VirnetX Holding Corp (NYSE:VHC): Initiating with Outperform; See significant Upside - Cowen

Cowen is initiating VirnetX Holding Corp (NYSE:VHC) with Outperform rating >40% upside target this morning calling it an unique IP play with ample upside.

Real-time peer-to-peer communication, including video chat, should be among the compelling applications end-users adopt as all-IP 4G LTE wireless networks and two-camera smartphones proliferate. Cowen believes VHC’s intellectual property sits at the heart of that market opportunity, making connections between end-users on tomorrow’s 4G networks as convenient and secure as those found on today’s voice networks. Over the next 1-5 years, the firm expects most major device OEMs to license, or otherwise be made aware of, patents VirnetX has uniquely declared as essential to the 3GPP’s LTE Series 33 specification. They expect VHC to appreciate > 40% relative to the market over the next year as its model tracks toward our $185MM C14 revenue forecast.

VirnetX is basically pre-revenue today; its (almost) only source of income the last twelve months was a $200MM settlement from Microsoft in 2Q10 that allowed MSFT limited use of the company's IPR. Looking forward, strong growth in VirnetX's core market (and increased licensee count) should drive EPS from ($0.32) in C11 to $1.25/est. diluted share in C14.

VirnetX Declares Its IPR Essential to LTE Standard. VirnetX has declared its IP "essential" to the 3GPP standards body which governs the LTE technology specification. That declaration makes OEMs of LTE equipment aware VHC believes its technology must be licensed to avoid infringing its patents (IPR). VirnetX’s key IPR automates the setup (lookup) of VPN connections between trusted peers, as called for in the Series 33 specification. We do not believe the 3GPP will (can) find a workaround for VirnetX’s patents, especially now that VHC has agreed to FRAND licensing.

Royalty Revenue From Massive 4G Market Likely. Cowen sizes the LTE market at $38B in 2014, growing at a ~34% 10-year CAGR through 2021. VHC should see $175MM of licensing revenue from that C14 TAM; they expect its LTE equipment royalties will increase sharply beyond C14 as its licensee count grows. VHC’s SDNI initiative, which automatically performs the lookup and key exchange (registry) services needed to connect trusted peers across networks, should see modest revenue near-term. SDNI has potential to become a highly valuable asset 4G operators utilize to deploy Skype-like (sold to MSFT for ~$8.5B) services, only using industry standard VPN.

- Strategic LTE Position Makes VirnetX an Acquisition Target

Cowen's Take: they believe VirnetX'ss core patents would be highly useful to a company with a weak relative position in the 4G LTE standard's patent stack (or no position whatsoever). They believe companies in this group that want to manufacture 4G LTE devices and/or equipment - including Apple, Cisco, and others - will recognize their margins will be inferior to what could be achieved if they did not have to pay for the use of competitor IPR. Patent stacking means that an OEM who has no/limited patents could face as high as a 12-15% total payment to 4G LTE IPR holders without patents to cross-license. 3G patents are likely somewhat lower today (in the 12% range) because Qualcomm has struck deals to pass through others patents for the 5%+ it charges (minus cross-licenses, its rate nets closer to 4%). To be competitive in the emerging tablet or converged 4G device market, many tech sector giants are likely to be looking for key 4G LTE IPR and they believe VHC fits the bill.


Cowen versus Consensus
Sell-side coverage of VHC is currently very limited. Thomson First Call shows the last set of estimates for VHC were provided in early April (i.e., before the company's 4/27/11 1Q11 March quarterly results report and conference call), and consisted of only a FY11 top and bottom line estimate. Therefore, Cowen assumes there is no standing consensus for VHC. They note the company does not provide full financial guidance.

Notablecalls: VHC is an animal of a stock. It's up 10-fold over the past 18 months, seemingly without any real analyst coverage. Cowen is the first Wall Street firm to officially pick up coverage and they sure are positive on the name.

What Cowen is essentially saying is that all the tech heavyweights (AAPL, CSCO, MSFT etc) need VHC's LTE 4G IP. That means not only revenues but makes the company a takeover candidate.

I also suspect Cowen's initiation serves as a prelude for a flurry of other firms picking up coverage.

Note there's about 20% short interest in the name.

All in all, I think VHC is likely to trade up in the n-t. It's a big mover, so worth keeping on radar. I would not be surprised to see a 7-10% move.

AK Steel (NYSE:AKS): Upgrade to Overweight with $24 PT - Morgan Stanley

Morgan Stanley's Metals & Mining team is out with positive Sector call noting that last week's slew of positive copper data points and outperformance in bellwether stock, FCX, could be harbingers of a shift in sentiment for the space.

They believe the recent ~15% correction provides more favorable risk-reward in steel (top picks AKS, X) and metals (FCX), in particular. Inflation and global growth remain key concerns among investors. Firm's Chinese Economics team expects China CPI to peak in June, which could lead to improved sentiment on growth towards the end of summer.

In particular, they are upgrading AK Steel (NYSE:AKS) to Overweight from Equal-Weight with a $24 price target (prev. NA) saying their Bull Case scenario points to $46 fair value (+266%).

The details:

Upgrading to Overweight: AK Steel is turning the corner, and earnings power is not priced in: While shares across the steel space have become cheap as a result of the recent correction, we see significant value upside in AKS shares, in particular (70% to our PT of $24). Our mid-cycle EBITDA estimate is 30% higher than what is discounted in the shares on our view that benefits from sustainable cost cuts, a lesser impact from iron ore costs, and improving margins in the company’s key electrical steel business have gone unnoticed.


Raising our valuation and estimates: We are raising our estimates by 30% in 2011 and 20-40% in 2012-13; we are now 15-40% above consensus in 2011-12 and 75% above in 2013. Our $24 price target is based on 10x 2012e EPS, and 5.0x our mid-cycle EBITDA estimate of $131/t.

Our higher estimates are a result of three factors: 1. Deep dive on mid-cycle earnings power: In the years leading into the downturn, AK Steel made significant sustainable cost cuts and operational improvements. We scrutinized the business and determined the company has improved sustainable EBITDA by $84/t since 2003.

2. New iron ore strategy: An iron ore margin squeeze was a major headwind for AKS shares in 2010, and investors remain concerned. We think the company’s tighter product markets enables it to pass iron ore costs through, and new contracts structures will make this automatic for 70% of sales.

3. Electrical steel market bottoming: Electrical steel appears to be recovering as ABB and Siemens reported strong growth in 1Q new orders, a good leading indicator of electrical steel volumes and pricing. This high margin business could improve EPS by $0.35 in 2012.

We see two catalysts in July: First, we expect steel prices to bottom around July; falling prices are currently an overhang. Second, we think 3Q guidance will surprise to the upside, which the company will release in late July.

Notablecalls: I think AKS has a fair chance of working on this call. Consider this:

- It's Morgan Stanley making the call. One of the largest Sell side crews out there. It's a sector call which adds some weight.

- The call makes sense, especially the part about iron ore cost pass-throughs (which I suspect was unknown to many). The electrical steel order trends at Siemens & ABB look interesting.

- It's very difficult to resist the Bull case +266% price target.

- There's a few catalysts out there. Always a plus. Morgan Stanley's estimates are now way above consensus and they are calling for an upside surprise in July.

The market this morning looks awful but this may actually be a good thing as it enables you to get OK fills.

It's one of those calls where you can expect a positive bias vs. the tape.

Mosaic (NYSE:MOS): Upgraded to Positive from Neutral at Susquehanna

Susqueanna Agriculture analyst Don Carson is upgrading Mosaic (NYSE:MOS) to Positive from Neutral with a $87 price target (prev. unch).

Susquehanna expects that the removal of most of the uncertainty surrounding the Cargill overhang will shift investor focus back to Mosaic's strong fundamental outlook for FY11/FY12. With the $65 per share secondary pricing reflecting an EV/EBITDA multiple of 6.6x their CY11 estimates, a significant discount to the 9.5x multiple at which peer POT trades, they believe MOS shares offer investors compelling upside from current levels.

Compelling risk/reward. The $65 per share pricing of the secondary offering represents a 24% discount to the $85 price at which MOS shares traded when the Cargill divestiture was originally announced on January 18 versus a 14.7% decline for the group over the same time-frame. Mosaic's under-performance, in Susquehanna's view, was primarily due to the sizable Cargill overhang. With 64-73% of the 157 mln shares that are eligible for distribution in the first 15 months post the deal closing now placed, they expect investor focus will shift back to the strong grain and potash outlook, and the compelling value that MOS shares offer at current levels.

Even at lower phosphate multiples. On January 20, following the initial announcement of the Cargill divestiture, the firm lowered their rating to Neutral and their phosphate segment multiple to 7.0x their CY11 EBITDA estimate from 8.0x. At the time, the firm cited the sizable new capacity slated to come online in 2011-2015 in Saudi Arabia and Morocco, and their view that while they did not expect a major decline in DAP prices until 2013, that they expected a compression in MOS's multiple, particularly given that the earnings decline that they expected
would result from the new capacity coinciding with significant new MOS share issuance. At the current share price, the firm believes these risks are fully reflected in the stock. Considerable upside exists in MOS shares, even at lower phosphate multiples – Susquehanna notes that a further 2 point multiple reduction from 7.0x to 5.0x CY11 EBITDA still results in an $80 price target, or 23% upside.

Notablecalls: This looks like a solid call that should push MOS higher in the n-t.

For further comments, see below.

Mosaic (NYSE:MOS): Don Carson from Susquehanna - BUY

Susquehanna's Don Carson, the Axe in Mosaic (NYSE:MOS) is upgrading his rating to Positive from Neutral this morning with a $87 price tag (prev. unch).

The 100 million share offering was priced @ $65 & I suspect the thing was a consensus short ahead of it.

The buyers here aren't flippers.

Carson's the Axe in the name, I'm told.

Probably means the stock is a buy here.

(I will update on details as soon as I get them).

Research in Motion (NASDAQ:RIMM): Cover Your Shorts Today - Bernstein

Bernstein's Pierre Ferragu, the Axe in Research in Motion (NASDAQ:RIMM) is backing off from his uber bearish thesis this morning.

- Ferragu is upgrading RIMM to Market Perform from Underperform (tgt unch. $40) telling his clients to cover their shorts today.

RIM's stock has lost 39% since its high of February and is now clearly implying a medium term evolution of the company far worse than management guidance or even sell-side consensus implies. With EPS 10% below consensus for this year and 21% for next year, they believe they currently model the bleakest possible outlook for the company and show in this piece of research that a significantly worse scenario is very unlikely to materialise in the next 2 years. As a consequence, Bernstein recommends covering short positions in RIM today.

They also recognise the stock is particularly cheap on any metric, were the company to stabilise its current position and make the right strategic moves to stay in the smartphone race. But they believe management remains in denial of challenges facing the company and therefore do not recommend buying the stock yet, or at least not beyond a short term play on a likely rebound.

They recommend covering short positions in RIM.

RIM's stock has lost 39% since its high of February, while sell-side earnings expectations only marginally adjusted and management maintained full year guidance. The stock is now trading at 4.7x management guidance and 5.5x sell side consensus for FY12 EPS (ex-net cash). In other words, investors give no credit to these numbers.

Even on their numbers, RIM appears cheap on all metrics. The firm forecasts EPS 10% below consensus (22% below guidance) for this year, 21% for next year. On these numbers RIM recently traded at 5.6x 2012 ex-cash Earnings and 0.9x 2012 sales, at the bottom end of the tech universe.

Bernstein believes the scenario they model is already very pessimistic.

They model RIM's user base growing only 32% this year and 17% next year, compared to 46% over the last 12 months, which implies a combination of continued share loss in North America, peak shipments in Europe this quarter and a steep deceleration of growth in other markets.

They expect service revenue per user down 25% in FY13 and FY14 resulting in service revenues falling by 10% in FY13 and 14% in FY 14, and device shipment growing 10% in FY12, 3% in FY13, which implies replacement rates will fall from 79% in the last 12 months to 61% in FY12 and 55% in FY13.

They model ASPs falling 7% this year, 12% in FY2013, which correspond to an ASP of $284 this year and $250 next year.

A scenario still justifying a short position (i.e. driving less than $4 of earnings for this year or next) remain highly unlikely. They do not see EPS falling below $4 per share without a steep collapse in shipment volumes. Such a scenario would reflect a decline of RIM's user base both the US and international markets, which remains very unlikely in the medium term, given the continued traction the brand gets in low ASP segments and outside of the US.

The firm therefore recommends covering short positions on RIM today.

Notablecalls: Ladies and gentlemen, will you give it up for Pierre Ferragu at Bernstein. He has done a great job as the most bearish Street analyst in RIMM.

Rumour has it RBC's former RIMM uber bull Mike Abramsky bursts into tears every time Ferragu is mentioned.

The stock is down 39% since February, pretty much in a straight line.

Today, Ferragu is telling his clients to cover their shorts. I suspect the stock will see n-t bounce that could last for several days and takes the stock toward $46-47 level.

I've been looking for a reason to buy RIMM for quite a while now (and have the tire marks on my back to prove I have tried). Today we got good one.


Oh and give kudos where it's due. I do!

Apple (NASDAQ:AAPL): Apple cutting 2Q11 iPhone production?! - FBR

FBR Capital Markets is out with some fairly cautious comments on Apple (NASDAQ:AAPL) saying that in short, their contacts now say 2Q11 iPhone production estimates were revised downward for 2Q11.

2Q iPhone build estimates revised downward on weak CDMA sell through. For the iPhone, FBR's contacts suggest calendar 2Q11 iPhone production has been revised downward since their last checks by 16% to 20.1M units. The majority of this negative revision was due to lower CDMAbased iPhone production, which was reduced from 5.0M builds to 2.1M builds. This negative -58% revision was on the back of lower than expected CDMA sell through at Verizon where they hear Apple faces steep competition in the CDMA-based smartphone market from Samsung and HTC -- both firms that address many price points from smart-feature phones to smartphones. Net, they now see 43M iPhones built in 1H11, suggesting Apple will build closer to 90M iPhones this year, down from their previous estimate of 100M-105M iPhones in 2011. Given the channel build and production estimates for 2Q, they estimate Apple could sell as many as 21M iPhones in the second quarter (below FBR's previous maximum of 25M units) before inventory levels reach hand to mouth.

Importantly for the iPhone 5 (codenamed N94), FBR's contacts have confirmed that Qualcomm is replacing Intel as the baseband supplier, selling an integrated CDMA/WCDMA baseband that allows Apple to streamline production. The iPhone 5 will also use an 8MP camera with OmniVision’s CMOS sensors, with Sony possibly being a backup image sensor supplier in 2012.

For the iPad, devicebuilds remain constrained as Japanese earthquake related supply chain shortages and manufacturing bottlenecks hamper production. iPad2 builds in 2Q are unrevised at 6.2M units, but early 3Q estimates reflect a sequential drop of 1M builds to 5.2M builds due to the aforementioned factors (though these could still get resolved and iPad production could get ratcheted up). Unless something were to change dramatically, Apple's internal iPad production goal of 40M-45M units for 2011 now seems out of reach.

3Q iPhone build estimates now flat sequentially, somewhat lower than expected. FBR's first look at 3Q11 iPhone production shows total iPhone production remaining roughly flat sequentially at 20M units, with 8M of these units being the long awaited iPhone 5, 1.8M units being CDMA-based iPhone 4, and 10.3M units being traditional iPhone 4 devices. They note that sequentially flat production is slightly worse than expected, and suggests Apple could sell as many as 22M iPhones in 3Q11 if it were to draw inventories down to hand-to-mouth levels.

Notablecalls: It is possible that the Android based phones are starting to take market share from Apple's iPhone? The answer is yes, according to FBR.

There has been so much hype & hope tied to the Verizon oppty that I can't believe the stock would go unpunished following FBR comments.

And the iPad scare, back again?

Not good. Not in this tape.

Airlines: Don't Wait, Just Buy - J.P. Morgan

J.P. Morgan's legendary Airline analyst Jamie Baker is out with very positive comments on several names. He is upgrading:

- AMR Corp (NYSE:AMR) to Overweight from Neutral with a $9.50 price target (prev. $8.50)

- JetBlue (NASDAQ:JBLU) to Overweight from Neutral with a $8.00 price target (prev. $7.00)

- US Airways Group (NYSE:LCC) price target moves to $18.00 from $13.50. The name remains OW rated.

According to JPM Jet fuel prices have declined $0.30 per gallon since April 29, representing a potential annualized industry benefit approaching $3.5 billion. And yet not a single estimate has been revised during this time. They’re not entirely sure why (they have some ideas), and would therefore suggest investors increase their exposure ahead of an expected upward surge in consensus estimates in coming weeks. For the second time in as many weeks, they are raising their estimates and target prices, with AMR and JBLU targets rising by an amount sufficient to warrant upgrades from Neutral to Overweight

The details:

Fuel prices have fallen—Jet fuel prices have declined $0.30/gallon from April 29, representing a potential annualized industry benefit approaching $3.5 billion (net of slightly softer revenue). Relative to our expectations, which were last recalibrated on April 27, this represents ~20% upside potential to earlier 2011 operating profit estimates, and ~30% in 2012.

Consensus remains grounded—In response to lower fuel costs, consensus airline estimates have . . . not budged. We’re not entirely sure why. Perhaps it’s merely earnings fatigue. Perhaps, after broadly reducing expectations into the Q1 earnings season, the sellside is recalcitrant to acknowledge it cut too deeply. Or perhaps, others are choosing to wait until the early-June release of May operating data. And hey, we understand that fuel volatility can easily leave one feeling whipsawed.

We see no reason to wait, and we suggest investors position themselves accordingly—We are broadly raising estimates and targets along with two ratings changes, and we suggest investors increase their exposure to airline equities ahead of an expected upward surge in consensus estimates. This week's airline investor conference coupled with the release of May operating data shortly thereafter is expected to awaken a stubborn consensus.

Our estimates are moving up—Our industry operating profit estimates rise by ~20% in 2011 and ~30% in 2012, resulting in estimates (with the exception of Alaska) that exceed consensus in every case, sometimes by as much as a factor of two.

Notablecalls: Mr. Baker = God. At least when it comes to Airline stocks. People buy his calls with eyes closed.

Baker turned slightly positive on the space on April 29 raising his estimates for the first time since last spring.

His main message was:

Same fuel, different industry—Here’s the sound bite: 2008 and 2011 fuel at midyear look about the same. In 2008 we expected a ~$7 billion operating loss, for 2011 we expect a ~$7 billion profit. Fundamentals tell a strong story, equities a weak one, and we think the latter is mistaken.

I would not be surprised to see 7-10% moves in the upgraded names over the next week or so. Several other names like LCC and UAL should perform as well. Barring a huge spike in oil, obviously.

What I really love about Mr. Baker's call is that you can go long after the open and just hold the names and watch them go up for days.

Sandisk (NASDAQ:SNDK): $100 Bull Case on +$7 EPS in 2012; BUY - Morgan Stanley

Morgan Stanley Semiconductors team is out very positive on Sandisk (NASDAQ:SNDK) raising their EPS #'s way above consensus while reiterating their $100 Bull Case target for 2012.

According to the firm, investors are missing the longer-term growth story:

SNDK is trading at 9x/6x Morgan Stanley's revised CY11/12 estimates respectively, suggesting investors underestimate the revenue and EPS upside potential from three catalysts: 1) NAND is becoming a non-commodity for OEM devices like smartphones as reflected by a 32% delta between spot and contract pricing; 2) client SSD adoption is poised to accelerate in 2H11 and 2012 as new ultra light notebooks with SSDs/and hybrid-SSD are launched; 3) NAND demand for high speed performance in enterprise storage for cloud computing surges.

Raising Estimates: Morgan Stanley raise their CY11/12 estimates on improving supply-demand fundamentals as reflected by Toshiba’s (#2 NAND maker globally - covered by Kazuo Yoshikawa) recent 20-30% annual ASP decline outlook versus MSe 32%. Their revised CY11/12 estimates are 24%/60% above consensus. Firm models full year gross margins at 46% versus 41-44% guide and ~300bps expansion next year.

What's Changed:
Price Target $65.00 to $70.00
CY11 Earnings From $4.97 to $5.46
CY12 Earnings From $6.28 to $7.31
CY13 Earnings Initiate at $9.90

Notablecalls: OK, this is a new one - NAND is now a non-commodity play as per Morgan Stanley. You hang around long enough in this business, you hear it all.

OK, Morgan Stanley's thesis seems to be that NAND will be non-commodity for the next 12-18 months as there is a lot of demand and they have the best quality product & manufacturing know-how. People are waking up to the fact NAND is quite difficult to manufacture. So that makes the call somewhat more understandable.

They are also playing the SSD card saying there will be lots of demand in 2012. That's what STEC CEO kept saying on their earnings conference call last week. STEC is building manufacturing capacity to meet an explosion of demand starting 2012. (Btw, STEC is getting upgraded by Benchmark this morning)

It also appears that the iPad scare is over. It pretty much ended the day JMP cut their rating on SNDK.

Morgan Stanley's estimates go WAY above consensus which will grab people's attention.

The SNDK call has a fair chance of working in the n-t.

Dead Foods Company (NYSE:DF): Upgraded to Buy at Goldman Sachs

Goldman Sachs is upgrading Dead Foods Company (NYSE:DF) to Buy from Neutral with a $19 price target representing 55% upside.

- They see the stock a potential double in 2-years, with $25 SOTP value.

The crux of Goldman's call is that DF’s margins have troughed at 3%-4% EBIT margin and they now have increased confidence that margins could recover towards a 5%-6% level over the next few years. Retailer pricing pressure on private label milk is in firm's view abating – leading to improved margin over milk costs – and cost savings could total more $1 per share of earnings over the next few years. Goldman is raising 2012/2013 estimates to $1.20/$1.50 from $0.78/$0.91.

DF’s margins are nearly 300 bp lower versus historical averages – DF’s EBIT margins have declined to 3.5% from its historical average margin of 6.5% and well off its peak margin of 7.7%. The primary driver of margin decline has been the pricing pressure from retailers on private label milk, which led to lower margin on DF’s private label milk and a wider price gap between branded and private label milk that resulted in consumer downtrading to private label milk.

Two quarters of improved pricing in private label milk – Goldman says they have begun to see signs of a more stable pricing environment as retailers are no longer pressuring private label milk pricing and promotional activity is down from the 2010 level. This is a positive for DF not only as margin over milk costs is improving but the branded milk performance is also improving, helping DF’s mix.

DF expects another $300 mm-plus in cost saves over the next three years – DF’s cost saving opportunity is sizable, with $100mm-plus targeted in each of the next three years. Firm's channel checks suggest DF’s cost savings opportunity is indeed large as the company improves supply chain, procurement, eliminates headcount, and integrates IT.

Stable pricing plus cost savings should drive margin recovery towards 5%- 6% level over the next few years – Given the improved pricing environment, they now have more confidence that DF should see some portion of its cost savings flow to the bottom line. Goldman is assuming about ½ of the $100 mm cost savings accrues to the bottom line, which should be enough to drive nearly 32% growth in EBIT in 2012 and 10-11% growth in 2013-2014. Their model forecasts 5.5% EBIT margin by 2014.


DF is also a deleveraging story – DF’s balance sheet remains highly levered at north of 5x, though recent asset sales have improved the leverage profile a bit. As their model forecasts sizable EBITDA growth over the next few years, DF should be in position to de-lever its balance sheet more quickly than consensus expects. They see DF’s net debt/EBITDA at 3.2x by the end of 2013. Lower interest expenses should boost EPS significantly, as Goldman estimates EPS growth of 72% in 2012 and 24% in 2013.

Shares could double in the next two years – Goldman's sum-of-the-parts valuation assumes a 7.5x Fresh Dairy EV/EBITDA multiple, 10x on Whitewave-Alpro, and 8x on Corporate. The two-year implied value of their SOTP points to $25 per share or about double the current DF price. Goldman expects DF’s 2011-2013 EPS CAGR to be about 45% vs. the Staples average of around 11% as DF should see sizable profit growth as margins recover and EPS is boosted by deleveraging.

Notablecalls: Dean Foods (DF) has been one of the the most hated names in the Food group. Huge leverage coupled with declining milk prices created a situation that left the stock for dead.

Two quarters of improved milk prices have caused the stock to double as the smart money buyers moved in.

Now Goldman is out with a 'all clear' upgrade, calling for another double. Their estimates & price target are the Street high. The upgrade is somewhat reactionary in nature.

The stock will be up 10%+ today, I suspect.

Hopefully there will be a quick dip in the name after open.

PS: Obviously this post was meant to be posted Friday morning but as Blogger was down, I'm posting it today.

Goldman Sachs (NYSE:GS): Dick says Sell

Rochdale's Dick Bove downgraded his rating on Goldman Sachs (NYSE:GS) to Sell from Neutral with a $120 price target (prev. $163).

The stock is down 7 pts so the s-t trade here is done. Yet, I think the comments from Bove are worth a read:

Goldman may have become the government's favorite target. This is not good for shareholders.

There have been two events in the past few hours that put Goldman Sachs at greater risk. The first was the decision by the Commodity Futures Trading Commission (CFTC) to request a fraud complaint against Goldman Sachs. The second was the conviction of Raj Rajaratnam on insider trading.

"In its quarterly filing with the Securities and Exchange Commission Tuesday, Goldman said that the agency's staff has orally advised it that it intends to recommend the agency bring "aiding and abetting, civil fraud and supervision-related charges" against Goldman Sachs Execution & Clearing.

The CFTC, the filing said, is basing these charges on allegations Goldman knew, or should have known, that its broker-dealer client's subaccounts at Goldman were accounts belonging to customers of the broker-dealer and not the broker-dealer's own accounts."

The fact that Mr. Rajaratnam was convicted may embolden the CFTC to pursue this case more aggressively and it is possible that a trial will follow. This is the problem with this stock. The company has become a target for any political thrust any agency wishes to pursue. It has no defenders.

The government clearly wants something from Goldman and Goldman is not willing to budge. I have repeatedly indicated that this battle is no good for shareholders and this potential charge is simply more evidence of that fact.

In 1932, Andrew Mellon was believed to be the richest man in the United States and he had just served 12 years as Treasury Secretary, a post he was relieved of by President Hoover.

When President Roosevelt took command he needed to personalize his belief that Republicans and capitalists had caused the Depression and that they needed to be punished. He, therefore, decided to sue Mr. Mellon for tax evasion even though neither the Treasury nor the Justice Departments believed Mr. Mellon had done anything wrong.

The President continued his suit for about six years. By the end of that time Mr. Mellon had died and given the United States the National Gallery of Art. The Supreme Court found in Mr. Mellon's favor but it did not matter. The President had found his foil and had achieved his goal.

It is becoming very clear that Goldman Sachs is the government's foil for the causation of the financial crisis. In my view the company has done nothing to remove itself from this position. Until it does so or until the government exacts its penalties, this stock is a bad purchase. It does not really matter who is right. What matters is getting this issue behind the company.

Notablecalls: According to Bove the pressure on the Justice Department to bring a criminal lawsuit against Goldman is building to a high pitch.

Talking to some L-T holders of the stock, the view seems to be that Goldman is becoming a disappointment as the otherwise one-off issues keep surfacing again and again.

Aixtron (NASDAQ:AIXG): Downgrade to Sell; PT to $25

Canaccord Genuity is downgrading MOCVD leader Aixtron (NASDAQ:AIXG) to Sell from Hold with a $25 price target (prev. 37.50) given an increased risk profile based on changing customer patterns, a pending cyclical downturn and relatively rich valuation.

The details:

Investment highlights
• As we revisit our Third Cycle assumptions, we conclude that even with significant support from China, the MOCVD market is on the verge of a cyclical downturn and 2010/2011 will represent a historical peak in equipment sales.

• Aixtron has changed its bookings policy, leaving it up to management’s discretion from a conservative criteria, including deposits, documentation and delivery date. While the company believes this is a normal event in a maturing market, we simply note it has increased the risk profile.

• AIXTRON remains the leading MOCVD equipment vendor, but shares are expensive on a relative basis, especially in front of what we expect will be a peaking scenario and cyclical downturn in 2012/13.

- Canaccord's not the only firm out cautious on the name. German based WestLB is also cutting their rating to Neutral from Buy on Aixtron (NASDAQ:AIXG) this morning after April sales figures from the LED producers in Taiwan showed only slow growth, and confirm a pattern that the firm has already seen at Cree and SemiLEDS.

LED sales are being squeezed by price weakness and new competition. Accordingly, they have revised their projections for the sale of machines into both Taiwan and Korea, formerly the main markets for LED production equipment. In view of the large capacity additions in China, they still see a strong level of shipments in 2011 but expect the growth in China to be offset by declines elsewhere.

The details:

April LED growth rate drops to 9%. The LED production and packaging sector in Taiwan led by Epistar and Everlight saw sales growth in April fall from 25% year-on-year in March to 9% in April, according to figures published in the last few days. This is based on our sample of 10 companies and compares with a growth rate of 84% this time last year. It is the lowest growth rate since the credit crunch.

Price declines and low margins. We suspect that the year-on-year decline in prices may well have reached 20%. The underlying business in backlighting units (BLUs) for televisions is still seeing increased penetration, albeit with less units per screen, so we expect underlying volumes to increase by around 40-50%. Smartphone and netbook demand may also be some 20% higher in terms of LED units. However, the weak pricing and the effect on the sector of the weak value of sales is bad for margins. Gross margins were below 20% in Q1. Q1 is seasonally slack but it is all the more disappointing that the April recovery has been so slow.

Samsung also complained about the slow screen market. The world’s largest screen producer saw a 25% sequential decline in flat panel TV sales in Q1, which represented an increase of only 5% in the screen market year on year. This is a slow result for a successful product range with a high share of LED BLUs in it. We suspect that the Korean producers of LEDs for TV backlights have even greater difficulty achieving revenue growth than the Taiwanese. The inclination to add new machines against this industry background must be low. In Taiwan, capacity utilisation is said to be 80% but in Korea we believe it is lower than that.

12% downward revision to MOCVD machine market forecast for 2011. In light of the difficult state of the client industry, we have lowered our forecasts for deliveries by 12% for 2011 and 18% for next year. Within this we still believe that Aixtron will increase its market share. This is because of the catch-up effect, which should derive from the success of G5 models and Crius II.

Notablecalls: To put this in context, please go back and read the April 5 Cree (CREE) downgrade from Morgan Stanley. CREE uses MOCVD reactors from Aixtron. So do many of its competitors.

What has been happening is that LED volumes have been going up but ASP's have been going down. When margins head south, companies will have less incentive to invest in equipment. The equipment side so far has been a duopoly (Veeco & Aixtron) so MOCVD ASP's have been holding up well. It's the volumes that are likely to suffer.

For some reason AIXG has always traded at a way (sometimes 2x) higher valuation than VECO. I suspect that this spread may decrease today.

The $25 PT is the Street low target for AIXG and I suspect will create selling pressure in the name in the n-t. I also suspect most people didn't know about AIXG's revised booking policy.

The stock took almost a 2 pt hit intraday back in Jan when Citigroup initiated it with a Sell & $30 PT, so it's prone to make big moves.

I would not be surprised to see AIXG break $39 level in the very n-t

Sky-mobi (NASDAQ:MOBI): Short squeeze Alert!

UBS is initiating Sky-mobi (NASDAQ:MOBI) with Buy & $20 target this morning.

UBS thinks the value-added in the handset supply chain has changed from hardware (IC) to software (games or other applications), and thus they are more positive on the long-term outlook for the mobile Internet market than they are for hardware companies. UBS believes the key catalysts for the company’s share price are: 1) the increasing penetration rate of its Maopao platform; 2) improving handset baseband performance, which could better support mobile content functionality; and 3) the rapidly growing mobile Internet market in China. Their price target of US$20.00 is derived from 30x one-year forward PE, and is 44% above the current level.

The share price has fluctuated significantly since the December 2010 IPO: 1) December 2010–January 2011: 37% decline, mainly because of concern on the ‘triple confirmation’ policy; 2) February 2011: the share price rose 51% after the announcement of MOBI’s partnership with Tencent; 3) March-April 2011: 49% rise after MOBI signed an agreement with Sohu; and 4) the past week: the share has declined 33% as some investors sell as the end of the lockup period approaches.

Key catalysts
Increasing bundle rate of Maopao platform MOBI’s Maopao platform has been the dominant middleware in China since 2009. In Q310, the bundle rate increased to 80%+ of China handsets, according to the company. Although the ratio dropped in Q410 as operators began to request ‘triple confirmation’ of apps purchases by SMS (as they did in Q309 when operators requested ‘double confirmation’), UBS thinks MOBI should be able to maintain a 75% bundle rate in China going forward. The bundle rate for MOBI’s Maopao Community for mobile on-line games and social networking has ramped up quickly. In Q410, approximately 16% of new handset users in China joined Maopao Community, according to the company. They think the ratio could increase to 30%+ in the next few years.

Expect mobile Internet to be the next focus of handset market
With new handset hardware features limited, improving user experience through software applications is becoming more important to handset vendors. Apple’s ‘App Store’ is the most successful example of selling such apps in the market. In China, UBS thinks domestic companies are better positioned to benefit from growth in the mobile Internet market. They believe MOBI will be one of the major beneficiaries.

Leading position
MOBI has installed its Maopao apps on more than 5,600 handset models. In 2009, it had more than 50% of the market by revenue. Given the industry’s high entry barriers, UBS does not expect new entrants to threaten MOBI’s leading position in the near term.

Notablecalls: As many of you know, Citron Research has been all over MOBI in the past days, causing the stock to drop from $22 to around $14-15 currently. Volume has ballooned up as shorts have established positions in this Chinese name.

Yet now we have a tier-1 firm out initiating coverage calling Sky-mobi Chinese equivalent of Apple 'App Store'. I'm pretty sure they wouldn't have initiated coverage if they had ANY doubts regarding MOBI's #'s. The environment is just too unforgiving when it comes to Chinese names.

I have no idea what the short interest looks like here but judging from the volume it probably stands around 30%.

A short squeeze may be in the cards today.

Calls of Note: Celanese (NYSE:CE) & OpenTable (NASDAQ:OPEN)

- Goldman Sachs is upgrading Celanese (NYSE:CE) to Buy from Neutral with a $62 price tag (prev. $45) ahead of its May 10 investor day and following recent meetings with management, very strong 1Q11 results and forward outlook, and recent stock weakness. They now expect 2011/12/13 EPS of $4.56/$5.31/$6.17 (vs. prior $4.04/$4.79/$5.50). Goldman's based, 12-month $62 price target implies 32% upside from current levels, which they view as an attractive entry point. CE trades at only 8.8X their 2012 EPS estimate and the firm believes that CE warrants a higher multiple considering the evolution of its earnings mix shift to higher margin specialty chemicals and less from more commodity-like end markets.

Catalyst
Goldman views CE’s May 10 analyst day as a catalyst for: 1) management to revisit its 2013 segment EBITDA targets and/or introduce higher 2014 targets; and 2) investor awareness of the prospects for CE’s nascent ethanol opportunity, which they view as a “call option”. Beyond the investor day, the firm views CE as one of the best beat and raise stories in their coverage universe and they are currently 7% / 9% above consensus’ 2011/12 EPS estimates. They believe that consensus is overlooking recent moves in acetic acid prices, 2H11 strength from a major plant move/expansion, and CE’s exposure to the strong Euro.

Notablecalls: OK looking chart & a clear catalyst on the horizon. May see some interest. Note this is a dual call as the firm is downgrading Albemarle (NYSE:ALB).

- Merril Lynch/BofA is upgrading OpenTable (NASDAQ:OPEN) to Buy from Neutral with a $121 price target (prev. unch) nothing that while the stock could be volatile in near-term as Street digests the CEO change and the local deal (Spotlight) revenue opportunity reset, with OPEN down approx. 25% from its recent peak, they are upgrading to Buy with 35% potential upside to their target. The OpenTable penetration growth story remains intact based on solid N.A. restaurant adds in 1Q and Merrill's new consumer survey results, and they estimate a $1bn revenue opportunity assuming 70% restaurant penetration, up from $147mn in 2011.

Thoughts on management change
CEO Jeff Jordan announced his resignation as CEO/President in conjunction with the 1Q earnings release, but he will remain as Chairman. Firm thinks the company is in good hands with Mr. Roberts in charge given his in-depth knowledge of the company’s operations and financials, and they expect Mr. Jordan to provide counsel as needed. They expect the shock value of the new CEO to fade quickly, plus solid 2Q U.S. restaurant counts, to benefit the stock.

Proprietary survey supports OpenTable value to restaurants
Merrill's recently conducted a proprietary survey of ~400 consumers about their Internet usage habits, and their survey results support the value proposition of OpenTable. Roughly 40% of the respondents who use OpenTable indicated that they use the site to discover new restaurants, resulting in high incremental diners to restaurants on the site, $2,500 in estimated monthly incremental revenue, and a relatively high ROI for a restaurant on its OpenTable investment.

Maintain $121 price objective
OpenTable now trades near 32x Merrill's ‘12E US EPS (backing out $33/share for int’l value plus cash) vs. a peak multiple of ~45x, which they see as attractive vs. their 45% avg. 3-year North America operating income growth rate. Firm's $121 price objective is based on 50x our CY12 North America EPS estimate of $1.76 + $31 in int’l value, which represents 35% of the value of the North America business, plus $2 in cash. They see 35% potential upside to their target price.

Notablecalls: The name fell out of bed yesterday after the CEO announced his resignation to make time for his VC ops. I must say, it takes guts to upgrade this momo name here. Maybe the analyst is feeling good about himself for downgrading it back in April.

Nonetheless, I think OPEN is prone to bounce in the n-t. Short interest stands at 30%+

BRB

Research in Motion (NASDAQ:RIMM): The bounce that wasn't

The shock factor of RIM's guide-down pretty much outweighed the catalyst trade on Friday. All we got was a 1.5-2 pt squeeze at around open that did little else than bring in additional sellers.

I would have preferred a flush toward the $47+ level around open, followed by a nice 2-3 pt bounce throughout the day.

Sometimes it's all about the trading dynamics.


Sorry to be boring you with this on a Sunday.