Wednesday, January 26, 2011

AK Steel (NYSE:AKS): Upgrade to Overweight, Street high estimates & target - J.P. Morgan

J.P. Morgan's North America Metals & Mining team is making a major call on AK Steel (NYSE:AKS) upgrading the steel maker to Overweight from Neutral with a $22 price target (prev. $18)

While rising raw material cost pressures have been a well-documented concern for AK and will continue to be an issue this year, JPM thinks rising carbon steel prices and improving volumes will more than offset these headwinds. As a result, they are upgrading AKS to OW from N and raising their Dec 2011 price target to $22 from $18. AKS has also clearly stated that it is interested in securing some degree of raw material integration. While it will clearly not be an easy task to acquire quality iron ore or met coal assets at a reasonable price in the current market, they think any success on this front, given AKS’s generally conservative approach to capital deployment, would also be a positive for the stock.

Raising 2011E EPS to $1.05. JPM is increasing their 2011E EPS to $1.05 from $0.54 to reflect the recent increase in steel prices, their belief that they are sustainable, and a generally improving demand outlook. While AK will clearly be confronted with rising iron ore, met coal and scrap costs, the firm thinks price increases and improved operating performance from higher volumes (they are forecasting volumes of 6.1mm tons vs. 5.6mm in 2010) will more than offset these pressures. Given these volumes and supports to pricing (both from production discipline and raw material cost pressures), they think their estimate for a 2011 EBITDA margin of 5.9% is readily achievable. AK’s pension and OPEB expense is also expected to be down by roughly $20mm in 2011, or $0.10

Pricing should win out over costs
While rising raw material cost pressures have been a well-documented concern for the company (and the stock) and will continue to be an issue this year, JPM thinks rising steel prices and improving volumes will more than offset these headwinds. As shown in Figure 1 below, 1Q11 contract prices for global iron ore costs were up 4% over 4Q10, and, if current spot prices hold steady through the end of February, Q2 contract prices will increase by roughly 30% over Q1 levels. AKS will also see an increase in its met coal/coke costs, as a significant portion of its lower-priced contracts rolled off at the end of 2010. However, AK did sign its 2011 contracts before the recent Australian floods pushed met coal prices sharply higher, and will still see some benefit from its leftover, lower-priced contracts. JPM also notes that domestic steel producers can typically secure contract prices for met coal below freight-adjusted global prices given the importance of the long-term relationships between the domestic steel and coal companies.

Increasing PT to $22. JPM is raising their Dec 2011 price target to $22 from $18 to reflect their higher 2011 earnings estimates. Firm's new target is based on a 7.0x multiple on their 2011E EBITDA, vs. AKS’s one-year forward average of 5.5x since 2002. However, their annualized 2H11E EBITDA would have their target price at a multiple in line with AKS’s long-term average. JPM thinks a premium to its historical average is warranted as 2011 is likely to be a depressed year for earnings, making the premium appropriate in their view. AKS currently trades at 4.1x their annualized 2H11E EBITDA.

Notablecalls: There are couple of reasons why this call is likely a major one:

- This is the 1st rating upgrade AKS has seen since 2009. If you don't believe me, go and check it out. AK Steel has been the underdog of the space.

- J.P. Morgan's team is well respected. Their 2011 EPS estimate is now towering 100% above Street consensus. Needless to say, the $22 price target is the new Street high.

This one is indeed a major one. So how to play it? If you want to buy size, you have to wait to til open. AKS was up 7-8% yesterday in reaction to earnings, so we may get a knee-jerk reaction before the stock resumes upward.

I'm guessing AKS can do 5-6% today putting 16.30-16.50 range in play.

Monday, January 24, 2011

Veeco Instruments (NASDAQ:VECO): Ouch... this could hurt

Dear readers,

Today I have a story for you about a Semi Equipment analyst at UBS called Stephen Chin. Stephen has made some good calls on Veeco Instruments (NASDAQ:VECO) in the past but today...he is going to have some egg in his face. He's a good analyst but this one is a bummer.

You see, Stephen is out with a call this morning titled: "Sanan’s LED factory appears on schedule"

Our recent checks found that Sanan, (Veeco’s biggest China based customer), has taken shipment of 48 total MOCVD reactors from Veeco in its big fab in Wuhu, China. We believe Sanan has installed 38 of these reactors with 15 of the reactors under testing. We believe this was in line with Sanan’s goal to install 35-40 reactors by the end of 2010. We believe Sanan’s installation schedule uncertainty was a reason Veeco gave a wide 4Q10 sales range of $285-$320M.

Increase to Wuhu City’s LED equipment subsidy viewed positively
Our checks found Wuhu City will now pay Sanan a higher subsidy of up to RMB 12M (about $1.8M) per tool for purchasing higher throughput MOCVD reactors (capacity of 45 two-inch wafers) which is 20% higher than its prior subsidy. The City now requires all subsidized equipment gets installed in Sanan’s Wuhu factory or 2x must be paid back to the City. We found no mention of subsidy deadlines yet but note Sanan has $227M of net cash to use when it chooses to build its 2nd fab.

Expect Sanan remains a key China based customer going forward
Our checks find Sanan plans to take delivery of another 42 MOCVD reactors from Veeco and 17 from Aixtron by Jun-11. Our checks found Sanan received complete subsidy payments from Wuhu City for 42 MOCVD reactors and partial subsidy payments from Wuhu City for an additional 15 which means there are still another 50 reactors that Sanan is scheduled to get subsidy payments on in 1H11.

UBS reits Buy & $54 target on VECO.


Citi's Timothy Arcuri, a Semi Equipment analyst is out with a call titled:

"Alert: Turning On the Light, AMAT Makes Progress in MOCVD"

AMAT making progress in MOCVD — Our checks across Asia indicate AMAT finally is making some progress with its MOCVD efforts in the LED sector with potential orders from several players in China, Taiwan, and Japan. Specifically, checks indicate the following activities: 1) AMAT looks set to get some of the 2nd phase of Sanan’s MOCVD investment in China (along with VECO and AIXG) an order that should be >70 tools across vendors in CQ1:11; 2) AMAT is being considered as the top contender for the next phase of expansion (~10 systems) at one LED chip maker in Xian China (we believe it is Zoomlight); and 3) Toshiba and TSMC continue to engage with AMAT on MOCVD process development.

Could take 5-10% share in 2011 — While the scale of the progress remains limited, we are now expecting AMAT to officially launch its MOCVD product in 1H:11 after finally securing a few volume customers. Overall, AMAT could take ~30-50 tools in 2011, or 5-8% share depending on the overall size of the market. While we still think that VECO’s new multi-chamber tool will be hard to compete with in the near-term, the fact that AMAT is finally on the map is notable and is all direct share gain from more established vendors like VECO/AIXG. While the impact to AMAT’s revenue will be largely de minimis, this is an important indicator in AMAT’s efforts to regain its competitive mojo through internal technology development.

Notablecalls: So you see why Stephen Chin (UBS) is going to have egg in his face today? I suspect VECO is going to get crushed today on the Citi call.

While Chin is yapping away how things at Sanan are 'all good', Citi has uncovered a way more important data-point. Contrary to consensus view Applied Materials (AMAT) is not dead & is actually coming on strong at Veeco's most important customer.

Just take a look at what Aixtron (NASDAQ:AIXG), Veeco's larger EU peer has done this morning. And I can tell you, AIXG usually never moves. Intraday, VECO can be all over the place with AIXG doing nada.

A 4% move in AIXG means VECO can be down 6-10%. That would be $42-40.

Veeco is set to report #'s in 2 weeks. Management will have some tough questions to prepare for, I suspect.

Thursday, January 20, 2011

F5 Networks (NASDAQ:FFIV): Upgraded to Outperform at Credit Suisse now

In a surprise move, Credit Suisse's Networking Eq. team is upgrading F5 Networks (NASDAQ:FFIV) to Outperfrom from Neutral with a $134 price target.

Credit Suisse:

Upgrade—Buying Opportunity: We would take advantage of the significant pullback in FFIV’s shares post its announcement of FY1Q11 results and FY2Q11 outlook to accumulate shares. We have raised our rating to Outperform and our TP to $134 and have increased our operating forecasts.

Bottom-line: we see no meaningful change in FFIV’s rev or EPS growth outlook. We still see FFIV driving among industry best-in-class growth in rev, margins and thereby EPS. Our $134TP based on 30x our new CY12 $4.60 EPS forecast, less interest income, adding back net cash, and using a 10% discount factor, amounts to 25% upside. We see primary risk as potential multiple contraction--with approx (14)% downside based upon 25x our new $3.80 CY11 forecast.

Visibility Remains Strong: FY1Q11 revenue was slightly below and EPS essentially in-line and FY2Q11 rev and EPS guidance were essentially inline relative to our and Street consensus’s estimates. FFIV attributed the rev shortfall to a particularly soft last week of Oct and a weaker than expected end of year budget flush. Despite the noted weakness and reporting its first B/B ratio below 1.0 since FY2Q09, FFIV maintained that its deal pipeline is at record levels and the company has strong visibility as to a strong second half of FY11. FFIV attributed the B/B decline primarily to closing fewer large deals in the quarter. FFIV remains leveraged to some of strongest secular growth drivers in all of tech including data center consolidation, mobile data and application growth, cloud computing adoption and storage growth. We see further margin expansion together with ongoing solid growth in F5’s Application Delivery Networking business and the potential for its ARX business to yet post meaningful sustainable growth leading to an upward bias to our operating forecasts.


A Bump in the Road...Not the Beginning of the End
While FFIV failed to live up to the Street's extremely high expectations for the quarter (by delivering a book-to-bill of <1.0 with "seasonality" issues in the telco/service provider vertical), the company remains the dominant force in a secular growth market (application delivery controllers or ADCs). In fact, despite 40%+ Y/Y growth in CY10, we estimate revenue will grow another 20%+ in CY11 with expanding operating margins (38.4%, up 44bps Q/Q). This combination will likely result in CY11 EPS growth approaching 30% Y/Y. While we downgraded the shares to a Neutral rating at about $112 (October 6, 2010) due to limited return profiles, our CY11 EPS estimate has increased by 16% since then while the stock has actually declined roughly 5%. In our view, this is indicative of the Street once again overreacting to a "bump in the road". We are upgrading FFIV to a BUY rating with a price target of $130 as we believe the risk/reward profile has once again turned favorable with roughly 20% upside potential in the near-term. Our new price target is based on ~30x our CY11 EPS of $3.71 plus net cash of about $15 per share by the end of year.

Notablecalls: Talk about a surprise move. This one is down 25pts since last night. No downgrades. Also, Gleacher is upgrading FFIV to a Buy.

Bounce? Could this see $115-117 again today? I'm somewhat puzzled about this situation.

It's a mess but is it really that big of a mess?

Wednesday, January 19, 2011

Apple (NASDAQ:AAPL): The new Street high target now is...$550/share!

Ticonderoga analyst Brian White is out making a name for himself with a $550 price target (up from $450) on Apple (NASDAQ:AAPL) this morning.

The details:

Apple Delivers Big Upside, and the Stock Has Plenty of Room to Run.
Last night, Apple reported 1QFY11 sales of $26.74 billion, above our estimate of $24.17 billion, while pro forma EPS of $6.43 handily exceeded our $5.35 projection (Street was at $5.40). Despite Monday's news regarding Steve Jobs's medical leave of absence, we believe it will be difficult to keep Apple's stock from reaching new highs given the much stronger than expected quarter and outlook reported by the company last night. With the stock now trading at just over 11x our conservative CY11 EPS estimate (ex-cash), we believe there is plenty of upside left in the stock price, and we are raising our 12-month price target to $550.00.

Here's a quick summary of other notable comments on AAPL:

- Jeffries: Strong Quarter and Guidance: We Slightly Raise our Street-High Estimates (reits $450 tgt)

- Piper: Mobile Products Take Off; Growth Rates Increase; Raising Rev Ests By 11% (tgt raised to $483)

- Morgan Stanley: CY11 Bull Case Becomes $30 EPS as Margins Beat (reits OW and $410 tgt)

- Merrill Lynch/BofA: Strong quarter on all fronts; much more to come; Buy (tgt raised to $450)

- Citigroup: GM Recovery and Balanced Growth Highlight Stellar Quarter; Reiterate Buy with New Target of $415

Notablecalls: Up, up & away? $350+ today?

Apple (NASDAQ:AAPL): You Can't Keep a Good Apple Down; Raising Estimates and PT to $550 - Ticonderoga

Ticonderoga analyst Brian White is out making a name for himself with a $550 price target (up from $450) on Apple (NASDAQ:AAPL) this morning.

That's the new Street high target.

More to follow.

Tuesday, January 18, 2011

Nvidia (NASDAQ:NVDA): Risk Reward Not Nearly As Compelling Now – Reducing Rating - BMO

BMO Capital Markets' Ambrish Srivastava, PhD is downgrading Nvidia (NASDAQ:NVDA) to Market Perform from Outperform with a $22 price target (prev. unch).

BMO notes that when they upgraded the stock, they had firmly believed that NVIDIA was an underpriced asset, with a fundamental tailwind that the market was missing. They now believe that, fundamentally,the company’s position both in its core business and in the emerging Tegra businessis fairly well understood and is now reflected in the stock.

Neutral. It's always hard to give up on winners. And this is not an easy call for us to make either, but after having run various scenarios ranging from bullish to very bullish on several variables – Tegra, discrete GPU share, and opex, they get to extremely bullish peak earnings of $1.70, and very optimistic earnings of $1.48. Note that the last peak earnings for NVIDIA were $1.31 in FY2008 when competitor ATI was on the mat. On peak earnings, BMO thinks a 15x earnings multiple, would be more appropriate; hence, they believe the stock is now fairly valued at current levels.

What Has Happened Since?
1. Trends have continued to turn positive for the core business
2. Tegra Design Wins Have Gained Visibility and Traction
3. Valuation Not as Attractive Any More, in BMO's View

Are they possibly leaving money on the table?
Possibly, but, BMO does not believe they are leaving tons of outperformance on the table over the next 6-12 months.

From a portfolio perspective, at around $11, the firm notes they would have made NVDA a large position. However, at current levels, they would still own the stock, but, would start to cut their position meaningfully. As BMO has laid out in their scenario analysis, even in the very optimistic scenario, where NVIDIA’s share in graphics goes back close to the prior peak level, and the company ships 40 million units in Tegra, the firm gets earnings of $1.70, and on peak earnings, they do not believe the stock will be valued higher than at a P/E of 15x. BMO believes that a more realistic "very optimistic" scenario is $1.48 in earnings. In either case, they do not believe the stock will get a higher than a 15x multiple; hence, they believe the stock is fairly valued at current levels.

Notablecalls: Ambrish Srivastava made an excellent call on NVDA back in September 2010 when the stock was trading around $11. Now, 4 months later the stock is trading at $22 and he is telling clients to cash in their chips. Well, majority of their chips.

Will people listen?

I'm betting they will. It's not evident here in pre-market but I suspect NVDA will see sub-$23 levels today. If it breaks should go toward $22.50.

Let's see how it works out.

Friday, January 14, 2011

Corinthian Colleges (NASDAQ:COCO): Upgrade to Outperform from Underperform - RBC Capital

RBC Capital is making a big call on Corinthian Colleges (NASDAQ:COCO) upgrading the name to Outperform from Underperform with a $6.00 price target (up from $5.00).

- The moves comes after meeting with the company's new CEO, Jack Massimino, earlier this week.

In RBC's opinion, the return of Mr. Massimino, who was previously COCO's chairman and its CEO before that, will be viewed a year from now as an important step in terms of getting the company back on track. They expect that Mr. Massimino will leverage his experience in running public companies in the health care and for-profit education sectors to develop a rehabilitation plan for COCO that stabilizes enrollment and addresses its perilous regulatory position. Firm also notes that they believe investor expectations for the company are excessively pessimistic. Although an investment in COCO is speculative, RBC believes that the risk/reward pendulum has swung in a favorable direction.

Potential Catalysts: 1) Investor confidence in COCO improves due to new messaging focused on quality student outcomes and the provision of a coherent business plan that has tangible operational and financial benchmarks. 2) CY11E enrollment stabilizes at 85,000 (-15% y/y) students. 3) CY11E operating margin exceeds 5% due to cost reduction initiatives. 4) Gainful Employment (GE) regulation is less onerous than expected. 5) COCO is acquired by another for-profit operator or a private equity investor.

Ratings Assessment: RBC notes their rating is consistent with their view that COCO shares will outperform the peer group due to excessively low investor expectations.

Valuation: RBC's new price target of $6 is based on CY11E EPS of $0.60 and a P/E of ~10.0x compared with a current valuation of ~8.0x and a peer group average of ~10.0x.

Conclusion: They think it makes sense to get in early before COCO articulates and implements a new game plan. Mr. Massimino is an experienced operator with the wherewithal to successfully adapt the business model to the current environment.

Notablecalls: Robert C. Wetenhall, the RBC Capital analyst might as well be the Axe in COCO. Why you ask? Take a look at this chart:

Wetenhall has been Underperform rated in COCO since 2009. The stock was trading around $20 back then vs. $5 currently. He saved his clients a lot of dough and has Street cred. Lots of it, I suspect.

Now, the call itself is a short one (just 1 pg.) and definitly lacks the oh-so-usual valuation mumbo-jumbo. Wetenhall's call is purely qualitative - Massimino is coming back & has lots of experience dealing the government. Health-care is highly regulated, as you know.

Couple of more points:

- The whole sector has rebounded sharply over the past week, since the STRA news. COCO has been VERY prone to move on intraday speculation/flow. The stock appears to want to go higher. All it needs is a good excuse.

- Ignore the $6 price target, just ignore it. If Wetenhall is right, this is one is an easy double. If not, then..not. But the price target means nothing here.

I see COCO trading up at least 10% today, putting $5.25-50 level possibly in play. Should go higher after that.

PS: (update 08:20 AM ET) I just checked, Wetenhall appears to be No1 ranked on Bloomberg absolute return ranking.

Tuesday, January 11, 2011

Coeur d'Alene Mines (NYSE:CDE): Deutsche Bank sees 124% upside

Deutsche Bank's Metals & Mining team is out with a large positive (100 pg.) call on the group:

DB’s outlook for commodities is increasingly bullish based on four core beliefs: emerging markets growth will remain strong, the Fed’s efforts to stimulate US growth will be successful, European sovereign risk will eventually be contained and physical fundamentals in many commodity markets are tight. On higher price deck, earnings outlooks have increased, leading the firm to increase PTs across the board and be more constructive on the space.

Rosy near-term metals price deck, with peak prices potentially by 2012
Deutsche notes they have increased their price estimates across the board with peak prices anticipated by 2012 though long-term prices remain largely unchanged (copper is an exception). Copper prices raised sharply, with 2011 and 2012 going up by 24% and 30% respectively to $4.65/lb and $5.22/lb. Iron-ore forecasts going up by ~1x as global contract pricing continues to converge with high Asia-driven spot prices and coking coal prices expected to benefit recently contracted quarterly prices and supply pressures. Gold prices expected to reach $2,000/oz in 2012 but silver prices may outshine with forecasts nearly doubling to $50/oz in 2012 from current prices. Gold to Silver ratio to narrow to 40x by 2012 from more traditional 60x on rising industrial demand for silver.

Among the names Deutsche upgrades Coeur d'Alene Mines (NYSE:CDE) to Buy from Hold with a $54 price target , representing 124% upside.

Coeur d'Alene (CDE) is a primary silver miner expected to reach ~22m oz of output in 2012. Current earnings leverage, along with its stock performance and valuation, is most tightly linked to the silver market, although gold exposure could rise to ~40% of sales by 2011 due to its Kensington gold mine in Alaska. Management has partially transformed Coeur d'Alene in terms of its balance sheet and asset quality but cost containment and project execution are sources of concern. Three greenfield projects (San Bartolome, Palmarejo and Kensington) are expected to provide longer-term growth as Coeur d'Alene streamlines its focus on these larger mines. Deutsche rates Coeur d'Alene a Buy based on bullish silver price estimates which should afford significant operating leverage as 2012 earnings come in to focus.

DBAB's 12-month Price Target (PT) for Coeur d'Alene has been raised to $54/share (+145% from prior $22/share) as a significant ramp-up in 2012 earnings estimates comes into view driven by high silver and gold prices. Firm's revised $54/share PT is now based on 10x their revised 2012E EPS of $5.43 (versus 12x prior 2011E EPS of $1.82 earlier.

Notablecalls: This is nutso call from DBAB's Metals team. They are no talking about $2,000/oz Gold & $50/oz Silver, both way higher than current consensus forecasts.

The 124% upside price target on CDE seems almost unbelievable.

They estimate an average of 44% upside to their revised Price Targets (PT) for their coverage, highlighting “value” golds (Newmont, 63%; Barrick, 55%), bulk plays (Cliffs, Teck and Vale), Alcoa and silver names appearing most attractive, while copper-related upsides appear limited by application of more conservative target multiples.

Anyway, CDE seems to be the posted boy of the call & will get most of the attention today. Precious metals are trading up this morning which is surely helping things.

I would not be surprised to see CDE trade up for several days, reaching $27-28 levels.

NVIDIA (NASDAQ:NVDA): Fade this gap?

The analyst community is surprisingly giving NVIDIA (NASDAQ:NVDA) a cold shoulder following news out last night the co has settled all pending litigation with Intel & has entered into a six-year, $1.5B cross licensing agreement.

The payment, net of ~$100M attributed to the settlement of prior legal claims, will be amortized over the 6-year term and result in a $233M operating income or ~$0.29 EPS increase per year.

- JMP Securities is downgrading NVDA to Market Perform from Outperform saying they believe the strongest of the near-term catalysts that the market had been anticipating are now effectively priced into the stock. Firm's new FY13 EPS estimate of $1.25 takes into full consideration a strong-case scenario with regard to the ramp of Tegra solutions into new Motorola, LG, and Microsoft smartphones and tablets. As such, they are moving to a Market Perform rating given their belief that the current trading level of ~18x their new FY13 estimate represents an appropriate midpoint to the stock's five-year trading range of 8-28x and adequately reflects the upside potential of emerging tablet and smartphone exposure as well as the downside risk of its legacy notebook and PC exposure.

The company's emerging tablet and smartphone opportunity is promising and reflects the sound strategic vision and execution of management but remains to be proven given still-uncertain launch timing and market acceptance of its new design wins.

New market opportunities are growing but so is the competitive landscape as Nvidia expands beyond a more PC-centric business model. In addition to ongoing competition with Intel and AMD (MP), it is also now competing against the Apple A4 (MO, $400PT, DCF-based), the Samsung Hummingbird, the Qualcomm Snapdragon (MO, $60PT, P/E-based), TI OMAP (MP), and the Marvell Armada (MO, $30PT, P/E-based), among other ARM solutions.

JMP cautions that monthly data out of Taiwan closed out 2010 on a weak note (excluding Hon Hai) with December quarter notebook ODM revenues declining -12.7% q/q (-23% y/y), OEM revenues rising a below-seasonal 1.8% q/q (-6.4% y/y), and TSM revenues falling -2.3% q/q (decelerating to +10.8% y/y). While Nvidia may be benefiting from some of the Hon Hai growth of +8.2% q/q (+83.8% y/y), the firm believes the strength is skewed toward iPhone and iPad products where Nvidia does not participate. They would look to become more aggressive on Nvidia once near-term PC uncertainty resolves itself and/or there is better visibility on new tablet success prospects.

- J.P. Morgan is also out cautious (as ever) reiterating their Underweight rating and $13 target saying they believe the market has already discounted overly-optimistic expectations.

The stock has increased over 130% since its trough in late-Aug’10 (vs SOX + 40% and SPX +21%), and up 36% YTD (SOX +4.5% and SPX +1%). Much of that run-up was due to the high expectations for the ramp of Tegra 2 and the optimistic anticipation of NVDA being a major beneficiary of the burgeoning tablet market, in firm's view. Although it is true that NVDA has gained numerous Tegra 2 wins in smart phones and tablets, as was readily apparent at last week’s CES, the resultant volumes have yet to materialize.

According to J.P. Morgan’s IT Hardware analyst, Mark Moskowitz, coming out of CES, there are indications that the tablet market is already setting up for a major components oversupply situation later this year or in early 2012. He estimates that more than 40 tablet vendors will manifest in the coming months, all of whom will be competing aggressively to catch up to the Apple iPad. Given his estimate that Apple will control 60% of the 46M tablet shipments that he forecasts for 2011, the remaining 40 vendors will end up battling for the remaining 18-20M tablets in the market. JPM's IT Hardware analyst posits that “many of the vendors believe that they can carve out a meaningful piece of the market”, and, consequently, build inventories in excess of what they can sell.

JPM believes the stock is currently trading at an unsustainable premium to the group. Post the settlement announcement, NVDA traded at ~$22 in the aftermarket. Taking into account the ~$0.29 earnings increase from the licensing payments on top of their C11 GAAP EPS estimate of $0.70, the stock is currently trading at a 21.5x multiple, which represents a 13% premium to the average stock in our universe. Given the headwinds that company still faces, the firm believes that this premium is unsustainable and, consequently, they reiterate their UW rating.

Notablecalls: Pull up NVDA chart and look at the 5-6 pt run the stock has had over the past week or so. People were clearly betting on CES & the possible INTC settlement. Now both catalysts have passed.

The stock was up 6% in after hours trading but that was clearly dumb money buying.

So, this morning we have a tier-2 firm downgrading the stock and JPM saying there are indications that the tablet market is already setting up for a major components oversupply situation later this year.

For objectivity's sake:

- UBS upgraded NVDA to Neutral from Sell last night. Unrelated to INTC news, btw.

- Citi reits Buy and $20 price target this morning...and get this..calling the name their Top Pick at current levels. (Say what? the thing is trading ABOVE your price px)

I wouldn't rule out a down close for NVDA today. That would be below $20.60 level.

Monday, January 10, 2011

Mind The Gap - China wireless component demand slowed in December?

Oppenheimer's Comm. Technology team made some fairy interesting comments on RF Micro Devices (NASDAQ:RFMD) this morning. While the comments were mostly RFMD specific, I think there could be some broader read through there:

Oppenheimer notes that based on their checks, they believe RFMD could see a pause in its momentum in the December/March quarters before gaining speed again in June. Near term, the firm believes demand in China has softened somewhat while Polaris shipments remain strong. They expect these trends to reverse (China to rise and Polaris to decline) in March, but near term they see little room for upside and mix could cap margin improvements. In addition, they believe Samsung has delayed somewhat its GalaxyS2/Tab2 launch. The delay could shift some of RFMD's PowerSmart ramp into the June quarter. RFMD is managing a complicated transition (Polaris down, PowerSmart up) and they expect bumps along the road. With Opco's LT thesis unchanged, they are raising their price target on RFMD to $10 from $8.

The details:

China softness. Based on our checks we believe demand in China in December slowed somewhat and MediaTek's recent monthly results support our view. With its strong exposure to China (>10%), we believe RFMD could be negatively impacted near term although we expect a recovery in March ahead of the Chinese holidays.

- Polaris likely still strong. RFMD expects Polaris to ramp down through the March quarter. Yet, our checks suggest demand has remained above targeted levels in December. We still expect Polaris to see a material decline in 2011, but near-term results in this area could still come in higher than planned.

- PowerSmart delayed? We believe Samsung has delayed its launch of GalaxyS2/Tab2 by 3-4 weeks to refresh some of the embedded features. We believe this delay could push out some of RFMD's expected PowerSmart sales into the June quarter.

- Tweaking estimates. We're slightly tweaking down our December and March estimates to account for the near-term headwinds. We note that strong Polaris sales could also cap near-term gross margin improvement yet this should be mitigated by the June quarter (Polaris out, PowerSmart in).

- Transition = opportunity. With near-term headwinds, we believe RFMD's shares could come under pressure. Yet, our thesis is unchanged in that RFMD is ramping with multiple new customers and RF complexity is increasing. Therefore, we would encourage investors to take advantage of any weakness. Raising PT to $10.

Notablecalls: Chinese wireless component demand slowing?!

Friday, January 07, 2011

Goodyear Tire & Rubber (NYSE:GT): Upgrade to Buy, this one could have 90% upside - Citi

Citigroup is out with a bullish U.S. Autos & Auto Parts (47 pg.) call. In the call they are upgrading Goodyear Tire & Rubber (NYSE:GT) to Buy from Hold with a $17 (up from $14) target noting the name could have 90% upside to low $20's.

Proprietary Vehicle Density Survey — Citi's latest density survey (which forecasts future plans amongst 2,100 respondents) showed solid improvement from their August survey, revealing a 1.9% forecasted 2-year density erosion— consistent with a 13-15 million SAAR outlook. More so, firm's survey yielded strong indications of existing pent-up demand suggesting that a stronger macro outcome could conceivably push SAAR to a 14-16mln range.

- Goodyear Tire & Rubber Co (GT): Upgrade to Buy: Out of Favor, But Momentum Could Build in 2011

Citigroup is upgrading Goodyear Tire shares to Buy from Hold, raising the target to $17 from $14 (5x ‘12E EBITDA) and raising the risk rating to Speculative from High in recognition of the unique volatility in Goodyear’s business model and this stock call. Following significant underperformance in the shares over the past 12-months, they believe the risk/reward may be poised to tilt favorably in 2011, as the stock appears washed out and out of favor.

Framing Risk/Reward – Though the Goodyear story has suffered one set back after another (unabsorbed overhead, rubber, Venezuela), the long-term earnings power of the company hasn’t changed much. In a year that should see a continued recovery in global volume, improving mix (aftermarket and commercial) and further cost savings, Goodyear’s future earnings power may receive a second look from the market. To be sure, Citi still thinks 2011 street estimates need to come down (rubber re-pricing), but the resetting of expectations should be priced-into the stock and may actually prove refreshing to the market. At a normalized $2 billion of EBITDA and 5.0x multiple, upside to a low-$20s (90%) can be justified, a proposition that’s hard to find in autos after a stellar 2010. Downside risks at a $1.5 billion EBITDA level look to be in around $10 (17%). Liquidity remains in good shape with ample runway through 2013, in their view.

Recent Management Meetings More Positive – After recently visiting management, Citi notes they walked away with added comfort on a number of issues :

1) Management continues to believe that the spike in rubber prices is not indicative of a structural supply/demand issue;

2) Management remains confident that pricing should continue to catch up with raw material inflation, and the dealer body experienced a strong 2010;

3) Future tire labeling regulations could become a catalyst towards improving Goodyear’s value proposition;

4) At a normalized $2 billion EBITDA, Goodyear could generate $0.6 billion of free cash flow before growth capital expenditures (the returns of which would be additive to EBITDA) and pension funding in excess of expense ($0.2 billion).

A 10x multiple of $0.4 billion FCF (incl. pension) would support Citi's $17 target. They believe that confusion over Goodyear’s somewhat complex reporting has contributed to the poor share price, but also believe that corrective action on the part of management could go a long way to helping investors frame the earnings power story.

Notablecalls: For several reasons, GT looks like a winner.

- The upgrade is going to catch a lot of people by surprise as the sentiment in the sector has been on the pessimistic side.

- This thing hasn't seen a decent upward rating change in a while. Merrill upgraded the name with a puny 12.50 price target back on Dec 9 2010, causing a 11-12% move on the day. For objectivity's sake, a Japanese competitor did announce raising tire prices that same morning.

- Needless to say, GT has lagged the Auto Parts space and now Citi is flashing a +ve low $20's scenario (90% upside) in front of investors starving for opportunities like this. That's how they generate attention.

I'm thinking this one could trade closer to $13 level today. Use the pull-backs for entry.

UPDATE (09:07 AM ET): After another look, I think this one could trade over $13 level, possibly toward $13.50 or thereabouts.

Thursday, January 06, 2011

General Motors (NYSE:GM): Could be worth $100 per share? - Morgan Stanley

Morgan Stanley is pressing their bet in General Motors (NYSE:GM) with a very bullish 21 pg. note saying the stock could be worth $100 per share.

Re-In-Car-Nation: The Path to $10 EPS and $71bn Cash

Could GM be one of the most cash generative manufacturers in the world? The irony defies business precedent. Little more than 18 months after the company’s reincarnation through section 363 of the US Bankruptcy Code, GM’s current financial prospects appear to be on par with the strongest in the global auto industry.

Morgan Stanley forecasts GM to generate 100% of its market cap in cash over the next 5 years. The confluence of cyclical recovery in N. America (where GM derives two-thirds of its cash flow) and secular growth in emerging markets (the rest of its cash flow) drives their estimate for GM’s net cash to improve from $19bn at the end of 2010 to $29bn by 2012 and $71bn by 2015.

EPS boosted by above-cycle earnings and depressed tax rate. Firm's FY 2011 earnings forecast of $6.25 is nearly 60% above consensus expectations. Their 2012 EPS forecast of $7.58 is more than 50% above consensus. They forecast GM EPS to peak at $9.61 in 2015 before normalizing at $4.21 on fully taxed basis excluding any pension income benefits.

Consensus expectations for 4Q results appear far too low in firm's view. Morgan Stanley notes their forecasting abilities will be tested in 4Q where their $0.93 EPS estimate is nearly 2x consensus at $0.50. They anticipate consensus will have to revisit their GM numbers throughout the first half of 2011.

Improved execution on the top line could trigger far higher valuation: Morgan Stanley's $50 price target is based on GM being a relevant ‘global player’ in the industry, but only keeping up with a cyclical recovery in the US light vehicle market while riding secular growth in emerging markets. With the historic impediments on costs substantially eliminated, the firm sees no structural reason why GM cannot one day be a dominating force in the global auto industry. While it’s too early to give the company the benefit of the doubt, they believe GM has the potential to one day produce the earnings and cash flow required to justify a valuation closer to $100 than $50.

Notablecalls: Well, this should create some buy interest. The stock is on a roll and with Morgan Stanley calling for a huge Q4 beat, I see little reason for it NOT to go up in the n-t.

The $100 per share comment is there to create attention. And attention it will create.

Should trade $39+ today.

Monday, January 03, 2011

Advanced Micro Devices (NYSE:AMD): Raising Estimates Well Above Consensus, PT to $12.50: Adding AMD to Top Picks Live!

Citigroup is making an interesting call on Advanced Micro Devices (NYSE:AMD) raising their 2011 EPS well above consensus, price target to $12.50 (prev. $9.00) & adding the name to Top Picks Live list.

Adding AMD to TPL — Citi is increasing their 2011 revenue and EPS estimates for AMD well above consensus, reflecting their expectation for MPU market share gain, the opposite view of consensus. Firm's 2011 revenue growth rate is 7.1%, noticeably higher than the consensus forecast of 0.58%. They also raise their gross margin estimate by 100bps to 46.9%, again above consensus of 45.3%, primarily reflecting the exclusion of Global Foundries (GF) under-utilization in GM. These are contributing to a 2011 EPS estimate of $0.91, versus consensus of $0.44. With no change to their valuation methodology, their price target increases to $12.50, representing 52.8% ETR. Citi is simultaneously adding AMD to TPL (replacing INTC which remains Buy-rated). They start 2011 with AMD and NVDA as their top ideas.

Expecting Share Gain... — Driven by 2 new platform refreshes (last seen in 2003), Citi expects AMD to gain market share in 2011. Firm's checks suggest their new mobile platform, Brazos, has shown significant design momentum in netbooks and notebooks, and has even made its way into tablets. Meanwhile, their checks also indicate that samples of AMD's Bulldozer server and high-end desktop chips are in the hands of customers, putting them on track for a mid-2011 launch. From low market share in mobile and servers, they believe low-hanging fruit exists.

...Consensus Does Not — Based on 3Q10 results, AMD currently sports its lowest ever revenue market share. To be sure, AMD should face stiff competition from Intel's Sandy Bridge platform in 2011, but from this low starting point, the firm believes that odds favor market share gain; design momentum suggests this to be true. They note, however, that consensus models only 0.58% revenue growth for AMD in 2011. Given the consensus expectation for positive PC unit growth, this suggests an anticipation of revenue share loss to all new lows (Intel revenues are modeled up 3% in 2011). In light of the odds of share gain, they view the likelihood of increases to consensus estimates as very high. Citi's revenue estimate increase exclusively reflects gains in MPU.

Gross Margin Has Upside Potential — Citi revises their GM estimate to reflect AMD's new accounting for GF. They raise their 2011 GM estimate to 46.9%, now 163bps above consensus. Beyond this, they expect the product ramps in 2011 based on AMD’s new architectures to be margin accretive, noting they are targeted at the higher margin server and notebook markets. Gross margin should also benefit as AMD shifts from expensive SOI wafers to less expensive bulk silicon wafers (first shipments on 28nm expected in mid-2011, and volume production in mid-2012). Citi notes that consensus reflects only 29bps growth in GM to 45.3% in 2011, at the low end of AMD's target model of 44-48%.

Fits Within their Sector View — Citi expects 2011 to be a relatively good year for semiconductors. Firm models 7%–9% industry growth, well above consensus of 4% growth. Given healthier inventory balances, reasonable valuations, and low growth expectations, they forecast semiconductor stocks to modestly outperform the broader markets in 2011, much like 2010 (firm's SOX target remains 460-500). Against this backdrop, they favor names where they see upside to consensus estimates. It is in this light that Citi favors AMD and NVDA and hence they add AMD to TPL.

Notablecalls: Well this is interesting. While I was walking to the office this morning, I was thinking to myself how great it would be if we got a good AMD call this morning.

You should have seen my face when I looked at my email.

This sure is an out-of-consensus call from Citigroup's Semi team. It looks like AMD’s new 40nm Fusion platform may have secured some design wins at large ODM's...and yes...Tablets. The word out there suggests the wins have come at the expense of Intel's Atom platform.

The Street has historically set a low bar for AMD (7 revenue beats of out past 9 quarters) and this may be the case here as well. Citi seems pretty confident in their well above consensus #'s.

AMD trades well below industry average valuations (EV/Sales 1.0 vs 2.5-3.0 indusry avrg)

All this leads me to believe, there could be upside to the name in the n-t.

I'm thinking AMD could trade $8.50 today and possibly a little higher. I suggest you don't chase it pre mkt but rather watch it settle after open.