Friday, April 29, 2011

Research in Motion (NASDAQ:RIMM): A pause that refreshes?

Research in Motion (NASDAQ:RIMM) is losing fans at a fast clip after lowering guidance yet again:

- Jefferies is lowering their rating to Underperform from Buy with a $35 price target (prev. $80) noting that based on their checks RIMM will see continued execution issues, product delays, and lackluster product launches for the next year. Firm believes Blackberry OS 7.0 (renamed, formerly 6.1) and QNX will be delayed and that carriers are withdrawing support. They have cut their FY12 (Feb) EPS to $5.50 (guidance $7.50), FY13 to $5 (St $7.37).

Ripple effect of Playbook execution issues
Jeffco's checks indicate the issues with the launch have led to a fire drill and resources being pulled off of other projects. They think this will cause BB OS 7.0 phones to be delayed and that QNX handsets will be pushed back until H2:CY12. A month ago management guided to an early 2012 launch of QNX.

QNX pushout
While not officially delayed, on the conference call last night management did not mention QNX once and implied that BB OS 7.0 will be their primary handset operating system for much longer than we had previously expected.

They believe RIMM is touting OS 7 (formerly 6.1) due to issues with QNX, OS 8 (formerly OS 7). Firm believes QNX is having integration and compatibility issues with RIM's massive telecom infrastructure (i.e., BES, BIS, NOC and node system). All of this has been coded to RIM's original BB OS. QNX, being UNIX based, is requiring massive amounts of recoding. With many new launches and products the ability to do this recoding and retooling of infrastructure is likely to be delayed. This delay in Jeffco's view is going to cause strained relationships with carriers, developers, etc.

Management had recently noted in an interview that a native email application would be available on the Playbook in 60 days. They believe that is unlikely.

BB OS 7.0 unproven and delayed
Management said BB OS 7.0 handsets were delayed by a couple weeks. Jeffco believes they may not launch until later in the Aug Q or maybe the Nov Q. And when they do launch, they will not get benefit of the doubt due to past execution issues. Firm thinks BB OS 7.0 will lack broad developer and carrier support as no QNX kernel means no Android app portability, and they will be reluctant to reinvest in a platform that is supposed to be replaced by QNX in a few months

Carrier support flagging: indications include AT&T not yet supporting BB Bridge, carriers charging for Playbook tethering, and consumers cannot buy the Bold at AT&T. They believe this will result in lower subsidies and less marketing support for RIM.

- RBC is downgrading RIMM from Top Pick to Sector Perform with a $55 price target (prev. $90)
saying they continue to see positives in the story as RIM remains an Enterprise/Consumer Smartphone leader with an International franchise, built-in advantages, and loyal 60M user base. But until RIM regains its operational footing, they recognize the market is unlikely to recognize this value until investors see sustainable improvement in execution, transparency and visibility.

- Credit Suisse notes its hard to defend RIMM here, so they are adopting a wait and see approach. The magnitude of the negative preannouncement so soon after results is hard to defend and they are lowering their EPS by 8%/20% for FY11/12 to $6.52/$6.86 and their price target drops to $70. For now the firm adopts a wait and see approach until next week’s analyst meeting to gain visibility on upcoming products

What caused the negative preannouncement? CSFB believes that a combination of an aging product portfolio together with delays to new product launches are driving volume and ASP weakness in the current quarter. With weakness being noted in both North and South America, they are somewhat surprised by weakness in the latter given strong recent sell through in the region. This suggests rapidly changing dynamics. They now expect volumes to decline 10% qoq to 13.5mn and ASPs to decline 7% to $281. Any subsequent recovery depends on the competitiveness of new product introductions where we will get better visibility next Monday. The firm will revisit the viability of their 2HFY12 estimates at that time.

What’s next? Next Monday RIM will host a Capital Markets Day and developer conference where management has alluded to several high-end product launches. Depending on the competitiveness of these new products they will determine whether their volume estimates of 63mn for FY12 (up 20% yoy) and current hardware GM estimates of 31.2% are at risk.

Notablecalls: It didn't take more than 4 week for RIMM to kitchen sink May qtr guidance again. Is management managing expectations here or are they really in trouble?

Little bit of both I think as they ready for the Monday product announcement. I'm not sure what to expect there really given RIM's track record. The popular buy-side trade today will be to buy the weakness in hopes of positive news.

I can't blame the buyers, as I can't think how much worse it can get from here in the n-t. The pre-announcement has de-risked the qtr & any positive news will surely drive a meaningful rally from current levels.

People have been buying RIMM recently in hopes of the May 2 catalyst, so today's sellers are more of the stop-loss variety than anything else.

I'm starting to hear chatter among analyst of an upcoming buy-back (10% kind), which could be meaningfully accreditive & de-risk 2011 EPS guidance.

Last but not least, RBC's Abramsky has thrown in the towel. Ouch!

The Jeffco call may bring some pre-mkt sellers, but I will be looking to get long some RIMM after open. For a trade, ofc. Tight stops.

Wednesday, April 27, 2011

Molycorp (NYSE:MCP): Morgan Stanley sees $240/share Bull Case

Morgan Stanley is out positive on Molycorp (NYSE:MCP) raising their Bull case to $240/share (prev. $140) & reiterating their Overweight rating on the rare earths miner.

Ok, seems I got your attention. The actual (base case) target is raised to $90 but who cares, we're talking about MCP here. Morgan Stanley notes they have a constructive view of rare earth oxides and of Molycorp’s prospects. REO fundamentals look favorable based on high-growth end markets and tight availability. They believe news flow regarding future Chinese rare earth policies, spot REO prices and advancement of MCP’s Mountain Pass project will be the key determinants of MCP share price until the start of production in mid-2012. MCP’s Mountain Pass mine is one of only two new REO projects (Mt. Weld in Australia being the other) outside China expected to come on line by 2012.

Spot prices continue to respond to tightening supply. Last year, Chinese export quotas declined ~40% from 2009. The basket price for MCP REO output rose 450% in 2H10, following the quota announcement. Prices are up another ~124% since the 1H11 quota announcement in late December. The rise in REO prices has been uneven though. Export cerium and lanthanum prices are ~600% higher than domestic Chinese prices, compared to ~120% higher for neodymium and praseodymium. Morgan Stanley notes they expect 2011 full-year quotas to be down ~20% yoy (base case), and a successful crackdown on illegal exports could drop supply outside China by as much as 40% yoy. While their conservative price deck is in line with consensus, they believe risks to pricing are still skewed to the upside as tightening supply meets rising demand.

Raising total 2011-13 EPS estimates by 67%, driven by a 52% increase in base case REO price to $47/kg. Morgan Stanley has raised their 2011 earnings estimate to $1.55 from $0.14 previously, 2012e to $3.56 from $2.43, and 2013e to $7.00 from $4.69 to reflect their revised REO price deck and higher near-term volumes due to Silmet acquisition. For now, MCP is selling stockpiled REO and real earnings will start in 2012. Their average 2012 realized price at $47/kg is ~68% below average spot price at $146/kg. They have used a constant price profile over life of mine in their earnings estimates.

Key MCP advantages: As REO prices normalize long term, the MCP investment case will be supported by: (i) Higher profit margins. With lower costs and higher recoveries than peers, MCP will be a profit margin leader. (ii) Lower technical risk. MCP’s Mountain Pass mine has 50+ years of operating history. Developing processing capability may be a hurdle for early stage competitor projects. (iii) Downstream focus. Recent acquisitions indicate management’s focus on downstream strategy, which improve exposure to high growth end markets and add stability to earnings.

What’s next: The next catalyst is China’s 2H11 export quota announcement, likely at mid-year. Morgnan Stanley anticipates 2H11 quotas will be flat sequentially. They expect China’s clampdown on illegal mining and exports to continue, keeping supply tight, as demand grows at an 8% CAGR driven by high-tech and clean energy applications.

Notablecalls: The analysts continue chasing rare earth prices as they move higher. MCP is a prime trading vehicle and the good folks at Morgan Stanley have presented us a reason to buy it today.

Can the $240 Bull Case create enough buy interest to push the stock to a new high? Sure, why not!

That would be $76+

I would note that MCP has been a stealthy mover of late, exploding higher 20-30 mins after open. Let's see if that happens again today.

Tuesday, April 26, 2011


The cusip for the new 2 year note ends with... QE3!

Netflix (NASAQ:NFLX): Headwinds Trump Momentum – Downgrading To SELL - Janney

While most of the analyst community is quite supportive of Netflix (NASAQ:NFLX) following last night's earnings release, Tony Wible from Janney is slashing his rating to a Sell from Neutral with a $170 fair value (down from $175).

According to the firm, they are downgrading NFLX to SELL, as they believe it will be increasingly more difficult to support its high valuation in the face of headwinds tied to Usage Based billing, a deceleration in sub growth, and an increase in competition that will likely trigger an increase in content costs and SAC. Furthermore, they are troubled by the company’s streaming cost accounting and its limiting of disclosures in this increasingly volatile environment. While a forthcoming Facebook application and international expansion can fuel more optimism, they believe Facebook is working with multiple IPTV platforms and believe international expansion will be more difficult than expected.


- Downgrade to SELL - Janney sees NFLX facing more headwinds tied to: 1) Usage Based Billion; 2) competition; 3) SAC pressure; 4) content cost accounting; 5) the deceleration of US sub growth; 6) rising content costs; and 7) the limiting of key disclosures. They believe the lack of full year guidance, the lower than expected 2Q11 guidance, and the incrementally lower Canadian sub growth contributes to these concerns. On balance, they believe it will be more difficult for NFLX to sustain its premium multiple in the face of these factors.

1Q11 Recap - NFLX reported EPS of $1.11 (+88.5%), beating their and consensus forecast of $1.07 (+81.2%). The earnings beat was in part due to higher than expected revenues ($719 vs. $705 million forecast) and lower fulfillment costs. Net additions of 3.55 million were on the high end of forecasts while ARPU of $11.97 (vs. $11.69) benefited from the recent price increase. NFLX also saw a sharp improvement in profitability, repurchased shares, and committed to more originals. On the negative side, churn of 3.9% and SAC of $14.38 were higher than expected, while international growth was lower than expected.

New IPTV Entrants - Well capitalized players are building IPTV platforms that will transition NFLX from an ideal competitive environment to one that could trigger an increase in content costs and SAC. They believe HBO Go stands to be a more formidable threat and expect competition with AMZN, GOOG, AAPL, TV Everywhere, and DISH to intensify. DISH’s distribution capabilities, content rights, tenacious management, and balance sheet should turn Blockbuster into a more formidable competitor.

International Growth – Canadian sub growth was lower than expected and actually saw a sequential decline in net additions, unlike the US. This could be a new seasonal pattern but it could also be a sign of higher churn tied to UBB or a drop in free sub conversions. The firm would note that UBB in Canada has recently forced NFLX to significantly reduce the quality of its video streaming in the country and that Canadians are trying to impose local broadcast regulations on NFLX. They believe these unique factors in Canada are symbolic of various hurdles NFLX will face in international markets. On balance, the firm believes international growth will not scale like the US and that the competition will be more intense.

Disclosures – Management is no longer providing certain key sub metric statistics (e.g. Bay Area penetration) and has limited the amount of guidance relative to prior quarters. The company does not disclose free subs or international churn and plans to stop disclosing US gross subs addition and cancellations in the near future, which will eliminate investors’ ability to track SAC and churn. Janney would note that churn has recently increased YOY after adjusting for the massive spike in free subs, which undermines the bullish theory that churn will trend down with more streaming offerings. They would note that management also stopped identifying the source of question on its earnings call, allowing it to more easily bypass difficult questions. They also note that their questions were not addressed on the call. The firm believes this backdrop increases the risk in NFLX and should justify compression in the target multiple.

Notablecalls: What bothers me the most about NFLX is the way they are starting to limit disclosure of key metrics. This may help them in the n-t but it will come back to bite them in the arse some time in the future. Some time in the future they will have a hiccup and the analysts will have nothing to work with to defend the stock. Hence the possibly compressed multiple.

But should one short the stock here?

Sure, if you have a death wish. NFLX is now an international expansion play. Sky's the limit, right?


PS: Just take a min and think about NFLX CFO leaving, presumably because he didn't have a say in things. Think about Hastings pushing the stock on SeekingAlpha (of all places?!). Think about Hastings increasingly limiting disclosure...

Monday, April 25, 2011

Tesla Motors (NASDAQ:TSLA): Investor meeting yielded significant positives, according to Goldman

Goldman Sachs has some interesting comments on Tesla Motors (NASDAQ:TSLA) after hosting an investor meetings with the company management in New York on April 20 and 21.

The takeaways:

Orders have picked up for the Model S, tracking at over 4,000 from around 3,400 at year’s end. The company expects to have 2012 production sold out soon and believes the first 12 months of production could be sold out by the end of this year. The company is on track to launch the Model S by mid-2012, having now sourced virtually all of its components, providing better cost visibility versus a few months ago. This has also provided added confidence around the 25% gross margin target for the program. With Tesla working successfully though many key design risks, Goldman now sees increased focus on managing vendor risk and large scale production. While the Model S production target remains at 20,000 for 2012, Tesla is configuring the Fremont facility to manufacture 20,000 units on one shift per year, as opposed to the 10,000 originally planed, in order to maximize upward production flexibility. The company has completed the build-out of numerous drivable “alpha” prototypes and expects to produce preproduction “beta” prototypes in the fall which will be shown to the public.

While the company believes it has enough liquidity to complete the Model S program on its own it expects to conduct a $100-$200 mn capital raise in the fall to help cover the upcoming Model X program which has been accelerated as well as a stepped-up investment in vertical integration and additional equipment from the former NUMMI plant which should be able to service Tesla’s production needs for more than five years.

Management’s reiteration of production and cost targets on the Model S post supplier sourcing and extensive prototype testing is a significant positive and gives the firm increased confidence that investors will be able to exceed the 25% annual returns used to discount their price target.

Notablecalls: While Goldman is not exactly a Tesla bull (Neutral rated, $29 tgt), the note does include some new information that may cause quite a stir among investors:

- Tesla seems to be readying for greater-than-forecast demand for Model S.

- The company has enough cash to complete the Model S program without additional financing. The offering, speculated to be a very n-t event may actually be 6 months away.

- Overall, everything seems to be going as planned. This is a surprise in itself as Tesla is a relatively new company and therefore prone to experience delays of all sorts.

Goldman is calling the info they gleaned from the management a significant positive. That's a strong statement on a high-beta name like TSLA.

Not exactly a trading call but I thought to highlight the comments following the hugely positive note from Morgan Stanley back in March.

Wednesday, April 20, 2011

Kudos: Joshua Paradise @ Morgan Stanley

Ladies and gentlemen, will you give it up for Joshua Paradise at Morgan Stanley.

April 5: CREE: Market Likely Overestimates Earnings Power, Cut to Underweight

The stock is down 8 pts (~20%) since his call from 2 weeks ago as the cheerleaders are cutting their ratings on the name. I've counted 4 downgrades so far.

Mr. Paradise, so very elegantly is closing his negative Research Tactical Idea on CREE this morning:

This Research Tactical Idea is closed because the stock price has moved according to our expectations. Cree reported earnings below us and consensus on April 19th after the close and management guided gross margins for the June quarter down to 40%, below consensus of 43%. Our negative RTI was based on lower gross margin guidance. This has played out.

Notablecalls: Give kudos where it's due. I do!

Intel (NASDAQ:INTC): Colour on quarter

Analyst community appears to be somewhat mixed following blow-out earnings from Intel (NASDAQ:INTC) last night:


- J.P Morgan, a long term Semi Bear is upgrading INTC to Overweight from Neutral with a $25 tgt (prev. $20.25) noting they had previously been cautious on INTC primarily due to the company’s inventory being too high. However, inventory declined 10 days QoQ from 85 days in 4Q10 to 75 days in 1Q11, in line with the normalized level of 75 days due to higher than expected sales.

Inventory replenishment drove Intel's rapid growth in 1Q11. Although Intel appears to have outgrown the PC industry substantially in 1Q11, JPM believes it is due to CPU inventory replenishment in the channel as PC units outgrew microprocessor units by over 10% during 2H10.

Raising estimates. They are raising their C11 revenue and EPS estimates from $48.3 billion and $1.74 to $54.7 billion and $2.35 due to higher revenue and margins. They are also raising their C12 revenue and EPS estimates from $49.5 billion and $1.81 to $59.0 billion and $2.32.

Upgrading to Overweight. JPM is upgrading INTC from Neutral to Overweight due to upside to Consensus as inventory has normalized at both Intel and the channel. They are raising their December 2011 price target from $20.50 to $25.00 or roughly 10.5X their new C11 EPS estimate of $2.35, in line with the historical multiple of its peer group such as IBM, HPQ and MSFT.

- Credit Suisse reits their Outperform & $28 target noting that consistent with their preview, and despite investor concerns, INTC significantly beat March Q and June Guide - Bears will argue overshipping, inventory and too much capex - and will also need to push out by yet another qtr the dreaded "miss" - They get the structural concerns: tablets, smartphones, ARM and power - They don't get the underappreciation of ASP leverage in core PCs, developing market growth, corporate refresh, server, cloud, storage and routers. In addition, INTC's manufacturing lead is growing, and manufacturing is a key point of differentiation relative to being successful in non-traditional markets. Firm still thinks this is at least a $30 stock, they hope it gets there before EPS goes to $3.00.


- Piper Jaffray notes Intel reported a strong Q1 and provided strong Q2 guidance. Q1 strength was driven by a quick recovery from its chipset flaw, Sandy Bridge channel fill, and an extra week. Backing out the extra week in Q1 and acquisitions, sequential organic revenue growth at the midpoint of guidance is up 7% vs. a more typical Q2 of flat to down 3%. They believe this growth is unsustainable and more a perturbation caused by chipset issues and double ordering. At a minimum, sell out of PCs is much weaker than Intel's sell into the channel. Piper thinksk this drives a weak 2H:11, much like last year. While only one of several factors, Intel did acknowledge tablets were cannibalizing sales of PCs and they believe this impact will accelerate going forward. While they expect shares will be up today, they would not chase. Remain Neutral & $22.50 tgt.

Increase 2011 Capex to $10.2B from $9.0. Intel indicated it is positioning to accelerate the transition to 14nm by spending more now to turn its 14nm development fab into a high volume manufacturing site when the time comes. However, Intel may also be positioning to be Apple's foundry at 22nm

- Goldman Sachs notes Intel returned $5 bn in cash to shareholders this quarter and is executing very well in servers. However, the firm sees significant cyclical risk given: 1) they believe Intel overshipped PC end demand by 12% in 1Q. As a result, they expect Intel’s revenues to correct relative to PC units over the course of the year. 2) Intel raised its 2011 capex guidance to $10.2 bn (+96% yoy). Five out of the last six times that Intel raised capex more than 25% yoy, gross margins were down nearly 800 bp the following year due to excess supply and higher depreciation. For example, in 2005 Intel raised capex 51% yoy. In 2006, MPU ASPs were down 14% yoy and Intel’s margins were down 825 bp despite 11% PC growth.

Goldman's new $1.50 2012 EPS estimate is 31% below the Street. They are positive on Intel’s server business, which they believe will benefit from share gains as well as a higher-end mix. In addition, they believe Intel’s 3.6% dividend yield and buyback support a Neutral rating.

Notablecalls: While I expect INTC to trade up in the 21.25- 21.50 range in the veryn-t, I'm not overly confident there is much upside after that.

As the UBS analyst Uche Orji notes this morning, >50% of PC sales are now from emerging markets, making it inherently more difficult to track. That's where the analysts got it at least partially wrong (he's a bull, btw raising his target to $28.50 this morning, Reit Buy).

The other thing about emerging markets is that the whole Tablet craze hasn't really arrived there yet. So there isn't much PC cannibalization happening yet. But it will, it surely will.

Consensus ests for 2011 are moving up this morning but that may prove to be short-lived. So, buyer beware!

(Sorry for the lack of posts lately, I've been somewhat under the weather lately)

Wednesday, April 13, 2011

Kraton Performance Polymers (NYSE:KRA): Raise Estimates on Continued Pricing Power; Raise Target to $67/share - Oppenheimer

Oppenheimer is out very positive on Kraton Performance Polymers (NYSE:KRA) raising their price target to a whopping $67 (prev. $50) while reiterating Outperform rating on the name. The price target lends close to 80% upside

The main reason for the target/est raise: Kraton's ability to raise prices. According to Oppenheimer, KRA has continued to raise prices this month, with 41 increases in the last 18 months.

There have been several positive fundamental developments since their last report: 1) KRA has announced three new rounds of price increases, 2) butadiene prices have risen by a record $0.17, or 16%, to $1.21, 3) potent HSBC competitor Kuraray appears hobbled by the earthquake and 4) private equity sold its remaining 10MM shares at $37.75, removing an overhang.

- In their recent meeting, KRA appeared confident in its ability to manage the ongoing surge in BD prices, which in the past for various financial and economic reasons have bolstered earnings. Aside from potent FIFO boosts, the more tangible benefit is to create a nice umbrella for KRA's smart-pricing strategy, while constraining Asian price competition.

On the Asian side, the tragic earthquake has had minimal impact on KRA (20kt), but hobbled Kuraray, a thorny competitor, as the Mitsubishi site appears down at least to the summer. Kuraray's customers are in the process of evaluating alternate suppliers and KRA is a logical fit. KRA is likely to pursue longer term contracts.

Opco raises '11E and '12E EPS by 2-4% to $4.21 and $5.13, respectively. While their numbers are 10% and 21% above consensus, they assume modest 6-7% volume growth, 5-9% pricing and minimal 50-100bps margin expansion to 17.6% by 2012, below KRA's long-term target in the "high-teens."

They see gains for KRA driven by strong EPS growth, as its niche rubber products are in the early stages of significant substitution opportunities vs. high natural rubber and less desirable PVC. KRA appears undervalued at 7.4x '12E P/E, while volumes have historically grown 2x GDP through substitution of less recyclable or efficacious materials

Notablecalls: Kraton (KRA) isn't exactly a household name, but it's a leading producer of styrenic block copolymers (SBCs). SBCs are a derivative of styrene butadiene synthetic rubber (SBR) that the U.S. Government developed in the 1940s.

Kraton is poised to benefit from the migration away from PVC plastics that are not recyclable and often require potentially unsafe additives. These products range from medical packaging and tubing to wire and cable. Companies such as Apple (NASDAQ: AAPL) that aim to make their products entirely from recyclable materials.

Kraton’s three primary raw materials are styrene, butadiene and isoprene. Kraton dominates its piece of the $4-$5 billion, 1,500-Kiloton SBC market.

The price of butadiene has been soaring but Kraton has done a very good job passing the costs on to customers. Opco is raising their #'s but even then the company is trading just 7-8X EPS.

The new $67 price target lends 70-80% upside (more if #'s keep raising). This is exactly what people are looking for in this market. Will likely create significant buy interest. Type of thing that is prone to make 7-10% moves intraday.

Tuesday, April 12, 2011

Apple (NASDAQ:AAPL): Apple's Assault on the Living Room and Video Is Coming: The New Halo Effect

Jefferies analyst Peter Misek is out with a significant new data point on Apple (NASDAQ:AAPL) saying he believes the company is about to launch a new video-focused cloud-based service.

Misek sees the new service as a potential game-changer for Apple and the industry. While he currently retains his estimates & $450 price target (Buy rated of course), the potential impact on F2012 #'s seems huge.

Super Data Centers
Jefferies notes they spent the last couple of weeks channel checking with developers and content providers on Apple’s possible plans regarding the cloud and their assault on the living room. First, they believe Apple’s data center in North Carolina has gone live or will do so shortly. Second, some unconfirmed indications point to Apple possibly building another super data center next to the first: 1) Apple purchased adjacent land at a high price; 2) aerial footage shows Apple has cleared adjacent land; and 3) at the announcement ceremony for the facility, a mock-up showed two side-by-side data centers.

Also, based on discussions with large multinational players, the firm additionally believes that plans for data center builds in other parts of the U.S. and Europe are accelerating meaningfully. They cannot trace the owner of these others back to Apple, but we believe the specs to be similar. They can envision Apple creating the service first in the United States and then rolling it out internationally.

While much has been speculated on what these data centers could be for it seems that much of this is likely being built for video. How do they come to that hypothesis? It is a guess based on the size of the storage that has been purchased, the fact that video consumes far more data than audio, and the introduction of a simple audio locker or cloud-based version of iTunes is unlikely to require this much storage and capability out of the gate. Second Jeffries finds some of the chatter in the content world to be centered around the iPad and future services. They find it notable that the content companies, citing a lack of domain license, asked Cablevision to remove channels from its iPad app. They believe these same companies are negotiating some sort of deal with Apple. They would find it easy to believe that Jobs’ final hurrah before turning the reins over would be to revolutionize video much in the same way Apple has transformed the mobile, computing, and music world. It is also notable that his authorized biography is due in 2012

New Apple Product = iTV?
So what else could they guess is going on? Jefferies continues to believe that the assault on the living room likely means the introduction of another Apple appliance or device. They find it difficult to believe that the Apple TV is the best Apple can do.

While a simple TV is certainly possible, they just believe Apple wants to do something completely different. Given Apple’s historical preference to innovate a new category could Apple’s introduction of the iTV allow it to launch a premium-priced piece of hardware?

New Cloud-Based Services
In terms of content, Jefferies thinks some sort of subscription model also makes sense. They believe something unique could be done in video with all the disparate content we watch from TV shows to movies to YouTube to home movies.

Jefferies thinks the following combination could make sense:
TV model: call it the “Best of TV” but time delayed and available for a fixed priceon an all-you-can-eat basis. Older movie content (ala Netflix).

They believe Apple has learned much from having Netflix on the Apple TV and cannot help but feel Apple will try to improve on this model somehow. So how does Apple convince Hollywood and other content creators to license it? In firm's view, the best way to do that would be the model they use for App developers: let them take the vast majority of the revenue while you use the content to drive device sales and monetize it that way.

Estimate potential: Jefferies notes they have run a sensitivity analysis on the potential impact. Assuming an iTV launch, a cloud-based services launch, and a halo effect on existing devices (boosting units and ASP by 5%), FY12 revenues would range from $150-171B vs their $134B and consensus' $118B. Also notably, these revenue ranges would be 50% or 70% higher than FY11 consensus revenues of $100B. 50-70% revenue growth would appear to be a fair tradeoff for a ~100-200bp hit to GM. Finally, EPS would range from ~$32-36 vs Jeffco's estimate of $28 and consensus' ~$26.50.

What does this mean for Apple?
The cloud-based services will likely drive a halo effect for Apple’s existing products and the iTV. For Apple this likely means more device sales and higher ASPs on existing products than they initially thought. Due to the rise of Android, they believed and the Street believed that Apple’s amazing run of innovative new devices was coming to an end meaning that Apple would be forced to compete on price in the future.

But if they are right about the cloud-based services, the main advantage of this closed system will be to ensure a quality, easy-to-use and leverageble content store similar and potentially more powerful than the App Store. This most likely means estimates are too conservative in 2012 and beyond.

Notablecalls: I think it was Morgan Stanley analyst Rebecca Runkle that first used the term 'Halo Effect' in relation to Apple. That was in 2005. Apple had a market cap of 30 billion back then vs $300 billion today.

And there it is again - Halo effect..

For some time I've considered myself to be part of the camp that believed it would be increasingly difficult for Apple to unveil revolutionary products. I was proven wrong again when the iPad was announced. Guess I'll be wrong again.

A lot of the time Apple trades on upcoming product chatter & with Jeffco's Misek coming out with these iTv comments people will get excited again.

Just take a look at these F2012 #'s - are these above consensus or what? 150-171B vs. 118B consensus?!

This note is going to be the talk of the day.

PS: Apple has way more resources than Netflix (NFLX) to lure content from movie studios. If they are willing to give away content revenue to the studios in order to sell hardware, I just don't see how Netflix can compete with that proposition.

Could this be the real Netflix (NFLX) killer?

Monday, April 11, 2011

Southern Copper (NASDAQ:SCCO): Tia Maria Project Cancelled; A Big Setback on SCCO’s Growth Plans

Southern Copper (NASDAQ:SCCO) could see some selling pressure this morning after the Peruvian government rejected on the eve of the elections (Friday) the license for the Tia Maria project.

Tía Maria is a $930mn project that would produce 120kt of copper when operational. It is located in Islay, in the Arequipa state of Peru. The project has faced strong opposition from local communities, and violent protests broke out recently after a UN-commissioned report was leaked signaling deficiencies in the environmental impact study submitted by Southern Copper.

Couple of tier-1 firms are out commenting on SCCO this morning:

- UBS cuts their tgt to $32 (prev. $34.50) and reits Sell noting SCCO should now have to submit a new environmental study. Given considerable local opposition, and the deaths of three protesters, they think this decision could rove difficult to reverse.

Tia Maria represents US$3.46 of NPV
The 120k Tia Maria project is the company’s only current Greenfield expansion. It was also the supposed to be the most advanced of the company’s expansions, scheduled to come on stream in early 2013. Representing close to 10% of the company’s production, and with a cash cost below the company’s long-term average, Tia Maria is a material project for the company.

Where to from here?
The company now has the option of submitting for a new environmental license, but would seem unlikely to do so near term given local opposition and the lack of government support. It would appear unlikely, however, for the full economic value of the project to be lost. They firm would view an eventual sale or a potential exchange of assets as also possible in the medium term. The financial impact is also likely to be mitigated by the positive impact that delaying the project is likely to have on medium-term copper prices.

- Morgan Stanley is out titled: Tia Maria Project Cancelled; A Big Setback on SCCO’s & GMEXICO’s Growth Plans

Investment conclusion: The cancellation of Tia Maria is a very negative development for Southern Copper (and Grupo Mexico) given that the project represented 22% of the company's copper volume growth over the next five years. The situation is particularly unfortunate because future capacity expansions are one of the company’s key competitive advantages. They continue to see project execution – now of planned brownfield expansions – as paramount for both Southern Copper and Grupo Mexico to meet market expectations.

Removing Tia Maria from estimates: Morgan Stanley is removing the project’s volume contribution from their SCCO’s and Grupo Mexico’s models. The 120ktpy copper (cathode) project was scheduled to start operations in 4Q12. For 2013, their new EBITDA estimate for SCCO is $5,419M (-9% from previous estimate) and for Grupo Mexico is now $6,785M (-7%).

Notablecalls: To add insult to injury, it looks like a left-leaning Ollanta Humala is leading the Peruvian vote (as of early Monday). You can pretty much imagine Ollantas views regarding Phoenix-based Southern Copper's aspirations to mine copper in Peru.

Not only is (or rather was) Tia Maria worth $3-4/share in NPV, SCCO faces declining production. That's rarely seen good for miner valuations.

The stock stock took a 1+ pt hit on April 7 after the Peruvian government proposed a 180-day interruption in the analysis of the Tía Maria environmental impact study, so it's surely prone to move on today's news.

Anyway, one to watch on the short side today. Could drop multiple points. $38-37 range?

Friday, April 08, 2011

Expedia Inc (NASDAQ:EXPE): Barry Back To His Old Tricks

Expedia Inc (NASDAQ:EXPE) was up 3 pts (13%) yesterday in after hours trading after the online travel company announced its intention to break into two separate operating units: 1) core Expedia and 2) TripAdvisor.

While most of the analyst community sees the news as a mild positive for the stock, RBC Capital analyst Ross Sandler is out with an interesting trading call, telling clients to actually fade the rally:

- The rationale is simple, at $22.40 investors are paying 4.6x OIBDA for core Expedia if we were to assign a peer-average vertical content multiple to TripAdvisor (10x). We think Trip deserves the 10x, given its dominant position in the travel content space. Recent M+A multiples for quality niche content assets are ~12x forward OIBDA (INET, RATE, etc), which we don’t expect to realize immediately upon spin for Trip, and given the one-time Google Places organic traffic step-down, we believe 10x is warranted. For core Expedia, we think the correct multiple is ~6x OIBDA, which is likely a conservative estimate of what a potential acquirer would pay for a slow growth OTA asset, especially given recent eDreams, Go Voyages and Opodo transactions at 10x-12x OIBDA. While we could see shares drift higher in anticipation of the spin and a possible FY guidance raise this quarter to account for the AA deal, history would suggest that fading this rally may be the right call. EXPE remains Outperform rated and our $28 target is based on 15x EPS, 8x OIBDA and a 10% FCF Yield.

Obvious Spin Positives: Removing the conglomerate multiple discount is the value creation behind the spin. Additionally, Trip can now operate independently, and in theory, invest to re-accelerate growth. Assigning 10x 2011 OIBDA for Trip and 6x for core Expedia, with full cost allocation, generates a $25 target valuation; shares traded close to our fair value in post-market trading.

Potential Spin Negatives: While Trip can operate independently, core EXPE benefits greatly from Trip ownership with essentially zero cash-cost “barter” advertising on Trip that it will now have to pay for, or risk Trip allocating that inventory elsewhere (assuming there is demand). We could see selling pressure in either company post-spin from investors who want to only own one or neither, which we witnessed post the IACI break-up, including Liberty Media’s 18% stake. Lastly, we don’t know details of the capitalizations, but core EXPE is likely to assume the $1B net debt, which may limit its flexibility to improve the business, which happened to some of the debt-burdened IAC spinco’s.

IACI Spin Analysis: IAC’s one-to-five spin vastly underperformed the Nasdaq and S+P over a 3 month, 6 month, and to-date basis , as did EXPE post its initial spin from IAC. IAC underperformed the Nasdaq and S+P by ~25% from announcement to close of the spin, which could have been exacerbated by the Diller-Malone lawsuit. While these assets are different, as is the investment climate and the ownership dynamics, there is risk that history could repeat itself.

Notablecalls: It appears Barry Diller, Chairman and majority owner of Expedia is back to his old tricks. As many of you probably remember, Expedia is actually a spin off of IACI, which is chaired by none else than Diller himself.

I see a 3 reasons to keep EXPE on the radar this morning:

- While most of the analyst community sees the break-up news as a mild positive for the stock, there are no upgrades or notable target raises this morning. Even the more bullish Tripadvisor valuation scenarios only reach $28-30 for the current combined entity.

- The stock has been acting heavy even in light of positive news. I highlighted a rather major upgrade from Citigroup on March 8 but the stock failed to produce a meaningful move.

On Monday the company announced a favourable settlement with AMR (NYSE:AMR). The stock gapped up +1pt the following morning but only to give up the gain over the next couple of days.

- I like the fact the RBC analyst making the fade call is actually a l-t bull in the name. That I think lends some credibility to the call. I also like his IACI comparison.

The stock is likely to open in the $25-26 range (where it traded in after hours) & I think watching for topping action and fading the strength may be the way to go here.

On the other hand, shorting the name may be such an obvious trade it ends up trapping everyone causing the stock to squeeze eventually. Several million shares were bought last night. These guys are either super smart or super trapped. So adjust your risk accordingly.

Feedback appreciated.

Tuesday, April 05, 2011

Cree Inc (NASDAQ:CREE): Market Likely Overestimates Earnings Power, Cut to Underweight - Morgan Stanley

Morgan Stanley is out making a significant LED lighting call this morning downgrading the sector leader Cree Inc (NASDAQ:CREE) to Underweight from Equal-Weight with a $36 price target (prev.NA).

Firm is cutting their estimates way below consensus noting they cannot recommend the stock today as a way to play the secular growth theme.

The details:

The stock is down 40% since July 2010, following four successive disappointments in earnings or guidance. At 25x 2011 earnings, valuation is nearly twice the market multiple, but Morgan Stanley forecasts only 4% EPS growth in 2011 and –5% in 2012. They believe lower ASPs, lower gross margins, and lower market share will offset strong industry volume growth in LED lighting. They are lowering their F2012 estimate by 29% and are 17% below consensus. Firm's $36 target implies 21% downside.

Four reasons for Underweight rating:

1) Competition and pricing pressure. More companies have the technology and IP to produce and sell lighting-class LEDs and are pricing aggressively,especially for higher-volume products.

Channel checks indicate that at least one top tier producer plans to sell lighting class LEDs at $7/klm by the end of calendar 2011. Epistar has targeted even lower pricing of $4/klm. Although Epistar has not been in the top tier of manufacturer for lighting class LEDs, a recent joint venture with Toyoda Gosei provides access to patents that will help it address the lighting market. Cree’s ASPs vary widely across products, but Morgan Stanley believes they currently average over $12/klm.

Even if Cree maintains a 15% price premium to the competitor at $7/klm, that would imply a 33% price drop from our current estimate of $12/klm. If Cree cannot maintain a price premium, $7/klm would imply a 43% price drop.

2) Share loss is a headwind. LED adoption is happening: Firm forecasts penetration rising from <4% today to 35% by 2015. Cree is the share leader at 30+%, but they expect its share to fall to 15% by 2015.

3) Morgan Stanley sees negative earnings growth in F2012 on lower ASPs (down 23% p.a., they expect) and lower gross margins (42.5% in 2012e vs. 45.8% in 2011e and L/T guidance of mid-to-high 40s).

Cree management believes long-term gross margins will be 45-48%; Morgan Stanley sees downside to that estimate and forecast 42.5% in F2012 and F2013. Over the last 10 years, Cree’s margins have averaged 44.7%, with a high of 55% in 2005 and a low of 34% in 2008. Firm's basis for a lower margin forecast is increasing competition, especially from Asian companies who are willing to operate at lower margin structures, and more price competition as we move into the lighting adoption phase of LEDs.

4) Unfavorable risk-reward. While Morgan Stanley's bull case offers 65% upside (Bear case -56% downside to $20), it requires margin assumptions that the firm views as low probability.

Significant forecast uncertainty. With growth rates over 50% and rapid evolution, there is significant uncertainty in LED industry forecasts.

They believe in LED lighting. Cree has excellent products, a history of execution, and over $1 billion in cash, but the firm cannot recommend the stock today as a way to play this secular growth theme.

Notablecalls: The call is a must read for every LED sector investor (42 pages long). Morgan Stanley paints a fairly bright picture for the sector as a whole but not so pretty for Cree (CREE).

Cree's market share appear to be unsustainable & with declining ASP's raising volumes aren't going to help that much.

I would call it a big change of heart by Morgan Stanley's team. They used to be so bullish. Now their price target is the new Street low.

To make things worse, take a look at what Semileds (NASDAQ:LEDS) had to say this morning. Cree's Chinese kid brother literally shit the bed. They almost halved their guidance blaming competitive pricing environment and their decision to preserve their market share. This does not read well for the industry. Remember, it was Semileds that acted as the canary in the coal mine in January. Looks like things may have worsened from there.

I wonder if CREE breaks the $43 level today?