Investment Technology Group (NYSE:ITG): Deep Value! Upgrade to OW - JPM

J.P. Morgan is upgrading Investment Technology Group (NYSE:ITG) to Overweight from Neutral with a $16.50 price target calling it a deep value stock.

- Upgrading ITG to Overweight – Unloved and Largely Ignored, But Management and the Board Have Options.

- With some help from ITG's balance sheet this could be a $18 stock, according to JPM.

With the stock underperforming materially in 2011, particularly since preannouncing soft 2Q11 results on July 12,
2011, the firm see management having capital management options that could be particularly positive for investors. The core of JPM's thesis is two fold –

1) ITG has the free cash flow to borrow against a cash rich balance sheet and buy a materially percentage of its stock.

2) An expense reduction program gives ITG meaningful flexibility should equity volumes remain subdued, but meaningful earnings potential should volumes rise.

JPM believes that ITG’s mgmt. is well positioned to be more aggressive in returning capital to shareholders, taking advantage of the recent steep drop in its stock. Over half of ITG’s ~$12 stock price is in cash – they estimate ~$7 per share. While much of this cash is trapped to support the business, ITG’s mgmt. has only been returning moderate capital to shareholders. However, with share price down 27.5% in 2011 and Private Equity in the sector, they think that pressure is on mgmt. to create additional shareholder value. Borrowing $170mn (1.5X trough 2Q11 EBITDA) and using the proceeds to purchase shares at $13 would increase ITG’s 2012 EPS by 30%, driving the stock to $18, at 12X earnings.

Management has listened to shareholders in the past, initiating a stock repurchase program following encouragement of D.E. Shaw in 2007. Given a significant decline in ITG’s stock price, they see the potential for the CEO and Board of Directors to take stronger action to deliver shareholder value.

ITG fundamentals challenged in 2Q11, but earnings outlook acceptable given cost cutting initiatives. ITG’s earnings are tied to equity trading commissions, which were solid in 1Q11, but struggled in 2Q11. However, mgmt. announced a meaningful expense reduction program in early July to offset recent softness in industry trading volumes. This program should not only mitigate weak volumes should they persist into 2H11, but increases ITG’s leverage to better trading volumes in a seasonally stronger 1Q12.

According to JPM, ITG’s market share of total NYSE and Nasdaq shares traded has increased from 2.75% in the beginning of 2010 to 3.3% at the end of June 2011.

ITG – A Deep Value Stock
Firm thinks ITG is especially inexpensive. After peaking earlier this year at ~$20 per share, the stock has declined as both industry volumes sank and as the perception of ITG’s customer mix deteriorated from higher fee paying mutual fund customers to lower fee paying brokers and lower touch customers. ITG stock has fallen 27.5% in 2011, including a 21% decline earlier in July following its earnings preannouncement.

ITG Trades at 10x JPM's 2012 Estimate of $1.18, FCF Yield Is An Attractive 13%. ITG trades at 15X what they expect will be trough earnings in 2011, and an inexpensive 10X times their 2012 estimate. Similarly positioned company, such as Knight Capital is trading at 8X JPM's 2012 estimate. However, ITG has a much higher FCF yield relative to Knight Capital – ITG's 13% based on 2Q estimates vs. Knight's 8%.

ITG Has No Sell-Side Support – No One on the Sell side Has a Buy on ITG! JPM believes there are a number of data points to suggest ITG is being ignored by the investment community. One example is that of the nine analysts that provide research coverage on ITG, there are no ‘Buy’ ratings – eight analysts have “Holds’ and one has a ‘Sell’. Firm notes that according to Bloomberg, 7% of the float is held short.

Notablecalls: What do you think will happen to a $500M company (a small-cap!), that nobody loves & seems to have forgotten about when a Tier-1 firm like J.P. Morgan comes out swinging calling it a Deep Value play with a hefty 50%+ upside price target.

It goes up! Big time.

I'm guessing +7-10%, putting 12.50-13.00 levels in play in the n-t.


PS: I'm posting this at Market Open 9:30 AM ET.

Bridgepoint Education (NYSE:BPI): Warburg files S-3 - 35 million shares

Bridgepoint Education (NYSE:BPI) may offer an interesting trade in the n-t after Warburg Pincus, majority owner & founder filed to sell their 35 million stake in the company.

Here's the S-3 filing

Here are some points why this may be a major event for the company:

- Bridgepoint Education Inc. (BPI) was formed in 2004 by current CEO Andrew Clark and Warburg Pincus to establish a for-profit post secondary education provider. The IPO was priced at $10.

Warburg & co can be considered 'smart money' & seeing them cash in their chips should be considered as a red flag.

- Warburg owns 34.6 million shares or about 57% of the fully diluted shares outstanding.

While short interest stands at a whopping 72% of float, the float is about get significantly larger. Current float stands around 18M shares.


I think the recent raise in BPI stock price can be attributed to a short squeeze. As you can see from the Bloomberg chart, short interest has been declining lately, while the stock has been going up.

All in all, Warburg filing is likely to have created a significant overhang for the stock in the near-term.

Notable Calls Network (NCN): InterDigital (NASDAQ:IDCC)

We caught a nice mover on Notable Calls Network (NCN) this morning:

InterDigital (NASDAQ:IDCC) has been on fire ever since the Nortel wireless patent estate was auctioned for $4.5 billion. InterDigital happens to hold patents related to the fundamental technologies that enable wireless communications.

The stock has gone from $35 in mid-July to a high of $82.50 as of this morning on speculation Google, Apple among others may be interested in buying the company for its patents.

All in all, it's been the main hype name that traders love to trade around on any new bits if info.

- This morning, around 8:00 AM ET a senior member of NCN brought to my attention that Peter Misek, an analyst at Jefferies & Co had an interesting call on IDCC saying Apple could potentially buy the company. What was even more interesting was the fact he thought IDCC patent estate would be worth up to $10 billion for Apple. IDCC's market capitalization was around $3.1 billion.

This was clearly market moving material, so I quickly distributed a short summary of the call to our wonderful members:

IDCC (Peter Misek) - InterDigital portfolio could be worth up to $10B to Apple = $200 per share!

InterDigital's patents could save Apple $3-$10 per handset and could substantially increase the price of the low-cost Android phones launching in H2:11.


- Sellers were scarce, so one had to buy up 4-5% to get decent fills. But as you can see from the chart it was well worth it. The stock went up another 10 pts.

You can probably imagine the profits some people have from this morning.


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.

OpenTable (NASDAQ:OPEN): Reduce Estimates on Slowed Subscriptions and Soft Spotlight - Benchmark

Benchmark is out surprisingly cautious on OpenTable (NASDAQ:OPEN) lowering their Q2 revenue estimates on increased competition and weakness at Spotlight, OpenTable’s deals product.

- Firm maintains Hold rating and $90 price target.

The details:

OpenTable appears to be facing more competition domestically from Urbanspoon’s RezBook, Livebookings and Eveve. CityPages recently reported that two notable restaurants in the Twin Cities dropped OpenTable. These restaurants apparently switched to Eveve, a European competitor that has 300 restaurants, due to lower cost and more flexibility. Competition may be slowing OpenTable’s restaurant growth. Our checks indicate OpenTable added meaningfully fewer restaurants in 2Q compared with prior quarters. We reduce our 2Q estimate for restaurant subscription revenue from $12.8 million to $12.4 million. This could affect reservations as well.

We believe at Spotlight, OpenTable’s deals product, revenue was down sequentially in 2Q11. For 2Q11, we now estimate Spotlight’s revenue at about $800,000, below our prior $1.5 million estimate, and down from $1.2 million in 1Q11. While there was an improvement in Spotlight revenue from April to June, no single month in 2Q11 was higher than March’s total. Large markets such as San Francisco (down an estimated 46% sequentially), Los Angeles (down 43%) and New York (down 34%) drove the projected soft result.

The National Restaurant Association reported weakening restaurant trends for May, the latest available data. The Restaurant Performance Index dropped 1% sequentially, from modest expansion to modest contraction. This was the first time in six months that the Index signaled contraction. Expectations for the next six months also declined slightly.

Consensus 2Q11 revenue, EBITDA and EPS are $35.5 million (45% y/y organic growth, $13.0 and $0.27 (91% y/y growth). Our revenue estimate drops from $36.3 million to $35.0 million. Our adjusted EPS drops from $0.32 to $0.29.

European competition remains a concern. Livebookings appears to have 8,700 restaurants in 23 countries, and seats one million diners monthly, mainly through its website bookatable.com. Livebookings main markets are the UK and Germany where it has about 5,000 and 2,000 restaurants, respectively. These are also OpenTable’s main European markets.

OpenTable closed at 62x and 32x 2011E adjusted EPS and EBITDA with about 50% average annual growth in both.

Notablecalls: Benchmark's Clayton Moran is making a potentially significant call here. If his checks are right, OPEN's huge valuation multiples are about to compress.

The weakness at Spotlight doesn't sound good either but seems to be well telegraphed by now. Still a big part of OPEN's valuation, though (based on Groupon-like multiple)

Imagine OPEN reporting slightly below consensus #'s on August 2. Ugh.

Note that 3 weeks ago PAA Research, a small shop with interesting ideas & a good track record published a very negative take on OPEN. They called it a short with a $55 price tag noting competition was quickly eating away OPEN's total addressable market. The stock is up 5 pts since.

Very volatile name so adjust your risk accordingly.

PS: I'm posting this around 9:30 AM ET.

Lam Research (NASDAQ:LRCX): Samsung's Gift to Semicon; Upgrade to Buy - Citi

Citigroup's Semiconductor Equipment team is making a significant call on the space, turning bullish again after several months of being very bearish. Title of the call is "Samsung's Gift to Semicon".

- Lam Research (NASDAQ:LRCX) is their new favourite pick in the space, after being on Citi Top Pick Live Sell list since April 6. They are upgrading LRCX to a Buy with $62 price target (prev. $43).

ASML and KLAC get upgraded to Hold from Sell. NVLS & AMAT remain at Hold.

Not only has LRCX meaningfully underpeformed the group in 2011 and back to historically attractive valuation levels, but should also be a significant near-term beneficiary from Samsung, according to Citi.

The details:

Samsung is finally coming back; increasing CQ3 from -10-15% to flattish — Citi's most recent checks indicate that Samsung is finally coming back to the table to place many of the orders pushed out in April. Specifically, the firm now thinks Samsung will take 20k wsm capacity for Line 16 phase 2 NAND ramp and ~30k wsm tool upgrades for Line 15 DRAM shrink, both of which should now order and ship in CQ3. They estimate this is nearly $1B of the ~$1.5B previously pushed out – a swing factor of ~15% on a wafer fab equipment order run rate of ~$6.5-7B for CQ2.

Overall, we believe this amounts to nearly ~$1B that should come back into CQ3, which should provide ~10-15% of the upside for CQ3 orders/shipments for the major front-end names. This essentially “fills the gap” between what the firm thought was previously a down 10-15% CQ3 and now looks more flat.

Importantly, Citi believes this should start to come through this week at the Semicon/WEST tradeshow and be reflected in surprisingly good sentiment for CQ3 relative to current Street expectations.

- Orders now below normalized levels, baking in $27B WFE — Citi estimates CQ2 wafer fab equipment (WFE) orders were back to ~$27B/yr run-rate, down from >$40B in CQ4:10 (fueled largely by ASML) and below the ~$29B/yr they consider “normalized”. Not only is this decline consistent with the correction magnitude in ‘04/’05 (the last supply-driven correction, ’01 and ’08 were demand-driven where GDP slowed meaningfully), but $27B WFE would be down ~15% from the $32-33B still suggested by equipment companies and bottom-up capex analysis for 2011.

Citi's sector view — While supply has ramped in face of end-market demand questions + IC inventory headwinds, the sudden and meaningful order pullback has mitigated risk while Street sentiment now very negative. Looking to 2012, it is hard to see a big down year given rising capital intensity, lack of memory over-spend, and INTC “changing the game” in the foundry segment. Their tgt increases are based on a new higher normalized mkt size due to higher capital intensity. LRCX/TER/FORM remain top ideas.

Notablecalls: Citi's Timothy Arcuri caused 8% intraday drop in LRCX on April 6, when he issued a Top Picks Live Sell rating on the name, claiming Samsung decided to push out shipments with the company.


April 20 results & guidance by LRCX confirmed his suspicions sending the stock further down.

Goldman Semicap analyst upgraded LRCX on May 5 but the selling pressure was so intense the stock failed to hold gains even for the day.

- Now we have Arcuri coming out saying his uber-negative thesis is now reversed. Following recent underperformance & Samsung resuming orders LRCX is his favourite name in the group.

If that's not a big call I don't know what is.

Plus we have Semicon/WEST the biggest Semi event starting tomorrow July 12. Citi thinks this could ignite the group.

All in all, I suspect LRCX will trade up markedly in the n-t. It will almost certainly produce a 3-5% upside move from open but given the significance of the call this could push the stock up for several days. So buying the pull-back could work here as well.

Buying the other names in the sector may prove to be somewhat more tricky as we have UBS & Merrill both out with cautious pre-Semicon comments lowering their cap-ex growth rates for the space. They are obviously lagging behind Citi checks wise.

Tape's drek so adjust your risk accordingly. It seems we're in a state of panic this morning. Quite the change from Friday's jolly bounce.

PS: I'm posting this at around 09:30 AM ET.

Google (NASDAQ:GOOG): Investment Ramp, Uncertain ROI, Downgrade to EW - Morgan Stanley

Morgan Stanley is downgrading Google (NASDAQ:GOOG) to Equal-Weight from Overweight with a $600 price target (prev. $645).

- Google is spending to innovate in social / local, retain talent, and to drive user adoption of key products, but those investments have uncertain ROI / payback periods. Morgan Stanley is reducing their PT to $600 (from $645) and C2012e EPS to $34, below consensus of $40.

Details:

Debate #1: Will margins decline from here? Yes. Given Google’s aggressive hiring plans, rising compensation expense, and significant advertising spend on Chrome & other Google products, we expect EBITDA margin to decline in C2011 / C2012.

Google is now hiring at a blazing pace (1,900+ net hires in CQ1) and is likely to attain its goal of making 2011 its “biggest hiring year in company history” – per Alan Eustace, Google’s SVP of Engineering & Research“. As a result, we believe the company is on track to hire 7,000 employees this year (an increase of 19% from year-end C2010), up from our prior estimate of 4,000 net additions.

Debate #2: Will “newer” businesses drive near-term revenue outperformance? No. We believe the consensus is too optimistic on the net revenue contribution of newer businesses, such as DoubleClick, YouTube, AdMob, Android Market, and mobile search. In 2011, we expect search & contextual ads to contribute ~90% of Google’s net revenue.

Debate #3: Will investments in local eCommerce and / or social pay-off? Too early to tell. We are encouraged by early progress of Google Plus and Google Offers, but Google faces stiff competition from incumbents who have first mover advantage. The pay-offs of such endeavors may be longer-term.

Google’s approach to capturing markets is to grow users / market share first, and monetization (profitability) second. We expect them to take a similar approach with Google Offers and Google Plus, which should limit near-term financial contribution even if both products prove successful. Further, these businesses appear to be scale businesses whereby the highest margin profile accrues to the market share leader. If Google is not able to capture a leadership position in the market, it may not enjoy EBITDA margins as high as in its core business.

As a Result, We Are Reducing Our Estimates
We are reducing our profitability estimates (now significantly lower than consensus) due to the following: 1) Google’s aggressive hiring plans, 2) rising salaries due to a competitive hiring environment, and 3) increased advertising spend to drive usage of new / existing products.

Our new CQ2 / C2011E EBITDA estimates are $3.44B / $14.5B, roughly 4% / 5% below consensus estimates. Our revised CQ2 / C2011E operating EPS estimates are $7.45 / $31.44, approximately 5% / 7% below consensus.

Notablecalls: Morgan Stanley has been a Google Bull since 2008. So that makes the call potentially a significant one.

LinkedIn (NASDAQ:LNKD): Initiating Coverage with a SELL and $45 price target - Capstone

Capstone Investments is making the call none of the other Wall Street firms want to make:

LinkedIn (NASDAQ:LNKD): Initiating Coverage with a 'SELL' and $45 price target - Price isn't the Only Risk

- The 18 pg note accuses the online recruiting firm of creative accounting, lower-than-advertised user base, high fixed cost business model and poor corporate governance.

All this they say, comes with a bubbly valuation not seen since 1990's. According to Capstone, their Street low $45 price target could prove to be too optimistic as the company fails to execute its ambitious business plan & insiders start dumping the shares. IPO lock-up expires in November 2011.

'... LinkedIn is an online professional identity and recruitment tool. Sprinkle on the "social media" moniker and in the Internet Bubble 2.0 you can price an IPO at $45per share, or 34% higher than the price talk midpoint, and the watch the stock rise to $94.54 - although it has been as high as $122.70 and as low as $60.14 over the sex weeks since LinkedIn's stock offering - to give this break-even business a $93.4 billion market cap. ... '

Paul Meeks, CFA at Capstone

The PDF file is copy-locked so I can only show you the Summary page of the note:


Notablecalls: There are two reasons why LNKD has only Buy ratings from major Wall Street firms:

- Merrill, JPM, Morgan Stanley & UBS were the underwriters. They need to keep their clients (both sides) happy.

- Facebook. The biggest IPO in recent memory is expected some time in 2012. Everyone wants a piece of the action and they are not going to get it by issuing Neutrals (or god forbid Sells) on other Social Media names.

That leaves the door open for Capstone to come in with a seriously scary story and a price target that should send people selling at least in the n-t.

I expect LNDK to trade down today, possibly to the tune of 5-10%, putting $89-85 levels in play.

Omnivision (NASDAQ:OVTI): Actionable Call Alert!

FBR Capital Market's Semiconductors team is out with a call on Omnivision (NASDAQ:OVTI) that I suspect could be a game-changer for the stock in the n-t.

- First I would note that FBR doesn't officially cover OVTI (yet!) but seems they stumbled upon the info while doing their Apple supply chain checks.

The firm discusses their iPhone/iPad estimates going up etc.. until it reads this buried in page 2:

We still expect the iPhone 4S (codenamed N94), to have an 8 mega-pixel camera though we hear reports that OmniVision may be having technical difficulties with its new CMOS sensor, possibly risking its iPhone socket supplier status. As reported previously, Apple’s iPhone 4S refresh has replaced Infinieon’s baseband processor with Qualcomm’s processor. Also of note, with 72.5M iPhones set for production through the first three quarters of 2011, 100M iPhone builds again seems reasonable for Apple this year. Given our new iPhone build estimates, for 2Q11 we now estimate Apple can sell a maximum of 21M units, and for 3Q11 we now estimate Apple can sell a maximum of 27M units (though actual sales will likely be lower as Apple builds more internal and channel iPhone inventory before holiday sales ramp in 4Q11.

Omnivision possibly out, Sony may pick up the slack. Our contacts tell us that Omnivision may have missed Apple’s commercial production deadline for products utilizing their BSI-2 architecture, and thus may have lost the lead supplier status for the image sensor socket to Sony. Omnivision’s BSI-2 technology is the world’s first 1.1-micron pixel architecture allowing for low-light sensitivity and accurate color reproduction for better overall image quality. Manufactured through Taiwan Semiconductor, it is built using a 300 mm copper process at the 65 nm node. However, we understand that yield rates at TSM have thus far been unacceptably low for commercial viability, and that the deadline for inclusion into the next iPhone has passed. Therefore, Sony could become Apple’s primary supplier of 8 mega-pixel CMOS image sensors for the next iPhone, with OmniVision possibly being a backup supplier. Many believed that Omivision would capture as much as 90% share of iPhone production, which may turn out to not be the case.

Notablecalls: FLASHBACK: February 23, 2011 - Sony could win all of initial iPhone 5 procurement orders - Baird

Baird's Tristan Gerra made a bold call just 2 days ahead of earnings saying Apple could potentially single source iPhone 5 sensors from Sony. This resulted in a 3 pt (15%) drop for the stock. OVTI was a 26 dollar stock back then.


The analyst was proven seemingly wrong as OVTI guided July qtr tad above guidance, implying all was good at Apple. The stock surged 10 pts as disgraced shorts fled the scene.

The consensus view became that OVTI's OmniBSI-2 technology would be in the iPhone 5 & Sony would at best be a me-too supplier.

That's until today.

FBR's ever-wonderful Semi team is saying OVTI is having real problems with the BSI-2 architecture as yields are way lower than expected. Low yields is the key to this call. You see, OVTI is converting its sensors to BSI technology because of better yields and lower defect densities.

I can't stress this enough but if OVTI cannot mass produce BSI-2 architecture, it means they can't get their stuff in the high end devices like the iPhones & iPads. That would mean consensus #'s are way too high.

Someone call the homicide unit because that would mean murder for the stock.

FBR could have it wrong with their checks. Maybe it was just a patch of BSI-2's that had bad yields & TSM being best in the business can turn it around for them. But with the stock 10 pts higher from where the concerns first surfaced, one can expect a rather painful reaction.

I would not be surprised to see the stock down 10% or more today after the FBR call makes the rounds.

That would be $31.50 or lower in the n-t.

Actionable Call Alert!

Netflix (NASDAQ:NFLX): Downgrade to Neutral - Merriman

Netflix (NASDAQ:NFLX) Merriman downgrading to Neutral on near-term margin pressures and limited upside to target

Netflix ran up to a new all time high yesterday on news of expanding into Latin America and Carribean. As such they confirmed what had been expected since earlier this year - that the most likely region for international expansion would be be Latin America. This is believed to be a very attractive market of broadband subscribers with expanding wealth due to less competition than in Europe or the UK. Netflix will offer its streaming-only subscription plan into 43 Latin American and Carribean countries during 2H11.

Merriman estimates that there are more than 40M broadband subscribers throughout Latin America and the Carribean, and given the 4% broadband subscriber penetration already achieved in Canada during the first 9 months, they see 5-10% penetration rate within the new regions during the first year. This would yield 1.9-3.8M subscribers and $180-360M in annual revenues(assuming $8.00/month subscription price).

Netflix seen to be entering a period of restrained operating margins. Although on the Q1 conference management increased their anticipated 2H11 operating losses from this year's international launch to $50-70M from $50M, the analyst believes the projected Y/Y declines in operating margins for at least the next year could begin to negatively impact investor perceptions of growth trends and appropriate valuation multiples.

Company could see increased international spend guidance as management has already increased the anticipated operating loss range with a likely desire to lock-up key content to gain a head-start over potential competition it would not be surprising if management increased the operating loss guidance again. While this decision would be positive for Netflix's long-term growth prospects, the analyst believes it would cause a near term shock to current earnings estimates and the valuation multiple.

Merriman's current valuation range of $300-330 is based on a P/E multiple of 45-50x FY12 EPS estimate (or a 1.0x PEG ratio). After the 89% increase in NFLX shares since their upgrade they now see less than 10% potential upside to the target valuation range. The analysts upgrade was based on the prospects of international expansion, which has now played out.

The analyst is recommending swapping into CSTR as a play on the ongoing transition within the physical home video segment along with a wild card on the pending announcement around Redbox's digital strategy and partner. He recently boosted the EBITDA estimates above guidance and consensus following a thourough analysis of 2011 DVD rental potential and he sees additional quarters of revenue/EPS upside near-term. Using a very conservative 5.5-6.0x FY12 EBITDA estimate multiple he believes CSTR shares can reach a valuation range of $72-79 (27-40% upside).

Notablecalls: You probably won't believe this but Merriman can actually move this name. Merriman had the Street high $300-$330 valuation range when the stock was in the low $200's.

What I like about this call is that it isn't too pushy. The analyst has been right but he is now becoming more hesitant regarding the upside. Tough yoy compares coupled with high valuation is not the best combo for a mo-mo stock.

Lots of trapped shorts there but the stock should come down on this. I'm thinking 285-280 range in the n-t.

This is the last thing people expect it to do, right?

Right?