is now close to their bull case (39x firm's ’11 bull case EPS of $7.50, or $293) and well above their base case of $218, biasing the risk/reward to the downside. While they believe fundamentals remain strong, at 37x their 2011 estimate and 18x forward EBITDA, this optimism appears reflected in shares; with valuation increasingly driven by scarcity value for growth rather than fundamentals alone, increasing risk of sudden revaluation should current momentum even nominally shift.

Unit growth, which has been CMG’s most distinguishing feature, remains encouraging, with 120-130 units opening in 2010 (albeit back-end loaded) and 135-145 units for 2011, representing ~13% unit growth for both years. Morgan Stanley notes that this is slower than prior years (18-20%) due to the law of larger numbers catching up with the company.Their assessment for the company’s US unit potential remains roughly 2,500 units (vs. 1,023 today), although because CMG is in relatively uncharted territory, standing between casual dining and fast food, there is not a direct analog business that they can compare it to measure absolute penetration.

What’s the historical evidence that this multiple can be sustained? Trading at a higher multiple than all but one restaurant stock (BJRI, a much smaller unit growth story), they have struggled to find a historical precedent for a valuation to maintain such high levels over time. The only example theywe could find was Starbucks, which from 1996 to 1999 grew from 1,000 to 2,000 US stores (on its way to 17,000 global units today), during which time the stock successfully maintained a 39x forward multiple. Given what the firm knows today of the size of the relative categories and frequency of use (quick service Mexican being much smaller than coffee), they think it’s a stretch to assume that CMG can maintain its current multiple for as long as SBUX did.

Why now? With a ~$8 b market cap, equivalent of a PNRA, CAKE, PFCB, TXRH and BJRI combined, valuation has become decoupled with fundamentals, in Morgan Stanley's view. The stock requires continued improvement in margins & comps, which, given the prospect for greater inflation in ‘11 and tougher comparisons, may not materialize to the extent demanded by this valuation.

Key debates for CMG in ‘11: 1) Whether CMG has ample future growth to justify valuation--they see it getting closer to 50% penetration in ’11. 2) Whether margins can continue to expand—we see small improvements from here, with risk from food inflation. 3) What level of fundamental performance is discounted in the stock? – Theythink the market may already be discounting $10 in EPS within the next two years, a bull case scenario.

Perils of unit growth stories. Finally, its worth noting that though unit growth and new store productivity at CMG are still strong, the case history for unit growth stores suggest that multiple compression usually sets in about half way through the unit roll out, driven by the deterioration of unit economics. While there is no sign that CMG has yet reached this inflection point, it nonetheless points to an additional risk in these shares.

Notablecalls: While I usually HATE valuation calls, I'm willing to make an exception if:

- The analyst has a very good track record in the name

- The call makes sense

- The call suits me sentiment-wise

1) MSCO's John Glass has been a Chipotle fanboy since early 2010. He upgraded the name to Overweight on Jan 8 & has been raising his price target ever since. The stock reacted with a huge 6 pt (7%) run on the same day.

It's worth noting that MSCO was among the first of Tier-1 firms to turn positive on CMG. Deutsche Bank upgraded CMG a day later, causing another 6 pt run. The stock hasn't looked back ever since. The run as taken the name from $90 to $250.

Deutsche got cold feet & downgraded CMG back to Hold couple of days ahead of Sept results, missing out another 70pt run.

What I'm trying to say is that MSCO has Street cred. They didn't just play the fundies, they played the sentiment. People will take notice.

2) The call makes sense. Take a look at the PE Lifecycle chart. CMG is about half way through the unit roll out. It's great but it's no Starbucks.

3) It kind of feels the CANDIE's are running out of steam. I may be wrong but watching NFLX underperform the market is kind of telling.

I would not be surprised to see CMG down 10pts today, putting low $240's in play (or possibly even lower levels)

Wednesday, December 01, 2010

Magna International (NYSE:MGA): Upgrade to Overweight on Higher Europe Margin Expectations - J.P. Morgan

Magna International (NYSE:MGA) is being upgraded by J.P. Morgan's 1st rated Himanshu Patel this morning.

Patel upgrades his rating to Overweight from Neutral with a $66 price target (prev. $53.50). He is raising his estimates largely on upgraded European margin forecasts. 2011/2012 EPS estimates move to $4.85/$5.90 (prior: $4.25/$4.70).

JPM also shifts valuation methodology to now give full credit for 2011-ending cash as they see growing likelihood that MGA’s excess cash will be deployed in an accretive manner through the next 6-18 months. Their estimates are still based on an unchanged 5x EV/EBITDA multiple and a conservative 13.2MM US SAAR for 2012.

The details:

Raise estimates on higher European margin assumptions. We raise our European margin assumptions in 2011 and 2012 to 3.6% and 6.0% (2.0% and 2.5% previously). We have long argued that MGA’s European restructuring offers significant company-specific value creation potential (YTD EBIT margins are 8.7% in NA vs. 0.6% in Europe—each 1% point in European margin adds $0.35 to annual EPS). Our 6% 2012 European margin estimate roughly assumes that the 80% of Europe that is non-vehicle assembly (i.e., comparable in structural margin potential to NA) reaches 5.6% margin (conservatively still ~300 bps below NA) and that the 20% of Europe that is the Steyr vehicle assembly business is a 2% margin business.

Investors are likely to become much more confident on European margin recovery potential in the next 3-6 months because of 1) announcement of detailed European restructuring plans by management, potentially on Q4 call or at Jan Detroit Auto Show; 2) surging auto sales in Russia partly due to extended scrappage programs (+50% y/y each month since June), a market where higher than expected revenue would clearly be welcomed given significant new MGA capacity being installed currently; 3) accelerating volumes at the Steyr vehicle assembly business (Stery production will firmly turn a corner in Q4.10, with production, as per CSM, +9% q/q and +74% in FY2011 as phased out vehicles like BMW X3 are fully replaced by new high volume vehicles like the Mini Countrymen by Q4.2010).

Cash deployment increasingly likely. More signs are emerging that MGA is willing to deploy its excess cash as recently suggested by the newly empowered management (post recent dual-class share collapse). MGA recently acquired Resil (a Brazilian seat structure maker with $200MM in sales, likely under a $100MM price tag) and has stated it has considered acquiring Pininfarina (a small Italian vehicle design house). Moreover, recent conversations with the company suggest roughly half a dozen small/medium size acquisitions are being actively looked at, making us think as much as $300-800MM of cash could be put to work fairly quickly.

Guidance release may be a catalyst. Magna recently signaled that it will be providing investors more granular financial guidance, much more than it has historically. We think this will likely occur on the Q4 call or at the Detroit Auto Show in Jan. We suspect the company will, for the first time, be prepared to provide next-year revenue and margin range, a multi-year backlog, and guidance on long-term margins (at least for Europe). While the devil will be in the details, we believe this level of transparency can only aid valuation in the long term, and it may even serve as a near-term catalyst depending on the guidance details. MGA has for years been ignored by a large swathe of the investment community for corporate governance reasons and partly also because it happens to be one of the largest and most diversified suppliers globally, yet it provided little beyond annual revenue guidance historically.

Notablecalls: As I mentioned, Patel the the 1st rated analyst in the Space which means the call won't fall on entirely deaf ears.

Note that we will have Auto #'s out today, which could add some fuel to the fire. The big 3 still account for almost 50% of Magna revenue.

People have been trying to get MGA moving after the dual-class share catalyst passed but with little luck. I suspect Patel is what's needed to get it moving again. I'm not going to guess ranges today, though.

PS: Note we have ISM data out today as well.